SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1998 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
Commission file number 0-18051
ADVANTICA RESTAURANT GROUP, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3487402
---------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
203 East Main Street
Spartanburg, South Carolina 29319-9966
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(Address of principal executive offices)
(Zip Code)
(864) 597-8000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of October 30, 1998, 40,009,889 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Advantica Restaurant Group, Inc
Statements of Consolidated Operations
(Unaudited)
Successor Company Predecessor Company
Quarter Ended Quarter Ended
September 30, 1998 October 1, 1997
-------------------- ---------------
(In thousands, except per share amounts)
Net company sales $ 438,448 $ 441,704
Franchise and licensing revenue 23,225 21,255
------ -------
Operating revenue 461,673 462,959
------- -------
Operating expenses:
Product costs 124,161 124,395
Payroll and benefits 167,600 171,847
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 34,475 ---
Depreciation and amortization of property 30,506 23,104
Amortization of other intangibles 4,587 3,703
Utilities expense 19,487 19,557
Other 88,403 86,073
------ -------
469,219 428,679
------- -------
Operating (loss) income (7,546) 34,280
Other charges:
Interest and debt expense, net
(contractual interest, net, for the
quarter ended October 1, 1997 is $58,703) 28,485 34,984
Other, net 9 836
------- ------
Loss before reorganization items and taxes (36,040) (1,540)
Reorganization items --- 11,613
------- --------
Loss before taxes (36,040) (13,153)
Provision for income taxes 500 320
----- -----
Loss from continuing operations (36,540) (13,473)
Discontinued operations:
Loss from operations of discontinued
operations, net of applicable
income tax benefit of: 1997 -- $162 --- (4,286)
------- ------
Net loss (36,540) (17,759)
Dividends on preferred stock --- (3,543)
------ ------
Net loss applicable to common shareholders $ (36,540) $ (21,302)
========= ==========
Basic and diluted per share amounts
applicable to
common shareholders:
Loss from continuing operations $ (0.91) $ (0.40)
Loss from discontinued operations --- (0.10)
------- ---------
Net loss $ (0.91) $ (0.50)
========= =========
Average outstanding and equivalent common
shares 40,010 42,434
====== ========
2
See accompanying notes
Advantica Restaurant Group, Inc
Statements of Consolidated Operations
(Unaudited)
Successor Predecessor
Company Company
--------------------------
Thirty-Eight One Week Three Quarters
Weeks Ended Ended Ended
September January 7, October 1,
30, 1998 1998 1997
-------------- ------------- --------------
(In thousands, except per share amounts)
Net company sales $ 1,233,482 $ 31,986 $ 1,328,535
Franchise and licensing revenue 64,348 1,602 60,720
-------- ----- ---------
Operating revenue 1,297,830 33,588 1,389,255
--------- ------ ---------
Operating expenses:
Product costs 340,424 8,638 371,832
Payroll and benefits 491,054 13,803 532,198
Amortization of reorganization value
in excess of amounts
allocable to identifiable assets 106,777 --- ---
Depreciation and amortization of
property 89,014 1,660 62,439
Amortization of other intangibles 10,648 24 8,035
Utilities expense 53,645 1,039 56,084
Other 248,917 (236) 269,939
-------- ---- ---------
1,340,479 24,928 1,300,527
--------- ------ ---------
Operating (loss) income (42,649) 8,660 88,728
Other charges (credits):
Interest and debt expense, net
(contractual interest, net, for the
one week ended January 7, 1998 --
$4,795; for the three
quarters ended October 1,
1997 -- $156,956) 86,109 2,669 133,237
Other, net 1,145 (313) 746
-------- ---- ---
(Loss) income before reorganization items
and taxes (129,903) 6,304 (45,255)
Reorganization items --- (714,207) 23,549
-------- -------- ------
(Loss) income before taxes (129,903) 720,511 (68,804)
Provision for (benefit from) income
taxes 1,500 (13,829) 1,674
-------- -------- ------
(Loss) income from continuing operations (131,403) 734,340 (70,478)
Discontinued operations:
Reorganization items of discontinued
operations, net of income tax
provision of $7,509 --- 48,887 ---
Loss from operations of discontinued
operations, net of applicable
income tax benefit of : 1998 -- $0; 1997
-- $190 (1,507) (1,154) (31,280)
-------- ------ --------
(Loss) income before extraordinary item (132,910) 782,073 (101,758)
Extraordinary item --- (612,845) ---
------ -------- ------
Net (loss) income (132,910) 1,394,918 (101,758)
Dividends on preferred stock --- (273) (10,631)
------ ---- ---------
Net (loss) income applicable to common
shareholders $ (132,910) $ 1,394,645 $ (112,389)
========== =========== ==========
Per share amounts applicable to common shareholders:
Basic (loss) income per share:
(Loss) income from continuing
operations $ (3.28) $ 17.30 $ (1.91)
(Loss) income from discontinued
operations (0.04) 1.13 (0.74)
Extraordinary item --- 14.44 ---
---------- ----------- ----------
Net (loss) income $ (3.32) $ 32.87 $ (2.65)
========== =========== ==========
Average outstanding and equivalent common
shares 40,005 42,434 42,434
======== ====== ======
Diluted (loss) income per share:
(Loss) income from continuing
operations $ (3.28) $ 13.32 $ (1.91)
(Loss) income from discontinued
operations (0.04) 0.87 (0.74)
Extraordinary item --- 11.11 ---
------------ ---------- ----------
Net (loss) income $ (3.32) $ 25.30 $ (2.65)
============ ========== ==========
Average outstanding and equivalent common
shares 40,005 55,132 42,434
======= ====== ======
See accompanying notes
3
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
Successor Company
September 30, Predecessor Company
1998 December 31, 1997
----- -----------------
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 259,786 $ 54,079
Receivables, less allowance for doubtful
accounts of:
1998 -- $4,299; 1997 -- $4,177 19,246 12,816
Inventories 18,532 18,161
Net assets held for sale --- 350,712
Other 18,836 44,568
Restricted investments securing
in-substance defeased debt 19,680 ---
------ -------
336,080 480,336
------- --------
Property and equipment 791,231 1,144,617
Less accumulated depreciation (90,259) (518,780)
---------- --------
700,972 625,837
---------- --------
Other Assets:
Reorganization value in excess of amounts
allocable to identifiable assets,
net of accumulated amortization of:
1998 -- $106,777 610,907 ---
Goodwill, net of accumulated amortization of:
1997 -- $8,061 --- 207,918
Other intangible assets, net of accumulated
amortization of: 1998 -- $10,648; 1997
-- $1,376 221,463 14,897
Deferred financing costs, net 27,714 56,716
Other 31,562 25,365
Restricted investments securing in-substance
defeased debt 168,103 ---
------- ---------
1,059,749 304,896
--------- ---------
Total Assets $2,096,801 $ 1,411,069
========== ===========
See accompanying notes
4
Advantica Restaurant Group, Inc.
Consolidated Balance Sheets
(Unaudited)
Successor Company Predecessor Company
September 30, 1998 December 31, 1997
------------------ -------------------
(In thousands)
Liabilities
Current Liabilities:
Current maturities of notes and
debentures $ 32,730 $ 37,572
Current maturities of capital lease
obligations 18,020 19,398
Current maturities of in-substance
defeased debt 12,165 ---
Accounts payable 82,467 103,262
Accrued salaries and vacations 50,151 55,367
Accrued insurance 33,664 34,277
Accrued taxes 35,401 25,078
Accrued interest 30,663 15,473
Other 99,842 69,405
------ ------
395,103 359,832
------- -------
Long-Term Liabilities:
Notes and debentures, less current
maturities 958,734 510,533
Capital lease obligations, less
current maturities 73,040 83,642
In-substance defeased debt, less
current maturities 174,603 ---
Deferred income taxes 5,133 10,015
Liability for self-insured claims 45,172 52,764
Other noncurrent liabilities and
deferred credits 160,510 144,333
------- -------
1,417,192 801,287
--------- -------
Total liabilities not subject to
compromise 1,812,295 1,161,119
Liabilities subject to compromise --- 1,612,400
--------- ---------
Total liabilities 1,812,295 2,773,519
--------- ---------
Shareholders' Equity (Deficit) 284,506 (1,362,450)
------- ----------
Total Liabilities and Shareholders'
Equity (Deficit) $ 2,096,801 $ 1,411,069
=========== ===========
See accompanying notes
5
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows
(Unaudited)
Successor Company Predecessor Company
Thirty-Eight ----------------------------
Weeks One Week Three Quarters
Ended Ended Ended
September 30, January 7, October 1,
(In thousands) 1998 1998 1997
----- ----- ----
Cash Flows from Operating Activities:
Net (loss) income $ (132,910) $1,394,918 $ (101,758)
Adjustments to reconcile net loss to cash
flows from operating activities:
Amortization of reorganization value in
excess of amounts
allocable to identifiable assets 106,777 --- ---
Depreciation and amortization of
property 89,014 1,660 62,439
Amortization of other intangible assets 10,648 24 8,035
Amortization of deferred financing
costs 4,981 111 5,034
Amortization of deferred gains (8,315) (218) (8,150)
Deferred income tax provision (benefit) --- (13,856) 2,092
Gain on sale of restaurants (630) (7,653) (956)
Extraordinary gain --- (612,845) ---
Noncash reorganization items --- (714,550) ---
Equity in (income) loss from
discontinued operation, net 1,507 (47,733) 31,280
Amortization of debt premium (10,714) --- ---
Write-off deferred financing costs --- --- 2,533
Other 473 (333) (2,270)
Decrease (increase) in assets:
Receivables (10,615) (2,054) 1,937
Inventories (819) 237 3,234
Other current assets (4,188) 2,457 12,430
Assets held for sale (2,869) 1,488 ---
Other assets 19,573 (1,049) (8,390)
Increase (decrease) in liabilities:
Accounts payable (15,566) (5,534) (34,518)
Accrued payroll and related (13,501) 6,199 163
Accrued taxes (15,263) (894) 2,142
Other accrued liabilities (32,113) 9,562 20,520
Other noncurrent liabilities and
deferred credits 1,848 (1,302) (4,222)
----- ------ ------
Net cash flows from operating activities
before reorganization activities (12,682) 8,635 (8,425)
------- ----- -----
Increase in liabilities from reorganization
activities:
Accrued payroll and related --- --- 627
Other accrued liabilities --- --- 2,417
------ --- -----
Net cash flows from operating activities (12,682) 8,635 (5,381)
------- ----- -----
Cash Flows from Investing Activities:
Purchase of property (33,466) (1) (26,735)
Proceeds from disposition of property 1,410 7,255 10,403
(Advances to) receipts from
discontinued operations 1,504 647 (30,574)
Proceeds from sale of discontinued
operations, net 460,424 --- ---
Purchase of investments securing
in-substance
defeased debt (201,713) ------
Proceeds from maturity of investments
securing in-substance defeased debt 14,213 --- ---
Other, net (1,695) --- 71
------ ------ ------
Net cash flows provided by (used in)
investing activities 240,677 7,901 (46,835)
------- -------- ---------
See accompanying notes
6
Advantica Restaurant Group, Inc.
