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 28, 2001 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 11, 2001, 40,143,025 shares of the registrant's Common Stock, par value $.01 per share, were outstanding. 1
PART I - FINANCIAL INFORMATION FINANCIAL STATEMENTS Advantica Restaurant Group, Inc. Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended March 28, 2001 March 29, 2000 -------------- -------------- <S> <C> <C> (In thousands, except per share amounts) Revenue: Company restaurant sales $236,787 $267,627 Franchise and licensing revenue 21,564 16,033 ------- -------- Total operating revenue 258,351 283,660 ------- -------- Cost of company restaurant sales: Product costs 59,672 68,633 Payroll and benefits 97,139 109,102 Occupancy 15,069 15,941 Other operating expenses 35,875 39,364 ------- -------- Total costs of company restaurant sales 207,755 233,040 Franchise restaurant costs 9,723 7,189 General and administrative expenses 16,030 19,171 Amortization of reorganization value in excess of amounts allocable to identifiable assets 7,574 10,731 Depreciation and other amortization 23,837 27,148 Restructuring charges --- 7,248 Gains on refranchising and other, net (4,400) (4,678) ------- -------- Total operating costs and expenses 260,519 299,849 ------- -------- Operating loss (2,168) (16,189) ------- -------- Other expenses: Interest expense, net 18,460 21,485 Other nonoperating (income) expenses, net (7) (739) ------- -------- Total other expenses, net 18,453 20,746 ------- -------- Loss before income taxes (20,621) (36,935) Provision for income taxes 533 360 ------- -------- Loss from continuing operations (21,154) (37,295) ------- -------- Discontinued operations: Loss from operations of discontinued operations, net of applicable income tax benefit of: 2000 -- $82 --- (9,180) ------- -------- Loss before extraordinary gain (21,154) (46,475) Extraordinary gain, net of income tax provision of: 2001 -- $0 7,778 --- ------- -------- Net loss applicable to common shareholders $(13,376) $(46,475) ======== ======== Per share amounts applicable to common shareholders: Basic and diluted earnings per share: Loss from continuing operations $ (0.53) $ (0.93) Loss from discontinued operations, net --- (0.23) ------ -------- Loss before extraordinary gain (0.53) (1.16) Extraordinary gain 0.20 --- ------ -------- Net loss $ (0.33) $ (1.16) ======== ======== Average outstanding shares 40,117 40,063 ======== ======== </TABLE> See accompanying notes 2
Advantica Restaurant Group, Inc. Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> March 28, 2001 December 27, 2000 -------------- ----------------- <S> <C> <C> (In thousands) Assets Current Assets: Cash and cash equivalents $ 4,090 $ 27,260 Receivables, less allowance for doubtful accounts of: 2001 -- $4,080; 2000 -- $4,308 4,897 6,427 Inventories 9,375 10,249 Other 19,725 10,593 --------- --------- 38,087 54,529 --------- --------- Property 635,582 641,757 Less accumulated depreciation 231,321 216,430 --------- --------- 404,261 425,327 --------- --------- Other Assets: Reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization of: 2001 -- $209,878; 2000 -- $202,304 50,603 61,177 Goodwill, net of accumulated amortization of: 2001 -- $2,947; 2000 -- $2,495 25,025 25,476 Other intangible assets, net of accumulated amortization of: 2001 -- $24,953; 2000 -- $23,168 112,965 115,516 Deferred financing costs, net 11,718 12,543 Other 43,858 48,865 --------- --------- Total Assets $686,517 $743,433 ========= ========= Liabilities Current Liabilities: Current maturities of notes and debentures $ 884 $ 1,086 Current maturities of capital lease obligations 5,295 10,510 Net liabilities of discontinued operations 12,580 69,400 Accounts payable 45,246 68,087 Accrued salaries and vacations 30,193 30,699 Accrued insurance 16,070 17,502 Accrued taxes 10,345 11,703 Accrued interest 13,587 28,159 Other 50,326 57,410 --------- --------- 184,526 294,556 --------- --------- Long-Term Liabilities: Notes and debentures, less current maturities 628,125 553,730 Capital lease obligations, less current maturities 38,665 39,980 Liability for insurance claims 24,716 25,468 Other noncurrent liabilities and deferred credits 70,092 75,960 --------- --------- 761,598 695,138 --------- --------- Total Liabilities 946,124 989,694 --------- --------- Shareholders' Deficiency (259,607) (246,261) --------- --------- Total Liabilities and Shareholders' Deficiency $686,517 $743,433 ========= ========= </TABLE> See accompanying notes 3
