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 OCTOBER 1, 1997
Commission File Number 1-13226
DENAMERICA CORP.
----------------
(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 85253
- ----------------------------------------- -------------------------
(address of principal executive offices) (zip code)
(602) 483-7055
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(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 shares of the issuer's class of common stock as of the latest
practicable date, is as follows:
13,437,777 shares of Common Stock, $.10 par value, as of November 12, 1997.
- ---------------------------------------------------------------------------
DENAMERICA CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 1, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - January 1, 1997 and
October 1, 1997 ........................................ 3
Condensed Consolidated Statements of Operations - 13-Week
Period ended October 1, 1997 and 13-Week Period ended
October 2, 1996 and 39-Week Period ended October 1,
1997 and 40-Week Period ended October 2, 1996 .......... 5
Condensed Consolidated Statements of Cash Flows - 13-Week
Period ended October 1, 1997 and 13-Week Period ended
October 2, 1996 and 39-Week Period ended October 1,
1997 and 40-Week Period ended October 2, 1996 .......... 6
Notes to Condensed Consolidated Financial Statements ........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................. 9
PART II. OTHER INFORMATION ........................................... 18
SIGNATURES .................................................. 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands)
January 1, October 1,
Assets 1997 1997
------ ---------- ----------
Current assets:
Cash and cash equivalents ......... $ 2,609 $ 975
Receivables ....................... 4,102 4,132
Inventories ....................... 3,520 3,557
Deferred income taxes ............. 2,955 3,268
Other current assets .............. 1,196 1,629
-------- --------
Total current assets ......... 14,382 13,561
-------- --------
Property and equipment, net ............ 65,535 57,957
Intangibles, net ....................... 80,113 79,902
Deferred financing costs, net .......... 3,801 4,302
Deferred income taxes .................. 7,174 7,174
Other assets ........................... 8,184 8,672
-------- --------
$179,189 $171,568
======== ========
See accompanying notes to condensed consolidated financial statements.
3
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued (Unaudited)
(In thousands)
January 1, October 1,
Liabilities and Shareholders' Equity 1997 1997
------------------------------------ ---------- ----------
Current liabilities:
Accounts payable ......................... $ 18,202 $ 17,046
Accrued compensation and related costs ... 8,487 6,292
Accrued taxes ............................ 4,636 3,989
Other current liabilities ................ 8,424 6,433
Current portion of long-term debt and
obligations under capital leases ........ 7,662 7,935
--------- ---------
Total current liabilities ............... 47,411 41,695
--------- ---------
Long-term debt, less current portion ....... 94,132 94,957
Deferred rent and other .................... 14,732 13,119
--------- ---------
Total liabilities ....................... 156,275 149,771
--------- ---------
Minority interest in joint ventures ........ 786 --
--------- ---------
Shareholders' equity:
Common stock ............................. 1,340 1,342
Additional paid-in capital ............... 35,706 35,781
Accumulated deficit ...................... (14,918) (15,326)
--------- ---------
Total shareholders' equity .............. 22,128 21,797
--------- ---------
$ 179,189 $ 171,568
========= =========
See accompanying notes to condensed consolidated financial statements.
4
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Period ended Period ended
----------------------- ----------------------
October 2, October 1, October 2, October 1,
1996 1997 1996 1997
---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (40 weeks) (39 weeks)
Restaurant sales .............................. $ 84,599 $ 75,494 $ 163,772 $ 227,787
--------- --------- --------- ---------
Restaurant operating expenses:
Cost of food and beverage ................... 23,001 20,644 44,972 62,097
Payroll and payroll related costs ........... 28,069 25,637 55,485 77,998
Depreciation and amortization ............... 2,379 2,232 5,215 6,822
Other restaurant operating expenses ......... 22,030 19,892 42,104 61,567
--------- --------- --------- ---------
Total restaurant operating expenses ........ 75,479 68,405 147,776 208,484
--------- --------- --------- ---------
Restaurant operating income ................... 9,120 7,089 15,996 19,303
Administrative expenses ....................... 3,223 3,006 6,404 10,579
--------- --------- --------- ---------
Operating income .............................. 5,897 4,083 9,592 8,724
Interest expense, net ......................... 2,930 3,220 6,581 9,587
--------- --------- --------- ---------
Income (loss) before minority interest in joint
venture, income taxes, and extraordinary item 2,967 863 3,011 (863)
Minority interest in joint venture ............ (7) (23) 4 (184)
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item .......................... 2,974 886 3,007 (679)
