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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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 number)
203 East Main Street 29319-9966
Spartanburg, South Carolina (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (864) 597-8000.
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
$.01 Par Value, Common Stock
Common Stock Warrants expiring January 7, 2005
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting stock held by non-
affiliates of the registrant was approximately $52,433,161 as of March 1, 2000,
based upon the closing sales price of registrant's Common Stock on that date of
$1.69 per share.
As of March 1, 2000, 40,078,543 of registrant's Common Stock, $.01 par value
per share, were outstanding.
Documents incorporated by reference. Portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held May 24, 2000 are
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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Page
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Part I
Item 1 Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
Part III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 13. Certain Relationships and Related Transactions 30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 32
8-K
Index to Financial Statements F-1
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Signatures
Forward-Looking Statements
The forward-looking statements included in the "Business," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Quantitative and Qualitative Disclosures About Market Risk"
sections and in Exhibit 99.2 -- Excerpt from Advantica's February 17, 2000
press release announcing its "One Company, One Brand" strategic direction,
which reflect management's best judgment based on factors currently known,
involve risks and uncertainties. Words such as "expects," "anticipates,"
"believes," "intends," "plans," and "hopes," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Actual results could differ materially from those anticipated in these forward-
looking statements as a result of a number of factors including, but not
limited to, the factors discussed in such sections and those set forth in the
cautionary statements contained in Exhibit 99.1 to this Form 10-K (see Exhibit
99.1 -- Safe Harbor Under the Private Securities Litigation Reform Act of
1995). Forward-looking information provided by the Company in such sections
pursuant to the safe harbor established under the Private Securities Litigation
Reform Act of 1995 should be evaluated in the context of these factors.
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PART I
Item 1. Business
Introduction
Advantica Restaurant Group, Inc. ("Advantica" and, together with its
subsidiaries, including predecessors, the "Company") is one of the largest
restaurant companies in the United States, operating (directly and through
franchisees) more than 2,400 Denny's, Coco's and Carrows restaurants.
Advantica's original predecessor was organized as a holding company in 1988 in
order to effect a 1989 leveraged buyout of the Company. As a result of the
buyout, the Company became very highly leveraged. While the Company's cash
flows were sufficient to cover interest costs, operating results subsequent to
the buyout fell short of expectations. Such shortfalls resulted from negative
operating trends due to increased competition, intense pressure on pricing due
to discounting, declining customer traffic and relatively limited capital
resources to respond to these changes.
Beginning in February 1997, Advantica's predecessor, Flagstar Companies, Inc.
("FCI"), and its wholly owned subsidiary, Flagstar Corporation ("Flagstar"),
commenced negotiations with various creditors in an effort to enable them to
restructure their indebtedness through a prepackaged filing pursuant to Chapter
11 of Title 11 of the United States Code (the "Bankruptcy Code"). The Amended
Joint Plan of Reorganization dated as of November 7, 1997 (the "Plan") was
confirmed by the Bankruptcy Court pursuant to an order entered as of November
12, 1997. On January 7, 1998 (the "Effective Date"), FCI and Flagstar emerged
from proceedings under the Bankruptcy Code. On the Effective Date, Flagstar
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 Acquisition Co. ("FRD") (and their respective
subsidiaries), did not file bankruptcy petitions and were not parties to the
above mentioned Chapter 11 proceedings. As a result of the reorganization, the
Company significantly reduced its debt and simplified its capital structure,
although it remains highly leveraged. Further discussion of the bankruptcy
reorganization proceedings is included in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 to the
accompanying Consolidated Financial Statements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for additional information concerning the Company's
indebtedness and debt service requirements.
The Company completed the disposition of its quick-service concepts on December
29, 1999, when it consummated the sale of all of the capital stock of its
wholly owned subsidiary, El Pollo Loco, Inc. ("EPL"), to American Securities
Capital Partners, L.P. for $128.3 million, which included the assumption of
$15.2 million of debt. The disposition of EPL resulted in a gain of
approximately $15.5 million, net of taxes.
On February 17, 2000, the Company announced that its future direction will
focus primarily on its Denny's brand, including efforts to move toward a more
franchise-based operation. In addition, the Company announced that it had
retained the firm of Donaldson, Lufkin & Jenrette Securities Corporation to
begin immediately exploring strategic alternatives for FRD, the subsidiary
which owns the Coco's and Carrows brands, including a possible sale or
recapitalization. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook" and Exhibit 99.2 to this Form
10-K (the discussion herein being qualified in its entirety by such Exhibit)
for additional information.
Restaurants
The Company's operations are currently conducted through three restaurant
chains or concepts which operate in the family-style category of the full-
service mid-scale dining segment. Denny's is the Company's largest concept,
with 1,784 units. Coco's is a bakery restaurant chain operating 485 units. The
Carrows chain, consisting of 145 units, specializes in traditional American
food. For a breakdown of the total revenues contributed by each concept (and
other related segment disclosures) for the last three years, see its
corresponding section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 18 to the accompanying
Consolidated Financial Statements.
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The Company's restaurant management strategy emphasizes superior value and
quality, friendly and attentive service and appealing facilities. During 1999,
the Company continued its strategy of growth through franchising by adding to
its continuing operations a net 63 units, representing an increase of 114
franchised/licensed units offset by a net decrease of 51 Company-owned units
(see the 1999 restaurant unit activity table in "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). The increase in
franchised/licensed units and the decrease in Company-owned units includes a
net 57 units which were sold to franchisees ("refranchised"). The Company
intends to continue focusing on growth through franchising in 2000.
The Company believes its restaurant operations benefit from the generally
strong market positions and consumer recognition enjoyed by its three chains,
the benefits of a centralized support system for purchasing, menu development,
human resources, management information systems, site selection, restaurant
design and construction, and an aggressive management team. Denny's, Coco's and
Carrows may benefit from the demographic trend of aging baby boomers and the
growing population of senior citizens. The largest percentage of mid-scale
customers are in the 35 years and up age category.
Denny's
Denny's, "America's Original Breakfast Diner," is the nation's largest family-
style restaurant chain in the full-service mid-scale segment in terms of market
share, number of units and U.S. systemwide sales. Denny's restaurants currently
operate in 49 states and the District of Columbia, two U.S. territories and
four foreign countries, with concentrations in California (21% of total
restaurants), Florida (11%) and Texas (9%). Denny's restaurants are designed to
provide a "dining value" with moderately priced food, friendly and efficient
service and a pleasant atmosphere. The restaurants generally are open 24 hours
a day, seven days a week. Denny's restaurants offer traditional family fare
(including breakfast items, hamburgers, sandwiches, steaks and chicken), and
provide both counter and table service. Denny's sales are evenly distributed
across each of its dayparts; however, breakfast items account for the majority
of Denny's sales. In 1999, Denny's Company-owned restaurants had an average
guest check of $6.13 and average sales of $1.3 million. Denny's employed
approximately 35,700 people at December 29, 1999.
The Company has taken strides to improve each component of the dining value
formula. In 1999, Denny's heavily promoted themed, higher-quality products such
as "All-Star Slams," "America's Favorite Omelets," "Major League Burgers" and
"Signature Skillets" while continuing to offer its popular Grand Value menus,
which feature value-priced items for breakfast and lunch. These products are
supported through television advertising and restaurant-based media including
special menus, posters, and window clings.
During 1999, the Company began developing initiatives that address the customer
service component of the dining value formula. The two primary goals will be
the implementation of a comprehensive restaurant "score card," and the testing
of an interactive customer response system. Delivering outstanding customer
service will continue to be the main focus of Denny's operations management in
2000.
The Denny's system opened 26 "Classic Diners" in 1999. These restaurants have
an upbeat, nostalgic look and feel that appeals to younger customers, while
retaining Denny's core brand equities. The Classic Diner features a modular,
stainless steel facility, new uniforms, a jukebox and a tailored menu to create
an energized dining experience. Operating trends to date are encouraging, with
a reduced per-unit investment producing above-average sales when compared to
the traditional Denny's restaurant.
After the successful market testing for the "Denny's Diner 2000" reimage in
1998, the Company implemented the remodel scheme in 140 Company-owned
restaurants in 1999. The reimaged stores have experienced year-over-year sales
growth of 8.1%. The remodeling of these selected units is intended to support
Denny's brand positioning as "America's Original Breakfast Diner" and to
complement the development of Denny's Classic Diners. The Company currently
plans to develop and test a lower cost reimage alternative during 2000.
Management believes that this alternative will appeal to existing and new
franchisees and is integral to the completion of the reimaging program system
wide.
In addition to the extensive remodeling project undertaken in 1999, Denny's
also opened 28 new Company-owned units and 82 new franchised/licensed units
during the year (including the Classic Diners mentioned above). Management
believes that over the last five years Denny's has opened more new units
(Company-
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owned and franchised units combined) than any competitor in the mid-scale
segment. Among the new openings were 27 units related to a large-scale
acquisition in upstate New York which provide strategic benefits in that
market, including a rapid increase in brand penetration and advertising
spending capabilities.
Denny's also continues to supplement its franchise development efforts by
selectively selling Company-owned units to franchisees. During the next several
years, the Company plans on refranchising 250 to 300 Company-owned units as
part of the Company's plan to reach its ultimate goal of retaining
approximately 300 units, or 40% of the current Company-owned portfolio. Of the
1,784 Denny's restaurants operating at December 29, 1999, 930 (52%) were
franchised units. The initial fee for a single Denny's franchise is $35,000,
and the current royalty payment is 4% of gross sales.
Coco's
Coco's is a bakery restaurant chain operating primarily in California as well
as Japan, South Korea and the United Arab Emirates. Coco's ranks among the top
15 chains in the family-style category based on U.S. systemwide sales and
international sales. Coco's offers a variety of fresh-baked goods such as pies,
muffins and cookies in addition to value-priced and innovative menu items. The
chain has positioned itself at the upper end of the family-style category, and
answers the needs of quality-conscious family diners by offering consistently
high-quality food, great service, fair prices and a pleasant, comfortable
atmosphere. At December 29, 1999, the Coco's chain consisted of 148 Company-
owned, 34 domestic franchised and 303 international licensed restaurants. The
initial fee for a single Coco's franchise in the United States is $35,000, and
the current royalty payment rate is 4% of net sales. Initial fees and royalties
for licensed restaurants are negotiated under separate licensing agreements
which generally carry lower royalty rates than franchised restaurants.
The restaurants are generally open 18 hours a day. Coco's restaurants have
uniform menus within the United States and serve breakfast, lunch and dinner.
Lunch and dinner dayparts are Coco's strongest, comprising approximately 37.6%
and 40.4% of 1999 sales, respectively. In 1999, the average guest check was
$7.41, with average Company-owned unit sales of approximately $1.5 million.
Coco's employed approximately 6,800 people at December 29, 1999.
Carrows
Carrows is a regional family-style restaurant chain operating primarily in
California. Carrows consisted of 117 Company-owned units and 28 domestic
franchises, and employed approximately 4,700 people at December 29, 1999.
Carrows specializes in traditional American food, with an emphasis on quality,
homestyle fare at an excellent value. The concept appeals strongly to families
with children as well as to mature adults, a group expected to grow rapidly in
the new century. Carrows restaurants have uniform menus and serve breakfast,
lunch and dinner. The menu is always current, but not trendy, and is revised
regularly to reflect the most appealing foods that guests demand. The
restaurants are generally open 18 hours a day.
Lunch and dinner dayparts (including "late night") are Carrows' strongest,
comprising approximately 32.7% and 42.3% of 1999 sales, respectively. In 1999,
the average guest check was $6.81, with average Company-owned unit sales of
approximately $1.4 million.
Operations
The Company believes that successful execution of basic restaurant operations
in each of its restaurant chains is critical to its success. Accordingly,
significant effort is devoted to ensuring that all restaurants offer quality
food and service. Through a network of division, region, district and
restaurant level managers or leaders, the Company standardizes specifications
for the preparation and efficient service of quality food, the maintenance and
repair of its premises and the appearance and conduct of its employees. Major
emphasis is placed on the proper preparation and delivery of the product to the
consumer and on the cost-effective procurement and distribution of quality
products.
A principal feature of the Company's restaurant operations is the constant
focus on improving operations at the unit level. Unit managers are especially
hands-on and versatile in their supervisory activities. Region and
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district leaders have no offices and spend substantially all of their time in
the restaurants. A significant majority of restaurant management personnel
began as hourly employees in the restaurants and therefore know how to perform
restaurant functions and are able to train by example. Each concept also
benefits from having an experienced management team.
The Company's restaurant chains each maintain a training program for employees
and restaurant managers. Restaurant managers and assistant managers receive
training at specially designated training units. Areas of training for managers
include customer interaction, kitchen management and food preparation, data
processing and cost control techniques, equipment and building maintenance and
leadership skills. Video training tapes demonstrating various restaurant job
functions are located at each restaurant location and are viewed by employees
prior to a change in job function or before using new equipment or procedures.
Each restaurant chain regularly evaluates its menu. New products are developed
in Company test kitchens and then introduced in selected restaurants to
determine customer response and to ensure that consistency, quality standards
and profitability are maintained. If a new item proves successful at the
research and development level, it is usually tested in selected markets, both
with and without media support. A successful menu item is then incorporated
into the restaurant system. While research and development activities are
important to the Company's business, amounts expended for these activities are
not significant.
Financial and management control is facilitated in all of the Company's
restaurants by the use of POS systems which transmit detailed sales reports,
payroll data and periodic inventory information for management review. The
Company completed the roll out of a new POS system in all of its Company-owned
restaurants in the third quarter of 1999. This system is helping restaurant
management improve customer service through faster and more accurate turnaround
of customer orders. In addition, the new POS system aids in sales analysis and
decision-making by providing information on a more timely basis and at a higher
level of detail. In 1999, the Company also implemented a new back office system
in all Company-owned Coco's and Carrows restaurants. This new system provides
additional functionality over the current restaurant management system and will
be used by restaurant management to improve the tracking of inventory and
labor.
Advertising
The Company uses an integrated process to promote its concepts, including
media, menu strategy, interior/exterior building design, style of service and
specialized promotions to help differentiate the concepts in the marketplace.
Media advertising is primarily product oriented, generally featuring high-
margin special entrees or meal combinations presented and priced to convey high
value. Such advertising is conducted through national, regional and local
television advertising as well as radio, outdoor and print advertising
depending on the target market. Sophisticated consumer marketing research
techniques are used to measure customer satisfaction and customers' evolving
expectations.
Site Selection
The success of any restaurant is influenced significantly by its location. The
Company's franchise development groups work closely with franchisees and real
estate brokers to identify sites which meet specific standards. Sites are
evaluated on the basis of a variety of factors, including demographics, traffic
patterns, visibility, building constraints, competition, environmental
restrictions and proximity to high-traffic consumer activities.
Raw Materials Sources and Availability
The Company has a centralized purchasing program which is designed to ensure
uniform product quality as well as reduced food, beverage and supply costs. The
Company's size provides it with significant purchasing power which often
enables it to obtain products at favorable prices from several nationally
recognized manufacturers.
In connection with the 1995 sale of its distribution subsidiary, Proficient
Food Company ("PFC"), to Meadowbrook Meat Company ("MBM"), the Company entered
into an eight-year distribution agreement, subsequently extended to ten years,
with MBM, under which PFC/MBM will continue to distribute and supply
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certain products and supplies to the Company's restaurants. Beginning in
January 1998, Coco's and Carrows became subject to similar agreements. There
are no volume requirements relative to these agreements; however, the products
named therein must be purchased through PFC/MBM unless they are unable to make
delivery within a reasonable period. The Company purchases approximately 85% of
its restaurant products and supplies from PFC/MBM. During the third quarter of
1996, the Company sold its two food processing systems, Portion-Trol Foods,
Inc. and the Mother Butler Pies division of Denny's (hereinafter collectively
referred to as "PTF"), in two separate transactions. In conjunction with these
sales, the Company entered into five-year purchasing agreements with the
acquirers under which the Company is required to purchase certain minimum
annual volumes. If such volumes are not purchased, the agreements provide for
the payment of penalties.
The Company believes that satisfactory sources of supply are generally
available for all the items regularly used by its restaurants and has not
experienced any material shortages of food, equipment, or other products which
are necessary to its restaurant operations.
Seasonality
The Company's business is moderately seasonal. Restaurant sales are generally
greater in the second and third calendar quarters (April through September)
than in the first and fourth calendar quarters (October through March).
Additionally, severe weather, storms and similar conditions may impact sales
volumes seasonally in some operating regions. Occupancy and other operating
costs, which remain relatively constant, have a disproportionately greater
negative effect on operating results during quarters with lower restaurant
sales.
Trademarks and Service Marks
The Company, either directly or through wholly owned subsidiaries, has certain
trademarks and service marks registered with the United States Patent and
Trademark office and in international jurisdictions, including Denny's, Coco's,
Carrows, and Grand Slam Breakfast. The Company considers its trademarks and
service marks important to the identification of its restaurants and believes
they are of material importance to the conduct of its business. Domestic
trademark and service mark registrations are renewable at various intervals
from 10 to 20 years, while international trademark and service mark
registrations have various durations from 5 to 20 years. The Company generally
intends to renew trademarks and service marks which come up for renewal. The
Company owns or has rights to all trademarks it believes are material to its
restaurant operations.
Competition
The restaurant industry can be divided into three main segments: full-service
restaurants, quick-service restaurants and other miscellaneous establishments.
Full-service restaurants include the mid-scale, casual dining and upscale (fine
dining) segments. A significant portion of the mid-scale segment is made up of
three categories -- family-style, family steak, and cafeteria -- and is
characterized by complete meals, menu variety and moderate prices ($5-$7
average check). The family-style category, which includes Denny's, Coco's and
Carrows, includes a small number of national chains, many local and regional
chains, and thousands of independent operators. The casual dining segment,
which typically has higher menu prices ($8-$16 average check) and availability
of alcoholic beverages, primarily consists of a small number of national
chains, regional chains and small independent restaurants. The quick-service
segment is characterized by low prices (generally, $3-$5 average check), finger
foods, fast service and convenience.
On a segment-wide basis, the full-service and quick-service restaurant segments
currently have approximately the same revenues. Throughout the 1990's, the mid-
scale segment's traffic volume has remained relatively flat, reflecting
increases in the family-style and cafeteria categories offset by decreases in
the family steak and other specialty categories.
The restaurant industry is highly competitive, and competition among a few
major companies that own or operate restaurant chains is especially intense,
particularly in the family-style segment. Restaurants compete on the basis of
name recognition and advertising; the price, quality and perceived value of
their food offerings; the quality and speed of their service; convenience and
the attractiveness of their facilities. Recent economic trends have also
increased competition for qualified managerial operations personnel as well as
hourly restaurant employees.
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Management believes the Company's principal competitive strengths include its
restaurants' brand name recognition; restaurant locations; the value, variety
and quality of food products served; the quality and training of its employees;
and the Company's market penetration, which has resulted in economies of scale
in a variety of areas including advertising, distribution and field
supervision. See Exhibit 99.1 to this Form 10-K for certain additional factors
relating to the Company's competition in the restaurant industry.
Economic, Market and Other Conditions
The restaurant industry is affected by many factors, including changes in
national, regional and local economic conditions affecting consumer spending,
changes in socio-demographic characteristics of areas where restaurants are
located, changes in consumer tastes and preferences, increases in the number of
restaurants both generally and in particular areas and unfavorable trends in
regional weather conditions.
Government Regulations
The Company and its franchisees are subject to various local, state and federal
laws and regulations governing various aspects of the restaurant business,
including, but not limited to health, sanitation, environmental matters,
safety, disabled persons' access to facilities, the sale of alcoholic beverages
and hiring and employment practices. The operation of the Company's franchise
system is also subject to regulations enacted by a number of states and rules
promulgated by the Federal Trade Commission. The Company believes that it is in
material compliance with applicable laws and regulations, but it cannot predict
the effect on operations of the enactment of additional regulations in the
future.
The Company is also subject to federal and state laws governing matters such as
minimum wage, overtime and other working conditions. At December 29, 1999, a
substantial number of the Company's employees were paid the minimum wage.
Accordingly, increases in the minimum wage or decreases in the allowable tip
credit (which reduces the minimum wage paid to tipped employees in certain
states) increase the Company's labor costs. This is especially true for the
Company's operations in California, where there is no tip credit. The
California minimum wage increased from $4.25 to $5.00 per hour on March 1, 1997
and increased to $5.75 per hour on March 1, 1998. Also, the federal minimum
wage increased to $5.15 per hour on September 1, 1997, and Congress is
currently considering another increase to $6.15 per hour over a multiple-year
time frame. Employers must pay the higher of the federal or state minimum wage.
The Company has attempted to offset increases in the minimum wage through
pricing and various cost control efforts; however, there can be no assurance
that the Company or its franchisees can continue to pass on such cost increases
to its customers.
Environmental Matters
Federal, state and local environmental laws and regulations have not
historically had a significant impact on the operations of the Company;
however, the Company cannot predict the effect on its operations of possible
future environmental legislation or regulations.
Compliance with Consent Decrees
On May 24, 1994, the Company entered into two consent decrees (the "Consent
Decrees") resolving the class action litigation brought against Denny's, Inc.
which alleged that Denny's, Inc. engaged in a pattern or practice of racial
discrimination in violation of the Civil Rights Act of 1964. The Company denied
any wrongdoing. The Consent Decrees enjoin the Company from racial
discrimination and require the Company to implement certain employee training
and testing programs and provide public notice of Denny's nondiscrimination
policies.
Denny's continues to meet all of its obligations under the Consent Decrees. As
part of orientation, every new Denny's employee receives notification of the
Consent Decree requirements. All newly hired hourly employees who work in the
restaurants complete video-based nondiscrimination training that focuses on
employees' responsibilities under the Consent Decrees and public accommodations
law. Additionally, management employees are required to attend a live
nondiscrimination training program.
Further, as required by the Consent Decrees, nondiscrimination testing is
conducted in Denny's restaurants. This nondiscrimination testing compares the
dining experience of similarly matched test groups to determine if guests are
treated equally without regard to race, color or national origin.
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Every Denny's restaurant displays a sign at each public entrance emphasizing
Denny's commitment to nondiscrimination and providing a toll-free telephone
number for customers to call if they have a problem which is not resolved to
their satisfaction. In addition, certain printed advertising materials such as
menus, magazine and newspaper advertising include a statement assuring that all
guests will receive fair and equal treatment.
Executive Officers of the Registrant
The following table sets forth information with respect to each executive
officer of Advantica.
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Current Principal Occupation or
Name Age Employment and Five-Year Employment History
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James B. Adamson 52 Chairman, Chief Executive Officer and President of
Advantica (1995-present); Chief Executive Officer and
President of Denny's (February 2000-present); Chief
Executive Officer of Burger King Corporation (1993-
1995).
Craig S. Bushey 44 Executive Vice President and Chief Operating Officer
of Denny's (February 2000-present); Executive Vice
President of Advantica and President of Coco's/Carrows
Division (1998-February 2000); Senior Vice President
of Advantica and President of Hardee's Division (1996-
1998); Managing Director, Vice President (Western
Europe) of Burger King (1995-1996); Region Vice
President (Central Region) of Burger King (1994-1995).
Janis S. Emplit 44 Senior Vice President and Chief Information Officer of
Advantica (1999-present); Vice President, Information
Systems of Advantica (1997-1998); Senior Director,
Burger King (1987-1997).
Andrew F. Green 44 Senior Vice President, Planning and Corporate
Controller of Advantica (1998-present); Vice
President, Planning and Corporate Controller of
Advantica (1997-1998); Vice President, Corporate
Planning and Risk Management of Advantica (1996-1997);
Vice President of Operations (Transit Contracting
Division) of Ryder System, Inc. (1993-1995).
Ronald B. Hutchison 50 Executive Vice President and Chief Financial Officer
of Advantica (1998-present); Vice President and
Treasurer of Advantica (1995-1998); Vice President and
Treasurer of Leaseway Transportation Corp. (1988-
1995).
Jonathan R. Jameson 51 Executive Vice President, Chief Strategy Officer of
Denny's (February 2000-present); Chief Operating
Officer of Denny's (September 1999-February 2000);
Senior Vice President, Marketing of Denny's (1998-
September 1999); Vice President, Marketing of Denny's
(1995-1998); Vice President, Marketing and Sales of
Host Marriot (1991-1995).
James W. Lyons 45 Executive Vice President, Franchise and Development of
Denny's (February 2000-present); Senior Vice
President, Franchise and Development of Denny's (1998-
February 2000); Vice President, Franchise Development
of Denny's (1997-1998); Vice President, Franchise and
Development Services of Burger King (1995-1997);
Director of Development of Burger King (1994-1995).
Rhonda J. Parish 43 Executive Vice President of Advantica (1998-present);
General Counsel and Secretary of Advantica (1995-
present); Senior Vice President of Advantica (1995-
1998).
Paul R. Wexler 56 Executive Vice President, Procurement and Distribution
of Advantica (1998-present); Senior Vice President,
Procurement and Distribution of Advantica (1995-1998);
Vice President, Procurement and Quality Assurance for
Marriott International (1991-1995).
Stephen W. Wood 41 Executive Vice President, Human Resources and
Corporate Affairs of Advantica (1998-present); Senior
Vice President, Human Resources and Corporate Affairs
of Advantica (1996-1998); Vice President,
Compensation, Benefits, and Employee Information
Systems and Corporate Office Human Resources of
Advantica (1993-1996).
</TABLE>
7
<PAGE>
Employees
At December 29, 1999, the Company had approximately 47,700 employees, none of
whom are subject to collective bargaining agreements. Many of the Company's
restaurant employees work part time, and many are paid at or slightly above
minimum wage levels. As is characteristic of the restaurant industry, the
Company experiences a high level of turnover among its restaurant employees.
The Company has experienced no significant work stoppages and considers its
relations with its employees to be satisfactory.
