EXHIBIT 99
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (as used in this
Exhibit 99, the "Act") provides a "safe harbor" for forward-looking statements
to encourage companies to provide prospective information about their companies,
so long as those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those discussed in the
statement. Advantica Restaurant Group, Inc. desires to take advantage of the
"safe harbor" provisions of the Act. Certain information, particularly
information regarding future economic performance, finances and management's
plans and objectives, contained or incorporated by reference in the Company's
2001 Annual Report on Form 10-K (the "Annual Report") is forward-looking. In
some cases, information regarding certain important factors that could cause
actual results to differ materially from any such forward-looking statement
appear together with such statement. The following factors, in addition to those
set forth in the Annual Report and other possible factors not listed, could also
affect our actual results and cause such results to differ materially from those
expressed in forward-looking statements:
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR OPERATIONS.
We have now and will continue to have a significant amount of indebtedness.
As of December 26, 2001, we had total indebtedness of approximately $650.2
million, and a shareholders' deficit of $339.8 million.
Our substantial indebtedness could have important consequences. For
example, it could:
o make it more difficult for us to satisfy our obligations with respect
to our indebtedness;
o require us to continue to dedicate a substantial portion of our cash
flow from operations to payments on our indebtedness, which would
reduce the availability of our cash flow to fund future working
capital, capital expenditures, acquisitions and other general
corporate purposes;
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
o restrict us from making strategic acquisitions or pursuing business
opportunities;
o place us at a competitive disadvantage compared to our competitors
that have relatively less indebtedness; and
o limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds. Failing to comply with those covenants could result in an event
of default which, if not cured or waived, could have a material
adverse effect on our business, financial condition and results of
operations.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL INCUR
SUBSTANTIALLY MORE INDEBTEDNESS, INCLUDING SECURED INDEBTEDNESS. INCURRING MORE
INDEBTEDNESS COULD INTENSIFY THE RISKS DESCRIBED ABOVE.
Subject to the restrictions in our revolving credit facility and the
indenture governing Advantica's senior notes, we may incur significant
additional indebtedness. Although the terms of the indenture governing our
senior notes and our revolving credit facility contain restrictions on the
incurrence of additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions, and additional indebtedness incurred in
compliance with these restrictions could be substantial. If new debt is added to
our current debt levels, the related risks that we and they now face could
intensify. As of December 26, 2001, we had $58.7 million of advances and $52.2
million of letters of credit outstanding under our revolving credit facility,
leaving $89.1 million of additional permitted borrowings available under our
revolving credit facility.
AS A HOLDING COMPANY, ADVANTICA DEPENDS ON UPSTREAM PAYMENTS FROM ITS OPERATING
SUBSIDIARIES.
Advantica is a holding company, which currently conducts its operations
through consolidated subsidiaries. As such, substantially all of the assets of
Advantica are owned by Advantica's subsidiaries. Accordingly, Advantica is
dependent upon dividends, loans and other intercompany transfers from its
subsidiaries to meet its debt service and other obligations. These transfers are
subject to contractual restrictions and are contingent upon the earnings of its
subsidiaries.
OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL, AND WE
MAY NOT BE ABLE TO GENERATE THE CASH REQUIRED TO SERVICE OR REPAY OUR
INDEBTEDNESS.
Our ability to pay or to refinance our indebtedness will depend upon our
future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Our historical financial results have been, and our future
financial results are expected to be, subject to substantial fluctuations. We
cannot be sure that our business will generate sufficient cash flow from
operations, that currently anticipated revenue growth and operating improvements
will be realized or that future borrowings will be available to us under our
revolving credit facility (currently set to expire in January 2003) or any
refinancing thereof in amounts sufficient to enable us to service or reduce our
indebtedness or to fund our other liquidity needs. Our ability to maintain or
increase operating cash flow will depend upon:
o consumer tastes;
o the success of our marketing initiatives and other efforts by us to
increase customer traffic in our restaurants; and
o prevailing economic conditions and other matters, many of which are
beyond our control.