Income tax (benefit) expense .................. 1,192 355 1,205 (271)
--------- --------- --------- ---------
Income (loss) before extraordinary item ...... 1,782 531 1,802 (408)
Extraordinary item - loss on
extinguishment of debt ...................... -- -- 497 --
--------- --------- --------- ---------
Net income (loss) income ...................... 1,782 531 1,305 (408)
Preferred stock dividend and accretion ........ -- -- 149 --
--------- --------- --------- ---------
Net income (loss) applicable to common
shareholders ................................. $ 1,782 $ 531 $ 1,156 ($ 408)
========= ========= ========= =========
Net income (loss) per common share
before extraordinary item ................... $ .13 $ .04 $ .15 ($ .03)
========= ========= ========= =========
Net income (loss) per common share ............ $ .13 $ .04 $ 0.10 ($ .03)
========= ========= ========= =========
Weighted average shares outstanding ........... 13,399 13,437 11,131 13,437
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
5
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Period ended Period ended
---------------------- ----------------------
October 2, October 1, October 2, October 1,
1996 1997 1996 1997
---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (40 weeks) (39 weeks)
Cash flows from operating activities:
Net income (loss) ............................ $ 1,782 $ 531 $ 1,305 ($ 408)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization ............. 2,379 2,232 5,215 6,822
Amortization of deferred financing costs .. 83 154 211 441
Minority interest in joint venture ........ (8) (356) 9 (518)
Deferred income taxes ..................... 549 313 547 (313)
Deferred rent - long term ................. 57 188 189 605
Other ..................................... 237 507 734 374
Changes in operating assets and liabilities:
Receivables ............................. 752 (786) (647) (30)
Inventories ............................. (54) 104 (602) (37)
Prepaid expenses and other assets ....... 188 397 (821) (433)
Accounts payable and accrued liabilities (1,432) (2,605) (2,444) (8,152)
-------- -------- -------- --------
Net cash provided by (used in)
operating activities .................. 4,533 679 3,696 (1,649)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment ........... (3,498) (2,261) (7,410) (5,267)
Purchase of intangibles ...................... (751) (198) (1,285) (1,696)
Payments for Acquisition of BEP and Merger,
net of cash acquired ........................ -- -- (231) --
Proceeds from the sale of assets ............. 2,422 1,774 2,422 8,508
-------- -------- -------- --------
Net cash (used in) provided by investing
activities .............................. (1,827) (685) (6,504) 1,545
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings, net .............................. -- 13,439 13,361 15,669
Dividends on preferred stock ................. -- -- (124) --
Principal reductions on long-term obligations (2,485) (13,592) (10,160) (17,276)
Issuance of Common Stock and other, net ...... (221) -- (269) 77
-------- -------- -------- --------
Net cash provided by financing activities . (2,706) (153) 2,808 (1,530)
-------- -------- -------- --------
Net change in cash and cash equivalents ... -- (159) -- (1,634)
Cash and cash equivalents at beginning of period -- 1,134 -- 2,609
-------- -------- -------- --------
Cash and cash equivalents at end of period ..... $ -- $ 975 $ -- $ 975
======== ======== ======== ========
Supplemental schedule of cash flow information:
Cash paid during period for:
Interest ..................................... $ 3,103 $ 2,480 $ 6,136 $ 7,960
======== ======== ======== ========
Income taxes ................................. $ 29 -- $ 76 --
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
6
DENAMERICA CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
(1) Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements of
DenAmerica Corp. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. 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 the Company's Annual Report on Form 10-K for the fiscal
year ended January 1, 1997. Certain reclassifications have been made in the 1996
financial statements to conform to the 1997 presentation.
The three-month and nine-month periods ended October 1, 1997, as explained
below, are not comparable to the prior periods.
Mergers
On March 29, 1996, Denwest Restaurant Corp. ("DRC") merged with and into the
Company, with the Company being the surviving corporation (the "Merger"). Upon
consummation of the Merger, the Company changed its name from American Family
Restaurants, Inc. ("AFR") to DenAmerica Corp. The Merger has been accounted for
as a reverse purchase under generally accepted accounting principles as a result
of which DRC is considered to be the acquiring entity and AFR the acquired
entity for accounting purposes.
On July 3, 1996, the Company acquired all of the issued and outstanding common
stock of Black-eyed Pea U.S.A., Inc. ("BEP") from BEP Holdings, Inc. ("BEP
Holdings") pursuant to a Stock Purchase Agreement (the "BEP Acquisition"). In
accordance with the terms and conditions of the Stock Purchase Agreement, the
effective accounting date of the BEP Acquisition was June 24, 1996.
