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 29, 1999 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 12, 1999, 40,025,207 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 29, 1999 September 30, 1998 ------------------ ------------------ <S> <C> <C> (In thousands, except per share amounts) Revenue: Company restaurant sales $ 393,408 $ 407,787 Franchise and licensing revenue 18,419 14,839 ---------- ----------- Total operating revenue 411,827 422,626 ---------- ----------- Cost of company restaurant sales: Product costs 102,994 110,505 Payroll and benefits 152,014 147,335 Occupancy 22,077 22,899 Other operating expenses 57,215 63,793 ---------- ----------- Total costs of company restaurant sales 334,300 344,532 Franchise restaurant costs 8,145 6,500 General and administrative expenses 16,338 16,779 Amortization of reorganization value in excess of amounts allocable to identifiable assets 31,962 31,611 Depreciation and other amortization 43,605 33,373 Gains on refranchising and other, net (4,055) (2,060) ---------- ----------- Total operating costs and expenses 430,295 430,735 ---------- ----------- Operating loss (18,468) (8,109) ---------- ----------- Other expenses: Interest expense, net 27,621 25,700 Other nonoperating expenses (income), net (746) 9 ---------- ----------- Total other expenses, net 26,875 25,709 ---------- ----------- Loss before taxes (45,343) (33,818) (Benefit from) provision for income taxes (340) 500 ---------- ----------- Loss from continuing operations (45,003) (34,318) Discontinued operations: Loss from operations of discontinued operations, net of applicable income taxes of: 1998 -- $0; 1999 -- $0 (212) (2,222) ---------- ----------- Net loss applicable to common shareholders $ (45,215) $ (36,540) ========== =========== </TABLE> See accompanying notes 2
Advantica Restaurant Group, Inc. Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Quarter Quarter Ended Ended September 29, 1999 September 30, 1998 ------------------ ------------------ <S> <C> <C> (In thousands, except per share amounts) Per share amounts applicable to common shareholders: Basic earnings per share: Loss from continuing operations $ (1.13) $ (0.86) Loss from discontinued operations, net (0.00) (0.05) ---------- --------- Net loss $ (1.13) $ (0.91) ========== ========= Average outstanding shares 40,025 40,010 ========== ========= Diluted earnings per share: Loss from continuing operations $ (1.13) $ (0.86) Loss from discontinued operations, net (0.00) (0.05) ---------- --------- Net loss $ (1.13) $ (0.91) ========== ========= Average outstanding shares and equivalent common shares, 40,025 40,010 unless antidilutive ========== ========= </TABLE> See accompanying notes 3
Advantica Restaurant Group, Inc. Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Successor Company Predecessor Company -------------------------------------------- ------------------- Three Quarters Thirty-Eight One Week Ended Weeks Ended Ended September 29, 1999 September 30, 1998 January 7, 1998 ------------------ ------------------ --------------- <S> <C> <C> <C> (In thousands, except per share amounts) Revenue: Company restaurant sales $ 1,151,815 $ 1,147,298 $ 30,245 Franchise and licensing revenue 50,305 40,918 1,333 ------------ ------------ -------------- Total operating revenue 1,202,120 1,188,216 31,578 ------------ ------------ -------------- Cost of company restaurant sales: Product costs 304,561 303,191 8,053 Payroll and benefits 451,355 431,511 11,840 Occupancy 65,804 65,590 839 Other operating expenses 172,861 182,832 5,068 ------------ ------------ -------------- Total costs of company restaurant sales 994,581 983,124 25,800 Franchise restaurant costs 24,786 17,981 667 General and administrative expenses 52,678 45,598 2,323 Amortization of reorganization value in excess of amounts allocable to identifiable assets 95,723 98,543 --- Depreciation and other amortization 112,584 94,371 1,584 Gains on refranchising and other, net (12,344) (5,552) (7,653) ------------ ------------ -------------- Total operating costs and expenses 1,268,008 1,234,065 22,721 ------------ ------------ -------------- Operating (loss) income (65,888) (45,849) 8,857 ------------ ------------ -------------- Other expenses: Interest expense, net 80,114 78,207 2,569 Other nonoperating expenses (income), net 435 1,145 (313) ------------ ------------ -------------- Total other expenses, net 80,549 79,352 2,256 ------------ ------------ -------------- (Loss) income before reorganization items and taxes (146,437) (125,201) 6,601 Reorganization items --- --- (626,981) ------------ ------------ -------------- (Loss) income before taxes (146,437) (125,201) 633,582 (Benefit from) provision for income taxes (1,014) 1,500 (13,829) ------------ ------------ -------------- (Loss) income from continuing operations (145,423) (126,701) 647,411 Discontinued operations: Reorganization items of discontinued operations, net of income tax provision of $7,509 --- --- 136,113 Loss from operations of discontinued operations, net of applicable income taxes of: 1998 -- $0; 1999 -- $0 (2,678) (6,209) (1,451) ------------ ------------ ------------- (Loss) income before extraordinary items (148,101) (132,910) 782,073 Extraordinary items --- --- (612,845) ------------ ------------ ------------- Net (loss) income (148,101) (132,910) 1,394,918 Dividends on preferred stock --- --- (273) ------------ ------------ ------------- Net (loss) income applicable to common shareholders $ (148,101) $ (132,910) $ 1,394,645 ============ ============ ============= </TABLE> See accompanying notes 4
Advantica Restaurant Group, Inc. Statements of Consolidated Operations (Unaudited) <TABLE> <CAPTION> Successor Company Predecessor Company -------------------------------------------- ------------------- Three Quarters Thirty-Eight One Week Ended Weeks Ended Ended September 29, 1999 September 30, 1998 January 7, 1998 ------------------ ------------------ --------------- <S> <C> <C> <C> (In thousands, except per share amounts) Per share amounts applicable to common shareholders: Basic earnings per share: (Loss) income from continuing operations $ (3.63) $ (3.17) $ 15.26 (Loss) income from discontinued operations, net (0.07) (0.15) 3.17 ----------- ---------- --------- (Loss) income before extraordinary items (3.70) (3.32) 18.43 Extraordinary items --- --- 14.44 ----------- ---------- --------- Net (loss) income $ (3.70) $ (3.32) $ 32.87 =========== ========== ========= Average outstanding shares 40,023 40,005 42,434 =========== ========== ========= Diluted earnings per share: (Loss) income from continuing operations $ (3.63) $ (3.17) $ 11.74 (Loss) income from discontinued operations, net (0.07) (0.15) 2.44 ----------- ---------- --------- (Loss) income before extraordinary items (3.70) (3.32) 14.18 Extraordinary items --- --- 11.12 ----------- ---------- ---------- Net (loss) income $ (3.70) $ (3.32) $ 25.30 =========== ========== ========== Average outstanding shares and equivalent common 40,023 40,005 55,132 shares, unless antidilutive =========== ========== ========== </TABLE> See accompanying notes 5
Advantica Restaurant Group, Inc. Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> September 29, 1999 December 30, 1998 ------------------ ----------------- <S> <C> <C> (In thousands) Assets Current Assets: Cash and cash equivalents $ 87,198 $ 224,768 Receivables, less allowance for doubtful accounts of: 1999 --$3,683; 1998 -- $4,098 16,951 16,773 Inventories 16,489 16,341 Net assets held for sale 86,354 87,675 Other 12,189 14,085 Restricted investments securing in-substance defeased debt 20,215 19,025 ------------ ------------- 239,396 378,667 ------------ ------------- Property and equipment 825,843 747,440 Less accumulated depreciation 208,921 117,177 ------------ ------------- 616,922 630,263 ------------ ------------- Other Assets: Reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization of: 1999 -- $224,427; 1998 -- $130,501 417,235 513,569 Other intangible assets, net of accumulated amortization of: 1999 -- $21,067; 1998 -- $12,289 189,248 189,379 Deferred financing costs, net 21,094 24,913 Other 45,698 37,231 Restricted investments securing in-substance defeased debt 147,845 156,721 ------------ ------------- $ 1,677,438 $ 1,930,743 ============ ============= Liabilities Current Liabilities: Current maturities of notes and debentures $ 166,356 $ 17,599 Current maturities of capital lease obligations 15,229 16,503 Current maturities of in-substance defeased debt 13,660 12,183 Accounts payable 64,197 94,457 Accrued salaries and vacations 48,674 48,350 Accrued insurance 25,049 31,611 Accrued taxes 22,416 19,331 Accrued interest 28,185 44,784 Other 68,845 89,848 ------------ ------------- 452,611 374,666 ------------ ------------- Long-Term Liabilities: Notes and debentures, less current maturities 753,604 911,266 Capital lease obligations, less current maturities 73,426 63,323 In-substance defeased debt, less current maturities 153,085 166,579 Deferred income taxes 2,988 5,400 Liability for self-insured claims 33,895 42,559 Other noncurrent liabilities and deferred credits 119,779 130,906 ------------ ------------- 1,136,777 1,320,033 ------------ ------------- Total liabilities 1,589,388 1,694,699 ------------ ------------- Shareholders' Equity 88,050 236,044 ------------ ------------- $ 1,677,438 $ 1,930,743 ============ ============= </TABLE> See accompanying notes 6
