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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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.
(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 number)
203 EAST MAIN STREET 29319-9966
SPARTANBURG, SOUTH CAROLINA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (864) 597-8000.
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
$.01 Par Value, Common Stock
Common Stock Warrants expiring January 7, 2005
(Title of class)
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 Section 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant was approximately $17,427,503 as of March 1,
2002, based upon the closing sales price of registrant's common stock on that
date of $0.92 per share.
As of March 1, 2002, 40,271,410 shares of registrant's common stock, $.01 par
value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held May 22, 2002 are
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7A Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management 23
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 25
INDEX TO FINANCIAL STATEMENTS F-1
SIGNATURES
</Table>
FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Business," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Quantitative and Qualitative Disclosures About Market Risk"
sections, which reflect our best judgment based on factors currently known,
involve risks and uncertainties. Words such as "expects," "anticipates,"
"believes," "intends," "plans," and "hopes," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors including, but not
limited to, the factors discussed in such sections and those set forth in the
cautionary statements contained in Exhibit 99 to this Form 10-K (see Exhibit
99 -- Safe Harbor Under the Private Securities Litigation Reform Act of 1995).
The forward-looking information we have provided in such sections pursuant to
the safe harbor established under the Private Securities Litigation Reform Act
of 1995 should be evaluated in the context of these factors.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Advantica Restaurant Group, Inc., or Advantica, is one of the largest restaurant
companies in the United States operating moderately priced restaurants in the
mid-scale dining segment. Our core brand is Denny's, which operates 1,749
company-owned, franchised and licensed restaurants. Advantica also owns and
operates the Coco's and Carrows restaurant chains through its subsidiary FRD
Acquisition Co., or FRD.
On January 7, 1998, Advantica's predecessor, Flagstar Companies, Inc., or FCI,
and its wholly owned subsidiary Flagstar Corporation, or Flagstar, emerged from
proceedings under Chapter 11 of the United States Bankruptcy Code pursuant to
FCI's and Flagstar's Amended Joint Plan of Reorganization dated as of November
7, 1997. Also on January 7, 1998, Flagstar merged with and into FCI, the
surviving corporation, and FCI changed its name to Advantica Restaurant Group,
Inc. FCI's operating subsidiaries did not file bankruptcy petitions and were not
parties to the above mentioned Chapter 11 proceedings. As a result of the
reorganization, we significantly reduced our debt and simplified our capital
structure, although we remain highly leveraged. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for information concerning our indebtedness and debt service
requirements.
In the second quarter of 2000, as a result of our decision to sell or otherwise
dispose of Coco's and Carrows, we began accounting for FRD as a discontinued
operation. On February 14, 2001, FRD filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code to facilitate the divestiture of Coco's and
Carrows and to preserve their going concern value. On February 19, 2002,
Advantica and Denny's, along with FRD, Coco's and Carrows, entered into a
stipulation and agreement of settlement with the official committee of unsecured
creditors of FRD seeking to resolve various disputes relating to the
administration of FRD's pending bankruptcy case. See "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Notes 3 and 9 to our
consolidated financial statements for additional information.
DESCRIPTION OF BUSINESS
Denny's is the nation's largest family-style restaurant chain in the mid-scale
segment in terms of market share, number of units and U.S. systemwide sales. At
December 26, 2001, Denny's restaurants operated in 49 states, the District of
Columbia, 2 U.S. territories and 5 foreign countries, with concentrations in
California (23% of total restaurants), Florida (12%) and Texas (9%). Denny's
restaurants are designed to provide a "dining value" with moderately priced
food, friendly and efficient service and a pleasant atmosphere. We believe that
Denny's benefits from its generally strong market position and consumer
recognition. In addition, Denny's may benefit from the demographic trend of
aging baby boomers and the growing population of senior citizens. The largest
percentage of mid-scale customers is in the 35 years and older age category.
Denny's restaurants generally are open 24 hours a day, 7 days a week. Denny's
restaurants offer traditional family fare (including breakfast items,
hamburgers, sandwiches, steaks and chicken), and provide both counter and table
service. Denny's sales are evenly distributed across each of its dayparts;
however, breakfast items account for the majority of Denny's sales. In 2001,
Denny's company-owned restaurants had an average guest check of $6.58 and
average sales of $1.4 million.
We have taken strides to improve each component of the dining value formula. In
2000, Denny's heavily promoted higher-quality, themed products such as "All-Star
Slams," "America's Favorite Omelets," "Major League Burgers" and "Signature
Skillets." We also offered our popular Grand Value menus, which feature
value-priced items for breakfast and lunch. In 2001, we continued to focus on
delivering value to our customers with promotions featuring the "$2.99 Grand
Slam," the "$3.99 Triple Play" and programs such as "Kids Eat Free." These
products are supported through television and radio advertising and
restaurant-based media including special menus, posters and window clings.
In 2001, we implemented initiatives designed to improve the customer service
component of our dining value formula. We invested more dollars into store-level
labor, and we focused our personnel on delivering outstanding customer
1
service by realigning our incentive programs. We also refined the interactive
customer response system we implemented in 2000.
To provide a well-maintained, comfortable environment and improve our overall
customer experience, we reinvested significantly in our restaurant facilities in
2001. We spent approximately $41 million in capital expenditures and $28 million
for repairs and maintenance. As part of our ongoing restaurant evaluation
process, we also identified 83 underperforming restaurants that did not warrant
additional capital investment and earmarked them for closure. By December 26,
2001, 53 of those restaurants had been closed.
In 1999, we initiated a remodel program for our restaurants. We remodeled 140
company-owned restaurants in 1999, 37 restaurants in 2000 and 55 restaurants in
2001. In addition, our franchisees have begun to remodel their units in the new
format, remodeling 71 restaurants in 2001. We believe the remodel program will
appeal to existing and new franchisees which is integral to the completion of
the program systemwide.
Of the 1,749 Denny's restaurants operating at December 26, 2001, 1,114 (64%)
were franchised units. During 2001, we opened 46 franchised units. The initial
fee for a single Denny's franchise is $35,000, and the royalty payment is 4% of
gross sales. Due to tightened financial markets and our strict standards for new
franchisees, in 2001 we sold 59 company-owned units to franchisees, compared
with 148 units in 2000. We expect to continue selling company-owned restaurants
to franchisees on a limited basis.
We believe that the proper execution of basic restaurant operations in each of
our Denny's restaurants, whether it is company-owned or franchised, is critical
to our success. To meet and exceed our customers' expectations, we rely on our
franchisees to maintain the same strict brand standards our company-owned
restaurants follow. These standards relate to the preparation and efficient
service of quality food, maintenance, repair and cleanliness of restaurants and
the appearance and conduct of employees.
OPERATIONS
We devote significant effort to ensuring that all restaurants offer quality food
served by friendly, knowledgeable and attentive employees in a clean and
well-maintained restaurant. Through a network of division, region, area and
restaurant level managers, we maintain standardized specifications for proper
food preparation and delivery and the cost-effective procurement and
distribution of quality food products.
A principal feature of Denny's restaurant operations is the constant focus on
improving operations at the unit level. Unit managers are especially hands-on
and versatile in their supervisory activities. Region and area managers have no
offices and spend substantially all of their time in the restaurants. A
significant majority of restaurant management personnel began as hourly
associates in the restaurants and, therefore, know how to perform restaurant
functions and are able to train by example.
Denny's maintains a training program for associates and restaurant managers.
General managers and restaurant managers receive training at specially
designated training units in the following areas:
- customer interaction;
- kitchen management and food preparation;
- data processing and cost control techniques;
- equipment and building maintenance; and
- leadership skills.
Video training tapes demonstrating various restaurant job functions are located
at each restaurant and are viewed by associates prior to a change in job
function or before using new equipment or procedures.
Denny's also regularly evaluates its menu. New products are developed in our
test kitchen and then introduced in selected restaurants to determine customer
response and to ensure that consistency, quality standards and profitability are
maintained. If a new item proves successful at the research and development
level, it is usually tested in selected markets. A successful menu item is then
incorporated into the restaurant system. While research and development is
important to the Denny's business, amounts expended for these activities are not
significant.
2
Financial and management control is facilitated in all of the Denny's
company-owned restaurants by the use of point-of-sale, or POS, systems which
transmit detailed sales reports, payroll data and periodic inventory information
for management review.
ADVERTISING
We use an integrated advertising process to promote our concepts, including:
- media;
- menu pricing strategy;
- interior/exterior building design;
- style of service; and
- specialized promotions to help differentiate Denny's from our
competitors.
Media advertising is primarily product oriented, generally featuring consistent,
high-quality entrees presented to communicate great food at great values to our
guests. Our advertising is conducted, depending on the market, through:
- national and local television advertising;
- radio; and
- outdoor and print advertising.
Denny's integrated advertising approach reaches out to all consumers. Relevant
messages are created to target general markets, as well as African American,
Hispanic and Asian markets. Community outreach programs are designed to enhance
our diversity efforts. We use sophisticated consumer marketing research
techniques to measure customer satisfaction and customers' evolving
expectations.
SITE SELECTION
The success of any restaurant is influenced significantly by its location. Our
franchise development groups work closely with franchisees and real estate
brokers to identify sites which meet specific standards. Sites are evaluated on
the basis of a variety of factors, including but not limited to:
- demographics;
- traffic patterns;
- visibility;
- building constraints;
- competition;
- environmental restrictions; and
- proximity to high-traffic consumer activities.
RAW MATERIALS SOURCES AND AVAILABILITY
We have a centralized purchasing program which is designed to ensure uniform
product quality as well as low food, beverage and supply costs. Our size
provides significant purchasing power which often enables us to obtain products
at favorable prices from several nationally recognized manufacturers.
In connection with the 1995 sale of our distribution subsidiary, Proficient Food
Company, or PFC, to Meadowbrook Meat Company, or MBM, we entered into an
eight-year distribution agreement with MBM, subsequently extended to September
7, 2005, under which PFC/MBM will continue to distribute and supply certain
products and supplies to Denny's restaurants. There are no volume requirements
relative to these agreements; however, the products named in the agreements must
be purchased through PFC/MBM unless they are unable to be delivered within a
reasonable period. During the third quarter of 1996, we sold our two food
processing systems, Portion-Trol Foods, Inc. and the Mother Butler Pies division
of Denny's, in two separate transactions. In conjunction with these sales, we
entered into five-year purchasing agreements with the acquirers, under which we
were required to purchase certain minimum annual volumes. The purchasing
agreement related to Mother Butler Pies expired on July 31, 2001 and the
purchasing agreement related to Portion-Trol Foods, Inc. was subsequently
extended to December 31, 2002.
We purchase approximately 85% of our restaurant products and supplies from
PFC/MBM. We believe that satisfactory sources of supply are generally available
for all the items regularly used by our restaurants, and we have not
3
experienced any material shortages of food, equipment, or other products which
are necessary to our restaurant operations.
SEASONALITY
Our business is moderately seasonal. Restaurant sales are generally greater in
the second and third calendar quarters (April through September) than in the
first and fourth calendar quarters (October through March). Additionally, severe
weather, storms and similar conditions may impact sales volumes seasonally in
some operating regions. Occupancy and other operating costs, which remain
relatively constant, have a disproportionately greater negative effect on
operating results during quarters with lower restaurant sales.
TRADEMARKS AND SERVICE MARKS
Either directly or through wholly owned subsidiaries, we have certain trademarks
and service marks registered with the United States Patent and Trademark Office
and in international jurisdictions, including Denny's(R) and Grand Slam
Breakfast(R). We consider our trademarks and service marks important to the
identification of our restaurants and believe they are of material importance to
the conduct of our business. Domestic trademark and service mark registrations
are renewable at various intervals from 10 to 20 years, while international
trademark and service mark registrations have various durations from 5 to 20
years. We generally intend to renew trademarks and service marks which come up
for renewal. We own or have rights to all trademarks we believe are material to
our restaurant operations. In addition, we have registered various domain names
on the Internet that incorporate certain of our trademarks and service marks,
and believe these domain name registrations are an integral part of our
identity. From time to time, we may resort to legal measures to defend and
protect the use of our intellectual property.
COMPETITION
The restaurant industry can be divided into three main segments: full-service
restaurants, quick-service restaurants, and other miscellaneous establishments.
Full-service restaurants include the midscale, casual dining and upscale (fine
dining) segments. A large portion of midscale business comes from three
categories -- family style, family steak and cafeteria -- and is characterized
by complete meals, menu variety and moderate prices ($5 to $8 average check).
The family style category, which includes Denny's, consists of a small number of
national chains, many local and regional chains, and thousands of independent
operators. The casual dining segment, which typically has higher menu prices ($8
to $16 average check) and generally offers alcoholic beverages, includes a small
number of national chains, regional chains and independent operators. The
quick-service segment is characterized by lower average checks (generally $3 to
$5), portable meals, fast service and convenience.
The quick-service segment accounts for the bulk of restaurant industry traffic,
but the full-service and quick-service segments of the industry currently have
approximately equal revenues. Throughout the recent past, the midscale segment's
traffic volumes have remained essentially flat. The family style category has
shown increases in traffic over the past few years, while other midscale
categories have shown mixed results.
The restaurant industry is highly competitive, and competition among a few major
companies that own or operate restaurant chains is especially intense,
particularly in the family style segment. Restaurants compete on the basis of
name recognition and advertising; the price, quality, variety, and perceived
value of their food offerings; the quality of their customer service; and the
convenience and attractiveness of their facilities. Commercial restaurants have
faced increased competition from other nontraditional suppliers of prepared
meals over the recent past. A primary example of this competition is the
increase in prepared meals available in many grocery outlets. In addition,
despite recent changes in economic conditions, competition for qualified
restaurant-level personnel remains high.
We believe that Denny's has a number of primary competitive strengths including
strong brand name recognition, well-located restaurants, and market penetration,
which has resulted in economies of scale in a variety of areas including
advertising, purchasing, distribution and field supervision. Additionally, we
believe that Denny's has competitive strengths in the value, variety, and
quality of our food products, and in the quality and training of our employees.
See Exhibit 99 to this Form 10-K for certain additional factors relating to our
competition in the restaurant industry.
4
ECONOMIC, MARKET AND OTHER CONDITIONS
The restaurant industry is affected by many factors, including changes in
national, regional and local economic conditions affecting consumer spending,
changes in socio-demographic characteristics of areas where restaurants are
located, changes in consumer tastes and preferences, increases in the number of
restaurants in general and in particular areas, unfavorable trends affecting
restaurant operations such as rising wage rates and utilities expenses and
unfavorable weather.
GOVERNMENT REGULATIONS
We and our franchisees are subject to local, state and federal laws and
regulations governing various aspects of the restaurant business, including, but
not limited to:
- health;
- sanitation;
- land use, sign restrictions and environmental matters;
- safety;
- disabled persons' access to facilities;
- the sale of alcoholic beverages; and
- hiring and employment practices.
The operation of our franchise system is also subject to regulations enacted by
a number of states and rules promulgated by the Federal Trade Commission. We
believe we are in material compliance with applicable laws and regulations, but
we cannot predict the effect on operations of the enactment of additional
regulations in the future.
We are also subject to federal and state laws governing matters such as minimum
wage, overtime and other working conditions. At December 26, 2001, a substantial
number of our employees were paid the minimum wage. Accordingly, increases in
the minimum wage or decreases in the allowable tip credit (which reduces the
minimum wage paid to tipped employees in certain states) increase our labor
costs. This is especially true for our operations in California, where there is
no tip credit. The California minimum wage increased from $5.75 per hour to
$6.25 per hour on January 1, 2001 and increased to $6.75 per hour on January 1,
2002. Employers must pay the higher of the federal or state minimum wage. We
have attempted to offset increases in the minimum wage through pricing and
various cost control efforts; however, there can be no assurance that we can
continue to pass on such cost increases to our customers.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations have not
historically had a material impact on our operations; however, we cannot predict
the effect of possible future environmental legislation or regulations on our
operations.
COMPLIANCE WITH CONSENT DECREES
On May 24, 1994, we entered into two consent decrees resolving class action
litigation brought against Denny's which alleged that Denny's engaged in a
pattern or practice of racial discrimination in violation of the Civil Rights
Act of l964. We denied any wrongdoing. The consent decrees enjoined us from
racial discrimination and required us to, among other things, implement certain
employee training and testing programs and provide public notice of Denny's
nondiscrimination policies.
Denny's has met all of its obligations under the consent decrees. On January 16,
2000, class counsel, together with counsel for the United States, submitted
reports to the courts that entered the consent decrees reporting on our
completion of the requirements of the consent decrees and recommending the early
dismissal of the consent decrees effective November 24, 2000. Praising our
leadership, counsel advised the courts that:
...Denny's has performed its obligations under the (Consent)
Decrees in a highly commendable and exemplary manner, and has
repeatedly gone beyond the strict requirements of the (Consent)
Decrees to achieve the broader purposes of these historic
settlements. Through a commitment of enormous resources and
effort, Denny's has embraced racial and cultural diversity in its
operations, demonstrated
5
an admirable degree of leadership in addressing racial issues, and
in doing so has set an example for other corporations to follow.
On January 23, 2001, the U.S. District Court for the District of Maryland issued
an order dismissing one of the consent decrees and on April 4, 2001, the U.S.
District Court Northern District of California dismissed the other consent
decree.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each executive
officer of Advantica.
<Table>
<Caption>
CURRENT PRINCIPAL OCCUPATION OR
NAME AGE EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
- ---- --- -------------------------------------------
Janis S. Emplit 46 Senior Vice President and Chief Information Officer of
Advantica (1999-present); Vice President, Information
Systems of Advantica (1997-1998); Senior Director, Burger
King (1987-1997).
Gustave E. Gelardi 55 Division Vice President, Operations of Denny's (May
2001-present); Director, Operations Projects of Burger King
(1997-1999); Vice President, Region Operations Asia/Pacific
Market of Burger King (1995-1997).
Roy C. Getz 37 Senior Vice President, Marketing and Product Development of
Denny's (July 2001-present); Vice President, Marketing of
Denny's (1999-July 2001); Vice President, Marketing of Bob
Evans Farms, Inc. (1997-1999); Director, Marketing of Bob
Evans Farms, Inc. (1995-1997).
Andrew F. Green 46 Senior Vice President and Chief Financial Officer of
Denny's, Inc. (January 2001-present); Senior Vice President
and Chief Financial Officer of Advantica (November
2001-present); Senior Vice President of Advantica (January
2001-October 2001); Senior Vice President, Planning and
Corporate Controller of Advantica (1998-January 2001); Vice
President, Planning and Corporate Controller of Advantica
(1997-1998); Vice President, Corporate Planning and Risk
Management of Advantica (1996-1997).
Craig E. Herman 50 Division Vice President, Operations of Denny's (May
2001-present); District Manager, Tim Hortons (2000-May
2001); Operating Partner, Regional Partner of Bruegger's
Bagels (1993-1999).
Nelson J. Marchioli 52 Chief Executive Officer and President of Advantica and
Denny's (February 2001-present); President of El Pollo Loco,
Inc. (1997-February 2001); Executive Vice President and
Chief Operating Officer of Bruegger's Corporation
(1996-1997); Senior Vice President of Worldwide Supply for
Burger King Corporation (1995-1996).
Bonnie J. McFarland 50 Division Vice President, Operations of Denny's (May
2001-present); Regional Vice President, Operations of
Denny's (1997-May 2001); Regional Director, Operations of
Denny's (1996-1997).
Mounir N. Sawda 44 Vice President, Franchise and Development of Denny's
(December 2001-present); Senior Director, Construction and
Facilities of Denny's (1998-December 2001); Director,
Franchise Real Estate and Construction of Denny's (1998);
Construction and Development, Burger King (1993-1997).
Rhonda J. Parish 45 Executive Vice President of Advantica (1998-present);
General Counsel and Secretary of Advantica (1995-present);
Senior Vice President of Advantica (1995-1998).
Mark C. Smith 41 Vice President, Procurement and Distribution of Advantica
(January 2001-present); Senior Director, Procurement of
Advantica (1996-2000).
Linda G. Traylor 50 Senior Vice President, Human Resources of Advantica (January
2001-present); Vice President, Human Resources, Planning and
Development of Advantica (1995-2000).
Samuel M. Wilensky 44 Division Vice President, Franchise Operations of Denny's
(May 2001-present); Regional Vice President, Franchise
Operations of Denny's (2000-May 2001); Regional Director,
Franchise Operations of Denny's (1999-2000); Regional
Director, Company Operations of Denny's (1994-1999).
</Table>
EMPLOYEES
At December 26, 2001, we had approximately 29,700 employees, none of whom are
subject to collective bargaining agreements. Many of our restaurant employees
work part time, and many are paid at or slightly above minimum wage levels. As
is characteristic of the restaurant industry, we experience a high level of
turnover among our restaurant
6
employees. We have experienced no significant work stoppages, and we consider
our relations with our employees to be satisfactory.
