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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 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 (I.R.S. employer
of incorporation or organization) identification no.)
203 East Main Street 29319-9966
(Zip code)
Spartanburg, South Carolina
(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:
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
Title of class
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant was approximately $293,345,612 based upon the
closing sales price of registrant's Common Stock on March 16, 1998 of $9.69 per
share.
As of March 16, 1998, 40,000,000 shares 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 June 18, 1998 are
incorporated by reference into Part III of this Form 10-K.
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Table of Contents
Page
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Part I
Item 1. Business ................................................................................ 1
Item 2. Properties .............................................................................. 11
Item 3. Legal Proceedings ....................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 13
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ................... 14
Item 6. Selected Financial Data ................................................................. 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................. 33
Item 8. Financial Statements and Supplementary Data ............................................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 33
Part III
Item 10. Directors and Executive Officers of the Registrant ...................................... 34
Item 11. Executive Compensation .................................................................. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 34
Item 13. Certain Relationships and Related Transactions .......................................... 34
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 39
Index to Financial Statements ..................................................................
F-1
Signatures
Forward-Looking Statements
The forward-looking statements included in the "Business," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" sections, which reflect management's best judgment
based on factors currently known, involve risks and uncertainties. Words such
as "expects," "anticipates," "believes," "intends," and "hopes," variations of
such words and similar expressions are intended to identify such
forward-looking statements. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including but not limited to, the factors discussed in such sections
and those set forth in the cautionary statements contained in Exhibit 99 to
this Form 10-K. (See Exhibit 99 -- Safe Harbor Under the Private Securities
Litigation Reform Act of 1995.) Forward-looking information provided by the
Company in such sections pursuant to the safe harbor established under the
Private Securities Litigation Reform Act of 1995 should be evaluated in the
context of these factors.
PART I
Item 1. Business
Introduction
Advantica Restaurant Group, Inc. (formerly Flagstar Companies, Inc.)
("Advantica" and together with its subsidiaries, including predecessors, the
"Company") is one of the largest restaurant companies in the United States,
operating (directly and through franchisees) approximately 3,300
moderately-priced restaurants.
Flagstar Companies, Inc. ("FCI") was organized as a holding company in
1988 in order to effect the 1989 acquisition of Flagstar Corporation
("Flagstar"). On November 16, 1992, FCI and Flagstar consummated the principal
elements of a recapitalization (the "1992 Recapitalization"), as a result of
which two partnerships affiliated with Kohlberg Kravis Roberts & Co. ("KKR")
acquired control of FCI and Flagstar. Prior to June 16, 1993, FCI and Flagstar
had been known, respectively, as TW Holdings, Inc. and TW Services, Inc.
As a result of the 1989 leveraged buyout of Flagstar, the Company became
and remains (even after giving effect to the Plan (as defined below)) very
highly leveraged. While the Company's cash flows have been sufficient to cover
interest costs, operating results since the buyout in 1989 have fallen short of
expectations. Such shortfalls resulted from negative operating trends due to
increased competition, intense pressure on pricing due to discounting,
declining customer traffic and relatively limited capital resources to respond
to these changes. These operating trends generally continued through 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for additional information.
On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly
formed subsidiary, consummated the acquisition of the Coco's and Carrows
restaurant chains consisting of 347 Company-owned units within the mid-scale
family-style dining category to strengthen the Company position in the
family-style restaurant category, particularly in California, one of the
Company's core markets. The ultimate acquisition price of $313.4 million was
paid in consideration for all of the outstanding stock of FRI-M Corporation
("FRI-M"), then a subsidiary of Family Restaurants, Inc. ("FRI"), which owns
the Coco's and Carrows chains. The acquisition was accounted for using the
purchase method of accounting and is reflected in the Company's Consolidated
Financial Statements and Notes thereto included herein as of the acquisition
date.
During the third quarter of 1996, the Company sold its two food processing
operations, Portion-Trol Foods, Inc. and the Mother Butler Pies division of
Denny's, Inc., a subsidiary of Flagstar (Portion-Trol Foods, Inc. and the
Mother Butler Pies division are hereinafter referred to collectively as "PTF").
These transactions mark the last in a series of non-restaurant divestitures
which began with the sale of Canteen Corporation, the Company's food and
vending business, in 1994 and also included the 1995 sales of TW Recreational
Services, Inc., a concession and recreation services subsidiary; Volume
Services, Inc., a stadium concession services subsidiary; and Proficient Food
Company ("PFC"), the Company's food distribution subsidiary.
The 1997 Restructuring
In early 1997, the Company hired Donaldson, Lufkin & Jenrette Securities
Corporation as a financial advisor to assist in exploring alternatives to
improve the Company's capital structure. Subsequently, the Company's management
concluded, in light of operating trends experienced by the Company and the
Company's liquidity and capital needs, that the reorganizational alternative
best designed to recapitalize the Company over the long-term and maximize the
recovery of all stakeholders was a prepackaged plan pursuant to Chapter 11 of
Title 11 of the United States Code (the "Bankruptcy Code"). Toward that end,
beginning in February 1997, FCI and Flagstar commenced intensive negotiations
with various creditors in an effort to enable the Company to restructure its
indebtedness through such a prepackaged filing. The prepackaged plan, the
principal terms of which were announced by FCI and Flagstar on March 17, 1997
(the "Original Plan"), was the result of such negotiation and effort. On June
5, 1997, FCI and Flagstar commenced a solicitation of votes on the Original
Plan by holders of impaired claims and impaired equity interests entitled to
vote thereon. The Original Plan was accepted by all but one class that voted,
and on July 11, 1997 (the "Petition Date") FCI and Flagstar filed voluntary
petitions for relief under the Bankruptcy Code in the Bankruptcy Court for the
District of South Carolina (the "Bankruptcy Court"). Flagstar Holdings, Inc.
("Holdings"), a wholly-owned subsidiary of Flagstar, filed its petition on June
27, 1997. FCI's operating subsidiaries, Denny's Holdings, Inc., Spartan
Holdings, Inc. and FRD Acquisition Co. (and their respective subsidiaries) did
not file bankruptcy petitions and were not parties to the above mentioned
Chapter 11 proceedings. The Amended Joint Plan of Reorganization dated as of
November 7, 1997 (the "Plan") (as amended following the resolution of certain
issues before the Bankruptcy Court) was confirmed by the Bankruptcy Court
pursuant to an order entered as of November 12, 1997 and became effective
January 7, 1998. As a result of the reorganization, FCI and Flagstar
significantly reduced their debt and simplified their capital structure.
1
Material features of the Plan, as it became effective as of January 7, 1998
(the "Effective Date"), are as follows:
(a) Flagstar merged with and into FCI, the surviving corporation, and FCI
changed its name to Advantica Restaurant Group, Inc.;
(b) The following securities of FCI and Flagstar were canceled,
extinguished and retired as of the Effective Date: (i) Flagstar's 10 7/8%
Senior Notes due 2002 (the "10 7/8% Senior Notes") and 10 3/4% Senior
Notes due 2001 (the "10 3/4% Senior Notes" and, collectively with the
10 7/8% Senior Notes due 2002, the "Old Senior Notes"), (ii) Flagstar's
11.25% Senior Subordinated Debentures due 2004 (the "11.25% Debentures")
and 11 3/8% Senior Subordinated Debentures due 2003 (the "11 3/8%
Debentures" and, collectively with the 11.25% Senior Subordinated
Debentures due 2004, the "Senior Subordinated Debentures"), (iii)
Flagstar's 10% Convertible Junior Subordinated Debentures due 2014 (the
"10% Convertible Debentures"), (iv) FCI's $2.25 Series A Cumulative
Convertible Exchangeable Preferred Stock (the "Old Preferred Stock") and
(v) FCI's $.50 par value common stock (the "Old Common Stock");
(c) Advantica had 100 million authorized shares of $.01 par value common
stock (the "Common Stock") (of which 40 million were deemed issued and
outstanding on the Effective Date pursuant to the Plan subject to
completion of the exchange of securities as contemplated by such plan)
and 25 million authorized shares of preferred stock (none of which are
currently outstanding). Pursuant to the Plan, ten percent (10%) of the
number of shares of Common Stock issued and outstanding on the Effective
Date, on a fully diluted basis, is reserved for issuance under a new
management stock option program. Additionally, 4 million shares of Common
Stock are reserved for issuance upon the exercise of new warrants
expiring January 7, 2005 that were deemed issued and outstanding on the
Effective Date and entitle the holders thereof to purchase in the
aggregate 4 million shares of Common Stock at an exercise price of $14.60
per share (the "Warrants");
(d) Each holder of the Old Senior Notes received such holder's pro rata
portion of 100% of Advantica's 11 1/4 % Senior Notes due 2007 (the "New
Senior Notes") in exchange for 100% of the principal amount of such
holders' Old Senior Notes and accrued interest through the Effective
Date;
(e) Each holder of the Senior Subordinated Debentures received such
holder's pro rata portion of shares of Common Stock equivalent to 95.5%
of the Common Stock issued on the Effective Date;
(f) Each holder of the 10% Convertible Debentures received such holder's
pro rata portion of (i) shares of Common Stock equivalent to 4.5% of the
Common Stock issued on the Effective Date and (ii) 100% of the Warrants
issued on the Effective Date; and
(g) Advantica refinanced its prior credit facilities by entering into a new
credit facility with The Chase Manhattan Bank ("Chase") and other lenders
named therein, providing the Company (excluding FRI-M) with a $200
million senior revolving credit facility (the "Credit Facility").
Further discussion of the bankruptcy reorganization proceedings is
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 to the Consolidated Financial Statements
included in this Form 10-K.
Pending Sale of Hardee's Operation
On February 18, 1998 Advantica entered into a definitive agreement with
CKE Restaurants, Inc. ("CKE") for the sale of stock of Flagstar Enterprises,
Inc. ("FEI"), a wholly-owned subsidiary which operates the Company's Hardee's
restaurants under licenses from Hardee's Food Systems, Inc. ("HFS"), a
wholly-owned subsidiary of CKE. As contemplated by such agreement, the Company
would receive $380.8 million in cash (subject to certain adjustments) in
exchange for all of the outstanding stock of FEI. In addition, CKE would assume
$45.6 million of capital leases. The definitive agreement with CKE includes a
covenant not to compete which expires on the second anniversary of the closing
date of the transaction. In general, the convenant requires that the Company
not engage, directly or indirectly, in the quick-service hamburger restaurant
business in certain designated market areas. The transaction is expected to be
completed on or about April 1, 1998. Approximately $180 million of the proceeds
of such transaction, if consummated, (together with $20.7 million previously on
deposit with respect to certain Mortgage Financings as defined herein) will be
applied to effect an in-substance defeasance of such Mortgage Financings of FEI
and Quincy's Restaurants, Inc. with a book value of $177.6 million at December
31, 1997 plus accrued interest of $2.3 million. Such Mortgage Financings are
collateralized by certain assets of FEI and its wholly-owned subsidiary
Spardee's Realty, Inc. and certain assets of Quincy's Restaurants, Inc. and its
wholly-owned subsidiary Quincy's Realty, Inc. The Company intends to replace
such collateral by purchasing Defeasance Eligible Investments
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(as defined in documents governing such Mortgage Financings) which will be
deposited in an irrevocable trust to satisfy principal and interest payments
under such Mortgage Financings through the stated maturity date in the year
2000. The proposed transaction would require consents of the lenders under the
Credit Facility, and the Company is currently negotiating the terms of an
amendment which would include such consent.
As a result of the adoption of fresh start reporting as of the Effective
Date (as further discussed in Note 1 to the Consolidated Financial Statements
included in this Form 10-K), the net assets of FEI will be adjusted to fair
value less estimated costs of disposal based on the terms of the definitive
agreement. To the extent that the final terms of the disposition reflect a
different fair value than that used as of the Effective Date, the effect of
such difference will be an adjustment to the reorganization value in excess of
amounts allocable to identifiable assets. Accordingly, the Company anticipates
there will be no additional gain or loss on the disposition of FEI in periods
subsequent to the effective date.
Restaurants
The Company's operations are conducted through six restaurant chains or
concepts, four chains in the full-service mid-scale dining segment and two in
the quick-service segment. Denny's, the Company's largest concept, is the
nation's largest chain of family-style, full-service restaurants, with more
than 1,650 units in 49 states, two U.S. territories, and two foreign countries.
Denny's largest concentration is in California and Florida with 552 units in
these two states. Management believes that Denny's has the leading share of the
national market in the family-style category. Quincy's, with 180 locations (69
of which management intends to close during 1998), is one of the largest chains
of family-steak restaurants in the southeastern United States, offering steak,
chicken and seafood entrees as well as a buffet bar, called "America's Home
Plate." A weekend breakfast buffet is also available at most Quincy's
locations. Advantica also operates El Pollo Loco, a chain of 247 quick-service
restaurants featuring flame-broiled chicken products and related Mexican food
items, with a strong regional presence in California. As indicated above,
Advantica acquired the Coco's and Carrows chains in 1996. Coco's is a bakery
restaurant chain operating 493 units in seven western states and three foreign
countries. Coco's offers a wide variety of fresh-baked goods and value priced
meals that capitalize on emerging food trends in the western United States. The
Carrows chain, consisting of 154 units located primarily in seven western
states, specializes in traditional American food, with an emphasis on quality,
homestyle fare at an excellent value. Hardee's is a chain of quick-service
restaurants of which Advantica, with 557 units located primarily in the
Southeast, is the largest franchisee. Although specializing in sandwiches,
Advantica's Hardee's restaurants serve fried chicken and offer a breakfast menu
that accounts for approximately 47% of total sales and features the chain's
famous "made-from-scratch" biscuits. For a breakdown of the total revenues
contributed by each referenced concept for the last three years, see the
corresponding section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations." For information concerning the pending
sale of the Company's Hardee's operation, see "Pending Sale of Hardee's
Operation."
Although operating in two distinct segments of the restaurant industry --
full-service and quick-service -- the Company's restaurants benefit from a
single management strategy that emphasizes superior value and quality, friendly
and attentive service and appealing facilities. During 1997, the Company
continued its strategy of growth through franchising, adding a net 41 total
units to the system, representing an increase of 106 franchise/licensed units,
offset by a decline of 65 Company-owned units. The increase in
franchise/licensed units and the decrease in Company-owned units includes a net
of 15 units which were sold to franchisees ("turnkeyed"). The Company intends
to continue focusing on growth in the franchise arena in 1998.
The Company believes its restaurant operations benefit from the diversity
of the restaurant concepts represented by its six chains, the generally strong
market positions and consumer recognition enjoyed by these chains, the benefits
of a centralized support system for purchasing, menu development, human
resources, management information systems, site selection, restaurant design
and construction, and an aggressive management team. Denny's, Quincy's, Coco's
and Carrows may benefit from the demographic trend of aging baby boomers and
the growing population of senior citizens. The largest percentage of
"mid-scale" customers are in the 35 and up age category. In the quick-service
segment, the Company expects El Pollo Loco to increase its strong position in
the Southwest.
During 1995, the Company identified 36 underperforming units for sale or
closure generally during 1996. As of December 31, 1997, two units remain
relative to the 1995 restructuring plan. Management intends to dispose of one
of the remaining units and to continue operating the other.
During the fourth quarter of 1997, the Company approved a restructuring
plan to significantly reduce the size of its Quincy's chain. In addition to the
sale or closure of restaurants, the restructuring plan will result in the
elimination of certain restaurant, field management and corporate support
positions. As a result of this plan, the Company identified 88 underperforming
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units for sale or closure, 19 of which were closed during 1997. The carrying
value of these units has been written down to estimated fair value less costs
to sell. In addition, six Quincy's units which will continue operating were
identified as impaired, as the estimated future undiscounted cash flows of each
of these units is insufficient to recover the related carrying value. As such,
the carrying values of these units were written down to the Company's estimate
of fair value.
See Note 5 to the Consolidated Financial Statements for additional
information concerning the 1995 and 1997 restructurings.
Denny's
Denny's is the largest full-service family-style restaurant chain in the
mid-scale segment in the United States in terms of both number of units and
systemwide sales. Denny's restaurants currently operate in 49 states, two U.S.
territories and two foreign countries, with principal concentrations in
California, Florida, Texas, Arizona, Washington, Illinois, Ohio and
Pennsylvania. Denny's restaurants are designed to provide a casual dining
atmosphere with moderately priced food and quick, efficient service to a broad
spectrum of customers. The restaurants generally are open 24 hours a day, seven
days a week. All Denny's restaurants have uniform menus (with some regional and
seasonal variations) offering traditional family fare (including breakfast
items, steaks, chicken, hamburgers and sandwiches) and provide both counter and
table service. Denny's sales are evenly distributed across each of its
dayparts; however, breakfast items account for the majority of Denny's sales.
Denny's restaurants had a 1997 average guest check of $5.54 and average unit
sales of $1.3 million. Denny's currently employs approximately 38,500 people.
Historically, Denny's has had the lowest average guest check within the
family-style category. This value position was reinforced through the
introduction of a value menu in January 1996, featuring value priced items for
breakfast, lunch and dinner with tiered pricing starting at $1.99, $2.99 and
$3.99, respectively. Denny's has sought to further expand the customer
perception of value through the use of themed, higher-quality new product
introductions such as "America's Favorite Omelets," "Major League Burgers" and
"Signature Skillets." These new products are supported through television
advertising and restaurant-based media including special menus, posters and
window clings. The Company expects to refine and accelerate these efforts in
1998.
Denny's has supported several capital spending initiatives designed to
enhance the competitive position of the brand. Over the last four years, the
restaurants in several market areas have been "reimaged," which involves an
updated exterior, new signage and an improved interior layout with more
comfortable seating and enhanced lighting. Most other restaurants have received
new landscaping, paint, exterior lighting and parking lot repairs. Furthermore,
the Company continues to focus on issues related to guest comfort and access,
including systematic remodels to bring restaurants into compliance with the
Americans with Disabilities Act ("ADA").
All domestic Company-owned restaurants received new point-of-sale
technology during 1997, along with certain other equipment designed to improve
operations and accommodate new product introductions. A restaurant reegineering
project, begun in late 1996, has progressed to the "mock up" stage, and
improved design elements and processes are being incorporated into new and
existing restaurants.
During 1997, Denny's franchisees opened two "Denny's Classic Diners."
These restaurants have an upbeat, nostalgic look and feel that appeals to
younger customers, while retaining Denny's core brand equities. The Classic
Diner features a modular, metal-skinned facility, new uniforms, music 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. The
Company plans to accelerate the development of the Classic Diner format in
1998.
Denny's opened 77 new franchised units in 1997, a new record for the
Company, and management believes that over the last four years Denny's has
opened more new units cumulatively than any competitor in the mid-scale
segment. Denny's also continues to supplement its franchise development efforts
by selectively selling Company-owned units to franchisees. There were a total
of 758 franchised/licensed units at the end of 1997, or 46% of all Denny's
restaurants. The initial fee for a single Denny's franchise is $35,000 and the
current royalty payment is 4% of gross sales.
Hardee's
As discussed above, the Company has entered into a definitive agreement
for the sale of FEI, which operates the Company's Hardee's restaurants. For
additional information, see "Pending Sale of Hardee's Operation."
The Company's Hardee's restaurants are operated under licenses from HFS,
the fifth largest sandwich chain in the United States based on national
systemwide sales. The Company is HFS' largest franchisee, operating 18% of
Hardee's restaurants nationwide. The 557 Hardee's restaurants operated by the
Company at December 31, 1997 are located primarily in
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six southeastern states. The Company's Hardee's restaurants provide uniform
menus in a quick-service format targeted to a broad spectrum of customers. The
restaurants offer hamburgers, chicken, roast beef and fish sandwiches, hot dogs
and low-fat yogurt, as well as a breakfast menu featuring Hardee's popular
"made-from-scratch" biscuits. To add variety to its menu, further differentiate
its restaurants from those of its major competitors and increase customer
traffic during the traditionally slower late afternoon and evening periods, HFS
completed the roll out of fresh fried chicken as a menu item in 1993.
Substantially all of the Company's Hardee's restaurants have drive-thru
facilities, which provided 52% of the concept's revenues in 1997. Most of the
restaurants are open 16-17 hours a day, seven days a week. Operating hours of
selected units have been extended to 24 hours a day on weekends. Hardee's
breakfast menu, featuring the chain's signature "made-from-scratch" biscuits,
accounts for approximately 47% of total sales at the Company's Hardee's
restaurants. The average guest check at the Company's Hardee's was $3.23 in
1997, and average annual unit sales for the Company's Hardee's restaurants was
approximately $1.0 million. Advantica's Hardee's currently employ approximately
19,400 people.
Each Hardee's restaurant is operated under a separate license from HFS.
Each license grants the exclusive right, in exchange for a franchise fee,
royalty payments and certain covenants, to operate a Hardee's restaurant in a
described territory, generally a town or an area measured by a radius from the
restaurant site. Each license has a term of 20 years from the date the
restaurant is first opened for business and is non-cancelable by HFS, except
for the Company's failure to abide by its covenants. Earlier issued license
agreements are renewable under HFS' renewal policy; more recent license
agreements provide for successive five-year renewals upon expiration, generally
at rates then in effect for new licenses. Each year, a number of the Company's
licenses are scheduled for renewal. The Company has historically experienced no
difficulty in obtaining such renewals and does not anticipate any problems in
the future. An arbitration proceeding is pending between the Company and HFS
relating to certain matters arising under these license agreements. Such
proceeding has been suspended in connection with the pending sale of FEI to
HFS' parent company. If the pending sale is consummated, all claims by the
Company against HFS would be released.
The Company's territorial development agreement with HFS, which called for
the Company to open a specified number of Hardee's restaurants in a development
territory in the Southeast (and certain adjacent areas) by the end of 1996, was
terminated during the fourth quarter of 1995. Termination of such agreement
makes the Company's development rights non-exclusive in the development
territory. As a result, HFS and other Hardee's franchisees along with the
Company are permitted to open Hardee's restaurants in such territory.
Quincy's
Quincy's is the sixth largest family steak chain in the United States
based on U.S. systemwide sales and one of the largest chains in the southeast
United States. The company owns and operates 180 restaurants in eight
southeastern states and one midwestern state, with its largest concentrations
in Florida, Alabama, North Carolina, and South Carolina. Quincy's currently
employs approximately 8,600 people. Quincy's menu consists principally of
steaks and an all-you-can-eat, buffet-style food bar (called "America's Home
Plate") that features a variety of meats, vegetables, soups and salads. All
Quincy's restaurants are open seven days a week for lunch and dinner, with most
offering breakfast on the weekend. The average guest check was $6.25 in 1997,
and average unit sales were $1.2 million.
After experimenting with a number of formats from 1993 to 1995, including
operating a few restaurants as buffet only and implementing restaurant-based
home delivery in others, management determined that Quincy's needed better food
quality and the "No Mistake Steak" to regain lost market share. These
improvements were implemented in October 1996. Although modest improvements
were seen, sales trends fell well short of management's expectation. Quincy's
marketing strategy is currently being modified.
Additionally, a site-by-site analysis was completed in 1997. As a result,
the Company approved a restructuring plan to divest itself of 88
underperforming restaurants. Nineteen restaurants were closed in 1997. Such
divestitures will continue until the brand consists of strong operating assets.
As a part of this asset redeployment, one restaurant was converted to a
Carrows. This test is designed to determine whether the Carrows brand can
compete in the Southeast. Preliminary restaurant sales results since the
conversion have been encouraging.
Management is also testing full service in six restaurants in the
Montgomery, Alabama area in recognition of the fact that the "midscale steak"
niche in which Quincy's (as well as other direct competitors) operates is
shrinking because the pay-on-entry service system is losing favor in the
marketplace. Preliminary sales trends for these full-service restaurants are
encouraging.
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El Pollo Loco
El Pollo Loco, which specializes in flame-broiled chicken, is one of the
leading chains in the quick-service chicken segment of the restaurant industry.
Of the total 247 El Pollo Loco restaurants, which are located in four
southwestern states, one southeastern state and two foreign countries, 88% are
located in Southern California. El Pollo Loco currently employs approximately
2,500 people.
El Pollo Loco restaurants are generally open 12 hours a day, seven days a
week for lunch and dinner. A majority of the Company's El Pollo Loco
restaurants have drive-thru facilities, which provided 35% of revenues in 1997.
The dinner daypart for El Pollo Loco is the strongest, representing 53% of
total sales.
El Pollo Loco directs its marketing at customers desiring an alternative
to traditional fast food products, offering unique tasting and high quality
products which help position the brand as high quality fast food at a
competitive price. The restaurants are designed to facilitate customer viewing
of the preparation of the flame-broiled chicken, and the food is served
quickly, but prepared slowly, using fresh ingredients. Much of the brand's
recent growth can be attributed to successful menu positioning, new product
offerings, dual branding with the complementary Fosters Freeze dessert line,
which commenced in late 1995, and restaurant remodeling. The average guest
check at El Pollo Loco in 1997 was $6.77 and average annual Company-owned
restaurant sales were approximately $1.2 million in 1997.
Based on El Pollo Loco's recent success, the Company is optimistic about
future expansion of the El Pollo Loco concept, principally through franchising
in Texas, Arizona and other California markets. By the year 2000, the Company
hopes to add as many as 150 additional El Pollo Loco restaurant units. In the
first quarter of 1996, the Company purchased the international rights to the El
Pollo Loco brand to facilitate expansion opportunities in Mexico and other
countries.
In 1997 the chain had a net increase of 12 units domestically,
representing an increase of ten franchise units and two Company-owned units.
The initial fee for a single El Pollo Loco franchise is $35,000 and the current
royalty payment rate is 4% of gross sales.
Coco's
Coco's is a bakery restaurant chain operating primarily in California,
Arizona, and Texas, as well as Japan and South Korea. Coco's, which ranks among
the top ten chains in the family-style category based on U.S. systemwide sales,
currently consists of 178 Company-owned, 17 domestic franchised and 298
international licensed restaurants, and employs approximately 8,900 people.
Coco's offers a variety of fresh-baked goods such as pies, muffins and cookies
and value-priced and innovative menu items that capitalize on emerging food
trends in the western United States. 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 a variety of great food, great
service, fair prices and a pleasant atmosphere. The restaurants are generally
open 18 hours a day. Coco's restaurants have uniform menus and serve breakfast,
lunch and dinner.
Lunch and dinner dayparts are Coco's strongest, comprising 37% and 38% of
1997 sales, respectively. In 1997, the average guest check was $6.77, with
average annual unit sales of approximately $1.5 million.
Coco's ranks among the top ten U.S. chains in international sales, and
since the Company acquired the chain in May 1996, 41 international units have
been added to the system. Currently, Coco's is placing emphasis on domestic
franchising as an opportunity to achieve further growth of the brand. The
initial fee for a single Coco's franchise is $35,000 and the current royalty
payment rate is 4% of net sales.
Carrows
Carrows is a regional mid-scale family-style restaurant chain operating
primarily in seven western states. Carrows currently consists of 140
Company-owned units and 14 domestic franchises, and employs approximately 6,200
people. Carrows began aggressively implementing its strategy of focusing on
growth through franchising in 1997.
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 -- two groups expected to
grow rapidly into the next century. The menu is always current, but not trendy,
and is revised regularly to reflect the most appealing foods that guests
demand. The restaurants are generally open at least 18 hours a day, with almost
half of the Company-owned units open 24 hours a day. Carrows restaurants have
uniform menus and serve breakfast, lunch and dinner, as well as a "late night"
menu in those restaurants open 24 hours a day.
6
Lunch and dinner dayparts (including "late night") are Carrows' strongest,
comprising 30% and 45% of 1997 sales, respectively. In 1997, the average guest
check was $6.49, with average annual 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 district
leaders have no offices and spend substantially all of their time in the
restaurants. A significant majority of restaurant management personnel began as
hourly employees in the restaurants and therefore know how to perform
restaurant functions and are able to train by example. The Company benefits
from an experienced management team.
Each of the Company's restaurant chains maintains training programs for
employees and restaurant managers. Restaurant managers and assistant managers
receive training at specially designated training units. Areas of training for
managers include customer interaction, kitchen management and food preparation,
data processing and cost control techniques, equipment and building maintenance
and leadership skills. Video training tapes demonstrating various restaurant
job functions are located at each restaurant location and are viewed by
employees prior to a change in job function or using new equipment or
procedures.
Each of the Company's restaurant chains regularly evaluates its menu. New
products are developed in Company test kitchens and then introduced in selected
restaurants to determine customer response and to ensure that consistency,
quality standards and profitability are maintained. If a new item proves
successful at the research and development level, it is usually tested in
selected markets, both with and without media support. A successful menu item
is then incorporated into the restaurant system. In the case of the Hardee's
restaurants, menu development is coordinated with HFS. While research and
development activities are important to the Company's business, amounts
expended for these activities are not material.
Financial and management control is facilitated by the use of
point-of-sale ("POS") systems in all of the Company's restaurants which
transmit detailed sales reports, payroll data and periodic inventory
information for management review. In July 1997, the Company completed the
rollout of a new POS system in its domestic Company-owned Denny's restaurants.
This system is helping restaurant management improve customer service through
faster and more accurate turnaround of customer orders. In addition, the new
POS system will aid in sales analysis and decision-making by providing
information on a more timely basis and at a higher level of detail. Over the
next two years, management intends to continue installing new POS systems in
all of Advantica's Company-owned restaurants pursuant to its information
services agreement with IBM Global Services ("IBM") (formerly Integrated
Systems Solutions Corporation) as more fully discussed in "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources."
Advertising
The Company uses an integrated process to promote its concepts, including
media, menu strategy, interior/exterior building design, style of service and
specialized promotions to help differentiate itself in the marketplace. Media
advertising is primarily product oriented, generally featuring high margin,
special entrees or meal combinations presented and priced to convey high value.
Such advertising is conducted through national, regional and local television
advertising as well as radio, outdoor and print advertising depending on the
target market. Sophisticated consumer marketing research techniques are used to
measure customer satisfaction and customers' evolving expectations. During
1997, the Company spent from 3% to 8% of each concept's total revenue on
advertising.
In accordance with the HFS licensing agreements, the Company spent
approximately 7.9% of its Hardee's units' total gross sales on marketing and
advertising during 1997. Of this amount, approximately 3.3% of total gross
sales is contributed to media cooperatives and HFS' national advertising fund.
