UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 29, 2000 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to __________ Commission file number 0-18051 ADVANTICA RESTAURANT GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3487402 - -------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 203 East Main Street Spartanburg, South Carolina 29319-9966 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (864) 597-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of May 12, 2000, 40,078,543 shares of the registrant's Common Stock, par value $.01 per share, were outstanding. 1
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Advantica Restaurant Group, Inc Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended March 29, 2000 March 31, 1999 -------------- -------------- <S> <C> <C> (In thousands, except per share amounts) Revenue: Company restaurant sales $ 360,280 $ 369,038 Franchise and licensing revenue 18,094 15,240 --------- --------- Total operating revenue 378,374 384,278 --------- --------- Cost of company restaurant sales: Product costs 94,830 99,253 Payroll and benefits 146,183 148,653 Occupancy 22,152 21,267 Other operating expenses 50,061 51,479 --------- --------- Total costs of company restaurant sales 313,226 320,652 Franchise restaurant costs 8,065 7,465 General and administrative expenses 23,956 25,632 Amortization of reorganization value in excess of amounts allocable to identifiable assets 15,491 31,917 Depreciation and other amortization 34,015 32,597 Restructuring and impairment charges 7,248 -- Gains on refranchising and other, net (4,678) (3,174) --------- --------- Total operating costs and expenses 397,323 415,089 --------- --------- Operating loss (18,949) (30,811) --------- --------- Other expenses: Interest expense, net 27,823 26,402 Other nonoperating (income) expenses, net (739) 1,155 --------- --------- Total other expenses, net 27,084 27,557 --------- --------- Loss before taxes (46,033) (58,368) Provision for (benefit from) income taxes 442 (340) --------- --------- Loss from continuing operations (46,475) (58,028) Discontinued operations: Loss from operations of discontinued operations, net of applicable income tax benefit of: 1999 -- $0 -- (3,652) --------- --------- Net loss applicable to common shareholders $ (46,475) $ (61,680) ========= ========= </TABLE> See accompanying notes 2
Advantica Restaurant Group, Inc Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended March 29,2000 March 31, 1999 ------------- -------------- <S> <C> <C> (In thousands, except per share amounts) Per share amounts applicable to common shareholders: Basic earnings per share: Loss from continuing operations $ (1.16) $ (1.45) Loss from discontinued operations, net -- (0.09) ---------- ---------- Net loss $ (1.16) $ (1.54) ========== ========== Average outstanding shares 40,063 40,020 ========== ========== Diluted earnings per share: Loss from continuing operations $ (1.16) $ (1.45) Loss from discontinued operations, net -- (0.09) ---------- ---------- Net loss $ (1.16) $ (1.54) ========== ========== Average outstanding shares and equivalent common shares, 40,063 40,020 unless antidilutive ========== ========== </TABLE> See accompanying notes 3
Advantica Restaurant Group, Inc. Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> March 29, 2000 December 29, 1999 -------------- ----------------- <S> <C> <C> (In thousands) Assets Current Assets: Cash and cash equivalents $ 68,973 $ 174,226 Investments 2,705 17,084 Receivables, less allowance for doubtful accounts of: 2000 --$3,335; 1999 -- $3,601 22,035 21,711 Inventories 14,635 14,948 Other 12,840 12,647 Restricted investments securing in-substance defeased debt 158,710 158,710 ----------- ----------- 279,898 399,326 ----------- ----------- Property 838,878 832,207 Less accumulated depreciation 235,263 209,602 ----------- ----------- 603,615 622,605 ----------- ----------- Other Assets: Reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization of: 2000 -- $253,842; 1999 -- $238,566 167,233 182,722 Goodwill, net of accumulated amortization of: 2000 -- $1,283; 1999 -- $1,075 19,655 16,758 Other intangible assets, net of accumulated amortization of: 2000 -- $15,819; 1999 -- $20,641 165,757 170,919 Deferred financing costs, net 17,861 19,946 Other 51,849 55,823 ----------- ----------- Total