-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RXsPDs+T1v8ecU7nRoevJiWPaEiU3pESbe+pDGLR0WX0a5utrkaBqspb343LAdaS GwvNHGS3pR03klBnjT8Gpg== 0000950144-01-509828.txt : 20020412 0000950144-01-509828.hdr.sgml : 20020412 ACCESSION NUMBER: 0000950144-01-509828 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20011206 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTICA RESTAURANT GROUP INC CENTRAL INDEX KEY: 0000852772 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 133487402 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-72658 FILM NUMBER: 1808000 BUSINESS ADDRESS: STREET 1: 203 E MAIN ST CITY: SPARTANBURG STATE: SC ZIP: 29319 BUSINESS PHONE: 8645978000 MAIL ADDRESS: STREET 1: 203 EAST MAINE STREET CITY: SPARTANBURG STATE: SC ZIP: 29319 FORMER COMPANY: FORMER CONFORMED NAME: FLAGSTAR COMPANIES INC DATE OF NAME CHANGE: 19930722 FORMER COMPANY: FORMER CONFORMED NAME: TW HOLDINGS INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DENNYS HOLDINGS INC CENTRAL INDEX KEY: 0001160490 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223004358 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-72658-01 FILM NUMBER: 1808001 BUSINESS ADDRESS: STREET 1: 203 EAST MAIN STREET CITY: SPARTANBURG STATE: SC ZIP: 29319 BUSINESS PHONE: 8645978000 MAIL ADDRESS: STREET 1: 200 MADISON AVENUE STREET 2: 5TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016-3903 S-4/A 1 g71871a1s-4a.txt ADVANTICA RESTAURANT GROUP/DENNY'S HOLDINGS S-4/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 6, 2001 REGISTRATION NO. 333-72658 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- ADVANTICA RESTAURANT GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 5812 13-3487402 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Incorporation or Organization) Classification Code Number) Number)
--------------------- DENNY'S HOLDINGS, INC. (Exact Name of Registrant as Specified in Its Charter) NEW YORK 5812 22-3004358 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Incorporation or Organization) Classification Code Number) Number)
203 EAST MAIN STREET SPARTANBURG, SOUTH CAROLINA 29319 (864) 597-8000 (Address, Including Zip Code, and Telephone Number, Including Area Code of Registrant's Principal Executive Offices) RHONDA J. PARISH, ESQ. EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL ADVANTICA RESTAURANT GROUP, INC. 203 EAST MAIN STREET SPARTANBURG, SOUTH CAROLINA 29319-9966 (864) 597-8000 (Address, Including Zip Code, and Telephone Number, Including Area Codes of Agent For Service) --------------------- WITH COPIES TO: GARY C. IVEY, ESQ. NICHOLAS P. SAGGESE, ESQ. ALSTON & BIRD LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP BANK OF AMERICA PLAZA, SUITE 4000 300 SOUTH GRAND AVENUE, SUITE 3400 101 S. TRYON STREET LOS ANGELES, CALIFORNIA 90071 CHARLOTTE, NORTH CAROLINA 28202 (213) 687-5000 (704) 444-1000
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as possible after the effective date of this Registration Statement. If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THE PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED DECEMBER 6, 2001 PROSPECTUS ADVANTICA RESTAURANT GROUP, INC. OFFER TO EXCHANGE $ % 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 $ aggregate principal amount of % 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 $ 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 % 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 , 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 $ million 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 42 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 , 2001. 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 , 2002, IN ORDER TO RECEIVE THEM BEFORE THE SCHEDULED EXPIRATION OF THE EXCHANGE OFFER ON , 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 % Senior Notes due September 30, 2007 of Denny's Holdings and Advantica (new notes)........... -- -- ------ ------ ------ Total structurally senior long-term debt, including current maturities.................... 56.6 119.7 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 8.9 ------ ------ ------ Total long-term debt, including current maturities...................................... $605.3 $666.9 ====== ====== ======
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 Structurally senior interest expense, net(b).............................. 22.8 10.6 15.4 Capital expenditures................... 41.9 25.2 38.0 38.0 Ratios for Total Debt: Ratio of debt(c) to EBITDA as defined............................. 3.5x NM* 4.4x Ratio of EBITDA as defined to interest expense, net........................ 2.1x 2.0x 2.0x Ratio of EBITDA as defined less capital expenditures to interest expense, net................................. 1.6x 1.5x 1.5x Ratios for Structurally Senior Debt: Ratio of structurally senior debt(c) to EBITDA as defined................... 0.3x NM 0.8x Ratio of EBITDA as defined to structurally senior interest expense, net........................ 7.6x 10.2x 9.8x Ratio of EBITDA as defined less capital expenditures to structurally senior interest expense, net............... 5.7x 7.8x 7.4x
- --------------- * 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 $ million aggregate principal amount of registered % 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 $ 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.................... $ Accrued and unpaid interest, in cash............. $ *
*Assumes a closing date for the exchange offer of , 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 $ 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 $ million, and the maximum tender would result in the issuance of an aggregate principal amount of new notes equal to $ 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 July 15, 2001 (the last interest payment date for the old notes) 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 January 15, 2002, the next interest payment date for the old notes. The new notes will bear interest from the closing date at % per annum. On or before March 31, 2002, the first interest payment date for the new notes, holders of the new notes will receive interest accrued on the new notes from and after the closing of the exchange offer. 3 Expiration Date; Extensions; Termination; Amendments............... The expiration date is 5:00 p.m., New York City time, on , 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 $ 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, the only U.S. persons to whom we are making the exchange offer are (1) institutional investors as described in the letter of transmittal, and (2) residents of states 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 prior to 5:00 p.m., New York City time, on 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 prior to 5:00 p.m., New York City time, on 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 prior to 5:00 p.m., New York City time, on 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 $ million aggregate principal amount of % 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. After September 30, 2004, the new notes will be redeemable, in whole or in part, at % 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 %, 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 amount would be reduced to $ million, on a pro forma basis 6 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. 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 $ million, assuming the maximum tender reduced to $264.6 million, assuming the amount, that may be issued in the exchange maximum tender amount offer, plus an additional $ million that may be issued thereafter, 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 %, payable semi-annually on March 31 and and July 15 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 % 2004 103.750 2005 2005 101.875 After September 30, 2006 100.000 After January 15, 2006 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 % 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 THREE QUARTERS ENDED ENDED WEEKS ENDED --------------------------- ----------------------------- JANUARY 7, DECEMBER 30, DECEMBER 29, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26, 1998(B) 1998(B) 1999(B) 2000 2000 2001 (IN MILLIONS, EXCEPT RATIOS) ----------- ------------ ------------ ------------ ------------- ------------- Income Statement Data: Company restaurant sales.......... $ 22.0 $1,106.1 $1,140.3 $1,080.6 $829.7 $724.8 Franchise and licensing revenue... 1.2 49.9 59.9 74.6 53.5 68.0 ------ -------- -------- -------- ------ ------ Operating revenue................. 23.2 1,156.0 1,200.2 1,155.2 883.2 792.8 Total cost of company restaurant sales........................... 18.5 927.9 957.8 929.8 716.3 622.8 Franchise restaurant costs........ 0.6 22.0 28.7 38.0 24.6 29.4 General and administrative expenses........................ 2.0 76.9 74.8 66.3 51.6 44.7 Total amortization and depreciation.................... 1.0 191.2 219.8 153.6 115.6 92.0 Total impairment and restructuring charges......................... -- -- 136.5 19.0 7.2 16.8 Gains on refranchising and other, net............................. (7.6) (10.8) (21.5) (51.2) (38.3) (12.1) ------ -------- -------- -------- ------ ------ Total operating costs and expenses........................ 14.5 1,207.2 1,396.1 1,155.5 877.0 793.6 Operating income (loss)........... $ 8.7 $ (51.2) $ (195.9) $ (0.3) $ 6.2 $ (0.8) ====== ======== ======== ======== ====== ====== Interest expense, net............. $ 2.0 $ 76.0 $ 79.4 $ 81.8 $ 62.3 $ 54.7 Income (loss) from continuing operations(d)................... 602.9(e) (127.0) (275.8) (82.5) (55.9) (56.8) Other Data: EBITDA as defined(f).............. $ 9.7 $ 140.0 $ 160.4 $ 172.3 $129.0 $108.1 Net cash flows provided by (used in) operating activities........ 7.7 (10.7) (31.1) (8.4) (24.4) (24.2) Net cash flows provided by (used in) investing activities(g)..... 7.9 180.3 86.7 204.8 44.3 (53.8) Net cash flows (used in) provided by financing activities......... (5.3) (66.6) (47.9) (335.0)(h) (173.1) 54.4 Capital expenditures.............. 0.0 (45.3) (90.7) (41.9) (29.2) (25.2) Pro Forma Data(i)(j): Interest expense, net............. 81.8 54.7 Ratio of debt(k) to EBITDA as defined......................... 3.5x NM* Ratio of EBITDA as defined to interest expense, net........... 2.1x 2.0x Ratio of EBITDA as defined less capital expenditures to interest expense, net.................... 1.6x 1.5x SUCCESSOR COMPANY(A) --------------------- FOUR QUARTERS ENDED SEPTEMBER 26, 2001(C) (IN MILLIONS, EXCEPT RATIOS) --------------------- Income Statement Data: Company restaurant sales.......... $ 975.7 Franchise and licensing revenue... 89.1 -------- Operating revenue................. 1,064.8 Total cost of company restaurant sales........................... 836.4 Franchise restaurant costs........ 42.8 General and administrative expenses........................ 59.3 Total amortization and depreciation.................... 130.0 Total impairment and restructuring charges......................... 28.6 Gains on refranchising and other, net............................. (25.0) -------- Total operating costs and expenses........................ 1,072.1 Operating income (loss)........... $ (7.3) ======== Interest expense, net............. $ 74.2 Income (loss) from continuing operations(d)................... (83.4) Other Data: EBITDA as defined(f).............. $ 151.3 Net cash flows provided by (used in) operating activities........ (8.2) Net cash flows provided by (used in) investing activities(g)..... 106.7 Net cash flows (used in) provided by financing activities......... (107.5) Capital expenditures.............. (38.0) Pro Forma Data(i)(j): Interest expense, net............. 74.2 Ratio of debt(k) to EBITDA as defined......................... 4.4x Ratio of EBITDA as defined to interest expense, net........... 2.0x Ratio of EBITDA as defined less capital expenditures to interest expense, net.................... 1.5x
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
- --------------- * 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 9 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, and we believe that it 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. 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 10 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): Interest expense, net..................................... Ratio of debt(k) to EBITDA as defined..................... Ratio of EBITDA as defined to interest expense, net....... Ratio of EBITDA as defined less capital expenditures to interest expense, net..................................
(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 $ 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. 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 -- Liquidity and Capital Resources" and "Business." 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) ------- --------- 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 % Senior Notes due September 30, 2007 of Denny's Holdings and Advantica (new notes)..................... -- ------- ------ Total structurally senior long-term debt, including current maturities.................................... 119.7 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 ------- ------ Shareholders' Equity (Deficit) Common Stock, $.01 par value; shares authorized -- 100,000; issued and outstanding -- 40,143.................................. 0.4 0.4 Paid-in capital........................................... 417.3 417.3 Deficit................................................... (710.3) Accumulated other comprehensive loss...................... (2.6) (2.6) ------- ------ Total Shareholders' Deficit............................ (295.2) ------- ------ Total Capitalization................................... $ 371.7 $ ======= ======
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. (k) We define "EBITDA" as operating income before depreciation, amortization and charges for restructuring and impairment, and we believe that it 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. 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. 23 (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, there can be no assurance that we will be able to recover all 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 "Business -- Legal Proceedings" and Notes 4 and 20 to our consolidated financial statements. 31 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 $ 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 $ (a) Other nonoperating expenses (income), net................ 12 12 -------- ----- -------- Total other expenses, net........................ 54,744 -------- ----- -------- Loss before income taxes................................... (55,505) Provision for income taxes................................. 1,280 -------- ----- -------- Loss from continuing operations............................ $(56,785) $ $ ======== ===== ======== Per share amounts applicable to common shareholders: Basic and diluted loss per share: Loss from continuing operations.......................... $ (1.41) $ ======== ======== 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 $ (a) Other nonoperating expenses (income), net............. (1,415) (1,415) ---------- ------- ---------- Total other expenses, net..................... 80,406 ---------- ------- ---------- Loss before income taxes................................ (80,670) Provision for income taxes.............................. 1,802 ---------- ------- ---------- Loss from continuing operations......................... $ (82,472) $ $ ========== ======= ========== Per share amounts applicable to common shareholders: Basic and diluted loss per share: Loss from continuing operations....................... $ (2.06) $ ========== ========== 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) (8,820)(b) 2,249(b) (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 --------- --------- --------- Total Liabilities.......................... 925,378 --------- --------- --------- SHAREHOLDERS' EQUITY (DEFICIT) Common stock......................................... 401 401 Paid-in capital...................................... 417,292 417,292 Deficit.............................................. (710,332) (d) Accumulated other comprehensive loss................. (2,603) (2,603) --------- --------- --------- Total Shareholders' Deficit................ (295,242) --------- --------- --------- 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... 869 715 Interest on new notes...................................... Amortization of estimated deferred financing costs on new notes.................................................... 600 450 -------- -------- Net adjustment to interest expense......................... $ $ ======== ========
(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 $ 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 $ million, net of taxes of $ 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, $ 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 debt but rather will result in a decrease of our outstanding debt by $ million, 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 % Senior Notes due September 30, 2007 of Denny's Holdings and Advantica (new notes)................ -- -- ------ ------ ------ Total structurally senior long-term debt, including current maturities................. 56.6 119.7 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 8.9 ------ ------ ------ Total long-term debt, including current maturities................................... $605.3 $666.9 $ ====== ====== ======
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 Structurally senior interest expense, net(b).............................. 22.8 10.6 15.4 Capital expenditures................... 41.9 25.2 38.0 38.0 Ratios for Total Debt: Ratio of debt(c) to EBITDA as defined............................. 3.5x NM* 4.4x Ratio of EBITDA as defined to interest expense, net........................ 2.1x 2.0x 2.0x Ratio of EBITDA as defined less capital expenditures to interest expense, net................................. 1.6x 1.5x 1.5x
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 Ratio of EBITDA as defined to structurally senior interest expense, net........................ 7.6x 10.2x 9.8x Ratio of EBITDA as defined less capital expenditures to structurally senior interest expense, net............... 5.7x 7.8x 7.4x
- --------------- * 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 $ 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 July 15, 2001 (the last interest payment date for the old notes) 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 January 15, 2002, the next scheduled interest payment date for those notes. 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. 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 40 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 , 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 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 or amend the exchange offer, if, at any time prior to the acceptance of tenders of old notes in 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 acceptance of tenders of old notes: - at least $ million principal amount of the old notes has been validly tendered and not properly withdrawn prior to the expiration date; - 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 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; 41 - 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 or may be waived by Advantica in whole or in part at any time and from time to time 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. 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 exemptions, the only persons to whom we are making the exchange offer are (1) institutional investors, as described in the letter of 42 transmittal, and (2) residents of states 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, prior to 5:00 p.m., New York City time, on 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 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 PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. HOLDERS 43 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 PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON 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 prior to 5:00 p.m., New York City time, on 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 PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON 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. 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 prior to the expiration date, or the procedures for book-entry transfer cannot be completed on a timely 44 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 until 5:00 p.m., New York City time, on 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 prior to 5:00 p.m. on 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 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. 45 Any old notes properly withdrawn will thereafter be deemed not 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 prior to 5:00 p.m., New York City time, on 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 prior to 5:00 p.m., New York City time, on 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. 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. 46 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. 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 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. 47 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 July 15, 2001 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. 48 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 complete 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 50 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. 51 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. 52 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 l964. We denied any wrongdoing. The consent decrees enjoined us from racial discrimination and required us to, among other things, implement certain employee training and testing programs and provide public notice of Denny's nondiscrimination policies. Denny's has met all of its obligations under the consent decrees. On January 16, 2000, class counsel, together with counsel for the United States, submitted reports to the courts that entered the consent decrees reporting on our completion of the requirements of the consent decrees and recommending the early dismissal of the consent decrees effective November 24, 2000. Praising our leadership, counsel advised the courts that: . . . Denny's has performed its obligations under the (Consent) Decrees in a highly commendable and exemplary manner, and has repeatedly gone beyond the strict requirements of the (Consent) Decrees to achieve the broader purposes of these historic settlements. Through a commitment of enormous resources and effort, Denny's has embraced racial and cultural diversity in its operations, demonstrated 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 expected to operate in the normal course of business throughout FRD's restructuring and sale process. The final selection of a buyer and completion of the divestiture will take place in the bankruptcy court. FRD and its subsidiaries intend to consummate a sale transaction without the need for the operating subsidiaries to also commence Chapter 11 cases. No assurance can be given, however, 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 "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 - ---- --- ---------------------------------------------- James B. Adamson............... 53 Chairman of Advantica (1995-present); Chief Executive Officer and President of Advantica (1995-February 2001); Chief Executive Officer and President of Denny's (2000-February 2001); Director of Kmart Corporation and FRD. 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 Director 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.
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CURRENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND NAME AGE FIVE YEAR EMPLOYMENT HISTORY - ---- --- ---------------------------------------------- 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.
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 - ---- --- ---------------------------------------------- James B. Adamson............... 53 Chairman of Advantica (1995-present); Chief Executive Officer and President of Advantica (1995-February 2001); Chief Executive Officer and President of Denny's (2000-February 2001). 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). James W. Lyons................. 46 Executive Vice President, Franchise and Development of Denny's (2000-present); Senior Vice President, Franchise and Development of Denny's (1998-2000); Vice President, Franchise Development of Denny's (1997-1998); Vice President, Franchise and Development Services of Burger King (1995-1997). 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).
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CURRENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND NAME AGE FIVE YEAR EMPLOYMENT HISTORY - ---- --- ---------------------------------------------- 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). Mark C. Smith.................. 41 Vice President, Procurement and Distribution of Advantica (January 2001-present); Senior Director, Procurement of Advantica (1996-2000). Linda G. Traylor............... 50 Senior Vice President, Human Resources of Advantica (January 2001-present); Vice President, Human Resources, Planning and Development of Advantica (1995-2000). Samuel M. Wilensky............. 44 Division Vice President, Franchise Operations of Denny's (May 2001-present); Regional Vice President, Franchise Operations of Denny's (2000-May 2001); Regional Director, Franchise Operations of Denny's (1999-2000); Regional Director, Company Operations of Denny's (1994-1999).
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. Mr. Marchioli assumed his new position on February 5, 2001. James B. Adamson will continue as chairman of the board of directors through his planned retirement at the end of 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 will also assume 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. 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. 62 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 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 63 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. 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 64 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 current 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. 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 65 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 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 66 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 November 30, 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(%) - ---------------- ----------------------- ------------- Lloyd I. Miller, III........................................ 5,875,002(2) 14.4 (and related entities) 4550 Gordon Drive Naples, FL 34102 Oaktree Capital Management, LLC............................. 5,746,916 14.3 (and related entities) ("Oaktree") 333 South Grand Avenue, 28th Floor Los Angeles, CA 90071 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 756,233 shares of common stock which Mr. Miller has the right to acquire through the exercise of warrants to purchase common stock, as well as 5,000 shares of common stock which he has the right to acquire through the exercise of stock options within 60 days of November 30, 2001. We believe, based on the information provided to us by Mr. Miller, that he has sole voting and investment power with respect to 3,350,001 shares and shared voting and investment power with respect to 2,525,001 shares. MANAGEMENT The following table sets forth, as of November 30, 2001, except as noted, the beneficial ownership of common stock by: (1) each of our directors (with the exception of director Lloyd I. Miller, III whose common stock ownership is reflected under "-- Principal Stockholders" above), (2) each of our executive officers included in the Summary Compensation Table above, and (3) all of our 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............................................ 350,000 * Vera K. Farris.............................................. 29,803 * James J. Gaffney............................................ 29,803 * Nelson J. Marchioli......................................... -- * 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 (20 persons).................................................. 7,047,829(2) 16.8%
- --------------- * 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 November 30, 2001) through the exercise of stock options: (1) Mr. Adamson (150,000 shares), (2) Messrs. Gaffney, Marks, Moran and Shepherd and Messrs. Farris and Sanders (11,000 shares each), (3) Ms. Parish (162,500 shares), (4) Messrs. Hutchison, Wexler and Wood (200,000 shares each) and (5) all current directors and executive officers as a group (811,625 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. 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 71 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. 72 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 $ million principal amount of new notes is being offered in the exchange offer. In addition to the $ million aggregate principal amount of new notes being issued in the exchange offer, the indenture provides, for the issuance 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 be limited to the sum of $ million. 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. All references to new notes herein includes the Additional Notes. 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 % 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. 73 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.............................................. % 2005.............................................. % 2006 and thereafter............................... 100.000%
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 %, 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. 74 "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 75 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. 76 "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) 77 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 78 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 86 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 87 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 88 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. 89 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. 90 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 91 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. 92 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 $ million (assuming the maximum reduced to $264.6 (assuming the tender amount) that may be issued in the maximum tender amount) exchange offer, plus an additional $ million that may be issued thereafter, 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 %, payable semi-annually on March 31 and and July 15 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 % 2004 103.750 2005 2005 101.875 After September 30, 2006 100.000 After January 15, 2006 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 % plus accrued notes were redeemable at 110% plus accrued interest, from the net proceeds of a public interest, from the net proceeds of a 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 101% of the all outstanding new notes at a purchase price principal amount thereof plus accrued equal to 101% of the principal amount thereof interest to the repurchase date, subject to plus accrued interest to the repurchase date, certain conditions. subject to certain conditions. In addition to the events constituting a change of control in the old notes, a
93 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 Denny's Holdings Group to any of the the Restricted Payment on a pro forma basis, 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 constitutes a Restricted Investment such Restricted Payment (provided that if and that Restricted Investments are deemed to Consolidated Net Income for such period is include transfers of assets by any member of less than zero, then minus 100% of the amount the Denny's Holdings Group to any Subsidiary of such loss) plus (b) 100% of aggregate or Affiliate of Denny's Holdings that is not amortization of goodwill and excess a wholly owned Subsidiary of Denny's Holdings reorganization value for such period, plus (other than certain approved transfers of (c) 100% of aggregate net cash proceeds and assets), excluding any Permitted Investments the fair market value of marketable (the definition of which differs in the securities received by Advantica from the manner set forth in subsection (e) below; and issue or sale, after the date of the (e) the definition of Permitted Investments indenture, of capital stock of Advantica excludes any Investment by any of the Denny's (other than capital stock issued and sold to Holdings Group in any member of the Advantica a Subsidiary of Advantica and other than Group. Disqualified Stock), or any Indebtedness or (2) the calculation setting forth the other security convertible into any such determination of the amount of permitted capital stock that has been so converted, Restricted Payments pursuant to clause (c) of plus (d) 100% of aggregate amounts "Limitation on Restricted Payments" is contributed to the capital of Advantica, plus different in the following ways: (e) 100% of the aggregate amounts received in (a) the calculation to determine whether a cash and the fair market value of marketable Restricted Payment is permissible runs from securities (other than Restricted the date of the new indenture; Investments) received from (1) the sale or (b) the part of the calculation related to other disposition of Restricted Investments the amount by which the aggregate of all then made by Advantica and its Subsidiaries or (2) the sale of the stock of an Unrestricted Subsidiary or the sale of all
94 or substantially all of the assets of an outstanding Investments in Unrestricted Unrestricted Subsidiary to the extent that a Subsidiaries (other than the FRD Investment) liquidating dividend is paid to Advantica or exceeds $75 million is reduced to the amount any Subsidiary from the proceeds of such by which such Investments exceed $25 million; sale. (c) the part of the calculation described in clause (3)(a) in the left hand column of this Restricted Payments are defined as (1) any comparison uses 50% of the Consolidated Net dividend or distribution on account of Income of Denny's Holdings after the date of Advantica's or any Subsidiary's capital stock the new indenture (rather than of Advantica or other Equity Interests (other than (A) after the date of the old indenture) as its dividends or distributions payable in Equity reference point; Interests (other than Disqualified Stock) of (d) the part of the calculation described in Advantica or such Subsidiary and (B) clauses (3)(c) and (e) in the first paragraph dividends or distributions payable by a of the left hand column of this comparison Subsidiary so long as, in the case of any refers to net proceeds or fair market value dividend or distribution payable on any class of marketable securities received by Denny's or series of securities issued by a Holdings from the sale of its Capital Stock Subsidiary other than a wholly owned or any Indebtedness or other security Subsidiary, Advantica or a Subsidiary of convertible into such Capital Stock, or from Advantica receives at least its pro rata the sale or other disposition of Restricted share of such dividend or distribution in Investments made by Denny's Holdings, or from accordance with its Equity Interest in such the sale of Denny's Holdings Unrestricted class or series of securities); (2) any Subsidiaries, provided that certain purchase, redemption or other acquisition or limitations are placed on the ability of retirement for value of any Equity Interests Advantica or Denny's Holdings to include such of Advantica or any of its Subsidiaries net proceeds or fair market value to prevent (other than any such Equity Interests owned double counting in such calculations; and by Advantica or any of its Subsidiaries); (3) (e) the part of the calculation described in voluntary prepayments of any Indebtedness clause (3)(d) in the left hand column of this that is subordinated to the old notes other comparison refers to amounts contributed to than in connection with any (a) refinancing the capital of Denny's Holdings (rather than of such Indebtedness specifically permitted Advantica) after the date of the indenture. by the terms of the covenant entitled (3) payments and distributions that do not "Limitation on Additional Indebtedness and constitute Restricted Payments also include: Issuance of Disqualified Stock", (b) (a) the retirement of shares of Denny's Indebtedness between Advantica and a Holding's Capital Stock out of the sale of Subsidiary of Advantica or between other shares of Denny's Holding's Capital Subsidiaries of Advantica or (c) Mortgage Stock; Financing or Mortgage Refinancing; or (4) any (b) payments for certain repurchases of Restricted Investments (as defined below) Advantica Equity Interests held by members of (other than an Investment in any Unrestricted management is reduced from $30 million to $5 Subsidiary). million plus cash proceeds from certain reissuances of such Equity Interests; Restricted Investments are defined as any (c) retirement of subordinated Indebtedness investments in capital contributions, loans of Denny's Holdings with proceeds from the or advances to or purchases of equity issuance of Equity Interests in Denny's interests in, any person that is not a Holdings; wholly-owned subsidiary, or other transfers (d) purchases of Equity Interests of of assets to Subsidiaries or Affiliates that Subsidiaries of Advantica (other than Equity are not wholly owned (except in transactions Interests owned by Denny's Holdings or any of the terms of which are fair and reasonable to its Subsidiaries) in an aggregate cumulative the transferor and at least as favorable as amount not to exceed $5 million annually; terms that could be obtained in an arms (e) Permitted Payments to Advantica, so long length transaction between unaffiliated as no default or event of default has parties, except in each case for Permitted occurred, consisting of payments by any Investments (as defined below) and any such Subsidiary of Advantica to Advantica in investments existing on the date of the old amounts sufficient to enable Advantica indenture. to: (i) pay reasonable and necessary operating expenses and other general Permitted Investments are defined to mean corporate expenses of Advantica and its (1) cash or Cash Equivalents, (2) investments subsidiaries, (ii) pay all tax liabilities that are in persons at least a majority of of Advantica and its current and former 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 Advantica or its Subsidiaries, (3) advances to
95 employees of up to $5 million subsidiaries, (iii) pay interest on the old at any one time outstanding, (4) accounts notes, (iv) pay (a) interest and (b) receivable created or acquired in the principal at maturity (or as otherwise ordinary course of business, (5) obligations required pursuant to contractually scheduled or shares of stock received in connection principal payments, which, in the case of with any good faith settlement or bankruptcy Existing Indebtedness are existing on the proceeding involving a claim related to a date of the indenture, and, in the case of Permitted Investment, (6) evidences of Indebtedness incurred after the date of the Indebtedness, obligations or other indenture are existing on the date such investments not exceeding $5 million in the Indebtedness is incurred), in each case on aggregate held at any one time and (7) the Credit Agreement, any Existing currency swap agreements and other similar Indebtedness and on any other Indebtedness agreements designed to hedge against incurred after the date of the indenture that fluctuations in foreign exchange rates was permitted to be incurred in accordance entered into in the ordinary course of with the terms of the indenture and (v) business. acquire or retire for value, Equity Interests in Advantica and the old notes in accordance The limitation on Restricted Payments does with the relevant provisions in "Limitation not prohibit certain payments and on Restricted Payments". Notwithstanding the distributions, including (A) the payment of above, Advantica must use funds distributed any dividend within 60 days of declaration, to it as permitted payments for their if at the date of declaration such payment intended purpose within 90 days of its was permitted, (B) the retirement of shares receipt thereof, provided that Advantica of Advantica Capital Stock in exchange for, shall be entitled to retain an aggregate of or out of the net proceeds of the sale of up to $250,000 for the purpose of making the other shares of Advantica Capital Stock, (C) payments described above; and payments for certain repurchases of Advantica (f) After the date on which a bankruptcy Capital Stock (up to $30 million plus the court enters an order closing the FRD Chapter cash proceeds from certain reissuances) 11 bankruptcy case, the acquisition for value issued to members of management, (D) the of old notes by Advantica for consideration repurchase, redemption or other acquisition in an aggregate amount not to exceed $50 or retirement for value of Indebtedness which million, provided that no Default or Event of is subordinated to the old notes with a Default shall have occurred and be proceeds from the issuance of Equity continuing at the time thereof. Interests in Advantica, (E) the redemption, repurchase or retirement for value of any In determining the amount for Restricted Indebtedness that is subordinated to the old Payments for the purposes of the calculation notes (i) with the proceeds of, or in described in clause (3) of the first exchange for, Refinancing Indebtedness paragraph of the left hand column of this incurred pursuant to "Restrictions on comparison, no amounts expended under clause Additional Indebtedness and Issuance of (3)(a) above, clause (3)(c) above and for the Disqualified Stock" or (ii) if, after giving retirement for value of any Indebtedness of effect to such redemption, repurchase or Advantica or Denny's Holdings subordinated to retirement, Advantica could incur at least $1 the new notes with proceeds of or in exchange of additional Indebtedness pursuant to the for certain permitted Indebtedness shall be Fixed Charge Coverage Ratio test described included in such determination, and 100% of under "Restrictions on Additional the amounts expended under clauses (e) and Indebtedness and Issuance of Disqualified (f) shall also be included. Stock", (F) the distribution to stockholders of Advantica of securities of a corporation The new indenture does not contain a controlled by Advantica in certain limited comparable provision to that described in circumstances, and (G) purchases of Equity clause (F) in the last paragraph in the left Interests of Subsidiaries of Advantica (other hand column of this comparison. than any such Equity Interests owned by Advantica or any Subsidiary of Advantica) in an annual aggregate cumulative amount up to $5 million plus the unused portion of the amount permitted to be expended in all preceding years; provided that in determining the aggregate amount expended for Restricted Payments in accordance with clause (3) of the 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
96 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 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),
97 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 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 respect to zoning restrictions and other the old indenture, Liens arising in restrictions on the use of real property or connection with any Advantica Indebtedness minor title irregularities under the old not expressly subordinated or junior in right indenture related to the assets of Advantica of payment to any other Advantica and all of its Subsidiaries, taken as a Indebtedness (including Liens granted whole, whereas under the new indenture, such pursuant to the
98 Credit Agreement), Liens arising in restrictions on the use of or title to real connection with the satisfaction and property are evaluated separately with discharge of the indenture, and Liens respect to the Denny's Holdings Group as a relating to judgments to the extent such whole and to the Advantica Group as a whole; judgments do not give rise to an Event of (2) Subsidiaries may create Liens securing Default under the old indenture; (2) Liens Indebtedness to Affiliates, except that for taxes or assessments either not Subsidiaries in the Denny's Holdings Group delinquent or contested in good faith and as may only create Liens to secure Indebtedness to which adequate reserves have been to any other member of the Denny's Holdings established; (3) Liens incurred in connection Group; (3) the new indenture provides that with workers' compensation, unemployment either Advantica or Denny's Holdings may insurance and other social security benefits, create any Lien upon its properties or assets or securing performance bids, tenders, if either Advantica or Denny's Holdings, leases, contracts (other than for the respectively, causes the new notes to be repayment of borrowed money), statutory equally and ratably secured with all other obligations, progress payments, surety and Indebtedness secured by such Lien as long as appeal bonds and other similar obligations such other Indebtedness shall be so secured; incurred in the ordinary course of business; (4) notwithstanding, anything in the new (4) Liens imposed by law (such as mechanics' indenture to the contrary, in no event shall or warehousemen's liens); (5) zoning any Lien be incurred (x) securing restrictions, easements and other Indebtedness outstanding pursuant to the old restrictions on the use of real property or notes or (y) on any assets of the Denny's minor title irregularities which do not in Holdings Group securing Indebtedness of any the aggregate materially detract from the of the Advantica Group (other than such value of Advantica or its Subsidiaries' Indebtedness of any of the Advantica Group property or assets, taken as a whole, or incurred which is also Indebtedness of any materially impair such entities' business member of the Denny's Holdings Group). operations taken as a whole; (6) Liens 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 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
99 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 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
100 formed by or surviving such consolidation or to Denny's Holdings as well as to Advantica and merger (if other than Advantica) or to which (2) the proviso described in clause (5) such sale or transfer has been made, is a in the left hand column of this comparison corporation organized within the United has 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 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 are as follows: (1) the provision relates
101 Advantica Indebtedness unless: (1) such to the new notes as opposed to the old notes; Subsidiary executes a supplemental indenture and (2) there is an absolute prohibition on evidencing its guarantee of Advantica's any Advantica Subsidiary guaranteeing the obligations under the old notes on a Indebtedness outstanding pursuant to the old substantially similar basis and (2) such notes. guarantee is 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 a business as Advantica and its Subsidiaries 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 transac- Investment by any of the Denny's Holdings tion, (b) a Net Proceeds Offer (defined to Group in any of the Advantica Group; (5) the mean the application by Advantica of the Net new indenture provides, with regard to the Proceeds of the relevant transaction to make application of Net Proceeds to the purchase a tender offer to repurchase the old notes at or repayment of outstanding Senior a price not less than 100% of the principal Indebtedness, that any amount used to repay amount of the old notes plus accrued and Indebtedness outstanding under the old notes unpaid interest thereon) expiring within 366 shall be applied only as and when permitted days of the relevant transaction or (c) the under the covenant entitled "Limitation on purchase or other repayment of outstanding Restricted Payments"; (6) the application of Senior Indebtedness within 366 days of the Net Proceeds to a Net Proceeds Offer applies relevant transaction; provided, however, if to repay the new notes rather than the old the net amount not invested pursuant to notes; and (7) the new indenture provides clause (a) above or applied pursuant to that the following shall not be deemed an clause (c) above is less than $15 million, Asset Sale or a sale or other disposition of a Advantica shall not be further obligated to Business Segment: (a) Permitted Investments, offer to redeem the old notes pursuant to the (b) sales or other dispositions of assets by Net Proceeds Offer provision described above. any of the Advantica Group to Advantica or any of its wholly owned Subsidiaries or by any of the Denny's
102 Asset Segment is defined to mean (1) Denny's Holdings Group to Denny's Holdings Holdings, (2) Spartan Holdings, Inc., (3) or (c) a Public Offering of the FRD, or (4) any Subsidiary, group of securities of any Subsidiary of Advantica, Subsidiaries or group of assets (other than but only to the extent that the proceeds of inventory held for sale in the ordinary which are used to redeem up to 35% of the course of business) of Advantica or its aggregate principal amount of new notes as Subsidiaries which (A) accounts for at least provided under "Optional Redemption." 20% of the total assets of Advantica and its Subsidiaries on a consolidated basis as of To the extent that holders of the new notes the end of the last fiscal quarter do not tender the new notes in a Net Proceeds immediately preceding the date for which such Offer, the issuer who originally received the determination is being made or (B) accounts Net Proceeds shall not be restricted as to for at least 20% of the income from its use of any proceeds made available to continuing operations before income taxes, make the Net Proceeds Offer, but not extraordinary items and cumulative effects of otherwise used to redeem the new notes. changes in accounting principals of Advantica and its Subsidiaries on a consolidated basis If there are outstanding securities of either for the four full fiscal quarters immediately issuer ranking pari passu in right of payment preceding the date for which such calculation with the new notes and the terms of such is being made. securities provide that an offer to repurchase such securities similar to the Net Business Segment is defined to mean (1) each Proceeds Offer with respect to the new notes of Advantica's Significant Subsidiaries, (2) is to be made, then the offer must be made the capital stock of any of Advantica's concurrently with such offer on a pro rata Subsidiaries, or (3) any group of assets of basis. Advantica or any Subsidiary 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, 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. 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
103 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.