Advantica Restaurant Group, Inc. Statements of Consolidated Cash Flows (Unaudited) <TABLE> <CAPTION> Successor Company Predecessor Company ------------------------------------------ ------------------- Three Quarters Thirty-Eight One Week Ended Weeks Ended Ended September 29, 1999 September 30, 1998 January 7, 1998 ------------------ ------------------ --------------- <S> <C> <C> <C> (In thousands) Cash Flows from Operating Activities: Net (loss) income $ (148,101) $ (132,910) $ 1,394,918 Adjustments to reconcile net (loss) income to cash flows from operating activities: Amortization of reorganization value in excess of amounts allocable to identifiable assets 95,723 98,543 --- Depreciation and other amortization 112,584 94,371 1,584 Amortization of deferred gains (8,639) (8,315) (202) Amortization of deferred financing costs 5,771 4,961 111 Deferred income tax benefit (2,249) --- (13,856) Gains on refranchising and other, net (12,344) (5,552) (7,653) Equity in loss (income) from discontinued operations, net 2,678 6,209 (134,662) Amortization of debt premium (11,588) (10,489) --- Noncash reorganization items --- --- (627,324) Extraordinary items --- --- (612,845) Other 3 2,395 (333) Changes in Assets and Liabilities Net of Effects of Acquisition and Dispositions: Decrease (increase) in assets: Receivables 464 (7,992) (2,058) Inventories (684) (767) 237 Other current assets (487) (4,050) 1,496 Assets held for sale --- (2,869) 1,488 Other assets (12,337) 19,692 (1,049) Increase (decrease) in liabilities: Accounts payable (28,882) (16,228) (4,480) Accrued salaries and vacations 325 (12,845) 5,945 Accrued taxes 2,484 (15,263) (894) Other accrued liabilities (46,606) (39,006) 9,519 Other noncurrent liabilities and deferred credits (11,069) 3,624 (1,245) ----------- ---------- ------------ Net cash flows (used in) from operating activities (62,954) (26,491) 8,697 ----------- ---------- ------------ Cash Flows from Investing Activities: Purchase of property (55,044) (28,719) (1) Acquisition of restaurant units (10,853) --- --- Proceeds from disposition of property 9,236 1,410 7,255 (Advances to) receipts from discontinued operations, net (1,442) 9,751 564 Proceeds from sale of discontinued operations, net --- 460,424 --- Purchase of investments securing in-substance defeased debt --- (201,713) --- Proceeds from maturity of investments securing in-substance defeased debt 9,675 14,213 --- Other long-term assets, net --- (1,695) --- ----------- ---------- ----------- Net cash flows (used in) provided by investing activities (48,428) 253,671 7,818 ----------- ---------- ----------- </TABLE> See accompanying notes 7
Advantica Restaurant Group, Inc. Statements of Consolidated Cash Flows (Unaudited) <TABLE> <CAPTION> Successor Company Predecessor Company ------------------------------------------ ------------------- Three Quarters Thirty-Eight One Week Ended Weeks Ended Ended September 29, 1999 September 30, 1998 January 7, 1998 ------------------ ------------------ --------------- <S> <C> <C> <C> Cash Flows from Financing Activities: Net borrowings under credit agreements $ 30,000 $ --- $ --- Long-term debt payments (53,420) (26,147) (6,870) Deferred financing costs (2,418) --- (4,971) Debt transaction costs (350) --- --- ------------ ------------ ----------- Net cash flows used in financing activities (26,188) (26,147) (11,841) ------------ ------------ ----------- Increase (decrease) in cash and cash equivalents (137,570) 201,033 4,674 Cash and Cash Equivalents at: Beginning of period 224,768 58,753 54,079 ------------ ------------ ----------- End of period $ 87,198 $ 259,786 $ 58,753 ============ ============ =========== </TABLE> See accompanying notes 8
ADVANTICA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 29, 1999 (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, Carrows, and El Pollo Loco restaurant brands. At September 29, 1999, the Company has accounted for El Pollo Loco ("EPL") 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 6. On January 7, 1998 (the "Effective Date"), Flagstar Companies, Inc. ("FCI") and Flagstar Corporation ("Flagstar") emerged from proceedings under Chapter 11 of Title 11 of the United States Code pursuant to FCI's and Flagstar's Amended Joint Plan of Reorganization dated as of November 7, 1997 (the "Plan"). On the Effective Date, Flagstar, a wholly owned subsidiary of FCI, merged with and into FCI, the surviving corporation, and FCI changed its name to Advantica Restaurant Group, Inc. FCI's operating subsidiaries, Denny's Holdings, Inc. and FRD (and their respective subsidiaries), did not file bankruptcy petitions and were not parties to the above mentioned Chapter 11 proceedings. 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 30, 1998 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. 1998 Annual Report on Form 10-K. The results of operations for the three quarters ended September 29, 1999 are not necessarily indicative of the results for the entire fiscal year ending December 29, 1999. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 2. FRESH START REPORTING As of the Effective Date of the Plan, Advantica adopted fresh start reporting pursuant to the guidance provided by the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Fresh start reporting assumes that a new reporting entity has been created and requires assets and liabilities to be adjusted to their fair values as of the Effective Date in conformity with the procedures specified by Accounting Principles Board Opinion No. 16, "Business Combinations." In conjunction with the revaluation of assets and liabilities, a reorganization value for the Company was determined which generally approximated the fair value of the Company before considering debt and approximated the amount a buyer would pay for the assets of the Company after reorganization. Under fresh start reporting, the reorganization value of the Company was allocated to the Company's assets and the portion of the reorganization value which was not attributable to specific tangible or identified intangible assets of the Company has been reported as "reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization" in the accompanying Consolidated Balance Sheets. Advantica is amortizing such amount over a five-year period. All financial statements for any period subsequent to the Effective Date are referred to as "Successor Company" statements, as they reflect the periods subsequent to the implementation of fresh start reporting and are not comparable to the financial statements for periods prior to the Effective Date. 9
The results of operations in the accompanying Statement of Operations for the week ended January 7, 1998 reflect the results of operations prior to Advantica's emergence from bankruptcy and the effects of fresh start reporting adjustments. In this regard, the Statement of Operations reflects an extraordinary gain on the discharge of certain debt as well as reorganization items consisting primarily of gains and losses related to the adjustments of assets and liabilities to fair value. Subsequent to the first quarter of 1998, the Company substantially completed valuation studies performed in connection with the revaluation of its assets and liabilities in accordance with fresh start reporting. Note 3. ACQUISITION In March 1999, Denny's, Inc. ("Denny's"), a wholly owned subsidiary of the Company, purchased 30 operating restaurants in western New York from Perk Development Corp., a former franchisee of Perkins Family Restaurants, L.P. The acquisition of the units has been accounted for under the purchase method of accounting. The purchase price of approximately $24.7 million, consisting of cash of approximately $10.9 million and capital leases and other liabilities assumed of approximately $13.8 million, exceeded the estimated fair value of the restaurants' identifiable assets by approximately $9.5 million. Denny's took possession of the restaurants on March 1, 1999. By March 8, 1999, 26 units were opened as Company-owned restaurants and one unit was reopened as a refranchised restaurant. Note 4. REPURCHASE OF SENIOR NOTES In March 1999, the Company repurchased $20 million aggregate principal amount of its 11 1/4% Senior Notes due 2008 (the "Senior Notes") for