<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 3, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER 1-13226
DENAMERICA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-1861457
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7373 N. SCOTTSDALE ROAD 85253
SUITE D-120, SCOTTSDALE AZ 85253 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 483-7055
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The number of shares of the issuer's class of capital stock as of August 15,
1996; the latest practicable date, is as follows: 13,399,277 shares of Common
Stock, $.10 par value.
<PAGE> 2
DENAMERICA CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 27, 1995 and July 3, 1996 3
Condensed Consolidated Statements of Operations -
13 and 14 Week Periods ended June 28, 1995 and
July 3, 1996 and 26 and 27 Week Periods ended
June 28, 1995 and July 3, 1996 5
Condensed Consolidated Statements of Cash Flows -
13 and 14 Week Periods ended June 28, 1995 and
July 3, 1996 and 26 and 27 Week Periods ended
June 28, 1995 and July 3, 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information 17
</TABLE>
<PAGE> 3
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
December 27, July 3,
Assets 1995 1996
------ ---- ----
<S> <C> <C>
Current assets:
Receivables $ 989 $ 3,537
Inventories 1,200 3,643
Deferred income taxes 249 376
Other current assets 215 1,568
------- --------
Total current assets 2,653 9,124
------- --------
Property and equipment, net 33,817 70,459
Intangibles, net 11,113 72,517
Franchise rights, net of accumulated amortization
of $200 at December 27, 1995 and $244 at
July 3, 1996 925 1,884
Deferred financing costs 653 3,025
Note receivable from Mid-American (Note 4) -- 4,600
Other assets 4,737 4,551
------- --------
$53,785 $166,160
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
December 27, July 3,
Liabilities and Shareholders' Equity 1995 1996
------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,775 $ 9,503
Accrued compensation and related costs 2,113 6,135
Store closing reserve -- 5,622
Accrued taxes 935 3,134
Accrued insurance reserves 240 5,972
Other current liabilities 2,709 6,981
Current portion of long-term debt and obligations
under capital leases 2,287 5,679
-------- ---------
Total current liabilities 12,059 43,026
Long-term debt, less current portion 10,371 43,594
Subordinated notes (face value $33,250)
(notes 1, 3 and 6) -- 29,961
Obligations under capital leases, less
current obligations 19,881 24,034
Other 1,508 4,345
-------- ---------
Total liabilities 43,819 144,960
-------- ---------
Minority interest in joint ventures 1,901 1,839
-------- ---------
5% Redeemable convertible preferred stock (note 1) 7,501 --
-------- ---------
Shareholders' equity (notes 1, 3, 5, and 6):
Common stock 7 1,327
Additional paid-in capital 3,156 34,537
Accumulated deficit (2,599) (16,503)
-------- ---------
Total shareholders' equity 564 19,361
-------- ---------
$ 53,785 $ 166,160
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Period ended Period ended
-------------------------- -----------------------
June 28, July 3, June 28, July 3,
1995 1996 1995 1996
-------- ------- -------- -------
(13 weeks) (14 weeks) (26 weeks) (27 weeks)
<S> <C> <C> <C> <C>
Restaurant sales:
Dennys restaurants $ 17,294 $ 45,922 $ 33,137 $64,078
Black-eyed Pea restaurants -- 3,402 -- 3,402
Other restaurants -- 9,688 -- 11,693
----------- ----------- ---------- -------
Total sales 17,294 59,012 33,137 79,173
Restaurant operating expenses:
Food and beverage cost 4,565 16,339 8,827 21,971
Payroll and payroll related costs 5,655 20,156 11,026 27,416
Depreciation and amortization 613 1,920 1,183 2,836
Other restaurant operating expenses 4,424 14,590 8,652 20,074
----------- ----------- ---------- -------
Total operating expenses 15,257 53,006 29,688 72,298
Restaurant operating income 2,037 6,006 3,449 6,875
Administrative expenses 804 2,134 1,603 3,181
----------- ----------- ---------- -------
Operating income 1,233 3,873 1,846 3,695
Interest expense, net 538 2,791 1,020 3,651
----------- ----------- ---------- -------
Income before minority interest in joint
venture, income taxes and extraordinary item 695 1,082 826 44
Minority interest 98 13 120 11
----------- ----------- ---------- -------
Income beore income taxes and
extraordinary item 597 1,069 706 33
Income tax expense 239 372 279 13
----------- ----------- ---------- -------
Income before extraordinary item 358 697 427 20
Extraordinary item-loss on extingishment
of debt 0 (497)
----------- ----------- ---------- -------
Net income (loss) 358 697 427 (477)
Preferred stock dividend and accretion (Note 1) 120 0 286 (149)
----------- ----------- ---------- -------
Net income (loss) applicable to common
shareholders $ 238 $ 697 $ 141 $ (626)
=========== =========== ========== =======
Income (loss) before extraordinary item
per common and common equivalent
share $ 0.03 $ 0.05 $ 0.02 ($ 0.01)
Extraordinary item - loss on extinguishment
of debt per common and common equivalent
share -- -- -- ( 0.05)
----------- ----------- ---------- -------
Net income (loss) per common and common
equivalent share $ 0.03 $ 0.05 $ 0.02 ($ 0.06)
=========== =========== ========== =======
Weighted average common and common
