UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 27, 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
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(Address of principal executive offices)
(Zip Code)
(864) 597-8000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of August 10, 2001, 40,143,025 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.
Consolidated Statements of Operations
(Unaudited)
Quarter Quarter
Ended Ended
June 27, 2001 June 28, 2000
------------- -------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 242,122 $ 279,412
Franchise and licensing revenue 22,270 17,521
--------- ---------
Total operating revenue 264,392 296,933
--------- ---------
Cost of company restaurant sales:
Product costs 60,435 73,360
Payroll and benefits 97,955 110,432
Occupancy 14,979 16,341
Other operating expenses 35,425 40,972
--------- ---------
Total costs of company restaurant sales 208,794 241,105
Franchise restaurant costs 10,565 8,419
General and administrative expenses 15,031 16,629
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 7,151 10,564
Depreciation and other amortization 24,196 28,516
Restructuring charges 8,495 --
Impairment charges 8,343 --
Gains on refranchising and other, net (5,896) (17,346)
--------- ---------
Total operating costs and expenses 276,679 287,887
--------- ---------
Operating (loss) income (12,287) 9,046
--------- ---------
Other expenses:
Interest expense, net 18,011 20,259
Other nonoperating expenses (income), net 18 (241)
--------- ---------
Total other expenses, net 18,029 20,018
--------- ---------
Loss before taxes (30,316) (10,972)
Provision for income taxes 535 337
--------- ---------
Loss from continuing operations (30,851) (11,309)
Discontinued operations:
Loss from operations of discontinued operations, net of
applicable income tax provision of: 2000 -- $104 -- (8,150)
--------- ---------
Net loss applicable to common shareholders $ (30,851) $ (19,459)
========= =========
Per share amounts applicable to common shareholders:
Basic and diluted loss per share:
Loss from continuing operations $ (0.77) $ (0.28)
Loss from discontinued operations, net -- (0.21)
--------- ---------
Net loss $ (0.77) (0.49)
========= =========
Average outstanding shares 40,143 40,079
========= =========
See accompanying notes
2
Advantica Restaurant Group, Inc.
Consolidated Statements of Operations
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 27, 2001 June 28, 2000
------------- -------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 478,909 $ 547,039
Franchise and licensing revenue 43,834 33,554
--------- ---------
Total operating revenue 522,743 580,593
--------- ---------
Cost of company restaurant sales:
Product costs 120,107 141,993
Payroll and benefits 195,094 219,534
Occupancy 30,048 32,282
Other operating expenses 71,300 80,336
--------- ---------
Total costs of company restaurant sales 416,549 474,145
Franchise restaurant costs 20,288 15,608
General and administrative expenses 31,061 35,800
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 14,725 21,295
Depreciation and other amortization 48,033 55,664
Restructuring charges 8,495 7,248
Impairment charges 8,343 --
Gains on refranchising and other, net (10,296) (22,024)
--------- ---------
Total operating costs and expenses 537,198 587,736
--------- ---------
Operating loss (14,455) (7,143)
--------- ---------
Other expenses:
Interest expense, net 36,471 41,744
Other nonoperating expenses (income), net 11 (980)
--------- ---------
Total other expenses, net 36,482 40,764
--------- ---------
Loss before taxes (50,937) (47,907)
Provision for income taxes 1,068 697
--------- ---------
Loss from continuing operations (52,005) (48,604)
Discontinued operations:
Loss from operations of discontinued operations, net of
applicable income tax provision of: 2000 -- $186 -- (17,330)
--------- ---------
Loss before extraordinary gain (52,005) (65,934)
Extraordinary gain, net income tax provision of: 2001 -- $0 7,778 --
--------- ---------
Net loss applicable to common shareholders $ (44,227) $ (65,934)
========= =========
Per share amounts applicable to common shareholders:
Basic and diluted (loss)earnings per share:
Loss from continuing operations $ (1.30) $ (1.21)
Loss from discontinued operations, net -- (0.44)
--------- ---------
Loss before extraordinary gain (1.30) (1.65)
Extraordinary gain 0.20 --
--------- ---------
Net loss $ (1.10) (1.65)
========= =========
Average outstanding shares 40,130 40,071
========= =========
See accompanying notes
3
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
June 27, 2001 December 27, 2000
------------- -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 4,145 $ 27,260
Receivables, less allowance for doubtful accounts of:
2001 -- $4,643; 2000 -- $4,308 6,153 6,427
