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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[Mark One]
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended
OR
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from Commission File Number
September 27, 1995 to December 27, 1995 1-13226
DENAMERICA CORP.
(Exact name of registrant as specified in its charter)
Georgia 58-1861457
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7373 N. Scottsdale Road 85253
Suite D120, Scottsdale, AZ (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (602) 483-7055
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on Which Registered
------------------- ------------------------------------
Common Stock, $.10 par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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 the Form 10-K. X
---
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant (5,307,675 shares) on June 7, 1996 was
$28,528,753. The aggregate market value was computed by reference to the closing
price of the Common Stock on such date.
Number of shares of Common Stock outstanding as of June 7, 1996:
13,148,944 shares of Common Stock, $.10 par value.
Documents incorporated by reference: None.
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DENAMERICA CORP.
TRANSITION REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 27, 1995
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C>
ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 21
ITEM 3. LEGAL PROCEEDINGS.................................................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED SHAREHOLDER MATTERS..... 22
ITEM 6. SELECTED FINANCIAL DATA............................................ 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................ 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 30
ITEM 11. EXECUTIVE COMPENSATION............................................. 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K... 44
SIGNATURES................................................................... 71
</TABLE>
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PART I
ITEM 1. BUSINESS.
GENERAL
DenAmerica Corp. (the "Company"), formerly American Family
Restaurants, Inc., currently operates 241 family-oriented, full-service
restaurants in 30 states in the southeastern, midwestern, and western United
States. Of the Company's 241 restaurants, 178 are Denny's restaurants, which
represents approximately 10% of the Denny's system and makes the Company the
world's largest Denny's franchisee in terms of revenue and the number of
restaurants operated. The Company also operates 63 non-Denny's restaurants under
the names "Jerry's," "Kettle," "Mr. Fable's," "Ike's Great American
Restaurants," "Ike's Diner," "Todd's," and "Bucky's Extraordinary Eatery."
The Company has pursued an aggressive growth strategy, having
acquired or developed all of its restaurants since April 1986. The Company
intends to increase the number of its Denny's restaurants through the
development of new Denny's restaurants, the acquisition of existing Denny's
restaurants or other restaurants that are suitable for conversion to the Denny's
concept, and the conversion of certain of its current non-Denny's restaurants to
the Denny's concept. The Company also plans to re-image certain of its Denny's
restaurants that have not already been re-imaged to the new Denny's format and
to sell or close other restaurants. In addition, the Company plans to expand its
operations to include one or more additional restaurant concepts through the
acquisition of one or more restaurant chains or multiple restaurant locations.
See Item 1, "Business - Strategy."
DEVELOPMENT OF THE COMPANY
Prior to 1992, the operations of the Company were conducted through
several entities that were either wholly owned by Jeffrey D. Miller, the
Company's Chairman of the Board, or in which Mr. Miller had a significant
ownership interest. The first of these predecessor entities began operations in
1986 with 62 restaurants. The Company was incorporated in 1989 and acquired 23
Denny's restaurants at that time. The Company effected a reorganization in July
1992, in which the Company acquired all of the issued and outstanding stock and
warrants of the affiliated entities in exchange for shares of the Company's
common stock, par value $.10 per share (the "Common Stock"), and warrants to
purchase shares of the Company's Common Stock. On October 18, 1994, the Company
completed its initial public offering and used a portion of the proceeds of the
offering to acquire the remaining 50% interest in a joint venture owned by CNL
Group, Inc. ("CNL") and all of the leasehold improvements owned by the joint
venture. As a result of a series of acquisitions from 1992 through 1995, the
Company operated a total of 91 Denny's restaurants and 57 non-Denny's
restaurants prior to March 29, 1996.
On March 29, 1996, Denwest Restaurant Corp. ("DRC") merged with and
into the Company (the "Merger"), at which time the Company changed its name from
American Family Restaurants, Inc. ("AFR") to DenAmerica Corp. Prior to the
Merger, DRC operated 82 Denny's restaurants and 20 restaurants under the
"Kettle" trade name. DRC, through its predecessors, began operations in 1986 and
had developed more new Denny's restaurants than either Denny's, Inc. (the
franchisor of Denny's restaurants) or any other Denny's franchisee prior to the
Merger.
In connection with the Merger, all of the previously outstanding
shares of DRC capital stock owned by Jack M. Lloyd, William J. Howard,
BancBoston Ventures, Inc. ("BancBoston"), and the other former shareholder of
DRC were automatically converted into an aggregate of 6,937,500 shares of the
Company's Common Stock, $24,250,000 principal amount of Series A 13%
Subordinated Notes, due 2003 (the "Series A Notes") and Series B 13%
Subordinated Notes due 2003 (the "Series B Notes") and warrants to purchase an
aggregate of 666,000 shares of the Company's Common Stock.
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The following table sets forth certain information with respect to
the Company's Denny's and non-Denny's restaurants as of May 31, 1996.
<TABLE>
<CAPTION>
DENNY'S NON-DENNY'S
RESTAURANTS OWNED TO BE TO BE NON-DENNY'S
---------------------- DEVELOPED CONVERTED DENNY'S TO TO BE SOLD
DENNY'S NON-DENNY'S BY 12/31/96 BY 12/31/97 BE CLOSED OR CLOSED
------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Alabama............ 8 3 3 1
Arizona............ 13 2
Arkansas........... 2
Colorado........... 8 2
Florida............ 15 10 6 4
Georgia............ 14 1 1
Idaho.............. 6
Illinois........... 1 1
Indiana............ 5 5 5
Iowa............... 5
Kansas............. 1 2
Kentucky........... 16 7 7
Louisiana.......... 1
Michigan........... 1 11
Minnesota.......... 1
Missouri........... 1
Nebraska........... 6
Nevada............. 1
North Carolina..... 2 2 2
Ohio............... 21 12 12
Oklahoma........... 2 5 5
Oregon............. 1
South Carolina..... 2 1 1
South Dakota....... 1
Tennessee.......... 5 1
Texas.............. 25 4 5 4
Utah............... 7 2
Virginia........... 1 1
Wisconsin.......... 3
Wyoming............ 5
--- -- -- -- - --
178 63 13 23 2 29
=== == == == = ==
</TABLE>
STRATEGY
The Company's business strategy is to (a) increase the number of its
Denny's restaurants through the development of new Denny's restaurants, the
acquisition of existing Denny's restaurants, the conversion of certain of its
current non-Denny's restaurants to the Denny's concept, and the acquisition and
conversion to Denny's of restaurants currently operating under other restaurant
concepts; (b) re-image certain of its Denny's restaurants that have not already
been re-imaged to the new Denny's format; (c) expand its operations to include
one or more additional restaurant concepts through the acquisition of one or
more restaurant chains or multiple restaurant
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locations; and (d) enhance its operational efficiencies by capitalizing on
operating synergies and selling or closing restaurants that are not profitable
and cannot be successfully re-imaged or converted.
Increase of Denny's Restaurants
The Company intends to increase the number of Denny's restaurants it
operates through new restaurant development, acquisitions, and conversions of
non-Denny's restaurants to the Denny's concept. The Company believes Denny's
restaurants are an attractive growth vehicle because Denny's are more profitable
than other restaurant concepts within the full-service family segment, with
higher average unit volumes and higher operating margins. In addition, the
Company believes that the Denny's brand name, which has excellent customer
recognition and appeal, provides a strong market position for Denny's
restaurants.
New Restaurant Development
The Company plans to continue to develop new Denny's restaurants. The
Company and Denny's, Inc. currently are parties to a development agreement, as
amended (the "Development Agreement") that requires the Company to develop 33
restaurants through 1997. The Company currently has 5 new restaurants in various
stages of development. The Company anticipates that it will develop 15 new
restaurants in 1996 and approximately 18 new restaurants in 1997, primarily
within its current geographic territory, thus capitalizing on an existing
management structure and on positive demographic and traffic patterns in many of
the Company's existing markets. During the past three years, the Company has
developed approximately 20 new Denny's restaurants. Sales per restaurant for
those of the new restaurants that operated for all of fiscal 1995 averaged $1.3
million, which exceeds the average sales per restaurant for the Company's other
Denny's and non-Denny's restaurants.
Restaurant Acquisitions
The Company plans to continue to acquire Denny's and other
family-style restaurants that it can convert to the Denny's concept. The Company
strives to acquire restaurants when it believes it can improve their performance
through better management and greater operating efficiencies or through
conversion to the Denny's concept. The Company believes it can continue to take
advantage of its organizational and management expertise to bring improved
quality and operating efficiencies to the restaurants its acquires.
From January 1, 1994 through March 27, 1996, the Company acquired a
total of 83 restaurants in nine transactions. Of these restaurants, 45 were
Denny's restaurants either acquired from Denny's, Inc. or from other Denny's
franchisees. These strategic acquisitions increased market share in existing
marketplaces or extended geographic coverage and resulted in a decrease in
administrative expenses as a percentage of sales primarily due to increased
sales volume without proportionate cost increases.
Conversions of Non-Denny's Restaurants
The Company plans to convert 23 of its current non-Denny's
restaurants to the Denny's concept. The Company converted two non-Denny's
restaurants in 1994, nine in 1995, and seven as of May 31, 1996. The Denny's
restaurants currently operated by the Company that were operating during the
entire year had average annual revenue and operating income in fiscal 1995 of
approximately $858,000 and $100,000, respectively, whereas the non-Denny's
restaurants that were operated during the entire year had average annual revenue
and operating income of approximately $637,000 and $61,000, respectively.
Historically, the Company's cost to convert a non-Denny's restaurant to a
Denny's restaurant has ranged from approximately $250,000 to $500,000, including
opening costs and franchise fees. The Company estimates the cost to convert each
Kettle restaurant to be $350,000, including opening costs and franchise fees,
but the lessors of 12 of the Company's Kettle restaurants have agreed to fund up
to $250,000 of these conversion costs.
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Re-Imaging Program
The Company plans to re-image certain of its Denny's restaurants that
have not been re-imaged to the new Denny's concept implemented by Denny's, Inc.,
the franchisor of Denny's restaurants, in 1994, which is designed to result in a
fundamental change in the competitive positioning of Denny's restaurants. The
re-imaging strategy includes an extensive remodeling program featuring an
updated exterior look, new signage, and an improved interior layout with more
comfortable seating and enhanced lighting. The Company believes that re-imaging
often results in a percentage growth in operating income that exceeds the
percentage growth in sales. The Company re-imaged seven Denny's restaurants
during 1995. Since their re-imaging, sales in these restaurants have increased
15% over the results in the prior year. The Company anticipates that it will
re-image approximately 40 Denny's restaurants by December 31, 1997. The
Company's costs to re-image its Denny's restaurants historically have averaged
approximately $300,000 per restaurant. Denny's, Inc. recently implemented a
program of re-imaging its Denny's restaurants at a cost of approximately
$150,000 per restaurant. The Company intends to implement this program for
future re-imagings of its Denny's restaurants. The re-imaging process generally
takes approximately 20 days per store, during which time the restaurant is
closed, causing a loss of revenue.
New Restaurant Concepts
The Company plans to expand its operations to include one or more
additional restaurant concepts through the acquisition of one or more restaurant
chains or multiple restaurant locations. It is currently contemplated that such
acquisitions would be made only if they can be integrated with the Company's
existing restaurant operations and only if they would have a meaningful impact
on the Company's operations. On May 31, 1996, the Company entered into an
agreement (the "BEP Agreement") to purchase all of the outstanding stock of
Black-eyed Pea U.S.A., Inc., which operates 100 restaurants under the
"Black-eyed Pea" concept and franchises the rights to operate an additional 30
Black-eyed Pea restaurants to third parties. See Item 1, "Business - Non-Denny's
Restaurants."
Enhancement of Operating Efficiencies
Capitalizing on Operating Synergies
The Company plans to continue to implement steps resulting in
significant operating efficiencies and cost savings made possible by the Merger.
The headquarters for the combined operations has been consolidated within DRC's
existing facility in Scottsdale, Arizona, which will reduce overall payroll
costs and other overhead expenses, including redundant legal, accounting, and
other corporate administrative costs. In addition, DRC's comprehensive insurance
policy was cancelled following the Merger. The Company's increased liquidity
should result in volume purchasing and the receipt of prompt payment discounts
that should yield additional savings.
Sale or Closure of Certain Restaurants
The Company currently anticipates that it will sell or close a total
of two Denny's restaurants and 21 non-Denny's restaurants by December 31, 1997,
of which six restaurants have been closed as of May 31, 1996. The Company has
determined that these restaurants either cannot be converted to the Denny's
concept because they are situated in close proximity to an existing Denny's
restaurant or have below-average unit operating results. Upon consummation of
the Merger, the Company established reserves of approximately $6.0 million
related to the cost of closing these restaurants.
DENNY'S RESTAURANTS
The Company currently operates 178 Denny's restaurants, representing
approximately 10% of the Denny's system and making the Company the world's
largest Denny's franchisee in terms of revenue and the number of restaurants
operated.
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Denny's, Inc.
The Company operates its Denny's restaurants pursuant to franchise
agreements with Denny's, Inc. See Item 1, "Business - Denny's Restaurants -
Denny's Franchise Agreements." Denny's, Inc. is a wholly owned subsidiary of
Flagstar, Inc. ("Flagstar"), a diversified company with business interests in
the restaurant and wholesale food industries. Flagstar conducts its restaurant
operations through three principal chains: Denny's, the largest family-oriented,
full-service restaurant chain in the United States, with over 1,500
corporate-owned or franchised units in 49 states and six foreign countries;
Hardee's, a chain of quick-service restaurants specializing in sandwiches; and
Quincy's, one of the largest chains of steakhouse restaurants in the
southeastern United States. Flagstar also operates El Pollo Loco, a chain of
quick-service restaurants featuring flame-broiled chicken and steak products and
related Mexican food items.
Concept
Denny's are family-oriented, full-service restaurants, featuring a
wide variety of traditional family fare. The restaurants are designed to provide
a casual dining atmosphere with moderately priced food and quick, efficient
service. Denny's restaurants generally are open 24 hours a day, seven days a
week.
Menu and Pricing
All Denny's restaurants throughout the United States have uniform
menus with some regional and seasonal variations. Denny's restaurants serve
breakfast, lunch, and dinner and also feature a "late night" menu. Breakfasts
include Denny's popular "Original Grand Slam Breakfast" combinations, consisting
of a variety of eggs, breakfast meats, pancakes, biscuits, muffins, and other
items, as well as traditional breakfast items such as eggs, omelets, pancakes,
waffles, cereals, and muffins. Lunch and dinner entrees include prime rib, roast
beef, fried shrimp, fish, roast turkey, grilled or fried chicken, sirloin tips,
and liver. The restaurants also offer a variety of soups, salads, sandwiches,
appetizers, side orders, beverages, and desserts. Appetizers include mozzarella
sticks, buffalo wings, chili, chicken strips, and quesadillas; and desserts
include cakes, pies, ice cream, and sundaes. The restaurants offer free refills
on coffee, soft drinks, lemonade, and tea. Special menus are available for
senior citizens and children.
In 1994, Denny's, Inc. initiated a promotional strategy that has
resulted in increased guest counts and improved per store comparable revenue.
This promotional strategy involves the "value pricing" of several menu items and
directing the marketing efforts at such items. The first and best known "valued
priced" item has been the $1.99 Grand Slam, which was introduced in April 1994.
The Grand Slam consists of two eggs, two pancakes, two sausage links, and two
strips of bacon that typically would sell for approximately $3.99. The value
pricing strategy has since been expanded to include a $5.99 prime rib dinner and
$2.99 lunch baskets. This promotional strategy continues to be utilized by
Denny's, Inc., including the January 1996 introduction of the "Breakaway
Breakfast," a new three-tiered pricing program featuring popular menu
combinations. The Company currently participates in the Breakaway Breakfast
program in certain of its markets.
Restaurant Layout
The Company's Denny's restaurants generally operate in free-standing
locations in high-traffic commercial areas. The restaurants average
approximately 4,800 square feet, with an average seating capacity of 180 people.
Generally, the dining areas are fully carpeted and informal in design and
contain booths, tables, and counter seating. The layout of each restaurant is
designed to easily accommodate both smaller groups of two and four as well as
large groups of guests. All guests are greeted and seated by a host or hostess
when they enter the restaurant.
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Unit Economics
The Company estimates that its total costs of developing a new
Denny's restaurant currently ranges from $290,000 to $390,000, exclusive of
annual operating costs and assuming that the land and buildings are obtained
under a lease arrangement. These costs include approximately (i) $230,000 to
$330,000 for furniture, fixtures, and equipment; (ii) $40,000 for pre-opening
costs, including hiring and training costs, employee wages, and advertising; and
(iii) $20,000 for the initial franchise fee. The Company estimates that its
total cost of converting an acquired restaurant to the Denny's concept currently
ranges from approximately $250,000 to $500,000, exclusive of annual operating
costs and assuming that the land and building are obtained under a lease
arrangement. These costs include approximately (i) $200,000 to $450,000 for
remodelling and improvements; (ii) $30,000 for pre-opening costs, including
hiring costs, employee wages, and advertising; and (iii) $20,000 for the initial
franchise fee. The Company leases substantially all of its restaurant sites in
order to minimize the costs of acquiring and developing new restaurants. The
Company currently intends to lease its restaurant sites in the future. See Item
1, "Business - Financing and Leasing."
Site Selection
When evaluating whether and where to develop a new Denny's
restaurant, the Company conducts an internal screening process to determine a
restaurant's estimated profit potential. The Company considers the location of a
restaurant to be one of the most critical elements of the restaurant's long-term
success. Accordingly, the Company expends significant time and effort in the
investigation and evaluation of potential restaurant sites. In conducting the
site selection process, the Company primarily evaluates site characteristics
(such as visibility, accessibility, and traffic volume), considers the
restaurant's proximity to demand generators (such as shopping malls, lodging,
and office complexes), reviews potential competition, and analyzes detailed
demographic information (such as population characteristics, density, and
household income levels). Because Denny's restaurants are often impulse rather
than destination restaurants, the Company's management emphasizes visibility and
high traffic patterns in its site selection and places somewhat less importance
on population demographics. Senior corporate management evaluates and approves
each restaurant site prior to its development. Denny's, Inc. provides site
selection guidelines and criteria as well as site selection counseling and
assistance and must approve sites selected by the Company.
The Denny's System
Denny's restaurants are developed and operated pursuant to a
specified system developed by Denny's, Inc. (the "Denny's System"). Denny's,
Inc. prepares and maintains the detailed standards, policies, procedures,
manuals, and other requirements that constitute the Denny's System in order to
facilitate the consistent operation and success of all Denny's restaurants. The
Denny's System includes distinctive interior and exterior designs, decors, color
schemes, furnishings, and employee uniforms; uniform specifications and
procedures for restaurant operations; standardized menus featuring unique
recipes and menu items; procedures for inventory and management control; formal
training and assistance programs; advertising and promotional programs; and
special promotional items. The Denny's System includes established, detailed
requirements regarding (i) the quality and uniformity of products and services
offered; (ii) the purchase or lease, from suppliers approved by Denny's, Inc.,
of equipment, fixtures, furnishings, signs, inventory, ingredients, and other
products and materials that conform with the standards and specifications of the
Denny's Systems; and (iii) standards for the maintenance, improvement, and
modernization of restaurants, equipment, furnishings, and decor. To ensure that
the highest degree of quality and service is maintained, each franchisee must
operate each Denny's restaurant in strict conformity with the methods,
standards, and specifications prepared by Denny's, Inc.
Denny's Franchise Agreements
The Company is a party to a separate franchise agreement with
Denny's, Inc. for each of its Denny's restaurants (the "Denny's Franchise
Agreements"). These agreements generally require payment of an initial
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franchise fee and a royalty equal to 4% of weekly gross sales (as defined in the
Denny's Franchise Agreements) and an advertising contribution of 2% of weekly
gross sales in markets where Denny's, Inc. conducts significant institutional
advertising. In markets where Denny's, Inc. does not conduct significant
institutional advertising, the Denny's Franchise Agreements require the Company
to pay Denny's, Inc. 0.5% of weekly gross sales and to spend an additional 1.5%
of weekly gross sales on local advertising. Initial franchise fees for the
Denny's restaurants operated by the Company have ranged from $0 to $35,000. The
Company negotiates the initial franchise fees, which vary based upon such
factors as involvement of Denny's, Inc. personnel in the training of the
Company's employees and the number of Denny's restaurants being developed or
acquired. Shorter development periods will result in lower initial franchise
fees. The Denny's Franchise Agreements generally have a term of 20 years or the
earlier expiration of the relevant building lease (including options for
extensions). A Denny's Franchise Agreement may be terminated by the Company only
upon the occurrence of a material breach by Denny's, Inc.
The Denny's Franchise Agreements entitle the Company to use the
"Denny's" name, trade symbols, and intellectual property, including menus,
symbols, labels, and designs, to promote the restaurants and the Denny's
affiliation. Denny's, Inc. also furnishes training and supervisory services for
maintaining modern and efficient operation of the restaurants and helps fund a
national advertising campaign. The Company generally is required to maintain a
standard exterior decor and exterior signs and a consistent interior color
scheme and layout. Each employee is required to wear a standard uniform. The
Company is free to establish its own prices, which may differ by location and
are influenced by geographic and other considerations.
In the event of a "change of control," the Denny's Franchise
Agreements give Denny's, Inc. the option to purchase within one year after the
date of such change of control of all of the Denny's restaurants owned or
operated by the Company for their fair market value. As long as the Company is a
publicly held corporation, a change of control will be deemed to have occurred
only if any person, entity, or group of persons (other than a group which
includes Jeffrey D. Miller, Jack M. Lloyd, William G. Cox, William J. Howard,
each of whom is an officer and director of the Company, or BancBoston) acquires
voting control of the Company's Board of Directors.
Without the consent of Denny's, Inc., the Company may not directly or
indirectly own, operate, control, or have any financial interest in any coffee
shop or family-style restaurant business or any other business that would
compete with the business of any Denny's restaurant, Denny's, Inc., or any
affiliate, franchisee, or subsidiary of Denny's, Inc. (other than restaurants
currently operated by the Company). For two years after the expiration or
termination of a Denny's Franchise Agreement, the Company will not be permitted,
without the consent of Denny's, Inc., directly or indirectly to own, operate,
control, or have any financial interest in any coffee shop or family-style
restaurant substantially similar to a Denny's located within a 15-mile radius of
a Denny's restaurant subject to the expired or terminated agreement. These
restrictions will not apply to the operation of another Denny's restaurant or
the ownership of less than 5% of the publicly traded stock of any other company.
An agreement with Denny's, Inc. and the terms of the leases for its Kettle
restaurants require the Company to convert 20 Kettle restaurants that it
currently operates to the Denny's concept prior to September 1997. Another
agreement with Denny's, Inc. requires the Company to convert at least 21
non-Denny's restaurants to the Denny's concept on a specified schedule prior to
January 1, 1998 and to close or convert 24 non-Denny's restaurants to a Denny's
or other restaurant concept that, as of September 13, 1994, was not in
competition with the business of Denny's, Inc., its affiliates, subsidiaries, or
franchisees.
NON-DENNY'S RESTAURANTS
In addition to its Denny's restaurants, the Company operates 63
non-Denny's restaurants, 21 of which it has agreed to convert to the Denny's
concept by January 1, 1998 and 24 of which it has agreed either to close or
convert to the Denny's concept or another restaurant concept that does not
compete with the Denny's restaurant concept. Of these restaurants, 12 operate
under the name "Jerry's," 20 under the name "Kettle," 15 under the name "Ike's
Great American Restaurants" or "Ike's Diner," 11 under the name "Mr. Fable's,"
four under the
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name "Todd's," and one under the name "Bucky's Extraordinary Eatery." The
operations of the non-Denny's restaurants are substantially similar to those of
the Denny's restaurants. These restaurants generally feature family-oriented
dining with full table service. Menu items vary slightly among the non-Denny's
restaurants, but they generally offer moderately priced items, such as
hamburgers, sandwiches, chicken, steaks, seafood and breakfast items.
In August 1995, DRC entered into a license agreement with Kettle
Restaurants, Inc., leases with CNL, an unaffiliated leasing company, and an
entity controlled by Jack M. Lloyd and William J. Howard, and subleases with
Kettle Restaurants, Inc. Upon consummation of the Merger, the Company assumed
DRC's rights and obligations under the license agreement, leases, and subleases,
pursuant to which the Company currently operates a total of 20 restaurants under
the Kettle family-style restaurant concept. See Item 13, "Certain Relationships
and Related Transactions." Pursuant to the terms of the license agreement, the
Company will not be required to pay franchise fees to Kettle Restaurant, Inc. as
the franchisor of the Kettle restaurant concept. The terms of the leases and
subleases and an agreement with Denny's, Inc. require the Company to convert
these restaurants to the Denny's concept by September 1997. The Company intends
to convert these restaurants to the Denny's concept as soon as practicable.
Historically, the annual revenue from Kettle restaurants averages $580,000 per
restaurant, compared with average revenue of $936,000 for the Denny's
restaurants currently operated by the Company. The Company believes that the
costs of these leases and subleases are on as favorable a basis as the lease
costs of similar Denny's restaurants. However, the costs of these leases may
result in unfavorable operating results until the restaurants are converted to
the Denny's concept and additional anticipated revenue is realized.
On May 31, 1996, the Company entered into the BEP Agreement to
purchase all of the outstanding stock of Black-eyed Pea U.S.A., Inc., which
operates 100 restaurants under the "Black-eyed Pea" concept and franchises the
rights to operate an additional 30 Black-eyed Pea restaurants to third parties.
Black-eyed Pea U.S.A., Inc. had revenue of approximately $145.0 million during
fiscal 1996. The purchase price for the stock of Black-eyed Pea U.S.A., Inc.
will be $65.0 million (subject to certain adjustments at closing), consisting of
cash of $50.0 million and a promissory note for $15.0 million. In connection
with the BEP Agreement, the Company has obtained a commitment from a third party
lender to provide sale-leaseback and equipment lease financing of up to $50.0
million.