Item 2. Properties
Most of the Company's restaurants are free-standing facilities. Presented below
is a schedule of the average property and building square footage, as well as
average seating capacity for each of the Company's concepts:
<TABLE>
<CAPTION>
Average Average Average
Property Building Seating
Concept Size in Sq. Ft. Size in Sq. Ft. Capacity
------- --------------- --------------- --------
<S> <C> <C> <C>
Denny's 42,000 4,750 140
Coco's 35,000 5,600 150
Carrows 35,000 4,900 150
</TABLE>
The following table sets forth certain additional information regarding
Company-owned restaurant properties as of December 29, 1999:
<TABLE>
<CAPTION>
Land Land Leased Land and
and and Building
Concept Building Owned Building Owned Leased Total
------- -------------- -------------- -------- -----
<S> <C> <C> <C> <C>
Denny's 221 34 580 835
Coco's 2 33 113 148
Carrows 3 14 100 117
--- --- --- -----
Total 226 81 793 1,100
=== === === =====
</TABLE>
8
<PAGE>
The number and location of the Company's restaurants as of December 29, 1999
are presented below:
<TABLE>
<CAPTION>
Denny's Coco's Carrows
----------------- ----------------- -----------------
Franchised/ Franchised/ Franchised/
State/Country Owned Licensed Owned Licensed Owned Licensed
- ------------- ----- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Alabama 1 7 - - - -
Alaska - 4 - - - -
Arizona 28 50 20 2 - 5
Arkansas 1 9 - - - -
California 207 170 124 24 110 7
Colorado 19 17 - 2 - -
Connecticut - 8 - - - -
District of Columbia - 1 - - - -
Delaware 3 - - - - -
Florida 93 106 - - - -
Georgia - 29 - - - -
Hawaii 4 3 - - - -
Idaho - 6 - - - -
Illinois 46 19 - - - -
Indiana 14 17 2 - - -
Iowa - 5 - - - -
Kansas 3 7 - - - -
Kentucky - 19 - - - -
Louisiana 5 8 - - - -
Maine - 8 - - - -
Maryland 13 16 - - - -
Massachusetts 9 - - - - -
Michigan 24 14 - - - -
Minnesota 4 15 - - - -
Mississippi 2 1 - - - -
Missouri 17 23 2 - - -
Montana - 5 - - - -
Nebraska - 4 - - - -
Nevada 10 8 - - 5 1
New Hampshire 2 1 - - - -
New Jersey 8 7 - - - -
New Mexico 2 19 - - - 4
New York 53 12 - - - -
North Carolina 8 10 - - - -
North Dakota - 2 - - - -
Ohio 25 29 - - - -
Oklahoma 9 20 - - - -
Oregon 5 20 - - - 8
Pennsylvania 44 7 - - - -
South Carolina 12 7 - - - -
South Dakota - 3 - - - -
Tennessee 4 7 - - - -
Texas 62 101 - - 2 2
Utah 7 15 - - - -
Vermont - 2 - - - -
Virginia 19 11 - - - -
Washington 49 25 - 6 - 1
West Virginia - 3 - - - -
Wisconsin 12 7 - - - -
Wyoming - 4 - - - -
Guam - 3 - - - -
Puerto Rico - 12 - - - -
Canada 11 35 - - - -
Japan - - - 270 - -
South Korea - - - 31 - -
Other International - 8 - 2 - -
--- --- --- --- --- ---
Total 835 949 148 337 117 28
=== === === === === ===
</TABLE>
9
<PAGE>
In addition to the restaurant locations set forth above, the Company owns an
18-story, 187,000 square foot office tower in Spartanburg, South Carolina,
which serves as its corporate headquarters. The Company's corporate offices
currently occupy approximately 15 floors of the tower, with the balance leased
to others.
See Note 10 to the accompanying Consolidated Financial Statements for
information concerning encumbrances on certain properties of the Company.
Item 3. Legal Proceedings
In 1994, the Company was advised by the Internal Revenue Service of proposed
deficiencies for federal income taxes totaling approximately $12.7 million. The
proposed deficiencies relate to examinations of certain income tax returns
filed by the Company for the seven taxable periods ended December 31, 1992. In
the third quarter of 1996, this proposed deficiency was reduced by
approximately $7.0 million as a direct result of the passage of the Small
Business Jobs Protection Act (the"Act") in August 1996. The Act included a
provision that clarified Internal Revenue Code Section 162(k) to allow for the
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. As the Company believes the remaining proposed
deficiencies are substantially incorrect, it intends to continue to contest
such proposed deficiencies. The Company filed petitions in the United States
Tax Court in 1998 for these periods. The case is expected to be tried in 2000.
One current and two former managers of Denny's restaurant units have initiated,
in the Superior Court for Los Angeles County, California, a class action
lawsuit seeking, among other things, overtime compensation. The action, which
was originally filed on September 2, 1997, was certified on June 21, 1999 as a
class action with all managers and general managers who worked for Company-
owned Denny's restaurants in California since September 4, 1994 being
identified as class members. The suit alleges 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. Denny's has been and will continue
defending this lawsuit vigorously.
Other proceedings are pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company, and in
others presenting allegations that are nonroutine and include compensatory or
punitive damage claims. The ultimate legal and financial liability of the
Company with respect to the matters mentioned above and these other proceedings
cannot be estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that the ultimate
disposition of these matters will not significantly affect the financial
position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Advantica's common stock and warrants were initially listed on The Nasdaq Stock
Market(R) commencing January 8, 1998 under the symbols "DINEV" and "DINWV,"
respectively. On January 12, 1998, the common stock and warrants were listed
under the symbols "DINE" and "DINEW," respectively. As of March 1, 2000,
40,078,543 shares of common stock and 3,999,992 warrants were outstanding, and
there were approximately 2,770 record and beneficial holders of common stock
and 20 warrant holders of record. Neither Advantica, nor either of its
predecessors, FCI and Flagstar, has ever paid dividends on its common equity
securities. Furthermore, restrictions contained in the instruments governing
the outstanding indebtedness of Advantica restrict its ability to pay dividends
on the common stock in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 10 to the accompanying Consolidated Financial Statements of
the Company.
The following tables list the high and low closing sales prices of the common
stock for each quarter since Advantica's emergence from bankruptcy on January
7, 1998. The sales prices were obtained from The Nasdaq Stock Market(R).
<TABLE>
<CAPTION>
1998 High Low
---- ------ -----
<S> <C> <C>
First quarter (from January 8, 1998) $11.06 $8.88
Second quarter 11.31 8.75
Third quarter 10.63 4.50
Fourth quarter 7.50 3.41
<CAPTION>
1999
----
<S> <C> <C>
First quarter 7.13 4.50
Second quarter 5.56 3.44
Third quarter 3.81 2.50
Fourth quarter (a) 3.03 1.28
</TABLE>
- ---------------
(a) On December 7, 1999, the listing of the Company's common stock was
transferred from the Nasdaq National Market to the Nasdaq SmallCap Market.
11
<PAGE>
Item 6. Selected Financial Data
Set forth below are certain selected financial data concerning the Company for
each of the three fiscal years ended December 31, 1997, the one week ended
January 7, 1998, the fifty-one weeks ended December 30, 1998 and the fiscal
year ended December 29, 1999. Such data generally have been derived from the
Consolidated Financial Statements of the Company for such periods, which have
been audited. The following information should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented elsewhere herein.
<TABLE>
<CAPTION>
Predecessor Company Successor Company
------------------------------------------------------- ---------------------------
Fiscal Year Ended One Week Fifty-One Fiscal Year
------------------------------------------ Ended Weeks Ended Ended
(In millions, except December 31, December 31, December 31, January 7, December 30, December 29,
ratios and per 1995 (a) 1996 (a) (b) 1997 (a) (c) 1998 (a) 1998(a) (d) 1999(d)
share amounts) ------------ ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenue $1,480.4 $1,540.0 $1,685.8 $31.6 $1,595.4 $1,590.0
Operating income (loss) 59.1 (e) 95.2 110.3 8.8 (69.1) (283.6)(e)
(Loss) income from
continuing operations
(f) (83.5) (60.1) (84.8) 647.4 (g) (171.6) (388.8)
Basic (loss) income per
share from continuing
operations applicable
to common shareholders (2.30) (1.75) (2.33) 15.26 (4.29) (9.72)
Diluted (loss) income
per share from
continuing operations
applicable to common
shareholders (2.30) (1.75) (2.33) 11.74 (4.29) (9.72)
Cash dividends per
common share (h) -- -- -- -- -- --
Ratio of earnings to
fixed charges (i) -- -- -- 216.7x -- --
Deficiency in the
coverage of fixed
charges by earnings
before fixed charges
(i) 80.7 76.4 83.1 -- 173.4 387.6
Balance Sheet Data (at
end of period):
Current assets (j) $ 285.3 $ 185.5 $ 129.6 $ 291.1 $ 399.3
Working capital
(deficit) (j) (k) (122.2) (297.7) (230.2) (81.2) (234.1)
Net property and
equipment 1,104.4 1,168.6 625.8 630.3 622.6
Total assets 1,507.8 1,687.4 1,407.4 1,930.7 1,468.1
Long-term debt,
excluding current
portion 1,996.1 2,180.7 594.2 (l) 1,141.2 822.5
Other Data:
EBITDA as defined (m) $ 166.9 $ 170.2 $ 198.0 $10.4 $ 197.4 $ 203.8
Net cash flows provided
by (used in) operating
activities (9.4) (25.1) 52.5 8.7 10.2 (25.5)
Net cash flows provided
by (used in) investing
activities 196.3 (n) (87.7)(o) (43.0) 7.8 188.3 (p) 67.9 (q)
Net cash flows provided
by (used in) financing
activities (56.6) 8.2 (47.8) (11.8) (93.2) (32.2)
</TABLE>
- ---------------
(a) Certain amounts for the three fiscal years ended December 31, 1997, the
one week ended January 7, 1998 and the fifty-one weeks ended December 30,
1998 have been reclassified to conform to the 1999 presentation.
(b) Reflects the acquisition in May 1996 of Coco's and Carrows.
(c) Due to the change in the Company's fiscal year end, the year ended
December 31, 1997 includes more than 52 weeks of operations as further
described in Note 3 to the accompanying Consolidated Financial Statements.
(d) As discussed in more detail in Note 1 to the Consolidated Financial
Statements, FCI and Flagstar emerged from bankruptcy on January 7, 1998.
As described in Note 2 to the Consolidated Financial Statements, the
change in ownership of the Company effected by the financial restructuring
resulting from the bankruptcy required that the Company apply fresh start
reporting effective January 7, 1998 in accordance with the American
Institute of Certified Public Accountants' ("AICPA") Statement of Position
90-7, "Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). All financial statements subsequent to
January 7, 1998 are referred to as "Successor Company" statements, as they
reflect periods subsequent to the implementation of fresh start reporting
and are not comparable to the financial statements for periods prior to
January 7, 1998.
(e) Operating income reflects a provision for restructuring charges of $10.2
million and a charge for impaired assets of $24.8 million for the fiscal
year ended December 31, 1995 and an impairment charge of $197.0 million
for the fiscal year ended December 29, 1999. For a discussion of the 1999
impairment
12
<PAGE>
charge, see the consolidated operating results discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 6 in the accompanying Consolidated Financial Statements.
(f) The Company has classified as discontinued operations TW Recreational
Services, Inc. ("TWRS"), a recreation services subsidiary, Volume
Services, Inc., ("VS"), a stadium concessions subsidiary, and restaurant
subsidiaries Flagstar Enterprises, Inc. ("FEI") (which operated the
Company's Hardee's under licenses from Hardee's Food Systems), Quincy's
Restaurants, Inc. ("Quincy's") and EPL. TWRS and VS were sold during 1995.
FEI and Quincy's were sold in 1998, and EPL was sold in 1999.
(g) The income from continuing operations for the one week ended January 7,
1998 includes reorganization items of $627.0 million.
(h) The Company's bank facilities have prohibited, and its public debt
indentures have significantly limited, distributions and dividends on
Advantica's (and its predecessors') common equity securities. See Note 10
to the accompanying Consolidated Financial Statements appearing elsewhere
herein.
(i) For purposes of computing the ratio of earnings to fixed charges or
deficiency in the coverage of fixed charges by earnings before fixed
charges, fixed charges consist of interest expense including capitalized
interest, amortization of debt expenses and the interest element in rental
payments under operating leases (estimated to be one third of the total
rental payments). Earnings consist of income from continuing operations
before income taxes and fixed charges excluding capitalized interest.
(j) The current assets and working capital deficit amounts presented exclude
assets held for sale of $5.1 million as of December 31, 1996, $347.0
million as of December 31, 1997 and $87.7 million as of December 30, 1998.
Such assets held for sale relate to FEI and Quincy's for the year ended
December 31, 1997. For the year ended December 30, 1998, net assets held
for sale relate to EPL.
(k) A negative working capital position is not unusual for a restaurant
operating company. The increase in the working capital deficit from
December 31, 1995 to December 31, 1996 reflects the use of the proceeds
from the 1995 sales of TWRS, VS and the Company's distribution subsidiary,
PFC, and the proceeds of the 1996 sale of PTF, for operating needs and for
the acquisition of Coco's and Carrows. The decrease in the working capital
deficit from December 31, 1996 to December 31, 1997 is attributable
primarily to a reclassification of accrued interest from current
liabilities to liabilities subject to compromise in accordance with SOP
90-7, largely offset by a reduction in cash and cash equivalents which was
used for Company operations. The decrease in the working capital deficit
from December 31, 1997 to December 30, 1998 is attributable primarily to
an increase in cash and cash equivalents from the sales of FEI and
Quincy's. For a discussion of the increase in the working capital deficit
from December 30, 1998 to December 29, 1999, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
(l) Reflects the reclassification of $1,496.7 million of long-term debt to
liabilities subject to compromise in accordance with SOP 90-7 as a result
of the Chapter 11 filing.
(m) "EBITDA as defined" is defined by the Company as operating income before
depreciation, amortization and charges for restructuring and impairment
and is a key internal measure used to evaluate the amount of cash flow
available for debt repayment and funding of additional investments. EBITDA
as defined is not a measure defined by generally accepted accounting
principles and should not be considered as an alternative to net income or
cash flow data prepared in accordance with generally accepted accounting
principles. The Company's measure of EBITDA as defined may not be
comparable to similarly titled measures reported by other companies. For
the fiscal years 1995 and 1999, restructuring and impairment charges of
$35.0 million and $197.0 million, respectively, have been excluded from
EBITDA as defined. For a discussion of the 1999 impairment charge, see the
consolidated operating results discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 6 in
the accompanying Consolidated Financial Statements.
(n) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations and subsidiaries of $294.6 million.
(o) Net cash flows used in investing activities include the acquisition of
Coco's and Carrows, net of cash acquired, of $127.1 million, as well as
the net proceeds from the disposition of PTF of $63.0 million.
(p) Net cash flows provided by investing activities include proceeds from
sales of discontinued operations of $460.4 million.
(q) Net cash flows provided by investing activities include proceeds from
sales of discontinued operations of $109.4 million.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The following discussion should be read in conjunction with "Selected Financial
Data," and the Consolidated Financial Statements and other more detailed
financial information appearing elsewhere herein. For purposes of providing a
meaningful comparison of the Company's 1998 operating performance, the
following discussion and presentation of the results of operations for the one
week ended January 7, 1998 (Predecessor Company) and the fifty-one weeks ended
December 30, 1998 (Successor Company) will be combined and referred to as the
fiscal year ended December 30, 1998, unless otherwise noted. Where appropriate,
the impact of the adoption of fresh start reporting on the results of
operations during the period will be separately disclosed.
Outlook
In late 1999, the Company's management and Board, assisted by the global
business consulting firm, McKinsey & Company, began an extensive review of the
Company's operations and structure. It was concluded that the Company's Denny's
brand, as the nation's largest full-service restaurant chain, deserved the full
attention of management and full deployment of capital resources. Therefore, on
February 17, 2000, the Company announced that its strategic direction will
focus primarily on Denny's. For additional information, see Exhibit 99.2, which
contains an excerpt from Advantica's February 17, 2000 press release announcing
the Company's new strategic direction (the discussion herein being qualified in
its entirety by such Exhibit). In connection therewith, James B. Adamson will
serve as chief executive officer of Denny's and as chairman and chief executive
officer of the Company. Mr. Adamson has announced his intention to step down
from his position within two years.
The Company also announced that Donaldson, Lufkin & Jenrette Securities
Corporation had been hired to begin immediately exploring strategic
alternatives for FRD, the subsidiary which owns the Coco's and Carrows brands,
including a possible sale or recapitalization. Additionally, the Company began
streamlining its overhead structure by merging corporate administrative
functions into the Denny's organization.
In addition to the above strategies, the Company also determined that becoming
a more franchised-based operation will, over time, add shareholder value.
During the next several years, the Company plans on refranchising 250 to 300
Company-owned Denny's units as part of the Company's plan to reach its ultimate
goal of retaining approximately 300 units, or 40% of the current Company-owned
portfolio. The proceeds from this refranchising effort will be used to fund the
continued reimaging of the Denny's restaurants and to reduce debt.
As Denny's becomes the singular focus of the Company, management believes that
its ability to concentrate efforts on improving service, enhancing the
appearance of facilities and maintaining and improving food quality will retain
existing customers, attract new patrons and provide an enjoyable dining
experience at every visit.
14
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
December 31, December 30, December 29,
Company Consolidated 1997 1998 1999
- -------------------- ------------ ------------ ------------
<S> <C> <C> <C>
(In millions)
Net company sales $1,634 $1,569 $1,522
Franchise revenue 52 58 68
------ ------ ------
Operating revenue 1,686 1,627 1,590
Impairment charge -- -- 197
Other operating expenses 1,576 1,687 1,677
------ ------ ------
Operating income (loss) $ 110 $ (60) $ (284)
====== ====== ======
EBITDA as defined $ 198 $ 208 $ 204
Interest expense, net 159 105 104
Reorganization items 30 (627) --
Income tax provision (benefit) 2 (16) 1
Extraordinary gains -- (614) --
Net (loss) income (134) 1,213 (382)
</TABLE>
1999 Restaurant Unit Activity
<TABLE>
<CAPTION>
Ending Ending
Units Units Units
December 30, Units Units Sold/ December 29,
1998 Opened Refranchised Closed 1999
------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C>
Denny's
Company-owned 878 28 (56) (15) 835
Franchised units 825 79 56 (30) 930
Licensed units 18 3 -- (2) 19
----- --- --- ---- -----
1,721 110 -- (47) 1,784
Coco's
Company-owned 150 -- -- (2) 148
Franchised units 31 4 -- (1) 34
Licensed units 300 11 -- (8) 303
----- --- --- ---- -----
481 15 -- (11) 485
Carrows
Company-owned 123 -- (1) (5) 117
Franchised units 26 1 1 -- 28
----- --- --- ---- -----
149 1 -- (5) 145
----- --- --- ---- -----
2,351 126 -- (63) 2,414
Discontinued Operations:
El Pollo Loco --
Company-owned 100 9 9 (118)(a) --
Franchised units 161 4 (9) (156)(a) --
Licensed units 4 -- -- (4)(a) --
----- --- --- ---- -----
265 13 -- (278) --
----- --- --- ---- -----
2,616 139 -- (341) 2,414
===== === === ==== =====
</TABLE>
- ---------------
(a)Reflects the consummation of the sale of EPL stock on December 29, 1999.
15
<PAGE>
1999 vs. 1998
The Company's consolidated revenue for the year ended December 29, 1999
decreased $37.0 million (2.3%) compared to the prior year. Company restaurant
sales decreased $47.5 million primarily due to a net 51-unit decrease in
Company-owned restaurants (excluding the impact of the EPL disposition). The
decrease in Company-owned restaurants reflects the sale of Company-owned units
to franchisees as part of a strategy to optimize growth through franchising.
Franchise and licensing revenue increased $10.5 million resulted from a 114-
unit increase in franchised and licensed restaurants. An increase in Denny's
revenue reflected positive same-store sales growth and increased franchise
revenue for the year. 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 13.5% and 12.3% declines in revenue, respectively.
Consolidated operating expenses increased $186.4 million (11.0%) compared to
the prior year. Excluding the impact of a $197.0 million impairment charge, a
$23.5 million increase in depreciation and other amortization and a $4.3
million decrease in refranchising and other gains, operating expenses decreased
$38.4 million. This decrease is primarily due to the net 51-unit decrease in
Company-owned restaurants described above. Increased payroll costs resulted
from higher wage rates driven by market conditions. The increase in payroll
costs was offset by improved product cost margins and by reduced repairs and
maintenance expense resulting indirectly from the reimaging strategy
implemented during 1999. Additionally, general and administrative expenses
decreased as a result of lower costs to administer Denny's guest assurance
program and reduced corporate overhead costs. The increase in depreciation and
other amortization is primarily the result of the retirement of assets replaced
in conjunction with recently reimaged units.
Due to the presence of certain conditions at December 29, 1999, including the
current market value of the Company's common stock, the market discount on
certain of the Company's debt instruments and certain operating trends, the
Company concluded it should perform an impairment assessment of the carrying
amount of the intangible asset "Reorganization value in excess of amounts
allocated to identifiable assets, net of accumulated amortization." In
performing this analysis, management utilized a discounted future cash flow
model and recorded an impairment charge of $197.0 million, representing the
difference between the estimated value of the Company resulting from the cash
flow model and the value of the Company's net assets recorded at December 29,
1999 prior to recognition of impairment. The cash flow model was prepared based
on assumptions which reflect the strategy described in the Outlook section
above and in Exhibit 99.2 to this Form 10-K. The discount rate used in the cash
model was an estimate of the Company's current cost of capital. The adjusted
carrying value of the intangible asset, $182.7 million, will continue to be
amortized over its three-year remaining useful life.
EBITDA as defined decreased $4.0 million (1.9%) compared to the prior year.
This decrease is a result of the factors noted in the preceding paragraphs,
excluding the impairment charge and the increase in depreciation and other
amortization.
Consolidated operating income decreased $223.3 million compared to the prior
year as a result of the factors noted above.
Consolidated interest expense, net, totaled $104.2 million for the year ended
December 29, 1999 compared to $105.5 million for the year ended December 30,
1998. The decrease is primarily attributable to lower debt balances in the
current year, offset by a decrease in interest income from lower cash and
short-term investment balances and by a decrease in the allocation of interest
expense to discontinued operations. For the year ended December 29, 1999, $11.0
million of interest expense has been allocated to discontinued operations
compared to $14.1 million in the prior year.
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 accompanying Consolidated Financial Statements.
16
<PAGE>
The provision for income taxes from continuing operations for the year ended
December 29, 1999 reflects an effective income tax rate applied to loss before
taxes of approximately 0.3% for the year ended December 29, 1999 compared to an
income tax benefit of approximately (1.0%) for the fifty-one weeks ended
December 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.
Extraordinary items for the year ended December 30, 1998 total $613.8 million.
Of this amount, $612.8 million is due to the implementation of the Plan, which
resulted in the exchange of Flagstar's previously outstanding senior
subordinated debentures and convertible debentures for 40 million shares of
Advantica's common stock and warrants to purchase 4 million additional shares
of Advantica's common stock. The difference between the carrying value of such
debt (including principal, accrued interest and deferred financing costs) and
the fair value of the common stock and warrants resulted in a gain on debt
extinguishment which was recorded as an extraordinary item. The remaining $1.0
million relates to the early retirement in 1998 of $42.4 million of Advantica's
senior notes (described elsewhere herein), plus accrued and unpaid interest.
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the year ended December 29, 1999, the fifty-one weeks
ended December 30, 1998 and the one week ended January 7, 1998 to reflect EPL
as discontinued operations in accordance with Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"). Discontinued
operations for the fifty-one weeks ended December 31, 1998 and the one week
ended January 7, 1998 also included the operating results and cash flow effects
of FEI and Quincy's. Revenue and operating income (loss) of discontinued
operations for the year ended December 29, 1999, the fifty-one weeks ended
December 30, 1998 and the one week ended January 7, 1998 were $144.9 million
and $2.4 million, $320.0 million and $7.6 million, and $14.7 million and $(0.1)
million, respectively. Loss from operations of discontinued operations
decreased $9.6 million compared to the prior year as a result of the completion
of the FEI and Quincy's sales during 1998 and improved operating results at EPL
in 1999. The Company completed the sale of EPL on December 29, 1999. The sale
resulted in a gain of $15.5 million, net of taxes. The $5.9 million of EPL's
net loss which was incurred subsequent to the measurement date is netted
against the gain on sale in the Statements of Consolidated Operations and Cash
Flows presented herein.
Net loss was $381.9 million for the year ended December 29, 1999 compared to
net income of $1.2 billion for the prior year primarily as a result of the
adoption of fresh start reporting and the extraordinary gain recorded in the
prior year and the impairment charge recorded in the current year.
Accounting Changes
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities" ("SFAS 133"), was issued in June
1998. This statement establishes accounting and reporting standards for
derivative financial instruments and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in fair value of the derivative (i.e., gains and losses) depends on the
intended use of the derivative and the resulting designation. In June 1999,
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"), was issued. In accordance with SFAS 133 and
SFAS 137, SFAS 133 will be effective for the Company's first quarter of its
2001 fiscal year. The Company is in the process of evaluating the effect of
adopting SFAS 133.
1998 vs. 1997
Emergence from Chapter 11 Bankruptcy
As discussed in more detail in "Business -- Introduction" and in Note 1 to the
accompanying Consolidated Financial Statements, FCI and Flagstar emerged from
bankruptcy on January 7, 1998 (with the surviving
17
<PAGE>
corporation in the merger of FCI and Flagstar on that date changing its name to
Advantica Restaurant Group, Inc.). As described in Note 2 to the Consolidated
Financial Statements, the change in ownership of the Company effected by the
financial restructuring required that the Company apply fresh start reporting
effective January 7, 1998, in accordance with SOP 90-7.
Operating Results
The Company's consolidated revenue for the year ended December 30, 1998
decreased $58.8 million (3.5%) compared to the prior year. The revenue decrease
was partially attributable to an estimated $30.3 million impact due to fewer
reporting days in the 1998 period versus the 1997 comparable period because of
the change in the Company's fiscal year end in 1997. Excluding the impact of
fewer days in the 1998 reporting period, revenue for 1998 decreased $28.5
million compared to the prior year. Company restaurant sales decreased
primarily due to a net 61-unit decrease in Company-owned restaurants (excluding
EPL's units and the impact of the FEI and Quincy's dispositions) resulting
primarily from refranchising activity. Denny's posted positive same-store sales
for the period, while Coco's and Carrows experienced declines. Franchise and
licensing revenue increased $5.8 million, primarily attributable to a 113-unit
increase in franchised and licensed units, reflecting the Company's strategy to
grow through franchising. The increase in the number of franchised units
includes 85 additional franchised units in Denny's, 14 in Coco's and 12 in
Carrows.
The comparability of 1998 and 1997 consolidated operating expenses is
significantly affected by the impact of the adoption of fresh start reporting
as of January 7, 1998. Specifically, the amortization of reorganization value
in excess of amounts allocable to identifiable assets, which is over a five-
year period, totaled $128.8 million for the fifty-one weeks ended December 30,
1998. In addition, the adjustment of property and equipment and other
intangible assets to fair value as a result of the adoption of fresh start
reporting resulted in an estimated increase in amortization and depreciation of
approximately $40.5 million. Excluding the effect of the estimated impact of
fresh start reporting and a $19.4 million increase in refranchising and other
gains, operating expenses decreased $38.2 million (2.4%), primarily reflecting
the effect of fewer reporting days than in the prior year, food cost controls,
the 61-unit decrease in Company-owned restaurants and improvement in actuarial
trends for workers' compensation and health benefits costs. Such decreases are
somewhat offset by increased labor costs due to minimum wage increases.
EBITDA as defined increased $9.8 million (5.0%) in 1998 compared to the prior
year. This increase is a result of the factors noted in the preceding
paragraphs, excluding the estimated increase in depreciation and amortization.