approximately $20.8 million, including approximately $469,000 of accrued interest. The repurchase of the notes resulted in an immaterial gain. Note 5. NEW FRD CREDIT FACILITY On May 14, 1999, FRD and certain of its operating subsidiaries entered into a new credit agreement with The Chase Manhattan Bank ("Chase") and Credit Lyonnais New York Branch ("Credit Lyonnais") and other lenders named therein and thereby established a $70 million Senior Secured Credit Facility (the "New FRD Credit Facility") to replace the bank facility previously in effect for the Company's Coco's and Carrows operations (the "Old FRD Credit Facility") which was 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. Note 6. DISCONTINUED OPERATIONS During the second quarter of 1999, the Company announced that a formal plan was approved by the Board of Directors to explore the sale of EPL. On November 9, 1999, the Company signed a definitive purchase agreement to sell EPL to an affiliate of American Securities Capital Partners, L.P. for $128 million, which includes the assumption of $14 million of debt. It is anticipated that the transaction will be completed during fiscal year 1999 and will result in a gain upon disposal. The financial statements presented herein have been reclassified for all periods to reflect EPL as a discontinued operation. In accordance with APB 30, EPL's results from operations subsequent to the date that EPL was identified as a discontinued operation (the "measurement date") have been included as a component of net assets held for sale. On April 1, 1998, the Company consummated the sale of Flagstar Enterprises, Inc. ("FEI"), the wholly owned subsidiary which had operated Hardee's restaurants under licenses from Hardee's Food Systems. In addition, on June 10, 1998, the Company consummated the sale of Quincy's Restaurants, Inc. ("Quincy's"), the wholly owned subsidiary which had operated the Company's Quincy's Family Steakhouse restaurants. The Statements of Consolidated Operations and Cash 10
Flows presented herein for the thirty-eight weeks ended September 30, 1998 and the one week ended January 7, 1998 reflect FEI and Quincy's as discontinued operations in accordance with APB 30. Revenue and operating income of the discontinued operations for the reported periods are as follows: <TABLE> <CAPTION> Predecessor Successor Company Company --------------------------------------------------------------------------------------- Quarter Quarter Three Quarters Thirty-Eight One Week Ended Ended Ended Weeks Ended Ended September 29,1999 September 30,1998 September 29, 1999 September 30, 1998 January 7, 1998 ----------------- ----------------- ------------------ ------------------ --------------- <S> <C> <C> <C> <C> <C> (In millions) REVENUE EPL $ 38.5 $ 33.1 $ 107.1 $ 93.3 $ 2.0 FEI --- --- --- 116.2 9.2 Quincy's --- --- --- 78.7 3.5 -------- -------- --------- -------- --------- $ 38.5 $ 33.1 $ 107.1 $ 288.2 $ 14.7 ======== ======== ========= ======== ========= OPERATING INCOME EPL $ 1.2 $ 0.6 $ 4.6 $ 3.2 $ (0.2) FEI --- --- --- 5.5 0.2 Quincy's --- --- --- 0.2 (0.1) -------- -------- --------- -------- --------- $ 1.2 $ 0.6 $ 4.6 $ 8.9 $ (0.1) ======== ======== ========= ======== ========= </TABLE> The net assets of EPL are included in Net assets held for sale in the Consolidated Balance Sheets and consist of the following: September 29, 1999 December 30, 1998 ------------------ ----------------- (In thousands) Assets Current assets $ 3,775 $ 4,361 Property owned, net 70,183 63,050 Other assets 67,810 75,729 ------------- ----------- 141,768 143,140 ------------- ----------- Less liabilities Current liabilities 20,411 16,799 Long-term liabilities 35,003 38,666 ------------- ----------- Total liabilities 55,414 55,465 ------------- ----------- Net assets held for sale $ 86,354 $ 87,675 ============= =========== 11
Note 7. COMPREHENSIVE INCOME The Company's comprehensive income for the quarters ended September 29, 1999 and September 30, 1998 and for the three quarters ended September 29, 1999, the thirty-eight weeks ended September 30, 1998 and the one week ended January 7, 1998, is as follows: <TABLE> <CAPTION> Predecessor Successor Company Company ----------------------------------------------------------------------------- --------------- Quarter Quarter Three Quarters Thirty-Eight One Week Ended Ended Ended Weeks Ended Ended September 29,1999 September 30,1998 September 29, 1999 September 30, 1998 January 7, 1998 ----------------- ----------------- ------------------ ------------------ --------------- <S> <C> <C> <C> <C> <C> Net (loss) income, excluding adjustments for reorganization and fresh start reporting for the one week ended January 7, 1998 $ (45,215) $ (36,540) $ (148,101) $ (132,910) $ (3,087) Other comprehensive income: Foreign currency translation adjustment (53) --- (84) --- --- ---------- ---------- ---------- ----------- ---------- Comprehensive income $ (45,268) $ (36,540) $ (148,185) $ (132,910) $ (3,087) ========== ========== ========== =========== ========== </TABLE> 12
Note 8. EARNINGS PER SHARE APPLICABLE TO COMMON SHAREHOLDERS The following table sets forth the computation of basic and diluted loss per share: <TABLE> <CAPTION> Predecessor Successor Company Company ---------------------------------------------------------------------------- --------------- Quarter Quarter Three Quarters Thirty-Eight One Week Ended Ended Ended Weeks Ended Ended September 29,1999 September 30,1998 September 29, 1999 September 30, 1998 January 7, 1998 ----------------- ----------------- ------------------ ------------------ --------------- <S> <C> <C> <C> <C> <C> (In thousands, except per share amounts) Numerator: (Loss) income from continuing operations $ (45,003) $ (34,318) $ (145,423) $ (126,701) $ 647,411 Preferred stock dividends --- --- --- --- (273) --------- ---------- ---------- ----------- --------- Numerator for basic (loss) earnings per share -- (loss) income from continuing operations available to common shareholders (45,003) (34,318) (145,423) (126,701) 647,138 --------- ---------- ---------- ----------- --------- Effect of dilutive securities: $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock --- --- --- --- 273 10% Convertible Junior Subordinated Debentures --- --- --- --- --- --------- ---------- ---------- ----------- --------- --- --- --- --- 273 --------- ---------- ---------- ----------- --------- Numerator for diluted (loss) earnings per share -- (loss) income from continuing operations available to common shareholders after assumed conversions $ (45,003) $ (34,318) $ (145,423) $ (126,701) $ 647,411 ========= ========== ========== =========== ========== Denominator: Denominator for basic earnings per share -- Weighted average shares 40,025 40,010 40,023 40,005 42,434 --------- ---------- ---------- ----------- ---------- Effect of dilutive securities: $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock --- --- --- --- 8,562 10% Convertible Junior Subordinated Debentures --- --- --- --- 4,136 --------- ---------- ---------- ----------- ---------- Dilutive potential common shares --- --- --- --- 12,698 --------- ---------- ---------- ----------- ---------- Denominator for diluted (loss) earnings per share -- adjusted weighted average shares and assumed conversions 40,025 40,010 40,023 40,005 55,132 ========= ========== ========== =========== ========== Basic (loss) earnings per share from continuing operations $ (1.13) $ (0.86) $ (3.63) $ (3.17) $ 15.26 ========= ========== ========= =========== ========== Diluted (loss) earnings per share from $ (1.13) $ (0.86) $ (3.63) $ (3.17) $ 11.74 continuing operations ========= ========== ========= =========== ========== </TABLE> The calculations of basic and diluted loss per share have been based on the weighted average number of Company shares outstanding. Because of the loss from continuing operations for the quarters ended September 29, 1999 and September 30, 1998 and for the three quarters ended September 29, 1999 and the thirty-eight weeks ended September 30, 1998, warrants and options of the Successor Company have been omitted from the calculation of weighted average dilutive shares for those periods. 13