The balance was directed by the Company at local levels.
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
7
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 more favorable prices from several
nationally recognized manufacturers.
Food and packaging products for the Company's Hardee's restaurants are
purchased from HFS and independent suppliers approved by HFS. A substantial
portion of the products for the Company's Hardee's and Quincy's restaurants is
obtained from Meadowbrook Meat Company, Inc. ("MBM"), an independent
supplier/distributor. In connection with the 1995 sale of its distribution
subsidiary, PFC, to MBM, the Company entered into an eight-year distribution
agreement, subsequently extended to ten years, with MBM under which PFC/MBM
will continue to distribute and supply certain products and supplies to the
Company's Denny's, Hardee's, Quincy's and El Pollo Loco restaurants. Beginning
in January 1998, Coco's and Carrows became subject to similar agreements. There
are no volume requirements relative to these agreements; however, the products
named therein must be purchased through PFC/MBM unless they are unable to make
delivery within a reasonable period. During the third quarter of 1996, the
Company sold Portion-Trol Foods, Inc. and the Mother Butler Pies division of
Denny's, its two food processing operations. In conjunction with each of these
sales, the Company entered into a five-year purchasing agreement with the
acquirer 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). 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
registered certain trademarks and service marks with the United States Patent
and Trademark office and in international jurisdictions, some of which include
Denny's, El Pollo Loco, Quincy'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 five to 20 years. The Company generally intends to renew trademarks and
service marks which come up for renewal. The Company owns or has rights to all
trademarks it believes are material to its restaurant operations.
The Company, through Denny's, Inc., its wholly-owned subsidiary, owns the
rights to one trademark used by Hardee's under a licensing agreement. All other
Hardee's trademarks are owned by HFS.
Competition
The restaurant industry can be divided into three main segments:
full-service restaurants, quick-service restaurants, and other miscellaneous
establishments. Since the early 1970's, growth in eating places has been driven
primarily by quick-service restaurants. On a segment-wide basis, the
full-service and quick-service restaurants currently have approximately the
same revenues and an equal share of the market. Full-service restaurants
include the mid-scale (family-style and family-steak), casual dining and
upscale (fine dining) segments. The mid-scale segment, which includes Coco's,
Carrows, Denny's and Quincy's, is characterized by complete meals, menu variety
and moderate prices ($5-$7 average check), and 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
independents. The quick-service segment, which
8
includes Hardee's and El Pollo Loco, is characterized by low prices (generally,
$3-$5 average check), finger foods, fast service, and convenience. A small
number of large sandwich, pizza, and chicken chains overwhelmingly dominate the
quick-service segment.
The restaurant industry is highly competitive and competition among a few
major companies that own or operate quick-service restaurant chains is
especially intense. Restaurants, particularly those in the quick-service
segment, 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.
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.
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 in which restaurants are
located, changes in consumer tastes and preferences, increases in the number of
restaurants 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 its restaurant 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 requirements in the future.
The Company is subject to Federal and state laws governing matters such as
minimum wage, overtime and other working conditions. At December 31, 1997, 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 on March 1, 1998. Also, the Federal minimum wage
increased from $4.25 per hour to $4.75 per hour on October 1, 1996 and
increased again to $5.15 per hour on September 1, 1997. Employers must pay the
higher of the Federal or state minimum wage. The Company has attempted to
offset increases in the minimum wage through pricing and various cost control
efforts; however, there can be no assurance that the Company or its franchisees
can continue to pass on such cost increases to its customers.
Environmental Matters
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.
Compliance with Consent Decrees
On May 24, 1994, the Company entered into two consent decrees (the
"Consent Decrees") resolving the class action litigation brought against
Denny's, Inc. alleging 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 non-discrimination
policies. They carry no direct monetary penalties.
During 1997, Denny's continued to meet all of its obligations under the
Consent Decrees. As part of orientation, every new employee receives
notification of the Consent Decree requirements. All newly-hired hourly
employees who work in the restaurants complete video-based non-discrimination
training that focuses on employee responsibilities under the Consent Decrees
and public accommodations law. During 1997, there were approximately 2,400
management employees who attended the first phase of live management
non-discrimination training. In addition, during 1997 Denny's rolled out the
second phase of live management non-discrimination training. By year end,
approximately 5,800 management employees had attended
9
this training. Video training for hourly employees and both phases of
management training are ongoing and required for every new employee.
Further, as required by the Consent Decrees, non-discrimination testing
was conducted by independent civil rights organizations in over 600 Denny's
restaurants in 1997. This non-discrimination testing compares the dining
experience of similarly matched test groups to determine if guests are treated
equally without regard to race, color or national origin.
Every Denny's restaurant displays a sign at each public entrance
emphasizing Denny's commitment to non-discrimination and providing an 800 phone
number directing customers to an independent civil rights monitor if they feel
they have been victims of disparate treatment. In addition, certain printed
advertising materials such as menus, magazine and newspaper advertising include
a statement assuring that all guests will receive fair and equal treatment.
Executive Officers of the Registrant
The following table sets forth information with respect to each senior
level executive officer of Advantica.
Current Principal Occupation or
Name Age Employment and Five-Year Employment History
- --------------------- ----- --------------------------------------------------------------------------------
James B. Adamson 50 Chairman, President and Chief Executive Officer of Advantica (1995-present);
Chief Executive Officer of Burger King Corporation (1993-1995); Chief
Operating Officer of Burger King Corporation (1991-1993); President of Burger
King U.S.A. Retail Division (1991); Executive Vice President, Marketing of
Revco, Inc. (1988-1991).
Craig S. Bushey 42 Executive Vice President of Advantica and President of Coco's/Carrows Division
(March 1998-present); Senior Vice President of Advantica and President of
Hardee's Division (May 1996-February 1998); Managing Director, Vice
President (Western Europe) of Burger King (1995-May 1996); Region Vice
President (Central Region) of Burger King (1994-1995); Burger King
Reengineering Team (1993-1994); Region Vice President (Midwest Retail) of
Burger King (1992-1993).
Ronald B. Hutchison 48 Executive Vice President and Chief Financial Officer of Advantica (March
1998-present); Vice President and Treasurer of Advantica (1995-March 1998);
Vice President and Treasurer of Leaseway Transportation Corp. (1988-1995).
Nelson J. Marchioli 48 Executive Vice President of Advantica (March 1998-present); Senior Vice
President of Advantica (May 1997-February 1998); President of El Pollo Loco
Division (May 1997-present); Executive Vice President and Chief Operating
Officer of Bruegger's Corporation (1996-May 1997); Senior Vice President of
Worldwide Supply for Burger King Corporation (1995-1996); Senior Vice
President, International Operation and Sales for Burger King Corporation
(1994-1995); Vice President-General Manager, Latin America Restaurant
Operations for Burger King Corporation (1994); Senior Vice President, Quality
and Cost, Burger King Corporation (1993-1994); Vice President, Operations
Standards and System Quality Assurance, Burger King Corporation (1989-1993).
Edna K. Morris 46 Executive Vice President of Advantica and President of Quincy's Division (April
1996-present); Executive Vice President, Human Resources and Corporate
Affairs of Advantica (1995-1996); Senior Vice President, Human Resources of
Advantica (1993-1995); Vice President, Education and Development of
Advantica (1992-1993).
Rhonda J. Parish 41 Executive Vice President of Advantica (March 1998-present); General Counsel
and Secretary of Advantica (1995-present); Senior Vice President of Advantica
(1995-February 1998); Assistant General Counsel of Wal-Mart Stores, Inc.
( 1990-1994).
John A. Romandetti 47 Executive Vice President of Advantica (March 1998-present); Senior Vice
President of Advantica (1995-February 1998); President of Denny's Division
(January 1997-present); President of El Pollo Loco Division (1995-1996); Vice
President of Operations for Burger King Corporation (1989-1995).
Mark L. Shipman 48 Executive Vice President, Acquisitions and Development of Advantica (March
1998-present); Senior Vice President of Advantica and President of
Coco's/Carrows Division (May 1996-February 1998); Vice-President of
Acquisitions and Development of Advantica (1995-1996); Vice President of
Administration of Denny's Division (1993-1995); Vice President of Operations
(West) of Denny's Division (1991-1993).
10
Current Principal Occupation or
Name Age Employment and Five-Year Employment History
- ----------------- ----- -------------------------------------------------------------------------------
Paul R. Wexler 54 Executive Vice President, Procurement and Distribution of Advantica (March
1998-present); Senior Vice President, Procurement and Distribution of
Advantica (1995-February 1998); Vice President, Procurement and Quality
Assurance -- Marriott International (1991-1995).
Stephen W. Wood 39 Executive Vice President, Human Resources and Corporate Affairs of Advantica
(March 1998-present); Senior Vice President, Human Resources and Corporate
Affairs of Advantica (April 1996-February 1998); Vice President, Compensation,
Benefits, and Employee Information Systems and Corporate Office Human
Resources of Advantica (1993-1996); Senior Director, Compensation, Benefits
and Employee Information Systems of Advantica (1993); Director, Benefits and
Executive Compensation of HFS (1991-1993).
Employees
At December 31, 1997, the Company had approximately 85,000 employees, none
of whom are subject to collective bargaining agreements. Many of the Company's
restaurant employees work part-time, and many are paid at or slightly above
minimum wage levels. 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:
Average Average Average
Property Building Seating
Concept Size in Sq. Ft. Size in Sq. Ft. Capacity
- ----------------------------- ----------------- ----------------- ---------
Carrows ............... 35,000 4,900 150
Coco's ................ 35,000 5,600 150
Denny's ............... 42,000 4,750 140
El Pollo Loco ......... 20,000 2,100 60
Hardee's .............. 52,000 3,400 95
Quincy's .............. 60,000 6,800 200
The following table sets forth certain additional information regarding
the Company's restaurant properties as of December 31, 1997:
Land and Land Leased Land and
Building and Building Building
Concept Owned Owned Leased Total
- ----------------------------- ---------- -------------- --------- --------
Carrows ............... 3 10 127 140
Coco's ................ 2 39 137 178
Denny's ............... 252 36 606 894
El Pollo Loco ......... 7 31 60 98
Hardee's .............. 283 95 179 557
Quincy's .............. 139 36 5 180
--- -- --- ---
Total ............... 686 247 1,114 2,047
=== === ===== =====
11
The number and location of the Company's restaurants in each chain as of
December 31, 1997 are presented below:
Denny's El Pollo Loco
--------------------- ---------------------
Franchised/ Franchised/
State/Country Owned Licensed Hardee's Quincy's Owned Licensed
- ----------------------------- ------- ------------- ---------- ---------- ------- -------------
Alabama ..................... 1 8 155 42 -- --
Alaska ...................... -- 4 -- -- -- --
Arizona ..................... 28 48 -- -- -- 2
Arkansas .................... 1 8 3 -- -- --
California .................. 220 144 -- -- 98 130
Colorado .................... 25 13 -- -- -- --
Connecticut ................. 5 3 -- -- -- --
Delaware .................... 3 -- -- -- -- --
Florida ..................... 102 86 55 39 -- --
Georgia ..................... -- 23 10 10 -- --
Hawaii ...................... 4 3 -- -- -- --
Idaho ....................... -- 6 -- -- -- --
Illinois .................... 47 14 -- -- -- --
Indiana ..................... 14 10 -- -- -- --
Iowa ........................ -- 6 -- -- -- --
Kansas ...................... 9 1 -- -- -- --
Kentucky .................... -- 20 -- -- -- --
Louisiana ................... 7 4 1 -- -- --
Maine ....................... -- 4 -- -- -- --
Maryland .................... 14 16 -- -- -- --
Massachusetts ............... 9 -- -- -- -- --
Michigan .................... 37 3 -- -- -- --
Minnesota ................... 13 4 -- -- -- --
Mississippi ................. 2 2 38 5 -- --
Missouri .................... 28 7 -- -- -- --
Montana ..................... -- 5 -- -- -- --
Nebraska .................... -- 4 -- -- -- --
Nevada ...................... 11 6 -- -- -- 8
New Hampshire ............... 2 1 -- -- -- --
New Jersey .................. 11 2 -- -- -- --
New Mexico .................. 2 13 -- -- -- --
New York .................... 24 11 -- -- -- --
North Carolina .............. 7 11 58 36 -- --
North Dakota ................ -- 3 -- -- -- --
Ohio ........................ 33 23 1 1 -- --
Oklahoma .................... 9 18 -- -- -- --
Oregon ...................... 5 20 -- -- -- --
Pennsylvania ................ 51 2 -- -- -- --
South Carolina .............. 9 5 123 40 -- 1
South Dakota ................ -- 2 -- -- -- --
Tennessee ................... 3 11 110 5 -- --
Texas ....................... 60 72 -- -- -- --
Utah ........................ 7 12 -- -- -- 4
Vermont ..................... -- 2 -- -- -- --
Virginia .................... 19 10 3 2 -- --
Washington .................. 50 22 -- -- -- --
West Virginia ............... -- 3 -- -- -- --
Wisconsin ................... 12 7 -- -- -- --
Wyoming ..................... -- 6 -- -- -- --
Canada ...................... 10 28 -- -- -- --
Japan ....................... -- -- -- -- -- --
Korea ....................... -- -- -- -- -- --
Other International ......... -- 22 -- -- -- 4
--- --- --- -- -- ---
Total ...................... 894 758 557 180 98 149
=== === === === == ===
Coco's Carrows
--------------------- --------------------
Franchised/ Franchised/
State/Country Owned Licensed Owned Licensed
- ----------------------------- ------- ------------- ------- ------------
Alabama ..................... -- -- -- --
Alaska ...................... -- -- -- --
Arizona ..................... 21 2 5 --
Arkansas .................... -- -- -- --
California .................. 128 15 115 3
Colorado .................... 5 -- -- --
Connecticut ................. -- -- -- --
Delaware .................... -- -- -- --
Florida ..................... -- -- -- --
Georgia ..................... -- -- -- --
Hawaii ...................... -- -- -- --
Idaho ....................... -- -- -- --
Illinois .................... -- -- -- --
Indiana ..................... 3 -- -- --
Iowa ........................ -- -- -- --
Kansas ...................... -- -- -- --
Kentucky .................... -- -- -- --
Louisiana ................... -- -- -- --
Maine ....................... -- -- -- --
Maryland .................... -- -- -- --
Massachusetts ............... -- -- -- --
Michigan .................... -- -- -- --
Minnesota ................... -- -- -- --
Mississippi ................. -- -- -- --
Missouri .................... 2 -- -- --
Montana ..................... -- -- -- --
Nebraska .................... -- -- -- --
Nevada ...................... -- -- 7 1
New Hampshire ............... -- -- -- --
New Jersey .................. -- -- -- --
New Mexico .................. -- -- 4 --
New York .................... -- -- -- --
North Carolina .............. -- -- -- 1
North Dakota ................ -- -- -- --
Ohio ........................ -- -- -- --
Oklahoma .................... -- -- -- --
Oregon ...................... -- -- -- 8
Pennsylvania ................ -- -- -- --
South Carolina .............. -- -- -- --
South Dakota ................ -- -- -- --
Tennessee ................... -- -- -- --
Texas ....................... 13 -- 9 --
Utah ........................ -- -- -- --
Vermont ..................... -- -- -- --
Virginia .................... -- -- -- --
Washington .................. 6 -- -- 1
West Virginia ............... -- -- -- --
Wisconsin ................... -- -- -- --
Wyoming ..................... -- -- -- --
Canada ...................... -- -- -- --
Japan ....................... -- 260 -- --
Korea ....................... -- 37 -- --
Other International ......... -- 1 -- --
--- --- --- --
Total ...................... 178 315 140 14
=== === === ==
In addition to the restaurant locations set forth above, the Company also
owns a 19-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 16 floors of the tower, with the balance
leased to others.
See "Certain Relationships and Related Transactions -- Description of
Indebtedness" and Note 8 to the accompanying Consolidated Financial Statements
for information concerning encumbrances on certain properties of the Company.
12
Item 3. Legal Proceedings
FCI, Flagstar, El Pollo Loco and Denny's, along with several former
officers and directors of those companies, are named as defendants in an action
filed on August 28, 1991 in the Superior Court of Orange County, California.
The remaining plaintiffs, who are former El Pollo Loco franchisees, allege that
the defendants, among other things, failed or caused a failure to promote,
develop and expand the El Pollo Loco franchise system in breach of contractual
obligations to the plaintiff franchisees and made certain misrepresentations to
the plaintiffs concerning the El Pollo Loco system. Asserting various legal
theories, the plaintiffs seek actual and punitive damages in excess of $90
million, together with declaratory and certain other equitable relief. The
defendants have denied all material allegations, and certain defendants have
filed cross-complaints against various plaintiffs in the action for breach of
contract and other claims. Since the filing of the action the defendants have
entered into settlements with six of the plaintiffs leaving two plaintiff
franchisees remaining in the lawsuit. With respect to the remaining plaintiffs,
the action has been stayed due to the bankruptcy filing of the principal
stockholder of the plaintiff corporations. Consequently, the trial date to hear
the outstanding issues in the case has been vacated and no new trial date has
been established.
In 1994, Flagstar was advised of proposed deficiencies from the Internal
Revenue Service for Federal income taxes totaling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by FCI 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 amortization of
borrowing costs incurred by a corporation in connection with a redemption of
its stock. The Company believes the remaining proposed deficiencies relating to
the proposed disallowance of certain costs incurred in connection with the 1989
acquisition of Flagstar are substantially incorrect, and it intends to continue
to contest such proposed deficiencies.
Other proceedings are pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company, and in
others presenting allegations that are nonroutine and include compensatory or
punitive damage claims. The ultimate legal and financial liability of the
Company with respect to the matters mentioned above and these other proceedings
cannot be estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that the ultimate
disposition of these matters will not materially affect the financial position
or results of operations of the Company. For information concerning the
suspended arbitration proceeding with HFS and the Plan, see "Business --
Restaurants -- Hardee's" and "Business -- The 1997 Restructuring."
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Common Stock and Warrants were listed on The NASDAQ Stock MarketSM on a
"when issued" basis on January 8, 1998 under the symbols "DINEV" and "DINWV",
respectively. On January 12, 1998 the Common Stock and Warrants were listed
under the symbols "DINE" and "DINEW", respectively. As of March 16, 1998, 40
million shares of Common Stock and 4 million Warrants were deemed outstanding
pursuant to the Plan subject to completion of the exchange of securities as
contemplated by such plan, and there were approximately 3,900 record and
beneficial shareholders. 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
8 to the accompanying Consolidated Financial Statements of the Company.
Prior to January 7, 1998 the Old Common Stock was traded on The NASDAQ
Stock MarketSM under the symbol "FLST." The following table lists the high and
low closing sales prices for the Old Common Stock for each quarter in the last
two fiscal years. The sales prices were obtained from summaries obtained from
NASDAQ.
High Low
--------- ----------
1996
First quarter .............. $ 5 $ 2 7/8
Second quarter ............. 4 1/4 2 7/8
Third quarter .............. 3 5/16 1 15/16
Fourth quarter ............. 2 1/8 29/32
1997
First quarter .............. 1 7/32 25/64
Second quarter (a) ......... 19/32 9/32
Third quarter (a) .......... 1/2 19/64
Fourth quarter (a) ......... 23/64 --
- ---------
(a) At the close of business on May 16, 1997, the Old Common Stock was delisted
for trading on The NASDAQ Stock MarketSM. Although such securities
continued to trade in the over-the-counter market until January 7, 1998,
such trading activity was limited and sporadic.
14
Item 6. Selected Financial Data
Set forth below are certain selected financial data concerning the Company
for each of the five years ended December 31, 1997. 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 presented elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Year Ended December 31,
--------------------------------------
1993(a) 1994(a)
(in millions, except per share amounts) ------------------- ------------------
Income Statement data:
Operating revenue ....................................... $ 2,615.2 $ 2,666.0
Operating income (loss) ................................. (1,102.4)(c) 211.5 (d)
Loss from continuing operations (g) ..................... (1,238.6) (16.8)
Basic and diluted loss per share applicable to common
shareholders (h):
Continuing operations ................................... (29.56) (0.73)
Discontinued operations (g) ............................ (9.67) 9.27
Net income (loss) (i) .................................. (40.14) 8.26
Cash dividends per common share (j) ..................... -- --
Ratio of earnings to fixed charges (k) .................. -- --
Deficiency in the coverage of fixed charges to
earnings before fixed charges (k) ...................... 1,318.2 19.3
Balance Sheet data (at end of period):
Current assets (l) ...................................... 122.2 186.1
Working capital (deficiency) (l)(m) ..................... (273.0) (205.6)
Net property and equipment .............................. 1,167.2 1,196.4
Total assets ............................................ 1,538.9 1,587.5
Long-term debt .......................................... 2,341.2 2,067.6
Other data:
EBITDA (o) .............................................. 331.0 333.9
Net cash flows provided by operating activities ......... 128.9 54.6
Net cash flows (used in) provided by investing
activities ............................................. (136.0) 296.9(p)
Net cash flows provided by (used in) financing
activities ............................................. 10.6 (308.9)
Year Ended December 31,
--------------------------------------------------------
1995(a) 1996(a)(b) 1997
(in millions, except per share amounts) ------------------ ------------------ ------------------
Income Statement data:
Operating revenue ....................................... $ 2,571.5 $ 2,542.3 $ 2,609.5
Operating income (loss) ................................. 98.2(e) 156.4 130.4(f)
Loss from continuing operations (g) ..................... (132.9) (85.5) (134.5)
Basic and diluted loss per share applicable to common
shareholders (h):
Continuing operations ................................... (3.47) (2.35) (3.50)
Discontinued operations (g) ............................ 1.82 -- --
Net income (loss) (i) .................................. (1.64) (2.35) (3.50)
Cash dividends per common share (j) ..................... -- -- --
Ratio of earnings to fixed charges (k) .................. -- -- --
Deficiency in the coverage of fixed charges to
earnings before fixed charges (k) ...................... 133.0 101.9 132.7
Balance Sheet data (at end of period):
Current assets (l) ...................................... 285.3 185.5 132.8
Working capital (deficiency) (l)(m) ..................... (122.2) (297.7) (248.9)
Net property and equipment .............................. 1,104.4 1,168.6 758.4
Total assets ............................................ 1,507.8 1,687.4 1,439.1
Long-term debt .......................................... 1,996.1 2,179.4 807.4(n)
Other data:
EBITDA (o) .............................................. 298.3 286.3 296.9
Net cash flows provided by operating activities ......... 19.5 19.5 76.0
Net cash flows (used in) provided by investing
activities ............................................. 186.4(q) (109.4)(r) (36.0)
Net cash flows provided by (used in) financing
activities ............................................. (75.6) (14.7) (78.3)
- ---------
(a) Certain amounts for the four years ended December 31, 1996 have been
reclassified to conform to the 1997 presentation.
(b) Reflects the acquisition in May 1996 of Coco's and Carrows.
(c) Operating loss for the year ended December 31, 1993 reflects charges for
the write-off of goodwill and certain other intangible assets of $1,104.6
million and the provision for restructuring charges of $158.6 million.
(d) Operating income for the year ended December 31, 1994 reflects a recovery
of restructuring charges of $7.2 million.
(e) Operating income for the year ended December 31, 1995 reflects a provision
for restructuring charges of $15.9 million and a charge for impaired
assets of $51.4 million.
(f) Operating income for the year ended December 31, 1997 reflects a provision
for restructuring charges of $10.5 million and a charge for impaired
assets of $15.1 million.
(g) The Company has classified as discontinued operations, Canteen Corporation,
a food and vending subsidiary, sold in 1994, TW Recreational Services,
Inc. ("TWRS"), a recreation services subsidiary, and Volume Services, Inc.
("VS"), a stadium concessions subsidiary. TWRS and VS were sold during
1995.
(h) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"). For such periods, under the new
standard, basic loss per share excludes any dilutive effects of options,
warrants and convertible securities, and diluted per share amounts do not
differ from basic per share amounts since the Company's options, warrants
and convertible debt and preferred stock have an antidilutive impact on
per share amounts due to losses from continuing operations in those
periods. For
15
further discussion of earnings per share and the impact of FAS 128, see the
Notes to the Consolidated Financial Statements included herein.
(i) For the year ended December 31, 1993, net loss includes extraordinary
losses of $0.62 per share related to the repurchase of the 10% Convertible
Debentures and to the charge off of unamortized deferred financing costs
related to a prepayment of Flagstar's senior term loan; net loss for 1993
also includes a charge of $0.29 per share due to a change of accounting
method relating to the discount rate applied to the Company's liability
for self insurance claims pursuant to Staff Accounting Bulletin No. 92.
For the year ended December 31, 1994, net income includes an extraordinary
loss of $0.28 per share, relating to the charge off of unamortized
deferred financing costs associated with the Company's prepayment of its
senior term loan and working capital facility during the second quarter of
1994. For the year ended December 31, 1995, net loss includes a $0.01 per
share extraordinary gain relating to the repurchase of $25.0 million of
senior indebtedness net of the charge off of unamortized deferred
financing costs.
(j) The Company's bank facilities have prohibited, and its public debt
indentures have significantly limited, distributions and dividends on
Advantica's (and its predecessor's) common equity securities. See Note 8
to the accompanying Consolidated Financial Statements appearing elsewhere
herein.
(k) The ratio of earnings to fixed charges has been calculated by dividing
pre-tax earnings by fixed charges. Earnings, as used to compute the ratio,
equal the sum of income from continuing operations before income taxes and
fixed charges excluding capitalized interest. Fixed charges are the total
interest expense 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.
(l) The current assets and working capital deficiency amounts presented exclude
assets held for sale of $103.2 million and $77.3 million as of December
31, 1993 and 1994, respectively, $5.1 million as of December 31, 1996 and
$242.5 million as of December 31, 1997. Such assets held for sale relate
to the Company's food and vending and concessions and recreation services
subsidiaries for the years ended December 31, 1993 and 1994. For the year
ended December 31, 1997, net assets held for sale relate to FEI.
(m) A negative working capital position is not unusual for a restaurant
operating company. The decrease in the working capital deficiency from
December 31, 1993 to December 31, 1994 is due primarily to an increase in
cash following the sale of the Company's food and vending subsidiary
during 1994. The decrease in the working capital deficiency from December
31, 1994 to December 31, 1995 is due primarily to an increase in cash
following the 1995 sales of the Company's (i) distribution subsidiary,
PFC, net of current assets and liabilities of such subsidiary, and (ii)
the concession and recreation services subsidiaries. The increase in the
working capital deficiency from December 31, 1995 to December 31, 1996
reflects the use of the proceeds from the 1995 sales noted above and the
proceeds of the sale of PTF for operating needs and for the acquisition of
Coco's and Carrows. The decrease in the working capital deficiency 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, largely offset by a reduction in cash
and cash equivalents which has been used for Company operations. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
(n) Reflects the reclassification of $1,496.7 million of long-term debt to
liabilities subject to compromise in accordance with the AICPA's Statement
of Position 90-7, "Financial Reporting By Entities in Reorganization Under
the Bankruptcy Code" ("SOP 90-7") as a result of the commencement of the
Chapter 11 filing.
(o) EBITDA is defined by the Company as operating income before depreciation,
amortization and charges for (recoveries of) restructuring and impairment
and is a key internal measure used to evaluate the amount of cash flow
available for debt repayment and funding of additional investments. EBITDA
is not a measure defined by generally accepted accounting principles and
should not be considered as an alternative to net income or cash flow data
prepared in accordance with generally accepted accounting principles, or
as a measure of a company's profitability or liquidity. The Company's
measure of EBITDA may not be comparable to similarly titled measures
reported by other companies. The following restructuring and impairment
charges (recoveries) have been excluded from EBITDA for the periods
indicated: 1993-$1,263.2 million; 1994-($7.2 million); 1995-$67.3 million;
and 1997-$25.6 million.
(p) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations of $447.1 million.
(q) Net cash flows provided by investing activities include proceeds from sale
of discontinued operations and subsidiaries of $294.6 million.
(r) Net cash flows used in investing activities include the acquisition of
Coco's and Carrows, net of cash acquired, of $127.1 million.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company's Management's Discussion and Analysis should be read in
conjunction with "Selected Financial Data" and the Consolidated Financial
Statements and other more detailed financial information appearing elsewhere
herein.
Results of Operations
Company Consolidated
- --------------------
Year Ended December 31
-----------------------------
1995 1996 1997
(In millions) --------- --------- ---------
Net company sales ....................................... $2,512 $2,471 $2,529
Franchise revenue ....................................... 59 71 81
------ ------ ------
Operating revenue ....................................... 2,571 2,542 2,610
Operating expenses ...................................... 2,473 2,386 2,480
------ ------ ------
Operating income ........................................ $ 98 $ 156 $ 130
====== ====== ======
Net interest expense from continuing operations ......... 229 255 226
Income tax provision (benefit) .......................... 0 (16) 2
Net income (loss) ....................................... $ 55 $ (85) $ (135)
1997 Restaurant Unit Activity
Ending Units Ending
Units Units Sold/ Unit Units
12/31/96 Opened Closed Conversions 12/31/97
------------ ---------- ----------- ------------- ------------
Denny's
Company-owned 894 1(a) (3) 2 894
Franchise units 677 76 (15) (2) 736
International licensees 25 1 (4) -- 22
--- -- ------ ---- ---
1,596 78 (22) -- 1,652
Hardee's 580(b) -- (23) -- 557(b)
Quincy's 199 -- (19) -- 180(c)
El Pollo Loco
Company-owned 96 1 -- 1 98
Franchise units 135(b) 12 (1) (1) 145(b)
International licensees 10 -- (6) -- 4
----- -- ------ ---- -----
241 13 (7) -- 247
----- -- ------ ---- -----
Coco's
Company-owned 183 4 (3) (6) 178
Franchise units 5 6 -- 6 17
International licensees 278 26 (6) -- 298
----- -- ------ ---- -----
466 36 (9) -- 493
Carrows
Company-owned 160 -- (8) (12) 140
Franchise units -- 2 -- 12 14(c)
----- -- ----- ----- -----
160 2 (8) -- 154
----- -- ------ ----- -----
3,242 129 (88) -- 3,283
===== === ===== ===== =====
(a) Represents the reopening of a unit that was temporarily closed at December
31, 1996.