Statements of Consolidated Cash Flows
(Unaudited)
Successor
Company Predecessor Company
Thirty-Eight --------------------------------
Weeks Ended One Week Three Quarters
September 30, Ended Ended
1998 January 7, 1998 October 1, 1997
----- --------------- ---------------
(In thousands)
Cash Flows from Financing Activities:
Long-term debt payments $ (26,962) $ (6,891) $ (8,942)
Deferred financing costs --- (4,971) (1,533)
------ ------ ------
Net cash flows used in financing
activities (26,962) (11,862) (10,475)
------- ------- -------
Increase (decrease) in cash and cash
equivalents 201,033 4,674 (62,691)
Cash and Cash Equivalents at:
Beginning of period 58,753 54,079 92,369
------ ------ -------
End of period $ 259,786 $58,753 $ 29,678
=========== ====== =========
See accompanying notes
7
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
Note 1. General
-------
Advantica Restaurant Group, Inc. (formerly Flagstar Companies, Inc.)
("Advantica" or, together with its subsidiaries including precedessors, the
"Company"), through its wholly-owned subsidiaries, Denny's Holdings, Inc. and
FRD Acquisition Co. (and their respective subsidiaries), owns and operates the
Denny's, Coco's, Carrows and El Pollo Loco restaurant brands. On April 1, 1998
the Company consummated the sale of Flagstar Enterprises, Inc. ("FEI"), the
wholly-owned subsidiary which had operated the Company's Hardee's restaurants
under licenses from Hardee's Food Systems ("HFS") (See Note 5). In addition, on
June 10, 1998, the Company consummated the sale of Quincy's Restaurants, Inc.
("Quincy's"), the wholly-owned subsidiary which had operated the Company's
Quincy's Family Steakhouse restaurants (See Note 5).
The consolidated financial statements of Advantica and its subsidiaries included
herein are unaudited and include all adjustments management believes are
necessary for a fair presentation of the results of operations for such interim
periods. All such adjustments are of a normal and recurring nature. The interim
consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto for the year ended December
31, 1997 and the related Management's Discussion and Analysis of Financial
Condition and Results of Operations, both of which are contained in the
Advantica Restaurant Group, Inc. 1997 Annual Report on Form 10-K (the "Advantica
10-K"). The results of operations for the 38 weeks ended September 30, 1998 and
the one week ended January 7, 1998 are not necessarily indicative of the results
for the entire fiscal year ending December 30, 1998.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Note 2. Reorganization
--------------
On January 7, 1998 (the "Effective Date"), Flagstar Companies, Inc. ("FCI") and
Flagstar Corporation ("Flagstar," and collectively with FCI, the "Debtors")
emerged from proceedings under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code") pursuant to FCI and Flagstar's Amended Joint Plan of
Reorganization dated as of November 7, 1997 (the "Plan"). On the Effective Date,
Flagstar, a wholly-owned subsidiary of FCI, merged with and into FCI, the
surviving corporation, and FCI changed its name to Advantica Restaurant Group,
Inc. The bankruptcy proceedings began when FCI, Flagstar and Flagstar Holdings,
Inc. ("Holdings") filed voluntary petitions for relief under the Bankruptcy Code
in the Bankruptcy Court for the District of South Carolina. Holdings filed its
petition on June 27, 1997, and Flagstar and FCI both filed their petitions on
July 11, 1997 (the "Petition Date"). FCI's operating subsidiaries, including
Denny's Holdings, Inc. and FRD Acquisition Co. (and their respective
subsidiaries), did not file bankruptcy petitions and were not parties to the
above mentioned Chapter 11 proceedings.
Material features of the Plan as it became effective as of January 7, 1998, are
as follows:
(a) On the Effective Date, Flagstar merged with and into FCI, the surviving
corporation, and FCI changed its name to Advantica Restaurant Group, Inc.;
(b) The following securities of FCI and Flagstar were canceled, extinguished and
retired as of the Effective Date: (i) Flagstar's 10 7/8% Senior Notes due 2002
(the "10 7/8% Senior Notes") and 10 3/4% Senior Notes due 2001 (the "10 3/4%
Senior Notes" and, collectively with the 10 7/8% Senior Notes due 2002, the "Old
Senior Notes"), (ii) Flagstar's 11.25% Senior Subordinated Debentures due 2004
(the "11.25% Debentures") and 11 3/8% Senior Subordinated Debentures due 2003
(the "11 3/8% Debentures" and, collectively with the 11.25% Senior Subordinated
Debentures due 2004, the "Senior Subordinated Debentures"), (iii) Flagstar's 10%
Convertible Junior Subordinated Debentures due 2014 (the "10% Convertible
Debentures"), (iv) FCI's $2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock (the "Old Preferred Stock") and (v) FCI's $.50 par value common
stock (the "Old Common Stock");
8
(c) Advantica had 100 million authorized shares of Common Stock (of which 40
million were issued and outstanding on the Effective Date) and 25 million
authorized shares of preferred stock (none of which are currently outstanding).
Pursuant to the Plan, 10% of the number of shares of Common Stock issued and
outstanding on the Effective Date, on a fully diluted basis, was reserved for
issuance under a new management stock option program. Additionally, 4 million
shares of Common Stock were reserved for issuance upon the exercise of new
warrants expiring January 7, 2005 that were issued and outstanding on the
Effective Date and that entitle the holders thereof to purchase in the aggregate
4 million shares of Common Stock at an exercise price of $14.60 per share (the
"Warrants");
(d) Each holder of the Old Senior Notes received such holder's pro rata portion
of 100% of Advantica's 11 1/4% Senior Notes due 2008 (the "New Senior Notes") in
exchange for 100% of the principal amount of such holders' Old Senior Notes and
accrued interest through the Effective Date;
(e) Each holder of the Senior Subordinated Debentures received each holder's pro
rata portion of shares of Common Stock equivalent to 95.5% of the Common Stock
issued on the Effective Date;
(f) Each holder of the 10% Convertible Debentures received such holder's pro
rata portion of (i) shares of Common Stock equivalent to 4.5% of the Common
Stock issued on the Effective Date and (ii) 100% of the Warrants issued on the
Effective Date; and
(g) Advantica refinanced its prior credit facilities by entering into the Credit
Facility (as defined below).
On the Effective Date, the automatic stay imposed by the Bankruptcy Code was
terminated.
In connection with the reorganization, the Company realized a gain from the
extinguishment of certain indebtedness (See Note 4). This gain will not be
taxable since the gain results from a reorganization under the Bankruptcy Code.
However, the Company will be required, as of the beginning of its 1999 taxable
year, to reduce certain tax attributes related to Advantica, exclusive of its
operating subsidiaries, including (i) net operating loss carry forwards
("NOLS"), (ii) certain tax credits and (iii) tax bases in assets in an amount
equal to such gain on extinguishment.
The reorganization of the Company on January 7, 1998 constituted an ownership
change under Section 382 of the Internal Revenue Code and therefore the use of
any of the Company's NOLS and tax credits generated prior to the ownership
change, that are not reduced pursuant to the provisions discussed above, will be
subject to an overall annual limitation of approximately $21 million for NOLS
and $7 million for tax credits.
The Company's financial statements as of December 31, 1997 have been presented
in conformity with the American Institute of Certified Public Accountants' (the
"AICPA") Statement of Position 90-7, "Financial Reporting By Entities In
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly, all
prepetition liabilities of the Debtors that are subject to compromise under the
Plan (as defined in Note 7) are segregated in the Company's Consolidated Balance
Sheet as liabilities subject to compromise. These liabilities are recorded at
the amounts allowed as claims by the Bankruptcy Court in accordance with the
Plan. In addition, SOP 90-7 requires the Company to report interest expense
during the bankruptcy proceeding only to the extent that it will be paid during
the proceedings or that it is probable to be an allowed priority, secured or
unsecured claim. Accordingly, and in view of the terms of the Plan, as of July
11, 1997, the Company ceased recording interest on its 11.25% Debentures, 11
3/8% Debentures and 10% Convertible Debentures. The contractual interest expense
for the three quarters ended October 1, 1997 and the week ended January 7, 1998
is disclosed in the accompanying Statements of Consolidated Operations.
Note 3. Fresh Start Reporting
---------------------
As of the Effective Date, Advantica adopted fresh start reporting pursuant to
the guidance provided by SOP 90-7. Fresh start reporting assumes that a new
reporting entity has been created and requires the adjustment of assets and
liabilities to their fair values as of the Effective Date in conformity with the
procedures specified by Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"). In conjunction with the revaluation of assets and
liabilities, a reorganization value for the
9
entity is determined which generally approximates the fair value of the entity
before considering debt and approximates the amount a buyer would pay for the
assets of the entity after reorganization. Under fresh start reporting, the
reorganization value of the entity is allocated to the entity's assets. If any
portion of the reorganization value cannot be attributed to specific tangible or
identified intangible assets of the emerging entity, such amount is reported as
"reorganization value in excess of amount allocable to identifiable assets."
