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 JULY 1, 1998
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
--------------
(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:
13,447,777 shares of Common Stock, $.10 par value, as of August 17, 1998.
- ---------------------------------------------------------------------------
DENAMERICA CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 1, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and July 1, 1998.............................. 3
Condensed Consolidated Statements of Operations -
13-Week Periods ended July 2, 1997 and July 1, 1998 and
26-Week Periods ended July 2, 1997 and July 1, 1998............. 4
Condensed Consolidated Statements of Cash Flows -
13-Week Periods ended July 2, 1997 and July 1, 1998 and
26-Week Periods ended July 2, 1997 and July 1, 1998............. 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7
PART II. OTHER INFORMATION................................................... 12
SIGNATURES.......................................................... 13
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars In thousands)
(unaudited)
December 31, July 1,
ASSETS 1997 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,267 $ 2,021
Receivables 3,192 2,222
Inventories 3,244 2,992
Other current assets 5,564 4,975
Assets held for sale 28,700 --
-------- --------
Total current assets 41,967 12,210
PROPERTY AND EQUIPMENT, net 61,328 58,785
INTANGIBLE ASSETS, net 51,545 50,525
DEFERRED INCOME TAXES 5,312 5,312
OTHER ASSETS 10,112 9,505
-------- --------
TOTAL $170,264 $136,337
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,511 $ 15,425
Accrued compensation 6,354 5,488
Accrued taxes 4,522 4,827
Other current liabilities 8,363 6,308
Current portion of long term debt 42,634 20,550
-------- --------
Total current liabilities 78,384 52,598
LONG-TERM DEBT, LESS CURRENT PORTION 78,418 72,017
OTHER LONG TERM LIABILITIES 12,214 10,196
-------- --------
Total liabilities 169,016 134,811
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01, par value; authorized
5,000,000 shares; issued and outstanding none 0 0
Common stock $.10 par value; authorized, 40,000,000
shares; 13,447,777 shares issued and outstanding 1,344 1,344
Additional paid-in capital 35,799 35,799
Accumulated deficit (35,895) (35,617)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 1,248 1,526
-------- --------
TOTAL $170,264 $136,337
======== ========
See accompanying notes to condensed consolidated financial statements
3
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
13 Week Period Ended 26 Week Period Ended
-------------------- --------------------
July 2, July 1, July 2, July 1,
1997 1998 1997 1998
---- ---- ---- ----
RESTAURANT SALES $ 76,185 $ 62,066 $ 152,299 $ 134,946
--------- --------- --------- ---------
RESTAURANT OPERATING EXPENSES:
Food and beverage cost 20,840 17,100 41,453 37,107
Payroll and payroll related costs 26,260 20,950 52,361 46,052
Depreciation and amortization 2,324 1,943 4,590 3,730
Other operating expenses 20,350 17,469 41,518 37,058
--------- --------- --------- ---------
Total operating expenses 69,774 57,462 139,922 123,947
--------- --------- --------- ---------
RESTAURANT OPERATING INCOME 6,411 4,604 12,377 10,999
ADMINISTRATIVE EXPENSES 3,831 3,030 7,575 6,048
--------- --------- --------- ---------
OPERATING INCOME 2,580 1,574 4,802 4,951
INTEREST EXPENSE, net 3,164 3,122 6,367 6,548
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (584) (1,548) (1,565) (1,597)
INCOME TAX (BENEFIT) (234) (487) (626) (504)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (350) (1,061) (939) (1,093)
EXTRAORDINARY ITEM - GAIN ON
EARLY EXTINGUISHMENT OF DEBT
net of income taxes of $914 -- -- -- 1,371
--------- --------- --------- ---------
NET INCOME (LOSS) $ (350) $ (1,061) $ (939) $ 278
========= ========= ========= =========
Basic and diluted income (loss) per share
Before extraordinary item $ (.03) $ (.08) $ (.07) $ (.08)
========= ========= ========= =========
Net income (loss) $ (.03) $ (.08) $ (.07) $ .02
========= ========= ========= =========
Basic and diluted weighted average shares
outstanding
Basic 13,414 13,447 13,414 13,447
Diluted 13,414 13,447 13,414 13,447
See accompanying notes to condensed consolidated financial statements.