(b) Unit count includes one Hardee's and El Pollo Loco dual brand unit. The
unit's results are included in Hardee's operating results.
(c) Unit count includes one Quincy's unit converted to a Carrows that is
operated by Quincy's as a Carrows franchise. The unit's operating results
are included in Quincy's operating results. Intercompany franchise fees
are eliminated in consolidation.
17
Company Consolidated
1997 vs. 1996
The 1997 Financial Restructuring
As discussed in more detail in "Business -- The 1997 Restructuring" and in
Note 1 to the Consolidated Financial Statements, FCI and Flagstar emerged from
bankruptcy on January 7, 1998. As described in Note 2 to the Consolidated
Financial Statements, the change in ownership of the Company effected by the
financial restructuring requires that the Company apply "fresh-start reporting"
effective January 7, 1998 in accordance with AICPA Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code."
The bankruptcy proceedings began when FCI, Flagstar and Holdings filed
voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy
Court. Holdings filed its petition on June 27, 1997, and Flagstar and FCI both
filed their petitions on July 11, 1997. FCI's operating subsidiaries did not
file bankruptcy petitions and were not parties to the above mentioned Chapter
11 proceedings.
FCI and Flagstar filed their Chapter 11 cases to implement the Original
Plan which was developed in the course of negotiations with an ad hoc committee
of holders of the Senior Subordinated Debentures and with the support of FCI's
majority shareholder. During the bankruptcy proceedings, the Original Plan's
classification of 10% Convertible Debentures as subordinate to the Senior
Subordinated Debentures was challenged by certain holders of the 10%
Convertible Debentures. As a result of litigation of this issue and subsequent
negotiations with representatives of the holders of the 10% Convertible
Debentures, on November 7, 1997 FCI and Flagstar filed the Plan, which was
confirmed by the Bankruptcy Court on November 12, 1997.
Operating Results
The Company's consolidated revenue for 1997 increased by $67.2 million
(2.6%) as compared with 1996. This increase is primarily attributable to two
factors: (i) the estimated $24.0 million impact attributable to the additional
days in 1997 compared to 1996 due to the change in the Company's fiscal year
and (ii) an approximate $202.3 million impact resulting from five additional
months of operations of Coco's and Carrows in the 1997 reporting period
compared to 1996. Excluding the impact of the extra days and the Coco's and
Carrows acquisition, revenue for 1997 decreased $159.1 million compared to the
prior year. This decrease reflects decreases in comparable store sales at all
of the Company's concepts except for El Pollo Loco and Coco's, as well as a
65-unit decrease in Company-owned units. Such decreases are slightly offset by
a $9.7 million increase in franchise revenue due to a 106-unit increase in
franchise units.
Consolidated operating expenses for 1997 increased by $93.1 million (3.9%)
as compared with 1996. The expense increase is primarily attributable to three
factors: (i) the estimated $20.3 million impact of the additional days in the
1997 reporting period in comparison to the prior year comparable period, (ii) a
$190.6 million impact of the additional five months of operations of Coco's and
Carrows in the current year in comparison to the prior year, and (iii) special
charges of $25.7 million primarily related to Quincy's restructuring plan which
began in 1997 (see discussion below). Excluding the extra reporting days, the
impact of the Coco's and Carrows acquisition and the special charges, operating
expenses for 1997 decreased $143.5 million in comparison to the prior year
comparable period. This decrease primarily reflects a decline in costs
associated with the decline in revenue, the positive impact of cost cutting
measures, and the impact on expenses of a 65-unit decrease in Company-owned
units. These decreases in operating expenses are somewhat offset by a decrease
in gains from sales of restaurants included in operating expenses from $8.4
million in 1996 to $6.2 million in 1997.
Consolidated operating income for 1997 decreased by $26.0 million (16.6%)
as compared with 1996 as a result of the factors noted above.
Consolidated interest and debt expense, net totaled $226.4 million during
1997 compared to $254.7 million during 1996. The decrease occurred principally
because the Company ceased recording interest on the Senior Subordinated
Debentures and 10% Convertible Debentures on July 11, 1997, in accordance with
SOP 90-7. This decrease is partially offset by an increase of $11.9 million of
interest and debt expense in 1997 as compared to 1996 related to the Coco's and
Carrows acquisition in May 1996 and a $3.6 million charge representing interest
and penalties associated with the early termination of the Company's interest
rate exchange agreements in 1997. Such termination occurred in conjunction with
the refinancing of the Company's bank facility necessitated by the bankruptcy
filing on July 11, 1997. In addition, interest income for the 1997 period
decreased $6.2 million compared to the prior year period because of decreased
cash and cash equivalents available for investment during the 1997 period and
the reclassification of interest earned during the bankruptcy period totaling
$1.2 million to reorganization items, in accordance with SOP 90-7.
18
Reorganization items include professional fees and other expenditures
incurred by the Company in conjunction with the reorganization under Chapter 11
of the Bankruptcy Code, as well as interest income earned during the bankruptcy
period, as further discussed in Note 6 to the Consolidated Financial Statements
included herein.
The provision for income taxes from continuing operations for the year
ended December 31, 1997 reflects an effective income tax rate of approximately
1.3 % for 1997 compared to a benefit for 1996 which reflects an approximate
rate of (16.1%). The change in the effective income tax rate from the prior
year can be attributed to the recognition in the prior year of anticipated
refunds due to the carryback of prior year tax losses and the reversal of
certain reserves established in prior years in connection with proposed
deficiencies from the Internal Revenue Service (See Note 10 to the accompanying
Consolidated Financial Statements for additional information).
The net loss was $134.5 million in 1997 compared to a net loss of $85.5
million for the prior year. The increase in the net loss is due to the factors
noted above.
Restructuring Plan and Impairment Charge
During the fourth quarter of 1997, the Company approved a restructuring
plan to significantly reduce the size of its Quincy's chain. In addition to the
sale or closure of restaurants, the restructuring plan will result in the
elimination of certain restaurant, field management and corporate support
positions. Relative to this plan, operating expenses for 1997 reflect a
provision for restructuring of $6.8 million including charges of $1.7 million
for severance, $1.7 million for operating lease reserves and $3.4 million for
various other charges. As a result of the restructuring plan, the Company
identified 88 underperforming units for sale or closure. In accordance with
Statement of Financial Accounting Standards 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"),
the carrying value of these units has been written down to estimated fair value
less costs to sell. In addition, six Quincy's units which will continue
operating were identified as impaired, as the estimated future undiscounted
cash flows of each of these units are insufficient to recover the related
carrying value. Accordingly, the carrying values of these units were written
down to the Company's estimate of fair value. Also included in the charge for
impaired assets is the impact of the writedown to sales price less costs to
sell of certain other long lived assets held for sale. Such assets consist
primarily of 19 Hardee's units which were disposed of prior to December 31,
1997. The total impairment charge included in operating expenses in 1997 is
$15.1 million.
Change in Fiscal Year
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to the last Wednesday of the calendar year. Concurrent with this
change, the Company changed to a four-four-five week quarterly closing calendar
which is the restaurant industry standard, and generally results in four
13-week quarters during the year with each quarter ending on a Wednesday. Due
to the timing of this change, the year ended December 31, 1997 includes more
than 52 weeks of operations. Carrows and Coco's include an additional six days,
Denny's includes an additional five days, El Pollo Loco includes an additional
week and Hardee's and Quincy's each include an additional day.
Accounting Changes
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") in the quarter ended December 31, 1997. SFAS
128 replaced the calculation of primary and fully diluted earnings (loss) per
share with basic and diluted earnings (loss) per share. Unlike primary earnings
(loss) per share, basic earnings (loss) per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted earnings (loss) per
share is very similar to the previously reported fully diluted earnings (loss)
per share.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
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. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company is in the process of determining
its preferred presentation format under the new standard. The adoption of SFAS
130 will have no impact on the Company's consolidated results of operations,
financial position or cash flows and will be implemented by the Company in the
fourth quarter of 1998.
In June 1997, the FASB issued 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. SFAS 131 is effective for
19
financial statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be restated.
The Company is in the process of evaluating the disclosure requirements. The
adoption of SFAS 131 will have no impact on the Company's consolidated results
of operations, financial position or cash flows and will be implemented by the
Company in the fourth quarter of 1998.
1996 vs. 1995
The Company's consolidated revenue for 1996 was $2,542.3 million, a
decrease of $29.2 million, or 1.1%, compared to 1995. The impact on revenues of
the Coco's and Carrows acquisition ($163.7 million and $131.4 million,
respectively, in revenue was contributed by Coco's and Carrows in 1996) was
somewhat offset by the loss of revenue attributable to the dispositions of the
Company's food distribution and processing operations, PFC and PTF, in
September 1995 and 1996, respectively (the decrease in revenue in 1996 as
compared to 1995 as a result of these dispositions totaled $218.2 million).
Excluding the effects of such acquisition and dispositions, revenue, on a
comparable basis, was $2,245.9 million in 1996, a decrease of $106.0 million
(4.5%) compared to 1995. The revenue decrease primarily reflects the impact of
lower comparable store sales at Hardee's and Quincy's and 63 fewer
Company-owned restaurants as compared with the prior year (excluding the impact
of the Coco's and Carrows acquisition), somewhat offset by an increase in
franchise revenue of $11.7 million, reflecting 133 additional franchised units
in 1996. At Hardee's and Quincy's, comparable store sales decreased 7.2% and
10.8%, respectively. Comparable store sales at Denny's and El Pollo Loco
increased 1.7% and 7.2%, respectively; however, due to decreases in the number
of Company-owned restaurants in comparison to 1995, neither concept reported
increases in revenue from Company-owned units.
Operating expenses decreased by $87.3 million (3.5%) in 1996 to $2,385.9
million as compared to 1995. This decrease reflects the impact of several
significant events which affect the comparability of 1996 and 1995 results,
including: a restructuring charge and charge for impaired assets totaling $67.2
million in 1995; a decrease in depreciation expense in 1996 of $5.4 million
because of the impairment write-down in 1995; and a decrease in expenses in
1996 of $201.6 million because of the sales of PTF and PFC. These items are
offset, in part, by the impact of the operating expenses of Coco's and Carrows
which were acquired in 1996 and total $280.2 million.
Excluding the effect of the items noted above, operating expenses
decreased $93.3 million in 1996 in comparison to 1995. This decrease is
primarily attributable to a decline in costs associated with the decline in
operating revenue, the positive impact of cost cutting measures (reflected in
improved margins at Denny's, Hardee's and El Pollo Loco), and the increase of
$8.2 million of the current year amortization of the deferred gains
attributable to the sales of PFC and PTF over the prior year amount. This
amortization is recorded as a reduction of product costs. These decreases in
operating expense are somewhat offset by a decrease in gains from the sales of
restaurants to franchisees reflected in operating expenses from $24.5 million
in 1995 to $8.4 million in 1996 and an increase in the cost to administer the
consent decree entered into in 1993 of $5.9 million over the prior year to
$11.3 million.
Operating income for 1996 increased by $58.2 million to $156.4 million in
comparison to 1995 as a result of the factors noted in the preceding
paragraphs.
Interest and debt expense, net, from continuing operations and
discontinued operations totaled $254.7 million for the year ended December 31,
1996 as compared to $248.0 million for the prior year. The net increase is due
principally to the addition of $17.6 million in interest and debt expense
associated with the Coco's and Carrows acquisition. This increase is partially
offset by the following: a decrease in interest expense of approximately $5.3
million due to a lower level of principal outstanding during the 1996 period
(excluding the impact of the Coco's and Carrows acquisition) resulting
primarily from the repurchase of approximately $25.0 million of senior
indebtedness on September 30, 1995 and the scheduled repayments of long-term
debt during 1996; an increase in interest income of $3.2 million during 1996
due to increased cash and cash equivalents prior to the acquisition of Coco's
and Carrows; a decline of $1.6 million in interest expense during the 1996
period associated with lower interest rates related to interest rate exchange
agreements; and the elimination of $0.8 million in interest expense associated
with various operations that were sold in 1995.
The benefit from income taxes from continuing operations for the year
ended December 31, 1996 reflects an effective income tax benefit of (16.1%)
compared with 0% for 1995. The change from the prior year can be attributed to
the recognition of refunds in the current period due to the carryback of
current year tax losses and the reversal of certain reserves established in
prior years in connection with proposed deficiencies from the Internal Revenue
Service (See Note 10 to the accompanying Consolidated Financial Statements for
additional information).
The loss from continuing operations was $85.5 million for the year ended
December 31, 1996 as compared with $132.9 million for the prior year. The net
loss for the 1996 year end was $85.5 million compared to a net loss for the
prior
20
year of $55.2 million. The prior year included $77.2 million of income from
discontinued operations reflecting gains of $77.9 million on the related sales
of the discontinued operations in the fourth quarter of 1995.
Restructuring
Effective in the fourth quarter of 1995, as a result of a comprehensive
financial and operational review, the Company approved a restructuring plan.
The plan generally involved a reduction in personnel and a decision to
outsource the Company's information systems function. Operating expenses for
1995 reflect a provision for restructuring of $15.9 million including charges
for severance of $5.4 million, $7.6 million for the write-down of computer
hardware and other assets, and $2.9 million for various other charges.
Accounting Change
In 1996, the Company adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), while continuing to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its stock-based compensation plans.
Under APB 25, because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized. The adoption of SFAS 123 did
not impact the Statements of Consolidated Operations or the Consolidated
Balance Sheets included herein.
Restaurant Operations
Denny's (a)
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
U. S. systemwide sales ........................................ $ 1,785 $ 1,850 $1,872
======= ======= ======
Net company sales ............................................. $ 1,222 $ 1,200 $1,146
Franchise and foreign licensing revenue ....................... 49 55 61
------- ------- ------
Total revenue ................................................ 1,271 1,255 1,207
Operating expenses ............................................ 1,199 1,141 1,087
------- ------- ------
Operating income (b) .......................................... $ 72 $ 114 $ 120
======= ======= ======
Average unit sales (in thousands):
Company-owned ................................................ $ 1,283 $ 1,313 $1,285
Franchise .................................................... 1,086 1,090 1,079
Comparable store data (Company-owned):
Comparable store sales increase (decrease) ................... 2.4% 1.7% (4.5%)
Average guest check .......................................... $ 4.86 $ 5.04 $ 5.54
Operated units
Company-owned ................................................ 933 894 894
Franchise .................................................... 596 677 736
International ................................................ 24 25 22
------- ------- -------
Total ....................................................... 1,553 1,596 1,652
======= ======= =======
- ---------
(a) Excludes the operating results of the Company's food processing (PTF) and
distribution (PFC) operations for all years presented.
(b) Operating income reflects a provision for restructuring of $5 million and a
charge for impaired assets of $24 million for the year ended December 31,
1995. For a discussion of the provision for restructuring and charge for
impaired assets see Notes 3 and 5 to the Consolidated Financial
Statements.
21
1997 vs. 1996
Denny's net company sales decreased by $54.0 million (4.5%) in 1997 as
compared to 1996. This change reflects a decrease in comparable store sales and
a 21-unit decrease in the number of Company-owned equivalent units operating
throughout 1997 as compared to 1996, reflecting the closure or sale of 40
Company-owned units since January 1, 1996. The decrease in sales is somewhat
offset by an estimated $21.7 million increase because of an additional five
days in the 1997 reporting period compared to the prior year period. The
decline in comparable store sales was driven by lower guest counts, partially
offset by an increase in average guest check. Both fluctuations reflect the
impact of management's decision to eliminate certain value pricing initiatives
in September 1996 in favor of a broader brand positioning that included greater
focus on service and product quality. Franchise and foreign licensing revenue
for the period increased by $5.8 million (10.5 %), reflecting the effect of 56
more franchised units open at the end of 1997 than at the end of 1996. The
significant increase in franchise units over the prior year as compared to no
net change in the number of Company-owned units is consistent with the
Company's strategy of focusing on growth through franchising.
Denny's operating expenses for 1997 compared with 1996 decreased by $54.3
million (4.8 %), reflecting the impact of 21 fewer Company-owned equivalent
units, a decrease in labor costs associated with improved labor efficiencies
and lower guest counts and a $5.8 million reduction in operating expenses
resulting from various non-recurring items recognized in the fourth quarter,
consisting primarily of an insurance recovery related to costs associated with
the Consent Decree. These decreases were somewhat offset by an estimated $18.5
million impact from five additional days in 1997 compared to 1996, increased
costs for produce, coffee, bacon, and sausage and increases in the Federal and
state minimum wage rates. In addition, operating expenses in the prior year
included $7.7 million of gains on sales of restaurants in comparison to $0.7
million of gains in the current year. Food cost as a percent of revenue
improved during the year because of the elimination of certain value pricing
initiatives and a shift to higher margin products in 1997.
Denny's operating income for 1997 increased $6.1 million (5.3%) over the
prior year as a result of the factors noted above.
1996 vs. 1995
Revenue from Company-owned units for 1996 decreased by $21.7 million
(1.8%) from 1995 to $1,200.3 million, primarily resulting from operating 39
fewer Company-owned restaurants in 1996 as compared to 1995, partially offset
by gains in comparable store sales. Average unit sales in 1996 increased by
2.4% versus 1995. This increase is comprised of a 0.7% gain resulting from the
impact of closed restaurants and those sold to franchisees, and a 1.7% gain in
comparable store sales. The gains in comparable store sales were driven by an
increase in average guest check, which was somewhat offset by a decrease in
customer traffic. The full year gains in average check were aided by a
September price increase that eliminated the $1.99 tier from the value menu
following management's decision to pursue a broader value position. This price
increase was triggered by commodity cost increases, minimum wage legislation
and labor rate pressures, but also reflected management's belief that a broader
value position would ultimately result in a more competitive business strategy.
While the price increase had a positive impact on guest check averages, this
increase was somewhat offset by an anticipated decline in customer counts.
Franchise revenue in 1996 increased by $6.2 million (12.7%) over 1995, to
$55.1 million. The increase in franchise revenue is primarily attributable to
82 additional franchised units in 1996. An increase of $2.2 million was
generated from initial fees from new franchise openings, while the balance
reflects an increase in royalties from units added in 1995 and 1996. Nineteen
Company-owned units were sold to franchisees during 1996, generating $7.7
million in gains which are reflected as a reduction in operating expense.
Operating expenses for 1996 compared to 1995 decreased by $57.4 million
(4.8%) to $1,141.4 million. This decrease is partially due to the restructuring
charge and charge for impaired assets included in the 1995 results ($5.4
million and $23.9 million, respectively), a $2.8 million decrease in 1996
depreciation expense related to the 1995 impairment write-down and a $4.7
million increase in the current year amortization of the deferred gain
attributable to the sales of PFC and PTF over the prior year amounts. The
effect of these items is somewhat offset by a decrease in the gains from
restaurants sold to franchisees ($20.7 million in 1995 versus $7.7 million in
1996). The decrease in operating expenses reflects several factors. Food costs
and restaurant labor were favorable in comparison to 1995 by $14.0 million and
$8.8 million, respectively, reflecting the decline in the number of
Company-owned restaurants as well as the positive impact of cost control
measures in the restaurants. These decreases were offset, in part, by higher
commodity prices (particularly for pork, dairy, eggs and bread) over the prior
year and increases in the Federal and state minimum wages.
22
As a result of the factors noted above, operating income for 1996 improved
by $41.7 million (57.8%), as compared to 1995, to $114.0 million.
Hardee's
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
Revenue ........................................................ $ 660 $ 603 $ 546
Operating expenses ............................................. 656 562 521
------ ------ ------
Operating income (a) ........................................... $ 4 $ 41 $ 25
====== ====== ======
Average annual unit sales (in thousands) ....................... $1,104 $1,041 $ 960
Comparable store data:
Comparable store sales decrease .............................. (8.6%) (7.2%) (7.7%)
Average guest check .......................................... $ 3.15 $ 3.16 $ 3.23
Operated units ................................................. 593 580 557
- ---------
(a) Operating income reflects restructuring charge and charge for impaired
assets for the years ended December 31, 1995 and December 31, 1997 of $32
million and $5 million, respectively. For a discussion of the provision
for restructuring and charge for impaired assets, see Notes 3 and 5 to the
Consolidated Financial Statements.
1997 vs. 1996
Hardee's revenue decreased by $56.7 million (9.4%) during 1997 as compared
with 1996, reflecting a 7.7% decline in comparable store sales, as well as a
23-unit decrease in comparison to the prior year. The decrease in comparable
store sales reflects a decline in traffic which was partially offset by an
increase in average guest check. The decrease in traffic count reflects the
impact of continuing aggressive promotions by competitors within the
quick-service category compounded by the persistent weakness of Hardee's brand
positioning and advertising programs.
Excluding the impact of the 1997 restructuring and impairment charges,
Hardee's operating expenses in the 1997 period decreased by $45.3 million
(8.1%), in spite of increased labor costs due to the Federal minimum wage rate
increase and the fact that there is a base level of labor and other fixed costs
necessary regardless of sales levels. The net decrease primarily reflects the
impact of the cost reduction program implemented in the second half of 1996,
the impact on expenses from the lower comparable store sales noted above and a
23-unit decrease in comparison to the prior year.
Hardee's operating income for the 1997 period decreased by $15.5 million
(38.2%) as compared to the prior year period as a result of the factors noted
above.
1996 vs. 1995
Revenue for Hardee's for 1996 decreased by $56.9 million (8.6%) from 1995,
to $602.9 million. The revenue decrease was primarily driven by 13 fewer
restaurants in the Company's chain and a decrease in average unit sales in
comparison to 1995. Comparable store sales decreased by 7.2% primarily due to
decreased customer traffic in the face of continued aggressive
"value/discounting" promotions by competitors within the quick-service segment
and inclement weather during the first quarter. In the second half of the year,
Advantica's Hardee's began focusing less on discounting and more on overall
value, introducing items which were somewhat higher priced but which management
believed still offered good value for the money. One such promotion introduced
the "Monster" line of items, featuring a large burger and a large omelet
biscuit. This strategy helped drive guest check averages; however, the
increased average guest check only marginally offset the decrease in traffic.
Operating expenses in 1996 decreased $93.4 million (14.2%), to $562.2
million, as compared to 1995. This decrease was partially driven by the
restructuring charge and charge for impaired assets included in the 1995
results ($7.8 million and $23.7 million, respectively), a $2.3 million decrease
in 1996 depreciation and amortization expense resulting from the impairment
write-down in 1995 and a $1.9 million increase in the current year amortization
of the deferred gain attributable to the sales of PFC and PTF over the prior
year amount. This decrease also reflects the impact of lower comparable store
sales, a decrease in the number of restaurants and management's increased focus
on achieving improvement in operating efficiencies. The success of such cost
control efforts was reflected by the fact that even after removing the impact
on 1995 of the restructuring and impairment charges and the related reduction
in depreciation in 1996, operating income would have increased
23
$2.7 million over 1995, despite a decrease in revenue of $56.9 million. Labor
savings had the most significant impact in reducing operating expenses. Labor
as a percent of sales was 1% lower than in 1995. This was accomplished
primarily by reducing in-store labor to become more competitive and more in
line with quick-service industry standards, allowing management to reduce costs
despite the impact of an increased Federal minimum wage.
Operating income for 1996 improved by $36.5 million, to $40.7 million, in
comparison to 1995 as a result of the factors described above.
Quincy's
Year Ended December 31,
------------------------------------
1995 1996 1997
----------- ------------ -----------
($ in millions, except average unit and comparable store data)
Revenue ........................................................ $ 294 $ 259 $ 234
Operating expenses ............................................. 272 252 253
------- ------- ------
Operating income (loss) (a) .................................... $ 22 $ 7 $ (19)
======= ======= ======
Average annual unit sales (in thousands) ....................... $ 1,438 $ 1,301 $1,199
Comparable store data:
Comparable store sales increase (decrease) ................... 4.8% (10.8%) (8.5%)
Average guest check .......................................... $ 5.87 $ 6.05 $ 6.25
Operated units ................................................. 203 199 180
- ---------
(a) Operating income reflects a restructuring charge and charge for impaired
assets of $1 million and $21 million for the years ended December 31, 1995
and December 31, 1997, respectively. For a discussion of the provision for
restructuring and charge for impaired assets see Notes 3 and 5 to the
Consolidated Financial Statements.
1997 vs. 1996
Quincy's revenue decreased by $25.6 million (9.9%) during 1997 as compared
with 1996, reflecting an 8.5% decline in comparable store sales. The decrease
in comparable store sales resulted from a decrease in traffic which was
partially offset by an increase in average guest check. The decline in customer
traffic reflects, among other things, continuing traffic declines in the
family-steak category in general and the difficulty, in spite of product
quality improvements and increased emphasis on consistency of service, of
"winning back" customers who have been lost over the past several years. Modest
improvements were seen after the implementation of the "Relaunch" program in
October 1996; however, sales trends fell well short of management's
expectations.
Excluding the impact of the 1997 restructuring and impairment charges,
Quincy's operating expenses in 1997 decreased by $20.0 million (7.9%) from the
prior year, primarily reflecting the impact on expenses of the lower comparable
store sales noted above and a decrease in product costs due to various cost
reduction initiatives including contract renegotiations and reviews of product
usage and packaging. These decreases are somewhat offset by increased labor
costs due to the Federal minimum wage rate increase, and the fact that certain
labor and other fixed costs cannot be reduced in proportion to the significant
decline in sales.
Quincy's operating income for 1997 decreased by $26.4 million as compared
to the prior year as a result of the factors noted above.
1996 vs. 1995
Revenue for Quincy's in 1996 decreased by $35.1 million (11.9%) from 1995,
to $259.2 million. The revenue decrease was primarily driven by a decrease in
customer traffic, as well as four fewer restaurants, offset somewhat by an
increase in the average guest check. Customer traffic, which decreased by 12%
versus 1995, was primarily responsible for the 10.8% decrease in comparable
store sales. The significant decline in customer traffic reflected, among other
things, continued traffic declines in the family-steak category, in general, as
well as a difficult comparison to the prior year (which benefited from several
newly remodeled units), in addition to the unsuccessful introduction of a new
steak product earlier in the year. Also, management experimented with various
formats at Quincy's, which led to some customer confusion and a lack of focus
for the concept.
To address this issue, in October, management initiated a "Relaunch"
program to re-establish the brand and give customers a consistent experience.
In this regard, during the third quarter of 1996, new products were developed
and tested,
24
training was implemented at all levels, facilities were improved, and
management rolled out a new value steak promotion, the "No Mistake Steak,"
which also introduced a number of new products accompanied by increased media
advertising.
Operating expenses in 1996 as compared to 1995 decreased by $19.4 million
(7.1%), to $252.5 million. This decrease was driven by the decline in sales and
an increase in the amortization of the deferred gain attributable to the sales
of PFC and PTF in 1996 over the prior year amount. These decreases were
partially offset by the additional costs in product, labor and advertising to
institute the "Relaunch" program. Primarily due to the training efforts related
to relaunching the brand, labor costs increased $3.0 million (1.2%) over 1995.
Also, after a period of no advertising for Quincy's in August and September as
the Relaunch plan was formulated, advertising was increased significantly in
the fourth quarter to support the reintroduction of the brand, resulting in an
overall increase in advertising expense of approximately $3.0 million in 1996
over the prior year.
Operating income in 1996 as compared to 1995 declined by $15.7 million, to
$6.6 million, as a result of the factors described above.
El Pollo Loco
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
U. S. systemwide sales ......................................... $ 198 $ 218 $ 235
======= ======= =======
Net company sales .............................................. $ 117 $ 114 $ 115
Franchise and foreign licensing revenue ........................ 10 14 15
------- ------- -------
Total revenue ................................................. 127 128 130
Operating expenses ............................................. 114 114 115
------- ------- -------
Operating income ............................................... $ 13 $ 14 $ 15
======= ======= =======
Average annual unit sales (in thousands):
Company-owned ................................................. $ 1,019 $ 1,155 $ 1,206
Franchise ..................................................... 858 852 856
Comparable store data (Company-owned):
Comparable store sales increase ............................... 2.0% 7.2% 0.2%
Average guest check ........................................... $ 6.76 $ 6.64 $ 6.77
Operated units:
Company-owned ................................................. 103 96 98
Franchise ..................................................... 112 135 145
International ................................................. 2 10 4
------- ------- -------
Total ....................................................... 217 241 247
======= ======= =======
1997 vs. 1996
El Pollo Loco's net company sales increased $0.2 million during 1997 as
compared with 1996. This increase reflects an estimated $2.3 million impact
from the additional week in the 1997 reporting period compared with the prior
year period. Excluding the impact of the additional week, revenue decreased
$2.1 million in comparison to the prior year period, primarily reflecting a
four-unit decrease in the number of Company-owned equivalent units operating
throughout 1997 as compared to the entire prior year. Comparable store sales
were relatively unchanged as a result of lower customer counts offset by a
higher guest check average, both of which are largely explained by a shift in
promotional emphasis during the first two quarters of 1997. A menu price
increase taken in March 1997 also contributed to the increase in average check
in comparison to 1996. Franchise and foreign licensing revenue for 1997
compared with 1996 increased by $1.4 million (10.4%), primarily due to four
more franchise units open at the end of 1997 as compared with 1996, as well as
an increase in franchise average unit sales. This increase in franchise revenue
over the prior year reflects the Company's strategy of focusing on growth
through franchising.
El Pollo Loco's operating expenses for the 1997 period as compared with
the 1996 comparable period increased by $0.7 million (0.6%), primarily
reflecting an estimated $1.8 million impact from the additional week in the
1997 reporting period in comparison to the prior year comparable period. Other
factors which contributed to the current year increase include an increase in
advertising expenses and an increase in labor costs primarily due to Federal
and state minimum wage increases. These increases were offset by gains on sales
of restaurants of $1.0 million in 1997 in comparison to $0.7 million
25
of gains in the prior year. These increases were also offset by lower chicken
prices, lower promotional discounting and the impact of a shift in product mix
and promotional emphasis.
El Pollo Loco's operating income for 1997 increased by $1.0 million (7.1%)
as compared to the prior year as a result of the factors noted above.