Advantica is amortizing such amount over a five-year period. All financial
statements for any period subsequent to the Effective Date are referred to as
"Successor Company" statements, as they reflect the periods subsequent to the
implementation of fresh start reporting and are not comparable to the financial
statements for periods prior to the Effective Date.
The Company has estimated a range of reorganization value between approximately
$1,631 million and $1,776 million. Such reorganization value is based upon a
review of the operating performance of 17 companies in the restaurant industry
that offer products and services that are comparable to or competitive with the
Company's various operating concepts. Multiples were established for these
companies with respect to the following: (i) enterprise value (defined as market
value of outstanding equity, plus debt, minus cash and cash
equivalents)/revenues for the four most recent fiscal quarters; (ii) enterprise
value/earnings before interest, taxes, depreciation, and amortization for the
four most recent fiscal quarters; and (iii) enterprise value/earnings before
interest and taxes for the four most recent fiscal quarters. The Company did not
independently verify the information for the comparative companies considered in
its valuations, which information was obtained from publicly available reports.
The foregoing multiples were then applied to the Company's financial forecast
for each of its six restaurant chains or concepts. Valuations achieved in
selected merger and acquisition transactions involving comparable businesses
were used as further validation of the valuation range. The valuation also takes
into account the following factors, not listed in order of importance:
(A) The Company's emergence from Chapter 11 proceedings, pursuant to the Plan
as described herein, during the first quarter of 1998.
(B) The assumed continuity of the present senior management team.
(C) The tax position of Advantica.
(D) The general financial and market conditions as of the date of consummation
of the Plan.
The total reorganization value of $1,729 million, the midpoint of the range of
$1,631 million and the $1,776 million adjusted to reflect an enterprise value of
FEI based on the terms of the stock purchase agreement related to the
disposition thereof, includes a value attributed to shareholders' equity of $417
million and long-term indebtedness contemplated by the Plan of $1,312 million.
The results of operations in the accompanying Statement of Operations for the
week ended January 7, 1998 reflect the results of operations prior to
Advantica's emergence from bankruptcy and the effects of fresh start reporting
adjustments. In this regard, the Statement of Operations reflects an
extraordinary gain on the discharge of certain debt as well as reorganization
items consisting primarily of gains and losses related to the adjustments of
assets and liabilities to fair value. During the second quarter of 1998 the
Company substantially completed valuation studies performed in connection with
the revaluation of its assets and liabilities in accordance with fresh start
reporting.
10
The effect of the Plan and the adoption of fresh start reporting on the
Company's January 7, 1998 balance sheet are as follows:
Predecessor Adjustments Adjustments Successor
Company for for Fresh Company
January 7, 1998 Reorganization Start Reporting January 7, 1998
--------------- -------------- --------------- ---------------
(In thousands) (a) (b)
Assets
Current Assets:
Cash and cash equivalents $ 58,753 $ 58,753
Receivables, net 15,247 $ (689) 14,558
Inventories 20,424 (425) 19,999
Net assets held for sale 288,039 110,027 398,066
Other 43,670 (496) 43,174
Property and equipment, net 719,152 64,501 783,653
Other Assets:
Goodwill, net 207,820 (207,820) ---
Other intangible assets, net 12,954 216,995 229,949
Deferred financing costs, net 58,590 $ (25,218) (61) 33,311
Other 22,416 (6,684) 15,732
Reorganization value in excess of
amounts allocable to
identifiable assets --- 761,736 761,736
--------- ---------- -------- -------
$ 1,447,065 $ (25,218) $ 937,084 $2,358,931
========= ========== =========== ==========
Liabilities and Shareholders' Equity
Liabilities
Current Liabilities:
Current maturities of notes and
debentures $ 30,913 $ 30,913
Current maturities of capital
lease obligations 17,863 17,863
Accounts payable 106,678 106,678
Accrued salaries and vacations 62,648 $ 4,355 67,003
Accrued insurance 36,104 292 36,396
Accrued taxes 40,142 2,662 42,804
Accrued interest and dividends 16,652 16,652
Other 95,152 8,008 103,160
Long-Term Liabilities:
Notes and debentures, less current
maturities 510,523 $ 592,005 72,388 1,174,916
Capital lease obligations, less
current maturities 87,667 216 87,883
Deferred income taxes 5,097 5,097
Liability for self-insured claims 55,444 4,700 60,144
Other noncurrent liabilities and
deferred credits 134,187 57,908 192,095
Liabilities subject to compromise 1,613,532 (1,613,532) ---
Shareholders' Equity (1,365,537) 996,309 786,555 417,327
---------- ---------- --------- ----------
$1,447,065 $ (25,218) $ 937,084 $2,358,931
========== ========== ========= ==========
(a) To record the transactions relative to the consummation of the Plan as
described in Note 2.
(b) To record (i) the increase in the value of net assets held for sale to their
fair value based on the terms of the stock purchase agreement, (ii) the
adjustment of property, net to estimated fair value, (iii) the write-off of
unamortized goodwill and establishment of estimated fair value of other
intangible assets (primarily franchise rights and tradenames), (iv) the
establishment of reorganization value in excess of amounts allocable to
identifiable assets, (v) the increase in value of debt to reflect estimated
fair value, (vi) the recognition of liabilities associated with severance
and other exit costs, and the adjustments to self-insured claims and
contingent liabilities reflecting a change in methodology, and (vii) the
adjustment
11
to reflect the new value of common shareholders' equity based on reorganization
value, which was determined by estimating the fair value of the Company.
Note 4. Extraordinary Gain
------------------
The implementation of the Plan resulted in the exchange of the Senior
Subordinated Debentures and the 10% Convertible Debentures for 40 million shares
of Common Stock and Warrants to purchase 4 million shares of Common Stock. The
difference between the carrying value of such debt (including principal, accrued
interest and deferred financing costs of $946.7 million, $74.9 million and $25.6
million, respectively) and the fair value of the Common Stock and Warrants
resulted in a gain on debt extinguishment of $612.8 million which was recorded
as an extraordinary item.
Note 5.Dispositions of Flagstar Enterprises, Inc. and Quincy's Restaurants, Inc.
------------------------------------------------------------------------
On April 1, 1998 (the "Disposition Date"), the Company completed the sale to CKE
Restaurants, Inc. ("CKE") of all of the capital stock of FEI, which had operated
the Company's Hardee's restaurants under licenses from HFS, a wholly-owned
subsidiary of CKE, for $427 million. This amount includes the assumption by CKE
of $46 million of capital leases. Approximately $173.1 million of the proceeds
(together with $28.6 million already on deposit with respect to certain mortgage
financings as defined below) was applied to in-substance defease the 10.25%
Guaranteed Secured Bonds due 2000 (the "Spartan Mortgage Financings") of
Spardee's Realty, Inc., a wholly-owned subsidiary of FEI, and Quincy's Realty,
Inc., a wholly-owned subsidiary of Quincy's with a book value of $198.9 million
plus accrued interest of $6.9 million at April 1, 1998. The Spartan Mortgage
Financings were collateralized by certain assets of Spardee's Realty, Inc. and
Quincy's Realty, Inc. The Company replaced such collateral through the purchase
of a portfolio of United States Government and AAA rated investment securities
which were deposited with the collateral agent with respect to the Spartan
Mortgage Financings to satisfy principal and interest payments under such
Spartan Mortgage Financings through the stated maturity date in the year 2000.
Such investments are reflected in the Consolidated Balance Sheet under the
caption "Restricted investments securing in-substance defeased debt." The
Spartan Mortgage Financings are reflected in the Consolidated Balance Sheet
under the caption "In-substance defeased debt."
As a result of the adoption of fresh start reporting, as of the Effective Date
the net assets of FEI were adjusted to fair value less estimated costs of
disposal based on the terms of the stock purchase agreement. The net gain
resulting from this adjustment is reflected as "Reorganization items of
discontinued operation" in the Statements of Consolidated Operations. As a
result of this adjustment, no gain or loss on disposition is reflected in the
twelve weeks ended April 1, 1998. Additionally, the operating results of FEI
subsequent to January 7, 1998 and through the Disposition Date were reflected as
an adjustment to "Net assets held for sale" prior to the disposition. The
adjustment to "Net assets held for sale" as a result of the net loss of FEI for
the twelve weeks ended April 1, 1998 was ($2.0) million. Revenue and operating
income of FEI for the twelve weeks ended April 1, 1998 were $116.2 million and
$5.7 million, respectively.
On June 10, 1998, the Company completed the sale of all of the capital stock of
Quincy's, the wholly-owned subsidiary which had operated the Company's Quincy's
Family Steakhouse Division, to Buckley Acquisition Corporation ("BAC") for $84.7
million (subject to adjustment). This amount includes the assumption by BAC of
$4.2 million of capital leases. The resulting gain of approximately $11.9
million from such disposition is reflected as an adjustment to reorganization
value in excess of amounts allocable to identifiable assets.
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the 1997 period, the one week ended January 7, 1998 and
the 38 weeks ended September 30, 1998 to reflect FEI and Quincy's as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Revenue and operating income of the
discontinued operations for the 38 weeks ended September 30, 1998, the one week
ended January 7, 1998 and the three quarters ended October 1, 1997 were $194.9
million and $5.7 million, $12.7 million and $0.1 million, and $600.1 million and
$24.7 million, respectively. Revenue and operating income of the discontinued
operations for the quarter ended October 1, 1997 were $191.2 million and $10.0
million. There was no revenue or operating income related to discontinued
operations for the third quarter of 1998 due to the FEI disposition on April 1,
1998 and the Quincy's disposition on June 10, 1998.