Assets $ 1,305,868 $ 1,468,099 =========== =========== Liabilities Current Liabilities: Current maturities of notes and debentures 107,504 $ 164,811 Current maturities of capital lease obligations 15,165 15,384 Current maturities of in-substance defeased debt 156,826 158,731 Accounts payable 70,004 93,368 Accrued salaries and vacations 40,254 40,524 Accrued insurance 22,949 23,412 Accrued taxes 17,082 19,307 Accrued interest 25,059 43,465 Other 69,494 74,408 ----------- ----------- 524,337 633,410 ----------- ----------- Long-Term Liabilities: Notes and debentures, less current maturities 751,975 753,047 Capital lease obligations, less current maturities 66,568 69,481 Deferred income taxes -- -- Liability for insurance claims 35,227 34,525 Other noncurrent liabilities and deferred credits 119,990 123,476 ----------- ----------- 973,760 980,529 ----------- ----------- Total Liabilities 1,498,097 1,613,939 ----------- ----------- Shareholders' Deficit (192,229) (145,840) ----------- ----------- Total Liabilities and Shareholders' Deficit $ 1,305,868 $ 1,468,099 =========== =========== </TABLE> See accompanying notes 4
Advantica Restaurant Group, Inc. Statements of Consolidated Cash Flows (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended March 29, 2000 March 31, 1999 -------------- -------------- <S> <C> <C> (In thousands) Cash Flows from Operating Activities: Net (loss) income $(46,475) $(61,680) Adjustments to reconcile net loss to cash flows from operating activities: Amortization of reorganization value in excess of amounts allocable to identifiable assets 15,491 31,917 Depreciation and other amortization 34,015 32,597 Restructuring and impairment charges 7,248 -- Amortization of deferred gains (3,364) (2,637) Amortization of deferred financing costs 1,834 1,876 Deferred income tax benefit -- (750) Gains on refranchising and other, net (4,678) (3,174) Equity in (income) loss from discontinued operations, net -- 3,652 Amortization of debt premium (3,765) (3,662) Other (173) (48) Changes in Assets and Liabilities Net of Effects of Acquisition and Dispositions: Decrease (increase) in assets: Receivables 1,990 (438) Inventories 197 308 Other current assets (1,300) (534) Other assets (676) (837) Increase (decrease) in liabilities: Accounts payable (1,098) (5,039) Accrued salaries and vacations (270) (6,907) Accrued taxes (2,246) (2,103) Other accrued liabilities (26,215) (21,898) Other noncurrent liabilities and deferred credits (1,058) 139 -------- -------- Net cash flows (used in) from operating activities (30,543) (39,218) -------- -------- Cash Flows from Investing Activities: Purchase of property (10,336) (11,309) Acquisition of restaurant units (3,422) (10,853) Proceeds from disposition of property 4,098 3,016 (Advances to) receipts from discontinued operations, net -- (1,339) Purchase of investments -- (22,933) Proceeds from sale and maturity of investments 14,379 26,628 -------- -------- Net cash flows (used in) provided by investing activities 4,719 (16,790) -------- -------- </TABLE> See accompanying notes 5
Advantica Restaurant Group, Inc. Statements of Consolidated Cash Flows (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended March 29, 2000 March 31, 1999 -------------- -------------- <S> <C> <C> (In thousands) Cash Flows from Financing Activities: Net borrowings under credit agreements $ 5,000 $ 7,200 Long-term debt payments (64,527) (26,117) Debt transaction costs (506) (350) Bank overdrafts (19,396) 1,116 --------- --------- Net cash flows used in financing activities (79,429) (18,151) --------- --------- Increase (decrease) in cash and cash equivalents (105,253) (74,159) Cash and Cash Equivalents at: Beginning of period 174,226 164,024 --------- --------- End of period $ 68,973 $ 89,865 ========= ========= </TABLE> See accompanying notes 6
