UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 27, 2000 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to __________ Commission file number 0-18051 ADVANTICA RESTAURANT GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3487402 - ---------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 203 East Main Street Spartanburg, South Carolina 29319-9966 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (864) 597-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of November 10, 2000, 40,061,119 shares of the registrant's Common Stock, par value $.01 per share, were outstanding. 1
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Advantica Restaurant Group, Inc. Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended September 27, 2000 September 29, 1999 ------------------ ------------------ <S> <C> <C> (In thousands, except per share amounts) Revenue: Company restaurant sales $ 282,619 $ 297,674 Franchise and licensing revenue 20,023 16,164 --------- --------- Total operating revenue 302,642 313,838 --------- --------- Cost of company restaurant sales: Product costs 73,568 75,975 Payroll and benefits 111,341 114,719 Occupancy 15,359 16,363 Other operating expenses 41,848 39,692 --------- --------- Total costs of company restaurant sales 242,116 246,749 Franchise restaurant costs 9,014 7,290 General and administrative expenses 15,850 18,516 Amortization of reorganization value in excess of amounts allocable to identifiable assets 10,342 22,229 Depreciation and other amortization 28,274 37,189 Gains on refranchising and other, net (16,315) (3,832) --------- --------- Total operating costs and expenses 289,281 328,141 --------- --------- Operating income (loss) 13,361 (14,303) --------- --------- Other expenses: Interest expense, net 20,578 21,219 Other nonoperating (income) expenses, net (418) (746) --------- --------- Total other expenses, net 20,160 20,473 --------- --------- Loss before taxes (6,799) (34,776) Provision for (benefit from) income taxes 478 (324) --------- --------- Loss from continuing operations (7,277) (34,452) Discontinued operations: Loss from operations of discontinued operations, net of applicable income tax provision (benefit) of: 2000 -- $0; 1999 -- $(16) -- (10,763) --------- --------- Net loss applicable to common shareholders $ (7,277) $ (45,215) ========= ========= Per share amounts applicable to common shareholders: Basic and diluted earnings per share: Loss from continuing operations $ (0.18) $ (0.86) Loss from discontinued operations, net -- (0.27) --------- --------- Net loss $ (0.18) $ (1.13) ========= ========= Average outstanding shares 40,079 40,025 ========= ========= </TABLE> See accompanying notes 2
Advantica Restaurant Group, Inc. Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Three Quarters Three Quarters Ended Ended September 27, 2000 September 29, 1999 ------------------ ------------------ <S> <C> <C> (In thousands, except per share amounts) Revenue: Company restaurant sales $ 829,658 $ 865,979 Franchise and licensing revenue 53,577 43,940 --------- --------- Total operating revenue 883,235 909,919 --------- --------- Cost of company restaurant sales: Product costs 215,561 223,566 Payroll and benefits 330,875 340,526 Occupancy 47,641 48,292 Other operating expenses 122,184 118,540 --------- --------- Total costs of company restaurant sales 716,261 730,924 Franchise restaurant costs 24,622 21,766 General and administrative expenses 51,650 59,012 Amortization of reorganization value in excess of amounts allocable to identifiable assets 31,637 66,556 Depreciation and other amortization 83,938 89,552 Restructuring and impairment charges 7,248 -- Gains on refranchising and other, net (38,339) (11,788) --------- --------- Total operating costs and expenses 877,017 956,022 --------- --------- Operating income (loss) 6,218 (46,103) --------- --------- Other expenses: Interest expense, net 62,322 60,947 Other nonoperating (income) expenses, net (1,398) 286 --------- --------- Total other expenses, net 60,924 61,233 --------- --------- Loss before taxes (54,706) (107,336) Provision for (benefit from) income taxes 1,175 (1,263) --------- --------- Loss from continuing operations (55,881) (106,073) Discontinued operations: Loss from operations of discontinued operations, net of applicable income tax provision of: 2000 -- $186; 1999 -- $249 (17,330) (42,028) --------- --------- Net loss applicable to common shareholders $ (73,211) $(148,101) ========= ========= Per share amounts applicable to common shareholders: Basic and diluted earnings per share: Loss from continuing operations $ (1.39) $ (2.65) Loss from discontinued operations, net (0.44) (1.05) --------- --------- Net loss $ (1.83) $ (3.70) ========= ========= Average outstanding shares 40,073 40,023 ========= ========= </TABLE> See accompanying notes 3