12
The Company has allocated to the discontinued operations a pro-rata portion of
interest and debt expense based on a ratio of the net assets of the discontinued
operations to the Company's consolidated net assets as of the 1989 acquisition
date of Flagstar by FCI for periods prior to January 7, 1998 and based on a
ratio of the net assets of the discontinued operations to the Company's net
assets after the adoption of fresh start reporting for periods subsequent to
January 7, 1998. Such allocated interest expense (which is in addition to other
interest expense incurred by FEI and Quincy's) included in discontinued
operations for the 38 weeks ended September 30, 1998, the week ended January 7,
1998 and the three quarters ended October 1, 1997 was $3.1 million, $0.4 million
and $28.1 million, respectively. Such allocated interest expense for the quarter
ended October 1, 1997 was $5.1 million. There was no allocated interest expense
for the third quarter due to the FEI disposition on April 1, 1998 and the
Quincy's disposition on June 10, 1998.
The Consolidated Balance Sheet at December 31, 1997 presented herein has been
reclassified to include the net assets of Quincy's in Net Assets Held for Sale.
Note 6. Reorganization Items
--------------------
Reorganization items included in the accompanying Statements of Consolidated
Operations for the week ended January 7, 1998 consist of the following items:
Week Ended
January 7, 1998
--------------
(In thousands)
Net gain related to adjustments of assets and
liabilities to fair value $ (734,216)
Professional fees and other 8,809
Severance and other exit costs 11,200
--------
$ (714,207)
==========
Note 7. Liabilities Subject To Compromise
---------------------------------
Liabilities subject to compromise are obligations which were outstanding on
the Petition Date and were subject to compromise under the terms of the Plan.
December 31, 1997
-----------------
(In thousands)
10 3/4% Senior Notes due September 15, 2001, interest payable
semi-annually $ 270,000
10 7/8% Senior Notes due December 1, 2002, interest payable
semi-annually 280,025
11.25% Senior Subordinated Debentures due November 1, 2004, interest
payable semi-annually 722,411
11 3/8% Senior Subordinated Debentures due September 15, 2003, interest
payable semi-annually 125,000
10% Convertible Junior Subordinated Debentures due 2014, interest
payable semi-annually; convertible into Old Common Stock
any time prior to maturity at $24.00 per share 99,259
Accrued interest 115,705
-----------
Total liabilities subject to compromise $ 1,612,400
===========
Note 8. The Advantica Credit Facility
-----------------------------
On the Effective Date the Company entered into a credit agreement with The Chase
Manhattan Bank ("Chase") and other lenders named therein providing the Company
(excluding FRD Acquisition Co.) with a $200 million senior secured revolving
credit facility (the "Credit Facility"). In connection with the closing of the
sales of FEI and Quincy's, the Credit Facility was amended to accommodate the
sale transactions and in-substance defeasance of the Spartan Mortgage Financings
consummated in conjunction with the sale of FEI. In addition, the Credit
Facility was amended to provide the Company flexibility to reinvest the residual
sales proceeds through additional capital expenditures and/or strategic
acquisitions, as well as to modify certain other covenants and
13
financial tests affected by the sales transactions. The commitments under the
Credit Facility were not reduced as a result of the sales.
Note 9. Earnings Per Share Applicable to Common Shareholders
----------------------------------------------------
The following table sets forth the computation of basic and diluted income per
share for the week ended January 7, 1998. For all other periods the effect of
dilutive securities would decrease the loss per share and therefore basic per
share amounts are not adjusted for dilutive securities.
For the Week ended January 7, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -------
Income before discontinued operations and
extraordinary item $ 734,340
Less: Preferred stock dividends (273)
----------
Basic EPS
Income available to common shareholders 734,067 42,434 $ 17.30
========
Effect of Dilutive Securities
$2.25 Series A Cumulative Convertible Exchangeable
Preferred Stock 273 8,562
10 % Convertible Junior Subordinated Debentures due
2014 --- 4,136
------- -----
Diluted EPS
Income available to common shareholders plus assumed
conversions $ 734,340 55,132 $ 13.32
========= ====== ========
Options and warrants to purchase shares of Old Common Stock were outstanding
during the week ended January 7, 1998 but were not included in the computation
of diluted earnings per share because the related exercise prices were greater
than the average market price of the common shares. The Predecessor Company
options and warrants were effectively terminated as a result of the
reorganization of the Company (See Note 2).
Note 10. New Accounting Standards
------------------------
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"),
which provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SOP 98-1 requires capitalization of
external and internal direct costs of developing or obtaining internal-use
software as a long-lived asset and also requires training costs included in the
purchase price of computer software and costs associated with research and
development to be expensed as incurred. In April 1998, the AICPA issued
Statement of Position 98-5, " Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), which provides additional guidance on the financial reporting of
start-up costs, requiring costs of start-up activities to be expensed as
incurred.
In conjunction with the adoption of fresh start reporting upon emergence from
bankruptcy (See Note 3), the Company adopted both statements of position as of
January 7, 1998. The adoption of SOP 98-1 at January 7, 1998 resulted in the
write-off of previously capitalized direct costs of obtaining computer software
associated with research and development totaling $3.4 million. Subsequent to
the Effective Date, similar costs are being expensed as incurred. The adoption
of SOP 98-5 at January 7, 1998 resulted in the write-off of previously
capitalized pre-opening costs totaling $0.6 million. Subsequent to the Effective
Date, pre-opening costs are being expensed as incurred.
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting of Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
Comprehensive income is comprised of net income and other comprehensive income
items, such as revenues, expenses, gains and losses that under generally
accepted accounting principles
14
are excluded from net income and reflected as a component of equity. For the 38
weeks ended September 30, 1998, the one week ended January 7, 1998 and the three
quarters ended October 1, 1997, there were no differences between net income and
comprehensive income.
Note 11. Change in Fiscal Year
---------------------
Effective January 1, 1997, the Company changed its fiscal year end from December
31 to the last Wednesday of the calendar year. Concurrent with this change, the
Company changed to a four-four-five week quarterly closing calendar which is the
restaurant industry standard, and generally results in four 13-week quarters
during the year with each quarter ending on a Wednesday. As a result of the
timing of this change, the first three quarters of 1997 include more than 39
weeks of operations. Carrows and Coco's include an additional six days; Denny's
includes an additional five days; and El Pollo Loco includes an additional week.
The 1998 comparable period consisted of 39 weeks.
Note 12. Subsequent Event
----------------
On July 31, 1998 the Company extended to the holders of the New Senior Notes an
offer to purchase, on a pro rata basis, up to $100.0 million of the outstanding
New Senior Notes at a price of 100% of the principal amount thereof plus accrued
and unpaid interest (the "Net Proceeds Offer"). Such offer was extended pursuant
to the terms of the indenture governing the New Senior Notes (the "Indenture"),
which requires the Company to apply the Net Proceeds (as defined therein) from
the sale of the Hardee's and Quincy's Business Segments (as defined in the
Indenture) within 366 days of such sales to (i) an investment in another asset
or business in the same line or similar line of business, (ii) a net proceeds
offer, as defined in the Indenture, or (iii) the prepayment or repurchase of
Senior Indebtedness (as defined), or any combination thereof as the Company may
choose. The Net Proceeds Offer expired on August 31, 1998. Tendering holders had
the option to withdraw their tenders during a 30-day period ending on September
30, 1998. At the close of the withdrawal period, $42.4 million of such
securities were tendered and not withdrawn. Such securities, plus accrued and
unpaid interest of $1.1 million, were retired on October 5, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to highlight significant changes in
financial position as of September 30, 1998 and the results of operations for
the quarter ended September 30, 1998, the 38 weeks ended September 30, 1998 and
one week ended January 7, 1998, as compared to the quarter and three quarters
ended October 1, 1997. For purposes of providing a meaningful comparison of the
Company's year-to-date operating performance, the following discussion and
presentation of the results of operations for the 38 weeks ended September 30,
1998 and the one week ended January 7, 1998 will be combined and referred to as
the three quarters ended September 30, 1998. Where appropriate, the impact of
the adoption of fresh start reporting on the results of operations during this
period will be separately disclosed.
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, which reflect management's
best judgment based on factors currently known, involve risks, uncertainties,
and other factors which may cause the actual performance of Advantica and its
subsidiaries, and underlying concepts to be materially different from the
performance indicated or implied by such statements. Such factors include, among
others: competitive pressures from within the restaurant industry; the level of
success of the Company's operating initiatives and advertising and promotional
efforts, including the initiatives and efforts specifically mentioned herein;
the ability of the Company to mitigate the impact of the Year 2000 issue
successfully; adverse publicity; changes in business strategy or development
plans; terms and availability of capital; regional weather conditions; overall
changes in the general economy, particularly at the retail level; and other
factors included in the discussion below, or in Management's Discussion and
Analysis and in Exhibit 99 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1997.
15
Results of Operations
- ---------------------
Quarter Ended September 30, 1998 Compared to the Quarter ended October 1, 1997
- ------------------------------------------------------------------------------
The Company's consolidated revenue for the third quarter was nearly flat (down
0.3%) in relation to the 1997 comparable quarter. Revenue grew at the Denny's
brand, reflecting positive same-store sales growth in the quarter combined with
increased franchise revenue. El Pollo Loco ("EPL") also reported growth due to
the addition of Company-owned units and franchise revenue growth. The revenue
growth at Denny's and EPL was offset by lower revenue at Coco's and Carrows,
where fewer Company-owned units and lower same-store sales resulted in 6.3% and
10.5% declines in company sales, respectively. Overall, Advantica ended the
quarter with 40 fewer Company-owned units than at the end of the third quarter
of 1997, while franchised and licensed restaurants increased by 98 units.
The comparability of 1998 and 1997 consolidated operating expenses is
significantly affected by the impact of the adoption of fresh start reporting as
of January 7, 1998. Specifically, the amortization of reorganization value in
excess of amounts allocable to identifiable assets, which is over a five-year
period, totaled $34.5 million for the quarter ended September 30, 1998. In
addition, the adjustment of property and equipment and other intangible assets
to fair value as a result of the adoption of fresh start reporting resulted in
an estimated net increase in amortization and depreciation of approximately
$11.1 million. Excluding the effect of the estimated impact of fresh start
reporting, operating expenses decreased $5.1 million (1.2%), primarily
reflecting lower payroll and benefits costs related to improvement in actuarial
trends on workers' compensation and health benefits costs.