ADVANTICA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 2000 (UNAUDITED) Note 1. General Advantica Restaurant Group, Inc. ("Advantica" or, together with its subsidiaries including predecessors, the "Company"), through its wholly owned subsidiaries, Denny's Holdings, Inc. and FRD Acquisition Co. ("FRD") (and their respective subsidiaries), owns and operates the Denny's, Coco's and Carrows restaurant brands. On December 29, 1999, the Company consummated the sale of its wholly owned subsidiary, El Pollo Loco, Inc. ("EPL"). The Statements of Consolidated Operations and Cash Flows presented herein have been reclassified for the quarter ended March 31, 1999 to reflect EPL as discontinued operations in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). The consolidated financial statements of Advantica and its subsidiaries included herein are unaudited and include all adjustments management believes are necessary for a fair presentation of the results of operations for such interim periods. All such adjustments are of a normal and recurring nature. The interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto for the year ended December 29, 1999 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Advantica Restaurant Group, Inc. 1999 Annual Report on Form 10-K. The results of operations for the quarter ended March 29, 2000 are not necessarily indicative of the results for the entire fiscal year ending December 27, 2000. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 2. Debt On or prior to July 12, 2000, the Company is required to repay or refinance the $160 million mortgage notes secured by a pool of cross-collateralized mortgages on the land, buildings, equipment and improvements of 239 Denny's restaurant properties (the "Denny's Mortgage Notes"). During the first quarter of 2000, the Company repurchased $60 million aggregate principal of the Denny's Mortgage Notes. The Company intends, through a combination of cash and short-term investments on hand and available debt capacity, to repay the remaining $100 million balance of the Denny's Mortgage Notes on or before the scheduled maturity. Advantica's $200 million senior secured revolving credit facility due 2003 (as amended to date, the "Credit Facility"), was subject to early termination on March 31, 2000 if (a) the Company had not refinanced the Denny's Mortgage Notes on terms acceptable to the lenders and (b) either (1) the Company had not deposited funds with The Chase Manhattan Bank ("Chase") equal to at least the face amount of the Denny's Mortgage Notes outstanding on that date (which deposit balance shall be maintained until the Denny's Mortgage Notes are redeemed or repaid in full) or (2) the aggregate principal amount of outstanding loans and letters of credit under the Credit Facility exceeded $150 million on or before March 31, 2000. On March 31, 2000 (subsequent to the end of the quarter), the Company deposited the required $100 million balance with Chase through the use of a combination of cash and available debt capacity, and thereby has maintained the Credit Facility in effect and available to the Company. 7
Note 3. Restructuring and Impairment In late 1999, the Company's management and Board began an extensive review of the Company's operations and structure. Based on its review, in February 2000 the Company announced that its strategic direction would focus primarily on its Denny's brand. At that time, management began the implementation of a restructuring plan focused primarily on (1) streamlining its overhead structure by merging corporate administrative functions with the Denny's organization and (2) becoming a more franchised-based operation by refranchising a significant number of its Denny's units over the next several years. The implementation of the restructuring plan during the first quarter of 2000 involved a reduction of personnel related to the corporate reorganization and the identification of units for closure. Fifty employees in the Company's corporate offices were terminated as a result of the plan. Additionally, an impairment charge was recorded for certain acquired software costs and capitalized construction costs which became obsolete as a result of the cancellation of projects identified through the review. Charges attributable to the restructuring plan for the quarter ended March 29, 2000 are comprised of the following: Restructuring: Severance and outplacement costs $ 3,713 Operating lease liabilities for closed stores 909 -------- 4,622 -------- Impairment: Acquired software costs 1,896 Capitalized construction costs 730 -------- 2,626 -------- $ 7,248 ======== Approximately $5.1 million of the restructuring and impairment charges represent cash charges of which approximately $1.8 million was paid through March 29, 2000. Note 4. Comprehensive Income (Loss) The Company's comprehensive income (loss) for the periods indicated is as follows: Quarter Quarter Ended Ended March 29, 2000 March 31, 1999 -------------- -------------- (In thousands) Net loss $(46,475) $(61,680) Other comprehensive income: Foreign currency translation adjustment 5 (9) -------- -------- Comprehensive income (loss) $(46,470) $(61,689) ======== ======== 8