Advantica Restaurant Group, Inc. Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> September 27, 2000 December 29, 1999 ------------------ ----------------- <S> <C> <C> (In thousands) Assets Current Assets: Cash and cash equivalents $ 12,571 $ 165,828 Investments -- 17,084 Receivables, less allowance for doubtful accounts of: 2000 -- $3,404; 1999 -- $3,461 10,171 16,902 Inventories 11,328 12,221 Other 10,973 8,706 Restricted investments securing in-substance defeased debt 147,845 158,710 ----------- ----------- 192,888 379,451 ----------- ----------- Property 654,706 667,564 Less accumulated depreciation 208,074 156,627 ----------- ----------- 446,632 510,937 ----------- ----------- Other Assets: Reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization of: 2000 -- $191,807; 1999 -- $160,319 95,273 126,910 Goodwill, net of accumulated amortization of: 2000 -- $2,069; 1999 -- $1,075 25,784 16,758 Other intangible assets, net of accumulated amortization of: 2000 -- $21,385; 1999 -- $16,829 118,386 131,513 Deferred financing costs, net 13,233 17,165 Other 50,589 53,529 ----------- ----------- Total Assets $ 942,785 $ 1,236,263 =========== =========== Liabilities Current Liabilities: Current maturities of notes and debentures $ 13,825 $ 164,811 Current maturities of capital lease obligations 10,926 12,614 Current maturities of in-substance defeased debt 146,363 158,731 Accounts payable 60,702 74,069 Accrued salaries and vacations 35,583 32,804 Accrued insurance 17,905 19,785 Accrued taxes 14,557 14,913 Accrued interest 18,057 33,974 Net liabilities of discontinued operations 69,391 53,979 Other 50,620 64,779 ----------- ----------- 437,929 630,459 ----------- ----------- Long-Term Liabilities: Notes and debentures, less current maturities 554,377 555,978 Capital lease obligations, less current maturities 41,109 59,385 Liability for insurance claims 28,847 26,708 Other 99,536 109,573 ----------- ----------- 723,869 751,644 ----------- ----------- Total Liabilities 1,161,798 1,382,103 ----------- ----------- Shareholders' Deficit (219,013) (145,840) ----------- ----------- Total Liabilities and Shareholders' Deficit $ 942,785 $ 1,236,263 =========== =========== </TABLE> See accompanying notes 4
Advantica Restaurant Group, Inc. Statements of Consolidated Cash Flows (Unaudited) <TABLE> <CAPTION> Three Quarters Three Quarters Ended Ended September 27, 2000 September 29, 1999 ------------------ ------------------ <S> <C> <C> (In thousands) Cash Flows from Operating Activities: Net loss $ (73,211) $(148,101) Adjustments to reconcile net loss to cash flows from operating activities: Amortization of reorganization value in excess of amounts allocable to identifiable assets 31,637 66,556 Depreciation and other amortization 83,938 89,552 Restructuring and impairment charges 7,248 -- Amortization of deferred gains (9,807) (8,639) Amortization of deferred financing costs 4,609 4,647 Deferred income tax benefit -- (2,249) Gains on refranchising and other, net (38,339) (11,788) Equity in loss from discontinued operations, net 17,330 42,028 Amortization of debt premium (8,003) (10,333) Other (195) 3 Changes in Assets and Liabilities Net of Effects of Acquisitions and Dispositions: Decrease (increase) in assets: Receivables 7,996 (1,736) Inventories 17 (1,122) Other current assets (3,006) 514 Other assets (1,989) (12,066) Increase (decrease) in liabilities: Accounts payable (640) (14,617) Accrued salaries and vacations 2,779 1,832 Accrued taxes (668) 2,138 Other accrued liabilities (40,946) (37,568) Other noncurrent liabilities and deferred credits (3,199) (9,337) --------- --------- Net cash flows used in operating activities (24,449) (50,286) --------- --------- Cash Flows from Investing Activities: Purchase of property (24,764) (42,036) Acquisition of restaurant units (4,461) (10,853) Proceeds from disposition of property 47,514 8,875 Advances to discontinued operations, net (1,917) (3,286) Proceeds from maturity of investments securing in-substance defeased debt 10,865 9,675 Purchase of investments -- (45,564) Proceeds from sale and maturity of investments 17,084 75,174 --------- --------- Net cash flows (used in) provided by investing activities 44,321 (8,015) --------- --------- </TABLE> See accompanying notes 5
Advantica Restaurant Group, Inc. Statements of Consolidated Cash Flows (Continued) (Unaudited) <TABLE> <CAPTION> Three Quarters Three Quarters Ended Ended September 27, 2000 September 29, 1999 ------------------ ------------------ <S> <C> <C> (In thousands) Cash Flows from Financing Activities: Net borrowings under credit agreements $ 12,600 $ -- Long-term debt payments (179,405) (40,491) Debt transaction costs (519) (350) Bank overdrafts (5,805) (7,230) --------- --------- Net cash flows used in financing activities (173,129) (48,071) --------- --------- Decrease in cash and cash equivalents (153,257) (106,372) Cash and Cash Equivalents at: Beginning of period 165,828 158,183 --------- --------- End of period $ 12,571 $ 51,811 ========= ========= </TABLE> See accompanying notes 6
