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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 1997
Commission File Number 1-13226
DENAMERICA CORP.
(Exact name of registrant as specified in its charter)
Georgia 58-1861457
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7373 N. Scottsdale Road
Suite D120, Scottsdale, AZ 85253
(Address of principal executive offices) (Zip Code)
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._____
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant (6,535,433 shares) on March 21, 1997 was
$19,606,299. The aggregate market value was computed by reference to the closing
price of the Common Stock on such date. For purposes of this computation, all
officers, directors, and 10% beneficial owners of the registrant are deemed to
be affiliates. Such determination should not be deemed an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
registrant.
Number of shares of Common Stock outstanding as of March 21, 1997:
13,409,277 shares of Common Stock, $.10 par value.
Documents incorporated by reference: None.
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DENAMERICA CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JANUARY 1, 1997
TABLE OF CONTENTS
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<S> <C> <C>
PART I
ITEM 1. BUSINESS.......................................................... 1
ITEM 2. PROPERTIES........................................................ 24
ITEM 3. LEGAL PROCEEDINGS................................................. 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED SHAREHOLDER MATTERS.... 26
ITEM 6. SELECTED FINANCIAL DATA........................................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................ 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 37
ITEM 11. EXECUTIVE COMPENSATION............................................ 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 50
SIGNATURES................................................................. 55
</TABLE>
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PART I
ITEM 1. BUSINESS.
GENERAL
The Company currently operates 307 family-oriented, full-service restaurants
in 31 states, primarily in the southeastern, midwestern, western, and
southwestern United States. Of the Company's 307 restaurants, 188 are Denny's
restaurants, which represents approximately 12% of the Denny's system and makes
the Company the largest Denny's franchisee in terms of revenue and the number of
restaurants operated. The Company also owns and operates 93 Black-eyed Pea
restaurants, primarily in Texas, Georgia, Oklahoma, and the Washington, D.C.
area, and franchises to third parties the rights to operate 29 Black-eyed Pea
restaurants in six states. In addition, the Company operates 20 restaurants
under various other concepts ("non-branded restaurants"), which the Company
currently is in the process of converting to the Denny's concept or selling, and
has an additional six restaurants closed for conversion to the Denny's concept.
The Company intends to increase the number of its restaurants through the
development of new Denny's and Black-eyed Pea restaurants, the acquisition of
existing Denny's restaurants, the franchising of additional Black-eyed Pea
restaurants, and the acquisition and conversion to the Denny's or Black-eyed Pea
concept of restaurants currently operating under other restaurant concepts. The
Company also plans to convert to the Denny's concept certain of its restaurants
currently operating under other restaurant concepts, and to sell or close other
restaurants as appropriate based on performance, geographical, and other
considerations. In addition, the Company may 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
The Company began operations in 1986 through one or more predecessor entities
under common control. The Company was incorporated in 1989 and has pursued an
aggressive program of growth through acquisitions of Denny's and other
restaurants and through development of new Denny's restaurants. The Company
resulted from the March 29, 1996, merger (the "Merger") of Denwest Restaurant
Corp. ("DRC") and American Family Restaurants, Inc. ("AFR"). The table below
sets forth information regarding the number of restaurants that the Company has
acquired, developed, converted to the Denny's concept, and closed or sold in
each year since the beginning of fiscal 1992, including restaurants developed,
sold, or closed by Black-eyed Pea U.S.A., Inc. ("BEP") prior to its acquisition
by the Company in July 1996 (the "BEP Acquisition").
RESTAURANTS ACQUIRED, DEVELOPED, CONVERTED, SOLD, OR CLOSED
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
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DENNY'S RESTAURANTS:
Number open beginning of period... 72 89 102 148 168
Acquired ......................... 3 2 40 3 0
Developed ........................ 1 4 6 8 5
Converted from other concept ..... 13 7 1 10 15
Sold or closed ................... 0 0 (1) (1) (6)
--- ---- ---- ---- ----
Number open at end of period ..... 89 102 148 168 182
BLACK-EYED PEA RESTAURANTS:
Number open beginning of period... 70 82 97 103 105
Developed ........................ 12 15 6 5 0
Sold or closed ................... 0 0 0 (3) (12)
--- ---- ---- ---- ----
Number open at end of period ..... 82 97 103 105 93
=== ==== ==== ==== ====
NON-BRANDED RESTAURANTS:
Number open beginning of period... 59 43 59 56 82
Acquired ......................... 1 24 1 36 0
Converted ........................ (13) (7) (1) (10) (15)
Closed(1) ........................ (4) (1) (3) 0 (24)
Sold ............................. 0 0 0 0 (23)
--- ---- ---- ---- ----
Number open at end of period ..... 43 59 56 82 20
=== ==== ==== ==== ====
</TABLE>
(1) Fourteen of the stores closed as of January 1, 1997 were closed for
remodeling or conversion.
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In February 1997, the Company executed a letter of intent to acquire Good
Eats Holding Company, which owns and operates 13 "Good Eats" family-oriented
restaurants in Texas, from one of the founders of BEP and the Black-eyed Pea
restaurant concept. The Company also may 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.
The following table sets forth certain information with respect to the
Company's restaurants as of January 1, 1997 and plans for future restaurant
activity.
<TABLE>
<CAPTION>
CURRENT RESTAURANTS ANTICIPATED FUTURE ACTIVITY
------------------------------------------------------------ --------------------------------------------
COMPANY-OWNED RESTAURANTS DENNY'S BLACK-EYED NON-BRANDED NON-
-------------------------------------------- TO BE PEAS TO BE TO BE BRANDED
CLOSED FRANCHISED DEVELOPED DEVELOPED CONVERTED TO BE
BLACK-EYED FOR BLACK-EYED THROUGH THROUGH THROUGH SOLD OR
DENNY'S PEA OTHER REMODEL PEA 12/31/97 12/31/97 12/31/97 CLOSED
------- --- ----- ------- --- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama ......... 7 2 2
Arizona ......... 13 6 2 1
Arkansas ........ 2 1
Colorado ........ 8 13 1
Florida ......... 20 4 5 1 3
Georgia ......... 14 9 1 1
Idaho ........... 6
Indiana ......... 5 1
Iowa ............ 5
Kansas .......... 1 2
Kentucky ........ 16
Louisiana ....... 1 1
Maryland ........ 4
Michigan ........ 1 11 11
Minnesota ....... 1
Missouri ........ 1 1
Nebraska ........ 4
Nevada .......... 1
New Mexico ...... 2
North Carolina... 2 1 2 2
Ohio ............ 21 3 3
Oklahoma ........ 3 5 1 3 1 4
Oregon .......... 1 1
South Carolina... 2 1 1 1
South Dakota .... 1
Tennessee ....... 5 2
Texas ........... 27 59 3 1 7 3
Utah ............ 8 1
Virginia ........ 5 1 3 1
Wisconsin ....... 1
Wyoming ......... 5
--- -- -- -- -- - - -- --
182 93 20 12 29 5 9 18 14
=== == == == == = = == ==
</TABLE>
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STRATEGY
The Company's business strategy is to (i) continue to develop new
restaurants; (ii) convert to the Denny's concept certain of its existing
restaurants operating under other concepts; (iii) accelerate efforts to
franchise additional Black-eyed Pea restaurants; (iv) acquire additional
restaurants; and (v) enhance its operational efficiencies.
New Restaurant Development
The Company plans to continue to develop new Denny's and Black-eyed Pea
restaurants, particularly in high-growth markets where it currently operates
restaurants in order to capitalize on positive demographic and traffic patterns,
an existing management structure, established advertising programs, and reduced
distribution costs of food and beverages. The Company currently intends to
concentrate its efforts on developing additional Black-eyed Pea restaurants
because of the better unit economics provided by those restaurants, and
anticipates that it will develop approximately nine new Black-eyed Pea
restaurants through the end of 1997. During the three-year period ended January
1, 1997, the Company developed 19 new Denny's restaurants. Sales per restaurant
for those of the Company's new Denny's restaurants that operated for all of
fiscal 1996 averaged $1.2 million, which exceeds the average sales per
restaurant for the Company's other Denny's restaurants. The Company developed
five new Denny's restaurants during fiscal 1996 and currently has two new
Denny's restaurants in various stages of development. The Company anticipates
that it will develop approximately five new Denny's restaurants in 1997,
primarily within its current geographic territory. See Item 1, "Special
Considerations - Inability to Develop or Convert Restaurants."
Conversions of Non-branded Restaurants
The Company plans to convert most of its current non-Denny's and
non-Black-eyed Pea restaurants to the Denny's concept. The Company believes that
conversion to the Denny's concept contributes substantially to improved
restaurant sales and restaurant operating income. 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 of its Kettle restaurants to
Denny's restaurants to be $350,000, including opening costs and franchise fees,
but the lessors of 12 of the Company's Kettle restaurants funded up to $250,000
of these conversion costs. During fiscal 1996, the Company converted 15
restaurants to the Denny's concept. The Company anticipates that it will convert
a total of 18 non-branded restaurants to the Denny's concept by the end of
fiscal 1997 and intends to sell the remainder of its non-Denny's, non-Black-eyed
Pea restaurants as soon as practicable.
Increased Franchising Efforts
The Company intends to increase its efforts to expand the number of
franchised Black-eyed Pea restaurants and to strengthen its franchise system.
