UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 29, 1996
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-22006
DAVCO RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1633813
State of other jurisdiction (I.R.S. Employer
of incorporation Identification Number)
1657 Crofton Boulevard, Crofton, Maryland 21114
(Address of Principal Executive Offices)
(410) 721-3770
(Registrants Telephone Number)
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 _____
6,477,628 shares of common stock, $.001 par value, were outstanding at
June 29, 1996.
<PAGE> 1
DAVCO RESTAURANTS, INC. Page
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the 13 weeks
ended June 29, 1996 and July 1, 1995 and for the 39
weeks June 29, 1996 and 40 weeks ended July 1, 1995 2
Consolidated Balance Sheets as of June 29, 1996 and
September 30, 1995 3
Consolidated Statements of Cash Flows for the 39 weeks
ended June 29, 1996 and 40 weeks ended July 1, 1995 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since the items are either
inapplicable or the answer is negative.
Signatures 14
<PAGE> 2
CONSOLIDATED STATEMENT OF OPERATIONS
(IN 000'S EXCEPT PER SHARE DATE)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the 13 weeks ended For the 39 For the 40
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
--------- --------- ---------- -----------
Restaurant Sales $54,491 $53,696 $148,701 $155,736
--------- --------- ---------- -----------
Costs and Expenses:
Cost of restaurant sales 32,468 32,115 90,624 92,832
Restaurant operating expenses 11,240 10,570 31,969 30,832
Franchise royalties 2,179 2,148 5,949 6,230
General and administrative 1,424 1,827 4,697 5,992
Depreciation and amortization 2,356 2,233 6,923 6,797
--------- --------- ---------- ----------
49,667 48,893 140,162 142,683
--------- --------- ---------- ----------
Operating Income 4,824 4,803 8,539 13,053
Interest expense (1,295) (1,411) (3,862) (4,410)
Interest income 8 48 22 157
Other income, net 150 206 594 383
--------- -------- ---------- ----------
Income before Provision for Income Taxes 3,687 3,646 5,293 9,183
Provision for Income Taxes (1,449) (1,195) (2,137) (3,203)
--------- -------- ---------- ----------
Net Income $2,238 $2,451 $3,156 $5,980
========= ======== ========== ==========
Earnings per Common Share - Assuming
Full Dilution (Note 2) $0.32 $0.34 $0.45 $0.84
========= ======== ========== ==========
Weighted Average Shares Outstanding -
Assuming Full Dilution (Note 2) 7,054 7,160 7,085 7,161
========= ======== ========== ==========
</TABLE>
<PAGE> 3
CONSOLIDATED BALANCE SHEETS (IN 000'S)
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, September 30,
1996 1995
(Unaudited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $2,437 $331
Receivables 717 572
Refundable income taxes 1,942 1,175
Inventories 1,409 1,307
Prepaid expenses 1,076 1,593
Deferred tax asset 786 786
------------ ------------
Total Current Assets 8,367 5,764
------------ ------------
PROPERTY AND EQUIPMENT,
Net of accumulated depreciation of $8,360 and $5,945, 50,415 41,661
respectively ------------ ------------
LEASED PROPERTIES,
Net of accumulated amortization of $12,441 and $9,362, 41,128 43,828
respectively ------------ ------------
OTHER ASSETS:
Franchise rights, net 4,074 4,095
Goodwill, net (Note 4) 19,114 19,639
Other 509 713
------------ ------------
Total Other Assets 23,697 24,447
------------ ------------
Total Assets $123,607 $115,700
============ ============
CURRENT LIABILITIES:
Accounts payable and accrued expenses $5,995 $6,397
Accrued advertising and royalty fees 2,073 2,230
Accrued salaries and wages 1,575 2,583
Accrued expenses 8,237 7,248
Short-term borrowings 8,644 -
Current portion of long-term debt 2,328 3,685
Current portion of capital lease obligations 3,205 3,094
Income taxes payable 1,318 -
------------ ------------
Total Current Liabilities 33,375 25,237
LONG-TERM DEBT, less current portion 13,132 14,778
CAPITAL LEASE OBLIGATIONS, less current portion 28,881 31,083
DEFERRED INCOME TAXES PAYABLE 1,734 383
------------ ------------
Total Liabilities 77,122 71,481
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock 7 7
Additional paid-in capital 31,101 31,101
Warrants outstanding 3,000 3,000
Retained earnings 13,267 10,111
Less: Treasury stock, 110,000 shares (Note 6) (890) -
------------ ------------
Total Stockholders' Equity 46,485 44,219
------------ ------------
Total Liabilities and Stockholders' Equity $123,607 $115,700
============ ============
</TABLE>