Inventories 10,108 10,249
Other 19,410 10,593
--------- ---------
39,816 54,529
--------- ---------
Property 616,307 641,757
Less accumulated depreciation 238,383 216,430
--------- ---------
377,924 425,327
--------- ---------
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net of accumulated amortization of:
2001 -- $217,028; 2000 -- $202,304 43,452 61,177
Goodwill, net of accumulated amortization of:
2001 -- $3,356; 2000 -- $2,495 24,615 25,476
Other intangible assets, net of accumulated amortization of:
2001 -- $26,597; 2000 -- $23,168 110,129 115,516
Deferred financing costs, net 10,892 12,543
Other 43,177 48,865
--------- ---------
Total Assets $ 650,005 $ 743,433
========= =========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 701 $ 1,086
Current maturities of capital lease obligations 4,998 10,510
Net liabilities of discontinued operations 11,970 69,400
Accounts payable 48,099 68,087
Accrued salaries and vacations 27,886 30,699
Accrued insurance 15,439 17,502
Accrued taxes 12,871 11,703
Accrued interest 27,910 28,159
Other 47,674 57,410
--------- ---------
197,548 294,556
--------- ---------
Long-Term Liabilities:
Notes and debentures, less current maturities 607,479 553,730
Capital lease obligations, less current maturities 37,774 39,980
Liability for insurance claims 24,514 25,468
Other noncurrent liabilities and deferred credits 72,843 75,960
--------- ---------
742,610 695,138
--------- ---------
Total Liabilities 940,158 989,694
--------- ---------
Shareholders' Deficit (290,153) (246,261)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 650,005 $ 743,433
========= =========
See accompanying notes
4
Advantica Restaurant Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 27, 2001 June 28, 2000
------------- -------------
(In thousands)
Cash Flows from Operating Activities:
Net loss $(44,227) $(65,934)
Adjustments to reconcile net loss to cash flows from
operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 14,725 21,295
Depreciation and other amortization 48,033 55,664
Restructuring charges 8,495 7,248
Impairment charges 8,343 --
Amortization of deferred gains (5,274) (6,729)
Amortization of deferred financing costs 1,652 3,186
Gains on refranchising and other, net (10,296) (22,024)
Equity in loss from discontinued operations, net -- 17,330
Amortization of debt premium (920) (6,124)
Extraordinary gain (7,778) --
Other -- (195)
Changes in Assets and Liabilities Net of Effects of
Acquisitions and Dispositions:
Decrease (increase) in assets:
Receivables 8,765 5,130
Inventories (4) (1,076)
Other current assets (8,728) (2,686)
Other assets (2,854) (531)
Increase (decrease) in liabilities:
Accounts payable (6,162) 794
Accrued salaries and vacations (2,813) (3,972)
Accrued taxes 1,135 (1,228)
Other accrued liabilities (16,943) (10,732)
Other noncurrent liabilities and deferred credits (1,298) (2,620)
-------- --------
Net cash flows used in operating activities (16,149) (13,204)
-------- --------
Cash Flows from Investing Activities:
Purchase of property (13,238) (16,744)
Acquisition of restaurant units -- (4,358)
Proceeds from disposition of property 18,273 24,553
Advances to discontinued operations, net (56,078) (1,287)
Change in restricted cash, net -- (95,000)
Proceeds from maturity of investments securing
in-substance defeased debt -- 10,865
Proceeds from sale and maturity of investments -- 17,084
-------- --------
Net cash flows (used in) provided by investing activities (51,043) (64,887)
-------- --------
See accompanying notes
5
Advantica Restaurant Group, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Two Quarters Two Quarters
Ended Ended
June 27, 2001 June 28, 2000
------------- -------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreements $ 55,000 $ 9,800
Long-term debt payments (3,531) (81,038)
Debt transaction costs -- (519)
Bank overdrafts (7,392) (10,032)
--------- ---------
Net cash flows provided by (used in) financing activities 44,077 (81,789)
--------- ---------
Decrease in cash and cash equivalents (23,115) (159,880)
Cash and Cash Equivalents at:
Beginning of period 27,260 165,828
--------- ---------
End of period $ 4,145 $ 5,948
========= =========
See accompanying notes
6
ADVANTICA RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
June 27, 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 and impairment charges, 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
and two quarters ended June 27, 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 the 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. Although the process has taken longer than expected, due in part to
procedural and legal constraints inherent in the FRD bankruptcy filing (see
below), FRD actively continues to market for divestiture its Coco's and Carrows
concepts.
