-----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, A2ycKicjfk12If1REzQadLsysvdJ7dbEvy7u//0mNrLp3lLQQ955hYDRWFjKtW5F b/tWik27Wk+7doWWC/lARw== 0000950144-99-003511.txt : 19990331 0000950144-99-003511.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950144-99-003511 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981230 FILED AS OF DATE: 19990330 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18051 FILM NUMBER: 99577911 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 10-K405 1 ADVANTICA FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from - --------------- to - --------------- Commission file number 0-18051 ADVANTICA RESTAURANT GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3487402 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 203 EAST MAIN STREET 29319-9966 SPARTANBURG, SOUTH CAROLINA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (864) 597-8000. ------------------------ Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ None None
------------------------ Securities registered pursuant to Section 12(g) of the Act: $.01 Par Value, Common Stock Common Stock Warrants expiring January 7, 2005 --------------------------------------------------------------- (TITLE OF CLASS) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No _ Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $152,015,220 as of March 1, 1999, based upon the closing sales price of registrant's Common Stock on that date of $5.00 per share. As of March 1, 1999, 40,025,207 of registrant's Common Stock, $.01 par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 1999 are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1 Business 1 Item 2. Properties 10 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Market for Registrant's Common Equity and Related Item 5. Stockholder Matters 13 Item 6. Selected Financial Data 14 Management's Discussion and Analysis of Financial Condition Item 7. and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32 Item 8. Financial Statements and Supplementary Data 33 Changes in and Disagreements with Accountants on Accounting Item 9. and Financial Disclosure 33 PART III Item 10. Directors and Executive Officers of the Registrant 33 Item 11. Executive Compensation 33 Security Ownership of Certain Beneficial Owners and Item 12. Management 33 Item 13. Certain Relationships and Related Transactions 33 PART IV Exhibits, Financial Statement Schedules, and Reports on Form Item 14. 8-K 35 INDEX TO FINANCIAL STATEMENTS F-1 SIGNATURES
FORWARD-LOOKING STATEMENTS The forward-looking statements included in the "Business," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk" sections, which reflect management's best judgment based on factors currently known, involve risks and uncertainties. Words such as "expects," "anticipates," "believes," "intends," "plans," and "hopes," variations of such words and similar expressions are intended to identify such forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the factors discussed in such sections and those set forth in the cautionary statements contained in Exhibit 99 to this Form 10-K. (See Exhibit 99 -- Safe Harbor Under the Private Securities Litigation Reform Act of 1995.) Forward-looking information provided by the Company in such sections pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. 3 PART I ITEM 1. BUSINESS INTRODUCTION Advantica Restaurant Group, Inc. (formerly Flagstar Companies, Inc.) ("Advantica" and together with its subsidiaries, including predecessors, the "Company") is one of the largest restaurant companies in the United States, operating (directly and through franchisees) approximately 2,600 moderately-priced restaurants. Flagstar Companies, Inc. ("FCI") was organized as a holding company in 1988 in order to effect the 1989 acquisition of Flagstar Corporation ("Flagstar"). On November 16, 1992, FCI and Flagstar consummated the principal elements of a recapitalization, as a result of which two partnerships affiliated with Kohlberg Kravis Roberts & Co. acquired control of FCI and Flagstar. Prior to June 16, 1993, FCI and Flagstar had been known, respectively, as TW Holdings, Inc. and TW Services, Inc. On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly formed subsidiary, consummated the acquisition of the Coco's and Carrows restaurant chains consisting of 347 Company-owned units within the mid-scale family-style dining category. This acquisition was intended to strengthen the Company's position in the family-style restaurant category, particularly in California, one of the Company's core markets. The ultimate acquisition price of $313.4 million was paid in consideration for all of the outstanding stock of FRI-M Corporation ("FRI-M"), which owns the Coco's and Carrows chains. The acquisition was accounted for using the purchase method of accounting and is reflected in the Company's Consolidated Financial Statements and Notes thereto included herein as of the acquisition date. During the third quarter of 1996, the Company sold its two food processing operations, Portion-Trol Foods, Inc. and the Mother Butler Pies division of Denny's, Inc., a subsidiary of Flagstar (Portion-Trol Foods, Inc. and the Mother Butler Pies division are hereinafter referred to collectively as "PTF"). These transactions marked the last in a series of nonrestaurant divestitures which began with the sale of Canteen Corporation, the Company's food and vending business, in 1994 and also included the 1995 sales of TW Recreational Services, Inc. ("TWRS"), a concession and recreation services subsidiary; Volume Services, Inc. ("VS"), a stadium concession services subsidiary; and Proficient Food Company ("PFC"), the Company's food distribution subsidiary. THE 1997 RESTRUCTURING As a result of the 1989 leveraged buyout of Flagstar, the Company became very highly leveraged. While the Company's 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. These operating trends generally continued through 1997. In early 1997, the Company hired Donaldson, Lufkin & Jenrette Securities Corporation as a financial advisor to assist in exploring alternatives to improve the Company's capital structure. Subsequently, the Company's management concluded, in light of operating trends experienced by the Company and the Company's liquidity and capital needs, that the reorganizational alternative best designed to recapitalize the Company over the long term and maximize the recovery of all stakeholders was a prepackaged plan pursuant to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). Toward that end, beginning in February 1997, FCI and Flagstar commenced intensive negotiations with various creditors in an effort to enable them to restructure their indebtedness through such a prepackaged filing. FCI's operating subsidiaries, Denny's Holdings, Inc., Spartan Holdings, Inc. and FRD (and their respective subsidiaries) did not file bankruptcy petitions and were not parties to such Chapter 11 proceedings. The plan of reorganization dated as of November 7, 1997 (following the resolution of certain issues before the Bankruptcy Court) (the "Plan of Reorganization") was confirmed by the Bankruptcy Court pursuant to an order entered as of November 12, 1997 and became effective January 7, 1998. As a result of the reorganization, FCI and Flagstar significantly reduced their debt and simplified their capital structure, although the Company remains highly leveraged. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for additional information concerning the Company's indebtedness and debt service requirements. 1 4 Material features of the Plan of Reorganization, as it became effective as of January 7, 1998 (the "Effective Date"), were as follows: (a) Flagstar merged with and into FCI, the surviving corporation, and FCI changed its name to Advantica Restaurant Group, Inc.; (b) The following securities of FCI and Flagstar were canceled, extinguished and retired as of the Effective Date: (1) Flagstar's 10 7/8% Senior Notes due 2002 and 10 3/4% Senior Notes due 2001 (collectively, the "Old Senior Notes"), (2) Flagstar's 11.25% Senior Subordinated Debentures due 2004 and 11 3/8% Senior Subordinated Debentures due 2003 (collectively, the "Senior Subordinated Debentures"), (3) Flagstar's 10% Convertible Junior Subordinated Debentures due 2014 (the "10% Convertible Debentures"), (4) FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock and (5) FCI's $.50 par value common stock (the "Old Common Stock"); (c) Advantica had 100 million authorized shares of $.01 par value common stock (the "Common Stock") (of which 40 million were deemed issued and outstanding on the Effective Date pursuant to the Plan of Reorganization subject to completion of the exchange of securities as contemplated by the Plan of Reorganization) and 25 million authorized shares of preferred stock (none of which are currently outstanding). Pursuant to the Plan of Reorganization, ten percent of the number of shares of Common Stock issued and outstanding on the Effective Date, on a fully diluted basis, was reserved for issuance under a new management stock option program. Additionally, 4 million shares of Common Stock were reserved for issuance upon the exercise of warrants expiring January 7, 2005 that were deemed issued and outstanding on the Effective Date and entitle the holders thereof to purchase in the aggregate 4 million shares of Common Stock at an exercise price of $14.60 per share (the "Warrants"); (d) Each holder of the Old Senior Notes received such holder's pro rata portion of 100% of Advantica's 11 1/4% Senior Notes due 2008 (the "Senior Notes") in exchange for 100% of the principal amount of such holders' Old Senior Notes and accrued interest through the Effective Date; (e) Each holder of the Senior Subordinated Debentures received such holder's pro rata portion of shares of Common Stock equivalent to 95.5% of the Common Stock issued on the Effective Date; (f) Each holder of the 10% Convertible Debentures received such holder's pro rata portion of (1) shares of Common Stock equivalent to 4.5% of the Common Stock issued on the Effective Date and (2) 100% of the Warrants issued on the Effective Date; and (g) Advantica refinanced its prior credit facilities by entering into a new credit facility with The Chase Manhattan Bank ("Chase") and other lenders named therein, providing the Company (excluding FRI-M) with a $200 million senior revolving credit facility (as amended to date, the "Credit Facility"). Further discussion of the bankruptcy reorganization proceedings is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 to the Consolidated Financial Statements. DISPOSITIONS OF FLAGSTAR ENTERPRISES, INC. AND QUINCY'S RESTAURANTS, INC. AND IN-SUBSTANCE DEFEASANCE OF RELATED DEBT On April 1, 1998, the Company completed the sale to CKE Restaurants, Inc. ("CKE") of all of the capital stock of Flagstar Enterprises, Inc. ("FEI"), which operated the Company's Hardee's restaurants under licenses from Hardee's Food Systems, Inc. ("HFS"), a wholly-owned subsidiary of CKE, for $427 million. This amount includes the assumption by CKE of $46 million of capital leases. Approximately $173.1 million of the proceeds (together with $28.6 million already on deposit with respect to certain mortgage financings as described below) was applied to in-substance defease the 10.25% Guaranteed Secured Bonds due 2000 (the "Spartan Mortgage Financing") of Spardee's Realty, Inc., a wholly-owned subsidiary of FEI, and Quincy's Realty, Inc., a wholly-owned subsidiary of Quincy's Restaurants, Inc. ("Quincy's"), with a book value of $198.9 million plus accrued interest of $6.9 million at April 1, 1998. The Spartan Mortgage Financing was collateralized by certain assets of Spardee's Realty, Inc. and Quincy's Realty, Inc. The Company replaced such collateral through the purchase of a portfolio of United States Government and AAA rated investment securities which were deposited with the collateral agent with respect to the Spartan Mortgage Financing to satisfy principal and interest payments under such Spartan Mortgage Financing through the stated maturity date in the year 2000. 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 2 5 this adjustment is reflected as "Reorganization items of discontinued operation" in the Statements of Consolidation Operations. As a result of this adjustment, no gain or loss on disposition is reflected. On June 10, 1998, the Company completed the sale of all of the capital stock of Quincy's, the wholly-owned subsidiary which operated the Company's Quincy's Family Steakhouse Division, to Buckley Acquisition Corporation ("BAC") for $84.7 million. This amount includes the assumption by BAC of $4.2 million of capital leases. The resulting gain from such disposition of approximately $13.7 million is reflected as an adjustment to reorganization value in excess of amounts allocable to identifiable assets. RESTAURANTS The Company's operations are conducted through four restaurant chains or concepts, three in the full-service mid-scale dining segment and one in the quick-service segment. Denny's is the Company's largest concept, with 1,721 units. Coco's is a bakery restaurant chain operating 481 units. The Carrows chain, consisting of 149 units, specializes in traditional American food. El Pollo Loco, a chain of 265 quick-service restaurants, features marinated flame-broiled chicken products and related Mexican food items. For a breakdown of the total revenues contributed by each concept for the last three years, see the corresponding section of "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although operating in two distinct segments of the restaurant industry -- full-service and quick-service -- the Company's restaurants benefit from a single management strategy that emphasizes superior value and quality, friendly and attentive service and appealing facilities. During 1998, the Company continued its strategy of growth through franchising, adding a net 70 total units to the system, representing an increase of 129 franchise/licensed units, offset by a net decrease of 59 Company-owned units. The increase in franchise/licensed units and the decrease in Company-owned units includes a net of 55 units which were sold to franchisees ("refranchised"). The Company intends to continue focusing on growth in the franchise arena in 1999. The Company believes its restaurant operations benefit from the diversity of the restaurant concepts represented by its four chains, the generally strong market positions and consumer recognition enjoyed by these chains, the benefits of a centralized support system for purchasing, menu development, human resources, management information systems, site selection, restaurant design and construction, and an aggressive management team. Denny's, Coco's and Carrows may benefit from the demographic trend of aging baby boomers and the growing population of senior citizens. The largest percentage of "mid-scale" customers are in the 35 and up age category. In the quick-service segment, the Company expects El Pollo Loco to increase its strong position in the Southwest. During the fourth quarter of 1997, the Company approved a restructuring plan to significantly reduce the size of its Quincy's chain. In addition to the sale or closure of restaurants, the restructuring plan resulted in the elimination of certain restaurant, field management and corporate support positions. As noted above, during 1998 the Company sold all of the capital stock of Quincy's, and accordingly, the net restructuring charge of $10.5 million is included in loss from operations of discontinued operations in the accompanying Statement of Consolidated Operations. Also included in the 1997 loss from operations of discontinued operations is an impairment charge totaling $15.1 million related to the write-down of certain Quincy's units in association with the 1997 restructuring plan, as well as the write-down of certain Hardee's units which were disposed of during 1997. DENNY'S Denny's is the largest full-service family-style restaurant chain in the mid-scale segment in the United States in terms of market share, number of units and U.S. systemwide sales. Denny's restaurants currently operate in 49 states, two U.S. territories and three foreign countries, with principal concentrations in California, Florida and Texas. Denny's restaurants are designed to provide a casual dining atmosphere with moderately priced food and quick, efficient service to a broad spectrum of customers. The restaurants generally are open 24 hours a day, seven days a week. All Denny's restaurants have uniform menus (with some regional and seasonal variations) offering traditional family fare (including breakfast items, steaks, chicken, hamburgers and sandwiches) and provide both counter and table service. Denny's sales are evenly distributed across each of its dayparts; however, breakfast items account for the majority of Denny's sales. In 1998, Denny's restaurants had an average guest check of $5.83 and average Company-owned restaurant sales of $1.3 million. Denny's currently employs approximately 37,700 people. Historically, Denny's has had one of the lower average guest checks within the family-style category. This value positioning is reinforced through its Grand Value menus, featuring value priced items for breakfast and lunch with tiered 3 6 pricing starting at $2.99 and $3.29, respectively. Denny's has sought to further expand the customer perception of value through the use of themed, higher-quality products such as "All-Star Slams," "America's Favorite Omelets," "Major League Burgers" and "Signature Skillets." These products are supported through television advertising and restaurant-based media including special menus, posters and window clings. The Company expects to refine and accelerate these efforts in 1999. During 1998, the Denny's system opened ten "Denny's Classic Diners." These restaurants have an upbeat, nostalgic look and feel that appeals to younger customers, while retaining Denny's core brand equities. The Classic Diner features a modular, stainless steel facility, new uniforms, a jukebox and a tailored menu to create an energized dining experience. Operating trends to date are encouraging, with a reduced per-unit investment producing above-average sales when compared to the traditional Denny's restaurant. Denny's plans to accelerate the development of the Classic Diner format in 1999. Also during 1998, the Company began testing a new "reimage" program for existing restaurants which will complement and support Denny's brand positioning as "America's Original Breakfast Diner." This "Denny's Diner 2000" reimage program borrows design elements from and was designed to complement the "Denny's Classic Diner" concept. Once the market testing is completed, the Company plans to roll this reimaging program out aggressively in 1999 beginning with Company-owned restaurants. Denny's has undertaken several capital spending initiatives designed to enhance the competitive position of the brand. All domestic Company-owned restaurants received new point-of-sale ("POS") technology during 1997, along with certain other equipment designed to improve operations and accommodate new product introductions. The final results of a restaurant reengineering project, initiated in late 1996 and refined and tested during 1997 and 1998, are now being incorporated into existing restaurants. In addition, plans are being finalized to begin building a reengineered restaurant in 1999. Denny's opened 72 new franchised units in 1998. Management believes 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 continues to supplement its franchise development efforts by selectively selling Company-owned units to franchisees. There were a total of 843 franchised/licensed units at December 30, 1998, or 49% of all Denny's restaurants. The initial fee for a single Denny's franchise is $35,000 and the current royalty payment is 4% of gross sales. Initial fees and royalties for licensed restaurants are negotiated under separate licensing agreements which generally carry lower royalty rates than franchised restaurants. Subsequent to December 30, 1998, Denny's purchased 30 operating restaurants in western New York from a former franchisee of Perkins Family Restaurants. Denny's took possession of the restaurants on March 1, 1999, and by March 8, 1999, reopened 27 units as Denny's restaurants. The remaining units are being evaluated for ultimate reopening or disposition. Management believes this acquisition will provide important strategic benefits, including a rapid increase in brand penetration and advertising spending capabilities in these markets. COCO'S Coco's is a bakery restaurant chain operating primarily in California and Arizona, as well as Japan and South Korea. Coco's ranks among the top 15 chains in the family-style category based on U.S. systemwide sales and international sales. Coco's offers a variety of fresh-baked goods such as pies, muffins and cookies and value-priced and innovative menu items. The chain has positioned itself at the upper end of the family-style category, and answers the needs of quality-conscious family diners by offering consistently high-quality food, great service, fair prices and a pleasant, comfortable atmosphere. Since the Company acquired the chain in May 1996, 43 international units have been added to the system. The Coco's chain currently consists of 150 Company-owned, 31 domestic franchised and 300 international licensed restaurants. The initial fee for a single Coco's franchise in the United States is $35,000 and the current royalty payment rate is 4% of net sales. Initial fees and royalties for licensed restaurants are negotiated under separate licensing agreements which generally carry lower royalty rates than franchised restaurants. The restaurants are generally open 18 hours a day. Coco's restaurants have uniform menus within the United States and serve breakfast, lunch and dinner. Lunch and dinner dayparts are Coco's strongest, each comprising approximately 38% of 1998 sales. In 1998, the average guest check was $6.96, with average Company-owned unit sales of approximately $1.6 million. Coco's currently employs approximately 7,600 people. 4 7 CARROWS Carrows is a regional mid-scale family-style restaurant chain operating primarily in six western states. Carrows currently consists of 123 Company-owned units and 26 domestic franchises, and employs approximately 5,500 people. Carrows specializes in traditional Santa Barbara-style American food, with an emphasis on quality, homestyle fare at an excellent value. The concept appeals strongly to families with children as well as to mature adults -- two groups expected to grow rapidly into the next century. The menu is always current, but not trendy, and is revised regularly to reflect the most appealing foods that guests demand. The restaurants are generally open 24 hours a day. Carrows restaurants have uniform menus and serve breakfast, lunch and dinner. Lunch and dinner dayparts (including "late night") are Carrows' strongest, comprising approximately 31% and 43% of 1998 sales, respectively. In 1998, the average guest check was $6.60, with average Company-owned unit sales of approximately $1.4 million. EL POLLO LOCO El Pollo Loco, which specializes in marinated flame-broiled chicken, is one of the leading chains in the quick-service chicken segment of the restaurant industry. Of the total 265 El Pollo Loco restaurants, which are located in four southwestern states and two foreign countries, 87% are located in Southern California. El Pollo Loco directs its marketing at customers desiring an alternative to traditional fast food products, offering unique tasting and high quality products which help position the brand as high quality fast food at a competitive price. The restaurants are designed to facilitate customer viewing of the preparation of the flame-broiled chicken, and the food is served quickly, but prepared slowly, using fresh ingredients. Much of the brand's recent growth can be attributed to successful menu positioning, new product offerings and dual branding with the complementary Fosters Freeze dessert line, which commenced in late 1995. El Pollo Loco restaurants are generally open 12 hours a day, seven days a week for lunch and dinner. A majority of the Company's El Pollo Loco restaurants have drive-through facilities, which provided approximately 37% of revenues in 1998. The dinner daypart for El Pollo Loco is the strongest, representing approximately 54% of total sales. In 1998, the average guest check at El Pollo Loco was $6.94. Average Company-owned restaurant sales were approximately $1.2 million. El Pollo Loco currently employs approximately 2,600 people. In 1998, the chain had a net increase of 18 units domestically, representing an increase of 16 franchise units and two Company-owned units. The initial fee for a single El Pollo Loco franchise is $35,000 and the current royalty payment rate is 4% of gross sales. Initial fees and royalties for licensed restaurants are negotiated under separate licensing agreements which generally carry lower royalty rates than franchised restaurants. Based on El Pollo Loco's recent success, the Company is optimistic about future expansion of the El Pollo Loco concept, principally through Company store development and franchising in the Texas, Arizona and California markets. By the year 2003, the Company hopes to add as many as 240 additional El Pollo Loco restaurant units. OPERATIONS The Company believes that successful execution of basic restaurant operations in each of its restaurant chains 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, district and restaurant level managers or leaders, the Company standardizes specifications for the preparation and efficient service of quality food, the maintenance and repair of its premises and the appearance and conduct of its employees. 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 the Company'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 district leaders have no offices and spend substantially all of their time in the restaurants. A significant majority of restaurant management personnel began as hourly employees in the restaurants and therefore know how to perform restaurant functions and are able to train by example. The Company benefits from an experienced management team. Each of the Company's restaurant chains maintains training programs for employees and restaurant managers. Restaurant managers and assistant 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 employees prior to a change in job function or using new equipment or procedures. 5 8 Each of the Company's restaurant chains regularly evaluates its menu. New products are developed in Company test kitchens 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, both with and without media support. A successful menu item is then incorporated into the restaurant system. While research and development activities are important to the Company's business, amounts expended for these activities are not material. Financial and management control is facilitated in all of the Company's restaurants by the use of POS systems which transmit detailed sales reports, payroll data and periodic inventory information for management review. In July 1997, the Company completed the rollout of a new POS system in its domestic Company-owned Denny's restaurants. In January 1998 and July 1998, the Company completed the rollout of the new system in its Canadian Company-owned Denny's restaurants and its Company-owned El Pollo Loco restaurants, respectively. This system is helping restaurant management improve customer service through faster and more accurate turnaround of customer orders. In addition, the new POS system will aid in sales analysis and decision-making by providing information on a more timely basis and at a higher level of detail. During the second and third quarters of 1999, management intends to install new POS systems in all Company-owned Coco's and Carrows restaurants. The Company also intends to implement a new back office system in all Company-owned restaurants. This new system will provide additional functionality over the current restaurant management system and will be used by restaurant management to handle payroll, inventory, labor scheduling, financial and sales reporting. Management intends to complete the rollout of the new back office system in all Company-owned Coco's and Carrows restaurants by August 1999 and in all Denny's and El Pollo Loco Company-owned restaurants by the second quarter of 2000. ADVERTISING The Company uses an integrated process to promote its concepts, including media, menu strategy, interior/exterior building design, style of service and specialized promotions to help differentiate itself in the marketplace. Media advertising is primarily product oriented, generally featuring high-margin special entrees or meal combinations presented and priced to convey high value. Such advertising is conducted through national, regional and local television advertising as well as radio, outdoor and print advertising depending on the target market. Sophisticated consumer marketing research techniques are used to measure customer satisfaction and customers' evolving expectations. SITE SELECTION The success of any restaurant is influenced significantly by its location. The Company's franchise development groups work closely with franchisees and real estate brokers to identify sites which meet specific standards. Sites are evaluated on 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 The Company has a centralized purchasing program which is designed to ensure uniform product quality as well as reduced food, beverage and supply costs. The Company's size provides it with significant purchasing power which often enables it to obtain products at favorable prices from several nationally recognized manufacturers. In connection with the 1995 sale of its distribution subsidiary, PFC, to Meadowbrook Meat Company ("MBM"), the Company entered into an eight-year distribution agreement, subsequently extended to ten years, with MBM, under which PFC/MBM will continue to distribute and supply certain products and supplies to the Company's restaurants. Beginning in January 1998, Coco's and Carrows became subject to similar agreements. 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. During the third quarter of 1996, the Company sold Portion-Trol Foods, Inc. and the Mother Butler Pies division of Denny's in two separate transactions. In conjunction with these sales, the Company entered into five-year purchasing agreements with the acquirers under which the Company is required to purchase certain minimum annual volumes. If such volumes are not purchased, the agreements provide for the payment of penalties. The Company believes that satisfactory sources of supply are generally available for all the items regularly used by its restaurants and has not experienced any material shortages of food, equipment, or other products which are necessary to its restaurant operations. 6 9 SEASONALITY The Company's 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 The Company, either directly or through wholly-owned subsidiaries, has certain trademarks and service marks registered with the United States Patent and Trademark office and in international jurisdictions, including Denny's, El Pollo Loco, Coco's, Carrows, and Grand Slam Breakfast. The Company considers its trademarks and service marks important to the identification of its restaurants and believes they are of material importance to the conduct of its 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 five to 20 years. The Company generally intends to renew trademarks and service marks which come up for renewal. The Company owns or has rights to all trademarks it believes are material to its restaurant operations. 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 mid-scale, casual dining and upscale (fine dining) segments. A significant portion of the mid-scale segment is made up of three categories -- family-style, family steak, and cafeteria -- and is characterized by complete meals, menu variety and moderate prices ($5-$7 average check). The family-style category, which includes Denny's, Coco's and Carrows, includes 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-$16 average check) and availability of alcoholic beverages, primarily consists of a small number of national chains, regional chains and small independent restaurants. The quick-service segment, which includes El Pollo Loco, is characterized by low prices (generally, $3-$5 average check), finger foods, fast service, and convenience. A small number of large sandwich, pizza and chicken chains overwhelmingly dominate the quick-service segment. On a segment-wide basis, the full-service and quick-service restaurant segments currently have approximately the same revenues. Throughout the 1990's, the quick-service segment has maintained steady growth in traffic volume. During the same time period, the mid-scale segment's traffic volume has remained relatively flat, reflecting increases in the family-style and cafeteria categories offset by decreases in the family-steak category. The restaurant industry is highly competitive, and competition among a few major companies that own or operate restaurant chains is especially intense, particularly in the quick-service and family-style segments. Restaurants compete on the basis of name recognition and advertising, the price, quality and perceived value of their food offerings, the quality and speed of their service, convenience and the attractiveness of their facilities. In addition, recent economic trends have increased competition for qualified managerial operations personnel as well as hourly restaurant employees. Management believes the Company's principal competitive strengths include its restaurants' brand name recognition; restaurant locations; the value, variety and quality of food products served; the quality and training of its employees; and the Company's market penetration, which has resulted in economies of scale in a variety of areas including advertising, distribution and field supervision. See Exhibit 99 to this Form 10-K for certain additional factors relating to the Company's 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 and increases in the number of restaurants generally and in particular areas. GOVERNMENT REGULATIONS The Company and its 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 restaurant facilities, the sale of alcoholic beverages and hiring and employment practices. The 7 10 operation of the Company's franchise system is also subject to regulations enacted by a number of states and rules promulgated by the Federal Trade Commission. The Company believes that it is in material compliance with applicable laws and regulations, but it cannot predict the effect on operations of the enactment of additional requirements in the future. The Company is subject to Federal and state laws governing matters such as minimum wage, overtime and other working conditions. At December 30, 1998, a substantial number of the Company's 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 the Company's labor costs. This is especially true for the Company's operations in California, where there is no tip credit. The California minimum wage increased from $4.25 to $5.00 per hour on March 1, 1997 and increased to $5.75 per hour on March 1, 1998. Also, the Federal minimum wage increased from $4.25 per hour to $4.75 per hour on October 1, 1996 and increased again to $5.15 per hour on September 1, 1997. Employers must pay the higher of the Federal or state minimum wage. The Company has attempted to offset increases in the minimum wage through pricing and various cost control efforts; however, there can be no assurance that the Company or its franchisees can continue to pass on such cost increases to its customers. ENVIRONMENTAL MATTERS Federal, state and local environmental laws and regulations have not historically had a material impact on the operations of the Company; however, the Company cannot predict the effect on its operations of possible future environmental legislation or regulations. COMPLIANCE WITH CONSENT DECREES On May 24, 1994, the Company entered into two consent decrees (the "Consent Decrees") resolving the class action litigation brought against Denny's, Inc. which alleged that Denny's, Inc. engaged in a pattern or practice of racial discrimination in violation of the Civil Rights Act of 1964. The Company denied any wrongdoing. The Consent Decrees enjoin the Company from racial discrimination and require the Company to implement certain employee training and testing programs and provide public notice of Denny's nondiscrimination policies. Denny's continues to meet all of its obligations under the Consent Decrees. As part of orientation, every new Denny's employee receives notification of the Consent Decree requirements. All newly-hired hourly employees who work in the restaurants complete video-based nondiscrimination training that focuses on employees' responsibilities under the Consent Decrees and public accommodations law. Additionally, management employees are required to attend a nondiscrimination training program consisting of two separate eight-hour live sessions. During 1998, approximately 7,000 people participated in management nondiscrimination training. In addition, during 1997 Denny's rolled out the second phase of live management nondiscrimination training. Video training for hourly employees and both phases of management training are ongoing and required for every new employee. Further, as required by the Consent Decrees, nondiscrimination testing was conducted by independent civil rights organizations in over 600 Denny's restaurants in 1998. This nondiscrimination testing compares the dining experience of similarly-matched test groups to determine if guests are treated equally without regard to race, color or national origin. Every Denny's restaurant displays a sign at each public entrance emphasizing Denny's commitment to nondiscrimination and providing an 800 phone number directing customers to an independent civil rights monitor if they feel they have been victims of disparate treatment. In addition, certain printed advertising materials such as menus, magazine and newspaper advertising include a statement assuring that all guests will receive fair and equal treatment. 8 11 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information with respect to each executive officer of Advantica.
CURRENT PRINCIPAL OCCUPATION OR NAME AGE EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY - ---- --- ------------------------------------------- James B. Adamson 51 Chairman, Chief Executive Officer and President of Advantica (1995-present); Chief Executive Officer of Burger King Corporation (1993-1995). Craig S. Bushey 43 Executive Vice President of Advantica and President of Coco's/Carrows Division (March 1998-present); Senior Vice President of Advantica and President of Hardee's Division (1996-February 1998); Managing Director, Vice President (Western Europe) of Burger King (1995-1996); Region Vice President (Central Region) of Burger King (1994-1995); Burger King Reengineering Team (1993-1994). Ronald B. Hutchison 49 Executive Vice President and Chief Financial Officer of Advantica (March 1998-present); Vice President and Treasurer of Advantica (1995-March 1998); Vice President and Treasurer of Leaseway Transportation Corp. (1988-1995). Nelson J. Marchioli 49 Executive Vice President of Advantica (March 1998-present); Senior Vice President of Advantica (1997-February 1998); President of El Pollo Loco Division (1997-present); 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); Senior Vice President, International Operation and Sales for Burger King Corporation (1994-1995); Vice President-General Manager, Latin America Restaurant Operations for Burger King Corporation (1994); Senior Vice President, Quality and Cost, Burger King Corporation (1993-1994). Rhonda J. Parish 42 Executive Vice President of Advantica (March 1998-present); General Counsel and Secretary of Advantica (1995-present); Senior Vice President of Advantica (1995-February 1998); Assistant General Counsel of Wal-Mart Stores, Inc. (1990-1994). John A. Romandetti 48 Executive Vice President of Advantica (March 1998-present); Senior Vice President of Advantica (1995-February 1998); Chief Executive Officer of Denny's Division (January 1999-present); President of Denny's Division (1997-present); President of El Pollo Loco Division (1995-1996); Vice President of Operations for Burger King Corporation (1989-1995). Paul R. Wexler 55 Executive Vice President, Procurement and Distribution of Advantica (March 1998-present); Senior Vice President, Procurement and Distribution of Advantica (1995-February 1998); Vice President, Procurement and Quality Assurance for Marriott International (1991-1995). Stephen W. Wood 40 Executive Vice President, Human Resources and Corporate Affairs of Advantica (March 1998-present); Senior Vice President, Human Resources and Corporate Affairs of Advantica (1996-February 1998); Vice President, Compensation, Benefits, and Employee Information Systems and Corporate Office Human Resources of Advantica (1993-1996).
EMPLOYEES At December 30, 1998, the Company had approximately 54,000 employees, none of whom are subject to collective bargaining agreements. Many of the Company's restaurant employees work part-time, and many are paid at or slightly above minimum wage levels. As is characteristic of the restaurant industry, the Company experiences a high level of turnover among its restaurant employees. The Company has experienced no significant work stoppages and considers its relations with its employees to be satisfactory. 9 12 ITEM 2. PROPERTIES Most of the Company's restaurants are free-standing facilities. Presented below is a schedule of the average property and building square footage, as well as average seating capacity for each of the Company's concepts:
AVERAGE AVERAGE AVERAGE PROPERTY BUILDING SEATING CONCEPT SIZE IN SQ. FT. SIZE IN SQ. FT. CAPACITY - ------- --------------- --------------- -------- Denny's 42,000 4,750 140 Coco's 35,000 5,600 150 Carrows 35,000 4,900 150 El Pollo Loco 20,000 2,400 65
The following table sets forth certain additional information regarding Company-owned restaurant properties as of December 30, 1998:
LAND AND LAND LEASED LAND AND BUILDING AND BUILDING BUILDING CONCEPT OWNED OWNED LEASED TOTAL - ------- --------- ------------ --------- ----- Denny's 238 37 603 878 Coco's 2 33 115 150 Carrows 3 14 106 123 El Pollo Loco 7 31 62 100 --- --- --- ----- Total 250 115 886 1,251 === === === =====
10 13 The number and location of the Company's restaurants as of December 30, 1998 are presented below:
DENNY'S COCO'S CARROWS EL POLLO LOCO ------------------- ------------------- ------------------- ------------------- FRANCHISED/ FRANCHISED/ FRANCHISED/ FRANCHISED/ STATE/COUNTRY OWNED LICENSED OWNED LICENSED OWNED LICENSED OWNED LICENSED - ------------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- Alabama 1 9 -- -- -- -- -- -- Alaska -- 4 -- -- -- -- -- -- Arizona 28 47 21 2 1 4 -- 8 Arkansas 1 10 -- -- -- -- -- -- California 219 152 125 21 115 6 100 141 Colorado 24 13 -- 2 -- -- -- -- Connecticut 2 8 -- -- -- -- -- -- Delaware 3 -- -- -- -- -- -- -- Florida 103 91 -- -- -- -- -- -- Georgia -- 23 -- -- -- -- -- -- Hawaii 4 3 -- -- -- -- -- -- Idaho -- 6 -- -- -- -- -- -- Illinois 47 14 -- -- -- -- -- -- Indiana 14 12 2 -- -- -- -- -- Iowa -- 5 -- -- -- -- -- -- Kansas 9 1 -- -- -- -- -- -- Kentucky -- 18 -- -- -- -- -- -- Louisiana 7 5 -- -- -- -- -- -- Maine -- 8 -- -- -- -- -- -- Maryland 14 17 -- -- -- -- -- -- Massachusetts 9 -- -- -- -- -- -- -- Michigan 24 15 -- -- -- -- -- -- Minnesota 6 10 -- -- -- -- -- -- Mississippi 2 2 -- -- -- -- -- -- Missouri 28 8 2 -- -- -- -- -- Montana -- 5 -- -- -- -- -- -- Nebraska -- 4 -- -- -- -- -- -- Nevada 11 6 -- -- 4 1 -- 9 New Hampshire 2 1 -- -- -- -- -- -- New Jersey 6 12 -- -- -- -- -- -- New Mexico 2 17 -- -- -- 4 -- -- New York 24 13 -- -- -- -- -- -- North Carolina 8 12 -- -- -- -- -- -- North Dakota -- 3 -- -- -- -- -- -- Ohio 32 25 -- -- -- -- -- -- Oklahoma 9 20 -- -- -- -- -- -- Oregon 5 20 -- -- -- 8 -- -- Pennsylvania 47 5 -- -- -- -- -- -- South Carolina 11 7 -- -- -- -- -- -- South Dakota -- 2 -- -- -- -- -- -- Tennessee 3 11 -- -- -- -- -- -- Texas 76 80 -- -- 3 2 -- 3 Utah 7 13 -- -- -- -- -- -- Vermont -- 2 -- -- -- -- -- -- Virginia 19 11 -- -- -- -- -- -- Washington 49 22 -- 6 -- 1 -- -- West Virginia -- 3 -- -- -- -- -- -- Wisconsin 12 7 -- -- -- -- -- -- Wyoming -- 6 -- -- -- -- -- -- Guam -- 3 -- -- -- -- -- -- Puerto Rico -- 10 -- -- -- -- -- -- Canada 10 33 -- -- -- -- -- -- Japan -- -- -- 267 -- -- -- -- South Korea -- -- -- 32 -- -- -- -- Other International -- 9 -- 1 -- -- -- 4 --- --- --- --- --- -- --- --- Total 878 843 150 331 123 26 100 165 === === === === === == === ===
11 14 In addition to the restaurant locations set forth above, the Company owns an 18-story, 187,000 square foot office tower in Spartanburg, South Carolina which serves as its corporate headquarters. The Company's corporate offices currently occupy approximately 15 floors of the tower, with the balance leased to others. See Note 11 to the accompanying Consolidated Financial Statements for information concerning encumbrances on certain properties of the Company. ITEM 3. LEGAL PROCEEDINGS FCI, Flagstar, El Pollo Loco and Denny's, along with several former officers and directors of those companies, were named as defendants in an action filed on August 28, 1991 in the Superior Court of Orange County, California. The plaintiffs in that action, who were former El Pollo Loco franchisees, alleged that the defendants, among other things, failed or caused a failure to promote, develop and expand the El Pollo Loco franchise system in breach of contractual obligations to the plaintiff franchisees and made certain misrepresentations to the plaintiffs concerning the El Pollo Loco system. Asserting various legal theories, the plaintiffs sought actual and punitive damages in excess of $90 million, together with declaratory and certain other equitable relief. The defendants denied all material allegations, and certain defendants filed cross-complaints against various plaintiffs in the action for breach of contract and other claims. Subsequent to the filing of the action, the defendants entered into settlements with six of the plaintiffs, leaving two plaintiff franchisees remaining in the lawsuit. With respect to the remaining plaintiffs, the action was stayed due to the bankruptcy filing of the principal stockholder of the plaintiff corporations. On September 30, 1998, an order was entered in that bankruptcy action approving the execution of a settlement agreement which would resolve the lawsuit in its entirety. The settlement agreement was executed on October 21, 1998, and on October 29, 1998, an order was entered in the Superior Court of Orange County, California dismissing the case in its entirety. In 1994, Flagstar was advised of proposed deficiencies from the Internal Revenue Service for federal income taxes totaling approximately $12.7 million. The proposed deficiencies relate to examinations of certain income tax returns filed by FCI and Flagstar 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. As the Company believes the remaining proposed deficiencies are substantially incorrect, it intends to continue to contest such proposed deficiencies. The Company filed petitions in the United States Tax Court in 1998 for these periods. The case is not expected to be tried until late 1999 or early 2000. 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 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 materially affect the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 12 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock and Warrants were listed on The Nasdaq Stock Market(R) on a "when issued" basis on January 8, 1998 under the symbols "DINEV" and "DINWV," respectively. On January 12, 1998 the Common Stock and Warrants were listed under the symbols "DINE" and "DINEW," respectively. As of March 1, 1999, 40,025,207 shares of Common Stock and 3,999,992 Warrants were outstanding, and there were approximately 3,200 record and beneficial holders of Common Stock and 29 Warrant holders of record. Neither Advantica, nor either of its predecessors FCI and Flagstar, has ever paid dividends on its common equity securities. Furthermore, restrictions contained in the instruments governing the outstanding indebtedness of Advantica restrict its ability to pay dividends on the Common Stock in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 11 to the accompanying Consolidated Financial Statements of the Company. The following table lists the high and low closing sales prices of the Common Stock for each quarter since Advantica's emergence from bankruptcy on January 7, 1998. The sales prices were obtained from The Nasdaq Stock Market(R).