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
104 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 The following is a general discussion of certain 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. 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. 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 106 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 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. 107 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 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. 108 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 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. 109 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, there can be no assurance that the Company will be able to recover all of the secured obligations owed to it under the Coco's/Carrows Credit Facility. 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 26, 2001 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 expected to operate in the normal course of business throughout FRD's restructuring and sale process. The final selection of a buyer and completion of the divestiture will take place in the bankruptcy court (see Note 4). FRD and its subsidiaries intend to consummate a sale transaction without the need for the operating subsidiaries to also commence Chapter 11 cases. It is possible, however, 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) 156 Fifth Avenue New York, New York 10010 (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 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Advantica Restaurant Group, Inc. Advantica Restaurant Group, Inc. ("Advantica") is a Delaware corporation. Reference is made to Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions) or (4) for any transaction from which a director derived an improper personal benefit. Reference is also made to Section 145 of the DGCL, which provides that a corporation may indemnify any persons, including officers and directors, who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify officers, directors, employees and agents in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer, director, employee or agent is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses that such officer, director, employee or agent actually and reasonably incurs. Advantica's Restated Certificate of Incorporation and By-Laws provide for indemnification of its officers and directors to the full extent permitted under Delaware law. Specifically, Articles Sixth and Seventh of the Restated Certificate of Incorporation provide for indemnification of officers and directors to the extent permitted by Section 145 of the DGCL and the elimination of liability of directors to the extent permitted by Section 102(b)(7) of the DGCL, and Article 5, Section 14 of the By-Laws provides for indemnification of officers and directors to the extent permitted by Section 145 of the DGCL. Consequently, Advantica maintains officers' and directors' liability insurance for the benefit of its officers and directors. The Employment Agreement dated as of January 7, 1998 between Advantica and James B. Adamson and the Employment Agreement dated January 2, 2001 between Advantica and Nelson J. Marchioli also provide for the indemnification of Messrs. Adamson and Marchioli by Advantica to the extent permitted by Delaware law and, in connection therewith, calls for the advancement of attorneys' fees and expenses (subject to repayment in certain circumstances). The Registration Rights Agreement, dated as of January 7, 1998, among Advantica and each of the holders of registrable securities named therein, provides for indemnification by Advantica of the holder of registrable securities that is a party thereto for control person liability, if any, in respect of certain claims under the Securities Act of 1933, as amended. Denny's Holdings, Inc. Denny's Holdings, Inc. is a New York corporation. Article 7, Section 722 of the New York Business Corporation Law (the "Business Corporation Law") states that a corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by or in the right of the corporation to procure a judgment in its favor), whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, II-1 trust, employee benefit plan or other enterprise, which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. Section 722 also states that a corporation may indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with an appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation, except that no indemnification under this paragraph shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper. Officers and directors of Denny's Holdings, Inc. are covered by the officers' and directors' liability insurance maintained by Advantica. Officers and directors of Denny's Holdings, Inc. are also covered by the indemnification provisions of Advantica's Restated Certificate of Incorporation and By-Laws (as described above) by virtue of the fact that such persons are serving in such capacities at the request of the Advantica. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits:
EXHIBIT NO. DESCRIPTION ------- ----------- 2.1 -- Joint Plan of Reorganization of FCI and Flagstar, as amended November 7, 1997 and as confirmed by order of the United States Bankruptcy Court for the District of South Carolina entered November 12, 1997 (incorporated by reference to Exhibit 2.1 to FCI's Form 8-K, dated November 12, 1997). 3.1 -- Restated Certificate of Incorporation of Advantica dated January 7, 1998 (incorporated by reference to Exhibit 3.1 to Form 8-A of Advantica filed January 7, 1998 relating to the Common Stock (the "Form 8-A")). 3.2 -- Certificate of Ownership and Merger of FCI filed January 7, 1998 (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Registration Statement (No. 333-45811) of Advantica). 3.3 -- By-Laws of Advantica, as amended through January 24, 2001. (incorporated by reference to Exhibit 3.1 to Advantica's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (the "2001 First Quarter Form 10-Q")). +3.4 -- Certificate of Incorporation of Denny's Holdings, Inc. dated October 3, 1989. +3.5 -- Amended and Restated By-Laws of Denny's Holdings, Inc., as amended. 4.1 -- Indenture dated as of May 23, 1996 between FRD and the Bank of New York, as Trustee (the "FRD Indenture") (incorporated by reference to Exhibit 4.1 to Registration Statements on Forms S-1 and S-4 dated as of September 6, 1996 (No. 333-07601) of FRD (the "FRD Form S-1/S-4")). 4.2 -- Form of First Supplemental Indenture to the FRD Indenture dated as of August 23, 1996 (incorporated by reference to Exhibit 4.1.1 to the FRD Form S-l/S-4).
II-2
EXHIBIT NO. DESCRIPTION ------- ----------- 4.3 -- Indenture relating to the Old Notes (including the form of security) dated as of January 7, 1998, between Advantica and First Trust National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Advantica's Form 8-K filed January 15, 1998 (the "1998 Form 8-K")). 4.4 -- Warrant Agreement (including the form of Warrant) (incorporated by reference to Exhibit 10.1 to the Form 8-A). 4.5 -- Rights Agreement, dated as of December 15, 1998, between Advantica and Continental Stock Transfer and Trust Company, as Rights Agent (including Form of Right Certificate) (incorporated by reference to Exhibit 1 to the Form 8-A). 4.6 -- Form of Indenture relating to the New Notes (including the form of security) among Advantica and Denny's Holdings, Inc. and U.S. Bank National Association, as Trustee. 5.1 -- Form of Opinion of Alston & Bird LLP regarding legality of the New Notes. 8.1 -- Form of Opinion of Alston & Bird LLP regarding tax matters. 10.1 -- Consent Order dated March 26, 1993 between the U.S. Department of Justice, Flagstar and Denny's, Inc. (incorporated by reference to Exhibit 10.42 to the Registration Statement on Form S-2 (No. 33-49843) of Flagstar (the "Form S-2")). 10.2 -- Fair Share Agreement dated July 1, 1993 between Flagstar and the NAACP (incorporated by reference to Exhibit 10.43 to the Form S-2). 10.3 -- Employment Agreement, dated as of January 10, 1995, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.42 to FCI's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K")). 10.4 -- Amendment to Employment Agreement, dated as of February 27, 1995, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.44 to the 1994 Form 10-K). 10.5 -- Amendment, dated February 6, 2001, to Addendum Agreement between Advantica and James B. Adamson dated April 7, 2000 (incorporated by reference to Exhibit 10.2 to the 2001 First Quarter Form 10-Q). 10.6 -- Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994 Form 10-K). 10.7 -- Consent Decree dated May 24, 1994 among certain named claimants, individually and on behalf of all others similarly situated, Flagstar and Denny's, Inc. (incorporated by reference to Exhibit 10.51 to the 1994 Form 10-K). 10.8 -- Second Amendment to Employment Agreement, dated December 31, 1996, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.47 to FCI's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K")). 10.9 -- Form of Agreement dated December 3, 1997 providing certain retention incentives and severance benefits for Company management (incorporated by reference to Exhibit 10.2 to Advantica's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (the "1999 First Quarter Form 10-Q"). 10.10 -- Information Systems Management Agreement, dated February 22, 1996, between Flagstar and Integrated Systems Solutions Corporation (incorporated by reference to Exhibit 10.49 to the 1996 Form 10-K). 10.11 -- Employment Agreement between Advantica and James B. Adamson, amended and restated as of January 7, 1998 (incorporated by reference to Exhibit 10.1 to the 1999 First Quarter Form 10-Q). 10.12 -- Credit Agreement, dated January 7, 1998, among Denny's, Inc., El Pollo Loco, Inc., Flagstar Enterprises, Inc., Flagstar Systems, Inc. and Quincy's Restaurants, Inc., as borrowers, Advantica, as a guarantor, the lenders named therein, and The Chase Manhattan Bank, as administrative agent (the "Advantica Credit Agreement") (incorporated by reference to Exhibit 10.1 to the 1998 Form 8-K). 10.13 -- Amendment No. 1 and Waiver, dated as of March 16, 1998, relating to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.53 to the Registration Statement (No. 333-4581) of Advantica).
II-3
EXHIBIT NO. DESCRIPTION ------- ----------- 10.14 -- Amendment No. 2 and Waiver, dated as of May 21, 1998, relating to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q for the quarter ended July 1, 1998). 10.15 -- Amendment No. 3 and Waiver, dated as of July 16, 1998, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998). 10.16 -- Amendment No. 4, dated as of November 12, 1998, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.35 to Advantica's Annual Report on Form 10-K for the year ended December 30, 1998). 10.17 -- Advantica Restaurant Group Director Stock Option Plan, as amended through January 24, 2001 (incorporated by reference to Exhibit 10.1 to the 2001 First Quarter 10-Q). 10.18 -- Amendment No. 5, dated March 12, 1999, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.3 to the 1999 First Quarter Form 10-Q). 10.19 -- Amendment No. 6, dated December 20, 1999, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.37 to Advantica's Annual Report on Form 10-K for the year ended December 29, 1999). 10.20 -- Merger Amendment, dated March 15, 1999, to the Advantica Restaurant Group Stock Option Plan and the Advantica Restaurant Group Officer Stock Option Plan (incorporated by reference to Exhibit 10.4 to the 1999 First Quarter Form 10-Q). 10.21 -- Advantica Stock Option Plan as amended through May 19, 1999 (incorporated by reference to Exhibit 10.2 to Advantica's Quarterly Report on Form 10-Q for the quarter ended June 28, 2000 (the "2000 Second Quarter Form 10-Q")). 10.22 -- Credit Agreement, dated May 14, 1999, among Coco's Restaurants, Inc., Carrows Restaurants, Inc., and jojo's Restaurants, Inc., as borrowers, FRD Acquisition Co. and FRD Corporation, as guarantors, the lenders named therein, Credit Lyonnais New York Branch as administrative agent, and The Chase Manhattan Bank, as documentation agent and syndication agent (incorporated by reference to Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q for the period ended June 30, 1999). 10.23 -- Addendum Agreement, dated April 7, 2000, between Advantica and James B. Adamson (incorporated by reference to Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q for the quarter ended March 29, 2000 (the "2000 First Quarter Form 10-Q")). 10.24 -- Form of Agreement, dated February 9, 2000, providing certain retention incentives and severance benefits for Company management (incorporated by reference to Exhibit 10.2 to the 2000 First Quarter Form 10-Q). 10.25 -- Master Service Agreement for Information Technology Services, dated January 25, 2000, between Advantica and Affiliated Computer Services, Inc. (incorporated by reference to Exhibit 10.1 to the 2000 Second Quarter Form 10-Q). 10.26 -- Amendment No. 7, dated as of June 20, 2000, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.3 to the 2000 Second Quarter Form 10-Q). 10.27 -- Amendment No. 8, dated as of December 26, 2000, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.26 to Advantica's Annual Report on Form 10-K for the year ended December 27, 2000 (the "2000 Form 10-K"). 10.28 -- Employment Agreement dated January 2, 2001 between Advantica and Nelson J. Marchioli. (incorporated by reference to Exhibit 10.3 to the 2001 First Quarter Form 10-Q). *10.29 -- Amendment No. 9, dated October 18, 2001, to the Advantica Credit Agreement. 12.1 -- Computation of Ratio of Earnings to Fixed Charges. 21.1 -- Subsidiaries of Advantica (incorporated by reference to Exhibit 21 to the 2000 Form 10-K). 23.1 -- Consent of Deloitte & Touche LLP. 24.1 -- Powers of Attorney. *23.2 -- Consent of Alston & Bird LLP (included in Exhibits 5.1 and 8.1). 25.1 -- Statement of Eligibility of Trustee on Form T-1.
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EXHIBIT NO. DESCRIPTION ------- ----------- 99.1 -- Form of Letter of Transmittal for the Old Notes. 99.2 -- Form of Notice of Guaranteed Delivery for the Old Notes. 99.3 -- Form of Letter to Clients. 99.4 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees. 99.5 -- Form of Guidelines for Certification of Taxpayer Identification Number or Substitute Form W-9.
- --------------- * To be filed by amendment. +Previously filed. (b) Financial Statement Schedules: None. ITEM 22. UNDERTAKINGS Each of the undersigned Registrants hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (5) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-5 (6) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrants have duly caused this Amendment No. 1 to the Registration Statement to be signed on their behalf by the undersigned, thereunto duly authorized, in the City of Spartanburg, State of South Carolina and the City of New York, State of New York, respectively, on December 6, 2001. ADVANTICA RESTAURANT GROUP, INC. By: /s/ RHONDA J. PARISH ------------------------------------ Rhonda J. Parish Executive Vice President, General Counsel and Secretary DENNY'S HOLDINGS, INC. By: /s/ JAMES H. ALLYN ------------------------------------ James H. Allyn Vice President and Secretary II-7 ADVANTICA RESTAURANT GROUP, INC. Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities indicated on December 6, 2001.
SIGNATURE TITLE --------- ----- * Chairman of the Board - --------------------------------------------- James B. Adamson * President and Chief Executive Officer, - --------------------------------------------- Director (Principal Executive Officer) Nelson J. Marchioli /s/ ANDREW F. GREEN Senior Vice President (Principal Financial - --------------------------------------------- Officer and Principal Accounting Officer) Andrew F. Green * Director - --------------------------------------------- Vera K. Farris * Director - --------------------------------------------- James J. Gaffney * Director - --------------------------------------------- Robert E. Marks * Director - --------------------------------------------- Lloyd I. Miller, III * Director - --------------------------------------------- Charles F. Moran * Director - --------------------------------------------- Elizabeth A. Sanders * Director - --------------------------------------------- Donald R. Shepherd
- --------------- *The undersigned, by signing her name hereto, does sign and execute this Amendment No. 1 to the Registration Statement pursuant to the Powers of Attorney executed by the above-named officers and directors and filed herewith. /s/ RHONDA J. PARISH -------------------------------------- Rhonda J. Parish Attorney-in-Fact II-8 DENNY'S HOLDINGS, INC. Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities indicated on December 6, 2001.
SIGNATURE TITLE --------- ----- * President and Treasurer, Director (Principal ------------------------------------------------ Executive Officer, Principal Financial Officer Samuel S. Sontag and Principal Accounting Officer) /s/ JAMES H. ALLYN Director ------------------------------------------------ James H. Allyn
- --------------- *The undersigned, by signing his name hereto, does sign and execute this Amendment No. 1 to the Registration Statement pursuant to the Power of Attorney executed by the above-named director and filed herewith. /s/ JAMES H. ALLYN -------------------------------------- James H. Allyn Attorney-in-Fact II-9 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 2.1 -- Joint Plan of Reorganization of FCI and Flagstar, as amended November 7, 1997 and as confirmed by order of the United States Bankruptcy Court for the District of South Carolina entered November 12, 1997 (incorporated by reference to Exhibit 2.1 to FCI's Form 8-K, dated November 12, 1997). 3.1 -- Restated Certificate of Incorporation of Advantica dated January 7, 1998 (incorporated by reference to Exhibit 3.1 to Form 8-A of Advantica filed January 7, 1998 relating to the Common Stock (the "Form 8-A")). 3.2 -- Certificate of Ownership and Merger of FCI filed January 7, 1998 (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Registration Statement (No. 333-45811) of Advantica). 3.3 -- By-Laws of Advantica, as amended through January 24, 2001. (incorporated by reference to Exhibit 3.1 to Advantica's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (the "2001 First Quarter Form 10-Q")). +3.4 -- Certificate of Incorporation of Denny's Holdings, Inc. dated October 3, 1989. +3.5 -- Amended and Restated By-Laws of Denny's Holdings, Inc., as amended. 4.1 -- Indenture dated as of May 23, 1996 between FRD and the Bank of New York, as Trustee (the "FRD Indenture") (incorporated by reference to Exhibit 4.1 to Registration Statements on Forms S-1 and S-4 dated as of September 6, 1996 (No. 333-07601) of FRD (the "FRD Form S-1/S-4")). 4.2 -- Form of First Supplemental Indenture to the FRD Indenture dated as of August 23, 1996 (incorporated by reference to Exhibit 4.1.1 to the FRD Form S-l/S-4). 4.3 -- Indenture relating to the Old Notes (including the form of security) dated as of January 7, 1998, between Advantica and First Trust National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Advantica's Form 8-K filed January 15, 1998 (the "1998 Form 8-K")). 4.4 -- Warrant Agreement (including the form of Warrant) (incorporated by reference to Exhibit 10.1 to the Form 8-A). 4.5 -- Rights Agreement, dated as of December 15, 1998, between Advantica and Continental Stock Transfer and Trust Company, as Rights Agent (including Form of Right Certificate) (incorporated by reference to Exhibit 1 to the Form 8-A). 4.6 -- Form of Indenture relating to the New Notes (including the form of security) among Advantica and Denny's Holdings, Inc. and U.S. Bank National Association, as Trustee. 5.1 -- Form of Opinion of Alston & Bird LLP regarding legality of the New Notes. 8.1 -- Form of Opinion of Alston & Bird LLP regarding tax matters. 10.1 -- Consent Order dated March 26, 1993 between the U.S. Department of Justice, Flagstar and Denny's, Inc. (incorporated by reference to Exhibit 10.42 to the Registration Statement on Form S-2 (No. 33-49843) of Flagstar (the "Form S-2")). 10.2 -- Fair Share Agreement dated July 1, 1993 between Flagstar and the NAACP (incorporated by reference to Exhibit 10.43 to the Form S-2). 10.3 -- Employment Agreement, dated as of January 10, 1995, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.42 to FCI's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K")). 10.4 -- Amendment to Employment Agreement, dated as of February 27, 1995, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.44 to the 1994 Form 10-K). 10.5 -- Amendment, dated February 6, 2001, to Addendum Agreement between Advantica and James B. Adamson dated April 7, 2000 (incorporated by reference to Exhibit 10.2 to the 2001 First Quarter Form 10-Q). 10.6 -- Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994 Form 10-K). 10.7 -- Consent Decree dated May 24, 1994 among certain named claimants, individually and on behalf of all others similarly situated, Flagstar and Denny's, Inc. (incorporated by reference to Exhibit 10.51 to the 1994 Form 10-K).
EXHIBIT NO. DESCRIPTION ------- ----------- 10.8 -- Second Amendment to Employment Agreement, dated December 31, 1996, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.47 to FCI's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K")). 10.9 -- Form of Agreement dated December 3, 1997 providing certain retention incentives and severance benefits for Company management (incorporated by reference to Exhibit 10.2 to Advantica Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (the "1999 First Quarter Form 10-Q"). 10.10 -- Information Systems Management Agreement, dated February 22, 1996, between Flagstar and Integrated Systems Solutions Corporation (incorporated by reference to Exhibit 10.49 to the 1996 Form 10-K). 10.11 -- Employment Agreement between Advantica and James B. Adamson, amended and restated as of January 7, 1998 (incorporated by reference to Exhibit 10.1 to the 1999 First Quarter Form 10-Q). 10.12 -- Credit Agreement, dated January 7, 1998, among Denny's, Inc., El Pollo Loco, Inc., Flagstar Enterprises, Inc., Flagstar Systems, Inc. and Quincy's Restaurants, Inc., as borrowers, Advantica, as a guarantor, the lenders named therein, and The Chase Manhattan Bank, as administrative agent (the "Advantica Credit Agreement") (incorporated by reference to Exhibit 10.1 to the 1998 Form 8-K). 10.13 -- Amendment No. 1 and Waiver, dated as of March 16, 1998, relating to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.53 to the Registration Statement (No. 333-4581) of Advantica. 10.14 -- Amendment No. 2 and Waiver, dated as of May 21, 1998, relating to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q for the quarter ended July 1, 1998). 10.15 -- Amendment No. 3 and Waiver, dated as of July 16, 1998, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998). 10.16 -- Amendment No. 4, dated as of November 12, 1998, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.35 to Advantica's Annual Report on Form 10-K for the year ended December 30, 1998). 10.17 -- Advantica Restaurant Group Director Stock Option Plan, as adopted January 28, 1998 and amended through January 24, 2001 (incorporated by reference to Exhibit 10.1 to the 2001 First Quarter 10-Q). 10.18 -- Amendment No. 5, dated March 12, 1999, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.3 to the 1999 First Quarter Form 10-Q). 10.19 -- Amendment No. 6, dated December 20, 1999, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.37 to Advantica's Annual Report on Form 10-K for the year ended December 29, 1999). 10.20 -- Merger Amendment, dated March 15, 1999, to the Advantica Restaurant Group Stock Option Plan and the Advantica Restaurant Group Officer Stock Option Plan (incorporated by reference to Exhibit 10.4 to the 1999 First Quarter Form 10-Q). 10.21 -- Advantica Stock Option Plan as amended through May 19, 1999 (incorporated by reference to Exhibit 10.2 to Advantica's Quarterly Report on Form 10-Q for the quarter ended June 28, 2000 (the "2000 Second Quarter Form 10-Q")). 10.22 -- Credit Agreement, dated May 14, 1999, among Coco's Restaurants, Inc., Carrows Restaurants, Inc., and jojo's Restaurants, Inc., as borrowers, FRD Acquisition Co. and FRD Corporation, as guarantors, the lenders named therein, Credit Lyonnais New York Branch as administrative agent, and The Chase Manhattan Bank, as documentation agent and syndication agent (incorporated by reference to Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q for the period ended June 30, 1999). 10.23 -- Addendum Agreement, dated April 7, 2000, between Advantica and James B. Adamson (incorporated by reference to Exhibit 10.1 to Advantica's Quarterly Report on Form 10-Q for the quarter ended March 29, 2000 (the "2000 First Quarter Form 10-Q")). 10.24 -- Form of Agreement, dated February 9, 2000, providing certain retention incentives and severance benefits for Company management (incorporated by reference to Exhibit 10.2 to the 2000 First Quarter Form 10-Q).
EXHIBIT NO. DESCRIPTION ------- ----------- 10.25 -- Master Service Agreement for Information Technology Services, dated January 25, 2000, between Advantica and Affiliated Computer Services, Inc. (incorporated by reference to Exhibit 10.1 to the 2000 Second Quarter Form 10-Q). 10.26 -- Amendment No. 7, dated as of June 20, 2000, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.3 to the 2000 Second Quarter Form 10-Q). 10.27 -- Amendment No. 8, dated as of December 26, 2000, to the Advantica Credit Agreement (incorporated by reference to Exhibit 10.26 to Advantica's Annual Report on Form 10-K for the year ended December 27, 2000 (the "2000 Form 10-K"). 10.28 -- Employment Agreement dated January 2, 2001 between Advantica and Nelson J. Marchioli. (incorporated by reference to Exhibit 10.3 to the 2001 First Quarter Form 10-Q). *10.29 -- Amendment No. 9, dated October 18, 2001, to the Advantica Credit Agreement. 12.1 -- Computation of Ratio of Earnings to Fixed Charges. 21.1 -- Subsidiaries of Advantica (incorporated by reference to Exhibit 21 to the 2000 Form 10-K). 23.1 -- Consent of Deloitte & Touche LLP. *23.2 -- Consent of Alston & Bird LLP (included in Exhibits 5.1 and 8.1). 24.1 -- Powers of Attorney. 25.1 -- Statement of Eligibility of Trustee on Form T-1. 99.1 -- Form of Letter of Transmittal for the Old Notes. 99.2 -- Form of Notice of Guaranteed Delivery for the Old Notes. 99.3 -- Form of Letter to Clients. 99.4 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees. 99.5 -- Form of Guidelines for Certification of Taxpayer Identification Number or Substitute Form W-9.
- --------------- * To be filed by amendment. +Previously filed. EX-4.6 3 g71871a1ex4-6.txt FORM OF INDENTURE RELATING TO THE NEW NOTES - ------------------------------------------------------------------------------- ADVANTICA RESTAURANT GROUP, INC. AND DENNY'S HOLDINGS, INC., AS ISSUERS AND U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE INDENTURE DATED AS OF JANUARY [ ], 2002 --------------------------------- [$ ] [ ]% SENIOR NOTES DUE 2007 - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page PARTIES...........................................................................................................1 RECITALS Authorization Of Indenture...............................................................................1 Form Of Face Of Security.................................................................................1 Form Of Reverse Of Security..............................................................................3 Form Of Trustee's Certificate Of Authentication..........................................................7 Compliance With Legal Requirements.......................................................................7 Purpose Of And Consideration For Indenture...............................................................7 ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined 8 ARTICLE TWO ISSUE, EXECUTION, FORM AND REGISTRATION OF SECURITIES SECTION 2.1 Authentication and Delivery of Securities 18 SECTION 2.2 Execution of Securities 18 SECTION 2.3 Certificate of Authentication 19 SECTION 2.4 Form, Denomination and Date of Securities; Payments of Interest 19 SECTION 2.5 Registration, Transfer and Exchange 20 SECTION 2.6 Mutilated, Defaced, Destroyed, Lost and Stolen Securities 20 SECTION 2.7 Cancellation of Securities; Destruction Thereof 21 SECTION 2.8 Temporary Securities 21 ARTICLE THREE COVENANTS OF THE ISSUERS AND THE TRUSTEE SECTION 3.1 Payment of Principal and Interest 22 SECTION 3.2 Offices for Payments, etc. 22 SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee 22 SECTION 3.4 Paying Agents 22 SECTION 3.5 Certificates to Trustee 23 SECTION 3.6 Securityholder Lists 23 SECTION 3.7 Reports by the Issuers 23 SECTION 3.8 Reports by the Trustee 24 SECTION 3.9 Limitation on Restricted Payments 24 SECTION 3.10 Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries 27
i SECTION 3.11 Limitation on Additional Indebtedness and Issuance of Disqualified Stock 27 SECTION 3.12 Limitation on Transactions with Affiliates 29 SECTION 3.13 Limitation on Sale of Assets 29 SECTION 3.14 Corporate Existence 31 SECTION 3.15 Limitation on Liens 31 SECTION 3.16 Future Subsidiary Guarantors 33 SECTION 3.17 Investments in Unrestricted Subsidiaries 33 SECTION 3.18 Offer to Redeem upon Change of Control 34 ARTICLE FOUR REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 4.1 Events of Default 35 SECTION 4.2 Acceleration 37 SECTION 4.3 Other Remedies 37 SECTION 4.4 Waiver of Defaults 38 SECTION 4.5 Control by Majority 38 SECTION 4.6 Limitation on Suits 38 SECTION 4.7 Rights of Holders to Receive Payment 38 SECTION 4.8 Collection Suit by Trustee 38 SECTION 4.9 Trustee May File Proofs of Claim 39 SECTION 4.10 Priorities 39 SECTION 4.11 Undertaking for Costs 39 ARTICLE FIVE CONCERNING THE TRUSTEE SECTION 5.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default 40 SECTION 5.2 Certain Rights of the Trustee 41 SECTION 5.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds hereof 42 SECTION 5.4 Trustee and Agents May Hold Securities; Collections, etc. 42 SECTION 5.5 Moneys Held by Trustee 42 SECTION 5.6 Compensation and Indemnification of Trustee and Its Prior Claim 42 SECTION 5.7 Right of Trustee to Rely on Officers' Certificates, etc 43 SECTION 5.8 Persons Eligible for Appointment as Trustee 43 SECTION 5.9 Resignation and Removal; Appointment of Successor Trustee 43 SECTION 5.10 Acceptance of Appointment by Successor Trustee 44 SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business of Trustee 44 SECTION 5.12 Notice of Default 45
ii ARTICLE SIX CONCERNING THE SECURITYHOLDERS SECTION 6.1 Evidence of Action Taken by Securityholders 45 SECTION 6.2 Proof of Execution of Instruments and of Holding of Securities; Record Date. 45 SECTION 6.3 Holders to Be Treated as Owners 45 SECTION 6.4 Securities Owned by Issuers Deemed Not Outstanding 46 SECTION 6.5 Right of Revocation of Action Taken 46 ARTICLE SEVEN SUPPLEMENTAL INDENTURES SECTION 7.1 Supplemental Indentures Without Consent of Securityholders 46 SECTION 7.2 Supplemental Indentures With Consent of Securityholders 47 SECTION 7.3 Effect of Supplemental Indenture 48 SECTION 7.4 Documents to Be Given to Trustee 48 SECTION 7.5 Notation on Securities in Respect of Supplemental Indentures 48 ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 8.1 When Issuer May Merge, etc. 49 SECTION 8.2 Successor Corporation Substituted 49 ARTICLE NINE SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS; DEFEASANCE SECTION 9.1 Satisfaction and Discharge of Indenture 50 SECTION 9.2 Application by Trustee of Funds Deposited for Payment of Securities 50 SECTION 9.3 Repayment of Moneys Held by Paying Agent 50 SECTION 9.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Three Years 51 SECTION 9.5 Defeasance 51 ARTICLE TEN MISCELLANEOUS PROVISIONS SECTION 10.1 Stockholders, Officers and Directors of Issuers Exempt from Individual Liability 52 SECTION 10.2 Provisions of Indenture for the Sole Benefit of Parties and Securityholders 52 SECTION 10.3 Successors and Assigns of Issuers Bound by Indenture 52 SECTION 10.4 Notices and Demands on Issuers, Trustee and Securityholders 52 SECTION 10.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein 53 SECTION 10.6 Payments Due on Saturdays, Sundays and Holidays 54 SECTION 10.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939 54 SECTION 10.8 New York Law to Govern 54 SECTION 10.9 Counterparts 54
iii SECTION 10.10 Effect of Headings 54 ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 11.1 Right of Optional Redemption 54 SECTION 11.2 Notice of Redemption; Partial Redemptions 54 SECTION 11.3 Payment of Securities called for Redemption 55 SECTION 11.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption 56 SECTION 11.5 Offer to Repurchase by Application of Net Proceeds 56 SECTION 11.6 Provisions Governing Repurchase Pursuant to Change of Control Offer 56
iv THIS INDENTURE, dated as of January [ ], 2002, among Advantica Restaurant Group, Inc., a Delaware corporation ("Advantica"), and Denny's Holdings, Inc., a New York corporation ("Denny's Holdings," and together with Advantica, the "Issuers"), and U.S. Bank National Association, as Trustee (the "Trustee"), W I T N E S S E T H: WHEREAS, the Issuers have duly authorized the issue of their [ ]% Senior Notes Due 2007 (the "Securities") and, to provide, among other things, for the authentication, delivery and administration thereof, the Issuers have duly authorized the execution and delivery of this Indenture; and WHEREAS, the Securities and the Trustee's certificate of authentication shall be in substantially the following form: [FORM OF FACE OF SECURITY] No. $ -------------------- ------------------ ADVANTICA RESTAURANT GROUP, INC. AND DENNY'S HOLDINGS, INC. [ ]% Senior Notes Due 2007 Advantica Restaurant Group, Inc., a Delaware corporation ("Advantica"), and Denny's Holdings, Inc., a New York corporation ("Denny's Holdings," and together with Advantica, the "Issuers"), for value received hereby promise to pay to _________________________ or registered assigns the principal sum of ______________ Dollars at the Issuers' office or agency for said purpose on September 30, 2007 in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually, on March 31 and September 30 of each year, on said principal sum in like coin or currency at the rate per annum set forth above at said office or agency from the March 31 or the September 30, as the case may be, next preceding the date of this Security to which interest on the Securities has been paid or duly provided for, unless the date hereof is a date to which interest on the Securities has been paid or duly provided for, in which case from the date of this Security, or unless no interest has been paid or duly provided for on the Securities, in which case from January ___, 2002, until payment of said principal sum has been made or duly provided for. Notwithstanding the foregoing, if the date hereof is after March 15 or September 15, as the case may be, and before the following March 31 or September 30, this Security shall bear interest from such March 31 or September 30; provided that, if the Issuers shall default in the payment of interest due on such March 31 or September 30, then this Security shall bear interest from the next preceding March 31 or September 30 to which interest on the Securities has been paid or duly provided for, or, if no interest has been paid or duly provided for on the Securities, from January ___, 2002. The interest so payable on any March 31 or September 30 will, except as otherwise provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Security is registered at the close of business on the March 15 or September 15 next preceding such March 31 or September 30, whether or not such day is a business day; provided that interest may be paid, at the option 1 of the Issuers, by mailing a check therefor payable to the registered holder entitled thereto at his last address as it appears on the Security register or by wire transfer to such holder. Reference is made to the further provisions set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Security shall not be valid or obligatory until the certificate of authentication hereof, shall have been duly signed by the Trustee acting under the Indenture. IN WITNESS WHEREOF, each of the Issuers has caused this instrument to be duly executed under its corporate seal. DATED: [SEAL] -------------------------------------- -------------------------------------- [SEAL] -------------------------------------- -------------------------------------- 2 [FORM OF REVERSE OF SECURITY] ADVANTICA RESTAURANT GROUP, INC. AND DENNY'S HOLDINGS, INC. [ ]% Senior Notes Due 2007 This Security is one of a duly authorized issue of debt securities of each Issuer, limited to the aggregate principal amount of $[ ] (except as otherwise provided in the Indenture mentioned below), issued or to be issued pursuant to an indenture dated as of January [ ], 2002 (the "Indenture"), duly executed and delivered by the Issuers to U.S. Bank National Association, as Trustee (herein called the "Trustee"), provided that Securities issued in the Exchange Offer shall not exceed $[ ] in aggregate principal amount. Reference is hereby made to the Indenture and all indentures supplemental thereto for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuers and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Securities. Defined terms used without definition herein shall have the meaning ascribed to them in the Indenture. If an Event of Default, other than in respect of certain events of bankruptcy or insolvency as set forth in the Indenture, shall have occurred and be continuing, 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, premium, if any, or interest on, the Securities) in aggregate principal amount of the Securities then outstanding may declare in writing 100% of the unpaid principal amount of, and any accrued and unpaid interest on, the Securities to be due and payable immediately; provided, however, that if any Senior Indebtedness is outstanding pursuant to the Credit Agreement, then all the Securities 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 has been cured or waived prior to such date and (y) the date of acceleration of any Senior Indebtedness under the Credit Agreement. Upon an Event of Default arising from certain events of bankruptcy or insolvency as described in the Indenture, the unpaid principal of and any accrued and unpaid interest on all the Securities will become immediately due and payable without further action or notice. The Indenture provides that in certain events a declaration of acceleration and its consequences resulting from a default under certain other Indebtedness of an Issuer or its Subsidiaries may be automatically annulled and that the holders of a majority in aggregate principal amount of the Securities then outstanding may, on behalf of the holders of all of the Securities, 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 principal of, premium, if any, or interest on any of the Securities. Any such consent or waiver by the holder of this Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Security and any Security which may be issued in exchange or substitution herefor, whether or not any notation thereof is made upon this Security or such other Securities. The Indenture permits the Issuers and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Securities at the time outstanding, evidenced as in the Indenture provided, to enter into supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Securities; provided that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the principal amount thereof, or 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 the redemption thereof, or impair or affect the right of any 3 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 Security, change the currency of payment of principal of, premium, if any, or interest on any Security, or modify any provision in the Indenture with respect to the priority of the Securities in right of payment without the consent of the holder of each Security so affected, or (b) reduce the aforesaid percentage of Securities, the consent of the holders of which is required for any such supplemental indenture, without the consent of the holders of each Security then outstanding. The Securities are senior unsecured obligations of the Issuers and will rank pari passu in right of payment to all Senior Indebtedness of the Issuers. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Issuers, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the place, times, and rate, and in the currency, herein prescribed. The Securities are issuable only as registered Securities without coupons in denominations of $1,000 and any multiple of $1,000. At the office or agency of the Issuers referred to on the face hereof and in the manner and subject to the limitations provided in the Indenture, Securities may be exchanged for a like aggregate principal amount of Securities of other authorized denominations. Upon due presentment for registration of transfer of this Security at the above-mentioned office or agency of the Issuers, a new Security or Securities of authorized denominations, for a like aggregate principal amount, will be issued to the transferee as provided in the Indenture. Securities may be presented for registration of transfer in part only in multiples of $1,000. No service charge shall be made for any such transfer, but the Issuers may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. Except as provided below, the Securities may not be redeemed, either in whole or in part at the option of the Issuers prior to September 30, 2004. On and after September 30, 2004, the Securities 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 September 30 of the years indicated below:
YEAR PERCENTAGE 2004 .................... % 2005 .................... % 2006 and thereafter .................... 100.000%