Advantica Restaurant Group, Inc. Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended March 28, 2001 March 29, 2000 -------------- -------------- <S> <C> <C> (In thousands) Cash Flows from Operating Activities: Net loss $(13,376) $(46,475) Adjustments to reconcile net loss to cash flows from operating activities: Amortization of reorganization value in excess of amounts allocable to identifiable assets 7,574 10,731 Depreciation and other amortization 23,837 27,148 Restructuring charges --- 7,248 Amortization of deferred gains (2,637) (3,364) Amortization of deferred financing costs 826 1,643 Gains on refranchising and other, net (4,400) (4,678) Loss from discontinued operations, net --- 9,180 Amortization of debt premium (454) (3,303) Extraordinary gain (7,778) --- Other --- (173) Changes in Assets and Liabilities, Net of Effects of Dispositions: Decrease (increase) in assets: Receivables 6,356 (477) Inventories 578 65 Other current assets (9,043) (294) Other assets (1,744) (693) Increase (decrease) in liabilities: Accounts payable (5,765) (1,731) Accrued salaries and vacations (506) (1,684) Accrued taxes (1,384) (2,105) Other accrued liabilities (24,440) (17,648) Other noncurrent liabilities and deferred credits (1,485) 386 -------- -------- Net cash flows used in operating activities (33,841) (26,224) -------- -------- Cash Flows from Investing Activities: Purchase of property (5,883) (7,822) Acquisition of restaurant units --- (3,422) Proceeds from disposition of property 10,913 4,098 Advances to discontinued operations, net (55,437) (357) Proceeds from sale and maturity of investments --- 14,379 -------- -------- Net cash flows (used in) provided by investing activities (50,407) 6,876 -------- -------- </TABLE> See accompanying notes 4
Advantica Restaurant Group, Inc. Consolidated Statements of Cash Flows - Continued (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended March 28, 2001 March 29, 2000 -------------- -------------- <S> <C> <C> (In thousands) Cash Flows from Financing Activities: Net borrowings under credit agreements $ 75,000 $ --- Long-term debt payments (1,768) (63,771) Debt transaction costs --- (506) Bank overdrafts (12,154) (17,446) -------- -------- Net cash flows provided by (used in) financing activities 61,078 (81,723) -------- -------- Decrease in cash and cash equivalents (23,170) (101,071) Cash and Cash Equivalents at: Beginning of period 27,260 165,828 -------- --------- End of period $ 4,090 $ 64,757 ======== ========= </TABLE> See accompanying notes 5
ADVANTICA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 28, 2001 (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. The Company has accounted for FRD as a discontinued operation 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. Excluding restructuring charges recorded in the quarter ended March 29, 2000, 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 27, 2000 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. 2000 Annual Report on Form 10-K. The results of operations for the quarter ended March 28, 2001 are not necessarily indicative of the results for the entire fiscal year ending December 26, 2001. 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 or recapitalization of its Coco's and Carrows concepts, which operate under Advantica's wholly owned subsidiary, FRD. As a result, the Company began accounting for FRD as a discontinued operation in the second quarter of 2000 and continued to market for divestiture its Coco's and Carrows concepts throughout the balance of 2000 and the first quarter of 2001. The Statements of Consolidated Operations and Cash Flows for the quarter ended March 29, 2000 have been reclassified to reflect FRD as a discontinued operation 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"). Also 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 of discontinued operations in the Consolidated Balance Sheets. Revenue and operating loss of the discontinued operations were $89.4 million and $0.8 million for the quarter ended March 28, 2001 and $94.7 million and $2.8 million for the quarter ended March 29, 2000. On February 14, 2001, FRD filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). FRD's financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The financial position of FRD is reported as net liabilities of discontinued operations in the Consolidated Balance Sheets and consists of the assets and liabilities reported below. FRD's financial position for the year ended December 27, 2000 and the quarter ended March 28, 2001 have been presented in conformity with American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), and accordingly, all prepetition liabilities of FRD that are subject to compromise through this bankruptcy proceeding are segregated below as liabilities subject to compromise. 6
