Securities and Exchange Commission
Washington, D.C.
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended September 27, 1997
[ ] Transition report pursuant to Section 10 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the transition period from ______________ to _______________.
Commission File Number 000-22006
DavCo Restaurants, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1633813
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
1657 Crofton Boulevard, Crofton Maryland 21114
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (410) 721-3770
Securities registered pursuant to Section 12(b) of the Act:
Common Stock $.001 par value
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on December 15, 1997 was $49,739,300 based on the
closing price of the Common Stock as provided by the American Stock
Exchange on December 15, 1997.
As of December 22, 1997, there were outstanding 6,587,628 shares of
the Registrant's Common Stock, par value $.001 per share.
PART I
ITEM 1: BUSINESS
GENERAL
DavCo Restaurants, Inc., a Delaware corporation, was
incorporated in December 1987. DavCo Restaurants, Inc.
and its subsidiaries are collectively referred to herein as
the "Company."
As of September 27, 1997, the Company operated 263
restaurants of which 229 are "Wendy's Old Fashioned
Hamburgers" restaurants ("Wendy's"), making it the world's
largest franchisee of Wendy's International, Inc. ("Wendy's
International"), and 34 Friendly's restaurants. The
Company also manages, under contract, 14 other Friendly's
restaurants.
Wendy's
The Company maintains exclusive Wendy's franchise
territories in metropolitan Baltimore and the District of
Columbia, the eastern shore of Maryland and portions of
northern Virginia (collectively the "Mid-Atlantic"), where it
operated 138 restaurants as of September 27, 1997. In
fiscal 1997, the Company opened five new Mid-Atlantic
restaurants and closed one existing restaurant. The
Mid-Atlantic restaurants had average sales of $1,121,200
for the fiscal year ended September 27, 1997. The average
restaurant operating profit margin for the Mid-Atlantic
restaurants was 21.1% for fiscal 1997. As of September 27,
1997, the Company also operated 53 Wendy's restaurants in
metropolitan St. Louis and central Illinois (the "Midwest").
The Company does not maintain exclusive franchise
territories in the Midwest. In fiscal 1997, the Company
closed three Midwest restaurants. Average sales for the
Midwest restaurants were $614,400 for the fiscal year
ended September 27, 1997. The average restaurant
operating profit margin for the Midwest restaurants was
3.8% for fiscal 1997. As of September 27, 1997, the
Company also operated 38 Wendy's restaurants in the
metropolitan Nashville, Tennessee area (the "Southern
Market"). The Company does not maintain exclusive
franchise territories in the Southern Market. Average sales
for the Southern restaurants were $958,600 and the average
restaurant operating profit margin was 18.1% for the fiscal
year ended September 27, 1997.
Friendly's
Effective July 14, 1997, the Company signed agreements
with Friendly's Restaurant Franchise, Inc. and Friendly's Ice
Cream Corporation to purchase certain assets and rights to
34 existing Friendly's Restaurants in the Company's Mid-Atlantic
Area, including Delaware. The Company also manages, under contract,
14 other Friendly's locations in the area. The Company has
exclusive rights to develop and operate Friendly's Restaurants
in Maryland, northern Virginia, Delaware and the District of Columbia.
STRATEGY
Opening New Restaurants. The Company has
implemented a program designed to increase its number of
restaurants, primarily in its Mid-Atlantic market. In fiscal
1997, the Company opened five new Wendy's restaurants in
its Mid-Atlantic market. The Company closed four Wendy's
restaurants, one in the Mid-Atlantic market and three in the
Midwest market, due to unprofitability. The company has
also selected the sites for up to nine new restaurants that it
intends to open in fiscal 1998 and intends to close up to
seven Wendy's restaurants in the Midwest market in fiscal
1998. The number of restaurants opened may vary
depending upon general economic conditions, variability in
the time required to obtain local permits, the continued
availability of financing, and the Company's ability to locate
additional suitable restaurants sites. The Company has
agreed with Wendy's International to open or have under
construction a minimum of six Mid-Atlantic restaurants in
each calendar year through 2001 and to operate a total of
240 Mid-Atlantic restaurants by the end of the calendar year
2015. The Company has met or exceeded its committed
growth rate through September 27, 1997 and anticipates
meeting this growth rate by opening at least an additional
102 restaurants in the Mid-Atlantic region by the end of the
calendar year 2015. Any new Wendy's restaurants opened
by the Company must be approved by Wendy's
International. The Company also has the right to open up
to an additional 100 Friendly's Restaurants during a 10 year
period with a commitment to construct 74 new restaurants
in the first 6 years. The Company and Exxon Corporation
have agreed to test up to five (5) co-branded food and
motor fuel facilities in DavCo's Mid-Atlantic market. Each
facility will consist of a Wendy's Old Fashioned Hamburger
Restaurant (operated by DavCo), a convenience store and
an Exxon motor fuel facility (which will be operated by
DavCo Oil Company, a second-tier subsidiary of DavCo, as
an Exxon-branded dealer).
Mid-Atlantic Wendy's Renovation Program. The
Company, pursuant to an agreement with Wendy's
International, has instituted a program to retrofit selected
Mid-Atlantic Wendy's restaurants, primarily through the
installation of an additional cash register, the upgrading of
the point of sale system, and certain other structural
modifications designed to increase service capacity and
operational efficiency. The cost of retrofitting a restaurant
is typically $35,000 to $50,000.
RESTAURANT OPERATIONS
Menu. Each Wendy's restaurant offers a diverse menu
containing a variety of food items, featuring hamburgers and
fillet of chicken breast sandwiches which are prepared to
order with the customer's choice of condiments. The
Wendy's menu also typically includes chili, baked and french
fried potatoes, freshly prepared salads, and Frosty dessert.
The Mid-Atlantic market continues to test fried chicken in
some of its restaurants. In addition, the restaurants sell a
variety of promotional products, normally on a limited time
basis. Friendly's menu offers a broad selection of
freshly-prepared foods which appeal to customers throughout all
day-parts. Breakfast items include specialty omelettes and
breakfast combinations featuring eggs, pancakes, and bacon
or sausage. Lunch and dinner include wrap sandwiches,
salads, soups, super-melts, specialty burgers, stir-fry,
chicken pot pie, tenderloin steaks and seafood entrees.
Friendly's is also recognized for its extensive line of ice
cream shop treats.
Marketing and Promotions. As required by its franchise
agreements, the Company must contribute at least 4.0% of
its Wendy's restaurant sales to an advertising and marketing
fund. Two and one half percent of Wendy's restaurants
sales are used to benefit all restaurants owned and
franchised by Wendy's International. The Wendy's National
Advertising Program, Inc. uses this fund to develop
advertising and sales promotion materials and concepts to
be implemented nationally. In fiscal 1997, the Wendy's
National Advertising Program, Inc. sponsored six
four-week promotional campaigns which featured specific
menu items. The Company is required to spend the
remainder of the 4% of its Wendy's restaurant sales on local
advertising. The Company is also required to contribute 3%
of its Friendly's restaurant sales to an advertising fund
managed by Friendly's Restaurants Franchise, Inc. The
fund will be used to enhance recognition of the trademark
products and patronage of Friendly's Restaurants and
Friendly's proprietary branded products. As of September
27, 1997, the fund has not been established and until such
time as the fund is established the Company may spend up
to 0.5% of Friendly's restaurant sales on local advertising.
The Company has properly recorded the 3% advertising
expense on Friendly's restaurant sales. See
"Business-Franchise and Development Agreements." The
Company typically spends its local advertising dollars on
local television and radio promotions.
Site Selection. Site selection for new restaurants is made
by the Company's real estate and development department
subject to acceptance by Wendy's International or Friendly's
Restaurant Franchise, Inc.
A typical market area will have a population base of at least
50,000 people within a three mile radius. Within the
potential market area, the Company evaluates major retail
and office concentrations and major traffic arteries to
determine focal points. Site specific factors which the
Company considers include visibility, convenience of access,
proximity to direct competition (including other Wendy's
and Friendly's restaurants), access to utilities, local zoning
regulations and various other factors. The Company's
current business strategy is to locate new restaurants,
whenever possible, in free-standing buildings located on the
grounds of shopping centers.
Restaurants Layout and Operations. Wendy's: The
Company's Wendy's restaurants typically range from 2,700
to 3,200 square feet with a seating capacity of between 90
and 130 people, and are typically open from 10:30 a.m. to
10:00 p.m., with many restaurants open for extended
evening hours. Generally, the dining areas are fully carpeted
and informal in design, with tables for two to four people.
Approximately 98% of the Company's Wendy's restaurants
also feature drive-thru windows. Average drive-thru guest
checks generally exceed in-restaurant guest checks. In
fiscal 1997, drive-thru sales constituted approximately 53%
of the Company's sales. Most Company Wendy's
restaurants opened since January 1992 are designed to
incorporate Wendy's International's new high-capacity
central grill/multiple register design ("High-Capacity
Restaurants"). High-Capacity Restaurants are typically
larger in size than traditional Wendy's restaurants and
feature a central grilling area and computerized ordering
system designed to relay customer orders to the grilling area
more efficiently. In addition, High-Capacity Restaurants
typically incorporate multiple cash registers, instead of the
earlier one register Wendy's design, and a second drive-thru
window.
Friendly's: The Company's Friendly's restaurants typically
range from 2,600 to 4,000 square feet with a seating
capacity ranging from 51 to 158 with an average of 95. The
typical Friendly's restaurant is open from 7:00 a.m. till
12:00 a.m., with hours varying depending on location and
season. Through dedicated carry-out areas, Friendly's
restaurants offer the Company's full line of frozen desserts
and certain of its food menu items. Reserved parking is
available at many of the Company's free-standing
restaurants to facilitate quick carry-out service.
Approximately 15% of the Company's average free
standing restaurant revenues are derived from its carry-out
business with a significant portion of these sales occurring
during the afternoon and evening snack periods. Of this
15%, approximately 5% comes from sales of packaged
frozen desserts in display cases within its restaurants.
The Company's reporting system provides restaurant and
operating data, including sales mix and labor cost
information, with respect to each restaurant to the
Company's executive offices. Weekly management reports
by Area Managers and Regional Managers track food and
labor costs and unit income.
RAW MATERIALS
As a Wendy's and Friendly's franchisee, the Company
complies with uniform, recipe and ingredient specifications
provided by Wendy's International, Inc. and Friendly's
Franchise, Inc., and purchases all food and beverage
inventories and restaurant supplies from independent
vendors approved by the applicable franchisor. Except for
The New Bakery Co. of Ohio, Inc. (The "Bakery"), a
wholly-owned subsidiary of Wendy's International, Wendy's
International does not sell food or supplies to its
franchisees. The Company purchases its sandwich buns
from the Bakery for the majority of its Wendy's restaurants.
The Company also purchases from Friendly's its signature
frozen products and the majority of the products offered for
sale in the Friendly's restaurants, with the exception of
beverages, breads and produce.
The Company purchases soft drink products from the
Coca-Cola Company and its affiliates. Most other food
items and supplies purchased by the Company are
warehoused and distributed by independent distributors.
The Company and, in some instances Wendy's International,
negotiate prices directly with the vendors.
The Company has not experienced any significant shortages
of food, equipment, fixtures or other products which are
necessary to restaurant operations. The Company
anticipates no such shortages and believes that alternate
suppliers are available in the event such shortages occur.
FRANCHISE AND DEVELOPMENT AGREEMENTS
Wendy's:
General. The Company's relationship with Wendy's
International is governed by (I) a development agreement
(the "Development Agreement"), which grants to the
Company an exclusive franchise territory, (II) unit franchise
and restaurant franchise agreements (collectively, the
"Franchise Agreements"), one of which is executed in
connection with the opening of each of the Company's
restaurants, and (III) certain other agreements between the
Company and Wendy's International. These agreements
provide Wendy's International with significant rights
regarding the business and operations of the Company and
impose restrictions regarding the ownership of the
Company's capital stock.
The Company is prohibited from engaging in any quick
service restaurant business selling hamburgers or chili and in
any other competitive family dining, ice cream shop or
coffee shop business. In addition, Ronald D. Kirstien, the
President and Chief Executive Officer of the Company, has
been designated by Wendy's International as the individual
responsible for the development and management of the
Company's restaurants. In the event Mr. Kirstien (or any
other successor approved by Wendy's International) (I) is no
longer employed by the Company, or (II) either owns less
than a 5% interest in the Company's capital stock or is not
the beneficiary of an employment incentive plan acceptable
to Wendy's International, the Company must employ a
successor, who is required to be approved by Wendy's
International, within 180 days of such condition. The
failure to obtain Wendy's International's approval of a
successor within such period would constitute an event of
default under each of the Development Agreements and
Franchise Agreements.
The Company's agreements with Wendy's International
restrict the ownership and transfer of the capital stock of the
Company. In the event any person or entity (other than
CVC or Management) acquires 20% or more of the
outstanding shares of Common Stock (assuming full
exercise of all presently outstanding warrants and all
presently outstanding options which are exercisable within
60 days), Wendy's International may terminate any or all of
the Development Agreement and/or the Franchise
Agreements. In addition, the Company agreed with
Wendy's International on a renovation plan for the
Mid-Atlantic restaurants as described under
"Business-Strategy and Mid-Atlantic Renovation Program."
Any acquisition by the Company of an existing Wendy's
restaurant requires the prior consent of Wendy's
International and is also subject to Wendy's International's
right of first refusal. Under the terms of an agreement
entered into between the Company and Wendy's
International, the Company agreed that it will not seek to
acquire any additional Wendy's restaurants or entities
controlling Wendy's restaurants without the prior consent of
Wendy's International, however, this prohibition did not
apply to any acquisition by the Company of Wendy's
restaurants in Maryland or Virginia.