equivalent shares outstanding 6,937,500 13,649,000 6,937,500 10,293,000
=========== =========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Period ended Period ended
------------------------ -------------------
June 28 July 3, June 28, July 3
1995 1996 1995 1996
-------- ------- -------------------
(13 weeks) (14 weeks) (26 weeks) (27 weeks)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 358 $ 697 $ 427 $( 477)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 610 1,920 1,183 2,836
Amortization of deferred financing costs 27 83 72 128
Minority interest in joint venture 100 15 122 17
Deferred income taxes 39 366 (2)
Deferred rent 242 51 268 132
Extraordinary item - loss on extinguishment
of debt 55
Other -- 82 497
Changes in operating assets and liabilities:
Receivables (193) (1,182) (155) (1,399)
Inventories (98) (490) (127) (548)
Prepaid expenses and other assets 250 (574) 114 (1,009)
Accounts payable and accrued liabilities (430) (4,104) 409 (1,012)
------- ------- ------- -------
Net cash provided by (used in) operating
activities 882 (3,136) 2,368 (837)
------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment (2,718) (2,487) (6,105) (3,912)
Purchase of intangibles (121) (534)
Payment for Acquisition of BEP and Merger,
net of cash acquired (387) 2,412 (711) (231)
------- ------- ------- -------
Net cash used in investing activities (3,105) (196) (6,816) (4,677)
------- ------- ------- -------
Cash flows from financing activities:
Borrowings 1,642 9,711 3,258 13,361
Principal reductions on long-term obligations (296) (6,331) (556) (7,675)
Proceeds from expansion loan 877 -- 1,737 --
Dividends on preferred stock -- -- -- (124)
Distributions to joint venturer and other -- (48) (149) (48)
------- ------- ------- -------
Net cash provided by financing activities 2,223 3,332 4,290 5,514
------- ------- ------- -------
Net change in cash and cash equivalents -- -- (158) --
Cash and cash equivalents at beginning of period -- -- 158 --
------- ------- ------- -------
Cash and cash equivalents at end of period $ -- $ -- $ $
======= ======= ======= =======
Supplemental schedule of cash flow information-
cash paid during the period for:
Interest $ 597 $ 2,083 $ 851 $ 3,033
======= ======= ======= =======
Income taxes $ -- $ 47 $ 100 $ 47
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
DENAMERICA CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
(1) Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements of
DenAmerica Corp. (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company's management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These statements
should be read in conjunction with the consolidated financial statements
and notes thereto and management's discussion and analysis of financial
condition and results of operations included in the Company's Transition
Report on Form 10-K for the fiscal year ended December 27, 1995, as well
as the Company's Current Report on Form 8-K filed on July 18, 1996.
The three month and six month periods ended July 3, 1996, are 14 and 27
week periods respectively, compared with 13 and 26 week periods in the
prior year. As explained below and in Note 3, during 1996 the Company
completed the merger with Denwest Restaurant Corp. (the "Merger") and
acquired Black-Eyed Pea U.S.A., Inc. (the "BEP Acquisition"). As a result
of these transactions, the financial statements presented as of July 3,
1996 and for the three and six month periods then ended are not comparable
with the financial statements of prior periods.
As a result of the BEP Acquisition, the Merger and the sale of 23
restaurants as described in Note 4, the Company currently operates 318
restaurants in 30 states.
Acquisition of Black-eyed Pea U.S.A., Inc.
On July 3, 1996, the Company acquired all of the issued and outstanding
common stock of Black-eyed Pea U.S.A., Inc. ("BEP") from BEP Holdings,
Inc. ("BEP Holdings") pursuant to a Stock Purchase Agreement (the "BEP
Acquisition"). In accordance with the terms and conditions of the Stock
Purchase Agreement, the effective accounting date of the BEP Acquisition
was June 24, 1996. The purchase price for the stock of BEP consisted of
(i) cash of $50.0 million, and (ii) a promissory note in the principal
amount of $15.0 million.
BEP operates approximately 100 casual dining restaurants in 11 states
under the "Black-Eyed Pea" concept and franchises the right to operate an
additional 30 Black-eyed Pea restaurants to third parties. The Company
currently intends to continue to operate most of these restaurants as
Black-eyed Pea restaurants.
The Merger
On March 29, 1996, Denwest Restaurant Corp. ("DRC") merged with and into
the Company, with the Company being the surviving corporation (the
"Merger"). Upon consummation of the Merger, the Company changed its name
from American Family Restaurants, Inc. ("AFR") to DenAmerica Corp. In
connection with the Merger, the Company issued to the former shareholders
of DRC an aggregate of 6,937,500 shares of the Company's Common Stock, an
aggregate of $24,250 principal amount of the Company's 13% Series A and
Series B Subordinated Notes due 2003 (the "Series A Notes" and "Series B
Notes" or "Notes") and warrants to purchase an aggregate of 666,000 shares
of the Company's Common Stock at an exercise price of $0.01 per share.