Note 9. SEGMENT INFORMATION The Company currently operates four restaurant concepts -- Denny's, Coco's, Carrows and El Pollo Loco -- and each concept is considered a reportable segment. El Pollo Loco has been reclassified as a discontinued operation in the consolidated financial statements; therefore, its operating results are shown separately in this section. The "Corporate and other" segment consists primarily of corporate operations. Advantica evaluates performance based on several factors, of which the primary financial measure is business segment operating income before interest, taxes, depreciation, amortization and charges for (recoveries of) restructuring and impairment ("EBITDA as defined"). EBITDA as defined is a key internal measure used to evaluate the amount of cash flow available for debt repayment and funding of additional investments. EBITDA as defined is not a measure defined by generally accepted accounting principles and should not be considered as an alternative to net income or cash flow data prepared in accordance with generally accepted accounting principles, or as a measure of a company's profitability or liquidity. The Company's measure of EBITDA as defined may not be comparable to similarly titled measures reported by other companies. <TABLE> <CAPTION> Predecessor Successor Company Company ----------------------------------------------------------------------------- --------------- Quarter Quarter Three Quarters Thirty-Eight One Week Ended Ended Ended Weeks Ended Ended September 29,1999 September 30, 1998 September 29, 1999 September 30, 1998 January 7, 1998 ----------------- ------------------ ------------------ ------------------ --------------- <S> <C> <C> <C> <C> <C> (In millions) REVENUE Denny's $ 313.1 $ 310.3 $ 907.6 $ 858.4 $ 23.2 Coco's 56.1 65.0 168.2 191.4 4.9 Carrows 41.9 47.3 124.0 138.4 3.5 Corporate and other 0.7 --- 2.3 --- --- --------- -------- --------- --------- -------- Total consolidated revenue from continuing operations $ 411.8 $ 422.6 $ 1,202.1 $ 1,188.2 $ 31.6 ========= ======== ========= ========= ======== Revenue from discontinued operations: El Pollo Loco $ 38.5 $ 33.1 $ 107.1 $ 93.3 $ 2.0 ========= ======== ========= ========= ======== </TABLE> 14
<TABLE> <CAPTION> Predecessor Successor Company Company ----------------------------------------------------------------------------- --------------- Quarter Quarter Three Quarters Thirty-Eight One Week Ended Ended Ended Weeks Ended Ended September 29,1999 September 30, 1998 September 29, 1999 September 30, 1998 January 7, 1998 ----------------- ------------------ ------------------ ------------------ --------------- <S> <C> <C> <C> <C> <C> (In millions) EBITDA AS DEFINED Denny's $ 52.9 $ 52.9 $ 134.8 $ 127.2 $ 11.1 Coco's 6.4 10.2 19.2 27.8 0.8 Carrows 5.6 4.9 13.2 15.7 --- Corporate and other (7.8) (8.5) (24.8) (21.0) (1.5) -------- -------- --------- -------- -------- Total EBITDA as defined from continuing reportable segments 57.1 59.5 142.4 149.7 10.4 Eliminate EBITDA as defined from intersegment transactions --- (2.6) --- (2.6) --- -------- -------- --------- --------- -------- Total EBITDA as defined from continuing operations 57.1 56.9 142.4 147.1 10.4 Depreciation and amortization expense (75.6) (65.0) (208.3) (192.9) (1.6) Other charges: Interest expense, net (27.6) (25.7) (80.1) (78.2) (2.5) Other, net 0.8 (0.0) (0.4) (1.2) 0.3 Reorganization items --- --- --- --- 627.0 -------- -------- --------- --------- -------- Consolidated (loss) income from continuing operations before income taxes and extraordinary items $ (45.3) $ (33.8) $ (146.4) $ (125.2) $ 633.6 ======== ======== ========= ========= ======== EBITDA as defined from discontinued operations: El Pollo Loco $ 6.7 $ 5.1 $ 20.0 $ 16.7 $ (0.1) ======== ======== ========= ========= ======== </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 September 29, 1999 and the results of operations for the quarter and three quarters ended September 29, 1999 as compared to the quarter ended September 30, 1998 and the thirty-eight weeks ended September 30, 1998 and one week ended January 7, 1998. For purposes of providing a meaningful comparison of the Company's year-to-date operating performance, the following discussion and presentation of the results of operations for the thirty-eight weeks ended September 30, 1998 and the one week ended January 7, 1998 will be combined and referred to as the three quarters ended September 30, 1998. Where appropriate, the impact of the adoption of fresh start reporting on the results of operations during this period will be separately disclosed. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations, including its "Strategic Focus" and "Impact of the Year 2000" sections, 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. Words such as "expects," "anticipates," "believes," "projects," "intends," "plans" and "hopes," variations of such words and similar expressions are intended to identify such forward-looking statements. Factors that could cause actual performance to differ materially from the performance indicated by such statements 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; the ability of the Company to mitigate the impact of the Year 2000 issue successfully; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general 15
economy, particularly at the retail level; and other factors included in the discussion below, or in the Management's Discussion and Analysis of Financial Condition and Result of Operations in, and Exhibit 99 to, the Company's Annual Report on Form 10-K for the period ended December 30, 1998. RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 29, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998 The Company's CONSOLIDATED REVENUE for the third quarter of 1999 decreased $10.8 million (2.6%) compared to the third quarter of 1998. Company restaurant sales decreased $14.4 million primarily due to a net 44-unit decrease in Company-owned restaurants. Franchise and licensing revenue increased $3.6 million, primarily attributable to a 117-unit increase in Denny's, Coco's and Carrows' franchised and licensed restaurants. Denny's reported revenue growth resulting from increased franchise revenue in the quarter. The revenue increase at Denny's was offset, however, by lower revenue at Coco's and Carrows, where fewer Company-owned units and lower same-store sales resulted in 13.8% and 11.4% declines in revenue, respectively. CONSOLIDATED OPERATING EXPENSES decreased $0.4 million (0.1%) compared to the prior year quarter. Excluding the impact of a $10.2 million increase in depreciation and other amortization and a $2.0 million increase in refranchising and other gains, operating expenses decreased $8.6 million. This decrease is primarily attributable to a net decrease of 44 Company-owned restaurants, partially offset by increases in payroll costs. Increased payroll costs resulted from higher wage rates driven by market conditions. In addition, prior year payroll costs benefitted from adjustments related to improvements in workers' compensation and health benefits actuarial trends. The increase in depreciation and other amortization is primarily the result of the retirement of assets replaced in conjunction with recently reimaged units. The Company's consolidated EBITDA AS DEFINED increased $0.2 million (0.4%) compared to the prior year quarter as a result of the factors discussed in the preceding paragraphs, excluding the increase in depreciation and other amortization. CONSOLIDATED OPERATING LOSS increased $10.4 million compared to the prior year quarter as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $27.6 million for the third quarter of 1999, an increase of $1.9 million compared to the prior year quarter. This increase in interest expense, net, resulted primarily from a decrease in interest income on lower cash balances partially offset by a decrease in interest expense from lower debt balances. For the quarter ended September 29, 1999, $2.4 million of interest expense has been allocated to discontinued operations compared to $2.8 million in the prior year quarter. The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the quarter ended September 29, 1999 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 benefit reflecting an effective income tax rate of approximately 0.7% for the third quarter of 1999 compared to an income tax provision of approximately 1.5% for the third quarter of 1998. The Statements of Consolidated Operations and Cash Flows presented herein have been reclassified for the quarters ended September 29, 1999 and September 30, 1998 to reflect EPL as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating income of EPL for the quarters ended September 29, 1999 and September 30, 1998 were $38.5 million and $1.2 million and $33.1 million and $0.6 million, respectively. Loss from operations of discontinued operations decreased $1.0 million compared to the prior year quarter as a result of improved operating results at EPL in the current quarter. The $1.0 million of EPL's net loss incurred subsequent to the measurement date is included as a component of net assets held for sale. Including this portion of EPL's loss, the loss from operations of discontinued operations decreased $2.0 million. 16