In order to secure the obligations of the Company to make
certain payments to Wendy's International pursuant to
Development Agreement and the Franchise Agreements, the
Company is required to maintain letters of credit in the face
amount of $2.0 million. If the Company fails to make any
required payment to Wendy's International, upon five days
prior written notice by Wendy's International, Wendy's
International is entitled to draw down amounts under the
letters of credit in satisfaction of such obligations or to
terminate the Development Agreement and the Franchise
Agreements, subject to applicable cure periods.
Should the Company fail to comply with the Development
Agreement or the Franchise Agreements for restaurants
within a covered territory, Wendy's International could
terminate the exclusive nature of the Company's franchises
in such covered territory. Any event of default under any
Franchise Agreement would give Wendy's International the
right to terminate the franchise rights of the Company's
restaurant governed by such Franchise Agreement. The loss
of the exclusive nature of a territory or a significant portion
of these franchise rights would have a material adverse
effect on the Company.
The Company is also required to operate each of its
Wendy's restaurants in accordance with certain standards
contained in the Wendy's International Operations Manual.
Wendy's International periodically
monitors the operations of the Company's restaurants and
notifies the Company of any failure to comply with any of
the Franchise Agreements, Development Agreement or the
Wendy's International Operations Manual.
Development Agreement. The Company and Wendy's
International entered into a Development Agreement
covering the District of Columbia and certain counties in
Virginia and Maryland and a Development Agreement
covering Baltimore and certain counties in Maryland in
1978. These two Development Agreements were
subsequently combined into a single Development
Agreement in 1980. The Company entered into another
Development Agreement covering certain counties on the
eastern shore of Maryland in 1982, which was substantially
completed and provided the Company a right of first refusal
for all new restaurants in this territory. This Development
Agreement was merged with the combined Development
Agreement in 1996. The Company does not have a
development agreement with Wendy's International for
either its Midwest operations or Southern Market although
it does have the permission of Wendy's International to
open an additional five restaurants in the Southern Market
within the next five years. Accordingly, Wendy's
International (or a person or entity approved by Wendy's
International) could, subject to certain limitations, open
Wendy's restaurants in the Midwest or in the Southern
Market that would compete with the Company's restaurants.
Pursuant to the Development Agreement, the Company has
been granted exclusive rights to develop and operate a
specific number of Wendy's restaurants within the covered
territories. The Company is required to develop and
commence construction of new Wendy's restaurants in
accordance with development and performance schedules.
The Company is currently obligated to open or commence
construction of a minimum of six restaurants in each
calendar year through 2015 and to operate a total of 240
Mid-Atlantic restaurants by the end of the calendar year
2015. The Company anticipates exceeding the agreement
by opening at least 102 additional restaurants in the
Mid-Atlantic region by the end of the calendar year 2015.
The Development Agreement extends through the term of
the development and performance schedules. Thereafter, the
Company retains a right of first refusal regarding the
development of new restaurants in the relevant franchise
territory for an additional 10 year period unless the
Company is in default under the terms of the Development
Agreement.
Pursuant to the Development Agreement, the Company is
required to submit to Wendy's International for its
acceptance each proposed restaurant site and the plans for
each new restaurant. Wendy's International provides
standard construction plans, specifications and layouts for
new restaurants and provides training in the Wendy's
International system, including standards, methods,
procedures and techniques for operation of a Wendy's
restaurant. The Company is obligated to pay Wendy's
International a technical assistance fee upon the opening of
each new restaurant.
Unit Franchise Agreement and Restaurant Agreements.
The Company operates each of its Wendy's restaurants
under a Franchise Agreement with Wendy's International.
Each Franchise Agreement provides the Company the right
to operate a Wendy's restaurant for a period of 20 years.
The Franchise Agreements are renewable by the Company,
subject to certain conditions, for varying periods of up to 20
years (the terms of any renewal period may differ from
those in effect during the initial term). Each unit franchise
agreement gives the Company the exclusive right to operate
a Wendy's restaurant in a particular
geographic area, defined by either a radius of three miles or
a population of 20,000 persons, whichever is smaller. There
are no exclusive territorial rights granted to the Company
under restaurant franchise agreements.
Pursuant to the Franchise Agreements, Wendy's
International prescribes the designs, color schemes, signs
and equipment to be utilized in each restaurant, and
determines the menu items as well as the formulas and
ingredients for the preparation of food and beverage
products. Each Franchise Agreement requires the Company
to pay to Wendy's International a technical assistance fee
upon the opening of each new restaurant and a monthly
royalty equal to 4% of the gross sales of that particular
restaurant. Each new restaurant opened within an area
covered by a Development Agreement according to the
applicable development schedule will be governed by a unit
franchise agreement, with a technical assistance fee of
$7,500. All other new restaurants will be governed by a
restaurant franchise agreement, with a technical assistance
fee of $25,000. In addition, the Company must contribute
to national advertising and spend specified percentages of
gross monthly sales for local advertising. See
"Business-Restaurant Operations-Marketing and
Promotion." Any new restaurant not located within an area
covered by the Development Agreements, including any
restaurant opened in the Midwest or the Southern Market,
has
been developed pursuant to a restaurant franchise
agreement.
Wendy's International has proposed a New Unit Franchise
Agreement, which would have an impact on the Company's
ability to diversify if it were to expand in areas not covered
by a Development Agreement. The Company does not
anticipate expanding into areas which would require the
Company to execute a New Unit Franchise Agreement.
Friendly's
On July 10, 1997, FriendCo Restaurants, Inc. executed 34
franchise agreements with Friendly's Restaurant Franchise,
Inc. ("F.R.F.I.") covering operational requirements for the
34 restaurants acquired by FriendCo from Friendly Ice
Cream Corporation ("F.I.C.C."). Pursuant to the Franchise
agreement, FriendCo agrees to operate the restaurants 365
days a year during established business hours, to pay an
annual royalty fee of 4% of gross sales, and to contribute
3% of gross sales to a marketing fund. F.R.F.I. retains the
right to approve and require menu items and to approve
distributors or suppliers of products used in the restaurants.
FriendCo and the Company have agreed with F.R.I.C. and
F.I.C.C. that they will not engage in competitive mid-scale
sit-down family style restaurant concepts for a period of
two years following the termination or expiration of the
franchise agreements.
On July 10, 1997, the Company's subsidiary, FriendCo
Restaurants, Inc., signed a Development Agreement with
Friendly Ice Cream Corporation, providing FriendCo with
an exclusive development territory in Delaware, Maryland,
the District of Columbia and certain counties in northern
Virginia. FriendCo Restaurants, Inc. is required to have
open or under construction 74 new Friendly's Restaurants
by December 31, 2003 in order to maintain territorial
exclusivity, and is entitled to open an additional 26 new
restaurants through December 31, 1997.
GOVERNMENT REGULATIONS
The restaurant business is subject to extensive federal, state
and local government regulations relating to the
development and operation of restaurants, including
regulations relating to building, ingress and egress, zoning
and the preparation and sale of food. The company is also
subject to federal and state environmental regulations, but
these have not had a material effect on the Company's
operations. The Company is also subject to laws governing
relationships with employees, such as minimum wage
requirements, health insurance coverage requirements, and
laws regulating overtime, working conditions and employee
citizenship. During fiscal year 1996 Congress passed the
Minimum Wage Bill which revised the minimum wage to
$4.75 per hour as of October 1, 1996 and to $5.15 per hour
as of September 1, 1997. In particular, further increases in
the minimum wage or mandatory health care coverage could
adversely affect the Company.
SEASONALITY AND QUARTERLY RESULTS
The restaurant sales of the Company, like the rest of the
restaurant industry, are moderately seasonal. The lowest
sales months are typically January and February, while the
highest sales months are June, July and August. During the
initial six months of each fiscal year (October through
March), the Company has typically recorded 47% to 49% of
its total annual sales, operating margins have been slightly
lower due to lower sales providing a smaller spread over
fixed costs.
TRADEMARKS AND SERVICE MARKS
The Franchise Agreements grant to the Company the right
to use certain registered trademarks and service marks, of
the applicable franchisor, Wendy's and Friendly's.
Examples such as, "Wendy's",
"Wendy", "Wendy's Old Fashioned Hamburgers", "Quality
Is Our Recipe", "Friendly's, "Friendly's Restaurant",
"Friendly's Ice Cream" and "Fribble" were adopted to
identify and promote the applicable restaurants. The
Company believes that these marks are of material
importance to the Company's business.
COMPETITION
The restaurant business is highly competitive and is affected
by changes in the public's eating habits and preferences,
population trends and traffic patterns, as well as by local
and national economic conditions affecting consumer
spending habits, many of which are beyond the Company's
control. Key competitive factors in the industry are the
quality and value of the food products offered, quality and
speed of service, attractiveness of facilities, advertising,
name brand awareness and image and restaurant location.
A number of the Company's significant competitors are
larger or more diversified and have substantially greater
resources than the Company. Key competitive factors in the
retail food business include brand awareness, access to retail
locations, price and quality.
The Company and the restaurant industry generally are
significantly affected by factors such as changes in local,
regional or national economic conditions, changes in
consumer tastes, severe weather and consumer concerns
about the nutritional quality of quick-service food. In
addition, factors such as increases in food, labor and energy
costs, the availability and cost of suitable restaurant sites,
fluctuating insurance rates, state and local regulations and
the availability of an adequate number of hourly-paid
employees can also adversely affect the restaurant industry.
EMPLOYEES
As of September 27, 1997, the Company employed
approximately 9,700 persons in six states and the District of
Columbia. Of those employees, approximately 1,350 hold
management or administrative positions and the remainder
are engaged in the operation of the Company's restaurants.
None of the Company's employees are covered by a
collective bargaining agreement. The Company considers
its employee relations to be good.
ITEM 2: PROPERTIES
As of September 27, 1997, the Company operated 263
restaurants (229 Wendy's and 34 Friendly's) in the locations
listed below. Of the 263 restaurants, the Company owned
the land and building for 23 restaurants and held long-term
leases covering land and/or buildings for the remainder. The
Company's land and building leases are most commonly
written for terms of 20 years, with one or more five year
renewal options. Certain leases require the payment of
additional rent equal to a percentage (usually between 2%
and 7%) of annual sales in excess of specified amounts.
The Company leases approximately 30,000 square feet of
office space in a building in Crofton, Maryland, which it
uses as a headquarters and operations center.
The Company also leases office space in Nashville,
Tennessee and St. Louis, Missouri for the local operations
of Southern Hospitality and MDF, respectively.
<TABLE>
<CAPTION>
The following lists the locations of the restaurants operated
by the Company (by market) as of
September 27, 1997:
No.
Location Restaurants
<S> <C>
Mid-Atlantic Market:
Maryland 114
Virginia 45
Delaware 6
District of Columbia 7
--------
172
Midwest Market:
Illinois 26
Missouri 27
---------
53
Southern Market:
Tennessee 38
---------
Total all Markets 263
</TABLE>
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is a party to routine
litigation incidental to its business. The Company maintains
commercial, general liability, workers' compensation and
directors and officers insurance policies which cover most
of the actions brought against the Company.
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS
On November 19, 1997, DavCo Restaurants, Inc. filed a
preliminary proxy, 14A, discussing an executed definitive
merger agreement with DavCo Acquisition Holding Inc., for
a merger transaction in which DavCo Acquisition Holding
Inc. would acquire all of DavCo's issued and outstanding
shares (other than shares held by DavCo Acquisition
Holding Inc.) for $20 cash per share, following unanimous
approval of the proposed transaction by Board of Directors
of DavCo (after a vote in which the interested directors
abstained from voting).
As previously disclosed, DavCo Acquisition Holding Inc. is
owned by an investor group that is headed by Ronald D.
Kirstien, the Company's President and Chief Executive
Officer, and Harvey Rothstein, Executive Vice President of
the Company, and includes the Company's principal
stockholder, Citicorp Venture Capital, Ltd., which currently
holds approximately 48% of the Company's outstanding
shares, and certain affiliates of Kirstien, Rothstein and CVC.
The terms of the merger agreement require approval by a
majority of the Company's stockholders, including approval
by a majority of stockholders unaffiliated with the investor
group. In addition, the merger is subject to certain
conditions, including a limitation on the number of
dissenting shareholders, regulatory approvals and the receipt
of necessary financing. The investor group has obtained a
commitment from Global Alliance Finance Company,
L.L.C., a wholly-owned subsidiary of Deutsche Bank North
America, to provide up to $150 million of debt financing to
complete the merger.
As of December 18, 1997 the Company is awaiting the
Securities and Exchange Commission's comments.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock commenced trading on the
NASDAQ National Market System on August 10, 1993, the
date of the Initial Public Offering. Prior to August 10,
1993, there was no market for the Company' s Common
Stock. As of December 11, 1996, the Company's Common
Stock trades on The American Stock Exchange under the
symbol "DVC".
The following table sets forth, for the periods indicated, the
applicable range of the high and low sales prices on the
Nasdaq National Market System and The American Stock
Exchange.
<TABLE>
<CAPTION>
1997 1996
Fiscal Year High Low High Low
- -------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 9.63 $ 8.38 $ 13.50 $ 8.50
Second Quarter 10.75 8.88 9.25 6.50
Third Quarter 11.50 8.75 9.75 6.50
Fourth Quarter 18.13 10.88 9.50 8.25
</TABLE>
NUMBER OF STOCKHOLDERS
The information available as of December 17, 1997
indicates that there were 47 holders of record and
approximately 1,400 beneficial owners of the Company's
Common Stock.
DIVIDENDS
The Company has not paid any cash dividends on its
Common Stock and does not intend to pay cash dividends
on its Common Stock for the foreseeable future. The
Company intends to retain
future earnings to finance future development.
