Company Profile

Advantica is one of the largest restaurant companies in the United States, operating (directly and through franchisees) over 2,500 moderately-priced restaurants.

In January 1998, the Company emerged from a successful financial restructuring and changed its name to Advantica Restaurant Group, Inc. from Flagstar Companies, Inc. The restructuring resulted in a new capital structure with $1 billion less debt, a new board of directors and a newly issued common stock which is listed on The Nasdaq Stock Market^SM under the trading symbol DINE. Advantica is one of the largest restaurant companies in the United States, operating (directly and through franchisees) over 2,500 moderately-priced restaurants in the mid-scale and quick-service dining segments. Advantica owns and operates the Denny's, Carrows, Coco's and El Pollo Loco restaurant brands.

	Denny's is the nation's largest chain of family-style, full-service restaurants, with more than 1,650 units in 49 states, two U.S. territories and two foreign countries.		Coco's is a bakery restaurant chain operating 493 units in seven western states and three foreign countries.
	The Carrows chain, which consists of 154 full-service restaurants located primarily in seven western states, specializes in traditional Americana food.		El Pollo Loco is a chain of 247 quick-service restaurants featuring flame-broiled chicken and related Mexican food items, with a strong regional presence in California.

U.S. Restaurant Locations

December 31, 1997

Contents

• Financial Summary
• Letter to Shareholders
• Concept Overviews
• Restaurant Locations
• Community Commitment
• Annual Report on Form 10-K
• Directors and Corporate Officers
• Corporate Information

Financial Summary

		Year ended December 31,
(dollars in millions)		1997		1996
Operating revenue		$2,609.5		$2,542.3
Operating income (a)		130.4		156.4
Interest and debt expense		227.1		261.6
Net income (loss)		(134.5	)	(85.5	)
EBITDA (b)		296.9		286.3
Net cash flows provided by operating activities		76.0		19.5
Number of restaurants:
Denny’s		1,652		1,596
Carrows		154		160
Coco’s		493		466
El Pollo Loco		247		241
Quincy’s (c)		180		199
Hardee’s (c)		557		580
		3,283		3,242
Restaurants by ownership:
Company-owned		2,047		2,112
Franchised		912		817
Licensed		324		313
		3,283		3,242

To Our Shareholders

James B. Adamson Chairman, CEO and President

We embarked on a new beginning in January of this year as we became a new company with $1 billion less debt and the financial flexibility to pursue growth opportunities and respond more effectively to changing consumer tastes. To reflect this new era, we changed our name to Advantica Restaurant Group, Inc. Derived from the words "advantage" and "America," Advantica conveys the competitive edge we are striving to build at each of our restaurant brands. It also reflects that we are a pure restaurant company. Advantica serves America, with nearly two million customers visiting our restaurants daily.

Despite the onerous capital structure under which we have operated, we have improved the efficiency of our operating structure, shed non-core operations, added exciting new restaurant concepts and made significant progress on diversity issues. We have also made progress in many of our consumer ratings as measured by independent market research. With our financial restructuring now behind us and freedom from much of the enormous debt that hampered our company since the 1989 leveraged buyout, our challenge now is to accelerate brand building enhancements in our businesses and provide the very best customer service to achieve a future of consistent profitability and long-term growth.
 

1997 Results

Our 1997 cash flow performance was substantially in line with our business plan. For the year ended December 31, 1997, EBITDA increased to $296.9 million, compared with $286.3 million in 1996. Total revenue increased to $2.61 billion, versus $2.54 billion in the prior year. While overall comparable store sales were disappointing during 1997, we anticipated much of this weakness. Sales declines at Denny's were the result of a fundamental shift in pricing strategy. Because a price-only value strategy is not sustainable in the long run, we made a decision to significantly increase Denny's pricing in late 1996, placing more emphasis on the other elements of "value" provided to the customer such as better product quality, service and image. At our other core brands, El Pollo Loco recorded a modest increase in comparable sales in 1997, while Coco's and Carrows comparable sales were flat to slightly down.

Denny's greatly expanded the presence of its brand during 1997 by opening a record 77 new franchised restaurants. We are excited about this franchising momentum and believe that it will carry into 1998.
 

