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 26, 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.
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(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)
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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 October 31, 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
September 26, 2001 September 27, 2000
------------------ ------------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 245,870 $ 282,619
Franchise and licensing revenue 24,202 20,023
--------- ---------
Total operating revenue 270,072 302,642
--------- ---------
Cost of company restaurant sales:
Product costs 60,504 73,568
Payroll and benefits 96,266 111,341
Occupancy 13,246 15,359
Other operating expenses 36,248 41,848
--------- ---------
Total costs of company restaurant sales 206,264 242,116
Franchise restaurant costs 9,115 9,014
General and administrative expenses 13,608 15,850
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 7,067 10,342
Depreciation and other amortization 22,151 28,274
Gains on refranchising and other, net (1,827) (16,315)
--------- ---------
Total operating costs and expenses 256,378 289,281
--------- ---------
Operating income 13,694 13,361
--------- ---------
Other expenses:
Interest expense, net 18,261 20,578
Other nonoperating expenses (income), net 1 (418)
--------- ---------
Total other expenses, net 18,262 20,160
--------- ---------
Loss before taxes (4,568) (6,799)
Provision for income taxes 212 478
--------- ---------
Loss from continuing operations (4,780) (7,277)
Discontinued operations --- ---
--------- ---------
Net loss applicable to common shareholders $ (4,780) $ (7,277)
========= =========
Per share amounts applicable to common shareholders:
Basic and diluted loss per share:
Loss from continuing operations $ (0.12) $ (0.18)
Discontinued operations --- ---
--------- ---------
Net loss $ (0.12) $ (0.18)
========= =========
Average outstanding shares 40,143 40,079
========= =========
See accompanying notes
2
Advantica Restaurant Group, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 26, 2001 September 27, 2000
------------------ ------------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $ 724,779 $ 829,658
Franchise and licensing revenue 68,036 53,577
--------- ---------
Total operating revenue 792,815 883,235
--------- ---------
Cost of company restaurant sales:
Product costs 180,611 215,561
Payroll and benefits 291,360 330,875
Occupancy 43,294 47,641
Other operating expenses 107,548 122,184
--------- ---------
Total costs of company restaurant sales 622,813 716,261
Franchise restaurant costs 29,403 24,622
General and administrative expenses 44,669 51,650
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 21,792 31,637
Depreciation and other amortization 70,184 83,938
Restructuring charges 8,495 7,248
Impairment charges 8,343 ---
Gains on refranchising and other, net (12,123) (38,339)
--------- ---------
Total operating costs and expenses 793,576 877,017
--------- ---------
Operating (loss) income (761) 6,218
--------- ---------
Other expenses:
Interest expense, net 54,732 62,322
Other nonoperating expenses (income), net 12 (1,398)
--------- ---------
Total other expenses, net 54,744 60,924
--------- ---------
Loss before taxes (55,505) (54,706)
Provision for income taxes 1,280 1,175
--------- ---------
Loss from continuing operations (56,785) (55,881)
Discontinued operations:
Loss from operations of discontinued operations, net of
income tax provision of: 2001 -- $0; 2000 -- $186 --- (17,330)
--------- ---------
Loss before extraordinary gain (56,785) (73,211)
Extraordinary gain, net of income tax provision of: 2001 -- $0 7,778 ---
--------- ---------
Net loss applicable to common shareholders $ (49,007) $ (73,211)
========= =========
Per share amounts applicable to common shareholders:
Basic and diluted loss per share:
Loss from continuing operations $ (1.41) $ (1.39)
Loss from discontinued operations, net --- (0.44)
--------- ---------
Loss before extraordinary gain (1.41) (1.83)
Extraordinary gain 0.19 ---
--------- ---------
Net loss $ (1.22) $ (1.83)
========= =========
Average outstanding shares 40,134 40,073
========= =========
See accompanying notes
3
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
September 26, 2001 December 27, 2000
------------------ -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 3,665 $ 27,260
Receivables, less allowance for doubtful accounts of:
2001 -- $3,170; 2000 -- $4,308 3,782 6,427
Inventories 9,681 10,249
Other 24,249 10,593
--------- ---------
Total Current Assets 41,377 54,529
--------- ---------
Property 623,091 641,757
Less accumulated depreciation 253,439 216,430
--------- ---------
Property, net 369,652 425,327
