Advantica Annual Report

Company Profile

Welcome to Advantica Restaurant Group, Inc. (Nasdaq: DINE). As a new company with a significantly strengthened capital structure and business portfolio, Advantica is poised with the resources to reinvest in and grow its four popular restaurant brands. Advantica is the nation's largest operator of family dining restaurants and also enjoys a leading niche position within the non-fried quick-service chicken category. The Company serves over one million customers a day in its Denny's, Coco's, Carrows and El Pollo Loco restaurants at over 2,600 locations.

is America's largest full-service restaurant chain, with more than 1,700 locations. A comprehensive repositioning program and development of the new Denny's Classic Diner^SM concept are revitalizing the brand and capitalizing on Denny's heritage as "America's Original Breakfast Diner."

is a bakery restaurant chain featuring a contemporary family menu with 181 locations concentrated in the western U.S. and 300 locations internationally. Coco's is positioned at the upper end of the family dining category and plans to test a brand "relaunch" remodeling program during 1999.

is a regional restaurant chain offering distinctive family dining in a vintage Americana atmosphere with 149 locations in the western U.S. Carrows has recently simplified and boosted the quality and taste profile of its popular menu, inspired by its "Santa Barbara" heritage.

(pronounced "L - Po-yo Lo-co"--Spanish for "The Crazy Chicken") is a quick-service chain of 265 restaurants featuring flame-broiled marinated chicken and a "Fresh Mex" menu, with a strong regional presence in California. El Pollo Loco's new unit development program has recently been accelerated and is being pursued in selected markets across the southwestern U.S.

Table of Contents

Financial Summary
Letter to Shareholders
Brand Overviews
Community Involvement
U.S. Restaurant Locations
Directors and Corporate Officers
Annual Report on Form 10-K
Corporate and Investor Information

This document contains forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ materially from the performance indicated or implied by such statements. Risk factors relating to such statements are described in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1998.

Fiscal Year Ended


(dollars in millions)	1998^(a)	1997^(b)

Revenue	$1,754.1	$1,810.6
EBITDA^(c)	228.9	218.1
EBITDA margin	13.0%	12.0%
Total debt^(d)	1,024.9	2,147.8
Cash and cash equivalents	224.8	54.1
Net debt^(e)	800.1	2,093.7

Systemwide Sales:
U.S.	$2,691.7	$2,639.9
International	402.6	379.7

	$3,094.3	$3,019.6

Number of Restaurants:
Denny's	1,721	1,652
Coco's	481	493
Carrows	149	154
El Pollo Loco	265	247

	2,616	2,546

Restaurants by Ownership:
Company-owned	1,251	1,310
Franchised	1,043	916
Licensed	322	320

	2,616	2,546

	^(a)Includes operations of the predecessor company (Flagstar) for the one-week period ended January 7, 1998 and the successor company (Advantica) for the 51-week period ended December 30, 1998.
	^(b)Fiscal 1997 represents a 53-week period.
	^(c)EBITDA is defined by the Company as operating income before depreciation, amortization and charges for restructuring and impairment.
	^(d)Total debt excludes in-substance defeased debt.
	^(e)Net debt is defined by the Company as total debt (excluding in-substance defeased debt) less cash and cash equivalents.

James B. Adamson
Chairman, CEO & President

"With a solid infrastructure

now in place and adequate

capital resources, we are

positioned to begin a period

of reinvestment in our

brands for future growth."

Success in the restaurant business calls for obvious ingredients such as quality food, great service and an enjoyable atmosphere. Combining these ingredients to create a great dining experience and generate increasing value for shareholders requires motivated employees, a talented management team, a strong support infrastructure and adequate capital resources.

In our first year as Advantica Restaurant Group, Inc., we made strong progress in positioning our Company for success in 1999 and beyond. Most notably, we strengthened our business portfolio, built same-store sales momentum at our flagship brand, Denny's, and further improved our capital structure. We continued to assemble, train and motivate strong teams within our field and restaurant management organization. We also rebuilt support areas such as franchising, development, construction and real estate, which were substantially downsized for several years due to prior capital constraints. With a solid infrastructure now in place and adequate capital resources, we are positioned to begin a period of reinvestment in our brands for future growth.