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000'S)
<TABLE>
<CAPTION>
<S> <C> <C>
For the 39 For the 40
weeks ended weeks ended
June 29, July 1,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,156 $5,980
Adjustments to reconcile net income to net
cash flows provided by operating activities-
Depreciation and amortization 6,923 6,797
Loss on disposition of assets 68 37
Deferred tax provision (benefit) 1,351 (2,044)
Amortization of debt discount 15 9
Net change in operating assets and liabilities 255 (758)
----------- -----------
Net Cash Flows Provided By Operating Activities 11,768 10,021
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets (481) (486)
Property and equipment acquired and constructed (11,651) (9,602)
Purchase of restricted asset, net of sale - (552)
Proceeds from disposition of assets - 175
Proceeds from redemption of restricted assets - 1,788
----------- -----------
Net Cash Flows Used In Investing Activities (12,132) (8,677)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (2,281) (1,996)
Short-term borrowings 8,644 -
Purchase of Treasury stock (890) -
Repayments of long-term debt (3,003) (2,127)
----------- -----------
Net Cash Flows Provided By (Used In) Financing
Activities 2,470 (4,123)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,106 (2,779)
CASH AND CASH EQUIVALENTS, beginning of period 331 3,065
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $2,437 $286
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $4,117 $4,410
=========== ===========
Cash paid for income taxes, net of refunds $239 $5,455
=========== ===========
</TABLE>
<PAGE> 5
DAVCO RESTAURANTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DavCo Restaurants, Inc., a Delaware corporation (the "Company"), operates
226 "Wendy's Old Fashioned Hamburgers" restaurants, making it the world's
largest franchisee of Wendy's International, Inc. ("Wendy's"). The Company
maintains exclusive franchise territories in metropolitan Baltimore,
Washington, D.C., the eastern shore of Maryland and portions of northern
Virginia (the "Mid-Atlantic"), where it operates 132 Wendy's restaurants. The
Company also operates 56 Wendy's restaurants in metropolitan St. Louis and
central Illinois (the "Midwest") through a wholly-owned subsidiary, MDF, Inc.
and 38 Wendy's restaurants in metropolitan Nashville, Tennessee (the "South").
The Company does not maintain exclusive franchise territories in the Midwest
or the South.
In Management's opinion, the accompanying interim consolidated financial
statements of the Company include all adjustments, consisting only of normal,
recurring adjustments necessary for a fair presentation of the Company's
financial position at June 29, 1996 and the results of its operations and its
cash flows for the periods ended June 29, 1996 and July 1, 1995. These
statements are presented in accordance with the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the Company's annual consolidated financial
statements have been omitted from these statements, as permitted under the
applicable rules and regulations. Readers of these statements should refer to
the consolidated financial statements and notes thereto as of September 30,
1995 and for the year then ended. The results of operations presented in the
accompanying financial statements are not necessarily representative of
operations for an entire year.
Certain reclassifications have been made to the prior year's balances in order
to conform to current year presentation.
The Company maintains its accounts on a 52/53 week fiscal year. The fiscal
1996 periods contained 13 weeks and 39 weeks. The fiscal 1995 periods
contained 13 weeks and 40 weeks.
2. EARNINGS PER COMMON SHARE
Earnings per common share is computed based on the weighted average number
of common and common equivalent shares outstanding during the periods.
Common stock equivalents include options and warrants to purchase common
stock which are assumed to be exercised using the treasury stock method. The
weighted average number of shares reflected includes treasury stock acquired
pursuant to the Stock Repurchase Program through the date of acquisition.
3. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is party to a number of legal proceedings which are considered
by Management to be customary and incidental to its business. In the opinion
of Management, after consulting with legal counsel, the ultimate disposition of
these lawsuits will not have a material adverse effect on the Company's
financial position or results of operations.