In accordance with the accounting rules for a purchase and a reverse
acquisition, the consolidated financial statements presented herein are as
follows:
(i) Consolidated Statements of Operations of the Company for the
periods ended October 1, 1997 (which include the results of
operations of the Company following the Merger and the BEP
Acquisition) and October 2, 1996 (which include the results of
operations of the AFR restaurants since the March 27, 1996
accounting date of the Merger and the results of operations of
BEP since the June 24, 1996 accounting date of the BEP
Acquisition); and
7
(ii) Consolidated Statements of Cash Flows of the Company for the
periods ended October 1, 1997 (which include the results of
operations of the Company following the Merger and the BEP
acquisition) and October 2, 1996 (which include the results of
operations of the AFR restaurants since the March 27, 1996
accounting date of the Merger and the results of operations of
BEP since the June 24, 1996 accounting date of the BEP
Acquisition).
(2) Earnings Per Share
Earnings per share for the period ended October 2, 1996 has been
computed based upon the weighted average shares of (i) the Company's Common
Stock received in connection with the Merger by the former shareholders of DRC
after deducting preferred stock dividends and accretion on preferred stock of
DRC outstanding prior to the Merger and (ii) the Company's common stock
outstanding after the Merger. Earnings per share for the period ended October 1,
1997 has been computed based upon the weighted average of the common shares
outstanding.
(3) Other Matters
On July 31, 1997, the Company sold its leasehold interests in fourteen
Denny's and two non-Denny's restaurants to an unrelated party for $2.1 million.
Proceeds from this transaction were used to repay $1.0 million of senior debt
obligations and for working capital purposes. In conjunction with this
transaction, the Company recognized a gain of $250,000, which is included as a
reduction of other restaurant operating expenses.
On October 1, 1997 the Company purchased from a BEP franchisee certain
assets and leasehold interests in six Black-eyed Pea restaurants located in
Arizona. In connection with this transaction, the Company and the franchisee
settled certain threatened litigation. Under this settlement, the Company will
forego future royalty payments from thirteen franchised restaurants located in
Colorado operated by the franchisee. The effect of the loss of royalty income
will be partially offset by operating income from the restaurants acquired. In
conjunction with the closing of this transaction, CNL Group, Inc. and certain
affiliates ("CNL") acquired certain assets directly from the BEP franchisee and
entered into operating leases with the Company. The value of the leases exceeded
the purchase price, resulting in the Company receiving approximately $2.5
million in cash that has been recorded as a deferred gain to be amortized over
the life of the leases.
As described below, on October 1, 1997, the Company entered into a
series of transactions with CNL. The Company utilized the proceeds from these
transactions, which totaled approximately $25.0 million, to repay senior debt
obligations of the Company. The following is a summary of the transactions with
CNL:
A. The Company and CNL each had a 50% interest in three joint
ventures, which operated a total of 16 Denny's restaurants, of which nine
restaurant locations were leased from CNL. On October 1, 1997, the Company
purchased CNL's 50% interest in these joint ventures and the land and buildings
for the nine Denny's restaurants for $12.1 million. Consideration consisted of a
$7.7 million promissory note, which amortizes over 10 years with an interest
rate of 9%, and a $4.4 million subordinated convertible debenture. The
subordinated convertible debenture bears interest of 5%, payable quarterly, and
is convertible at the holder's option through October 2002 into the Company's
common stock at 90% of the share price immediately prior to the conversion. The
Company subsequently entered into 15-year sale/leaseback arrangements with CNL
for the nine Denny's restaurants described above and received $8.0 million. No
gain or loss was recognized on these transactions.
8
B. The Company entered into equipment notes payable with CNL
totaling approximately $12.5 million. The notes payable are secured by certain
equipment located in 44 Denny's restaurants, bear interest at 10%, and amortize
over a seven-year period. No gain or loss was recognized in connection with this
transaction.
C. The Company sold eight buildings located on ground leases
to CNL for proceeds of $4.6 million and entered into operating leases for these
locations. No gain or loss was recognized on this transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Basis of Presentation
Upon consummation of the Merger with AFR, the former shareholders of
DRC owned an aggregate of approximately 53.0% of the outstanding voting power of
the Company immediately following the Merger. Accordingly, the Merger has been
accounted for as a reverse purchase under generally accepted accounting
principles with an effective accounting date of March 29, 1996, the last day of
DRC's first quarter for fiscal 1996. In addition, on July 3, 1996 the Company
acquired all of the issued and outstanding common stock of BEP. The effective
accounting date of the BEP Acquisition was June 24, 1996.