ITEM 2. PROPERTIES
Most Denny's restaurants are free-standing facilities, with property sizes
averaging approximately one acre. The restaurant buildings average 4,800 square
feet, allowing them to accommodate an average of 140 guests. The number and
location of our restaurants as of December 26, 2001 are presented below:
<Table>
<Caption>
FRANCHISED/
STATE/COUNTRY OWNED LICENSED
------------- ----- -----------
Alabama 3 2
Alaska -- 4
Arizona 27 50
Arkansas 1 11
California 161 233
Colorado 9 22
Connecticut -- 8
District of Columbia -- 1
Delaware 3 --
Florida 62 145
Georgia -- 29
Hawaii 4 4
Idaho -- 6
Illinois 39 22
Indiana 2 32
Iowa -- 1
Kansas -- 10
Kentucky 6 6
Louisiana 5 7
Maine -- 8
Maryland 12 19
Massachusetts -- 7
Michigan 27 5
Minnesota 3 15
Mississippi 2 1
Missouri 6 41
Montana -- 6
Nebraska -- 1
Nevada 10 7
New Hampshire -- 3
New Jersey 6 7
New Mexico 2 18
New York 46 12
North Carolina 4 14
North Dakota -- 3
Ohio 26 18
Oklahoma 3 23
Oregon -- 27
Pennsylvania 37 8
Rhode Island -- 2
South Carolina 12 6
South Dakota -- 2
Tennessee 3 6
Texas 46 118
Utah -- 23
Vermont -- 2
Virginia 12 14
Washington 22 45
West Virginia -- 3
Wisconsin 10 9
Guam -- 2
Puerto Rico -- 11
Canada 10 41
Other International -- 8
--- -----
Total 621 1,128
=== =====
</Table>
7
Of the 621 restaurants we operated as of December 26, 2001, we owned the land
and building of 162, owned the building and leased the land of 26, and leased
both the land and building of 433. We also owned the land and building of 102
franchised restaurants and leased the land and building of an additional 282
franchised restaurants, which we leased or subleased to our franchisees.
In addition to the restaurants, we own an 18-story, 187,000 square foot office
tower in Spartanburg, South Carolina, which serves as our corporate
headquarters. Our corporate offices currently occupy approximately 15 floors of
the tower, with the balance leased to others.
See Note 9 to our consolidated financial statements for information concerning
encumbrances on some of our properties.
ITEM 3. LEGAL PROCEEDINGS
On February 14, 2001, FRD filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code in the U.S. Bankruptcy Court for the District of
Delaware, Case No. 01-0436-PJW, to facilitate the divestiture of its Coco's and
Carrows brands and to preserve their going concern value. FRD is a
debtor-in-possession in the proceeding which excludes FRD's subsidiaries.
Consequently, all of FRD's subsidiaries, including its operating concepts Coco's
and Carrows, are not part of FRD's Chapter 11 case. FRD's Chapter 11 filing does
not include Advantica or Denny's; however, on January 8, 2001, Denny's became
the lender under the Coco's/Carrows credit facility. On February 19, 2002,
Advantica and Denny's, along with FRD, Coco's and Carrows, entered into a
stipulation and agreement of settlement with the official committee of unsecured
creditors of FRD seeking to resolve various disputes relating to the
administration of FRD's pending bankruptcy case. The bankruptcy court approved
the settlement agreement on March 8, 2002. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Notes 3 and 9 to our consolidated financial statements
for additional information.
Four former Denny's restaurant managers 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 will continue to vigorously defend this lawsuit.
Other proceedings are pending against us, in many cases involving ordinary and
routine claims incidental to our business, and in others presenting allegations
that are nonroutine and include compensatory or punitive damage claims. Our
ultimate legal and financial liability with respect to the matters mentioned
above and these other proceedings cannot be estimated with certainty. However,
we believe, based on our examination of these matters and our experience to
date, that the ultimate disposition of these matters will not significantly
affect our financial position or results of operations.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
8
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock and warrants are listed under the symbols "DINE" and "DINEW,"
respectively, and are eligible for trading on the Over-the-Counter Bulletin
Board. As of March 1, 2002, 40,271,410 shares of common stock and 3,236,104
warrants were outstanding, and there were approximately 2,320 record and
beneficial holders of common stock and 21 warrant holders of record. We have
never paid dividends on our common equity securities. Furthermore, restrictions
contained in the instruments governing the outstanding indebtedness of Advantica
prohibit us from paying dividends on the common stock in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 9 to our consolidated
financial statements.
The following tables list the high and low closing sales prices of the common
stock for each quarter of fiscal years 2000 and 2001. The sales prices were
obtained from The Nasdaq Stock Market(R).
<Table>
<Caption>
2000 HIGH LOW
---- ----- -----
First quarter $1.88 $1.28
Second quarter 1.50 0.59
Third quarter 0.97 0.50
Fourth quarter 0.63 0.30
</Table>
<Table>
<Caption>
2001
----
First quarter 1.09 0.47
Second quarter 1.21 0.67
Third quarter 0.88 0.65
Fourth quarter 0.71 0.48
</Table>
9
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are certain selected financial data for the fiscal year ended
December 31, 1997, the one week ended January 7, 1998, the fifty-one weeks ended
December 30, 1998 and the fiscal years ended December 29, 1999, December 27,
2000 and December 26, 2001. Such data generally have been derived from our
consolidated financial statements for such periods, which have been audited. The
following information should be read in conjunction with our consolidated
financial statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" presented elsewhere
in this report.
<Table>
<Caption>
PREDECESSOR COMPANY SUCCESSOR COMPANY(a)
------------------------- ---------------------------------------------------------
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR ENDED
ENDED ENDED WEEKS ENDED ------------------------------------------
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, DECEMBER 26,
1997(b) 1998 1998 1999 2000 2001
------------ ---------- ------------ ------------ ------------ ------------
(In millions, except ratios and per
share amounts)
Income Statement Data:
Operating revenue $1,193.3 $ 23.2 $1,156.0 $1,200.2 $1,155.2 $1,039.7
Operating income (loss)(c) 78.2 8.7 (51.2) (195.9) (0.3) (19.7)
(Loss) income from continuing
operations(d) (83.2) 602.9(e) (127.0) (275.8) (82.5) (96.3)
Basic (loss) income per share from
continuing operations applicable to
common shareholders (2.29) 14.21 (3.17) (6.89) (2.06) (2.40)
Diluted (loss) income per share from
continuing operations applicable to
common shareholders (2.29) 10.93 (3.17) (6.89) (2.06) (2.40)
Cash dividends per common share(f) -- -- -- -- -- --
Ratio of earnings to fixed charges(g) -- 268.5x -- -- -- --
Deficiency in the coverage of fixed
charges by earnings before fixed
charges(g) 82.0 -- 129.1 275.0 80.7 94.8
Balance Sheet Data (at end of period):
Current assets(h) $ 129.6 $ 291.1 $ 379.5 $ 56.4 $ 40.1
Working capital (deficit)(h)(i) (230.2) (81.2) (197.0) (170.6) (147.5)
Net property and equipment 625.8 630.3 510.9 425.3 362.4
Total assets 1,407.4 1,930.7 1,236.3 745.3 607.3
Long-term debt, excluding current
portion 594.2(j) 1,141.2 615.4 593.7 645.1
Other Data:
EBITDA as defined(k) $ 136.4 $ 9.7 $ 140.0 $ 160.4 $ 172.3 $ 135.1
Net cash flows provided by (used in)
operating activities 37.0 7.7 (10.7) (31.1) (8.4) 8.1
Net cash flows (used in) provided by
investing activities(l) (41.6) 7.9 180.3 86.7 204.8 (75.1)
Net cash flows (used in) provided by
financing activities(m) (28.4) (5.3) (66.6) (47.9) (335.0) 46.3
</Table>
- ------------------------------------
(a) As discussed in the Introduction, FCI and Flagstar emerged from bankruptcy
on January 7, 1998. The change in ownership of Advantica effected by the
financial restructuring resulting from the bankruptcy required the
application of fresh start reporting effective January 7, 1998 in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7, or SOP 90-7, "Financial Reporting By Entities
in Reorganization Under the Bankruptcy Code." All financial statements
subsequent to January 7, 1998 are referred to as "Successor Company"
statements, as they reflect periods subsequent to the implementation of
fresh start reporting and are not comparable to the financial statements
for periods prior to January 7, 1998.
(b) Effective January 1, 1997, we changed our fiscal year end from December 31
to the last Wednesday of the calendar year. Concurrent with this change, we
changed to a four-four-five week quarterly closing calendar. This reporting
schedule generally results in four 13-week quarters during the fiscal year,
for a total of 52 weeks. Due to the timing of this change, the fiscal year
ended December 31, 1997 included five additional days of Denny's
operations.
(c) Operating income (loss) reflects restructuring and impairment charges of
$136.5 million, $19.0 million and $30.5 million for 1999, 2000 and 2001,
respectively. For a discussion of these charges, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and Notes 5 and 6 to our consolidated
financial statements.
(d) We have classified as discontinued operations restaurant subsidiaries
Flagstar Enterprises, Inc., or FEI, (which operated our Hardee's
restaurants under licenses from Hardee's Food Systems), Quincy's
Restaurants, Inc., or
10
Quincy's, El Pollo Loco, Inc., or EPL, and FRD. FEI and Quincy's were sold
in 1998, and EPL was sold in 1999. We began accounting for FRD as a
discontinued operation in the second quarter of 2000. See Note 3 to our
consolidated financial statements.
(e) The income from continuing operations for the one week ended January 7,
1998 includes reorganization items of $582.0 million resulting from the
application of fresh start reporting in accordance with SOP 90-7.
(f) Our bank facilities have prohibited, and our public debt indentures have
significantly limited, distributions and dividends on Advantica's (and its
predecessors') common equity securities. See Note 9 to our consolidated
financial statements.
(g) For purposes of computing the ratio of earnings to fixed charges or
deficiency in the coverage of fixed charges by earnings before fixed
charges, fixed charges consist of interest expense including capitalized
interest, amortization of debt expenses and the interest element in rental
payments under operating leases (estimated to be one third of the total
rental payments). Earnings consist of income from continuing operations
before income taxes and fixed charges excluding capitalized interest.
(h) The current assets and working capital deficit amounts presented exclude
assets held for sale of $347.0 million as of December 31, 1997, $87.7
million as of December 30, 1998, and net liabilities of discontinued
operations of $54.0 million as of December 29, 1999, $69.4 million as of
December 27, 2000 and $15.1 million as of December 26, 2001. Assets held
for sale for 1997 relate to FEI and Quincy's. For 1998, net assets held for
sale relate to EPL. For 1999, 2000 and 2001, net liabilities of
discontinued operations relate to FRD.
(i) A negative working capital position is not unusual for a restaurant
operating company. The decrease in the working capital deficit from
December 31, 1997 to December 30, 1998 is attributable primarily to an
increase in cash and cash equivalents from the sales of FEI and Quincy's.
The increase in the working capital deficit from December 30, 1998 to
December 29, 1999 is attributable primarily to the reclassification of
certain mortgage notes to current liabilities and a reduction in cash and
cash equivalents related to acquisitions of restaurants, the retirement of
a portion of senior notes and expenditures related to Denny's reimaging
program. The decrease in working capital deficit from December 29, 1999 to
December 27, 2000 is attributable primarily to the increase in Denny's
refranchising activity in 2000. For a discussion of the decrease in the
working capital deficit from December 27, 2000 to December 26, 2001, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(j) Reflects the reclassification of $1,496.7 million of long-term debt to
liabilities subject to compromise in accordance with SOP 90-7 as a result
of the Chapter 11 filing.
(k) We define "EBITDA" as operating income (loss) before depreciation,
amortization and charges for restructuring and impairment as follows:
<Table>
<Caption>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------- ---------------------------------------------------------
FISCAL YEAR ONE WEEK FIFTY-ONE FISCAL YEAR ENDED
ENDED ENDED WEEKS ENDED ------------------------------------------
DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, DECEMBER 26,
1997 1998 1998 1999 2000 2001
------------ ---------- ------------ ------------ ------------ ------------
(In millions)
Operating income (loss) $ 78.2 $8.7 $(51.2) $(195.9) $ (0.3) $(19.7)
Total amortization and depreciation 58.2 1.0 191.2 219.8 153.6 124.3
Total impairment and restructuring
charges -- -- -- 136.5 19.0 30.5
------ ---- ------ ------- ------ ------
EBITDA as defined $136.4 $9.7 $140.0 $ 160.4 $172.3 $135.1
====== ==== ====== ======= ====== ======
</Table>
We believe that 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
accounting principles generally accepted in the United States of America
and should not be considered as an alternative to net income or cash flow
data prepared in accordance with accounting principles generally accepted
in the United States of America. Our measure of EBITDA as defined may not
be comparable to similarly titled measures reported by other companies, and
although the definition of EBITDA in Advantica's revolving credit facility
differs somewhat from the definition of "EBITDA as defined," the amount of
Advantica's EBITDA as defined has been the same as that calculated under
the revolving credit facility since Advantica's emergence from bankruptcy
in January 1998. For a discussion of the restructuring and impairment
charges, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations" and Notes 5 and 6 to
our consolidated financial statements.
(l) Net cash flows (used in) provided by investing activities include net
proceeds of $460.4 million from the disposition of FEI and Quincy's in the
fifty-one weeks ended December 31, 1998 and net proceeds of $109.4 million
from the sale of
11
EPL in 1999. For 2000, net cash flows from investing activities includes
$158.7 million of proceeds from the maturity of investments securing our
in-substance defeased debt (see (m) below). For 2001, net cash flows used
in investing activities includes borrowings by FRD's operating
subsidiaries, Coco's and Carrows, under the Coco's/Carrows credit facility
and Denny's deposit to secure FRD's letters of credit (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 3 to our
consolidated financial statements).
(m) Net cash flows (used in) provided by financing activities for 2000 include
the repayment of the $160.0 million principal amount of Denny's mortgage
notes and the repayment of the $153.3 million principal amount of our
in-substance defeased debt through the use of the proceeds described in (l)
above. For 2001, net cash flows provided by financing activities includes
borrowings of $58.7 million under our revolving credit facility (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 9 to our
consolidated financial statements).
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected Financial
Data," and our consolidated financial statements and other more detailed
financial information appearing elsewhere herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to allowances for doubtful accounts, self-insurance liabilities,
impairment of long-lived assets, restructuring and exit costs, income taxes,
contingencies and litigation and discontinued operations. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, we believe that
our estimates, including those for the above-described items, are reasonable and
that actual results will not vary significantly from the estimated amounts.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
ALLOWANCES FOR DOUBTFUL ACCOUNTS. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our franchisees to make
required payments for franchise royalties, rent, advertising and notes
receivable. In assessing recoverability of these receivables, we make
assumptions regarding the financial condition of the franchisees based primarily
on past payment trends and periodic financial information which the franchisees
are required to submit to us. If the financial condition of our franchisees were
to deteriorate and result in an impairment of their ability to make payments, we
may be required to increase our allowances by recording additional bad debt
expense. Likewise, should the financial condition of our franchisees improve and
result in payments or settlements of previously reserved amounts, we may be
required to record a reduction in bad debt expense to reverse our allowances.
SELF-INSURANCE LIABILITIES. We record liabilities for insurance claims during
periods in which we have been insured under large deductible programs or have
been self-insured for our workers' compensation, general/product and automobile
insurance liabilities. The liabilities for prior and current estimated incurred
losses are discounted to their present value based on expected loss payment
patterns determined by independent actuaries. If these patterns were to
deteriorate, we may be required to increase our self-insurance liabilities by
recording additional insurance expense. Likewise, should these patterns improve,
we may be required to reduce our self-insurance liabilities by recording a
reduction in insurance expense.
IMPAIRMENT OF LONG-LIVED ASSETS. Our long-lived assets include property,
reorganization value in excess of amounts allocable to identifiable assets,
goodwill and other intangible assets. We assess impairment of long-lived assets
whenever changes or events indicate that the carrying value may not be
recoverable. We assess impairment of restaurant-level assets based on the
operating cash flows of the restaurant and our plans for restaurant closings. In
performing our
12
assessment, we must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, we may be required
to record additional impairment charges. Impairment of reorganization value,
goodwill and other intangible assets has historically been evaluated based on
future discounted cash flows. See "New Accounting Standards."
RESTRUCTURING AND EXIT COSTS. As a result of changes in our organizational
structure, we have recorded charges for restructuring and exit costs. These
costs consist primarily of severance and outplacement costs for terminated
employees and the costs of future obligations related to closed units or units
identified for closure. In assessing the cost of future obligations related to
closed units or units identified for closure, we make assumptions regarding the
timing of units' closures, amounts of future subleases, amounts of future
property taxes and costs of closing the units. If these estimates or their
related assumptions change in the future, we may be required to record
additional exit costs or reduce exit costs previously recorded.
INCOME TAXES. We record a valuation allowance to reduce our net deferred tax
assets to the amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for our valuation allowance, in the event we
were to determine that we would be able to realize our deferred tax assets in
the future in an amount in excess of the net recorded amount, an adjustment to
the valuation allowance (except for the valuation allowance established in
connection with the adoption of fresh start reporting -- see Note 11 to our
consolidated financial statements) would decrease income tax expense in the
period such determination was made. Likewise, should we determine that we would
not be able to realize all or part of our net deferred tax assets in the future,
an adjustment to our valuation allowance would increase income tax expense in
the period such determination was made.
CONTINGENCIES AND LITIGATION. We are subject to legal proceedings involving
ordinary and routine claims incidental to our business as well as legal
proceedings that are nonroutine and include compensatory or punitive damage
claims. Our ultimate legal and financial liability with respect to such matters
cannot be estimated with certainty and requires the use of estimates in
recording liabilities for potential litigation settlements. If these estimates
or the related facts and circumstances change in the future, we may be required
to increase or reduce our settlement liabilities by recording additional legal
expense or by recording a reduction in legal expense. See "Legal Proceedings."
DISCONTINUED OPERATIONS. We have reported FRD as a discontinued operation in our
consolidated financial statements as of the second quarter of 2000, or the
measurement date (see Notes 1 and 3 to our consolidated financial statements),
and through December 26, 2001 because we continue to maintain control over the
operations of FRD while in bankruptcy. Reporting FRD as a discontinued operation
required us to make estimates regarding (1) the results of operations from the
measurement date to the disposal date and (2) the gain to be recognized upon
disposal. Based on our determination that a gain is expected upon disposal,
FRD's net losses of $89.5 million for the two quarters ended December 27, 2000
and $22.4 million for the year ended December 26, 2001, which were incurred
subsequent to the measurement date, are deferred and included as a component of
net liabilities of discontinued operations in our consolidated balance sheets,
and accordingly, have not been recognized as losses in our consolidated
statements of operations. A reversal of discontinued operations reporting
resulting from, among other things, a failure to consummate a sale or transfer
of ownership of FRD, would require us to recognize the previously deferred
losses in our consolidated statements of operations.
13
DENNY'S RESTAURANT OPERATIONS
<Table>
<Caption>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1999 2000 2001
------------ ------------ ------------
(Dollars in thousands)
Revenue:
Company restaurant sales $1,140,338 $1,080,641 $ 949,180
Franchise and licensing revenue 59,911 74,608 90,548
---------- ---------- ----------
Total operating revenue 1,200,249 1,155,249 1,039,728
---------- ---------- ----------
Cost of company restaurant sales:
Product costs 293,860 280,473 237,721
Payroll and benefits 446,497 427,222 382,864
Occupancy 60,935 59,311 55,941
Other operating expenses 156,466 162,881 142,281
---------- ---------- ----------
Total costs of company restaurant sales 957,758 929,887 818,807
Franchise restaurant costs 28,737 38,000 39,002
General and administrative expenses 74,852 66,291 60,180
Amortization of excess reorganization value 88,989 42,133 28,692
Depreciation and other amortization 130,782 111,449 95,639
Impairment charges 136,500 6,416 13,630
Restructuring charges and exit costs -- 12,556 16,863
Gains on refranchising and other, net (21,514) (51,219) (13,340)
---------- ---------- ----------
Total operating costs and expenses 1,396,104 1,155,513 1,059,473
---------- ---------- ----------
Operating loss (195,855) (264) (19,745)
---------- ---------- ----------
Other expenses:
Interest expense, net 79,435 81,821 73,235
Other nonoperating (income) expenses, net (302) (1,415) 1,771
---------- ---------- ----------
Total other expenses, net 79,133 80,406 75,006
---------- ---------- ----------
Loss before income taxes (274,988) (80,670) (94,751)
Provision for income taxes 814 1,802 1,571
---------- ---------- ----------
Loss from continuing operations (275,802) (82,472) (96,322)
Loss from operations of discontinued operations (106,102) (15,530) --
---------- ---------- ----------
Loss before extraordinary item (381,904) (98,002) (96,322)
Extraordinary item -- -- 7,778
---------- ---------- ----------
Net loss $ (381,904) $ (98,002) $ (88,544)
========== ========== ==========
Other Data:
Total systemwide sales(a) $2,139,742 $2,227,666 $2,291,623
EBITDA as defined(b) 160,416 172,290 135,079
Average unit sales:
Company-owned 1,309 1,341 1,420
Franchise 1,132 1,161 1,197
Same-store sales increase (company-owned)(c)(d) 2.4% 1.5% 2.7%
Guest check average increase(d) 5.1% 5.1% 1.7%
</Table>
- ------------------------------------
(a) Total systemwide sales includes sales from company-owned, franchised and
licensed restaurants and is not a measure which has been determined in
accordance with accounting principles generally accepted in the United
States of America.