1998 HIGH LOW - ---- ---- --- First quarter (from January 7, 1998) $11 1/16 $8 7/8 Second quarter 11 5/16 8 3/4 Third quarter 10 5/8 4 1/2 Fourth quarter 7 1/2 3 13/32
Prior to May 17, 1997, the Old Common Stock was traded on The Nasdaq Stock Market(R) under the symbol "FLST." The following table lists the high and low closing sales prices for the Old Common Stock for each quarter in the 1997 fiscal year. The sales prices were obtained from summaries obtained from The Nasdaq Stock Market(R).
1997 HIGH LOW - ---- ---- --- First quarter $ 1 7/32 $ 25/64 Second quarter (a) 19/32 9/32 Third quarter (a) 1/2 19/64 Fourth quarter (a) 23/64 -
- --------------- (a) At the close of business on May 16, 1997, the Old Common Stock was delisted for trading on The Nasdaq Stock Market(R). Although such securities continued to trade in the over-the-counter market until January 7, 1998, such trading activity was limited and sporadic. 13 16 ITEM 6. SELECTED FINANCIAL DATA Set forth below are certain selected financial data concerning the Company for each of the four years ended December 31, 1997, the one week ended January 7, 1998 and the 51 weeks ended December 30, 1998. Such data generally have been derived from the Consolidated Financial Statements of the Company for such periods, which have been audited. The following information should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented elsewhere herein.
SUCCESSOR PREDECESSOR COMPANY COMPANY -------------------------------------------------------------- ------------ ONE WEEK FISCAL YEAR ENDED ENDED FIFTY-ONE ------------------------------------------------- JANUARY 7, WEEKS ENDED DEC. 31, DEC. 31, DEC. 31, DEC. 31, JANUARY 7, DECEMBER 30, (In millions, except ratios and per share 1994 (a) 1995 (a) 1996 (a)(b) 1997 (a)(c) 1998 1998 (d) amounts) -------- -------- ------------ ------------ ---------- ------------ Income statement data: Operating revenue $1,669.4 $1,603.7 $1,664.1 $1,810.6 $ 33.6 $1,720.5 Operating income (loss) 112.9(e) 71.6(f) 109.0 125.0 8.7 (67.3) (Loss) income from continuing operations (g) (24.2) (77.7) (53.0) (76.3) 734.3(h) (181.0) Basic (loss) income per share from continuing operations applicable to common shareholders (0.91) (2.17) (1.58) (2.13) 17.30 (4.52) Diluted (loss) income per share from continuing operations applicable to common shareholders (0.91) (2.17) (1.58) (2.13) 13.32 (4.52) Cash dividends per common share (i) -- -- -- -- -- -- Ratio of earnings to fixed charges (j) -- -- -- -- 249.3x -- Deficiency in the coverage of fixed charges to earnings before fixed charges (j) 26.3 74.9 69.3 74.6 -- 182.8 Balance sheet data (at end of period): Current assets (k) $ 186.1 $ 285.3 $ 185.5 $ 129.6 $ 295.4 Working capital (deficit) (k)(l) (205.6) (122.2) (297.7) (230.2) (96.1) Net property and equipment 1,196.4 1,104.4 1,168.6 625.8 693.3 Total assets 1,587.5 1,507.8 1,687.4 1,407.4 1,986.2 Long-term debt, excluding current portion 2,067.6 1,996.1 2,180.7 594.2(m) 1,156.0 Other data: EBITDA as defined (n) $ 184.4 $ 185.2 $ 190.3 $ 218.1 $ 10.3 $ 218.6 Net cash flows from operating activities (14.2) (2.4) (9.9) 62.8 8.6 25.5 Net cash flows provided by (used in) investing activities 355.0(o) 190.0(p) (101.4)(q) (52.7) 7.9 235.3(r) Net cash flows provided by (used in) investing activities (298.2) (57.3) 6.8 (48.4) (11.9) (94.8)
- --------------- (a) Certain amounts for the four years ended December 31, 1997 have been reclassified to conform to the 1998 presentation. (b) Reflects the acquisition in May 1996 of Coco's and Carrows. (c) Due to the change in the Company's fiscal year end, the year ended December 31, 1997 includes more than 52 weeks of operations as further described in Note 4 to the Consolidated Financial Statements. 14 17 (d) As discussed in more detail in Note 1 to the Consolidated Financial Statements, FCI and Flagstar emerged from bankruptcy on January 7, 1998. As described in Note 2 to the Consolidated Financial Statements, the change in ownership of the Company effected by the financial restructuring resulting from the bankruptcy required that the Company apply fresh start reporting effective January 7, 1998 in accordance with the American Institute of Certified Public Accountants' (the "AICPA") Statement of Position 90-7, "Financial Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). All financial statements subsequent to January 7, 1998 are referred to as "Successor Company," 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. (e) Operating income for the year ended December 31, 1994 reflects a recovery of restructuring charges of $5.0 million. (f) Operating income for the year ended December 31, 1995 reflects a provision for restructuring charges of $10.3 million and a charge for impaired assets of $24.8 million. (g) The Company has classified as discontinued operations Canteen Corporation, a food and vending subsidiary, TWRS, a recreation services subsidiary, VS, a stadium concessions subsidiary, FEI, a restaurant subsidiary, and Quincy's, a restaurant subsidiary. Canteen Corporation was sold in 1994. TWRS and VS were sold during 1995. FEI and Quincy's were sold in 1998. (h) The income from continuing operations for the one week ended January 7, 1998 includes reorganization items of $714.2 million. (i) The Company's bank facilities have prohibited, and its public debt indentures have significantly limited, distributions and dividends on Advantica's (and its predecessor's) common equity securities. See Note 11 to the accompanying Consolidated Financial Statements appearing elsewhere herein. (j) For purposes of computing the ratio of earnings to fixed charges or deficiency in the coverage of fixed charges to 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). Earnings consist of income from continuing operations before income taxes and fixed charges excluding capitalized interest. (k) The current assets and working capital deficit amounts presented exclude assets held for sale of $77.3 million as of December 31, 1994, $5.1 million as of December 31, 1996 and $347.0 million as of December 31, 1997. Such assets held for sale relate to the Company's food and vending, concessions and recreation services subsidiaries for the year ended December 31, 1994. For the year ended December 31, 1997, net assets held for sale relate to FEI and Quincy's. (l) A negative working capital position is not unusual for a restaurant operating company. The decrease in the working capital deficit from December 31, 1994 to December 31, 1995 is due primarily to an increase in cash following the 1995 sales of the Company's distribution subsidiary, PFC, and the concession and recreation services subsidiaries, net of current assets and liabilities of such subsidiaries. The increase in the working capital deficit from December 31, 1995 to December 31, 1996 reflects the use of the proceeds from the 1995 sales noted above, and the proceeds of the sale of PTF, for operating needs and for the acquisition of Coco's and Carrows. 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 Company 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Advantica -- Liquidity and Capital Resources." (m) 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. (n) "EBITDA as defined" is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment and is a key internal measure used to evaluate the amount of cash flow available for debt repayment and funding of additional investments. EBITDA 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. The Company's measure of EBITDA as defined may not be comparable to similarly titled measures reported by other companies. The following restructuring and impairment charges (recoveries) have been excluded from EBITDA as defined for the periods indicated: 1994 -- ($5.0 million) and 1995 -- $35.1 million. (o) Net cash flows provided by investing activities include proceeds from sale of discontinued operations of $447.1 million. (p) Net cash flows provided by investing activities include proceeds from sale of discontinued operations and subsidiaries of $294.6 million. (q) Net cash flows used in investing activities include the acquisition of Coco's and Carrows, net of cash acquired, of $127.1 million as well as the net proceeds from the disposition of PTF of $63.0 million. (r) Net cash flows provided by investing activities include proceeds from sales of discontinued operations of $460.4 million. 15 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion should be read in conjunction with "Selected Financial Data," and the Consolidated Financial Statements and other more detailed financial information appearing elsewhere herein. For purposes of providing a meaningful comparison of the Company's 1998 operating performance, the following discussion and presentation of the results of operations for the one week ended January 7, 1998 (Predecessor Company) and the 51 weeks ended December 30, 1998 (Successor Company) will be combined and referred to as the year ended December 30, 1998. RESULTS OF OPERATIONS
FISCAL YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 30, COMPANY CONSOLIDATED 1996 1997 1998 - -------------------- ------------ ------------ ------------ (In millions) Net company sales $1,609 $1,749 $1,686 Franchise revenue 55 62 68 ------ ------ ------ Operating revenue 1,664 1,811 1,754 Operating expenses 1,555 1,686 1,813 ------ ------ ------ Operating income (loss) $ 109 $ 125 $ (59) ====== ====== ====== EBITDA as defined $ 190 $ 218 $ 229 Consolidated interest expense, net 177 165 117 Reorganization items -- 30 (714) Income tax (benefit) provision (16) 2 (15) Extraordinary gains -- -- (614) Net (loss) income (85) (134) 1,213
1998 RESTAURANT UNIT ACTIVITY
ENDING UNITS ENDING UNITS UNITS SOLD/ UNITS UNITS 12/31/97 OPENED CLOSED REFRANCHISED 12/30/98 -------- ------ ------ ------------ -------- Denny's Company-owned 894 21 (8) (29) 878 Franchised units (a) 740 72 (16) 29 825 Licensed units (a) 18 -- -- -- 18 ----- --- ---- --- ----- 1,652 93 (24) -- 1,721 Coco's Company-owned 178 -- (17) (11) 150 Franchised units 17 4 (1) 11 31 Licensed units 298 12 (10) -- 300 ----- --- ---- --- ----- 493 16 (28) -- 481 Carrows Company-owned 140 -- (5) (12) 123 Franchised units 14 2 (2) 12 26 ----- --- ---- --- ----- 154 2 (7) -- 149 El Pollo Loco Company-owned 98 5 -- (3) 100 Franchised units 145 16 (3) 3 161 Licensed units 4 -- -- -- 4 ----- --- ---- --- ----- 247 21 (3) -- 265 Hardee's 557 -- (557)(b) -- -- Quincy's 180 -- (180)(c) -- -- ----- --- ---- --- ----- 3,283 132 (799) -- 2,616 ===== === ==== === =====
- --------------- (a) Certain units have been reclassified to conform to the 1998 presentation. (b) Reflects the consummation of the sale of FEI stock on April 1, 1998. (c) Reflects the consummation of the sale of Quincy's stock on June 10, 1998. 16 19 1998 VS. 1997 EMERGENCE FROM CHAPTER 11 BANKRUPTCY As discussed in more detail in "Business -- The 1997 Restructuring" and in Note 1 to the Consolidated Financial Statements, FCI and Flagstar emerged from bankruptcy on January 7, 1998 (with the surviving corporation in the merger of FCI and Flagstar on that date changing its name to Advantica Restaurant Group, Inc.). As described in Note 2 to the Consolidated Financial Statements, the change in ownership of the Company effected by the financial restructuring required that the Company apply fresh start reporting effective January 7, 1998, in accordance with SOP 90-7. OPERATING RESULTS The Company's CONSOLIDATED REVENUE for the year ended December 30, 1998 decreased by $56.5 million (3.1%) as compared to the prior year. The revenue decrease is partially attributable to an estimated $32.6 million impact due to fewer reporting days in the 1998 period versus the 1997 comparable period because of the change in the Company's fiscal year end in 1997. Excluding the impact of fewer days in the 1998 reporting period, revenue for 1998 decreased $23.9 million compared to the prior year. This decrease is principally due to a 59-unit decrease in Company-owned units (excluding the impact of the FEI and Quincy's dispositions) resulting primarily from refranchising activity, whereby the Company has sold Company units to franchisees as part of its strategy to optimize its portfolio of Company-owned and franchised restaurants. Denny's posted positive same-store sales for the period, although the Company's other concepts experienced declines. The decrease in Company sales is partially offset by a $6.2 million (10.1%) increase in franchise and licensing revenue attributed to a 129-unit increase in franchised and licensed units, reflecting the Company's strategy to grow through franchising. The 129-unit increase results primarily from an increase in the number of franchised units and includes 85 additional franchised units in Denny's, 14 in Coco's, 12 in Carrows and 16 in El Pollo Loco. The comparability of 1998 and 1997 CONSOLIDATED OPERATING EXPENSES is significantly affected by the impact of the adoption of fresh start reporting as of January 7, 1998. Specifically, the amortization of reorganization value in excess of amounts allocable to identifiable assets, which is over a five-year period, totaled $139.8 million for the 51 weeks ended December 30, 1998. In addition, the adjustment of property and equipment and other intangible assets to fair value as a result of the adoption of fresh start reporting resulted in an estimated increase in amortization and depreciation of approximately $43.1 million. Excluding the effect of the estimated impact of fresh start reporting, operating expenses decreased $55.8 million (3.3%), primarily reflecting the effect of fewer reporting days than in the prior year, food cost controls, the 59-unit decrease in Company-owned restaurants, improvement in actuarial trends for workers' compensation and health benefits costs and an increase of $12.3 million in gains on sales of units which are reflected as a reduction of operating expenses. Such decreases are somewhat offset by increased labor costs due to minimum wage increases. EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, increased by $10.8 million in 1998 as compared to 1997. This increase is a result of the factors noted in the preceding paragraphs, excluding the estimated $182.9 million increase in depreciation and amortization. Excluding the estimated impact of the adoption of fresh start reporting as discussed above, CONSOLIDATED OPERATING INCOME for 1998 decreased by $0.7 million compared to 1997 as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $116.7 million during the year ended December 30, 1998 as compared with $164.9 million during 1997. The decrease is primarily due to the significant reduction in debt resulting from the implementation of the Plan of Reorganization which became effective on January 7, 1998 and a $18.6 million increase in interest income in 1998 due to increased cash and cash equivalents available for investment as a result of the FEI and Quincy's dispositions. Also contributing to the decrease in interest expense in 1998 is the lower effective yield on Company debt resulting from the revaluation of such debt to fair value at January 7, 1998 in accordance with fresh start reporting, largely offset by the effect of the allocation of $24.8 million of interest expense to discontinued operations in the prior year compared to $2.8 million in the current year period. REORGANIZATION ITEMS include professional fees and other expenditures incurred by the Company in conjunction with the reorganization as well as the impact of adjusting assets and liabilities to fair value in accordance with SOP 90-7 as discussed in Notes 2 and 7 to the Consolidated Financial Statements included herein. 17 20 The PROVISION FOR (BENEFIT FROM) INCOME TAXES from continuing operations for the 51-week period has been computed based on management's estimate of the annual effective income tax rate applied to loss before taxes. The Company recorded an income tax benefit reflecting an effective income tax rate of approximately (1.0%) for the 51 weeks ended December 30, 1998 compared to a provision for the 1997 fiscal year period reflecting an approximate rate of 2.3%. The benefit from income taxes from continuing operations for the one-week period ended January 7, 1998 of approximately $13.8 million includes adjustments of approximately $12.5 million of various tax accruals. The remaining benefit of approximately $1.3 million relates to the tax effect of the revaluation of certain Company assets and liabilities in accordance with fresh start accounting (See Note 13 to the accompanying Consolidated Financial Statements for additional information). EXTRAORDINARY GAINS for the year ended December 30, 1998 total $613.8 million. Of this amount, $612.8 million is due to the implementation of the Plan of Reorganization which resulted in the exchange of the Senior Subordinated Debentures and the 10% Convertible Debentures for 40 million shares of Common Stock and Warrants to purchase four million additional shares of Common Stock. The difference between the carrying value of such debt (including principal, accrued interest and deferred financing costs) and the fair value of the Common Stock and Warrants resulted in a gain on debt extinguishment which was recorded as an extraordinary item. The remaining $1.0 million of the extraordinary gains relates to the early retirement of $42.4 million of Senior Notes as a result of Advantica's July 31, 1998 Net Proceeds Offer (as defined and further described in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources"). The Statements of Consolidated Operations and Cash Flows presented herein have been reclassified for the 1997 period to reflect FEI and Quincy's as DISCONTINUED OPERATIONS in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Revenue and operating income of the discontinued operations for the year ended December 30, 1998 and the year ended December 31, 1997 were $207.6 million and $5.8 million and $779.9 million and $5.4 million, respectively. The operating results of FEI subsequent to January 7, 1998 and through the disposition date were reflected as an adjustment to "Net assets held for sale" prior to the disposition. The adjustment to "Net assets held for sale" as a result of the net loss of FEI for the twelve weeks ended April 1, 1998 was ($1.4) million. Revenue and operating income of FEI for the twelve weeks ended April 1, 1998 were $116.2 million and $5.7 million, respectively. NET INCOME was $1.2 billion for the year ended December 30, 1998 as compared to a net loss of $0.1 million for the prior year, primarily as a result of the adoption of fresh start reporting and the extraordinary gain discussed above. ACCOUNTING CHANGES In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 requires external and internal direct costs of developing or obtaining internal-use software to be capitalized as a long-lived asset and also requires training costs included in the purchase price of computer software and costs associated with research and development to be expensed as incurred. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") which provides additional guidance on the financial reporting of start-up costs, requiring costs of start-up activities to be expensed as incurred. In accordance with the adoption of fresh start reporting upon emergence from bankruptcy (see Note 2 to the Consolidated Financial Statements herein), the Company adopted both statements of position as of January 7, 1998. The adoption of SOP 98-1 at January 7, 1998 resulted in the write-off of previously capitalized direct costs of obtaining computer software associated with research and development totaling $3.4 million. Subsequent to the Effective Date, similar costs are being expensed as incurred. The adoption of SOP 98-5 at January 7, 1998 resulted in the write-off of an immaterial amount of previously capitalized preopening costs. Subsequent to the Effective Date, preopening costs are being expensed as incurred. In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statement of Shareholders' Equity. The adoption of SFAS 130 does not impact the Company's consolidated results of operations, financial position or cash flows. Prior year financial statements have been reclassified to conform to the SFAS 130 requirements. 18 21 In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 does not impact the Company's consolidated results of operations, financial position or cash flows. In 1998, the Company adopted statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). This Statement does not change the measurement or recognition of those plans, but is designed to simplify disclosures about pension and other postretirement benefit plans. Specifically, it standardizes the disclosure requirements to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," were issued. The Statement also suggests combined formats for presentation of pension and other postretirement benefit disclosures. The adoption of SFAS 132 had no impact on the Company's consolidated results of operations, financial position or cash flows. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities" ("SFAS 133"), was issued in June 1998. This statement establishes 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. SFAS No. 133 will be effective for the Company's fiscal year-end 2000 financial statements. The Company is in the process of evaluating the effect of SFAS 133 on its consolidated results of operations, financial position and cash flows. 1997 VS. 1996 The Company's CONSOLIDATED REVENUE for 1997 increased by $146.5 million (8.8%) as compared with 1996. This increase is primarily attributable to two factors: (1) the estimated $24.0 million impact attributable to the additional days in 1997 compared to 1996 due to the change in the Company's fiscal year and (2) an approximate $202.3 million impact resulting from five additional months of operations of Coco's and Carrows in the 1997 reporting period compared to 1996. Excluding the impact of the extra days and the Coco's and Carrows acquisition, revenue for 1997 decreased $79.8 million compared to the prior year. This decrease reflects decreases in same-store sales at Denny's and Carrows, as well as a 23-unit decrease in Company-owned units (excluding Hardee's and Quincy's unit activity). Such decreases are slightly offset by a $9.7 million increase in franchise revenue due to a 106-unit increase in franchise units. CONSOLIDATED OPERATING EXPENSES for 1997 increased by $130.5 million (8.4%) as compared with 1996. The expense increase is primarily attributable to two factors: (1) the estimated $20.3 million impact of the additional days in the 1997 reporting period in comparison to the prior year comparable period and (2) a $190.6 million impact of the additional five months of operations of Coco's and Carrows in 1997 in comparison to the prior year. Excluding the extra reporting days and the impact of the Coco's and Carrows acquisition, operating expenses for 1997 decreased $80.4 million in comparison to the prior year comparable period. This decrease primarily reflects a decline in costs associated with the decline in revenue, the positive impact of cost cutting measures, and the impact on expenses of a 23-unit decrease in Company-owned units. These decreases in operating expenses are somewhat offset by a decrease in gains from sales of restaurants included in operating expenses from $8.4 million in 1996 to $7.9 million in 1997. EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, increased by $27.8 million in 1997 as compared to 1996. This increase is a result of the factors noted in the preceding paragraphs. CONSOLIDATED OPERATING INCOME for 1997 increased by $16.0 million (14.7%) as compared with 1996 as a result of the factors noted above. CONSOLIDATED INTEREST EXPENSE, NET, totaled $164.9 million during 1997 compared to $177.2 million during 1996. The decrease occurred principally because the Company ceased recording interest on the Senior Subordinated Debentures 19 22 and 10% Convertible Debentures (each as defined herein) on July 11, 1997, in accordance with SOP 90-7. This decrease is partially offset by an increase of $11.9 million of interest expense in 1997 as compared to 1996 related to the Coco's and Carrows acquisition in May 1996 and a $3.6 million charge representing interest and penalties associated with the early termination of the Company's interest rate exchange agreements in 1997. Such termination occurred in conjunction with the refinancing of the Company's bank facility necessitated by the bankruptcy filing on July 11, 1997. In addition, interest income for 1997 decreased $5.7 million compared to the prior year because of decreased cash and cash equivalents available for investment during the 1997 period and the reclassification of interest earned during the bankruptcy period totaling $1.2 million to reorganization items, in accordance with SOP 90-7. REORGANIZATION ITEMS include professional fees and other expenditures incurred by the Company in conjunction with the reorganization under Chapter 11 of the Bankruptcy Code, as well as interest income earned during the bankruptcy period, as further discussed in Note 7 to the Consolidated Financial Statements included herein. The PROVISION FOR INCOME TAXES from continuing operations for the year ended December 31, 1997 reflects an effective income tax rate of approximately 2.3% for 1997 compared to a benefit for 1996 which reflects an approximate rate of (23.5%). The change in the effective income tax rate from the prior year can be attributed to the recognition in the prior year of anticipated refunds due to the carryback of prior year tax losses and the reversal of certain reserves established in prior years in connection with proposed deficiencies from the Internal Revenue Service. See Note 13 to the accompanying Consolidated Financial Statements for additional information. The Statements of Consolidated Operations and Cash Flows presented herein have been reclassified for the 1997 and 1996 periods to reflect FEI and Quincy's as DISCONTINUED OPERATIONS in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Revenue and operating income of the discontinued operations for the years ended December 31, 1997 and 1996 were $779.9 million and $5.4 million and $862.1 million and $47.4 million, respectively. The NET LOSS was $134.5 million in 1997 compared to a net loss of $85.5 million for the prior year. The increase in the net loss is due to the factors noted above. CHANGE IN FISCAL YEAR Effective January 1, 1997, the Company changed its fiscal year end from December 31 to the last Wednesday of the calendar year. Concurrent with this change, the Company changed to a four-four-five week quarterly closing calendar which is the restaurant industry standard, and generally results in four 13-week quarters during the year with each quarter ending on a Wednesday. Due to the timing of this change, the year ended December 31, 1997 includes more than 52 weeks of operations. Carrows and Coco's include an additional six days, Denny's includes an additional five days and El Pollo Loco includes an additional week. ACCOUNTING CHANGES The Company adopted SFAS 128 in the quarter ended December 31, 1997. SFAS 128 replaced the calculation of primary and fully diluted earnings (loss) per share with basic and diluted earnings (loss) per share. Unlike primary earnings (loss) per share, basic earnings (loss) per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings (loss) per share is very similar to the previously reported fully diluted earnings (loss) per share. 20 23 RESTAURANT OPERATIONS DENNY'S (a)
FISCAL YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 30, 1996 1997 1998 ------------ ------------ ------------ ($ in millions, except average unit and same-store data) U. S. systemwide sales $ 1,850 $1,902 $1,963 ======== ====== ====== Net company sales $ 1,220 $1,146 $1,128 Franchise and licensing revenue 43 47 51 -------- ------ ------ Total revenue 1,263 1,193 1,179 -------- ------ ------ Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets -- -- 79 Other 1,149 1,073 1,086 -------- ------ ------ Total operating expenses 1,149 1,073 1,165 -------- ------ ------ Operating income $ 114 $ 120 $ 14 ======== ====== ====== EBITDA as defined $ 165 $ 172 $ 184 Average unit sales (in thousands): Company-owned 1,313 1,285 1,283 Franchised 1,090 1,079 1,091 Same-store data (Company-owned) (b): Same-store sales increase (decrease) 1.7% (4.5%) 1.3% Average guest check $ 5.04 $ 5.54 $ 5.83 Operated units: Company-owned 894 894 878 Franchised 681(c) 740(c) 825 Licensed 21(c) 18(c) 18 -------- ------ ------ Total 1,596 1,652 1,721 ======== ====== ======
- --------------- (a) Excludes the operating results of the Company's food processing (PTF) operations for all years presented. (b) Prior year amounts have not been restated for 1998 comparable units. (c) Certain units have been reclassified to conform to the 1998 presentation. 1998 VS. 1997 Denny's NET COMPANY SALES decreased by $18.2 million (1.6%) during the year ended December 30, 1998 compared to the prior year. The decrease primarily reflects a $21.7 million impact resulting from five fewer reporting days in the first quarter of 1998 in comparison to the prior year comparable period and 16 fewer equivalent Company-owned units. This was partially offset by $3.4 million in additional sales at Company-owned units as year-to-date same-store sales turned positive due to strong sales increases in the last half of the year. Such increases were primarily driven by an increase in Denny's average guest check due to successful promotions of higher-priced menu items as well as price increases initiated to keep pace with minimum wage and other costs increases. Additionally, in the fourth quarter Denny's experienced an increase in guest counts, reversing recent negative guest traffic trends. FRANCHISE AND LICENSING REVENUE increased $4.1 million, up 8.7% over last year. The increased franchising revenue reflects the Company's strategy to grow its franchise store base, including the sale of Company-owned units to franchisees to stimulate such growth. Denny's added 72 franchised stores in the current year, reflecting a growth pace similar to 1997 when Denny's opened a record 77 franchise units. The comparability of 1998 and 1997 OPERATING EXPENSES is significantly affected by the impact of the adoption of fresh start reporting as of January 7, 1998. Specifically, the amortization of reorganization value in excess of amounts allocable to identifiable assets, which is over a five-year period, totaled $79.2 million for the 51 weeks ended December 30, 1998. In addition, the adjustment of property and equipment and other intangible assets to fair value resulted in an estimated increase in amortization and depreciation of approximately $35.6 million. Excluding the estimated effect of fresh start reporting, operating expenses decreased $22.7 million (2.1%), primarily reflecting the effect of five fewer reporting days, fewer Company-owned units, improvements in actuarial trends for workers' compensation and health benefits costs and 21 24 an increase of $10.8 million in gains on sales of units which are reflected as a reduction of operating expenses. These decreases are partially offset by an increase in labor costs due to minimum wage increases and the effect on the prior year of a $5.8 million nonrecurring reduction of operating expenses. EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, increased by $12.8 million in 1998 as compared to 1997. This increase is a result of the factors noted in the preceding paragraphs, excluding the estimated $114.8 million increase in depreciation and amortization. Excluding the estimated impact of fresh start reporting, Denny's OPERATING INCOME for the year ended December 30, 1998 increased by $8.7 million over the prior year comparable period as a result of the factors noted above. 1997 VS. 1996 Denny's NET COMPANY SALES decreased by $73.7 million (6.0%) in 1997 as compared to 1996. This change reflects a decrease in same-store sales and a 21-unit decrease in the number of Company-owned equivalent units operating throughout 1997 as compared to 1996, reflecting the closure or sale of 40 Company-owned units since January 1, 1996. The decrease in sales is somewhat offset by an estimated $21.7 million increase because of an additional five days in the 1997 reporting period compared to the prior year period. The decline in same-store sales was driven by lower guest counts, partially offset by an increase in average guest check. Both fluctuations reflect the impact of management's decision to eliminate certain value pricing initiatives in September 1996 in favor of a broader brand positioning that included greater focus on service and product quality. FRANCHISE AND LICENSING REVENUE for the period increased by $3.8 million (8.7%), reflecting the effect of 56 more franchised units open at the end of 1997 than at the end of 1996. The significant increase in franchised units over the prior year as compared to no net change in the number of Company-owned units is consistent with the Company's strategy of focusing on growth through franchising. Denny's OPERATING EXPENSES for 1997 compared with 1996 decreased by $76.0 million (6.6%), reflecting the impact of 21 fewer Company-owned equivalent units, a decrease in labor costs associated with improved labor efficiencies and lower guest counts and a $5.8 million reduction in operating expenses resulting from various nonrecurring items recognized in the fourth quarter, consisting primarily of an insurance recovery related to costs associated with the Consent Decree. These decreases were somewhat offset by an estimated $18.5 million impact from five additional days in 1997 compared to 1996, increased costs for produce, coffee, bacon, and sausage and increases in the Federal and state minimum wage rates. In addition, operating expenses in the prior year included $7.7 million of gains on sales of restaurants in comparison to $2.4 million of gains in the current year. Food cost as a percent of revenue improved during the year because of the elimination of certain value pricing initiatives and a shift to higher margin products in 1997. EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, increased $6.2 million in 1997 as compared to 1996. This increase is a result of the factors noted in the preceding paragraphs. Denny's OPERATING INCOME for 1997 increased $6.1 million (5.3%) over the prior year as a result of the factors noted above. 22 25 COCO'S AND CARROWS The following information for the year ended December 31, 1996 is provided for analysis purposes only, as it includes information for periods prior to the Company's acquisition of Coco's and Carrows on May 23, 1996. Specifically, the discussion of 1997 vs. 1996 results includes a full year of operating results for both years, although such operating results prior to May 23, 1996 are not included in consolidated operating results of the Company. COCO'S
FISCAL YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 30, 1996 1997 1998 ------------ ------------ ------------ ($ in millions, except average unit and same-store data) U. S. systemwide sales $ 278 $ 288 $ 280 ====== ====== ====== Net company sales $ 270 $ 276 $ 256 Franchise and licensing revenue 4 4 4 ------ ------ ------ Total revenue 274 280 260 ------ ------ ------ Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets -- -- 22 Other 264 262 245 ------ ------ ------ Total operating expenses 264 262 267 ------ ------ ------ Operating income (loss) $ 10 $ 18 $ (7) ====== ====== ====== EBITDA as defined $ 19(a) $ 35 $ 35 Average annual unit sales (in thousands): Company-owned 1,462 1,492 1,569 Franchised 1,719 1,728 1,356 Same-store data (Company-owned) (b): Same-store sales decrease (1.6%) 0.0% (0.7%) Average guest check $ 6.80 $ 6.77 $ 6.96 Operated units: Company-owned 183 178 150 Franchised 5 17 31 Licensed 278 298 300 ------ ------ ------ Total 466 493 481 ====== ====== ======
- --------------- (a) EBITDA as defined relates only to the period subsequent to the Company's acquisition of Coco's and Carrows, as the Company's measure of EBITDA as defined may not be comparable to similarly titled measures reported by other companies. (b) Prior year amounts have not been restated for 1998 comparable units. 1998 VS. 1997 Coco's NET COMPANY SALES for the year ended December 30, 1998 decreased $20.1 million (7.3%) as compared to the prior year. The decrease includes a $4.8 million impact due to six fewer reporting days compared to the prior year comparable period. The remaining decrease reflects a 28-unit decrease in the number of Company-owned restaurants and a small decrease in same-store sales. The decrease in same-store sales resulted primarily from a decline in customer traffic, partially offset by a higher average guest check in the first half of the year. The increase in average guest check reflects menu price increases instituted in August 1997 and February 1998 in response to minimum wage increases. In the third and fourth quarters, the Company was able to reverse the negative trend in customer traffic through the implementation of successful value-priced promotions. Due to the effect of such value pricing on average guest check, same-store sales remained slightly negative on a year-to-date basis. FRANCHISE AND LICENSING REVENUE was flat compared to the prior year, reflecting an increase in franchise revenue offset by a decrease in licensing revenue. The increase in franchise revenue resulted from the net increase of 14 franchised units in 1998. The decline in foreign licensing revenue resulted primarily from a stronger dollar versus the yen. The stronger dollar versus the yen and the increase in the number of franchised units also explain the large variance in franchise average unit sales. 23 26 The comparability of 1998 and 1997 OPERATING EXPENSES is significantly affected by the impact of the adoption of fresh start reporting as of January 7, 1998. Specifically, the amortization of reorganization value in excess of amounts allocable to identifiable assets, which is over a five-year period, totaled $22.1 million for the year ended December 30, 1998. In addition, the adjustment of property and equipment and other intangible assets to fair value resulted in an estimated increase in amortization and depreciation of $3.2 million. Excluding the estimated impact of fresh start reporting, operating expenses decreased $19.2 million (7.3%). This decrease reflects the effect of six fewer reporting days than in the prior year and the 28-unit decrease in Company-owned restaurants. EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, was flat for 1998 compared to 1997. This results from the factors noted in the preceding paragraphs, excluding the estimated $25.3 million increase in depreciation and amortization. Excluding the estimated impact of the adoption of fresh start reporting, Coco's OPERATING INCOME for the year ended December 30, 1998 decreased $0.5 million compared to the prior year comparable period as a result of the factors noted above. 1997 VS. 1996 Coco's NET COMPANY SALES for 1997 increased $5.9 million (2.2%) as compared to 1996. This increase reflects an estimated $4.8 million impact from the additional six days in the 1997 reporting period compared to the prior year comparable period. In addition, four Carrows units were converted to Coco's restaurants during 1997, contributing $3.3 million in sales. Offsetting these increases is the impact of a decrease of nine Company-owned stores in 1997. Coco's same-store sales were flat in 1997 as compared to 1996. FRANCHISE AND LICENSING REVENUE increased by $0.5 million (12.9%) for 1997 as compared to 1996. This increase is a result of the net increase of 20 foreign licensed units as well as 12 additional domestic franchise units in the current year. Coco's OPERATING EXPENSES for 1997 decreased by $2.4 million (0.9%) as compared to the prior year. This decrease is primarily a result of savings in product and labor costs due to an increased operations focus on cost controls, waste reduction and labor initiatives and $1.4 million of gains on sales of restaurants, compared to no gains recorded in 1996. In addition, the prior year included nonrecurring adjustments of approximately $1.6 million, which increased legal and workers' compensation expenses. No comparable charges are included in the current year period. These decreases were partially offset by the impact of an additional six days in the 1997 reporting period as compared to the prior year comparable period and the increase in Federal and state minimum wage rates. EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, increased by $16.5 million in 1997 as compared to 1996. This increase is primarily a result of calculating EBITDA using the twelve months' operating results for 1997 versus using the operating results for only the seven months after acquisition for 1996, as well as the other factors noted in the preceding paragraphs. OPERATING INCOME for Coco's increased to $18.4 million in 1997 as a result of the factors noted above. 24 27 CARROWS
FISCAL YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 30, 1996 1997 1998 ------------ ------------ ------------ ($ in millions, except average unit and same-store data) U. S. systemwide sales $ 217 $ 215 $ 204 ===== ====== ====== Net company sales $ 217 $ 211 $ 185 Franchise and licensing revenue -- 1 2 ----- ------ ------ Total revenue 217 212 187 ----- ------ ------ Operating expenses: Amortization of reorganization value in excess of amounts allocable to identifiable assets -- -- 18 Other 210 198 179 ----- ------ ------ Total operating expenses 210 198 197 ----- ------ ------ Operating income $ 7 $ 14 $ (10) ===== ====== ====== EBITDA as defined $ 15(a) $ 27 $ 23 Average annual unit sales (in thousands) Company-owned 1,343 1,362 1,377 Franchised NM NM 1,131 Same-store data (Company-owned) (b): Same-store sales increase (decrease) 0.1% (1.7%) (2.0%) Average guest check $6.25 $ 6.49 $ 6.60 Operated units: Company-owned 160 140 123 Franchised -- 14 26 ----- ------ ------ Total 160 154 149 ===== ====== ======
- --------------- (a) EBITDA as defined relates only to the period subsequent to the Company's acquisition of Coco's and Carrows, as the Company's measure of EBITDA as defined may not be comparable to similarly titled measures reported by other companies. (b) Prior year amounts have not been restated for 1998 comparable units. NM = Not meaningful 1998 VS. 1997 Carrows' NET COMPANY SALES decreased $26.3 million (12.4%) for the year ended December 30, 1998 as compared to the prior year comparable period. The decrease reflects a $3.8 million impact due to six fewer reporting days compared to the prior year. The remaining decrease reflects a 17-unit decrease in the number of Company-owned restaurants, 12 of which were converted to franchise units, and a decrease in same-store sales. The decrease in same-store sales resulted primarily from a decrease in customer traffic, partially offset by a higher average guest check in the first half of the year. The increase in average guest check reflects menu price increases instituted in August 1997 and February 1998 in response to minimum wage increases. In the third and fourth quarters, the Company was able to reverse the negative trend in customer traffic through the implementation of successful value-priced promotions. Due to the effect of such value pricing on average guest check, same-store sales remained negative on a year-to-date basis. FRANCHISE AND LICENSING REVENUE increased $1.3 million for the year ended December 30, 1998 compared to the prior year. This increase resulted from the addition of 12 franchised units over the prior year. The comparability of 1998 and 1997 OPERATING EXPENSES is significantly affected by the impact of the adoption of fresh start reporting as of January 7, 1998. Specifically, the amortization of reorganization value in excess of amounts allocable to identifiable assets, which is over a five-year period, totaled $17.9 million for the year ended December 30, 1998. In addition, the adjustment of property and equipment and other intangible assets to fair value resulted in an estimated increase in amortization and depreciation of $2.2 million. Excluding the estimated impact of fresh start reporting, operating expenses decreased $21.2 million (10.7%), reflecting the effect of six fewer reporting days than in the prior year comparable period and the 17-unit decrease in Company-owned restaurants. 25 28 EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, decreased by $3.2 million in 1998 as compared to 1997. This decrease is a result of the factors noted in the preceding paragraphs, excluding the estimated $20.1 million increase in depreciation and amortization. Excluding the estimated impact of the adoption of fresh start reporting, Carrows' OPERATING INCOME for the year ended December 30, 1998 decreased $3.8 million from the prior year as a result of the factors noted above. 1997 VS. 1996 Carrows' NET COMPANY SALES decreased $5.5 million (2.5%) for 1997 as compared to 1996 in spite of an estimated $3.8 million impact from the additional six days in the 1997 reporting period in comparison to the prior year comparable period. The sales decrease is primarily the result of a 20-unit decrease in Company-owned restaurants, 12 of which were converted to franchise units. It also reflects a decrease in same-store sales, reflecting a decrease in traffic partially offset by an increase in average guest check. FRANCHISE AND LICENSING REVENUE increased by $0.6 million for 1997 as compared to 1996, reflecting the opening of 14 domestic franchise units. Carrows' OPERATING EXPENSES decreased $12.0 million (5.7%) for 1997 as compared to 1996, despite the impact of an additional six days in the 1997 reporting period as compared to the prior year comparable period and increases in the Federal and state minimum wage rates. The decrease in expenses as compared with the prior year reflects the impact of approximately $1.5 million of nonrecurring adjustments which increased legal and workers' compensation expenses in 1996, as well as savings in product and labor costs in 1997 due to increased focus by operations on cost control, waste reduction and labor initiatives. In addition, operating expenses in 1997 include $3.2 million of gains on sales of restaurants, compared to no gains recorded in 1996. EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, increased by $11.7 million in 1997 as compared to 1996. This increase is primarily a result of calculating EBITDA using the twelve months' operating results for 1997 versus using the operating results for only the seven months after acquisition for 1996, as well as the other factors noted in the preceding paragraphs. OPERATING INCOME for Carrows increased to $13.6 million in 1997 as a result of the factors noted above. 26 29 EL POLLO LOCO