1996 vs. 1995
Revenue from Company-owned El Pollo Loco units for 1996 decreased by $1.6
million (1.4%) from 1995 to $114.7 million. The revenue decrease was primarily
driven by a net decrease of seven restaurants (eight units sold to franchisees,
one Company-owned unit opened), partially offset by gains in comparable store
sales. Comparable store sales increased 7.2%, driven by increased guest
traffic, which on a comparable store basis, increased 9.9%. The increased
traffic was principally attributable to the highly successful "Pollo Bowl,"
rolled out in late 1995, which accounted for 11% of the menu mix in 1996, as
well as other key promotions. Comparable store sales also benefited from the
Foster's Freeze rollout. The decrease in average guest check was driven by a
change in value focus in 1996. During 1995, most of the value offerings
featured very large amounts of food (such as the $14.99 Holiday Feast), whereas
in 1996, value was approached on a quantity and price basis (such as the Pollo
Bowl and $9.99 for 12 pieces of chicken).
Franchise revenue in 1996 increased $3.3 million (31.7%) over 1995 to
$13.7 million. The increase in revenue is primarily due to 31 additional
franchise units in 1996. Of the increase in revenue, $0.8 million was generated
from initial fees collected as new franchised units were opened, with the
remainder coming from the ongoing royalty stream of the additional units. Eight
units were sold to franchisees during 1996, generating $0.7 million in gains
which are reflected as a reduction of operating expenses.
Operating expenses increased $0.5 million in 1996 over the prior year, to
$114.6 million, due to a decrease in gains recognized on the sale of
restaurants to franchisees, from $3.8 million in 1995 to $0.7 million in 1996.
Removing the impact of the decrease in restaurant sales to franchisees, El
Pollo Loco experienced a net decrease in operating expenses of $2.6 million
reflecting, among other things, lower product costs associated with the Pollo
Bowl and other new products, a decrease in direct labor costs due to improved
labor scheduling and staffing initiatives, food cost control measures and a
$0.4 million increase in the current year amortization of the deferred gain
attributable to the sales of PFC and PTF over the prior year amount. These
improvements were attained despite an increase in chicken prices versus 1995,
and the increased Federal and state minimum wages.
Operating income for 1996 in comparison to 1995, improved by $1.2 million
(9.5%) to $13.8 million as a result of the factors discussed above.
Coco's and Carrows
The following information for the years ended December 31, 1995 and 1996
is provided for analysis purposes only, as it includes information for periods
prior to the Company's acquisition of Coco's and Carrows on May 23, 1996.
Specifically, the discussion of 1997 vs. 1996 results includes a full year of
operating results for both years, although such operating results prior to May
23, 1996 are not included in consolidated operating results of the Company. For
1995 operating results, see the presentation of combined Coco's and Carrows
operating results, 1996 vs. 1995, following the separate discussions of Coco's
and Carrows 1997 vs. 1996 results.
26
Coco's
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
U. S. systemwide sales ......................................... $ 278 $ 288
====== =======
Net company sales .............................................. $ 270 $ 276
Franchise and foreign licensing revenue ........................ 4 4
------ -------
Total revenue ................................................. 274 280
Operating expenses ............................................. 264 262
------ -------
Operating income ............................................... $ 10 $ 18
====== =======
Average annual unit sales (in thousands)
Company-owned ................................................. $1,506 $1,462 $ 1,492
Franchise ..................................................... 1,884 1,719 1,728
Comparable store data (Company-owned):
Comparable store sales decrease ............................... (5.0%) (1.6%) 0.0%
Average guest check (a) ....................................... $ 6.72 $ 6.80 $ 6.77
Operated units:
Company-owned ................................................. 188 183 178
Franchise ..................................................... 6 5 17
International ................................................. 252 278 298
------- ------- -------
Total ....................................................... 446 466 493
======= ======= =======
- ---------
(a) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to conform better to Advantica's
methodology. Amounts for periods prior to September 1996 have not been
restated. Relative to Coco's, the revised method will generally result in
higher weekly traffic counts and lower average guest checks than
calculated under the previous method.
27
1997 vs. 1996
Coco's net company sales for 1997 increased $5.9 million (2.2%) as
compared to 1996. This increase reflects an estimated $4.8 million impact from
the additional six days in the 1997 reporting period compared to the prior year
comparable period. In addition, four Carrows units were converted to Coco's
restaurants during 1997, contributing $3.3 million in sales. Offsetting these
increases is the impact of a decrease of nine Company-owned stores in 1997.
Coco's comparable store sales were flat in 1997 as compared to 1996. Franchise
and foreign licensing revenue increased by $0.5 million (12.9%) for 1997 as
compared to 1996. This increase is a result of the net increase of 20 foreign
licensed units as well as 12 additional domestic franchise units in the current
year.
Coco's operating expenses for 1997 decreased by $2.4 million (0.9%) as
compared to the prior year. This decrease is primarily a result of savings in
product and labor costs due to an increased operations focus on cost controls,
waste reduction and labor initiatives and $1.4 million of gains on sales of
restaurants, compared to no gains recorded in 1996. In addition, the prior year
included non-recurring adjustments of approximately $1.6 million, which
increased legal and workers' compensation expenses. No comparable charges are
included in the current year period. These decreases were partially offset by
the impact of an additional six days in the 1997 reporting period as compared
to the prior year comparable period and the increase in Federal and state
minimum wage rates.
Operating income for Coco's increased to $18.4 million in 1997 as a result
of the factors noted above.
Carrows
The following information for the years ended December 31, 1995 and 1996
is provided for analysis purposes only, as it includes information for periods
prior to the Company's acquisition of Coco's and Carrows on May 23, 1996.
Specifically, the discussion of 1997 vs. 1996 results includes a full year of
operating results for both years, although such operating results prior to May
23, 1996 are not included in consolidated operating results of the Company. For
1995 operating results, see the presentation of combined Coco's and Carrows
operating results, 1996 vs. 1995, following the separate discussions of Coco's
and Carrows 1997 vs. 1996 results.
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
($ in millions, except average unit and comparable store data)
U. S. systemwide sales ......................................... $ 217 $ 215
======= ======
Net company sales .............................................. $ 217 $ 211
Franchise and foreign licensing revenue ........................ -- 1
------- ------
Total revenue ................................................. 217 212
Operating expenses ............................................. 210 198
------- ------
Operating income ............................................... $ 7 $ 14
======= ======
Average annual unit sales (in thousands)
Company-owned ................................................. $1,372 $ 1,343 $1,362
Comparable store data (Company-owned):
Comparable store sales increase (decrease) .................... (0.2%) 0.1% (1.7%)
Average guest check (a) ....................................... $ 6.09 $ 6.25 $ 6.49
Operated units:
Company-owned ................................................. 161 160 140
Franchise ..................................................... -- -- 14
------- ------- -------
Total ....................................................... 161 160 154
======= ======= =======
- ---------
(a) The method for determining weekly customer traffic and average guest check
was changed in September 1996 in order to conform better to Advantica's
methodology. Amounts for periods prior to September 1996 have not been
restated. Relative to Carrows, the revised method will generally result in
lower weekly traffic counts and higher average guest checks than
calculated under the previous method.
28
1997 vs. 1996
Carrows' net company sales decreased $5.5 million (2.5%) for 1997 as
compared to 1996 in spite of an estimated $3.8 million impact from the
additional six days in the 1997 reporting period in comparison to the prior
year comparable period. The sales decrease is primarily the result of a 20-unit
decrease in Company-owned restaurants, 12 of which were converted to franchise
units. It also reflects a decrease in comparable store sales, reflecting a
decrease in traffic partially offset by an increase in average guest check.
Franchise and foreign licensing revenue increased by $0.6 million for 1997 as
compared to 1996, reflecting the opening of 14 domestic franchise units.
Carrows' operating expenses decreased $12.0 million (5.7%) for 1997 as
compared to 1996, despite the impact of an additional six days in the 1997
reporting period as compared to the prior year comparable period and increases
in the Federal and state minimum wage rates. The decrease in expenses as
compared with the prior year reflects the impact of approximately $1.5 million
of non-recurring adjustments which increased legal and workers' compensation
expenses in 1996, as well as savings in product and labor costs in 1997 due to
increased focus by operations on cost control, waste reduction and labor
initiatives. In addition, operating expenses in 1997 include $3.2 million of
gains on sales of restaurants, compared to no gains recorded in 1996.
Operating income for Carrows increased to $13.6 million in 1997 as a
result of the factors noted above.
1996 vs. 1995
Coco's and Carrows
1995 1996
------ -------
(In millions)
Net company sales .......... $502 $487
Franchise revenue .......... 4 4
---- ----
Total revenue .............. 506 491
Operating expenses ......... 474 474
---- ----
Operating income ........... $ 32 $ 17
==== ====
The Company's operating results for the year ended December 31, 1996
include 31 weeks of Coco's and Carrows operations subsequent to their
acquisition in May. Coco's and Carrows revenues for the post-acquisition period
were $163.7 million and $131.4 million, respectively. Operating expenses for
Coco's and Carrows were $155.5 million and $124.7 million, respectively.
Liquidity and Capital Resources
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 replaced and refinanced the $200 million
debtor-in-possession financing facility (the "DIP Facility") between FCI,
Flagstar, Holdings, certain subsidiaries of Flagstar and Chase. The DIP
Facility was entered into on July 11, 1997 and refinanced the credit facility
of the Company that was in effect prior to commencement of FCI's and Flagstar's
Chapter 11 proceeding (the "Prepetition Credit Agreement"). At December 31,
1997, Advantica had no working capital advances outstanding under the DIP
Facility; however, letters of credit outstanding were $84.5 million.
The Credit Facility matures on January 7, 2003 (subject to early
termination under certain circumstances). See "Description of Indebtedness --
The Advantica Credit Agreement." The Credit Facility is generally secured by
liens on the same collateral that secured the Company's obligations under the
Prepetition Credit Agreement and the DIP Facility (and the Company's guarantee
and additional liens on the Company's corporate headquarters in Spartanburg,
South Carolina and accounts receivable). 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 Credit Facility was approved by the Bankruptcy
Court pursuant to the order confirming the Plan. 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.
29
The following table sets forth, for each of the years indicated, a
calculation of the Company's cash from operations available for debt repayment,
dividends on the Old Preferred Stock and capital expenditures:
Year Ended December 31,
------------------------
1996 1997
----------- ------------
(In millions)
Net loss .................................................................. $ (85.5) $ (134.5)
Charge for impaired assets ................................................ -- 15.1
Provision for restructuring charges ....................................... -- 10.5
Non-cash charges .......................................................... 119.9 110.9
Deferred income tax benefit ............................................... (9.0) (0.1)
Change in certain working capital items ................................... 10.2 41.7
Change in other assets and other liabilities, net ......................... (16.1) (21.5)
Increase in liabilities from reorganization activities .................... -- 10.9
------- --------
Cash from operations available for debt repayment, dividends on the Old
Preferred Stock and capital expenditures ................................. $ 19.5 $ 76.0
======= ========
The cash flows generated by Coco's and Carrows, which were acquired in May
1996, are required by the instruments governing the indebtedness incurred to
finance such acquisition, to service the debt issued by FRD and, therefore,
other than for the payment of certain management fees and tax reimbursements
payable to Advantica under certain conditions, are currently unavailable to be
used to service the debt of Advantica and its other subsidiaries. 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 $21.2 million and
$17.1 million for the years ended December 31, 1996 and 1997, respectively.
In connection with the acquisition of Coco's and Carrows, FRI-M, which
became thereby a wholly-owned subsidiary of the Company, obtained a new credit
facility consisting of a $56 million term loan, which matures on August 31,
1999, and a $35 million revolving credit facility, which is available until
August 31, 1999 for Coco's and Carrows general working capital advances and
letters of credit. Such facility is unavailable to Advantica and its other
subsidiaries. See "Description of Indebtedness -- The FRI-M Credit Facility."
Since the leveraged buyout of Flagstar in 1989, the Company has not
achieved the revenue and earnings projections prepared at the time of the
transaction, so while the Company's cash flows have been sufficient to fund its
operations and make interest payments when due, the Company's core businesses
have not experienced cash flow growth sufficient to provide adequate funds to
invest for future growth. This is related in large part to increased
competition, intense pressure on pricing due to discounting, and relatively
limited capital resources to respond to these changes. Such trends have
generally continued into 1997.
These conditions presented both short-term and long-term financial
challenges to the Company. To address these matters, management took steps in
1997 to maintain the Company's liquidity and improve its capital structure.
Specifically, the Board of Directors elected not to declare the January 15,
1997 and April 15, 1997 quarterly dividends on the Old Preferred Stock (the
July 15, 1997 and October 15, 1997 payments were also not declared, in view of
FCI's bankruptcy). Additionally, on January 21, 1997, the Company hired
Donaldson, Lufkin & Jenrette Securities Corporation as a financial advisor to
assist in exploring alternatives to improve the Company's capital structure.
After a review of the various alternatives available to the Company, management
concluded that the reorganizational alternative best designed to recapitalize
the Company over the long-term and maximize the recovery of all stakeholders
was a prepackaged plan pursuant to Chapter 11 of the Bankruptcy Code and on
July 11, 1997 FCI and Flagstar filed voluntary petitions for relief under the
Bankruptcy Code. FCI's operating subsidiaries, Denny's Holdings, Inc., Spartan
Holdings, Inc. and FRD Acquisition Co. (and their respective subsidiaries) did
not file bankruptcy petitions and were not parties to the above mentioned
Chapter 11 proceedings.
The Plan dated as of November 7, 1997 (as amended following the resolution
of certain issues before the Bankruptcy Court) was confirmed by the Bankruptcy
Court pursuant to an order entered as of November 12, 1997 and became effective
January 7, 1998. As a result of the reorganization, FCI and Flagstar
significantly reduced their debt and simplified their capital structure.
Although consummation of the Plan significantly reduced the Company's debt
obligations, the Company still has substantial indebtedness and debt service
requirements, in absolute terms and in relation to shareholder's equity. With
respect to the long-term liquidity of the Company, management believes that,
after giving effect to the Plan, the Company will have sufficient cash flow
from operations (together with funds available under the Credit Facility) to
pay interest and scheduled amortization on all of its outstanding indebtedness
and to fund anticipated capital expenditures through 1999. Even with the
completion of the Plan, however, the Company's ability to meet its debt service
obligations will depend on a
30
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 31, 1997, and as of December 31, 1997 on a pro forma basis
giving effect to the reorganization and the disposition of FEI, scheduled
maturities of long-term debt relative to Advantica and its subsidiaries for the
years 1998 and thereafter are as follows:
Historical Pro Forma
-------------------------- --------------------------
Advantica Advantica
Excluding FRD FRD Excluding FRD FRD
(In millions) --------------- ---------- --------------- ----------
1998 ............... $ 33.7 $ 23.5 $ 33.7 $ 23.5
1999 ............... 28.9 23.4 28.9 23.4
2000 ............... 325.7 3.1 325.7 3.1
2001 ............... 280.4 2.9 10.4 2.9
2002 ............... 284.6 2.5 4.6 2.5
Thereafter ......... 979.9 163.6 624.1 163.6
In addition to scheduled maturities of principal, on a consolidated basis
and giving effect to the reorganization, approximately $96.7 million of cash
will be required in 1998 to meet interest payments on long-term debt.
The Company's principal capital requirements are those associated with
opening new restaurants and remodeling and maintaining its existing restaurants
and facilities. During 1997, total capital expenditures were approximately
$82.8 million, of which approximately $1.7 million was used to remodel existing
restaurants, $4.9 million was used to refurbish existing restaurants, $20.2
million was used for POS systems and other information technology assets, $3.7
million was used to open new restaurants, and $46.6 million was used to
maintain existing facilities and to purchase equipment. Of the total capital
expenditures, approximately $19.2 million were financed through capital leases.
Capital expenditures during 1998, excluding the estimated $20 million
associated with the development or purchase of new software (see "Impact of the
Year 2000 Issue"), are expected to total approximately $87 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
deficiency because (i) restaurant operations and most food service operations
are conducted primarily on a cash (and cash equivalent) basis with a low level
of accounts receivable, (ii) rapid turnover allows a limited investment in
inventories, and (iii) accounts payable for food, beverages and supplies
usually become due after the receipt of cash from the related sales. At
December 31, 1997, the Company's working capital deficiency, exclusive of net
assets held for sale, was $248.9 million as compared with $297.7 million at the
end of 1996. The decrease in the deficiency is attributable primarily to a
reclassification at December 31, 1997 of accrued interest of $115.7 million
from current liabilities to liabilities subject to compromise, largely offset
by a reduction in cash and cash equivalents which has been used for Company
operations.
On February 22, 1996, the Company entered into an agreement with IBM. The
ten-year agreement for $358.1 million, as amended, requires annual payments by
the Company ranging from $24.0 million to $51.2 million. The agreement provides
for IBM to manage and operate the Company's information systems, as well as to
develop and implement new systems and applications to enhance information
technology for the Company's corporate headquarters, restaurants, and field
management. IBM will oversee data center operations, applications development
and maintenance, voice and data networking, help desk operations, and POS
technology. The disposition of FEI will reduce the future commitment under the
agreement with IBM. The Company is currently working with IBM to quantify this
impact.
As further discussed in "Business -- Pending Sale of Hardees Operation",
on February 18, 1998, Advantica entered into a definitive agreement for the
sale of stock of FEI. Upon the disposition of FEI, the Company will realize
cash proceeds of $380.8 million (subject to certain adjustments) in exchange
for all of the outstanding stock of FEI. Approximately $180 million of the
proceeds from such transaction (together with $20.7 million previously on
deposit with respect to certain Mortgage Financings as herein defined) will be
applied to effect an in-substance defeasance of such Mortgage Financings
31
with a carrying value of $177.6 million plus accrued interest of $2.3 million
at December 31, 1997. Together with the capital lease obligations to be assumed
by the buyer, this will result in a reduced debt load for the Company. The
remaining proceeds, approximately $185 million after transaction expenses, will
increase the Company's short-term liquidity and be available for capital
expenditures or acquisitions, as appropriate. Because of the classification of
the net assets of FEI as assets held for sale at December 31, 1997 and the
adoption of fresh start reporting as of the Effective Date, the operating
results of FEI will be excluded from the consolidated operating results of the
Company subsequent to January 7, 1998. In 1997 FEI contributed revenue of $546
million and operating income of $25 million, or 20.9% and 19.2% of the
company's total revenue and operating income, respectively.
Impact of Bankruptcy Petitions on Franchising
The operation of the Company's franchise system is subject to laws enacted
by a number of states, and rules promulgated by the Federal Trade Commission.
Among other things, such regulations require that each franchising entity
annually renew its Uniform Franchise Offering Circular ("UFOC") which provides
current information about the business. In addition, in the event that any
information in the UFOC becomes misleading, inaccurate or incomplete during the
year, the UFOC must be amended at that time to make appropriate disclosures.
When this occurs, the franchising entity must cease its sale of new franchises
until the UFOC has been updated to make the required disclosures. In some
states, the updated UFOC must be reviewed and approved by a regulatory agency
before the entity can resume franchise sales. Due to the involuntary Chapter 11
proceeding that was filed against Flagstar on June 17, 1997 (which was
subsequently dismissed) and the subsequent filing of voluntary petitions with
the Bankruptcy Court by FCI and Flagstar on July 11, 1997, management decided
it would be appropriate for the Company's franchising subsidiaries (Carrows,
Coco's, Denny's and El Pollo Loco) to update their offering circulars and to
cease sales of new franchises until an updated UFOC had been prepared and
approved by those states that regulate the sale of franchises. Denny's obtained
approval and began selling franchises again in all states in which it has
significant operations in mid-July 1997; Carrows and Coco's obtained approval
and began selling franchises again in all states in which they have significant
operations in late July 1997; and El Pollo Loco resumed franchising in early
August 1997.
Due to the Bankruptcy Court's approval of the Plan by order entered on
November 12, 1997, management decided that it would be appropriate for the
Company's franchising subsidiaries again to update their offering circulars and
to cease sales of new franchises until an updated UFOC had been prepared and
approved by those states that regulate the sale of franchises. Denny's began
selling franchises again in all states in which it has significant operations
in mid-November 1997; Carrows and Coco's obtained approval and began selling
franchises again in all states in which they have significant operations in
late November 1997; and El Pollo Loco resumed franchising in mid-December 1997.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software which uses two
digits to define the applicable year may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Company has performed an assessment of the impact of the Year 2000
issue and determined that a significant portion of its software applications
will need to be modified or replaced so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company presently believes that
with modifications to existing software and conversions to new software, the
impact of the Year 2000 issue can be mitigated. However, if such modification
or conversions are not made, or are not completed timely, the Year 2000 issue
could have a material impact on the operations of the Company.
For the most part, the Company intends to replace existing systems to
mitigate the impact of the Year 2000 issue and will utilize both external and
internal resources to do so. In this regard, the Company expects to spend
approximately $20 million in both 1998 and 1999 to develop or purchase new
software, the majority of which will be capitalized. Non-capital expenditures
associated with the Year 2000, which will be expensed when incurred, are
expected to be immaterial in both years.
During 1998, the Company intends to communicate with its significant
suppliers and franchisees to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. The Company's current estimate of costs associated with the Year 2000
issue excludes the potential impact of the Year 2000 issue on third parties.
There can be no guarantee that the systems of other companies on which the
Company's systems rely will be
32
converted timely, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The Company believes, based on available information, that it will be able
to manage its Year 2000 transition without any material adverse effect on its
business operations. However, the costs of the project and the ability of the
Company to complete it on a timely basis are based on management's best
estimates, which were derived based on assumptions of future events including
the availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results may differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
On January 28, 1997, the registrant had a market capitalization of $2.5
billion or less and accordingly, such disclosures are not required in this
Annual Report on Form 10-K. Such disclosures will be included in filings that
include financial statements for fiscal years ended after June 15, 1998.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements which appears on page F-1 herein.
Form 11-K Information
Advantica, pursuant to Rule 15d-21 promulgated under the Securities
Exchange Act of 1934, as applicable, will file as an amendment to this Annual
Report of Form 10-K the information, financial statements and exhibits required
by Form 11-K with respect to the Flagstar 401(k) Plan and the Denny's 401(k)
Plan.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
33
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item with respect to the Company's directors
and compliance by the Company's directors, executive officers and certain
beneficial owners of the Company's Common Stock with Section 16(a) of the
Securities Exchange Act of 1934 is furnished by incorporation by reference of
all information under the captions entitled "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement for Advantica's Annual Meeting of the Shareholders to be held
on June 18, 1998 (the "Proxy Statement"). The information required by this item
with respect to the Company'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 of all information under the caption entitled "Executive
Compensation" 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 of all information under the caption "General -- Ownership of Capital
Securities" 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 of all information under the caption "Certain Transactions" in the
Proxy Statement.
Description of Indebtedness
The following summary of the principal terms of the current 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 this
Annual Report on Form 10-K. 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.
The Advantica Credit Agreement
On the Effective Date the Company entered into a credit agreement with
Chase and other lenders named therein which established the $200 million senior
secured Credit Facility.
Such facility will be used for working capital advances, letters of credit
and general corporate purposes by the Company's principal operating
subsidiaries (other than FRI-M) which are borrowers thereunder (the
"Borrowers"). The Credit Facility is guaranteed by Advantica and, subject to
certain exceptions, by the Company's subsidiaries that are not borrowers
thereunder and generally is secured by liens on the same collateral that
formerly secured the Company's obligations under the Prepetition Credit
Agreement (with additional liens on the Company's corporate headquarters in
Spartanburg, South Carolina and accounts receivable).
The Credit Facility matures on the date that is five years after the
Effective Date (the "Maturity Date"), subject to earlier termination on March
31, 2000 in the event that the Mortgage Financings have not, on or prior to
such date, been refinanced with other indebtedness that (a) matures at least 90
days after the Maturity Date, and (b) is otherwise satisfactory to the lenders.
Commitments under the Credit Facility will be reduced in amounts equal to (a) a
percentage of the net cash proceeds of all non-ordinary course asset sales or
other dispositions of property by Advantica, subject to certain exceptions, and
(b) 100% of the net cash proceeds of issuance of debt obligations of Advantica,
subject to certain exceptions (including exceptions for certain subordinated
indebtedness).
The Credit Facility contains covenants customarily found in credit
agreements for leveraged financings that, among other things, place limitations
on (i) dividends on capital stock; (ii) redemptions and repurchases of capital
stock; (iii) prepayments, redemptions and repurchases of debt (other than loans
under the Credit Facility); (iv) liens and sale-leaseback transactions; (v)
loans and investments; (vi) incurrence of debt; (vii) capital expenditures;
(viii) operating leases; (ix) mergers
34
and acquisitions; (x) asset sales; (xi) transactions with affiliates; (xii)
changes in the business conducted by Advantica and its subsidiaries; and (xiii)
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
described below:
Total Debt to EBITDA Ratio. Advantica is required not to permit the ratio
of (a) Total Debt (as defined below) outstanding on the last day of any fiscal
quarter to (b) EBITDA (as defined below) of Advantica, the Borrowers and the
Specified Subsidiaries (as defined) on a consolidated basis for the period of
four consecutive fiscal quarters then ended to be more than a specified ratio,
ranging from a ratio of 5.10:1.00 applicable on March 31, 1998 to a ratio of
4.00:1.00 applicable on or after December 31, 2001.
Senior Secured Debt Ratio. Advantica is required not to permit the ratio
of (a) Senior Secured Debt (as defined below) outstanding on the last day of
any fiscal quarter to (b) EBITDA of Advantica, the Borrowers and the Specified
Subsidiaries on a consolidated basis for the period of four consecutive fiscal
quarters then ended to be more than a specified ratio, ranging from a ratio of
2.35:1.00 applicable on March 31, 1998 to a ratio of 2.00:100 applicable on or
after September 30, 1999.
Interest Ratio Coverage. Advantica is required not to permit the ratio,
determined on the last day of each fiscal quarter for the period of four
consecutive fiscal quarters, then ended, of (a) EBITDA of Advantica, the
Borrowers and the Specified Subsidiaries on a consolidated basis to (b) Cash
Interest Expense (as defined below) to be less than a specified ratio, ranging
from a ratio of 1.65:1.00 applicable on December 31, 1997 to a ratio of
1.85:100 applicable on or after December 31, 1999.
Fixed Charge Coverage Ratio. Advantica is required not to permit the
ratio, determined on the last day of each fiscal quarter for the period of four
consecutive fiscal quarters then ended, of (a) the sum of (i) EBITDA of
Advantica, the Borrowers and the Specified Subsidiaries on a consolidated basis
and (ii) Lease Expense (as defined below) to (b) the sum of (i) Cash Interest
Expense and (ii) Lease Expense to be less than a specified ratio, ranging from
a ratio of 1.35:100 applicable on December 31, 1997 to a ratio of 1.55:1.00
applicable on or after December 31, 2000.
Capital Expenditures Test. Advantica is required not to permit Advantica,
the Borrowers and the Specified Subsidiaries on a consolidated basis to incur
Capital Expenditures (as defined below) in excess of $90.0 million in the
aggregate for the fiscal year ending December 31, 1997 and $100 million in the
aggregate for the fiscal years ending December 31, 1998 and thereafter.
Certain Defined Terms. As used in the Credit Facility, the following terms
shall have the following meanings.
"Capital Expenditures" means, for any period, without duplication, the sum
of the aggregate of all expenditures (whether paid in cash or other
consideration or accrued as a liability) by Advantica, the Borrowers and the
Specified Subsidiaries during such period that, in conformity with GAAP, would
be included in "additions to property, plant or equipment" or comparable items
reflected in the consolidated statement of cash flows of Advantica, the
Borrowers and the Specified Subsidiaries for such period, including (a) Capital
Lease Obligations (as defined) and (b) expenditures for equipment that is
purchased simultaneously with the trade-in of existing equipment owned by any
Borrower or any of the Specified Subsidiaries to the extent of the gross amount
of the purchase price less the book value of the equipment being traded in at
such time, but excluding (c) interest capitalized during construction and (d)
expenditures made in connection with the replacement or restoration of assets,
to the extent reimbursed or financed from insurance proceeds paid on account of
the loss of or the damage to the assets being replaced or restored, or from
awards of compensation arising from the taking by condemnation or eminent
domain of such assets being replaced, and net of cash amounts received by the
Borrowers and the Specified Subsidiaries from other persons during that period
in reimbursement of Capital Expenditures made by the Borrowers and the
Specified Subsidiaries.
"Cash Interest Expense" means, for any period, Interest Expense minus (a)
interest not paid in cash (including amortization of (i) discount and deferred
debt expenses (but excluding any capitalized interest expense with respect to
the Old Senior Notes) and (ii) fees with respect to Interest Rate Protection
Agreements (as defined) payable in connection with the incurrence of
Indebtedness to the extent included in interest expense in accordance with GAAP
(including fees and expenses in connection with the transactions relating to
the Plan of Reorganization, plus (b) the amortization of the write-up of
indebtedness relating to the fresh-start accounting treatment (in accordance
with GAAP) of Advantica's consolidated financial statements resulting from the
Reorganization Cases and Advantica's emergence therefrom.
"EBITDA" means, with respect to Advantica, the Borrowers and the Specified
Subsidiaries for any period, all as determined in accordance with GAAP on a
consolidated basis after eliminating intercompany items, the net income (or net
loss)
35
for such period, plus (a) to the extent deducted in computing such net income
(or net loss) the sum of (i) depreciation expense, (ii) amortization expense,
(iii) other non-cash charges, (iv) provisions for LIFO adjustment for inventory
valuation, (v) net total federal, state and local income tax expense, (vi)
Interest Expense, (vii) extraordinary losses, (viii) any non-recurring charge
or restructuring charge that in accordance with GAAP is excluded from operating
income, (ix) the cumulative effect of any change in accounting principles and
(x) "Chapter 11 expenses" (or "administrative costs reflecting Chapter 11
expenses") as shown on Advantica's consolidated statement of income for such
period minus (b) extraordinary gains minus (c) the amount of cash expended in
such period in respect of any amount that, under clause (viii) above, was taken
into account in determining EBITDA for such or any prior period.