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 the Company.
7
<PAGE> 8
Reverse Purchase Method of Accounting
As described above, the former shareholders of DRC owned an aggregate of
approximately 53.0% of the outstanding voting power of the Company
immediately following the Merger. Accordingly, the Merger has been
accounted for as a reverse purchase under generally accepted accounting
principles as a result of 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, 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 date of 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.
In accordance with the accounting rules for a purchase and a reverse
acquisition, the consolidated financial statements presented herein are as
follows:
(i) Consolidated Balance Sheets of the Company at July 3, 1996
(which reflects the BEP Acquisition and the Merger) and
December 27, 1995 (which does not include the balance
sheet of BEP or AFR at such date);
(ii) Consolidated Statements of Operations of the Company for the
periods ended July 3, 1996 (which include the results of
operations of BEP, since the accounting date of the
Acquisition of June 24, 1996, and the results of AFR since the
accounting date of the Merger of March 27, 1996) and June 28,
1995 (which do not include the results of operations of BEP
or AFR); and
(iii) Consolidated Statements of Cash Flows of the Company for the
periods ended July 3, 1996 (which include the results of
operations of BEP since the accounting date of the BEP
Acquisition of June 24, 1996 and the results of AFR since
the accounting date of the Merger of March 27, 1996) and
June 28, 1995 (which do not include the results of operations
of BEP or AFR). For purposes of the Consolidated Statement of
Cash Flows, the Acquisition and Merger were substantially
reported as noncash transactions, as they were completed
primarily by using third party financing and the Company's
Common Stock and Notes.
See Note 3 for certain summary pro forma financial information for the
Company.
(2) Earnings Per Share
Earnings per share for the periods ended June 28, 1995 and for the first
quarter of 1996 have been computed based upon weighted average shares of
the Company's Common Stock received in connection with the Merger by the
former shareholders of DRC after deducting preferred stock dividends and
accretion on preferred stock of DRC outstanding prior to the Merger.
(3) BEP Acquisition and the Merger
BEP Acquisition
The BEP Acquisition has been accounted for using the purchase method of
accounting with an effective accounting date of June 24, 1996. The total
purchase price was $65.0 million. The purchase price consisted of (i)
cash of approximately $50.0 million and (ii) a promissory note in the
principal amount of $15.0 million issued to BEP Holdings, Inc. (the "BEP
Purchase Note"). At June 24, 1996, assets acquired and liabilities
assumed were deemed to have fair values substantially equal to their
historic book values, except for property and equipment, intangible
assets, deferred and current tax accounts and certain liabilities
associated with closing certain restaurants. These amounts have been
recorded in the accounts of the Company based upon estimates available
at this time. The Company will finalize these estimates during the next
twelve months, although it currently does not believe that such amounts
will materially change. The following summarizes the noncash activity
associated with the acquisition.
Working capital deficit,
including cash balances of $4,341 $(2,880)
Property and equipment 19,865
Liabilities (1,985)
BEP Purchase Note issued (15,000)
The Company obtained the funds for the cash portion of the purchase
price by entering into sale and lease transactions with (i) FFCA
Acquisition Corporation ("FFCA"), an independent entity, (ii) LH
Leasing Company, Inc. ("LH Leasing"), a corporation owned by Jack M.
Lloyd, the Chairman of the Board, President, and Chief Executive Officer
of the Company, and William J. Howard, Executive Vice President,
Secretary, and a director of the Company. Messrs. Lloyd and Howard
formed LH Leasing as an accommodation to the Company to enable it to
consummate the BEP Acquisition. Messrs. Lloyd and Howard received no
compensation for the transaction involving LH Leasing.
In conjunction with the BEP Acquisition, the Company repaid all of the
$6.0 million outstanding principal amount of Series A Notes (face
amount $6.0 million) and related accrued interest for cash of $5.2
million and the issuance of 250,000 shares of the Company's Common
Stock. In addition, warrants to purchase 188,047 shares of the Company's
Common Stock that were issued in connection with the Series A Notes
were automatically cancelled upon repayment of the Series A Notes.
No gain or loss was recorded.
The Merger
As described in Note 1 herein, the Merger has been accounted for as
a reverse acquisition in which DRC acquired control of AFR for accounting
purposes.
The total purchase price of the Merger was $31.4 million, which represents
the number of shares of AFR Common Stock outstanding immediately prior to
the Merger valued at the market price of such shares as of the date of the
signing of the merger agreement plus merger-related expenses. This amount
8
<PAGE> 9
was allocated to the assets of AFR acquired and liabilities of AFR
assumed, based upon their estimated fair value as of March 27, 1996. At
March 27, 1996, assets acquired and liabilities assumed were deemed to
have fair values substantially equal to their historic book values, except
for property and equipment, certain intangible assets, and certain
liabilities related to the costs associated with closing certain
restaurants. These amounts have been recorded based upon estimates
available at this time. The Company will finalize these estimates during
the remainder of fiscal 1996, although it currently does not believe that
such amounts will materially change.