--------- ---------
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net of accumulated amortization of:
2001 -- $224,095; 2000 -- $202,304 35,385 61,177
Goodwill, net of accumulated amortization of:
2001 -- $3,766; 2000 -- $2,495 24,686 25,476
Other intangible assets, net of accumulated amortization of:
2001 -- $28,477; 2000 -- $23,168 108,021 115,516
Deferred financing costs, net 10,241 12,543
Other 40,774 48,865
--------- ---------
Total Assets $ 630,136 $ 743,433
========= =========
Liabilities
Current Liabilities:
Current maturities of notes and debentures $ 679 $ 1,086
Current maturities of capital lease obligations 4,702 10,510
Net liabilities of discontinued operations 13,534 69,400
Accounts payable 37,766 68,087
Accrued salaries and vacations 30,584 30,699
Accrued insurance 15,831 17,502
Accrued taxes 13,213 11,703
Accrued interest 12,800 28,159
Other 39,656 57,410
--------- ---------
Total Current Liabilities 168,765 294,556
--------- ---------
Long-Term Liabilities:
Notes and debentures, less current maturities 624,721 553,730
Capital lease obligations, less current maturities 36,783 39,980
Liability for insurance claims 25,273 25,468
Other noncurrent liabilities and deferred credits 69,836 75,960
--------- ---------
Total Long-Term Liabilities 756,613 695,138
--------- ---------
Total Liabilities 925,378 989,694
Shareholders' Deficit (295,242) (246,261)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 630,136 $ 743,433
========= =========
See accompanying notes
4
Advantica Restaurant Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 26, 2001 September 27, 2000
------------------ ------------------
(In thousands)
Cash Flows from Operating Activities:
Net loss $(49,007) $(73,211)
Adjustments to reconcile net loss to cash flows from
operating activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 21,792 31,637
Depreciation and other amortization 70,184 83,938
Restructuring charges 8,495 7,248
Impairment charges 8,343 ---
Amortization of deferred gains (8,421) (9,807)
Amortization of deferred financing costs 2,478 4,609
Gains on refranchising and other, net (12,123) (38,339)
Equity in loss from discontinued operations, net --- 17,330
Amortization of debt premium (1,398) (8,003)
Extraordinary gain (7,778) ---
Other --- (195)
Changes in Assets and Liabilities Net of Effects of
Acquisitions and Dispositions:
Decrease (increase) in assets:
Receivables 8,215 7,996
Inventories 336 17
Other current assets (13,567) (3,006)
Other assets (3,263) (1,989)
Increase (decrease) in liabilities:
Accounts payable (10,484) (640)
Accrued salaries and vacations (115) 2,779
Accrued taxes 1,460 (668)
Other accrued liabilities (33,762) (40,946)
Other noncurrent liabilities and deferred credits (5,612) (3,199)
-------- --------
Net cash flows used in operating activities (24,227) (24,449)
-------- --------
Cash Flows from Investing Activities:
Purchase of property (25,248) (24,764)
Acquisition of restaurant units --- (4,461)
Proceeds from disposition of property 26,157 47,514
Advances to discontinued operations, net (54,707) (1,917)
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 (53,798) 44,321
-------- --------
See accompanying notes
5
Advantica Restaurant Group, Inc.
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Three Quarters Three Quarters
Ended Ended
September 26, 2001 September 27, 2000
------------------ ------------------
(In thousands)
Cash Flows from Financing Activities:
Net borrowings under credit agreements $ 73,300 $ 12,600
Long-term debt payments (5,663) (179,405)
Debt transaction costs --- (519)
Bank overdrafts (13,207) (5,805)
--------- ---------
Net cash flows provided by (used in) financing activities 54,430 (173,129)
--------- ---------
Decrease in cash and cash equivalents (23,595) (153,257)
Cash and Cash Equivalents at:
Beginning of period 27,260 165,828
--------- ---------
End of period $ 3,665 $ 12,571
========= =========
See accompanying notes
6
ADVANTICA RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
September 26, 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. Nonrecurring adjustments include restructuring charges, impairment
charges and extraordinary gains. Otherwise, all 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 three quarters ended
September 26, 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 income (loss) of the
discontinued operations for the reported periods are as follows:
Quarter Quarter Three Quarters Three Quarters
Ended Ended Ended Ended
September 26, 2001 September 27, 2000 September 26, 2001 September 27, 2000
------------------ ------------------ ------------------ ------------------
(In millions)
Revenue $ 87.7 $ 90.9 $ 265.0 $ 279.4
Operating income (loss) 0.5 (4.3) (1.4) (8.7)
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").