"Indebtedness" of any person means, without duplication, (a) all
indebtedness of such person for borrowed money; (b) all indebtedness of such
person for the deferred purchase price of property or services (other than
property, including inventory, and services purchased, and expense accruals and
deferred compensation items arising, in the ordinary course of business); (c)
all obligations of such person evidenced by notes, bonds, debentures or other
similar instruments (other than performance, surety and appeal bonds arising in
the ordinary course of business); (d) all indebtedness of such person created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such person (even though the rights and
remedies of the seller or lender under such agreement n the event of default
are limited to repossession or sale of such property); (e) all Capital Lease
Obligations of such person; (f) all reimbursement, payment or similar
obligations of such person, contingent or otherwise, under acceptance, letter
of credit or similar facilities; (g) all obligations of such person in respect
of (i) currency swap agreements, currency future or option contracts and other
similar agreements designed to hedge against fluctuations in foreign interest
rates and (ii) interest rate swap, cap or collar agreements, interest rate
future or option contracts and other similar agreements designed to hedge
against fluctuations in interest rates; (h) all Guarantees (as defined) by such
person of Indebtedness referred to in clauses (a) through (g) above; and (i)
all Indebtedness referred to in clauses (a) through (h) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien (as defined) upon or in property
(including accounts and contract rights) owned by such person, even though such
person has not assumed or become liable for the payment of such Indebtedness.
The Indebtedness of any person shall include the Indebtedness of any
partnership in which such person is a general partner. Notwithstanding the
foregoing, the amount of Indebtedness of Advantica and the Subsidiaries (or any
of them) shall exclude, for all purposes in the Credit Facility, the fair
market value write-up of indebtedness relating to the fresh-start accounting
treatment (in accordance with GAAP) of Advantica's consolidated financial
statements resulting from the Reorganization Cases and Advantica's emergence
therefrom.
"Interest Expense" means, for any period, all interest expense (including
the interest component in respect of Capital Lease Obligations), net of
interest income, accrued or paid by Advantica, the Borrowers and the Specified
subsidiaries during such period in respect of Indebtedness of Advantica, the
Borrowers and the Specified Subsidiaries, including (a) any amortization of
initial debt discount or any fees (including fees with respect to Interest Rate
Protection Agreements) payable in connection with the incurrence of
Indebtedness to the extend included in interest expense in accordance with GAAP
(including fees and expenses in connection with the transactions relating to
the Plan of Reorganization), (b) any commitment fees, agent's and other
regularly scheduled fees and charges in respect of such Indebtedness, (c)
commissions and other fees and charges payable in connection with letters of
credit, (d) the net payment, if any, payable in connection with all interest
rate protection contracts and (e) interest capitalized during construction, all
determined on a consolidated basis in accordance with GAAP after eliminating
all intercompany items.
"Lease Expense" means, for any period, all payment obligations of
Advantica, the Borrowers and the Specified Subsidiaries during such period
under Operating Leases (as defined), as determined on a consolidated basis for
Advantica, the Borrowers and the Specified Subsidiaries in accordance with
GAAP.
"Senior Secured Debt" means, at any date and without duplication, Total
Debt at such date minus (a) the aggregate principal amount of New Senior Notes
outstanding on such date and (b) to the extent included in computing such Total
Debt, the aggregate amount of other unsecured Indebtedness of Advantica at such
date on a consolidated basis in accordance with GAAP.
"Total Debt" means, at any date and without duplication, the aggregate
amount of all Indebtedness of Advantica, the Borrowers and the Specified
Subsidiaries at such date on a consolidated basis in accordance with GAAP
(other than (a) the undrawn amount of (i) outstanding letters of credit and
(ii) other obligations under similar facilities and (b) Indebtedness of the
type described in clause (g) of the definition of the term "Indebtedness" or
Indebtedness of the type referred to in clause (h) or (i) or the final sentence
of such definition to the extent that the Indebtedness of the other person
referred to in such clause (h) or (i) or such final sentence is Indebtedness of
the type referred to in clause (a) or (b) above).
36
Under the Credit Facility, an event of default includes, among other
things, a reversal, modification or stay, in whole or in part, of any of the
orders issued by the Bankruptcy Court, nonpayment of principal interest,
violations of covenants, breaches of representations and warranties, the
triggering of certain cross-default and cross-acceleration provisions, certain
events of bankruptcy, material judgments against Advantica or its subsidiaries,
and the occurrence of a "Change in Control," as defined in the Credit
Agreement. If such an event of default were to occur, the lenders under the
Credit Facility would be entitled to exercise a number of remedies, including
acceleration of all amounts owned under the Credit Facility.
Advantica Public Debt
Pursuant to the Plan, Advantica issued on January 7, 1998, $592,005,000
aggregate principal amount of 11 1/4% Senior Notes. The New Senior Notes are
senior unsecured obligations of Advantica and rank pari passu in right of
payment to all Senior Indebtedness, including the Credit Facility. Interest on
the New 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 New 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 New
Senior Notes outstanding on the date of the Indenture 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.
Mortgage Financings
A subsidiary of Advantica had issued and outstanding, at December 31,
1997, $177.6 million in aggregate principal amount of 10 1/4% Guaranteed
Secured Bonds due 2000. Interest is payable semi-annually in arrears on each
November 15 and May 15. As a result of the downgrade of Advantica's outstanding
debt securities during 1994, certain payments by the Company which fund such
interest payments are due and payable on a monthly basis. Principal payments
total $12.5 million annually for the years 1997 through 1999; and $152.6
million in 2000. The bonds are secured by a financial guaranty insurance policy
issued by Financial Security Assurance, Inc. and by collateral assignment of
mortgage loans on 238 Hardee's and 146 Quincy's restaurants. In connection with
the pending sale of FEI, as described elsewhere in this Annual Report, the
Company intends to use a portion of the proceeds from the disposition to effect
an in-substance defeasance of such Mortgage Financings with a book value of
$177.6 million at December 31, 1997 ($102 of which is collateralized by the
assets of FEI). The Company intends to purchase Defeasance Eligible Investments
(as defined in documents governing such Mortgage Financings) which will be
deposited in an irrevocable trust to satisfy principal and interest payments on
the related bonds through the stated maturity.
Another subsidiary of Advantica has outstanding $160 million aggregate
principal amount of 11.03% Notes due 2000. Interest is payable quarterly in
arrears, with the principal maturing in a single installment payment in July
2000. These notes are redeemable, in whole, at the subsidiary's option, upon
payment of a premium. They are secured by a pool of cross-collateralized
mortgages on approximately 240 Denny's restaurant properties.
The foregoing financings by subsidiaries of Advantica, as described in the
two preceding paragraphs, are referred to collectively and separately in this
Form 10-K as the "Mortgage Financings."
The FRI-M Credit Facility
In connection with the acquisition by FRD of Coco's and Carrows on May 23.
1996, FRI-M, a wholly-owned subsidiary of FRD, obtained a new credit facility
(the "FRI-M Credit Facility") consisting of a $56 million term loan (the "FRI-M
Term Loan") and a $35 million working capital facility (the "FRI-M Revolver").
Proceeds from the FRI-M Term Loan were used to fund the Coco's and Carrows
acquisition and to pay the transactions costs associated therewith. Proceeds
from the FRI-M Revolver are to be used for working capital requirements and
other general corporate purposes, which may include the making of intercompany
loans to any of FRI-M's wholly-owned subsidiaries for their own working capital
and other general corporate purposes. Letters of credit may be issued under the
FRI-M Revolver for the purpose of supporting (i) workers' compensation
liabilities of FRI-M or any of its subsidiaries; (ii) the obligations of third
party insurers of FRI-M or any of its subsidiaries; and (iii) certain other
obligations of FRI-M and its subsidiaries.
37
Principal installments of the FRI-M Term Loan are payable quarterly as
follows: $4 million per quarter for four consecutive quarters beginning
February 28, 1997; $5 million for four consecutive quarters beginning February
28, 1998; $6 million on February 28, 1999; and $7 million for two consecutive
quarters beginning May 31, 1999. All amounts owing under the FRI-M Term Loan
are required to be repaid on August 31, 1999. The commitment to make loans or
issue letters of credit pursuant to the FRI-M Revolver expires, and all amounts
outstanding under the FRI-M Revolver must be repaid, on August 31, 1999. All
borrowings under the FRI-M Credit Facility accrue interest at a variable rate
based on a base rate (as defined therein) or an adjusted Eurodollar rate
(8.4375% at December 31, 1997).
The FRI-M Credit Facility requires FRI-M to make mandatory prepayments in
certain circumstances out of its Consolidated Excess Cash Flow (as defined
therein), out of cash proceeds of certain asset sales, out of assets
distributed to FRD, the Borrower or any of Borrower's direct or indirect
subsidiaries (each, a "Loan Party") in connection with an employee benefit plan
termination and out of net cash proceeds received by a Loan Party from certain
other sources. Any mandatory partial prepayment of the FRI-M Term Loan shall be
applied to installments scheduled to be paid during the twelve months
immediately following the date of such prepayment, with any excess being
applied ratably to the scheduled installments of the FRI-M Term Loan. The FRI-M
Credit Facility contains certain restrictive covenants which, among other
things, limit (subject to certain exceptions) FRI-M and its subsidiaries with
respect to (a) incurrence of debt; (b) the existence of liens; (c) investments
and joint ventures; (d) the declaration or payment of dividends; (e) the making
of guarantees and other contingent obligations; (f) the amendment or waiver of
certain related agreements; (g) mergers, consolidations, liquidations and sales
of assets (including sale and leaseback transactions); (h) payment obligations
under leases; (i) transactions with shareholders and affiliates; (j) the sale,
assignment, pledge or other disposition of shares of FRI-M or its subsidiaries
by FRI-M or its subsidiaries; (k) capital expenditures; and (l) material
changes in their business.
The FRI-M Credit Facility also imposes on FRD, FRI-M and its subsidiaries
certain financial tests and minimum ratios which, among other things, require
that FRI-M (a) shall not permit the ratio determined on the last day of each
fiscal quarter for such quarter and the three preceding quarters ("Rolling
Period") then ended of Consolidated Adjusted EBITDA (as defined therein) to
Consolidated Interest Expense (as defined therein) to be less than levels
increasing from 1.85:1.00 on December 31, 1997 to 2.10:1.00 on September 23,
1999 and each fiscal quarter end thereafter; (b) permit the ratio determined on
the last day of each fiscal quarter for the Rolling Period then ended of
Consolidated Total Debt (as defined therein) to Consolidated Adjusted EBITDA
(as defined) to exceed a level varying from 4.35:1.00 on December 31, 1997 to
3.65:1.00 on September 23, 1999 and each fiscal quarter end thereafter; and (c)
shall not permit Consolidated Adjusted EBITDA determined on the last day of
each fiscal quarter for the Rolling Period then ended to be less than an amount
increasing from $49.0 million for the Rolling Period ending December 31, 1997
to $49.5 million for the Rolling Period ending June 25, 1998 and each Rolling
Period thereafter.
FRD and all of FRI-M's subsidiaries have guaranteed the obligations of
FRI-M under the FRI-M Credit Facility and the other Loan Documents (as defined
therein). All of the issued and outstanding common stock of FRI-M and its
subsidiaries has been pledged as security for the obligations of FRD under the
FRI-M Credit Facility and the other Loan Documents. The obligations of FRI-M
under the FRI-M Credit Facility and the other Loan Documents are secured by
substantially all assets of FRI-M and its subsidiaries.
The FRD Senior Notes
In connection with the May 23, 1996 acquisition of FRI-M, FRD issued
$156.9 million principal amount of 12 1/2% FRD Senior Notes due 2004 (the "FRD
Notes"). Interest on the FRD Notes accrues at the rate of 12 1/2% per annum and
is payable semi-annually in arrears on January 15 and July 15, commencing on
July 15, 1996. They will mature on July 15, 2004. The FRD Notes 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 borrowings under the FRI-M Credit Facility to the extent of the value
of FRD's assets securing such indebtedness. Borrowings under the FRI-M Credit
Facility are secured by substantially all of FRD's assets (The FRD Notes are
structurally subordinated to all indebtedness of the Borrower (as defined
above), including its indebtedness under the FRI-M Credit Facility).
38
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.
Exhibit
No. Description
- -------- ---------------------------------------------------------------------------------------------------------------
*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")).
*3.3 By-Laws of Advantica as amended through January 7, 1998 (incorporated by reference to Exhibit 3.2 to the
Form 8-A).
*4.1 Registration Rights Agreement (incorporated by reference to Exhibit 10.1 to the Form 8-A).
*4.2 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing, and
Assignment of Leases and Rents, from Denny's Realty, Inc. to State Street Bank and Trust Company, dated
July 12, 1990 (incorporated by reference to Exhibit 4.9 to Post-effective Amendment No. 1 to the Registration
Statement on Form S-1 (No. 33-29769) of FCI (the "Form S-l Amendment")).
*4.3 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of December 29, 1989, as amended and
restated as of July 12, 1990 (incorporated by reference to Exhibit 4.10 to the Form S-l Amendment).
*4.4 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and State Street Bank and Trust Company
relating to certain mortgage notes (incorporated by reference to Exhibit 4.11 to the Form S-l Amendment).
*4.5 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.15 to the Registration Statement on Form S-4 (No. 33-48923) of Flagstar (the "11.25%
Debentures S-4")).
*4.6 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by
reference to Exhibit 4.16 to the 11.25% Debentures S-4).
*4.7 Mortgage Note in the amount of $98,000000 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 Credit Agreement, dated as of May 23, 1996, among FRD, FRI-M, certain lenders and co-agents named
therein, and Credit Lyonnais New York Branch as administrative agent (the "FRI-M Credit Agreement")
(incorporated by reference to Exhibit 10.1 to the Registration Statement on Forms S-1 and S-4
(No. 333-07601) of FRD (the "FRD Form S-l/S-4")).
*4.11 First Amendment to the FRI-M Credit Agreement, dated July 1, 1996 (incorporated by reference to Exhibit
10.3.1 to FCI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
*4.12 Second Amendment to the FRI-M Credit Agreement, dated November 19, 1996 (incorporated by reference to
Exhibit 4.24 to FCI's 1996 Form 10-K, File No. 0-18051 (the "1996 Form 10-K")).
*4.13 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-l/S-4).
39
Exhibit
No. Description
- ---------- ----------------------------------------------------------------------------------------------------------------
*4.14 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).
*4.15 Stock Purchase Agreement dated as of March 1, 1996 by and among FCI, Flagstar, FRD and FRI
(incorporated by reference to Exhibit 4.2 to the FRD Form S-l/S-4).
*4.16 Indenture relating to the New Senior Notes (including the form of security) dated as of January 7, 1998,
between Advantica and First Trust National Association, as Trustee (incorporated by reference to Exhibit 4.1 to
Advantica's Form 8-K filed January 15, 1998 (the "1998 Form 8-K")).
*4.17 Warrant Agreement (including the form of Warrant) (incorporated by reference to Exhibit 10.1 to the
Form 8-A).
*4.18 Third Amendment to the FRI-M Credit Agreement, dated as of March 17, 1997 (incorporated by reference to
Exhibit 4.2 to FCI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the "1997 First
Quarter Form 10-Q")).
*4.19 Fourth Amendment and Limited Waiver dated July 9, 1997 to the FRI-M Credit Agreement (incorporated by
reference to Exhibit 4.2 to FCI's Quarterly Report on Form 10-Q for the quarter ended October 1, 1997).
*4.20 Fifth Amendment to the FRI-M Credit Agreement, dated as of December 9, 1997 (incorporated by reference
to Exhibit 4.21 to the Advantica Form S-1 Amendment).
*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 Form of Agreement providing certain supplemental retirement benefits (incorporated by reference to Exhibit
10.7 to FCI's 1992 Form 10-K, File No. 0-18051 (the "1992 Form 10-K")).
*10.4 Form of Supplemental Executive Retirement Plan Trust of Advantica (incorporated by reference to Exhibit
10.8 to the 1992 Form 10-K).
*10.5 Form of Mortgage related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.1
to the Form S-11).
*10.6 Mortgage Note in the amount of $521,993,982, made by Flagstar Enterprises, Inc. in favor of Spartan
Holdings, Inc., dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by
reference to Exhibit 10.12 to the 11.25% Debentures S-4).
*10.7 Mortgage Note in the amount of $210,077,402, made by Quincy's Restaurants, Inc. in favor of Spartan
Holdings, Inc., dated as of February 1, 1990, as amended and restated November 15, 1990 (incorporated by
reference to Exhibit 10.13 to the 11.25% Debentures S-4).
*10.8 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).
*10.9 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).
*10.10 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).
*10.11 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).
*10.12 Bank Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.18 to the 11.25% Debentures S-4).
*10.13 Indemnification Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.19 to the 11.25% Debentures S-4).
*10.14 Liquidity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.20 to the 11.25% Debentures S-4).
*10.15 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).
*10.16 Amended and Restated Lease between Quincy's Realty Inc. and Quincy's Restaurants, Inc., dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.22 to the 11.25% Debentures S-4).
*10.17 Amended and Restated Lease between Spardee's Realty, Inc. and Spardee's Restaurants, Inc., dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.23 to the 11.25% Debentures S-4).
*10.18 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).
*10.19 Form of Assignment of Leases and Rents related to Secured Restaurants Trust transaction (incorporated by
reference to Exhibit 10.12 to the Form S-11).
40
Exhibit
No. Description
- ----------- ---------------------------------------------------------------------------------------------------------------
*10.20 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).
*10.21 Form of Hardee's License Agreement related to Secured Restaurants Trust transaction (incorporated by
reference to Exhibit 10.14 to the Form S-11).
*10.22 Stock Pledge Agreement among Flagstar Enterprises, Inc. and Secured Restaurants Trust, dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.28 to the 11.25% Debentures S-4).
*10.23 Stock Pledge Agreement among Quincy's Restaurants, Inc. and Secured Restaurants Trust, dated as of
November 1, 1990 (incorporated by reference to Exhibit 10.29 to the 11.25% Debentures S-4).
*10.24 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).
*10.25 Form of Collateral Assignment of Security Documents related to Secured Restaurants Trust transaction
(incorporated by reference to Exhibit 10.17 to the Form S-11).
*10.26 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).
*10.27 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).
*10.28 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).
*10.29 Form of Agreement providing certain severance benefits (incorporated by reference to Exhibit 10.48 to the
1994 Form 10-K).
*10.30 Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994 Form
10-K).
*10.31 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).
*10.32 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).
10.33 Form of Agreement dated December 3, 1997 providing certain retention incentives and severance benefits for
Company management.
*10.34 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).
*10.35 Employment Agreement, dated as of April 24, 1995, between Flagstar and C. Robert Campbell (incorporated
by reference to Exhibit 10.50 to the 1996 Form 10-K).
*10.36 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).
*10.37 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).
*10.38 Employment Agreement between Advantica and James B. Adamson, amended and restated as of January 17,
1998 (incorporated by reference to Exhibit 10.38 to the Advantica Form S-1 Amendment).
*10.39 Agreement Concerning Voting dated as of March 21, 1997 by and among Advantica, Magten Asset
Management Corporation, Loomis Sayles & Company and Moore Capital Management, Inc. (incorporated by
reference to Exhibit 10.55 to the Registration Statement of Form S-4 (No. 333-23875) ( the "1997 Form S-4")).
*10.40 Supplement to Agreement Concerning Voting dated as of May 21, 1997 by and among Advantica, Magten
Asset Management Corporation, Loomis Sayles & Company and Moore Capital Management, Inc.
(incorporated by reference to Exhibit 10.56 to the 1997 Form S-4).
*10.41 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 (incorporated by reference to Exhibit
10.1 to the 1998 Form 8-K).
*10.42 Revolving Credit and Guaranty Agreement, dated as of July 11, 1997, among Flagstar, as borrower, FCI,
Flagstar Holdings, Inc., TWS Funding, Inc. and each of the other direct or indirect subsidiaries of Flagstar
named therein, as guarantors, the lenders named therein, and The Chase Manhattan Bank, as administrative
agent (incorporated by reference to Exhibit 10.1 to the 1997 Third Quarter Form 10-Q).
*10.43 Advantica Restaurant Group Stock Option Plan, as adopted January 28, 1998 (incorporated by reference to
Exhibit 10.43 to the Advantica Form S-1 Amendment).
*10.44 Advantica Restaurant Group Officer Stock Option Plan, as adopted January 28, 1998 (incorporated by
reference to Exhibit 10.44 to the Advantica Form S-1 Amendment).
41
Exhibit
No. Description
- ----------- ---------------------------------------------------------------------------------------------------------
*10.45 Advantica Restaurant Group Director Stock Option Plan, as adopted January 28, 1998 (incorporated by
reference to Exhibit 10.45 to the Advantica Form S-1 Amendment).
*10.46 Final Amendment to Revolving Credit and Guaranty Agreement, dated as of August 15, 1997 (incorporated by
reference to the 1997 Third Quarter Form 10-Q).
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of Advantica.
27 Financial Data Schedule.
99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
- ---------
* Certain of the exhibits to this Annual Report on Form 10-K, 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 part hereof
as of their respective dates.
(b) The Company filed a report on Form 8-K on November 21, 1997 reporting
under Item 3 of such report that on November 12, 1997, the Bankruptcy
Court entered an order confirming the Amended Joint Plan of Reorganization
of FCI and Flagstar (the "Plan"). The filing set forth the material
features of the Plan and included condensed balance sheets of FCI and
Flagstar (which were prepared using the equity method of accounting for
reporting the results of wholly-owned subsidiaries of FCI that were not
parties to the proceedings), which set forth the assets and liabilities of
FCI and Flagstar as of October 1, 1997.
42
ADVANTICA RESTAURANT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
-----
Independent Auditors' Report ............................................................. F-2
Statements of Consolidated Operations for the Three Years Ended December 31, 1995, 1996 F-3
and 1997
Consolidated Balance Sheets as of December 31, 1996 and 1997 ............................. F-4
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 1995, 1996 F-5
and 1997
Notes to Consolidated Financial Statements ............................................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Advantica
Restaurant Group, Inc. (formerly Flagstar Companies, Inc.) and subsidiaries
(the "Company") as of December 31, 1996 and 1997, and the related statements of
consolidated operations and consolidated cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1 to the financial statements, on November 12, 1997,
the Bankruptcy Court entered an order confirming the plan of reorganization
which became effective after the close of business on January 7, 1998. As
described in Note 2, the change in ownership of the Company effected by the
plan of reorganization requires that the Company apply "fresh-start reporting"
effective January 7, 1998 in accordance with AICPA Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code",
as a new entity with assets, liabilities, and a capital structure having
carrying values not comparable with prior periods.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 20, 1998
F-2
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
Year Ended December 31,
-------------------------------------------
1995 1996 1997
-------------- -------------- -------------
(In thousands, except per share amounts)
Net company sales .......................................................... $2,512,164 $2,471,247 $2,528,659
Franchise revenue .......................................................... 59,323 71,055 80,797
---------- ---------- ----------
Operating revenue .......................................................... 2,571,487 2,542,302 2,609,456
---------- ---------- ----------
Operating expenses:
Product cost .............................................................. 867,141 746,680 760,974
Payroll and benefits ...................................................... 914,315 943,164 976,189
Depreciation and amortization expense ..................................... 132,872 129,948 140,828
Utilities ................................................................. 98,212 104,477 110,138
Other ..................................................................... 393,482 461,641 465,285
Provision for restructuring charges ....................................... 15,873 -- 10,540
Charge for impaired assets ................................................ 51,358 -- 15,074
---------- ---------- ----------
2,473,253 2,385,910 2,479,028
---------- ---------- ----------
Operating income ........................................................... 98,234 156,392 130,428
---------- ---------- ----------
Other charges (credits):
Interest and debt expense (contractual interest for the year ended
December 31, 1997 is $278,061)........................................... 232,874 261,633 227,110
Interest income ........................................................... (3,725) (6,926) (722)
Other -- net .............................................................. 2,005 3,537 5,648
---------- ---------- ----------
231,154 258,244 232,036
---------- ---------- ----------
Loss before reorganization items and taxes ................................. (132,920) (101,852) (101,608)
Reorganization items ....................................................... -- -- 31,073
---------- ---------- ----------
Loss before income taxes ................................................... (132,920) (101,852) (132,681)
(Benefit from) provision for income taxes .................................. (14) (16,392) 1,769
---------- ---------- ----------
Loss from continuing operations ............................................ (132,906) (85,460) (134,450)
Gain on sale of discontinued operations, net of income tax provision of:
1995 -- $10,092............................................................ 77,877 -- --
Loss from discontinued operations, net of income tax benefit of:
1995 -- $(1,361)........................................................... (636) -- --
---------- ---------- ----------
Loss before extraordinary items ............................................ (55,665) (85,460) (134,450)
Extraordinary items, net of income tax benefit of: 1995 -- $25.............. 466 -- --
---------- ---------- ----------
Net loss ................................................................... (55,199) (85,460) (134,450)
Dividends on preferred stock ............................................... (14,175) (14,175) (14,175)
---------- ---------- ----------
Net loss applicable to common shareholders ................................. ($ 69,374) ($ 99,635) ($ 148,625)
========== ========== ==========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Loss from continuing operations ........................................... $ (3.47) $ (2.35) $ (3.50)
Income from discontinued operations, net .................................. 1.82 -- --
---------- ---------- ----------
Loss before extraordinary items ........................................... ( 1.65) ( 2.35) ( 3.50)
Extraordinary items, net .................................................. 0.01 -- --
---------- ---------- ----------
Net loss .................................................................. $ (1.64) $ (2.35) $ (3.50)
========== ========== ==========
Average outstanding and equivalent common shares .......................... 42,431 42,434 42,434
========== ========== ==========
See notes to consolidated financial statements.
F-3
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
Historical
December 31,
-------------------------------
1996 1997
--------------- ---------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents ............................................................... $ 92,369 $ 54,079
Receivables, less allowance for doubtful accounts of: 1996 -- $2,405; 1997--$4,177....... 17,812 12,920
Loan receivable from former officer ..................................................... 13,922 --
Merchandise and supply inventories ...................................................... 31,543 20,700
Net assets held for sale ................................................................ 5,114 242,479
Other ................................................................................... 29,895 45,101
Restricted investments securing in-substance defeased debt .............................. -- --
------------- -------------
190,655 375,279
------------- -------------
Property:
Property owned:
Land ................................................................................... 253,067 195,743
Buildings and improvements ............................................................. 891,512 588,140
Other property and equipment ........................................................... 536,886 406,315
------------- -------------
Total property owned .................................................................... 1,681,465 1,190,198
Less accumulated depreciation ........................................................... 629,676 510,690
------------- -------------
Property owned -- net ................................................................... 1,051,789 679,508
------------- -------------
Buildings and improvements, vehicles, and other equipment held under capital leases ..... 210,533 164,691
Less accumulated amortization ........................................................... 93,740 85,826
------------- -------------
Property held under capital leases -- net ............................................... 116,793 78,865
------------- -------------
1,168,582 758,373
------------- -------------
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077; 1997-- $8,061............... 205,389 207,918
Other intangible assets, net of accumulated amortization: 1996 -- $20,611; 1997--$16,781. 27,595 14,897
Deferred financing costs -- net ......................................................... 64,153 56,716
Other ................................................................................... 30,996 25,885
Restricted investments securing in-substance defeased debt .............................. -- --
Reorganization value in excess of amounts allocable to identifiable assets .............. -- --
------------- -------------
328,133 305,416
------------- -------------
$ 1,687,370 $ 1,439,068
============= =============
Liabilities
Current Liabilities:
Current maturities of notes and debentures .............................................. $ 39,161 $ 37,572
Current maturities of capital lease obligations ......................................... 23,729 19,657
Current maturities of in-substance defeased debt ........................................ -- --
Accounts payable ........................................................................ 160,444 109,778
Accrued salaries and vacations .......................................................... 58,838 58,232
Accrued insurance ....................................................................... 52,244 35,749
Accrued taxes ........................................................................... 25,060 25,927
Accrued interest and dividends .......................................................... 47,676 15,487
Other ................................................................................... 76,123 79,291
------------- -------------
483,275 381,693
------------- -------------
Long-Term Liabilities:
Notes and debentures, less current maturities ........................................... 2,044,179 510,533
Capital lease obligations, less current maturities ...................................... 136,497 87,703
In-substance defeased debt, less current maturities ..................................... -- --
Deferred income taxes ................................................................... 16,361 10,015
Liability for self-insured claims ....................................................... 57,665 54,669
Other non-current liabilities and deferred credits ...................................... 176,920 144,505
------------- -------------
2,431,622 807,425
------------- -------------
Total liabilities not subject to compromise .............................................. 2,914,897 1,189,118
Liabilities subject to compromise ........................................................ -- 1,612,400
------------- -------------
Total liabilities ....................................................................... 2,914,897 2,801,518
------------- -------------
Commitments and Contingencies
Shareholders' Equity (Deficit):
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock:
$0.10 par value; 1995 and 1996, 25,000 shares authorized; 6,300 shares issued and
outstanding; liquidation preference $157,500 excluding dividends in arrears............... 630 630
Common stock:
$0.50 par value; shares authorized -- 200,000; issued and outstanding; 1996 and 21,218 21,218
1997--42,434
Pro forma -- $0.01 par value; shares authorized--100,000; issued and outstanding--40,000. -- --
Paid-in capital ......................................................................... 724,912 724,912
Deficit ................................................................................. (1,973,365) (2,107,815)
Minimum pension liability adjustment .................................................... (922) (1,395)
------------- -------------
(1,227,527) (1,362,450)
------------- -------------
$ 1,687,370 $ 1,439,068
============= =============
Pro Forma
December 31,
1997
-------------
(In thousands) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents ............................................................... $ 247,220
Receivables, less allowance for doubtful accounts of: 1996 -- $2,405; 1997--$4,177....... 12,341
Loan receivable from former officer ..................................................... --
Merchandise and supply inventories ...................................................... 20,275
Net assets held for sale ................................................................ --
Other ................................................................................... 24,387
Restricted investments securing in-substance defeased debt .............................. 14,868
----------
319,091
----------
Property:
Property owned:
Land ................................................................................... 89,468
Buildings and improvements ............................................................. 468,748
Other property and equipment ........................................................... 152,633
----------
Total property owned .................................................................... 710,849
Less accumulated depreciation ........................................................... --
----------
Property owned -- net ................................................................... 710,849
----------
Buildings and improvements, vehicles, and other equipment held under capital leases ..... 107,110
Less accumulated amortization ........................................................... --
----------
Property held under capital leases -- net ............................................... 107,110
----------
817,959
----------
Other Assets:
Goodwill net of accumulated amortization of: 1996 -- $3,077; 1997-- $8,061............... --
Other intangible assets, net of accumulated amortization: 1996 -- $20,611; 1997--$16,781. 222,822
Deferred financing costs -- net ......................................................... 36,397
Other ................................................................................... 25,446
Restricted investments securing in-substance defeased debt .............................. 184,605
Reorganization value in excess of amounts allocable to identifiable assets .............. 729,315
----------
1,198,585
----------
$2,335,635
==========
Liabilities
Current Liabilities:
Current maturities of notes and debentures .............................................. $ 25,024
Current maturities of capital lease obligations ......................................... 19,657
Current maturities of in-substance defeased debt ........................................ 12,548
Accounts payable ........................................................................ 109,778
Accrued salaries and vacations .......................................................... 58,232
Accrued insurance ....................................................................... 35,749
Accrued taxes ........................................................................... 25,927
Accrued interest and dividends .......................................................... 15,487
Other ................................................................................... 116,957
----------
419,359
----------
Long-Term Liabilities:
Notes and debentures, less current maturities ........................................... 987,304
Capital lease obligations, less current maturities ...................................... 87,703
In-substance defeased debt, less current maturities ..................................... 186,382
Deferred income taxes ................................................................... 5,170
Liability for self-insured claims ....................................................... 60,236
Other non-current liabilities and deferred credits ...................................... 179,249
----------
1,506,044
----------
Total liabilities not subject to compromise .............................................. 1,925,403
Liabilities subject to compromise ........................................................ --
----------
Total liabilities ....................................................................... 1,925,403
----------
Commitments and Contingencies
Shareholders' Equity (Deficit):
$2.25 Series A Cumulative Convertible Exchangeable Preferred Stock:
$0.10 par value; 1995 and 1996, 25,000 shares authorized; 6,300 shares issued and
outstanding; liquidation preference $157,500 excluding dividends in arrears............... --
Common stock:
$0.50 par value; shares authorized -- 200,000; issued and outstanding; 1996 and --
1997--42,434
Pro forma -- $0.01 par value; shares authorized--100,000; issued and outstanding--40,000. 400
Paid-in capital ......................................................................... 409,832
Deficit ................................................................................. --
Minimum pension liability adjustment .................................................... --
----------
410,232
----------
$2,335,635
==========
See notes to consolidated financial statements.