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 for the reported
periods are as follows:
Quarter Quarter Two Quarters Two Quarters
Ended Ended Ended Ended
June 27, 2001 June 28, 2000 June 27, 2001 June 28, 2000
------------- ------------- ------------- -------------
(In millions)
Revenue $87.9 $93.8 $177.3 $188.5
Operating loss (1.2) (1.6) (2.0) (4.3)
7
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 at December 27, 2000 and
June 27, 2001 has 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.
June 27, December 27,
2001 2000
--------- ------------
(In thousands)
Assets
Current assets $ 32,040 $ 14,982
Property owned, net 78,955 88,562
Property held under capital leases, net 9,018 10,791
Other assets 109,775 99,126
--------- ---------
229,788 213,461
--------- ---------
Less liabilities
Current liabilities
Current portion of obligations under capital lease 2,671 2,709
Coco's/Carrows Credit Facility payable to Denny's, Inc.
(see Note 3) 56,097 --
Other current liabilities 38,931 81,504
--------- ---------
97,699 84,213
--------- ---------
Long-term liabilities
Obligations under capital lease, noncurrent 5,899 7,323
Other long-term liabilities 17,923 17,117
--------- ---------
23,822 24,440
--------- ---------
Total liabilities not subject to compromise 121,521 108,653
Liabilities subject to compromise 176,334 174,208
--------- ---------
Total liabilities 297,855 282,861
--------- ---------
Net liabilities of FRD (68,067) (69,400)
Denny's, Inc. receivable related to Coco's/Carrows Credit
Facility (see Note 3) 56,097 --
--------- ---------
Net liabilities of discontinued operations $ (11,970) $ (69,400)
========= =========
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"), owed to Denny's, Inc., another
wholly owned subsidiary of Advantica, consisting of a $30 million term loan and
a $40 million revolving credit facility. At June 27, 2001, FRD's operating
subsidiaries had $30 million outstanding term loan borrowings, working capital
borrowings of $24.7 million and letters of credit outstanding of $11.4 million.
Denny's, Inc. deposited cash collateral with one of the former lenders to secure
the Coco's/Carrows Credit Facility's outstanding letters of credit. At June 27,
2001, the balance of such deposit was $11.4 million, which is reflected in the
other current assets on Advantica's Consolidated Balance Sheet. The balance of
the Denny's, Inc. receivable relates to borrowings under the Coco's/Carrows
Credit Facility of $56.1 million at June 27, 2001 (see Note 2) including accrued
interest of $1.4 million. Such obligations eliminate in consolidation.
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 changes in their business. In
addition, the Coco's/Carrows Credit Facility contains certain financial
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,
8
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 June 27, 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 (approximately 8.8% at June 27, 2001) based
on the prime rate or an adjusted Eurodollar rate. The advances are secured by
substantially all of the assets of FRD and its subsidiaries and by the issued
and outstanding stock of FRD's subsidiaries.