EXPANSION OF OPERATIONS
The Company has implemented an aggressive growth plan in its target
geographic markets based upon growth through the development of new Denny's
restaurants, acquisitions of existing Denny's restaurants, and acquisitions of
other family-style restaurants that can be converted to the Denny's concept.
This growth plan emphasizes a continued focus on restaurant locations and
operations. The Company's current target geographic market ranges from the
southeastern and midwestern United States west to Arizona, Nevada, and Idaho.
Many of the states within the target market, such as Arizona, Colorado, Florida,
Georgia, Idaho, Nevada, Texas, and Utah, are among the fastest growing states in
the United States. Before developing or acquiring any restaurants in a
particular location within its target market, the Company evaluates factors such
as the size of the market area, demographic and population trends, competition,
and the availability and cost of suitable restaurant locations. See Item 1,
"Business - Denny's Restaurants - Site Selection."
The Company believes it is able to achieve significant cost savings
when it incorporates newly developed or acquired restaurants into its operations
by taking advantage of certain economies of scale associated with administrative
overhead and management personnel and systems. As a result, the Company believes
that its corporate infrastructure enables it to eliminate administrative and
managerial redundancies and to reduce the overall operating costs on a
per-restaurant basis. The Company also believes that it is able to increase
sales volume at acquired or converted restaurants through remodeling and
improved service. The Company intends to continue developing and acquiring
additional restaurants in order to enhance its presence in its target markets,
to establish the necessary base from which it can further penetrate these
markets, and to capitalize on purchasing, advertising,
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managerial, administrative, and other efficiencies that result from the
concentration of restaurants in specific markets.
Restaurant Development
Since 1986, the Company has developed and opened more Denny's
restaurants than either Denny's, Inc. or any other franchisee. In 1994, the
Company entered into an agreement with Denny's, Inc., which requires it to
develop an additional 33 new Denny's restaurants by the end of 1997. See Item 1,
"Business - Development Agreement." The specific time frame in which the Company
is able to develop new restaurants will be determined by the Company's success
in identifying suitable sites; obtaining financing for construction, tenant
improvements, furniture, fixtures, and equipment; negotiating acceptable lease
or purchase terms; securing the appropriate governmental permits and approvals
(including those relating to zoning, environmental, health, and liquor
licenses); managing restaurant construction; and recruiting and training
qualified personnel. There can be no assurance as to the number of new
restaurants that the Company will be able to open or the ultimate success of any
such restaurants. The development of new restaurants also may be affected by
increased construction costs and delays resulting from governmental regulatory
approvals, strikes or work stoppages, and adverse weather conditions. Newly
developed restaurants may operate at a loss for a period following their initial
opening. The length of this period will depend upon a number of factors,
including the time of year the facility is opened, sales volume, and the
Company's ability to control costs. There can be no assurance that the Company
will be successful in achieving its expansion goals through the opening of
additional restaurants or that any additional restaurants that are opened will
be profitable.
Restaurant Acquisitions
The Company actively evaluates the opportunities to acquire
additional Denny's restaurants or franchise rights from Denny's, Inc. or other
Denny's franchisees and to acquire other family-style restaurants that can be
converted to the Denny's concept. The Company also actively evaluates
opportunities to acquire other restaurant concepts, such as the "Black-eyed Pea"
concept, that it can operate profitably by integrating the acquired restaurants
with the Company's existing operations. The Company evaluates such opportunities
based on numerous factors, including location, operating history, future
potential, acquisition price, and the terms and availability of financing for
such restaurants or additional franchise rights. The acquisition of any such
existing restaurants or additional franchise rights may require the approval of
Denny's, Inc. There can no be assurance that the Company will be able to acquire
additional operating Denny's restaurants, other restaurants that are suitable
for conversion to Denny's restaurants or that the Company may continue to
operate as non-Denny's restaurants, or other franchise rights or that any such
restaurants that are acquired will be profitable to the Company.
Restaurant Conversions
The Company plans to convert 23 of its current non-Denny's
restaurants to the Denny's concept. The Company believes that these conversions
contribute substantially to improved restaurant sales and restaurant
contribution (restaurant operating income before amortization and depreciation
and occupancy costs). The Company is obligated to convert 20 restaurants that it
currently operates under the "Kettle" trade name to the Denny's concept by
September 1997, to convert at least 21 of its other non-Denny's restaurants to
the Denny's concept by January 1, 1998, and to either close 24 non-Denny's
restaurants or convert them to the Denny's concept or another restaurant concept
that is not in competition with the business of Denny's, Inc., its affiliates,
subsidiaries or franchisees.
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RESTAURANT OPERATIONS
Management Services
The Company believes that successful execution of basic restaurant
operations is essential to achieve and maintain a high level of customer
satisfaction in order to enhance the Company's success and future growth.
Therefore, the Company devotes significant efforts to ensure that all of its
restaurants offer quality food and service. The Company has established a
network of regional vice presidents of operations, district managers and
restaurant managers to communicate and maintain standards for the preparation
and service of quality food, the maintenance and repair of restaurant
facilitates and the appearance and conduct of employees.
Once a restaurant is integrated into its operations, the Company
provides a variety of corporate services to assure the proper execution of the
Denny's System and the operational success of the restaurant. The Company's
executive management continually monitors restaurant operations; maintains
management controls; inspects individual restaurants to assure the quality of
products and services and the maintenance of facilities; develops employee
programs for efficient staffing, motivation, compensation, and career
advancement; institutes procedures to enhance efficiency and reduce costs; and
provides centralized support systems.
The Company also maintains quality assurance procedures designed to
ensure compliance with the high quality of products and services mandated by
Denny's, Inc. Company personnel make unannounced visits to its restaurants to
evaluate the facilities, products, employees, and services. The Company believes
that its quality review program and executive oversight enhance restaurant
operations, reduce operating costs, improve customer satisfaction, and
facilitate the highest level of compliance with the Denny's System.
The Company's district and restaurant management personnel are
responsible for the maintenance of the operational standards specified by
Denny's, Inc. District managers are responsible for the six to eight restaurants
within their district. Restaurant managers are responsible for day-to-day
operations, including customer relations, food preparation and service, cost
control, restaurant maintenance, and personnel relations. As required by
Denny's, Inc., the Company staffs each of its Denny's restaurants with an
on-site general manager, two assistant managers, and 20 to 50 full-time of
part-time hourly employees.
Training
The Company seeks to attract and retain high-quality individuals with
prior restaurant experience for restaurant management positions. As the only
Denny's franchisee authorized to train its own restaurant management personnel,
the Company maintains a comprehensive training program that provides all
instructors, facilities, and required training materials necessary to train its
restaurant managers and other restaurant management personnel. The training
covers all aspects of management philosophy and overall restaurant operations,
including supervisory skills, customer interaction, operating standards, cost
control techniques, accounting procedures, employee selection and training, risk
management, and the skills required to perform all duties necessary for
restaurant operations. By training its own management personnel and opening its
own restaurants, the Company reduces its initial franchise fee per restaurant
from $35,000 to $20,000.
Newly hired employees are reviewed at regular intervals during their
first year, and all restaurant personnel receive annual performance reviews. New
managers work closely with experienced managers and district managers to
solidify their skills and expertise. The Company designates certain experienced
employees as "Certified Trainers" who are responsible for training newly hired
employees. The Company's district managers and general managers regularly
participate in on-going training efforts. The Company generally seeks to promote
existing employees to fill restaurant management positions.
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Maintenance and Improvement of Restaurants
The Company maintains its Denny's restaurants and all associated
fixtures, furnishings, and equipment in conformity with the Denny's System. The
Company also makes necessary additions, alterations, repairs, and replacements
to its Denny's restaurants as required by Denny's, Inc., including periodic
repainting or replacement of obsolete signs, furnishings, equipment, and decor.
The Company may be required, subject to certain limitations, to modernize its
Denny's restaurants to the then-current standards and specifications of Denny's,
Inc.
Management Information Systems
The Company maintains a centralized, computerized accounting system
for financial controls and reporting functions. The Company has a point-of-sale
reporting system installed in each of its current Denny's restaurants.
Restaurants managers submit weekly reports on sales volume and mix, customer
counts, and labor costs to the Company's corporate management. Each restaurant
maintains "par stock" inventory levels and the restaurant manager takes monthly
physical inventories of all food, beverage, and supply items. The Company's
accounting department prepares monthly profit and loss statements, which
operational managers review and compare with the Company's prepared budgets.
DEVELOPMENT AGREEMENT
In conjunction with the purchase of 13 Denny's restaurants from
Denny's, Inc. in 1994, the Company entered into the Development Agreement with
Denny's, Inc. The Development Agreement gives the Company the exclusive right to
develop and open Denny's restaurants in specified locations (the "Territory") in
Arizona, Colorado, Idaho, Kansas, Missouri, Nebraska, Texas, Utah, and Wyoming.
The Development Agreement requires the Company to develop 15 restaurants in the
Territory in 1996 and 18 in 1997. Acquisitions of existing Denny's restaurants
within the Territory and development of new restaurants outside the Territory
will not satisfy the Company's obligations under the Development Agreement.
During the term of the Development Agreement, Denny's, Inc. retains
the right (i) to open and operate or franchise Denny's restaurants at certain
non-standard locations within the Territory, such as universities, government
facilities, public transportation facilities, or shopping malls; (ii) to open
and operate or franchise non-standard Denny's restaurants within the Territory,
such as at drug or department stores, truck stops, or hotel or motel chains; and
(iii) to open and operate or franchise others to operate Denny's restaurants
located within the Territory that Denny's, Inc. acquires during the term of the
Development Agreement.
There can be no assurance that the Company will be able to identify
sufficient restaurant sites that it deems to be suitable or develop restaurants
on such sites on terms and conditions it considers favorable in order to satisfy
the requirements of the Development Agreement. The Development Agreement gives
Denny's, Inc. the right to terminate the Development Agreement and the Company's
exclusive right to develop restaurants in the Territory in the event that the
Company fails to timely comply with the development schedule for the restaurants
or if the Company otherwise defaults under the Development Agreement. Although
the Company believes it should be able to timely meet its development
commitments pursuant to the Development Agreement, no assurance can be given
that the Company will be able to satisfy its obligations. A failure to fulfill
such obligations may have an adverse effect on the Company. At the request of
the Company, Denny's, Inc. in the past has agreed to amend the terms of the
Development Agreement so as to extend the time in which the Company was required
to develop certain restaurants. There can be no assurance that Denny's, Inc.
will agree to extend the development schedules in the future in the event the
Company experiences any difficulty in satisfying such schedules for any reason,
including a shortage of capital. See Item 1, "Special Considerations - Reliance
on Denny's, Inc.," "Special Considerations - Inability to Develop or Convert
Restaurants," and "Special Considerations - Restrictions Imposed by Denny's
Franchise Agreements."
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FINANCING AND LEASING
It is the Company's current strategy to lease, rather than own, the
land and buildings associated with the operations of its restaurants.
Historically, the Company has entered into sale-leaseback transactions or joint
ventures under which the financing company purchases the identified parcel of
land and funds the costs of the restaurant construction, excluding the initial
franchise fee, equipment costs, and restaurant preopening expenses. The
financing company then leases the restaurant property back to the Company for up
to 30 years, including renewal option periods, under terms of a triple-net
lease. Initial rental rates under these leases generally range from 10% to 12%
of the financing company's investment in land, improvements, and construction
costs. The initial rate typically is subject to rent increases of 10% every five
years. The leases also require the Company to pay additional rent based upon the
gross sales of the restaurant.
The Company's ability to effect its new store development strategy
will depend on the availability of additional sale-leaseback financing on terms
and conditions that the Company believes are appropriate for the risk of the
development. The Company currently has a commitment from CNL to provide $20.0
million of sale-leaseback financing through 1996. The commitment is subject to
various terms and conditions and provides for an initial rate of 10-5/8% on the
financing company's investment in land, improvements, and construction costs.
The inability of the Company to secure sufficient additional sale-leaseback
financing in the future could have a significant impact on its ability to
acquire or develop new restaurants.
The Company and CNL currently are parties to three joint venture
agreements for the purpose of acquiring, developing, owning, and operating a
total of 16 restaurants. The Company and CNL each has a 50% interest in each of
the joint ventures. The Company is responsible for day-to-day operations of the
restaurants owned by each joint venture, and CNL pays the Company a management
fee of approximately 3.5% of sales for its services. Under the terms of the
joint ventures, CNL contributed 100% of the initial capital required for land,
building, and site development costs, and a subsidiary of CNL contributed 100%
of the capital required to equip the restaurants, acquire the franchises, train
the staff, stock the inventory, and open the restaurants. On a quarterly basis,
each of the joint ventures distributes to CNL that amount of its cash flows
available for distribution equal to a 20% annual, non-compounded, cumulative
distribution on CNL's initial capital contributions plus all additional capital
contributions. If any cash flows remain available for distribution, each of the
joint ventures next distributes to the Company the amount necessary to provide
the Company with distributions up to the amount received by CNL, except that the
distributions to the Company in any fiscal year will not exceed the sum which
would equal a 20% annual, non-compounded, non-cumulative distribution on CNL's
capital contributions.
EQUIPMENT, FOOD PRODUCTS, AND OTHER SUPPLIES
The Company's ability to maintain consistent quality throughout its
Denny's restaurants depends in part upon its ability to acquire from reliable
sources the equipment, food products, and related items necessary to meet the
standards set by Denny's, Inc. The Company believes the maintenance of this
uniformity and consistency enables it to capitalize on the name recognition and
goodwill associated with Denny's restaurants. As a result, the Company leases or
purchases all fixtures, furnishings, equipment, signs, food products, supplies,
inventory, and other products and materials required for the development and
operation of its Denny's restaurants from suppliers approved by Denny's, Inc. In
order to be approved as a supplier, a prospective supplier must demonstrate to
the reasonable satisfaction of Denny's, Inc. its ability to meet the
then-current standards and specifications of Denny's, Inc. for such items, must
possess adequate quality controls, and must possess the capacity to provide
supplies promptly and reliably. Although the Company is not required to acquire
its equipment or supplies from any specified supplier, it must obtain the
approval of Denny's, Inc. before purchasing or leasing any items from an
unapproved supplier.
The Company's restaurants operate on a par stock system, which is a
system that enables restaurant managers to place weekly inventory orders based
on historical sales volumes, thereby focusing on customer service rather than on
purchasing decisions. The Company purchases most of its food inventory from a
single supplier that
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specializes in providing food products to Denny's franchisees. The Company
believes that its purchases from this supplier enable the Company to maintain a
high level of quality consistent with Denny's restaurants, to realize
convenience and dependability in the receipt of its supplies, to avoid the costs
of maintaining a large purchasing department, large inventories, and product
warehouses, and to attain cost advantages as a result of volume purchases. The
Company does not have a supply agreement or other contractual arrangement with
its primary supplier and effects purchases through purchase orders. The Company
believes that food goods could be readily purchased from a large number of
vendors throughout its regions of operation in the event that it is unable to
purchase sufficient inventory from its primary supplier. The Company negotiates
directly with manufacturers and packers for contract pricing for equipment, food
products, and other supplies used at its non-Denny's restaurants. Each of the
Company's restaurants purchases dairy, bakery, and produce goods from approved
local vendors.
ADVERTISING AND MARKETING
As generally required under the terms of the Denny's Franchise
Agreements, the Company contributes 2% of its restaurant sales to an advertising
and marketing fund controlled by Denny's, Inc. Denny's, Inc. uses this fund
primarily to develop system-wide advertising, sale promotions, and marketing
materials and programs. The Denny's Franchise Agreements prohibit franchisees,
including the Company, from conducting any local, regional, or national
advertising without the prior written consent of Denny's, Inc. From time to
time, Denny's, Inc. may establish advertising cooperatives for geographic areas
not covered by existing advertising campaigns. In the event that the Company
participates in such a cooperative, any contribution that it makes to a
cooperative is in addition to the 2% of gross sales that the Company is required
to contribute to Denny's, Inc. Cooperatives have recently been established in
several of the Company's markets. The Company anticipates that these
cooperatives will be efficient, economical methods of increasing sales through
more effective regional or local advertising.
GOVERNMENT REGULATION
The restaurant business is subject to extensive federal, state and
local government regulation relating to the development and operation of
restaurants. Each of the Company's restaurants is subject to licensing and
regulation by state and local departments and bureaus of alcohol control,
health, sanitation, and fire and to periodic review by the state and municipal
authorities for areas in which the restaurants are located. In addition, the
Company is subject to local land use, zoning, building, planning, and traffic
ordinances and regulations in the selection and acquisition of suitable sites
for constructing new restaurants. Delays in obtaining, or denials of, revocation
of, or temporary suspension of, necessary licenses or approvals could have a
material adverse impact upon the Company's development or acquisition of
restaurants or the Company's operations generally. The Company also is subject
to regulation under the Fair Labor Standards Act, which governs such matters as
working conditions and minimum wages. An increase in the minimum wage rate or
changes in tip-credit provisions, employee benefit costs (including costs
associated with mandated health insurance coverage), or other costs associated
with employees could adversely affect the Company. In addition, the Company is
subject to the Americans with Disabilities Act of 1990 which, among other
things, may require certain installations in new restaurants or renovations to
its existing restaurants to meet federally mandated requirements. To the
Company's knowledge, the Company is in compliance in all material respects with
all applicable federal, state and local laws affecting its business.
Sales of alcoholic beverages comprised less than 1% of the Company's
total restaurant sales for fiscal 1995. The sale of alcoholic beverages is
subject to extensive regulations. The Company may be subject to "dram-shop"
statues, which generally provide an individual injured by an intoxicated person
the right to recover damages from the establishment that wrongfully served
alcoholic beverages to that person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance and
has never been a defendant in a lawsuit involving "dram-shop" statues.
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TRADEMARKS
The Company licenses the right to use the "Denny's" trademark
directly from Denny's, Inc. The Company believes that the continued right to use
the "Denny's" trademark is important to its success. The Company also licenses
the right to use the "Kettle" trademark from Kettle Restaurants, Inc., pending
the Company's conversion of its Kettle restaurants to the Denny's concept, and
licenses the "Todd's" trademark for a period ending August 31, 1998. The Company
owns the rights to various trade names, including "Ike's," "Ike's Great American
Restaurant," "Jerry's," a registered trademark, "Mr. Fable's," a registered
trademark, and "Bucky's Extraordinary Eatery." The Company does not consider the
trademarks it owns important to its success. The Company has granted
non-exclusive royalty-free rights to the "Jerry's" trademark to the owners of 22
other Jerry's restaurants in the midwest. These owners are former Jerry's
franchisees and are not affiliated with the Company.
COMPETITION
The restaurant industry is highly competitive with respect to price,
service, and food type and quality. In addition, restaurants compete for the
availability of restaurant personnel and managers. The Company's restaurants
compete with a large number of other restaurants, including national and
regional restaurant chains and franchised restaurant systems, many of which have
greater financial resources, more experience, and longer operating histories
that the Company, as well as with locally owned independent restaurants. Changes
in factors such as consumer tastes, local, regional, or national economic
conditions, demographic trends, traffic patterns, cost and availability of food
products or labor, inflation, and purchasing power of consumers also could have
a material adverse effect on the Company's operations.
The Company's restaurants also compete with various types of food
businesses, as well as other businesses, for restaurant locations. The Company
believes that site selection is one of the most crucial decisions required in
connection with the development of restaurants. As the result of the presence of
competing restaurants in the Company's target markets, the Company devotes great
attention to obtaining what it believes will be premium locations for new
restaurants, although no assurances can be given that it will be successful in
this regard.
The Company's Denny's restaurants, as part of the nation's largest
family-oriented, full-service restaurant chain, compete primarily with regional
restaurant chains such as International House of Pancakes, Big Boy, Shoney's,
Friendly's and Perkins. The Company's non-Denny's restaurants also compete with
these chains, as well as with smaller regional, local and independent operators.
INSURANCE
The Company maintains general liability and property insurance and an
umbrella and excess liability policy in amounts it considers adequate and
customary for businesses of its kind. There can be no assurance, however, that
future claims will not exceed insurance coverage.
EMPLOYEES
At May 31, 1996, the Company had approximately 10,000 employees, of
whom approximately 115 were corporate personnel, approximately 750 were
restaurant management personnel, and the remainder were hourly personnel. The
Company is not a party to any collective bargaining agreement. The Company
believes that its relationship with its employees is good.
Each of the Company's typical Denny's restaurants has approximately
50 employees, including approximately 20 kitchen personnel and 30 service
personnel. Each of the Company's non-Denny's restaurant has approximately 30 to
50 employees, depending upon average restaurant sales. Many of the Company's
employees work part-time. Restaurant personnel, other than regional, district
and restaurant managers, are paid
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on an hourly basis. Hourly rates vary according to geographical location,
generally ranging from $5.00 to $6.00 an hour for kitchen personnel. Service
personnel are paid approximately $2.25 an hour plus tips.
SPECIAL CONSIDERATIONS
NO ASSURANCE OF PROFITABILITY; INTEGRATION OF BUSINESS OPERATIONS FOLLOWING THE
MERGER
The Company's ability to generate operating profits will depend upon
its ability to successfully integrate the operations of DRC with those of the
Company subsequent to the Merger; the nature and extent of any future
developments, acquisitions, conversions, and re-imagings of restaurants; the
Company's capital resources; general economic and demographic conditions; and
the Company's ability to refinance, restructure, or repay its outstanding
indebtedness. There can be no assurance that the Company will be profitable in
the future. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company anticipates that it will be able to use the opportunities
created by the Merger to effect what it believes will be substantial cost
savings, including a reduction in operating expenses as a result of the
elimination of duplicative administrative facilities, personnel, and other
overhead expenses. Significant uncertainties, however, accompany any business
combination and its implementation with respect to the ability of the combined
companies to integrate administrative functions and management resources in
order to achieve operating efficiencies. There can be no assurance that the
Company will be able to realize cost savings as a result of the Merger, that
such reductions will not result in a decrease in revenue and profits, or that
there will not be other adverse effects from the reduction of such expenses. The
inability to achieve the anticipated cost savings could have a material adverse
effect on the Company's operating results in the future.
RISKS ASSOCIATED WITH BUSINESS STRATEGY
The Company intends to pursue a strategy of growth primarily through
the development of new Denny's restaurants, the acquisition of existing Denny's
restaurants, the conversion of certain non-Denny's restaurants to the Denny's
concept, the re-imaging of certain of its existing Denny's restaurants to the
new Denny's format, and the expansion of its operations to include one or more
additional restaurant concepts. There can be no assurance that the Company will
be successful in developing new Denny's restaurants or acquiring existing
Denny's restaurants on acceptable terms and conditions, that its operations can
be expanded to include other restaurant concepts, that any additional
restaurants it develops or acquires will be effectively and profitably managed
and integrated into its operations, that it will be able to effect its
contemplated conversions or re-imagings, or that any restaurants that it
develops, acquires, converts, or re-images will operate profitably. The
execution of the Company's business strategy will require the availability of
substantial funds. See Item 1, "Special Considerations - Significant Borrowings
and Future Financings."
Unforeseen expenses, difficulties, and delays frequently encountered
in connection with the rapid expansion of operations also could hinder the
Company from executing its business strategy. The magnitude, timing, and nature
of future restaurant developments, acquisitions, conversions, and re-imagings
will depend upon various factors, including the availability of suitable sites,
the ability to negotiate suitable terms, the Company's financial resources, the
availability of restaurant management and other personnel, the ability to obtain
the consent of Denny's, Inc. to such development, acquisitions, and conversions,
and general economic and business conditions. Many of these factors will be
beyond the control of the Company.
EXPANSION OF OPERATIONS
The Company's operations have expanded significantly since 1990. The
Company's success in the future will depend on its ability to integrate the
operations of DRC with its prior operations, to expand the number of its
restaurants either through increasing the number of its Denny's restaurants or
expanding its operations to include
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one or more additional restaurant concepts, such as the Black-eyed Pea concept,
or both, and to operate and manage successfully its growing operations. The
Company's ability to expand successfully will depend upon a number of factors,
including the availability and cost of suitable restaurant locations for
development; the availability of restaurant acquisition opportunities; the
hiring, training, and retaining of additional management and restaurant
personnel; the availability of adequate financing; the continued development and
implementation of management information systems; and competitive factors.
The rate at which the Company will be able to increase the number of
restaurants it operates will vary depending upon whether the Company acquires
existing restaurants or develops new restaurants. The acquisition of existing
restaurants will depend upon the Company's ability to identify and acquire
restaurants on satisfactory terms and conditions. The opening of new restaurants
will depend upon the Company's ability to locate suitable sites in terms of
favorable population characteristics, density and household income levels,
visibility, accessibility and traffic volume, proximity to demand generators
(including shopping malls, lodging, and office complexes) and potential
competition; to obtain financing for construction, tenant improvements,
furniture, fixtures, and equipment; to negotiate acceptable leases or terms of
purchase; to secure liquor licenses and zoning, environmental, health and
similar regulatory approvals; to recruit and train qualified personnel; and to
manage successfully the rate of expansion and expanded operations. The opening
of new restaurants also may be affected by increased construction costs and
delays resulting from governmental regulatory approvals, strikes or work
stoppages, adverse weather conditions, and various acts of God. Newly opened
restaurants may operate at a loss for a period following their initial opening.
The length of this period will depend upon a number of factors, including the
time of year the restaurant is opened, sales volume, and the Company's ability
to control costs. There can be no assurance that the Company will be successful
in achieving its expansion goals through development or acquisition of
additional restaurants or that any additional restaurants that are developed or
acquired will be profitable.