Because the Merger was completed primarily with the issuance of newly
issued shares of Common Stock and Notes, the Company's Consolidated
Balance Sheet following the Merger reflects the reverse acquisition of
AFR. However, such noncash activity is excluded from the accompanying
Consolidated Statement of Cash Flows for the period prior to the Merger.
The following summarizes the noncash activity associated with the Merger.
<TABLE>
<S> <C>
Working capital deficit, including outstanding
checks in excess of cash balances of $(2,643) $(20,208)
Property and equipment 14,450
Intangible assets 64,162
Long-term obligations (49,222)
</TABLE>
9
<PAGE> 10
The following represents the summary pro forma results of operations as if
the Acquisition and the Merger had occurred at the beginning of fiscal
1995. The pro forma results are not necessarily indicative of the results
which will occur in the future.
<TABLE>
<CAPTION>
Period Ended
-------------------------
June 28, July 3,
1995 1996
------- -------
(26 weeks) (27 weeks)
<S> <C> <C>
Restaurant sales $168,611 $183,162
Income (loss) before extraordinary item 5,029 (1,713)
Net income (loss) 5,029 (2,210)
Earnings (loss) per share $0.49 $(0.21)
</TABLE>
(4) Disposition of 23 Restaurants to Mid-American Restaurants, Inc.
Effective July 3, 1996, the Company sold the assets related to 23
restaurants operated under the "Ike's" and "Jerry's" trade names to
Mid-American Restaurants, Inc. ("Mid-American"), a corporation wholly
owned by Haig V. Antrankian, a former officer and director of the Company.
As payment for the restaurants, Mid-American issued to the Company a
promissory note in the principal amount of $4.6 million (the "Mid-American
Note"). The Mid-American Note is secured by the assets sold, requires
monthly payments of $65,000 to $85,000, and bears interest at the rate of
10% per annum through June 30, 2001, 11% per annum through June 30, 2002,
and 12% per annum through June 30, 2003. All unpaid principal and interest
on the Mid-American Note will be due and payable on June 30, 2003. The
fair value of the assets sold to Mid-American, recorded at the date of the
Merger, were adjusted to reflect the sale proceeds and no gain or loss was
recorded.
(5) Shareholders' Equity
The Company has authorized 20,000,000 shares of Common Stock, par value of
$.10 per share. Upon consummation of the Merger, there were 13,084,944
shares issued and outstanding.
In connection with the Merger, the Company granted options to purchase
300,000 shares of Common Stock, of which options to purchase 60,000 shares
of Common Stock at an exercise price of $3.00 per share are immediately
vested and exercisable. The remaining options to purchase 240,000 shares
of Common Stock at an exercise price of $4.00 per share vest over a
four-year period, provided the employee who received the options continues
his employment with the Company.
10
<PAGE> 11
In addition, in connection with the closing of the Company's credit
facility in March 1996, the Company issued to Banque Paribas six-year
warrants to acquire 438,028 shares of DenAmerica Common Stock at an
exercise price of $4.3065 per share.
On April 29, 1996, the Company granted stock options pursuant to its stock
option plan to acquire 240,000 shares of Common Stock at an exercise price
of $4.00 per share. Of the options granted, options to acquire 48,000
shares are immediately vested and exercisable. The remaining options vest
over a four-year period, provided the employees who received the options
continue their employment with the Company.
In addition, on April 29, 1996 the Company granted an option to purchase
24,800 shares of Common Stock at an exercise price of $4.00 per share. Of
these options, options to acquire 4,960 shares are immediately vested and
exercisable. The remaining options vest over a four-year period provided
the employee who received the options continues his employment with the
Company.
(6) Debt
During 1996, the Company entered into the following new financial
arrangements:
(a) Credit Facility
In connection with the Merger, the Company entered into a $65.0 million
credit facility with Banque Paribas, as agent, and the Company's other
senior lenders. That credit facility was amended and restated in
connection with the BEP Acquisition (the "Amended Credit Agreement"). The
Amended Credit Agreement 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 Amended
Credit Agreement 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 Amended Credit Agreement 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
Amended Credit Agreement in the event of certain asset sales, equity
issuances, excess cash flows, and under certain other circumstances.
The Amended Credit Agreement 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 or sell assets, or exceed
specified levels of capital expenditures.
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 Amended Credit Agreement.
The Amended Credit Agreement 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.
The Company, Banque Paribas, and the Company's other senior lenders
entered into the Amended Credit Agreement in order to amend and restate
the previous credit facility between the Company and those lenders
so as to reflect the BEP Acquisition and to make certain other
modifications to the previous credit facility. The Company also pledged
all of the stock of BEP and BEP pledged the stock of certain of its
subsidiaries as additional security under the Amended Credit Agreement.
