UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 28, 2000 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to __________ Commission file number 0-18051 ADVANTICA RESTAURANT GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3487402 - -------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 203 East Main Street Spartanburg, South Carolina 29319-9966 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (864) 597-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of August 11, 2000, 40,078,543 shares of the registrant's Common Stock, par value $.01 per share, were outstanding. 1
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Advantica Restaurant Group, Inc. Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended June 28, 2000 June 30, 1999 ------------- ------------- <S> <C> <C> (In thousands, except per share amounts) Revenue: Company restaurant sales $ 279,412 $ 292,256 Franchise and licensing revenue 17,521 14,527 --------- --------- Total operating revenue 296,933 306,783 --------- --------- Cost of company restaurant sales: Product costs 73,360 75,243 Payroll and benefits 110,432 114,312 Occupancy 16,341 16,472 Other operating expenses 40,972 38,820 --------- --------- Total costs of company restaurant sales 241,105 244,847 Franchise restaurant costs 8,419 8,116 General and administrative expenses 16,629 19,455 Amortization of reorganization value in excess of amounts allocable to identifiable assets 10,564 22,136 Depreciation and other amortization 28,516 27,944 Gains on refranchising and other, net (17,346) (4,784) --------- --------- Total operating costs and expenses 287,887 317,714 --------- --------- Operating income (loss) 9,046 (10,931) --------- --------- Other expenses: Interest expense, net 20,259 19,805 Other nonoperating (income) expenses, net (241) 3 --------- --------- Total other expenses, net 20,018 19,808 --------- --------- Loss before taxes (10,972) (30,739) Provision for (benefit from) income taxes 337 (450) --------- --------- Loss from continuing operations (11,309) (30,289) Discontinued operations: Loss from operations of discontinued operations, net of applicable income tax provision of: 2000 -- $104; 1999 -- $116 (8,150) (10,917) --------- --------- Net loss applicable to common shareholders $ (19,459) $ (41,206) ========= ========= Per share amounts applicable to common shareholders: Basic and diluted earnings per share: Loss from continuing operations $ (0.28) $ (0.76) Loss from discontinued operations, net (0.21) (0.27) --------- --------- Net loss (0.49) $ (1.03) ========= ========= Average outstanding shares 40,079 40,025 ========= ========= </TABLE> See accompanying notes 2
Advantica Restaurant Group, Inc. Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Two Quarters Two Quarters Ended Ended June 28, 2000 June 30, 1999 ------------- ------------- <S> <C> <C> (In thousands, except per share amounts) Revenue: Company restaurant sales $ 547,039 $ 568,305 Franchise and licensing revenue 33,554 27,776 --------- --------- Total operating revenue 580,593 596,081 --------- --------- Cost of company restaurant sales: Product costs 141,993 147,591 Payroll and benefits 219,534 225,807 Occupancy 32,282 31,929 Other operating expenses 80,336 78,848 --------- --------- Total costs of company restaurant sales 474,145 484,175 Franchise restaurant costs 15,608 14,476 General and administrative expenses 35,800 40,496 Amortization of reorganization value in excess of amounts allocable to identifiable assets 21,295 44,327 Depreciation and other amortization 55,664 52,363 Restructuring and impairment charges 7,248 -- Gains on refranchising and other, net (22,024) (7,956) --------- --------- Total operating costs and expenses 587,736 627,881 --------- --------- Operating loss (7,143) (31,800) --------- --------- Other expenses: Interest expense, net 41,744 39,728 Other nonoperating (income) expenses, net (980) 1,032 --------- --------- Total other expenses, net 40,764 40,760 --------- --------- Loss before taxes (47,907) (72,560) Provision for (benefit from) income taxes 697 (939) --------- --------- Loss from continuing operations (48,604) (71,621) Discontinued operations: Loss from operations of discontinued operations, net of applicable income tax provision of: 2000 -- $186; 1999 -- $265 (17,330) (31,265) --------- --------- Net loss applicable to common shareholders $ (65,934) $(102,886) ========= ========= Per share amounts applicable to common shareholders: Basic and diluted earnings per share: Loss from continuing operations $ (1.21) $ (1.79) Loss from discontinued operations, net (0.44) (0.78) --------- --------- Net loss (1.65) $ (2.57) ========= ========= Average outstanding shares 40,071 40,022 ========= ========= </TABLE> See accompanying notes 3