<PAGE> 6
Letters of Credit
As of June 29, 1996, the Company was contingently liable for outstanding
letters of credit relating to liability insurance, workers' compensation
collateral and Wendy's current royalty requirements, aggregating approximately
$4,070,000.
4. GOODWILL
The Company's excess of cost over the fair value of net assets acquired (or
goodwill) is amortized on a straight-line basis over 30 years. The carrying
amount of goodwill is reviewed if facts and circumstances suggest that it may
be impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted cash flows of the entity
acquired over the remaining amortization period, the carrying amount of the
goodwill is reduced by the estimated shortfall of cash flows.
In addition, the Company will assess long-lived assets for impairment under
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. Under those rules, goodwill
associated with assets acquired in a purchase business combination is included
in impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.
5. PENDING ACCOUNTING POLICY
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Due to the significant number of
operating facilities the Company maintains and the extensive number of
estimates that must be made to assess the impact of Statement 121, the financial
statement impact of adoption has not yet been determined, however, it may be
material.
6. TREASURY STOCK
On May 2, 1996, the Company announced that its Board of Directors had
authorized management to repurchase up to 1,000,000 shares of its common
stock on the open market and in privately negotiated transactions during the
following twenty four months. During the third quarter ended June 29, 1996,
the Company purchased 110,000 shares of the its common stock for $889,888.
The Company is accounting for the treasury stock at cost.
<PAGE> 7
PART I.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Components of Revenues and Expenses
The fiscal 1995 year to date amounts contain an additional week as a result of
the Company's 52/53 week reporting basis. The fiscal 1995 first quarter
contained 14 weeks and the fiscal 1996 first quarter contained 13 weeks. The
second and third quarters for both fiscal 1995 and 1996 contained 13 weeks.
The Company's revenues consist of restaurant sales. Any additional amounts of
income are minor and are included in Other Income, net. Restaurant operating
profit is computed by subtracting cost of restaurant sales and restaurant
operating expenses from restaurant sales. Cost of restaurant sales consists of
the Company's expenditures for food, supplies (primarily paper goods) and
direct labor.
Restaurant operating expenses include all other direct costs, including
occupancy costs, advertising expense, expenditures for repairs and
maintenance, area and regional management expenses, and workers'
compensation, casualty and general liability insurance costs.
In addition to franchise royalty payments, the Company is also required to
contribute 2.0% of its restaurant sales to The Wendy's National Advertising
Program, Inc. The Company has agreed to increase such contributions to 2.5%
of restaurant sales for fiscal 1995 and through calendar year 1996. Franchise
royalties, as required by the Company's franchise agreement with
Wendy's, have remained constant at 4.0% of restaurant sales throughout the
periods presented.
General and administrative expenses consist of corporate expenses, including
executive and administrative compensation, office expenses and professional
fees.
<PAGE> 8
Results of Operations
The following table presents certain items in the Company's Consolidated
Statements of Operations as a percentage of restaurant sales for the interim
periods indicated.
<TABLE>
<S> <C> <C> <C> <C>
For the 39 For the 40
For the 13 weeks ended weeks ended weeks ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
Statements of Operations Data:
Restaurant Sales 100.0% 100.0% 100.0% 100.0%
Cost of Restaurant Sales 59.6 59.8 60.9 59.6
Restaurant Operating Expenses 20.6 19.7 21.5 19.8
Restaurant Operating Profit 19.8 20.5 17.6 20.6
Franchise Royalties 4.0 4.0 4.0 4.0
General and Administrative 2.6 3.4 3.2 3.8
Depreciation and Amortization 4.3 4.2 4.7 4.4
Operating Income 8.9% 8.9% 5.7% 8.4%
</TABLE>
Thirteen Weeks Ended June 29, 1996 Compared to Thirteen Weeks Ended
July 1, 1995
Revenues: Company restaurant sales increased to $54.5 million for the 13
weeks ended in June 29, 1996 from $53.7 million for the 13 weeks ended July
1, 1995, an increase of 1.5%. The increase in sales is attributed to new stores
opened since July 1, 1995. Same store sales decreased 3.6% from the same
period in fiscal year 1995. Same store sales have improved from the second
quarter decline of 8.7% and management believes that the same store sales will
continue to improve with new strategies for increasing sales, such as, a renewed
focus on the Company's Super Value menu and increased selection of
permanent menu items.
