Filed Pursuant to Rule 424(b)(3)
Registration No. 333-72658 and
Registration No. 333-84850
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 3, 2002
AND PROSPECTUS SUPPLEMENT DATED MARCH 15, 2002)
ADVANTICA RESTAURANT GROUP, INC.
HAS AMENDED ITS
OFFER TO EXCHANGE
$212,000,000 (PREVIOUSLY $204,050,000)
12 3/4% SENIOR NOTES DUE 2007
OF DENNY'S HOLDINGS, INC. AND
ADVANTICA RESTAURANT GROUP, INC.
FOR
$265,000,000 OUTSTANDING
11 1/4% SENIOR NOTES DUE 2008
OF ADVANTICA RESTAURANT GROUP, INC.
The purposes of this prospectus supplement are to describe additional
changes to the terms of Advantica's offer to exchange new senior notes to be
jointly issued by Denny's Holdings and Advantica, which we refer to as the new
notes, for up to $265,000,000 aggregate principal amount of outstanding 11 1/4%
senior notes due 2008 of Advantica, which we refer to as the old notes, as
originally described in the prospectus dated January 3, 2002, as modified by the
prospectus supplement dated March 15, 2002, pursuant to which the exchange offer
is being made. The information in this prospectus supplement should be read in
conjunction with the prospectus dated January 3, 2002 and the prospectus
supplement dated March 15, 2002 to which this prospectus supplement is attached.
---------------------
INVESTING IN THE NEW NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 12 OF THE PROSPECTUS FOR A DISCUSSION OF FACTORS THAT YOU SHOULD CONSIDER
IN CONNECTION WITH THIS EXCHANGE OFFER AND AN INVESTMENT IN THE NEW NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
CHANGES TO THE TERMS OF THE EXCHANGE OFFER
Advantica has modified its offer to exchange new notes to be jointly issued
by Denny's Holdings and Advantica for Advantica's old notes as follows:
- Advantica's offer to exchange, as previously extended to 5:00 p.m., New
York City time, on March 25, 2002, and as amended hereby, is further
extended to 5:00 p.m., New York City time, on April 9, 2002, at which
time the offer will expire unless further extended by means described in
the prospectus.
- Advantica has increased the principal amount of new notes offered in
exchange for old notes from $770 for each $1,000 principal amount of old
notes to $800 for each $1,000 principal amount of old notes. As a result,
under the terms and conditions of the amended offer to exchange,
Advantica is now offering to exchange up to $212,000,000 aggregate
principal amount of new notes for up to $265,000,000 aggregate principal
amount of old notes.
- Advantica has waived the condition of the exchange offer stated in the
prospectus supplement dated March 15, 2002, that a minimum of $60,000,000
aggregate principal amount of old notes be validly tendered and accepted
on or prior to the expiration date and has amended the conditions to the
exchange offer to provide that consummation of the exchange offer is now
conditioned on at least $50,000,000 aggregate principal amount of old
notes having been validly tendered and accepted on or prior to the
expiration date.
The date of this prospectus supplement is March 25, 2002.
You may withdraw tendered outstanding old notes at any time prior to the
expiration of the exchange offer, as extended as indicated above.
Although the changes set forth in this prospectus supplement are not
reflected in the letter of transmittal or other documents related to the
exchange offer, Advantica will not distribute new documents reflecting these
changes. Holders of old notes who have previously tendered their old notes by
delivery of physical certificates in proper form for transfer or by compliance
with procedures for book-entry transfer (along with delivery by the registered
holders of a properly completed letter of transmittal or facsimile thereof), as
provided in the prospectus, need not re-tender their securities in order to
participate in the exchange as amended hereby. Holders of old notes who have not
yet tendered their old notes, but desire to do so, should use the originally
distributed letter of transmittal in order to tender their old notes. The letter
of transmittal and all other required documents must be delivered to the
Exchange Agent prior to 5:00 p.m., New York City time, on April 9, 2002, in the
manner set forth in the prospectus under "The Exchange Offer -- Procedures for
Tendering" and on the outside back cover of the prospectus to which this
prospectus supplement is attached. All holders who have previously tendered or
who tender old notes pursuant to the offer to exchange will, subject to
acceptance of such tenders by Advantica, participate in the exchange on the
basis of the prospectus, as amended by the terms and provisions described in
this prospectus supplement.
Except as expressly modified as indicated above, the exchange offer and the
terms of the new notes offered in the exchange as described in the prospectus
and the prospectus supplement dated March 15, 2002 have not been modified or
amended. Please refer to the prospectus and prospectus supplement to which this
prospectus supplement is attached for additional information.
Advantica reserves the right to extend, delay or amend further or to
terminate the exchange offer as provided in the prospectus.
SS-2
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 3, 2002)
ADVANTICA RESTAURANT GROUP, INC.
HAS AMENDED ITS
OFFER TO EXCHANGE
$204,050,000
12 3/4% SENIOR NOTES DUE 2007
OF DENNY'S HOLDINGS, INC. AND
ADVANTICA RESTAURANT GROUP, INC.
FOR
$265,000,000 OUTSTANDING
11 1/4% SENIOR NOTES DUE 2008
OF ADVANTICA RESTAURANT GROUP, INC.
The purposes of this prospectus supplement are to (1) describe changes to
the terms of Advantica's offer to exchange new senior notes to be jointly issued
by Denny's Holdings and Advantica, which we refer to as the new notes, for up to
$265,000,000 aggregate principal amount of outstanding 11 1/4% senior notes due
2008 of Advantica, which we refer to as the old notes, as originally described
in the prospectus dated January 3, 2002, pursuant to which the exchange offer is
being made, and (2) provide an update of recent developments relating to our
fourth quarter and year-end operating results and the FRD bankruptcy proceeding.
The information in this prospectus supplement should be read in conjunction with
the prospectus to which this prospectus supplement is attached.
---------------------
INVESTING IN THE NEW NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 12 OF THE PROSPECTUS FOR A DISCUSSION OF FACTORS THAT YOU SHOULD CONSIDER
IN CONNECTION WITH THIS EXCHANGE OFFER AND AN INVESTMENT IN THE NEW NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
CHANGES TO THE TERMS OF THE EXCHANGE OFFER
Advantica has modified its offer to exchange new notes to be jointly issued
by Denny's Holdings and Advantica for Advantica's old notes as follows:
- Advantica's offer to exchange, as previously extended to 5:00 p.m., New York
City time, on March 15, 2002, and as amended hereby, is further extended to
5:00 p.m., New York City time, on March 22, 2002, at which time the offer will
expire unless further extended by means described in the prospectus.
- Advantica has waived the condition of the exchange offer that a minimum of
$160,000,000 aggregate principal amount of old notes be validly tendered and
accepted on or prior to the expiration date and has amended the conditions to
the exchange offer to provide that consummation of the exchange offer is now
conditioned on at least $60,000,000 aggregate principal amount of old notes
having been validly tendered and accepted on or prior to the expiration date.
- Advantica has waived the requirement that old notes may be tendered and will
be accepted for exchange only in denominations of $1,000 principal amount or
integral multiples thereof. As provided in the prospectus, new notes will be
issued only in integral multiples of $1,000, and Advantica will pay cash in
lieu of issuing new notes in a lesser principal amount.
The date of this prospectus supplement is March 15, 2002.
- Advantica has modified three covenants in the new notes indenture as follows:
-- Limitation on Restricted Payments has been modified to increase the
amount of old notes that may be repurchased, redeemed or otherwise
acquired or retired for value from $50 million to an amount, not less
than $50 million, equal to the sum of $50 million plus 50% of the
difference between $160 million and the amount of old notes tendered and
accepted pursuant to this exchange offer. Specifically, clause (8) of
the second paragraph of such covenant as set forth in the prospectus
will provide as follows:
"(8) after the date on which a bankruptcy court enters an order
closing the FRD Chapter 11 Case, the repurchase, redemption or
other acquisition or retirement for value of Old Notes by
Advantica for consideration in an aggregate amount not to exceed
an amount, not less than $50 million, equal to the sum of $50
million plus 50% of the difference between $160 million and the
amount of old notes tendered and accepted pursuant to this
exchange offer; provided, however, that no Default or Event of
Default shall have occurred and be continuing at the time of any
such repurchase, redemption or other acquisition or retirement;"
-- Limitation on Additional Indebtedness and Issuance of Disqualified Stock
has been modified to increase the amount of additional indebtedness (in
addition to the other forms of permitted additional indebtedness
enumerated therein) that may be incurred from $50 million to the
difference between $250 million and the amount of new notes issued
pursuant to this exchange offer, subject to the proviso indicated below.
Specifically, subclause (e) of clause (1) of the third paragraph of such
covenant will provide as follows:
"(e) constituting additional Indebtedness in an aggregate
principal amount (including any Indebtedness incurred to refund
or refinance such Indebtedness) at any one time outstanding equal
to the difference between $250 million and the aggregate
principal amount of new notes issued on the date of the
indenture, whether incurred under the Credit Agreement or
otherwise; provided, however, that no more than $50 million of
such additional Indebtedness incurred pursuant to this subclause
(e) shall be secured by a consensual Lien or be incurred by
Advantica or any Subsidiary of Advantica other than Denny's
Holdings,"
-- Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries has been modified to increase the amount of additional
indebtedness in the exclusion therefrom relating to encumbrances or
restrictions existing under or by reason of additional indebtedness (in
addition to the exclusions therefrom relating to other forms of permitted
additional indebtedness enumerated therein) from $50 million to the
difference between $250 million and the amount of new notes issued
pursuant to this exchange offer. Specifically, clause (g) of such
covenant will provide as follows:
"(g) additional Indebtedness in an aggregate principal amount at
any one time outstanding equal to the difference between $250
million and the aggregate principal amount of new notes issued on
the date of the indenture,"
In addition to the provisions set forth above, the new notes indenture will
be modified to make changes consistent with and necessary to effectuate the
intent of the modifications described above.
You may withdraw tendered outstanding old notes at any time prior to the
expiration of the exchange offer, as extended as indicated above.
Although the changes set forth in this prospectus supplement are not
reflected in the letter of transmittal or other documents related to the
exchange offer, Advantica will not distribute new documents reflecting these
changes. Holders of old notes who have previously tendered their old notes by
delivery of physical certificates in proper form for transfer or by compliance
with procedures for book-entry transfer (along with delivery by the registered
holders of a properly completed letter of transmittal or facsimile thereof), as
provided in the prospectus, need not re-tender their securities in order to
participate in the exchange as amended hereby. Holders of old notes who have not
yet tendered their old notes, but desire to do so, should use the originally
distributed letter of transmittal in order to tender their old notes. The letter
of transmittal and all other required documents must be delivered to the
Exchange Agent prior to 5:00 p.m., New York City time, March 22, 2002, in the
manner set forth in the prospectus under "The Exchange Offer -- Procedures for
Tendering" and on the outside back cover of the prospectus to which this
prospectus supplement is attached. All holders who have previously tendered or
who tender old notes pursuant to the offer to exchange will, subject to
acceptance of such tenders by Advantica, participate in the exchange on the
basis of the prospectus, as amended by the terms and provisions described in
this prospectus supplement.
Except as expressly modified as indicated above, the exchange offer and the
terms of the new notes offered in the exchange as described in the prospectus
have not been modified or amended. Please refer to the prospectus to which this
prospectus supplement is attached for additional information.
S-2
Advantica reserves the right to extend, delay or amend further or to
terminate the exchange offer as provided in the prospectus.
RECENT DEVELOPMENTS
Our condensed consolidated operating results for the fourth quarter and for
the year ended December 26, 2001 were as follows (unaudited):
FOURTH QUARTER RESULTS
Revenue at Denny's company-owned restaurants for the fourth quarter of 2001
decreased to $224.4 million from $251.0 million in the prior year quarter as a
result of a 115-unit net reduction in company restaurants, partially offset by a
3.4% increase in same-store sales. The reduction in company restaurants during
2001 included 59 refranchising transactions and the closing of 61
underperforming stores. EBITDA decreased to $27.0 million from $43.2 million in
the prior year quarter. As stated in the prospectus, we define "EBITDA" as
operating income before depreciation, amortization and charges for restructuring
and impairment. Our measure of EBITDA as defined may not be comparable to
similarly titled measures reported by other companies. The decrease in EBITDA
was primarily attributable to $11.7 million less in refranchising gains and, to
a lesser extent, the lower company restaurant base and reduced operating
margins. Higher company restaurant operating costs as a percentage of sales were
attributable to additional store-level labor and benefits as well as continued
increases in repairs and maintenance expenditures. Higher occupancy costs as a
percentage of sales were due to an adjustment that lowered general liability
insurance expense by $3.5 million in the prior year quarter.
Franchise and licensing revenue increased approximately 7.0% to $22.5
million compared with $21.0 million in the prior year quarter, while franchise
operating income increased to $12.9 million from $7.7 million in last year's
quarter. The increase in franchise revenue resulted from a net 42-unit increase
in franchised and licensed units compared with the prior year quarter. In
addition to the unit increase, the improvement in franchise operating income is
attributable to $2.4 million of bad debt expense recorded in last year's
quarter. During the quarter, Denny's system-wide opened 13 restaurants and
closed 40, resulting in 1,749 restaurants at the end of the fourth quarter.
We reported a loss from continuing operations for the quarter of $39.5
million, or $0.98 per diluted common share, compared with last year's fourth
quarter loss of $26.6 million, or $0.66 per diluted common share. This year's
fourth quarter results include amortization of excess reorganization value of
$6.9 million compared with $10.5 million last year. Also, this year's fourth
quarter results include a restructuring charge of $8.4 million compared with a
similar charge of $5.3 million last year. The charge this year reflects
severance and other costs related to our elimination of out-of-restaurant
support staff in the fourth quarter as well as the planned closure of
underperforming stores. Also, this year's fourth quarter results include an
impairment charge of $5.3 million compared with a similar charge of $6.4 million
last year. The charge this year reflects a writedown for underperforming
restaurants, including the units identified for closure.
FULL YEAR RESULTS
Revenue at Denny's company-owned restaurants for fiscal 2001 decreased to
$949.2 million from $1,080.6 million in the prior year. A 2.7% increase in
same-store sales was offset by fewer company-owned units. Franchise and
licensing revenue increased to $90.5 million in 2001 compared with $74.6 million
in the prior year. The increase in franchise revenue resulted from additional
franchised and licensed units compared with the prior year. EBITDA decreased to
$135.1 million from $172.3 million in the prior year. The lower EBITDA primarily
resulted from reduced gains on fewer refranchising transactions.
For the year ended December 26, 2001, we reported a loss from continuing
operations of $96.3 million, or $2.40 per diluted common share, compared with
last year's loss of $82.5 million, or $2.06 per diluted common share. This
year's results reflect restructuring and impairment charges of $30.5 million,
while the loss last year included similar charges of $19.0 million. This year's
results include amortization of excess reorganization value of approximately
$28.7 million compared with $42.1 million last year. Refranchising gains
decreased to $13.3 million compared with $51.2 million last year.
On December 26, 2001, Advantica's $200 million credit facility had
outstanding revolver advances of $58.7 million compared with no outstanding
balances at year end 2000. The revolver advances primarily resulted from
Advantica's satisfaction of the Coco's/Carrows credit facility guarantee in
January 2001. Outstanding letters of credit decreased to $52.2 million from
$65.3 million at year end 2000, leaving a net availability for additional
borrowings of $89.1 million at the end of the 2001.
S-3
SYSTEMWIDE SALES
For the fourth quarter ended December 26, 2001, Denny's systemwide sales,
which include sales from company-owned, franchised and licensed restaurants,
increased to $553 million compared with $547 million in the prior year quarter.
This increase is attributable to a 2.4% gain in systemwide same-store sales,
which reflects an increase of 3.4% at company units and 1.4% at franchised
units. The same-store sales gain is partially offset by a 73-unit net reduction
in total systemwide Denny's restaurants since the end of the same period last
year.
Denny's systemwide sales for the year ended December 26, 2001 increased by
approximately 3% to $2.30 billion compared with $2.23 billion in the prior year.
This increase is primarily attributable to a full-year increase in systemwide
same-store sales of 1.7%, which reflects an increase of 2.7% at company units
and 0.8% at franchised units.
DISCONTINUED OPERATIONS
During the fourth quarter, revenue at FRD declined to $85.9 million from
$91.6 million in the prior year quarter. EBITDA at FRD decreased to $7.4 million
versus $9.0 million in the prior year quarter. FRD's revenue for fiscal year
2001 declined to $350.9 million from $371.1 million in the prior year. EBITDA at
FRD decreased to $25.2 million from $35.7 million in the prior year.
PROPOSED SETTLEMENT IN FRD BANKRUPTCY PROCEEDING
On February 19, 2002, Advantica and Denny's, along with FRD, Coco's and
Carrows, entered into a stipulation and agreement of settlement, or settlement
agreement, with the official committee of unsecured creditors of FRD seeking to
resolve various disputes relating to the administration of FRD's pending case
under Chapter 11 of the United States Bankruptcy Code. The bankruptcy court
approved the settlement agreement on March 8, 2002.
Under the terms of the settlement agreement, Denny's will allow a 120-day
forbearance period (that commenced on March 8, 2002) during which the creditors'
committee and FRD and its operating subsidiaries shall use their best efforts to
obtain new financing to repay, at a discount, the outstanding borrowings from
Denny's (approximately $48.7 million at the date of the settlement agreement),
plus accrued but unpaid interest, fees and expenses. During this forbearance
period, the effort to sell FRD or its assets to a third party will be suspended.
If new financing sufficient to repay the outstanding borrowings from Denny's,
less a $10 million discount, is obtained by the end of the forbearance period,
Denny's will accept such discounted repayment amount in full satisfaction of its
claims against FRD and Coco's and Carrows. If FRD is unable to obtain financing
to repay this discounted repayment amount by the end of the forbearance period,
FRD shall, at the election of the creditors' committee, in lieu thereof:
- pay Denny's the proceeds of any new financing that is obtained, plus
additional cash necessary for a total cash repayment to Denny's of at
least $20 million,
- issue new junior secured notes to Denny's in a principal amount equal to
the amount of Coco's and Carrows' current obligations to Denny's, minus
the amount of any cash paid and any applicable repayment discount as
described in the settlement agreement (such junior secured notes
subordinate in right of payment and as to collateral to the new
financing), and
- issue to Denny's up to 10% of the common stock in FRD dependent upon the
amount of cash repaid to Denny's as described above.
The parties have agreed to attempt to replace the outstanding letters of
credit (approximately $9.6 million at the date of the settlement agreement) and
cause the cash deposit provided by Denny's supporting the letters of credit to
be released. If the letters of credit are not replaced, Denny's will keep them
in place and allow them to terminate in the ordinary course and will receive a
separate note payable from Coco's and Carrows to provide reimbursement if any
letters of credit are drawn upon. Advantica will continue to provide management
and information technology services pursuant to a one-year services agreement at
a cost to FRD set forth in the settlement agreement.
The settlement agreement is also conditioned upon the consent of Denny's
revolving credit facility lender. If the terms of the proposed settlement
agreement, including the financing described above, are satisfied, controlling
interest of FRD and its subsidiaries will be transferred to the creditors of
FRD.
In light of, among other things, the operating results and financial
condition of FRD and the uncertainties as to the outcome of the proposed
settlement agreement outlined above, there can be no assurance that we will be
able to recover any or all of the secured obligations owed to us under the
Coco's/Carrows credit facility.
S-4
PROSPECTUS
ADVANTICA RESTAURANT GROUP, INC.
OFFER TO EXCHANGE
$204,050,000
12 3/4% SENIOR NOTES DUE 2007
OF DENNY'S HOLDINGS, INC. AND
ADVANTICA RESTAURANT GROUP, INC.
FOR
$265,000,000 OUTSTANDING
11 1/4% SENIOR NOTES DUE 2008
OF ADVANTICA RESTAURANT GROUP, INC.
Advantica is offering to exchange up to $204,050,000 aggregate principal
amount of 12 3/4% senior notes due 2007 to be jointly issued by Denny's Holdings
and Advantica, which we refer to as the new notes, for up to $265,000,000
aggregate principal amount of outstanding 11 1/4% senior notes due 2008 of
Advantica, which we refer to as the old notes, or $770 principal amount of new
notes for each $1,000 principal amount of old notes.
PLEASE CONSIDER THE FOLLOWING DIFFERENCES BETWEEN THE OLD NOTES AND THE NEW
NOTES:
- The old notes bear interest at a rate of 11 1/4% per annum, payable
January 15 and July 15 of each year. The new notes will bear interest
at a rate of 12 3/4% per annum payable March 31 and September 30 of
each year.
- The old notes mature on January 15, 2008. The new notes will mature on
September 30, 2007.
- Only Advantica is obligated with respect to the old notes. Advantica
and Denny's Holdings, Advantica's wholly owned subsidiary and the
direct parent of the Denny's restaurant operations, will be jointly
obligated with respect to the new notes. As a result, the new notes
will be structurally senior to the old notes not accepted for exchange
in the exchange offer.
- For additional information regarding differences between the old notes
and the new notes, see "Description of New Notes" and "Differences
Between the New Notes and the Old Notes".
PLEASE CONSIDER THE FOLLOWING REGARDING THE OFFER TO EXCHANGE:
- Advantica's offer to exchange new notes for old notes will expire at
5:00 p.m., New York City time, on February 1, 2002, unless Advantica
extends the exchange offer, in which case the expiration date will be
the latest date and time to which the exchange offer is extended.
- Advantica will exchange outstanding old notes up to an aggregate
principal amount of $265,000,000 that are validly tendered and not
properly withdrawn prior to the expiration date of the exchange offer,
so long as a minimum of $160,000,000 aggregate principal amount of old
notes is tendered and accepted and other specified conditions are
satisfied or waived. You should carefully review the procedures for
tendering the old notes beginning on page 43 of this prospectus.
- Advantica reserves the right to extend, delay, amend or terminate the
exchange offer.
- You may withdraw tendered outstanding old notes at any time prior to
the expiration of the exchange offer.
- We will not receive any proceeds from the exchange offer.
- The old notes are not listed, and we do not intend to list the new
notes, on any securities exchange.
We are offering the new notes pursuant to registration in Pennsylvania and
pursuant to exemptions from registration in other states. In order to avail
ourselves of these state exemptions, we are making the exchange offer only to
(1) institutional investors as described in the letter of transmittal, and (2)
residents of states or other jurisdictions that exempt the offer from
registration even if directed to a person or entity that is not an institutional
investor. If you do not fall within the description of a qualifying
institutional investor, we may still be able to make an offer to you. We will
make that determination after receipt of your letter of transmittal.
---------------------
INVESTING IN THE NEW NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 12 OF THIS PROSPECTUS FOR A DISCUSSION OF FACTORS THAT YOU SHOULD CONSIDER
IN CONNECTION WITH THIS EXCHANGE OFFER AND AN INVESTMENT IN THE NEW NOTES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus is January 3, 2002.
Dealer Manager
(UBS WARBURG LOGO)
---------------------
TABLE OF CONTENTS
PAGE
----
Where You Can Find More Information......................... ii
Forward-Looking Statements.................................. ii
Summary..................................................... 1
Risk Factors................................................ 12
Capitalization.............................................. 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................ 35
Use of Proceeds............................................. 39
The Exchange Offer.......................................... 39
Business.................................................... 49
Management.................................................. 58
Certain Transactions........................................ 67
Equity Security Ownership................................... 68
Description of Indebtedness................................. 70
Description of New Notes.................................... 73
Differences Between the New Notes and the Old Notes......... 93
United States Federal Income Tax Considerations............. 106
Legal Matters............................................... 110
Experts..................................................... 110
Index to Financial Statements............................... F-1
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT OR ADDITIONAL INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT. YOU SHOULD ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT
COVER OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THEN. WE ARE NOT MAKING AN OFFER
TO SELL, OR SOLICITING AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED BY THIS
PROSPECTUS IN ANY JURISDICTION WHERE THE EXCHANGE OFFER IS NOT PERMITTED.
i
WHERE YOU CAN FIND MORE INFORMATION
Advantica Restaurant Group, Inc. is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and accordingly
files reports, proxy statements and other information with the Securities and
Exchange Commission, or the SEC. In addition, we have filed with the SEC a
registration statement on Form S-4 under the Securities Act of 1933, as amended,
with respect to the new notes offered in this prospectus. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits and schedules that are a part of the registration statement. For
further information with respect to us and the new notes, we refer you to the
registration statement and the exhibits and schedules filed or referenced as a
part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document is an exhibit to the
registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement in this prospectus relating to a contract or
document filed or referenced as an exhibit is qualified in all respects by the
exhibit. Copies of our reports, proxy statements and other information may be
inspected and copied at the public reference room maintained by the SEC at:
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549
Information on the operation of the public reference room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains a Website that contains
reports, proxy statements and other information regarding Advantica. The address
of the SEC Website is http://www.sec.gov. This information is also available on
Advantica's Website, the address of which is http://www.advantica-dine.com.
Information contained at our Website is not, and should not be deemed to be, a
part of this prospectus.
In addition, we will provide, without charge, to each person to whom this
prospectus is delivered, upon written or oral request, a copy of any or all of
the foregoing documents (other than exhibits to documents that are not
specifically incorporated by reference to the documents). Please direct such
requests to 203 East Main Street, Spartanburg, South Carolina 29319-9966, (864)
597-8000, Attention: Corporate Secretary.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY JANUARY 25, 2002,
IN ORDER TO RECEIVE THEM BEFORE THE SCHEDULED EXPIRATION OF THE EXCHANGE OFFER
ON FEBRUARY 1, 2002.
FORWARD-LOOKING STATEMENTS
This prospectus contains numerous forward-looking statements about our
financial condition, results of operations, cash flows, financing plans,
business strategies, operating efficiencies, capital and other expenditures,
competitive positions, growth opportunities, plans and objectives of management,
markets for our stock and debt securities and other matters which reflect
management's best judgment based on factors currently known. These
forward-looking statements involve risks and uncertainties. The words
"estimate," "project," "intend," "expect," "believe," "forecast" or similar
expressions, or the negative of these terms or expressions, are intended to
identify these forward-looking statements, but some of these statements use
other phrasing. In addition, any statement in this prospectus that is not a
historical fact is a "forward-looking statement." Except as required by law, we
expressly disclaim any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this prospectus or to reflect the occurrence of unanticipated events. Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors including, among others:
- the outcome of the pending Chapter 11 proceedings involving FRD
Acquisition Co., or FRD, a wholly owned subsidiary of Advantica,
described in this prospectus;
- divestiture efforts relating to FRD and related matters described in this
prospectus;
- competitive pressures from within the restaurant industry;
ii
- the level of success of our operating initiatives and advertising and
promotional efforts, including the initiatives and efforts specifically
mentioned in this prospectus;
- 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 sections containing the forward-looking
statements, including the section entitled "Risk Factors" in this
prospectus.
iii
SUMMARY
This summary highlights material information from the prospectus. It may
not contain all of the information that is important to you. For a more complete
understanding of the exchange offer and the terms of the new notes, you should
read this entire prospectus and the other documents to which it refers you. As
used in this prospectus, unless the context otherwise requires, and except as
set forth in the "Description of New Notes" section, the terms "we," "us," and
"our company" refer to Advantica Restaurant Group, Inc. and its subsidiaries.
THE ISSUERS
Advantica Restaurant Group, Inc., or Advantica, is one of the largest
restaurant companies in the United States operating moderately priced
restaurants in the mid-scale dining segment. Our core brand is Denny's, the
nation's largest family-style restaurant chain in the full-service mid-scale
segment in terms of market share, number of units and U.S. systemwide sales.
Denny's, Inc., or Denny's, operates almost 1,800 company-owned and franchised
restaurants. Denny's Holdings, Inc., or Denny's Holdings, is a wholly owned
subsidiary of Advantica and the direct parent of Denny's. Advantica also owns
and operates the Coco's and Carrows restaurant chains through its subsidiary FRD
Acquisition Co., or FRD. FRD is currently in a Chapter 11 bankruptcy proceeding.
FRD is reported as a discontinued operation in our consolidated financial
statements. Consequently, the financial results of Advantica's continuing
operations are substantially the same as those of Denny's Holdings. FRD is not a
party to the exchange offer.
(Existing Corporate Organizational Chart)
Our principal executive offices are located at 203 East Main Street,
Spartanburg, South Carolina 29319-9966. Our telephone number is (864) 597-8000.
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
If the exchange offer is completed, Advantica will reduce its outstanding
indebtedness. Accordingly, completion of the exchange offer may help to improve
Advantica's access to financing sources and its ability to refinance its
revolving credit facility, which matures in January 2003. The table below
provides information concerning the pro forma effect of the exchange offer,
assuming the maximum tender amount, on our long-term debt and our other
financial data and ratios, including information concerning our indebtedness and
1
related interest expense that will be structurally senior to the old notes. This
information should be read in conjunction with the information contained in the
sections entitled "Summary Consolidated Financial Data" and "Capitalization."
ACTUAL
---------------------------- PRO FORMA
DECEMBER 27, SEPTEMBER 26, SEPTEMBER 26,
2000 2001 2001
(In millions, except ratios) ------------ ------------- -------------
Long-Term Debt:
Advances outstanding under the revolving credit
facility.......................................... $ -- $ 73.3 $ 79.0
Other notes payable.................................. 7.4 6.2 6.2
Discount on other notes payable...................... (1.3) (1.3) (1.3)
Capital lease obligations............................ 50.5 41.5 41.5
12 3/4% Senior Notes due September 30, 2007 of
Denny's Holdings and Advantica (new notes)........ -- -- 204.1
------ ------ ------
Total structurally senior long-term debt,
including current maturities.................... 56.6 119.7 329.5
11 1/4% Senior Notes due January 15, 2008 of
Advantica (old notes)............................. 529.6 529.6 264.6
Premium on 11 1/4% Senior Notes of Advantica......... 19.1 17.6 8.8
------ ------ ------
Total long-term debt, including current
maturities...................................... $605.3 $666.9 $602.9
====== ====== ======
ACTUAL
----------------------------------------------- PRO FORMA(A)
FISCAL YEAR THREE QUARTERS FOUR QUARTERS FOUR QUARTERS
ENDED ENDED ENDED ENDED
DECEMBER 27, SEPTEMBER 26, SEPTEMBER 26, SEPTEMBER 26,
2000 2001 2001 2001
------------ --------------- -------------- --------------
Other Data:
EBITDA as defined...................... $172.3 $108.1 $151.3 $151.3
Interest expense, net.................. 81.8 54.7 74.2 71.4
Structurally senior interest expense,
net(b).............................. 22.8 10.6 15.4 42.0
Capital expenditures................... 41.9 25.2 38.0 38.0
Ratios for Total Debt:
Ratio of debt(c) to EBITDA as
defined............................. 3.4x NM* 4.3x 3.9x
Ratio of EBITDA as defined to interest
expense, net........................ 2.1x 2.0x 2.0x 2.1x
Ratio of EBITDA as defined less capital
expenditures to interest expense,
net................................. 1.6x 1.5x 1.5x 1.6x
Ratios for Structurally Senior Debt:
Ratio of structurally senior debt(c) to
EBITDA as defined................... 0.3x NM 0.8x 2.2x
Ratio of EBITDA as defined to
structurally senior interest
expense, net........................ 7.6x 10.2x 9.8x 3.6x
Ratio of EBITDA as defined less capital
expenditures to structurally senior
interest expense, net............... 5.7x 7.8x 7.4x 2.7x
---------------
* Not meaningful
(a) The pro forma financial data have been derived from our unaudited pro forma
condensed consolidated financial statements and notes thereto intended
elsewhere in this prospectus.
(b) Excludes interest expense, net related to the old notes.
(c) Excludes the related premium or discount thereon.
2
THE EXCHANGE OFFER
Offeror.................... Advantica Restaurant Group, Inc.
Exchange Offer Size........ Subject to the terms and conditions set forth in
this prospectus, Advantica is offering to exchange
up to $204.1 million aggregate principal amount of
registered 12 3/4% senior notes due 2007 of Denny's
Holdings and Advantica, which we refer to as the
new notes, for up to $265.0 million aggregate
principal amount of Advantica's 11 1/4% senior
notes due 2008, which we refer to as the old notes
(or $770 principal amount of new notes for each
$1,000 principal amount of old notes). We sometimes
refer to the new notes and the old notes together
as the notes. As of the date of this prospectus,
$529.6 million aggregate principal amount of old
notes is outstanding.
Consideration Offered...... For each $1,000 principal amount of old notes
exchanged:
CONSIDERATION
-------------
Principal amount of new notes...................... $ 770.00
Accrued and unpaid interest, in cash............... $ 6.56*
*Assumes a closing date for the exchange offer of
February 6, 2002. Interest accrued and unpaid to
the closing date of the exchange offer on the old
notes accepted for exchange will be paid on the
closing date. We will not issue any new notes or
pay any cash until all conditions set forth in this
prospectus have been satisfied or waived.
Minimum and Maximum Tender
Amounts.................. Payment of the consideration offered to old note
holders is subject to, among other things, a
minimum tender of $160.0 million in aggregate
principal amount of old notes and a maximum tender
of $265.0 million in aggregate principal amount of
old notes. The minimum tender would result in the
issuance of an aggregate principal amount of new
notes equal to $123.2 million, and the maximum
tender would result in the issuance of an aggregate
principal amount of new notes equal to $204.1
million. In the event old notes tendered pursuant
to the exchange offer are less than the minimum
tender, we currently intend to terminate the
exchange offer. In the event that old notes
tendered pursuant to the exchange offer exceed the
maximum tender, Advantica will, on a pro rata
basis, allocate new notes among tendering holders
of old notes so that the maximum tender requirement
is satisfied. See "The Exchange Offer -- Terms of
the Exchange Offer" and "-- Conditions of the
Exchange Offer" for more information.
Accrued Interest on the Old
Notes and New Notes........ If you tender old notes for new notes and your old
notes are accepted by Advantica, you will receive,
as of the closing date, in cash, the accrued and
unpaid interest on the old notes accepted for
exchange from January 15, 2002 (the last interest
payment date for the old notes prior to the closing
date) up to, but not including, the closing date.
Interest accrued on old notes not accepted for
exchange will be paid in the ordinary course on
July 15, 2002, the next interest payment date for
the old notes after the closing date. The new notes
will bear interest from the closing date at 12 3/4%
per annum. On or before March 31, 2002, the first
interest payment date for the new notes, holders of
the new notes
3
will receive interest accrued on the new notes from
and after the closing of the exchange offer.
Expiration Date;
Extensions; Termination;
Amendments............... The expiration date is 5:00 p.m., New York City
time, on February 1, 2002, unless the exchange
offer is extended, in which case the expiration
date will be the latest date and time to which the
exchange offer is extended.
Advantica reserves the right to extend, delay,
amend or terminate the exchange offer, including,
without limitation, the right to modify the minimum
and maximum tender amounts stated above.
Conditions of the Exchange
Offer...................... Consummation of the exchange offer is conditioned
on at least $160.0 million in aggregate principal
amount of old notes having been validly tendered
and not properly withdrawn and on other customary
conditions which may be waived by us. See "The
Exchange Offer -- Conditions of the Exchange
Offer."
Subject to the filing of the registration
statement, of which this prospectus is a part, and
compliance with all applicable state securities
laws, no federal or state regulatory filings or
approvals are required in connection with the
exchange offer.
Consequences of Failure to
Exchange Your Old
Notes.................... If you do not exchange your old notes for new notes
in the exchange offer, you will still hold your old
notes subject to the same terms and conditions
existing prior to the exchange offer.
A decision not to participate in the exchange offer
means that your unexchanged old notes will:
- be structurally subordinated to the new notes;
- bear interest at a stated interest rate that is
lower than the stated interest rate for the new
notes (although on a higher aggregate principal
amount of notes outstanding); and
- have a maturity date later than the maturity date
for the new notes.
See "Risk Factors -- Risks Related to the Exchange
Offer" and "The Exchange Offer -- Consequences of
Failure to Exchange Old Notes."
Offerees................... We are offering the new notes pursuant to
registration in Pennsylvania and pursuant to
exemptions from registration in other states. In
order to avail ourselves of these state exemptions,
we are making the exchange offer only to (1)
institutional investors as described in the letter
of transmittal, and (2) residents of states or
other jurisdictions that exempt the offer from
registration even if directed to a person or entity
that is not an institutional investor. Generally,
an "institutional investor" means any dealer, bank,
savings institution, insurance company or other
financial institution or institutional investor, as
defined under applicable state law. If you do not
fall within the list of qualifying institutional
investors, we may still be able to make an offer to
you. We will make that determination after receipt
of your letter of transmittal.
4
Procedures for Tendering
Old Notes.................. If you wish to tender your old notes for exchange,
you must:
- complete and sign the accompanying letter of
transmittal (even if you effect a tender pursuant
to the procedures for book-entry transfer as
discussed in this prospectus),
- indicate the amount of old notes, if less than
all, to which your election to tender for new
notes applies (subject to Advantica's right to
effect a reallocation of tenders in order to
satisfy the maximum tender requirement),
- have the signature guaranteed if required by the
letter of transmittal, and
- either (1) mail or deliver the certificates for
the old notes or (2) if the procedures for
book-entry transfers are used, transmit a
confirmation of the book-entry transfer, in
either case, together with a properly completed
and duly executed letter of transmittal (or a
facsimile thereof), with any required signature
guarantees and any other required documents, to
the exchange agent at its address shown on the
back cover page of this prospectus on or prior to
the expiration date.
Any beneficial owner of old notes whose old notes
are registered in the name of brokers, dealers,
commercial banks, trust companies or other nominees
should contact these entities or persons promptly
to instruct them to accept the exchange offer on
the beneficial owner's behalf, if the beneficial
owner wishes to accept the exchange offer. A
registered holder is any person in whose name old
notes are registered on the books of Advantica or
any other person who has obtained properly
completed bond powers from the registered holder.
Guaranteed Delivery
Procedures................. If you wish to tender your old notes but are not
able to deliver the required documents or complete
the procedures for book-entry transfer prior to the
expiration date for the exchange offer, you may
tender your old notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer -- Guaranteed Delivery."
Withdrawal Rights.......... You may withdraw tenders of old notes at any time
on or prior to the expiration date. Any old notes
not accepted for exchange will be returned to the
tendering holder without cost promptly after the
termination or expiration of the exchange offer.
Acceptance of Tenders;
Delivery of New Notes...... Subject to the satisfaction or waiver of all
conditions of the exchange offer (including the
minimum and maximum tender amounts), Advantica will
accept for exchange all old notes that have been
validly tendered in the exchange offer and not
properly withdrawn on or prior to the expiration
date. We will issue and deliver the new notes in
exchange for the applicable old notes accepted
pursuant to the exchange offer promptly following
the expiration date.
Use of Proceeds............ We will not receive any cash proceeds from the
issuance of the new notes, although our total
indebtedness will decrease. See "Use of Proceeds."
5
U.S. Federal Income Tax
Considerations........... For a discussion of U.S. federal income tax
considerations relating to the tender of the old
notes for new notes and related matters, see
"United States Federal Income Tax Considerations."
Dealer Manager............. UBS Warburg LLC is acting as the dealer manager in
the exchange offer. The address and phone number of
the dealer manager are set forth on the outside
back cover of this prospectus.
Exchange Agent............. U.S. Bank National Association is acting as the
exchange agent in the exchange offer. The address
and phone numbers of the exchange agent are set
forth on the outside back cover of this prospectus.
Information Agent.......... MacKenzie Partners, Inc. is acting as the
information agent in the exchange offer. The
address and phone numbers of the information agent
are set forth on the outside back cover of this
prospectus.
THE NEW NOTES
Issuers.................... Denny's Holdings, Inc. and Advantica Restaurant
Group, Inc.
Aggregate Principal Amount;
Interest................. Up to $204.1 million aggregate principal amount of
12 3/4% senior notes due 2007 will be issued under
the new notes indenture to be dated as of the
closing date, among Denny's Holdings, Advantica and
U.S. Bank National Association, as trustee.
Interest Payment Dates..... Interest on the new notes will be payable
semi-annually in arrears on each March 31 and
September 30, commencing March 31, 2002.
Maturity Date.............. September 30, 2007.
Optional Redemption........ Except as provided below, the new notes may not be
redeemed prior to September 30, 2004. On and after
September 30, 2004, the new notes will be
redeemable, in whole or in part, at 106.3750% of
their principal amount, at decreasing amounts
thereafter to and including September 30, 2006, and
thereafter at 100% of their principal amount,
together in each case with accrued and unpaid
interest. Notwithstanding the foregoing, from the
closing date until September 30, 2004, the issuers
may redeem up to 35% of the aggregate principal
amount of new notes, at a redemption price of
112.75%, plus accrued and unpaid interest to the
redemption date, from the net proceeds of any
public offering for cash of certain equity
securities of Advantica, Denny's Holdings or any of
their subsidiaries.
Ranking.................... The new notes will be senior obligations of the
issuers and will rank equal in right of payment
with all other senior indebtedness of the issuers,
including indebtedness of Advantica under the old
notes. Because Denny's Holdings is an issuer of the
new notes but not of the old notes, the new notes
will be structurally senior to the unexchanged old
notes. See "Risk Factors." The new notes will be
senior to all existing and future subordinated
indebtedness of the issuers. However, the new notes
will be effectively subordinated to the issuers'
secured indebtedness to the extent of the assets
securing this indebtedness, and structurally
subordinated to indebtedness and other obligations
of Denny's and the issuers' other subsidiaries. As
of September 26, 2001, we had total indebtedness of
approximately $666.9 million, which
6
amount would be reduced to $602.9 million, on a pro
forma basis assuming the maximum tender amount. Of
that amount, $125.4 million, plus trade payables,
would be structurally senior to the new notes, and
$273.4 million would be structurally subordinated
to the new notes. See "Capitalization" for more
information.
Covenants.................. The new notes indenture will contain covenants
that, among other things, will limit our ability to
incur additional indebtedness, pay dividends or
make other distributions, make loans and
investments, enter into asset sales and use those
proceeds, create liens, enter into transactions
with affiliates, merge, consolidate or transfer all
or substantially all of our assets or make
investments in unrestricted subsidiaries. For
additional information, see "Description of New
Notes."
Change of Control.......... If we experience a change of control, we must offer
to purchase the new notes at a purchase price equal
to 101% of the principal amount, plus accrued and
unpaid interest. We might not be able to pay you
the required price for the new notes you present to
us at the time of a change of control because our
revolving credit facility or other indebtedness may
prohibit payment or we might not have enough funds
at the time.
Trustee.................... U.S. Bank National Association will serve as
trustee under the indenture governing the new
notes.
Transferability............ We have registered the new notes under the
Securities Act of 1933, as amended. As a result, if
you are not one of our affiliates, you may freely
transfer the new notes. The old notes held by
non-affiliates are also freely transferable.
SUMMARY OF DIFFERENCES BETWEEN NEW NOTES AND OLD NOTES
OLD NOTES NEW NOTES
--------- ---------
Aggregate Principal Amount
$529.6 million currently outstanding, to be $204.1 million, assuming the maximum tender
reduced to $264.6 million, assuming the amount, that may be issued in the exchange
maximum tender amount offer. Up to an additional $50.0 million may
be issued under the indenture subsequent to
the exchange offer, subject to the
limitations and restrictions set forth in
the indenture.
Issuer of the Notes
Advantica Advantica and Denny's Holdings
Maturity
January 15, 2008 September 30, 2007
Interest
11 1/4%, payable semi-annually on January 15 12 3/4%, payable semi-annually on March 31
and July 15 and September 30
7
OLD NOTES NEW NOTES
--------- ---------
Optional Redemption
Redeemable, in whole or in part, during the Redeemable, in whole or in part, during the
12-month period beginning on the anniversary 12-month period beginning on the anniversary
of January 15 in the years and at the of September 30 in the years and at the
redemption prices (expressed as percentages redemption prices (expressed as percentages
of the principal amount) indicated below: of the principal amount) indicated below:
YEAR PERCENTAGE YEAR PERCENTAGE
2003 105.625% 2004 106.3750%
2004 103.750 2005 103.1875
2005 101.875 2006 and thereafter 100.0000
2006 and thereafter 100.000 plus accrued interest
plus accrued interest
Until September 30, 2004, up to 35% of the
Until January 15, 2001, up to 35% of the old new notes are redeemable at 112.75% plus
notes were redeemable at 110% plus accrued accrued interest, from the net proceeds of a
interest, from the net proceeds of a public public equity offering for cash of
equity offering for cash of Advantica or any Advantica, Denny's Holdings or any of their
of its subsidiaries. subsidiaries.
Change of Control Offer
If at any time a change of control (as If at any time a change of control (as
defined) occurs, Advantica is required to defined) occurs, Advantica and Denny's
offer to purchase all outstanding old notes Holdings are required to offer to purchase
at a purchase price equal to 101% of the all outstanding new notes at a purchase
principal amount thereof plus accrued price equal to 101% of the principal amount
interest to the repurchase date, subject to thereof plus accrued interest to the
certain conditions. repurchase date, subject to certain
conditions. A change of control includes,
among other things, Advantica ceasing to own
100% of the equity interests in Denny's
Holdings.
Restrictive Covenants
For information concerning differences between restrictive covenants
governing the old notes as compared with those governing the new notes, see
"Differences between the Old Notes and the New Notes."
RISK FACTORS
For a discussion of factors that you should consider in connection with the
exchange offer and an investment in the new notes, see "Risk Factors" beginning
on page 12 of this prospectus.
8
SUMMARY CONSOLIDATED FINANCIAL DATA
Set forth below are summary consolidated financial data concerning
Advantica for the one week ended January 7, 1998, the fifty-one weeks ended
December 30, 1998 and the fiscal years ended December 29, 1999 and December 27,
2000. Such data have been derived from our consolidated financial statements for
such periods, which have been audited and are included elsewhere in this
prospectus. Also set forth below are summary consolidated financial data for the
three quarters ended September 27, 2000 and September 26, 2001 and the four
quarters ended September 26, 2001, which have been derived from our unaudited
consolidated financial statements. In the opinion of management, our unaudited
interim consolidated financial statements include all adjustments necessary for
a fair presentation of our consolidated results of operations, cash flows and
financial position for these interim periods. Excluding restructuring and
impairment charges, all of these adjustments are of a normal and recurring
nature. The unaudited interim consolidated results of operations are not
necessarily indicative of the consolidated results of operations for any other
interim period or for any fiscal year as a whole. The following information
should be read in conjunction with our consolidated financial statements and the
notes thereto, "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
presented elsewhere in this prospectus.
PREDECESSOR
COMPANY SUCCESSOR COMPANY(A)
----------- ------------------------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED
ENDED WEEKS ENDED ---------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27,
1998(B) 1998(B) 1999(B) 2000
(IN MILLIONS, EXCEPT RATIOS) ----------- ------------ ------------ ------------
Income Statement Data:
Company restaurant sales................... $ 22.0 $1,106.1 $1,140.3 $1,080.6
Franchise and licensing revenue............ 1.2 49.9 59.9 74.6
------ -------- -------- --------
Operating revenue.......................... 23.2 1,156.0 1,200.2 1,155.2
Total cost of company restaurant sales..... 18.5 927.9 957.8 929.8
Franchise restaurant costs................. 0.6 22.0 28.7 38.0
General and administrative expenses........ 2.0 76.9 74.8 66.3
Total amortization and depreciation........ 1.0 191.2 219.8 153.6
Total impairment and restructuring
charges.................................. -- -- 136.5 19.0
Gains on refranchising and other, net...... (7.6) (10.8) (21.5) (51.2)
------ -------- -------- --------
Total operating costs and expenses......... 14.5 1,207.2 1,396.1 1,155.5
Operating income (loss).................... $ 8.7 $ (51.2) $ (195.9) $ (0.3)
====== ======== ======== ========
Interest expense, net...................... $ 2.0 $ 76.0 $ 79.4 $ 81.8
Income (loss) from continuing
operations(d)............................ 602.9(e) (127.0) (275.8) (82.5)
Other Data:
EBITDA as defined(f)....................... $ 9.7 $ 140.0 $ 160.4 $ 172.3
Net cash flows provided by (used in)
operating activities..................... 7.7 (10.7) (31.1) (8.4)
Net cash flows provided by (used in)
investing activities(g).................. 7.9 180.3 86.7 204.8
Net cash flows (used in) provided by
financing activities..................... (5.3) (66.6) (47.9) (335.0)(h)
Capital expenditures....................... 0.0 (45.3) (90.7) (41.9)
Pro Forma Data(i)(j):
Interest expense, net...................... 78.9
Ratio of debt(k) to EBITDA as defined...... 3.1x
Ratio of EBITDA as defined to interest
expense, net............................. 2.2x
Ratio of EBITDA as defined less capital
expenditures to interest expense, net.... 1.7x
SUCCESSOR COMPANY(A)
-----------------------------------------------------
THREE QUARTERS ENDED
----------------------------- FOUR QUARTERS
SEPTEMBER 27, SEPTEMBER 26, ENDED
2000 2001 SEPTEMBER 26, 2001(C)
(IN MILLIONS, EXCEPT RATIOS) ------------- ------------- ---------------------
Income Statement Data:
Company restaurant sales................... $829.7 $724.8 $ 975.7
Franchise and licensing revenue............ 53.5 68.0 89.1
------ ------ --------
Operating revenue.......................... 883.2 792.8 1,064.8
Total cost of company restaurant sales..... 716.3 622.8 836.4
Franchise restaurant costs................. 24.6 29.4 42.8
General and administrative expenses........ 51.6 44.7 59.3
Total amortization and depreciation........ 115.6 92.0 130.0
Total impairment and restructuring
charges.................................. 7.2 16.8 28.6
Gains on refranchising and other, net...... (38.3) (12.1) (25.0)
------ ------ --------
Total operating costs and expenses......... 877.0 793.6 1,072.1
Operating income (loss).................... $ 6.2 $ (0.8) $ (7.3)
====== ====== ========
Interest expense, net...................... $ 62.3 $ 54.7 $ 74.2
Income (loss) from continuing
operations(d)............................ (55.9) (56.8) (83.4)
Other Data:
EBITDA as defined(f)....................... $129.0 $108.1 $ 151.3
Net cash flows provided by (used in)
operating activities..................... (24.4) (24.2) (8.2)
Net cash flows provided by (used in)
investing activities(g).................. 44.3 (53.8) 106.7
Net cash flows (used in) provided by
financing activities..................... (173.1) 54.4 (107.5)
Capital expenditures....................... (29.2) (25.2) (38.0)
Pro Forma Data(i)(j):
Interest expense, net...................... 52.6 71.4
Ratio of debt(k) to EBITDA as defined...... NM* 3.9x
Ratio of EBITDA as defined to interest
expense, net............................. 2.1x 2.1x
Ratio of EBITDA as defined less capital
expenditures to interest expense, net.... 1.6x 1.6x
9
AS OF
SEPTEMBER 26, 2001
----------------------
ACTUAL PRO FORMA(I)
------- ------------
Balance Sheet Data:
Cash...................................................... $ 3.7 $ --
Working capital deficit excluding net liabilities of
discontinued operations(l).............................. (113.9) (111.6)
Total assets.............................................. 630.1 626.3
Total debt(m)............................................. 666.9 602.9
---------------
* Not meaningful
(a) As discussed in more detail in Note 1 to our consolidated financial
statements, Flagstar Companies, Inc., or FCI, and Flagstar Corporation, or
Flagstar, emerged from bankruptcy on January 7, 1998. As described in Note
2 to our consolidated financial statements, the change in ownership of
Advantica effected by the financial restructuring resulting from the
bankruptcy required the application of fresh start reporting effective
January 7, 1998 in accordance with the American Institute of Certified
Public Accountants' Statement of Position 90-7, "Financial Reporting By
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). All
financial statements subsequent to January 7, 1998 are referred to as
"Successor Company" statements, as they reflect periods subsequent to the
implementation of fresh start reporting and are not comparable to the
financial statements for periods prior to January 7, 1998.
(b) Certain amounts for the one week ended January 7, 1998, the fifty-one
weeks ended December 30, 1998 and the fiscal year ended December 29, 1999
have been reclassified to conform to the 2000 presentation.
(c) Summary consolidated financial data for the four quarters ended September
26, 2001 is presented supplementally and is derived from the consolidated
financial data for the fiscal year ended December 27, 2000 and for the
three quarters ended September 27, 2000 and September 26, 2001. It
represents our most current annualized operations and resulting ratios.
(d) We have classified as discontinued operations restaurant subsidiaries
Flagstar Enterprises, Inc., or FEI, (which operated Advantica's Hardee's
under licenses from Hardee's Food Systems), Quincy's Restaurants, Inc., or
Quincy's, El Pollo Loco, Inc., or EPL, and FRD. FEI and Quincy's were sold
in 1998, and EPL was sold in 1999. We began accounting for FRD as a
discontinued operation in the second quarter of 2000.
(e) The income from continuing operations for the one week ended January 7,
1998 includes reorganization items of $582.0 million. For a discussion of
these reorganization items, see Note 8 to our consolidated financial
statements.
(f) We define "EBITDA" as operating income before depreciation, amortization
and charges for restructuring and impairment as follows:
PREDECESSOR SUCCESSOR COMPANY(A)
COMPANY ------------------------------------------------------------------------------------------
----------- FOUR
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED THREE QUARTERS ENDED QUARTERS
ENDED WEEKS ENDED --------------------------- ----------------------------- ENDED
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 26,
1998 1998 1999 2000 2000 2001 2001
----------- ------------ ------------ ------------ ------------- ------------- -------------
(in millions)
Operating income
(loss)............. $8.7 $(51.2) $(195.9) $ (0.3) $ 6.2 $ (0.8) $ (7.3)
Total amortization
and depreciation... 1.0 191.2 219.8 153.6 115.6 92.0 130.0
Total impairment and
restructuring
charges............ -- -- 136.5 19.0 7.2 16.8 28.6
---- ------ ------- ------ ------ ------ ------
EBITDA as defined.... $9.7 $140.0 $ 160.4 $172.3 $129.0 $108.1 $151.3
==== ====== ======= ====== ====== ====== ======
We believe that EBITDA as defined is a key internal measure used to
evaluate the amount of cash flow available for debt repayment and funding
of additional investments. EBITDA as defined is not a measure defined by
generally accepted accounting principles and should not be considered as an
10
alternative to net income or cash flow data prepared in accordance with
generally accepted accounting principles. Our measure of EBITDA as defined
may not be comparable to similarly titled measures reported by other
companies, and although the definition of EBITDA in Advantica's revolving
credit facility differs somewhat from the definition of "EBITDA as
defined", the amount of Advantica's EBITDA as defined has been the same as
that calculated under the revolving credit facility since Advantica's
emergence from bankruptcy in January 1998. For a discussion of the
restructuring and impairment charges, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" and Notes 6 and 7 in our consolidated financial statements.
(g) Net cash flows provided by (used in) investing activities include net
proceeds of $460.4 million from the disposition of FEI and Quincy's in the
fifty-one weeks ended December 31, 1998 and net proceeds of $109.4 million
from the sale of EPL in fiscal year 1999. For fiscal year 2000, net cash
flows from investing activities includes $158.7 million of proceeds from
the maturity of investments securing our in-substance defeased debt (see
(h) below).
(h) Net cash flows (used in) provided by financing activities for fiscal year
2000 includes the repayment of the $160.0 million principal amount of
Denny's mortgage notes (as discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources") and the repayment of the $153.3 million principal
amount of our in-substance defeased debt through the use of the proceeds
described in (g) above.
(i) The pro forma financial data have been derived from our unaudited pro
forma condensed consolidated financial statements and notes thereto
included elsewhere herein. The unaudited pro forma condensed consolidated
statements of operations give effect to the exchange offer as if the
exchange offer had been consummated on December 30, 1999, the first day of
fiscal year 2000. The unaudited pro forma condensed consolidated balance
sheet gives effect to the exchange offer as if the exchange offer had been
consummated on September 26, 2001. The pro forma information included in
this prospectus is provided for informational purposes only and should not
be construed to be indicative of the financial condition or results of
operations of Advantica had the exchange offer been consummated on the
respective dates indicated above, nor is it intended to predict the
financial condition or results of operations of Advantica at any future
date or for any future period.
(j) As discussed in the section entitled "Description of New Notes," the new
notes will be structurally senior to the unexchanged old notes. The pro
forma amounts in the following table exclude the unexchanged old notes of
$264.6 million and unamortized premium of $8.8 million (assuming the
maximum tender amount) and the related interest expense thereon of $29.4
million for the four quarters ended September 26, 2001:
Pro Forma Data(i):
Structurally senior interest expense, net................. $42.0
Ratio of structurally senior debt(k) to EBITDA as
defined................................................ 2.2x
Ratio of EBITDA as defined to structurally senior interest
expense, net........................................... 3.6x
Ratio of EBITDA as defined less capital expenditures to
structurally senior interest expense, net.............. 2.7x
(k) For purposes of this calculation, debt is total debt less the net premium
thereon.
(l) A negative working capital position is not unusual for a restaurant
operating company. For a discussion of the working capital deficit at
September 26, 2001, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(m) Total debt consists of notes and debentures and capital lease obligations,
including current maturities thereof.
11
RISK FACTORS
You should read and carefully consider the risks described in this section,
as well as the other information contained in this prospectus, before making a
decision to tender your old notes in exchange for new notes in the exchange
offer.
RISKS RELATED TO OUR INDEBTEDNESS
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR OPERATIONS, INCLUDING
OUR ABILITY TO PERFORM OUR OBLIGATIONS UNDER THE NOTES.
We have now and will continue to have a significant amount of indebtedness.
As of September 26, 2001, we had total indebtedness of approximately $666.9
million, and a shareholders' deficit of $295.2 million.
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the old notes and the new notes;
- require us to continue to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, which would reduce the
availability of our cash flow to fund future working capital, capital
expenditures, acquisitions and other general corporate purposes;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- restrict us from making strategic acquisitions or pursuing business
opportunities;
- place us at a competitive disadvantage compared to our competitors that
have relatively less indebtedness; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds.