Excluding the impact of the adoption of fresh start reporting as discussed
above, consolidated operating income for the third quarter of 1998 increased by
$3.8 million compared to the 1997 comparable quarter as a result of the factors
noted above.
Consolidated interest and debt expense, net, totaled $28.5 million during the
third quarter of 1998 as compared with $35.0 million during the comparable 1997
period. The decrease is primarily due to a $6.6 million increase in interest
income in 1998 due to increased cash and cash equivalents available for
investment as a result of the FEI and Quincy's sales. Also contributing to the
decrease in interest expense in the 1998 period is the lower effective yield on
Company debt resulting from the revaluation of such debt to fair value at the
Effective Date in accordance with fresh start reporting.
The provision for income taxes from continuing operations for the quarter has
been computed based on management's estimate of the annual effective income tax
rate applied to loss before taxes. The Company recorded an income tax provision
reflecting an effective income tax rate of approximately 1.4% for the quarter
ended September 30, 1998 compared to a provision for the quarter ended October
1, 1997 reflecting an approximate rate of 2.4%.
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the 1997 period to reflect FEI and Quincy's as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Revenue and operating income of the
discontinued operations for the quarter ended October 1, 1997 were $191.2
million and $10.0 million. There was no revenue or operating income related to
discontinued operations for the third quarter of 1998 due to the FEI disposition
on April 1, 1998 and the Quincy's disposition on June 10, 1998.
Net loss was $36.5 million in the third quarter of 1998 as compared to a net
loss of $17.8 million for the prior year quarter primarily as a result of the
factors noted above.
16
EBITDA, as set forth below, is defined by the Company as operating income before
depreciation, amortization and charges for restructuring and impairment and is a
key internal measure used to evaluate the amount of cash flow available for debt
repayment and funding of additional investments. EBITDA is not a measure defined
by generally accepted accounting principles and should not be considered as an
alternative to net income or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. The Company's measure of EBITDA may not be
comparable to similarly titled measures reported by other companies.
Quarter Ended
September 30, 1998 October 1, 1997 (a)
------------------- --------------------
(In millions)
Denny's $ 52.9 $ 48.7
Coco's 7.6 7.9
Carrows 4.9 6.1
El Pollo Loco 5.1 4.8
Corporate and other (8.5) (6.4)
-------- --------
$ 62.0 $ 61.1
======== ========
(a) Excludes the EBITDA of Hardee's and Quincy's of $17.7 million
and $4.2 million, respectively, for comparability purposes.
Restaurant Operations:
The table below summarizes restaurant unit activity for the quarter ended
September 30, 1998.
Ending Units Ending Ending
Units Units Sold/ Units Units Units
7/1/98 Opened Closed Refranchised 9/30/98 10/1/97
------- ------- ------- ------------ ------- -------
Denny's
Company-owned units 874 15 (1) (1) 887 887
Franchised units 780 14 (1) 1 794 737(a)
Licensed units 18 -- -- -- 18 22(a)
------- ---- ---- ---- ------ ------
1,672 29 (2) -- 1,699 1,646
Coco's
Company-owned units 175 -- (15) -- 160 186
Franchised units 17 2 -- -- 19 8
Licensed units 296 3 -- -- 299 292
------- ---- ---- ---- ------ -------
488 5 (15) -- 478 486
Carrows
Company-owned units 137 -- (1) -- 136 153
Franchised units 18 -- (2) -- 16 3
------- ---- ------- ---- ----- ---
155 -- (3) -- 152 156
El Pollo Loco
Company-owned units 100 -- -- -- 100 97
Franchised units 154 3 -- -- 157 143
Licensed units 4 -- -- -- 4 4
------ ---- ------ ----- ------ ------
258 3 -- -- 261 244
------ ---- ------ ----- ------ ------
2,573 37 (20) -- 2,590 2,532
====== ==== ====== ===== ====== ======
(a) Certain units have been reclassified to conform to the 1998 presentation.
17
Denny's
- -------
Quarter Ended
September 30, October 1, %
1998 1997 Increase/(Decrease)
---- ----- ----------------
($ in millions, except average unit and
same-store data)
U.S. systemwide sales $ 523.1 $ 493.9 5.9
======= ========
Net Company sales $ 297.0 $ 292.0 1.7
Franchise and licensing revenue 18.0 16.1 11.8
----- ----
Total revenue 315.0 308.1 2.2
----- -----
Operating expenses:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 19.8 --- NM
Other 284.4 275.7 3.2
------ ------
Total operating expenses 304.2 275.7 10.3
----- ------
Operating income $ 10.8 $ 32.4 (66.7)
======= ========
Average unit sales
Company-owned $ 338,500 $ 326,200 3.8
Franchised $ 294,400 $ 284,500 3.5
Same-store data (Company-owned)
Same-store sales increase (decrease) 2.6% (5.8%)
Average guest check $5.84 $5.60 4.3
NM = Not Meaningful
Denny's net company sales for the quarter increased $5.0 million over the prior
year comparable quarter. This included an $8.6 million increase resulting from a
2.6% increase in same-store sales compared to last year. Sales benefited from
positive customer response to Denny's highly successful "All Star Slams" and
"Major League Burgers" promotions. Partially offsetting the sales increase was a
$2.9 million decrease in revenue due to fewer Company-owned units than last
year. As the quarter ended, however, Denny's acquired 13 units in Texas and
began the fourth quarter with the same number of Company-owned units as last
year. Franchise and licensing revenue increased $1.9 million, up 11.8% over last
year. Denny's continues to grow the brand, adding 14 franchised units in the
third quarter and 57 franchised units since the same period last year. The
increased franchising revenue reflects the Company's strategy to grow its
franchise store base.
The comparability of 1998 and 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$19.8 million for the current year period. In addition, the adjustment of
property and equipment and other intangible assets to fair value resulted in an
estimated increase in amortization and depreciation of approximately $9.1
million. Excluding the estimated effect of fresh start reporting, operating
expenses decreased $0.4 million (0.1%), reflecting an increase in product costs
associated with increased revenues and an increase in labor costs driven by the
minimum wage increases, offset by improvements in actuarial trends on workers'
compensation and health benefits costs.
Excluding the estimated impact of fresh start reporting, Denny's operating
income for the 1998 quarter increased by $7.3 million compared to the prior year
quarter as a result of the factors noted above.
18
Quarter Ended %
September 30, 1998 October 1, 1997 Increase/(Decrease)
----------------- --------------- -------------------
($ in millions, except average unit and
same-store data)
U.S. systemwide sales $ 70.0 $ 71.5 (2.1)
======= =======
Net Company sales $ 63.9 $ 68.2 (6.3)
Franchise and licensing revenue 1.0 1.1 (9.1)
----- ------
Total revenue 64.9 69.3 (6.3)
----- ------
Operating expenses:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 5.5 --- NM
Other 62.2 65.6 (5.2)
------ ------
Total operating expenses 67.7 65.6 3.2
------ ------
Operating (loss) income $ (2.8) $ 3.7 NM
======== =======
Average unit sales
Company-owned $ 369,900 $366,500 0.9
Franchised $ 340,500 $441,700 (22.9)
Same-store data (Company-owned)
Same-store sales (decrease) increase (1.6%) 2.7%
Average guest check $6.73 $6.79 (0.9)
NM = Not Meaningful
Coco's net company sales for the quarter decreased $4.3 million (6.3%) compared
to the prior year comparable quarter. This decrease reflects a 13-unit decrease
in the number of Company-owned restaurants (excluding 13 units disposed of on
September 30, 1998) and a 1.6% decrease in same-store sales. The decrease in
same-store sales is due to a decrease in average guest check, reflecting the
impact of promotions of certain popular menu items at value prices during the
period, somewhat offset by menu price increases instituted in February 1998 in
response to minimum wage increases. Franchise and foreign licensing revenue
decreased $0.1 million for the third quarter of 1998 as compared to the third
quarter of 1997, reflecting a stronger dollar versus the yen. This decline was
partially offset by the net increase of eleven domestic franchised units and
seven foreign licensed units over the prior year quarter. The stronger dollar
versus the yen and the increase in the number of franchised units (the
calculation for the prior year reflected only eight franchised units) also
explain the large variance in franchise average unit sales.
The comparability of 1998 to 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled $5.5
million for the quarter ended September 30, 1998. In addition, the adjustment of
property and equipment and other intangible assets to fair value resulted in an
estimated increase in amortization and depreciation of $0.8 million. Excluding
the estimated impact of fresh start reporting, operating expenses decreased $4.2
million (6.4%), reflecting the effect of the 13-unit decrease in Company-owned
restaurants.
Excluding the estimated impact of the adoption of fresh start reporting, Coco's
operating income for the third quarter of 1998 decreased $0.2 million from the
prior year comparable quarter as a result of the factors noted above.
