UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 2000
Commission File Number 1-13226
PHOENIX RESTAURANT GROUP, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS 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 85253
- ---------------------------------------- ----------
(address of principal executive offices) (zip code)
(480) 483-7055
----------------------------------------------------
(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: 13,081,821 shares of Common Stock, $.10
par value, as of August 16, 2000.
PHOENIX RESTAURANT GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 2000
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets -
December 29, 1999 and June 28, 2000................................ 3
Condensed Consolidated Statements of Operations - 13-Week Periods
ended June 30, 1999 and June 28, 2000 and 26-Week Periods ended
June 30, 1999 and June 28, 2000 ................................... 4
Condensed Consolidated Statements of Cash Flows - 13-Week Periods
ended June 30, 1999 and June 28, 2000 and 26-Week Periods ended
June 30, 1999 and June 28, 2000.................................... 5
Notes to Condensed Consolidated Financial Statements............... 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 8
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk......... 14
PART II. OTHER INFORMATION.................................................. 15
SIGNATURES......................................................... 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 29, JUNE 28,
1999 2000
--------- ---------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,491 $ 2,465
Receivables 2,244 2,180
Inventories 1,087 1,011
Deferred income taxes 11,700 11,700
Other current assets 4,761 1,451
Net assets held for sale 42,128 42,809
--------- ---------
Total current assets 63,411 61,616
PROPERTY AND EQUIPMENT - Net 20,619 20,054
INTANGIBLE ASSETS - Net 11,117 10,934
OTHER ASSETS 3,220 3,212
--------- ---------
TOTAL $ 98,367 $ 95,816
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 17,778 $ 21,026
Accrued compensation 5,237 5,146
Accrued taxes 4,733 3,614
Other current liabilities 14,082 14,067
Current debt obligations 25,651 25,711
--------- ---------
Total current liabilities 67,481 69,564
LONG-TERM DEBT - Less current portion 54,908 51,877
OTHER LONG-TERM LIABILITIES 5,214 4,662
--------- ---------
Total liabilities 127,603 126,103
--------- ---------
COMMITMENTS AND CONTINGENCIES (note 3)
SHAREHOLDERS' DEFICIT
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 shares issued
and outstanding 1,349 1,349
Additional paid-in capital 35,869 35,869
Treasury stock, at cost, 403,456 shares -- (1,139)
Accumulated deficit (66,454) (66,366)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT (29,236) (30,287)
--------- ---------
TOTAL $ 98,367 $ 95,816
========= =========
See accompanying notes to condensed consolidated financial statements
3
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13-WEEK PERIOD ENDED 26-WEEK PERIOD ENDED
(UNAUDITED) (UNAUDITED)
---------------------- ----------------------
JUNE 30, JUNE 28, JUNE 30, JUNE 28,
1999 2000 1999 2000
--------- --------- --------- ---------
RESTAURANT SALES $ 61,801 $ 55,523 $ 122,742 $ 111,994
--------- --------- --------- ---------
RESTAURANT OPERATING
EXPENSES:
Food and beverage costs 16,775 15,263 33,238 30,484
Payroll and payroll related costs 21,341 19,202 42,160 38,574
Depreciation and amortization 1,676 633 3,361 1,309
Other restaurant operating expenses 17,425 14,671 34,296 29,551
Charge for impaired assets 3,000 -- 3,000 --
--------- --------- --------- ---------
Total operating expenses 60,217 49,769 116,055 99,918
--------- --------- --------- ---------
RESTAURANT OPERATING INCOME 1,584 5,754 6,687 12,076
ADMINISTRATIVE EXPENSES 2,950 3,100 5,781 6,074
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (1,366) 2,654 906 6,002
INTEREST EXPENSE - Net 3,389 3,043 5,995 5,914
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES (4,755) (389) (5,089) 88
INCOME TAX (BENEFIT) (596) -- (731) --
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS (4,159) (389) (4,358) 88
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT net of
income tax benefit of $686 (1,273) -- (1,273) --
--------- --------- --------- ---------
NET INCOME (LOSS) $ (5,432) $ (389) $ (5,631) $ 88
========= ========= ========= =========
Basic and diluted income (loss) per share
Before extraordinary item $ (.31) $ (.03) $ (.32) $ .01
========= ========= ========= =========
Net income (loss) $ (.31) $ (.03) $ (.32) $ .01
========= ========= ========= =========
Basic and diluted weighted average shares