If we are unable to meet our debt service obligations or fund other
liquidity needs, we may need to refinance all or a portion of our indebtedness
on or before maturity or seek additional equity capital. We cannot be sure that
we will be able to pay or refinance our indebtedness or
-2-
obtain additional equity capital on commercially reasonable terms, or at all.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS RESTRICT OR PROHIBIT OUR ABILITY
TO ENGAGE IN OR ENTER INTO A VARIETY OF TRANSACTIONS, WHICH COULD ADVERSELY
AFFECT US.
The indenture governing Advantica's senior notes contains various covenants
that limit, among other things, our ability to:
o incur additional indebtedness;
o pay dividends or make distributions or certain other restricted
payments;
o make certain investments;
o create dividend or other payment restrictions affecting restricted
subsidiaries;
o issue or sell capital stock of restricted subsidiaries;
o guarantee indebtedness;
o enter into transactions with stockholders or affiliates;
o create liens;
o sell assets and use the proceeds thereof;
o engage in sale-leaseback transactions; and
o enter into certain mergers and consolidations.
The revolving credit facility contains similar and additional restrictive
covenants, including financial maintenance requirements. These covenants could
have an adverse effect on our business by limiting our ability to take advantage
of financing, merger and acquisition or other corporate opportunities and to
fund our operations.
A BREACH OF A COVENANT IN OUR DEBT INSTRUMENTS COULD CAUSE ACCELERATION OF A
SIGNIFICANT PORTION OF OUR OUTSTANDING INDEBTEDNESS.
A breach of a covenant or other provision in any debt instrument governing
our current or future indebtedness could result in a default under that
instrument and, due to cross-default and cross-acceleration provisions, could
result in a default under our other debt instruments. In addition, our revolving
credit facility requires us to maintain certain financial ratios. Our ability to
comply with these covenants may be affected by events beyond our control, and we
cannot be sure that we will be able to comply with these covenants. Upon the
occurrence of an event of default under the revolving credit facility or any
other debt instrument, the lenders could elect to declare all amounts
outstanding to be immediately due and payable and terminate all commitments to
extend further credit. If we were unable to repay those amounts, the lenders
could proceed against the collateral granted to them, if any, to secure the
indebtedness. If the lenders under our current or future indebtedness accelerate
the payment of the indebtedness, we
-3-
cannot be sure that our assets would be sufficient to repay in full our
outstanding indebtedness.
WE MAY NOT COLLECT THE AMOUNT OWED TO US BY COCO'S AND CARROWS, AND THE OUTCOME
AND EFFECTS OF THE FRD BANKRUPTCY PROCEEDINGS ARE HIGHLY UNCERTAIN.
On January 8, 2001, Advantica paid $70.0 million to the lenders under the
Coco's/Carrows credit facility in full and complete satisfaction of Advantica's
guarantee of this facility with a combination of cash on hand and an advance
under Advantica's revolving credit facility. Coco's and Carrows are operating
subsidiaries of FRD. As a result of its satisfaction of obligations under its
guarantee, Advantica was subrogated to the rights and collateral of the lenders,
which it immediately assigned to its wholly owned subsidiary, Denny's. At
December 26, 2001, Coco's and Carrows had $26.0 million of outstanding term loan
borrowings, working capital borrowings of $24.7 million, interest payable of
$0.9 million and letters of credit outstanding of $9.6 million under their
credit facility with Denny's.
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. 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 to resolve various disputes
relating to the administration of FRD's pending bankruptcy case. For additional
information concerning this settlement agreement, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity in
Capital Resources" in this Annual Report. 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, 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. In addition, the uncertainties of the FRD
bankruptcy proceedings could have other effects on us, including the bankruptcy
of any of FRD's subsidiaries, including Coco's and Carrows, and the initiation
of litigation against us directly.
THE RESTAURANT BUSINESS IS HIGHLY COMPETITIVE.
The restaurant business is highly competitive and the competition is
expected to increase. If we are unable to compete effectively, our business will
be adversely affected. The following are important aspects of competition:
o price;
o restaurant location;
o food quality;
o quality and speed of service;
o attractiveness and repair and maintenance of facilities; and
o the effectiveness of marketing and advertising programs.