ADVANTICA RESTAURANT GROUP, INC. Notes to Consolidated Financial Statements September 27, 2000 (Unaudited) Note 1. General Advantica Restaurant Group, Inc. ("Advantica" or, together with its subsidiaries including predecessors, the "Company"), through its wholly owned subsidiaries, Denny's Holdings, Inc. and FRD Acquisition Co. ("FRD") (and their respective subsidiaries), owns and operates the Denny's, Coco's and Carrows restaurant brands. At September 27, 2000, the Company has accounted for FRD as a discontinued operation in its consolidated financial statements in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). See Note 2. The consolidated financial statements of Advantica and its subsidiaries included herein are unaudited and include all adjustments management believes are necessary for a fair presentation of the results of operations for such interim periods. All such adjustments are of a normal and recurring nature. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 29, 1999 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Advantica Restaurant Group, Inc. 1999 Annual Report on Form 10-K. The results of operations for the three quarters ended September 27, 2000 are not necessarily indicative of the results for the entire fiscal year ending December 27, 2000. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 2. Discontinued Operations During the first quarter of 2000, the Company announced a plan to explore the possible sale of FRD, its wholly owned subsidiary which operates the Company's Coco's and Carrows restaurants. Due to the Company's progress in the sale process, the Company began accounting for FRD as a discontinued operation in the second quarter. The financial statements presented herein have been reclassified for all periods to reflect FRD as a discontinued operation, and in accordance with APB 30, FRD's results from operations subsequent to the date that FRD was identified as a discontinued operation (the "measurement date") have been included as a component of net liabilities held for sale in the accompanying Consolidated Balance Sheets. On December 29, 1999, the Company consummated the sale of its wholly owned subsidiary, El Pollo Loco, Inc. ("EPL"). The Statements of Consolidated Operations and Cash Flows presented herein for the quarter and three quarters ended September 29, 1999 reflect EPL as a discontinued operation in accordance with APB 30. 7
Revenue and operating income of the discontinued operations for the reported periods are as follows: <TABLE> <CAPTION> Quarter Quarter Three Quarters Three Quarters Ended Ended Ended Ended September 27, 2000 September 29, 1999 September 27, 2000 September 29, 1999 ------------------ ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> (In millions) REVENUE FRD $90.9 $ 98.0 $279.4 $292.2 EPL --- 38.5 --- 107.1 ----- ------ ------ ------ $90.9 $136.5 $279.4 $399.3 ===== ====== ====== ====== OPERATING (LOSS) INCOME FRD $(4.3) $ (4.2) $ (8.7) $(19.8) EPL --- 1.2 --- 4.6 ----- ------ ------ ------ $(4.3) $ (3.0) $ (8.7) $(15.2) ===== ====== ====== ====== </TABLE> The financial position of FRD at September 27, 2000 and December 29, 1999 is reported in the Consolidated Balance Sheets as "Net liabilities of discontinued operations" and consists of the following: <TABLE> <CAPTION> (In thousands) September 27, 2000 December 29, 1999 ------------------ ----------------- <S> <C> <C> Assets Current assets $ 12,212 $ 19,885 Property owned, net 102,168 111,669 Other assets 95,053 100,320 --------- --------- 209,433 231,874 --------- --------- Less liabilities Current liabilities 88,993 57,106 Long-term liabilities 189,831 228,747 --------- --------- Total liabilities 278,824 285,853 --------- --------- Net liabilities of discontinued operations $ (69,391) $ (53,979) ========= ========= </TABLE> On May 14, 1999, FRD and certain of its operating subsidiaries entered into a new $70 million credit facility (the "FRD Credit Facility"). The FRD Credit Facility, which is guaranteed by Advantica, consists of a $30 million term loan and a $40 million revolving credit facility and matures in May 2003. Such facility is unavailable to Advantica and its other subsidiaries. FRD has entered into an amendment with the lenders under the FRD Credit Facility which, among other things, provides for a waiver of compliance with certain third quarter financial covenants until January 8, 2001. If the FRD sales process is not completed by January 8, 2001, the Company may be required to seek an additional waiver or negotiate other arrangements with its lenders. No assurance can be given that the Company will be able to obtain such additional waiver or to negotiate such other arrangements on commercially reasonable terms or otherwise, if needed. A default under the FRD Credit Facility, if not adequately resolved, could give the lenders under the FRD Credit Facility the ability to exercise their rights under the Advantica guarantee. As a result, the outstanding term loan borrowings of $30.0 million have been reclassified as current debt. The Company believes, however, that it will be able to successfully complete the FRD sale process or negotiate other arrangements with its lenders. Note 3. Debt On March 31, 2000, the Company deposited $100 million with The Chase Manhattan Bank ("Chase"), which equaled the then outstanding principal amount of the mortgage notes secured by a pool of cross-collateralized mortgages on the land, buildings, equipment and improvements of 239 Denny's restaurant properties (the "Denny's Mortgage Notes"). Such deposit was required under the terms and conditions of Advantica's $200 million senior secured revolving credit facility (as amended to date, the "Advantica Credit Facility"). During the quarter ended June 28, 2000, the Company used a portion of the funds held in escrow to repurchase $5.0 million in aggregate principal amount of these notes. On July 12, 2000, the Company used the remaining funds to repay in full the outstanding balance of the Denny's Mortgage Notes. 8