Business Portfolio Changes

Already in 1998 we have moved quickly to address the two underperforming brands in our business portfolio. On April 1, 1998, the Company completed the sale of its 557-unit Hardee's franchise subsidiary to CKE Restaurants, Inc. for $427 million. The sales price included $381 million in cash plus the assumption of $46 million in certain debt obligations by CKE. Nearly one-half of the cash proceeds were used to further reduce debt, and the remaining funds are targeted for reinvestment in our existing restaurants and possible acquisitions of other restaurant brands. This divestiture, at a very attractive price, was an outstanding opportunity for Advantica and is consistent with our desire to only operate brands we control.

We also have begun streamlining our Quincy's portfolio of restaurants to improve Advantica's overall profitability. During the fourth quarter of 1997, the predecessor company recorded $25.6 million in special charges primarily related to the closure or sale of 88 Quincy's restaurants during 1997 and 1998. This restructuring of Quincy's will allow management to direct effort and resources to restaurants in stronger trade areas and to eliminate underperforming and non-strategic units.
 

Strategies for 1998 and Beyond

We are focused on improving the key financial measures that will influence Advantica's future investment performance -- comparable store sales, margin improvement and new restaurant growth. To drive sales, we are placing emphasis on providing customers with a restaurant experience that delivers the food quality and service they demand, supported by marketing and image initiatives which make our brands distinctive in the marketplace. All incentive plans for 1998 have a significant component tied to comparable sales growth. In addition, we are re-engineering back-of-the-house processes in our restaurants and improving information technology to achieve margin improvement.

We are very excited about a number of new programs underway at Denny's, including the design and upcoming testing of a new image repositioning project, new building design prototypes and the Denny's Classic Diner concept. We look forward to generating new top-line growth from expansion of our franchising programs at Denny's, Coco's and El Pollo Loco, as well as the resumption of company-owned restaurant development at Denny's and El Pollo Loco. Quincy's will continue the conversion of restaurants to a full-service format in additional markets in 1998. The acquisition of Coco's and Carrows continues to be a very positive move for our company, both financially and strategically. We will continue to fine-tune the positioning of these two strong brands during 1998.
 

Strengthening Leadership

A redeployment of key members of our senior management team was recently announced to more effectively utilize their talents. Ronald B. Hutchison was appointed Chief Financial Officer; Craig S. Bushey, President of Coco's and Carrows; and Mark L. Shipman, Executive Vice President of Acquisitions and Development. During 1997, Nelson J. Marchioli joined the Company as President of El Pollo Loco, replacing John A. Romandetti, who was appointed President of Denny's.

Advantica also welcomes a new board of directors, reflecting the Company's new ownership structure. The new Advantica board members are Robert H. Allen, Ronald E. Blaylock, James J. Gaffney, Irwin N. Gold, Robert E. Marks, Charles F. Moran and Donald R. Shepherd. They join former board members Vera King Farris and Elizabeth A. Sanders. We also welcome Darrell Jackson and Raul R. Tapia as new board members of FRD Acquisition Co., the parent company of Coco's and Carrows. We look forward to the advice and counsel of our board members in achieving our goal of building Advantica into a great restaurant company.

We expect the competitive environment to remain very aggressive in 1998. With a stronger capital structure and business portfolio in place, we are better equipped with the resources needed to compete effectively. Our priorities are to deliver more consistent execution in our restaurants and to enhance the brand positioning of each of our concepts.

We appreciate the hard work of our employees, the patronage of our customers and the tremendous support from our suppliers and investors. That we were able to move through the 1997 restructuring process so quickly and successfully is testimony to the great effort and commitment of our employees and investors. With all of us working together, we can make Advantica the best restaurant company in the industry.

James B. Adamson Chairman, CEO and President April 22, 1998

From its humble beginning in 1953 as a single doughnut shop in Lakewood, California, Denny's has grown into America's largest full-service family restaurant chain and the most recognized name in family dining. During 1997, Denny's U.S. systemwide sales reached a record level of $1.87 billion. With over 1,650 restaurants, Denny's appeals to a wide spectrum of customers and offers a relaxed dining atmosphere with moderately priced food and quick, efficient service 24 hours a day for breakfast, lunch, dinner and "late night." Simply put, Denny's serves any meal, anytime.