SIGNIFICANT BORROWINGS AND FUTURE FINANCINGS
The development of new restaurants, the acquisition of existing
restaurants, and the conversion and re-imaging of restaurants requires funds for
construction, tenant improvements, furniture, fixtures, equipment, training of
employees, permits, initial franchise fees, and additional expenditures. See
Item 1, "Business - Denny's Restaurants - Unit Economics." The Company has
incurred substantial indebtedness to effect its restaurant developments,
acquisitions, conversions, and re-imagings to date, and the Company may incur
substantial additional indebtedness in the future in order to implement its
business plan and growth strategy. The Company had long-term debt of $34.8
million, subordinated notes of $20.8 million, and obligations under capital
leases aggregating $22.0 million and a working capital deficit of $30.1 million
as of March 27, 1996.
The Company may seek additional equity or debt financing in the
future to provide funds to develop or acquire additional restaurants. In
addition, the Company currently intends to raise sufficient capital, either
through the sale of equity or by incurring replacement indebtedness, to enable
it to retire its Series A Notes and Series B Notes prior to the dates on which
the related Series A Warrants and Series B Warrants, respectively, become
exercisable. There can be no assurance that such financing will be available or
will be available on satisfactory terms, that the Company will be able to repay
its obligations to develop new restaurants or to convert non-Denny's restaurants
to the Denny's concept or that it will otherwise be able to expand its
restaurant operations, that the Company will be able to refinance, restructure,
or satisfy its obligations as they become due, or that it will be able to retire
its Series A Notes or Series B Notes before the related Series A Warrants or
Series B Warrants are exercised. See Item 1, "Special Considerations - Expansion
of Operations" and "Special Considerations - Inability to Develop or Convert
Restaurants." While debt financing enables the Company to add more restaurants
than it would otherwise be able to do, expenses are increased by such financing
and such financing must be repaid by the Company regardless of the Company's
operating results. Future equity financings could result in dilution to
shareholders.
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The terms of the Series A Notes provide that the holders of such
notes may require the Company to redeem all of the Series A Notes in the event
of a "Change of Control," as defined in the Indentures governing the Series A
Notes. There can be no assurance that the Company will have sufficient funds
available to redeem all or any part of the Series A Notes or that the Company
will have access to adequate third-party financing on acceptable terms in order
to enable it to redeem the Series A Notes upon the occurrence of a Change of
Control. The inability to redeem the Series A Notes or the lack of adequate
financing on favorable terms could have a material adverse effect on the
Company.
RELIANCE ON DENNY'S, INC.
The Company currently operates 178 Denny's restaurants as a Denny's
franchisee. As a result of the nature of franchising and the Company's franchise
agreements with Denny's, Inc., the long-term success of the Company depends, to
a significant extent, on the continued vitality of the Denny's restaurant
concept and the overall success of the Denny's system; the ability of Denny's,
Inc. to identify and react to new trends in the restaurant industry, including
the development of popular menu items; the ability of Denny's Inc. to develop
and pursue appropriate marketing strategies in order to maintain and enhance the
name recognition, reputation, and market perception of Denny's restaurants; the
goodwill associated with the Denny's trademark; the quality, consistency, and
management of the overall Denny's system; and the successful operation of
Denny's restaurants owned by other franchisees. Any business reversals that may
be encountered by Denny's, Inc., a failure by Denny's, Inc. to promote the
Denny's name or restaurant concept, the inability or failure of Denny's, Inc. to
support its franchisees, including the Company, or the failure to operate
successfully the Denny's restaurants that Denny's, Inc. itself owns could have a
material adverse effect on the Company. The Company has no control over the
management or operation of Denny's, Inc. or other Denny's franchisees. Negative
publicity with respect to Denny's, Inc. or the Denny's name could adversely
affect the Company. For example, the Company experienced a decline in traffic
and restaurant sales in certain of its Denny's restaurants as a result of the
negative publicity that arose in 1993 relating to claims of alleged racial
discrimination against customers in certain Denny's, Inc. restaurants and a
subsequent investigation of such claims by the United States Department of
Justice.
INABILITY TO DEVELOP OR CONVERT RESTAURANTS
The Company's Development Agreement with Denny's, Inc. gives the
Company the exclusive right to develop and open an additional 33 Denny's
restaurants in specified locations during the period ending December 31, 1997.
See Item 1, "Business - Development Agreement." The acquisition of restaurants
does not constitute the opening of new restaurants under the Development
Agreement. There can be no assurance that the Company will be able to secure
sufficient restaurant sites that it deems to be suitable or to develop
restaurants on such sites on terms and conditions it considers favorable in
order to satisfy the requirements of the Development Agreement. In the event
that the Company fails to timely comply with the schedule for developing
restaurants or otherwise defaults under the Development Agreement, Denny's, Inc.
will have the right to terminate the Development Agreement and the Company's
exclusive right to develop restaurants under that agreement, which could have an
adverse effect on the Company.
An agreement with Denny's Inc. requires the Company to convert 20
non-Denny's restaurants to the Denny's concept by September 1997. Another
agreement with Denny's, Inc. requires the Company to convert 21 designated
non-Denny's restaurants to the Denny's concept by January 1, 1998 at the rate of
11 conversions in 1996 and 10 in 1997. The Company also has agreed to close or
convert to a non-competing restaurant concept 24 designated non-Denny's
restaurants by January 1, 1998. The failure to meet the requirements of these
agreements will be deemed to be a material breach of all of the Company's
franchise agreements with Denny's, Inc., which would enable Denny's, Inc. to
terminate all such agreements. Such a termination would have a material adverse
effect on the Company.
17
<PAGE> 20
At the request of the Company, Denny's, Inc. from time to time has
agreed to amend the terms of the agreements described above, so as to extend the
time in which the Company was required to develop new Denny's restaurants or to
convert restaurants to the Denny's concept. The Company requested such
amendments as a result of its inability to secure sites for new restaurants that
it believed to be attractive on favorable terms and conditions and to secure
adequate financing to enable it to convert restaurants to the Denny's concept
within the time periods required. There can be no assurance that Denny's, Inc.
will extend the development or conversion schedules in the future in the event
that the Company experiences any difficulty in satisfying such schedules for any
reason, including a shortage of capital.
RESTRICTIONS IMPOSED BY DENNY'S FRANCHISE AGREEMENTS
The Denny's Franchise Agreements impose a number of restrictions and
obligations on the Company. The Denny's Franchise Agreements require the Company
to pay an initial franchise fee and royalties equal to 4% of weekly gross sales
and an advertising contribution of 2% of weekly gross sales. Such amounts must
be paid or expended regardless of the profitability of the Company's Denny's
restaurants. In addition, the Denny's Franchise Agreements require the Company
to operate its Denny's restaurants in accordance with the requirements and
specifications established by Denny's, Inc. relating to the exterior and
interior design, decor, and furnishings of Denny's restaurants, menu selection,
the preparation of food products, and quality of service as well as general
operating procedures, advertising, maintenance of records, and protection of
trademarks. The failure of the Company to satisfy such requirements could result
in the loss of the Company's franchise rights for some or all of its Denny's
restaurants as well as its development rights for additional Denny's
restaurants. See Item 1, "Business -Denny's Restaurants - Denny's Franchise
Agreements" and "Business - Development Agreement." In the event that the
Company defaults under the Denny's Franchise Agreements, the Company could be
subject to potential damages for breach of contract and could lose its rights
under those agreements, including the right to what the Company believes are
favorable franchise arrangements and the right to use the "Denny's" trademarks
and trade styles. The loss of such rights would have a material adverse effect
on the Company. Denny's, Inc. has retained the right to open on its own behalf
or to grant to other franchisees the right to open other Denny's restaurants in
the immediate vicinity of the Company's Denny's restaurants. In addition, from
time to time, Denny's, Inc. may require the Company to modify its restaurants to
conform with the then-existing Denny's restaurant format.
The Denny's Franchise Agreements provide that, in the event an
assignment is deemed to have occurred thereunder, Denny's, Inc. will have the
option to purchase the interest being transferred. An assignment under the
Denny's Franchise Agreements will be deemed to have occurred if a person,
entity, or group of persons (other than a group including any of Jack M. Lloyd,
William J. Howard, Jeffrey D. Miller, William G. Cox, or BancBoston) acquires
voting control of the Board of Directors of the Company.
CERTAIN FACTORS AFFECTING THE RESTAURANT INDUSTRY
The ownership and operation of restaurants may be affected by adverse
changes in national, regional, or local economic or market conditions; increased
costs of labor (including those which may result from any increases in
applicable minimum wage requirements); increased costs of food products; fuel
shortages and price increases; competitive factors; the number, density, and
location of competitors; limited alterative uses for properties and equipment;
changing consumer tastes, habits, and spending priorities; the cost and
availability of insurance coverage; management problems; uninsured losses;
changing demographics; changes in government regulation; changing traffic
patterns; weather conditions; and other factors. The Company may be the subject
of litigation based on discrimination, personal injury, or other claims,
including claims that may be based upon legislation that imposes liability on
restaurants or their employees for injuries or damages caused by the negligent
service of alcoholic beverages to an intoxicated person or to a minor.
Multi-unit restaurant operators, such as the Company, can be adversely affected
by publicity resulting from food quality, illness, injury, or other health and
safety concerns or operating issues resulting from one restaurant or a limited
number of restaurants operated under the same name, including those not owned by
the Company. None of these factors can be predicted with any degree of
certainty, and any one or more of these factors could have a material adverse
effect on the Company.
18
<PAGE> 21
COMPETITION
As part of the nation's largest family-oriented, full-service
restaurant chain, the Company's Denny's restaurants compete primarily with
regional restaurant chains such as International House of Pancakes, Big Boy,
Shoney's, Friendly's, and Perkins. The Company's non-Denny's restaurants also
compete with these chains as well as with smaller regional, local, and
independent operators. The restaurant industry is intensely competitive with
respect to price, service, location, personnel, and type and quality of food. In
addition, restaurants compete for attractive restaurant sites and the
availability of restaurant personnel and managers. The Company has many
well-established competitors with financial and other resources substantially
greater than those of the Company. Certain competitors have been in existence
for a substantially longer period than the Company and may be better established
in markets where the Company's restaurants are or may be located. The restaurant
business often is affected by changes in consumer tastes, national, regional, or
local economic conditions, demographic trends, traffic patterns, and the type,
number and location of competing restaurants. The Company's success will depend,
in part, on the ability of both the Company's management and Denny's, Inc. to
identify and respond appropriately to changing conditions. In addition, factors
such as inflation, increased food, labor, and benefit costs, and the
availability of experienced management and hourly employees, which may adversely
affect the restaurant industry in general, would affect the Company's
restaurants.
CONTROL BY CERTAIN SHAREHOLDERS; CONFLICTS OF INTEREST
The directors and officers of the Company currently own approximately
46.2% of the Company's outstanding Common Stock. In addition, BancBoston, a
former shareholder of DRC, currently owns approximately 14.3% of the Company's
outstanding Common Stock. Accordingly, such shareholders collectively have the
power to elect all of the members of the Company's Board of Directors and
thereby control the business and policies of the Company.
Jack M. Lloyd, the President and Chief Executive Officer of the
Company, William J. Howard, a Vice President of the Company, and BancBoston
currently hold an aggregate of $22,794,000 principal amount of the Company's
Series A Notes and Series B Notes in addition to their Common Stock. As a result
of such shareholders' ability, together with the Company's other directors and
officers, to direct the policies of the Company, an inherent conflict of
interest may arise in connection with decisions regarding the timing of and the
allocation of assets of the Company for the purposes of interest payments on, or
redemption of, the Series A Notes and Series B Notes. In addition, the Series A
Notes and Series B Notes contain restrictive covenants relating to the operation
of the Company and the maintenance of certain financial ratios and tests. There
can be no assurance that the holders of the Series A Notes and Series B Notes
will waive any default under the notes. A default not waived by a majority of
the holders of the Series A Notes and Series B Notes could have a material
adverse effect on the holders of the Company's Common Stock.
DEPENDENCE UPON KEY PERSONNEL
The Company's success will depend, in large part, upon the services
of Jeffrey D. Miller, the Company's Chairman of the Board; Jack M. Lloyd, the
Company's President and Chief Executive Officer; and William G. Cox, the
Company's Chief Operating Officer. Although the Company has employment
agreements with Messrs. Miller, Lloyd, and Cox expiring in September 1998,
December 1997, and May 1999, respectively, the loss of the services of any of
them could materially and adversely affect the Company. See Item 10, "Directors
and Executive Officers of the Registrant - Employment Agreements."
GOVERNMENT REGULATION
The Company is subject to various federal, state, and local laws
affecting its business. The development and operation of restaurants depend to a
significant extent on the selection and acquisition of suitable sites, which are
subject to zoning, land use, environmental, traffic, and other regulations of
state and local governmental
19
<PAGE> 22
agencies. City ordinances or other regulations, or the application of such
ordinances or regulations, could impair the Company's ability to construct or
acquire restaurants in desired locations and could result in costly delays. In
addition, restaurant operations are subject to licensing and regulation by state
and local departments relating to health, sanitation, safety standards, and fire
codes; federal and state labor laws (including applicable minimum wage
requirements, tip credit provisions, overtime regulations, workers' compensation
insurance rates, unemployment and other taxes, working and safety conditions,
and citizenship requirements); zoning restrictions; and, in the few restaurants
currently operated by the Company at which alcoholic beverages are served, state
and local licensing of the sale of alcoholic beverages. The delay or failure to
obtain or maintain any licenses or permits necessary for operations could have a
material adverse effect on the Company. In addition, an increase in the minimum
wage rate, employee benefit costs (including costs associated with mandated
health insurance coverage), or other costs associated with employees could
adversely affect the Company. The Company also is subject to the Americans with
Disabilities Act of 1990 which, among other things, may require the installation
of certain fixtures or accommodations in new restaurants or renovations to its
existing restaurants to meet federally mandated requirements.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock could be subject to
wide fluctuations in response to quarterly variations in the operating results
of the Company or other restaurant companies, changes in analysts' estimates of
the Company's financial performance, changes in national and regional economic
conditions, the financial markets, or the restaurant industry, natural
disasters, or other developments affecting the Company or other restaurant
companies. The trading volume of the Company's Common Stock has been limited,
which increases the volatility of the market price for such stock. In addition,
the stock market has experienced extreme price and volume fluctuation in recent
years. This volatility has had a significant effect on the market prices of
securities issued by many companies for reasons not necessarily related to the
operating performances of these companies.
RIGHTS TO ACQUIRE SHARES
A total of 1,235,000 shares of the Company's Common Stock have been
reserved for issuance upon exercise of options granted or which may be granted
under the Company's stock option plans. See Item 10, "Directors and Executive
Officers of the Registrant - Stock Option Plans." Employee stock options to
acquire an aggregate of 1,116,800 shares of Common Stock at a weighted average
exercise price of $4.01 per share currently are outstanding. In addition,
warrants and unit purchase options to acquire 2,031,523 shares of Common Stock
at a weighted average exercise price of $3.66 per share currently are
outstanding. During the terms of such options and warrants, the holders thereof
will have the opportunity to profit from an increase in the market price of the
Company's Common Stock. The existence of such options and warrants may adversely
affect the terms on which the Company can obtain additional financing in the
future, and the holders of such options and warrants can be expected to exercise
such options and warrants at a time when the Company, in all likelihood, would
be able to obtain additional capital by offering shares of Common Stock on terms
more favorable to it than those provided by the exercise of such options and
warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices for the Company's Common Stock
and could adversely affect the Company's ability to raise capital. There
currently are outstanding 13,148,944 shares of the Company's Common Stock. Of
these shares, approximately 10,170,700 shares are freely transferrable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
unless they are held by "affiliates" of the Company, as that term is defined in
the Securities Act and the regulations promulgated thereunder or unless transfer
of certain shares is restricted as a result of contractual obligations.
20
<PAGE> 23
The 6,937,500 shares of Common Stock issued pursuant to the Merger
generally are freely tradeable under Rule 145 under the Securities Act, unless
held by an affiliate, in which case such shares will be subject to the volume
and manner of sale restrictions under Rule 144. In connection with the Merger,
certain of the former shareholders of DRC entered into lock-up agreements with
respect to 4,660,256 shares of Common Stock issued to them upon consummation of
the Merger. The former shareholders of DRC have certain rights with respect to
registration of the shares of Common Stock issued in connection with the Merger
or upon exercise of the warrants issued in connection with the Merger. Holders
of other outstanding warrants and unit purchase options have certain rights with
respect to registration of the shares underlying such warrants and options for
offer or sale to the public.
LACK OF DIVIDENDS; RESTRICTIONS ON ABILITY TO PAY DIVIDENDS IN THE FUTURE
The Company has never paid any dividends on its Common Stock, and it
is not anticipated that it will pay dividends in the foreseeable future. The
Company intends to apply any earnings to the expansion and development of its
business. In addition, the terms of the Company's $65.0 million credit facility
and the terms of the Indentures governing its Series A Notes and Series B Notes
also prohibit the Company from paying dividends on its Common Stock.
CHANGE IN CONTROL PROVISIONS
The Company's Restated Articles of Incorporation and Amended and
Restated Bylaws and certain provisions of the Georgia Business Corporation Code
contain provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of the Company, even when these attempts
may be in the best interests of shareholders.
ITEM 2. PROPERTIES.
The Company leases for a term expiring in 1997 approximately 12,000
square feet of office space in Scottsdale, Arizona, for use as its principal
corporate offices. The Company believes that this space may not be adequate for
its reasonably anticipated needs following the Merger and intends to enter into
leases for new or additional space as and when the need arises.
The Company leases substantially all the land and buildings for its
restaurants. The initial lease terms range from 10 to 20 years and include
renewal options for up to 30 years. All of the Company's current leases have
remaining initial terms or renewal options that extend for more than five years
from the date of this Report. The leases generally provide for a minimum
annual rent and additional rental payments if restaurant sales volume exceed
specified amounts. In addition, the leases generally require the Company to pay
real estate taxes, insurance premiums, maintenance costs, and certain other of
the landlords' operating costs. Contingent rentals have represented less than
15% of total rent expense for each of fiscal 1993, 1994, and 1995. Annual base
rent for each location ranges from approximately $8,900 a year to approximately
$151,000 a year, with the annual average rent approximating $53,000. The
Company's restaurants generally are located in single-purpose, one-story,
freestanding buildings with a capacity of between 90 and 220 customers. The
Company owns most of the furniture, fixtures and equipment in its restaurants,
including kitchen equipment, seating and tables.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings to which the Company is a party or to
which any of its properties are subject other than routine litigation incident
to the Company's business which is covered by insurance or an indemnity, or
which is not expected to have a material adverse effect on the Company's
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
21
<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
(the "AMEX") under the symbol "DEN." The following table sets forth the high and
low sales prices per share of the Company's Common Stock as reported on the AMEX
for the calendar periods indicated since the Company's initial public offering
on October 18, 1994.
<TABLE>
<CAPTION>
COMMON STOCK
------------
HIGH LOW
---- ---
<S> <C> <C>
1994
----
Fourth Quarter............................ $5.125 $3.500
1995
----
First Quarter............................. $4.125 $2.625
Second Quarter............................ 4.750 3.125
Third Quarter............................. 5.250 4.000
Fourth Quarter............................ 6.000 4.000
1996
----
First Quarter............................. $5.750 $3.625
Second Quarter (through June 7, 1996)..... 5.875 3.000
</TABLE>
The Company has never declared or paid any dividends. The Company
intends to retain earnings, if any, to fund the growth of its business and does
not anticipate paying any cash dividends in the foreseeable future. In addition,
the payment of dividends on the Company's Common Stock is prohibited under the
Company's existing credit facility with Banque Paribas.
As of June 7, 1996, there were approximately 200 holders of record of
the Company's Common Stock. On June 7, 1996, the closing sales price of the
Company's Common Stock on the AMEX was $5.375 per share.
22
<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical consolidated financial data of the
Company for each of the fiscal years in the three-year period ended December 27,
1995 have been derived from and should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
herein. The selected historical summary consolidated financial data for the two
fiscal years ended December 31, 1992 are derived from DRC's historical financial
statements (not included elsewhere herein), of which the fiscal year ended
December 26, 1991, is unaudited. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Basis of
Presentation" and Note 1 to the consolidated financial statements.
<TABLE>
<CAPTION>
AS OF AND FOR THE FISCAL YEAR ENDING
------------------------------------------------------------
DEC. 26, DEC. 31, DEC. 30, DEC. 28, DEC. 27,
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Restaurant sales $20,702 $27,712 $32,584 $47,323 $74,683
Restaurant operating income 1,265 2,671 3,147 4,539 6,643
Administrative expenses 1,461 1,867 2,050 2,619 3,380
Operating income (loss) (23) 930 1,328 1,320 3,263
Interest expense (535) (449) (736) (1,301) (2,467)
Net income (loss) (701) (22) 140 (341) 200
OTHER DATA:
EBITDA(2) $ 655 $ 1,923 $ 2,656 $ 2,821 $ 6,722
Cash flows provided by operating activities 985 1,633 2,493 2,410 6,305
Cash flows (used in) investing activities (1,393) (1,988) (1,002) (9,667) (8,736)
Cash flows provided by (used in)
financing activities 400 (118) (1,168) 7,092 2,273
Capital expenditures 1,499 2,346 1,574 9,667 8,736
Depreciation and amortization 678 993 1,328 1,501 2,936
Ratio of earnings to fixed charges(3) .41 1.11 1.15 .81 1.10
Number of restaurants, end of period 28 31 37 70 102
BALANCE SHEET DATA:
Working capital (deficit) $(2,470) $(3,213) $(3,568) $(6,107) $(9,406)
Total assets 8,618 9,907 14,529 35,028 53,785
Long-term debt, less current portion 602 475 2,135 7,552 10,371
Obligations under capital leases,
less current obligations 2,289 2,808 4,307 7,151 19,881
Redeemable convertible preferred stock - - - 7,397 7,501
Shareholders' equity (deficit) (1,102) (1,703) (1,218) 957 564
</TABLE>
- ---------------
(1) The Company has consummated various acquisitions and has opened new
restaurants during each of the five fiscal years shown. Accordingly,
revenue increases in each of the years shown arise primarily from
restaurant acquisitions and openings in each year.
(2) EBITDA represents income (loss) before minority interest in joint ventures,
interest, income taxes, depreciation and amortization. EBITDA is not
intended to represent cash flows from operations as defined by generally
accepted accounting principles and should not be considered as an
alternative to net income (loss) as an indication of the Company's
operating performance or to cash flows from operations as a measure of
liquidity. EBITDA is included in this Report because it is a basis upon
which the Company assesses its financial performance.
(3) Earnings consist of pre-tax income after minority interests plus fixed
charges, excluding capitalized interest. The Company's fixed charges
consist of (i) interest, whether expensed or capitalized; (ii) amortization
of debt expense, including any discount or premium whether expensed or
capitalized; and (iii) a portion of rental expense representing the
interest factor. Earnings were inadequate to cover fixed charges in fiscal
years 1991 $(841,000) and 1994 $(550,000).
23
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
BASIS OF PRESENTATION
Upon consummation of the Merger, the former shareholders of DRC owned an
aggregate of approximately 53.0% of the outstanding voting power of the Company
immediately following the Merger. See Item 1, "Business Development of the
Company." Accordingly, the Merger has been accounted for as a reverse purchase
under generally accepted accounting principles, pursuant to which DRC is
considered to be the acquiring entity and AFR the acquired entity for accounting
purposes, even though the Company is the surviving legal entity. In addition, as
permitted under generally accepted accounting principles, for accounting
purposes the Merger was deemed to have occurred on March 27, 1996, the last day
of DRC's first quarter for fiscal 1996. As a result, (i) the historical
financial statements of AFR for periods prior to the date of the Merger are no
longer the historical financial statements of the Company and therefore are no
longer presented; (ii) the historical financial statements of the Company for
periods prior to the Merger are those of DRC; (iii) all references to the
financial statements of the "Company" apply to the historical financial
statements of DRC prior to and subsequent to the Merger; and (iv) any references
to "AFR" apply solely to American Family Restaurants, Inc. and its financial
statements prior to the Merger. The following discussion and analysis should be
read in conjunction with the information set forth under "Selected Financial
Data" and the consolidated financial statements and notes thereto included
elsewhere herein.
COMPARISON OF RESULTS OF OPERATIONS
The following table presents for the periods indicated, certain items in
the historical consolidated statements of operations as a percentage of total
restaurant sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
DEC. 30, DEC. 28, DEC. 27,
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Restaurant sales:
Denny's restaurants 100.0% 100.0% 94.2%
Non-Denny's restaurants - - 5.8%
----- ----- -----
Total restaurant sales 100.0 100.0 100.0%
----- ----- -----
Restaurant operating expenses:
Cost of food and beverage 27.4 27.0 27.2
Payroll and payroll related costs 31.6 33.8 33.5
Charge for impaired assets - - 0.7
Depreciation and amortization 4.1 3.2 3.9
Other restaurant operating costs 27.3 26.4 25.7
----- ----- -----
Total restaurant operating expenses 90.4 90.4 91.0
----- ----- -----
Restaurant operating income 9.6 9.6 9.0
Administrative expenses 6.3 5.5 4.5
Other items (0.8) 1.3 -
----- ----- -----
Operating income 4.1 2.8 4.5
Other income (expense) 0.4 (0.1) -
Interest expense (2.3) (2.7) (3.3)
----- ----- -----
Income (loss) before minority interest in joint
ventures, income taxes and extraordinary item 2.2 - 1.2
Minority interest in joint ventures 1.4 1.1 0.4
----- ----- -----
Income (loss) before income taxes and
extraordinary item 0.8 (1.1) 0.8
Income taxes 0.4 (0.4) 0.5
----- ----- -----
Net income (loss) 0.4% (0.7)% 0.3%
===== ===== =====
</TABLE>
FISCAL 1995 COMPARED WITH FISCAL 1994
Restaurant Sales. Restaurant sales increased $27.4 million, or 57.9%, to
$74.7 million for fiscal 1995 as compared with restaurant sales of $47.3 million
for fiscal 1994. This increase was primarily attributable to
24
<PAGE> 27
restaurant sales associated with the 1994 acquisitions, restaurants opened
during 1995, and the restaurants associated with the Kettle leases.