(b) We define EBITDA as operating loss before depreciation, amortization and
impairment and restructuring charges. Our measure of EBITDA as defined may
not be comparable to similarly titled measures reported by other companies.
See EBITDA computations in "Selected Financial Data."
(c) Same-store sales includes sales from restaurants that were open the same
days in both the current year and prior year.
(d) Prior year amounts have not been restated for 2001 comparable units.
14
UNIT ACTIVITY
<Table>
<Caption>
ENDING ENDING
UNITS UNITS FRANCHISED UNITS UNITS
DECEMBER 27, OPENED/ UNITS UNITS SOLD/ DECEMBER 26,
2000 ACQUIRED REFRANCHISED REACQUIRED CLOSED 2001
------------ -------- ------------ ---------- ------ ------------
Company-owned restaurants 736 2 (59) 3 (61) 621
Franchised restaurants 1,067 46 61(a) (3) (57) 1,114
Licensed restaurants 19 -- (2)(a) -- (3) 14
----- --- --- --- ---- -----
1,822 48 -- -- (121) 1,749
===== === === === ==== =====
</Table>
- ------------------------------------
(a) Includes two licensed restaurants reclassified as franchised restaurants.
2001 VS. 2000
COMPANY OPERATIONS
Denny's recorded 2.7% same-store sales growth for 2001 which was driven by a
1.7% increase in guest check average and higher guest traffic. However, company
restaurant sales decreased $131.5 million (12.2%) due to a net 115-unit decrease
in company-owned restaurants, partially offset by the increase in same-store
sales. The decrease in company-owned restaurants resulted from the sale of
restaurants to franchisees and store closures.
Total costs of company restaurant sales decreased $111.1 million (11.9%), driven
by the decrease in company-owned restaurants. As a percentage of company
restaurant sales, product costs decreased to 25.0% from 26.0% resulting from a
higher guest check average and reduced waste costs. Payroll and benefits
increased to 40.3% from 39.5% due to increased staffing levels and wage rate
increases. Our occupancy costs increased to 5.9% from 5.5%. The increase in
occupancy costs as a percentage of restaurant sales was primarily due to
adjustments of $3.5 million that reduced general liability insurance expense in
2000. Other operating expenses decreased to 15.0% from 15.1%, as the effects of
higher utility rates and increased repair and maintenance activities were offset
by lower advertising expenses.
Operating margins for company-owned restaurants were $130.4 million (13.7% of
company restaurant sales) for 2001 compared with $150.8 million (14.0% of
company restaurant sales) for 2000.
FRANCHISE OPERATIONS
Franchise and licensing revenue was $90.5 million for 2001, comprised of
royalties and fees of $56.1 million and occupancy revenue of $34.4 million,
compared with $74.6 million for 2000, comprised of royalties and fees of $51.5
million and occupancy revenue of $23.1 million. Franchise and licensing revenue
increased $15.9 million (21.4%) resulting from a net 42-unit increase in
franchised and licensed restaurants, partially offset by a $3.3 million
reduction in initial franchise fees due to reduced refranchising activity in
2001.
Franchise costs were $39.0 million for 2001, comprised of occupancy costs of
$20.3 million and other direct expenses of $18.7 million, compared with $38.0
million for 2000, comprised of occupancy costs of $14.1 million and other direct
expenses of $23.9 million. Franchise restaurant costs increased $1.0 million
(2.6%), driven by the increase in the number of franchise and licensed
restaurants. As a percentage of franchise and licensing revenues, these costs
decreased to 43.1% in 2001 from 50.9% in 2000, resulting primarily from a $4.3
million decrease in bad debt expense related to the collection of certain past
due accounts.
Our franchise operating margins were $51.5 million (56.9% of franchise and
licensing revenue) for 2001 compared with $36.6 million (49.1% of franchise and
licensing revenue) for 2000.
OTHER OPERATING COSTS AND EXPENSES
General and administrative expenses, which relate to the support of both company
and franchise operations, decreased $6.1 million (9.2%), resulting primarily
from reductions in information systems costs of $6.0 million and other corporate
overhead costs primarily related to recent workforce reductions of $4.5 million,
offset by $1.9 million of
15
additional legal costs related to the disposition of FRD and a $2.5 million
increase in payroll tax expense resulting from an adjustment recorded in 2000.
The decrease in amortization of excess reorganization value from 2000 resulted
from a reduction of reorganization value totaling approximately $27.8 million
related to the reversals of certain income tax liabilities recorded in the
fourth quarter of 2000 and during 2001. Depreciation and other amortization
decreased $15.8 million primarily as a result of fewer company-owned units.
Lower refranchising activity in 2001 resulted in a $37.9 million decrease in
refranchising gains, primarily due to the tightening in financing markets and
our strict standards for new franchisees.
RESTRUCTURING CHARGES AND EXIT COSTS of $16.9 million were recorded in 2001, of
which $11.9 million related to management's plan to close a total of 83
underperforming Denny's restaurants. Of the restaurants identified for closure,
53 had been closed by December 26, 2001. The remaining $5.0 million of
restructuring charges related to management's elimination of approximately 90
out-of-restaurant support staff positions in November 2001. For additional
information concerning these restructuring charges, see Note 6 to our
consolidated financial statements.
In 2001, we recorded asset IMPAIRMENT CHARGES of $13.6 million related to the
identification of certain underperforming restaurants, including the stores
identified for closure as described above.
OPERATING LOSS was $19.7 million for 2001 compared with $0.3 million for 2000.
INTEREST EXPENSE, NET, for 2001 was comprised of $79.7 million of interest
expense offset by $6.5 million of interest income compared with $86.9 million of
interest expense offset by $5.1 million of interest income for 2000. Lower
interest expense is due to a $11.1 million decrease primarily from the repayment
of the Denny's mortgage notes and other debt during 2000, offset by a $3.9
million increase in expense related to borrowings under our credit facility. The
increase in interest income of $1.4 million related to $5.0 million interest
income from the Coco's/Carrows credit facility, offset by a $3.6 million
decrease related to lower cash balances in 2001.
The PROVISION FOR INCOME TAXES from continuing operations for 2001 has been
computed based on management's estimate of the annual effective income tax rate
applied to loss before taxes. We recorded an income tax provision reflecting an
approximate rate of 1.7% for 2001 compared with a provision reflecting an
approximate rate of 2.2% for 2000.
The consolidated statements of operations and cash flows reflect FRD as
DISCONTINUED OPERATIONS in accordance with Accounting Principles Board Opinion
No. 30, or APB 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." Revenue and operating loss of
the discontinued operations for 2001 and 2000 were $350.9 million and $7.6
million and $371.1 million and $79.8 million, respectively. In accordance with
APB 30, FRD's net losses of $89.5 million for the two quarters ended December
27, 2000 and $22.4 million for the year ended December 26, 2001, which were
incurred subsequent to the measurement date, are deferred and included as a
component of net liabilities of discontinued operations.
During the first quarter of 2001, as a result of the settlement of the remaining
issues related to our 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 $88.5 million for 2001 compared with a net loss of $98.0 million
for 2000 due to the factors noted above.
EBITDA AS DEFINED, a key internal measure described in "Selected Financial
Data," decreased to $135.1 million in 2001 from $172.3 million in 2000 due to
the factors noted above.
2000 VS. 1999
COMPANY OPERATIONS
Denny's recorded 1.5% same-store sales growth in 2000, the third consecutive
year of positive same-store sales, related primarily to an increase in guest
check average. However, company restaurant sales decreased $59.7 million
resulting from a net 99-unit decrease in company-owned restaurants, partially
offset by the increase in same-store sales. The reduction in company-owned
restaurants was consistent with the refranchising strategy we implemented in
2000.
16
Total costs of company restaurant sales decreased $27.9 million (2.9%) primarily
from the decrease in the number of company-owned restaurants. As a percentage of
company restaurant sales, product costs increased to 26.0% from 25.8% primarily
resulting from pressures on commodity costs. Payroll and benefits increased to
39.5% from 39.2% due to increased staffing levels and wage rate increases. Our
occupancy costs increased from 5.3% to 5.5%. The increase in occupancy costs as
a percentage of restaurant sales was primarily due to charges related to unit
closures during the year. Other operating expenses increased to 15.1% from 13.7%
primarily resulting from increased repairs and maintenance activities.
Operating margins for company-owned restaurants were $150.8 million (14.0% of
company restaurant sales) for 2000 compared with $182.6 million (16.0% of
company restaurant sales) for 1999.
FRANCHISE OPERATIONS
Franchise and licensing revenue was $74.6 million for 2000, comprised of
royalties and fees of $51.5 million and occupancy revenue of $23.1 million,
compared with $59.9 million for 1999, comprised of royalties and fees of $43.7
million and occupancy revenue of $16.2 million. Franchise and licensing revenue
increased $14.7 million (24.5%) primarily from a net 137-unit increase in
franchised restaurants and a $1.9 million increase in initial franchise fees.
Franchise costs were $38.0 million for 2000, comprised of occupancy costs of
$14.1 million and other direct expenses of $23.9 million, compared with $28.7
million for 1999, comprised of occupancy costs of $9.5 million and other direct
expenses of $19.2 million. Franchise restaurant costs increased $9.3 million
(32.2%), driven by the increase in franchise and licensed restaurants. As a
percentage of franchise and licensing revenues, these costs increased to 50.9%
in 2000 from 48.0% in 1999, resulting primarily from a $3.2 million increase in
bad debt expense provisions.
Our franchise operating margins were $36.6 million (49.1% of franchise and
licensing revenue) for 2000 compared with $31.2 million (52.1% of franchise and
licensing revenue) for 1999.
OTHER OPERATING COSTS AND EXPENSES
General and administrative expenses, which relate to the support of both company
and franchise operations, decreased $8.6 million (11.4%). The decrease included
reduced information systems costs of approximately $4.9 million, a benefit of
$1.2 million related to a reduction of payroll tax liabilities and lower
corporate overhead resulting primarily from the implementation of restructuring
plans in 2000. Lower depreciation and other amortization of $19.3 million
resulted from the decrease in company-owned units and the retirements recorded
in 1999 of assets replaced in conjunction with units reimaged. The decrease in
amortization of excess reorganization value of $46.9 million resulted from the
$136.5 million impairment of reorganization value recorded in the fourth quarter
of 1999. Refranchising gains in 2000 increased $29.7 million as a result of
record refranchising activity.
During the first quarter of 2000, we announced a restructuring plan as a result
of an extensive review of our operations and structure completed in early 2000.
The plan's implementation involved a reduction of personnel related to a
corporate reorganization and the identification of units for closure.
Consequently, we recorded RESTRUCTURING CHARGES AND EXIT COSTS which included
approximately $3.7 million of severance and outplacement costs and $0.9 million
of operating lease liabilities for closed stores as a result of the plan.
Additionally, a $2.6 million charge was recorded related to certain acquired
software and capitalized construction costs which became obsolete as a result of
the cancellation of projects identified as part of the plan. During the fourth
quarter of 2000, we recorded approximately $5.3 million of restructuring
charges, comprised entirely of severance and outplacement costs, resulting from
the realignment of certain senior management positions.
In addition, during the fourth quarter of 2000, we recorded a $6.4 million
IMPAIRMENT CHARGE on the assets of certain underperforming restaurants based on
the estimated deficiencies in the future discounted cash flows of those
restaurants.
OPERATING LOSS was $0.3 million for 2000 compared with $195.9 million for 1999.
INTEREST EXPENSE, NET, for 2000 was $86.9 million of interest expense offset by
$5.1 million of interest income compared with $86.4 million of interest expense
offset by $7.0 million of interest income for 1999. Excluding the effect of $7.3
million of interest expense allocated to discontinued operations in 1999,
interest expense decreased $6.8 million in
17
2000. This decrease primarily resulted from the effects of the repayment of
Denny's mortgage notes in 2000. In addition, interest income decreased $1.9
million in 2000 due to lower cash balances.
The PROVISION FOR INCOME TAXES from continuing operations for 2000 has been
computed based on management's estimate of the annual effective income tax rate
applied to loss before taxes. We recorded an income tax provision reflecting an
approximate rate of 2.2% for 2000 compared with a provision reflecting an
approximate rate of 0.3% for 1999.
Our consolidated statements of operations and cash flows presented herein for
the years ended December 27, 2000 and December 29, 1999 reflect FRD as
DISCONTINUED OPERATIONS in accordance with APB 30. Revenue and operating loss of
FRD for the years 2000 and 1999 were $371.1 million and $79.8 million and $389.8
million and $87.7 million, respectively. In accordance with APB 30, FRD's net
loss of $89.5 million for the two quarters ended December 27, 2000, which was
incurred subsequent to the measurement date, is deferred and included as a
component of net liabilities of discontinued operations. Additionally, our
consolidated statements of operations and cash flows presented herein for 1999
reflect EPL as a discontinued operation. EPL's revenue and operating income for
1999 were $144.9 million and $2.4 million, respectively.
NET LOSS was $98.0 million for 2000 compared with a net loss of $381.9 million
for 1999 primarily as a result of the factors discussed above.
EBITDA AS DEFINED, a key internal measure described in "Selected Financial
Data," increased to $172.3 million in 2000 from $160.4 million in 1999. This
increase is a result of the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Revolving Credit Facility
Denny's, our principal operating subsidiary, is the borrower under a senior
secured revolving credit facility with JP Morgan Chase Bank and other lenders,
providing Denny's with a working capital and letter of credit facility of up to
$200.0 million as of December 26, 2001. At December 27, 2000, we had no working
capital advances outstanding under the revolving credit facility; however,
letters of credit outstanding were $65.3 million, leaving net availability of
$134.7 million. At December 26, 2001, we had working capital advances of $58.7
million and letters of credit outstanding of $52.2 million under the facility,
leaving net availability of $89.1 million. Advances under the revolving credit
facility accrue interest at a variable rate (approximately 6.1% at December 26,
2001) based on the prime rate or an adjusted Eurodollar rate. The increase in
the outstanding advances, included in notes and debentures on our consolidated
balance sheet, is primarily the result of our satisfaction of the Coco's/Carrows
credit facility guarantee in January 2001 (as discussed below).
The revolving credit facility matures on January 7, 2003 and is generally
secured by liens on the stock of Advantica's subsidiaries, accounts receivable,
intellectual property, cash and cash accounts and our corporate headquarters in
Spartanburg, South Carolina. Advantica and its subsidiaries (exclusive of FRD
and its subsidiaries) are guarantors under the revolving credit facility. The
revolving credit facility contains certain financial and negative covenants,
conditions precedent, events of default and other terms, conditions and
provisions customarily found in credit agreements for leveraged financings. For
more information, see Note 9 to our consolidated financial statements. Effective
October 18, 2001, we obtained an amendment to the revolving credit facility
increasing the maximum ratio of total debt to EBITDA for the remaining term of
the facility in order to maintain covenant compliance and our continued ability
to borrow under the revolving credit facility. Also pursuant to that amendment,
certain covenants and other provisions were modified, permitting us to undertake
an exchange offer relating to our 11 1/4% senior notes due 2008, or Senior
Notes, under certain terms and conditions. In addition, as a result of the
amendment, commitments under the revolving credit facility will be reduced from
$200.0 million to an amount not less than $150.0 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.
We were in compliance with the terms of the revolving credit facility at
December 26, 2001. Under the most restrictive provision of the revolving credit
facility (the total debt to EBITDA ratio), we could have borrowed an additional
$14.0 million and we would still have been in compliance.
18
Coco's/Carrows Credit Facility
FRD's principal operating subsidiaries, Coco's and Carrows, have a $70.0 million
senior secured credit facility, which initially consisted of a $30.0 million
term loan and a $40.0 million revolving credit facility. At December 27, 2000,
the facility was guaranteed by Advantica. Coco's and Carrows obtained a waiver
of compliance from certain third quarter 2000 financial covenants from the
former lenders until January 8, 2001. On January 8, 2001, Advantica paid $70.0
million to the former lenders in full and complete satisfaction of Advantica's
guarantee of the Coco's/Carrows credit facility with a combination of cash on
hand and an advance under Denny's revolving credit facility. As a result of its
satisfaction of obligations under the guarantee, Advantica was subrogated to the
rights and collateral of the former lenders which it immediately assigned to
Denny's. Additionally, following the satisfaction of the guarantee, our ability
to make further investments in FRD became restricted in accordance with the
terms of the indenture for our Senior Notes.
At December 26, 2001, FRD's operating subsidiaries had $26.0 million of
outstanding term loan borrowings, working capital borrowings of $24.7 million
and letters of credit outstanding of $9.6 million. Denny's has deposited cash
collateral with one of Coco's and Carrows' former lenders to secure
Coco's/Carrows credit facility's outstanding letters of credit. At December 26,
2001, the balance of such deposit was $9.8 million, which is reflected in other
current assets in our consolidated balance sheets. Denny's receivable of $51.7
million, including accrued interest of $0.9 million at December 26, 2001 (see
Notes 3 and 9 to our consolidated financial statements), relates to borrowings
under the Coco's/Carrows credit facility. This receivable eliminates in
consolidation, thereby reducing the net liabilities of discontinued operations
on our consolidated balance sheet at December 26, 2001.
All advances under the Coco's/Carrows credit facility due to Denny's accrue
interest at a variable rate (approximately 6.8% at December 26, 2001) based on
the prime rate. The advances are secured by substantially all of the assets of
FRD and its subsidiaries, including 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 change in their business. The
Coco's/Carrows credit facility also contains certain financial covenants
including provisions for the maintenance of a minimum level of interest
coverage, limitations on ratios of indebtedness to EBITDA and limitations on
annual capital expenditures. At December 26, 2001, FRD's operating subsidiaries
were not in compliance with certain covenants under the Coco's/Carrows credit
facility, which constitutes an event of default under the facility. As a result
of the default, Denny's may exercise certain rights including, but not limited
to, the right to terminate commitments, declare the loans outstanding due and
payable and seek to foreclose on its collateral. It has agreed not to do so,
however, during a 120-day forbearance period under the terms of the settlement
agreement (described below) related to FRD's bankruptcy proceeding.
FRD Bankruptcy
On January 16, 2001, FRD elected not to make the scheduled interest payment (and
all subsequent interest payments to date) due on the $156.9 million aggregate
principal amount of its 12.5% senior notes due 2004, or FRD Notes. 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 United States Bankruptcy Code. For additional information concerning the FRD
Notes and the Chapter 11 filing, see "Certain Relationships and Related
Transactions -- The FRD Notes."
On February 19, 2002, Advantica and Denny's, along with FRD, Coco's and Carrows,
entered into a stipulation and agreement of settlement, or settlement agreement,
with the official committee of unsecured creditors of FRD seeking to resolve
various disputes relating to the administration of FRD's pending bankruptcy
case. The bankruptcy court approved the settlement agreement on March 8, 2002.
Under the terms of the settlement agreement, Denny's will allow a 120-day
forbearance period (which commenced on March 8, 2002) during which the
creditors' committee and FRD and its operating subsidiaries shall use their best
efforts to obtain new financing to repay, at a discount, the outstanding
borrowings from Denny's (approximately $48.7 million at the date of the
settlement agreement), plus accrued but unpaid interest, fees and expenses.
During this forbearance period, the effort to sell FRD or its assets to a third
party
19
will be suspended. If new financing sufficient to repay the outstanding
borrowings from Denny's, less a $10 million discount, is obtained by the end of
the forbearance period, Denny's will accept such discounted repayment amount in
full satisfaction of its claims against FRD and Coco's and Carrows. If FRD is
unable to obtain financing to repay this discounted repayment amount by the end
of the forbearance period, FRD shall, at the election of the creditors'
committee in lieu thereof:
- pay Denny's the proceeds of any new financing that is obtained, plus
additional cash necessary for a total cash repayment to Denny's of at
least $20 million,
- issue new junior secured notes to Denny's in a principal amount equal to
the amount of Coco's and Carrows' current obligations to Denny's, minus
the amount of any cash paid and any applicable repayment discount as
described in the settlement agreement (such junior secured notes will be
subordinate in right of payment and as to collateral to the new
financing), and
- issue to Denny's up to 10% of the common stock in FRD dependent upon the
amount of cash repaid to Denny's as described above.