The weighted average number of restaurants open was 224.1 for the 1996
period and 214.0 for the 1995 period. Average sales per Company restaurant
decreased to $243,200 for the 13 weeks ended June 29, 1996 from $250,900 for
the 13 weeks ended July 1, 1995, a 3.1% decrease. The weighted average
number of Mid-Atlantic restaurants open was 130.1 for the 1996 period and
124.7 for the 1995 period, and average sales per restaurant decreased to
$280,300 from $287,400, a 2.5% decrease. The weighted average number of
Midwest restaurants open for the 1996 period was 56.0 and for the 1995 period
was 54.1, and average sales per restaurant decreased 2.9%, to $159,900 from
$164,800. For the 1996 period, the weighted average number of restaurants
operating in the South was 38.0 and 35.2 for the 1995 period. Average sales per
restaurant decreased to $238,700 in 1996 from $254,000 in 1995, a 6.0%
decrease. The average sales per restaurant decreases are directly related to
the same store sales decline.
<PAGE> 9
Average guest count per Company restaurant decreased to 79,100 for the 13
weeks ended June 29, 1996 from 83,700 for the 13 weeks ended July 1, 1995, a
decrease of 5.5%. Average guest check increased to $3.07 for the 13
weeks ended June 29, 1996 from $3.00 the 13 weeks ended July 1, 1995, an
increase of 2.3%. The increase is primarily the result of the $0.99 Chicken
Nuggets addition, which is a value added menu item.
Costs and Expenses: Cost of restaurant sales decreased to 59.6% of sales for
the 13 weeks ended June 29, 1996 from 59.8% of sales for the 13 weeks ended
July 1, 1995. Cost of restaurant sales as a percent of sales in the Mid-
Atlantic restaurants decreased to 57.6% in the 1996 period from 58.3% in the
1995 period. Comparing the components of cost of restaurant sales for the Mid-
Atlantic restaurants, the cost of food and supplies decreased to 32.6% of sales
in the 1996 period from 32.7% of sales in the 1995 period. Payroll and benefits
expense decreased 0.6 percentage points to 25.0% of sales in the 1996 period
from 25.6% of sales in the 1995 period. Cost of restaurant sales as a percent
of sales in the Midwest restaurants increased to 66.5% in the 1996 period from
66.3% in the 1995 period. Comparing the components of cost of restaurant
sales for the Midwest restaurants, the cost of food and supplies decreased 0.3
percentage points to 35.0% of sales in the 1996 period from 35.3% of sales in
the 1995 period. As a percent of sales, payroll and benefits expense increased
to 31.5% of sales in the 1996 period from 31.0% of sales in the 1995 period.
Cost of restaurant sales as a percent of sales in the Southern restaurants
increased to 60.9% in the 1996 period from 59.3% in the 1995 period.
Comparing the components of cost of restaurant sales for the Southern
restaurants, the cost of food and supplies increased 0.9 percentage points to
32.4% of sales in the 1996 period from 31.5% of sales in the 1995 period. As a
percent of sales, payroll and benefits expense increased to 28.5% of sales in
the 1996 period from 27.8% of sales in the 1995 period. The Company wide food
cost and supplies remained relatively constant with the prior year period.
There was a change in the product mix that produced slightly lower margins,
such as the Double Stack sandwich, and Chicken Nuggets. Payroll and benefit
cost increased as a percentage of sales in the Midwest and Southern restaurants,
primarily due to the cost leveraging effect of lower same store sales for the
quarter. There is a certain level of labor cost that is not dependent on sales
volume which caused an impact due to the decline in revenue as stated above.
Payroll costs in the Southern market were also impacted by very low
unemployment rates. These increases were offset by a decrease in payroll and
benefits expense, as a percentage of sales, for the Mid-Atlantic market.
Restaurant operating expenses increased to $11.2 million for the 13 weeks
ended June 29, 1996 from $10.6 million for the 13 weeks ended July 1, 1995.