<TABLE> <CAPTION> March 28, December 27, 2001 2000 -------- ----------- <S> <C> <C> (In thousands) Assets Current assets $ 26,692 $ 14,982 Property owned, net 83,727 88,562 Property held under capital leases, net 9,949 10,791 Other assets 107,363 99,126 --------- --------- 227,731 213,461 --------- --------- Less liabilities Current liabilities Current portion of obligations under capital lease 2,745 2,709 Coco's/Carrows Credit Facility payable to Denny's, Inc. (see Note 3) 56,129 --- Other current liabilities 37,016 81,504 --------- --------- 95,890 84,213 --------- --------- Long-term liabilities Obligations under capital lease, noncurrent 6,554 7,323 Other long-term liabilities 17,662 17,117 --------- --------- 24,216 24,440 --------- --------- Total liabilities not subject to compromise 120,106 108,653 Liabilities subject to compromise 176,334 174,208 --------- --------- Total liabilities 296,440 282,861 --------- --------- Net liabilities of FRD (68,709) (69,400) Denny's, Inc. receivable related to Coco's/Carrows Credit Facility (see Note 3) 56,129 --- --------- --------- Net liabilities of discontinued operations $ (12,580) $ (69,400) ========= ========= </TABLE> Note 3. COCO'S/CARROWS CREDIT FACILITY Certain of FRD's operating subsidiaries have a $70 million senior secured credit facility (the "Coco's/Carrows Credit Facility"), which consists of a $30 million term loan and a $40 million revolving credit facility. At December 27, 2000, the lenders under the Coco's/Carrows Credit Facility were Credit Lyonnais New York Branch and other lenders named therein (the "Lenders"), and the facility was guaranteed by Advantica. On January 8, 2001, by utilizing a combination of cash on hand and an advance under the Advantica Credit Facility, Advantica paid $70 million to the Lenders in full and complete satisfaction of Advantica's guarantee of the Coco's/Carrows Credit Facility. As a result of its satisfaction of obligations under its guarantee, Advantica was subrogated to the rights and collateral of the Lenders. Immediately after obtaining its subrogation rights, Advantica assigned such rights to its wholly owned subsidiary, Denny's, Inc. The $70 million paid to the Lenders included approximately $14.9 million paid as a deposit to one of the former Lenders to secure outstanding letters of credit issued under the revolving credit facility. The balance of the Denny's, Inc. receivable related to the Coco's/Carrows Credit Facility of $56.1 million at March 28, 2001 (see Note 2) includes related interest of $1.4 million and eliminates in consolidation. At March 28, 2001, the balance of the deposit related to the outstanding letters of credit was $11.9 million which is reflected in other current assets on Advantica's Consolidated Balance Sheet. Immediately upon satisfaction of the guarantee of the Coco's/Carrows Credit Facility, Advantica designated FRD an "unrestricted subsidiary" pursuant to the indenture for Advantica's 11 1/4% Senior Notes due 2008, which limits Advantica's ability to make further investments in FRD. The Coco's/Carrows Credit Facility contains a number of restrictive covenants which, among other things, limit (subject to certain exceptions) FRD and its subsidiaries with respect to the incurrence of debt, existence of liens, investments and joint ventures, the declaration or payment of dividends, the making of guarantees and other contingent obligations, mergers, the sale of assets, capital expenditures and material change in their business. In addition, the Coco's/Carrows Credit Facility contains certain financial 7
covenants including provisions for the maintenance of a minimum level of interest coverage (as defined), limitations on ratios of indebtedness (as defined) to earnings before interest, taxes, depreciation and amortization (EBITDA) (as defined) and limitations on annual capital expenditures. FRD's operating subsidiaries were not in compliance with certain financial covenants under the Coco's/Carrows Credit Facility for the quarter ended March 28, 2001. In light of, among other things, the operating results and financial condition of FRD and the uncertainties as to the outcome of the FRD divestiture process, there can be no assurance that the Company will be able to recover all of the secured obligations owed to it under the Coco's/Carrows Credit Facility. All advances under the Coco's/Carrows Credit Facility due to Denny's, Inc. accrue interest at a variable rate based on the prime rate or an adjusted Eurodollar rate (approximately 10% at March 28, 2001) and are secured by substantially all of the assets of FRD and its subsidiaries and by the issued and outstanding stock of FRD's subsidiaries. At March 28, 2001, FRD's operating subsidiaries had $30 million of outstanding term loan borrowings, working capital borrowings of $24.8 million and letters of credit outstanding of $11.6 million. Note 4. REORGANIZATION VALUE As discussed in the Advantica 2000 Annual Report on Form 10-K, during the first quarter of 2001, the Company and the IRS completed the final computations of the federal income taxes and interest related to the Company's pending IRS litigation. Therefore, the Company