Note 4. DEBT
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"). The Company was in compliance with the terms of
the Advantica Credit Facility at June 27, 2001; however, certain of the
financial covenants become more restrictive as of and for the period ended
December 26, 2001. The Company's ability to comply with such covenants will
depend on (a) FRD completing the sale of Coco's and Carrows prior to December
26, 2001 and receiving sufficient cash proceeds to substantially repay
Denny's, Inc.'s $56.1 million receivable and $11.4 million deposit securing
outstanding letters of credit under the Coco's/Carrows Credit Facility (see
Notes 2 and 3), and (b) meeting or exceeding current operating projections,
particularly as it relates to gains and cash proceeds from restaurant
refranchisings. If the Company is unable to meet such covenants, the Company
would be required to seek an amendment or negotiate other arrangements with its
lenders. Although no assurances can be given, the Company believes it would be
able to negotiate the required arrangements on commercially reasonable terms or
otherwise, if needed.
Note 5. RESTRUCTURING AND IMPAIRMENT 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 terms. The remaining amount relates to severance and
outplacement costs, of which $7.6 million was paid through June 27, 2001. The
Company expects the remaining severance and outplacement liabilities of $1.9
million to be fully paid out by the second quarter of 2002.
During the second quarter of 2001, the Company approved a restructuring plan
that provided for the closing of 63 underperforming Denny's restaurants. At June
27, 2001, 31 of the 63 restaurants had been closed. The majority of the
remaining restaurants will be closed within 12 months and the rest will be
closed or otherwise disposed of within 24 months. As a result of this plan, the
Company reported a restructuring charge of approximately $8.5 million. The
restructuring charge consisted of the following:
(In thousands)
Future rents, net of estimated subleases $3,378
Property taxes 2,952
Brokerage commissions 942
Deidentification and maintenance costs 878
Severance and other costs 345
------
$8,495
======
Based on information currently available, management believes its remaining
restructuring liabilities are adequate and not excessive as of June 27, 2001.
During the second quarter of 2001, the Company recorded an impairment charge of
$8.3 million, of which $6.8 million relates to certain of the restaurants
identified for closure and $1.5 million relates to certain other underperforming
restaurants. The charges were calculated based on the estimated future
discounted cash flows of the impaired units.
9
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, approximately $7.8 million of capital lease obligations were forgiven
and an extraordinary gain was recorded.
Note 7. COMPREHENSIVE LOSS
The Company's comprehensive loss for the periods indicated is as follows:
Quarter Quarter Two Quarters Two Quarters
Ended Ended Ended Ended
June 27, 2001 June 28, 2000 June 27, 2001 June 28, 2000
------------- ------------- ------------- -------------
(In thousands)
Net loss $(30,851) $(19,459) $(44,227) $(65,934)
Other comprehensive income (loss):
Foreign currency translation adjustment 306 40 246 45
-------- -------- -------- --------
Comprehensive income (loss) $(30,545) $(19,419) $(43,981) $(65,889)
======== ======== ======== ========
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 and two quarters ended June 27, 2001
and June 28, 2000, warrants and options of the Company would be antidilutive and
therefore have been omitted from the calculation of weighted average dilutive
shares.
Note 9. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that adoption of SFAS 141 will have a significant
impact on its financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which will be
effective for the Company beginning December 27, 2001, the first day of its 2002
fiscal year. SFAS 142 requires the Company, among other things, to discontinue
goodwill amortization, including reorganization value in excess of amounts
allocable to identifiable assets. In addition, the standard provides for
reclassifying certain existing recognized intangibles as goodwill, reassessing
the useful lives of existing recognized intangibles, reclassifying certain
intangibles out of previously reported goodwill and identifying reporting units
for purposes of assessing potential future impairments of goodwill. SFAS 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The total amortization expense related to
excess reorganization and goodwill was $7.6 million and $15.6 million for the
quarter and two quarters ended June 27, 2001 and $11.0 million and $22.6 million
for the quarter and two quarters ended June 28, 2000, respectively. The Company
is currently assessing but has not yet determined the impact of SFAS 142 on its
financial position and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in
financial position as of June 27, 2001 compared to December 27, 2000 and the
results of operations for the quarter and two quarters ended June 27, 2001
compared to the quarter and two quarters ended June 28, 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
10
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, divestiture efforts 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.