Accordingly, 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. FRD's financial position at December 27, 2000 and September
26, 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 as
7
liabilities subject to compromise. 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.
September 26, December 27,
2001 2000
------------- ------------
(In thousands)
Assets
Current assets $ 29,765 $ 14,982
Property owned, net 76,384 88,562
Property held under capital leases, net 8,160 10,791
Other assets, including deferred loss from
discontinued operations 112,207 99,126
-------- --------
226,516 213,461
-------- --------
Less liabilities
Current liabilities
Current portion of obligations under capital lease 2,605 2,709
Coco's/Carrows Credit Facility payable to
Denny's, Inc. (see Note 3) 53,904 ---
Other current liabilities 37,895 81,504
-------- --------
94,404 84,213
-------- --------
Long-term liabilities
Obligations under capital lease, noncurrent 5,286 7,323
Other long-term liabilities 17,930 17,117
-------- --------
23,216 24,440
-------- --------
Total liabilities not subject to compromise 117,620 108,653
Liabilities subject to compromise 176,334 174,208
-------- --------
Total liabilities 293,954 282,861
-------- --------
Net liabilities of FRD 67,438 69,400
Denny's, Inc. receivable related to Coco's/Carrows
Credit Facility (see Note 3) 53,904 ---
-------- --------
Net liabilities of discontinued operations $ 13,534 $ 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 September 26, 2001, FRD's operating
subsidiaries had $28.0 million outstanding term loan borrowings, working capital
borrowings of $24.7 million and letters of credit outstanding of $9.6 million.
Denny's, Inc. has deposited cash collateral with one of the former lenders to
secure the Coco's/Carrows Credit Facility's outstanding letters of credit. At
September 26, 2001, the balance of such deposit was $9.8 million, which is
reflected in the other current assets on Advantica's Consolidated Balance Sheet.
Denny's, Inc.'s receivable of $53.9 million, including accrued interest of $1.2
million at September 26, 2001 (see Note 2), relates to borrowings under the
Coco's/Carrows Credit Facility. This receivable eliminates in consolidation,
thereby reducing the net liabilities of discontinued operations on Advantica's
Consolidated Balance Sheet at September 26, 2001.
All advances under the Coco's/Carrows Credit Facility due to Denny's, Inc.
accrue interest at a variable rate (approximately 8.0% at September 26, 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.
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, depreciation and amortization
(EBITDA) (as defined) and limitations on annual capital expenditures. FRD's
operating
8
subsidiaries were not in compliance with certain financial covenants under the
Coco's/Carrows Credit Facility for the quarter ended September 26, 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.
Note 4. Debt
The Company was in compliance with the terms of Advantica's working capital and
letter of credit facility (the "Advantica Credit Facility") at September 26,
2001; however, the total debt to EBITDA covenant was to become more restrictive
as of and for the quarter ending December 26, 2001. Accordingly, effective
October 18, 2001, the Company obtained an amendment to the Advantica Credit
Facility increasing the maximum ratio of total debt to EBITDA for the remaining
term of the facility. Also pursuant to that amendment, certain covenants and
other provisions were modified, permitting the Company to undertake an exchange
offer relating to Advantica's currently outstanding senior notes under certain
terms and conditions. In addition, as a result of the amendment, commitments
under the Advantica Credit Facility shall be reduced from $200 million to an
amount not less than $150 million upon receipt of cash payments, if any, related
to Denny's receivable and deposits securing outstanding letters of credit under
the Coco's/Carrows Credit Facility (see Note 3).
Note 5. Restructuring and Impairment Charges
The Company recorded $12.5 million of restructuring charges in fiscal year 2000.
Approximately $10.4 million represented cash charges, of which $0.9 million
related to operating lease liabilities for closed stores that will be paid out
over the remaining lease terms. The remaining cash charges of $9.5 million
primarily related to severance and outplacement costs, of which $7.8 million was
paid through September 26, 2001. The remaining $1.7 million is expected to be
paid out by the second quarter of 2002.
During the second quarter of 2001, the Company approved a restructuring plan to
close 63 underperforming Denny's restaurants. At September 26, 2001, 46 of the
63 restaurants had been closed. The remaining restaurants are expected to be
closed or otherwise disposed of within 18 months. As a result of this plan, the
Company reported a restructuring charge of approximately $8.5 million during the
second quarter of 2001. 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 September 26,
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 impairment of certain other
underperforming restaurants. The charges were calculated based on the difference
between the estimated future discounted cash flows and the carrying value of the
impaired units at June 27, 2001.