Our restaurants compete with a wide variety of restaurants ranging from
national and regional
-4-
restaurant chains (some of which have substantially greater financial resources
than we do) to locally owned restaurants. There is also active competition for
advantageous commercial real estate sites suitable for restaurants.
FOOD SERVICE BUSINESSES MAY BE ADVERSELY AFFECTED BY CHANGES IN CONSUMER TASTES,
ECONOMIC CONDITIONS AND DEMOGRAPHIC TRENDS.
Food service businesses are often adversely affected by changes in:
o consumer tastes;
o national, regional and local economic conditions; and
o demographic trends.
The performance of individual restaurants may be adversely affected by
factors such as:
o traffic patterns;
o demographic consideration; and
o the type, number and location of competing restaurants.
Multi-unit food service chains such as ours can also be materially and
adversely affected by publicity resulting from:
o poor food quality;
o illness;
o injury; and
o other health concerns or operating issues.
Dependence on frequent deliveries of fresh produce and groceries subjects
food service businesses to the risk that shortages or interruptions in supply
caused by adverse weather or other conditions could adversely affect the
availability, quality and cost of ingredients. In addition, the food service
industry in general and our results of operations and financial condition in
particular may also be adversely affected by unfavorable trends or developments
such as:
o inflation;
o increased food costs;
o labor and employee benefits costs (including increases in minimum
hourly wage and employment tax rates);
o regional weather conditions; and
-5-
o the availability of experienced management and hourly employees.
THE LOCATIONS WHERE WE HAVE RESTAURANTS MAY CEASE TO BE ATTRACTIVE AS
DEMOGRAPHIC PATTERNS CHANGE.
The success of our owned and franchised restaurants is significantly
influenced by location. Current locations may not continue to be attractive as
demographic patterns change. It is possible that the neighborhood or economic
conditions where our restaurants are located could decline in the future,
potentially resulting in reduced sales in those locations.
THERE ARE NUMEROUS RISKS RELATED TO FRANCHISING.
We have refranchised, and may continue to refranchise, a significant
portion of our company-owned restaurants. This franchising initiative may
ultimately not be successful due to a lack of franchisee interest or changing
economic conditions. In addition, even if our franchising initiative is
successful, there can be no assurance that this decision will prove advantageous
to us from an operational standpoint. The interests of franchisees might
sometimes conflict with our interests. For example, whereas franchisees are
concerned with their individual business strategies and objectives, we are
responsible for ensuring the success of the entire Denny's chain.
Franchising also presents certain financial risks for us. The family dining
industry is intensely competitive, and some of our franchisees are and will be
highly leveraged. Some of our current franchisees have recently experienced
financial difficulties. Financial problems of our franchisees adversely affect
our royalty income and the value of the Denny's brand.
NUMEROUS GOVERNMENT REGULATIONS IMPACT OUR BUSINESS.
We and our franchisees are subject to federal, state and local laws and
regulations governing, among other things:
o health;
o sanitation;
o environmental matters;
o safety;
o the sale of alcoholic beverages; and
o hiring and employment practices, including minimum wage laws.
Restaurant operations are also subject to federal and state laws that
prohibit discrimination and laws regulating the design and operation of
facilities, such as the American With Disabilities Act of 1990. The operation of
our franchisee system is also subject to regulations enacted by a number of
states and rules promulgated by the Federal Trade Commission. If we or our
franchisees fail to comply with these laws and regulations, we could be
subjected to closure, fines, penalties, and litigation, which may be costly. We
cannot predict the effect on our operations, particularly on our relationship
with franchisees, caused by the future enactment of
-6-
additional legislation regulating the franchise relationship.
NEGATIVE PUBLICITY GENERATED BY INCIDENTS AT A FEW RESTAURANTS CAN ADVERSELY
AFFECT THE OPERATING RESULTS OF OUR ENTIRE CHAIN AND THE DENNY'S BRAND.
Food safety concerns, criminal activity, alleged discrimination or other
operating issues stemming from one restaurant or a limited number of restaurants
do not just impact that particular restaurant or a limited number of
restaurants. Rather, our entire chain of restaurants is at risk from negative
publicity generated by an incident at a single restaurant. This negative
publicity can adversely affect the operating results of our entire chain and the
Denny's brand.
-7-