Cost of Food and Beverage. Cost of food and beverage increased to 27.2%
of restaurant sales for fiscal 1995 as compared with 27.0% of restaurant sales
for fiscal 1994, primarily due to increased commodity prices in the fourth
quarter of 1995 and higher food costs at the restaurants associated with the
Kettle leases of 32.2% of restaurant sales. Excluding the food and beverage
costs at the restaurants associated with the Kettle leases, food and beverage
costs for fiscal 1995 would have been 26.9% of restaurant sales, a decrease of
0.1% from fiscal 1994.
Payroll and Payroll Related Costs. Payroll and payroll related costs were
33.5% of restaurant sales for fiscal 1995 as compared with 33.8% of restaurant
sales for fiscal 1994. This decrease was primarily attributable to improved
workers' compensation costs and the addition of new restaurants with higher
sales volumes without a proportionate increase in payroll costs. The payroll and
payroll related costs at the restaurants associated with the Kettle leases were
37.9% of restaurant sales. Excluding the payroll and payroll related costs at
the restaurants associated with the Kettle leases, payroll and payroll related
costs for fiscal 1995 would have been 32.9% of restaurant sales, a decrease of
0.8% from fiscal 1994.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment and leasehold improvements, intangible assets, and
pre-opening costs totaled $2.9 million, or 3.9% of restaurant sales, for fiscal
1995 as compared with $1.5 million, or 3.2% of restaurant sales, for fiscal
1994. The increase of approximately $1.4 million is attributable to the
amortization of the capital leases associated with new restaurants, the
amortization of intangible assets associated with the 1994 acquisitions, and the
amortization of pre-opening costs.
Other Restaurant Operating Costs. Other restaurant operating costs were
25.7% of restaurant sales for fiscal 1995 as compared with 26.4% of restaurant
sales for fiscal 1994. The decrease is attributable to improved cost controls at
the restaurant level as well as lower occupancy costs, including general
liability insurance costs. Other operating costs at the restaurants associated
with the Kettle leases, which include no franchise costs, were 30.8% of
restaurant sales. If the Kettle results were excluded, other operating costs for
fiscal 1995 would have been 25.5% of restaurant sales, a decrease of 0.9% from
fiscal 1994.
Restaurant Operating Income. Restaurant operating income increased $2.1
million to $6.6 million for fiscal 1995 as compared with $4.5 million for fiscal
1994. This increase was principally the result of increased restaurant sales and
the factors described above.
Administrative Expenses. Administrative expenses decreased to 4.5% of
restaurant sales for fiscal 1995 as compared with 5.5% of restaurant sales for
fiscal 1994. This decrease was primarily the result of increased sales volume
without proportionate cost increases.
Interest Expense. Interest expense increased to $2.5 million, or 3.3% of
restaurant sales, for fiscal 1995 as compared with $1.3 million, or 2.7% of
restaurant sales for fiscal 1994. This increase is attributable to the increased
level of long-term debt associated with the restaurant acquisitions in 1994 and
the capitalized lease obligations associated with new store development.
Income Taxes. The income tax provision was $305,000 for fiscal 1995 as
compared with income tax benefit of $(209,000) for fiscal 1994. Due to the
adjustment of several items from the prior year, a tax rate of 60.3% resulted in
fiscal 1995.
25
<PAGE> 28
FISCAL 1994 COMPARED WITH FISCAL 1993
Restaurant Sales. Restaurant sales increased $14.7 million, or 45.2%, to
$47.3 million for fiscal 1994 as compared with restaurant sales of $32.6 million
for fiscal 1993. This increase is due to the increased number of restaurants in
operation during 1994.
Cost of Food and Beverage. Cost of food and beverage decreased to 27.0%
of restaurant sales for fiscal 1994 as compared with 27.4% of restaurant sales
for fiscal 1993. This decrease is primarily attributable to improved cost
controls at the restaurant level.
Payroll and Payroll Related Costs. Payroll and payroll related costs were
33.8% of restaurant sales for fiscal 1994 as compared with 31.6% of restaurant
sales for fiscal 1993. This increase was attributable to staffing inefficiencies
associated with the 1994 acquisitions and increased workers' compensation costs.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment and leasehold improvements, intangible assets, and
pre-opening costs totaled $1.5 million, or 3.2% of restaurant sales, for fiscal
1994 as compared with $1.3 million, or 4.1% of restaurant sales, for fiscal
1993. This increase of approximately $200,000 is attributable to the increase in
obligations under capital leases associated with new restaurant openings and the
amortization of intangible assets associated with the 1994 acquisitions.
Other Operating Expenses. Other operating expenses were 26.4% of
restaurant sales for fiscal 1994 as compared with 27.3% of restaurant sales for
fiscal 1993. The decrease is attributable to improved cost controls at the
restaurant level as well as lower occupancy costs. Lower occupancy costs are
attributable to newly developed stores, which typically have higher sales
volumes and thus lower percentage occupancy costs.
Restaurant Operating Income. Restaurant operating income increased to
$4.5 million for fiscal 1994 as compared with $3.1 million for fiscal 1993 as a
result of the increased number of units inspected and operating.
Administrative Expenses. Administrative expenses decreased to 5.5% of
restaurant sales for fiscal 1994 as compared with 6.3% of restaurant sales for
fiscal 1993. This percentage decrease is primarily attributable to increased
sales volume without proportionate cost increases.
Interest Expense. Interest expense increased to $1.3 million, or 2.7% of
restaurant sales, for fiscal 1994 as compared with $736,000, or 2.3% of
restaurant sales for fiscal 1993. This increase is attributable to the increased
level of long-term debt associated with the 1994 acquisitions and the
capitalized lease obligations associated with new store development.
Income Taxes. The income tax benefit was $(209,000) for fiscal 1994 as
compared with income tax provision of $144,000 for fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company, and the restaurant industry generally, operate principally
on a cash basis with a relatively small amount of receivables. Therefore, like
many other companies in the restaurant industry, the Company operates with a
working capital deficit. The Company's working capital deficit was $3.6 million
at December 30, 1993, $6.1 million at December 28, 1994, and $9.4 million at
December 27, 1995. The Company anticipates that it will continue to operate with
a working capital deficit.
The Company requires capital principally for the development of new
restaurants and the acquisition and conversion of existing restaurants. The
Company has historically satisfied its capital and operating requirements
26
<PAGE> 29
through a combination of private placements of equity securities and debt
instruments, cash generated from operations, and leasing transactions.
Expenditures for property and equipment totaled approximately $1.6
million, $9.7 million and $8.7 million for fiscal 1993, fiscal 1994, fiscal
1995, respectively.
The Company believes that its future capital requirements will be
primarily for the development of new restaurants, for continued acquisitions,
and for conversion of restaurants to the Denny's or other restaurant concepts.
Pursuant to the Development Agreement with Denny's, Inc., the Company is
required to develop and open 33 Denny's restaurants in specified locations
during the period ending December 31, 1997. During the first quarter of fiscal
1996, the Company developed and opened two new Denny's restaurants. Pursuant to
various other agreements with Denny's, Inc. and certain other parties, the
Company is required to (i) convert 20 restaurants currently operating under the
"Kettle" trade name to the Denny's concept by March 1997; (ii) convert at least
a total of 21 other non-Denny's restaurants to the Denny's concept before
January 1, 1998; and (iii) close or convert 24 non-Denny's restaurants to the
Denny's or other restaurant concept that is not in competition with the business
of Denny's, Inc., its affiliates, subsidiaries or franchisees. During the first
quarter of fiscal 1996, the Company converted five non-Denny's restaurants to
Denny's restaurants. The Company estimates that its costs to develop and open
new Denny's restaurants, excluding real estate and building costs, will be
approximately $350,000 to $390,000 per restaurant, and that its costs associated
with the conversion of a non-Denny's restaurant to the Denny's concept will be
approximately $160,000 to $450,000 per restaurant.
An affiliate of CNL has agreed, subject to various conditions, including
that there be no material adverse change in the financial condition of the
Company, to make available to the Company up to $20.0 million in each of 1996
and 1997 in order to finance the conversion of non-Denny's restaurants to the
Denny's concept. Each financing will take the form of a "sale-leaseback," in
which CNL would purchase a particular restaurant property and lease it back to
the Company for up to 30 years. During that period, the initial annual rent will
be 10.625% of the purchase price, subject to a 10% increase every five years
(e.g., from 10.625% to 11.6875% at the end of the first five-year period). The
leases also will provide for additional rent based on increases in gross sales
at the respective restaurants. The Company will have a right of first refusal on
the sale of each property by CNL, and will have the right to purchase each
property during the eighth year of the lease.
At December 27, 1995, the Company was not in compliance with certain
financial covenants for which waivers have been obtained.
CREDIT FACILITY
In connection with the Merger, the Company entered into a $65.0 million
credit facility with Banque Paribas (the "Paribas Facility"). The Paribas
Facility consists of (i) a Term Loan (the "Term Loan"), (ii) Revolving Loans
(the "Revolver"), and (iii) a Delayed Draw Term Loan (the "Delayed Term Loan").
The Term Loan, the Revolver, and the Delayed Term Loan will mature and become
payable December 31, 2001. At the Company's option, interest on all amounts
borrowed under the Paribas Facility will accrue at the rate of either prime plus
1.5% or a "Eurodollar Rate" calculated based upon LIBOR plus 3.5%. Amounts
borrowed under the Paribas Facility are secured by substantially all of the
tangible and intangible assets of the Company. The Company will be required to
make mandatory prepayments of amounts borrowed under the Paribas Facility in the
event of certain asset sales, equity issuances, excess cash flows, and under
certain other circumstances. The Company, at its option and without penalty, may
cancel any unused commitments or prepay outstanding indebtedness under the
Paribas Facility, in whole or in part, at any time during the term of the
Paribas Facility.
The Paribas Facility contains certain provisions that, among other
things, will limit the ability of the Company and its subsidiaries, without the
consent of Banque Paribas, to incur additional indebtedness, pay certain
dividends or make certain distributions on their respective capital stock,
repurchase shares of their respective capital stock, enter into additional
restaurant leases, make acquisitions or sell assets, or exceed specified levels
of capital
27
<PAGE> 30
expenditures. The Paribas Facility also requires the Company to maintain certain
financial ratios and to meet certain financial tests. The Paribas Facility also
includes customary provisions for credit facilities of this type, including
representations, warranties, covenants, and events of default.
The Company paid loan origination, investment banking, legal, prepayment
fees on existing debt, and other fees of approximately $4.0 million in
connection with the closing of the Paribas Facility. During the term of the
Paribas Facility, the Company will be required to pay an annual fee of $75,000
to Banque Paribas as agent of the lenders that participate with it in the
facility and a fee of 0.5% of the unused portion of amounts available for
borrowing under the Paribas Facility. In addition, the Company issued to Banque
Paribas six-year warrants to acquire 438,028 shares of the Company's Common
Stock at an exercise price of $4.3065 per share.
Term Loan
In connection with the Merger, the Company borrowed $35.0 million under
the Term Loan, which was used to refinance certain indebtedness of AFR and DRC
existing prior to the Merger and to pay certain transaction expenses incurred in
connection with the Merger and the Paribas Facility. The Company is required to
repay the Term Loan in quarterly payments of principal and interest.
Revolver
The Paribas Facility includes a $15.0 million Revolver which the Company
may utilize to finance working capital needs, to repay the Term Loan, to make
capital expenditures, and to support letters of credit. In connection with the
Merger, the Company borrowed $2.8 million under the Revolver.
Delayed Term Loan
Provided that certain conditions are met, the Company will be permitted
to make draws of all or a part of the $15.0 million available under the Delayed
Term Loan to finance acquisitions of additional restaurants beginning on June
30, 1996 and ending on December 31, 1997, and will be permitted to make draws
under the Delayed Term Loan to repay the Series A Notes and Series B Notes
beginning December 31, 1996 and ending on December 31, 1997. The Company will be
required to repay the total amount outstanding under the Delayed Term Loan in
equal quarterly payments over a four-year period commencing on January 1, 1998.
The maximum amount that the Company will be permitted to borrow under the
Delayed Term Loan will be limited by a specified ratio of the Company's adjusted
senior debt (as defined) to its earnings before interest, taxes, depreciation,
and amortization for the prior twelve-month period.
SEASONALITY
The Company's operating results fluctuate from quarter to quarter as a
result of the seasonal nature of the restaurant industry, the temporary closing
of existing restaurants for conversion, and other factors. The Company's
restaurant sales are generally greater in the second and third fiscal quarters
(April through September) than in the first and fourth fiscal quarters (October
through March). Occupancy and other operating costs, which remain relatively
constant, have a disproportionately negative effect on operating results during
quarters with lower restaurant sales. The Company's working capital requirements
also fluctuate seasonally, with its greatest needs occurring during its first
and fourth quarters.
INFLATION
The Company does not believe that inflation has had a material effect on
operating results in past years. Although increases in labor, food or other
operating costs could adversely affect the Company's operations, the Company
generally has been able to modify its operating procedures or to increase prices
to offset increases in its operating costs.
28
<PAGE> 31
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," in fiscal 1995.
The Company has determined that it will not change to the fair value
method under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," but will continue to use Accounting Principles
Board Opinion No. 25 for measurement and recognition of employee stock based
transactions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) for a listing of the consolidated financial statements and
supplementary data filed with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As a result of the reverse purchase accounting treatment described in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Basis of Presentation," the Company determined that it was in
its best interests that Deloitte & Touche LLP ("Deloitte & Touche"), DRC's
independent public accountants prior to the Merger, serve as the Company's
independent public accountants following the Merger. Accordingly, effective
April 29, 1996, the Company ceased its client-auditor relationship with KPMG
Peat Marwick LLP ("Peat Marwick") and on April 29, 1996, the Company retained
Deloitte & Touche as its independent public accountants. The change in
independent public accountants was approved by the Board of Directors of the
Company, including all of the members of the Audit Committee of the Board of
Directors.
Peat Marwick's report on the financial statements of AFR, which are not
included in this Report, for the years ended September 28, 1994 and September
27, 1995 did not contain an adverse opinion or a disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles. In connection with the two audits for the years ended September 28,
1994 and September 27, 1995, and subsequently to April 29, 1996, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Peat Marwick, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report. Prior to retaining Deloitte & Touche, no discussions took place between
the Company and Deloitte & Touche regarding the application of accounting
principles or the type of opinion that might be rendered on the Company's
financial statements since the historical financial statements of DRC, as
audited by Deloitte & Touche, will be the continuing historical financial
statements of the Company. The Company has authorized Peat Marwick to respond
fully to inquiries from Deloitte & Touche.
29
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to each
of the Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey D. Miller............. 42 Chairman of the Board
Jack M. Lloyd................. 45 President, Chief Executive Officer, and Director
William G. Cox................ 46 Chief Operating Officer and Director
William J. Howard............. 51 Vice President, Secretary, and Director
Todd S. Brown................. 39 Vice President, Chief Financial Officer,
Treasurer, and Director
Haig V. Antranikian........... 44 Vice President and Director
Edward C. Williams............ 35 Vice President - Finance
Michael Larsen................ 42 Vice President
John M. Holliman, III......... 41 Director
C. Alan MacDonald............. 62 Director
Fred W. Martin................ 63 Director
Philip B. Smith............... 59 Director
</TABLE>
Jeffrey D. Miller has served as Chairman of the Board of the Company
since its inception in April 1986 and served as President and Chief Executive
Officer of the Company from April 1986 until March 1996. Mr. Miller served as
chairman of the Denny's Franchisee Advisory Board from 1989 to 1991.
Jack M. Lloyd has served as President, Chief Executive Officer, and a
Director of the Company since March 1996. Mr. Lloyd served as Chairman of the
Board and Chief Executive Officer of DRC from 1987 until March 1996 and served
as President of DRC from 1987 until November 1994. Since 1987, Mr. Lloyd,
through DRC, developed or acquired more than 70 Denny's restaurants throughout
the western United States. Mr. Lloyd engaged in commercial and residential real
estate development and property management as President of First Federated
Investment Corporation during the early and mid-1980s. Mr. Lloyd also held
senior management positions in accounting, financing, and budgeting for Texas
Utilities. Mr. Lloyd also currently serves as a director of Action Performance
Companies, Inc., a publicly held company.
William G. Cox has served as Chief Operating Officer and a Director of
the Company since March 1996. Mr. Cox served as Vice President of Operations for
Denny's, Inc. from June 1993 until November 1995, with responsibility for
approximately 590 company-owned and franchised Denny's restaurants located
throughout the United States. Mr. Cox served as a Senior Vice President of
Flagstar and as Chief Operating Officer of Flagstar's "Quincy's" restaurant
chain from May 1992 to June 1993. Mr. Cox served as Vice President of Eastern
Operations of Denny's, Inc. from March 1991 to May 1992 and as a Regional
Manager and Division Leader for Denny's, Inc. from 1981 to March 1991. Mr. Cox
joined Denny's, Inc. as a Manager-in-Training in September 1977 and had advanced
to the position of Regional Manager by 1981.
William J. Howard has served as Vice President, Secretary, and a Director
of the Company since March 1996. Mr. Howard served as President of DRC from
November 1994 until March 1996 and as a Director of DRC
30
<PAGE> 33
from 1990 until March 1996. Mr. Howard served as Vice President of DRC from 1990
until November 1994 and served as Chief Financial Officer of DRC from 1990 until
August 1994. Prior to joining DRC, Mr. Howard held numerous senior management
positions with Citicorp and Citibank, including Senior Vice President and Senior
Credit Officer with Citicorp Mortgage, Inc.
Todd S. Brown has served as Chief Financial Officer, Treasurer, and a
Director of the Company since March 1996. Mr. Brown served as Vice President,
Chief Financial Officer, and a Director of DRC from September 1994 until March
1996. Mr. Brown was employed by Deloitte & Touche LLP from 1980 to September
1994, most recently as a Senior Manager. Mr. Brown is a Certified Public
Accountant in the state of Arizona.
Haig V. Antranikian has served as a Vice President of the Company since
March 1996 and as a Director of the Company since May 1993. Mr. Antranikian
served as Executive Vice President and Chief Operating Officer of the Company
from March 1989 until March 1996 and as Secretary from June 1994 until March
1996. Mr. Antranikian became a district manager for L-K Restaurants, Inc. in
1983, assuming supervision of eight restaurants. Mr. Antranikian joined the
Company in 1986, becoming an area director with responsibility for half of the
Company's restaurants. In December 1986, he was promoted to Vice President of
Operations and was subsequently placed in charge of all restaurant operations.
Edward C. Williams has served as Vice President - Finance of the Company
since March 1996. Mr. Williams served as Chief Financial Officer and Treasurer
of the Company from February 1993 until March 1996. From 1987 until February
1993, Mr. Williams was employed by KPMG Peat Marwick LLP and in 1991 was
promoted to Senior Manager. Mr. Williams is a Certified Public Accountant.
Michael Larsen has served as a Vice President of the Company since March
1996. From 1993 until March 1996, Mr. Larsen served as Vice President of Real
Estate and Development of DRC. Mr. Larsen directs the due diligence of site and
building acquisitions and coordinates the construction of new restaurants. From
April 1984 to April 1993, Mr. Larsen was the Operations Manager for B&B
Properties, an advisor to several publicly traded real estate investment trusts.
John M. ("Jock") Holliman, III has served as a Director of the Company
since March 1996. Mr. Holliman served as a Director of DRC from January 1995
until March 1996. Mr. Holliman is the sole general partner of AGP Management,
L.P., which is the managing general partner of Arizona Growth Partners, L.P., a
limited partnership formed in 1993 to purchase the venture capital portfolio of
Valley National Bank of Arizona. From 1985 to 1993, Mr. Holliman served as
Senior Managing Director of Valley National Investors, Inc., a wholly owned
Small Business Investment Corporation subsidiary of Valley National Bank of
Arizona. Mr. Holliman also currently serves as a director of Voxel, OrthoLogic
Corp., Express America Holdings Corp., TopoMetrix, PhotoMetrics, Ltd. (each of
which are part of the portfolio held by Arizona Growth Partners, L.P.), Antiqua
Group, Inc., and Ellerbe Becket, Inc. Mr. Holliman also serves as a director of
several non-profit organizations.
C. Alan MacDonald has served as a Director of the Company since July
1993. Mr. MacDonald currently is a General Partner of the Marketing Partnership
Inc., a packaged goods marketing consulting firm. From 1992 through 1994, Mr.
MacDonald was Chairman of the Board and Chief Executive Officer of Lincoln
Snacks Company and continues to serve on that company's Board of Directors. From
1983 to 1995, Mr. MacDonald served as President and Chief Executive Officer of
the Nestle Foods Corporation. From 1955 through 1982, Mr. MacDonald was employed
by the Stouffers Corporation, serving as President of The Stouffer Frozen Food
Company from 1971 through 1982. Mr. MacDonald currently serves as a director of
American Maize-Products Co., a producer of corn sweeteners, corn starches, and
tobacco products; Lord, Abbett & Company, a manager of mutual funds;
Fountainhead Water Company, a producer of bottled water; and J.B. Williams, a
producer of men's toiletries. Mr. MacDonald is a member of the Board of Trustees
of Manhattanville College.
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<PAGE> 34
Fred W. Martin has served as a Director of the Company since March 1996.
Mr. Martin served as a Director of DRC from November 1994 until March 1996. Mr.
Martin served as Western Regional Director of Franchise Development with
Denny's, Inc. from 1985 to 1994, during which time he approved and developed 400
franchise and company locations for Denny's, Inc. throughout the western United
States. Mr. Martin served as Western Real Estate Representative with Denny's,
Inc. until 1985. Mr. Martin has over 17 years of experience in the restaurant
industry.
Philip B. Smith has served as a Director of the Company since May 1993.
Mr. Smith has been a Vice Chairman of the Board of Spencer Trask Securities
Incorporated since 1991. He was formerly a Managing Director of Prudential
Securities in its merchant bank. Mr. Smith is a founding general partner of
Lawrence Venture Associates, a venture capital limited partnership headquartered
in New York City. From 1981 to 1984, he served as Executive Vice President and
Group Executive of the worldwide corporations group at Irving Trust Company.
Prior to joining Irving Trust Company, he was at Citibank for 15 years, where he
founded Citicorp Venture Capital as President and Chief Executive Officer. Since
1988, Mr. Smith also has been the managing general partner of Private Equity
Partnership, L.P. Mr. Smith is also a director of Great Bear Technology Inc.,
Movie Gallery, Inc., and StarPress, Inc., which are publicly held companies.
All directors of the Company hold office until the Company's next annual
meeting of shareholders or the election and qualification of their successors.
The former shareholders of DRC collectively own a sufficient number of shares of
the Company's Common Stock to elect all of the members of the Board of
Directors. Except for the terms of Mr. Miller's employment agreement, which
provides for Mr. Miller to serve as Chairman of the Board of the Company, there
is no agreement or understanding between the Company and any of the persons who
constitute the Company's Board of Directors as to their serving on the Company's
Board of Directors in the future.
The Company's Board of Directors maintains an Audit Committee, a
Compensation Committee and a 1992 Stock Option Plan Committee. Messrs. Holliman
and Smith constitute the Audit Committee; and Messrs. Holliman, MacDonald and
Martin constitute the Compensation and 1992 Stock Option Plan Committees.
32
<PAGE> 35
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and the two other most highly compensated
executive officers whose cash salary and bonuses exceeded $100,000 during the
fiscal year ended December 27, 1995 (the "Named Executive Officers"). The table
does not include information concerning the compensation during fiscal 1995 of
Jack M. Lloyd, William J. Howard, Todd S. Brown, or Michael Larsen, who became
officers of the Company on March 29, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ------------
OTHER ANNUAL SECURITIES
FISCAL SALARY COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR $ ($) OPTIONS (#)
--------------------------- ------ --- ------------ ------------
<S> <C> <C> <C> <C>
Jeffrey D. Miller, Chairman of the Board(1) 1995 $240,863 $23,750 --
1994 193,808 25,847 --
1993 178,969 39,183 --
Haig V. Antranikian, Vice President 1995 $150,594 $ 5,417 10,000(3)
and Director(2) 1994 117,275 406 28,000(4)
1993 103,158 5,294 --
Edward C. Williams, 1995 $ 99,509 $11,750 10,000(3)
Vice President - Finance(5) 1994 89,001 5,961 40,000(4)
1993 64,808 5,294 25,000(6)
</TABLE>
- ------------------
(1) Mr. Miller served as the President and Chief Executive Officer of the
Company or its predecessors from April 1986 until March 1996.
(2) Mr. Antranikian served as Executive Vice President and Chief Operating
Officer of the Company from March 1989 until March 1996.
(3) The options were granted at an exercise price of $4.75 per share (the fair
value of the shares on the date of grant) and vest and become exercisable
in three equal annual installments beginning on the first anniversary of
the date of grant.
(4) The options were granted at an exercise price of $4.00 per share (the fair
value of the shares on the date of grant) and vest and become exercisable
in three equal annual installments beginning on the first anniversary of
the date of grant.
(5) Mr. Williams served as Chief Financial Officer and Treasurer of the Company
from February 1993 until March 1996.
(6) The options were granted at an exercise price of $2.00 per share (which was
below the fair value of the shares on the date of grant) and vest and
become exercisable in three equal annual installments beginning on the
first anniversary of the date of grant.