Subsequent to quarter end, on November 1, 2001, the Company announced a
restructuring plan to eliminate approximately 90 out-of-restaurant support
staff positions which will result in a future reduction of general and
administrative expenses. The related restructuring charge will be recorded in
the fourth quarter of 2001.
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 Three Quarters Three Quarters
Ended Ended Ended Ended
September 26, 2001 September 27, 2000 September 26, 2001 September 27, 2000
------------------ ------------------ ------------------ ------------------
(In thousands)
Net loss $ (4,780) $ (7,277) $(49,007) $(73,211)
Other comprehensive loss:
Foreign currency translation adjustment (310) (87) (64) (42)
-------- -------- -------- --------
Comprehensive loss $ (5,090) $ (7,364) $(49,071) $(73,253)
======== ======== ======== ========
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 three quarters ended September
26, 2001 and September 27, 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 the amortization of its 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 within six months from the date of adoption. The total
amortization expense related to excess reorganization value and goodwill was
$7.5 million and $23.1 million for the quarter and three quarters ended
September 26, 2001 and $10.8 million and $33.3 million for the quarter and three
quarters ended September 27, 2000, respectively. The Company is currently
assessing but has not yet determined the impact of adopting SFAS 142 on its
financial position and results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes Statement of Financial
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB 30 related to the disposal of a segment of a business. SFAS
144 will be effective for the Company beginning December 27, 2001, the first day
of its 2002 fiscal year. The Company is currently assessing but has not yet
determined the impact of adopting SFAS 144 on its financial position and results
of operations.
10
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 26, 2001 compared to December 27, 2000 and
the results of operations for the quarter and three quarters ended September 26,
2001 compared to the quarter and three quarters ended September 27, 2000. The
forward-looking statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations, which reflect management's best
judgment based on factors currently known, involve risks, uncertainties, and
other factors which may cause the actual performance of Advantica, its
subsidiaries and underlying concepts to be materially different from the
performance indicated or implied by such statements. Such factors include, among
others: the outcome of FRD's pending Chapter 11 proceedings, 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 Three Quarters Ended
------------------------------------- -------------------------------------
September 26, September 27, September 26, September 27,
2001 2000 Increase 2001 2000 Increase
------------ ------------ -------- ------------- ------------- --------
Total systemwide sales (in millions)(a) $ 610.0 $ 592.7 2.9% $ 1,739.0 $ 1,681.2 3.4%
Average unit sales:
Company-owned 379,200 349,500 8.5% 1,062,100 1,012,300 4.9%
Franchise 321,900 314,500 2.4% 906,100 883,700 2.5%
Company-owned data (b):
Same-store sales increase 3.2% 1.4% 2.5% 1.6%
Guest check average increase 1.2% 5.0% 2.1% 5.4%
------------------
(a) Systemwide sales include sales from company-owned, franchised and licensed
restaurants.
(b) Prior period amounts have not been restated for subsequent period comparable
units.
The table below summarizes Denny's restaurant unit activity for the quarter
ended September 26, 2001.
Ending Units Units Ending Ending
Units Opened/ Units Units Sold/ Units Units
June 27, 2001 Acquired Refranchised Reacquired Closed September 26, 2001 September 27, 2000
------------- -------- ------------ ---------- ------ ------------------ ------------------
Company-owned units 663 --- (9) 1 (17) 638 784
Franchised units 1,114 11 9 (1) (9) 1,124 1,013
Licensed units 14 --- --- --- --- 14 19
----- ---- ---- ---- ---- ----- -----
1,791 11 --- --- (26) 1,776 1,816
===== === ==== ==== ==== ===== =====
11
Results of Operations
Quarter Ended September 26, 2001 Compared to Quarter Ended September 27, 2000
-----------------------------------------------------------------------------
Company Operations
Denny's recorded 3.2% same-store sales growth for the current year quarter which
was driven by a 1.2% increase in guest check average and higher guest traffic.
The Company's guest traffic started to soften in late August as the summer $2.99
Grand Slam promotion and its associated media slowed down. The tragic events of
September 11 further reduced sales as consumer spending slowed considerably.