Failing to comply with those covenants could result in an event of
default which, if not cured or waived, could have a material adverse
effect on our business, financial condition and results of operations.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL INCUR
SUBSTANTIALLY MORE INDEBTEDNESS, INCLUDING SECURED INDEBTEDNESS. INCURRING MORE
INDEBTEDNESS COULD INTENSIFY THE RISKS DESCRIBED ABOVE.
Subject to the restrictions in our revolving credit facility and the
indentures governing the old notes and, when and if issued, the new notes, we
may incur significant additional indebtedness. Although the terms of the
indentures governing the old and new notes and our revolving credit facility
contain restrictions on the incurrence of additional indebtedness, these
restrictions are subject to a number of qualifications and exceptions, and
additional indebtedness incurred in compliance with these restrictions could be
substantial. If new debt is added to our and our subsidiaries' current debt
levels, the related risks that we and they now face could intensify. As of
September 26, 2001, we had $73.3 million of advances and $52.6 million of
letters of credit outstanding under our revolving credit facility, leaving $74.1
million of additional permitted borrowings available under our revolving credit
facility.
YOUR RIGHT TO RECEIVE PAYMENT ON THE NOTES WILL BE EFFECTIVELY SUBORDINATE TO
OUR OBLIGATIONS UNDER THE REVOLVING CREDIT FACILITY AND STRUCTURALLY SUBORDINATE
TO THE DEBT OF OUR SUBSIDIARIES.
Our revolving credit facility is secured by a first priority security
interest on the majority of our assets, including the capital stock of our
subsidiaries. Any borrowings under our revolving credit facility or other
secured indebtedness would be effectively senior to the old notes and new notes
to the extent of the security. In the event of our liquidation or insolvency, or
if any of our secured indebtedness is accelerated, the secured
12
assets will be first applied to repay our obligations under our secured
indebtedness in full and then to repay our obligations under our unsecured
indebtedness, including under the new notes and the old notes. Accordingly,
there may not be sufficient assets remaining to pay amounts due on any or all of
the new notes or old notes then outstanding. In addition, borrowings of our
subsidiaries, whether secured or not and including capital lease obligations,
and trade payables, will be structurally senior to the old and new notes.
AS HOLDING COMPANIES, ADVANTICA AND DENNY'S HOLDINGS DEPEND ON UPSTREAM PAYMENTS
FROM THEIR OPERATING SUBSIDIARIES.
Advantica is a holding company, which currently conducts its operations
through consolidated subsidiaries, including Denny's Holdings. As such,
substantially all of the assets of Advantica are owned by Advantica's
subsidiaries. Accordingly, Advantica is dependent upon dividends, loans and
other intercompany transfers from its subsidiaries to meet its debt service and
other obligations. These transfers are subject to contractual restrictions and
are contingent upon the earnings of its subsidiaries. Similarly, Denny's
Holdings is itself a holding company, which conducts its operations through
consolidated subsidiaries, including Denny's. Dividends, loans and other
intercompany transfers from subsidiaries to Denny's Holdings are also subject to
contractual restrictions and are contingent upon the earnings of its
subsidiaries. We cannot assure you that the operating results of our
subsidiaries will be sufficient to enable us to make payments on the notes.
OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL, AND WE
MAY NOT BE ABLE TO GENERATE THE CASH REQUIRED TO SERVICE OR REPAY OUR
INDEBTEDNESS.
Our ability to pay or to refinance our indebtedness, including the old and
new notes, will depend upon our future operating performance, which will be
affected by general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Our historical financial results
have been, and our future financial results are expected to be, subject to
substantial fluctuations. We cannot assure you that our business will generate
sufficient cash flow from operations, that currently anticipated revenue growth
and operating improvements will be realized or that future borrowings will be
available to us under our revolving credit facility (currently set to expire in
January 2003) or any refinancing thereof in amounts sufficient to enable us to
service or reduce our indebtedness, including the notes, or to fund our other
liquidity needs. Our ability to maintain or increase operating cash flow will
depend upon:
- consumer tastes;
- the success of our marketing initiatives and other efforts by us to
increase customer traffic in our restaurants; and
- prevailing economic conditions and other matters, many of which are
beyond our control.
If we are unable to meet our debt service obligations or fund other
liquidity needs, we may need to refinance all or a portion of our indebtedness,
including the old and new notes, on or before maturity or seek additional equity
capital. We cannot assure you that we will be able to pay or refinance our
indebtedness or obtain additional equity capital on commercially reasonable
terms, or at all.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS RESTRICT OR PROHIBIT OUR ABILITY
TO ENGAGE IN OR ENTER INTO A VARIETY OF TRANSACTIONS, WHICH COULD ADVERSELY
AFFECT US.
The indenture governing the old notes contains, and the indenture to govern
the new notes will contain, various covenants that limit, among other things,
our ability to:
- incur additional indebtedness;
- pay dividends or make distributions or certain other restricted payments;
- make certain investments;
- create dividend or other payment restrictions affecting restricted
subsidiaries;
13
- issue or sell capital stock of restricted subsidiaries;
- guarantee indebtedness;
- enter into transactions with stockholders or affiliates;
- create liens;
- sell assets and use the proceeds thereof;
- engage in sale-leaseback transactions; and
- enter into certain mergers and consolidations.
The revolving credit facility contains similar and additional restrictive
covenants, including financial maintenance requirements. These covenants could
have an adverse effect on our business by limiting our ability to take advantage
of financing, merger and acquisition or other corporate opportunities and to
fund our operations.
A BREACH OF A COVENANT IN OUR DEBT INSTRUMENTS COULD CAUSE ACCELERATION OF A
SIGNIFICANT PORTION OF OUR OUTSTANDING INDEBTEDNESS.
A breach of a covenant or other provision in any debt instrument governing
our current or future indebtedness could result in a default under that
instrument and, due to cross-default and cross-acceleration provisions, could
result in a default under our other debt instruments. In addition, our revolving
credit facility requires us to maintain certain financial ratios. Our ability to
comply with these covenants may be affected by events beyond our control, and we
cannot assure you that we will be able to comply with these covenants. Upon the
occurrence of an event of default under the revolving credit facility or any
other debt instrument, the lenders could elect to declare all amounts
outstanding to be immediately due and payable and terminate all commitments to
extend further credit. If we were unable to repay those amounts, the lenders
could proceed against the collateral granted to them, if any, to secure the
indebtedness. If the lenders under our current or future indebtedness accelerate
the payment of the indebtedness, we cannot assure you that our assets would be
sufficient to repay in full our outstanding indebtedness, including the notes.
WE MAY BE UNABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL.
In the event of a "change of control" (as defined, respectively, in the
indentures for the old notes and the new notes), we must offer to purchase the
notes at a purchase price equal to 101% of the principal amount, plus accrued
and unpaid interest to the date of repurchase. See "Description of New Notes --
Change of Control." In the event that we are required to make such an offer,
there can be no assurance that we would have sufficient funds available to
purchase any old notes or new notes tendered, and we may be required to
refinance the old notes and the new notes. There can be no assurance that we
would be able to accomplish a refinancing or, if a refinancing were to occur,
that it would be accomplished on commercially reasonable terms.
Our revolving credit facility prohibits us from repurchasing any old notes
or new notes, except under limited circumstances. Our revolving credit facility
also provides that certain change of control events with respect to Advantica
would constitute a default. In the event a change of control occurs at a time
when we are prohibited from purchasing the old notes and the new notes, we could
seek the consent of the lenders under the revolving credit facility to purchase
the old notes and the new notes or we could attempt to refinance the revolving
credit facility. If we do not obtain such a consent or are unable to refinance
the revolving credit facility, we would remain prohibited from purchasing the
old notes and the new notes. In this case, our failure to purchase tendered
notes would constitute an event of default under the indentures. The provisions
relating to a change of control included in the indentures may also increase the
difficulty of a potential acquirer from obtaining control of Advantica or
Denny's Holdings.
14
RISKS RELATED TO THE EXCHANGE OFFER
UNEXCHANGED OLD NOTES WILL BE STRUCTURALLY SUBORDINATED TO, AND HAVE A LATER
MATURITY DATE THAN, THE NEW NOTES.
The new notes will be jointly issued by Advantica and Denny's Holdings, a
wholly owned subsidiary of Advantica, that, through its subsidiaries, controls
the assets of the Denny's restaurant operations. Unlike the holders of the old
notes that are issued only by Advantica, the holders of the new notes may
enforce their rights directly against Advantica or Denny's Holdings.
Accordingly, the unexchanged old notes will be structurally subordinated to the
new notes. Structural subordination means that, in the event of liquidation or
insolvency of Advantica or Denny's Holdings, the assets of Denny's Holdings and
its subsidiaries will be available to pay obligations under the old notes only
after the new notes have been paid in full. In this case, there may not be
sufficient assets remaining to pay amounts due on any or all of the old notes
then outstanding. In addition, the new notes mature on September 30, 2007, an
earlier date than the January 15, 2008 maturity date for the old notes.
WE MAY CANCEL THE EXCHANGE OFFER IF CERTAIN CONDITIONS ARE NOT MET.
We are not obligated to complete the exchange offer unless and until:
- we receive valid and unrevoked tenders representing more than $160.0
million in aggregate outstanding principal amount of the old notes; and
- we are satisfied that the other conditions to the exchange offer set
forth in this prospectus are satisfied or waived.
See "The Exchange Offer -- Conditions of the Exchange Offer." Even if the
exchange offer is completed, it may not be completed on the schedule described
in this prospectus. Accordingly, holders participating in the exchange offer may
have to wait longer than expected to receive their new notes, during which time
those holders of old notes will not be able to effect transfers of their old
notes tendered in the exchange, unless they withdraw their tender.
THE EXCHANGE OFFER WILL RESULT IN REDUCED LIQUIDITY OF UNEXCHANGED OLD NOTES.
The trading market for unexchanged old notes could become more limited than
the existing limited trading market for the old notes due to the reduction in
the amount of the old notes outstanding upon consummation of the exchange offer.
A more limited trading market might adversely affect the liquidity, market price
and price volatility of the old notes. If a market for unexchanged old notes
continues after consummation of the exchange offer, the old notes may trade at a
discount to the price at which they would trade if the amount outstanding were
not reduced. An active market in the unexchanged old notes may not exist,
develop or be maintained, and the prices at which the unexchanged old notes may
be traded may be less than the price at which you purchased your old notes.
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP FOR THE NEW NOTES, YOU MAY BE
UNABLE TO SELL THE NEW NOTES OR TO SELL THEM AT A PRICE YOU DEEM SUFFICIENT.
The new notes will be new securities for which there is no established
trading market. We do not intend to list the new notes on any exchange. We
cannot give you any assurance as to:
- the liquidity of any trading market that may develop;
- the ability of holders to sell their new notes; or
- the price at which holders would be able to sell their new notes.
15
Even if a trading market develops, the new notes may trade at higher or
lower prices than their principal amount, depending on many factors, including:
- prevailing interest rates;
- the number of holders of the new notes;
- the interest of securities dealers in making a market for the new notes;
- the market for similar notes; and
- our financial performance.
Finally, if only the minimum aggregate principal amount of old notes is
tendered and accepted in the exchange offer, the limited amount of new notes
that would be issued and outstanding after we complete the exchange offer could
adversely affect the development of a market for the new notes.
INSOLVENCY PROCEEDINGS INVOLVING ADVANTICA, DENNY'S HOLDINGS OR DENNY'S MAY
HINDER THE RECEIPT OF PAYMENT ON THE NEW NOTES AND COULD CAUSE THE NEW NOTES TO
LOSE THEIR STRUCTURAL SENIORITY OVER THE OLD NOTES.
An investment in the new notes involves insolvency and bankruptcy
considerations that investors should carefully consider. If Advantica, Denny's
Holdings or Denny's becomes a debtor subject to insolvency proceedings under the
United States Bankruptcy Code, such circumstances are likely to result in delays
in the payment of the new notes and may result in our inability to make payment
of all or a portion of the amounts due under the new notes. Provisions of the
United States Bankruptcy Code or general principles of equity that could result
in the impairment of your rights include the automatic stay, avoidance of
transfers by a trustee or debtor-in-possession, substantive consolidation,
limitations on the collectibility of unmatured interest or attorneys' fees, and
forced restructuring of the new notes.
If Advantica, Denny's Holdings or Denny's becomes a debtor in a case under
the United States Bankruptcy Code, claims could be made by creditors that the
assets and liabilities of any one of those entities should be substantively
consolidated with those of any other of those entities. If such claims are
successful, the effect could impair the ability of Advantica and/or Denny's
Holdings to repay the new notes and the old notes.
Substantive consolidation is an exception rather than the rule, especially
if one of the companies involved is not in bankruptcy. If Advantica, Denny's
Holdings, or Denny's becomes a debtor in a case under the United States
Bankruptcy Code, the equitable doctrine of substantive consolidation could
permit a bankruptcy court to disregard the corporate separateness of those
entities and to consolidate and pool their respective assets and liabilities as
though they were held and incurred by one entity. If a court were to order the
substantive consolidation of the assets and liabilities of Advantica and Denny's
Holdings, the new notes would lose their structural seniority over the old
notes. In such event, the holders of the new notes would have the same priority
as the holders of the old notes with respect to the assets of the consolidated
entities. The assets of the substantively consolidated entities may not be
sufficient to pay amounts then due on the new notes and the old notes.
DENNY'S HOLDINGS' OBLIGATIONS UNDER THE NEW NOTES MAY BE SUBJECT TO CANCELLATION
UNDER FRAUDULENT TRANSFER LAW.
Denny's Holdings will be a co-issuer of the new notes. If Denny's Holdings
becomes a debtor in a case under the United States Bankruptcy Code or encounters
other financial difficulty, a court might avoid (that is cancel) Denny's
Holdings' obligations under the new notes under federal or state fraudulent
transfer law. The court might do so if it found that when Denny's Holdings
issued the new notes it (a) received less than reasonably equivalent value or
fair consideration for the issuance of the new notes and (b) either (1) was or
was rendered insolvent, (2) was left with inadequate capital to conduct its
business, or (3) believed (or reasonably should have believed) that it would
incur debts beyond its ability to pay. The court may also avoid
16
Denny's Holdings' obligations under the new notes, without regard to those
factors, if it found that Denny's Holdings issued the new notes with actual
intent to hinder, delay or defraud its creditors.
In applying the above factors, a court would likely find that Denny's
Holdings did not receive fair consideration or reasonably equivalent value,
except to the extent that it benefited directly or indirectly from the issuance
of the new notes.
The determination of whether Denny's Holdings was "insolvent" when it
issued the new notes will vary depending on the law of the jurisdiction being
applied. Generally, an entity would be considered insolvent if the sum of its
debts (including contingent or unliquidated debts) is greater than all of its
property at a fair valuation or if the present fair salable value of its assets
is less than the amount that will be required to pay its probable liability on
its existing debts (including contingent or unliquidated debts) as they become
absolute and matured.
If a court avoided Denny's Holdings' obligations under the new notes, you
would still have a claim against Advantica, with the same priority as holders of
the old notes, but would no longer have a direct claim against Denny's Holdings.
We cannot assure you that the assets of Advantica would be sufficient to pay
amounts then due under the new notes.
THE EXCHANGE OF OLD NOTES FOR NEW NOTES MAY BE A TAXABLE EVENT FOR UNITED STATES
FEDERAL INCOME TAX PURPOSES, AND THE NEW NOTES MAY BE ISSUED WITH ORIGINAL ISSUE
DISCOUNT.
If the exchange of old notes for new notes pursuant to the exchange offer
qualifies as a recapitalization for United States federal income tax purposes,
holders will generally not recognize any gain or loss as a result of such
exchange, except to the extent of cash received, if any, in lieu of a fractional
new note. If the exchange does not qualify as a recapitalization, holders will
recognize gain or loss in an amount equal to the difference between the (x) fair
market value of the new notes plus cash received, if any, in lieu of a
fractional new note and (y) the adjusted tax basis of the old notes tendered in
exchange therefor. The new notes may be issued with original issue discount. If
the new notes are issued with original issue discount, U.S. holders will be
required to include original issue discount (subject to reduction by amortized
acquisition premium, if any) as ordinary income over the period that they hold
the new notes in advance of the receipt of the cash attributable thereto.
Holders who do not exchange their old notes for new notes will not have a
taxable event for United States federal income tax purposes. See "United States
Federal Income Tax Considerations."
RISKS RELATED TO OUR BUSINESS
WE MAY NOT COLLECT THE AMOUNT OWED TO US BY COCO'S AND CARROWS, AND THE OUTCOME
AND EFFECTS OF THE FRD BANKRUPTCY PROCEEDINGS ARE HIGHLY UNCERTAIN.
On January 8, 2001, Advantica paid $70.0 million to the lenders under the
Coco's/Carrows credit facility in full and complete satisfaction of Advantica's
guarantee of this facility with a combination of cash on hand and an advance
under Advantica's revolving credit facility. Coco's and Carrows are operating
subsidiaries of FRD. As a result of its satisfaction of obligations under its
guarantee, Advantica was subrogated to the rights and collateral of the lenders.
Immediately after obtaining its subrogation rights, Advantica assigned these
rights to its wholly owned subsidiary, Denny's. At September 26, 2001, Coco's
and Carrows had $28.0 million of outstanding term loan borrowings, working
capital borrowings of $24.7 million, interest payable of $1.2 million and
letters of credit outstanding of $9.6 million under their credit facility with
Denny's.
On February 14, 2001, to facilitate the divestiture of its Coco's and
Carrows brands and to preserve their going concern value, FRD filed for
protection under Chapter 11 of the United States Bankruptcy Code. In light of,
among other things, the operating results and financial condition of FRD and the
uncertainties as to the outcome of the FRD bankruptcy and related divestiture
process, there can be no assurance that we will be able to recover any or all of
the secured obligations owed to us under the Coco's/Carrows credit facility. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business." In addition, the uncertainties of the FRD bankruptcy proceedings
could have other effects on us, including the bankruptcy of any of FRD's
subsidiaries, including Coco's and Carrows, and the initiation of litigation
against us directly.
17
THE RESTAURANT BUSINESS IS HIGHLY COMPETITIVE.
The restaurant business is highly competitive and the competition is
expected to increase. If we are unable to compete effectively, our business will
be adversely affected. The following are important aspects of competition:
- price;
- restaurant location;
- food quality;
- quality and speed of service;
- attractiveness and repair and maintenance of facilities; and
- the effectiveness of marketing and advertising programs.
Our restaurants compete with a wide variety of restaurants ranging from
national and regional restaurant chains (some of which have substantially
greater financial resources than we do) to locally owned restaurants. There is
also active competition for advantageous commercial real estate sites suitable
for restaurants.
FOOD SERVICE BUSINESSES MAY BE ADVERSELY AFFECTED BY CHANGES IN CONSUMER TASTES,
ECONOMIC CONDITIONS AND DEMOGRAPHIC TRENDS.
Food service businesses are often adversely affected by changes in:
- consumer tastes;
- national, regional and local economic conditions; and
- demographic trends.
The performance of individual restaurants may be adversely affected by
factors such as:
- traffic patterns;
- demographic consideration; and
- the type, number and location of competing restaurants.
Multi-unit food service chains such as ours can also be materially and
adversely affected by publicity resulting from:
- poor food quality;
- illness;
- injury; and
- other health concerns or operating issues.
Dependence on frequent deliveries of fresh produce and groceries subjects
food service businesses to the risk that shortages or interruptions in supply
caused by adverse weather or other conditions could adversely affect the
availability, quality and cost of ingredients. In addition, the food service
industry in general and our results of operations and financial condition in
particular may also be adversely affected by unfavorable trends or developments
such as:
- inflation;
- increased food costs;
- labor and employee benefits costs (including increases in hourly wage and
minimum unemployment tax rates);
18
- regional weather conditions; and
- the availability of experienced management and hourly employees.
THE LOCATIONS WHERE WE HAVE RESTAURANTS MAY CEASE TO BE ATTRACTIVE AS
DEMOGRAPHIC PATTERNS CHANGE.
The success of our owned and franchised restaurants is significantly
influenced by location. Current locations may not continue to be attractive as
demographic patterns change. It is possible that the neighborhood or economic
conditions where our restaurants are located could decline in the future,
potentially resulting in reduced sales in those locations.
THERE ARE NUMEROUS RISKS RELATED TO FRANCHISING.
We have refranchised, and may continue to refranchise, a significant
portion of our company-owned restaurants. This franchising initiative may
ultimately not be successful due to a lack of franchisee interest or changing
economic conditions. In addition, even if our franchising initiative is
successful, there can be no assurance that this decision will prove advantageous
to us from an operational standpoint. The interests of franchisees might
sometimes conflict with our interests. For example, whereas franchisees are
concerned with their individual business strategies and objectives, we are
responsible for ensuring the success of the entire Denny's chain.
Franchising also presents certain financial risks for us. The family dining
industry is intensely competitive, and some of our franchisees are and will be
highly leveraged. Some of our current franchisees have recently experienced
financial difficulties. Financial problems of our franchisees adversely affect
our royalty income and the value of the Denny's brand.
NUMEROUS GOVERNMENT REGULATIONS IMPACT OUR BUSINESS.
We and our franchisees are subject to federal, state and local laws and
regulations governing, among other things:
- health;
- sanitation;
- environmental matters;
- safety;
- the sale of alcoholic beverages; and
- hiring and employment practices, including minimum wage laws.
Restaurant operations are also subject to federal and state laws that
prohibit discrimination and laws regulating the design and operation of
facilities, such as the American With Disabilities Act of 1990. The operation of
our franchisee system is also subject to regulations enacted by a number of
states and rules promulgated by the Federal Trade Commission. If we or our
franchisees fail to comply with these laws and regulations, we could be
subjected to closure, fines, penalties, and litigation, which may be costly. We
cannot predict the effect on our operations, particularly on our relationship
with franchisees, caused by the future enactment of additional legislation
regulating the franchise relationship.
NEGATIVE PUBLICITY GENERATED BY INCIDENTS AT A FEW RESTAURANTS CAN ADVERSELY
AFFECT THE OPERATING RESULTS OF OUR ENTIRE CHAIN AND THE DENNY'S BRAND.
Food safety concerns, criminal activity, alleged discrimination or other
operating issues stemming from one restaurant or a limited number of restaurants
do not just impact that particular restaurant or a limited number of
restaurants. Rather, our entire chain of restaurants is at risk from negative
publicity generated by an incident at a single restaurant. This negative
publicity can adversely affect the operating results of our entire chain and the
Denny's brand.
19
CAPITALIZATION
The following table sets forth the capitalization of Advantica at September
26, 2001 on an actual basis and as adjusted to give effect to the proposed
exchange offer (assuming the maximum tender amount) as if it had been
consummated at September 26, 2001. This table should be read in conjunction with
our unaudited pro forma condensed consolidated financial statements (including
notes thereto) and with our consolidated financial statements set forth
elsewhere in this prospectus.
SEPTEMBER 26, 2001
--------------------
ACTUAL PRO FORMA
(In millions, except par value and shares) ------- ---------
Cash and cash equivalents................................... $ 3.7 $ --
======= =======
Long-Term Debt:
Advances outstanding under the revolving credit
facility............................................... $ 73.3 $ 79.0
Other notes payable....................................... 6.2 6.2
Discount on other notes payable........................... (1.3) (1.3)
Capital lease obligations................................. 41.5 41.5
12 3/4% Senior Notes due September 30, 2007 of Denny's
Holdings and Advantica (new notes)..................... -- 204.1
------- -------
Total structurally senior long-term debt, including
current maturities.................................... 119.7 329.5
11 1/4% Senior Notes due January 15, 2008 of Advantica
(old notes)............................................ 529.6 264.6
Premium on 11 1/4% Senior Notes of Advantica.............. 17.6 8.8
------- -------
Total long-term debt, including current maturities..... 666.9 602.9
------- -------
Shareholders' Equity (Deficit)
Common Stock, $.01 par value; shares
authorized -- 100,000,000; issued and
outstanding -- 40,143,025.............................. 0.4 0.4
Paid-in capital........................................... 417.3 417.3
Deficit................................................... (710.3) (644.2)
Accumulated other comprehensive loss...................... (2.6) (2.6)
------- -------
Total Shareholders' Deficit............................ (295.2) (229.1)
------- -------
Total Capitalization................................... $ 371.7 $ 373.8
======= =======
20
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated balance sheet data as of December 31, 1996 and 1997, and
December 30, 1998, and the related statements of consolidated operations and
consolidated cash flow data for the years ended December 31, 1996 and 1997 are
derived from our audited consolidated financial statements that are not included
in this prospectus. The statement of consolidated operations and consolidated
cash flow data for the one week period ended January 7, 1998 are derived from
the audited consolidated financial statements of our predecessor company that
are included elsewhere in this prospectus. The consolidated balance sheet data
as of December 29, 1999 and December 27, 2000 and the statements of consolidated
operations and consolidated cash flow data for the fifty-one week period ended
December 30, 1998 and the fiscal years ended December 29, 1999 and December 27,
2000 are derived from our audited consolidated financial statements that are
included elsewhere in this prospectus. The consolidated balance sheet data as of
the three quarters ended September 26, 2001 and the statements of consolidated
operations and consolidated cash flow data for the three quarters ended
September 27, 2000 and September 26, 2001 are derived from our unaudited
consolidated financial statements that are included elsewhere in this
prospectus. In the opinion of management, our unaudited interim consolidated
financial statements include all adjustments necessary for a fair presentation
of our consolidated results of operations, cash flows and financial condition
for these interim periods. Excluding restructuring and impairment charges, all
of these adjustments are of a normal and recurring nature. The unaudited interim
consolidated results of operations are not necessarily indicative of the
consolidated results of operations for any other interim period or for any
fiscal year as a whole. You should read the selected consolidated financial data
and other information in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements included elsewhere in this prospectus.
21
PREDECESSOR COMPANY SUCCESSOR COMPANY(A)
---------------------------------------- ------------------------------------------
ONE WEEK FIFTY-ONE
FISCAL YEAR ENDED ENDED WEEKS ENDED FISCAL YEAR ENDED
--------------------------- ---------- ------------ ---------------------------
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27,
(In millions, except ratios and 1996(B) 1997(B)(C) 1998(B) 1998(B) 1999(B) 2000
per share amounts) ------------ ------------ ---------- ------------ ------------ ------------
Income Statement Data:
Company restaurant sales.... $1,201.7 $1,146.3 $ 22.0 $1,106.1 $1,140.3 $1,080.6
Franchise and licensing
revenue................... 43.3 47.0 1.2 49.9 59.9 74.6
-------- -------- ------ -------- -------- --------
Operating revenue........... 1,245.0 1,193.3 23.2 1,156.0 1,200.2 1,155.2
Total cost of company
restaurant sales.......... 1,050.0 958.1 18.5 927.9 957.8 929.8
Franchise restaurant costs... 19.4 19.3 0.6 22.0 28.7 38.0
General and administrative
expenses.................. 48.5 81.9 2.0 76.9 74.8 66.3
Total amortization and
depreciation.............. 55.3 58.2 1.0 191.2 219.8 153.6
Total impairment and
restructuring charges..... -- -- -- -- 136.5 19.0
Gains on refranchising and
other, net................ (8.5) (2.4) (7.6) (10.8) (21.5) (51.2)
-------- -------- ------ -------- -------- --------
Total operating costs and
expenses.................. 1,164.7 1,115.1 14.5 1,207.2 1,396.1 1,155.5
Operating income (loss)..... $ 80.3 $ 78.2 $ 8.7 $ (51.2) $ (195.9) $ (0.3)
======== ======== ====== ======== ======== ========
Interest expense, net....... $ 152.8 $ 129.4 $ 2.0 $ 76.0 $ 79.4 $ 81.8
(Loss) income from continuing
operations(d)............. (57.1) (83.2) 602.9(e) (127.0) (275.8) (82.5)
Basic (loss) income per share
from continuing operations
applicable to common
shareholders.............. (1.68) (2.29) 14.21 (3.17) (6.89) (2.06)
Diluted (loss) income per
share from continuing
operations applicable to
common shareholders....... (1.68) (2.29) 10.93 (3.17) (6.89) (2.06)
Cash dividends per common
share(f).................. -- -- -- -- -- --
Ratio of earnings to fixed
charges(g)................ -- -- 268.5x -- -- --
Deficiency in the coverage of
fixed charges by earnings
before fixed charges(g)... 73.7 82.0 -- 129.1 275.0 80.7
Balance Sheet Data (at end of
period):
Current assets(h)........... $ 185.5 $ 129.6 $ 291.1 $ 379.5 $ 54.5
Working capital
deficit(h)(i)............. (297.7) (230.2) (81.2) (197.0) (170.6)
Net property and equipment.. 1,168.6 625.8 630.3 510.9 425.3
Total assets................ 1,687.4 1,407.4 1,930.7 1,236.3 743.4
Long-term debt, excluding
current portion........... 2,180.7 594.2(j) 1,141.2 615.4 593.7
Other Data:
EBITDA as defined(k)........ $ 135.6 $ 136.4 $ 9.7 $ 140.0 $ 160.4 $ 172.3
Net cash flows (used in)
provided by operating
activities................ (46.3) 37.0 7.7 (10.7) (31.1) (8.4)
Net cash flows (used in)
provided by investing
activities(l)............. (32.9) (41.6) 7.9 180.3 86.7 204.8
Net cash flows (used in)
provided by financing
activities................ (39.7) (28.4) (5.3) (66.6) (47.9) (335.0)(m)
SUCCESSOR COMPANY(A)
-----------------------------
THREE QUARTERS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
(In millions, except ratios and 2000 2001
per share amounts) ------------- -------------
Income Statement Data:
Company restaurant sales.... $ 829.7 $ 724.8
Franchise and licensing
revenue................... 53.5 68.0
-------- -------
Operating revenue........... 883.2 792.8
Total cost of company
restaurant sales.......... 716.3 622.8
Franchise restaurant costs... 24.6 29.4
General and administrative
expenses.................. 51.6 44.7
Total amortization and
depreciation.............. 115.6 92.0
Total impairment and
restructuring charges..... 7.2 16.8
Gains on refranchising and
other, net................ (38.3) (12.1)
-------- -------
Total operating costs and
expenses.................. 877.0 793.6
Operating income (loss)..... $ 6.2 $ (0.8)
======== =======
Interest expense, net....... $ 62.3 $ 54.7
(Loss) income from continuing
operations(d)............. (55.9) (56.8)
Basic (loss) income per share
from continuing operations
applicable to common
shareholders.............. (1.39) (1.41)
Diluted (loss) income per
share from continuing
operations applicable to
common shareholders....... (1.39) (1.41)
Cash dividends per common
share(f).................. -- --
Ratio of earnings to fixed
charges(g)................ -- --
Deficiency in the coverage of
fixed charges by earnings
before fixed charges(g)... 54.7 55.5
Balance Sheet Data (at end of
period):
Current assets(h)........... $ 192.9 $ 41.4
Working capital
deficit(h)(i)............. (175.7) (113.9)
Net property and equipment.. 446.6 369.7
Total assets................ 942.8 630.1
Long-term debt, excluding
current portion........... 595.5 661.5
Other Data:
EBITDA as defined(k)........ $ 129.0 $ 108.1
Net cash flows (used in)
provided by operating
activities................ (24.4) (24.2)
Net cash flows (used in)
provided by investing
activities(l)............. 44.3 (53.8)
Net cash flows (used in)
provided by financing
activities................ (173.1) 54.4
---------------
(a) As discussed in more detail in Note 1 to our consolidated financial
statements, FCI and Flagstar emerged from bankruptcy on January 7, 1998. As
described in Note 2 to our consolidated financial statements, the change in
ownership of Advantica effected by the financial restructuring resulting
from the bankruptcy required the application of fresh start reporting
effective January 7, 1998 in accordance with SOP 90-7. All financial
statements subsequent to January 7, 1998 are referred to as "Successor
Company" statements, as they reflect periods subsequent to the
implementation of fresh start reporting and are not comparable to the
financial statements for periods prior to January 7, 1998.
(b) Certain amounts for the fiscal years ended December 31, 1996 and December
31, 1997, the one week ended January 7, 1998, the fifty-one weeks ended
December 30, 1998 and the fiscal year ended December 29, 1999 have been
reclassified to conform to the 2000 presentation.
22
(c) Effective January 1, 1997, Advantica changed its fiscal year end from
December 31 to the last Wednesday of the calendar year. Concurrent with
this change, Advantica changed to a four-four-five week quarterly closing
calendar. This reporting schedule generally results in four 13-week
quarters during the fiscal year, for a total of 52 weeks. Due to the timing
of this change, the fiscal year ended December 31, 1997 included five
additional days of Denny's operations.
(d) Advantica has classified as discontinued operations restaurant subsidiaries
FEI (which operated Advantica's Hardee's under licenses from Hardee's Food
Systems), Quincy's, EPL and FRD. FEI and Quincy's were sold in 1998, and
EPL was sold in 1999. Advantica began accounting for FRD as a discontinued
operation in the second quarter of 2000.
(e) The income from continuing operations for the one week ended January 7,
1998 includes reorganization items of $582.0 million. For a discussion of
these reorganization items, see Note 8 to our consolidated financial
statements.
(f) Advantica's bank facilities have prohibited, and its public debt
indentures have significantly limited, distributions and dividends on
Advantica's (and its predecessors') common equity securities. See Note 11
to our consolidated financial statements.
(g) For purposes of computing the ratio of earnings to fixed charges or
deficiency in the coverage of fixed charges by earnings before fixed
charges, fixed charges consist of interest expense including capitalized
interest, amortization of debt expenses and the interest element in rental
payments under operating leases (estimated to be one third of the total
rental payments). Earnings consist of income from continuing operations
before income taxes and fixed charges excluding capitalized interest.
(h) The current assets and/or working capital deficit amounts presented exclude
assets held for sale of $5.1 million as of December 31, 1996, $347.0
million as of December 31, 1997, $87.7 million as of December 30, 1998, and
net liabilities of discontinued operations of $54.0 million as of December
29, 1999, $69.4 million as of December 27, 2000 and as of September 27,
2000 and $13.5 million as of September 26, 2001. Assets held for sale
relate to FEI and Quincy's for the year ended December 31, 1997. For the
year ended December 30, 1998, net assets held for sale relate to EPL. For
the years ended December 29, 1999 and December 27, 2000 and for the three
quarters ended September 27, 2000 and September 26, 2001, net liabilities
of discontinued operations relate to FRD.
(i) A negative working capital position is not unusual for a restaurant
operating company. The decrease in the working capital deficit from
December 31, 1996 to December 31, 1997 is attributable primarily to a
reclassification of accrued interest from current liabilities to
liabilities subject to compromise in accordance with SOP 90-7, largely
offset by a reduction in cash and cash equivalents which was used for
Advantica's operations. The decrease in the working capital deficit from
December 31, 1997 to December 30, 1998 is attributable primarily to an
increase in cash and cash equivalents from the sales of FEI and Quincy's.
The increase in the working capital deficit from December 30, 1998 to
December 29, 1999 is attributable primarily to the reclassification of
certain mortgage notes to current liabilities and a reduction in cash and
cash equivalents related to acquisitions of restaurants, the retirement of
a portion of senior notes and expenditures related to Denny's reimaging
program. For a discussion of the decrease in the working capital deficit
from December 29, 1999 to December 27, 2000 and from December 27, 2000 to
September 26, 2001, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(j) Reflects the reclassification of $1,496.7 million of long-term debt to
liabilities subject to compromise in accordance with SOP 90-7 as a result
of the Chapter 11 filing.
23
(k) We define "EBITDA" as operating income before depreciation, amortization
and charges for restructuring and impairment as follows:
PREDECESSOR COMPANY SUCCESSOR COMPANY(A)
---------------------------------------- ------------------------------------------
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE FISCAL YEAR ENDED
--------------------------- ENDED WEEKS ENDED ---------------------------
DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, DECEMBER 30, DECEMBER 27,
1996 1997 1998 1998 1999 2000
------------ ------------ ---------- ------------ ------------ ------------
(in millions)
Operating income
(loss)............. $ 80.3 $ 78.2 $8.7 $(51.2) $(195.9) $ (0.3)
Total amortization
and depreciation... 55.3 58.2 1.0 191.2 219.8 153.6
Total impairment and
restructuring
charges............ -- -- -- -- 136.5 19.0
------ ------ ---- ------ ------- ------
EBITDA as defined.... $135.6 $136.4 $9.7 $140.0 $ 160.4 $172.3
====== ====== ==== ====== ======= ======
SUCCESSOR COMPANY(A)
-----------------------------
THREE QUARTERS ENDED
-----------------------------
DECEMBER 27, SEPTEMBER 26,
2000 2001
------------- -------------
(in millions)
Operating income
(loss)............. $ 6.2 $ (0.8)
Total amortization
and depreciation... 115.6 92.0
Total impairment and
restructuring
charges............ 7.2 16.8
------ ------
EBITDA as defined.... $129.0 $108.1
====== ======
We believe that EBITDA as defined is a key internal measure used to
evaluate the amount of cash flow available for debt repayment and funding
of additional investments. EBITDA as defined is not a measure defined by
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. Our measure of EBITDA as defined
may not be comparable to similarly titled measures reported by other
companies, and although the definition of EBITDA in Advantica's revolving
credit facility differs somewhat from the definition of "EBITDA as
defined", the amount of Advantica's EBITDA as defined has been the same as
that calculated under the revolving credit facility since Advantica's
emergence from bankruptcy in January 1998. For a discussion of the
restructuring and impairment charges, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" and Notes 6 and 7 in our consolidated financial statements.
(l) Net cash flows (used in) provided by investing activities include net
proceeds of $63.0 million from the disposition of Portion-Trol Foods, Inc.
in fiscal year 1996, net proceeds of $460.4 million from the disposition
of FEI and Quincy's in the fifty-one weeks ended December 31, 1998 and net
proceeds of $109.4 million from the sale of EPL in fiscal year 1999. For
fiscal year 2000, net cash flows from investing activities includes $158.7
million of proceeds from the maturity of investments securing Advantica's
in-substance defeased debt (see (m) below).
(m) Net cash flows (used in) provided by financing activities for fiscal year
2000 include the repayment of the $160.0 million principal amount of
Denny's mortgage notes (as defined in "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources") and the repayment of the $153.3 million principal amount of
Advantica's in-substance defeased debt through the use of the proceeds
described in (l) above.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data," and our consolidated financial statements and
other more detailed financial information appearing elsewhere in this
prospectus. For purposes of providing a meaningful comparison of our 1998
operating performance, the following discussion and presentation of the results
of operations for the one week ended January 7, 1998 for our company prior to
its reorganization and the fifty-one weeks ended December 30, 1998 for our
company subsequent to its reorganization will be combined and referred to as the
fiscal year ended December 30, 1998, unless otherwise noted. Where appropriate,
the impact of the adoption of fresh start reporting on the results of operations
during the period will be separately disclosed.
Also discussed are significant changes in our financial position as of
September 26, 2001 compared to December 27, 2000 and the results of operations
for the three quarters ended September 26, 2001 compared to the three quarters
ended September 27, 2000.
DENNY'S RESTAURANT OPERATIONS AND UNIT ACTIVITY
FISCAL YEAR ENDED THREE QUARTERS ENDED
------------------------------------------ -----------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1998 1999 2000 2000 2001
($ in thousands) ------------ ------------ ------------ ------------- -------------
Net company sales............................ $1,128,093 $1,140,338 $1,080,641 $ 829,658 $ 724,779
Franchise revenue............................ 51,115 59,911 74,608 53,577 68,036
---------- ---------- ---------- ---------- ----------
Operating revenue............................ 1,179,208 1,200,249 1,155,249 883,235 792,815
Impairment charges........................... -- 136,500 6,416 -- 8,343
Restructuring charges........................ -- -- 12,556 7,248 8,495
Gains on refranchising and other, net........ (18,453) (21,514) (51,219) (38,339) (12,123)
Other operating expenses..................... 1,240,084 1,281,118 1,187,760 908,108 788,861
---------- ---------- ---------- ---------- ----------
Operating (loss) income...................... $ (42,423) $ (195,855) $ (264) $ 6,218 $ (761)
========== ========== ========== ========== ==========
Interest expense, net........................ $ 77,972 $ 79,435 $ 81,821 $ 62,322 $ 54,732
Reorganization items......................... 581,988 -- -- -- --
Income tax (benefit) provision............... (15,870) 814 1,802 1,175 1,280
Extraordinary items.......................... 613,889 -- -- -- 7,778
Net income (loss)............................ 1,213,226 (381,904) (98,002) (73,211) (49,007)
Other Data:
EBITDA as defined............................ $ 149,735 $ 160,416 $ 172,290 $ 129,041 $ 108,053
Total systemwide sales(a).................... $2,009,631 $2,139,742 $2,227,666 $1,681,178 $1,739,047
Average unit sales:
Company-owned.............................. $ 1,283 $ 1,309 $ 1,341 $ 1,012 $ 1,062
Franchise.................................. 1,091 1,132 1,161 884 906
Same-store sales increase
(company-owned)(b)......................... 1.3% 2.4% 1.5% 1.6% 2.5%
Guest check average increase(b).............. 5.0% 5.1% 5.1% 5.4% 2.1%
ENDING ENDING
UNITS UNITS FRANCHISED UNITS UNITS UNITS
DECEMBER 29, OPENED/ UNITS UNITS SOLD/ DECEMBER 27, OPENED/ UNITS
1999 ACQUIRED REFRANCHISED REACQUIRED CLOSED 2000 ACQUIRED REFRANCHISED
------------ -------- ------------ ---------- ------ ------------ -------- ------------
Denny's
Company-owned....... 835 6 (148) 68 (25) 736 2 (48)
Franchised units.... 930 83 148 (68) (26) 1,067 33 50(c)
Licensed units...... 19 1 -- -- (1) 19 -- (2)(c)
----- -- ---- --- --- ----- -- ---
1,784 90 -- -- (52) 1,822 35 --
===== == ==== === === ===== == ===
ENDING ENDING
FRANCHISED UNITS UNITS UNITS
UNITS SOLD/ SEPTEMBER 26, SEPTEMBER 27,
REACQUIRED CLOSED 2001 2000
---------- ------ ------------- -------------
Denny's
Company-owned....... 1 (53) 638 784
Franchised units.... (1) (25) 1,124 1,013
Licensed units...... -- (3) 14 19
--- --- ----- -----
-- (81) 1,776 1,816
=== === ===== =====
---------------
(a) Total systemwide sales includes sales from company-owned, franchised and
licensed restaurants and is not a measure which has been determined in
accordance with generally accepted accounting principles.
(b) Prior year amounts have not been restated for subsequent period comparable
units.
(c) Includes two licensed units reclassified as franchised units.
25
RESULTS OF OPERATIONS
THREE QUARTERS ENDED SEPTEMBER 26, 2001 COMPARED TO THE THREE QUARTERS ENDED
SEPTEMBER 27, 2000
COMPANY OPERATIONS
Denny's recorded 2.5% same-store sales growth (approximately $43.4 million)
for the current year period which was driven by a 2.1% increase in guest check
average and higher guest traffic; however, company restaurant sales decreased
$104.9 million (12.6%) due to a 146-unit decrease in company-owned restaurants,
partially offset by the increase in same-store sales. The decrease in
company-owned restaurants resulted primarily from the sale of restaurants to
franchisees and store closures.
Total costs of company restaurant sales decreased $93.4 million (13.0%),
driven by the decrease in company-owned restaurants. As a percentage of company
restaurant sales, we experienced higher payroll costs from increased staffing
levels and wage rate increases as well as higher occupancy costs. These
percentage increases were offset by lower product costs resulting from a higher
guest check average and reduced waste costs. Additionally, the negative effect
of higher utility rates and increased repair and maintenance activities on
operating costs for the period was partially offset by lower advertising
expense.
Operating margins for the company-owned restaurants were $102.0 million
(14.1% of company restaurant sales) for the three quarters ended September 26,
2001 compared to $113.4 million (13.7% of company restaurant sales) for the
three quarters ended September 27, 2000.
FRANCHISE OPERATIONS
Franchise and licensing revenue was $68.0 million for the current year
period, comprised of royalties and fees of $42.3 million and occupancy revenue
of $25.7 million, compared to $53.6 million for the prior year period, comprised
of royalties and fees of $38.1 million and occupancy revenue of $15.5 million.
Franchise and licensing revenue increased $14.5 million (27.0%) resulting from a
111-unit increase in franchised restaurants, partially offset by a $2.3 million
reduction in initial franchise fees.
Franchise costs were $29.4 million for the current year period, comprised
of occupancy costs of $15.3 million and other direct expenses of $14.1 million,
compared to $24.6 million for the prior year period, comprised of occupancy
costs of $9.1 million and other direct expenses of $15.5 million. Franchise
restaurant costs increased $4.8 million (19.4%), driven by the increase in
franchise and licensed restaurants. As a percentage of franchise and licensing
revenues, these costs decreased to 43.2% in the current year period from 46.0%
in the prior year period, resulting primarily from a $1.5 million decrease in
bad debt expense related to the collection of certain past due accounts.
Our franchise operating margins were $38.6 million (56.8% of franchise and
licensing revenue) for the three quarters ended September 26, 2001 compared to
$29.0 million (54.0% of franchise and licensing revenue) for the three quarters
ended September 27, 2000.
OTHER OPERATING COSTS AND EXPENSES
General and administrative costs decreased $7.0 million (13.5%), resulting
from reductions in information systems costs of $5.1 million and other corporate
overhead expenses of $1.9 million. The decrease in amortization of excess
reorganization value from the prior year period resulted from a reduction of
reorganization value totaling approximately $26.6 million related to the
reversals of certain income tax liabilities recorded in the fourth quarter of
2000 and the first quarter of 2001. Depreciation and other amortization
decreased primarily as a result of fewer company-owned units. As a result of the
tightening in the financing market and our strict standards for new franchisees
in the current year, refranchising gains decreased $26.2 million compared to the
prior year period due to lower refranchising activity.
RESTRUCTURING CHARGES of $8.5 million recorded in the current year period
relate to management's plan to close 63 underperforming Denny's restaurants (see
Note 5 to our consolidated financial statements). Of the
26
63 restaurants identified for closure, 46 had been closed by September 26, 2001.
In addition, we recorded an $8.3 million asset IMPAIRMENT CHARGE in the current
year period primarily related to the planned closure of the underperforming
restaurants. Subsequent to quarter end, on November 1, 2001, we announced a
restructuring plan to eliminate approximately 90 out-of-restaurant support staff
positions which will result in a future reduction of general and administrative
expenses. A restructuring charge of approximately $2.5 million to $3.0 million
related to the elimination of these positions will be recorded in the fourth
quarter of 2001.
OPERATING LOSS was $0.8 million for the three quarters ended September 26,
2001 compared to operating income of $6.2 million for the three quarters ended
September 27, 2000.
INTEREST EXPENSE, NET, totaled $54.7 million for the three quarters ended
September 26, 2001, a decrease of $7.6 million compared to the prior year
period. The decrease in interest expense, net, resulted primarily from the
repayment of the Denny's mortgage notes in July 2000 and other debt throughout
2000, offset by a $3.5 million decrease in interest income resulting from lower
cash balances.
The PROVISION FOR INCOME TAXES from continuing operations for the three
quarters ended September 26, 2001 has been computed based on management's
estimate of the annual effective income tax rate applied to loss before taxes.
We recorded an income tax provision reflecting an approximate rate of 2.3% for
the three quarters ended September 26, 2001 compared to a provision reflecting
an approximate rate of 2.1% for the three quarters ended September 27, 2000.
The consolidated statements of operations and cash flows presented in this
prospectus reflect FRD as DISCONTINUED OPERATIONS in accordance with APB 30.
Revenue and operating loss of the discontinued operations for the three quarters
ended September 26, 2001 and September 27, 2000 were $265.0 million and $1.4
million and $279.4 million and $8.7 million, respectively.
During the first quarter of 2001, as a result of the settlement of the
remaining issues related to our former information systems outsourcing contract
with IBM, approximately $7.8 million of capital lease obligations were forgiven
and an EXTRAORDINARY GAIN was recorded.
NET LOSS was $49.0 million for three quarters ended September 26, 2001
compared to a net loss of $73.2 million for the three quarters ended September
27, 2000 due to the factors noted above.
EBITDA AS DEFINED decreased to $108.1 million in the current year period
from $129.0 million in the prior year period due to the factors noted above.
FISCAL YEAR ENDED DECEMBER 27, 2000 COMPARED TO THE FISCAL YEAR ENDED DECEMBER
29, 1999
Our CONSOLIDATED REVENUE for the year ended December 27, 2000 decreased
$45.0 million (3.7%) compared to the year ended December 29, 1999. Denny's
experienced a 1.5% increase in same-store sales (approximately $23.8 million),
the third consecutive year of positive same-store sales, related primarily to an
increase in guest check average. However, company restaurant sales decreased
$59.7 million resulting from a net 99-unit decrease in company-owned
restaurants, partially offset by the increase in same-store sales. The reduction
in company-owned restaurants is consistent with the implementation of our
refranchising strategy. FRANCHISE AND LICENSING REVENUE increased 24.5% to $74.6
million, primarily from a net 137-unit increase in franchised units and $1.9
million increase in initial franchise fees.
CONSOLIDATED OPERATING EXPENSES for 2000 decreased $240.6 million (17.2%)
compared to 1999. Cost of company restaurant sales decreased $27.9 million
primarily from the decrease in the number of company-owned restaurants. As a
percentage of company restaurant sales, cost of company restaurant sales rose
from increased repairs and maintenance activities and continued wage rate
increases over the prior year. In addition, modest increases in product costs
and occupancy costs as a percentage of sales resulted from pressure on commodity
costs and charges related to unit closures during the year. As a percentage of
franchise and licensing revenues, franchise restaurant costs were negatively
affected by a $3.2 million increase in bad debt expense provisions over the
prior year. The decrease in general and administrative expenses included lower
corporate overhead resulting from the implementation of restructuring plans of
approximately $2.4 million and from reduced information systems costs of
approximately $4.9 million. Lower depreciation
27
and other amortization resulted from the decrease in company-owned units and the
retirements recorded in 1999 of assets replaced in conjunction with units
reimaged and the decrease in company-owned units. The decrease in amortization
of excess reorganization value resulted from the $136.5 million impairment of
reorganization value recorded in the fourth quarter of 1999. During the fourth
quarter of 2000, we recorded a $6.4 million impairment charge on the assets of
certain underperforming restaurants based on the estimated future discounted
cash flows of those units. Refranchising gains in 2000 increased $29.7 million
as a result of record refranchising activity.
During the first quarter of 2000, we announced a restructuring plan as a
result of an extensive review of our operations and structure completed in early
2000. The plan's implementation involved a reduction of personnel related to a
corporate reorganization and the identification of units for closure.
Consequently, we recorded approximately $3.7 million of severance and
outplacement costs and $0.9 million of operating lease liabilities for closed
stores as a result of the plan. Additionally, a $2.6 million charge was recorded
related to certain acquired software and capitalized construction costs which
became obsolete as a result of the cancellation of projects identified as part
of the plan. During the fourth quarter of 2000, we recorded approximately $5.3
million of restructuring charges, comprised entirely of severance and
outplacement costs, resulting from the realignment of certain senior management
positions.
CONSOLIDATED OPERATING LOSS for 2000 decreased $195.6 million compared to
1999 primarily as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $81.8 million for 2000, an
increase of $2.4 million compared to 1999. Excluding the effect of $7.3 million
of interest expense allocated to discontinued operations in 1999, interest
expense, net, decreased $4.9 million. This decrease primarily resulted from the
effects of the repayment of Denny's mortgage notes in 2000, partially offset by
a $1.9 million reduction in interest income from lower cash balances.
The PROVISION FOR INCOME TAXES from continuing operations for 2000 has been
computed based on management's estimate of the annual effective income tax rate
applied to loss before taxes. We recorded an income tax provision reflecting an
approximate rate of 2.2% for 2000 compared to a provision reflecting an
approximate rate of 0.3% for 1999.
The Statements of Consolidated Operations and Cash Flows for the years
ended December 27, 2000 and December 29, 1999 reflect FRD 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" ("APB 30"). Revenue and operating loss of FRD for the
years 2000 and 1999 were $371.1 million and $79.8 million and $389.8 million and
$87.7 million, respectively. In accordance with APB 30, FRD's net loss of $89.5
million for the two quarters ended December 27, 2000, which was incurred
subsequent to the measurement date, is included as a component of net
liabilities held for sale. Additionally, the Statements of Consolidated
Operations and Cash Flows for 1999 reflect EPL as a discontinued operation.
EPL's revenue and operating income for 1999 were $144.9 million and $2.4
million, respectively.
NET LOSS was $98.0 million for 2000 compared to a net loss of $381.9
million for 1999 primarily as a result of the factors discussed above.
Our consolidated EBITDA AS DEFINED for 2000 increased $11.9 million (7.4%)
compared to 1999. This increase is a result of the factors noted in the
preceding paragraphs, excluding the restructuring and impairment charges and the
change in depreciation and amortization expense.
FISCAL YEAR ENDED DECEMBER 29, 1999 COMPARED TO THE FISCAL YEAR ENDED DECEMBER
30, 1998
Our CONSOLIDATED REVENUE for the year ended December 29, 1999 increased
$21.0 million (1.8%) compared to the year ended December 30, 1998. Company
restaurant sales increased $12.2 million primarily reflecting 2.4% growth in
Denny's same-store sales (approximately $26.3 million), the second consecutive
year of positive same-store sales. Denny's benefited from an increase in guest
check average resulting from successful promotions of higher-priced menu items
and from moderate price increases. The increase in same-
28
store sales was partially offset by the effects of a net 43-unit decrease in
company-owned restaurants. FRANCHISE AND LICENSING REVENUE increased $8.8
million (17.1%), primarily attributable to a net increase of 105 franchised
restaurants over the prior year and a $1.3 million increase in initial franchise
fees. The increased franchising revenue reflects our strategy to optimize growth
through franchising, including the sale of company-owned restaurants to
franchisees to stimulate such growth.
CONSOLIDATED OPERATING EXPENSES for 1999 increased $174.5 million (14.3%)
compared to 1998. Costs of company restaurant sales increased $11.3 million, but
were relatively flat as a percentage of company restaurant sales. The effects of
higher wage rates on payroll costs were offset primarily by reduced repairs and
maintenance expense resulting indirectly from the reimage strategy implemented
during 1999. As a percentage of franchise and licensing revenues, franchise
restaurant costs increased as a result of higher advertising expenses.
Additionally, general and administrative expenses decreased as a result of
reduced corporate overhead costs. The increase in depreciation and other
amortization is primarily the result of the retirement of assets replaced in
conjunction with recently reimaged units.
Due to the presence of certain conditions at December 29, 1999, including
the current market value of our common stock, the market discount on certain of
our debt instruments and certain operating trends, we performed an impairment
assessment of the carrying amount of the intangible asset "Reorganization value
in excess of amounts allocated to identifiable assets, net of accumulated
amortization." In performing this analysis, we utilized a discounted future cash
flow model and recorded an impairment charge of $136.5 million, representing the
difference between our estimated value resulting from the cash flow model and
the value of our net assets recorded at December 29, 1999 prior to recognition
of impairment. The discount rate used in the cash model was an estimate of our
current cost of capital. The adjusted carrying value of the intangible asset,
$126.9 million, will continue to be amortized over its remaining useful life.
CONSOLIDATED OPERATING LOSS for 1999 increased $153.4 million compared to
1998 as a result of the factors noted above.
CONSOLIDATED INTEREST EXPENSE, NET, totaled $79.4 million for the year
ended December 29, 1999 compared to $78.0 million for the year ended December
30, 1998. The increase is primarily due to a $3.1 million decrease in interest
income from lower cash and short-term investment balances and a $3.8 million
decrease in the allocation of interest expense to discontinued operations,
offset by the impact of lower debt balances in 1999.
REORGANIZATION ITEMS recorded in the one week ended January 7, 1998 include
professional fees and other expenditures incurred by us 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 2 to the Consolidated
Financial Statements.
The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations
for the year ended December 29, 1999 reflects an effective income tax rate
applied to loss before taxes of approximately 0.3% for the year ended December
29, 1999 compared to an income tax benefit of approximately (1.6%) for the
fifty-one weeks ended December 30, 1998. 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 of our assets and
liabilities in accordance with fresh start accounting.
EXTRAORDINARY ITEMS for the year ended December 30, 1998 total $613.8
million. Of this amount, $612.8 million is due to the implementation of our
Chapter 11 reorganization plan, which resulted in the exchange of Flagstar's
previously outstanding senior subordinated debentures and convertible debentures
for 40 million shares of Advantica's common stock and warrants to purchase 4
million additional shares of Advantica's 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 which was recorded as an extraordinary
item. The remaining $1.0 million relates to the early retirement in 1998 of
$42.4 million of old notes plus accrued and unpaid interest.
29
The Statements of Consolidated Operations and Cash Flows have been
reclassified for the year ended December 29, 1999, the fifty-one weeks ended
December 30, 1998 and the one week ended January 7, 1998 to reflect FRD as
DISCONTINUED OPERATIONS in accordance with APB 30. Discontinued operations for
the fifty-one weeks ended December 31, 1998 and the one week ended January 7,
1998 also included the operating results and cash flow effects of FEI and
Quincy's. Revenue and operating loss of discontinued operations for the year
ended December 29, 1999, the fifty-one weeks ended December 30, 1998 and the one
week ended January 7, 1998 were $534.7 million and $85.3 million, $759.4 million
and $10.4 million and $23.1 million and $0.0 million, respectively. Net loss
from operations of discontinued operations increased $58.4 million in 1999
compared to 1998 as a result of poorer operating results at FRD, partially
mitigated by the completion of the FEI and Quincy's sales during 1998 and
improved operating results at EPL in 1999. We completed the sale of EPL on
December 29, 1999. The sale resulted in a gain of $15.5 million, net of taxes.
The $5.9 million of EPL's net loss which was incurred subsequent to the
measurement date is netted against the gain on sale in the Statements of
Consolidated Operations and Cash Flows.
NET LOSS was $381.9 million for the year ended December 29, 1999 compared
to net income of $1.2 billion for the year ended December 30, 1998 primarily as
a result of the adoption of fresh start reporting, the extraordinary gain
recorded in 1998 and the impairment charge recorded in 1999.