The Company currently is developing and implementing plans to identify selected
high-growth markets that will be suitable locations for franchised Black-eyed
Pea restaurants and to initiate a program of controlled franchise expansion. The
Company intends to attract franchisees that have the experience, financial
resources, and management capabilities necessary to develop and operate multiple
restaurant locations in accordance with the standards of the Black-eyed Pea
franchise system. The Company also intends to provide its franchisees with
sufficient assistance in site selection, store design and construction, employee
training, restaurant operations, purchasing, and marketing in order to ensure
the success of the entire Black-eyed Pea restaurant concept.
Restaurant Acquisitions
The Company plans to continue to acquire Denny's restaurants as well as
other restaurants that it can convert to the Denny's or Black-eyed Pea 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
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the Denny's or Black-eyed Pea concept. The Company believes it can take
advantage of its organizational and management expertise to bring improved
quality and operating efficiencies to the restaurants it acquires.
From January 1, 1994 through July 3, 1996, the Company acquired a total of
179 restaurants in 9 transactions. Of these restaurants, 43 were Denny's
restaurants acquired either from Denny's, Inc. or from other Denny's franchisees
and 99 were Black-eyed Pea restaurants purchased in the BEP Acquisition. 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 without a proportionate cost increase. In
February 1997, the Company executed a letter of intent to acquire Good Eats
Holding Company, which owns and operates 13 "Good Eats" family-oriented
restaurants in Texas, from one of the founders of BEP and the Black-eyed Pea
restaurant concept.
Enhancement of Operating Efficiencies
The Company intends to enhance its operating efficiencies by (i)
concentrating its restaurant development, acquisitions, and franchising efforts
in specific markets where it has existing restaurants, and (ii) selling or
closing restaurants that are not profitable and cannot be successfully re-imaged
or converted.
Concentrating Restaurant Growth in Specific Markets. The Company currently
plans to concentrate the restaurant development, acquisition, and franchising
efforts described above in selected high-growth markets where it operates
existing restaurants in order to capitalize on certain operating efficiencies
that such concentration generally provides. The Company's experience indicates
that operating multiple restaurant locations in targeted markets enables each
restaurant within the market to achieve increased customer recognition and to
obtain greater benefits from advertising and marketing expenditures than can be
obtained by single restaurants in isolated markets. In addition, concentration
of restaurants in specific markets will create economies of scale and costs
savings as a result of lower overall management costs, lower costs of goods sold
as a result of lower distribution costs, more efficient utilization of
advertising and marketing programs, and other administrative savings. The
Company believes that this strategy has been particularly successful in the core
market areas for its Black-eyed Pea restaurants. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
General."
Sale or Closure of Certain Restaurants. Following the Merger, the Company
decided to sell or close a total of two Denny's restaurants and 31 non-Denny's
restaurants. The Company determined that these restaurants either could not be
converted to the Denny's concept because they were situated in close proximity
to an existing Denny's restaurant or had 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.
Effective as of July 3, 1996, the Company sold 23 non-branded restaurants to a
former officer and director of the Company. See Item 13, "Certain Relationships
and Related Transactions." The Company intends to continue to evaluate the
operating results of each of its restaurants and to sell or close any
underperforming restaurants that it determines it will be unable to successfully
re-image or convert.
DENNY'S RESTAURANTS
The Company currently operates 188 Denny's restaurants, representing
approximately 12% 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.
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 Companies, Inc. ("Flagstar"), one of the largest restaurant companies
in the United States
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with annualized revenue of approximately $2.7 billion. Flagstar conducts its
restaurant operations through three principal chains: Denny's, the largest
family-oriented, full-service restaurant chain in the United States, with more
than 1,500 corporate-owned or franchised units in 49 states and six foreign
countries; as the largest franchisee of 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.
Flagstar recently announced that it has reached an agreement in principle with
holders of certain of its outstanding indebtedness on a financial restructuring
plan. See Item 1, "Special Considerations - Reliance on Denny's, Inc."
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. As of January 1, 1997, the average check per
customer at the Company's Denny's restaurants was $5.18.
Since 1994, Denny's, Inc. has conducted a promotional strategy that
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 Original Grand Slam Breakfast, which consists of two eggs, two pancakes, two
sausage links, and two strips of bacon that typically would sell for
approximately $3.99 but currently sells for $2.99. These programs have resulted
in increased costs of food and beverage as a percentage of the Company's
restaurant sales. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." During 1996, Denny's Inc. discontinued
several of these promotional programs.
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.
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 $160,000 to $480,000, exclusive of annual
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operating costs and assuming that the land and building are obtained under a
lease arrangement. These costs include approximately (a) $110,000 to $430,000
for remodelling and improvements; (b) $30,000 for pre-opening costs, including
hiring costs, employee wages, and advertising; and (c) $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" and Item 2, "Properties."
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 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"). The
Denny's Franchise Agreements generally require payment of an initial 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
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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 at its Denny's restaurants. Each Denny's restaurant employee is required
to wear a standard uniform. The Company is free to establish its own prices at
its Denny's restaurants, which may differ by location and are influenced by
geographic and other considerations.
Pursuant to an agreement between the Company and Denny's, Inc., in the
event that the Company is in default under the terms of its credit facility with
Banque Paribas and the Company's other senior lenders, Denny's, Inc. will have
the right to terminate substantially all of the Denny's Franchise Agreements.
The cancellation of the Denny's Franchise Agreements as a result of a default by
the Company under its credit facility would have a material adverse effect on
the Company. In the event of a "change of control" of the Company, 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 Jack M. Lloyd, William J. Howard, and William G. Cox, each of
whom is an officer and director of the Company, Jeffrey D. Miller, a former
officer and director of the Company, or BancBoston Ventures, Inc.
("BancBoston"), a significant shareholder of the Company) 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 25 Kettle restaurants operated by it
to the Denny's concept prior to September 1997. As of January 1, 1997, the
Company has converted 15 of the 25 Kettle restaurants to the Denny's concept.
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."
Development Agreement
In conjunction with the purchase of 13 Denny's restaurants from Denny's,
Inc. in 1994, the Company entered into a development agreement (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 40 new Denny's restaurants in the Territory by the end of 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. Through March 21, 1997,
the Company has developed a total of 21 new restaurants in the Territory and
does not currently
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anticipate that it will develop the number of restaurants required to be
developed by the end of 1997. 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 Denny's
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."
The Company will, however, continue to be able to develop additional Denny's
restaurants on a non-exclusive basis upon termination or expiration of 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.
BLACK-EYED PEA RESTAURANTS
Concept
Black-eyed Pea restaurants are full-service, casual dining establishments,
featuring wholesome home-style meals, including traditional favorites such as
pot roast, chicken fried steak, roast turkey, vegetable dishes, and freshly
baked breads and desserts. The Company believes that the emphasis of Black-eyed
Pea restaurants on quality food, comfortable atmosphere, friendly service, and
reasonable prices attracts a broad range of customers, including families and
business people.
Black-eyed Pea restaurants are open for lunch and dinner seven days a
week, typically from 11:00 a.m. to 10:00 p.m. On average, sales before 4:30 p.m.
account for approximately 44% of total sales per restaurant.
Menu
Black-eyed Pea restaurants offer a variety of entrees accompanied by a
broad selection of fresh vegetables, unlimited helpings of freshly baked breads,
large servings of iced tea and soft drinks (with complimentary refills), and
fruit cobblers, pies, and other freshly prepared desserts. Entrees include
chicken fried steak, grilled chicken, seasoned meat loaf, pot roast with gravy,
and roast turkey with dressing. Black-eyed Pea restaurants also offer a range of
freshly made soups, salads, appetizers, and sandwiches. In addition to its
standard menu items, Black-eyed Pea restaurants offer regular daily specials,
such as chicken pot pie, fried fish, and chicken and dumplings. Vegetable
offerings are an important component of the Black-eyed Pea restaurant menu. Each
restaurant features a dozen vegetables daily, from which customers can make two
or three selections to accompany their meals, as well as a vegetable plate
entree, which consists of up to five vegetable selections. To encourage family
dining, Black-eyed Pea restaurants feature a children's menu, which offers
smaller portions of regular menu items, as well as special items such as peanut
butter and jelly and grilled cheese sandwiches. As of January 1, 1997, the
average check per customer at the Company's Black-eyed Pea restaurants was
$8.10. During the same period, liquor sales accounted for approximately 2.5% of
total revenue of Black-eyed Pea restaurants.
Each Black-eyed Pea restaurant has a full-service kitchen, which gives it
the flexibility to prepare daily and seasonal specials and to otherwise expand
its food offerings. The Company regularly reviews and revises the existing
Black-eyed Pea restaurant menu and conducts consumer tests of new menu items in
order to improve the quality and breadth of food offerings and encourage repeat
business. The Company maintains a test kitchen facility, which includes a full
Black-eyed Pea restaurant cookline, for use in its product development efforts.
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Restaurant Layout
The distinctive, turn-of-the-century "General Store" appearance of
Black-eyed Pea restaurants is designed to create a casual and comfortable dining
atmosphere, which appeals to their broad customer base, including families. The
focal point of each Black-eyed Pea restaurant is a mural depicting the history
of the area in which the restaurant is located. Restaurant interiors are
decorated with quilts, canned goods, toys, antique farm tools and cooking
utensils which line the walls and shelves. Most Black-eyed Pea restaurants have
booth and table seating as well as a small lunch counter/bar on one side of the
dining room, which also provides take-out service.