The results of operations for the 1997 periods have been materially
impacted by the Merger and the BEP Acquisition. For the nine-month period ended
October 1, 1997, revenue and related expenses increased significantly over prior
years primarily as a result of these acquisitions. As a result, the 1997
operating results are not comparable to prior periods. In addition, the 1997
period contains thirty-nine weeks while the 1996 nine-month period contains
forty weeks.
General
As set forth below, the Company's restaurant operating income increased
by approximately $3.3 million and operating income decreased by approximately
$900,000 for the thirty-nine week period ended October 1, 1997 as compared with
the forty-week period ended October 2, 1996. For the thirteen-week period ended
October 1, 1997, restaurant operating income and operating income decreased by
approximately $2.0 million and $1.8 million, respectively, as compared with the
thirteen-week period ended October 2, 1996. The decrease in operating income for
the thirty-nine week period ended October 1, 1997 would have been approximately
$2.5 million without the gain on sale of restaurants of $900,000 and the gain on
other disposals of approximately $700,000 during this period. These changes
result primarily from the Merger and the BEP Acquisition, the additional week of
operating results in 1996, and the decline in same store sales in 1997, which
have negatively impacted the Company's operating results due to fixed cost
structure.
Denny's
For the thirteen-week period ended October 1, 1997, the Company
operated 176 Denny's restaurants in 31 states as compared with operating 182
Denny's restaurants in the comparable prior year period. In January 1996, the
Company and Denny's, Inc. adopted the "Breakaway Breakfast" value pricing
promotion, which offered five breakfast items for $1.99 or less. In September
1996, the Company withdrew from the Breakaway Breakfast and increased the price
of the Grand Slam breakfast to $2.99. The withdrawal from the Breakaway
Breakfast resulted in the decline of comparable Denny's restaurant sales of 5.8%
during the thirty-nine week period ending October 1, 1997 compared with the
prior year. The average guest check increased from $4.97 in the third quarter
1996 to $5.21 for the
9
third quarter of 1997; however, guest counts for the same period declined. In
order to mitigate the possible material negative impact of the continued decline
in the Denny's sales levels, the Company has adopted a selective restaurant
disposition strategy described below.
Black-eyed Pea
For the thirteen-week period ended October 1, 1997, the Company
operated 92 Black-eyed Pea restaurants in 13 states and franchised 25 Black-eyed
pea restaurants in 5 states, as compared with operating 99 Black-eyed Pea
restaurants in the comparable prior year period. As previously described, the
Company purchased six franchised restaurant locations in Arizona during the
third quarter of 1997. The Company also opened three new Black-eyed Pea
restaurants during the third quarter of fiscal 1997. Subsequent to October 1,
1997, the Company opened an additional one restaurant in its core market of
Texas and has five locations in various stages of development. In addition, the
Company is under contract to purchase three restaurant locations in the Orlando,
Florida market from its Flordia franchisees.
The Company operates 64 Black-eyed Pea restaurants in Texas and
Oklahoma, which the Company considers to be its core market for Black-eyed Pea
restaurants. For the thirty-nine week period ended October 1, 1997, comparable
same-store sales decreased 4.6% for all of the Company's Black-eyed Pea
restaurants. Comparable same-store sales in the core market decreased only 2.5%,
however, during the thirty-nine week period ended October 1, 1997. The guest
check average at the Company's Black-eyed Pea restaurants is approximately
$7.90. For the third quarter of 1997, alcohol and carry-out sales accounted for
approximately 2.0% and 11.2%, respectively, of total sales at the Company's
Black-eyed Pea restaurants.
10
COMPARISON OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
in the condensed consolidated statements of operations as a percentage of total
restaurant sales. As discussed above, as a result of the Merger and BEP
Acquisition, these results are not comparable.