The Company issued to Banque Paribas six-year warrants to purchase an
aggregate of 738,028 shares of the Company's Common Stock. The exercise
price for 150,000 shares of Common Stock issuable upon exercise of the
warrants is $4.30 per share, the exercise price for 438,028 shares of
Common Stock issuable upon exercise of the warrants is $4.3065 per share,
and the exercise price for the remaining 150,000 shares issuable upon
exercise of the warrants is $6.45 per share.
(b) BEP Purchase Note
The BEP Purchase Note is an unsecured obligation of the Company and is
subordinate to all of the Company's senior indebtedness, as defined in the
BEP Purchase Note, including the Company's borrowings under the Amended
Credit Agreement. The BEP Purchase Note bears interest at 12% per annum,
subject to adjustment if the note is not repaid by March 31, 1997.
Interest on the BEP Purchase Note through March 31, 1997, will accrue to
principal on the BEP Purchase Note. The Company will then pay all
accrued interest on the BEP Purchase Note on each June 30, September 30,
December 31, and March 31, beginning on June 30, 1997. The BEP Purchase
Note will mature on March 31, 2002. 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 repay the
BEP Purchase Note described below beginning on January 1, 1997 and
ending on December 31, 1997.
11
<PAGE> 12
The BEP Purchase Note contains certain provisions with respect to
representations, warranties, covenants, reporting requirements and events
of default. The BEP Purchase Note also contains certain provisions that,
among other things, limits the ability of the Company and its subsidiaries
to incur additional indebtedness, pay certain dividends or make certain
distributions on their respective capital stock, repurchase shares of
their respective capital stock, make or hold certain investments, or make
asset acquisitions or sales.
In conjunction with the BEP Purchase Note, the Company issued BEP Holdings
a Common Stock Purchase Warrant dated as of July 3, 1996 (the "BEP
Purchase Warrant") which will entitle BEP Holdings to purchase that number
of shares of the Company's Common Stock equal to the total amount of
principal and interest outstanding under the BEP Purchase Note on April 1,
1997, times one half of one percent of the number of shares of Common
Stock outstanding on March 31, 1997, on a fully diluted basis (excluding
shares issuable upon exercise of the BEP Purchase Warrant and employee
stock options). The exercise price per share of Common Stock underlying
the BEP Purchase Warrant will be 80% of the lesser of (a) the fair market
value of the Common Stock on July 3, 1996, or (b) the fair market value of
the Common Stock on the date that is five business days following the
publication of the Company's earnings release for the period ending March
31, 1997.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the condensed 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 condensed consolidated statements of operations as a percentage of total
restaurant sales.
<TABLE>
<CAPTION>
Period ended Period ended
--------------------- ----------------------
June 28, July 3, June 28, July 3,
1995 1996 1995 1996
-------- ------- -------- --------
(13 weeks) (14 weeks) (26 weeks) (27 weeks)
<S> <C> <C> <C> <C>
Restaurant sales:
Dennys restaurant 100.00% 77.82% 100.00% 80.93%
Black-eyed Pea restaurants 0.00% 5.76% 0.00% 4.30%
Other restaurants 0.00% 16.42% 0.00% 14.77%
------- ------- ------- -------
Total sales 100.00% 100.00% 100.00% 100.00%
Restaurant operating expenses:
Food and beverage cost 26.40% 27.69% 26.64% 27.75%
Payroll and payroll related costs 32.70% 34.16% 33.27% 34.63%
Depreciation and amortization 3.54% 3.25% 3.57% 3.58%
Other restaurant operating expenses 25.58% 24.72% 26.11% 25.36%
------- ------- ------- -------
Total operating expenses 88.22% 89.82% 89.59% 91.32%
Restaurant operating income 11.78% 10.18% 10.41% 8.68%
Administrative expenses 4.65% 3.62% 4.84% 4.02%
------- ------- ------- -------
Operating income 7.13% 6.56% 5.57% 4.66%
Interest expense 3.11% 4.73% 3.08% 4.61%
------- ------- ------- -------
Income before minority interest
in joint venture, income taxes and
extraordinary item 4.02% 1.83% 2.49% 0.05%
Minority interest 0.57% 0.02% 0.36% 0.01%
------- ------- ------- -------
Income before income taxes and
extraordinary item 3.45% 1.81% 2.13% 0.04%
Income tax expense 1.38% 0.63% 0.84% 0.02%
------- ------- ------- -------
Income (loss) before extraordinary item 2.07% 1.18% 1.29% 0.02%
Extraordinary item - loss on extinguishment
of debt 0.00% 0.00% 0.00% -0.63%
------- ------- ------- -------
Net income (loss) applicable to 2.07% 1.18% 1.29% (0.61%)
common shareholders ======= ======= ======= =======
</TABLE>
13
<PAGE> 14
14 WEEK PERIOD ENDED JULY 3, 1996 COMPARED WITH 13 WEEK PERIOD ENDED JUNE 28,
1995
Restaurant Sales. Restaurant sales increased $41.7 million, to $59.0
million for the period ended July 3, 1996 as compared with restaurant sales of
$17.3 million for the period ended June 28, 1995. This increase was primarily
attributable to the BEP Acquisition, the Merger, and new restaurants opened.