Outstanding:
Basic 13,485 13,081 13,485 13,081
========= ========= ========= =========
Diluted 13,485 13,081 13,485 13,559
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13-WEEK PERIOD ENDED 26-WEEK PERIOD ENDED
(UNAUDITED) (UNAUDITED)
------------------ ------------------
JUNE 30, JUNE 28, JUNE 30, JUNE 28,
1999 2000 1999 2000
------- ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(5,432) $ (389) $(5,631) $ 88
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,676 633 3,361 1,309
Amortization of deferred financing costs 90 -- 181 187
Charge for impaired assets 3,000 -- 3,000 --
Extraordinary items 1,273 -- 1,273 --
Deferred income taxes (596) -- (731) --
Deferred rent (8) 82 53 197
Other - net (319) (31) (534) (34)
Changes in operating assets and liabilities
net of dispositions:
Receivables (558) 720 (529) 65
Inventories 99 37 50 76
Other current assets 424 (217) 590 (98)
Accounts payable and accrued liabilities 395 204 (698) 1,755
------- ------- ------- -------
Net cash provided by operating activities 44 1,039 385 3,545
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (948) (584) (2,407) (1,014)
Purchase of intangibles (84) -- (120) --
Proceeds from sale of assets -- 145 -- 145
------- ------- ------- -------
Net cash provided by (used in) operating activities (1,032) (439) (2,527) (869)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 5,521 -- 6,378 --
Debt issuance costs (1,033) -- (1,033) --
Note receivable collections 595 112 733 197
Principal reductions on long-term obligations (878) (1,108) (1,786) (1,899)
------- ------- ------- -------
Net cash used in financing activities 4,205 (996) 4,292 (1,702)
------- ------- ------- -------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 3,217 (396) 2,150 974
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,263 2,861 2,330 1,491
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 4,480 $ 2,465 $ 4,480 $ 2,465
======= ======= ======= =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for interest: $ 2,191 $ 2,289 $ 4,064 $ 4,237
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Cancellation of related party notes:
Subordinated debenture $ 1,456
Note receivable $ 2,600
Treasury stock $ 1,139
See accompanying notes to condensed consolidated financial statements
5
PHOENIX RESTAURANT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Phoenix Restaurant Group, Inc. and Subsidiaries have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission Form
10-Q and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
our 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 included in our Annual Report
on Form 10-K for the fiscal year ended December 29, 1999.
We currently operate 189 family-oriented, full-service restaurants in 20 states,
primarily in the southwestern, midwestern, western, and southeastern United
States. We own and operate 92 Black-eyed Pea restaurants, primarily in Texas,
Arizona, Oklahoma, and the Washington, D.C. area. We also own and operate 97
Denny's restaurants, which represents approximately 5.4% of the Denny's system
and makes us the largest Denny's franchisee in terms of revenue and the number
of restaurants operated.
(2) ACQUISITIONS AND DIVESTITURES
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 in the first six months of 2000.
All of these restaurants were underperforming and geographically undesirable. We
believe that these sales and closures have improved our restaurant portfolio. We
will continue to evaluate the operating results of all remaining restaurants
after our currently anticipated sales. We will sell or close any of those
restaurants that do not meet our criteria for operating results.
In October 1999, we retained CNL Advisory Services to act as our agent in the
sale of our remaining Denny's restaurants. On June 22, 2000, we entered into an
agreement to sell 56 Denny's restaurants to an existing Denny's franchisee for
$35.6 million in cash. The consummation of the sale is subject to usual and
customary conditions to closing, including the buyer's satisfactory completion
of its due diligence and inspection of the restaurants and the buyer's obtaining
financing for the transaction. As of June 28, 2000, we received letters of
interest for the proposed sale of the other 41 Denny's restaurants. These
proposals are subject to usual and customary conditions to closing, including
the buyers' obtaining financing for such transactions. To the extent that we
sell some or all of our remaining Denny's restaurants, we intend to apply the
proceeds to reduce our outstanding indebtedness and pay customary fees
associated with the closing of the transactions.