Note 4. Restructuring and Impairment In late 1999, the Company's management and Board began an extensive review of the Company's operations and structure. Based on its review, in February 2000, the Company announced that its strategic direction would focus primarily on its Denny's brand. At that time, management began the implementation of a restructuring plan focused on (1) streamlining its overhead structure by merging corporate administrative functions with the Denny's organization and (2) becoming a more franchised-based operation by refranchising a significant number of its Denny's units over the next several years. The implementation of the restructuring plan during the first quarter of 2000 involved a reduction of personnel related to the corporate reorganization and the identification of units for closure. Fifty employees in the Company's corporate offices were terminated as a result of the plan. Additionally, an impairment charge was recorded for certain acquired software costs and capitalized construction costs which became obsolete as a result of the cancellation of projects identified through the review. Charges attributable to the restructuring plan are comprised of the following: Restructuring: Severance and outplacement costs $ 3,713 Operating lease liabilities for closed stores 909 ------- 4,622 ------- Impairment: Acquired software costs 1,896 Capitalized construction costs 730 ------- 2,626 ------- $ 7,248 ======= Approximately $5.1 million of the restructuring and impairment charges represent cash charges of which approximately $3.3 million was paid through September 27, 2000. Note 5. Acquisitions During 2000, Denny's, Inc., a wholly owned subsidiary of the Company, purchased 59 Denny's franchise restaurants from Olajuwon Holdings, Inc. ("OHI"), a bankrupt franchisee. The purchases were made with the approval of the bankruptcy court and other parties having an interest in OHI bankruptcy estate. Denny's, Inc. separately reacquired 3 other restaurants from affiliated franchisees of OHI. The acquisitions of these units have been accounted for under the purchase method of accounting. The purchase price of approximately $16.4 million, consisting of cash of approximately $4.5 million, the forgiveness of debt of $1.4 million and the assumption of capital leases and other liabilities of $10.5 million, exceeded the estimated fair value of the restaurants' identifiable net assets by approximately $10.2 million. This excess has been reflected as goodwill in the accompanying consolidated financial statements. The Company is in the process of identifying which units will ultimately be retained, sold or closed. Assets acquired and liabilities assumed have been recorded at their estimated fair values, and are subject to adjustment when additional information concerning asset and liability valuations is finalized. 9
Note 6. Comprehensive Income (Loss) --------------------------- The Company's comprehensive income (loss) for the periods indicated is as follows: <TABLE> <CAPTION> Quarter Quarter Three Quarters Three Quarters Ended Ended Ended Ended September 27, 2000 September 29, 1999 September 27, 2000 September 29, 1999 ------------------ ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> (In thousands) Net loss $ (7,277) $(45,215) $(73,221) $(148,101) Other comprehensive income (loss): Foreign currency translation adjustment (87) (53) (42) (84) -------- -------- -------- --------- Comprehensive income (loss) $ (7,364) $(45,268) $(73,263) $(148,185) ======== ======== ======== ========= </TABLE> Note 7. Loss Per Share Applicable to Common Shareholders The calculations of basic and diluted loss per share have been based on the weighted average number of Advantica shares outstanding. Because of the loss from continuing operations for the quarters and three quarters ended September 27, 2000 and September 29, 1999, warrants and options of the Company have been omitted from the calculation of weighted average dilutive shares. Note 8. Segment Information The Company currently operates three restaurant concepts -- Denny's, Coco's and Carrows -- and each concept is considered a reportable segment. Coco's and Carrows are operated by FRD, the wholly owned subsidiary which has been reclassified as a discontinued operation in the consolidated financial statements; therefore, their operating results are shown separately in this section. See Note 2. Advantica evaluates performance based on several factors, of which the primary financial measure is business segment operating income before interest, taxes, depreciation, amortization and charges for restructuring and impairment ("EBITDA as defined"). EBITDA as defined is a key internal measure used to evaluate the amount of cash flow available for debt repayment and funding of additional investments. EBITDA as defined is not a measure defined by generally accepted accounting principles and should not be considered as an alternative to net income or cash flow data prepared in accordance with generally accepted accounting principles, or as a measure of a company's profitability or liquidity. 10
