UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X](Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBERJUNE 27, 20002001 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 1-13226
PHOENIX RESTAURANT GROUP, INC.
------------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Itsits Charter)
GEORGIA 58-1861457
- ------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7373 N. SCOTTSDALE ROAD
SUITE D-120, SCOTTSDALE AZ 852531210 BRIARVILLE RD
MADISON, TENNESSEE 37115
- ---------------------------------------- ----------
(address(Address of principal executive offices) (zip code)
(480) 483-7055Principal Executive Offices) (Zip Code)
(615)277-1234
----------------------------------------------------
(registrant's telephone number, including area code)(Registrant's Telephone Number, Including Area Code)
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 [ ]
The number of outstanding shares of the issuer's class of common stock as of the
latest practicable date, is as follows: 13,485,277 shares ofRegistrant's Common Stock, $.10 par
value, as of November 20, 2000.
August 17, 2001, is 13,925,111.
PHOENIX RESTAURANT GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBERJUNE 27, 20002001
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets -
December 29, 199927, 2000 and SeptemberJune 27, 2000............................. 32001..............................1
Condensed Consolidated Statements of Operations -
13-Week Periods ended September 29, 1999 and September 27,June 28, 2000 and
39-WeekJune 27, 2001 and 26-Week Periods
ended September 29, 1999June 28, 2000 and SeptemberJune 27, 2000............................. 42001............................2
Condensed Consolidated Statements of Cash Flows -
13-Week Periods ended September 29, 1999 and
September 27,June 28, 2000 and 39-WeekJune 27, 2001
and 26-Week Periods ended September 29, 1999June 28, 2000 and SeptemberJune 27, 2000............................. 52001........3
Notes to Condensed Consolidated Financial Statements.................. 6Statements.............4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 11Operations..............................8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........... 18Risk........20
PART II. OTHER INFORMATION................................................... 19
SIGNATURES .................................................................. 20
2
INFORMATION................................................21
SIGNATURES................................................................22
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBERTHOUSANDS EXCEPT FOR SHARE DATA)
ASSETS DECEMBER 27, DECEMBER 29, 2000 ASSETS 1999JUNE 27, 2001
(UNAUDITED)
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,4912,681 $ 2,1202,714
Receivables 2,244 2,0091,412 1,162
Inventories 1,087 1,093
Deferred income taxes 11,700 11,7001,059 1,111
Other current assets 4,761 1,1571,134 3,262
Net assets held for sale 42,128 42,644
--------- ---------42,649 23,973
---------- ------------
Total current assets 63,411 60,72348,935 32,222
PROPERTY AND EQUIPMENT - Net 20,619 18,94618,859 18,397
INTANGIBLE ASSETS - Net 11,117 10,5288,768 8,622
OTHER ASSETS 3,220 3,040
--------- ---------2,808 4,160
---------- ------------
TOTAL $ 98,36779,370 $ 93,237
========= =========63,401
========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 17,77815,257 $ 15,82013,850
Accrued compensation 5,237 5,5635,324 4,766
Accrued taxes 4,733 4,0304,302 5,930
Other current liabilities 14,082 22,48028,544 37,904
Current debt obligations 25,651 26,924
--------- ---------79,040 69,914
---------- -----------
Total current liabilities 67,481 74,817132,467 132,364
LONG-TERM DEBT OBLIGATIONS -
Less current portion 54,908 51,3951,096 1,008
OTHER LONG-TERM LIABILITIES 5,214 7,423
--------- ---------6,929 6,354
---------- -----------
TOTAL LIABILITIES 127,603 133,635
--------- ---------
COMMITMENTS AND CONTINGENCIES140,492 139,726
---------- -----------
SHAREHOLDERS' DEFICITDEFICIT:
Preferred stock, $.01 par value;
authorized, 5,000,000 shares;
issued and outstanding, none
Common stock, $.10 par value;
authorized, 40,000,000 shares;
13,485,277 and 13,925,111 shares
issued and outstanding at
December 27, 2000 and June 27,
2001, respectively 1,349 1,3491,393
Additional paid-in capital 35,869 34,982 34,942
Treasury stock, at cost, 403,456 shares --(252) (252)
Accumulated deficit (66,454) (76,477)
--------- ---------(97,201) (112,408)
---------- -----------
TOTAL SHAREHOLDERS' DEFICIT (29,236) (40,398)
--------- ---------(61,122) (76,325)
---------- -----------
TOTAL $ 98,36779,370 $ 93,237
========= =========63,401
========== ===========
See accompanying notes to condensed consolidated financial statements
3
statements.
1
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN(DOLLARS IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
13-Week Periods Ended 39-Week Periods Ended
(Unaudited) (Unaudited)
---------------------------- ----------------------------
September 29, September13-WEEK PERIODS ENDED 26-WEEK PERIODS ENDED
(UNAUDITED) (UNAUDITED)
JUNE 28, 2000 JUNE 27, September 29, September2001 JUNE 28, 2000 JUNE 27, 1999 2000 1999 2000
-------- -------- --------- ---------2001
RESTAURANT SALES $ 60,07855,523 $ 54,90646,494 $ 182,820111,994 $ 166,900
-------- --------94,083
--------- --------- --------- ----------
RESTAURANT OPERATING
EXPENSES:
Food and beverage costs 16,307 15,052 49,545 45,53615,263 12,860 30,484 25,984
Payroll and payroll related costs 20,691 19,641 62,851 58,21519,202 17,860 38,574 35,949
Other operating expenses 14,671 16,081 29,551 31,203
Loss on sale of note receivable - - - 389
Restructuring expenses - 700 - 700
Depreciation and amortization 1,789 673 5,150 1,982
Other633 680 1,309 1,352
--------- --------- --------- ----------
Total restaurant operating
expenses 18,640 15,386 52,936 44,937
Restructuring expense 8,326 6,750 8,326 6,750
Charge for impaired assets 5,500 1,080 8,500 1,080
-------- --------49,769 48,181 99,918 95,577
--------- --------- Total operating expenses 71,253 58,582 187,308 158,500
-------- -------- --------- -------------------
RESTAURANT OPERATING INCOME
(LOSS) (11,175) (3,676) (4,488) 8,4005,754 (1,687) 12,076 (1,494)
ADMINISTRATIVE EXPENSES 3,014 3,504 8,795 9,578
-------- --------3,100 4,081 6,074 7,220
--------- --------- --------- ----------
OPERATING INCOME (LOSS) (14,189) (7,180) (13,283) (1,178)2,654 (5,768) 6,002 (8,714)
INTEREST EXPENSE - Net 3,262 2,931 9,257 8,845
-------- --------3,043 3,277 5,914 6,477
--------- --------- --------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (17,451) (10,111) (22,540) (10,023)(389) (9,045) 88 (15,191)
INCOME TAX (BENEFIT) -- -- (731) --
-------- --------EXPENSE - 5 - 16
--------- --------- --------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (17,451) (10,111) (21,809) (10,023)
EXTRAORDINARY (LOSS) ON EARLY EXTINGUISHMENT OF
DEBT net of income tax benefit of $686 -- -- (1,273) --
-------- -------- --------- ---------
NET (LOSS) $(17,451) $(10,111) $ (23,082)(389) $ (10,023)
======== ========(9,050) $ 88 $ (15,207)
========= ========= ========= ==========
Basic and diluted income
(loss) per share before
extraordinary itemshare:
Applicable to common shareholders $ (1.29)(.03) $ (.77)(.67) $ (1.62).01 $ (.77)
======== ========(1.14)
========= ========= Net (loss) $ (1.29) $ (.77) $ (1.71) $ (.77)
======== ======== ========= ===================
Basic and diluted weighted
average shares Outstanding:outstanding:
Basic 13,485 13,081 13,48513,522 13,081 ======== ========13,321
========= ========= ========= ==========
Diluted 13,485 13,081 13,485 13,081
======== ========13,522 13,559 13,321
========= ========= ========= ==========
See accompanying notes to condensed consolidated financial statements.
4
2
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN(DOLLARS IN THOUSANDS)
13-Week Periods Ended 39-Week Periods Ended
(Unaudited) (Unaudited)
---------------------------- ----------------------------
September 29, September13-WEEK PERIODS ENDED 26-WEEK PERIODS ENDED
(UNAUDITED) (UNAUDITED)
JUNE 28, 2000 JUNE 27, September 29, September2001 JUNE 28, 2000 JUNE 27, 1999 2000 1999 2000
-------- -------- -------- --------2001
CASH FLOWS FROM OPERATING
ACTIVITIESACTIVITIES:
Net income (loss) $(17,451) $(10,111) $(23,082) $(10,023)$ (389) $ (9,050) $ 88 $ (15,207)
Adjustments to reconcile net
lossincome (loss) to net cash
provided by (used in) operating
activities:
Restructuring expenses - 700 - 700
Depreciation and amortization 1,789 673 5,150 1,982633 680 1,309 1,352
Amortization of deferred
financing costs 120- 2 187 4
301 191
Restructuring expense 8,326 6,750 8,326 6,750
Charge for impaired assets 5,500 1,080 8,500 1,080
Extraordinary items -- -- 1,273 --
Deferred income taxes -- -- (731) --Loss on sale of note receivable - - - 389
Deferred rent 17782 50 197 103 230 300
Other - net 349 74 (305) 40(31) (219) (34) 6
Changes in operating assets
and liabilities,
net of dispositions:liabilities:
Receivables 42 120 (487) 185720 57 65 250
Inventories 81 (50) 131 2637 1 76 (52)
Other current assets (32) 378 558 280(217) (1,191) (98) (2,794)
Accounts payable and
accrued liabilities 437 910 (261) 1,844
-------- -------- -------- --------204 11,013 1,755 11,310
--------- --------- --------- ----------
Net cash provided by (used in)
operating activities 1,039 2,043 3,545 (3,939)
--------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (584) (841) (1,014) (1,485)
Proceeds from sale of assets 145 (82) 145 2,937
--------- --------- --------- ----------
Net cash (used in) provided by
operatinginvesting activities (662) (69) (397) 2,655
-------- -------- -------- --------(439) (923) (869) 1,452
--------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,317) (201) (3,724) (1,215)FINANCING ACTIVITIES:
Proceeds from borrowings - - - 1,533
Note receivable collections 112 6 197 103
Proceeds from sale of assets -- -- -- 145
-------- -------- -------- --------
Net cash (used in) investing activities (1,317) (201) (3,724) (1,070)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 450 142 6,828 142
Debt issuance costs (304) -- (1,337) --
Notenote
receivable collections 90 103 823 300- - - 973
Issuance of common stock - - - 4
Principal reductions onof
long-term obligations (1,041) (320) (2,827) (1,398)
-------- -------- -------- --------debt (1,108) (48) (1,899) (93)
--------- --------- --------- ----------
Net cash (used in) provided
by financing activities (805) (75) 3,487 (956)
-------- -------- -------- --------(996) (42) (1,702) 2,520
--------- --------- --------- ----------
NET CHANGE(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (2,784) (345) (634) 629(396) 1,078 974 33
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF PERIOD 4,480 2,465 2,3302,861 1,636 1,491 -------- -------- -------- --------2,681
--------- --------- --------- ----------
CASH AND CASH EQUIVALENTS, AT END OF
PERIOD $ 1,6962,465 $ 2,1202,714 $ 1,6962,465 $ 2,120
======== ======== ======== ========2,714
========= ========= ========= ==========
SUPPLEMENTAL SCHEDULEDISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest $ 1,9802,289 $ 6796 $ 6,0444,237 $ 2,54651
Cash paid during the period for
income taxes $ - $ 5 $ - $ 16
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Exchange of note receivable for
common stock and note payable:payable
Subordinated debenture - - $ 1,456 -
Note receivable - - $ 2,600 -
Treasury stock - - $ 252 -
Additional paid-in capital - - $ 887 -
See accompanying notes to condensed consolidated financial statements
5
statements.