Company restaurant sales decreased $36.7 million (13.0%) primarily due to a
146-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 and store closures.
Total costs of company restaurant sales decreased $35.9 million (14.8%), driven
by the decrease in company-owned restaurants. As a percentage of company
restaurant sales, the Company experienced lower payroll costs resulting from
productivity gains related to increased traffic. Lower product costs as a
percentage of company restaurant sales resulted from a higher guest check
average and reduced waste costs. Additionally, the negative effect of higher
utility rates and increased repair and maintenance activities on operating costs
was partially offset by lower advertising expenses.
Operating margins related to company-owned restaurants were $39.6 million (16.1%
of company restaurant sales) for the quarter ended September 26, 2001 compared
to $40.5 million (14.3% of company restaurant sales) for the quarter ended
September 27, 2000.
Franchise Operations
Franchise and licensing revenue was $24.2 million for the current year quarter,
comprised of royalties and fees of $15.2 million and occupancy revenue of $9.0
million, compared to $20.0 million for the prior year quarter, comprised of
royalties and fees of $14.1 million and occupancy revenue of $5.9 million.
Franchise and licensing revenue increased $4.2 million (20.9%) resulting
primarily from a 111-unit increase in franchised restaurants and from a higher
average unit volume from franchised restaurants.
Franchise costs were $9.1 million for the current year quarter, comprised of
occupancy costs of $5.3 million and other direct expenses of $3.8 million,
compared to $9.0 million for the prior year quarter, comprised of occupancy
costs of $3.1 million and other direct expenses of $5.9 million. Franchise
restaurant costs increased $0.1 million (1.1%). Higher costs driven by the
increase in the number of franchised restaurants were offset by a decrease in
bad debt expense related to the collection of certain past due accounts. As a
percentage of franchise and licensing revenues, franchise costs decreased to
37.7% in the current quarter from 45.0% in the prior year quarter, resulting
primarily from the decrease in bad debt expense.
The Company's franchise operating margins were $15.1 million (62.3% of franchise
and licensing revenue) for the quarter ended September 26, 2001 compared to
$11.0 million (55.0% of franchise and licensing revenue) for the quarter ended
September 27, 2000.
Other Operating Costs and Expenses
General and administrative costs decreased $2.2 million (14.1%) primarily from
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. As a result of continued tightening in the financing market
and the Company's strict standards for new franchisees, refranchising gains in
the current quarter decreased $14.5 million compared to the prior year quarter
due to lower refranchising activity.
12
Operating income was $13.7 million for the quarter ended September 26, 2001
compared to operating income of $13.4 million for the quarter ended September
27, 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 $42.9 million in the
current year quarter compared to $52.0 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.
Interest expense, net, totaled $18.3 million for the third quarter of 2001, a
decrease of $2.3 million compared to the prior year quarter. The decrease in
interest expense, net, resulted primarily from the repayment of the 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
September 26, 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 4.6% for the
quarter ended September 26, 2001 compared to a provision reflecting an
approximate rate of 7.0% for the quarter ended September 27, 2000.
The Consolidated Statements of Operations and Cash Flows presented herein
reflect FRD as discontinued operations in accordance with APB 30. Revenue and
operating income (loss) of the discontinued operations for the quarters ended
September 26, 2001 and September 27, 2000 were $87.7 million and $0.5 million
and $90.9 million and ($4.3) million, respectively.
Net loss was $4.8 million for third quarter of 2001 compared to a net loss of
$7.3 million for the third quarter of 2000 due to the factors noted above.
Three Quarters Ended September 26, 2001 Compared to Three Quarters Ended
------------------------------------------------------------------------
September 27, 2000
------------------
Company Operations
Denny's recorded 2.5% same-store sales growth for the current year period which
was driven by a 2.1% increase in guest check average and higher guest traffic.
Company restaurant sales decreased $104.9 million (12.6%) primarily due to a
146-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 and store closures.
Total costs of company restaurant sales decreased $93.4 million (13.0%), 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 reduced 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 $102.0 million (14.1%
of company restaurant sales) for the three quarters ended September 26, 2001
compared to $113.4 million (13.7% of company restaurant sales) for the three
quarters ended September 27, 2000.
Franchise Operations
Franchise and licensing revenue was $68.0 million for the current year period,
comprised of royalties and fees of $42.3 million and occupancy revenue of $25.7
million, compared to $53.6 million for the prior year period, comprised of
13
royalties and fees of $38.1 million and occupancy revenue of $15.5 million.
