SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended December 28, 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 or other jurisdiction (I.R.S. Employer
ofincorporation or organization) Incorporation Number)
1657 Crofton Boulevard, Crofton Maryland 21114
(Address of principal executive offices) (Zip code)
(410)721-3770
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 than 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 ____
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of February 11, 1997.
Class: Common Stock, $.001 par value
Number of Shares: 6,428,821
DAVCO RESTAURANTS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Statements of Operations
for the 13 weeks ended December 28, 1996
and December 30, 1995 2
Consolidated Balance Sheets as of
December 28, 1996 and September 28, 1996 3
Consolidated Statements of Cash Flows for the
13 weeks ended December 28, 1996 and
and December 30, 1995 4
Notes to Unaudited Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since the items
are either inapplicable or the answer is negative
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
PART I.
Item 1.
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in 000's except per share data)
<TABLE>
<CAPTION>
For the weeks ended
December 28, 1996 December 30, 1995
<S> <C> <C>
Restaurants Sales $ 52,029 $ 48,581
------- -------
Costs and Expenses:
Cost of restaurant sales 32,075 29,656
Restaurant operating expenses 10,543 9,926
Franchise royalties 2,082 1,945
General and administrative 1,865 1,867
Depreciation and amortization 2,174 2,163
------- -------
$ 48,739 $ 45,557
------- -------
Operating Income 3,290 3,024
Interest expense (1,228) (1,266)
Interest income 9 8
Other income, net 253 277
------- -------
Income before Provision for
Income Taxes 2,324 2,043
Provision for Income Taxes (961) (789)
------- -------
Net Income $ 1,363 $ 1,254
======= =======
Earnings per Common Share -
Assuming Full Dilution (Note 2) $ 0.20 $ 0.18
======= =======
Weighted Average Shares Outstanding
- Assuming Full Dilution (Note 2) 6,947 7,132
</TABLE> ======= =======
See notes unaudited consolidated financial statements.
DAVCO RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(in 000's except per share data)
<TABLE>
<CAPTION>
December 28, 1996 September 28, 1996
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,265 $ 1,948
Receivables 885 652
Refundable income taxes 12 12
Inventories 1,436 1,421
Prepaid expenses 1,280 1,377
Deferred tax asset 1,004 1,004
-------- --------
Total Current Assets 5,882 6,414
Property and equipment, net 51,868 49,521
Leased properties, net 37,043 37,918
Other Assets:
Franchise rights, net 3,470 3,551
Goodwill, net 18,557 18,730
Deferred tax asset 1,152 1,144
Other 231 280
-------- --------
Total Other Assets 23,410 23,705
Total Assets $ 118,203 $ 117,558
======== ========
Current Liabilities:
Accounts Payable $ 4,758 $ 5,615
Accured advertising and
royalty fees 1,900 2,588
Accured salaries and wages 2,544 2,732
Accured expenses 8,164 7,997
Short-term borrowings 8,254 6,768
Current portion of
long-term debt 2,760 3,055
Current portion of capital
lease obligations 3,144 3,174
Income taxes payable 861 0
-------- --------
Total Current Liabilities 32,385 31,929
Long-term debt, less
current portion 11,549 11,699
Capital lease obligation,
less current portion 27,616 28,404
-------- --------
Total Liabilities 71,550 72,032
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value;
11,400,000 shares authorized and
6,587,628 issued 7 7
Treasury stock, at cost,
158,807 shares (1,320) (1.084)
Additional paid-in capital 31,101 31,101
Warrants outstanding 3,000 3,000
Retained earnings 13,865 12,502
-------- --------
Total Stockholders' Equity $ 46,653 $ 45,526
Total Liabilities and -------- --------
Stockholderes' Equity $ 118,203 $ 117,558
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in 000's)
<TABLE>
<CAPTION>
For the 13 weeks ended
December 28, 1996 December 30, 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,363 $ 1,254
Adjustments to reconcile net income to net
cash flows provided by operating activities-
Depreciation and amortization 2,174 2,163
Decrease in deferred tax benefit (8) (291)
Amortization of debt discount - 6
Net change in assets and liabilities (787) (2,043)
-------- --------
Net Cash Flows Provided By Operating Activities 2,742 1,089
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Decrease) Increase in other assets 49 (251)