It is anticipated that the sale of all Denny's restaurants will be completed by
the end of fiscal 2000.
6
(3) OTHER MATTERS
On June 30, 1999, CNL APF Partners, LP acquired the remaining outstanding
indebtedness under our existing senior credit facility and advanced an
additional $5.4 million to us. As part of this transaction, we issued to CNL a
$20.1 million interim balloon note. In August 1999, this debt was modified to be
interest only through January 31, 2000. As of January 31, 2000 the entire
principal balance was due. We are currently in default on the note and have
classified it as a current liability. 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 cannot provide assurance, however, that we and CNL will agree to
any further extension or other revisions of the payment terms of the note that
will be acceptable to us.
Included in other current assets at December 31, 1999 was a $2.5 million note
receivable from shareholders bearing interest at 6%. The note was secured by
Series B Notes with a face amount of approximately $1.5 million and 403,456
shares of our company's common stock. In the first quarter of fiscal 2000, we
entered into an agreement with the holder of the note whereby the securities
collateralizing the note were used to redeem the receivable. The common stock
thus acquired has been classified as treasury stock with a value of $1,139,000
representing the difference in carrying value between the note receivable and
the Series B Notes redeemed.
(4) BUSINESS SEGMENTS
We operate family-oriented, full-service restaurants under two separate
concepts, Black-eyed Pea and Denny's. We own the Black-eyed Pea brand and
operate the Denny's restaurants under the terms of franchise agreements. Our
revenue and restaurant operating income for the thirteen-week and twenty
six-week periods ended June 28, 2000 and June 30, 1999 are as follows:
13-WEEK PERIOD ENDED 26-WEEK PERIOD ENDED
---------------------- ----------------------
REVENUES June 30, June 28, June 30, June 28,
1999 2000 1999 2000
--------- --------- --------- ---------
Black-eyed Pea $ 35,288 $ 29,612 $ 70,901 $ 61,090
Denny's 26,513 25,911 51,841 50,904
--------- --------- --------- ---------
Total revenues $ 61,801 $ 55,523 $ 122,742 $ 111,994
========= ========= ========= =========
RESTAURANT OPERATING INCOME
Black-eyed Pea $ 2,504 $ 2,771 $ 5,946 $ 6,158
Denny's 1,898 2,955 3,559 5,824
Charge for impaired assets (3,000) -- (3,000) --
Gain on sale of assets 182 28 182 94
--------- --------- --------- ---------
Total restaurant operating income 1,584 5,754 6,687 12,076
Administrative expenses 2,950 3,100 5,781 6,074
--------- --------- --------- ---------
Total operating income (loss) $ (1,366) $ 2,654 $ 906 $ 6,002
========= ========= ========= =========
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We currently operate 92 Black-eyed Pea restaurants in 8 states, including 81
restaurants in Texas, Oklahoma, and Arizona. Through June 28, 2000, comparable
same-store sales decreased 12.3%, and average weekly sales decreased 5.4% as
compared with the first quarter of fiscal 1999. This decrease is primarily
attributable to the shift from television advertising to local store marketing.
Carry-out sales accounted for approximately 13.0% and 11.4% of restaurant sales
for the 13-week period and 12.9% and 11.5% for the 26-week period ended June 28,
2000 and June 30, 1999.
As of June 28, 2000, we operated 97 Denny's restaurants in 17 states, including
54 restaurants in Texas, Florida, and Arizona. Through June 28, 2000, comparable
same-store sales increased 1.0%, and average weekly sales remained constant at
$20,200 per unit as compared with the first two quarters of fiscal 1999. The
increase is the result of the disposal of certain underperforming restaurants
and the improvement in the overall asset base.
COMPARISON OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in
the condensed consolidated statements of operations expressed as a percentage of
total restaurant sales.