Restaurant operating expenses as a percent of sales was 20.6% and 19.7% for
the 1996 and 1995 periods, respectively. Restaurant operating expenses in the
Mid-Atlantic restaurants increased to 19.9% of sales in the 1996 period from
19.3% of sales in the 1995 period. Restaurant operating expenses in the
Midwest restaurants increased to 25.0% of sales in the 1996 period from 22.5%
of sales in the 1995 period. As a percent of sales, restaurant operating
expenses for the restaurants operating in the South were 19.4% for the 13 weeks
ended June 29, 1996, compared to 18.6% for the 13 weeks ended July 1,1995. The
increase in restaurant operating expenses, as a percentage of sales is related
to the cost leveraging effect of lower same store sales, higher rents in the
stores opened after July 1, 1995, and increased insurance costs.
General and administrative expenses decreased to $1.4 million for the 13 weeks
ended June 29, 1996 from $1.8 million for the 13 weeks ended July 1, 1995,
representing, as a percent of sales, a decrease to 2.6% in the 1996 period from
3.4% in the 1995 period. This decrease relates to the implementation of curbs
on administrative costs and expenses directly related to sales and profit, such
as bonuses.
<PAGE> 10
Depreciation and amortization expense increased to $2.4 million for the 13
weeks ended June 29, 1996 from $2.2 million for the 13 weeks ended July 1,
1995. As a percent of sales, depreciation and amortization increased to 4.3% in
the 1996 period from 4.2% in the 1995 period. This increase is due to the
effect of having incurred additional depreciation expense on capital
expenditures for new store openings and existing store improvements.
Non-Operating Charges: Interest expense decreased to $1.3 million for the 13
weeks ended June 29, 1996 from $1.4 million for the 13 weeks ended April 1,
1995. The decrease relates to a decline in interest rates, additional
capitalization of interest relating to construction in progress, and the
reduction in the principal amount of the Company's long term debt. The
provision for income taxes increased to a $1.4 million for the 13 weeks ended
June 29, 1996 from $1.2 million for the 13 weeks ended July 1, 1995.
<PAGE> 11
Thirty-nine Weeks Ended June 29, 1996 Compared to Forty Weeks Ended July
1, 1995
Revenues: Company restaurant sales decreased to $148.7 million for the 39
weeks ended June 29, 1996 from $155.7 million for the 40 weeks ended July
1, 1995, a decrease of 4.5%. The decrease in sales can be attributed to an
additional week included in the fiscal 1995 period as a result of the Company's
52/53 week reporting basis. Approximately $3.9 million of the decrease in
sales is related to the additional week in the fiscal 1995 period. The decrease
is also related to the loss of sales, estimated in excess of $2.7 million, due
to the inclement weather that occurred during the 1996 period. The Federal
Government shutdown also had a negative impact on sales. Same store sales
decreased 6.3% compared to the 1995 period.
The weighted average number of restaurants open was 219.9 for the 1996
period and 211.1 for the 1995 period. Average sales per Company restaurant
decreased to $676,200 for the 39 weeks ended June 29, 1996 from $737,700 for
the 40 weeks ended July 1, 1995. The weighted average number of
Mid-Atlantic restaurants open was 126.9 for the 1996 period and 121.7 for the
1995 period, and average sales per restaurant decreased to $774,900 from
$847,600, a 6.2% decrease after adjusting for the additional week in the 1995
period. The weighted average number of Midwest restaurants open for the 1996
period was 55.1 and for the 1995 period was 54.4, and average sales per
restaurant decreased from $479,800 to $452,600, a 3.2% decrease after
adjusting for the additional week in the 1995 period. For the 1996 period, the
weighted average number of restaurants operating in the South was 37.9
compared to 35.0 for the 1995 period. Average sales per restaurant in the South
decreased to $670,700 for the 1996 period from $756,400 for the 1995 period, a
decrease of 9.1% after adjusting for the additional week in the 1995 period.
The average sales per restaurant decreases are directly related to the above
mentioned revenue declines.