4
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
13 Week Period Ended 26 Week Period Ended
-------------------- --------------------
July 2, July 1, July 2, July 1,
1997 1998 1997 1998
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (350) $(1,061) $ (939) $ 278
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,324 1,943 4,590 3,730
Amortization of deferred financing costs 162 245 287 492
Extraordinary item -- -- -- (1,371)
Deferred income taxes (234) (487) (626) (504)
Deferred rent 341 69 417 146
Note receivable collections -- 1,621 -- 1,715
Other (316) (381) (295) (831)
Changes in operating assets and liabilities
net of dispositions:
Receivables 721 (135) 756 527
Inventories 65 71 (141) 192
Other current assets (917) 263 (830) 669
Accounts payable and accrued liabilities 465 (3,428) (5,547) (5,405)
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 2,261 (1,280) (2,328) (362)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,528) (443) (3,006) (1,187)
Purchase of intangibles (313) (61) (1,498) (69)
Proceeds from the sale of assets 498 -- 6,734 25,900
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (1,343) (504) 2,230 24,644
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings, net 759 4,738 2,230 3,671
Principal reductions on long-term obligations (1,861) (2,532) (3,684) (27,199)
Other 28 -- 77 --
-------- -------- -------- --------
Net cash (used in) provided by
financing activities (1,074) 2,206 (1,377) (23,528)
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (156) 422 (1,475) 754
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,290 1,599 2,609 1,267
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,134 $ 2,021 $ 1,134 $ 2,021
======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,326 $ 2,187 $ 5,480 $ 5,233
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
5
DENAMERICA CORP. AND SUBSIDIARIES
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
DenAmerica Corp. and Subsidiaries (the "Company") 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 the opinion of the Company's management, 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 the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997. Certain
reclassifications have been made in the 1997 financial statements to conform to
the 1998 presentation.
The Company currently operates 206 family-oriented, full-service restaurants in
19 states, primarily in the southwestern, midwestern, western, and southeastern
United States. The Company owns and operates 104 Black-eyed Pea restaurants,
primarily in Texas, Georgia, Arizona, Oklahoma, Florida, and the Washington,
D.C. area, and franchises to third parties the rights to operate one Black-eyed
Pea restaurant in Texas. The Company also owns and operates 101 Denny's
restaurants, which represents approximately 6.4% of the Denny's system and makes
the Company the largest Denny's franchisee in terms of revenue and the number of
restaurants operated.
(2) Other Matters
In March 1998, the Company completed the sale of 63 Denny's and eight
non-branded restaurants, of which six were closed, to a Denny's franchisee for
gross proceeds $28,700. Net cash proceeds of $25,200 were used to (i) repay the
promissory note (the "BEP Note") payable to the seller of Black-eyed Pea U.S.A.,
Inc. ("BEP") at a $2,400 discount from its outstanding principal amount of
approximately $15,285; (ii) cancel outstanding warrants to acquire approximately
1,000,000 shares of Common Stock at an exercise price of $1.90 per share, which
were issued in connection with the BEP Note; (iii) permanently reduce the
Company's outstanding borrowings under the term loan of the Credit Facility to
$1,500; and (iv) repay certain equipment operating leases associated with the
restaurants sold in this transaction. The Company has included the $2,400
discount on the BEP note as an extraordinary item in the accompanying financial
statements.
In a separate transaction completed in March 1998, the Company also sold five
Denny's restaurants located in Wyoming to an unrelated party for cash of $700
plus a note in the principal amount of $400. The Company utilized the proceeds
from this transaction to permanently reduce its outstanding borrowings under the
term loan portion of its Credit Facility. The Company has recorded a gain of
approximately $575 on this transaction, which is included as an offset to other
operating expenses.
The Company was not in compliance with certain of its senior bank debt covenants
at July 1, 1998, and has reclassified its senior bank debt as current. The
Company has not received waivers but is currently working with its senior
lenders to obtain such waivers. Should the Company be unable to secure waivers
the senior lenders could among other things accelerate its obligations, which as
of July, 1998 totaled approximately $14.4 million. The Company has received
commitments from several financing sources, the proceeds of which will be used
to retire its senior bank debt. Although the Company believes that such
financing will be available, there is no assurance that such financing will be
consummated on terms and conditions acceptable to the Company.