NET LOSS was $45.2 million for the third quarter of 1999 compared to a net loss of $36.5 million for the third quarter of 1998, primarily as a result of the factors discussed above. Restaurant Operations: The table below summarizes restaurant unit activity for the quarter ended September 29, 1999. <TABLE> <CAPTION> Ending Units Net Ending Ending Units Units Sold/ Units Units Units June 30, 1999 Opened Closed Refranchised September 29, 1999 September 30, 1998 ------------- ------ ------ ------------ ------------------ ------------------ <S> <C> <C> <C> <C> <C> <C> Denny's Company-owned units 883 1 (4) (11) 869 887 Franchised units 862 22 (16) 11 879 794 Licensed units 17 -- -- -- 17 18 -------- ------ ------ ----- ------- -------- 1,762 23 (20) -- 1,765 1,699 Coco's Company-owned units 150 -- -- -- 150 160 Franchised units 34 -- -- -- 34 19 Licensed units 301 5 (1) -- 305 299 -------- ------ ------ ----- ------- -------- 485 5 (1) -- 489 478 Carrows Company-owned units 120 -- -- -- 120 136 Franchised units 27 1 -- -- 28 16 -------- ------ ------- ----- ------- -------- 147 1 -- -- 148 152 -------- ------ ------- ----- ------- -------- 2,394 29 (21) -- 2,402 2,329 Assets Held for Sale: El Pollo Loco Company-owned units 108 5 -- 2 115 100 Franchised units 157 -- -- (2) 155 157 Licensed units 4 -- -- -- 4 4 -------- ------ ------- ----- ------- -------- 269 5 -- -- 274 261 -------- ------ ------- ----- ------- -------- 2,663 34 (21) -- 2,676 2,590 ======== ====== ======= ===== ======= ======== </TABLE> 17
DENNY'S <TABLE> <CAPTION> Quarter Ended % September 29, 1999 September 30, 1998 Increase/(Decrease) ------------------ ------------------ ------------------- <S> <C> <C> <C> ($ in millions, except average unit data) U.S. systemwide sales $ 555.5 $ 523.0 6.2 ========= ========= Net company sales $ 297.0 $ 297.0 --- Franchise and licensing revenue 16.1 13.4 20.1 --------- --------- Total revenue 313.1 310.4 0.9 --------- --------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 20.3 19.8 2.5 Other 294.8 279.8 5.4 --------- --------- Total operating expenses 315.1 299.6 5.2 --------- --------- Operating (loss) income $ (2.0) $ 10.8 NM ========= ========= EBITDA as defined $ 52.9 $ 52.9 --- Average unit sales Company-owned 340,800 338,500 0.7 Franchised 307,200 294,400 4.3 Same-store sales increase (Company-owned) 1.4% 2.6% NM = Not Meaningful </TABLE> Denny's NET COMPANY SALES for the third quarter of 1999 were comparable to the third quarter of 1998. The effect of the increase in same-store sales was offset by a decrease in Denny's Company-owned stores. The increase in same-store sales was driven primarily by a higher guest check average resulting from successful promotions of higher-priced menu items and from moderate price increases. FRANCHISE AND LICENSING REVENUE increased $2.7 million (20.1%), primarily attributable to a net increase of 85 franchised units over the prior year quarter. Denny's OPERATING EXPENSES increased $15.5 million (5.2%) compared to the prior year quarter. Excluding the impact of a $12.4 million increase in depreciation and amortization expense and a $2.6 million increase in refranchising and other gains, operating expenses increased $5.7 million. The increase is primarily the result of increased payroll costs, offset slightly by a decrease in product costs. Increased payroll costs in the current year resulted from higher wage rates driven by market conditions. In addition, prior year payroll costs benefitted from adjustments related to improvements in workers' compensation and health benefits actuarial trends. The increase in depreciation and amortization expense resulted primarily from the retirement of assets replaced in conjunction with recently reimaged restaurants. EBITDA AS DEFINED was comparable to the prior year quarter as a result of the factors noted in the preceding paragraphs, excluding the increase in depreciation and other amortization. Denny's OPERATING INCOME decreased $12.8 million compared to the prior year quarter as a result of the factors noted above. 18
COCO'S <TABLE> <CAPTION> Quarter Ended % September 29, 1999 September 30, 1998 Increase/(Decrease) ------------------ ------------------ ------------------- <S> <C> <C> <C> ($ in millions, except average unit data) U.S. systemwide sales $ 66.0 $ 70.0 (5.7) ======== ======== Net company sales $ 54.5 $ 64.0 (14.8) Franchise and licensing revenue 1.6 1.1 45.5 -------- -------- Total revenue 56.1 65.1 (13.8) -------- -------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 5.2 5.4 (3.7) Other 53.5 62.5 (14.4) -------- -------- Total operating expenses 58.7 67.9 (13.5) -------- -------- Operating loss $ (2.6) $ (2.8) 7.1 ======== ======== EBITDA as defined $ 6.4 $ 7.6 (15.8) Average unit sales Company-owned 364,800 369,900 (1.4) Franchised 336,200 340,500 (1.3) Same-store sales decrease (Company-owned) (5.6%) (1.6%) </TABLE> Coco's NET COMPANY SALES for the third quarter of 1999 decreased $9.5 million (14.8%) compared to the third quarter of 1998. This decline reflects a decrease in same-store sales and lower revenue due to 23 fewer Company-owned restaurants than last year (including 13 Company-owned restaurants sold on the last day of the prior year quarter). FRANCHISE AND LICENSING REVENUE increased $0.5 million (45.5%), primarily attributable to a net increase of 15 franchised units and six licensed units over the prior year quarter. Coco's OPERATING EXPENSES decreased $9.2 million (13.5%) compared to the prior year quarter, primarily resulting from sales declines and a decrease in Company-owned restaurants. Additionally, operating expenses decreased in the current year quarter due to a nonrecurring reduction of an environmental accrual, which is reflected as a credit to operating expenses. Depreciation and other amortization decreased primarily as a result of a significant group of assets becoming fully depreciated in the second quarter of the current year. The decrease in operating expenses is partially offset by increased labor costs due to higher wage rates driven by market conditions. EBITDA AS DEFINED decreased $1.2 million (15.8%) compared to the prior year quarter as a result of the factors noted in the preceding paragraphs, excluding the decrease in depreciation and other amortization. Coco's OPERATING INCOME increased $0.2 million compared to the prior year quarter as a result of the factors noted above. 19
CARROWS <TABLE> <CAPTION> Quarter Ended % September 29, 1999 September 30, 1998 Increase/(Decrease) ------------------ ------------------ ------------------- <S> <C> <C> <C> ($ in millions, except average unit data) U.S. systemwide sales $ 48.3 $ 51.7 (6.6) ======== ======== Net company sales $ 41.2 $ 46.9 (12.2) Franchise and licensing revenue 0.7 0.4 75.0 -------- -------- Total revenue 41.9 47.3 (11.4) -------- -------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 4.5 4.4 2.3 Other 39.0 46.4 (15.9) -------- -------- Total operating expenses 43.5 50.8 (14.4) -------- -------- Operating loss $ (1.6) $ (3.5) 54.3 ======== ======== EBITDA as defined $ 5.6 $ 4.9 14.3 Average unit sales Company-owned 343,900 343,000 0.3 Franchised 259,500 274,400 (5.4) Same-store sales decrease (Company-owned) (3.7%) (2.1%) </TABLE> Carrows' NET COMPANY SALES for the third quarter of 1999 decreased $5.7 million (12.2%) compared to the third quarter of 1998. The decrease reflects a 16-unit decrease in Company-owned restaurants and a decrease in same-store sales. FRANCHISE AND LICENSING REVENUE increased $0.3 million primarily attributable to a net increase of 12 franchised units over the prior year quarter. Carrows' OPERATING EXPENSEs decreased $7.3 million (14.4%) compared to the prior year quarter, primarily resulting from sales declines, fewer Company-owned restaurants and management's continued focus on cost controls. Additionally, operating expenses decreased in the current year quarter due to a nonrecurring reduction of an environmental accrual, which is reflected as a credit to operating expenses. Depreciation and other amortization decreased primarily as a result of a significant group of assets becoming fully depreciated in the second quarter of the current year. The decrease in operating expenses is partially offset by increased labor costs due to higher wage rates driven by market conditions. EBITDA AS DEFINED increased $0.7 million (14.3%) compared to the prior year quarter as a result of the factors noted in the preceding paragraphs, excluding the decrease in depreciation and other amortization. Carrows' OPERATING INCOME increased $1.9 million compared to the prior year quarter as a result of the factors noted above. 20