DENNY'S RESTAURANT OPERATIONS AND UNIT ACTIVITY
Quarter Ended Two Quarters Ended
------------------------------------- -------------------------------------
June 27, June 28, Increase/ June 27, June 28, Increase/
2001 2000 (Decrease) 2001 2000 (Decrease)
-------- -------- ---------- -------- -------- ----------
Total systemwide sales (in millions) $ 577.4 $ 556.6 3.7% $1,129.1 $1,088.5 3.7%
Average unit sales:
Company-owned 353,400 340,100 3.9% 684,800 663,000 3.3%
Franchise 298,000 291,800 2.1% 583,900 568,300 2.7%
Company-owned data:
Same-store sales increase 2.0% 0.6% 2.1% 1.4%
Guest check average increase 1.4% 5.5% 2.6% 5.7%
The table below summarizes Denny's restaurant unit activity for the quarter
ended June 27, 2001.
Ending Units Units Ending Ending
Units Opened/ Units Sold/ Units Units
March 28, 2001 Acquired Refranchised Closed June 28, 2000 June 27, 2001
-------------- ------------ ------------ -------- ------------- -------------
Company-owned units 705 1 (11) (32) 663 833
Franchised units 1,097 12 11 (6) 1,114 942
Licensed units 16 --- --- (2) 14 18
----- ---- ---- ---- ----- -----
1,818 13 --- (40) 1,791 1,793
===== ==== ==== ==== ===== =====
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 27, 2001 COMPARED TO QUARTER ENDED JUNE 28, 2000
- -------------------------------------------------------------------
COMPANY OPERATIONS
Denny's recorded 2.0% same-store sales growth for the current year quarter which
was driven by higher guest check averages and increased traffic. Company
restaurant sales decreased $37.3 million (13.3%) primarily due to a 170-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 $32.3 million (13.4%), driven
by the decrease in company-owned restaurants. As a percentage of company
restaurant sales, the Company experienced higher payroll costs from increased
staffing levels and wage rate increases as well as higher occupancy costs. These
percentage increases were offset by lower product costs resulting from a higher
guest check average and improved waste costs. Additionally, the negative effect
of
11
higher utility rates and increased repair and maintenance activities on
operating costs was partially offset by lower advertising expense.
Operating margins related to company-owned restaurants were $33.3 million (13.8%
of company restaurant sales) for the quarter ended June 27, 2001 compared to
$38.3 million (13.7% of company restaurant sales) for the quarter ended June 28,
2000.
FRANCHISE OPERATIONS
Franchise and licensing revenue was $22.3 million for the current year quarter,
comprised of royalties and fees of $13.8 million and occupancy revenue of $8.5
million, compared to $17.5 million for the prior year quarter, comprised of
royalties and fees of $12.7 million and occupancy revenue of $4.8 million.
Franchise and licensing revenue increased $4.8 million (27.1%) resulting
primarily from a 172-unit increase in franchised restaurants and from a higher
average unit volume from franchised restaurants.
Franchise costs were $10.6 million for the current year quarter, comprised of
occupancy costs of $5.0 million and other direct expenses of $5.6 million,
compared to $8.4 million for the prior year quarter, comprised of occupancy
costs of $3.1 million and other direct expenses of $5.3 million. Franchise
restaurant costs increased $2.2 million (25.5%), driven by the increase in
franchise and licensed restaurants. As a percentage of franchise and licensing
revenues, these costs were comparable to the prior year quarter.