FISCAL YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 30, 1996 1997 1998 ------------ ------------ ------------ ($ in millions, except average unit and same-store data) U. S. systemwide sales $ 218 $ 235 $ 245 ====== ====== ====== Net company sales $ 115 $ 115 $ 117 Franchise and licensing revenue 9 10 10 ------ ------ ------ Total revenue 124 125 127 ------ ------ ------ Operating expenses Amortization of reorganization value in excess of amounts allocable to identifiable assets -- -- 11 Other 110 110 114 ------ ------ ------ Total operating expenses 110 110 125 ------ ------ ------ Operating income $ 14 $ 15 $ 2 ====== ====== ====== EBITDA as defined $ 20 $ 20 $ 21 Average annual unit sales (in thousands): Company-owned 1,155 1,206 1,176 Franchise 852 856 847 Same-store data (Company-owned) (a): Same-store sales increase 7.2% 0.2% (0.9%) Average guest check $ 6.64 $ 6.77 $ 6.94 Operated units: Company-owned 96 98 100 Franchised 135 145 161 Licensed 10 4 4 ------ ------ ------ Total 241 247 265 ====== ====== ======
- --------------- (a) Prior year amounts have not been restated for 1998 comparable units. 1998 VS. 1997 El Pollo Loco's NET COMPANY SALES increased $1.8 million (1.6%) during the year ended December 30, 1998 compared with the prior year comparable period. The increase is primarily driven by the addition of four Company-owned units early in the current year (with four units refranchised at the end of the year), somewhat offset by a $2.3 million impact due to seven fewer reporting days in the current period compared to the prior year period and a small decline in same-store sales. The decline in same-store sales resulted from the first three quarters of 1998, when lower customer counts were only partially offset by an increase in the average guest check resulting from menu price increases implemented in response to minimum wage increases. El Pollo Loco experienced an increase in both same-store sales and customer guest counts in the fourth quarter. FRANCHISE AND LICENSING REVENUE increased $0.4 million (4.5%), reflecting 16 additional franchise units in 1998 compared to 1997. The comparability of 1998 and 1997 OPERATING EXPENSES is significantly affected by the impact of the adoption of fresh start reporting as of January 7, 1998. Specifically, the amortization of reorganization value in excess of amounts allocable to identifiable assets, which is over a five-year period, totaled $11.0 million for the year ended December 30, 1998. In addition, the adjustment of property and equipment and other intangible assets to fair value resulted in an estimated increase in amortization and depreciation of approximately $2.6 million. Excluding the estimated impact of fresh start reporting, operating expenses increased $1.8 million (1.6%) compared to 1997, reflecting the increase in Company-owned units, higher labor costs due to minimum wage increases and efforts to improve staffing levels and increased advertising expenditures in the fourth quarter. Such increases were somewhat offset by the impact of fewer reporting days in the current period, aggressive food cost controls, and a $0.7 million nonrecurring insurance recovery recorded in the current year as a reduction to operating expenses. 27 30 EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, increased by $1.0 million in 1998 as compared to 1997. This increase is a result of the factors noted in the preceding paragraphs, excluding the estimated $13.6 million increase in depreciation and amortization. Excluding the estimated impact of the adoption of fresh start reporting, El Pollo Loco's operating income for the year ended December 30, 1998 increased by $0.5 million compared to the prior year period as a result of the factors noted above. 1997 VS. 1996 El Pollo Loco's NET COMPANY SALES increased $0.2 million during 1997 as compared with 1996. This increase reflects an estimated $2.3 million impact from the additional week in the 1997 reporting period compared with the prior year period. Excluding the impact of the additional week, revenue decreased $2.1 million in comparison to the prior year period, primarily reflecting a four-unit decrease in the number of Company-owned equivalent units operating throughout 1997 as compared to the entire prior year. Same-store sales were relatively unchanged as a result of lower customer counts offset by a higher guest check average, both of which are largely explained by a shift in promotional emphasis during the first two quarters of 1997. A menu price increase taken in March 1997 also contributed to the increase in average check in comparison to 1996. FRANCHISE AND LICENSING REVENUE for 1997 compared with 1996 increased by $1.4 million (10.4%), primarily due to four more franchise units open at the end of 1997 as compared with 1996, as well as an increase in franchise average unit sales. This increase in franchise revenue over the prior year reflects the Company's strategy of focusing on growth through franchising. El Pollo Loco's OPERATING EXPENSES for the 1997 period as compared with the 1996 comparable period increased by $0.7 million (0.6%), primarily reflecting an estimated $1.8 million impact from the additional week in the 1997 reporting period in comparison to the prior year comparable period. Other factors which contributed to the current year increase include an increase in advertising expenses and an increase in labor costs primarily due to Federal and state minimum wage increases. These increases were offset by gains on sales of restaurants of $1.0 million in 1997 in comparison to $0.7 million of gains in the prior year. These increases were also offset by lower chicken prices, lower promotional discounting and the impact of a shift in product mix and promotional emphasis. EBITDA AS DEFINED, which is defined by the Company as operating income before depreciation, amortization and charges for (recoveries of) restructuring and impairment, was flat in 1997 as compared to 1996. This is a result of the factors noted in the preceding paragraphs. El Pollo Loco's OPERATING INCOME for 1997 increased by $1.0 million (7.1%) as compared to the prior year as a result of the factors noted above. LIQUIDITY AND CAPITAL RESOURCES The Plan of Reorganization became effective January 7, 1998, and as a result, the Company significantly reduced its debt and simplified its capital structure. On the Effective Date, the Company entered into the Credit Facility with Chase and other lenders named therein which includes a working capital and letter of credit facility of up to a total of $200 million. At December 30, 1998, the Company had no working capital advances outstanding under the Credit Facility; however, letters of credit outstanding were $49.4 million. Historically, the Company has met its liquidity requirements with internally generated funds, external borrowings, and in recent years, proceeds from asset sales. The Company expects to continue to rely on internally generated funds, supplemented by available working capital advances under the Credit Facility and other external borrowings, as its primary source of liquidity. The Credit Facility matures on January 7, 2003 (subject to early termination under certain circumstances -- see Note 11 to the Consolidated Financial Statements) and is generally secured by liens on the stock of Advantica's direct and indirect subsidiaries, accounts receivable, intellectual property and cash and cash accounts, along with Advantica's guarantee and additional liens on the Company's corporate headquarters in Spartanburg, South Carolina. The 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. The Company believes the Credit Facility, together with cash generated from operations, various cash management measures and other sources, will provide the Company with adequate liquidity to meet its working capital, debt service and capital expenditure requirements for at least the next twelve months. 28 31 The following table sets forth a calculation of the Company's cash from operations available for debt repayment and capital expenditures for the periods indicated:
FISCAL ONE FIFTY-ONE YEAR WEEK WEEKS ENDED ENDED ENDED DECEMBER 31, JANUARY 7, DECEMBER 30, 1997 1998 1998 (In millions) ------------ ---------- ------------ Net (loss) income $(134.5) $1,394.9 $(181.4) Equity in (income) loss from discontinued operations, net 58.1 (47.7) 1.5 Extraordinary items -- (612.8) (1.0) Noncash reorganization items -- (714.6) -- Other noncash charges 62.9 (6.4) 254.6 Deferred income tax provision (benefit) 0.1 (13.9) 0.1 Change in certain working capital items 32.4 10.0 (60.2) Change in other assets and other liabilities, net 33.9 (0.9) 11.9 Increase in liabilities from reorganization activities 9.9 -- -- ------- -------- ------- Cash from operations available for debt repayment and capital expenditures $ 62.8 $ 8.6 $ 25.5 ======= ======== =======
Coco's and Carrows cash flows from operations, which are included in the Company's total cash flow from operations set forth in the table above, were $17.1 million, $1.0 million and $23.0 million for the year ended December 31, 1997, the one week ended January 7, 1998 and the 51 weeks ended December 30, 1998, respectively. Except for the payment of certain management fees and tax reimbursements payable to Advantica under certain conditions, such cash flows are currently unavailable to Advantica and its other subsidiaries. In connection with the acquisition of Coco's and Carrows, FRI-M, which became thereby a wholly-owned subsidiary of the Company, obtained a credit facility (as amended to date, the "FRI-M Credit Facility") consisting of a $56 million term loan, which matures on August 31, 1999, and a $35 million revolving credit facility, which is available until August 31, 1999 for Coco's and Carrows general working capital advances and letters of credit. At December 30, 1998, the amount of the term loan outstanding was $10.4 million and FRI-M had no outstanding capital borrowings; however, letters of credit outstanding were $13.2 million. Such facility is unavailable to Advantica and its other subsidiaries. On April 1, 1998, the Company completed the sale of all of the capital stock of FEI for $427 million which included the assumption by the buyer of $46 million of capital leases. Approximately $173.1 million of the proceeds (together with $28.6 million already on deposit with respect to the Spartan Mortgage Financing) was applied to in-substance defease the Spartan Mortgage Financing, with a book value of $198.9 million plus accrued interest of $6.9 million at April 1, 1998. The Spartan Mortgage Financing was collateralized by certain assets of Spardee's Realty, Inc. and Quincy's Realty, Inc. The Company replaced such collateral through the purchase of a portfolio of United States Government and AAA rated investment securities which were deposited with the collateral agent with respect to the Spartan Mortgage Financing to satisfy principal and interest payments thereunder through the stated maturity date in the year 2000. On June 10, 1998, the Company completed the sale of all of the capital stock of Quincy's for $84.7 million, which included the assumption by the buyer of $4.2 million of capital leases. The remaining proceeds from both transactions, after transaction expenses, improved the Company's short-term liquidity. On July 31, 1998, the Company extended to the holders of the Senior Notes an offer to purchase, on a pro rata basis, up to $100.0 million of the outstanding Senior Notes at a price of 100% of the principal amount thereof plus accrued and unpaid interest (the "Net Proceeds Offer"). Such offer was extended pursuant to the terms of the indenture governing the Senior Notes (the "Senior Notes Indenture") which requires the Company to apply the Net Proceeds (as defined therein) from the sale of the Hardee's and Quincy's Business Segments (as defined in the indenture) within 366 days of such sales to (1) an investment in another asset or business in the same line or similar line of business, (2) a net proceeds offer, as defined in the Indenture, or (3) the prepayment or repurchase of Senior Indebtedness (as defined), or any combination thereof as the Company may choose. The Net Proceeds Offer expired on August 31, 1998. Tendering holders had the option to withdraw their tenders during a 30-day period ending on September 30, 1998. At the close of the withdrawal period, $42.4 million of such securities were tendered and not withdrawn. Such securities, plus accrued and unpaid interest of $1.1 million, were retired on October 5, 1998 resulting in an extraordinary gain of $1.0 million. During the first quarter of 1999, the Company utilized a portion of the remaining proceeds from the Hardee's and Quincy's sales transactions to purchase an additional $20 million aggregate principal amount of the Senior Notes. 29 32 As noted above, since the completion of its financial reorganization in January 1998, Advantica has sold two declining restaurant concepts and, in addition, has focused its attention on reinvigorating its remaining concepts, Denny's, Coco's, Carrows and El Pollo Loco. Because of covenant limitations under the Senior Notes Indenture and the Credit Facility and under the FRD Indenture and FRI-M Credit Facility, the Company's ability to make further investments in FRD to upgrade its Coco's and Carrows concepts has been severely limited. In an effort to address this issue, during the latter half of 1998 the Company began exploring various alternatives to restructure FRD's capital structure in order to increase capital availability and otherwise improve FRD's financial flexibility. Most recently, the Company has (1) designated FRD and its subsidiaries as restricted subsidiaries in accordance with the terms of the Senior Notes Indenture, generally increasing Advantica's investment flexibility thereunder in its relationship with FRD and its subsidiaries, (2) obtained certain amendments to the Credit Facility to increase Advantica's investment flexibility under that facility with respect to the Coco's and Carrows operations, and (3) held discussions with certain financial institutions regarding refinancing the FRI-M Credit Facility prior to its scheduled maturity date in August 1999. As a result of those discussions, Coco's and Carrows have entered into a written commitment letter, pursuant to which they have received commitments from Chase and Credit Lyonnais New York Branch ("Credit Lyonnais") for a $70 million Senior Secured Credit Facility (the "New FRI-M Facility"). Such facility, which is expected to be guaranteed by Advantica, will consist of a combined term loan and revolving credit facility and will mature four years from the date of closing. The closing of such facility, expected to occur in the second quarter of 1999, is subject to, among other conditions, the negotiation of definitive agreements with Chase and Credit Lyonnais on mutually acceptable terms. Management believes the New FRI-M Facility, together with cash generated from operations, various cash management measures and other sources, will provide FRD with adequate liquidity to meet its working capital, debt service and capital expenditure requirements for at least the next twelve months. However, a significant downturn in the restaurant industry, the California economy or other developments adversely affecting FRD's cash flow could materially impair its ability to service its indebtedness. Additionally, on or prior to July 12, 2000, the Company will be required to repay or refinance the $160 million mortgage financing which is secured by a pool of cross-collateralized mortgages on 240 Denny's restaurant properties ("the Denny's Mortgage Financing"). Although management believes that the Company will be successful in refinancing or replacing such facility, the Company's highly leveraged position may limit its ability to do so on acceptable terms. Although consummation of the Plan of Reorganization significantly reduced the Company's debt obligations, the Company still has substantial indebtedness and debt service requirements, both in absolute terms and in relation to shareholders' equity. With respect to the long-term liquidity of the Company, management believes that the Company will have sufficient cash flow from operations (together with funds available under its existing credit facilities) to pay interest and scheduled amortization on all of its outstanding indebtedness and to fund anticipated capital expenditures through 2000 (provided it is able to refinance on reasonable terms the FRI-M Credit Facility and the Denny's Mortgage Financing). The Company's ability to meet its 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. The Company's ability to maintain or increase operating cash flow will depend upon consumer tastes, the success of marketing initiatives and other efforts by the Company to increase customer traffic in its restaurants, prevailing economic conditions and other matters, many of which are beyond the control of the Company. As of December 30, 1998, scheduled maturities of long-term debt relative to Advantica and its subsidiaries for the years 1999 and thereafter, excluding approximately $165 million of in-substance defeased debt maturing in 2000, are as follows:
ADVANTICA EXCLUDING FRD FRD (In millions) ------------- ------ 1999 $ 16.8 $ 13.6 2000 174.9 2.9 2001 12.3 2.8 2002 6.2 2.4 2003 4.9 1.8 Thereafter 583.6 161.0
In addition to scheduled maturities of principal, on a consolidated basis, approximately $121.6 million of cash (excluding $16.4 million related to the in-substance defeased debt) will be required in 1999 to meet interest payments on long-term debt. 30 33 The Company's principal capital requirements are those associated with opening new restaurants and remodeling and maintaining its existing restaurants and facilities. During 1998, total capital expenditures were approximately $78.1 million. Of the total capital expenditures, approximately $12.3 million were financed through capital leases. Capital expenditures during 1999, excluding the estimated $16 million associated with the development or purchase of new software (see "Impact of the Year 2000 Issue"), are expected to total approximately $150 million to $160 million; however, the Company is not committed to spending this amount and could spend less if circumstances warrant. The Company is 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. At December 30, 1998, the Company's working capital deficit, exclusive of net assets held for sale, was $96.1 million as compared with $230.2 million at December 31, 1997. The decrease in the deficit is attributable primarily to an increase in cash and cash equivalents from the sales of FEI and Quincy's. On February 22, 1996, the Company entered into an agreement with IBM Global Services ("IBM") (formerly Integrated Systems Solutions Corporation). The ten-year agreement (as amended) requires annual payments by the Company ranging from $26.9 million to $49.1 million. The agreement provides for IBM to manage and operate the Company's information systems, as well as to develop and implement new systems and applications to enhance information technology for the Company's corporate headquarters, restaurants, and field management. IBM will oversee data center operations, applications development and maintenance, voice and data networking, help desk operations, and POS technology. STOCKHOLDER RIGHTS PLAN As further discussed in Note 16 to the Consolidated Financial Statements, 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. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs which were written using two digits rather than four to define the applicable year. Any of the Company's computer programs or operating equipment that have date-sensitive software using two digits to define the applicable year may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. The Company has a comprehensive enterprise-wide program in place to address the impact and issues associated with processing dates up to, through and beyond the year 2000. This program consists of three main areas: (a) information systems, (b) supply chain and critical third party readiness and (c) business equipment. The Company is utilizing both internal and external resources to inventory, assess, remediate, replace and test its systems for Year 2000 compliance. To oversee the process, the Company has established a Steering Committee which is comprised of senior executives from all functional areas within the Company and which reports regularly to the Board of Directors and the Audit Committee. The Company has performed an assessment of the impact of the Year 2000 issue and determined that a significant portion of its software applications will need to be modified or replaced so that its systems will properly utilize dates beyond December 31, 1999. For the most part, the Company intends to replace existing systems and, based on current estimates, expects to spend approximately $20 million in 1999 to address its information systems issues. Relative to this amount, the Company estimates that approximately $16 million will be used to develop or purchase new software and will be capitalized. The remaining amounts will be expensed as incurred. Total Year 2000 expenditures through December 30, 1998 are approximately $16.1 million. All estimated costs have been budgeted and are expected to be funded by cash flows from operations. Currently all information systems projects are on schedule and are fully staffed. Systems that are critical to the Company's operations are targeted to be Year 2000 compliant by June of 1999. The nature of its business makes the Company very dependent on critical suppliers and service providers, and the failure of such third parties to adequately address the Year 2000 issue could have a material impact on the Company's ability to conduct its business. Accordingly, the Company has a dedicated team in place to assess the Year 2000 readiness of all 31 34 third parties on which it depends. Surveys have been sent to critical suppliers and service providers and each survey response is being scored and assessed based on the third party's Year 2000 project plans in place and progress to date. On-site visits or follow-up phone interviews are being performed for critical suppliers and service providers. For any critical supplier or service provider which does not provide the Company with satisfactory evidence of their Year 2000 readiness, contingency plans will be developed which will include establishing alternative sources for the product or service provided. The Company is also communicating with its franchise business partners regarding Year 2000 business risks. The Company's current estimate of costs associated with the Year 2000 issue excludes the potential impact of the Year 2000 issue on third parties. There can be no guarantee that the systems of other companies on which the Company relies will be timely converted, or that a failure to convert by another company would not have a material adverse effect on the Company's operations. The Company has inventoried and determined the business criticality of all restaurant equipment. Based on preliminary findings, the Company believes that the date-related issues associated with the proper functioning of such assets are insignificant and are not expected to represent a material risk to the Company or its operations. The Company has conducted an inventory of its facilities at the corporate office and is beginning the correction of certain date-deficient systems. The Company believes, based on available information, that it will be able to manage its Year 2000 transition without any material adverse effect on its business operations. As the Year 2000 project progresses, the Company will establish contingency plans addressing business critical processes for operations and other critical corporate functions. However, the costs of the project and the ability of the Company to complete the Year 2000 transition on a timely basis are based on management's best estimates, which were derived based on numerous assumptions of future events including the availability of certain resources, third party modification plans and other factors. Specific factors that could have a material adverse effect on the cost of the project and its completion date include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, unanticipated failures by critical vendors and franchisees as well as a failure by the Company to execute its own remediation efforts. As a result, there can be no assurance that these forward looking estimates will be achieved and actual results may differ materially from those plans, resulting in material financial risk to the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company has exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, the Company has in place two bank credit facilities, Advantica's $200 million Credit Facility and the FRI-M Credit Facility, which bear interest at variable rates. The Company had no amounts outstanding under the Credit Facility during 1998. The FRI-M Credit Facility consists of the FRI-M Term Loan, with a balance outstanding of $10.4 million at December 30, 1998, and the $35 million FRI-M Revolver. There were no amounts outstanding under the FRI-M Revolver at December 30, 1998. Borrowings under the Credit Facility and the FRI-M Credit Facility bear interest based on the prime rate or an adjusted Eurodollar rate (approximately 8.4% at December 30, 1998). The Company's other outstanding long-term debt bear fixed rates of interest. While changes in the prime rate and Eurodollar rate could affect the cost of funds borrowed in the future, existing amounts outstanding are at fixed rates; therefore, the Company believes the effect, if any, of reasonably possible near-term changes in interest rates on the Company's consolidated financial position, results of operations and cash flows would not be material. The Company may from time to time use interest rate swaps to manage overall borrowing costs and reduce exposure to adverse fluctuations in interest rates. The Company does not use derivative instruments for trading purposes. No financial derivatives were in place at December 30, 1998. COMMODITY PRICE RISK The Company purchases 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 the Company's control and which are generally unpredictable. Changes in commodity prices affect the Company and its competitors generally and often simultaneously. In general, the food products purchased by the Company are purchased 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. The Company uses these types of purchase arrangements to control costs as an alternative to using financial instruments to hedge commodity prices. In 32 35 many cases, the Company believes it will be able to address commodity cost increases which are significant and appear to be long-term in nature by adjusting its menu pricing or changing its product delivery strategy. However, competitive circumstances could limit such actions and in those circumstances increases in commodity prices could result in lower margins for the Company. Because of the often short-term nature of commodity pricing aberrations and the ability of the Company to change menu pricing or product delivery strategies in response to commodity price increases, the Company believes that the impact of commodity price risk is immaterial. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements which appears on page F-1 herein. FORM 11-K INFORMATION Advantica, pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934, as applicable, will file as an amendment to this Annual Report of Form 10-K the information, financial statements and exhibits required by Form 11-K with respect to the Flagstar 401(k) Plan and the Denny's 401(k) Plan (these plans were combined into one Advantica 401(k) Plan as of December 1, 1998). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item with respect to Advantica's directors and compliance by Advantica's directors, executive officers and certain beneficial owners of Advantica's Common Stock with Section 16(a) of the Securities Exchange Act of 1934 is furnished by incorporation by reference to all information under the captions entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement (to be filed hereafter) for Advantica's Annual Meeting of the Shareholders to be held on May 19, 1999 (the "Proxy Statement"). The information required by this item with respect to Advantica's executive officers appears in Item I of Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is furnished by incorporation by reference to all information under the captions entitled "Executive Compensation" and "Election of Directors -- Compensation of Directors" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is furnished by incorporation by reference to all information under the caption "General -- Equity Security Ownership" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS The information required by this item is furnished by incorporation by reference to all information under the caption "Certain Transactions" in the Proxy Statement. INFORMATION REGARDING CERTAIN INDEBTEDNESS The following information regarding certain indebtedness of the Company does not purport to be complete and is qualified in its entirety by reference to the documents governing such indebtedness, including the definitions of certain terms therein, which have been filed as exhibits to filings of Advantica and/or FRD with the Commission. Whenever particular provisions of such documents are referred to herein, such provisions are incorporated herein by reference, and the statements are qualified in their entirety by such reference. See Note 11 to the Consolidated Financial Statements for additional information regarding the Company's indebtedness and the terms thereof (including indebtedness under the Credit Facility, the FRI-M Credit Agreement and certain mortgage financings). 33 36 ADVANTICA PUBLIC DEBT Pursuant to the Plan of Reorganization, Advantica issued on January 7, 1998, $592,002,000 aggregate principal amount of 11 1/4% Senior Notes due 2008. The Senior Notes are senior unsecured obligations of Advantica and rank pari passu in right of payment to all Senior Indebtedness, including the Credit Facility. The Senior Notes are effectively subordinated to Advantica's secured indebtedness, including indebtedness under the Credit Facility. The Senior Notes are structurally subordinated to indebtedness under the Credit Facility to the extent of direct obligations of Advantica's subsidiaries, as Borrowers and as subsidiary guarantors, thereunder. Interest on the Senior Notes accrues at a rate equal to 11 1/4% per annum and is payable semi-annually in arrears on each July 15 and January 15, beginning July 15, 1998. They will mature on January 15, 2008. The Senior Notes will be redeemable, in whole or in part, at the option of Advantica at any time on or after January 15, 2003, 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. Notwithstanding the foregoing, from January 15, 1998 until January 15, 2001, Advantica may redeem up to 35% of the aggregate principal amount of Senior Notes outstanding on January 7, 1998 at a redemption price (expressed as a percentage of the principal amount) of 110%, plus accrued and unpaid interest, if any, to the redemption date, from the net proceeds of any public offering for cash of any equity securities of Advantica or any subsidiary thereof. As of October 5, 1998, Advantica repurchased $42.4 million in aggregate principal amount of the Senior Notes tendered by holders thereof pursuant to the Net Proceeds Offer. THE FRD NOTES In connection with the May 23, 1996 acquisition of FRI-M, FRD issued $156.9 million principal amount of 12 1/2% FRD Senior Notes due 2004. The FRD Notes are senior unsecured, general obligations of FRD and rank senior in right of payment to all existing and future subordinated indebtedness of FRD and rank pari passu in right of payment with all existing and future unsubordinated indebtedness of FRD. The FRD Notes are effectively subordinated to secured indebtedness of FRD, including FRD's guaranty of borrowings under the FRI-M Credit Facility, to the extent of the value of FRD's assets securing such guaranty. Borrowings under the FRI-M Credit Facility are secured by substantially all of FRD's assets. The FRD Notes are structurally subordinated to all indebtedness of FRI-M, including its indebtedness under the FRI-M Credit Facility. Interest on the FRD Notes accrues at the rate of 12 1/2% per annum and is payable semi-annually in arrears on January 15 and July 15, commencing on July 15, 1996. They will mature on July 15, 2004. The FRD Notes will be redeemable, in whole or in part, at the option of FRD at any time on or after May 23, 2001, initially at a redemption price equal to 105.0% of the principal amount thereof to and including May 22, 2002, at 102.5% of the principal amount thereof to and including May 22, 2003, and thereafter at 100% of the principal amount thereof, together in each case with accrued interest. Notwithstanding the foregoing, at any time prior to May 23, 1999, FRD may redeem up to $50 million aggregate principal amount of the FRD Notes at a redemption price equal to 107.5% of the principal amount thereof, together with accrued interest, from the net cash proceeds of an initial public equity offering of FRD, subject to certain further terms and conditions. 34 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements: See the Index to Financial Statements which appears on page F-1 hereof. (2) Financial Statement Schedules: No schedules are filed herewith because of the absence of conditions under which they are required or because the information called for is in the Consolidated Financial Statements or Notes thereto. (3) Exhibits: Certain of the exhibits to this Report, indicated by an asterisk, are hereby incorporated by reference to other documents on file with the Commission with which they are physically filed, to be a part hereof as of their respective dates.
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 (the "1997 Form 8-K")). *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 (the "Advantica Form S-1 Amendment No. 1")). *3.3 By-Laws of Advantica as amended through January 7, 1998 (incorporated by reference to Exhibit 3.2 to the Form 8-A). *4.1 Registration Rights Agreement (incorporated by reference to Exhibit 10.1 to the Form 8-A). *4.2 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing, and Assignment of Leases and Rents, from Denny's Realty, Inc. to State Street Bank and Trust Company, dated July 12, 1990 (incorporated by reference to Exhibit 4.9 to Post-effective Amendment No. 1 to the Registration Statement on Form S-1 (No. 33-29769) of FCI (the "Form S-l Amendment")) . *4.3 Lease between Denny's Realty, Inc. and Denny's, Inc., dated as of December 29, 1989, as amended and restated as of July 12, 1990 (incorporated by reference to Exhibit 4.10 to the Form S-l Amendment). *4.4 Indenture dated as of July 12, 1990 between Denny's Realty, Inc. and State Street Bank and Trust Company relating to certain mortgage notes (incorporated by reference to Exhibit 4.11 to the Form S-l Amendment). *4.5 Mortgage Note in the amount of $10,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by reference to Exhibit 4.15 to the Registration Statement on Form S-4 (No. 33-48923) of Flagstar (the "11.25% Debentures S-4")). *4.6 Mortgage Note in the amount of $52,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by reference to Exhibit 4.16 to the 11.25% Debentures S-4). *4.7 Mortgage Note in the amount of $98,000,000 of Denny's Realty, Inc., dated as of July 12, 1990 (incorporated by reference to Exhibit 4.16 to the 11.25% Debentures S-4). *4.8 Indenture between Secured Restaurants Trust and The Citizens and Southern National Bank of South Carolina, dated as of November 1, 1990, relating to certain secured bonds (incorporated by reference to Exhibit 4.18 to the 11.25% Debentures S-4). *4.9 Amended and Restated Trust Agreement between Spartan Holdings, Inc., as Depositor for Secured Restaurants Trust, and Wilmington Trust Company, dated as of October 15, 1990 (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-11 (No. 33-36345) of Secured Restaurants Trust (the "Form S-11")). *4.10 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 the FRD Form S-1/S-4).
35 38
EXHIBIT NO. DESCRIPTION - ----------- ----------- *4.11 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). *4.12 Stock Purchase Agreement dated as of March 1, 1996 by and among FCI, Flagstar, FRD and FRI (incorporated by reference to Exhibit 4.2 to the FRD Form S-l/S-4). *4.13 Indenture relating to the New Senior Notes (including the form of security) dated as of January 7, 1998, between Advantica and First Trust National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Advantica's Form 8-K filed January 15, 1998 (the "1998 Form 8-K")). *4.14 Warrant Agreement (including the form of Warrant) (incorporated by reference to Exhibit 10.1 to the Form 8-A). *4.15 Rights Agreement, dated as of December 15, 1998, between Advantica and Continental Stock Transfer and Trust Company, as Rights Agent (including Form of Right Certificate) (incorporated by reference to Exhibit 1 to Advantica's Form 8-A, dated December 15, 1998). *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 Credit Agreement, dated as of May 23, 1996, among FRD, FRI-M, certain lenders and co-agents named therein, and Credit Lyonnais New York Branch as administrative agent (the "FRI-M Credit Agreement") (incorporated by reference to Exhibit 10.1 to the Registration Statement on Forms S-1 and S-4 (No. 333-07601) of FRD (the "FRD Form S-l/S-4")). *10.4 First Amendment to the FRI-M Credit Agreement, dated July 1, 1996 (incorporated by reference to Exhibit 10.3.1 to FCI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). *10.5 Second Amendment to the FRI-M Credit Agreement, dated November 19, 1996 (incorporated by reference to Exhibit 4.24 to FCI's 1996 Form 10-K, File No. 0-18051 (the "1996 Form 10-K")). *10.6 Third Amendment to the FRI-M Credit Agreement, dated as of March 17, 1997 (incorporated by reference to Exhibit 4.2 to FCI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the "1997 First Quarter Form 10-Q")). *10.7 Fourth Amendment and Limited Waiver dated July 9, 1997 to the FRI-M Credit Agreement (incorporated by reference to Exhibit 4.2 to FCI's Quarterly Report on Form 10-Q for the quarter ended October 1, 1997). *10.8 Fifth Amendment to the FRI-M Credit Agreement, dated as of December 9, 1997 (incorporated by reference to Exhibit 4.21 to the Advantica Form S-1 Amendment No. 1). *10.9 Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc., dated as of November 1, 1990 (incorporated by reference to Exhibit 10.14 to the 11.25% Debentures S-4). *10.10 Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc., dated as of November 1, 1990 (incorporated by reference to Exhibit 10.15 to the 11.25% Debentures S-4). *10.11 Insurance and Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.16 to the 11.25% Debentures S-4). *10.12 Intercreditor Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.17 to the 11.25% Debentures S-4). *10.13 Indemnification Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.19 to the 11.25% Debentures S-4). *10.14 Financial Guaranty Insurance Policy, issued November 15, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.21 to the 11.25% Debentures S-4). *10.15 Collateral Assignment Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.24 to the 11.25% Debentures S-4). *10.16 Spartan Guaranty, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.26 to the 11.25% Debentures S-4). *10.17 Management Agreement, dated as of November 1, 1990, related to the Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.30 to the 11.25% Debentures S-4). *10.18 Indemnity Agreement, dated as of November 1, 1990, related to Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.32 to the 11.25% Debentures S-4).
36 39
EXHIBIT NO. DESCRIPTION - ----------- ----------- *10.19 Employment Agreement, dated as of January 10, 1995, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.42 to the 1994 Form 10-K). *10.20 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). *10.21 Amended Consent Decree dated May 24, 1994 (incorporated by reference to Exhibit 10.50 to the 1994 Form 10-K). *10.22 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). *10.23 Second Amendment to Employment Agreement, dated December 31, 1996, between FCI and James B. Adamson (incorporated by reference to Exhibit 10.47 to the 1996 Form 10-K). *10.24 Form of Agreement dated December 3, 1997 providing certain retention incentives and severance benefits for Company management (incorporated by reference to Exhibit 10.33 to Advantica's 1997 Form 10-K, File No. 0-18051). *10.25 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). *10.26 Employment Agreement, dated as of April 22, 1996, between Flagstar and Craig S. Bushey (incorporated by reference to Exhibit 10.51 to the 1996 Form 10-K). *10.27 Employment Agreement, dated as of November 21, 1995, between Flagstar and John A. Romandetti (incorporated by reference to Exhibit 10.52 to the 1996 Form 10-K). *10.28 Employment Agreement between Advantica and James B. Adamson, amended and restated as of January 7, 1998 (incorporated by reference to Exhibit 10.38 to the Advantica Form S-1 Amendment). *10.29 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). *10.30 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 (the "Advantica Form S-1 Amendment No. 2"). *10.31 Stock Purchase Agreement among Advantica Restaurant Group, Inc., Spartan Holdings, Inc., Flagstar Enterprises, Inc., and CKE Restaurants, Inc., dated as of February 18, 1998 (incorporated by reference to Exhibit 99.1 to Advantica's Form 8-K filed April 16, 1998). *10.32 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). *10.33 Stock Purchase Agreement by and among Buckley Acquisition Corporation, Spartan Holdings, Inc. and Advantica Restaurant Group, Inc., dated as of May 13, 1998 (incorporated by reference to Exhibit 99.1 to Advantica's Form 8-K filed June 25, 1998). *10.34 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 (the "1998 Third Quarter 10-Q")). 10.35 Amendment No. 4, dated as of November 12, 1998, to the Advantica Credit Agreement. 10.36 Sixth Amendment to the FRI-M Credit Agreement, dated as of December 23, 1998. 10.37 Assignment and Assumption Agreement, by and between Quincy's Realty, Inc. and I.M. Special, Inc. dated May 1, 1998. 10.38 Stock Pledge Agreement among Spartan Holdings, Inc., Financial Security Assurance, Inc. and The Bank of New York, dated April 1, 1998. 10.39 Consent and Agreement Regarding Substitution among Financial Security Assurance, Inc., I.M. Special, Inc., Collateral Agent, Trustee, Owners, Issuer Trustee and Advantica dated May 1, 1998.