Black-eyed Pea restaurants generally range in size from approximately 4,000
square feet to 6,000 square feet and have dining room seating for 160 to 210
customers and counter/bar seating for approximately 10 additional guests. The
Company's current prototype restaurant is approximately 5,400 square feet and
has dining room seating for approximately 200 customers plus counter/bar seating
for approximately 10 customers.
Unit Economics
The Company estimates that its total costs of developing a new Black-eyed
Pea restaurant currently ranges from $385,000 to $435,000, exclusive of annual
operating costs and assuming that the land and buildings are obtained under a
lease arrangement. These costs include approximately (i) $300,000 to $350,000
for furniture, fixtures, and equipment; (ii) $50,000 for pre-opening costs,
including hiring and training costs, employee wages, and advertising; and (iii)
$30,000 for the initial franchise fee in the case of franchisees. The Company
currently plans to lease substantially all of its new Black-eyed Pea restaurant
sites in order to minimize the costs of developing new restaurants. See Item 1,
"Business - Financing and Leasing" and Item 2, "Properties."
Site Selection
The Company believes that proper site selection is critical to maximizing
the success of a particular Black-eyed Pea restaurant and, therefore, senior
management devotes significant time and resources in selecting and evaluating
each prospective site. A variety of factors are analyzed in the site selection
process, including local market demographics, acquisition cost, site visibility
and accessibility, and proximity to significant generators of potential
customers such as major retailers, retail centers, office complexes, hotels and
entertainment centers. In most instances, the Company prefers the stand-alone
Black-eyed Pea prototype because it enhances the restaurant's visibility and
customer access.
Franchises
As of January 1, 1997, the Company had seven Black-eyed Pea franchisees or
licensees operating 29 restaurants in 6 states. The Company plans to accelerate
its efforts to franchise additional Black-eyed Pea restaurants. See Item 1,
"Business - Strategy - Increased Franchising Efforts."
The Company has typically offered development agreements to franchisees for
construction of one or more restaurants over a defined period of time within a
specific geographic area. Under the current form of development agreement, a
franchisee is required to pay, at the time the agreement is signed, a
nonrefundable fee of $5,000 per restaurant committed to be developed. The
Company's current development agreement also requires franchisees to pay a
franchise fee of $30,000 per restaurant upon signing a franchise agreement for a
specific location before construction begins. The Company's current form of
franchise agreement has a 15 year initial term with certain renewal rights and
provisions for payment to the Company of royalties equal to 3.5% of gross sales
and advertising fees and required marketing expenditures of up to 2.75% of gross
sales. The Company requires each franchisee to have an approved full-time
principal operator who is responsible for the supervision and operation of the
franchise.
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OTHER RESTAURANTS
In addition to its Denny's and Black-eyed Pea restaurants, the Company
currently operates 20 other restaurants. Of these restaurants, six operate under
the name "Kettle," 11 under the name "Mr. Fable's," and three operate under
other concepts. The operations of these restaurants are substantially similar to
those of the Company's Denny's restaurants. These restaurants generally feature
family-oriented dining with full table service. Menu items vary slightly among
these restaurants, but they generally offer moderately priced items, such as
hamburgers, sandwiches, chicken, steaks, seafood and breakfast items.
The terms of the August 1995 license agreement, leases, and subleases
pursuant to which the Company acquired the right to operate a total of 25
restaurants under the "Kettle" family-style restaurant concept as well as an
agreement with Denny's, Inc. require the Company to convert these restaurants to
the Denny's concept by September 1997. Since August 1995, the Company has
converted 15 of these 25 Kettle restaurants to the Denny's concept and plans to
convert the remainder as soon as practicable. Pursuant to the terms of the
license agreement, the Company will not be required to pay franchise fees to
Kettle Restaurants, Inc. as the franchisor of the Kettle restaurant concept
during the conversion period. Historically, the annual revenue from Kettle
restaurants averages $580,000 per restaurant, compared with average revenue of
$985,000 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.
Effective as of July 3, 1996, the Company sold the assets related to 23
restaurants operated under the "Ike's" and "Jerry's" trade names to a former
officer and director of the Company. The restaurants were located in Illinois,
Indiana, Kentucky, and Ohio. See Item 13, "Certain Relationships and Related
Transactions." The Company intends to sell, close, or convert to the Denny's
concept the remainder of its non-Denny's, non-Black-eyed Pea restaurants as soon
as practicable.
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 and
Black-eyed Pea restaurants, acquisitions of existing Denny's restaurants,
franchising of additional Black-eyed Pea restaurants, and acquisitions of other
family-style restaurants that can be converted to the Denny's or Black-eyed Pea
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" and "Business - Black-eyed Pea
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. Historically, the Company generally has been 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, managerial,
administrative, and other efficiencies that result from the concentration of
restaurants in specific markets.
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Restaurant Development
Since 1986, the Company has developed and opened more Denny's restaurants
than either Denny's, Inc. or any other franchisee. In the three and one-half
year period prior to the BEP Acquisition, BEP developed 11 and franchised four
Black-eyed Pea restaurants. The Company plans to accelerate the development and
franchising of Black-eyed Pea restaurants.
In 1994, the Company entered into the Development Agreement with Denny's,
Inc. under which it has the exclusive right to develop an additional 40 new
Denny's restaurants in specified locations by the end of 1997. See Item 1,
"Business - Denny's Restaurants - Development Agreement." Although the Company
does not currently anticipate that it will develop all of the 40 new Denny's
restaurants required to be developed under the Development Agreement by the end
of 1997, the Company will continue to be able to develop additional Denny's
restaurants on a non-exclusive basis upon termination or expiration of the
Development Agreement. The specific time frame in which the Company is able to
develop new Denny's and Black-eyed Pea 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 or Black-eyed Pea concept. The Company also actively evaluates
opportunities to acquire other restaurant concepts 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. and the Company's
lenders. There can no be assurance that the Company will be able to acquire
additional operating Denny's restaurants, or other restaurants that are suitable
for conversion to Denny's or Black-eyed Pea restaurants, or that any such
restaurants that are acquired will be profitable to the Company.
Restaurant Conversions
The Company, primarily through AFR, historically has acquired and operated
non-branded restaurants. During the past several years, most of these
restaurants have been sold, closed, or converted to the Denny's concept. As of
March 21, 1997, the Company has converted 52 non-branded restaurants to the
Denny's concept, including 21 that have been converted since December 27, 1995.
For the 31 restaurants converted prior to the beginning of fiscal 1996,
restaurant sales for the 12-month period following conversion averaged $882,000
per restaurant, an increase of 61% over average sales of $548,000 per restaurant
for the 12-month period ended December 27, 1995. Operating income at these
restaurants (excluding depreciation and amortization) for the 12- month period
prior to conversion averaged $91,000, or 16.6% of sales, per restaurant as
compared with $196,000, or 22.2% of sales, per restaurant for the 12-month
period ended January 1, 1997. Sales and operating results at
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restaurants that have been converted after December 27, 1995 have exceeded these
increases. There can be no assurance, however, that the improved operating
results at these restaurants will continue in the future. The Company currently
is in the process of converting six of its restaurants to the Denny's concept
and intends to convert most of its remaining non-Denny's, non-Black-eyed Pea
restaurants to the Denny's concept within the next 12-months. The Company is a
party to agreements obligating it to convert 25 restaurants operated under the
"Kettle" trade name to the Denny's concept by September 1997. As of March 21,
1997, the Company has converted 15 of the 25 Kettle restaurants to the Denny's
concept.
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 maintains 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 operational success of the
restaurant and the proper execution of standards required by the Company for all
of its restaurants and by Denny's, Inc. in the case of its Denny's restaurants.
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 it and by
Denny's, Inc. in the case of its Denny's restaurants. 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 Company's standards and those mandated by Denny's, Inc. in the case of
its Denny's restaurants.
The Company's district and restaurant management personnel are responsible
for the maintenance of the operational standards of its Denny's restaurants as
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
or part-time hourly employees.
Responsibility for managing the operations of Black-eyed Pea restaurants is
currently shared by two operations managers. The Black-eyed Pea restaurant
system has three regional managers who report to their respective operations
managers. Each regional manager is responsible for five to eight districts, each
of which is in turn managed by a district supervisor. Most district supervisors
are responsible for six or seven restaurant locations. The management staff of a
typical Black-eyed Pea restaurant consists of a general manager, an assistant
general manager, and one or two assistant managers. Each Black-eyed Pea
restaurant employs approximately 60 persons.
Training
The Company seeks to attract and retain high-quality individuals with prior
restaurant experience for restaurant management positions. The Company believes
that the training of its management and other restaurant employees is important
to its ability to maintain the quality and consistency of its food and service
and to develop
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the personnel necessary to achieve its expansion plans. Newly hired employees
are reviewed at regular intervals during their first year, and all restaurant
personnel receive annual performance reviews. The Company generally seeks to
promote existing employees to fill 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 Denny's 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. 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 Denny's
restaurant employees. The Company's district managers and general managers
regularly participate in on-going training efforts. By training its own
management personnel and opening its own restaurants, the Company reduces its
initial franchise fee per Denny's restaurant from $35,000 to $20,000.