EBITDA AS DEFINED for 1999 increased $10.7 million (7.1%) compared to 1998.
This decrease is a result of the factors noted in the preceding paragraphs,
excluding the impairment charge and the increase in depreciation and other
amortization.
LIQUIDITY AND CAPITAL RESOURCES
Our principal operating subsidiary Denny's is the borrower under a senior
secured revolving credit facility with The Chase Manhattan Bank and other
lenders named therein, providing Denny's with a working capital and letter of
credit facility of up to a total of $200 million. Advantica and Denny's Holdings
are guarantors under the revolving credit facility. At December 27, 2000, we had
no working capital advances outstanding under the revolving credit facility;
however, letters of credit outstanding were $65.3 million, leaving net
availability of $134.7 million. At September 26, 2001, we had working capital
advances of $73.3 million and letters of credit outstanding of $52.6 million
under the facility, leaving net availability of $74.1 million. Advances under
the revolving credit facility accrue interest at a variable rate (approximately
6.7% at September 26, 2001) based on the prime rate or an adjusted Eurodollar
rate. The increase in the outstanding advances, included in notes and debentures
on Advantica's consolidated balance sheet, is primarily the result of our
satisfaction of the Coco's/Carrows credit facility guarantee in January 2001 (as
discussed below).
The revolving credit facility matures on January 7, 2003 and is generally
secured by liens on the stock of Advantica's subsidiaries, accounts receivable,
intellectual property, cash and cash accounts and additional liens on our
corporate headquarters in Spartanburg, South Carolina. The revolving credit
facility contains certain financial and negative covenants, conditions
precedent, events of default and other terms, conditions and provisions
customarily found in credit agreements for leveraged financings.
We were in compliance with the terms of the revolving credit facility at
December 27, 2000. Under the most restrictive provision of the revolving credit
facility (the fixed charge coverage ratio), for the four quarters ended December
27, 2000, our EBITDA could have been approximately $32.1 million less and we
would still have been in compliance. We were also in compliance with the terms
of the revolving credit facility at September 26, 2001. Under the most
restrictive provision (the total debt to EBITDA ratio), we could have borrowed
an additional $3.7 million and we would still have been in compliance. However,
the total debt to EBITDA covenant was to become more restrictive as of and for
the quarter ending December 26, 2001. Accordingly, effective October 18, 2001,
we obtained an amendment to the revolving credit facility increasing the maximum
ratio of total debt to EBITDA for the remaining term of the facility in order to
maintain covenant compliance and our continued ability to borrow under the
revolving credit facility. Also pursuant to that amendment, certain covenants
and other provisions were modified, permitting us to undertake an exchange offer
relating to the old notes under certain terms and conditions. In addition, as a
30
result of the amendment, commitments under the revolving credit facility will be
reduced from $200.0 million to an amount not less than $150.0 million upon
receipt of cash payments, if any, related to Denny's receivable and deposits
securing outstanding letters of credit under the Coco's/Carrows credit facility.
For more information, see "Description of Indebtedness -- The Revolving Credit
Facility."
On July 12, 2000, we repaid in full the outstanding balance of mortgage
notes secured by a pool of cross-collateralized mortgages on the land,
buildings, equipment and improvements of 239 Denny's restaurant properties. The
repayment or refinancing of the Denny's mortgage notes was required to maintain
the revolving credit facility in effect and available to us.
Certain of FRD's operating subsidiaries, Coco's and Carrows, have a $70.0
million senior secured credit facility, which consists of a $30.0 million term
loan and a $40.0 million revolving credit facility. At December 27, 2000, the
lenders under the Coco's/Carrows credit facility were Credit Lyonnais New York
Branch and other lenders named therein, and the facility was guaranteed by
Advantica. FRD obtained from the lenders a waiver of compliance from certain
third quarter financial covenants until January 8, 2001. On January 8, 2001,
Advantica paid $70.0 million to the lenders in full and complete satisfaction of
Advantica's guarantee of the Coco's/Carrows credit facility with a combination
of cash on hand and an advance under the revolving credit facility. As a result
of its satisfaction of obligations under its guarantee, Advantica was subrogated
to the rights and collateral of the lenders. Immediately after obtaining its
subrogation rights, Advantica assigned such rights to its wholly owned
subsidiary, Denny's. In addition, immediately upon satisfaction of the
guarantee, Advantica designated FRD an "unrestricted subsidiary" pursuant to the
indenture for the old notes, which limits Advantica's ability to make further
investments in FRD.
At September 26, 2001, FRD's operating subsidiaries had $28.0 million of
outstanding term loan borrowings, working capital borrowings of $24.7 million
and letters of credit outstanding of $9.6 million. Denny's has deposited cash
collateral with one of the former lenders to secure Coco's/Carrows credit
facility's outstanding letters of credit. At September 26, 2001, the balance of
such deposit was $9.8 million, which is reflected in other current assets in our
consolidated balance sheets. Denny's receivable of $53.9 million, including
accrued interest of $1.2 million at September 26, 2001 (see Notes 4 and 11 to
our consolidated financial statements), relates to borrowings under the
Coco's/Carrows credit facility. This receivable eliminates in consolidation,
thereby reducing the net liabilities of discontinued operations on our
consolidated balance sheet at September 26, 2001.
All advances under the Coco's/Carrows credit facility due to Denny's accrue
interest at a variable rate (approximately 8.0% at September 26, 2001) based on
the prime rate or an adjusted Eurodollar rate. The advances are secured by
substantially all of the assets of FRD and its subsidiaries and by the issued
and outstanding stock of FRD's subsidiaries.
The Coco's/Carrows credit facility contains a number of restrictive
covenants which, among other things, limit (subject to certain exceptions) FRD
and its subsidiaries with respect to the incurrence of debt, existence of liens,
investments and joint ventures, the declaration or payment of dividends, the
making of guarantees and other contingent obligations, mergers, the sale of
assets, capital expenditures and material change in their business. The
Coco's/Carrows credit facility also contains certain financial covenants
including provisions for the maintenance of a minimum level of interest
coverage, limitations on ratios of indebtedness to EBITDA and limitations on
annual capital expenditures. On January 16, 2001, FRD elected not to make the
scheduled interest payment due on $156.9 million aggregate principal amount of
its 12.5% senior notes due 2004. On February 14, 2001, to facilitate the
divestiture of its Coco's and Carrows brands and to preserve their going concern
value, FRD filed for protection under Chapter 11 of the United States Bankruptcy
Code. FRD's operating subsidiaries were not in compliance with certain financial
covenants under the Coco's/Carrows credit facility for the quarter ended
September 26, 2001. In light of, among other things, the operating results and
financial condition of FRD and the uncertainties as to the outcome of the FRD
divestiture process and bankruptcy proceeding, there can be no assurance that we
will be able to recover all or any part of the secured obligations owed to us
under the Coco's/Carrows credit facility. For additional information concerning
the FRD notes and the Chapter 11 filing, see "Risk Factors -- We may not collect
the amount owed to us by Coco's and Carrows, and the outcome and effects of the
FRD bankruptcy proceedings are
31
highly uncertain", "Business -- Legal Proceedings" and Notes 4 and 20 to our
consolidated financial statements.
The following table sets forth a calculation of our cash used in
operations, for the periods indicated:
FISCAL YEAR ENDED THREE QUARTERS ENDED
--------------------------- -----------------------------
DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1999 2000 2000 2001
------------ ------------ ------------- -------------
(In thousands) (UNAUDITED) (UNAUDITED)
Net loss............................. $(381,904) $(98,002) $(73,211) $(49,007)
Equity in loss from discontinued
operations, net.................... 115,718 15,530 17,330 --
Impairment charges................... 136,500 6,416 -- 8,343
Restructuring charges................ -- 12,556 7,248 8,495
Gains from refranchising and other,
net................................ (21,514) (51,219) (38,339) (12,123)
Extraordinary items.................. -- -- -- (7,778)
Other noncash charges................ 190,485 137,576 102,179 84,635
Change in certain working capital
items.............................. (48,203) (21,906) (34,468) (47,917)
Change in other assets and other
liabilities, net................... (22,205) (9,363) (5,188) (8,875)
--------- -------- -------- --------
Cash used in operations.............. $ (31,123) $ (8,412) $(24,449) $(24,227)
========= ======== ======== ========
Historically, we have met our liquidity requirements with internally
generated funds, external borrowings, and in recent years, proceeds from asset
sales. Management believes that, together with funds available under the
revolving credit facility, we will have sufficient cash flow from operations to
pay interest and scheduled amortization on all of our outstanding indebtedness
and to fund anticipated capital expenditures for the next twelve months. Our
ability to meet our debt service obligations will depend on a number of factors,
including management's ability to maintain operating cash flow, and there can be
no assurance that targeted levels of operating cash flow will actually be
achieved. Our ability to maintain or increase operating cash flow will depend
upon consumer tastes, the success of marketing initiatives and other efforts by
us to increase customer traffic in our restaurants, prevailing economic
conditions and other matters, many of which are beyond our control.
As of December 27, 2000, scheduled maturities of long-term debt relative to
Advantica and its subsidiaries for the years 2001 and thereafter are as follows:
(In thousands)
2001........................................................ $ 11,596
2002........................................................ 5,447
2003........................................................ 4,734
2004........................................................ 3,944
2005........................................................ 3,484
Thereafter.................................................. 558,375
--------
$587,580
========
In addition to scheduled maturities of principal, on a consolidated basis,
a total of approximately $69.0 million of cash is required in 2001 to meet
interest payments on long-term debt (not including the effects of the exchange
offer).
Our principal capital requirements are associated with opening new
restaurants and remodeling and maintaining our existing restaurants and
facilities. During 2000, our capital expenditures were $43.2 million. Of that
amount, approximately $5.8 million was financed through capital leases. Capital
expenditures for the three quarters ended September 26, 2001 totaled $26.3
million, of which approximately $1.1 million was financed through capital
leases. These amounts were expended primarily to maintain existing facilities
and replace equipment. Capital expenditures are expected to total approximately
$40.0 million to $45.0 million for the year ending December 26, 2001. We are not
committed, however, to spending this amount and could spend less if
circumstances warrant.
32
During 2000, in addition to the capital expenditures above, we purchased 59
restaurant units from our franchisee, Olajuwon Holdings, Inc., or OHI, a
bankrupt franchisee. The purchases were made with the approval of the bankruptcy
court and other parties having an interest in the OHI bankruptcy estate. We
separately reacquired 3 other restaurants from affiliated franchisees of OHI.
The total purchase price for the 62 restaurants was approximately $16.2 million,
consisting of cash of approximately $4.5 million, the forgiveness of debt of
$1.4 million and the assumption of capital leases and other liabilities of $10.3
million.
At December 27, 2000, our working capital deficit, excluding net
liabilities of discontinued operations, was $170.6 million compared to $197.0
million at December 29, 1999. The decrease in the deficit is attributable
primarily to the increase in Denny's refranchising activity in 2000. As of
September 26, 2001, we had working capital deficits, excluding net liabilities
of discontinued operations, of $113.9 million. The decrease in the deficit at
September 26, 2001 is primarily related to the use of cash on hand and
borrowings under the revolving credit facility to satisfy current liabilities,
the reduction in capital lease obligations resulting in the extraordinary gain
recorded during the three quarters ended September 26, 2001, and the reduction
of company-owned units from refranchising activity and store closures. We are
able to operate with a substantial working capital deficit because (1)
restaurant operations and most food service operations are conducted primarily
on a cash (and cash equivalent) basis with a low level of accounts receivable,
(2) rapid turnover allows a limited investment in inventories, and (3) accounts
payable for food, beverages and supplies usually become due after the receipt of
cash from the related sales.
SFAS 133 AND SFAS 138 IMPLEMENTATION
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement established
accounting and reporting standards for derivative financial instruments and for
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in fair value of the derivative (i.e.,
gains and losses) depends on the intended use of the derivative and the
resulting designation. In June 2000, the FASB issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an amendment of FASB Statement No. 133" ("FAS
138"), which amends certain provisions of SFAS 133 to clarify areas causing
difficulties in implementation, including expanding the normal purchase and sale
exemption for supply contracts. Advantica appointed a team to implement SFAS 133
for the entire company. This team has implemented a SFAS 133 risk management
process and has been educating both financial and nonfinancial personnel,
reviewing contracts to identify derivatives and embedded derivatives and
addressing various other SFAS 133-related issues. Advantica adopted SFAS 133 and
the corresponding amendments under SFAS 138 at the beginning of fiscal year 2001
in accordance with Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." The adoption of SFAS 133, as amended
by SFAS 138, did not have a material impact on Advantica's consolidated results
of operations, financial position or cash flows.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 27, 2001 and
eliminates the pooling-of-interests method. We do not believe the adoption of
SFAS 141 will have a significant impact on our financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which
will be effective for us beginning December 27, 2001, the first day of our 2002
fiscal year. SFAS 142 requires us, among other things, to discontinue goodwill
amortization, including the amortization of its reorganization value in excess
of amounts allocable to identifiable assets. In addition, the standard provides
for reclassifying certain existing recognized intangibles as goodwill,
reassessing the useful lives of existing recognized intangibles, reclassifying
certain intangibles out of previously reported goodwill and identifying
reporting units for purposes of assessing potential future
33
impairments of goodwill. SFAS 142 also requires us to complete a transitional
goodwill impairment test within six months from the date of adoption. Total
amortization expense related to excess reorganization value and goodwill for the
fifty-one weeks ended December 30, 1998, and the fiscal years ended December 29,
1999 and December 27, 2000 was $89.4 million, $89.9 million and $44.2 million,
respectively. Total amortization expense related to excess reorganization value
and goodwill for the three quarters ended September 27, 2000 and September 26,
2001 was $33.3 million and $23.1 million, respectively. We are currently
assessing but have not yet determined the impact of adopting SFAS 142 on our
financial position and results of operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 will be effective for us beginning December 27,
2001, the first day of our 2002 fiscal year. We are currently assessing but have
not yet determined the impact of adopting SFAS 144 on our financial position and
results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We have exposure to interest rate risk related to certain instruments
entered into for other than trading purposes. Specifically, borrowings under the
revolving credit facility bear interest at a variable rate based on the prime
rate or an adjusted Eurodollar rate. A 100 basis point increase in the revolving
credit facility interest rate (approximately 6.7% at September 26, 2001) would
increase interest expense for the remainder of the year by approximately $0.2
million. This computation is determined by considering the impact of
hypothetical interest rates on our variable long-term debt at September 26,
2001. However, the nature and amount of our borrowings under the revolving
credit facility may vary as a result of future business requirements, market
conditions and other factors.
Our other outstanding long-term debt bears fixed rates of interest. The
estimated fair value of our fixed rate long-term debt (excluding capital leases)
was approximately $329 million at September 26, 2001. This computation is based
on market quotations for the same or similar debt issues or the estimated
borrowing rates available to us. The decrease in the estimated fair value of
long-term debt compared to its historical cost reported in our consolidated
financial statements relates primarily to market quotations for the old notes at
September 26, 2001.
We do not use derivative instruments for trading purposes, and no interest
rate derivatives were in place at September 26, 2001.
Commodity Price Risk
We purchase certain products such as beef, poultry, pork and coffee which
are affected by commodity pricing and are, therefore, subject to price
volatility caused by weather, production problems, delivery difficulties and
other factors that are outside our control and which are generally
unpredictable. Changes in commodity prices affect us and our competitors
generally and often simultaneously. In general, we purchase food products based
upon market prices established with vendors. Although many of the items
purchased are subject to changes in commodity prices, certain purchasing
arrangements are structured to contain features that minimize price volatility
by establishing price ceilings and/or floors. We use these types of purchase
arrangements to control costs as an alternative to using financial instruments
to hedge commodity prices. In many cases, we believe we will be able to address
commodity cost increases which are significant and appear to be long-term in
nature by adjusting our menu pricing or changing our product delivery strategy.
However, competitive circumstances could limit such actions and in those
circumstances increases in commodity prices could lower our margins. Because of
the often short-term nature of commodity pricing aberrations and our ability to
change menu pricing or product delivery strategies in response to commodity
price increases, we believe that the impact of commodity price risk is not
significant.
34
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated statements of
operations give effect to the proposed exchange offer as if it had been
consummated on December 30, 1999, the first day of fiscal year 2000. The
following unaudited pro forma condensed consolidated balance sheet gives effect
to the exchange offer as if it had been consummated on September 26, 2001.
The pro forma adjustments reflected in the unaudited pro forma condensed
consolidated statements of operations and unaudited pro forma condensed
consolidated balance sheets are based upon available information and upon
certain assumptions that we believe are reasonable under the circumstances. In
particular, the adjustments with respect to the exchange offer assume that (1)
old notes having an aggregate principal amount of $265.0 million and unamortized
premium of $8.8 million are tendered by the expiration date in exchange for
$204.1 million in principal amount of the new notes, (2) the payoff of accrued
and unpaid interest of approximately $5.9 million with respect to tendered old
notes and (3) the payment of $3.5 million of estimated deferred financing costs
with respect to the new notes. The actual amount of specific debt securities
that remain outstanding, that are exchanged and that are issued in connection
with the exchange offer may vary from these assumptions. Accordingly, it is
possible that significantly different results may occur as a result of the
exchange offer than those reflected in the unaudited pro forma condensed
consolidated financial statements.
The pro forma information included herein is provided for informational
purposes only and should not be construed to be indicative of the consolidated
financial condition or results of operations of Advantica had the exchange offer
been consummated on the respective dates indicated above, nor is it intended to
predict the financial condition or results of operations of Advantica at any
future date or for any future period.
35
ADVANTICA RESTAURANT GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE QUARTERS ENDED SEPTEMBER 26, 2001
-----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(In thousands, except per share amounts) ----------- ------------ ----------
Total operating revenue.................................... $792,815 $792,815
Total operating costs and expenses......................... 793,576 793,576
-------- ------- --------
Operating loss............................................. (761) (761)
Other expenses:
Interest expense, net.................................... 54,732 $(2,123)(a) 52,609
Other nonoperating expenses (income), net................ 12 12
-------- ------- --------
Total other expenses, net........................ 54,744 (2,123) 52,621
-------- ------- --------
Loss before income taxes................................... (55,505) 2,123 (53,382)
Provision for income taxes................................. 1,280 1,280
-------- ------- --------
Loss from continuing operations............................ $(56,785) $ 2,123 $(54,662)
======== ======= ========
Per share amounts applicable to common shareholders:
Basic and diluted loss per share:
Loss from continuing operations.......................... $ (1.41) $ (1.36)
======== ========
Average outstanding shares............................... 40,134 40,134
======== ========
FISCAL YEAR ENDED DECEMBER 27, 2000
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(In thousands, except per share amounts) ---------- ----------- ----------
Total operating revenue................................. $1,155,249 $1,155,249
Total operating costs and expenses...................... 1,155,513 1,155,513
---------- ------- ----------
Operating loss.......................................... (264) (264)
Other expenses:
Interest expense, net................................. 81,821 $(2,913)(a) 78,908
Other nonoperating expenses (income), net............. (1,415) (1,415)
---------- ------- ----------
Total other expenses, net..................... 80,406 (2,913) 77,493
---------- ------- ----------
Loss before income taxes................................ (80,670) 2,913 (77,757)
Provision for income taxes.............................. 1,802 1,802
---------- ------- ----------
Loss from continuing operations......................... $ (82,472) $ 2,913 $ (79,559)
========== ======= ==========
Per share amounts applicable to common shareholders:
Basic and diluted loss per share:
Loss from continuing operations....................... $ (2.06) $ (1.99)
========== ==========
Average outstanding shares............................ 40,070 40,070
========== ==========
See notes to unaudited pro forma condensed consolidated financial statements.
36
ADVANTICA RESTAURANT GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 26, 2001
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(In thousands) ---------- ----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 3,665 $ (3,665)(b) $ --
Other current assets............................... 37,712 37,712
--------- --------- ---------
Total Current Assets....................... 41,377 (3,665) 37,712
Property, net........................................ 369,652 369,652
Other Assets:
Reorganization value in excess of amounts allocable
to identifiable assets, net of accumulated
amortization.................................... 35,385 35,385
Goodwill, net of accumulated amortization.......... 24,686 24,686
Other intangible assets, net of accumulated
amortization.................................... 108,021 108,021
Deferred financing costs, net...................... 10,241 (3,680)(b) 10,061
3,500(c)
Other.............................................. 40,774 40,774
--------- --------- ---------
Total Assets............................... $ 630,136 $ (3,845) $ 626,291
========= ========= =========
LIABILITIES
Current Liabilities:
Current maturities of notes and debentures......... $ 679 $ 679
Current maturities of capital lease obligations.... 4,702 4,702
Net liabilities of discontinued operations......... 13,534 13,534
Other current liabilities.......................... 149,850 $ (5,914)(b) 143,936
--------- --------- ---------
Total Current Liabilities.................. 168,765 (5,914) 162,851
Long-Term Liabilities:
Notes and debentures, less current maturities...... 624,721 (265,000)(b) 560,700
(8,820)(b)
2,249(b)
204,050(c)
3,500(c)
Capital lease obligations, less current
maturities...................................... 36,783 36,783
Other noncurrent liabilities and deferred
credits......................................... 95,109 95,109
--------- --------- ---------
Total Long-Term Liabilities................ 756,613 (64,021) 692,592
--------- --------- ---------
Total Liabilities.......................... 925,378 (69,935) 855,443
--------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock......................................... 401 401
Paid-in capital...................................... 417,292 417,292
Deficit.............................................. (710,332) 66,090(d) (644,242)
Accumulated other comprehensive loss................. (2,603) (2,603)
--------- --------- ---------
Total Shareholders' Deficit................ (295,242) 66,090 (229,152)
--------- --------- ---------
Total Liabilities and Shareholders'
Deficit.................................. $ 630,136 $ (3,845) $ 626,291
========= ========= =========
See notes to unaudited pro forma condensed consolidated financial statements.
37
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) The following table details the net adjustment to interest expense related
to the consummation of the exchange offer:
FISCAL YEAR THREE QUARTERS
ENDED ENDED
DECEMBER 27, SEPTEMBER 26,
2000 2001
(In thousands) ------------ --------------
Elimination of amortization of deferred financing costs on
old notes retired........................................ $ (586) $ (440)
Elimination of interest on old notes retired............... (29,813) (22,359)
Elimination of premium amortization on old notes retired... 870 714
Interest on new notes...................................... 26,016 19,512
Amortization of estimated deferred financing costs on new
notes.................................................... 600 450
-------- --------
Net adjustment to interest expense......................... $ (2,913) $ (2,123)
======== ========
(b) To reflect the retirement of approximately 50% of the old notes with a face
value of $265.0 million and unamortized premium of $8.8 million, including
the write-off of related unamortized deferred financing costs of $3.7
million and payment of related accrued interest of $5.9 million at September
26, 2001. Assumes payment of accrued interest in excess of cash and cash
equivalents (approximately $2.2 million) will require an advance under the
revolving credit facility.
(c) To reflect the issuance of $204.1 million of the new notes and the payment
of $3.5 million of deferred financing costs. Assumes payment of deferred
financing costs will require an advance under the revolving credit facility.
(d) Estimated extraordinary gain on early retirement related to the exchange
offer of $66.1 million is not reflected in the unaudited pro forma condensed
consolidated statements of operations as it is not expected to have a
continuing impact on Advantica's operations. This extraordinary gain will be
included in Advantica's operating results in the period in which the
exchange offer is consummated.
38
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. You will receive,
in exchange for each $1,000 principal amount of old notes tendered by you and
accepted by Advantica in the exchange offer, $770 principal amount of new notes,
plus accrued and unpaid interest on your old notes that are exchanged. The old
notes tendered in exchange for the new notes will be retired and cancelled and
cannot be reissued. Accordingly, the issuance of the new notes will not result
in any increase of our outstanding principal debt but rather will result in a
decrease of our outstanding principal debt by $60.9 million at the exchange
date, assuming the maximum tender amount.
THE EXCHANGE OFFER
BACKGROUND AND PURPOSE OF THE EXCHANGE OFFER
If the exchange offer is completed, Advantica will reduce its outstanding
indebtedness. Accordingly, completion of the exchange offer may help to improve
Advantica's access to financing sources and its ability to refinance its
revolving credit facility, which matures in January 2003. The table below
provides information concerning the pro forma effect of the exchange offer,
assuming the maximum tender amount, on our long-term debt and our other
financial data and ratios, including information concerning our indebtedness and
related interest expense that will be structurally senior to the old notes. This
information should be read in conjunction with the information contained in the
sections entitled "Summary Consolidated Financial Data" and "Capitalization."
ACTUAL
---------------------------- PRO FORMA(A)
DECEMBER 27, SEPTEMBER 26, SEPTEMBER 26,
2000 2001 2001
(In millions, except ratios) ------------ ------------- -------------
Long-Term Debt:
Advances outstanding under the revolving credit
facility.......................................... $ -- $ 73.3 $ 79.0
Other notes payable.................................. 7.4 6.2 6.2
Discount on other notes payable...................... (1.3) (1.3) (1.3)
Capital lease obligations............................ 50.5 41.5 41.5
12 3/4% Senior Notes due September 30, 2007 of
Denny's Holdings and Advantica (new notes)........ -- -- 204.1
------ ------ ------
Total structurally senior long-term debt,
including current maturities................. 56.6 119.7 329.5
11 1/4% Senior Notes due January 15, 2008 of
Advantica (old notes)............................. 529.6 529.6 264.6
Premium on 11 1/4% Senior Notes of Advantica......... 19.1 17.6 8.8
------ ------ ------
Total long-term debt, including current
maturities................................... $605.3 $666.9 $602.9
====== ====== ======
ACTUAL
----------------------------------------------- PRO FORMA(A)
FISCAL YEAR THREE QUARTERS FOUR QUARTERS FOUR QUARTERS
ENDED ENDED ENDED ENDED
DECEMBER 27, SEPTEMBER 26, SEPTEMBER 26, SEPTEMBER 26,
2000 2001 2001 2001
------------ --------------- -------------- --------------
Other Data:
EBITDA as defined...................... $172.3 $108.1 $151.3 $151.3
Interest expense, net.................. 81.8 54.7 74.2 71.4
Structurally senior interest expense,
net(b).............................. 22.8 10.6 15.4 42.0
Capital expenditures................... 41.9 25.2 38.0 38.0
Ratios for Total Debt:
Ratio of debt(c) to EBITDA as
defined............................. 3.4x NM* 4.3x 3.9x
Ratio of EBITDA as defined to interest
expense, net........................ 2.1x 2.0x 2.0x 2.1x
Ratio of EBITDA as defined less capital
expenditures to interest expense,
net................................. 1.6x 1.5x 1.5x 1.6x
39
ACTUAL
----------------------------------------------- PRO FORMA(A)
FISCAL YEAR THREE QUARTERS FOUR QUARTERS FOUR QUARTERS
ENDED ENDED ENDED ENDED
DECEMBER 27, SEPTEMBER 26, SEPTEMBER 26, SEPTEMBER 26,
2000 2001 2001 2001
------------ --------------- -------------- --------------
Ratios for Structurally Senior Debt:
Ratio of structurally senior debt(c) to
EBITDA as defined................... 0.3x NM 0.8x 2.2x
Ratio of EBITDA as defined to
structurally senior interest
expense, net........................ 7.6x 10.2x 9.8x 3.6x
Ratio of EBITDA as defined less capital
expenditures to structurally senior
interest expense, net............... 5.7x 7.8x 7.4x 2.7x
---------------
* Not meaningful
(a) The pro forma financial data have been derived from our unaudited pro forma
condensed consolidated financial statements and notes thereto included
elsewhere in this prospectus.
(b) Excludes the interest expense, net related to the old notes.
(c) Excludes the related premium or discount thereon.
TERMS OF THE EXCHANGE OFFER
Advantica is offering, upon the terms and subject to the conditions set
forth in this prospectus (including the maximum and minimum tender amounts) and
in the accompanying letter of transmittal, to exchange $770 million principal
amount of new notes for each $1,000 in principal amount of outstanding old
notes, subject to the maximum tender of $265.0 million of old notes. New notes
will be issued only in integral multiples of $1,000 and Advantica will pay cash
in lieu of issuing new notes in a lesser principal amount. In the event that
tenders of old notes pursuant to the exchange offer are less than the amount of
the minimum tender requirement, Advantica intends to terminate the exchange
offer. In the event that tenders pursuant to the exchange offer exceed the
amount of the maximum tender, Advantica will, on a pro rata basis, subject to
the rights of ineligible holders as indicated below, allocate new notes among
tendering holders of old notes so that the maximum tender requirement is
satisfied.
All tendering holders whose old notes are accepted for new notes pursuant
to the exchange offer will receive, as of the closing date, in cash, that
portion of the unpaid interest accrued thereon from January 15, 2002 (the last
interest payment date for the old notes prior to the closing date) up to, but
not including, the closing date of the exchange offer and will be deemed to have
waived the right to receive any payment in respect of interest on the old notes
accrued on and after the closing date. Interest accrued on old notes not
accepted for exchange will be paid in the ordinary course on July 15, 2002, the
next scheduled interest payment date for those notes after the closing date.
REGISTERED HOLDERS OF OLD NOTES WHO WISH TO TENDER THEIR OLD NOTES PURSUANT
TO THE EXCHANGE OFFER (INCLUDING REGISTERED HOLDERS WHO EFFECT A TENDER PURSUANT
TO PROCEDURES FOR BOOK-ENTRY TRANSFER AS PROVIDED IN THIS PROSPECTUS) MUST
DELIVER A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL IN
CONNECTION WITH THEIR TENDER. SEE "-- PROCEDURES FOR TENDERING."
Old notes may be tendered and will be accepted for exchange only in
denominations of $1,000 principal amount or integral multiples thereof.
Advantica shall be deemed to have accepted validly tendered old notes in the
exchange offer when, as and if Advantica has given oral or written notice
thereof to the exchange agent. The exchange agent will act as agent for
tendering holders of old notes for the purposes of receiving the new notes. The
new notes will be delivered (and payments in cash of accrued and unpaid interest
will be made) in exchange for old notes accepted in the exchange offer promptly
following the expiration date and the satisfaction or waiver of all conditions
to the exchange offer.
40
Although Advantica has no obligation to do so, Advantica reserves the right
to seek in the future to acquire old notes not tendered in the exchange offer by
means of open market purchases, privately negotiated acquisitions, subsequent
exchange or tender offers, redemptions or otherwise, at prices or on terms which
may be higher or lower or more or less favorable than those in the exchange
offer. The terms of any such purchases or offers could differ materially from
the terms of the exchange offer.
Tendering holders of old notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of old notes pursuant
to the exchange offer. Advantica will pay certain charges and expenses in
connection with the exchange offer. See "-- Fees and Expenses."
As of the date hereof, approximately $529.6 million aggregate principal
amount of old notes are outstanding. This prospectus and the letter of
transmittal are first being sent on or about the date hereof to all registered
holders of old notes known to Advantica.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
February 1, 2002, subject to extension by Advantica by notice to the exchange
agent as provided in this prospectus. Advantica reserves the right to extend the
exchange offer in its reasonable discretion, in which event the expiration date
will be the latest time and date to which the exchange offer is extended. In
order to extend the expiration date, Advantica will notify the exchange agent of
any extension by oral or written notice and make a public announcement thereof
prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
In addition, Advantica reserves the right, in its discretion:
- to delay acceptance of any old notes tendered or to terminate the
exchange offer and not accept for exchange any old notes by giving oral
or written notice of such extension or termination to the exchange agent;
and
- to amend the terms of the exchange offer in any manner.
Any such delay, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the exchange offer is amended
in a manner determined by us to constitute a material change, Advantica will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of old notes of such amendment and will extend the exchange offer for
the minimum period of time required by applicable law (which in certain
instances could be 5 or 10 business days from the date of such amendment, if the
exchange offer would otherwise expire during this 5 or 10 business day period).
The rights reserved by Advantica in this paragraph are in addition to its rights
set forth below under the caption "-- Conditions of the Exchange Offer."
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, Advantica will
not be required to accept for exchange any old notes, issue any new notes or
make any payment for accrued interest, and Advantica may terminate the exchange
offer, if at least $160.0 million principal amount of the old notes has not been
validly tendered on or prior to the expiration date. In addition, and
notwithstanding any other provision to the contrary, Advantica will not be
required to accept for exchange any old notes, issue any new notes or make any
payment for accrued interest, and may terminate the exchange offer if, at any
time prior to the expiration of the exchange offer, Advantica determines, in its
reasonable judgment, that any of the following conditions has not been satisfied
prior to or concurrently with the expiration of the exchange offer:
- no action or proceeding has been instituted or threatened or is pending
in any court or by or before any governmental agency or instrumentality,
and there has been proposed, adopted or enacted, no law, statute, rule or
regulation with respect to the exchange offer or Advantica or Denny's
Holdings which, in Advantica's reasonable judgment, has or may have a
material adverse effect on Advantica's
41
business, financial condition, operations or prospects or which, in
Advantica's reasonable judgment, impairs the benefits of the exchange
offer to us or our ability to proceed with the exchange offer;
- there shall not have occurred or be likely to occur any event which, in
Advantica's reasonable judgment, has or may have a material adverse
effect on Advantica's business, financial condition, operations or
profits or impair the benefits of the exchange offer to Advantica or its
ability to proceed with the exchange offer; and
- there shall not have occurred:
(1) any general suspension of or general limitation on prices for, or
trading in, securities on any national securities exchange or in the
over-the-counter market;
(2) any limitation by a governmental agency or authority which may
adversely affect Advantica's ability to complete the transactions
contemplated by the exchange offer;
(3) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation by any
governmental agency or authority that adversely affects the extension of
credit; or
(4) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United States,
or, in the case of any of the foregoing existing at the time of the
commencement of the exchange offer, a material acceleration or worsening
thereof.
The foregoing conditions are for Advantica's sole benefit and may be
asserted by Advantica regardless of the circumstances giving rise to such
conditions. These conditions may be waived or amended by Advantica in whole or
in part at any time and from time to time prior to expiration of the exchange
offer in Advantica's reasonable discretion. If Advantica waives or amends the
foregoing conditions, Advantica will, if required by applicable law, extend the
exchange offer for the minimum period of time required by applicable law (which
in certain instances could be 5 or 10 business days) commencing on the date that
Advantica first gives notice, by public announcement or otherwise, of such
waiver or amendment, if the exchange offer would otherwise expire within this
time period. Any determination by Advantica concerning the events described will
be final and binding upon all parties.
In addition, Advantica will not accept for exchange any old notes tendered,
and no new notes will be issued in exchange for any such old notes, if at such
time any stop order shall be threatened or in effect with respect to the
registration statement of which this prospectus forms a part, or the
qualification of the indenture for the new notes under the Trust Indenture Act
of 1939, as amended.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders who do not exchange their old notes in the exchange offer will
still hold their old notes subject to the same terms and conditions existing
prior to the exchange offer and will not receive any new notes or any accrued
and unpaid interest at the closing of the exchange offer, if consummated.
Non-tendering holders will receive accrued and unpaid interest with respect to
the unexchanged old notes in the ordinary course on the same interest payment
dates as set forth in the indenture for the old notes.
A holder's decision not to participate in the exchange offer means that
such holder's unexchanged old notes will:
- be structurally subordinated to the new notes;
- bear interest at an interest rate that is lower than the interest rate
for the new notes (although on a higher aggregate principal amount of
notes outstanding); and
- have a maturity date later than the maturity date for the new notes.
42
OFFEREES
We are not registering the offering of the new notes with any individual
states other than Pennsylvania, although we have registered as dealers in New
York. Other than in Pennsylvania and New York, we are relying on various state
exemptions from registration. In order to avail ourselves of these state
exemptions, we are making the exchange offer only to (1) institutional
investors, as described in the letter of transmittal, and (2) residents of
states and other jurisdictions that exempt the offer from registration even if
directed to a person or entity that is not an institutional investor. Generally,
an "institutional investor" means any dealer, bank, savings institution,
insurance company or other financial institution or institutional investor as
defined under applicable state law.
If you do not fall within the list of qualifying institutional investors,
some jurisdictions will still permit us to make an offer to you. We will make
that determination after receipt of your letter of transmittal.
PROCEDURES FOR TENDERING
The tender of old notes by a holder pursuant to one of the procedures set
forth below, upon acceptance of such tender by Advantica, will constitute an
agreement between such holder on the one hand and Advantica on the other in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the associated letter of transmittal.
A holder who wishes to tender old notes for exchange pursuant to the
exchange offer must, on or prior to the expiration date:
- deliver the certificates for such old notes in proper form for transfer
if the old notes are held in physical form; or
- comply with procedures for book-entry transfer of old notes tendered
electronically into the exchange agent's account at The Depository Trust
Company, or DTC, as set forth below.
IN EITHER CASE, THE REGISTERED HOLDER MUST ALSO DELIVER A PROPERLY
COMPLETED LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF), DULY EXECUTED BY THE
REGISTERED HOLDER WITH ANY REQUIRED SIGNATURE GUARANTEE(S) AND ANY OTHER
DOCUMENTS REQUIRED THEREBY, PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER
IN ORDER FOR THE TENDER OF OLD NOTES TO BE VALID AND COMPLETE.
YOU SHOULD SEND LETTERS OF TRANSMITTAL AND OLD NOTES TO THE EXCHANGE AGENT
AND NOT TO ADVANTICA, DENNY'S HOLDINGS, THE DEALER MANAGER, THE INFORMATION
AGENT, DTC OR THE TRUSTEE UNDER THE INDENTURE.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old notes tendered pursuant thereto
are tendered either:
- by a registered holder of old notes who has not completed the boxes
entitled "Special Issuance Instructions" and "Special Delivery
Instructions" on the letter of transmittal, or
- for the account of an eligible guarantor institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a firm that is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc., or the
NASD, or a commercial bank or trust company having an office in the United
States, or an eligible guarantor institution within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended.
Holders of old notes whose certificates for such old notes are not
immediately available or who cannot deliver all required documents to the
exchange agent on or prior to the expiration date, or who cannot complete the
procedures for book-entry transfer on a timely basis, may tender their old notes
according to the guaranteed delivery procedures set forth below under
"-- Guaranteed Delivery."
THE METHOD OF DELIVERY OF THE LETTER OF TRANSMITTAL, OLD NOTES AND ALL
OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY OF OLD NOTES THROUGH DTC AND
TRANSMISSION OF A BOOK-ENTRY CONFIRMATION, IS AT THE
43
ELECTION AND RISK OF THE TENDERING HOLDERS, AND THE DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. IF THE LETTER OF
TRANSMITTAL, OLD NOTES OR OTHER REQUIRED DOCUMENTS ARE SENT BY MAIL, IT IS
SUGGESTED THAT THE MAILING BE BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED AND MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO
PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
HOLDERS TENDERING OLD NOTES USING DTC'S BOOK-ENTRY PROCEDURES MUST ALLOW
SUFFICIENT TIME FOR COMPLETION OF SUCH PROCEDURES DURING THE NORMAL BUSINESS
HOURS OF DTC TO INSURE DELIVERY OF THE CONFIRMATION OF THE BOOK-ENTRY TRANSFER
ON OR PRIOR TO THE EXPIRATION DATE.
Generally, only a registered holder of old notes may tender old notes in
the exchange offer. If the letter of transmittal is signed by a person other
than the registered holder of the old notes, such old notes must be endorsed or
accompanied by appropriate bond powers, signed exactly as the name or names of
the registered holder (or registered holders) appear on the old notes. If the
letter of transmittal or any old notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by Advantica, provide
evidence satisfactory to Advantica of their authority to so act.
Any beneficial owner whose old notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender his old notes in the exchange offer should contact such registered
holder promptly and instruct such registered holder to tender on his behalf by
completing the form of instructions (including the section regarding eligibility
to participate in the exchange offer) provided by his broker, bank or other
nominee. If a beneficial owner wishes to tender on his own behalf, the
beneficial owner must, prior to completing and executing the letter of
transmittal and delivering his old notes, either make appropriate arrangements
to register ownership of the old notes in such holder's name or obtain a
properly completed bond power from the registered holder. Beneficial owners
should be aware that the transfer of record ownership may take considerable
time.
BOOK-ENTRY TRANSFER
The exchange agent will seek to establish accounts with respect to the old
notes at DTC for the purpose of the exchange offer within two New York Stock
Exchange, or NYSE, trading days from the date of this prospectus. Any financial
institution that is a participant in DTC's book-entry transfer facility system
may make book-entry delivery of old notes on behalf of a holder by causing DTC
to transfer such old notes into the exchange agent's account in accordance with
DTC's Automated Tender Offer Program, or ATOP, procedures for such transfer. IN
SUCH CASE, A LETTER OF TRANSMITTAL IS STILL REQUIRED TO BE TRANSMITTED TO THE
EXCHANGE AGENT. Both the confirmation of a book-entry transfer thereof and a
properly completed and validly executed letter of transmittal (or a facsimile
thereof) must be delivered to and be received or confirmed by the exchange agent
at its address set forth on the back cover page of this prospectus on or prior
to the expiration date, in order for such tender of old notes to be valid and
complete.
An agent's message transmitted by DTC to, and received by, the exchange
agent and forming a part of the confirmation of a book-entry transfer will state
that DTC has received an express acknowledgment from the DTC participant
tendering old notes on behalf of the holder of such old notes that such DTC
participant has received and agrees to be bound by the terms and conditions of
the exchange offer as set forth in this prospectus and the associated letter of
transmittal and that we may enforce such agreement against such participant.
HOLDERS TENDERING OLD NOTES THROUGH DTC'S ATOP SYSTEM MUST ALLOW SUFFICIENT
TIME FOR COMPLETION OF THE ATOP PROCEDURES DURING THE NORMAL BUSINESS HOURS OF
DTC TO ASSURE DELIVERY OF THE CONFIRMATION OF THE BOOK-ENTRY TRANSFER ON OR
PRIOR TO THE EXPIRATION DATE.
OLD NOTES WILL NOT BE DEEMED SURRENDERED FOR EXCHANGE UNTIL SUCH DOCUMENTS
ARE RECEIVED BY THE EXCHANGE AGENT AND DELIVERY OF SUCH DOCUMENTS TO DTC WILL
NOT CONSTITUTE VALID DELIVERY TO THE EXCHANGE AGENT.
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GUARANTEED DELIVERY
If a holder desires to tender old notes pursuant to the exchange offer and
the certificates for such old notes are not immediately available or time will
not permit all required documents to reach the exchange agent on or prior to the
expiration date, or the procedures for book-entry transfer cannot be completed
on a timely basis, such old notes may nevertheless be tendered, provided that
all of the following guaranteed delivery procedures are complied with:
(1) such tenders are made by or through an eligible guarantor institution;
(2) prior to the expiration date, the exchange agent receives from an
eligible guarantor institution a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form accompanying
the letter of transmittal, setting forth the name and address of the
holder of the old notes and the amount of old notes tendered, stating
that the tender is being made thereby and guaranteeing that, within
three NYSE trading days after the date of execution of the Notice of
Guaranteed Delivery, a properly completed and duly executed letter of
transmittal and the certificates for all physically tendered old notes,
in proper form for transfer, or a book-entry confirmation, as the case
may be, and any other documents required by the letter of transmittal,
will be deposited by the eligible guarantor institution with the
exchange agent. The Notice of Guaranteed Delivery may be delivered by
hand, or transmitted by facsimile or mail to the exchange agent and
must include a guarantee by an eligible guarantor institution in the
form set forth in the Notice of Guaranteed Delivery; and
(3) the certificates representing all physically tendered old notes, in
proper form for transfer, or a book-entry confirmation, in either case,
together with a properly completed and duly executed letter of
transmittal, with any required signature guarantees and any other
documents required by the letter of transmittal, are received by the
exchange agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of old notes pursuant to the exchange offer may be properly
withdrawn at any time on or prior to the expiration date. Thereafter, such
tenders may be withdrawn only if the exchange offer is terminated without any
old notes being accepted for exchange.
If you have tendered old notes, you may withdraw such old notes prior to
the expiration date by delivery of a written notice of withdrawal and
revocation, subject to the limitations described in this prospectus. To be
effective, a written notice delivered by hand, overnight courier, mail or
telegraphic or facsimile transmission, or a properly transmitted request message
pursuant to DTC's ATOP procedures (or delivered by hand or by mail) notice of
withdrawal and revocation must:
- be timely received by the exchange agent at its addresses set forth on
the back cover hereof on or prior to the expiration date;
- specify the name of the person having tendered the old notes to be
withdrawn and the principal amount of such old notes to be withdrawn;
- identify the old notes to be withdrawn (including the principal amount of
such old notes); and
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such old notes were tendered
(including any required signature guarantees).
If certificates representing old notes to be withdrawn have been delivered
or otherwise identified to the exchange agent, then the name of the registered
holder and the serial numbers of the particular certificate evidencing the old
notes to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an eligible institution, except in the case of old notes tendered
by an eligible institution (in which case no signature guarantee shall be
required), must also be so furnished to the exchange agent as aforesaid prior to
the physical release of the certificates for the withdrawn old notes. If old
notes have been tendered pursuant
45
to the procedures for book-entry transfer as set forth in this prospectus, any
notice of withdrawal and revocation must also specify the name and number of the
account at DTC to be credited with the withdrawn old notes. Advantica reserves
the right to contest the validity of any withdrawal and revocation. A purported
withdrawal and revocation which is not received by the exchange agent in a
timely fashion will not be effective.
Any old notes properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the exchange offer and the holder will not
receive any consideration in the exchange offer. Withdrawn old notes may be
re-tendered by again following one of the appropriate procedures described in
this prospectus at any time on or prior to the expiration date.
ACCEPTANCE OF TENDERS; COMPLIANCE WITH CONDITIONS OF THE EXCHANGE OFFER;
DELIVERY OF NEW NOTES AND CASH
Upon the terms and subject to the conditions of the exchange offer
(including the maximum and minimum tender amounts), Advantica will accept for
exchange all old notes validly tendered and not properly withdrawn on or prior
to the expiration date. The acceptance for exchange of old notes validly
tendered and not properly withdrawn and the delivery of new notes and any cash
payments will be made as promptly as practicable after the expiration date upon
consummation of the exchange offer. Advantica expressly reserves the right to
delay acceptance of any of the old notes or to terminate the exchange offer and
not accept for exchange and payment any old notes not theretofore accepted if
any of the conditions set forth under the heading "-- Conditions of the Exchange
Offer" have not been satisfied or waived. In all cases, the issuance of new
notes in exchange for old notes accepted for exchange pursuant to the exchange
offer and the payment of any cash due will be made only after timely receipt by
the exchange agent of old notes or confirmation of book-entry transfer thereof,
in either case, together with a properly completed and validly executed letter
of transmittal (or a facsimile thereof) with any required signature guarantees
and any other documents required thereby.
For purposes of the exchange offer, Advantica shall be deemed to have
accepted validly tendered old notes when, as and if Advantica gives oral or
written notice thereof to the exchange agent. The exchange agent will act as
agent for the tendering holders of old notes for the purposes of receiving the
new notes and any cash payments pursuant to the exchange offer. Under no
circumstances will additional interest be paid by Advantica or by the exchange
agent by reason of any delay in making such payment or delivery by DTC or any
DTC participant.
All questions as to the form of all documents and the validity, eligibility
(including the time of receipt and eligibility under applicable state securities
laws), acceptance and withdrawal of tendered old notes will be determined by
Advantica, in Advantica's discretion, which determination shall be final and
binding. Advantica expressly reserves the right to reject any and all tenders
not in proper form and to determine whether the acceptance of or payment by it
for such tenders would be unlawful. Advantica also reserves the right, subject
to applicable laws, to waive or amend any of the conditions to the exchange
offer or to waive any defect or irregularity in the tender of any of the old
notes. None of Advantica, Denny's Holdings, the exchange agent, the dealer
manager, the information agent or any other person will be under any duty to
give notification of any defects or irregularities in tenders or will incur any
liability for failure to give any such notification. No tender of old notes will
be deemed to have been validly made until all defects and irregularities with
respect to such old notes have been cured or waived. Any old notes received by
the exchange agent that are not properly tendered and as to which irregularities
have not been cured or waived will be returned by the exchange agent to the
appropriate tendering holder or, in the case of tenders made in accordance with
book-entry procedures, such notes will be credited to the account maintained
with DTC for the old notes, as soon as practicable. Advantica's interpretation
of the terms and conditions of the exchange offer (including the letter of
transmittal and the instructions thereto) will be final and binding on all
parties.
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LOST OR MISSING CERTIFICATES
If you desire to tender old notes pursuant to the exchange offer, but your
old note has been mutilated, lost, stolen or destroyed, you should write to or
telephone the exchange agent at the telephone number or address listed on the
back cover page of this prospectus, concerning the procedures for obtaining
replacement certificates for such old notes, arranging for indemnification or
any other matter with regard to the tender.
DEALER MANAGER
We have engaged UBS Warburg LLC, or UBS Warburg, to act as dealer manager
in connection with the exchange offer. The obligations of the dealer manager to
perform its services are subject to certain conditions. We have agreed to pay
the dealer manager a fee of 1% of the principal amount of old notes exchanged in
the exchange offer, plus a monthly advisory fee of $175,000, 50% of which for
the first three months and 100% of which thereafter will be offset against the
1% transaction fee. The dealer manager will pay a portion of these fees to
Andersen Weinroth Capital Corporation. In addition, we have agreed to reimburse
the dealer manager for all of its reasonable out-of-pocket expenses, including
the reasonable fees and reasonable expenses of its legal counsel, incurred in
connection with the exchange offer. If we engage in other specified financing
transactions during the term of the dealer manager's engagement with us and for
a period of nine months thereafter, the dealer manager has the right, but not
the obligation, to provide certain services to us in connection with such
financing arrangements. We have agreed to indemnify the dealer manager against
certain liabilities in connection with the exchange offer, including liabilities
under the federal securities laws, and will contribute to payments the dealer
manager may be required to make in respect thereof.
From time to time, UBS Warburg and its affiliates may own, for their own
account or for the accounts of their customers, old notes or new notes and
interests therein, and may tender with respect to any such old notes in the
exchange offer and receive the full consideration therefore in accordance with
the terms and conditions described in this prospectus. At any given time, UBS
Warburg or its affiliates may trade any of our debt or equity securities for its
own accounts or for the accounts of their customers. Accordingly, they may hold
a long or short position at any given time in any of our securities. In
addition, UBS Warburg may provide investment banking and financial advisory
services to Advantica in the future.
EXCHANGE AGENT
U.S. Bank National Association has been appointed as exchange agent for the
exchange offer. Letters of transmittal, confirmations of book-entry transfers,
notices of guaranteed delivery and all correspondence in connection with the
exchange offer should be sent or delivered by each holder of old notes or a
beneficial owner's broker, dealer, commercial bank, trust company or other
nominee to the exchange agent at the address set forth on the back cover page of
prospectus and associated letter of transmittal. We will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
INFORMATION AGENT
MacKenzie Partners, Inc. has been appointed as information agent for this
exchange offer and will receive customary compensation for its services. We will
also reimburse the information agent for its reasonable out-of-pocket expenses.
Questions concerning tender procedures and requests for additional copies of
this prospectus, the letter of transmittal or the notice of guaranteed delivery
should be directed to the information agent at the address and telephone numbers
set forth on the back cover page of this prospectus. Holders of old notes may
also contact their broker, dealer, commercial bank or trust company for
assistance concerning the exchange offer.
FEES AND EXPENSES
Except as described above, we will not make any payments to brokers,
dealers, or other persons soliciting acceptances of the exchange offer. We will,
however, pay the reasonable and customary fees and out-of-pocket expenses of the
exchange agent, the trustee, and the dealer manager, and legal, accounting and
47
other related fees and expenses associated with the exchange offer. We will also
pay the reasonable expenses of holders in delivering their old notes to the
exchange agent. We will also pay brokerage houses and other custodians, nominees
and fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of the prospectus and related documents to the beneficial
owners of the old notes and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the exchange offer will be
paid by us and are estimated to be $3.5 million.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of old
notes pursuant to the exchange offer. If, however, new notes and/or substitute
old notes for principal amounts not exchanged are to be delivered to, or are to
be registered or issued in the name of, any person other than the registered
holder of the old notes, or if tendered old notes are registered in the name of
any person other than the person signing the letter of transmittal, or if a
transfer tax is imposed for any reason other than the exchange of old notes
pursuant to the exchange offer, the amount of any those transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted, the amount of such transfer taxes will be billed
directly to tendering holder.
INTEREST ON TENDERED OLD NOTES; NEW NOTES
Interest will cease to accrue on the old notes tendered and exchanged
pursuant to the exchange offer on the closing date of the exchange offer,
regardless of the actual dates on which old notes are surrendered for exchange.
From the time interest ceases to accrue on the old notes, interest will accrue
on the new notes at the rate and upon the terms as set forth elsewhere in this
prospectus. See "Description of New Notes." Holders of old notes tendering for
new notes will receive as of the closing date, accrued and unpaid interest on
old notes tendered and accepted for exchange from January 15, 2002 to the
closing date. Interest on the new notes will begin to accrue on the closing date
of the exchange offer, with the first interest payment date occurring on March
31, 2002. Holders whose old notes are accepted for exchange will be deemed to
have waived the right to receive any payment in respect of interest on the old
notes accrued on and after the closing date.
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BUSINESS
INTRODUCTION
We are one of the largest restaurant companies in the United States,
operating (directly and through franchisees) almost 1,800 Denny's restaurants.
Our original predecessor was organized as a holding company in 1988 in
order to effect a 1989 leveraged buyout of us. As a result of the buyout, we
became very highly leveraged. While our cash flows were sufficient to cover
interest costs, operating results subsequent to the buyout fell short of
expectations. Such shortfalls resulted from negative operating trends due to
increased competition, intense pressure on pricing due to discounting, declining
customer traffic and relatively limited capital resources to respond to these
changes.
On January 7, 1998, our predecessors, FCI, and its wholly owned subsidiary
Flagstar, emerged from proceedings under Chapter 11 of the United States
Bankruptcy Code pursuant to FCI's and Flagstar's Amended Joint Plan of
Reorganization dated as of November 7, 1997. Also on January 7, 1998, Flagstar
merged with and into FCI, the surviving corporation, and FCI changed its name to
Advantica Restaurant Group, Inc. FCI's operating subsidiaries did not file
bankruptcy petitions and were not parties to the above-mentioned Chapter 11
proceedings. As a result of the reorganization, we significantly reduced our
debt and simplified our capital structure, although we remain highly leveraged.
Further discussion of the bankruptcy reorganization proceedings is included in
Note 1 to our consolidated financial statements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for additional information concerning our indebtedness and
debt service requirements.
In late 1999, our management and board of directors, assisted by outside
advisors, began an extensive review of our operations and structure. In February
2000, we began to implement our "One Company, One Brand" strategy which focused
its direction primarily on the Denny's concept. This strategy included efforts
to move toward a more franchised-based operation and actions to streamline our
overhead structure by merging corporate administrative functions with the
Denny's organization. See Note 7 to our consolidated financial statements for
more information regarding the implementation of this strategy. As part of this
strategy, during the first quarter of 2000, we also began exploring the possible
sale or recapitalization of our Coco's and Carrows concepts, which operate under
our wholly owned subsidiary, FRD. As a result, we began accounting for FRD as a
discontinued operation in the second quarter of 2000, and FRD continued to
market for divestiture the Coco's and Carrows concepts throughout the balance of
2000. See Note 4 to our consolidated financial statements. On February 14, 2001,
FRD filed a voluntary petition under Chapter 11 of the United States Bankruptcy
Code. See also "-- Legal Proceedings" and Note 20 to our consolidated financial
statements for additional information. Although the sale process has taken
longer than expected due in part to procedural and legal constraints inherent in
the FRD bankruptcy filing, FRD actively continues to market for divestiture its
Coco's and Carrows concepts.
RESTAURANT OPERATIONS
Denny's, "America's Original Breakfast Diner," is the nation's largest
family-style restaurant chain in the full-service mid-scale segment in terms of
market share, number of units and U.S. systemwide sales. At September 26, 2001,
Denny's restaurants operated in 49 states, the District of Columbia, two U.S.
territories and five foreign countries, with concentrations in California (22%
of total restaurants), Florida (12%) and Texas (10%). Denny's restaurants are
designed to provide a "dining value" with moderately priced food, friendly and
efficient service and a pleasant atmosphere. We believe that Denny's benefits
from its generally strong market position and consumer recognition. In addition,
Denny's may benefit from the demographic trend of aging baby boomers and the
growing population of senior citizens. The largest percentage of mid-scale
customers is in the 35 years and older age category.
Denny's restaurants generally are open 24 hours a day, 7 days a week.
Denny's restaurants offer traditional family fare (including breakfast items,
hamburgers, sandwiches, steaks and chicken), and provide
49
both counter and table service. Denny's sales are evenly distributed across each
of its dayparts; however, breakfast items account for the majority of Denny's
sales. For the three quarters ended September 26, 2001, Denny's company-owned
restaurants had an average guest check of $6.57, average sales of $1.1 million
and employed approximately 30,100 people.
We have taken strides to improve each component of the dining value
formula. In 2000, Denny's continued heavy promotion of its themed,
higher-quality products such as "All-Star Slams," "America's Favorite Omelets,"
"Major League Burgers" and "Signature Skillets." Denny's also continued to offer
its popular Grand Value menus, which feature value-priced items for breakfast
and lunch. In 2001, Denny's has continued its focus on delivering value to our
consumer with the promotion of the "$2.99 Grand Slam", the "$3.99 Triple Play"
and "Kid's Eat Free". These products are supported through television
advertising and restaurant-based media including special menus, posters and
window clings.
In 2001, Denny's implemented initiatives to address the customer service
component of its dining value formula. Company-owned restaurants began
collecting customer input on their dining experiences via an interactive
customer response survey. From each of our company-owned restaurants, a random
sample of customers is selected and offered the opportunity to call a toll-free
number to provide feedback on their dining experience. Customers give their
feedback about performance on a number of items relating to the overall service
experience. Monthly reports are provided to individual restaurants, which help
restaurant managers focus on specific areas that may improve customers' service
perceptions. Delivering outstanding customer service will continue to be the
main focus of Denny's operations management in the coming year.