Excluding the estimated impact of the adoption of fresh start reporting as
discussed above, consolidated operating income decreased $1.2 million compared
to the prior year as a result of the factors noted above.
Consolidated interest expense, net, totaled $105.5 million for the year ended
December 30, 1998 compared to $159.0 million for the year ended December 31,
1997. The decrease is primarily due to the significant reduction in debt
resulting from the implementation of the Plan which became effective on January
7, 1998 and a $18.6 million increase in interest income in 1998 due to
increased cash and cash equivalents available for investment as a result of the
FEI and Quincy's dispositions. Also contributing to the decrease in interest
expense in 1998 is the lower effective yield on Company debt resulting from the
revaluation of such debt to fair value at January 7, 1998 in accordance with
fresh start reporting, largely offset by a decrease in the allocation of
interest expense to discontinued operations. For the year ended December 30,
1998, $14.1 million of interest expense was allocated to discontinued
operations compared to $30.7 million in the prior year.
Reorganization items include professional fees and other expenditures incurred
by the Company in conjunction with the reorganization as well as the impact of
adjusting assets and liabilities to fair value in accordance with SOP 90-7 as
discussed in Notes 2 and 7 to the Consolidated Financial Statements included
herein.
The benefit from income taxes from continuing operations for the fifty-one-week
period reflects an effective income tax rate applied to loss before taxes of
approximately (1.0%) for the fifty-one weeks ended December 30, 1998 compared
to a provision for the 1997 fiscal year period reflecting an approximate rate
of 2.0%. The benefit from income taxes from continuing operations for the one-
week period ended January 7,
18
<PAGE>
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.
Extraordinary items for the year ended December 30, 1998 total $613.8 million.
Of this amount, $612.8 million is due to the implementation of the Plan, which
resulted in the exchange of Flagstar's previously outstanding senior
subordinated debentures and convertible debentures for 40 million shares of
Advantica's common stock and warrants to purchase 4 million additional shares
of Advantica's common stock. The difference between the carrying value of such
debt (including principal, accrued interest and deferred financing costs) and
the fair value of the common stock and warrants resulted in a gain on debt
extinguishment which was recorded as an extraordinary item. The remaining $1.0
million relates to the early retirement in 1998 of $42.4 million of Advantica's
senior notes (described elsewhere herein), plus accrued and unpaid interest.
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the fifty-one weeks ended December 31, 1998, the one week
ended January 7, 1998 and the year ended December 31, 1997 to reflect EPL as
discontinued operations in accordance with APB 30. Discontinued operations also
included the operating results and cash flow effects of FEI and Quincy's.
Revenue and operating income of the discontinued operations for the fifty-one
weeks ended December 30, 1998, the one week ended January 7, 1998 and the year
ended December 31, 1997 were $320.0 million and $7.6 million, $14.7 million and
$(0.1) million and $904.7 million and $20.1 million, respectively. The
operating results of FEI subsequent to January 7, 1998 and through the
disposition date were reflected as an adjustment to "Net assets held for sale"
prior to the disposition. The adjustment to "Net assets held for sale" as a
result of the net loss of FEI for the twelve weeks ended April 1, 1998 was a
decrease of $1.4 million.
Net income was $1.2 billion for the year ended December 30, 1998 compared to a
net loss of $0.1 million for the prior year, primarily as a result of the
adoption of fresh start reporting and the extraordinary gains discussed above.
Accounting Changes
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-
1"), which provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SOP 98-1 requires external and internal
direct costs of developing or obtaining internal-use software to be capitalized
as a long-lived asset and also requires training costs included in the purchase
price of computer software and costs associated with research and development
to be expensed as incurred. In April 1998, the AICPA issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"),
which provides additional guidance on the financial reporting of start-up
costs, requiring costs of start-up activities to be expensed as incurred.
In accordance with the adoption of fresh start reporting upon emergence from
bankruptcy (see Note 2 to the Consolidated Financial Statements herein), the
Company adopted both statements of position as of January 7, 1998. The adoption
of SOP 98-1 at January 7, 1998 resulted in the write-off of previously
capitalized direct costs of obtaining computer software associated with
research and development totaling $3.4 million. Subsequent to the Effective
Date, similar costs are being expensed as incurred. The adoption of SOP 98-5 at
January 7, 1998 resulted in the write-off of an insignificant amount of
previously capitalized preopening costs. Subsequent to the Effective Date,
preopening costs are being expensed as incurred.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards
for reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated Statement
of Shareholders' Equity. The adoption of SFAS 130 does not impact the Company's
consolidated results of operations, financial position or cash flows. Prior
year financial statements have been reclassified to conform to the SFAS 130
requirements.
19
<PAGE>
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 does
not impact the Company's consolidated results of operations, financial position
or cash flows.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"). This Statement does not change the measurement or recognition of
those plans, but is designed to simplify disclosures about pension and other
postretirement benefit plans. Specifically, it standardizes the disclosure
requirements to the extent practicable, requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that are no
longer as useful as they were when SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
were issued. The Statement also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The adoption of SFAS 132
had no impact on the Company's consolidated results of operations, financial
position or cash flows.
Change in Fiscal Year
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to the last Wednesday of the calendar year. Concurrent with this
change, the Company changed to a four-four-five week quarterly closing calendar
which is the restaurant industry standard, and generally results in four 13-
week quarters during the year with each quarter ending on a Wednesday. Due to
the timing of this change, the fiscal year ended December 31, 1997 includes
more than 52 weeks of operations. Carrows' and Coco's fiscal year includes an
additional six days and Denny's fiscal year includes an additional five days.
20
<PAGE>
Restaurant Operations
Denny's
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
December 31, December 30, December 29,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average unit and
same-store data)
U.S. systemwide sales $1,902 $1,963 $2,079
====== ====== ======
Net company sales $1,146 $1,128 $1,137
Franchise and licensing revenue 47 51 60
------ ------ ------
Total revenue 1,193 1,179 1,197
------ ------ ------
Operating expenses:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets -- 79 81
Impairment charge -- -- 112
Other 1,073 1,086 1,129
------ ------ ------
Total operating expenses 1,073 1,165 1,322
------ ------ ------
Operating income $ 120 $ 14 $ (125)
====== ====== ======
EBITDA as defined $ 172 $ 184 $ 189
Average unit sales (in thousands):
Company-owned 1,285 1,283 1,309
Franchised 1,079 1,091 1,132
Same-store sales (decrease) increase
(Company-owned)(a): (4.5)% 1.3% 2.4%
Operated units:
Company-owned 894 878 835
Franchised 740 825 930
Licensed 18 18 19
------ ------ ------
Total 1,652 1,721 1,784
====== ====== ======
</TABLE>
- ---------------
(a)Prior year amounts have not been restated for 1999 comparable units.
1999 vs. 1998
Denny's net company sales for the year ended December 29, 1999 increased $9.0
million (0.8%) compared to the prior year. The increase reflects 2.4% growth in
same-store sales, the second consecutive year of positive same-store sales.
Denny's benefitted from an increase in guest check average resulting from
successful promotions of higher-priced menu items and from moderate price
increases. Franchise and licensing revenue increased $8.8 million (17.1%),
primarily attributable to a net increase of 105 franchised restaurants over the
prior year. The increased franchising revenue reflects the Company's strategy
to grow its franchise store base, including the sale of Company-owned
restaurants to franchisees to stimulate such growth.
Denny's operating expenses increased $156.2 million (13.4%) compared to the
prior year. Excluding the impact of a $112.0 million impairment charge, a $24.8
million increase in depreciation and other amortization and a $0.9 million
decrease in refranchising and other gains, operating expenses increased $18.5
million. This increase is primarily the result of increased sales and higher
labor costs offset by reduced repairs and maintenance. Increased payroll costs
resulted from higher wage rates driven by market conditions. The reduction in
repairs and maintenance resulted indirectly from the initiation of the
Company's reimaging program. The increase in depreciation and other
amortization is primarily the result of the retirement of assets replaced in
conjunction with recently reimaged units.
EBITDA as defined increased $4.8 million (2.6%) compared to the prior year as a
result of the factors noted in the preceding paragraphs, excluding the
impairment charge and the increase in depreciation and other amortization.
21
<PAGE>
Denny's operating income for the year ended December 29, 1999 decreased $138.5
million compared to the prior year as a result of the factors noted above.
1998 vs. 1997
Denny's net company sales for the year ended December 30, 1998 decreased $18.2
million (1.6%) compared to the prior year. The decrease primarily reflects a
$21.7 million impact resulting from five fewer reporting days in the first
quarter of 1998 in comparison to the prior year comparable period and 16 fewer
equivalent Company-owned units. This decrease was partially offset by higher
sales at Company-owned units which resulted from positive same-store sales.
Such increases were primarily driven by an increase in average guest check due
to successful promotions of higher-priced menu items and price increases
initiated to keep pace with minimum wage and other cost increases. Franchise
and licensing revenue increased $4.1 million over the prior year. The increased
franchising revenue reflects the Company's strategy to grow its franchise store
base, including the sale of Company-owned units to franchisees to stimulate
such growth. Denny's added 72 franchised stores in 1998, reflecting a growth
pace similar to 1997 when Denny's opened a record 77 franchise units.
The comparability of 1998 and 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$79.2 million for the fifty-one weeks ended December 30, 1998. In addition, the
adjustment of property and equipment and other intangible assets to fair value
resulted in an estimated increase in amortization and depreciation of
approximately $35.6 million. Excluding the estimated effect of fresh start
reporting and a $10.8 million increase in refranchising and other gains,
operating expenses decreased $11.9 million (1.1%), primarily reflecting the
effect of five fewer reporting days, fewer Company-owned units and improvements
in actuarial trends for workers' compensation and health benefits costs. These
decreases are partially offset by an increase in labor costs due to minimum
wage increases and the effect on the prior year of a $5.8 million nonrecurring
reduction of operating expenses.
EBITDA as defined increased $12.8 million (7.5%) compared to the prior year as
a result of the factors noted in the preceding paragraphs, excluding the
estimated increase in depreciation and amortization.
Excluding the estimated impact of fresh start reporting, Denny's operating
income for the year ended December 30, 1998 increased $8.7 million over the
prior year as a result of the factors noted above.
22
<PAGE>
Coco's
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
December 31, December 30, December 29,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
($in millions, except average unit and
same-store data)
U. S. systemwide sales $ 288 $ 280 $ 264
====== ====== ======
Net company sales $ 276 $ 256 $ 219
Franchise and licensing revenue 4 4 6
------ ------ ------
Total revenue 280 260 225
------ ------ ------
Operating expenses:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets -- 22 21
Impairment charge -- -- 35
Other 262 245 218
------ ------ ------
Total operating expenses 262 267 274
------ ------ ------
Operating income (loss) $ 18 $ (7) $ (49)
====== ====== ======
EBITDA as defined $ 35 $ 35 $ 25
Average annual unit sales (in
thousands):
Company-owned 1,492 1,569 1,472
Franchised 1,728 1,356 1,310
Same-store sales decrease (Company-
owned) (a): 0.0% (0.7)% (6.2)%
Operated units:
Company-owned 178 150 148
Franchised 17 31 34
Licensed 298 300 303
------ ------ ------
Total 493 481 485
====== ====== ======
</TABLE>
- ---------------
(a)Prior year amounts have not been restated for 1999 comparable units.
1999 vs. 1998
Coco's net company sales for the year ended December 29, 1999 decreased $36.2
million (14.2%) compared to the prior year. The decrease reflects lower sales
from a decrease in the number of Company-owned equivalent units from the prior
year. In addition, lower same-store sales resulted from a decline in customer
traffic partially offset by a higher guest check average. Franchise and
licensing revenue increased $1.2 million (24.7%), primarily attributable to a
net increase in franchised units over the prior year.
Coco's operating expenses increased $6.7 million (2.5%) compared to the prior
year. Excluding the impact of a $35.3 million impairment charge, operating
expenses decreased $28.6 million, primarily reflecting the decrease in Company-
owned equivalent units and lower same-store sales.
EBITDA as defined decreased $9.4 million (27.1%) for 1999 compared to 1998.
This decrease is the result of factors noted in the preceding paragraphs,
excluding the impairment charge.
Coco's operating income for the year ended for the year ended December 29, 1999
decreased $41.7 million compared to the prior year as a result of the factors
noted above.
1998 vs. 1997
Coco's net company sales for the year ended December 30, 1998 decreased $20.1
million (7.3%) compared to the prior year. The decrease includes a $4.8 million
impact due to six fewer reporting days compared to the prior year comparable
period. The remaining decrease reflects a 28-unit decrease in the number of
Company-
23
<PAGE>
owned restaurants and a decrease in same-store sales. The decrease in same-
store sales resulted primarily from a decline in customer traffic, partially
offset by a higher average guest check in the first half of 1998. Franchise and
licensing revenue was flat in 1998 compared to the prior year, reflecting an
increase in franchise revenue offset by a decrease in licensing revenue. The
increase in franchise revenue resulted from the net increase of 14 franchised
units in 1998. The decline in foreign licensing revenue resulted primarily from
a stronger dollar versus the yen.
The comparability of 1998 and 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$22.1 million for the year ended December 30, 1998. In addition, the adjustment
of property and equipment and other intangible assets to fair value resulted in
an estimated increase in amortization and depreciation of $3.2 million.
Excluding the estimated impact of fresh start reporting, operating expenses
decreased $19.2 million (7.3%). This decrease reflects the effect of six fewer
reporting days in 1998 than in the prior year and the 28-unit decrease in
Company-owned restaurants.
EBITDA as defined for the year ended December 30, 1998 was flat compared to the
prior year. This results from the factors noted in the preceding paragraphs,
excluding the estimated increase in depreciation and amortization.
Excluding the estimated impact of the adoption of fresh start reporting, Coco's
operating income for the year ended December 30, 1998 decreased $0.5 million
compared to the prior year as a result of the factors noted above.
24
<PAGE>
Carrows
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
December 31, December 30, December 29,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
($ in millions, except average unit and
same-store data)
U. S. systemwide sales $ 215 $ 204 $ 190
====== ====== ======
Net company sales $ 211 $ 185 $ 162
Franchise revenue 1 2 3
------ ------ ------
Total revenue 212 187 165
------ ------ ------
Operating expenses:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets - 18 18
Impairment charge - - 25
Other 198 179 161
------ ------ ------
Total operating expenses 198 197 204
------ ------ ------
Operating income $ 14 $ (10) $ (39)
====== ====== ======
EBITDA as defined $ 27 $ 23 $ 18
Average annual unit sales (in thousands)
Company owned 1,362 1,377 1,365
Franchised NM 1,131 1,052
Same-store sales decrease (Company-
owned) (a): (1.7)% (2.0)% (3.7)%
Operated units:
Company-owned 140 123 117
Franchised 14 26 28
------ ------ ------
Total 154 149 145
====== ====== ======
</TABLE>
- ---------------
NM = Not Meaningful
(a)Prior year amounts have not been restated for 1999 comparable units.
1999 vs. 1998
Carrows' net company sales for the year ended December 29, 1999 decreased $23.5
million (12.7%) compared to the prior year. The decrease reflects lower sales
from a decrease in the number of Company-owned equivalent units from the prior
year. In addition, lower same-store sales resulted from a decline in customer
traffic partially offset by a higher guest check average. Franchise revenue
increased $0.5 million (28.9%), primarily attributable to a net increase in
franchised units over the prior year.
Carrows' operating expenses increased $5.2 million (2.6%) compared to the prior
year. Excluding the impact of a $25.2 million impairment charge, operating
expenses decreased $20.0 million, primarily reflecting the decrease in Company-
owned equivalent units and lower same-store sales.
EBITDA as defined decreased $5.3 million (22.6%) for 1999 compared to 1998.
This decrease is the result of factors noted in the preceding paragraphs,
excluding the impairment charge.
Carrows' operating income for the year ended December 29, 1999 decreased $28.2
million compared to the prior year as a result of the factors noted above.
1998 vs. 1997
Carrows' net company sales for the year ended December 30, 1998 decreased $26.3
million (12.4%) compared to the prior year comparable period. The decrease
reflects a $3.8 million impact due to six fewer reporting days in 1998 compared
to the prior year. The remaining decrease reflects a 17-unit decrease in the
number of
25
<PAGE>
Company-owned restaurants, 12 of which were converted to franchise units, and a
decrease in same-store sales. The decrease in same-store sales resulted
primarily from a decrease in customer traffic, partially offset by a higher
average guest check in the first half of 1998. Franchise revenue increased $1.3
million for the year ended December 30, 1998 compared to the prior year. This
increase resulted from the addition of 12 franchised units over the prior year.
The comparability of 1998 and 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$17.9 million for the year ended December 30, 1998. In addition, the adjustment
of property and equipment and other intangible assets to fair value resulted in
an estimated increase in amortization and depreciation of $2.2 million.
Excluding the estimated impact of fresh start reporting, operating expenses
decreased $21.2 million (10.7%), reflecting the effect of six fewer reporting
days in 1998 than in the prior year and the 17-unit decrease in Company-owned
restaurants.
EBITDA as defined decreased by $3.2 million (12.0%) for 1998 compared to 1997.
This decrease is a result of the factors noted in the preceding paragraphs,
excluding the estimated $20.1 million increase in depreciation and
amortization.
Excluding the estimated impact of the adoption of fresh start reporting,
Carrows' operating income for the year ended December 30, 1998 decreased $3.8
million from the prior year as a result of the factors noted above.
Liquidity and Capital Resources
On the Effective Date, the Company entered into a new senior revolving credit
facility with The Chase Manhattan Bank ("Chase") and other lenders named
therein, providing the Company (excluding FRD) with a working capital and
letter of credit facility of up to a total of $200 million (as amended to date,
the "Credit Facility"). At December 29, 1999, the Company had no working
capital advances outstanding under the Credit Facility; however, letters of
credit outstanding were $50.7 million. Historically, the Company has met its
liquidity requirements with internally generated funds, external borrowings,
and in recent years, proceeds from asset sales. The Company expects to continue
to rely on internally generated funds, supplemented by available working
capital advances under the Credit Facility and other external borrowings, as
its primary source of liquidity.
The Credit Facility matures on January 7, 2003 (subject to early termination on
March 31, 2000 as described below -- see also Note 10 to the accompanying
Consolidated Financial Statements) and is generally secured by liens on the
stock of Advantica's subsidiaries, accounts receivable, intellectual property
and cash and cash accounts, along with Advantica's guarantee and additional
liens on the Company's corporate headquarters in Spartanburg, South Carolina.
The Credit Facility contains certain financial and negative covenants,
conditions precedent, events of default and other terms, conditions and
provisions customarily found in credit agreements for leveraged financings. The
Company believes the Credit Facility, together with cash generated from
operations, various cash management measures and other sources, will provide
the Company with adequate liquidity to meet its working capital, debt service
and capital expenditure requirements for at least the next twelve months.
The Credit Facility is subject to early termination on March 31, 2000 if (a)
the Company has not refinanced the Denny's Mortgage Notes (as defined below) on
terms acceptable to the lenders and (b) either (1) the Company has not
deposited funds with Chase equal to at least the face amount of the Denny's
Mortgage Notes then outstanding (which deposit balance shall be maintained
until the Denny's Mortgage Notes are redeemed or repaid in full) or (2) the
aggregate principal amount of outstanding loans and letters of credit under the
Credit Facility exceeds $150 million on or before the earlier of March 31, 2000
and the date the Denny's Mortgage Notes are repaid in full. The latest
amendment to the Credit Facility, dated as of December 20, 1999, provided the
Company with the ability to redeem or repay the Denny's Mortgage Notes on or
before their scheduled maturity. As of the date hereof, $100 million in
aggregate principal amount of the Denny's Mortgage Notes remain outstanding.
The Company intends to make the required deposit, as indicated above, and
thereby maintain the Credit Facility in effect and available to the Company
beyond March 31, 2000.
26
<PAGE>
On or prior to July 12, 2000, the Company is required to repay or refinance the
$160 million 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"). During the first quarter of 2000,
the Company repurchased $60 million of the Denny's Mortgage Notes. The Company
intends, through a combination of cash and short-term investments on hand and
available debt capacity, to repay the balance of the Denny's Mortgage Notes on
or before their scheduled maturity.
The following table sets forth a calculation of the Company's cash from
operations available for debt repayment and capital expenditures, or cash used
in operations, for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
Ended Ended
December 30, December 29,
1998 1999
------------ ------------
<S> <C> <C>
(In millions)
Net income (loss) $1,213.5 $(381.9)
Equity in (income) loss from discontinued
operations, net (123.9) (6.9)
Extraordinary items (613.8) --
Noncash reorganization items (627.3) --
Impairment charge -- 197.0
Other noncash charges 227.8 248.3
Deferred income tax provision (benefit) (13.8) --
Change in certain working capital items (51.1) (52.9)
Change in other assets and other liabilities, net 7.5 (29.1)
-------- -------
Cash from operations available for debt repayment
and capital expenditures or cash (used in)
operations $ 18.9 $ (25.5)
======== =======
</TABLE>
Coco's and Carrows cash flows from operations, which are included in the
Company's total cash flow from operations set forth in the table above, were
$24.0 million and $8.8 million for the fiscal years ended December 30, 1998 and
December 29, 1999, respectively. Except for the payment of certain management
fees and tax reimbursements payable to Advantica under certain conditions, such
cash flows are currently unavailable to Advantica and its other subsidiaries.
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new credit agreement with Chase and Credit Lyonnais New York Branch and other
lenders named therein and thereby established a $70 million senior secured
credit facility (the "New FRD Credit Facility") to replace a prior 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. Borrowings under
the New FRD Credit Facility are to be used for Coco's and Carrows' working
capital requirements and other general corporate purposes. Certain letters of
credit may be issued under the revolving credit facility. All borrowings under
the New FRD Credit Facility accrue interest at a variable rate based on the
prime rate or an adjusted Eurodollar rate (approximately 9.6% at December 29,
1999) and are secured by substantially all of the assets of FRD and its
subsidiaries and by the issued and outstanding stock of FRI-M and its
subsidiaries. Principal installments of the term loan will be payable as
follows: $2.0 million per quarter for three consecutive quarters beginning June
30, 2001; $3.0 million per quarter for four consecutive quarters beginning
March 31, 2002; and $6.0 million for two consecutive quarters beginning March
31, 2003. At December 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 $11.1 million.
Management believes the New FRD Credit Facility, together with cash generated
from operations, various cash management measures and other sources, will
provide FRD with adequate liquidity to meet its working capital, debt service
and capital expenditure requirements for at least the next twelve months.
However, a significant downturn in the restaurant industry, the California
economy or other developments adversely affecting FRD's cash flow could impair
its ability to service its indebtedness. For additional information regarding
the New FRD Credit Facility, see Note 10 to the accompanying Consolidated
Financial Statements.
On April 1, 1998, the Company completed the sale of all of the capital stock of
FEI and used a portion of the proceeds to in-substance defease the guaranteed
secured bonds of Spardee's Realty, Inc., a wholly owned
27
<PAGE>
subsidiary of FEI, and of Quincy's Realty, Inc., a wholly owned subsidiary of
Quincy's. The Company replaced the original mortgage collateral for such
indebtedness through the purchase of United States Government and AAA rated
investment securities which were deposited with the collateral agent and which
satisfy the principal and interest payments of the bonds though the stated
maturity date of November 15, 2000.
The Company completed the disposition of its quick-service concepts on December
29, 1999, when it consummated the sale of all of the capital stock of its
wholly owned subsidiary, EPL, to American Securities Capital Partners, L.P. for
$128.3 million, which included the assumption of $15.2 million of debt. The
disposition of EPL resulted in a gain of approximately $15.5 million, net of
taxes.
Although consummation of the Plan and subsequent debt repayment from asset sale
proceeds significantly reduced the Company's debt obligations, the Company
still has substantial indebtedness and debt service requirements, both in
absolute terms and in relation to shareholders' equity. With respect to the
liquidity of the Company, management believes that the Company will have
sufficient cash flow from operations (together with funds available under its
existing credit facilities) to pay interest and scheduled amortization on all
of its outstanding indebtedness and to fund anticipated capital expenditures
through 2000. The Company's ability to meet its debt service obligations will
depend on a number of factors, including management's ability to maintain
operating cash flow, and there can be no assurance that targeted levels of
operating cash flow will actually be achieved. The Company's ability to
maintain or increase operating cash flow will depend upon consumer tastes, the
success of marketing initiatives and other efforts by the Company to increase
customer traffic in its restaurants, prevailing economic conditions and other
matters, many of which are beyond the control of the Company.
As of December 29, 1999, scheduled maturities of long-term debt relative to
Advantica and its subsidiaries for the years 2000 and thereafter, excluding
approximately $153 million of in-substance defeased debt maturing in 2000, are
as follows:
<TABLE>
<CAPTION>
Advantica
Excluding FRD FRD
------------- -----
<S> <C> <C>
(In millions)
2000 $174.5 $ 2.9
2001 12.5 8.8
2002 6.0 14.5
2003 4.9 13.9
2004 4.5 157.6
Thereafter 568.0 2.1
</TABLE>
In addition to scheduled maturities of principal, on a consolidated basis,
approximately $108.2 million of cash (excluding $13.1 million related to the
in-substance defeased debt) will be required in 2000 to meet interest payments
on long-term debt.
The Company's principal capital requirements are associated with opening new
restaurants and remodeling and maintaining its existing restaurants and
facilities, and during 1999, the Company's related capital expenditures were
$128.4 million. Of that amount, approximately $29.0 million was financed
through capital leases. In addition, the Company spent approximately $14.0
million for the acquisition of restaurants, of which $10.9 was related to the
acquisition of certain Perkins restaurants by its wholly owned subsidiary,
Denny's, Inc. (see Note 5 to the accompanying Consolidated Financial
Statements). Capital expenditures during 2000 are expected to total
approximately $60 million to $70 million; however, the Company is not committed
to spending this amount and could spend less if circumstances warrant.
The Company is able to operate with a substantial working capital deficit
because (1) restaurant operations and most food service operations are
conducted primarily on a cash (and cash equivalent) basis with a low level of
accounts receivable, (2) rapid turnover allows a limited investment in
inventories, and (3) accounts payable for food, beverages and supplies usually
become due after the receipt of cash from the related sales. At December 29,
1999, the Company's working capital deficit, exclusive of net assets held for
sale, was $234.1 million compared to $81.2 million at December 30, 1998. The
increase in the deficit is attributable primarily to the reclassification of
the Denny's Mortgage Notes to current liabilities and a reduction in cash and
cash equivalents
28
<PAGE>
related to the acquisition of the Perkins restaurants, the retirement of $20
million of Advantica's Senior Notes (as defined below) and expenditures related
to the Denny's reimaging program. The increase in working capital deficit is
partially offset by the proceeds from the sale of EPL.