(3) Subsequent Events
On July 10, 1998, the Company entered into an Agreement and Plan of Merger
("Agreement") with Tech Electro Industries, Inc. ("Tech Electro"). Under the
terms of the Agreement, the Company's shareholders will receive $4.00 in cash
and $.90 in newly issued preferred stock in Tech Electro for each share of the
Company's Common Stock that they own. The proposed merger is subject to various
contingencies including financing, shareholder approval, regulatory approvals,
and other matters.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company currently operates 104 Black-eyed Pea restaurants in 14 states and
franchises one Black-eyed Pea restaurant in Texas. The Company operates 66
Black-eyed Pea restaurants in Texas and Oklahoma, which the Company considers to
be its core market for Black-eyed Pea restaurants. For the twenty-six week
period ended July 1, 1998, comparable same-store sales decreased 1.4% for all of
the Company's Black-eyed Pea restaurants, while comparable same-store sales
increased 0.1% for Black-eyed Pea restaurants in the core market. The guest
check average at the Company's Black-eyed Pea restaurants for the second quarter
of 1998 was $7.86, versus $7.93 for the second quarter of 1997. Alcohol and
carry-out sales account for approximately 2.1% and 11.3% of sales for the
twenty-six week period ended July 1, 1998, respectively.
As of July 1, 1998, the Company operated 101 Denny's restaurants in 19 states.
For the thirteen weeks ended July 1, 1998, comparable store sales increased 3.5%
as a result of an increase in guest counts and an increase in the average guest
check to approximately $5.39 versus $5.31 for the second quarter of 1997.
Comparable same store sales for the twenty six weeks ended July 1, 1998
increased 1.9%.
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.
13 Week Period Ended 26 Week Period Ended
-------------------- --------------------
July 2, 1997 July 1, 1998 July 1, 1997 July 1,1998
------------ ------------ ------------ -----------
Restaurant sales 100.0% 100.0% 100.0% 100.0%
Restaurant operating expenses:
Food and beverage cost 27.4 27.6 27.2 27.5
Payroll and payroll related costs 34.5 33.8 34.4 34.1
Depreciation and amortization 3.1 3.1 3.0 2.8
Other operating cost 26.6 28.1 27.3 27.5
----- ----- ----- -----
Total operating expenses 91.6 92.6 91.9 91.9
----- ----- ----- -----
Restaurant operating income 8.4 7.4 8.1 8.1
Administrative expenses 5.0 4.9 5.0 4.5
----- ----- ----- -----
Operating income 3.4 2.5 3.1 3.6
Interest expense 4.2 5.0 4.1 4.8
----- ----- ----- -----
Loss before income taxes and
extraordinary item (.8) (2.5) (1.0) (1.2)
Income tax (benefit) (.3) (.8) (.4) (.4)
----- ----- ----- -----
Loss before extraordinary item (.5) (1.7) (.6) (.8)
Extraordinary item -- -- -- 1.0
----- ----- ----- -----
Net income (loss) (.5)% (1.7)% (.6)% .2%
===== ===== ===== =====
7
THIRTEEN-WEEK PERIOD ENDED JULY 1, 1998 COMPARED WITH THIRTEEN-WEEK PERIOD ENDED
JULY 2, 1997
Restaurant sales. Restaurant sales decreased $14.1 million, or 18.5%,
to $62.1 million for the thirteen-week period ended July 1, 1998 as compared
with restaurant sales of $76.2 million for the thirteen-week period ended July
2, 1997. This decrease was primarily attributable to the sale of 63 Denny's and
eight non-branded restaurants on March 25, 1998. As a result of this sale,
restaurant sales attributable to the Black-eyed Pea restaurants increased to 58%
of total sales in the 1998 period versus 42% of total sales in the 1997 period.
Food and Beverage Cost. Food and beverage cost increased to 27.6% of
restaurant sales for the thirteen-week period ended July 1, 1998 as compared
with 27.4% of restaurant sales for the thirteen-week period ended July 2, 1997,
primarily as the result of higher food costs associated with the operation of
the Black-eyed Pea restaurants.
Payroll and Payroll Related Costs. Payroll and payroll related costs
were 33.8% of restaurant sales for the thirteen-week period ended July 1, 1998
as compared with 34.5% of restaurant sales for the thirteen-week period ended
July 2, 1997. This decrease was primarily attributable to the sale and closure
in 1997 and 1998 of restaurants operating with higher payroll costs.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs, and other items was $1.9 million, or 3.1% of restaurant sales, for the
thirteen-week period ended July 1, 1998, as compared with $2.3 million, or 3.1%
of restaurant sales, for the thirteen-week period ended July 2, 1997. This
decrease is attributable to a decrease in the amortization of store opening
costs and the reduction of depreciation and amortization associated with the
restaurants sold in March 1998.
Other Restaurant Operating Costs. Other restaurant operating costs were
28.1% of restaurant sales for the thirteen-week period ended July 1, 1998 as
compared with 26.6% of restaurant sales for the thirteen-week period ended July
2, 1997. Excluding a $650,000 gain relating to the sale of eleven non-branded
restaurants in 1997, other operating costs expressed as a percentage of revenue,
would have been 27.8% This increase was attributable to higher restaurant
operating costs associated with Black-eyed Pea restaurants.