In January of 1998, we completed a successful financial restructuring, reducing debt by approximately $1 billion. Long-term debt was cut by an additional $270 million with the subsequent divestiture of two underperforming businesses at excellent transaction multiples. The sale of our Hardee's franchise for $427 million, or 6.6x EBITDA, and Quincy's for $85 million, or 6.1x EBITDA, enabled us to enhance our business portfolio and dramatically improve our liquidity and financial flexibility. As a result of these actions, Advantica ended the year with over $200 million in surplus cash which will be targeted for reinvestment in our restaurant businesses.

We improved our financial performance in 1998, with EBITDA increasing to $228.9 million from $218.1 million in the prior year. Due to the significant noncash, fresh start reporting charges associated with our restructuring, EBITDA will continue to be the best indicator of our financial performance and progress. We believe more and more investors will soon recognize Advantica's enormous future earnings potential, since the majority of the noncash, fresh start charges (which totaled nearly $170 million during 1998) will disappear on the fifth anniversary of the financial restructuring.

We are particularly excited about Denny's same-store sales turnaround during the year, since that brand accounts for approximately 70% of Advantica's consolidated revenue and EBITDA. We attribute the turnaround primarily to continued menu enhancements, effective promotional programs and improved guest service. We also successfully tested the Denny's remodeling program in the Orlando and Philadelphia markets during the latter part of the year. Those restaurants posted double-digit year-over-year sales increases from re-opening through year-end 1998. During the fourth quarter, same-store sales rebounded at El Pollo Loco due to new product introductions, and guest counts improved over the prior year quarter at Coco's and Carrows due to a new emphasis on value positioning.

In November, the Company introduced the prototype City Range^SM Steakhouse Grill, a research and development test of an upscale casual dining restaurant concept, in Greenville, South Carolina. This concept's distinctive menu and design combine the best of traditional and contemporary to create an imaginative dining choice with strong

*"We are particularly excited about Denny's same-store sales turnaround during the year, since that brand accounts for* *approximately 70% of Advantica's consolidated revenue and EBITDA."*


market appeal. We are very encouraged by the initial sales results of this prototype restaurant. Initiatives for 1999 We are pleased with the accomplish- ments of 1998. We are even more excited about business prospects for 1999. The events of 1998 have positioned Advantica to begin a major, multi-year reinvestment program. Based upon successful results of Denny's remodelings in three test markets, we plan to remodel up to 150 restaurants during 1999. Incorporating many features of the successful new Denny's Classic Diner concept, the remodels are designed to dramatically improve the atmosphere of our restaurants and give Denny's a more distinct and upbeat brand positioning. These initiatives will also complement and support Denny's brand positioning as "America's Original Breakfast Diner." Our Denny's franchisees plan to accelerate the new unit opening pace of Denny's Classic Diners during 1999 and to maintain an aggressive development pace for traditional Denny's units as well. Another major reinvestment initiative beginning in 1999 includes the testing of a Coco's brand "relaunch" remodel program to position the brand as slightly more upscale within the family dining category. The positioning change should also allow Coco's to compete more effectively with casual dining restaurants. At Carrows, we will complete a "spruce-up" facilities upgrade program during April of this			year. And while 1998 represented the most aggressive development year for El Pollo Loco since 1991 with 21 new unit openings, we intend to accelerate the new unit opening pace for that concept even further. Key initiatives include a refocus on the Mexican food portion of the menu in order to capitalize on the "Fresh Mex" trend and an emphasis on dinner take-out in response to the growing home meal replacement dining segment. With the broadening of the brand's consumer relevance and increased development, we remain very optimistic about the growth prospects for El Pollo Loco in the southwestern U.S. We are in the midst of a major transformation at Advantica that is positioning us to win in today's competitive dining environment. As a result of the progress we made in 1998, we have four strong brands in our portfolio and the financial flexibility to realize their growth potential. We are particularly optimistic about the future because of the people involved with Advantica. We have an outstanding group of restaurant employees, an excellent field and corporate organization to support our restaurants, a talented and stable management team and great franchisees. We appreciate your ongoing support as shareholders and encourage you to patronize our restaurants as customers. James B. Adamson Chairman, CEO and President March 30, 1999

A new remodeling program

for existing restaurants

and development of the

new Denny's Classic Diner

concept are revitalizing

the Denny's brand and

capitalizing on its heritage

Denny's posted record systemwide sales of $2.0 billion and record EBITDA of $184 million in 1998. The brand also achieved a significant turnaround in same-store sales which accelerated during the latter half of the year.