The parties have agreed to attempt to replace the outstanding letters of credit
(approximately $9.6 million at the date of the settlement agreement) and cause
the cash deposit provided by Denny's supporting the letters of credit to be
released. If the letters of credit are not replaced, Denny's will keep them in
place and allow them to terminate in the ordinary course and will receive a
separate note payable from Coco's and Carrows to provide reimbursement if any
letters of credit are drawn upon. Advantica will continue to provide management
and information technology services pursuant to a one-year services agreement at
a cost to FRD set forth in the settlement agreement.
The settlement agreement is also conditioned upon the consent of Denny's
revolving credit facility lender. If the terms of the proposed settlement
agreement, including the financing described above, are satisfied, Advantica's
ownership of the common stock of FRD (or controlling interest in the case of the
third bullet point above) will transfer to the unsecured creditors of FRD.
In light of, among other things, the operating results and financial condition
of FRD and the uncertainties as to the outcome of the proposed settlement
agreement outlined above, there can be no assurance that we will be able to
recover any or all of the secured obligations owed to us under the
Coco's/Carrows credit facility. However, since we report FRD as a net liability
of discontinued operations in our consolidated balance sheets, we will not incur
any additional losses from the disposition of FRD (even if no amounts are
realized from the proposed settlement agreement or other disposal actions).
However, a reversal of discontinued operations reporting resulting from, among
other things, a failure to consummate a sale or transfer of ownership to FRD,
would require us to recognize the previously deferred losses in our consolidated
statements of operations.
Cash Requirements
The following table sets forth a calculation of our cash (used in) provided by
operations, for the periods indicated:
<Table>
<Caption>
FISCAL YEAR ENDED
---------------------------
DECEMBER 27, DECEMBER 26,
2000 2001
------------ ------------
(In thousands)
Net loss $(98,002) $(88,544)
Equity in loss from discontinued operations, net 15,530 --
Impairment charges 6,416 13,630
Restructuring charges and exit costs 12,556 16,863
Gains from refranchising and other, net (51,219) (13,340)
Extraordinary item -- (7,778)
Other noncash charges 137,576 114,560
Change in certain working capital items (21,906) (14,500)
Change in other assets and other liabilities, net (9,363) (12,731)
-------- --------
Cash (used in) provided by operations $ (8,412) $ 8,160
======== ========
</Table>
20
Our future contractual obligations and commitments at December 26, 2001 consist
of the following:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------
LESS THAN 1-2 3-4 5 YEARS
TOTAL 1 YEAR (a) YEARS YEARS AND THEREAFTER
---------- ---------- -------- ------- --------------
(In thousands)
Long-term debt $ 594,294 $ 599 $ 59,872 $ 477 $533,346
Capital lease obligations 40,050 4,523 7,389 6,456 21,682
Operating lease obligations 356,162 47,875 84,043 68,496 155,748
Information technology agreement (b) 15,847 11,856 3,991 -- --
---------- ------- -------- ------- --------
$1,006,353 $64,853 $155,295 $75,429 $710,776
========== ======= ======== ======= ========
</Table>
- ------------------------------------
(a) In addition to scheduled maturities of principal, approximately $74.8
million of cash will be required in 2002 to meet interest payments on
long-term debt.
(b) In January 2000, we entered into an agreement with Affiliated Computer
Services, Inc., or ACS, to manage and operate our information technology for
its corporate headquarters, restaurants and field management. ACS oversees
data center operations, desktop support, data networking, help desk
operations and POS hardware maintenance. The agreement expires April 30,
2003.
In addition to the obligations and commitments listed above, we have purchase
agreements with various vendors for certain products and supplies, principally
PFC/MBM (see "Business -- Raw Materials Sources and Availability").
Our principal capital requirements have been largely associated with remodeling
and maintaining our existing restaurants and facilities. During 2001, our
capital expenditures were $42.2 million. Of that amount, approximately $1.1
million was financed through capital leases. Capital expenditures during 2002
are expected to total $35 million to $45 million; however, we are not committed
to spending this amount and could spend less if circumstances require.
Historically, we have met our liquidity requirements with internally generated
funds, external borrowings and in recent years, proceeds from asset sales. Our
ability to meet liquidity requirements, debt service obligations and to maintain
continuity of operations will depend on a number of factors, including our
ability to refinance our current revolving credit facility by its January 7,
2003 maturity date and our ability to meet targeted levels of operating cash
flow. We are currently considering alternatives for refinancing our revolving
credit facility. We believe that we will be able to negotiate a replacement
credit facility on or prior to the January 2003 maturity date; however, no
assurance can be given that we will be successful in negotiating a sufficient
facility on commercially reasonable terms. Additionally, there can be no
assurance that targeted levels of operating cash flow will actually be achieved.
Our ability to achieve operating cash flow targets will depend upon consumer
tastes, the success of marketing initiatives and other efforts to increase
customer traffic in our restaurants, prevailing economic conditions and other
matters, some of which are beyond our control. We believe that, together with
funds available under the revolving credit facility (or replacement facility),
we will have sufficient cash flow from operations to meet working capital
requirements, to pay interest and scheduled amortization on all of our
outstanding indebtedness and to fund anticipated capital expenditures through
2002.
At December 26, 2001, our working capital deficit, excluding net liabilities of
discontinued operations, was $147.5 million compared to $170.6 million at
December 27, 2000. The decrease in the working capital deficit at December 26,
2001 is primarily related to the use of cash on hand and borrowings under the
revolving credit facility to satisfy current liabilities, the reduction in
capital lease obligations resulting in the extraordinary gain recorded in 2001
and the reduction of company-owned units from refranchising activity and store
closures. We are able to operate with a substantial working capital deficit
because (1) restaurant operations and most food service 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 the related sales.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement
21
established accounting and reporting standards for derivative financial
instruments and for hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in fair value of the
derivative (i.e., gains and losses) depends on the intended use of the
derivative and the resulting designation. In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, or SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities -- an
amendment of FASB Statement No. 133," which amended certain provisions of SFAS
133 to clarify areas causing difficulties in implementation, including expanding
the normal purchase and sale exemption for supply contracts. We adopted SFAS 133
and the corresponding amendments under SFAS 138 at the beginning of fiscal year
2001 in accordance with Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS 133, as amended by SFAS 138, did
not have a material impact on our consolidated results of operations, financial
position or cash flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, or SFAS 141, "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 27, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS 141 has had no
impact on our financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, or SFAS 142, "Goodwill and Other Intangible Assets," which became
effective for us on December 27, 2001, the first day of our 2002 fiscal year.
SFAS 142 requires us, among other things, to discontinue goodwill amortization,
including the amortization of our reorganization value in excess of amounts
allocable to identifiable assets. In addition, the standard provides for
reclassifying certain intangibles as goodwill, reassessing the useful lives of
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 us to complete a
transitional goodwill impairment test within six months from the date of
adoption. We have determined that we will no longer amortize excess
reorganization value, goodwill and trade names. Total amortization expense
related to those intangible assets for 1999, 2000 and 2001 was $91.1 million,
$45.4 million and $31.6 million, respectively. During the first quarter of 2002,
we will complete our testing of intangible assets with definite lives and our
assessment of impairment of goodwill and other intangible assets with indefinite
lives. At this time, however, we do not anticipate a change in the useful lives
of our intangible assets nor do we expect to incur an impairment charge as a
result of implementing SFAS 142.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, or SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes Statement of Financial
Accounting 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 became effective for us on December 27, 2001, the first day
of our 2002 fiscal year. We do not expect our adoption of the statement to have
a significant impact on our financial position or future results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We have exposure to interest rate risk related to certain instruments entered
into for other than trading purposes. Specifically, borrowings under the
revolving credit facility bear interest at a variable rate based on the prime
rate or an adjusted Eurodollar rate. A 100 basis point change in the revolving
credit facility interest rate (approximately 6.1% at December 26, 2001) would
cause the interest expense for 2002 to change by approximately $0.6 million.
This computation is determined by considering the impact of hypothetical
interest rates on our variable long-term debt at December 26, 2001. However, the
nature and amount of our borrowings under the revolving credit facility may vary
as a result of future business requirements, market conditions and other
factors.
Our other outstanding long-term debt bears fixed rates of interest. The
estimated fair value of our fixed rate long-term debt (excluding capital leases)
was approximately $379 million at December 26, 2001. This computation is based
on market quotations for the same or similar debt issues or the estimated
borrowing rates available to us. The decrease in the estimated fair value of
long-term debt compared to its historical cost reported in our consolidated
balance sheets at December 26, 2001 relates primarily to market quotations for
our Senior Notes.
22
COMMODITY PRICE RISK
We purchase certain food products such as beef, poultry, pork and coffee, and
utilities such as gas and electricity, which are affected by commodity pricing
and are, therefore, subject to price volatility caused by weather, production
problems, delivery difficulties and other factors that are outside our control
and which are generally unpredictable. Changes in commodity prices affect us and
our competitors generally and often simultaneously. In general, we purchase food
products and utilities based upon market prices established with vendors.
Although many of the items purchased are subject to changes in commodity prices,
certain purchasing arrangements are structured to contain features that minimize
price volatility by establishing price ceilings and/or floors. We use these
types of purchase arrangements to control costs as an alternative to using
financial instruments to hedge commodity prices. In many cases, we believe we
will be able to address commodity cost increases which are significant and
appear to be long-term in nature by adjusting our menu pricing or changing our
product delivery strategy. However, competitive circumstances could limit such
actions and in those circumstances increases in commodity prices could lower our
margins. Because of the often short-term nature of commodity pricing aberrations
and our ability to change menu pricing or product delivery strategies in
response to commodity price increases, we believe that the impact of commodity
price risk is not significant.
We have established a policy to identify, control and manage market risks which
may arise from changes in interest rates, foreign currency exchange rates,
commodity prices and other relevant rates and prices. We do not use derivative
instruments for trading purposes, and no interest rate or other financial
derivatives were in place at December 26, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements which appears on page F-1 herein.
FORM 11-K INFORMATION
Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934,
as amended, we will file as an amendment to this Annual Report on Form 10-K the
information, financial statements and exhibits required by Form 11-K with
respect to the Advantica 401(k) Plans.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to our directors and compliance
by our directors, executive officers and certain beneficial owners of our common
stock with Section 16(a) of the Securities Exchange Act of 1934 is furnished by
incorporation by reference to all information under the captions entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the proxy statement (to be filed later) in connection with
Advantica's Annual Meeting of the Shareholders to be held on May 22, 2002. The
information required by this item related to our executive officers appears in
Item I of Part I of this report under the caption "Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is furnished by incorporation by reference
to all information under the captions entitled "Executive Compensation" and
"Election of Directors -- Compensation of Directors" in the proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is furnished by incorporation by reference
to all information under the caption "General -- Equity Security Ownership" in
the proxy statement.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The information required by this item is furnished by incorporation by reference
to all information under the caption "Certain Transactions" in the proxy
statement.
INFORMATION REGARDING CERTAIN INDEBTEDNESS
The following information regarding certain of our debt does not purport to be
complete and is qualified in its entirety by reference to the documents
governing such debt, including the definitions of certain terms therein, which
have been filed as exhibits to filings of Advantica and/or FRD with the
Commission. Whenever particular provisions of such documents are referred to
herein, such provisions are incorporated herein by reference, and the statements
are qualified in their entirety by such reference. See Note 9 to our
consolidated financial statements for additional information regarding our
indebtedness and the terms thereof (including indebtedness under the revolving
credit facility and certain mortgage financings).
ADVANTICA PUBLIC DEBT
Advantica currently has outstanding $529.6 million aggregate principal amount of
11 1/4% Senior Notes due 2008, or Senior Notes. The Senior Notes are senior
unsecured obligations of Advantica and rank pari passu in right of payment to
all senior indebtedness, including the revolving credit facility. The Senior
Notes are effectively subordinated to Advantica's secured indebtedness,
including indebtedness under the revolving credit facility. The Senior Notes are
structurally subordinated to indebtedness under the revolving credit facility to
the extent of direct obligations of Advantica's subsidiaries, as borrowers and
as subsidiary guarantors, thereunder. Interest on the Senior Notes accrues at a
rate equal to 11 1/4% per annum and is payable semi-annually in arrears on each
July 15 and January 15. They will mature on January 15, 2008.
The Senior Notes will be redeemable, in whole or in part, at the option of
Advantica at any time on or after January 15, 2003, at a redemption price equal
to 105.625% of the principal amount thereof to and including January 14, 2004,
at 103.750% of the principal amount thereof to and including January 14, 2005,
at 101.875% of the principal amount thereof to and including January 14, 2006,
and thereafter at 100% of the principal amount thereof, together in each case
with accrued interest.
THE FRD NOTES
FRD currently has outstanding $156.9 million principal amount of 12.5% Senior
Notes, or FRD Notes. The FRD Notes are senior unsecured, general obligations of
FRD and rank senior in right of payment to all existing and future subordinated
indebtedness of FRD and rank pari passu in right of payment with all existing
and future unsubordinated indebtedness of FRD. The FRD Notes are effectively
subordinated to secured indebtedness of FRD, including FRD's guaranty of
borrowings under the Coco's/Carrows credit facility, to the extent of the value
of FRD's assets securing such guaranty. Borrowings under the Coco's/Carrows
credit facility are secured by substantially all of FRD's assets. The FRD Notes
are structurally subordinated to all indebtedness of FRD's subsidiaries,
including indebtedness under the Coco's/Carrows credit facility. Interest on the
FRD Notes accrues at the rate of 12 1/2% per annum and is payable semi-annually
in arrears on January 15 and July 15.
The FRD Notes, by their terms, mature on July 15, 2004. They are redeemable, in
whole or in part, at the option of FRD at any time on or after May 23, 2001, at
a redemption price equal to 105.0% of the principal amount thereof to and
including May 22, 2002, at 102.5% of the principal amount thereof to and
including May 22, 2003, and thereafter at 100% of the principal amount thereof,
together in each case with accrued interest.
On January 16, 2001, FRD elected not to make the interest payment (and all
subsequent interest payments to date) due with respect to the FRD Notes. As a
result of the nonpayments, and as a result of FRD's Chapter 11 filing on
February 14, 2001, FRD is in default under the indenture governing the FRD
Notes. The FRD bankruptcy filing, as discussed in "Legal Proceedings" and Note 3
to our consolidated financial statements, operates as an automatic stay of all
collection and enforcement actions by the holders of the FRD Notes with respect
to FRD's failure to make the
24
interest payments when due. See also the discussion of the proposed settlement
agreement in "Management's Discussion and Analysis -- Liquidity and Capital
Resources" and Note 9 to our consolidated financial statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
See the Index to Financial Statements which appears on page F-1 hereof.
(2) Financial Statement Schedules:
No schedules are filed herewith because of the absence of conditions
under which they are required or because the information called for is in
the Consolidated Financial Statements or Notes thereto.
(3) Exhibits:
Certain of the exhibits to this Report, indicated by an asterisk, are
hereby incorporated by reference to other documents on file with the
Commission with which they are physically filed, to be a part hereof as
of their respective dates.
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*2.1 Joint Plan of Reorganization of FCI and Flagstar, as amended
November 7, 1997 and as confirmed by order of the United
States Bankruptcy Court for the District of South Carolina
entered November 12, 1997 (incorporated by reference to
Exhibit 2.1 to FCI's Form 8-K, dated November 12, 1997).
*3.1 Restated Certificate of Incorporation of Advantica dated
January 7, 1998 (incorporated by reference to Exhibit 3.1 to
Form 8-A of Advantica filed January 7, 1998 relating to the
Advantica's common stock (the "Form 8-A")).
*3.2 Certificate of Ownership and Merger of FCI filed January 7,
1998 (incorporated by reference to Exhibit 3.2 to Amendment
No. 1 to the Registration Statement (No. 333-45811) of
Advantica).
*3-2A Certificate of Designation, Preferences, and Rights of
Series A Junior Participating Preferred Stock of Advantica
dated December 16, 1998 (incorporated by reference to
Exhibit 3.2A to Amendment No. 2 to the Registration
Statement (No. 333-72658) of Advantica (the "Advantica 2001
Form S-4 Amendment No. 2")).
*3-2B Certificate of Ownership and Merger merging TWS Funding,
Inc. into Advantica dated December 17, 2001 (incorporated by
reference to Exhibit 3.2B to the "Advantica 2001 S-4
Amendment No. 2").
*3.3 By-Laws of Advantica, as amended through January 24, 2001
(incorporated by reference to Exhibit 3.1 to Advantica's
Quarterly Report on Form 10-Q for the quarter ended March
28, 2001(the "2001 First Quarter Form 10-Q")).
*4.1 Indenture dated as of May 23, 1996 between FRD and the Bank
of New York, as Trustee (the "FRD Indenture") (incorporated
by reference to Exhibit 4.1 to Registration Statements on
Forms S-1 and S-4 dated as of September 6, 1996 (No.
333-07601) of FRD (the "FRD Form S-1/S-4")).
*4.2 Form of First Supplemental Indenture to the FRD Indenture
dated as of August 23, 1996 (incorporated by reference to
Exhibit 4.1.1 to the FRD Form S-l/S-4).
*4.3 Indenture relating to the Senior Notes (including the form
of security) dated as of January 7, 1998, between Advantica
and First Trust National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to Advantica's
Form 8-K filed January 15, 1998 (the "1998 Form 8-K")).
*4.4 Warrant Agreement (including the form of Warrant)
(incorporated by reference to Exhibit 10.1 to the Form 8-A
of Advantica filed January 7, 1998 relating to Advantica's
common stock warrants).
*4.5 Rights Agreement, dated as of December 15, 1998, between
Advantica and Continental Stock Transfer and Trust Company,
as Rights Agent (including Form of Right Certificate)
(incorporated by reference to Exhibit 1 to Advantica's Form
8-A, filed December 15, 1998, relating to Preferred Stock
purchase rights).
*10.1 Consent Order dated March 26, 1993 between the U.S.
Department of Justice, Flagstar and Denny's, Inc.
(incorporated by reference to Exhibit 10.42 to the
Registration Statement on Form S-2 (No. 33-49843) of
Flagstar (the "Form S-2")).
*10.2 Fair Share Agreement dated July 1, 1993 between Flagstar and
the NAACP (incorporated by reference to Exhibit 10.43 to the
Form S-2).
</Table>
25
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*10.3 Amended Consent Decree dated May 24, 1994 (incorporated by
reference to Exhibit 10.50 to FCI's Annual Report on Form
10-K for the year ended December 31, 1994 (the "1994 Form
10-K")).
*10.4 Consent Decree dated May 24, 1994 among certain named
claimants, individually and on behalf of all others
similarly situated, Flagstar and Denny's, Inc. (incorporated
by reference to Exhibit 10.51 to the 1994 Form 10-K).
*10.5 Employment Agreement, dated as of January 10, 1995, between
FCI and James B. Adamson (incorporated by reference to
Exhibit 10.42 to the 1994 Form 10-K).
*10.6 Amendment to Employment Agreement, dated as of February 27,
1995, between FCI and James B. Adamson (incorporated by
reference to Exhibit 10.44 to the 1994 Form 10-K).
*10.7 Second Amendment to Employment Agreement, dated December 31,
1996, between FCI and James B. Adamson (incorporated by
reference to Exhibit 10.47 to FCI's Annual Report on Form
10-K for the year ended December 31, 1996 (the "1996 Form
10-K")).
*10.8 Information Systems Management Agreement, dated February 22,
1996, between Flagstar and Integrated Systems Solutions
Corporation (incorporated by reference to Exhibit 10.49 to
the 1996 Form 10-K).
*10.9 Employment Agreement between Advantica and James B. Adamson,
amended and restated as of January 7, 1998 (incorporated by
reference to Exhibit 10.1 to Advantica's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999 (the "1999
First Quarter Form 10-Q")).
*10.10 Credit Agreement, dated January 7, 1998, among Denny's,
Inc., El Pollo Loco, Inc., Flagstar Enterprises, Inc.,
Flagstar Systems, Inc. and Quincy's Restaurants, Inc., as
borrowers, Advantica, as a guarantor, the lenders named
therein, and The Chase Manhattan Bank, as administrative
agent (the "Advantica Credit Agreement") (incorporated by
reference to Exhibit 10.1 to the 1998 Form 8-K).
*10.11 Amendment No. 1 and Waiver, dated as of March 16, 1998,
relating to the Advantica Credit Agreement (incorporated by
reference to Exhibit 10.53 to the Registration Statement
(No. 333-4581) of Advantica).
*10.12 Amendment No. 2 and Waiver, dated as of May 21, 1998,
relating to the Advantica Credit Agreement (incorporated by
reference to Exhibit 10.1 to Advantica's Quarterly Report on
Form 10-Q for the quarter ended July 1, 1998).