On January 25, 2000, the Company entered into a three-year agreement with
Affiliated Computer Services, Inc. ("ACS") to manage and operate the Company's
information technology for its corporate headquarters, restaurants and field
management. This agreement replaces the IBM Global Services contract which had
been in existence since 1996. ACS will oversee data center operations,
applications development and maintenance, desktop support, data networking,
help desk operations and POS hardware maintenance. The Company anticipates
spending approximately $16.0 million per year under this contract.
Impact of the Year 2000 Issue
The Company's systems infrastructure and critical applications successfully
handled the transition into the Year 2000. All restaurants were fully
functional and opened for business without incident on January 1, 2000. No
supply chain interruptions were identified. Although no Year 2000-related
problems are anticipated, the Company is monitoring all systems throughout the
first quarter of 2000.
Total Company spending in 1999 related to Year 2000 remediation efforts was
approximately $16.6 million. Of that amount, a total of approximately $13.6
million expended to develop or purchase new software was capitalized. The
Company does not expect to incur additional costs related to this issue during
2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company has exposure to interest rate risk related to certain instruments
entered into for other than trading purposes. Specifically, the Company has in
place two bank credit facilities, Advantica's Credit Facility and the New FRD
Credit Facility, which bear interest at variable rates. Borrowings under the
Credit Facility and the New FRD Credit Facility bear interest based on the
prime rate or an adjusted Eurodollar rate (approximately 9.6% at December 29,
1999). The Company's other outstanding long-term debt bear fixed rates of
interest. While changes in the prime rate and Eurodollar rate could affect the
cost of funds borrowed in the future, existing amounts outstanding are at fixed
rates; therefore, the Company believes the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's consolidated
financial position, results of operations and cash flows would not be
significant.
The Company may from time to time use interest rate swaps to manage overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
The Company does not use derivative instruments for trading purposes. No
interest rate derivatives were in place at December 29, 1999.
Foreign Currency Exchange Rate Risk
The Company has exposure to foreign exchange rate risk related to certain
foreign currency transactions. In order to mitigate this risk, the Company from
time to time has entered into foreign exchange forward contracts. The Company
does not speculate on the future direction of foreign currency exchange rates
nor does the Company use these derivative financial instruments for trading
purposes. While changes in the foreign currency exchange rates could affect the
amount of gains or losses on forward contracts, forward contracts outstanding
as of December 29, 1999 are not significant; therefore, the Company believes
the effect, if any, of reasonably possible near-term changes in foreign
currency exchange rates on the Company's consolidated financial position,
results of operations and cash flows would not be significant.
Commodity Price Risk
The Company purchases certain products such as beef, poultry, pork and coffee
which are affected by commodity pricing and are, therefore, subject to price
volatility caused by weather, production problems, delivery difficulties and
other factors that are outside the Company's control and which are generally
29
<PAGE>
unpredictable. Changes in commodity prices affect the Company and its
competitors generally and often simultaneously. In general, the food products
purchased by the Company are purchased based upon market prices established
with vendors. Although many of the items purchased are subject to changes in
commodity prices, certain purchasing arrangements are structured to contain
features that minimize price volatility by establishing price ceilings and/or
floors. The Company uses these types of purchase arrangements to control costs
as an alternative to using financial instruments to hedge commodity prices. In
many cases, the Company believes it will be able to address commodity cost
increases which are significant and appear to be long-term in nature by
adjusting its menu pricing or changing its product delivery strategy. However,
competitive circumstances could limit such actions and in those circumstances
increases in commodity prices could result in lower margins for the Company.
Because of the often short-term nature of commodity pricing aberrations and the
ability of the Company to change menu pricing or product delivery strategies in
response to commodity price increases, the Company believes that the impact of
commodity price risk is not significant.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements which appears on page F-1 herein.
Form 11-K Information
Advantica, pursuant to Rule 15d-21 promulgated under the Securities Exchange
Act of 1934, as amended, will file as an amendment to this Annual Report of
Form 10-K the information, financial statements and exhibits required by Form
11-K with respect to the Advantica 401(k) Plan.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item with respect to Advantica's directors and
compliance by Advantica's directors, executive officers and certain beneficial
owners of Advantica's common stock with Section 16(a) of the Securities
Exchange Act of 1934 is furnished by incorporation by reference to all
information under the captions entitled "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement (to be
filed hereafter) in connection with Advantica's Annual Meeting of the
Shareholders to be held on May 24, 2000 (the "Proxy Statement"). The
information required by this item with respect to Advantica's executive
officers appears in Item I of Part I of this Annual Report on Form 10-K under
the caption "Executive Officers of the Registrant."
Item 11. Executive Compensation
The information required by this item is furnished by incorporation by
reference to all information under the captions entitled "Executive
Compensation" and "Election of Directors -- Compensation of Directors" in the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is furnished by incorporation by
reference to all information under the caption "General -- Equity Security
Ownership" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Certain Transactions
The information required by this item is furnished by incorporation by
reference to all information under the caption "Certain Transactions" in the
Proxy Statement.
30
<PAGE>
Information Regarding Certain Indebtedness
The following information regarding certain indebtedness of the Company does
not purport to be complete and is qualified in its entirety by reference to the
documents governing such indebtedness, including the definitions of certain
terms therein, which have been filed as exhibits to filings of Advantica and/or
FRD with the Commission. Whenever particular provisions of such documents are
referred to herein, such provisions are incorporated herein by reference, and
the statements are qualified in their entirety by such reference. See Note 10
to the accompanying Consolidated Financial Statements for additional
information regarding the Company's indebtedness and the terms thereof
(including indebtedness under the Credit Facility, the New FRD Credit Facility
and certain mortgage financings).
Advantica Public Debt
Pursuant to the Plan, on January 7, 1998, Advantica issued $592.0 million
aggregate principal amount of 11 1/4% Senior Notes due 2008, (the "Senior
Notes"). The Senior Notes are senior unsecured obligations of Advantica and
rank pari passu in right of payment to all senior indebtedness, including the
Credit Facility. The Senior Notes are effectively subordinated to Advantica's
secured indebtedness, including indebtedness under the Credit Facility. The
Senior Notes are structurally subordinated to indebtedness under the Credit
Facility to the extent of direct obligations of Advantica's subsidiaries, as
Borrowers and as subsidiary guarantors, thereunder. Interest on the Senior
Notes accrues at a rate equal to 11 1/4% per annum and is payable semi-annually
in arrears on each July 15 and January 15, beginning July 15, 1998. They will
mature on January 15, 2008.
The Senior Notes will be redeemable, in whole or in part, at the option of
Advantica at any time on or after January 15, 2003, initially at a redemption
price equal to 105.625% of the principal amount thereof to and including
January 14, 2004, at 103.750% of the principal amount thereof to and including
January 14, 2005, at 101.875% of the principal amount thereof to and including
January 14, 2006, and thereafter at 100% of the principal amount thereof,
together in each case with accrued interest.
Notwithstanding the foregoing, from January 15, 1998 until January 15, 2001,
Advantica may redeem up to 35% of the aggregate principal amount of Senior
Notes outstanding on January 7, 1998 at a redemption price (expressed as a
percentage of the principal amount) of 110%, plus accrued and unpaid interest,
if any, to the redemption date, from the net proceeds of any public offering
for cash of any equity securities of Advantica or any subsidiary thereof.
As of October 5, 1998, Advantica retired $42.4 million in aggregate principal
amount of the Senior Notes. During the first quarter of 1999, the Company
utilized a portion of the remaining proceeds from the Hardee's and Quincy's
sales transactions to purchase an additional $20 million aggregate principal
amount of the Senior Notes, leaving an aggregate principal amount of Senior
Notes outstanding of $529.6 million.
The FRD Notes
In connection with the May 23, 1996 acquisition of FRI-M, FRD issued $156.9
million principal amount of 12.5% FRD Senior Notes due 2004 (the "FRD Notes").
The FRD Notes are senior unsecured, general obligations of FRD and rank senior
in right of payment to all existing and future subordinated indebtedness of FRD
and rank pari passu in right of payment with all existing and future
unsubordinated indebtedness of FRD. The FRD Notes are effectively subordinated
to secured indebtedness of FRD, including FRD's guaranty of borrowings under
the New FRD Credit Facility, to the extent of the value of FRD's assets
securing such guaranty. Borrowings under the New FRD Credit Facility are
secured by substantially all of FRD's assets. The FRD Notes are structurally
subordinated to all indebtedness of FRI-M, including its indebtedness under the
New FRD Credit Facility. Interest on the FRD Notes accrues at the rate of 12
1/2% per annum and is payable semi-annually in arrears on January 15 and July
15. They will mature on July 15, 2004.
The FRD Notes will be redeemable, in whole or in part, at the option of FRD at
any time on or after May 23, 2001, initially at a redemption price equal to
105.0% of the principal amount thereof to and including May 22, 2002, at 102.5%
of the principal amount thereof to and including May 22, 2003, and thereafter
at 100% of the principal amount thereof, together in each case with accrued
interest.
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1)Financial Statements:
See the Index to Financial Statements which appears on page F-1 hereof.
(2)Financial Statement Schedules:
No schedules are filed herewith because of the absence of conditions
under which they are required or because the information called for is in
the Consolidated Financial Statements or Notes thereto.
(3) Exhibits:
Certain of the exhibits to this Report, indicated by an asterisk, are
hereby incorporated by reference to other documents on file with the
Commission with which they are physically filed, to be a part hereof as
of their respective dates.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*2.1 Joint Plan of Reorganization of FCI and Flagstar, as amended November
7, 1997 and as confirmed by order of the United States Bankruptcy
Court for the District of South Carolina entered November 12, 1997
(incorporated by reference to Exhibit 2.1 to FCI's Form 8-K, dated
November 12, 1997 (the "1997 Form 8-K")).
*3.1 Restated Certificate of Incorporation of Advantica dated January 7,
1998 (incorporated by reference to Exhibit 3.1 to Form 8-A of
Advantica filed January 7, 1998 relating to the Common Stock (the
"Form 8-A")).
*3.2 Certificate of Ownership and Merger of FCI filed January 7, 1998
(incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the
Registration Statement (No. 333-45811) of Advantica (the "Advantica
Form S-1 Amendment No. 1")).
*3.3 By-Laws of Advantica as amended through March 19, 1999 (incorporated
by reference to Exhibit 3.1 to Advantica's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 (the "1999 First Quarter
Form 10-Q")).
*4.1 Registration Rights Agreement (incorporated by reference to Exhibit
10.1 to the Form 8-A).
*4.2 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing, and Assignment of Leases and Rents, from
Denny's Realty, Inc. to State Street Bank and Trust Company, dated
July 12, 1990 (incorporated by reference to Exhibit 4.9 to Post-
effective Amendment No. 1 to the Registration Statement on Form S-1
(No. 33-29769) of FCI (the "Form S-l Amendment")) .
*4.3 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of
December 29, 1989, as amended and restated as of July 12, 1990
(incorporated by reference to Exhibit 4.10 to the Form S-l Amendment).
*4.4 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and
State Street Bank and Trust Company relating to certain mortgage notes
(incorporated by reference to Exhibit 4.11 to the Form S-l Amendment).
*4.5 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc.,
dated as of July 12, 1990 (incorporated by reference to Exhibit 4.15
to the Registration Statement on Form S-4 (No. 33-48923) of Flagstar
(the "11.25% Debentures S-4")).
*4.6 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc.,
dated as of July 12, 1990 (incorporated by reference to Exhibit 4.16
to the 11.25% Debentures S-4).
*4.7 Mortgage Note in the amount of $98,000,000 of Denny's Realty, Inc.,
dated as of July 12, 1990 (incorporated by reference to Exhibit 4.16
to the 11.25% Debentures S-4).
*4.8 Indenture between Secured Restaurants Trust and The Citizens and
Southern National Bank of South Carolina, dated as of November 1,
1990, relating to certain secured bonds (incorporated by reference to
Exhibit 4.18 to the 11.25% Debentures S-4).
*4.9 Amended and Restated Trust Agreement between Spartan Holdings, Inc.,
as Depositor for Secured Restaurants Trust, and Wilmington Trust
Company, dated as of October 15, 1990 (incorporated by reference to
Exhibit 3.3 to the Registration Statement on Form S-11 (No. 33-36345)
of Secured Restaurants Trust (the "Form S-11")).
*4.10 Indenture dated as of May 23, 1996 between FRD and the Bank of New
York, as Trustee (the "FRD Indenture") (incorporated by reference to
Exhibit 4.1 to the FRD Form S-1/S-4).
*4.11 Form of First Supplemental Indenture to the FRD Indenture dated as of
August 23, 1996 (incorporated by reference to Exhibit 4.1.1 to the FRD
Form S-l/S-4).
*4.12 Indenture relating to the Senior Notes (including the form of
security) dated as of January 7, 1998, between Advantica and First
Trust National Association, as Trustee (incorporated by reference to
Exhibit 4.1 to Advantica's Form 8-K filed January 15, 1998 (the "1998
Form 8-K")).
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*4.13 Warrant Agreement (including the form of Warrant) (incorporated by
reference to Exhibit 10.1 to the Form 8-A).
*4.14 Rights Agreement, dated as of December 15, 1998, between Advantica and
Continental Stock Transfer and Trust Company, as Rights Agent
(including Form of Right Certificate) (incorporated by reference to
Exhibit 1 to Advantica's Form 8-A, dated December 15, 1998).
*10.1 Consent Order dated March 26, 1993 between the U.S. Department of
Justice, Flagstar and Denny's, Inc. (incorporated by reference to
Exhibit 10.42 to the Registration Statement on Form S-2 (No. 33-49843)
of Flagstar (the "Form S-2")).
*10.2 Fair Share Agreement dated July 1, 1993 between Flagstar and the NAACP
(incorporated by reference to Exhibit 10.43 to the Form S-2).
*10.3 Loan Agreement between Secured Restaurants Trust and Spardee's Realty,
Inc., dated as of November 1, 1990 (incorporated by reference to
Exhibit 10.14 to the 11.25% Debentures S-4).
*10.4 Loan Agreement between Secured Restaurants Trust and Quincy's Realty,
Inc., dated as of November 1, 1990 (incorporated by reference to
Exhibit 10.15 to the 11.25% Debentures S-4).
*10.5 Insurance and Indemnity Agreement, dated as of November 1, 1990,
related to Secured Restaurants Trust transaction (incorporated by
reference to Exhibit 10.16 to the 11.25% Debentures S-4).
*10.6 Intercreditor Agreement, dated as of November 1, 1990, related to
Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.17 to the 11.25% Debentures S-4).
*10.7 Indemnification Agreement, dated as of November 1, 1990, related to
Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.19 to the 11.25% Debentures S-4).
*10.8 Financial Guaranty Insurance Policy, issued November 15, 1990, related
to Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.21 to the 11.25% Debentures S-4).
*10.9 Collateral Assignment Agreement, dated as of November 1, 1990, related
to Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.24 to the 11.25% Debentures S-4).
*10.10 Spartan Guaranty, dated as of November 1, 1990, related to Secured
Restaurants Trust transaction (incorporated by reference to Exhibit
10.26 to the 11.25% Debentures S-4).
*10.11 Management Agreement, dated as of November 1, 1990, related to the
Secured Restaurants Trust transaction (incorporated by reference to
Exhibit 10.30 to the 11.25% Debentures S-4).
*10.12 Indemnity Agreement, dated as of November 1, 1990, related to Secured
Restaurants Trust transaction (incorporated by reference to Exhibit
10.32 to the 11.25% Debentures S-4).
*10.13 Employment Agreement, dated as of January 10, 1995, between FCI and
James B. Adamson (incorporated by reference to Exhibit 10.42 to the
1994 Form 10-K).
*10.14 Amendment to Employment Agreement, dated as of February 27, 1995,
between FCI and James B. Adamson (incorporated by reference to Exhibit
10.44 to the 1994 Form 10-K).
*10.15 Amended Consent Decree dated May 24, 1994 (incorporated by reference
to Exhibit 10.50 to the 1994 Form 10-K).
*10.16 Consent Decree dated May 24, 1994 among certain named claimants,
individually and on behalf of all others similarly situated, Flagstar
and Denny's, Inc. (incorporated by reference to Exhibit 10.51 to the
1994 Form 10-K).
*10.17 Second Amendment to Employment Agreement, dated December 31, 1996,
between FCI and James B. Adamson (incorporated by reference to Exhibit
10.47 to the 1996 Form 10-K).
*10.18 Form of Agreement dated December 3, 1997 providing certain retention
incentives and severance benefits for Company management (incorporated
by reference to Exhibit 10.2 to the 1999 First Quarter Form 10-Q).
*10.19 Information Systems Management Agreement, dated February 22, 1996,
between Flagstar and Integrated Systems Solutions Corporation
(incorporated by reference to Exhibit 10.49 to the 1996 Form 10-K).
*10.20 Employment Agreement, dated as of April 22, 1996, between Flagstar and
Craig S. Bushey (incorporated by reference to Exhibit 10.51 to the
1996 Form 10-K).
*10.21 Employment Agreement, dated as of November 21, 1995, between Flagstar
and John A. Romandetti (incorporated by reference to Exhibit 10.52 to
the 1996 Form 10-K).
*10.22 Employment Agreement between Advantica and James B. Adamson, amended
and restated as of January 7, 1998 (incorporated by reference to
Exhibit 10.1 to the 1999 First Quarter Form 10-Q).
*10.23 Credit Agreement, dated January 7, 1998, among Denny's, Inc., El Pollo
Loco, Inc., Flagstar Enterprises, Inc., Flagstar Systems, Inc. and
Quincy's Restaurants, Inc., as borrowers, Advantica, as a guarantor,
the lenders named therein, and The Chase Manhattan Bank, as
administrative agent (the "Advantica Credit Agreement") (incorporated
by reference to Exhibit 10.1 to the 1998 Form 8-K).
*10.24 Amendment No. 1 and Waiver, dated as of March 16, 1998, relating to
the Advantica Credit Agreement (incorporated by reference to Exhibit
10.53 to the Registration Statement (No. 333-4581) of Advantica (the
"Advantica Form S-1 Amendment No. 2")).
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*10.25 Amendment No. 2 and Waiver, dated as of May 21, 1998, relating to the
Advantica Credit Agreement (incorporated by reference to Exhibit 10.1
to Advantica's Quarterly Report on Form 10-Q for the quarter ended
July 1, 1998).
*10.26 Amendment No. 3 and Waiver, dated as of July 16, 1998, to the
Advantica Credit Agreement (incorporated by reference to Exhibit 10.1
to Advantica's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1998 (the "1998 Third Quarter 10-Q")).
*10.27 Amendment No. 4, dated as of November 12, 1998, to the Advantica
Credit Agreement (incorporated by reference to Exhibit 10.35 to
Advantica's Annual Report on Form 10-K for the year ended December 30,
1998 (the "1998 Form 10-K")).
*10.28 Sixth Amendment to the FRI-M Credit Agreement, dated as of December
23, 1998 (incorporated by reference to Exhibit 10.36 to the 1998 Form
10-K).
*10.29 Assignment and Assumption Agreement, by and between Quincy's Realty,
Inc. and I.M. Special, Inc. dated May 1, 1998 (incorporated by
reference to Exhibit 10.37 to the 1998 Form 10-K).
*10.30 Stock Pledge Agreement among Spartan Holdings, Inc., Financial
Security Assurance, Inc. and The Bank of New York, dated April 1, 1998
(incorporated by reference to Exhibit 10.38 to the 1998 Form 10-K).
*10.31 Consent and Agreement Regarding Substitution among Financial Security
Assurance, Inc., I.M. Special, Inc., Collateral Agent, Trustee,
Owners, Issuer Trustee and Advantica dated May 1, 1998 (incorporated
by reference to Exhibit 10.39 to the 1998 Form 10-K).
*10.32 Second Amendment to the Loan Agreement between Secured Restaurants
Trust and Spardee's Realty, Inc., dated as of April 1, 1998
(incorporated by reference to Exhibit 10.47 to the Advantica Form S-1
Amendment No. 2).
*10.33 Second Amendment to the Loan Agreement between Secured Restaurants
Trust and Quincy's Realty, Inc., dated as of April 1, 1998
(incorporated by reference to Exhibit 10.48 to the Advantica Form S-1
Amendment No. 2).
*10.34 First Amendment to the Collateral Assignment Agreement, dated as of
November 1, 1990, related to the Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.10 to the Advantica Form S-1
Amendment No. 2).
*10.35 Advantica Restaurant Group Director Stock Option Plan, as adopted
January 28, 1998 and amended through September 28, 1998 (incorporated
by reference to Exhibit 10.4 to the 1998 Third Quarter 10-Q).
*10.36 Amendment No. 5, dated March 12, 1999, to the Advantica Credit
Agreement (incorporated by reference to Exhibit 10.3 to the 1999 First
Quarter Form 10-Q).
10.37 Amendment No. 6, dated December 20, 1999, to the Advantica Credit
Agreement.
*10.38 Merger Amendment, dated March 15, 1999, to the Advantica Restaurant
Group Stock Option Plan and the Advantica Restaurant Group Officer
Stock Option Plan (incorporated by reference to Exhibit 10.4 to the
1999 First Quarter Form 10-Q).
*10.39 Advantica Stock Option Plan as amended through March 15, 1999
(incorporated by reference to Exhibit 10.5 to the 1999 First Quarter
Form 10-Q).
*10.40 Credit Agreement, dated May 14, 1999, among Coco's Restaurants, Inc.,
Carrows Restaurants, Inc., and jojo's Restaurants, Inc., as borrowers,
FRD Acquisition Co. and FRD Corporation, as guarantors, the lenders
named therein, Credit Lyonnias New York Branch as administrative
agent, and The Chase Manhattan Bank, as documentation agent and
syndication agent (incorporated by reference to Exhibit 10.1 to
Advantica's Quarterly Report on Form 10-Q for the period ended June
30, 1999).
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of Advantica.
23.1 Consent of Deloitte and Touche LLP.
27 Financial Data Schedule (for SEC use only).
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of
1995.
99.2 Excerpt from Advantica's February 17, 2000 press release announcing
its "One Company, One Brand" strategic direction.
</TABLE>
- ---------------
(b)No reports on Form 8-K were filed during the quarter ended December 29,
1999.
34
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Statements of Consolidated Operations for the Fiscal Year Ended December
31, 1997, the One Week Ended January 7, 1998, the Fifty-One Weeks Ended
December 30, 1998 and the Fiscal Year Ended December 29, 1999 F-3
Consolidated Balance Sheets as of December 30, 1998 and December 29, 1999 F-5
Statements of Consolidated Cash Flows for the Fiscal Year Ended December
31, 1997, the One Week Ended January 7, 1998, the Fifty-One Weeks Ended
December 30, 1998 and the Fiscal Year Ended December 29, 1999 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Advantica
Restaurant Group, Inc. and subsidiaries (the "Company") as of December 29, 1999
and December 30, 1998 (Successor Company) and the related statements of
consolidated operations and consolidated cash flows for the fiscal year ended
December 29, 1999, the fifty-one week period ended December 30, 1998 (Successor
Company) and for the one week period ended January 7, 1998 and the fiscal year
ended December 31, 1997 (Predecessor Company). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on November 12, 1997, the
Bankruptcy Court entered an order confirming the plan of reorganization which
became effective after the close of business on January 7, 1998. Accordingly,
the accompanying consolidated financial statements have been prepared in
conformity with AICPA Statement of Position 90-7, "Financial Reporting for
Entities in Reorganization Under the Bankruptcy Code," for the Successor
Company as a new entity with assets, liabilities, and a capital structure
having carrying values not comparable with prior periods as described in Note
2.