The Company's franchise operating margins were $11.7 million (52.6% of franchise
and licensing revenue) for the quarter ended June 27, 2001 compared to $9.1
million (52.0% of franchise and licensing revenue) for the quarter ended June
28, 2000.
OTHER OPERATING COSTS AND EXPENSES
General and administrative costs decreased $1.6 million (9.6%) primarily from
lower information system costs and reduced corporate overhead. The decrease in
amortization of excess reorganization value from the prior year quarter resulted
from a reduction of reorganization value related to the reversals of certain
income tax liabilities recorded in the fourth quarter of 2000 and the first
quarter of 2001. Depreciation and other amortization decreased primarily as a
result of fewer company-owned units. Refranchising gains decreased $11.5 million
in the current quarter resulting from reduced refranchising activity compared to
the prior year.
RESTRUCTURING CHARGES of $8.5 million recorded in the current quarter relate to
management's plan to close 63 underperforming Denny's restaurants (see Note 5)
and consist of lease costs, net of estimated subleases, property taxes and
certain other costs associated with closing the restaurants. At June 27, 2001,
31 of the 63 restaurants had been closed. The majority of the remaining
restaurants will be closed within 12 months and the rest will be closed or
otherwise disposed of within 24 months. In addition, the Company recorded an
$8.3 million asset IMPAIRMENT CHARGE in the current quarter primarily related to
the planned closure of the underperforming restaurants.
OPERATING LOSS was $12.3 million for the quarter ended June 27, 2001 compared to
operating income of $9.0 million for the quarter ended June 28, 2000.
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 decreased to $35.9 million in the
current year quarter compared to $48.1 million in the prior 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.
12
INTEREST EXPENSE, NET, totaled $18.0 million for the second quarter of 2001, a
decrease of $2.2 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 resulting from lower cash balances.
The PROVISION FOR INCOME TAXES from continuing operations for the quarter ended
June 27, 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 1.8% for the quarter
ended June 27, 2001 compared to a provision reflecting an approximate rate of
3.1% for the quarter ended June 28, 2000.
The Consolidated Statements of Operations and Cash Flows presented herein
reflect FRD as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and
operating loss of the discontinued operations for the quarters ended June 27,
2001 and June 28, 2000 were $87.9 million and $1.2 million and $93.8 million and
$1.6 million, respectively.
NET LOSS was $30.9 million for second quarter of 2001 compared to a net loss of
$19.5 million for the second quarter of 2000 due to the factors noted above.
TWO QUARTERS ENDED JUNE 27, 2001 COMPARED TO TWO QUARTERS ENDED JUNE 28, 2000
- -----------------------------------------------------------------------------
COMPANY OPERATIONS
Denny's recorded 2.1% same-store sales growth for the current year period which
was driven by a 2.6% increase in guest check average. Company restaurant sales
decreased $68.1 million (12.5%) primarily due to a 170-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 $57.6 million (12.1%), driven
by the decrease in company-owned restaurants. As a percentage of company
restaurant sales, the Company experienced higher payroll costs from increased
staffing levels and wage rate increases as well as higher occupancy costs. These
percentage increases were offset by lower product costs resulting from a higher
guest check average and improved waste costs. Additionally, the negative effect
of higher utility rates and increased repair and maintenance activities on
operating costs for the period was partially offset by lower advertising
expense.
Operating margins for the company-owned restaurants were $62.4 million (13.0% of
company restaurant sales) for the two quarters ended June 27, 2001 compared to
$72.9 million (13.3% of company restaurant sales) for the two quarters ended
June 28, 2000.
FRANCHISE OPERATIONS
Franchise and licensing revenue was $43.8 million for the current year period,
comprised of royalties and fees of $27.1 million and occupancy revenue of $16.7
million, compared to $33.6 million for the prior year period, comprised of
royalties and fees of $24.0 million and occupancy revenue of $9.6 million.