The Company's measure of EBITDA as defined may not be comparable to similarly titled measures reported by other companies. <TABLE> <CAPTION> Quarter Quarter Three Quarters Three Quarters Ended Ended Ended Ended September 27, 2000 September 29, 1999 September 27, 2000 September 29, 1999 ------------------ ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> (In millions) REVENUE Revenue from continuing operations $302.6 $313.8 $ 883.2 $ 909.9 ====== ====== ======= ======= Revenue from discontinued operations: Coco's $ 51.8 $ 56.1 $ 161.3 $ 168.2 Carrows 39.1 41.9 118.1 124.0 ------ ------ ------- ------- Total revenue from discontinued operations $ 90.9 $ 98.0 $ 279.4 $ 292.2 ====== ====== ======= ======= EBITDA AS DEFINED EBITDA as defined from continuing operations $ 52.0 $ 45.1 $ 129.0 $ 110.0 Depreciation and amortization expense (38.6) (59.4) (115.6) (156.1) Restructuring and impairment charges --- --- (7.2) --- Other expenses: Interest expense, net (20.6) (21.2) (62.3) (60.9) Other, net 0.4 0.7 1.4 (0.3) ------ ------ ------- ------- Consolidated loss from continuing operations before income taxes $ (6.8) $(34.8) $(54.7) $(107.3) ====== ====== ====== ======= EBITDA as defined from discontinued operations: Coco's $ 3.8 $ 6.4 $ 15.5 $ 19.2 Carrows 3.3 5.6 11.2 13.2 ------ ------ ------ ------- Total EBITDA as defined from discontinued operations $ 7.1 $ 12.0 $ 26.7 $ 32.4 ====== ======= ====== ======= </TABLE> Note 9. SFAS 133 and SFAS 138 Implementation In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133" ("SFAS 138"), which amends certain provisions of SFAS 133 to clarify areas causing difficulties in implementation, including expanding the normal purchase and sale exemption for supply contracts. Advantica has appointed a team to implement SFAS 133 for the entire company. This team has been implementing a SFAS 133 risk management process, educating both financial and nonfinancial personnel, reviewing contracts to identify derivatives and embedded derivatives and addressing various other SFAS 133-related issues. Advantica will adopt SFAS 133 and the corresponding amendments under SFAS 138 on January 1, 2001. SFAS 133, as amended by SFAS 138, is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to highlight significant changes in financial position as of September 27, 2000 and the results of operations for the quarter and three quarters ended September 27, 2000 compared to the quarter and three quarters ended September 29, 1999. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, which reflect management's best judgment based on factors currently known, involve risks, uncertainties, and other factors which may cause the actual performance of Advantica and its subsidiaries and underlying concepts to be materially different from the performance indicated or implied by such 11
statements. Such factors include, among others: competitive pressures from within the restaurant industry; the level of success of the Company's operating initiatives and advertising and promotional efforts, including the initiatives and efforts specifically mentioned herein; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy, particularly at the retail level; and other factors included in the discussion below, in Management's Discussion and Analysis of Financial Condition and Result of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 29, 1999 and in Exhibit 99.1 thereto. RESTAURANT UNIT ACTIVITY The table below summarizes restaurant unit activity for the quarter ended September 27, 2000. <TABLE> <CAPTION> Ending Ending Ending Units Units Net Units Units Units June 28, Opened/ Units Sold/ September 27, September 29, 2000 Acquired Refranchised Closed 2000 1999 ------------ -------- ------------ ----------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Denny's Company-owned units 833 1 (39) (11) 784 869 Franchised units 942 36 39 (4) 1,013 879 Licensed units 18 1 -- -- 19 17 ------ ------ ------ ------ ------ ------ 1,793 38 -- (15) 1,816 1,765 ------ ------ ------ ------ ------ ------ Discontinued Operations: Coco's Company-owned units 144 -- -- -- 144 150 Franchised units 34 2 -- -- 36 34 Licensed units 301 2 -- (3) 300 305 ------ ------ ------ ------ ------ ------ 479 4 -- (3) 480 489 ------ ------ ------ ------ ------ ------ Carrows Company-owned units 116 -- -- -- 116 120 Franchised units 28 1 -- (1) 28 28 ------ ------ ------ ------ ------ ------ 144 1 -- (1) 144 148 ------ ------ ------ ------ ------ ------ 2,416 43 -- (19) 2,440 2,402 ====== ====== ====== ====== ====== ====== </TABLE> RESULTS OF OPERATIONS Quarter Ended September 27, 2000 Compared to Quarter Ended September 29, 1999 - ----------------------------------------------------------------------------- The Company's CONSOLIDATED REVENUE for the third quarter of 2000 decreased $11.2 million (3.6%) compared to the