37 40
EXHIBIT NO. DESCRIPTION - ----------- ----------- *10.40 Second Amendment to the Loan Agreement between Secured Restaurants Trust and Spardee's Realty, Inc., dated as of April 1, 1998 (incorporated by reference to Exhibit 10.47 to the Advantica Form S-1 Amendment No. 2). *10.41 Second Amendment to the Loan Agreement between Secured Restaurants Trust and Quincy's Realty, Inc., dated as of April 1, 1998 (incorporated by reference to Exhibit 10.48 to the Advantica Form S-1 Amendment No. 2). *10.42 First Amendment to the Collateral Assignment Agreement, dated as of November 1, 1990, related to the Secured Restaurants Trust transaction (incorporated by reference to Exhibit 10.10 to the Advantica Form S-1 Amendment No. 2). *10.43 Advantica Restaurant Group Stock Option Plan, as adopted January 28, 1998 and amended through September 28, 1998 (incorporated by reference to Exhibit 10.2 to the 1998 Third Quarter 10-Q). *10.44 Advantica Restaurant Group Officer Stock Option Plan, as adopted January 28, 1998 and amended through September 28, 1998 (incorporated by reference to Exhibit 10.3 to the 1998 Third Quarter 10-Q). *10.45 Advantica Restaurant Group Director Stock Option Plan, as adopted January 28, 1998 and amended through September 28, 1998 (incorporated by reference to Exhibit 10.4 to the 1998 Third Quarter 10-Q). 12 Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of Advantica. 23.1 Consent of Deloitte and Touche LLP. 27 Financial Data Schedule (for SEC use only). 99 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
- --------------- (b) The Company filed a report on Form 8-K on December 16, 1998 reporting, under Item 5 of such report, that on December 14, 1998, the Company had announced in a press release that its Board of Directors had approved the adoption of a Stockholder Rights Plan (the "Rights Plan"). The material terms of the Rights Plan are described in the press release which is attached as an exhibit to such report. No financial statements were included in the filing. 38 41 ADVANTICA RESTAURANT GROUP, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report F-2 Statements of Consolidated Operations for the Two Years Ended December 31, 1997, the One Week Ended January 7, 1998 and the Fifty-One Weeks Ended December 30, 1998 F-3 Consolidated Balance Sheets as of December 31, 1997 and December 30, 1998 F-5 Statements of Consolidated Cash Flows for the Two Years Ended December 31, 1997, the One Week Ended January 7, 1998 and the Fifty-One Weeks Ended December 30, 1998 F-6 Notes to Consolidated Financial Statements F-8
F-1 42 INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Advantica Restaurant Group, Inc. (formerly Flagstar Companies, Inc.) and subsidiaries (the "Company") as of December 30, 1998 (Successor Company balance sheet) and December 31, 1997 (Predecessor Company balance sheet), and the related statements of consolidated operations and consolidated cash flows for the fifty-one week period ended December 30, 1998 (Successor Company operations) and for the one week period ended January 7, 1998 and the fiscal years ended December 31, 1997 and 1996 (Predecessor Company operations). 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 generally accepted auditing standards. 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 consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 30, 1998 and the results of its consolidated operations and its consolidated cash flows for the fifty-one week period ended December 30, 1998 in conformity with generally accepted accounting principles. Further, in our opinion, the Predecessor Company consolidated financial statements present fairly, in all material respects, the consolidated financial position as of December 31, 1997 and the results of its consolidated operations and its consolidated cash flows for the one week period ended January 7, 1998 and the fiscal years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Greenville, South Carolina February 16, 1999 F-2 43 ADVANTICA RESTAURANT GROUP, INC STATEMENTS OF CONSOLIDATED OPERATIONS
PREDECESSOR COMPANY SUCCESSOR COMPANY ----------------------------------------- ------------------ ONE WEEK FIFTY-ONE WEEKS ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In thousands, except per share amounts) ------------ ------------ ----------- ------------------ Revenue: Company restaurant sales $1,609,128 $1,748,787 $ 31,986 $1,654,092 Franchise and licensing revenue 54,966 61,840 1,629 66,433 ---------- ---------- ---------- ---------- Total operating revenue 1,664,094 1,810,627 33,615 1,720,525 ---------- ---------- ---------- ---------- Cost of company restaurant sales: Product costs 444,425 478,889 8,638 449,421 Payroll and benefits 600,240 637,601 12,577 592,540 Occupancy 77,028 93,737 1,155 91,329 Other operating expenses 243,279 276,958 5,248 266,162 ---------- ---------- ---------- ---------- Total costs of company restaurant sales 1,364,972 1,487,185 27,618 1,399,452 Franchise restaurant costs 27,047 27,671 983 32,458 General and administrative expenses 90,184 85,625 2,323 82,647 Amortization of excess reorganization value -- -- -- 139,799 Depreciation and other amortization 81,321 93,090 1,684 146,052 Gain on disposition of assets, net (8,439) (7,943) (7,653) (12,617) ---------- ---------- ---------- ---------- Total operating costs and expenses 1,555,085 1,685,628 24,955 1,787,791 ---------- ---------- ---------- ---------- Operating income (loss) 109,009 124,999 8,660 (67,266) ---------- ---------- ---------- ---------- Other expenses: Interest expense, net (contractual interest for the year ended December 31, 1997 is $278,061; for the one week ended January 7, 1998 is $4,795) 177,151 164,924 2,669 114,077 Other nonoperating expenses (income), net 1,171 4,571 (313) 1,407 ---------- ---------- ---------- ---------- Total other expenses, net 178,322 169,495 2,356 115,484 ---------- ---------- ---------- ---------- (Loss) income before reorganization items and taxes (69,313) (44,496) 6,304 (182,750) Reorganization items -- 30,141 (714,207) -- ---------- ---------- ---------- ---------- (Loss) income before taxes (69,313) (74,637) 720,511 (182,750) (Benefit from) provision for income taxes (16,302) 1,688 (13,829) (1,794) ---------- ---------- ---------- ---------- (Loss) income from continuing operations (53,011) (76,325) 734,340 (180,956) Discontinued operations: Reorganization items of discontinued operations, net of income tax provision of $7,509 -- -- 48,887 -- Loss from operations of discontinued operations, net of applicable income tax (benefit) provision of: 1996 -- $(90); 1997 -- $81; 1998 -- $0 (32,449) (58,125) (1,154) (1,507) ---------- ---------- ---------- ---------- (Loss) income before extraordinary items (85,460) (134,450) 782,073 (182,463) Extraordinary items -- -- (612,845) (1,044) ---------- ---------- ---------- ---------- Net (loss) income (85,460) (134,450) 1,394,918 (181,419) Dividends on preferred stock (14,175) (14,175) (273) -- ---------- ---------- ---------- ---------- Net (loss) income applicable to common shareholders $ (99,635) $ (148,625) $1,394,645 $ (181,419) ========== ========== ========== ==========
See notes to consolidated financial statements. F-3 44 ADVANTICA RESTAURANT GROUP, INC STATEMENTS OF CONSOLIDATED OPERATIONS -- (CONTINUED)
PREDECESSOR COMPANY SUCCESSOR COMPANY ----------------------------------------- ------------------ ONE WEEK FIFTY-ONE WEEKS ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In thousands, except per share amounts) ------------ ------------ ----------- ------------------ Per share amounts applicable to common shareholders: Basic earnings per share: (Loss) income from continuing operations $ (1.58) $ (2.13) $ 17.30 $ (4.52) (Loss) income from discontinued operations, net (0.77) (1.37) 1.13 (0.04) ---------- ---------- ---------- ---------- (Loss) income before extraordinary items (2.35) (3.50) 18.43 (4.56) Extraordinary items -- -- 14.44 0.03 ---------- ---------- ---------- ---------- Net (loss) income $ (2.35) $ (3.50) $ 32.87 $ (4.53) ========== ========== ========== ========== Average outstanding shares 42,434 42,434 42,434 40,006 ========== ========== ========== ========== Diluted earnings per share: (Loss) income from continuing operations $ (1.58) $ (2.13) $ 13.32 $ (4.52) (Loss) income from discontinued operations, net (0.77) (1.37) 0.87 (0.04) ---------- ---------- ---------- ---------- (Loss) income before extraordinary items (2.35) (3.50) 14.19 (4.56) Extraordinary items -- -- 11.11 0.03 ---------- ---------- ---------- ---------- Net (loss) income $ (2.35) $ (3.50) $ 25.30 $ (4.53) ========== ========== ========== ========== Average outstanding shares and equivalent common shares, unless antidilutive 42,434 42,434 55,132 40,006 ========== ========== ========== ==========
See notes to consolidated financial statements. F-4 45 ADVANTICA RESTAURANT GROUP, INC. CONSOLIDATED BALANCE SHEETS
PREDECESSOR SUCCESSOR COMPANY COMPANY DECEMBER 31, DECEMBER 30, 1997 1998 ------------------- ----------------- (In thousands) ASSETS Current Assets: Cash and cash equivalents $ 54,079 $ 224,768 Receivables, less allowance for doubtful accounts of: 1997 -- $4,177; 1998 -- $4,316 12,816 18,461 Inventories 18,161 17,239 Net assets held for sale 346,994 -- Other 44,568 15,860 Restricted investments securing in-substance defeased debt -- 19,025 ---------- ---------- 476,618 295,353 Property, net 625,837 693,313 Other Assets: Reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization of: 1998 -- $139,799 -- 558,961 Goodwill, net of accumulated amortization of: 1997 -- $8,061 207,918 -- Other intangible assets, net of accumulated amortization of: 1997 -- $16,781; 1998 -- $22,131 14,897 217,587 Deferred financing costs, net 56,716 24,913 Other 25,365 39,360 Restricted investments securing in-substance defeased debt -- 156,721 ---------- ---------- $1,407,351 $1,986,208 ========== ========== LIABILITIES Current Liabilities: Current maturities of notes and debentures $ 37,572 $ 17,835 Current maturities of capital lease obligations 19,398 17,654 Current maturities of in-substance defeased debt -- 12,183 Accounts payable 103,262 102,405 Other 199,600 241,388 ---------- ---------- 359,832 391,465 ---------- ---------- Long-Term Liabilities: Notes and debentures, less current maturities 510,533 912,699 Capital lease obligations, less current maturities 83,642 76,740 In-substance defeased debt, less current maturities -- 166,579 Deferred income taxes 6,297 5,400 Liability for self-insured claims 52,764 44,442 Other noncurrent liabilities and deferred credits 144,333 152,839 ---------- ---------- 797,569 1,358,699 ---------- ---------- Total liabilities not subject to compromise 1,157,401 1,750,164 Liabilities subject to compromise 1,612,400 -- ---------- ---------- Total liabilities 2,769,801 1,750,164 ---------- ---------- Commitments and contingencies SHAREHOLDERS' EQUITY (DEFICIT) $2.25 Series A Cumulative Convertible Exchanged Preferred Stock: $0.10 par value 25,000 shares authorized; 6,300 shares issued and outstanding; liquidation preference $157,500 excluding dividends in arrears 630 -- Common Stock: Predecessor Company -- $0.50 par value; shares authorized -- 200,000; issued and outstanding -- 42,434 21,218 -- Successor Company -- $0.10 par value; shares authorized -- 100,000; issued and outstanding -- 40,010 -- 489 Paid-in capital 724,912 416,927 Deficit (2,107,815) (181,419) Foreign currency translation adjustment -- 47 Minimum pension liability adjustment (1,395) -- ---------- ---------- (1,362,450) 236,044 ---------- ---------- $1,407,351 $1,986,208 ========== ==========
See notes to consolidated financial statements. F-5 46 ADVANTICA RESTAURANT GROUP, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS
SUCCESSOR PREDECESSOR COMPANY COMPANY ---------------------------------------- ------------ FISCAL YEAR ENDED ONE WEEK FIFTY-ONE --------------------------- ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 ------------ ------------ ---------- ------------ (In thousands) Cash Flows from Operating Activities: Net (loss) income $ (85,460) $(134,450) $1,394,918 $(181,419) Adjustments to Reconcile Net (Loss) Income to Cash Flows from Operating Activities: Amortization of reorganization value in excess of amounts allocable to identifiable assets -- -- -- 139,799 Depreciation and other amortization 81,321 93,090 1,684 146,052 Amortization of deferred gains (6,699) (6,623) (218) (11,159) Amortization of deferred financing costs 5,590 6,052 111 6,898 Write-off of deferred financing costs -- 2,533 -- -- Deferred income tax (benefit) provision (8,542) 132 (13,856) 84 Gain on disposition of assets, net (8,439) (7,943) (7,653) (12,617) Equity in loss (income) from discontinued operations, net 32,449 58,125 (47,733) 1,507 Amortization of debt premium -- -- -- (14,831) Noncash reorganization items -- -- (714,550) -- Extraordinary items -- -- (612,845) (1,044) Other (6,118) (24,179) (333) 473 Changes in Assets and Liabilities Net of Effects of Acquisition and Dispositions: Decrease (increase) in assets: Receivables 623 1,468 (2,054) (6,381) Inventories (795) 2,437 237 474 Other current assets (3,666) 3,735 2,457 (4,736) Assets held for sale -- -- 1,488 (2,869) Other assets (1,798) (9,376) (1,049) 10,790 Increase (decrease) in liabilities: Accounts payable (5,342) (11,856) (5,534) (1,742) Accrued salaries and vacations 9,620 1,375 6,199 (8,723) Accrued taxes (6,326) (4,592) (894) (22,639) Other accrued liabilities 4,584 39,732 9,562 (13,495) Other noncurrent liabilities and deferred credits (10,912) 43,227 (1,302) 1,121 --------- --------- ---------- --------- Net cash flows from operating activities before reorganization activities (9,910) 52,887 8,635 25,543 Increase in liabilities from reorganization activities -- 9,922 -- -- --------- --------- ---------- --------- Net cash flows from operating activities (9,910) 62,809 8,635 25,543 --------- --------- ---------- ---------
See notes to consolidated financial statements. F-6 47 ADVANTICA RESTAURANT GROUP, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS -- (CONTINUED)
SUCCESSOR PREDECESSOR COMPANY COMPANY ---------------------------------------- ------------ FISCAL YEAR ENDED ONE WEEK FIFTY-ONE --------------------------- ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 ------------ ------------ ---------- ------------ (In thousands) Cash Flows from Investing Activities: Purchase of property $ (28,492) $ (44,287) $ (1) $ (65,700) Proceeds from disposition of property 11,586 20,382 7,255 17,714 (Advances to) receipts from discontinued operations, net (13,551) (30,114) 647 1,504 Proceeds from sale of discontinued operations, net -- -- -- 460,425 Proceeds from sales of subsidiaries 62,992 -- -- -- Acquisition of business, net of cash acquired (127,068) -- -- -- Purchase of investments securing in-substance defeased debt -- -- -- (201,713) Proceeds from maturity of investments securing in-substance defeased debt -- -- -- 24,749 Other long term assets, net (6,911) 1,296 -- (1,696) --------- --------- ---------- --------- Net cash flows (used in) provided by investing activities (101,444) (52,723) 7,901 235,283 --------- --------- ---------- --------- Cash Flows from Financing Activities: Net borrowings under credit agreements 56,000 -- -- -- Deferred financing costs (9,591) (4,605) (4,971) -- Long-term debt payments (22,677) (39,871) (6,891) (94,111) Cash dividends on preferred stock (14,175) -- -- -- Net bank overdrafts (2,800) (3,900) -- (700) --------- --------- ---------- --------- Net cash flows provided by (used in) financing activities 6,757 (48,376) (11,862) (94,811) --------- --------- ---------- --------- (Decrease) increase in cash and cash equivalents (104,597) (38,290) 4,674 166,015 Cash and Cash Equivalents at: Beginning of period 196,966 92,369 54,079 58,753 --------- --------- ---------- --------- End of period $ 92,369 $ 54,079 $ 58,753 $ 224,768 ========= ========= ========== ========= Supplemental Cash Flow Information: Income taxes paid $ 1,976 $ 124 $ -- $ 8,517 ========= ========= ========== ========= Interest paid $ 211,853 $ 97,328 $ -- $ 104,755 ========= ========= ========== ========= Non cash financing activities: Capital lease obligations $ 11,333 $ 18,543 $ -- $ 12,315 ========= ========= ========== ========= Non cash investing activities: Other investing $ -- $ 3,050 $ -- $ 8,002 ========= ========= ========== =========
See notes to consolidated financial statements. F-7 48 ADVANTICA RESTAURANT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 REORGANIZATION AND BASIS OF REPORTING Advantica (formerly Flagstar Companies, Inc. ("FCI")), through its wholly-owned subsidiaries, Denny's Holdings, Inc. and FRD Acquisition Co. (and their respective subsidiaries), owns and operates the Denny's, Coco's, Carrows, and El Pollo Loco restaurant brands. Denny's, a family-style restaurant chain, operates in 49 states, two U.S. territories, and two foreign countries, with principal concentrations in California, Florida and Texas. The Coco's and Carrows restaurant chains, acquired by Advantica in May 1996, compete in the family-style category and are located primarily in the western United States. El Pollo Loco is a quick-service flame-broiled chicken concept which operates primarily in southern California. On April 1, 1998 the Company consummated the sale of Flagstar Enterprises, Inc. ("FEI"), the wholly-owned subsidiary which had operated the Company's Hardee's restaurants under licenses from Hardee's Food Systems, Inc. ("HFS") (See Note 5). In addition, on June 10, 1998, the Company consummated the sale of Quincy's Restaurants, Inc. ("Quincy's"), the wholly-owned subsidiary which had operated the Company's Quincy's Family Steakhouse restaurants (See Note 5). On January 7, 1998 (the "Effective Date"), FCI and Flagstar Corporation ("Flagstar") emerged from proceedings under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") pursuant to FCI and Flagstar's Amended Joint Plan of Reorganization dated as of November 7, 1997 (the "Plan"). On the Effective Date, Flagstar, a wholly-owned subsidiary of FCI, merged with and into FCI, the surviving corporation, and FCI changed its name to Advantica Restaurant Group, Inc. ("Advantica," or together with its subsidiaries, the "Company"). The bankruptcy proceedings began when FCI, Flagstar and Flagstar Holdings, Inc. ("Holdings") filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court for the District of South Carolina. Holdings filed its petition on June 27, 1997, and Flagstar and FCI both filed their petitions on July 11, 1997 (the "Petition Date"). FCI's operating subsidiaries, Denny's Holdings, Inc. and FRD Acquisition Co. (and their respective subsidiaries) did not file bankruptcy petitions and were not parties to the above mentioned Chapter 11 proceedings. Material features of the Plan as it became effective as of January 7, 1998, are as follows: (a) On the Effective Date, Flagstar merged with and into FCI, the surviving corporation, and FCI changed its name to Advantica Restaurant Group, Inc.; (b) The following securities of FCI and Flagstar were canceled, extinguished and retired as of the Effective Date: (1) Flagstar's 10 7/8% Senior Notes due 2002 (the "10 7/8% Senior Notes") and 10 3/4% Senior Notes due 2001 (the "10 3/4% Senior Notes" and, collectively with the 10 7/8% Senior Notes due 2002, the "Old Senior Notes"), (2) Flagstar's 11.25% Senior Subordinated Debentures due 2004 (the "11.25% Debentures") and 11 3/8% Senior Subordinated Debentures due 2003 (the "11 3/8% Debentures" and, collectively with the 11.25% Senior Subordinated Debentures due 2004, the "Senior Subordinated Debentures"), (3) Flagstar's 10% Convertible Junior Subordinated Debentures due 2014 (the "10% Convertible Debentures"), (4) FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock (the "Old Preferred Stock") and (5) FCI's $.50 par value common stock (the "Old Common Stock"); (c) Advantica had 100 million authorized shares of Common Stock (of which 40 million were issued and outstanding on the Effective Date) and 25 million authorized shares of preferred stock (none of which are currently outstanding). Pursuant to the Plan, 10% of the number of shares of Common Stock issued and outstanding on the Effective Date, on a fully diluted basis, was reserved for issuance under a new management stock option program. Additionally, 4 million shares of Common Stock were reserved for issuance upon the exercise of new warrants expiring January 7, 2005 that were issued and outstanding on the Effective Date and that entitle the holders thereof to purchase in the aggregate 4 million shares of Common Stock at an exercise price of $14.60 per share (the "Warrants"); (d) Each holder of the Old Senior Notes received such holder's pro rata portion of 100% of Advantica's 11 1/4% Senior Notes due 2008 (the "Senior Notes") in exchange for 100% of the principal amount of such holders' Old Senior Notes and accrued interest through the Effective Date; (e) Each holder of the Senior Subordinated Debentures received each holder's pro rata portion of shares of Common Stock equivalent to 95.5% of the Common Stock issued on the Effective Date; F-8 49 (f) Each holder of the 10% Convertible Debentures received such holder's pro rata portion of (1) shares of Common Stock equivalent to 4.5% of the Common Stock issued on the Effective Date and (2) 100% of the Warrants issued on the Effective Date; and (g) Advantica refinanced its prior credit facilities by entering into the Credit Facility (as defined below). Pursuant to the Plan, Advantica's certificate of incorporation and by-laws were amended and restated in their entirety. On January 12, 1998, a motion to dismiss the Chapter 11 case of Holdings pursuant to section 1112(b) of the Bankruptcy Code was filed with the Bankruptcy Court. No objections were filed, and on March 6, 1998, the Bankruptcy Court entered an order dismissing the case. On September 18, 1998, an application for final decree was filed with the Bankruptcy Court on behalf of FCI and Flagstar. No objections were filed, and on November 2, 1998, the Bankruptcy Court entered an order closing the case. In connection with the reorganization, the Company realized a gain from the extinguishment of certain indebtedness (See Note 18). This gain will not be taxable since the gain results from a reorganization under the Bankruptcy Code. However, the Company will be required, as of the beginning of its 1999 taxable year, to reduce certain tax attributes related to Advantica, exclusive of its operating subsidiaries, including (1) net operating loss ("NOL") carryforwards, (2) certain tax credits and (3) tax bases in assets in an amount equal to such gain on extinguishment. The reorganization of the Company on January 7, 1998 constituted an ownership change under Section 382 of the Internal Revenue Code and therefore the use of any of the Company's NOL's and tax credits generated prior to the ownership change, that are not reduced pursuant to the provisions discussed above, will be subject to an overall annual limitation of approximately $21 million for NOL's or $7 million for tax credits, plus the recognition of certain built-in gains. The Company's financial statements as of December 31, 1997 have been presented in conformity with the American Institute of Certified Public Accountants' (the "AICPA") Statement of Position 90-7, "Financial Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Accordingly, all prepetition liabilities of the Debtors that are subject to compromise under the Plan (as defined in Note 10) are segregated in the Company's Consolidated Balance Sheet as liabilities subject to compromise. These liabilities are recorded at the amounts allowed as claims by the Bankruptcy Court in accordance with the Plan. In addition, SOP 90-7 requires the Company to report interest expense during the bankruptcy proceeding only to the extent that it will be paid during the proceedings or that it is probable to be an allowed priority, secured, or unsecured claim. Accordingly, and in view of the terms of the Plan, as of July 11, 1997, the Company ceased recording interest on its 11.25% Debentures, 11 3/8% Debentures and 10% Convertible Debentures. The contractual interest expense for the year ended December 31, 1997 and one week ended January 7, 1998 is disclosed in the accompanying Statements of Consolidated Operations. NOTE 2 FRESH START REPORTING As of the Effective Date of the Plan, 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" ("APB 16"). 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 upon emergence has been reported as "reorganization value in excess of amounts allocable to identifiable assets, net of accumulated amortization" in the accompanying Consolidated Balance Sheet at December 30, 1998. Advantica is amortizing such amount over a five-year period. All financial statements for any period subsequent to the Effective Date are referred to as "Successor Company" statements, as they reflect the periods subsequent to the implementation of fresh start reporting and are not comparable to the financial statements for periods prior to the Effective Date. The Company estimated a range of reorganization value between approximately $1,631 million and $1,776 million. Such reorganization value was based upon a review of the operating performance of 17 companies in the restaurant industry that offer products and services that are comparable to or competitive with the Company's various operating concepts. The following multiples were established for these companies: (1) enterprise value (defined as market value of outstanding equity, plus debt, minus cash and cash equivalents)/revenues for the four most recent fiscal quarters; F-9 50 (2) enterprise value/earnings before interest, taxes, depreciation, and amortization for the four most recent fiscal quarters; and (3) enterprise value/earnings before interest and taxes for the four most recent fiscal quarters. The Company did not independently verify the information for the comparative companies considered in its valuations, which information was obtained from publicly available reports. The foregoing multiples were then applied to the Company's financial forecast for each of its restaurant chains or concepts. Valuations achieved in selected merger and acquisition transactions involving comparable businesses were used as further validation of the valuation range. The valuation also took into account the following factors, not listed in order of importance: (A) The Company's emergence from Chapter 11 proceedings, pursuant to the Plan as described herein, during the first quarter of 1998. (B) The assumed continuity of the present senior management team. (C) The tax position of Advantica. (D) The general financial and market conditions as of the date of consummation of the Plan. The total reorganization value of $1,729 million, the midpoint of the range of $1,631 million and $1,776 million (adjusted to reflect an enterprise value of FEI based on the terms of the stock purchase agreement related to the disposition thereof), includes a value attributed to shareholders' equity of $417 million and long-term indebtedness contemplated by the Plan of $1,312 million. The results of operations in the accompanying Statement of Consolidated Operations for the week ended January 7, 1998 reflect the results of operations prior to Advantica's emergence from bankruptcy and the effects of fresh start reporting adjustments. In this regard, the Statement of 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. During the second quarter of 1998 the Company substantially completed valuation studies performed in connection with the revaluation of its assets and liabilities in accordance with fresh start reporting. F-10 51 The effect of the Plan and the adoption of fresh start reporting on the Company's January 7, 1998 balance sheet are as follows:
ADJUSTMENTS PREDECESSOR ADJUSTMENTS FOR SUCCESSOR COMPANY FOR FRESH START COMPANY JANUARY 7, 1998 REORGANIZATION(a) REPORTING(b) JANUARY 7, 1998 (In thousands) --------------- ----------------- ------------ --------------- ASSETS Current Assets: Cash and cash equivalents $ 58,753 $ 58,753 Receivables, net 15,247 $ (689) 14,558 Inventories 20,424 (425) 19,999 Net assets held for sale 288,039 110,027 398,066 Other 43,670 (496) 43,174 Property and equipment, net 719,152 64,501 783,653 Other Assets: Goodwill, net 207,820 (207,820) -- Other intangible assets, net 12,954 216,995 229,949 Deferred financing costs, net 58,590 $ (25,218) (61) 33,311 Other 22,416 (6,684) 15,732 Reorganization value in excess of amounts allocable to identifiable assets -- 761,736 761,736 ---------- ----------- -------- ---------- $1,447,065 $ (25,218) $937,084 $2,358,931 ========== =========== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Current Liabilities: Current maturities of notes and debentures $ 30,913 $ 30,913 Current maturities of capital lease obligations 17,863 17,863 Accounts payable 106,678 106,678 Accrued salaries and vacations 62,648 $ 4,355 67,003 Accrued insurance 36,104 292 36,396 Accrued taxes 40,142 2,662 42,804 Accrued interest and dividends 16,652 16,652 Other 95,152 8,008 103,160 Long-Term Liabilities: Notes and debentures, less current maturities 510,523 $ 592,005 72,388 1,174,916 Capital lease obligations, less current maturities 87,667 216 87,883 Deferred income taxes 5,097 5,097 Liability for self-insured claims 55,444 4,700 60,144 Other noncurrent liabilities and deferred credits 134,187 57,908 192,095 Liabilities subject to compromise 1,613,532 (1,613,532) -- Shareholders' Equity (1,365,537) 996,309 786,555 417,327 ---------- ----------- -------- ---------- $1,447,065 $ (25,218) $937,084 $2,358,931 ========== =========== ======== ==========
- --------------- (a) To record the transactions relative to the consummation of the Plan as described in Note 1. (b) To record (1) the increase in the value of net assets held for sale to their fair value based on the terms of the stock purchase agreement related to the disposition of FEI, (2) the adjustment of property, net to estimated fair value, (3) the write-off of unamortized goodwill and establishment of estimated fair value of other intangible assets (primarily franchise rights and tradenames), (4) the establishment of reorganization value in excess of amounts allocable to identifiable assets, (5) the increase in value of debt to reflect estimated fair value, (6) the recognition of liabilities associated with severance and other exit costs, and the adjustments to self-insured claims and contingent liabilities reflecting a change in methodology, and (7) the adjustment to F-11 52 reflect the new value of common shareholders' equity based on reorganization value, which was determined by estimating the fair value of the Company. NOTE 3 PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma financial information shows the results of operations of the Company for the year ended December 31, 1997 as though the Plan discussed in Note 1 and the adoption of fresh start reporting discussed in Note 2 occurred as of January 1, 1997. These results include: the estimated net increase in amortization and depreciation expense as a result of the write-off of goodwill, the revaluation of property and intangible assets to estimated fair value and the recording of reorganization value in excess of amounts allocable to identifiable assets which is being amortized on a straight-line basis over a five-year period; the net decrease in interest expense as a result of debt securities retired and the amortization of the premium on long-term debt recorded in conjunction with the adoption of fresh start reporting; and the estimated income tax effects of fresh start reporting.
YEAR ENDED DECEMBER 31, 1997 (In millions, except per share amounts) ----------------- Revenue $ 1,810.6 Loss from continuing operations (189.9) Net loss (248.0) Basic and diluted loss per common share: Loss from continuing operations (4.75) Net loss (6.20)
The pro forma financial information presented above does not purport to be indicative of either (1) the results of operations for the year ended December 31, 1997 had the Plan and the adoption of fresh start reporting been consummated on January 1, 1997 or (2) future results of operations. The operations of the Company on a pro forma basis for the period ended January 7, 1998 would differ from historical results primarily due to the reorganization items credit of approximately $714 million. NOTE 4 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. Change in Fiscal Year. Effective January 1, 1997, the Company changed its fiscal year end from December 31 to the last Wednesday of the calendar year. Concurrent with this change, the Company changed to a four-four-five week quarterly closing calendar which is the restaurant industry standard, and generally results in four 13-week quarters during the year with each quarter ending on a Wednesday. Due to the timing of this change, the year ended December 31, 1997 included more than 52 weeks of operations. Denny's included an additional five days and El Pollo Loco included an additional week. 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. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Inventories. Inventories are valued primarily at the lower of average cost (first-in, first-out) or market. F-12 53 Property and Depreciation. Prior to January 7, 1998 owned property was stated at cost. 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 thirty years Equipment -- Two to ten years Leasehold Improvements -- Estimated useful life limited by the lease period. Goodwill and Other Intangible Assets. Prior to January 7, 1998 the excess of cost over the fair value of the net assets acquired of FRI-M Corporation (see Note 6 for further details) was being amortized over a 40-year period on the straight-line method. Unamortized goodwill was written off at January 7, 1998 in conjunction with the adoption of fresh start reporting. Other intangible assets consist primarily of trademarks, tradenames, franchise and other operating agreements. Prior to January 7, 1998, such assets are stated at cost. 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. The Company assesses the recoverability of intangible assets by projecting future net income related to the acquired business, before the effect of amortization of intangible assets, over the remaining amortization period of such assets. 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 identifiable intangible assets of the Company is being amortized using the straight-line method over a five-year period. Impairment of Long-Lived Assets. The Company reviews long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. At the time impairment of an asset is identified, the asset's carrying value is written down to the Company's estimate of fair value, based on sales of similar assets or other estimates of selling price, less costs to sell. In addition, long-lived assets and certain identifiable intangibles to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell. 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. Preopening Costs. Prior to January 7, 1998, the Company capitalized certain direct incremental costs incurred in conjunction with the opening of restaurants and amortized such costs over a 12-month period from the date of opening. Subsequent to January 7, 1998, preopening costs are being expensed as incurred (see New Accounting Standards below). Insurance. Through June 30, 1997, the Company was primarily self-insured for workers' compensation, general liability, and automobile risks which were supplemented by stop-loss type insurance policies. As of July 1, 1997, the Company changed to a guaranteed cost program to cover workers' compensation insurance in most states. At December 30, 1998, the Company remains self-insured for workers' compensation in only two states. The liabilities for prior and current estimated incurred losses are discounted to their present value based on expected loss payment patterns determined by independent actuaries or experience. The total discounted self-insurance liabilities recorded at December 31, 1997 and December 30, 1998 were $77.6 million and $69.4 million, respectively, reflecting a 5% discount rate for 1997 and 1998. The related undiscounted amounts at such dates were $86.1 million, and $78.1 million respectively. Interest Rate Exchange Agreements. As a hedge against fluctuations in interest rates, the Company from time to time has entered into interest rate exchange agreements to swap a portion of its fixed rate interest payment obligations for floating rates without the exchange of the underlying principal amounts. The Company does not speculate on the future direction of interest rates nor does the Company use these derivative financial instruments for trading purposes. Since such agreements are not entered into on a speculative basis, the Company uses the settlement basis of accounting. No such agreements were outstanding as of December 30, 1998. Advertising Costs. Production costs for radio and television advertising are expensed as of the date the commercials are initially aired. Advertising expense for the fiscal years ended December 31, 1996 and 1997, the one week ended January 7, 1998 and the 51 weeks ended December 30, 1998 was $62.9 million, $68.3 million, $1.4 million and $70.3 million, respectively. F-13 54 Interest Associated with Discontinued Operations. The Company has allocated to the 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 years ended December 31, 1996 and 1997 and the one week ended January 7, 1998 and 51 weeks ended December 30, 1998 was $79.1 million, $62.8 million, $0.6 million and $10.4 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 ten years. 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. Cash Overdrafts. The Company has included in accounts payable on the accompanying Consolidated Balance Sheets cash overdrafts totaling $31.9 million and $32.6 million at December 31, 1997 and December 30, 1998, 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 insignificant. 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 of sale, if the collection of the sale price is reasonably assured. Cash proceeds received from sales of Company-owned restaurants totaled $8.5 million, $7.9 million, $7.3 million and $20.3 million for the years ended December 31, 1996 and 1997, the one week ended January 7, 1998, and the 51 weeks ended December 30, 1998, respectively. Deferred gains and the noncash portion of proceeds related to such transactions are not significant. Earnings per Share. The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), in the quarter ended December 31, 1997. SFAS 128 replaced the calculation of primary and fully diluted earnings (loss) per share with basic and diluted earnings (loss) per share. Unlike primary earnings (loss) per share, basic earnings (loss) per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings (loss) per share is very similar to the previously reported fully diluted earnings (loss) per share. New Accounting Standards. In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 requires external and internal direct costs of developing or obtaining internal-use software to be capitalized as a long-lived asset and also requires training costs included in the purchase price of computer software and costs associated with research and development to be expensed as incurred. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which provides additional guidance on the financial reporting of start-up costs, requiring costs of start-up activities to be expensed as incurred. In accordance with the adoption of fresh start reporting upon emergence from bankruptcy (see Note 2), the Company adopted both statements of position as of January 7, 1998. The adoption of SOP 98-1 at January 7, 1998 resulted in the write-off of previously capitalized direct costs of obtaining computer software associated with research and development totaling $3.4 million. Subsequent to the Effective Date, similar costs are being expensed as incurred. The adoption of SOP 98-5 at January 7, 1998 resulted in the write-off of an immaterial amount of previously capitalized preopening costs. Subsequent to the Effective Date, preopening costs are being expensed as incurred. F-14 55 In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in Note 16. The adoption of SFAS 130 does not impact the Company's consolidated results of operations, financial position or cash flows. Prior year disclosures have been reclassified to conform to the SFAS 130 requirements. In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 does not impact the Company's consolidated results of operations, financial position or cash flows. In 1998, the Company adopted statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). This Statement does not change the measurement or recognition of those plans, but is designed to simplify disclosures about pension and other postretirement benefit plans. Specifically, it standardizes the disclosure requirements to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," were issued. The Statement also suggests combined formats for presentation of pension and other postretirement benefit disclosures. The adoption of SFAS 132 does not impact the Company's consolidated results of operations, financial position or cash flows. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities" ("SFAS 133"), was issued in June 1998. This statement establishes 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. SFAS No. 133 is effective for the Company's fiscal year 2000 financial statements. The Company is in the process of evaluating the effect of SFAS 133 on its consolidated results of operations, financial position and cash flows, and therefore is unable to estimate the effect of the adoption. NOTE 5 DISPOSITIONS OF FLAGSTAR ENTERPRISES, INC. AND QUINCY'S RESTAURANTS, INC. AND IN-SUBSTANCE DEFEASANCE OF RELATED DEBT On April 1, 1998, the Company completed the sale to CKE Restaurants, Inc. ("CKE") of all of the capital stock of FEI, which had operated the Company's Hardee's restaurants under licenses from HFS, a wholly-owned subsidiary of CKE, for $427 million. This amount includes the assumption by CKE of $46 million of capital leases. Approximately $173.1 million of the proceeds (together with $28.6 million already on deposit with respect to certain Spartan Mortgage Financing as defined below) was applied to in-substance defease the 10.25% Guaranteed Secured Bonds due 2000 (the "Spartan Mortgage Financing") of Spardee's Realty, Inc., a wholly-owned subsidiary of FEI, and Quincy's Realty, Inc., a wholly-owned subsidiary of Quincy's, with a book value of $198.9 million plus accrued interest of $6.9 million at April 1, 1998. Such Spartan Mortgage Financing was collateralized by certain assets of Spardee's Realty, Inc. and Quincy's Realty, Inc. The Company replaced such collateral through the purchase of a portfolio of United States Government and AAA rated investment securities which were deposited with the collateral agent with respect to such the Spartan Mortgage Financing to satisfy principal and interest payments under the Spartan Mortgage Financing through the stated maturity date in the year 2000. Such investments are reflected in the Consolidated Balance Sheet at December 30, 1998 under the caption "Restricted investments securing in-substance defeased debt." The Spartan Mortgage Financing is reflected under the caption "In-substance defeased debt." As a result of the adoption of fresh start reporting, as of the Effective Date the net assets of FEI were adjusted to fair value less estimated costs of disposal based on the terms of the stock purchase agreement. The net gain resulting from this adjustment is reflected as "Reorganization items of discontinued operation" in the Statements of Consolidated Operations. As a result of this adjustment, no gain or loss on disposition is reflected in the 51 weeks ended F-15 56 December 30, 1998. Additionally, the operating results of FEI subsequent to January 7, 1998 and through the disposition date were reflected as an adjustment to "Net assets held for sale" prior to the disposition. The adjustment to "Net assets held for sale" as a result of the net loss of FEI for the twelve weeks ended April 1, 1998 was ($1.4) million. Revenue and operating income of FEI for the twelve weeks ended April 1, 1998 were $116.2 million and $5.7 million, respectively. On June 10, 1998, the Company completed the sale of all of the capital stock of Quincy's, the wholly-owned subsidiary which had operated the Company's Quincy's Family Steakhouse Division, to Buckley Acquisition Corporation ("BAC") for $84.7 million. This amount includes the assumption by BAC of $4.2 million of capital leases. The resulting gain of approximately $13.7 million from such disposition is reflected as an adjustment to reorganization value in excess of amounts allocable to identifiable assets. The Statements of Consolidated Operations and Cash Flows for all periods presented herein have been reclassified to reflect FEI and Quincy's as discontinued operations in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Included in the Company's loss from discontinued operations for the year ended December 31, 1997 is a net restructuring charge of $10.5 million related primarily to a plan to reduce significantly the size of the Company's Quincy's restaurant chain. In addition to the sale or closure of restaurants, the restructuring plan resulted in the elimination of certain restaurant, field management and corporate support positions. Also included in the 1997 loss from operations of discontinued operations is an impairment charge totaling $15.1 million related to the write-down of certain Quincy's units in association with the 1997 restructuring plan, as well as the write-down of certain Hardee's units disposed of in 1997. Revenue and operating income of the discontinued operations for the reported periods are as follows:
SUCCESSOR PREDECESSOR COMPANY COMPANY ---------------------------------------- ---------------- FISCAL YEAR ENDED ONE WEEK FIFTY-ONE WEEKS --------------------------- ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 31, 1996 1997 1998 1998 (In millions) ------------ ------------ ---------- ---------------- Revenue $862.1 $779.9 $12.7 $194.9 Operating income 47.4 5.4 0.1 5.7
The net assets of FEI and Quincy's are included in net assets held for sale in the accompanying Consolidated Balance Sheet at December 31, 1997, and consist of the following:
FEI QUINCY'S (In thousands) -------- -------- Assets Current assets $ 8,715 $ 3,176 Property owned, net 290,621 130,475 Property held under capital leases, net 32,619 2,061 Other assets 13,338 520 -------- -------- 345,293 136,232 -------- -------- Less liabilities Current liabilities Current portion of obligations under capital lease 3,874 259 Other current liabilities 28,368 21,602 -------- -------- 32,242 21,861 -------- -------- Long-term liabilities Obligations under capital lease, noncurrent 41,339 4,061 Other long-term liabilities 29,233 5,795 -------- -------- 70,572 9,856 -------- -------- Total liabilities 102,814 31,717 -------- -------- Net assets held for sale $242,479 $104,515 ======== ========
F-16 57 NOTE 6 ACQUISITION On May 23, 1996, the Company, through FRD Acquisition Co. ("FRD"), a newly formed subsidiary, consummated the acquisition of the Coco's and Carrows restaurant chains consisting of 347 company-owned units within the family-style category. The acquisition price of $313.4 million plus acquisition costs (which was paid in exchange for all of the outstanding stock of FRI-M Corporation ("FRI-M"), which owns the Coco's and Carrows chains) was financed with $125.0 million in cash ($75.0 million of which was provided from the Company's cash balances and the remaining $50.0 million pursuant to bank term loans which totaled $56.0 million with the remaining $6.0 million being used to pay transaction fees), the issuance of $156.9 million in senior notes of FRD to the seller and the assumption of certain capital lease obligations of approximately $31.5 million. The acquisition was accounted for using the purchase method of accounting. Accordingly, the assets and liabilities and results of operations of Coco's and Carrows are included in the Company's consolidated financial statements for the periods subsequent to the acquisition. In accordance with the purchase method of accounting, the purchase price has been allocated to the underlying assets and liabilities of FRI-M based on their estimated respective fair values at the date of acquisition. The purchase price exceeded the fair value of the net assets acquired by approximately $216 million, as adjusted. Prior to January 7, 1998, the resulting goodwill was being amortized on a straight-line basis over 40 years. Unamortized goodwill was written off at January 7, 1998 in conjunction with the adoption of fresh start reporting. NOTE 7 REORGANIZATION ITEMS Reorganization items included in the accompanying Statements of Consolidated Operations consist of the following:
FISCAL YEAR ONE WEEK ENDED ENDED DECEMBER 31, JANUARY 7, 1997 1998 (In thousands) ------------ ---------- Net gain related to adjustments of assets and liabilities to fair value $ -- $(734,216) Professional fees and other 28,313 8,809 Debtor-in-possession financing expenses 3,062 -- Interest earned on accumulated cash (1,234) -- Severance and other exit costs -- 11,200 ------- --------- $30,141 $(714,207) ======= =========
NOTE 8 PROPERTY, NET Property, net, consists of the following:
DECEMBER 31, DECEMBER 30, 1997 1998 (In thousands) ------------ ------------ Property owned: Land $143,681 $ 70,419 Buildings and improvements 487,739 476,327 Other property and equipment 352,765 162,342 -------- -------- Total property owned 984,185 709,088 Less accumulated depreciation 435,152 94,078 -------- -------- Property owned, net 549,033 615,010 -------- -------- Buildings and improvements, vehicles, and other equipment held under capital leases 160,432 108,146 Less accumulated amortization 83,628 29,843 -------- -------- Property held under capital leases, net 76,804 78,303 -------- -------- $625,837 $693,313 ======== ========
F-17 58 NOTE 9 OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
FISCAL YEAR ENDED --------------------------- DECEMBER 31, DECEMBER 30, 1997 1998 (In thousands) ------------ ------------ Accrued salaries and vacations $ 55,367 $ 51,234 Accrued insurance 34,277 32,698 Accrued taxes 25,078 20,235 Accrued interest and dividends 15,473 44,837 Other 69,405 92,384 -------- -------- $199,600 $241,388 ======== ========
NOTE 10 LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise are obligations which were outstanding on the Petition Date and were subject to compromise under the terms of the Plan (see Note 11 for additional information).