ITEM 6: SELECTED FINANCIAL INFORMATION
The following table sets forth the selected financial
information of DavCo Restaurants, Inc. (The Company) and
DavCo Restaurants, Inc. (The Predecessor). Effective
February 10, 1993, the Predecessor underwent a
recapitalization which was accounted for using the "push
down" method of accounting. The predecessor was then
merged with DavCo Food, Inc. in August 1993 to create
the Company.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------------------------
Predecessor
and Company
Company Company Company Company Combined
-------- ------- ------- --------- -----------
Sept. 27, Sept. 28, Sept. 30, Sept. 24, Sept. 25,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS (in 000's)(1):
Restaurant sales $229,096 $206,903 $208,671 $163,355 $152,702
Operating income 15,130 8,071 (2) 17,290 14,558 6,525
Income (loss) before
extraordinary item 6,344 2,391 (2) 8,415 7,034 (1,813)
Net income (loss) 6,344 2,391 (2) 8,415 7,034 (4,197)
PER SHARE DATA:
Earnings per common share -
assuming full dilution $0.89 $0.34 $1.18 $0.98
PRO FORMA RESULTS (3):
Operating income $12,498
Net income (loss) 5,001
Earnings (loss) per common share -
assuming full dilution $0.69
FINANCIAL POSITION AT END OF
FISCAL YEAR (1) (in 000's):
Property and equipment, net $58,074 $49,521 $41,661 $33,521 $12,321
Leased properties, net 34,355 37,918 43,828 44,300 42,734
Franchise rights, net 5,015 3,551 4,095 4,154 3,025
Total assets 126,434 117,558 115,700 113,428 82,400
Long-term debt, net of current portion 17,487 11,699 14,778 17,928 1,734
Capital lease obligations, net of
current portion 25,374 28,404 31,083 32,838 30,722
Redeemable preferred stock - - - - -
Stockholders' equity 51,634 45,526 44,219 35,804 28,770
</TABLE>
(1) On September 24, 1994 the company acquired Southern Hospitality
Corporation for approximately $17.5 million cash (net of cash acquired)
and the assumption of certain liabilities. The acquisition was accounted
for as a purchase.
(2) Income for the fiscal year ended September 28, 1996 includes a pre-tax
charge of $5.5 million related to SFAS No. 121 (Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of.)
(3) Pro forma results assume that the recapitalization and subsequent initial
public offering occurred on the first day of the period presented and
exclude certain one-time charges related to such.
ITEM 7: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPONENTS OF REVENUES AND EXPENSES
The Company's revenues consist entirely 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 expenses,
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 Wendy's 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 Wendy's local advertising. The
Company is required to contribute 3% of its Friendly's
restaurant sales to an advertising fund managed by
Friendly's Restaurants Franchise, Inc. The fund will be used
to enhance recognition of the trademark products and
patronage of Friendly's Restaurants and Friendly's
proprietary branded products. As of September 27, 1997
the fund has not yet been established, until such time the
fund is established the Company may spend up to 1/2% of
Friendly's restaurant sales on local advertising.
Franchise royalties, as required by the Company's franchise
agreements with Wendy's International Inc. and Friendly's
Restaurant Franchise, Inc. 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 expresses certain items in the
Company's Consolidated Statements of Operations as a
percentage of restaurant sales for each of the three most
recent fiscal years. Note: Friendly's operations began on
July 14, 1997 (11 weeks in Fiscal 1997) and are not
indicative of a full year results.
<TABLE>
<CAPTION>
Consolidated
For the fiscal year ended For the fiscal year ended
Sept. 27, 1997 Sept. 27, Sept. 28, Sept. 30,
Wendy's Friendly's 1997 1996 1995
------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Restaurant sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of restaurant sales 60.6 69.1 60.9 61.0 60.0
Restaurant operating expenses 20.6 24.7 20.8 20.5 19.8
-------- ---------- --------- --------- -----------
Restaurant operating profit 18.8 6.2 18.3 18.5 20.2
Franchise royalties 4.0 4.0 4.0 4.0 4.0
General and administrative 3.9 1.4 3.8 3.6 3.8
Depreciation and amortization 4.0 1.3 3.9 4.3 4.1
Loss on write down of
impaired long-lived assets - - - 2.7 -
--------- ---------- ----------- ---------- -----------
Operating income 6.9% (0.5%) 6.6% 3.9% 8.3%
--------- ---------- ----------- --------- -----------
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Wendy's
Revenues. Wendy's restaurant sales increased to $222.1
million in 1997 from $206.9 million in 1996, an increase of
7.3%. This increase is due to the successful introduction of
the "Fresh Stuffed PITA" sandwiches, favorable winter
weather, and increased attention to our guest first service
philosophy. Wendy's same store sales increased by 2.7% for
fiscal year 1997 compared to fiscal year 1996. Same store sales for
fiscal year 1997 increased for the Southern market by 4.6%
and for the Mid-Atlantic market by 3.3%, and decreased for
the Mid-West market by 1.9%.
The average sales per Wendy's restaurant increased to
$973,800 for fiscal year 1997 from $933,300 for fiscal year
1996. The weighted average number of Wendy's
restaurants open during the year was 228.1 for 1997 and
221.7 for 1996. The weighted average number of Mid-Atlantic
Wendy's restaurants was 136.0 for 1997 and 128.5
for 1996, and average sales per restaurant in the Mid-Atlantic
region increased to $1,121,200 from $1,073,000.
The weighted average number of Midwest restaurants open
was 54.1 for 1997 and 55.3 for 1996, and average
restaurant sales decreased to $614,400 from $615,700. The
weighted average number of Southern restaurants open for
1997 was 38.0 compared to 37.9 for 1996, and average
restaurant sales for 1997 were $958,600 compared to
$922,700 for 1996. Average guest count per Wendy's
restaurant was 291,500 for fiscal 1997. Average guest
check was $3.34 for fiscal year 1997. These figures are not
comparable to fiscal year 1996 figures due to changes in the
product mix such as the addition of the $.99 Chicken
Nuggets, which is a value added menu item, and an increase
of strategically selected menu items prices.
Cost and Expenses. Cost of Wendy's restaurant sales
increased to $134.7 million in 1997 from $126.3 million in
1996. As a percent of sales, cost of restaurant sales
decreased to 60.6% in 1997 from 61.0% in 1996. Cost of
restaurant sales as a percent of sales for the Mid-Atlantic
restaurants decreased to 58.8% in 1997 from 59.1% in
1996. Comparing the components of cost of Wendy's
restaurant sales for the Mid-Atlantic restaurants, the cost of
food and supplies decreased to 33.0% of sales in 1997 from
33.2% of sales in 1996. Payroll and benefits expense
decreased slightly to 25.8% of sales for 1997 compared to
25.9% of sales for 1996. Cost of restaurant sales as a
percent of sales in the Midwest Wendy's restaurants
decreased to 66.7% for the 1997 period from 67.6% for the
1996 period. Comparing the components of cost of
restaurant sales for the Midwest restaurants, the cost of
food and supplies decreased to 34.8% of sales in 1997 from
35.8% of sales in 1996. Payroll and benefits expense
increased slightly to 31.9% of sales in 1997 from 31.8% of
sales in 1996. The Southern Wendy's restaurants cost of
sales for fiscal 1997 increased slightly to 62.7% from 62.5%
in 1996. Comparing the components of cost of restaurant
sales for the Southern restaurants, the cost of food and
supplies increased to 33.6% for the 1997 period from
33.3% in the 1996 period. Payroll and benefits expenses
decreased to 29.1% for the 1997 period from 29.3% in the
1996 period. The overall decrease in the Wendy's cost of
restaurant sales can be attributed to favorable food cost, and
the leveraging effect of higher same store sales for fiscal
year 1997. Higher labor cost due to the newly enacted
Federal Minimum Wage increase was offset, as a percentage
of sales, by the leveraging effect of higher same store sales.
Wendy's restaurant operating expenses increased to $45.8
million in 1997 from $42.4 million in 1996. As a percent of
sales, this represents a slight increase to 20.6% in 1997 from
20.5% in 1996. Restaurant operating expenses in the Mid-Atlantic
Wendy's restaurants decreased slightly to 19.4% of
sales in 1997 from 19.5% in 1996. Restaurant operating
expenses in the Midwest Wendy's restaurants increased
slightly to 29.0% of sales in 1997 from 25.0% of sales in
1996. This increase was due to a $1,300,000 reserve
expense for six under performing stores, which are to be
closed. Restaurant operating expenses in the Southern
Wendy's restaurants decreased to 18.4% of sales for 1997
from 19.9% of sales in 1996. Overall restaurant operating
expenses as a percentage of sales, excluding the above
reserve, decreased as a percentage of sales from fiscal year
1996 due to the cost leveraging effect of higher same store
sales for fiscal year 1997 and the additional expenses in the
1996 period related to the severe weather, such as increased
utilities, snow removal and roof repairs.
Friendly's
The operations of Friendly's restaurants began on July 14,
1997, which translates to 11 weeks in fiscal year 1997. The
revenue from the Friendly's operations was $7.0 million for
the 11 week period. Cost of Friendly's restaurant sales was
69.1% of sales, which is comprised of 37.3% for food and
supplies and 31.8% for payroll and benefits. Friendly's
restaurant operating expenses constituted 24.7% of sales.
Due to the short operating period management believes that
these results are not necessarily indicative of an entire year's
results.
The following discussion is based on the consolidated
Company
General and administrative expenses increased to $8.8
million in fiscal year 1997 from $7.4 million in fiscal year
1996, representing as a percent of consolidated sales for
both Wendy's and Friendly's, 3.8% for 1997 and 3.6% for
1996. This increase is directly related to incentive type
expenses, such as bonuses, incurred due to the Company's
improved performance when compared to fiscal 1996 and
additional expenses related to the operating of the Friendly's
restaurants.
Depreciation and amortization expense was $8.9 million in
fiscal year 1997 and 1996, representing a decrease, as a
percent of sales, to 3.9% in 1997 from 4.3% in 1996. This
decrease is related to asset write offs in 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). This decrease more than offset the
additional depreciation and amortization expense incurred
on capital expenditures for new store openings, existing
improvements and the Friendly's operations acquisition.
Non-Operating Charges. Interest expense decreased
slightly to $4.9 million in fiscal year 1997 from $5.0 million
in 1996. With additional borrowing for expansion and the
acquisition of Friendly's operations interest expense is
expected to increase in the future periods. During fiscal
year 1997, other income was $791,000 compared to other
income of $1.1 million for fiscal year 1996.
The provision for income taxes increased to $4.7 million for
fiscal 1997 from $1.8 million for fiscal 1996. The
Company's effective tax rate for fiscal 1997 was 42.7% and
42.6% for fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
The following discussion, fiscal year 1996 compared to
fiscal 1995, does not include any results for Friendly's
restaurant, as the Friendly's operations began on July 14,
1997.
Revenues. Company restaurant sales decreased to $206.9
million in 1996 from $208.7 million in 1995, a decrease of
0.9%. This decrease in sales is primarily 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 in sales is related to the
additional week in fiscal 1995. Also, sales were negatively
impacted by the severe inclement weather experienced
during 1996 and the Federal Government shutdown. There
was a 3.9% decrease in same store sales for the fiscal year
1996 compared to fiscal year 1995. Same store sales for
fiscal year 1996 for the Mid-Atlantic market decreased by
3.7%, for the Midwest market decreased 4.0%, and for the
Southern market decreased by 4.3%. To counteract this
trend, management identified and introduced new strategies
for building sales. As these initiatives were combined with
the Company's other strategies, same store sales began
improving during the later part of fiscal 1996. Same store
sales for the fourth quarter fiscal 1996 increased 3.2% from
the fourth quarter fiscal 1995.
The average sales per Company restaurant decreased to
$933,300 for the 52 weeks ended September 28, 1996 from
$984,800 for the 53 weeks ended September 30, 1995. The
weighted average number of restaurants open during the
year was 221.7 for 1996 and 211.9 for 1995. The weighted
average number of Mid-Atlantic restaurants was 128.5 for
1996 and 122.5 for 1995, and average sales per restaurant
in the Mid-Atlantic region decreased to $1,073,000 from
$1,131,000. The weighted average number of Midwest
restaurants open was 55.3 for 1996 and 54.3 for 1995, and
average restaurant sales decreased to $615,700 from
$643,800. The weighted average number of Southern
restaurants open for 1996 was 37.9 compared to 35.1 for
1995, and average restaurant sales for 1996 were $922,700
compared to $1,001,900 for 1995. Average guest count per
Company restaurant decreased to 303,900 in 1996 from
330,300 in 1995. The overall decrease in average sales and
average guest count per Company restaurant, for the 1996
period compared to 1995 period can be attributed to the
additional week in the 1995 period and the above mentioned
reasons for decreased revenue. Average guest check
increased to $3.07 for fiscal 1996 from $2.98 for fiscal
1995. This increase is primarily the result of the $0.99
Chicken Nuggets addition, which is a value added menu
item.
Cost and Expenses. Cost of restaurant sales increased to
$126.3 million in 1996 from $125.2 million in 1995. As a
percent of sales, cost of restaurant sales increased to 61.0%
in 1996 from 60.0% in 1995. Cost of restaurant sales as a
percent of sales for the Mid-Atlantic restaurants increased
to 59.1% in 1996 from 58.4% in 1995. 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 1996 from 32.7% of sales in 1995. Payroll
and benefits expense increased to 25.9% in 1996 from
25.7% in 1995. Cost of restaurant sales as a percent of sales
in the Midwest restaurants increased to 67.6% for the 1996
period from 66.9% for the 1995 period. Comparing the
components of cost of restaurant sales for the Midwest
restaurants, the cost of food and supplies increased to
35.8% of sales in 1996 from 35.5% of sales in 1995.
Payroll and benefits expense increased to 31.8% of sales in
1996 from 31.4% of sales in 1995. The Southern
restaurants' cost of sales for fiscal 1996 were 62.5%
compared to 59.5% in 1995. Comparing the components of
cost of restaurant sales for the Southern restaurants, the
cost of food and supplies increased to 33.3% for the 1996
period from 31.6% in the 1995 period. Payroll and benefits
expenses increased to 29.3% for the 1996 period from
27.9% in the 1995 period due to the very low
unemployment rate in the Southern market. The overall
increase in the cost of restaurant sales can be attributed to
increased labor cost, increased food cost, primarily related
to product mix change, and the cost leveraging effect of
lower same store sales for fiscal year 1996. Labor cost is
expected to increase due to the newly enacted Federal
Minimum Wage increase.