*10.13 Amendment No. 3 and Waiver, dated as of July 16, 1998, to
the Advantica Credit Agreement (incorporated by reference to
Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
*10.14 Amendment No. 4, dated as of November 12, 1998, to the
Advantica Credit Agreement (incorporated by reference to
Exhibit 10.35 to Advantica's Annual Report on Form 10-K for
the year ended December 30, 1998).
*10.15 Advantica Restaurant Group Director Stock Option Plan, as
amended through January 24, 2001 (incorporated by reference
to Exhibit 10.1 to the 2001 First Quarter Form 10-Q).
*10.16 Amendment No. 5, dated March 12, 1999, to the Advantica
Credit Agreement (incorporated by reference to Exhibit 10.3
to the 1999 First Quarter Form 10-Q).
*10.17 Amendment No. 6, dated December 20, 1999, to the Advantica
Credit Agreement (incorporated by reference to Exhibit 10.37
to Advantica's Annual Report on Form 10-K for the year ended
December 29, 1999).
*10.18 Merger Amendment, dated March 15, 1999, to the Advantica
Restaurant Group Stock Option Plan and the Advantica
Restaurant Group Officer Stock Option Plan (incorporated by
reference to Exhibit 10.4 to the 1999 First Quarter Form
10-Q).
10.19 Advantica Stock Option Plan as amended through November 28,
2001.
*10.20 Credit Agreement, dated May 14, 1999, among Coco's
Restaurants, Inc., Carrows Restaurants, Inc., and jojo's
Restaurants, Inc., as borrowers, FRD Acquisition Co. and FRD
Corporation, as guarantors, the lenders named therein,
Credit Lyonnias New York Branch as administrative agent, and
The Chase Manhattan Bank, as documentation agent and
syndication agent (incorporated by reference to Exhibit 10.1
to Advantica's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999).
*10.21 Addendum Agreement, dated April 7, 2000, between Advantica
and James B. Adamson (incorporated by reference to Exhibit
10.1 to Advantica's Quarterly Report on Form 10-Q for the
quarter ended March 29, 2000 (the "2000 First Quarter Form
10-Q")).
*10.22 Form of Agreement, dated February 9, 2000, providing certain
retention incentives and severance benefits for Company
management (incorporated by reference to Exhibit 10.2 to the
2000 First Quarter Form 10-Q)
</Table>
26
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*10.23 Master Service Agreement for Information Technology
Services, dated January 25, 2000, between Advantica and
Affiliated Computer Services, Inc. (incorporated by
reference to Exhibit 10.1 to Advantica's Quarterly Report on
Form 10-Q for the quarter ended June 28, 2000 (the "2000
Second Quarter Form 10-Q")).
*10.24 Amendment No. 7, dated as of June 20, 2000, to the Advantica
Credit Agreement (incorporated by reference to Exhibit 10.3
to the 2000 Second Quarter Form 10-Q).
*10.25 Amendment No. 8, dated as of December 26, 2000, to the
Advantica Credit Agreement (incorporated by reference to
Exhibit 10.26 to Advantica's Annual Report on Form 10-K for
the year ended December 27, 2000).
*10.26 Amendment No. 9, dated as of October 18, 2001, to the
Advantica Credit Agreement (incorporated by reference to
Exhibit 10.29 to Advantica 2001 S-4 Amendment No. 2.)
*10.27 Amendment, dated February 6, 2001, to Addendum Agreement
between Advantica and James B. Adamson dated April 7, 2000
(incorporated by reference to Exhibit 10.2 to the 2001 First
Quarter Form 10-Q).
*10.28 Employment Agreement dated January 2, 2001 between Advantica
and Nelson J. Marchioli (incorporated by reference to
Exhibit 10.3 to the 2001 First Quarter Form 10-Q).
*10.29 Stipulation and Agreement of Settlement, dated February 19,
2002, by and among FRD, the Creditors Committee, Advantica,
Denny's, FRI-M Corporation, Coco's and Carrows, and as filed
with the Bankruptcy Court on February 19, 2002 (incorporated
by reference to Exhibit 99.1 to Advantica's Form 8-K, dated
February 19, 2001).
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of Advantica.
23.1 Consent of Deloitte and Touche LLP.
99 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995.
</Table>
(b) No reports on Form 8-K were filed during the quarter ended December 26,
2001. Subsequent to year end, on February 20, 2002, we filed a report on
Form 8-K reporting under Item 5 that on February 19, 2002, Advantica and
Denny's, along with FRD, Coco's and Carrows, entered into a settlement
agreement with the official committee of unsecured creditors of FRD seeking
to resolve various disputes relating to the administration of FRD's pending
bankruptcy case. The settlement agreement, which is attached to the Form 8-K
as Exhibit 99.1, was filed with the bankruptcy court on February 19, 2002
and approved by the court on March 8, 2002. No financial statements were
required to be included and were not included in this Form 8-K filing.
27
ADVANTICA RESTAURANT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Independent Auditors' Report F-2
Consolidated Statements of Operations for the Three Fiscal
Years Ended December 26, 2001 F-3
Consolidated Balance Sheets as of December 27, 2000 and
December 26, 2001 F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the Three Fiscal Years Ended December 26, 2001 F-5
Consolidated Statements of Cash Flows for the Three Fiscal
Years Ended December 26, 2001 F-6
Notes to Consolidated Financial Statements F-8
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Advantica
Restaurant Group, Inc. and subsidiaries as of December 26, 2001 and December 27,
2000 and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three fiscal years in the period ended
December 26, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, Advantica's consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Advantica at
December 26, 2001 and December 27, 2000, and the results of its consolidated
operations and consolidated cash flows for each of the three fiscal years in the
period ended December 26, 2001, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 19, 2002, except
as to Note 9, which is as of
March 8, 2002, and Note 19, which is
as of March 9, 2002.
F-2
ADVANTICA RESTAURANT GROUP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1999 2000 2001
------------ ------------ ------------
(In thousands, except per share amounts)
Revenue:
Company restaurant sales $1,140,338 $1,080,641 $ 949,180
Franchise and licensing revenue 59,911 74,608 90,548
---------- ---------- ----------
Total operating revenue 1,200,249 1,155,249 1,039,728
---------- ---------- ----------
Cost of company restaurant sales:
Product costs 293,860 280,473 237,721
Payroll and benefits 446,497 427,222 382,864
Occupancy 60,935 59,311 55,941
Other operating expenses 156,466 162,881 142,281
---------- ---------- ----------
Total costs of company restaurant sales 957,758 929,887 818,807
Franchise restaurant costs 28,737 38,000 39,002
General and administrative expenses 74,852 66,291 60,180
Amortization of excess reorganization value 88,989 42,133 28,692
Depreciation and other amortization 130,782 111,449 95,639
Impairment charges 136,500 6,416 13,630
Restructuring charges and exit costs -- 12,556 16,863
Gains on refranchising and other, net (21,514) (51,219) (13,340)
---------- ---------- ----------
Total operating costs and expenses 1,396,104 1,155,513 1,059,473
---------- ---------- ----------
Operating loss (195,855) (264) (19,745)
---------- ---------- ----------
Other expenses:
Interest expense, net 79,435 81,821 73,235
Other nonoperating (income) expenses, net (302) (1,415) 1,771
---------- ---------- ----------
Total other expenses, net 79,133 80,406 75,006
---------- ---------- ----------
Loss before income taxes (274,988) (80,670) (94,751)
Provision for income taxes 814 1,802 1,571
---------- ---------- ----------
Loss from continuing operations (275,802) (82,472) (96,322)
Discontinued operations:
Gain on sale of discontinued operations, including
provision of $5,900 for operating losses during the
disposal period, net of income tax provision of $37 9,616 -- --
Loss from operations of discontinued operations, net of
income tax provision (benefit): 1999 -- $408;
2000 -- $(1,416); 2001 -- $0 (115,718) (15,530) --
---------- ---------- ----------
Loss before extraordinary item (381,904) (98,002) (96,322)
Extraordinary item -- -- 7,778
---------- ---------- ----------
Net loss $ (381,904) $ (98,002) $ (88,544)
========== ========== ==========
Per share amounts applicable to common shareholders:
Basic and diluted earnings per share:
Loss from continuing operations $ (6.89) $ (2.06) $ (2.40)
Loss from discontinued operations, net (2.65) (0.39) --
---------- ---------- ----------
Loss before extraordinary item (9.54) (2.45) $ (2.40)
Extraordinary item -- -- 0.19
---------- ---------- ----------
Net loss $ (9.54) $ (2.45) $ (2.21)
========== ========== ==========
Weighted average outstanding and equivalent shares 40,024 40,070 40,136
========== ========== ==========
</Table>
See notes to consolidated financial statements.
F-3
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 27, DECEMBER 26,
2000 2001
------------ ------------
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 27,260 $ 6,696
Receivables, less allowance for doubtful accounts of:
2000 -- $4,308; 2001 -- $2,730 8,260 6,508
Inventories 10,249 7,979
Other 10,593 18,954
--------- ---------
Total Current Assets 56,362 40,137
Property, net 425,327 362,441
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net of accumulated amortization
of: 2000 -- $202,304; 2001 -- $230,995 61,177 28,285
Goodwill, net of accumulated amortization of:
2000 -- $2,495; 2001 -- $4,181 25,476 25,068
Other intangible assets, net of accumulated
amortization of:
2000 -- $23,168; 2001 -- $29,399 115,516 103,302
Deferred financing costs, net 12,543 10,067
Other 48,865 37,953
--------- ---------
Total Assets $ 745,266 $ 607,253
========= =========
LIABILITIES
Current Liabilities:
Current maturities of notes and debentures $ 1,086 $ 599
Current maturities of capital lease obligations 10,510 4,523
Accounts payable 69,920 55,862
Net liabilities of discontinued operations 69,400 15,115
Other 145,473 126,618
--------- ---------
Total Current Liabilities 296,389 202,717
--------- ---------
Long-Term Liabilities:
Notes and debentures, less current maturities 553,730 609,531
Capital lease obligations, less current maturities 39,980 35,527
Liability for insurance claims 25,468 26,778
Other noncurrent liabilities and deferred credits 75,960 72,457
--------- ---------
Total Long-Term Liabilities 695,138 744,293
--------- ---------
Total Liabilities 991,527 947,010
--------- ---------
Commitments and contingencies
SHAREHOLDERS' DEFICIT
Common Stock:
$0.01 par value; shares authorized -- 100,000; issued
and outstanding: 2000 -- 40,058; 2001 -- 40,143 401 401
Paid-in capital 417,203 417,293
Deficit (661,325) (749,869)
Accumulated other comprehensive loss (2,540) (7,582)
--------- ---------
Total Shareholders' Deficit (246,261) (339,757)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 745,266 $ 607,253
========= =========
</Table>
See notes to consolidated financial statements.
F-4
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL OTHER SHAREHOLDERS'
--------------- PAID-IN COMPREHENSIVE EQUITY/
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) (DEFICIT)
------ ------ ---------- --------- ------------- -------------
(In thousands)
Balance, December 30, 1998 40,010 $400 $417,016 $(181,419) $ 47 $ 236,044
------ ---- -------- --------- ------- ---------
Comprehensive loss:
Net loss -- -- -- (381,904) -- (381,904)
Other comprehensive loss:
Foreign currency translation
adjustments -- -- -- -- (87) (87)
------ ---- -------- --------- ------- ---------
Comprehensive loss -- -- -- (381,904) (87) (381,991)
Issuance of common stock 15 -- 107 -- -- 107
------ ---- -------- --------- ------- ---------
Balance, December 29, 1999 40,025 400 417,123 (563,323) (40) (145,840)
------ ---- -------- --------- ------- ---------
Comprehensive loss:
Net loss -- -- -- (98,002) -- (98,002)
Other comprehensive loss:
Foreign currency translation
adjustments -- -- -- -- (56) (56)
Additional minimum pension
liability -- -- -- -- (2,444) (2,444)
------ ---- -------- --------- ------- ---------
Comprehensive loss -- -- -- (98,002) (2,500) (100,502)
Issuance of common stock 53 1 80 -- -- 81
Cancellation of common stock held for
former debt holders (20) -- -- -- -- --
------ ---- -------- --------- ------- ---------
Balance, December 27, 2000 40,058 401 417,203 (661,325) (2,540) (246,261)
------ ---- -------- --------- ------- ---------
Comprehensive loss:
Net loss -- -- -- (88,544) -- (88,544)
Other comprehensive loss:
Foreign currency translation
adjustments -- -- -- -- (80) (80)
Additional minimum pension
liability -- -- -- -- (4,962) (4,962)
------ ---- -------- --------- ------- ---------
Comprehensive loss -- -- -- (88,544) (5,042) (93,586)
Issuance of common stock 85 -- 90 -- -- 90
------ ---- -------- --------- ------- ---------
Balance, December 26, 2001 40,143 $401 $417,293 $(749,869) $(7,582) $(339,757)
====== ==== ======== ========= ======= =========
</Table>
See notes to consolidated financial statements.
F-5
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1999 2000 2001
------------ ------------ ------------
(In thousands)
Net loss $(381,904) $(98,002) $(88,544)
Adjustments to Reconcile Net Loss to Cash Flows from
Operating Activities:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 88,989 42,133 28,692
Depreciation and other amortization 130,782 111,449 95,639
Impairment charges 136,500 6,416 13,630
Restructuring charges and exit costs -- 12,556 16,863
Amortization of deferred gains (12,003) (12,445) (11,322)
Amortization of deferred financing costs 6,219 5,708 3,440
Gains on refranchising and other, net (21,514) (51,219) (13,340)
Gain on sale of discontinued operations, net (9,616) -- --
Equity in loss from discontinued operations, net 115,718 15,530 --
Amortization of debt premium (13,901) (9,074) (1,889)
Extraordinary item -- -- (7,778)
Other 15 (195) --
Changes in Assets and Liabilities Net of Effects of
Acquisitions and Dispositions:
Decrease (increase) in assets:
Receivables (1,744) 12,425 8,106
Inventories 529 505 1,710
Other current assets 1,089 (2,797) 1,519
Other assets (10,908) (3,716) (3,698)
Increase (decrease) in liabilities:
Accounts payable (17,025) 2,673 (5,027)
Accrued salaries and vacations (2,420) (2,105) (355)
Accrued taxes (1,581) (2,768) (582)
Other accrued liabilities (27,051) (29,839) (19,871)
Other noncurrent liabilities and deferred credits (11,297) (5,647) (9,033)
--------- -------- --------
Net cash flows (used in) provided by operating activities (31,123) (8,412) 8,160
--------- -------- --------
</Table>
See notes to consolidated financial statements.
F-6
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-- (CONTINUED)
<Table>
<Caption>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 27, DECEMBER 26,
1999 2000 2001
------------ ------------ ------------
(In thousands)
Cash Flows from Investing Activities:
Purchase of property $(76,780) $(37,474) $(41,117)
Proceeds from disposition of property 17,147 72,874 29,189
Acquisition of restaurant units (13,963) (4,461) --
Advances to discontinued operations, net (11,791) (1,910) (53,339)
Deposits securing FRD letters of credit -- -- (9,790)
Proceeds from sale of discontinued operations, net 109,414 -- --
Purchase of investments (45,564) -- --
Proceeds from sale and maturity of investments 89,224 17,084 --
Proceeds from maturity of investments securing
in-substance defeased debt 19,025 158,710 --
-------- -------- --------
Net cash flows provided by (used in) investing activities 86,712 204,823 (75,057)
-------- -------- --------
Cash Flows from Financing Activities:
Net borrowings under credit agreement -- -- 58,700
Deferred financing costs (3,089) (1,373) (964)
Debt transaction costs (350) (519) --
Long-term debt payments (52,405) (327,239) (6,936)
Net bank overdrafts 7,900 (5,848) (4,467)
-------- -------- --------
Net cash flows (used in) provided by financing activities (47,944) (334,979) 46,333
-------- -------- --------
Increase (decrease) in cash and cash equivalents 7,645 (138,568) (20,564)
Cash and Cash Equivalents at:
Beginning of year 158,183 165,828 27,260
-------- -------- --------
End of year $165,828 $ 27,260 $ 6,696
======== ======== ========
Supplemental Cash Flow Information:
Income taxes paid $ 1,539 $ 1,327 $ 2,191
======== ======== ========
Interest paid $101,086 $100,262 $ 74,601
======== ======== ========
Noncash investing activities:
Notes received related to refranchising $ 11,504 $ 3,557 $ 1,433
======== ======== ========
Notes forgiven related to reacquisition of restaurants $ 2,015 $ 1,340 $ 1,146
======== ======== ========
Other investing $ 8,458 $ 4,506 $ 2,068
======== ======== ========
Noncash financing activities:
Capital lease obligations $ 28,804 $ 5,760 $ 1,078
======== ======== ========
Other financing $ 846 $ 900 --
======== ======== ========
</Table>
See notes to consolidated financial statements.
F-7
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 INTRODUCTION AND BASIS OF REPORTING
Advantica Restaurant Group, Inc., or Advantica, is one of the largest restaurant
companies in the United States operating moderately priced restaurants in the
mid-scale dining segment. Our core brand is Denny's, the nation's largest
family-style restaurant chain in the mid-scale segment in terms of market share,
number of units and U.S. systemwide sales. At December 26, 2001, Denny's
operated 621 company-owned and 1,128 franchised/licensed restaurants in 49
states, the District of Columbia, 2 U.S. territories and 5 foreign countries,
with principal concentrations in California, Florida and Texas. Advantica also
operates the Coco's and Carrows restaurant chains through its wholly owned
subsidiary, FRD Acquisition Co., or FRD. Coco's and Carrows compete in the
family-style category and are located primarily in California. We have accounted
for FRD as a discontinued operation in our consolidated financial statements in
accordance with Accounting Principles Board Opinion No. 30, or APB 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." See Notes 2 and 3.
At December 26, 2001, we had a shareholders' deficit of approximately $339.8
million and have incurred net losses in each of the last three fiscal years. Our
revolving credit facility matures on January 7, 2003, and our 11 1/4% Senior
Notes, or Senior Notes, mature on January 15, 2008. We expect to remain in
compliance with our loan covenants throughout fiscal year 2002. Our ability to
maintain continuity of operations will depend on a number of factors, including
our ability to negotiate a replacement revolving credit facility. We are
currently considering alternatives for refinancing our revolving credit
facility. We believe that we will be able to negotiate a replacement credit
facility on or prior to the January 2003 maturity date; however, no assurance
can be given that we will be successful in negotiating a sufficient facility on
commercially reasonable terms.
Our consolidated financial statements include the accounts of Advantica and our
subsidiaries. Certain prior year amounts have been reclassified to conform to
the current year presentation. Our fiscal year ends on the last Wednesday in
December. References in our notes to the consolidated financial statements to
1999, 2000 and 2001 refer to the fiscal years ended December 29, 1999, December
27, 2000 and December 26, 2001, respectively.
NOTE 2 SUMMARY OF CRITICAL AND OTHER SIGNIFICANT ACCOUNTING POLICIES
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to allowances
for doubtful accounts, self-insurance liabilities, impairment of long-lived
assets, restructuring and exit costs, income taxes, contingencies and litigation
and discontinued operations. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable and that actual results will
not vary significantly from the estimated amounts.
We believe the following critical accounting policies relate to our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Allowances for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our franchisees to make
required payments for franchise royalties, rent, advertising and notes
receivable. In assessing recoverability of these receivables, we make
assumptions regarding the financial condition of the franchisees based primarily
on past payment trends and periodic financial information which the franchisees
are required to submit to us. If the financial condition of our franchisees were
to deteriorate and result in an impairment of their ability to make payments, we
may be required to increase our allowances by recording additional bad debt
expense. Likewise, should the financial condition of our franchisees improve and
result in payments or settlements of previously reserved amounts, we may be
required to record a reduction in bad debt expense to reverse our allowances.
F-8
Self-Insurance Liabilities. We record liabilities for insurance claims during
periods in which we have been insured under large deductible programs or have
been self-insured for our workers' compensation, general/product and automobile
insurance liabilities. The liabilities for prior and current estimated incurred
losses are discounted to their present value based on expected loss payment
patterns determined by independent actuaries. If these patterns were to
deteriorate, we may be required to increase our self-insurance liabilities by
recording additional insurance expense. Likewise, should these patterns improve,
we may be required to reduce our self-insurance liabilities by recording a
reduction in insurance expense. Total discounted insurance liabilities at
December 27, 2000 and December 26, 2001 were $39.1 million and $39.6 million,
respectively, reflecting a 5% discount rate for 2000 and 2001. The related
undiscounted amounts at such dates were $44.3 million and $44.7 million,
respectively.