During 1999, we initiated a remodel program for our restaurants. We
remodeled 140 company-owned restaurants in 1999, 37 restaurants in 2000, and
expect to have completed approximately 60 remodels in 2001. In addition, our
franchisees have begun to remodel their units in the new remodel format,
remodeling 101 restaurants through September 26, 2001. We believe that this
remodel program will appeal to existing and new franchisees, which is integral
to the completion of our remodel program systemwide.
During 2000, Denny's also opened 6 new company-owned units and 84 new
franchised/licensed units. We believe that over the last five years Denny's has
opened more new units (company-owned and franchised units combined) than any
competitor in the mid-scale segment. Denny's also acquired 68 units from
franchisees during 2000.
Denny's supplements its franchise development efforts by selling
company-owned units to franchisees. During 2000, we sold 148 company-owned units
to franchisees. For the three quarters ended September 26, 2001, we sold 48
company-owned units to franchisees. Due to the tightened financial markets and
our strict standards for new franchisees, the pace of refranchising has slowed
in 2001. We expect to continue to sell a limited number of company-owned
restaurants to franchisees as part of the ongoing evaluation of our restaurant
portfolio. Of the 1,776 Denny's restaurants operating at September 26, 2001,
1,124 (63%) were franchised units. The initial fee for a single Denny's
franchise is $35,000, and the current royalty payment is 4% of gross sales.
OPERATIONS
We believe that successful execution of basic restaurant operations in each
of our Denny's restaurants is critical to its success. Accordingly, significant
effort is devoted to ensuring that all restaurants offer quality food and
service. Through a network of division, region, area and restaurant level
managers, we standardize specifications for the preparation and efficient
service of quality food, the maintenance and repair of the premises and the
appearance and conduct of our associates. Major emphasis is placed on the proper
preparation and delivery of the product to the consumer and on the
cost-effective procurement and distribution of quality products.
A principal feature of Denny's restaurant operations is the constant focus
on improving operations at the unit level. Unit managers are especially hands-on
and versatile in their supervisory activities. Region and area managers have no
offices and spend substantially all of their time in the restaurants. A
significant majority of
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restaurant management personnel began as hourly associates in the restaurants
and, therefore, know how to perform restaurant functions and are able to train
by example.
Denny's maintains a training program for associates and restaurant
managers. General managers and restaurant managers receive training at specially
designated training units. Areas of training for managers include:
- customer interaction;
- kitchen management and food preparation;
- data processing and cost control techniques;
- equipment and building maintenance; and
- leadership skills.
Video training tapes demonstrating various restaurant job functions are
located at each restaurant location and are viewed by associates prior to a
change in job function or before using new equipment or procedures.
Denny's also regularly evaluates its menu. New products are developed in
our test kitchen and then introduced in selected restaurants to determine
customer response and to ensure that consistency, quality standards and
profitability are maintained. If a new item proves successful at the research
and development level, it is usually tested in selected markets. A successful
menu item is then incorporated into the restaurant system. While research and
development activities are important to the Denny's business, amounts expended
for these activities are not significant.
Financial and management control is facilitated in all of the Denny's
restaurants by the use of point-of-sale, or POS, systems which transmit detailed
sales reports, payroll data and periodic inventory information for management
review.
ADVERTISING
We use an integrated advertising process to promote our concepts,
including:
- media;
- menu pricing strategy;
- interior/exterior building design;
- style of service; and
- specialized promotions to help differentiate Denny's from our
competitors.
Media advertising is primarily product oriented, generally featuring
high-margin new promotional entrees presented and priced to convey high value.
Such advertising is conducted, depending on the market, through:
- national and local television advertising;
- radio; and
- outdoor and print advertising.
Denny's integrated advertising approach reaches out to all consumers.
Relevant messages are created to target general markets, African American
markets and Hispanic markets. Community outreach programs extend media
sponsorships designed to enhance diversity efforts. Sophisticated consumer
marketing research techniques are used to measure customer satisfaction and
customers' evolving expectations.
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SITE SELECTION
The success of any restaurant is influenced significantly by its location.
Our franchise development groups work closely with franchisees and real estate
brokers to identify sites which meet specific standards. Sites are evaluated on
the basis of a variety of factors, including:
- demographics;
- traffic patterns;
- visibility;
- building constraints;
- competition;
- environmental restrictions; and
- proximity to high-traffic consumer activities.
RAW MATERIALS SOURCES AND AVAILABILITY
We have a centralized purchasing program which is designed to ensure
uniform product quality as well as reduced food, beverage and supply costs. Our
size provides us with significant purchasing power which often enables us to
obtain products at favorable prices from several nationally recognized
manufacturers.
In connection with the 1995 sale of our distribution subsidiary, Proficient
Food Company, or PFC, to Meadowbrook Meat Company, or MBM, we entered into an
eight-year distribution agreement with MBM, subsequently extended to September
7, 2005, under which PFC/MBM will continue to distribute and supply certain
products and supplies to Denny's restaurants. There are no volume requirements
relative to these agreements; however, the products named therein must be
purchased through PFC/MBM unless they are unable to make delivery within a
reasonable period. We purchase approximately 85% of our restaurant products and
supplies from PFC/MBM.
We believe that satisfactory sources of supply are generally available for
all the items regularly used by our restaurants and have not experienced any
material shortages of food, equipment, or other products which are necessary to
our restaurant operations.
SEASONALITY
Our business is moderately seasonal. Restaurant sales are generally greater
in the second and third calendar quarters (April through September) than in the
first and fourth calendar quarters (October through March). Additionally, severe
weather, storms and similar conditions may impact sales volumes seasonally in
some operating regions. Occupancy and other operating costs, which remain
relatively constant, have a disproportionately greater negative effect on
operating results during quarters with lower restaurant sales.
TRADEMARKS AND SERVICE MARKS
We, either directly or through wholly owned subsidiaries, have certain
trademarks and service marks registered with the United States Patent and
Trademark office and in international jurisdictions, including "Denny's" and
"Grand Slam Breakfast." We consider our trademarks and service marks important
to the identification of our restaurants and believe they are of material
importance to the conduct of our business. Domestic trademark and service mark
registrations are renewable at various intervals from 10 to 20 years, while
international trademark and service mark registrations have various durations
from 5 to 20 years. We generally intend to renew trademarks and service marks
which come up for renewal. We own or have rights to all trademarks we believe
are material to our restaurant operations. In addition, we have registered
various domain names on the Internet that incorporate certain of our trademarks
and service marks, and believe these domain name registrations are an integral
part of our identity. From time to time, we may become involved in litigation to
defend and protect our use of our intellectual property.
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COMPETITION
The restaurant industry can be divided into three main segments:
full-service restaurants, quick-service restaurants, and other miscellaneous
establishments. Full-service restaurants include the midscale, casual dining and
upscale (fine dining) segments. A large portion of midscale business comes from
three categories -- family style, family steak and cafeteria -- and is
characterized by complete meals, menu variety and moderate prices ($5 to $8
average check). The family style category, which includes Denny's, consists of a
small number of national chains, many local and regional chains, and thousands
of independent operators. The casual dining segment, which typically has higher
menu prices ($8 to $16 average check) and generally offers alcoholic beverages,
includes a small number of national chains, regional chains and independent
operators. The quick-service segment is characterized by lower average checks
(generally $3 to $5), portable meals, fast service and convenience.
The quick-service segment accounts for the bulk of commercial restaurant
industry traffic, but the full-service and quick-service segments of the
industry currently have approximately equal revenues. Throughout the recent
past, the midscale segment's traffic volumes have remained essentially flat. The
family style category has shown increases in traffic over the past few years,
while other midscale categories have shown mixed results.
The commercial restaurant industry is highly competitive, and competition
among a few major companies that own or operate restaurant chains is especially
intense, particularly in the family style segment. Restaurants compete on the
basis of name recognition and advertising; the price, quality, variety, and
perceived value of their food offerings; the quality of their customer service;
and the convenience and attractiveness of their facilities. Commercial
restaurants have faced increased competition from other nontraditional suppliers
of prepared meals over the recent past. A primary example of this competition is
the increased availability of prepared meals available in many grocery outlets.
Recent economic trends have also increased competition for qualified personnel
at the restaurant level.
We believe that Denny's has a number of primary competitive strengths
including strong brand name recognition, well located restaurants, and market
penetration, which has resulted in economies of scale in a variety of areas
including advertising, purchasing, distribution and field supervision.
Additionally, we believe that Denny's has competitive strengths in the value,
variety, and quality of its food products, and in the quality and training of
its employees. See "Risk Factors" for additional factors relating to our
competition in the restaurant industry.
ECONOMIC, MARKET AND OTHER CONDITIONS
The restaurant industry is affected by many factors, including changes in
national, regional and local economic conditions affecting consumer spending,
changes in socio-demographic characteristics of areas where restaurants are
located, changes in consumer tastes and preferences, increases in the number of
restaurants in general and in particular areas, unfavorable trends affecting
restaurant operations such as rising wage rates and utilities expenses and
unfavorable trends in regional weather conditions.
GOVERNMENT REGULATIONS
We and our franchisees are subject to various local, state and federal laws
and regulations governing various aspects of the restaurant business, including
but not limited to:
- health;
- sanitation;
- environmental matters;
- safety;
- disabled persons' access to facilities;
53
- the sale of alcoholic beverages; and
- hiring and employment practices.
The operation of our franchise system is also subject to regulations
enacted by a number of states and rules promulgated by the Federal Trade
Commission. We believe that we are in material compliance with applicable laws
and regulations, but cannot predict the effect on operations of the enactment of
additional regulations in the future.
We are also subject to federal and state laws governing matters such as
minimum wage, overtime and other working conditions. At September 26, 2001, a
substantial number of our employees were paid the minimum wage. Accordingly,
increases in the minimum wage or decreases in the allowable tip credit (which
reduces the minimum wage paid to tipped employees in certain states) increase
our labor costs. This is especially true for our operations in California, where
there is no tip credit. The California minimum wage increased from $5.00 per
hour to $5.75 per hour on March 1, 1998; it increased again to $6.25 per hour on
January 1, 2001 and will increase to $6.75 per hour on January 1, 2002. Also,
the United States Congress is considering a federal minimum wage increase to
$6.15 per hour over a multiple-year time frame. Employers must pay the higher of
the federal or state minimum wage. We have attempted to offset increases in the
minimum wage through pricing and various cost control efforts; however, there
can be no assurance that we or our franchisees can continue to pass on such cost
increases to our customers.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations; however, we cannot predict
the effect on our operations of possible future environmental legislation or
regulations.
COMPLIANCE WITH CONSENT DECREES
On May 24, 1994, we entered into two consent decrees resolving class action
litigation brought against Denny's which alleged that Denny's engaged in a
pattern or practice of racial discrimination in violation of the Civil Rights
Act of 1964. We denied any wrongdoing. The consent decrees enjoined us from
racial discrimination and required us to, among other things, implement certain
employee training and testing programs and provide public notice of Denny's
nondiscrimination policies.
Denny's has met all of its obligations under the consent decrees. On
January 16, 2000, class counsel, together with counsel for the United States,
submitted reports to the courts that entered the consent decrees reporting on
our completion of the requirements of the consent decrees and recommending the
early dismissal of the consent decrees effective November 24, 2000. Praising our
leadership, counsel advised the courts that:
. . . Denny's has performed its obligations under the (Consent) Decrees
in a highly commendable and exemplary manner, and has repeatedly gone
beyond the strict requirements of the (Consent) Decrees to achieve the
broader purposes of these historic settlements. Through a commitment of
enormous resources and effort, Denny's has embraced racial and cultural
diversity in its operations, demonstrated an admirable degree of
leadership in addressing racial issues, and in doing so has set an
example for other corporations to follow.
On January 23, 2001, the U.S. District Court for the District of Maryland
issued an order dismissing one of the consent decrees and on April 4, 2001, the
U.S. District Court Northern District of California dismissed the second consent
decree.
54
EMPLOYEES
At September 26, 2001, we had approximately 30,100 employees, none of whom
are subject to collective bargaining agreements. Many of our restaurant
employees work part time, and many are paid at or slightly above minimum wage
levels. As is characteristic of the restaurant industry, we experience a high
level of turnover among our restaurant employees. We have experienced no
significant work stoppages and consider our relations with our employees to be
satisfactory.
PROPERTIES
Most Denny's restaurants are free-standing facilities, with property sizes
averaging 42,000 square feet. The restaurant buildings average 4,800 square
feet, allowing them to accommodate an average of 140 guests. The number and
location of our restaurants as of September 26, 2001, are presented below:
FRANCHISED/
STATE/COUNTRY OWNED LICENSED
------------- ----- -----------
Alabama..................................................... 3 2
Alaska...................................................... -- 4
Arizona..................................................... 27 51
Arkansas.................................................... 1 10
California.................................................. 164 227
Colorado.................................................... 10 26
Connecticut................................................. -- 8
District of Columbia........................................ -- 1
Delaware.................................................... 3 --
Florida..................................................... 62 147
Georgia..................................................... -- 30
Hawaii...................................................... 4 3
Idaho....................................................... -- 6
Illinois.................................................... 39 22
Indiana..................................................... 2 32
Iowa........................................................ -- 4
Kansas...................................................... -- 11
Kentucky.................................................... 6 6
Louisiana................................................... 5 8
Maine....................................................... -- 8
Maryland.................................................... 12 19
Massachusetts............................................... -- 7
Michigan.................................................... 28 5
Minnesota................................................... 4 14
Mississippi................................................. 2 1
Missouri.................................................... 7 40
Montana..................................................... -- 6
Nebraska.................................................... -- 3
Nevada...................................................... 10 8
New Hampshire............................................... -- 3
New Jersey.................................................. 7 8
New Mexico.................................................. 2 19
New York.................................................... 46 13
North Carolina.............................................. 4 14
North Dakota................................................ -- 3
Ohio........................................................ 26 18
Oklahoma.................................................... 3 25
Oregon...................................................... 5 22
55
FRANCHISED/
STATE/COUNTRY OWNED LICENSED
------------- ----- -----------
Pennsylvania................................................ 39 8
Rhode Island................................................ -- 2
South Carolina.............................................. 12 6
South Dakota................................................ -- 3
Tennessee................................................... 5 5
Texas....................................................... 46 124
Utah........................................................ -- 22
Vermont..................................................... -- 2
Virginia.................................................... 12 14
Washington.................................................. 22 45
West Virginia............................................... -- 3
Wisconsin................................................... 10 9
Guam........................................................ -- 2
Puerto Rico................................................. -- 11
Canada...................................................... 10 41
Other International......................................... -- 7
--- -----
Total..................................................... 638 1,138
=== =====
Of the 638 restaurants operated by us as of September 26, 2001, we owned
the land and building of 166, owned the building and leased the land of 26, and
leased both the land and building of 446.
In addition to the restaurants, we own an 18-story, 187,000 square foot
office tower in Spartanburg, South Carolina, which serves as our corporate
headquarters. Our corporate offices currently occupy approximately 15 floors of
the tower, with the balance leased to others.
See Note 11 to our consolidated financial statements for information
concerning encumbrances on some of our properties.
LEGAL PROCEEDINGS
On February 14, 2001, FRD filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code in the U.S. Bankruptcy Court for the District
of Delaware, Case No. 01-0436-PJW, to facilitate the divestiture of its Coco's
and Carrows brands and to preserve their going concern value. FRD is a
debtor-in-possession in the proceeding which involves only FRD and none of its
subsidiaries. Consequently, all of FRD's subsidiaries, including its operating
concepts Coco's and Carrows, are operating in the normal course of business. The
final selection of a buyer and completion of the divestiture will take place in
the bankruptcy court. No assurance can be given that FRD's subsidiaries will not
be required to commence Chapter 11 cases in the future. This Chapter 11 filing
does not include Advantica, Denny's Holdings or Denny's; however, on January 8,
2001, Denny's became the lender under the Coco's/Carrows Credit Facility. See
"Risk Factors -- We may not collect the amount owed to us by Coco's and Carrows,
and the outcome and effects of the FRD bankruptcy proceedings are highly
uncertain," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 11 to our
consolidated financial statements for additional information.
In 1994, we were advised by the Internal Revenue Service of proposed
deficiencies for federal income taxes totaling approximately $12.7 million. The
proposed deficiencies relate to examinations of certain income tax returns filed
by us for the seven taxable periods ended December 31, 1992. In the third
quarter of 1996, this proposed deficiency was reduced by approximately $7.0
million as a direct result of the passage of the Small Business Jobs Protection
Act in August 1996. This legislation included a provision that clarified
Internal Revenue Code Section 162(k) to allow for the amortization of borrowing
costs incurred by a corporation in connection with a redemption of its stock.
Because we believed the remaining proposed deficiencies were substantially
incorrect, we contested such proposed deficiencies in 1998 by filing petitions
in the United States Tax Court. We settled all the issues in these petitions
with the IRS in the fourth quarter
56
of 2000, and accordingly adjusted our income tax liabilities established in
connection with these issues. We and the IRS completed the final computations of
the federal income taxes and interest in the first quarter of 2001, and we
recorded an additional adjustment of the related income tax liabilities (see
Note 13 to the Consolidated Financial Statements).
One current and two former managers of Denny's restaurant units initiated,
in the Superior Court of Los Angeles County, California, a class action lawsuit
seeking, among other things, overtime compensation. The action was originally
filed on September 2, 1997. The suit alleged that Denny's requires its managers
to work more than 50% of their time performing nonmanagement related tasks, thus
entitling them to overtime compensation. Denny's contends that it properly
classifies its managers as salaried employees, thereby exempting them from the
payment of overtime compensation. During the third quarter of 2000, the parties
reached an agreement to resolve the claims of individuals who were employed as
managers of Denny's in California between September 2, 1994 and July 21, 2000.
While continuing to deny liability, we elected to resolve the case to avoid the
expense of continued litigation and the risk of loss. The total settlement of
$4.0 million was approved by the court on October 27, 2000 and paid in the first
quarter of 2001.
Four former managers of Denny's restaurant units have initiated, in the
Superior Court for King County, Washington, a class action lawsuit seeking,
among other things, overtime compensation. The action, which was originally
filed on May 16, 2000, was certified on July 31, 2001 as a class action with all
managers and general managers who worked for company-owned Denny's restaurants
in Washington since January 1, 1997 being identified as class members. The suit
alleges that managers at Denny's are not exempt "executive" employees because
they supposedly spend most of their time on non-exempt tasks, thus entitling
them to overtime compensation. Denny's contends that it properly classifies its
managers as salaried employees, thereby exempting them from the payment of
overtime compensation. Denny's has been and will continue to vigorously defend
this lawsuit.
Other proceedings are pending against us, in many cases involving ordinary
and routine claims incidental to our business, and in others presenting
allegations that are nonroutine and include compensatory or punitive damage
claims. Our ultimate legal and financial liability with respect to the matters
mentioned above and these other proceedings cannot be estimated with certainty.
However, we believe, based on our examination of these matters and our
experience to date, that the ultimate disposition of these matters will not
significantly affect our financial position or results of operations.
57
MANAGEMENT
The name, age, present principal occupation or employment, directorships
and the material occupations, positions, offices, or employments for at least
the past five years, of each director of Advantica are set forth below. Unless
otherwise indicated, each such person has held the occupation listed opposite
his or her name for at least the past five years.
CURRENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE FIVE YEAR EMPLOYMENT HISTORY
---- --- ----------------------------------------------
Vera K. Farris................. 61 Director of Advantica; President of The Richard Stockton
College of New Jersey (1983-present); Director of National
Utilities Investors, Inc. and FRD.
James J. Gaffney............... 61 Director of Advantica; Vice Chairman, Viking Pacific
Holdings Limited, a diversified holding company
headquartered in Auckland, New Zealand with approximately 23
different businesses based primarily in New Zealand
(1998-present); Chairman, Vermont Investments Limited, a
diversified holding company involved in manufacturing and
distribution (1997-1998); President and Chief Executive
Officer, General Aquatics, Inc., a company involved in
swimming pool equipment manufacturing and construction
(1995-1997); Director of SCP Pool Corporation, Hexcel
Corporation, Seabulk International, Inc., Safelite Glass
Corporation, Purina Mills, Inc., Imperial Sugar Company and
FRD.
Nelson J. Marchioli............ 52 Director of Advantica; Chief Executive Officer and President
of Advantica and Denny's (February 2001-present); President
of El Pollo Loco, Inc. (1997-February 2001); Executive Vice
President and Chief Operating Officer of Bruegger's
Corporation (1996-1997); Senior Vice President of Worldwide
Supply for Burger King Corporation (1995-1996); Director of
FRD.
Robert E. Marks................ 49 Director of Advantica; President of Marks Ventures, Inc.,
New York, New York, a private equity investment firm
(1994-present); Managing Director of Carl Marks & Co., Inc.
(1982-1994); Director of Soluol Chemical Co., Inc., Brandrud
Furniture Company and FRD.
Lloyd I. Miller, III .......... 47 Director of Advantica; Registered Investment Advisor
(1990-present); Director of Aldila, Inc. and FRD.
Charles F. Moran............... 71 Interim Chairman of Advantica; Retired; Senior Vice
President of Administration of Sears, Roebuck and Co.
(1989-1993); Senior Vice President and Chief Information
Officer of Sears, Roebuck and Co. (1988-1989); Director of
Leapnet, Inc. and FRD.
Elizabeth A. Sanders........... 56 Director of Advantica; Principal of The Sanders Partnership,
Sutter Creek, California, a consulting firm (1990-present);
Vice President and General Manager of Nordstrom, Inc.
(1981-1990); Director of Washington Mutual, Inc., Wal-Mart
Stores, Inc., Wellpoint Health Networks, Inc., Wolverine
Worldwide, Inc. and FRD.
Donald R. Shepherd............. 65 Director of Advantica; Retired; Chairman of Loomis, Sayles &
Company, L.P., Boston, Massachusetts, an investment
management firm (1992-1995); Chief Executive Officer and
Chief Investment Officer of Loomis, Sayles & Company, L.P.
(1990-1995); Director of Seabulk International, Inc., Geneva
Steel Holdings Corporation and FRD.
58
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age, present principal occupation or employment, directorships
and the material occupations, positions, offices, or employments for at least
the past five years, of each executive officer of Advantica are set forth below.
Unless otherwise indicated, each such person has held the occupation listed
opposite his or her name for at least the past five years.
CURRENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE FIVE YEAR EMPLOYMENT HISTORY
---- --- ----------------------------------------------
Janis S. Emplit................ 45 Senior Vice President and Chief Information Officer of
Advantica (1999-present); Vice President, Information
Systems of Advantica (1997-1998); Senior Director, Burger
King (1987-1997).
Gustave E. Gelardi............. 55 Division Vice President, Operations of Denny's (May
2001-present); Director, Operations Projects of Burger King
(1997-1999); Vice President, Region Operations Asia/Pacific
Market of Burger King (1995-1997).
Roy C. Getz.................... 37 Senior Vice President, Marketing and Product Development of
Denny's (July 2001-present); Vice President, Marketing of
Denny's (1999-July 2001); Vice President, Marketing of Bob
Evans Farms, Inc. (1997-1999); Director, Marketing of Bob
Evans Farms, Inc. (1995-1997).
Andrew F. Green................ 46 Senior Vice President and Chief Financial Officer of Denny's
(January 2001-present); Senior Vice President of Advantica
(January 2001-present); Senior Vice President, Planning and
Corporate Controller of Advantica (1998-January 2001); Vice
President, Planning and Corporate Controller of Advantica
(1997-1998); Vice President, Corporate Planning and Risk
Management of Advantica (1996-1997).
Craig E. Herman................ 50 Division Vice President, Operations of Denny's (May
2001-present); District Manager, Tim Hortons (2000-May
2001); Operating Partner, Regional Partner of Bruegger's
Bagels (1993-1999).
Nelson J. Marchioli............ 52 Chief Executive Officer and President of Advantica and
Denny's (February 2001-present); President of El Pollo Loco,
Inc. (1997-February 2001); Executive Vice President and
Chief Operating Officer of Bruegger's Corporation
(1996-1997); Senior Vice President of Worldwide Supply for
Burger King Corporation (1995-1996).
Bonnie J. McFarland............ 49 Division Vice President, Operations of Denny's (May
2001-present); Regional Vice President, Operations of
Denny's (1997-May 2001); Regional Director, Operations of
Denny's (1996-1997).
Rhonda J. Parish............... 45 Executive Vice President of Advantica (1998-present);
General Counsel and Secretary of Advantica (1995-present);
Senior Vice President of Advantica (1995-1998).
Mounir N. Sawda................ 44 Vice President, Franchise and Development of Denny's
(December 2001-present); Senior Director, Construction and
Facilities of Denny's (1998-December 2001); Director,
Franchise Real Estate and Construction of Denny's (1998);
Construction and Development, Burger King (1993-1997).
Mark C. Smith.................. 41 Vice President, Procurement and Distribution of Advantica
(January 2001-present); Senior Director, Procurement of
Advantica (1996-2000).
Linda G. Traylor............... 50 Senior Vice President, Human Resources of Advantica (January
2001-present); Vice President, Human Resources, Planning and
Development of Advantica (1995-2000).
59
CURRENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE FIVE YEAR EMPLOYMENT HISTORY
---- --- ----------------------------------------------
Samuel M. Wilensky............. 44 Division Vice President, Franchise Operations of Denny's
(May 2001-present); Regional Vice President, Franchise
Operations of Denny's (2000-May 2001); Regional Director,
Franchise Operations of Denny's (1999-2000); Regional
Director, Company Operations of Denny's (1994-1999).
In January 2001, we announced that our board of directors had named Nelson
J. Marchioli as president and chief executive officer of Advantica and Denny's
to replace James B. Adamson in connection with his planned retirement. Mr.
Marchioli assumed his new position on February 5, 2001. Mr. Adamson continued as
chairman of the board of directors through his planned retirement which was
effective December 21, 2001. Also, in January 2001, we announced that Ronald B.
Hutchison resigned as executive vice president and chief financial officer of
Denny's. At the request of the board of directors, Mr. Hutchison agreed to
remain in the same capacity at Advantica for a period of time to assist in the
divestiture of the Coco's and Carrows concepts. Replacing him as chief financial
officer of Denny's is Andrew F. Green, former senior vice president of planning
and corporate controller of Advantica, who assumed the position at Denny's on
February 5, 2001. Effective October 31, 2001, Mr. Green assumed the position of
Chief Financial Officer of Advantica replacing Mr. Hutchison in such capacity.
COMPENSATION OF DIRECTORS
Each of our non-employee directors receives the following compensation: (1)
a $30,000 annual cash retainer (paid in $7,500 installments on a quarterly
basis), (2) an annual restricted stock retainer (the size of such award
determined annually by the compensation committee) with a requirement that the
restricted stock be held until the director resigns or retires from the board
(for the years 1998, 1999, 2000 and 2001, 1,000, 1,702, 6,667 and 9,434 shares,
respectively, were awarded to each director), and (3) a stock option grant every
three (3) years (6,000 shares were granted in 1998 and 15,000 shares were
granted in 2001). These options have a term of 10 years, become exercisable at a
rate of 33 1/3% per annum for three consecutive years beginning on the first
anniversary of the date of grant and have an exercise price equal to the fair
market value of the common stock on the date of grant. In addition to the above
described compensation, the lead director beginning for the year 2001 will
receive $70,000 annually for his service as lead director and the chairmen of
the audit committee and the compensation committee each receive additional
compensation of $10,000 annually for their service as the committee chair.
Additionally, during 2000, the board appointed a chief executive officer, or
CEO, succession planning committee, consisting of Messrs. Gaffney, Marks,
Miller, Shepherd and Ms. Sanders. This committee was given the responsibility of
recommending to the board a successor to our chief executive officer, Mr.
Adamson. For their services in 2000, each committee member received $500 for
each one hour or longer telephonic meeting, $1,000 for each face-to-face meeting
scheduled in connection with other board-related business, and $2,500 for
separately scheduled meetings.
60
COMPENSATION OF OFFICERS
All compensation paid to the executive officers of Advantica for their
services provided to us is paid by Advantica. Set forth below is information for
2000, 1999 and 1998 with respect to compensation for services to us of our chief
executive officer and the four most highly compensated executive officers other
than the chief executive officer, who were serving as executive officers at the
end of 2000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION(1) SECURITIES ALL OTHER
-------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION AS OF DECEMBER 27, 2000 YEAR SALARY($)(2) BONUS($)(3) OPTION(#)(6) ($)(4)(5)
--------------------------------------------------- ---- ------------ ----------- ------------ ------------
James B. Adamson............................. 2000 $1,097,635 $1,646,152 -- $ 177,680
Chairman, Chief Executive 1999 1,096,519 825,000 -- 80,826
Officer and President of 1998 1,096,597 -- 700,000 5,819,315
Advantica and Denny's
Ronald B. Hutchison.......................... 2000 330,514 122,850 -- 227,950
Executive Vice President 1999 301,535 178,753 150,000 186,160
and Chief Financial Officer 1998 267,174 162,505 150,000 158,750
of Advantica and Denny's
Rhonda J. Parish............................. 2000 297,713 111,150 -- 226,666
Executive Vice President, 1999 277,575 175,500 150,000 185,639
General Counsel and 1998 247,951 146,250 150,000 153,880
Secretary of Advantica and Denny's
Paul R. Wexler............................... 2000 243,101 95,552 -- 224,982
Executive Vice President, 1999 233,285 152,577 150,000 184,220
Procurement and 1998 227,417 146,250 150,000 157,700
Distribution of Advantica
Stephen W. Wood.............................. 2000 265,967 99,450 -- 225,425
Executive Vice President, 1999 245,924 152,577 150,000 184,351
Human Resources and 1998 231,272 146,250 150,000 155,360
Corporate Affairs of Advantica
---------------
(1) The amounts shown for each named executive officer exclude perquisites and
other personal benefits that did not exceed, in the aggregate, the lesser of
either $50,000 or 10% of the total of annual salary and bonus reported for
the named executive officer for any year included in this table.
(2) The amounts in this column include certain costs and credits to the named
executive officers relating to certain life, health and disability insurance
coverage provided through Advantica.
(3) The amounts shown in this column reflect bonus payments received in the
respective year by the named executive officers under our incentive programs
which may relate to the prior fiscal year.
(4) The amounts for Mr. Adamson for 2000, 1999 and 1998 consist of (1)
company-paid life insurance premium payments of $17,383, $17,249 and
$16,880, respectively, (2) contributions of $46,073, $25,385 and $19,800,
respectively, made to the Advantica Secured Savings Plan, or the ASSP, a
non-qualified deferred compensation plan, (3) company-paid travel expenses
of $12,381, $11,000 and $22,819, respectively, (4) reimbursement of certain
incurred professional fees totaling $66,598, $27,192 and $28,874,
respectively, (5) reimbursement for certain tax payments of $35,245 in 2000
and $1,780,942 in 1998, (6) a retention payment for 1998 of $2,000,000 and
(7) a $1,950,000 payment in 1998 for the purchase of 200,000 shares of
Advantica common stock (paid in lieu of a scheduled $3,000,000 retention
payment due to Mr. Adamson on January 2, 1999 pursuant to Mr. Adamson's
employment agreement). For additional information see "-- Employment
Agreements -- Adamson Employment Agreement."
61
(5) The amounts for Ms. Parish and Messrs. Hutchison, Wexler and Wood include
our contributions made to their officers' accounts under the ASSP, which for
2000 amounted to $11,666, $12,950, $9,982 and $10,425 respectively, for 1999
amounted to $10,639, $11,160, $9,220 and $9,351 respectively, and for 1998
amounted to $3,880, $8,750, $7,700 and $5,360, respectively. With the
exception of Mr. Adamson, each named executive officer's amounts reflect
leadership retention payments of $215,000 in 2000, $175,000 in 1999 and
$150,000 in 1998.
(6) The numbers for each of the named executive officers except Mr. Adamson
include for 1998 an option to purchase 100,000 shares which was subsequently
rescinded by the named executive officers and effectively cancelled and
terminated as of August 15, 2000. Additionally, the numbers for Mr. Adamson
for 1998 include an option to purchase 500,000 shares which was subsequently
rescinded by Mr. Adamson and effectively cancelled and terminated as of
August 15, 2000.
As a supplement to the foregoing, in 2001, Messrs. Adamson and Marchioli
each served as Advantica's chief executive officer. Mr. Adamson's 2001
compensation included salary and bonus of $1,100,004 and $1,281,400,
respectively. Mr. Marchioli's 2001 compensation included salary of $530,769 and
a sign-on bonus of $1,623,264. It is expected that the other most highly
compensated executive officers in 2001 will be the following (with salary and
bonuses (including retention payments, as applicable) as indicated
parenthetically): Ms. Parish ($320,192 and $306,600, respectively), Mr. Green
($257,308 and $272,450, respectively), Ms. Emplit ($250,192 and $250,998,
respectively), Ms. Traylor ($199,153 and $166,581, respectively), Mr. Hutchison
($298,923 and $284,870, respectively), and Mr. James W. Lyons (a former
Executive Vice President) ($261,553 and $355,975, respectively). Salary and
bonuses in 2000 were as follows: Mr. Green ($223,078 and $172,401,
respectively), Ms. Emplit ($238,482 and $329,702, respectively), Ms. Traylor
($154,246 and $100,500, respectively), and Mr. Lyons ($245,134 and $157,410,
respectively). See "-- Stock Options" below for information concerning stock
option grants in 2001. Options grants in 1999 were as follows: Mr. Green
(75,000), Ms. Emplit (85,000), Ms. Traylor (15,000), and Mr. Lyons (25,000).
None of these executive officers received options in 2000.
STOCK OPTIONS
There were no stock options granted to the named executive officers during
the fiscal year ended December 27, 2000. The following table sets forth
information with respect to the 2000 year-end values of unexercised options, all
of which were granted by us pursuant to the Advantica Stock Option Plan, held by
each of the persons named in the Summary Compensation Table at fiscal year-end.
AGGREGATED OPTION EXERCISES IN 2000 AND
FISCAL YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END
------------------------------- --------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- ------------------------------- --------------------
James B. Adamson.................................. 100,000/100,000 --/--
Ronald B. Hutchison............................... 62,500/137,500 --/--
Rhonda J. Parish.................................. 62,500/137,500 --/--
Paul R. Wexler.................................... 62,500/137,500 --/--
Stephen W. Wood................................... 62,500/137,500 --/--
No options held by the above named executive officers were exercised in
2000.
As a supplement to the foregoing, the above-named executive officers were
granted the following ten year options in 2001 (vesting over a three-year period
in the case of Marchioli and vesting over a two-year period in the case of the
other executive officers): Mr. Marchioli (for 2,000,000 shares pursuant to his
employment agreement -- 1,250,000 shares at an exercise price of $1.03 per share
and 750,000 shares at an exercise price of $2.00 per share); Mss. Parish, Emplit
and Traylor and Messrs. Green and Lyons (each
62
100,000 shares at an exercise price of $0.84 per share). At year-end 2001, the
number of shares underlying unexercised options was as follows for the executive
officers indicated: Mr. Adamson (200,000), Mr. Marchioli (2,000,000), Ms. Parish
(300,000), Mr. Green (190,000), Ms. Emplit (200,000), Ms. Traylor (125,000), Mr.
Hutchison (200,000), and Mr. Lyons (140,000). All of these options were
out-of-the-money at year-end 2001. No options held by the above-named executive
officers were exercised in 2001.
RETIREMENT PLANS
We maintain the Advantica Pension Plan, a tax qualified defined benefit
retirement plan. This plan is described below.
The following table shows the estimated annual benefits for a single life
annuity that could be payable under the pension plan, as amended, and the
ancillary plan described below upon a person's normal retirement at age 65 if
that person were in one of the following classifications of assumed compensation
and years of credited service.
ADVANTICA PENSION PLAN
YEARS OF SERVICE
----------------------------------------------------
AVERAGE ANNUAL REMUNERATION OVER A FIVE-YEAR PERIOD 15 20 25 30 35
--------------------------------------------------- -------- -------- -------- -------- --------
$ 200,000...................................... $ 42,368 $ 56,490 $ 70,613 $ 84,735 $ 98,858
250,000..................................... 53,618 71,490 89,363 107,235 125,108
300,000..................................... 64,868 86,490 108,113 129,735 151,358
350,000..................................... 76,118 101,490 126,863 152,235 177,608
400,000..................................... 87,368 116,490 145,613 174,735 203,858
500,000..................................... 109,868 146,490 183,113 219,735 256,358
600,000..................................... 132,368 176,490 220,613 264,735 308,858
700,000..................................... 154,868 206,490 258,113 309,735 361,358
800,000..................................... 177,368 236,490 295,613 354,735 413,858
900,000..................................... 199,868 266,490 333,113 399,735 466,358
1,000,000..................................... 222,368 296,490 370,613 444,735 518,858
1,200,000..................................... 267,368 356,490 445,613 534,735 623,858
1,400,000..................................... 312,368 416,490 520,613 624,735 728,858
1,600,000..................................... 357,368 476,490 595,613 714,735 833,858
The pension plan is noncontributory and generally covers our employees (but
not employees of our subsidiaries Denny's, Coco's and Carrows). In 1999, the
pension plan was amended to effect the following changes: (1) no new
participants will be allowed into the plan after December 31, 1999; (2) all
future pension benefit accruals for highly compensated employees will be earned
beginning January 1, 2000 under the ancillary plan described below; and (3) all
benefit accruals earned under the plan and ancillary plan will be frozen as of
December 31, 2004. Participants in the pension plan, therefore, are limited to
those employees who, on or prior to December 31, 1999, had attained the age of
21 and had completed one thousand hours of service. A participant's annual
retirement benefit under the pension plan at normal retirement age is calculated
by multiplying the number of years of participation in the pension plan (not to
exceed 35 years, and not including years after 1999 for highly compensated
participants or years after 2004 for other participants) by the sum of one
percent of the average compensation paid during 60 consecutive calendar months
chosen to produce the highest average through 1999 for highly compensated
participants or through 2004 for other participants plus an additional one-half
of one percent of the average compensation in excess of the average Social
Security wage base. Benefits payable cannot exceed 50% of the average
compensation. Plan benefits are normally in the form of a life annuity or, if
the retiree is married, a joint and survivor annuity. "Compensation" for the
purpose of this paragraph generally consists of all remuneration paid by the
employer to the employee for services rendered as reported or reportable on Form
W-2 for federal income tax withholding purposes (including the amount of any
year-end bonus paid), excluding reimbursements and other expense allowances,
fringe benefits, moving expenses, deferred compensation and welfare benefits
(such
63
exclusions including, without limitation, severance pay, leadership retention
payments, relocation allowance, gross-up pay to compensate for taxable
reimbursements, hiring bonuses, cost of living differentials, special overseas
premiums, compensation resulting from participation in, or cancellation of,
stock option plans, contributions by the employer to the pension plan or any
other benefits plan and imputed income resulting from the use of our property or
services). Except for limited purposes described in the plan, Compensation also
includes any deferred compensation under a Section 401(k) plan maintained by the
employer and salary reduction amounts under a Section 125 plan maintained by the
employer. The funding of the pension plan is based on actuarial determinations.
Ancillary to the pension plan is a non-qualified plan for a select group of
management and highly compensated employees that provides for benefits limited
by the limits on benefits and compensation under the Code. "Compensation" and
"Average Compensation" are defined in this ancillary plan the same way they are
defined in the pension plan. Consequently, the accrual of all further benefits
under the ancillary plan shall cease on and after December 31, 2004. Benefits
payable under the ancillary plan are included in the table above.
The maximum annual pension benefit payable under the pension plan for 2000
was $135,000 (or, if greater, the participant's 1982 accrued benefit).
Except for the accrual of certain non-qualified benefits as described
herein, the Compensation included under the pension plan (including the
ancillary non-qualified plan) generally corresponds with the annual compensation
of the named executive officers in the summary compensation table above.
Includable compensation for 2000 for Ms. Parish and Messrs. Adamson, Hutchison,
Wexler and Wood was $408,265, $2,746,156, $454,004, $348,630 and $366,566,
respectively.
As of December 31, 2000, the estimated credited years of service under the
Advantica Pension Plan for Ms. Parish and Messrs. Adamson, Hutchison, Wexler and
Wood at normal retirement age was 9, 9, 8, 9 and 11, respectively.
Employees with age and service equaling or exceeding 85 and who are within
five years of the normal retirement age will receive no reduction of accrued
benefits. Employees who are at least 55 years of age with 15 years of service
will receive a reduction of three percent in accrued benefits for the first five
years prior to normal retirement date and six percent for the next five years.
Accrued benefits for employees retiring with less than 15 years of service will
be actuarially reduced beginning at age 55. Vesting of retirement benefits was
also changed to comply with the law from 12-year graduating vesting to five-year
cliff vesting for the plan.
EMPLOYMENT AGREEMENTS
ADAMSON EMPLOYMENT AGREEMENT
We have entered into an employment agreement with Mr. Adamson (as entered
into January 10, 1995, effective January 23, 1995, amended on February 27, 1995
and December 31, 1996, amended and restated as of January 7, 1998, and further
amended pursuant to addendum agreements effective January 1, 2000 and January
24, 2001) which provides that we will employ Mr. Adamson as chief executive
officer and president of Advantica and Denny's until the earlier of January 1,
2002, his death or termination of employment by reason of permanent disability,
voluntary termination of employment or involuntary termination with or without
cause (as defined) and the board shall continue to nominate Mr. Adamson as a
director of Advantica and Mr. Adamson shall serve as the board's chairman during
his employment term. Additionally, under his employment agreement, we shall not
change Mr. Adamson's title, duties or responsibilities without Mr. Adamson's
consent. On February 5, 2001, we, with Mr. Adamson's consent, named Nelson J.
Marchioli the president and chief executive officer of Advantica and Denny's
with Mr. Adamson continuing as the chairman of the board of Advantica. His
employment agreement further prohibits Mr. Adamson from soliciting for
employment the employees of Advantica or our affiliates and from engaging in
certain competitive activities generally during his term of employment and for a
period of two years after the later of the termination of his employment or the
date on which we are no longer required to make certain termination benefits.
64
Mr. Adamson's employment agreement further prohibits him from using or
disclosing certain "confidential" or "proprietary" information for purposes
other than carrying out his duties with Advantica.
Under his employment agreement, Mr. Adamson is entitled to (1) an annual
base salary as determined by the board during Mr. Adamson's term of employment,
but in no event less than $1,100,000 unless we implement a broad scale salary
reduction initiative; (2) during 2000 and 2001, success bonuses available to be
earned in amounts totaling no less than $7,405,750 (i.e., an amount equal to the
sum of 200% of his annual target bonus plus 299% of his base salary and his
targeted bonus) upon the successful completion of certain strategic initiatives
such as the divestiture of Coco's and Carrows, achieving certain changes in our
capital structure necessary to execute our business plan, CEO succession and the
achievement of certain customer growth, service, refranchising, reimaging and
financial health targets (for 2000, $1,563,650 of the success bonuses under the
terms of his agreement was earned); (3) a lump sum payment of $1,500,000 for the
purchase of Mr. Adamson's Greenville, SC residence to be paid within ten (10)
business days after January 1, 2002 or earlier upon the occurrence of Mr.
Adamson's termination without cause or our relocation; (4) cash payments of $1
million, if, at anytime prior to January 1, 2002, the closing bid price for any
consecutive thirty (30) day period equals or exceeds $5 per share, and $500,000
if the average closing bid price for Advantica common stock for the thirty (30)
day period immediately prior to January 1, 2002 equals or exceeds $5 per share;
and (5) life insurance coverage maintained by us with death benefits of at least
$3,250,000 in the aggregate. These success bonuses, however, will not be due or
owing for the successful completion of any of the above referenced strategic
initiatives on or after the commencement of a financial restructuring under
Chapter 11 of the United States Bankruptcy Code or analogous law unless the
distribution received per share under such proceeding by holders of common stock
equals or exceeds the average of the closing bid and asked prices for such a
share on the last trading day immediately preceding the commencement of the
proceeding. Additionally, pursuant to his employment agreement, in 2000, Mr.
Adamson received a cash payment of $1,300,000, representing the purchase price
of his Charleston, SC residence, which was paid from the proceeds received by us
from the sale of Mr. Adamson's Charleston residence.
In January 1998, under his employment agreement, Mr. Adamson received under
the Advantica Stock Option Plan an option to purchase 500,000 shares of
Advantica common stock, with an exercise price equal to the fair market value of
the common stock on the date of grant. Effective August 15, 2000, Mr. Adamson,
along with other officers of Advantica, agreed to the rescission, termination
and cancellation of the option awards they received in January 1998.
Mr. Adamson's employment agreement also entitles him to certain other
privileges, reimbursements and benefits, including participation in all of our
benefit plans generally applicable to our executive officers and reimbursement
of certain professional fees and travel and relocation expenses. Additionally,
his agreement entitles him to generally participate in our welfare benefits in
addition to any continuation coverage to which he is entitled, for two years
after the completion of his employment term on January 1, 2002.
In the event of Mr. Adamson's termination of employment during the term of
his employment agreement, we are required to make payments as follows based upon
the cause of such termination: (1) if by reason of death, Mr. Adamson's
surviving spouse is entitled to be paid an amount equal to Mr. Adamson's base
salary and annual bonus and continuation of certain benefits for a one-year
period after his death; (2) if by reason of permanent disability, Mr. Adamson is
entitled to be paid one-half of his base salary and annual bonus and
continuation of certain benefits for a period of two years after termination of
employment; and (3) if by us other than for cause, Mr. Adamson is, in general,
entitled to: (a) the payment of $7,405,750 (less the sum of the amount of
success bonus already paid or not paid for failure to attain the applicable
strategic initiatives); and (b) continuation of certain benefits and other
contract rights. In the event of a termination by us of Mr. Adamson's employment
for some reason other than for cause following the consummation of a change of
control of Advantica that occurs prior to January 1, 2002, Mr. Adamson shall be
paid $7,405,750 less the sum of the success bonus already paid or not paid for
failure to attain the applicable strategic initiatives. In the event of
termination for cause or voluntary termination, we shall pay Mr. Adamson
generally the benefits due him under our benefit plans for his services rendered
to us through his date of termination.
65
MARCHIOLI EMPLOYMENT AGREEMENT
We entered into an employment agreement with Mr. Marchioli effective
February 5, 2001 which provides that Advantica will employ Mr. Marchioli as
president and chief executive officer of Advantica and Denny's for a period of
three years from the effective date unless terminated earlier by reason of his
death, permanent disability, voluntary termination or involuntary termination
with or without cause. Mr. Marchioli's employment agreement prohibits him from
soliciting for employment the employees of Advantica or our affiliates and from
engaging in certain competitive activities generally during his term of
employment and for a period of one year after the later of the termination of
his employment or the date on which we are no longer required to make certain
termination benefits. His employment agreement further prohibits him from using
or disclosing certain "confidential" or "proprietary" information for purposes
other than carrying out his duties with us.
Under his employment agreement, Mr. Marchioli is entitled to: (1) an annual
base salary of $600,000; (2) an annual performance bonus at an annual rate of at
least 75% of his annual base salary if Advantica and Mr. Marchioli achieve
budgeted financial and other performance targets which shall be established by
the compensation committee, with the payment of the performance bonus for the
year 2001 being guaranteed by us; (3) a grant of an option as of the agreement's
effective date under the Advantica Stock Option Plan, to purchase, for a ten
year period, 2,000,000 shares of Advantica common stock (at an exercise price
equivalent to the fair market per share of the common stock on the effective
date of his employment agreement with respect to 1,250,000 shares and $2.00 per
share with respect to the remaining 750,000 shares) which vests at a rate of
33 1/3% per year beginning on the first anniversary date of the grant and which
becomes 100% vested in the event of (a) termination without cause in which case
the option shall be exercisable for 36 months following the effective date of
such termination; (b) a dissolution or liquidation of Advantica; (c) a sale of
all or substantially all of our assets; (d) a merger or consolidation involving
Advantica where we are not a surviving corporation or where holders of the
common stock receive securities or other property from another corporation; or
(e) a tender offer for at least a majority of the outstanding common stock; and
(4) a sign-on bonus within five days of the effective date of his agreement in
the amount of $1,623,264.
Mr. Marchioli's employment agreement entitles him to certain other
privileges and benefits, including participation in all of our benefit plans,
generally applicable to our executive officers.
In addition to the compensation described above, under the terms of his
employment agreement we will pay or reimburse Mr. Marchioli for all normal and
reasonable expenses he incurs during his employment term in connection with his
responsibilities to us, including his travel expenses. Additionally, if Mr.
Marchioli during his employment elects to relocate to Greenville/Spartanburg, we
will provide him with the full relocation benefits package applicable to our
executive officers, including the guaranteed buyout of his current primary
residence in California. For the portion of his employment term which Mr.
Marchioli elects not to relocate to Greenville/Spartanburg, he will be paid a
$25,000 annual travel allowance and a $25,000 annual housing allowance, each of
which will be grossed up at a combined rate for tax purposes which is necessary
to provide a net amount to Mr. Marchioli of $25,000 annually for each of said
allowances. We further agreed under the terms of his employment agreement to (1)
generally defend and indemnify Mr. Marchioli against any breach of contract
claim made by his former employer ensuing from his acceptance of employment with
us, provided Mr. Marchioli is in compliance with the notice of termination
provision of his employment agreement with his previous employer; and (2)
reimburse Mr. Marchioli for all reasonable legal, accounting and financial
advisor fees and expenses incurred for the personal tax, financial and estate
planning services in the negotiation and documentation of his employment
agreement.
In the event of Mr. Marchioli's termination of employment during the term
of his employment agreement, we are required to make payments as follows based
upon the cause of such termination (1) if by reason of death, Mr. Marchioli's
surviving spouse is entitled to be paid an amount equal to Mr. Marchioli's base
salary and annual bonus and his eligible family dependents are entitled to
receive certain health and welfare benefits for a one-year period after his
death; (2) if by reason of permanent disability, Mr. Marchioli is entitled to be
paid one-half of his base salary and annual bonus and he and his eligible family
dependents are entitled to receive certain health and welfare benefits for a
period of two years after termination of
66
employment; and (3) if by us other than for cause, Mr. Marchioli is, in general,
entitled to (a) a lump sum in an amount equal to the greater of the number of
full and fractional years remaining in his employment term or one year of his
then current annual base salary and annual bonus; (b) the immediate vesting of
100% of Mr. Marchioli's options to be exercisable as of the date of termination
for a period of 36 months after termination; and (c) continuation of certain
benefits and other contract rights. Furthermore, in the event of termination for
cause or voluntary termination, we shall pay Mr. Marchioli the portion of his
annual base salary earned through his termination date and generally the
benefits due him under our benefit plans for his services rendered to us through
his date of termination.
OTHER EMPLOYMENT AGREEMENTS
Each of the named executive officers other than Mr. Adamson and Mr.
Marchioli are parties to separate letter agreements with us, dated February 9,
2000, which update and replace similar prior agreements and provide, for the
named executive officers, the following compensation and benefits. Leadership
retention payments totaling $250,000 in the aggregate are to be paid
periodically to each of the named executive officers over a two year period
provided the named executive officer remains employed with us as of such payment
dates. Each such scheduled payment is subject to upward adjustment based upon
improved stock price performance. In addition to the leadership retention
payments, each named executive officer will also be entitled to the payment of
severance benefits equal to the sum of (1) two times the named executives' then
current base pay and targeted annual bonus; (2) an amount, grossed up for
applicable taxes, equal to actual benefit credits for an eighteen-month period
and vested benefits under the ancillary non-qualified pension plan; (3) a lump
sum amount equal to two times the named executive's annual car allowance; and
(4) an amount equal to any accrued but unused vacation time. Such severance
payment shall be guaranteed by certain of our subsidiaries. The letter
agreements further provide that the named executive officers will receive career
placement benefits upon a termination without cause and that all stock options
granted by us to the named executive officer shall become 100% exercisable in
the event of (a) termination without cause, (b) a dissolution or liquidation of
Advantica, (c) a sale of all or substantially all of our assets, (d) a merger or
consolidation involving Advantica in which Advantica is not the surviving
corporation or in which holders of the common stock receive securities from
another corporation, or (e) a tender offer for at least a majority of the
outstanding common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as members of the compensation committee
during the fiscal year ended December 27, 2000: Ronald E. Blaylock, Vera K.
Farris, Lloyd I. Miller, III, Elizabeth A. Sanders and Donald R. Shepherd. None
of the members of the compensation committee was an officer or employee of
Advantica or had any relationship directly or indirectly with us requiring
disclosure under SEC regulations.
CERTAIN TRANSACTIONS
During our last three fiscal years, except as otherwise described herein,
there were no transactions occurring or relationships that existed between us
and our management that require disclosure under SEC regulations.
67
EQUITY SECURITY OWNERSHIP
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 26, 2001, the beneficial
ownership of common stock by each stockholder known by us to own more than 5% of
the outstanding shares. Some of the following stockholders may also be holders
of the old notes, and consequently, may participate in the exchange offer.
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP OF PERCENTAGE OF
OUTSTANDING COMMON
NAME AND ADDRESS SHARES(1) STOCK(%)
---------------- ----------------------- -------------
Oaktree Capital Management, LLC............................. 5,746,916 14.3
(and related entities) ("Oaktree")
333 South Grand Avenue, 28th Floor
Los Angeles, CA 90071
Lloyd I. Miller, III........................................ 5,118,769(2) 12.8
(and related entities)
4550 Gordon Drive
Naples, FL 34102
Aspen Advisors, LLC......................................... 4,613,325 11.5
(and related entities) ("Aspen")
152 W. 57th Street
New York, NY 10019
Moore Capital Management, Inc. ............................. 3,863,007 9.6
(and related entities) ("Moore Capital")
1251 Avenue of the Americas
New York, NY 10020
CNA Financial Corporation................................... 3,225,087 8.0
(and related entities) ("CNA")
CNA Plaza 23 South
Chicago, IL 60685
S.A.C. Capital Advisors, LLC................................ 3,030,000 7.5
(and related entities) ("S.A.C.")
777 Long Ridge Road
Stamford, CT 06902
George W. Haywood........................................... 2,530,200 6.3
642 Second Street
Brooklyn, NY 11215
Maurice A. Halperin......................................... 2,518,902 6.2
17890 Deauville Lane
Boca Raton, FL 33496
The PNC Financial Services Group, Inc....................... 2,148,258 5.4
(and related entities) ("PNC")
One PNC Plaza
249 Fifth Avenue
Pittsburgh, PA 15222-2707
---------------
(1) Shares shown as beneficially owned by Mr. Haywood, Mr. Halperin, Oaktree,
Aspen, Moore, CNA, S.A.C. and PNC and their related entities are as reported
on the latest Schedule 13G or 13D filing by each such stockholder. The
filing for Oaktree reflects that each such respective stockholder has sole
voting and investment power with respect to those shares reported as
beneficially owned. Filings for
68
Aspen, Moore, CNA and S.A.C. reflect that each such stockholder has shared
voting and investment power with respect to those shares reported as
beneficially owned. Shares shown as beneficially owned by PNC represent
shares held in trusts for which PNC serves as trustee. With respect to these
shares, Mr. Miller has sole investment power and both PNC and Mr. Miller
have shared voting power. These shares are also reflected in the share
totals for Mr. Miller as being beneficially owned by him. The shares shown
as beneficially owned by Mr. Halperin include 313,523 shares of common stock
which Mr. Halperin has the right to acquire through the exercise of warrants
to purchase common stock.
(2) Shares shown as beneficially owned by Lloyd I. Miller, III are as reported
to us by Mr. Miller. Such shares include 5,000 shares of common stock which
he has the right to acquire through the exercise of stock options within 60
days of December 26, 2001. We believe, based on the information provided to
us by Mr. Miller, that he has sole voting and investment power with respect
to 2,946,511 shares and shared voting and investment power with respect to
2,172,258 shares.
MANAGEMENT
The following table sets forth, as of December 26, 2001, except as noted,
the beneficial ownership of common stock by: (1) each of our current directors
(with the exception of director Lloyd I. Miller, III whose common stock
ownership is reflected under "-- Principal Stockholders" above), (2) each of our
current or former executive officers included in the Summary Compensation Table
above, and (3) all of our current directors and executive officers as a group.
Except as otherwise noted, the persons named in the table below have sole voting
and investment power with respect to all shares shown as beneficially owned by
them.
PERCENTAGE OF
AMOUNT AND NATURE OF COMMON
NAME BENEFICIAL OWNERSHIP(1) STOCK
---- ----------------------- -------------
James B. Adamson............................................ 400,000 *
Vera K. Farris.............................................. 29,803 *
James J. Gaffney............................................ 29,803 *
Nelson J. Marchioli......................................... 666,667 1.7
Robert E. Marks............................................. 39,803 *
Charles F. Moran............................................ 35,803 *
Elizabeth A. Sanders........................................ 31,803 *
Donald R. Shepherd.......................................... 48,803 *
Ronald B. Hutchison......................................... 202,000 *
Rhonda J. Parish............................................ 164,000 *
Paul R. Wexler.............................................. 201,500 *
Stephen W. Wood............................................. 200,250 *
All current directors and executive officers as a group (19
persons).................................................. 6,550,138(2) 16.3%
---------------
* less than one (1) percent.
(1) The common stock listed as beneficially owned by the following individuals
includes shares of common stock which those individuals have the right to
acquire (within sixty (60) days of December 26, 2001) through the exercise
of stock options: (1) Messrs. Gaffney, Marks, Moran and Shepherd and Mss.
Farris and Sanders (11,000 shares each), (2) Ms. Parish (162,500 shares),
(3) Messrs. Adamson, Hutchison, Wexler and Wood (200,000 shares each) and
(4) all current directors and executive officers as a group (1,279,167
shares). Each of these options were granted by us pursuant to the Advantica
Stock Option Plan.
(2) Includes shares beneficially owned by Lloyd I. Miller, III.
(3) Share amounts for Messrs. Wexler, Wood and Adamson are reflected as of their
departure dates of December 31, 2000, March 31, 2001 and December 21, 2001,
respectively.