Restaurant operating expenses increased to $42.4 million in
1996 from $41.4 million in 1995. As a percent of sales, this
represents a increase to 20.5% in 1996 from 19.8% in 1995.
Restaurant operating expenses in the Mid-Atlantic
restaurants remained consistent at 19.5% of sales in 1996
and in 1995. Restaurant operating expenses in the Midwest
restaurants increased to 25.0% of sales in 1996 from 22.9%
of sales in 1995. Restaurant operating expenses in the
Southern restaurants increased to 19.9% of sales for 1996
from 18.3% of sales in 1995. The increase in restaurant
operating expenses is related to the cost leveraging effect of
the additional week in the fiscal 1995 period and the
additional expenses in the 1996 period related to the severe
weather, such as increased utilities, snow removal and roof
repairs. The impact as a percentage of sales was less in the
Mid-Atlantic restaurants due to the larger sales
base.
General and administrative expenses decreased to $7.4
million in fiscal year 1996 from $7.9 million in fiscal year
1995, representing as a percent of sales, 3.6% for 1996 and
3.8% for 1995. This decrease related to the implementation
of curbs on administrative costs and the impact of reduced
expenses directly related to sales and profit, such as
bonuses.
Depreciation and amortization expense increased to $8.9
million in 1996 from $8.5 million in 1995, representing an
increase, as a percent of sales, to 4.3% in 1996 from 4.1%
in 1995. This increase is due to lower sales in the 1996
period and having incurred additional depreciation expense
on capital expenditures for new store openings and existing
store improvements.
The implementation of SFAS No. 121(Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of) resulted in a pre-tax charge of $5,513,000
during the 1996 period.
Non-Operating Charges. Interest expense decreased to
$5.0 million in 1996 from $5.8 million in 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 $169,000
between periods due to a reduction in overnight
investments. Other income decreased slightly between
periods.
The provision for income taxes decreased to $1.8 million for
fiscal 1996 from $4.5 million for fiscal 1995. The
Company's effective tax rate for fiscal 1996 was 42.6% and
34.6% for fiscal 1995. The increase in the effective tax rate
is due to the reevaluation of the Company's deferred tax
liability during the 1995 period and 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 operating activities,
long-term debt, "build-to-suit" leases, ground leases, 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 past 3 years, the
Company has purchased the land and/or buildings for
certain of its new restaurants.
Cash flow provided by operating activities was $19.9
million, $16.4 million and $13.9 million in 1997, 1996 and
1995, respectively. Net cash used in investing activities was
$19.5 million in fiscal 1997, $13.6 million in fiscal 1996, and
$11.7 million in fiscal 1995. Cash used in investing
activities typically represents capital expenditures for the
building of new restaurants and acquisitions of certain
assets, such as the Friendly's acquisition. These
expenditures also include franchise fees, deferred
pre-opening costs and leasehold improvements on existing
restaurants.
Financing activities in fiscal 1997 used net cash of $1.7
million. This netted amount consisted of long term debt
used to finance the Acquisition of Friendly's Franchise
Rights offset by debt and capital lease repayments.
Financing activities in fiscal 1996 used net cash of $1.1
million and consisted of debt and capital lease repayments
offset by short-term borrowings. Financing activities in
fiscal 1995 used net cash of $4.9 million which relates to
debt and capital lease repayments.
The Company opened five new Wendy's restaurants, all in
the Mid-Atlantic market and closed four Wendy's
restaurants, one the Mid-Atlantic market and three in the
Mid-West market during the year ended September 27,
1997.
The Company anticipates that its future capital requirements
will be primarily for the development of new restaurants,
upgrading of existing restaurants and possible acquisitions.
On July 15, 1997 the Company signed an agreement
combining the revolving line of credit for $13 million and
the $5 million credit facility to form an $18 million revolving
credit facility. Also, on July 15, 1997, the Company's
wholly owned subsidiary FriendCo Restaurants, Inc. signed
a $10 million term loan facility which was mainly used to
fund the purchase price and start up costs for the Friendly's
transaction which was disclosed on Form 8-K filed on July
25, 1997. Management anticipates that cash provided by
operating activities, cash on hand, the revolving line of
credit facility of $18 million, and the term loans will enable
the Company to meet its cash requirements through fiscal
1998. 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.
INFLATION
Certain of the Company's operating costs are subject to
inflationary pressures, of which the most significant are food
and labor costs. As of September 27, 1997, approximately
85% of the Company's employees were paid wages equal to
or based on the federal minimum hourly wage rate. Recent
changes in the federal minimum hourly wage rate will serve
to increase labor costs in fiscal year 1998 and beyond.
Economic growth that would reduce unemployment or
make more jobs available in higher paying industries, would
directly affect the Company's labor costs.
ITEM 8: FINANCIAL STATEMENTS
Index to Financial Statements and Schedules
Page
Report of Independent Public Accountants
Consolidated Statements of Operations of the Company for
the years ended September 27, 1997, September 28, 1996
and September 30, 1995.
Consolidated Balance Sheet as of September 27, 1997 and
September 28, 1996.
Consolidated Statements of Stockholders' Equity of the
Company for the years ended September 27, 1997,
September 28, 1996 and September 30, 1995.
Consolidated Statements of Cash Flows of the Company for
the years ended September 27, 1997, September 28, 1996
and September 30, 1995.
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
To the Board of Directors of DavCo Restaurants, Inc.:
We have audited the accompanying consolidated balance
sheets of DavCo Restaurants, Inc. (a Delaware corporation)
and subsidiaries (the Company) as of September 27, 1997
and September 28, 1996, and the related consolidated
statements of operations, changes in stockholders' equity
and cash flows for the years ended September 27, 1997,
September 28, 1996 and September 30, 1995. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of DavCo Restaurants, Inc. and subsidiaries as of
September 27, 1997 and September 28, 1996, and the
results of their operations and their cash flows for the years
ended September 27, 1997, September 28, 1996 and
September 30, 1995, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP/s/
Baltimore, Maryland
November 4, 1997
<TABLE>
<CAPTION>
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
( in 000's except per share data)
Year Ended Year Ended Year Ended
September 27, September 28, September 30,
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Restaurant sales $229,096 $206,903 $208,671
Costs and Expenses:
Cost of restaurant sales 139,520 126,309 125,242
Restaurant operating expenses 47,558 42,408 41,373
Franchise royalties 9,179 8,277 8,346
General and administrative 8,838 7,407 7,881
Depreciation and amortization 8,871 8,918 8,539
Loss on write down of impaired
long-lived assets - 5,513 -
---------------------------------------------------
213,966 198,832 191,381
---------------------------------------------------
Operating income 15,130 8,071 17,290
Interest expense (4,886) (5,048) (5,775)
Interest income 42 36 205
Other income, net 791 1,105 1,146
---------------------------------------------------
Income before income taxes 11,077 4,164 12,866
Provision for income taxes (4,733) (1,773) (4,451)
--------------------------------------------------
Net income 6,344 2,391 8,415
--------------------------------------------------
Earnings per common share
Net income per common share $0.89 $0.34 $1.18
--------------------------------------------------
Weighted average number of shares
outstanding - assuming full dilution 7,089 7,052 7,157
--------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<TABLE>
<CAPTION>
DAVCO RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(in 000's except per share data)
September 27, September 28,
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 640 $ 1,948
Receivables 580 652
Inventories 1,879 1,421
Prepaid expenses 1,321 1,377
Deferred tax asset 1,514 1,004
------------- ---------------
Total Current Assets 5,934 6,402
------------- ----------------
Property and equipment,
net of accumulated depreciation
of $11,945 and $8,378, respectively 58,074 49,521
-------------- ------------------
Leased properties,
net of accumulated amortization of
$11,704 and $8,044, respectively 34,355 37,918
------------- ------------------
Other Assets:
Franchise rights, net 5,015 3,551
Development rights, net 492 0
Goodwill, net 21,514 18,730
Deferred tax asset - 1,156
Other 1,050 280
--------------- -------------------
Total Other Assets 28,071 23,717
---------------- -------------------
Total Assets $ 126,434 $ 117,558
---------------- --------------------
Current Liabilities:
Accounts payable $ 6,808 $ 5,615
Accrued advertising and royalty fees 2,426 2,588
Accrued salaries and wages 3,420 2,732
Accrued expenses 10,200 7,997
Short-term borrowings 2,099 6,768
Current portion of long-term debt 3,674 3,055
Current portion of capital lease obligations 3,034 3,174
----------------- --------------------
Total Current Liabilities 31,661 31,929
Long-term debt, less current portion 17,487 11,699
Capital lease obligations, less current portion 25,374 28,404
Deferred tax liability 278 -
----------------- -------------------
Total Liabilities 74,800 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 and
132,107 shares, (1,320) (1,084)
respectively
Additional paid-in capital 31,101 31,101
Warrants outstanding 3,000 3,000
Retained earnings 18,846 12,502
------------------ -------------------
Total Stockholders' Equity 51,634 45,526
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 126,434 $ 117,558
------------------- -------------------
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<TABLE>
<CAPTION>
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(in 000's)
Additional Total
Common Treasury Paid-In Warrants Retained Stockholders'
Stock Stock Capital Outstanding Earnings Equity
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 24, 1994 $7 - $31,101 $3,000 $1,696 $35,804
Net Income - - - - 8,415 8,415
--------------------------------------------------------------------------------
BALANCE, September 30, 1995 $7 - $31,101 $3,000 $10,111 $44,219
Purchase of Treasury Stock
(132,107 shares) - (1,084) - - - (1,084)
Net Income - - - - 2,391 2,391
--------------------------------------------------------------------------------
BALANCE, September 28, 1996 $7 ($1,084) $31,101 $3,000 $12,502 $45,526
Purchase of Treasury Stock
(26,700 shares) (236) (236)
Net Income - - - 6,344 6,344
BALANCE, September 27, 1997 $7 ($1,320) $31,101 $3,000 $18,846 $51,634
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DAVCO RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
Year Ended Year Ended Year Ended
September 27, September 28, September 30,
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,344 $2,391 $8,415
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Loss on write down of impaired long-lived assets - 5,513 -
Depreciation and amortization 8,871 8,918 8,539
Net loss (gain) on disposition of assets 156 (356) (420)
Deferred tax provision (benefit) 924 (2,278) (1,204)
Amortization of debt discount - - 36
Net change in operating assets and liabilities
Decrease (increase) in receivables 72 (80) (240)
Decrease (increase) in refundable income taxes - 1,175 (806)
Increase in inventories (458) (114) (30)
Decrease (increase) in prepaid expenses 56 216 (520)
Increase (decrease) in accounts payable
and accrued expenses 3,396 (33) 771
(Decrease) increase in accrued advertising
and royalty fees (162) 358 33
Increase (decrease) in accrued salaries and wages 688 149 (9)
Increase (decrease) in income taxes payable - 521 (626)
-----------------------------------------------------------------------------------------------------
Net Cash Flows Provided By Operating Activities 19,887 16,380 13,939
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in other assets (812) 71 (100)
Property and equipment acquired and constructed (10,229) (14,243) (13,384)
Proceeds from disposition of assets - 528 500
Payment for acquisition of company,
net of cash acquired (8,486) - -
Proceeds from redemption of restricted asset - - 1,236
----------------------------------------------------------------------------------------------------
Net Cash Flows Used In Investing Activities (19,527) (13,644) (11,748)
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (3,170) (3,094) (2,608)
Purchase of treasury stock (236) (1,084) -
Repayments of long-term obligations (2,843) (3,709) (2,317)
Proceeds from long-term debt 9,250 - -
Short-term borrowings (4,669) 6,768 -
----------------------------------------------------------------------------------------------------
Net Cash Flows Used In Financing Activities (1,668) (1,119) (4,925)
----------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,308) 1,617 (2,734)
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, beginning of period 1,948 331 3,065
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $640 $1,948 $331
- -----------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:
Cash paid for interest $4,959 $5,419 $5,885
- -----------------------------------------------------------------------------------------------------
Cash paid for income taxes, net of refunds $3,571 $2,358 $7,433
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
As of September 27, 1997, DavCo Restaurants, Inc., a
Delaware corporation (the "Company"), operated 263
restaurants of which 229 are "Wendy's Old Fashioned
Hamburgers" restaurants, making it the world's largest
franchisee of Wendy's International, Inc. ("Wendy's"), and
34 Friendly's restaurants. The Company also manages
under contract 14 other Friendly's restaurants. The
Company maintains exclusive Wendy's franchise territories
in metropolitan Baltimore and Washington, D.C., the
eastern shore of Maryland and portions of northern Virginia
(the "Mid-Atlantic"), where it operates 138 Wendy's
restaurants. The Company also maintains exclusive rights
to develop and operate Friendly's restaurants in Maryland,
northern Virginia, Delaware and Washington, D.C. where it
operates 34 Friendly's restaurants (see Note 12). The
Company also operates 53 Wendy's restaurants in
metropolitan St. Louis and central Illinois (the "Midwest")
and 38 Wendy's restaurants in the metropolitan Nashville,
Tennessee area (the"Southern Market"). The Company
does not maintain exclusive franchise territories in the
Midwest or Southern Market.
The Company was incorporated in December 1987, at
which time certain members of management
("Management"), Citicorp Venture Capital ("CVC") and
one of its affiliates sponsored a leveraged buy out pursuant
to which Management acquired 100% of the Company's
outstanding common equity of the Company, then
consisting only of the Mid-Atlantic restaurants; and CVC
acquired convertible preferred stock representing 70% of
the Company's common equity on a fully diluted basis.