Franchise and licensing revenue increased $10.3 million (30.6%) resulting
primarily from a 172-unit increase in franchised restaurants and from a higher
average unit volume from franchised restaurants.
Franchise costs were $20.3 million for the current year period, comprised of
occupancy costs of $10.0 million and other direct expenses of $10.3 million,
compared to $15.6 million for the prior year period, comprised of occupancy
costs of $6.0 million and other direct expenses of $9.6 million. Franchise
restaurant costs increased $4.7 million (30.0%), driven by the increase in
franchise and licensed restaurants. As a percentage of franchise and licensing
revenues, these costs were comparable to the prior year period.
The Company's franchise operating margins were $23.5 million (53.7% of franchise
and licensing revenue) for the two quarters ended June 27, 2001 compared to
$17.9 million (53.5% of franchise and licensing revenue) for the two quarters
ended June 27, 2000.
13
OTHER OPERATING COSTS AND EXPENSES
General and administrative costs decreased $4.7 million (13.2%) primarily from
lower information system costs and reduced corporate overhead. The decrease in
amortization of excess reorganization value from the prior year period resulted
from a reduction of reorganization value related to the reversals of certain
income tax liabilities recorded in the fourth quarter of 2000 and the first
quarter of 2001. Depreciation and other amortization decreased primarily as a
result of fewer company-owned units. Refranchising gains decreased $11.7 million
in the current year period resulting from reduced refranchising activity
compared to the prior year period.
RESTRUCTURING CHARGES of $8.5 million recorded in the current year period relate
to management's plan to close 63 underperforming Denny's restaurants (see Note
5). In addition, the Company recorded an $8.3 million asset IMPAIRMENT CHARGE in
the current year period primarily related to the planned closure of the
underperforming restaurants.
OPERATING LOSS increased to $14.5 million for the two quarters ended June 27,
2001 from $7.1 million for the two quarters ended June 28, 2000.
EBITDA AS DEFINED decreased to $65.1 million in the current year period from
$77.1 million in the prior year period due to the factors noted above.
INTEREST EXPENSE, NET, totaled $36.5 million for the two quarters ended June 27,
2001, a decrease of $5.3 million compared to the prior year period. 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 resulting from lower cash balances.
The PROVISION FOR INCOME TAXES from continuing operations for the two quarters
ended June 27, 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 2.1% for the
two quarters ended June 27, 2001 compared to a provision reflecting an
approximate rate of 1.5% for the two quarters ended June 28, 2000.
The Consolidated Statements of Operations and Cash Flows presented herein
reflect FRD as DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and
operating loss of the discontinued operations for the two quarters ended June
27, 2001 and June 28, 2000 were $177.3 million and $2.0 million and $188.5
million and $4.3 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, approximately $7.8 million of capital lease obligations were forgiven
and an EXTRAORDINARY GAIN was recorded.
NET LOSS was $44.2 million for two quarters ended June 27, 2001 compared to a
net loss of $65.9 million for the two quarters ended June 28, 2000 due to
the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Advantica Credit Facility provides to the Company (excluding FRD) a working
capital and letter of credit facility of up to $200 million. At June 27, 2001,
the Company had outstanding revolver advances of $55.0 million and letters of
credit outstanding of $51.6 million under the Advantica Credit Facility, leaving
a net availability of $93.4 million. Advances under the Advantica Credit
Facility accrue interest at a variable rate (approximately 7.3% at June 27,
2001) based on the prime rate or an adjusted Eurodollar rate. The increase in
the outstanding advances, included in notes and debentures on Advantica's
Consolidated Balance Sheet, is primarily the result of Company's satisfaction of
the Coco's/Carrows Credit Facility guaranty in January 2001. 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).