From its beginning in 1953 in Lakewood, California, Denny's has grown into America's largest full-service restaurant chain and the most recognized name in family dining. With over 1,700 restaurants, Denny's appeals to consumers looking for a

were instrumental in driving same-store sales increases for 1998. Denny's also had one of its most profitable kids' premium promotions ever with the summer-long offering of Wishbone^TMBuddies bean-filled, stuffed animals. In 1999, Denny's plans to continue building its "families with kids" business through further integration with recognizable national promotions.

as "America's Original

Breakfast Diner." These

initiatives will give Denny's

a more distinct, upbeat

and nostalgic brand

positioning to attract

customers of all ages.

convenient, full-service dining atmosphere with moderately-priced, great-tasting food served at any time of the day. While sales are fairly evenly distributed across its four dayparts--breakfast, lunch, dinner and late night--Denny's breakfast menu is its core business, as breakfast items account for the majority of sales.

Successful promotions of product lines such as All-Star Slams^TM, Signature Denny's skillet/HiRes Skillets® and Major League Burgers^TM

A new remodeling program for existing restaurants and development of the new Denny's Classic Diner concept are revitalizing the Denny's brand and capitalizing on its heritage as "America's Original Breakfast Diner." These initiatives will give Denny's a more distinct, upbeat and nostalgic brand positioning to attract customers of all ages. Denny's recently initiated a test remodeling program of nine restaurants in the Orlando, Philadelphia and Seattle markets. As with the traditional Denny's restaurant layout, the counter remains a focal point. Design elements such as neon lighting, glass block walls, rotating pie cases and juke boxes from the

successful new Denny's Classic Diner concept have been added to give the remodeled restaurant a diner look and feel. Based upon results from this test, up to 150 restaurants will be remodeled in 1999, the first year of a multi-year program.

The new Denny's Classic Diner, which combines the best of Denny's past and future, features a '50s-style retro atmosphere in a stainless steel and chrome modular facility with neon lighting and a checkerboard tiled floor and counter.

The menu includes signature items such as "Classic" Double-Decker Hamburgers, Chili Fries, Open-Faced Sandwiches and a "Classic" Banana Split, along with traditional Denny's favorites. This concept carries a relatively low investment cost and has produced above average sales compared to traditional Denny's restaurants. To date, there are 18 Denny's Classic Diners open in 10 states with more locations scheduled for development in 1999.

During 1998, Denny's opened 93 new restaurants, the brand's best development year since 1980.

This included 72 franchised openings, which followed the all-time record year of 77 franchised openings in 1997. Denny's plans to accelerate its new unit development pace even further in 1999 with openings of Denny's Classic Diners as well as traditional Denny's units.

Improvements in product quality, advertising, marketing, promotions and service have enabled Denny's to improve its customer attribute rankings and same-store sales over the past year. The quality and taste profile of Denny's menu continues to be improved. Meanwhile, breakthrough advertising and an increased share of advertising voice in the family dining segment have helped draw more consumers to the restaurants to experience these enhancements. More new products and tools to improve guest service, including cook-to-server pagers, will be rolled out during 1999.

Denny's plans to build on its competitive advantages within the family segment by increasing its market penetration, improving guest value and repositioning the brand with a more distinct personality and image. As a great brand with a bright future, Denny's will always serve great-tasting classic food at an honest price, anytime.

Successful promotions

of product lines such as

All-Star Slams ^TM, Signature

Skillets ® and Major League

Burgers ^TM were instrumental

in driving same-store sales

increases for 1998.

Since 1969, Carrows has been offering distinctive family dining in a comfortable atmosphere at a good value. With 149 locations in the western U.S., Carrows specializes in flavorful, traditional American meals served in abundant portions, using the finest recipes.

Carrows appeals to families with children as well as to seniors--two demographic groups expected to grow rapidly well into the next century. The restaurants offer high-quality breakfasts priced to compete with fast-food competitors, and lunches and dinners that rival the quality of those found at casual dinnerhouses, but at a lower cost.