Advantica Restaurant Group, Inc. Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> June 28, 2000 December 29, 1999 ------------- ----------------- <S> <C> <C> (In thousands) Assets Current Assets: Cash and cash equivalents $ 5,948 $ 165,828 Investments -- 17,084 Receivables, less allowance for doubtful accounts of: 2000 --$3,303; 1999 -- $3,461 14,209 16,902 Inventories 12,994 12,221 Other 7,907 8,706 Restricted cash held in escrow 96,665 -- Restricted investments securing in-substance defeased debt 147,845 158,710 ----------- ----------- 285,568 379,451 ----------- ----------- Property 657,655 667,564 Less accumulated depreciation 191,591 156,627 ----------- ----------- 466,064 510,937 ----------- ----------- Other Assets: Reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization of: 2000 -- $181,344; 1999 -- $160,319 105,583 126,910 Goodwill, net of accumulated amortization of: 2000 -- $1,643; 1999 -- $1,075 25,226 16,758 Other intangible assets, net of accumulated amortization of: 2000 -- $19,478; 1999 -- $16,829 120,619 131,513 Deferred financing costs, net 14,663 17,165 Other 50,578 53,529 ----------- ----------- Total Assets $ 1,068,301 $ 1,236,263 =========== =========== Liabilities Current Liabilities: Current maturities of notes and debentures $ 106,344 $ 164,811 Current maturities of capital lease obligations 11,051 12,614 Current maturities of in-substance defeased debt 147,676 158,731 Accounts payable 57,958 74,069 Accrued salaries and vacations 28,833 32,804 Accrued insurance 19,713 19,785 Accrued taxes 13,864 14,913 Accrued interest 31,375 33,974 Net liabilities of discontinued operations 70,022 53,979 Other 65,136 64,779 ----------- ----------- 551,972 630,459 ----------- ----------- Long-Term Liabilities: Notes and debentures, less current maturities 554,137 555,978 Capital lease obligations, less current maturities 42,240 59,385 Liability for insurance claims 28,673 26,708 Other 102,928 109,573 ----------- ----------- 727,978 751,644 ----------- ----------- Total Liabilities 1,279,950 1,382,103 ----------- ----------- Shareholders' Deficit (211,649) (145,840) ----------- ----------- Total Liabilities and Shareholders' Deficit $ 1,068,301 $ 1,236,263 =========== =========== </TABLE> See accompanying notes 4
Advantica Restaurant Group, Inc. Statements of Consolidated Cash Flows (Unaudited) <TABLE> <CAPTION> Two Quarters Two Quarters Ended Ended June 28, 2000 June 30, 1999 ------------- ------------- <S> <C> <C> (In thousands) Cash Flows from Operating Activities: Net loss $ (65,934) $(102,886) Adjustments to reconcile net loss to cash flows from operating activities: Amortization of reorganization value in excess of amounts allocable to identifiable assets 21,295 44,327 Depreciation and other amortization 55,664 52,363 Restructuring and impairment charges 7,248 -- Amortization of deferred gains (6,729) (5,275) Amortization of deferred financing costs 3,186 3,075 Deferred income tax benefit -- (1,499) Gains on refranchising and other, net (22,024) (7,956) Equity in loss from discontinued operations, net 17,330 31,265 Amortization of debt premium (6,124) (6,813) Other (195) (9) Changes in Assets and Liabilities Net of Effects of Acquisitions and Dispositions: Decrease (increase) in assets: Receivables 5,130 246 Inventories (1,076) (518) Other current assets (2,686) 828 Other assets (531) (8,321) Increase (decrease) in liabilities: Accounts payable 794 (3,759) Accrued salaries and vacations (3,972) 1,988 Accrued taxes (1,228) (129) Other accrued liabilities (10,732) (14,746) Other noncurrent liabilities and deferred credits (2,620) (4,353) --------- --------- Net cash flows used in operating activities (13,204) (22,172) --------- --------- Cash Flows from Investing Activities: Purchase of property (16,744) (14,737) Acquisition of restaurant units (4,358) (10,853) Proceeds from disposition of property 24,553 7,567 Advances to discontinued operations, net (1,287) (71) Change in restricted cash, net (95,000) -- Proceeds from maturity of investments securing in-substance defeased debt 10,865 9,675 Purchase of investments -- (45,564) Proceeds from sale and maturity of investments 17,084 58,442 --------- --------- Net cash flows (used in) provided by investing activities (64,887) 4,459 --------- --------- </TABLE> See accompanying notes 5
Advantica Restaurant Group, Inc. Statements of Consolidated Cash Flows (Continued) (Unaudited) <TABLE> <CAPTION> Two Quarters Two Quarters Ended Ended June 28, 2000 June 30, 1999 ------------- ------------- <S> <C> <C> (In thousands) Cash Flows from Financing Activities: Net borrowings under credit agreements $ 9,800 $ -- Long-term debt payments (81,038) (36,037) Debt transaction costs (519) (350) Bank overdrafts (10,032) (14,461) ---------- ---------- Net cash flows used in financing activities (81,789) (50,848) ---------- ---------- Decrease in cash and cash equivalents (159,880) (68,561) Cash and Cash Equivalents at: Beginning of period 165,828 158,183 ---------- ---------- End of period $ 5,948 $ 89,622 ========== ========== </TABLE> See accompanying notes 6