33
<PAGE> 36
OPTIONS GRANTS
The following table sets forth certain information with respect to stock
options granted to the Named Executive Officers during the fiscal year ended
December 27, 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
PERCENTAGE ANNUAL RATES
NUMBER OF OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------
NAME GRANTED (#) FISCAL YEAR ($/SH)(1) DATE 5% 10%
---- --------------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Jeffery D. Miller,
Chairman of the Board - - - - - -
Haig V. Antranikian,
Vice President and
Director 10,000 50% $4.75 10/10/05 $29,900 $75,700
Edward C. Williams,
Vice President - Finance 10,000 50% $4.75 10/10/05 $29,900 $75,700
</TABLE>
- ---------------------
(1) The options were granted at the fair value of the shares on the date of
grant. The options vest and become exercisable in three equal annual
installments beginning on the first anniversary of the date of grant, and
have a ten-year term.
(2) Potential gains are net of the exercise price, but before taxes associated
with the exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with the rules of the Securities and Exchange Commission and
do not represent the Company's estimate or projection of the future price
of the Company's Common Stock. Actual gains, if any, on stock option
exercises will depend upon the future market prices of the Company's Common
Stock.
RECENT GRANTS OF STOCK OPTIONS
Pursuant to his employment agreement with the Company, on March 29, 1996,
the Company granted William G. Cox, its Chief Operating Officer and a director,
options to acquire 300,000 shares of Common Stock, of which options to acquire
60,000 shares were granted at an exercise price of $3.00 per share and were
immediately vested and exercisable. The remaining options to acquire 240,000
shares of Common Stock were granted at an exercise price of $4.00 per share and
vest and became exercisable in equal annual installments of 60,000 shares each
year, beginning on March 29, 1997.
On April 29, 1996, the Company granted options to acquire an aggregate of
264,800 shares of Common Stock at an exercise price of $4.00 per share,
including options to acquire 124,800 and 100,000 shares of Common Stock granted
to Todd S. Brown, Vice President, Chief Financial Officer, Treasurer, and a
director of the Company, and Michael Larsen, a Vice President of the Company,
respectively. Of the options granted, 20% were immediately vested and
exercisable and the remaining options vest and become exercisable in equal
annual installments beginning on April 29, 1997.
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<PAGE> 37
OPTION HOLDINGS
The following table sets forth information concerning the options exercised
in fiscal 1995, and the number and value of all options held at December 27,
1995, by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)(1)
ACQUIRED VALUE -------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey D. Miller......... None N/A - - N/A N/A
Haig V. Antranikian....... None N/A 49,333 28,667 $160,166 $ 39,084
Edward C. Williams........ None N/A 13,333 61,667 $ 11,666 $142,709
</TABLE>
- ---------------
(1) Calculated based upon the closing price of the Company's Common Stock on
December 27, 1995 of $5.625 per share, less the exercise prices of the
options held.
EMPLOYMENT AGREEMENTS
General
The Company currently is a party to employment agreements with each of
Jeffrey D. Miller, Jack M. Lloyd, William J. Howard, Todd S. Brown, William G.
Cox, Haig V. Antranikian, and Edward C. Williams. In addition to the provisions
of the individual employment agreements as described below, the employment
agreements generally require the Company to provide each person with certain
medical and life insurance benefits, to reimburse them for all travel,
entertainment, and other ordinary and necessary expenses incurred in connection
with the Company's business and their duties under their respective employment
agreements, and to provide such other fringe benefits that the Company makes
generally available to all of its employees on a non-discriminatory basis. The
employment agreements with Messrs. Miller, Lloyd, Howard, and Cox require the
Company to provide each such officer with an automobile for use in connection
with the Company's business. The agreements with Messrs. Lloyd, Howard, Brown,
and Cox contain provisions that prohibit the respective officer from (i)
competing with the business of the Company, (ii) taking certain actions intended
to solicit other persons to terminate their business relationship with the
Company or to terminate his or her employment relationship with the Company, and
(iii) making unauthorized use or disclosure of the Company's trade names,
fictitious names, or confidential information.
Jeffrey D. Miller
The employment agreement with Mr. Miller provides for his employment as
Chairman of the Board of the Company until September 30, 1998, subject to
automatic renewal for successive one-year periods unless either the Company or
Mr. Miller has given prior notice of non-renewal. The employment agreement
provides Mr. Miller with an annual base salary of $240,000 per year plus
performance bonuses and annual increases, if any, as determined by the Company's
Board of Directors. If the employment agreement is terminated without cause or
as a result of a constructive termination (as defined in the agreement), Mr.
Miller is entitled, subject to specified limitations, to receive a severance
payment over a 24-month period of twice the average of the sum of his
then-current base salary and bonus, determined for the three full fiscal years
ending on the last day of the Company's fiscal year immediately preceding the
termination.
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<PAGE> 38
Jack M. Lloyd; William J. Howard; Todd S. Brown
DRC entered into employment agreements, effective September 30, 1994,
with each of Jack M. Lloyd, William J. Howard, and Todd S. Brown. Upon
consummation of the Merger, the Company assumed DRC's obligations under these
agreements. The employment agreement with Mr. Lloyd provides for a base salary
of $312,000 per year; the agreement with Mr. Howard provides for a base salary
of $156,000 per year; and the agreement with Mr. Brown, as amended, provides for
a base salary of $124,800 per year. In addition, each agreement provides that
the Company may pay each of Messrs. Lloyd, Howard, and Brown additional
incentive compensation for each fiscal year, based upon standards to be
determined from time to time by the Company's Board of Directors in its sole
discretion. In order to be eligible to receive incentive compensation for any
fiscal year, however, the officer must be employed by the Company on the last
day of such fiscal year. Each employment agreement expires on December 25, 1997.
The Company may terminate each officer's employment only for cause, as defined
in the respective agreements. Each agreement also will terminate automatically
upon the death of the respective officer, and each officer may terminate his
employment agreement upon 60 days' written notice to the Company.
William G. Cox
In December 1995, the Company entered into an employment agreement with
William G. Cox, which became effective upon consummation of the Merger. Pursuant
to his agreement with the Company, Mr. Cox serves as the Chief Operating Officer
of the Company at a base salary of $220,000 per year. The agreement also
provides that Mr. Cox will be eligible to receive an annual bonus of up to 50%
of his annual base salary pursuant to a bonus pool plan to be established by and
administered in the sole discretion of the Company. Pursuant to the agreement,
the Company reimbursed Mr. Cox for certain relocation expenses and granted to
Mr. Cox options to purchase 300,000 shares of the Company's Common Stock. Mr.
Cox's agreement provides for his employment until March 29, 1999, subject to
extension for additional one-year periods under mutually agreeable terms and
conditions. The Company may terminate the agreement only for cause, as defined
in the agreement.
Haig V. Antranikian; Edward C. Williams
The employment agreement with Mr. Antranikian provides for his employment
until June 1, 2000, subject to automatic renewal for successive one-year periods
unless either Mr. Antranikian or the Company has given prior notice of
non-renewal. The employment agreement provides Mr. Antranikian with an annual
base salary of $150,000 per year plus (i) an annual option to purchase not less
than 10,000 shares of Common Stock and (ii) performance bonuses and annual
increases, if any, as determined by the Company's Board of Directors.
The employment agreement with Mr. Williams, effective as of June 1, 1995,
provides for his employment until December 1, 1997, subject to automatic renewal
for successive one-year periods unless either the Company or Mr. Williams has
given prior notice of non-renewal. The employment agreement provides Mr.
Williams with an annual base salary of $100,000 per year plus (i) an annual
option to purchase not less than 10,000 shares of Common Stock and (ii)
performance bonuses and annual increases, if any, as determined by the Company's
Board of Directors. In addition, Mr. Williams received a $50,000 non-interest
bearing loan from the Company upon consummation of the Merger. Mr. Williams will
be required to pay such loan only in the event that his employment agreement is
terminated as a result of a "termination without cause" or "constructive
termination" (as defined in the agreement).
Pursuant to their employment agreements, Messrs. Antranikian and Williams
will each have the option for a period of 720 days to terminate their respective
employment with the Company and receive an amount equal to two and one-half
times their current salary, as defined. Each of Mr. Antranikian and Mr. Williams
is entitled to receive a severance payment over a 12-month period of (i) twice
his current salary including bonus and benefit payments ("Current Salary") if
his employment agreement is terminated as a result of a "constructive
termination" in connection with a "change of control" (as such terms are defined
in the agreement), or (ii) two and one-half
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<PAGE> 39
times his Current Salary if his employment agreement is terminated as a result
of a "constructive termination" in connection with the Merger or as a result of
the election of either party not to renew the agreement, and (iii) three times
his Current Salary if his agreement is terminated as a result of a "termination
without cause." In addition, in the event that either Mr. Antranikian's or Mr.
Williams' agreement is terminated as a result of a "termination without cause"
or "constructive termination," any and all stock options held by Mr. Antranikian
or Mr. Williams will immediately become vested and exercisable. In the event all
personal guarantees by Mr. Antranikian of the Company's indebtedness are not
removed upon the termination of his employment, Mr. Antranikian will be entitled
to a payment of $50,000 per year until all such guarantees are terminated.
STOCK OPTION PLANS
Amended and Restated 1992 Stock Option Plan
The Company's Amended and Restated 1992 Stock Option Plan (the "1992
Plan") was adopted by the Company's Board of Directors and approved by the
Company's shareholders in August 1994. In January 1995, the Company's Board of
Directors adopted, and in March 1995 the shareholders approved, an amendment to
the 1992 Plan that increased the number of shares of Common Stock reserved for
issuance under the 1992 Plan to 1,000,000 shares. The 1992 Plan provides for the
granting of options to purchase shares of Common Stock to employees and other
key persons who, in the judgment of the compensation committee of the Board of
Directors (the "Committee"), have made special contributions to the Company's
efforts. The 1992 Plan limits the persons eligible to receive options to
directors, consultants, and key employees, including officers, of the Company or
a subsidiary of the Company and "key persons" who are not employees but have
provided valuable services, have incurred financial risk on behalf of the
Company, or have extended credit to the Company or its subsidiaries. The 1992
Plan provides that options granted to employees may be designated "incentive
stock options" ("ISOs") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified options subject
to taxation pursuant to Section 83 of the Code. Employees, including officers,
are eligible to receive both ISOs and non-qualified options under the 1992 Plan,
while key persons who are not employees are eligible to receive only
non-qualified options. The 1992 Plan is intended to comply with Rule 16b-3 as
promulgated under the Exchange Act with respect to persons subject to Section 16
of the Exchange Act. As of June 7, 1996, there were outstanding options to
acquire a total of 792,000 shares of Common Stock at a weighted average exercise
price of $4.09 per share under the 1992 Plan.
The Committee determines the periods during which options granted under
the 1992 Plan may be exercised, but no option granted under the 1992 Plan may
expire more than 10 years from the date of grant. The Board of Directors or the
Committee, in its sole discretion, determines the exercise price of options
granted under the 1992 Plan. ISOs may not have an exercise price less than the
fair market value of the Common Stock on the grant date, except that, in the
case of an ISO granted to any participant who owns more than 10% of the
Company's outstanding voting shares, the exercise price must be at least 110% of
the fair market value of the Common Stock on the date of grant and the term of
the option may be no longer than five years. Options that are not ISOs may not
have an exercise price less than the greater of the minimum price required by
applicable state law, by the Company's Restated Articles of Incorporation, or
the par value of the Common Stock.
At the discretion of the Committee or the Board of Directors, options may
be exercised by delivery of any combination of cash, shares of Common Stock, or
by delivering to the Company a promissory note upon such terms and conditions as
the Committee or Board of Directors may determine. The 1992 Plan also permits
the Committee or the Board of Directors, in its sole discretion, to include a
provision in any option agreement that will allow the optionholder, on any date
on which the option is exercisable and on which the fair market value (as
defined in the 1992 Plan) of Common Stock exceeds the exercise price of the
option, to surrender the option in lieu of exercise and in exchange receive cash
or shares of Common Stock in an amount equal to the excess of the fair market
value of Common Stock over the exercise price of the option.
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<PAGE> 40
The Committee or the Board of Directors has the right to amend, alter or
discontinue the 1992 Plan. Without the consent of the affected optionholder,
however, no amendment or alteration may be made that would impair the rights of
such optionholder under any outstanding option, except in the case of certain
stock splits, certain mergers or sales of assets, or upon the dissolution or
liquidation of the Company. Without the approval of the Company's shareholders,
no amendment or alteration may be made to the 1992 Plan that would (i) increase
the total number of shares reserved for issuance under the 1992 Plan; (ii)
change the class of persons eligible to participate in the 1992 Plan; (iii)
decrease the minimum exercise price of options that may be granted under the
1992 Plan; or (iv) extend the maximum life of the 1992 Plan or maximum option
exercise period. The number of shares and option prices are subject to
adjustment pursuant to certain anti-dilution provisions contained in the 1992
Plan. The 1992 Plan terminates on April 1, 2002.
1995 Directors Stock Option Plan
The Company's 1995 Directors Stock Option Plan (the "1995 Plan") was
adopted by the Board of Directors in January 1995 and approved by the Company's
shareholders in March 1995. A total of 300,000 shares of Common Stock have been
reserved for issuance under the 1995 Plan. The purpose of the 1995 Plan is to
promote the interests of the Company and its shareholders by strengthening the
Company's ability to attract and retain the services of experienced and
knowledgeable non-employee directors and by encouraging such directors to
acquire an increased proprietary interest in the Company.
A committee of two or more directors appointed by the Board of Directors
is responsible for interpreting and administering the 1995 Plan. The terms of
options granted, including the exercise price and number of shares of Common
Stock subject to the options, are set forth in the 1995 Plan and are not subject
to the discretion of the Board of Directors. Options to purchase 10,000 shares
of Common Stock are automatically granted to each non-employee director of the
Company on the date of his or her initial election to the Board of Directors or
re-election at an annual meeting of the Company's shareholders. Directors who
are first elected or appointed to the Board of Directors on a date other than an
annual meeting date are automatically granted options to purchase the number of
shares of Common Stock equal to the product of 10,000 multiplied by a fraction,
the numerator of which is the number of days during the period beginning on such
grant date and ending on the date of the next annual meeting, and the
denominator of which is 365. If no meeting is scheduled at a time a director is
first elected or appointed to the Board of Directors, the date of the next
annual meeting is deemed to be the 120th day of the fiscal year next following
the interim grant date. No option is transferable by the optionholder other than
by will or the laws of descent and distribution, and each option is exercisable,
during the lifetime of the optionholder, only by the optionholder or a person
who obtained the option pursuant to a qualified domestic relations order. The
exercise price of each option is the fair market value of the Company's Common
Stock on the business day preceding the date of grant, and the term of each
option may not exceed ten years. One-half of the options granted vest and become
exercisable after the first year of continuous service as a director following
the automatic grant date, and 100% vest after two years of continuous service on
the Board of Directors. The non-discretionary provisions of the 1995 Plan are
intended to satisfy the requirements of rules promulgated under the Exchange Act
with respect to non-employee directors of the Company.
The exercise price of options granted pursuant to the 1995 Plan is
payable in full upon exercise of the options. Optionholders generally may pay
the exercise price by delivering to the Company any combination of cash, Common
Stock, or a promissory note with such terms and conditions as the Board of
Directors may determine. The 1995 Plan also permits the Board of Directors, in
its sole discretion, to include a provision in any option agreement that will
allow the optionholder, on any date on which the option is exercisable and on
which the fair market value (as defined in the 1995 Plan) of the Company's
Common Stock exceeds the exercise price of the option, to surrender the option
in lieu of exercise and in exchange receive cash or shares of Common Stock in an
amount equal to the excess of the fair market value of Common Stock over the
exercise price of the option.
The Board of Directors has the right to amend, alter or discontinue the
1995 Plan. Without the consent of the affected optionholder, however, no
amendment or alteration may be made that would impair the rights of any
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<PAGE> 41
optionholder under any outstanding options, except in the case of certain stock
splits, certain mergers or sales of assets, or upon the dissolution or
liquidation of the Company. Without approval of the Company's shareholders, no
amendment or alteration may be made that would (i) increase the total number of
shares reserved under the 1995 Plan; (ii) change the class of persons eligible
to participate in the 1995 Plan; (iii) decrease the minimum exercise price of
options that may be granted under the 1995 Plan; or (iv) extend the maximum life
of the 1995 Plan or maximum option exercise period. The number of shares and
option prices are subject to adjustment pursuant to certain anti-dilution
provisions contained in the 1995 Plan. The 1995 Plan expires on January 16,
2005.
The 1995 Plan replaced the Company's 1992 Directors' Stock Option Plan,
pursuant to which options to purchase 22,500 shares of Common Stock at an
exercise price of $6.00 per share were granted to each of Messrs. MacDonald,
Smith, and a former director of the Company. Each of Messrs. MacDonald, Smith,
and a former director of the Company received options to purchase 10,000 shares
of Common Stock at an exercise price of $3.00 per share at the time the 1995
Plan was approved by the Company's shareholders in March 1995. Upon consummation
of the Merger, C. Alan McDonald, Philip B. Smith, John M. Holliman, III, and
Fred W. Martin each were automatically granted options to purchase 10,000 shares
of Common Stock at an exercise price of $4.00 per share.
DIRECTOR COMPENSATION
Employees of the Company do not receive compensation for serving as
members of the Company's Board of Directors. Effective April 29, 1996,
non-employee members of the Board of Directors receive cash compensation in the
amount of $10,000 per annum. Non-employee directors receive automatic grants of
stock options under the 1995 Directors Stock Option Plan. See Item 11,
"Executive Compensation - Stock Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
C. Alan MacDonald and Philip B. Smith served as members of the
Compensation Committee of the Board of Directors during fiscal 1995. Mr. Smith
was Director of Merchant Banking for Spencer Trask Securities Incorporated
("Spencer Trask") from February 1992 through January 1994. From September 1992
through December 1993, Spencer Trask received from the Company as compensation
for acting as placement agent in the Company's private placement of units
consisting of Series A Preferred Stock and warrants to purchase Common Stock (i)
4.98 unit purchase options to purchase, at an exercise price of $165,000 per
unit, an aggregate of 124,532 shares of Common Stock and warrants to purchase
37,360 shares of Common Stock at an exercise price of $6.00 per share; (ii)
warrants to purchase 26,585 shares of Common Stock at an exercise price of $5.96
per share, as adjusted; (iii) a commission of 8% of the gross proceeds of all of
the units sold in the private placement; (iv) a management fee of 2% of the
gross proceeds of all of the units sold in the private placement; (v) a
non-accountable expense allowance of 2% of the gross proceeds of all of the
units sold in the private placement; and (vi) an agreement to enter into a
consulting agreement pursuant to which Spencer Trask received $3,000 per month
for consulting services. In December 1992, the Company executed the consulting
agreement, which terminated upon the consummation of the Company's initial
public offering. In November 1993, the Company issued to Spencer Trask warrants
to purchase 10,500 shares of Common Stock at an exercise price of $6.60 per
share in connection with the waiver by Spencer Trask of its right of first
refusal to serve as the underwriter of the Company's initial public offering.
Also in November 1993, the Company agreed to pay Spencer Trask $145,000 for
services rendered in connection with the acquisition of certain restaurants, of
which $50,000 was paid prior to the Company's initial public offering in October
1994. The Company paid to Spencer Trask an aggregate of $161,000 of the proceeds
of the Company's initial public offering, which represented the balance owed to
Spencer Trask for services rendered in connection with the acquisition of
certain restaurants, all accrued consulting fees under the consulting agreement
from November 1993 through October 1994, and a payment of $30,000 in connection
with Spencer Trask's waiver of its right of first refusal to serve as
underwriter of the Company's initial public offering. In July 1995, in
consideration for rendering services to the Company in connection with the
Merger, the Company granted Mr. Smith options to purchase 50,000 shares of
Common Stock at an exercise price of $4.9375 per share. One-half of
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<PAGE> 42
these options vest and become exercisable commencing in July 1996 and the
remaining options vest and become exercisable commencing in July 1997.
INDEMNIFICATION AND LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
The Company's Amended and Restated Bylaws require the Company to
indemnify its directors and officers against liabilities that they may incur
while serving in such capacities, to the full extent permitted and in the manner
required by the Georgia Business Corporation Code (the "GBCC"). Pursuant to
these provisions, the Company will indemnify its directors and officers against
any losses incurred in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director or
officer of the Company or served with another corporation, partnership, joint
venture, trust or other enterprise at the request of the Company. In addition,
the Company will provide advances for expenses incurred in defending any such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such advances if it is ultimately determined
that he or she is not entitled to indemnification by the Company. The Company
has entered into indemnification agreements with certain of its directors and
executive officers pursuant to the foregoing provisions of its Amended and
Restated Bylaws.
As permitted by the GBCC, the Company's Restated Articles of
Incorporation contain provisions that eliminate the personal liability of
directors for monetary damages to the Company or its shareholders for breach of
their fiduciary duties as directors. In accordance with the GBCC, these
provisions do not limit the liability of a director for (i) any appropriation of
a business opportunity of the Company in violation of the director's duty, (ii)
acts or omissions that involve intentional misconduct or a knowing violation of
law, (iii) any dividend payment, stock repurchase, stock redemption or
distribution in liquidation that is prohibited under Georgia law, or (iv) any
merger from which the director derived an improper personal benefit. These
provisions do not limit or eliminate the rights of the Company or any
shareholder to seek an injunction or any other non-monetary relief in the event
of a breach of a director's fiduciary duty. In addition, these provisions apply
only to claims against a director arising out of his or her role as a director
and do not relieve a director from liability for violations of statutory law,
such as certain liabilities imposed on a director under the federal securities
laws.
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<PAGE> 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the shares
of the Company's Common Stock beneficially owned as of June 1, 1996 by (i) each
of the Company's directors and executive officers; (ii) all executive officers
and directors of the Company as a group; and (iii) each person known by the
Company to be the beneficial owner of 5% or more of the Company's Common Stock.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL HOLDER(1) OF SHARES(2) OWNERSHIP(2)
- ---------------------------------------- ------------ ------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
<S> <C> <C>
Jeffrey D. Miller 1,194,192 9.1%
Jack M. Lloyd 3,108,504 23.6%
William G. Cox 60,000(3) *
William J. Howard 1,551,752 11.8%
Todd S. Brown 24,960(4) *
Haig V. Antranikian 116,899(5) *
Edward C. Williams 38,833(6) *
Michael Larsen 20,000(7) *
John M. Holliman, III - -
C. Alan MacDonald 20,000(7) *
Fred W. Martin 1,000 *
Philip B. Smith 27,500(8) *
All directors and executive
officers as a group (12 persons) 6,163,640 46.2%
NON-MANAGEMENT 5% SHAREHOLDER
- -----------------------------
BancBoston Ventures, Inc.(9) 1,878,788 14.3%
</TABLE>
- --------------
* Less than 1.0% of the outstanding shares of Common Stock.
(1) Except as otherwise indicated, each person named in the table has sole
voting and investment power with respect to all Common Stock beneficially
owned by him, subject to applicable community property law. Except as
otherwise indicated, each of such persons may be reached through the
Company at 7373 N. Scottsdale Road, Suite D-120, Scottsdale, Arizona
85253.
(2) The numbers and percentages shown include the shares of Common Stock
actually owned as of June 1, 1996 and the shares of Common Stock which
the person or group had the right to acquire within 60 days of such date.
In calculating the percentage of ownership, all shares of Common Stock
which the identified person or group had the right to acquire within 60
days of June 1, 1996 upon the exercise of options and warrants are deemed
to be outstanding for the purpose of computing the percentage of the
shares of Common Stock owned by such person or group, but are not deemed
to be outstanding for the purpose of computing the percentage of the
shares of Common Stock owned by any other person.
(3) Represents 60,000 shares issuable upon the exercise of currently
exercisable options.
(4) Represents 24,960 shares issuable upon the exercise of currently
exercisable options.
(5) Includes 9,333 shares issuable upon the exercise of currently exercisable
options.
(6) Includes 38,333 shares issuable upon the exercise of currently
exercisable options.
(7) Represents 20,000 shares issuable upon the exercise of currently
exercisable options.
(8) Represents 27,500 shares issuable upon the exercise of currently
exercisable options.
(9) The address of BancBoston Ventures, Inc. is c/o BancBoston Capital, Inc.,
100 Federal Street, Boston, Massachusetts 02110.
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<PAGE> 44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In June 1992, the Company, Jeffrey D. Miller, and Ronald C. Davis, a
former director of the Company and a beneficial owner of more than 5% of the
Company's Common Stock at the time, entered into a stock redemption agreement
(the "Davis Redemption Agreement"). Pursuant to the Davis Redemption Agreement,
on July 1, 1992, the Company redeemed certain shares of the Company's Common
Stock owned by Mr. Davis for a $4.5 million promissory note payable in June
1997. The Company's obligation to make payments under the note was secured by
the Company's pledge of the shares redeemed from Mr. Davis. Also pursuant to the
Davis Redemption Agreement, the Company agreed to provide payment of health
insurance premiums for Mr. Davis, payment for a four-year lease for an
automobile, payment of automobile insurance during the term of the automobile
lease, and payment of approximately $15,000 for legal costs incurred in past
negotiations of agreements with respect to the redemption of Mr. Davis's shares.
In connection with the Company's obtaining a new credit facility in May 1995,
Mr. Davis agreed to release the pledge of the shares of Common Stock, to extend
the maturity date of the note, and to subordinate the note to amounts due under
the credit facility, in exchange for increasing the principal amount of the note
to $4.75 million, increasing the interest rate of the note, and the payment to
Mr. Davis of $500,000. In March 1996, the Company utilized a portion of the
proceeds of the Paribas Facility to repay the note, together with an additional
payment of $50,000 to obtain Mr. Davis' consent to the early repayment of the
note.