In the case of its Black-eyed Pea restaurants, the Company requires each
restaurant management employee to participate in a training program at
designated training restaurants. The restaurant management training program
utilizes manuals, tests and a scheduled evaluation process. In addition, the
Company has developed procedures for coordinating and overseeing the opening of
new Black-eyed Pea restaurants in order to maintain quality and consistency of
food and service. Special training teams are on hand at new locations, generally
for a period of one week before and one week after each restaurant opens.
Maintenance and Improvement of Restaurants
The Company maintains its Denny's and Black-eyed Pea restaurants and all
associated fixtures, furnishings, and equipment in conformity with the Denny's
System and the Black-eyed Pea concept, respectively. The Company also makes
necessary additions, alterations, repairs, and replacements to its restaurants,
such as periodic repainting or replacement of obsolete signs, furnishings,
equipment, and decor, including those required by Denny's, Inc. in the case of
its Denny's restaurants. 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 for all of its Denny's and Black-eyed
Pea restaurants. The Company has a point-of-sale reporting system installed in
each of its Denny's and Black-eyed Pea restaurants, which provide sales mix
information, labor scheduling functions, and weekly close-out processes.
Restaurants managers submit weekly reports on sales volume and mix, customer
counts, and labor costs to the Company's corporate management. Each Denny's
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.
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%
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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 restaurant 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. During 1996, the Company completed a sale and lease transaction
with FFCA Acquisition Corporation and other entities in connection with the BEP
Acquisition. See Item 2, "Properties" and Item 13, "Certain Relationships and
Related Transactions." In addition, the Company currently has a commitment from
CNL to provide $20.0 million of sale-leaseback financing through 1997. The
commitment is subject to various terms and conditions and provides for an
initial rate of 10.625% on the financing company's investment in land,
improvements, and construction costs. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." 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.
The Company entered into its $65.0 million credit facility with Banque
Paribas, as agent, and the Company's other senior lenders in connection with the
Merger and the BEP Acquisition. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Credit Facility."
Reference is made to Item 2, "Properties" and Item 13, "Certain Relationships
and Related Transactions" for additional information regarding sale and lease
transactions in connection with the BEP Acquisition.
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.
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The Company's Denny'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 for its
Denny's restaurants from a single supplier that 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. Each of the Company's Denny's restaurants purchases dairy,
bakery, and produce goods from approved local vendors.
With respect to its Black-eyed Pea restaurants, the Company strives to
obtain supplies of a high and consistent quality at competitive prices from
reliable sources. The Company negotiates directly with food manufacturers for
the majority of its purchases and with local suppliers for fresh produce, dairy,
and meat products. In addition, the Company contracts with a centralized
distribution company to store and deliver substantially all of the products and
supplies it purchases (other than fresh produce, meat and dairy products). The
Company offers its Black-eyed Pea franchisees the option to participate in its
purchasing and distribution program. Franchisees may purchase products and
supplies from other sources as long as the products meet Company specifications.
ADVERTISING AND MARKETING
As generally required under the terms of the Denny's Franchise Agreements,
the Company contributes 2% of its Denny's 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.
The Company uses television, radio and print advertising, and special
promotions to increase the traffic and sales at its Black-eyed Pea restaurants.
The Company's strategy is to develop a sufficient number of Black-eyed Pea
restaurants in its markets to permit the cost-effective use of television and
radio advertising. The Company's advertising campaigns are designed to
communicate the distinctive aspects of the Black-eyed Pea concept and are
targeted to appeal to its customer base. The Company employs a full-time vice
president of marketing and a full-time marketing director who plan, develop, and
implement advertising campaigns for its Black-eyed Pea restaurants. The Company
also uses full service advertising agencies. During BEP's last fiscal year,
expenditures for Black-eyed Pea advertising (including local promotions) were
approximately 4.6% of Black-eyed Pea restaurant sales.
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
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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, such as the increase enacted during 1996, 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.
Sales of alcoholic beverages comprised less than 1% and 2.5%, respectively,
of restaurant sales in its Denny's restaurants and Black-eyed Pea restaurants
during their last fiscal year. 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.
The Company is subject to Federal Trade Commission ("FTC") regulations and
state laws which regulate the offer and sale of Black-eyed Pea restaurant
franchises. The Company also is subject to state laws which regulate substantive
aspects of the franchisor-franchisee relationship. The FTC requires the Company
to furnish to prospective Black-eyed Pea franchisees a franchise offering
circular containing prescribed information. A number of states in which the
Company offers Black-eyed Pea franchises also regulate the offer and sale of
franchises and require registration of the franchise offering with state
authorities. State laws that regulate the franchisor-franchisee relationship
presently exist in a substantial number of states and bills have been introduced
in Congress and in a number of state legislatures from time to time (some of
which are now pending) which would provide for federal and state regulation of
the franchisor-franchisee relationship in certain respects. Certain of such laws
may restrict the Company's ability to terminate the franchise agreements for its
franchised Black-eyed Pea restaurants, although these provisions have not had a
significant effect on the Company's operations to date.
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 has registered a number of
service marks, including the names "Black-eyed Pea" and the slogan "Home Cookin'
Worth Going Out For," with the United States Patent and Trademark Office and in
various states in connection with its Black-eyed Pea operations. The Company
regards these service marks as having significant value and being an important
factor in the marketing of its restaurants. The Company also owns or licenses
the right to use certain other trademarks that it does not consider important to
its success.
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
than 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 a result of the presence of
competing restaurants in the
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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.
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 Black-eyed Pea restaurants compete in
both the casual mid-scale dining segment and the family dining segment.
Competitors include Applebee's and Chili's.
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 March 21, 1997, the Company had approximately 16,000 employees, of whom
approximately 110 were corporate personnel, approximately 900 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 typical Black-eyed Pea restaurants employs
approximately 60 persons. Many of the Company's employees work part-time.
Restaurant personnel, other than regional, district and restaurant managers, are
paid on an hourly basis. Hourly rates vary according to geographical location,
generally ranging from $5.00 to $6.00 an hour for kitchen personnel. The Company
generally pays service personnel the applicable minimum wage plus tips.
SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in this
Report, should be considered carefully in evaluating the Company and its
business.
NO ASSURANCE OF PROFITABILITY
The Company's ability to generate operating profits will depend upon the
nature and extent of any future developments, acquisitions, and conversions
of restaurants; the Company's capital resources; the success of its
franchising of Black-eyed Pea restaurants; 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."
RISKS ASSOCIATED WITH BUSINESS STRATEGY
The Company intends to pursue a strategy of growth primarily through the
development of new Denny's and Black-eyed Pea restaurants, the acquisition of
existing Denny's restaurants, the franchising of additional Black-eyed Pea
restaurants, the acquisition and conversion to the Denny's or Black-eyed Pea
concepts of restaurants operating under other restaurant concepts, the
conversion of certain existing restaurants to the Denny's or Black-eyed Pea
concepts, 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 restaurants or acquiring existing restaurants on
acceptable terms and conditions,
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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 that any restaurants that it develops,
acquires, or converts will operate profitably. The execution of the Company's
strategy will require the availability of substantial funds. These funds
historically have been provided by sale-leaseback financing arrangements, and
the Company currently has in place commitments for approximately $20.0 million
of sale-leaseback financing through 1997. There can be no assurance, however,
that adequate financing will continue to be available on terms acceptable to the
Company. 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, and conversions 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 any
required consents from Denny's, Inc. or the Company's lenders for such
developments, 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 expand the number
of its restaurants either through increasing the number of its Denny's and BEP
restaurants or expanding its operations to include one or more additional
restaurant concepts, 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. Although the Company has entered into a letter of intent to
acquire 13 Good Eats restaurants, there can be no assurance that the Company
will be able to consummate that acquisition or any other acquisitions that it
may consider in the future.
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
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- - Unit Economics" and "Business - Black-eyed Pea 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 $39.8 million, subordinated notes of $30.1 million, obligations under capital
leases aggregating $24.2 million, and a working capital deficit of $33.0 million
as of January 1, 1997.
The Company may seek additional equity or debt financing in the future to
provide funds to develop, acquire, convert, and re-image 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 12% Subordinated Notes due 2002 in the principal amount of
$15,000,000 (the "BEP Purchase Note") and to redeem the related warrants (the
"BEP Warrants"), each of which were issued to the seller of BEP, prior to the
date on which the BEP Warrants become exercisable on October 1, 1997, and to
retire its Series B 13% Subordinated Notes due 2003 in the principal amount of
$18,250,000 (the "Series B Notes") prior to the date on which the related Series
B Warrants become exercisable on March 29, 1999. 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 develop or acquire new restaurants, to convert
existing restaurants to the Denny's or Black-eyed Pea concepts, or to
otherwise expand its restaurant operations; that the Company will be able to
refinance, restructure, or satisfy its obligations as they become due; or that
the Company will be able to retire its BEP Purchase Note and Series B Notes
before the related BEP Warrants and 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.
RELIANCE ON DENNY'S, INC.
The Company currently operates 188 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 Denny's, Inc. and other Denny's 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. In this
regard, Flagstar Companies, Inc., which owns Denny's, Inc., has been
experiencing financial difficulties and recently announced that it has reached
an agreement in principle with holders of certain of its outstanding
indebtedness on a financial restructuring plan. Any financial reversals or
illiquidity on the part of Flagstar could have a material adverse effect on
Denny's, Inc. 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.