Advantica Restaurant Group, Inc. Notes to Consolidated Financial Statements June 28, 2000 (Unaudited) Note 1. General Advantica Restaurant Group, Inc. ("Advantica" or, together with its subsidiaries including predecessors, the "Company"), through its wholly owned subsidiaries, Denny's Holdings, Inc. and FRD Acquisition Co. ("FRD") (and their respective subsidiaries), owns and operates the Denny's, Coco's and Carrows restaurant brands. At June 28, 2000, the Company has accounted for FRD as a discontinued operation in its consolidated financial statements in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). See Note 2. The consolidated financial statements of Advantica and its subsidiaries included herein are unaudited and include all adjustments management believes are necessary for a fair presentation of the results of operations for such interim periods. All such adjustments are of a normal and recurring nature. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 29, 1999 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Advantica Restaurant Group, Inc. 1999 Annual Report on Form 10-K. The results of operations for the two quarters ended June 28, 2000 are not necessarily indicative of the results for the entire fiscal year ending December 27, 2000. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 2. Discontinued Operations During the first quarter of 2000, the Company announced a plan to explore the possible sale of FRD, its wholly owned subsidiary which operates the Company's Coco's and Carrows restaurants. Due to the Company's progress in the sale process, the financial statements presented herein have been reclassified for all periods to reflect FRD as a discontinued operation in accordance with APB 30. On December 29, 1999, the Company consummated the sale of its wholly owned subsidiary, El Pollo Loco, Inc. ("EPL"). The Statements of Consolidated Operations and Cash Flows presented herein for the quarter and two quarters ended June 30, 1999 reflect EPL as a discontinued operation in accordance with APB 30. Revenue and operating income of the discontinued operations for the reported periods are as follows: <TABLE> <CAPTION> Quarter Quarter Two Quarters Two Quarters Ended Ended Ended Ended June 28, 2000 June 30, 1999 June 28, 2000 June 30, 1999 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> (In millions) REVENUE FRD $ 93.8 $ 99.2 $ 188.5 $ 194.2 EPL -- 36.2 -- 68.6 -------- -------- --------- --------- $ 93.8 $ 135.4 $ 188.5 $ 262.8 ======== ======== ========= ========= OPERATING (LOSS) INCOME FRD $ (1.6) $ (5.7) $ (4.3) $ (15.6) EPL -- 4.2 -- 3.4 ------- -------- ---------- --------- $ (1.6) $ (1.5) $ (4.3) $ (12.2) ======= ======== ======== ========= </TABLE> 7
The financial position of FRD at June 28, 2000 and December 29, 1999 is reported in the Consolidated Balance Sheets as Net liabilities of discontinued operations and includes the following: June 28, 2000 December 29, 1999 ------------- ----------------- (In thousands) Assets Current assets $ 13,801 $ 19,885 Property owned, net 104,171 111,669 Other assets 89,632 100,320 --------- --------- 207,604 231,874 --------- --------- Less liabilities Current liabilities 54,503 57,106 Long-term liabilities 223,123 228,747 --------- --------- Total liabilities 277,626 285,853 --------- --------- Net liabilities of discontinued operations $ (70,022) $ (53,979) ========= ========= Note 3. Debt On March 31, 2000, the Company deposited $100 million with The Chase Manhattan Bank ("Chase"), which equaled the then outstanding principal amount of the mortgage notes secured by a pool of cross-collateralized mortgages on the land, buildings, equipment and improvements of 239 Denny's restaurant properties (the "Denny's Mortgage Notes"). Such deposit was required under the terms and conditions of Advantica's $200 million senior secured revolving credit facility (as amended to date, the "Credit Facility"). During the quarter ended June 28, 2000, the Company used a portion of the funds held in escrow to repurchase $5.0 million in aggregate principal amount of these notes. On July 12, 2000 (subsequent to the end of the quarter), the Company used the remaining funds to repay in full the outstanding balance of the Denny's Mortgage Notes. Note 4. Restructuring and Impairment In late 1999, the Company's management and Board began an extensive review of the Company's operations and structure. Based on its review, in February 2000 the Company announced that its strategic direction would focus primarily on its Denny's brand. At that time, management began the