13-WEEK PERIOD ENDED 26-WEEK PERIOD ENDED
---------------------- ----------------------
June 30, June 28, June 30, June 28,
1999 2000 1999 2000
--------- --------- --------- ---------
Restaurant sales 100% 100% 100% 100%
----- ----- ----- -----
Restaurant operating expenses:
Food and beverage costs 27.1 27.5 27.1 27.2
Payroll and payroll related costs 34.5 34.6 34.4 34.4
Depreciation and amortization 2.7 1.1 2.7 1.2
Other restaurant operating expenses 28.2 26.4 28.0 26.4
Charge for impaired assets 4.9 -- 2.4 --
----- ----- ----- -----
Total operating expenses 97.4 89.6 94.6 89.2
----- ----- ----- -----
Restaurant operating income 2.6 10.4 5.4 10.8
Administrative expenses 4.8 5.6 4.7 5.4
----- ----- ----- -----
Operating income (2.2) 4.8 .7 5.4
Interest expense 5.5 5.5 4.9 5.3
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary items (77) (0.7) (4.2) .1
Income tax benefit (1.0) -- (0.6) --
----- ----- ----- -----
Loss before extraordinary items (6.7) (0.7) (3.6) .1
Extraordinary items (2.1) -- (1.0) --
----- ----- ----- -----
Net income (loss) (8.8%) (0.7%) (4.6%) .1%
===== ===== ===== =====
8
THIRTEEN-WEEK PERIOD ENDED JUNE 28, 2000 COMPARED WITH THIRTEEN-WEEK PERIOD
ENDED JUNE 30, 1999
RESTAURANT SALES. Restaurant sales decreased $6.3 million, or 10.2%, to
$55.5 million for the thirteen-week period ended June 28, 2000 as compared with
restaurant sales of $61.8 million for the thirteen-week period ended June 30,
1999. This decrease was primarily attributable to a decline in same-store sales
of $4.1 million for the Black-eyed Pea restaurants due to a reduced emphasis on
television advertising and a decline of $3.5 million due to the closure or sale
of Black-eyed Pea and Denny's restaurants offset by sales from new stores. Our
Denny's restaurants increased same-store sales by 0.5% during the second quarter
of 2000. Restaurant sales attributable to the Black-eyed Pea restaurants for the
second quarter of 2000 and 1999 totaled 53% and 57% of total restaurant sales,
respectively.
FOOD AND BEVERAGE COSTS. Food and beverage costs increased to 27.5% of
restaurant sales for the thirteen-week period ended June 28, 2000 as compared
with 27.1% of restaurant sales for the thirteen-week period ended June 30, 1999.
This increase is primarily due to increases in pork and coffee costs.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs were
34.6% of restaurant sales for the thirteen-week period ended June 28, 2000 as
compared with 34.5% of restaurant sales for the thirteen-week period ended June
30, 1999. This increase was primarily attributable to the lower sales volumes
from the change in the Black-eyed Pea restaurants marketing program and higher
average wages offset by the closing of higher cost restaurants.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, and other items was
$633,000 for the thirteen-week period ended June 28, 2000, as compared with $1.7
million for the thirteen-week period ended June 30, 1999. In September 1999, we
committed to a plan to sell all of our 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 $1.0 million is primarily due to the cessation of depreciation on these
assets.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses
were 26.4% of restaurant sales for the thirteen-week period ended June 28, 2000
as compared with 28.2% of restaurant sales for the thirteen-week period ended
June 30, 1999. As a result of a change in accounting principles, new store
opening costs of approximately zero and $380,000, were expensed when incurred in
the second quarter of 2000 and 1999, respectively. Occupancy costs were reduced
by $813,000 in the second quarter of 2000 due to the renegotiation of an
equipment lease. Excluding these items, other restaurant operating expenses
would have been $15.5 million, or 27.9% of sales, for the thirteen-week period
ended June 28, 2000 and $17.0 million, or 27.6% of sales, for the thirteen-week
period ended June 30, 1999. The remaining decrease of $1.6 million is primarily
due to the reduction in television advertising.
RESTAURANT OPERATING INCOME. Restaurant operating income increased to $5.8
million, or 10.4% of restaurant sales, for the thirteen-week period ended June
28, 2000, as compared with $1.6 million, or 2.6% of restaurant sales, for the
thirteen-week period ended June 30, 1999. Restaurant operating income in 1999
included a $3.0 million charge for impaired assets. Excluding this charge,
restaurant operating income would have been $4.6 million, or 7.4% of restaurant
sales in 1999. This increase was principally the result of the reduced level of
expenses described above.