Impairment of Long-Lived Assets. Our long-lived assets include property,
reorganization value in excess of amounts allocable to identifiable assets,
goodwill and other intangible assets. We currently follow the provisions of
Accounting Principles Board Opinion No. 17, or ABP 17, "Intangible Assets," and
Statement of Financial Accounting Standards No. 121, or SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." In accordance with APB 17 and SFAS 121, as applicable, we assess impairment
of long-lived assets such as reorganization value in excess of amounts allocable
to identifiable assets, goodwill and property whenever changes or events
indicate that the carrying value may not be recoverable. In accordance with APB
17, we assess impairment of goodwill, reorganization value in excess of amounts
allocable to identifiable assets and certain intangible assets whenever our
market indicators (such as common stock market value) and/or operating trends
have had other than a temporary adverse change. We apply a discounted cash flow
approach to measure impairment using our estimated current cost of capital as
the discount rate. We assess impairment of restaurant-level assets based on the
operating cash flows of the restaurant and our plans for restaurant closings. In
accordance with SFAS 121, we write down other long-lived assets to fair value
if, based on an analysis, the sum of the expected future undiscounted cash flows
is less than the carrying amount of the assets (see New Accounting Standards
below).
Restructuring and Exit Costs. As a result of changes in our organizational
structure, we have recorded charges for restructuring and exit costs. These
costs consist primarily of severance and outplacement costs for terminated
employees and the costs of future obligations related to closed units or units
identified for closure. In assessing the cost of future obligations related to
closed units or units identified for closure, we make assumptions regarding the
timing of units' closures, amounts of future subleases, amounts of future
property taxes and costs of closing the units. If these estimates or their
related assumptions change in the future, we may be required to record
additional exit costs or reduce exit costs previously recorded.
Income Taxes. We record a valuation allowance to reduce our net deferred tax
assets to the amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for our valuation allowance, in the event we
were to determine that we would be able to realize our deferred tax assets in
the future in an amount in excess of the net recorded amount, an adjustment to
the valuation allowance (except for the valuation allowance established in
connection with the adoption of fresh start reporting on January 7, 1998 -- see
Note 11) would decrease income tax expense in the period such determination was
made. Likewise, should we determine that we would not be able to realize all or
part of our net deferred tax assets in the future, an adjustment to our
valuation allowance would increase income tax expense in the period such
determination was made.
Contingencies and Litigation. We are subject to legal proceedings involving
ordinary and routine claims incidental to our business as well as legal
proceedings that are nonroutine and include compensatory or punitive damage
claims. Our ultimate legal and financial liability with respect to such matters
cannot be estimated with certainty and requires the use of estimates in
recording liabilities for potential litigation settlements. If these estimates
or the related facts and circumstances change in the future, we may be required
to increase or reduce our settlement liabilities by recording additional legal
expense or by recording a reduction in legal expense.
Discontinued Operations. As noted in Note 1 and further described in Note 3, we
have reported FRD as a discontinued operation in our consolidated financial
statements as of the second quarter of 2000, or the measurement date, and
through December 26, 2001 because we continue to maintain control over the
operations of FRD while in bankruptcy. Reporting FRD as a discontinued operation
required us to make estimates regarding (1) the results of operations from the
measurement date to the disposal date and (2) the gain to be recorded upon
disposal. Based on
F-9
our determination that a gain is expected upon disposal, FRD's net losses of
$89.5 million for the two quarters ended December 27, 2000 and $22.4 million for
the year ended December 26, 2001, which were incurred subsequent to the
measurement date, are deferred and included as a component of net liabilities of
discontinued operations (included in other assets of discontinued operations as
disclosed in Note 3) in our consolidated balance sheets, and accordingly, have
not been recognized as losses in our consolidated statements of operations. A
reversal of discontinued operations reporting resulting from, among other
things, a failure to consummate a sale or transfer of ownership of FRD, would
require us to recognize the previously deferred losses in our consolidated
statements of operations.
Also, the following accounting policies significantly affect the preparation of
our consolidated financial statements:
Cash and Cash Equivalents and Investments. We consider all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Investments with longer maturities, generally consisting of
corporate, United States Treasury or agency debt securities, are considered
available for sale and reported in the balance sheet as investments at fair
value. Unrealized holding gains and losses on available-for-sale investments,
net of related tax effect, are reported as a separate component of shareholders'
equity (deficit) until realized. At December 27, 2000 and December 26, 2001, we
had no available-for-sale investments.
Inventories. Inventories are valued primarily at the lower of average cost
(first-in, first-out) or market.
Property and Depreciation. We depreciate property by the straight-line method
over its estimated useful life. We amortize property held under capital leases
(at capitalized value) over its estimated useful life, limited generally by the
lease period. The following estimated useful service lives were in effect during
all periods presented in the financial statements:
Buildings -- Five to twenty years
Equipment -- Two to ten years
Leasehold Improvements -- Estimated useful life limited by the lease
period, generally between five and ten years.
Goodwill. Goodwill represents the excess of the cost of acquired assets over
the fair market value of their net tangible and identifiable intangible assets.
We amortized goodwill on a straight-line basis over a period of no more than 20
years; however, the amortization will be discontinued at the beginning of fiscal
year 2002 in accordance with the implementation of SFAS 142 (see New Accounting
Standards below).
Other Intangible Assets. Other intangible assets consist primarily of
trademarks, trade names, franchise and other operating agreements. These assets
have been amortized on the straight-line basis over the useful lives of the
franchise and other agreements and over 40 years for trade names; however, the
amortization for certain of the intangible assets will be discontinued at the
beginning of fiscal year 2002 in accordance with the implementation of SFAS 142
(see New Accounting Standards below).
Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets. Upon emergence from bankruptcy as of January 7, 1998, we adopted fresh
start reporting pursuant to the guidance provided by American Institute of
Certified Public Accountants' Statement of Position 90-7, or SOP 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code."
Under fresh start reporting, the reorganization value that was not attributable
to specific tangible or identified intangible assets was reported in our
consolidated balance sheets as reorganization value in excess of amounts
allocable to identifiable assets (see Note 5 regarding impairment of the
reorganization value in 1999). We amortized the reorganization value using the
straight-line method over a five-year period; however, the amortization will be
discontinued at the beginning of fiscal year 2002 in accordance with the
implementation of SFA 142 (see New Accounting Standards below).
Deferred Financing Costs. Costs related to the issuance of debt are deferred
and amortized as a component of interest expense using the interest method over
the terms of the respective debt issues.
Advertising Costs. We expense production costs for radio and television
advertising in the year in which the commercials are initially aired.
Advertising expense for 1999, 2000 and 2001 was $50.8 million, $53.3 million and
$39.1 million, respectively.
F-10
Interest Associated with Discontinued Operations. During 1999, approximately
$7.3 million of interest expense was allocated to certain discontinued
operations based on the ratio of the net assets of the discontinued operations
to our net assets after the adoption of fresh start reporting on January 7,
1998. There was no interest expense allocated to discontinued operations during
2000 and 2001.
Deferred Gains. In 1995, we sold our distribution subsidiary, Proficient Food
Company, or PFC, for approximately $122.5 million. In conjunction with the sale,
we entered into an eight-year distribution contract with the acquirer of PFC,
which was subsequently extended to September 7, 2005. This transaction resulted
in a deferred gain of approximately $72.0 million that is being amortized over
the life of the distribution contract as a reduction of product costs. During
1996, we sold Portion-Trol Foods, Inc., or PTF, and the Mother Butler Pies
division of Denny's, our two food processing operations. Consideration from the
sales totaled approximately $72.1 million, including the receipt of
approximately $60.6 million in cash. In conjunction with these sales, we entered
into five-year purchasing agreements with the acquirers. These transactions
resulted in deferred gains totaling approximately $41.5 million that are being
amortized over the lives of the respective purchasing agreements as a reduction
of product costs. Related to these purchasing agreements, we recognized gains of
$10.5 million, $10.5 million and $9.3 million in 1999, 2000 and 2001,
respectively. We reported deferred gain balances related to these purchasing
agreements of $15.8 million and $6.5 million in our consolidated balance sheets
at December 27, 2000 and December 26, 2001, respectively.
During 2001, we received $2.0 million from the sale of 25,000 shares of
preferred stock of PTF's acquirer that we had received as consideration for the
sale of PTF to the acquirer. At the date of the sale of PTF, we assigned no
value to this portion of the consideration. Therefore, the gain on the sale of
this preferred stock was $2.0 million. This gain was recorded as a reduction of
product costs as it represented additional deferred gain on the sale of PTF. The
purchasing agreement related to Mother Butler Pies expired on July 31, 2001 and
the purchasing agreement related to PTF expires on December 31, 2001. During
2001, we extended our purchasing agreement with PTF through December 31, 2002 in
exchange for, among other things, waiving the remaining $3.7 million of purchase
commitment liabilities of certain discontinued operations related to PTF. As a
result, the remaining $3.7 million, which is included in our deferred gain
balance at December 26, 2001, will be amortized over the life of the purchasing
agreement as a reduction of product costs.
Cash Overdrafts. We have included in accounts payable on the consolidated
balance sheets cash overdrafts totaling $24.8 million and $20.4 million at
December 27, 2000 and December 26, 2001, respectively.
Franchise and License Fees. We recognize initial franchise and license fees
when all of the material obligations have been performed and conditions have
been satisfied, typically when operations have commenced. During 1999, 2000 and
2001, we recorded initial fees of $4.3 million, $6.2 million and $2.9 million,
respectively. Continuing fees, such as royalties and rents, are recorded as
income on a monthly basis.
For 2001, our ten largest franchisees accounted for approximately 30% of our
franchise revenues. At December 26, 2001, two of our ten largest franchisees
were in bankruptcy. Those two franchisees accounted for approximately 6% of our
franchise revenue in 2001. Both of the franchisees have continued to pay
applicable fees in accordance with their franchise and/or lease agreements
subsequent to their bankruptcy filing dates; however, no assurances can be given
as to the outcome of these franchisee bankruptcy cases.
Gains on Sales of Company-Owned Restaurants. We typically do not include real
estate in our sales of company-owned restaurants; therefore, we recognize gains
on sale transactions at the time collection of the sale price is reasonably
assured. From sales of company-owned restaurants we received proceeds totaling
$27.6 million, $74.4 million and $29.8 million in 1999, 2000 and 2001,
respectively. Of those amounts, we received cash proceeds in 1999, 2000 and 2001
of $16.1 million, $70.9 million and $28.3 million, respectively. Any gains on
sales of company-owned restaurants that include real estate are recognized when
the cash proceeds exceed 20 percent of the sales price, in accordance with
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate." During 1999, 2000 and 2001, we had no sales of company-owned
restaurants that included real estate.
New Accounting Standards. In June 1998, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting Standards No. 133, or
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement established accounting and reporting standards for derivative
financial instruments and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the balance sheet
and
F-11
measure those instruments at fair value. The accounting for changes in fair
value of the derivative (i.e., gains and losses) depends on the intended use of
the derivative and the resulting designation. In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, or SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities -- an
amendment of FASB Statement No. 133," which amended certain provisions of SFAS
133 to clarify areas causing difficulties in implementation, including expanding
the normal purchase and sale exemption for supply contracts. We adopted SFAS 133
and the corresponding amendments under SFAS 138 at the beginning of fiscal year
2001 in accordance with Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS 133, as amended by SFAS 138, did
not have a material impact on our consolidated results of operations, financial
position or cash flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, or SFAS 141, "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 27, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS 141 has had no
impact on our financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, or SFAS 142, "Goodwill and Other Intangible Assets," which will be
effective for us beginning December 27, 2001, the first day of our 2002 fiscal
year. SFAS 142 requires us, among other things, to discontinue goodwill
amortization, including the amortization of our reorganization value in excess
of amounts allocable to identifiable assets. In addition, the standard provides
for reclassifying certain intangibles as goodwill, reassessing the useful lives
of 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 us to complete a
transitional goodwill impairment test within six months from the date of
adoption. We have determined that we will no longer amortize excess
reorganization value, goodwill and trade names. Total amortization expense
related to those intangible assets for 1999, 2000 and 2001 was $91.1 million,
$45.4 million and $31.6 million, respectively. During the first quarter of 2002,
we will complete our testing of intangible assets with definite lives and our
assessment of goodwill and other intangible assets with indefinite lives. At
this time, however, we do not anticipate a change in the useful lives of our
intangible assets nor do we expect to incur an impairment charge as a result of
implementing SFAS 142.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, or SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121 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 us beginning the first day
of our 2002 fiscal year. We do not expect our adoption of the statement to have
a significant impact on our financial position or future results of operations.
F-12
NOTE 3 DISPOSITIONS OF BUSINESS SEGMENTS AND DISCONTINUED OPERATIONS
Our statements of consolidated operations and cash flows for all periods
presented herein reflect FRD and El Pollo Loco, Inc., or EPL, as discontinued
operations in accordance with APB 30. Revenue, operating income (loss) and net
loss of the discontinued operations for the reported periods are as follows:
<Table>
<Caption>
1999 2000 2001
--------- --------- ---------
(In thousands)
REVENUE
FRD $ 389,790 $ 371,060 $ 350,944
EPL 144,889 -- --
--------- --------- ---------
$ 534,679 $ 371,060 $ 350,944
========= ========= =========
OPERATING INCOME (LOSS)
FRD $ (87,748) $ (79,762) $ (7,595)
EPL 2,381 -- --
--------- --------- ---------
$ (85,367) $ (79,762) $ (7,595)
========= ========= =========
NET LOSS
FRD $(113,040) $(106,870) $ (22,409)
EPL (8,578) -- --
--------- --------- ---------
$(121,618) $(106,870) $ (22,409)
========= ========= =========
</Table>
As a result of our decision to sell or otherwise dispose of Coco's and Carrows,
we began accounting for FRD as a discontinued operation in the second quarter of
2000, and FRD continued to market for divestiture the Coco's and Carrows
concepts throughout the balance of 2001. On February 14, 2001, FRD filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code.
Because we maintain control over the operations of FRD while in bankruptcy, we
continued to consolidate and report FRD as a discontinued operation at December
26, 2001. On February 19, 2002, Advantica and Denny's, along with FRD, Coco's
and Carrows, entered into a stipulation and agreement of settlement with the
official committee of unsecured creditors of FRD seeking to resolve various
disputes relating to the administration of FRD's pending bankruptcy case. See
Note 9 to our consolidated financial statements for additional information.
For 2000 and 2001, FRD's net losses of $89.5 million for the two quarters ended
December 27, 2000 and $22.4 million for the year ended December 26, 2001, which
were incurred subsequent to the measurement date, are deferred and included as a
component of net liabilities of discontinued operations (included in other
assets of discontinued operations) in our consolidated balance sheets, and
accordingly, have not been recognized as losses in our consolidated statements
of operations.
FRD currently has outstanding $156.9 million principal amount of 12.5% Senior
Notes, or FRD Notes. The FRD Notes are senior unsecured, general obligations of
FRD and rank senior in right of payment to all existing and future subordinated
indebtedness of FRD and rank pari passu in right of payment with all existing
and future unsubordinated indebtedness of FRD. The FRD Notes are effectively
subordinated to secured indebtedness of FRD, including FRD's guaranty of
borrowings under the Coco's/Carrows credit facility, to the extent of the value
of FRD's assets securing such guaranty. Borrowings under the Coco's/Carrows
credit facility are secured by substantially all of FRD's assets. The FRD Notes
are structurally subordinated to all indebtedness of FRD's subsidiaries,
including indebtedness under the Coco's/Carrows credit facility. Interest on the
FRD Notes accrues at the rate of 12 1/2% per annum and is payable semi-annually
in arrears on January 15 and July 15.
The FRD Notes, by their terms, mature on July 15, 2004. They are redeemable, in
whole or in part, at the option of FRD at any time on or after May 23, 2001,
initially at a redemption price equal to 105.0% of the principal amount thereof
to and including May 22, 2002, at 102.5% of the principal amount thereof to and
including May 22, 2003, and thereafter at 100% of the principal amount thereof,
together in each case with accrued interest.
On January 16, 2001, FRD elected not to make the interest payment (and all
subsequent interest payments to date) due with respect to the FRD Notes. As a
result of the nonpayments, and as a result of FRD's Chapter 11 filing on
F-13
February 14, 2001, FRD is in default under the indenture governing the FRD
Notes. FRD's bankruptcy filing operates as an automatic stay of all collection
and enforcement actions by the holders of the FRD Notes with respect to its
failure to make the interest payments when due.
As a result of its Chapter 11 bankruptcy filing, FRD's financial position at
December 27, 2000 and December 26, 2001 has been presented in conformity with
SOP 90-7, and accordingly, all prepetition liabilities of FRD that are subject
to compromise through this bankruptcy proceeding are segregated as liabilities
subject to compromise. Our presentation of FRD's financial position does not
purport to show (a) the realizable value of its assets on a liquidation basis or
their availability to satisfy liabilities, (b) the amounts of its prepetition
liabilities that may be allowed for claims or contingencies, or (c) the effect
of any change in capitalization on its shareholder accounts. The financial
position of FRD is reported as net liabilities of discontinued operations in our
consolidated balance sheets and consists of the assets and liabilities reported
below.
<Table>
<Caption>
DECEMBER 27, DECEMBER 26,
2000 2001
------------ ------------
(In thousands)
Assets
Current assets $ 12,680 $ 27,273
Property owned, net 83,437 63,662
Property held under capital leases, net 10,791 5,808
Other assets, including deferred losses from operations 106,553 129,213
-------- --------
213,461 225,956
-------- --------
Less liabilities
Current liabilities
Current portion of obligations under capital lease 2,709 2,523
Coco's/Carrows credit facility payable to Denny's (see
Note 9) -- 51,692
Other current liabilities 81,504 37,434
-------- --------
84,213 91,649
-------- --------
Long-term liabilities
Obligations under capital lease, noncurrent 7,323 4,680
Other long-term liabilities 17,117 20,100
-------- --------
24,440 24,780
-------- --------
Total liabilities not subject to compromise 108,653 116,429
Liabilities subject to compromise 174,208 176,334
-------- --------
Total liabilities 282,861 292,763
-------- --------
Net liabilities of FRD 69,400 66,807
Denny's receivable related to Coco's/Carrows credit facility
(see Note 9) -- 51,692
-------- --------
Net liabilities of discontinued operations $ 69,400 $ 15,115
======== ========
</Table>
On December 29, 1999, we completed the sale of all of the capital stock of EPL
to American Securities Capital Partners, L.P. The disposition of EPL resulted in
a gain of approximately $15.5 million, net of taxes. In accordance with APB 30,
$5.9 million of EPL's net loss which was incurred subsequent to the date it was
identified as a discontinued operation was netted against the gain on sale in
our 1999 consolidated statements of operations and cash flows.
NOTE 4 ACQUISITIONS
In March 1999, Denny's purchased 30 operating restaurants in western New York
from Perk Development Corp., a former franchisee of Perkins Family Restaurants,
L.P. We accounted for the acquisition of these restaurants under the purchase
method of accounting. The purchase price of approximately $24.7 million,
consisting of cash of approximately $10.9 million and capital leases and other
liabilities assumed of approximately $13.8 million, exceeded the estimated fair
value of the restaurants' identifiable net assets by approximately $9.5 million.
The excess has been reflected as goodwill in our consolidated balance sheets.
During 2000, we purchased 59 Denny's franchise restaurants from Olajuwon
Holdings, Inc., or OHI, a bankrupt franchisee. The purchases were made with the
approval of the bankruptcy court and other parties having an interest in the OHI
bankruptcy estate. In addition, in 2000 we separately reacquired 3 other
restaurants from affiliated franchisees
F-14
of OHI. We accounted for the acquisitions of these units under the purchase
method of accounting. The total purchase price for the 62 restaurants of
approximately $16.2 million, which consisted of cash of approximately $4.5
million, the forgiveness of debt of $1.4 million and the assumption of capital
leases and other liabilities of $10.3 million, exceeded the estimated fair value
of the restaurants' identifiable net assets by approximately $10.0 million. This
excess has been reflected as goodwill in our consolidated financial statements.
NOTE 5 IMPAIRMENT CHARGES
Due to the presence of certain conditions at December 29, 1999, including the
then current market value of our common stock, the market discount on certain of
our debt instruments and certain operating trends, we performed an impairment
assessment of the carrying amount of the reorganization value in excess of
amounts allocated to identifiable assets, net of accumulated amortization. In
performing this analysis, we utilized a discounted future cash flow model and
recorded an impairment charge of $136.5 million, representing the difference
between the estimated fair value of Advantica resulting from the discounted cash
flow model and the carrying value of our net assets recorded at December 29,
1999 prior to recognition of impairment.
At December 27, 2000, we recorded an impairment charge of $6.4 million for
certain underperforming restaurants based on the difference between the
estimated future discounted cash flows and the carrying value of those units at
December 27, 2000. During 2001, we recorded charges of $13.6 million related to
the impairment of certain underperforming restaurants, including those
identified for closure (see Note 6). The charges were calculated based on the
difference between the estimated future discounted cash flows and the carrying
value of the units at the time of impairment.