14
The Company was in compliance with the terms of the Advantica Credit Facility at
June 27, 2001; however, certain of the financial covenants become more
restrictive as of and for the period ended December 26, 2001. The Company's
ability to comply with such covenants will depend on (a) FRD completing the sale
of Coco's and Carrows prior to December 26, 2001 and receiving sufficient cash
proceeds to substantially repay Denny's, Inc.'s $56.1 million receivable and
$11.4 million deposit securing outstanding letters of credit under the
Coco's/Carrows Credit Facility (see Notes 2 and 3), and (b) meeting or exceeding
current operating projections, particularly as it relates to gains and cash
proceeds from restaurant refranchisings. If the Company is unable to meet such
covenants, the Company would be required to seek an amendment or negotiate other
arrangements with its lenders. Although no assurances can be given, the Company
believes it would be able to negotiate the required arrangements on commercially
reasonable terms or otherwise, if needed.
As of June 27, 2001 and December 27, 2000, the Company had working capital
deficits, excluding net liabilities of discontinued operations, of $145.8
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.
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 June 27, 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 two quarters ended June 27, 2001 totaled $14.2
million, of which approximately $1.0 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 $40 million to $45 million; however, the Company is not committed
to spending this amount and could spend less if circumstances warrant.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe the
adoption of SFAS 141 will have a significant impact on its financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which will be
effective for the Company beginning December 27, 2001, the first day of its 2002
fiscal year. SFAS 142 requires the Company, among other things, to discontinue
goodwill amortization, including reorganization value in excess of amounts
allocable to identifiable assets. In addition, the standard provides for
reclassifying certain existing recognized intangibles as goodwill, reassessing
the useful lives of existing recognized intangibles, reclassifying certain
intangibles out of previously reported goodwill and identifying reporting units
for purposes of assessing potential future impairments of goodwill. SFAS 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The total amortization expense related to
excess reorganization and goodwill was $7.6 million and $15.6 million for the
quarter and two quarters ended June 27, 2001 and $11.0 million and $22.6 million
for the quarter and two quarters ended June 28, 2000, respectively. The Company
is currently assessing but has not yet determined the impact of SFAS 142 on its
financial position and results of operations.
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
15
adjusted Eurodollar rate. A 100 basis point increase in the Advantica Credit
Facility interest rate (approximately 7.3% at June 27, 2001) would increase
interest expense for the remainder of the year by approximately $0.3 million.
Such computation is determined by considering the impact of hypothetical
interest rates on the Company's variable long-term debt at June 27, 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 $326.5 million at June 27, 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 June 27, 2001.
PART II - OTHER INFORMATION
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Advantica was held on Wednesday, May 23,
2001, at which the following matters were voted on by the stockholders of
Advantica:
(i) Election of Directors
Votes Against
Name Votes for or Withheld
---- ---------- ------------
James B. Adamson 36,167,430 114,367
Vera K. Farris 36,167,539 114,258
James J. Gaffney 36,167,539 114,258
Nelson J. Marchioli 36,167,538 114,259
Robert E. Marks 36,167,539 114,258
Lloyd I. Miller, III 36,167,539 114,258
Charles F. Moran 36,167,539 114,258
Elizabeth A. Sanders 36,167,167 114,630
Donald R. Shepherd 36,167,539 114,258
(ii) Ratification of the Selection of Auditors
Votes for Votes Against Votes AbstaininG
--------- ------------- ----------------
34,754,656 1,494,990 32,151
16
(iii) Approval of 2001 Incentive Program for the Company's Employees
Votes for Votes Against Votes Abstaining
---------- ------------- ----------------
33,251,726 2,989,750 40,321
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
b. No reports on Form 8-K were filed during the quarter ended June 27, 2001.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANTICA RESTAURANT GROUP, INC.
Date: August 13, 2001 By: /s/Rhonda J. Parish
-------------------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: August 13, 2001 By: /s/Ronald B. Hutchison
-------------------------------------
Ronald B. Hutchison
Executive Vice President and
Chief Financial Officer