implementation of a restructuring plan focused primarily on (1) streamlining its overhead structure by merging corporate administrative functions with the Denny's organization and (2) becoming a more franchised-based operation by refranchising a significant number of its Denny's units over the next several years. The implementation of the restructuring plan during the first quarter of 2000 involved a reduction of personnel related to the corporate reorganization and the identification of units for closure. Fifty employees in the Company's corporate offices were terminated as a result of the plan. Additionally, an impairment charge was recorded for certain acquired software costs and capitalized construction costs which became obsolete as a result of the cancellation of projects identified through the review. Charges attributable to the restructuring plan are comprised of the following: Restructuring: Severance and outplacement costs $3,713 Operating lease liabilities for closed stores 909 ------ 4,622 ------ Impairment: Acquired software costs 1,896 Capitalized construction costs 730 ------ 2,626 ------ $7,248 ====== 8
Approximately $5.1 million of the restructuring and impairment charges represent cash charges of which approximately $2.6 million was paid through June 28, 2000. Note 5. Acquisitions In March 2000, Denny's, Inc., a wholly owned subsidiary of the Company, purchased 9 Denny's franchise restaurants from Olajuwon Holdings, Inc. ("OHI"), a franchisee of Denny's, Inc. The acquisition of the units has been accounted for under the purchase method of accounting. The purchase price of approximately $4.1 million, consisting of cash of approximately $3.4 million and the forgiveness of debt and assumption of liabilities of $0.7 million, exceeded the estimated fair value of the restaurants' identifiable net assets by approximately $3.7 million. The excess has been reflected as goodwill in the accompanying consolidated financial statements. In May 2000, Denny's, Inc. purchased an additional 50 Denny's franchise restaurants from OHI. The acquisition of the units has been accounted for under the purchase method of accounting. The purchase price of approximately $10.3 million, consisting of cash of approximately $0.9 million and capital leases and other liabilities assumed of approximately $9.4 million, exceeded the estimated fair value of the restaurants' identifiable net assets by approximately $6.1 million. The excess has been reflected as goodwill in the accompanying consolidated financial statements. Assets acquired and liabilities assumed have been recorded at their estimated fair values, and are subject to adjustment when additional information concerning asset and liability valuations is finalized. Note 6. Comprehensive Income (Loss) The Company's comprehensive income (loss) for the periods indicated is as follows: <TABLE> <CAPTION> Quarter Quarter Two Quarters Two Quarters Ended Ended Ended Ended June 28, 2000 June 30, 1999 June 28, 2000 June 30, 1999 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> (In thousands) Net loss $ (19,459) $ (41,206) $ (65,934) $(102,886) Other comprehensive income (loss): Foreign currency translation adjustment 40 (22) 45 (31) --------- --------- --------- --------- Comprehensive income (loss) $ (19,419) $ (41,228) $ (65,889) $(102,917) ========= ========= ========= ========= </TABLE> Note 7. Loss Per Share Applicable to Common Shareholders The calculations of basic and diluted loss per share have been based on the weighted average number of Advantica shares outstanding. Because of the loss from continuing operations for the quarters and two quarters ended June 28, 2000 and June 30, 1999, warrants and options of the Company have been omitted from the calculation of weighted average dilutive shares. Note 8. Segment Information The Company currently operates three restaurant concepts -- Denny's, Coco's and Carrows -- and each concept is considered a reportable segment. Coco's and Carrows are operated by FRD, the wholly owned subsidiary which has been reclassified as a discontinued operation in the consolidated financial statements; therefore, their operating results are shown separately in this section. See Note 2. Advantica evaluates performance based on several factors, of which the primary financial measure is business segment operating income before interest, taxes, depreciation, amortization and charges for restructuring and impairment ("EBITDA as defined"). EBITDA as defined is a key internal measure used to evaluate the amount of cash flow available for debt repayment and funding of additional investments. EBITDA as defined is not a measure defined by generally 9