While Carrows recorded a decline in EBITDA due to lower same-store sales during 1998, the concept had several accomplishments during the year, including simplification of its organizational structure, enhancements to its field and restaurant training programs and significant improvements to its lunch/ dinner menu. These initiatives and a new emphasis on value positioning contributed to a rebound in customer traffic late in the year.

The Carrows menu is always current, but not trendy, and is revised regularly to emphasize the foods that customers most demand. When founder David Nancarrow first envisioned his new restaurant, people said it must have been inspired by the beauty of Santa Barbara. Carrows' menu includes

popular house specialties such as its

State Street Crispy Rolls, Beef Stew in a Bread Bowl, Southwest Chicken Salad, Mile High^TM Roast Beef Melt, Mushroom and Garlic Burger, Chicken Fettuccine Primavera and New England Clam Bake. Breakfast specialties include the California Omelette, Mega Skillet^TM, Country Morning Breakfast^TM and Breakfast Burritos. Carrows has recently simplified and boosted the quality and taste profile of its popular menu, inspired by its "Santa Barbara" herit age. Exciting new menu additions include Santa Barbara Hot Stix, the Mile High^TM Santa Barbara Crunch Sandwich, the Italian Seafood Platter and Teriyaki Almond Chicken.

During late 1998, Carrows began a facilities upgrade program to improve the on-premise experience for customers. This limited upgrade includes new interior paint, wall coverings and carpeting and new exterior signage, paint and awnings. The program is scheduled to be completed by April 1999.

With tangible improvements to its menu, advertising programs and facilities, Carrows is well-positioned to grow its popular regional restaurant brand.

Carrows specializes in

flavorful traditional

American meals served

inabundant portions,

using the finest recipes.

During 1998, Coco's

developed a new unit

prototype and a

remodel prototype to

strategically reposition

the Coco's brand by

the year 2000. After

successful testing

of the brand "relaunch"

remodel program during

1999, a full-scale

remodel rollout program

is scheduled.

The Coco's dining experience appeals to

the contemporary customer who is quality conscious and seeks a wide variety of innovative entrees and bakery items not typically offered at family restaurants. Since its beginning in 1948 as The Snack Shop in Corona Del Mar, California, the Coco's brand has grown to nearly 500 locations, including 181 restaurants concentrated in the western U.S. and 300 licensed restaurants located principally in Japan and South Korea.

Coco's posted EBITDA of $35 million in 1998, flat with the prior year, as same-store sales declined slightly from the prior year. During the year, Coco's simplified its organizational structure, enhanced its field and restaurant training programs and made significant improvements to its menu. These initiatives and a new emphasis on value positioning contributed to a rebound in customer traffic late in the year.

By continuing to offer great food and service at reasonable prices, Coco's has established itself at the top rung of the family dining category. The brand has developed its loyal customer base through a creative menu, supported by strong product development and execution capabilities, high-quality food and consistent "dinnerhouse" style service. The Coco's menu includes a wide range of delicious food items such as pasta dishes, fresh fish, steak, sandwiches, salads, a variety of breakfast offerings and fresh baked goods such as pies, muffins and cookies. The menu has recently been modified significantly to expand its taste

profile to

attract a wider target audience. New appetizers such as Parmesan Herb Onion Rings and entrees such as Shrimp Pesto Penne, Thai Chicken Fettuccine, Mediterranean Chicken and Granola Pancake Combo were added to the menu. New salads and sandwiches including the Cajun Ahi Tuna Caesar Salad, Greek Salad, Tortilla Cobb Salad Wrap and Focaccia Tuna Melt Sandwich have also been added.

During 1998, Coco's developed a new unit prototype and a remodel prototype to strategically reposition the Coco's brand by the year 2000. After successful testing of the brand "relaunch" remodel program during 1999, a full-scale remodel rollout program is scheduled.

Coco's sold or refranchised 28 Company-owned restaurants in non-core markets during 1998 to focus Company operations in core strategic markets. Going forward, Coco's has a goal of capturing the number one or two share of advertising voice in its dining category in each core strategic market through new franchised and Company-owned restaurant development. With its strong regional brand name, quality menu and planned remodeling program, Coco's is very excited about its growth opportunities.

With its continued success

and superior brand

positioning, El Pollo Loco

possesses tremendous

growth potential throughout

the southwestern U.S.