3
PHOENIX RESTAURANT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN(DOLLARS IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Phoenix Restaurant Group, Inc. ("PRG") and subsidiaries (collectively, the
"Company") have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for Form 10-Q and do not include all
of the information and footnotes required by accounting principles generally
accepted accounting principlesin the United States of America for audited financial statements. In
management's opinion, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
However, these operating results are not necessarily indicative of the
results expected for the full year. These statements should be read in
conjunction with the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") included in ourPRG's Annual Report on Form 10-K for the
fiscal year ended December 29, 199927, 2000 and MD&A in Part I, Item 2 of this
Quarterly Report on Form 10-Q. Certain reclassifications have been made
in the Condensed Consolidated Financial Statements to conform to the September
27, 2000 basis of presentation.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. From 1997 through 1999, we haveJune 27,
2001, the Company has experienced net losses aggregating approximately
$51.5 million,$97,490, which includes restructuring charges and asset impairment losses of
$33.4 million. In the first
three fiscal quarters of 2000 there has been a net loss of $10.0 million.$42,995. As a result, at SeptemberJune 27, 2000, we2001, the Company had a shareholders'
deficit of $40.4 million$76,325 and ourthe Company's current liabilities exceeded our current
assets by $14.1 million.$100,142. These factors, among others, may indicate that at some
point in the foreseeable future, wethe Company will be unable to continue as a
going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should wethe Company
be unable to continue as a going concern. Our continuationContinuation as a going concern
depends upon ourthe Company's ability to generate sufficient cash flow to meet
ourits obligations on a timely basis, to comply with the terms and covenants of
ourits financing agreements, to obtain additional financing or refinancing as
may be required and ultimately to attain profitablesuccessful operations. We areThe Company
is continuing ourits efforts to obtain additional funds so that weit can meet ourits
obligations and sustain ourits operations. There can be no assurance that
additional financing will be available to usthe Company or available on
satisfactory terms.
(2) RECLASSIFICATION
Included in other current assets at December 29, 1999 was a $2.6 million note
receivable collateralized by 403,456 shares of the Company's common stock. In
August 1999, the Company entered into a foreclosure and settlement agreement
whereby the $2.6 million note receivable was exchanged for $1.5 million in
Series B Notes Payable and the 403,456 shares of the Company's common stock. The
effective date of this transaction was January 3, 2000 at which time the Company
recorded the cancellation of the $2.6 million note receivable and the $1.5
million in Series B Notes Payable at face value while reflecting the transfer of
403,456 shares of common stock as treasury stock. Originally, the common stock
thus
6
acquired was classified as treasury stock with a value of $1.1 million
representing the difference in the carrying value of the note receivable and the
Series B Notes Payable. The Company has determined that the transaction should
have been reflected as an acquisition of treasury stock for $252 representing
its market value at the effective date. Consequently, the Company has reduced
the previously reported carrying value of the treasury stock by $887 with a
corresponding reduction of additional paid-in capital of $887. This
reclassification has been reflected in the accompanying financial statements for
the period ended September 27, 2000.
(3) ACQUISITIONS AND DIVESTITURES
We sold orThe Company closed one Denny's restaurant and one Black-eyed Pea restaurant
in 2000 and closed two Denny's and sixteen Black-eyed Pea restaurants in 1999 and
one Denny'sthe first 13 week period of
2001 and one Black-eyed Pea restaurant in the first thirty-nine weekssecond 13 week period of 2000.2001.
All of these restaurants were underperforming. Weunderperforming and failed to meet certain
operational and financial goals established by the Company. The Company will
continue to evaluate the operating results of all remaining restaurants after the completion
of the disposition of certain properties currently held for sale. We intendand intends to sell or close
any of those restaurants that do not meet ourits criteria for operating results.
In October 1999, wethe Company retained CNL Advisory Services, Inc. to act as
ourthe agent in the sale of our remainingall the Company's Denny's restaurants. In June 2000, we announced an
agreement to sell certain of our Denny's restaurants. We also announcedOn January
26, 2001, the receipt of letters of interest for the sale of the remaining Denny's
restaurants. Both the agreement and the purchase proposals were subject to usual
and customary conditions to closing, including buyer's satisfactory completion
of due diligence and buyer's obtaining financing for such transactions. The
agreement for sale of restaurants has expired on its terms, although discussions
regarding the purchase of restaurants are continuing with that party.
In October 2000, we reaffirmed our intent to move forward with the announced
strategy of selling our Denny's restaurants. We are at various stages of
discussions with several potential buyers for the restaurants. We anticipate
that the sale of certainCompany sold 23 Denny's restaurants will occurto Mountain Range
Restaurants, LLC ("MRR") for $20,300, consisting of cash of $17,300 and a
note for $3,000. The note is secured by warrants that give the endCompany the
right to a 40% equity position in MRR in the event of a default by MRR. MRR
is owned by Messrs. William G. Cox and Robert J. Gentz. Mr. Cox was formerly
the fiscal
yearChief Operating Officer of PRG and continues
4
to serve as a director. Mr. Gentz was formerly an Executive Vice President of
PRG and also continues to serve as a director.
The sales price of $20,300 exceeded the Company's cost basis plus selling
costs by approximately $13,000. The gain on this sale was offset, however, as
a result of management's determination that an additional reserve of
approximately $13,000 was needed to reduce the carrying value of the remaining
Denny's restaurants will occur by the end of
the first quarter of fiscal 2001. All such transactions are subject to usual and
customary conditions to closing. To the extenttheir net realizable value. Cash proceeds from the sale
of the Denny's occur, we
anticipate using the proceedstransaction were primarily used to reduce outstanding indebtedness along with
payment of the costscapital lease obligations associated
with these properties by approximately $1,500, retire debt of approximately
$7,700 to CNL APF Partners, LP (collectively, with its affiliates, "CNL"),
retire a note payable of approximately $1,700 to Advantica (Denny's, Inc.'s
parent company), repay approximately $3,100 of accrued interest and infuse
additional working capital into the transactions.
(4)Company.
(3) DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
On June 30, 1999, CNL APF Partners, LP acquired the remaining outstanding indebtedness under
ourPRG's existing senior credit facility and advanced PRG an additional $5.4 million to us.$5,400.
As part of this transaction, wePRG issued to CNL a $20.1 million$20,100 interim balloon
note. In August 1999, this debt was modified to be interest only through
January 31, 2000. Concurrent with the sale of the restaurants to MRR, the
Company paid CNL all accrued interest outstanding on this note through
December 27, 2000 and received a waiver of defaults along with an extension of
the due date to March 31, 2001. On March 31, 2001, the maturity date of this
note was extended until December 31, 2001. As of January 31, 2000June 27, 2001, accrued and
unpaid interest on the entire
principal balance was due. We arenote due to CNL totaled $1,044. The Company is
currently in default on the note and havehas classified it as a current
liability. As of September 27, 2000 accrued and
unpaid interest duePRG intends to CNL totals $3.8 million. In May 2000, we entered into a
non-binding letter of intent with CNL to extend the maturity date of the note to
September 30, 2000. We are currently negotiatingpursue an extension inof the maturity date and
waiver of default on this note. Wethe note from CNL. PRG cannot provide assurance,
however, that CNL will agree to any further extension or waiver or that other
revisions in the payment terms of the note will be acceptable to us.the Company.
During the second quarter of 2000, the Company stopped making payments due to
CNL for principal and interest on debt, principal and interest on several
capital leases and rent on several operating leases. On March 29, 2001, $3,700
of these delinquent payments due to CNL was transferred to an affiliate of
CNL with the same terms and conditions of payment. On June 30, 2001, an
additional $2,100 was transferred to an affiliate of CNL with the same terms
and conditions of payment.
During the second quarter of 2000, PRG received a waiver of a substantial
portion of the payments on an operating lease from a secondary lender. The
waiver was for a period of one year expiring on March 31, 2001. As of June
27, 2001, PRG has not received an extension of the waiver from the secondary
lender and has not re-instituted full payments under the terms of the lease
agreement.
At June 28, 2000, we27, 2001, the Company had outstanding $15.7 million book valueapproximately $16,000 carrying
amount (net of discount) of Series B 13% Subordinated Notes ("Series B
Notes") due 2003. We areThe Company is in default on the Series B Notes due to
non-payment of interest since March 31, 1997. As of September
7
June 27, 20002001, accrued
and unpaid interest due to these holders totals $9.2 million.totaled approximately $12,531.
Waivers for non-payment were received from the noteholders through June 1999
but notno interest waivers have been received since that date.
No formal notice of default has been received. The par value of
the Series B Notes at SeptemberJune 27, 2000 is $16.8 million.
(5) RESTRUCTURING EXPENSE
When the decision to close a restaurant is made,2001 was approximately $16,800.
In March 2001, the Company incurs exit costs,
generally for the accrualreceived notice from Mr. Jack Lloyd, PRG's former
Chairman of the remaining leasehold obligations less
anticipated sublease income related to leased units that are to be closed.
During the third quarter of 1999, the Company recorded $8.3 million in such
costs, primarily associatedBoard and Chief Executive Officer and holder (together with
the accrual of the remaining leasehold
obligations on restaurants closed or to be closed.
In the third quarter of 2000, the Company recorded approximately $6.8 million in
exit costs, primarily associated with $600 related to three Black-eyed Pea
restaurants which the Company anticipates closing by the end of the fiscal year
and $6.2 million to reflect increased estimates of liabilities related to
Black-eyed Pea and Denny's restaurants closed in prior periods because the
Company determined that the cost of subleasing those properties will exceed
previous estimates. Approximately $9.2 million of accrued exit costs remain at
September 27, 2000.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future.
(6) IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR DISPOSAL
During the third fiscal quarter of 2000, the Company completed an asset
impairment analysis on its operating restaurants and rental properties and
recorded an asset impairment chargeMs. Cathy Lloyd) of approximately $1.1 million. The entire
amount of this impairment charge was related to the Black-eyed Pea restaurant
division. In the third fiscal quarter of 1999, the Company recorded an asset
impairment charge of $5.5 million related to the Denny's restaurant division.