accepted accounting principles and should not be considered as an alternative to net income or cash flow data prepared in accordance with generally accepted accounting principles, or as a measure of a company's profitability or liquidity. The Company's measure of EBITDA as defined may not be comparable to similarly titled measures reported by other companies. <TABLE> <CAPTION> Quarter Quarter Two Quarters Two Quarters Ended Ended Ended Ended June 28, 2000 June 30, 1999 June 28, 2000 June 30, 1999 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> (In millions) REVENUE Revenue from continuing operations $ 296.9 $ 306.8 $ 580.6 $ 596.1 ======== ======== ======== ======== Revenue from discontinued operations: Coco's $ 53.9 $ 57.2 $ 109.5 $ 112.1 Carrows 39.9 42.0 79.0 82.1 -------- -------- -------- -------- Total revenue from discontinued operations $ 93.8 $ 99.2 $ 188.5 $ 194.2 ======== ======== ======== ======== EBITDA AS DEFINED EBITDA as defined from continuing operations $ 48.1 $ 39.1 $ 77.1 $ 64.9 Depreciation and amortization expense (39.1) (50.0) (77.0) (96.7) Restructuring and impairment charges -- -- (7.2) -- Other expenses: Interest expense, net (20.2) (19.8) (41.7) (39.7) Other, net 0.2 -- 0.9 (1.1) -------- -------- -------- -------- Consolidated loss from continuing operations before income taxes $ (11.0) $ (30.7) $ (47.9) $ (72.6) ======== ======== ======== ======== EBITDA as defined from discontinued operations: Coco's $ 6.3 $ 7.4 $ 11.8 $ 12.8 Carrows 4.5 5.1 7.8 7.6 -------- -------- -------- -------- Total EBITDA as defined from discontinued operations $ 10.8 $ 12.5 $ 19.6 $ 20.4 ======== ======== ======== ======== </TABLE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to highlight significant changes in financial position as of June 28, 2000 and the results of operations for the quarter and two quarters ended June 28, 2000 compared to the quarter and two quarters ended June 30, 1999. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which reflect management's best judgment based on factors currently known, involve risks, uncertainties, and other factors which may cause the actual performance of Advantica and its subsidiaries and underlying concepts to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of the Company's operating initiatives and advertising and promotional efforts, including the initiatives and efforts specifically mentioned herein; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy, particularly at the retail level; and other factors included in the discussion below, in Management's Discussion and Analysis of Financial Condition and Result of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 29, 1999 and in Exhibit 99.1 thereto. 10
RESTAURANT UNIT ACTIVITY The table below summarizes restaurant unit activity for the quarter ended June 28, 2000. <TABLE> <CAPTION> Ending Units Net Units Ending Ending Units Opened/ Units Sold/ Units Units 3/29/00 Acquired Refranchised Closed 6/28/00 6/30/99 ------- -------- ------------ ------ ------- ------- <S> <C> <C> <C> <C> <C> <C> Denny's Company-owned units 822 4 12 (5) 833 883 Franchised units 938 16 (12) -- 942 862 Licensed units 18 -- -- -- 18 17 ------ ------ ------ ------ ------ ------ 1,778 20 -- (5) 1,793 1,762 ------ ------ ------ ------ ------ ------ Discontinued Operations: Coco's Company-owned units 146 -- -- (2) 144 150 Franchised units 34 -- -- -- 34 34 Licensed units 302 -- -- (1) 301 301 ------ ------ ------ ------ ------ ------ 482 -- -- (3) 479 485 Carrows Company-owned units 117 -- -- (1) 116 120 Franchised units 28 -- -- -- 28 27 ------ ------ ------ ------ ------ ------ 145 -- -- (1) 144 147 ------ ------ ------ ------ ------ ------ 2,405 20 -- (9) 2,416 2,394 ====== ====== ====== ====== ====== ====== </TABLE> RESULTS OF OPERATIONS Quarter Ended June 28, 2000 Compared to Quarter Ended June 30, 1999 - ------------------------------------------------------------------- The Company's CONSOLIDATED REVENUE for the second quarter of 2000 decreased $9.9 million (3.2%) compared to the second quarter of 1999. Denny's experienced a modest increase in same-store sales for the quarter; however, company restaurant sales decreased $12.8 million. This decrease is primarily due to a net 50-unit decrease in company-owned restaurants, consistent with the Company's strategy to reduce its portfolio of company-owned Denny's restaurants. FRANCHISE AND LICENSING REVENUE increased $3.0 million (20.6%), primarily attributable to a net 81-unit increase in franchised and licensed units. CONSOLIDATED OPERATING EXPENSES decreased $29.8 million (9.4%) compared to the prior year quarter. Excluding the impact of an $11.6 million decrease in amortization of excess reorganization value and a $12.6 million increase in refranchising gains, operating expenses decreased $5.6 million. The majority of this decrease represents a reduction in the costs of company restaurant sales driven by the decrease in