F-4
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31,
------------------------------------------
1995 1996 1997
------------- ------------- --------------
(In thousands)
Cash Flows from Operating Activities:
Net loss ...................................................................... $ (55,199) $ (85,460) $ (134,450)
Adjustments to Reconcile Net loss to Cash Flows from Operating Activities:
Provision for restructuring charges .......................................... 15,873 -- 10,540
Charge for impaired assets ................................................... 51,358 -- 15,074
Depreciation and amortization of property .................................... 126,488 120,059 127,529
Amortization of goodwill ..................................................... -- 3,077 5,081
Amortization of other intangible assets ...................................... 6,384 6,812 8,218
Amortization of deferred gains ............................................... (2,867) (11,188) (16,581)
Amortization of deferred financing costs ..................................... 7,504 8,920 9,551
Write-off of deferred financing costs ........................................ -- -- 2,533
Deferred income tax benefit .................................................. (3,451) (9,031) (178)
Other ........................................................................ (17,161) (7,816) (25,412)
Loss from discontinued operations, net ....................................... 636 -- --
Gain on sale of discontinued operations, net ................................. (77,877) -- --
Extraordinary items, net ..................................................... (466) -- --
Changes in Assets and Liabilities Net of Effects of Acquisition,
Dispositions and Restructurings:
Decrease (increase) in assets:
Receivables ................................................................ (4,713) 327 2,055
Inventories ................................................................ (848) (833) 2,981
Other current assets ....................................................... (7,086) (3,964) (540)
Other assets ............................................................... (2,622) (5,456) (8,220)
Increase (decrease) in liabilities:
Accounts payable ........................................................... 21,896 21,932 (30,257)
Accrued salaries and vacations ............................................. (5,551) 4,560 3,944
Accrued taxes .............................................................. (429) (5,502) 325
Other accrued liabilities .................................................. (4,014) (6,283) 63,188
Other noncurrent liabilities and deferred credits .......................... (28,364) (10,628) 29,777
---------- ---------- ----------
Net cash flows from operating activities before reorganization activities ..... 19,491 19,526 65,158
Increase in liabilities from reorganization activities ........................ -- -- 10,853
---------- ---------- ----------
Net cash flows from operating activities ...................................... 19,491 19,526 76,011
---------- ---------- ----------
Cash Flows from Investing Activities:
Purchase of property ......................................................... (123,739) (55,026) (63,616)
Proceeds from dispositions of property ....................................... 25,693 14,323 26,319
Advances to discontinued operations, net ..................................... (6,952) -- --
Proceeds from sale of discontinued operations ................................ 172,080 -- --
Proceeds from sales of subsidiaries .......................................... 122,500 62,992 --
Acquisition of business, net of cash acquired ................................ -- (127,068) --
Other long-term assets, net .................................................. (3,217) (4,670) 1,250
---------- ---------- ----------
Net cash flows provided by (used in) investing activities ..................... 186,365 (109,449) (36,047)
---------- ---------- ----------
See notes to consolidated financial statements.
F-5
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued)
Year Ended December 31,
-------------------------------------
1995 1996 1997
------------ ------------ -----------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreements ............... $ -- $ 56,000 $ --
Deferred financing costs ............................. -- (9,591) (4,605)
Long-term debt payments .............................. (56,035) (44,108) (61,949)
Net bank overdrafts .................................. (5,400) (2,800) (11,700)
Cash dividends on preferred stock .................... (14,175) (14,175) --
--------- ---------- ---------
Net cash flows used in financing activities .......... (75,610) (14,674) (78,254)
--------- ---------- ---------
Increase (decrease) in cash and cash equivalents ..... 130,246 (104,597) (38,290)
Cash and Cash Equivalents at:
Beginning of period .................................. 66,720 196,966 92,369
--------- ---------- ---------
End of period ........................................ $ 196,966 $ 92,369 $ 54,079
========= ========== =========
Supplemental Cash Flow Information:
Income taxes paid .................................... $ 3,591 $ 2,196 $ 381
========= ========== =========
Interest paid ........................................ $ 238,832 $ 239,284 $ 123,278
========= ========== =========
Non-cash financing activities:
Capital lease obligations ........................... $ 5,505 $ 12,310 $ 19,170
========= ========== =========
Dividends declared but not paid ..................... $ 3,544 $ -- $ --
========= ========== =========
Non-cash investing activities:
Other investing ..................................... $ 8,185 $ -- $ 3,050
========= ========== =========
See notes to consolidated financial statements.
F-6
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 REORGANIZATION AND BASIS OF REPORTING
Advantica (formerly Flagstar Companies, Inc.), through its wholly-owned
subsidiaries, Denny's Holdings, Inc., Spartan Holdings, Inc. and FRD
Acquisition Co. (and their respective subsidiaries), owns and operates the
Denny's, El Pollo Loco, Quincy's Family Steakhouse, Coco's and Carrows
restaurant brands and is the largest franchisee of Hardee's. 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,
Texas, Washington, Arizona, Pennsylvania, Illinois, and Ohio. Hardee's competes
in the quick-service hamburger category and Quincy's operates in the
family-steak restaurant category. The Company's Hardee's and Quincy's
restaurant chains are located primarily in the southeastern United States. El
Pollo Loco is a quick-service flame-broiled chicken concept which operates
primarily in southern California. The Coco's and Carrows restaurant chains,
acquired by Advantica in May 1996, compete in the family-style category and are
located primarily in the western United States.
On January 7, 1998 (the "Effective Date"), Flagstar Companies, Inc.
("FCI") and Flagstar Corporation ("Flagstar") emerged from proceedings under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")
pursuant to FCI and Flagstar's Amended Joint Plan of Reorganization dated as of
November 7, 1997 (the "Plan"). On the Effective Date, Flagstar, a wholly-owned
subsidiary of FCI, merged with and into FCI, the surviving corporation, and FCI
changed its name to Advantica Restaurant Group, Inc. ("Advantica," or together
with its subsidiaries, the "Company"). The bankruptcy proceedings began when
FCI, Flagstar and Flagstar Holdings, Inc. ("Holdings") filed voluntary
petitions for relief under the Bankruptcy Code in the Bankruptcy Court for the
District of South Carolina. Holdings filed its petition on June 27, 1997, and
Flagstar and FCI both filed their petitions on July 11, 1997 (the "Petition
Date"). FCI's operating subsidiaries, Denny's Holdings, Inc., Spartan Holdings,
Inc. and FRD Acquisition Co. (and their respective subsidiaries) did not file
bankruptcy petitions and were not parties to the above mentioned Chapter 11
proceedings.
Material features of the Plan as it became effective as of January 7,
1998, are as follows:
(a) On the Effective Date, Flagstar merged with and into FCI, the surviving
corporation, and FCI changed its name to Advantica Restaurant Group,
Inc.;
(b) The following securities of FCI and Flagstar were canceled, extinguished
and retired as of the Effective Date: (i) Flagstar's 10 7/8% Senior
Notes due 2002 (the "10 7/8% Senior Notes") and 10 3/4% Senior Notes due
2001 (the "10 3/4% Senior Notes" and, collectively with the 10 7/8%
Senior Notes due 2002, the "Old Senior Notes"), (ii) Flagstar's 11.25%
Senior Subordinated Debentures due 2004 (the "11.25% Debentures") and
11 3/8% Senior Subordinated Debentures due 2003 (the "11 3/8%
Debentures" and, collectively with the 11.25% Senior Subordinated
Debentures due 2004, the "Senior Subordinated Debentures"), (iii)
Flagstar's 10% Convertible Junior Subordinated Debentures due 2014 (the
"10% Convertible Debentures"), (iv) FCI's $2.25 Series A Cumulative
Convertible Exchangeable Preferred Stock (the "Old Preferred Stock") and
(v) FCI's $.50 par value common stock (the "Old Common Stock");
(c) Advantica had 100 million authorized shares of Common Stock (of which 40
million were deemed issued and outstanding on the Effective Date
pursuant to the Plan subject to completion of the exchange of securities
as contemplated by such Plan) and 25 million authorized shares of
preferred stock (none of which are currently outstanding). Pursuant to
the Plan, 10% of the number of shares of Common Stock issued and
outstanding on the Effective Date, on a fully diluted basis, is reserved
for issuance under a new management stock option program. Additionally,
4 million shares of Common Stock are reserved for issuance upon the
exercise of new warrants expiring January 7, 2005 that were deemed
issued and outstanding on the Effective Date and entitle the holders
thereof to purchase in the aggregate 4 million shares of Common Stock at
an exercise price of $14.60 per share (the "Warrants");
(d) Each holder of the Old Senior Notes received such holder's pro rata
portion of 100% of Advantica's 11 1/4% Senior Notes due 2007 (the "New
Senior Notes") in exchange for 100% of the principal amount of such
holders' Old Senior Notes and accrued interest through the Effective
Date;
(e) Each holder of the Senior Subordinated Debentures received each holder's
pro rata portion of shares of Common Stock equivalent to 95.5% of the
Common Stock issued on the Effective Date;
(f) Each holder of the 10% Convertible Debentures received such holder's pro
rata portion of (i) shares of Common Stock equivalent to 4.5% of the
Common Stock issued on the Effective Date and (ii) 100% of the Warrants
issued on the Effective Date; and
F-7
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 REORGANIZATION AND BASIS OF REPORTING -- Continued
(g) Advantica refinanced its prior credit facilities by entering the Credit
Facility (as defined below).
Pursuant to the Plan, Advantica's certificates of incorporation and
by-laws were amended and restated in their entirety.
FCI and Flagstar filed their Chapter 11 cases to implement their
Prepackaged Plan which was developed in the course of negotiations with an ad
hoc committee of holders of the Senior Subordinated Debentures and with the
support of FCI's majority shareholder. During the Bankruptcy proceedings, the
Prepackaged Plan's classification of the 10% Convertible Debentures as
subordinate to the Senior Subordinated Debentures was challenged by certain
holders of the 10% Convertible Debentures. As a result of litigation of this
issue and subsequent negotiations with representatives of the holders of the
10% Convertible Debentures, on November 7, 1997 FCI and Flagstar filed the Plan
which was confirmed by the Bankruptcy Court on November 12, 1997.
On the Effective Date, the automatic stay imposed by the Bankruptcy Code
was terminated and, other than in certain limited circumstances pursuant to the
terms of the Plan, Advantica is no longer subject to the jurisdiction and
supervision of the Bankruptcy Court. Additionally, on January 12, 1998, a
motion to dismiss the Chapter 11 case of Holdings pursuant to section 1112(b)
of the Bankruptcy Code was filed with the Bankruptcy Court. No objections were
filed and on March 6, 1998, the Bankruptcy Court entered an order dismissing
the case.
In connection with the reorganization, the Company will realize a gain
from the extinguishment of certain indebtedness. This gain will not be taxable
since the gain results from a reorganization under the Bankruptcy Code.
However, the Company will be required, as of the beginning of its 1999 taxable
year, to reduce certain tax attributes related to Advantica, exclusive of its
operating subsidiaries, including (i) net operating loss carryforwards
("NOLS"), (ii) certain tax credits and (iii) tax bases in assets in an amount
equal to such gain on extinguishment.
The reorganization of the Company on January 7, 1998 constituted an
ownership change under Section 382 of the Internal Revenue Code and therefore
the use of any of the Company's NOLS 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 NOLS or $7 million for tax credits.
The Company's financial statements as of December 31, 1997 have been
presented in conformity with the American Institute of Certified Public
Accountants' (the "AICPA") Statement of Position 90-7, "Financial Reporting By
Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7").
Accordingly, all prepetition liabilities of the Debtors that are subject to
compromise under the Plan (as defined in Note 7) are segregated in the
Company's Consolidated Balance Sheet as liabilities subject to compromise.
These liabilities are recorded at the amounts allowed as claims by the
Bankruptcy Court in accordance with the Plan. In addition, SOP 90-7 requires
the Company to report interest expense during the bankruptcy proceeding only to
the extent that it will be paid during the proceedings or that it is probable
to be an allowed priority, secured, or unsecured claim. Accordingly, and in
view of the terms of the Plan, as of July 11, 1997, the Company ceased
recording interest on its 11.25% Debentures, 11 3/8% Debentures and 10%
Convertible Debentures. The contractual interest expense for the year ended
December 31, 1997 is disclosed in the accompanying Statements of Consolidated
Operations.
The following unaudited pro forma condensed consolidated balance sheets
and unaudited pro forma condensed statements of consolidated operations give
effect to the Plan discussed above and the disposition discussed in Note 18 as
if such Plan and disposition had been consummated, for balance sheet purposes,
on December 31, 1997 and, for statement of operations purposes, on January 1,
1997.
The pro forma information included herein is provided for informational
purposes only and should not be construed to be indicative of the financial
condition or results of operations of the company had the reorganization plan
or the disposition been consummated on the respective dates indicated and is
not intended to be predictive of future financial condition or results of
operations of the Company at any future date or for any future period.
F-8
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, 1997
-----------------------------------
Adjustments
for
Historical Reorganization(a)
(In thousands) --------------- -------------------
Assets
Current Assets:
Cash and cash equivalents ................ $ 54,079 $ (8,900)
Net assets held for sale ................. 242,479
Other .................................... 78,721
Restricted investments securing
in-substance defeased debt .............. --
-------------
375,279 (8,900)
------------- -------------
Property -- net ........................... 758,373
-------------
Other Assets:
Goodwill, net ............................ 207,918
Other intangible assets, net ............. 14,897
Other .................................... 82,601 (20,319)
Restricted investments securing
in-substance defeased debt .............. --
Reorganization value in excess of
amounts allocable to identifiable
assets .................................. --
-------------
305,416 (20,319)
------------- -------------
$ 1,439,068 $ (29,219)
============= =============
Liabilities
Current Liabilities:
Current maturities of notes and
debentures .............................. $ 37,572
Current maturities of capital lease
obligations ............................. 19,657
Current maturities of in-substance
defeased debt ........................... --
Other current liabilities ................ 324,464
-------------
381,693
-------------
Long-Term Liabilities:
Notes and debentures, less current
maturities .............................. 510,533 $ 590,867
Capital lease obligations, less current
maturities .............................. 87,703
In-substance defeased debt, less
current maturities ...................... --
Other non-current liabilities ............ 209,189
-------------
807,425 590,867
------------- -------------
Total liabilities not subject to
compromise ............................... 1,189,118 590,867
Liabilities subject to compromise ......... 1,612,400 (1,612,400)
------------- -------------
Total liabilities ........................ 2,801,518 (1,021,533)
------------- -------------
Shareholders' Equity:
Capital stock ............................ 21,848 (21,448)
Paid-In capital .......................... 724,912 404,912
Deficit .................................. (2,107,815) 608,850
Minimum pension liability
adjustment .............................. (1,395)
-------------
(1,362,450) 992,314
------------- -------------
$ 1,439,068 $ (29,219)
============= =============
December 31, 1997
----------------------------------------------------------------------
After
After Reorganization,
Adjustments Reorganization Adjustments Fresh Start
for Fresh Start and Fresh Start for Disposition Reporting and
Reporting(b) Reporting of FEI(c) Disposition
(In thousands) ----------------- ----------------- ----------------- ----------------
Assets
Current Assets:
Cash and cash equivalents ................ $ 45,179 $ 202,041 $ 247,220
Net assets held for sale ................. $ 121,821 364,300 (364,300) --
Other .................................... (1,004) 77,717 (20,714) 57,003
Restricted investments securing
in-substance defeased debt .............. -- 14,868 14,868
---------- ---------- ----------
120,817 487,196 (168,105) 319,091
----------- ---------- ---------- ----------
Property -- net ........................... 59,586 817,959 817,959
----------- ---------- ----------
Other Assets:
Goodwill, net ............................ (207,918) -- --
Other intangible assets, net ............. 207,925 222,822 222,822
Other .................................... (439) 61,843 61,843
Restricted investments securing
in-substance defeased debt .............. -- 184,605 184,605
Reorganization value in excess of
amounts allocable to identifiable
assets .................................. 729,315 729,315 729,315
----------- ---------- ----------
728,883 1,013,980 184,605 1,198,585
----------- ---------- ---------- ----------
$ 909,286 $2,319,135 $ 16,500 $2,335,635
=========== ========== ========== ==========
Liabilities
Current Liabilities:
Current maturities of notes and
debentures .............................. $ 37,572 $ (12,548) $ 25,024
Current maturities of capital lease
obligations ............................. 19,657 19,657
Current maturities of in-substance
defeased debt ........................... -- 12,548 12,548
Other current liabilities ................ $ 21,166 345,630 16,500 362,130
----------- ---------- ---------- ----------
21,166 402,859 16,500 419,359
----------- ---------- ---------- ----------
Long-Term Liabilities:
Notes and debentures, less current
maturities .............................. 72,286 1,173,686 (186,382) 987,304
Capital lease obligations, less current
maturities .............................. 87,703 87,703
In-substance defeased debt, less
current maturities ...................... -- 186,382 186,382
Other non-current liabilities ............ 35,466 244,655 244,655
----------- ---------- ----------
107,752 1,506,044 -- 1,506,044
----------- ---------- ---------- ----------
Total liabilities not subject to
compromise ............................... 128,918 1,908,903 16,500 1,925,403
Liabilities subject to compromise ......... --
----------
Total liabilities ........................ 128,918 1,908,903 16,500 1,925,403
----------- ---------- ---------- ----------
Shareholders' Equity:
Capital stock ............................ 400 400
Paid-In capital .......................... (719,992) 409,832 409,832
Deficit .................................. 1,498,965 -- --
Minimum pension liability
adjustment .............................. 1,395 -- --
----------- ---------- ----------
780,368 410,232 410,232
----------- ---------- ----------
$ 909,286 $2,319,135 $ 16,500 $2,335,635
=========== ========== ========== ==========
- ---------
F-9
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(a) Reflects the cancellation of the Old Common Stock and Old Preferred Stock,
the issuance of Common Stock to the holders of the Senior Subordinated
Debentures, the issuance of Common Stock and Warrants to the holders of
the 10% Convertible Debentures and the estimated gain on such transactions
and the issuance of the New Senior Notes in exchange for the Old Senior
Notes, including accrued and unpaid interest.
(b) In accordance with the principles of SOP 90-7, the reorganization will
result in the application of fresh start reporting which results in the
revaluation of assets and liabilities to estimated current fair value. The
revaluation reflects adjustments for fresh start reporting, which include
(i) the increase in the value of net assets held for sale to their fair
value based on the terms of the definitive agreement, (ii) the adjustment
of property, net to estimated fair value, (iii) the write-off of
unamortized goodwill, and establishment of estimated fair value of other
intangible assets (primarily franchise rights and tradenames), (iv) the
establishment of reorganization value in excess of amounts allocable to
identifiable assets, (v) the increase in value of debt to reflect
estimated fair value, (vi) the recognition of liabilities associated with
severance and other exit costs, and the adjustments to self-insured claims
and contingent liabilities reflecting a change in methodology, and (vii)
the adjustment to reflect the new value of common shareholders' equity
based on reorganization value, which was determined by estimating the fair
value of the Company. The fair value of identifiable assets and
liabilities has been determined based on certain valuations and other
studies which are not yet completed. Because the current valuation is
preliminary in nature, further adjustments may be required (See Note 2).
(c) Reflects cash proceeds of $380.8 million and the incurrence of $16.5
million of estimated sale costs. Approximately $180 million of the
proceeds (together with $20.7 million previously on deposit with respect
to certain Mortgage Financings as herein defined) will be used to purchase
Defeasance Eligible Investments (as defined in documents governing the
Mortgage Financings) which will be deposited in an irrevocable trust to
meet the debt service requirements under such Mortgage Financings through
the stated maturity date in the year 2000. Cash flows from the investments
will be used solely to satisfy the principal and interest obligations of
the debt. Accordingly, the investment securities are reflected in the Pro
Forma Consolidated Balance Sheets under the caption Investments securing
in-substance defeased debt. The related Mortgage Financings are reflected
under the caption In-substance defeased debt.
F-10
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
PRO FORMA CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
Year Ended December 31, 1997
-----------------------------------
Pro Forma
--------------------
Adjustments
for
Historical Reorganization (d)
-------------- --------------------
Operating revenue .................. $2,609,456
Operating expenses ................. 2,479,028
----------
Operating income ................... 130,428
Other charges:
Interest and debt expense,
net ............................. 226,388 $ (48,984)
Other, net ........................ 5,648
----------
232,036 (48,984)
---------- ---------
Income (loss) before
reorganization expenses and
taxes ............................ (101,608) 48,984
Reorganization expenses ............ 31,073 (31,073)
---------- ---------
(Loss) income before income
taxes ............................. (132,681) 80,057
Provision for (benefit from)
income taxes ...................... 1,769
----------
Net (loss) income .................. $ (134,450) $ 80,057
========== =========
Basic and diluted loss per share
applicable to common
shareholders ...................... $ (3.50)
==========
Average outstanding and
equivalent shares ................. 42,434
==========
Year Ended December 31, 1997
----------------------------------------------------------------------
Pro Forma
----------------------------------------------------------------------
After
After Reorganization,
Adjustments Reorganization Adjustments Fresh Start
for Fresh-Start and Fresh Start for Disposition Reporting and
Reporting (e) Reporting of FEI (f) Disposition
----------------- ----------------- ----------------- ----------------
Operating revenue .................. $2,609,456 $ (546,268) $2,063,188
Operating expenses ................. 161,587 2,640,615 (516,901) 2,123,714
------- ---------- ---------- ----------
Operating income ................... (161,587) (31,159) (29,367) (60,526)
Other charges:
Interest and debt expense,
net ............................. (12,430) 164,974 (7,129) 157,845
Other, net ........................ 5,648 (2,023) 3,625
---------- ---------- ----------
(12,430) 170,622 (9,152) 161,470
-------- ---------- ---------- ----------
Income (loss) before
reorganization expenses and
taxes ............................ (149,157) (201,781) (20,215) (221,996)
Reorganization expenses ............
(Loss) income before income
taxes ............................. (149,157) (201,781) (20,215) (221,996)
Provision for (benefit from)
income taxes ...................... 14 1,783 (40) 1,743
-------- ---------- ---------- ----------
Net (loss) income .................. $ (149,171) $ (203,564) $ (20,175) $ (223,739)
========== ========== ========== ==========
Basic and diluted loss per share
applicable to common
shareholders ...................... $ (5.09) $ (5.59)
========== ==========
Average outstanding and
equivalent shares ................. 40,000 40,000
========== ==========
- ---------
(d) Reflects the elimination of the amortization of deferred financing costs
and interest expense related to debt securities retired, the amortization
of deferred financing costs on the Credit Facility, an increase in
interest expense due to the exchange of the Old Senior Notes and the
elimination of reorganization expenses which would not be reflected in the
post-reorganization statement of operations.
(e) Reflects the amortization of the increase in intangible assets as a result
of the application of fresh start reporting over the estimated useful
lives of the related assets, including reorganization value in excess of
amounts allocable to identifiable assets over a five-year period;
tradenames over a 40-year period; and franchise rights over the estimated
average remaining term of the related franchise agreements (10 years).
Also reflects the estimated increase in depreciation expense as a result
of the adjustment of property to fair value, the removal of the
amortization of goodwill and the impact on interest expense of the
amortization of net premium on long-term debt.
(f) Reflects the removal of the results of operations of Flagstar Enterprises,
Inc.
NOTE 2 FRESH START REPORTING
As of the Effective Date of the Plan, Advantica will adopt fresh start
reporting pursuant to the guidance provided by SOP 90-7. Fresh start reporting
assumes that a new reporting entity has been created and requires assets and
liabilities to be adjusted to their fair values as of the Effective Date in
conformity with the procedures specified by Accounting Principles Board Opinion
No. 16, "Business Combinations" ("APB 16"). In conjunction with the revaluation
of assets and liabilities, a reorganization value for the entity will be
determined which generally approximates the fair value of the entity before
considering debt and approximates the amount a buyer would pay for the assets
of the entity after reorganization. Under fresh start reporting, the
reorganization value of the entity is allocated to the entity's assets. If any
portion of the reorganization value cannot be attributed to specific tangible
or identified intangible assets of the emerging entity, such amount is reported
F-11
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 FRESH START REPORTING -- Continued
as "reorganization value in excess of amounts allocable to identifiable
assets." Advantica intends to amortize such amount over a five-year
amortization period. As a result of the application of fresh start reporting,
the Company's financial statements issued subsequent to the Effective Date will
not be comparable with those prepared before emergence, including the
historical financial statements in this annual report.
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. Certain prior
year amounts have been reclassified to conform to the current year
presentation.
Change in Fiscal Year. Effective January 1, 1997, the Company changed its
fiscal year end from December 31 to the last Wednesday of the calendar
year. Concurrent with this change, the Company changed to a four-four-five
week quarterly closing calendar which is the restaurant industry standard,
and generally results in four 13-week quarters during the year with each
quarter ending on a Wednesday. Due to the timing of this change, the year
ended December 31, 1997 includes more than 52 weeks of operations. Denny's
includes an additional five days, El Pollo Loco includes an additional week
and Hardee's and Quincy's each include an additional day.
Financial Statement Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the amounts of
revenues and expenses during the period reported. Actual results could
differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Inventories. Merchandise and supply inventories are valued primarily at the
lower of average cost (first-in, first-out) or market.
Property and Depreciation. Owned property is stated at cost and 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 -- Three to ten years
Leasehold Improvements -- Estimated useful life limited by the lease
period.
Goodwill and Other Intangible Assets. The excess of cost over the fair
value of the net assets acquired of FRI-M Corporation (see Note 4 for
further details) is being amortized over a 40-year period on the
straight-line method. Other intangible assets consist primarily of costs
allocated to tradenames, franchise and other operating agreements. Such
assets are being amortized on the straight-line basis over the useful lives
of the franchise or the contract period of the operating agreements. The
Company assesses the recoverability of goodwill and other intangible assets
by projecting future net income related to the acquired business, before
the effect of amortization of intangible assets, over the remaining
amortization period of such assets.
Impairment of Long-Lived Assets. During 1995, the Company adopted the
provisions of 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 No. 121"). Pursuant to this statement, the
Company reviews long-lived assets and certain identifiable intangibles to
be held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. In
addition, long-lived assets and certain identifiable intangibles to be
disposed of are reported at the lower of carrying amount or estimated fair
value less costs to sell. See Note 5 for further discussion of the
impairment of long-lived assets and Note 18 for further discussion of
assets to be disposed of.
F-12
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Deferred Financing Costs. Costs related to the issuance of debt are
deferred and amortized as a component of interest and debt expense using
the interest method over the terms of the respective debt issues.
Preopening Costs. The Company capitalizes certain direct incremental costs
incurred in conjunction with the opening of restaurants and amortizes such
costs over a 12-month period from the date of opening.
Insurance. Through June 30, 1997, the Company was primarily self-insured
for workers' compensation, general liability, and automobile risks which
are supplemented by stop-loss type insurance policies. As of July 1, 1997,
the Company changed to a guaranteed cost program to cover workers'
compensation insurance in most states. At December 31, 1997, the Company
remains self-insured for workers' compensation in only six states. The
liabilities for estimated incurred losses are discounted to their present
value based on expected loss payment patterns determined by independent
actuaries or experience. The total discounted self-insurance liabilities
recorded at December 31, 1996 and 1997 were $100.1 million and $90.4
million respectively, reflecting a 4% discount rate for 1996 and a 5%
discount rate for 1997. The related undiscounted amounts at such dates were
$111.1 million and $100.6 million, respectively.
Interest Rate Exchange Agreements. As a hedge against fluctuations in
interest rates, the Company from time to time has entered into interest
rate exchange agreements to swap a portion of its fixed rate interest
payment obligations for floating rates without the exchange of the
underlying principal amounts. The Company does not speculate on the future
direction of interest rates nor does the Company use these derivative
financial instruments for trading purposes. Since such agreements are not
entered into on a speculative basis, the Company uses the settlement basis
of accounting. No such agreements were outstanding as of December 31, 1997.
Advertising Costs. Production costs for radio and television advertising
are expensed as of the date the commercials are initially aired.