RESULTS OF OPERATIONS THREE QUARTERS ENDED SEPTEMBER 29, 1999 COMPARED TO THREE QUARTERS ENDED SEPTEMBER 30, 1998 The Company's CONSOLIDATED REVENUE for the three quarters ended September 29, 1999 decreased $17.7 million (1.4%) compared to the 1998 comparable period. Company restaurant sales decreased $25.7 million primarily due to a net 44-unit decrease in Company-owned restaurants, partially offset by higher sales at Denny's. Franchise and licensing revenue increased $8.0 million, primarily attributable to a 117-unit increase in Denny's, Coco's and Carrows' franchised and licensed restaurants. Denny's reported revenue increases reflecting positive same-store sales growth and increased franchise revenue in the period. The revenue growth at Denny's was offset, however, by lower revenue at Coco's and Carrows, where fewer Company-owned units and lower same-store sales resulted in 14.3% and 12.6% declines in revenue, respectively. CONSOLIDATED OPERATING EXPENSES increased $11.2 million (0.9%) compared to the prior year comparable period. Excluding the impact of a $16.6 million increase in depreciation and other amortization and a $0.9 million decrease in refranchising and other gains, operating expenses decreased $6.3 million. This decrease is primarily attributable to a net decrease of 44 Company-owned restaurants, partially offset by increases in payroll costs. Increased payroll costs resulted from higher wage rates driven by market conditions. General and administrative expenses increased compared to the prior year as a result of an insurance recovery in the prior year period which was reflected as a credit to operating expenses in the prior year period. The increase in depreciation and other amortization is the result of the retirement of assets replaced in conjunction with recently reimaged units and the revaluation of assets and liabilities in accordance with fresh start reporting. The revaluation was completed during the latter half of 1998 and resulted in increased depreciation and other amortization being recorded in subsequent 1998 and 1999 quarters. The Company's consolidated EBITDA AS DEFINED decreased $15.1 million (9.6 %) compared to the prior year comparable period. This decrease is a result of the factors noted in the preceding paragraphs, excluding the increase in depreciation and other amortization. CONSOLIDATED OPERATING INCOME decreased $28.9 million compared to the prior year comparable period as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $80.1 million for the three quarters ended September 29, 1999, a decrease of $0.7 million (0.8%) compared to the prior year comparable period. The decrease in interest expense, net, is attributable primarily to lower debt balances in the current year period, offset by a decrease in interest income in the current period due to decreased cash balances and by a decrease in the allocation of interest expense to discontinued operations. For the three quarters ended September 29, 1999, $8.3 million of interest expense has been allocated to discontinued operations compared to $11.5 million in the prior year period. REORGANIZATION ITEMS recorded in the one week ended January 7, 1998 include professional fees and other expenditures incurred by the Company in conjunction with the reorganization as well as the impact of adjusting assets and liabilities to fair value in accordance with SOP 90-7 as discussed in Note 2 to the consolidated financial statements included herein. The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the three quarters ended September 29, 1999 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 benefit reflecting an effective income tax rate of approximately 0.7% for the three quarters ended September 29, 1999 compared to an income tax provision of approximately 1.2% for the thirty-eight weeks ended September 30, 1998. The benefit from income taxes from continuing operations for the one-week period ended January 7, 1998 of approximately $13.8 million includes adjustments of approximately $12.5 million of various tax accruals. The remaining benefit of approximately $1.3 million relates to the tax effect of the revaluation of certain Company assets and liabilities in accordance with fresh start accounting. 21
The EXTRAORDINARY ITEM recorded in the one week ended January 7, 1998 relates to the implementation of the Plan which resulted in the exchange of the Company's Senior Subordinated Debentures and 10% Convertible Debentures previously outstanding for 40 million shares of common stock of Advantica and warrants to purchase an additional 4 million shares of Advantica common stock. The difference between the carrying value of such debt (including principal, accrued interest and deferred financing costs) and the fair value of the common stock and warrants resulted in a gain on debt extinguishment of $612.8 million which was recorded as an extraordinary item. The Statements of Consolidated Operations and Cash Flows presented herein have been reclassified for the three quarters ended September 29, 1999, the thirty-eight weeks ended September 30, 1998 and the one week ended January 7, 1998 to reflect EPL as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating income (loss) of EPL for the three quarters ended September 29, 1999, the thirty-eight weeks ended September 30, 1998 and the one week ended January 7, 1998 were $107.1 million and $4.6 million, $93.3 million and $3.2 million, and $2.0 million and $(0.2) million, respectively. Additionally, the Statements of Consolidated Operations and Cash Flows presented herein for the three quarters ended September 30, 1998 also reflect FEI and Quincy's as discontinued operations. FEI and Quincy's revenue and operating income for the thirty-eight weeks ended September 30, 1998 and the one week ended January 7, 1998 were $194.9 million and $5.7 million and $12.7 million and $0.1 million, respectively. Loss from operations of discontinued operations decreased $4.0 million compared to the prior year period as a result of the completion of the FEI and Quincy's sales during 1998 and improved operating results at EPL in the current year period. The $1.0 million of EPL's net loss incurred subsequent to the measurement date is included as a component of net assets held for sale. Including this portion of EPL's loss, the loss from operations of discontinued operations decreased $5.0 million. NET LOSS was $148.1 million for the three quarters ended September 29, 1999 compared to net income of $1.3 billion for the 1998 comparable period, primarily as a result of the adoption of fresh start reporting and the extraordinary gain recorded in the prior year period. 22
Restaurant Operations: DENNY'S <TABLE> <CAPTION> Three Quarters Ended % September 29, 1999 September 30, 1998 Increase/(Decrease) ------------------ ------------------ ------------------- <S> <C> <C> <C> ($ in millions, except average unit data) U.S. systemwide sales $ 1,576.6 $ 1,467.9 7.4 ========= =========== Net company sales $ 863.7 $ 843.7 2.4 Franchise and licensing revenue 43.9 37.9 15.8 --------- ----------- Total revenue 907.6 881.6 2.9 --------- ----------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 60.6 57.8 4.8 Other 855.5 808.3 5.8 --------- ----------- Total operating expenses 916.1 866.1 5.8 --------- ----------- Operating income $ (8.5) $ 15.5 NM ========= =========== EBITDA as defined $ 134.8 $ 138.3 (2.5) Average unit sales Company-owned 985,900 962,200 2.5 Franchised 856,100 822,200 4.1 Same-store sales increase (Company-owned) 3.0% 0.3% NM = Not Meaningful </TABLE> Denny's NET COMPANY SALES for the three quarters ended September 29, 1999 increased $20.0 million (2.4%) compared to the 1998 comparable period. The increase reflects growth in same-store sales driven primarily by a higher guest check average. The increase in guest check average resulted from successful promotions of higher-priced food items and from moderate price increases. FRANCHISE AND LICENSING REVENUE increased $6.0 million (15.8%), primarily attributable to a net increase of 85 franchised units over the prior year period. Denny's OPERATING EXPENSES increased $50.0 million (5.8%) compared to the prior year comparable period. Excluding the impact of a $17.3 million increase in depreciation and other amortization and a $1.3 million decrease in refranchising and other gains, operating expenses increased $31.4 million. This increase is primarily the result of increased sales and higher labor costs. Increased payroll costs resulted from higher wage rates driven by market conditions. The increase in depreciation and other amortization is the result of the retirement of assets replaced in conjunction with recently reimaged units and the revaluation of assets and liabilities in accordance with fresh start reporting. The revaluation was completed during the latter half of 1998 and resulted in increased depreciation and other amortization being recorded in subsequent 1998 and 1999 quarters. EBITDA AS DEFINED decreased $3.5 million compared to the prior year comparable period as a result of the factors noted in the preceding paragraphs, excluding the increase in depreciation and other amortization. Denny's OPERATING INCOME decreased $24.0 million compared to the prior year comparable period as a result of the factors noted above. 23