In January 1991, the Company acquired most of the St.
Louis restaurants and certain other Wendy's restaurants in
central Illinois. This acquisition, which was accounted for as
a purchase, was effected through MDF, Inc. ("MDF"), a
wholly-owned subsidiary of the Company.
In February 1993, the Company consummated a
recapitalization (the "Recapitalization") to effectuate certain
agreements executed in May 1992 (the "1992 Settlement")
to settle outstanding litigation between the Company, CVC
and certain affiliates of CVC. Pursuant to the
Recapitalization, the Company (I) repurchased all of its
common equity from Management; (II) made payments to
Management for covenants not to compete with the
Company in the amount of $6,186,000; (III) repaid its
indebtedness to a CVC affiliate, which was incurred to
finance the leveraged buy out; and (IV) issued 500,000
shares of common stock to Management at the initial public
offering price of $12, which was recorded by the Company
as management stock expense of $6,000,000 at the date of
issuance.
As a result of the Recapitalization, CVC and its affiliates
acquired substantially all of the outstanding common stock
of the Company. Accordingly, the Recapitalization was
accounted for using the push-down method of accounting
whereby the purchase price was allocated to the assets and
liabilities of the Company based on their estimated fair
values at the date of the Recapitalization.
In August 1993, the Company consummated an initial
public offering (the "Initial Public Offering") of 2,600,000
shares of its common stock, par value $.001. The net
proceeds from the Initial Public Offering, which aggregated
approximately $27,600,000, along with certain Company
cash, were used to repay the $15,000,000 in senior debt and
$10,000,000 in subordinated debt, redeem the Class A
preferred stock, and repay deferred royalties.
In September 1994, the Company acquired most of the
Wendy's restaurants in the metropolitan Nashville,
Tennessee area. The acquisition, which was accounted for
as a purchase, was effected through Southern Hospitality
Corporation, a wholly owned subsidiary of the Company.
2. BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned
subsidiaries and second-tier subsidiaries. All significant
intercompany balances and transactions have been
eliminated in consolidation.
Fiscal Year
The Company maintains its accounts on a 52/53 week fiscal
year ending the last Saturday of September. The fiscal years
ended September 27, 1997 (fiscal 1997) and September 28,
1996 (fiscal 1996) each contained 52 weeks, while the fiscal
year ended September 30, 1995 (fiscal 1995) contained 53
weeks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to
be cash equivalents.
Inventories
Inventories consist primarily of food and supplies and are
stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost. Normal repairs
and maintenance costs are expensed as incurred.
Depreciation is being recorded using the straight-line
method over the estimated
useful lives of the property and equipment, as follows:
<TABLE>
<CAPTION>
Useful Lives
- ----------------------------------------------------------
<S> <C>
Buildings 25 years
Building equipment 10-20 years
Furniture, fixtures and equipment 5-10 years
</TABLE>
Leased Properties
Leased properties consist of capitalized building and
leasehold improvements. Amortization is recorded using the
straight-line method over the lives of the leases.
Franchise Rights
The franchise agreements with Wendy's International, Inc.
and Friendly's Restaurant Franchise, Inc. require the
Company to pay a fee for technical assistance to be
provided over the term of the franchise agreement for each
unit opened or acquired. Additional franchise rights were
acquired in the Friendly's transaction, (see Note 12) in the
amount of $860,000. Amortization is recorded on the
straight-line method over the terms of the franchise
agreements. The franchise agreements generally provide for
a term of 20 years and renewal options upon expiration.
Accumulated amortization as of September 27, 1997 and
September 28, 1996, was approximately $1,417,000 and
$1,053,000, respectively (see Note 5).
Development Rights
The franchise agreements with Friendly's Restaurant
Franchise, Inc. includes specific development rights in the
Mid-Atlantic market (see Note 12). Development rights are
being amortized over the ten-year term of the development
agreement.
Goodwill
The Company has classified the cost in excess of fair value
of the net assets (including tax attributes) of companies or
assets acquired in purchase transactions as goodwill.
Goodwill is being amortized on a straight-line method over
30 years. Additional goodwill of $3,496,000 was recorded
as part of the Friendly's transaction (see Note 12).
Accumulated amortization was approximately $2,766,000
and $2,054,000 as of September 27, 1997 and September
28, 1996, respectively.
Income Taxes
Deferred income taxes are computed using the liability
method, which provides that deferred tax assets and
liabilities are recorded based on the differences between the
tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes (see Note 8).
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.
Preopening Costs
Direct costs incurred in connection with opening new
restaurants are deferred and amortized on a straight-line
basis over a 12-month period following the opening of a
new restaurant.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and
expenses in the financial statements and in the disclosure of
contingent assets and liabilities. While actual results could
differ from those estimates, management believes that actual
results will not be materially different from amounts
provided in the accompanying consolidated financial
statements.
Prior Year Reclassifications
Certain reclassifications have been made to the prior years'
balances in order to conform to fiscal 1997 presentation.
New Accounting Prouncements
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share"
(SFAS No. 128), which establishes new standards for
computing and presenting earnings per share. SFAS No.
128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods.
Adoption of this pronouncement will require the restatement of
all prior period earnings per share data presented.
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS No. 130), which establishes standards for
reporting and display of comprehensive income and its
components in a full set of general purpose financial
statements. SFAS No.130 is effective for fiscal years
beginning after December 15, 1997. Management has not
yet determined whether the implementation of SFAS No.
130 will have any impact on the Company's financial
reporting.
In June 1997, the Financial Accounting Standards Board
issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" (SFAS No.131),
which establishes a new approach for determining segments
within a company and reporting information on those
segments. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. Management has not
yet determined whether the implementation of SFAS No.
131 will have any impact on the Company's current method
of disclosing business segment information.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
Property and equipment consisted of the following
(amounts in 000's):
September 27, September 28,
1997 1996
--------------- ---------------
<S> <C> <C>
Buildings $ 20,264 $ 14,708
Land 13,589 10,339
Furniture, fixtures and equipment 33,511 26,992
Construction in progress 2,655 5,860
--------------- ---------------
70,019 57,899
Less: Accumulated depreciation (11,945) (8,378)
---------------- ---------------
Property and equipment, net $ 58,074 $ 49,521
</TABLE>
4. ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS
TO BE DISPOSED OF:
During the fourth quarter of fiscal 1996, the Company
elected early adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed
Of "(SFAS No. 121). SFAS No. 121 requires impairment
losses to be recorded on long-lived assets used in operations
when events or circumstances indicate that the assets may
be impaired based upon the undiscounted cash flows
estimated to be generated by those assets. The Company
determined that due to recent operating and cash flow
changes and due to the overall decline in the Quick Service
Restaurant market, that indicators were present.
Accordingly, the Company evaluated the ongoing value of
the property and equipment (and intangibles) associated
with its restaurants. Based on this evaluation, the Company
determined that assets with a net book value of $89,900,000
were impaired and reduced their carrying value by
$5,500,000 to their estimated fair value. Fair value was
determined based on the most appropriate of the following-
the market value of restaurants in an arms length
transaction, the recoverability of rents (and other assets)
through a sublease arrangement or the estimated future cash
flows to be generated by the restaurants.
5. FRANCHISE RIGHTS:
The Wendy's franchise agreements for Washington, D.C.,
Baltimore, Maryland, and the surrounding areas contain
certain requirements regarding the number of units to be
opened in the future. Should the Company fail to comply
with the required development schedule or with the
requirements of the agreements for restaurants within areas
covered by the development agreements, Wendy's
International, Inc. could terminate the exclusive nature of
the Company's franchise. The franchise agreements also
provide Wendy's International, Inc. significant rights
regarding the business and operations of the Company and
impose restrictions regarding the ownership of the
Company's capital stock. Franchise agreements with
Friendly's Restaurant Franchise, Inc. provide the Company
with an exclusive Mid-Atlantic territory as long as it is
opening new Friendly's restaurants in accordance with the
requirements of the development agreement between the
Company's subsidiary, FriendCo, and Friendly's Restaurant
Franchise, Inc.
The Company is also required to pay royalty and advertising
fees on both Wendy's and Friendly's restaurants sales as
defined by the applicable franchise agreement. Royalties
under both agreements are 4% of annual restaurant sales.
The advertising fee for Wendy's is 4% of restaurant sales
which is a combination of 2.5% to Wendy's National
Advertising Program, Inc. for national advertising, with the
remainder for local advertising. The advertising fee for
Friendly's is 3% of restaurant sales, contributed to an
advertising fund managed by Friendly's Restaurant
Franchise, Inc. The fund will be used to enhance
recognition of the trademark products and patronage of
Friendly's Restaurants and Friendly's proprietary branded
products. As of September 27, 1997, the fund has not been
established. Until such time the fund is established the
Company may spend up to 1/2% of Friendly's restaurant
sales on local advertising.
6. RETIREMENT PLANS:
Substantially all full-time employees of the Company are
eligible to participate in a defined contribution 401(k) plan.
Employees may make contributions to the plan through
salary deferral. The Company makes annual contributions to
the plan based on a percentage of the employee's
contribution, up to certain limitations. The Company's
contributions were approximately $109,000, $107,000 and
$94,000 for the years ended September 27, 1997,
September 28, 1996 and September 30, 1995, respectively.
7. COST OF RESTAURANT SALES AND
RESTAURANT OPERATING EXPENSES:
<TABLE>
<CAPTION>
Cost of restaurant sales and restaurant operating expenses
consisted of the following (amounts in 000's):
Year Ended Year Ended Year Ended
September 27, September 28, September 30,
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Cost of restaurant sales -
Food and supplies $ 76,683 $ 69,603 $ 68,856
Labor 62,837 56,706 56,386
-------------- -------------- ---------------
$ 139,520 $ 126,309 $ 125,242
--------------- -------------- ---------------
Restaurant operating expenses -
Advertising $ 9,863 $ 8,869 $ 9,448
Rent 8,903 7,675 7,261
Utilities 8,299 7,915 7,620
Maintenance and repairs 6,224 5,891 5,100
Other 14,269 12,058 11,944
---------------- -------------- ---------------
$ 47,558 $ 42,408 $ 41,373
----------------- -------------- ----------------
</TABLE>
8. INCOME TAXES:
<TABLE>
<CAPTION>
The provision (benefit) for income taxes was comprised of
the following (amounts in 000's):
Year Ended Year Ended Year Ended
September 27, September 28, September 30,
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Federal:
Current $ 3,057 $ 2,927 $ 4,621
Deferred 601 (1,457) (1,023)
State:
Current 752 603 1,034
Deferred 323 (300) (181)
__________________________________________________
Provision for income taxes $ 4,733 $ 1,773 $ 4,451
==================================================
</TABLE>
<TABLE>
<CAPTION>
The difference between the recorded income tax provision
and the "expected" tax provision based on the statutory
federal income tax rate is as follows (amounts in 000's):
Year Ended Year Ended Year Ended
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Computed federal tax provision (benefit) at statutory rate $ 3,767 $ 1,416 $ 4,374
State income taxes (net of federal income tax effect) 775 329 563
Nondeductible expenses 24 15 -
Targeted jobs tax credit (90) (10) (382)
Goodwill amortization 283 238 238
Reevaluation of deferred tax liability (54) (200) (383)
Other, net 28 (15) 41
____________________________________________
Provision for income taxes $ 4,733 $ 1,773 $ 4,451
============================================
</TABLE>
As of September 27, 1997 and September 28, 1996, the
Company had federal net operating loss carry- forwards for
income tax purposes of approximately $1,804,000 and
$3,023,000, respectively, to offset against future taxable
income. Approximately $1,200,000 of net operating loss
carryforwards are utilizable per year. If not utilized, these
carryforwards will expire through 2003. In addition, the
Company had state net operating loss carryforwards of
approximately $765,000 as of September 27, 1997.
Total deferred tax liabilities and deferred tax assets as of
September 27, 1997 and September 28, 1996, and the
sources of the differences between financial accounting and
tax bases of the Company's assets and liabilities which give
rise to the deferred tax liabilities and deferred tax assets and
the tax effects of each, are as follows (amounts in 000's):
<TABLE>
<CAPTION>
September 27, September 28,
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ 2,217 $ 1,958
Leased properties 638 546
Franchise rights 548 628
Other 21 141
----------- ------------
Total $ 3,424 $ 3,273
=========== ============
Deferred tax assets:
Accrued expenses and reserves 1,538 1,169
Covenants not to compete 2,237 2,396
Operating loss carryforwards and credits 226 1,343
Capitalized development costs 333 278
Other 326 247
----------- ------------
Total $ 4,660 $ 5,433
=========== ============
</TABLE>
9. LONG-TERM DEBT AND FINANCING
ARRANGEMENTS:
<TABLE>
<CAPTION>
Long-term debt consisted of the following (amounts in 000's):
Sept. 27, Sept. 28,
1997 1996
--------- ---------
<S> <C> <C>
Installment promissory notes, interest ranging from 1% to 2%
over the bank's prime rate, due in monthly principal
installments plus interest through September 1999; secured
by restaurant equipment, furniture and fixtures, leasehold
improvements and inventory $ 295 $ 714
SHC Term Loan from a bank (as described below) 11,770 14,040
FriendCo Term Loan from a bank (as described below) 9,096 -
-------- --------
21,161 14,754
Less: Current portion (3,674) (3,055)
-------- --------
Long-term debt $ 17,487 $ 11,699
======== ========
</TABLE>
<TABLE>
<CAPTION>
Aggregate maturities of the Company's long-term debt as of
September 27, 1997, are as follows (amounts in 000's):
<S> <C> <C>
Maturing fiscal year
1998 $ 3,674
1999 10,242
2000 925
2001 925
2002 5,395
--------
$ 21,161
========
</TABLE>
Financing Arrangements
In September 1994, the Company borrowed $18,250,000
(the "SHC Term Loan") from a bank. The proceeds from
the SHC Term Loan were used to consummate the
acquisition of Southern Hospitality Corporation. The SHC
Term Loan is secured by the common stock of Southern
Hospitality Corporation. The SHC Term Loan provides for
fixed principal payments of approximately $152,000 per
month plus interest beginning in November 1994 and ending
with a balloon payment in September 1999. In addition,
each year the agreement requires the Company to repay
against the Term Loan, a certain percentage of any excess
cash flow, as defined, within 120 days of its fiscal year end.