At September 27, 2000, the carrying$11,200 par value of the 97 Denny's restaurantsSeries B Notes, of
his intention to be
disposedaccelerate the payment of was $42.6 millionall principal and interest due
under the Series B Notes and to declare all amounts immediately due and
payable. The Company believes that Mr. Lloyd is reflected onpresently unable to pursue
any remedies for any defaults under the Consolidated Condensed
Balance Sheet as net assets held for sale. Under the provisionsSeries B Notes which are subordinated,
unsecured obligations of SFAS 121,
depreciation and amortization are not recorded during the period in which assets
are being held for disposal.
(7) LITIGATION
During the third quarter of 2000, the Company increased its litigation reserve
by $750. This additional reserve primarily relates to a court settlement
achieved during the third quarter with regard to an employment lawsuit filed in
Florida. This expense is reflected in administrative expenses.
In addition to the litigation described above, the Company is a party to other
legal proceedings incidental to its business. In the opinion of management,
based upon information currently available, the ultimate
8
liabilityPRG. To date, PRG has received no further
correspondence from Mr. Lloyd with respect to these other actions will not materially affect the operating results or the financial position of the Company.
(8)Series B Notes.
5
(4) CONCENTRATION OF RISKS AND USE OF ESTIMATES
As of SeptemberJune 27, 2000,2001, the Company operated 189162 restaurants in 2019 states,
which consistsconsisting of two separate concepts, Black-eyed Pea and Denny's. The
majority of the Company's restaurants are located in Texas, Arizona, Florida, Oklahoma
and Oklahoma.Arizona. Both concepts are family-oriented restaurantsfull-service, dining establishments offering
full table
servicea broad menu and a broad menu.comfortable dining atmosphere. The Company believes there
is no concentration of risk with any single customer, supplier or small group
of customers or suppliers whose failure or nonperformance would materially
affect the Company's results of operations.
The preparation of financial statements in conformity with accounting
principles generally accepted accounting principlesin the United States of America requires
management to use judgmentjudgments and make estimates that affect the amounts
reported in the Condensed Consolidated Condensed Financial Statements. Management
believes that such estimates have been based on reasonable and supportable
assumptions and that the resulting estimates are reasonable for use in the
preparation of the Condensed Consolidated Condensed Financial Statements. Changes in
such estimates will be made as appropriate as additional information becomes
available and may affect amounts reported in future periods.
(9)(5) BUSINESS SEGMENTS
We currently operate 189 family-oriented, full-service restaurants in 20 states.
We ownThe Company owns and operateoperates 92 Black-eyed Pea restaurants, including 81a
total of 80 restaurants located in Texas, Oklahoma,Arizona and Arizona. WeOklahoma. The Company
also own and operate 97operates 70 Denny's restaurants, including 54a total of 40 restaurants
located in Texas Florida, and Arizona. We ownFlorida. The Company owns the Black-eyed Pea brand and
operateoperates the Denny's restaurants under the terms of franchise agreements.
OurThe Company's revenue and restaurant operating income for the thirteen-week
and thirty-ninetwenty-six week periods ended September 27,June 28, 2000 and September 29, 1999June 27, 2001,
respectively, are as follows:
13-WEEK PERIOD ENDED 39-WEEK PERIOD ENDED
---------------------------- ----------------------------
September 29, September 27, September 29, September 27,
------------- ------------- ------------- -------------
1999 2000 1999 2000
-------- -------- --------- ---------
REVENUES
Black-eyed Pea $ 33,467 $ 28,159 $ 104,368 $ 89,249
Denny's 26,611 26,747 78,452 77,651
-------- -------- --------- ---------
Total revenues $ 60,078 $ 54,906 $ 182,820 $ 166,900
======== ======== ========= =========
RESTAURANT OPERATING INCOME
Black-eyed Pea $ 1,514 $ 1,542 $ 7,460 $ 7,700
Denny's 1,539 2,520 5,098 8,344
Restructuring expense (8,326) (6,750) (8,326) (6,750)
Charge for impaired assets (5,500) (1,080) (8,500) (1,080)
Gain (loss) on sale of assets (402) 92 (220) 186
-------- -------- --------- ---------
Restaurant operating income (loss) (11,175) (3,676) (4,488) 8,400
Administrative expenses 3,014 3,504 8,795 9,578
-------- -------- --------- ---------
Operating (loss) $(14,189) $ (7,180) $ (13,283) $ (1,178)13-WEEK PERIOD 26-WEEK PERIOD
ENDED ENDED
June 28, 2000 June 27, 2001 June 28, 2000 June 27, 2001
REVENUES: ------------- ------------- ------------- -------------
Black-eyed Pea $ 29,612 $ 28,571 $ 61,090 $ 56,392
Denny's 25,911 17,923 50,904 37,691
-------- -------- --------- --------
Total revenues $ 55,523 $ 46,494 $ 111,994 $ 94,083
======== ======== ========= ========
RESTAURANT OPERATING
INCOME (LOSS):
Black-eyed Pea $ 2,771 $ (2,832) $ 6,158 $ (3,433)
Denny's 2,955 1,145 5,824 1,939
Gain on sale of
assets 28 - 94 -
-------- --------- --------- ---------
Total restaurant
operating income
(loss) 5,754 (1,687) 12,076 (1,494)
Administrative
expenses 3,100 4,081 6,074 7,220
-------- --------- --------- ---------
Total operating
income (loss) $ 2,654 $ (5,768) $ 6,002 $ (8,714)
======== ========= =========
9
(10) SUBSEQUENT EVENTS
On October 18,=========
6
(6) OTHER MATTERS
In August 1999, PRG entered into a foreclosure and settlement agreement
whereby a $2,600 note receivable (collateralized by 403,456 shares of PRG's
common stock) was exchanged for $1,456 in Series B Notes payable and the
collateral of 403,456 shares of PRG's common stock. The effective date of
this transaction was January 3, 2000, we received notification from The American Stock Exchange
(AMEX) that AMEX intends to file an application to remove our securities from
listingat which time PRG recorded the
cancellation of the $2,600 note receivable and registration with AMEX. As previously disclosed, ourthe $1,456 in Series B Notes
payable at face value while reflecting the transfer of 403,456 shares of
common stock has not maintainedas treasury stock. In the minimum requirementsfirst quarter of 2000, PRG recorded
the transaction as an acquisition of treasury stock for continued listing on$252, representing
its market value at the AMEX.
We have notified AMEX that we intendeffective date, and a reduction of additional paid-in
capital of $887.
During the quarter ended June 27, 2001, the Company executed agreements to
appealsell 6 of its Denny's restaurants for an aggregate of $7.45 million and
received deposits in the decisionamount of the purchase prices. These agreements
give the Company the right to seek delisting.
However, there can be no assurance thatterminate the agreements upon a refund of the
deposits. Subsequent to the end of the second quarter, the Company entered
into an appealagreement with an entity owned by William J. Howard, a director of
any action by AMEXPRG, to delist our securities would be successful.sell 13 of its Denny's restaurants, including 6 of the restaurants
previously discussed, in which case the Company will terminate the previous
agreements with respect to these restaurants. The Company presently
is exploring
alternative venues foranticipates that the tradingsales of these restaurants will close on or before
September 30, 2001.
(7) SUBSEQUENT EVENTS
In September 1999, the Company committed to a plan to sell all of its securities.
10
Denny's
restaurants. Consequently, the assets of these restaurants were reclassified
as held for sale. On January 26, 2001, the sale of 23 restaurants to MRR was
completed. On August 6, 2001, the Company changed its intent with regard to
selling its remaining Denny's restaurants. The Company will continue its
efforts to sell approximately 29 Denny's restaurants located primarily in
Florida and Colorado. The Company now intends to continue operating in the
family dining segment with Denny's restaurants primarily in its core market
areas of Texas, Oklahoma and Florida. Therefore, as of August 6, 2001 the
carrying amount of the Denny's restaurants not being sold will be
reclassified from net assets held for sale to property, plant and equipment.
The amount of the reclassification will be approximately $10,300, which will
become the new historical cost basis of the assets. Depreciation and
amortization for these assets will commence as of August 6, 2001.
On June 29, 2001 several debt agreements with CNL totaling $16,900 were
modified to be interest only until maturity. Maturity dates for these debt
agreements range from 2002 though 2013. The Company is currently in default
on these notes due to non-payment of interest.
On July 12, 2001 the Company entered into a purchase agreement to sell 13
Denny's restaurants for $11,000 in cash. It is anticipated that this
transaction will close during the third quarter of 2001.
On July 27, 2001 the Company entered into a purchase agreement to sell 7
Denny's restaurants for $2,250 in cash. It is anticipated that this
transaction will close during the third quarter of 2001.
During the second quarter of fiscal 2001, the Company recorded restructuring
expenses of $700 related to four underperforming Black-eyed Pea restaurants
which the Company closed in July 2001. This adjustment reflects the estimated
liability for future rents, equipment leases, property taxes, and other costs
associated with the closure of these restaurants.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
As of SeptemberJune 27, 2000, we2001, the Company operated 92 Black-eyed Pea restaurants in
8nine states, including 81a total of 80 restaurants located in Texas, Oklahoma,Arizona
and Arizona. Through September 27,
2000,Oklahoma. During the first 26 weeks of 2001, comparable store sales at
its Black-eyed Pea restaurants decreased 12.9%, and average weekly sales decreased
7.0%8.1% as compared with the first
three fiscal quarterstwenty-six week period of 1999. We believe that
the2000. The decrease in comparable store sales iswas
attributable primarily to significant coupon advertising in the first quarter
of 2000, which did not occur in the first quarter of 2001. In addition, the
elimination of television advertising.advertising, which occurred in the first quarter of
2000 and continued until the first quarter of 2001, resulted in negative
sales trends throughout 2000 and into 2001. In March 2001, the television
advertising program was re-instituted. Comparable store sales during the
second quarter of 2001 decreased 5.0% as compared with the second quarter of
2000. Carry-out sales accounted for approximately 12.6%12.5% and 11.3%13.0% of
restaurant sales for the 13-week periodthirteen-week periods and 12.8% and 11.4%12.9% for the
39-week periodtwenty-six week periods ended SeptemberJune 27, 20002001 and September
29, 1999,June 28, 2000, respectively.
As of SeptemberJune 27, 2000, we2001, the Company operated 9770 Denny's restaurants in 1714
states, including 54a total of 40 restaurants located in Texas Florida, and Arizona.Florida.
Through SeptemberJune 27, 2000,2001, comparable store sales at the Company's Denny's
restaurants increased 1.2%, and average weekly sales increased
2.4%0.2% as compared with the first three fiscal quarterstwenty-six week period
of 1999. We believe that
the increases are2000. This increase in comparable store sales is the result of the
disposalclosure of certain underperforming restaurants and the improvement in the
operations of the remaining restaurants.