Advertising expense for the years ended December 31, 1995, 1996 and 1997
was $93.0 million, $114.3 million, and $116.9 million, respectively.
Discontinued Operations. The Company has allocated to discontinued
operations a pro-rata portion of interest and debt expense related to its
acquisition debt based on a ratio of the net assets of its discontinued
operations to its total consolidated net assets as of the 1989 acquisition
date. Interest included in discontinued operations for the year ended
December 31, 1995 was $18.9 million.
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
each of the sales, the Company entered into a five-year purchasing
agreement with the acquirer. 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. The portion of the deferred gains recognized as a reduction in
product costs in 1995, 1996, and 1997 was approximately $2.8 million, $11.1
million, and $16.6 million, respectively.
Cash Overdrafts. The Company has included in accounts payable on the
accompanying Consolidated Balance Sheets cash overdrafts totaling $51.6
million and $39.9 million at December 31, 1996 and 1997, respectively.
Franchise and License Fees. Initial franchise and license fees are
recognized when all of the material obligations have been performed and
conditions have been satisfied, typically when operations have commenced.
Initial fees for all periods presented are insignificant. Continuing fees,
based upon a percentage of net sales, are recorded as income on a monthly
basis.
Gains on Sales of Company-Owned Restaurants. Gains on the sales of
Company-owned restaurants to franchisees are recognized in accordance with
Statement of Financial Accounting Standards No. 66, "Accounting for Sales
of Real
F-13
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Estate." In this regard, gains on such sales are recognized when the cash
proceeds from the sale exceed 20% of the sales price. During the years
ended December 31, 1995, 1996, and 1997, the Company recognized gains
related to sales of Company-owned restaurants of approximately $24.5
million, $8.4 million, and $6.2 million, respectively. Such gains are
included as a reduction of other operating expenses in the accompanying
Statements of Consolidated Operations. Cash proceeds received from sales of
Company-owned restaurants totaled $26.1 million, $8.5 million and $7.9
million for the years ended December 31, 1995, 1996 and 1997, respectively.
Deferred gains and the non-cash portion of proceeds related to such
transactions are not significant.
Earnings per Share. The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), in the quarter ended
December 31, 1997. SFAS 128 replaced the calculation of primary and fully
diluted earnings (loss) per share with basic and diluted earnings (loss)
per share. Unlike primary earnings (loss) per share, basic earnings (loss)
per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings (loss) per share is very similar
to the previously reported fully diluted earnings (loss) per share.
New Accounting Standards. In June 1997, the Financial Accounting Standards
Board ("FASB") issued 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. SFAS 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company
is in the process of determining its preferred presentation format under
the new standard. The adoption of SFAS 130 will have no impact on the
Company's consolidated results of operations, financial position or cash
flows and will be implemented by the Company in the fourth quarter of 1998.
In June 1997, the FASB issued 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. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for
prior periods are required to be restated. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS 131 will have
no impact on the Company's consolidated results of operations, financial
position or cash flows and will be implemented by the Company in the fourth
quarter of 1998.
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
addition, in the second quarter of 1998, the AICPA is expected to issue a
statement of position which provides additional guidance on the financial
reporting of start-up costs, requiring costs of start-up activities to be
expensed as incurred.
Both statements of position are effective for fiscal years beginning after
December 15, 1997. In accordance with the adoption of fresh start reporting
upon emergence from bankruptcy (see Note 2), the Company will adopt both
statements of position as of January 7, 1998. The adoption of the statement
of position relative to start-up costs at January 7, 1998 will result in
the write-off of previously capitalized pre-opening costs totaling $0.6
million. Subsequent to the Effective Date, pre-opening costs will be
expensed as incurred. The adoption of SOP 98-1 at January 7, 1998 will
result 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 will be expensed
as incurred.
F-14
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4 ACQUISITION
On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly
formed subsidiary, consummated the acquisition of the Coco's and Carrows
restaurant chains consisting of 347 company-owned units within the family-style
category. The acquisition price of $313.4 million plus acquisition costs (which
was paid in exchange for all of the outstanding stock of FRI-M Corporation
("FRI-M"), the subsidiary of Family Restaurants Inc. ("FRI") which owns the
Coco's and Carrows chains) was financed with $125.0 million in cash ($75.0
million of which was provided from the Company's cash balances and the
remaining $50.0 million pursuant to bank term loans which totaled $56.0 million
with the remaining $6.0 million being used to pay transaction fees), the
issuance of $156.9 million in senior notes of FRD to the seller and the
assumption of certain capital lease obligations of approximately $31.5 million.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities and results of operations of Coco's and
Carrows are included in the Company's consolidated financial statements for the
periods subsequent to the acquisition.
In accordance with the purchase method of accounting, the purchase price
has been allocated to the underlying assets and liabilities of FRI-M based on
their estimated respective fair values at the date of acquisition. The purchase
price exceeded the fair value of the net assets acquired by approximately $216
million, as adjusted. The resulting goodwill is being amortized on a
straight-line basis over 40 years.
NOTE 5 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS
During the fourth quarter of 1997, the Company approved a restructuring
plan to significantly reduce the size of its Quincy's chain. In addition to the
sale or closure of restaurants, the restructuring plan will result in the
elimination of certain restaurant, field management and corporate support
positions. As a result of this plan, the Company identified 88 underperforming
units for sale or closure. In accordance with SFAS 121, the carrying value of
these units has been written down to estimated fair value less costs to sell.
In addition, six Quincy's units which will continue operating were identified
as impaired, as the estimated future undiscounted cash flows of each of these
units is insufficient to recover the related carrying value. Accordingly, the
carrying values of these units were written down to the Company's estimate of
fair value. Also included in the charge for impaired assets is the impact of
the write-down to sales price less costs to sell of certain other long-lived
assets held for sale. Such assets consist primarily of 19 Hardee's units which
were disposed of prior to December 31, 1997.
In conjunction with the completion of the 1995 restructuring plan (as
further described below), the Company recorded an additional restructuring
charge of $3.8 million in 1997 representing the additional write-down of the
carrying value of certain assets.
Charges attributable to the restructuring plan and the impairment of
long-lived assets during the year ended December 31, 1997 are comprised of the
following (in thousands):
Restructuring:
Severance ............................................................... $ 1,676
Reserve for operating leases ............................................ 1,747
Adjustment of 1995 restructuring charge ................................. 3,758
Other ................................................................... 3,359
-------
$10,540
=======
Impairment of long-lived assets:
Write-down attributable to restaurant units the Company will continue
operating .............................................................. $ 3,109
Write-down attributable to restaurant units to be disposed of ........... 11,965
-------
$15,074
=======
Approximately $6.9 million of the restructuring charges represent cash
charges of which an immaterial amount was paid in 1997. Unpaid amounts are
included in other current liabilities in the accompanying Consolidated Balance
Sheet. Of the 88 units identified for disposal in 1997, 19 units were closed
prior to December 31, 1997. The 88 units had aggregate
F-15
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS -- Continued
operating revenues of approximately $80.4 million and negative operating income
of $5.8 million during 1997, and an aggregate carrying value prior to the
impairment write-down of approximately $48.5 million as of December 31, 1997.
The Company anticipates completion of its restructuring plan by the end of
1998.
Effective in the fourth quarter of 1995, as a result of a comprehensive
financial and operational review, the Company approved a restructuring plan.
The plan generally involved a reduction in personnel and a decision to
outsource the Company's information systems function. In addition, the Company
adopted SFAS No. 121 during 1995 (see Note 3). In connection with such
adoption, 99 restaurant units which the Company intended to continue operating
were identified as impaired, as the future undiscounted cash flows of each of
these units was estimated to be insufficient to recover the related carrying
value. As such, the carrying values of these units were written down to the
Company's estimate of fair value based on sales of similar units or other
estimates of selling price.
During 1995, the Company also identified 36 underperforming units for sale
or closure generally during 1996. The carrying value of these units was written
down to estimated fair value, based on sales of similar units or other
estimates of selling price, less costs to sell. The 36 units identified in 1995
for disposal had aggregate operating revenues of approximately $26.1 million,
an operating loss of approximately $2.9 million during 1995, and an aggregate
carrying value of approximately $5.8 million as of December 31, 1995. As of
December 31, 1997, two units remain relative to the 1995 restructuring plan.
Management intends to dispose of one of the remaining units and to continue
operating the other. The unit to be disposed of had operating revenues of
approximately $0.6 million and immaterial operating income during 1997 and an
aggregate carrying amount of $0.2 million at December 31, 1997.
Charges attributable to the restructuring plan and the adoption of SFAS
No. 121 during the year ended December 31, 1995 are comprised of the following:
(In thousands)
Restructuring:
Severance ........................................................... $ 5,376
Write-down of computer hardware and software and other assets ....... 7,617
Other ............................................................... 2,880
-------
$15,873
=======
Impairment of Long-lived Assets:
Write-down attributable to restaurant units the Company will continue
operating .......................................................... $41,670
Write-down attributable to restaurant units to be disposed of ....... 9,688
-------
$51,358
=======
The 1995 restructuring plan was substantially completed in 1997.
NOTE 6 REORGANIZATION ITEMS
Reorganization expenses included in the accompanying Statement of
Consolidated Operations consist of the following items:
December 31, 1997
(In thousands) ------------------
Professional fees and other .............. $ 29,245
Debtor-in-possession financing expenses .. 3,062
Interest earned on accumulated cash ...... (1,234)
--------
$ 31,073
========
F-16
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7 LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise are obligations which were outstanding
on the Petition Date and are subject to compromise under the terms of the Plan
(see Note 8 for additional information).
December 31, 1997
------------------
(In thousands)
10 3/4% Senior Notes due September 15, 2001, interest payable
semi-annually ....................................................... $ 270,000
10 7/8% Senior Notes due December 1, 2002, interest payable
semi-annually ....................................................... 280,025
11.25% Senior Subordinated Debentures due November 1, 2004, interest
payable semi-annually ............................................... 722,411
11 3/8% Senor Subordinated Debentures due September 15, 2003, interest
payable semi-annually ............................................... 125,000
10% Convertible Junior Subordinated Debentures due 2014, interest
payable semi-annually; convertible into Company common stock any
time prior to maturity at $24.00 per share .......................... 99,259
Accrued interest ..................................................... 115,705
----------
Total liabilities subject to compromise ............................. $1,612,400
==========
F-17
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 DEBT
Long-term debt consists of the following:
December 31, Pro Forma
-------------------------- December 31,
1996 1997 1997
------------- ------------ -------------
(In thousands) (Unaudited)
Notes and Debentures:
10 3/4% Senior Notes due September 15, 2001, interest payable semi-annually ...... $ 270,000 (a) --
10 7/8% Senior Notes due December 1, 2002, interest payable semi-annually ........ 280,025 (a) --
11.25% Senior Subordinated Debentures due November 1, 2004, interest
payable semi-annually .......................................................... 722,411 (a) --
11 3/8% Senior Subordinated Debentures due September 15, 2003, interest
payable semi-annually .......................................................... 125,000 (a) --
10% Convertible Junior Subordinated Debentures due 2014, interest payable
semi-annually; convertible into Company common stock any time prior to
maturity at $24.00 per share ................................................... 99,259 (a) --
11 1/4% Senior Notes due January 15, 2008, interest payable semi-annually ........ -- -- $ 590,867
12.5% Senior Notes of FRD due July 15, 2004, interest payable semi-annually 156,897 $156,897 156,897
Mortgage Notes Payable:
10.25% Guaranteed Secured Bonds due 2000 ....................................... 190,164 177,615 --
11.03% Notes due 2000 .......................................................... 160,000 160,000 160,000
Term loan of FRI-M, principal payable in quarterly installments .................. 56,000 40,000 40,000
Other notes payable, maturing over various terms to 20 years, payable in
monthly or quarterly installments with interest rates ranging from 7.5% to
13.25% (b) ..................................................................... 14,844 10,077 10,077
Notes payable secured by equipment, maturing over various terms up to 7
years, payable in monthly installments with interest rates ranging from 8.5%
to 9.64% (c) ................................................................... 8,740 3,516 3,516
Capital lease obligations (see Note 9) ............................................ 160,226 107,360 107,360
In-substance defeased debt (See Note 1) ........................................... -- -- 177,615
---------- -------- ----------
2,243,566 655,465 1,246,332
---------- -------- ----------
Reorganization premium (discount):
11 1/4% Senior Notes, effective rate 10.79% ...................................... -- -- 26,589
12.5% Senior Notes of FRD, effective rate 10.95% ................................. -- -- 13,336
11.03% Notes, effective rate 8.18% ............................................... -- -- 12,800
In-substance defeased debt, effective rate 5.29% ................................. -- -- 21,315
Other notes payable .............................................................. -- -- (1,347)
Notes payable secured by equipment ............................................... -- -- (407)
---------- -------- ----------
Total .......................................................................... 2,243,566 655,465 1,318,618
Less current maturities ........................................................... 62,890 57,229 57,229
---------- -------- ----------
Total long term debt .............................................................. $2,180,676 $598,236 $1,261,389
========== ======== ==========
- ---------
(a) Included in liabilities subject to compromise at December 31, 1997 ( See
Note 7).
(b) Collateralized by restaurant and other properties with a net book value of
$14.3 million at December 31, 1997.
(c) Collateralized by equipment with a net book value of $13.0 million at
December 31, 1997.
F-18
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Aggregate annual maturities of long-term debt during the next five years,
excluding capital lease obligations of FEI (See Note 18), are as follows:
Pro Forma
December 31, 1997 December 31, 1997
(In millions) ------------------- ------------------
Year:
1998 ......... $ 57.2 $ 57.2
1999 ......... 52.3 52.3
2000 ......... 328.8 328.8
2001 ......... 283.3 13.3
2002 ......... 287.1 7.1
As discussed in Note 1, pursuant to the Plan, Flagstar's Old Senior Notes,
Senior Subordinated Debentures and 10% Convertible Debentures which are
included in liabilities subject to compromise (See Note 7) in the accompanying
Consolidated Balance Sheet at December 31, 1997, were canceled, extinguished
and retired as of the Effective Date. In addition, each holder of the Old
Senior Notes received such holder's pro rata portion of 100% of New Senior
Notes in exchange for 100% of the principal amount of such holders' Old Senior
Notes and accrued interest through the Effective Date. The above unaudited pro
forma summary of long-term debt gives effect to these transactions as if they
were consummated on December 31, 1997. The unaudited pro forma summary also
gives effect to the revaluation of long-term debt to fair value as required
under fresh start reporting (See Note 2) and the impact of the disposition of
FEI. The fair value computations are based on market quotations for the same or
similar debt issues or the estimated borrowing rates available to the Company.
On March 7, 1997, FCI's Second Amended and Restated Credit Agreement (the
"Credit Agreement") was amended to provide for less restrictive financial
covenants for measurement periods ending on March 31, 1997 and June 30, 1997,
as well as to provide FCI flexibility to forego certain scheduled interest
payments due in March, May and June 1997 without triggering a default under the
agreement, unless any such debt was declared due and payable as a result of the
failure to pay such interest.
On March 17, 1997, in connection with the financial restructuring
discussed in Note 1, Flagstar elected not to make the interest payment due and
payable as of that date to holders of the 11 3/8% Debentures. In addition, on
May 1, 1997, also in connection with the restructuring, Flagstar elected not to
make the interest payments due and payable as of that date to holders of the
11.25% Debentures and 10% Convertible Debentures. As a result of these
nonpayments, and as a result of a continuation of such nonpayments for 30 days
past their respective due dates, Flagstar was in default under the terms of the
indentures governing such debentures. During the pendency of Flagstar's
bankruptcy proceedings, Flagstar also failed to make the interest payments due
September 15, 1997 on its 10 3/4% Senior Notes and 11 3/8% Debentures, the
interest payments due November 1, 1997 on its 11.25% Debentures and 10%
Convertible Debentures and the interest payment due December 1, 1997 on its
10 7/8% Senior Notes. The bankruptcy filings operate as an automatic stay of
all collection and enforcement actions by the holders of the Senior
Subordinated Debentures, 10% Convertible Debentures, the Old Senior Notes and
the respective indentures trustees with respect to Flagstar's failure to make
the interest payments when due.
On July 11, 1997 FCI entered into a $200 million debtor-in-possession
financing facility (the "DIP Facility") between FCI, Flagstar, Holdings,
certain subsidiaries of Flagstar and The Chase Manhattan Bank ("Chase") for
working capital and general corporate purposes and letters of credit. The DIP
Facility refinanced the Credit Agreement and is guaranteed by certain operating
subsidiaries of FCI and generally is secured by liens on the same collateral
that secured FCI's obligations under the Credit Agreement, including the stock
of certain operating subsidiaries and certain of FCI's trade and service marks.
At December 31, 1997, Advantica had no working capital advances outstanding
under the DIP Facility; however, letters of credit outstanding were $84.5
million.
The DIP Facility and indentures under which the debt securities have been
issued contain a number of restrictive covenants. Such covenants restrict,
among other things, (i) the ability of Flagstar and its restricted subsidiaries
to incur indebtedness, create liens, engage in business activities which are
not in the same field as that in which the Company currently operates, (ii)
mergers and acquisitions, (iii) sales of assets, (iv) transactions with
affiliates and (v) the payment of dividends. In addition, the DIP Facility
contains financial covenants including provisions for the maintenance of a
minimum level of
F-19
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 DEBT -- Continued
interest coverage (as defined), limitations on ratios of indebtedness (as
defined) to earnings before interest, taxes, depreciation and amortization
(EBITDA), and limitations on annual capital expenditures.
The Company was in compliance with the terms of the DIP Facility at
December 31, 1997. Under the most restrictive provision of the DIP Facility
(minimum EBITDA, as defined), for the month of December 1997, the Company's
EBITDA could be $2.1 million less and the Company would still be in compliance.
On the Effective Date, Advantica entered into a credit agreement with
Chase and other lenders named therein which established the $200 million senior
secured Credit Facility (the "Credit Facility"). The Credit Facility refinances
the DIP Facility and will be used for working capital advances, letters of
credit and general corporate purposes by certain of Advantica's operating
subsidiaries which are borrowers thereunder. The Credit Facility is guaranteed
by Advantica and, subject to certain exceptions, by Advantica's subsidiaries
that are not borrowers thereunder and generally is secured by liens on the same
collateral that formerly secured Advantica's obligations under the Credit
Agreement.
The Credit Facility includes a working capital and letter of credit
facility of up to a total of $200 million. The Credit Facility matures on
January 7, 2003 (the "Maturity Date"), subject to earlier termination on March
31, 2000 in the event that certain mortgage financings of Advantica have not,
on or prior to such date, been refinanced with other indebtedness that (a)
matures at least 90 days after the Maturity Date, and (b) is otherwise
satisfactory to the lenders. The Credit Facility is subject to mandatory
prepayments and commitment reductions under certain circumstances upon
Advantica's sale of assets or incurrence of additional debt.
The Credit Facility contains covenants customarily found in credit
agreements for leveraged financings that, among other things, place limitations
on (i) dividends on capital stock; (ii) redemptions and repurchases of capital
stock; (iii) prepayments, redemptions and repurchases of debt (other than loans
under the Credit Facility); (iv) liens and sale-leaseback transactions; (v)
loans and investments; (vi) incurrence of debt; (vii) capital expenditures;
(viii) operating leases: (ix) mergers and acquisitions; (x) asset sales; (xi)
transactions with affiliates; (xii) changes in the business conducted by
Advantica and its subsidiaries; and (xiii) 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.
At December 31, 1997, the 10.25% guaranteed bonds were secured by, among
other things, mortgage loans on 384 restaurants, a lien on the related
restaurant equipment, assignment of intercompany lease agreements, and the
stock of the issuing subsidiaries. At December 31, 1997, the restaurant
properties and equipment had a net book value of $305.1 million. In addition,
the bonds are insured with a financial guaranty insurance policy written by a
company that engages exclusively in such coverage. Principal and interest on
the bonds are payable semiannually; certain payments are made by the Company on
a monthly basis. Principal payments total $12.5 million annually through 1999
and $152.6 million in 2000. The Company through its operating subsidiaries
covenants that it will maintain the properties in good repair and expend
annually (or on a five year average basis) to maintain the properties at least
$20.6 million in 1998 and increasing each year to $23.7 million in 2000 (See
Note 18 regarding the Company's plans to in-substance defease the 10.25%
guaranteed bonds).
The 11.03% mortgage notes are secured by a pool of cross-collateralized
mortgages on 240 restaurants with a net book value at December 31, 1997 of
$218.1 million. In addition, the notes are collateralized by, among other
things, a security interest in the restaurant equipment, the assignment of
intercompany lease agreements and the stock of the issuing subsidiary. Interest
on the notes is payable quarterly with the entire principal due at maturity in
2000. The notes are redeemable, in whole, at the issuer's option, upon payment
of a premium. The Company through its operating subsidiary covenants that it
will use each property as a food service facility, maintain the properties in
good repair and expend at least $5.3 million per annum and not less than $33
million, in the aggregate, in any five-year period to maintain the properties.
In connection with the acquisition by FRD of Coco's and Carrows on May 23,
1996, FRI-M (the "Borrower"), a wholly-owned subsidiary of FRD, obtained a new
credit facility (the "FRI-M Credit Facility") consisting of a $56 million,
39-month term loan (the "FRI-M Term Loan") and a $35 million working capital
facility (the "FRI-M Revolver"). Proceeds from the
F-20
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 DEBT -- Continued
FRI-M Term Loan were used to fund the Coco's and Carrows acquisition, and to
pay the transactions costs associated therewith. Proceeds from the FRI-M
Revolver are to be used for working capital requirements and other general
corporate purposes, which may include the making of intercompany loans to any
of the Borrower's wholly owned subsidiaries for their own working capital and
other general corporate purposes. Letters of credit may be issued under the
FRI-M Revolver for the purpose of supporting (i) workers' compensation
liabilities of the Borrower or any of its subsidiaries; (ii) the obligations of
third party insurers of the Borrower or any of its subsidiaries; and (iii)
certain other obligations of the Borrower and its subsidiaries. At December 31,
1997, there were no working capital borrowings outstanding; however, letters of
credit outstanding were $19.8 million. Beginning February 28, 1997, the
principal installments of the FRI-M Term Loan were payable quarterly as
follows: $4.0 million per quarter for four consecutive quarters; $5.0 million
for four consecutive quarters beginning February 28, 1998; $6.0 million on
February 28, 1999; and $7.0 million for two consecutive quarters beginning May
31, 1999. The FRI-M Credit Facility expires, and all amounts must be repaid, on
August 31, 1999. All borrowings under the FRI-M Credit Facility accrue interest
at a variable rate based on a base rate or an adjusted Eurodollar rate (8.4375%
at December 31, 1997) and are secured by the issued and outstanding stock, as
well as substantially all the assets, of FRD and its subsidiaries.
The FRI-M Credit Facility and the indenture under which the 12.5% senior
notes have been issued contain a number of restrictive covenants which, among
other things, limit (subject to certain exceptions) FRD and its subsidiaries
with respect to the incurrence of debt, existence of liens, investments and
joint ventures, the declaration or payment of dividends, the making of
guarantees and other contingent obligations, mergers, the sale of assets,
capital expenditures and material change in their business. In addition, the
FRI-M Credit Facility contains certain financial covenants including provisions
for the maintenance of a minimum level of interest coverage (as defined),
limitations on ratios of indebtedness (as defined) to earnings before interest,
taxes, depreciation and amortization (EBITDA), maintenance of a minimum level
of EBITDA, and limitations on annual capital expenditures. The cash flows from
FRD are required to be used to service the debt issued in the Coco's and
Carrows acquisition (the FRI-M Credit Facility and the 12.5% Senior Notes),
and, therefore, other than for the payment of certain management fees and tax
reimbursements payable to Advantica under certain conditions, are currently
unavailable to service the debt of Advantica and its other subsidiaries. FRD's
cash flows from operating activities, included in the Company's total cash flow
from operating activities, were $21.2 million in 1996 and $17.1 million in
1997.
FRD and its subsidiaries were in compliance with the terms of the FRI-M
Credit Facility at December 31, 1997. Under the most restrictive provision of
the FRI-M Credit Facility (ratio of indebtedness to EBITDA), at December 31,
1997, FRD could incur approximately $4.7 million of additional indebtedness.
The estimated fair value of the Company's long-term debt including
long-term debt which has been reclassified to liabilities subject to compromise
(excluding capital lease obligations) is approximately $1.5 billion at December
31, 1997. Such computations are based on market quotations for the same or
similar debt issues or the estimated borrowing rates available to the Company.
NOTE 9 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-21
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 9 LEASES AND RELATED GUARANTEES -- Continued
Information regarding the Company's leasing activities at December 31,
1997, excluding the capital lease obligations of FEI (See Note 18), is as
follows:
Capital Leases Operating Leases
--------------------- --------------------
Minimum Minimum Minimum Minimum
Lease Sublease Lease Sublease
Payments Receipts Payments Receipts
---------- ---------- ---------- ---------
(In thousands)
Year:
1998 .................................... $ 31,723 $ 3,285 $ 56,186 $ 7,124
1999 .................................... 27,283 2,722 52,564 6,658
2000 .................................... 22,362 2,214 48,150 5,901
2001 .................................... 18,345 1,771 43,371 5,132
2002 .................................... 11,118 1,404 38,180 4,431
Subsequent years .......................... 51,731 6,573 201,974 20,233
-------- ------- -------- -------
Total ................................... 162,562 $17,969 $440,425 $49,479
======= ======== =======
Less imputed interest ..................... 55,202
--------
Present value of capital lease obligations $107,360
========
Payments for certain FRD operating leases are being made by FRI in
accordance with the provisions of the Stock Purchase Agreement. As such, these
payments have been excluded from the amount of minimum lease payments and
minimum sublease receipts reported above.
The total rental expense included in the determination of operating income
for the years ended December 31, 1995, 1996 and 1997 is as follows:
Year Ended December 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(In thousands)
Base rents ............... $48,269 $59,322 $72,010
Contingent rents ......... 11,274 10,929 13,241
------- ------- -------
Total .................... $59,543 $70,251 $85,251
======= ======= =======
Total rental expense does not reflect sublease rental income of $14.4
million, $16.3 million and $15.9 million for the years ended December 31, 1995,
1996, and 1997, respectively.
F-22
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10 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:
Year Ended December 31,
-----------------------------------
1995 1996 1997
(In thousands) ----------- ------------ ----------
Current:
Federal ....................................................... $ 1,940 $ (6,074) $ --
State, Foreign and Other ...................................... 1,497 (1,287) 1,947
-------- --------- ------
3,437 (7,361) 1,947
-------- --------- ------
Deferred:
Federal ....................................................... -- (6,797) --
State, Foreign and Other ...................................... (3,451) (2,234) (178)
-------- --------- ------
(3,451) (9,031) (178)
-------- --------- ------
(Benefit from) provision for income taxes ...................... $ (14) $ (16,392) $1,769
======== ========= ======
The total provision for (benefit from) income taxes related to:
Loss before discontinued operations and extraordinary items ... $ (14) $ (16,392) $1,769
Discontinued operations ....................................... 8,731 -- --
Extraordinary items ........................................... 25 -- --
-------- --------- ------
Total provision for (benefit from) income taxes ................ $ 8,742 $ (16,392) $1,769
======== ========= ======
For the year ended December 31, 1995, the provision for income taxes
relating to discontinued operations was reduced due to the utilization of
regular tax net operating loss carryforwards of approximately $75 million. In
addition, for the year ended December 31, 1996, the Company recorded a $7.3
million deferred Federal tax benefit related to the reversal of certain
reserves established in connection with proposed deficiencies from the Internal
Revenue Service.
The following represents the approximate tax effect of each significant
type of temporary difference and carryforward giving rise to deferred income
tax liabilities or assets:
December 31,
--------------------------
1996 1997
------------ -------------
(In thousands)
Deferred tax assets:
Deferred income .................................. $ 39,953 $ 29,312
Self-insurance reserves .......................... 43,006 35,056
Capitalized leases ............................... 19,869 14,961
Amortization of intangible assets ................ 2,949 7,155
Other accruals and reserves ...................... 18,054 31,521
Alternative minimum tax credit carryforwards ..... 10,459 10,459
General business credit carryforwards ............ 19,232 50,840
Capital loss carryforwards ....................... -- 10,400
Net operating loss carryforwards ................. 32,135 85,155
Less: valuation allowance ........................ (83,828) (212,375)
--------- ----------
Total deferred tax assets ........................ 101,829 62,484
Deferred tax liabilities:
Depreciation of fixed assets ..................... 118,190 72,499
--------- ----------
Total deferred income tax liability .............. $ 16,361 $ 10,015
========= ==========
The Company has provided a valuation allowance for the portion of the
deferred tax asset for which it is more likely than not that a tax benefit will
not be realized.
F-23
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10 INCOME TAXES -- Continued
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:
Year Ended December 31,
--------------------------
1995 1996 1997
-------- -------- --------
Statutory rate .......................................................................... 35% 35% 35%
Differences:
State, foreign, and other taxes, net of federal income tax benefit ..................... -- 2 (1)
Amortization of goodwill ............................................................... -- 1 (1)
Reversal of certain reserves established in connection with proposed Internal Revenue
Service deficiencies .................................................................. -- 7 --
Non-deductible costs related to the reorganization ..................................... -- -- (4)
Non-deductible wages related to the FICA tip credit .................................... -- -- (2)
Portion of losses and income tax credits not benefited as a result of the establishment
of valuation allowance ................................................................... (35) (29) (28)
--- --- ---
Effective tax rate ..................................................................... --% 16% (1%)
==== === ===
At December 31, 1997, the Company has available, to reduce income taxes
that become payable in the future, general business credit carryforwards of
approximately $51 million, most of which expire in 2002 through 2007, and
alternative minimum tax ("AMT") credits of approximately $10 million. The AMT
credits may be carried forward indefinitely. In addition, the Company has
available regular income tax net operating loss carryforwards of approximately
$180 million which expire in 2007 through 2012 and AMT net operating loss
carryforwards of approximately $142 million which expire in 2011 and 2012. Due
to the recapitalization of the Company which occurred during 1992, the
Company's ability to utilize general business credits and AMT credits which
arose prior to the recapitalization is limited to a specified annual amount.