NOTE 6 RESTRUCTURING CHARGES AND EXIT COSTS
In 2000, we began implementing senior management's plan to focus primarily on
the Denny's concept. The plan included reducing corporate-level and
out-of-restaurant staff support positions and identifying underperforming units
for closure. Consequently, during 2000, we recorded approximately $9.0 million
of severance and outplacement costs and $0.9 million of exit costs for operating
lease liabilities of closed stores. We also recorded a $2.6 million charge
related to certain acquired software and capitalized construction costs which
became obsolete as a result of cancelling projects identified under the plan.
During 2001, we identified an additional 83 underperforming Denny's restaurants
for closure. At December 26, 2001, 53 of the restaurants had been closed. The
remaining restaurants are expected to be closed or otherwise disposed of within
18 months. As a result, we recorded restructuring charges of $11.9 million which
were comprised of the following:
<Table>
(In thousands)
Property taxes $ 4,474
Future rents, net of estimated sublease income 4,156
Brokerage commissions 1,404
De-identification and maintenance costs 1,333
Severance and other costs 494
-------
$11,861
=======
</Table>
In November 2001, we eliminated approximately 90 additional out-of-restaurant
support staff positions. The related charge of $5.0 million, comprised of
approximately $4.1 million in severance and outplacement costs and $0.9 million
of operating lease liabilities and other costs, was recognized in the fourth
quarter of 2001.
Of the total $29.4 million restructuring charges we recorded in 2000 and 2001,
$27.3 million represent cash charges, including closed store exit costs of $13.7
million which will be paid out over the remaining lease terms. The remaining
cash charges of $13.6 million primarily relate to severance and outplacement
costs, of which $9.7 million has been paid through December 26, 2001. The
remaining $3.9 million is expected to be paid out by the first quarter of 2003.
Based on information currently available, we believe our remaining restructuring
liabilities are adequate and not excessive as of December 26, 2001.
F-15
NOTE 7 PROPERTY, NET
Property, net, consists of the following:
<Table>
<Caption>
DECEMBER 27, DECEMBER 26,
2000 2001
------------ ------------
(In thousands)
Property owned:
Land $ 65,738 $ 64,995
Buildings and improvements 390,993 383,599
Other property and equipment 103,286 114,344
-------- --------
Total property owned 560,017 562,938
Less accumulated depreciation 170,959 224,955
-------- --------
Property owned, net 389,058 337,983
-------- --------
Buildings and improvements, vehicles, and other equipment
held under capital leases 81,740 62,327
Less accumulated amortization 45,471 37,869
-------- --------
Property held under capital leases, net 36,269 24,458
-------- --------
$425,327 $362,441
======== ========
</Table>
NOTE 8 OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<Table>
<Caption>
DECEMBER 27, DECEMBER 26,
2000 2001
------------ ------------
(In thousands)
Accrued salaries and vacations $ 30,699 $ 30,345
Accrued insurance 17,502 15,331
Accrued taxes 11,703 10,760
Accrued interest 28,159 27,520
Other 57,410 42,662
-------- --------
$145,473 $126,618
======== ========
</Table>
F-16
NOTE 9 DEBT
Long-term debt consists of the following:
<Table>
<Caption>
DECEMBER 27, DECEMBER 26,
2000 2001
------------ ------------
(In thousands)
Notes and Debentures:
11 1/4% Senior Notes due January 15, 2008, interest
payable semi-annually $529,608 $529,608
Revolving credit facility advances outstanding, due
January 7, 2003 -- 58,700
Other notes payable, maturing over various terms to 12
years, payable in monthly or quarterly installments
with interest rates ranging from 7.5% to 12.0% (a) 3,531 3,691
Notes payable secured by equipment, maturing over various
terms up to 8 years, payable in monthly installments
with interest rates ranging from 9.0% to 11.97% (b) 3,951 2,295
Capital lease obligations (see Note 10) 50,490 40,050
-------- --------
587,580 634,344
Premium (discount), net (c):
11 1/4% Senior Notes, effective rate 10.79% 19,055 17,125
Other notes payable (1,329) (1,289)
-------- --------
Total debt 605,306 650,180
Less current maturities 11,596 5,122
-------- --------
Total long-term debt $593,710 $645,058
======== ========
</Table>
- -------------------------------------
(a) Includes notes collateralized by restaurant and other properties with a net
book value of $0.8 million at December 26, 2001.
(b) Includes notes collateralized by equipment with a net book value of $0.4
million at December 26, 2001.
(c) Upon emergence from bankruptcy on January 7, 1998, we adopted fresh start
reporting in accordance with SOP 90-7 and adjusted our liabilities to their
fair values, which resulted in our recording premiums or discounts related
to our long-term notes.
Aggregate annual maturities of long-term debt at December 26, 2001 during the
next five years and thereafter are as follows:
<Table>
<Caption>
YEAR:
- -----
(In thousands)
2002 $ 5,122
2003 63,264
2004 3,997
2005 3,415
2006 3,518
Thereafter 555,028
--------
$634,344
========
</Table>
Senior Notes
Advantica currently has outstanding $529.6 million aggregate principal amount of
Senior Notes. The Senior Notes are senior unsecured obligations of Advantica and
rank pari passu in right of payment to all senior indebtedness, including the
revolving credit facility. The Senior Notes are effectively subordinated to
Advantica's secured indebtedness, including indebtedness under the revolving
credit facility. The Senior Notes are structurally subordinated to indebtedness
under the revolving credit facility to the extent of direct obligations of
Advantica's subsidiaries, as borrowers and as subsidiary guarantors, thereunder.
Interest on the Senior Notes accrues at a rate equal to 11 1/4% per annum and is
payable semi-annually in arrears on each July 15 and January 15. They will
mature on January 15, 2008.
The Senior Notes will be redeemable, in whole or in part, at the option of
Advantica at any time on or after January 15, 2003, at a redemption price equal
to 105.625% of the principal amount thereof to and including January 14, 2004,
at 103.750% of the principal amount thereof to and including January 14, 2005,
at 101.875% of the
F-17
principal amount thereof to and including January 14, 2006, and thereafter at
100% of the principal amount thereof, together in each case with accrued
interest.
Revolving Credit Facility
Denny's, our principal operating subsidiary, is the borrower under a senior
secured revolving credit facility with JP Morgan Chase Bank and other lenders
named therein, providing Denny's with a working capital and letter of credit
facility of up to a total of $200.0 million at December 26, 2001. At December
27, 2000, we had no working capital advances outstanding under the revolving
credit facility; however, letters of credit outstanding were $65.3 million,
leaving net availability of $134.7 million. At December 26, 2001, we had working
capital advances of $58.7 million and letters of credit outstanding of $52.2
million under the facility, leaving net availability of $89.1 million. Advances
under the revolving credit facility accrue interest at a variable rate
(approximately 6.1% at December 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
our satisfaction of the Coco's/Carrows credit facility guarantee in January 2001
(as discussed below).
The revolving credit facility matures on January 7, 2003 and is generally
secured by liens on the stock of Advantica's subsidiaries, accounts receivable,
intellectual property, cash and cash accounts and our corporate headquarters in
Spartanburg, South Carolina. Advantica and its subsidiaries (exclusive of FRD
and its subsidiaries) are guarantors under the revolving credit facility. The
revolving credit facility contains covenants customarily found in credit
agreements for leveraged financings that, among other things, prohibit dividends
on capital stock and place limitations on (1) redemptions and repurchases of
capital stock; (2) prepayments, redemptions and repurchases of debt (other than
loans under the revolving credit facility); (3) liens and sale-leaseback
transactions; (4) loans and investments; (5) incurrence of debt; (6) capital
expenditures; (7) operating leases; (8) mergers and acquisitions; (9) asset
sales; (10) transactions with affiliates; (11) changes in the business conducted
by Advantica and its subsidiaries and (12) amendment of debt and other material
agreements. The revolving credit facility also contains covenants that require
Advantica and its subsidiaries on a consolidated basis to meet certain financial
ratios and tests including provisions for the maintenance of a minimum level of
interest coverage (as defined) and a minimum level of fixed charges 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. Effective October 18, 2001, we
obtained an amendment to the revolving credit facility increasing the maximum
ratio of total debt to EBITDA for the remaining term of the facility in order to
maintain covenant compliance and our continued ability to borrow under the
revolving credit facility. Also pursuant to that amendment, certain covenants
and other provisions were modified, permitting us to undertake an exchange offer
relating to our Senior Notes under certain terms and conditions. In addition, as
a result of the amendment, commitments under the revolving credit facility will
be reduced from $200.0 million to an amount not less than $150.0 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 discussed below).
We were in compliance with the terms of the revolving credit facility at
December 26, 2001. Under the most restrictive provision of the revolving credit
facility (the total debt to EBITDA ratio), we could have borrowed an additional
$14.0 million and we would still have been in compliance.
Coco's/Carrows Credit Facility
FRD's principal operating subsidiaries, Coco's and Carrows, have a $70.0 million
senior secured credit facility, which initially consisted of a $30.0 million
term loan and a $40.0 million revolving credit facility. At December 27, 2000,
the facility was guaranteed by Advantica. Coco's and Carrows obtained a waiver
of compliance from certain third quarter 2000 financial covenants from the
former lenders until January 8, 2001. On January 8, 2001, Advantica paid $70.0
million to the former lenders in full and complete satisfaction of Advantica's
guarantee of the Coco's/Carrows credit facility with a combination of cash on
hand and an advance under Denny's revolving credit facility. As a result of its
satisfaction of obligations under the guarantee, Advantica was subrogated to the
rights and collateral of the former lenders which it immediately assigned to
Denny's. Additionally, following the satisfaction of the guarantee, our ability
to make further investments in FRD became restricted in accordance with the
terms of the indenture for our Senior Notes.
F-18
At December 26, 2001, FRD's operating subsidiaries had $26.0 million of
outstanding term loan borrowings, working capital borrowings of $24.7 million
and letters of credit outstanding of $9.6 million. Denny's has deposited cash
collateral with one of Coco's and Carrows' former lenders to secure
Coco's/Carrows credit facility's outstanding letters of credit. At December 26,
2001, the balance of such deposit was $9.8 million, which is reflected in other
current assets in our consolidated balance sheets. Denny's receivable of $51.7
million, including accrued interest of $0.9 million at December 26, 2001 (see
Note 3), relates to borrowings under the Coco's/Carrows credit facility. This
receivable eliminates in consolidation, thereby reducing the net liabilities of
discontinued operations on our consolidated balance sheet at December 26, 2001.
All advances under the Coco's/Carrows credit facility due to Denny's accrue
interest at a variable rate (approximately 6.8% at December 26, 2001) based on
the prime rate. The advances are secured by substantially all of the assets of
FRD and its subsidiaries, including 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 change in their business. The
Coco's/Carrows credit facility also contains certain financial covenants
including provisions for the maintenance of a minimum level of interest
coverage, limitations on ratios of indebtedness to EBITDA and limitations on
annual capital expenditures. At December 26, 2001, FRD's operating subsidiaries
were not in compliance with certain covenants under the Coco's/ Carrows credit
facility, which constitutes an event of default under the facility. As a result
of the default, Denny's may exercise certain rights including, but not limited
to, the right to terminate commitments, declare the loans outstanding due and
payable and seek to foreclose on its collateral. It has agreed not to do so,
however, during a 120-day forbearance period under the terms of the settlement
agreement (described below) related to FRD's bankruptcy proceeding.
FRD Bankruptcy
On January 16, 2001, FRD elected not to make the scheduled interest payment (and
all subsequent interest payments to date) due on the $156.9 million aggregate
principal amount of its 12.5% senior notes due 2004, or FRD Notes. 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 United States Bankruptcy Code. For additional information concerning the FRD
Notes and the Chapter 11 filing, see Note 3.
On February 19, 2002, Advantica and Denny's, along with FRD, Coco's and Carrows,
entered into a stipulation and agreement of settlement, or settlement agreement,
with the official committee of unsecured creditors of FRD seeking to resolve
various disputes relating to the administration of FRD's pending bankruptcy
case. The bankruptcy court approved the settlement agreement on March 8, 2002.
Under the terms of the settlement agreement, Denny's will allow a 120-day
forbearance period (which commenced on March 8, 2002) during which the
creditors' committee and FRD and its operating subsidiaries shall use their best
efforts to obtain new financing to repay, at a discount, the outstanding
borrowings from Denny's (approximately $48.7 million at the date of the
settlement agreement), plus accrued but unpaid interest, fees and expenses.
During this forbearance period, the effort to sell FRD or its assets to a third
party will be suspended. If new financing sufficient to repay the outstanding
borrowings from Denny's, less a $10 million discount, is obtained by the end of
the forbearance period, Denny's will accept such discounted repayment amount in
full satisfaction of its claims against FRD and Coco's and Carrows. If FRD is
unable to obtain financing to repay this discounted repayment amount by the end
of the forbearance period, FRD shall, at the election of the creditors'
committee in lieu thereof:
- pay Denny's the proceeds of any new financing that is obtained, plus
additional cash necessary for a total cash repayment to Denny's of at
least $20 million,
- issue new junior secured notes to Denny's in a principal amount equal to
the amount of Coco's and Carrows' current obligations to Denny's, minus
the amount of any cash paid and any applicable repayment discount as
described in the settlement agreement (such junior secured notes
subordinate in right of payment and as to collateral to the new
financing), and
F-19
- issue to Denny's up to 10% of the common stock in FRD dependent upon the
amount of cash repaid to Denny's as described above.
The parties have agreed to attempt to replace the outstanding letters of credit
(approximately $9.6 million at the date of the settlement agreement) and cause
the cash deposit provided by Denny's supporting the letters of credit to be
released. If the letters of credit are not replaced, Denny's will keep them in
place and allow them to terminate in the ordinary course and will receive a
separate note payable from Coco's and Carrows to provide reimbursement if any
letters of credit are drawn upon. Advantica will continue to provide management
and information technology services pursuant to a one-year services agreement at
a cost to FRD set forth in the settlement agreement.
The settlement agreement is also conditioned upon the consent of Denny's
revolving credit facility lender. If the terms of the proposed settlement
agreement, including the financing described above, are satisfied, Advantica's
ownership of the common stock of FRD (or controlling interest in the case of the
third bullet point above) will transfer to the unsecured creditors of FRD.
In light of, among other things, the operating results and financial condition
of FRD and the uncertainties as to the outcome of the proposed settlement
agreement outlined above, there can be no assurance that we will be able to
recover any or all of the secured obligations owed to us under the
Coco's/Carrows credit facility. However, since we report FRD as a net liability
of discontinued operations in our consolidated balance sheets, we will not incur
any additional losses from the disposition of FRD (even if no amounts are
realized from the proposed settlement agreement or other disposal actions).
Fair Value of Long-Term Debt
The estimated fair value of our long-term debt (excluding capital lease
obligations) is approximately $379 million at December 26, 2001. The computation
is based on market quotations for the same or similar debt issues or the
estimated borrowing rates available to us. The decrease in the estimated fair
value of long-term debt compared to its historical cost reported in our
consolidated balance sheets at December 26, 2001 relates primarily to market
quotations for our Senior Notes.
NOTE 10 LEASES AND RELATED GUARANTEES
Our operations utilize property, facilities, equipment and vehicles leased from
others. Buildings and facilities are primarily used for restaurants and support
facilities. Restaurants are operated under lease arrangements which generally
provide for a fixed basic rent, and, in some instances, contingent rent based on
a percentage of gross revenues. Initial terms of land and restaurant building
leases generally are not less than 20 years exclusive of options to renew.
Leases of other equipment primarily consist of restaurant equipment, computer
systems and vehicles.
We lease certain owned and leased property, facilities and equipment to others.
Our net investment in direct financing leases receivable is as follows:
<Table>
<Caption>
DECEMBER 27, DECEMBER 26,
2000 2001
------------ ------------
(In thousands)
Total minimum rents receivable $18,988 $18,444
Less unearned income 7,994 7,699
------- -------
Net investment in direct financing leases
receivable 10,994 10,745
Less current portion 688 711
------- -------
Long-term direct financing leases receivable $10,306 $10,034
======= =======
</Table>
F-20
Minimum future lease payments and receipts at December 26, 2001 are as follows:
<Table>
<Caption>
CAPITAL LEASES OPERATING LEASES
------------------- -------------------
MINIMUM MINIMUM MINIMUM MINIMUM
LEASE SUBLEASE LEASE SUBLEASE
YEAR: PAYMENTS RECEIPTS PAYMENT RECEIPTS
- ----- -------- -------- -------- --------
(In thousands)
2002 $ 9,592 $ 4,193 $ 47,875 $ 20,901
2003 8,644 4,063 44,342 20,110
2004 7,633 3,848 39,701 19,624
2005 7,059 3,835 35,950 19,285
2006 6,879 3,823 32,546 18,847
Subsequent years 38,563 42,951 155,748 199,763
------- ------- -------- --------
Total 78,370 $62,713 $356,162 $298,530
======= ======== ========
Less imputed interest 38,320
-------
Present value of capital lease
obligations $40,050
=======
</Table>
The total rental expense included in the determination of loss from continuing
operations is as follows:
<Table>
<Caption>
1999 2000 2001
------- ------- -------
(In thousands)
Base rents $37,046 $47,322 $46,540
Contingent rents 8,379 6,562 6,768
------- ------- -------
$45,425 $53,884 $53,308
======= ======= =======
</Table>
Total rental expense in the above table does not reflect sublease rental income
of $14.1 million, $20.1 million and $29.8 million for 1999, 2000 and 2001,
respectively.
NOTE 11 INCOME TAXES
A summary of the provision for (benefit from) income taxes attributable to the
loss from continuing operations is as follows:
<Table>
<Caption>
1999 2000 2001
------ ------ ------
(In thousands)
Current:
Federal $ -- $ -- $ --
State, foreign and other 814 1,802 1,571
------ ------ ------
814 1,802 1,571
------ ------ ------
Deferred:
Federal -- -- --
State, foreign and other -- -- --
------ ------ ------
-- -- --
------ ------ ------
Provision for income taxes $ 814 $1,802 $1,571
====== ====== ======
The total provision for (benefit from) income taxes
related to:
Loss from continuing operations $ 814 $1,802 $1,571
Discontinued operations 445 (1,416) 321
Extraordinary item -- -- --
------ ------ ------
Total provision for income taxes $1,259 $ 386 $1,892
====== ====== ======
</Table>
F-21
The following represents the approximate tax effect of each significant type of
temporary difference giving rise to deferred income tax assets or liabilities
from continuing operations:
<Table>
<Caption>
DECEMBER 27, DECEMBER 26,
2000 2001
------------ ------------
(In thousands)
Deferred tax assets:
Deferred income $ 6,960 $ 1,748
Debt premium 7,851 7,782
Lease reserves 4,206 2,309
Self-insurance reserves 18,155 19,009
Capitalized leases 6,034 3,023
Closed store reserve 1,554 5,598
Fixed assets 23,530 45,425
Other accruals and reserves 12,631 3,882
Alternative minimum tax credit carryforwards 12,451 14,635
General business credit carryforwards 61,862 52,519
Net operating loss carryforwards 744 19,138
Less: valuation allowance (113,498) (135,550)
--------- ---------
Total deferred tax assets 42,480 39,518
--------- ---------
Deferred tax liabilities:
Intangible assets (42,480) (39,518)
--------- ---------
Total deferred tax liabilities (42,480) (39,518)
--------- ---------
Net deferred tax liability $ -- $ --
========= =========
</Table>
We have established a valuation allowance for the portion of the deferred tax
assets for which it is more likely than not that a tax benefit will not be
realized. Any subsequent reversal of the valuation allowance established in
connection with fresh start reporting on January 7, 1998 (approximately $59
million at December 26, 2001) would be applied first to reduce reorganization
value in excess of amounts allocable to identifiable assets, or reorganization
value, then to reduce other identifiable intangible assets, followed by a credit
directly to equity. In 2000, we settled all issues related to petitions we filed
with the Internal Revenue Service, or IRS, to contest federal income tax
deficiencies. As a result of the IRS settlement and the settlement and
revaluation of other income tax reserves established on January 7, 1998, in 2000
we reversed approximately $25.4 million of income tax reserves and recorded a
corresponding $23.6 million reduction in reorganization value and a $1.8 million
reduction to loss from discontinued operations. In 2001, the final computations
of the federal income taxes and interest were completed related to the IRS
settlement, and we recorded an additional $4.2 million reduction in
reorganization value. During 2001, we filed amended federal income tax returns
to forgo general business credits previously elected, which reduces the amount
of general business credit carryforwards but increases the net operating loss,
or NOL, carryforwards available to future years. These changes are reflected in
the valuation allowance.