COMPARISON OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
in the condensed consolidated statementsCondensed Consolidated Statements of operationsOperations expressed as a
percentage of total restaurant sales.sales:
8
13-WEEK PERIOD ENDED 39-WEEK26-WEEK PERIOD ENDED
---------------------------- ----------------------------
September 29, September 27, September 29, September 27,
------------- ------------- ------------- -------------
All(Unaudited) (Unaudited)
(All amounts in percentages (%) 1999) JUNE 28, 2000 1999JUNE 27, 2001 JUNE 28, 2000 ----- ----- ----- -----JUNE 27, 2001
Restaurant sales Restaurant operating expenses: 100.0 100.0 100.0 100.0
------ ------ ----- ------
Restaurant operating expenses:
Food and beverage costs 27.1 27.4 27.1 27.327.5 27.7 27.2 27.6
Payroll and payroll related costs 34.5 35.8 34.3 34.934.6 38.4 34.4 38.2
Other operating expenses 26.4 34.6 26.4 33.3
Loss on sale of note receivable - - - .4
Restructuring expenses - 1.5 - .7
Depreciation and amortization 3.01.1 1.5 1.2 2.8 1.2
Other1.4
------ ------ ----- ------
Total restaurant operating
expenses 31.0 28.0 29.0 27.0
Restructuring expense 13.9 12.3 4.6 4.0
Charge for impaired assets 9.1 2.0 4.6 .689.6 103.7 89.2 101.6
------ ------ ----- ----- ----- -----
Total operating expenses 118.6 106.7 102.4 95.0
----- ----- ----- -----------
Restaurant operating income (loss) (18.6) (6.7) (2.4) 5.010.4 (3.7) 10.8 (1.6)
Administrative expenses 5.0 6.45.6 8.8 5.4 7.7
------ ------ ----- ------
Operating income (loss) 4.8 5.7
----- ----- ----- -----
Operating (loss) (23.6) (13.1) (7.2) (.7)(12.5) 5.4 (9.3)
Interest expense - net 5.45.5 7.0 5.3 5.1 5.36.9
------ ------ ----- ----- ----- -----
(Loss)------
Income (loss) before income taxes and
extraordinary items (29.0) (18.4) (12.3) (6.0)(0.7) (19.5) .1 (16.2)
Income tax benefit -- -- (.4) --expense - - - -
------ ------ ----- ----- ----- -----
(Loss) before extraordinary items (29.0) (18.4) (11.9) (6.0)
Extraordinary items -- -- (.7) --
----- ----- ----- -----------
Net (Loss) (29.0) (18.4) (12.6) (6.0)income (loss) (0.7) (19.5) .1 (16.2)
====== ====== ===== ===== ===== ===========
11
9
THIRTEEN-WEEK PERIOD ENDED SEPTEMBERJUNE 27, 20002001 COMPARED WITH THIRTEEN-WEEK PERIOD
ENDED SEPTEMBER 29, 1999JUNE 28, 2000
RESTAURANT SALES. RestaurantThe Company's restaurant sales decreased $5.2$9.0
million, or 8.6%16.3%, to $54.9$46.5 million for the thirteen-week period ended SeptemberJune
27, 20002001 as compared with restaurant sales of $60.1$55.5 million for the thirteen-weekthirteen-
week period ended September 29, 1999.June 28, 2000. This decrease was attributable primarily to
a declinereduction in comparablesales of $7.3 million due to the sale in January 2001 of 23
Denny's restaurants to Mountain Range Restaurants, LLC ("MRR"). Comparable
store sales at the Denny's restaurants decreased by 0.4% during the second
fiscal quarter of $4.3 million2001 compared to the second fiscal quarter of 2000. Sales
for the Black-eyed Pea restaurants. We
believerestaurants declined $1.1 million. This reduction was
primarily attributable to a decline in same store sales of 5.0% during the
second quarter of fiscal 2001, or $1.5 million, which was partially offset
by $589,000 in sales generated by a new Black-eyed Pea restaurant opened in
April 2001 in Hendersonville, Tennessee. The Company believes the decrease
in comparable store sales iswas attributable primarily to the eliminationcessation of
television advertising. Restaurant sales were also impacted by a
decline of $2.3 million due toadvertising for the closure or sale ofBlack-eyed Pea restaurants offset by
sales from restaurants opened during fiscal 1999. Our Denny's restaurants
increased comparable store sales by 1.7% during the third fiscal quarter of
2000.until March 2001.
FOOD AND BEVERAGE COSTS. Food and beverage costs increased to 27.4%27.7% of
restaurant sales for the thirteen-week period ended SeptemberJune 27, 20002001 as compared
with 27.1%27.5% of restaurant sales for the thirteen-week period ended September 29, 1999.June 28,
2000. This increase is duewas attributable primarily to increases in pork, steak
and coffee costs.the increased delivery
costs by the Company's food distributor.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs
were 35.8%38.4% of restaurant sales for the thirteen-week period ended SeptemberJune 27,
20002001 as compared with 34.5%34.6% of restaurant sales for the thirteen-week period
ended September 29, 1999.June 28, 2000. This increase was attributable primarily to the lower
sales volumes at the Black-eyed Pea restaurants, and higher average wages generally,
bothand
higher worker's compensation insurance rates. Also contributing to the
increase in payroll costs for the thirteen-week period ended June 27, 2001
was increased staffing resulting from a renewed commitment to outstanding
customer service.
OTHER OPERATING EXPENSES. Other operating expenses were 34.6% of
whichrestaurant sales for the thirteen-week period ended June 27, 2001 as compared
with 26.4% of restaurant sales for the thirteen-week period ended June 28,
2000. This increase was attributable primarily to (a) lower sales volumes at
the Black-eyed Pea restaurants, (b) an increase in advertising expense of
$1.7 million due to the new television and radio advertising campaign that
began in March 2001, (c) increases in utility costs of $466,000 and (d) an
increase in the Company's general liability insurance premiums. These
increases were partially offset by reductions in occupancy costs of $233,000
due to the expiration of 12 Denny's restaurants' equipment leases.
RESTRUCTURING EXPENSES. In the second fiscal quarter of 2001, the
Company recorded restructuring expenses of $700,000 related to four Black-
eyed Pea restaurants which the Company closed in July 2001. This adjustment
reflects the estimated liability for furture rents, equipment leases,
property taxes, and other costs associated with the closure of under-performingthese
restaurants.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets and other
items was $673,000$680,000 for the thirteen-week period ended SeptemberJune 27, 2000,2001, as
compared with $1.8 million$633,000 for the thirteen-week period ended September 29, 1999.June 28, 2000. In
September 1999, wethe Company committed to a plan to sell all of ourits Denny's
restaurants. In accordance with SFAS No. 121, the assets of these
restaurants were reclassified as being held for sale and depreciation ceased.
The decrease in depreciation and
amortization of $1.1 million is due primarily to the cessation of depreciation
on these assets.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurantINCOME (LOSS). Restaurant operating expenses
were 28.0%loss was $1.7
million, or 3.7% of restaurant sales, for the thirteen-week period ended SeptemberJune
27, 20002001 as compared with 31.0%restaurant operating income of $5.8 million, or
10.4% of restaurant sales, for the thirteen-week period ended September 29, 1999. New store opening costs of approximately $-0- and
$611,000 were expensed when incurredJune 28, 2000.
The reduction in the third fiscal quarters of 2000 and
1999, respectively. Occupancy costs were reduced by $813,000 in the third fiscal
quarter of 2000 due to the renegotiation of an equipment lease in April 2000.
Excluding these items, other restaurant operating expenses would have been $16.2income of $7.5 million or 29.5% of sales, for the thirteen-week period ended September 27,
2000 and $18.0 million, or 30.0% of sales, for the thirteen-week period ended
September 29, 1999. The remaining decrease of $1.8 million iswas due
primarily to the reduction in spending for television advertisinglower sales volumes at the Black-eyed Pea restaurants.
RESTRUCTURING EXPENSE. Inrestaurants, the third fiscal quartersale
of 2000, the Company
recorded a restructuring expense of $6.75 million comprised of $550,000 related
to three Black-eyed Pea restaurants which the Company anticipates closing by the
end of the fiscal year and $6.2 million related to the increase in the estimated
liabilities related to Black-eyed Pea and23 Denny's restaurants closed in prior
periods. The increase in estimated liabilities is the result of the Company's
determination that the costs associated with subleasing those properties will
exceed previous estimates.
12
In the third fiscal quarter of 1999, the Company recorded a restructuring
expense of $8.3 million comprised of $3.0 million related to the closure of four
Black-eyed Pea restaurantsMRR and one Denny's restaurant during the quarter, $1.4
million to reflect the increase in estimated liabilities related to restaurants
closed in prior periods and $3.9 million related to 16 Denny's restaurants sold
in 1997 and 1998 for which the Company remains contingently liable for
equipment, leases, rents and property taxes as a result of bankruptcy filings by
two buyers.
CHARGE FOR IMPAIRED ASSETS. In the third fiscal quarter of 2000, the
Company recorded a charge of approximately $1.1 million for impaired assets
related to the Black-eyed Pea restaurant division. In the third fiscal quarter
of 1999, the Company recorded a charge of $5.5 million for impaired assets
related to the Denny's restaurant division.
RESTAURANT OPERATING (LOSS). Restaurant operating loss was $(3.7)increased expenses described above.
10
ADMINISTRATIVE EXPENSES. Administrative expenses were $4.1 million, or
6.7%8.8% of restaurant sales, for the thirteen-week period ended SeptemberJune 27, 2000,2001 as
compared with $(11.2)$3.1 million, or 18.6%5.6% of restaurant sales, for the thirteen-
week period ended June 28, 2000. This increase was due primarily to an
increase of $253,000 in consulting, professional and temporary agency fees,
$261,000 in costs associated with moving the corporate office to Tennessee
and an increase of $259,000 in travel costs. Reductions in restaurant sales
did not result in a corresponding reduction in administrative expense due to
the transition to the new management team and the preparation for the move of
the corporate office.
INTEREST EXPENSE - NET. Net interest expense was $3.3 million, or 7.0%
of restaurant sales, for the thirteen-week period ended September 29, 1999. Restaurant operating loss
included restructuring expenses and charges for impaired assets of $7.8 million
and $13.8 million in fiscal 2000 and 1999, respectively.
ADMINISTRATIVE EXPENSES. Administrative expenses were $3.5 million, or 6.4%
of restaurant sales for the thirteen week period ended SeptemberJune 27, 20002001 as
compared with $3.0 million, or 5.0%5.5% of restaurant sales, for the thirteen-weekthirteen-
week period ended September 29, 1999.June 28, 2000. The increase in interest expense of
$490,000$234,000 was due primarily to the settlement of an employment lawsuit along with increases in legalpenalties and professional fees.