Note 5. Earnings Per Share Applicable to Common Shareholders The following table sets forth the computation of basic and diluted loss per share: <TABLE> <CAPTION> Quarter Quarter Ended Ended March 29, 2000 March 31, 1999 -------------- -------------- <S> <C> <C> (In thousands, except per share amounts) Numerator: Numerator for basic (loss) earnings per share -- (loss) income from continuing operations available to common shareholders $ (46,475) $ (58,028) Effect of dilutive securities --- --- --------- --------- Numerator for diluted (loss) earnings per share -- (loss) income from continuing operations available to common shareholders $ (46,475) $ (58,028) ========= ========= Denominator: Denominator for basic earnings per share -- weighted average shares 40,063 40,020 Dilutive potential common shares -- -- --------- --------- Denominator for diluted (loss) earnings per share 40,063 40,020 ========= ========= Basic (loss) earnings per share from continuing operations $ (1.16) $ (1.45) ========= ========= Diluted (loss) earnings per share from $ (1.16) $ (1.45) continuing operations ========= ========= </TABLE> The calculations of basic and diluted loss per share have been based on the weighted average number of Advantica shares outstanding. Because of the loss from continuing operations for the quarters ended March 29, 2000 and March 31, 1999, warrants and options of the Company have been omitted from the calculation of weighted average dilutive shares. Note 6. Segment Information The Company operates three restaurant concepts -- Denny's, Coco's and Carrows -- and each concept is considered a reportable segment. The "Corporate and other" segment consists primarily of corporate operations. Advantica evaluates performance based on several factors, of which the primary financial measure is business segment operating income before interest, taxes, depreciation, amortization and charges for restructuring and impairment ("EBITDA as defined"). EBITDA as defined is a key internal measure used to evaluate the amount of cash flow available for debt repayment and funding of additional investments. EBITDA as defined is not a measure defined by generally accepted accounting principles and should not be considered as an alternative to net income or cash flow data prepared in accordance with generally accepted accounting principles, or as a measure of a company's profitability or liquidity. The Company's measure of EBITDA as defined may not be comparable to similarly titled measures reported by other companies. 9
Quarter Quarter Ended Ended March 29, 2000 March 31,1999 -------------- ------------- (In millions) REVENUE Denny's $ 282.9 $ 288.5 Coco's 55.6 54.8 Carrows 39.1 40.2 Corporate and other 0.8 0.8 -------- -------- Total consolidated revenue $ 378.4 $ 384.3 ======== ======== EBITDA AS DEFINED Denny's $ 37.4 $ 35.6 Coco's 5.5 5.5 Carrows 3.4 2.5 Corporate and other (8.5) (9.9) -------- -------- Total consolidated EBITDA as defined 37.8 33.7 Depreciation and amortization expense (49.5) (64.5) Restructuring and impairment charges (7.2) -- Other expenses: Interest expense, net (27.8) (26.4) Other, net 0.7 (1.2) -------- -------- Consolidated loss from continuing operations $ (46.0) $ (58.4) before income taxes ======== ======== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to highlight significant changes in financial position as of March 29, 2000 and the results of operations for the quarter ended March 29, 2000 as compared to the quarter ended March 31, 1999. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which reflect management's best judgment based on factors currently known, involve risks, uncertainties, and other factors which may cause the actual performance of Advantica and its subsidiaries, and underlying concepts to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of the Company's operating initiatives and advertising and promotional efforts, including the initiatives and efforts specifically mentioned herein; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy, particularly at the retail level; and other factors included in the discussion below, or in Management's Discussion and Analysis of Financial Condition and Result of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 29, 1999 and in Exhibit 99.1 thereto. 10