third quarter of 1999. Denny's experienced a 1.4% increase in same-store sales for the quarter; however, company restaurant sales decreased $15.1 million. This decrease is primarily due to a net 85-unit decrease in company-owned restaurants, consistent with the Company's strategy to reduce its portfolio of company-owned Denny's restaurants. FRANCHISE AND LICENSING REVENUE increased $3.9 million (23.9%), primarily attributable to a net 136-unit increase in franchised and licensed units. CONSOLIDATED OPERATING EXPENSES decreased $38.9 million (11.8%) compared to the prior year quarter. Excluding the impact of an $11.9 million decrease in amortization of excess reorganization value, an $8.9 million decrease in depreciation and other amortization and a $12.5 million increase in refranchising gains, operating expenses decreased $5.6 million. The majority of this decrease represents a reduction in the costs of company restaurant sales driven by the decrease in the number of company-owned restaurants. As a percentage of sales, cost of company restaurant sales increased primarily due to higher payroll costs, commodity costs and repairs and maintenance expenses. Franchise 12
margins improved primarily due to strong franchise revenue growth in the current quarter. General and administrative expenses benefited from reduced corporate overhead and information systems costs. The decrease in depreciation expense results from asset retirements related to the restaurants reimaged in 1999. Such retirements are recorded as a component of depreciation expense. The decrease was partially offset by higher depreciation expense resulting from asset additions throughout 1999 and 2000 related to the reimage program. The decrease in amortization of excess reorganization value from the prior year quarter resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. The Company's consolidated EBITDA AS DEFINED increased $6.9 million (15.2%) compared to the prior year quarter. This increase is a result of the factors noted in the preceding paragraphs, excluding the change in depreciation and amortization expense. CONSOLIDATED OPERATING INCOME for the third quarter of 2000 was $13.4 million compared to an operating loss of $14.3 million for the third quarter of 1999, primarily as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $20.6 million for the third quarter of 2000, an decrease of $0.6 million compared to the prior year quarter. Excluding the effect of $1.8 million of interest expense allocated to discontinued operations in the prior year, interest expense, net, decreased $2.4 million. This decrease primarily resulted from the repayment of the Denny's Mortgage Notes in 2000. The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the quarter ended September 27, 2000 has been computed based on management's estimate of the annual effective income tax rate applied to loss before taxes. The Company recorded an income tax provision reflecting an approximate rate of 7.0% for the quarter ended September 27, 2000 compared to an income tax benefit reflecting an approximate rate of (0.9)% for the quarter ended September 29, 1999. The change is due to the decrease in the Company's loss before taxes in the current year quarter and to the change in management's estimate of the annual effective income tax rate for the third quarter of 2000 compared to the third quarter of 1999. The Statements of Consolidated Operations and Cash Flows presented herein for the quarters ended September 27, 2000 and September 29, 1999 reflect FRD as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of FRD for the quarters ended September 27, 2000 and September 29, 1999 were $90.9 million and $4.3 million and $98.0 million and $4.2 million, respectively. In accordance with APB 30, FRD's net loss of $10.4 million for the quarter ended September 27, 2000, which was incurred subsequent to the measurement date, is included as a component of net liabilities held for sale. Additionally, the Statements of Consolidated Operations and Cash Flows presented herein for the quarter ended September 29, 1999 reflect EPL as a discontinued operation. EPL's revenue and operating income for the quarter ended September 29, 1999 were $38.5 million and $1.2 million, respectively. NET LOSS was $7.3 million for the third quarter of 2000 compared to a net loss of $45.2 million for the third quarter of 1999, primarily as a result of the factors discussed above. Three Quarters Ended September 27, 2000 Compared to Three Quarters Ended September 29, 1999 - -------------------------------------------------------------------------------- The Company's CONSOLIDATED REVENUE for the three quarters ended September 27, 2000 decreased $26.7 million (2.9%) compared to the three quarters ended September 29, 1999. Denny's experienced a 1.6% increase in same-store sales for the period; however, company restaurant sales decreased $36.3 million. This decrease is primarily due to a net 85-unit decrease in company-owned restaurants, consistent with the Company's strategy to reduce its portfolio of company-owned Denny's restaurants. FRANCHISE AND LICENSING REVENUE increased $9.6 million, primarily attributable to a net 136-unit increase in franchised and licensed units. CONSOLIDATED OPERATING EXPENSES decreased $79.0 million (8.3%) compared to the prior year period. Excluding the impact of a $34.9 million decrease in amortization of excess reorganization value, a $5.6 million decrease in depreciation 13