INTEREST EXPENSE - NET. Netlate fees of
$421,000 and increased interest expense was $2.9 million, or 5.3% of restaurant sales, for$210,000 from the thirteen-week period ended September 27, 2000 as
compared with $3.3 million, or 5.4%Series B Notes.
These increases were partially offset by reductions of restaurant sales, for the thirteen-week
period ended September 29, 1999. The reductionapproximately $275,000
in interest expense is due
primarilyon CNL notes resulting from the partial payoff of the notes from
the sale of 23 Denny's restaurants to deferred financing costs being completely amortized byMRR and $60,000 in interest income from
the endnote receivable resulting from the sale of 1999 and no additional expense being incurred in 2000.MRR.
INCOME TAX (BENEFIT). WeEXPENSE. The Company did not record additionala federal tax expense (benefit)benefit
associated with the operating losslosses in 2001 and 2000 due to the uncertainty
of the future utilizationrealization of any of the deferred incomeCompany's tax asset.
THIRTY-NINEloss carryforwards.
The Company, however, did record and pay state taxes.
TWENTY-SIX WEEK PERIOD ENDED SEPTEMBERJUNE 27, 20002001 COMPARED WITH THIRTY-NINETWENTY-SIX WEEK
PERIOD ENDED SEPTEMBER 29, 1999JUNE 28, 2000
RESTAURANT SALES. RestaurantThe Company's restaurant sales decreased $15.9$17.9
million, or 8.7%16.0%, to $166.9$94.1 million for the thirty-ninetwenty-six week period ended SeptemberJune
27, 20002001 as compared with restaurant sales of $182.8$112.0 million for the thirty-ninetwenty-
six week period ended September 29, 1999.June 28, 2000. This decrease was attributable
primarily to a reduction in sales of $12.2 million due to the sale in January
2001 of 23 Denny's restaurants to MRR. Comparable store sales at the
Company's Denny's restaurants increased by 0.2% during the twenty-six week
period ended June 27, 2001 compared to the twenty-six week period ended June
28, 2000. Sales for the Black-eyed Pea restaurants declined $4.7 million.
This reduction was primarily attributable to a decline in comparablesame store sales of
$12.18.1% during the second quarter of fiscal 2001, or $4.7 million, for ourwhich was
partially offset by $589,000 in sales generated by a new Black-eyed Pea
restaurants.
We believerestaurant opened in April 2001 in Hendersonville, Tennessee. The Company
believes the decrease in comparable store sales iswas attributable primarily to
the eliminationcessation of television advertising. Restaurant sales were also impacted
by a decline of $9.6 million due to the closure or sale of 16 restaurants offset
by sales from eight restaurants opened during 1999. Our Denny's restaurants
increased comparable store sales by 1.2% duringadvertising until March 2001 and significant
coupon advertising which occurred in the first three fiscal quartersquarter of 2000.
13
2000 that was not
repeated in 2001.
FOOD AND BEVERAGE COSTS. Food and beverage costs increased to 27.3%27.6% of
restaurant sales for the thirty-ninetwenty-six week period ended SeptemberJune 27, 20002001 as
compared with 27.1%27.2% of restaurant sales for the thirty-ninetwenty-six week period ended
September 29, 1999.June 28, 2000. This increase is duewas attributable primarily to increases in pork, steak
and coffee costs.the increased
delivery costs by the Company's food distributor.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs
increased to 34.9%were 38.2% of restaurant sales for the thirty-ninetwenty-six week period ended SeptemberJune 27,
20002001 as compared with 34.3%34.4% of restaurant sales for the thirty-ninetwenty-six week
period ended September 27, 1999. TheJune 28, 2000. This increase in payroll costs
as a percentage of sales was attributable primarily to the
lower sales volumes at the Black-eyed Pea restaurants, and higher average wages
generally, bothand higher worker's compensation insurance rates. Also contributing to the
increase in payroll costs for the twenty-six week period ended June 27, 2001
was increased staffing resulting from a renewed commitment to outstanding
customer service.
11
OTHER OPERATING EXPENSES. Other operating expenses were 33.3% of
whichrestaurant sales for the twenty-six week period ended June 27, 2001 as
compared with 26.4% of restaurant sales for the twenty-six week period ended
June 28, 2000. This increase was attributable primarily to (a) lower sales
volumes at the Black-eyed Pea restaurants, (b) an increase in advertising
expense of $2.3 million due to the new television and radio campaign that
began in March 2001, (c) increases in utility costs of $1.2 million and (d)
an increase in the Company's general liability insurance premiums. These
increases were partially offset by reductions in rent expense of $420,000 due
to the closingexpiration of underperforming12 Denny's restaurants' equipment leases.
LOSS ON SALES OF NOTE RECEIVABLE. The loss recognized in fiscal 2001
resulted from the sale of a note receivable of approximately $2.4 million to
CNL, the Company's senior lender, for cash of approximately $973,000 and the
payoff of a loan and related interest of approximately $1.0 million.
RESTRUCTURING EXPENSES. In the second fiscal quarter of 2001, the
Company recorded restructuring expenses of $700,000 related to four Black-
eyed Pea restaurants, which the Company closed in July 2001. This adjustment
reflects the estimated liability for future rents, equipment leases, property
taxes, and other costs associated with the closure of these restaurants.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets and other
items decreased
to $2.0was $1.4 million for the thirty-ninetwenty-six week period ended SeptemberJune 27, 20002001, as
compared with $5.2$1.3 million for the thirty-ninetwenty-six week period ended September 29,
1999.June 28,
2000. In September 1999, wethe Company committed to a plan to sell all of ourits
Denny's restaurants. In accordance with SFAS No. 121, the assets of these
restaurants were reclassified as being held for sale and depreciation ceased.
The decrease
in depreciation and amortization of $3.2 million is due primarily to the
cessation of depreciation on these assets.
OTHER RESTAURANT OPERATING COSTS. Other restaurant operating costs were
27.0% of restaurant sales for the thirty-nine week period ended September 27,
2000 as compared with 29.0% of restaurant sales for the thirty-nine week period
ended September 29, 1999. New store opening costs of approximately $-0- and $1.2
million were expensed when incurred in the thirty-nine week periods ended
September 27, 2000 and September 29, 1999, respectively. Occupancy costs were
reduced by $1.6 million in the second and third fiscal quarters of 2000 due to
the renegotiation of an equipment lease in April, 2000. Excluding these items,
other restaurant operating expenses would have been $46.6 million, or 27.9% of
sales, for the thirty-nine-week period ended September 27, 2000 and $51.7
million, or 28.3% of sales, for the thirty-nine-week period ended September 29,
1999. The remaining decrease of $5.1 million is due primarily to the reduction
in spending for television advertising at the Black-eyed Pea restaurants.
RESTRUCTURING EXPENSE. In the first three fiscal quarters of 2000, the
Company recorded a restructuring expense of $6.75 million comprised of $550,000
related to three Black-eyed Pea restaurants which the Company anticipates
closing by the end of the year and $6.2 million related to the increase in the
estimated liabilities related to Denny's restaurants closed in prior periods.
The increase in the estimated liabilities is the result of the Company's
determination that the cost associated with subleasing those properties will
exceed previous estimates. In the first three fiscal quarters of 1999, the
Company recorded charges of $8.3 million comprised of $3.0 million related to
the closure of four Black-eyed Pea restaurants and one Denny's restaurant during
the third quarter, $1.4 million to reflect the increase in estimated liabilities
related to restaurants closed in prior periods and $3.9 million related to 16
Denny's restaurants sold in 1997 and 1998 for which the Company remains
contingently liable for equipment, leases, rents and property taxes as a result
of a pending bankruptcy filing by two buyers.
CHARGE FOR IMPAIRED ASSETS. In the first three fiscal quarters of 2000, the
Company recorded a charge of approximately $1.1 million for impaired assets
related to the Black-eyed Pea restaurant division. In the first three fiscal
quarters of 1999, the Company recorded a charge of $8.5 million for impaired
assets related to the Denny's restaurant division.
14
RESTAURANT OPERATING INCOME (LOSS). Restaurant operating income (loss)
increased to $8.4loss was $1.5
million, or 5.0%1.6% of restaurant sales, for the thirty-ninetwenty-six week period ended
SeptemberJune 27, 20002001 as compared with $(4.5)restaurant operating income of $12.1 million,
or 2.4%10.8% of restaurant sales, for the thirty-ninetwenty-six week period ended September 29, 1999.
RestaurantJune 28,
2000. The reduction in restaurant operating income (loss) included restructuringof $13.6 million was due
primarily to lower sales volumes at the Black-eyed Pea restaurants, the sale
of the 23 Denny's restaurants to MRR and increased expenses and impaired
asset charges of $7.8 million and $16.8 million in 2000 and 1999, respectively.described above.
ADMINISTRATIVE EXPENSES. Administrative expenses were $9.6$7.2 million, or
5.7%7.7% of restaurant sales, for the thirty-ninetwenty-six week periodsperiod ended SeptemberJune 27, 20002001
as compared with $8.8$6.1 million, or 4.8%5.4% of restaurant sales, for the thirteen-weektwenty-
six week period ended September 29, 1999. TheJune 28, 2000. This increase of $783,000$1.1 million was due
primarily to an increase of $603,000 in consulting, professional and
temporary agency fees, $261,000 in costs associated with moving the settlementcorporate
office to Tennessee and an increase of an employment lawsuit along with increases$304,000 in legaltravel costs. Reductions
in restaurant sales did not result in a corresponding reduction in
administrative expense due to the transition to the new management team and
professional fees.the preparation for the move of the corporate office.
INTEREST EXPENSE - NET.EXPENSE-NET. Net interest expense was $8.8$6.5 million, or 6.9% of
restaurant sales, for the twenty-six week period ended June 27, 2001 as
compared with $5.9 million, or 5.3% of restaurant sales, for the thirty-ninetwenty-six
week period ended September 27, 2000 as
compared with $9.3 million, or 5.1% of restaurant sales, for the thirty-nine
week period ended September 29, 1999.June 28, 2000. The reductionincrease in interest expense isof $563,000
was due primarily due to deferred financing costs being completely amortizedincreases in penalties and late fees of $696,000 and
increased interest expense of $401,000 from the Series B Notes. These
increases were partially offset by reductions of approximately $598,000 in
interest on CNL notes resulting from the endpartial payoff of 1999the notes from the
sale of 23 Denny's restaurants to MRR and no additional expense being incurred$150,000 in 2000.interest income from
the note receivable resulting from the sale to MRR.
INCOME TAX BENEFIT. WeEXPENSE. The Company did not record federal tax expense (benefit)benefit
associated with the operating loss in 20002001 due to the uncertainty of the
future utilizationrealization of any of the deferred incomeCompany's tax asset.
EXTRAORDINARY ITEMS.loss carryforwards. The
extraordinary items related to expensing of
certain deferred financing costs associated with the early payoff of certain
debt obligations.Company, however, did record and pay state taxes.