provided that, if the dated fixed for redemption is on March 31, or September 30, 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 March 31 or September 30. Notwithstanding the foregoing, prior to September 30, 2004, the Issuers may redeem up to 35% of the aggregate principal amount of Securities outstanding on the date of the Indenture at a redemption price (expressed as a percentage of the principal amount) of [ ]%, plus accrued and unpaid interest, if any, to the redemption date, from the net proceeds of any Public Offering. 4 Notice of redemption shall be mailed at least 30 and not more than 60 days prior to the date fixed for redemption to each holder of Securities to be redeemed at its last registered address. Securities may be redeemed in part only in multiples of $1,000. Subject to the terms of the Indenture, if an Issuer consummates an Asset Sale or sells, leases, conveys or otherwise disposes of a Business Segment, such Issuer shall be obligated to apply the Net Proceeds thereof to one or more of the following in such combination as such Issuer may choose: (i) 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, (ii) an offer, expiring within 366 days of such Asset Sale or such sale, lease, conveyance or other disposition of a Business Segment, to repurchase Securities at a price not less than 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date (a "Net Proceeds Offer") or (iii) 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 by the Indenture; provided, however, that if the net amount not invested pursuant to clause (i) above or applied pursuant to clause (iii) above is less than $15,000,000, such Issuer shall not be further obligated to offer to repurchase Securities pursuant to clause (ii) above. Holders of Securities that are the subject of an offer to repurchase shall receive an offer to repurchase from the Issuers prior to any related repurchase date, and may elect to have such Securities repurchased by completing the form entitled "Option of Holder to Elect to Have Security Repurchased" appearing below. Notwithstanding any provision of the Indenture to the contrary, the Issuer that originally received the Net Proceeds may, for a period of 120 days after the last date on which holders of Securities are permitted to tender their Securities in a Net Proceeds Offer, use any Net Proceeds that were available to make such Net Proceeds Offer but not used to repurchase Securities pursuant thereto, to purchase, redeem or otherwise acquire or retire for value securities of such Issuer ranking junior in right of payment to the Securities 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 Securities, 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 Securities less than the aggregate principal amount of the Securities 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. Subject to payment by the Issuers (by deposit with the Trustee or otherwise) of a sum sufficient to pay the amount due on redemption, interest on this Security (or portion hereof if this Security is redeemed or repurchased in part) shall cease to accrue upon the date duly fixed for redemption or repurchase of this Security (or portion hereof if this Security is redeemed or repurchased in part), and all rights of the holder with respect to such redeemed Security (or portion thereof if this Security is redeemed or repurchased in part) hereunder or under the Indenture, except the right to payment of amounts payable on such redemption or repurchase, shall cease. The Issuers, the Trustee, and any authorized agent of the Issuers or the Trustee, may deem and treat the registered holder hereof as the absolute owner of this Security (whether or not this Security shall be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other 5 than the Issuers or the Trustee or any authorized agent of the Issuers or the Trustee), for the purpose of receiving payment of, or on account of, the principal hereof and premium, if any, and, subject to the provisions on the face hereof, interest hereon and for all other purposes, and neither the Issuers nor the Trustee nor any authorized agent of the Issuers or the Trustee shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of, premium, if any, or interest on this Security, for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any incorporator, stockholder, officer or director, as such, past, present or future, of either Issuer or of any successor corporation, either directly or through such Issuer or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. Nothing in this provision limits the liability, if any, of any such incorporator, officer, director or shareholder, as such, under the federal securities laws. 6 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Securities described in the within-mentioned Indenture. U.S. Bank National Association, as Trustee -------------------------------------------- Authorized Signatory OPTION OF HOLDER TO ELECT TO HAVE SECURITY REPURCHASED If you have received a Net Proceeds Offer from the Issuers and want to elect to have this Security repurchased by the Issuers pursuant to Section 11.5 of the Indenture, check the box: [ ] If you have received a Change of Control Offer from the Issuers and want to elect to have this Security repurchased by the Issuers pursuant to Section 3.18 of the Indenture, check the box [ ] If you want to elect to have any part of this Security repurchased by the Issuers pursuant to Section 3.18 of the Indenture, state the amount: $__________________________ Date: Your Signature: ------------------ ------------------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ---------------------------------------- AND WHEREAS, all things necessary to make the Securities, when executed by the Issuers and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Issuers, and to constitute these presents a valid indenture and agreement according to its terms, have been done; NOW, THEREFORE: In consideration of the premises and the purchases of the Securities by the holders thereof, the Issuers and the Trustee mutually covenant and agree for the equal and proportionate benefit of the respective holders from time to time of the Securities as follows: 7 ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined. The following terms (except as otherwise expressly provided or unless the context otherwise clearly requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939 or the definitions of which in the Securities Act of 1933 are referred to in the Trust Indenture Act of 1939 (except as herein otherwise expressly provided or unless the context otherwise clearly requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture. All accounting terms used herein and not expressly defined shall have the meanings given to them in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" shall mean such accounting principles which are generally accepted at the date or time of any computation or at the date hereof. The words "herein," "hereto" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. References to Sections or Articles mean reference to such Section or Article in this Indenture, unless otherwise stated. The terms defined in this Article include the plural as well as the singular. "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. "Additional Securities"means the [ ]% Senior Notes Due 2007 authenticated and delivered hereunder that may be issued pursuant to this Indenture after the date of the Exchange Offer, other than in exchange for or in replacement of outstanding Securities. "Adjusted Consolidated Net Worth" means, with respect to any person as of any date, the Consolidated Net Worth of such person plus (i) 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 (ii) 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 (iii) 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" means the entity identified as "Advantica" in the first paragraph hereof until a successor replaces it pursuant to this Indenture, and thereafter means such successor. "Advantica Group" means Advantica and any Subsidiary of Advantica, other than Denny's Holdings or any Subsidiary of Denny's Holdings. 8 "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. "Agent" means any registrar, paying agent or co-registrar for the Securities. "Asset Segment" means (i) Denny's Holdings, or (ii) 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. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board of Directors" means either the Board of Directors of an Issuer, as indicated, or any committee of such Board duly authorized to act hereunder. "Business Day" means a day which, in the city (or in any of the cities if more than one) where amounts are payable in respect of the Securities as specified on the face of the form of Security recited above, is neither a legal holiday nor a day on which banking institutions are authorized by law or regulation to close. "Business Segment" means (i) each Significant Subsidiary of an Issuer, (ii) the Equity Interests of any of an Issuer's Subsidiaries or (iii) 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 Interest 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 (i) 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), (ii) 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 $500,000,000 or a commercial bank organized under the laws of any other country that is a member of the Organization for Economic Cooperation and Development and having total assets in excess of $500,000,000, (iii) repurchase obligations with a term of not more than 7 days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (ii) above, (iv) commercial paper issued by the parent corporation of any domestic commercial 9 bank of recognized standing having capital and surplus in excess of $500,000,000 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 (v) investments in money market funds substantially all of whose assets comprise securities of the types described in clauses (i) through (iv) above. "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. "Commission" means the Securities and Exchange Commission. "Consolidated Fixed Charges" means, with respect to any person for a given period, (i) 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 hereof and the amortization thereof) plus (ii) 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 which 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 with the transaction causing a calculation to be made hereunder, 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 (i) 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, (ii) 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, (iii) 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 (iv) with respect to an Issuer, the Net Income (if positive) of any person that becomes a Subsidiary of such Issuer after the date hereof 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 (iv) would cause such Net Income to be negative, then such Net Income shall be deemed to be zero. 10 "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. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located at 180 East Fifth Street, St. Paul, MN 55101. "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 hereof, 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" means the entity identified as "Denny's Holdings" in the first paragraph hereof until a successor replaces it pursuant to this Indenture, and thereafter means such successor. "Denny's Holdings Group" means Denny's Holdings and any Subsidiary of Denny's Holdings. "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 Securities. "Exchange Offer"means the issuance of $[ ] million aggregate principal amount of Securities in exchange for $[ ] million aggregate principal amount of Old Notes occurring on the date hereof. 11 "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, (i) 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), (ii) 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 (i) hereof, (iii) 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 (iv) depreciation and amortization (including amortization of goodwill, deferred financing costs existing immediately after the date hereof and other intangibles) to the extent required under generally accepted accounting principles, all on a consolidated basis; provided that if, during such period, (A) 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 (B) 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 hereunder, 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). "Event of Default" means any event or condition specified as such in Section 4.1 which shall have continued for the period of time, if any, therein designated. "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 hereof (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 hereunder. "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 Investments in FRD by either Issuer or any of its Subsidiaries existing on the date hereof. 12 "Holder", "holder", "holder of Securities", "securityholder", "Securityholder" or other similar terms means the registered holder of any Security. "Indebtedness" means, with respect to any person at any date, without duplication, (i) all obligations of such person for borrowed money, (ii) all obligations of such person evidenced by bonds, debentures, notes or other similar instruments other than Interest Rate Agreements, (iii) all reimbursement obligations and other liabilities of such person with respect to letters of credit issued for such person's account, (iv) 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, (v) all obligations of such person as lessee in respect of capital lease obligations under capital leases and (vi) all obligations of others of a nature described in any of clauses (i) through (v) above guaranteed by such person; provided that, in the case of clauses (i) through (v) above, Indebtedness shall include only obligations reported as liabilities in the financial statements of such person in accordance with generally accepted accounting principles. "Indenture" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented. "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. "Initial Securities" means the [ ]% Senior Notes Due 2007 authenticated and delivered hereunder in the Exchange Offer. "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 Interest, bonds, notes, debentures or other securities issued by, any other person. "Issuers" means (except as otherwise provided in Article Five) Advantica and Denny's Holdings. "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 hereof. "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 13 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 hereof 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, (i) 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 (ii) 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 (i) 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 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 Section 3.13(a)) 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 (ii) 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. "Officers' Certificate" means a certificate signed by the Chairman of the Board of Directors or the President or any Vice President (whether or not designated by a number or numbers or a word or words added before or after the title "Vice President") and by the Treasurer or the Secretary or any 14 Assistant Secretary of each Issuer (which may be a joint certificate of both Issuers) and delivered to the Trustee. Each such certificate shall comply with Section 314 of the Trust Indenture Act of 1939 and include the statements provided for in Section 10.5, if and to the extent required hereby. "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. "Opinion of Counsel" means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Issuers. Each such opinion shall comply with Section 314 of the Trust Indenture Act and include the statements provided for in Section 10.5, if and to the extent required hereby. "Outstanding" when used with reference to the Securities, shall, subject to the provisions of Section 6.4, mean, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than an Issuer) or shall have been set aside, segregated and held in trust by an Issuer (if an Issuer shall act as paying agent); provided that, if such Securities are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as herein provided, or provision satisfactory to the Trustee shall have been made for giving such notice, and (c) Securities in substitution for which other Securities shall have been authenticated and delivered, or which shall have been paid, pursuant to the terms of Section 2.6 (unless proof satisfactory to the Trustee is presented that any of such Securities is held by a person in whose hands such Security is a legal, valid and binding obligation of the Issuers). "Permitted Investments" means (i) 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, (ii) 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), (iii) advances to employees of Advantica or its Subsidiaries not in excess of $5,000,000 in the aggregate at any one time outstanding, (iv) accounts receivable created or acquired in the ordinary course of business, (v) obligations or shares of stock received in connection with any good faith settlement or bankruptcy proceeding involving a claim relating to a Permitted Investment, (vi) evidences of Indebtedness, obligations or other Investments not exceeding $5,000,000 in the aggregate held at any one time by Advantica or any of its Subsidiaries and (vii) 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 (i) pay reasonable and necessary 15 operating expenses and other general corporate expenses of Advantica and its subsidiaries, (ii) 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, (iii) pay, as and when the same becomes due and payable, interest on the Old Notes, (iv) pay, as and when the same becomes due and payable, (a) interest and (b) 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 hereof, and, in the case of Indebtedness incurred after the date hereof 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 hereof that was permitted to be incurred in accordance with Section 3.11 and (v) 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, Section 3.9. 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 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 person's 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 hereof. "Principal" wherever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any", whether or not so stated. "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. "Responsible Officer" when used with respect to the Trustee, means the chairman of the board of directors, any vice chairman of the board of directors, the chairman of the trust committee, the chairman of the executive committee, any vice chairman of the executive committee, the president, any vice president (whether or not designated by numbers or words added before or after the title "vice president"), the cashier, the secretary, the treasurer, any trust officer, any assistant trust officer, any assistant vice president, any assistant cashier, any assistant secretary, any assistant treasurer, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Investments" means (i) any Investment by any of the (a) Advantica Group in any person that is not a wholly owned Subsidiary of Advantica and (b) Denny's Holdings Group in any person that is not a wholly owned Subsidiary of Denny's Holdings, or (ii) other transfers of assets by any of the (a) Advantica Group to any Subsidiary or Affiliate of Advantica that is not a wholly owned Subsidiary of Advantica or (b) 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 (ii) above in transactions the terms of which are fair and reasonable to the transferor and are at 16 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 $5,000,000, 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 hereof. "Security" or "Securities" means the Initial Securities and the Additional Securities. "Senior Indebtedness" means (i) 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 Securities, whether for principal, interest (including, without limitation, interest accruing after the filing of a petition initiating any proceeding referred to in Section 4.1(6) or Section 4.1(7), 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 Securities and all obligations and claims related thereto, (ii) all Obligations of an Issuer in respect of Interest Rate Agreements and (iii) additional Indebtedness permitted by Section 3.11(a), Section 3.11(b) or Section 3.11(c) which is not expressly by its terms subordinated to the Securities 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 materials or for 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 Securities shall continue to constitute Senior Indebtedness for all purposes of this 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 of 1933, as amended (the "Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act") (as such Regulation is in effect on the date hereof) (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 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." "Trustee" means the entity identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article Five, shall also include any successor trustee. "Trust Indenture Act of 1939" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was originally executed (except for purposes of the terms of any supplemental indenture executed pursuant to Article VII). 17 "Unrestricted Subsidiary" means (i) FRD, (ii) 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 (iii) 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 Section 3.9 and Section 3.17 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 set forth in Section 3.11(a) 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 (i) the then outstanding aggregate principal amount of such Indebtedness into (ii) 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. ARTICLE TWO ISSUE, EXECUTION, FORM AND REGISTRATION OF SECURITIES SECTION 2.1 Authentication and Delivery of Securities. Upon the execution and delivery of this Indenture, or from time to time thereafter, Securities in an aggregate principal amount not in excess of $[ ] (except as otherwise provided in Section 2.6) may be executed by the Issuers and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Securities (provided, that Securities executed, delivered and authenticated for issuance in the Exchange Offer shall not exceed $[ ] in aggregate principal amount) to or upon the written order of the Issuers, signed by both (a) the Chairman of the Board of Directors, or any Vice Chairman of the Board of Directors, or the President or any Vice President (whether or not designated by a number or numbers or a word or words added before or after the title "Vice President") of each Issuer and (b) the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of each Issuer without any further action by the Issuers. SECTION 2.2 Execution of Securities. The Securities shall be signed on behalf of the Issuers by both (a) the Chairman of the Board of Directors or any Vice Chairman of the Board of Directors or the President or any Vice President (whether or not designated by a number or numbers or a word or words added before or after the title "Vice President") of each Issuer and (b) by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of each Issuer under each Issuer's corporate seal 18 which may, but need not, be attested. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of each Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Securities. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Security which has been duly authenticated and delivered by the Trustee. In case any officer of an Issuer who shall have signed any of the Securities shall cease to be such officer before the Security so signed shall be authenticated and delivered by the Trustee or disposed of by the Issuers, such Security nevertheless may be authenticated and delivered or disposed of as though the person who signed such Security had not ceased to be such officer of such Issuer; and any Security may be signed on behalf of such Issuer by such persons as, at the actual date of the execution of such Security, shall be the proper officers of such Issuer, although at the date of the execution and delivery of this Indenture any such person was not such officer. SECTION 2.3 Certificate of Authentication. Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee by manual signature of one of its authorized signatories, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Security executed by the Issuers shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. SECTION 2.4 Form, Denomination and Date of Securities; Payments of Interest. The Securities and the Trustee's certificates of authentication shall be substantially in the form recited above. The Securities shall be issuable as registered securities without coupons and in denominations provided for in the form of Security above recited. The Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers of the Issuers executing the same may determine with the approval of the Trustee. Any of the Securities may be issued with appropriate insertions, omissions, substitutions and variations, and may have imprinted or otherwise reproduced thereon such legend or legends, not inconsistent with the provisions of this Indenture, as may be required to comply with any law, or with any rules or regulations pursuant thereto, or with the rules of any securities market in which the Securities are admitted to trading, or to conform to general usage. Each Security shall be dated the date of its authentication, shall bear interest from the applicable date and shall be payable on the dates and in the manner specified on the face of the form of Security recited above. The person in whose name any Security is registered at the close of business on any record date with respect to any interest payment date shall be entitled to receive the interest, if any, payable on such interest payment date notwithstanding any transfer or exchange of such Security subsequent to the record date and prior to such interest payment date, except if and to the extent the Issuers shall default in the payment of the interest due on such interest payment date, in which case such defaulted interest shall be paid to the persons in whose names outstanding Securities are registered at the close of business on a subsequent record date (which shall be not less than five business days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuers to the holders of Securities not less than 15 days preceding such subsequent record date. The term "record date", as used with respect to any interest payment date (except a date for payment of defaulted interest), shall mean if such interest payment date is the last day of a calendar month, the fifteenth day of such calendar month 19 and shall mean, if such interest payment date is the fifteenth day of a calendar month, the first day of such calendar month, whether or not such record date is a business day. Interest will be computed on the basis of a 360-day year of twelve 30-day months. SECTION 2.5 Registration, Transfer and Exchange. The Issuers shall keep at each office or agency to be maintained for the purpose as provided in Section 3.2 a register or registers in which, subject to such reasonable regulations as it may prescribe, it will register, and will register the transfer of, Securities as in this Article provided. Such register shall be in written form in the English language or in any other form capable of being converted into such form within a reasonable time. At all reasonable times such register or registers shall be open for inspection by the Trustee. Upon due presentation for registration of transfer of any Security at each such office or agency, the Issuers shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Security or Securities in authorized denominations for a like aggregate principal amount. Securities may be presented for registration of transfer in part only in multiples of $1,000. Any Security or Securities may be exchanged for a Security or Securities in other authorized denominations, in an equal aggregate principal amount. Securities to be exchanged shall be surrendered at each office or agency to be maintained by the Issuers for such purpose as provided in Section 3.2, and the Issuers shall execute and the Trustee shall authenticate and deliver in exchange therefor the Security or Securities which the Securityholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. All Securities presented for registration of transfer, exchange, redemption or payment shall (if so required by the Issuers or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuers and the Trustee duly executed by, the holder or his attorney duly authorized in writing. 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 Securities. No service charge shall be made for any such registration of transfer or exchange of the Securities. The Trustee shall not be required to exchange or register a transfer of (a) any Securities for a period of 15 days next preceding the first mailing of notice of redemption of Securities to be redeemed or (b) any Securities selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not so to be redeemed. All Securities issued upon any transfer or exchange of Securities shall be valid obligations of the Issuers, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. SECTION 2.6 Mutilated, Defaced, Destroyed, Lost and Stolen Securities. In case any temporary or definitive Security shall become mutilated, defaced or be apparently destroyed, lost or stolen, the Issuers in their discretion may execute, and upon the written request of any officer of an Issuer, the Trustee shall authenticate and deliver, a new Security, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated or defaced Security, or in lieu of and substitution for the Security so apparently destroyed, lost or stolen. In every case the applicant for a substitute Security shall furnish to the Issuers and to the Trustee and any agent of the 20 Issuers or the Trustee such security or indemnity as may be required by them to indemnify, and defend and to save each of them harmless and, in every case of destruction, loss or theft evidence to their satisfaction of the apparent destruction, loss or theft of such Security and of the ownership thereof. Upon the issuance of any substitute Security, the Issuers may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. In case any Security which has matured or is about to mature, or has been called for redemption in full, shall become mutilated or defaced or be apparently destroyed, lost or stolen, the Issuers may, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated or defaced Security), if the applicant for such payment shall furnish to the Issuers and to the Trustee and any agent of the Issuers or the Trustee such security or indemnity as any of them may require to save each of them harmless from all risks, however remote, and, in every case of apparent destruction, loss or theft, the applicant shall also furnish to the Issuers and the Trustee and any agent of the Issuers or the Trustee evidence to their satisfaction of the apparent destruction, loss or theft of such Security and of the ownership thereof. Every substitute Security issued pursuant to the provisions of this Section by virtue of the fact that any Security is apparently destroyed, lost or stolen shall constitute an additional contractual obligation of the Issuers, whether or not the apparently destroyed, lost or stolen Security shall be at any time enforceable by anyone and shall be entitled to all the benefits of (but shall be subject to all the limitations of rights set forth in) this Indenture equally and proportionately with any and all other Securities duly authenticated and delivered hereunder. All Securities shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, defaced or apparently destroyed, lost or stolen Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.7 Cancellation of Securities; Destruction Thereof. All Securities surrendered for payment, redemption, registration of transfer or exchange, if surrendered to the Issuers or any agent of the Issuers or the Trustee, shall be delivered to the Trustee for cancellation or, if surrendered to the Trustee, shall be cancelled by it; and no Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall destroy cancelled Securities held by it and deliver a certificate of destruction to the Issuers. If the Issuers shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are delivered to the Trustee for cancellation. SECTION 2.8 Temporary Securities. Pending the preparation of definitive Securities, the Issuers may execute and the Trustee shall authenticate and deliver temporary Securities (printed, lithographed, typewritten or otherwise reproduced, in each case in form satisfactory to the Trustee). Temporary Securities shall be issuable as registered Securities without coupons of any authorized denomination, and substantially in the form of the definitive Securities but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Issuers with the concurrence of the Trustee. Temporary Securities may contain such reference to any provisions of this Indenture as may be appropriate. Every temporary Security shall be executed by the Issuers and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Securities. Without unreasonable delay the Issuers shall execute and shall furnish definitive Securities and thereupon temporary Securities may be surrendered in 21 exchange therefor without charge at each office or agency to be maintained by the Issuers for the purpose pursuant to Section 3.2, and the Trustee shall authenticate and deliver in exchange for such temporary Securities a like aggregate principal amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall be entitled to the same benefits under this Indenture as definitive Securities. ARTICLE THREE COVENANTS OF THE ISSUERS AND THE TRUSTEE SECTION 3.1 Payment of Principal and Interest. The Issuers jointly and severally covenant and agree that they will duly and punctually pay or cause to be paid the principal of, and interest on each of the Securities at the place or places at the respective times and in the manner provided in the Securities. Each installment of interest on the Securities may, at the option of the Issuers, be paid by wire transfer or by check mailed to the holders of Securities entitled thereto as they shall appear on the registry books of the Issuers. SECTION 3.2 Offices for Payments, etc. So long as any of the Securities remain outstanding, the Issuers will maintain the following: (a) an office or agency where the Securities may be presented for payment, (b) an office or agency where the Securities may be presented for registration of transfer and for exchange as in this Indenture provided and (c) an office or agency where notices and demands to or upon the Issuers in respect of the Securities or of this Indenture may be served. The Issuers will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. The Issuers hereby initially designate the Corporate Trust Office of the Trustee as the office or agency for each such purpose. In case the Issuers shall fail to maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Corporate Trust Office. SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee. The Issuers, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 5.9, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 3.4 Paying Agents. Whenever the Issuers shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section, (a) that it will hold all sums received by it as such agent for the payment of the principal of or interest on the Securities (whether such sums have been paid to it by the Issuers or by any other obligor on the Securities) in trust for the benefit of the holders of the Securities or of the Trustee, (b) that it will give the Trustee notice of any failure by the Issuers (or by any other obligor on the Securities) to make any payment of the principal of or interest on the Securities when the same shall be due and payable, and (c) that it will pay any such sums so held in trust by it to the Trustee upon the Trustee's written request at any time during the continuance of the failure referred to in clause (b) above. 22 The Issuers will, on or prior to each due date of the principal of or interest on the Securities, deposit with the paying agent a sum sufficient to pay such principal or interest, and (unless such paying agent is the Trustee) the Issuers will promptly notify the Trustee of any failure to take such action. If either Issuer shall act as paying agent, it will, on or before each due date of the principal of or interest on the Securities, set aside, segregate and hold in trust for the benefit of the holders of the Securities a sum sufficient to pay such principal or interest so becoming due. The Issuers will promptly notify the Trustee of any failure to take such action. Anything in this Section to the contrary notwithstanding, the Issuers may at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Issuers or any paying agent hereunder, as required by this Section, such sums to be held by the Trustee upon the trusts herein contained. Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section are subject to the provisions of Sections 9.3 and 9.4. SECTION 3.5 Certificates to Trustee. The Issuers will, so long as any of the Securities are outstanding: (a) deliver to the Trustee, forthwith upon becoming aware of any default or defaults in the performance of any covenant, agreement or condition contained in this Indenture (including notice of any event of default which with the giving of notice and lapse of time would become an Event of Default under Section 4.1 hereof), an Officers' Certificate specifying such default or defaults and what action the issuers are taking or propose to take with respect thereto; and (b) deliver to the Trustee within 120 days after the end of each fiscal year of the Issuers beginning with the fiscal year ending December 31, 2002, an Officers' Certificate in compliance with Section 314(a)(4) of the Trust Indenture Act of 1939. SECTION 3.6 Securityholder Lists. If and so long as the Trustee shall not be the Security registrar, the Issuers will furnish or cause to be furnished to the Trustee a list in such form as the Trustee may reasonably require of the names and addresses of the holders of the Securities pursuant to Section 312 of the Trust Indenture Act (a) semi-annually not more than 15 days after each record date for the payment of semi-annual interest on the Securities, as hereinabove specified, as of such record date, and (b) at such other times as the Trustee may request in writing, within thirty days after receipt by the Issuers of any such request as of a date not more than 15 days prior to the time such information is furnished. SECTION 3.7 Reports by the Issuers. The Issuers jointly and severally covenant and agree to: (a) file with the Commission and, within 15 days after either Issuer is required to file the same with the Commission, with the Trustee copies of the annual reports and of the information, documents and other reports which either Issuer may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act and, if neither Issuer is required to file such information, documents or reports with the Commission, to file with the 23 Commission and the Trustee the same such information, documents or reports as if either Issuer were so subject; (b) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information. documents and reports with respect to compliance by the Issuers with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations; and (c) transmit by mail to the Holders of Securities, within 30 days after the filing thereof with the Trustee, any information, documents and reports required to be filed by the Issuers with the Trustee pursuant to (a) and (b) of this Section 3.7. SECTION 3.8 Reports by the Trustee. Within 60 days after May 15 of each year, beginning May 15, 2002, for so long as any Securities are outstanding hereunder, the Trustee shall transmit by mail to all Securityholders, as their names and addresses appear in the registry books, in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act of 1939, a brief report dated as of such May 15 if required by and in compliance with Section 313(a) of the Trust Indenture Act of 1939. SECTION 3.9 Limitation on Restricted Payments. Subject to the other provisions of this Section 3.9, each Issuer shall not and shall not permit any of its Subsidiaries to, directly or indirectly: (a) 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 ((i) other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of such Issuer or such Subsidiary and (ii) 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); (b) 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); (c) voluntarily prepay any Old Notes or any Indebtedness that is subordinated to the Securities other than in connection with any (i) refinancing of such Indebtedness specifically permitted pursuant to Section 3.11(c), (ii) Indebtedness between (x) Advantica and any of its Subsidiaries in the Advantica Group or between Subsidiaries in the Advantica Group, (y) Denny's Holdings and any of its Subsidiaries in the Denny's Holdings Group or between Subsidiaries in the Denny's Holdings Group or (iii) Indebtedness of any of the Advantica Group to any of the Denny's Holdings Group; or 24 (d) 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: (i) a Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof; (ii) immediately after such Restricted Payment and after giving effect thereto on a pro forma basis, Advantica would not be able to incur $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in Section 3.11(a); or (iii) 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 hereof 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 hereof 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 hereof, 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 hereof 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 hereof 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. 25 For purposes of clause (iii) above, 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. The provisions of this Section 3.9 shall not prohibit: (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 hereof; (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; (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 hereof and Equity Interests in Advantica issued to future members of management pursuant to subscription agreements executed subsequent to the date hereof, 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 hereof; provided that the amount of such dividends or distributions, after the date hereof, in the aggregate will not exceed the sum of (A) $5,000,000 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 Securities 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 Securities (A) with the proceeds of, or in exchange for, Indebtedness incurred pursuant to Section 3.11(c) or (B) if, after giving effect to such redemption, repurchase or retirement, Advantica could incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in Section 3.11(a); (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 $5,000,000 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 $50,000,000; 26 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 (iii) of the first paragraph of this Section 3.9, (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. SECTION 3.10 Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries. Each Issuer shall not, and shall 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 (a) 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, (b) make loans or advances to an Issuer or any of its Subsidiaries or (c) 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 (i) applicable law, (ii) this Indenture, (iii) the Credit Agreement or any other agreement entered into in connection therewith or as contemplated thereby, (iv) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of an Issuer or any of its Subsidiaries, (v) 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, (vi) the Old Notes, Existing Indebtedness or other contractual obligation of an Issuer or any of its Subsidiaries existing on the date hereof, (vii) additional Indebtedness in an aggregate principal amount of up to $50,000,000 at any one time outstanding, (viii) any amendment, modification, renewal, extension, replacement, refinancing or refunding of encumbrances or restrictions imposed pursuant to clauses (ii), (iii), (vi) or (vii) 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 Securities, (ix) any Mortgage Financing or Mortgage Refinancing, (x) any Permitted Investment or (xi) contracts for the sale of assets so long as such encumbrances or restrictions apply only to the assets to be sold pursuant thereto. SECTION 3.11 Limitation on Additional Indebtedness and Issuance of Disqualified Stock. (a) Subject to the other provisions of this Section 3.11, (x) each Issuer shall not, and shall 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 (y) neither Issuer shall issue any Disqualified Stock, 27 unless (i) 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 (ii) Advantica's Fixed Charge Coverage Ratio for the four full fiscal quarters 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 limitations of this Section 3.11(a) shall 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 shall not exceed the greater of $250,000,000 and the aggregate amount of the commitments under the Credit Agreement on the date hereof. (b) The limitations of Section 3.11(a) hereof notwithstanding, Advantica or any of its Subsidiaries may create, incur, issue, assume or guarantee Indebtedness pursuant to the Credit Agreement or otherwise, (i) 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 Section 3.9, (ii) 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 (i) above); provided that, in the case of Indebtedness exceeding $2,000,000 for any such obligation or transaction, such Indebtedness exists at the date of the purchase or transaction or is created within 180 days thereafter, (iii) constituting capital lease obligations, (iv) 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, (v) constituting additional Indebtedness in an aggregate principal amount (including any Indebtedness incurred to refund or refinance such Indebtedness) of up to $50,000,000 at any one time outstanding, whether incurred under the Credit Agreement or otherwise, (vi) constituting Indebtedness secured by the Excluded Property, and (vii) constituting Existing Indebtedness and permitted refinancings thereof in accordance with Section 3.11(c); (c) The limitations of Section 3.11(a) hereof notwithstanding, 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 Securities, Existing Indebtedness or any other Indebtedness incurred as permitted hereunder, 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 (i) 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 28 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, (ii) 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 (iii) to the extent such Refinancing Indebtedness refinances Indebtedness subordinated to the Securities, such Refinancing Indebtedness is subordinated to the Securities at least to the same extent as the Indebtedness being refinanced or refunded, and provided further that clauses (i), (ii) and (iii) of this clause (c) will not apply to any refunding or refinancing of any Senior Indebtedness; and (d) The limitations of Section 3.11(a) hereof notwithstanding, any nonconsolidated subsidiary of an Issuer created after the date hereof 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. SECTION 3.12 Limitation on Transactions with Affiliates. Each Issuer shall not, and shall 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 Securities 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 Section 3.9 and (4) payments or loans to employees or consultants pursuant to employment or consultancy contracts which are approved by the Board of Directors of Advantica or Denny's Holdings, as applicable, in good faith. SECTION 3.13 Limitation on Sale of Assets. (a) Neither Issuer nor any of their respective Subsidiaries (other than nonconsolidated Subsidiaries) shall (A) (I) 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 shall not be governed by this Section 3.13 but shall be governed by the provisions of Section 8.1) or (II) 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: (i) 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 29 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, (ii) 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 (iii) 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 Section 3.9 hereof; provided, however, that if the net amount not invested pursuant to clause (i) above or applied pursuant to clause (iii) above is less than $15,000,000, such Issuer shall not be further obligated to offer to repurchase Securities pursuant to clause (ii) 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 $50,000,000 or more (excluding proceeds to be used for replacement of such Business Segment, provided that 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: (1) Permitted Investments, (2) sales, leases, conveyances or other dispositions of assets by (x) any of the Advantica Group to Advantica or any of its wholly owned Subsidiaries or (y) any of the Denny's Holdings Group to Denny's Holdings, or (3) 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 Securities as provided in Section 11.1. (b) For purposes of subsection (ii) of Section 3.13(a), 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 Securities 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 Securities are at the time outstanding, and the terms of such securities provide that an offer to repurchase such securities similar to the Net Proceeds Offer is to be made with respect thereto, then the Net Proceeds Offer for the Securities shall be made concurrently with such other offer, and securities of each issue shall be accepted on a pro rata basis, 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 Securities are permitted to tender their Securities in a Net Proceeds Offer, the Issuer that originally received the Net Proceeds shall not be restricted under this Section 3.13 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 Securities assuming 100% acceptance of the Net Proceeds Offer) but not used to repurchase Securities pursuant thereto. (c) Notwithstanding any provision hereof to the contrary, for a period of 120 days after the last date on which holders of the Securities are permitted to tender their Securities 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 Securities 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 Securities 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 Securities, offered in the Net Proceeds Offer; provided that, if the Net Proceeds Offer is for a principal amount (the "Net Proceeds 30 Offer Amount") of the Securities less than the aggregate principal amount of the Securities 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. (d) An offer to repurchase Securities pursuant to this Section 3.13 shall be made pursuant to the provisions of Section 11.5 hereof. Simultaneously with the notification of such offer of redemption to the Trustee as required by Section 11.5 hereof, the Issuers shall provide the Trustee with an Officers' Certificate setting forth the information required to be included therein by Section 10.5 hereof and, in addition, setting forth the calculations used in determining the amount of Net Proceeds to be applied to the redemption of Securities. (e) In the event that an Issuer shall make any payment of Net Proceeds to the Trustee which, to the actual knowledge of a trust officer of the Trustee, should properly have been made to holders or to the representative of the holders of any Senior Indebtedness for the prepayment or repayment of such Senior Indebtedness pursuant to the provisions of this Section 3.13, such payment shall be held by the Trustee for the benefit of, and, upon written request of the holders of such Senior Indebtedness or their representative, shall be paid forthwith over and delivered to, the holders of such Senior Indebtedness or their representative for application in accordance with the provisions of this Section 3.13. With respect to the holders of such Senior Indebtedness, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Section 3.13(e), and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness. If Net Proceeds are received by Holders which, pursuant to the provisions of this Section 3.13, should properly have been received by the holders of such Senior Indebtedness or their representative for the prepayment or repayment of such Senior Indebtedness, the Holders who receive such Net Proceeds shall hold such Net Proceeds in trust for, and pay such Net Proceeds over to, the holders of such Senior Indebtedness or their representative. SECTION 3.14 Corporate Existence. Subject to Article 8 hereof and other than as permitted by the Credit Agreement, each Issuer shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each Significant Subsidiary in accordance with the respective organizational documents as they may be from time to time amended of each Issuer and each such Subsidiary and the rights (charter and statutory), governmental licenses and governmental franchises of each Issuer and its Subsidiaries; provided, however, that neither Issuer shall be required to preserve any such right, license or franchise or the corporate, partnership or other existence of any such Subsidiary, if the preservation thereof is no longer necessary in the conduct of the business of such Issuer and its Subsidiaries taken as a whole and the loss thereof is not adverse in any material respect to the Holders (which determination, if made in good faith by the Board of Directors of such Issuer, shall be conclusive). SECTION 3.15 Limitation on Liens. (a) 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 on any asset now owned or hereafter acquired by such Issuer or any such Subsidiary, except with respect to: 31 (i) 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; (ii) Liens existing on the date hereof; (iii) Liens permitted by or required pursuant to the Credit Agreement; (iv) Liens relating to judgments to the extent such judgments do not give rise to an Event of