As of December 26, 2001, Mr. Green beneficially owned 106,700 shares
(including 105,000 shares subject to options), Ms. Emplit beneficially owned
113,500 shares (including 112,500 shares subject to options), Ms. Traylor
beneficially owned 65,000 shares (all of which shares are subject to options)
and Mr. Lyons beneficially owned 83,750 shares (including 73,750 shares subject
to options).
69
DESCRIPTION OF INDEBTEDNESS
The following summary of the principal terms of our indebtedness does not
purport to be complete and is qualified in its entirety by reference to the
documents governing our indebtedness, including the definitions of certain terms
therein, copies of which are exhibits to the registration statement filed with
the SEC that contains this prospectus. Whenever particular provisions of these
documents are referred to in this prospectus, such provisions are incorporated
by reference, and the statements are qualified in their entirety by such
reference.
THE REVOLVING CREDIT FACILITY
As of January 7, 1998, our principal operating subsidiary Denny's entered
into a revolving credit facility with the Chase Manhattan Bank and other lenders
named therein which established a $200.0 million senior secured credit facility.
This facility, as amended to date, is used for working capital advances,
letters of credit and general corporate purposes by Denny's. The revolving
credit facility is guaranteed by Advantica and Denny's Holdings and, subject to
certain exceptions, by Advantica's subsidiaries that are not borrowers under the
revolving credit facility, and generally is secured by liens on the stock of our
direct and indirect subsidiaries, accounts receivable, intellectual property and
cash and cash accounts (along with additional liens on our corporate
headquarters in Spartanburg, South Carolina).
The revolving credit facility matures on January 7, 2003. As a result of a
recent amendment, commitments under the revolving credit facility will be
reduced from $200.0 million to an amount not less than $150.0 million upon
receipt of cash payments, if any, relating to Denny's receivable and deposits
securing outstanding letters of credit under the Coco's/Carrows credit facility.
Commitments under the revolving credit facility will also be reduced in amounts
equal to: (a) a percentage of the net cash proceeds of all nonordinary course
asset sales or other dispositions of property by us, subject to certain
exceptions; and (b) 100% of the net cash proceeds of issuances of our debt
obligations, subject to certain exceptions (including exceptions for certain
subordinated indebtedness).
The revolving credit facility contains covenants customarily found in
credit agreements for leveraged financings that, among other things, place
limitations on:
- dividends on capital stock;
- redemptions and repurchases of capital stock;
- prepayments, redemptions and repurchases of debt (other than loans under
the credit agreement);
- liens and sale-leaseback transactions;
- loans and investments;
- incurrence of debt;
- capital expenditures;
- operating leases;
- mergers and acquisitions;
- asset sales;
- transactions with affiliates;
- changes in the business conducted by us and our subsidiaries; and
- amendment of debt and other material agreements.
70
The revolving credit facility also contains covenants that require us and
our subsidiaries on a consolidated basis to meet certain financial ratios and
tests described below:
Consolidated Total Debt Ratio. We are required not to permit the ratio of
(a) total debt outstanding on the last day of any fiscal quarter to (b) EBITDA
(as defined) of Advantica, the borrowers and the specified subsidiaries on a
consolidated basis for the period of four consecutive fiscal quarters then ended
to be more than 4.75:1.00 at December 31, 2001, 5.00:1.00 at March 31, 2002 and
5.10:1.00 on or after June 30, 2002.
Consolidated Senior Secured Debt Ratio. We are required not to permit the
ratio of (a) senior secured debt outstanding on the last day of any fiscal
quarter to (b) EBITDA of Advantica, the borrowers and the specified subsidiaries
on a consolidated basis for the period of four consecutive fiscal quarters then
ended to be more than 2.00:1.00.
Consolidated Interest Coverage Ratio. We are required not to permit the
ratio, determined on the last day of each fiscal quarter for the period of four
consecutive fiscal quarters then ended, of (a) EBITDA of Advantica, the
borrowers and the specified subsidiaries on a consolidated basis to (b)
Consolidated Cash Interest Expense (as defined) to be less than 1.85:1.00.
Consolidated Fixed Charge Coverage Ratio. We are required not to permit
the ratio, determined on the last day of each fiscal quarter for the period of
four consecutive fiscal quarters then ended, of (a) the sum of (1) EBITDA of
Advantica, the borrowers and the specified subsidiaries on a consolidated basis
and (2) Consolidated Lease Expense to (b) the sum of (1) Consolidated Cash
Interest Expense (as defined) and (2) Consolidated Lease Expense (as defined) to
be less than 1.55:1.00.
Consolidated Capital Expenditures. We are required not to permit the
borrowers and the specified subsidiaries on a consolidated basis to incur
Consolidated Capital Expenditures (as defined) in excess of $100 million (plus
any unused amount from the immediately preceding fiscal year) in the aggregate
for each of the fiscal years ending December 31, 1998 and thereafter, provided,
that, in addition to the Consolidated Capital Expenditures (or certain permitted
investments in lieu thereof) permitted to be incurred as provided above, we may
from time to time incur capital expenditures (or certain permitted investments
in lieu thereof) to the extent that such additional Consolidated Capital
Expenditures or investments are funded solely from, and shall reduce, the
Remaining H&Q Net Cash Proceeds (as defined), provided that immediately after
giving effect to the capital expenditure or investment, the Remaining H&Q Net
Cash Proceeds shall not be less than the aggregate principal amount of the loans
outstanding under the revolving credit facility.
Events of default under the revolving credit facility include (1) a default
in the payment of principal amounts due thereunder, (2) a default in the payment
of interest and the continuance thereof for three business days, (3) a default
in the observance or performance of financial and other covenants, including,
but not limited, to those described or referred to above (and, in the case of
certain non-financial covenants, the continuance thereof for 10 days), (4) our
failure to pay, when due or payable, principal or interest on our other
indebtedness having a principal amount in excess of $10.0 million or our failure
to observe other terms, covenants, conditions or agreements under such
indebtedness if the effect of such failure is to permit the acceleration of such
indebtedness, (5) certain courts of bankruptcy or other similar proceedings, (6)
a money judgment against us in an amount in excess of $5.0 million remaining
undischarged for 30 days or other non-monetary judgment against us reasonably
likely to have a material adverse effect, (7) the lenders' loss of security
interests securing our indebtedness under the revolving credit facility, and (8)
a Change of Control (as defined).
Upon the occurrence and during the continuance of an event of default, the
lenders may terminate their commitments under the revolving credit facility and
declare amounts outstanding thereunder immediately due and payable, except that
in the case of an event of default referred to in clause (5) above, such
remedies shall become automatically effective.
ADVANTICA PUBLIC DEBT
Advantica currently has outstanding $529.6 million aggregate principal
amount of 11 1/4% senior notes due 2008, which we are referring to as the old
notes in this prospectus and which are the subject of this
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exchange offer. The old notes are senior unsecured obligations of Advantica and
rank pari passu in right of payment to all senior indebtedness, including the
revolving credit facility. The old notes are effectively subordinated to our
secured indebtedness, including indebtedness under the revolving credit
facility. The old notes are structurally subordinated to indebtedness under the
revolving credit facility to the extent of direct obligations of our
subsidiaries, as borrowers and as subsidiary guarantors, thereunder. See "-- The
Revolving Credit Facility." Interest on the old notes accrues at a rate equal to
11 1/4% per annum and is payable semi-annually in arrears on each July 15 and
January 15, beginning July 15, 1998. The old notes will mature on January 15,
2008.
The old notes are redeemable, in whole or in part, at the option of
Advantica at any time on or after January 15, 2003, initially at a redemption
price equal to 105.625% of the principal amount thereof to and including January
14, 2004, at 103.750% of the principal amount thereof to and including January
14, 2005, at 101.875% of the principal amount thereof to and including January
14, 2006, and thereafter at 100% of the principal amount thereof, together in
each case with accrued interest.
The old notes contain restrictive covenants that limit the ability of
Advantica and its subsidiaries to, among other things, incur debt, pay dividends
and make other distributions, make loans and investments, enter into asset sales
and use those proceeds, create liens, enter into transactions with affiliates,
merge, consolidate or transfer all or substantially all of our assets and make
investments in unrestricted subsidiaries.
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DESCRIPTION OF NEW NOTES
The new notes will be issued under an indenture to be dated as of the
closing date among Advantica and Denny's Holdings, as issuers, and U.S. Bank
National Association, as trustee. In this section of the prospectus, the term
"issuers" refers to Advantica Restaurant Group, Inc. and Denny's Holdings, Inc.;
the term "Advantica" refers only to Advantica Restaurant Group, Inc.; and the
term "Denny's Holdings" refers only to Denny's Holdings, Inc. The terms of the
new notes will include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939 as in effect on the
date of the indenture. The new notes will be subject to all of these terms, and
holders of the new notes are referred to the indenture and the Trust Indenture
Act for a statement thereof. The following is a summary of the material
provisions of the indenture. It does not restate the indenture in its entirety.
We urge you to read the indenture because it, and not this description, defines
your rights as a holder of the new notes. Copies of the proposed forms of the
indenture and the new notes will be filed as exhibits to our registration
statement filed with the SEC that contains this prospectus.
GENERAL
The new notes will be issued only in registered form without coupons in
denominations of $1,000 or multiples thereof. After execution and delivery of
the indenture, new notes, in an aggregate principal amount not to exceed the
amount permitted to be issued under the indenture, may be executed by the
issuers and delivered to the trustee for authentication, and the trustee will
then authenticate and deliver the new notes to or upon the written order of the
issuers, as provided in the indenture. Principal of, premium, if any, and
interest on the new notes will be payable, and the new notes will be
transferable and exchangeable, at the corporate trust office or agency of the
trustee in The Borough of Manhattan, The City of New York, maintained for such
purposes. In addition, interest may be paid, at the option of the issuers, by
wire transfer or check mailed to the person entitled thereto as shown on the
register for the new notes.
An aggregate of up to $204.1 million principal amount of new notes is being
offered in the exchange offer. In addition to the new notes being issued in the
exchange offer, the indenture provides for the issuance subsequent to the
exchange offer of up to $50 million principal amount of additional new notes
having identical terms and conditions to the new notes offered hereby (the
"Additional Notes"), subject to compliance with the terms of the indenture,
including the covenant "Limitation on Incurrence of Additional Indebtedness and
Issuance of Disqualified Stock." The aggregate principal amount of new notes and
Additional Notes will not exceed $254.1 million, assuming the maximum tender
amount is exchanged in the exchange offer. Interest will accrue on the
Additional Notes issued pursuant to the Indenture from and including the date of
issuance of such Additional Notes. Any such Additional Notes will be issued on
the same terms as the new notes and will constitute part of the same series of
securities as the new notes and will vote together as one series on all matters
with respect to the new notes. Except where the context otherwise requires, all
references to new notes herein includes the Additional Notes. No offering of any
such Additional Notes is being or shall in any manner be deemed to be made by
this prospectus. There can be no assurance as to whether or when the issuers
will issue any Additional Notes in the future.
The new notes will be senior unsecured obligations of the issuers and will
be pari passu in right of payment to all Senior Indebtedness of the issuers.
Interest on the new notes will accrue at a rate equal to 12 3/4% per annum,
payable in arrears on each March 31 and September 30, commencing March 31, 2002,
until maturity, to holders of record of new notes at the close of business on
each March 15 and September 15 next preceding the interest payment date.
Interest on the new notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of the
indenture. Interest will be computed on the basis of a 360-day year of twelve
30-day months. The new notes will mature September 30, 2007.
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OPTIONAL REDEMPTION
Except as provided below, the new notes may not be redeemed at the option
of the issuers prior to September 30, 2004. On and after September 30, 2004, the
new notes will be redeemable, in whole or in part, at the option of the issuers,
at the redemption prices (expressed as percentages of the principal amount) set
forth below, plus accrued and unpaid interest, if any, to the redemption date,
if redeemed during the 12-month period beginning on September 30 of the years
indicated below:
YEAR PERCENTAGE
---- ----------
2004.............................................. 106.3750%
2005.............................................. 103.1875%
2006 and thereafter............................... 100.0000%
provided that, if the date fixed for redemption is on an interest payment date,
then the interest payable on such date shall be paid to the holder of record on
the March 15 or September 15 next preceding such interest payment date.
Notwithstanding the foregoing, prior to September 30, 2004, the issuers may
redeem up to 35% of the aggregate principal amount of new notes outstanding on
the date of the indenture at a redemption price (expressed as a percentage of
the principal amount) of 112.75%, plus accrued and unpaid interest, if any, to
the redemption date, from the net proceeds of any Public Offering.
SELECTION AND NOTICE
Notice of redemption shall be mailed at least 30 and not more than 60 days
prior to the redemption date to each holder of new notes to be redeemed. In the
event of a redemption of less than all of the new notes, the trustee shall
select, in such manner as it shall deem appropriate and fair, but generally pro
rata or by lot, which new notes shall be redeemed in whole or in part, and shall
promptly notify the issuers in writing of the new notes selected for redemption.
On and after the redemption date, interest ceases to accrue on the new notes or
portions thereof called for redemption and all rights of the holder with respect
to such redeemed new notes, except the right to payment of amounts payable on
such redemption, shall cease.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definitions of all
terms set forth below and used in such indenture as well as for any other
capitalized terms used under this "Description of New Notes" for which no
definition is provided.
"Acquisition Indebtedness" means Indebtedness of any person existing at the
time such person becomes a Subsidiary of an issuer (or at the time such person
is merged with or into a Subsidiary of an issuer), excluding Indebtedness of any
Subsidiary of an issuer incurred in connection with, or in contemplation of,
such person becoming a Subsidiary of such issuer.
"Adjusted Consolidated Net Worth" means, with respect to any person as of
any date, the Consolidated Net Worth of such person plus (1) the respective
amounts reported on such person's most recent consolidated balance sheet with
respect to any Preferred Stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
person upon issuance of such Preferred Stock or of securities converted into
such Preferred Stock, excluding (2) any amount reflecting any equity adjustment
resulting from a foreign currency translation on a consolidated balance sheet of
such person, but only to the extent not excluded in calculating Consolidated Net
Worth of such person, plus (3) any gain realized upon the sale or other
disposition of any Business Segment to the extent such gains do not exceed the
sum of the aggregate amount of any losses included (on a net after tax basis) in
the computation of Consolidated Net Worth.
"Advantica Group" means Advantica and any Subsidiary of Advantica, other
than Denny's Holdings or any Subsidiary of Denny's Holdings.
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"Affiliate" means, with respect to any person, any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such person. For the purposes of this definition, beneficial
ownership of 10% or more of the voting common equity of a person shall be deemed
to be control unless ownership of a lesser amount may be deemed to be control
under the Trust Indenture Act.
"Asset Segment" means (1) Denny's Holdings, or (2) any Subsidiary, group of
Subsidiaries or group of assets (other than inventory held for sale in the
ordinary course of business) of an issuer or its Subsidiaries which (A) accounts
for at least 20 percent of the total assets of such issuer and its Subsidiaries
on a consolidated basis as of the end of the last fiscal quarter immediately
preceding the date for which such determination is being made or (B) accounts
for at least 20 percent of the income from continuing operations before income
taxes, extraordinary items and cumulative effects of changes in accounting
principles of such issuer and its Subsidiaries on a consolidated basis for the
four full fiscal quarters immediately preceding the date for which such
calculation is being made.
"Business Segment" means (1) each Significant Subsidiary of an issuer, (2)
the Equity Interests of any of an issuer's Subsidiaries or (3) any group of
assets of an issuer or any of its Subsidiaries, whether now owned or hereafter
acquired; provided, in each case, that the sale (other than the sale of
inventory in the ordinary course of business), lease, conveyance or other
disposition of such Significant Subsidiary, Equity Interests or group of assets,
as the case may be, either in a single transaction or group of related
transactions that are part of a common plan, results in Net Proceeds to such
issuer or any of its Subsidiaries of $50 million or more.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock.
"Cash Equivalents" means (1) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (2) time deposits and
certificates of deposit with a maturity date not more than one year from the
date of acquisition issued by any domestic commercial bank of recognized
standing having capital and surplus in excess of $500 million or a commercial
bank organized under the laws of any other country that is a member of the
Office for Economic Cooperation and Development and having total assets in
excess of $500 million, (3) repurchase obligations with a term of not more than
7 days for underlying securities of the types described in clause (1) above
entered into with any bank meeting the qualifications specified in clause (2)
above, (4) commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess of
$500 million and commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case maturing
within one year after the date of acquisition and (5) investments in money
market funds substantially all of whose assets comprise securities of the types
described in clauses (1) through (4) above.
"Code" means the Internal Revenue Code of 1986, as it may be amended from
time to time.
"Consolidated Fixed Charges" means, with respect to any person for a given
period, (1) consolidated interest expense of such person and its consolidated
Subsidiaries to the extent deducted in computing Consolidated Net Income of such
person (including, without limitation, amortization of original issue discount
and non-cash interest payments, all net payments and receipts in respect of
Interest Rate Agreements and the interest component of capital leases, but
excluding deferred financing costs existing immediately after the date of the
indenture and the amortization thereof), plus (2) the amount of all cash
dividend payments on any series of Preferred Stock of such person; provided that
if, during such period, (1) such person or any of its Subsidiaries shall have
made any asset sales (other than, in the case of an issuer and its Subsidiaries,
sales of the Capital Stock of, or any assets of, Unrestricted Subsidiaries),
Consolidated Fixed Charges of such person and its Subsidiaries for such period
shall be reduced by an amount equal to the Consolidated Fixed Charges directly
attributable to the assets that are the subject of such asset sales for such
period and (2) such person or any of its Subsidiaries has made any acquisition
of assets or Capital Stock (occurring by merger or otherwise), including,
without limitation, any acquisition of assets or Capital Stock occurring in
connection
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with the transaction causing a calculation to be made under the indenture,
Consolidated Fixed Charges of such person and its Subsidiaries shall be
calculated on a pro forma basis as if such acquisition of assets or Capital
Stock (including the incurrence of any Indebtedness in connection with any such
acquisition and the application of the proceeds thereof) took place on the first
day of such period.
"Consolidated Net Income" means, with respect to any person for a given
period, the aggregate of the Net Income of that person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with generally
accepted accounting principles; provided that (1) the Net Income of any person
that is not a Subsidiary of that person or is accounted for by the equity method
of accounting shall be included only to the extent of the amount of dividends or
distributions paid to that person and its Subsidiaries, (2) the Net Income of
any person that is a Subsidiary (other than a Subsidiary of which at least 80%
of the Capital Stock having ordinary voting power for the election of directors
or other governing body of such Subsidiary is owned by that person directly or
indirectly through one or more Subsidiaries) shall be included only to the
extent of the lesser of (a) the amount of dividends or distributions paid to
that person and its Subsidiaries and (b) the Net Income of such person, (3) the
Net Income of any person acquired by that person and its Subsidiaries in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded and (4) with respect to an issuer, the Net Income
(if positive) of any person that becomes a Subsidiary of such issuer after the
date of the indenture shall be included only to the extent that the declaration
or payment of dividends on Capital Stock or any similar distributions, by that
Subsidiary to such issuer or to any other consolidated Subsidiary of such
issuer, of such Net Income is at the time permitted under the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations binding upon or applicable to that
Subsidiary, provided that, if the exclusion from an otherwise positive Net
Income of certain amounts pursuant to this clause (4) would cause such Net
Income to be negative, then such Net Income shall be deemed to be zero.
"Consolidated Net Worth" means, with respect to any person at any date of
determination, the sum of the Capital Stock and additional paid-in capital plus
retained earnings (or minus accumulated deficit) of such person and its
Subsidiaries on a consolidated basis, each item to be determined in conformity
with generally accepted accounting principles (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52), except that all effects of
the application of Accounting Principles Board Opinions Nos. 16 and 17 and
related interpretations shall be disregarded.
"Credit Agent" means any person acting as managing agent (or in a similar
capacity) under the Credit Agreement, or any successor thereto; provided that
"Credit Agent" shall also mean any person acting as managing agent (or in a
similar capacity) under any agreement pursuant to which the Credit Agreement is
refunded or refinanced if such person is designated as such by each person that
is at the time of such designation a Credit Agent; and provided further that if
at any time there shall be more than one Credit Agent, then "Credit Agent" shall
mean each such Credit Agent, and any notice, consent or waiver to be given by,
action to be taken by, or notice to be given to, the Credit Agent shall be given
or taken by, or given to, each such Credit Agent.
"Credit Agreement" means the Credit Agreement, dated as of January 7, 1998,
among Denny's, Inc., El Pollo Loco, Inc., Flagstar Enterprises, Inc., Flagstar
Systems, Inc. and Quincy's Restaurants, Inc., as borrowers, Advantica as a
guarantor, the lenders named therein, and The Chase Manhattan Bank, as
administrative agent, as amended through and including the date of the
indenture, including any and all related notes, collateral and security
documents, instruments and agreements executed in connection therewith
(including, without limitation, all Loan Documents (as defined in such Credit
Agreement)) and all obligations of Advantica and its Subsidiaries incurred
thereunder or in respect thereof, and in each case as amended, supplemented,
restructured or otherwise modified, extended or renewed and each other agreement
pursuant to which any or all of the foregoing may be refunded or refinanced,
from time to time.
"Default" means any event that is, or after notice or passage of time would
be, an Event of Default.
"Denny's Holdings Group" means Denny's Holdings and any Subsidiary of
Denny's Holdings.
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"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the new notes.
"EBITDA" means, with respect to any person and its consolidated
Subsidiaries for a given period, the Consolidated Net Income of such person for
such period plus, with respect to an issuer and its consolidated Subsidiaries,
(1) an amount equal to any net loss realized upon the sale or other disposition
of any Business Segment (to the extent such loss was deducted in computing
Consolidated Net Income), (2) any provision for taxes based on income or profits
deducted in computing Consolidated Net Income and any provision for taxes
utilized in computing net loss under clause (1) hereof, (3) consolidated
interest expense (including amortization of original issue discount and non-cash
interest payments, all net payments and receipts in respect of Interest Rate
Agreements and the interest component of capital leases) and (4) depreciation
and amortization (including amortization of goodwill and deferred financing
costs existing immediately after the date of the indenture and other
intangibles) to the extent required under generally accepted accounting
principles, all on a consolidated basis; provided that if, during such period,
(x) such person or any of its Subsidiaries shall have made any asset sales
(other than, in the case of an issuer and its Subsidiaries, sales of the Capital
Stock of, or any assets of, Unrestricted Subsidiaries), EBITDA of such person
and its Subsidiaries for such period shall be reduced by an amount equal to the
EBITDA directly attributable to the assets that are the subject of such asset
sales for such period, and (y) such person or any of its Subsidiaries has made
any acquisition of assets or Capital Stock (occurring by merger or otherwise),
including, without limitation, any acquisition of assets or Capital Stock
occurring in connection with the transaction causing a calculation to be made
under the indenture, EBITDA of such person and its Subsidiaries shall be
calculated, excluding any expenses which in the good faith estimate of
management of such person will be eliminated as a result of such acquisition, on
a pro forma basis as if such acquisition of assets or Capital Stock (including
the incurrence of any Indebtedness in connection with any such acquisition and
the application of the proceeds thereof) took place on the first day of such
period.
"Equity Interests" means Capital Stock or warrants, options or other rights
to acquire Capital Stock (but excluding any debt security that is convertible
into or exchangeable for Capital Stock).
"Excluded Property" means Advantica's corporate headquarters property
located in Spartanburg, South Carolina.
"Existing Indebtedness" means Indebtedness of an issuer or any of its
Subsidiaries existing on the date of the indenture (other than Indebtedness
under the Old Notes and the Credit Agreement).
"Fixed Charge Coverage Ratio" means, with respect to any person for a given
period, the ratio of the EBITDA of such person for such period to the
Consolidated Fixed Charges of such person for such period.
"FRD" means FRD Acquisition Co., a Delaware corporation, a wholly owned
subsidiary of Advantica, and an Unrestricted Subsidiary under the indenture.
"FRD Chapter 11 Case" means the voluntary petition under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware,
Case No. 01-0436-PJW, filed by FRD on February 14, 2001.
"FRD Investment" means any Investment in FRD by either issuer or any of its
Subsidiaries existing on the date of the indenture.
"Indebtedness" means, with respect to any person at any date, without
duplication, (1) all obligations of such person for borrowed money, (2) all
obligations of such person evidenced by bonds, debentures, notes or other
similar instruments other than Interest Rate Agreements, (3) all reimbursement
obligations and other liabilities of such person with respect to letters of
credit issued for such person's account, (4) all obligations of such person to
pay the deferred purchase price of property or services, except accounts payable
arising in the ordinary course of business, (5) all obligations of such person
as lessee in respect of capital lease obligations under capital leases and (6)
all obligations of others of a nature described in any of clauses (1)
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through (5) above guaranteed by such person; provided that, in the case of
clauses (1) through (5) above, Indebtedness shall include only obligations
reported as liabilities in the financial statements of such person in accordance
with generally accepted accounting principles.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future, interest rate option, interest rate swap, interest rate
cap or other interest rate hedge arrangement to or under which an issuer or any
of its subsidiaries is or becomes a party or a beneficiary.
"Investment" means any direct or indirect advance (other than advances to
customers in the ordinary course of business that are recorded as accounts
receivable on the balance sheet of any person or its subsidiaries), loan or
other extension of credit or capital contribution to (by means of any transfer
of cash or other property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Equity
Interests, bonds, notes, debentures or other securities issued by, any other
person.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any capital
lease, any option or other agreement to sell and any filing of or agreement to
give any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction).
"Mortgage Financing" means the incurrence by an issuer or any of its
Subsidiaries of any Indebtedness secured by a mortgage or other Lien on real
property acquired or improved by such issuer or any such Subsidiary after the
date of the indenture.
"Mortgage Financing Proceeds" means, with respect to any Mortgage
Financing, the aggregate amount of cash proceeds received or receivable by an
issuer or any of its Subsidiaries in connection with such financing after
deducting therefrom brokerage commissions, legal fees, finder's fees, closing
costs and other expenses incidental to such Mortgage Financing and the amount of
taxes payable in connection with or as a result of such transaction, to the
extent, but only to the extent, that the amounts so deducted are, at the time of
receipt of such cash, actually paid to a person that is not an Affiliate of such
issuer or its Subsidiaries and are properly attributable to such transaction or
to the asset that is the subject thereof.
"Mortgage Refinancing" means the incurrence by an issuer or any of its
Subsidiaries of any Indebtedness secured by a mortgage or other Lien on real
property subject to a mortgage or other Lien existing on the date of the
indenture or created or incurred subsequent to the date hereof as permitted
hereby and owned by such issuer or any such Subsidiary.
"Mortgage Refinancing Proceeds" means, with respect to any Mortgage
Refinancing, the aggregate amount of cash proceeds received or receivable by an
issuer or any of its Subsidiaries in connection with such refinancing after
deducting therefrom the original mortgage amount of the underlying indebtedness
refinanced therewith and brokerage commissions, legal fees, finder's fees,
closing costs and other expenses incidental to such Mortgage Refinancing and the
amount of taxes payable in connection with or as a result of such transaction,
to the extent, but only to the extent, that the amounts so deducted are, at the
time of receipt of such cash, actually paid to a person that is not an Affiliate
of such issuer or its Subsidiaries and are properly attributable to such
transaction or to the asset that is the subject thereof.
"Net Income" of any person shall mean the net income (loss) of such person,
determined in accordance with generally accepted accounting principles,
excluding, however, (1) with respect to an issuer and its Subsidiaries, any gain
or loss, together with any related provision for taxes on such gain or loss,
realized upon the sale or other disposition (including, without limitation,
dispositions pursuant to sale and leaseback transactions) of a Business Segment,
and (2) any gain or loss realized upon the sale or other disposition by such
person of any capital stock or marketable securities.
"Net Proceeds" with respect to any Asset Sale, sale and leaseback
transaction or sale or other disposition of a Business Segment, means (1) cash
(freely convertible into U.S. dollars) received by an issuer or any of its
Subsidiaries from such transaction, after (a) provision for all income or other
taxes measured by
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or resulting from such transaction, (b) payment of all brokerage commissions and
other expenses (including, without limitation, the payment of principal, premium
(if any) and interest on Indebtedness required (other than pursuant to the
provisions described in the first paragraph under "Certain Covenants--Limitation
on Sale of Assets") to be paid as a result of such transaction) in connection
with such transaction and (c) deduction of appropriate amounts to be provided by
an issuer as a reserve, in accordance with generally accepted accounting
principles, against any liabilities associated with the asset disposed of in
such transaction and retained by such issuer or its Subsidiaries after such sale
or other disposition thereof, including, without limitation, pension and other
post-employment benefit liabilities and liabilities related to environmental
matters or against any indemnification obligations associated with such
transaction and (2) promissory notes received by an issuer or any of its
Subsidiaries in connection with such transaction upon the liquidation or
conversion of such notes into cash.
"Obligations" means, with respect to any Indebtedness or any Interest Rate
Agreement, any principal, premium, interest (including, without limitation,
interest, whether or not allowed, after the filing of a petition initiating
certain bankruptcy proceedings), penalties, commissions, charges, expenses,
fees, indemnifications, reimbursements and other liabilities or amounts payable
under or in respect of the documentation governing such Indebtedness or such
Interest Rate Agreement.
"Old Notes" means any outstanding 11 1/4% senior notes due 2008 of
Advantica issued pursuant to that certain indenture, dated as of January 7,
1998, by and between Advantica and U.S. Bank National Association (formerly,
First Trust National Association), as Trustee.
"Permitted Investments" means (1) Investments in cash (including major
foreign currency or currency of a country in which an issuer or any of its
Subsidiaries has operations) or Cash Equivalents, (2) with respect to each
issuer and its Subsidiaries, Investments that are in persons at least a majority
of whose revenues are derived from food service operations, ancillary operations
or related activities and that have the purpose of furthering the food service
operations of such issuer or any of its Subsidiaries (other than any Investment
by any of the Denny's Holdings Group in any of the Advantica Group), (3)
advances to employees of Advantica or its Subsidiaries not in excess of $5
million in the aggregate at any one time outstanding, (4) accounts receivable
created or acquired in the ordinary course of business, (5) obligations or
shares of stock received in connection with any good faith settlement or
bankruptcy proceeding involving a claim relating to a Permitted Investment, (6)
evidences of Indebtedness, obligations or other Investments not exceeding $5
million in the aggregate held at any one time by Advantica or any of its
Subsidiaries and (7) currency swap agreements and other similar agreements
designed to hedge against fluctuations in foreign exchange rates entered into in
the ordinary course of business in connection with the operation of the
business.
"Permitted Payments to Advantica" means, without duplication, payments by
any Subsidiary of Advantica to Advantica in an amount sufficient to enable
Advantica to (a) pay reasonable and necessary operating expenses and other
general corporate expenses of Advantica and its subsidiaries, (b) pay foreign,
federal, state and local tax liabilities of Advantica and its current and former
subsidiaries to the extent that Advantica has an obligation to pay such tax
liabilities, the determination of which shall take into account any operating
losses, net operating loss carryovers, and other tax attributes available to
Advantica and its subsidiaries, (c) pay, as and when the same becomes due and
payable, interest on the Old Notes, (d) pay, as and when the same becomes due
and payable, (i) interest and (ii) principal at maturity (or as otherwise
required pursuant to contractually scheduled principal payments, which, in the
case of Existing Indebtedness are existing on the date of the indenture, and, in
the case of Indebtedness incurred after the date of the indenture are existing
on the date such Indebtedness is incurred), in each case on the Credit
Agreement, any Existing Indebtedness and on any other Indebtedness incurred
after the date of the indenture that was permitted to be incurred in accordance
with the covenant "Limitation on Additional Indebtedness and Issuance of
Disqualified Capital Stock" and (e) repurchase, redeem or otherwise acquire or
retire for value, Equity Interests in Advantica in accordance with clause (3)
of, and the Old Notes in accordance with clause (8) of, the covenant "Limitation
on Restricted Payments." Notwithstanding anything herein to the contrary, any
such payments made to Advantica pursuant hereto shall either be used by
Advantica for the purpose such payment was made to Advantica within 90 days of
Advantica's receipt of such payment or refunded to the party from whom Advantica
received such payment; provided, however, that to the extent that any such
79
payments have not been paid within such 90 day period, Advantica shall be
entitled to retain an amount that shall not at any time exceed an aggregate of
$250,000 for the purpose of making the payments described herein.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
persons' stock which is preferred or has a preference with respect to the
payment of dividends, or as to distributions upon any dissolution or liquidation
over Equity Interests of any other class of such person whether now outstanding
or issued after the date of the indenture.
"Public Offering" means any underwritten public offering for cash pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act of Capital Stock other than Disqualified Stock of Advantica or
any of its Subsidiaries.
"Restricted Investments" means (a) any Investment by any of the (i)
Advantica Group in any person that is not a wholly owned Subsidiary of Advantica
and (ii) Denny's Holdings Group in any person that is not a wholly owned
Subsidiary of Denny's Holdings, or (b) other transfers of assets by any of the
(i) Advantica Group to any Subsidiary or Affiliate of Advantica that is not a
wholly owned Subsidiary of Advantica or (ii) Denny's Holdings Group to any
Subsidiary or Affiliate of Denny's Holdings that is not a wholly owned
Subsidiary of Denny's Holdings (other than any such other transfers of assets
described in clause (b) above in transactions the terms of which are fair and
reasonable to the transferor and are at least as favorable as the terms that
could be obtained by the transferor in a comparable transaction made on an arms'
length basis between unaffiliated parties, as conclusively determined, for any
such transfer involving aggregate consideration in excess of $5 million, by a
majority of the directors of Advantica or Denny's Holdings, as applicable, that
are unaffiliated with the transferee or, if there are no such directors, by a
majority of the directors of Advantica or Denny's Holdings, as applicable),
except in each case for Permitted Investments and any such Investments existing
on the date of the indenture.
"Senior Indebtedness" means (1) all obligations of an issuer and its
Subsidiaries now or hereafter existing under or in respect of the Credit
Agreement, the Old Notes, and the new notes, whether for principal, interest
(including, without limitation, interest accruing after the filing of a petition
initiating any bankruptcy, insolvency or similar proceeding, whether or not such
interest is an allowable claim under such proceeding), penalties, commissions,
charges, indemnifications, liabilities, reimbursement obligations in respect of
letters of credit, fees, expenses or other amounts payable under or in respect
of the Credit Agreement, the Old Notes and the new notes and all obligations and
claims related thereto, (2) all Obligations of an issuer in respect of Interest
Rate Agreements and (3) additional Indebtedness permitted by the covenant
"Limitation on Additional Indebtedness and Issuance of Disqualified Stock"
(other than pursuant to clause (3) of the third paragraph thereof) which is not
expressly by its terms subordinated to the new notes and all Obligations and
claims related thereto; provided, that Senior Indebtedness shall not include (x)
any Indebtedness of an issuer to any of its Subsidiaries or (y) Indebtedness
incurred for the purchase of goods or services (other than services provided by
the Credit Agent in connection with the Credit Agreement or any other party to
an agreement evidencing Senior Indebtedness in connection with such agreement)
obtained in the ordinary course of business. "Senior Indebtedness" under or in
respect of the Credit Agreement, the Old Notes and the new notes shall continue
to constitute Senior Indebtedness for all purposes of the indenture
notwithstanding that such Senior Indebtedness or any obligations or claims in
respect thereof may be disallowed, avoided or subordinated pursuant to any
Bankruptcy Law or other applicable insolvency law or equitable principles.
"Significant Subsidiary" means any Subsidiary of an issuer that would be a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X under the
Securities Act and the Exchange Act (as such Regulation is in effect on the date
of the in denture) (excluding, except for the purposes of determining an Event
of Default, subparagraph (c) of Rule 1-02 of Regulation S-X).
"Subsidiary" of any person means any entity of which shares of the Capital
Stock or other Equity Interests (including partnership interests) entitled to
cast at least a majority of the votes that may be cast by all shares or Equity
Interests having ordinary voting power for the election of directors or other
governing
80
body of such entity are owned by such person directly and/or through one or more
Subsidiaries of such person; provided that each Unrestricted Subsidiary shall be
excluded from the definition of "Subsidiary."
"Unrestricted Subsidiary" means (1) FRD, (2) any subsidiary of an issuer
that at the time of determination is an Unrestricted Subsidiary (as designated
by such issuer's board of directors, as provided below) and (3) any subsidiary
of an Unrestricted Subsidiary. The board of directors of such issuer may
designate any subsidiary of an issuer (including any Subsidiary and any newly
acquired or newly formed subsidiary) to be an Unrestricted Subsidiary unless
such subsidiary owns any Capital Stock of, or owns, or holds any lien on, any
property of, any Subsidiary of such issuer (other than any subsidiary of the
subsidiary to be so designated); provided that (a) any Unrestricted Subsidiary
must be an entity of which shares of the Capital Stock or other Equity Interests
(including partnership interests) entitled to cast at least a majority of the
votes that may be cast by all shares or Equity Interests having ordinary voting
power for the election of directors or other governing body are owned, directly
or indirectly, by such issuer (b) such issuer certifies that such designation
complies with the covenants described under "Certain Covenants--Limitation on
Restricted Payments" and "Investments in Unrestricted Subsidiaries" and (c) each
of (1) the subsidiary to be so designated and (2) its subsidiaries have not at
the time of designation, and do not thereafter, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable with respect to any
Indebtedness pursuant to which the lender has recourse to any of the assets of
such issuer or any of its Subsidiaries. The board of directors of such issuer
may designate any Unrestricted Subsidiary to be a Subsidiary; provided that,
immediately after giving effect to such designation, Advantica could incur at
least $1 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test described under "Certain Covenants--Limitation on Additional Indebtedness
and Issuance of Disqualified Stock" on a pro forma basis taking into account
such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (1) the then outstanding
aggregate principal amount of such Indebtedness into (2) the total of the
product obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
CERTAIN COVENANTS
Limitation on Restricted Payments. The indenture provides that each issuer
will not, and will not permit any of its Subsidiaries to, directly or
indirectly:
(1) declare or pay any dividend or make any distribution on account of
the Capital Stock or other Equity Interests of such issuer or any
Subsidiary of Advantica or Denny's Holdings ((A) other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock)
of such issuer or such Subsidiary and (B) other than dividends or
distributions payable by a Subsidiary (other than dividends or
distributions payable by any of the Denny's Holdings Group to any of the
Advantica Group) so long as, in the case of any dividend or distribution
payable on any class or series of securities issued by a Subsidiary other
than a wholly owned Subsidiary, such issuer or a Subsidiary of such issuer
receives at least its pro rata share of such dividend or distribution in
accordance with its Equity Interest in such class or series of securities);
(2) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of such issuer or any Subsidiary of Advantica or Denny's
Holdings (other than any such Equity Interests (i) owned by Advantica or
any of its Subsidiaries so purchased, redeemed or otherwise acquired or
retired for value by any of the Advantica Group and (ii) owned by any of
the Denny's Holdings Group so purchased, redeemed or otherwise acquired or
retired for value by any of the Denny's Holdings Group);
(3) voluntarily prepay any Old Notes or any Indebtedness that is
subordinated to the new notes other than in connection with any (a)
refinancing of such Indebtedness specifically permitted by the terms of the
indenture, (b) Indebtedness between (i) Advantica and any of its
Subsidiaries in the Advantica Group or between Subsidiaries in the
Advantica Group, (ii) Denny's Holdings and any of its
81
Subsidiaries in the Denny's Holdings Group or between Subsidiaries in the
Denny's Holdings Group or (c) Indebtedness of any of the Advantica Group to
any of the Denny's Holdings Group; or
(4) make any Restricted Investments (other than an Investment in any
Unrestricted Subsidiary)
(all such dividends, distributions, purchases, redemptions or other
acquisitions, retirements, prepayments or Restricted Investments being
collectively referred to as "Restricted Payments"), if, at the time of such
Restricted Payment:
(a) a Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof;
(b) immediately after such Restricted Payment and after giving
effect thereto on a pro forma basis, Advantica would not be able to
incur $1 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test described under "Limitation on Additional
Indebtedness and Issuance of Disqualified Stock" below; or
(c) such Restricted Payment, without duplication, together with (A)
the aggregate of all other Restricted Payments (in each case valued,
where other than cash, at their fair market value as of the date such
Restricted Payment is made) made after the date of the indenture and (B)
the amount by which the aggregate of all then outstanding Investments in
Unrestricted Subsidiaries (other than the FRD Investment), calculated
without giving effect to amounts included pursuant to clause (z)(2)
below, exceeds $25 million, is greater than the sum of, without
duplication: (v) 50% of the aggregate Consolidated Net Income of Denny's
Holdings for the period (taken as one accounting period) from the
beginning of the first quarter immediately after the date of the
indenture to the end of its most recently ended fiscal quarter at the
time of such Restricted Payment; provided that if such Consolidated Net
Income for such period is less than zero, then minus 100% of the amount
of such loss, plus (w) 100% of the aggregate amortization of goodwill
and of excess reorganization value for the period specified in clause
(v) above, plus (x) 100% of the aggregate net cash proceeds and the fair
market value of marketable securities received by Denny's Holdings from
the issue or sale, after the date of the indenture, of Capital Stock of
Denny's Holdings (other than Capital Stock issued and sold to a
Subsidiary of Denny's Holdings and other than Disqualified Stock), or
any Indebtedness or other security convertible into any such Capital
Stock that has been so converted plus (y) 100% of the aggregate amounts
contributed to the capital of Denny's Holdings after the date of the
indenture plus (z) 100% of the aggregate amounts received in cash and
the fair market value of marketable securities (other than Restricted
Investments) received from (1) the sale or other disposition of
Restricted Investments made after the date of the indenture by Denny's
Holdings and its Subsidiaries or (2) the sale of the stock of an
Unrestricted Subsidiary or the sale of all or substantially all of the
assets of an Unrestricted Subsidiary to the extent that a liquidating
dividend is paid to Denny's Holdings or any Subsidiary of Denny's
Holdings from the proceeds of such sale (in each case, other than to the
extent of the FRD Investment and only to the extent that such amounts
were not applied to reduce the aggregate amount of all outstanding
Investments in Unrestricted Subsidiaries for purposes of calculating the
aggregate amount of all such Investments in (B) above); provided, that
no such amounts shall be included pursuant to clause (x) or (y) above to
the extent that the proceeds (including by exchange) from any such
issuance, sale or contribution were used as provided in clause (2), (4)
or (5) in the next succeeding paragraph. For purposes of this clause
(c), the fair market value of property other than cash shall be
conclusively determined in good faith by the board of directors of
Denny's Holdings.
Notwithstanding the foregoing, the indenture permits:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the indenture;
(2) the retirement of any shares of Capital Stock of an issuer in
exchange for, or out of the net proceeds of the substantially concurrent
sale (other than to a Subsidiary of such issuer) of, other shares of such
issuer's Capital Stock, other than any Disqualified Stock;
82
(3) payments for the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests in Advantica issued to members
of management of Advantica and its Subsidiaries pursuant to subscription
and option agreements in effect on the date of the indenture and Equity
Interests in Advantica issued to future members of management pursuant to
subscription agreements executed subsequent to the date of the indenture,
containing provisions for the repurchase of such Equity Interests upon
death, disability or termination of employment of such persons which are
substantially identical to those contained in the subscription agreements
in effect on the date of the indenture; provided that the amount of such
dividends or distributions, after the date of the indenture, in the
aggregate will not exceed the sum of (A) $5 million plus (B) the cash
proceeds from any reissuance of such Equity Interests by Advantica to
members of management of Advantica and its Subsidiaries;
(4) the repurchase, redemption or other acquisition or retirement for
value of any Indebtedness of an issuer that is subordinated in right of
payment to the new notes in exchange for or with the proceeds of the
issuance of shares of such issuer's Equity Interests (other than
Disqualified Stock);
(5) the redemption, repurchase or retirement for value of any
Indebtedness of an issuer that is subordinated to the new notes (A) with
the proceeds of, or in exchange for, Indebtedness incurred pursuant to
clause (2) of the third paragraph under "Limitation on Additional
Indebtedness and Issuance of Disqualified Stock" below or (B) if, after
giving effect to such redemption, repurchase or retirement, Advantica could
incur at least $1 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test described under "Limitation on Additional Indebtedness
and Issuance of Disqualified Stock" below;
(6) the purchase, redemption or other acquisition or retirement for
value of Equity Interests of any Subsidiary of Advantica (other than any
such Equity Interests (i) owned by Advantica or any of its Subsidiaries so
purchased, redeemed or otherwise acquired or retired for value by any of
the Advantica Group and (ii) owned by any of the Denny's Holdings Group so
purchased, redeemed or otherwise acquired or retired for value by any of
the Denny's Holdings Group) in an aggregate cumulative amount not to exceed
$5 million annually;
(7) so long as no Default or Event of Default shall have occurred and
be continuing, Permitted Payments to Advantica; and
(8) after the date on which a bankruptcy court enters an order closing
the FRD Chapter 11 Case, the repurchase, redemption or other acquisition or
retirement for value of Old Notes by Advantica for consideration in an
aggregate amount not to exceed $50 million; provided, however, that no
Default or Event of Default shall have occurred and be continuing at the
time of any such repurchase, redemption or other acquisition or retirement;
provided, that in determining the aggregate amount expended for Restricted
Payments in accordance with clause (c) of the first paragraph of this covenant,
(x) no amounts expended under clauses (2), (4), or (5) of this paragraph shall
be included, (y) 100% of the amounts expended under clauses (3), (6), (7) and
(8) of this paragraph shall be included, and (z) 100% of the amounts expended
under clause (1), to the extent not included under subclauses (x) or (y) of this
proviso, shall be included.
Limitation on Additional Indebtedness and Issuance of Disqualified Stock.
The indenture provides that (1) each issuer will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume or
guarantee any Indebtedness (other than (A) Indebtedness (a) owing from any of
the Denny's Holdings Group payable to any of the Advantica Group; (b) between
Denny's Holdings and a Subsidiary of Denny's Holdings; (c) between Subsidiaries
of Denny's Holdings; (d) between Advantica and a Subsidiary of Advantica in the
Advantica Group; or (e) between Subsidiaries of the Advantica Group; and (B)
guarantees by Advantica or any Subsidiary of Advantica of Indebtedness of any of
the Denny's Holdings Group or guarantees by any Subsidiary in the Advantica
Group of Indebtedness of any of the Advantica Group) and (2) neither issuer will
issue any Disqualified Stock, unless (a) such Indebtedness or Disqualified Stock
is either Acquisition Indebtedness or is created, incurred, issued, assumed or
guaranteed by such issuer and not a Subsidiary of such issuer and (b)
Advantica's Fixed Charge Coverage Ratio for the four full fiscal quarters
83
last preceding the date such additional Indebtedness is created, incurred,
assumed or guaranteed, or such additional stock is issued, would have been at
least 2.25:1, determined on a pro forma basis (including a pro forma application
of the net proceeds of such Indebtedness or such issuance of stock) as if the
additional Indebtedness had been created, incurred, assumed or guaranteed, or
such additional stock had been issued, at the beginning of such four-quarter
period.
The foregoing limitations will not apply to the incurrence by an issuer or
any of its Subsidiaries of any Indebtedness pursuant to the Credit Agreement;
provided, however, that the principal amount of such Indebtedness incurred and
outstanding at any time pursuant to the Credit Agreement (including any
Indebtedness incurred to refund or refinance such Indebtedness) for this purpose
will not exceed the greater of $250 million and the aggregate amount of the
commitments under the Credit Agreement on the date of the indenture.
In addition, the foregoing limitations notwithstanding,
(1) Advantica or any of its Subsidiaries may create, incur, issue,
assume or guarantee Indebtedness pursuant to the Credit Agreement or
otherwise, (a) in connection with or arising out of Mortgage Financings,
Mortgage Refinancings and sale and lease-back transactions; provided that
the Mortgage Financing Proceeds, Mortgage Refinancing Proceeds (excluding
any Mortgage Refinancing Proceeds received in connection with any
refinancing of any Indebtedness secured by a mortgage or Lien on the
Excluded Property) or Net Proceeds, as the case may be, incurred, assumed
or created in connection therewith are used to pay any outstanding Senior
Indebtedness, and provided further that any amounts used to repay
Indebtedness outstanding under the Old Notes shall be applied only as and
when permitted under the covenant "Limitation on Restricted Payments", (b)
constituting purchase money obligations for property acquired in the
ordinary course of business or other similar financing transactions
(including, without limitation, in connection with Mortgage Financings and
Mortgage Refinancings as and to the extent permitted in clause (a) above);
provided that, in the case of Indebtedness exceeding $2 million for any
such obligation or transaction, such Indebtedness exists at the date of the
purchase or transaction or is created within 180 days thereafter, (c)
constituting capital lease obligations, (d) constituting reimbursement
obligations with respect to letters of credit, including, without
limitation, letters of credit in respect of workers' compensation claims
issued for the account of an issuer or a Subsidiary of an issuer in the
ordinary course of its business, or other Indebtedness with respect to
reimbursement type obligations regarding workers' compensation claims, (e)
constituting additional Indebtedness in an aggregate principal amount
(including any Indebtedness incurred to refund or refinance such
Indebtedness) of up to $50 million at any one time outstanding, whether
incurred under the Credit Agreement or otherwise, (f) constituting
Indebtedness secured by the Excluded Property, and (g) constituting
Existing Indebtedness and permitted refinancings thereof in accordance with
clause (2) of this paragraph;
(2) an issuer or any Subsidiary of an issuer may create, incur, issue,
assume or guarantee any Indebtedness that serves to refund, refinance or
restructure the new notes, Existing Indebtedness or any other Indebtedness
incurred as permitted under the indenture, or any Indebtedness issued to so
refund, refinance or restructure such Indebtedness, in an amount equal to
or less than the Indebtedness being so refunded, refinanced or
restructured, including additional Indebtedness incurred to pay premiums
and fees in connection therewith ("Refinancing Indebtedness"), prior to its
respective maturity; provided, however, that such Refinancing Indebtedness
is incurred by the obligor on the Indebtedness being refinanced and (a)
bears an interest rate per annum that is equal to or less than the interest
rate per annum then payable under such Indebtedness being refunded or
refinanced (calculated in accordance with any formula set forth in the
documents evidencing any such Indebtedness) unless such Refinancing
Indebtedness is incurred, created or assumed within twelve months of the
scheduled maturity of the Indebtedness being refinanced, (b) has a Weighted
Average Life to Maturity at the time such Refinancing Indebtedness is
incurred which is not less than the remaining Weighted Average Life to
Maturity of such Indebtedness being refunded or refinanced, and (c) to the
extent such Refinancing Indebtedness refinances Indebtedness subordinated
to the new notes, such refinancing indebtedness is subordinated to the new
notes at least to the same extent as the Indebtedness being refinanced or
refunded, and provided
84
further that subclauses (a), (b) and (c) of this clause (2) will not apply
to any refunding or refinancing of any Senior Indebtedness; and
(3) any nonconsolidated subsidiary of an issuer created after the date
of the indenture may create, incur, issue, assume, guarantee or otherwise
become liable with respect to any additional Indebtedness; provided that
such Indebtedness is nonrecourse to any issuer and its consolidated
subsidiaries, and the issuers and their consolidated Subsidiaries have no
liability with respect to such additional Indebtedness.
Limitation on Liens. The indenture provides that, subject to certain
exceptions, each issuer shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Lien
upon any asset now owned or hereafter acquired, except with respect to (a) Liens
securing or arising under or in connection with any Indebtedness of an issuer
not expressly by its terms subordinate or junior in right of payment to any
other Indebtedness of such issuer; (b) Liens existing on the date of the
indenture; (c) Liens permitted by or required pursuant to the Credit Agreement;
(d) Liens relating to judgments to the extent such judgments do not give rise to
specified Events of Default; (e) Liens arising under or in connection with the
satisfaction and discharge of the indenture; (f) Liens incurred in the ordinary
course of business so long as the Indebtedness secured by such Lien does not
exceed $5 million at any one time outstanding; (g) Liens for taxes or
assessments and similar charges either (x) not delinquent or (y) contested in
good faith by appropriate proceedings and as to which either issuer or a
Subsidiary of either issuer shall have set aside on its books such reserves as
may be required pursuant to generally accepted accounting principles; (h) Liens
incurred or pledges and deposits in connection with workers' compensation,
unemployment insurance and other social security benefits, or securing
performance bids, tenders, leases, contracts (other than for the repayment of
borrowed money), statutory obligations, progress payments, surety and appeal
bonds and other obligations of like nature, incurred in the ordinary course of
business; (i) Liens imposed by law, such as mechanics', carriers',
warehousemen's, materialmen's and vendors' Liens, incurred in good faith in the
ordinary course of business; (j) zoning restrictions, easements of licenses,
covenants, reservations, restrictions on the use of real property or minor
irregularities of title incident thereto of any of the Denny's Holdings Group
which do not in the aggregate materially detract from the value of the property
or assets of the Denny's Holdings Group, taken as a whole, or of any of the
Advantica Group which do not in the aggregate materially detract from the value
of the property or assets the Advantica Group, taken as a whole, or materially
impair the operation of the business of, as applicable, either the Denny's
Holdings Group, taken as a whole, or the Advantica Group, taken as a whole; (k)
Liens created by Subsidiaries in the Denny's Holdings Group to secure
Indebtedness of such Subsidiaries to any of Denny's Holdings Group or Liens
created by Subsidiaries in the Advantica Group to secure Indebtedness of such
Subsidiaries to any of the Advantica Group or the Denny's Holdings Group; (l)
pledges of or Liens on raw materials or on manufactured products as security for
any drafts or bills of exchange in connection with the importation of such raw
materials or manufactured products in the ordinary course of business; (m) a
Lien on any assets (x) securing Indebtedness incurred or assumed pursuant to
clause (b) or (c) or paragraph (1) of the covenant "Limitation on Additional
Indebtedness and Issuance of Disqualified Stock" for the purpose of financing
all or any part of the cost of acquiring such asset or construction thereof or
thereon or (y) existing on assets or businesses at the time of the acquisition
thereof; (n) the Lien granted to the Trustee pursuant to the indenture and any
substantially equivalent Lien granted to the respective trustees under the
indentures for other debt securities of either issuer; (o) Liens arising in
connection with any Mortgage Financing or Mortgage Refinancing by either issuer
or any of its Subsidiaries; (p) Liens securing reimbursement obligations with
respect to letters of credit issued for the account of either issuer or any of
its Subsidiaries in the ordinary course of business; (q) any Lien on the
Excluded Property; (r) Liens securing an interest of a landlord in real property
leases; and (s) Liens created in connection with the refinancing of any
Indebtedness secured by Liens permitted to be incurred or to exist pursuant to
the foregoing clauses; provided, however, that no additional assets are
encumbered by such Liens in connection with such refinancing, unless permitted
by clause (c) above or the immediately succeeding sentence. The indenture
provides that, notwithstanding the foregoing, an issuer may create or assume any
Lien upon its properties or assets if such issuer shall cause the new notes to
be equally and ratably secured with all other Indebtedness secured by such Lien
as long as such other Indebtedness shall be so secured. Notwithstanding anything
in the indenture to the contrary, in no event shall any Lien be incurred (i)
securing Indebtedness outstanding pursuant to the Old Notes or (ii) on any
85
assets of the Denny's Holdings Group securing Indebtedness of any of the
Advantica Group (other than such Indebtedness of any of the Advantica Group
which is also Indebtedness of any of the Denny's Holdings Group).
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The indenture provides that each issuer will not, and will not
permit any of its Subsidiaries (other than nonconsolidated subsidiaries) to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any such
Subsidiary to (1) pay dividends or make any other distributions on its Capital
Stock or any other interest or participation in, or measured by, its profits,
owned by an issuer or any of its Subsidiaries or pay any Indebtedness owed to an
issuer or any of its Subsidiaries, (2) make loans or advances to an issuer or
any of its Subsidiaries or (3) transfer any of its properties or assets to an
issuer or any of its Subsidiaries, except in each case for such encumbrances or
restrictions existing under or by reason of (a) applicable law, (b) the
indenture, (c) the Credit Agreement or any other agreement entered into in
connection therewith or as contemplated thereby, (d) customary provisions
restricting subletting or assignment of any lease governing a leasehold interest
of an issuer or any of its Subsidiaries, (e) any instrument governing
Indebtedness of a person acquired by an issuer or any of its Subsidiaries at the
time of such acquisition; provided that such Indebtedness is not incurred in
connection with or in contemplation of such acquisition, (f) the Old Notes,
Existing Indebtedness or other contractual obligation of an issuer or any of its
Subsidiaries existing on the date of the indenture, (g) additional Indebtedness
in an aggregate principal amount of up to $50 million at any one time
outstanding, (h) any amendment, modification, renewal, extension, replacement,
refinancing or refunding of encumbrances or restrictions imposed pursuant to
clauses (b), (c), (f) or (g) above; provided that the restrictions contained in
any such amendment, modification, renewal, extension, replacement, refinancing
or refunding are no less favorable in all material respects to the holders of
the new notes, (i) any Mortgage Financing or Mortgage Refinancing, (j) any
Permitted Investment or (k) contracts for the sale of assets so long as such
encumbrances or restrictions apply only to the assets to be sold pursuant
thereto.