Average guest count per Company restaurant decreased to 49,900 for the 39
weeks ended June 29, 1996 from 52,820 for the 40 weeks ended July 1,
1995, a decrease of 5.5%. Average guest check increased to $2.98 for the 39
weeks ended June 29, 1996 from $2.95 the 40 weeks ended July 1, 1995, an
increase of one percent, this increase is primarily due to the addition of
Chicken Nuggets which is a value added menu item.
Costs and Expenses: Cost of restaurant sales decreased to $90.6 million for
the 39 weeks ended June 29, 1996 from $92.8 million for the 40 weeks ended
July 1, 1995, increasing as a percentage of sales to 60.9% in 1996 from 59.6% in
1995. Cost of restaurant sales as a percent of sales in the Mid-Atlantic
restaurants increased to 59.0% in the 1996 period from 58.1% in the 1995
period. Comparing the components of cost of restaurant sales for the Mid-
Atlantic restaurants, the cost of food and supplies increased 0.2 percentage
points to 32.5% of sales in the 1996 period from 32.3% of sales in the 1995
period. Payroll and benefits expense increased 0.7 percentage points to 26.5%
of sales in the 1996 period from 25.8% of sales in the 1995 period. Cost of
restaurant sales as a percent of sales in the Midwest restaurants increased to
67.4% in the 1996 period from 66.6% in the 1995 period. Comparing the
components of cost of restaurant sales for the Midwest restaurants, the cost of
food and supplies increased 0.2 percentage points to 35.1% of sales in the 1996
period from 34.9% of sales in the 1995 period. As a percent of sales, payroll
and benefits expense increased to 32.3% of sales in the 1996 period from 31.7%
of sales in the 1995 period. For the restaurants operating in the South, cost
<PAGE> 12
of restaurant sales was 61.9% of sales for the 39 weeks ended June 29, 1996,
and 58.7% of sales for the 40 weeks ended July 1, 1995. Comparing the
components of cost of restaurant sales for the Southern restaurants, the cost of
food and supplies increased 1.0 percentage points to 32.3% of sales in the 1996
period from 31.3% of sales in the 1995 period. As a percent of sales, payroll
and benefits expense increased to 29.6% of sales in the 1996 period from 27.4%
of sales in the 1995 period. The Company wide increase in cost of restaurant
sales as a percentage of sales is attributable to the increase, as a percentage
of sales, of the food and supplies cost and of the payroll and benefits cost.
The increase in food and supplies is due to the increasing cost of paper and
supplies, which was anticipated by management. The food cost remained
relatively constant with the prior year period. Payroll and benefits cost
increased as a percentage of sales, primarily due to the cost leveraging effect
of lower sales for the quarter. There is a certain level of labor cost that is
not dependent on sales volume. The Southern market was also impacted by very
low unemployment rates.
Restaurant operating expenses increased to $32.0 million for the 39 weeks
ended June 29, 1996 from $30.8 million for the 40 weeks ended July 1, 1995.
Restaurant operating expenses as a percent of sales was 21.5% and 19.8% for
the 1996 and 1995 periods, respectively. Restaurant operating expenses in the
Mid-Atlantic restaurants increased 1.3 percentage points to 20.8% of sales in
the 1996 period from 19.5% of sales in the 1995 period. Restaurant operating
expenses in the Midwest restaurants increased to 25.2% of sales in the 1996
period from 22.7% of sales in the 1995 period. As a percent of sales, restaurant
operating expenses for the restaurants operating in the South was 20.4% for the
39 weeks ended June 29, 1996 compared to 18.3% of sales for the 40 weeks
ended July 1, 1995. The increase relates primarily to the cost leveraging effect
of one less week of revenue in the 1996 period and additional expenses in the
1996 period related to the severe weather, such as increased utilities, snow
removal and roof repairs.
General and administrative expenses decreased to $4.7 million for the 39 weeks
ended June 29, 1996 from $6.0 million for the 40 weeks ended July 1, 1995,
representing, as a percent of sales, a decrease to 3.2% in the 1996 period from
3.8% in the 1995 period. This decrease relates to the implementation of curbs
on administrative costs and the impact of expenses directly related to sales and
profit, such as bonuses.