and other amortization, $7.2 million of restructuring and impairment charges in the current year period and a $26.6 million increase in refranchising gains, operating expenses decreased $19.1 million. The majority of this decrease represents a reduction in the costs of company restaurant sales driven by the decrease in the number of company-owned restaurants. As a percentage of sales, cost of company restaurant sales increased due primarily to higher payroll, commodity and advertising expenses. Franchise margins improved due to strong franchise revenue growth. General and administrative expenses benefited from reduced corporate overhead and information system costs and from a nonrecurring payroll tax adjustment. The decrease in depreciation expense results from asset retirements related to the restaurants reimaged in 1999. Such retirements are recorded as a component of depreciation expense. The decrease was partially offset by higher depreciation expense resulting from asset additions throughout 1999 and 2000 related to the reimage program. The decrease in amortization of excess reorganization value from the prior year period resulted from an impairment charge to reorganization value recorded in the fourth quarter of 1999. During the first quarter of 2000, the Company announced a restructuring plan as a result of an extensive review of the Company's operations and structure completed in early 2000. The plan's implementation involved a reduction of personnel related to the corporate reorganization and the identification of units for closure. Consequently, the Company recorded approximately $3.7 million of severance and outplacement costs and $0.9 million of operating lease liabilities for closed stores as a result of the plan. Additionally, a $2.6 million impairment charge was recorded related to certain acquired software and capitalized construction costs which became obsolete as a result of the cancellation of projects identified as part of the plan. The Company's consolidated EBITDA AS DEFINED increased $19.0 million (17.3%) compared to the prior year period. This increase is a result of the factors noted in the preceding paragraphs, excluding the restructuring and impairment charges and the change in depreciation and amortization expense. CONSOLIDATED OPERATING INCOME for the period was $6.2 million compared to an operating loss of $46.1 million for the prior year period, primarily as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $62.3 million for the three quarters ended September 27, 2000, an increase of $1.4 million compared to the prior year period. Excluding the effect of $5.5 million of interest expense allocated to discontinued operations in the prior year, interest expense, net, decreased $4.1 million. This decrease primarily resulted from the effects of the repayment of Denny's Mortgage Notes in 2000 partially offset by an increase related to Advantica Credit Facility borrowings. The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the three quarters ended September 27, 2000 has been computed based on management's estimate of the annual effective income tax rate applied to loss before taxes. The Company recorded an income tax provision reflecting an approximate rate of 2.1% for the three quarters ended September 27, 2000 compared to an income tax benefit reflecting an approximate rate of (1.2)% for the three quarters ended September 29, 1999. The Statements of Consolidated Operations and Cash Flows presented herein for the three quarters ended September 27, 2000 and September 29, 1999 reflect FRD as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of FRD for the three quarters ended September 27, 2000 and September 29, 1999 were $279.4 million and $8.7 million and $292.2 million and $19.8 million, respectively. In accordance with APB 30, FRD's net loss of $10.4 million for the quarter ended September 27, 2000, which was incurred subsequent to the measurement date, is included as a component of net liabilities held for sale. Additionally, the Statements of Consolidated Operations and Cash Flows presented herein for the three quarters ended September 29, 1999 reflect EPL as a discontinued operation. EPL's revenue and operating income for the three quarters ended September 29, 1999 were $107.1 million and $4.6 million, respectively. NET LOSS was $73.2 million for the three quarters ended September 27, 2000 compared to a net loss of $148.1 million for the three quarters ended September 29, 1999, primarily as a result of the factors discussed above. 14