reversed approximately $3.0 million of income tax liabilities which were established on January 7, 1998 in connection with the Company's reorganization and recorded a corresponding reduction in reorganization value in excess of amounts allocable to identifiable assets. Note 5. RESTRUCTURING CHARGES The Company recorded $12.6 million of restructuring charges in 2000. Approximately $10.4 million represented cash charges, of which $0.9 million relates to operating lease liabilities for closed stores that will be paid out over the remaining lease term. The remaining amount relates to severance and outplacement costs, of which $6.2 million was paid through March 28, 2001. The Company expects to continue paying the remaining cash charges through the second quarter of 2002. Note 6. EXTRAORDINARY GAIN During the first quarter of 2001, as a result of the settlement of the remaining issues related to the Company's former information systems outsourcing contract with IBM, capital lease obligations were forgiven and a $7.8 million extraordinary gain was recorded. Note 7. COMPREHENSIVE LOSS The Company's comprehensive loss for the periods indicated is as follows: <TABLE> <CAPTION> Quarter Quarter Ended Ended March 28, 2001 March 29, 2000 -------------- -------------- <S> <C> <C> (In thousands) Net loss $ (13,376) $(46,475) Other comprehensive income (loss): Foreign currency translation adjustment (60) 5 --------- -------- Comprehensive loss $ (13,436) $(46,470) ========= ======== </TABLE> 8
Note 8. 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 ended March 28, 2001 and March 29, 2000, warrants and options of the Company would be antidilutive and therefore have been omitted from the calculation of weighted average dilutive shares. 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 28, 2001 and the results of operations for the quarter ended March 28, 2001 compared to the quarter ended March 29, 2000. 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, its subsidiaries and underlying concepts to be materially different from the performance indicated or implied by such statements. Such factors include, among others: the outcome of FRD's pending Chapter 11 proceedings and related matters described herein; 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 27, 2000 and in Exhibit 99 thereto. RESTAURANT OPERATIONS AND UNIT ACTIVITY <TABLE> <CAPTION> Quarter Ended ------------------------------- March 28, 2001 March 29, 2000 Increase/(Decrease) -------------- -------------- ------------------- <S> <C> <C> <C> Total systemwide sales (in millions) $ 552.6 $ 532.7 3.7% ======== ========= Average unit sales: Company-owned $331,800 $323,000 2.7% Franchise 285,900 276,500 3.4% Company-owned data: Same-store sales increase 2.0% 2.0% Guest check average increase 4.0% 6.0% </TABLE> The table below summarizes Denny's restaurant unit activity for the quarter ended March 28, 2001. <TABLE> <CAPTION> Ending Ending Ending Units Units Units Units Units December 27, Opened/ Units Sold/ March 28, March 29, 2000 Acquired Refranchised Closed 2001 2000 ------------ -------- ------------ ------ --------- --------- <S> <C> <C> <C> <C> <C> <C> Company-owned 736 1 (28) (4) 705 822 Franchised units 1,067 10 30 (a) (10) 1,097 938 Licensed units 19 --- (2) (a) (1) 16 18 ----- ---- ---- ---- ----- ----- 1,822 11 --- (15) 1,818 1,778 ===== ==== ==== ==== ===== ===== </TABLE> - ---------------------- (a) Includes two licensed units reclassified as franchised units. 9
RESULTS OF OPERATIONS QUARTER ENDED MARCH 28, 2001 COMPARED TO QUARTER ENDED MARCH 29, 2000 - --------------------------------------------------------------------- COMPANY OPERATIONS Denny's recorded 2.0% same-store sales growth for the quarter which was driven by a 4% increase in guest check average. Company restaurant sales decreased $30.8 million (11.5%) primarily due to a 117-unit decrease in company-owned restaurants, partially offset by the increase in same-store sales. The decrease in company-owned restaurants resulted primarily from the sale of restaurants to franchisees. Total costs of company restaurant sales decreased $25.3 million (10.9%), driven by the decrease in company-owned restaurants. As a percentage of company restaurant sales, the Company experienced higher payroll costs from wage rate increases and higher occupancy costs primarily related to increases in rent expense. Additionally, higher utility rates and increased repair and maintenance activities had a negative effect on operating costs. These increases were somewhat offset by lower product costs as a percentage of sales resulting from a higher guest check average. Company operations margins were $29.0 million (12.3% of company restaurant sales) for the quarter ended March 28, 2001 compared to $34.6 million (12.9% of company restaurant sales) for the quarter ended