Limitation on Sale of Assets. The indenture provides that neither issuer
nor any of their respective Subsidiaries (other than nonconsolidated
subsidiaries) will (A) (x) sell, lease, convey or otherwise dispose of, in any
transaction or group of transactions that are a part of a common plan, all or
substantially all of the assets or Capital Stock of any Asset Segment (provided
that the sale, lease, conveyance or other disposition of all or substantially
all of an issuer's assets will not be governed by this provision but rather by
the provisions described under "-- Merger, Consolidation or Sale of All or
Substantially All Assets") or (y) issue or sell Equity Interests of any Asset
Segment (each of the foregoing, an "Asset Sale") or (B) sell, lease, convey or
otherwise dispose of any Business Segment, unless in each case, such issuer
shall apply the Net Proceeds from such Asset Sale or such sale, lease,
conveyance or other disposition of a Business Segment to one or more of the
following in such combination as such issuer may choose: (1) an Investment in
another asset or business in the same line of business as, or a line of business
similar to that of, the line of business of Advantica and its Subsidiaries
(other than in the case of any Asset Sale of an Asset Segment in any of the
Denny's Holdings Group or any sale, lease, conveyance or other disposition of
any Business Segment in any of the Denny's Holdings Group, any Investment by any
of the Denny's Holdings Group in any of the Advantica Group) and such Investment
occurs within 366 days of such Asset Sale or such sale, lease, conveyance or
other disposition of a Business Segment, (2) a Net Proceeds Offer (defined
below) expiring within 366 days of such Asset Sale or such sale, lease,
conveyance or other disposition of a Business Segment or (3) the purchase,
redemption or other prepayment or repayment of outstanding Senior Indebtedness
within 366 days of such Asset Sale or such sale, lease, conveyance or other
disposition of a Business Segment, provided that any amounts used to repay
Indebtedness outstanding under the Old Notes shall be applied only as and when
permitted under the covenant "Limitation on Restricted Payments"; provided,
however, that if the net amount not invested pursuant to clause (1) above or
applied pursuant to clause (3) above is less than $15 million, such issuer shall
not be further obligated to offer to repurchase new notes pursuant to clause (2)
above. Notwithstanding the foregoing, the receipt of all proceeds of insurance
paid on account of the loss of or damage to any Business Segment and awards of
compensation for any such Business Segment taken by condemnation or eminent
domain which result in net proceeds to such issuer of $50 million or more
(excluding proceeds to be used for replacement of such Business Segment,
provided that
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the trustee has received notice from such issuer within 90 days of such receipt
of its intention to use such proceeds for such purpose) will be deemed an "Asset
Sale." Notwithstanding anything herein to the contrary, the following will not
be deemed an "Asset Sale" or a sale or other disposition of a Business Segment:
(a) Permitted Investments, (b) sales, leases, conveyances or other dispositions
of assets by (i) any of the Advantica Group to Advantica or any of its wholly
owned Subsidiaries or (ii) any of the Denny's Holdings Group to Denny's
Holdings, or (c) a Public Offering of any Subsidiary of Advantica, but only to
the extent that the proceeds of which are used to redeem up to 35% of the
aggregate principal amount of new notes as provided above under "Optional
Redemption."
For purposes of clause (2) of the preceding paragraph, the issuers shall
apply the Net Proceeds of the Asset Sale or the sale, lease, conveyance or other
disposition of a Business Segment to make a tender offer in accordance with
applicable law (a "Net Proceeds Offer") to repurchase new notes at a price not
less than 100% of the principal amount thereof, plus accrued and unpaid
interest. Any Net Proceeds Offer shall be made by the issuers only if and to the
extent permitted under, and subject to prior compliance with, the terms of any
agreement governing Senior Indebtedness. If on the date any Net Proceeds Offer
is commenced, securities of an issuer ranking pari passu in right of payment
with the new notes are at the time outstanding, and the terms of such securities
provide that a similar offer is to be made with respect thereto, then the Net
Proceeds Offer for the new notes shall be made concurrently with such other
offer, and securities of each issue shall be accepted pro rata in proportion to
the aggregate principal amount of securities of each issue which the holders of
securities of such issue elect to have repurchased. After the last date on which
holders of the new notes are permitted to tender their new notes in a Net
Proceeds Offer, the issuer that originally received the Net Proceeds shall not
be restricted under this "Restrictions on Sale of Assets" covenant as to its use
of any Net Proceeds available to make such Net Proceeds Offer (up to the amount
of Net Proceeds that would have been used to repurchase new notes assuming 100%
acceptance of the Net Proceeds Offer) but not used to repurchase new notes
pursuant thereto.
Notwithstanding any provision of the indenture to the contrary, for a
period of 120 days after the last date on which holders of the new notes are
permitted to tender their new notes in the Net Proceeds Offer, the issuer that
originally received the Net Proceeds may use any Net Proceeds available to make
such Net Proceeds Offer but not used to repurchase new notes pursuant thereto to
purchase, redeem or otherwise acquire or retire for value any securities of such
issuer ranking junior in right of payment to the new notes at a price, stated as
a percentage of the principal or face amount of such junior securities, not
greater than the price, stated as a percentage of the principal amount of the
new notes, offered in the Net Proceeds Offer; provided that, if the Net Proceeds
Offer is for a principal amount (the "Net Proceeds Offer Amount") of the new
notes less than the aggregate principal amount of the new notes then
outstanding, then the Net Proceeds available for use by such issuer for such a
purchase, redemption or other acquisition or retirement for value of junior
securities shall not exceed the Net Proceeds Offer Amount.
Limitation on Transactions with Affiliates. The indenture provides that
each issuer will not, and will not permit any of its Subsidiaries to, directly
or indirectly, enter into any transaction with any Affiliate (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) involving aggregate consideration in excess of
$5,000,000 for any one transaction, except for (1) transactions (including any
investments, loans or advances by or to any Affiliate) in good faith the terms
of which are fair and reasonable to such issuer or Subsidiary, as the case may
be, and are at least as favorable as the terms that could be obtained by such
issuer or Subsidiary, as the case may be, in a comparable transaction made on an
arm's length basis between unaffiliated parties (in each case as conclusively
determined by a majority of the board of directors of Advantica or Denny's
Holdings, as applicable, unaffiliated with such Affiliate or, if there are no
such directors, as conclusively determined by a majority of the board of
directors of Advantica or Denny's Holdings, as applicable), (2) transactions in
which such issuer or any of its Subsidiaries, as the case may be, delivers to
the holders of the new notes a written opinion of a nationally recognized
investment banking firm stating that such transaction is fair to such issuer or
Subsidiary, as the case may be, from a financial point of view, (3) transactions
between such issuer and its Subsidiaries or between Subsidiaries of such issuer
that are not otherwise prohibited by the covenant described under "Limitation on
Restricted Payments," and (4) payments or loans to employees or consultants
pursuant to employment or consultancy
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contracts which are approved by the board of directors of Advantica or Denny's
Holdings, as applicable, in good faith.
Investments in Unrestricted Subsidiaries. The indenture provides that each
issuer will not, and will not permit any of its Subsidiaries to, directly or
indirectly, make any Investment in any Unrestricted Subsidiary unless (1) the
amount of such Investment does not exceed the amount then permitted to be used
to make a Restricted Payment pursuant to clause (c) of the first paragraph under
"Limitation on Restricted Payments" above and (2) immediately after such
Investment, and after giving effect thereto on a pro forma basis deducting from
Net Income the amount of any Investment the issuers and Subsidiaries of the
issuers have made in Unrestricted Subsidiaries during the four full fiscal
quarters last preceding the date of such Investment, Advantica would be able to
incur $1 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test described under "Limitation on Additional Indebtedness and Issuance of
Disqualified Stock" above.
Notwithstanding clauses (1) and (2) of the immediately preceding paragraph
or any provision contained in the indenture to the contrary, the issuers and
their Subsidiaries shall be permitted to make investments in Unrestricted
Subsidiaries in an aggregate amount not to exceed $25 million (without regard to
the FRD Investment) at any one time outstanding. The amount by which the
aggregate of all Investments in Unrestricted Subsidiaries exceeds $25 million
(without regard to the FRD Investment) shall be counted in determining the
aggregate permissible amount of Restricted Payments pursuant to clause (c) of
the first paragraph under "Limitation on Restricted Payments" above. Neither
issuer will permit any Unrestricted Subsidiary to become a Subsidiary, except
pursuant to the last sentence of the definition of "Unrestricted Subsidiary."
Merger, Consolidation or Sale of All or Substantially All Assets. The
indenture provides that neither issuer will consolidate or merge with or into,
or sell, transfer, lease or convey all or substantially all of its assets to,
any person unless:
(1) the person formed by or surviving any such consolidation or merger
(if other than such issuer), or to which such sale, transfer, lease or
conveyance shall have been made, is a corporation organized and existing
under the laws of the United States, any state thereof or the District of
Columbia;
(2) the corporation formed by or surviving any such consolidation or
merger (if other than such issuer), or to which such sale, transfer, lease
or conveyance shall have been made, assumes all the obligations of such
issuer pursuant to a supplemental indenture in a form reasonably
satisfactory to the trustee under the new notes and the indenture;
(3) immediately after such transaction no Default or Event of Default
exists;
(4) such issuer or any corporation formed by or surviving any such
consolidation or merger, or to which such sale, transfer, lease or
conveyance shall have been made, shall have an Adjusted Consolidated Net
Worth (immediately after the transaction but prior to any purchase
accounting adjustments resulting from the transaction) equal to or greater
than the Adjusted Consolidated Net Worth of such issuer immediately
preceding the transaction; provided, however, that clause (4) will not
apply to any transaction where the consideration consists solely of common
stock or other Equity Interests of such issuer or any surviving corporation
and any liabilities of such person are not assumed by and are specifically
non-recourse to such issuer or such surviving corporation; and
(5) after giving effect to such transaction and immediately
thereafter, such issuer or any corporation formed by or surviving any such
consolidation or merger, or to which such sale, transfer, lease or
conveyance shall have been made, shall be permitted to incur at least $1 of
additional indebtedness as provided under clause (b) of the first paragraph
under "Limitation on Additional Indebtedness and Issuance of Disqualified
Stock" above if such provision were applicable to such entity.
Future Subsidiary Guarantors. The indenture provides that each issuer will
not permit any of its Subsidiaries to guarantee the payment of any Indebtedness
of an issuer that is expressly by its terms subordinate or junior in right of
payment to any other Indebtedness of such issuer (a "Subordinated
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Indebtedness Guarantee"), unless (i) such Subsidiary executes and delivers a
supplemental indenture evidencing its guarantee of such issuer's Obligations
under the indenture and under the new notes on a substantially similar basis
(the "Securities Guarantee") and (ii) the Securities Guarantee is senior in
right of payment to such Subordinated Indebtedness Guarantee to the same extent
as the new notes are senior in right of payment to such junior Indebtedness of
such issuer; provided that if such Subordinated Indebtedness Guarantee ceases to
exist for any reason, the Securities Guarantee shall thereupon automatically
cease to exist. Notwithstanding anything herein to the contrary, in no event
shall any Subsidiary of Advantica guarantee Indebtedness outstanding pursuant to
the Old Notes.
CHANGE OF CONTROL
The indenture provides that, if at any time
(1) all or substantially all of an issuer's assets are sold as an
entirety to any person or related group of persons,
(2) an issuer is merged with or into another corporation or another
corporation is merged with or into an issuer with the effect that
immediately after such transaction the stockholders of such issuer
immediately prior to such transaction hold less than a majority in interest
of the total voting power entitled to vote in the election of directors,
managers or trustees of the person surviving such transaction,
(3) any person or related group of persons acquires a majority in
interest of the total voting power or voting stock of an issuer,
(4) the persons constituting the board of directors of Advantica on
the date of the indenture or persons nominated or elected to the board of
directors of Advantica by a majority vote of such directors (the
"Continuing Directors") or by a majority vote of the Continuing Directors
do not constitute a majority of the members of the board of directors of
Advantica, or
(5) Advantica shall cease to own, directly or indirectly, 100% of the
Equity Interests of Denny's Holdings having ordinary voting power for the
election of directors or other governing body,
then, in any such case, the issuers will notify the holders of the new notes in
writing of such occurrence and will make an offer to purchase in accordance with
the terms of the indenture (the "Change of Control Offer") all new notes then
outstanding at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the repurchase date; provided,
however, that such repurchase will only occur if there has been no acceleration
which has not been withdrawn or paid pursuant to the Credit Agreement prior to
the time of notice of a Change of Control Offer.
Prior to the mailing of the notice to holders provided for above, the
issuers will (x) to the extent then repayable or prepayable, repay in full all
Indebtedness under the Credit Agreement and, to the extent not then repayable or
prepayable, offer to repay in full all such Indebtedness and to repay the
Indebtedness of each lender under the Credit Agreement who has accepted such
offer or (y) obtain the requisite consent under the Credit Agreement to permit
the repurchase of the new notes. The issuers shall first comply with the proviso
in the preceding sentence before they shall be required to repurchase the new
notes pursuant to this covenant. The issuers will comply with all applicable
tender offer rules (including without limitation Rule 14e-1 under the Exchange
Act, if applicable) in the event that the repurchase option is triggered under
the circumstances described herein. Not less than 30 or more than 60 days
following any change of control, the issuers will mail a notice to each holder
of any new notes stating, among other things, (a) that a change of control has
occurred and that a change of control offer is being made as described in this
provision, (b) the purchase price and the change of control payment date and (c)
the instructions determined by the issuers, consistent with this provision, that
a holder of the new notes must follow in order to have such holder's new notes
repurchased.
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EVENTS OF DEFAULT AND REMEDIES
"Events of Default" under the indenture include:
(1) default for 30 days in payment of interest on any of the new
notes;
(2) default in payment when due of principal, whether at maturity,
upon redemption or otherwise;
(3) failure by the issuers for 30 days after notice to comply with any
other agreements or covenants in the indenture or the new notes;
(4) default under any instrument governing any Indebtedness of an
issuer or its Subsidiaries (other than (A) Indebtedness of any of the
Advantica Group to any of the Advantica Group or Indebtedness of any of the
Denny's Holdings Group to any of the Denny's Holdings Group or (B)
Indebtedness of a nonconsolidated subsidiary of an issuer that is
nonrecourse to such issuer or its consolidated Subsidiaries), if (a) either
(x) such default results from the failure to pay principal upon the final
maturity of such Indebtedness (after the expiration of any applicable grace
period) or (y) as a result of such default the maturity of such
Indebtedness has been accelerated prior to its final maturity, (b) the
principal amount of such Indebtedness, together with the principal amount
of any other such Indebtedness with respect to which the principal amount
remains unpaid upon its final maturity (after the expiration of any
applicable grace period), or the maturity of which has been so accelerated,
aggregates $30 million or more and (c) such default does not result from
compliance with any applicable law or any court order or governmental
decree to which such issuer or any of its Subsidiaries is subject;
(5) failure by an issuer or any of its Subsidiaries to pay certain
final judgments aggregating in excess of $10 million (net of amounts
covered by insurance, treating any deductibles, self-insurance or retention
as not so covered) which judgments remain undischarged for a period of 60
days after their entry by a competent tribunal; and
(6) certain events of bankruptcy or insolvency.
An Event of Default shall not be deemed to have occurred under clause (4)
or (5) until the issuers shall have received written notice thereof from the
trustee or the holders of at least 30% in principal amount of the new notes then
outstanding.
If an Event of Default, other than in respect of any events of bankruptcy
or insolvency, occurs and is continuing with respect to the new notes, the
trustee or the holders of at least 30% (or 25% in the case of an Event of
Default with respect to payment of principal of or interest on the new notes) in
principal amount of the new notes then outstanding may declare in writing 100%
of the principal amount of, and any accrued and unpaid interest on, the new
notes to be due and payable immediately; provided, however, that if any Senior
Indebtedness is outstanding pursuant to the Credit Agreement, then all the new
notes shall be due and payable upon the earlier of (x) the day that is five
business days after the provision to the issuers and the Credit Agent of such
written notice of acceleration unless such Event of Default is cured or waived
prior to such date and (y) the date of acceleration of any Senior Indebtedness
under the Credit Agreement. In the event of a declaration of acceleration
because an event of default described in clause (4) of the immediately preceding
paragraph has occurred and is continuing, such declaration of acceleration shall
be automatically annulled if such payment default is cured or waived or the
holders of the Indebtedness which is the subject of such Event of Default have
rescinded their declaration of acceleration in respect of such Indebtedness
within 60 days thereof and the trustee has received written notice of such cure,
waiver or rescission and no other Event of Default described in clause (4) of
the preceding paragraph has occurred and is continuing with respect to which 60
days have elapsed since the declaration of acceleration of the Indebtedness
which is the subject thereof (without rescission of the declaration of
acceleration of such indebtedness). Upon an Event of Default arising from
certain events of bankruptcy or insolvency, the unpaid principal of and any
accrued and unpaid interest on all the new notes will immediately become due and
payable without further action or notice.
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Holders of the new notes may not enforce the indenture or the new notes
except as provided in the indenture. Subject to certain limitations, holders of
a majority in principal amount of the new notes then outstanding may direct the
trustee in its exercise of any trust or power.
The trustee may withhold from holders of the new notes notice of any
continuing Default or Event of Default (except a default or event of default in
payment of principal or interest) if it determines in good faith that
withholding notice is in the interests of such holders.
The holders of a majority in aggregate principal amount of the new notes
then outstanding may on behalf of the holders of all of the new notes waive any
past Default or Event of Default under the indenture and its consequences,
except a continuing Default or Event of Default in the payment of the principal
of or interest on the new notes.
The issuers are required to deliver to the trustee annually a statement
regarding compliance with the indenture, and, upon an officer of an issuer
becoming aware of any event of default or of certain defaults, a statement
specifying such event of default or default and what action the issuers are
taking or propose to take with respect thereto.
RECOURSE AGAINST INCORPORATORS, OFFICERS, DIRECTORS AND STOCKHOLDERS
No recourse shall be had against any incorporator, officer, director or
stockholder, as such, of Advantica or Denny's Holdings for any obligation under
the new notes or the indenture, and each holder of the new notes by accepting a
new senior note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the new notes. Nothing in this
provision limits the liability, if any, of any such incorporator, officer,
director or stockholder, as such, under the federal securities laws.
TRANSFER AND EXCHANGE
The issuers may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any exchange or
registration of transfer of new notes. No service charge will be made for any
registration of transfer or exchange of the new notes.
The trustee is not required to transfer or exchange any new notes selected
for redemption except, in the case of any new note where public notice has been
given that such new note is to be redeemed in part, the portion thereof not so
to be redeemed. Also, the trustee is not required to transfer or exchange any
new note for a period of 15 days before the mailing of a notice of redemption of
new notes to be redeemed.
The registered holder of a new note will be treated as its owner for all
purposes.
SATISFACTION AND DISCHARGE
The indenture and the new notes provide that the indenture shall cease to
be of further effect (except for specified rights of registration of transfer
and exchange; the issuers' right of optional redemption; substitution of
mutilated, defaced, destroyed, lost or stolen new notes; rights of holders to
receive payments of principal and interest on the new notes; the rights,
obligations and immunities of the trustee under the indenture; rights of note
holders as beneficiaries of the indenture with respect to the property so
deposited with the trustee payable to all or any of them; and the obligation of
the issuers to maintain an office or agency for payment of the new notes), if at
any time:
(a) the issuers shall have paid or caused to be paid the principal of
and interest on all of the new notes outstanding, as and when the same
shall have become due and payable, or
(b) the issuers shall have delivered to the trustee for cancellation
all new notes previously authenticated (subject to specified exceptions),
or
(c) all new notes not previously cancelled or delivered to the trustee
for cancellation shall have become due and payable, or are by their terms
to become due and payable within one year, or are to be called for
redemption within one year under arrangements satisfactory to the trustee
for the giving of notice of redemption, and the issuers shall deposit with
the trustee, in trust, funds sufficient to pay at maturity or upon
redemption of all of the new notes (other than any that have been
destroyed, lost or stolen and have been replaced or paid as provided in the
indenture) not previously cancelled or delivered to the trustee for
cancellation, including principal and interest due or to become due to such
date of
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maturity or redemption date, as the case be, (but excluding, however, the
amount of any moneys for the payment of principal of or interest on the new
notes previously repaid to the issuers pursuant to specified provisions of
the indenture or unclaimed property or similar laws), and
(d) the issuers shall also pay or cause to be paid all other sums
payable under the indenture by the issuers.
In addition, the issuers must deliver an Officers' Certificate and an
Opinion of Counsel to the trustee indicating that they have complied with all
conditions precedent to obtaining satisfaction and discharge under this
provision.
DEFEASANCE
The indenture and the new notes provide that the issuers will be deemed to
be discharged from any and all obligations in respect of the new notes (except
for certain obligations to register the transfer, substitution or exchange of
new notes to replace stolen, lost or mutilated new notes and to maintain paying
agencies, and except for the right of the holders of the new notes to receive
payments of principal, premium, if any, and interest on the new notes from the
defeasance trust, and the rights, obligations and immunities of the trustee)
within 91 days after applicable conditions have been satisfied, or that the
issuers may terminate their obligations under certain covenants in the indenture
upon the satisfaction of applicable conditions, including, in either case, upon
the deposit with the trustee, in trust, of money and/or U.S. Government
obligations which through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium, if any) and each installment of
interest on the new notes on the stated maturity of such payments or on a
selected date of redemption in accordance with the terms of the indenture and
the new notes. Such a trust may only be established if, among other things, the
issuers have delivered to the trustee either (1) an opinion of counsel to the
effect that holders of the new notes will not recognize income, gain or loss for
U.S. federal income tax purposes as a result of such deposit, discharge or
covenant defeasance and will be subject to U.S. federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, discharge or covenant defeasance had not occurred or (2) a
private letter ruling to such effect directed to the trustee received from the
Internal Revenue Service.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than a majority in aggregate
principal amount of the new notes at the time outstanding, the issuers, when
authorized by a resolution of their respective boards of directors, and the
trustee may, from time to time and at any time, enter into an indenture or
indentures supplemental to the indenture for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the indenture or of any supplemental indenture or of modifying in any manner the
rights of the holders of the new notes; provided that no such supplemental
indenture shall (a) extend the final maturity of any new notes, reduce the
principal amount thereof, reduce the rate or extend the time of payment of
interest thereon, or reduce the premium, if any, payable thereon, or reduce any
amount payable on redemption thereof, or impair or affect the right of any
holder to institute suit for the payment thereof, or waive a default in the
payment of principal of, premium, if any, or interest on any new notes, change
the currency of payment of principal of, premium, if any, or interest on any new
notes, or modify any provision in the indenture with respect to the priority of
the new notes in right of payment without the consent of the holder of each new
note so affected, or (b) reduce the aforesaid percentage of new notes, the
consent of the holders of which is required for any such supplemental indenture,
without the consent of the holders of each new note then outstanding. The
indenture also contains provisions permitting the issuers and the trustee to
enter into supplemental indentures for certain limited purposes without the
consent of any holders of the new notes.
CONCERNING THE TRUSTEE
U.S. Bank National Association, will act as trustee under the indenture and
will initially be paying agent and registrar for the new notes.
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DIFFERENCES BETWEEN THE NEW NOTES AND THE OLD NOTES
The following comparison sets forth material differences between the terms
of the old notes and the new notes. This comparison is a summary which does not
purport to be complete and is qualified in its entirety by reference to the new
notes, the indenture governing the new notes (or new indenture), the old notes
and the indenture governing the old notes (or old indenture). Copies of these
instruments and documents are exhibits to our registration statement filed with
the SEC that contains this prospectus. Capitalized terms used below are defined
in the applicable indenture. Only those provisions with respect to which there
are material differences between the old notes and new notes are discussed
below. For further information concerning the old notes and the new notes, see
"Description of Indebtedness -- Advantica Public Debt" and "Description of New
Notes," respectively.
OLD NOTES NEW NOTES
--------- ---------
Aggregate Principal or Face Amount
$529.6 million currently outstanding, to be $204.1 million (assuming the maximum tender
reduced to $264.6 (assuming the amount) that may be issued in the exchange
maximum tender amount) offer. Up to an additional $50.0 million may
be issued under the indenture subsequent to
the exchange offer, subject to the
limitations and restrictions set forth in the
indenture.
Issuer of the Notes
Advantica Advantica and Denny's Holdings
Maturity
January 15, 2008 September 30, 2007
Interest
11 1/4%, payable semi-annually on January 15 12 3/4%, payable semi-annually on March 31
and July 15 and September 30
Optional Redemption
Redeemable, in whole or in part, during the Redeemable, in whole or in part, during the
12-month period beginning on the anniversary 12-month period beginning on the anniversary
of January 15 in the years and at the of September 30 in the years and at the
redemption prices (expressed as percentages redemption prices (expressed as percentages
of the principal amount) indicated below: of its principal amount) indicated below:
YEAR PERCENTAGE YEAR PERCENTAGE
2003 105.625% 2004 106.3750%
2004 103.750 2005 103.1875
2005 101.875 2006 and thereafter 100.0000
2006 and thereafter 100.000 plus accrued interest
plus accrued interest
Until September 30, 2004, up to 35% of the
Until January 15, 2001, up to 35% of the old new notes are redeemable at 112.75% plus
notes were redeemable at 110% plus accrued accrued interest, from the net proceeds of a
interest, from the net proceeds of a public public equity offering for cash of Advantica,
equity offering for cash of Advantica or any Denny's Holdings or any of their
of its subsidiaries. subsidiaries.
Change of Control Offer
If at any time a change of control (as If at any time a change of control (as
defined) occurs, Advantica is required to defined) occurs, Advantica and Denny's
offer to purchase all outstanding new notes Holdings are required to offer to purchase
at a purchase price equal to all outstanding new notes at a
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101% of the principal amount thereof plus purchase price equal to 101% of the principal
accrued interest to the repurchase date, amount thereof plus accrued interest to the
subject to certain conditions. repurchase date, subject to certain
conditions. In addition to the events
constituting a change of control in the old
notes, a change of control includes Advantica
ceasing to own 100% of the Equity Interests
in Denny's Holdings.
Definitions -- "Advantica Group"
The old indenture did not contain the defined "Advantica Group" means Advantica and any
term "Advantica Group." Subsidiary of Advantica, other than Denny's
Holdings or any Subsidiary of Denny's
Holdings.
Definitions -- "Denny's Holdings Group"
The old indenture did not contain the defined "Denny's Holdings Group" means Denny's
term "Denny's Holdings Group." Holdings and any Subsidiary of Denny's
Holdings.
Limitations on Restricted Payments
With certain exceptions described below, The material differences between this
Advantica will not, and will not permit any covenant in the old indenture and the
Subsidiary to make, a Restricted Payment (as corresponding covenant in the new indenture
defined below) if, at the time of such are as follows:
Restricted Payment (1) a Default or an Event (1) what constitutes a Restricted Payment is
of Default exists or would occur as a result different in the following ways:
thereof, (2) immediately after such (a) dividends and distributions payable by
Restricted Payment and after giving effect to any of the Denny's Holdings Group to any of
the Restricted Payment on a pro forma basis, the Advantica Group are also considered
Advantica would not be able to incur $1 of Restricted Payments;
additional Indebtedness pursuant to the Fixed (b) purchases of the Equity Interests of any
Charge Coverage Ratio test described in of the Advantica Group by any of the Denny's
"Restrictions on Additional Indebtedness and Holdings Group are also considered Restricted
Disqualified Stock", or (3) such Restricted Payments;
Payment, together with all other Restricted (c) voluntary prepayments of the old notes or
Payments made after the date of the indenture of any intercompany Indebtedness owed by any
and the amount by which the aggregate of all of the Denny's Holdings Group to any of the
then outstanding Investments in Unrestricted Advantica Group are also considered
Subsidiaries (other than the FRD Investment) Restricted Payments;
exceeds $75 million, is greater than the sum (d) the definition of Restricted Investments
of: (a) 50% of Advantica's aggregate (which are Restricted Payments) states that
Consolidated Net Income since the beginning any Investment by any entity within the
of the first fiscal quarter after the date of Denny's Holdings Group in any person that is
the indenture, to the end of the most not a wholly owned Subsidiary of Denny's
recently ended fiscal quarter at the time of Holdings and any Investment by any entity
such Restricted Payment (provided that if within the Advantica Group in any person that
Consolidated Net Income for such period is is not a wholly owned Subsidiary of Advantica
less than zero, then minus 100% of the amount constitutes a Restricted Investment, and that
of such loss) plus (b) 100% of aggregate Restricted Investments are deemed to include
amortization of goodwill and excess transfers of assets by any member of the
reorganization value for such period, plus Denny's Holdings Group to any Subsidiary or
(c) 100% of aggregate net cash proceeds and Affiliate of Denny's Holdings that is not a
the fair market value of marketable wholly owned Subsidiary of Denny's Holdings
securities received by Advantica from the and by any member of the Advantica Group to
issue or sale, after the date of the any Subsidiary or Affiliate of Advantica that
indenture, of capital stock of Advantica is not a wholly owned Subsidiary of Advantica
(other than capital stock issued and sold to (other than certain approved transfers of
a Subsidiary of Advantica and other than assets), excluding any Permitted Investments
Disqualified Stock), or any Indebtedness or (the definition of which differs in the
other security convertible into any such manner set forth in subsection (e) below);
capital stock that has been so converted, and
plus
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(d) 100% of aggregate amounts contributed to (e) the definition of Permitted Investments
the capital of Advantica, plus (e) 100% of excludes any Investment by any of the Denny's
the aggregate amounts received in cash and Holdings Group in any member of the Advantica
the fair market value of marketable Group.
securities (other than Restricted (2) the calculation setting forth the
Investments) received from (1) the sale or determination of the amount of permitted
other disposition of Restricted Investments Restricted Payments pursuant to clause (c) of
made by Advantica and its Subsidiaries or (2) "Limitation on Restricted Payments" is
the sale of the stock of an Unrestricted different in the following ways:
Subsidiary or the sale of all or (a) the calculation to determine whether a
substantially all of the assets of an Restricted Payment is permissible runs from
Unrestricted Subsidiary to the extent that a the date of the new indenture;
liquidating dividend is paid to Advantica or (b) the part of the calculation related to
any Subsidiary from the proceeds of such the amount by which the aggregate of all then
sale. outstanding Investments in Unrestricted
Subsidiaries (other than the FRD Investment)
Restricted Payments are defined as (1) any exceeds $75 million is reduced to the amount
dividend or distribution on account of by which such Investments exceed $25 million;
Advantica's or any Subsidiary's capital stock (c) the part of the calculation described in
or other Equity Interests (other than (A) clause (3)(a) in the left hand column of this
dividends or distributions payable in Equity comparison uses 50% of the Consolidated Net
Interests (other than Disqualified Stock) of Income of Denny's Holdings after the date of
Advantica or such Subsidiary and (B) the new indenture (rather than of Advantica
dividends or distributions payable by a after the date of the old indenture) as its
Subsidiary so long as, in the case of any reference point;
dividend or distribution payable on any class (d) the part of the calculation described in
or series of securities issued by a clauses (3)(c) and (e) in the first paragraph
Subsidiary other than a wholly owned of the left hand column of this comparison
Subsidiary, Advantica or a Subsidiary of refers to net proceeds or fair market value
Advantica receives at least its pro rata of marketable securities received by Denny's
share of such dividend or distribution in Holdings from the sale of its Capital Stock
accordance with its Equity Interest in such or any Indebtedness or other security
class or series of securities); (2) any convertible into such Capital Stock, or from
purchase, redemption or other acquisition or the sale or other disposition of Restricted
retirement for value of any Equity Interests Investments made by Denny's Holdings, or from
of Advantica or any of its Subsidiaries the sale of Denny's Holdings Unrestricted
(other than any such Equity Interests owned Subsidiaries, provided that certain
by Advantica or any of its Subsidiaries); (3) limitations are placed on the ability of
voluntary prepayments of any Indebtedness Advantica or Denny's Holdings to include such
that is subordinated to the old notes other net proceeds or fair market value to prevent
than in connection with any (a) refinancing double counting in such calculations; and
of such Indebtedness specifically permitted (e) the part of the calculation described in
by the terms of the covenant entitled clause (3)(d) in the left hand column of this
"Limitation on Additional Indebtedness and comparison refers to amounts contributed to
Issuance of Disqualified Stock", (b) the capital of Denny's Holdings (rather than
Indebtedness between Advantica and a Advantica) after the date of the indenture.
Subsidiary of Advantica or between (3) payments and distributions that do not
Subsidiaries of Advantica or (c) Mortgage constitute Restricted Payments also include:
Financing or Mortgage Refinancing; or (4) any (a) the retirement of shares of Denny's
Restricted Investments (as defined below) Holding's Capital Stock out of the sale of
(other than an Investment in any Unrestricted other shares of Denny's Holding's Capital
Subsidiary). Stock;
(b) payments for certain repurchases of
Restricted Investments are defined as any Advantica Equity Interests held by members of
investments in capital contributions, loans management is reduced from $30 million to $5
or advances to or purchases of equity million plus cash proceeds from certain
interests in, any person that is not a reissuances of such Equity Interests;
wholly-owned subsidiary, or other transfers
of assets to Subsidiaries or Affiliates that
are not wholly owned (except in transactions
the terms of which are fair and reasonable to
the transferor and at least as favorable as
terms that could be obtained in an arms
length transaction between unaffiliated
parties),
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except in each case for Permitted Investments (c) retirement of subordinated Indebtedness
(as defined below) and any such investments of Denny's Holdings with proceeds from the
existing on the date of the old indenture. issuance of Equity Interests in Denny's
Holdings;
Permitted Investments are defined to mean (1) (d) purchases of Equity Interests of
cash or Cash Equivalents, (2) investments Subsidiaries of Advantica (other than Equity
that are in persons at least a majority of Interests owned by Denny's Holdings or any of
whose revenues are derived from food service its Subsidiaries) in an aggregate cumulative
operations, ancillary operations or related amount not to exceed $5 million annually;
activities and that have the purpose of (e) Permitted Payments to Advantica, so long
furthering the food service operations of as no default or event of default has
Advantica or its Subsidiaries, (3) advances occurred, consisting of payments by any
to employees of up to $5 million at any one Subsidiary of Advantica to Advantica in
time outstanding, (4) accounts receivable amounts sufficient to enable Advantica to:
created or acquired in the ordinary course of (i) pay reasonable and necessary operating
business, (5) obligations or shares of stock expenses and other general corporate expenses
received in connection with any good faith of Advantica and its subsidiaries, (ii) pay
settlement or bankruptcy proceeding involving all tax liabilities of Advantica and its
a claim related to a Permitted Investment, current and former subsidiaries, (iii) pay
(6) evidences of Indebtedness, obligations or interest on the old notes, (iv) pay (a)
other investments not exceeding $5 million in interest and (b) principal at maturity (or as
the aggregate held at any one time and (7) otherwise required pursuant to contractually
currency swap agreements and other similar scheduled principal payments, which, in the
agreements designed to hedge against case of Existing Indebtedness are existing on
fluctuations in foreign exchange rates the date of the indenture, and, in the case
entered into in the ordinary course of of Indebtedness incurred after the date of
business. the indenture are existing on the date such
Indebtedness is incurred), in each case on
The limitation on Restricted Payments does the Credit Agreement, any Existing
not prohibit certain payments and Indebtedness and on any other Indebtedness
distributions, including (A) the payment of incurred after the date of the indenture that
any dividend within 60 days of declaration, was permitted to be incurred in accordance
if at the date of declaration such payment with the terms of the indenture and (v)
was permitted, (B) the retirement of shares acquire or retire for value, Equity Interests
of Advantica Capital Stock in exchange for, in Advantica and the old notes in accordance
or out of the net proceeds of the sale of with the relevant provisions in "Limitation
other shares of Advantica Capital Stock, (C) on Restricted Payments". Notwithstanding the
payments for certain repurchases of Advantica above, Advantica must use funds distributed
Capital Stock (up to $30 million plus the to it as permitted payments for their
cash proceeds from certain reissuances) intended purpose within 90 days of its
issued to members of management, (D) the receipt thereof, provided that Advantica
repurchase, redemption or other acquisition shall be entitled to retain an aggregate of
or retirement for value of Indebtedness which up to $250,000 for the purpose of making the
is subordinated to the old notes with payments described above; and
proceeds from the issuance of Equity (f) After the date on which a bankruptcy
Interests in Advantica, (E) the redemption, court enters an order closing the FRD Chapter
repurchase or retirement for value of any 11 bankruptcy case, the acquisition for value
Indebtedness that is subordinated to the old of old notes by Advantica for consideration
notes (i) with the proceeds of, or in in an aggregate amount not to exceed $50
exchange for, Refinancing Indebtedness million, provided that no Default or Event of
incurred pursuant to "Restrictions on a Default shall have occurred and be
Additional Indebtedness and Issuance of continuing at the time thereof.
Disqualified Stock" or (ii) if, after giving
effect to such redemption, repurchase or In determining the amount for Restricted
retirement, Advantica could incur at least $1 Payments for the purposes of the calculation
of additional Indebtedness pursuant to the described in clause (3) of the first
Fixed Charge Coverage Ratio test described paragraph of the left hand column of this
under "Restrictions on Additional comparison, no amounts expended under clause
Indebtedness and Issuance of Disqualified (3)(a) above, clause (3)(c) above and for
Stock", (F) the distribution to stockholders
of
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Advantica of securities of a corporation the retirement for value of any Indebtedness
controlled by Advantica in certain limited of Advantica or Denny's Holdings subordinated
circumstances, and (G) purchases of Equity to the new notes with proceeds of or in
Interests of Subsidiaries of Advantica (other exchange for certain permitted Indebtedness
than any such Equity Interests owned by shall be included in such determination, and
Advantica or any Subsidiary of Advantica) in 100% of the amounts expended under clauses
an annual aggregate cumulative amount up to (e) and (f) shall also be included.
$5 million plus the unused portion of the
amount permitted to be expended in all The new indenture does not contain a
preceding years; provided that in determining comparable provision to that described in
the aggregate amount expended for Restricted clause (F) in the last paragraph in the left
Payments in accordance with clause (3) of the hand column of this comparison.
first paragraph, (i) no amounts expended
under clauses (B), (D), (E) and (F) of this
paragraph shall be included, (ii) 100% of the
amounts expended under clauses (C) and (G) of
this paragraph shall be included, and (iii)
100% of the amounts expended under clause
(A), to the extent not included under
subclauses (i) or (ii) of this proviso, shall
be included.
Limitations on Incurrence of Additional Indebtedness and Issuance of Disqualified Stock
With certain exceptions described below, The material differences between this
Advantica will not and will not permit any covenant in the old indenture and the
Subsidiary to incur any Indebtedness (except corresponding covenant in the new indenture
certain intercompany Indebtedness) or issue are as follows:
Disqualified Stock unless such Indebtedness
or Disqualified Stock is Acquisition (1) Advantica Fixed Charge Coverage Ratio has
Indebtedness or is incurred or issued by been increased to 2.25:1;
Advantica and not a Subsidiary of Advantica (2) Permitted indebtedness does not include
and the Fixed Charge Coverage Ratio of Indebtedness of any of the Advantica Group to
Advantica for the four full fiscal quarters any of the Denny's Holdings Group, except for
preceding the date of incurrence of such guarantees by Advantica or any of its
Indebtedness would have been at least 2:1, Subsidiaries of Indebtedness of any of the
determined on a pro forma basis as if such Denny's Holdings Group;
Indebtedness were incurred at the beginning (3) any proceeds of mortgage or
of such period. sale-leaseback transactions used to pay
Indebtedness outstanding under the old notes
Notwithstanding the foregoing, Advantica or shall be applied only as and when permitted
any Subsidiary may incur Indebtedness (i) under the covenant entitled "Limitation on
pursuant to the Credit Agreement to the Restricted Payments";
extent of the greater of $250 million or the (4) Indebtedness incurred to finance capital
amount of the commitments thereunder on the expenditures is not permitted additional
date of the indenture, (ii) pursuant to the Indebtedness;
Credit Agreement or otherwise (a) in (5) additional Indebtedness up to an
connection with or arising out of certain aggregate principal amount of $50 million is
mortgage or sale-lease back transactions, permitted (rather than $250 million as set
provided the proceeds received in connection forth under the old indenture);
with such transactions incurred or assumed or (6) the new notes may be refinanced in
created in connection therewith are used to amounts equal to or less than the amounts due
pay any outstanding Senior Indebtedness; (b) under the new notes, as can other existing or
constituting purchase money obligations for permitted Indebtedness, so long as the
property acquired in the ordinary course of refinanced Indebtedness, is incurred by the
business or similar financing transactions, obligor on the Indebtedness being refinanced
provided that in the case of Indebtedness and provided certain other conditions are
exceeding $2 million for any such obligation, met.
such Indebtedness exists at, or is created
within 180 days after, the date of the
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purchase or transaction, (c) constituting
capital lease obligations, (d) in connection
with capital expenditures, (e) constituting
reimbursement obligations with respect to
letters of credit, including in respect of
workers' compensation claims, (f)
constituting additional Indebtedness in an
aggregate principal amount up to $250,000,000
at any one time outstanding, (g) constituting
Indebtedness secured by the Excluded
Property, (h) constituting Existing
Indebtedness and permitted refinancings
thereof in accordance with this covenant and
(i) to refinance Existing Indebtedness or any
other Indebtedness incurred as permitted
under the old indenture (including additional
Indebtedness incurred to pay premiums and
fees in connection therewith), provided that,
unless the Indebtedness being refinanced is
senior Indebtedness, the new Indebtedness has
an interest rate no greater than and a
weighted average life to maturity no less
than, and is subordinated at least to the
same extent as, the Indebtedness being
refinanced.
Notwithstanding the above, any unconsolidated
Subsidiary of Advantica created after the
date of the indenture may create, incur,
assume, guarantee or otherwise become liable
with respect to any additional Indebtedness
that is nonrecourse to Advantica and its
consolidated Subsidiaries.
Investments in Unrestricted Subsidiaries
Advantica will not and will not permit any The material differences between this
Subsidiary to make any Investment in any covenant in the old indenture and the
Unrestricted Subsidiary unless (1) the amount corresponding covenant in the new indenture
of such Investment does not exceed the amount are as follows: (1) the portion of the test
then permitted to be used to make a for the making of an Investment in an
Restricted Payment pursuant to clause (3) of Unrestricted Subsidiary relating to debt
the first paragraph under "Limitations on incurrence provides that Advantica (but not
Restricted Payments" above and (2) any Subsidiary thereof) would be able to
immediately after such Investment (after incur $1 of additional Indebtedness pursuant
giving effect thereto on a pro forma basis to the Fixed Charge Coverage Ratio test; (2)
deducting from Net Income the amount of any Advantica, Denny's Holdings and their
Investment in an Unrestricted Subsidiary Subsidiaries may make Investments in
during the four full fiscal quarters last Unrestricted Subsidiaries in an aggregate
preceding such Investment) Advantica or any amount of up to $25 million, rather than $75
Subsidiary would be able to incur $1 of million under the old indenture (without
additional Indebtedness pursuant to the Fixed regard to the investment in FRD) at any time
Charge Coverage Ratio test under "Limitations outstanding; and (c) the amount by which the
on Incurrence of Additional Indebtedness" aggregate of all Investments in Unrestricted
above. Notwithstanding the foregoing, Subsidiaries exceeds $25 million, rather than
Advantica and its Subsidiaries may make $75 million under the old indenture, shall be
Investments (1) of up to $75 million in FRD counted in calculating the aggregate
as an Unrestricted Subsidiary, and (2) in permissible amounts of Restricted Payments
other Unrestricted Subsidiaries in an pursuant to clause (C) of the first paragraph
aggregate amount not to exceed $75 million under "Limitations on Restricted Payments."
(without regard to the FRD Investment) at any
one time outstanding. The amount by which all
Investments in Unrestricted Subsidiaries
(other than
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FRD) exceeds $75 million will be counted in
determining the permissible amount of
Restricted Payments pursuant to clause (3) of
the first paragraph under "Limitations on
Restricted Payments."
Limitation on Liens
Neither Advantica nor any of its Subsidiaries The material differences between this
will grant or suffer to exist any Lien on any covenant in the old indenture and the
asset now owned or hereafter acquired by corresponding covenant in the new indenture
Advantica or any of its Subsidiaries, except: are as follows: (1) the Liens permitted with
(1) Liens existing on the date of the old respect to zoning restrictions and other
indenture, Liens arising in connection with restrictions on the use of real property or
any Advantica Indebtedness not expressly minor title irregularities under the old
subordinated or junior in right of payment to indenture related to the assets of Advantica
any other Advantica Indebtedness (including and all of its Subsidiaries, taken as a
Liens granted pursuant to the Credit whole, whereas under the new indenture, such
Agreement), Liens arising in connection with restrictions on the use of or title to real
the satisfaction and discharge of the property are evaluated separately with
indenture, and Liens relating to judgments to respect to the Denny's Holdings Group as a
the extent such judgments do not give rise to whole and to the Advantica Group as a whole;
an Event of Default under the old indenture; (2) Subsidiaries may create Liens securing
(2) Liens for taxes or assessments either not Indebtedness to Affiliates, except that
delinquent or contested in good faith and as Subsidiaries in the Denny's Holdings Group
to which adequate reserves have been may only create Liens to secure Indebtedness
established; (3) Liens incurred in connection to any other member of the Denny's Holdings
with workers' compensation, unemployment Group; (3) the new indenture provides that
insurance and other social security benefits, either Advantica or Denny's Holdings may
or securing performance bids, tenders, create any Lien upon its properties or assets
leases, contracts (other than for the if either Advantica or Denny's Holdings,
repayment of borrowed money), statutory respectively, causes the new notes to be
obligations, progress payments, surety and equally and ratably secured with all other
appeal bonds and other similar obligations Indebtedness secured by such Lien as long as
incurred in the ordinary course of business; such other Indebtedness shall be so secured;
(4) Liens imposed by law (such as mechanics' (4) notwithstanding, anything in the new
or warehousemen's liens); (5) zoning indenture to the contrary, in no event shall
restrictions, easements and other any Lien be incurred (x) securing
restrictions on the use of real property or Indebtedness outstanding pursuant to the old
minor title irregularities which do not in notes or (y) on any assets of the Denny's
the aggregate materially detract from the Holdings Group securing Indebtedness of any
value of Advantica or its Subsidiaries' of the Advantica Group (other than such
property or assets, taken as a whole, or Indebtedness of any of the Advantica Group
materially impair such entities' business incurred which is also Indebtedness of any
operations taken as a whole; (6) Liens member of the Denny's Holdings Group).
created by Advantica's Subsidiaries to secure
the Indebtedness of such Subsidiaries to
Advantica or its Subsidiaries; (7) pledges of
or Liens on raw materials or manufactured
products as security for any drafts or bills
of exchange in connection with the
importation of such raw materials or
manufactured products in the ordinary course
of business; (8) a Lien on any assets (a)
securing Indebtedness incurred or assumed in
connection with certain permitted
Indebtedness under the indenture for the
purpose of financing all or any part of the
cost of acquiring such asset or construction
thereof or thereon or (b) existing on assets
or businesses at the time of the acquisition
thereof; (9) the Lien granted to the Trustee;
(10) Liens arising in connection with any
Mortgage Financing or
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Mortgage Refinancing by Advantica or any of
its Subsidiaries; (11) Liens securing
reimbursement obligations with respect to
letters of credit issued in the ordinary
course of business; (12) any Lien on
Advantica's corporate headquarters property
in Spartanburg, South Carolina; (13) Liens
securing a landlord's interest in real
property leases; (14) all other Liens
incurred in the ordinary course of business
provided that the aggregate amount of
Indebtedness secured by such Liens is limited
to $5 million at any one time outstanding; or
(15) Liens created in connection with the
refinancing of any Indebtedness secured by
Liens permitted to be incurred or to exist
pursuant to any of the foregoing clauses;
provided, however, that no additional assets
are encumbered by such Liens in connection
with refinancing, unless permitted by clause
(1) above or as set forth in the following
sentence.
Notwithstanding the above, Advantica or any
Subsidiary may create any Lien upon any of
its properties or assets, if Advantica makes
effective a provision whereby the old notes
will be equally and ratably secured with any
and all other Indebtedness secured by such
Lien as long as any such other Indebtedness
shall be so secured, provided that if the
Lien ceases to exist, the Lien in favor of
the old notes shall also automatically cease
to exist.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
Neither Advantica nor any of its Subsidiaries The material differences between this
(other than unconsolidated Subsidiaries) will covenant in the old indenture and the
create or suffer to exist any consensual corresponding covenant in the new indenture
encumbrance or restriction on the ability of are as follows: the exceptions to the
any such Subsidiary to: (1) pay dividends or prohibition on the creation of consensual
make any other distributions on its capital encumbrances or restrictions are extended to
stock or any other interest or participation encumbrances or restrictions existing under
in its profits, owned by Advantica or any (a) the old notes and Existing Indebtedness
Advantica Subsidiary, or pay any Indebtedness on the date of the new indenture and (b)
owed to Advantica or an Advantica Subsidiary, additional Indebtedness in an aggregate
(2) make loans or advances to Advantica or an principal amount of up to $50 million at any
Advantica Subsidiary or (3) transfer any of one time outstanding (as compared to $250
its property or assets to Advantica or any million set forth in the old indenture).
Subsidiary, except in each case for such
encumbrances or restrictions created pursuant
to: (a) applicable law, (b) the indenture
governing the old notes, (c) the Credit
Agreement, (d) customary provisions
restricting subletting or assignment of any
lease, (e) any instrument governing
Indebtedness of the person acquired by
Advantica or any of its Subsidiaries at the
time of such acquisition, (f) Indebtedness
existing on the date of the old indenture or
additional Indebtedness in an aggregate
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principal amount of up to $250 million at any
one time outstanding or other contractual
obligation of Advantica or any of its
Subsidiaries existing on the date of the old
indenture or any amendment, modification,
renewal, extension, replacement or
refinancing or refunding thereof, provided
that the restrictions contained in any such
amendment, replacement modification, renewal,
extension, refinancing or refunding are no
less favorable in all material respects to
the holders of the old notes, (g) any
Mortgage Financing or Mortgage Refinancing,
(h) any Permitted Investment under the old
indenture or (i) contracts for the sale of
assets.
Merger, Consolidation or Sale of All or Substantially All Assets
Advantica shall not consolidate or merge with The material differences between this
or into, or sell or transfer all or covenant in the old indenture and the
substantially all of its assets to, any corresponding covenant in the new indenture
person or entity unless: (1) the entity are as follows: (1) the provisions apply to
formed by or surviving such consolidation or Denny's Holdings as well as to Advantica and
merger (if other than Advantica) or to which (2) the proviso described in clause (5) in
such sale or transfer has been made, is a the left hand column of this comparison has
corporation organized within the United been eliminated in the new indenture.
States, (2) the corporation formed by or
surviving any such consolidation or merger
(if other than Advantica) or to which such
sale or transfer shall have been made assumes
by supplemental indenture all the obligations
of Advantica under the old indenture and the
old notes, (3) immediately after the
transaction no Default or Event of Default
under the indenture exists, (4) Advantica or
any corporation formed by or surviving such
consolidation or merger, or to which such
sale or transfer shall have been made, shall
have an Adjusted Consolidated Net Worth
immediately after the transaction, but prior
to any purchase accounting adjustments
resulting from the transaction, which is
equal to or greater than the Adjusted
Consolidated Net Worth of Advantica
immediately preceding the transaction;
provided, however, that this clause shall not
apply to any transaction where the
consideration consists solely of common stock
or other Equity Interests of Advantica or any
surviving corporation and any liabilities of
such other person are not assumed by and are
specifically non-recourse to Advantica or
such surviving corporation; and (5) after
giving effect to such transaction and
immediately thereafter, Advantica or any
corporation formed by or surviving any such
consolidation or merger, or to which such
sale or transfer shall have been made, shall
be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test described in
"Restrictions
101
OLD NOTES NEW NOTES
--------- ---------
on Additional Indebtedness and Issuance of
Disqualified Stock," provided that, if
Advantica's Fixed Charge Coverage Ratio
immediately prior to such transaction is
within a stipulated range, then the pro forma
Fixed Charge Coverage Ratio of Advantica or
the surviving entity, as the case may be,
immediately after such transaction, must at
least be equal to the lesser of (1) the ratio
determined by multiplying a stipulated
percentage by the Fixed Charge Coverage Ratio
of Advantica prior to the transaction and (2)
the stipulated ratio stated in the indenture,
provided that if the Fixed Charge Coverage
Ratio of Advantica or the surviving
corporation exceeds 2.5:1, the transaction is
deemed to have complied with this clause.
Future Subsidiary Guarantors
Advantica's Subsidiaries may not guarantee The material differences between this
the payment of any Advantica Indebtedness covenant in the old indenture and the
that is expressly subordinate or junior in corresponding covenant in the new indenture
right of payment to any other Advantica are as follows: (1) the provision relates to
Indebtedness unless: (1) such Subsidiary the new notes as opposed to the old notes;
executes a supplemental indenture evidencing and (2) there is an absolute prohibition on
its guarantee of Advantica's obligations any Advantica Subsidiary guaranteeing the
under the old notes on a substantially Indebtedness outstanding pursuant to the old
similar basis and (2) such guarantee is notes.
senior in right of payment to the
subordinated Indebtedness guarantee
referenced in the first clause hereof to the
same extent as the old notes are senior in
right of payment to such junior Indebtedness
of Advantica; provided that if such
subordinated Indebtedness guarantee ceases to
exist for any reason, then the guarantee by
such Subsidiary evidencing its guarantee of
Advantica's obligations under the old notes
shall also automatically cease to exist.
Limitation on Sale of Assets
Neither Advantica nor any of its consolidated The material differences between this
Subsidiaries shall (1) (a) dispose of all or covenant in the old indenture and the
substantially all of the assets or capital corresponding covenant in the new indenture
stock of any Asset Segment (as defined below) are as follows: (1) the new indenture does
(provided that the disposition of all or not contain an express reference to Spartan
substantially all of Advantica's assets is Holdings, Inc. and FRD in the definition of
not subject to this section, but rather Asset Segment; (2) in the definition of
subject to the covenant relating to mergers Business Segment, "Significant Subsidiary" is
and consolidations described elsewhere in the defined with reference to both Denny's
old indenture) or (b) issue or sell equity Holdings and Advantica; (3) the limitations
securities of any such Asset Segment (with on sale of assets and the application of Net
any of the foregoing transactions deemed to Proceeds and the making of a Net Proceeds
be an "Asset Sale") or (2) dispose of any Offer set forth in this covenant apply to
Business Segment (as defined below) both Denny's Holdings and Advantica; (4) the
(resulting in Net Proceeds to Advantica and application of the Net Proceeds provision
its Subsidiaries of $50 million or more), which relates to an Investment in another
unless Advantica applies the Net Proceeds asset or business in the same line of
from such Asset Sale or such disposition of business as Advantica and its Subsidiaries
102
OLD NOTES NEW NOTES
--------- ---------
a Business Segment to one or more of the states that the proceeds from any Asset Sale
following: (a) an investment in another asset of an Asset Segment in any of the Denny's
or business in the same or similar line of Holdings Group or any disposition of any
business to Advantica's and its Subsidiaries' Business Segment in any of the Denny's
lines of business and such Investment occurs Holdings Group may not be applied to an
within 366 days of the relevant transaction, Investment by any of the Denny's Holdings
(b) a Net Proceeds Offer (defined to mean the Group in any of the Advantica Group; (5) the
application by Advantica of the Net Proceeds new indenture provides, with regard to the
of the relevant transaction to make a tender application of Net Proceeds to the purchase
offer to repurchase the old notes at a price or repayment of outstanding Senior
not less than 100% of the principal amount of Indebtedness, that any amount used to repay
the old notes plus accrued and unpaid Indebtedness outstanding under the old notes
interest thereon) expiring within 366 days of shall be applied only as and when permitted
the relevant transaction or (c) the purchase under the covenant entitled "Limitation on
or other repayment of outstanding Senior Restricted Payments"; (6) the application of
Indebtedness within 366 days of the relevant Net Proceeds to a Net Proceeds Offer applies
transaction; provided, however, if the net to repay the new notes rather than the old
amount not invested pursuant to clause (a) notes; and (7) the new indenture provides
above or applied pursuant to clause (c) above that the following shall not be deemed an
is less than $15 million, Advantica shall not Asset Sale or a sale or other disposition of
be further obligated to offer to redeem the a Business Segment: (a) Permitted
old notes pursuant to the Net Proceeds Offer Investments, (b) sales or other dispositions
provision described above. of assets by any of the Advantica Group to
Advantica or any of its wholly owned
Asset Segment is defined to mean (1) Denny's Subsidiaries or by any of the Denny's
Holdings, (2) Spartan Holdings, Inc., (3) Holdings Group to Denny's Holdings or (c) a
FRD, or (4) any Subsidiary, group of Public Offering of the securities of any
Subsidiaries or group of assets (other than Subsidiary of Advantica, but only to the
inventory held for sale in the ordinary extent that the proceeds of which are used to
course of business) of Advantica or its redeem up to 35% of the aggregate principal
Subsidiaries which (A) accounts for at least amount of new notes as provided under
20% of the total assets of Advantica and its "Optional Redemption."
Subsidiaries on a consolidated basis as of
the end of the last fiscal quarter To the extent that holders of the new notes
immediately preceding the date for which such do not tender the new notes in a Net Proceeds
determination is being made or (B) accounts Offer, the issuer who originally received the
for at least 20% of the income from Net Proceeds shall not be restricted as to
continuing operations before income taxes, its use of any proceeds made available to
extraordinary items and cumulative effects of make the Net Proceeds Offer, but not
changes in accounting principals of Advantica otherwise used to redeem the new notes.
and its Subsidiaries on a consolidated basis
for the four full fiscal quarters immediately If there are outstanding securities of either
preceding the date for which such calculation issuer ranking pari passu in right of payment
is being made. with the new notes and the terms of such
securities provide that an offer to
Business Segment is defined to mean (1) each repurchase such securities similar to the Net
of Advantica's Significant Subsidiaries, (2) Proceeds Offer with respect to the new notes
the capital stock of any of Advantica's is to be made, then the offer must be made
Subsidiaries, or (3) any group of assets of concurrently with such offer on a pro rata
Advantica or any Subsidiary whether now owned basis.
or hereafter acquired, provided, in each case
that the sale (other than the sale of
inventory in the ordinary course of
business), lease, conveyance or other
disposition of such Significant Subsidiary,
capital stock or group of assets, as the case
may be either in a single transaction or
group of related transactions that are part
of a common plan, results in the Net Proceeds
to Advantica and its Subsidiaries of $50
million or more.
103
OLD NOTES NEW NOTES
--------- ---------
Notwithstanding the foregoing, (1) the
receipt of insurance proceeds paid on account
of the loss of or damage to any Business
Segment and awards of compensation for any
such Business Segment taken by condemnation
or eminent domain which results in net
proceeds to Advantica or its Subsidiaries of
$50 million or more (excluding proceeds to be
used for replacement of such Business
Segment) will be deemed an Asset Sale and (2)
Permitted Investments and other dispositions
of assets by Advantica or its Subsidiaries to
Advantica or any Advantica Subsidiary will
not be deemed an Asset Sale or a disposition
of a Business Segment.