the number of company-owned restaurants. As a percentage of sales, cost of company restaurant sales increased due to higher payroll, benefit and product costs and increased advertising expenses. Payroll and benefit costs as a percentage of sales increased as a result of higher wage rates in the current year quarter and improved workers' compensation actuarial trends in the prior year quarter. Product costs as a percentage of sales increased primarily due to higher commodity costs. Franchise margins improved due to strong franchise growth in the current quarter and higher bad debt expense in the prior year quarter. General and administrative expenses benefited from reduced corporate overhead costs and a nonrecurring payroll tax adjustment. Additionally, depreciation and other amortization increased as a result of the net addition of assets throughout 1999 related to the Denny's Diner reimage program. The decrease in amortization of excess reorganization value from the prior year quarter resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. 11
The Company's consolidated EBITDA AS DEFINED increased $9.0 million (23.0%) compared to the prior year quarter. This increase is a result of the factors noted in the preceding paragraphs, excluding the change in depreciation and amortization expense. CONSOLIDATED OPERATING INCOME for the second quarter of 2000 was $9.0 million compared to an operating loss of $10.9 million for the second quarter of 1999, primarily as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $20.3 million for the second quarter of 2000, an increase of $0.5 million compared to the prior year quarter. Excluding the effect of $1.8 million of interest expense allocated to discontinued operations in the prior year, interest expense, net, decreased $1.3 million. This decrease in interest expense, net, resulted primarily from the repurchase of a portion of the Denny's Mortgage Notes in 2000. The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the quarter ended June 28, 2000 has been computed based on management's estimate of the annual effective income tax rate applied to loss before taxes. The Company recorded an income tax provision reflecting an approximate rate of 3.1% for the quarter ended June 28, 2000 compared to an income tax benefit reflecting an approximate rate of (1.5)% for the quarter ended June 30, 1999. The Statements of Consolidated Operations and Cash Flows presented herein for the quarters ended June 28, 2000 and June 30, 1999 reflect FRD as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of FRD for the quarter ended June 28, 2000 and June 30, 1999 were $93.8 million and $1.6 million and $99.2 million and $5.7 million, respectively. The decrease in the operating loss of FRD is primarily due to the decrease in amortization of excess reorganization value which resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. Additionally, the Statements of Consolidated Operations and Cash Flows presented herein for the quarter ended June 30, 1999 reflect EPL as a discontinued operation. EPL's revenue and operating income for the quarter ended June 30, 1999 were $36.2 million and $4.2 million, respectively. NET LOSS was $19.5 million for the second quarter of 2000 compared to a net loss of $41.2 million for the second quarter of 1999, primarily as a result of the factors discussed above. Two Quarters Ended June 28, 2000 Compared to Two Quarters Ended June 30, 1999 - ----------------------------------------------------------------------------- The Company's CONSOLIDATED REVENUE for the two quarters ended June 28, 2000 decreased $15.5 million (2.6%) compared to the two quarters ended June 30, 1999. Denny's experienced an increase in same-store sales for the period; however, company restaurant sales decreased $21.3 million. This decrease is primarily due to a net 50-unit decrease in company-owned restaurants, consistent with the Company's strategy to reduce its portfolio of company-owned Denny's restaurants. FRANCHISE AND LICENSING REVENUE increased $5.8 million, primarily attributable to a net 81-unit increase in franchised and licensed units. CONSOLIDATED OPERATING EXPENSES decreased $40.1 million (6.4%) compared to the prior year period. Excluding the impact of a $23.0 million decrease in amortization of excess reorganization value, $7.2 million of restructuring and impairment charges in the current year period and a $14.1 million increase in refranchising gains, operating expenses decreased $10.2 million. The majority of this decrease represents a reduction in the costs of company restaurant sales driven by the decrease in the number of company-owned restaurants. As a percentage of sales, cost of company restaurant sales increased due primarily to higher payroll costs and increased advertising expenses. Franchise margins improved due to strong revenue growth and higher bad debt expense in the prior year period. General and administrative expenses benefited from reduced corporate overhead costs and a nonrecurring payroll tax adjustment. Additionally, depreciation and other amortization increased as a result of the net addition of assets throughout 1999 related to the Denny's Diner reimage program. The decrease in amortization of excess reorganization value from the prior year period resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. 12