12
LIQUIDITY AND CAPITAL RESOURCES
Our strategyHistorically, the Company has been to: (a) concentrate on developingmet its liquidity requirements with cash provided
by operating activities supplemented by external borrowing. Like other
companies in the Black-eyed Pea
conceptrestaurant industry, the Company operates with a working
capital deficit.
Due to its default under several debt agreements, the Company has reclassified
the majority of its debt as current liabilities thereby substantially
increasing its working capital deficit. During the first two quarters of
fiscal 2001, the Company had a net increase in cash of $33,000 reflecting net
cash used by operating activities of $3.9 million that was offset by net cash
provided by investing activities of $1.5 million and building it's brand identity; (b) focus on restaurantsby net cash provided by
financing activities of $2.5 million. Net cash used by operating activities
reflected that achieve
certain operational and geographic efficiencies; (c) sell or close
underperforming restaurants; and (d) refinance our indebtedness. We sold or
closed two Denny's and sixteen Black-eyed Pea restaurants in 1999 and one
Denny's and one Black-eyed Pea restaurant operating expenses absorbed all but approximately
$947,000 of cash generated by sales in the first three fiscaltwo quarters of 2001. Net
cash provided by investing activities included $2.9 million generated from the
sale of 23 Denny's restaurants to MRR offset by the purchase of additional
property and equipment of $1.5 million. Net cash provided by financing
activities primarily reflects the proceeds from borrowings of $1.5 million and
proceeds of $1.0 million from the sale of a note receivable to CNL during the
first quarter of 2001.
The Company's total liabilities decreased from $140.5 million at December 27,
2000 to $139.7 million at June 27, 2001. This change is primarily a result of
applying the proceeds from the sale of 23 Denny's restaurants to the capital
lease obligations of $1.5 million associated with those properties, the
retirement of debt of $7.7 million to the Company's senior lender, retirement
of a note payable of $1.7 million to Advantica and the repayment of $3.1
million of accrued interest. The offset of these reductions in liabilities is
$7.5 million in deposits for the future sale of restaurants, the non-payment of
principal and interest on certain promissory notes and lease obligations, and
operational indebtedness incurred during the normal course of business. The
Company's debt balance is comprised of promissory notes, obligations under
capital leases and subordinated indebtedness. The Company has classified the
majority of its debt as current debt obligations since the Company is currently
in default to CNL and its related parties for the non-payment of principal and
interest on certain promissory notes, capital lease obligations and operating
leases. On March 29, 2001 and June 30, 2001, an affiliate of CNL paid $3.7
million and $2.1 million, respectively of payments due CNL from the Company.
No additional indebtedness was incurred by the Company nor did the Company
agree to repay these amounts to the CNL affiliate. The CNL affiliate is
subrogated to the rights of CNL to receive these payments.
On June 30, 1999, CNL acquired the remaining outstanding indebtedness under the
Company's existing senior credit facility for $14.7 million, restructured $2.2
million of existing debt and advanced an additional $5.4 million to the
Company. The original due date of the senior debt was January 31, 2000, for
which the Company received an extension of the maturity date to September 2000.
AllAt December 27, 2000, the Company was in default on the covenants of the senior
debt. Concurrent with the January 26, 2001 sale of 23 Denny's restaurants, CNL
agreed to waive existing defaults under the senior credit agreement and extend
the maturity of the senior debt to March 31, 2001. On March 31, 2001 the
maturity date of this note was extended until December 31, 2001. The Company
currently is in default on the indebtedness under its senior credit facility,
its subordinated indebtedness and other credit agreements. While certain
indebtedness is classified as a current liability, the Company has been engaged
in negotiations with CNL and anticipates the indebtedness will be restructured.
No assurances can be given, however, that this restructuring will occur.
In September 1999 the Company committed to a plan to sell all of its Denny's
Restaurants. The assets of these restaurants were underperforming.reclassified as being held
for sale.
In October 1999, we retained CNL Advisory ServicesJanuary 2001, the Company sold 23 Denny's restaurants to actMRR for $20.3
million, consisting of cash of $17.3 million and a note for $3.0 million. MRR
is owned by Messrs. William G. Cox and Robert J. Gentz. Mr. Gentz was formerly
an Executive Vice President of PRG and continues to serve as our agenta director. Mr.
Cox was formerly the Chief Operating Officer of PRG and also continues to serve
as a director.
13
During the quarter ended June 27, 2001, the Company executed agreements to
sell 6 of its Denny's restaurants for an aggregate of $7.45 million and
received deposits in the sale of our remaining Denny's restaurants. In June 2000, we announced an
agreement to sell certain of our Denny's restaurants. We also announced the
receipt of letters of interest for the saleamount of the remaining Denny's
restaurants. Bothpurchase prices. These agreements
give the agreement andCompany the purchase proposals were subjectright to usual
and customary conditionsterminate the agreements upon a refund of the
deposits. Subsequent to closing, including buyer's satisfactory completion
of due diligence and buyer's obtaining financing for such transactions. The
agreement for sale of restaurants has expired on its terms, although discussions
regarding the purchase of restaurants are continuing with that party.
In October 2000, we reaffirmed our intent to move forward with the announced
strategy of selling our Denny's restaurants. We are at various stages of
discussions with several potential buyers for the restaurants. We anticipate
that the sale of certain Denny's restaurants will occur by the end of the fiscal
year andsecond quarter, the saleCompany entered
into an agreement with an entity owned by William J. Howard, a director of
PRG, to sell 13 of its Denny's restaurants, including 6 of the restaurants
previously discussed, in which case the Company will terminate the previous
agreements with respect to these restaurants. The Company presently
anticipates that the sales of these restaurants will close on or before
September 30, 2001.
On August 6, 2001 the Company changed its intent with regard to selling its
remaining Denny's restaurants. The Company will continue its efforts to
sell approximately 29 Denny's restaurants will occur bylocated primarily in Florida and
Colorado. The Company now intends to continue operating in the endfamily dining
segment with Denny's restaurants primarily in its core market areas of
Texas, Oklahoma and Florida. Therefore, as of August 6, 2001 the carrying
amount of the first quarterDenny's restaurants not being sold will be reclassified from
net assets held for sale to property, plant, and equipment. The amount of
fiscal 2001. All such transactions are subject to usualthe reclassification will be approximately $10.3 million which will become
the new historical cost basis of the assets. Depreciation and customary conditions to closing.amortization
for these assets will commence as of this date.
To the extent the salesales of any Denny's restaurants occur, the Denny's occur, we
anticipateCompany
anticipates using the sale proceeds to reduce outstanding indebtedness,
along with
payment of theprovide additional working capital and pay costs associated with thethese
transactions.
15
The assets and liabilities related to the Denny's restaurants have been reported
as net assets held for sale. We continueCompany continues to review net assets held for sale to determine whether
events or changes in circumstances indicate that the carrying value of the
net assets may not be recoverable. WeThe Company will continue to evaluate the
operating results of ourall its restaurants remaining after our currently anticipated
sales. We willand intends to sell or close any of those
restaurants that do not meet ourits criteria for operating results.
We operate primarilyDuring the second quarter of fiscal 2000, the Company ceased making payments
of principal and interest on several capital leases held by CNL and payments
on several operating leases to a cash basissecondary lender. On March 29, 2001 and
June 30, 2001, an affiliate of CNL paid $3.7 million and $2.1 million,
respectively, of payments due CNL from the Company. No additional
indebtedness was incurred by the Company nor did the Company agree to repay
these amounts to the CNL affiliate. The CNL affiliate is subrogated to the
rights of CNL to receive these payments. The Company received a waiver of a
substantial portion of the payments, for a period of one year expiring on
March 31, 2001, from the secondary lender but has not, as of yet, received a
waiver from CNL or its related party and has not received an extension of the
expired waiver from the secondary lender. During the first quarter of fiscal
2001, the Company borrowed an additional $1.5 million from CNL. The proceeds
were used for general operating purposes and the new notes, a demand note and
a term note with a relatively small amount of
receivablesmaturity date in March 2013, are secured by real and
inventory. Therefore, we believe that we are like many other
companiespersonal property owned by the Company.
At June 27, 2001, the Company was not in compliance with certain financial
covenants and payment terms set forth in the restaurant industry that operate with a working capital
deficit. Our working capital deficit was $14.1 million at September 27, 2000 and
$4.1 million at December 29, 1999. Our working capital deficit increased $10.0
million due primarily to a charge for impaired assets of $8.5 million which is
reflected in other current liabilities andSeries B Notes. Also, the
exchange of a current note
receivable and a long-term subordinated note payable in the first fiscal quarter
of 2000 (which is described in Note 2 to the Condensed Consolidated Financial
Statements included in Part II, Item 1 of this Quarterly Report on Form 10-Q.)
We anticipate that weCompany will continue to operatebe in default under the senior credit agreement
until other acceptable refinancing or restructuring alternatives become
available. Additional financing, however, may not be available or may not be
available on satisfactory terms.
The sale of restaurants has significantly affected liquidity because the
Company:
* repaid the negative working capital attributable to the
restaurants that it sold from cash flows generated by the
remaining restaurants,
* continued to pay costs associated with subleasing properties
for which purchasers defaulted on primary leases and for
which the Company remains contingently liable, and
14
* did not realize the beneficial effects of reduced
administrative costs commensurate with the reduction in the
number of restaurants operated by the Company.
The Company currently requires capital principally for general operating
purposes as well as maintenance expenditures on existing restaurants.
Expenditures for property and equipment totaled approximately $1.5 million
for the first two quarters of fiscal 2001. The Company intends to pursue
opportunities to develop additional Black-eyed Pea restaurants as favorable
locations and acceptable sources of financing for new restaurants are
identified.
RISK FACTORS
The Company's business is highly competitive with respect to food quality,
concept, location, service and price. In addition, there are a number of
well-established food service competitors with substantially greater
financial and other resources as compared to the Company. The Company's
Black-eyed Pea restaurants have experienced declining customer traffic
during the past three years as a result of intense competition and a decline
in operational execution. The Company has initiated a number of programs to
address the decline in customer traffic; however, performance improvement
efforts for the Black-eyed Pea restaurants during the past three years have
not resulted in improvements in customer traffic and margins for the concept
as a whole. There can be no assurance that the current programs will be
successful. The Company has experienced increased costs for labor and
operating expenses at its restaurant concepts which, coupled with a workingdecrease
in average restaurant sales volumes in its Black-eyed Pea restaurants,
have reduced its operating margins. The Company does not expect to be able to
significantly improve Black-eyed Pea restaurants' operating margins until it
can consistently increase its comparable restaurant sales. An increase in
comparable restaurant sales cannot be assured.
SPECIAL CONSIDERATIONS
THE COMPANY IS NOT EXPECTED TO BE PROFITABLE IN THE NEAR TERM AND ITS
AUDITORS' REPORT EXPRESSES A GOING CONCERN OPINION.