In our opinion, the Successor Company consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company at December 29, 1999 and December 30, 1998 and the results of its
consolidated operations and its consolidated cash flows for the fiscal year
ended December 29, 1999 and the fifty-one week period ended December 30, 1998
in conformity with accounting principles generally accepted in the United
States of America. Further, in our opinion, the Predecessor Company
consolidated financial statements present fairly, in all material respects, the
results of its consolidated operations and its consolidated cash flows for the
one week period ended January 7, 1998 and the fiscal year ended December 31,
1997 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 16, 2000
F-2
<PAGE>
ADVANTICA RESTAURANT GROUP, INC
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Predecessor Company Successor Company
----------------------- -------------------------
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands, except per
share amounts)
Revenue:
Company restaurant sales $1,633,846 $ 30,245 $1,539,044 $1,521,812
Franchise and licensing
revenue 51,944 1,333 56,385 68,234
---------- ---------- ---------- ----------
Total operating revenue 1,685,790 31,578 1,595,429 1,590,046
---------- ---------- ---------- ----------
Cost of company restaurant
sales:
Product costs 445,087 8,053 412,636 402,042
Payroll and benefits 634,343 11,840 589,674 595,205
Occupancy 89,415 839 87,306 83,734
Other operating expenses 204,293 5,068 208,338 201,787
---------- ---------- ---------- ----------
Total costs of company
restaurant sales 1,373,138 25,800 1,297,954 1,282,768
Franchise restaurant costs 20,767 667 24,652 32,631
General and administrative
expenses 100,880 2,323 94,139 92,888
Amortization of excess
reorganization value -- -- 128,766 127,574
Depreciation and other
amortization 87,709 1,584 137,721 162,816
Impairment charge -- -- -- 197,000
Gain on refranchising and
other, net (6,957) (7,653) (18,685) (22,042)
---------- ---------- ---------- ----------
Total operating costs and
expenses 1,575,537 22,721 1,664,547 1,873,635
---------- ---------- ---------- ----------
Operating income (loss) 110,253 8,857 (69,118) (283,589)
---------- ---------- ---------- ----------
Other expenses:
Interest expense, net
(contractual interest for
the year ended December
31, 1997 -- $278,061; for
the one week ended January
7, 1998 -- $4,795) 159,004 2,569 102,885 104,205
Other nonoperating expenses
(income), net 4,571 (313) 1,407 (174)
---------- ---------- ---------- ----------
Total other expenses, net 163,575 2,256 104,292 104,031
---------- ---------- ---------- ----------
(Loss) income before
reorganization items and
taxes (53,322) 6,601 (173,410) (387,620)
Reorganization items 29,744 (626,981) -- --
---------- ---------- ---------- ----------
(Loss) income before taxes (83,066) 633,582 (173,410) (387,620)
Provision for (benefit from)
income taxes 1,688 (13,829) (1,794) 1,222
---------- ---------- ---------- ----------
(Loss) income from
continuing operations (84,754) 647,411 (171,616) (388,842)
Discontinued operations:
Reorganization items of
discontinued operations,
net of income tax
provision of $7,509 -- 136,113 -- --
Gain on sale of
discontinued operations,
including provision of
$5,900 for operating
losses during the disposal
period, net of income tax
provision of $37 -- -- -- 9,616
Loss from operations of
discontinued operations,
net of income tax
provision of: 1997 -- $81;
1998 -- $0; 1999 -- $0 (49,696) (1,451) (10,847) (2,678)
---------- ---------- ---------- ----------
(Loss) income before
extraordinary items (134,450) 782,073 (182,463) (381,904)
Extraordinary items -- (612,845) (1,044) --
---------- ---------- ---------- ----------
Net (loss) income (134,450) 1,394,918 (181,419) (381,904)
Dividends on preferred stock (14,175) (273) -- --
---------- ---------- ---------- ----------
Net (loss) income applicable
to common shareholders $ (148,625) $1,394,645 $ (181,419) $ (381,904)
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ADVANTICA RESTAURANT GROUP, INC
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Predecessor Company Successor Company
----------------------- -------------------------
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <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 $ (2.33) $ 15.26 $ (4.29) $ (9.72)
(Loss) income from
discontinued operations,
net (1.17) 3.17 (0.27) 0.18
------- ------- ------- -------
(Loss) income before
extraordinary items (3.50) 18.43 (4.56) (9.54)
Extraordinary items -- 14.44 0.03 --
------- ------- ------- -------
Net (loss) income $ (3.50) $ 32.87 $ (4.53) $ (9.54)
======= ======= ======= =======
Average outstanding shares 42,434 42,434 40,006 40,024
======= ======= ======= =======
Diluted earnings per share:
(Loss) income from
continuing operations $ (2.33) $ 11.74 $ (4.29) $ (9.72)
(Loss) income from
discontinued operations,
net (1.17) 2.44 (0.27) 0.18
------- ------- ------- -------
(Loss) income before
extraordinary items (3.50) 14.18 (4.56) (9.54)
Extraordinary items -- 11.12 0.03 --
------- ------- ------- -------
Net (loss) income $ (3.50) $ 25.30 $ (4.53) $ (9.54)
======= ======= ======= =======
Average outstanding shares
and equivalent common
shares, unless
antidilutive 42,434 55,132 40,006 40,024
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 30, December 29,
1998 1999
------------ ------------
<S> <C> <C>
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 164,024 $ 174,226
Investments 60,744 17,084
Receivables, less allowance for doubtful accounts
of: 1998 -- $3,816; 1999 -- $3,601 16,773 21,711
Inventories 16,749 14,948
Net assets held for sale 87,675 --
Other 13,736 12,647
Restricted investments securing in-substance
defeased debt 19,025 158,710
---------- ----------
378,726 399,326
Property, net 630,263 622,605
Other Assets:
Reorganization value in excess of amounts allocable
to identifiable assets, net of accumulated
amortization of: 1998 -- $128,766; 1999 --
$238,566 513,569 182,722
Goodwill, net of accumulated amortization of:
1998 -- $240; 1999 -- $1,075 1,357 16,758
Other intangible assets, net of accumulated
amortization of: 1998 -- $11,257; 1999 -- $20,641 188,021 170,919
Deferred financing costs, net 24,933 19,946
Other 37,153 55,823
Restricted investments securing in-substance
defeased debt 156,721 --
---------- ----------
$1,930,743 $1,468,099
========== ==========
LIABILITIES
Current Liabilities:
Current maturities of notes and debentures $ 17,599 $ 164,811
Current maturities of capital lease obligations 16,503 15,384
Current maturities of in-substance defeased debt 12,183 158,731
Accounts payable 94,187 93,368
Other 231,828 201,116
---------- ----------
372,300 633,410
---------- ----------
Long-Term Liabilities:
Notes and debentures, less current maturities 911,266 753,047
Capital lease obligations, less current maturities 63,323 69,481
In-substance defeased debt, less current maturities 166,579 --
Deferred income taxes 5,400 --
Liability for insurance claims 42,559 34,525
Other noncurrent liabilities and deferred credits 133,272 123,476
---------- ----------
1,322,399 980,529
---------- ----------
Total liabilities 1,694,699 1,613,939
---------- ----------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock:
$0.01 par value; shares authorized -- 100,000;
issued and outstanding: 1998 -- 40,010; 1999 --
40,025 400 400
Paid-in capital 417,016 417,123
Deficit (181,419) (563,323)
Foreign currency translation adjustment 47 (40)
---------- ----------
236,044 (145,840)
---------- ----------
$1,930,743 $1,468,099
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Predecessor Company Successor Company
----------------------- -------------------------
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Cash Flows from Operating
Activities:
Net (loss) income $(134,450) $1,394,918 $(181,419) $(381,904)
Adjustments to Reconcile
Net (Loss) Income to Cash
Flows from Operating
Activities:
Amortization of
reorganization value in
excess of amounts
allocable to identifiable
assets -- -- 128,766 127,574
Depreciation and other
amortization 87,709 1,584 137,721 162,816
Impairment charge -- -- -- 197,000
Amortization of deferred
gains (5,782) (202) (10,331) (12,003)
Amortization of deferred
financing costs 5,964 111 6,869 7,534
Write-off of deferred
financing costs 2,533 -- -- --
Deferred income tax
(benefit) provision 132 (13,856) 84 --
Gain on refranchising and
other, net (6,957) (7,653) (18,685) (22,042)
Gain on sale of
discontinued operations,
net -- -- -- (9,616)
Equity in loss (income)
from discontinued
operations, net 49,696 (134,662) 10,847 2,678
Amortization of debt
premium -- -- (14,531) (15,568)
Noncash reorganization
items -- (627,324) -- --
Extraordinary items -- (612,845) (1,044) --
Other (24,209) (333) 4,518 15
Changes in Assets and
Liabilities Net of Effects
of Acquisition and
Dispositions:
Decrease (increase) in
assets:
Receivables 993 (2,058) (4,050) (253)
Inventories 2,326 237 460 899
Other current assets 4,705 1,496 (3,934) 1,030
Assets held for sale -- 1,488 (2,869) --
Other assets (10,096) (1,049) 11,290 (13,515)
Increase (decrease) in
liabilities:
Accounts payable (8,842) (4,480) (5,832) (18,088)
Accrued salaries and
vacations 176 5,945 (8,195) (4,760)
Accrued taxes (4,592) (894) (22,639) (1,581)
Other accrued liabilities 40,619 9,519 (16,694) (30,182)
Other noncurrent
liabilities and deferred
credits 43,045 (1,245) (87) (15,526)
--------- ---------- --------- ---------
Net cash flows provided by
(used in) operating
activities before
reorganization activities 42,970 8,697 10,245 (25,492)
Increase in liabilities
from reorganization
activities 9,525 -- -- --
--------- ---------- --------- ---------
Net cash flows provided by
(used in) operating
activities 52,495 8,697 10,245 (25,492)
--------- ---------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Predecessor Company Successor Company
---------------------------- -------------------------
One Week Fifty-One Fiscal Year
Fiscal Year Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
----------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Cash Flows from
Investing Activities:
Purchase of property $(39,883) $ (1) $(55,685) $(99,350)
Acquisition of
restaurant units -- -- -- (13,963)
Proceeds from
disposition of
property 19,100 7,255 17,114 17,737
(Advances to) receipts
from discontinued
operations, net (23,483) 564 5,816 (8,595)
Proceeds from sale of
discontinued
operations, net -- -- 460,425 109,414
Purchase of investments -- -- (72,813) (45,564)
Proceeds from sale and
maturity of
investments -- -- 12,069 89,224
Purchase of investments
securing in-substance
defeased debt -- -- (201,713) --
Proceeds from maturity
of investments
securing in-substance
defeased debt -- -- 24,749 19,025
Other long term assets,
net 1,296 -- (1,696) --
-------- -------- -------- --------
Net cash flows (used in)
provided by investing
activities (42,970) 7,818 188,266 67,928
-------- -------- -------- --------
Cash Flows from
Financing Activities:
Net borrowings under
credit agreements -- -- -- 30,000
Deferred financing
costs (4,605) (4,971) -- (3,089)
Debt transaction costs -- -- -- (350)
Long-term debt payments (39,026) (6,870) (93,003) (66,695)
Cash dividends on
preferred stock -- -- -- --
Net bank overdrafts (4,184) -- (237) 7,900
-------- -------- -------- --------
Net cash flows (used in)
provided by financing
activities (47,815) (11,841) (93,240) (32,234)
-------- -------- -------- --------
(Decrease) increase in
cash and cash
equivalents (38,290) 4,674 105,271 10,202
Cash and Cash
Equivalents at:
Beginning of period 92,369 54,079 58,753 164,024
-------- -------- -------- --------
End of period $ 54,079 $ 58,753 $164,024 $174,226
======== ======== ======== ========
Supplemental Cash Flow
Information:
Income taxes paid $ 124 $ -- $ 8,517 $ 1,775
======== ======== ======== ========
Interest paid $ 95,606 $ -- $102,871 $124,666
======== ======== ======== ========
Non cash financing
activities:
Capital lease
obligations $ 18,543 $ -- $ 10,368 $ 29,029
======== ======== ======== ========
Non cash investing
activities:
Other investing $ 2,363 $ -- $ 6,220 $ 15,689
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 REORGANIZATION AND BASIS OF REPORTING
Advantica, 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. Denny's, a family-
style restaurant chain, operates in 49 states, two U.S. territories, and two
foreign countries, with principal concentrations in California, Florida and
Texas. The Coco's and Carrows restaurant chains compete in the family-style
category and are located primarily in California. On December 29, 1999, the
Company consummated the sale of its wholly owned subsidiary, El Pollo Loco,
Inc. ("EPL"), a quick-service flame-broiled chicken concept (See Note 4).
On January 7, 1998 (the "Effective Date"), Advantica's predecessor, Flagstar
Companies, Inc. ("FCI"), and its wholly owned subsidiary Flagstar Corporation
("Flagstar"), emerged from proceedings under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy 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 merged with and into FCI, the surviving
corporation, and FCI changed its name to Advantica Restaurant Group, Inc. FCI's
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.
In connection with the reorganization, the Company realized a gain from the
extinguishment of certain indebtedness (see Note 17). This gain is not taxable
since the gain resulted from a reorganization under the Bankruptcy Code.
However, the Company is required, beginning with its 1999 taxable year, to
reduce certain tax attributes related to Advantica, exclusive of its operating
subsidiaries, including (1) net operating loss ("NOL") carryforwards, (2)
certain tax credits and (3) tax bases in assets in an amount equal to such gain
on extinguishment.
The reorganization of the Company on January 7, 1998 constituted an ownership
change under Section 382 of the Internal Revenue Code. Therefore, the use of
any of the Company's NOL carryforwards and tax credits generated prior to the
ownership change, that are not reduced pursuant to the provisions discussed
above, will be subject to an overall annual limitation of approximately $21
million for NOL carryforwards or $7 million for tax credits, plus the
recognition of certain built-in gains.
The Company's financial statements as of December 31, 1997 have been presented
in conformity with the American Institute of Certified Public Accountants'
("AICPA") Statement of Position 90-7, "Financial Reporting By Entities In
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7 requires that
the Company report interest expense during a bankruptcy proceeding only to the
extent that it would be paid during the proceedings or that was probable it
would be an allowed priority, secured or unsecured claim. Accordingly, and in
view of the terms of the Plan, as of July 11, 1997, the Company ceased
recording interest on Flagstar's then outstanding senior subordinated
debentures and convertible debentures. The contractual interest expense for the
year ended December 31, 1997 and one week ended January 7, 1998 is disclosed in
the accompanying Statements of Consolidated Operations.
NOTE 2 FRESH START REPORTING
As of the Effective Date, Advantica adopted fresh start reporting pursuant to
the guidance provided by SOP 90-7. Fresh start reporting assumes that a new
reporting entity has been created and requires assets and liabilities to be
adjusted to their fair values as of the Effective Date in conformity with the
procedures specified by Accounting Principles Board Opinion No. 16, "Business
Combinations." 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
F-8
<PAGE>
allocable to identifiable assets, net of accumulated amortization" in the
accompanying Consolidated Balance Sheets (see Note 6 regarding the 1999
impairment of the reorganization value). Advantica is amortizing such amount
over a five-year period. All financial statements for any period subsequent to
the Effective Date are referred to as "Successor Company" statements, as they
reflect the periods subsequent to the implementation of fresh start reporting
and are not comparable to the financial statements for periods prior to the
Effective Date.
The results of operations in the accompanying Statement of Consolidated
Operations for the one week ended January 7, 1998 reflect the results of
operations prior to Advantica's emergence from bankruptcy and the effects of
fresh start reporting adjustments. In this regard, the Statement of
Consolidated Operations reflects an extraordinary gain on the discharge of
certain debt as well as reorganization items consisting primarily of gains and
losses related to the adjustments of assets and liabilities to fair value.
During 1998, the Company completed valuation studies performed in connection
with the revaluation of its assets and liabilities in accordance with fresh
start reporting.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies and methods of their application that significantly affect
the determination of financial position, cash flows and results of operations
are as follows:
Consolidated Financial Statements. Consolidated Financial Statements include
the accounts of the Company and its subsidiaries. Previously, some of the
Company's general and administrative costs that were allocated to its concepts
were classified as other operating costs in its Statements of Consolidated
Operations. Commencing at 1999 year end, the Company is classifying these costs
as general and administrative costs. Prior general and administrative costs and
other operating costs have been reclassified accordingly. In addition, certain
other prior year amounts have been reclassified to conform to the current year
presentation. These changes in classification have no effect on previously
reported net income or earnings per share.
Change in Fiscal Year. Effective January 1, 1997, the Company changed its
fiscal year end from December 31 to the last Wednesday of the calendar year.
Concurrent with this change, the Company changed to a four-four-five week
quarterly closing calendar which is the restaurant industry standard. This
reporting schedule generally results in four 13-week quarters during the fiscal
year, for a total of 52 weeks. Due to the timing of this change, the fiscal
year ended December 31, 1997 included five additional days of Denny's
operations and six additional days of Coco's and Carrows' operations.
Financial Statement Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
period reported. Actual results could differ from those estimates.
Cash and Cash Equivalents and Investments. The Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents. Investments with longer maturities, generally consisting of
corporate, U.S. Treasury or agency debt securitues, are considered available
for sale and reported in the balance sheet as investments at fair value.
Unrealized holding gains and losses on available-for-sale investments, net of
related tax effect, are reported as a separate component of shareholders'
equity (deficit) until realized. At December 30, 1998 and December 29, 1999,
the carrying value of available-for-sale investments approximated their fair
value.
Inventories. Inventories are valued primarily at the lower of average cost
(first-in, first-out) or market.
Preopening Costs. Prior to January 7, 1998, the Company capitalized certain
direct incremental costs incurred in conjunction with the opening of
restaurants and amortized such costs over a 12-month period from the date of
opening. Subsequent to January 7, 1998, preopening costs are expensed as
incurred.
F-9
<PAGE>
Property and Depreciation. Property was adjusted to estimated fair value as of
January 7, 1998, in conjunction with the adoption of fresh start reporting.
Property additions subsequent to January 7, 1998 are stated at cost. Property
is depreciated on the straight-line method over its estimated useful life.
Property held under capital leases (at capitalized value) is amortized over its
estimated useful life, limited generally by the lease period. The following
estimated useful service lives were in effect during all periods presented in
the financial statements:
Buildings -- Five to thirty years
Equipment -- Two to ten years
Leasehold Improvements -- Estimated useful life limited by the lease
period.
Goodwill and Other Intangible Assets. Goodwill represents the excess of the
cost of acquired assets over the fair market value of their net tangible and
identifiable intangible assets and is being amortized on a straight-line basis
over a period of no more than 20 years. Other intangible assets consist
primarily of trademarks, tradenames, franchise and other operating agreements.
Intangible assets were adjusted to estimated fair value at January 7, 1998, as
a result of the adoption of fresh start reporting. Such assets are being
amortized on the straight-line basis over the useful lives of the franchise and
other agreements and over 40 years for tradenames.
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets. The
portion of the reorganization value of the Company which was not attributable
to specific tangible or identified intangible assets of the Company is being
amortized using the straight-line method over a five-year period.
Asset Impairment. The Company follows the provisions of Accounting Principles
Board Opinion No. 17, "Intangible Assets" ("APB 17"), and Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). In
accordance with APB17 and SFAS 121, as applicable, the Company assesses
impairment of long-lived assets such as reorganization value in excess of
amounts allocable to identifiable assets, goodwill and property, plant and
equipment whenever changes or events indicate that the carrying value may not
be recoverable. In accordance with APB 17, the Company assesses impairment of
the intangible assets reorganization value in excess of amounts allocable to
identifiable assets and goodwill whenever the Company's market indicators
(e.g., common stock market value) and/or operating trends have had other than a
temporary adverse change. The Company applies a discounted cash flow approach
to measure impairment. The discount rate used is the Company's estimated
current cost of capital. In accordance with SFAS 121, other long-lived assets
are written down to fair value if, based on an analysis, the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
assets.
Deferred Financing Costs. Costs related to the issuance of debt are deferred
and amortized as a component of interest expense using the interest method over
the terms of the respective debt issues.
Interest Rate Exchange Agreements. As a hedge against fluctuations in interest
rates, the Company from time to time has entered into interest rate exchange
agreements to swap a portion of its fixed rate interest payment obligations for
floating rates without the exchange of the underlying principal amounts. The
Company does not speculate on the future direction of interest rates nor does
the Company use these derivative financial instruments for trading purposes.
Since such agreements are not entered into on a speculative basis, the Company
uses the settlement basis of accounting. No such agreements were outstanding as
of December 29, 1999.
Insurance Reserves. Through June 29, 1997, the Company was subject to insurance
retentions/deductibles for workers' compensation, general liability and
automobile liability risks, supplemented by stop-loss type insurance policies.
From June 30, 1997 to June 29, 1999, the Company was primarily insured through
a guaranteed cost program for workers' compensation. On June 30, 1999, the
Company changed to a retention/deductible insurance program for all states in
the guaranteed cost program with the exception of California and Nevada. At
December 29, 1999, the Company remained self-insured for workers' compensation
in only two states (Ohio and Washington). The liabilities for prior and current
estimated incurred losses are discounted to their present value based on
expected loss payment patterns determined by independent actuaries. The total
discounted insurance liabilities recorded at December 30, 1998 and December 29,
1999 were $66.7 million and $52.7 million, respectively, reflecting a 5%
discount rate for 1998 and 1999. The related undiscounted amounts at such dates
were $75.0 million and $59.6 million, respectively.
F-10
<PAGE>
Advertising Costs. Production costs for radio and television advertising are
expensed in the year in which the commercials are initially aired. Advertising
expense for the fiscal year ended December 31, 1997, the one week ended January
7, 1998, and the fifty-one weeks ended December 30, 1998 and the fiscal year
ended December 29, 1999 was $62.7 million, $1.2 million, $64.5 million and
$64.4 million, respectively.
Interest Associated with Discontinued Operations. The Company has allocated to
the discontinued operations a pro-rata portion of interest expense based on a
ratio of the net assets of the discontinued operations to the Company's
consolidated net assets as of the 1989 acquisition date of Flagstar by FCI for
periods prior to January 7, 1998 and based on a ratio of the net assets of the
discontinued operations to the Company's net assets after the adoption of fresh
start reporting for periods subsequent to January 7, 1998. Interest related to
discontinued operations, including allocated interest expense, for the fiscal
year ended December 31, 1997, the one week ended January 7, 1998, the fifty-one
weeks ended December 30, 1998 and the fiscal year ended December 29, 1999 was
$68.7 million, $0.7 million, and $21.6 million and $11.0 million, respectively.
Deferred Gains. In September 1995, the Company sold its distribution
subsidiary, Proficient Food Company ("PFC"), for approximately $122.5 million.
In conjunction with the sale, the Company entered into an eight-year
distribution contract with the acquirer of PFC, which was subsequently extended
to ten years. This transaction resulted in a deferred gain of approximately
$72.0 million that is being amortized over the life of the distribution
contract as a reduction of product cost. During the third quarter of 1996, the
Company sold Portion-Trol Foods, Inc. and the Mother Butler Pies division of
Denny's, its two food processing operations. The sales were finalized in the
fourth quarter of 1996 pursuant to the purchase price adjustment provisions of
the related agreements. Consideration from the sales totaled approximately
$72.1 million, including the receipt of approximately $60.6 million in cash. In
conjunction with these sales, the Company entered into five-year purchasing
agreements with the acquirers. These transactions resulted in deferred gains
totaling approximately $41.5 million that are being amortized over the lives of
the respective purchasing agreements as a reduction of product cost.
Cash Overdrafts. The Company has included in accounts payable on the
accompanying Consolidated Balance Sheets cash overdrafts totaling $32.6 million
and $40.5 million at December 30, 1998 and December 29, 1999, respectively.
Franchise and License Fees. Initial franchise and license fees are recognized
when all of the material obligations have been performed and conditions have
been satisfied, typically when operations have commenced. Initial fees for all
periods presented are not significant. Continuing fees, based upon a percentage
of net sales, are recorded as income on a monthly basis.
Gains on Sales of Company-Owned Restaurants. Gains on sales of Company-owned
restaurants that include real estate owned by the Company are recognized in
accordance with Statement of Financial Accounting Standards No. 66, "Accounting
for Sales of Real Estate." In this regard, gains on such sales are recognized
when the cash proceeds from the sale exceed 20 percent of the sales price. For
restaurant sale transactions that do not include real estate owned by the
Company, gains are recognized at the time of sale, if the collection of the
sale price is reasonably assured.
Cash proceeds received from sales of Company-owned restaurants totaled $7.3
million, $7.3 million, $19.7 million and $16.7 million for the fiscal year
ended December 31, 1997, the one week ended January 7, 1998, the fifty-one
weeks ended December 30, 1998 and the fiscal year ended December 29, 1999,
respectively. Deferred gains and the noncash portion of proceeds related to
such transactions are not significant.
New Accounting Standards. Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities" ("SFAS
133"), was issued in June 1998. This statement establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities. It requires that entities recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. The accounting for changes in fair value of the derivative (i.e.,
gains and losses) depends on the intended use of the derivative and the
resulting designation. In June 1999, Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" ("SFAS
137"), was issued. In accordance with
F-11
<PAGE>
SFAS 133 and SFAS 137, SFAS 133 will be effective for the Company's first
quarter of its 2001 fiscal year. The Company is in the process of evaluating
the effect of adopting SFAS 133.
NOTE 4 DISPOSITIONS OF BUSINESS SEGMENTS
On April 1, 1998, the Company completed the sale to CKE Restaurants, Inc.
("CKE") of all of the capital stock of Flagstar Enterprises, Inc. ("FEI"),
which had operated the Company's Hardee's restaurants under licenses from HFS,
a wholly owned subsidiary of CKE, for $427 million. This amount includes the
assumption by CKE of $46 million of capital leases. As a result of the adoption
of fresh start reporting, as of the Effective Date the net assets of FEI were
adjusted to fair value less estimated costs of disposal based on the terms of
the stock purchase agreement. The net gain resulting from this adjustment is
reflected in "Reorganization items of discontinued operation" in the Statements
of Consolidated Operations. As a result of this adjustment, no gain or loss on
disposition is reflected in the fifty-one weeks ended December 30, 1998.
Additionally, the operating results of FEI subsequent to January 7, 1998 and
through the disposition date were reflected as an adjustment to "Net assets
held for sale" prior to the disposition. The adjustment to "Net assets held for
sale" as a result of the net loss of FEI for the twelve weeks ended April 1,
1998 was a decrease of $1.4 million.
On June 10, 1998, the Company completed the sale of all of the capital stock of
Quincy's Restaurants, Inc. ("Quincy's"), the wholly owned subsidiary which had
operated the Company's Quincy's Family Steakhouse Division, to Buckley
Acquisition Corporation ("BAC") for $84.7 million. This amount includes the
assumption by BAC of $4.2 million of capital leases. The resulting gain of
approximately $13.7 million from such disposition was reflected as an
adjustment to reorganization value in excess of amounts allocable to
identifiable assets.
On December 29, 1999, the Company completed the sale of all of the capital
stock of EPL to American Securities Capital Partners, L.P. for $128.3 million,
which included the assumption of $15.2 million of debt. The disposition of EPL
resulted in a gain of approximately $15.5 million, net of taxes.
The Statements of Consolidated Operations and Cash Flows for all periods
presented herein have been reclassified to reflect EPL, FEI and Quincy's as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." Included in the Company's loss
from discontinued operations for the year ended December 31, 1997 is a net
restructuring charge of $10.5 million related primarily to a plan to reduce the
size of the Company's Quincy's restaurant chain significantly. In addition to
the sale or closure of restaurants, the restructuring plan resulted in the
elimination of certain restaurant, field management and corporate support
positions. Also included in the 1997 loss from operations of discontinued
operations is an impairment charge totaling $15.1 million related to the write-
down of certain Quincy's units in association with the 1997 restructuring plan,
as well as the write-down of certain Hardee's units disposed of in 1997.
Revenue and operating income of the discontinued operations for the reported
periods are as follows:
<TABLE>
<CAPTION>
Predecessor Company Successor Company
----------------------- -------------------------
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In millions)
Revenue
EPL $ 124.8 $ 2.0 $ 125.1 $ 144.9
FEI 546.3 9.2 116.2 --
Quincy's 233.6 3.5 78.7 --
------- ------ ------- -------
$ 904.7 $ 14.7 $ 320.0 $ 144.9
======= ====== ======= =======
Operating income
EPL $ 14.7 $ (0.2) $ 1.9 $ 2.4
FEI 25.2 0.2 5.5 --
Quincy's (19.8) (0.1) 0.2 --
------- ------ ------- -------
$ 20.1 $ (0.1) $ 7.6 $ 2.4
======= ====== ======= =======
</TABLE>
F-12
<PAGE>
The net assets of EPL are included in net assets held for sale in the
accompanying Consolidated Balance Sheet at December 30, 1998, and consist of
the following:
<TABLE>
<CAPTION>
EPL
--------
<S> <C>
(In thousands)
Assets
Current assets $ 4,361
Property owned, net 51,424
Property held under capital leases, net 11,626
Other assets 75,729
--------
$143,140
--------
Less liabilities
Current liabilities
Current portion of obligations under capital lease 1,151
Other current liabilities 15,648
--------
16,799
--------
Long-term liabilities
Obligations under capital lease, noncurrent 13,417
Other long-term liabilities 25,249
--------
38,666
--------
Total liabilities 55,465
--------
Net assets held for sale $ 87,675
========
</TABLE>
NOTE 5 ACQUISITIONS
In March 1999, Denny's, Inc., 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 net assets by approximately $9.5 million. Denny's,
Inc. 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. The other units have remained closed and are being
evaluated for ultimate reopening or disposition.
NOTE 6 IMPAIRMENT OF REORGANIZATION VALUE
Due to the presence of certain conditions at December 29, 1999, including the
current market value of the Company's common stock, the market discount on
certain of the Company's debt instruments and certain operating trends, the
Company concluded it should perform an impairment assessment of the carrying
amount of the intangible asset "Reorganization value in excess of amounts
allocated to identifiable assets, net of accumulated amortization." In
performing this analysis, management utilized a discounted future cash flow
model and recorded an impairment charge of $197.0 million, representing the
difference between the estimated value of the Company resulting from the cash
flow model and the value of the Company's net assets recorded at December 29,
1999 prior to recognition of impairment. The adjusted carrying value of the
intangible asset, $182.7 million, will continue to be amortized over its three-
year remaining useful life.