El Pollo Loco achieved record systemwide sales of $246 million and record EBITDA of $21 million in 1998. It also enjoyed its most aggressive new unit development year since 1991 with 21 restaurant openings. With average unit sales of $1.2 million, the brand enjoys one of the highest per unit sales volumes in the quick-service restaurant segment.

El Pollo Loco is the nation's leading quick-service restaurant chain specializing in flame-broiled chicken, with 265 restaurants principally located in California, Arizona, Nevada and Texas. The secret to El Pollo Loco's success is the chicken, which is hand-marinated, flame-broiled to perfection, hand-cut and served with steamy flour or corn tortillas and freshly-made salsa. "Pollo" can be purchased in individual meal servings or in family meal quantities of 8 and 12 pieces. Side orders include signature spicy pinto beans, red Spanish rice, creamy cole slaw and green salads. A full line of delicious "Fresh Mex" entrees are also available, including made-to-order half-pound burritos, Pollo Bowls® and Salad Bowls, tacos al carbon and hand-made taquitos. The same marinated, flame-broiled chicken serves as the main ingredient in all of these entrees. Four new salsas were introduced in 1998, providing guests the ability to "customize" their meal with fresh, made-on-premises condiments. Going

forward, El Pollo Loco plans to broaden its "Fresh Mex" line and improve carry-out ackaging and product presentation to capitalize on the growing home meal replacement dinner opportunity.

El Pollo Loco's advertising strategy
incorporates two executions--one for the general market and one for Hispanic consumers. This dual-communication strategy has proven successful as it addresses the needs of each group and makes El Pollo Loco relevant to the way each consumer group uses quick-service restaurants.

In 1999, El Pollo Loco plans to accelerate its new unit opening pace, with up to 20 Company-owned and 12 franchised unit openings. With the new capital resources of Advantica, El Pollo Loco has the ability to seed new markets with Company-owned restaurants which, in turn, will foster subsequent franchise development in those markets. With its continued success and superior brand positioning, El Pollo Loco possesses tremendous growth potential throughout the southwestern U.S.

Two youths from the Save the Children program in the Pacoima neighborhood of Los Angeles utilize their artistic talents to paint murals for a local service project.

We Care About Families
and Communities
At Advantica, we believe healthy and vibrant communities keep America strong. We focus the majority of our community outreach efforts on programs benefiting the well-being, development and future of our children and youth.

Advantica's largest restaurant chain, Denny's, is Save the Children's largest corporate sponsor. The Denny's/Save the Children partnership, formed four years ago, has raised over $3.5 million for disadvantaged children and youth throughout the U.S. In 1998, Denny's and Save the Children launched a new out-of-school-time program called the "Web of Support," and a complementary public awareness campaign. The initiative is expected to serve thousands of economically disadvantaged, at-risk children by providing safe places, constructive activities and the support of caring adults in conjunction with 45 neighborhood organizations in over 100 rural and urban U.S. communities.

contributors for both Advantica Support Centers. The funds raised through this campaign greatly impact the quality of life for many in our communities, including pre-schoolers, the elderly, and the mentally and physically challenged.

We Care About Diversity
At Advantica, we continue to find diversity to be a rich source of ideas, creativity and innovation. Our diversity efforts received national recognition last year. In April 1998, 60 Minutes, the nation's number one news program, aired a ground-breaking story on Denny's non-discrimination diversity training. The segment, which took a candid, behind-the-scenes look at what really goes on at Denny's, cited the chain as a model for other corporations. In August 1998, Fortune magazine ranked Advantica second in its inaugural list of "The 50 Best Companies for Asians, Blacks & Hispanics," following an extensive survey of the entire Fortune 1000 and the 200 largest privately-held
companies in the U.S.

Denny's is also in its fourth year as a corporate sponsor of the Harlem Globetrotters North American Tour. As part of its sponsorship, Denny's makes it possible for approximately 10,000 disadvantaged children from Save the Children Programs and NAACP branches around the U.S. to attend a game and pre-game interactive basketball clinic each year. During these clinics, the players encourage participants to stay in school and off drugs.

Advantica and its employees are also involved in a number of other community initiatives including food banks, literacy programs, disaster relief and other special events where the Company and its employees volunteer time and resources. This past year marked the most successful year as United Way corporate

Curley "Boo" Johnson of the Harlem Globetrotters shares a moment with Save the Children youth participants during a Globetrotters pre-game clinic.