The Company has not been profitable in the last four fiscal years and its
operations are not expected to be profitable in the near future. Its ability
to generate operating profits will depend upon:
* its ability to restructure, refinance, or repay its
outstanding debt;
* successfully obtaining additional capital deficit.resources;
* the nature and extent of any future developments and
acquisitions; and
* general economic and demographic conditions.
The accompanyingCompany cannot provide assurance that it will be able to sell any of its
Denny's restaurants, restructure or refinance its debt, or improve the
performance of its Black-eyed Pea restaurants so as to achieve profitability
in the future. In addition, the report by its independent auditors on its
financial statements have been prepared on a going concern
basis, which contemplatesfor the realization of assets and the satisfaction of
liabilities in the normal course of business. From 1997 through 1999, we have
experienced net losses aggregating approximately $51.5 million, which includes
restructuring charges and asset impairment losses of $33.4 million. In the first
three fiscal quarters of 2000 there has been a net loss of $10.0 million. As a
result, at Septemberyear ended December 27, 2000, we had a shareholders' deficit of $40.4 million
and our current liabilities exceeded our current assets by $14.1 million. These
factors, among others, may indicatestates that at some point in the
foreseeable
future, we will be unable to continue as a going concern.
The financial statements do not include any adjustmentsuncertainty relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern. Our continuation as a going concern depends upon
ourits ability to generate sufficient cash flow to meet
ourits obligations on a timely basis, to comply with the terms and covenants of
ourits financing agreements, to obtain additional financing or refinancing as
may be required, and ultimately to attain profitable operations. We are continuing oursuccessful operations raise
substantial doubt about its ability to continue as a going concern.
15
THE COMPANY IS IN DEFAULT ON THE PAYMENT OF SUBSTANTIALLY ALL OF ITS
OUTSTANDING INDEBTEDNESS.
As of the filing date of this Report, the Company is in default on the
payment of its $22.3 million promissory note to its senior lender, $16.8
million principal amount of subordinated indebtedness, as well as interest
and rent payments to CNL and interest on its subordinated indebtedness (see
the Company's Form 10-K for the period ended December 27, 2000, Item 7.
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Liquidity and Capital Resources").
THE COMPANY HAS SIGNIFICANT INDEBTEDNESS.
As of June 27, 2001, the Company had a working capital deficit of $100.1
million and total debt obligations of $70.9 million, including subordinated
indebtedness in the outstanding principal amount of approximately $16.8
million and obligations under capital leases aggregating $19.6 million. The
Company has incurred substantial debt to develop and acquire restaurants and
to operate its business. The Company will continue its efforts to obtain additional
funds sosell
approximately 29 of its remaining Denny's restaurants and plans to use the
proceeds from those sales to refine and reposition the Black-eyed Pea
restaurant brand and reduce outstanding indebtedness. In addition, the
Company has been engaged in negotiations with CNL and anticipates that we can meet our obligations and sustain our operations. Thereits
senior indebtedness will be restructured. No assurances can be nogiven,
however, that this restructuring will occur.
The Company may seek additional equity or debt financing in the future to
provide funds to support its operations or to develop or acquire additional
restaurants. The Company, however, cannot provide assurance that additionalthat:
* such financing will be available to us or will be available on
satisfactory terms.
Onterms;
* the Company will be able to develop or acquire new
restaurants or to otherwise expand its restaurant
operations; or
* the Company will be able to restructure, refinance, or
satisfy its obligations as they become due.
Any additional debt financings obtained by the Company will increase expenses
and must be repaid regardless of the Company's operating results. Also, any
new equity financings would result in dilution to existing shareholders.
THE COMPANY HAS SIGNIFICANT CONTINGENT LIABILITIES ASSOCIATED WITH
RESTAURANTS IT HAS SOLD.
Since 1996, the Company has sold a total of 167 restaurants. The Company has
assigned or subleased the real property leases and other obligations to the
buyers of these restaurants, but it generally remains liable under those
obligations if the buyers default. During 1999, three buyers of 87
restaurants that the Company sold during 1997 and 1998 filed for bankruptcy
or failed to perform on their obligations to third parties. As a result, the
Company recorded charges of $4.8 million for equipment leases, rents,
property taxes, and other obligations for which it remains contingently
liable. As of June 30, 1999,27, 2001, the Company had a reserve of approximately $5.8
million for closed restaurant properties where the Company subsidizes the
existing rent payments and remains liable until the end of the lease term.
As the Company sells additional restaurants, it may remain contingently liable
for obligations on those restaurants. Any further defaults by buyers of
restaurants that the Company has sold in the past or that it sells in the
future could have a material adverse effect on its operating results and
financial condition.
16
RELIANCE ON DENNY'S.
As of June 27, 2001, the Company operated 70 franchised Denny's restaurants.
As a result of the nature of operating franchised restaurants and the
franchise agreements with Denny's, Inc. (together wtih its affiliates,
"Denny's"), as long as the Company operates Denny's restaurants, its success
depends, to a significant extent, on:
* the continued vitality of the Denny's restaurant concept and
the overall success of the Denny's system;
* the ability of Denny's to identify and react to new trends
in the restaurant industry, including the development of
popular menu items;
* the ability of Denny's to develop and pursue appropriate
marketing strategies in order to maintain and enhance the
name recognition, reputation, and market perception of
Denny's restaurants;
* the goodwill associated with the Denny's trademark;
* the quality, consistency, and management of the overall
Denny's system; and
* the successful operation of Denny's restaurants owned by
Denny's and other Denny's franchisees.
The Company has no control over the management or operation of Denny's or
other Denny's franchisees. A variety of factors affecting Denny's could have
a material adverse effect on the Company, including the following:
* any business or financial reversals or illiquidity on the
part of Denny's or its parent corporation, Advantica;
* a failure by Denny's to promote the Denny's name or
restaurant concept;
* the inability or failure of Denny's to support its
franchisees, including the Company;
* the failure to operate successfully the Denny's restaurants
that Denny's itself owns; or
* negative publicity with respect to Denny's or the Denny's
restaurant concept.
RESTRICTIONS IMPOSED BY THE DENNY'S FRANCHISE AGREEMENTS.
So long as the Company operates Denny's restaurants, the cancellation of the
Denny's franchise agreements, which include the right to what the Company
believes are favorable franchise arrangements and the right to use the
"Denny's" trademarks and trade styles, would have a material adverse effect
on the Company's business. The Denny's franchise agreements impose a number
of restrictions and obligations on the Company. The Company must pay
royalties and an advertising contribution to Denny's regardless of the
profitability of its Denny's restaurants. The Denny's franchise agreements
also require the Company to operate its Denny's restaurants in accordance
with the requirements and specifications established by Denny's. In
addition, Denny's has the right to require the Company to modify its
restaurants to conform to the then-existing Denny's restaurant format.
Denny's has retained the right to open on its own behalf or to grant to other
franchisees the right to open other Denny's restaurants in the immediate
vicinity of the Company's Denny's restaurants.
An agreement between the Company and Denny's gives Denny's the right to
terminate substantially all of the Denny's franchise agreements in the event
that CNL, APF Partners, LP acquiredas the remaining outstanding
indebtednesssuccessor to PRG's previous senior lender, takes certain
actions while PRG is in default under our existing seniorthe terms of its credit facility with
CNL. If PRG fails to satisfy the requirements described above
17
or otherwise defaults under the Denny's franchise agreements, it could be
subject to potential damages for breach of contract and advancedcould lose its rights
under those agreements.
The Denny's franchise agreements also provide that, in the event the Company
assigns its rights under any of those agreements, Denny's will have the
option to purchase the interest being transferred. An assignment under the
Denny's franchise agreements will be deemed to have occurred if a person,
entity, or group of persons (other than a group including William J. Howard
and William G. Cox, each of whom is a director of the Company, Jack M. Lloyd
or BancBoston Ventures, Inc., significant shareholders of the Company)
acquires voting control of the Company's Board of Directors.
Without the consent of Denny's, the Company may not directly or indirectly
own, operate, control, or have any financial interest in any coffee shop or
family-style restaurant business or any other business that would compete
with the business of any Denny's restaurant, Denny's, or any affiliate,
franchisee, or subsidiary of Denny's, other than restaurants the Company
currently operates. For two years after the expiration or termination of a
Denny's franchise agreement, the Company will not be permitted, without the
consent of Denny's, directly or indirectly to own, operate, control, or have
any financial interest in any coffee shop or family-style restaurant
substantially similar to a Denny's located within a 15-mile radius of a
Denny's restaurant subject to the expired or terminated agreement. These
restrictions will not apply to the operation of another Denny's restaurant or
the ownership of less than 5% of the publicly traded stock of any other
company.
CERTAIN SHAREHOLDERS MAY CONTROL THE COMPANY AND CERTAIN OF THE COMPANY'S
DIRECTORS MAY HAVE CONFLICTS OF INTEREST.
William J. Howard, a director of the Company, currently owns (together with
his spouse) approximately 12.2% of the Company's outstanding common stock.
On March 23, 2001, Mr. Howard exercised a stock purchase warrant and
purchased 146,611 shares of PRG's common stock (at an exercise price of $0.01
per share) by submitting funds to PRG in the amount of $1,466. Jack M.
Lloyd, former Chairman of the Board and Chief Executive Officer of PRG,
currently owns (together with Ms. Cathy Lloyd) approximately 24.9% of PRG's
outstanding common stock. Mr. Lloyd and Ms. Lloyd also exercised a stock
purchase warrant and acquired an additional $5.4 million293,223 shares of common stock at
an exercise price of $0.01 per share on March 20, 2001 by submitting funds to
us. As partPRG in the amount of $2,932. BancBoston Ventures, Inc. currently owns
approximately 15.3% of PRG's outstanding common stock. Accordingly, this
transaction, we issuedgroup of shareholders collectively has the power to CNLelect all of the members
of the Company's Board of Directors and thereby control the business and
policies of the Company.
Messrs. Howard and Lloyd (and Mrs. Howard and Ms. Lloyd) currently hold an
aggregate of $16,794,000 in principal amount of PRG's Series B Notes in
addition to their common stock. The Series B Notes contain restrictive
covenants relating to the operation of the Company and the maintenance of
certain financial ratios and tests. A default not waived by a $20.1 million interim balloon note. In August 1999, this debt was modified to be
interest only through January 31, 2000. Asmajority of January 31, 2000 the
entire
principal balance was due. We are currently in defaultholders of the Series B Notes could have a material adverse effect on the
note and have
classified it as a current liability. In May 2000, we entered into a non-binding
letterholders of intent with CNL to extend the maturity datePRG's common stock. Certain holders of the note to September
30, 2000. We are currently negotiating an extension in the maturity date and
waiver of default on this note. We cannot provide assurance, however, that CNL
will agree to an extension or waiver or that other revisions of the payment
terms of the note that will be acceptable to us.