Food and Beverage Cost. Cost of food and beverage increased to 27.7% of
restaurant sales for the period ended July 3, 1996 as compared with 26.4% of
restaurant sales for the period ended June 28, 1995, primarily as the result of
several promotional programs implemented in January 1996 and the higher food
costs associated with the Company's non-Denny's restaurants, which were 30.5% of
sales at those restaurants for the period.
Payroll and Payroll Related Costs. Payroll and payroll related costs were
34.2% of restaurant sales for the period ended July 3, 1996 as compared with
32.7% of restaurant sales for the period ended June 28, 1995. This increase was
primarily attributable to staffing inefficiencies created by the promotional
programs implemented in the first quarter of 1996 and higher payroll costs
associated with the Company's non-Denny's restaurants, which were 38.3% of
sales at those restaurants for the period.
Depreciation and Amortization. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, pre-opening costs and
other items decreased to 3.3% of restaurant sales for the period ended July 3,
1996 as compared with 3.5% of restaurant sales for the period ended June 28,
1995. This decrease was primarily attributable to increased sales levels in
1996.
Other Restaurant Operating Costs. Other restaurant operating costs were
24.7% of restaurant sales for the period ended July 3, 1996 as compared with
25.6% of restaurant sales for the period ended June 28, 1995. This decrease was
primarily attributable to lower occupancy costs associated with restaurants
operated by AFR prior to the Merger and lower insurance costs.
Restaurant Operating Income. Restaurant operating income increased $4.0
million to $6.0 million for the period ended July 3, 1996 as compared with $2.0
million for the period ended June 28, 1995. This increase was primarily the
result of the factors described above.
Administrative Expenses. Administrative expenses decreased to 3.6% of
restaurant sales for the period ended July 3, 1996 as compared with 4.7% of
restaurant sales for the period ended June 28, 1995. This decrease was primarily
the result of the elimination of administrative staffing levels as a result of
the Merger and an increase in revenue without a proportional increase
in administrative costs.
Interest Expense. Interest expense was $2.8 million, or 4.7% of restaurant
sales, for the period ended July 3, 1996 as compared with $538,000, or 3.1% of
restaurant sales, for the period ended June 28, 1995. The increase is the result
of increased debt levels, including interest expense on capitalized lease
obligations associated with new store development.
Income Tax Expense. The Company recorded an income tax expense of
approximately $372,000, an effective rate of 34.8%, for the period ended July 3,
1996 as compared with income tax expense of approximately $239,000, an effective
rate of 40.0%, for the period ended June 28, 1995.
Net Income. The Company recorded net income of approximately $697,000 for
the period ended July 3, 1996 as compared with net income of $358,000 for the
period ended June 28, 1995, as a result of the factors described above.
14
<PAGE> 15
27 WEEK PERIOD ENDED JULY 3, 1996 COMPARED WITH 26 WEEK PERIOD ENDED JUNE 28,
1995
Restaurant Sales. Restaurant sales increased $46.1 million, to $79.2
million for the period ended July 3, 1996 as compared with restaurant sales of
$33.1 million for the period ended June 28, 1995. This increase was primarily
attributable to the BEP Acquisition, the Merger, and new restaurants opened
during fiscal 1995.
Food and Beverage Costs. Cost of food and beverage increased to 27.8% of
restaurant sales for the period ended July 3, 1996 as compared with 26.6% of
restaurant sales for the period ended June 28, 1995, primarily as the result of
several promotional programs implemented in January 1996 and the higher food
costs associated with the Company's non-Denny's restaurants, which were 30.5% of
sales at those restaurants for the period.
Payroll and Payroll Related Costs. Payroll and payroll related costs were
34.6% of restaurant sales for the period ended July 3, 1996 as compared with
33.3% of restaurant sales for the period ended June 28, 1995. This increase was
primarily attributable to staffing inefficiencies created by the promotional
programs implemented in the first quarter of 1996 and higher payroll costs
associated with the Company's non-Denny's restaurants, which were 38.3% of
sales at those restaurants for the period.
Depreciation and Amortization. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, pre-opening costs and
other items were 3.6% of restaurant sales for the period ended July 3, 1996 as
compared with 3.6% of restaurant sales for the period ended June 28, 1995.
Other Restaurant Operating Costs. Other restaurant operating costs were
25.4% of restaurant sales for the period ended July 3, 1996 as compared with
26.1% of restaurant sales for the period ended June 28, 1995. This decrease was
primarily attributable to lower occupancy costs associated with the
restaurants operated by AFR prior to the Merger and lower insurance costs.
Restaurant Operating Income. Restaurant operating income increased $3.4
million to $6.9 million for the period ended July 3, 1996 as compared with $3.5
million for the period ended June 28, 1995. This increase was primarily the
result of the factors described above.