Each of Jeffrey D. Miller, the Company's Chairman of the Board, and Haig
V. Antranikian, a Vice President and director of the Company, owns a 20%
interest in a building located in Marion, Ohio that the Company leased for
administrative offices. The Company paid rent of $2,850 per month under the
lease, which was the amount payable per month under a promissory note issued to
finance the initial acquisition of the building. The Company also was
responsible for all taxes, utilities, maintenance and other expenses incurred in
connection with the operation of the building. Effective with the closing of the
Merger, the Company's obligations under this lease were terminated by paying the
lessor an amount equal to 50% of the balance of payments remaining under the
lease.
Jeffrey D. Miller and his wife have personally guaranteed repayment of
certain of the Company's obligations, including obligations of the Company to
its joint venture partners and its affiliates; obligations under the Denny's
Franchise Agreements; and certain property and equipment lease obligations of
the Company.
The Company has from time to time made loans to Mr. Miller. As of March
27, 1996, the outstanding principal balance of such loans was $102,000. The
largest outstanding principal balance of such loans during fiscal 1993, fiscal
1994 and fiscal 1995 was $202,000, $102,000, and $102,000, respectively. Such
loans do not bear interest and are repayable on demand.
On June 2, 1993, Lucien I. Levy, a beneficial owner of more than 5% of
the Company's Common Stock at that time, and persons affiliated with Mr. Levy
(collectively, the "Levy Investors") purchased $330,000 of the Company's 9%
Subordinated Notes due December 2, 1993 (the "1993 Notes") and received warrants
to purchase up to 60,218 shares of the Company's Common Stock at a price of
$5.48 per share, as adjusted. On September 1, 1993, the Company repaid the 1993
Notes in full. In connection with the Merger, the Company extended the period in
which it is required to register the shares of Common Stock issuable upon
exercise of the Levy Warrants.
On September 1, 1993, the Levy Investors, including Lucien I. Levy, a
beneficial owner of more than 5% of the Company's Common Stock at that time,
purchased an aggregate principal amount of $3.5 million of the Company's 10%
Senior Bonds due June 30, 1996 (the "Bonds") and warrants to purchase up to
297,500 shares of the Company's Common Stock at an exercise price of $2.50 per
share (the "September Levy Warrants"). At the request of one of the Levy
Investors, the Company used a portion of the proceeds from the sale of the Bonds
to repay $100,000 of the principal of the Bonds. On September 30, 1993, the
Company repaid approximately $1.4 million of the Bonds and the number of shares
that could be purchased under the September Levy Warrants was reduced to
228,125. In October 1994, the exercise price of the remaining September Levy
Warrants was reduced to $.02 per share because the Company did not complete its
initial public offering before the date specified in such warrants. The Company
utilized a portion of the proceeds of its initial public offering to repay the
Bonds in full.
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<PAGE> 45
On June 30, 1995, the Levy Investors exercised the September Levy Warrants. In
connection with the Merger, the Company extended the period in which it is
required to register the shares of Common Stock issued upon exercise of the
September Levy Warrants.
On March 31, 1994, the Company sold 40,000 shares of Common Stock to
Frank Regas in exchange for (i) $215,000 in cash, (ii) Mr. Regas' ownership
interest in 2.5% of the stock of Rudy's Country Store and Bar-B-Q, Inc.
(the "Rudy's Franchisor"), and (iii) an assignment of Mr. Regas' rights under a
development agreement dated as of February 1994 between Mr. Regas and the Rudy's
Franchisor covering territories in Tennessee. Mr. Regas joined the Company as
Senior Vice President -- Product Development and as a director in June 1994. Mr.
Regas resigned from the Company and from the Board of Directors effective with
the Merger.
Philip B. Smith, a director of the Company since May 1993, was Director
of Merchant Banking for Spencer Trask from February 1992 through January 1994.
From September 1992 through December 1993, the Company paid Spencer Trask, as
compensation for acting as placement agent in the Company's private placement of
units consisting of Series A Preferred Stock and warrants to purchase the
Company Common Stock, (i) 4.98 unit purchase options to purchase, at an exercise
price of $165,000 per unit, an aggregate of 124,352 shares of the Company Common
Stock and warrants to purchase 37,630 shares of the Company's Common Stock; (ii)
warrants to purchase 26,585 shares of the Company's Common Stock at an exercise
price of $5.96 per share, as adjusted; (iii) a commission of 8% of the gross
proceeds of all of the units sold in the private placement; (iv) a management
fee of 2% of the gross proceeds of all of the units sold in the private
placement; (v) a non-accountable expense allowance of 2% of the gross proceeds
of all of the units sold in the private placement; and (vi) an agreement to
enter into a consulting agreement pursuant to which Spencer Trask would receive
$3,000 per month for consulting services. In December 1992, the Company executed
the consulting agreement, which terminated upon the consummation of the initial
public offering. In November 1993, the Company issued to Spencer Trask warrants
to purchase 10,500 shares of Common Stock at an exercise price of $6.60 per
share in connection with the waiver by Spencer Trask of its right of first
refusal to serve as the underwriter of the Company's initial public offering. In
November 1993, the Company also agreed to pay Spencer Trask $145,000 for
services rendered in connection with the acquisition of certain restaurants, of
which $50,000 was paid prior to the initial public offering in October 1994. In
October 1994, the Company paid to Spencer Trask an aggregate of $161,000 of the
proceeds of the initial public offering, which represented the balance owed to
Spencer Trask for services rendered in connection with the acquisition of
certain restaurants, all accrued consulting fees under the consulting agreement
from November 1993 through October 1994, and a payment of $30,000 in connection
with Spencer Trask's waiver of its right of first refusal to serve as
underwriter in the initial public offering.
The Company paid to affiliates of CNL (the "Selling Venturers") an
aggregate of $4.7 million from the net proceeds of the Company's initial public
offering in exchange for such persons' interests in a joint venture with the
Company. The Selling Venturers purchased an aggregate of 475,000 shares of the
Company's Common Stock in the initial public offering, at the initial public
offering price of $5.00 per share.
In July 1995, the Company granted Philip B. Smith, a director of the
Company, options to purchase 50,000 shares of Common Stock at an exercise price
of $4.9375 per share in consideration for rendering services to the Company in
connection with the Merger. One-half of these options vest and become
exercisable commencing in July 1996 and the remaining options vest and become
exercisable commencing in July 1997.
Prior to the Merger, certain officers of DRC lent funds to DRC or its
predecessors. On December 10, 1993, Jack M. Lloyd and William J. Howard
contributed as paid-in-capital obligations owed to them by DRC in amounts
aggregating $469,275 and accrued interest of $52,250.
In April 1995, DRC purchased, for a purchase price of $75,000, a parcel
of land adjacent to one of its restaurants from an entity controlled by Jack M.
Lloyd. The Company believes that the purchase price represents the fair value of
the property on the date of purchase.
43
<PAGE> 46
In August 1995, DRC entered into leases for two restaurant properties
owned by Lloyd/Howard L.L.C. ("Lloyd/Howard"), a limited liability company
controlled by Jack M. Lloyd and William J. Howard. Lloyd/Howard acquired these
two properties and certain other properties from Kettle Restaurants, Inc. in
consideration of the assumption by Lloyd/Howard of environmental liabilities
associated with the two properties leased by DRC. The Company believes that the
terms of the leases for these two restaurant properties are no less favorable to
the Company than could be obtained from an unaffiliated third party for
comparable properties.
Upon consummation of the Merger, the Company issued an aggregate of (i)
3,103,504 shares of Common Stock, $11,196,000 principal amount of Series B
Notes, and Series B Warrants to purchase an aggregate of 293,223 shares of
Common Stock to Jack M. Lloyd, the Company's President and Chief Executive
Officer; (ii) 1,551,752 shares of Common Stock, $5,598,000 principal amount of
Series B Notes, and Series B Warrants to purchase 146,611 shares of Common Stock
to William J. Howard, the Company's Vice President and Secretary; and (iii)
1,878,788 shares of Common Stock, $6,000,000 principal amount of Series A Notes,
and Series A Warrants to purchase 188,047 shares of Common Stock to BancBoston,
in exchange for such persons' respective shares of DRC capital stock. In
connection with the Merger, the Company entered into a registration rights
agreement with Mr. Lloyd, Mr. Howard, and BancBoston with respect to the shares
of Common Stock issued to them in the Merger and the shares issuable upon
exercise of the warrants.
In May 1996, Jeffrey D. Miller, Chairman of the Board, forgave a $1.0
million loan to the Company at the request of former shareholders of DRC. The
existence of the loan would have constituted a breach of obligations of the
Company to the former shareholders of DRC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1) Financial Statements
Independent Auditors' Report .................................................. 45
Consolidated Balance Sheets as of December 28, 1994 and December 27, 1995 ..... 46
Consolidated Statements of Operations for the years ended December 30, 1993,
December 28, 1994 and December 27, 1995 ................................ 47
Consolidated Statements of Shareholders' Equity for the years ended
December 30, 1993, December 28, 1994 and December 27, 1995 ............. 48
Consolidated Statements of Cash Flows for the years ended December 30, 1993,
December 28, 1994 and December 27, 1995 ................................ 49
Notes to Consolidated Financial Statements .................................... 51
(2) Financial Statement Schedule:
II. Valuation and Qualifying Accounts for the years ended December 30, 1993,
December 28, 1994, and December 27, 1995 ............................... 63
</TABLE>
All other schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the financial statements or notes thereto.
44
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
DenAmerica Corp.:
We have audited the accompanying consolidated balance sheets of DenAmerica
Corp. (formerly Denwest Restaurant Corp.) and subsidiaries (the "Company") as of
December 28, 1994 and December 27, 1995, and the related consolidated statements
of operations, shareholders' equity (deficiency), and cash flows for each of the
three years in the period ended December 27, 1995. Our audits also included the
consolidated financial statement schedule as listed in the index at Item 14.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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, such consolidated financial statements present fairly, in
all material respects, the financial position of DenAmerica Corp. and
subsidiaries as of December 28, 1994 and December 27, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 27, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
March 29, 1996 (except for Note 16, as to which the date is May 31, 1996)
Phoenix, Arizona
45
<PAGE> 48
DENAMERICA CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1994 1995
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 158 $
Receivables 914 989
Inventories 806 1,200
Deferred income taxes 189 249
Other current assets 201 215
------- -------
Total current assets 2,268 2,653
------- -------
PROPERTY AND EQUIPMENT - Net 16,614 33,817
INTANGIBLE ASSETS - Net 11,151 11,925
NOTE RECEIVABLE FROM SHAREHOLDER 2,600 2,600
OTHER ASSETS 2,395 2,790
------- -------
TOTAL $35,028 $53,785
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,194 $ 3,775
Accrued liabilities 3,922 5,997
Current portion of long-term obligations 2,259 2,287
------- -------
Total current liabilities 8,375 12,059
LONG-TERM OBLIGATIONS 14,703 30,252
DEFERRED RENT AND OTHER 1,382 1,508
------- -------
Total liabilities 24,460 43,819
------- -------
MINORITY INTEREST IN JOINT VENTURES 2,214 1,901
------- -------
5% REDEEMABLE CONVERTIBLE PREFERRED STOCK,
par value, $1.00 per share; authorized,
8,000 shares; issued and outstanding,
8,000 shares; liquidation preference, $8,000 7,397 7,501
------- -------
SHAREHOLDERS' EQUITY (note 1):
Class A common stock, par value, $.001 per share;
authorized, 12,000,000 shares; issued and
outstanding, 6,520,000 shares 7 7
Class B common stock, par value, $.001 per share;
authorized, 4,000,000 shares; issued and
outstanding, no shares
Additional paid-in capital 3,260 3,156
Deficit (2,310) (2,599)
------- -------
Total shareholders' equity 957 564
------- -------
TOTAL $35,028 $53,785
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 49
DENAMERICA CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
RESTAURANT SALES $32,584 $ 47,323 $ 74,683
------- ---------- ----------
RESTAURANT COSTS AND EXPENSES:
Cost of food and beverage 8,936 12,788 20,343
Payroll and payroll related costs 10,309 15,979 25,025
Charge for impaired assets 523
Depreciation and amortization 1,328 1,501 2,936
Other restaurant operating costs 8,864 12,516 19,213
------- ---------- ----------
Total restaurant costs and expenses 29,437 42,784 68,040
------- ---------- ----------
RESTAURANT OPERATING INCOME 3,147 4,539 6,643
ADMINISTRATIVE EXPENSES 2,050 2,619 3,380
PROVISION FOR RESTAURANT CLOSINGS 600
GAIN ON SALE OF RESTAURANTS (231)
------- ---------- ----------
OPERATING INCOME 1,328 1,320 3,263
INTEREST EXPENSE 736 1,301 2,467
OTHER (INCOME) EXPENSE (132) 64
MINORITY INTEREST IN JOINT VENTURES 440 505 291
------- ---------- ----------
INCOME LOSS BEFORE INCOME TAXES 284 (550) 505
INCOME TAX PROVISION (BENEFIT) 144 (209) 305
------- ---------- ----------
NET INCOME (LOSS) 140 (341) 200
PREFERRED STOCK DIVIDEND AND ACCRETION (84) (593)
------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ 140 $ (425) $ (393)
======= ========== ==========
NET (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ (.06) $ (.06)
========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,937,500 6,937,500
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 50
DENAMERICA CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------------------
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL DEFICIT TOTAL
----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $6 $ 330 $(2,039) $(1,703)
Contribution of notes payable and
receivable from shareholders 345 345
Net income 140 140
-- ------ ------ -------
BALANCE, DECEMBER 30, 1993 6 675 (1,899) (1,218)
Issuance of preferred stock - net of
issuance costs of $617 $7,383
Issuance of common stock 1 2,599 2,600
Preferred stock accretion 14 (14) (14)
Preferred stock dividends (70) (70)
Net loss (341) (341)
------ -- ------ ------- --------
BALANCE, DECEMBER 28, 1994 7,397 7 3,260 (2,310) 957
Preferred stock accretion 104 (104) (104)
Preferred stock dividends (489) (489)
Net income 200 200
------ -- ------ ------ -------
BALANCE, DECEMBER 27, 1995 $7,501 $7 $3,156 $(2,599) $ 564
====== == ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 51
DENAMERICA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 140 $ (341) $ 200
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Minority interest in joint ventures 440 505 291
Depreciation and amortization 1,328 1,501 2,936
Amortization of deferred financing costs 135 144
Gain on sale of restaurants - net (231)
Charge for impaired assets 523
Deferred income taxes (37) (29) 145
Deferred rent 98 121 196
Other - net 65 (29)
Changes in operating assets and liabilities, net of
effect of acquisitions:
Receivables (160) (229) (75)
Inventories (119) (101) (394)
Prepaid expenses (36) 90 (14)
Other assets (265) (502) (744)
Accounts payable and accrued liabilities 1,128 1,469 3,061
Income taxes payable 142 (180) 36
------- ------- -------
Net cash provided by operating activities 2,493 2,410 6,305
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of restaurants 572
Purchase of property and equipment (1,104) (1,356) (7,003)
Purchase of intangibles (470) (712) (1,733)
Cash paid to acquire fair value of assets (4,999)
Issuance of note receivable (2,600)
------- -------
Net cash used in investing activities (1,002) (9,667) (8,736)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from working capital loan 2,566 3,031
Principal reductions on long-term debt (937) (2,241) (1,154)
Payment of note to Flagstar (4,000)
Proceeds from borrowings 565 5,022 1,000
Debt issuance costs (931)
Joint venture partners' contributions 50
Payment of obligations on behalf of shareholders (241) (102)
Distributions to minority interest joint venture partners (605) (605) (604)
Issuance of preferred stock - net of expenses 7,383
------- ------- -------
Net cash provided by (used in) financing activities (1,168) 7,092 2,273
------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 323 (165) (158)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 323 158
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 323 $ 158 $
======= ======= =======
</TABLE>
49
<PAGE> 52
DENAMERICA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1993 1994 1995
--------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 669 $ 1,140 $ 2,397
======= ======= =======
Income taxes $ 100
=======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES (Note 3):
Avon acquisition - cash paid to acquire fair value of assets $ 504
=======
Flagstar acquisition - note issued (repaid November 1994)
to acquire fair value of assets $ 4,000
=======
Ontario acquisition - cash paid to acquire fair value of assets $ 200
=======
Whirral acquisition:
Fair value of assets acquired $ 4,764
Liabilities assumed (464)
Cash acquired (5)
-------
Cash paid to acquire Whirral - net of cash $ 4,295
=======
Wytex acquisition:
Fair value of assets acquired $ 3,400
Liabilities assumed (800)
Common stock issued (2,600)
-------
Cash paid to acquire Wytex $
=======
1993 acquisition:
Fair value of assets acquired $ 2,120
Liabilities assumed (2,120)
-------
Cash paid for fair value of assets acquired $
=======
CAPITAL EXPENDITURES FINANCED THROUGH
INCREASE IN OBLIGATIONS UNDER CAPITAL
LEASES $ 1,968 $ 3,664 $12,700
======= ======= =======
CONTRIBUTION OF NOTES RECEIVABLE AND
NOTES PAYABLE FROM SHAREHOLDER $ 345
=======
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 53
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1993, DECEMBER 28, 1994 AND DECEMBER 27, 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
1. BASIS OF PRESENTATION, SUBSEQUENT MERGER, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION - Denwest Restaurant Corp. ("DRC") was formed in
April 1994 and its predecessor companies, which were controlled by the
majority stockholders of DRC, were merged into DRC in exchange for DRC
common stock. This combination has been accounted for in a manner
similar to a pooling of interest. These consolidated financial
statements reflect the capital accounts of DRC, which were subsequently
adjusted as a result of the Merger described below.
The consolidated financial statements include the accounts of DRC, its
wholly-owned subsidiaries, and two 50%-owned joint venture
partnerships. The joint venture partnerships are consolidated because
DRC, as managing venture partner, has the ability to exercise control
over these partnerships. Such entities are referred to collectively in
these consolidated financial statements as the "Company." All
intercompany balances and transactions are eliminated in these
consolidated financial statements.
DRC operated 37, 70 and 102 restaurants at the end of fiscal 1993,
1994, and 1995, respectively. These restaurants are operated primarily
as Denny's restaurants under the terms of franchise agreements which
typically extend for a period of 20 years and provide for renewals at
the option of the franchisor. Under the terms of the franchise
agreements, the Company is obligated to remit advertising and royalty
fees to the franchisor (Note 8). DRC's restaurants are primarily
located in the western and midwestern United States.
SUBSEQUENT MERGER - On March 29, 1996, DRC merged with and into
American Family Restaurants, Inc. ("AFR") with AFR being the surviving
corporation (the "Merger"). Upon consummation of the Merger, AFR
changed its name to DenAmerica Corp. In connection with the Merger,
DenAmerica Corp. issued to the former shareholders of DRC an aggregate
of 6,937,500 shares of DenAmerica Corp.'s Common Stock, an aggregate of
$24,250 principal amount of 13% Series A and Series B Subordinated
Notes due 2003 and warrants to purchase an aggregate of 666,000 shares
of DenAmerica Corp.'s Common Stock at an exercise price of $0.01 per
share. In connection with the Merger, $200 of bonuses were expensed in
fiscal 1995.
Upon completion of the Merger, the four former shareholders of DRC held
securities having an aggregate of approximately 53.0% of the
outstanding voting power of DenAmerica Corp. Accordingly, the Merger
has been accounted for as a reverse purchase under generally accepted
accounting principles, with DRC considered to be the acquiring entity
and AFR the acquired entity for accounting purposes, even though
DenAmerica Corp. is the surviving legal entity. As a result, (i) the
historical financial statements of AFR for periods prior to the date of
the Merger are no longer the historical financial statements of
DenAmerica Corp. and therefore are no longer presented; (ii) the
historical financial statements of DenAmerica Corp. for periods prior
to the date of the Merger are those of DRC; and (iii) all references to
the financial statements of the "Company" apply to the historical
financial statements of DRC prior to and subsequent to the Merger.
SIGNIFICANT ACCOUNTING POLICIES - A summary of significant accounting
policies is as follows:
a. Fiscal Year-End - The Company uses a 52-53 week fiscal year
which ended on the last Thursday of December in 1993 and the
last Wednesday of December in 1994 and 1995. The fiscal years
ended 1993, 1994 and 1995 were 52 week years.
51
<PAGE> 54
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
b. Inventories consist of food and beverages in restaurants and
are carried at the lower of cost or market. Cost is determined
under a method which approximates the last-in, first-out
("LIFO") method.
c. Property, equipment and leased properties are recorded at
cost. Depreciation is computed under the straight-line
depreciation method over the estimated useful lives of the
assets which range from 4-20 years. Leased properties consist
of capitalized buildings and equipment and leasehold
improvements. Amortization is recorded principally on the
straight-line method over the lesser of the estimated useful
lives or the lives of the leases.
d. Franchise Rights - The franchise agreements with Denny's Inc.
require the Company to pay a franchise fee for each unit
opened. The fees are capitalized and amortization is recorded
on the straight-line method over the lives of the franchise
agreements. The franchise agreements provide for a term of 20
years. Upon expiration of the franchise agreements, the
franchisor may grant the Company the right to extend the term
of the franchise agreement. Also, at termination the
franchisor has the right, at its option, to purchase the
restaurant equipment at the lesser of the Company's cost (as
defined) or fair value.
e. Preopening Costs - Direct costs incurred in connection with
the opening of new restaurants are deferred and amortized on a
straight-line basis over a one-year period following the
opening of the restaurant.
f. Goodwill represents the excess of the cost of restaurants
acquired over the fair value of the net assets at the date of
acquisition. Goodwill is amortized using the straight-line
method ranging from 25 to 40 years. The Company acquires
goodwill and other intangible assets in the normal course of
business and in business combinations.
g. Intangible Impairments - Deferred costs and intangible assets
are recorded at cost. The Company periodically reviews for
changes in circumstances to determine whether there are
conditions that indicate that the carrying amount of such
assets may not be reasonable. If such conditions are deemed to
exist, the Company will determine whether estimated future
undiscounted cash flows are less than the carrying amount of
such assets, in which case the Company will calculate an
impairment loss. Any impairment loss will be reflected as a
component of operating earnings.
h. Deferred rent represents the accrual resulting from recording
rental expense on a straight-line basis calculated in
accordance with Statement of Financial Accounting Standards
("SFAS") No. 13, Accounting for Leases, and SFAS No. 29,
Determining Contingent Rentals. As of December 28, 1994 and
December 27, 1995, deferred rent totaled $1,340 and $1,364,
respectively.
i. Cash equivalents consist of highly liquid investments,
principally certificates of deposit, purchased with initial
maturities of three months or less.
j. Deferred financing costs are amortized using the effective
interest method over the terms of the related loans.
k. Reclassifications - Certain reclassifications have been made
to the 1993 and 1994 financial statements to conform to the
presentation in the 1995 financial statements.
l. Earnings per Share - Earnings per share have been computed
based upon the shares of DenAmerica Corp. common stock
received in connection with the Merger by the former
52
<PAGE> 55
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
shareholders of DRC after deducting preferred stock dividends
and accretion on preferred stock of DRC outstanding prior to
the Merger.
m. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
n. Fair Value - Based on the borrowing rates currently available
to the Company, the fair value of the note receivable from
shareholder, other assets and long-term obligations
approximate the carrying value.
o. New Accounting Pronouncements - In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123 "Accounting for
Stock Based Compensation." The Company has determined that it
will not change to the fair value method and will continue to
use Accounting Principles Board Opinion No. 25 for measurement
and recognition of employee stock based transactions.
2. PREFERRED STOCK AND SECURED CREDIT AGREEMENT FINANCING
In November 1994, the Company completed a Preferred Stock and Secured
Credit Financing Plan ("Financing Plan") whereby the Company entered
into a Securities Purchase Agreement under which it issued 8,000 shares
of Preferred Stock for $8,000. In conjunction, therewith, the Company
entered into a Secured Credit Agreement with an unaffiliated lender to
provide $17,000 of various debt facilities (Note 7). Initial proceeds
from the Financing Plan were used for acquisitions as described in Note
3, to repay indebtedness of $5,440, and to pay transaction costs of
$1,370.
The Preferred Stock has a mandatory redemption date of November 9, 2004
or at the occurrence of certain events, as defined in the agreement.
The initial dividend rate is 5% per annum, which may be adjusted by 1%
upon certain circumstances. Dividends are payable quarterly. At the
Company's option, however, the dividends may be deferred until April 1,
1996. Deferred dividends are compounded quarterly and are due on
November 9, 2004. At its option, the Company has the right to call the
Preferred Stock at any time after November 9, 2000.
The holder of the Preferred Stock has the ability to put its shares to
the Company subsequent to October 1999 or in the event of a change of
control or events, as defined in the agreement, at a repurchase price
which is based upon a defined formula. In addition, the holder of the
Preferred Stock has the right to convert its outstanding shares into
common shares based upon a conversion formula. While the Preferred
Stock is outstanding, the Company is subject to various events of
default which will allow the holders to exercise certain rights and
assume control of the Company. In addition, the Company is subject to
various covenants similar to those described in Note 7. The Preferred
Stock is stated net of acquisition costs, which discount is being
accredited to par value over six years.
3. ACQUISITIONS AND DIVESTITURES
During 1993, 1994, and 1995, the Company expanded the number of
restaurants it operates by i) opening new Denny's restaurants; ii)
converting existing non-operating restaurant locations into Denny's
restaurants; and iii) acquiring operating Denny's restaurants. In
addition, over the same period the Company sold several restaurants and
has in certain situations continued to remain contingently liable for
the performance of certain leases (Note 10). A summary of the
significant acquisitions and disposals is as follows:
53
<PAGE> 56
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1993 TRANSACTIONS
In July 1993, the Company purchased certain land, buildings, and
equipment which included two existing Denny's restaurants and two
closed restaurants, for $3,220. Consideration for this transaction
consisted of a $700 note payable to the seller and financing provided
from a third party consisting of $1,420 of mortgage notes payable and
$1,100 in cash arising from the sale of all the land to such third
party (as described below). This transaction has been accounted for
using the purchase method of accounting, and the results of operations
of the two existing Denny's restaurants have been included in the
consolidated financial statements since the date of acquisition.