COCO'S <TABLE> <CAPTION> Three Quarters Ended % September 29, 1999 September 30, 1998 Increase/(Decrease) ------------------ ------------------ ------------------- <S> <C> <C> <C> ($ in millions, except average unit data) U.S. systemwide sales $ 196.1 $ 210.4 (6.8) ========= ========= Net company sales $ 163.7 $ 193.2 (15.3) Franchise and licensing revenue 4.5 3.1 45.2 --------- --------- Total revenue 168.2 196.3 (14.3) --------- --------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 15.7 16.2 (3.1) Other 162.2 185.1 (12.4) --------- --------- Total operating expenses 177.9 201.3 (11.6) ---------- --------- Operating loss $ (9.7) $ (5.0) (94.0) ========== ========= EBITDA as defined $ 19.2 $ 26.0 (26.2) Average unit sales Company-owned 1,093,400 1,115,600 (2.0) Franchised 968,400 1,005,000 (3.6) Same-store sales decrease (Company-owned) (6.1%) (0.8%) </TABLE> Coco's NET COMPANY SALES for the three quarters ended September 29, 1999 decreased $29.5 million (15.3%) compared to the 1998 comparable period. The decrease reflects lower same-store sales and fewer Company-owned restaurants. FRANCHISE AND LICENSING REVENUE increased $1.4 million (45.2%), primarily attributable to a net increase of 15 domestic franchised units and six licensed restaurants over the prior year comparable period. Coco's OPERATING EXPENSES decreased $23.4 million (11.6%) compared to the prior year comparable period, primarily reflecting the decrease in Company-owned restaurants. Additionally, depreciation and other amortization decreased primarily as a result of a significant group of assets becoming fully depreciated in the second quarter of the current year. EBITDA AS DEFINED decreased $6.8 million (26.2%) compared to the prior year comparable period as a result of the factors noted in the preceding paragraphs, excluding the decrease in depreciation and other amortization. Coco's OPERATING INCOME decreased $4.7 million compared to the prior year comparable period as a result of the factors noted above. 24
CARROWS <TABLE> <CAPTION> Three Quarters Ended % September 29, 1999 September 30, 1998 Increase/(Decrease) ------------------ ------------------ ------------------- <S> <C> <C> <C> ($ in millions, except average unit data) U.S. systemwide sales $ 143.1 $ 154.5 (7.4) =========== =========== Net company sales $ 122.1 $ 140.7 (13.2) Franchise and licensing revenue 1.9 1.2 58.3 ----------- ----------- Total revenue 124.0 141.9 (12.6) ----------- ----------- Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets 13.4 12.9 3.9 Other 120.7 137.7 (12.3) ----------- ----------- Total operating expenses 134.1 150.6 (11.0) ----------- ----------- Operating loss $ (10.1) $ (8.7) (16.1) =========== =========== EBITDA as defined $ 13.2 $ 15.7 (15.9) Average unit sales Company-owned 1,017,800 1,024,000 (0.6) Franchised 785,500 850,200 (7.6) Same-store sales decrease (Company-owned) (3.9%) (1.6%) </TABLE> Carrows' NET COMPANY SALES for the three quarters ended September 29, 1999 decreased $18.6 million (13.2%) compared to the 1998 comparable period. This decrease reflects lower same-store sales and fewer Company-owned restaurants. FRANCHISE AND LICENSING REVENUE increased $0.7 million for the three quarters ended September 29, 1999 compared to the 1998 comparable period. This increase resulted from a net increase of 12 domestic franchise units over the prior year. Carrows' OPERATING EXPENSES decreased $16.5 million (11.0%) compared to the prior year comparable period, reflecting a decrease in Company-owned restaurants and management's continued focus on cost controls. Additionally, depreciation and other amortization decreased primarily as a result of a significant group of assets becoming fully depreciated in the second quarter of the current year. EBITDA AS DEFINED decreased $2.5 million (15.9%) compared to the prior year comparable period as a result of the factors noted in the preceding paragraphs, excluding the decrease in depreciation and other amortization. Carrows' OPERATING INCOME decreased $1.4 million compared to the prior year comparable period as a result of the factors noted above. 25
LIQUIDITY AND CAPITAL RESOURCES On the Effective Date, the Company entered into a credit agreement with Chase and other lenders named therein providing the Company (excluding FRD) with a senior secured revolving credit facility (the "Credit Facility") which includes a working capital and letter of credit facility of up to a total of $200 million and matures in January 2003, subject to earlier termination on March 31, 2000 in the event that Advantica's currently outstanding mortgage financings have not been refinanced on or prior to such date. At September 29, 1999, Advantica had no outstanding working capital advances against the Credit Facility, and letters of credit outstanding were $42.7 million. In connection with the acquisition of Coco's and Carrows, FRD entered into the Old FRD Credit Facility on May 23, 1996. Because of covenant limitations under Advantica's and FRD's various financing documents, the Company's ability to make further investments in FRD to upgrade its Coco's and Carrows concepts was severely limited. In an effort to address this issue and otherwise improve FRD's financial flexibility, during the first half of 1999, the Company (1) designated FRD and its subsidiaries as restricted subsidiaries in accordance with the terms of Advantica's Senior Notes Indenture, generally increasing Advantica's investment flexibility thereunder in its relationship with FRD and its subsidiaries, (2) obtained certain amendments to the Credit Facility to increase Advantica's investment flexibility under that facility with respect to the Coco's and Carrows operations, and (3) effective May 14, 1999, entered into the New FRD Credit Facility which consists of a $30 million term loan and a $40 million revolving credit facility and matures in May 2003 (see Note 5 to the consolidated financial statements). The New FRD Credit Facility, which is guaranteed by Advantica, refinanced the Old FRD Credit Facility and is available to fund Coco's and Carrows' capital expenditures and for general corporate purposes. Such facility is not available to Advantica and its other subsidiaries. At September 29, 1999, FRD and its subsidiaries had $30.0 million outstanding term loan borrowings, no outstanding working capital borrowings and letters of credit outstanding of $12.7 million. In March 1999, the Company repurchased $20 million aggregate principal amount of its Senior Notes, as also permitted by the Credit Facility amendments referenced above, for approximately $20.8 million, including approximately $469,000 of accrued interest. The repurchase of the notes resulted in an immaterial gain. On or prior to July 12, 2000, the Company will be required to repay or refinance the $160 million 11.03% mortgage notes payable which are secured by a pool of cross-collateralized mortgages on 240 Denny's restaurants properties. During the third quarter, the Company began preliminary discussions with certain financial institutions regarding the refinancing or replacement of such facility. Although there are no assurances in this regard, management believes that, through a combination of cash on hand and available debt capacity, the Company will be successful in repaying or refinancing such facility within applicable time periods. As of September 29, 1999 and December 30, 1998, the Company had working capital deficits, exclusive of net assets held for sale, of $299.6 million and $83.7 million, respectively. The increase in the deficit is attributable primarily to the reclassification of the $160 million 11.03% mortgage notes payable to current liabilities, debt-related interest payments, the repurchase of Senior Notes for approximately $20.8 million and the acquisition of certain Perkins restaurants by Denny's for approximately $10.9 million cash and the assumption of capital leases and other liabilities (see Note 4 to the consolidated financial statements). 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. As of September 29, 1999, the Company had cash balances of $87.2 million consisting of $82.9 million at the Advantica level and $4.3 million at the FRD level. The Company believes that these cash balances, the availability of funds under the Credit Facility and the New FRD Credit Facility and future operating cash flows will be sufficient to fund its major capital 26