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INABILITY TO DEVELOP OR CONVERT RESTAURANTS
The Company intends to develop new Denny's and Black-eyed Pea restaurants
and to convert to the Denny's concept certain restaurants that it currently owns
or that it may acquire in the future. See Item 1, "Business - Strategy" and
"Business - Expansion of Operations." The Company's ability to develop new
Denny's and Black-eyed Pea restaurants will depend upon numerous factors,
particularly the Company's ability to identify suitable sites, obtain adequate
financing on acceptable terms, and other factors over which the Company may have
little or no control. 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
Denny's or Black-eyed Pea restaurants on such sites on terms and conditions it
considers favorable in order to meet its growth objectives or to satisfy the
requirements of the Development Agreement described below.
The Company and Denny's, Inc. currently are parties to the Development
Agreement that gives the Company the exclusive right to develop and open a total
of 40 Denny's restaurants in specified locations during the period ending
December 31, 1997. See Item 1, "Business - Denny's Restaurants - Development
Agreement." The acquisition of existing Denny's restaurants or the conversion of
other restaurants to the Denny's concept do not constitute the opening of new
Denny's restaurants under the Development Agreement. At the request of the
Company, Denny's, Inc. from time to time has agreed to amend the terms of the
Development Agreement so as to extend the time in which the Company is required
to develop new Denny's restaurants. 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 within the time periods
required. The Company does not currently anticipate that it will develop the
number of restaurants required to be developed pursuant to the Development
Agreement by the end of 1997 and has requested an extension of the time in which
it will be required to develop those restaurants. There can be no assurance,
however, that Denny's, Inc. will extend the development schedules as a result of
this request or in the future in the event that the Company experiences any
difficulty in satisfying such schedules for any reason, including a shortage of
capital. In the event that the Company fails to timely comply with the schedule
for developing Denny's 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 Denny's restaurants in
the locations specified in that agreement. The Company will, however, continue
to be able to develop additional Denny's restaurants on a non-exclusive basis
upon termination or expiration of the Development Agreement.
The Company's ability to convert additional restaurants to the Denny's
concept will depend upon a number of factors, including the continued
availability of adequate financing on acceptable terms and the Company's ability
to identify and acquire existing restaurants that are suitable for conversion to
the Denny's concept. An agreement with Denny's Inc. requires the Company to
convert a total of 25 Kettle's restaurants to the Denny's concept by September
1997. As of March 21, 1997, the Company had converted 15 of the 25 Kettle
restaurants it is required to convert to the Denny's concept and was in the
process of converting another five Kettle restaurants to the Denny's concept.
There can be no assurance that the Company will be able to convert its existing
non-Denny's, non-Black-eyed Pea restaurants in a timely manner or to acquire and
convert additional restaurants in the future in a manner that will enable it to
meet its expansion objectives.
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. The Denny's Franchise Agreements also 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. 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
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restaurant format. 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 - Denny's Restaurants - 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.
Pursuant to an agreement between the Company and Denny's, Inc., in the
event that the Company is in default under the terms of its credit facility with
Banque Paribas and the Company's other senior lenders, Denny's, Inc. will have
the right to terminate substantially all of the Denny's Franchise Agreements.
The cancellation of the Denny's Franchise Agreements as a result of a default by
the Company under its credit facility would have a material adverse effect on
the Company. The Denny's Franchise Agreements also 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, and William G. Cox, each of whom is an officer and director
of the Company; Jeffrey D. Miller; a former officer and director of the Company;
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 the increases in
applicable minimum wage requirements enacted in 1996); increased costs of food
products; fuel shortages and price increases; competitive factors; the number,
density, and location of competitors; limited alternative 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.
COMPETITION
As part of the nation's largest family-oriented, full-service restaurant
chain, the Company's Denny's restaurants compete primarily with national and
regional restaurant chains, such as International House of Pancakes, Big Boy,
Shoney's, Friendly's, and Perkins. The Company's Black-eyed Pea restaurants
compete in the casual and mid-scale dining segment and the family dining segment
with national and regional restaurant chains such as Applebee's and Chili's.
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
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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 the Company (and Denny's, Inc. in the case of the Company's
Denny's restaurants) 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 35.4%
of the Company's outstanding Common Stock. In addition, BancBoston, a former
shareholder of DRC, currently owns approximately 15.8% 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 Chairman of the Board, President, and Chief Executive
Officer of the Company, and William J. Howard, Executive Vice President and a
director of the Company, currently hold an aggregate of $16,794,000 in principal
amount of the Company's 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 B Notes. In addition, the 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 B Notes will waive any default under the notes. A
default not waived by a majority of the holders of the 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 Jack
M. Lloyd, the Company's Chairman of the Board, President, and Chief Executive
Officer, and William G. Cox, the Company's Chief Operating Officer. Although the
Company has employment agreements with Messrs. Lloyd and Cox expiring in
December 1997 and May 1999, respectively, the loss of the services of either of
them could materially and adversely affect the Company. See "Management -
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 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 those 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 (such as the increase
enacted during 1996), employee benefit costs (including costs associated with
mandated health insurance coverage), or other costs associated with employees
could adversely affect the Company. The
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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. With respect to its franchised Black-eyed
Pea restaurants, the Company is subject to regulation by the Federal Trade
Commission and must comply with certain state laws governing the offer, sale,
and termination of franchises and the refusal to renew franchises.
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 may increase 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 2,169,800 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 or other outstanding employee stock
options. See Item 11, "Executive Compensation - Stock Option Plans." Employee
and director stock options to acquire an aggregate of 1,311,300 shares of Common
Stock currently are outstanding. In addition, warrants and unit purchase options
to acquire 1,283,040 shares of Common Stock currently are outstanding and
warrants to acquire approximately 7.5% of the Company's Common Stock on a fully
diluted basis will become exercisable on October 1, 1997. Series B Warrants to
acquire an additional 477,953 shares of Common Stock will become exercisable on
March 29, 1999 unless the Company repays all of the outstanding Series B Notes
prior to that date. 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, or even
the potential for such sales, could adversely affect prevailing market prices
for the Company's Common Stock and could adversely affect the Company's ability
to raise capital. As of March 21, 1997, there were outstanding 13,409,277 shares
of the Company's Common Stock. Of these shares, approximately 12,375,840 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. The remaining 1,033,437 shares of Common
Stock currently outstanding are "restricted securities," as that term is defined
in Rule 144 under the Securities Act, and may be sold only in compliance with
Rule 144, pursuant to registration under the Securities Act, or pursuant to an
exemption therefrom. Affiliates also are subject to certain of the resale
limitations of Rule 144 as promulgated under the Securities Act. Generally,
under Rule 144, each person who beneficially owns restricted securities with
respect to which at least two years have elapsed since the later of the date the
shares were acquired from the Company or an affiliate of the Company may, every
three months, sell in ordinary brokerage transactions or to market makers an
amount of shares equal to the greater of 1% of the Company's then-outstanding
Common Stock or the average weekly trading volume for the four weeks prior to
the proposed sale of such shares. Recent
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changes to Rule 144, which go into effect in April 1997, will reduce the
two-year holding period described above to one year.
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. An aggregate of approximately 3,755,500 shares of
Common Stock that are currently outstanding or that are issuable upon exercise
of certain warrants and unit purchase options have been registered for resale
pursuant to an effective registration statement.
LACK OF DIVIDENDS; RESTRICTIONS ON ABILITY TO PAY DIVIDENDS IN THE FUTURE
The Company has never paid any dividends on its Common Stock and does not
anticipate 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, the note
issued to the sellers of BEP, and the indenture governing its Series B Notes
limit the ability of the Company to pay 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this Report under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Item 1, "Business" concerning future, proposed, and anticipated
activities of the Company, certain trends with respect to the Company's
operating results, capital resources, and liquidity or with respect to the
restaurant industry in general, and other statements contained in this Report
regarding matters that are not historical facts are forward-looking statements,
as such term is defined in the Securities Act. Forward-looking statements, by
their very nature, include risks and uncertainties. Accordingly, actual results
may differ, perhaps materially, from those expressed in or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include those discussed elsewhere under this Item 1, "Special
Considerations."
ITEM 2. PROPERTIES.
The Company leases for a term expiring in September 1998 approximately
18,000 square feet of office space in Scottsdale, Arizona, for use as its
principal corporate offices. The Company also leases for a term expiring in 1999
approximately 3,000 square feet of office space in Dallas, Texas, that it
utilizes for regional sales, facilities, and maintenance operations. The Company
currently believes that these facilities are adequate for its reasonably
anticipated needs.
The Company leases substantially all the land and buildings for its Denny's
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
24
<PAGE> 27
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
exceeds 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 1994, 1995, and 1996.
Annual base rent for each location ranges from approximately $10,000 a year to
approximately $151,000 a year, with the annual average rent approximating
$53,000. The Company's Denny's restaurants generally are located in
single-purpose, one-story, freestanding buildings with a capacity of between 90
and 150 customers. The Company owns most of the furniture, fixtures, and
equipment in its Denny's restaurants, including kitchen equipment, seating and
tables.