Administrative Expenses. Administrative expenses decreased to 4.0% of
restaurant sales for the period ended July 3, 1996 as compared with 4.8% of
restaurant sales for the period ended June 28, 1995. This decrease was primarily
the result of reduced administrative staffing levels as a result of the
Merger and an increase in revenues without a proportional increase in
administrative costs.
Interest Expense. Interest expense was $3.7 million, or 4.6% of restaurant
sales, for the period ended July 3, 1996 as compared with $1.0 million, or 3.1%
of restaurant sales, for the period ended June 28, 1995. The increase is the
result of increased debt levels, including interest expense on capitalized lease
obligations associated with new store development.
Income Tax Expense. The Company recorded an income tax expense of
approximately $13,000, an effective rate of 39.4%, for the period ended July 3,
1996 as compared with income tax expense of approximately $40,000, an
effective rate of 39.5%, for the period ended June 28, 1995.
Extraordinary item - Loss on Extinguishment of Debt. In connection with the
Merger, the Company repaid approximately $11.0 million of indebtedness, which
resulted in an extraordinary loss on extinguishment of such debt of $497,000,
net of an income tax benefit of $332,000.
Net Income (Loss). The Company recorded a net loss of approximately
$(477,000) for the period ended July 3, 1996 as compared with net income of
$427,000 for the period ended June 28, 1995, as a result of the factors
described above.
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
15
<PAGE> 16
a working capital deficit. The Company's working capital deficit was $9.4
million at December 27, 1995 and $33.9 million at July 3, 1996. Of the working
capital deficit at July 3, 1996, approximately $11.6 million relates to
accruals for amounts that are not currently due but which the Company may be
required to pay or satisfy over the next 12-month period. The Company's working
capital has been affected by the expenditures of approximately $4.0 million to
settle past-due accounts of AFR existing on the date of the Merger.
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
through a combination of public and private placements of equity securities and
debt instruments, cash from operations, and leasing transactions. Expenditures
for property and equipment and intangibles totaled approximately $2.5 million
and $3.9 million for the 14 and 27 week periods ended July 3, 1996 respectively.
The Company believes that its future capital requirements will be primarily
for the development of new restaurants and the continued acquisition and
conversion of restaurants to a Denny's or other restaurant concept. Pursuant to
an agreement with Denny's, Inc., the franchisor of the Company's Denny's
restaurants, the Company has the right to develop and open a total of 40
Denny's restaurants in specified locations during the period ending December 31,
1997. Through July 3, 1996, the Company has developed and opened a total of 9
of the 40 new Denny's restaurants and has 2 under development. Various other
agreements with Denny's, Inc. and certain other parties require the Company to
(i) convert a total of 25 restaurants operated under the "Kettle" trade name to
the Denny's concept by March 1997; (ii) convert at least a total of 30 of the
non-Denny's restaurants to a Denny's before January 1, 1998; and (iii) close or
convert 25 non-Denny's restaurants to a Denny's or other restaurant concept that
is not in competition with the business of Denny's, Inc., its affiliates,
subsidiaries or franchisees. During fiscal 1996, the Company has converted five
non-Denny's restaurants to Denny's restaurants and sold 23 of the non-Denny's
restaurants that it was required to close or convert. 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 a
Denny's will be approximately $160,000 to $450,000 per restaurant.
An affiliate of CNL Group, Inc. ("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.
In connection with the Merger and the BEP Acquisition, the Company entered
into a $65.0 million credit facility with Banque Paribas. The Paribas Facility
consists of (i) a Term Loan; (ii) a Revolver; and (iii) a Delayed Term Loan. The
Company is required to make principal payments of $3.8 million over the next
twelve months under the $35.0 million Term Loan. As of August 12, 1996, the
Company had approximately $2.0 million available for borrowings under the
Revolver.
The Company plans to further increase its working capital as necessary
through equity or debt financings in the public or private securities market,
additional sale-leaseback transactions, the disposition of underperforming
restaurants, and additional credit facilities. There can be no assurance that
such financing will be available or will be available on satisfactory terms.
16
<PAGE> 17
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.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
17
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
2.5 Stock Purchase Agreement dated May 31, 1996, between BEP
Holdings, Inc. and DenAmerica Corp.(1)
4.6 Supplemental Indenture (Series B Notes) between DenAmerica
Corp. and State Street Bank and Trust Company, as trustee(1)
4.7 Common Stock Purchase Warrant dated July 3, 1996, issued to BEP
Holdings, Inc.(1)
4.8 Common Stock Purchase Warrant dated July 3, 1996, issued to
Banque Paribas(1)
10.92A Amended and Restated Credit Agreement dated as of July 3, 1996,
among DenAmerica Corp., the Banks named therein, and Banque
Paribas, as Agent(1)
10.96 Senior Subordinated Promissory Note dated July 3, 1996, in the
principal sum of $15,000,000, payable by DenAmerica Corp. to
BEP Holdings, Inc.(1)
10.97 Registration Rights Agreement dated as of July 3, 1996, between
DenAmerica Corp. and BEP Holdings, Inc.(1)
10.98 Intercreditor Agreement among DenAmerica Corp., certain holders
of DenAmerica's Series B Notes, and State Street Bank and Trust
Company(1)
10.99 Sale and Lease Agreement dated July 3, 1996, among FFCA
Acquisition Corporation, Black-eyed Pea U.S.A., Inc., and Texas
BEP, L.P.(1)
10.100 Form of Lease dated July 3, 1996, between FFCA Acquisition
Corp. and DenAmerica Corp.(1)