Default pursuant to Section 4.1(5); (v) Liens arising under or in connection with Section 9.1; (vi) Liens incurred in the ordinary course of business so long as the Indebtedness secured by such Lien does not exceed $5,000,000 at any one time outstanding; (vii) 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; (viii) 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; (ix) 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; (x) 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; (xi) 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; (xii) 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; 32 (xiii) a Lien on any assets (x) securing Indebtedness incurred or assumed pursuant to clause (ii) or (iii) or Section 3.11(b) hereof 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; (xiv) the Lien granted to the Trustee pursuant to Section 5.6 hereof and any substantially equivalent Lien granted to the respective trustees under the indentures for other debt securities of either Issuer; (xv) Liens arising in connection with any Mortgage Financing or Mortgage Refinancing by either Issuer or any of its Subsidiaries; (xvi) 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; (xvii) any Lien on the Excluded Property; (xviii) Liens securing an interest of a landlord in real property leases; and (xix) 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 (iii) above or Section 3.15(b) hereof. (b) Notwithstanding the provisions of paragraph (a) above, an Issuer may create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, if such Issuer shall cause the Securities to 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 such Lien ceases to exist, such equal and ratable Lien shall thereupon automatically cease. Notwithstanding anything in this 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 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). SECTION 3.16 Future Subsidiary Guarantors. Each Issuer shall 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 Indebtedness Guarantee"), unless (i) such Subsidiary executes and delivers a supplemental indenture evidencing its guarantee of such Issuer's Obligations hereunder and under the Securities 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 Securities 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. Nothwithstanding anything herein to the contrary, in no event shall any Subsidiary of Advantica guarantee Indebtedness outstanding pursuant to the Old Notes. SECTION 3.17 Investments in Unrestricted Subsidiaries. Each Issuer shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make any Investment in any Unrestricted 33 Subsidiary unless (i) the amount of such Investment does not exceed the amount then permitted to be used to make a Restricted Payment pursuant to clause (iii) of the first paragraph of Section 3.9 and (ii) 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 $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in Section 3.11(a). Notwithstanding clauses (i) and (ii) of this Section 3.17 or any provision hereof to the contrary, the Issuers and their Subsidiaries shall be permitted to make investments in Unrestricted Subsidiaries in an aggregate amount not to exceed $25,000,000 (without regard to the FRD Investment) at any one time outstanding. The amount by which the aggregate of all Investments in Unrestricted Subsidiaries exceeds $25,000,000 (without regard to the FRD Investment) shall be counted in determining the aggregate permissible amount of Restricted Payments pursuant to clause (iii) of the first paragraph of Section 3.9. Neither Issuer will permit any Unrestricted Subsidiary to become a Subsidiary, except pursuant to the last sentence of the definition of "Unrestricted Subsidiary." SECTION 3.18 Offer to Redeem upon Change of Control. If at any time (the "Change of Control Date") (i) all or substantially all of an Issuer's assets are sold as an entirety to any person or related group of persons, (ii) 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, (iii) any person or related group of persons acquires a majority in interest of the total voting power or voting stock of an Issuer, (iv) the persons constituting the Board of Directors of Advantica on the date hereof 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 (v) 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 (each a "Change of Control"), then, in any such case, the Issuers will notify the Holders of the Securities in writing of such occurrence and will make an offer to purchase in accordance with the terms of this Indenture (the "Change of Control Offer") all Securities 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 Securities. The Issuers shall first comply with the proviso in the preceding sentence before they shall be required to repurchase the Securities pursuant to this Section 3.18. The Issuers shall 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 pursuant to this Section 3.18 is triggered under the circumstances described herein. Not less than 30 or more than 60 days following any Change of Control, the Issuers shall mail a notice to each Holder of any Securities stating (a) that a Change of Control has occurred and that a Change of Control Offer is being made as described in this Section 3.18 and that all Securities properly tendered will be accepted for payment, (b) the purchase price and the repurchase date, which will be no later than 30 Business Days from the date such notice is mailed (the "Change of Control Payment Date"), (c) that only Securities not tendered 34 will continue to accrue interest, (d) that any Securities accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date, (e) that Holders electing to have Securities redeemed pursuant to the Change of Control Offer will be required to surrender the Securities, with the form entitled "Option of Holder to Elect to Have Security Repurchased" on the reverse of the Security completed (with the box checked referencing the Change of Control Offer pursuant to this Section 3.18), to the Issuer or paying agent prior to the close of business on the third Business Day preceding the Change of Control Payment Date, (f) that Holders will be entitled to withdraw their election if the Issuers or paying agent receives, not later than the second Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Securities delivered for redemption, and a statement that such Holder is withdrawing his election to have the Securities redeemed, (g) that Holders whose Securities are being redeemed only in part will be issued new Securities equal in principal amount to the unredeemed portion of the Securities surrendered, which unredeemed portion must be equal to $1,000 in principal amount or an integral multiple thereof, and (h) such other instructions determined by the Issuers, consistent with this provision, that a Holder of the Securities must follow in order to have such Holder's Securities repurchased. On the Change of Control Payment Date, the Issuers shall, to the extent lawful, (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the paying agent money sufficient to pay the redemption price of all Securities or portions thereof so tendered and (iii) deliver to the Trustee Securities so accepted together with an Officer's Certificate stating the Securities or portions thereof tendered to the Issuers. The paying agent shall promptly mail to the Holder of Securities so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to Holders whose Securities are redeemed only in part new Securities equal in principal amount to any unredeemed portion of the Securities surrendered, provided that such new Securities shall be in a principal amount of $1,000 or an integral multiple thereof. ARTICLE FOUR REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 4.1 Events of Default. An "Event of Default" occurs if: (1) the Issuers default in the payment of interest on any Security when the same becomes due and payable and the Default continues for a period of 30 days; (2) the Issuers default in the payment of the principal of any Security when the same becomes due and payable, whether at maturity, upon redemption or otherwise; (3) an Issuer fails to comply with any of its other agreements or covenants in, or any other provisions of, the Securities or this Indenture and the Default continues for the period and after the notice specified in this Section 4.1; (4) a default occurs under any mortgage indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by an Issuer or any of its Subsidiaries (or the payment of which is guaranteed by an Issuer or any of its Subsidiaries) other than (i) Indebtedness of any of the Advantica Group to any 35 of the Advantica Group or Indebtedness of any of the Denny's Holdings Group to any of the Denny's Holdings Group or (ii) 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 $30,000,000 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) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against an Issuer or any of its Subsidiaries and such judgment or judgments remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days, provided that the aggregate of all such judgments (net of amounts covered by insurance, treating any deductibles, self-insurance or retention as not so covered) exceeds $10,000,000; and (6) an Issuer or any Significant Subsidiary of an Issuer pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (d) makes a general assignment for the benefit of its creditors; or (7) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against an Issuer or any Significant Subsidiary of an Issuer in an involuntary case, (b) appoints a Custodian of an Issuer or any Significant Subsidiary of an Issuer or for all or substantially all of its property, or (c) orders the liquidation of an Issuer or any Significant Subsidiary of an Issuer, and the order or decree remains unstayed and in effect for 60 days. The term "Custodian" means any receiver. trustee, assignee, liquidator or similar official under any Bankruptcy Law. 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 aggregate 36 principal amount of the Securities then outstanding. A Default under clause (3) is not an Event of Default until the Trustee notifies the Issuers, or the Holders of at least 30% in aggregate principal amount of the Securities then outstanding notify the Issuers and the Trustee, of the Default and the Issuers do not cure the Default within 30 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." In the case of any Event of Default pursuant to the provisions of this Section 4.1 occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of an Issuer with the intention of avoiding payment of the premium which the Issuers would have to pay if the Issuers then had elected to redeem the Securities pursuant to Section 11.1, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law, anything in this Indenture or in the Securities contained to the contrary notwithstanding. SECTION 4.2 Acceleration. If an Event of Default (other than an Event of Default specified in clause (6) or (7) of Section 4.1) occurs and is continuing, the Trustee may, by written notice to the Issuers, or the Holders of at least 30% (or 25% in the case of an Event of Default specified in Section 4.1(l) or 4.1(2)) in aggregate principal amount of the Securities then outstanding may, by written notice to the Issuers and the Trustee, and the Trustee shall, upon the request of such Holders, declare 100% of the unpaid principal of and any accrued and unpaid interest on the Securities to be due and payable. Upon such declaration the principal and interest shall be due and payable immediately; provided, however, that if any Senior Indebtedness is outstanding pursuant to the Credit Agreement, upon a declaration of acceleration, such principal and interest 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, 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 specified in Section 4.1(4) 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 under Section 4.1(4) 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 of such other event of default (without rescission of the declaration of acceleration of such Indebtedness). If an Event of Default specified in clause (6) or (7) of Section 4.1 occurs, the unpaid principal of and any accrued and unpaid interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the then outstanding Securities by written notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. No such rescission shall affect any subsequent Default or Event of Default or impair any right consequent thereto. SECTION 4.3 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or 37 constitute a waiver of or acquiescence in the Event of Default. Except as set forth in Section 2.6 hereof, all remedies are cumulative to the extent permitted by law. SECTION 4.4 Waiver of Defaults. Subject to Section 7.2 hereof, the Holders of a majority in principal amount of the then outstanding Securities by notice to the Trustee may waive any past Default or Event of Default and its consequences except a continuing Default or Event of Default in the payment of the principal of or interest on any Security. Upon any such waiver, such Default or Event of Default shall cease to exist and together with any Event of Default arising therefrom, shall be deemed to have been cured for every purpose of this Indenture, but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 4.5 Control by Majority. The Holders of a majority in principal amount of the then outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may (i) refuse to follow any direction that conflicts with law or this Indenture, that the Trustee reasonably determines may be unduly prejudicial to the rights of other Holders or that may subject the Trustee to personal liability or (ii) take any other action that it deems proper that is not inconsistent with such decision. The Trustee shall be entitled to indemnification reasonably satisfactory to it against losses or expenses caused by the taking or not taking of such action. SECTION 4.6 Limitation on Suits. A Holder may pursue a remedy with respect to this Indenture or the Securities only if: (1) the Holder gives to the Trustee written notice of a continuing Event of Default; (2) the Holders of at least 30% (or 25 % in the case of an Event of Default specified in Section 4.1(1) or 4.1(2)) in principal amount of the Securities then outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (5) during such 60-day period the Holders of a majority in principal amount of the then outstanding Securities do not give the Trustee a direction which, in the opinion of the Trustee, is inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 4.7 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. SECTION 4.8 Collection Suit by Trustee. If an Event of Default specified in Section 4.1(1) or 4.1(2) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as 38 trustee of an express trust against the Issuers for the whole amount of principal and interest remaining unpaid on the Securities and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 4.9 Trustee May File Proofs of Claim. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Issuers (or any other obligor upon the Securities), their respective creditors or property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 5.6 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 5.6 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. If the Trustee does not file a proper claim or proof of debt in the form required in any such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the Credit Agent shall have the right to file and is hereby authorized to file an appropriate claim for and on behalf of the Holders. SECTION 4.10 Priorities. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 5.6, including payment of all compensation, expense and liabilities incurred, and all advances made by the Trustee and the costs and expenses of collection; Second: to the Holders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively, and Third: to the Issuers. The Trustee may fix a record date and payment date for any payment to Holders. SECTION 4.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the 39 claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 4.7, or a suit by Holders of more than 10% in principal amount of the then outstanding Securities. ARTICLE FIVE CONCERNING THE TRUSTEE SECTION 5.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default. The Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default which may have occurred: (i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness (if the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this indenture; but in the case of any such statements, certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) the Trustee shall not be liable for any error of judgment made in good faith by a responsible officer or responsible officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Securities at the time outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the 40 exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. This Section 5.1 is in furtherance of and subject to Sections 315 and 316 of the Trust Indenture Act of 1939. SECTION 5.2 Certain Rights of the Trustee. In furtherance of and subject to the Trust Indenture Act of 1939, and subject to Section 5.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Issuers mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors of an Issuer may be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of such Issuer; (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing so to do by the holders of not less than a majority in aggregate principal amount of the Securities then outstanding; provided that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such examination shall be paid by the Issuers or, if paid by the Trustee or any predecessor Trustee shall be repaid by the Issuers upon demand; and 41 (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys not regularly in its employ and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder. SECTION 5.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuers, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities or as to the adequacy of any disclosure document used in connection with the sale of the Securities. The Trustee shall not be accountable for the use or application by the Issuers of any of the Securities or of the proceeds thereof. SECTION 5.4 Trustee and Agents May Hold Securities; Collections, etc. The Trustee or any agent of the Issuers or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not the Trustee or such agent and may otherwise deal with the Issuers and receive, collect, hold and retain collections from the Issuers with the same rights it would have if it were not the Trustee or such agent. SECTION 5.5 Moneys Held by Trustee. Subject to the provisions of Section 9.4 hereof, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by mandatory provisions of law. Neither the Trustee nor any agent of the Issuers or the Trustee shall be under any liability for interest on any moneys received by it hereunder. SECTION 5.6 Compensation and Indemnification of Trustee and Its Prior Claim. The Issuers jointly and severally covenant and agree to pay to the Trustee from time to time, and the Trustee shall be entitled to reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Issuers jointly and severally covenant and agree to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Issuers also jointly and severally covenant and agree to indemnify the Trustee and each predecessor Trustee for, and to hold each of them harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in the premises. The obligations of the Issuers under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be a senior claim to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Securities, and the Securities are hereby subordinated to such senior claim. If the Trustee incurs expenses or renders services after an Event of Default specified in clause (6) or (7) of Section 4.1 occurs, such expenses and the compensation for such services are intended to constitute expenses of administration under any Bankruptcy Law. 42 SECTION 5.7 Right of Trustee to Rely on Officers' Certificates, etc. Subject to Sections 5.1 and 5.2, whenever in the administration of the trusts of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 5.8 Persons Eligible for Appointment as Trustee. The Trustee hereunder shall at all times be a corporation having a combined capital and surplus of at least $25,000,000, and which is eligible in accordance with the provisions of Section 310(a) of the Trust Indenture Act of 1939. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of a federal, state or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. SECTION 5.9 Resignation and Removal; Appointment of Successor Trustee. (a) The Trustee may at any time resign by giving written notice of resignation to the Issuers and by mailing notice thereof by first-class mail to holders of Securities at their last addresses as they shall appear on the Security register. Upon receiving such notice of resignation, the Issuers shall promptly appoint a successor trustee by written instrument, in duplicate, executed by authority of the Board of Directors of each Issuer, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide holder of a Security or Securities for at least six months may, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act of 1939, after written request therefor by an Issuer or by any Securityholder who has been a bona fide holder of a Security or Securities for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 5.8 and shall fail to resign after written request therefor by an Issuer or by any such Securityholder; or (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation: 43 then, in any such case, the Issuers may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of each Issuer, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to Section 315(e) of the Trust Indenture Act of 1939, any Securityholder who has been a bona fide holder of a Security or Securities for at least six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Securities at the time outstanding may at any time remove the Trustee and appoint a successor trustee by delivering to the Trustee so removed, to the successor trustee so appointed and to the Issuers the evidence provided for in Section 6.1 of the action in that regard taken by the Securityholders. (d) Any resignation or removal of the Trustee and any appointment of a successor trustee pursuant to any of the provisions of this Section 5.9 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 5.10. SECTION 5.10 Acceptance of Appointment by Successor Trustee. Any successor trustee appointed as provided in Section 5.9 shall execute and deliver to the Issuers and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of an Issuer or of the successor trustee, upon payment of its charges then unpaid, the Trustee ceasing to act shall, subject to Section 9.4, pay over to the successor trustee all moneys at the time field by it hereunder and shall execute and deliver an instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, such Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 5.6. Upon acceptance of appointment by a successor trustee as provided in this Section 5.10, the Issuers shall mail notice thereof by first-class mail to the holders of Securities at their last addresses as they shall appear in the Security register. If the acceptance of appointment is substantially contemporaneous with the predecessor's resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 5.9. If the Issuers fail to mail such notice within 10 days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Issuers. SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business of Trustee. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder; provided that such corporation shall be eligible under the provisions of Section 5.8, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. 44 In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 5.12 Notice of Default. If a Default or an Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder notice of the uncured Default or Event of Default within 90 days after such Default or Event of Default occurs. The Trustee may withhold from Securityholders notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest on the Securities) if it determines in good faith that withholding notice is in the interests of such Securityholders. ARTICLE SIX CONCERNING THE SECURITYHOLDERS SECTION 6.1 Evidence of Action Taken by Securityholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by securityholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such securityholders in person or by agent duly appointed in writing, and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Sections 5.1 and 5.2) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Article. SECTION 6.2 Proof of Execution of Instruments and of Holding of Securities; Record Date. Subject to Sections 5.1 and 5.2, the execution of any instrument by a securityholder or his agent or proxy may be proved in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The holding of Securities shall be proved by the Security register or by a certificate of the registrar thereof. The Issuers may set a record date for purposes of determining the identity of holders of Securities entitled to vote or consent to any action referred to in Section 6.1, which record date may be set at any time or from time to time by notice to the Trustee, for any date or dates (in the case of any adjournment or resolicitation) not more than 60 days nor less than five days prior to the proposed date of such vote or consent, and thereafter, notwithstanding any other provisions hereof, only holders of Securities of record on such record date shall be entitled to so vote or give such consent or to withdraw such vote or consent. SECTION 6.3 Holders to Be Treated as Owners. The Issuers, the Trustee and any authorized agent of the Issuers or the Trustee may deem and treat the person in whose name any Security shall be registered upon the Security register as the absolute owner of such Security (whether or not such Security shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of, or on account of, the principal of and premium, if any, and, subject to the 45 provisions of this Indenture, interest on, such Security and for all other purposes, and neither the Issuers nor the Trustee nor any authorized agent of the Issuers or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such person, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security. SECTION 6.4 Securities Owned by Issuers Deemed Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by an Issuer or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with such Issuer or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities which the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not an Issuer or any other obligor upon the Securities or any person directly or indirectly controlling or controlled by or under direct or indirect common control with an Issuer or any other obligor on the Securities. In case of a dispute as to such right, the advice of counsel shall be full protection in respect of any decision made by the Trustee in accordance with such advice. Upon request of the Trustee, the Issuers shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Securities, if any, known by each Issuer to be owned or held by or for the account of any of the above-described persons; and, subject to Sections 5.1 and 5.2, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Securities not listed therein are outstanding for the purpose of any such determination. SECTION 6.5 Right of Revocation of Action Taken. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 6.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Securities specified in this Indenture in connection with such action, any holder of a Security the certificate number of which is shown by the evidence to be included among the certificate numbers of the Securities the holders of which have consented to such action may, by filing written notice at the Corporate Trust Office and upon proof of holding as provided in this Article, revoke such action so far as concerns such Security. Except as aforesaid, any such action taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security and of any Securities issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon any such Security. Any action taken by the holders of the percentage in aggregate principal amount of the Securities specified in this Indenture in connection with such action shall be conclusively binding upon the Issuers, the Trustee and the holders of all the Securities. ARTICLE SEVEN SUPPLEMENTAL INDENTURES SECTION 7.1 Supplemental Indentures Without Consent of Securityholders. 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 hereto for one or more of the following purposes: 46 (a) to evidence the succession of another corporation to either Issuer or successive successions and the assumption by the successor corporation of the covenants, agreements and obligations of such Issuer pursuant to Article Eight; (b) to add to the covenants of the Issuers such further covenants, restrictions, conditions or provisions as such Boards of Directors and the Trustee shall consider to be for the protection of the holders of Securities, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the holders of a majority in aggregate principal amount of the Securities to waive such an Event of Default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture; or to make such other provisions in regard to matters or questions arising under this Indenture or under any supplemental indenture as such Boards of Directors may deem necessary or desirable and which shall not materially and adversely affect the interests of the holders of the Securities; and (d) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with Securities issued hereunder in fully registered form, and to make all appropriate changes for such purpose. The Trustee is hereby authorized to join in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 7.2. SECTION 7.2 Supplemental Indentures With Consent of Securityholders. With the consent (evidenced as provided in Article Six) of the holders of not less than a majority in aggregate principal amount of the Securities 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 hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Securities; provided that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the principal amount thereof, or 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 47 Securityholder to institute suit for the payment thereof, or waive a default in the payment of principal of, premium, if any, or interest on any Security, change the currency of payment of principal of, premium, if any, or interest on any Security, or modify any provision of this Indenture with respect to the priority of the Securities in right of payment without the consent of the holder of each Security so affected, or (b) reduce the aforesaid percentage of Securities, the consent of the holders of which is required for any such supplemental indenture, without the consent of the holders of all Securities then outstanding. Upon the request of the Issuers, accompanied by a copy of a resolution of their respective Boards of Directors certified by their respective Secretaries or Assistant Secretaries authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of securityholders and other documents, if any, required by Section 6.1, the Trustee shall join with the Issuers in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuers and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Issuers shall mail a notice thereof by first-class mail to the holders of Securities at their addresses as they shall appear on the registry books of the Issuers, setting forth in general terms the substance of such supplemental indenture. Any failure of the Issuers to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 7.3 Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Issuers and the holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 7.4 Documents to Be Given to Trustee. The Trustee, subject to the provisions of Sections 5.1 and 5.2, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such supplemental indenture complies with the applicable provisions of this Indenture. SECTION 7.5 Notation on Securities in Respect of Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved by the Trustee as to any matter provided for by such supplemental indenture or as to any action taken at any such meeting. If the Issuers or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Boards of Directors of each Issuer, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Issuers, authenticated by the Trustee and delivered in exchange for the Securities then outstanding. 48 ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 8.1 When Issuer May Merge, etc. Neither Issuer shall 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 Securities and this 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 this clause (4) shall 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 $1.00 of additional Indebtedness as provided under clause (ii) of Section 3.11(a) hereof if such provision were applicable to such entity. SECTION 8.2 Successor Corporation Substituted. Upon any consolidation or merger, or any sale, transfer, lease, conveyance or other disposition of all or substantially all of the assets of an Issuer in accordance with Section 8.1, the successor corporation formed by such consolidation or into or with which such Issuer is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Issuers under this Indenture with the same effect as if such successor person has been named as an Issuer herein and thereafter, except in the case of a lease, the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Securities. 49 ARTICLE NINE SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS; DEFEASANCE SECTION 9.1 Satisfaction and Discharge of Indenture. If at any time (a) the Issuers shall have paid or caused to be paid the principal of and interest on all the Securities outstanding hereunder, as and when the same shall have become due and payable, or (b) the Issuers shall have delivered to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) or (c) all Securities not theretofore 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 the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) not theretofore cancelled or delivered to the Trustee for cancellation, including principal and interest due or to become due to such date of maturity or redemption date, as the case may be (but excluding, however, the amount of any moneys for the payment of principal of or interest on the Securities theretofore repaid to the Issuers in accordance with the provisions of Section 9.4 or paid to any state or the District of Columbia pursuant to its unclaimed property or similar laws), and (d) the Issuers shall also pay or cause to be paid all other sums payable hereunder by the Issuers, then this Indenture shall cease to be of further effect (except as to (i) rights of registration of transfer and exchange, and the Issuers' right of optional redemption, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen securities, (iii) rights of holders to receive payments of principal thereof and interest thereon, (iv) the rights, obligations and immunities of the Trustee hereunder, (v) the rights of the securityholders as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them and (vi) the obligation of the Issuers to maintain an office or agency as provided in Section 3.2), and the Trustee, on demand of the Issuers accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuers, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture. The Issuers jointly and severally agree to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities. SECTION 9.2 Application by Trustee of Funds Deposited for Payment of Securities. Subject to Section 9.4, all moneys deposited with the Trustee pursuant to Section 9.1 or 9.5 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Issuers acting as their own paying agent), to the holders of the particular Securities for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extent required by law. SECTION 9.3 Repayment of Moneys Held by Paying Agent. In connection with the satisfaction and discharge of this Indenture all moneys then held by any paying agent under the provisions of this Indenture shall, upon demand of the Issuers, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. 50 SECTION 9.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Three Years. Any moneys deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest on any Security and not applied but remaining unclaimed for three years after the date upon which such principal or interest shall have become due and payable, shall, upon the written request of the Issuers and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuers by the Trustee or such paying agent, and the holder of such Security shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Issuer for any payment which such holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease. SECTION 9.5 Defeasance. At the Issuers' option, either (a) the Issuers shall be deemed to have been Discharged (as defined below) from their respective obligations under the Securities on the 91st day after the applicable conditions set forth below have been satisfied or (b) the Issuers shall cease to be under any obligation to comply with any term, provision or condition set forth in Sections 3.9 through 3.18, 8.1 and 8.2 with respect to the Securities at any time after the applicable conditions set forth below have been satisfied: (1) the Issuers shall have deposited or caused to be deposited irrevocably with the Trustee as funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities (i) funds in an amount sufficient to pay (A) the principal amount of the Securities in full on the date of maturity of the Securities or a selected date of redemption of the Securities as permitted under this Indenture (if such Securities are to be called for redemption and satisfactory arrangements have been made with the Trustee for the giving of notice of redemption) and (B) the interest on such aggregate principal amount to the date of maturity of the Securities or such date of redemption, taking into account all intervening interest payment dates, for the period from the date through which interest on the Securities has been paid to the date of maturity of the Securities or such date of redemption and all other sums payable hereunder by the Issuers; provided that such funds, if invested, shall be invested only in U.S. Government obligations maturing prior to the date of maturity of the Securities or, to the extent applicable, such date of redemption and such intervening interest payment dates; and, provided further, however, that the Trustee shall have no obligation to invest such funds; or (ii) U.S. Government obligations in such aggregate principal amount and maturity on such dates as will, together with the income or increment to accrue thereon, but without consideration of any reinvestment of such income or increment, be sufficient to pay when due (including any intervening interest payment dates) the amounts set forth in the foregoing clauses (A) and (B); or (iii) a combination of (i) and (ii) sufficient (in the cases of deposits made pursuant to (ii) or (iii)), in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge each installment of principal of, and interest on, the outstanding Securities on the dates such installments of principal or interest are due; (2) no Event of Default or event which with notice or lapse of time would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit; (3) the Issuers shall have delivered to the Trustee (A) an Opinion of Counsel to the effect that the deposit of such funds or investments or both to defease the Issuers' obligations in respect of the Securities is in accordance with the provisions of this Indenture and (B) either (i) an Opinion of Counsel to the effect that Holders of the Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of the exercise of the option under this Section 9.5 and will be subject to United States federal income tax on the same amount and in the same manner and at the same time as would have been the case if such option had not been exercised, or (ii) a private letter ruling to that effect directed to the Trustee received from the United States Internal Revenue Service; and (4) the deposit of such funds or investments shall not contravene applicable law. 51 "Discharged" means that the Issuers shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities and to have satisfied all the obligations under this Indenture and the Securities (and the Trustee, at the request and the expense of the Issuers, shall execute proper instruments acknowledging the same), except (i) the rights of Holders of Securities to receive, from the trust fund described in clause (1) above, payment of the principal of and the interest on the Securities when such payments are due; (ii) the Issuers' obligations with respect to the Securities under Section 2.5, 2.6, and 9.4; (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder; and (iv) the obligation of the Issuers to maintain an office or agency as provided in Section 3.2. ARTICLE TEN MISCELLANEOUS PROVISIONS SECTION 10.1 Stockholders, Officers and Directors of Issuers Exempt from Individual Liability. No recourse under or upon any obligation, covenant or agreement contained in this Indenture, or in any Security, or because of any indebtedness evidenced thereby, shall be had against any past, present or future incorporator, stockholder, officer or director, as such, of Advantica or Denny's Holdings or of any successor, either directly or through Advantica or Denny's Holdings or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities by the holders thereof and as part of the consideration for the issue of the Securities. Nothing in this provision limits the liability, if any, of any such incorporator, officer, director or shareholder, as such, under the federal securities laws. SECTION 10.2 Provisions of Indenture for the Sole Benefit of Parties and Securityholders. Nothing in this Indenture or in the Securities, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and their successors and the holders of Senior Indebtedness and the holders of the Securities, any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto and their successors and of the holders of Senior Indebtedness and the holders of the Securities. SECTION 10.3 Successors and Assigns of Issuers Bound by Indenture. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of each Issuer shall bind its successors and assigns, whether so expressed or not. SECTION 10.4 Notices and Demands on Issuers, Trustee and Securityholders. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities to or on the Issuers may be given or served by hand delivery, by overnight courier or by being deposited postage prepaid, first-class mail (except, in each case, as otherwise specifically provided herein), in each case addressed (until another address of the Issuers is filed by the Issuers with the Trustee) to Advantica Restaurant Group, Inc., 203 East Main Street, Spartanburg, South Carolina 29319, Attention: Chief Financial Officer. Any notice, direction, request or demand by the Issuers or any securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the Corporate Trust Office. Where this Indenture provides for notice to Holders, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and delivered by hand, delivered by overnight 52 courier or mailed, first-class postage prepaid, to each Holder entitled thereto, at his last address as it appears in the Security register. In any case where notice to Holders is given by any of the foregoing means, neither the failure to give such notice by such means, nor any defect in any notice so given, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impracticable to mail notice to the Issuers and securityholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. SECTION 10.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein. Upon any application or demand by the Issuers to the Trustee to take any action under any of the provisions of this Indenture, the Issuers shall furnish to the Trustee an Officers' Certificate of each Issuer, which may be a joint certificate of both Issuers, stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition, (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based, (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Any certificate, statement or opinion of an officer of an Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters information with respect to which is in the possession of an Issuer, upon the certificate, statement or opinion of or representations by an officer or officers of such Issuer, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of an Issuer or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Issuer, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters 53 upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. SECTION 10.6 Payments Due on Saturdays, Sundays and Holidays. If the date of maturity of interest on or principal of the Securities or the date fixed for redemption of any Security shall not be a Business Day, then payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. SECTION 10.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture by operation of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939 (an "incorporated provision"), such incorporated provision shall control. SECTION 10.8 New York Law to Govern. This Indenture and each Security shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said state, except as may otherwise be required by mandatory provisions of law. SECTION 10.9 Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 10.10 Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 11.1 Right of Optional Redemption. Except as provided below, the Securities may not be redeemed, in whole or in part, at the option of the Issuers prior to September 30, 2004. On and after such date, the Securities may be redeemed, in whole or in part, at the option of the Issuers, upon the terms and subject to the conditions set forth in the form of Security hereinabove recited. Notwithstanding the foregoing, prior to September 30, 2004, the Issuers may redeem up to 35% of the aggregate principal amount of Securities outstanding on the date hereof at a redemption price (expressed as a percentage of the principal amount) of [ ]%, plus accrued and unpaid interest, if any, to the redemption date, from the net proceeds of any Public Offering. SECTION 11.2 Notice of Redemption; Partial Redemptions. Notice of redemption to the holders of Securities to be redeemed as a whole or in part shall be given by mailing notice of such redemption by first class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such holders of Securities at their last addresses as they shall appear upon the registry books. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives the notice. Failure to give notice 54 by mail, or any defect in the notice to the holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. The notice of redemption to each such holder shall specify the principal amount of each Security held by such holder to be redeemed, the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In case any Security is to be redeemed in part only the notice if redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities to be redeemed at the option of the Issuers shall be given by the Issuers or, at the Issuers' request, by the Trustee in the name and at the expense of the Issuers. On or prior to the redemption date specified in the notice of redemption given as provided in this Section, the Issuers will deposit with the Trustee or with one or more paying agents (or, if either Issuer is acting as paying agent, set aside, segregate and hold in trust as provided in Section 3.4) an amount of money sufficient to redeem on the redemption date all the Securities so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. If less than all the outstanding Securities are to be redeemed the Issuers will deliver to the Trustee at least 70 days prior to the date fixed for redemption an Officers' Certificate stating the aggregate principal amount of Securities to be redeemed. If less than all the Securities are to be redeemed the Trustee shall select in such manner as it shall deem appropriate and fair, but generally pro rata or by lot, Securities to be redeemed in whole or in part. Securities may be redeemed in part in multiples of $1,000 only. The Trustee shall promptly notify the Issuers in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 11.3 Payment of Securities called for Redemption. If notice of redemption has been given as above provided, the Securities or portions of Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Issuers shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue and, except as provided in Sections 5.5 and 9.4, such Securities shall cease from and after the date fixed for redemption to be entitled to any benefit or security under this Indenture, and the holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to the date fixed for redemption. On presentation and surrender of such Securities at a place of payment specified in said notice said Securities or the specified portions thereof shall be paid and redeemed by the Issuers at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; provided that any semi-annual payment of interest becoming due on the date fixed for redemption shall be payable to the holders of such Securities registered as such on the relevant record date subject to the terms and provisions of Section 2.4 hereof. 55 If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate borne by the Security. Upon presentation of any Security redeemed in part only, the Issuers shall execute and the Trustee shall authenticate and deliver to or on the order of the holder thereof, at the expense of the Issuers, a new Security or Securities, of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 11.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption. Securities shall be excluded from eligibility for selection for redemption if they are identified by registration and certificate number in a written statement signed by an authorized officer of the Issuers and delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by either (a) an Issuer or (b) an entity specifically identified in such written statement directly or indirectly controlling or controlled by or under direct or indirect common control with an Issuer. SECTION 11.5 Offer to Repurchase by Application of Net Proceeds. At such time as the Issuers determine to make a Net Proceeds Offer pursuant to the provisions of Section 3.13 hereof, the Issuers shall deliver to the Trustee a notice to such effect specifying the aggregate principal amount of the Securities for which the Net Proceeds Offer will be made. Within 15 days thereafter, the Trustee shall select the Securities to be offered to be repurchased in accordance with Section 11.2 hereof. Within 10 days thereafter the Issuers shall mail or cause the Trustee to mail (in the Issuers' names and at their expense and pursuant to an Officers' Certificate as required by Section 3.13 hereof) a Net Proceeds Offer to repurchase to each Holder of Securities whose Securities are to be offered to be repurchased. The Net Proceeds Offer shall identify the Securities to which it relates and shall contain the information required by the second paragraph of Section 11.2 hereof and shall provide for a repurchase date no earlier than 65 days after the mailing of the Net Proceeds Offer. A Holder receiving a Net Proceeds Offer may elect to have repurchased the Securities to which the Net Proceeds Offer relates by providing written notice thereof to the Trustee and the Issuers on or before 35 days preceding the repurchase date and shall thereafter complete the form entitled "Option of Holder to Elect to Have Security Repurchased" on the reverse of the Security (with the box checked referencing the Net Proceeds Offer pursuant to this Section 11.5) and surrender the Security to the Issuers, or depositary, if appointed by the Issuers, or a paying agent at least three days prior to the repurchase date. A Holder may not elect to have repurchased less than all of the Securities to which the Net Proceeds Offer relates. Other than as specifically provided in this Section 11.5, any repurchase pursuant to this Section 11.5 shall be made pursuant to the provisions of Sections 11.2 through 11.4 hereof. SECTION 11.6 Provisions Governing Repurchase Pursuant to Change of Control Offer. Any repurchase of Securities pursuant to any Holder's acceptance of a Change of Control Offer shall be governed by the provisions of Section 3.18 of this Indenture and, to the extent applicable and not inconsistent therewith, the provisions of Sections 11.2 through 11.4 hereof. 56 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed all as of the date first above written. ADVANTICA RESTAURANT GROUP, INC. By ------------------------------------- Ronald B. Hutchison, Vice President Attest: By ------------------------- DENNY'S HOLDINGS, INC. By ------------------------------------- Attest: By ------------------------- U.S. BANK NATIONAL ASSOCIATION, as Trustee By ------------------------------------- Title: Assistant Vice President 57 EX-5.1 4 g71871a1ex5-1.txt FORM OF OPINION OF ALSTON & BIRD LLP / LEGALITY EXHIBIT 5.1 Form of Opinion of Counsel Advantica Restaurant Group, Inc. Denny's Holdings, Inc. 230 East Main Street Spartanburg, South Carolina 29319 Re: Registration Statement on Form S-4 (File No. 333-72658) Ladies and Gentlemen: We have acted as counsel to Advantica Restaurant Group, Inc., a Delaware corporation ("Advantica") and Denny's Holdings, Inc., a New York corporation ("Denny's Holdings," and together with Advantica, the "Companies"), in connection with the filing of the above-referenced Registration Statement (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") to register under the Securities Act of 1933, as amended (the "Securities Act"), $ million principal amount of Senior Notes due 2007 of the Companies (the "Notes") to be issued under an Indenture (the "Indenture") by and among the Companies and U.S. Bank National Association, as Trustee (the "Trustee"). Following the effectiveness of the Registration Statement, the Companies intend to exchange Advantica's 11 1/4% Senior Notes due 2008 for the Notes (the "Old Notes"), subject to the terms and conditions set forth in the prospectus constituting part of the Registration Statement (the "Exchange Offer"). This opinion letter is rendered pursuant to Item 21 of Form S-4 and Item 601(b)(5) of the Commission's Regulation S-K. We have examined the Restated Certificate of Incorporation of Advantica, the Bylaws of Advantica, as amended, the Certificate of Incorporation of Denny's Holdings and the Amended and Restated By-Laws of Denny's Holdings, as amended, records of proceedings of the Boards of Directors of the Companies deemed by us to be relevant to this opinion letter, the proposed form of Note, the proposed form of Indenture relating to the Notes, the Registration Statement, and other agreements and documents that we deemed necessary for the purpose of expressing the opinion set forth herein. We also have made such further legal and factual examinations and investigations as we deemed necessary for purposes of expressing the opinion set forth herein. As to certain factual matters relevant to this opinion letter, we have relied upon certificates and statements of officers of the Companies and certificates of public officials. Except to the extent expressly set forth herein, we have made no independent investigations with regard thereto, and, accordingly, we do not express any opinion as to matters that might have been disclosed by independent verification. Our opinion set forth below is limited to the laws of the State of New York, the General Corporation Law of the State of Delaware, applicable provisions of the Constitution of the State of Delaware and reported judicial decisions interpreting such General Corporation Law and Constitution. We do not express any opinion herein concerning any other laws. This opinion letter is provided to the Companies and the Commission for their use solely in connection with the transactions contemplated by the Registration Statement and may not be used, circulated, quoted or otherwise relied upon by any other person or for any other purpose without our express written consent. The only opinion rendered by us consists of those matters set forth in the sixth paragraph hereof, and no opinion may be implied or inferred beyond the opinion expressly stated. Based on the foregoing, it is our opinion that, when (i) the Companies, pursuant to authority granted by their respective Boards of Directors, shall have duly taken action to determine the financial terms of the Notes and the Exchange Offer, (ii) the Companies shall have duly complied with the registration and prospectus delivery requirements of the Securities Act, with the Securities Exchange Act of 1934, as amended, and with such state securities laws as may be applicable, (iii) the Indenture shall have been duly completed, executed, attested and delivered by the Companies and the Trustee, and (iv) the Notes shall have been exchanged for the Old Notes in accordance with the terms and conditions of the Exchange Offer as stated in the Registration Statement and the transmittal documents that are exhibits thereto, and (v) the Notes shall have been duly completed, executed and attested by the Companies, authenticated by the Trustee under the Indenture, assuming due authorization of the Indenture by the Trustee and the due qualification thereof under the Trust Indenture Act of 1939, as amended, the Notes will be validly issued and will constitute legally binding obligations of the Companies entitled to the benefits of the Indenture, except (a) as may be limited by applicable bankruptcy, insolvency, liquidation, reorganization, moratorium and other laws relating to or affecting the rights and remedies of creditors generally, and by notions of reasonableness, good faith and fair dealing, and (b) as the remedy of specific performance and other forms of equitable relief may be subject to certain defenses and to the discretion of the court before which proceedings may be brought (regardless of whether enforceability is considered in a proceeding in equity or at law). We consent to the filing of this opinion letter as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the Prospectus constituting a part thereof. In giving such consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder. Very truly yours, EX-8.1 5 g71871a1ex8-1.txt FORM OF OPINION OF ALSTON & BIRD LLP / TAX MATTERS EXHIBIT 8.1 Form of Opinion of Counsel Advantica Restaurant Group, Inc. Denny's Holdings, Inc. 203 East Main Street Spartanburg, South Carolina 29319 Re: Registration Statement on Form S-4 (File No. 333-72658) Ladies and Gentlemen: We have acted as counsel to Advantica Restaurant Group, Inc., a Delaware corporation ("Advantica") and Denny's Holdings, Inc., a New York corporation ("Denny's Holdings"), in connection with the proposed offer (the "Exchange Offer") to exchange up to $265,000,000 aggregate principal amount of Advantica's outstanding 11 1/4% Senior Notes due 2008 (the "Old Notes"), for Senior Notes due 2007 issued by Advantica and Denny's Holdings (the "New Notes"), pursuant to a Registration Statement on Form S-4 (File No. 333-72658) (as amended or supplemented, the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. You have requested our opinion as to the material United States federal income tax consequences of the Exchange Offer. In preparing our opinion, we have examined and relied upon the Registration Statement and such other documents as we deemed necessary. Based upon and subject to the foregoing, we are of the opinion that 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 constitute securities for United States federal income tax purposes, and that the discussion in the Registration Statement under the heading "United States Federal Income Tax Considerations" sets forth the material United States federal income tax consequences of the exchange of Old Notes for New Notes pursuant to the Exchange Offer. The opinion set forth above is based upon existing statutory, regulatory, and judicial authority, any of which may be changed at any time, possibly with retroactive effect. We assume no obligation to revise or supplement this opinion in the event of any change in existing statutory, regulatory, or judicial authority. No tax ruling has been sought from the Internal Revenue Service ("IRS") with respect to any of the matters discussed herein. Unlike a ruling from the IRS, an opinion of counsel is not binding on the IRS. Hence, no assurance can be given that the opinion stated in this letter will not be successfully challenged by the IRS or that a court would reach the same conclusion. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm in the section entitled "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, -2- EX-12.1 6 g71871a1ex12-1.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 ADVANTICA RESTAURANT GROUP, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
One Week Fifty-One Three Quarters Ended Ended Weeks Ended ---------------------------- ------------------ January 7, December 30, --------- --------- September 27, September 26, 1996 1997 1998 1998 1999 2000 2000 2001 -------- -------- ---------- ------------ --------- --------- ------------- ------------- (In thousands) Loss from continuing operations before income taxes ($73,654) ($81,978) $589,044 ($129,060) ($274,988) ($80,670) ($54,706) ($55,505) -------- -------- -------- --------- --------- -------- -------- -------- Add: Interest expense excluding capitalized interest 153,839 124,507 1,901 101,590 93,498 90,311 62,322 54,732 Amortization of debt expense 4,696 4,608 83 (7,501) (7,682) (3,366) (3,394) 1,080 -------- -------- -------- --------- --------- -------- -------- -------- Subtotal 158,535 129,115 1,984 94,089 85,816 86,945 58,928 55,812 -------- -------- -------- --------- --------- -------- -------- -------- Interest factor in rents 11,668 11,190 218 11,174 12,349 15,774 11,831 12,019 -------- -------- -------- --------- --------- -------- -------- -------- Total earnings (losses) $ 96,549 $ 58,327 $591,246 ($23,797) ($176,823) $ 22,049 $ 16,053 $ 12,326 ======== ======== ======== ========= ========= ======== ======== ======== Fixed charges: Interest expense excluding capitalized interest $153,839 $124,507 $ 1,901 $ 101,590 $ 93,498 $ 90,311 $ 62,322 $ 54,732 Amortization of debt expense 4,696 4,608 83 (7,501) (7,682) (3,366) (3,394) 1,080 -------- -------- -------- --------- --------- -------- -------- -------- Subtotal 158,535 129,115 1,984 94,089 85,816 86,945 58,928 55,812 Interest factor in rents 11,668 11,190 218 11,174 12,349 15,774 11,831 12,019 -------- -------- -------- --------- --------- -------- -------- -------- Total fixed charges $170,203 $140,305 $ 2,202 $ 105,263 $ 98,165 $102,719 $ 70,759 $ 67,831 ======== ======== ======== ========= ========= ======== ======== ======== Ratio of earnings to fixed charges --- --- 268.5 --- --- --- --- --- ======== ======== ======== ========= ========= ======== ======== ======== Deficiency in the coverage of fixed charges by earnings (losses) before fixed charges 73,654 81,978 --- 129,060 274,988 80,670 54,706 55,505 ======== ======== ======== ========= ========= ======== ======== ========
For purposes of these computations, the ratio of earnings to fixed charges has been calculated by dividing pretax earnings by fixed charges. Earnings, as used to compute the ratio, equals the sum of income before income taxes and fixed charges excluding capitalized interest. Fixed charges are the total interest expenses including capitalized interest, amortization of debt expenses and a rental factor that is representative of an interest factor (estimated to be one third) on operating leases. EX-23.1 7 g71871a1ex23-1.txt CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-72658 of Advantica Restaurant Group, Inc. and Denny's Holdings, Inc. on Form S-4 of our report on Advantica Restaurant Group, Inc. dated February 14, 2001, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Greenville, South Carolina December 6, 2001 EX-24.1 8 g71871a1ex24-1.txt POWERS OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY ADVANTICA RESTAURANT GROUP, INC. KNOW ALL THESE PERSONS BY THESE PRESENTS, that each of the undersigned hereby constitutes and appoints Rhonda J. Parish and Andrew F. Green the true and lawful attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, to sign on his or her behalf, as a director or officer, or both, as the case may be, of Advantica Restaurant Group, Inc., a Delaware corporation (the "Corporation"), a Registration Statement on Form S-4 (and any abbreviated registration statement relating thereto permitted pursuant to Rule 462 under the Securities Act of 1933, as amended (the "Securities Act")), for the purpose of registering, pursuant to the Securities Act, senior notes due 2007 of the Corporation, and to sign any or all amendments and any or all post-effective amendments to such Registration Statement (and any such abbreviated registration statement), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, each of them with or without the other, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or each of them or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. /s/ JAMES B. ADAMSON /s/ NELSON J. MARCHIOLI - ----------------------------------- ------------------------------------- James B. Adamson Nelson J. Marchioli /s/ VERA K. FARRIS /s/ JAMES J. GAFFNEY - ----------------------------------- ------------------------------------- Vera K. Farris James J. Gaffney /s/ ROBERT E. MARKS /s/ LLOYD I. MILLER, III - ----------------------------------- ------------------------------------- Robert E. Marks Lloyd I. Miller, III /s/ CHARLES F. MORAN /s/ ELIZABETH A. SANDERS - ----------------------------------- ------------------------------------- Charles F. Moran Elizabeth A. Sanders /s/ DONALD R. SHEPHERD - ----------------------------------- Donald R. Shepherd Dated: November 2, 2001 POWER OF ATTORNEY DENNY'S HOLDINGS, INC. KNOW ALL THESE PERSONS BY THESE PRESENTS, that each of the undersigned hereby constitutes and appoints James H. Allyn the true and lawful attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf, as a director or officer, or both, as the case may be, of Denny's Holdings, Inc., a New York corporation (the "Corporation"), a Registration Statement on Form S-4 (and any abbreviated registration statement relating thereto permitted pursuant to Rule 462 under the Securities Act of 1933, as amended (the "Securities Act")), for the purpose of registering, pursuant to the Securities Act, senior notes due 2007 of the Corporation, and to sign any or all amendments and any or all post-effective amendments to such Registration Statement (and any such abbreviated registration statement), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney or attorney-in-fact, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney or attorney-in-fact or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. /s/ SAMUEL S. SONTAG /s/ JAMES H. ALLYN - -------------------------------------- -------------------------------- Samuel S. Sontag James H. Allyn Dated: November 1, 2001 EX-25.1 9 g71871a1ex25-1.txt STATEMENT OF ELIGIBILITY OF TRUSTEE ON FORM T-1 EXHIBIT 25.1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2)___ ------------------------------------------------------- U.S. BANK NATIONAL ASSOCIATION (Exact name of Trustee as specified in its charter) 31-0841368 I.R.S. Employer Identification No. 601 SECOND AVENUE SOUTH MINNEAPOLIS, MN 55402 (Address of principal executive offices) (Zip Code) Richard H. Prokosch U.S. Bank National Association 180 East Fifth Street St. Paul, MN 55101 (Name, address and telephone number of agent for service) ADVANTICA RESTAURANT GROUP, INC. (Exact name of Obligor as specified in its charter) DELAWARE 13-3487402 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) DENNY'S HOLDINGS, INC. (Exact name of Obligor as specified in its charter) NEW YORK 22-3004358 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 203 EAST MAIN STREET SPARTANBURG, SOUTH CAROLINA 29319-9966 (Address of principal executive offices) (Zip Code) FORM T-1 ITEM 1. GENERAL INFORMATION. Furnish the following information as to the Trustee. a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Washington, D.C. b) Whether it is authorized to exercise corporate trust powers. Yes ITEM 2. AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the Trustee, describe each such affiliation. None ITEMS 3-15 Items 3-15 are not applicable because to the best of the Trustee's knowledge the obligor is not in default under any Indenture for which the Trustee acts as Trustee. ITEM 16. LIST OF EXHIBITS: List below all exhibits filed as a part of this statement of eligibility and qualification. 1. A copy of the Articles of Association of the Trustee now in effect, attached as Exhibit 1. 2. A copy of the certificate of authority of the Trustee to commence business, attached as Exhibit 2. 3. A copy of the certificate of authority of the Trustee to exercise corporate trust powers, attached as Exhibit 3. 4. A copy of the existing bylaws of the Trustee, as now in effect, attached as Exhibit 4. 5. A copy of each Indenture referred to in Item 4. Not applicable. 6. The consent of the Trustee required by Section 321(b) of the Trust Indenture Act of 1939, attached as Exhibit 6. 7. Report of Condition of the Trustee as of June 30, 2001, published pursuant to law or the requirements of its supervising or examining authority, attached as Exhibit 7. 2 NOTE The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligors within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligors, or affiliates, are based upon information furnished to the Trustee by the obligors. While the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the Trustee, U.S. BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of St. Paul, State of Minnesota on the 28th day of November, 2001. U.S. BANK NATIONAL ASSOCIATION By: /s/ Richard H Prokosch ------------------------------- Richard H Prokosch Vice President By: /s/ Julie Eddington ------------------- Julie Eddington Assistant Vice President 3 EXHIBIT 1 U.S. BANK NATIONAL ASSOCIATION (FORMERLY NAMED FIRSTAR BANK, NATIONAL ASSOCIATION) CHARTER NO. 24 AMENDED AND RESTATED ARTICLES OF ASSOCIATION These Amended and Restated Articles of Association supersede the Articles of Association of Firstar Bank, National Association, being renamed U.S. Bank National Association (the "Association"), heretofore in effect. FIRST: The title of the Association shall be "U.S. Bank National Association." SECOND: The main office of the Association shall be in the City of Cincinnati, County of Hamilton, State of Ohio. The general business of the Association shall be conducted at its main office and its branches. THIRD: The Board of Directors of the Association shall consist of not less than five (5) nor more than twenty-five (25) shareholders, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors. FOURTH: The annual meeting of the shareholders for the election of Directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office or such other place as the Board of Directors may designate, on the day of each year specified thereof by the Bylaws, but if no election is held on that day, it may be held on any subsequent day according to the provisions of law; and all elections shall be held according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the Board of Directors. FIFTH: The aggregate number of shares of common stock that the Association has authority to issue is 3,640,000, all of which are of one class only, each such share having a par value of $5.00 (the "Common Stock"). The Association shall also have authority to issue 2,411,935 shares of preferred stock, without par value (the "Preferred Stock"). No holder of shares of the capital stock of any class of the Association shall have any pre-emptive or preferential right of subscription to any shares of any class of stock of the Association, whether now or hereafter authorized, or to any obligations convertible into stock of the Association issued or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion, may from time to time determine and at such price as the Board of Directors may from time to time fix. 4 The Association, at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. SECTION 5.01. SERIES A PREFERRED STOCK. Pursuant to the provisions of this Article Fifth, a series of Series A Non-Cumulative Preferred Stock, consisting of one hundred sixty-seven thousand (167,000) shares, is hereby established and authorized to be issued, and in addition to such matters specified elsewhere in this Article Fifth, such Series A Non-Cumulative Preferred Stock shall have the following powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions: (A) DESIGNATION AND AMOUNT. The shares of Preferred Stock shall be designated as the Series A Non-Cumulative Preferred Stock (the "Series A Preferred Stock"), and the number of shares constituting the Series A Preferred Stock shall be one hundred sixty-seven thousand (167,000). The liquidation preference of the Series A Preferred Stock shall be $1,000 per share (the "Series A Liquidation Value"). (B) RANK. The Series A Preferred Stock shall, with respect to dividend rights and upon liquidation, dissolution and winding up of the Association, rank (i) senior to all classes and series of Common Stock of the Association and to all classes and series of capital stock of the Association now or hereafter authorized, issued or outstanding, which by their terms expressly provide that they are junior to the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association, or which do not specify their rank (collectively with the Common Stock, the "Series A Junior Securities"); (ii) on a parity with the Series B Preferred Stock and the Series C Preferred Stock and each other class of capital stock or series of preferred stock issued by the Association after the date hereof, the terms of which specifically provide that such class or series will rank on a parity with the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association (collectively with the Series B Preferred Stock and the Series C Preferred Stock, the "Series A Parity Securities"); and (iii) junior to each other class of capital stock or series of preferred stock issued by the Association after the date hereof, the terms of which specifically provide that such class or series will rank senior to the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association (collectively, the "Series A Senior Securities"). (C) DIVIDENDS. Dividends are payable on the Series A Preferred Stock as follows: (i) The holders of shares of the Series A Preferred Stock in preference to the Series A Junior Securities shall be entitled to receive, out of funds legally available for that purpose, and when, as, and if declared by the Board of Directors of the Association, dividends payable in cash at the annual rate of eight percent (8%) of the Series A Liquidation Value (the "Series A Dividend Rate"). (ii) Dividends on the Series A Preferred Stock shall be non-cumulative. Dividends not paid on any Series A Dividend Payment Date shall not accumulate thereafter. Dividends shall accumulate from the first day of any Series A Dividend Period to but excluding the immediately succeeding Series A Dividend Payment Date. Dividends, if and when declared, shall be payable in arrears in cash on each Series A Dividend Payment Date of each year with respect to the Series A Dividend Period ending 5 on the day immediately prior to such Series A Dividend Payment Date at the Series A Dividend Rate to holders of record at the close of business on the applicable Record Date, commencing on December 31, 2000 with respect to any shares of Series A Preferred Stock issued prior to that Series A Dividend Payment Date; provided that dividends payable on the Series A Preferred Stock on the Series A Dividend Payment Date immediately following the first Series A Dividend Period following the Issue Date (and any dividend payable for a period less than a full semiannual period) shall be prorated for the period and computed on the basis of a 360-day year of twelve 30-day months and the actual number of days in such Series A Dividend Period; and provided, further, that dividends payable on the Series A Preferred Stock on the Series A Dividend Payment Date immediately following the first Series A Dividend Period following the Issue Date shall include any accumulated and unpaid dividends on the Realty Company Series B Exchangeable Stock exchanged for the Series A Preferred Stock as of the Exchange Date for the then current dividend period. Dividends on such Series A Preferred Stock shall be paid only in cash. (iii) No dividends on shares of Series A Preferred Stock shall be declared by the Board of Directors or paid or set apart for payment by the Board of Directors or paid or set apart for payment by the Association if such declaration or payment shall be restricted or prohibited by law. (iv) Holders of shares of Series A Preferred Stock shall not be entitled to any dividends in excess of full dividends declared, as herein provided, on the shares of Series A Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment on the shares of Series A Preferred Stock that may be in arrears. (v) (A) So long as any shares of Series A Preferred Stock are outstanding, no dividends (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Series A Junior Securities and other than as provided in clause (B) below) shall be declared, paid or set aside for payment or other distribution upon any Series A Junior Securities or any other Series A Parity Securities, nor shall any shares of any Series A Junior Securities or any other Series A Parity Securities be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or set aside or made available for a sinking fund for the redemption of any shares of any such stock) by the Association (except by conversion into or exchange for shares of, or options, warrants or rights to subscribe for or purchase, Series A Junior Securities) unless, in each case, the full dividends on all outstanding shares of the Series A Preferred Stock shall have been declared and paid, when due, for the Series A Dividend Period, if any, terminating on or immediately prior to the date of payment in respect of such dividend, distribution, redemption, purchase or acquisition. (B) When dividends for any Series A Dividend Period are not paid in full, as provided in clause (A) above, on the shares of the Series A Preferred Stock or any other Series A Parity Securities, dividends may be declared and paid on any such shares for any dividend period therefor, but only if such dividends are declared and paid pro rata so that the amount of dividends declared and paid per share on the shares of the Series A Preferred Stock and any other Series A Parity Securities, in all cases shall bear to each other the same ratio that the amount of unpaid dividends per share on the 6 shares of the Series A Preferred Stock for such Series A Dividend Period and such other Series A Parity Securities for the corresponding dividend period bear to each other. (D) LIQUIDATION PREFERENCE. (i) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Association, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Association available for distribution to its shareholders an amount in cash equal to the Series A Liquidation Value for each share outstanding, plus an amount in cash equal to all unpaid dividends thereon for the then current Series A Dividend Period, whether or not earned or declared, before any payment shall be made or any assets distributed to the holders of Series A Junior Securities. If the assets of the Association are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Series A Preferred Stock and any Series A Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of Series A Preferred Stock and the holders of outstanding shares of such Series A Parity Securities are entitled were paid in full. (ii) For the purpose of this Section 5.01(d), neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Association, nor the consolidation or merger of the Association, shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Association, unless such voluntary sale, conveyance, exchange or transfer shall be in connection with a plan of liquidation, dissolution or winding up of the Association. (E) REDEMPTION. The Series A Preferred Stock is not redeemable prior to December 31, 2021. On or after such date, the Series A Preferred Stock shall be redeemable, in whole or in part, at the option of the Association, but with the consent of the Comptroller of the Currency and any other appropriate regulatory authorities, if required, for cash out of any source of funds legally available, at a redemption price equal to 100% of the Series A Liquidation Value per share plus unpaid dividends thereon accumulated since the immediately preceding Series A Dividend Payment Date (the "Series A Redemption Price"). Any date of such redemption is referred to as the "Series A Redemption Date." If fewer than all the outstanding shares of Series A Preferred Stock are to be redeemed, the Association will select those to be redeemed by lot or pro rata or by any other method as may be determined by the Board of Directors to be equitable. The Series A Preferred Stock is not subject to any sinking fund. (F) PROCEDURE FOR REDEMPTION. (i) Upon redemption of the Series A Preferred Stock pursuant to Section 5.01(e) hereof, notice of such redemption (a "Series A Notice of Redemption") shall be mailed by first-class mail, postage prepaid, not less than thirty (30) days nor more than sixty (60) days prior to the Series A Redemption Date to the holders of record of the shares to be redeemed at their respective addresses as they shall appear in the records of the Association; provided, however, that failure to give such notice or any defect therein 7 or in the mailing thereof shall not affect the validity of the proceeding for the redemption of any shares so to be redeemed except as to the holder to whom the Association has failed to give such notice or except as to the holder to whom notice was defective. Each such notice shall state: (A) the Series A Redemption Date; (B) the Series A Redemption Price; (C) the place or places where certificates for such shares are to be surrendered for payment of the Series A Redemption Price; and (D) the CUSIP number of the shares being redeemed. (ii) If a Series A Notice of Redemption shall have been given as aforesaid and the Association shall have deposited on or before the Series A Redemption Date a sum sufficient to redeem the shares of Series A Preferred Stock as to which a Series A Notice of Redemption has been given in trust with the Transfer Agent with irrevocable instructions and authority to pay the Series A Redemption Price to the holders thereof, or if no such deposit is made, then upon the Series A Redemption Date (unless the Association shall default in making payment of the Series A Redemption Price), all rights of the holders thereof as shareholders of the Association by reason of the ownership of such shares (except their right to receive the Series A Redemption Price thereof without interest) shall cease and terminate, and such shares shall no longer be deemed outstanding for any purpose. The Association shall be entitled to receive, from time to time, from the Transfer Agent the interest, if any, earned on such moneys deposited with it, and the holders of any shares so redeemed shall have no claim to any such interest. In case the holder of any shares of Series A Preferred Stock so called for redemption shall not claim the Series A Redemption Price for its shares within twelve (12) months after the related Series A Redemption Date, the Transfer Agent shall, upon demand, pay over to the Association such amount remaining on deposit, and the Transfer Agent shall thereupon be relieved of all responsibility to the holder of such shares, and such holder shall look only to the Association for payment thereof. (iii) Not later than 1:30 p.m., Eastern Standard Time, on the Business Day immediately preceding the Series A Redemption Date, the Association shall irrevocably deposit with the Transfer Agent sufficient funds for the payment of the Series A Redemption Price for the shares to be redeemed on the Series A Redemption Date and shall give the Transfer Agent irrevocable instructions to apply such funds, and, if applicable and so specified in the instructions, the income and proceeds therefrom, to the payment of such Series A Redemption Price. The Association may direct the Transfer Agent to invest any such available funds, provided that the proceeds of any such investment will be available to the Transfer Agent in Milwaukee, Wisconsin at the opening of business on such Series A Redemption Date. (iv) Except as otherwise expressly set forth in this Section 5.01(f), nothing contained in these Amended and Restated Articles of Association shall limit any legal right of the Association to purchase or otherwise acquire any shares of Series A Preferred Stock at any price, whether higher or lower than the Series A Redemption Price, in private negotiated transactions, the over-the-counter market or otherwise. (v) If the Association shall not have funds legally available for the redemption of all of the shares of Series A Preferred Stock on any Series A Redemption Date, the Association shall redeem on the Series A Redemption Date only the number of shares of Series A Preferred Stock as it shall have legally available funds to redeem, as determined 8 in an equitable manner, and the remainder of the shares of Series A Preferred Stock shall be redeemed, at the option of the Association, on the earliest practicable date next following the day on which the Association shall first have funds legally available for the redemption of such shares. (G) REACQUIRED SHARES. Shares of the Series A Preferred Stock that have been redeemed, purchased or otherwise acquired by the Association are not subject to reissuance or resale as shares of Series A Preferred Stock and shall be held in treasury. Such shares shall revert to the status of authorized but unissued shares of preferred stock, undesignated as to series, until the Board of Directors of the Association shall designate them again for issuance as part of a series. (H) VOTING RIGHTS. Except as otherwise required by applicable law, the holders of Series A Preferred Stock shall not have any voting rights. SECTION 5.02. SERIES B PREFERRED STOCK. PURSUANT TO THE PROVISIONS OF THIS ARTICLE FIFTH, A SERIES OF SERIES B NON-CUMULATIVE PREFERRED STOCK, CONSISTING OF ONE MILLION FOUR HUNDRED NINETY-FOUR THOUSAND NINE HUNDRED THIRTY-FIVE (1,494,935) SHARES, IS HEREBY ESTABLISHED AND AUTHORIZED TO BE ISSUED, AND IN ADDITION TO SUCH MATTERS SPECIFIED ELSEWHERE IN THIS ARTICLE FIFTH, SUCH SERIES B NON-CUMULATIVE PREFERRED STOCK SHALL HAVE THE FOLLOWING POWERS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS AND QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS: (A) DESIGNATION AND AMOUNT. The shares of Preferred Stock shall be designated as the Series B Non-Cumulative Preferred Stock (the "Series B Preferred Stock"), and the number of shares constituting the Series B Preferred Stock shall be one million four hundred ninety-four thousand nine hundred thirty-five (1,494,935). The liquidation preference of the Series B Preferred Stock shall be $1,000 per share (the "Series B Liquidation Value"). (B) RANK. The Series B Preferred Stock shall, with respect to dividend rights and upon liquidation, dissolution and winding up of the Association, rank (i) senior to all classes and series of Common Stock of the Association and to all classes and series of capital stock of the Association now or hereafter authorized, issued or outstanding, which by their terms expressly provide that they are junior to the Series B Preferred Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association, or which do not specify their rank (collectively with the Common Stock, the "Series B Junior Securities"); (ii) on a parity with the Series A Preferred Stock and the Series C Preferred Stock and each other class of capital stock or series of preferred stock issued by the Association after the date hereof, the terms of which specifically provide that such class or series will rank on a parity with the Series B Preferred Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association (collectively with the Series A Preferred Stock and the Series C Preferred Stock, the "Series B Parity Securities"); and (iii) junior to each other class of capital stock or series of preferred stock issued by the Association after the date hereof, the terms of which specifically provide that such class or series will rank senior to the Series B Preferred 9 Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association (collectively, the "Series B Senior Securities"). (C) DIVIDENDS. Dividends are payable on the Series B Preferred Stock as follows: (i) The holders of the Series B Preferred Stock in preference to the Series B Junior Securities shall be entitled to receive, out of funds legally available for that purpose, and when, as, and if declared by the Board of Directors of the Association, dividends payable in cash at the applicable annual rate set forth in this Section 5.02(c)(i) below of the Series B Liquidation Value (the "Series B Dividend Rate"): (1) With respect to dividends payable on each Series B Dividend Payment Date occurring from the Issue Date through December 31, 2005, the Series B Dividend Rate shall be eight and seven-eighths percent (8.875%); and (2) Thereafter, dividends shall accrue at a variable rate per annum equal to the 5-year CMT Rate plus two percent (2%). On December 31, 2005, and on December 31 every five (5) years thereafter, the previous dividend rate shall be replaced by the then-current 5-year CMT Rate plus two percent (2%). The 5-year CMT Rate for each 5-year period shall be determined by the Calculation Agent on the second Business Day immediately preceding the first day of such period (each a "CMT Determination Date"). (ii) Dividends on the Series B Preferred Stock shall be non-cumulative. Dividends not paid on any Series B Dividend Payment Date shall not accumulate thereafter. Dividends shall accumulate from the first day of any Series A Dividend Period to but excluding the immediately succeeding Series A Dividend Payment Date. Dividends, if and when declared, shall be payable in arrears in cash on each Series B Dividend Payment Date of each year with respect to the Series B Dividend Period ending on the day immediately prior to such Series B Dividend Payment Date at the Series B Dividend Rate per share to holders of record at the close of business on the applicable Record Date, commencing on the Exchange Date with respect to any shares of Series B Preferred Stock issued prior to that Series B Dividend Payment Date; provided that dividends payable on the Series B Preferred Stock on the Series B Dividend Payment Date immediately following the first Series B Dividend Period following the Issue Date (and any dividend payable for a period less than a full quarterly period) shall be prorated for the period and computed on the basis of a 360-day year of twelve 30-day months and the actual number of days in such Series B Dividend Period; and provided, further, that dividends payable on the Series B Preferred Stock on the Series B Dividend Payment Date immediately following the first Series B Dividend Period following the Issue Date shall include any accumulated and unpaid dividends on the Realty Company Series C Exchangeable Stock exchanged for the Series B Preferred Stock as of the Exchange Date for the then current dividend period. Dividends on such Series B Preferred Stock shall be paid only in cash. 10 (iii) No dividends on shares of Series B Preferred Stock shall be declared by the Board of Directors or paid or set apart for payment by the Board of Directors or paid or set apart for payment by the Association if such declaration or payment shall be restricted or prohibited by law. (iv) Holders of shares of Series B Preferred Stock shall not be entitled to any dividends in excess of full dividends declared, as herein provided, on the shares of Series B Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment on the shares of Series B Preferred Stock that may be in arrears. (v) (A) So long as any shares of Series B Preferred Stock are outstanding, no dividends (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Series B Junior Securities and other than as provided in clause (B) below) shall be declared, paid or set aside for payment or other distribution upon any Series B Junior Securities or any other Series B Parity Securities, nor shall any shares of any Series B Junior Securities or any other Series B Parity Securities be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or set aside or made available for a sinking fund for the redemption of any shares of any such stock) by the Association (except by conversion into or exchange for shares of, or options, warrants or rights to subscribe for or purchase, Series B Junior Securities) unless, in each case, the full dividends on all outstanding shares of the Series B Preferred Stock shall have been declared and paid, when due, for the Series B Dividend Period, if any, terminating on or immediately prior to the date of payment in respect of such dividend, distribution, redemption, purchase or acquisition. (B) When dividends for any Series B Dividend Period are not paid in full, as provided in clause (A) above, on the shares of the Series B Preferred Stock or any other Series B Parity Securities, dividends may be declared and paid on any such shares for any dividend period therefor, but only if such dividends are declared and paid pro rata so that the amount of dividends declared and paid per share on the shares of the Series B Preferred Stock and any other Series B Parity Securities, in all cases shall bear to each other the same ratio that the amount of unpaid dividends per share on the shares of the Series B Preferred Stock for such Series B Dividend Period and such other Series B Parity Securities for the corresponding dividend period bear to each other. (D) LIQUIDATION PREFERENCE. (i) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Association, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Association available for distribution to its shareholders an amount in cash equal to the Series B Liquidation Value for each share outstanding, plus an amount in cash equal to all unpaid dividends thereon for the then current Series B Dividend Period, whether or not earned or declared, before any payment shall be made or any assets distributed to the holders of Series B Junior Securities. If the assets of the Association are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Series B Preferred Stock and any Series B Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which 11 would be payable on such distribution if the amounts to which the holders of outstanding shares of Series B Preferred Stock and the holders of outstanding shares of such Series B Parity Securities are entitled were paid in full. (ii) For the purpose of this Section 5.02(d), neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Association, nor the consolidation or merger of the Association, shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Association, unless such voluntary sale, conveyance, exchange or transfer shall be in connection with a plan of liquidation, dissolution or winding up of the Association. (E) REDEMPTION. The Series B Preferred Stock is not redeemable prior to December 31, 2005. On such date and on each fifth anniversary of such date, the Series B Preferred Stock shall be redeemable, in whole or in part, at the option of the Association, but with the consent of the Comptroller of the Currency and any other appropriate regulatory authorities, if required, for cash out of any source of funds legally available, at a redemption price equal to 100% of the Series B Liquidation Value per share plus unpaid dividends thereon accumulated since the immediately preceding Series B Dividend Payment Date (the "Series B Redemption Price"). Any date of such redemption is referred to as the "Series B Redemption Date." If fewer than all the outstanding shares of Series B Preferred Stock are to be redeemed, the Association will select those to be redeemed by lot or pro rata or by any other method as may be determined by the Board of Directors to be equitable. The Series B Preferred Stock is not subject to any sinking fund. (F) PROCEDURE FOR REDEMPTION. (i) Upon redemption of the Series B Preferred Stock pursuant to Section 5.02(e) hereof, notice of such redemption (a "Series B Notice of Redemption") shall be mailed by first-class mail, postage prepaid, not less than thirty (30) days nor more than sixty (60) days prior to the Series B Redemption Date to the holders of record of the shares to be redeemed at their respective addresses as they shall appear in the records of the Association; provided, however, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceeding for the redemption of any shares so to be redeemed except as to the holder to whom the Association has failed to give such notice or except as to the holder to whom notice was defective. Each such notice shall state: (A) the Series B Redemption Date; (B) the Series B Redemption Price; (C) the place or places where certificates for such shares are to be surrendered for payment of the Series B Redemption Price; and (D) the CUSIP number of the shares being redeemed. (ii) If a Series B Notice of Redemption shall have been given as aforesaid and the Association shall have deposited on or before the Series B Redemption Date a sum sufficient to redeem the shares of Series B Preferred Stock as to which a Series B Notice of Redemption has been given in trust with the Transfer Agent with irrevocable instructions and authority to pay the Series B Redemption Price to the holders thereof, or if no such deposit is made, then upon the Series B Redemption Date (unless the Association shall default in making payment of the Series B Redemption Price), all rights 12 of the holders thereof as shareholders of the Association by reason of the ownership of such shares (except their right to receive the Series B Redemption Price thereof without interest) shall cease and terminate, and such shares shall no longer be deemed outstanding for any purpose. The Association shall be entitled to receive, from time to time, from the Transfer Agent the interest, if any, earned on such moneys deposited with it, and the holders of any shares so redeemed shall have no claim to any such interest. In case the holder of any shares of Series B Preferred Stock so called for redemption shall not claim the Series B Redemption Price for its shares within twelve (12) months after the related Series B Redemption Date, the Transfer Agent shall, upon demand, pay over to the Association such amount remaining on deposit, and the Transfer Agent shall thereupon be relieved of all responsibility to the holder of such shares, and such holder shall look only to the Association for payment thereof. (iii) Not later than 1:30 p.m., Eastern Standard Time, on the Business Day immediately preceding the Series B Redemption Date, the Association shall irrevocably deposit with the Transfer Agent sufficient funds for the payment of the Series B Redemption Price for the shares to be redeemed on the Series B Redemption Date and shall give the Transfer Agent irrevocable instructions to apply such funds, and, if applicable and so specified in the instructions, the income and proceeds therefrom, to the payment of such Series B Redemption Price. The Association may direct the Transfer Agent to invest any such available funds, provided that the proceeds of any such investment will be available to the Transfer Agent in Milwaukee, Wisconsin at the opening of business on such Series B Redemption Date. (iv) Except as otherwise expressly set forth in this Section 5.02(f), nothing contained in these Amended and Restated Articles of Association shall limit any legal right of the Association to purchase or otherwise acquire any shares of Series B Preferred Stock at any price, whether higher or lower than the Series B Redemption Price, in private negotiated transactions, the over-the-counter market or otherwise. (v) If the Association shall not have funds legally available for the redemption of all of the shares of Series B Preferred Stock on any Series B Redemption Date, the Association shall redeem on the Series B Redemption Date only the number of shares of Series B Preferred Stock as it shall have legally available funds to redeem, as determined in an equitable manner, and the remainder of the shares of Series B Preferred Stock shall be redeemed, at the option of the Association, on the earliest practicable date next following the day on which the Association shall first have funds legally available for the redemption of such shares. (G) REACQUIRED SHARES. Shares of the Series B Preferred Stock that have been redeemed, purchased or otherwise acquired by the Association are not subject to reissuance or resale as shares of Series B Preferred Stock and shall be held in treasury. Such shares shall revert to the status of authorized but unissued shares of preferred stock, undesignated as to series, until the Board of Directors of the Association shall designate them again for issuance as part of a series. (H) VOTING RIGHTS. Except as otherwise required by applicable law, the holders of Series B Preferred Stock shall not have any voting rights. 