9
ADMINISTRATIVE EXPENSES. Administrative expenses were $3.1 million, or 5.6%
of restaurant sales, for the thirteen-week period ended June 28, 2000, as
compared with $3.0 million, or 4.8% of restaurant sales, for the thirteen-week
period ended June 30, 1999. The increase of $150,000 was due to increases in
legal and professional fees offset by the reduction in administrative costs
associated with the restaurants sold and closed. Administrative expenses
expressed as a percentage of restaurant sales, however, increased primarily as a
result of decreased same-store sales at the Black-eyed Pea restaurants.
INTEREST EXPENSE - NET. Interest expense, net, was $3.0 million, or 5.5% of
restaurant sales, for the thirteen-week period ended June 28, 2000 as compared
with $3.4 million, or 5.5% of restaurant sales, for the thirteen-week period
ended June 30, 1999. The change is the result of the increase in outstanding
debt in 2000 offset by the recording of approximately $239,000 in 2000 and
$600,000 in 1999, which represents the accrual of the compound effect of the
interest associated with the Series B notes.
INCOME TAX (BENEFIT). We did not record additional tax expense (benefit)
associated with the operating loss in 2000 due to the uncertainty of the future
utilization of the deferred income tax asset.
EXTRAORDINARY ITEMS. The extraordinary item related to the expensing of
certain deferred financing costs associated with the early payoff of certain
debt obligations.
NET INCOME (LOSS). We recorded a net loss of approximately $389,000 for the
thirteen-week period ended June 28, 2000 and a net loss of $5.4 million for the
thirteen-week period ended June 30, 1999, as a result of the factors described
above.
TWENTY-SIX WEEK PERIOD ENDED JUNE 28, 2000 COMPARED WITH TWENTY-SIX WEEK PERIOD
ENDED JUNE 30, 1999
RESTAURANT SALES. Restaurant sales decreased $10.7 million, or 8.8%, to
$112.0 million for the twenty-six week period ended June 28, 2000 as compared
with restaurant sales of $122.7 million for the twenty-six week period ended
June 30, 1999. This decrease was primarily attributable to a decline in
same-store sales of $7.8 million for our Black-eyed Pea restaurants due to a
reduced emphasis on television advertising and a decline of $7.3 million due to
the closure or sale of Black-eyed Pea and Denny's restaurants offset by sales
from new stores. Our Denny's restaurants increased same-store sales by 1.0%
during the first two quarters of 2000. Restaurant sales attributable to our
Black-eyed Pea restaurants for the fiscal 2000 and 1999 periods totaled 55% and
58% of total restaurant sales, respectively.
FOOD AND BEVERAGE COSTS. Cost of food and beverage increased to 27.2% of
restaurant sales for the twenty-six week period ended June 28, 2000 as compared
with 27.1% of restaurant sales for the twenty-six week period ended June 30,
1999. This increase is primarily due to increases in pork and coffee costs.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs
remained constant at 34.4% of restaurant sales for the twenty-six week periods
ended June 28, 2000 and June 30, 1999. Increases in payroll costs as a
percentage of sales were attributable to the lower sales volumes from the change
in the Black-eyed Pea marketing program and higher average wages, offset by the
closing of higher cost restaurants.
10
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, and other items decreased
to $1.3 million for the twenty-six week period ended June 28, 2000 as compared
with $3.4 million for the twenty-six week period ended June 30, 1999. In
September 1999, we committed to a plan to sell all of our 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 $2.1 million is primarily due to the cessation
of depreciation on these assets.
OTHER RESTAURANT OPERATING COSTS. Other restaurant operating costs were
26.4% of restaurant sales for the twenty-six week period ended June 28, 2000 as
compared with 28.0% of restaurant sales for the twenty-six week period ended
June 30, 1999. As a result of a change in accounting principles, new store
opening costs of approximately zero and $597,000, were expensed when incurred in
the twenty six-week period of 2000 and 1999, respectively. Occupancy costs were
reduced by $813,000 in the second quarter of 2000 due to the renegotiation of an
equipment lease. Excluding these items, other restaurant operating expenses
would have been $30.4 million, or 27.1% of sales, for the twenty six-week period
ended June 30, 2000 and $33.7 million, or 27.5% of sales, for the twenty
six-week period ended June 30, 1999. The decrease of $3.3 million is primarily
due to the reduction in television advertising.