19
Carrows
- -------
Quarter Ended %
September 30, 1998 October 1, 1997 Increase/(Decrease)
------------------ --------------- -------------------
($ in millions, except average unit and
same-store data)
U.S. systemwide sales $ 51.7 $ 53.7 (3.7)
======= =======
Net Company sales $ 46.9 $ 52.4 (10.5)
Franchise and licensing revenue 0.2 0.1 100.0
-------- -------
Total revenue 47.1 52.5 (10.3)
-------- -------
Operating expenses:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 4.3 --- NM
Other 46.3 49.5 (6.5)
------- -------
Total operating expenses 50.6 49.5 2.2
------- -------
Operating (loss) income $ (3.5) $ 3.0 NM
======= =======
Average unit sales
Company-owned $343,000 $ 339,500 1.0
Franchised $274,400 NM
Same-store data (Company-owned)
Same-store sales increase (decrease) (2.1%) (0.3%)
Average guest check $6.38 $6.52 (2.1)
NM = Not Meaningful
Carrows' net company sales for the quarter decreased $5.5 million (10.5%) as
compared to the prior year comparable quarter. This decrease reflects a 17-unit
decrease in the number of Company-owned restaurants, 13 of which were converted
to franchise units, and a 2.1% decrease in same-store sales. The decrease in
same-store sales is largely due to a decrease in average guest check partially
offset by an increase in customer traffic. The increase in customer traffic
reflects the positive impact of promotions of certain popular menu items at
value prices during the period. Such promotions also resulted in a lower average
guest check, which was somewhat offset by the effect of menu price increases
instituted in February 1998 in response to minimum wage increases. Franchise
revenue increased $0.1 million for the third quarter of 1998 as compared to the
third quarter of 1997, reflecting the addition of 13 franchised units over the
prior year quarter.
The comparability of 1998 to 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled $4.3
million for the quarter ended September 30, 1998. In addition, the adjustment of
property and equipment and other intangible assets to fair value resulted in an
estimated increase in amortization and depreciation of $0.5 million. Excluding
the estimated impact of fresh start reporting, operating expenses decreased $3.7
million (7.5%), reflecting the effect of the 17-unit decrease in Company-owned
restaurants.
Excluding the estimated impact of the adoption of fresh start reporting,
Carrows' operating income for the third quarter of 1998 decreased $1.7 million
as compared to the prior year comparable quarter as a result of the factors
noted above.
20
El Pollo Loco
-------------
Quarter Ended %
September 30, 1998 October 1, 1997 Increase/(Decrease)
--------------------- --------------- -------------------
($ in millions, except average unit and
same-store data)
U.S. systemwide sales $ 64.8 $ 61.2 5.9
======= ========
Net Company sales $ 30.5 $ 29.2 4.5
Franchise and licensing revenue 4.1 3.9 5.1
-------- ---------
Total revenue 34.6 33.1 4.5
-------- ---------
Operating expenses:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 2.9 --- NM
Other 31.1 29.6 5.1
------- ----------
Total operating expenses 34.0 29.6 14.9
------- ----------
Operating income $ 0.6 $ 3.5 (82.9)
======= =======
Average unit sales
Company-owned $ 305,200 $309,200 (1.3)
Franchised $ 220,200 $224,500 (1.9)
Same-store data (Company-owned)
Same-store sales increase (decrease) (1.2%) 1.9%
Average guest check $6.95 $6.69 3.9
NM = Not Meaningful
El Pollo Loco's net company sales increased $1.3 million (4.5%) during the 1998
quarter as compared with the prior year quarter, primarily due to the addition
of three Company-owned units over the prior year quarter. The increase in
revenue related to the additional units was somewhat offset by lower same-store
sales. The decline in same-store sales reflects lower guest counts, which were
offset by an increase in average guest check resulting from menu pricing
increases implemented in response to minimum wage increases. Franchise and
licensing revenue increased by $0.2 million (5.1%) to $4.1 million, reflecting
14 additional franchised units in the 1998 quarter compared to the 1997 quarter
end. El Pollo Loco added three franchise units during the 1998 quarter, which is
consistent with the Company's strategy to grow through franchising.
The comparability of 1998 to 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled $2.9
million for the 1998 quarter. In addition, the adjustment of property and
equipment and other intangible assets to fair value resulted in an estimated
increase in amortization and depreciation of approximately $0.6 million.
Excluding the estimated impact of fresh start accounting, operating expenses
increased approximately $0.9 million (3.0%) compared to the 1997 quarter. Such
increase reflects the addition of three Company-owned units.
Excluding the estimated impact of the adoption of fresh start reporting, El
Pollo Loco's operating income for the 1998 quarter increased by $0.6 million
compared to the prior year quarter as a result of the factors noted above.
21
Results of Operations
Three Quarters Ended September 30, 1998 Compared to Three Quarters Ended
October 1, 1997
The Company's consolidated revenue for the three quarters ended September 30,
1998 decreased by $57.8 million (4.2%) as compared with the 1997 comparable
period. The revenue decrease is partially attributable to an estimated $32.6
million impact due to fewer reporting days in the 1998 period versus the 1997
comparable period because of the change in the Company's fiscal year end in
1997. Excluding the impact of fewer days in the 1998 reporting period, revenue
for the 1998 quarter decreased $25.2 million compared to the prior year quarter.
This decrease is principally due to a 40-unit decrease in Company-owned units
(excluding the impact of the FEI and Quincy's dispositions) resulting primarily
from refranchising activity, whereby the Company has sold Company units to
franchisees as part of its strategy to optimize its portfolio of Company-owned
and franchised restaurants. Denny's posted positive same-store sales for the
period, although the Company's other concepts experienced declines. The decrease
in Company sales is partially offset by a $5.2 million (8.6%) increase in
franchise and licensing revenue attributed to a 98-unit increase in franchised
and licensed units reflecting the Company's strategy to grow through
franchising. The 98-unit increase results primarily from an increase in the
number of franchised units and includes 57 additional franchised units in
Denny's, 11 in Coco's, 13 in Carrows and 14 in El Pollo Loco.
The comparability of 1998 and 1997 consolidated operating expenses is
significantly affected by the impact of the adoption of fresh start reporting as
of January 7, 1998. Specifically, the amortization of reorganization value in
excess of amounts allocable to identifiable assets, which is over a five-year
period, totaled $106.8 million for the 38 weeks ended September 30, 1998. In
addition, the adjustment of property and equipment and other intangible assets
to fair value as a result of the adoption of fresh start reporting resulted in
an estimated increase in amortization and depreciation of approximately $32.6
million. Excluding the effect of the estimated impact of fresh start reporting,
operating expenses decreased $74.5 million (5.7%), primarily reflecting the
effect of fewer reporting days than in the prior year comparable period, food
cost controls, the 40-unit decrease in Company-owned restaurants, improvement in
actuarial trends for workers' compensation and health benefits costs and an
increase of $7.6 million in gains on sales of units which are reflected as a
reduction of operating expenses.
Excluding the estimated impact of the adoption of fresh start reporting as
discussed above, consolidated operating income for the three quarters ended
September 30, 1998 increased by $16.7 million compared to the 1997 comparable
period as a result of the factors noted above.
Consolidated interest and debt expense, net, totaled $88.8 million during the
three quarters ended September 30, 1998 as compared with $133.2 million during
the comparable 1997 period. The decrease is primarily due to the significant
reduction in debt resulting from the implementation of the Plan which became
effective on January 7, 1998 and a $12.0 million increase in interest income in
1998 due to increased cash and cash equivalents available for investment as a
result of the FEI and Quincy's sales. Also contributing to the decrease in
interest expense in the 1998 period is the lower effective yield on Company
debt resulting from the revaluation of such debt to fair value at the Effective
Date in accordance with fresh start reporting, largely offset by the effect of
the allocation of $28.1 million of interest expense to discontinued operations
in the prior year period in comparison to $3.5 million in the current year
period.
Reorganization items include professional fees and other expenditures incurred
by the Company in conjunction with the reorganization as well as the impact of
adjusting assets and liabilities to fair value in accordance with SOP 90-7 as
discussed in Note 3 to the consolidated financial statements included herein.
The provision for (benefit from) income taxes from continuing operations for the
38-week period has been computed based on management's estimate of the annual
effective income tax rate applied to loss before taxes. The Company recorded an
income tax provision reflecting an effective income tax rate of approximately
1.2% for the 38 weeks ended September 30, 1998 compared to a provision for the
1997 39-week period reflecting an approximate rate of 2.4%. The benefit from
income taxes from continuing operations for the one-week period ended January 7,
1998 of approximately $13.8 million includes adjustments of approximately $12.5
million of various tax accruals. The remaining benefit of approximately $1.3
million relates to the tax effect of the revaluation of certain Company assets
and liabilities in accordance with fresh start accounting.
22
The extraordinary gain is due to the implementation of the Plan which resulted
in the exchange of the Senior Subordinated Debentures and the 10% Convertible
Debentures for 40 million shares of Common Stock and Warrants to purchase 4
million shares of Common Stock. The difference between the carrying value of
such debt (including principal, accrued interest and deferred financing costs)
and the fair value of the Common Stock and Warrants resulted in a gain on debt
extinguishment of $612.8 million which was recorded as an extraordinary item.
The Statements of Consolidated Operations and Cash Flows presented herein have
been reclassified for the 1997 period to reflect FEI and Quincy's as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Revenue and operating income of the
discontinued operations for the three quarters ended September 30, 1998 and the
three quarters ended October 1, 1997 were $207.6 million and $5.8 million and
$600.1 million and $24.7 million, respectively. The operating results of FEI
subsequent to January 7, 1998 and through the disposition date were reflected as
an adjustment to "Net assets held for sale" prior to the disposition. The
adjustment to "Net assets held for sale" as a result of the net loss of FEI for
the twelve weeks ended April 1, 1998 was ($2.0) million. Revenue and operating
income of FEI for the twelve weeks ended April 1, 1998 were $116.2 million and
$5.7 million, respectively.
Net income was $1,262.0 million for the three quarters ended September 30, 1998
as compared to a net loss of ($101.8) million for the prior year comparable
period primarily as a result of the adoption of fresh start reporting and the
extraordinary gain discussed above.
EBITDA, as set forth below, is defined by the Company as operating income before
depreciation, amortization and charges for restructuring and impairment and is a
key internal measure used to evaluate the amount of cash flow available for debt
repayment and funding of additional investments. EBITDA is not a measure defined
by generally accepted accounting principles and should not be considered as an
alternative to net income or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. The Company's measure of EBITDA may not be
comparable to similarly titled measures reported by other companies.