RESULTS OF OPERATIONS Quarter Ended March 29, 2000 Compared to Quarter Ended March 31, 1999 - --------------------------------------------------------------------- The Company's CONSOLIDATED REVENUE for the first quarter of 2000 decreased $5.9 million (1.5%) compared to the first quarter of 1999. Denny's, Coco's and Carrows all experienced same-store sales increases for the quarter; however, Company restaurant sales decreased $8.8 million primarily due to an 81-unit decrease in Company-owned restaurants, consistent with the Company's strategy to reduce its portfolio of Company-owned Denny's restaurants through refranchising. Franchise and licensing revenue increased $2.9 million, primarily attributable to a net 105-unit increase in franchised and licensed units. CONSOLIDATED OPERATING EXPENSES decreased $17.8 million (4.3%) compared to the prior year quarter. Excluding the impact of a $16.4 million decrease in amortization of excess reorganization value, $7.2 million of restructuring and impairment charges in the current year quarter and a $1.5 million increase in refranchising gains, operating expenses decreased $7.1 million. The majority of this decrease represents a reduction in the costs of Company restaurant sales driven by the decrease in the number of Company-owned restaurants. As a percentage of Company restaurant sales, lower food costs, primarily reflecting the effect of a higher guest check average, were offset by slightly higher payroll and occupancy costs. Increased franchise restaurant costs were driven by the increase in the number of franchised units; nevertheless, franchise margins increased due to strong revenue growth. General and administrative expenses benefited from reduced corporate overhead costs. Additionally, depreciation and other amortization increased from the net addition of assets throughout 1999 related to the Denny's Diner reimage program. The decrease in amortization of excess reorganization value from the prior year quarter resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. During the first quarter of 2000, the Company announced a restructuring plan as a result of an extensive review of the Company's operations and structure completed in early 2000. The plan's implementation during the first quarter involved a reduction of personnel related to the corporate reorganization and the identification of units for closure. Consequently, the Company recorded approximately $3.7 million of severance and outplacement costs and $0.9 million of operating lease liabilities for closed stores as a result of the plan. Additionally, a $2.6 million impairment charge was recorded related to certain acquired software and capitalized construction costs which became obsolete as a result of the cancellation of projects identified as part of the plan. The Company's consolidated EBITDA AS DEFINED increased $4.1 million (12.2%) compared to the prior year quarter. This increase is a result of the factors noted in the preceding paragraphs, excluding the restructuring and impairment charges and the change in depreciation and amortization expense. CONSOLIDATED OPERATING LOSS decreased $11.9 million compared to the 1999 comparable quarter as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $27.8 million for the first quarter of 2000, an increase of $1.4 million compared to the prior year quarter. Excluding the effect of $1.9 million of interest expense allocated to discontinued operations in the prior year quarter, interest expense, net, decreased $0.5 million. This decrease in interest expense, net, resulted primarily from reduced debt balances due to the repurchase in April 1999 of $20 million of Advantica's 11 1/4 % Senior Notes due 2008 and to the repurchase of $60 million of Denny's Mortgage Notes in the first quarter of 2000, offset by a decrease in interest income as a result of lower cash and investment balances. The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the quarter ended March 29, 2000 has been computed based on management's estimate of the annual effective income tax rate applied to loss before taxes. The 11