Property and equipment acquired and constructed (3,330) (5,106)
-------- --------
Net Cash Flows Used In Investing Activities (3,281) (5,357)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (818) (736)
Repayments of long-term obligations, net (576) (895)
Purchase of treasury stock (236) -
Short-term borrowings, net 1,486 7,547
-------- --------
Net Cash Flows (Used In) Provided by
Financing Activities (144) 5,916
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (683) 1,648
-------- --------
CASH AND EQUIVALENTS, beginning of period 1,948 331
-------- --------
CASH AND EQUIVALENTS, end of period $ 1,265 $ 1,979
======== ========
Supplemental Cash Flow Information:
Cash paid for interest $ 1,284 $ 1,358
======== ========
Cash paid for income taxes, net of refunds $ 108 $ 349
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
DAVCO RESTAURANTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF
PRESENTATION
DavCo Restaurants, Inc., a Delaware corporation (the
"Company"), operates 228 "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 135 Wendy's restaurants. The
Company also operates 55 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 December 28, 1996 and the results of its operations
and its cash flows for the periods ended December 28, 1996 and
December 30, 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 28, 1996 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. Both the fiscal 1997 and 1996 periods contained 13
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.
Letters of Credit
As of December 28, 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 $4,370,000.
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.
5. 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. As of December 28, 1996, the Company
purchased 158,807 shares of its common stock for $1,319,505.
The Company is accounting for the treasury stock at cost.
PART I.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Components of Revenues and Expenses
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 4.0% of
its restaurant sales to an advertising fund, which consists of an
amount (2.5% of sales) for the Wendy's National Advertising
Program, Inc. and the remainder for local advertising.
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.
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>
<CAPTION>
For the 13 Weeks Ended
December 28, 1996 December 30, 1995
<S> <C> <C>
Statements of Operations Data:
Restaurant Sales 100.0% 100.0%
Cost of Restaurant Sales 61.6 61.1
Restaurant Operating Expenses 20.3 20.4
------ ------
Restaurant Operating Profit 18.1 18.5
Franchise Royalties 4.0 4.0
General and Administrative 3.6 3.8
Depreciation and Amortization 4.2 4.5
------ ------
Operating Income 6.3% 6.2%
</TABLE> ====== ======
Thirteen Weeks Ended December 28, 1996 Compared to
Thirteen Weeks Ended December 30, 1995
Revenues. Company restaurant sales increased to $52.0 million
for the 13 weeks ended December 28, 1996 from $48.6 million
for the 13 weeks ended December 30, 1995, a increase of 7.1%.
The increase in sales is attributed to new stores opened since
December 30, 1995 and an increase in same store sales overall.
Same store sales overall increased 0.9% from the same period
in fiscal year 1996. Same store sales for the Southern market
increased by 8.0%, for the Mid-West market decreased by
2.6%, and for the Mid-Atlantic market increased by 0.1%. The
overall improvement in sales is attributable to improved
operations, an expanded menu and continued guest satisfaction.
The weighted average number of restaurants open was 227.6 for
the fiscal 1997 period and 216.5 for the fiscal 1996 period.
Average sales per Company restaurant increased to $228,600
for the 13 weeks ended December 28, 1996 from $224,400 for
the 13 weeks ended December 30, 1995, a 1.9% increase. The
weighted average number of Mid-Atlantic restaurants open was
133.9 for the fiscal 1997 period and 124.6 for the fiscal 1996
period, and average sales per restaurant increased to $259,900
from $257,100, a 1.1% increase. The weighted average number
of Midwest restaurants open for the fiscal 1997 period was 55.7
and 54.3 for the fiscal 1996 period, and average sales per
restaurant decreased 1.3%, to $148,200 from $150,200. The
weighted average number of restaurants operating in the South
was 38 for the fiscal 1997 period and 37.6 for the fiscal 1996
period, and average sales per restaurant increased to $236,100
from $223,000, a 5.9% increase.