As the only family restaurant chain with a broad national presence, Denny's enjoys particular advantages over smaller chains and independent operators. These advantages include high brand awareness, extensive research and development capabilities, and purchasing and advertising economies of scale. Denny's has strong brand equity in its breakfast business and has defined itself as the value leader in full-service dining. The value positioning at Denny's is expanding to emphasize not only pricing, but also great service, excellent product quality and menu innovation in an inviting atmosphere. Denny's has enhanced consumers' perception of value with the introduction of themed, higher quality products such as "America's Favorite Omelets," "Major League Burgers" and "Signature Skillets." Marketing activities during 1998 will reinforce the "value leader" positioning while also conveying the brand's distinct personality and breakfast heritage. Additionally, Denny's plans to add more "kid appeal" to its children's menu and intensify marketing efforts targeted at rapidly growing segments of our population such as African-American, Asian-American and Hispanic consumers.

Denny's has recently taken many other steps to improve performance and enhance the quality, service and value delivered to its customers. These steps include the rollout of new point-of-sale technology, a simpler management structure, enhanced service training and new management incentive plans. During 1998, Denny's will begin testing a new image repositioning program in several markets which is designed to improve curb appeal, make the brand more distinctive and improve investment returns.

During 1997, Denny's opened 77 new franchised units, an all-time record in its 44-year history. Denny's franchisees opened two new Denny's Classic Diners that feature an upbeat, nostalgic look and feel that appeals to younger customers, while retaining Denny's core brand equities. The Classic Diner features a 1950s-60s atmosphere with stainless steel, neon lighting, jukebox music, new uniforms and a "diner" menu tailored to create an energized dining experience. Company and franchise development of this concept will be accelerated during 1998, as will development of traditional Denny's restaurants in three new prototype designs. Franchising will continue to be the primary growth vehicle of the Denny's brand with several hundred new restaurant openings planned over the next five years.

Since 1969, Carrows has been offering distinctive family dining in a vintage Americana atmosphere -- wholesome, relaxed and familiar-- at a good value. Carrows specializes in made-to-order food using homestyle recipes and served in generous portions, accompanied by appetizing side dishes such as stuffing, creamed spinach and homemade mashed potatoes. A regional full-service chain, Carrows consists of 140 company-owned and 14 franchised restaurants operating primarily in seven western states.

Carrows 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 emphasize the foods that customers most demand. Carrows offers high-quality breakfasts priced to compete with fast-food competitors, and lunch and dinners that rival the quality of casual-themed dinner houses, but at lower cost.

After the May 1996 acquisition by Advantica, the chain began enhancing brand awareness and differentiation. Significant improvements were made to its marketing strategy and menu. These changes enhanced perceived value to the customer, as well as service, by greatly reducing operating complexity in the restaurant. The brand building effort has recently been followed by limited franchising of Carrows restaurants.

Coco's began operations in 1948 as The Snack Shop in Corona Del Mar, California, just as eating out was becoming a form of entertainment in our culture. By continuing to offer great food, service and ambiance at reasonable prices, Coco's has established itself at the top rung of the family dining segment with 178 company-owned and 17 franchised bakery restaurants located primarily in the western United States, as well as 298 international units operating primarily in Japan and South Korea.

The Coco's experience appeals to a contemporary customer who is quality-conscious and seeks a wide variety of innovative entrees and bakery items not typically offered at family restaurants. The typical customer has a moderate to relatively high income and is 25-54 years of age. The brand has developed a strong customer base through a creative menu, supported by strong product development and execution capabilities, high-quality food and consistent "dinnerhouse style" service. The menu includes delicious food items like fresh fish, salads, Italian specialties, smothered steak and fresh pies.

Coco's recently began repositioning to better compete with casual dining restaurants, focusing on a more upscale dining experience. This repositioning plan includes minor decor changes, more impactful advertising, a better focused menu and emphasis on the bakery as a point of difference.

With an appealing contemporary menu positioning, Coco's has laid the foundation for further expansion. Coco's plans to emphasize franchising as a means of facilitating growth of the brand during 1998 and beyond.

El Pollo Loco (pronounced "L - Po-yo Lo-co" -- Spanish for "The Crazy Chicken") began two decades ago in Guasave, Mexico, where Pancho Ochoa started a small restaurant serving flame-broiled chicken from his mother's old family recipe. The restaurants were soon all over Mexico, and in 1980, El Pollo Loco came to the United States, serving its delicious flame-broiled chicken with hot tortillas, freshly made salsa and a variety of side dishes. Today, El Pollo Loco is the nation's leading quick-service restaurant chain specializing in flame-broiled chicken, with 247 restaurants principally located in California, Arizona, Nevada and Texas.