Restaurant Operations <TABLE> <CAPTION> Denny's Quarter Ended Three Quarters Ended ----------------------------------------- ----------------------------------------- September 27, September 29, Increase/ September 27, September 29, Increase 2000 1999 (Decrease) 2000 1999 (Decrease) --------- --------- ---------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> Total systemwide sales (in millions) $ 592.7 $ 569.4 4.1% $ 1,681.2 $ 1,613.0 4.2% Average unit sales: Company-owned 349,500 340,800 2.6% 1,012,300 985,900 2.7% Franchise 314,500 307,200 2.4% 883,700 858,900 2.9% Same-store sales increase (company-owned) 1.4% 1.4% 1.6% 3.0% </TABLE> LIQUIDITY AND CAPITAL RESOURCES As of September 27, 2000 and December 29, 1999, the Company had working capital deficits, exclusive of net liabilities of discontinued operations, of $175.7 million and $197.0 million, respectively. The decrease in deficit relates primarily to Denny's refranchising activity. The Company is able to operate with a substantial working capital deficit because: (1) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows a limited investment in inventories and (3) accounts payable for food, beverages, and supplies usually become due after the receipt of cash from related sales. On March 31, 2000, the Company deposited $100 million with Chase, which equaled the then outstanding principal amount of the Denny's Mortgage Notes. Such deposit was required under the terms and conditions of the Advantica Credit Facility. During the quarter ended June 28, 2000, the Company used a portion of the funds held in escrow to repurchase $5.0 million in aggregate principal amount of these notes. On July 12, 2000, the Company used the remaining funds to repay in full the outstanding balance of the Denny's Mortgage Notes. The repayment or refinancing of the Denny's Mortgage Notes was required to maintain the Advantica Credit Facility in effect and available to the Company. The Advantica Credit Facility provides to the Company (excluding FRD) a working capital and letter of credit facility of up to $200 million. At September 27, 2000, the Company had outstanding working capital advances of $12.6 million and letters of credit outstanding of $67.3 million under the Advantica Credit Facility, leaving a net availability of $120.1 million. At September 27, 2000, FRD had $30.0 million outstanding term loan borrowings, working capital borrowings of $11.8 million and letters of credit outstanding of $16.3 million under the FRD Credit Facility, leaving a net availability of $11.9 million. FRD has entered into an amendment with the lenders under the FRD Credit Facility which, among other things, provides for a waiver of compliance with certain third quarter financial covenants until January 8, 2001. If the FRD sales process is not completed by January 8, 2001, the Company may be required to seek an additional waiver or negotiate other arrangements with its lenders. No assurance can be given that the Company will be able to obtain such additional waiver or to negotiate such other arrangements on commercially reasonable terms or otherwise, if needed. A default under the FRD Credit Facility, if not adequately resolved, could give the lenders under the FRD Credit Facility the ability to exercise their rights under the Advantica guarantee. The Company believes, however, that it will be able to successfully complete the FRD sale process or negotiate other arrangements with its lenders. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposure at September 27, 2000 is consistent with the types of market risk and amount of exposure presented in its Annual Report on Form 10-K for the year ended December 29, 1999. 15
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS One current and two former managers of Denny's restaurant units initiated, in the Superior Court of Los Angeles County, California, a class action lawsuit seeking, among other things, overtime compensation. The action was originally filed on September 2, 1997. The suit alleged that Denny's requires its managers to work more than 50% of their time performing nonmanagement related tasks, thus entitling them to overtime compensation. Denny's contends that it properly classifies its managers as salaried employees, thereby exempting them from the payment of overtime compensation. During the third quarter of 2000, the parties reached an agreement to resolve the claims of individuals who were employed as managers of Denny's in California between September 2, 1994 and July 21, 2000. While continuing to deny liability, the Company elected to resolve the case to avoid the expense of continued litigation and the risk of loss. The total settlement of $4.0 million was approved by the Court on October 27, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. The following are included as exhibits to this report: EXHIBIT NO. DESCRIPTION - ------- ----------- 27 Financial Data Schedule for the nine months ended September 27, 2000. - ---------------------------------- b. No reports on Form 8-K were filed during the quarter ended September 27, 2000. 16
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANTICA RESTAURANT GROUP, INC. Date: November 13, 2000 By: /s/Rhonda J. Parish ------------------------------------ Rhonda J. Parish Executive Vice President, General Counsel and Secretary Date: November 13, 2000 By: /s/Ronald B. Hutchison ------------------------------------ Ronald B. Hutchison Executive Vice President and Chief Financial Officer 17