(In millions) Three Quarters Ended
September 30, 1998 October 1, 1997 (a)
------------------ --------------------
Denny's $ 138.3 $ 125.8
Coco's 26.0 25.8
Carrows 15.7 18.8
El Pollo Loco 16.6 14.5
Corporate and other (22.5) (25.7)
-------- ---------
$ 174.1 $ 159.2
========= =========
(a) Excludes the EBITDA of Hardee's and Quincy's of $48.2 million and $13.0
million, respectively, for comparability purposes.
23
Restaurant Operations:
Denny's
- -------
Three Quarters Ended
September 30, October 1, %
1998 1997 Increase/(Decrease)
------------- ---------- -------------------
($ in millions, except average unit and
same-store data)
U.S. systemwide sales $ 1,463.6 $ 1,445.1 1.3
========= =========
Net Company sales $ 843.7 $ 873.4 (3.4)
Franchise and licensing revenue 50.8 46.2 10.0
---- -----
Total revenue 894.5 919.6 (2.7)
----- ------
Operating expenses:
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 57.8 -- NM
Other 821.2 833.1 (1.4)
----- ------
Total operating expenses 879.0 833.1 5.5
----- ------
Operating income $ 15.5 $ 86.5 (82.1)
======= =======
Average unit sales
Company-owned $ 962,200 $ 978,100 (1.6)
Franchised $ 822,200 $ 827,000 (0.6)
Same-store data (Company-owned)
Same-store sales increase (decrease) 0.3% (4.6%)
Average guest check $5.81 $5.51 5.4
NM = Not Meaningful
Denny's net company sales decreased by $29.7 million (3.4%) during the three
quarters ended September 30, 1998 compared to the prior year comparable period.
The decrease primarily reflects a $21.7 million impact resulting from five fewer
reporting days in the first quarter of 1998 in comparison to the prior year
comparable period and a $9.6 million decrease associated with 13 fewer
Company-owned units (excluding the impact of 13 units acquired on September 30,
1998). This was partially offset by $3.4 million additional sales at
Company-owned units as year-to-date same-store sales turned positive due to
strong third-quarter sales increases. The increase in same-store sales has
resulted from an increase in Denny's average guest check due to successful
promotions of higher-priced menu items as well as price increases initiated to
keep pace with minimum wage and other costs increases. Franchise and licensing
revenue increased $4.6 million, up 10% over last year. The increased franchising
revenue reflects the Company's strategy to grow its franchise store base,
including the sale of Company-owned units to franchisees to stimulate such
growth. Denny's has added 54 franchised stores so far this year, a growth pace
similar to 1997 when Denny's opened a record 77 franchise units.
The comparability of 1998 and 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$57.8 million for the 38 weeks ended September 30, 1998. In addition, the
adjustment of property and equipment and other intangible assets to fair value
resulted in an estimated increase in amortization and depreciation of
approximately $26.5 million. Excluding the estimated effect of fresh start
reporting, operating expenses decreased $38.4 million (4.6%), primarily
reflecting the effect of five fewer reporting days, fewer Company-owned units,
improvements in actuarial trends for workers' compensation and health benefits
costs and an increase of $7.4 million in gains on sales of units which are
reflected as a reduction of operating expenses.
Excluding the estimated impact of fresh start reporting, Denny's operating
income for the three quarters ended September 30, 1998 increased by $13.3
million over the prior year comparable period as a result of the factors noted
above.
24
Coco's
- ------
Three Quarters Ended %
September 30, 1998 October 1, 1997 Increase/(Decrease)
---------------- --------------- ------------------
($ in millions, except average unit and same-store data)
U.S. systemwide sales $ 210.4 $ 214.8 (2.0)
===== =========
Net Company sales $ 193.2 $ 206.7 (6.5)
Franchise and licensing revenue 2.7 3.1 (12.9)
--------- ---------
Total revenue 195.9 209.8 (6.6)
--------- ---------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 16.2 --- NM
Other 184.7 196.4 (6.0)
--------- ---------
Total operating expenses 200.9 196.4 2.3
--------- ---------
Operating (loss) income $ (5.0) $ 13.4 NM
======== ========
Average unit sales
Company-owned $1,115,600 $1,119,400 (0.3)
Franchised $1,005,000 $1,323,900 (24.1)
Same-store data (Company-owned)
Same-store sales decrease (0.8%) 0.1%
Average guest check $6.96 $6.70 3.9
NM = Not Meaningful
Coco's net company sales for the three quarters ended September 30, 1998
decreased $13.5 million (6.5%) as compared to the prior year comparable period.
The decrease includes a $4.8 million impact due to six fewer reporting days
compared to the prior year comparable period. The remaining decrease reflects a
13-unit decrease in the number of Company-owned restaurants (excluding the 13
units disposed of on September 30, 1998) and a slight decrease in same-store
sales. The decrease in same-store sales is due to a decrease in customer traffic
offset by an increase in average guest check. The increase in average guest
check resulted from menu price increases instituted in August 1997 and February
1998 in response to minimum wage increases. Franchise and foreign licensing
revenue decreased $0.4 million (12.9%) for the three quarters ended September
30, 1998 as compared to the prior year comparable period, resulting primarily
from a stronger dollar versus the yen. This decline was partially offset by the
net increase of eleven domestic franchised units and seven foreign licensed
units over the prior year. The stronger dollar versus the yen and the increase
in the number of franchised units (the calculation for the prior year reflected
only eight franchised units) also explain the large variance in franchise
average unit sales.
The comparability of 1998 to 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$16.2 million for the three quarters ended September 30, 1998. In addition, the
adjustment of property and equipment and other intangible assets to fair value
resulted in an estimated increase in amortization and depreciation of $2.4
million. Excluding the estimated impact of fresh start reporting, operating
expenses decreased $14.1 million (7.2%), reflecting the effect of six fewer
reporting days than in the prior year comparable period, the 13-unit decrease in
Company-owned restaurants and the impact of cost reduction programs implemented
to increase operating margins.
Excluding the estimated impact of the adoption of fresh start reporting, Coco's
operating income for the three quarters ended September 30, 1998 increased $0.2
million compared to the prior year comparable period as a result of the factors
noted above.
25
Carrows
Three Quarters Ended %
September 30, 1998 October 1, 1997 Increase/(Decrease)
------------------ --------------- ------------------
($ in millions, except average unit and same-store data)
U.S. Systemwide sales $ 154.5 $ 163.4 (5.4)
======= ========
Net Company sales $ 140.7 $ 161.2 (12.7)
Franchise and licensing revenue 0.7 0.2 NM
------- -------
Total revenue 141.4 161.4 (12.4)
------- -------
Operating expenses:
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 12.9 --- NM
Other 137.2 152.5 (10.0)
------- -------
Total operating expenses 150.1 152.5 (1.6)
------- -------
Operating (loss) income $ (8.7) $ 8.9 NM
======= =======
Average unit sales
Company-owned $1,024,000 $ 1,028,400 (0.4)
Franchised $ 850,200 NM
Same-store data (Company-owned)
Same-store sales increase (decrease) (1.6%) (1.5%)
Average guest check $6.69 $6.46 3.6
NM = Not Meaningful
Carrows' net company sales decreased $20.5 million (12.7%) for the three
quarters ended September 30, 1998 as compared to the prior year comparable
period. The decrease reflects a $3.8 million impact due to six fewer reporting
days compared to the prior year. The remaining decrease reflects a 17-unit
decrease in the number of Company-owned restaurants, 13 of which were converted
to franchise units, and a decrease in same-store sales. The decrease in
same-store sales is largely due to a decrease in customer traffic partially
offset by an increase in average guest check. The increase in average guest
check resulted from menu price increases instituted in July 1997 and February
1998 in response to minimum wage increases. Franchise revenue increased $0.5
million for the three quarters ended September 30, 1998 as compared to the prior
year comparable period. This increase resulted from the addition of 13
franchised units over the prior year quarter.
The comparability of 1998 to 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled
$12.9 million for the three quarters ended September 30, 1998. In addition, the
adjustment of property and equipment and other intangible assets to fair value
resulted in an estimated increase in amortization and depreciation of $1.7
million. Excluding the estimated impact of fresh start reporting, operating
expenses decreased $17.0 million (11.1%), reflecting the effect of six fewer
reporting days than in the prior year comparable
period and the 17-unit decrease in Company-owned restaurants.
Excluding the estimated impact of the adoption of fresh start reporting,
Carrows' operating income for the three quarters ended September 30, 1998
decreased $3.0 million from the prior year comparable quarter as a result of the
factors noted above.
26
El Pollo Loco
Three Quarters Ended %
September 30, 1998 October 1, 1997 Increase/(Decrease)
------------------ --------------- ------------------
($ in millions, except average unit and same-store data)
U.S. Systemwide sales $ 183.3 $ 177.8 3.1
========= ========
Net Company sales $ 87.7 $ 87.3 0.5
Franchise and licensing revenue 11.8 11.2 5.4
--------- ---------
Total revenue 99.5 98.5 1.0
--------- ---------
Operating expenses:
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 8.2 --- NM
Other 88.3 87.9 0.5
--------- ---------
Total operating expenses 96.5 87.9 9.8
--------- ---------
Operating income $ 3.0 $ 10.6 NM
======== =======
Average unit sales
Company-owned $883,200 $921,000 (4.1)
Franchised $636,600 $667,700 (4.7)
Same-store data (Company-owned)
Same-store sales increase (decrease) (2.0%) 0.0%
Average guest check $6.90 $6.69 3.1
NM = Not Meaningful
El Pollo Loco's net company sales increased $0.4 million (0.5%) during the three
quarters ended September 30, 1998 compared with the prior year comparable
period. The increase is primarily driven by the addition of three units in the
current year, somewhat offset by a $2.3 million impact due to seven fewer
reporting days in the current period compared to the prior year and a decline in
same-store sales. The decline in same-store sales reflects lower customer
counts, partially offset by an increase in the average guest check resulting
from menu price increases implemented in response to minimum wage increases.
Franchise and licensing revenue increased $0.6 million (5.4%), reflecting 14
additional franchise units in 1998 compared to 1997.