13 SECTION 5.03. SERIES C PREFERRED STOCK. PURSUANT TO THE PROVISIONS OF THIS ARTICLE FIFTH, A SERIES OF SERIES C NON-CUMULATIVE PREFERRED STOCK, CONSISTING OF SEVEN HUNDRED FIFTY THOUSAND (750,000) SHARES, IS HEREBY ESTABLISHED AND AUTHORIZED TO BE ISSUED, AND IN ADDITION TO SUCH MATTERS SPECIFIED ELSEWHERE IN THIS ARTICLE FIFTH, SUCH SERIES C NON-CUMULATIVE PREFERRED STOCK SHALL HAVE THE FOLLOWING POWERS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS AND QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS: (A) DESIGNATION AND AMOUNT. The shares of Preferred Stock shall be designated as the Series C Non-Cumulative Preferred Stock (the "Series C Preferred Stock"), and the number of shares constituting the Series C Preferred Stock shall be seven hundred fifty thousand (750,000). The liquidation preference of the Series C Preferred Stock shall be $1,000 per share (the "Series C Liquidation Value"). (B) RANK. The Series C Preferred Stock shall, with respect to dividend rights and upon liquidation, dissolution and winding up of the Association, rank (i) senior to all classes and series of Common Stock of the Association and to all classes and series of capital stock of the Association now or hereafter authorized, issued or outstanding, which by their terms expressly provide that they are junior to the Series C Preferred Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association, or which do not specify their rank (collectively with the Common Stock, the "Series C Junior Securities"); (ii) on a parity with the Series A Preferred Stock and the Series B Preferred Stock and each other class of capital stock or series of preferred stock issued by the Association after the date hereof, the terms of which specifically provide that such class or series will rank on a parity with the Series C Preferred Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association (collectively with the Series A Preferred Stock and the Series B Preferred Stock, the "Series C Parity Securities"); and (iii) junior to each other class of capital stock or series of preferred stock issued by the Association after the date hereof, the terms of which specifically provide that such class or series will rank senior to the Series C Preferred Stock as to dividend distributions and distributions upon the liquidation, dissolution or winding up of the Association (collectively, the "Series C Senior Securities"). (C) DIVIDENDS. Dividends are payable on the Series C Preferred Stock as follows: (i) The holders of the Series C Preferred Stock in preference to the Series C Junior Securities shall be entitled to receive, out of funds legally available for that purpose, and when, as, and if declared by the Board of Directors of the Association, dividends payable in cash at the annual rate of 7.75% of the Series C Liquidation Value (the "Series C Dividend Rate"). (ii) Dividends on the Series C Preferred Stock shall be non-cumulative. Dividends not paid on any Series C Dividend Payment Date shall not accumulate thereafter. Dividends shall accumulate from the first day of any Series C Dividend Period to but excluding the immediately succeeding Series C Dividend Payment Date. Dividends, if and when declared, shall be payable in arrears in cash on each Series C 14 Dividend Payment Date of each year with respect to the Series C Dividend Period ending on the day immediately prior to such Series C Dividend Payment Date at the Series C Dividend Rate per share to holders of record at the close of business on the applicable Record Date, commencing on the Exchange Date with respect to any shares of Series C Preferred Stock issued prior to that Series C Dividend Payment Date; provided that dividends payable on the Series C Preferred Stock on the Series C Dividend Payment Date immediately following the first Series C Dividend Period following the Issue Date (and any dividend payable for a period less than a full quarterly period) shall be prorated for the period and computed on the basis of a 360-day year of twelve 30-day months and the actual number of days in such Series C Dividend Period; and provided, further, that dividends payable on the Series C Preferred Stock on the Series C Dividend Payment Date immediately following the first Series C Dividend Period following the Issue Date shall include any accumulated and unpaid dividends on the Funding Company Exchangeable Securities exchanged for the Series C Preferred Stock as of the Exchange Date for the then current dividend period. Dividends on such Series C Preferred Stock shall be paid only in cash. (iii) No dividends on shares of Series C Preferred Stock shall be declared by the Board of Directors or paid or set apart for payment by the Board of Directors or paid or set apart for payment by the Association if such declaration or payment shall be restricted or prohibited by law. (iv) Holders of shares of Series C Preferred Stock shall not be entitled to any dividends in excess of full dividends declared, as herein provided, on the shares of Series C Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment on the shares of Series C Preferred Stock that may be in arrears. (v) (A) So long as any shares of Series C Preferred Stock are outstanding, no dividends (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Series C Junior Securities and other than as provided in clause (B) below) shall be declared, paid or set aside for payment or other distribution upon any Series C Junior Securities or any other Series C Parity Securities, nor shall any shares of any Series C Junior Securities or any other Series C Parity Securities be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or set aside or made available for a sinking fund for the redemption of any shares of any such stock) by the Association (except by conversion into or exchange for shares of, or options, warrants or rights to subscribe for or purchase, Series C Junior Securities) unless, in each case, the full dividends on all outstanding shares of the Series C Preferred Stock shall have been declared and paid, when due, for the Series C Dividend Period, if any, terminating on or immediately prior to the date of payment in respect of such dividend, distribution, redemption, purchase or acquisition. (B) When dividends for any Series C Dividend Period are not paid in full, as provided in clause (A) above, on the shares of the Series C Preferred Stock or any other Series C Parity Securities, dividends may be declared and paid on any such shares for any dividend period therefor, but only if such dividends are declared and paid pro rata so that the amount of dividends declared and paid per share on the shares of the Series C Preferred Stock and any other Series C Parity Securities, in all cases shall bear to each 15 other the same ratio that the amount of unpaid dividends per share on the shares of the Series C Preferred Stock for such Series C Dividend Period and such other Series C Parity Securities for the corresponding dividend period bear to each other. (D) LIQUIDATION PREFERENCE. (i) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Association, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Association available for distribution to its shareholders an amount in cash equal to the Series C Liquidation Value for each share outstanding, plus an amount in cash equal to all unpaid dividends thereon for the then current Series C Dividend Period, whether or not earned or declared, before any payment shall be made or any assets distributed to the holders of Series C Junior Securities. If the assets of the Association are not sufficient to pay in full the liquidation payments payable to the holders of outstanding shares of the Series C Preferred Stock and any Series C Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of Series C Preferred Stock and the holders of outstanding shares of such Series C Parity Securities are entitled were paid in full. (ii) For the purpose of this Section 5.03(d), neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Association, nor the consolidation or merger of the Association, shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Association, unless such voluntary sale, conveyance, exchange or transfer shall be in connection with a plan of liquidation, dissolution or winding up of the Association. (E) REDEMPTION. The Series C Preferred Stock shall be redeemable at any time, in whole or in part, at the option of the Association, but with the consent of the Comptroller of the Currency and any other appropriate regulatory authorities, if required, for cash out of any source of funds legally available, at a redemption price equal to 100% of the Series C Liquidation Value per share plus unpaid dividends thereon accumulated since the immediately preceding Series C Dividend Payment Date (the "Series C Redemption Price"). Any date of such redemption is referred to as the "Series C Redemption Date." If fewer than all the outstanding shares of Series C Preferred Stock are to be redeemed, the Association will select those to be redeemed by lot or pro rata or by any other method as may be determined by the Board of Directors to be equitable. The Series C Preferred Stock is not subject to any sinking fund. (F) PROCEDURE FOR REDEMPTION. (i) Upon redemption of the Series C Preferred Stock pursuant to Section 5.03(e) hereof, notice of such redemption (a "Series C Notice of Redemption") shall be mailed by first-class mail, postage prepaid, not less than thirty (30) days nor more than sixty (60) days prior to the Series C Redemption Date to the holders of record of the shares to be redeemed at their respective addresses as they shall appear in the records of the Association; provided, however, that failure to give such notice or any 16 defect therein or in the mailing thereof shall not affect the validity of the proceeding for the redemption of any shares so to be redeemed except as to the holder to whom the Association has failed to give such notice or except as to the holder to whom notice was defective. Each such notice shall state: (A) the Series C Redemption Date; (B) the Series C Redemption Price; (C) the place or places where certificates for such shares are to be surrendered for payment of the Series C Redemption Price; and (D) the CUSIP number of the shares being redeemed. (ii) If a Series C Notice of Redemption shall have been given as aforesaid and the Association shall have deposited on or before the Series C Redemption Date a sum sufficient to redeem the shares of Series C Preferred Stock as to which a Series C Notice of Redemption has been given in trust with the Transfer Agent with irrevocable instructions and authority to pay the Series C Redemption Price to the holders thereof, or if no such deposit is made, then upon the Series C Redemption Date (unless the Association shall default in making payment of the Series C Redemption Price), all rights of the holders thereof as shareholders of the Association by reason of the ownership of such shares (except their right to receive the Series C Redemption Price thereof without interest) shall cease and terminate, and such shares shall no longer be deemed outstanding for any purpose. The Association shall be entitled to receive, from time to time, from the Transfer Agent the interest, if any, earned on such moneys deposited with it, and the holders of any shares so redeemed shall have no claim to any such interest. In case the holder of any shares of Series C Preferred Stock so called for redemption shall not claim the Series C Redemption Price for its shares within twelve (12) months after the related Series C Redemption Date, the Transfer Agent shall, upon demand, pay over to the Association such amount remaining on deposit, and the Transfer Agent shall thereupon be relieved of all responsibility to the holder of such shares, and such holder shall look only to the Association for payment thereof. (iii) Not later than 1:30 p.m., Eastern Standard Time, on the Business Day immediately preceding the Series C Redemption Date, the Association shall irrevocably deposit with the Transfer Agent sufficient funds for the payment of the Series C Redemption Price for the shares to be redeemed on the Series C Redemption Date and shall give the Transfer Agent irrevocable instructions to apply such funds, and, if applicable and so specified in the instructions, the income and proceeds therefrom, to the payment of such Series C Redemption Price. The Association may direct the Transfer Agent to invest any such available funds, provided that the proceeds of any such investment will be available to the Transfer Agent in Milwaukee, Wisconsin at the opening of business on such Series C Redemption Date. (iv) Except as otherwise expressly set forth in this Section 5.03(f), nothing contained in these Amended and Restated Articles of Association shall limit any legal right of the Association to purchase or otherwise acquire any shares of Series C Preferred Stock at any price, whether higher or lower than the Series C Redemption Price, in private negotiated transactions, the over-the-counter market or otherwise. (v) If the Association shall not have funds legally available for the redemption of all of the shares of Series C Preferred Stock on any Series C Redemption Date, the Association shall redeem on the Series C Redemption Date only the number of shares of Series C Preferred Stock as it shall have legally available funds to redeem, as determined 17 in an equitable manner, and the remainder of the shares of Series C Preferred Stock shall be redeemed, at the option of the Association, on the earliest practicable date next following the day on which the Association shall first have funds legally available for the redemption of such shares. (G) REACQUIRED SHARES. Shares of the Series C Preferred Stock that have been redeemed, purchased or otherwise acquired by the Association are not subject to reissuance or resale as shares of Series C Preferred Stock and shall be held in treasury. Such shares shall revert to the status of authorized but unissued shares of preferred stock, undesignated as to series, until the Board of Directors of the Association shall designate them again for issuance as part of a series. (H) VOTING RIGHTS. Except as otherwise required by applicable law, the holders of Series C Preferred Stock shall not have any voting rights. SECTION 5.04. DEFINITIONS. For the purpose of Sections 5.01, 5.02 and 5.03 hereof, the following terms shall have the meanings indicated: "5-year CMT Rate" for any CMT Determination Date will be the rate equal to: (i) the weekly average interest rate of U.S. Treasury securities having an index maturity of five years for the week that ends immediately before the week in which the relevant CMT Determination Date falls, as such rate appears on page "7052" on Telerate (or such other page as may replace the 7052 page on that service or any successor services) under the heading "... Treasury Constant Maturities ... Federal Reserve Board Release H.15 ... Mondays Approximately 3:45 p.m." (ii) If the applicable rate described in clause (i) above is not displayed on Telerate page 7052 at 3:00 p.m., New York City time, on the relevant CMT Determination Date, then the 5-year CMT Rate will be the Treasury constant maturity rate applicable to a five-year index maturity for the weekly average as published in H.15(519) (as defined below). (iii) If the applicable rate described in clause (ii) above does not appear in H.15(519) at 3:00 p.m., New York City time, on the relevant CMT Determination Date, then the 5-year CMT Rate will be the Treasury constant maturity rate, or other U.S. Treasury rate, applicable to a five-year index maturity with reference to the relevant CMT Determination Date, that: (a) is published by the Board of Governors of the Federal Reserve System, or the U.S. Department of the Treasury; and (b) is determined by the Association to be comparable to the applicable rate formerly displayed on Telerate page 7052 and published in H.15(519). 18 (iv) If the rate described in clause (iii) above does not appear at 3:00 p.m., New York City time, on the relevant CMT Determination Date, than the 5-year CMT Rate will be the yield to maturity of the arithmetic mean of the secondary market offered rates for Treasury notes having an original maturity of approximately five years and a remaining term to maturity of not less than four years, and in a representative amount, as of approximately 3:30 p.m., New York City time, on the relevant CMT Determination Date, as quoted by three primary U.S. government securities dealers in New York City selected by the Association. In selecting these offered rates, the Association will request quotations from five primary dealers and will disregard the highest quotation - or, if there is equality, one of the highest - and the lowest quotation - or, if there is equality, one of the lowest. (v) If the Association is unable to obtain three quotations of the kind described in clause (iv) above, the CMT Rate will be the yield to maturity of the arithmetic mean of the secondary market offered rates for Treasury notes with an original maturity longer than five years and a remaining term to maturity closest to five years, and in a representative amount, as of approximately 3:30 p.m., New York City time, on the relevant CMT Determination Date, as quoted by the three primary U.S. governmental securities dealers in New York City selected by the Association. In selecting these offered rates, the Association will request quotations from five primary declares and will disregard the highest quotation - or, if there is equality, one of the highest - and the lowest quotation, or, if there is equality, one of the lowest. (vi) If fewer than five but more than two primary dealers are quoting offered rates as described above in clause (v), then the 5-year CMT Rate for the relevant CMT Determination Date will be based on the arithmetic mean of the offered rates so obtained, and neither the highest nor the lowest of those quotations will be disregarded. (vii) If two or fewer primary dealers are quoting offered rates as described above in clause (v), the 5-year CMT Rate in effect for the new dividend period will be the 5-year CMT Rate in effect for the prior dividend period. As used in this definition, "H.15(519)" means the weekly statistical release entitled "Statistical Release H.15(519)," or any successor publication, published by the Board of Governors of the Federal Reserve System. Absent manifest error, the Association's determination of the 5-year CMT Rate will be final and binding. "Association" means U.S. Bank National Association (formerly named Firstar Bank, National Association), a national banking association. 19 "Business Day" means a day on which the New York Stock Exchange is open for trading and which is not a day on which banking institutions in The City of New York and Milwaukee, Wisconsin are authorized or required by law or executive order to close. "Calculation Agent" means any Person authorized by the Association to determine the Series B Dividend Rate, which initially shall be the Association. "CMT Determination Date" has the meaning set forth in Section 5.02(c)(i)(2) hereof. "Dividend Payment Date" means, as the context requires, a Series A Dividend Payment Date, a Series B Dividend Payment Date or a Series C Dividend Payment Date. "Exchange Date" means, as the context requires, any date on which the Realty Company Series B Exchangeable Stock is exchanged for the Series A Preferred Stock, any date on which the Realty Company Series C Exchangeable Stock is exchanged for the Series B Preferred Stock, or any date on which the Funding Company Exchangeable Securities are exchanged for the Series C Preferred Stock. "Firstar Realty" means Firstar Realty L.L.C., an Illinois limited liability company. "Funding Company Exchangeable Securities" means the Non-Cumulative Exchangeable Preferred Securities of USB Funding LLC, a Delaware limited liability company. "Issue Date" means, as the context requires, the first date on which shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock are issued. "Person" means any individual, firm, bank or other entity and shall include any successor (by merger or otherwise) of such entity. "Realty Company Series B Exchangeable Stock" means the Series B Non-Cumulative Exchangeable Preferred Stock of Firstar Realty. "Realty Company Series C Exchangeable Stock" means the Series C Non-Cumulative Exchangeable Preferred Stock of Firstar Realty. "Record Date" means the 15th day of the month in which the applicable Dividend Payment Date falls for dividends declared by the Board of Directors. "Series A Dividend Payment Date" means each June 30 and December 31 of each year. "Series A Dividend Period" is the period from a Series A Dividend Payment Date to, but excluding, the next succeeding Series A Dividend Payment Date, except that the initial Series A Dividend Period shall commence on the date of the original issuance of shares of Series A Preferred Stock. "Series A Dividend Rate" has the meaning set forth in Section 5.01(c)(i) hereof. "Series A Junior Securities" has the meaning set forth in Section 5.01(b) hereof. 20 "Series A Liquidation Value" has the meaning set forth in Section 5.01(a) hereof. "Series A Notice of Redemption" has the meaning set forth in Section 5.01(f)(i) hereof. "Series A Parity Securities" has the meaning set forth in Section 5.01(b) hereof. "Series A Preferred Stock" has the meaning set forth in Section 5.01(a) hereof. "Series A Redemption Date" has the meaning set forth in Section 5.01(e) hereof. "Series A Redemption Price" has the meaning set forth in Section 5.01(e) hereof. "Series A Senior Securities" has the meaning set forth in Section 5.01(b) hereof. "Series B Dividend Payment Date" means each June 30 and December 31 of each year. "Series B Dividend Period" is the period from a Series B Dividend Payment Date to, but excluding, the next succeeding Series B Dividend Payment Date, except that the initial Series B Dividend Period shall commence on the original issuance of shares of Series B Preferred Stock. "Series B Dividend Rate" has the meaning set forth in Section 5.02(c)(i) hereof. "Series B Junior Securities" has the meaning set forth in Section 5.02(b) hereof. "Series B Liquidation Value" has the meaning set forth in Section 5.02(a) hereof. "Series B Notice of Redemption" has the meaning set forth in Section 5.02(f)(i) hereof. "Series B Parity Securities" has the meaning set forth in Section 5.02(b) hereof. "Series B Preferred Stock" has the meaning set forth in Section 5.02(a) hereof. "Series B Redemption Date" has the meaning set forth in Section 5.02(e) hereof. "Series B Redemption Price" has the meaning set forth in Section 5.02(e) hereof. "Series B Senior Securities" has the meaning set forth in Section 5.02(b) hereof. "Series C Dividend Payment Date" means each January 15 and July 15 of each year. "Series C Dividend Period" is the period from a Series C Dividend Payment Date to, but excluding, the next succeeding Series C Dividend Payment Date, except that the initial Series C Dividend Period shall commence on the original issuance of shares of Series C Preferred Stock. "Series C Dividend Rate" has the meaning set forth in Section 5.03(c)(i) hereof. "Series C Junior Securities" has the meaning set forth in Section 5.03(b) hereof. 21 "Series C Liquidation Value" has the meaning set forth in Section 5.03(a) hereof. "Series C Notice of Redemption" has the meaning set forth in Section 5.03(f)(i) hereof. "Series C Parity Securities" has the meaning set forth in Section 5.03(b) hereof. "Series C Preferred Stock" has the meaning set forth in Section 5.03(a) hereof. "Series C Redemption Date" has the meaning set forth in Section 5.03(e) hereof. "Series C Redemption Price" has the meaning set forth in Section 5.03(e) hereof. "Series C Senior Securities" has the meaning set forth in Section 5.03(b) hereof. "Transfer Agent" means a bank or trust company as may be appointed from time to time by the Board of Directors of the Association, or a committee thereof, to act as transfer agent, paying agent and registrar of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock. SIXTH: The Board of Directors shall appoint one of its members President of the Association, who shall be Chairman of the Board, unless the Board appoints another Director to be the Chairman of the Board. The Board of Directors shall have the power to appoint one or more Vice Presidents; and to appoint a Cashier and such other officers and employees as may be required to transact the Business of the Association. The Board of Directors shall have the power to define the duties of the officers and employees of the Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of the Association shall be made; to manage and administer the business affairs of the Association; to make all Bylaws that it may be lawful for them to make and generally to do and perform all acts that it may be legal for a Board of Directors to do and perform. SEVENTH: The Board of Directors, without need for approval of shareholders, shall have the power to change the location of the main office of the Association, subject to such limitations as from time to time may be provided by law; and shall have the power to establish or change the location of any branch or branches of the Association to any other location, without the approval of the shareholders, but subject to the approval of the Comptroller of the Currency. EIGHTH: The corporate existence of the Association shall continue until terminated in accordance with the laws of the United States. NINTH: The Board of Directors of the Association, the Chairman of the Board, the President, or any three or more holders of Common Stock owning, in the aggregate, not less than twenty-five percent of the Common Stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place, and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten (10) days prior to the date of such 22 meeting to each shareholder of record entitled to vote at such meeting at his address as shown upon the books of the Association. TENTH: Any person, his heirs, executors, or administrators, may be indemnified or reimbursed by the Association for reasonable expenses actually incurred in connection with any action, suit, or proceeding, civil or criminal, to which he or they shall be made a party by reason of his being or having been a Director, officer, or employee of the Association or of any firm, corporation, or organization which he served in any such capacity at the request of the Association. Provided, however, that no person shall be so indemnified or reimbursed in relation to any matter in such action, suit, or proceeding as to which he shall finally be adjudged to have been guilty of or liable for gross negligence, willful misconduct or criminal acts in the performance of his duties to the Association. And, provided further, that no person shall be so indemnified or reimbursed in relation to any matter in such action, suit, or proceeding which has been made the subject of a compromise settlement except with the approval of a court of competent jurisdiction, or the holders of record of a majority of the outstanding shares of the Association, or the Board of Directors, acting by vote of Directors not parties to the same or substantially the same action, suit or proceeding, constituting a majority of the whole number of Directors. And, provided further, that no Director, officer or employee shall be so indemnified or reimbursed for expenses, penalties or other payments incurred in an administrative proceeding or action instituted by an appropriate bank regulatory agency where said proceeding or action results in a final order assessing civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to the Association. The foregoing right of indemnification shall not be exclusive of other rights to which such person, his heirs, executors, or administrators, may be entitled as a matter of law. The Association may, upon the affirmative vote of a majority of its Board of Directors, purchase insurance for the purpose of indemnifying its Directors, officers and other employees to the extent that such indemnification is allowed in the preceding paragraph. Such insurance may, but need not, be for the benefit of all Directors, officers, or employees. ELEVENTH: Except as otherwise specifically provided in Article Fifth hereof, these Amended and Restated Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock of the Association, unless the vote of the holders of a greater amount of stock is required by law and in that case by the vote of the holders of such greater amount. 23 EXHIBIT 2 [LOGO] Comptroller of the Currency Administrator of National Banks Washington, D.C. 20219 CERTIFICATE I, John D. Hawke, Jr., Comptroller of the Currency, do hereby certify that: 1. The Comptroller of the Currency, pursuant to Revised Statutes 324, et seq., as amended, 12 U.S.C. 1, et seq., as amended, has possession, custody and control of all records pertaining to the chartering of all National Banking Associations. 2. "U.S. Bank National Association," Cincinnati, Ohio, (Charter No. 24) is a National Banking Association formed under the laws of the United States and is authorized thereunder to transact the business of banking on the date of this Certificate. IN TESTIMONY WHEREOF, I have hereunto subscribed my name and caused my seal of office to be affixed to these presents at the Treasury Department in the City of Washington and District of Columbia, this 21st day of August, 2001. [SEAL] /s/ JOHN D. HAWKE, JR. -------------------------------------------- Comptroller of the Currency 24 EXHIBIT 3 [LOGO] Comptroller of the Currency Administrator of National Banks Washington, D.C. 20219 CERTIFICATE OF FIDUCIARY POWERS I, John D. Hawke, Jr., Comptroller of the Currency, do hereby certify that: 1. The Comptroller of the Currency, pursuant to Revised Statues 324, et seq., as amended, 12 U.S.C. 1, et seq., as amended, has possession, custody and control of all records pertaining to the chartering of all National Banking Associations. 2. "U.S. Bank National Association," Cincinnati, Ohio, (Charter No. 24), was granted, under the hand and seal of the Comptroller, the right to act in all fiduciary capacities authorized under the provisions of the Act of Congress approved September 28, 1962, 76 Stat. 668, 12 U.S.C. 92a, and that the authority so granted remains in the full force and effect on the date of this Certificate. IN TESTIMONY WHEREOF, I have hereunto subscribed my name and caused my seal of office to be affixed to these presents at the Treasury Department in the City of Washington and District of Columbia, this 21st day of August, 2001. [SEAL] /s/ JOHN D. HAWKE, JR. -------------------------------------------- Comptroller of the Currency 25 EXHIBIT 4 BYLAWS OF U.S. BANK NATIONAL ASSOCIATION ARTICLE I. MEETINGS OF SHAREHOLDERS SECTION 1. ANNUAL MEETING The annual meeting of shareholders shall be held at the main banking house of the Association or other convenient place duly authorized by the Board of Directors (the "Board") at 11:00 a.m. on the second Tuesday in March of each year, or such other date or time which the Board may designate at any Board meeting held prior to the required date for sending notice of the annual meeting to the shareholders. Notice of such meeting shall be mailed to shareholders not less than ten (10) or more than sixty (60) days prior to the meeting date. SECTION 2. SPECIAL MEETINGS Special meetings of shareholders may be called and held at such times and upon such notice as is specified in the Articles of Association. SECTION 3. QUORUM A majority of the outstanding capital stock represented in person or by proxy shall constitute a quorum of any meeting of the shareholders, unless otherwise provided by law, but less than a quorum may adjourn any meeting, from time to time, and the meeting may be held as adjourned without further notice. SECTION 4. INSPECTORS The Board of Directors may, and in the event of its failure so to do, the Chairman of the Board may appoint Inspectors of Election who shall determine the presence of quorum, the validity of proxies, and the results of all elections and all other matters voted upon by shareholders at all annual and special meetings of shareholders. SECTION 5. VOTING In deciding on questions at meetings of shareholders, except in the election of directors, each shareholder shall be entitled to one vote for each share of stock held. A majority of votes cast shall decide each matter submitted to the shareholders, except where by law a larger vote is required. In all elections of directors, each shareholder shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, or to cumulate such shares and give one candidate as many votes as the number of directors multiplied by the number of his shares equal, or to distribute them on the same principle among as many candidates as he shall think fit. SECTION 6. WAIVER AND CONSENT The shareholders may act without notice or a meeting by a unanimous written consent by all shareholders. 26 ARTICLE II. BOARD OF DIRECTORS SECTION 1. TERM OF NOTICE The directors of this Association shall hold office for one year and until their successors are duly elected and qualified. SECTION 2. REGULAR MEETINGS The organizational meeting of the Board of Directors shall be held on the same date as soon as practical following the annual meeting of shareholders wherever the Directors deem appropriate. Other regular meetings of the Board of Directors shall be held at such time and place as may be designated in the notice of the meeting. When any regular meeting of the Board falls on a holiday, the meeting shall be held on the next banking business day, unless the Board shall designate some other day. SECTION 3. SPECIAL MEETINGS Special meetings of the Board of Directors may be called by the Chairman of the Board of the Association, or at the request of three or more Directors. Notice of the time, place and purposes of such meetings shall be given by letter, by telephone, in person, by facsimile, by electronic mail or other reasonable manner to every Director. SECTION 4. QUORUM A majority of the entire membership of the Board shall constitute a quorum of any meeting of the board. SECTION 5. NECESSARY VOTE A majority of those Directors present and voting at any meeting of the Board of Directors shall decide each matter considered, except where otherwise required by law or the Articles or Bylaws of this Association. SECTION 6. COMPENSATION Directors, excluding full-time employees of the Bank, shall receive such reasonable compensation as may be fixed from time to time by the Board of Directors. SECTION 7. ELECTION-AGE & RETIREMENT-AGE LIMITATION No person shall be elected or re-elected a Director after reaching his seventieth (70th) birthday. Every Director of the Bank shall retire no later than the first month next following his seventieth (70th) birthday. SECTION 8. DIRECTORS EMERITUS The Board shall have the right from time to time to choose as Directors Emeritus persons who have had prior service as members of the Board and who may receive such compensation as shall be fixed from time to time by the Board of Directors. 27 ARTICLE III. OFFICERS SECTION 1. WHO SHALL CONSTITUTE The Officers of the Association shall be a Chairman of the Board, Chief Executive Officer, a President, a Secretary, and other officers such as Vice Chairman of the Board, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Vice Presidents, Assistant Vice Presidents, Assistant Secretaries, Trust Officers, Trust Investment Officers, Trust Real Estate Officers, Assistant Trust Officers, Controller, Assistant Controller, Auditor and Assistant Auditors, as the Board may appoint from time to time. The Board may choose to delegate authority to elect officers other than the Chairman, Chief Executive Office, President, Secretary, Vice Chairman and Executive Vice Presidents, to the Chief Executive Officer or President. Any person may hold two offices. The Chairman of the Board, all Vice Chairmen of the Board, Chief Executive Officer and the President shall at all times be members of the Board of Directors. SECTION 2. NUMBER As provided in the Articles of Association, the Board of this Association shall consist of not less than five nor more than twenty-five members. At any meeting of the shareholders held for the purpose of electing directors, or changing the number thereof, the number of directors may be determined by a majority of the votes cast by the shareholders in person or by proxy. Any vacancy occurring in the Board shall be filled by the remaining directors. Between meetings of the shareholders held for the purpose of electing directors, the Board by a majority vote of the full Board may increase the size of the Board by not more than four directors in any one year, but not to more than a total of twenty-five directors, and fill any vacancy so created in the Board. All directors shall hold office until their successors are elected and qualified. SECTION 3. TERM OF OFFICE All officers shall be elected for and shall hold office for one year and until their successors are elected and qualified, subject to the right in the Board of directors by a majority vote of the entire membership to discharge any officer at any time. SECTION 4. CHAIRMAN OF THE BOARD The Chairman of the Board shall have general executive powers and duties and shall perform such other duties as may be assigned from time to time by the Board of Directors. He shall, when present, preside at all meetings of the shareholders and directors and shall be ex officio a member of all committees of the Board. He shall name all members of the committees of the Board, subject to the confirmation thereof by the Board. SECTION 5. CHIEF EXECUTIVE OFFICER The Chief Executive Officer, who may also be the Chairman or the President, shall have general executive powers and duties and shall perform such other duties as may be assigned from time to time by the Board of Directors. SECTION 6. PRESIDENT The President shall have general executive powers and duties and shall perform such other duties as may be assigned from time to time by the board of Directors. In addition, if designated by the 28 Board of Directors, the President shall be the Chief Executive Officer and shall have all the powers and duties of the Chief Executive Officer, including the same power to name temporarily a Chief Executive Officer to serve in the absence of the President if there is a vacancy in the position of the chairman or in the event of the absence or incapacity of the Chairman. SECTION 7. VICE CHAIRMAN OF THE BOARD The Board of directors shall have the power to elect one or more Vice Chairmen of the Board of Directors. Any such Vice Chairmen of the Board shall participate in the formation of the policies of the Association and shall have such other duties as may be assigned to him from time to time by the Chairman of the Board or by the Board of Directors. SECTION 8. OTHER OFFICERS The Secretary and all other officers appointed by the Board of Directors shall have such duties as defined by law and as may from time to time be assigned to them by the chief executive Officer or the Board of Directors. SECTION 9. RETIREMENT Every officer of the Association shall retire not later than the first of the month next following his 65th birthday. The Board of directors may, in its discretion, set the retirement date and terms of retirement of an officer at a date later than provided above. ARTICLE IV. COMMITTEES SECTION 1. COMPENSATION COMMITTEE The duties of the Compensation Committee of the Association shall be carried out by the Compensation Committee of the financial holding company that is the parent of this Association. SECTION 2. COMMITTEE ON AUDIT The duties of the Audit Committee of the Association shall be carried out by the Audit Committee of the financial holding company that is the parent of this Association. SECTION 3. TRUST COMMITTEE The Board of Directors of this Association shall also serve as the Trust Committee. The Trust Committee shall determine policies of the Department and review actions of the Trust Policy Committee. All actions of the Trust Committee shall be reported to the Board of Directors. SECTION 4. TRUST POLICY COMMITTEE There shall be a standing committee of this association to be known as the Trust Policy Committee composed of the officers of the Association. The Trust Policy Committee or such officers as may be duly designated by the Trust Policy Committee, shall pass upon the acceptance of all trusts, the closing out or relinquishment of all trusts and the making, retention, or disposition of all investments of trust funds in conformity with policies established by the Trust Committee. Action of the Trust Policy Committee shall be reported to the Trust Committee. 29 SECTION 5. PENSION COMMITTEE The duties of the Pension Committee of the Association shall be carried out by the Compensation Committee of the financial holding company that is the parent of this Association. SECTION 6. OTHER COMMITTEES The Chairman may appoint, from time to time, other committees for such purposes and with such powers as he or the Board my direct. ARTICLE V. MINUTE BOOK The organization papers of this Association, the Bylaws as revised or amended from time to time and the proceedings of all regular and special meetings of the shareholders and the directors shall be recorded in a minute book or books. All reports of committees required to be made to the Board shall be recorded in a minute book or shall be filed by the recording officer. The minutes of each meeting of the shareholders and the Board shall be signed by the recording officer. ARTICLE VI. CONVEYANCES, CONTRACTS, ETC. All transfers and conveyances of real estate, mortgages, and transfers, endorsements or assignments of stock, bonds, notes, debentures or other negotiable instruments, securities or personal property shall be signed by any elected or appointed officer. All checks, drafts, certificates of deposit and all funds of the Association held in its own or in a fiduciary capacity may be paid out by an order, draft or check bearing the manual or facsimile signature of any elected or appointed officer of the Association. All mortgage satisfactions, releases, all types of loan agreements, all routine transactional documents of the Association, and all other instruments not specifically provided for, whether to be executed in a fiduciary capacity or otherwise, may be signed on behalf of the Association by any elected or appointed officer thereof. The Secretary or any Assistant Secretary of the Association or other proper officer may execute and certify that required action or authority has been given or has taken place by resolution of the Board under this Bylaw without the necessity of further action by the Board. ARTICLE VII. SEAL The Association shall have no corporate seal. 30 ARTICLE VIII. INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES SECTION 1. INDEMNIFY The Association shall indemnify such persons for such liabilities in such manner under such circumstances and to such extent as permitted by the corporate laws of the Sate of Ohio as enacted or amended. The Board of Directors may authorize the purchase and maintenance of insurance and/or the execution of individual agreements for the purpose of such indemnification, and the Association shall advance all reasonable costs and expenses (including attorneys' fees) incurred in defending any action, suit or proceeding to all persons entitled to indemnification under this Section 1. SECTION 2. PAYMENTS Notwithstanding Section 1, however, (a) any indemnification payments to an institution-affiliated party, as defined at 12 USC 1813(u), for an administrative proceeding or civil action initiated by a federal banking agency, shall be reasonable and consistent with the requirements of 12 USC 1828(k) and the associated regulations; and (b) any indemnification payments and advancement of costs and expenses to an institution-affiliated party, as defined at 12 USC 1813(u), in cases involving an administrative proceeding or civil action not initiated by a federal banking agency, shall be consistent with safe and sound banking practices. ARTICLE IX. AMENDMENTS These Bylaws, or any of them, may be added to, altered, amended or repealed by the Board at any regular or special meeting of the Board. ARTICLE X. GOVERNING LAW This Association designates the Ohio Business Corporation Act, as amended from time to time, as the governing law for its corporate governance procedures, to the extent not inconsistent with Federal banking statutes and regulations. 31 EXHIBIT 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, U.S. BANK NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Dated: November 28, 2001 U.S. BANK NATIONAL ASSOCIATION By: /s/ Richard H Prokosch ----------------------- Richard H Prokosch Vice President By: /s/ Julie Eddington ------------------- Julie Eddington Assistant Vice President 32 EXHIBIT 7 U.S. BANK NATIONAL ASSOCIATION STATEMENT OF FINANCIAL CONDITION AS OF 6/30/2001 ($000'S)