F-13
<PAGE>
NOTE 7 REORGANIZATION ITEMS
Reorganization items included in the accompanying Statements of Consolidated
Operations consist of the following:
<TABLE>
<CAPTION>
Fiscal Year One Week
Ended Ended
December 31, January 7,
1997 1998
------------ ------------
<S> <C> <C>
(In thousands)
Net gain related to adjustments of assets and
liabilities to fair value $ -- $(646,482)
Professional fees and other 27,916 8,809
Debtor-in-possession financing expenses 3,062 --
Interest earned on accumulated cash (1,234) --
Severance and other exit costs -- 10,692
--------- ---------
$ 29,744 $(626,981)
========= =========
NOTE 8 PROPERTY, NET
Property, net, consists of the following:
<CAPTION>
December 30, December 29,
1998 1999
------------ ------------
<S> <C> <C>
(In thousands)
Property owned:
Land $ 65,614 $ 69,037
Buildings and improvements 442,767 487,539
Other property and equipment 143,750 152,820
--------- ---------
Total property owned 652,131 709,396
Less accumulated depreciation 88,545 160,630
--------- ---------
Property owned, net 563,586 548,766
--------- ---------
Buildings and improvements, vehicles, and other
equipment held under capital leases 95,310 122,811
Less accumulated amortization 28,633 48,972
--------- ---------
Property held under capital leases, net 66,677 73,839
--------- ---------
$ 630,263 $ 622,605
========= =========
NOTE 9 OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<CAPTION>
December 30, December 29,
1998 1999
------------ ------------
<S> <C> <C>
(In thousands)
Accrued salaries and vacations $ 44,941 $ 40,524
Accrued insurance 31,608 23,412
Accrued taxes 19,330 19,307
Accrued interest and dividends 44,785 43,465
Other 91,164 74,408
--------- ---------
$ 231,828 $ 201,116
========= =========
</TABLE>
F-14
<PAGE>
NOTE 10 DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 30, December 29,
1998 1999
------------ ------------
<S> <C> <C>
(In thousands)
Notes and Debentures:
11 1/4% Senior Notes due January 15, 2008, interest
payable semi-annually $ 549,611 $ 529,608
12.5% Senior Notes of FRD due July 15, 2004,
interest payable semi-annually 156,897 156,897
Mortgage Notes Payable:
11.03% Notes due July 12, 2000 160,000 160,000
Term loan of FRD, principal payable in quarterly
installments 10,411 30,000
Other notes payable, maturing over various terms to
20 years, payable in monthly or quarterly
installments with interest rates ranging from 7.5%
to 12.8% (a) 6,680 4,974
Notes payable secured by equipment, maturing over
various terms up to 12 years, payable in monthly
installments with interest rates ranging from
9.17% to 11.97% (b) 3,608 3,844
Capital lease obligations (see Note 11) 79,826 84,865
In-substance defeased debt, due November 15, 2000 165,468 153,297
---------- ----------
1,132,501 1,123,485
Premium (discount), net (see Note 2):
11 1/4% Senior Notes, effective rate 10.79% 23,198 20,792
12.5% Senior Notes of FRD, effective rate 10.95% 11,839 10,172
11.03% Notes, effective rate 8.18% 8,059 2,935
In-substance defeased debt, effective rate 5.29% 13,294 5,433
Other notes payable (1,438) (1,363)
---------- ----------
Total 1,187,453 1,161,454
Less current maturities 46,285 338,926
---------- ----------
Total long-term debt $1,141,168 $ 822,528
========== ==========
</TABLE>
(a) Collateralized by restaurant and other properties with a net book value of
$11.9 million at December 29, 1999.
(b) Collateralized by equipment with a net book value of $0.7 million at
December 29, 1999.
Aggregate annual maturities of long-term debt at December 29, 1999 during the
next five years, excluding approximately $153 million of in-substance defeased
debt maturing in 2000, are as follows:
<TABLE>
<S> <C>
Year:
-----
(In millions)
2000 $177.4
2001 21.3
2002 20.5
2003 18.8
2004 162.1
</TABLE>
Pursuant to the Plan, on the Effective Date, Advantica issued $592.0 million
aggregate principal amount of 11 1/4% Senior Notes due 2008 (the "Senior
Notes"). On July 31, 1998, the Company extended to the holders of the Senior
Notes an offer to purchase up to $100.0 million of the outstanding Senior
Notes. As a result of this offer, $42.4 million of such securities were retired
on October 5, 1998. During the first quarter of 1999, the Company retired an
additional $20.0 million aggregate principal amount of the Senior Notes.
Also on the Effective Date, Advantica entered into a credit agreement with The
Chase Manhattan Bank ("Chase") and other lenders named therein which
established the senior secured credit facility (as amended to date, the "Credit
Facility"). The Credit Facility is used for working capital advances, letters
of credit and general corporate purposes by certain of Advantica's operating
subsidiaries which are borrowers thereunder. The Credit Facility is guaranteed
by Advantica and, subject to certain exceptions, by Advantica's subsidiaries
F-15
<PAGE>
that are not borrowers thereunder and generally is secured by liens on the same
collateral that formerly secured Flagstar's obligations under the Credit
Agreement (with additional liens on the Company's corporate headquarters in
Spartanburg, South Carolina and accounts receivable).
The Credit Facility includes a working capital and letter of credit facility of
up to a total of $200 million. The Credit Facility is subject to early
termination on March 31, 2000 if (a) the Company has not refinanced the Denny's
Mortgage Notes (as defined below) on terms acceptable to the lenders and (b)
either (1) the Company has not deposited funds with Chase equal to at least the
face amount of the Denny's Mortgage Notes then outstanding (which deposit
balance shall be maintained until the Denny's Mortgage Notes are redeemed or
repaid in full) or (2) the aggregate principal amount of outstanding loans and
letters of credit under the Credit Facility exceeds $150 million on or before
the earlier of March 31, 2000 and the date the Denny's Mortgage Notes are
repaid in full. The Credit Facility is subject to mandatory prepayments and
commitment reductions under certain circumstances upon Advantica's sale of
assets or incurrence of additional debt.
The Credit Facility contains covenants customarily found in credit agreements
for leveraged financings that, among other things, place limitations on (1)
dividends on capital stock; (2) redemptions and repurchases of capital stock;
(3) prepayments, redemptions and repurchases of debt (other than loans under
the Credit Facility); (4) liens and sale-leaseback transactions; (5) loans and
investments; (6) incurrence of debt; (7) capital expenditures; (8) operating
leases; (9) mergers and acquisitions; (10) asset sales; (11) transactions with
affiliates; (12) changes in the business conducted by Advantica and its
subsidiaries and (13) amendment of debt and other material agreements. The
Credit Facility also contains covenants that require Advantica and its
subsidiaries on a consolidated basis to meet certain financial ratios and tests
including provisions for the maintenance of a minimum level of interest
coverage (as defined) and a minimum level of fixed charges coverage (as
defined), limitations on ratios of indebtedness (as defined) to earnings before
interest, taxes, depreciation and amortization (EBITDA) (as defined), and
limitations on annual capital expenditures. In connection with the closing of
the sales of FEI and Quincy's, the Credit Facility was amended to accommodate
the sale transactions and in-substance defeasance consummated in conjunction
with the sale of FEI. In addition, the Credit Facility was amended to provide
the Company flexibility to reinvest the residual sales proceeds through
additional capital expenditures and/or strategic acquisitions, as well as to
modify certain other covenants and financial tests affected by the sales
transactions. The latest amendment to the Credit Facility, dated as of December
20, 1999, permitted the sale of El Pollo Loco and provided the Company with the
ability to redeem or repay the Denny's Mortgage Notes on or before their
scheduled maturity. The commitments under the Credit Facility were not reduced
as a result of the sales.
The Company was in compliance with the terms of the Credit Facility at December
29, 1999. Under the most restrictive provision of the Credit Facility (the
minimum interest coverage ratio), for the four quarters ended December 29,
1999, the Company's EBITDA could be approximately $14.3 million less and the
Company would still be in compliance.
As discussed in Note 4, on April 1, 1998, the Company completed the sale of all
of the capital stock of FEI, and used a portion of the proceeds to in-substance
defease the guaranteed secured bonds of Spardee's Realty, Inc., a wholly owned
subsidiary of FEI, and of Quincy's Realty, Inc., a wholly owned subsidiary of
Quincy's. The Company replaced the original collateral through the purchase of
United States Government and AAA rated investment securities which were
deposited with the collateral agent and which satisfy the principal and
interest payments of the bonds though the stated maturity date of November 15,
2000. The investments related to the in-substance defeased debt are reflected
in the Consolidated Balance Sheets under the caption "Restricted investments
securing in-substance defeased debt."
The 11.03% mortgage notes (the "Denny's Mortgage Notes") are secured by a pool
of cross-collateralized mortgages on the land, buildings, equipment and
improvements of 239 Denny's restaurants with a net book value at December 29,
1999 of approximately $181.3 million. In addition, the notes are collateralized
by, among other things, the assignment of intercompany lease agreements, the
stock of the issuing subsidiary and a letter of credit. The notes are
redeemable, in whole, at the issuer's option upon payment of a premium. On or
prior to July 12, 2000, the Company is required to repay or refinance the
Denny's Mortgage Notes. During the first quarter of 2000, the Company
repurchased $60 million of the Denny's Mortgage Notes. The Company
F-16
<PAGE>
intends, through a combination of cash and short-term investments on hand and
available debt capacity, to repay the balance of the Denny's Mortgage Notes on
or before their scheduled maturity.
On May 14, 1999, FRD and certain of its operating subsidiaries entered into a
new credit agreement with Chase and Credit Lyonnais New York Branch and other
lenders named therein and thereby established a $70 million senior secured
credit facility (the "New FRD Credit Facility") to replace a prior 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. Borrowings under
the New FRD Credit Facility are to be used for Coco's and Carrows' working
capital requirements and other general corporate purposes. Certain letters of
credit may be issued under the revolving credit facility. All borrowings under
the New FRD Credit Facility accrue interest at a variable rate based on the
prime rate or an adjusted Eurodollar rate (approximately 9.6% at December 29,
1999) and are secured by substantially all of the assets of FRD and its
subsidiaries and by the issued and outstanding stock of FRI-M and its
subsidiaries. Principal installments of the term loan will be payable as
follows: $2.0 million per quarter for three consecutive quarters beginning June
30, 2001; $3.0 million per quarter for four consecutive quarters beginning
March 31, 2002; and $6.0 million for two consecutive quarters beginning March
31, 2003. At December 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 $11.1 million.
The New FRD Credit Facility and the indenture under which the 12.5% FRD Senior
Notes due 2004 (the "FRD Notes") have been issued contain a number of
restrictive covenants which, among other things, limit (subject to certain
exceptions) FRD and its subsidiaries with respect to the incurrence of debt,
existence of liens, investments and joint ventures, the declaration or payment
of dividends, the making of guarantees and other contingent obligations,
mergers, the sale of assets, capital expenditures and material change in their
business. In addition, the New FRD Credit Facility contains certain financial
covenants including provisions for the maintenance of a minimum level of
interest coverage (as defined), limitations on ratios of indebtedness (as
defined) to earnings before interest, taxes, depreciation and amortization
(EBITDA), maintenance of a minimum level of EBITDA, and limitations on annual
capital expenditures. The cash flows from FRD are required to be used to
service the debt issued in the Coco's and Carrows acquisition (the New FRD
Credit Facility and the FRD Notes) and, therefore, other than for the payment
of certain management fees and tax reimbursements payable to Advantica under
certain conditions, FRD's cash flows are currently unavailable to service the
debt of Advantica and its other subsidiaries. FRD's cash flows from operating
activities, included in the Company's total cash flow from operating
activities, were $17.1 million, $1.0 million and $23.0 and $8.8 million for the
fiscal year ended December 31, 1997, the one week ended January 7, 1998, the
fifty-one weeks ended December 30, 1998 and the fiscal year ended December 29,
1999, respectively.
FRD and its subsidiaries were in compliance with the terms of the New FRD
Credit Facility at December 29, 1999. Under the most restrictive provision of
the FRD Credit Facility (the Total debt/EBITDA ratio), at December 29, 1999,
FRD's total debt could be approximately $3.6 million more and FRD would still
be in compliance.
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) is approximately $850 million at December 29, 1999. Such
computation is based on market quotations for the same or similar debt issues
or the estimated borrowing rates available to the Company.
NOTE 11 LEASES AND RELATED GUARANTEES
The Company's operations utilize property, facilities, equipment and vehicles
leased from others. In addition, certain owned and leased property, facilities
and equipment are leased to others.
Buildings and facilities leased from others primarily are for restaurants and
support facilities. Restaurants are operated under lease arrangements which
generally provide for a fixed basic rent, and, in some instances, contingent
rental based on a percentage of gross operating profit or gross revenues.
Initial terms of land and restaurant building leases generally are not less
than 20 years exclusive of options to renew. Leases of other equipment
primarily consist of restaurant equipment, computer systems and vehicles.
F-17
<PAGE>
Information regarding the Company's leasing activities at December 29, 1999 is
as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
----------------- -----------------
Minimum Minimum Minimum Minimum
Lease Sublease Lease Sublease
Year: Payments Receipts Payments Receipts
- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
2000 $ 24,935 $ 3,514 $ 50,895 $ 11,367
2001 21,550 3,179 45,908 10,890
2002 13,582 2,673 40,879 10,132
2003 11,204 2,178 35,806 9,372
2004 8,990 1,736 28,464 7,541
Subsequent years 56,077 10,606 132,106 54,547
-------- ------- -------- --------
Total 136,338 $23,886 $334,058 $103,849
======= ======== ========
Less imputed interest 51,473
--------
Present value of capital lease obligations $ 84,865
========
</TABLE>
Payments for certain FRD operating leases are being made by FRI, the former
owner of Coco's and Carrows, in accordance with the provisions of the stock
purchase agreement executed at the date of the acquisition. Therefore, these
payments have been excluded from the amount of minimum lease payments and
minimum sublease receipts reported above.
The total rental expense included in the determination of operating income for
continuing operations is as follows:
<TABLE>
<CAPTION>
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Base rents $57,105 $1,103 $56,209 $57,654
Contingent rents 12,421 240 11,774 11,294
------- ------ ------- -------
Total $69,526 $1,343 $67,983 $68,948
======= ====== ======= =======
</TABLE>
Total rental expense does not reflect sublease rental income of $11.8 million,
$0.2 million, $12.6 million and $14.8 million for the fiscal year ended
December 31, 1997, the one week ended January 7, 1998, the fifty-one weeks
ended December 30, 1998 and the fiscal year ended December 29, 1999,
respectively.
F-18
<PAGE>
NOTE 12 INCOME TAXES
A summary of the provision for (benefit from) income taxes attributable to the
loss before discontinued operations and extraordinary items is as follows:
<TABLE>
<CAPTION>
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Current:
Federal $ -- $ -- $(2,924) $ --
State, foreign and other 1,556 27 1,046 1,222
------ -------- ------- ------
1,556 27 (1,878) 1,222
------ -------- ------- ------
Deferred:
Federal -- (12,513) -- --
State, foreign and other 132 (1,343) 84 --
------ -------- ------- ------
132 (13,856) 84 --
------ -------- ------- ------
Provision for (benefit
from) income taxes $1,688 $(13,829) $(1,794) $1,222
====== ======== ======= ======
The total provision for
(benefit from) income
taxes related to:
Loss before discontinued
operations and
extraordinary items $1,688 $(13,829) $(1,794) $1,222
Discontinued operations 81 7,509 -- 37
Extraordinary items -- -- -- --
------ -------- ------- ------
Total provision for
(benefit from) income
taxes $1,769 $ (6,320) $(1,794) $1,259
====== ======== ======= ======
</TABLE>
The following represents the approximate tax effect of each significant type of
temporary difference giving rise to deferred income tax assets or liabilities:
<TABLE>
<CAPTION>
December 30, December 29,
1998 1999
------------ ------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Deferred income $ 21,336 $ 12,822
Debt premium 22,584 15,962
Lease reserves 11,808 8,004
Self-insurance reserves 29,338 23,151
Capitalized leases 6,537 3,445
Other accruals and reserves 31,487 16,194
Alternative minimum tax credit carryforwards 10,548 12,451
General business credit carryforwards 56,627 64,640
Capital loss carryforwards 8,135 5,766
Net operating loss carryforwards 9,512 11,166
Less: valuation allowance (105,149) (115,633)
--------- ---------
Total deferred tax assets 102,763 57,968
--------- ---------
Deferred tax liabilities:
Intangible assets (70,016) (55,924)
Fixed assets (38,147) (2,044)
--------- ---------
Total deferred tax liabilities (108,163) (57,968)
--------- ---------
Net deferred tax liability $ (5,400) $ --
========= =========
</TABLE>
F-19
<PAGE>
The Company has provided a valuation allowance for the portion of the deferred
tax assets for which it is more likely than not that a tax benefit will not be
realized. Any subsequent reversal of the valuation allowance of approximately
$88 million established in connection with fresh start reporting on January 7,
1998 will be applied first to reduce reorganization value in excess of amounts
allocable to identifiable assets, then to reduce other identifiable intangible
assets followed by a credit directly to equity. In 1999, the Company reversed
approximately $5 million of the valuation allowance and recorded a
corresponding reduction in reorganization value in excess of amounts allocable
to identifiable assets.
The difference between the statutory federal income tax rate and the effective
tax rate on loss from continuing operations before discontinued operations and
extraordinary items is as follows:
<TABLE>
<CAPTION>
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Statutory tax (benefit) rate (35)% 35% (35)% (35)%
Differences:
State, foreign, and other
taxes, net of federal
income tax benefit 2 -- 1 --
Amortization of goodwill 3 -- -- --
Amortization of
reorganization value in
excess of amounts allocable
to identifiable assets -- -- 29 13
Impairment charge of excess
reorganization value 18
Nondeductible costs related
to the reorganization 6 -- -- --
Nontaxable income related to
the reorganization -- (28) -- --
Nondeductible wages related
to the FICA tip credit 3 -- 1 1
Portion of losses and income
tax credits not benefitted
from as a result of the
establishment of a
valuation allowance 19 (7) 7 5
Other 4 (2) (4) (2)
--- --- --- ---
Effective tax (benefit) rate 2% (2)% (1)% --%
=== === === ===
</TABLE>
The Company utilized substantially all of its pre-1999 NOL carryforwards and
portions of certain other pre-1999 carryforwards to offset taxable income
principally generated from the sale of its discontinued operations during 1998.
At December 29, 1999, the Company has available, on a consolidated basis,
general business credit carryforwards of approximately $65 million, most of
which expire in 2004 through 2019, and alternative minimum tax ("AMT") credit
carryforwards of approximately $12 million. The AMT credits may be carried
forward indefinitely. In addition, the Company has available regular NOL and
AMT NOL carryforwards of approximately $8 million and $43 million,
respectively, which expire in 2012 through 2019. Due to the reorganization of
the Company on January 7, 1998, the Company's ability to utilize the general
business credit carryforwards, AMT credit carryforwards, and NOL carryforwards
which arose prior to the reorganization is limited to a specified annual
amount. The annual limitation for the utilization of these carryforwards is
approximately $21 million for NOL carryforwards or $7 million for tax credits.
The annual limitation may also be increased for the recognition of certain
built-in gains. General business credits of approximately $15 million, regular
NOL carryforwards of approximately $3 million and AMT NOL carryforwards of
approximately $14 million that arose subsequent to the reorganization are not
subject to any limitation as of the end of 1999. See Note 1 for further
discussions of the reorganization including an additional discussion of the
reorganization's impact on the Company's carryover tax benefits and its tax
basis in its assets for future taxable years.
In connection with the purchase of FRI-M in May 1996, the Company acquired
certain income tax attributes which, prior to 1999, could be used only to
offset the separate taxable income of FRI-M and its subsidiaries. Approximately
$23 million of regular NOL carryforwards and $14 million of regular and AMT
capital loss carryforwards are available at December 29, 1999 to reduce the
future taxable income of the Company and its subsidiaries, subject to certain
limitations. Due to FRI-M's prior ownership changes in January 1994 and May
1996, the ability to utilize these carryforwards is limited. The annual
limitation for the utilization of FRI-M's
F-20
<PAGE>
NOL carryforwards and capital loss carryforwards which were generated after
January 1994 and before May 1996 is approximately $4 million, plus the
recognition of certain built-in gains. These NOL carryforwards expire
principally in 2009 through 2011. FRI-M's capital loss carryforward, which will
expire in 2000, can be utilized to offset certain capital gains generated by
the Company or its subsidiaries, subject to certain limitations. Utilization of
FRI-M's loss carryforwards are also subject to the Company's overall annual
limitation of $21 million. FRI-M and the Company utilized capital loss
carryovers of approximately $4 million in 1997, $7 million in 1998 and $4
million in 1999 to offset capital gains recognized during 1997 through 1999.
NOTE 13 EMPLOYEE BENEFIT PLANS
Pension and Other Defined Benefit and Contribution Plans
The Company maintains several defined benefit plans for continuing operations
which cover a substantial number of employees. Benefits are based upon each
employee's years of service and average salary. The Company's funding policy is
based on the minimum amount required under the Employee Retirement Income
Security Act of 1974. The Company also maintains defined contribution plans.
The components of net pension cost of the pension plan and other defined
benefit plans as determined under SFAS No. 87 for the fiscal year ended
December 31, 1997, the one week ended January 7, 1998, the fifty-one weeks
ended December 30, 1998 and the fiscal year ended December 29, 1999 are as
follows:
<TABLE>
<CAPTION>
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Pension Plan:
Service cost $3,210 $ 70 $1,040 $ 758
Interest cost 2,872 63 2,861 2,700
Expected return on plan
assets (3,085) (71) (3,658) (3,307)
Amortization of prior
service cost -- -- -- --
Recognized net actuarial
loss 325 -- -- --
------ ------- ------ ------
Net periodic benefit cost $3,322 $ 62 $ 243 $ 151
====== ======= ====== ======
Purchase accounting -- $11,633 -- --
Settlement loss -- -- $ 119 --
Other Defined Benefit Plans:
Service cost $ 145 $ 2 $ 125 $ 370
Interest cost 198 3 166 176
Expected return on plan
assets -- -- -- --
Amortization of prior
service cost 41 -- 27 --
Recognized net actuarial
gain (3) -- (1) 96
------ ------- ------ ------
Net periodic benefit cost $ 381 $ 5 $ 317 $ 642
====== ======= ====== ======
Settlement loss $1,342 -- -- --
</TABLE>
Net pension and other defined benefit plan costs charged to continuing
operations for the fiscal year ended December 31, 1997, the fifty-one weeks
ended December 30, 1998 and the fiscal year ended December 29, 1999 were $2.2
million, $0.7 million and $0.6 million, respectively. Costs charged to
continuing operations for the one week ended January 7, 1998 were not
significant.
F-21
<PAGE>
The following table sets forth the funded status and amounts recognized in the
Company's balance sheet for its pension plan and other defined benefit plans:
<TABLE>
<CAPTION>
Pension Plan Other Defined Benefit Plans
------------------------- ----------------------------
December 30, December 29, December 30, December 29,
1998 1999 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
Change in Benefit
Obligation
Benefit obligation at
beginning of year $46,800 $41,123 $ 2,259 $ 2,498
Service cost 1,110 758 127 370
Interest cost 2,923 2,700 169 176
Actuarial losses (gains) 2,102 (2,002) 133 476
Curtailment gains (6,338) (1,539) -- (2)
Settlement (1998 lump
sum payments) (3,776) (1,775) -- --
Benefits paid (periodic
only for 1998) (1,698) (2,239) (190) (178)
------- ------- ------- -------
Benefit obligation at
end of year $41,123 $37,026 $ 2,498 $ 3,340
======= ======= ======= =======
Change in Plan Assets
Fair value of plan
assets at beginning of
year $37,342 $37,043 $ -- $ --
Actual return on plan
assets 3,561 1,854 -- --
Employer contributions 1,614 -- 190 178
Settlement (1998 lump
sum payments) (3,776) (1,775) -- --
Benefits paid (periodic
only for 1998) (1,698) (2,239) (190) (178)
------- ------- ------- -------
Fair value of plan
assets at end of year $37,043 $34,883 $ -- $ --
======= ======= ======= =======
Reconciliation of Funded
Status
Funded Status $(4,080) $(2,143) $(2,498) $(3,340)
Unrecognized actuarial
losses (gains) 1,293 -- 135 (190)
Unrecognized transition
amount -- -- (1) (1)
Unrecognized prior
service cost -- -- -- --
Fourth quarter
contribution -- -- -- --
------- ------- ------- -------
Net amount recognized $(2,787) $(2,143) $(2,364) $(3,531)
======= ======= ======= =======
Amounts Recognized in
the Consolidated
Balance Sheet Consist
of:
Accrued benefit
liability $(2,787) $(2,143) $(2,364) $(3,531)
Accumulated other
comprehensive income -- -- -- --
------- ------- ------- -------
Net amount recognized $(2,787) $(2,143) $(2,364) $(3,531)
======= ======= ======= =======
</TABLE>
Assets held by the Company's plans are invested in money market and other fixed
income funds as well as equity funds.
Significant assumptions used in determining net pension cost and funded status
information for all the periods shown above are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.0% 6.8% 7.3%
Rates of salary progression 4.0% 4.0% 4.0%
Long-term rates of return on assets 10.0% 10.0% 9.5%
</TABLE>
In addition, the Company has defined contribution plans whereby eligible
employees can elect to contribute from 1% to 15% of their compensation to the
plans. Under these plans, the Company makes matching contributions, subject to
certain limitations. Amounts charged to income under these plans for continuing
operations were $2.0 million, $2.1 million and $2.1 million for the fiscal year
ended December 31, 1997, the fifty-one weeks ended December 30, 1998 and the
fiscal year ended December 29, 1999 respectively. Matching contributions
related to the one week ended January 7, 1998 were not significant.
F-22
<PAGE>
Stock Option Plans
At December 29, 1999, the Company has two stock-based compensation plans, which
are described below. The Company has adopted the disclosure-only provisions of
Financial Accounting Standards Board Statement 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), while continuing to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
and related interpretations in accounting for its stock-based compensation
plans. Under APB 25, because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
Pursuant to the Plan, and shortly after the Effective Date, the Company adopted
the Advantica Restaurant Group Stock Option Plan (the "Non-Officer Plan") and
the Advantica Restaurant Group Officer Stock Option Plan (the "Officer Plan").