During the first quarter of 2000, the Company announced a restructuring plan as a result of an extensive review of the Company's operations and structure completed in early 2000. The plan's implementation involved a reduction of personnel related to the corporate reorganization and the identification of units for closure. Consequently, the Company recorded approximately $3.7 million of severance and outplacement costs and $0.9 million of operating lease liabilities for closed stores as a result of the plan. Additionally, a $2.6 million impairment charge was recorded related to certain acquired software and capitalized construction costs which became obsolete as a result of the cancellation of projects identified as part of the plan. The Company's consolidated EBITDA AS DEFINED increased $12.2 million (18.8%) compared to the prior year period. This increase is a result of the factors noted in the preceding paragraphs, excluding the restructuring and impairment charges and the change in depreciation and amortization expense. CONSOLIDATED OPERATING LOSS decreased $24.7 million compared to the prior year period as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $41.7 million for the two quarters ended June 28, 2000, an increase of $2.0 million compared to the prior year period. Excluding the effect of $3.6 million of interest expense allocated to discontinued operations in the prior year, interest expense, net, decreased $1.6 million. The decrease in interest expense, net, resulted primarily from the effects of the repurchase of $20 million of Advantica's 11 1/4 % Senior Notes in April 1999 and the repurchase of Denny's Mortgage Notes in 2000 offset by an increase related to Credit Facility borrowings. The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the two quarters ended June 28, 2000 has been computed based on management's estimate of the annual effective income tax rate applied to loss before taxes. The Company recorded an income tax provision reflecting an approximate rate of 1.5% for the two quarters ended June 28, 2000 compared to an income tax benefit reflecting an approximate rate of (1.3)% for the two quarters ended June 30, 1999. The Statements of Consolidated Operations and Cash Flows presented herein for the two quarters ended June 28, 2000 and June 30, 1999 reflect FRD as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of FRD for the two quarters ended June 28, 2000 and June 30, 1999 were $188.5 million and $4.3 million and $194.2 million and $15.6 million, respectively. The decrease in the operating loss of FRD is primarily due to the decrease in amortization of excess reorganization value which resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. Additionally, the Statements of Consolidated Operations and Cash Flows presented herein for the two quarters ended June 30, 1999 reflect EPL as a discontinued operation. EPL's revenue and operating income for the two quarters ended June 30, 1999 were $68.6 million and $3.4 million, respectively. NET LOSS was $65.9 million for the two quarters ended June 28, 2000 compared to a net loss of $102.9 million for the two quarters ended June 30, 1999, primarily as a result of the factors discussed above. 13
Restaurant Operations Denny's <TABLE> <CAPTION> Quarter Ended Two Quarters Ended ------------------------------------ -------------------------------------- June 28, June 30, Increase/ June 28, June 30, Increase/ 2000 1999 (Decrease) 2000 1999 (Decrease) ----------- ---------- ---------- ----------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> Total systemwide sales (in millions) $ 556.6 $ 542.0 2.7% $ 1,088.5 $ 1,043.7 4.3% Average unit sales: Company-owned 340,100 331,300 2.7% 663,000 645,200 2.8% Franchise 291,800 286,500 1.8% 568,300 551,000 3.1% Same-store sales increase (company-owned) 0.6% 4.1% 1.4% 3.9% </TABLE> LIQUIDITY AND CAPITAL RESOURCES As of June 28, 2000 and December 29, 1999, the Company had working capital deficits, exclusive of net liabilities of discontinued operations, of $196.4 million and $197.0 million, respectively. The Company is able to operate with a substantial working capital deficit because: (1) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows a limited investment in inventories and (3) accounts