Beginning with the first such additional payment, the
Company's monthly principal payment drops by 10% of the
excess cash flow payment. After that period of time, the
monthly payment reverts back to $152,000 unless there has
been an additional excess cash flow payment. The interest
rate is either (1) a floating rate per annum equal to 0.25% in
excess of the higher of the prime rate or the average rate for
90 day commercial paper or (2) a fixed rate equal to 1.25%
per annum in excess of an adjusted LIBOR rate in effect for
periods up to 180 days. In August 1995, the Company
fixed the interest rate at 7.47% on approximately half of the
SHC Term Loan principal amount, for the duration of the
loan, through an interest rate swap arrangement with the
bank. In January 1996, the Company fixed the interest rate
at 6.75% on the remainder of the SHC Term Loan principal
amount, for the duration of the loan, through an additional
interest rate swap arrangement with the bank. As of
September 27, 1997, the estimated fair market value of
interest rate swap arrangements was approximately $14,000
based on a dealer quote.
During fiscal 1996, the Company established a $13,000,000
Revolving Credit Facility. The Revolving Credit Facility
includes a sub-limit for letters of credit up to $7,000,000.
In July 1997, the Company modified its bank credit
facilities. The Revolving Credit Facility was increased to
$18,000,000, with the sub-limit for letters of credit
increased to $8,000,000.
The Company's funding needs, up to $5,000,000, may be
automatically advanced into its commercial checking
account. Advances under the automated system bear
interest at a daily adjusting rate equal to 1.5% per annum in
excess of the one month LIBOR rate.
The interest rate on the Revolving Line of Credit is either
(1) a floating rate per annum equal to the bank's prime rate
or the floating rate per annum equal to an adjusted LIBOR
rate for a 30 day interest period, determined and adjusted
daily, plus up to 155 basis points per annum or (2) a fixed
rate equal to an adjusted LIBOR rate for the period
corresponding to the term of the interest period selected,
plus up to 155 basis points per annum. The weighted
average balance outstanding under the Revolving Line of
Credit for the years ended September 27, 1997 and
September 28, 1996 was $5,048,000 and $4,353,000,
respectively. The weighted average interest rate under the
Revolving Line of Credit for the year ended September 27,
1997 and September 28, 1996 was 6.99% and 7.03%,
respectively. The balance outstanding at September 27,
1997 and September 28, 1996 was $2,099,000 and
$6,768,000, respectively.
In July 1997, in conjunction with the modification of its
Revolving Credit Facility, the Company borrowed
$9,250,000 (the "FriendCo Term Loan") from a bank. The
proceeds from this loan were used to consummate the
acquisition of assets and operating rights of 34 Friendly's
Restaurants (see Note 12). The transaction was accounted
for under the purchase method of accounting. The loan is
secured by the capital stock of FriendCo Restaurants, Inc.
and is cross-guaranteed by DavCo Restaurants, Inc. and
Southern Hospitality Corporation. The FriendCo Term
Loan provides for fixed principal payments of approximately
$77,000 per month plus interest beginning in July 1997 and
ending with a balloon payment in July 2002. In addition,
each year the agreement requires the Company to repay
against the FriendCo Term Loan, a certain percentage of
any excess cash flow, as defined, within 120 days of its
fiscal year end. Beginning with the first such additional
payment, the Company's monthly principal payment for the
following 12 months would drop by 10% of the excess cash
flow payment. After that period of time, the monthly
payment reverts back to $77,000, unless there has been an
additional excess cash flow payment. The FriendCo Term
Loan bears interest at either (1) the floating rate per annum
equal to the bank's prime rate or the floating rate per annum
equal to an adjusted LIBOR rate for a 30 day interest
period, determined and adjusted daily, plus up to 150 basis
points per annum or (2) a fixed rate equal to an adjusted
LIBOR rate for the period corresponding to the term of the
interest period selected, plus up to 150 basis points per
annum. As of September 27, 1997, the FriendCo Term
Loan rate was 7.16%.
The terms of the financing arrangements contain, among
other provisions, certain covenants for maintaining defined
levels of tangible net worth and various financial ratios,
including cash flow coverage and total liabilities to tangible
net worth. As of September 27, 1997, the Company was in
compliance with all applicable covenants.
10. LEASES:
The Company leases a substantial portion of the land and
buildings used in the operation of its restaurants. These
leases generally provide for a noncancellable term of 20
years and provide for additional renewal terms at the
Company's option. Certain leases contain provisions for
percentage rentals on sales above specified minimums.
Expenses incurred under these provisions aggregated
approximately $690,000, $579,000 and $764,000 for the
years ended September 27, 1997, September 28, 1996, and
September 30, 1995, respectively.
<TABLE>
<CAPTION>
As of September 27, 1997, future minimum lease payments related to leases
were as follows (amounts in 000's):
Capital Operating
Fiscal Year Leases Leases
--------------- -------- ----------
<S> <C> <C> <C>
1998 $ 6,227 $ 9,151
1999 5,614 8,830
2000 5,348 8,849
2001 5,103 8,834
2002 4,853 8,638
2003 and thereafter 20,016 58,514
-------- -------
$ 47,161 $102,816
-------- -------
Less: Amount representing
interest (18,753)
--------
Present value of future
minimum lease payments $ 28,408
========
</TABLE>
Rent expense under operating leases, including percentage
rentals based on sales, was approximately $9,380,000,
$8,313,000 and $7,895,000 for the years ended September
27, 1997, September 28, 1996 and September 30, 1995,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is party to several 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
At September 27, 1997, the Company was contingently
liable for outstanding letters of credit relating to liability
insurance and Wendy's International, Inc. current royalty
requirements, aggregating approximately $4,670,000.
Other
During fiscal year 1998, the Company will be required to
pledge additional collateral in the amount of approximately
$600,000 in connection with the Company's worker
compensation insurance policy.
12. ACQUISITION OF FRIENDLY'S FRANCHISE RIGHTS:
DavCo Restaurants, Inc.'s wholly owned subsidiary
FriendCo Restaurants, Inc. ("FriendCo") entered into
agreements with Friendly's Ice Cream Corporation and
Friendly's Restaurants Franchise, Inc. signed
July 11, 1997, effective July 14, 1997. The agreements set
forth the terms pursuant to which FriendCo purchased
certain assets and rights to 34 existing restaurants, and will
manage under contract with an option to purchase, 14 other
Friendly's locations and have exclusive rights to develop
and operate Friendly's Restaurants in Maryland, northern
Virginia, Delaware and the District of Columbia. The
purchase was accounted for under the purchase method of
accounting whereby the purchase price of $8,486,000 was
recorded as follows: $860,000 to initial franchise fees,
$2,700,000 to equipment and tenant improvements,
$3,496,000 to goodwill, $500,000 to franchise development
rights and $930,000 as payment of one-half of the initial
franchise fee for the first 74 restaurants to be developed.
The transaction was financed through a term loan for
$10,000,000, signed July 15, 1997.
13. BUSINESS SEGMENT INFORMATION:
Prior to July 14, 1997, the Company's operations consisted
primarily of Wendy's Restaurants. As of July 14, 1997, the
Company began operations of Friendly's Restaurants (see
Note 12) in addition to Wendy's Restaurants. For the fiscal
year ended September 27, 1997, the Friendly's operations
do not meet the criteria for a reportable segment under
Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business
Enterprise." The Company expects its Friendly's operations
to meet the reportable segment criteria in the future fiscal
year periods and therefore has determined the Friendly's
Restaurant operations and Wendy's Restaurant operations
are reportable business segments. Segment information is
shown only for fiscal year 1997, which includes operations
for Friendly's from July 14, 1997 to September 27, 1997(11
weeks). Prior to July 14, 1997, the Company's operations
consisted primarily of Wendy's operations, therefore
segment information is not applicable.
<TABLE>
<CAPTION>
Fiscal Year Ended
September 27, 1997
-------------
<S> <C>
Revenue:
Wendy's $ 222,141
Friendly's 6,955
-------------
Total $ 229,096
=============
Operating Income:
Wendy's $ 15,165
Friendly's (35)
-------------
Total $ 15,130
=============
Total Assets:
Wendy's $ 117,221
Friendly's 9,213
-----------
Total $ 126,434
===========
Depreciation & Amortization:
Wendy's $ 8,782
Friendly's 89
-----------
Total $ 8,871
===========
Capital Expenditures:
Wendy's $ 10,276
Friendly's 8,439
-----------
Total $ 18,715
===========
</TABLE>
There were no significant intersegment sales or transfers
during the period. Operating income or loss by business
segment excludes interest income and expense and net
unallocated corporate expenses which decreased income by
$4,053,000 in fiscal year 1997. Allocated corporate
expenses are applied to each segment based on actual
expenses.
14. CAPITAL STOCK AND WARRANTS:
Effective with the Initial Public Offering, the Company's
authorized capital stock consisted of 8,200,000 shares of
voting common stock and 3,200,000 shares of nonvoting
common stock . As of September 27, 1997, there were
6,587,628 shares of voting common stock outstanding and
no shares of nonvoting common stock outstanding.
In connection with the Recapitalization, warrants to
purchase 441,026 shares of common stock, at $.01 each,
were issued and recorded at their estimated fair value of
$3,000,000 at the date of issuance. These warrants expire
February 10, 2003.
Effective May 1, 1996, the Compay adopted a stock
repurchase plan where up to 1,000,000 shares of the
Company's voting common stock can be purchased,
depending on price and market conditions. As of
September 27, 1997, the Company had purchased 158,807
shares at an aggregate cost of $1,319,505.
15. INCENTIVE OPTION PLAN:
The Company adopted an Incentive Plan (the "Plan"). The
Plan generally provides for the granting of stock, stock
options, stock appreciation rights, restricted shares or any
combination of the foregoing to the eligible participants, as
defined. The exercise price of an option granted under the
Plan may not be less than the fair market value of the
underlying shares of common stock on the date of grant and
the options expire at the earlier of termination of
employment or ten years from the date of grant.
As of September 27, 1997, options for 697,118 shares had
been granted under the Plan at exercise prices ranging from
$6.80 - $16.13 per share and options for 687,118 shares
were exercisable at September 27, 1997.
The Company has computed for pro forma disclosure
purposes the value of all compensatory options granted
during fiscal year 1995, 1996 and 1997, using the Black-Scholes
option pricing model as prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" (SFAS No. 123).
Assumptions used for the pricing model include a range of
5.7% - 5.9% for the risk-free interest rate, expected lives of
1-3 years, expected dividend yield of 0% and expected
volatility of 35%. Options were assumed to be exercised
upon vesting for the purposes of this valuation.
Adjustments are made for options forfeited prior to vesting.
Had compensation costs for compensatory options been
determined consistent with SFAS No. 123, the Company's
pro forma net income would have been $6,266,000,
$2,381,000 and $8,415,000 in fiscal year 1997, 1996 and
1995, respectively. Pro forma earnings per share would
have been $.88, $.34 and $1.18 in fiscal year 1997, 1996
and 1995, respectively.
The following table summarizes the stock option activity for
the years ended September 30, 1995, September 28, 1996
and September 27, 1997:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
---------- ---------------
<S> <C> <C>
Options outstanding as of
September 24, 1994 595,618 $6.80 - $16.13
Granted 5,000 $13.81
Exercised/Canceled (5,000) $16.13
--------- --------------
Options outstanding as of
September 30, 1995 595,618 $6.80 - $16.13
Granted 48,000 $8.50
Exercised/Canceled (10,000) $8.50 - $16.13
--------- --------------
Options outstanding as of
September 28, 1996 633,618 $6.80 - $16.13
Granted 53,500 $9.88
Exercised/Canceled - -
--------- --------------
Options outstanding as of
September 27, 1997 687,118 $6.80 - $16.13
--------- --------------
</TABLE>
16. SUBSEQUENT EVENTS:
DavCo Restaurants, Inc. executed a definitive merger
agreement with DavCo Acquisition Holding Inc., for a
merger transaction in which DavCo Acquisition Holding
Inc. would acquire all of DavCo's issued and outstanding
shares (other than shares held by DavCo Acquisition
Holding Inc.) for $20 cash per share, following unanimous
approval of the proposed transaction by the Board of
Directors of DavCo (after a vote in which the interested
directors abstained from voting).
As previously disclosed, DavCo Acquisition Holding Inc. is
owned by an investor group that is headed by Ronald D.
Kirstien, the Company's President and Chief Executive
Officer, and Harvey Rothstein, Executive Vice President of
the Company, and includes the Company's principal
stockholder, Citicorp Venture Capital, Ltd., which currently
holds approximately 48% of the Company's outstanding
shares, and certain affiliates of Kirstien, Rothstein and CVC.
The terms of the merger agreement require approval by a
majority of the Company's stockholders, including approval
by a majority of stockholders unaffiliated with the investor
group. In addition, the merger is subject to certain
conditions, including a limitation on the number of
dissenting shareholders, regulatory approvals and the receipt
of necessary financing. The investor group has obtained a
commitment from Global Alliance Finance Company,
L.L.C., a wholly-owned subsidiary of Deutsche Bank North
America, to provide up to $150 million of debt financing to
complete the merger.
In September 1997, the Company entered into an agreement
to sell operations of 46 Midwestern Wendy's restaurants to
Western & Southern Food Service, L.L.C. ("W&S") and to
sublease the real estate and improvements held by the
Company under lease for these restaurants. The agreement
with W&S is subject to, among other conditions, the
approval by Wendy's of W&S as a Wendy's franchisee, the
receipt of financing by W&S and the consent of certain
landlords. The Compay would, under the terms of this
agreement, remain primarily liable as lessee of the leased
real estate and is responsible for the closing costs and
disposing of six under performing restaurants.