The annual limitation for the utilization of the tax credit carryforwards is
approximately $8 million. The net operating loss carryforward arose subsequent
to the recapitalization and was not subject to any limitation as of the end of
1997.
In connection with the purchase of FRI-M in 1996, the Company acquired
certain income tax attributes which may be used to offset FRI-M's separate
taxable income. Approximately $33 million of regular net operating loss
carryfowards and $26 million of regular and AMT capital loss carryforwards are
available to reduce the future separate taxable income of FRI-M and its
subsidiaries. Due to FRI-M's ownership changes in January 1994 and again in May
1996, FRI-M's ability to utilize these loss carryforwards, which arose prior to
the ownership changes, is limited.
The annual limitation for the utilization of approximately $22 million of
FRI-M's net operating loss carryforwards which were generated after January
1994 is approximately $4 million. The remaining $11 million of FRI-M's net
operating loss carryforwards which were generated prior to January 1994 can
only be utilized to offset any pre-January 1994 built-in-gains which are
recognized in certain future periods. These net operating loss carryforwards
expire principally in 2006 through 2010. FRI-M's remaining capital loss
carryforward of $26 million can only be utilized to offset capital gains
generated by FRI-M or its subsidiaries. FRI-M's capital loss carryforwards are
also subject to the same $4 million annual limitation as the net operating
losses generated after January 1994. In 1997, FRI-M recognized approximately $4
million of capital gains which were utilized to offset some of the capital loss
carryover. The remaining capital loss carryforward of approximately $26 million
will expire in 2000.
The Company's reorganization, which became effective January 7, 1998, will
impact the Company's ability to utilize certain net operating loss, general
business credit and AMT credit carryforwards. See Note 1 which discusses the
reorganization including the impact on the Company's carryover tax benefits and
its tax basis in its assets.
F-24
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 EMPLOYEE BENEFIT PLANS
The Company maintains several defined benefit plans 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.
Total net pension cost of defined benefit plans for the years ended
December 31, 1995, 1996, and 1997 amounted to $5.6 million, $3.5 million, and
$4.9 million, respectively, of which $3.3 million is related to funded defined
benefit plans for each year, and $2.3 million, $0.2 million and $1.6 million is
related to nonqualified unfunded supplemental defined benefit plans for
executives.
The components of net pension cost of the funded and unfunded defined
benefit plans for the years ended December 31, 1995, 1996, and 1997 determined
under SFAS No. 87 follow:
Year Ended December 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
(In thousands)
Service cost ........................................................................ $ 2,829 $ 3,151 $ 3,354
Interest cost on projected benefit obligations ...................................... 2,651 2,895 2,926
Actual return on plan assets ........................................................ (3,722) (2,277) (5,374)
Net amortization and deferral ....................................................... 2,074 (242) 2,636
Curtailment/settlement losses (due to early retirement of certain participants) ..... 1,762 -- 1,342
-------- -------- --------
Net pension cost .................................................................... $ 5,594 $ 3,527 $ 4,884
======== ======== ========
The following table sets forth the funded status and amounts recognized in
the Company's balance sheet for its funded defined benefit plans:
December 31,
-------------------------
1996 1997
------------ ------------
(In thousands)
Actuarial present value of accumulated benefit obligations:
Vested benefits ...................................................... $ 27,661 $ 34,736
Non-vested benefits .................................................. 1,488 2,685
--------- ---------
Accumulated benefit obligations ....................................... $ 29,149 $ 37,421
========= =========
Plan assets at fair value ............................................. $ 31,109 $ 37,342
Projected benefit obligation .......................................... (36,416) (46,800)
--------- ---------
Funded status ......................................................... (5,307) (9,458)
Unrecognized net loss from past experience different from that assumed 6,890 10,774
Additional liability .................................................. -- (1,395)
--------- ---------
Prepaid (accrued) pension costs ....................................... $ 1,583 $ (79)
========= =========
Assets held by the Company's plans are invested in money market and other
fixed income funds as well as equity funds.
F-25
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 EMPLOYEE BENEFIT PLANS -- Continued
The following sets forth the funded status and amounts recognized in the
Company's balance sheet for its unfunded defined benefit plans:
December 31,
-------------------------
1996 1997
------------- -----------
(In thousands)
Actuarial present value of accumulated benefit obligations:
Vested benefits ............................................................ $ 4,924 $ 134
Non-vested benefits ........................................................ 33 168
------- -----
Accumulated benefit obligations .............................................. $ 4,957 $ 302
======= =====
Plan assets at fair value .................................................... $ -- $ --
Projected benefit obligation ................................................. (5,051) (401)
------- -----
Funded status ................................................................ (5,051) (401)
Unrecognized net loss (gain) from past experience different from that assumed 616 (49)
Unrecognized prior service cost .............................................. 68 27
Unrecognized net asset at January 1, 1987 being amortized over 15 years ...... (9) (1)
Additional liability ......................................................... (974) --
--------- -------
Accrued pension costs ........................................................ $(5,350) $(424)
========= =======
Significant assumptions used in determining net pension cost and funded
status information for all the periods shown above are as follows:
1995 1996 1997
--------- --------- ---------
Discount rate ................................ 8.0% 8.0% 7.0%
Rates of salary progression .................. 4.0% 4.0% 4.0%
Long-term rates of return on assets .......... 10.0% 10.0% 10.0%
In addition, the Company has defined contribution plans whereby eligible
employees can elect to contribute from 1%-15% of their compensation to the
plans. Under these plans the Company makes matching contributions, with certain
limitations. Amounts charged to income under these plans were $3.9 million and
$2.4 million for the years ended December 31, 1995 and 1997, respectively. The
Company made no matching contributions for the year ended December 31, 1996.
Incentive compensation plans provide for awards to management employees
based on meeting or exceeding certain levels of income as defined by such
plans. The amounts charged to income under the plans for the years ended
December 31, 1995, 1996, and 1997 were as follows: $0.6 million, $1.9 million,
and $3.8 million, respectively. In addition to these incentive compensation
plans, certain operations have incentive plans in place under which regional,
divisional and local management participate.
At December 31, 1997, 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.
The 1989 Stock Option Plan (the "1989 Plan") permits a Committee of the
Board of Directors to grant options to key employees of the Company and its
subsidiaries to purchase shares of Old Common Stock of the Company at a stated
price established by the Committee. Such options are exercisable at such time
or times either in whole or part, as determined by the Committee. The 1989 Plan
authorizes grants of up to 6.5 million common shares. The exercise price of
each option equals or exceeds the market price of the Company's stock on the
date of grant. Options granted to officer level employees vest at a rate of 20%
per annum beginning on the first anniversary date of the grant. Options granted
to non-officer level
F-26
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 EMPLOYEE BENEFIT PLANS -- Continued
employees prior to August 13, 1996 vest at a rate of 25% per annum. Those
granted on August 13, 1996 or subsequent thereto, vest at a rate of 20% per
annum. If not exercised, all options expire ten years from the date of grant.
During January 1995, the Company issued 65,306 shares of Old Common Stock
(Note 13) and granted an option under the 1989 Stock Option Plan to purchase
800,000 shares of the Company's Old Common Stock to an executive officer, at
market value at date of grant, for a ten year period. Such grant becomes
exercisable at a rate of 20% per year beginning on January 9, 1996 and each
anniversary thereafter.
On June 21, 1995, generally all of the outstanding options held by the
then current employees of the Company under the 1989 Plan were repriced to
$6.00 per share, the market value of the Old Common Stock on that date. All
officer level employees were given the choice of either retaining their current
options at their existing exercise prices and vesting schedule or surrendering
their existing options in exchange for an option to purchase the same number of
shares exercisable at a rate of 20% per annum beginning on the first
anniversary date of the new grant. All non-officer employees received the new
exercise price of $6.00 per share and retained their original vesting schedules
for all of their outstanding options previously granted.
On December 13, 1996, the outstanding options of certain officers and
senior staff, representing approximately 2.2 million outstanding options, were
repriced to $1.25 per share, the closing price of the Old Common Stock on
December 12, 1996. The repricing did not impact the option vesting schedules.
In 1990, the Board of Directors adopted a 1990 Non-qualified Stock Option
Plan (the "1990 Plan") for its directors who do not participate in management
and were not affiliated with Gollust Tierney & Oliver, Incorporated, a former
shareholder of the Company. Such plan authorizes the issuance of up to 110,000
shares of Old Common Stock. The plan is substantially similar in all respects
to the 1989 Plan described above. At both December 31, 1996 and 1997, options
outstanding under the 1990 Option Plan totaled 10,000 shares.
During January 1997, the Company issued 291,000 options relative to the
1989 Plan. Options forfeited during the year totaled approximately 1,070,000.
No options were exercised during the year. On the Effective Date of the
Company's emergence from bankruptcy, pursuant to the Plan, FCI's Old Common
Stock was canceled, extinguished and retired. As a result, all stock options
outstanding as of that date, including those under both the 1989 Plan and the
1990 Plan, were effectively canceled. Due to the insignificant quantity of
options issued during 1997 and the fact that all options were issued at an
exercise price which exceeded the market price of the Old Common Stock upon
issuance and through January 7, 1998, the date upon which all outstanding
options were effectively canceled, the effect on the accompanying Statement of
Consolidated Operations for the year ended December 31, 1997 of the
compensation expense calculated under SFAS 123 related to such issuance is not
material and accordingly, is not included in the pro forma information
presented below.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted or repriced during 1995 and 1996 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 grants in 1995 and
1996, respectively: dividend yield of 0.0% for both years; expected volatility
of 0.438 for both years; risk-free interest rates of 5.6% and 5.7% and a
weighted average expected life of the options of 8.3 years and 8.9 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Year Ended December 31,
------------------------------------------
1995 1996 1997
(in thousands) ------------- ------------- --------------
Pro forma net loss ......... $ (57,719) $ (87,124) $ (136,559)
Pro forma loss per share:
Basic and diluted ......... (1.68) (2.39) (3.55)
F-27
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 EMPLOYEE BENEFIT PLANS -- Continued
Due to the fact that the pro forma amounts above include only the impact
of the application of fair value accounting to options issued in 1995 and 1996
as prescribed by Statement 123, they are not, and will not be, indicative of
future pro forma amounts.
A summary of the Company's stock option plans as of December 31, 1996 and
the changes during the year ended December 31, 1996 is presented below. This
summary and the following summary of information about stock options
outstanding are not updated for 1997 activity as discussed above, based on the
insignificance of such activity and the cancellation of all stock option plans
relative to the Old Common Stock effective January 7, 1998.
1996
-----------------------------
Options Weighted-Average
(000) Exercise Price
----------- -----------------
Outstanding at beginning of year ....................... 4,338 $ 8.02
Granted
Exercise price equals fair value at grant date ....... 687 2.75
Exercise price exceeds fair value at grant date ...... 3,167 2.68
Exercised .............................................. -- --
Forfeited/Expired ...................................... (3,873) 6.05
------ -------
Outstanding at end of year ............................. 4,319 $ 5.04
====== =======
Exercisable at year-end ................................ 1,154 $ 9.84
====== =======
The following table summarizes information about stock options outstanding
at December 31, 1996:
Number Weighted-Average Number
Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Range of Exercise Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
- -------------------------- ---------------- ------------------ ------------------ ---------------- -----------------
$ 1.25-$ 1.25 2,210,895 9.06 $ 1.25 191,358 $ 1.25
$ 2.75-$ 2.75 126,700 9.62 2.75 -- --
$ 6.00-$ 6.13 1,381,280 7.71 6.07 482,475 6.04
$ 15.00-$17.50 600,000 1.88 17.08 480,000 17.08
--------- ---- -------- ------- --------
4,318,875 7.64 $ 5.04 1,153,833 $ 9.84
========= ==== ======== ========= ========
The weighted average fair value per option of options granted during the
years ended December 31, 1995 and 1996 are as follows:
1995 1996
---------- ----------
Exercise price equals fair value at grant date ........... $ 3.06 $ 1.65
Exercise price exceeds fair value at grant date .......... 2.97 .78
Pursuant to the Plan, and shortly after its effective date, the Company
adopted The Advantica Restaurant Group Stock Option Plan (the "Non-Officer
Plan") and The Advantica Restaurant Group Officer Stock Option Plan (the
"Officer Plan" and, together with the Non-Officer Plan, the "New Stock Option
Plans"). The New Stock Option Plans are designed to facilitate awarding stock
options as incentives to employees and consultants of Advantica.
The New Stock Option Plans shall be administered by the Compensation and
Incentives Committee of the Advantica Board, who shall have sole discretion to
determine the exercise price, term and vesting schedule of options awarded
under such plans. A total of 4,888,888 shares of Advantica Common Stock are
authorized to be issued under these plans.
Under the terms of the plans, optionees who terminate for any reason other
than cause or death will be allowed 60 days after the termination date to
exercise "vested" options. "Vested" options are exercisable for one year when
termination is by a reason other than voluntary termination or for cause. If
termination is for cause, no option shall be exercisable after the termination
date.
F-28
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 EMPLOYEE BENEFIT PLANS -- Continued
In addition to the New Stock Option Plans, the Company has adopted The
Advantica Restaurant Group Director Stock Option Plan (the "Director Plan"),
the terms of which are substantially similar to the terms of the New Stock
Option Plans. A total of 200,000 shares of Advantica Common Stock are
authorized to be issued under the Director Plan. Both the Director Plan and the
Officer Plan are contingent upon receiving shareholder approval at Advantica's
1998 annual shareholders' meeting.
NOTE 12 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 31, 1997, over and
above any insurance coverage in respect to certain of them, are not
specifically determinable at this time.
In 1994, Flagstar was advised of proposed deficiencies from the Internal
Revenue Service for federal income taxes totaling approximately $12.7 million.
The proposed deficiencies relate to examinations of certain income tax returns
filed by FCI and Flagstar for the seven taxable periods ended December 31,
1992. In the third quarter of 1996, this proposed deficiency was reduced by
approximately $7.0 million as a direct result of the passage of the Small
Business Jobs Protection Act ("the Act") in August 1996. The Act included a
provision that clarified Internal Revenue Code Section 162(k) to allow for the
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. As the Company believes the remaining proposed
deficiencies are substantially incorrect, it intends to continue to contest
such proposed deficiencies.
It is the opinion of Management (including General Counsel), after
considering a number of factors, including but not limited to the current
status of the litigation (including any settlement discussions), the views of
retained counsel, the nature of the litigation or proposed tax deficiencies,
the prior experience of the consolidated companies, and the amounts which the
Company has accrued for known contingencies, that the ultimate disposition of
these matters will not materially affect the consolidated financial position or
results of operations of the Company.
The Company's Hardee's restaurants are operated under licenses from
Hardee's Food Systems, Inc. ("HFS"). The Company does not believe HFS has
satisfied its contractual obligations to support the Hardee's franchise and on
March 19, 1997, the Company notified HFS, pursuant to its various license
agreements, that its subsidiary was seeking to arbitrate certain claims of the
subsidiary against HFS. In its demand for arbitration, the Company's subsidiary
makes a number of claims, including, (i) breach by HFS of its license
agreements with the Company's subsidiary, (ii) breach of fiduciary duty and
negligence by HFS in mishandling and misapplying funds of the Company's
subsidiary held for advertising, and (iii) unfair trade practices. Such
arbitration proceeding has been suspended by the parties as a result of the
definitive agreement for the sale of Flagstar Enterprises, Inc. ("FEI"), the
wholly-owned subsidiary which operates the Company's Hardee's restaurants, to
HFS' parent company. If such proposed sale were not consummated and the
arbitration proceeding were to resume, no assurance can be given as to the
outcome of such proceeding or its impact on the Company's continuing Hardee's
operations. If the proposed sale is consummated, all claims made by the Company
against HFS would be released. See Note 18 regarding potential disposition of
the Company's Hardee's restaurants.
On February 22, 1996, the Company entered into an agreement with IBM
Global Services ("IBM") (formerly Integrated Systems Solutions Corporation).
The ten-year agreement (as amended) for $358.1 million, which requires annual
payments ranging from $24.0 million to $51.2 million, provides for IBM to
manage and operate the Company's information systems, as well as develop and
implement new systems and applications to enhance information technology for
the Company's corporate headquarters, restaurants and field management. Under
the agreement, IBM has full oversight responsibilities for the data center
operations, applications development and maintenance, voice and data
networking, help desk operations, and point-of-sale technology. The disposition
of FEI will reduce the future commitment under the agreement with IBM. The
Company is currently working with IBM to quantify this impact. Additionally,
the Company expects to spend approximately $20 million in both 1998 and 1999,
which is not included in this agreement, to develop or purchase new software.
F-29
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 COMMITMENTS AND CONTINGENCIES -- Continued
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 31, 1997 relative to Portion-Trol Foods, Inc.
and Mother Butler Pies, respectively, are approximately $360 million and $43
million.
NOTE 13 SHAREHOLDERS' EQUITY (DEFICIT)
Total Shareholders'
Other Equity Deficit Equity (Deficit)
-------------- ---------------- -----------------
(In thousands)
Balance December 31, 1994 ........................ $745,400 $ (1,807,900) $ (1,062,500)
Activity:
Net loss ...................................... -- (55,199) (55,199)
Dividends declared on Old Preferred Stock ..... -- (14,175) (14,175)
Issuance of Common Stock (Note 11) ............ 400 -- 400
Minimum pension liability adjustment .......... 497 -- 497
-------- ------------ ------------
Balance December 31, 1995 ........................ 746,297 (1,877,274) (1,130,977)
Activity:
Net loss ...................................... -- (85,460) (85,460)
Dividends declared on Old Preferred Stock ..... -- (10,631) (10,631)
Minimum pension liability adjustment .......... (459) -- (459)
-------- ------------ ------------
Balance December 31, 1996 ........................ 745,838 (1,973,365) (1,227,527)
Activity:
Net loss ...................................... -- (134,450) (134,450)
Minimum pension liability adjustment .......... (473) -- (473)
-------- ------------ ------------
Balance December 31, 1997 ........................ $745,365 $ (2,107,815) $ (1,362,450)
======== ============ ============
Each share of the $2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock (the "Old Preferred Stock") is convertible at the option of the
holder, unless previously redeemed, into 1.359 shares of Old Common Stock. The
Old Preferred Stock may be exchanged at the option of the Company, in up to two
parts, at any dividend payment date for the Company's 9% Convertible
Subordinated Debentures ("Exchange Debentures") due July 15, 2017 in a
principal amount equal to $25.00 per share of $2.25 Old Preferred Stock. Each
$25.00 principal amount of Exchange Debenture, if issued, would be convertible
at the option of the holder into 1.359 shares of Old Common Stock of the
Company.
The Old Preferred Stock may be redeemed at the option of the Company, in
whole or in part, on or after July 15, 1994 at $26.80 per share if redeemed
during the twelve month-period beginning July 15, 1994, and thereafter at
prices declining annually to $25.00 per share on or after July 15, 2002.
The Company did not make the fourth quarter 1996 or the first, second,
third and fourth quarter 1997 dividend payments on its Old Preferred Stock.
Such cumulative dividends that have not been declared or paid total $17.7
million, or $.42 per share, at December 31, 1997.
At December 31, 1997, there are warrants outstanding which entitle the
holder, an affiliate of Kohlberg, Kravis, Roberts & Co. ("KKR"), a shareholder
of the Company at December 31, 1997, to purchase 15 million shares of Old
Common Stock at $17.50 per share, subject to adjustment for certain events.
Such warrants may be exercised through November 16, 2000.
As discussed in Note 1, pursuant to the Plan, Flagstar's 10% Convertible
Debentures, FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred
Stock and FCI's $.50 par value common stock were canceled, extinguished and
retired as of the Effective Date. In addition, the warrants related to such Old
Common Stock were also canceled.
F-30
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 SHAREHOLDERS' EQUITY (DEFICIT) -- Continued
Pursuant to the Plan and as of the Effective Date, the Company is deemed
to have issued warrants to purchase in the aggregate, 4 million shares of
Common Stock. Each warrant, when exercised, will entitle the holder thereof to
purchase one share of Common Stock at an exercise price of $14.60 per share,
subject to adjustment for certain events. Such warrants may be exercised
through January 7, 2005.
Also pursuant to the Plan, 10% of the number of shares of Common Stock
issued and outstanding on the Effective Date, on a fully diluted basis, is
reserved for issuance under a new management stock option program (See Note
11).
NOTE 14 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
The following table sets forth the computation of basic and diluted loss per
share:
1995 1996 1997
-------------- ------------- --------------
Numerator:
Loss from continuing operations $ (132,906) $ (85,460) $ (134,450)
Preferred stock dividends (14,175) (14,175) (14,175)
---------- --------- ----------
Numerator for basic and diluted loss per share--
loss from continuing operations available to
common shareholders $ (147,081) $ (99,635) $ (148,625)
========== ========= ==========
Denomininator:
Denominator for basic and diluted loss per share --
weighted-average shares 42,431 42,434 42,434
========== ========= ==========
Basic and diluted loss per share from continuing
operations $ (3.47) $ (2.35) $ (3.50)
========== ========= ==========
The calculations of basic and diluted loss per share have been based on the
weighted average number of Company shares outstanding. The warrants, options,
$2.25 Preferred Stock and 10% Convertible Debentures have been omitted from the
calculations because they have an antidilutive effect on loss per share. For
additional disclosures regarding the warrants, options, $2.25 Preferred Stock
and 10% Convertible Debentures, see Notes 1, 8, 11 and 13.
NOTE 15 EXTRAORDINARY ITEMS
The Company recorded losses from extraordinary items as follows:
Year Ended December 31, 1995
-------------------------------------
Income
Tax
Gain Provision Gain (Loss),
(Loss) (Benefits) Net of Taxes
---------- ------------ -------------
(In thousands)
Repurchase of Senior Indebtedness:
Gain on repurchase of senior indebtedness .................................... $1,461 $ 74 $1,387
Write-off of deferred financing costs on repurchase of senior indebtedness ... (970) (49) (921)
------ ----- ------
Total ........................................................................ $ 491 $ 25 $ 466
====== ===== ======
During the third quarter of 1995, the Company recognized an extraordinary
gain totaling $0.5 million, net of income taxes, which represents the
repurchase of $25.0 million principal amount of certain senior indebtedness,
net of the charge-off of the related unamortized deferred financing costs of
$0.9 million.
NOTE 16 RELATED PARTY TRANSACTIONS
The Company recorded charges against income of approximately $1.3 million
for the years ended December 31, 1995, 1996, and 1997 relative to KKR's
financial advisory fees.
F-31
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 16 RELATED PARTY TRANSACTIONS -- Continued
During January 1997, the Company settled its employment and benefits
arrangements with, and loan receivable from, a former officer previously
scheduled to mature in November 1997. The Company received net proceeds of $8.2
million and recorded a net charge of approximately $3.5 million which is
included in other non-operating expenses in the 1996 Statement of Consolidated
Operations.
Interest income for the loan receivable from the former officer for the
years ended December 31, 1995 and 1996 totaled $886,000 and $935,000,
respectively.
NOTE 17 DISCONTINUED OPERATIONS
During December 1995, the Company sold TW Recreational Services, Inc., a
concession and recreation services subsidiary, for $98.7 million and Volume
Services, Inc., a stadium concession services subsidiary for $75.8 million, and
recognized gains totaling $77.9 million, net of income taxes.
The financial statements and related notes presented herein classify TW
Recreational Services, Inc. and Volume Services, Inc. as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30.
Revenue and operating income of the discontinued operations for the year ended
December 31, 1995 were $32.6 million and $17.1 million, respectively.
NOTE 18 SUBSEQUENT EVENT
On February 18, 1998 Advantica entered into a definitive agreement with
CKE Restaurants, Inc. ("CKE") for the sale of stock of Flagstar Enterprises,
Inc. ("FEI"), a wholly-owned subsidiary which operates the Company's Hardee's
restaurants under licenses from Hardee's Food Systems, Inc. ("HFS"), a
wholly-owned subsidiary of CKE. As contemplated by such agreement, the Company
would receive $380.8 million in cash (subject to certain adjustments) in
exchange for all of the outstanding stock of FEI. In addition, CKE would assume
$45.6 million of capital leases. The transaction is expected to be completed on
or about April 1, 1998. Approximately $180 million of the proceeds of such
transaction, if consummated, (together with $20.7 million previously on deposit
with respect to certain Mortgage Financings defined herein) will be applied to
effect an in-substance defeasance of the Company's 10.25% guaranteed bonds (the
"Mortgage Financings") of FEI and Quincy's Restaurants, Inc. with a book value
of $177.6 million (and a pro forma fair value of $198.9 million) at December
31, 1997, plus accrued interest of $2.3 million. Such Mortgage Financings are
collateralized by certain assets of FEI and its wholly-owned subsidiary
Spardee's Realty, Inc. and certain assets of Quincy's Restaurants, Inc. and its
wholly-owned subsidiary Quincy's Realty, Inc. The Company intends to replace
such collateral by purchasing Defeasance Eligible Investments (as defined in
documents governing such Mortgage Financings) which will be deposited in an
irrevocable trust to satisfy principal and interest payments under such
Mortgage Financings through the stated maturity date in the year 2000. The
proposed transaction would require consents of the lenders under the Credit
Facility, and the Company is currently negotiating the terms of an amendment
which would include such consent. The net assets of FEI are included in net
assets held for sale in the accompanying Consolidated Balance Sheet at December
31, 1997, and consist of the following:
F-32
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 18 SUBSEQUENT EVENT -- Continued
Assets
Current assets ............................................... $ 8,715
Property owned, net .......................................... 290,621
Property held under capital leases, net ...................... 32,619
Other assets ................................................. 13,338
--------
345,293
--------
Less liabilities
Current liabilities
Current portion of obligations under capital lease ......... 3,874
Other current liabilities .................................. 28,368
--------
32,242
--------
Long-term liabilities
Obligations under capital lease, non current ............... 41,339
Other long term liabilities ................................ 29,233
--------
70,572
--------
Total liabilities ............................................ 102,814
--------
Net assets held for sale ..................................... $242,479
========
F-33
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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. During the fourth quarter of 1997 the Company recorded a $5.8
million reduction in operating expenses resulting from various non-recurring
items consisting primarily of an insurance recovery. The consolidated financial
results on an interim basis are not necessarily indicative of future financial
results on either an interim or an annual basis.
Selected consolidated financial data for each quarter within 1996 and 1997
are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
(In thousands)
Year Ended December 31, 1996:
Operating revenue ..................................................... $ 550,425 $ 626,570 $ 703,838 $ 661,469
Operating expenses:
Product costs ....................................................... 160,752 185,499 207,390 193,039
Payroll and benefits ................................................ 213,807 234,948 258,000 236,409
Depreciation and amortization expense ............................... 29,047 30,006 33,555 37,340
Utilities expense ................................................... 22,754 24,329 30,698 26,696
Other ............................................................... 96,579 108,428 125,868 130,766
--------- --------- --------- ---------
Operating income ...................................................... $ 27,486 $ 43,360 $ 48,327 $ 37,219
========= ========= ========= =========
Loss before extraordinary item ........................................ $ (27,310) $ (17,435) $ (12,519) $ (28,196)
========= ========= ========= =========
Net loss applicable to common shareholders ............................ $ (30,854) $ (20,979) $ (16,062) $ (31,740)
========= ========= ========= =========
Basic and diluted loss per share applicable to common shareholders:
Net loss ............................................................ $ (0.73) $ (0.49) $ (0.38) $ (0.75)
========= ========= ========= =========
Year Ended December 31, 1997:
Operating revenue ................................................... $ 675,775 $ 659,428 $ 654,153 $ 620,100
Operating expenses:
Product costs ...................................................... 197,692 192,261 191,026 179,995
Payroll and benefits ............................................... 256,787 243,446 235,826 240,130
Depreciation and amortization expense .............................. 34,682 33,546 38,672 33,928
Utilities expense .................................................. 27,480 26,508 28,968 27,182
Other .............................................................. 136,107 117,505 115,394 96,279
Provision for restructuring charges ................................ -- -- -- 10,540
Charge for impaired assets ......................................... -- -- -- 15,074
--------- --------- --------- ---------
Operating income ...................................................... $ 23,027 $ 46,162 $ 44,267 $ 16,972
========= ========= ========= =========
Loss before extraordinary item ........................................ $ (51,728) $ (32,271) $ (17,759) $ (32,692)
========= ========= ========= =========
Net loss applicable to common shareholders ............................ $ (55,272) $ (35,815) $ (21,302) $ (36,236)
========= ========= ========= =========
Basic and diluted loss per share applicable to common shareholders:
Net loss ............................................................ $ (1.30) $ (0.84) $ (0.50) $ (0.86)
========= ========= ========= =========
F-34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ADVANTICA RESTAURANT GROUP, INC.
By: /s/ RHONDA J. PARISH
-------------------------------------
Rhonda J. Parish
(Executive Vice President, General
Counsel and Secretary)
Date: March 31, 1998
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.
Signature Title Date
- --------------------------------------- --------------------------------------- ---------------
/s/ JAMES B. ADAMSON
Director, Chairman, President and March 31, 1998
------------------------------------
(James B. Adamson) Chief Executive Officer (Principal
Executive Officer)
/s/ RONALD B. HUTCHISON Executive Vice President and Chief March 31, 1998
------------------------------------
(Ronald B. Hutchison) Financial Officer (Principal Financial
and Accounting Officer)
/s/ ROBERT H. ALLEN Director March 31, 1998
------------------------------------
(Robert H. Allen)
/s/ RONALD E. BLAYLOCK Director March 31, 1998
------------------------------------
(Ronald E. Blaylock)
/s/ VERA KING FARRIS Director March 31, 1998
------------------------------------
(Vera King Farris)
/s/ JAMES J. GAFFNEY
------------------------------------ Director March 31, 1998
(James J. Gaffney)
/s/ IRWIN N. GOLD Director March 31, 1998
------------------------------------
(Irwin N. Gold)
/s/ ROBERT E. MARKS Director March 31, 1998
------------------------------------
(Robert E. Marks)
/s/ CHARLES F. MORAN Director March 31, 1998
------------------------------------
(Charles F. Moran)
/s/ ELIZABETH A. SANDERS Director March 31, 1998
------------------------------------
(Elizabeth A. Sanders)
/s/ DONALD R. SHEPHERD Director March 31, 1998
------------------------------------
(Donald R. Shepherd)