payable for food, beverages, and supplies usually become due after the receipt of cash from related sales. On March 31, 2000, the Company deposited $100 million with Chase, which equaled the then outstanding principal amount of the Denny's Mortgage Notes. Such deposit was required under the terms and conditions of Advantica's Credit Facility. During the quarter ended June 28, 2000, the Company used a portion of the funds held in escrow to repurchase $5.0 million in aggregate principal amount of these notes. On July 12, 2000 (subsequent to the end of the quarter), the Company used the remaining funds to repay in full the outstanding balance of the Denny's Mortgage Notes. The repayment or refinancing of the Denny's Mortgage Notes was required to maintain the Credit Facility in effect and available to the Company. The Credit Facility provides to the Company (excluding FRD) a working capital and letter of credit facility of up to $200 million. At June 28, 2000, Advantica had outstanding working capital advances of $9.8 million and letters of credit outstanding of $47.8 million under the Credit Facility, leaving a net availability of $142.4 million. On May 14, 1999, FRD and certain of its operating subsidiaries entered into a new $70 million credit facility (the "New FRD Credit Facility") to replace a prior facility scheduled to mature in August 1999. The New FRD Credit Facility, which is guaranteed by Advantica, consists of a $30 million term loan and a $40 million revolving credit facility and matures in May 2003. Such facility is unavailable to Advantica and its other subsidiaries. At June 28, 2000, the Company had $30.0 million outstanding term loan borrowings, no outstanding working capital borrowings and letters of credit outstanding of $11.1 million, leaving a net availability of $28.9 million. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposure at June 28, 2000 is consistent with the types of market risk and amount of exposure presented in its Annual Report on Form 10-K for the year ended December 29, 1999. 14
PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of Advantica was held on Wednesday, May 24, 2000, at which the following matters were voted on by the stockholders of Advantica: (i) Election of Directors Votes Against Name Votes For or Withheld ---------------- ---------- ------------- James B. Adamson 29,945,240 165,583 Ronald E. Blaylock 29,605,687 505,136 Vera King Farris 29,972,651 138,172 James J. Gaffney 29,971,687 139,136 Robert E. Marks 29,973,451 137,372 Lloyd I. Miller, III 30,001,585 109,238 Charles F. Moran 29,972,582 138,241 Elizabeth A. Sanders 29,971,564 139,259 Donald R. Shepherd 29,974,449 136,374 (ii) Ratification of the Selection of Auditors Votes For Votes Against Votes Abstaining --------- ------------- ---------------- 30,066,439 28,998 15,386 (iii) Approval of 2000 Incentive Program for the Company's employees Votes For Votes Against Votes Abstaining --------- ------------- ---------------- 28,340,309 1,750,746 19,768 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. The following are included as exhibits to this report: EXHIBIT NO. DESCRIPTION - ------- ----------- 10.1 Master Service Agreement for Information Technology Services, dated January 25, 2000, between Advantica and Affiliated Computer Services, Inc. 10.2 Advantica Stock Option Plan, as amended through May 19, 1999. 10.3 Amendment No. 7, dated as of June 20, 2000, to the Credit Agreement dated January 7, 1998, among Denny's, Inc., El Pollo Loco, Inc., Flagstar Enterprises, Inc., Flagstar Systems, Inc. and Quincy's Restaurants, Inc., as borrowers, Advantica, as a guarantor, the lenders named therein, and The Chase Manhattan Bank. 27.1 Financial Data Schedule for the 6 months ended June 28, 2000. 27.2 Restated Financial Data Schedule for the 3 months ended March 29, 2000. 15
27.3 Restated Financial Data Schedule for the year ended December 29, 1999. 27.4 Restated Financial Data Schedule for the 9 months ended September 29, 1999. 27.5 Restated Financial Data Schedule for the 6 months ended June 30, 1999. 27.6 Restated Financial Data Schedule for the 3 months ended March 30, 1999. 27.7 Restated Financial Data Schedule for the 51 weeks ended December 30, 1998. 27.8 Restated Financial Data Schedule for the one week ended January 7, 1998. - -------------------------------- b. No reports on Form 8-K were filed during the quarter ended June 28, 2000. 16
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANTICA RESTAURANT GROUP, INC. Date: August 14, 2000 By: /s/ Rhonda J. Parish -------------------------------- Rhonda J. Parish Executive Vice President, General Counsel and Secretary Date: August 14, 2000 By: /s/ Ronald B. Hutchison -------------------------------- Ronald B. Hutchison Executive Vice President and Chief Financial Officer 17