The Company also leases substantially all of its Black-eyed Pea restaurant
locations. The Company leases 37 Black-eyed Pea restaurants from FFCA
Acquisition Corporation ("FFCA") as a result of a sale and lease transaction
that provided a portion of the financing for the BEP Acquisition. The sale and
lease transaction with FFCA consisted of the sale to FFCA, for cash in the
amount of $35.75 million, of the real properties for 37 restaurants owned by BEP
or Texas BEP, L.P. ("Texas BEP"), a limited partnership in which BEP is the
general partner and in which a wholly owned subsidiary of BEP is the limited
partner. Concurrently with the sale of the properties to FFCA, FFCA leased the
properties to the Company and the Company subleased the properties to BEP and
Texas BEP. Each of the leases provides for a term of 20 years and includes
renewal options for two terms of five years each. The leases provide for an
initial annual rent of 10.5% of FFCA's investment and additional rental payments
if restaurant sales volume exceeds specified amounts. In addition, the leases
require the Company to pay real estate taxes, insurance premiums, maintenance
costs, and certain other of the landlord's operating costs. The terms of the
subleases between the Company and BEP and Texas BEP are substantially identical
to the terms set forth in the leases between the Company and FFCA. Most of the
other Black-eyed Pea restaurant leases provide for minimum annual rent and
additional rental payments if sales volume exceeds specified amounts. Generally,
the Company is required to pay the cost of insurance, taxes, and certain other
items under these leases. Typically, these leases provide for an initial term of
10 to 20 years with one or more renewal terms.
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.
25
<PAGE> 28
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 (beginning October 18, 1994)....... $ 5.125 $ 3.50
1995
First Quarter .................................... $ 4.125 $ 2.625
Second Quarter ................................... 4.75 3.125
Third Quarter .................................... 5.25 4.00
Fourth Quarter ................................... 6.00 4.00
1996
First Quarter .................................... $ 5.625 $ 3.94
Second Quarter ................................... 5.69 3.00
Third Quarter .................................... 5.50 3.50
Fourth Quarter ................................... 5.125 3.125
1997
First Quarter (through March 21, 1997)............ $ 3.625 $ 3.00
</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 and other outstanding
debt obligations.
As of March 21, 1997, there were approximately 125 holders of record of
the Company's Common Stock. On March 21, 1997, the closing sales price of the
Company's Common Stock on the AMEX was $3.00 per share.
26
<PAGE> 29
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 January 1,
1997 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, 1993 are derived from DRC's historical financial
statements, which are not included elsewhere herein. 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. 31, DEC. 30, DEC. 28, DEC. 27, JAN. 1,
1992 1993 1994 1995 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Restaurant sales .......................... $ 27,712 $ 32,584 $ 47,323 $ 74,683 $ 241,480
Restaurant operating income ............... 2,671 3,147 4,539 6,643 22,137
Administrative expenses ................... 1,867 2,050 2,619 3,380 10,303
Operating income (loss) ................... 930 1,328 1,320 3,263 11,834
Interest expense .......................... (449) (736) (1,301) (2,467) (9,605)
Net income (loss) ......................... (22) 140 (341) 200 1,118
OTHER DATA:
EBITDA(2) ................................. $ 1,923 $ 2,656 $ 2,821 $ 6,722 $ 18,834
Cash flows provided by operating activities 1,633 2,493 2,410 6,305 9,664
Cash flows (used in) investing activities . (1,988) (1,002) (9,667) (8,736) (9,393)
Cash flows provided by (used in)
financing activities ................... (118) (1,168) 7,092 2,273 1,157
Capital expenditures ...................... 2,346 1,574 9,667 8,736 11,584
Depreciation and amortization ............. 993 1,328 1,501 2,936 7,000
Ratio of earnings to fixed charges(3) ..... 1.11 1.15 .81 1.10 1.14
Number of restaurants, end of period ...... 31 37 70 102 307
BALANCE SHEET DATA:
Working capital (deficit) ................. $ (3,213) $ (3,568) $ (6,107) $ (9,406) $ (33,028)
Total assets .............................. 9,907 14,529 35,028 53,785 179,189
Long-term debt, less current portion ...... 475 2,135 7,552 10,371 69,903
Obligations under capital leases,
less current obligations ................ 2,808 4,307 7,151 19,881 24,229
Redeemable convertible preferred stock .... -- -- 7,397 7,501 --
Shareholders' equity (deficit) ............ (1,703) (1,218) 957 564 22,128
</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
1994 $(550,000).
27
<PAGE> 30
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. On July 3, 1996, the Company acquired all of the
issued and outstanding common stock of BEP. The effective accounting date of the
BEP Acquisition was June 24, 1996.
The results of operations for 1996 were materially impacted by the Merger
and the BEP Acquisition. During fiscal 1996, revenue and related expenses
increased significantly over prior years primarily as a result of these
acquisitions. As a result, fiscal 1996 operating results are not comparable to
those of fiscal 1994 and fiscal 1995. The following discussion and analysis
should be read in conjunction with the information set forth under Item 6,
"Selected Financial Data" and the consolidated financial statements and notes
thereto included elsewhere herein.
GENERAL
As set forth below, the Company's Denny's same-store sales declined while
restaurant operating income and operating income increased by $15.5 million and
$8.6 million, respectively. The increase in restaurant operating income is
attributable to the increased number of restaurants owned, while the increase in
operating income is primarily a result of the increase in restaurant operating
income without a proportionate increase in administrative expenses. The
Company's strategy is to pursue acquisitions that can be incrementally
profitable as a result of the consolidation of administrative functions.
The development of new restaurants also increases restaurant operating
income without a significant increase in administrative expenses. As noted
below, operating margins for the non-branded restaurants are significantly lower
than the margins arising from the Company's Denny's and Black-eyed Pea
restaurants. The Company therefore intends to convert certain of its remaining
non-branded restaurants to the Denny's concept and to sell the remainder of its
non-branded restaurants as soon as practicable.
As of January 1, 1997, the Company operated 182 Denny's restaurants in 31
states. The Company's Denny's restaurants that were open for a 12-month period
had average restaurant sales of $911,000 in fiscal 1996 as compared with
$907,000 in fiscal 1995. Denny's restaurants that were developed by the Company
had average sales of approximately $1.3 million in fiscal 1996. In January 1996,
the Company and Denny's, Inc. adopted the "Breakaway Breakfast" value price
strategy, which offered five breakfast items for $1.99 or less. The promotional
advertising associated with the Breakaway Breakfast was directed primarily in
"A" media markets, while the majority of the Company's Denny's restaurants are
located in non-A markets. As a result, the Company's operating results under
this value pricing strategy reflected lower guest check averages without a
corresponding increase in guest counts. Comparable restaurant sales declined
4.5% through January 1, 1997 and margins were adversely impacted, primarily as a
result of increased labor costs. However, comparable restaurant sales for the
Company's current Denny's restaurants, which include restaurants converted from
non-branded restaurants, increased 0.5% over
28
<PAGE> 31
the prior year. In July 1996 and September 1996, the Company and Denny's, Inc.,
respectively, withdrew from the Breakaway Breakfast promotional specials and
increased the price of the Grand Slam breakfast special to $2.99 during certain
periods of the day. As a result, the average guest check increased from $4.80
during the 27-week period ended July 3, 1996 to $5.18 for the period from July
4, 1996 through January 1, 1997. However, guest counts for the period from July
4, 1996 through January 1, 1997 have decreased approximately 10% as compared
with the comparable period in the prior year. The Company believes that the
increase in the pricing tiers within the value pricing strategy will result in
improved long-term operating results.
The Company currently operates 93 Black-eyed Pea restaurants in 13 states
and franchises 29 Black-eyed Pea restaurants in 6 states. The Company operates
64 Black-eyed Pea restaurants in Texas and Oklahoma, which the Company considers
to be its core market for Black-eyed Pea restaurants. The average sales for all
Black-eyed Pea restaurants was $1.5 million and $1.4 million in fiscal 1995 and
1996, respectively, as compared with average sales at restaurants in the core
market of $1.64 million and $1.59 million during the same periods. Through
January 1, 1997, comparable same-store sales decreased 0.8% for all of the
Company's Black-eyed Pea restaurants, while comparable same-store sales
increased by 0.2% for Black-eyed Pea restaurants in the core market. The guest
check average at the Company's Black-eyed Pea restaurants is $8.10. Alcohol and
carry-out sales account for approximately 2.3% and 10.1% respectively, of total
sales at the Company's Black-eyed Pea restaurants.