RESTAURANT OPERATING INCOME. Restaurant operating income increased to $12.1
million, or 10.8% of restaurant sales, for the twenty-six week period ended June
28, 2000 as compared with $6.7 million, or 5.4% of restaurant sales, for the
twenty-six week period ended June 30, 1999. Restaurant operating income in 1999
included a $3.0 million charge for impaired assets. Excluding this charge,
restaurant operating income would have been $9.7 million, or 7.9% of restaurant
sales, in 1999. This increase was principally the result of the reduced level of
expenses described above.
ADMINISTRATIVE EXPENSES. Administrative expenses increased to $6.1 million,
or 5.4% of restaurant sales for the twenty-six week period ended June 28, 2000
as compared with $5.8 million, or 4.7% of restaurant sales, for the twenty-six
week period ended June 30, 1999. This increase of $293,000 is primarily
attributable to increased legal and professional fees, offset by the reduction
in administrative costs associated with the restaurants sold and closed.
Administrative expenses expressed as a percentage of restaurant sales, however,
increased primarily as a result of decreased same-store sales at our Black-eyed
Pea restaurants.
INTEREST EXPENSE - NET. Interest expense was $5.9 million, or 5.3% of
restaurant sales, for the twenty-six week period ended June 28, 2000 as compared
with $6.0 million, or 4.9% of restaurant sales, for the twenty-six week period
ended June 30, 1999. The change is the result of the increase in outstanding
debt in 2000 offset by the recording of approximately $430,000 in 2000 and
$600,000 in 1999, which represents the accrual of the compound effect of the
interest associated with the Series B notes.
INCOME TAX BENEFIT. We did not record tax expense (benefit) associated with
the operating income in 2000 due to the uncertainty of the future utilization of
the deferred income tax asset.
EXTRAORDINARY ITEMS. The extraordinary items related to expensing of
certain deferred financing costs associated with the early payoff of certain
debt obligations.
11
NET INCOME (LOSS). We recorded net income of approximately $88,000 for the
twenty six-week period ended June 28, 2000 and a net loss of $5.6 million for
the twenty six-week period ended June 30, 1999, as a result of the factors
described above.
LIQUIDITY AND CAPITAL RESOURCES
Our strategy has been to: (a) concentrate on developing the Black-eyed Pea
concept and brand identity; (b) focus on restaurants that achieve certain
operational and geographic efficiencies; and (c) sell or close underperforming
restaurants and 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 in the first six months of 2000. All of these restaurants were
underperforming and geographically undesirable. We believe that these sales and
closures have improved our restaurant portfolio.
In October 1999, we retained CNL Advisory Services to act as our agent in the
sale of our remaining Denny's restaurants. On June 22, 2000, we entered into an
agreement to sell 56 Denny's restaurants to an existing Denny's franchisee for
$35.6 million in cash. The consummation of the sale is subject to usual and
customary conditions to closing, including the buyer's satisfactory completion
of its due diligence and inspection of the restaurants and the buyer's obtaining
financing for the transaction. As of June 28, 2000, we received letters of
interest for the proposed sale of the other 41 Denny's restaurants. These
proposals are subject to usual and customary conditions to closing, including
the buyers' obtaining financing for such transactions.
To the extent that we sell some or all of our remaining Denny's restaurants, we
intend to apply the proceeds to reduce our outstanding indebtedness and pay
customary fees associated with the closing of the transactions. The assets and
liabilities related to the Denny's restaurants have been reported as net assets
held for sale. We continue 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. We will continue to evaluate the
operating results of our restaurants remaining after our currently anticipated
sales. We will sell or close any of those restaurants that do not meet our
criteria for operating results.
We, and the restaurant industry generally, operate primarily on a cash basis
with a relatively small amount of receivables and inventory. Therefore, like
many other companies in the restaurant industry, we operate with a working
capital deficit. Our working capital deficit was $7.9 million at June 28, 2000
and $4.1 million at December 29, 1999. Our working capital deficit increased
$3.8 million primarily due to the cancellation of a current note receivable and
a long-term subordinated note in the first quarter of 2000 as described in
"Other Matters" in the notes under Item 1 of this Form 10-Q. We anticipate that
we will continue to operate with a working capital deficit.