Average guest count per Company restaurant decreased to
71,400 for the 13 weeks ended December 28, 1996 from 75,500
for the 13 weeks ended December 30, 1995, a decrease of 5.4%.
Average guest check increased to $3.20 from $2.95 for the
related periods. This 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 increased to $32.1
million or 61.6% of sales for the 13 weeks ended December 28,
1996 from $29.7 million or 61.1% of sales for the 13 weeks
ended December 30, 1995. Cost of restaurant sales as a percent
of sales in the Mid-Atlantic restaurants increased to 59.8% in
the fiscal 1997 period from 59.2% in the fiscal 1996 period.
Comparing the components of cost of restaurant sales for the
Mid-Atlantic restaurants, the cost of food and supplies
increased to 33.2% of sales in the fiscal 1997 period from
32.5% of sales in the fiscal 1996 period. Payroll and benefits
expense decreased slightly to 26.6% of sales in the fiscal 1997
period from 26.7% of sales in the fiscal 1996 period. Cost of
restaurant sales as a percent of sales in the Midwest restaurants
increased to 67.8% in the fiscal 1997 period from 67.2% in the
fiscal 1996 period. Comparing the components of cost of
restaurant sales for the Midwest restaurants, the cost of food
and supplies increased to 35.6% of sales in the fiscal 1997
period from 35.3% of sales in the fiscal 1996 period. As a
percent of sales, payroll and benefits expense increased to
32.3% of sales in the fiscal 1997 period from 31.9% of sales in
the fiscal 1996 period. For the restaurants operating in the
South, cost of restaurant sales was 63.0% of sales for the 13
weeks ended December 28, 1996, and 62.0% of sales for the 13
weeks ended December 30, 1995. Comparing the components
of cost of restaurant sales for the South restaurants, the cost of
food and supplies increased as a percentage of sales to 33.9% in
the fiscal 1997 period from 32.4% in the fiscal 1996 period. As
a percent of sales, payroll and benefits expense decreased to
29.1% of sales in the fiscal 1997 period from 29.7% of sales in
the fiscal 1996 period. The company wide increase in food and
supplies cost is related to a change in the product mix such as
the Spicy Chicken sandwich and the Crispy Chicken Nuggets
that produced slightly lower margins. The consolidated slight
decrease in labor cost as a percentage of sales is related to the
Mid-Atlantic and Southern market operating more efficiently
and the leveraging effect of increased sales. These factors more
than offset the negative impact of the increase in the Federal
Minimum wage.
Restaurant operating expenses increased to $10.5 million for
the 13 weeks ended December 28, 1996 from $9.9 million for
the 13 weeks ended December 30, 1995. Restaurant operating
expenses as a percent of sales were 20.3% and 20.4% for the
fiscal 1997 and fiscal 1996 periods, respectively. Restaurant
operating expenses in the Mid-Atlantic restaurants remained
constant at 19.9% of sales in the fiscal 1997 period and the
fiscal 1996 period. Restaurant operating expenses in the
Midwest restaurants increased to 23.8% of sales in the fiscal
1997 period from 22.6% of sales in the fiscal 1996 period. As a
percent of sales, restaurant operating expenses for the
restaurants operating in the South decreased to 18.5% for the 13
weeks ended December 28, 1996 from 20.4% for the 13 weeks
ended December 30, 1995.
General and administrative expenses decreased as a percentage
of sales to 3.6% for the 13 weeks ended December 28, 1996
from 3.8% of sales for the 13 weeks ended December 30, 1995,
remaining constant at $1.9 million for both periods. The
decrease as a percentage of sales is related to the leveraging
effect of higher sales.
Depreciation and amortization expense decreased as a
percentage of sales from 4.5% for the fiscal 1996 period to
4.2% for the 1997 fiscal period. The decrease as a percentage
of sales directly related to the leveraging effect of higher sales.