March 29, 2000. FRANCHISE OPERATIONS Franchise and licensing revenue was $21.6 million for the current year quarter, comprised of royalties and fees of $13.4 million and occupancy revenue of $8.2 million, compared to $16.0 million for the prior year quarter, comprised of royalties and fees of $11.3 million and occupancy revenue of $4.7 million. Franchise and licensing revenue increased $5.6 million (34.5%) from a 157-unit increase in franchised and licensed restaurants and from a higher average unit volume from franchised restaurants. Franchise costs were $9.7 million for the current year quarter, comprised of occupancy costs of $5.0 million and other direct expenses of $4.7 million, compared to $7.2 million for the prior year quarter, comprised of occupancy costs of $2.9 million and other direct expenses of $4.3 million. Franchise restaurant costs increased $2.5 million (35.2%), driven by the increase in franchise and licensed restaurants. As a percentage of franchise and licensing revenues, these costs increased primarily as a result of higher occupancy costs. Franchise operations margins were $11.8 million (54.9% of franchise and licensing revenue) for the quarter ended March 28, 2001 compared to $8.8 million (55.2% of franchise and licensing revenue) for the quarter ended March 29, 2000. OTHER OPERATING COSTS AND EXPENSES General and administrative costs decreased $3.1 million (16.4%) primarily from lower information system costs and reduced corporate overhead. The decrease in amortization of excess reorganization value from the prior year resulted from a reduction of reorganization value related to the reversal of certain income tax liabilities which was recorded in the fourth quarter of 2000. Depreciation and other amortization decreased primarily as a result of fewer company-owned units. OPERATING LOSS decreased from $16.2 million for the quarter ended March 28, 2000 to $2.2 million for the quarter ended March 29, 2001. 10
Advantica's primary financial measure is operating income before interest, taxes, depreciation, amortization and charges for restructuring and impairment ("EBITDA as defined"). EBITDA AS DEFINED increased from $28.9 million in the prior year quarter to $29.2 million in the current year quarter due to the factors noted above. 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. INTEREST EXPENSE, NET, totaled $18.5 million for the first quarter of 2001, a decrease of $3.0 million compared to the prior year quarter. The decrease in interest expense, net, resulted primarily from the repayment of the Denny's mortgage notes in July 2000 and other debt throughout 2000, offset by a decrease in interest income from lower cash balances. The PROVISION FOR INCOME TAXES from continuing operations for the quarter ended March 28, 2001 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 2.6% for the quarter ended March 28, 2001 compared to an income tax provision reflecting an approximate rate of 1.0% for the quarter ended March 29, 2000. The Statements of Consolidated Operations and Cash Flows presented herein have been reclassified for the quarter ended March 29, 2000 to reflect FRD as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of the discontinued operations for the quarters ended March 28, 2001 and March 29, 2000 were $89.4 million and $0.8 million and $94.7 million and $2.8 million, respectively. During the first quarter of 2001, as a result of the settlement of the remaining issues related to the Company's former information systems outsourcing contract with IBM, capital lease obligations were forgiven and a $7.8 million EXTRAORDINARY GAIN was recorded. NET LOSS was $13.4 million for first quarter of 2001 compared to a net loss of $46.5 million for the first quarter of 2000 due to the factors noted above. LIQUIDITY AND CAPITAL RESOURCES Advantica's credit facility with its lenders provides to the Company (excluding FRD) a working capital and letter of credit facility of up to $200 million (the "Advantica Credit Facility"). At March 28, 2001, the Company had outstanding revolver advances of $75.0 million and letters of credit outstanding of $58.7 million under the Advantica Credit Facility, leaving a net availability of $66.3 million. Advances under the Advantica Credit Facility accrue interest at a variable rate based on the prime rate or an adjusted Eurodollar rate (approximately 8.5% at March 28, 2001). The increase in the outstanding advances, included in notes and debentures on Advantica's Consolidated Balance Sheet, is primarily the result of Advantica's satisfaction of the Coco's/Carrows Credit Facility guaranty. The resulting receivable and related interest due from Coco's and Carrows eliminates in consolidation, thereby reducing the net liabilities of discontinued operations on Advantica's Consolidated Balance Sheet (see Notes 2 and 3). As of March 28, 2001 and December 27, 2000, the Company had working capital deficits, excluding net liabilities of discontinued operations, of $133.9 million and $170.6 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. 11