Period ended Period ended
---------------------- ----------------------
October 2, October 1, October 2, October 1,
1996 1997 1996 1997
---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (40 weeks) (39 weeks)
Restaurant sales: .......................... 100.0% 100.0% 100.0% 100.0%
Restaurant operating expenses:
Cost of food and beverages .............. 27.2 27.4 27.5 27.3
Payroll and payroll related costs ....... 33.2 34.0 33.9 34.2
Depreciation and amortization ........... 2.8 3.0 3.2 3.0
Other restaurant operating cost ......... 26.0 26.2 25.7 27.0
----- ----- ----- -----
Total restaurant operating expenses . 89.2 90.6 90.3 91.5
----- ----- ----- -----
Restaurant operating income ................ 10.8 9.4 9.7 8.5
Administrative expenses .................... 3.8 4.0 3.9 4.6
----- ----- ----- -----
Operating income ........................... 7.0 5.4 5.8 3.9
Interest expense ........................... 3.5 4.2 4.0 4.2
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item ....................... 3.5 1.2 1.8 (.3)
Income tax expense (benefit) ............... 1.4 .5 0.7 (.1)
----- ----- ----- -----
Income (loss) before extraordinary item .... 2.1 .7 1.1 (.2)
Extraordinary item - loss on extinguishment
of debt ............................. -- -- 0.3% --
----- ----- ----- -----
Net income (loss) .......................... 2.1% .7% 0.8% (.2)%
===== ===== ===== =====
THIRTEEN-WEEK PERIOD ENDED OCTOBER 1, 1997 COMPARED WITH THIRTEEN-WEEK PERIOD
ENDED OCTOBER 2, 1996
Restaurant sales. Restaurant sales decreased $9.1 million, or 11%, to
$75.5 million for the thirteen-week period ended October 1, 1997 as compared
with restaurant sales of $84.6 million for the thirteen-week period ended
October 2, 1996. This decrease was primarily attributable to the sale or closure
of certain underperforming restaurants and same-store sales decline
Cost of Food and Beverage. Cost of food and beverage increased to 27.4%
of restaurant sales for the thirteen-week period ended October 1, 1997 as
compared with 27.2% of restaurant sales for the thirteen-week period ended
October 2, 1996, primarily as the result of several promotional programs
implemented in July 1997.
Payroll and Payroll Costs. Payroll and payroll related costs were 34.0%
of restaurant sales for the thirteen-week period ended October 1, 1997 as
compared with 33.2% of restaurant sales for the thirteen-week period ended
October 2, 1996. This increase was primarily attributable to the increased cost
of health insurance benefits for the Denny's restaurant employees, as well as
the impact of minimum wage rate increases.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs, and other items was $2.2 million, or 3.0% of restaurant sales, for the
thirteen-week period ended October 1, 1997, which is comparable to $2.4 million,
or 2.8% of restaurant sales, for the thirteen-week period ended October 2, 1996.
Other Restaurant Operating Costs. Other restaurant operating costs were
26.2% of restaurant sales for the thirteen-week period ended October 1, 1997 as
compared with 26.0% of restaurant sales for the thirteen-week period ended
October 2, 1996. Included in the 1997 results is a gain of $250,000 relating to
the sale of a non-branded restaurant. Excluding this gain, other restaurant
operating costs, expressed as percentage of revenue, would have been 26.7%. This
increase was primarily attributable to the increased restaurant operating costs
associated with restaurants acquired as a result of the BEP acquisition (where
other restaurant operating costs as a percentage of revenue are higher than
Denny's operating costs) and a decrease in comparable same-store sales in the
Company's Denny's restaurants.
Restaurant Operating Income. Restaurant operating income decreased $2.0
million to $7.1 million for the thirteen-week period ended October 1, 1997, as
compared with $9.1 million for the thirteen-week period ended October 2, 1996.
This decrease was principally the result of the factors described above.
Administrative Expenses. Administrative expenses were $3.0 million, or
4.0% of restaurant sales, for the thirteen-week period ended October 1, 1997,
which is comparable with $3.2 million, or 3.8% of restaurant sales, for the
thirteen-week period ended October 2, 1996.
Interest Expense. Interest expense was $3.2 million, or 4.2% of
restaurant sales, for the thirteen-week period ended October 1, 1997 as compared
with $2.9 million, or 3.5% of restaurant sales, for the thirteen-week period
ended October 2, 1996. The increase is the result of amortization of warrants
issued in connection with the BEP Acquisition and the increase in outstanding
capital lease obligations.
12
Income Tax Expense. The Company recorded an income tax expense of
approximately $355,000, an effective rate of 40%, for the thirteen-week period
ended October 1, 1997 as compared with income tax expense of approximately $1.2
million, or an effective rate of 40%, for the thirteen week period ended October
2, 1996.
Net Income. The Company recorded net income of approximately $531,000
for the thirteen week period ended October 1, 1997 as compared with net income
of $1.8 million for the thirteen-week period ended October 2, 1996, as a result
of the factors described above.
THIRTY-NINE WEEK PERIOD ENDED OCTOBER 1, 1997 COMPARED WITH FORTY- WEEK PERIOD
ENDED OCTOBER 2, 1996
Restaurant sales. Restaurant sales increased $64.0 million, or 39.1%,
to approximately $227.8 million for the thirty-nine week period ended October 1,
1997 as compared with restaurant sales of $163.8 million for the forty-week
period ended October 2, 1996. This increase was primarily attributable to the
Merger and the BEP Acquisition.