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. 28, DEC. 27, JAN. 1,
1994 1995 1997
------ ------ ------
<S> <C> <C> <C>
Restaurant sales:
Denny's restaurants ................. 100.0% 94.2% 62.7%
Black-eyed Pea restaurants .......... -- -- 28.6
Other restaurants ................... -- 5.8% 8.7
------ ------ ------
Total restaurant sales ............ 100.0% 100.0% 100.0%
Restaurant operating expenses:
Cost of food and beverage ........... 27.0 27.2 27.3
Payroll and payroll related costs ... 33.8 33.5 34.3
Charge for impaired assets .......... -- 0.7 --
Depreciation and amortization ....... 3.2 3.9 2.9
Other restaurant operating costs .... 26.4 25.7 26.3
------ ------ ------
Total restaurant operating
expenses ........................ 90.4 91.0 90.8
------ ------ ------
Restaurant operating income ........... 9.6 9.0 9.2
Administrative expenses ............... 5.5 4.5 4.3
Other items ........................... 1.3 -- --
------ ------ ------
Operating income ...................... 2.8 4.5 4.9
Other income (expense) ................ (0.1) -- --
Interest expense ...................... (2.7) (3.3) (4.0)
------ ------ ------
Income before minority interest
in joint ventures, income
taxes and extraordinary item ........ -- 1.2 0.9
Minority interest in joint ventures ... 1.1 0.4 (0.1)
------ ------ ------
Income before income taxes and
extraordinary item .................. (1.1) 0.8 1.0
Income tax expense (benefit) .......... (0.4) 0.5 0.4
------ ------ ------
Income (loss) before
extraordinary item .................. (0.7) 0.3 0.6
Extraordinary item - loss on
extinguishment of debt .............. -- -- (0.2)
------ ------ ------
Net income (loss) ..................... (0.7)% 0.3% 0.4%
====== ====== ======
</TABLE>
29
<PAGE> 32
FISCAL 1996 COMPARED WITH FISCAL 1995
Restaurant Sales. Restaurant sales increased $166.8 million, or 223.3%, to
$241.5 million for fiscal 1996 as compared with restaurant sales of $74.7
million for fiscal 1995. This increase was primarily attributable to restaurant
sales associated with restaurants acquired as a result of the Merger and the BEP
Acquisition during 1996.
Cost of Food and Beverage. Cost of food and beverage increased to 27.3% of
restaurant sales for fiscal 1996 as compared with 27.2% of restaurant sales for
fiscal 1995, primarily due to higher food costs at the Black-eyed Pea
restaurants and the non-branded restaurants. Excluding the food and beverage
costs at the non-branded restaurants but including food and beverage costs at
Black-eyed Pea restaurants, food and beverage costs for fiscal 1996 would have
been 27.0% of restaurant sales, a decrease of 0.2% from fiscal 1995.
Payroll and Payroll Related Costs. Payroll and payroll related costs were
34.3% of restaurant sales for fiscal 1996 as compared with 33.5% of restaurant
sales for fiscal 1995. This increase was primarily attributable to the
non-branded restaurants, where payroll and payroll related costs were 38.0% of
restaurant sales. In addition, the payroll and payroll related costs associated
with the AFR Denny's restaurants were 35.7% of restaurant sales.
Depreciation and Amortization. Depreciation and amortization of restaurant
equipment and leasehold improvements, intangible assets, and pre-opening costs
totaled $7.0 million, or 2.9% of restaurant sales, for fiscal 1996 as compared
with $2.9 million, or 3.9% of restaurant sales, for fiscal 1995. The increase of
approximately $4.1 million is attributable to the amortization of the capital
leases associated with new restaurants, the amortization of intangible assets
associated with the 1996 acquisitions, and the amortization of pre-opening
costs.
Other Restaurant Operating Costs. Other restaurant operating costs were
26.3% of restaurant sales for fiscal 1996 as compared with 25.7% of restaurant
sales for fiscal 1995. The increase is primarily attributable to the operating
costs of 36.2% of restaurant sales at the non-branded restaurants, which include
no franchise costs. If the non-branded restaurant results were excluded, other
operating costs for fiscal 1996 would have been 25.3% of restaurant sales, a
decrease of 0.4% from fiscal 1995.
Restaurant Operating Income. Restaurant operating income increased $8.6
million to $11.8 million for fiscal 1996 as compared with $3.3 million for
fiscal 1995. This increase was principally the result of increased restaurant
sales and the factors described above.
Administrative Expenses. Administrative expenses decreased to 4.3% of
restaurant sales for fiscal 1996 as compared with 4.5% of restaurant sales for
fiscal 1995. This decrease was primarily the result of increased sales volume
without proportionate cost increases. Included in administrative expenses in
fiscal 1996 are non-recurring Merger-related costs of approximately $1.1
million.
Interest Expense. Interest expense increased to $9.6 million, or 4.0% of
restaurant sales, for fiscal 1996 as compared with $2.5 million, or 3.3% of
restaurant sales for fiscal 1995. This increase is attributable to the increased
level of long-term debt associated with the 1996 acquisitions and the
capitalized lease obligations associated with new store development.
Income Taxes. The income tax provision was $870,000 for fiscal 1996 as
compared with the income tax provision of $305,000 for fiscal 1995. Due to
certain tax credits, the tax rate decreased from 60.3% to 35.0% for fiscal 1995
and 1996, respectively.
30
<PAGE> 33
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 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.
31
<PAGE> 34
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 $6.1 million at
December 28, 1994, $9.4 million at December 27, 1995, and $33.0 million at
January 1, 1997. The Company believes that its working capital deficit is
consistent with the working capital position of restaurant operators of similar
size. The Company anticipates that it will continue to operate with a working
capital deficit, but that the deficit will be reduced from current levels as the
costs incurred as a result of the Merger are paid.
The Company historically has satisfied its capital requirements through
credit facilities and the sale and leaseback of developed and acquired
restaurants or restaurants converted to the Denny's concept. The Company
requires capital principally for the development of new restaurants and to fund
the acquisition and conversion of existing restaurants. Expenditures for
property and equipment totaled approximately $9.7 million, $8.7 million, and
$11.8 million for fiscal 1994, fiscal 1995, and fiscal 1996, respectively. As
described below, the Company currently has commitments for approximately $20.0
million of sale-leaseback financing through 1997, which the Company believes
will be adequate to meet its financing needs during that period.
Net cash from operating activities increased from $2.4 million in fiscal
1994 to $7.5 million in fiscal 1995 and $9.7 million in fiscal 1996. These
increases are attributable to increases in net income in fiscal 1995 and fiscal
1996 and the increase in depreciation and amortization arising from the various
acquisitions in those years.
Net cash used in investing activities decreased from $9.7 million in fiscal
1994 to $8.7 million in fiscal 1995 and increased to $9.4 million in fiscal
1996. These changes are primarily attributable to the acquisition of property
and equipment or the purchase of restaurants. In addition, during fiscal 1996
the Company disposed of approximately $2.4 million of various assets acquired
in the BEP Acquisition.
Net cash provided by financing activities decreased from $7.1 million in
fiscal 1994 to $2.3 million in fiscal 1995 and $1.1 million in fiscal 1996. The
fiscal 1994 amount was greater than subsequent years as a result of the issuance
of preferred stock in fiscal 1994. Remaining cash provided by financing
activities arose primarily from the proceeds of borrowing activities, net of the
principal reductions in long-term debt.
On March 29, 1996, the Company completed the Merger by issuing an aggregate
of 6,937,500 shares of Common Stock, $6.0 million of Series A 13% Subordinated
Notes due 2003 (the "Series A Notes"), $18.25 million of Series B Notes, and
Series A Warrants and Series B Warrants to acquire an aggregate of 660,000
shares of Common Stock of DRC. Although no cash was required for this
acquisition of restaurant properties, the Company entered into a new credit
facility to fund acquisition costs and the significant past-due payables of AFR
existing at the time of the Merger. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Credit Facility." As
described below, the Company repaid the Series A Notes in connection with the
BEP Acquisition. The Series B Notes bear interest at the rate of 13% per annum,
payable semi-annually every March 29 and September 29 until March 29, 2003, at
which time all principal and any unpaid and accrued interest will be due. The
payment of the principal of and interest on and all premiums, fees, costs,
expenses, and liabilities arising under and in connection with the Series B
Notes is subordinated and subject in right of payment to the prior payment in
full of all senior indebtedness of the Company, including the Company's $65.0
million credit facility and the promissory note issued to the seller of BEP.
Subject to certain limitations, the Company, at its option, may redeem the
Series B Notes in whole or in part at any time prior to maturity. Upon the
occurrence of certain equity issuances, the Company will be required to offer to
redeem the maximum principal amount of Series B Notes that may be redeemed with
a specified portion of the proceeds of such equity issuance, at the then-current
redemption price plus accrued and unpaid interest to the redemption date.
On July 3, 1996, the Company completed the BEP Acquisition. The purchase
price for BEP consisted of (i) cash of approximately $50.0 million arising from
the sale and leaseback of certain property and equipment
32
<PAGE> 35
acquired in the BEP Acquisition, and (ii) the BEP Purchase Note in the
principal amount of $15.0 million issued to the seller. See Item 2,
"Properties" and Item 13, "Certain Relationships and Related Transactions."
Also in connection with the BEP Acquisition, on July 3, 1996, the Company
repaid all of the $6.0 million principal amount outstanding on its Series A
Notes plus accrued and unpaid interest on the Series A Notes as of July 3,
1996. The Company repaid the Series A Notes by utilizing cash acquired in
connection with the BEP Acquisition, borrowings under the credit facility
described below, and by issuing 250,000 shares of Common Stock to the holder of
the Series A Notes. See Item 13, "Certain Relationships and Related
Transactions."
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 its credit facility. The
BEP Purchase Note bears interest at 12% per annum. Interest on the BEP Purchase
Note will accrue from July 3, 1996 to March 31, 1997, at which time any accrued
but unpaid interest will be added to the outstanding 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.
Subject to certain limitations, the Company, at its option, may repay all or any
portion of the amount outstanding under the BEP Purchase Note at any time
without premium or penalty. The BEP Purchase Note also requires the Company to
use its best efforts to repay all or a portion of the amount outstanding under
such note on or before March 31, 1997 and June 30, 1997, respectively, by making
certain borrowings as permitted under the credit facility or by utilizing cash
or other investments in excess of working capital needs as permitted under the
BEP Purchase Note and the Company's credit facility. The BEP Purchase Note
requires the Company to repay all or a portion of the amount outstanding under
such note in the event of certain "Equity Issuances" or a "Change of Control,"
as those terms are defined in the BEP Purchase Note.