The comparability of 1998 to 1997 operating expenses is significantly affected
by the impact of the adoption of fresh start reporting as of January 7, 1998.
Specifically, the amortization of reorganization value in excess of amounts
allocable to identifiable assets, which is over a five-year period, totaled $8.2
million for the 38 weeks ended September 30, 1998. In addition, the adjustment
of property and equipment and other intangible assets to fair value resulted in
an estimated increase in amortization and depreciation of approximately $1.9
million. Excluding the estimated impact of fresh start accounting, operating
expenses decreased $1.5 million (1.7%) compared to 1997, reflecting fewer
reporting days in the current period and aggressive food cost controls. This
decrease also reflects a $0.7 million nonrecurring insurance recovery recorded
in the current year period as a reduction to operating expenses.
Excluding the estimated impact of the adoption of fresh start reporting, El
Pollo Loco's operating income for the three quarters ended September 30, 1998
increased by $2.5 million compared to the prior year period as a result of the
factors noted above.
Liquidity and Capital Resources
- --------------------------------
On the Effective Date the Company entered into a credit agreement with The Chase
Manhattan Bank ("Chase") and other lenders named therein providing the Company
(excluding FRD Acquisition Co. ("FRD")) with a $200 million senior secured
revolving credit facility (the "Credit Facility"). In connection with the
closing of the sales of FEI and Quincy's, the Credit Facility was amended to
accommodate the sale transactions and in-substance defeasance of the Spartan
Mortgage Financings associated with the FEI disposition. In addition, the Credit
Facility was amended to provide the Company flexibility to reinvest the residual
sales proceeds through additional capital expenditures and/or strategic
acquisitions, as well as to modify certain other covenants and financial tests
affected by the sale transactions. The commitments under the Credit Facility
were not reduced as a result of the FEI
27
and Quincy's sales. At September 30, 1998, Advantica had no outstanding working
capital advances against the Credit Facility; however, letters of credit
outstanding were $49.4 million.
In connection with the acquisition of FRI-M Corporation ("FRI-M"), the parent
company of Coco's and Carrows, FRI-M and FRD entered into a credit agreement on
May 23, 1996, which provided a $35.0 million revolving credit facility, which is
also available for letters of credit. At September 30, 1998, FRD had no
outstanding working capital borrowings; however, letters of credit outstanding
were $18.0 million.
As of September 30, 1998 and December 31, 1997, the Company had working capital
deficits, exclusive of net assets held for sale, of $59.0 million and $230.2
million, respectively. The decrease in the deficit is attributable primarily to
an increase in cash and cash equivalents from the sales of FEI and Quincy's. As
discussed in further detail in Note 5 to the consolidated financial statements
included herein, on April 1, 1998 the Company sold FEI, receiving cash proceeds
of $380.8 million. Approximately $173.1 million of the proceeds (together with
$28.6 million already on deposit with respect to the Spartan Mortgage
Financings) was used to effect an in-substance defeasance of the Spartan
Mortgage Financings. Together with capital lease obligations assumed by the
buyer, this transaction resulted in a reduced debt load for the Company. On June
10, 1998 the Company sold Quincy's, receiving cash proceeds of approximately
$80.5 million. The Company is able to operate with a substantial working
capital deficiency because: (i) restaurant operations are conducted primarily
on a cash (and cash equivalent) basis with a low level of accounts receivable,
(ii) rapid turnover allows a limited investment in inventories and (iii)
accounts payable for food, beverages, and supplies usually become due after
the receipt of cash from related sales.
Impact of the Year 2000 Issue
- ------------------------------
The Year 2000 issue is the result of computer programs which were written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or operating equipment that have date-sensitive software using
two digits to define the applicable year may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions or engage in normal business
activities.
The Company has a comprehensive enterprise-wide program in place to address the
impact and issues associated with processing dates up to, through and beyond the
Year 2000. This program consists of three main areas: (a) information systems,
(b) supply chain and critical third party readiness and (c) business equipment.
The Company is utilizing both internal and external resources to inventory,
assess, remediate, replace and test its systems for Year 2000 compliance. To
oversee the process, the Company has established a Steering Committee which is
comprised of senior executives from all functional areas within the company and
which reports regularly to the Board of Directors and the Audit Committee.
The Company has performed an assessment of the impact of the Year 2000 issue and
determined that a significant portion of its software applications will need to
be modified or replaced so that its systems will properly utilize dates beyond
December 31, 1999. For the most part, the Company intends to replace existing
systems and based on current estimates expects to spend approximately $19
million in both 1998 and 1999 to address its information systems issues.
Relative to these amounts, the Company estimates that approximately $16 million
and $14 million will be used in 1998 and 1999, respectively, to develop or
purchase new software and will be capitalized. The remaining amounts will be
expensed as incurred. Total Year 2000 expenditures through September 30, 1998
are approximately $7.2 million. All estimated costs have been budgeted and are
expected to be funded by cash flows from operations. Currently, all information
systems projects are on schedule and are fully staffed. Systems that are
critical to the Company's operations are targeted to be Year 2000 compliant by
June of 1999.
The nature of its business makes the Company very dependent on critical
suppliers and service providers, and the failure of such third parties to
address the Year 2000 issue adequately could have a material impact on the
Company's ability to conduct its business. Accordingly, the Company has a team
in place to access the Year 2000 readiness of all third parties on which it
depends. Surveys have been sent to critical suppliers and service providers, and
each survey response is being scored and assessed based on the third party's
Year 2000 project plans in place and progress to date. On-site visits or
follow-up telephone interviews will be performed for critical suppliers and
service providers. For any critical supplier or service provider which does not
provide the Company with satisfactory evidence of their Year 2000 readiness,
contingency plans will be developed which will include
28
establishing alternative sources for the product or service provided. The
Company is also communicating with its franchise business partners regarding
Year 2000 business risks. The Company's current estimate of costs associated
with the Year 2000 issue excludes the potential impact of the Year 2000 issue
on third parties. There can be no guarantee that the systems of other companies
on which the Company relies will be timely converted, or that a failure to
convert by another company would not have a material adverse effect on the
Company.
The Company has inventoried and determined the business criticality of all
restaurant equipment. Based on preliminary findings the Company believes that
the date-related issues associated with the proper functioning of such assets
are insignificant and are not expected to represent a material risk to the
Company or its operations. The Company has conducted an inventory of its
facilities at the corporate office and has begun the correction of certain
date-deficient systems.
The Company believes, based on available information, that it will be able to
manage its Year 2000 transition without any material adverse effect on its
business operations. However, the costs of the project and the ability of the
Company to complete it on a timely basis are based on management's best
estimates, which were derived based on numerous assumptions of future events
including the availability of certain resources, third party modification plans
and other factors. Specific factors that could have a material adverse effect on
the cost of the project and its completion date include, but are not limited to,
the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, unanticipated failures by
critical vendors and franchisees as well as a failure by the Company to execute
its own remediation efforts. As a result, there can be no assurance that these
forward looking estimates will be achieved and actual results may differ
materially from those plans, resulting in material financial risk to the
Company. As the Year 2000 project progresses, the Company will establish
contingency plans if necessary.
29
PART II - OTHER INFORMATION
Item 2. Changes in Securities
The information required by this item is furnished by incorporation by reference
to the information regarding the material features of the Plan contained in Note
2 -- Reorganization, of the Notes to Consolidated Financial Statements in Item 1
of Part I of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
a. The following are included as exhibits to this report:
Exhibit
No. Description
- ---- ------------
10.1 Amendment No. 3 and Waiver, dated as of July 16, 1998, to the Credit
Agreement dated as of January 7, 1998, among certain Advantica
subsidiaries, as borrowers, Advantica, as a guarantor, the lenders named
therein, and The Chase Manhattan Bank, as administrative agent.
10.2 Advantica Restaurant Group Stock Option Plan as adopted January 28, 1998
and amended through September 28, 1998.
10.3 Advantica Restaurant Group Officer Stock Option Plan as adopted January
28, 1998 and amended through September 28, 1998.
10.4 Advantica Restaurant Group Director Stock Option Plan as adopted January
28, 1998 and amended through September 28, 1998.
10.5 Assignment and Assumption Agreement, dated as of May 1, 1998, by and
between Quincy's Realty, Inc. and I.M. Special, Inc.
10.6 Quincy's Realty, Inc. Release and Agreement dated as of May 1, 1998.
10.7 Stock Pledge Agreement, dated as of April 1, 1998, among Spartan
Holdings, Inc., Financial Security Assurance Inc. and The Bank of New
York.
10.8 Consent and Agreement Regarding Substitution, dated as of May 1, 1998,
by and among SFS Secured Restaurants, Inc., Spartan Secured Restaurants,
Inc., Secured Restaurants Trust, The Bank of New York, I.M. Special,
Inc., Financial Security Assurance Inc. and Advantica Restaurant Group,
Inc.
27.1 Financial Data Schedule for 38 weeks ended September 30, 1998.
27.2 Restated Financial Data Schedule for 12 weeks ended April 1, 1998.
27.3 Restated Financial Data Schedule for 1 week ended January 7, 1998.
27.4 Restated Financial Data Schedule for year ended December 31, 1997.
27.5 Restated Financial Data Schedule for nine months ended October 1, 1997.
27.6 Restated Financial Data Schedule for six months ended July 2, 1997.
27.7 Restated Financial Data Schedule for three months ended April 2, 1997.
27.8 Restated Financial Data Schedule for year ended December 31, 1996.
- ---------------------------------------
b. No reports on Form 8-K were filed during the quarter ended September 30,
1998.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANTICA RESTAURANT GROUP, INC.
Date: November 2, 1998 By: /s/ Rhonda J. Parish
-----------------------------
Rhonda J. Parish
Executive Vice President,
General Counsel and Secretary
Date: November 2, 1998 By: /s/ Ronald B. Hutchison
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Ronald B. Hutchison
Executive Vice President and
Chief Financial Officer