Cost of Food and Beverage. Cost of food and beverage decreased to 27.3%
of restaurant sales for the thirty-nine week period ended October 1, 1997 as
compared with 27.5% of restaurant sales for the forty-week period ended October
2, 1996, primarily as the result of discontinuing several Denny's promotional
programs implemented in January 1996 and the conversion or sale of certain of
the Company's non-branded restaurants.
Payroll and Payroll Costs. Payroll and payroll related costs were 34.2%
of restaurant sales for the thirty-nine week period ended October 1, 1997 as
compared with 33.9% of restaurant sales for the forty week period ended October
2, 1996. This increase was primarily attributable to the costs of group
insurance benefits provided to employees of the Company's Denny's restaurants,
as well as the impact of minimum wage increases.
Depreciation and Amortization. Amortization and depreciation of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs and other items decreased to 3.0% of restaurant sales for the thirty-nine
week period ended October 1, 1997 as compared with 3.2% of restaurant sales for
the forty-week period ended October 2, 1996. The increase of $1.6 million was
primarily attributable to the amortization of intangible assets associated with
the 1996 acquisitions and an increase of $600,000 in amortization of pre-opening
costs.
Other Restaurant Operating Costs. Other restaurant operating costs were
27.0% of restaurant sales for the thirty-nine week period ended October 1, 1997
as compared with 25.7% of restaurant sales for the forty-week period ended
October 2, 1996. Included in the 1997 results is a gain of $1.7 million relating
to the sale of restaurants and other assets. Excluding this gain, other
restaurant operating costs expressed as a percentage of revenue, would have been
27.8%. This increase was primarily attributable to increased restaurant
operating costs associated with restaurants acquired as a result of the BEP
Acquisition (where other restaurant operating costs as a percentage of revenues
are higher than Denny's operating costs), a decrease in comparable same store
sales in the Company's Denny's restaurants, and the impact of a thirty-nine week
operating period in 1997 versus a forty-week operating period in 1996.
13
Restaurant Operating Income. Restaurant operating income increased $3.3
million to approximately $19.3 million for the thirty-nine week period ended
October 1, 1997, as compared with $16.0 million for the forty-week period ended
October 2, 1996. This increase was principally the result of the factors
described above.
Administrative Expenses. Administrative expenses increased to 4.6% of
restaurant sales for the thirty-nine week period ended October 1, 1997 as
compared with 3.9% of restaurant sales for the forty- week period ended October
2, 1996. This increase was primarily the result of declining same store-sales,
the impact of the thirty-nine week operating period in 1997 versus a forty-week
operating period in 1996, as well as the greater administrative support required
as a franchisor as opposed to operating solely as a franchisee.
Interest Expense. Interest expense was $9.6 million, or 4.2% of
restaurant sales, for the thirty-nine week period ended October 1, 1997 as
compared with $6.6 million, or 4.0% of restaurant sales, for the forty week
period ended October 2, 1996. The increase is the result of the increased level
of long-term debt associated with the 1996 acquisitions.
Income Tax Expense (Benefit). The Company recorded an income tax
benefit of approximately $271,000, an effective rate of 40%, for the thirty-nine
week period ended October 1, 1997 as compared with income tax expense of
approximately $1.2 million, an effective rate of 40%, for the forty week period
ended October 2, 1996.
Net Income (Loss). The Company recorded a net loss of approximately
$408,000 for the thirty-nine week period ended October 1, 1997 as compared with
net income of $1.2 million after the extraordinary item for the forty week
period ended October 2, 1996, as a result of the factors described above.
Liquidity and Capital Resources
The Company, and the restaurant industry generally, receives
substantially all of its revenues in cash with a relatively small amount of
receivables. Therefore, like many other companies in the restaurant industry,
the Company operates with a working capital deficit. The Company's working
capital deficit was $28.1 million at October 1, 1997 and $33.0 million at
January 1, 1997. The Company believes that it has funded the excessive working
capital deficit acquired in the Merger and that its current working capital
deficit is consistent with the working capital position of restaurant operators
of similar size. The Company anticipates that it will continue to operate with a
working capital deficit.