Company recorded an income tax provision reflecting an approximate rate of 1.0% for the quarter ended March 29, 2000 compared to an income tax benefit reflecting an approximate rate of (0.6)% for the quarter ended March 31, 1999. The Statements of Consolidated Operations and Cash Flows presented herein have been reclassified for the quarter ended March 31, 1999 to reflect EPL as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of the discontinued operations for the quarter ended March 31, 1999 were $32.4 million and $3.7 million, respectively. NET LOSS was $46.5 million for first quarter of 2000 compared to a net loss of $61.7 million for the first quarter of 1999, primarily as a result of the factors discussed above. Restaurant Operations: - ---------------------- The table below summarizes restaurant unit activity for the quarter ended March 29, 2000. <TABLE> <CAPTION> Ending Units Net Units Ending Ending Units Opened/ Units Sold/ Units Units 12/29/99 Acquired Refranchised Closed 3/29/00 3/31/99 -------- -------- ------------ ------ ------- ------- <S> <C> <C> <C> <C> <C> <C> Denny's Company-owned units 835 1 (10) (4) 822 894 Franchised units 930 11 10 (13) 938 840 Licensed units 19 -- -- (1) 18 18 ------ ------ ------ ------ ------ ------ 1,784 12 -- (18) 1,778 1,752 Coco's Company-owned units 148 -- -- (2) 146 150 Franchised units 34 1 -- (1) 34 33 Licensed units 303 -- -- (1) 302 298 ------ ------ ------ ------ ------ ------ 485 1 -- (4) 482 481 Carrows Company-owned units 117 -- -- -- 117 122 Franchised units 28 -- -- -- 28 26 ------ ------ ------ ------ ------ ------ 145 -- -- -- 145 148 ------ ------ ------ ------ ------ ------ 2,414 13 -- (22) 2,405 2,381 ====== ====== ====== ====== ====== ====== </TABLE> 12
Denny's - ------- <TABLE> <CAPTION> Quarter Ended -------------------------------- % March 29, 2000 March 31, 1999 Increase/(Decrease) -------------- -------------- ------------------- <S> <C> <C> <C> ($ in millions, except average unit data) U.S. systemwide sales $ 517.5 $ 491.2 5.4 ========= ========= Net company sales $ 266.8 $ 275.3 (3.1) Franchise and licensing revenue 16.1 13.2 22.0 --------- --------- Total revenue 282.9 288.5 (1.9) --------- --------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 10.6 20.2 (47.5) Other 273.9 275.1 (0.4) --------- --------- Total operating expenses 284.5 295.3 (3.7) --------- --------- Operating loss $ (1.6) $ (6.8) (76.5) ========= ========= EBITDA as defined $ 37.4 $ 35.6 5.1 Average unit sales: Company-owned 323,000 313,800 2.9 Franchise 276,500 264,200 4.7 Same-store sales increase (Company-owned) 2.0% 3.6% </TABLE> Denny's NET COMPANY SALES for the first quarter of 2000 decreased $8.5 million (3.1%) compared to the first quarter of 1999. The decrease results primarily from the impact of fewer Company-owned restaurants, which reflects the Company's strategy to reduce its portfolio of Company-owned restaurants. This decrease was offset by an increase in same-store sales which was driven primarily by a higher guest check average. The average guest check increased as a result of menu mix gains from the successful promotion of higher-priced menu items and from price increases implemented in 1999. FRANCHISE AND LICENSING REVENUE increased $2.9 million (22.0%), primarily attributable to the increase of franchised units over the prior year quarter. Denny's OPERATING EXPENSES decreased $10.8 million (3.7%) compared to the prior year quarter. Excluding the impact of a $9.6 million decrease in amortization of excess reorganization value, $4.0 million of restructuring and impairment charges in the current year quarter, and a $1.5 million increase in refranchising gains, operating expenses decreased $3.7 million. This cost decrease is primarily driven by the decrease in the number of Company-owned restaurants. As a percentage of Company restaurant sales, lower food costs, primarily reflecting the effect of a higher guest check average, partially offset slightly higher payroll and occupancy costs. The decrease in operating expenses was offset by increases in franchise restaurant costs and depreciation and amortization expense. Increased franchise restaurant costs resulted from the increase in the number