Restaurant Operating Income. Restaurant operating income decreased to
$4.6 million for the thirteen-week period ended July 1, 1998, as compared with
$6.4 million for the thirteen-week period ended July 2, 1997. This decrease was
principally the result of the factors described above.
Administrative Expenses. Administrative expenses were $3.0 million, or
4.9% of restaurant sales, for the thirteen-week period ended July 1, 1998, which
is a decrease of $801,000 from $3.8 million, or 5.0% of restaurant sales, for
the thirteen-week period ended July 2, 1997. This decrease is attributable to
the sale of certain restaurants during 1997 and 1998 and the division and
restructuring of administration functions between the Company's Black-eyed Pea
and Denny's restaurant concepts.
Interest Expense. Interest expense was $3.1 million, or 5.0% of
restaurant sales, for the thirteen-week period ended July 1, 1998 as compared
with $3.2 million, or 4.2% of restaurant sales, for the thirteen-week period
ended July 2, 1997. The increase is the result of the increase in outstanding
capital lease obligations.
Income Tax Benefit. The Company recorded an income tax benefit of
approximately $487,000, or an effective rate of 31.5%, for the thirteen-week
period ended July 1, 1998 as compared with an income tax
8
benefit of approximately $234,000, or an effective rate of 40%, for the thirteen
week period ended July 2, 1997. In 1998, the Company established a valuation
allowance of $135,000.
Net (loss). The Company recorded a net loss of approximately $1.1
million for the thirteen week period ended July 1, 1998 as compared with a net
loss of $350,000 for the thirteen-week period ended July 2, 1997, as a result of
the factors described above.
TWENTY-SIX WEEK PERIOD ENDED JULY 1, 1998 COMPARED WITH TWENTY-SIX WEEK PERIOD
ENDED JULY 2, 1997
Restaurant sales. Restaurant sales decreased $17.4 million, or 11.4%,
to $134.9 million for the twenty-six week period ended July 1, 1998 as compared
with restaurant sales of $152.3 million for the twenty-six week period ended
July 2, 1997. This decrease was primarily attributable to the sale and closure
of certain restaurants during 1997 and 1998.
Cost of Food and Beverage. Cost of food and beverage increased to 27.5%
of restaurant sales for the twenty-six week period ended July 1, 1998 as
compared with 27.2% of restaurant sales for the twenty-six week period ended
July 2, 1997, primarily as the result of higher food costs associated with the
operation of the Black-eyed Pea restaurants.
Payroll and Payroll Related Costs. Payroll and payroll related costs
were 34.1% of restaurant sales for the twenty-six week period ended July 1, 1998
as compared with 34.4% of restaurant sales for the twenty-six week period ended
July 2, 1997. This decrease was primarily attributable to the sale and closure
in 1997 and 1998 of restaurants operating with higher payroll costs.
Amortization and Depreciation. Amortization and depreciation of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs and other items decreased to 2.8% of restaurant sales for the twenty-six
week period ended July 1, 1998 as compared with 3.0% of restaurant sales for the
twenty-six week period ended July 2, 1997. The decrease of $860,000 was
primarily attributable to a decrease in the amortization of store opening costs
and the reduction of depreciation and amortization associated with the
restaurants sold in March 1998.
Other Restaurant Operating Costs. Other restaurant operating costs were
27.5% of restaurant sales for the twenty-six week period ended July 1, 1998 as
compared with 27.3% of restaurant sales for the twenty-six week period ended
July 2, 1997. Included in the 1998 and 1997 results are gains of $579,000 and
$650,000 respectively relating to the sale of restaurants. Excluding these
gains, other restaurant operating costs expressed as a percentage of revenue,
would have been 27.9% and 27.7% respectively. This increase was primarily
attributable to increased restaurant operating costs associated with BEP
restaurants.
Restaurant Operating Income. Restaurant operating income decreased $1.4
million to $11.0 million for the twenty-six week period ended July 1, 1998 as
compared with $12.4 million for the twenty-six week period ended July 2, 1997.
This increase was principally the result of the factors described above.
Administrative Expenses. Administrative expenses decreased to 4.5% of
restaurant sales for the twenty-six week period ended July 1, 1998 as compared
with 5.0% of restaurant sales for the twenty-six week period ended July 2, 1997.