The Company has recorded the assets acquired, excluding the land sold,
as shown below:
<TABLE>
<CAPTION>
<S> <C>
Buildings on leased land (see below) $1,420
Equipment 283
Inventory 10
Goodwill 407
------
Total $2,120
======
</TABLE>
In conjunction with the acquisition, the Company immediately sold the
acquired land to the third party mentioned above for cash of $1,100 and
entered into an operating ground lease for a period of 20 years. No
gain or loss was recorded on this sale. The Company has an option to
repurchase the land, through the term of the lease, at the greater of
its fair value or $1,100.
In July 1993, the Company sold three Denny's restaurants and a
developed Denny's restaurant location with a combined net book value of
$580 for $500 in cash and a $250 note receivable. The note receivable,
totaling $176 and $158, respectively, at December 28, 1994 and December
27, 1995, is included in other current assets, bears interest at 14.3%,
and is collateralized by the franchise agreement and equipment of one
of the restaurants. As described in Note 7, the Company has
approximately $75 of obligations collateralized by the equipment in one
of the sold restaurants. These obligations are not assignable and as a
result are currently in technical default. In addition, as described in
Note 10, the Company continues to remain obligated under the terms of
the operating leases for an amount totaling $3,143.
1994 ACQUISITIONS
In April 1994, the Company purchased certain equipment, inventories,
and the rights, including leasehold rights, to operate 13 Denny's
restaurants from Denny's Inc. for $4,000. The Company consummated the
transaction by issuing a $4,000 note payable, which was repaid in
conjunction with the Financing Plan. This acquisition has been
accounted for using the purchase method of accounting and the results
of operations have been included in the consolidated financial
statements subsequent to the acquisition.
In November 1994, the Company purchased certain equipment, inventories,
and the rights, including leasehold rights, to operate five Denny's
restaurants for $4,300 and assumed certain obligations, including
operating lease agreements. This acquisition was completed in
conjunction with the Financing Plan and has been accounted for using
the purchase method of accounting. The results of operations have been
included in the consolidated financial statements subsequent to the
acquisition.
In November 1994, in conjunction with the Financing Plan, the Company
advanced $2,600 to an unrelated party under a 7% note receivable
("Wytex Note") the proceeds of which were used by the individual to
purchase the stock of Wytex Corporation, which operated 11 Denny's
restaurants. Concurrently with the issuance of the Wytex Note, the
Company acquired the outstanding shares of the Wytex Corporation from
54
<PAGE> 57
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
this unrelated party by issuing 520,000 shares of common stock valued
at $2,600. The Wytex Note is collateralized by the 520,000 shares of
common stock. This acquisition has been accounted for using the
purchase method of accounting and the results of operations have been
included in the consolidated financial statements subsequent to the
acquisition.
In September 1994, the Company purchased the minority interest in a
restaurant in Avon, Colorado for $504. In November 1994, the Company
purchased the equipment and certain other rights to a restaurant in
Ontario, Oregon for $200.
The Company has recorded the assets acquired on these transactions as
shown below:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 541
Property and equipment 2,412
Intangibles 9,512
Minority interest 398
-------
Total costs of acquisition $12,863
=======
</TABLE>
Consideration for these transactions consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Cash paid $ 4,999
Note issued 4,000
Liabilities assumed 1,264
520,000 shares of common stock 2,600
-------
Total consideration $12,863
=======
</TABLE>
The following table summarizes unaudited, pro forma operating results
for the Company for the fiscal years 1993 and 1994, assuming that the
acquisitions had occurred at the beginning of the year preceding the
acquisition, after giving effect to financing costs and purchase
accounting adjustments:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Consolidated revenues $65,338 $64,727
======= =======
Net income $ 387 $ 557
======= =======
Net income per share $ .06 $ .08
======= =======
</TABLE>
55
<PAGE> 58
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment including assets under capitalized leases as of
December 28, 1994 and December 27, 1995 consist of the following:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Buildings $ 6,827 $19,288
Restaurant equipment 9,638 13,666
Leasehold improvements 2,837 4,717
Other 334 1,651
------- -------
Total 19,636 39,322
Less accumulated depreciation and amortization 3,022 5,505
------- -------
Property and equipment - net $16,614 $33,817
======= =======
Assets recorded under capital leases as of December 28, 1994 and
December 27, 1995 consist of the following:
1994 1995
---- ----
Buildings $ 4,842 $17,305
Restaurant equipment 4,608 4,845
------- -------
Total 9,450 22,150
Less accumulated amortization 1,692 2,529
------- -------
Total $ 7,758 $19,621
======= =======
</TABLE>
Depreciation and amortization expense was $873, $1,072 and $1,977 for
the fiscal years ended 1993, 1994 and 1995, respectively.
5. INTANGIBLE AND OTHER ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Goodwill $10,117 $10,285
Franchise rights 880 1,126
Favorable lease arrangements and other 428 1,059
Pre-opening costs 295 958
------- -------
Total 11,720 13,428
Less accumulated amortization 569 1,503
------- -------
Intangible assets - net $11,151 $11,925
======= =======
</TABLE>
Amortization expense was $455, $429 and $959 for the fiscal years ended
1993, 1994 and 1995, respectively.
Other assets consist of the following:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
AFR merger - related expenses (Note 1) $ $ 778
Deposits 793 714
Deferred financing costs - net 796 653
Deferred income taxes (Note 9) 586 380
Other 220 265
------- -------
Total other assets $ 2,395 $ 2,790
======= =======
</TABLE>
56
<PAGE> 59
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consist of the following: 1994 1995
---- ----
<S> <C> <C>
Payroll and benefits $ 1,476 $ 2,114
Property taxes 408 935
Dividends payable 559
Sales tax 345 421
Restaurant closings (Note 13) 584 348
Due to franchisor (Note 8) 313 323
Professional fees related to the Merger 323
Other 796 974
--------- ---------
Total accrued liabilities $ 3,922 $ 5,997
========= =========
</TABLE>
7. DEBT
Long-term debt as of December 28, 1994 and December 27, 1995 consist of
the following:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Working capital loan, interest at prime (8.5% at
December 27, 1995) plus 1.5%, maturing December 31, 1997 $ 2,566 $ 5,597
Revolving credit loan, interest at prime (8.5% at
December 27, 1995) plus 1.5%, maturing December 31, 1999 5,000 5,000
Notes payable, interest rates ranging from 9% to 15%,
required monthly principal and interest payments
through 1998, collateralized by buildings and equipment 1,208 943
Other notes payable - unsecured 253 202
Capital lease obligations (Note 10) 7,935 20,797
------- -------
Total 16,962 32,539
Less current maturities 2,259 2,287
------- -------
Total long-term obligations $14,703 $30,252
======= =======
</TABLE>
WORKING CAPITAL LOAN - As described in Note 2, on November 9, 1994 the
Company entered into a Secured Credit Agreement ("Credit Agreement")
pursuant to which the lender has committed to make loans to the Company
of up to $7,000 through December 31, 1997. Borrowings bear interest at
prime plus 1.5% and the unused portion of the loan is subject to a .5%
fee. As of December 27, 1995, $5,597 was outstanding under the Working
Capital Loan.
REVOLVING CREDIT LOAN - Under the terms of the Credit Agreement, the
lender agreed to provide a $5,000 Revolving Credit Loan which requires
annual payments of $1,000 beginning on December 31, 1995. Borrowings
bear interest at prime plus 1.5%. As of December 27, 1995, $5,000 was
outstanding under the Revolving Credit Loan.
EXPANSION LOAN - Under the terms of the Credit Agreement, the lender
has committed to make loans to the Company of up to $5,000 through
December 31, 1996. Borrowings under this commitment are to be used to
purchase restaurant sites and fund construction costs. Borrowings bear
interest at prime plus 1.5% and the unused portion of the loan is
subject to a .5% fee. As of December 27, 1995, no borrowings were
outstanding under the Expansion Loan. The loan matures December 31,
1996.
57
<PAGE> 60
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Credit Agreement requires the Company to comply with certain
restrictive covenants which require, among other things, the
maintenance of a minimum annualized operating cash flow, certain debt
ratios, certain debt service coverage ratios, certain lease ratios, and
limits on capital expenditures and the Company is restricted as to
capital expenditures, additional indebtedness and related party
transactions and the Company may not purchase, redeem or otherwise
acquire any equity interest or declare or pay any dividends or
distributions. At December 27,1995, the Company was not in compliance
with certain financial covenants for which waivers have been obtained.
The working capital and revolving credit loans were repaid upon
consummation of the Merger on March 29, 1996 (Note 1).
The aggregate annual maturities of long-term debt, excluding capital
lease obligations, for the years subsequent to December 27, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 1,371
1997 6,798
1998 1,144
1999 2,012
2000 12
Thereafter 405
-------
Total $11,742
=======
</TABLE>
Included in equipment notes payable and capital lease obligations (Note
10) as of December 28, 1994 and December 27, 1995 are $106 and $75 of
obligations, respectively, which are collateralized by equipment
included in one of the sold restaurants (Note 3). These obligations are
not assignable and are currently in technical default and have been
classified as current liabilities in the accompanying consolidated
financial statements.
8. TRANSACTIONS WITH FRANCHISOR
As of December 27, 1995, the Company operates 78 Denny's restaurants
under the terms of franchise agreements with Denny's, Inc. In
accordance with the franchise agreements, the Company is required to
pay Denny's Inc. royalty (4%) and advertising fees (0.5% to 2%) based
upon gross sales. For the fiscal years ended 1993, 1994 and 1995,
franchise fees totaled $1,817, $2,748 and $4,172, respectively.
In conjunction with the Financing Plan, the Company entered into a
development agreement with Denny's Inc. to develop 40 restaurants
through 1997. In conjunction therewith, the Company paid Denny's Inc.
$200.
9. INCOME TAXES
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes (benefit) consist of
the following:
Current:
Federal $146 $160
State 35
---- ----
Total current 181 160
---- ----
Deferred:
Federal (33) $(164) 123
State (4) (45) 22
---- ----- ----
Total deferred (37) (209) 145
---- ----- ----
Total $144 $(209) $305
==== ===== ====
</TABLE>
58
<PAGE> 61
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the (benefit) provisions for income taxes and the
amounts that would be computed using Federal statutory tax rates for
the fiscal years ended in December are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Computed expected tax (benefit) expense $ 97 $(187) $177
State income taxes - net of federal benefit 16 (31) 25
Effect of terminating S Corporation election (29)
Nondeductible expenses 57 11 20
Adjustment from prior years 83
Other - net 3 (2)
---- -----
Total $144 $(209) $305
==== ===== ====
</TABLE>
Deferred income tax assets at December 28, 1994 and December 27, 1995 are
as follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Current deferred income tax assets:
Accrued self insurance and contingent losses $120 $111
Accrued vacation 60 39
Other accrued expenses 9 99
---- ----
Total current deferred income tax assets $189 $249
==== ====
Non-current deferred income tax assets (liabilities):
Deferred rent $ 457 $ 543
Store closing 232 139
Intangibles (257)
Net operating loss carryforward 222 52
Alternative minimum tax credit carryforward 44 189
Depreciation, capitalized leases and deferred gain (333) (494)
Start-up costs and other intangibles (59)
Other - net 23 208
----- -----
Net non-current deferred income tax assets
(included in other assets) $ 586 $ 380
===== =====
</TABLE>
As of December 27, 1995, the Company has approximately $129 of net
operating loss carryforwards that expire beginning in 2004 and
alternative minimum tax credit carryforwards of approximately $189.
10. LEASES
The Company's operations utilize leased property, facilities and
equipment. At December 27, 1995, substantially all of the Company's
restaurants are operated under lease arrangements that provide for a
fixed basis rent and, in some instances, contingent rental based on a
percentage of gross revenues. Initial terms of the leases generally are
not less than 20 years, exclusive of options to renew. The leases have
expiration dates through September 2015 and contain various renewal and
purchase options. Future minimum lease payments do not include amounts
payable by the Company for maintenance costs, real estate taxes or
contingent rentals payable based on a percentage of sales in excess of
stipulated amounts of the leases.
59
<PAGE> 62
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Future minimum lease payments under noncancelable operating leases and
the present value of future minimum capital lease payments, including
certain leases relating to restaurants sold as of December 27, 1995,
are as follows:
<TABLE>
<CAPTION>
Minimum Minimum
Operating Operating
Capital Lease Sublease
Leases Payments Payments
------ -------- --------
<S> <C> <C> <C>
1996 $ 3,377 $ 5,660 $ (742)
1997 3,151 5,666 (795)
1998 3,078 5,539 (783)
1999 2,802 5,523 (794)
2000 2,536 5,579 (795)
Subsequent years 32,702 50,783 (6,871)
------- ------- --------
Total 47,646 $78,750 $(10,780)
======= ========
Less imputed interest - interest
rates ranging from 11% to 13% 26,849
-------
Present value of minimum capital lease obligations 20,797
Less current portion of capital lease obligations 916
-------
Long-term portion of capital lease obligations $19,881
=======
</TABLE>
Obligations under operating leases related to restaurants sold (Note 3)
that are being paid directly by the purchaser but for which the Company
continues to be contingently liable are included in minimum sublease
payments.
1995 TRANSACTION
In August 1995, the Company entered into leases or subleases for 25
restaurants located in Texas, Georgia, South Carolina, Colorado,
Oklahoma, Alabama, Florida, Virginia, and North Carolina that were
operated under the Kettle family-style restaurant concept. Under the
terms of the leases and subleases and an agreement with Denny's Inc.,
the Company is required to convert these restaurants to the Denny's
concept over the next 24 months. Under a license agreement, the Company
will not be required to pay franchise fees to Kettle Restaurant Inc.,
as the franchisor for a period of 24 months. A company owned by the
Company's principal shareholders is the lessor of two of the
restaurants. These two restaurants and certain other restaurant
properties are held by the company owned by the principal shareholders
in consideration for assuming environmental liabilities applicable to
the two restaurants leased by the Company.
The following is a summary of rental expense, excluding sublease
amounts, under all operating leases for the fiscal years ended 1993,
1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Minimum rentals $ 2,252 $ 3,475 $ 5,150
Contingent rentals 326 145 282
------- ------- --------
Total rent expense $ 2,578 $ 3,620 $ 5,432
======= ======= ========
</TABLE>
60
<PAGE> 63
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company is self-insured for the first $150 of
individual claims related to workers' compensation in Texas. The
Company is involved in various legal matters that management considers
to be in the normal course of business. In management's opinion, all
matters will be settled without material effect on the Company's
financial position, results of operations or cash flows. Beginning in
fiscal 1996, the Company is no longer self-insured in Texas.
12. SHAREHOLDERS' EQUITY
ADDITIONAL PAID-IN CAPITAL AND TREASURY STOCK TRANSACTIONS - At
December 30, 1993, in contemplation of the merger described in Note 1,
the shareholders of the Company contributed notes payable of $469 and
accrued interest of $53 and the Company forgave notes receivable from
one of the shareholders of $153 and accrued interest of $24. These
transactions have been reflected as a contribution to additional
paid-in capital of the Company.
STOCK OPTIONS - In October 1994, the Company adopted a Stock Option
Plan ("Plan") authorizing the issuance of 600,000 shares to management
and key employees. As of December 27, 1995, 391,000 shares under the
Plan had been granted with an exercise price of $4.125 per share. These
shares vest over a five year period from the grant date. No shares have
been exercised as of December 27, 1995.
The Company has a put/call agreement with the 50% owner of Denwest
Joint Venture and Denwest II Joint Venture pursuant to which if either
party desires to sell or purchase the other party's interest in the
partnerships, the Company may, at its option, either put its interest
in the partnerships to that party or initiate a call and purchase that
party's interests.
13. ADOPTION OF SFAS 121 AND RESTAURANT CLOSINGS
As of December 27, 1995, the Company elected to early adopt Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of. In conjunction with such adoption, six restaurant units,
which will continue to be operated, were identified as impaired as the
future undiscounted cash flows of each of these units is estimated to
be insufficient to recover the related carrying value. As such, the
carrying values of the related property and equipment were written down
by $523 to the Company's estimate of fair value based on sales of
similar units or other estimates of selling price.
During the fiscal year ended December 28, 1994, the Company formulated
a plan to close three restaurants over the next fiscal year. In
connection with the plan, a provision of $600 was charged to income for
the following:
<TABLE>
<CAPTION>
<S> <C>
Cost of asset write offs $450
Estimated lease costs 150
----
$600
====
</TABLE>
The cost of asset write-offs represent a non-cash charge and the
estimated lease costs are anticipated to be paid over a two-year period
in which the restaurants will be subleased or leases will be settled.
Only direct and incremental costs are included in amounts provided
above. During 1995, the Company closed two restaurants, resulting in
charges of $125 to cost of asset write-offs and $107 of estimated lease
costs.
61
<PAGE> 64
DENAMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. RELATED PARTY TRANSACTIONS
During fiscal 1993, 1994 and 1995, the Company entered into a number of
transactions with officers and/or shareholders of the Company or
affiliated companies. The following summarizes those transactions for
the fiscal years then ended:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Notes receivable from officers and
shareholders, due on demand $42 $ 35 $ 35
=== ====== ======
Note receivable from shareholder $2,600 $2,600
====== ======
Management fee income $61 $ 90
=== ======
Interest income $14
===
Interest expense $31
===
Lease expense paid to shareholders $ 40
======
</TABLE>
15. MINORITY INTEREST IN JOINT VENTURES
The Company has executed two joint venture agreements with CNL Income
and Growth Fund, a Florida partnership ("CNL"), for the purpose of
acquiring, developing or owning restaurants. The joint ventures expire
in 2019 and 2021. The Company and CNL each has a 50% interest in the
joint ventures and the Company is responsible for day-to-day operations
and receives a management fee equal to 3.5% of operating revenue. Under
the terms of the joint venture agreements, CNL financed the land,
building, and site development costs under real estate leases with
terms of 20 years and two five-year options to extend.
As of December 28, 1994 and December 27, 1995, minority interest in the
joint ventures are as follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Minority interest, beginning of period $2,712 $2,214
Purchase of minority interest (398)
Distributions (605) (604)
Minority interest in income of consolidate joint ventures 505 291
------ ------
Minority interest, end of period $2,214 $1,901
====== ======
</TABLE>
16. SUBSEQUENT EVENT
On May 31, 1996, the Company entered into an agreement to purchase all
of the outstanding stock of Black-eyed Pea, U.S.A., Inc., which
operates 100 restaurants under the "Black-eyed Pea" concept and
franchises the rights to operate an additional 30 Black-eyed Pea
restaurants to third parties.
* * * * * *
62
<PAGE> 65
DENAMERICA CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 30, 1993, DECEMBER 28, 1994, AND DECEMBER 27, 1995
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
FISCAL PERIOD OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1993 - Restaurant closings n/a n/a n/a n/a n/a
========= ======== ========= ========= ========
1994 - Restaurant closings n/a $600 - $16 $584
========= ======== ========= ========= ========
1995 - Restaurant closings
and SFAS 121 $ 584 $523 - $236 $871(1)
========= ======== ========= ========= ========
</TABLE>
(1) Included in accrued liabilities $348 and accumulated depreciation $523.
63
<PAGE> 66
(B) REPORTS ON FORM 8-K.
Not applicable.
(C) EXHIBITS - INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION OF EXHIBIT
- ---------- ----------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
August 9, 1995, between American Family Restaurants, Inc. and
Denwest Restaurant Corp. Included herein as Annex A to the
Proxy Statement/Prospectus.(1)
2.2 Amended and Restated Agreement and Plan of Reorganization by
and among Great Southeastern Restaurants, Inc., Jerry's
Licensing Corp., Great Restaurants of the Midsouth, Inc.,
Great American Restaurants, Inc., JLC Acquisition Corp., GRM
Acquisition Corp., and GAR Acquisition Corp., entered into as
of May 25, 1992.(2)
2.3 Articles of Merger of Great Midwestern Restaurants, Inc.,
Great Restaurants of the Midsouth, Inc., Jerry's Licensing
Corp., AFR Acquisition Corp., Inc., Florida Family
Restaurants, Inc. and McFadden Metz Leased Restaurants, Inc.
into American Family Restaurant, Inc.(1)
2.4 List of Schedules to Amended and Restated Agreement and Plan
of Merger, dated as of August 9, 1995, between American Family
Restaurants, Inc. and Denwest Restaurant Corp.(1)
3.1 Articles of Restatement of the Articles of Incorporation of
American Family Restaurants, Inc. and Articles of Amendment
thereto.(2)
3.2 Amended and Restated Bylaws of American Family Restaurants,
Inc.(3)
3.3 Certificate of Merger of Denwest Restaurant Corp. into
American Family Restaurants, Inc.(4)
4.1 Form of Indenture between DenAmerica Corp. and State Street
Bank and Trust Company, as trustee, relating to the Series A
Notes (including the Form of Series A Note).(4)
4.2 Form of Indenture between DenAmerica Corp. and State Street
Bank and Trust Company, as trustee, relating to the Series B
Notes (including the Form of Series B Note).(4)
4.3 Form of Series A Common Stock Purchase Warrant.(2)
4.4 Form of Series B Common Stock Purchase Warrant.(2)
4.5 Common Stock Purchase Warrant dated March 29, 1996, issued to
Banque Paribas.(4)
5.1 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A.
8.1 Opinion of Troy & Gould Professional Corporation with respect
to certain Federal income tax consequences of the Merger of
Denwest Restaurant Corp. with American Family Restaurants,
Inc.(1)
8.2 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, P.A. with respect to certain Federal income tax
consequences of the Merger of Denwest Restaurant Corp. with
American Family Restaurants, Inc.(1)
9.1 Voting Agreement, dated August 9, 1995, by and between Jeffrey
D. Miller and Denwest Restaurant Corp.(1)
9.2 Form of Voting Agreement to be entered into between American
Family Restaurants, Inc. and certain of the shareholders of
Denwest Restaurant Corp.(1)
10.1 American Family Restaurants, Inc. 1992 Stock Option Plan.(2)
10.1A American Family Restaurants, Inc. Amended and Restated 1992
Stock Option Plan.(2)
10.2 American Family Restaurants, Inc. Directors Stock Option
Plan.(2)
10.3 Purchase Agreement by and between L-K Restaurants & Motels,
Inc. and L-K Restaurants, Inc., dated March 26, 1986.(2)
10.4 Adjustable Rate Note in the principal amount of $170,000
payable by Jeffrey D. Miller and Vickie A. Miller to State
Savings Bank, Marion, Ohio, dated February 1, 1988.(2)
10.5 Asset Purchase Agreement by and between Great Southeastern
Restaurants, Inc. and Restaurant Associates of Southeast,
Inc., dated October 17, 1989.(2)
10.6 Installment Note payable by Great Southeastern Restaurants,
Inc. to Sanwa Business Credit Corporation in the original
principal amount of $2,354,975, dated November 30, 1989.(2)
</TABLE>
64
<PAGE> 67
<TABLE>
<CAPTION>
<S> <C>
10.7 Loan Modification Agreement, made as of November 21, 1990, by
and among Sanwa Business Credit Corporation, Southeastern
Restaurants, Inc., and Great Southeastern Restaurants, Inc.,
whereby Great Southeastern Restaurants, Inc. assumed
$1,004,635 of indebtedness due to Sanwa Business Credit
Corporation, including First Amendment thereto, dated October
9, 1991.(2)
10.7A Security Agreement by and between Great Southwestern
Restaurants, Inc. and Sanwa Business Credit Corporation, dated
November 30, 1989, Master Security Agreement, dated November
21, 1990 and Amendments thereto, dated May 13, 1994 and August
30, 1994.(2)
10.8 Agreement for Purchase of Assets by and between Great
Restaurants of the Midsouth, Inc. and Jerrico, Inc., dated
April 16, 1990.(2)
10.9 Letter Agreement by and among Denny's, Inc., Great Restaurants
of the Midsouth, Inc., Jerry's Licensing Corp., Midsouth
Family Restaurants Joint Venture and Midsouth Family
Restaurants Real Estate Joint Venture, dated July 18, 1990,
with respect to the conversion of Denny's restaurants.(2)
10.10 Joint Venture Agreement of Midsouth Family Restaurants Joint
Venture, effective as of June 28, 1990, and entered into July
19, 1990, by and between Midsouth Foods I Joint Venture and
Midsouth Foods II Joint Venture, including First Amendment
thereto, dated June 17, 1992.(2)
10.11 Joint Venture Agreement of Midsouth Foods I Joint Venture,
effective as of June 28, 1990, and entered into July 19, 1990
by and between Great Restaurants of the Midsouth, Inc. and
Midsouth Foods I, Ltd., including First Amendment thereto,
dated June 17, 1992.(2)
10.12 Joint Venture Agreement of Midsouth Foods II Joint Venture,
effective as of June 28, 1990, and entered into July 19, 1990,
by and between Great Restaurants of the Midsouth, Inc. and
Midsouth Foods II, Ltd., including First Amendment thereto,
dated June 17, 1992.(2)
10.13 Management Agreement, entered into July 19, 1990, effective as
of June 28, 1990, by and among Midsouth Family Restaurants
Joint Venture, Great Restaurants of the Midsouth, Inc., and
Great American Restaurants, Inc., including First Amendment
thereto, dated June 1992.(2)
10.14 Contract for Sale and Purchase by and between Southeastern
Restaurants, Inc. and Great Southeastern Restaurants, Inc.,
dated October 29, 1990.(2)
10.15 Mortgage Note payable in the principal sum of $435,000 by
Midsouth Family Restaurants Joint Venture to Brock & Company,
Inc., dated December 26, 1990. (Note was later negotiated to
$50,000, as evidenced by payment schedule attached to
note.)(2)
10.16 Promissory Note in the principal sum of $1,000,000 payable by
Midsouth Family Restaurants Joint Venture to General Electric
Capital Corporation, dated November 12, 1991.(2)
10.17 Master Lease Agreement, dated and effective as of December 9,
1991, by and between General Electric Capital Corporation and
Midsouth Family Restaurants Joint Venture, including schedules
thereto.(2)
10.18 Promissory Note in the sum of $185,000 payable by American
Family Restaurants, Inc. to Walter F. Demming, dated March 1,
1992.(2)
10.19 Stock Redemption Agreement by and between Great Midwestern
Restaurants, Inc., Jeffrey D. Miller and Ronald C. Davis,
dated June 17, 1992.(2)
10.20 Promissory Note in the principal sum of $4,500,000 payable by
Great Midwestern Restaurants, Inc. to Ronald C. Davis, dated
July 1, 1992.(2)
10.21 Placement agency agreement between Spencer Trask Securities,
Incorporated and Great American Restaurants, Inc., dated July
17, 1992.(2)
10.22 Warrant issued by Great American Restaurants, Inc. to Spencer
Trask Securities, Incorporated for 21,292 shares of Common
Stock, dated July 27, 1992. (American Family Restaurants, Inc.