Effective March 15, 1999, the Non-Officer Plan and the Officer Plan were merged
together and the surviving plan's name was changed to the Advantica Stock
Option Plan (the "Company Plan"). All participants in the Non-Officer Plan and
Officer Plan on the effective date of the plan merger continued to be
participants in the Company Plan and retained all options previously issued to
participants under the Officer Plan and the Non-Officer Plan under the same
terms and conditions existing at the time of grant.
The Company Plan permits the Compensation and Incentives Committee of the
Advantica Board (the "Committee") to award stock options as incentives to
employees and consultants of Advantica. The Committee has sole discretion to
determine the exercise price, term and vesting schedule of options awarded
under such plans. A total of 7,388,888 shares of Advantica common stock are
authorized to be issued under the Company Plan. Under the terms of the Company
Plan, optionees who terminate for any reason other than cause, disability,
retirement or death will be allowed 60 days after the termination date to
exercise vested options. Vested options are exercisable for one year when
termination is by a reason of disability, retirement or death. If termination
is for cause, no option shall be exercisable after the termination date.
In addition to the Company Plan, the Company has adopted the Advantica
Restaurant Group Director Stock Option Plan (the "Director Plan"), the terms of
which are substantially similar to the terms of the Company Plan. A total of
200,000 shares of Advantica common stock are authorized to be issued under the
Director Plan.
Effective January 28, 1998, options to purchase 1,927,500 shares, 409,000
shares and 54,000 shares of common stock, at market value of the date of grant,
were issued under the former Officer Plan, the former Non-Officer Plan and the
Director Plan, respectively. Thirty percent of such grants under the former
Officer and Non-Officer Plans became exercisable immediately, with an
additional 20% vesting the first and second anniversaries of the date of grant
and an additional 15% vesting on the third and fourth anniversaries. The grants
under the Director Plan vest at a rate of 33.3% per year beginning on the first
anniversary of the grant date. On September 11, 1998, options to purchase an
additional 910,000 and 79,100 shares of common stock, at market value at the
date of grant, were issued under the former Officer Plan and former Non-Officer
Plan, respectively. Such grants vest at a rate of 25% per year beginning on the
first anniversary of the grant date. All options issued in 1998 expire ten
years from the date of grant.
During 1999, options to purchase 2,063,500 shares of common stock, at market
value at the date of grant, were issued under the Company Plan. Such options
vest at a rate of 25% per year beginning on the first anniversary of the grant
date and expire ten years from the date of grant. No options were granted under
the Director Plan in 1999.
Prior to its emergence from bankruptcy, the Company had two stock-based
compensation plans, the 1989 Stock Option Plan (the "1989 Plan") and the 1990
Non-qualified Stock Option Plan (the "1990 Plan"). On the Effective Date,
pursuant to the Plan, all stock options outstanding as of that date, including
those under both the 1989 Plan and the 1990 Plan, were effectively canceled.
Due to the fact that all options under the 1989 Plan and the 1990 Plan were
canceled, extinguished and retired on the Effective Date, the effect on the
accompanying Statement of Consolidated Operations of the compensation expense
calculated under SFAS 123 related to such plans is not included in the pro
forma information presented below.
F-23
<PAGE>
Pro forma information regarding net income and earnings per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
employee stock options granted under the fair value method of that statement.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for such grants:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Expected volatility 0.64 0.72
Risk-free interest rate 4.6% 6.4%
Weighted average expected life 9.0 years 9.0 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
Fifty-One Fiscal Year
Weeks Ended Ended
December 30, December 29,
1998 1999
------------ ------------
<S> <C> <C>
(In millions, except per share data)
Pro forma net loss $(189.6) $(386.3)
Pro forma loss per share:
Basic and diluted (4.73) (9.63)
</TABLE>
A summary of the Company's stock option plans is presented below.
<TABLE>
<CAPTION>
1998 1999
------------------------ ----------------------
Weighted Weighted
Options Average Options Average
(000) Exercise Price (000) Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of year --(a) $ --(a) 3,092 $8.32
Granted 3,380 8.45 2,063 3.66
Exercised (1) 10.00 -- --
Forfeited/Expired (287) 9.75 (387) 7.50
----- -----
Outstanding, end of year 3,092 8.32 4,768 6.37
===== =====
Exercisable at year end 637 10.00 1,210 8.99
</TABLE>
- ---------------
(a) Outstanding as of the Effective Date.
The following table summarizes information about stock options outstanding at
December 29, 1999:
<TABLE>
<CAPTION>
Weighted-
Number Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Exercise at 12/29/99 Contractual Exercise at 12/29/99 Exercise
Prices (000) Life Price (000) Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.50 1,916 9.50 $3.50 -- $ --
4.69 851 8.70 4.69 231 4.69
6.31 40 9.02 6.31 -- --
7.00 60 9.09 7.00 -- --
10.00 1,901 8.08 10.00 979 10.00
----- -----
4,768 8.78 6.37 1,210 8.99
===== =====
</TABLE>
The weighted average fair value per option of options granted during the fifty-
one weeks ended December 30, 1998 and the fiscal year ended December 29, 1999
was $6.06 and $2.78, respectively.
F-24
<PAGE>
NOTE 14 COMMITMENTS AND CONTINGENCIES
There are various claims and pending legal actions against or indirectly
involving the Company, including actions concerned with civil rights of
employees and customers, other employment related matters, taxes, sales of
franchise rights and businesses and other matters. Certain of these are seeking
damages in substantial amounts. The amounts of liability, if any, on these
direct or indirect claims and actions at December 29, 1999, over and above any
insurance coverage in respect to certain of them, are not specifically
determinable at this time.
In 1994, the Company was advised by the Internal Revenue Service of proposed
deficiencies for federal income taxes totaling approximately $12.7 million. The
proposed deficiencies relate to examinations of certain income tax returns
filed by the Company for the seven taxable periods ended December 31, 1992. In
the third quarter of 1996, this proposed deficiency was reduced by
approximately $7.0 million as a direct result of the passage of the Small
Business Jobs Protection Act (the "Act") in August 1996. The Act included a
provision that clarified Internal Revenue Code Section 162(k) to allow for the
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. As the Company believes the remaining proposed
deficiencies are substantially incorrect, it intends to continue to contest
such proposed deficiencies. The Company filed petitions in the United States
Tax Court in 1998 for these periods. The case is expected to be tried in 2000.
One current and two former managers of Denny's restaurant units have initiated,
in the Superior Court for Los Angeles County, California, a class action
lawsuit seeking, among other things, overtime compensation. The action, which
was originally filed on September 2, 1997, was certified on June 21, 1999 as a
class action with all managers and general managers who worked for Company-
owned Denny's restaurants in California since September 4, 1994 being
identified as class members. The suit alleges 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. Denny's has been and will continue
defending this lawsuit vigorously.
It is the opinion of Management (including General Counsel), after considering
a number of factors, including but not limited to the current status of the
litigation (including any settlement discussions), the views of retained
counsel, the nature of the litigation or proposed tax deficiencies, the prior
experience of the consolidated companies, and the amounts which the Company has
accrued for known contingencies, that the ultimate disposition of these matters
will not significantly affect the consolidated financial position or results of
operations of the Company.
In conjunction with the sales of Portion-Trol Foods, Inc. and the Mother Butler
Pies division of Denny's, the Company entered into five-year purchasing
agreements with the acquirers under which the Company is required to make
minimum annual purchases over the contract terms. The aggregate estimated
commitments remaining at December 29, 1999 relative to Portion-Trol Foods, Inc.
and Mother Butler Pies, respectively, are approximately $125.0 million and
$28.0 million after giving effect to the disposition of EPL.
On January 25, 2000, the Company entered into a three-year agreement with
Affiliated Computer Services, Inc. ("ACS") to manage and operate the Company's
information technology for its corporate headquarters, restaurants and field
management. This agreement replaces the IBM Global Services contract which had
been in existence since 1996. ACS will oversee data center operations,
applications development and maintenance, desktop support, data networking,
help desk operations and POS hardware maintenance. The Company anticipates
spending approximately $16.0 million per year under this contract.
F-25
<PAGE>
NOTE 15 SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated
Other Shareholders'
Total Comprehensive Equity/
Other Equity Deficit Income (Deficit)
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
Balance December 31, 1996 $745,800 $(1,973,365) $ 38 $(1,227,527)
Comprehensive income:
Net loss -- (134,450) -- (134,450)
Other comprehensive
income -- minimum
pension liability
adjustment -- -- (473) (473)
-------- ----------- ---- -----------
Comprehensive income -- (134,450) (473) (134,923)
-------- ----------- ---- -----------
Balance December 31, 1997 745,800 (2,107,815) (435) (1,362,450)
-------- ----------- ---- -----------
Comprehensive income:
Net income excluding
adjustments for
reorganization and
fresh start reporting -- (3,087) -- (3,087)
-------- ----------- ---- -----------
Comprehensive income -- (3,087) -- (3,087)
Adjustments for
reorganization 383,464 612,845 -- 996,309
Adjustments for fresh
start reporting (711,937) 1,498,057 435 786,555
-------- ----------- ---- -----------
Balance January 7, 1998 417,327 -- -- 417,327
-------- ----------- ---- -----------
Comprehensive income:
Net loss -- (181,419) -- (181,419)
Other comprehensive
income -- foreign
currency translation
adjustments -- -- 47 47
-------- ----------- ---- -----------
Comprehensive income -- (181,419) 47 (181,372)
Issuance of Common Stock 89 -- -- 89
-------- ----------- ---- -----------
Balance December 30, 1998 417,416 (181,419) 47 236,044
-------- ----------- ---- -----------
Comprehensive income:
Net loss -- (381,904) -- (381,904)
Other comprehensive
income -- foreign
currency translation
adjustments -- -- (87) (87)
-------- ----------- ---- -----------
Comprehensive income -- (381,904) (87) (381,991)
Issuance of Common Stock 107 -- -- 107
-------- ----------- ---- -----------
Balance December 29, 1999 $417,523 $ (563,323) $(40) $ (145,840)
======== =========== ==== ===========
</TABLE>
Pursuant to the Plan, Flagstar's convertible debentures, FCI's preferred stock
and FCI's common stock were canceled, extinguished and retired as of the
Effective Date. In addition, the warrants related to such common stock were
also canceled.
Pursuant to the Plan and as of the Effective Date, the Company is deemed to
have issued warrants to purchase, in the aggregate, four million shares of
common stock. Each warrant, when exercised, will entitle the holder thereof to
purchase one share of common stock at an exercise price of $14.60 per share,
subject to adjustment for certain events. Such warrants may be exercised
through January 7, 2005.
Stockholder Rights Plan
The Company's Board of Directors adopted a stockholder rights plan (the "Rights
Plan") on December 14, 1998, which is designed to provide protection for the
Company's shareholders against coercive or unfair takeover tactics. The Rights
Plan is also designed to prevent an acquirer from gaining control of the
Company without offering a fair price to all shareholders. The Rights Plan was
not adopted in response to any specific proposal or inquiry to gain control of
the Company. Under the Rights Plan, the Company's Board of Directors declared a
dividend of one right payable to shareholders of record as of December 30,
1998. Such rights are exercisable for one one-thousandth share of a new series
of junior participating preferred stock. In conjunction with the adoption of
the Rights Plan, the Company designated 100,000 shares of preferred stock as
Series A Junior Participating Preferred Stock (the "Participating Preferred
Stock") having a par value of $1.00 per share.
F-26
<PAGE>
The rights may only be exercised if a third party acquires 15% or more of the
outstanding common shares of the Company or ten days following the commencement
of, or announcement of intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a third party
of 15% or more of the common shares. The Rights Plan provides that the current
ownership of Advantica common stock by Loomis Sayles & Company, L.P. and
certain related entities ("Loomis Sayles"), which exceeds 15%, will not cause
the rights to become exercisable so long as Loomis Sayles does not increase its
ownership in excess of one percent without the consent of the Company's Board
of Directors. When exercisable, each right will entitle the holder to purchase
one one-thousandth share of the Participating Preferred Stock at an exercise
price of $42.50. If a person or group acquires 15% or more of the outstanding
common shares of the Company, each right, in the absence of timely redemption
of the rights by the Company, will entitle the holder, other than the acquiring
party, to purchase shares of Advantica common stock at a 50% discount from the
then market value of such common stock. Additionally, in the event that
Advantica is acquired in a merger or other business combination transaction
after any person or group has acquired 15% or more of Advantica outstanding
common stock, each right will entitle the holder, other than the acquirer, to
receive, upon payment of the exercise price, common shares of the acquiring
company at a 50% discount from the then market value.
The rights, until exercised, do not entitle the holder to vote or receive
dividends. The Company has the option to redeem the rights at a price of $.01
per right, at any time prior to the earlier of (1) the time the rights become
exercisable or (2) December 30, 2008, the date the rights expire. Until the
rights become exercisable, they have no dilutive effect on earnings per share.
NOTE 16 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands)
Numerator:
(Loss) income from
continuing operations $(84,754) $647,411 $(171,616) $(388,842)
Preferred stock dividends (14,175) (273) -- --
-------- -------- --------- ---------
Numerator for basic (loss)
earnings per share --
(loss) income from
continuing operations
available to common
shareholders (98,929) 647,138 (171,616) (388,842)
-------- -------- --------- ---------
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 $(98,929) $647,411 $(171,616) $(388,842)
======== ======== ========= =========
Denominator:
Denominator for basic
earnings per share --
weighted average shares 42,434 42,434 40,006 40,024
-------- -------- --------- ---------
Effect of dilutive
securities:
$2.25 Series A Cumulative
Convertible Exchangeable
Preferred Stock -- 8,562 -- --
10% Convertible Junior
Subordinated Debentures -- 4,136 -- --
-------- -------- --------- ---------
Dilutive potential common
shares -- 12,698 -- --
-------- -------- --------- ---------
Denominator for diluted
(loss) earnings per
share --adjusted weighted
average shares and assumed
conversions 42,434 55,132 40,006 40,024
======== ======== ========= =========
Basic (loss) earnings per
share from continuing
operations $ (2.33) $ 15.26 $ (4.29) $ (9.72)
======== ======== ========= =========
Diluted (loss) earnings per
share from continuing
operations $ (2.33) $ 11.74 $ (4.29) $ (9.72)
======== ======== ========= =========
</TABLE>
F-27
<PAGE>
The calculations of basic and diluted loss per share have been based on the
weighted average number of Company shares outstanding. The Predecessor Company
warrants, options, preferred stock and convertible debentures have been omitted
from the calculations for the fiscal year ended December 31, 1997 because they
have an antidilutive effect on loss per share. The warrants and options of the
Successor Company have been omitted from the calculations for the fifty-one
weeks ended December 30, 1998 and the fiscal year ended December 29, 1999
because they have an antidilutive effect on loss per share.
NOTE 17 EXTRAORDINARY ITEMS
The implementation of the Plan resulted in the exchange of Advantica's
predecessors' senior subordinated debentures and the convertible debentures for
40 million shares of Advantica's common stock and warrants to purchase 4
million shares of Advantica's common stock. The difference between the carrying
value of such debt (including principal, accrued interest and deferred
financing costs of $946.7 million, $74.9 million and $25.6 million,
respectively) and the fair value of the common stock and warrants resulted in a
gain on debt adjustment of $612.8 million which was recorded as an
extraordinary item. On July 31, 1998, Advantica extended to the holders of the
Senior Notes an offer to purchase up to $100.0 million of the outstanding
Senior Notes. As a result of this offer, $42.4 million of such securities were
tendered and not withdrawn. Such securities, plus accrued and unpaid interest
of $1.1 million, were retired on October 5, 1998, resulting in an extraordinary
gain of $1.0 million.
NOTE 18 SEGMENT INFORMATION
Advantica operates entirely in the food service industry with substantially all
revenues resulting from the sale of menu products at restaurants operated by
the Company, franchisees or licensees. The Company operates three restaurant
concepts -- Denny's, Coco's and Carrows -- and each concept is considered a
reportable segment. The "Corporate and other" segment consists primarily of the
corporate headquarters.
Advantica evaluates performance based on several factors, of which the primary
financial measure is business segment income before interest, taxes,
depreciation, amortization and charges for restructuring and impairment
("EBITDA as defined"). The accounting policies of the business segments are the
same as those described in the summary of significant accounting policies in
Note 3. Intersegment transactions generally consist of sales of restaurant
units or lease buyouts and are accounted for at fair value as if the sales were
to unrelated third parties.
<TABLE>
<CAPTION>
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In millions)
Revenue
Denny's $1,193.3 $23.2 $1,156.0 $1,197.2
Coco's 280.0 4.9 255.4 225.3
Carrows 212.5 3.5 184.0 164.5
Corporate and other -- -- -- 3.0
-------- ----- -------- --------
Total consolidated revenue $1,685.8 $31.6 $1,595.4 $1,590.0
======== ===== ======== ========
Depreciation and
Amortization
Denny's $ 51.5 $ 1.0 $ 169.8 $ 201.8
Coco's 16.6 0.3 41.8 39.1
Carrows 13.0 0.2 33.5 31.5
Corporate and other 6.6 0.1 21.4 18.0
-------- ----- -------- --------
Total consolidated
depreciation and
amortization $ 87.7 $ 1.6 $ 266.5 $ 290.4
======== ===== ======== ========
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In millions)
EBITDA as defined
Denny's $171.6 $ 11.1 $ 173.3 $ 189.2
Coco's 35.0 0.8 37.2 25.3
Carrows 26.6 -- 23.4 18.1
Corporate and other (35.2) (1.5) (33.2) (28.8)
------ ------ ------- -------
Total EBITDA as defined for
reportable segments 198.0 10.4 200.7 203.8
Eliminate EBITDA as defined
resulting from intersegment
transactions -- -- (3.3) --
------ ------ ------- -------
Total consolidated EBITDA as
defined 198.0 10.4 197.4 203.8
Depreciation and
amortization expense (87.7) (1.6) (266.5) (290.4)
Impairment charge -- -- -- (197.0)
Other charges:
Interest expense, net (159.0) (2.5) (102.9) (104.2)
Other, net (4.6) 0.3 (1.4) 0.2
Reorganization items (29.8) 627.0 -- --
------ ------ ------- -------
Consolidated (loss) income
from continuing operations
before income taxes and
extraordinary items $(83.1) $633.6 $(173.4) $(387.6)
====== ====== ======= =======
Capital Expenditures
(Including Capital Leases)
Denny's $ 43.1 $ -- $ 52.7 $ 102.2
Coco's 8.4 -- 5.4 13.1
Carrows 6.5 -- 5.0 9.7
Corporate and other 1.2 1.0 4.6 3.4
------ ------ ------- -------
Total capital expenditures
for reportable segments 59.2 1.0 67.7 128.4
Elimination of intersegment
capital expenditures -- -- (2.5) --
------ ------ ------- -------
Total consolidated capital
expenditures $ 59.2 $ 1.0 $ 65.2 $ 128.4
====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 30, December 29,
1998 1999
------------ ------------
<S> <C> <C>
Assets
Denny's $1,021.0 $ 841.3
Coco's 205.7 137.5
Carrows 153.1 94.4
Corporate and other 558.1 394.9
-------- --------
Total assets for reportable segments 1,937.9 1,468.1
Elimination of intersegment receivables (7.2) --
-------- --------
Total consolidated assets $1,930.7 $1,468.1
======== ========
</TABLE>
Information as to Advantica's operations in different geographical areas is as
follows:
<TABLE>
<CAPTION>
Fiscal Year One Week Fifty-One Fiscal Year
Ended Ended Weeks Ended Ended
December 31, January 7, December 30, December 29,
1997 1998 1998 1999
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
(In millions)
Revenue
United States $1,668.2 $31.3 $1,580.2 $1,573.4
Other 17.6 0.3 15.2 16.6
</TABLE>
F-29
<PAGE>
Because a substantial portion of the Company's international restaurants are
operated by franchisees and licensees, assets located outside the United States
are not material.
NOTE 19 QUARTERLY DATA (UNAUDITED)
The results for each quarter include all adjustments which are, in the opinion
of management, necessary for a fair presentation of the results for interim
periods. All such adjustments are of a normal and recurring nature.
Selected consolidated financial data for the one week ended January 7, 1998,
the twelve weeks ended April 1, 1998, the second, third and fourth quarters of
1998 and for each quarter of 1999 are set forth below. Certain amounts have
been reclassified to conform to the current year presentation.
<TABLE>
<CAPTION>
Predecessor Company Successor Company
------------------- -----------------------------------------
One Week Twelve Weeks
Ended Ended
January 7, April 1, Second Third Fourth
1998 1998 Quarter Quarter Quarter
------------------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands, except
per share data)
Year Ended December 30,
1998:
Revenue:
Company restaurant
sales $ 30,245 $345,837 $393,674 $407,787 $391,746
Franchise and license
revenue 1,333 11,819 14,260 14,839 15,467
---------- -------- -------- -------- --------
Total operating revenue 31,578 357,656 407,934 422,626 407,213
---------- -------- -------- -------- --------
Cost of company
restaurant sales:
Product costs 8,053 91,938 103,530 111,055 106,113
Payroll and benefits 11,840 136,493 150,489 148,910 153,782
Occupancy 839 21,124 22,160 23,047 20,975
Other operating
expenses 5,068 46,723 52,797 55,126 53,692
---------- -------- -------- -------- --------
Total costs of company
restaurant sales 25,800 296,278 328,976 338,138 334,562
Franchise restaurant
costs 667 4,975 6,506 6,500 6,671
General and
administrative
expenses 2,323 20,460 21,697 23,173 28,809
Amortization of
reorganization value
in excess of amounts
allocable to
identifiable assets -- 31,486 35,446 31,611 30,223
Depreciation and other
amortization 1,584 22,931 38,067 33,373 43,350
Gains on refranchising
and other, net (7,653) (3,035) (457) (2,060) (13,133)
---------- -------- -------- -------- --------
Total costs and
expenses 22,721 373,095 430,235 430,735 430,482
---------- -------- -------- -------- --------
Operating income (loss) $ 8,857 $(15,439) $(22,301) $ (8,109) $(23,269)
========== ======== ======== ======== ========
Income (loss) before
extraordinary items $ 782,073 $(43,080) $(53,290) $(36,540) $(49,553)
Net income (loss) 1,394,918 (43,080) (53,290) (36,540) (48,509)
Basic net income (loss)
per share before
extraordinary items 18.43 (1.08) (1.33) (0.91) (1.24)
Diluted net income
(loss) per share
before extraordinary
items 14.18 (1.08) (1.33) (0.91) (1.24)
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Successor Company
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
(In thousands, except per share
data)
Year Ended December 29, 1999:
Revenue:
Company restaurant sales $369,038 $389,369 $393,408 $ 369,997
Franchise and license revenue 15,240 16,646 18,419 17,929
-------- -------- -------- ---------
Total operating revenue 384,278 406,015 411,827 387,926
-------- -------- -------- ---------
Cost of company restaurant sales:
Product costs 99,253 102,085 103,117 97,587
Payroll and benefits 148,653 151,587 152,380 142,585
Occupancy 21,267 22,421 22,230 17,816
Other operating expenses 51,479 50,244 49,980 50,084
-------- -------- -------- ---------
Total costs of company restaurant
sales 320,652 326,337 327,707 308,072
Franchise restaurant costs 7,465 9,176 8,145 7,845
General and administrative expenses 25,632 24,001 22,931 20,324
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets 31,917 31,844 31,962 31,851
Depreciation and other amortization 32,597 36,382 43,605 50,232
Impairment charge -- -- -- 197,000
Gains on refranchising and other,
net (3,174) (5,115) (4,055) (9,698)
-------- -------- -------- ---------
Total costs and expenses 415,089 422,625 430,295 605,626
-------- -------- -------- ---------
Operating income (loss) $(30,811) $(16,610) $(18,468) $(217,700)
======== ======== ======== =========
Income (loss) before extraordinary
items $(61,680) $(41,206) $(45,215) $(233,803)
Net income (loss) (61,680) (41,206) (45,215) (233,803)
Basic net income (loss) per share
before extraordinary items (1.54) (1.03) (1.13) (5.84)
Diluted net income (loss) per share
before extraordinary items (1.54) (1.03) (1.13) (5.84)
</TABLE>
F-31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ADVANTICA RESTAURANT GROUP, INC.
/s/ RHONDA J. PARISH
By: _____________________________________
Rhonda J. Parish
(Executive Vice President,
General Counsel and Secretary)
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES B. ADAMSON Director, Chairman, March 28, 2000
______________________________________ President, and Chief
(James B. Adamson) Executive Officer
(Principal Executive
Officer)
/s/ RONALD B. HUTCHISON Executive Vice President March 28, 2000
______________________________________ and Chief Financial
(Ronald B. Hutchison) Officer (Principal
Financial and Accounting
Officer)
/s/ RONALD E. BLAYLOCK Director March 28, 2000
______________________________________
(Ronald E. Blaylock)
/s/ VERA KING FARRIS Director March 28, 2000
______________________________________
(Vera King Farris)
/s/ JAMES J. GAFFNEY Director March 28, 2000
______________________________________
(James J. Gaffney)
/s/ IRWIN N. GOLD Director March 28, 2000
______________________________________
(Irwin N. Gold)
/s/ ROBERT E. MARKS Director March 28, 2000
______________________________________
(Robert E. Marks)
/s/ CHARLES F. MORAN Director March 28, 2000
______________________________________
(Charles F. Moran)
/s/ ELIZABETH A. SANDERS Director March 28, 2000
______________________________________
(Elizabeth A. Sanders)
/s/ DONALD R. SHEPHERD Director March 28, 2000
______________________________________
(Donald R. Shepherd)
</TABLE>
<PAGE>
EXHIBIT 10.37
AMENDMENT NO. 6, dated as of December 20, 1999 (this
"Amendment"), to the Credit Agreement dated as of January 7,
1998, as amended by Amendment No. 1 and Waiver dated as of
March 16, 1998, Amendment No. 2 and Waiver dated as of May
21, 1998, Amendment No. 3 and Waiver dated as of July 16,
1998, Amendment No. 4 dated as of November 12, 1998, and
Amendment No. 5 dated as of March 12, 1999 (the "Credit
Agreement"), among DENNY'S, INC., a California corporation,
EL POLLO LOCO, INC., a Delaware corporation, FLAGSTAR
ENTERPRISES, INC., an Alabama corporation, FLAGSTAR SYSTEMS,
INC., a Delaware corporation, QUINCY'S RESTAURANTS, INC., an
Alabama corporation (each of the foregoing, except for
FLAGSTAR ENTERPRISES, INC., QUINCY'S RESTAURANTS, INC. and,
after the EPL Sale, EL POLLO LOCO, INC., for purposes of
this Amendment and the Credit Agreement, individually, a
"Borrower" and, collectively, the "Borrowers"), ADVANTICA
RESTAURANT GROUP, INC., a Delaware corporation ("Parent"),
the Lenders (as defined in Article I of the Credit
Agreement) and THE CHASE MANHATTAN BANK, a New York banking
corporation, as swingline lender (in such capacity, the
"Swingline Lender"), as issuing bank (in such capacity, the
"Issuing Bank"), as administrative agent (in such capacity,
the "Administrative Agent") and as collateral agent (in such
capacity, the "Collateral Agent") for the Lenders.