Depreciation and amortization expense increased to $6.9 million for
the 39 weeks ended June 29, 1996 from $6.8 million for the 40 weeks ended
July 1, 1995. As a percent of sales, depreciation and amortization increased to
4.7% in the 1996 period from 4.4% in the 1995 period. This increased is due to
lower sales in the 1996 period and having incurred additional depreciation
expense on capital expenditures for store openings and existing store
improvements.
Non-Operating Charges: Interest expense decreased to $3.9 million for the 39
weeks ended June 29, 1996 from $4.4 million for the 40 weeks ended July 1,
1995. The decrease relates to a decline in interest rates, additional
capitalization of interest relating to construction in progress, and the
reduction in the principal amount of the Company's long term debt. Interest
income decreased to $22,000 in fiscal 1996 period from $157,000 in the fiscal
1995 period due to a reduction in overnight investments. The provision for
income taxes decreased to $2.1 million for the 39 weeks ended June 29, 1996
from $3.2 million for the 40 weeks ended July 1, 1995.
<PAGE> 13
Liquidity and Capital Resources
The Company has historically financed its business activities primarily from
cash generated from operations and from long-term debt and sale/leasebacks.
The Company has reviewed its policy of leasing all of its new restaurants and
has determined that it is in the Company's best interest to own certain
properties. Accordingly, during the 39 weeks ended June 29, 1996, the
Company purchased the land and self financed the cost of buildings and
equipment for certain new restaurants.
Cash flow provided by operating activities was $11.8 million for the 39 weeks
ended June 29, 1996. Net cash used in investing activities was $12.1 million
for the 39 weeks ended June 29, 1996, which includes $11.7 million in capital
expenditures and related land acquisitions for eleven new Company restaurants
opened during the period and for additional restaurants under construction.
Financing activities during the 39 weeks ended June 29, 1996 provided cash of
$2.5 million, which reflected short-term borrowings net of capital
lease and debt repayments. The net change in cash and cash equivalents during
the 39 weeks ended June 29, 1996 was an increase of $2.1 million.
The Company anticipates that its future capital requirements will be primarily
for the development of new restaurants and the upgrading of existing
restaurants. Management signed a revolving line of credit facility for $13
million on January 5, 1996. This agreement replaces the revolving line of
credit facility for $7.5 million and the real estate acquisition facility for
$2.5 million. Management anticipates that cash provided by operating
activities, cash on hand, and the revolving line of credit facility of $13
million will enable the Company to meet its cash requirements through the
remainder of fiscal 1996, although the Company may take advantage of
opportunities to finance some of its new restaurant development with more
permanent debt or sale/leaseback financing, if such financing is available at
attractive rate and terms.
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
27.1 Article 5 of Regulation S-X Financial Data
Schedule for 3rd quarter Form 10-Q (for SEC use
only)
(b) Reports on Form 8-K:
There was no Form 8-K filed during the second quarter ended June 29,
1996.
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DAVCO RESTAURANTS, INC.
August 12, 1996 /S/ RONALD D. KIRSTIEN
President and Director
August 12, 1996 /S/ CHARLES C. MCGUIRE, III
Controller (Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF JUNE 29, 1996, AND THE STATEMENT OF OPERATONS FOR THE 39
WEEKS ENDED JUNE 29, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-29-1996
<CASH> 2437
<SECURITIES> 0
<RECEIVABLES> 717
<ALLOWANCES> 0
<INVENTORY> 1409
<CURRENT-ASSETS> 8367
<PP&E> 112344
<DEPRECIATION> 20801
<TOTAL-ASSETS> 123607
<CURRENT-LIABILITIES> 33375
<BONDS> 42013
0
0
<COMMON> 7
<OTHER-SE> 46478
<TOTAL-LIABILITY-AND-EQUITY> 123607
<SALES> 148701
<TOTAL-REVENUES> 148701
<CGS> 90624
<TOTAL-COSTS> 122593
<OTHER-EXPENSES> 17569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3862
<INCOME-PRETAX> 5293
<INCOME-TAX> 2137
<INCOME-CONTINUING> 3156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3156
<EPS-PRIMARY> 0.45<F1>
<EPS-DILUTED> 0.45<F1>
<FN>
<F1>EARNINGS PER SHARE DATA IS IN ACTUAL DOLLARS. MULTIPLIER NOT APPLICABLE.
</FN>
</TABLE>