reimaging and remodeling programs that it is undertaking at its Denny's and Coco's concepts in order to expand its customer base and enhance value. Subject to applicable restrictions, the Company plans, from time to time, to consider using its cash resources for the purchase of its securities. STRATEGIC FOCUS As indicated in prior reports, the Company's primary objective is to maintain and enhance shareholder value over time through its restaurant operations. Management believes this objective can be attained through investment in its restaurants, by reducing the Company's debt through the reduction of debt over time and by improving its restaurant operations. These tactics are not mutually exclusive and must be accomplished if shareholder value is to be enhanced. During the third quarter and into the fourth quarter of 1999, the Company has continued to invest in its Denny's brand. Denny's has reimaged 110 units to date and expects to complete 140 reimages for the full year. The initial results from the completed units show year-over-year same-store sales increases of 10 percent, which exceeds the Company's minimum return requirements. These initial results are encouraging; however, the Company realizes that the results must be sustainable over a longer period. Accordingly, during the early part of next year, the Company intends to slow the reimaging pace at Denny's and to evaluate and fine tune the reimage elements of the initial group of restaurants completed during 1999. Additionally, the Company continues to strive to lower the cost of the reimaging program to enhance its potential long-term return. The Company continues to believe that capital must be invested in Denny's to offer a more contemporary dining experience to its customers and to ensure its leadership position in family dining. During the first three quarters of 1999, the Company completed the reimaging of 12 Coco's Cafe and Bakery restaurants in Southern California. Nine of these units were completed late in the third quarter; accordingly, it is too early to measure the returns. Coco's plans to evaluate the post-reimage performance of these restaurants through the first quarter of next year before beginning a full rollout of the program. Additionally, Coco's is developing an alternative reimage package which will be available for implementation at a lower cost in certain markets as appropriate. As with Denny's, the Company believes that Coco's must invest capital into its older facilities to attract new customers and retain its existing customer base against constant competitive pressures. Although the Company believes that a program of reinvestment in its restaurants must be undertaken to prevent a deterioration in value and long-term potential of its family dining brands, the Company will continue to explore ways to reduce debt. Since its emergence from restructuring in early 1998, the Company has sold two declining businesses, Hardee's (FEI) and Quincy's, and used the majority of those proceeds to reduce debt significantly and to invest in its restaurants. The proceeds from the sale of El Pollo Loco will provide an opportunity to reduce the Company's debt further. The Company continues to believe that reinvestment in its restaurants and the prudent delevering of the Company will, over time, enhance shareholder value. To assist the Company in attaining its objective, McKinsey & Company ("McKinsey"), a global business consulting firm, has been retained. McKinsey will provide analysis, evaluation and consideration of strategic alternatives to improve business efficiencies. Accordingly, McKinsey will focus on implementation of "best practices" techniques within the Company's restaurant operations and corporate support functions, as well as provide recommendations designed to provide the most efficient business model for maximizing Advantica's enterprise value. The review is expected to be completed early next year. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs which were written using two digits rather than four to define the applicable year. Any of the Company's computer programs or operating equipment that have date-sensitive software using two digits to define the applicable year may recognize a date using "00" as the year 1900 rather than the year 2000. This 27
could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. Over the past two years, the Company has had a comprehensive enterprise-wide program in place to address the impact and issues associated with processing dates up to, through and beyond the year 2000. This program consisted of three main areas: (a) information systems, (b) supply chain and critical third party readiness and (c) business equipment. An executive steering committee, comprised of senior executives from all functional areas, oversaw all Year 2000 efforts and reported to the Board of Directors regularly. The Company utilized both internal and external resources to inventory, assess, remediate, replace and test its systems for Year 2000 compliance. The Company performed an assessment of the impact of the Year 2000 issue and determined that a significant portion of its software applications needed to be modified or replaced so that its systems would properly recognize dates beyond December 31, 1999. For the most part, the Company replaced existing systems. Based on current estimates, it is anticipated that total Company spending in 1999 related to Year 2000 remediation efforts will be approximately $16 million. Of that amount, the Company estimates that by year end a total of approximately $13 million expended to develop or purchase new software will have been capitalized. All Year 2000 projects addressing critical business issues are complete. Financial systems that are critical to the Company's operations became Year 2000 compliant by the end of June 1999, and restaurant systems became compliant by September 1999. Incremental testing of some lower priority systems is in process to provide further assurance of Year 2000 compliance. The nature of its business makes the Company very dependent on critical suppliers and service providers, and failure of such third parties to address the Year 2000 issues adequately could have a material impact on the Company's ability to conduct its business. To address these concerns, the Company has had a dedicated team in place to assess the Year 2000 readiness of all third parties on which it depends. Surveys were sent to critical suppliers and service providers and each survey response was scored and assessed based on the third party's Year 2000 project plans in place and progress to date. On-site visits or follow-up phone interviews were performed for critical suppliers and service providers. For any critical supplier or service providers which did not provide the company with satisfactory evidence of their Year 2000 readiness, contingency plans were developed which included establishing alternative sources for the product or service provided. The Company also communicated with its franchise business partners regarding Year 2000 business risks. The Company's costs associated with the Year 2000 issues exclude the potential impact of the Year 2000 issue on third parties. There can be no guarantee that the systems of other companies on which the Company relies will be timely converted or that a failure to convert by another company would not have a material adverse effect on the Company's operations. The Company inventoried and determined the business criticality of all restaurant equipment. Based on its findings, the Company believes that the date-related issues associated with the proper functioning of such assets are insignificant and are not expected to represent a material risk to the Company operations. The Company conducted an inventory and assessment of its facilities at its corporate offices and corrected certain date deficient systems. The Company believes, based on available information, that it will be able to manage its Year 2000 transition without any material adverse effect on its business operations. The Company has established contingency plans addressing business-critical processes for operations and other critical corporate functions. In addition, the Company has developed a detailed Year 2000 rollover plan and communications strategy, and has frozen system changes until the first quarter of 2000. A team is in place to validate that systems are functioning correctly once year 2000 arrives and to quickly address issues should they arise. 28
PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. The following are included as exhibits to this report: Exhibit No. Description - ------- ----------- 27 Financial Data Schedule. - ------------------------------------ b. No reports on Form 8-K were filed during the quarter ended September 29, 1999. 29
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 12, 1999 By: /s/ Rhonda J. Parish --------------------------------------- Rhonda J. Parish Executive Vice President, General Counsel and Secretary Date: November 12, 1999 By: /s/ Ronald B. Hutchison --------------------------------------- Ronald B. Hutchison Executive Vice President and Chief Financial Officer 30