At June 28, 2000, we had outstanding $15.7 million book value of Series B 13%
Subordinated Notes due 2003. We are in default due to non-payment ofhave not
received interest payments since March 31, 1997. As of September
16
June 27, 20002001, accrued
and unpaid interest due to these holders totals $9.2totaled $12.5 million. WaiversThe Company
has not received waivers from these holders for non-payment werenoncompliance of certain of
the debt covenants under the Series B Notes since June 1999.
On March 26, 2001, PRG received through June 1999 but not sincea notice from Mr. Lloyd in which he stated
that date.
No formal noticehe is the holder of default has been received. The par valuemore than 25% of the Series B Notes and purported to
accelerate the payment of all principal and interest under the Series B Notes
and to declare all amounts under the Series B Notes to be immediately due and
payable. On March 30, 2001, PRG also received a copy of a letter to State
Street Bank and Trust Company, the trustee (the "Trustee") under the
Indenture pursuant to which PRG issued the Series B Notes, from Mr. Lloyd,
who represented that he is a holder of Series B Note No. B-1. In his letter,
Mr. Lloyd advised the Trustee of the existence of defaults under the
Indenture. He also stated his belief that the Company has defaulted in
complying with debt priorities under the Indenture with respect to the
application of
18
proceeds from the sale of assets. Mr. Lloyd further requested
that the Trustee commence immediate litigation against PRG to recover all
amounts due on the Series B Notes, including unpaid principal, accrued unpaid
interest and interest on overdue installments at September 27, 2000the default rate. In the
event that the Trustee elects not to comply with his request, Mr. Lloyd
indicated that he is $16.8 million.ready, willing and able to pursue PRG on his own behalf.
To date, the Company has received no further correspondence from Mr. Lloyd or
the Trustee with respect to Mr. Lloyd's request.
The Company believes that it has complied with its obligations under the
Indenture and its other credit agreements with respect to sales of assets and
the application of the proceeds from those sales. As of June 30, 1999, Mr.
Lloyd and certain other holders of the Series B Notes waived defaults
existing under the Series B Notes at that time. Furthermore, the enforcement
of remedies under the Indenture and the Series B Notes is limited by the
terms of the Senior Subordinated Intercreditor Agreement, dated March 29,
1996 (the "Intercreditor Agreement"), among Banque Paribas, as Agent under
the Credit Agreement (as defined therein), certain holders of the Series B
Notes (including Mr. Lloyd) and the Trustee. CNL APF Partners, LP, has
succeeded to the interest of Banque Paribas. Under the terms of the
Intercreditor Agreement, the Company believes that both the Trustee and
holders of the Series B Notes (including Mr. Lloyd) presently are unable to
pursue any remedies for any alleged defaults under the Indenture or the
Series B Notes (including the initiation of litigation to collect the
indebtedness owing under the Series B Notes), which are subordinated,
unsecured obligations of the Company.
SEASONALITY
OurThe Company's operating results fluctuate from quarter to quarter as a result
of the seasonal nature of the restaurant industry and other factors.
Our restaurantRestaurant sales generally are generally greater in the second and third fiscal quarters (April
through September) than in the first and second fiscal
quarters (January through June) than in the third and fourth fiscal quarters
(October(July through March)December). In 2000, restaurant sales declined in the second and third fiscal
quarters due to a change in the marketing program for Black-eyed Pea restaurants
and a reduction in the number of restaurants. Occupancy and other operating costs, which remain
relatively constant, have a disproportionately negative effect on operating
results during quarters with lower restaurant sales. OurThe Company's working
capital requirements also fluctuate seasonally.
INFLATION
We doThe Company does not believe that inflation has had a material effect on
operating results in past years. Although increases in labor, food or other
operating costs could adversely affect ourthe Company's operations, wethe Company
generally havehas been able to modify ourits operating procedures or to increase
menu prices to offset increases in operating costs.
NEW ACCOUNTING STANDARDS
In June 1998,2001, the FASBFinancial Accounting Standards Board ("FASB") issued SFAS No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. This standard, as amended, is effective for the Company
on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including those imbedded in other contracts, and for
hedging activities. It requires all derivatives to be recognized as either
assets or liabilities in the statement of financial position and measured at
fair value. We do not anticipate that the effects of this pronouncement will
have a material impact on our reported operating results or our financial
position.
At September 27, 2000, we did not participate in any derivative financial
instruments or other financial and commodity instruments for which fair value
disclosure would be required undertwo
new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
107. We do141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest
method is prohibited for business combinations initated after June 30, 2001;
and b) the provisions of SFAS 141 also apply to all business combinations
accounted for by the purchase method that are completed after June 30, 2001
(that is, the date of the acquisition is July 2001 or later). There are also
transition provisions that apply to business combinations completed before
July 1, 2001, that were accounted for by the purchase method. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 to all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized. The Company is currently evaluating the provisions of SFAS 141
and SFAS 142 and has not hold investment securities that would require disclosure of
market risk and we do not engageadopted such provisions in currency speculation or use derivative
instruments to hedge against known or forecasted market exposures.
FORWARD LOOKINGits June 27, 2001
condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The forward-looking statements included in this Form 10-Q relating to certain
matters involve risks and uncertainties, including the ability of management
to successfully implement its strategy for improving the performance of the
Black-eyedBlack-
19
eyed Pea restaurants, the ability of management to effect asset sales
consistent with projected proceeds and timing expectations, the results of
pending and threatened litigation, adequacy of management personnel
resources, shortages of restaurant labor, commodity price increases, product
shortages, adverse general economic conditions, adverse weather conditions
that may affect the Company's markets, turnover and a variety of other
similar matters. Forward
lookingForward-looking statements generally can be identified by
the use of forward lookingforward-looking terminology such as "may", "will", "expect",
"intend", "estimate", "anticipate", "believe", or "continue" (or the negative
thereof) or similar
17
terminology. Actual results and experience could differ
materially from the anticipated results or other expectations expressed in
the Company's forward-looking statements as a result of a number of factors,
including but not limited to those discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations and under the
caption "Special Considerations" included in Part 1.,I, Item 1.,2 herein and in
Part II, Item 7 of the Company'sPRG's Annual Report on Form 10-K. Forward-looking
information provided by the Company pursuant to the safe harbor established
under the Private Securities Litigation Reform Act of 1995 should be
evaluated in the context of these factors. In addition, the Company
disclaims any intent or obligation to update these forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's business is highly competitive with respect to food quality,
concept, location, service and price. In addition, there are a numberItem 7A of well-established food service competitors with substantially greater financial
and other resources when compared to the Company. The Company's Black-eyed Pea
restaurants have experienced declining customer traffic during the past three
years as a result of intense competition and a change in marketing strategy
regarding television advertising. The Company does not expect to be able to
significantly improve Black-eyed Pea's operating margins until it can
consistently increase its comparable restaurant sales.
The Company has assigned its leasehold interest to third parties with respect to
approximately 87 propertiesPRG's Annual Report on which the Company remains contingently liable to
the landlordForm 10-K for the performance of all obligations of the party to whom the
lease was assigned in the event that party does not perform its obligations
under the lease. The assigned leases are for restaurant sites that the Company
has sold. The Company currently estimates that there will be no liability
associated with these assigned leases as of September 27, 2000.
The Company subleases four properties to others. The Company remains liable for
the leasehold obligations in the event these third parties do not make the
required lease payments. The sublet properties are former restaurant sites that
the Company has closed. The Company estimates its contingent liability
associated with these sublet properties as of Septemberfiscal year ended
December 27, 2000, to be
approximately $1.1 million.
18
and filed with the Commission on April 11, 2001, is
incorporated herein in this item of this report by this reference.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Note 43 of the Notes to the Condensed Consolidated Financial Statements is
incorporated herein by this reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Effective October 11, 2000, Robert M. Langford was named the Company's Chairman,
Chief Executive Officer and Director. William J. Howard resigned as Interim
Chief Executive Officer and will remain with the Company as Executive Vice
President and Director.
Effective October 11, 2000, W. Craig Barber was named as the Company's President
and Director. William G. Cox formerly President and Chief Operating Officer will
continue as Chief Operating Officer and Director.
On October 18, 2000 we received notification from The American Stock Exchange
(AMEX) that AMEX intends to file an application to remove our securities from
listing and registration with AMEX. As previously disclosed, our common stock
has not maintained the minimum requirements for continued listing on the AMEX.
We have notified AMEX that we intend to appeal the decision to seek delisting.
However, there can be no assurance that an appeal of any action by AMEX to
delist our securities would be successful. The Company presently is exploring
alternative venues for the trading of its securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27.1 Financial Data Schedule.Exhibits
See Exhibit Index immediately following the signature page hereto.
(b) REPORTS ON FROM 8-K.
Not applicable.
19
Reports on Form 8-K
On April 13, 2001, PRG filed an Amendment to Current Report on Form
8-K/A which amended PRG's Current Report on Form 8-K, dated January
26, 2001. This Amendment was filed to set forth pro forma financial
information in connection with the Company's sale of 23 Denny's
restaurants to Mountain Range Restaurants, LLC.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOENIX RESTAURANT GROUP, INC.
Dated: NovemberAUGUST 20, 20002001 By: /s/ James C. Todd
------------------------------------
James C. Todd, ActingJeffrey M. Pate
-----------------------------------------
Jeffrey M. Pate, Chief Financial Officer,
(Duly authorized
officerSecretary and Senior Vice President
22
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 $ 4,000,000 Asset Purchase Agreement, made and
entered into as of the registrant, principal
financialMay 24, 2001, by and accounting officer)
20among CNL
Restaurants IV, Inc. and Phoenix Restaurant Group,
Inc.
10.2 $2,250,000 Asset Purchase Agreement, made and
entered into as of March 30, 2001, by and among CNL
Restaurants IV, Inc. and Phoenix Restaurant Group,
Inc., pertaining to Unit 6788 located at 2335 West
Highway 76, Branson, Missouri (1)
10.3 $1,100,000 Asset Purchase Agreement, made and
entered into as of May 1, 200, by and among CNL
Restaurants IV, Inc. and Phoenix Restaurant Group,
Inc., pertaining to Unit 6394 located at 4999 34th
Street North, St. Petersburg, Florida (1)
10.4 $100,000 Asset Purchase Agreement, made and entered
into as of May 1, 2001, by and among CNL
Restaurants IV, Inc. and Phoenix Restaurant Group,
Inc., pertaining to Unit 7027 located at 5003
Highway 301 North (1)
10.5 Modification of Consolidated Interim Promissory
Note Revising Maturity Date, made and entered into
as of March 31, 2001, by and between CNL APF
Partners, LP and Phoenix Restaurant Group, Inc.
10.6 Employment Agreement between Phoenix Restaurant
Group, Inc. and Robert M. Langford
10.7 Employment Agreement between Phoenix Restaurant
Group, Inc. and W. Craig Barber
- ---------------------
(1) Document not filed because substantially similar in all material
respects to Exhibit 10.1.
23