of franchised units. Additionally, depreciation and other amortization increased from the net addition of assets throughout 1999 related to the Denny's Diner reimage program. The decrease in amortization of excess reorganization value from the prior year quarter resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. EBITDA AS DEFINED increased $1.8 million (5.1%) compared to the prior year quarter as a result of the factors noted in the preceding paragraphs, excluding the restructuring and impairment charges and the change in depreciation and amortization expense. Denny's OPERATING LOSS decreased $5.2 million compared to the prior year quarter as a result of the factors noted above. 13
Coco's - ------ <TABLE> <CAPTION> Quarter Ended -------------------------------- % March 29, 2000 March 31, 1999 Increase/(Decrease) -------------- -------------- ------------------- <S> <C> <C> <C> U.S. systemwide sales $ 65.8 $ 63.5 3.6 ======== ======== Net company sales $ 54.2 $ 53.4 1.5 Franchise and licensing revenue 1.4 1.4 --- -------- -------- Total revenue 55.6 54.8 1.5 -------- -------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 2.5 5.3 (52.8) Other 54.3 54.0 0.6 -------- -------- Total operating expenses 56.8 59.3 (4.2) -------- -------- Operating loss $ (1.2) $ (4.5) (73.3) ======== ======== EBITDA as defined $ 5.5 $ 5.5 --- Average unit sales: Company-owned 374,100 358,000 4.5 Franchised 338,700 311,400 8.8 Same-store sales increase (decrease) (Company-owned) 3.3% (7.8)% </TABLE> Coco's NET COMPANY SALES for the first quarter of 2000 increased $0.8 million (1.5%) compared to the prior year quarter. The increase is the result of a 3.3% increase in same-store sales partially offset by a decrease in the number of Company- owned units. FRANCHISE AND LICENSING REVENUE remained flat compared to the prior year quarter. Coco's OPERATING EXPENSES decreased $2.5 million (4.2%) compared to the prior year quarter. Excluding the impact of a $2.8 million decrease in amortization of excess reorganization value and a $0.6 million decrease in depreciation and other amortization, operating expenses increased $0.9 million over the prior year quarter. This increase primarily reflects an increase in occupancy and general and administrative costs. The decrease in amortization of excess reorganization value from the prior year quarter resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. EBITDA AS DEFINED was unchanged from the prior year quarter as a result of the factors noted in the preceding paragraphs, excluding the decrease in depreciation and amortization expense. Coco's OPERATING LOSS decreased $3.3 million compared to the prior year quarter as a result of the factors noted above. 14
Carrows - ------- <TABLE> <CAPTION> Quarter Ended -------------------------------- % March 29, 2000 March 31, 1999 Increase/(Decrease) -------------- -------------- ------------------- <S> <C> <C> <C> U.S. systemwide sales $ 45.9 $ 46.4 (1.1) ======== ======== Net company sales $ 38.5 $ 39.6 (2.8) Franchise revenue 0.6 0.6 --- -------- -------- Total revenue 39.1 40.2 (2.7) -------- -------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 2.2 4.5 (51.1) Other 38.5 41.1 (6.3) -------- -------- Total operating expenses 40.7 45.6 (10.7) -------- -------- Operating loss $ (1.6) $ (5.4) (70.4) ======== ======== EBITDA as defined $ 3.4 $ 2.5 36.0 Average unit sales: Company-owned 327,300 327,200 --- Franchise 263,300 263,400 --- Same-store sales increase (decrease) (Company-owned) 0.2% (3.6)% </TABLE> Carrows' NET COMPANY SALES for the first quarter of 2000 decreased $1.1 million (2.8%) compared to the prior year quarter. The decrease reflects the impact of fewer Company-owned units over the prior year quarter, partially offset by a 0.2% increase in same-store sales over the prior year quarter. FRANCHISE REVENUE remained flat over the prior year quarter. Carrows' OPERATING EXPENSES decreased $4.9 million (10.7%) compared to the prior year quarter. Excluding the impact of a $2.3 million decrease in amortization of excess reorganization value and a $0.7 million decrease in depreciation and other amortization, operating expenses decreased $1.9 million over the prior year quarter. This decrease primarily reflects the impact of fewer Company-owned units and effective cost management. The decrease in amortization of excess reorganization value from the prior year quarter resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. EBITDA AS DEFINED increased $0.9 million (36.0%) compared to the prior year quarter as a result of the factors noted in the preceding paragraphs, excluding the decrease in depreciation and amortization expense. Carrows' OPERATING LOSS decreased $3.8 million compared to the prior year quarter as a result of the factors noted above. 15