On February 14, 2001, to facilitate the divestiture of its Coco's and Carrows brands and to preserve their going concern value, FRD filed for protection under Chapter 11 of the Bankruptcy Code. FRD's operating subsidiaries were not in compliance with certain financial covenants under the Coco's/Carrows Credit Facility for the quarter ended March 28, 2001. In light of, among other things, the operating results and financial condition of FRD and the uncertainties as to the outcome of the FRD divestiture process, there can be no assurance that the Company will be able to recover all of the secured obligations owed to it under the Coco's/Carrows Credit Facility. Capital expenditures for the quarter ended March 28, 2001 totaled $6.5 million, of which approximately $0.7 million was financed through capital leases. These amounts were expended primarily to maintain existing facilities and replace equipment. Capital expenditures during 2001 are expected to total approximately $30 million to $40 million; however, the Company is not committed to spending this amount and could spend less if circumstances warrant. 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"). This statement established accounting and reporting standards for derivative financial instruments and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in fair value of the derivative (i.e., gains and losses) depends on the intended use of the derivative and the resulting designation. In June 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 appointed a team to develop a SFAS 133 risk management process for the entire company and to educate both financial and nonfinancial personnel about the implementation of SFAS 133. The team continues to review contracts to identify derivatives and embedded derivatives and address various other SFAS 133-related issues. Advantica adopted SFAS 133 and the corresponding amendments under SFAS 138 at the beginning of fiscal year 2001 in accordance with Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, borrowings under the Advantica Credit Facility bear interest at a variable rate based on the prime rate or an adjusted Eurodollar rate. A 100 basis point increase in the Advantica Credit Facility interest rate (approximately 8.5% at March 28, 2001) would increase interest expense for the remainder of the year by approximately $0.6 million. Such computation is determined by considering the impact of hypothetical interest rates on the Company's variable long-term debt at March 28, 2001. However, the nature and amount of the Company's borrowings under the Advantica Credit Facility may vary as a result of future business requirements, market conditions and other factors. The Company's other outstanding long-term debt bears fixed rates of interest. The estimated fair value of the Company's fixed rate long-term debt (excluding capital leases) was approximately $342.8 million at March 28, 2001. Such computation is based on market quotations for the same or similar debt issues or the estimated borrowing rates available to the Company. The Company does not use derivative instruments for trading purposes, and no interest rate derivatives were in place at March 28, 2001. 12
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 14, 2001, FRD filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware, Case No. 01-0436 PJW, to facilitate the divestiture of its Coco's and Carrows brands and to preserve their going concern value. FRD is a debtor-in-possession in the proceeding which involves only FRD and none of its subsidiaries. Consequently, all of FRD's subsidiaries, including its operating concepts, Coco's and Carrows, are expected to operate in the normal course of business throughout FRD's restructuring and sale process. The final selection of a buyer and completion of the divestiture is expected to take place in the bankruptcy court. FRD and its subsidiaries intend to consummate a sale transaction without the need for the operating subsidiaries to also commence Chapter 11 cases. No assurance can be given, however, that FRD's subsidiaries will not be required to commence Chapter 11 cases in the future. This Chapter 11 filing does not include Advantica or Denny's; however, on January 8, 2001, Denny's became the lender under the Coco's/Carrows Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 3 to the Consolidated Financial Statements for additional information. In 1994, the Company was advised by the Internal Revenue Service of proposed deficiencies for federal income taxes totaling approximately $12.7 million. The proposed deficiencies relate to examinations