Depreciation and amortization remained consistent at $2.2
million for both periods. The additional depreciation and
amortization related to new assets acquired since December 30,
1995 was offset by the reduction in depreciation and
amortization due to asset write offs in the fourth quarter of
fiscal year 1996 of approximately $5.5 million resulting from
the implementation of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of ".
Non-Operating Charges. Interest expense decreased slightly to
$1,228,000 for the 13 weeks ended December 28, 1996 from
$1,266,000 for the 13 weeks ended December 30, 1995.
Interest income increased from $8,000 in the fiscal 1996 period
to $9,000 in the fiscal 1997 period. The provision for income
taxes increased to $961,000 for the 13 weeks ended December
28, 1996 from $789,000 for the 13 weeks ended December 30,
1995. The Company's effective tax rate for the fiscal 1997
period was 41.4%, versus 38.6% for the fiscal 1996 period.
The increase is the effective tax rate is due to the impact of
changes in certain states' tax rates.
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 may be in the Company's best interest to own certain
properties. Accordingly, during the 13 weeks ended December
28, 1996, the Company purchased the land and/or buildings for
certain of its new restaurants. The Company plans to continue
this policy during the remainder of fiscal year 1997.
Cash flow provided by operating activities was $2.7 million for
the 13 weeks ended December 28, 1996. Net cash used in
investing activities was $3.3 million for fiscal 1997 period,
which primarily consisted of capital expenditures and related
land acquisitions for new Company restaurants opened during
the period, and for additional restaurants under construction.
Financing activities during the 13 weeks ended December 28,
1996 used net cash of $144,000, which reflected short-term
borrowings offset by capital lease and debt repayments. The
net change in cash and cash equivalents during the 13 weeks
ended December 28, 1996 was a decrease of $683,000.
The Company anticipates that its future capital requirements
will be primarily for the development of new restaurants,
upgrading of existing restaurants and possible acquisitions.
Management signed a revolving line of credit facility for $13
million on January 5, 1996. This agreement replaced 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, the revolving line of credit facility for $13 million and
additional lines of credit will enable the Company to meet its
cash requirements through the remainder of fiscal 1997,
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 rates 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 first quarter Form 10-Q
(for SEC use only)
(b) Reports on Form 8-K:
There was no Form 8-K filed during the first quarter
ended December 28, 1996.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act or 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
DAVCO RESTAURANTS, INC.
February 11, 1997 /S/ RONALD D KIRSTIEN
Ronald D. Kirstien
President and Director
February 11, 1997 /S/ CHARLES C. MCGUIRE, III
Charles C. McGuire, III
Vice President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF DECEMBER 28, 1996, AND THE STATEMENT OF OPERATONS FOR THE
13 WEEKS ENDED DECEMBER 29, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> DEC-28-1996
<CASH> 1265
<SECURITIES> 0
<RECEIVABLES> 897
<ALLOWANCES> 0
<INVENTORY> 1436
<CURRENT-ASSETS> 5882
<PP&E> 107161
<DEPRECIATION> 18250
<TOTAL-ASSETS> 118203
<CURRENT-LIABILITIES> 32385
<BONDS> 39165
0
0
<COMMON> 7
<OTHER-SE> 46646
<TOTAL-LIABILITY-AND-EQUITY> 118203
<SALES> 52029
<TOTAL-REVENUES> 52029
<CGS> 32075
<TOTAL-COSTS> 42618
<OTHER-EXPENSES> 6121
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1228
<INCOME-PRETAX> 2324
<INCOME-TAX> 961
<INCOME-CONTINUING> 1363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1363
<EPS-PRIMARY> 0.20<F1>
<EPS-DILUTED> 0.20<F1>
<FN>
<F1>EARNINGS PER SHARE DATA IS IN ACTUAL DOLLARS. MULTIPLIER NOT APPLICABLE.
</FN>
</TABLE>