Over the past three quarters, the Company has converted ten non-Denny's
and non-Black-eyed Pea restaurants to the Denny's concept. In addition, during
1997 the Company has closed ten restaurants that were not achieving designated
cash flow requirements. The Company intends to continue to evaluate its existing
restaurant portfolio and to close or sell restaurants as appropriate. As
described above, the Denny's operating results have been negatively impacted by
same-store sales declines. The Company intends to pursue a strategy to lessen
its dependence on the Denny's brand and has identified certain geographic
markets where restaurants are available for disposition. Proceeds from such
dispositions will be used to retire debt and to reduce the working capital
deficit. As part of this strategy, in April 1997 the Company sold eleven
non-branded restaurants for cash and notes totaling $850,000, and in July 1997
the Company sold fourteen Denny's and two non-Denny's restaurants to an
unrelated party for $2.1 million. These transactions resulted in a gain of
$900,000, which has been included in the accompanying financial statements as a
reduction of other restaurant operating expenses.
14
The Company intends to continue to expand the number of its Black-eyed
Pea restaurants in its core market through the development of new restaurants.
To date in 1997, the Company has opened four new Black-eyed Pea restaurants and
purchased six franchised restaurants located in Arizona, including the
associated development rights, and has entered into an agreement to purchase
three franchised restaurants located in Florida. The Company believes that the
Arizona market provides significant growth opportunities. These acquisitions are
a part of an overall settlement of threatened litigation by these franchisees.
Under the Arizona agreement, the Company will forego future royalty payments
from an additional thirteen franchise restaurants located in Colorado in
exchange for various releases and indemnifications. The loss of royalty income
will be partially offset by operating income from the restaurants acquired.
The Company historically has satisfied its capital requirements through
credit facilities and sale/leaseback financing. The Company requires capital
principally for the development of new restaurants and to fund the acquisition
and conversion of existing restaurants. Expenditures for property and equipment
and intangibles totaled approximately $2.5 million and $7.0 million for the
thirteen-week and thirty-nine week periods ended October 1, 1997, respectively.
The Company currently has commitments for approximately $40.0 million of
sale-leaseback financing through August 1998, which the Company believes will be
adequate to meet its financing needs during that period.
The Company believes that its future capital requirements will be
primarily for the development of new restaurants, for continued restaurant
acquisitions, and for conversion of restaurants to the Denny's or Black-eyed Pea
concepts. The Company estimates that its costs to develop and open new Denny's
and Black-eyed Pea restaurants, excluding real estate and building costs, will
be approximately $350,000 to $450,000 per restaurant, and that its costs
associated with the conversion of a non-branded restaurant to the Denny's
concept will be approximately $160,000 to $450,000 per restaurant.
The Company was not in compliance with certain of its debt covenants at
October 1, 1997, for which the Company has received waivers. In addition,
certain holders of the Series B Notes agreed to defer the interest due as of
September 30, 1997 until March 31, 1998.
Net cash provided by (used in) operating activities decreased from $3.7
million in the first forty-weeks of 1996 to ($1.6 million) in the first
thirty-nine weeks of 1997. This decrease is attributable to a reduction of
accounts payable, the payment of property taxes, and costs associated with the
closing and conversion of certain restaurants.
Net cash (used in) provided by investing activities increased from
($6.5 million) in the first forty-weeks of 1996 to $1.5 million in the first
thirty-nine weeks of 1997. This change primarily is attributable to the disposal
of approximately $5.2 million of various assets acquired in the BEP Acquisition.
Net cash provided by (used in) financing activities decreased from $2.8
million in the first forty-weeks of 1996 to ($1.5 million) in the first
thirty-nine weeks of 1997. Cash (used in) financing activities arose primarily
from the proceeds of borrowing activities, net of the principal reductions in
long-term debt.
15
Seasonality
The Company's operating results fluctuate from quarter to quarter as a
result of the seasonal nature of the restaurant industry, the temporary closing
of existing restaurants for conversion, and other factors. The Company's
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). Occupancy and other operating costs, which remain relatively
constant, have a disproportionately negative effect on operating results during
quarters with lower restaurant sales. The Company's working capital requirements
also fluctuate seasonally, with its greatest needs occurring during its first
and fourth quarters.
Inflation
The 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 the Company's operations, the Company
generally has been able to modify its operating procedures or to increase prices
to offset increases in its operating costs.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", effective for both interim and annual periods ending after December
15, 1997. This statement specifies the computation, presentation and disclosure
of earnings per share for entities with publicly held common stock or potential
common stock. The Company will provide the required disclosures in its year-end
report. The effect on the Company's earning per share disclosure will not be
material for the periods presented.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 31, 1997.
The statement changes the reporting of certain items currently reported in the
stockholders' equity section of the balance sheet and establishes standards for
reporting of comprehensive income and its components in a full set of general
purpose financial statements. The Company does not expect this standard to have
a material effect on the its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 31, 1997. This standard requires segments
of a business enterprise to be reported based on the way management organizes
and evaluates segments within the company. The standard also requires
disclosures regarding products and services, geographical areas and major
customers. The Company currently is evaluating the impact of this standard on
its disclosures.