issued five additional warrants which are substantially
identical in all material respects, except as to warrantholder
and number of shares. The six warrants give rights to purchase
a total of 48,000 shares of Common Stock.)(2)
10.22A Schedule of warrants substantially identical to Exhibit
10.22.(2)
10.23 Joint Venture Agreement of Densouth Restaurants 11 Joint
Venture, entered into September 4, 1992 and effective January
2, 1992, by and between Great Restaurants of the Midsouth,
Inc. and Densouth Foods II, Ltd., including First Amendment
thereto, dated September 4, 1992, and Amendment thereto, dated
April 15, 1993.(2)
</TABLE>
65
<PAGE> 68
<TABLE>
<CAPTION>
<S> <C>
10.24 Amended and Restated Promissory Note in the principal amount
of $435,655 payable by McFadden Metz Restaurants, Inc. to
Marriott Family Restaurants, Inc., dated December 1, 1992.(2)
10.25 Amended and Restated Promissory Note in the principal amount
of $914,487 payable by McFadden Metz Restaurant, Inc. to
Marriott Family Restaurants, Inc., dated December 1,
1992.(2)
10.26 Amended and Restated Promissory Note in the principal amount
of $396,523 payable by McFadden Metz Restaurants, Inc. to
Marriott Family Restaurants, Inc., dated December 1,
1992.(2)
10.27 Amended and Restated Promissory Note in the principal amount
of $396,299 payable by McFadden Metz Restaurants, Inc. to
Marriott Family Restaurants, Inc., dated December 1, 1992.(2)
10.28 Letter Agreement between Great American Restaurants, Inc. and
Denny's, Inc., dated August 25, 1992, regarding
reorganization.(2)
10.29 Form of registration rights agreement covering the sale of the
Series A Preferred Stock and warrants in the 1992 private
placement. (Each such registration rights agreement is
substantially identical in all material respects except as to
date, number of shares and holder.) (2)
10.29A Schedule of registration rights agreements substantially
identical to Exhibit 10.29.(2)
10.30 Form of warrant issued in connection with the 1992 private
placement. (Each agreement is substantially identical in all
material respects except as to the date, the holder and the
number of shares subject to the warrant.)(2)
10.30A Schedule of warrants substantially identical to Exhibit
10.30.(2)
10.31 Unit Purchase Option to purchase up to 2.2224 units at
$165,000 per unit, by Great American Restaurants, Inc. to
Spencer Trask Securities, Incorporated, dated December 31,
1992. (There are nine unit purchase options substantially
identical in all material respects except as to number of
units, and option holder.)(2)
10.31A Schedule of unit purchase options substantially identical to
Exhibit 10.31.(2)
10.32 Warrant No. W-0527933 issued by Great American Restaurants,
Inc. to Merl Trust for 33,333.33 shares of Common Stock, dated
June 2, 1993. (Three additional warrants were issued and are
substantially identical in all material respects except as to
the warrantholder and the number of shares.)(2)
10.32A Schedule of warrants substantially identical to Exhibit
10.32.(2)
10.33 Registration Rights Agreement between Great American
Restaurants, Inc. and Merl Trust, dated June 2, 1993 covering
warrants issued in connection with 9% subordinated notes.
(Registration Rights Agreements entered into by other holders
of warrants issued in connection with the 9% subordinated
notes are substantially identical in all material respects
except as to the name of the holder.)(2)
10.33A Schedule of registration rights agreements substantially
identical to Exhibit 10.33.(2) 10.34 Stock Purchase Agreement
by and among Great Midwestern Restaurants, Inc., Great
American Restaurants, Inc., and the stockholders of McFadden
Metz Restaurants, Inc., dated August 31, 1993.(2)
10.35 License Agreement by and among Lance McFadden, PB Cafes, Inc.
and Great Midwestern Restaurants, Inc., entered into as of
August 31, 1993.(2)
10.36 Option and Escrow Agreement by and among McFadden Metz Leased
Restaurants, Inc., Arthur 1. Meyer, Gail M. Asarch, Lance
McFadden and John C. Metz and Great American Restaurants,
Inc., Great Midwestern Restaurants, Inc. and Holland & Knight,
dated September 2, 1993, including Amendment No. I thereto,
entered into February 28, 1994.(2)
10.37 Restaurant Option Agreement by and among Arthur I. Meyer, Gail
M. Asarch, Lance McFadden and John C. Metz and Great American
Restaurants, Inc., executed August 31, 1993, including
Amendment thereto, entered into February 28, 1994.(2)
10.37A Termination of Restaurant Option Agreement by and among Arthur
I. Meyer, Gail M. Asarch, Lance McFadden, John C. Metz and
American Family Restaurants, Inc., executed July 14,
1994.(2)
</TABLE>
66
<PAGE> 69
<TABLE>
<CAPTION>
<S> <C>
10.38 Amended and Restated Promissory Note in the principal sum of
$1,834,980 payable by Great Midwestern Restaurants, Inc. and
Great American Restaurants, Inc. to Arthur I. Meyer, Gail M.
Asarch, Lance McFadden and John C. Metz, dated August 31, 1993
and executed February 24, 1994.(2)
10.39 Restaurant Management Agreement by and between McFadden Metz
Leased Restaurants, Inc. and Great American Restaurants, Inc.
entered into September 2, 1993, including Amendment thereto,
dated February 28, 1994.(2)
10.40 Promissory Note in the principal sum of $156,000 payable by
Great American Restaurants, Inc. and Great Midwestern
Restaurants, Inc. to Lance McFadden, dated September 2,
1993.(2)
10.41 Bond Purchase Agreement among Great American Restaurants,
Great Midwestern Restaurants, Inc., O.T. Finance, S.A., The
Elvire Levy Revocable Living Trust, The Lucien I. Levy
Revocable Living Trust, Merl Trust and Michele Spycher, dated
as of September 1, 1993.(2)
10.42 Warrant No. W-14R-l by Great American Restaurants, Inc. to
Merck, Finck & Co. for 8,811 (adjusted to 9,878) shares of
Common Stock. (Additional warrants to purchase an aggregate of
88,097 (adjusted to 88,219) shares of Common Stock were issued
and are substantially identical in all material respects
except as to the issue date, the holder of record and the
number of shares.)(2)
10.42A Schedule of warrants substantially identical to Exhibit
10.42.(2)
10.43 10% Senior Bond No. R-1 issued by Great Midwestern
Restaurants, Inc. in the sum of $2,000,000 due June 30, 1996
to O.T. Finance, S.A., dated September 1, 1993.(2)
10.44 10% Senior Bond No. R-2 issued by Great Midwestern
Restaurants, Inc. in the sum of $900,000 due June 30, 1996 to
The Lucien 1. Levy Revocable Living Trust and The Elvire Levy
Revocable Living Trust, dated September 1, 1993.(2)
10.45 10% Senior Bond No. R-3 issued by Great Midwestern
Restaurants, Inc. in the sum of $500,000 due June 30, 1996 to
Merl Trust, dated September 1, 1993.(2)
10.46 10% Senior Bond No. R-4 issued by Great Midwestern
Restaurants, Inc. in the sum of $100,000 due June 30, 1996 to
Michele Spycher, dated September 1, 1993.(2)
10.46A Letter from Lucien I. Levy, dated June 14, 1994 waiving breach
of 10% Senior Bond provisions.(2)
10.47 Warrant No. W-1 issued by Great American Restaurants, Inc. to
O.T. Finance, S.A. for 237,845 shares of Common Stock, dated
September 1, 1993. (Three additional warrants were issued, and
each is substantially identical in all material respects
except as to the holder, the warrant number and the number of
shares subject to the warrant.)(2)
10.47A Schedule of warrants substantially identical to Exhibit
10.47.(2)
10.48 Registration Rights Agreement between Great American
Restaurants, Inc. and O.T. Finance, S.A., The Lucien I. Levy
Revocable Living Trust, The Elvire Levy Revocable Living
Trust, Merl Trust and Michele Spycher, dated September 1,
1993.(2)
10.48A Agreement by and among American Family Restaurants, Inc., O.T.
Finance, S.A., The Elvire Levy Revocable Living Trust, The
Lucien 1. Levy Revocable Living Trust, Merl Trust, Michele
Spycher and Lucien I. Levy, dated September 1, 1994, amending
Registration Rights Agreement.(2)
10.49 Letter agreement between Spencer Trask Securities,
Incorporated and Great American Restaurants, Inc., dated
November 18, 1993.(2)
10.50 Warrant No. W-5 issued by Great American Restaurants, Inc. to
Spencer Trask Securities, Incorporated for 10,500 shares of
Common Stock, dated November 18, 1993.(2)
10.51 Warrant No. W-6 issued by Great American Restaurants, Inc. to
John F. Steinmetz for 10,500 shares of Common Stock, dated
November 18, 1993.(2)
10.52 Asset Purchase Agreement by and among Great Restaurants of the
Midsouth, Inc. and Midsouth Family Restaurants Real Estate
Trust Venture, dated as of January 1994.(2)
10.52A Amendment to Asset Purchase Agreement between Great
Restaurants of the Midsouth, Inc. and Midsouth Family
Restaurants Real Estate Joint Venture, dated July 22, 1994.(2)
10.53 Agreement for Purchase and Sale of Partnership Interests by
and among Great Restaurants of the Midsouth, Inc., Midsouth
Foods I, Ltd., and Midsouth Foods II, Ltd., dated as of March
25, 1994.(2)
</TABLE>
67
<PAGE> 70
<TABLE>
<CAPTION>
<S> <C>
10.53A Amendment to Agreement for Purchase and Sale of Partnership
Assets among Great Restaurants of the Midsouth, Inc., Midsouth
Foods I, Ltd. and Midsouth Foods II, Ltd., dated July 22,
1994.(2)
10.54 Purchase Agreement between Denny's, Inc. and American Family
Restaurants, Inc., dated as of March 31, 1994, with respect to
a restaurant located in Texarkana, Arkansas. (American Family
Restaurants, Inc. has eleven other purchase agreements which
are substantially identical in all material respects except as
to location of restaurants and purchase price.)(2)
10.54A Schedule of purchase agreements substantially identical to
Exhibit 10.54.(2)
10.55 Amended and Restated Promissory Note in the principal sum of
$3,940,000 payable by American Family Restaurants, Inc. to
Denny's, Inc., dated June 13, 1994, and Note Modification
Agreement, dated June 13, 1994.(2)
10.55A Second Note Modification Agreement between American Family
Restaurants, Inc. and Denny's, Inc., dated September 12,
1994.(2)
10.55B Second Amended and Restated Note payable in the principal
amount of $3,940,000 by American Family Restaurants, Inc.,
dated September 12, 1994.(2)
10.56 Security Agreement between American Family Restaurants, Inc.
and Denny's, Inc., dated May 18, 1994.(2)
10.56A Security Agreement by and between American Family Restaurants,
Inc. and Denny's, Inc., dated September 12, 1994.(2)
10.57 Assignment and Assumption Agreement between American Family
Restaurants, Inc. and AFR Acquisition Corp., Inc., dated June
7, 1994.(2)
10.58 Executive Employment Agreement between Great American
Restaurants, Inc. and Jeffrey D. Miller, dated April 19,
1994.(2)
10.59 Executive Employment Agreement between Great American
Restaurants, Inc. and Haig V. Antranikian, dated April 19,
1994.(2)
10.60 Form of Franchise Agreement between American Family
Restaurants, Inc. and Denny's, Inc. (American Family
Restaurants, Inc. has 78 franchise agreements which are
substantially identical in all material respects except as to
location of restaurants and date of agreement.)(2)
10.60A Letter Agreement between American Family Restaurants, Inc. and
Denny's, Inc., dated September 13, 1994, regarding change of
control provisions.(2)
10.60B Letter Agreement between American Family Restaurants, Inc. and
Denny's, Inc., dated September 13, 1994, regarding non-compete
provisions.(2)
10.60A Schedule of franchise agreements substantially identical to
Exhibit 10.60.(2)
10.61 Rudy's Franchise Agreement for Tampa, Florida between Rudy's
Country Store and Bar-B-Q, Inc. and Great American
Restaurants, Inc., dated February 1994, including Addendum
thereto, dated February 1994.(2)
10.61A Letter from Rudy's Country Store and Bar-B-Q, Inc. to American
Family Restaurants, Inc. regarding additional advertising
expenditures, dated April 15, 1994.(2)
10.61B Letter from Rudy's Country Store and Bar-B-Q, Inc. to American
Family Restaurants, Inc., dated July 19, 1994.(2)
10.62 Rudy's Development Agreement for Tampa, Florida between Rudy's
Country Store and Bar-B-Q, Inc., and Great American
Restaurants, Inc., dated February 1994, including Addendum
thereto, dated February 1994. (American Family Restaurants,
Inc. has five other development agreements which are
substantially identical in all material respects except as to
location of restaurant and development timetable.)(2)
10.62A Schedule of development agreements substantially identical to
Exhibit 10.62.(2)
10.62B Letter from Rudy's Country Store and Bar-B-Q, Inc. to American
Family Restaurant, Inc., dated September 13, 1994, amending
Rudy's Development Agreements.(2)
10.63 Assignment and Assumption Agreement among Frank Regas, Great
American Restaurants, Inc. and Rudy's Country Store and
Bar-B-Q, Inc., dated March 31, 1994.(2)
10.64 Subscription Agreement between Great American Restaurants,
Inc. and Frank Regas for 40,000 shares of Common Stock, dated
March 31, 1994.(2)
10.65 Form of Warrant Agreement between American Family Restaurants,
Inc. and Fahnestock & Co. Inc. for 250,000 shares of Common
Stock.(2)
</TABLE>
68
<PAGE> 71
<TABLE>
<CAPTION>
<S> <C>
10.66 Stock Pledge and Assignment between American Family
Restaurants, Inc., and Denny's, Inc., dated June 13, 1994.(2)
10.67 Letter Agreement between CNL Group, Inc. and American Family
Restaurants, Inc. regarding sale-leaseback transactions, dated
August 18, 1994.(2)
10.68 Letter Agreement from CNL Group, Inc. to American Family
Restaurants, Inc., dated October 13, 1994, regarding the
commitment letter.(2)
10.69 Form of Letter regarding Proposed Amendment of Redeemable
Warrants together with Registration Rights Agreement. (Letters
and Registration Rights Agreements entered into by holders of
warrants are substantially identical in all material respects
except as to the name of the holder, the number of warrants
and the expiration date of the warrants.)(1)
10.70 Schedule of Letters regarding Proposed Amendment of Redeemable
Warrants, together with Registration Rights Agreements,
substantially identical to Exhibit 10.69 (included as Exhibit
10.30.A hereto).(1)
10.71 Executive Employment Agreement between American Family
Restaurants, Inc. and Edward Williams, dated July 12, 1995.(1)
10.72 First Amended and Restated Executive Employment Agreement
between American Family Restaurants, Inc. and Haig V.
Antranikian, dated July 12, 1995.(1)
10.73 Employment Agreement dated December 8, 1995 between American
Family Restaurants, Inc. and William G. Cox.(1)
10.74 Amendment No. 1 to Executive Employment Agreement between
American Family Restaurants, Inc. and Jeffrey D. Miller.(1)
10.75 Asset Purchase Agreement, dated as of September 8, 1995, by
and among Fables-Innkeepers Management, Inc. and American
Family Restaurants, Inc.(1)
10.76 General Bill of Sale and Assignment of Assets, Properties and
Business of Certain Restaurants, dated as of January 1, 1995,
by and between DenGlass Foods Joint Venture and American
Family Restaurants, Inc.(1)
10.77 Credit Agreement by and among American Family Restaurants,
Inc., Great Midwestern Restaurants, Inc., Great Restaurants of
the Midsouth, Inc., AFR Acquisition Corp., Inc., Jerry's
Licensing Corp., Florida Family Restaurants, Inc., McFadden
Metz Leased Restaurants, Inc., The Provident Bank, as Agent
and various lenders described therein, dated as of May 17,
1995.(1)
10.78 Amendment to American Family Restaurants, Inc. Amended and
Restated 1992 Stock Option Plan.(1)
10.79 Letter Agreement, dated December 20, 1995, from American
Family Restaurants, Inc. to Denny's, Inc. and Denwest
Restaurant Corp.(1)
10.80 Form of Registration Rights Agreement to be entered into
between American Family Restaurants, Inc. and certain of the
existing shareholders of Denwest Restaurant Corp.(1)
10.81 Franchise Development Agreement, dated November 9, 1994,
between Denny's, Inc. and Denwest Restaurant Corp.(1)
10.82 Executive Employment Agreement, dated November 9, 1994,
between Jack M. Lloyd and Denwest Restaurant Corp.(1)
10.83 Executive Employment Agreement, dated November 9, 1994,
between William J. Howard and Denwest Restaurant Corp.(1)
10.84 Executive Employment Agreement, dated November 9, 1994,
between William S. Leto and Denwest Restaurant Corp.(1)
10.85 Executive Employment Agreement, dated as of November 9, 1994,
between Todd S. Brown and Denwest Restaurant Corp.(1)
10.86 Amended and Restated Joint Venture Agreement of Denwest Joint
Venture between Denwest Corp. and Denwest Foods, Ltd. dated
December 30, 1991.(1)
10.87 Joint Venture Agreement of Denwest II Joint Venture between
L&H Restaurant Corp. and Denwest Foods II, Ltd. dated December
30, 1991.(1)
10.88 Secured Credit Agreement dated as of November 9, 1994, among
Household Commercial Services, Inc., Household Commercial
Financial Services, Inc., Denwest Restaurant Corp., L&H
Restaurant Corporation, Wyden Restaurants, Inc., Phoenix
Foods, Inc., Denwest Corporation, and Wytex Corporation.(1)
</TABLE>
69
<PAGE> 72
<TABLE>
<CAPTION>
<S> <C>
10.89 Commitment Letter, dated as of January 5, 1996, by and among
American Family Restaurants, Inc., Denwest Restaurant Corp.
and Banque Paribas.(1)
10.90 Intercreditor Agreement among DenAmerica Corp., certain
holders of DenAmerica's Series B Notes, and State Street Bank
and Trust Company.(4)
10.91 Note Modification Agreement, dated as of May 12, 1995, by and
among American Family Restaurants, Inc., Great Midwestern
Restaurants, Inc., Jeffrey D. Miller, and Ronald C. Davis.(1)
10.92 Credit Agreement dated as of February 29, 1996, among
DenAmerica Corp., the Banks named therein, and Banque Paribas,
as Agent (including the Form of Term Note, Form of Revolving
Note, and Form of Delayed Draw Term Note).(4)
10.93 Security Agreement dated as of February 29, 1996, between
DenAmerica Corp. and Banque Paribas, as Agent.(4)
10.94 Form of Senior Intercreditor Agreement among Banque Paribas,
as Agent, the holders of Series A Notes, and State Street Bank
and Trust Company.(4)
10.95 Stock Option Agreement dated March 29, 1996, between
DenAmerica Corp. and William G. Cox.(4)
11.1 DenAmerica Corp. Calculation of Earnings Per Share.
12.1 DenAmerica Corp. Ratio of Income to Fixed Charges.
16. Letter Re: Change in Certifying Accountant.(5)
21.1 List of Subsidiaries of DenAmerica Corp.
23.1 Consent of Deloitte & Touche LLP.
25.1 Form T-1 statement of eligibility and qualification of State
Street Bank and Trust Company relating to the Series A
Notes.(1)
25.2 Form T-1 statement of eligibility and qualification of State
Street Bank and Trust Company relating to the Series B
Notes.(1)
27. Financial Data Schedule.
99.1 Engagement Letter between American Family Restaurants, Inc.
and Montgomery Securities.(1)
</TABLE>
- ---------------
(1) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-4, No. 33-00216, and Amendment No. 1 thereto, as
filed on January 10, 1996 and February 1, 1996, respectively.
(2) Incorporated by reference to the Exhibits to The Registrant's Registration
Statement on Form S-1, File No. 33-80550, and Amendments 1-3 thereto,
filed on June 22, 1994, September 16, 1994, October 13, 1994, and October
17, 1994, respectively.
(3) Incorporated by reference to the Exhibits to the Registrant's to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 27,
1996, as filed on May 16, 1996.
(4) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K and Form 8-K/A as filed on April 15, 1996, and June
12, 1996, respectively.
(5) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on May 3, 1996.
70
<PAGE> 73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 11th day
of June 1996.
DenAmerica Corp.
By: /s/ Jack M. Lloyd
----------------------------------------
Jack M. Lloyd
President and Chief Executive Officer
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 in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Jeffrey D. Miller Chairman of the Board June 11, 1996
- -----------------------------
Jeffrey D. Miller
/s/ Jack M. Lloyd President, Chief Executive Officer, June 11, 1996
- ----------------------------- and Director (Principal Executive
Jack M. Lloyd Officer)
/s/ William G. Cox Chief Operating Officer and Director June 11, 1996
- -----------------------------
William G. Cox
/s/ William J. Howard Vice President, Secretary, and June 11, 1996
- ----------------------------- Director
William J. Howard
/s/ Todd S. Brown Vice President, Chief Financial June 11, 1996
- ----------------------------- Officer, Treasurer, and Director
Todd S. Brown (Principal Financial and Accounting
Officer)
/s/ Haig V. Antranikian Vice President and Director June 11, 1996
- -----------------------------
Haig V. Antranikian
Director ________, 1996
- -----------------------------
John M. Holliman, III
/s/ C. Alan MacDonald Director June 11, 1996
- -----------------------------
C. Alan MacDonald
/s/ Fred W. Martin Director June 7, 1996
- -----------------------------
Fred W. Martin
/s/ Philip B. Smith Director June 11, 1996
- -----------------------------
Philip B. Smith
</TABLE>
71
<PAGE> 1
EXHIBIT 11.1
DENAMERICA CORP.
CALCULATION OF EARNINGS PER SHARE
(000 OMITTED)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 28, DECEMBER 27,
1994 1995
----------- -----------
<S> <C> <C>
Net Income (Loss)............................. $ (341) $ 200
Less: Preferred Stock Dividend and Accretion.. (84) (593)
---------- ----------
Net Loss Applicable to Common Shareholders.... $ (425) $ 393
========== ==========
Net Loss Per Share............................ $ (.06) $ (.06)
========== ==========
Weighted Average Common and
Common Equivalent Shares Outstanding........ 6,937,500 6,937,500
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 12.1
DENAMERICA CORP.
RATIO OF INCOME TO FIXED CHARGES
(000 OMITTED)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income (Loss) After Minority
Interest and Before Income Taxes........ $ (841) $ 162 $ 284 $ (550) $ 505
Fixed Charges:
Rental Expense.......................... 894 1,028 1,111 1,584 2,499
Interest................................ 535 449 736 1,301 2,467
Debt Expense Amortization............... 15 144
------ ------ ------ ------ ------
Total Fixed Charges.................. 1,429 1,477 1,847 2,900 5,110
------ ------ ----- ------ ------
Net Income as Adjusted...................... $ 588 $1,639 $2,131 $2,350 $5,615
====== ====== ====== ====== ======
Ratio....................................... .41 1.11 1.15 .81 1.10
====== ====== ====== ====== ======
Amount Inadequate to Cover
Fixed Charges.............................. $ 841 $ 550
====== ======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
------------
SUBSIDIARIES OF DENAMERICA CORP.
Subsidiary State of Incorporation or Organization
- ---------- --------------------------------------
Phoenix Foods, Inc. Florida
Denwest Joint Venture (partnership) Florida
Denwest II Joint Venture (partnership) Florida
Densouth Restaurants II Joint Venture (partnership) Florida
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
33-93192 of DenAmerica Corp. (formerly American Family Restaurants, Inc.) on
Form S-8 of our report dated March 29, 1996 (except for Note 16, as to which
the date is May 31, 1996), appearing in the Transition Report on Form 10-K of
DenAmerica Corp. for the year ended December 27, 1995.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
June 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1997
<PERIOD-START> DEC-29-1994
<PERIOD-END> DEC-27-1995
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 989
<ALLOWANCES> 0
<INVENTORY> 1,200
<CURRENT-ASSETS> 2,653
<PP&E> 39,322
<DEPRECIATION> 5,505
<TOTAL-ASSETS> 53,785
<CURRENT-LIABILITIES> 12,059
<BONDS> 30,252
7,501
0
<COMMON> 7
<OTHER-SE> 557
<TOTAL-LIABILITY-AND-EQUITY> 53,785
<SALES> 74,683
<TOTAL-REVENUES> 74,683
<CGS> 20,343
<TOTAL-COSTS> 20,343
<OTHER-EXPENSES> 51,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,467
<INCOME-PRETAX> 505
<INCOME-TAX> 305
<INCOME-CONTINUING> 200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (393)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