This decrease is attributable to the sale of certain restaurants during 1997 and
1998 and the division and restructuring of administration functions between the
Company's Black-eyed Pea and Denny's restaurant concepts.
9
Interest Expense. Interest expense was $6.5 million, or 4.8% of
restaurant sales, for the twenty-six week period ended July 1, 1998 as compared
with $6.4 million, or 4.1% of restaurant sales, for the twenty-six week period
ended July 2, 1997. The increase is the result of the increased level of
long-term debt.
Income Tax Benefit. The Company recorded an income tax benefit of
approximately $504,000, or an effective rate of 31.6%, for the twenty-six week
period ended July 1, 1998 as compared with income tax benefit of approximately
$626,000, or an effective rate of 40%, for the twenty-six week period ended July
2, 1997. In 1998, the Company established a valuation allowance of $135,000.
Net Income (Loss). The Company recorded net income of approximately
$278,000, after the extraordinary gain associated with the early extinguishment
of debt for the twenty-six week period ended July 1, 1998 as compared with net
loss of $939,000 for the twenty-six week period ended July 2, 1997, as a result
of the factors described above.
Liquidity and Capital Resources
The Company, and the restaurant industry generally, receives substantially all
of its revenue 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 $40.4
million at July 1, 1998 and $36.4 million at December 31, 1997. The Company
believes 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.
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. Currently, the Company is in various
stages of development of nine Black-eyed Pea restaurants, which it expects to
open over the next six months. The Company estimates that its costs to develop
and open new Black-eyed Pea restaurants, excluding real estate and building
costs, will be approximately $350,000 to $450,000 per restaurant. The Company
believes that its financing commitments will be adequate to meet its financing
needs during the remainder of 1998.
Net cash provided by (used in) operating activities changed from ($2.3 million)
in the first twenty-six weeks of 1997 to ($362,000) in the first twenty-six
weeks of 1998. This change is attributable to improved restaurant operations.
Net cash provided by investing activities increased from $2.2 million in the
first twenty-six weeks of 1997 to $24.6 million in the first twenty-six weeks of
1998. This change primarily is attributable to the sale of certain restaurants
in March 1998.
Net cash provided by (used in) financing activities changed from ($1.4 million)
in the first twenty-six weeks of 1997 to ($23.5 million) in the first twenty
six-weeks of 1998. Cash (used in) financing activities arose primarily from the
principal reductions in long-term debt.
In March 1998, the Company completed the sale of 63 Denny's and eight
non-branded restaurants, of which six were closed, to a Denny's franchisee for
gross proceeds $28.7 million. Net cash proceeds of $25.2 million were used to
(i) repay the promissory note (the "BEP Note") payable to the seller of
Black-eyed Pea U.S.A., Inc. ("BEP") at a $2.4 million discount from its
outstanding principal amount of approximately $15.3 million;
10
(ii) cancel outstanding warrants to acquire approximately 1,000,000 shares of
Common Stock at an exercise price of $1.90 per share, which were issued in
connection with the BEP Note; (iii) permanently reduce the Company's outstanding
borrowings under the term loan of the Credit Facility to $1.5 million; and (iv)
repay certain equipment operating leases associated with the restaurants sold in
this transaction. The Company has included the $2.4 million discount on the BEP
note as an extraordinary item in the accompanying financial statements.
In March 1998, the Company sold five Denny's restaurants for cash and notes
totaling $1.1 million, to an unrelated party. This transactions resulted in a
gain of $575,000, which has been included in the accompanying financial
statements as a reduction of other restaurant operating expenses. In addition,
during fiscal 1998, the Company has closed six (five in the first quarter and
one in the second quarter) Denny's 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.
The Company was not in compliance with certain of its senior bank debt covenants
at July 1, 1998, and has reclassified its senior bank debt as current. The
Company has not received waivers but is currently working with its senior
lenders to obtain such waivers. Should the Company be unable to secure waivers
the senior lenders could among other things accelerate its obligations, which as
of July 1, 1998 totaled approximately $14.4 million. The Company has received
commitments from several financing sources, the proceeds of which will be used
to retire its senior bank debt. Although the Company believes that such
financing will be available, there is no assurance that such financing will be
consummated on terms and conditions acceptable to the Company.
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.
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 December 31, 1997.
11
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
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On April 9, 1998, the Company filed a Current Report on Form 8-K
dated March 25, 1998, as amended by Form 8-K/A filed on June 3,
1998, reporting the sale of 63 Denny's restaurants and eight
non-branded restaurants.
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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: August 17, 1998 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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