The difference between our statutory federal income tax rate and our effective
tax rate on loss from continuing operations before discontinued operations and
extraordinary items is as follows:
<Table>
<Caption>
1999 2000 2001
---- ---- ----
Statutory tax (benefit) rate (35)% (35)% (35)%
Differences:
State, foreign, and other taxes, net of federal income tax
benefit -- 1 1
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 13 19 12
Impairment charge of excess reorganization value 18 -- --
Nondeductible wages related to the FICA tip credit and
work opportunity tax credit 1 3 --
Portion of net operating losses and unused income tax
credits resulting from of the establishment of a
valuation allowance 5 13 24
Other (2) 1 --
--- --- ---
Effective tax rate --% 2% 2%
=== === ===
</Table>
F-22
In connection with our reorganization on January 7, 1998, we realized a gain
from the extinguishment of certain indebtedness, which is not taxable since it
resulted from a reorganization under the bankruptcy code. However, in 1999 we
were required to reduce certain tax attributes related to Advantica, exclusive
of its operating subsidiaries, including (1) NOL carryforwards, (2) certain tax
credits and (3) tax bases in assets in an amount equal to such gain on
extinguishment.
At December 26, 2001, Advantica has available, on a consolidated basis, general
business credit carryforwards of approximately $53 million, most of which expire
in 2004 through 2019, and alternative minimum tax, or AMT, credit carryforwards
of approximately $15 million, which never expire. In addition, we have available
regular NOL and AMT NOL carryforwards of approximately $55 million and $104
million, respectively, which expire in 2012 through 2021. Due to our
reorganization on January 7, 1998, our ability to utilize the general business
credit carryforwards, AMT credit carryforwards, and NOL carryforwards which
arose prior to the reorganization is limited to a specified annual amount. The
annual limitation for the utilization of these carryforwards is approximately
$21 million for NOL carryforwards or $7 million for tax credits. The annual
limitation may also be increased for the recognition of certain built-in gains.
General business credits of approximately $8 million, regular NOL carryforwards
of approximately $51 million and AMT NOL carryforwards of approximately $71
million that arose subsequent to the reorganization are not subject to any
limitation as of the end of 2001, although limitations could be triggered by
future changes in Advantica stock ownership. A portion of the carryforwards may
be reduced or lost based upon the ultimate disposition of FRD's operating
subsidiaries. See also Note 19.
In connection with the acquisition of FRD's subsidiaries in May 1996, Advantica
acquired certain income tax attributes which, prior to 1999, could be used only
to offset the separate taxable income of FRD's subsidiaries. Approximately $23
million of regular NOL carryforwards are available at December 26, 2001 to
reduce the future taxable income of Advantica and its subsidiaries, subject to
certain limitations. Due to prior ownership changes of FRD's subsidiaries in
January 1994 and May 1996, our ability to utilize these carryforwards is
limited. The annual limitation for the utilization of the NOL carryforwards
which were generated after January 1994 and before May 1996 is approximately $4
million, plus the recognition of certain built-in gains. These NOL carryforwards
expire principally in 2009 through 2011. Utilization of the loss carryforwards
related to FRD's subsidiaries are also subject to our overall annual limitation
of $21 million. Advantica and FRD's subsidiaries have utilized all of these
capital loss carryforwards, including approximately $4 million utilized in 1999
and $4 million utilized in 2000 to offset capital gains recognized in those
years. A substantial portion of the carryforwards may be utilized or lost upon
the ultimate disposition of FRD's operating subsidiaries.
NOTE 12 EMPLOYEE BENEFIT PLANS
PENSION AND OTHER DEFINED BENEFIT AND CONTRIBUTION PLANS
We maintain several defined benefit plans for continuing operations which cover
a substantial number of employees. Benefits are based upon each employee's years
of service and average salary. Our funding policy is based on the minimum amount
required under the Employee Retirement Income Security Act of 1974. We also
maintain defined contribution plans.
F-23
The components of net pension cost of the pension plan and other defined benefit
plans as determined under Statement of Accounting Standards No. 87, "Employers'
Accounting for Pensions," are as follows:
<Table>
<Caption>
1999 2000 2001
------- ------- -------
(In thousands)
PENSION PLAN:
Service cost $ 758 $ 459 $ 266
Interest cost 2,700 2,608 2,713
Expected return on plan assets (3,307) (3,225) (3,051)
------- ------- -------
Net periodic benefit cost (gain) $ 151 $ (158) $ (72)
======= ======= =======
Curtailment gains $ (796) $ -- $ --
Other comprehensive loss -- 2,444 4,791
OTHER DEFINED BENEFIT PLANS:
Service cost $ 370 $ 681 $ 510
Interest cost 176 236 229
Recognized net actuarial gain 96 (1) (15)
------- ------- -------
Net periodic benefit cost $ 642 $ 916 $ 724
======= ======= =======
Curtailment loss $ 702 $ -- $ --
Other comprehensive loss -- -- 171
</Table>
Net pension and other defined benefit plan costs charged to continuing
operations for 1999, 2000 and 2001 were $0.6 million, $1.1 million and $0.9
million, respectively.
The following table sets forth the funded status and amounts recognized in our
balance sheet for our pension plan and other defined benefit plans:
<Table>
<Caption>
PENSION PLAN OTHER DEFINED BENEFIT PLANS
--------------------------- ---------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 27, DECEMBER 26,
2000 2001 2000 2001
------------ ------------ ------------ ------------
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $37,026 $37,265 $ 3,340 $ 3,692
Service cost 459 266 680 510
Interest cost 2,608 2,713 236 229
Actuarial losses (gains) (617) 1,535 (342) 856
Benefits paid (2,211) (2,099) (222) (761)
------- ------- ------- -------
Benefit obligation at end of year $37,265 $39,680 $ 3,692 $ 4,526
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $34,883 $33,081 $ -- $ --
Actual return on plan assets (182) (209) -- --
Employer contributions 591 230 222 761
Benefits paid (2,211) (2,099) (222) (761)
------- ------- ------- -------
Fair value of plan assets at end of year $33,081 $31,003 $ -- $ --
======= ======= ======= =======
RECONCILIATION OF FUNDED STATUS
Funded Status $(4,184) $(8,677) $(3,692) $(4,526)
Unrecognized losses (gains) 2,790 7,585 (531) 339
Unrecognized transition amount -- -- (1) --
------- ------- ------- -------
Net amount recognized $(1,394) $(1,092) $(4,224) $(4,187)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET CONSIST OF:
Accrued benefit liability $(3,838) $(8,327) $(4,224) $(4,358)
Accumulated other comprehensive loss 2,444 7,235 -- 171
------- ------- ------- -------
Net amount recognized $(1,394) $(1,092) $(4,224) $(4,187)
======= ======= ======= =======
</Table>
Assets held by our plans are invested in money market and other fixed income
funds as well as equity funds.
F-24
Significant assumptions used in determining net pension cost and funded status
information for all the periods shown above are as follows:
<Table>
<Caption>
1999 2000 2001
---- ---- ----
Discount rate 7.3% 7.5% 7.3%
Rates of salary progression 4.0% 4.0% 4.0%
Long-term rates of return on assets 9.5% 9.5% 9.5%
</Table>
In addition, we have defined contribution plans whereby eligible employees can
elect to contribute from 1% to 15% of their compensation to the plans. Under
these plans, we make matching contributions, subject to certain limitations.
Amounts charged to income from continuing operations under these plans
operations were $2.0 million, $2.1 million and $1.9 million for 1999, 2000 and
2001, respectively.
Stock Option Plans
We have two stock-based compensation plans as described below. We have adopted
the disclosure-only provisions of Financial Accounting Standards Board Statement
123, or SFAS 123, "Accounting for Stock Based Compensation," while continuing to
follow Accounting Principles Board Opinion No. 25, or APB 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based compensation plans. Under APB 25, because the exercise price of our
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pursuant to the plan of reorganization, and shortly after January 7, 1998, we
adopted the Advantica Restaurant Group Stock Option Plan, or the Non-Officer
Plan, and the Advantica Restaurant Group Officer Stock Option Plan, or the
Officer Plan. Effective March 15, 1999, the Non-Officer Plan and the Officer
Plan were merged together and the surviving plan's name was changed to the
Advantica Stock Option Plan, or the Advantica Plan. All participants in the
Non-Officer Plan and Officer Plan on the effective date of the plan merger
continued to be participants in the Advantica Plan and retained all options
previously issued to participants under the Officer Plan and the Non-Officer
Plan under the same terms and conditions existing at the time of grant.
The Advantica Plan permits the Compensation and Incentives Committee of the
Advantica Board to award stock options as incentives to employees of Advantica.
The committee has sole discretion to determine the exercise price, term and
vesting schedule of options awarded under such plans. A total of 7,388,888
shares of Advantica common stock are authorized to be issued under the Advantica
Plan. Under the terms of the Advantica Plan, optionees who terminate for any
reason other than cause, disability, retirement or death will be allowed 60 days
after the termination date to exercise vested options. Vested options are
exercisable for one year when termination is by a reason of disability,
retirement or death. If termination is for cause, no option shall be exercisable
after the termination date.
In addition to the Advantica Plan, we have adopted the Advantica Restaurant
Group Director Stock Option Plan, or the Director Plan, the terms of which are
substantially similar to the terms of the Advantica Plan. A total of 200,000
shares of Advantica common stock are authorized to be issued under the Director
Plan.
Under each plan, options granted to date generally vest evenly over 3 to 5
years, have a 10-year life and are issued at the market value at the date of
grant.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 and has been determined as if we had accounted for its employee stock
options granted under the fair value method of that statement. The fair value of
the stock options granted in 1999 and 2001 was estimated at the date of grant
using the Black-Scholes option pricing model. No options were granted in 2000.
We used the following weighted average assumptions for the grants:
<Table>
<Caption>
1999 2001
--------- ---------
Dividend yield 0.0% 0.0%
Expected volatility 0.72 0.95
Risk-free interest rate 6.4% 5.2%
Weighted average expected life 9.0 years 8.8 years
</Table>
F-25
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro forma
information follows:
<Table>
<Caption>
1999 2000 2001
------- ------ ------
(In millions, except per share data)
Reported net loss $(381.9) $(98.0) $(88.5)
Pro forma net loss (386.3) (99.9) (90.9)
Reported basic and diluted loss per share (9.54) (2.45) (2.21)
Pro forma basic and diluted loss per share (9.63) (2.49) (2.26)
</Table>
A summary of our stock option plans is presented below.
<Table>
<Caption>
1999 2000 2001
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
(Option amounts in thousands)
Outstanding, beginning of year 3,092 $8.32 4,768 $6.37 2,491 $4.81
Granted 2,063 3.66 -- -- 3,750 1.14
Forfeited/Expired (387) 7.50 (2,277) 8.08 (1,005) 3.99
----- ------ ------
Outstanding, end of year 4,768 6.37 2,491 4.81 5,236 2.34
===== ====== ======
Exercisable at year end 1,210 8.99 1,002 5.66 1,880 3.46
</Table>
The following table summarizes information about stock options outstanding at
December 26, 2001 (option amounts in thousands):
<Table>
<Caption>
WEIGHTED-
AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/26/01 LIFE PRICE 12/26/01 PRICE
- --------------- ----------- ----------- --------- ----------- ---------
$0.84 - 1.06 2,839 9.16 $0.93 757 $0.84
2.00 - 4.69 2,080 7.91 3.22 875 4.03
6.31 - 10.00 317 6.34 9.20 248 9.49
----- -----
5,236 1,880
===== =====
</Table>
The weighted average fair value per option of options granted during the fiscal
years ended December 29, 1999 and December 26, 2001 was $2.78 and $0.85,
respectively. No options were granted during 2000.
NOTE 13 COMMITMENTS AND CONTINGENCIES
There are various claims and pending legal actions against or indirectly
involving us, including actions concerned with civil rights of employees and
customers, other employment related matters, taxes, sales of franchise rights
and businesses and other matters. Certain of these are seeking damages in
substantial amounts. The amounts of liability, if any, on these direct or
indirect claims and actions at December 26, 2001, over and above any insurance
coverage in respect to certain of them, are not specifically determinable at
this time.
Four former Denny's restaurant managers 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.
F-26
Other proceedings are pending against us, in many cases involving ordinary and
routine claims incidental to our business, and in others presenting allegations
that are nonroutine and include compensatory or punitive damage claims. Our
ultimate legal and financial liability with respect to the matters mentioned
above and these other proceedings cannot be estimated with certainty. However,
we believe, based on our examination of these matters and our experience to
date, that the ultimate disposition of these matters will not significantly
affect our financial position or results of operations.
In conjunction with the sales of Portion-Trol Foods, Inc. and the Mother Butler
Pies division of Denny's, we entered into five-year purchasing agreements with
the acquirers under which we were required to make minimum annual purchases over
the contract terms. The purchasing agreement related to Mother Butler Pies
expired on July 31, 2001 and the purchasing agreement related to Portion-Trol
Foods, Inc. was subsequently extended to December 31, 2002.
In January 2000, we entered into an agreement with Affiliated Computer Services,
Inc., or ACS, to manage and operate our information technology for its corporate
headquarters, restaurants and field management. ACS oversees data center
operations, desktop support, data networking, help desk operations and POS
hardware maintenance. Under the agreement, including expenditures related to
FRD, we spent $11.4 million and $13.5 million in 2000 and 2001, respectively,
and anticipate spending approximately $11.9 million in 2002. The agreement
expires on April 30, 2003.
NOTE 14 WARRANTS
Pursuant to the plan of reorganization and as of January 7, 1998, Advantica is
deemed to have issued warrants to purchase, in the aggregate, 4.0 million shares
of common stock. Each warrant, when exercised, will entitle the holder to
purchase one share of common stock at an exercise price of $14.60 per share,
subject to adjustment for certain events. Such warrants may be exercised through
January 7, 2005. There were approximately 4.0 million, 4.0 million and 3.2
million warrants outstanding at December 29, 1999, December 27, 2000 and
December 26, 2001, respectively.
NOTE 15 STOCKHOLDER RIGHTS PLAN
Our Board of Directors adopted a stockholder rights plan on December 14, 1998,
which is designed to provide protection for our shareholders against coercive or
unfair takeover tactics. The rights plan is also designed to prevent an acquirer
from gaining control of Advantica without offering a fair price to all
shareholders. The rights plan was not adopted in response to any specific
proposal or inquiry to gain control of Advantica.
The rights, until exercised, do not entitle the holder to vote or receive
dividends. We have the option to redeem the rights at a price of $0.01 per
right, at any time prior to the earlier of (1) the time the rights become
exercisable or (2) December 30, 2008, the date the rights expire. Until the
rights become exercisable, they have no dilutive effect on earnings per share.
NOTE 16 LOSS PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
The calculations of our basic and diluted loss per share have been based on the
weighted average number of Advantica shares outstanding. Advantica's warrants
and options have been omitted from the calculations for all the periods
presented because they have an antidilutive effect on loss per share. Therefore,
the diluted loss per share is the same as the basic loss per share. See Notes 12
and 14 for the number of options and warrants outstanding.
NOTE 17 EXTRAORDINARY ITEM
During the first quarter of 2001, as a result of the settlement of the remaining
issues related to our former information systems outsourcing contract with IBM,
approximately $7.8 million of capital lease obligations were forgiven and an
extraordinary gain was recorded.
NOTE 18 RELATED PARTY TRANSACTIONS
We have frequently sold company-owned restaurants to former employees, including
our former executives. We received proceeds totaling $4.2 million, $49.8 million
and $13.2 million for 1999, 2000 and 2001, respectively, from the sale of
restaurants to related parties. Of those amounts, we received cash proceeds of
$2.2 million, $47.0 million and $12.4 million for 1999, 2000 and 2001,
respectively. Amounts received in 2000 included proceeds of $18.4 million, of
which $17.7 million were cash proceeds, from the sale of restaurants to former
Denny's officers.
F-27
NOTE 19 SUBSEQUENT EVENT
On March 9, 2002, President Bush signed into law H.R. 3090, the Job Creation and
Worker Assistance Act, or the Act, of 2002. The Act will allow us to carry back
alternative minimum tax, or AMT, net operating losses generated during 2001,
which will result in a cash refund of 1998 AMT taxes paid of approximately $2.7
million.
NOTE 20 QUARTERLY DATA (UNAUDITED)
The results for each quarter include all adjustments which, in our opinion, are
necessary for a fair presentation of the results for interim periods.
Nonrecurring adjustments include restructuring charges and exit costs,
impairment charges and extraordinary items. Otherwise, all adjustments are of a
normal and recurring nature.
Selected consolidated financial data for each quarter of 2000 and 2001 are set
forth below:
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(In thousands, except per share data) -------- -------- -------- --------
YEAR ENDED DECEMBER 27, 2000:
Revenue:
Company restaurant sales $267,627 $279,412 $282,619 $250,983
Franchise and license revenue 16,033 17,521 20,023 21,031
-------- -------- -------- --------
Total operating revenue 283,660 296,933 302,642 272,014
-------- -------- -------- --------
Cost of company restaurant sales:
Product costs 68,633 73,360 73,568 64,912
Payroll and benefits 109,102 110,432 111,341 96,347
Occupancy 15,941 16,341 15,359 11,670
Other operating expenses 39,364 40,972 41,848 40,697
-------- -------- -------- --------
Total costs of company restaurant sales 233,040 241,105 242,116 213,626
Franchise restaurant costs 7,189 8,419 9,014 13,378
General and administrative expenses 19,171 16,629 15,850 14,641
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 10,731 10,564 10,342 10,496
Depreciation and other amortization 27,148 28,516 28,274 27,511
Impairment charges -- -- -- 6,416
Restructuring charges and exit costs 7,248 -- -- 5,308
Gains on refranchising and other, net (4,678) (17,346) (16,315) (12,880)
-------- -------- -------- --------
Total costs and expenses 299,849 287,887 289,281 278,496
-------- -------- -------- --------
Operating (loss) income $(16,189) $ 9,046 $ 13,361 $ (6,482)
======== ======== ======== ========
Net loss $(46,475) $(19,459) $ (7,277) $(24,791)
Basic and diluted net loss per share (1.16) (0.49) (0.18) (0.62)
</Table>
F-28
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(In thousands, except per share data) -------- -------- -------- --------
YEAR ENDED DECEMBER 26, 2001:
Revenue:
Company restaurant sales $236,787 $242,122 $245,870 $224,401
Franchise and licensing revenue 21,564 22,270 24,202 22,512
-------- -------- -------- --------
Total operating revenue 258,351 264,392 270,072 246,913
-------- -------- -------- --------
Cost of company restaurant sales:
Product costs 59,672 60,435 60,504 57,110
Payroll and benefits 97,139 97,955 96,266 91,504
Occupancy 15,069 14,979 13,246 12,647
Other operating expenses 35,875 35,425 36,248 34,733
-------- -------- -------- --------
Total costs of company restaurant sales 207,755 208,794 206,264 195,994
Franchise restaurant costs 9,723 10,565 9,115 9,599
General and administrative expenses 16,030 15,031 13,608 15,511
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 7,574 7,151 7,067 6,900
Depreciation and other amortization 23,837 24,196 22,151 25,455
Impairment charges -- 8,343 -- 5,287
Restructuring charges and exit costs -- 8,495 -- 8,368
Gains on refranchising and other, net (4,400) (5,896) (1,827) (1,217)
-------- -------- -------- --------
Total operating costs and expenses 260,519 276,679 256,378 265,897
-------- -------- -------- --------
Operating (loss) income $ (2,168) $(12,287) $ 13,694 $(18,984)
======== ======== ======== ========
Loss before extraordinary item $(21,154) $(30,851) $ (4,780) $(39,537)
Net loss (13,376) (30,851) (4,780) (39,537)
Basic and diluted loss per share before extraordinary item (0.53) (0.77) (0.12) (0.98)
Basic and diluted net loss per share (0.33) (0.77) (0.12) (0.98)
</Table>
F-29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
By: /s/ RHONDA J. PARISH
---------------------------------------
RHONDA J. PARISH
Executive Vice President,
General Counsel and Secretary
Date: March 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ NELSON J. MARCHIOLI President, Chief Executive Officer and March 26, 2002
- ------------------------------------- Director (Principal Executive Officer)
(NELSON J. MARCHIOLI)
/s/ ANDREW F. GREEN Senior Vice President and March 26, 2002
- ------------------------------------- Chief Financial Officer
(ANDREW F. GREEN) (Principal Financial Officer
and Principal Accounting Officer)
/s/ CHARLES F. MORAN Director and Chairman March 26, 2002
- -------------------------------------
(CHARLES F. MORAN)
/s/ VERA K. FARRIS Director March 26, 2002
- -------------------------------------
(VERA K. FARRIS)
/s/ ROBERT E. MARKS Director March 26, 2002
- -------------------------------------
(ROBERT E. MARKS)
/s/ LLOYD I. MILLER, III Director March 26, 2002
- -------------------------------------
(LLOYD I. MILLER, III)
/s/ ELIZABETH A. SANDERS Director March 26, 2002
- -------------------------------------
(ELIZABETH A. SANDERS)
/s/ DONALD R. SHEPHERD Director March 26, 2002
- -------------------------------------
(DONALD R. SHEPHERD)
</Table>