of certain income tax returns filed by the Company for the seven taxable periods ended December 31, 1992. In the third quarter of 1996, this proposed deficiency was reduced by approximately $7.0 million as a direct result of the passage of the Small Business Jobs Protection Act (the "Act") in August 1996. The Act included a provision that clarified Internal Revenue Code Section 162(k) to allow for the amortization of borrowing costs incurred by a corporation in connection with a redemption of its stock. Because the Company believed the remaining proposed deficiencies were substantially incorrect, it contested such proposed deficiencies in 1998 by filing petitions in the United States Tax Court. The Company settled all the issues in these petitions with the IRS in the fourth quarter of 2000, and, accordingly, adjusted its income tax liabilities established in connection with these issues. The Company and the IRS completed the final computations of the federal income taxes and interest in the first quarter of 2001, and the Company recorded an additional adjustment of the related income tax liabilities (see Note 4). On May 24, 1994, the Company entered into two consent decrees (the "Consent Decrees") resolving the class action litigation brought against Denny's, Inc. which alleged that Denny's, Inc. engaged in a pattern or practice of racial discrimination in violation of the Civil Rights Act of l964. The Company denied any wrongdoing. The Consent Decrees enjoined the Company from racial discrimination and required the Company to, among other things, implement certain employee training and testing programs and provide public notice of Denny's, Inc. nondiscrimination policies. Denny's, Inc. has met all of its obligations under the Consent Decrees. On January 16, 2000, class counsel, together with counsel for the United States, submitted reports to the courts that entered the Consent Decrees reporting on the Company's completion of the requirements of the Consent Decrees and recommending the early dismissal of the Consent Decrees effective November 24, 2000. On January 23, 2001, the U.S. District Court for the District of Maryland issued an order dismissing one of the Consent Decrees, and on April 4, 2001, the United States District Court Northern District of California dismissed the second Consent Decree. ITEM 3. DEFAULT UPON SENIOR SECURITIES On January 16, 2001, FRD elected not to make the interest payment due and payable with respect to its 12.5% Senior Notes due 2004 (the "FRD Senior Notes"). As a result of this nonpayment, and as a result of FRD's Chapter 11 filing on February 14, 2001, FRD is in default under the indenture governing the FRD Senior Notes. Therefore, the FRD Senior Notes are included in liabilities subject to compromise in net liabilities of discontinued operations on the accompanying 13
Consolidated Balance Sheets (see Note 2). FRD's bankruptcy filing operates as an automatic stay of all collection and enforcement actions by the holders of the FRD Senior Notes with respect to FRD's failure to make the interest payments when due. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. The following are included as exhibits to this report: Exhibit No. Description - ------- ----------- 3.1 By-Laws of Advantica, as amended through January 24, 2001. 10.1 Advantica Restaurant Group Director Stock Option Plan as amended through January 24, 2001. 10.2 Amendment, dated February 6, 2001, to Addendum Agreement between Advantica and James B. Adamson dated April 7, 2000. 10.3 Employment Agreement dated January 2, 2001 between Advantica and Nelson J. Marchioli. - ------------------------ b. On January 9, 2001, the Company filed a report on Form 8-K reporting under Item 5 that on January 8, 2001, it paid $70 million to the lenders under the Coco's/Carrows Credit Facility and, as a result, had been subrogated to the rights and collateral of the lenders under the facility. In addition, the Company reported that its board of directors named Nelson J. Marchioli as president and chief executive officer of Advantica and its core brand, Denny's, effective February 2001. No financial statements were included in the filing. On January 16, 2001, the Company filed a report on Form 8-K reporting under Item 5 that its operating subsidiary, FRD, had elected not to make an interest payment due and payable as of January 16, 2001 with respect to its 12.5% Senior Notes due 2004. No financial statements were included in the filing. 14
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 14, 2001 By: /s/Rhonda J. Parish ------------------------------------ Rhonda J. Parish Executive Vice President, General Counsel and Secretary Date: May 14, 2001 By: /s/Ronald B. Hutchison ------------------------------------ Ronald B. Hutchison Executive Vice President and Chief Financial Officer