DECEMBER 31, 1997 (In thousands) ----------------- 10 3/4% Senior Notes due September 15, 2001, interest payable semi-annually $ 270,000 10 7/8% Senior Notes due December 1, 2002, interest payable semi-annually 280,025 11.25% Senior Subordinated Debentures due November 1, 2004, interest payable semi-annually 722,411 11 3/8% Senior Subordinated Debentures due September 15, 2003, interest payable semi-annually 125,000 10% Convertible Junior Subordinated Debentures due 2014, interest payable semi-annually; convertible into Company common stock any time prior to maturity at $24.00 per share 99,259 Accrued interest 115,705 ---------- Total liabilities subject to compromise $1,612,400 ==========
F-18 59 NOTE 11 DEBT Long-term debt consists of the following:
DECEMBER 31, DECEMBER 30, 1997 1998 (In thousands) ------------ ------------ Notes and Debentures: 10 3/4% Senior Notes due September 15, 2001, interest payable semi-annually (a) -- 10 7/8% Senior Notes due December 1, 2002, interest payable semi-annually (a) -- 11.25% Senior Subordinated Debentures due November 1, 2004, interest payable semi-annually (a) -- 11 3/8% Senior Subordinated Debentures due September 15, 2003, interest payable semi-annually (a) -- 10% Convertible Junior Subordinated Debentures due 2014, interest payable semi-annually; convertible into Company common stock any time prior to maturity at $24.00 per share (a) -- 11 1/4% Senior Notes due January 15, 2008, interest payable semi-annually -- $ 549,611 12.5% Senior Notes of FRD due July 15, 2004, interest payable semi-annually $156,897 156,897 Mortgage Notes Payable: 10.25% Guaranteed Secured Bonds due 2000 (see Note 5) 177,615 -- 11.03% Notes due 2000 160,000 160,000 Term loan of FRI-M, principal payable in quarterly installments 40,000 10,411 Other notes payable, maturing over various terms to 20 years, payable in monthly or quarterly installments with interest rates ranging from 7.5% to 13.25%(b) 10,077 8,282 Notes payable secured by equipment, maturing over various terms up to 7 years, payable in monthly installments with interest rates ranging from 8.5% to 9.64% (c) 3,516 3,608 Capital lease obligations (see Note 12) 103,040 94,394 In-substance defeased debt (see Note 5) -- 165,468 -------- ---------- 651,145 1,148,671 Premium (discount), net (see Note 2): 11 1/4% Senior Notes, effective rate 10.79% -- 23,198 12.5% Senior Notes of FRD, effective rate 10.95% -- 11,839 11.03% Notes, effective rate 8.18% -- 8,059 In-substance defeased debt, effective rate 5.29% -- 13,294 Other notes payable -- (1,371) -------- ---------- Total 651,145 1,203,690 Less current maturities 56,970 47,672 -------- ---------- Total long-term debt $594,175 $1,156,018 ======== ==========
- --------------- (a) Included in liabilities subject to compromise at December 31, 1997 (See Note 10). (b) Collateralized by restaurant and other properties with a net book value of $13.0 million at December 30, 1998. (c) Collateralized by equipment with a net book value of $6.8 million at December 30, 1998. As discussed in Note 1, pursuant to the Plan, Flagstar's Old Senior Notes, Senior Subordinated Debentures and 10% Convertible Debentures which are included in liabilities subject to compromise (See Note 10) in the accompanying Consolidated Balance Sheet at December 31, 1997, were canceled, extinguished and retired as of the Effective Date. F-19 60 Aggregate annual maturities of long-term debt at December 30, 1998 during the next five years, excluding approximately $165 million of in-substance defeased debt maturing in 2000, are as follows:
YEAR: - ----- (In millions) 1999 $ 30.4 2000 177.8 2001 15.1 2002 8.6 2003 6.7
On March 7, 1997, Flagstar's Second Amended and Restated Credit Agreement (the "Credit Agreement") was amended to provide for less restrictive financial covenants for measurement periods ending on March 31, 1997 and June 30, 1997, as well as to provide FCI flexibility to forego certain scheduled interest payments due in March, May and June 1997 without triggering a default under the agreement, unless any such debt was declared due and payable as a result of the failure to pay such interest. On March 17, 1997, in connection with the financial restructuring discussed in Note 1, Flagstar elected not to make the interest payment due and payable as of that date to holders of the 11 3/8% Debentures. In addition, on May 1, 1997, also in connection with the restructuring, Flagstar elected not to make the interest payments due and payable as of that date to holders of the 11.25% Debentures and 10% Convertible Debentures. As a result of these nonpayments, and as a result of a continuation of such nonpayments for 30 days past their respective due dates, Flagstar was in default under the terms of the indentures governing such debentures. During the pendency of Flagstar's bankruptcy proceedings, Flagstar also failed to make the interest payments due September 15, 1997 on its 10 3/4% Senior Notes and 11 3/8% Debentures, the interest payments due November 1, 1997 on its 11.25% Debentures and 10% Convertible Debentures and the interest payment due December 1, 1997 on its 10 7/8% Senior Notes. The bankruptcy filings operated as an automatic stay of all collection and enforcement actions by the holders of the Senior Subordinated Debentures, 10% Convertible Debentures, the Old Senior Notes and the respective indentures trustees with respect to Flagstar's failure to make the interest payments when due. On July 11, 1997 Flagstar entered into a $200 million debtor-in-possession financing facility (the "DIP Facility") between FCI, Flagstar, certain subsidiaries of Flagstar and The Chase Manhattan Bank ("Chase") for working capital and general corporate purposes and letters of credit. The DIP Facility refinanced the Credit Agreement and was guaranteed by certain operating subsidiaries of Flagstar and generally was secured by liens on the same collateral that secured Flagstar's obligations under the Credit Agreement, including the stock of certain operating subsidiaries and certain of Flagstar's trade and service marks. On the Effective Date, Advantica entered into a credit agreement with Chase and other lenders named therein which established the $200 million senior secured credit facility (as amended to date, the "Credit Facility"). The Credit Facility refinanced the DIP Facility and 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 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). The Credit Facility includes a working capital and letter of credit facility of up to a total of $200 million. The Credit Facility matures on January 7, 2003 (the "Maturity Date"), subject to earlier termination on March 31, 2000 in the event that certain mortgage financings of Advantica have not, on or prior to such date, been refinanced with other indebtedness that (a) matures at least 90 days after the Maturity Date, and (b) is otherwise satisfactory to the lenders. The Credit Facility is subject to mandatory prepayments and commitment reductions under certain circumstances upon Advantica's sale of assets or incurrence of additional debt. The Credit Facility contains covenants customarily found in credit agreements for leveraged financings that, among other things, place limitations on (1) dividends on capital stock; (2) redemptions and repurchases of capital stock; (3) prepayments, redemptions and repurchases of debt (other than loans under the Credit Facility); (4) liens and sale-leaseback transactions; (5) loans and investments; (6) incurrence of debt; (7) capital expenditures; (8) operating leases: (9) mergers and acquisitions; (10) asset sales; (11) transactions with affiliates; (12) changes in the business conducted by Advantica and its subsidiaries; and (13) amendment of debt and other material agreements. The Credit Facility also contains covenants that require Advantica and its subsidiaries on a consolidated basis to meet certain financial ratios and F-20 61 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. In connection with the closing of the sales of FEI and Quincy's, the Credit Facility was amended to accommodate the sale transactions and in-substance defeasance consummated in conjunction with the sale of FEI. In addition, the Credit Facility was amended to provide the Company flexibility to reinvest the residual sales proceeds through additional capital expenditures and/or strategic acquisitions, as well as to modify certain other covenants and financial tests affected by the sales transactions. The commitments under the Credit Facility were not reduced as a result of the sales. The Company was in compliance with the terms of the Credit Facility at December 30, 1998. Under the most restrictive provision of the Credit Facility (the minimum fixed charge coverage ratio), for the four quarters ended December 30 1998, the Company's EBITDA could be approximately $38.1 million less and the Company would still be in compliance. As further discussed in Note 5, effective with the disposition of FEI on April 1, 1998, the Company in-substance defeased the Spartan Mortgage Financing. The 11.03% mortgage notes are secured by a pool of cross-collateralized mortgages on 240 Denny's restaurants with a net book value at December 30, 1998 of $187.4 million. In addition, the notes are collateralized by, among other things, a security interest in the restaurant equipment, the assignment of intercompany lease agreements and the stock of the issuing subsidiary. Interest on the notes is payable quarterly with the entire principal due at maturity in 2000. The notes are redeemable, in whole, at the issuer's option, upon payment of a premium. The Company through its operating subsidiary covenants that it will use each property as a food service facility, maintain the properties in good repair and expend at least $5.3 million per annum and not less than $33 million, in the aggregate, in any five-year period to maintain the properties. In connection with the acquisition by FRD of Coco's and Carrows on May 23, 1996, FRI-M (the "Borrower"), a wholly-owned subsidiary of FRD, obtained a credit facility (as amended to date, the "FRI-M Credit Facility") consisting of a $56 million, 39-month term loan (the "FRI-M Term Loan") and a $35 million working capital facility (the "FRI-M Revolver"). Proceeds from the FRI-M Term Loan were used to fund the Coco's and Carrows acquisition, and to pay the transactions costs associated therewith. Proceeds from the FRI-M Revolver are to be used for working capital requirements and other general corporate purposes, which may include the making of intercompany loans to any of the Borrower's wholly owned subsidiaries for their own working capital and other general corporate purposes. Letters of credit may be issued under the FRI-M Revolver for the purpose of supporting (1) workers' compensation liabilities of the Borrower or any of its subsidiaries; (2) the obligations of third party insurers of the Borrower or any of its subsidiaries; and (3) certain other obligations of the Borrower and its subsidiaries. At December 30, 1998, there were no working capital borrowings outstanding; however, letters of credit outstanding were $13.2 million. Beginning February 28, 1997, the principal installments of the FRI-M Term Loan are payable quarterly as follows: $4.0 million per quarter for four consecutive quarters; $5.0 million for four consecutive quarters beginning February 28, 1998; $6.0 million on February 28, 1999; and $7.0 million for two consecutive quarters beginning May 31, 1999. All borrowings under the FRI-M Credit Facility accrue interest at a variable rate based on the prime rate or an adjusted Eurodollar rate (approximately 8.4% at December 30, 1998) and are secured by substantially all of the assets of FRD and its subsidiaries and by the issued and outstanding stock of FRI-M and its subsidiaries. The FRI-M Credit Facility expires, and all amounts must be repaid, on August 31, 1999. At December 30, 1998, the amount of the term loan outstanding was $10.4 million and FRI-M had no outstanding capital borrowings; however, letters of credit outstanding were $13.2 million. The Company is exploring various alternatives to restructure FRD's capital structure in order to increase capital availability and otherwise improve FRD's financial flexibility. Such efforts include pursuing a new credit facility to refinance the FRI-M Credit Facility before its expiration, as well as other alternatives to increase Advantica's investment flexibility with respect to FRD's operations. The FRI-M Credit Facility and the indenture under which the 12.5% Senior Notes have been issued contain 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 FRI-M 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), maintenance of a minimum level of EBITDA, and limitations on annual capital expenditures. The cash flows from FRD are required to be used to service the debt issued in the Coco's and Carrows acquisition (the FRI-M Credit Facility and the 12.5% Senior F-21 62 Notes), and, therefore, other than for the payment of certain management fees and tax reimbursements payable to Advantica under certain conditions, are currently unavailable to service the debt of Advantica and its other subsidiaries. FRD's cash flows from operating activities, included in the Company's total cash flow from operating activities, were $17.1 million, $1.0 million and $23.0 million for the year ended December 31, 1997, the one week ended January 7, 1998 and the 51 weeks ended December 30, 1998, respectively. FRD and its subsidiaries were in compliance with the terms of the FRI-M Credit Facility at December 30, 1998. Under the most restrictive provision of the FRI-M Credit Facility (the minimum interest coverage ratio), for the four quarters ended December 30, 1998, FRD's EBITDA could be approximately $0.3 million less and FRD would still be in compliance. The estimated fair value of the Company's long-term debt (excluding capital lease obligations) is approximately $1.1 billion at December 30, 1998. Such computation is based on market quotations for the same or similar debt issues or the estimated borrowing rates available to the Company. 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 rental 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 30, 1998 is as follows:
CAPITAL LEASES OPERATING LEASES ------------------- ------------------- (In thousands) MINIMUM MINIMUM MINIMUM Minimum LEASE SUBLEASE LEASE SUBLEASE YEAR: PAYMENTS RECEIPTS PAYMENTS RECEIPTS - -------------- -------- -------- -------- -------- 1999 $29,386 $ 3,136 $ 61,207 $ 7,763 2000 22,916 2,600 60,483 7,128 2001 18,601 2,287 56,175 6,215 2002 12,968 2,001 48,585 5,097 2003 10,132 1,709 41,852 4,251 Subsequent years 43,613 9,333 205,253 18,701 ------- ------- -------- ------- Total 137,616 $21,066 $473,555 $49,155 ======= ======== ======= Less imputed interest 43,222 ------- Present value of capital lease obligations $94,394 =======
Payments for certain FRD operating leases are being made by FRI in accordance with the provisions of the Stock Purchase Agreement. As such, these payments have been excluded from the amount of minimum lease payments and minimum sublease receipts reported above. The total rental expense included in the determination of operating income for continuing operations is as follows:
FIFTY-ONE FISCAL YEAR ENDED WEEK WEEKS --------------------------- ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In thousands) ------------ ------------ ---------- ------------ Base rents $52,694 $65,202 $700 $56,837 Contingent rents 9,798 12,477 214 10,455 ------- ------- ---- ------- Total $62,492 $77,679 $914 $67,292 ======= ======= ==== =======
Total rental expense does not reflect sublease rental income of $15.9 million, $15.6 million, $0.2 million and $10.5 million for the years ended December 31, 1996 and 1997, the one week ended January 7, 1998 and the 51 weeks ended December 30, 1998, respectively. F-22 63 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 FIFTY-ONE FISCAL YEAR ENDED WEEK WEEKS --------------------------- ENDED ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In thousands) ------------ ------------ ---------- ------------ Current: Federal $ (6,074) $ -- $ -- $(2,924) State, Foreign and Other (1,686) 1,556 27 1,046 -------- ------ -------- ------- (7,760) 1,556 27 (1,878) -------- ------ -------- ------- Deferred: Federal (6,797) -- (12,513) -- State, Foreign and Other (1,745) 132 (1,343) 84 -------- ------ -------- ------- (8,542) 132 (13,856) 84 -------- ------ -------- ------- Provision for (benefit from) income taxes $(16,302) $1,688 $(13,829) $(1,794) ======== ====== ======== ======= The total provision for (benefit from) income taxes related to: Loss before discontinued operations and extraordinary items $(16,302) $1,688 $(13,829) $(1,794) Discontinued operations (90) 81 7,509 -- Extraordinary items -- -- -- -- -------- ------ -------- ------- Total (benefit from) provision for income taxes $(16,392) $1,769 $ (6,320) $(1,794) ======== ====== ======== =======
For the year ended December 31, 1996, the Company recorded a $7.3 million deferred Federal tax benefit related to the reversal of certain reserves established in connection with proposed deficiencies from the Internal Revenue Service. The following represents the approximate tax effect of each significant type of temporary difference giving rise to deferred income tax assets or liabilities:
DECEMBER 31, DECEMBER 30, 1997 1998 (In thousands) ------------ ------------ Deferred tax assets: Deferred income $ 26,492 $ 21,336 Debt premium -- 22,584 Lease reserves -- 11,808 Self-insurance reserves 32,810 29,338 Capitalized leases 14,083 6,537 Intangible assets 8,386 -- Other accruals and reserves 26,246 31,487 Alternative minimum tax credit carryforwards 10,459 10,548 General business credit carryforwards 50,840 56,627 Capital loss carryforwards 10,400 8,135 Net operating loss carryforwards 85,155 9,512 Less: valuation allowance (222,823) (105,149) --------- --------- Total deferred tax assets 42,048 102,763 --------- --------- Deferred tax liabilities: Intangible assets -- (70,016) Fixed assets (48,345) (38,147) --------- --------- Total deferred tax liabilities (48,345) (108,163) --------- --------- Net deferred tax liability $ (6,297) $ (5,400) ========= =========
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. F-23 64 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:
FISCAL YEAR ENDED ONE FIFTY-ONE --------------------------- WEEK ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 ------------ ------------ ---------- ------------ Statutory rate 35% 35% 35% 35% Differences: State, foreign, and other taxes, net of federal income tax benefit 2 (2) -- (1) Amortization of goodwill 1 (3) -- -- Amortization of reorganization value in excess of amounts allocable to identifiable assets -- -- -- (29) Reversal of certain reserves established in connection with proposed Internal Revenue Service deficiencies 11 -- -- -- Nondeductible costs related to the reorganization -- (6) -- -- Nontaxable income related to the reorganization -- -- (28) -- Nondeductible wages related to the FICA tip credit -- (3) -- (1) Portion of losses and income tax credits not benefited as a result of the establishment of a valuation allowance (28) (19) (7) (7) Other 3 (4) (2) 4 --- --- --- --- Effective tax rate 24% (2)% (2)% 1% === === === ===
The Company utilized substantially all of its NOL carryforwards and portions of certain other carryforwards to offset taxable income principally generated from the sale of its discontinued operations during 1998. At December 30, 1998, the Company has available, on a consolidated basis, general business credit carryforwards of approximately $57 million, most of which expire in 2004 through 2013, and alternative minimum tax ("AMT") credit carryforwards of approximately $11 million. The AMT credits may be carried forward indefinitely. In addition, the Company has available AMT net operating loss ("NOL") carryforwards of approximately $19 million which expire in 2012. 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 AMT 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 $7 million arose subsequent to the reorganization and are not subject to any limitation as of the end of 1998. See Note 1 for further discussions of the reorganization including additional discussion of the reorganization's impact on the Company's carryover tax benefits and its tax basis in its assets for future taxable years. In connection with the purchase of FRI-M in May 1996, the Company acquired certain income tax attributes which may be used only to offset the separate taxable income of FRI-M and its subsidiaries. Approximately $24 million of regular NOL carryforwards and $21 million of regular and AMT capital loss carryforwards are available at December 30, 1998 to reduce the future separate taxable income of FRI-M and its subsidiaries. Due to FRI-M's prior ownership changes in January 1994 and May 1996, FRI-M's ability to utilize these carryforwards is limited. The annual limitation for the utilization of FRI-M's NOL carryforwards and capital loss 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. FRI-M's capital loss carryforward , which will expire in 2000, can only be utilized to offset certain capital gains generated by FRI-M or its subsidiaries. Utilization of FRI-M's loss carryforwards are also subject to the Company's overall annual limitation of $21 million. FRI-M utilized approximately $4 million in 1997 and $5 million in 1998 of capital loss carryover to offset capital gains recognized during 1997 and 1998. F-24 65 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. The components of net pension cost of the pension plan and other defined benefit plans for the years ended December 31, 1996 and 1997, the one week ended January 7, 1998 and 51 weeks ended December 30, 1998 determined under SFAS No. 87 are as follows:
FISCAL YEAR ENDED ONE FIFTY-ONE --------------------------- WEEK ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In thousands) ------------ ------------ ---------- ------------ PENSION PLAN: Service cost $ 2,963 $ 3,210 $ 70 $ 1,040 Interest cost 2,560 2,872 63 2,861 Expected return on plan assets (2,646) (3,085) (71) (3,658) Amortization of prior service cost 69 -- -- -- Recognized net actuarial loss 339 325 -- -- ------- ------- ------- ------- Net periodic benefit cost $ 3,285 $ 3,322 $ 62 $ 243 ======= ======= ======= ======= Purchase accounting -- -- $11,633 -- Settlement loss -- -- -- $ 119 OTHER DEFINED BENEFIT PLANS: Service cost $ 188 $ 145 $ 2 $ 125 Interest cost 335 198 3 166 Expected return on plan assets -- -- -- -- Amortization of prior service cost 41 41 -- 27 Recognized net actuarial gain (322) (3) -- (1) ------- ------- ------- ------- Net periodic benefit cost $ 242 $ 381 $ 5 $ 317 ======= ======= ======= ======= Settlement loss -- $ 1,342 -- --
Net pension and other defined benefit plan costs charged to continuing operations for the years ended December 31, 1996 and 1997 and the 51 weeks ended December 30, 1998 were $0.7 million, $2.2 million and $0.7 million, respectively. Costs charged to continuing operations for the one week ended January 7, 1998 were immaterial. F-25 66 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 31, DECEMBER 30, DECEMBER 31, DECEMBER 30, 1997 1998 1997 1998 ------------ ------------ ------------ ------------ (In thousands) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $36,416 $46,800 $ 6,944 $ 2,258 Service cost 3,210 1,110 144 127 Interest cost 2,872 2,923 198 169 Actuarial loss 6,498 2,102 682 132 Curtailment gains -- (6,338) -- -- Settlement (1998 lump sum payments) -- (3,776) -- -- Benefits paid (periodic only for 1998) (2,196) (1,698) (5,710) (190) ------- ------- ------- ------- Benefit obligation at end of year $46,800 $41,123 $ 2,258 $ 2,496 ======= ======= ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $31,109 $37,342 $ -- $ -- Actual return on plan assets 5,374 3,561 -- -- Employer contributions 3,055 1,614 5,710 190 Settlement (1998 lump sum payments) -- (3,776) -- -- Benefits paid (periodic only for 1998) (2,196) (1,698) (5,710) (190) ------- ------- ------- ------- Fair value of plan assets at end of year $37,342 $37,043 $ -- $ -- ======= ======= ======= ======= RECONCILIATION OF FUNDED STATUS Funded Status $(9,457) $(4,080) $(2,258) $(2,498) Unrecognized actuarial (gain)/loss 10,773 1,293 (48) 135 Unrecognized transition amount -- -- (1) (1) Unrecognized prior service cost -- -- 26 -- Fourth Quarter contribution -- -- 49 -- ------- ------- ------- ------- Net amount recognized $ 1,316 $(2,787) $(2,232) $(2,364) ======= ======= ======= ======= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF: Accrued benefit liability $ (79) $(2,787) $(2,232) $(2,364) Accumulated other comprehensive income 1,395 -- -- -- ------- ------- ------- ------- Net amount recognized $ 1,316 $(2,787) $(2,232) $(2,364) ======= ======= ======= =======
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:
1996 1997 1998 ---- ---- ---- Discount rate 8.0% 7.0% 6.8% Rates of salary progression 4.0% 4.0% 4.0% Long-term rates of return on assets 10.0% 10.0% 10.0%
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 matching contributions, with certain limitations. Amounts charged to income under these plans for continuing operations were $2.0 million and $2.1 million for the year ended December 31, 1997 and the 51 weeks ended December 30, 1998, respectively. Matching contributions related to the one week ended January 7, 1998 were immaterial. The Company made no matching contributions for the year ended December 31, 1996. F-26 67 STOCK OPTION PLANS At December 30, 1998, the Company has three 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 its 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" and, together with the Non-Officer Plan, the "1998 Stock Option Plans"). The 1998 Stock Option Plans permit 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 4,888,888 shares of Advantica Common Stock are authorized to be issued under these plans. Under the terms of the plans, optionees who terminate for any reason other than cause 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 other than voluntary termination or for cause. If termination is for cause, no option shall be exercisable after the termination date. In addition to the 1998 Stock Option Plans, 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 1998 Stock Option Plans. A total of 200,000 shares of Advantica Common Stock are authorized to be issued under the Director Plan. Effective January 28, 1998, options to purchase 1,927,500 shares, 409,000 shares and 54,000 shares of Common Stock at market value at the date of grant were issued under the Officer Plan, the Non-Officer Plan and the Director Plan, respectively. Thirty percent of such grants under the Officer and Non-Officer Plans became exercisable immediately, with an additional 20% vesting the first and second anniversaries of the date of grant and an additional 15% vesting on the third and fourth anniversaries. The grants under the Director Plan vest at a rate of 33.3% per year beginning on the first anniversary of the grant date. On September 11, 1998, options to purchase an additional 910,000 and 79,100 shares of Common Stock at market value at the date of grant were issued under the Officer Plan and the Non-Officer Plan, respectively. Such grants vest at a rate of 25% per year beginning on the first anniversary of the grant date. All options issued in 1998 expire ten years from the date of grant. 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. 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 during 1998 under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for such grants: dividend yield of 0.0%; expected volatility of .64; risk-free interest rate of 4.6% and a weighted average expected life of the options of 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 WEEKS ENDED DECEMBER 30, 1998 ------------ (In millions, except per share data) Pro forma net loss $(189.6) Pro forma loss per share: Basic and diluted (4.73)
F-27 68 A summary of the Company's stock option plans as of December 30, 1998 and the changes during the 51 weeks ended December 30, 1998 is presented below.
1998 -------------------------- OPTIONS WEIGHTED-AVERAGE (000) EXERCISE PRICE ------- ---------------- Outstanding at January 7, 1998 -- $ -- Granted 3,380 8.45 Exercised (1) 10.00 Forfeited/Expired (287) 9.75 ----- Outstanding at end of year 3,092 8.32 ===== Exercisable at year-end 637 10.00
The following table summarizes information about stock options outstanding at December 30, 1998:
WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE PRICES 12/30/98 CONTRACTUAL LIFE EXERCISE PRICE 12/30/98 EXERCISE PRICE - --------------- -------------- ---------------- -------------- -------------- -------------- $ 4.69 975,600 9.70 $ 4.69 -- $ -- 10.00 2,116,150 9.08 10.00 636,600 10.00
The weighted average fair value per option of options granted during the 51 weeks ended December 30, 1998 was $6.06. 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 30, 1998, over and above any insurance coverage in respect to certain of them, are not specifically determinable at this time. In 1994, Flagstar was advised of proposed deficiencies from the Internal Revenue Service for federal income taxes totaling approximately $12.7 million. The proposed deficiencies relate to examinations of certain income tax returns filed by FCI and Flagstar 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. As the Company believes the remaining proposed deficiencies are substantially incorrect, it intends to continue to contest such proposed deficiencies. The Company filed petitions in the United States Tax Court in 1998 for these periods. The case is not expected to be tried until late 1999 or early 2000. It is the opinion of Management (including General Counsel), after considering a number of factors, including but not limited to the current status of the litigation (including any settlement discussions), the views of retained counsel, the nature of the litigation or proposed tax deficiencies, the prior experience of the consolidated companies, and the amounts which the Company has accrued for known contingencies, that the ultimate disposition of these matters will not materially affect the consolidated financial position or results of operations of the Company. The Company's Hardee's restaurants were operated under licenses from Hardee's Food Systems, Inc. ("HFS"). The Company did not believe HFS satisfied its contractual obligations to support the Hardee's franchise and on March 19, 1997, the Company notified HFS, pursuant to its various license agreements, that its subsidiary was seeking to arbitrate certain claims of the subsidiary against HFS. In its demand for arbitration, the Company's subsidiary made a number of claims, including, (1) breach by HFS of its license agreements with the Company's subsidiary, (2) breach of fiduciary duty and negligence by HFS in mishandling and misapplying funds of the Company's subsidiary held for advertising, and (3) unfair trade practices. Such arbitration proceeding was suspended by the parties as a result of the definitive agreement for the sale of FEI to HFS' parent company. Upon the consummation of the sale of FEI on April 1, 1998 all claims made by the Company against HFS were released. On February 22, 1996, the Company entered into an agreement with IBM Global Services ("IBM") (formerly Integrated Systems Solutions Corporation). The ten-year agreement (as amended), which requires annual payments ranging from F-28 69 $26.9 million to $49.1 million, provides for IBM to manage and operate the Company's information systems, as well as develop and implement new systems and applications to enhance information technology for the Company's corporate headquarters, restaurants and field management. Under the agreement, IBM has full oversight responsibilities for the data center operations, applications development and maintenance, voice and data networking, help desk operations, and point-of-sale technology. 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 30, 1998 relative to Portion-Trol Foods, Inc. and Mother Butler Pies, respectively, are approximately $192.0 million and $41.9 million after giving effect to the dispositions of FEI and Quincy's. NOTE 16 SHAREHOLDERS' EQUITY (DEFICIT)
ACCUMULATED OTHER SHAREHOLDERS' TOTAL COMPREHENSIVE EQUITY/ OTHER EQUITY DEFICIT INCOME (DEFICIT) ------------ ----------- ------------- ------------- (In thousands) Balance December 31, 1995 $ 745,800 $(1,877,274) $ 497 $(1,130,977) --------- ----------- ----- ----------- Comprehensive income: Net loss -- (85,460) -- (85,460) Other comprehensive income -- minimum pension liability adjustment -- -- (459) (459) --------- ----------- ----- ----------- Comprehensive income -- (85,460) (459) (85,919) Dividends declared on Old Preferred Stock -- (10,631) -- (10,631) --------- ----------- ----- ----------- Balance December 31, 1996 745,800 (1,973,365) 38 (1,227,527) --------- ----------- ----- ----------- Comprehensive income: Net loss -- (134,450) -- (134,450) Other comprehensive income -- minimum pension liability adjustment -- -- (473) (473) --------- ----------- ----- ----------- Comprehensive income -- (134,450) (473) (134,923) --------- ----------- ----- ----------- Balance December 31, 1997 745,800 (2,107,815) (435) (1,362,450) --------- ----------- ----- ----------- Comprehensive income: Net income excluding adjustments for reorganization and fresh start reporting -- (3,087) -- (3,087) --------- ----------- ----- ----------- Comprehensive income -- (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 income: Net loss -- (181,419) -- (181,419) Other comprehensive income -- foreign currency translation adjustments -- -- 47 47 --------- ----------- ----- ----------- Comprehensive income -- (181,419) 47 (181,372) Issuance of Common Stock 89 -- -- 89 --------- ----------- ----- ----------- Balance December 30, 1998 $ 417,416 $ (181,419) $ 47 $ 236,044 ========= =========== ===== ===========
As discussed in Note 1, pursuant to the Plan, Flagstar's 10% Convertible Debentures, FCI's Old Preferred Stock and FCI's Old Common Stock were canceled, extinguished and retired as of the Effective Date. In addition, the warrants related to such Old 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, 4 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. Also pursuant to the Plan, 10% of the number of shares of Common F-29 70 Stock issued and outstanding on the Effective Date, on a fully diluted basis, is reserved for issuance under a new management stock option program (See Note 14). 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. Under the Rights Plan the Company's Board of Directors declared a dividend of one right payable to shareholders of record as of December 30, 1998. Such rights are exercisable for one one-thousandth share of a new series of junior participating preferred stock. In conjunction with the adoption of the Rights Plan, the Company designated 100,000 shares of preferred stock as Series A Junior Participating Preferred Stock (the "Participating Preferred Stock") having a par value of $1.00 per share. The rights may only be exercised if a third party acquires 15% or more of the outstanding common shares of the Company or ten days following the commencement of, or announcement of intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a third party of 15% or more of the common shares. The Rights Plan provides that the current ownership of Advantica common stock by Loomis Sayles & Company, L.P. and certain related entities ("Loomis Sayles"), which exceeds 15%, will not cause the rights to become exercisable so long as Loomis Sayles does not increase its ownership in excess of one percent without the consent of the Company's Board of Directors. When exercisable, each right will entitle the holder to purchase one one-thousandth share of the Participating Preferred Stock at an exercise price of $42.50. If a person or group acquires 15% or more of the outstanding common shares of the Company, each right, in the absence of timely redemption of the rights by the Company, will entitle the holder, other than the acquiring party, to purchase shares of Advantica common stock at a 50% discount from the then market value of such common stock. Additionally, in the event that Advantica is acquired in a merger or other business combination transaction after any person or group has acquired 15% or more of Advantica outstanding common stock, each right will entitle the holder, other than the acquirer, to receive, upon payment of the exercise price, common shares of the acquiring company at a 50% discount from the then market value. 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-30 71 NOTE 17 EARNINGS (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS The following table sets forth the computation of basic and diluted loss per share:
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE --------------------------- ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In thousands) ------------ ------------ ---------- ------------ Numerator: (Loss) income from continuing operations $(53,011) $(76,325) $734,340 $(180,956) Preferred stock dividends (14,175) (14,175) (273) -- -------- -------- -------- --------- Numerator for basic (loss) earnings per share -- (loss) income from continuing operations available to common shareholders (67,186) (90,500) 734,067 (180,956) -------- -------- -------- --------- Effect of dilutive securities: $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock -- -- 273 -- 10% Convertible Junior Subordinated Debentures -- -- -- -- -------- -------- -------- --------- -- -- 273 -- -------- -------- -------- --------- Numerator for diluted (loss) earnings per share-- (loss) income from continuing operations available to common shareholders after assumed conversions $(67,186) $(90,500) $734,340 $(180,956) ======== ======== ======== ========= Denominator: Denominator for basic earnings per share -- weighted average shares 42,434 42,434 42,434 40,006 -------- -------- -------- --------- 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 (loss) earnings per share -- adjusted weighted average shares and assumed conversions 42,434 42,434 55,132 40,006 ======== ======== ======== ========= Basic (loss) earnings per share from continuing operations $ (1.58) $ (2.13) $ 17.30 $ (4.52) ======== ======== ======== ========= Diluted (loss) earnings per share from continuing operations $ (1.58) $ (2.13) $ 13.32 $ (4.52) ======== ======== ======== =========
The calculations of basic and diluted loss per share have been based on the weighted average number of Company shares outstanding. The Predecessor Company warrants, options, $2.25 Preferred Stock and 10% Convertible Debentures have been omitted from the calculations for the 1996 and 1997 periods because they have an antidilutive effect on loss per share. For additional disclosures regarding such warrants, options, $2.25 Preferred Stock and 10% Convertible Debentures, see Notes 1, 11, 14 and 16. The warrants and options of the Successor Company have been omitted from the calculations for the 51 weeks ended December 30, 1998 because they have an antidilutive effect on loss per share. NOTE 18 EXTRAORDINARY ITEMS The implementation of the Plan resulted in the exchange of the Senior Subordinated Debentures and the 10% Convertible Debentures for 40 million shares of Common Stock and Warrants to purchase 4 million shares of Common Stock. The difference between the carrying value of such debt (including principal, accrued interest and deferred financing costs of $946.7 million, $74.9 million and $25.6 million, respectively) and the fair value of the Common Stock and Warrants resulted in a gain on debt adjustment of $612.8 million which was recorded as an extraordinary item. On July 31, 1998 the Company extended to the holders of the Senior Notes an offer to purchase, on a pro rata basis, up to $100.0 million of the outstanding Senior Notes at a price of 100% of the principal amount thereof plus accrued and F-31 72 unpaid interest (the "Net Proceeds Offer"). Such offer was extended pursuant to the terms of the indenture governing the Senior Notes (the "Indenture") which requires the Company to apply the Net Proceeds (as defined therein) from the sale of the Hardee's and Quincy's Business Segments (as defined in the Indenture) within 366 days of such sales to (1) an investment in another asset or business in the same line or similar line of business, (2) a net proceeds offer, as defined in the Indenture, or (3) the prepayment or repurchase of Senior Indebtedness (as defined), or any combination thereof as the Company may choose. The Net Proceeds Offer expired on August 31, 1998. Tendering holders had the option to withdraw their tenders during a 30-day period ending on September 30, 1998. At the close of the withdrawal period, $42.4 million of such securities were tendered and not withdrawn. Such securities, plus accrued and unpaid interest of $1.1 million, were retired on October 5, 1998 resulting in an extraordinary gain of $1.0 million. NOTE 19 RELATED PARTY TRANSACTIONS The Company recorded charges against income of approximately $1.3 million for the years ended December 31, 1996 and 1997 relative to financial advisory fees to a former shareholder. During January 1997, the Company settled its employment and benefits arrangements with, and loan receivable from, a former officer previously scheduled to mature in November 1997. The Company received net proceeds of $8.2 million and recorded a net charge of approximately $3.5 million which is included in other nonoperating expenses in the accompanying Statement of Consolidated Operations for the year ended December 30, 1996. Interest income for the loan receivable from the former officer for the year ended December 31, 1996 totaled $935,000. NOTE 20 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 four restaurant concepts -- Denny's, Coco's, Carrows and El Pollo Loco -- and each concept is considered a reportable segment. The amounts reported for Coco's and Carrows reflect only the periods subsequent to the acquisition date of May 23, 1996. The "Corporate and other" segment consists primarily of the corporate headquarters. The corporate and other segment also includes the operating results of the Company's food processing operations for the year ended December 31, 1996. Advantica evaluates performance based on several factors, of which the primary financial measure is business segment operating income before interest, taxes, depreciation, amortization and charges for (recoveries of) restructuring and impairment ("EBITDA as defined"). The accounting policies of the business segments are the same as those described in the summary of significant accounting policies in Note 4. Intersegment transactions generally consist of sales of restaurant units or lease buyouts and are accounted for at fair value as if the sales were to unrelated third parties.