LIQUIDITY AND CAPITAL RESOURCES On or prior to July 12, 2000, the Company is required to repay or refinance the $160 million Denny's Mortgage Notes. During the first quarter of 2000, the Company repurchased $60 million aggregate principal of the Denny's Mortgage Notes. The Company intends, through a combination of cash and short-term investments on hand and available debt capacity, to repay the remaining $100 million balance of the Denny's Mortgage Notes on or before the scheduled maturity. Advantica's Credit Facility was subject to early termination on March 31, 2000 if (a) the Company had not refinanced the Denny's Mortgage Notes on terms acceptable to the lenders and (b) either (1) the Company had not deposited funds with Chase equal to at least the face amount of the Denny's Mortgage Notes outstanding on that date (which deposit balance shall be maintained until the Denny's Mortgage Notes are redeemed or repaid in full) or (2) the aggregate principal amount of outstanding loans and letters of credit under the Credit Facility exceeded $150 million on or before March 31, 2000. On March 31, 2000 (subsequent to the end of the quarter), the Company deposited the required $100 million balance with Chase through the use of a combination of cash and available debt capacity, and thereby has maintained the Credit Facility in effect and available to the Company. At March 29, 2000, Advantica had no outstanding working capital advances against the Credit Facility; however, letters of credit outstanding were $50.7 million. On May 14, 1999, FRD and certain of its operating subsidiaries entered into a new credit agreement (the "New FRD Credit Facility") to replace a prior facility scheduled to mature in August 1999. The New FRD Credit Facility, which is guaranteed by Advantica, consists of a $30 million term loan and a $40 million revolving credit facility and matures in May 2003. Such facility is unavailable to Advantica and its other subsidiaries. At March 29, 2000, FRD and its subsidiaries had $30.0 million outstanding term loan borrowings, $5.0 million working capital borrowings and letters of credit outstanding of $11.1 million. As of March 29, 2000 and December 29, 1999, the Company had working capital deficits of $244.4 million and $234.1 million, respectively. The increase in the deficit is attributable primarily to the purchase of assets and restaurant units during the first quarter of 2000. The Company is able to operate with a substantial working capital deficit because: (1) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows a limited investment in inventories and (3) accounts payable for food, beverages, and supplies usually become due after the receipt of cash from related sales. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposure at March 29, 2000 is consistent with the types of market risk and amount of exposure presented in its Annual Report on Form 10-K for the year ended December 29, 1999. 16
PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. The following are included as exhibits to this report: EXHIBIT NO. DESCRIPTION - ------- ----------- 10.1 Addendum Agreement, dated April 7, 2000, between Advantica and James B. Adamson. 10.2 Form of Agreement, dated February 9, 2000, providing certain retention incentives and severance benefits for Company management. 27 Financial Data Schedule. - ---------------------------- b. No reports on Form 8-K were filed during the first quarter ended March 29, 2000. 17
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANTICA RESTAURANT GROUP, INC. Date: May 12, 2000 By: /s/ Rhonda J. Parish ------------------------------------ Rhonda J. Parish Executive Vice President, General Counsel and Secretary Date: May 12, 2000 By: /s/ Ronald B. Hutchison ------------------------------------ Ronald B. Hutchison Executive Vice President and Chief Financial Officer 18