Franchise and licensing revenue increased $14.5 million (27.0%) resulting
primarily from a 111-unit increase in franchised restaurants and from a higher
average unit volume from franchised restaurants.
Franchise costs were $29.4 million for the current year period, comprised of
occupancy costs of $15.3 million and other direct expenses of $14.1 million,
compared to $24.6 million for the prior year period, comprised of occupancy
costs of $9.1 million and other direct expenses of $15.5 million. Franchise
restaurant costs increased $4.8 million (19.4%), driven by the increase in
franchise and licensed restaurants. As a percentage of franchise and licensing
revenues, these costs decreased to 43.2% in the current year period from 46.0%
in the prior year period, resulting primarily from a decrease in bad debt
expense related to the collection of certain past due accounts.
The Company's franchise operating margins were $38.6 million (56.8% of franchise
and licensing revenue) for the three quarters ended September 26, 2001 compared
to $29.0 million (54.0% of franchise and licensing revenue) for the three
quarters ended September 27, 2000.
Other Operating Costs and Expenses
General and administrative costs decreased $7.0 million (13.5%) 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. As a result of the tightening in the
financing market and the Company's strict standards for new franchisees in the
current year, refranchising gains decreased $26.2 million compared to the prior
year period due to lower refranchising activity.
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
to the Consolidated Financial Statements). Of the 63 restaurants identified for
closure, 46 had been closed by September 26, 2001. 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.
Subsequent to quarter end, on November 1, 2001, the Company announced a
restructuring plan to eliminate approximately 90 out-of-restaurant support
staff positions which will result in a future reduction of general and
administrative expenses. The related restructuring charge will be recorded in
the fourth quarter of 2001.
Operating loss was $0.8 million for the three quarters ended September 26, 2001
compared to operating income of $6.2 million for the three quarters ended
September 27, 2000.
EBITDA as defined decreased to $108.1 million in the current year period from
$129.0 million in the prior year period due to the factors noted above.
Interest expense, net, totaled $54.7 million for the three quarters ended
September 26, 2001, a decrease of $7.6 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 three quarters
ended September 26, 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 2.3% for the
three quarters ended September 26, 2001 compared to a provision reflecting an
approximate rate of 2.1% for the three quarters ended September 27, 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 three quarters ended
14
September 26, 2001 and September 27, 2000 were $265.0 million and $1.4 million
and $279.4 million and $8.7 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 $49.0 million for three quarters ended September 26, 2001 compared
to a net loss of $73.2 million for the three quarters ended September 27, 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 September 26,
2001, the Company had outstanding revolver advances of $73.3 million and letters
of credit outstanding of $52.6 million under the Advantica Credit Facility,
leaving a net availability of $74.1 million. Advances under the Advantica Credit
Facility accrue interest at a variable rate (approximately 6.7% at September 26,
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 (see Notes 2 and 3
to the Consolidated Financial Statements).
The Company was in compliance with the terms of the Advantica Credit Facility at
September 26, 2001; however, the total debt to EBITDA covenant was to become
more restrictive as of and for the quarter ending December 26, 2001.
Accordingly, effective October 18, 2001, the Company obtained an amendment to
the Advantica Credit Facility increasing the maximum ratio of total debt to
EBITDA for the remaining term of the facility. Also pursuant to that amendment,
certain covenants and other provisions were modified, permitting the Company to
undertake an exchange offer relating to Advantica's currently outstanding senior
notes under certain terms and conditions. In addition, as a result of the
amendment, commitments under the Advantica Credit Facility shall be reduced from
$200 million to an amount not less than $150 million upon receipt of cash
payments, if any, related to Denny's receivable and deposits securing
outstanding letters of credit under the Coco's/Carrows Credit Facility.
As of September 26, 2001 and December 27, 2000, the Company had working capital
deficits, excluding net liabilities of discontinued operations, of $113.9
million and $170.6 million, respectively. The decrease in the deficit at
September 26, 2001 is primarily related to the use of cash on hand and
borrowings under the Company's revolving credit facility to satisfy current
liabilities, the reduction in capital lease obligations resulting in the
extraordinary gain recorded during the three quarters ended September 26, 2001,
and the reduction of company-owned units from refranchising activity and store
closures. 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 September 26, 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 any or all of the secured
obligations owed to it under the Coco's/Carrows Credit Facility. For additional
information concerning the Coco's/Carrows Credit Facility and the Chapter 11
filing, see Notes 2 and 3 to the Consolidated Financial Statements.