Any Net Proceeds Offer must be made only if
permitted and then in compliance with the
terms of any agreement governing Senior
Indebtedness. If there are outstanding
securities of Advantica ranking pari passu in
right of payment with the old notes and the
terms of such securities provide that an
offer to repurchase such securities similar
to the Net Proceeds Offer with respect to the
old notes is to be made, then the offer must
be made concurrently with such offer on a pro
rata basis. To the extent that holders of the
old notes do not tender the old notes in a
Net Proceeds Offer, Advantica shall not be
restricted as to its use of any proceeds made
available to make such offer up to the amount
of Net Proceeds that would have been used to
redeem the old notes assuming 100% acceptance
of the Net Proceeds Offer but not otherwise
used to redeem the old notes.
Notwithstanding any other provision, for 120
days after the old note holders are permitted
to elect to have the old notes purchased in
the Net Proceeds Offer, Advantica may use any
Net Proceeds available to make such offer but
not used to redeem the old notes to purchase
or otherwise acquire or retire for value any
Advantica securities ranking junior in right
of payment to the old notes at a price,
stated as a percentage of the principal or
face amount of such junior securities, not
greater than the price, stated as a
percentage of the principal amount of the old
notes offered in the Net Proceeds Offer;
provided that if the Net Proceeds Offer is
for a principal amount of the old notes less
than the aggregate principal amount of the
old notes then outstanding, then the Net
Proceeds available for use by Advantica for
such purchase of junior securities shall not
exceed the principal amount that is the
subject of the Net Proceeds Offer.
104
OLD NOTES NEW NOTES
--------- ---------
Events of Default and Remedies
Events of default under the old indenture The material differences between this section
include: (1) default for 30 days in payment in the old indenture and the corresponding
of interest on any of the old notes; (2) section in the new indenture are as follows:
default in the payment of the principal of (1) an Event of Default shall not arise from
the old notes when the same becomes due and a Default related to: (a) Indebtedness of any
payable at maturity, upon redemption or member of the Advantica Group to any other
otherwise; (3) Advantica fails to comply with member of the Advantica Group or Indebtedness
any of its other agreements or covenants of any of the Denny's Holdings Group to any
under the old indenture and the default of the Denny's Holdings Group or (b)
continues for a stipulated period of time; Indebtedness of a nonconsolidated Subsidiary
(4) a default occurs under any mortgage, of either Advantica or Denny's Holdings that
indenture or instrument under which there may is nonrecourse to such issuer or its
issued or which there may be secured or consolidated Subsidiaries, subject to the
evidenced any Indebtedness for money borrowed same other conditions under the old
by Advantica or any of its Subsidiaries (or indenture.
the payment of which is guaranteed by
Advantica or any of its Subsidiaries) other
than (a) Indebtedness of Advantica or any
Subsidiary to Advantica or any Subsidiary or
(b) Indebtedness permitted under the
indenture in the last paragraph under the
covenant entitled "Limitation on Additional
Indebtedness" with respect to unconsolidated
Subsidiaries of Advantica, if (a) either (x)
such default results from the failure to pay
principal upon the final maturity of such
Indebtedness or (y) as a result of such
default the maturity of such Indebtedness has
been accelerated prior to its final maturity,
(b) the principal amount of such
Indebtedness, together with the principal
amount of any such Indebtedness with respect
to which the principal amount remains unpaid
upon its final maturity or upon its
accelerated maturity, aggregates $30 million
or more and (c) such default does not result
from compliance with any applicable law or
any court order or governmental decree; (5) a
final judgment for the payment of money is
entered by a court against Advantica or any
of its Subsidiaries and such judgments remain
undischarged for a period of 60 days,
provided that the aggregate of all such
judgments (net of amounts covered by
insurance) exceeds $10 million; (6) Advantica
or any significant Subsidiary of Advantica
commences bankruptcy or insolvency
proceedings or a court of competent
jurisdiction enters an order or decree under
any bankruptcy law with respect to such
matters and the order or decree remains
unstayed and in effect for 60 days.
105
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
UNITED STATES TAX CONSEQUENCES
Alston & Bird LLP, counsel to the issuers ("Counsel") has advised us that
the following reflects its opinion as to the material United States federal
income tax consequences associated with the exchange of the old notes for the
new notes pursuant to the exchange offer and the ownership and disposition of
the new notes. Except where noted, this discussion deals only with those holders
who hold the old notes and new notes as capital assets and does not deal with
special situations, such as those of brokers, dealers in securities or
currencies, financial institutions, tax-exempt entities, insurance companies,
persons liable for alternative minimum tax, United States persons whose
"functional currency" is not the U.S. dollar, persons holding old notes or new
notes as part of a hedging, integrated, conversion or constructive sale
transaction or a straddle, and traders in securities that elect to use a
mark-to-market method of accounting for their securities holdings. The following
summary does not address any state, local or non-United States tax consequences
or United States federal tax consequences (e.g., estate or gift tax) other than
those pertaining to the income tax.
Furthermore, this discussion is based on provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations of the foregoing,
all as in effect as of the date hereof and all of which are subject to change,
possibly with retroactive effect. Moreover, substantial uncertainty, resulting
from a lack of definitive judicial or administrative authority and
interpretation, exists with respect to various aspects of the exchange offer, as
discussed below. This discussion represents Counsel's legal judgment, which will
not be binding in any manner on the Internal Revenue Service (the "IRS") or the
courts. No ruling has been or will be requested from the IRS on any tax matters
relating to the tax consequences of the exchange offer, and no assurance can be
given that the IRS will not successfully challenge certain of the conclusions
set forth below. This discussion does not address tax consequences of the
purchase, ownership, or disposition of the new notes to holders of new notes
other than those holders who acquired their new notes pursuant to the exchange
offer. If a partnership holds the old notes or new notes, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. Partners of partnerships that hold old notes or will acquire
new notes pursuant to the exchange offer should consult their own tax advisors.
As used herein, the term "U.S. Holder" means a holder of old notes or new
notes that is, for United States federal income tax purposes:
(1) an individual who is a citizen or resident of the United States;
(2) a corporation or partnership created or organized in or under the
law of the United States or of any political subdivision thereof; or
(3) an estate, the income of which is includible in gross income for
United States federal income tax purposes regardless of its source; or
(4) a trust if (a) a United States court is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust or (b) the trust was in existence on August 20, 1996, was treated
as a United States person prior to that date, and elected to continue to be
treated as a United States person.
For purposes of this discussion, the term "non-U.S. Holder" means any
person other than a U.S. Holder.
EACH U.S. HOLDER AND NON-U.S. HOLDER SHOULD CONSULT ITS TAX ADVISOR
REGARDING THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OF THE
OLD NOTES FOR THE NEW NOTES PURSUANT TO THE EXCHANGE OFFER, THE OWNERSHIP AND
DISPOSITION OF THE OLD NOTES AND/OR THE NEW NOTES, AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY OTHER RELEVANT FOREIGN, STATE,
LOCAL, OR OTHER TAXING JURISDICTION.
106
U.S. HOLDERS
Exchange Offer
An exchange of notes for other notes of the same corporation will qualify
as a tax-free recapitalization if the notes qualify as securities for United
States federal income tax purposes. Although there is no legal authority
directly addressing the United States federal income tax treatment of an
exchange of a debt instrument of a particular corporate issuer for a new debt
instrument issued by the same issuer and an additional issuer, such as in the
case of the exchange of old notes for new notes pursuant to the exchange offer,
the exchange of old notes for new notes pursuant to the exchange offer should
qualify as a tax-free "recapitalization" if the old notes and the new notes
qualify as securities for United States federal income tax purposes. The term
"securities" is not defined in the Internal Revenue Code or the Treasury
regulations. Under the case law, the determination of whether an instrument
constitutes a security is based on a variety of factors, including the maturity
date of the instrument. While a term of at least ten years has been held to be
sufficient to constitute a security, and a term of less than five years has been
held to be too short to qualify as a security, there is substantial uncertainty
whether notes with a term of more than five but less than ten years, as in the
case of the old notes and the new notes, are securities for federal income tax
purposes.
If the exchange qualifies as a tax-free recapitalization, a U.S. Holder
will generally (1) not recognize any gain or loss as a result of such exchange,
except to the extent of cash received, if any, in lieu of a fractional new note,
(2) have a holding period for the new notes that includes the holding period of
the old notes, and (3) have a tax basis in the new notes equal to the adjusted
tax basis in the old notes tendered in exchange therefor, reduced by the tax
basis allocable to any fractional new note. Subject to the market discount rules
discussed below, any gain or loss recognized on the receipt of cash in lieu of a
fractional new note will be capital gain or loss equal to the difference between
the amount of cash received and the adjusted tax basis of such fractional new
note. If the exchange of old notes for new notes pursuant to the exchange offer
qualifies as a tax-free "recapitalization," we believe that the addition of
Denny's Holdings as a co-obligor on the new notes should not constitute
non-qualifying property (i.e., "boot") received by U.S. Holders who participate
in the exchange. There can be no assurance, however, that the Internal Revenue
Service would not successfully challenge such characterization. If the addition
of Denny's Holdings as a co-obligor were to be treated as boot, a U.S. Holder
participating in the exchange would recognize gain in the amount equal to the
lesser of (A) the excess, if any, of (x) the fair market value of the new notes
received in the exchange over (y) such U.S. Holder's adjusted tax basis in the
old notes tendered in exchange therefor or (B) the value, if any, of the boot.
In addition, it is not entirely clear whether the new notes qualify as
securities for United States federal income tax purposes. U.S. Holders are urged
to consult their own tax advisors regarding the possible tax-free treatment of
exchanges of the old notes for the new notes.
If the exchange does not qualify as a tax-free recapitalization, a U.S.
Holder will recognize the gain or loss in an amount equal to the difference
between (x) the fair market value of the new notes received in the exchange plus
cash received, if any, in lieu of a fractional new note and (y) such U.S.
Holder's adjusted tax basis in the old notes exchanged therefor. If the U.S.
Holder recognizes a capital loss on the exchange, the deductibility of such
capital loss may be subject to limitations. Subject to the market discount rules
discussed below, any gain or loss recognized by a U.S. Holder pursuant to the
exchange will be capital gain or loss, and will be long-term if the old notes
have been held for more than one year.
We intend to treat the payment of interest for the period between the last
interest payment date for the old notes and the closing date as attributable to
the accrued but unpaid interest on the old notes tendered in the exchange offer.
A U.S. Holder, other than a purchaser of the old notes in the original
offering, should be aware that a sale or other disposition of the new notes
(including a disposition of a fractional new note for cash pursuant to the
exchange offer) may be affected by the market discount provisions of the Code.
These rules generally provide that if a U.S. Holder of the old notes purchased
such notes, subsequent to the original offering, at a market discount in excess
of a statutorily defined de minimis amount, and thereafter recognizes gain upon
a disposition (including a partial redemption) of the new notes received in
exchange for such old notes, the lesser of such gain or the portion of the
market discount that accrued while the old notes and the new notes
107
were held by such holder will be treated as ordinary interest income at the time
of disposition. The market discount rules also provide that a U.S. Holder who
acquires the new notes at a market discount may be required to defer a portion
of any interest expense that may otherwise be deductible on any indebtedness
incurred or maintained to purchase or carry the new notes until the U.S. Holder
disposes of such notes in a taxable transaction. If a U.S. Holder of the new
notes elects to include market discount in income currently, both of the
foregoing rules would not apply.
Consequences to Non-Tendering U.S. Holders
Non-tendering U.S. Holders of the old notes will not have a taxable event
for United States federal income tax purposes.
Payment of Interest
Stated interest payable on the new notes generally will be included in the
gross income of a U.S. Holder as ordinary interest income at the time accrued or
received, in accordance with such U.S. Holder's method of accounting for United
States federal income tax purposes.
Original Issue Discount and Amortizable Bond Premium
The new notes will be issued with original issue discount if the stated
principal amount due at maturity exceeds their issue price by more than a
statutorily defined de minimis amount. The issue price of the new notes will be
the fair market value of the new notes as determined by reference to the public
trading of the new notes on the date of the consummation of the exchange. If the
new notes are issued with original issue discount, U.S. Holders will be required
to include original issue discount in ordinary income over the period that they
hold the new notes in advance of the receipt of the cash attributable thereto.
Any original issue discount accruing on the new notes will be subject to
reduction by amortized "acquisition premium." In the case of any particular U.S.
Holder, the new notes will have acquisition premium in an amount equal to the
excess, if any, of (1) such U.S. Holder's adjusted tax basis in the new notes
(but not in excess of the stated principal amount due at maturity) over (2) the
issue price of the new notes. We will provide information returns stating the
amount of original issue discount accrued on the new notes held of record by the
various U.S. Holders. Any amount of original issue discount (net of amortized
acquisition premium, if any) included in income will increase a U.S. Holder's
tax basis in the new notes.
Generally, if the tax basis of a debt obligation exceeds the amount payable
at maturity (other than payments of qualified stated interest), the holder may
elect to treat such excess as "amortizable bond premium," in which case the
amount required to be included in income each year with respect to interest on
the obligation will be reduced by the amount of amortizable bond premium
allocable to such year, determined on the basis of the obligation's yield to
maturity. Any election to amortize bond premium applies to all taxable debt
obligations held at the beginning of the first taxable year to which the
election applies or acquired thereafter, and may not be revoked without the
consent of the Internal Revenue Service.
Cancellation of Indebtedness Income
We will have cancellation of indebtedness income to the extent the adjusted
issue price of the old notes exceeds the issue price of the new notes. The issue
price of the new notes will be the fair market value of the new notes as
determined by reference to the public trading of the new notes on the date of
the consummation of the exchange.
Sale, Exchange and Retirement of Notes
Subject to the market discount rules discussed above under the heading
"Exchange Offer", a U.S. Holder generally will recognize capital gain or loss
upon the sale, exchange, retirement at maturity, or other taxable disposition of
the new notes equal to the difference between the amount realized by such holder
(less an amount equal to any accrued and unpaid interest not previously included
in income, which will be treated as ordinary interest income) and such holder's
adjusted tax basis in the notes. A U.S. Holder's adjusted basis in a note will
generally be its issue price, increased by original issue discount included in
the gross income
108
of such holder. Such gain or loss will be long-term if the new notes have been
held for more than one year. The deductibility of capital losses may be subject
to limitations.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to payments of
principal and interest (including original issue discount) on the new notes and
to the proceeds of the sale of new notes or old notes made to U.S. Holders other
than certain exempt recipients (such as corporations). A backup withholding tax
will apply to such payments if the U.S. Holder fails to file a Form W-9, fails
to provide a taxpayer identification number, furnishes an incorrect taxpayer
identification number, fails to certify foreign or other exempt status from
backup withholding, or fails to report in full dividend and interest income.
Backup withholding is not an additional tax. Any amounts withheld from a payment
to a U.S. Holder under the backup withholding rules will be allowed as a credit
against the holder's United States federal income tax liability and may entitle
the holder to a refund, provided that the required information is furnished to
the Internal Revenue Service.
NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, the interest income
and gains that a non-U.S. Holder derives in respect of the old notes and the new
notes generally will be exempt from United States federal income taxes,
including withholding tax.
Payments of interest or principal in respect of the new notes by Advantica
and Denny's Holdings or the paying agent to a holder that is a non-U.S. Holder
will not be subject to withholding of United States federal income tax, provided
that, in the case of payments of interest (including OID):
(1) the income is effectively connected with the conduct by such
non-U.S. Holder of a trade or business carried on in the United States and
the non-U.S. Holder complies with applicable identification requirements
(described below under "Backup Withholding and Information Reporting"); or
(2) the non-U.S. Holder and/or each securities clearing organization,
bank, or other financial institution that holds the new notes on behalf of
such non-U.S. Holder in the ordinary course of its trade or business, in
the chain between the non-U.S. Holder and the paying agent, complies with
applicable identification requirements (described below under "Backup
Withholding and Information Reporting") to establish that the holder is a
non-U.S. Holder and in addition, that the following requirements of the
"portfolio interest" exemption under the Code are satisfied:
- the non-U.S. Holder does not actually or constructively own 10% or
more of the voting stock of the Company;
- the non-U.S. Holder is not a controlled foreign corporation with
respect to Advantica and Denny's Holdings; and the non-U.S. Holder
is not a bank whose receipt of interest on the new notes is
described in Section 881(c)(3)(A) of the Code.
Any gain realized by a non-U.S. Holder on the exchange of the old notes for
the new notes or the sale or exchange of the new notes generally will be exempt
from U.S. federal income tax, including withholding tax, unless:
(1) such gain is effectively connected with the conduct of a trade or
business in the United States (or if a tax treaty applies, such gain is
attributable to a permanent establishment of the non-U.S. Holder);
(2) in the case of a non-U.S. Holder that is an individual, such
non-U.S. Holder is present in the United States for 183 days or more during
the taxable year in which such sale, exchange, or other disposition occurs;
or
(3) in the case of gain representing accrued interest, the
requirements of the portfolio interest exemption are not satisfied.
If the interest income (including original issue discount) paid on the new
notes or gain recognized from a sale or exchange of the old notes or the new
notes is effectively connected with the conduct of a trade or
109
business in the United States by a non-U.S. Holder, such non-U.S. holder will
generally be taxed under the same rules that govern the taxation of a U.S.
Holder. In addition, if such holder is a foreign corporation, it may be subject
to an additional branch profits tax.
Backup Withholding and Information Reporting
Payment of the proceeds of a sale of a note or payment of interest
(including original issue discount) will be subject to information reporting
requirements and backup withholding tax unless the beneficial owner certifies
its non-United States status under penalties of perjury or otherwise establishes
an exemption provided that the paying agent does not actually know, or has
reason to know, that the holder is actually a U.S. Holder). Recently promulgated
Treasury Regulations provide certain presumptions under which a non-U.S. Holder
will be subject to backup withholding and information reporting unless such
holder certifies as to its non-U.S. status or otherwise establishes an
exemption. In addition, the recent Treasury Regulations change certain
procedural requirements related to establishing a holder's non-United States
status. Non-U.S. Holders should consult with their tax advisors regarding the
above issues.
Any amounts withheld from a payment to a non-U.S. Holder under the backup
withholding rules will be allowed as a credit against the holder's United States
federal income tax liability and may entitle the holder to a refund, provided
that the required information is furnished to the Internal Revenue Service.
Applicable identification requirements generally will be satisfied if there
is delivered to a securities clearing organization either directly, or
indirectly, by the appropriate filing of a Form W-8IMY:
(1) IRS Form W-8BEN signed under penalties of perjury by the non-U.S.
Holder, stating that such holder of the new notes is not a United States
person and providing such non-U.S. Holder's name and address;
(2) with respect to non-U.S. Holders of the new notes residing in a
country that has a tax treaty with the United States who seek an exemption
or reduced tax rate (depending on the treaty terms), Form W-8BEN. If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the non-U.S. Holder qualifies under the portfolio interest
rules set forth in the Code and files a W-8BEN; or
(3) with respect to interest income "effectively connected" with the
conduct by such non-U.S. Holder of a trade or business carried on in the
United States, Form W-8ECI;
provided that in any such case:
- the applicable form is delivered pursuant to applicable procedures
and is properly transmitted to the United States withholding agent,
otherwise required to withhold tax; and
- none of the entities receiving the form has actual knowledge or
reason to know that the holder is a U.S. Holder.
LEGAL MATTERS
Certain legal matters in connection with the exchange offer will be passed
upon for us by Alston & Bird LLP, Charlotte, North Carolina.
EXPERTS
The consolidated balance sheets of Advantica Restaurant Group, Inc. as of
December 27, 2000 and December 29, 1999 and the related statements of
consolidated operations and consolidated cash flows for the fiscal years ended
December 27, 2000 and December 29, 1999, for the fifty-one week period ended
December 30, 1998 (Successor Company) and for the one week period ended January
7, 1998 (Predecessor Company) included in the prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
110
ADVANTICA RESTAURANT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Statements of Consolidated Operations for the One Week Ended
January 7, 1998 (Predecessor Company) and for the
Fifty-One Weeks Ended December 30, 1998 and Fiscal Years
Ended December 29, 1999 and December 27, 2000 and for the
Three Quarters Ended September 27, 2000 and September 26,
2001 (Unaudited) (Successor Company)...................... F-3
Consolidated Balance Sheets as of December 29, 1999,
December 27, 2000 and September 26, 2001 (Unaudited)...... F-5
Statements of Consolidated Cash Flows for the One Week Ended
January 7, 1998 (Predecessor Company) and for the
Fifty-One Weeks Ended December 30, 1998 and Fiscal Years
Ended December 29, 1999 and December 27, 2000 and for the
Three Quarters Ended September 27, 2000 and September 26,
2001 (Unaudited) (Successor Company)...................... F-6
Notes to Consolidated Financial Statements.................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Advantica
Restaurant Group, Inc. and subsidiaries (the "Company") as of December 27, 2000
and December 29, 1999, and the related statements of consolidated operations and
consolidated cash flows for the fiscal years ended December 27, 2000 and
December 29, 1999, the fifty-one week period ended December 30, 1998 (Successor
Company) and for the one week period ended January 7, 1998 (Predecessor
Company). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on November 12, 1997,
the Bankruptcy Court entered an order confirming the plan of reorganization
which became effective after the close of business on January 7, 1998.
Accordingly, the accompanying consolidated financial statements have been
prepared in conformity with AICPA Statement of Position 90-7, "Financial
Reporting for Entities in Reorganization Under the Bankruptcy Code," for the
Successor Company as a new entity with assets, liabilities, and a capital
structure having carrying values not comparable with prior periods as described
in Note 2.
In our opinion, the Successor Company's consolidated financial statements
present fairly, in all material respects, the consolidated financial position of
the Company at December 27, 2000 and December 29, 1999, and the results of its
consolidated operations and its consolidated cash flows for the fiscal years
ended December 27, 2000 and December 29, 1999 and the fifty-one week period
ended December 30, 1998 in conformity with accounting principles generally
accepted in the United States of America. Further, in our opinion, the
Predecessor Company's consolidated financial statements present fairly, in all
material respects, the results of its consolidated operations and its
consolidated cash flows for the one week period ended January 7, 1998 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
February 14, 2001
F-2
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------- --------------------------------------------------------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED THREE QUARTERS ENDED
ENDED WEEKS ENDED --------------------------- -----------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1998 1998 1999 2000 2000 2001
----------- ------------ ------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
Revenue:
Company restaurant sales............. $ 21,979 $1,106,114 $1,140,338 $1,080,641 $829,658 $724,779
Franchise and licensing revenue...... 1,192 49,923 59,911 74,608 53,577 68,036
---------- ---------- ---------- ---------- -------- --------
Total operating revenue........ 23,171 1,156,037 1,200,249 1,155,249 883,235 792,815
---------- ---------- ---------- ---------- -------- --------
Cost of company restaurant sales:
Product costs........................ 5,798 284,204 293,860 280,473 215,561 180,611
Payroll and benefits................. 8,647 426,727 446,497 427,222 330,875 291,360
Occupancy............................ 318 61,885 60,935 59,311 47,641 43,294
Other operating expenses............. 3,737 155,094 156,466 162,881 122,184 107,548
---------- ---------- ---------- ---------- -------- --------
Total costs of company
restaurant sales............. 18,500 927,910 957,758 929,887 716,261 622,813
Franchise restaurant costs............. 620 21,975 28,737 38,000 24,622 29,403
General and administrative expenses.... 1,984 76,937 74,852 66,291 51,650 44,669
Amortization of excess reorganization
value................................ -- 89,161 88,989 42,133 31,637 21,792
Depreciation and other amortization.... 993 102,004 130,782 111,449 83,938 70,184
Impairment charges..................... -- -- 136,500 6,416 -- 8,343
Restructuring charges.................. -- -- -- 12,556 7,248 8,495
Gains on refranchising and other,
net.................................. (7,653) (10,800) (21,514) (51,219) (38,339) (12,123)
---------- ---------- ---------- ---------- -------- --------
Total operating costs and
expenses..................... 14,444 1,207,187 1,396,104 1,155,513 877,017 793,576
---------- ---------- ---------- ---------- -------- --------
Operating income (loss)................ 8,727 (51,150) (195,855) (264) 6,218 (761)
---------- ---------- ---------- ---------- -------- --------
Other expenses:
Interest expense, net (contractual
interest for the one week ended
January 7, 1998 -- $4,795)......... 1,984 75,988 79,435 81,821 62,322 54,732
Other nonoperating (income) expenses,
net................................ (313) 1,922 (302) (1,415) (1,398) 12
---------- ---------- ---------- ---------- -------- --------
Total other expenses, net...... 1,671 77,910 79,133 80,406 60,924 54,744
---------- ---------- ---------- ---------- -------- --------
Income (loss) before reorganization
items and income taxes............... 7,056 (129,060) (274,988) (80,670) (54,706) (55,505)
Reorganization items................... 581,988 -- -- -- -- --
---------- ---------- ---------- ---------- -------- --------
Income (loss) before income taxes...... 589,044 (129,060) (274,988) (80,670) (54,706) (55,505)
(Benefit from) provision for income
taxes................................ (13,829) (2,041) 814 1,802 1,175 1,280
---------- ---------- ---------- ---------- -------- --------
Income (loss) from continuing
operations........................... 602,873 (127,019) (275,802) (82,472) (55,881) (56,785)
Discontinued operations:
Reorganization items of discontinued
operations, net of income tax
provision of $7,509................ 181,106 -- -- -- -- --
Gain on sale of discontinued
operations, including provision of
$5,900 for operating losses during
the disposal period, net of income
tax provision of $37............... -- -- 9,616 -- -- --
Loss from operations of discontinued
operations, net of income tax
provision (benefit) of:
1998 -- $247; 1999 -- $408;
December 27, 2000 -- $(1,416); June
28, 2000 -- $186................... (1,906) (55,444) (115,718) (15,530) (17,330) --
---------- ---------- ---------- ---------- -------- --------
Income (loss) before extraordinary
items................................ 782,073 (182,463) (381,904) (98,002) (73,211) (56,785)
Extraordinary items.................... 612,845 1,044 -- -- -- 7,778
---------- ---------- ---------- ---------- -------- --------
Net income (loss)...................... 1,394,918 (181,419) (381,904) (98,002) (73,211) (49,007)
Dividends on preferred stock........... (273) -- -- -- -- --
---------- ---------- ---------- ---------- -------- --------
Net income (loss) applicable to common
shareholders......................... $1,394,645 $ (181,419) $ (381,904) $ (98,002) $(73,211) $(49,007)
========== ========== ========== ========== ======== ========
See notes to consolidated financial statements.
F-3
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS -- (CONTINUED)
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------- --------------------------------------------------------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED THREE QUARTERS ENDED
ENDED WEEKS ENDED --------------------------- -----------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1998 1998 1999 2000 2000 2001
----------- ------------ ------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
Per share amounts applicable to
common shareholders:
Basic earnings per share:
Income (loss) from
continuing operations..... $ 14.21 $ (3.17) $ (6.89) $ (2.06) $ (1.39) $ (1.41)
Income (loss) from
discontinued operations,
net....................... 4.22 (1.39) (2.65) (0.39) (0.44) --
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary items....... 18.43 (4.56) (9.54) (2.45) (1.83) (1.41)
Extraordinary items......... 14.44 0.03 -- -- -- 0.19
------- ------- ------- ------- ------- -------
Net income (loss)........... $ 32.87 $ (4.53) $ (9.54) $ (2.45) $ (1.83) $ (1.22)
======= ======= ======= ======= ======= =======
Average outstanding shares.... 42,434 40,006 40,024 40,070 40,073 40,134
======= ======= ======= ======= ======= =======
Diluted earnings per share:
Income (loss) from
continuing operations..... $ 10.93 $ (3.17) $ (6.89) $ (2.06) $ (1.39) $ (1.41)
Income (loss) from
discontinued operations,
net....................... 3.25 (1.39) (2.65) (0.39) (0.44) --
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary items....... 14.18 (4.56) (9.54) (2.45) (1.83) (1.41)
Extraordinary items......... 11.12 0.03 -- -- -- 0.19
------- ------- ------- ------- ------- -------
Net income (loss)........... $ 25.30 $ (4.53) $ (9.54) $ (2.45) $ (1.83) $ (1.22)
======= ======= ======= ======= ======= =======
Average outstanding shares and
equivalent common shares,
unless antidilutive......... 55,132 40,006 40,024 40,070 40,073 40,134
======= ======= ======= ======= ======= =======
See notes to consolidated financial statements.
F-4
ADVANTICA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1999 2000 2001
------------ ------------ -------------
(IN THOUSANDS) (UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 165,828 $ 27,260 $ 3,665
Investments............................................... 17,084 -- --
Receivables, less allowance for doubtful accounts of:
1999 -- $3,461; 2000 -- $4,308; 2001 -- $3,170.......... 16,902 6,427 3,782
Inventories............................................... 12,221 10,249 9,681
Other..................................................... 8,706 10,593 24,249
Restricted investments securing in-substance defeased
debt.................................................... 158,710 -- --
---------- --------- ---------
Total Current Assets........................................ 379,451 54,529 41,377
Property, net............................................... 510,937 425,327 369,652
Other Assets:
Reorganization value in excess of amounts allocable to
identifiable assets, net of accumulated amortization of:
1999 -- $160,319; 2000 -- $202,304; 2001 -- $224,095.... 126,910 61,177 35,385
Goodwill, net of accumulated amortization of:
1999 -- $1,075; 2000 -- $2,495; 2001 -- $3,766.......... 16,758 25,476 24,686
Other intangible assets, net of accumulated amortization
of: 1999 -- $16,829; 2000 -- $23,168; 2001 -- $28,457... 131,513 115,516 108,021
Deferred financing costs, net............................. 17,165 12,543 10,241
Other..................................................... 53,529 48,865 40,774
---------- --------- ---------
Total Assets................................................ $1,236,263 $ 743,433 $ 630,136
========== ========= =========
LIABILITIES
Current Liabilities:
Current maturities of notes and debentures................ $ 164,811 $ 1,086 $ 679
Current maturities of capital lease obligations........... 12,614 10,510 4,702
Current maturities of in-substance defeased debt.......... 158,731 -- --
Net liabilities of discontinued operations................ 53,979 69,400 13,534
Accounts payable.......................................... 74,069 68,087 37,766
Other..................................................... 166,255 145,473 112,084
---------- --------- ---------
Total Current Liabilities................................... 630,459 294,556 168,765
---------- --------- ---------
Long-Term Liabilities:
Notes and debentures, less current maturities............. 555,978 553,730 624,721
Capital lease obligations, less current maturities........ 59,385 39,980 36,783
Liability for insurance claims............................ 26,708 25,468 25,273
Other noncurrent liabilities and deferred credits......... 109,573 75,960 69,836
---------- --------- ---------
Total Long-Term Liabilities................................. 751,644 695,138 756,613
---------- --------- ---------
Total Liabilities........................................... 1,382,103 989,694 925,378
---------- --------- ---------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock:
$0.01 par value; shares authorized -- 100,000; issued and
outstanding: 1999 -- 40,025; 2000 -- 40,058;
2001 -- 40,143.......................................... 400 401 401
Paid-in capital............................................. 417,123 417,203 417,292
Deficit..................................................... (563,323) (661,325) (710,332)
Accumulated other comprehensive loss........................ (40) (2,540) (2,603)
---------- --------- ---------
Total Shareholders' Deficit................................. (145,840) (246,261) (295,242)
---------- --------- ---------
Total Liabilities and Shareholders' Deficit................. $1,236,263 $ 743,433 $ 630,136
========== ========= =========
See notes to consolidated financial statements.
F-5
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
PREDECESSOR
COMPANY SUCCESSOR COMPANY
------------ ------------------------------------------------------------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED THREE QUARTERS ENDED
ENDED WEEKS ENDED --------------------------- ---------------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1998 1998 1999 2000 2000 2001
------------ ------------ ------------ ------------ --------------- ---------------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Cash Flows from Operating
Activities:
Net income (loss)................. $1,394,918 $(181,419) $(381,904) $(98,002) $(73,211) $(49,007)
Adjustments to Reconcile Net
Income (Loss) to Cash Flows from
Operating Activities:
Amortization of reorganization
value in excess of amounts
allocable to identifiable
assets........................ -- 89,161 88,989 42,133 31,637 21,792
Depreciation and other
amortization.................. 993 102,004 130,782 111,449 83,938 70,184
Impairment charges.............. -- -- 136,500 6,416 -- 8,343
Restructuring charges........... -- -- -- 12,556 7,248 8,495
Amortization of deferred
gains......................... (202) (10,331) (12,003) (12,445) (9,807) (8,421)
Amortization of deferred
financing costs............... 83 5,533 6,219 5,708 4,609 2,478
Deferred income tax (benefit)
provision..................... (13,829) 84 -- -- -- --
Gains on refranchising and
other, net.................... (7,653) (10,800) (21,514) (51,219) (38,339) (12,123)
Gain on sale of discontinued
operations, net............... -- -- (9,616) -- -- --
Equity in (income) loss from
discontinued operations,
net........................... (179,200) 55,444 115,718 15,530 17,330 --
Amortization of debt premium.... -- (13,034) (13,901) (9,074) (8,003) (1,398)
Noncash reorganization items.... (582,331) -- -- -- -- --
Extraordinary items............. (612,845) (1,044) -- -- -- (7,778)
Other........................... (333) 4,518 15 (195) (195) --
Changes in Assets and
Liabilities Net of Effects of
Acquisitions and Dispositions:
Decrease (increase) in assets:
Receivables................... (2,310) (2,861) (1,744) 12,425 7,996 8,215
Inventories................... 237 (78) 529 505 17 336
Other current assets.......... (2,422) (5,485) 1,089 (2,797) (3,006) (13,567)
Assets held for sale.......... 1,488 (2,869) -- -- -- --
Other assets.................. (1,049) 10,418 (10,908) (3,716) (1,989) (3,263)
Increase (decrease) in
liabilities:
Accounts payable.............. (1,395) (9,110) (17,025) 2,673 (640) (10,484)
Accrued salaries and
vacations................... 7,396 (7,025) (2,420) (2,105) 2,779 (115)
Accrued taxes................. (1,026) (22,639) (1,581) (2,768) (668) 1,460
Other accrued liabilities..... 8,131 (12,701) (27,051) (29,839) (40,946) (33,762)
Other noncurrent liabilities
and deferred credits........ (995) 1,528 (11,297) (5,647) (3,199) (5,612)
---------- --------- --------- -------- -------- --------
Net cash flows provided by (used
in) operating activities........ 7,656 (10,706) (31,123) (8,412) (24,449) (24,227)
---------- --------- --------- -------- -------- --------
Cash Flows from Investing
Activities:
Purchase of property............ (1) (45,318) (76,780) (37,474) (24,764) (25,248)
Acquisition of restaurant
units......................... -- -- (13,963) (4,461) (4,461) --
Proceeds from disposition of
property...................... 7,255 3,593 17,147 72,874 47,514 26,157
Receipts from (advances to)
discontinued operations,
net........................... 648 971 (11,791) (1,910) (1,917) (54,707)
Proceeds from sale of
discontinued operations,
net........................... -- 460,425 109,414 -- -- --
Purchase of investments......... -- (72,813) (45,564) -- -- --
Proceeds from sale and maturity
of investments................ -- 12,069 89,224 17,084 17,084 --
Purchase of investments securing
in-substance defeased debt.... -- (201,713) -- -- -- --
Proceeds from maturity of
investments securing
in-substance defeased debt.... -- 24,749 19,025 158,710 10,865 --
Other long term assets, net..... -- (1,696) -- -- -- --
---------- --------- --------- -------- -------- --------
Net cash flows provided by (used
in) investing activities........ 7,902 180,267 86,712 204,823 44,321 (53,798)
---------- --------- --------- -------- -------- --------
See notes to consolidated financial statements.
F-6
ADVANTICA RESTAURANT GROUP, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS -- (CONTINUED)
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------- --------------------------------------------------------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED THREE QUARTERS ENDED
ENDED WEEKS ENDED --------------------------- -----------------------------
JANUARY 7, DECEMBER 29, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1998 1998 1999 2000 2000 2001
----------- ------------ ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Cash Flows from Financing Activities:
Net borrowings under credit
agreements......................... $ -- $ -- $ -- $ -- $ 12,600 $ 73,300
Deferred financing costs............. (4,971) -- (3,089) (1,373) (965) (176)
Debt transaction costs............... -- -- (350) (519) (519) --
Long-term debt payments.............. (355) (66,401) (52,405) (327,239) (178,440) (5,487)
Net bank overdrafts.................. -- (237) 7,900 (5,848) (5,805) (13,207)
------- -------- -------- --------- --------- --------
Net cash flows (used in) provided by
financing activities................. (5,326) (66,638) (47,944) (334,979) (173,129) 54,430
------- -------- -------- --------- --------- --------
Increase (decrease) in cash and cash
equivalents.......................... 10,232 102,923 7,645 (138,568) (153,257) (23,595)
Cash and Cash Equivalents at:
Beginning of period.................. 45,028 55,260 158,183 165,828 165,828 27,260
------- -------- -------- --------- --------- --------
End of period........................ $55,260 $158,183 $165,828 $ 27,260 $ 12,571 $ 3,665
======= ======== ======== ========= ========= ========
Supplemental Cash Flow Information:
Income taxes paid.................... $ -- $ 9,919 $ 1,539 $ 1,327
======= ======== ======== =========
Interest paid........................ $ -- $ 78,914 $101,086 $ 100,262
======= ======== ======== =========
Noncash investing activities:
Other investing.................... $ -- $ 5,000 $ 21,977 $ 9,403
======= ======== ======== =========
Noncash financing activities:
Capital lease obligations.......... $ -- $ 9,799 $ 28,804 $ 5,760
======= ======== ======== =========
Other financing.................... $ -- $ 1,220 $ 846 $ 900
======= ======== ======== =========
See notes to consolidated financial statements.
F-7
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. REORGANIZATION AND BASIS OF REPORTING
Advantica Restaurant Group, Inc. ("Advantica" or, together with its
subsidiaries including predecessors, the "Company") through its wholly owned
subsidiary, Denny's Holdings, Inc., owns and operates the Denny's restaurant
brand. At December 27, 2000, Denny's, a family-style restaurant chain, operated
in all 50 states, the District of Columbia, two U.S. territories, and five
foreign countries, with principal concentrations in California, Florida and
Texas. The Company, through its wholly owned subsidiary, FRD Acquisition Co.
("FRD"), also operates the Coco's and Carrows restaurant chains. Coco's and
Carrows compete in the family style category and are located primarily in
California. The Company has accounted for FRD as a discontinued operation in its
Consolidated Financial Statements in accordance with Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"). See Note 4.
On January 7, 1998 (the "Effective Date"), Advantica's predecessor,
Flagstar Companies, Inc. ("FCI"), and its wholly owned subsidiary Flagstar
Corporation ("Flagstar"), emerged from proceedings under Chapter 11 of Title 11
of the United States Code (the "Bankruptcy Code") pursuant to FCI's and
Flagstar's Amended Joint Plan of Reorganization dated as of November 7, 1997
(the "Plan"). On the Effective Date, Flagstar merged with and into FCI, the
surviving corporation, and FCI changed its name to Advantica Restaurant Group,
Inc. FCI's operating subsidiaries did not file bankruptcy petitions and were not
parties to the above mentioned Chapter 11 proceedings.
The Company's financial statements as of January 7, 1998 have been
presented in conformity with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting By Entities In
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7 requires that
the Company report interest expense during a bankruptcy proceeding only to the
extent that it would be paid during the proceedings or that was probable it
would 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 Flagstar's then outstanding senior subordinated debentures and
convertible debentures. The contractual interest expense for the one week ended
January 7, 1998 is disclosed in the Statements of Consolidated Operations.
The interim consolidated financial statements of Advantica and its
subsidiaries for the three quarters ended September 27, 2000 and September 26,
2001 included herein are unaudited and include all adjustments management
believes are necessary for a fair presentation of the results of operations for
such interim periods. Nonrecurring adjustments include restructuring charges,
impairment charges and extraordinary gains. Otherwise, all adjustments are of a
normal and recurring nature. The results of operations for the three quarters
ended September 26, 2001 are not necessarily indicative of the results for the
entire fiscal year ending December 26, 2001.
NOTE 2. 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 assets and liabilities to be
adjusted to their fair values as of the Effective Date in conformity with the
procedures specified by Accounting Principles Board Opinion No. 16, "Business
Combinations." In conjunction with the revaluation of assets and liabilities, a
reorganization value for the Company was determined which generally approximated
the fair value of the Company before considering debt and approximated the
amount a buyer would pay for the assets of the Company after reorganization.
Under fresh start reporting, the reorganization value of the Company was
allocated to the Company's assets and the portion of the reorganization value
which was not attributable to specific tangible or identified intangible assets
of the Company has been reported as "Reorganization value in excess of amounts
allocable to identifiable assets, net of accumulated
F-8
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortization" in the Consolidated Balance Sheets (see Note 6 regarding the 1999
impairment of the reorganization value). 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 results of operations in the Statement of Consolidated Operations for
the one 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 Consolidated 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.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies and methods of their application that significantly
affect the determination of financial position, cash flows and results of
operations are as follows:
Consolidated Financial Statements. Consolidated Financial Statements
include the accounts of the Company and its subsidiaries. Certain prior year
amounts have been reclassified to conform to the current year presentation.
These changes in classification have no effect on previously reported net income
or earnings per share.
Financial Statement Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
period reported. Actual results could differ from those estimates.
Cash and Cash Equivalents and Investments. The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. Investments with longer maturities, generally consisting of
corporate, U.S. Treasury or agency debt securities, are considered available for
sale and reported in the balance sheet as investments at fair value. Unrealized
holding gains and losses on available-for-sale investments, net of related tax
effect, are reported as a separate component of shareholders' equity (deficit)
until realized. At December 29, 1999, the carrying value of available-for-sale
investments approximated their fair value. At December 27, 2000 and September
26, 2001, there were no available-for-sale investments.
Inventories. Inventories are valued primarily at the lower of average cost
(first-in, first-out) or market.
Preopening Costs. Subsequent to January 7, 1998, preopening costs are
expensed as incurred.
Property and Depreciation. Property was adjusted to estimated fair value
as of January 7, 1998, in conjunction with the adoption of fresh start
reporting. Property additions subsequent to January 7, 1998 are stated at cost.
Property is depreciated on the straight-line method over its estimated useful
life. Property held under capital leases (at capitalized value) is amortized
over its estimated useful life, limited generally by the lease period. The
following estimated useful service lives were in effect during all periods
presented in the financial statements:
Buildings -- Five to twenty years
Equipment -- Two to ten years
Leasehold Improvements -- Estimated useful life limited by the lease
period, generally between five and ten years.
F-9
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and Other Intangible Assets. Goodwill represents the excess of
the cost of acquired assets over the fair market value of their net tangible and
identifiable intangible assets and is being amortized on a straight-line basis
over a period of no more than 20 years. Other intangible assets consist
primarily of trademarks, tradenames, franchise and other operating agreements.
Intangible assets were adjusted to estimated fair value at January 7, 1998 as a
result of the adoption of fresh start reporting. Such assets are being amortized
on the straight-line basis over the useful lives of the franchise and other
agreements and over 40 years for tradenames.
Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets. The portion of the reorganization value of the Company which was not
attributable to specific tangible or identified intangible assets of the Company
is being amortized using the straight-line method over a five-year period.
Asset Impairment. The Company follows the provisions of Accounting
Principles Board Opinion No. 17, "Intangible Assets" ("APB 17"), and Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). In
accordance with APB 17 and SFAS 121, as applicable, the Company assesses
impairment of long-lived assets such as reorganization value in excess of
amounts allocable to identifiable assets, goodwill and property, plant and
equipment whenever changes or events indicate that the carrying value may not be
recoverable. In accordance with APB 17, the Company assesses impairment of the
intangible assets reorganization value in excess of amounts allocable to
identifiable assets and goodwill whenever the Company's market indicators (e.g.,
common stock market value) and/or operating trends have had other than a
temporary adverse change. The Company applies a discounted cash flow approach to
measure impairment. The discount rate used is the Company's estimated current
cost of capital. In accordance with SFAS 121, other long-lived assets are
written down to fair value if, based on an analysis, the sum of the expected
future undiscounted cash flows is less than the carrying amount of the assets.
Deferred Financing Costs. Costs related to the issuance of debt are
deferred and amortized as a component of interest expense using the interest
method over the terms of the respective debt issues.
Self-Insurance Liabilities. The Company has historically been insured
under guaranteed cost/deductible insurance programs and/or has been self-insured
for its workers' compensation, general/product and automobile insurance
liabilities. The liabilities for prior and current estimated incurred losses for
periods while the Company has been self-insured are discounted to their present
value based on expected loss payment patterns determined by independent
actuaries. The total discounted insurance liabilities recorded at December 29,
1999, December 27, 2000 and September 26, 2001 were $41.7 million, $39.1 million
and $37.7 million, respectively, reflecting a 5% discount rate for 1999, 2000
and 2001. The related undiscounted amounts at such dates were $47.2 million,
$44.3 million and $42.6 million, respectively.
Advertising Costs. Production costs for radio and television advertising
are expensed in the year in which the commercials are initially aired.
Advertising expense for the one week ended January 7, 1998, the fifty-one weeks
ended December 30, 1998 and the fiscal years ended December 29, 1999 and
December 27, 2000 was $0.9 million, $48.5 million, and $50.8 million and $53.3
million, respectively. For the three quarters ended September 27, 2000 and
September 26, 2001, advertising expense totaled $41.0 million and $29.9 million,
respectively.
Interest Associated with Discontinued Operations. The Company has
allocated to certain discontinued operations a pro-rata portion of interest
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. Interest
related to discontinued operations, including allocated interest expense, for
the one week ended January 7, 1998, the fifty-one weeks ended December 30, 1998
and the fiscal years ended December 29,
F-10
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 and December 27, 2000 was $1.3 million, $48.5 million, $35.7 million and
$26.6 million, respectively. For the three quarters ended September 27, 2000 and
September 26, 2001, interest expense related to discontinued operations totaled
$18.8 million and $7.9 million, respectively.
Deferred Gains. In September 1995, the Company sold its distribution
subsidiary, Proficient Food Company ("PFC"), for approximately $122.5 million.
In conjunction with the sale, the Company entered into an eight-year
distribution contract with the acquirer of PFC, which was subsequently extended
to September 7, 2005. This transaction resulted in a deferred gain of
approximately $72.0 million that is being amortized over the life of the
distribution contract as a reduction of product cost. During the third quarter
of 1996, the Company sold Portion-Trol Foods, Inc. and the Mother Butler Pies
division of Denny's, its two food processing operations. The sales were
finalized in the fourth quarter of 1996 pursuant to the purchase price
adjustment provisions of the related agreements. Consideration from the sales
totaled approximately $72.1 million, including the receipt of approximately
$60.6 million in cash. In conjunction with these sales, the Company entered into
five-year purchasing agreements with the acquirers. These transactions resulted
in deferred gains totaling approximately $41.5 million that are being amortized
over the lives of the respective purchasing agreements as a reduction of product
cost. The purchasing agreement related to Mother Butler Pies expired on July 31,
2001 and the purchasing agreement related to Portion-Trol Foods, Inc. expires on
December 31, 2001.
Cash Overdrafts. The Company has included in accounts payable on the
Consolidated Balance Sheets cash overdrafts totaling $30.7 million, $24.8
million and $13.2 million at December 29, 1999, December 27, 2000 and September
26, 2001, respectively.
Franchise and License Fees. Initial franchise and license fees are
recognized when all of the material obligations have been performed and
conditions have been satisfied, typically when operations have commenced.
Initial fees for all periods presented are not significant. Continuing fees,
based upon a percentage of net sales, are recorded as income on a monthly basis.
Gains on Sales of Company-Owned Restaurants. Gains on sales of
company-owned restaurants that include real estate owned by the Company are
recognized in accordance with Statement of Financial Accounting Standards No.
66, "Accounting for Sales of Real Estate." In this regard, gains on such sales
are recognized when the cash proceeds from the sale exceed 20 percent of the
sales price. For restaurant sale transactions that do not include real estate
owned by the Company, gains are recognized at the time collection of the sale
price is reasonably assured. Total proceeds and cash proceeds received from
sales of company-owned restaurants totaled $8.7 million and $7.3 million, $7.7
million and $5.4 million, $27.6 million and $16.1 million and $74.4 million and
$70.9 million for the one week ended January 7, 1998, the fifty-one weeks ended
December 30, 1998 and the fiscal years ended December 29, 1999 and December 27,
2000, respectively. For the three quarters ended September 27, 2000 and
September 26, 2001, total proceeds and cash proceeds were $49.1 million and
$45.5 million and $26.7 million and $25.3 million, respectively.
New Accounting Standards. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement established accounting and reporting standards for derivative
financial instruments and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The accounting for changes in fair
value of the derivative (i.e., gains and losses) depends on the intended use of
the derivative and the resulting designation. In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133" ("SFAS 138"), which amends certain provisions of SFAS 133 to
clarify areas causing difficulties in implementation, including expanding the
normal purchase and sale exemption for supply contracts. Advantica appointed a
team to implement SFAS 133 for the entire company. This team has implemented a
SFAS 133 risk management process and has been educating both financial and
nonfinancial
F-11
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
personnel, reviewing contracts to identify derivatives and embedded derivatives
and addressing various other SFAS 133-related issues. Advantica adopted SFAS 133
and the corresponding amendments under SFAS 138 at the beginning of fiscal year
2001 in accordance with Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." The adoption of SFAS 133, as amended
by SFAS 138, did not have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe the
adoption of SFAS 141 will have a significant impact on its financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which
will be effective for the Company beginning December 27, 2001, the first day of
its 2002 fiscal year. SFAS 142 requires the Company, among other things, to
discontinue goodwill amortization, including the amortization of its
reorganization value in excess of amounts allocable to identifiable assets. In
addition, the standard provides for reclassifying certain existing recognized
intangibles as goodwill, reassessing the useful lives of existing recognized
intangibles, reclassifying certain intangibles out of previously reported
goodwill and identifying reporting units for purposes of assessing potential
future impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption. Total amortization expense related to excess reorganization value and
goodwill for the fifty-one weeks ended December 30, 1998, and the fiscal years
ended December 29, 1999 and December 27, 2000 was $89.4 million, $89.9 million
and $44.2 million, respectively. Total amortization expense related to excess
reorganization value and goodwill for the three quarters ended September 27,
2000 and September 26, 2001 was $33.3 million and $23.1 million, respectively.
The Company is currently assessing but has not yet determined the impact of
adopting SFAS 142 on its financial position and results of operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 will be effective for the Company beginning
December 27, 2001, the first day of its 2002 fiscal year. The Company is
currently assessing but has not yet determined the impact of adopting SFAS 144
on its financial position and results of operations.
NOTE 4. DISPOSITIONS OF BUSINESS SEGMENTS AND DISCONTINUED OPERATIONS
On April 1, 1998, the Company completed the sale to CKE Restaurants, Inc.
of all of the capital stock of Flagstar Enterprises, Inc. ("FEI"), which had
operated the Company's Hardee's restaurants. 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 in "Reorganization items of discontinued operations" in the Statements
of Consolidated Operations. As a result of this adjustment, no gain or loss on
disposition is reflected in the fifty-one weeks ended December 30, 1998.
On June 10, 1998, the Company completed the sale of all of the capital
stock of Quincy's Restaurants, Inc. ("Quincy's"), the wholly owned subsidiary
which had operated the Company's Quincy's Family Steakhouse Division, to Buckley
Acquisition Corporation. The resulting gain was reflected as an adjustment to
reorganization value in excess of amounts allocable to identifiable assets.
F-12
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 29, 1999, the Company completed the sale of all of the capital
stock of El Pollo Loco, Inc. ("EPL") to American Securities Capital Partners,
L.P. The disposition of EPL resulted in a gain of approximately $15.5 million,
net of taxes.
During the first quarter of 2000, the Company announced a plan to explore
the possible sale or recapitalization of the Coco's and Carrows concepts, which
operate under Advantica's wholly owned subsidiary, FRD. As a result, the Company
began accounting for FRD as a discontinued operation in the second quarter of
2000. Although the process has taken longer than expected, due in part to
procedural and legal constraints inherent in the FRD bankruptcy filing (see
below), FRD actively continues to market for divestiture its Coco's and Carrows
concepts.
The Statements of Consolidated Operations and Cash Flows for all periods
presented herein reflect FRD, EPL, 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" ("APB 30"). Also in accordance with APB 30, FRD's results from
operations subsequent to the date that FRD was identified as a discontinued
operation (the "measurement date") have been included as a component of net
liabilities held for sale in the Consolidated Balance Sheets at December 27,
2000 and September 26, 2001.
F-13
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with APB 30, FRD's results from operations subsequent to the
date that FRD was identified as a discontinued operation (the "measurement
date") have been included as a component of net liabilities of discontinued
operations in the Consolidated Balance Sheets. Revenue and operating income
(loss) of the discontinued operations for the reported periods are as follows:
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------- --------------------------------------------------------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED THREE QUARTERS ENDED
ENDED WEEKS ENDED --------------------------- -----------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1998 1998 1999 2000 2000 2001
----------- ------------ ------------ ------------ ------------- -------------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
REVENUE
FRD.................. $ 8,407 $439,392 $389,790 $371,060 $279,433 $265,031
EPL.................. 2,037 125,096 144,889 -- -- --
FEI.................. 9,145 116,184 -- -- -- --
Quincy's............. 3,544 78,683 -- -- -- --
------- -------- -------- -------- -------- --------
$23,133 $759,355 $534,679 $371,060 $279,433 $265,031
======= ======== ======== ======== ======== ========
OPERATING INCOME (LOSS)
FRD.................. $ 130 $(17,968) $(87,748) $(79,762) $ (8,673) $ (1,425)
EPL.................. (197) 1,852 2,381 -- -- --
FEI.................. 192 5,517 -- -- -- --
Quincy's............. (86) 140 -- -- -- --
------- -------- -------- -------- -------- --------
$ 39 $(10,459) $(85,367) $(79,762) $ (8,673) $ (1,425)
======= ======== ======== ======== ======== ========
On February 14, 2001, FRD filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Bankruptcy
Code"). FRD's financial statements have been prepared on a going concern basis,
which contemplates the continuity of operations, the realization of assets and
the satisfaction of liabilities and commitments in the ordinary course of
business. FRD's financial position at December 27, 2000 and September 26, 2001
has been presented in conformity with SOP 90-7, and accordingly, all prepetition
liabilities of FRD that are subject to compromise through this bankruptcy
proceeding are segregated as "Liabilities subject to compromise." The financial
position of FRD is reported as net liabilities of discontinued operations in the
Consolidated Balance Sheets and consists of the assets and liabilities reported
below.
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1999 2000 2001
------------ ------------ -------------
(IN THOUSANDS) (UNAUDITED)
Assets
Current assets................................... $ 19,885 $ 14,982 $ 29,765
Property owned, net.............................. 96,955 88,562 76,384
Property held under capital leases, net.......... 14,714 10,791 8,160
Other assets, including deferred loss from
discontinued operations........................ 100,320 99,126 112,207
--------- --------- ---------
231,874 213,461 226,516
--------- --------- ---------
F-14
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1999 2000 2001
------------ ------------ -------------
(IN THOUSANDS) (UNAUDITED)
Less liabilities
Current liabilities
Current portion of obligations under capital
lease....................................... 2,770 2,709 2,605
Coco's/Carrows Credit Facility payable to
Denny's, Inc. (see Note 11)................. -- -- 53,904
Other current liabilities...................... 54,336 81,504 37,895
--------- --------- ---------
57,106 84,213 94,404
--------- --------- ---------
Long-term Liabilities
Obligations under capital lease, noncurrent.... 10,095 7,323 5,286
Other long-term liabilities.................... 218,652 17,117 17,930
--------- --------- ---------
228,747 24,440 23,216
--------- --------- ---------
Total liabilities not subject to compromise...... 285,853 108,653 117,620
Liabilities subject to compromise................ -- 174,208 176,334
--------- --------- ---------
Total liabilities................................ 285,853 282,861 293,954
--------- --------- ---------
Net liabilities of FRD........................... 53,979 69,400 67,438
Denny's, Inc. receivable related to
Coco's/Carrows Credit Facility (see Note 11)... -- -- 53,904
--------- --------- ---------
Net liabilities of discontinued operations....... $ 53,979 $ 69,400 $ 13,534
========= ========= =========
NOTE 5. ACQUISITIONS
In March 1999, Denny's, Inc., a wholly owned subsidiary of the Company,
purchased 30 operating restaurants in western New York from Perk Development
Corp., a former franchisee of Perkins Family Restaurants, L.P. The acquisition
of the units has been accounted for under the purchase method of accounting. The
purchase price of approximately $24.7 million, consisting of cash of
approximately $10.9 million and capital leases and other liabilities assumed of
approximately $13.8 million, exceeded the estimated fair value of the
restaurants' identifiable net assets by approximately $9.5 million. This excess
has been reflected as goodwill in the Consolidated Balance Sheets.
During 2000, Denny's, Inc., purchased 59 Denny's franchise restaurants from
Olajuwon Holdings, Inc. ("OHI"), a bankrupt franchisee. The purchases were made
with the approval of the bankruptcy court and other parties having an interest
in the OHI bankruptcy estate. Denny's, Inc. separately reacquired 3 other
restaurants from affiliated franchisees of OHI. The acquisitions of these units
have been accounted for under the purchase method of accounting. The total
purchase price for the 62 restaurants of approximately $16.2 million, which
consisted of cash of approximately $4.5 million, the forgiveness of debt of $1.4
million and the assumption of capital leases and other liabilities of $10.3
million, exceeded the estimated fair value of the restaurants' identifiable net
assets by approximately $10.0 million. This excess has been reflected as
goodwill in the Consolidated Balance Sheets.