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE --------------------------- ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In millions) ------------ ------------ ---------- ------------ REVENUE Denny's $1,243.4 $1,193.3 $23.2 $1,156.0 Coco's 163.7 280.0 4.9 255.4 Carrows 131.4 212.5 3.5 184.0 El Pollo Loco 124.2 124.8 2.0 125.1 Corporate and other 19.8 -- -- -- -------- -------- ----- -------- Total revenue for reportable segments 1,682.5 1,810.6 33.6 1,720.5 Elimination of intersegment revenue (18.4) -- -- -- -------- -------- ----- -------- Total consolidated revenue $1,664.1 $1,810.6 $33.6 $1,720.5 ======== ======== ===== ========
F-32 73
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE --------------------------- ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In millions) ------------ ------------ ---------- ------------ DEPRECIATION AND AMORTIZATION Denny's $ 51.4 $ 51.5 $ 1.1 $ 169.8 Coco's 10.3 16.6 0.3 41.8 Carrows 8.2 13.0 0.2 33.5 El Pollo Loco 6.3 5.4 -- 19.4 Corporate and other 5.1 6.6 0.1 21.4 ------- ------- ------ ------- Total consolidated depreciation and amortization $ 81.3 $ 93.1 $ 1.7 $ 285.9 ======= ======= ====== ======= EBITDA AS DEFINED Denny's $ 165.4 $ 171.6 $ 11.1 $ 173.3 Coco's 18.5 35.0 0.8 37.2 Carrows 14.9 26.6 -- 23.4 El Pollo Loco 20.1 20.1 (0.1) 21.2 Corporate and other (28.6) (35.2) (1.5) (33.2) ------- ------- ------ ------- Total EBITDA as defined for reportable segments 190.3 218.1 10.3 221.9 Eliminate EBITDA as defined resulting from intersegment transactions -- -- -- (3.3) ------- ------- ------ ------- Total consolidated EBITDA as defined 190.3 218.1 10.3 218.6 Depreciation and amortization expense (81.3) (93.1) (1.7) (285.9) Other charges: Interest expense, net (177.2) (164.9) (2.6) (114.1) Other, net (1.1) (4.6) 0.3 (1.4) Reorganization items -- (30.1) 714.2 -- ------- ------- ------ ------- Consolidated (loss) income from continuing operations before income taxes and extraordinary items $ (69.3) $ (74.6) $720.5 $(182.8) ======= ======= ====== =======
F-33 74
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE --------------------------- ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In millions) ------------ ------------ ---------- ------------ CAPITAL EXPENDITURES Denny's $29.0 $43.1 $ -- $52.7 Coco's 1.5 8.4 -- 5.4 Carrows 1.2 6.5 -- 5.0 El Pollo Loco 2.4 5.1 -- 11.9 Corporate and other 5.6 1.2 1.0 4.6 ----- ----- ----- ----- Total capital expenditures for reportable segments 39.7 64.3 1.0 79.6 Elimination of intersegment capital expenditures -- -- -- (2.5) ----- ----- ----- ----- Total consolidated capital expenditures $39.7 $64.3 $ 1.0 $77.1 ===== ===== ===== =====
DECEMBER 31, DECEMBER 30, 1997 1998 (In millions) ------------ ------------ ASSETS Denny's $ 497.7 $1,021.0 Coco's 226.5 205.7 Carrows 145.0 153.1 El Pollo Loco 73.5 148.8 Corporate and other 731.6 464.8 -------- -------- Total assets for reportable segments 1,674.3 1,993.4 Elimination of intersegment receivables (266.9) (7.2) -------- -------- Total consolidated assets $1,407.4 $1,986.2 ======== ========
Information as to Advantica's operations in different geographical areas is as follows:
FISCAL YEAR ENDED ONE WEEK FIFTY-ONE --------------------------- ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1996 1997 1998 1998 (In millions) ------------ ------------ ---------- ------------ REVENUE United States $1,647.4 $1,793.0 $33.3 $1,705.3 Other 16.7 17.7 0.3 15.2
Because a substantial portion of the Company's international revenue is derived from restaurants operated by franchisees and licensees, assets located outside the United States are not material. 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. During the fourth quarter of 1997, the Company recorded a $5.8 million reduction in operating expenses resulting from various nonrecurring items consisting primarily of an insurance recovery. The consolidated financial results on an interim basis are not necessarily indicative of future financial results on either an interim or an annual basis. F-34 75 Selected consolidated financial data for each quarter within 1997, the one week ended January 7, 1998, the twelve weeks ended April 1, 1998 and the second, third and fourth quarters of 1998 are as follows:
PREDECESSOR COMPANY ----------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER (In thousands, except per share data) -------- -------- -------- -------- Year Ended December 31, 1997: Revenue: Company sales $455,167 $431,664 $441,703 $420,253 Franchise and license revenue 14,298 16,101 16,031 15,410 -------- -------- -------- -------- Total revenue 469,465 447,765 457,734 435,663 Total costs and expenses 449,598 413,184 423,454 399,392 -------- -------- -------- -------- Operating income $ 19,867 $ 34,581 $ 34,280 $ 36,271 ======== ======== ======== ======== Loss before extraordinary items $(51,728) $(32,271) $(17,759) $(32,692) Basic and diluted net loss per share before extraordinary items (1.30) (0.84) (0.50) (0.86) Net loss (51,728) (32,271) (17,759) (32,692)
PREDECESSOR COMPANY SUCCESSOR COMPANY ------------ ------------------------------------------ ONE TWELVE WEEK WEEKS ENDED ENDED JANUARY 7, APRIL 1, SECOND THIRD FOURTH 1998 1998 QUARTER QUARTER QUARTER (In thousands, except per share data) ------------ --------- -------- -------- -------- Year Ended December 30, 1998: Revenue: Company sales $ 31,986 $371,747 $423,160 $438,311 $420,874 Franchise and license revenue 1,629 13,996 16,933 17,403 18,101 --------- -------- -------- -------- -------- Total revenue 33,615 385,743 440,093 455,714 438,975 Total costs and expenses 24,955 400,306 460,633 463,260 463,592 --------- -------- -------- -------- -------- Operating income (loss) $ 8,660 $(14,563) $(20,540) $ (7,546) $(24,617) ========= ======== ======== ======== ======== Income (loss) before extraordinary items $ 782,073 $(43,080) $(53,290) $(36,540) $(49,553) Basic net income (loss) per share before extraordinary items 18.43 (1.08) (1.33) (0.91) (1.24) Diluted net income (loss) per share before extraordinary items 14.19 (1.08) (1.33) (0.91) (1.24) Net income (loss) 1,394,918 (43,080) (53,290) (36,540) (48,509)
F-35 76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADVANTICA RESTAURANT GROUP, INC. By: /s/ RHONDA J. PARISH -------------------------------------- Rhonda J. Parish (Executive Vice President, General Counsel and Secretary) Date: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES B. ADAMSON Director, Chairman, President, and Chief March 30, 1999 - ----------------------------------------------------- Executive Officer (Principal Executive (James B. Adamson) Officer) /s/ RONALD B. HUTCHISON Executive Vice President and Chief March 30, 1999 - ----------------------------------------------------- Financial Officer (Principal Financial (Ronald B. Hutchison) and Accounting Officer) /s/ ROBERT H. ALLEN Director March 30, 1999 - ----------------------------------------------------- (Robert H. Allen) /s/ RONALD E. BLAYLOCK Director March 30, 1999 - ----------------------------------------------------- (Ronald E. Blaylock) /s/ VERA KING FARRIS Director March 30, 1999 - ----------------------------------------------------- (Vera King Farris) /s/ JAMES J. GAFFNEY Director March 30, 1999 - ----------------------------------------------------- (James J. Gaffney) /s/ IRWIN N. GOLD Director March 30, 1999 - ----------------------------------------------------- (Irwin N. Gold) /s/ ROBERT E. MARKS Director March 30, 1999 - ----------------------------------------------------- (Robert E. Marks) /s/ CHARLES F. MORAN Director March 30, 1999 - ----------------------------------------------------- (Charles F. Moran) /s/ ELIZABETH A. SANDERS Director March 30, 1999 - ----------------------------------------------------- (Elizabeth A. Sanders) /s/ DONALD R. SHEPHERD Director March 30, 1999 - ----------------------------------------------------- (Donald R. Shepherd)
EX-10.35 2 FOURTH AMENDMENT TO CREDIT AGREEMENT 1 CONFORMED COPY AMENDMENT NO. 4 dated as of November 12, 1998 (this "Amendment"), to the Credit Agreement dated as of January 7, 1998, as amended by Amendment No. 1 and Waiver dated as of March 16, 1998, Amendment No. 2 and Waiver dated as of May 21, 1998, and Amendment No. 3 and Waiver dated as of July 16, 1998 (the "Credit Agreement"), among DENNY'S, INC., a California corporation, EL POLLO LOCO, INC., a Delaware corporation, FLAGSTAR ENTERPRISES, INC., an Alabama corporation, FLAGSTAR SYSTEMS, INC., a Delaware corporation, QUINCY'S RESTAURANTS, INC., an Alabama corporation (each of the foregoing, except for FLAGSTAR ENTERPRISES, INC. and QUINCY'S RESTAURANTS, INC., for purposes of this Amendment and the Credit Agreement, individually, a "Borrower" and, collectively, the "Borrowers"), ADVANTICA RESTAURANT GROUP, INC., a Delaware corporation ("Parent"), the Lenders (as defined in Article I of the Credit Agreement) and THE CHASE MANHATTAN BANK, a New York banking corporation, as swingline lender (in such capacity, the "Swingline Lender"), as issuing bank, as administrative agent (in such capacity, the "Administrative Agent") and as collateral agent (in such capacity, the "Collateral Agent") for the Lenders. A. The Lenders have extended credit to the Borrowers, and have agreed to extend credit to the Borrowers, in each case pursuant to the terms and subject to the conditions set forth in the Credit Agreement. B. Parent and the Borrowers have requested that the Required Lenders agree to amend certain provisions of the Credit Agreement. C. The Required Lenders are willing to agree to such amendments, on the terms and subject to the conditions set forth herein. D. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Credit Agreement after giving effect to this Amendment. Accordingly, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Amendment. (a) Section 1.01 of the Credit Agreement is hereby amended as follows: (i) by inserting the following definitions in the appropriate alphabetical order: "'FRD Restructuring' shall mean, collectively: (a) the consummation of the exchange of FRD Senior Notes for New Senior Notes (Series II) and/or cash pursuant to the FRD Senior Notes Exchange Offer; (b) the effectiveness of the New Senior Notes (Series II) Indenture upon consummation of the FRD Senior Notes Exchange Offer; (c) FRD's receipt in response to the FRD Senior Notes Consent Solicitation of consents from holders representing at least a majority in aggregate principal amount of the FRD Senior Notes approving the FRD Senior Notes Supplemental Indenture; (d) the effectiveness of such FRD Senior Notes Supplemental Indenture; and (e) the payment in full of all principal, interest, fees and other amounts due under, the discharge of all obligations (other than indemnification obligations that would customarily survive termination) and security interests related to, and the permanent termination of, the FRI-M Credit Agreement." 2 2 "'FRD Restructuring Offering Memorandum' shall mean the Offering Memorandum and Solicitation Statement, dated as November 12, 1998, of Parent and FRD with respect to the FRD Senior Notes Exchange Offer and the FRD Senior Notes Consent Solicitation." "'FRD Senior Notes' shall mean FRD's 12-1/2% Senior Notes due 2004." "'FRD Senior Notes Consent Solicitation' shall mean FRD's solicitation of consents from holders of the FRD Senior Notes to the amendments to the FRD Senior Notes Indenture set forth in the FRD Senior Notes Supplemental Indenture and as more particularly described in the FRD Restructuring Offering Memorandum." "'FRD Senior Notes Documents' shall mean the FRD Senior Notes, the FRD Senior Notes Indenture, the FRD Senior Notes Supplemental Indenture and all material agreements, documents and instruments related thereto, in each case as amended, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof." "'FRD Senior Notes Exchange Offer' shall mean the offer by Parent to holders of FRD Senior Notes to exchange such FRD Senior Notes for (i) a specified cash payment, (ii) a specified principal amount of New Senior Notes (Series II) or (iii) a combination of cash and New Senior Notes (Series II), at each holder's option in such proportion as the holder shall determine, subject to (A) the condition, among others, that at least a majority of the aggregate principal amount of FRD Senior Notes must be tendered and not withdrawn and (B) Advantica's right to reallocate tenders of FRD Senior Notes for New Senior Notes (Series II) or cash in order to cause the aggregate principal amount of FRD Senior Notes tendered for cash to be not less than $60,000,000 and not more than $80,000,000, all as more particularly described in the FRD Restructuring Offering Memorandum." "'FRD Senior Notes Indenture' shall mean the Indenture with respect to the FRD Senior Notes between FRD and The Bank of New York, as trustee, as amended, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof." "'FRD Senior Notes Supplemental Indenture' shall mean the Supplemental Indenture to the FRD Senior Notes Indenture to be entered into by FRD and The Bank of New York, as trustee, to effect the amendments to the FRD Senior Notes Indenture contemplated by the FRD Senior Notes Consent Solicitation, as amended, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof." "'FRI-M' shall mean FRI-M Corporation, a Delaware corporation and a direct, wholly owned subsidiary of FRD." "'FRI-M Credit Agreement' shall mean the Credit Agreement dated as of May 23, 1996, as heretofore amended, among FRD, FRI-M, certain financial institutions and Credit Lyonnais New York Branch, as administrative agent." "'New Senior Notes (Series I)' shall mean Parent's 11-1/4% Senior Notes due 2008 issued as part of the Emergence Transactions." "'New Senior Notes (Series I) Indenture' shall mean the Indenture with respect to the New Senior Notes (Series I) between Parent and the New Senior 3 3 Notes Trustee, as amended, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof." "'New Senior Notes (Series II)' shall mean Parent's 11-1/4% Senior Notes due 2008 to be issued as part of the FRD Senior Notes Exchange Offer or any senior notes of Parent ("New Senior Exchange Notes") issued in exchange for New Senior Notes (Series II) and having terms substantially identical to the terms of the New Senior Notes (Series II) (with certain additional provisions relating to restrictions on transfers of New Senior Notes (Series II) issued as part of the FRD Senior Notes Exchange Offer and certain registration rights in respect thereof), all as contemplated by the FRD Restructuring Offering Memorandum." "'New Senior Notes (Series II) Indenture' shall mean the Indenture with respect to the New Senior Notes (Series II) (including any New Senior Exchange Notes) between Parent and the New Senior Notes Trustee, as amended, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof." "'Remaining H&Q Net Cash Proceeds' shall mean, at any time, (a) $245,000,000 less (b) the aggregate amount of the Net Cash Proceeds of the Enterprise Sale and the Quincy's Sale that prior to such time has been applied to (i) pay Indebtedness (including the repayment of all amounts due under the FRI- M Credit Agreement in connection with the FRD Restructuring), (ii) purchase New Senior Notes and/or FRD Senior Notes (including pursuant to any Net Proceeds Offer (as defined in the New Senior Notes Indenture) and in connection with the FRD Restructuring), (iii) incur Capital Expenditures (or investments in lieu thereof permitted under Section 6.04(k)), (iv) make investments or (v) for any other purpose other than to effect the SRT Defeasance."; (ii) by substituting the following new definitions for the existing definitions of the terms "Excluded Subsidiaries", "New Senior Notes" and "New Senior Notes Indenture": "'Excluded Subsidiaries' shall mean FRD and its subsidiaries; provided that upon and after the consummation of the FRD Restructuring and the effectiveness of Amendment No. 4 to this Agreement, Parent shall not have any Excluded Subsidiaries." "'New Senior Notes' shall mean collectively the New Senior Notes (Series I) and the New Senior Notes (Series II) (including any New Senior Exchange Notes)." "'New Senior Notes Indenture' shall mean collectively the New Senior Notes (Series I) Indenture and the New Senior Notes (Series II) Indenture."; (iii) by substituting the words "U.S. Bank Trust" for the words "First Trust" in the definition of the term "New Senior Notes Trustee"; (iv) by deleting after the words "the lesser of" in the definition of the term "Consolidated Total Debt" the remaining text of such definition and substituting in its place the following: "(x) the Remaining H&Q Net Cash Proceeds as of such date and (y) the aggregate amount of all cash and cash equivalents of Parent, the Borrowers and the Specified Subsidiaries (excluding the Defeasance Eligible Investments (as defined in the Real Estate Financing Documents) acquired in connection with the SRT Defeasance) that would be set forth on a consolidated balance sheet of Parent, the 4 4 Borrowers and the Specified Subsidiaries prepared as of such date in accordance with GAAP."; (v) by (A) substituting the words "(or other similar property or assets of a Real Estate Subsidiary that have been substituted for such specific property or assets)" for the parenthetical phrase in clause (f) of the definition of the term "Real Estate Refinancing", (B) substituting the word "and" for the comma at the end of clause (g) of such definition and (C) deleting all the text beginning with the word "and" at the end of clause (h) of such definition up to (but not including) the period at the end of such definition; and (vi) by deleting the definition of the term "Significant Subsidiary Group". (b) Section 3.08 of the Credit Agreement is hereby amended by substituting (i) the words "(other than the shares of the capital stock of the Real Estate Subsidiaries)" for the parenthetical phrase in Section 3.08(a) and (ii) a new Schedule 3.08(a) attached to this Amendment for the existing Schedule 3.08(a) to the Credit Agreement. (c) Section 5.11 of the Credit Agreement is hereby amended by deleting the words "(other than a subsidiary of FRD)". (d) Section 6.01 of the Credit Agreement is hereby amended as follows: (i) by substituting a new Schedule 6.01 attached to this Amendment for the existing Schedule 6.01 to the Credit Agreement; (ii) by substituting the words ", (iv) the FRD Senior Notes Documents and (v)" for the words "and (iv)" in Section 6.01(b); and (iii) by inserting at the end of Section 6.01(b) before the semicolon the following: ", provided that (i) Indebtedness evidenced by the New Senior Notes (Series II) and the New Senior Notes (Series II) Indenture (A) shall be incurred only pursuant to the consummation of the FRD Senior Notes Exchange Offer or the exchange offer of unregistered New Senior Notes (Series II) for New Senior Exchange Notes as contemplated by the FRD Restructuring Offering Memorandum and (B) shall not exceed an aggregate principal amount of $101,742,000 and (ii) Indebtedness evidenced by the FRD Senior Notes Documents shall not exceed an aggregate principal amount of $78,292,000.". (e) Section 6.02 of the Credit Agreement is hereby amended as follows: (i) by deleting (A) after the words "subject to the Lien of a Loan Document, so long as" in the last proviso to Section 6.02(a), the word "(i)" and (B) after the words "made is fully and effectively released from such Lien" in such proviso, the remaining text of such proviso up to (but not including) the semicolon at the end of such proviso; and (ii) by deleting after the words "arising in connection with intercompany transactions among Borrowers or Subsidiary Guarantors" in Section 6.02(f) the remaining text of such Section 6.02(f) up to (but not including) the semicolon. (f) Section 6.04 of the Credit Agreement is hereby amended (i) by deleting after the words "in the ordinary course of business" in Section 6.04(c) the comma and the entire proviso up to (but not including) the semicolon at the end of Section 6.04(c) and (ii) by substituting the following new Section 6.04(l) for the existing Section 6.04(l): 5 5 "(l) investments by Parent in FRD Senior Notes to the extent that Parent is permitted to repurchase such FRD Senior Notes pursuant to Section 6.08(a); and". (g) Section 6.05 of the Credit Agreement is hereby amended (i) by deleting after the words "its assets to any Subsidiary Guarantor" in Section 6.05(d) the comma and the proviso to Section 6.05(d) up to (but not including) the semicolon; and (ii) by substituting the following new Section 6.05(g) for the existing Section 6.05(g): "(g) any Subsidiary Guarantor may merge or consolidate with or transfer all or substantially all of its assets to any other Subsidiary Guarantor and acquire by merger the assets of any person to the extent permitted by Section 6.04(k), provided that no such merger, consolidation, transfer or acquisition involving a Subsidiary Guarantor results in any loss of ownership by Parent of such Subsidiary Guarantor;". (h) Section 6.08 of the Credit Agreement is hereby amended as follows: (i) by substituting the following new Section 6.08(a) for the existing Section 6.08(a): "(a) Make any voluntary or optional payments, prepayments or redemptions of principal or premium or voluntarily repurchase, acquire or retire for value prior to the stated maturity with respect to Indebtedness (other than Indebtedness arising under the Loan Documents); provided that: (i) the Mortgage Notes may be repaid with the proceeds of the Real Estate Refinancing, (ii) Parent or the Subsidiaries may make up to an aggregate of $2,000,000 in prepayments of Indebtedness of Enterprises retained by Parent or any Subsidiary in connection with the Enterprises Sale, (iii) Parent shall be permitted to purchase voluntarily FRD Senior Notes pursuant to the FRD Senior Notes Exchange Offer in an aggregate principal amount of not more than $156,897,000, provided that (A) Parent promptly contributes such FRD Senior Notes to FRD and FRD promptly cancels such FRD Senior Notes and (B) any cash purchase price of such FRD Senior Notes, not to exceed in aggregate $82,400,000, shall be funded from and shall reduce the Remaining H&Q Net Cash Proceeds, (iv) Parent shall be permitted to purchase voluntarily New Senior Notes and/or FRD Senior Notes from time to time, provided, that (A) the purchase price of any such New Senior Note or FRD Senior Note, not to exceed the lesser of such note's then current Fair Market Value and its unpaid principal amount, shall be funded from and shall reduce the Remaining H&Q Net Cash Proceeds, (B) immediately after giving effect to such a purchase, (x) the Remaining H&Q Net Cash Proceeds shall not be less than the sum of the aggregate principal amount of the Loans outstanding at such time plus $40,000,000 and (y) no Default or Event of Default shall have occurred or be continuing or would result therefrom and (C) Parent promptly cancels such New Senior Notes and/or contributes such FRD Senior Notes to FRD and FRD promptly cancels such FRD Senior Notes, (v) Parent shall be permitted to acquire unregistered New Senior Notes (Series II) pursuant to an exchange offer of such New Senior Notes for New Senior Exchange Notes as contemplated by the FRD Restructuring Offering Memorandum, and 6 6 (vi) FRI-M shall be permitted to prepay all Indebtedness and other amounts due under the FRI-M Credit Agreement pursuant to the FRD Restructuring, provided that such payments shall be funded from and shall reduce the Remaining H&Q Net Cash Proceeds; provided further that such payments shall be permitted to retire Indebtedness to the extent required under a "due on sale" clause applicable to any disposition of assets permitted under Section 6.05."; and (ii) by inserting at the end of Section 6.08 the following new section: "(c) If, as a result of the receipt of any cash proceeds by Parent or any Subsidiary in connection with an Asset Sale, Parent or FRD would be required by the terms of the FRD Senior Notes Indenture or the New Senior Notes Indenture to make an offer to repurchase FRD Senior Notes or New Senior Notes, respectively, prior to the respective maturity dates of such Notes, then Parent shall or shall cause one or more of the Subsidiaries to invest such cash proceeds in assets or businesses of Parent or the Subsidiaries in a manner that is permitted by the other provisions of this Agreement and that will eliminate any requirement under the FRD Senior Notes Indenture or the New Senior Notes Indenture to offer to repurchase FRD Senior Notes or New Senior Notes, respectively. Any such investment shall be made prior to the first day on which FRD or Parent would be required to commence a tender offer to repurchase with such cash proceeds FRD Senior Notes or New Senior Notes, respectively, under the FRD Senior Notes Indenture or New Senior Notes Indenture, respectively.". (i) Section 6.10 of the Credit Agreement is hereby amended by (i) deleting after the words "from time to time incur Consolidated Capital Expenditures (or investments in lieu thereof permitted under Section 6.04(k))" in the second proviso thereto the remaining text of Section 6.10 and substituting in its place the following: "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 at such time (provided that immediately after giving effect to any such additional Consolidated Capital Expenditure or investment, the Remaining H&Q Net Cash Proceeds shall not be less than the aggregate principal amount of the Loans outstanding at such time)". (j) Section 6.15 of the Credit Agreement is hereby amended by inserting at the end of Section 6.15 the following: "Parent shall not permit FRD to (i) own or acquire any assets (other than shares of capital stock of FRD's subsidiaries, cash and Permitted Investments, provided that the amount of such cash, together with the Fair Market Value of such Permitted Investments, shall not at any time exceed $500,000 other than on any day on which a payment is due in respect of the FRD Senior Notes, in which event FRD may during such day hold additional cash in an amount up to the aggregate amount of such payment) or (ii) incur any liabilities (other than (A) liabilities under the Loan Documents or the FRD Senior Notes Documents, (B) liabilities imposed by law, including tax liabilities, and (C) other liabilities incidental to its existence and permitted business and activities).". (k) Section 6.04 of the Credit Agreement is hereby amended by inserting at the end of Section 6.04(e) before the semicolon the words ", or to the extent that Parent transfers all or a portion of such capital stock to a Subsidiary Guarantor, investments by such Subsidiary Guarantor in such capital stock". (l) Section 6.06(a) of the Credit Agreement is hereby amended (i) by substituting a comma for the word "and" immediately following the words "to Parent, to the Borrowers or to 7 7 the Subsidiary Guarantors" in the proviso to such Section 6.06(a) and (ii) by inserting at the end of such Section 6.06(a) immediately before the period the following: "and (iii) Parent may declare and distribute to its stockholders a dividend comprised of rights to purchase preferred stock and/or common stock of Parent, provided that (A) such rights are issued and distributed to Parent's stockholders pursuant to a stockholders' rights plan, with substantially the same terms and conditions as described in the form of Rights Agreement, between Parent and a Rights Agent (to be determined), furnished to the Administrative Agent by Parent on or prior to the date hereof, and have only nominal value at the time of their issuance and distribution and (B) no Default or Event of Default shall have occurred or be continuing or would result therefrom". (m) Section 6.07 of the Credit Agreement is hereby amended by inserting at the end of such Section 6.07 immediately before the period the following: ", provided that Parent may issue and distribute to its stockholders that are Affiliates rights to purchase preferred stock and/or common stock of Parent to the extent that such rights are permitted to be issued and distributed to Parent's stockholders pursuant to Section 6.06(a)(iii)". SECTION 2. Effectiveness Date. The "Effectiveness Date" shall be specified by Parent and the Borrowers and shall be a date not later than December 31, 1998, as of which all the conditions set forth or referred to in Section 4 hereof shall be satisfied. Parent and the Borrowers shall give the Administrative Agent not less than five Business Day's written notice proposing a date as the Effectiveness Date to the Administrative Agent. Sections 1(a) through 1(j) of this Amendment shall terminate at 5:00 p.m., New York City time, on December 31, 1998, if the Effectiveness Date shall not have occurred at or prior to such time. SECTION 3. Representations and Warranties. Parent and the Borrowers represent and warrant to the Administrative Agent and to each of the Lenders that: (a) This Amendment has been duly authorized, executed and delivered by Parent and each of the Borrowers and constitutes their legal, valid and binding obligations, enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). (b) Before and after giving effect to this Amendment, the representations and warranties set forth in Article III of the Credit Agreement are true and correct in all material respects with the same effect as if made on the date hereof, except to the extent such representations and warranties expressly relate to an earlier date. (c) Before and after giving effect to this Amendment, no Event of Default or Default has occurred and is continuing. (d) Immediately after the consummation of the FRD Restructuring on the Effectiveness Date, (a) the fair value of the assets of each Loan Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) each Loan Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effectiveness Date. 8 8 SECTION 4. Conditions to Effectiveness. Effectiveness of Sections 1(a) through 1(j) of this Amendment shall be subject to satisfaction of all of the following conditions: (a) On or prior to the Effectiveness Date, the FRD Restructuring shall have been consummated on terms and conditions reasonably satisfactory to the Required Lenders (it being understood that the terms and conditions of the FRD Restructuring that are described in the FRD Restructuring Offering Memorandum shall, to the extent specifically described in such FRD Restructuring Offering Memorandum, be deemed satisfactory to the Required Lenders) and after giving effect thereto and the other transactions contemplated hereby, no default or event of default would exist under the FRD Senior Notes Indenture (as amended by the FRD Senior Notes Supplemental Indenture), the New Senior Notes Indenture or the Credit Agreement, as amended hereby. (b) The Administrative Agent shall have received, on behalf of itself, the Lenders and the Issuing Bank, a favorable written opinion of Parker, Poe, Adams & Bernstein L.L.P., counsel for Parent and the Borrowers, substantially to the effect set forth in Exhibit A hereto, (A) dated the Effectiveness Date, (B) addressed to the Issuing Bank, the Administrative Agent, the Collateral Agent and the Lenders and (C) covering such other matters relating to the Loan Documents and the FRD Restructuring as the Administrative Agent shall reasonably request, and Parent and the Borrowers hereby request such counsel to deliver such opinions. (c) All legal matters incident to this Amendment and the other Loan Documents to be entered into in connection herewith shall be satisfactory to the Lenders, to the Issuing Bank and to Cravath, Swaine & Moore, counsel for the Administrative Agent. (d) The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of FRD and each of its subsidiaries (each, a "FRD Subsidiary Guarantor"), certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of each FRD Subsidiary Guarantor as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of each FRD Subsidiary Guarantor dated the Effectiveness Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of such FRD Subsidiary Guarantor as in effect on the Effectiveness Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such FRD Subsidiary Guarantor authorizing the execution, delivery and performance of the Loan Documents executed or to be executed in connection herewith and to which such person is a party and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate or articles of incorporation of such FRD Subsidiary Guarantor have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer executing any such Loan Document or any other document delivered in connection herewith on behalf of such FRD Subsidiary Guarantor; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (ii) above; and (iv) such other documents as the Lenders, the Issuing Bank or Cravath, Swaine & Moore, counsel for the Administrative Agent, may reasonably request. (e) The representations and warranties set forth in Section 3 hereof shall be true and correct with the same effect as if made on the Effectiveness Date, except to the extent such representations and warranties expressly relate to an earlier date, and the Administrative Agent shall have received a certificate, dated the Effectiveness Date and signed by a Financial Officer of Parent, confirming compliance with such condition. 9 9 (f) A Pledge Agreement shall have been duly executed by FRD and the Subsidiaries of FRD listed on Schedule 4(f) hereto and delivered to the Collateral Agent and shall be in full force and effect, and all the outstanding capital stock of each FRD Subsidiary Guarantor shall have been duly and validly pledged thereunder to the Collateral Agent for the ratable benefit of the Secured Parties and certificates representing such shares, accompanied by instruments of transfer and stock powers endorsed in blank, shall be in the actual possession of the Collateral Agent; provided that to the extent to do so would cause adverse tax consequences to Parent or FRD, (A) no Domestic Subsidiary shall be required to pledge more than 65% of the capital stock of any Foreign Subsidiary and (B) no Foreign Subsidiary shall be required to pledge the capital stock of any of its subsidiaries. (g) A Security Agreement shall have been duly executed by each FRD Subsidiary Guarantor and shall have been delivered to the Collateral Agent and shall be in full force and effect on such date and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid, legal and perfected first-priority security interest in and lien on the Collateral of the FRD Subsidiary Guarantors (subject to any Lien expressly permitted by Section 6.02 of the Credit Agreement) described in such agreement shall have been delivered to the Collateral Agent. (h) The Collateral Agent shall have received the results of a search of the Uniform Commercial Code filings (or equivalent filings) made with respect to the FRD Subsidiary Guarantors in the states (or other jurisdictions) in which the chief executive office of each such person is located, any offices of such persons in which records have been kept relating to Accounts (as defined in the Security Agreement) of the FRD Subsidiary Guarantors and the other jurisdictions in which Uniform Commercial Code filings (or equivalent filings) are to be made pursuant to the preceding paragraph, together with copies of the financing statements (or similar documents) disclosed by such search, and accompanied by evidence satisfactory to the Collateral Agent that the Liens indicated in any such financing statement (or similar document) would be permitted under Section 6.02 or have been released (or will be released pursuant to UCC termination statements which have been received by, and are satisfactory to, the Collateral Agent). (i) The Collateral Agent shall have received a Perfection Certificate with respect to the FRD Subsidiary Guarantors dated the Effectiveness Date and duly executed by a Responsible Officer of Parent. (j) A Subsidiary Guarantee Agreement shall have been duly executed by each FRD Subsidiary Guarantor, shall have been delivered to the Collateral Agent and shall be in full force and effect. (k) An Indemnity, Subrogation and Contribution Agreement shall have been duly executed by each FRD Subsidiary Guarantor, shall have been delivered to the Collateral Agent and shall be in full force and effect. (l) The Administrative Agent shall have received with respect to each FRD Subsidiary Guarantor a copy of, or a certificate as to coverage under, the insurance policies required by Section 5.02 of the Credit Agreement and the applicable provisions of the Security Documents, each of which shall be endorsed or otherwise amended to include a "standard" or "New York" lender's loss payable endorsement and to name the Collateral Agent as additional insured, in form and substance satisfactory to the Administrative Agent. (m) The Lenders shall have received a pro forma consolidated balance sheet of Parent as of the Effectiveness Date, after giving effect to the consummation of the FRD 10 10 Restructuring and the other transactions contemplated hereby, which shall not be materially inconsistent with the forecasts previously provided to the Lenders. (n) The Board of Directors of Parent shall have designated FRD and its subsidiaries as "Subsidiaries" for purposes of the New Senior Notes (Series I) Indenture and the New Senior Notes (Series II) Indenture in accordance with the terms thereof, and the Administrative Agent shall have received a copy of the resolutions of the Board of Directors of Parent authorizing such designation together with a reasonably detailed calculation of the Fixed Charge Coverage Ratio (as defined in the New Senior Notes (Series I) Indenture), determined on a pro forma basis to give effect to the FRD Restructuring. (o) The terms and conditions of the New Senior Notes (Series II) to be issued by Parent in connection with the FRD Senior Notes Exchange Offer (including the terms and conditions thereof relating to the interest rate, fees, amortization, maturity, prepayment requirements, mandatory call or redemption features, sinking funds, security, subordination (if any), covenants, events of default and remedies) shall be substantially identical to the terms and conditions of the New Senior Notes (Series I) with only certain additional provisions relating to restrictions on transfer of New Senior Notes (Series II) issued as part of the FRD Senior Notes Exchange Offer and certain registration rights in respect thereof and such other changes as shall be satisfactory to the Lenders. (p) The terms and conditions of the FRD Senior Notes Supplemental Indenture shall be satisfactory to the Lenders (it being understood that the terms and conditions set forth in the form of FRD Senior Notes Supplemental Indenture provided to the Administrative Agent in connection with the FRD Restructuring Offering Memorandum shall be deemed satisfactory to the Lenders). (q) On or prior to the Effectiveness Date, (i) the principal, interest, fees and other amounts due under the FRI-M Credit Agreement shall have been repaid in full, (ii) all commitments to lend under the FRI-M Credit Agreement shall have been permanently terminated, (iii) all obligations under or relating to the FRI-M Credit Agreement (other than indemnification obligations that would customarily survive termination) and all security interests related thereto shall have been discharged and (iv) the Administrative Agent shall have received satisfactory evidence of such repayment, termination and discharge. (r) The Lenders shall be satisfied with the capitalization, structure and equity ownership of Parent and the Subsidiaries after giving effect to the consummation of the FRD Restructuring (it being understood that the post-FRD Restructuring capitalization and structure of Parent and the Subsidiaries that are described in the FRD Restructuring Offering Memorandum shall, to the extent specifically described in such FRD Restructuring Offering Memorandum, be deemed satisfactory to the Lenders). (s) There shall be no litigation, arbitration or administrative proceeding or consent decree that would reasonably be expected to have a material adverse effect on the business, assets, operations, properties, condition (financial or otherwise), prospects or material agreements of Parent and the Subsidiaries, taken as a whole, or on the ability of the parties to consummate the FRD Restructuring. (t) The Administrative Agent shall be reasonably satisfied with the liquidity, and sufficiency of amounts available under the Credit Agreement to meet the ongoing working capital and other cash requirements, of Parent and the Subsidiaries following the consummation of the FRD Restructuring and the other transactions contemplated hereby. (u) The consummation of the FRD Restructuring shall not (i) violate any applicable law, statute, consent decree, rule or regulation or (ii) conflict with, or result in a 11 11 default or event of default under, or a termination or interruption of, any material agreement of Parent or any of the Subsidiaries. (v) The Administrative Agent shall have received counterparts of this Amendment that, when taken together, bear the signatures of Parent, each of the Borrowers and the Required Lenders. Sections 1(k), 1(l) and 1(m) of this Amendment shall be effective upon satisfaction of the condition set forth in Section 4(v) notwithstanding any termination of the other provisions of Section 1 pursuant to Section 2. SECTION 5. Additional Agreements. Parent and the Borrowers agree that (i) their respective obligations pursuant to this Amendment to deliver to the Collateral Agent Security Documents with respect to assets of the FRD Subsidiary Guarantors shall not in any way affect their obligations under Section 5.11 of the Credit Agreement and (ii) any Security Documents delivered to the Collateral Agent pursuant to this Amendment shall be deemed for purposes of the Credit Agreement also to have been delivered by the applicable Loan Party pursuant Section 5.11 of the Credit Agreement. SECTION 6. Credit Agreement. Except as specifically amended hereby, the Credit Agreement shall continue in full force and effect in accordance with the provisions thereof as in existence on the date hereof. On and after the Effectiveness Date, any reference to the Credit Agreement shall mean the Credit Agreement as amended hereby. SECTION 7. Loan Document. This Amendment shall be a Loan Document for all purposes. SECTION 8. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 9. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one agreement. Delivery of an executed counterpart of a signature page of this Amendment by telecopy shall be effective as delivery of a manually executed counterpart of this Amendment. SECTION 10. Expenses. Parent and the Borrowers agree to reimburse the Administrative Agent for its out-of-pocket expenses in connection with this Amendment, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first written above. ADVANTICA RESTAURANT GROUP, INC., by /s/ Kenneth E. Jones ------------------------------------ Name: Kenneth E. Jones Title: Vice President and Treasurer 12 12 DENNY'S, INC., by /s/ Kenneth E. Jones ------------------------------------ Name: Kenneth E. Jones Title: Vice President and Treasurer EL POLLO LOCO, INC., by /s/ Kenneth E. Jones ------------------------------------ Name: Kenneth E. Jones Title: Vice President and Treasurer FLAGSTAR SYSTEMS, INC., by /s/ Kenneth E. Jones ------------------------------------ Name: Kenneth E. Jones Title: Vice President and Treasurer THE CHASE MANHATTAN BANK, individually and as Administrative Agent, Collateral Agent, Swingline Lender and Issuing Bank, by /s/ William P. Rindfuss ------------------------------------ Name: William P. Rindfuss Title: Vice President GREEN TREE FINANCIAL SERVICING CORPORATION, by /s/ C. A. Gouskos ------------------------------------ Name: C. A. Gouskos Title: Senior Vice President JACKSON NATIONAL LIFE INSURANCE COMPANY, as Assignee, by PPM Finance, Inc., its attorney in fact, by /s/ Martin J. Battaglia ------------------------------------ Name: Martin J. Battaglia Title: Senior Managing Director 13 13 KZH III LLC, by /s/ Andrew Taylor ------------------------------------ Name: Andrew Taylor Title: Authorized Agent KZH CNC LLC, by /s/ Andrew Taylor ------------------------------------ Name: Andrew Taylor Title: Authorized Agent THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH, by /s/ Koji Sasayama ------------------------------------ Name: Koji Sasayama Title: Deputy General Manager SANWA BUSINESS CREDIT CORPORATION, by /s/ Mark Flamm ------------------------------------ Name: Mark Flamm Title: Vice President EX-10.36 3 SIXTH AMENDMENT TO CREDIT AGREEMENT 1 FRI-M CORPORATION SIXTH AMENDMENT TO CREDIT AGREEMENT This SIXTH AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated as of December 23, 1998 and entered into by and among FRD ACQUISITION CO., a Delaware corporation ("HOLDINGS"), FRI-M CORPORATION, a Delaware corporation ("COMPANY"), the other Credit Support Parties (as defined in Section 4 hereof), THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred to herein as a "LENDER" and collectively as "LENDERS"), BANKERS TRUST COMPANY, THE CHASE MANHATTAN BANK (formerly known as CHEMICAL BANK) and CITICORP USA, INC., as co-syndication agents for Lenders (in such capacity, each individually referred to herein as a "CO-SYNDICATION AGENT" and collectively as "CO-SYNDICATION AGENTS"), and CREDIT LYONNAIS NEW YORK BRANCH, as administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"), and is made with reference to that certain Credit Agreement dated as of May 23, 1996, by and among Holdings, Company, Lenders, Co-Syndication Agents and Administrative Agent, as amended by the First Amendment to Credit Agreement, Guaranties and Certain Collateral Documents dated as of July 1, 1996, the Second Amendment to Credit Agreement, Guaranties and Certain Collateral Documents dated as of November 19, 1996, the Third Amendment to Credit Agreement dated as of March 7, 1997, the Consent dated as of March 7, 1997, the Fourth Amendment to Credit Agreement dated as of July 9, 1997, and the Fifth Amendment to Credit Agreement dated December 9, 1997 (as so amended, the "CREDIT AGREEMENT"), and to the other Loan Documents. Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, Loan Parties and Lenders desire to amend the Credit Agreement to permit Company and its Subsidiaries to make Asset Sales having a fair market value not in excess of $30,000,000. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT 1.1 AMENDMENT TO SECTION 7.7: RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS Subsection 7.7(vi) of the Credit Agreement is hereby amended by deleting the reference to "$20,000,000" contained therein and substituting "$30,000,000" therefor. 2 SECTION 2. CONDITIONS TO EFFECTIVENESS Section 1 of this Amendment shall become effective only upon the prior or concurrent satisfaction of all of the following conditions precedent (the date of satisfaction of such conditions being referred to herein as the "AMENDMENT EFFECTIVE DATE"): A. On or before the Amendment Effective Date, Company shall deliver to Lenders (or to Administrative Agent for Lenders) the following, each, unless otherwise noted, dated the Amendment Effective Date: 1. Resolutions of its Board of Directors of Company approving and authorizing the execution, delivery, and performance of this Amendment, certified as of the Amendment Effective Date by its corporate secretary or an assistant secretary as being in full force and effect without modification or amendment; 2. Signature and incumbency certificates of the officers of Company certified by its corporate secretary or assistant secretary; and 3. Counterparts of this Amendment executed by Requisite Lenders and each of the other parties hereto. B. On or before the Amendment Effective Date, all corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Administrative Agent and such counsel, and Administrative Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent may reasonably request. Company hereby agrees that Company shall deliver to Lenders (or to Administrative Agent for Lenders) on or before January 15, 1999 (i) resolutions of the Board of Directors of Holdings approving and authorizing (retroactively or otherwise) the execution, delivery and performance of this Amendment, certified on or before January 15, 1999 by its corporate secretary or an assistant secretary as being in full force and effect without modification or amendment, and (ii) signature and incumbency certificates of Holdings dated on or before January 15, 1999 certified by its corporate secretary or assistant secretary. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, each of Holdings, Company and each other Loan Party party hereto represents and warrants to each Lender that the following statements are true, correct and complete: A. CORPORATE POWER AND AUTHORITY. Each Loan Party party hereto has all requisite corporate power and authority to enter into this Amendment and to carry out the 2 3 transactions contemplated hereby and each of Holdings, Company and each other Loan Party party hereto has all requisite corporate power and authority to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as further amended by this Amendment (the "AMENDED AGREEMENT"). B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all necessary corporate action on the part of Holdings, Company and each of the other Loan Parties party hereto, as the case may be. C. NO CONFLICT. The execution and delivery by each Loan Party party hereto of this Amendment and the performance by such Loan Party of this Amendment and the performance by Holdings and Company of the Amended Agreement do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Holdings or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Holdings or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Holdings or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under the Holdings Note Indenture or the Holdings Note or any other Contractual Obligation of Holdings or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Holdings or any of its Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Holdings or any of its Subsidiaries. D. GOVERNMENTAL CONSENTS. The execution and delivery by each Loan Party party hereto of this Amendment and the performance by such Loan Party of this Amendment and the performance by Holdings and Company of the Amended Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. E. BINDING OBLIGATION. This Amendment has been duly executed and delivered by each Loan Party party hereto and this Amendment and the Amended Agreement are the legally valid and binding obligations of such Loan Party, enforceable against such Loan Party in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Section 5 of the Credit Agreement and the Amended Credit Agreement are and will be true, correct and complete in all material respects on and as of the Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. 3 4 G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default or a Potential Event of Default. SECTION 4. ACKNOWLEDGEMENT AND CONSENT Company is a party to certain Collateral Documents, in each case as amended through the Amendment Effective Date, pursuant to which Company has created Liens in favor of Administrative Agent on certain Collateral to secure the Obligations. Each of the other Loan Parties party hereto is a party to certain Collateral Documents, the Subsidiary Guaranty or the Holdings Guaranty, in each case as amended through the Amendment Effective Date, pursuant to which each such Loan Party has (i) guarantied the Obligations and (ii) created Liens in favor of Administrative Agent on certain Collateral to secure the obligations of such Loan Party under the Subsidiary Guaranty or the Holdings Guaranty, as the case may be. The Loan Parties party hereto are collectively referred to herein as the "CREDIT SUPPORT PARTIES", and the Collateral Documents, the Subsidiary Guaranty and the Holdings Guaranty are collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS". Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement, the Collateral Documents and Guaranties and this Amendment and consents to the further amendment of the Credit Agreement effected pursuant to this Amendment. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, to the fullest extent possible the payment and performance of all "Obligations," "Guarantied Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Obligations," "Guarantied Obligations" or "Secured Obligations," as the case may be, in respect of the Obligations of Company now or hereafter existing under or in respect of the Amended Agreement and the Notes defined therein. Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the Amended Agreement and the other Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. Each Credit Support Party (other than Holdings and Company) acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this 4 5 Amendment, such Credit Support Party is not required by the terms of the Credit Agreement or any other Loan Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Loan Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Credit Agreement. SECTION 5. MISCELLANEOUS A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. (i) On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Amended Agreement. (ii) Except as specifically amended by this Amendment, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (iii) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of Agent or any Lender under, the Credit Agreement or any of the other Loan Documents. B. FEES AND EXPENSES. Company acknowledges that all reasonable costs, fees and expenses as described in subsection 11.2 of the Credit Agreement incurred by Administrative Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of Company. C. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached 5 6 from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Amendment (other than the provisions of Section 1, which shall become effective upon the satisfaction of each of the conditions set forth in Section 2 hereof) shall become effective upon the execution of a counterpart hereof by Requisite Lenders and each of the other parties hereto and receipt by Company and Administrative Agent of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank] 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. FRD ACQUISITION CO. By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- FRI-M CORPORATION By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- FRI-FRD CORPORATION By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- CFC FRANCHISING COMPANY By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- FRI-J CORPORATION By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- JOJOS RESTAURANTS, INC. By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- 7 8 JOJOS CALIFORNIA FAMILY RESTAURANTS, INC. By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- COCO'S RESTAURANTS, INC. By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- FRI-C CORPORATION By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- CARROWS RESTAURANTS, INC. By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- CARROWS CALIFORNIA FAMILY RESTAURANTS, INC. By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- FRI-DHD CORPORATION By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- FAR WEST CONCEPTS, INC. By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- 8 9 FRI-NA CORPORATION By: /s/ Kenneth E. Jones ---------------------------------------------- Title: Kenneth E. Jones, Vice President and Treasurer ------------------------------------------- 9 10 LENDERS: CREDIT LYONNAIS NEW YORK BRANCH, individually and as Administrative Agent By: /s/ Attila O. Koc ---------------------------------------------- Title: SVP ------------------------------------------- BANKERS TRUST COMPANY, individually and as Co-Syndication Agent By: /s/ Mary Jo Jolly ---------------------------------------------- Title: Assistant Vice President ------------------------------------------- THE CHASE MANHATTAN BANK (FORMERLY KNOWN AS CHEMICAL BANK), individually and as Co- Syndication Agent By: /s/ Lawrence Palumbo, Jr. ---------------------------------------------- Title: Vice President ------------------------------------------- CITICORP USA, INC., individually and as Co- Syndication Agent By: /s/ Timothy L. Freeman ---------------------------------------------- Title: Vice President ------------------------------------------- 10 EX-10.37 4 ASSIGNMENT & ASSUMPTION AGREEMENT 1 Exhibit 10.37 EXECUTION COPY ASSIGNMENT AND ASSUMPTION AGREEMENT This Assignment and Assumption Agreement (this "Agreement") is made and entered into as of the 1st day of May, 1998, by and between Quincy's Realty, Inc., an Alabama corporation (the "Assignor"), and I.M. Special, Inc., a Delaware corporation (the "Assignee"). Reference is made to (i) that certain Loan Agreement, dated as of November 1, 1990, as amended by a First Amendment to Loan Agreement, dated as of November 15, 1991, and as further amended by a Second Amendment to Loan Agreement, dated as of April 1, 1998, between Spardee's Realty, Inc. ("Spardee's") as borrower, and Secured Restaurants Trust (the "Issuer") with respect to a loan in the original principal amount of One Hundred Thirty Million Dollars ($130,000,000) (the "Spardee's Loan Agreement"), and (ii) that certain Loan Agreement, dated as November 1, 1990, as amended by a First Amendment to Loan Agreement, dated as of November 15, 1991, and as further amended by a Second Amendment to Loan Agreement, dated as of April 1, 1998, between Assignor, as borrower, and the Issuer, in the original principal amount of Ninety-Five Million Dollars ($95,000,000) (the "Quincy's Loan Agreement", and collectively with the Spardee's Loan Agreement, the "Loan Agreements"), and certain other agreements and instruments relating to the Loan Agreements (the "SRT Financing Documents") and certain other agreements and instruments executed as of the date hereof pursuant to the Letter Agreement (as defined herein) (collectively with the SRT Financing Documents, the "Documents"). Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Loan Agreements. Reference is also made to the Stock Purchase Agreement dated February 18, 1998 among Advantica Restaurant Group, Inc. ("Advantica"), Spartan Holdings, Inc. ("Spartan"), Flagstar Enterprises, Inc. ("FEI"), and CKE Restaurants, Inc. ("Purchase Agreement") pursuant to which Spartan, as of April 1, 1998, sold to CKE Restaurants, Inc. (the "Buyer") the stock of FEI (the "FEI Stock Sale"). Under the provisions of the Purchase Agreement, Advantica and Spartan were required, among other things, as applicable, to deliver to Buyer evidence of the release of FEI and Spardee's and their assets from any obligations and liens relating to the SRT Financing Documents. Concurrently with the closing of the FEI Stock Sale (the "Closing") and in order to effect the release of certain obligations and liens relating to the SRT Financing Documents in connection therewith, Advantica, Spartan, Spardee's and the Assignor, together with the other requisite parties to the SRT Financing Documents, effected a defeasance of the Mortgage Notes underlying the Loan Agreements in accordance with the terms of such Loan Agreements (and certain waivers, consents, and directions from the Controlling Party provided pursuant to the terms and provisions of the SRT Financing Documents) (the "Defeasance Transaction") and, pursuant to an Assignment and Assumption Agreement, dated as of April 1, 1998, by and between Spardee's and the Assignor (the "Spardee's Assignment Agreement"), the Assignor assumed all liabilities and obligations of Spardee's and agreed to 2 perform and discharge all obligations of Spardee's under the Spardee's Loan Agreement and the Mortgage Notes thereunder and any related Loan Documents. As a result of (and after giving effect to) the Defeasance Transaction, among other things, FEI and Spardee's and their assets were released from any obligations and liens relating to the SRT Financing Documents, and the other Collateral under the Collateral Assignment Agreement, as amended (other than the Borrower Collateral (as defined in the Second Amendments to Loan Agreement)) was released from any lien, security interest or encumbrance, charge or other claim of any kind, character or nature whatsoever securing, arising out of or in any way connected with or relating to the SRT Financing Documents. In order to effect the releases and terminations contemplated by that certain letter agreement dated April 1, 1998 among Advantica, Quincy's Restaurants, Inc., Assignor and Financial Security Assurance Inc. ("FSA") (the "Letter Agreement"), Assignee is required to assume all of the obligations and take an assignment of the rights of Assignor under the Assignor's interest in Loan Agreements and the respective Mortgage Notes thereunder and take an assignment of the Assignor's interest in the Borrower Collateral. Concurrently with the execution and delivery of this Agreement, Assignee shall receive title to the Assignor's interest in the Borrower Collateral held by the Collateral Agent subject to the first priority security interest of the Collateral Agent. I. Assignment. In consideration of the foregoing, the Assignor hereby transfers, conveys and assigns to Assignee all of Assignor's right, title and interest in, to and under the Documents, including without limitation, the Loan Agreements and the respective Mortgage Notes thereunder and any related Loan Documents, as applicable, and all of Assignor's right, title and interest in, to and under the Borrower Collateral, including without limitation, each Defeasance Eligible Investment and proceeds thereof. Assignee hereby accepts such transfer, conveyance and assignment and assumes, in full, all liabilities, duties, covenants, agreements and obligations and agrees to perform and discharge each and every agreement, liability, duty, covenant and obligation of Assignor under the Documents, including without limitation, the Loan Agreements and the respective Mortgage Notes thereunder and any related Loan Documents, as applicable. The transfer, conveyance and assignment of the Assignor's right, title and interest in, to and under the Borrower Collateral made hereby is intended to be an absolute transfer, conveyance and assignment. This Assignment and Assumption Agreement shall automatically become effective, without any further action of the undersigned required, upon its full execution with the prior written consent of FSA. II. Representations and Warranties. Assignee represents and warrants as follows: (a) Due Organization and Qualification. Assignor and Assignee are corporations, duly organized, validly existing and in good standing under the laws of 2 3 the States of Alabama and Delaware, respectively and each is duly qualified to do business, is in good standing and has obtained all necessary licenses, permits, charter, registrations and approvals (together, "approvals") necessary for the conduct of its business as currently conducted and as proposed to be conducted and the performance of its obligations under this Agreement or any Loan Document, in each jurisdiction in which the failure to be so qualified or to obtain such approvals would render this Agreement or any Loan Document unenforceable in any respect or would have a material adverse effect upon the transaction. (b) Power and Authority. Assignor and Assignee have all necessary corporate power and authority to conduct their business as currently conducted and as proposed to be conducted, to execute, deliver and perform its obligations under this Agreement or any Loan Document and to consummate the transaction. (c) Due Authorization. The execution, delivery and performance of this Agreement and, as applicable, the Loan Documents by Assignor and Assignee have been duly authorized by all necessary corporate action and do not require any additional approvals or consents or other action by or any notice to or filing with any person, including, without limitation, any governmental entity or the Assignor's and Assignee's respective stockholders. (d) Noncontravention. Neither the execution and delivery of this Agreement or any Loan Document by the Assignor or Assignee, the consummation of the transactions contemplated thereby nor the satisfaction of the terms and conditions of this Agreement or any Loan Document, (i) conflicts with or results in any breach or violation of any provision of the certificate of incorporation or bylaws of either the Assignor or Assignee or any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award currently in effect having applicability to the Assignor or Assignee or any of its properties, including regulations issued by an administrative agency or other governmental authority having supervisory powers over the Assignor or Assignee, (ii) constitutes a default by the Assignor or Assignee under or a breach of any provision of any loan agreement, mortgage, indenture or other agreement or instrument to which the Assignor or Assignee is a party or by which it or any of their properties is or may be bound or affected, or (iii) results in or requires the creation of any Lien upon or in respect of any of the assets of the Assignor or Assignee except as otherwise expressly contemplated by this Agreement or any Loan Document. (e) Legal Proceedings. There is no action, proceeding or investigation by or before any court, governmental or administrative agency or arbitrator against or affecting the Assignor or Assignee or the Borrower Collateral, or any of Assignor's or 3 4 Assignee's properties or rights pending or, to their knowledge after reasonable inquiry, threatened, which, in any case, if decided adversely to either, would result in a material adverse change with respect to either of them. (f) Valid and Binding Obligations. This Agreement has been duly executed and delivered by Assignor and Assignee and it constitutes their legal, valid and binding obligations enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy; insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equitable principles. (g) Good Title; Absence of Liens; Security Interest. Assignor is the owner of, and has good and marketable title to, all Borrower Collateral free and clear of all Liens (other than the Liens created by the Loan Agreements) and has full right, corporate power and lawful authority to assign, convey, transfer and pledge its interests in, to and under the Borrower Collateral (and any documents which are a part thereof) and all such substitutions therefor and additions thereto delivered under the Loan Agreements. The Collateral Agent has a valid and perfected first priority security interest in the Borrower Collateral free and clear of all Liens. Upon transfer to Assignee, Assignee will have good and marketable title free and clear of all Liens (other than the Liens created by the Loan Agreements). (h) Solvent Entity. After giving effect to the transactions contemplated by this Agreement, each of Assignee and Assignor will have sufficient capital to pay its debts as they become due. Neither Assignee nor Assignor is engaged in any business, or about to engage in any business or any transaction, for which it has, or will have after engaging in such business or transaction, unreasonably small capital in relation to such business or transaction. Neither Assignee nor Assignor intends to incur, or believes that it will incur, additional debts that would be beyond its ability to pay as such debts become due. (i) No Intent To Defraud. Each of Assignor and Assignee has valid business reasons for entering into the transactions contemplated by this Agreement and has not entered into the transactions contemplated by this Agreement or the Loan Agreements with any intent to hinder, delay or defraud any entity to which Assignor or Assignee is or may become indebted. (j) Loan Agreement. The representations and warranties contained in Sections 6.01, 6.02, 6.03, 6.04, 6.05 and 6.06 of the Loan Agreements are true and correct on and as of the date hereof, as though made on and as of the date hereof. III. Covenants. Assignee covenants and agrees that: (i) Its capital is adequate for its business and undertakings. 4 5 (ii) Other than with respect to this Agreement, it is not engaged in any business transactions with Assignor or any affiliate. (iii) At least one director of Assignee is not, and will not be, a director, officer, employee or holder of any of the equity securities of Assignor or any affiliate thereof. (iv) Its funds and assets are not, and will not be, commingled with those of Assignor or any other person. (v) Its bylaws require it to maintain (a) correct and complete books and records of account, and (b) minutes of the meetings and other proceedings of its stockholders and board of directors. (vi) It is solvent and will not be rendered insolvent by the transactions contemplated by the Loan Agreements and Mortgage Notes thereunder and any related Loan Documents and, after giving effect to such transactions, it will not be left with an unreasonably small amount of capital with which to engage in its business nor will it have intended to incur, or believe that it has incurred, debts beyond its ability to pay such debts as they mature. Assignee does not contemplate the commencement of insolvency, bankruptcy, liquidation or consolidation proceedings or the appointment of a receiver, liquidator, conservator, trustee or similar official in respect of itself or any of its assets. (vii) All the outstanding shares of capital stock of Assignee are owned by Spartan Holdings, Inc. (viii) It will comply and perform all covenants set forth in the Loan Documents, including, in particular, but without limitations, those set forth in Article VI of the Loan Agreements. (ix) It will not take any actions, or permit any actions to be taken, with respect to the Borrower Collateral or otherwise, that would cause a default under the Collateral Assignment Agreement. (x) It will comply with its organizational documents. IV. Security Interest. As security for Assignee's obligations under the Loan Agreements, including, without limitation, its obligations to pay to the Issuer the amounts payable under the Mortgage Notes and under this Agreement, and the performance of all of its representations, warranties, covenants, agreements and obligations under this Agreement and under the Mortgage Notes, Assignee hereby expressly grants to Issuer for the benefit of Financial Security and the Trustee, as secured parties, a first priority security interest in and to all of Assignee's right, title and interest in, to and under the Borrower Collateral and any proceeds thereof. 5 6 Assignee intends such grant to be prior to all others to the full extent of applicable law and shall take all actions reasonably necessary to confer a first priority perfected security interest in, to and under the Borrower Collateral granted hereunder. It is the intention of Assignee that, with respect to the Borrower Collateral, this Agreement shall constitute a security agreement under applicable law, and the Issuer shall have all of the rights and remedies of a secured party and creditor under the UCC and other applicable law as in force in the relevant jurisdictions. Assignee hereby agrees that the Collateral Agent has accepted delivery of the Borrower Collateral on behalf of the Issuer and that the Issuer has pledged and assigned all of its right, title and interest in the Borrower Collateral to the Collateral Agent, for the benefit of Financial Security and the Trustee, pursuant to the Collateral Assignment Agreement. V. Miscellaneous. The representations, warranties, covenants and agreements set forth in this Agreement are made for the benefit of the Issuer, the Collateral Agent, the Trustee and Financial Security and each of the Issuer, the Collateral Agent, the Trustee and Financial Security shall be third party beneficiaries of this Agreement. This Agreement shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, each party has caused this Assignment and Assumption Agreement to be executed in its corporate name as of the day and year first above written. I.M. SPECIAL, INC. By: /s/ Kenneth E. Jones ----------------------------------- Name: Kenneth E. Jones --------------------------- Title: President and Treasurer QUINCY'S REALTY, INC. By: /s/ Kenneth E. Jones ----------------------------------- Name: Kenneth E. Jones --------------------------- Title: Vice President and Treasurer 6 EX-10.38 5 STOCK PLEDGE AGREEMENT 1 EXHIBIT 10.38 EXECUTION COPY STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") dated as of April l, 1998 among SPARTAN HOLDINGS, INC., a New York corporation (the "Pledgor"), who owns all of the outstanding capital stock in I. M. Special, Inc., a Delaware corporation (the "Pledged Entity"), FINANCIAL SECURITY ASSURANCE INC., a New York stock insurance company ("Financial Security"), and THE BANK OF NEW YORK, as collateral agent (the "Collateral Agent"), on behalf of Financial Security. Capitalized terms used herein and not otherwise defined have the meanings assigned to them in the Insurance Agreement (as defined below). INTRODUCTORY STATEMENTS The Pledgor is the sole shareholder of the Pledged Entity. Pursuant to an Assignment and Assumption Agreement, dated May 1, 1998, the Pledged Entity has assumed all obligations and responsibilities of Quincy's Realty, Inc. ("Quincy's") and has been substituted as the "Borrower" under: (i) the Loan Agreement, dated as of November 1, 1990, between Quincy's Realty, Inc. and Secured Restaurants Trust (the "Issuer"), as amended by a First Amendment to Loan Agreement, dated as of November 1, 1991, and as further amended by a Second Amendment to Loan Agreement, dated as of April 1, 1998, and the related Mortgage Notes (collectively, the "Quincy's Loan Agreement"); and (ii) the Loan Agreement, dated as of November 1, 1990, between Spardee's Realty, Inc. ("Spardee's") and the Issuer, as amended by a First Amendment to Loan Agreement, dated as of November 1, 1991, and as further amended by a Second Amendment to Loan Agreement, dated as of April 1, 1998 and the related Mortgage Notes, each, as assumed by Quincy's pursuant to an Assignment and Assumption Agreement, made as of April 1, 1998, by and between Quincy's and Spardee's (collectively, the "Spardee's Loan Agreement"). (Each of the Quincy's Loan Agreement and the Spardee's Loan Agreement are referred to as a "Loan Agreement" and together, as the "Loan Agreements"). Pursuant to the Insurance and Indemnity Agreement, dated as of November 1,1990, between Financial Security and the Issuer (the "Insurance Agreement"), Financial Security has issued its Financial Guaranty Insurance Policy #50137A-N with respect to the Issuer's $225,000,000 initial aggregate principal amount of 10 1/4% Guaranteed Secured Bonds Due 2000. The Collateral Agent has succeeded The Citizens and Southern National Bank of South Carolina (the "Previous Collateral Agent") as collateral agent under the Collateral Assignment Agreement, dated as of November 1, 1990, among the Issuer, Financial Security and the Previous Collateral Agent, as amended by the First Amendment to Collateral Assignment Agreement, dated as of April 1, 1998 (as amended, the "Collateral Assignment Agreement"). 2 In consideration of the premises and of the agreements herein contained, the Pledgor, Financial Security and the Collateral Agent agree as follows: SECTION 1. SECURITY INTEREST. As security for the full and complete performance of all of the obligations of the Pledged Entity under the Loan Agreements (the "Obligations"), Pledgor hereby delivers, pledges and assigns to the Collateral Agent on behalf of Financial Security, and creates in the Collateral Agent on behalf of Financial Security, a first priority security interest in all of the Pledgor's right, title and interest in, to and under its shares of the Pledged Entity (collectively, the "Pledged Shares"), together with all of Pledgor's rights and privileges with respect thereto, including without limitation all dividends thereon, all proceeds, income and profits thereof and all property received in exchange thereof or in substitution therefor (the "Collateral"). SECTION 2. STOCK DIVIDENDS, OPTIONS OR OTHER ADJUSTMENTS. Until the Termination Date (as defined in Section 17), the Pledgor shall deliver, as Collateral, to the Collateral Agent, any and all additional shares of stock or any other property of any kind distributable on or by reason of the Collateral, whether in the form of or by way of stock dividends, warrants, total or partial liquidation, conversion, prepayments, redemptions or otherwise. If any additional shares of capital stock, instruments or other property a security interest in which can be perfected only by possession by the Collateral Agent, which are distributable on or by reason of the Collateral pledged hereunder, shall come into the possession or control of the Pledgor, Pledgor shall forthwith transfer and deliver such property to the Collateral Agent, as Collateral hereunder. SECTION 3. DELIVERY OF SHARE CERTIFICATES; STOCK POWERS. Simultaneously with the delivery of this Pledge Agreement, the Pledgor is delivering to the Collateral Agent all instruments and stock certificates representing the Collateral, together with stock powers duly executed in blank by Pledgor. Pledgor shall promptly deliver to the Collateral Agent, or cause the Pledged Entity or any other entity issuing any Collateral to deliver directly to the Collateral Agent, share certificates or other instruments representing any Collateral acquired or received after the date of this Pledge Agreement with a stock or bond power duly executed by Pledgor. If at any time either the Collateral Agent or Financial Security notifies Pledgor that it requires additional stock powers endorsed in blank, Pledgor shall, at its expense, promptly execute in blank and deliver the requested power to the requesting party. SECTION 4. POWER OF ATTORNEY. Pledgor hereby constitutes and irrevocably appoints the Collateral Agent and Financial Security, or either one acting alone, with full power of substitution and revocation, as Pledgor's true and lawful attorney-in-fact, with the power, after the occurrence of a Stock Pledge Event (as defined in Section 10), to the full extent permitted by law, to affix to any certificates and documents representing the Collateral the stock or bond powers delivered with respect thereto, and to transfer or cause the transfer of the Collateral, or any part thereof, on the books of the Pledged Entity or other entity issuing any Collateral, to the name of the Collateral Agent or Financial Security or any nominee, and thereafter to exercise, with respect to such Collateral, all the rights, powers and remedies of an owner. The power of attorney granted pursuant to this Pledge Agreement and all authority hereby conferred are granted and conferred solely to protect Financial Security's interest in the Collateral and shall not impose any duty upon the Collateral Agent or Financial Security to exercise any power. This power of attorney shall be irrevocable as one coupled with an interest until the occurrence of the Termination Date. 2 3 SECTION 5. INDUCING REPRESENTATIONS OF PLEDGOR. (a) Pledgor represents and warrants to Financial Security that: (i) The Pledged Shares are validly issued, fully paid and nonassessable. (ii) The Pledged Shares represent all of the issued and outstanding capital stock of the Pledged Entity. (iii) The Pledgor is the sole legal and beneficial owner of the Pledged Shares, free and clear of all Liens (other than the Lien created by this Pledge Agreement) and the Pledgor has the unqualified power, right and authority to execute and perform this Pledge Agreement. (iv) No options, warrants or other agreements with respect to the Collateral are outstanding. (v) Any consent, approval or authorization of, or designation or filing with, any authority on the part of the Pledgor which is required in connection with the pledge and security interest granted under this Pledge Agreement has been obtained or effected. (vi) Neither the execution and delivery of this Pledge Agreement by the Pledgor, the consummation of the transaction contemplated hereby nor the satisfaction of the teems and conditions of this Pledge Agreement: (A) conflicts with or results in any breach or violation of any provision of the articles of incorporation or bylaws of the Pledgor or any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award currently in effect having applicability to the Pledgor or any of its properties, including regulations issued by an administrative agency or other governmental authority having supervisory powers over the Pledgor; (B) conflicts or will conflict with, constitutes or will constitute a default (or an event which with the giving of notice or the passage of time, or both, would constitute a default) by the Pledgor under, or a breach of, or contravenes or will contravene any provision of its organizational documents, either Loan Agreement, or any Mortgage Note (collectively, the "Borrower Documents") or any loan agreement, mortgage, indenture or other agreement or instrument to which the Pledgor is a party or by which it or any of its properties is or may be bound or affected; or (C) results in or requires the creation of any Lien upon or in respect of any of the Pledgor's assets (other than the Lien created by this Pledge Agreement). 3 4 (vii) Upon the Pledgor's delivery of the Pledged Shares to the Collateral Agent, the Collateral Agent, on behalf of Financial Security, will have a valid, perfected first priority Lien on the Collateral, enforceable as such against all creditors of the Pledgor and against all Persons purporting to purchase any of the Collateral from the Pledgor. (b) Any damages payable due to a breach of this Section 6 are limited to amounts payable (i) pursuant to a drawing under Irrevocable Letter of Credit No. P-360919 issued by The Chase Manhattan Bank and dated April 1, 1998 and (ii) from the Collateral, including pursuant to any action taken with respect to the Collateral pursuant to Section 10 hereof. SECTION 6. OBLIGATIONS OF PLEDGOR. (a) Pledgor hereby covenants and agrees as follows: (i) Pledgor shall not incur, assume or guarantee any indebtedness for money borrowed by the Pledged Entity. (ii) Pledgor does not, and will not, assume liability for any debts of the pledged Entity and does not, and will not, guarantee any of the debts or obligations of the Pledged Entity. Pledgor will not hold itself out as being liable for the debts of the Pledged Entity. (iii) Pledged Entity is not referred to as a "department" or "division" in the incorporation or other internal materials, records or documents of Pledgor. (iv) Pledgor shall conduct its business solely in its own name so as not to mislead others as to the identity of the Pledged Entity with which those others are concerned and particularly will use its best efforts to avoid the appearance of conducting business on behalf of the Pledged Entity. Without limiting the generality of the foregoing, all oral and written communications, including, without limitation, letters, invoices, purchase orders, contracts, statements and loan applications, will be made solely in the name of the Pledgor. (v) Pledgor will act solely in its corporate name and through its duly authorized officers or agents in the conduct of its business. (vi) Where necessary and appropriate, Pledgor shall disclose the nature of the transaction referred to above and the independent corporate status of the Pledged Entity to creditors of Pledgor, if any. (vii) The annual financial statements of Pledgor, including consolidated financial statements, if any, will disclose the effects of Pledgor's transactions in accordance with generally accepted accounting principles and will disclose that the assets of the Pledged Entity are not available to pay any creditors of Pledgor. (viii) The resolutions, agreements and other instruments of Pledgor, if any, underlying the transactions described in this Pledge Agreement will be continuously maintained by Pledgor as the official records. 4 5 (ix) Pledgor will use its best efforts to maintain an arm's-length relationship with the Pledged Entity. (x) Pledgor will use its best efforts to keep its assets and its liabilities wholly separate from those of the Pledged Entity. (xi) Except for actions taken by it as the sole shareholder of the Pledged Entity, Pledgor will not direct, or otherwise control, the ongoing business decisions of the Pledged Entity. (b) Any damages payable due to a breach of this Section 6 are limited to amounts payable (i) pursuant to a drawing under Irrevocable Letter of Credit No. P-360919 issued by The Chase Manhattan Bank and dated April 1, 1998 and (ii) from the Collateral, including pursuant to any action taken with respect to the Collateral pursuant to Section 10 hereof. SECTION 7. FURTHER COVENANTS; CERTAIN VOTING RIGHTS. (a) Pledgor hereby further covenants and agrees as follows: (i) The Pledgor will not sell, transfer or convey any interest in, or suffer or permit any Lien or encumbrance to be created upon or with respect to, any of the Collateral (other than as created under this Pledge Agreement) during the term of this Pledge Agreement. (ii) The Pledgor will, at its own expense, at any time and from time to time at the request of the Collateral Agent or Financial Security, do, make, procure, execute and deliver all acts, things, writings, assurances and other documents as may be reasonably requested by the Collateral Agent or Financial Security to preserve or establish Financial Security's Lien on the Collateral. (iii) The Pledgor has not and will not take any action which would cause the Pledged Entity to issue any other capital stock, without the prior written consent of Financial Security. Any such issuance shall be subject to this Pledge Agreement. (iv) The Pledgor will not consent to any amendment of the Pledged Entity's Certificate of Incorporation or Bylaws without the prior written consent of Financial Security. (v) The Pledgor will not voluntarily permit the Pledged Entity to engage in any dissolution, insolvency proceeding, liquidation, consolidation, merger, asset sale, transfer of ownership or amendment of organic documents without the prior written consent of Financial Security. (vi) Pledgor will not file or cause to be filed a voluntary petition in bankruptcy against the Pledged Entity, nor seek substantive consolidation of the assets and liabilities of the Pledged Entity and Pledgor in any bankruptcy or insolvency proceeding, for one year and one day after maturity of all debt of the Pledged Entity under the Loan Agreements. 5 6 (b)(i) Subject to Section 8, so long as no Stock Pledge Event (as defined in Section 10) exists, Pledgor shall be entitled to vote its Pledged Stock and to give consents, waivers or ratifications in respect of its Pledged Stock; (ii) provided, however, that until the date described in 7(a)(vi), no vote shall be cast, or consent, waiver or ratification given, by Pledgor with respect to any matter described in Section 7(a) hereof, any matter prohibited by the organizational documents of the Pledged Entity in effect as of the date hereof or as amended with the prior written consent of Financial Security, any matter relating to the Loan Agreements, or any matter relating to the Borrower Collateral (as defined in the Loan Agreements) without the prior written consent of Financial Security. All rights of Pledgor to vote and give consents, waivers and ratifications pursuant to (b)(i) above shall cease if a Stock Pledge Event exists, except to the extent that Financial Security in writing otherwise agrees. SECTION 8. VOTING PROXY. Pledgor hereby grants to the Collateral Agent on behalf of Financial Security an irrevocable proxy to vote the Pledged Shares with respect to any matter described in Section 7(b)(ii) above, which proxy is coupled with an interest and shall continue until the Termination Date. Pledgor represents and warrants that it has directed the Pledged Entity to reflect the Collateral Agent's right to vote the Collateral, on behalf of Financial Security, on the Pledged Entity's books. Upon the request of the Collateral Agent or Financial Security, Pledgor shall deliver to the Collateral Agent such further evidence of such irrevocable proxy or such further irrevocable proxy to vote the Collateral as the Collateral Agent or Financial Security may reasonably request. The Collateral Agent shall exercise all such rights to vote the Collateral granted hereunder in accordance with the written directions given by Financial Security. SECTION 9. RIGHTS OF FINANCIAL SECURITY. At any time and without notice, Financial Security may, upon providing the Collateral Agent with the full amount necessary to carry out such direction, direct the Collateral Agent to discharge any taxes, liens, security interests or other encumbrances levied or placed on the Collateral, or pay for the maintenance and preservation of the Collateral. The Collateral Agent shall have no duty or obligation to follow any direction provided in this Section 9 unless Financial Security has provided the Collateral Agent with the full amount necessary to carry out such direction. SECTION 10. REMEDIES UPON EVENT OF DEFAULT. (a) If a material default exists under this Pledge Agreement or an "Event of Default" exists under either Loan Agreement, any Mortgage Note or the Insurance Agreement (any such event, a "Stock Pledge Event"), Financial Security may, directly or through the Collateral Agent, without notice to Pledgor: (i) cause the Collateral to be transferred to the Collateral Agent's name or Financial Security's name or in the name of nominees of either and thereafter exercise as to such Collateral all of the rights, powers and remedies of an owner; 6 7 (ii) collect by legal proceedings or otherwise all amounts now or hereafter payable on account of the Collateral, and hold all such sums as part of the Collateral, or apply such sums to the payment of the Obligations in such manner and order as Financial Security may decide, in its sole discretion; and (iii) enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith deposit or surrender control of the Collateral thereunder, and accept other property in exchange therefor and hold and apply such property or money so received in accordance with the provisions hereof. (b) In addition to all the rights and remedies of a secured party under the Uniform Commercial Code, Financial Security shall have the right, and without demand of performance or other demand, advertisement or notice of any kind, except as specified below, to or upon Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law), to proceed forthwith, or direct the Collateral Agent to proceed forthwith, to collect, receive, appropriate and realize upon the Collateral, or any part thereof and to proceed forthwith to sell, assign, give an option or options to purchase, contract to sell, or otherwise dispose of and deliver the Collateral or any part thereof in one or more parcels in accordance with applicable securities laws and in a manner designed to ensure that such sale will not result in a distribution of the Pledged Shares in violation of the Securities Act and on such terms (including, without limitation, a requirement that any purchaser of all or any part of the Collateral shall be required to purchase any securities constituting the Collateral solely for investment and without any intention to make a distribution thereof) as Financial Security, in its sole and absolute discretion deems appropriate without any liability for any loss due to decrease in the market value of the Collateral during the period held. If any notification of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed to Pledgor, postage prepaid, at least 10 days before any such disposition at the address indicated in Section 20. Any disposition of the Collateral or any part thereof may be for cash or on credit or for future delivery without assumption of any credit risk, with the right of Financial Security to purchase all or any part of the Collateral so sold at any such sale or sales, public or private, free of any equity or right of redemption in Pledgor, which right of equity is, to the extent permitted by applicable law, hereby expressly waived or released by Pledgor. (c) Financial Security, in its sole discretion, may elect to obtain or cause the Collateral Agent to obtain the advice of any independent nationally known investment banking firm which is a member firm of the New York Stock Exchange, with respect to the method and manner of sale or other disposition of any of the Collateral, the best price reasonably obtainable therefor, the consideration of cash and/or credit terms, or any other details concerning such sale or disposition; costs and expenses of obtaining such advice shall be for the account of the Pledged Entity. Financial Security, in its sole discretion, may elect to sell, or cause the Collateral Agent to sell, the Collateral on any credit terms which it deems reasonable; the out-of-pocket costs and expenses of such sale shall be for the account of the Pledged Entity. The sale of any of the Collateral on credit terms shall not relieve the Pledged Entity of its liabilities with respect to the Obligations. All payments received by the Collateral Agent, if any, and Financial Security in respect of any sale of the Collateral shall be applied to the Obligations as and when such payments are received. Pledgor shall not have an obligation to register the Pledged Shares under the Securities Act or any state securities laws. 7 8 (d) Pledgor recognizes that it may not be feasible to effect a public sale of all or a part of the Collateral by reason of certain prohibitions contained in the Securities Act and that it may be necessary to sell privately to a restricted group of purchasers who will be obliged to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view for the distribution or resale thereof. Pledgor agrees that private sales may be at prices and other terms less favorable to the seller than if the Collateral were sold at public sale and that neither the Collateral Agent nor Financial Security has any obligation to delay the sale of any Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Securities Act. Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority shall be necessary to effectuate any sale or other disposition of the Collateral, or any partial disposition of the Collateral, Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization and will otherwise use its best efforts to secure the same. (f) Upon any sale or other disposition, the Collateral Agent, acting at the direction of Financial Security, or Financial Security, shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold or disposed of. Each purchaser at any such sale or other disposition (including Financial Security) shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of Pledgor. Pledgor specifically waives, to the extent permitted by applicable law, all rights of redemption, stay or appraisal which it may have under any rule of law or statute now existing or hereafter adopted. (g) Neither the Collateral Agent nor Financial Security shall be obligated to make any sale or other disposition of the Collateral, unless the terms thereof shall be satisfactory to Financial Security. The Collateral Agent or Financial Security may, without notice or publication, adjourn any private or public sale and, upon 10 days' prior notice to Pledgor, hold such sale at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral, on credit or future delivery, the Collateral so sold may be retained by the Collateral Agent or Financial Security until the selling price is paid by the purchaser thereof, but neither the Collateral Agent nor Financial Security shall incur any liability in case of the failure of such purchaser to take up and pay for the property so sold and, in case of any such failure, such property may again be sold as herein provided. (h) Except as otherwise expressly provided herein, all of the rights and remedies herein provided, including, but not limited to the foregoing, shall be cumulative and not exclusive of any other remedies provided by law or any other agreement, and shall be enforceable alternatively, successively or concurrently as Financial Security may deem expedient. 8 9 SECTION 11. LIMITATION ON LIABILITY. (a) Neither the Collateral Agent nor Financial Security, nor any of their respective directors, officers or employees, shall be liable to Pledgor or to the Pledged Entity for any action taken or omitted to be taken by it or them hereunder, or in connection herewith, except that the Collateral Agent and Financial Security shall each be liable for its own negligence, bad faith or willful misconduct. (b) The Collateral Agent shall incur no liability to Financial Security except for the Collateral Agent's negligence or willful misconduct in carrying out its duties hereunder. (c) The Collateral Agent shall be protected and shall incur no liability to any party in relying upon the accuracy, acting in reliance upon the contents, and assuming the genuineness of any notice, demand, certificate, signature, instrument or other document the Collateral Agent reasonably believes to be genuine and to have been duly executed by the appropriate signatory, and (absent actual knowledge to the contrary) the Collateral Agent shall not be required to make any independent investigation with respect thereto. The Collateral Agent shall at all times be free independently to establish to its reasonable satisfaction, but shall have no duty to independently verify, the existence or nonexistence of facts that are a condition to the exercise or enforcement of any right or remedy hereunder. (d) The Collateral Agent may consult with qualified counsel, financial advisors or accountants and shall not be liable for any action taken or omitted to be taken by it hereunder in good faith and in accordance with the written advice of such counsel, financial advisors or accountants. (e) The Collateral Agent shall not be under any obligation to exercise any of the remedial rights or powers vested in it by this Pledge Agreement unless it shall have received reasonable security or indemnity satisfactory to the Collateral Agent against the reasonable costs, expenses and liabilities which it might incur. SECTION 12. PERFORMANCE OF DUTIES. The Collateral Agent shall have no duties or responsibilities except those expressly set forth in this Pledge Agreement, subject to the provisions of this Pledge Agreement or as directed by Financial Security in accordance with this Pledge Agreement. The Collateral Agent on behalf of Financial Security and its successors and assigns shall have no obligation in respect of the Collateral, except to use reasonable care in holding the Collateral and to hold and dispose of the same in accordance with the terms of this Pledge Agreement. SECTION 13. APPOINTMENT AND POWERS. Subject to the terms and conditions hereof, Financial Security appoints The Bank of New York as its Collateral Agent and The Bank of New York accepts such appointment and agrees to act as Collateral Agent on behalf of Financial Security to maintain custody and possession of the Collateral and to perform the other duties of the Collateral Agent in accordance with the provisions of this Pledge Agreement. The Collateral Agent shall, subject to the other terms and provisions of this Pledge Agreement, act upon and in compliance with Financial Security's written instructions delivered pursuant to this Pledge Agreement as promptly as possible following receipt of such written instructions. Receipt of written instructions shall not be a condition 9 10 to the exercise by the Collateral Agent of its express duties hereunder, unless this Pledge Agreement provides that the Collateral Agent is permitted to act only following receipt of such instructions. SECTION 14. SUCCESSOR COLLATERAL AGENT. (a) Merger. Any Person into which the Collateral Agent may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its corporate trust business and assets as a whole or substantially as a whole, or any Person resulting from any such conversion, merger, consolidation, sale or transfer to which the Collateral Agent is a party, shall (provided it is otherwise qualified to serve as the Collateral Agent hereunder) be and become a successor Collateral Agent hereunder and be vested with all of the title to and interest in the Collateral and all of the trusts, powers, immunities, privileges and other matters as was its predecessor without the execution or fling of any instrument or any further act, deed or conveyance on the part of any of the parties hereto, anything herein to the contrary notwithstanding. (b) Resignation. The Collateral Agent and any successor Collateral Agent may resign only (i) with the 45 days' prior written notice to Financial Security or (ii) if the Collateral Agent is unable to perform its duties hereunder as a matter of law as evidenced by an opinion of counsel acceptable to Financial Security. Upon the occurrence of (i) or (ii) above, the Collateral Agent shall give notice of its resignation by registered or certified mail to Pledgor (with a copy to Financial Security). Any resignation by the Collateral Agent shall take effect only upon the date which is the later of (x) the effective date of the appointment by Financial Security of a successor Collateral Agent and the acceptance in writing by such successor Collateral Agent of such appointment and (y) the date on which the Collateral is delivered to the successor Collateral Agent. Notwithstanding the preceding sentence, if by the contemplated date of resignation specified in the written notice of resignation delivered (as described above) no successor Collateral Agent has been appointed Collateral Agent or becomes the Collateral Agent pursuant to subsection (d) below, the resigning Collateral Agent may petition a court of competent jurisdiction for the appointment of a successor. (c) Removal. The Collateral Agent may be removed by Financial Security at any time, with or without cause, by an instrument or concurrent instruments in writing delivered to the Collateral Agent. Any removal pursuant to the provisions of this subsection (c) shall take effect only upon the later to occur of (i) the effective date of the appointment of a successor Collateral Agent and the acceptance in writing by such successor Collateral Agent of such appointment and of its obligation to perform its duties hereunder in accordance with the provisions hereof and (ii) the date on which the Collateral is delivered to the successor Collateral Agent. (d) Appointment of and Acceptance by Successor. (i) Financial Security shall have the sole right to appoint each successor Collateral Agent. Every successor Collateral Agent appointed hereunder shall execute, acknowledge and deliver to its predecessor and to Financial Security and Pledgor an instrument in writing accepting such appointment hereunder and the relevant predecessor shall execute, acknowledge and deliver such other documents 10 11 and instruments as will effectuate the delivery of all Collateral to the successor Collateral Agent, whereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, duties and obligations of its predecessor. Such predecessor shall, nevertheless, on the written request of Financial Security, execute and deliver an instrument transferring to such successor all the estates, properties, rights and powers of such predecessor hereunder. (ii) Every predecessor Collateral Agent shall assign, transfer and deliver all Collateral held by it as Collateral Agent hereunder to its successor as Collateral Agent. (iii) Should any instrument in writing from Pledgor or the Pledged Entity be reasonably required by a successor Collateral Agent for more fully and certainly vesting in such successor the estates, properties, rights, powers, duties and obligations vested or intended to be vested hereunder in the Collateral Agent, any and all such written instruments shall, at the request of the successor Collateral Agent, be forthwith executed, acknowledged and delivered by Pledgor. (iv) The designation of any successor Collateral Agent and the instrument or instruments removing any Collateral Agent and appointing a successor hereunder, together with all other instruments provided for herein, shall be maintained with the records relating to the Collateral and, to the extent required by applicable law, filed or recorded by the successor Collateral Agent in each place where such filing or recording is necessary to effect the transfer of the Collateral to the successor Collateral Agent or to protect and preserve the security interests granted hereunder. SECTION 15. REIMBURSEMENT AND INDEMNIFICATION. (a) The Pledgor hereby agrees to pay, and to protect, indemnify and save harmless Financial Security and its officers, directors, shareholders, employees, agents and each Person, if any, who controls Financial Security within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act from and against, any and all claims, losses, liabilities (including penalties), actions, suits, judgments, demands, damages, costs or expenses (including, without limitation, the costs and expenses of defending against any claim of liability) of any nature arising out of or in connection with this Pledge Agreement, except such loss, liabilities, actions, suits, judgments, demands, damages, costs or expenses as shall result from the negligence, bad faith or willful misconduct of Financial Security or its officers, directors, shareholders, employees, agents and each Person, if any, who controls Financial Security within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act; PROVIDED, however, that, any provision herein to the contrary notwithstanding: 11 12 (i) Pledgor's obligations pursuant to this Section 15 arising in connection with any breach of Section 5 or Section 6 hereof shall be limited to amounts payable (A) pursuant to a drawing under Irrevocable Letter of Credit No. P-360919 issued by The Chase Manhattan Bank and dated April 1, 1998 and (B) from the Collateral, including pursuant to any action taken with respect to the Collateral pursuant to Section 10 hereof; and (ii) The only damages indemnifiable or payable with respect to a breach of Section 7 hereof shall be any loss or damages which (A) are not recovered by a drawing under Irrevocable Letter of Credit No. P-360919 issued by The Chase Manhattan Bank and dated April 1, 1998, and (B) result from the loss of the ability or right, or any delay in the exercise of ability or right, of either the "Collateral Agent" under the Collateral Assignment Agreement or Financial Security to realize the full and timely benefits of the Defeasance Eligible Investments or other Borrower Collateral, or any loss resulting from a delay in such realization, including any and all charges, fees, costs and expenses which Financial Security may reasonably pay or incur, including, but not limited to, attorneys' and accountants' fees and expenses, in connection with (1) reimbursement of the Collateral Agent, or (2) the administration, enforcement, defense or preservation of any rights in respect of any of the Related Documents (as defined in the Insurance Agreement), including defending, monitoring or participating in any litigation or proceeding (including any bankruptcy proceeding in respect of the Pledged Entity or any affiliate of the Pledged Entity) relating to any of the Related Documents, any party to any of the Related Documents or the Transaction. (b) The obligations of Pledgor under this Section 15 shall survive the termination of this Pledge Agreement and the resignation or removal of the Collateral Agent. SECTION 16. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COLLATERAL AGENT. The Collateral Agent represents and warrants to Pledgor and to Financial Security as follows: (a) The Collateral Agent is a state banking corporation, duly organized, validly existing and in good standing under the laws of the State of New York and is duly authorized and licensed under applicable law to conduct its business as presently conducted. (b) The Collateral Agent has all requisite right, power and authority to execute and deliver this Pledge Agreement and the other Transaction Documents to which it is or becomes a party and to perform all of its duties as Collateral Agent hereunder and thereunder. (c) The execution and delivery by the Collateral Agent of this Pledge Agreement, and the performance by the Collateral Agent of its duties hereunder, have been duly authorized by all necessary corporate proceedings and no further approvals or filings, including any governmental approvals, are required or will be required, as the case may be, for the valid execution and delivery by the Collateral Agent, or the performance by the Collateral Agent, of this Pledge Agreement. 12 13 (d) The Collateral Agent has duly executed and delivered this Pledge Agreement, and, assuming the due authorization, execution and delivery hereof by the other parties hereto, this Pledge Agreement constitutes the legal, valid and binding obligation of the Collateral Agent, enforceable against the Collateral Agent in accordance with its terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization and similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (e) The Collateral Agent has been paid in full its ordinary administrative fee for acting as Collateral Agent under this Pledge Agreement. SECTION 17. TERMINATION. This Pledge Agreement shall continue in full force and effect until the date (the "Termination Date") on which the Insurance Agreement terminates in accordance with its terms. SECTION 18. RESERVED. SECTION 19. RESERVED. SECTION 20. NOTICES. Any notice or other communication given hereunder shall be in writing and shall be sent by registered mail, postage prepaid, or personally delivered or telecopied to the recipient as follows: (a) To the Collateral Agent: The Bank of New York Towermarc Plaza 10161 Centurion Parkway Jacksonville, FL 32256 Attention: Corporate Trust Department Telephone: (904) 998-4700 Facsimile: (904) 645-1932 (b) To Financial Security: Financial Security Assurance Inc. 350 Park Avenue New York, NY 10022 Attention: Surveillance Department Telephone: (212) 826-0100 Facsimile: (212) 339-3518 (212) 339-3529 13 14 (c) To Pledgor: Spartan Holdings, Inc. 203 East Main Street Spartanburg, SC 29301 Attention: General Counsel Facsimile: (864) 597-8216 With a copy to: Advantica Restaurant Group, Inc. 203 East Main Street Spartanburg, SC 29301 Attention: General Counsel Facsimile: (864) 596-8327 SECTION 21. GENERAL PROVISIONS. (a) The failure of the Collateral Agent or Financial Security to exercise, or delay in exercising, any right, power or remedy hereunder shall not operate as a waiver thereof, nor shall any single or partial exercise by the Collateral Agent or Financial Security of any right, power or remedy hereunder preclude any other or future exercise thereof, or the exercise of any other right, power or remedy. (b) The representations of Pledgor herein contained shall survive the date hereof. (c) Neither this Pledge Agreement nor the provisions hereof can be changed, waived or terminated orally. This Pledge Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, legal representatives and assigns. If any provision of this Pledge Agreement shall be invalid or unenforceable in any respect or in any jurisdiction, the remaining provisions shall remain in full force and effect and shall be enforceable to the maximum extent permitted by law. (d) Unless otherwise indicated, all references to particular Sections are references to Sections of this Pledge Agreement. (e) This Pledge Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. (f) Each of the parties hereto waives, to the fullest extent permitted by law, any right it may have to a trial by jury in respect of any litigation arising directly or indirectly out of, under or in connection with this Pledge Agreement or any of the transactions contemplated hereunder. Each of the parties hereto (i) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (ii) acknowledges that it has not been induced to enter into this Pledge Agreement and the other Borrower Documents (as defined in Section 5) to which it is a party 14 15 nor will have been induced to enter into any other Borrower Documents to which it becomes a party by, among other things, this waiver. (g) THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. (h) PLEDGOR IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, ANY COURT IN THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS PLEDGE AGREEMENT, THE OTHER BORROWER DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREUNDER OR THEREUNDER OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH SUIT OR ACTION OR PROCEEDING MAY BE HEARD OR DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THIS PLEDGE AGREEMENT OR ANY OF THE OTHER BORROWER DOCUMENTS OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURTS. PLEDGOR IRREVOCABLY APPOINTS AND DESIGNATES CT CORPORATION SYSTEM AS ITS TRUE AND LAWFUL ATTORNEY AND DULY AUTHORIZED AGENT FOR ACCEPTANCE OF SERVICE OF LEGAL PROCESS. PLEDGOR AGREES THAT SERVICE OF SUCH PROCESS UPON SUCH PERSON SHALL CONSTITUTE PERSONAL SERVICE OF PROCESS UPON IT. NOTHING CONTAINED IN THIS PLEDGE AGREEMENT SHALL LIMIT OR AFFECT THE RIGHTS OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO START LEGAL PROCEEDINGS RELATED TO ANY OF THE BORROWER DOCUMENTS AGAINST PLEDGOR OR ITS RESPECTIVE PROPERTY IN THE COURTS OF ANY JURISDICTION. (i) The Collateral Agent, by the execution hereof, acknowledges receipt of the Pledged Shares on behalf of Financial Security. 15 16 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Stock Pledge Agreement on the date first above written. SPARTAN HOLDINGS, INC. By: /s/ James H. Allyn ------------------------------------------- Name James H. Allyn ----------------------------------------- Title Director ---------------------------------------- FINANCIAL SECURITY ASSURANCE INC. By: /s/ Alex G. Makowski ------------------------------------------- Alex G. Makowski Managing Director THE BANK OF NEW YORK By: /s/ Heidi Van Horn-Bash ------------------------------------------- Name Heidi Van Horn-Bash ----------------------------------------- Agent 16 EX-10.39 6 SUBSTITUTION CONSENT & AGREEMENT 1 EXHIBIT 10.39 EXECUTION COPY CONSENT AND AGREEMENT REGARDING SUBSTITUTION This Consent And Agreement Regarding Substitution (this "Agreement"), dated as of May 1, 1998, is by and among SFS SECURED RESTAURANTS, INC., SPARTAN SECURED RESTAURANTS, INC. (each of SFS Secured Restaurants, Inc. and Spartan Secured Restaurants, Inc. are referred to herein as an "Owner" and together as the "Owners"), SECURED RESTAURANTS TRUST (the "Issuer"), THE BANK OF NEW YORK, I. M. SPECIAL, INC., and FINANCIAL SECURITY ASSURANCE INC. ("Financial Security" and ADVANTICA RESTAURANT GROUP, INC. ("Advantica")). Reference is made to: (i) the Loan Agreement, dated as of November 1, 1990, as amended by a First Amendment to Loan Agreement, dated as of November 1, 1991, and as further amended by a Second Amendment to Loan Agreement, dated as of April 1, 1998, (collectively, the "Quincy's Loan Agreement") between the Issuer and Quincy's Realty, Inc. ("Quincy's Realty"), (ii) the Loan Agreement, dated as of November 1, 1990, as amended by a First Amendment to Loan Agreement, dated as of November 1, 1991, and as further amended by a Second Amendment to Loan Agreement, dated as of April 1, 1998 (collectively, the "Spardee's Loan Agreement"), between the Issuer and Spardee's Realty, Inc. ("Spardee's Realty"), (iii) the Collateral Assignment Agreement, dated as of November l, 1990, as amended by a First Amendment to Collateral Assignment Agreement, dated as of April 1, 1998 (collectively, the "Collateral Assignment Agreement") among the Issuer, Financial Security and The Bank of New York, as successor to The Citizens and Southern Bank of South Carolina, as indenture trustee (the "Trustee") and as collateral agent (the "Collateral Agent"), and (iv) The Intercreditor Agreement, dated as of November l, 1990 (the "Intercreditor Agreement"), among Financial Security, the Trustee and the Collateral Agent. All obligations and liabilities of Spardee's under the Spardee's Loan Agreement were assigned to, and assumed by, Quincy's Realty pursuant to an Assignment and Assumption Agreement, dated April 1, 1998 between Quincy's Realty and Spardee's Realty. The Quincy's Loan Agreement, the Spardee's Loan Agreement, the Collateral Assignment Agreement and the Intercreditor Agreement all relate to the Issuer's 10 1/4 % Guaranteed Secured Bonds Due 2000 (the "Bonds") issued pursuant to an indenture dated as of November 1, 1990 (the "Indenture") between the Issuer and the Trustee. The Quincy's Loan Agreement and the Spardee's Loan Agreement, and the Mortgage Notes thereunder (as defined in such agreements), are referred to collectively herein as the "Loan Agreements." 2 Financial Security is the Controlling Party (as defined in the Intercreditor Agreement). On April 1, 1998, Quincy's Realty effected a defeasance of the Mortgage Notes pursuant to Section 2.04(c) of each of the Quincy's Loan Agreement and the Spardee's Loan Agreement (such transaction, the "Defeasance"). Quincy's Realty has requested that Financial Security and the other parties hereto consent to the substitution of I. M. Special, Inc. as "Borrower" for Quincy's under (a) the Quincy's Loan Agreement, (b) the Spardee's Loan Agreement and (c) in connection with the related Mortgage Notes. Such substitution (the "Substitution") will occur pursuant to an Assignment and Assumption Agreement dated May 1, 1998 (the "Assignment Agreement") by and between Quincy's Realty and I. M. Special, Inc. In consideration of the premises the parties hereto agree as follows: I. FINANCIAL SECURITY CONSENT TO SUBSTITUTION Financial Security hereby consents to the Substitution subject to the following: (1) Receipt by Financial Security of executed originals (or copies of executed originals, provided that Advantica shall deliver executed originals to Financial Security by May 30, 1998) of: (1) The Assignment Agreement; (2) Certified copies of the certificate of incorporation and bylaws of I. M. Special, Inc.; (iii) Evidence that the Board of Directors of I. M. Special, Inc. has authorized I. M. Special, Inc. to enter into the Substitution; (iv) Stock Pledge Agreement, dated as of May 1, 1998, among Spartan Holdings Inc., Financial Security and the Collateral Agent; (v) One or more legal opinions from Parker Poe Adams and Bernstein L.L.P. addressed to, and in form and substance acceptable to, Financial Security relating to the Substitution and such other matters as may be contemplated thereby or by this Agreement; and (vi) Certificates from Advantica, Quincy's Realty, I. M. Special, Inc. and/or their affiliates and such other documents as Financial Security may reasonably request. 2 3 (b) Payment to Kutak Rock, as set forth in a statement from Kutak Rock, of fees and disbursements for legal services provided to Financial Security in connection with the Substitution. (c) Execution of this Agreement by Advantica II. CONSENTS AND DIRECTIONS REGARDING DOCUMENTS. (a) Financial Security hereby directs The Bank of New York, as Trustee and as Collateral Agent, to execute, and directs the Owners to cause Wilmington Trust Company (the "Issuer Trustee"), on behalf of the Issuer, to execute, as applicable: (i) the Quincy's Realty, Inc. Release and Agreement, dated May 1, 1998 (the "Quincy's Release"), by the Issuer, Financial Security, the Trustee and the Collateral Agent; (ii) the Termination of Reimbursement Agreement, dated May 1, 1998, by Financial Security and Advantica; and (iii) the Termination of Stock Pledge Agreement, dated May 1, 1998 (the "Termination of Stock Pledge"), by Quincy's Restaurants, Inc. and the Issuer. (b) Financial Security hereby consents to the Issuer Trustee's execution, on its own behalf, of this Agreement; (c) Financial Security hereby directs the Owners to direct the Issuer Trustee to execute this Agreement, the Quincy's Release and the Termination of Stock Pledge and any other certificates or instruments required to be executed by the Owners in connection with the matters contemplated hereby; (d) The Owners hereby direct the Issuer Trustee to execute this Agreement, the Quincy's Release and the Termination of Stock Pledge. (e) Upon satisfaction of all conditions set forth in this Agreement, Financial Security will cancel Irrevocable Letter of Credit No. 360920 issued by The Chase Manhattan Bank dated April 1, 1998. III. DEFINED TERMS. The parties hereby agree that for purposes of the Collateral Assignment Agreement, the Loan Agreements, the Mortgage Notes and the Insurance Agreement (as defined in the Collateral Assignment Agreement), the following terms shall have the meanings set forth below: 3 4 "Borrower" means I. M. Special, Inc., a Delaware corporation. "Stock Pledge Agreement," "Stock Pledge" or "Quincy's Stock Pledge" means the Stock Pledge Agreement, dated as of May 1, 1998, among Spartan Holdings, Inc., Financial Security and the Collateral Agent. IV. ADVANTICA AGREEMENTS. Advantica hereby covenants and agrees as follows: (a) Advantica and its affiliates have received adequate consideration and fair value in connection with the Defeasance and the Substitution and neither such action has been taken with the intent of defrauding any creditors of Advantica or of any of its affiliates; (b)(i) Following the substitution, neither Advantica nor any of its affiliates, other than I. M. Special, Inc., has any right, title or interest in, to or under the Defeasance Eligible Investments (as defined in the Collateral Assignment Agreement) or any other part of the Borrower Collateral (as defined in the Loan Agreements) or has made any representation to the Banks (as defined in (v) below) that it has any such right, title or interest; (ii) Prior to transfer of ownership of either Quincy's Restaurants, Inc. or Quincy's Realty to any entity which is not an affiliate of Advantica (a "Transferee"), Advantica will provide to Financial Security a written confirmation, in form and substance satisfactory to Financial Security, from the Transferee that neither such Transferee nor Quincy's Realty, Inc. has any right, title or interest in, to or under the Defeasance Eligible Investments or any other part of the Borrower Collateral; (iii) Neither Advantica nor any of its affiliates will take any action to obtain or recover any interest in the Defeasance Eligible Investments or any other part of the Borrower Collateral until the Term of the Agreement (as defined in the Insurance Agreement) has expired; and (iv) Advantica confirms that the Banks have approved the Substitution and the transfer of all right, title and interest of Quincy's Realty in, to and under the Borrower Collateral to I. M. Special, Inc. in connection therewith. (v) Advantica will enforce the agreement pursuant to the Credit Agreement, dated as of January 7, 1998, as amended or waived by Amendment No. l and Waiver (the "Amendment"), dated as of March 16, 1998, each among Quincy's Restaurants, Inc., Flagstar Enterprises Inc., Advantica Restaurant Group, Inc., the Lenders (as defined in the Credit Agreement), The Chase Manhattan Bank and the other parties thereto, set forth in Section l(a) of the Amendment, which provides that I. M. Special, Inc., as the SPC referred to in such amendment, shall not be required to execute a 4 5 Subsidiary Guarantee Agreement, an Indemnity and Contribution Agreement or any Security Document until] such time when I. M. Special], Inc. is no longer subject to a contractual prohibition on doing so. The Lenders and The Chase Manhattan Bank are collectively referred to herein as the "Banks". V. MISCELLANEOUS. (a) NOTICES. All demands, notices and other communications to be given hereunder shall be in writing (except as otherwise specifically provided herein) and shall be mailed by overnight delivery or personally delivered or facsimile to the recipient as follows: (i) To Financial Security: Financial Security Assurance Inc. 350 Park Avenue New York, NY 10022 Attention: Surveillance Department Telephone: (212) 826-0100 Facsimile Nos.: (212) 339-3518 (212) 339-3527 (in each case in which notice or other communication to Financial Security refers to a Security Event, Event of Default, a claim on the Policy or with respect to which failure on the part of Financial Security to respond shall be deemed to constitute consent or acceptance, then a copy of such notice or other communication should also be sent to the attention of each of the General Counsel and the Head Financial Guaranty Group and shall be marked to indicate "URGENT MATERIAL ENCLOSED.") (ii) To the Issuer: Secured Restaurants Trust c/o Wilmington Trust Company Rodney Square North Wilmington, DE 19890 Attention: Corporate Trust Administration Telephone No.: (302) 651-1428 Telex No.: 835437 Answer Back: WILM-TR Facsimile No.: (302) 651-1576 with a copy to the Manager: Advantica Restaurant Group, Inc. 203 East Main Street Spartanburg, SC 29301 Attention: Legal Department Telephone No.: (803) 596-8000 Facsimile No.: (803) 596-8327 5 6 (iii) To the Trustee: The Bank of New York Towermarc Plaza 10161 Centurion Parkway Jacksonville, FL 32256 Attention: Corporate Trust Department Telephone No.: (904) 998-4700 Facsimile No.: (904) 645-1932 (iv) To the Collateral Agent: The Bank of New York Towermarc Plaza 10161 Centurion Parkway Jacksonville, FL 32256 Attention: Corporate Trust Department Telephone No.: (904) 998-4700 Facsimile No.: (904) 645-1932 (v) To the Borrower: I. M. Special, Inc. 201 East Main Street Spartanburg, SC 29301 Attention: Legal Department Telephone No.: (864) 596-8000 Facsimile No.: (864) 596-8327 (vi) To Advantica: Advantica Restaurant Group, Inc. 201 East Main Street Spartanburg, SC 29301 Attention: Legal Department Telephone No.: (864) 596-8000 Facsimile No.: (864) 596-8327 A party may specify an additional or different address or addresses by writing mailed or delivered to the other parties as aforesaid. Except as may be otherwise specified herein, all such notices and other communications shall be effective two Business Days after being sent. Any notice required to be given to any Non-Controlling Party shall also be given to the Controlling Party. (b) COUNTERPARTS. This Agreement may be executed in counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. (c) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 6 7 (d) BINDING AGREEMENT. This Agreement shall be binding upon, shall inure to the benefit of, and shall be enforceable by, the parties hereto and their respective successors and permitted assigns. IN WITNESS WHEREOF, each party has hereby executed this Consent and Agreement Regarding Substitution as of the date first above written. SFS SECURED RESTAURANTS, INC. By /s/ Lamont R. Wallin -------------------------------------- Name Lamont R. Wallin ------------------------------------ Title President ----------------------------------- SPARTAN SECURED RESTAURANTS, INC. By /s/ Lamont R. Wallin -------------------------------------- Name Lamont R. Wallin ------------------------------------ Title President ----------------------------------- SECURED RESTAURANTS TRUST By Wilmington Trust Company, not in its individual capacity but solely as Issuer Trustee By /s/ Mary St. Amand -------------------------------------- Mary St. Amand Assistant Vice President THE BANK OF NEW YORK, as Collateral Agent and as Trustee By /s/ Heidi Van Horn-Bash -------------------------------------- Name Heidi Van Horn-Bash ------------------------------------ Title Agent ----------------------------------- FINANCIAL SECURITY ASSURANCE INC. By: /s/ Alex G. Makowski ------------------------------------- Alex G. Makowski, Managing Director 7 8 I. M. SPECIAL, INC. By /s/ Kenneth G. Jones -------------------------------------- Name Kenneth G. Jones ------------------------------------ Title President and Treasurer ----------------------------------- ADVANTICA RESTAURANT GROUP, INC. By /s/ Kenneth G. Jones -------------------------------------- Name Kenneth G. Jones ------------------------------------ Title Vice President and Treasurer ----------------------------------- 8 EX-12.01 7 RATIO OF EARNINGS COMPUTATION 1 EXHIBIT 12 ADVANTICA RESTAURANT GROUP, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SUCCESSOR PREDECESSOR COMPANY COMPANY ---------------------------------------------------------------- ------------ FISCAL YEAR ENDED ONE WEEK FIFTY-ONE ----------------------------------------------------- ENDED WEEKS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JANUARY 7, DECEMBER 30, 1994 1995 1996 1997 1998 1998 ------------ ------------ ------------ ------------ --------- ------------ (In thousands) Loss from continuing operations before income taxes $ (25,998) $ (74,771) $ (69,313) $ (74,637) $720,511 $(182,750) --------- --------- --------- --------- -------- --------- Add: Interest expense excluding capitalized interest 141,397 147,325 177,278 158,872 2,558 140,207 Amortization of debt expense 3,411 4,203 5,590 6,052 111 (7,933) --------- --------- --------- --------- -------- --------- Subtotal 144,808 151,528 182,868 164,924 2,669 132,274 Interest factor in rents 14,172 13,850 17,565 21,734 233 18,946 --------- --------- --------- --------- -------- --------- Total earnings (losses) $ 132,982 $ 90,607 $ 131,120 $ 112,021 $723,413 $ (31,530) ========= ========= ========= ========= ======== ========= Fixed charges: Interest expense including capitalized interest 141,657 147,406 177,278 158,872 2,558 140,207 Amortization of debt expense 3,411 4,203 5,590 6,052 111 (7,933) --------- --------- --------- --------- -------- --------- Subtotal 145,068 151,609 182,868 164,924 2,669 132,274 Interest factor in rents 14,172 13,850 17,565 21,734 233 18,946 --------- --------- --------- --------- -------- --------- Total fixed charges $ 159,240 $ 165,459 $ 200,433 $ 186,658 $ 2,902 $ 151,220 ========= ========= ========= ========= ======== ========= Ratio of earnings (losses) to fixed charges --- --- --- --- 249.3x -- ========= ========= ========= ========= ======== ========= Deficiency in the coverage of fixed charges by earnings (losses) before fixed charges $ 26,258 $ 74,852 $ 69,313 $ 74,637 $ --- $ 182,750 ========= ========= ========= ========= ======== =========
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-21.01 8 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF ADVANTICA RESTAURANT GROUP, INC. NAME STATE OF INCORPORATION - ---- ---------------------- TWS Funding, Inc. Delaware Denny's Holdings, Inc. New York FRD Acquisition Co. Delaware FRI-J Corporation Delaware Far West Concepts Delaware FRI-M Corporation Delaware FRI-NA Corporation Delaware FRI-C Corporation Delaware FRI-DHD Corporation Delaware FRI-FRD Corporation Delaware CFC Franchising Company Delaware Spartan Holdings, Inc. New York Flagstar Holdings, Inc. New York TWS 800 Corporation Delaware TWS 500 Corporation Delaware TWS 600 Corporation Delaware TWS 700 Corporation Delaware El Pollo Loco, Inc. Delaware Denny's, Inc. California DFO, Inc. Delaware Denny's Realty, Inc. Delaware Spartan Realty, Inc. Delaware Flagstar Systems, Inc. Delaware IM Purchasing, Inc. Delaware I.M. Special, Inc. Delaware Coco's Restaurants, Inc. California Carrows Restaurants, Inc. California Carrows California Family Restaurants, Inc. Delaware jojo's Restaurants, Inc. California EX-23.01 9 INDEPENDENT AUDITOR'S CONSENT 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Advantica Restaurant Group, Inc.'s Registration Statement Nos. 333-53031, 333-58169, 333-58167 of our report dated February 16, 1999, appearing in the Annual Report on Form 10-K of Advantica Restaurant Group, Inc., for the year ended December 30, 1998. Deloitte & Touche LLP Greenville South Carolina March 30, 1999 EX-27.01 10 FINANCIAL DATA SCHEDULE
5 1,000 OTHER DEC-30-1998 JAN-08-1998 DEC-30-1998 224,768 0 22,777 4,316 17,239 295,353 817,234 123,921 1,986,208 391,465 912,699 0 0 489 235,555 1,986,208 0 1,720,525 0 1,399,452 1,407 0 114,077 (182,750) (1,794) (180,956) (1,507) (1,044) 0 (181,419) (4.53) (4.53)
EX-99.01 11 SAFE HARBOR 1 EXHIBIT 99 SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of the "safe harbor" provisions of the Act. Certain information, particularly information regarding future economic performance, finances, the impact of the Year 2000 issue and management's plans and objectives, contained or incorporated by reference in the Company's 1998 Annual Report on Form 10-K, is forward-looking. In some cases information regarding certain important factors that could cause actual results to differ materially from any such forward-looking statement appear together with such statement. Also, the following factors, in addition to other possible factors not listed, could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements: Liquidity and Capital Resources. On July 11, 1997, FCI and Flagstar filed voluntary petitions for relief under the Bankruptcy Code. The Plan dated as of November 7, 1997 (as amended following the resolution of certain issues before the Bankruptcy Court) was confirmed by the Bankruptcy Court pursuant to an order entered as of November 12, 1997 and became effective January 7, 1998. As a result of the reorganization, FCI and Flagstar significantly reduced their debt and simplified their capital structure. Although consummation of the Plan of Reorganization significantly reduced the Company's debt obligations, the Company still has substantial indebtedness and debt service requirements, in absolute terms and in relation to stockholders' equity. With respect to the long-term liquidity of the Company, management believes that after giving effect to the Plan of Reorganization, the Company will have sufficient cash flow from operations (together with funds available under the Credit Facility) to pay interest and scheduled amortization on all of its outstanding indebtedness and to fund anticipated capital expenditures through 1999. Even with the completion of the Plan of Reorganization, however, the Company's ability to meet its 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. The Company's ability to maintain or increase operating cash flow will depend upon consumer tastes, the success of marketing initiatives and other efforts by the Company to increase customer traffic in its restaurants, prevailing economic conditions and other matters many of which are beyond the control of the Company. Competition. The Company's future performance will be subject to a number of factors that affect the restaurant industry generally, including competition. The restaurant business is highly competitive and the competition can be expected to increase. Price, restaurant location, food quality, quality and speed of service and attractiveness of facilities are important aspects of competition as are the effectiveness of marketing and advertising programs. The competitive environment is also often affected by factors beyond the Company's or a particular restaurant's control. The Company's restaurants compete with a wide variety of restaurants ranging from national and regional restaurant chains (some of which have substantially greater financial resources than the Company) to locally-owned restaurants. There is also active competition for advantageous commercial real estate sites suitable for restaurants. Economic, Market and Other Conditions. Food service businesses are often 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 the Company's can also be materially and adversely affected by publicity resulting from food quality, illness, injury, or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. 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, unfavorable trends or developments concerning factors such as inflation, increased food, labor and employee benefit costs (including increases in hourly wage and minimum unemployment tax rates), regional weather conditions and the availability of experienced management and hourly employees may also adversely affect the food service industry in general and the Company's results of operations and financial condition in particular. 2 Importance of Locations. The success of Company and franchised restaurants is significantly influenced by location. There can be no assurance that current locations will continue to be attractive, as demographic patterns change. It is possible the neighborhood or economic conditions where restaurants are located could decline in the future, resulting in potentially reduced sales in those locations. Government Regulations. The Company and its franchisees are subject to Federal, state and local laws and regulations governing health, sanitation, environmental matters, safety, the sale of alcoholic beverages and hiring and employment practices. 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 the Company's franchisee system is also subject to regulations enacted by a number of states and to rules promulgated by the Federal Trade Commission. The Company cannot predict the effect on its operations, particularly on its relationship with franchisees, caused by the future enactment of additional legislation regulating the franchise relationship. -----END PRIVACY-ENHANCED MESSAGE-----