ITEM 9: CHANGE IN AND DISAGREEMENT WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
The directors and executive officers of the Company and
their respective ages are as follows:
Name Age Position
- ------------ ---- -------------------------
Ronald D. Kirstien 52 Chairman of the Board, Chief
Executive Officer and President
Harvey Rothstein 54 Senior Executive Vice President of
Real Estate and Development,Director
Joseph F. Cunnane, III 48 Executive Vice President of
Operations
Richard H. Borchers 42 Executive Vice President of Human
Resources
David J. Norman 38 General Counsel and Secretary
Danny E. Jones 42 Vice President of Operations
Charles C. McGuire, III 41 Vice President of Finance
Gino Marchetti 71 Director
James D. Farley 71 Director
Harold O. Rosser 49 Director
Byron L. Knief 55 Director
Barton J. Winokur 57 Director
Edward H. Chambers 60 Director
Charles Corpening 32 Director
Ronald D. Kirstien has served as Chairman of the Board and
Chief Executive Officer of the Company since 1987 and
President of DavCo since 1983. Mr. Kirstien joined DavCo
in 1979, and became Vice President of Operations. He
began his career in 1961 with Gino's Restaurants, Inc. and
transferred to the Rustler division of Gino's Restaurants,
Inc. in 1973.
Harvey Rothstein has served as Senior Executive Vice
President of Real Estate and Development since September
1997. From 1987 to September 1997, he was Executive
Vice President of Real Estate and Development of the
Company. Mr. Rothstein joined DavCo in 1979, and
became Vice President of Real Estate and Development in
1980. From 1978 to 1979, Mr. Rothstein was the manager
of franchise development for Arthur Treacher's, Inc.
Joseph F. Cunnane, III has served as Executive Vice
President of Operations since September 1997. From 1994
to September 1997 he was Senior Vice President of
Operations of the Company. Prior to that time, he served as
Vice President of Operations of DavCo from 1984 to 1994.
From 1980 to 1984, he served as Regional Manager for the
Company's Washington, D.C. region.
Richard H. Borchers has served as Executive Vice President
of Human Resources of since September 1997. From 1994
to September 1997, he was Senior Vice President of Human
Resources of the Company. Prior to that time, he served as
Vice President of Human Resources of DavCo from 1991
to 1994, Director of Human Resources of DavCo from
1988 to 1991 and as Regional Manager of DavCo's
Washington, D.C. northern region from 1985 to 1988.
David J. Norman has served as General Counsel and
Secretary since September 1997. Prior to joining the
Company, Mr. Norman was a principal in the firm of
Mason, Ketterman and Morgan from 1992 to 1997 and
represented the Company in corporate and litigation
matters.
Danny E. Jones has served as Vice President of Mid-Atlantic
since October 1997. From October 1994 to
September 1997, he was Division Vice President of the
Washington Operations. Prior to that time, he served as
Regional Manager of the Washington South region from
June 1989 to September 1993. Danny was promoted to
Area Manager in October 1983. He started with DavCo in
July 1981 as an Assistant Manager, then was promoted to
General Manager in January of 1982.
Charles C. McGuire, III , CPA, CFP has served as Vice
President of Finance since September 1996. Prior to that
time, he served as Controller since joining the Company in
February 1994. Prior to joining the Company, he served as
Director of Finance for Crop Genetics International from
1991 to 1994 and as Controller of E.I. Kane from 1987 to
1990. He began his career in the Baltimore office of Ernst
and Young in 1980 last serving in the position of audit
manager.
Gino Marchetti co-founded Gino's Restaurants, Inc., a
publicly-traded company which operated a
hamburger restaurant chain, in 1958 and served on the
board of directors of Gino's Restaurants, Inc.
until 1982. Mr. Marchetti served on the board of directors
of DavCo from December 1987 to August
1993. Mr. Marchetti was also a professional football player
with the former Baltimore Colts and
has been inducted into the National Football League's Hall
of Fame. Director since September 1993.
James D. Farley served as Vice Chairman and Director of
Citibank, N.A. and Citicorp from 1984 until his
retirement in 1991. Mr. Farley also currently serves as
director of Moore Corporation, Ltd., a provider of business
forms, and is the Chairman of the Hartford Foundation, a
non-profit organization. Director since February 1993.
Harold O. Rosser is currently a principal in the private
equity firm of Bruckman, Rosser, Sherrill & Co., Inc. Prior
to 1995, Mr. Rosser served as Managing Director of
Citicorp Venture Capital, Ltd. since 1994
and Vice President of Citicorp Venture Capital, Ltd. since
1987, after spending 12 years with Citicorp
and Citibank, N.A. in various corporate finance positions.
Mr. Rosser also currently serves as a
director of Jitney-Jungle Stores of America, Inc. and
Restaurant Associates Corp. Mr. Rosser
previously served as a member of the Company's board of
directors from 1991 to mid-1993. Director since September
1993.
Byron L. Knief currently serves as President of Citicorp
Capital Investors, Ltd. and Senior Vice President of
Citicorp Venture Capital, Ltd. Mr. Knief joined Citicorp in
1966 and has run a variety of Citicorp
businesses in the United States, Canada, Latin America and
Europe. Mr. Knief also currently
serves as a director of Fonorola, Inc., a Canadian telephone
company. Mr. Knief previously served as
a director of the Company from 1991 to mid-1993.
Director since September 1993.
Barton J. Winokur has been a partner of the law firm of
Dechert Price & Rhoads since 1972. He is the
chairman of the firm's Mergers and Acquisitions and
International Law Service Groups. His practice
encompasses a broad range of corporate matters, with
emphasis on international business law and
negotiations of mergers and acquisitions. Mr. Winokur also
currently serves as director of AmeriSource Corporation, a
drug wholesaling company, The Bibb Company, a
manufacturer of home textiles, CDI Corporation, a provider
of consulting and engineering, temporary help and
executive placement services, and Farm Fresh, Inc., a chain
of supermarket grocery stores. Director since September
1993.
Edward H. Chambers is Executive Vice President - Finance
and Administration for Wawa, Inc., an operator of
Mid-Atlantic convenience stores with sales in excess of
$900 million. From 1984 to 1988, Mr. Chambers served as
President and Chief Executive Officer of Northern Lites,
Ltd., a start-up venture operating quick service restaurants.
From 1976 to 1984, he served as Senior Vice President -
Finance and then President of the Kentucky Fried Chicken
Retail Operations of Heublien/RJR Nabisco. Mr. Chambers
presently serves as a member of the board of directors of
Nobel Education Dynamics, a publicly traded company, and
of Riddle Memorial Hospital. Director since 1995.
Charles Corpening joined and became an officer of Citicorp
Venture Capital, Ltd. in 1994. Prior to joining CVC, Mr.
Corpening was a Vice President with Roundtree Capital
Corporation, a private investment firm based in Stamford,
Connecticut. Additionally, he had worked with the
Rockefeller Group and the Mergers and Acquisitions Group
of Paine Webber, Inc. He received his A.B. from
Princeton University and his M.B.A. from Columbia
Business School. Mr. Corpening is also a director
of Kemet Corporation, Chase Brass and W.B. Bottling.
Director since 1995.
ITEM 11: EXECUTIVE COMPENSATION
The following Summary Compensation Table discloses, for
the fiscal years indicated, individual compensation
information for Mr. Kirstien and the four other most highly
compensated executive officers in fiscal 1997 who were
serving as executive officers at the end of the fiscal 1997.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
---------------------------------- -------------------------------
Restricted All Other
Fiscal Other Annual Stock Options Compensa-
Name and Principal Position Year Salary ($) Bonus ($) Compensation(1) Awards($) SARs(#) tion(2)
- ------------------------------- ------ ---------- --------- --------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald D. Kirstien 1997 353,252 300,000 2,519 0 7,500 6,117
President and Chief Executive Officer 1996 325,000 81,250 2,180 0 7,500 9,338
1995 260,842 195,000 4,127 0 0 7,368
Harvey Rothstein 1997 271,803 240,000 7,050 0 7,500 5,874
Sr. Executive Vice President of Real 1996 250,000 62,500 6,139 0 7,500 6,011
Estate and Development 1995 221,946 137,040 7,104 0 0 4,698
Joesph F. Cunnane, III 1997 142,998 51,482 2,135 0 3,000 1,289
Executive Vice President of 1996 133,650 12,696 2,059 0 3,000 1,265
Operations 1995 126,827 17,325 2,449 0 0 1,397
Richard H. Borchers 1997 119,273 46,000 3,995 0 3,000 883
Executive Vice President 1996 103,725 12,966 3,868 0 3,000 876
of Human Resources 1995 98,465 19,689 4,543 0 0 850
Danny E. Jones (3) 1997 98,648 27,692 1,092 0 2,000 783
Vice President of Operations
</TABLE>
(1) Other annual compensation consists of income for personal use of
Company-leased automobile (including gross-up for taxes).
(2) All other compensation consists of the Company's 401(k) contribution,
group term life insurance premiums paid by the Company and, for
Messrs, Kirstien, and Rothstein, medical costs and expenses.
(3) Danny E. Jones was promoted to Vice President of Operations in
October 1996. Prior years compensation was less than $100,000 during
the fiscal year.
Option Grants in Last Fiscal Year
The following table discloses, Mr. Kirstien and the other
named executives, information regarding stock options
and warrants granted during fiscal 1997.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation for
Individual Grants Option Term(1)
------------------------------------------------------ --------------------
Number of % of Total Options Exercise or
Options Granted to Employees Base Price Expiration
Name Granted in Fiscal Year (per share) Date 5% 10%
- --------------- --------- --------------------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Ronald D. Kirstien 7,500 26% $9.88 (2) $46,601 $118,096
Harvey Rothstein 7,500 26% $9.88 (2) $46,601 $118,096
Joesph F. Cunnane, III 3,000 10% $9.88 (2) $18,640 $47,239
Richard H. Borchers 3,000 10% $9.88 (2) $18,640 $47,239
Danny E. Jones 2,000 7% $9.88 (2) $12,427 $31,492
(1) Amounts reflect certain assumed rates of appreciation set forth in the
Securities and Exchange Commission's executive compensation disclosure
rules. Actual gains, if any, on stock option exercises depend on future
performance of the Common Stock and overall market conditions. Fair market
value per share on the date of grant was determined to be $9.88.
(2) Options granted under the 1997 Plan and indicated herein generally will
expire on the tenth anniversary of the date of grant. As of September 17, 1997
the Board of Directors voted unamiously to vest all outstanding options approved
previously by the shareholders. In the event that any named executive's employment
with the Company is terminated for any reason whatsoever, all unexercisable options
will expire and be permanently forfeited.
</TABLE>
Option Exercises and Fiscal Year End Values for the Fiscal
Year Ending September 28, 1997 (1)
<TABLE>
<CAPTION>
The following table shows information regarding the
exercise of stock options during fiscal 1997 by
Mr. Kirstien and the other named executives and
the number and value of any unexercised stock options
held by them as of September 27, 1997.
Value of Unexercised In-The-
Number of Unexercised Money Options/at FY-End
Options at FY-End (#) ($)(2)
-------------------------- -----------------------------
Shares Value
Acquired on Realized
Name Exercise(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------- ------------ -------- -------------------------- ------------------------------
<S> <C> <C> <C> <C>
Ronald D. Kirstien 0 0 345,769 / 0 3,815,152 / 0
Harvey Rothstein 0 0 199,274 / 0 1,225,339 / 0
Joesph F. Cunnane, III 0 0 11,000 / 0 61,548 / 0
Richard H. Borchers 0 0 11,000 / 0 61,548 / 0
Danny E. Jones 0 0 3,500 / 0 30,271 / 0
(1) The closing price of the Common Stock on September 26, 1997 was $17.94.
(2) Value equals fair market value as of September 26, 1997 less exercise price.
</TABLE>
Pension Plan
The Company does not currently maintain a pension plan
for its employees.
Compensation Committee Interlocks and Insider
Participation
The Compensation Committee of the Board of Directors
currently consists of Messrs. Kirstien, Rosser, Winokur,
Farley and Knief.
Report of Compensation Committee
This Report outlines the Company's management
compensation philosophy and reviews the compensation
decisions made in fiscal 1997 regarding Mr. Kirstien and the
other named executives.
Management Compensation Philosophy.
To advance the interests of its shareholders, the Company
has developed a management compensation system that
ensures that key members of management are compensated
at a level which is competitive for the quick-service
restaurant industry and commensurate with each such
member's responsibility. An annual review process has been
instituted to determine such member's annual performance
against pre-determined criteria.
Criteria Used For Making Compensation Decisions in Fiscal
1997.
This section describes the criteria used by the Company
regarding compensation decisions affecting Mr. Kirstien and
the other executives for fiscal 1997.
For fiscal 1997, the criteria used by the Company regarding
fiscal 1997 bonuses consisted of (I) the Company's
restaurant sales and earnings per share as compared to
budgeted amounts for these items, (II) meeting the schedule
for opening new restaurants set forth in the Company's
development agreement with Wendy's International, and
(III) performance of newly opened restaurants based on
certain criterion.
Base salary for other executive officers are determined on a
case-by-case basis by the Compensation Committee and
aim to compensate each such officer at a level which meets
industry standards and such officer's performance. Bonuses
for executives of the Company are based on certain
predetermined, quantitative performance criteria of the
Company. For fiscal 1997 , such criteria generally consisted
of (I) the Company's net sales as compared to prior year net
sales, (II) pre-tax income targets for the Company, (III)
cash flow targets for the Company, (IV) management
retention, (V) other operational factors depending on such
executive's primary area of responsibility and (VI) a
discretionary component based on a variety of intangible
factors (generally less than 5% of the total bonus).