10.101 Form of Sublease dated July 3, 1996, between DenAmerica Corp.
and Black-eyed Pea U.S.A., Inc.(1)
10.102 Form of Sublease dated July 3, 1996, between DenAmerica Corp.
and Texas BEP, L.P.(1)
10.103 Equipment Purchase Agreement and Bill of Sale dated July 3,
1996, between LH Leasing Company, Inc. and Black-eyed Pea
U.S.A., Inc.(1)
10.104 Equipment Purchase Agreement and Bill of Sale dated July 3,
1996, between LH Leasing Company, Inc. and Texas BEP, L.P.(1)
10.105 Equipment Lease dated July 3, 1996, between LH Leasing Company,
Inc. and DenAmerica Corp.(1)
10.106 Equipment Sublease dated July 3, 1996, between DenAmerica Corp.
and Black-eyed Pea, U.S.A., Inc.(1)
10.107 Equipment Sublease dated July 3, 1996, between DenAmerica Corp.
and Texas BEP, L.P.(1)
10.108 Asset Purchase Agreement effective as of July 3, 1996, among
Mid-American Restaurants, Inc., Haig V. Antranikian, and
DenAmerica Corp(1)
10.109 Stock Option Agreement dated April 29, 1996, by and between
DenAmerica Corp. and Todd S. Brown(2)
11.1 Statement regarding Computation of per share income (loss)
27.1 Financial Data Schedule
_______________
(1) Incorporated by reference to the Exhibits to the Registrant's
Current Report on Form 8-K as filed on July 18, 1996.
(2) Incorporated by reference to the Exhibits to the Registrant's
Registration Statement on Form S-8, No. 333-09731, as filed on
August 7, 1996.
(b) Report on Form 8-K.
On July 18, 1996, the Registrant filed a Current Report on Form 8-K,
dated July 3, 1996, reporting (i) the acquisition of all of the issued and
outstanding common stock of Black-eyed Pea U.S.A., Inc., and other transactions
related to that acquisition, and (ii) the sale of the assets related to 23
restaurants to Mid-American Restaurants, Inc.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DENAMERICA CORP.
Dated: August 19, 1996 By: /s/ TODD S. BROWN
----------------------------------------
TODD S. BROWN
Chief Financial Officer and
Treasurer
(Duly authorized officer of the
registrant, principal financial
and accounting officer)
19
<PAGE> 1
EXHIBIT 11.1
DENAMERICA CORP. AND SUBSIDIARIES
Statement re: computation of per share income (loss)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Period Ended
----------------------------------
Description June 28, 1995 July 3, 1996
- ----------- -------------- --------------
(26 weeks) (27 weeks)
<S> <C> <C>
Income before extraordinary item $ 427 $ 20
Extraordinary item - loss on extinguishment of debt -- (497)
----------- -----------
Net income (loss) 427 (477)
Less: Preferred stock dividend and accretion (286) (149)
----------- -----------
Net income (loss) applicable to common shareholders $ 141 $ (626)
=========== ===========
Income (loss) before extraordinary item per
common and common equivalent share $ .02 $ (.01)
Extraordinary item - loss on extinguishment
of debt per common and common equivalent share -- (.05)
----------- -----------
Net income (loss) per common and common
equivalent share $ .02 $ (.06)
=========== ===========
Weighted average common and common equivalent
shares outstanding 6,937,500 10,293,000
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-1997
<PERIOD-START> DEC-28-1995
<PERIOD-END> JUL-03-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,537
<ALLOWANCES> 0
<INVENTORY> 3,643
<CURRENT-ASSETS> 9,124
<PP&E> 70,459
<DEPRECIATION> 6,738
<TOTAL-ASSETS> 166,160
<CURRENT-LIABILITIES> 43,026
<BONDS> 97,589
0
0
<COMMON> 1,327
<OTHER-SE> 18,034
<TOTAL-LIABILITY-AND-EQUITY> 166,160
<SALES> 79,173
<TOTAL-REVENUES> 79,173
<CGS> 21,971
<TOTAL-COSTS> 21,971
<OTHER-EXPENSES> 53,507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,651
<INCOME-PRETAX> 33
<INCOME-TAX> 13
<INCOME-CONTINUING> 20
<DISCONTINUED> 0
<EXTRAORDINARY> (497)
<CHANGES> 0
<NET-INCOME> (626)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