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 have
experienced net losses aggregating approximately $51.5 million, which includes
asset impairment losses of $33.4 million. In the first six months of 2000 there
has been a net gain of $88,000. As a result, as of June 28, 2000 we had a
shareholders' deficit of $30.3 million and our current liabilities exceeded our
current assets by $7.9 million. These factors, among others, may indicate that
we will be unable to continue as a going concern for a reasonable period of
time.
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 we be unable to
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continue as a going concern. Our continuation as a going concern depends upon
our ability to generate sufficient cash flow to meet our obligations on a timely
basis, to comply with the terms and covenants of our financing agreements, to
obtain additional financing or refinancing as may be required, and ultimately to
attain successful operations. We are continuing our efforts to obtain additional
funds so that we can meet our obligations and sustain operations. There can be
no assurance that additional financing will be available to us or available on
satisfactory terms.
On June 30, 1999, CNL APF Partners, LP acquired the remaining outstanding
indebtedness under our existing senior credit facility and advanced an
additional $5.4 million to us. As part of this transaction, we issued to CNL a
$20.1 million interim balloon note. In August 1999, this debt was modified to be
interest only through January 31, 2000. As of January 31, 2000 the entire
principal balance was due. We are currently in default on the note and have
classified it as a current liability. 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 cannot provide assurance, however, that we and CNL will agree to an
extension or other revisions of the payment terms of the note that will be
acceptable to us.
At June 28, 2000, we had outstanding $15,563,000 book value of Series B 13%
Subordinated Notes due 2003. We are in default due to non-payment of interest
since March 31, 1997. As of June 28, 2000 accrued and unpaid interest due to
these holders totals $8,383,000. Waivers for non-payment were received through
June 1999 but not since that date. The holders of the Subordinated Notes cannot
pursue their rights under a default until thirty months after the default date.
No formal notice of default has been received. The par value of the Series B
Notes at June 28, 2000 is $16,794,000.
SEASONALITY
Our operating results fluctuate from quarter to quarter as a result of the
seasonal nature of the restaurant industry and other factors. Our restaurant
sales are generally greater in the second and third fiscal quarters (April
through September) than in the first and fourth fiscal quarters (October through
March). In 2000, restaurant sales declined $948,000 from the first quarter to
the second quarter due to a shift in the marketing program for Black-eyed Pea
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. Our
working capital requirements also fluctuate seasonally.
INFLATION
We do 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 our operations, we generally have been able to modify our
operating procedures or to increase prices to offset increases in operating
costs.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. This standard, as amended, is effective for fiscal years
beginning after June 15, 2000. 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 have not completed the process of
evaluating the impact that will result from adopting SFAS No. 133. We are
therefore unable to disclose the impact that adopting SFAS No. 133 will have on
our financial position and results of operations when such statement is adopted.
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FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements, including
statements regarding our business strategies, our business, and the industry in
which we operate. These forward-looking statements are based primarily on the
our expectations and are subject to a number of risks and uncertainties, some of
which are beyond our control. Actual results could differ materially from the
forward-looking statements as a result of numerous factors, including those set
forth in Item 1 - "Special Considerations" in our Annual Report on Form 10-K for
the fiscal year ended December 29, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At June 28, 2000, we did not participate in any derivative financial instruments
or other financial and commodity instruments for which fair value disclosure
would be required under Statement of Financial Accounting Standards No. 107. We
do not hold investment securities that would require disclosure of market risk
and we do not engage in currency speculation or use derivative instruments to
hedge against known or forecasted market exposures.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Effective July 31, 2000, Brian McAlpine resigned as the Company's Acting
Chief Financial Officer. James C. Todd, who has served as the Company's
Controller since August 1990, was named as Acting Chief Financial Officer.
Effective August 11, 2000, Jack M. Lloyd resigned as the Company's Chairman
of the Board, Chief Executive Officer and Director. William J. Howard, the
Company's Executive Vice President, was named as Interim Chief Executive
Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27.1 Financial Data Schedule.
(b) REPORTS ON FROM 8-K.
Not applicable.
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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: August 11, 2000 By: /s/ James C. Todd
-------------------------------------
James C. Todd, Acting Chief Financial
Officer (Duly authorized officer of
the registrant, principal financial
and accounting officer)
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