NOTE 6. IMPAIRMENT CHARGES
Due to the presence of certain conditions at December 29, 1999, including
the then current market value of the Company's common stock, the market discount
on certain of the Company's debt instruments and certain operating trends, the
Company concluded it should perform an impairment assessment of the carrying
amount of the intangible asset "Reorganization value in excess of amounts
allocated to identifiable assets, net of accumulated amortization." In
performing this analysis, management utilized a discounted future cash flow
F-15
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
model and recorded an impairment charge of $136.5 million, representing the
difference between the estimated value of the Company resulting from the cash
flow model and the value of the Company's net assets recorded at December 29,
1999 prior to recognition of impairment.
At December 27, 2000, the Company recorded an impairment charge of $6.4
million for certain underperforming restaurants based on the difference between
the estimated future discounted cash flows and the carrying value of those units
at December 27, 2000. During the second quarter of 2001, the Company recorded an
impairment charge of $8.3 million, of which $6.8 million relates to the closure
of certain restaurants (see Note 7) and $1.5 million relates to impairment of
certain other underperforming restaurants. The charges were calculated based on
the difference between the estimated future discounted cash flows and the
carrying value of the impaired units at June 27, 2001.
NOTE 7. RESTRUCTURING CHARGES
In late 1999, the Company's management and board of directors, assisted by
outside advisors, began an extensive review of the Company's operations and
structure. In February 2000, the Company began to implement its "One Company,
One Brand" strategy which focused its direction primarily on the Denny's
concept. This strategy included efforts to move toward a more franchised-based
operation and actions to streamline its overhead structure by merging corporate
administrative functions with the Denny's organization.
The plan's implementation involved a reduction of personnel related to a
corporate reorganization and the identification of units for closure.
Consequently, the Company recorded approximately $3.7 million of severance and
outplacement costs and $0.9 million of operating lease liabilities for closed
stores as a result of the plan. Additionally, a $2.6 million charge was recorded
related to certain acquired software and capitalized construction costs which
became obsolete as a result of the cancellation of projects identified as part
of the plan. In addition, during the fourth quarter of 2000, the Company
recorded $5.3 million of restructuring charges, comprised entirely of severance
and outplacement costs, resulting from the realignment of certain senior
management positions.
Of the total restructuring charges of $12.5 million recorded in 2000, $10.4
million represent cash charges. Of the $10.4 million, $0.9 million relate to
operating lease liabilities for closed stores that will be paid out over the
remaining lease terms. The remaining cash charges of $9.5 million primarily
relate to severance and outplacement costs, of which $7.8 million has been paid
through September 26, 2001. The remaining $1.7 million is expected to be paid
out by the second quarter of 2002.
During the second quarter of 2001, the Company approved a restructuring
plan to close 63 underperforming Denny's restaurants. At September 26, 2001, 46
of the 63 restaurants had been closed. The remaining restaurants are expected to
be closed or otherwise disposed of within 18 months. As a result of this plan,
the Company reported a restructuring charge of approximately $8.5 million during
the second quarter of 2001. The restructuring charge consisted of the following:
(In thousands)
Future rents, net of estimated subleases.................... $3,378
Property taxes.............................................. 2,952
Brokerage commissions....................................... 942
Deidentification and maintenance costs...................... 878
Severance and other costs................................... 345
------
$8,495
======
Based on information currently available, management believes its remaining
restructuring liabilities were adequate and not excessive as of September 26,
2001.
F-16
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to quarter end, on November 1, 2001, the Company announced a
restructuring plan to eliminate approximately 90 out-of-restaurant support staff
positions which will result in a future reduction of general and administrative
expenses. A restructuring charge of approximately $2.5 million to $3.0 million
related to the elimination of these positions will be recorded in the fourth
quarter of 2001.
NOTE 8. REORGANIZATION ITEMS
Reorganization items included in the Statements of Consolidated Operations
consist of the following:
ONE WEEK
ENDED
JANUARY 7,
1998
(In thousands) --------------
Net gain related to adjustments of assets and liabilities to
fair value................................................ $(595,689)
Professional fees and other................................. 8,809
Severance and other exit costs.............................. 4,892
---------
$(581,988)
=========
NOTE 9. PROPERTY, NET
Property, net, consists of the following:
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1999 2000 2001
------------ ------------ -------------
(IN THOUSANDS) (UNAUDITED)
Property owned:
Land............................... $ 66,654 $ 65,738 $ 65,009
Buildings and improvements......... 399,130 390,993 383,609
Other property and equipment....... 105,284 103,286 109,883
-------- -------- --------
Total property owned....... 571,068 560,017 558,501
Less accumulated depreciation...... 119,257 170,959 214,796
-------- -------- --------
Property owned, net................ 451,811 389,058 343,705
-------- -------- --------
Buildings and improvements,
vehicles, and other equipment
held under capital leases....... 96,496 81,740 64,590
Less accumulated amortization...... 37,370 45,471 38,643
-------- -------- --------
Property held under capital leases,
net............................. 59,126 36,269 25,947
-------- -------- --------
$510,937 $425,327 $369,652
======== ======== ========
NOTE 10. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1999 2000 2001
------------ ------------ -------------
(IN THOUSANDS) (UNAUDITED)
Accrued salaries and vacations....... $ 32,804 $ 30,699 $ 30,584
Accrued insurance.................... 19,785 17,502 15,831
Accrued taxes........................ 14,913 11,703 13,213
Accrued interest..................... 33,974 28,159 12,800
Other................................ 64,779 57,410 39,656
-------- -------- --------
$166,255 $145,473 $112,084
======== ======== ========
F-17
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. DEBT
Long-term debt consists of the following:
DECEMBER 29, DECEMBER 27, SEPTEMBER 26,
1999 2000 2001
------------ ------------ -------------
(IN THOUSANDS) (UNAUDITED)
Notes and Debentures:
11 1/4% Senior Notes due January 15, 2008,
interest payable semi-annually.............. $529,608 $529,608 $529,608
Advances outstanding under the Advantica Credit
Facility.................................... -- -- 73,300
Mortgage Notes Payable:
11.03% Notes due July 12, 2000.............. 160,000 -- --
Other notes payable, maturing over various
terms to 12 years, payable in monthly or
quarterly installments with interest rates
ranging from 7.5% to 12.8% (a).............. 4,974 3,531 3,737
Notes payable secured by equipment, maturing
over various terms up to 13 years, payable
in monthly installments with interest rates
ranging from 9.0% to 11.97% (b)............. 3,844 3,951 2,428
Capital lease obligations (see Note 12).......... 71,999 50,490 41,485
In-substance defeased debt due November 15,
2000........................................... 153,297 -- --
-------- -------- --------
923,722 587,580 650,558
Premium (discount), net (see Note 2):
11 1/4% Senior Notes, effective rate 10.79%.... 20,792 19,055 17,627
11.03% Notes, effective rate 8.18%............. 2,935 -- --
In-substance defeased debt, effective rate
5.29%....................................... 5,433 -- --
Other notes payable............................ (1,363) (1,329) (1,300)
-------- -------- --------
Total debt............................. 951,519 605,306 666,885
Less current maturities.......................... 336,156 11,596 5,381
-------- -------- --------
Total long-term debt................... $615,363 $593,710 $661,504
======== ======== ========
---------------
(a) Includes notes collateralized by restaurant and other properties with a net
book value of $5.0 million and $0.8 million at December 27, 2000 and
September 26, 2001, respectively.
(b) Collateralized by equipment with a net book value of $0.6 million and $0.4
million at December 27, 2000 and September 26, 2001, respectively.
Aggregate annual maturities of long-term debt at December 27, 2000 during
the next five years and thereafter are as follows:
YEAR
----
(In thousands)
2001...................................................... $ 11,596
2002...................................................... 5,447
2003...................................................... 4,734
2004...................................................... 3,944
2005...................................................... 3,484
Thereafter................................................ 558,375
--------
$587,580
========
F-18
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a senior revolving credit facility with The Chase Manhattan
Bank and other lenders named therein, providing the Company (excluding FRD) with
a working capital and letter of credit facility of up to a total of $200 million
(as amended to date, the "Advantica Credit Facility"). The Advantica Credit
Facility is used for working capital advances, letters of credit and general
corporate purposes by certain of Advantica's operating subsidiaries which are
borrowers thereunder. The Advantica Credit Facility is guaranteed by Advantica
and, subject to certain exceptions, by Advantica's subsidiaries that are not
borrowers thereunder and generally is secured by liens on the same collateral
that formerly secured Flagstar's obligations under the Credit Agreement (with
additional liens on the Company's corporate headquarters in Spartanburg, South
Carolina and accounts receivable).
At December 27, 2000, the Company had no working capital advances
outstanding under the Advantica Credit Facility; however, letters of credit
outstanding were $65.3 million, leaving net availability of $134.7 million. At
September 26, 2001, the Company had working capital advances of $73.3 million
and letters of credit outstanding of $52.6 million under the Advantica Credit
Facility, leaving net availability of $74.1 million. Advances under the
Advantica Credit Facility accrue interest at a variable rate (approximately 6.7%
at September 26, 2001) based on the prime rate or an adjusted Eurodollar rate.
The Advantica Credit Facility contains covenants customarily found in
credit agreements for leveraged financings that, among other things, prohibit
dividends on capital stock and place limitations on (1) redemptions and
repurchases of capital stock; (2) prepayments, redemptions and repurchases of
debt (other than loans under the Advantica Credit Facility); (3) liens and
sale-leaseback transactions; (4) loans and investments; (5) incurrence of debt;
(6) capital expenditures; (7) operating leases; (8) mergers and acquisitions;
(9) asset sales; (10) transactions with affiliates; (11) changes in the business
conducted by Advantica and its subsidiaries and (12) amendment of debt and other
material agreements. The Advantica Credit Facility also contains covenants that
require Advantica and its subsidiaries on a consolidated basis to meet certain
financial ratios and tests including provisions for the maintenance of a minimum
level of interest coverage (as defined) and a minimum level of fixed charges
coverage (as defined), limitations on ratios of indebtedness (as defined) to
earnings before interest, taxes, depreciation and amortization (EBITDA) (as
defined), and limitations on annual capital expenditures. The Advantica Credit
Facility was amended in June 2000 to allow the Company the flexibility to
execute its recently announced strategic plan, including the divestiture of FRD
and the refranchising of several hundred Denny's restaurants. An amendment of
the Advantica Credit Facility, dated December 26, 2000, provided, among other
things, a modification of certain cross-default provisions related to its FRD
subsidiary.
The Company was in compliance with the terms of the Advantica Credit
Facility at December 27, 2000. Under the most restrictive provision of the
Advantica Credit Facility (the fixed charge coverage ratio), for the four
quarters ended December 27, 2000, the Company's EBITDA could have been
approximately $32.1 million less and the Company would still have been in
compliance. The Company was also in compliance with the terms of the revolving
credit facility at September 26, 2001. Under the most restrictive provision (the
total debt to EBITDA ratio), the Company could have borrowed an additional $3.7
million and the Company would still have been in compliance. However, the total
debt to EBITDA covenant was to become more restrictive as of and for the quarter
ending December 26, 2001. Accordingly, effective October 18, 2001, the Company
obtained an amendment to the Advantica Credit Facility increasing the maximum
ratio of total debt to EBITDA for the remaining term of the Facility. Also
pursuant to that amendment, certain covenants and other provisions were
modified, permitting the Company to undertake an exchange offer relating to
Advantica's currently outstanding senior notes under certain terms and
conditions. In addition, as a result of the amendment, commitments under the
Advantica Credit Facility shall be reduced from $200.0 million to an amount not
less than $150.0 million upon receipt of cash payments, if any, related to
Denny's receivable and deposits securing outstanding letters of credit under the
Coco's/Carrows Credit Facility.
F-19
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 12, 2000, the Company repaid in full the outstanding balance of the
mortgage notes secured by a pool of cross-collateralized mortgages on the land,
buildings, equipment and improvements of 239 Denny's restaurant properties (the
"Denny's Mortgage Notes"). The repayment or refinancing of the Denny's Mortgage
Notes was required to maintain the Advantica Credit Facility in effect and
available to the Company.
Certain of FRD's operating subsidiaries have a $70.0 million senior secured
credit facility (the "Coco's/Carrows Credit Facility"), which consists of a
$30.0 million term loan and a $40.0 million revolving credit facility. At
December 27, 2000, the lenders under the Coco's/Carrows Credit Facility were
Credit Lyonnais New York Branch and other lenders named therein (the "Lenders"),
and the facility was guaranteed by Advantica. FRD obtained from the Lenders a
waiver of compliance from certain third quarter financial covenants until
January 8, 2001. On January 8, 2001, Advantica paid $70.0 million to the Lenders
in full and complete satisfaction of Advantica's guarantee of the Coco's/Carrows
Credit Facility with a combination of cash on hand and an advance under the
Advantica Credit Facility. As a result of its satisfaction of obligations under
its guarantee, Advantica was subrogated to the rights and collateral of the
Lenders. Immediately after obtaining its subrogation rights, Advantica assigned
such rights to its wholly owned subsidiary, Denny's, Inc. In addition,
immediately upon satisfaction of the guarantee, Advantica designated FRD an
"unrestricted subsidiary" pursuant to the indenture for the Advantica Senior
Notes, which limits Advantica's ability to make further investments in FRD.
At September 26, 2001, FRD's operating subsidiaries had $28.0 million
outstanding term loan borrowings, working capital borrowings of $24.7 million
and letters of credit outstanding of $9.6 million. Denny's, Inc. has deposited
cash collateral with one of the former lenders to secure the Coco's/Carrows
Credit Facility's outstanding letters of credit. At September 26, 2001, the
balance of such deposit was $9.8 million, which is reflected in other current
assets in the Consolidated Balance Sheets. Denny's Inc.'s receivable of $53.9
million, including accrued interest of $1.2 million at September 26, 2001 (see
Note 4 to the Consolidated Financial Statements), relates to borrowings under
the Coco's/Carrows Credit Facility. This receivable eliminates in consolidation,
thereby reducing the net liabilities of discontinued operations on the Company's
Consolidated Balance Sheet at September 26, 2001.
All advances under the Coco's/Carrows Credit Facility due to Denny's, Inc.
accrue interest at a variable rate (approximately 8.0% at September 26, 2001)
based on the prime rate or an adjusted Eurodollar rate. The advances are secured
by substantially all of the assets of FRD and its subsidiaries and by the issued
and outstanding stock of FRD's subsidiaries.
The Coco's/Carrows Credit Facility contains a number of restrictive
covenants which, among other things, limit (subject to certain exceptions) FRD
and its subsidiaries with respect to the incurrence of debt, existence of liens,
investments and joint ventures, the declaration or payment of dividends, the
making of guarantees and other contingent obligations, mergers, the sale of
assets, capital expenditures and material change in their business. In addition,
the Coco's/Carrows Credit Facility contains certain financial covenants
including provisions for the maintenance of a minimum level of interest coverage
(as defined), limitations on ratios of indebtedness (as defined) to earnings
before interest, taxes, depreciation and amortization (EBITDA) (as defined) and
limitations on annual capital expenditures. On January 16, 2001, FRD elected not
to make the scheduled interest payment due on its 12.5% Senior Notes due July
15, 2004 (the "FRD Notes"). On February 14, 2001, to facilitate the divestiture
of its Coco's and Carrows brands and to preserve their going concern value, FRD
filed for protection under Chapter 11 of the Bankruptcy Code. FRD's operating
subsidiaries have received certain waivers of default from Denny's, Inc., as
lender under the Coco's/Carrows Credit Facility, with respect to FRD's Chapter
11 Filing and to certain covenants for the quarters ended September 27, 2000 and
December 27, 2000. FRD's operating subsidiaries were not in compliance with
certain financial covenants under the Coco's/Carrows Credit Facility for the
quarter ended September 26, 2001. In light of, among other things, the operating
results and financial condition of FRD and the
F-20
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
uncertainties as to the outcome of the FRD divestiture process and bankruptcy
proceeding, there can be no assurance that the Company will be able to recover
all or any part of the secured obligations owed to it under the Coco's/Carrows
Credit Facility. For additional information concerning the FRD Notes and the
Chapter 11 filing, see Notes 4 and 20.
The estimated fair value of the Company's long-term debt (excluding capital
lease obligations) was approximately $253 million at December 27, 2000 and
approximately $329 million at September 26, 2001. Such computations are based on
market quotations for the same or similar debt issues or the estimated borrowing
rates available to the Company at the time the estimated fair value was
calculated. The decrease in estimated fair value of long-term debt compared to
its historical cost relates primarily to market quotations for the 11 1/4%
Senior Notes at December 27, 2000 and September 26, 2001.
NOTE 12. LEASES AND RELATED GUARANTEES
The Company's operations utilize property, facilities, equipment and
vehicles leased from others. In addition, certain owned and leased property,
facilities and equipment are leased to others.
Buildings and facilities leased from others primarily are for restaurants
and support facilities. Restaurants are operated under lease arrangements which
generally provide for a fixed basic rent, and, in some instances, contingent
rent based on a percentage of gross operating profit or gross revenues. Initial
terms of land and restaurant building leases generally are not less than 20
years exclusive of options to renew. Leases of other equipment primarily consist
of restaurant equipment, computer systems and vehicles.
Information regarding the Company's leasing activities at December 27, 2000
is as follows:
CAPITAL LEASES OPERATING LEASES
------------------- -------------------
MINIMUM MINIMUM MINIMUM MINIMUM
LEASE SUBLEASE LEASE SUBLEASE
YEAR PAYMENTS RECEIPTS PAYMENT RECEIPTS
---- -------- -------- -------- --------
(In thousands)
2001.......................................... $16,680 $ 3,979 $ 43,589 $ 18,571
2002.......................................... 9,881 3,663 40,716 17,987
2003.......................................... 8,764 3,524 37,121 17,247
2004.......................................... 7,520 3,316 32,670 16,805
2005.......................................... 7,040 3,265 29,859 16,564
Subsequent years.............................. 46,788 37,501 182,355 190,955
------- ------- -------- --------
Total......................................... 96,673 $55,248 $366,310 $278,129
======= ======== ========
Less imputed interest......................... 46,183
-------
Present value of capital lease obligations.... $50,490
=======
The total rental expense included in the determination of operating income
for continuing operations is as follows:
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED THREE QUARTERS ENDED
ENDED WEEKS ENDED --------------------------- -----------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1998 1998 1999 2000 2000 2001
---------- ------------ ------------ ------------ ------------- -------------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Base rents........... $ 653 $33,523 $37,046 $47,322 $35,301 $36,038
Contingent rents..... 169 8,174 8,379 6,562 5,186 4,980
------- ------- ------- ------- ------- -------
$ 822 $41,697 $45,425 $53,884 $40,487 $41,018
======= ======= ======= ======= ======= =======
Total rental expense does not reflect sublease rental income of $0.2
million, $11.5 million, $14.1 million, $20.1 million, $13.3 million and $22.2
million for the one week ended January 7, 1998, the fifty-one weeks ended
December 30, 1998, the fiscal years ended December 29, 1999 and December 27,
2000 and the three quarters ended September 27, 2000 and September 26, 2001,
respectively.
F-21
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. INCOME TAXES
A summary of the provision for (benefit from) income taxes attributable to
the loss before discontinued operations and extraordinary items is as follows:
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED
ENDED WEEKS ENDED ---------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27,
1998 1998 1999 2000
(In thousands) ----------- ------------- ------------ ------------
Current:
Federal.............................. $ -- $(2,924) $ -- $ --
State, foreign and other............. 27 799 814 1,802
-------- ------- ------ -------
27 (2,125) 814 1,802
-------- ------- ------ -------
Deferred:
Federal.............................. (12,513) -- -- --
State, foreign and other............. (1,343) 84 -- --
-------- ------- ------ -------
(13,856) 84 -- --
-------- ------- ------ -------
Provision for (benefit from) income
taxes................................ $(13,829) $(2,041) $ 814 $ 1,802
======== ======= ====== =======
The total provision for (benefit from)
income taxes related to:
Loss before discontinued
operations........................ $(13,829) $(2,041) $ 814 $ 1,802
Discontinued operations.............. 7,509 247 445 (1,416)
-------- ------- ------ -------
Total provision for (benefit
from) income taxes......... $ (6,320) $(1,794) $1,259 $ 386
======== ======= ====== =======
The following represents the approximate tax effect of each significant
type of temporary difference giving rise to deferred income tax assets or
liabilities:
DECEMBER 29, DECEMBER 27,
1999 2000
(In thousands) ------------ ------------
Deferred tax assets:
Deferred income........................................... $ 12,129 $ 6,960
Debt premium.............................................. 11,893 7,851
Lease reserves............................................ 4,601 4,206
Self-insurance reserves................................... 18,757 18,155
Capitalized leases........................................ 5,142 6,034
Fixed assets.............................................. 934 23,530
Other accruals and reserves............................... 12,107 14,185
Alternative minimum tax credit carryforwards.............. 12,451 12,451
Capital loss carryforwards................................ 1,491
General business credit carryforwards..................... 55,871 61,862
Net operating loss carryforwards.......................... 2,955 744
Less: valuation allowance................................. (90,309) (113,498)
-------- ---------
Total deferred tax assets......................... 48,022 42,480
-------- ---------
Deferred tax liabilities:
Intangible assets......................................... (48,022) (42,480)
-------- ---------
Total deferred tax liabilities.................... (48,022) (42,480)
-------- ---------
Net deferred tax liability.................................. $ -- $ --
======== =========
F-22
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has provided a valuation allowance for the portion of the
deferred tax assets for which it is more likely than not that a tax benefit will
not be realized. Any subsequent reversal of the valuation allowance of
approximately $59 million established in connection with fresh start reporting
on January 7, 1998 will be applied first to reduce reorganization value in
excess of amounts allocable to identifiable assets, then to reduce other
identifiable intangible assets followed by a credit directly to equity. In 1999,
the Company reversed approximately $5 million of the valuation allowance and
recorded a corresponding reduction in reorganization value in excess of amounts
allocable to identifiable assets. In 2000, the Company reversed approximately
$25.4 million of income tax reserves and recorded a corresponding $23.6 million
reduction in reorganization value in excess of amounts allocable to identifiable
assets and a $1.8 million reduction to loss from discontinued operations. In the
first quarter of 2001, the Company reversed an additional $3.0 million of income
tax liabilities and recorded a corresponding reduction in reorganization value
in excess of amounts allocable to identifiable assets. These reserve reversals
relate to the settlement of the IRS litigation (see Note 15) along with the
settlement and revaluation of other income tax reserves established on January
7, 1998 in connection with the Company's reorganization.
The difference between the statutory federal income tax rate and the
effective tax rate on loss from continuing operations before discontinued
operations and extraordinary items is as follows:
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED
ENDED WEEKS ENDED ---------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27,
1998 1998 1999 2000
---------- ------------ ------------ ------------
Statutory tax (benefit) rate............ 35% (35)% (35)% (35)%
Differences:............................ -- -- -- --
State, foreign, and other taxes, net
of federal income tax benefit...... -- 1 -- 1
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets................ -- 27 13 19
Impairment charge of excess
reorganization value............... -- -- 18 --
Nontaxable income related to the
reorganization..................... (29) -- -- --
Nondeductible wages related to the
FICA tip credit and work
opportunity tax credit............. -- 1 1 3
Portion of losses and income tax
credits not benefited from as a
result of the establishment of a
valuation allowance................ (8) 7 5 13
Other................................. -- (3) (2) 1
--- --- --- ---
Effective tax (benefit) rate.......... (2)% (2)% --% 2%
=== === === ===
The Company utilized substantially all of its pre-1999 net operating loss
("NOL") carryforwards and portions of certain other pre-1999 carryforwards to
offset taxable income principally generated from the sale of its discontinued
operations during 1998.
In connection with the reorganization, the Company realized a gain from the
extinguishment of certain indebtedness (see Note 18). This gain is not taxable
since the gain resulted from a reorganization under the Bankruptcy Code.
However, the Company is required, beginning with its 1999 taxable year, to
reduce certain tax attributes related to Advantica, exclusive of its operating
subsidiaries, including (1) NOL carryforwards, (2) certain tax credits and (3)
tax bases in assets in an amount equal to such gain on extinguishment.
F-23
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 27, 2000, the Company has available, on a consolidated basis,
general business credit carryforwards of approximately $73 million, most of
which expire in 2004 through 2020, and alternative minimum tax ("AMT") credit
carryforwards of approximately $12 million, which never expire. In addition, the
Company has available regular NOL and AMT NOL carryforwards of approximately $2
million and $45 million, respectively, which expire in 2012 through 2020. Due to
the reorganization of the Company on January 7, 1998, the Company's ability to
utilize the general business credit carryforwards, AMT credit carryforwards, and
NOL carryforwards which arose prior to the reorganization is limited to a
specified annual amount. The annual limitation for the utilization of these
carryforwards is approximately $21 million for NOL carryforwards or $7 million
for tax credits. The annual limitation may also be increased for the recognition
of certain built-in gains. General business credits of approximately $23
million, regular NOL carryforwards of approximately $2 million and AMT NOL
carryforwards of approximately $19 million that arose subsequent to the
reorganization are not subject to any limitation as of the end of 2000. A
portion of the carryforwards may be reduced or lost based upon the ultimate
disposition of FRD's operating subsidiaries.
In connection with the purchase of FRI-M in May 1996, the Company acquired
certain income tax attributes which, prior to 1999, could be used only to offset
the separate taxable income of FRI-M and its subsidiaries. Approximately $23
million of regular NOL carryforwards are available at December 27, 2000 to
reduce the future taxable income of the Company and its subsidiaries, subject to
certain limitations. Due to FRI-M's prior ownership changes in January 1994 and
May 1996, the ability to utilize these carryforwards is limited. The annual
limitation for the utilization of FRI-M's NOL carryforwards which were generated
after January 1994 and before May 1996 is approximately $4 million, plus the
recognition of certain built-in gains. These NOL carryforwards expire
principally in 2009 through 2011. Utilization of FRI-M's loss carryforwards are
also subject to the Company's overall annual limitation of $21 million. FRI-M
and the Company utilized capital loss carry over of approximately $4 million in
1997, $7 million in 1998, $4 million in 1999 and $4 million in 2000 to offset
capital gains recognized during 1997 through 2000. A portion of the
carryforwards may be reduced or lost based upon the ultimate disposition of
FRD's operating subsidiaries.
NOTE 14. EMPLOYEE BENEFIT PLANS
Pension and Other Defined Benefit and Contribution Plans
The Company maintains several defined benefit plans for continuing
operations which cover a substantial number of employees. Benefits are based
upon each employee's years of service and average salary. The Company's funding
policy is based on the minimum amount required under the Employee Retirement
Income Security Act of 1974. The Company also maintains defined contribution
plans.
F-24
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net pension cost of the pension plan and other defined
benefit plans as determined under SFAS No. 87 are as follows:
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED
ENDED WEEKS ENDED ---------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27,
1998 1998 1999 2000
(In thousands) ---------- ------------ ------------ ------------
PENSION PLAN:
Service cost.......................... $ 70 $ 1,040 $ 758 $ 459
Interest cost......................... 63 2,861 2,700 2,608
Expected return on plan assets........ (71) (3,658) (3,307) (3,225)
Amortization of prior service cost.... -- -- -- --
Recognized net actuarial loss......... -- -- -- --
------- ------- ------- -------
Net periodic benefit cost............. $ 62 $ 243 $ 151 $ (158)
======= ======= ======= =======
Purchase accounting................... $11,633 $ -- $ -- $ --
Curtailment gains..................... -- (6,338) (796) --
Settlement loss....................... -- 119 -- --
Other comprehensive income............ -- -- -- 2,444
OTHER DEFINED BENEFIT PLANS:
Service cost.......................... $ 2 $ 125 $ 370 $ 681
Interest cost......................... 3 166 176 236
Expected return on plan assets........ -- -- -- --
Amortization of prior service cost.... -- 27 -- --
Recognized net actuarial gain......... -- (1) 96 (1)
------- ------- ------- -------
Net periodic benefit cost............. $ 5 $ 317 $ 642 $ 916
======= ======= ======= =======
Curtailment loss...................... $ -- $ -- $ 702 $ --
Net pension and other defined benefit plan costs charged to continuing
operations for the fifty-one weeks ended December 30, 1998, the fiscal years
ended December 29, 1999 and December 27, 2000 and the three quarters ended
September 27, 2000 and September 26, 2001 were $0.7 million, $0.6 million and
$1.1 million, $0.8 million and $0.6 million, respectively. Costs charged to
continuing operations for the one week ended January 7, 1998 were not
significant.
F-25
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status and amounts recognized in
the Company's balance sheet for its pension plan and other defined benefit
plans:
PENSION PLAN OTHER DEFINED BENEFIT PLANS
--------------------------- ---------------------------
DECEMBER 29, DECEMBER 27, DECEMBER 29, DECEMBER 27,
1999 2000 1999 2000
(In thousands) ------------ ------------ ------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year................................ $41,123 $37,026 $ 2,498 $ 3,340
Service cost.......................... 758 459 370 680
Interest cost......................... 2,700 2,608 176 236
Actuarial losses (gains).............. (2,002) (617) 476 (342)
Curtailment gains..................... (1,539) -- (2) --
Settlement............................ (1,775) -- -- --
Benefits paid......................... (2,239) (2,211) (178) (222)
------- ------- ------- -------
Benefit obligation at end of year..... $37,026 $37,265 $ 3,340 $ 3,692
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year............................. $37,043 $34,883 $ -- $ --
Actual return on plan assets.......... 1,854 (182) -- --
Employer contributions................ -- 591 178 222
Settlement............................ (1,775) -- -- --
Benefits paid......................... (2,239) (2,211) (178) (222)
------- ------- ------- -------
Fair value of plan assets at end of
year................................ $34,883 $33,081 $ -- $ --
======= ======= ======= =======
RECONCILIATION OF FUNDED STATUS
Funded Status......................... $(2,143) $(4,184) $(3,340) $(3,692)
Unrecognized actuarial losses
(gains)............................. -- 2,790 (190) (531)
Unrecognized transition amount........ -- -- (1) (1)
Unrecognized prior service cost....... -- -- -- --
Fourth quarter contribution........... -- -- -- --
------- ------- ------- -------
Net amount recognized................. $(2,143) $(1,394) $(3,531) $(4,224)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET CONSIST OF:
Accrued benefit liability............. $(2,143) $(3,838) $(3,531) $(4,224)
Accumulated other comprehensive
income.............................. -- 2,444 -- --
------- ------- ------- -------
Net amount recognized................. $(2,143) $(1,394) $(3,531) $(4,224)
======= ======= ======= =======
Assets held by the Company's plans are invested in money market and other
fixed income funds as well as equity funds.
Significant assumptions used in determining net pension cost and funded
status information for all the periods shown above are as follows:
1998 1999 2000
---- ---- ----
Discount rate............................................... 6.8% 7.3% 7.5%
Rates of salary progression................................. 4.0% 4.0% 4.0%
Long-term rates of return on assets......................... 10.0% 9.5% 9.5%
In addition, the Company has defined contribution plans whereby eligible
employees can elect to contribute from 1% to 15% of their compensation to the
plans. Under these plans, the Company makes
F-26
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matching contributions, subject to certain limitations. Amounts charged to
income under these plans for continuing operations were $2.0 million, $2.0
million and $1.9 million, $1.5 million and $1.4 million for the fifty-one weeks
ended December 30, 1998, the fiscal years ended December 29, 1999 and December
27, 2000 and the three quarters ended September 27, 2000 and September 26, 2001,
respectively. Matching contributions related to the one week ended January 7,
1998 were not significant.
Stock Option Plans
The Company has two stock-based compensation plans, which are described
below. The Company has adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), while continuing to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations in accounting for its stock-based compensation plans.
Under APB 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
Pursuant to the Plan, and shortly after the Effective Date, the Company
adopted the Advantica Restaurant Group Stock Option Plan (the "Non-Officer
Plan") and the Advantica Restaurant Group Officer Stock Option Plan (the
"Officer Plan"). Effective March 15, 1999, the Non-Officer Plan and the Officer
Plan were merged together and the surviving plan's name was changed to the
Advantica Stock Option Plan (the "Company Plan"). All participants in the
Non-Officer Plan and Officer Plan on the effective date of the plan merger
continued to be participants in the Company Plan and retained all options
previously issued to participants under the Officer Plan and the Non-Officer
Plan under the same terms and conditions existing at the time of grant.
The Company Plan permits the Compensation and Incentives Committee of the
Advantica Board (the "Committee") to award stock options as incentives to
employees and consultants of Advantica. The Committee has sole discretion to
determine the exercise price, term and vesting schedule of options awarded under
such plans. A total of 7,388,888 shares of Advantica common stock are authorized
to be issued under the Company Plan. Under the terms of the Company Plan,
optionees who terminate for any reason other than cause, disability, retirement
or death will be allowed 60 days after the termination date to exercise vested
options. Vested options are exercisable for one year when termination is by a
reason of disability, retirement or death. If termination is for cause, no
option shall be exercisable after the termination date.
In addition to the Company Plan, the Company has adopted the Advantica
Restaurant Group Director Stock Option Plan (the "Director Plan"), the terms of
which are substantially similar to the terms of the Company Plan. A total of
200,000 shares of Advantica common stock are authorized to be issued under the
Director Plan.
Under each plan, options granted to date generally vest evenly over three
to five years, have a 10-year life and are issued at the market value at the
date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options granted under the fair value method of that
statement. Prior to its emergence from bankruptcy the Company had two
stock-based compensation plans, the 1989 Stock Option Plan (the "1989 Plan") and
the 1990 Non-qualified Stock Option Plan (the "1990 Plan"). On the Effective
Date, pursuant to the Plan, FCI's Old Common Stock was canceled, extinguished
and retired. As a result, all stock options outstanding as of that date,
including those under both the 1989 Plan and the 1990 Plan, were effectively
canceled. Due to the fact that all options under the 1989 Plan and the 1990 Plan
were canceled, extinguished and retired on the Effective Date, the effect on the
accompanying Statement of Consolidated Operations of the compensation expense
calculated under SFAS 123 related to such plans is not included in the pro forma
information presented below. The fair value of the
F-27
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock options granted in 1998 and 1999 was estimated at the date of grant using
the Black-Scholes option pricing model. No options were granted in 2000. The
following weighted average assumptions were used for such grants:
1998 1999
---- ----
Dividend yield........................................... 0.0% 0.0%
Expected volatility...................................... 0.64 0.72
Risk-free interest rate.................................. 4.6% 6.4%
Weighted average expected life........................... 9.0 years 9.0 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
FIFTY-ONE FISCAL YEAR ENDED
WEEKS ENDED ---------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27,
1998 1999 2000
(In millions, except per share data) ------------ ------------ ------------
Pro forma net loss............................... $(189.6) $(386.3) $(99.9)
Pro forma loss per share:
Basic and diluted.............................. (4.73) (9.63) (2.49)
A summary of the Company's stock option plans is presented below.
1998 1999 2000
------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
(Option amounts in thousands)
Outstanding, beginning of
year................... --(a) $ --(a) 3,092 $8.32 4,768 $6.37
Granted.................. 3,380 8.45 2,063 3.66 -- --
Exercised................ (1) 10.00 -- -- -- --
Forfeited/Expired........ (287) 9.75 (387) 7.50 (2,277) 8.08
----- ----- ------
Outstanding, end of
year................... 3,092 8.32 4,768 6.37 2,491 4.81
===== ===== ======
Exercisable at year
end.................... 637 10.00 1,210 8.99 1,002 5.66
---------------
(a) Outstanding as of the Effective Date.
The following table summarizes information about stock options outstanding
at December 27, 2000 (option amounts in thousands):
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/27/00 LIFE PRICE AT 12/27/00 PRICE
--------------- ----------- ----------- --------- ----------- ---------
$ 3.50............................. 1,411 8.50 $ 3.50 385 $ 3.50
4.69............................. 659 7.71 4.69 336 4.69
6.31............................. 20 8.02 6.31 5 6.31
7.00............................. 60 8.10 7.00 15 7.00
10.00............................. 341 7.09 10.00 261 10.00
----- -----
2,491 8.08 4.81 1,002 5.66
===== =====
F-28
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value per option of options granted during the
fiscal year ended December 29, 1999 was $2.78. No options were granted during
2000.
NOTE 15. COMMITMENTS AND CONTINGENCIES
There are various claims and pending legal actions against or indirectly
involving the Company, including actions concerned with civil rights of
employees and customers, other employment related matters, taxes, sales of
franchise rights and businesses and other matters. Certain of these are seeking
damages in substantial amounts. The amounts of liability, if any, on these
direct or indirect claims and actions at December 27, 2000, over and above any
insurance coverage in respect to certain of them, are not specifically
determinable at this time.
In 1994, the Company was advised by the Internal Revenue Service of
proposed deficiencies for federal income taxes totaling approximately $12.7
million. The proposed deficiencies relate to examinations of certain income tax
returns filed by the Company for the seven taxable periods ended December 31,
1992. In the third quarter of 1996, this proposed deficiency was reduced by
approximately $7.0 million as a direct result of the passage of the Small
Business Jobs Protection Act (the "Act") in August 1996. The Act included a
provision that clarified Internal Revenue Code Section 162(k) to allow for the
amortization of borrowing costs incurred by a corporation in connection with a
redemption of its stock. Because the Company believed the remaining proposed
deficiencies were substantially incorrect, it contested such proposed
deficiencies in 1998 by filing petitions in the United States Tax Court. The
Company settled all the issues in these petitions with the IRS in the fourth
quarter of 2000, and, accordingly, adjusted its income tax liabilities
established in connection with these issues (see Note 13). The Company and the
IRS completed the final computations of the federal income taxes and interest in
the first quarter of 2001, and as a result, the Company reversed an additional
$3.0 million of income tax liabilities and recorded a corresponding reduction in
reorganization value in excess of amounts allocable to identifiable assets.
One current and two former managers of Denny's restaurant units initiated,
in the Superior Court of Los Angeles County, California, a class action lawsuit
seeking, among other things, overtime compensation. The action was originally
filed on September 2, 1997. The suit alleged that Denny's requires its managers
to work more than 50% of their time performing nonmanagement related tasks, thus
entitling them to overtime compensation. Denny's contends that it properly
classifies its managers as salaried employees, thereby exempting them from the
payment of overtime compensation. During the third quarter of 2000, the parties
reached an agreement to resolve the claims of individuals who were employed as
managers of Denny's in California between September 2, 1994 and July 21, 2000.
While continuing to deny liability, the Company elected to resolve the case to
avoid the expense of continued litigation and the risk of loss. The total
settlement of $4.0 million was approved by the court on October 27, 2000, was
included in accrued liabilities at December 27, 2000 and paid in the first
quarter of 2001.
Four former managers of Denny's restaurant units have initiated, in the
Superior Court for King County, Washington, a class action lawsuit seeking,
among other things, overtime compensation. The action, which was originally
filed on May 16, 2000, was certified on July 31, 2001 as a class action with all
managers and general managers who worked for company-owned Denny's restaurants
in Washington since January 1, 1997 being identified as class members. The suit
alleges that managers at Denny's are not exempt "executive" employees because
they supposedly spend most of their time on non-exempt tasks, thus entitling
them to overtime compensation. Denny's contends that it properly classifies its
managers as salaried employees, thereby exempting them from the payment of
overtime compensation. Denny's has been and will continue to vigorously defend
this lawsuit.
Other proceedings are pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company, and in
others presenting allegations that are nonroutine and include compensatory or
punitive damage claims. The ultimate legal and financial liability of the
Company
F-29
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with respect to the matters mentioned above and these other proceedings cannot
be estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that the ultimate
disposition of these matters will not significantly affect the financial
position or results of operations of the Company.
In conjunction with the sales of Portion-Trol Foods, Inc. and the Mother
Butler Pies division of Denny's, the Company entered into five-year purchasing
agreements with the acquirers under which the Company is required to make
minimum annual purchases over the contract terms. The aggregate estimated
commitments remaining at December 27, 2000 relative to Portion-Trol Foods, Inc.
and Mother Butler Pies, respectively, are approximately $62.0 million and $14.0
million.
On January 25, 2000, the Company entered into a three-year agreement with
Affiliated Computer Services, Inc. ("ACS") to manage and operate the Company's
information technology for its corporate headquarters, restaurants and field
management. This agreement replaced the IBM Global Services contract which had
been in existence since 1996. ACS oversees data center operations, applications
development and maintenance, desktop support, data networking, help desk
operations and POS hardware maintenance. The Company spent $11.4 million in 2000
under the agreement and anticipates spending approximately $16.0 million in each
of the next two years.
NOTE 16. SHAREHOLDERS' EQUITY (DEFICIT)
ACCUMULATED
OTHER SHAREHOLDERS'
TOTAL COMPREHENSIVE EQUITY/
OTHER EQUITY DEFICIT INCOME (LOSS) (DEFICIT)
(In thousands) ------------ ----------- ------------- -------------
Balance December 31, 1997................... $745,800 $(2,107,815) $ (435) $(1,362,450)
-------- ----------- ------- -----------
Comprehensive loss:
Net income excluding adjustments for
reorganization and fresh start
reporting............................ -- (3,087) -- (3,087)
-------- ----------- ------- -----------
Comprehensive loss........................ -- (3,087) -- (3,087)
Adjustments for reorganization............ 383,464 612,845 -- 996,309
Adjustments for fresh start reporting..... (711,937) 1,498,057 435 786,555
-------- ----------- ------- -----------
Balance January 7, 1998..................... 417,327 -- -- 417,327
-------- ----------- ------- -----------
Comprehensive loss:
Net loss............................... -- (181,419) -- (181,419)
Other comprehensive income:
Foreign currency translation
adjustments....................... -- -- 47 47
-------- ----------- ------- -----------
Comprehensive loss........................ -- (181,419) 47 (181,372)
Issuance of common stock.................. 89 -- -- 89
-------- ----------- ------- -----------
Balance December 30, 1998................... 417,416 (181,419) 47 236,044
-------- ----------- ------- -----------
Comprehensive loss:
Net loss............................... -- (381,904) -- (381,904)
Other comprehensive loss:
Foreign currency translation
adjustments....................... -- -- (87) (87)
-------- ----------- ------- -----------
Comprehensive loss........................ -- (381,904) (87) (381,991)
Issuance of common stock.................. 107 -- -- 107
-------- ----------- ------- -----------
F-30
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCUMULATED
OTHER SHAREHOLDERS'
TOTAL COMPREHENSIVE EQUITY/
OTHER EQUITY DEFICIT INCOME (LOSS) (DEFICIT)
(In thousands) ------------ ----------- ------------- -------------
Balance December 29, 1999................... 417,523 (563,323) (40) (145,840)
-------- ----------- ------- -----------
Comprehensive loss:
Net loss............................... -- (98,002) -- (98,002)
Other comprehensive loss:
Foreign currency translation
adjustments....................... -- -- (56) (56)
Additional minimum pension
liability......................... -- -- (2,444) (2,444)
-------- ----------- ------- -----------
Comprehensive loss........................ -- (98,002) (2,500) (100,502)
Issuance of common stock.................. 81 -- -- 81
-------- ----------- ------- -----------
Balance December 27, 2000................... 417,604 (661,325) (2,540) (246,261)
-------- ----------- ------- -----------
Comprehensive loss (unaudited):
Net loss (unaudited)................... -- (49,007) -- (49,070)
Other comprehensive income (unaudited):
Foreign currency translation
adjustments (unaudited)........... -- -- (63) (63)
-------- ----------- ------- -----------
Comprehensive loss (unaudited)............ -- (49,007) (63) (49,007)
Issuance of common stock (unaudited)...... 89 -- -- 89
-------- ----------- ------- -----------
Balance September 26, 2001 (unaudited)...... $417,693 $ (710,332) $(2,603) $ (295,242)
======== =========== ======= ===========
Pursuant to the Plan, Flagstar's convertible debentures, FCI's preferred
stock and FCI's common stock were canceled, extinguished and retired as of the
Effective Date. In addition, the warrants related to such common stock were also
canceled.
Pursuant to the Plan and as of the Effective Date, the Company is deemed to
have issued warrants to purchase, in the aggregate, four million shares of
common stock. Each warrant, when exercised, will entitle the holder thereof to
purchase one share of common stock at an exercise price of $14.60 per share,
subject to adjustment for certain events. Such warrants may be exercised through
January 7, 2005. There were approximately 4.0 million warrants outstanding at
December 30, 1998, December 29, 1999 and December 27, 2000.
Stockholder Rights Plan
The Company's Board of Directors adopted a stockholder rights plan (the
"Rights Plan") on December 14, 1998, which is designed to provide protection for
the Company's shareholders against coercive or unfair takeover tactics. The
Rights Plan is also designed to prevent an acquirer from gaining control of the
Company without offering a fair price to all shareholders. The Rights Plan was
not adopted in response to any specific proposal or inquiry to gain control of
the Company.
The rights, until exercised, do not entitle the holder to vote or receive
dividends. The Company has the option to redeem the rights at a price of $.01
per right, at any time prior to the earlier of (1) the time the rights become
exercisable or (2) December 30, 2008, the date the rights expire. Until the
rights become exercisable, they have no dilutive effect on earnings per share.
F-31
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
The following table sets forth the computation of basic and diluted loss
per share:
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------- --------------------------------------------------------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED THREE QUARTERS ENDED
ENDED WEEKS ENDED --------------------------- -----------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1998 1998 1999 2000 2000 2001
----------- ------------ ------------ ------------ ------------- -------------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
Numerator:
Income (loss) from continuing
operations......................... $602,873 $(127,019) $(275,802) $(82,472) $(55,881) $(56,785)
Preferred stock dividends............ (273) -- -- -- -- --
-------- --------- --------- -------- -------- --------
Numerator for basic earnings (loss)
per share -- income (loss) from
continuing operations available to
common shareholders................ 602,600 (127,019) (275,802) (82,472) (55,881) (56,785)
-------- --------- --------- -------- -------- --------
Effect of dilutive securities:
$2.25 Series A Cumulative
Convertible Exchangeable
Preferred Stock.................. 273 -- -- -- -- --
10% Convertible Junior Subordinated
Debentures....................... -- -- -- -- -- --
-------- --------- --------- -------- -------- --------
273 -- -- -- -- --
-------- --------- --------- -------- -------- --------
Numerator for diluted earnings (loss)
per share -- income (loss) from
continuing operations available to
common shareholders after assumed
conversions........................ $602,873 $(127,019) $(275,802) $(82,472) $(55,881) $(56,785)
======== ========= ========= ======== ======== ========
Denominator:
Denominator for basic earnings per
share -- weighted average shares... 42,434 40,006 40,024 40,070 40,073 40,134
-------- --------- --------- -------- -------- --------
Effect of dilutive securities:
$2.25 Series A Cumulative
Convertible Exchangeable
Preferred Stock.................. 8,562 -- -- -- -- --
10% Convertible Junior Subordinated
Debentures....................... 4,136 -- -- -- -- --
-------- --------- --------- -------- -------- --------
Dilutive potential common shares..... 12,698 -- -- -- -- --
-------- --------- --------- -------- -------- --------
Denominator for diluted earnings
(loss) per share -- adjusted
weighted average shares and assumed
conversions........................ 55,132 40,006 40,024 40,070 40,073 40,134
======== ========= ========= ======== ======== ========
Basic earnings (loss) per share from
continuing operations.............. $ 14.21 $ (3.17) $ (6.89) $ (2.06) $ (1.39) $ (1.41)
======== ========= ========= ======== ======== ========
Diluted earnings (loss) per share
from continuing operations......... $ 10.93 $ (3.17) $ (6.89) $ (2.06) (1.39) (1.41)
======== ========= ========= ======== ======== ========
The calculations of basic and diluted loss per share have been based on the
weighted average number of Company shares outstanding. The warrants and options
of the Successor Company have been omitted from the calculations for the
fifty-one weeks ended December 30, 1998, the fiscal years ended December 29,
1999 and December 27, 2000, and the three quarters ended September 27, 2000 and
September 26, 2001 because they have an antidilutive effect on loss per share.
See Notes 14 and 16 for the number of options and warrants outstanding.
NOTE 18. EXTRAORDINARY ITEMS
The implementation of the Plan resulted in the exchange of Advantica's
predecessors' senior subordinated debentures and the convertible debentures for
40 million shares of Advantica's common stock and warrants to purchase 4 million
shares of Advantica's common stock. The difference between the carrying
F-32
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
adjustment of $612.8 million which was recorded as an extraordinary item. On
July 31, 1998, Advantica extended to the holders of the Senior Notes an offer to
purchase up to $100.0 million of the outstanding Senior Notes. As a result of
this offer, $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, resulting in an extraordinary gain of $1.0 million.
During the first quarter of 2001, as a result of the settlement of the
remaining issues related to the Company's former information systems outsourcing
contract with IBM, approximately $7.8 million of capital lease obligations were
forgiven and an extraordinary gain was recorded.
NOTE 19. SEGMENT INFORMATION
Advantica operates entirely in the food service industry with substantially
all revenues resulting from the sale of menu products at restaurants operated by
the Company, franchisees or licensees. The Company operates one restaurant
concept which is considered a reportable segment. Therefore, revenues, assets,
depreciation and amortization and capital expenditures have been reported in the
Consolidated Financial Statements.
Advantica evaluates performance based on several factors, of which the
primary financial measure is business segment income before interest, taxes,
depreciation, amortization and charges for restructuring and impairment ("EBITDA
as defined"). EBITDA as defined is a key internal measure used to evaluate the
amount of cash flow available for debt repayment and funding of additional
investments; however, it 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. The Company's measure of EBITDA as defined may not be
comparable to similarly titled measures reported by other companies. The
accounting policies of the business segment are the same as those described in
the summary of significant accounting policies in Note 3.
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------- ------------------------------------------
ONE WEEK FIFTY-ONE FISCAL YEAR ENDED
ENDED WEEKS ENDED ---------------------------
JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27,
1998 1998 1999 2000
(In thousands) ----------- ------------ ------------ ------------
EBITDA AS DEFINED
EBITDA as defined from continuing operations... $ 9,720 $ 140,015 $ 160,386 $ 172,290
Depreciation and amortization expense.......... (993) (191,165) (219,771) (153,582)
Impairment charges............................. -- -- (136,500) (6,416)
Restructuring charges.......................... -- -- -- (12,556)
Other charges:
Interest expense, net........................ (1,984) (75,988) (79,435) (81,821)
Other, net................................ 313 (1,922) 302 1,415
Reorganization items........................... 581,988 -- -- --
-------- --------- --------- ---------
Consolidated income (loss) from continuing
operations before income taxes and
extraordinary items.......................... $589,044 $(129,060) $(275,018) $ (80,670)
======== ========= ========= =========
Revenues and long-lived assets of the company-owned, franchised and
licensed restaurants operated outside the United States are not material.
F-33
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20. SUBSEQUENT EVENTS
On January 16, 2001, FRD elected not to make the scheduled interest payment
due on the FRD Notes. On February 14, 2001, FRD filed a voluntary petition under
Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District
of Delaware, Case No. 01-0436-PJW, to facilitate the divestiture of its Coco's
and Carrows brands and to preserve their going concern value. FRD is the
debtor-in-possession in the proceeding which excludes FRD's subsidiaries.
Consequently, all of its subsidiaries, including the operating concepts Coco's
and Carrows, are not part of FRD's Chapter 11 case and are operating in the
normal course of business. The final selection of a buyer and completion of the
divestiture will take place in the bankruptcy court (see Note 4). It is possible
that some or all of FRD's subsidiaries may have to commence Chapter 11 cases in
the future. This Chapter 11 filing does not include Advantica or Denny's, Inc.;
however, on January 8, 2001, Denny's, Inc. became the lender under the FRD
Credit Facility (see Note 11).
NOTE 21. QUARTERLY DATA (UNAUDITED)
The results for each quarter include all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for
interim periods. All such adjustments are of a normal and recurring nature.
Selected consolidated financial data for each quarter of 1999 and 2000 and
for the first and second quarters of 2001 are set forth below. Certain amounts
have been reclassified to conform to the current year presentation.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(In thousands, except per share data) -------- -------- -------- ---------
YEAR ENDED DECEMBER 29, 1999:
Revenue:
Company restaurant sales................... $276,049 $292,256 $297,674 $ 274,359
Franchise and license revenue.............. 13,249 14,527 16,164 15,971
-------- -------- -------- ---------
Total operating revenue............ 289,298 306,783 313,838 290,330
-------- -------- -------- ---------
Cost of company restaurant sales:
Product costs.............................. 72,348 75,243 75,975 70,294
Payroll and benefits....................... 111,495 114,312 114,719 105,971
Occupancy.................................. 15,457 16,472 16,363 12,643
Other operating expenses................... 40,028 38,820 39,692 37,926
-------- -------- -------- ---------
Total costs of company restaurant
sales............................ 239,328 244,847 246,749 226,834
Franchise restaurant costs................... 6,360 8,116 7,290 6,971
General and administrative expenses.......... 21,041 19,455 18,516 15,840
Amortization of reorganization value in
excess of amounts allocable to identifiable
assets..................................... 22,191 22,136 22,229 22,433
Depreciation and other amortization.......... 24,419 27,944 37,189 41,230
Impairment charges........................... -- -- -- 136,500
Gains on refranchising and other, net........ (3,172) (4,784) (3,832) (9,726)
-------- -------- -------- ---------
Total costs and expenses........... 310,167 317,714 328,141 440,082
-------- -------- -------- ---------
Operating loss............................... $(20,869) $(10,931) $(14,303) $(149,752)
======== ======== ======== =========
Net loss..................................... $(61,680) $(41,206) $(45,215) $(233,803)
Basic and diluted net loss per share......... (1.54) (1.03) (1.13) (5.84)
F-34
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(In thousands, except per share data) -------- -------- -------- ---------
YEAR ENDED DECEMBER 27, 2000:
Revenue:
Company restaurant sales................... $267,627 $279,412 $282,619 $ 250,983
Franchise and license revenue.............. 16,033 17,521 20,023 21,031
-------- -------- -------- ---------
Total operating revenue............ 283,660 296,933 302,642 272,014
-------- -------- -------- ---------
Cost of company restaurant sales:
Product costs.............................. 68,633 73,360 73,568 64,912
Payroll and benefits....................... 109,102 110,432 111,341 96,347
Occupancy.................................. 15,941 16,341 15,359 11,670
Other operating expenses................... 39,364 40,972 41,848 40,697
-------- -------- -------- ---------
Total costs of company restaurant
sales............................ 233,040 241,105 242,116 213,626
Franchise restaurant costs................... 7,189 8,419 9,014 13,378
General and administrative expenses.......... 19,171 16,629 15,850 14,641
Amortization of reorganization value in
excess of amounts allocable to identifiable
assets..................................... 10,731 10,564 10,342 10,496
Depreciation and other amortization.......... 27,148 28,516 28,274 27,511
Impairment charges........................... -- -- -- 6,416
Restructuring charges........................ 7,248 -- -- 5,308
Gains on refranchising and other, net........ (4,678) (17,346) (16,315) (12,880)
-------- -------- -------- ---------
Total costs and expenses........... 299,849 287,887 289,281 278,496
-------- -------- -------- ---------
Operating (loss) income...................... $(16,189) $ 9,046 $ 13,361 $ (6,482)
======== ======== ======== =========
Net loss..................................... $(46,475) $(19,459) $ (7,277) $ (24,791)
Basic and diluted net loss per share......... (1.16) (0.49) (0.18) (0.62)
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
(In thousands, except per share data) -------- -------- --------
THREE QUARTERS ENDED SEPTEMBER 26, 2001
Revenue:
Company restaurant sales................... $236,787 $242,122 $245,870
Franchise and license revenue.............. 21,564 22,270 24,202
-------- -------- --------
Total operating revenue............ 258,351 264,392 270,072
-------- -------- --------
Cost of company restaurant sales:
Product costs.............................. 59,672 60,435 60,504
Payroll and benefits....................... 97,139 97,955 96,266
Occupancy.................................. 15,069 14,979 13,246
Other operating expenses................... 35,875 35,425 36,248
-------- -------- --------
Total costs of company restaurant
sales............................ 207,755 208,794 206,264
Franchise restaurant costs................... 9,723 10,565 9,115
General and administrative expenses.......... 16,030 15,031 13,608
Amortization of reorganization value in
excess of amounts allocable to identifiable
assets..................................... 7,574 7,151 7,067
Depreciation and other amortization.......... 23,837 24,196 22,151
Impairment charges........................... -- 8,343 --
Restructuring charges........................ -- 8,495 --
Gains on refranchising and other, net........ (4,400) (5,896) (1,827)
-------- -------- --------
Total costs and expenses........... 260,519 276,679 256,378
-------- -------- --------
Operating (loss) income...................... $ (2,168) $(12,287) $ 13,694
======== ======== ========
F-35
ADVANTICA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
(In thousands, except per share data) -------- -------- --------
Loss before extraordinary gain............... $(21,154) $(30,851) $ (4,780)
Net loss..................................... (13,376) (30,851) $ (4,780)
Basic and diluted loss per share before
extraordinary gain......................... (0.53) (0.77) (0.12)
Basic and diluted net loss per share......... (0.33) (0.77) (0.12)
F-36
The exchange agent for the exchange offer is:
U.S. BANK NATIONAL ASSOCIATION
By Mail: By Hand or Overnight Courier:
U.S. Bank Trust Center U.S. Bank Trust Center
180 East Fifth Street 180 East Fifth Street
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
Attention: Specialized Finance Attention: Specialized Finance
Department Department
By Facsimile (for Eligible Institutions only):
(651) 244-1537 or (651) 244-8883
Confirmation:
(800) 934-6802
QUESTIONS, REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND ASSOCIATED LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE
INFORMATION AGENT OR THE DEALER MANAGER AT THEIR RESPECTIVE ADDRESSES. YOU MAY
ALSO CONTACT YOUR BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER
NOMINEE FOR ASSISTANCE CONCERNING THE EXCHANGE OFFER.
The information agent for the exchange offer is:
(Mackenzie Partners, Inc. Logo)
105 Madison Avenue
New York, New York 10016
(212) 929-5500 (Call Collect)
or
CALL TOLL-FREE (800) 322-2885
E-mail: proxy@mackenziepartners.com
The dealer manager for the exchange offer is:
(UBS WARBURG LOGO)
101 California Street, 25th Floor
San Francisco, California 94111
Attention: Brian Taylor
Telephone: (415) 352-6085