El Pollo Loco offers unique-tasting and high-quality products which help position the brand as "Superior Fast Food at a Competitive Price." The brand appeals to consumers seeking a "healthful" fast-food alternative, as well as Mexican food enthusiasts. El Pollo Loco's extensive, multi-lingual advertising and marketing program includes television and radio commercials that target diverse ethnic groups. 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. Fresh chicken is carefully marinated in seasoned fruit juices, then slowly cooked over an open flame until crispy on the outside and tender and flavorful on the inside. Vine-ripened tomatoes are used to make fresh salsa several times a day, while hot tortillas and a selection of freshly prepared beans, rice, corn on the cob, potato salad and coleslaw are served on the side. New menu items such as Lemon Pepper Chicken, Smokey Black Beans, Pollo Bowls and a wide variety of burritos are also offered.

Much of the brand's growth can be attributed to successful menu positioning, new product offerings and dual branding with the complementary Fosters Freeze^® dessert line. The excellent positioning of the brand was further demonstrated during 1997 as the chain experienced record U.S. systemwide sales of $235 million.

Based on El Pollo Loco's continued success and superior brand positioning, Advantica plans to accelerate expansion of the brand through both company and franchise development in the southwestern United States. Expansion is targeted in existing markets to attain critical advertising mass and in new markets where consumer demographics are similar to those in successful existing markets.

Community Commitment

At Advantica, we strongly believe we have a responsibility to give back to our neighborhoods and communities. The Company and its employees are involved in a number of ongoing community initiatives including the United Way, school fund raisers, food drives, disaster relief and other events where our restaurant and support employees volunteer their time and resources.

Children and Youth

We believe it is particularly important to invest in our children and youth, who are the future of America. Since the formation of the Denny's/Save the Children partnership in 1995, Denny's, our flagship restaurant concept, has raised over $2.5 million for Save the Children, a national charity that helps at-risk, disadvantaged children and families. The funds underwrite a number of self-help community programs throughout the United States. Most initiatives target the needy, particularly in rural and inner-city areas across the country, addressing such varied and critical needs as maternal and infant health care for pregnant teenagers and other expectant mothers; the education and employment of refugee parents; and the funding of small enterprise projects for single mothers who need a financial base to support their children.

Denny's is in its third year as a national sponsor of the Harlem Globetrotters Tour. On the multiple-city tour, the legendary Globetrotters team conducts pre-game interactive ball clinics for youth from Save the Children programs and youth affiliated with NAACP branches. The basketball clinics are not just fun and games. Each clinic features powerful "stay-in-school" and "stay drug-free" messages for the hundreds of young participants.

Community Partnerships

Advantica-Hardee's launched "Benefits Nights" in the Fall of 1996. This initiative raised over $550,000 during 1997 for participating schools, universities, churches, daycare centers and other community organizations. Participating schools or community organizations received 20% of all incremental sales at restaurants holding a Benefit Night that evening. Some restaurants had as many as ten events a month. The money raised was used to fund special needs of the school or organization, such as sports equipment, computers and field trips.

Last year marked Advantica's most successful year ever as a corporate contributor to the local United Way campaign. Eighty-three percent of Spartanburg support center employees participated in the campaign. These investments make a meaningful difference in people's lives and help strengthen our community's social and economic structure for now and for tomorrow.

Diversity Commitment

Advantica believes that strength is derived from the diversity of our customers, employees, suppliers, franchisees and other partners across the country. Numerous community leaders and civil rights groups have cited Advantica for its work in building a highly diverse, multicultural organization. The Company has won a number of national awards for its diversity work, including the 1997 Minority Business Development Award from the NAACP. Currently, minorities and women comprise one-third of Advantica's Board of Directors and 25% of its senior management. Minorities make up 27% of Advantica's overall management. In the purchasing arena, the Company posted over $125 million in contracts with minority suppliers in 1997, a twelve-fold increase since 1993. There were no contracts with minority suppliers in 1992. More than one-third of Denny's franchised restaurants and over half of El Pollo Loco franchised restaurants are minority-owned. In marketing and advertising, Advantica restaurant concepts spend a total of $15 million annually in targeting the fast growing minority consumer markets.

Annual Report on Form 10-K (click here)

Directors

(1) Director, Advantica Restaurant Group, Inc.
(2) Director, FRD Acquisition Co. (parent company of Coco's/Carrows)

Corporate Officers

Corporate Information