Capital expenditures for the three quarters ended September 26, 2001 totaled
$26.3 million, of which approximately $1.1 million was financed through capital
leases. These amounts were expended primarily to maintain existing facilities
and
15
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 the amortization of its 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 within six months from the date of adoption. The total
amortization expense related to excess reorganization value and goodwill was
$7.5 million and $23.1 million for the quarter and three quarters ended
September 26, 2001 and $10.8 million and $33.3 million for the quarter and three
quarters ended September 27, 2000, respectively. The Company is currently
assessing but has not yet determined the impact of adopting SFAS 142 on its
financial position and results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes Statement of Financial
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB 30 related to the disposal of a segment of a business. SFAS
144 will be effective for the Company beginning December 27, 2001, the first day
of its 2002 fiscal year. The Company is currently assessing but has not yet
determined the impact of adopting SFAS 144 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 adjusted Eurodollar rate. A 100 basis point increase in the Advantica
Credit Facility interest rate (approximately 6.7% at September 26, 2001) would
increase interest expense for the remainder of the year by approximately $0.2
million. Such computation is determined by considering the impact of
hypothetical interest rates on the Company's variable long-term debt at
September 26, 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 $329 million at September 26, 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 September 26, 2001.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Four former managers of Denny's restaurant units have initiated, in the Superior
Court for King County, Washington, a class action lawsuit seeking, among other
things, overtime compensation. The action, which was originally filed on May 16,
2000, was certified on July 31, 2001 as a class action with all managers and
general managers who worked for Company-owned Denny's restaurants in Washington
since January 1, 1997 being identified as class members. The suit alleges that
managers at Denny's are not exempt "executive" employees because they supposedly
spend most of their time on non-exempt tasks, thus entitling them to overtime
compensation. Denny's contends that it properly classifies its managers as
salaried employees, thereby exempting them from the payment of overtime
compensation. Denny's has been and will continue to vigorously defend this
lawsuit.
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 to the Consolidated
Financial Statements). 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
During the third quarter of 2001, the Company received, from its inspector of
election, revised vote totals correcting the vote totals for the election of
directors recorded at the Company's annual meeting of stockholders held on
Wednesday, May 23, 2001 and previously reported in the Company's Form 10-Q for
the second quarter of 2001. The corrected totals, which do not alter the overall
results reported last quarter, are as follows:
Election of Directors
---------------------
Votes Against
Name Votes For or Withheld
---- ---------- -------------
James B. Adamson 34,714,520 1,567,277
Vera K. Farris 36,114,540 167,257
James J. Gaffney 36,163,865 117,932
Nelson J. Marchioli 34,713,301 1,568,496
Robert E. Marks 36,164,539 117,258
Lloyd I. Miller, III 36,162,776 119,021
Charles F. Moran 34,714,653 1,567,144
Elizabeth A. Sanders 36,164,680 117,117
Donald R. Shepherd 34,719,876 1,561,921
Item 6. Exhibits and Reports on Form 8-K
b. On September 6, 2001, the Company filed a report on Form 8-K reporting
under Item 5 that on August 10, 2001, FRD entered into a letter of intent
with Lyon's of California, Inc. ("Lyon's"), with respect to the purchase
and sale of all of the outstanding capital stock of FRI-M which operates
the Coco's and Carrows restaurant chains.
On September 21, 2001, the Company filed a report on Form 8-K reporting
under Item 5 that on September 19, 2001, the letter of intent entered
into by FRD and Lyon's terminated pursuant to its own terms. Additionally,
the Company reported that on September 20, 2001, FRD entered into a
letter of intent with Coco's and Carrows
17
Acquisition Company ("CCAC") with respect to the purchase and sale of all
the outstanding capital stock of FRI-M.
On October 15, 2001, the Company filed a report on Form 8-K reporting
under Item 5 that on October 11, 2001, the letter of intent entered into
by FRD and CCAC terminated in accordance with its own terms following an
extension of time.
No financial statements were required to be included and were not
included in any of these Form 8-K filings.
18
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 1, 2001 By: /s/Rhonda J. Parish
-----------------------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: November 1, 2001 By: /s/Andrew F. Green
-----------------------------------------
Andrew F. Green
Senior Vice President and
Chief Financial Officer