6/30/2001 ----------- ASSETS Cash and Due From Depository Institutions $ 3,561,101 Federal Reserve Stock 0 Securities 4,731,459 Federal Funds 1,058,080 Loans & Lease Financing Receivables 62,250,889 Fixed Assets 558,051 Intangible Assets 5,316,987 Other Assets 2,975,129 ----------- TOTAL ASSETS $80,451,696 LIABILITIES Deposits $52,892,333 Fed Funds 1,342,118 Treasury Demand Notes 0 Trading Liabilities 90,576 Other Borrowed Money 11,563,493 Acceptances 138,422 Subordinated Notes and Debentures 2,430,442 Other Liabilities 1,542,375 ----------- TOTAL LIABILITIES $69,999,759 EQUITY Minority Interest in Subsidiaries $ 766,058 Common and Preferred Stock 321,551 Surplus 6,094,941 Undivided Profits 3,269,387 ----------- TOTAL EQUITY CAPITAL $10,451,937 TOTAL LIABILITIES AND EQUITY CAPITAL $80,451,696
To the best of the undersigned's determination, as of this date the above financial information is true and correct. U.S. Bank National Association By: /s/ Richard H Prokosch ----------------------- Vice President Date: November 28, 2001 33 EX-99.1 10 g71871a1ex99-1.txt FORM OF LETTER OF TRANSMITTAL FOR THE OLD NOTES EXHIBIT 99.1 LETTER OF TRANSMITTAL RELATING TO OFFER BY ADVANTICA RESTAURANT GROUP, INC. TO EXCHANGE $ PRINCIPAL AMOUNT OF % SENIOR NOTES DUE 2007 OF DENNY'S HOLDINGS, INC. AND ADVANTICA RESTAURANT GROUP, INC. (THE "NEW NOTES") FOR UP TO $265,000,000 OUTSTANDING PRINCIPAL AMOUNT OF 11 1/4% SENIOR NOTES DUE 2008 OF ADVANTICA RESTAURANT GROUP, INC. (THE "OLD NOTES") (CUSIP NO. 00758B-AA-7) PURSUANT TO THE PROSPECTUS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER , 2001 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY , 2002, UNLESS EXTENDED IN ACCORDANCE WITH THE PROSPECTUS (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. The Exchange Agent for the Exchange Offer is: U.S. BANK NATIONAL ASSOCIATION By Registered or Certified Mail: By Hand or Overnight Courier: U.S. Bank National Association U.S. Bank National Association Corporate Trust Services Corporate Trust Services 180 East Fifth Street 180 East Fifth Street St. Paul, Minnesota 55101 St. Paul, Minnesota 55101 Attention: Specialized Finance Department Attention: Specialized Finance Department By Facsimile (for Eligible Confirm Facsimile by Institutions only): Telephone ONLY: (651) 244-1537 (800) 934-6802 (651) 244-8883
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE OR IN ACCORDANCE WITH THE INSTRUCTIONS HEREIN, WILL NOT CONSTITUTE VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. 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. CAPITALIZED TERMS USED BUT NOT DEFINED ABOVE ARE DEFINED HEREIN. THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN ANY DOUBT AS TO THE ACTION TO BE TAKEN, YOU SHOULD IMMEDIATELY CONSULT YOUR BROKER, BANK MANAGER, LAWYER, ACCOUNTANT, INVESTMENT ADVISOR OR OTHER PROFESSIONAL. This document relates to an exchange offer (the "EXCHANGE OFFER") made by Advantica Restaurant Group, Inc. ("we," "us," "our" or "ADVANTICA"). The Exchange Offer is described in the prospectus dated December , 2001 as filed with the Securities and Exchange Commission (the "PROSPECTUS") of Advantica and Denny's Holdings, Inc. ("DENNY'S HOLDINGS") and in this Letter of Transmittal (the "LETTER OF TRANSMITTAL"). All terms and conditions contained in the Prospectus are deemed to be incorporated in and form a part of this Letter of Transmittal. Therefore, you are urged to read the Prospectus carefully. The terms and conditions contained in the Prospectus, together with the terms and conditions governing this Letter of Transmittal and the instructions herein, are collectively referred to below as the "Terms and Conditions." Consummation of the Exchange Offer is subject to, among other things, a minimum tender of $ million in aggregate principal amount of Old Notes and a maximum tender of $265.0 million in aggregate principal amount of Old Notes. In addition, our obligation to accept Old Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth in the Prospectus. We may waive any condition described therein in our reasonable discretion. Holders of Old Notes who validly tender and do not properly withdraw their Old Notes and whose Old Notes are accepted by us will receive $ principal amount of New Notes per $1,000 principal amount of Old Notes exchanged. Additionally, we will pay such holders the accrued and unpaid interest on Old Notes from the last interest payment date immediately preceding the date upon which the Notes will be exchanged (the "EXCHANGE DATE") to, but not including, the Exchange Date, in cash. Each registered holder of Old Notes wishing to accept the Exchange Offer, including registered holders of Old Notes executing their tender through the Automated Tender Offer Program ("ATOP") procedures of The Depository Trust Company ("DTC"), must complete, sign and submit this Letter of Transmittal to the exchange agent, U.S. Bank National Association (the "EXCHANGE AGENT"), on or prior to the Expiration Date. TO PROPERLY COMPLETE THIS LETTER OF TRANSMITTAL, A REGISTERED HOLDER MUST (1) COMPLETE THE QUESTIONS HEREIN ENTITLED "INFORMATION TO DETERMINE ELIGIBILITY TO PARTICIPATE IN THE EXCHANGE OFFER," (2) COMPLETE THE BOX ENTITLED "DESCRIPTION OF OLD NOTES TENDERED," (3) IF APPROPRIATE, CHECK AND COMPLETE THE BOXES RELATING TO SPECIAL ISSUANCE INSTRUCTIONS AND SPECIAL DELIVERY INSTRUCTIONS, (4) SIGN THIS LETTER OF TRANSMITTAL, (5) COMPLETE SUBSTITUTE FORM W-9 AND (6) FOLLOW THE INSTRUCTIONS HERETO. EACH REGISTERED HOLDER SHOULD CAREFULLY READ THE DETAILED INSTRUCTIONS HERETO PRIOR TO COMPLETING THIS LETTER OF TRANSMITTAL. Questions regarding the Exchange Offer or the completion of this Letter of Transmittal should be directed to the information agent, MacKenzie Partners, Inc. (the "INFORMATION AGENT"), at the following telephone numbers: (800) 322-2885 (toll free)/(212) 929-5500 (call collect). This Letter of Transmittal must be used to accept the Exchange Offer whether Old Notes are to be tendered by delivering certificates to the Exchange Agent or by effecting a book-entry transfer into the Exchange Agent's account at DTC. Even if you intend to tender Old Notes through ATOP, a Letter of Transmittal must be completed and submitted to the Exchange Agent on or before the Expiration Date to indicate the action you desire to take with respect to the Exchange Offer. Holders of Old Notes tendering by book-entry transfer to the Exchange Agent's account at DTC may execute the tender through ATOP, for which the Exchange Offer is eligible. Financial institutions that are DTC participants may execute tenders through ATOP by transmitting acceptance of the Exchange Offer to DTC on or prior to the Expiration Date. DTC will verify such acceptance, execute a book-entry transfer of the tendered Old Notes into the account of the Exchange Agent at DTC and send to the Exchange Agent a "book-entry confirmation," which shall include an agent's message. An "agent's message" transmitted by 2 DTC to, and received by, the Exchange Agent and forming a part of the confirmation of book-entry transfer will state that DTC has received an express acknowledgement from a 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 the Prospectus and this Letter of Transmittal and that Advantica and Denny's Holdings may enforce such agreement against such participant. Delivery of the agent's message by DTC will satisfy the terms of the Exchange Offer as to execution and delivery of a Letter of Transmittal by the DTC participant identified in the agent's message. HOWEVER, A LETTER OF TRANSMITTAL MUST STILL BE COMPLETED AND SUBMITTED ON BEHALF OF HOLDERS WHO TENDER THEIR OLD NOTES THROUGH DTC'S ATOP PROCEDURES. Subject to the Terms and Conditions and applicable law, in exchange for up to $265.0 million aggregate principal amount outstanding of Old Notes accepted for tender, Advantica and Denny's Holdings will issue up to $ principal amount of New Notes. The New Notes will be issued in exchange for Old Notes in the Exchange Offer, if consummated, on the third business day following the Expiration Date or as soon as practicable thereafter. The Exchange Agent will act as agent for the tendering holders of Old Notes for the purpose of receiving the New Notes from Advantica and Denny's Holdings and delivering the New Notes to or at the direction of those holders. The Exchange Agent will make this delivery on the Expiration Date or as soon thereafter as practicable. 3 TENDER OF OLD NOTES To effect a valid tender of Old Notes, the undersigned must complete the tables below entitled "Information to Determine Eligibility to Participate in the Exchange Offer" and "Description of Old Notes Tendered" and sign the Letter of Transmittal where indicated. New Notes will either be delivered in book-entry form through DTC to the DTC account of the undersigned or the undersigned's custodian, as specified in the table below, or as certificates to those holders who hold certificates of the Old Notes, on the Expiration Date or as soon as practicable thereafter. Failure to provide the information to determine eligibility to participate in the Exchange Offer will render the undersigned ineligible to participate. Failure to provide the information necessary to effect delivery of New Notes will render such holder's tender defective and Advantica will have the right, which it may waive, to reject such tender without notice. INFORMATION TO DETERMINE ELIGIBILITY TO PARTICIPATE IN THE EXCHANGE OFFER NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. PLEASE COMPLETE THE ITEMS REQUESTED SO THAT ADVANTICA MAY DETERMINE WHETHER THE UNDERSIGNED, OR THE BENEFICIAL OWNER (AS DEFINED BELOW) ON BEHALF OF WHICH THE UNDERSIGNED IS ACTING, IS ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER: 1. Address of the residence (if an individual) or principal place of business (if a corporation, partnership or other form of legal entity) of the Beneficial Owner:
ENTITIES SHOULD COMPLETE ITEMS 2 AND 3 BELOW. INDIVIDUALS SHOULD COMPLETE ITEM 4. IN ADDITION, IF THE ADDRESS ABOVE IS IN ANY OF THE STATES NOTED BELOW, PLEASE COMPLETE THE OTHER ITEMS INDICATED:
OTHER ITEM STATE TO COMPLETE - ----- ----------- California.................................................. 4 Washington.................................................. 6 Colorado.................................................... 7 Indiana..................................................... 7 Kentucky.................................................... 7 Ohio........................................................ 7 Tennessee................................................... 7 Utah........................................................ 7 Florida..................................................... 8 Illinois.................................................... 9
NOTE: A BENEFICIAL OWNER MAY NOT BE ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER DEPENDING UPON THE JURISDICTION OF THE BENEFICIAL OWNER'S RESIDENCE OR PRINCIPAL PLACE OF BUSINESS AND THE INFORMATION TO BE PROVIDED BELOW. THE LETTER OF TRANSMITTAL SHOULD BE SIGNED AND DELIVERED AS SOON AS POSSIBLE SO THAT ADVANTICA WILL HAVE SUFFICIENT TIME TO DETERMINE THE ELIGIBILITY OF THE BENEFICIAL OWNER TO PARTICIPATE IN THE EXCHANGE OFFER. 2. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS THAT ARE LEGAL ENTITIES. Is the Beneficial Owner an entity formed for the purpose of acquiring the securities offered? [ ] Yes [ ] No
4 The Beneficial Owner has total assets (as determined by GAAP) in excess of: [ ] $1.0 million [ ] $5.0 million [ ] $10.0 million [ ] $100.0 million The Beneficial Owner has a net worth (as determined by GAAP) in excess of: [ ] $1.0 million [ ] $5.0 million [ ] $10.0 million [ ] $14.0 million The above assessments of total assets and net worth are as of (check ALL that apply): [ ] latest fiscal year [ ] date of this Letter of Transmittal Does a substantial part of the Beneficial Owner's business activities consist of investing, purchasing, selling or trading in securities of more than one issuer and not of its own issue? [ ] Yes [ ] No Beneficial Owners with a principal place of business in New Mexico should indicate whether the percentage of the Beneficial Owner's annual gross income from investing, purchasing, selling or trading in securities is in excess of 80%: [ ] Yes [ ] No 3. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS THAT ARE LEGAL ENTITIES. Please check ALL of the boxes that describe the Beneficial Owner. [ ] Broker/dealer [ ] Registered under Section 15 of Securities Exchange Act of 1934 [ ] Registered with the jurisdiction of the principal place of business of Beneficial Owner [ ] Bank [ ] Savings institution [ ] Credit Union [ ] Trust company [ ] Insurance company [ ] Investment company as defined in the Investment Company Act of 1940 [ ] Trust Please check if the following applies: [ ] A bank serves as trustee [ ] Estate [ ] Investment adviser [ ] Registered under the Investment Advisers Act of 1940 [ ] Exempt from registration under the Investment Advisers Act of 1940 [ ] A corporation or any wholly owned subsidiary thereof with a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934 [ ] Organization described in Section 501(c)(3) of the Internal Revenue Code [ ] Corporation [ ] Massachusetts or similar business trust [ ] Partnership
5 [ ] Limited liability company [ ] Qualified Institutional Buyer as defined in Rule 144A of the Securities Act of 1933 [ ] An "accredited investor" as defined by Rule 501(a) of Regulation D promulgated under the Securities Act of 1933 [ ] A trust, with total assets in excess of $5.0 million whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) [ ] An entity in which all of the equity owners are "accredited investors" as defined by Rule 501(a) of Regulation D promulgated under the Securities Act of 1933 [ ] Plan established and maintained by a state, its political subdivision, or any instrumentality of a state or its political subdivisions, for the benefit of its employees [ ] Employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 Please check if the following applies: [ ] The investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, registered broker-dealer or registered investment adviser [ ] Business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940 [ ] Private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940 [ ] Small Business Investment Company licensed by the U.S. Small Business Administration under 301(c) or (d) of the Small Business Investment Act of 1958 [ ] a manager of investment accounts on behalf of other than natural persons, who, with affiliates, exercises sole investment discretion with respect to such accounts, and provided such accounts exceed 10 in number and have a fair market value of not less than $10.0 million at the end of the calendar month preceding the month during which the transaction occurred for which the exemption is utilized [ ] investment companies, universities, and other organizations whose primary purpose is to invest its own assets or those held in trust by it for others [ ] trust accounts and individual or group retirement accounts in which a bank, trust company, insurance company or savings and loan institution acts in a fiduciary capacity [ ] foundations and endowment funds exempt from taxation under the Internal Revenue Code, a principal business function of which is to invest funds to produce income in order to carry out the purpose of the foundation or fund 4. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WHO ARE INDIVIDUALS. Please check ALL of the boxes that describe the Beneficial Owner: [ ] A director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer [ ] A natural person whose individual net worth, or joint net worth with that person's spouse, at the time of purchase exceeds $1.0 million [ ] A natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year 5. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WITH A RESIDENCE (IF AN INDIVIDUAL) OR A PRINCIPAL PLACE OF BUSINESS (IF A LEGAL ENTITY) IN CALIFORNIA: Is the Beneficial Owner purchasing for its own account (or a trust account if the Beneficial Owner is a trustee) for investment and not with a view to or for sale in connection with any distribution of the security? [ ] Yes [ ] No
6 Are assessments of total assets and net worth in item 2 above based on most recent audited financial statements? [ ] Yes [ ] No 6. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WITH A PRINCIPAL PLACE OF BUSINESS IN WASHINGTON: Is the Beneficial Owner a corporation, business trust, or partnership or wholly-owned subsidiary of such entity, which has been operating at least 12 months and which has a net worth on a consolidated basis of at least $10.0 million as determined by the Beneficial Owner's most recent audited financial statements, which statements are dated within the last 16 months? [ ] Yes [ ] No 7. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WITH A RESIDENCE (IF AN INDIVIDUAL) OR A PRINCIPAL PLACE OF BUSINESS (IF A LEGAL ENTITY) IN COLORADO, INDIANA, KENTUCKY, OHIO, TENNESSEE OR UTAH: Is the Beneficial Owner purchasing for its own account (or a trust account if the Beneficial Owner is a trustee) for investment and not with a view to or for sale in connection with any distribution of the security? [ ] Yes [ ] No 8. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WITH A RESIDENCE (IF AN INDIVIDUAL) OR A PRINCIPAL PLACE OF BUSINESS (IF A LEGAL ENTITY) IN FLORIDA: The undersigned certifies that the Beneficial Owner is aware of the following privilege: any sale in the state of Florida made pursuant to Fla. Stat. Ann. sec. 517.061(11) is voidable by the purchaser in such sale within 3 days after the first tender of consideration is made by such purchaser to the issuer, an agent of the issuer, or an escrow agent. [ ] Yes [ ] No 9. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WHO ARE NATURAL PERSONS WHOSE RESIDENCE IS IN ILLINOIS: [ ] I certify that I have an individual net worth or joint net worth with my spouse in excess of $1.0 million excluding the value of a principal residence. [ ] I certify that I have had an individual income or joint income with my spouse in excess of $200,000 in each of the two most recent years and reasonably expect to have an income in excess of $200,000 in the current year.
NOTE: IF THERE ARE MULTIPLE BENEFICIAL OWNERS OF AN OLD NOTE, THIS TABLE MUST BE COMPLETED BY OR ON BEHALF OF EACH BENEFICIAL OWNER. 7 List below the Old Notes to which this Letter of Transmittal relates. If the space provided below is inadequate, the certificate numbers and principal amount of Old Notes per $1,000 principal amount should be listed on a separate signed schedule affixed hereto. DESCRIPTION OF OLD NOTES TENDERED (SEE INSTRUCTIONS 3 AND 4) NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY BEFORE COMPLETING THIS TABLE.
- ---------------------------------------------------------------------------------------------- CERTIFICATE NUMBER(S) AGGREGATE PRINCIPAL AMOUNT AGGREGATE PRINCIPAL AMOUNT (DELIVERED HEREWITH)(1) OF OLD NOTES OF OLD NOTES TENDERED(2) - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------
(1) NEED NOT BE COMPLETED IF OLD NOTES ARE BEING TENDERED BY BOOK-ENTRY TRANSFER. (2) UNLESS OTHERWISE INDICATED IN THIS COLUMN, A HOLDER WILL BE DEEMED TO HAVE TENDERED ALL OF THE OLD NOTES REPRESENTED BY THE OLD NOTES INDICATED IN THE PREVIOUS COLUMN. OLD NOTES TENDERED HEREBY MUST BE IN DENOMINATIONS OF $1,000 PRINCIPAL AMOUNT AND ANY INTEGRAL MULTIPLE THEREOF. - -------------------------------------------------------------------------------- [ ] CHECK HERE IF CERTIFICATES REPRESENTING TENDERED OLD NOTES ARE ENCLOSED HEREWITH. [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: ____________________________________________ Account Number: ___________________________________________________________ VOI Number (MUST INCLUDE): ________________________________________________ [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): __________________________________________ Window Ticket Number (if any): ____________________________________________ Date of Execution of Notice of Guaranteed Delivery: _______________________ Name of Institution Which Guaranteed Delivery: ____________________________ If Delivered by Book-Entry Transfer, Complete the Following: Name of Tendering Institution: ____________________________________________ Account Number: ___________________________________________________________ VOI Number (MUST INCLUDE): ________________________________________________ - -------------------------------------------------------------------------------- IMPORTANT: UNLESS GUARANTEED DELIVERY PROCEDURES ARE COMPLIED WITH, THIS LETTER OF TRANSMITTAL, OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES REPRESENTING THE OLD NOTES OR A BOOK-ENTRY CONFIRMATION, AS APPLICABLE, AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. 8 NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. LADIES AND GENTLEMEN: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to Advantica the aggregate principal amount of Old Notes indicated in the table above entitled "Description of Old Notes Tendered." Subject to, and effective upon, consummation of the Exchange Offer, which is subject to, among other things, a minimum tender of $ million in aggregate principal amount of Old Notes and a maximum tender of $265.0 million in aggregate principal amount of Old Notes, the undersigned hereby sells, assigns and transfers to Advantica, or upon the order of Advantica, all right, title and interest in and to such Old Notes as are being tendered pursuant to this Letter of Transmittal. The undersigned understands that validly tendered Old Notes (or defectively tendered Old Notes with respect to which Advantica has waived such defect) will be deemed to have been accepted by Advantica if, as and when Advantica gives oral or written notice thereof to the Exchange Agent. The undersigned understands that subject to the Terms and Conditions, Old Notes properly tendered and accepted (and not validly withdrawn) in accordance with such Terms and Conditions will be exchanged for the New Notes. The undersigned understands that, under certain circumstances, Advantica may not be required to accept any of the Old Notes tendered (including any such Old Notes tendered after the Expiration Date). If any Old Notes are not accepted for exchange for any reason (or if Old Notes are validly withdrawn), such unexchanged (or validly withdrawn) Old Notes will be returned without expense to the undersigned or the undersigned's account at DTC or such other account as designated herein pursuant to the book-entry transfer procedures described in the Prospectus as promptly as practicable after the expiration or termination of the Exchange Offer. The undersigned understands that prior to the Expiration Date tenders of Old Notes may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer -- Withdrawal of Tenders" section of the Prospectus. Following the Expiration Date, and subject to and effective upon Advantica's acceptance for exchange of the principal amount of the Old Notes tendered hereby, upon the Terms and Conditions, the undersigned hereby: (1) irrevocably sells, assigns and transfers to or upon the order of Advantica or its nominees, all right, title and interest in and to, and any and all claims in respect of or arising or having arisen as a result of the undersigned's status as a holder of, all Old Notes tendered hereby; (2) waives any and all rights with respect to the Old Notes tendered hereby (including, without limitation, any existing or past defaults and their consequences in respect of such Old Notes); and (3) releases and discharges Advantica and U.S. Bank National Association, trustee under the indenture for the Old Notes (the "TRUSTEE"), from any and all claims the undersigned may have, now or in the future, arising out of or related to the Old Notes tendered hereby, including, without limitation, any and all claims that the undersigned is entitled to receive additional principal or interest payments with respect to the Old Notes tendered hereby (other than as expressly provided in the Prospectus and in this Letter of Transmittal) or to participate in any redemption or defeasance of the Old Notes tendered hereby. The undersigned understands that tenders of Old Notes pursuant to any of the procedures described in the Prospectus and in the instructions in this Letter of Transmittal and acceptance of such Old Notes by Advantica will, following the Expiration Date, constitute a binding agreement between the undersigned and Advantica upon the Terms and Conditions. The undersigned understands that the delivery and surrender of any Old Notes is not effective, and the risk of loss of the Old Notes does not pass to the Exchange Agent, until receipt by the Exchange Agent of this Letter of Transmittal, or a copy hereof, properly completed and duly executed, together with the Old 9 Notes or a properly transmitted book-entry confirmation thereof and all accompanying evidences of authority and any other required documents in form satisfactory to Advantica. All questions as to the form of all documents and the validity, eligibility (including time of receipt and eligibility under state securities laws), acceptance of tenders and withdrawals of tendered Old Notes will be determined by Advantica, in its discretion, which determination shall be final and binding. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer all right, title and interest in the Old Notes and to acquire New Notes issuable upon the exchange of such tendered Old Notes, and that, when such Old Notes are accepted by Advantica for exchange, Advantica will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned will, upon request, execute and deliver any additional documents deemed by Advantica to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred by this Letter of Transmittal shall not be affected by, and shall survive, the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, executors, administrators, trustees in bankruptcy, personal and legal representatives, successors and assigns of the undersigned. The undersigned hereby further represents, warrants and agrees that: (1) it has received and reviewed the Prospectus; (2) it is the Beneficial Owner (as defined below), or a duly authorized representative of one or more such Beneficial Owners, of the Old Notes tendered hereby and it has full power and authority to execute this Letter of Transmittal; (3) the Old Notes being tendered hereby were owned as of the date of tender, free and clear of any liens, charges, claims, encumbrances, interests and restrictions of any kind, and Advantica will acquire good, indefeasible and unencumbered title to such Old Notes, free and clear of all liens, charges, claims, encumbrances, interests and restrictions of any kind, when the same are accepted by Advantica; (4) it will not sell, pledge, hypothecate or otherwise encumber or transfer any Old Notes tendered hereby from the date of this Letter of Transmittal and agrees that any purported sale, pledge, hypothecation or other encumbrance or transfer will be void and of no effect; (5) it acknowledges that (a) none of Advantica or Denny's Holdings, the Exchange Agent, the Information Agent or the dealer manager for the Exchange Offer (the "DEALER MANAGER"), or any person acting on behalf of the foregoing has made any statement, representation or warranty, express or implied, to it with respect to Advantica and Denny's Holdings or the offer or sale of any New Notes, other than the information included in the Prospectus (as supplemented prior to the Expiration Date), and (b) any information it desires concerning Advantica, Denny's Holdings and the New Notes or any other matter relevant to its decision to purchase the New Notes (including a copy of the Prospectus) is or has been made available to it; (6) it (a) is able to act on its own behalf for itself in the transactions contemplated by the Prospectus, (b) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its prospective investment in the New Notes, and (c) (or the account for which it is acting) has the ability to bear the economic risks of its prospective investment in the New Notes and can afford the complete loss of such investment; (7) in evaluating the Exchange Offer and in making its decision whether to participate therein by submitting a Letter of Transmittal and tendering its Old Notes, the undersigned has made its own independent appraisal of the matters referred to in the Prospectus, herein and in any related communications and is not relying on any statement, representation or warranty, express or implied, made to such holder by Advantica and Denny's Holdings, the Exchange Agent, the 10 Information Agent or the Dealer Manager other than those contained in the Prospectus (as amended or supplemented to the Expiration Date); (8) represents that it has had access to such financial and other information and has been afforded the opportunity to ask such questions of Advantica's representatives and receive answers thereto, as it deems necessary in connection with its decision to participate in the Exchange Offer; (9) the execution and delivery of this Letter of Transmittal shall constitute an undertaking to execute and deliver any further documents and give any further assurances that may be required in connection with any of the foregoing, in each case on and subject to the Terms and Conditions; (10) the submission of this Letter of Transmittal to the Exchange Agent shall, subject to the Terms and Conditions of the Exchange Offer generally, constitute the irrevocable appointment of the Exchange Agent as its attorney and agent, and an irrevocable instruction to such attorney and agent to complete and execute all or any form(s) of transfer and other document(s) at the discretion of such attorney and agent in relation to the Old Notes tendered hereby in favor of Advantica or such other person or persons as they may direct and to deliver such form(s) of transfer and other document(s) in the attorney's and/or agent's discretion and the certificate(s) and other document(s) of title relating to such Old Notes' registration and to execute all such other documents and to do all such other acts and things as may be in the opinion of such attorney or agent necessary or expedient for the purpose of, or in connection with, the acceptance of the Exchange Offer, and to vest in Advantica or its nominees such Old Notes; and (11) it understands that Advantica and Denny's Holdings, the Exchange Agent, the Information Agent, the Dealer Manager and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements and agrees that if any of the acknowledgements, representations and warranties made by it by its submission of this Letter of Transmittal are, at any time prior to the consummation of the Exchange Offer, no longer accurate, it shall promptly notify Advantica and Denny's Holdings and the Dealer Manager. If it is acquiring the New Notes to be exchanged for the Old Notes tendered hereby as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and it has full power to make the foregoing acknowledgements, representations and agreements on behalf of such account. The representations and warranties and agreements of a holder tendering Old Notes shall be deemed to be repeated and reconfirmed on and as of the Expiration Date and the Expiration Date. For purposes of this Letter of Transmittal, the "BENEFICIAL OWNER" of any Old Notes shall mean any holder that exercises sole investment discretion with respect to such Old Notes. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please issue certificates for the New Notes and, if applicable, substitute certificates representing the Old Notes for any Old Notes not exchanged, and a check in New York clearing house funds for the cash payment in respect of accrued and unpaid interest on the Old Notes to which the undersigned is entitled in the name of the undersigned or, in the case of a book-entry delivery of the Old Notes, please credit the account indicated above maintained at DTC. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Notes and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged, and a check in New York clearing house funds for the cash payment in respect of accrued and unpaid interest on the Old Notes to which the undersigned is entitled to the undersigned at the address shown above in the table entitled "Description of Old Notes Tendered". 11 SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 6, 7 AND 9) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes and cash payments in respect of accrued and unpaid interest on the Old Notes are to be issued in the name of someone other than the person or persons whose signature(s) appear(s) on this Letter of Transmittal above, or if Old Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at DTC other than the account indicated above. Issue: (please check one or more) [ ] New Notes [ ] Old Notes [ ] Check In the name of: Name(s) --------------------------------------------------------------- (PLEASE TYPE OR PRINT) --------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ (ZIP CODE) TIN ---------------------------------------------------------------- (SOCIAL SECURITY NUMBER OR EMPLOYER IDENTIFICATION NUMBER) [ ] Credit unexchanged Old Notes delivered by book-entry transfer to DTC account set forth below. -------------------------------------------------------- (DTC ACCOUNT NUMBER, IF APPLICABLE) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 6, 7 AND 9) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes and cash payments in respect of accrued and unpaid interest on the Old Notes are to be sent to someone other than the person or persons whose signature(s) appear(s) on this Letter of Transmittal above or to such person or persons at an address other than that shown in the table entitled "Description of Old Notes Tendered" on this Letter of Transmittal above. Mail: (please check one or more) Name(s) --------------------------------------------------------------- (PLEASE TYPE OR PRINT) --------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- (ZIP CODE) IMPORTANT: UNLESS GUARANTEED DELIVERY PROCEDURES ARE COMPLIED WITH, THIS LETTER OF TRANSMITTAL, OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION, AS APPLICABLE, AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. 12 - -------------------------------------------------------------------------------- SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS OF OLD NOTES) By completing, executing and delivering this Letter of Transmittal, the undersigned hereby tenders to Advantica the principal amount of the Old Notes listed in the table on page 9 labeled "Description of Old Notes Tendered" under the column heading "Aggregate Principal Amount of Old Notes Tendered" or, if nothing is indicated in such column, with respect to the entire aggregate principal amount represented by the Old Notes described in such table. ------------------------------------------------- ------------------------------------------------- Signature of Registered Holder(s) or Authorized Date Signatory (see guarantee requirement below) ------------------------------------------------- ------------------------------------------------- Signature of Registered Holder(s) or Authorized Date Signatory (see guarantee requirement below) ------------------------------------------------- ------------------------------------------------- Signature of Registered Holder(s) or Authorized Date Signatory (see guarantee requirement below)
Area Code(s) and Telephone Number(s): ------------------------------------------------------------------ If a holder of Old Notes is tendering any Old Notes, this Letter of Transmittal must be signed by the Registered Holder(s) exactly as the name(s) appear(s) on a securities position listing of DTC or by any person(s) authorized to become the Registered Holder(s) by endorsements and documents transmitted herewith. If the signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person, acting in a fiduciary or representative capacity, please set forth at the line entitled "Capacity (full title)" and submit evidence satisfactory to the Exchange Agent and Advantica of such person's authority to so act. See Instruction 6. Name(s): -------------------------------------------------------------------- -------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Capacity (full title): ------------------------------------------------------ Address(es): ----------------------------------------------------------------- ----------------------------------------------------------------- (INCLUDING ZIP CODE) Tax Identification Number: -------------------------------------------------- SIGNATURE GUARANTEE (IF REQUIRED -- SEE INSTRUCTION 6) Signature(s) Guaranteed by an Eligible Guarantor Institution: ---------------- (AUTHORIZED SIGNATURE) -------------------------------------------------------------------------- (TITLE) -------------------------------------------------------------------------- (NAME OF FIRM) -------------------------------------------------------------------------- (ADDRESS) Dated: ---------------------------------------------------------------------- - -------------------------------------------------------------------------------- 13 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. EFFECTIVENESS OF LETTER OF TRANSMITTAL. This Letter of Transmittal shall be of no effect unless the Beneficial Owner is deemed in the discretion of Advantica to be eligible to participate in the Exchange Offer as described above. 2. DELIVERY OF LETTER OF TRANSMITTAL; GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal is to be submitted by all tendering holders of Old even if tender of such Old Notes is to be made by book-entry transfer to the Exchange Agent's account at DTC. HOLDERS WHO TENDER THEIR OLD NOTES THROUGH DTC'S ATOP PROCEDURES MUST STILL COMPLETE THIS LETTER OF TRANSMITTAL AND RETURN IT TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. Certificates representing the Old Notes or a confirmation of a book-entry transfer into the Exchange Agent's account at DTC of all Old Notes delivered electronically, as well as a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth herein on or prior to the Expiration Date. Any financial institution that is a participant in DTC may electronically transmit its acceptance of the Exchange Offer by causing DTC to transfer Old Notes to the Exchange Agent in accordance with DTC's ATOP procedures for such transfer on or prior to the Expiration Date. The Exchange Agent will make available its general participant account at DTC for the Old Notes for purposes of the Exchange Offer. DELIVERY OF A LETTER OF TRANSMITTAL TO DTC WILL NOT CONSTITUTE VALID DELIVERY TO THE EXCHANGE AGENT. The method of delivery of this Letter of Transmittal, the Old Notes and all other required documents, including delivery of Old Notes through DTC and transmission of a book-entry confirmation is at the 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, the 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 prior to 5:00 p.m., New York City time, on such date. 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 INSURE DELIVERY OF THE CONFIRMATION OF BOOK-ENTRY TRANSFER PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON SUCH DATE. No Old Notes, Letters of Transmittal, agent's messages or other required documents should be sent to Advantica or Denny's Holdings. Neither Advantica nor the Exchange Agent is under any obligation to notify any tendering holder of Old Notes of Advantica's acceptance of tendered Old Notes prior to the Expiration Date. 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 in the "The Exchange Offer -- Guaranteed Delivery" section of the Prospectus. Pursuant to such procedures, (1) such tender must be made by or through an Eligible Guarantor Institution (as defined below), (2) prior to the Expiration Date, the Exchange Agent must receive from an Eligible Guarantor Institution a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form accompanying this Letter of Transmittal, (A) setting forth the name and address of the holder of the Old Notes and the amount of Old Notes tendered, (B) stating that the tender is being made thereby and (C) guaranteeing that, within three New York Stock Exchange ("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 this Letter of Transmittal will be deposited by the Eligible Guarantor Institution with the Exchange Agent, and (3) the certificates representing all physically-tendered Old Notes, in proper form for transfer, or a book-entry 14 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 this 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. All questions concerning the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by Advantica in its discretion, which determination will be final and binding. Advantica reserves the right to reject any and all tenders not in proper form and to determine whether the acceptance or payment by it for such tenders would be unlawful. Advantica also reserves the right, subject to applicable laws, to waive any defect or irregularity in the tender of any of the Old Notes. See "The Exchange Offer" section of the Prospectus. 3. DELIVERY OF THE NEW NOTES. New Notes held in book-entry form will be delivered through DTC and only to the DTC account of the tendering holder or the tendering holder's custodian. Accordingly, the appropriate DTC participant name and number (along with any other required account information) needed to permit such delivery must be provided in the table on page 8 hereof entitled "Description of the Old Notes Tendered." Failure to do so will render a tender of Old Notes defective, and Advantica will have the right, which it may waive, to reject such tender without notice. Holders who hold certificates of the Old Notes will receive certificates for the New Notes. 4. AMOUNT OF TENDERS. Tenders of Old Notes will be accepted only in denominations of $1,000. New Notes will be issued only if integral multiples of $1,000 and Advantica will pay cash in lieu of issuing New Notes in lesser principal amount. 5. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). If holders wish to tender with respect to less than the entire principal amount evidenced by any Old Notes submitted, such holders must fill in the principal amount that is to be tendered in the table above labeled "Description of Old Notes Tendered" under the column heading "Aggregate Principal Amount of Old Notes Tendered." In the case of a partial tender of Old Notes, as soon as practicable after the consummation of the Exchange Offer, new certificates for the remainder of Old Notes that were evidenced by such holder's old certificates will be sent to such holder, unless otherwise provided in the table of this Letter of Transmittal. The entire principal amount that is represented by tendered Old Notes delivered to the Exchange Agent will be deemed to have been tendered, unless otherwise indicated. 6. SIGNATURES ON LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the registered holder of the Old Notes tendered hereby, the signature must correspond exactly with the name(s) as written on the face of the certificates without any change whatsoever. If any tendered Old Notes are owned of record by two or more joint owners, all of such owners must sign this Letter of Transmittal. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of certificates. When this Letter of Transmittal is signed by the registered holder of the Old Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, Old Notes are to be issued, or any untendered Old Notes are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by an Eligible Guarantor Institution. If this Letter of Transmittal is signed by a person other than the registered holder or holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered holder or holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Guarantor Institution. 15 If this Letter of Transmittal or any certificates 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, proper evidence satisfactory to Advantica of their authority to so act must be submitted. ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OF SIGNATURES ON BOND POWERS REQUIRED BY THIS INSTRUCTION 6 MUST BE GUARANTEED BY ANY MEMBER FIRM OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., A COMMERCIAL BANK OR TRUST COMPANY HAVING AN OFFICE OR CORRESPONDENT 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 (EACH AN "ELIGIBLE GUARANTOR INSTITUTION"). SIGNATURES ON THIS LETTER OF TRANSMITTAL NEED NOT BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, PROVIDED OLD NOTES ARE TENDERED: (1) BY A REGISTERED HOLDER OF OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN DTC'S SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) WHO HAS NOT COMPLETED THE TABLES ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" IN THIS LETTER OF TRANSMITTAL OR (2) FOR THE ACCOUNT OF AN ELIGIBLE GUARANTOR INSTITUTION. 7. SPECIAL ISSUANCE INSTRUCTIONS AND SPECIAL DELIVERY INSTRUCTIONS. Tendering holders of Old Notes should indicate in the tables the name and address to which (1) New Notes issued pursuant to the Exchange Offer, (2) any substitute certificates evidencing Old Notes not exchanged and/or (3) payment by check for any cash payment in respect of accrued and unpaid interest on the Old Notes, is to be issued or sent if different from the name or address of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Holders tendering Old Notes by book-entry transfer may request that Old Notes not exchanged be credited to such account maintained at DTC as such holder may designate hereon. If no such instructions are given, such Old Notes not exchanged will be returned to the name and address of the person signing this Letter of Transmittal. 8. TAXPAYER IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income tax law generally requires that a tendering holder whose Old Notes are accepted for exchange must provide Advantica (as payor), or U.S. Bank National Association as the paying agent designated by Advantica to act on its behalf (the "PAYOR") with such holder's correct Taxpayer Identification Number ("TIN"), which, in the case of a holder who is an individual, is his social security number. If the Payor is not provided with the correct TIN or an adequate basis for an exemption, such holder may be subject to a $50 penalty imposed by the Internal Revenue Service and backup withholding at the applicable rate may be imposed upon the gross proceeds of any payment received hereunder. If withholding results in an overpayment of taxes, a refund may be obtained. To prevent backup withholding, each tendering holder of Old Notes must provide his or her correct TIN by completing the "Substitute Form W-9" set forth herein, which requires a tendering holder to certify, under penalties of perjury, (1) that the TIN provided is correct (or that such holder is awaiting a TIN), (2) that (i) the holder is exempt from backup withholding, (ii) the holder has not been notified by the Internal Revenue Service that he is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified the holder that he is no longer subject to backup withholding, and (3) that the holder is a U.S. person. Exempt holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. To prevent possible erroneous backup withholding, an exempt holder must enter its correct TIN in Part 1 of Substitute Form W-9, write "Exempt" in Part 2 of such form, and sign and date the form. See the enclosed Guidelines for Certification of Taxpayer Identification Number of Substitute Form W-9 (the "W-9 GUIDELINES") for additional instructions. In order for a nonresident alien or foreign entity to qualify as exempt, such person must submit a completed Form W-8BEN or Form W-8ECI signed under penalties of perjury attesting to such exempt status. Such forms may be obtained from the Payor. 16 If the Old Notes are held in more than one name or are not in the same name of the actual owner, consult the W-9 Guidelines for information on which TIN to report. If you do not have a TIN, consult the W-9 Guidelines for instructions on applying for a TIN, write Form W-9, and sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer Identification Number set forth herein. If you do not provide your TIN to the Payor within 60 days, backup withholding will begin and continue until you furnish your TIN to the Payor. Note: Writing "Applied For" on the form means that you have already applied for a TIN or that you intend to apply for one in the near future. 9. TRANSFER TAXES. Advantica will pay all transfer taxes, if any, applicable to the transfer of Old Notes to Advantica or Advantica's order 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 Old Notes tendered pursuant to this Letter of Transmittal, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason for other than the transfer of Old Notes to Advantica or Advantica's order pursuant to the Exchange Offer, then the amount of such 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 herewith, the amount of such transfer taxes will be billed directly to such tendering holder. 10. VALIDITY OF TENDERS. All questions concerning the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by Advantica in its discretion, which determination will be final and binding. Advantica reserves the right to reject any and all tenders not in proper form and to determine whether the acceptance or payment by it for such tenders would be unlawful. Advantica also reserves the right, subject to applicable laws, to waive any defect or irregularity in the tender of any of the Old Notes. The interpretation of the Terms and Conditions by Advantica shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as Advantica shall determine. None of Advantica, the Exchange Agent, the Information Agent, the Dealer Manager or any other person will be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not validly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the holders of Old Notes, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Exchange Offer Expiration Date or the withdrawal or termination of the Exchange Offer. 11. WAIVER OF CONDITIONS. Advantica reserves the right, in its reasonable discretion, to amend or waive any of the conditions in the Exchange Offer concerning any Old Notes at any time. See the Prospectus under the caption "The Exchange Offer -- Conditions of the Exchange Offer." 12. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address and telephone numbers indicated herein for further instructions. 13. WITHDRAWAL. Tenders may be withdrawn only pursuant to the procedures and subject to the terms set forth in the Prospectus under the caption "The Exchange Offer -- Withdrawal of Tenders." 14. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance and requests for additional copies of the Prospectus, this Letter of Transmittal or the Notice of Guaranteed Delivery may be directed to the Information Agent or the Exchange Agent at the addresses and telephone numbers indicated herein. 17 TO BE COMPLETED BY ALL TENDERING HOLDERS OF OLD NOTES (SEE INSTRUCTION 8) PAYOR'S NAME: U.S. BANK NATIONAL ASSOCIATION, AS PAYING AGENT