The Company plans to adopt both SFAS No. 130 and No. 131 in 1998.
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Forward Looking Statements
This Report on Form 10-Q contains forward-looking statements, including
statements regarding the Company's business strategies, the Company's business,
and the industry in which the Company operates. These forward-looking statements
are based primarily on the Company's expectations and are subject to a number of
risks and uncertainties, some of which are beyond the Company's 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 the Company's Annual Report on Form 10-K for the fiscal year
ended January 1, 1997.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1997 the Company filed a lawsuit against Beck Holdings,
Inc. f/k/a/ BEP Holdings, Inc., and Unigate Holdings, N.V. (the "defendants") in
the United States District Court for the District of Arizona (Civil Action No.
CIV 97-1546 PHX RGS). The lawsuit alleged that the defendants breached a stock
purchase agreement and guaranty and violated Sections 10(b) and 20(a) and Rule
10b-5 of the Securities Exchange Act of 1934, as well as A.R.S. Sections 44-1991
et seq. (the Arizona securities fraud statute). The lawsuit also asserted common
law claims for breach of the implied covenant of good faith and fair dealing,
fraudulent misrepresentation and negligent misrepresentation. All of these
claims related to the Company's July 3, 1996 acquisition of the outstanding
capital stock of BEP and the defendants' failure to indemnify the Company in
connection with a settlement the Company reached in July 1997 with Arizona and
Colorado Black-eyed Pea restaurant franchisees. As part of the settlement with
these franshisees, the Company agreed to acquire six Arizona Black-eyed Pea
restaurants for a purchase price of $3.25 million. Other claims included in the
lawsuit involved alleged misrepresentations made by the defendants in connection
with the 1996 acquisition of BEP.
On September 30, 1997, the Company, BEP, and the defendants agreed to
settle this lawsuit. As part of the settlement, the Company has the option to
repurchase the promissory note issued to Beck Holdings, Inc. in connection with
the purchase of BEP (the "BEP Purchase Note") for approximately $13.0 million on
or before March 27, 1998. The BEP Purchase Note had an outstanding principal
amount of approximately $15.3 million as of September 30, 1997. In addition, the
common stock purchase warrant issued to Beck Holdings, Inc. was amended to
provide that (i) the warrant will not become exercisable until April 1, 1998,
and (ii) if any or all of the BEP Purchase Note is repaid on or before March 31,
1998, the warrant will be canceled pro rata based on the amount of the
outstanding principal that is repaid. As part of the settlement, the Company and
BEP on the one hand and the defendants on the other hand released one another
for any injury, damage, or loss arising directly or indirectly from the
Company's purchase of BEP, including claims that may be brought in the future by
past, present, or future Black-eyed Pea franchisees. The terms of the release do
not, however, relieve the defendants from their obligations to indemnify the
Company and BEP with respect to claims made by former Black-eyed Pea franchisees
whose status as a franchisee terminated prior to the Company's purchase of BEP.
On October 23, 1997, the court issued its final order dismissing the lawsuit
with prejudice.
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
18
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1A Articles of Amendment to the Articles of Incorporation of
DenAmerica Corp., as filed on July 2, 1997.
10.92.B Amendment and Limited Consent and Waiver dated as of September
30, 1997 among DenAmerica Corp., the Banks (as defined), and
Banque Paribas, as agent.
10.111 Loan and Security Agreement dated as of September 30, 1997 by
and among DenAmerica Corp., CNL Growth Corp., Midsouth Foods
I, Ltd., and Midsouth Foods II, Ltd.
10.112 5-Year 5% Convertible Redeemable Debenture dated September 30,
1997 in the principal amount of $4,400,000.
10.113 Subordinated Promissory Note dated September 30, 1997 in the
principal amount of $7,700,000.
10.114 Registration Rights Agreement dated as of September 30, 1997
between DenAmerica Corp., and CNL Growth Corp.
10.115 Agreement dated as of September 30, 1997 by and among
DenAmerica Corp., Beck Holdings, Inc. and Unigate Holdings,
NV.
11.1 Statement regarding computation of per share income
27.1 Summary Financial Information
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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.
DENAMERICA CORP.
Dated: November 14, 1997 By: /s/ Todd S. Brown
------------------
Todd S. Brown
Vice President, Chief Financial Officer,
and Treasurer
(Duly authorized officer of the
registrant, principal financial
and accounting officer)
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