The Board of Directors held six (6) meetings during the
fiscal year ended September 27, 1997. Each of the
Company's directors participated in 80% or more of the
meetings except Mr. Farley who participated in 60% of the
meetings and Mr. Corpening who participated in 40% of the
meetings. During fiscal 1997, each director of the Company
(other than Messrs. Kirstien, Rothstein, Rosser, Knief and
Corpening) received a stipend of $1,500 for each Board of
Directors meeting attended by such director. No additional
compensation was paid for committee participation. The
Board of Directors has established an Audit Committee, a
Compensation Committee and an Operating Committee.
The Audit Committee, which currently consists of Messrs.
Rosser, Chambers and Winokur, oversees actions taken by
the Company's independent auditors, recommends the
engagement of auditors and reviews the Company's audit
results. The Compensation Committee, which consists of
Messrs. Knief, Rosser, Farley, Winokur and Kirstien
approves the compensation of executives of the Company,
makes recommendations to the Board of Directors with
respect to standards for setting compensation levels and
administers the Company's incentive plans. The Operations
Committee, which consists of Messrs. Chambers,
Corpening, Kirstien and Marchetti, reviews quarterly
performance and operational goals with senior executives
and makes recommendations to the Board of Directors
concerning personnel matters and operating strategies.
Performance Graph
The following graph compares the cumulative total return
on $100 invested on August 9, 1993 (the first day of public
trading of the Common Stock) in the Common Stock of the
Company, the S&P 500 Index and the S&P Restaurants
Index. The return of the Standard & Poor's indices is
calculated assuming reinvestment of dividends during the
period presented. The Company has not paid any dividends.
The stock price performance shown on the graph below is
not necessarily indicative of future price performance.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN GRAPH APPEARS HERE
MEASUREMENT DATE DAVCO RESTAURANTS, INC. S&P 500 PEER GROUP
- ---------------- ----------------------- ------- ----------
<S> <C> <C> <C>
8/10/93 100 100 100
9/93 FYE 121 103 102
9/94 FYE 132 107 101
9/95 FYE 111 139 145
9/96 FYE 72 167 173
9/97 FYE 152 234 176
</TABLE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT
The table below sets forth certain information regarding
beneficial ownership of Common Stock as of November 28,
1997, by each person or entity known to the Company who
owns of record or beneficially five percent or more of the
Common Stock, by each named executive officer and
director nominee and all officers and director nominees as a
group. Unless otherwise indicated, the business address of
each person or entity listed below is 399 Park Avenue, New
York, New York 10043.
<TABLE>
<CAPTION>
Percentage of
Outstanding
Number of Shares Common Stock (1)
Name Common Stock (*denotes less than 1%)
- ------------------------------------- ------------ -----------------------
<S> <C> <C>
Citicorp Venture Capital, Ltd. (2).......... 3,133,149 47.6%
Ronald D. Kirstien (3)(4)................... 595,769 8.6
Harvey Rothstein (3)(4)(5).................. 449,274 6.6
James D. Farley (6)......................... 48,122 *
Byron L. Knief (7).......................... 45,742 *
Harold O. Rosser (6)(8)..................... 80,829 1.2
Gino Marchetti (6)(9)....................... 13,600 *
Barton J. Winokur (6)(10)................... 24,000 *
Edward H. Chambers (6)(11).................. 11,100 *
Charles Corpening(12)....................... 0 *
Joseph F. Cunnane, III (3)(6)............... 12,600 *
Richard H. Borchers (3)(9).................. 11,900 *
David J. Norman (3)(6)...................... 2,200 *
Danny E. Jones (3)(6)....................... 3,500 *
Charles C. McGuire, III (3)(6).............. 4,000 *
All officers and directors as a group
(14 Persons) (4)(6) ..................... 1,302,636 19.8
World Equity Partners, L.P. (13) ........... 441,026 6.7
Brinson Partners, Inc. (14) ................ 573,100 8.7
</TABLE>
(1) In determining the percent of shares beneficially
owned, shares issuable pursuant to options and warrants
exercisable. On September 17, 1997 the Board of
Directors voted unamiously to vest all outstanding options
approved previously by the shareholders.
(2) Citicorp Venture Capital, Ltd. ("CVC") is a
subsidiary of Citibank, N.A., a national bank. The shares
listed in this table do not include 119,724 shares of Common
Stock owned by certain affiliates of CVC.
(3) Business address is 1657 Crofton Boulevard,
Crofton, Maryland 21114.
(4) Includes all stock options exercisable to acquire
345,769 and 199,274 shares of Common Stock by Messrs.
Kirstien and Rothstein, respectively.
(5) Includes approximately 83,000 shares held in trust.
(6) Includes all stock options exercisable to acquire
42,281 shares for Messrs. Farley, 4,000 shares for Messrs.
Rosser, 12,000 shares for Messrs. Marchetti, 24,000 shares
for Messrs. Winokur, 9,5000 shares, for Chambers, 11,000
shares for both Messrs. Cunnane and Borchers, 1,500 shares
for Messrs. Norman, 3,500 shares for Messrs.
Jones, 4,000 shares for Messrs. McGuire.
(7) Mr. Knief serves as Senior Vice President, of CVC.
(8) Business address is Bruckman, Rosser, Sherrill &
Co., Inc., 425 Park Avenue, 7th Floor, New York, New
York 10022.
(9) Business address is 324 Devon Way, West Chester,
Pennsylvania 19380.
(10) Business address is 4000 Bell Atlantic Tower, 1717
Arch Street, Philadelphia, Pennsylvania 19103.
(11) Business address is Wawa, Inc., 260 Baltimore Pike,
Wawa, Pennsylvania 19063.
(12) Mr. Corpening serves as an officer of CVC.
(13) World Equity Partners, L.P., a limited partnership of
which another affiliate of CVC is the investment advisor,
received a warrant which is exercisable for 441,026 shares
of Common Stock in connection with the recapitalization
described in "Certain Relationships and Transactions" below.
All warrants are currently exercisable.
(14) Business address is 209 South La Salle St., Chicago,
IL 60604.
ITEM 13: CERTAIN RELATIONSHIPS AND
TRANSACTIONS
The Company entered into an exchange agreement dated as
of August 16, 1993 pursuant to which the Company will, at
CVC's option, exchange all or any portion of the shares of
Common Stock held by CVC, on a share-for-share basis,
into Non-Voting Common Stock, par value $.001 per share
("Non-Voting Common"). The Non-Voting Common has
all of the same rights and conditions, including the right to
receive dividends, as the Common Stock, except holders of
Non-Voting Common have no voting rights except as
required by law and except with respect to certain
amendments to the Company's Restated Certificate of
Incorporation. The Company has been informed by CVC
that CVC has no present intention to convert its shares of
Common Stock into shares of Non-Voting Common.
The Company, CVC, Management and WEP entered into a
stockholders agreement dated as of August 16, 1993 which
restricts transfers of Common Stock by CVC, Management
and WEP, subject to certain exceptions. These restrictions
are intended, among other things, to ensure compliance with
the requirements contained in the Company's agreements
with Wendy's International regarding minimum ownership
of the Company's capital stock by CVC, Management and
WEP.
On September 5 ,1997, the Company received a proposal
for a merger from a group consisting of Ronald Kirstien,
Harvey Rothstein, Citicorp Venture Capital, Ltd ("CVC")
and certain employees or affiliates of CVC. After review of
the proposal and receiving advice from special counsel and a
fairness opinion from Equitable Securities Corporation, the
Board of Directors voted to approve the proposed merger,
in which the Company's shares which were not held by the
acquisition entity would be exchanged for $20.00 per share
in cash, and the Company would cease to be publicly held.
Shareholders of the proposed acquisition entity include
Ronald Kirstien (Chairman, President and CEO) who will
own 16.5% of the entity's common stock, beneficially or
otherwise; Harvey Rothstein (Director and Sr. Executive
Vice President) who will own 16.5% beneficially or
otherwise; and Byron Knief (Director) and Charles
Corpening (Director), who together with their employer,
CVC and other employees or affiliates will own 67% of the
acquisition entity's common stock.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
a. Documents filed as part of this Form 10-K:
1 and 2. Financial Statements - see Index to Financial Statements and
Schedules on page __.
3. Exhibits
11.1 Computation of Earnings Per Share Schedule
25.4 Power of Attorney
27.1 Article 5 of Regulation S-X Financial Data Schedule
for FY 1997 Form 10-K
(For SEC use only)
b. Reports on Form 8-K:
The Company filed a report on Form 8-K on
September 12, 1997 disclosing the proposal the
Company received for a merger from a group
consisting of Ronald Kirstien, Harvey Rothstein,
Citicorp Venture Capital, Ltd. and certain
employees affiliates of Citicorp Venture Capital,
Ltd. The Company also filed a report on Form
8-K on November 5, 1995, disclosing Broad of
Directors voted to approve the proposed merger
which requires approval by a majority of the
Company's stockholders, including approval by
a majority of stockholders unaffiliated with the
investor group and certain other conditions.
c. Exhibits filed with this report are listed in Item (a) 3.
above.
d. Financial Statement Schedules are listed in Item (a) 2. above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly
cause this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DAVCO RESTAURANTS, INC.
By: /s/ Ronald D. Kirstien
---------------------------
Ronald D. Kirstien
President and Director
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/s/ Ronald D. Kirstien /s/ Bryon L. Knief
- ----------------------- ------------------
Ronald D. Kirstien Bryon L. Knief
President and Director Director
(Principal Executive Officer)
/s/ Harvey Rothstein /s/ Gino Marchetti
- --------------------- ------------------
Harvey Rothstein Gino Marchetti
Secretary and Director Director
/s/ Charles C. McGuire, III /s/ Barton J.Winokur
- --------------------------- ---------------------
Charles C. McGuire, III Barton J. Winokur
Vice President of Finance Director
/s/ Harold O. Rosser /s/ Charles Corpening
- -------------------- ----------------------
Harold O. Rosser Charles Corpening
Director Director
/s/ James D. Farley /s/ Edward H. Chambers
- -------------------- ------------------------
James D. Farley Edward H. Chambers
Director Director
/s/ Ronald D. Kirstien
- -----------------------
Ronald D. Kirstien
Attorney-in-Fact
EXHIBIT 11-1
DavCo Restaurants, Inc.
Computation of Earnings Per Share
(In 000's except per share data)
FISCAL YEAR
ENDED
___________________________
SEPT 27, SEPT 28, SEPT 30,
1997 1996 1995
___________________________
Number of shares issued 6,588 6,588 6,588
Treasury Stock (159) (132) -
Dilutive effect of outstanding options 660 596 569
Weighted-average number of common
and common equivalent shares
outstanding 7,089 7,052 7,157
Net Income $ 6,344 $ 2,391 $ 8,415
Net Income per common and common
equivalent share $ 0.89 $ 0.34 $ 1.18
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that
each person whose signature appears below
constitutes and appoints Ronald D. Kirstien and
Harvey Rothstein and each of them, his true and
lawful attorneys-in-fact and agents, with full power
of capacities, to sign the annual report on Form 10-K
for DavCo Restaurants, Inc. for fiscal year ended
September 27, 1997, and any and all amendments
thereto, and to file the same, with all exhibits
thereto, and other documents in connection
therewith, with the Securities Exchange
Commission, granting unto said attorneys-in-fact
and agents full power an authority to do and
perform each and every act and thing requisite and
necessary to be done for such limited purpose, as
fully to all intents and purposes as he might or could
do in person, hereby ratifying and conforming all
that each of said attorneys-in-fact, or his substitute
or substitutes, many lawfully do or cause to be done
by virtue hereof, for such purpose.
Signature Title Date
/s/Ronald D. Kirstien President and Director December 23, 1997
- --------------------- (Principal Executive
Ronald D. Kirstien Officer)
/s/Harvey Rothstein Secretary and Director December 23 , 1997
- -------------------
Harvey Rothstein
/s/Charles C. McGuire, III Vice President of December 23 , 1997
- -------------------------- Finance
Charles C. McGuire, III
/s/Harold O. Rosser, II Director December 23 , 1997
- -----------------------
Harold O. Rosser, II
/s/James D. Farley Director December 23 , 1997
- ---------------------
James D. Farley
/s/Byron L. Knief Director December 23 , 1997
- ---------------------
Byron L. Knief
/s/Gino Marchetti Director December 23, 1997
- -------------------
Gino Marchetti
/s/Barton J. Winokur Director December 23 , 1997
- ---------------------
Barton J. Winokur
/s/Charles Corpening Director December 23 , 1997
- --------------------
Charles Corpening
/s/Edward H. Chambers Director Decemnber 23, 1997
- ----------------------
Edward H. Chambers
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF SEPTEMBER 27, 1997, AND THE STATEMENT OF OPERATONS FOR THE
FISCAL YEAR ENDED SEPTEMBER 27, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 640
<SECURITIES> 0
<RECEIVABLES> 580
<ALLOWANCES> 0
<INVENTORY> 1879
<CURRENT-ASSETS> 5934
<PP&E> 116078
<DEPRECIATION> 23649
<TOTAL-ASSETS> 126434
<CURRENT-LIABILITIES> 31661
<BONDS> 43139
0
0
<COMMON> 7
<OTHER-SE> 51627
<TOTAL-LIABILITY-AND-EQUITY> 126434
<SALES> 229096
<TOTAL-REVENUES> 229096
<CGS> 139520
<TOTAL-COSTS> 187078
<OTHER-EXPENSES> 26888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4886
<INCOME-PRETAX> 11077
<INCOME-TAX> 4733
<INCOME-CONTINUING> 6344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6344
<EPS-PRIMARY> 0.89<F1>
<EPS-DILUTED> 0.89<F1>
<FN>
<F1>EARNINGS PER SHARE DATA IS IN ACTUAL DOLLARS. MULTIPLIER NOT APPLICABLE.
</FN>
</TABLE>