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT TIN _______________________________ FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW Social Security Number or Employer Identification Number) Department of the Treasury Part 2 -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING (SEE INSTRUCTIONS) Internal Revenue Service PAYER'S REQUEST FOR TAXPAYER Part 3 -- CERTIFICATION-UNDER PENALTIES OF PERJURY. I CERTIFY THAT (1) The number shown on IDENTIFICATION NUMBER (TIN) AND this form is my correct TIN (or I am waiting for a number to be issued to me), (2) I am not CERTIFICATION subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding, and (3) I am a U.S. person (including a U.S. resident alien). SIGNATURE ______________________________ DATE ___________________________
You must cross out item (2) in Part 3 above if you have been notified by the IRS that you are currently subject to backup withholding because of under-reporting interest or dividends on your tax return. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR" IN PART 1 OF THE SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and that I mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office (or I intend to mail or deliver an application in the near future). I understand that if I do not provide a taxpayer identification number to the Payor within 60 days, the Payor is required to withhold at the applicable rate all cash payments made to me thereafter until I provide a number. ______________________________________ _______________________________________ Signature Date NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING AT THE APPLICABLE RATE OF ANY GROSS PROCEEDS. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 18 In order to tender, a holder of Old Notes should send or deliver a properly completed and signed Letter of Transmittal, together with certificates representing the Old Notes or a book-entry confirmation of the tender and any other required documents, to the Exchange Agent at its address set forth below. THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS: U.S. BANK NATIONAL ASSOCIATION By Registered or Certified Mail: By Hand or Overnight Courier: U.S. Bank, National Association U.S. Bank, National Association Corporate Trust Services Corporate Trust Services 180 East Fifth Street 180 East Fifth Street St. Paul, Minnesota 55101 St. Paul, Minnesota 55101 Attention: Specialized Finance Department Attention: Specialized Finance Department
By Facsimile (for Eligible Institutions only): (651) 244-1537 or (651) 244-8883 Confirm Facsimile by Telephone ONLY: (800) 934-6802 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE OR IN ACCORDANCE WITH THE INSTRUCTIONS HEREIN, WILL NOT CONSTITUTE VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. Any questions or requests for assistance or for additional copies of the Prospectus, the Letter of Transmittal, or related documents may be directed to the Information Agent at the telephone numbers set forth below. A holder of Old Notes may also contact the Dealer Manager at the telephone number set forth below or such holder's custodian bank, depositary, broker, trust company or other nominee for assistance concerning the Exchange Offer. THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS: MACKENZIE PARTNERS, INC. 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (call collect) or (800) 322-2885 (call toll free) Email: proxy@mackenziepartners.com THE DEALER MANAGER FOR THE EXCHANGE OFFER IS: UBS WARBURG 101 California Street, 25th Floor San Francisco, California 94111 Attention: Brian Taylor Telephone: (415) 352-6085 19 EX-99.2 11 g71871a1ex99-2.txt FORM OF NOTICE OF GUARANTEED DELIVERY / OLD NOTES EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY OFFER BY ADVANTICA RESTAURANT GROUP, INC. TO EXCHANGE $ PRINCIPAL AMOUNT OF % SENIOR NOTES DUE 2007 OF DENNY'S HOLDINGS, INC. AND ADVANTICA RESTAURANT GROUP, INC. (THE "NEW NOTES") FOR UP TO $265,000,000 OUTSTANDING PRINCIPAL AMOUNT OF 11 1/4% SENIOR NOTES DUE 2008 OF ADVANTICA RESTAURANT GROUP, INC. (THE "OLD NOTES") (CUSIP NO. 00758B-AA-7) PURSUANT TO THE PROSPECTUS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER , 2001 This Notice of Guaranteed Delivery, or one substantially in the form hereof, must be used to accept the Exchange Offer if (1) certificates evidencing the Old Notes and all other documents required by the letter of transmittal (the "LETTER OF TRANSMITTAL") related to the Exchange Offer cannot be delivered to U.S. Bank National Association (the "EXCHANGE AGENT") on or prior to the Expiration Date or (2) the procedures for delivery by book-entry transfer cannot be completed on or prior to the Expiration Date. This Notice of Guaranteed Delivery may be delivered by hand, overnight courier or mail, or transmitted by facsimile transmission, to the Exchange Agent. See "The Exchange Offer - Procedures for Tendering" in the Prospectus (as defined below). In addition, in order to tender Old Notes according to the guaranteed delivery procedures, (1) such tender must be made by or through an Eligible Guarantor Institution (as defined below), (2) prior to the Expiration Date, the Exchange Agent must receive from an Eligible Guarantor Institution this properly completed and duly executed Notice of Guaranteed Delivery, (A) setting forth the name and address of the holder of the Old Notes and the amount of Old Notes tendered, (B) stating that the tender is being made thereby and (C) guaranteeing that, within three New York Stock Exchange ("NYSE") trading days after the date of execution of this 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, 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 this Notice of Guaranteed Delivery. Capitalized terms used but not defined herein have the meanings assigned to them in the Letter of Transmittal. ADVANTICA IS OFFERING THE NEW NOTES PURSUANT TO REGISTRATION IN PENNSYLVANIA AND PURSUANT TO STATE EXEMPTIONS FROM REGISTRATION IN OTHER STATES. IN ORDER TO AVAIL ITSELF OF THESE STATE EXEMPTIONS, ADVANTICA IS 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 A HOLDER DOES NOT FALL WITHIN THE DESCRIPTION OF A QUALIFYING INSTITUTIONAL INVESTOR, ADVANTICA MAY STILL BE ABLE TO MAKE AN OFFER TO THAT HOLDER. ADVANTICA WILL MAKE THAT DETERMINATION AFTER RECEIPT OF SUCH HOLDER'S LETTER OF TRANSMITTAL. The Exchange Agent for the Exchange Offer is: U.S. BANK NATIONAL ASSOCIATION By Registered or Certified Mail: By Hand or Overnight Courier: U.S. Bank National Association U.S. Bank, National Association Corporate Trust Services Corporate Trust Services 180 East Fifth Street 180 East Fifth Street St. Paul, Minnesota 55101 St. Paul, Minnesota 55101 Attention: Specialized Finance Department Attention: Specialized Finance Department
By Facsimile (for Eligible Institutions only): (651) 244-1537 or (651) 244-8883 Confirm Facsimile by Telephone ONLY: (800) 934-6802 DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Guarantor Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. 2 Ladies and Gentlemen: Upon the terms and subject to the conditions set forth in the prospectus filed by Advantica Restaurant Group, Inc. ("ADVANTICA") and Denny's Holdings, Inc. ("DENNY'S HOLDINGS") dated December , 2001 as filed with the Securities and Exchange Commission (the "PROSPECTUS") and the accompanying Letter of Transmittal, the undersigned hereby tenders to Advantica the principal amount of Old Notes indicated below, pursuant to the guaranteed delivery procedures described in the Prospectus and Letter of Transmittal. A withdrawal of a tender may only occur prior to the Expiration Date in accordance with the procedures set forth in "The Exchange Offer -- Withdrawal of Tenders" section of the Prospectus. In the event of a termination of the Exchange Offer, certificates representing the Old Notes tendered pursuant to the Exchange Offer will be returned to the tendering holders promptly or, in the case of Old Notes tendered by book-entry transfer, such Old Notes will be credited to the account maintained at DTC from which such Old Notes were delivered. If Advantica and Denny's Holdings make a material change in the terms of the Exchange Offer, Advantica and Denny's Holdings will disseminate additional material and will extend the Exchange Offer, in each case to the extent required by law. The undersigned understands that the exchange by the Exchange Agent for Old Notes tendered and accepted for payment pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Old Notes (or confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at DTC) AND a properly completed Letter of Transmittal executed with any required signature guarantee(s), and any other documents required by the Letter of Transmittal. All authority conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned, and every obligation of the undersigned under the Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives. 3 PLEASE SIGN AND COMPLETE This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Old Notes exactly as their name(s) appear(s) on certificate(s) for such Old Notes or, if tendered by a DTC participant, exactly as such participant's name appears on a security position listing as the owner of such Old Notes, or by person(s) authorized to become registered holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her name, address and full title as indicated below and submit evidence satisfactory to Advantica of such person's authority so to act. Aggregate Principal Amount of Old Notes Tendered: - ------------------------------------------------------ Certificate No(s). (if available): - ------------------------------------------------------ Window Ticket No. (if any): - ------------------------------------------------------ Check box if Old Notes will be tendered by book-entry transfer: [ ] U.S. BANK NATIONAL ASSOCIATION Account Number: ---------------------------------------------- VOI Number (MUST INCLUDE): - ------------------------------------------------------ Dated: ----------------------------------------------- Name(s) of Holder(s): - ------------------------------------------------------ - ------------------------------------------------------ Address(es) of Holder(s): - ------------------------------------------------------ - ------------------------------------------------------ (INCLUDING ZIP CODE) Area Code(s) and Telephone Number(s): - ------------------------------------------------------ Name(s) of Authorized Signatory(ies): - ------------------------------------------------------ Full Title(s): --------------------------------------- Address(es) of Authorized Signatory(ies): - ------------------------------------------------------ Signature(s) of Registered Holder(s) or Authorized Signatory(ies): - ------------------------------------------------------ - ------------------------------------------------------ 4 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent 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 (each, an "ELIGIBLE GUARANTOR INSTITUTION"), hereby guarantees to deposit with the Exchange Agent 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 within three New York Stock Exchange trading days after the date of execution of this Notice of Guaranteed Delivery. The Eligible Guarantor Institution that completes this form must communicate the Guarantee to the Exchange Agent and must deliver the required documents to the Exchange Agent within the time period shown herein. Failure to do so could result in financial loss to such Eligible Guarantor Institution. - --------------------------------------------- --------------------------------------------- Name of Firm Authorized Signature - --------------------------------------------- --------------------------------------------- Address Name - --------------------------------------------- --------------------------------------------- (INCLUDING ZIP CODE) Title Area Code & Tel. No. Date -------------------------- ----------------------------------------
NOTE: DO NOT SEND PHYSICAL CERTIFICATES REPRESENTING OLD NOTES WITH THIS NOTICE. SUCH PHYSICAL CERTIFICATES SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL. 5 EX-99.3 12 g71871a1ex99-3.txt FORM OF LETTER TO CLIENTS EXHIBIT 99.3 OFFER BY ADVANTICA RESTAURANT GROUP, INC. TO EXCHANGE $ PRINCIPAL AMOUNT OF % SENIOR NOTES DUE 2007 OF DENNY'S HOLDINGS, INC. AND ADVANTICA RESTAURANT GROUP, INC. (THE "NEW NOTES") FOR UP TO $265,000,000 OUTSTANDING PRINCIPAL AMOUNT OF 11 1/4% SENIOR NOTES DUE 2008 OF ADVANTICA RESTAURANT GROUP, INC. (THE "OLD NOTES") (CUSIP NO. 00758B-AA-7) PURSUANT TO THE PROSPECTUS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER , 2001 To Our Clients: Enclosed for your consideration is the Prospectus dated December , 2001 as filed with the Securities and Exchange Commission (the "PROSPECTUS") by Advantica Restaurant Group, Inc. ("ADVANTICA") and Denny's Holdings, Inc. ("DENNY'S HOLDINGS") and the letter of transmittal (the "LETTER OF TRANSMITTAL"), relating to the offer of Advantica to exchange (the "EXCHANGE OFFER") the New Notes for its Old Notes. The Exchange Offer is conditioned upon important conditions that are described in the Prospectus under "The Exchange Offer -- Conditions of the Exchange Offer". Capitalized terms used but not defined herein have the meanings assigned to them in the Letter of Transmittal. ADVANTICA IS OFFERING THE NEW NOTES PURSUANT TO REGISTRATION IN PENNSYLVANIA AND PURSUANT TO EXEMPTIONS FROM REGISTRATION IN OTHER STATES. IN ORDER TO AVAIL ITSELF OF THESE STATE EXEMPTIONS, ADVANTICA IS 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, ADVANTICA MAY STILL BE ABLE TO MAKE AN OFFER TO YOU. ADVANTICA WILL MAKE THAT DETERMINATION AFTER IT RECEIVES THE LETTER OF TRANSMITTAL WHICH WE WILL COMPLETE FOR YOU BASED ON THE INFORMATION YOU PROVIDE TO US IN THE SECTION HEREIN ENTITLED "INSTRUCTIONS WITH RESPECT TO THE EXCHANGE OFFER" (THE "INSTRUCTION FORM"). THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY , 2002 UNLESS EXTENDED OR EARLIER TERMINATED BY ADVANTICA (SUCH TIME AND DATE, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE"). TENDERED NOTES MAY BE WITHDRAWN ANY TIME PRIOR TO THE EXPIRATION DATE. Consummation of the Exchange Offer is subject to, among other things, a minimum tender of $ million in aggregate principal amount of Old Notes and a maximum tender of $265.0 million in aggregate principal amount of Old Notes. In addition, Advantica's obligation to accept Old Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth in the Prospectus. Advantica may waive any condition described therein in its reasonable discretion. Holders of Old Notes who validly tender and do not properly withdraw their Old Notes and whose Old Notes are accepted by Advantica will receive $ principal amount of New Notes per $1,000 principal amount of Old Notes exchanged. Additionally, Advantica will pay such holders the accrued and unpaid interest on Old Notes from the last interest payment date immediately preceding the date upon which the Notes will be exchanged (the "EXCHANGE DATE") to, but not including, the Exchange Date, in cash. This material is being forwarded to you as the beneficial owner of the Old Notes carried by us in your account but not registered in your name. A TENDER OF SUCH OLD NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. Accordingly, we request instructions as to whether you wish us to tender on your behalf the Old Notes held by us for your account, pursuant to the terms and conditions set forth in the enclosed Prospectus and Letter of Transmittal. If you wish to have us tender your Old Notes on your behalf, please so instruct us by completing, executing and returning to us the Instruction Form attached hereto. We must receive your instructions in ample time to permit us to effect a tender of Old Notes on your behalf prior to the Expiration Date. We encourage you to read the Prospectus and Letter of Transmittal carefully before instructing us as to whether or not to tender your Old Notes. YOU MUST ALSO COMPLETE, EXECUTE AND RETURN TO US THE INSTRUCTION FORM. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER OLD NOTES. Your attention is directed to the following: 1. Tenders will not be accepted from, or on behalf of, holders of Old Notes who are not (1) institutional investors as described in the Letter of Transmittal, or (2) residents of states or other jurisdictions that exempt the Exchange 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, Advantica may still be able to make an offer to you. Such determination will be made upon receipt of the Letter of Transmittal which we will complete for you based on your Instruction Form. 2. Consummation of the Exchange Offer is conditioned upon, among other things, at least $ million in aggregate outstanding principal amount of Old Notes being validly tendered and not properly withdrawn prior to the Expiration Date. In addition, Advantica's obligation to accept the Old Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth in the Prospectus. Advantica may waive any condition described therein in its reasonable discretion. 3. The Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date in accordance with the procedures set forth in the Prospectus. 4. Holders who tender Old Notes will not be obligated to pay brokerage commissions or solicitation fees. Any transfer taxes incident to the transfer of Old Notes from the holder to Advantica will be paid by Advantica, except as otherwise provided in the Letter of Transmittal. IF YOU WISH TO HAVE US TENDER ANY OR ALL OF YOUR OLD NOTES HELD BY US FOR YOUR ACCOUNT OR BENEFIT PURSUANT TO THE EXCHANGE OFFER, PLEASE SO INSTRUCT US BY COMPLETING, EXECUTING AND RETURNING TO US THE INSTRUCTION FORM. WE WILL PREPARE AND SUBMIT YOUR LETTER OF TRANSMITTAL TO THE EXCHANGE AGENT BASED UPON THE INFORMATION PROVIDED IN YOUR INSTRUCTION FORM. 2 INSTRUCTIONS WITH RESPECT TO THE EXCHANGE OFFER The undersigned acknowledge(s) receipt of your letter and the enclosed material referred to therein relating to the Exchange Offer made by Advantica with respect to the Old Notes. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer all right, title and interest in the Old Notes and to acquire the New Notes issuable upon the exchange of such Old Notes, and that, when such validly tendered Old Notes are accepted by Advantica for exchange, Advantica will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. By completing, executing and delivering this Instruction Form, the undersigned hereby makes the acknowledgments, representations and warranties referred to above and instructs you to tender the Old Notes held by you for the account of the undersigned, upon and subject to the terms and conditions set forth in the Prospectus and the Letter of Transmittal, and execute and deliver any additional documents deemed to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. PART I of this letter will instruct you to tender the principal amount at maturity of Old Notes indicated below by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal with respect to the Old Notes tendered. PART II of this letter will inform you whether the Beneficial Owner is (1) an institutional investor or (2) a resident of a state or other jurisdiction that exempts the offer from registration even if the undersigned is not an institutional investor. PART I OLD NOTES WHICH ARE TO BE TENDERED UNLESS OTHERWISE INDICATED:
CERTIFICATE NUMBER(S) PRINCIPAL AMOUNT OR PRINCIPAL AMOUNT OF OLD NOTES ACCOUNT NUMBER(S) OF OLD NOTES TO BE TENDERED - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
* Unless otherwise indicated, you will be deemed to have tendered all of the Old Notes represented by the Old Notes indicated in the provisions column. Old Notes tendered hereby must be in denominations of $1,000 principal amount and any integral multiple thereof. 3 PART II INFORMATION TO DETERMINE ELIGIBILITY TO PARTICIPATE IN THE EXCHANGE OFFER NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. Please complete the items requested so that Advantica may determine whether the undersigned, or the Beneficial Owner (as defined below) on behalf of which the undersigned is acting, is eligible to participate in the Exchange Offer: 1. Address of the residence (if an individual) or principal place of business (if a corporation, partnership or other form of legal entity) of the Beneficial Owner: _______________________________
Entities should complete items 2 and 3 below. Individuals should complete item 4. In addition, if the address above is in any of the states noted below, please complete the other items indicated:
OTHER ITEM STATE TO COMPLETE - ----- ----------- California.................................................. 4 Pennsylvania................................................ 5 Colorado.................................................... 7 Indiana..................................................... 7 Kentucky.................................................... 7 Ohio........................................................ 7 Tennessee................................................... 7 Utah........................................................ 7 Florida..................................................... 8 Illinois.................................................... 9
NOTE: A BENEFICIAL OWNER MAY NOT BE ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER DEPENDING UPON THE JURISDICTION OF THE BENEFICIAL OWNER'S RESIDENCE OR PRINCIPAL PLACE OF BUSINESS AND THE INFORMATION TO BE PROVIDED BELOW. THIS INSTRUCTION FORM SHOULD BE SIGNED AND DELIVERED AS SOON AS POSSIBLE SO THAT WE MAY COMPLETE AND SUBMIT A LETTER OF TRANSMITTAL FOR THE BENEFICIAL OWNER AND ADVANTICA WILL HAVE SUFFICIENT TIME TO DETERMINE THE ELIGIBILITY OF THE BENEFICIAL OWNER TO PARTICIPATE IN THE EXCHANGE OFFER. FOR PURPOSES OF THIS INSTRUCTION FORM, THE "BENEFICIAL OWNER" OF ANY OLD NOTES SHALL MEAN ANY HOLDER THAT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO SUCH OLD NOTES. 2. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS THAT ARE LEGAL ENTITIES. Is the Beneficial Owner an entity formed for the purpose of acquiring the securities offered? [ ] Yes [ ] No The Beneficial Owner has total assets (as determined by GAAP) in excess of: [ ] $1.0 million [ ] $5.0 million [ ] $10.0 million [ ] $100.0 million
4 The Beneficial Owner has a net worth (as determined by GAAP) in excess of: [ ] $1.0 million [ ] $5.0 million [ ] $10.0 million [ ] $14.0 million The above assessments of total assets and net worth are as of (check ALL that apply): [ ] latest fiscal year [ ] date of this Letter of Transmittal Does a substantial part of the Beneficial Owner's business activities consist of investing, purchasing, selling or trading in securities of more than one issuer and not of its own issue? [ ] Yes [ ] No Beneficial Owners with a principal place of business in New Mexico should indicate whether the percentage of the Beneficial Owner's annual gross income from investing, purchasing, selling or trading in securities is in excess of 80%: [ ] Yes [ ] No 3. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS THAT ARE LEGAL ENTITIES. Please check ALL of the boxes that describe the Beneficial Owner. [ ] Broker/dealer [ ] Registered under Section 15 of Securities Exchange Act of 1934 [ ] Registered with the jurisdiction of the principal place of business of Beneficial Owner [ ] Bank [ ] Savings institution [ ] Credit Union [ ] Trust company [ ] Insurance company [ ] Investment company as defined in the Investment Company Act of 1940 [ ] Trust Please check if the following applies: [ ] A bank services as trustee [ ] Estate [ ] Investment adviser [ ] Registered under the Investment Advisers Act of 1940 [ ] Exempt from registration under the Investment Advisers Act of 1940 [ ] A corporation or any wholly owned subsidiary thereof with a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934 [ ] Organization described in Section 501(c)(3) of the Internal Revenue Code [ ] Corporation [ ] Massachusetts or similar business trust [ ] Partnership [ ] Limited liability company [ ] Qualified Institutional Buyer as defined in Rule 144A of the Securities Act of 1933 [ ] An "accredited investor" as defined by Rule 501(a) of Regulation D promulgated under the Securities Act of 1933
5 [ ] A trust, with total assets in excess of $5.0 million whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) [ ] An entity in which all of the equity owners are "accredited investors" as defined by Rule 501(a) of Regulation D promulgated under the Securities Act of 1933 [ ] Plan established and maintained by a state, its political subdivision, or any instrumentality of a state or its political subdivisions, for the benefit of its employees [ ] Employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 Please check if the following applies: [ ] The investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, registered broker-dealer or registered investment adviser. [ ] Business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940 [ ] Private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940 [ ] Small Business Investment Company licensed by the U.S. Small Business Administration under 301(c) or (d) of the Small Business Investment Act of 1958 [ ] a manager of investment accounts on behalf of other than natural persons, who, with affiliates, exercises sole investment discretion with respect to such accounts, and provided such accounts exceed 10 in number and have a fair market value of not less than $10.0 million at the end of the calendar month preceding the month during which the transaction occurred for which the exemption is utilized [ ] investment companies, universities, and other organizations whose primary purpose is to invest its own assets or those held in trust by it for others [ ] trust accounts and individual or group retirement accounts in which a bank, trust company, insurance company or savings and loan institution acts in a fiduciary capacity [ ] foundations and endowment funds exempt from taxation under the Internal Revenue Code, a principal business function of which is to invest funds to produce income in order to carry out the purpose of the foundation or fund 4. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WHO ARE INDIVIDUALS. Please check ALL of the boxes that describe the Beneficial Owner: [ ] A director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer [ ] A natural person whose individual net worth, or joint net worth with that person's spouse, at the time of purchase exceeds $1.0 million [ ] A natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year 5. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WITH A RESIDENCE (IF AN INDIVIDUAL) OR A PRINCIPAL PLACE OF BUSINESS (IF A LEGAL ENTITY) IN CALIFORNIA: Is the Beneficial Owner purchasing for its own account (or a trust account if the Beneficial Owner is a trustee) for investment and not with a view to or for sale in connection with any distribution of the security? [ ] Yes [ ] No Are assessments of total assets and net worth in item 2 above based on most recent audited financial statements? [ ] Yes [ ] No
6 6. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WITH A PRINCIPAL PLACE OF BUSINESS IN WASHINGTON: Is the Beneficial Owner a corporation, business trust, or partnership or wholly-owned subsidiary of such entity, which has been operating at least 12 months and which has a net worth on a consolidated basis of at least $10.0 million as determined by the Beneficial Owner's most recent audited financial statements, which statements are dated within the last 16 months? [ ] Yes [ ] No 7. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WITH A RESIDENCE (IF AN INDIVIDUAL) OR A PRINCIPAL PLACE OF BUSINESS (IF A LEGAL ENTITY) IN COLORADO, INDIANA, KENTUCKY, OHIO, TENNESSEE OR UTAH: Is the Beneficial Owner purchasing for its own account (or a trust account if the Beneficial Owner is a trustee) for investment and not with a view to or for sale in connection with any distribution of the security? [ ] Yes [ ] No 8. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WITH A RESIDENCE (IF AN INDIVIDUAL) OR A PRINCIPAL PLACE OF BUSINESS (IF A LEGAL ENTITY) IN FLORIDA: The undersigned certifies that the Beneficial Owner is aware of the following privilege: any sale in the state of Florida made pursuant to Fla. Stat. Ann. sec. 517.061(11) is voidable by the purchaser in such sale within 3 days after the first tender of consideration is made by such purchaser to the issuer, an agent of the issuer, or an escrow agent. [ ] Yes [ ] No 9. THIS ITEM NEED ONLY BE COMPLETED BY BENEFICIAL OWNERS WHO ARE NATURAL PERSONS WHOSE RESIDENCE IS IN ILLINOIS: [ ] I certify that I have an individual net worth or joint net worth with my spouse in excess of $1.0 million excluding the value of a principal residence. [ ] I certify that I have had an individual income or joint income with my spouse in excess of $200,000 in each of the two most recent years and reasonably expect to have an income in excess of $200,000 in the current year. NOTE: IF THERE ARE MULTIPLE BENEFICIAL OWNERS OF AN OLD NOTE, THIS TABLE MUST BE COMPLETED BY OR ON BEHALF OF EACH BENEFICIAL OWNER.
7 PLEASE SIGN HERE Signature(s) ------------------------------------------------------------------- - -------------------------------------------------------------------------------- Name(s) ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (PLEASE PRINT) Address(es) -------------------------------------------------------------------- - -------------------------------------------------------------------------------- (INCLUDING ZIP CODE(S)) Area Code(s) and Telephone Number(s) ------------------------------------------- Tax Identification or Social Security Number(s) -------------------------------- Date -------------------------------------------------------------------------- 8 EX-99.4 13 g71871a1ex99-4.txt FORM OF LETTER TO BROKERS, DEALERS, ETC. EXHIBIT 99.4 OFFER BY ADVANTICA RESTAURANT GROUP, INC. TO EXCHANGE $ PRINCIPAL AMOUNT OF % SENIOR NOTES DUE 2007 OF DENNY'S HOLDINGS, INC. AND ADVANTICA RESTAURANT GROUP, INC. (THE "NEW NOTES") FOR UP TO $265,000,000 OUTSTANDING PRINCIPAL AMOUNT OF 11 1/4% SENIOR NOTES DUE 2008 OF ADVANTICA RESTAURANT GROUP, INC. (THE "OLD NOTES") (CUSIP NO. 00758B-AA-7) PURSUANT TO THE PROSPECTUS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER , 2001 To Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees: YOUR PROMPT ACTION IS REQUESTED. PLEASE FURNISH COPIES OF THE ENCLOSED MATERIALS AS QUICKLY AS POSSIBLE TO THOSE OF YOUR CLIENTS FOR WHOM YOU HOLD OLD NOTES (AS DEFINED BELOW) IN YOUR NAME OR IN THE NAME OF YOUR NOMINEE OR WHO HOLD OLD NOTES REGISTERED IN THEIR OWN NAMES. Advantica Restaurant Group, Inc. ("we," "us," "our" or "ADVANTICA") is offering, upon and subject to the terms and conditions set forth in the enclosed prospectus dated December , 2001 as filed with the Securities and Exchange Commission (the "PROSPECTUS") by Advantica and Denny's Holdings, Inc. ("DENNY'S HOLDINGS") and the enclosed letter of transmittal (the "LETTER OF TRANSMITTAL"), to exchange (the "EXCHANGE OFFER") the New Notes for the Old Notes. Capitalized terms used but not defined herein have the meanings assigned to them in the Letter of Transmittal. WE ARE OFFERING THE NEW NOTES PURSUANT TO REGISTRATION IN PENNSYLVANIA AND PURSUANT TO STATE 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 A HOLDER DOES NOT FALL WITHIN THE DESCRIPTION OF A QUALIFYING INSTITUTIONAL INVESTOR, WE MAY STILL BE ABLE TO MAKE AN OFFER TO THAT HOLDER. WE WILL MAKE THAT DETERMINATION AFTER RECEIPT OF THE LETTER OF TRANSMITTAL YOU COMPLETE ON BEHALF OF SUCH HOLDER BASED ON THE INFORMATION SUCH HOLDER PROVIDES. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY , 2002 UNLESS EXTENDED OR EARLIER TERMINATED BY ADVANTICA (SUCH TIME AND DATE, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE"). TENDERED NOTES MAY BE WITHDRAWN ANY TIME PRIOR TO THE EXPIRATION DATE. Consummation of the Exchange Offer is subject to, among other things, a minimum tender of $ million in aggregate outstanding principal amount of Old Notes and a maximum tender of $265.0 million in principal amount of Old Notes. In addition, Advantica's obligation to accept the Old Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth in the Prospectus. Advantica may waive any condition described therein in its reasonable discretion. We are requesting that you contact your clients for whom you hold Old Notes regarding the Exchange Offer. For your information and for forwarding to your clients for whom you hold Old Notes registered in your name or in the name of your nominee, or who hold Old Notes registered in their own names, we are enclosing the following documents: l. the Prospectus; 2. the Letter of Transmittal for your use and for informational purposes for your clients; 3. a Notice of Guaranteed Delivery to be used to accept the Exchange Offer if time will not permit all required documents to reach the Exchange Agent prior to the Expiration Date or if the procedures for book-entry transfer cannot be completed on a timely basis; 4. a form of letter that may be sent to your clients for whose account you hold Old Notes registered in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer; and 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. Tenders will not be accepted from or on behalf of, holders of Old Notes who are not (1) institutional investors as described in the Letter of Transmittal, or (2) residents of states or other jurisdictions that exempt the Exchange Offer from registration even if directed to a person or entity that is not an institutional investor. If a holder does not fall within the description of a qualifying institutional investor, we may still be able to make an offer to that holder. Such determination will be made upon receipt of the Letters of Transmittal you complete on behalf of the holder based on the information such holder provides to you in its instructions to you. ACCORDINGLY, YOU MUST TRANSMIT A PROPERLY COMPLETED LETTER OF TRANSMITTAL ON BEHALF OF YOUR CLIENTS IN ORDER FOR THEIR TENDER TO BE ACCEPTED. To participate in the Exchange Offer, (1) certificates representing tendered Old Notes or timely confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at DTC, (2) a duly executed and properly completed Letter of Transmittal (or facsimile thereof) with any required signature guarantees and (3) any other required documents, should be sent to the Exchange Agent, all in accordance with the instructions set forth in the Letter of Transmittal and in the Prospectus under the heading "The Exchange Offer -- Procedures for Tendering". If holders of Old Notes wish to tender but it is impracticable for them to deliver their certificates for the Old Notes and all other required documents to the Exchange Agent or to comply with the book-entry transfer procedures on or prior to the Expiration Date, a tender may be effected by following the guaranteed delivery procedures described in the Prospectus under "The Exchange Offer -- Guaranteed Delivery". Except as described in the Prospectus, Advantica will not pay any fees or commissions to any broker or dealer or other person for soliciting tenders of Old Notes. Advantica will, upon request, reimburse brokers, dealers, commercial banks and trust companies for reasonable and necessary costs and expenses incurred by them in forwarding the Prospectus and the related documents to the beneficial owners of the Old Notes held by them as nominee or in a fiduciary capacity. Advantica will pay or cause to be paid all transfer taxes applicable to the tender of Old Notes pursuant to the Exchange Offer, except as set forth in Instruction 9 of the Letter of Transmittal. 2 Any inquiries you may have with respect to the Exchange Offer, or requests for additional copies of the enclosed materials, should be directed to the Exchange Agent or the Information Agent at the addresses and telephone numbers set forth on the back cover page of the Prospectus. NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF ADVANTICA OR DENNY'S HOLDINGS OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL. Very truly yours, ADVANTICA RESTAURANT GROUP, INC. Enclosures 3 EX-99.5 14 g71871a1ex99-5.txt FORM OF GUIDELINES FOR CERTIFICATION OF TAXPAYER EXHIBIT 99.5 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYOR. Social Security numbers have nine digits separated by two hyphens, e.g., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen, e.g., 00-0000000. The table below will help determine the number to give the payor. GIVE THE GIVE THE FOR THIS TYPE SOCIAL SECURITY FOR THIS TYPE SOCIAL SECURITY OF ACCOUNT: NUMBER OF -- OF ACCOUNT: NUMBER OF -- 1. An individual's The individual 9. A valid trust, estate, The legal entity (do account or pension trust not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title) (5) 2. Two or more The actual owner of 10. Corporate account The corporation individuals (joint the account or, if account) combined funds, the first individual on the account (1) 3. Husband and wife The actual owner of 11. Religious, charitable, The organization (joint account) the account or, if or educational joint funds, either organization person (1) 4. Custodian account of a The minor (2) 12. Partnership account The partnership minor (Uniform Gift to held in the name of Minors Act) the business 5. Adult and minor (joint The adult or, if the 13. Association, club, or The organization account) minor is the only other tax-exempt contributor, the minor organization (1) 6. Account in the name of The ward, minor, or 14. A broker or registered The broker or nominee guardian or committee incompetent person (3) nominee for a designated ward, minor, or incompetent person 7. a. A revocable savings The grantor-trustee 15. Account with the The public entity trust account (in (1) Department of which grantor is Agriculture in the also trustee) name of a public b. Any "trust" account The actual owner (1) entity (such as a that is not a legal State or local or valid trust government, school under State law district, or prison) that receives agricultural program payments 8. Sole proprietorship The owner (4) account
- --------------- (1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. If the owner does not have an employer identification number, furnish the owner's social security number. (5) List first and circle the name of the legal trust, estate or pension trust. NOTE: IF NO NAME IS CIRCLED WHEN THERE IS MORE THAN ONE NAME, THE NUMBER WILL BE CONSIDERED TO BE THAT OF THE FIRST NAME LISTED. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 OBTAINING A NUMBER If you do not have a taxpayer identification number or you do not know your number, obtain form SS-5, Application for a Social Security Number Card (for resident individuals), Form SS-4, Application for Employer Identification Number (for businesses and all other entities), Form W-7 for International Taxpayer Identification Number (for alien individuals required to file U.S. tax returns), at an office of the Social Security Administration or the Internal Revenue Service. To complete the Substitute Form W-9, if you do not have a taxpayer identification number, write "Applied For" in the space for the taxpayer identification number in Part 1, sign and date the Form, and give it to the requester. Generally, you will then have 60 days to obtain a taxpayer identification number and furnish it to the requester. If the requester does not receive your taxpayer identification number within 60 days, backup withholding, if applicable, will begin and will continue until you furnish your taxpayer identification number to the requester. PAYEES EXEMPT FROM BACKUP WITHHOLDING PENALTIES Payees specifically exempted from backup withholding on ALL payments include the following:* - A corporation. - A financial institution. - An organization exempt from tax under section 501(a), or an individual retirement plan, or a custodial account under section 403(b)(7). - The United States or any agency or instrumentality thereof. - A State, the District of Columbia, a possession of the United States, or any political subdivision or instrumentality thereof. - A foreign government or a political subdivision, agency or instrumentality thereof. - An international organization or any agency or instrumentality thereof. - A registered dealer in securities or commodities registered in the United States or a possession of the United States. - A real estate investment trust. - A common trust fund operated by a bank under section 584(a). - An entity registered at all times during the tax year under the Investment Company Act of 1940. - A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under section 1441. - Payments to partnerships not engaged in a trade or business in the United States and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. - Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. NOTE: You may be subject to backup withholding if (i) this interest is $600 or more, (ii) the interest is paid in the course of the payor's trade or business and (iii) you have not provided your correct taxpayer identification number to the payor. - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - Payments described in section 6049(b)(5) to non-resident aliens. - Payments on tax-free covenant bonds under section 1451. - Payments made by certain foreign organizations. - Payments made to a nominee. EXEMPT PAYEES DESCRIBED ABOVE SHOULD FILE A SUBSTITUTE FORM W-9 TO AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE THIS FORM WITH THE PAYOR, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" IN PART 2, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYOR. Certain payments other than interest, dividends and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICES. Section 6109 requires most recipients of dividends, interest or other payments to give taxpayer identification numbers to payors who must report the payments to the IRS. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. Payors must be given the numbers whether or not recipients are required to file tax returns. Payors must generally withhold the applicable rate from taxable interest, dividends, and certain other payments to a payee who does not furnish a taxpayer identification number to a payor. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail to furnish your taxpayer identification number to a payor, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE STATEMENTS WITH RESPECT TO WITHHOLDING. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. If you falsify certifications or affirmations, you are subject to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. - --------------- * Unless otherwise noted herein, all references below to section numbers or to regulations are references to the Internal Revenue Code and the regulations promulgated thereunder -2- -----END PRIVACY-ENHANCED MESSAGE-----