A. The Lenders have extended credit to the Borrowers, and have agreed to
extend credit to the Borrowers, in each case pursuant to the terms and subject
to the conditions set forth in the Credit Agreement.
B. Parent and the Borrowers have requested that the Required Lenders agree
to amend certain provisions of the Credit Agreement as provided herein.
C. The Required Lenders are willing to agree to such amendments, on the
terms and subject to the conditions set forth herein.
D. Capitalized terms used but not defined herein shall have the meanings
assigned to them in the Credit Agreement after giving effect to this Amendment.
Accordingly, in consideration of the mutual agreements herein contained and
other good and valuable consideration, the sufficiency and receipt of which are
hereby acknowledged, the parties hereto agree as follows:
<PAGE>
2
SECTION 1. Amendment. (a) Section 1.01 of the Credit Agreement is
---------
hereby amended as follows:
(i) by inserting the following definitions in the appropriate
alphabetical order:
"'EPL' shall mean El Pollo Loco, Inc., a Delaware corporation and an
indirect, wholly owned subsidiary of Parent."
"'EPL Sale' shall have the meaning assigned to such term in Section
6.05(k)."
(ii) by substituting for the proviso at the end of the definition of
the term "Consolidated EBITDA" before the period the following proviso:
"; provided, however, that (a) upon and after the occurrence of an EPL
Sale, Consolidated EBITDA for each period that includes the date of
occurrence of such EPL Sale will, solely for purposes of determining
compliance with Sections 6.11, 6.12, 6.13 and 6.14, be determined on a
pro forma basis, as if EPL had been sold on the first day of such
period, and (b) after the occurrence of any acquisition of any person
by Parent, any Borrower or any Specified Subsidiary, Consolidated
EBITDA for each period that includes the date of occurrence of such
acquisition will, solely for purposes of determining compliance with
Sections 6.11 and 6.12, be determined on a pro forma basis, based on
the actual historical results of operations of such person, as if such
acquisition had occurred on the first day of such period";
(iii) by substituting for the last sentence of the definition of the
term "Consolidated Interest Expense" the following sentence:
"Notwithstanding the foregoing, (i) upon and after the occurrence of
an EPL Sale, Consolidated Interest Expense for each period that
includes the date of such EPL Sale will, for all purposes in this
Agreement, be determined on a pro forma basis, as if EPL had been sold
on the first day of such period, and (ii) upon and after the
occurrence of the deposit referenced in Section 2.09(a), Consolidated
Interest Expense for each period that includes the date of such
deposit will, for all purposes in this Agreement, be determined on a
pro forma basis, as if the Mortgage Notes had been repaid or redeemed
on the first day of such period.";
(iv) by substituting for the last sentence of the definition of the
term "Consolidated Lease Expense" the following sentence:
"Notwithstanding the foregoing, upon and after the occurrence of an
EPL Sale, Consolidated Lease Expense for each period that includes the
date of occurrence of such EPL Sale will, for all purposes of this
Agreement, be determined on a pro forma basis, as if EPL had been sold
on the first day of such period.";
(b) Section 2.05 of the Credit Agreement is hereby amended as follows:
<PAGE>
3
(i) by deleting the percentage "0.50%" following the text "a
commitment fee (a "Commitment Fee") of" in the fourth line of Section
2.05(a) and replacing it with the percentage "1.00%"; and
(ii) by deleting the percentage "2.75%" following the text "at a rate
per annum equal to" in the eighth line of Section 2.05(c) and replacing it
with the percentage "3.25%".
(c) Section 2.06 of the Credit Agreement shall be amended as follows:
(i) by deleting the percentage "1.75%" at the end of Section 2.06(a)
and replacing it with the percentage "2.25%"; and
(ii) by deleting the percentage "2.75%" at the end of Section 2.06(b)
and replacing it with the percentage "3.25%".
(d) Section 2.09(a) of the Credit Agreement is hereby amended as follows:
(i) by inserting the text "(i)" after the text "New York City time, on
March 31, 2000, if" in the first sentence of Section 2.09(a); and
(ii) by inserting the text "and (ii) either (A) the Borrowers shall
not have deposited, in an account with the Administrative Agent, not less
than the face amount of Mortgage Notes then outstanding, which deposit
shall be maintained with the Administrative Agent at all times during the
period from March 31, 2000 until the redemption or repayment in full of the
Mortgage Notes or (B) the aggregate principal amount of outstanding Loans
and Letters of Credit exceeds $150,000,000 on or before the earlier of (x)
March 31, 2000 or (y) the date the Mortgage Notes are repaid in full" after
the text "by such time" in the first sentence of Section 2.09(a).
(e) The following Sections shall be added to Article V of the Credit
Agreement, following Section 5.13:
"SECTION 5.14. Denny's Realty. Following any redemption or repayment
--------------
of the Mortgage Notes (other than pursuant to the consummation of the Real
Estate Refinancing), (i) Denny's Realty, Inc. ("Denny's Realty"), a
Delaware corporation, and its subsidiaries, shall execute a Subsidiary
Guarantee Agreement, Indemnity, Subrogation and Contribution Agreement and
each applicable Security Document in favor of the Collateral Agent, (ii)
all outstanding capital stock of each of Denny's Realty and its
subsidiaries shall be pledged pursuant to the Pledge Agreement, (iii)
Denny's Realty and its subsidiaries shall not create, incur, assume or
permit to exist any Indebtedness or other liabilities except (A) under the
Subsidiary Guarantee Agreement and (B) liabilities (other than
Indebtedness) incurred in the ordinary course of business, and (iv) Denny's
Realty and its subsidiaries shall not engage in any business other than the
ownership of real property and improvements thereto and the leasing of such
properties to Denny's, Inc."
(f) Section 6.05 of the Credit Agreement is hereby amended as follows:
<PAGE>
4
(i) by deleting the word "and" set forth at the end of Section
6.05(i); and
(ii) by inserting the word "and" immediately before the period at the
end of Section 6.05(j) and adding the following new paragraph before such
period:
"(k) TWS 800 Corp. may sell all the capital stock of EPL (the "EPL
Sale"), provided that (i) at the time of the EPL Sale, and immediately
--------
after giving effect thereto, no Default or Event of Default shall have
occurred and be continuing, (ii) the EPL Sale is consummated in
accordance with the terms of the Stock Purchase Agreement dated as of
November 9, 1999 (the "EPL Stock Purchase Agreement"), by and among
Parent, Denny's Holdings, Inc., TWS 800 Corp., EPL and EPL Holdings,
Inc. (without giving effect to any amendments, waivers, supplements or
other modifications thereto that are adverse to the Lenders) and
applicable law and regulations and otherwise on terms reasonably
satisfactory to the Administrative Agent, and (iii) TWS 800 Corp.
shall have received gross cash proceeds in the aggregate of not less
than $128,300,000 (subject to adjustment as provided in the EPL Stock
Purchase Agreement) from the EPL Sale;".
(g) Section 6.08(a)(i) of the Credit Agreement is hereby amended by
substituting the following new Section 6.08(a)(i) for the existing Section
6.08(a)(i):
"(i) the Mortgage Notes may be prepaid, redeemed, repurchased,
acquired or retired at any time or from time to time,".
SECTION 2. Amendment Fee. In consideration of the agreements of the
-------------
Required Lenders contained in this Amendment, the Borrower agrees to pay to the
Administrative Agent, for the account of each Lender that delivers an executed
counterpart of this Amendment on or prior to December 20, 1999, an amendment fee
(the "Amendment Fee") in an amount equal to 0.125% of such Lender's Commitment
as of such date; provided that the Amendment Fee shall not be payable unless and
until this Amendment becomes effective as provided in Section 5 below.
SECTION 3. Representations and Warranties. Parent and the Borrowers
------------------------------
represent and warrant to the Administrative Agent and to each of the Lenders
that:
(a) This Amendment has been duly authorized, executed and delivered by
Parent and each of the Borrowers and constitutes their legal, valid and binding
obligations, enforceable in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and by
general principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity).
(b) Before and after giving effect to this Amendment, the representations
and warranties set forth in Article III of the Credit Agreement are true and
correct in all material respects with the same effect as if made on the date
hereof, except to the extent such representations and warranties expressly
relate to an earlier date.
(c) The execution, delivery and performance by Parent and each necessary
Loan Party of the EPL Stock Purchase Agreement, and the completion of the EPL
Sale,
<PAGE>
5
(a) have been duly authorized by all requisite corporate and, if required,
stockholder action and (b) will not (i) violate (A) any provision of law,
statute, rule or regulation, or of the certificate or articles of incorporation
or other constitutive documents or by-laws of Parent, any Borrower or any other
Subsidiary, (B) any order of any Governmental Authority or (C) any provision of
any indenture, agreement or other instrument to which Parent, any Borrower or
any other Subsidiary is a party or by which any of them or any of their property
is or may be bound or (ii) be in conflict with, result in a breach of or
constitute (alone or with notice or lapse of time or both) a default under, or
give rise to any right to accelerate or to require the prepayment, repurchase or
redemption of any obligation under any such indenture, agreement or other
instrument.
(d) Before and after giving effect to this Amendment, no Event of Default
or Default has occurred and is continuing.
SECTION 4. Releases. Upon the consummation of the EPL Sale in
--------
accordance with the terms of the Credit Agreement, (a) EPL and its subsidiaries
will have no further Obligations under the Credit Agreement or the other Loan
Documents, and (b) all Liens on the capital stock and assets of EPL and its
subsidiaries under the Credit Agreement and the other Loan Documents will be
released.
SECTION 5. Conditions to Effectiveness. This Amendment shall become
---------------------------
effective as of the date first above written when the Administrative Agent shall
have received (a) counterparts of this Amendment that, when taken together, bear
the signatures of Parent, each of the Borrowers and the Required Lenders and (b)
the Amendment Fee.
SECTION 6. Credit Agreement. Except as specifically amended hereby,
----------------
the Credit Agreement shall continue in full force and effect in accordance with
the provisions thereof as in existence on the date hereof. After the date
hereof, any reference to the Credit Agreement shall mean the Credit Agreement as
amended hereby.
SECTION 7. Loan Document. This Amendment shall be a Loan Document for
-------------
all purposes.
SECTION 8. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
--------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9. Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall constitute an original but all of which when
taken together shall constitute but one agreement. Delivery of an executed
counterpart of a signature page of this Amendment by telecopy shall be effective
as delivery of a manually executed counterpart of this Amendment.
SECTION 10. Expenses. Parent and the Borrowers agree to reimburse the
--------
Administrative Agent for its out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and disbursements of Cravath,
Swaine & Moore, counsel for the Administrative Agent.
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first written above.
ADVANTICA RESTAURANT GROUP, INC.,
by
/s/ Kenneth E. Jones
---------------------------------
Name: Kenneth E. Jones
Title: Vice President and Treasurer
DENNY'S, INC.,
by
/s/ Kenneth E. Jones
---------------------------------
Name: Kenneth E. Jones
Title: Vice President and Treasurer
EL POLLO LOCO, INC.,
by
/s/ Kenneth E. Jones
---------------------------------
Name: Kenneth E. Jones
Title: Vice President and Treasurer
FLAGSTAR SYSTEMS, INC.,
by
/s/ Kenneth E. Jones
---------------------------------
Name: Kenneth E. Jones
Title: Vice President and Treasurer
THE CHASE MANHATTAN BANK, by Chase
Securities Inc., as agent,
by
---------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK, by Chase
Securities Inc., as agent,
by
---------------------------------
Name:
Title:
<PAGE>
7
THE CHASE MANHATTAN BANK, individually and as
Administrative Agent, Collateral Agent,
Swingline Lender and Issuing Bank,
by
/s/ Barry K. Bergman
---------------------------------
Name: Barry K. Bergman
Title: Vice President
BHF-BANK AKTIENGESELLSCHAFT
by
---------------------------------
Name:
Title:
GREEN TREE FINANCIAL SERVICING
CORPORATION,
by
---------------------------------
Name:
Title:
JACKSON NATIONAL LIFE INSURANCE
COMPANY, as Assignee, by PPM Finance, Inc.,
its attorney in fact,
by
---------------------------------
Name:
Title:
KZH CRESCENT LLC,
by
---------------------------------
Name:
Title:
KZH SHOSHONE LLC,
by
---------------------------------
Name:
Title:
<PAGE>
8
KZH CNC LLC,
by
/s/ Susan Lee
---------------------------------
Name: Susan Lee
Title: Authorized Agent
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, NEW YORK BRANCH,
by
---------------------------------
Name:
Title:
PAM CAPITAL FUNDING LP,
by
---------------------------------
Name:
Title:
FLEET BUSINESS CREDIT CORPORATION,
by
/s/ Mark Flamm
---------------------------------
Name: Mark Flamm
Title: Vice President
TORONTO DOMINION (TEXAS), INC.,
by
/s/ Anne Favoriti
---------------------------------
Name: Anne Favoriti
Title: Vice President
GENERAL ELECTRIC CAPITAL CORP.,
by
---------------------------------
Name:
Title:
<PAGE>
9
CONSECO FINANCE SERVICING CORP.,
by
/s/ C.A. Gouskos
---------------------------------
Name: C.A. Gouskos
Title: Sr. Vice President
AMSOUTH BANK,
by
/s/ Kathleen F. Kerlinger
---------------------------------
Name: Kathleen F. Kerlinger
Title: Attorney-In-Fact
<PAGE>
SIGNATURE PAGE TO
AMENDMENT NO. 6,
DATED AS OF
December 20, 1999
To approve the Amendment:
Name of Institution SPS Swaps
-------------------------------------------------
by
/s/ Anna Maria Beissel
-------------------------------------
Name: Anna Maria Beissel
Title: Vice President
<PAGE>
EXHIBIT 12
ADVANTICA RESTAURANT GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Predecessor Company Successor Company
--------------------------------------------------------- ----------------------------
Fiscal Year Ended One Week Fifty-One
------------------------------------------ Ended Weeks Ended Fiscal Year Ended
December 31, December 31, December 31, January 7, December 30, December 29,
1995 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Loss from continuing operations
before income taxes $ (80,572) $ (76,433) $ (83,066) $ 633,582 $ (173,410) $ (387,620)
------------ ------------ ------------ ------------ ------------ ------------
Add:
Interest expense excluding
capitalized interest 136,895 164,986 153,040 2,458 110,547 112,239
Amortization of debt expense 4,118 5,512 5,964 111 (7,662) (8,034)
------------ ------------ ------------ ------------ ------------ ------------
Subtotal 141,013 170,498 159,004 2,569 102,885 104,205
------------ ------------ ------------ ------------ ------------ ------------
Interest factor in rents 10,925 14,935 19,035 368 18,736 17,919
------------ ------------ ------------ ------------ ------------ ------------
Total earnings (losses) $ 71,366 $ 109,000 $ 94,973 $ 636,519 $ (51,789) $ (265,496)
============ ============ ============ ============ ============ ============
Fixed charges:
Interest expense including
capitalized interest $ 136,976 $ 164,986 $ 153,040 $ 2,458 $ 110,547 $ 112,239
Amortization of debt expense 4,118 5,512 5,964 111 (7,662) (8,034)
------------ ------------ ------------ ------------ ------------ ------------
Subtotal 141,094 170,498 159,004 2,569 102,885 104,205
Interest factor in rents 10,925 14,935 19,035 368 18,736 17,919
------------ ------------ ------------ ------------ ------------ ------------
Total fixed charges $ 152,019 $ 185,433 $ 178,039 $ 2,937 $ 121,621 $ 122,124
============ ============ ============ ============ ============ ============
Ratio of earnings to fixed charges --- --- --- 216.7 --- ---
============ ============ ============ ============ ============ ============
Deficiency in the coverage of fixed
charges by earnings (losses) before
fixed charges $ 80,653 $ 76,433 $ 83,066 $ --- $ 173,410 $ 387,620
============ ============ ============ ============ ============ ============
</TABLE>
For purposes of these computations, the ratio of earnings to fixed charges has
been calculated by dividing pretax earnings by fixed charges. Earnings, as used
to compute the ratio, equals the sum of income before income taxes and fixed
charges excluding capitalized interest. Fixed charges are the total interest
expenses including capitalized interest, amortization of debt expenses and a
rental factor that is representative of an interest factor (estimated to be one
third) on operating leases.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ADVANTICA RESTAURANT GROUP, INC.
Name State of Incorporation
- ---- ----------------------
Denny's Holdings, Inc. New York
FRD Acquisition Co. Delaware
FRI-J Corporation Delaware
Far West Concepts Delaware
FRI-M Corporation Delaware
FRI-C Corporation Delaware
FRI-DHD Corporation Delaware
Spartan Holdings, Inc. New York
TWS 500 Corporation Delaware
TWS 600 Corporation Delaware
TWS 700 Corporation Delaware
Denny's, Inc. California
DFO, Inc. Delaware
Denny's Realty, Inc. Delaware
Advantica Systems, Inc. Delaware
I.M. Special, Inc. Delaware
Coco's Restaurant, Inc. California
Carrows Restaurants, Inc. California
Carrows California Family Restaurants, Inc. Delaware
jojo's Restaurants, Inc. California
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Advantica's Restaurant Group,
Inc.'s Registration Statements Nos. 333-53031, 333-58169, 333-58167 and
333-95981 (such Registration Statement also constitutes a post-effective
amendment to Registration Statement No. 333-53031) on Form S-8 of our report
dated February 16, 2000, appearing in this Annual Report on Form 10-K of
Advantica Restaurant Group, Inc., for the year ended December 29, 1999.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> DEC-29-1999
<CASH> 174,226
<SECURITIES> 17,084
<RECEIVABLES> 25,312
<ALLOWANCES> 3,601
<INVENTORY> 14,948
<CURRENT-ASSETS> 399,326
<PP&E> 832,207
<DEPRECIATION> 209,602
<TOTAL-ASSETS> 1,468,099
<CURRENT-LIABILITIES> 633,410
<BONDS> 822,528
0
0
<COMMON> 400
<OTHER-SE> (146,240)
<TOTAL-LIABILITY-AND-EQUITY> 1,468,099
<SALES> 0
<TOTAL-REVENUES> 1,590,046
<CGS> 0
<TOTAL-COSTS> 1,873,635
<OTHER-EXPENSES> (174)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,205
<INCOME-PRETAX> (387,620)
<INCOME-TAX> 1,222
<INCOME-CONTINUING> (388,842)
<DISCONTINUED> 6,938
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (381,904)
<EPS-BASIC> (9.54)
<EPS-DILUTED> (9.54)
</TABLE>
<PAGE>
EXHIBIT 99.1
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (as used in this Exhibit
99.1, the "Act") provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about their companies, so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed in the statement.
The Company desires to take advantage of the "safe harbor" provisions of the
Act. Certain information, particularly information regarding future economic
performance, finances and management's plans and objectives, contained or
incorporated by reference in the Company's 1999 Annual Report on Form 10-K (the
"Annual Report") is forward-looking. In some cases, information regarding
certain important factors that could cause actual results to differ materially
from any such forward-looking statement appear together with such statement.
The following factors, in addition to those set forth in the Annual Report and
other possible factors not listed, could also affect the Company's actual
results and cause such results to differ materially from those expressed in
forward-looking statements:
Liquidity and Capital Resources. On July 11, 1997, Advantica's predecessors, FCI
and Flagstar, filed voluntary petitions for relief under the Bankruptcy Code.
The Plan of Reorganization (the "Plan") dated as of November 7, 1997 was
confirmed by the Bankruptcy Court pursuant to an order entered as of November
12, 1997 and became effective January 7, 1998. As a result of the
reorganization, the Company, significantly reduced its debt and simplified its
capital structure. Although consummation of the Plan and subsequent debt
repayment from asset sale proceeds significantly reduced the Company's debt
obligations, the Company still has substantial indebtedness and debt service
requirements, both in absolute terms and in relation to shareholders' equity.
With respect to the long-term liquidity of the Company, management believes that
the Company will have sufficient cash flow from operations (together with funds
available under the Credit Facility) to pay interest and scheduled amortization
on all of its outstanding indebtedness and to fund anticipated capital
expenditures through 2000. The Company's ability to meet its debt service
obligations will depend on a number of factors, including management's ability
to maintain operating cash flow, and there can be no assurance that targeted
levels of operating cash flow will actually be achieved. The Company's ability
to maintain or increase operating cash flow will depend upon consumer tastes,
the success of marketing initiatives and other efforts by the Company to
increase customer traffic in its restaurants, prevailing economic conditions and
other matters many of which are beyond the control of the Company.
Competition. The Company's future performance will be subject to a number of
factors that affect the restaurant industry generally, including competition.
The restaurant business is highly competitive and the competition can be
expected to increase. Price, restaurant location, food quality, quality and
speed of service and attractiveness of facilities are important aspects of
competition as are the effectiveness of marketing and advertising programs. The
competitive environment is also often affected by factors beyond the Company's
or a particular restaurant's control. The Company's restaurants compete with a
wide variety of restaurants ranging from national and regional restaurant chains
(some of which have substantially greater financial resources than the Company)
to locally owned restaurants. There is also active competition for advantageous
commercial real estate sites suitable for restaurants.
Economic, Market and Other Conditions. Food service businesses are often
affected by changes in consumer tastes, national, regional and local economic
conditions and demographic trends. The performance of individual restaurants may
be adversely affected by factors such as traffic patterns, demographic
consideration and the type, number and location of competing restaurants. Multi-
unit food service chains such as the Company's can also be materially and
adversely affected by publicity resulting from food quality, illness, injury, or
other health concerns or operating issues stemming from one restaurant or a
limited number of restaurants. Dependence on frequent deliveries of fresh
produce and groceries subjects food service businesses to the risk that
shortages or interruptions in supply caused by adverse weather or other
conditions could adversely affect the availability, quality and cost of
ingredients. In addition, unfavorable trends or developments concerning factors
such as inflation, increased food, labor and employee benefit costs (including
increases in hourly wage and minimum unemployment tax rates), regional weather
conditions and the availability of experienced management and
<PAGE>
hourly employees may also adversely affect the food service industry in general
and the Company's results of operations and financial condition in particular.
Importance of Locations. The success of Company-owned and franchised restaurants
is significantly influenced by location. There can be no assurance that current
locations will continue to be attractive, as demographic patterns change. It is
possible the neighborhood or economic conditions where restaurants are located
could decline in the future, resulting in potentially reduced sales in those
locations.
Government Regulations. The Company and its franchisees are subject to federal,
state and local laws and regulations governing health, sanitation, environmental
matters, safety, the sale of alcoholic beverages and hiring and employment
practices. Restaurant operations are also subject to federal and state laws that
prohibit discrimination and laws regulating the design and operation of
facilities, such as the Americans With Disabilities Act of 1990. The operation
of the Company's franchisee system is also subject to regulations enacted by a
number of states and to rules promulgated by the Federal Trade Commission. The
Company cannot predict the effect on its operations, particularly on its
relationship with franchisees, caused by the future enactment of additional
legislation regulating the franchise relationship.
<PAGE>
EXHIBIT 99.2
EXCERPT FROM ADVANTICA'S FEBRUARY 17,2000 PRESS RELEASE ANNOUNCING "ONE COMPANY,
ONE BRAND" STRATEGIC DIRECTION
Investor Contact: Ken Jones FOR IMMEDIATE RELEASE
864-597-8994
Media Contact: Karen Randall
864-597-8440
ADVANTICA RESTAURANT GROUP ANNOUNCES "ONE COMPANY,
ONE BRAND" STRATEGIC DIRECTION WITH FOCUS ON DENNY'S BRAND ONLY; ALSO REPORTS
FOURTH QUARTER EARNINGS
Denny's-brand-only focus will result in Company's exploration of strategic
alternatives for Coco's and Carrows, an increase in franchise activity,
and staff reductions and other measures expected to yield annualized
savings of approximately $15 million
SPARTANBURG, S.C., February 17, 2000 - Advantica Restaurant Group, Inc. (Nasdaq:
DINE) today announced that the future direction of the Company will focus
exclusively on its Denny's brand, historically the cornerstone of the Company
and America's largest full service restaurant chain. The Denny's-brand-only
strategy will include efforts to increase significantly the number of Denny's
restaurants owned and operated by franchisees.
The Company has retained the firm of Donaldson, Lufkan & Jenrette Securities
Corporation to commence immediately exploring strategic alternatives, including
a possible sale or recapitalization, for its ERD subsidiary which houses its
Coco's and Carrows brands.
As part of the "One Company, One Brand" strategy, the Company has also taken
initial actions to merge and streamline its corporate overhead structure with
the Denny's organization. Accordingly, James B. Adamson will serve as chairman
and chief executive officer of the Company, and John Romandetti has resigned as
chief executive officer of Denny's. Staff reductions and a new information
systems outsourcing agreement are expected to reduce general and administration
costs by approximately $15 million on an annualized basis.
Adamson said, "Today's announcement is the result of an extensive review of the
Company's operations and structure over the past four months by the Company's
management and Board with the assistance of outside advisors. Denny's continues
to have tremendous brand equity and, as the leading family dining chain,
deserves the full attention of our management and the deployment of our capital
resources. Last year, we began our Denny's Diner 2000 reimage program and
completed 140 units. We are pleased with the overall results to date, and we
plan to continue to reinvest in our restaurants. During 2000, however, we will
develop and test a lower cost alternative in approximately 20 other units. We
expect that the lower cost alternative will have appeal to existing and new
franchisees and will be essential to a successful completion of our reimaging
program system wide.
"We believe that moving to a more franchised-based operation will, over time,
add value for our shareholders. During the next several years, we plan on
refranchising 250 to 300 Company-owned units. Our ultimate goal is for the
Company to retain about 300 units or 40 percent of the current Company-owned
portfolio. The proceeds from the refranchising effort will be used to fund the
reimaging of our remaining Denny's restaurants and to reduce debt.
<PAGE>
"With the strategic direction of the Company focused on Denny's, we have begun
the process of merging corporate administration functions into the Denny's
organization. This process will more closely align operational objectives with
the Advantica management team's corporate objective of enhancing shareholder
value. As a result, certain functions and duplication within functions have been
eliminated. Upon completion of DLJ's engagement with respect to Coco's and
Carrows, and as our Company-owned restaurant units decrease, further general and
administrative expense reductions are expected. Reducing the workforce, while
difficult, is a necessary decision for Advantica at this time. We are committed
to treating our employees fairly. Those employees who are separated from the
Company will be offered severance packages and outplacement services to help
with the transition.
"As we move to our Denny's only focus in the future, we will concentrate our
efforts on improving service levels, enhancing the appearance of facilities and
maintaining and improving food quality, all in an effort to retain our existing
customers, attract new ones and provide customers with an enjoyable dining
occasion on every visit."