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. As of
January 1, 1997, the Company operated 20 non-branded restaurants. The Company
intends to convert six of these restaurants to the Denny's concept during 1997
and to sell or close the remaining restaurants. In addition, as of January 1,
1997, the Company had 12 restaurants that were closed for conversion to the
Denny's concept. As of March 21, 1997, six of these restaurants have been
reopened under the Denny's concept. The Company anticipates that the six other
restaurants closed as of January 1, 1997 will be converted to the Denny's
concept and reopened during 1997. The Company estimates that its costs to
develop and open new Denny's restaurants, excluding real estate and building
costs, will be approximately $290,000 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 $480,000 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 1997 in order to finance development of new restaurants and 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.
The Company plans to further increase its working capital as necessary
through equity or debt financings in the public or private securities markets,
additional sale-leaseback transactions, the disposition of underperforming
restaurants, and additional credit facilities. The Company currently intends to
utilize the Delayed Term Loan described below to repay the BEP Purchase Note
prior to September 30, 1997 in order to enable it to redeem the BEP Warrants
issued in connection with the BEP Purchase Note prior to September 30, 1997,
which is the last date
33
<PAGE> 36
on which they may be redeemed. The Company also intends to use its best efforts
to redeem all of the Series B Notes prior to the date on which the Series B
Warrants become exercisable. The Company currently anticipates that it will be
required to obtain the funds needed to repay the Series B Notes through the sale
of equity securities or by increasing its debt financing. There can be no
assurance that financing for any of these purposes will be available or will be
available on satisfactory terms.
CREDIT FACILITY
In connection with the Merger and the BEP Acquisition, the Company entered
into a $65.0 million credit facility with Banque Paribas, as agent, and the
Company's other senior lenders (the "Credit Facility"). The Credit 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 Credit 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 Credit 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 Credit Facility in the
event of certain asset sales, equity issuances, excess cash flows, and under
certain other circumstances.
The Credit 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 expenditures.
The Company paid fees for loan origination and amendment, investment
banking services, legal services, prepayment of existing debt, and other fees of
approximately $4.7 million in connection with the negotiation and execution of
the Credit Facility at the time of the Merger and the negotiation and execution
of amendments to the Credit Facility at the time of the BEP Acquisition. During
the term of the Credit 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 Credit Facility. In addition, the Company issued to
Banque Paribas six-year warrants to acquire an aggregate of 738,028 shares of
the Company's Common Stock.
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 Credit Facility. The Company is required to
repay the Term Loan in quarterly payments of principal and interest.
Revolver
The Credit Facility includes a $15.0 million Revolver that the Company may
utilize to finance working capital needs, to repay the Term Loan, to make
capital expenditures, and to support letters of credit. As of January 1, 1997,
the Company had approximately $2.8 million available for borrowings 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 or to repay the BEP
Purchase Note and Series B Notes during the period ending on December 31, 1997.
The Company
34
<PAGE> 37
currently is not in compliance with certain of the financial covenants required
to enable it to make draws under the Delayed Term Loan.
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.
35
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements, the report thereon, the
notes thereto, and the supplemental data commencing at page F-1 of this Report,
which financial statements, report, notes and data are incorporated by
reference.
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.
36
<PAGE> 39
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>
Jack M. Lloyd................ 47 Chairman of the Board, President, and Chief
Executive Officer
William J. Howard............ 52 Executive Vice President, Secretary, and Director
William G. Cox............... 48 Chief Operating Officer and Director
Todd S. Brown................ 40 Vice President, Chief Financial Officer,
Treasurer, and Director
Michael Larsen............... 42 Vice President
John M. Holliman, III........ 43 Director
C. Alan MacDonald............ 63 Director
Fred W. Martin............... 66 Director
Philip B. Smith.............. 60 Director
</TABLE>
Jack M. Lloyd has served as Chairman of the Board of the Company since
July 9, 1996 and as President, Chief Executive Officer, and a director of the
Company since March 29, 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. 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 currently serves as a director of Action Performance Companies,
Inc., a publicly held company, and Masterview Window Company, a privately held
company.
William J. Howard has served as Executive Vice President of the Company
since July 9, 1996 and as Secretary and a director of the Company since March
29, 1996. Mr. Howard served as a Vice President of the Company from March 29,
1996 until July 3, 1996. Mr. Howard served as President of DRC from November
1994 until March 1996 and as a director of DRC from 1990 until March 1996. Mr.
Howard served as Vice President of DRC from 1990 until November 1994 and 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.
William G. Cox has served as Chief Operating Officer and a director of the
Company since March 29, 1996. Mr. Cox served as Vice President - 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.
37
<PAGE> 40
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.
Todd S. Brown has served as Vice President, Chief Financial Officer,
Treasurer, and a director of the Company since March 29, 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.
Michael Larsen has served as a Vice President of the Company since March
29, 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 29, 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 Valley Ventures, 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., and
Express America Holdings Corp., each of which are publicly held corporations,
and several other privately held corporations. 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
several privately held corporations.
Fred W. Martin has served as a director of the Company since March 29,
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. from 1979 until 1985.
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 ChatCom, Inc., Digital Video
Systems, KLS Resources, Inc., Movie Gallery, Inc., and StarPress, Inc., which
are publicly held companies, as well as several privately held companies.
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<PAGE> 41
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. 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, a 1992 Stock Option Plan Committee, and a 1995
Directors' Stock Option Plan Committee. Messrs. Holliman and Smith constitute
the Audit Committee; Messrs. Holliman, MacDonald, and Martin constitute the
Compensation and 1992 Stock Option Plan Committees; and Messrs. Lloyd and Howard
constitute the 1995 Directors' Stock Option Plan Committee.
KEY EMPLOYEES
The Company has identified Robert L. Hogan, Paul J. Bier, and Robert J.
Gentz as key employees.
Robert L. Hogan has served as a Vice President - Marketing of the Company
since August 1996. Mr. Hogan is responsible for the marketing, research and
product development efforts for all of the Company's Denny's and Black-eyed Pea
restaurants. Prior to joining the Company, Mr. Hogan served as Vice President of
Marketing for Jack-In-The-Box Restaurants from 1979 to 1983; was employed as
Vice President of Marketing with SAGA Corp. from 1984 to 1986; operated his own
multi-unit restaurant company in California from 1986 to 1994, and was employed
as Vice President of Marketing with Shoney's Inc. from 1995 to 1996.
Paul J. Bier has served as the Company's Vice President - Operations for
the Company's Denny's restaurants since October 1996. Mr. Bier's 25 years of
food service experience includes employment with Denny's, Inc. from 1974 to
1996. Mr. Bier most recently served as Division Vice President for Denny's, Inc.
with responsibility for over 500 company-owned and franchised restaurants.
Robert J. Gentz has served as Senior Vice President - Franchising and
Development of the Company since October 1996. Mr. Gentz oversees the
franchising and development of Black-eyed Pea restaurants. Prior to joining the
Company, Mr. Gentz spent nine years as Executive Vice President for CNL Group,
Inc., a diversified investment company that specializes in providing financing
to the restaurant industry. Mr. Gentz also served as Director of Development for
Wendy's International, Inc. from 1982 through 1988, where he was responsible for
company-owned and franchised restaurant development.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Exchange Act") requires the Company's directors and officers, and persons who
own more than 10 percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors, and
greater than 10 percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based solely upon
the Company's review of the copies of such forms received by it during the
fiscal year ended January 1, 1997, and written representations that no other
reports were required, the Company believes that each person who, at any time
during such fiscal year, was a director, officer, or beneficial owner of more
than 10 percent of the Company's Common Stock complied with all Section 16(a)
filing requirements during such fiscal year except that (i) Jack M. Lloyd filed
a late report on Form 4 covering two transactions; (ii) Todd S. Brown filed two
late reports on Form 4 covering two transactions; (iii) John M. Holliman, III
filed a late report on Form 4 covering two transactions, and (iv) Haig V.
Antranikian, a former officer and director of the Company, filed two late
reports on Form 4 covering a total of ten transactions.
39
<PAGE> 42
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation of
each of the Company's Chief Executive Officers and the four other most highly
compensated executive officers whose cash salary and bonuses exceeded $100,000
during the fiscal year ended January 1, 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------------------------------ ------
OTHER ANNUAL SECURITIES
FISCAL SALARY COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR $(1) BONUS($) ($) OPTIONS (#) COMPENSATION($)(2)
--------------------------- ----- ------ -------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Jack M. Lloyd, Chairman of the 1996 $375,200 -- -- -- --
Board, President, and Chief 1995 312,000 -- -- -- --
Executive Officer(3) 1994 312,000 -- -- -- --
Jeffrey D. Miller, Chairman of the 1996 $129,227 -- $ 0 -- $115,385
Board, President, and Chief 1995 240,863 -- 23,750 -- --
Executive Officer(4) 1994 193,808 -- 25,847 -- --
William J. Howard, Executive Vice 1996 $187,600 -- -- -- --
President and Secretary(5) 1995 156,000 -- -- -- --
1994 156,000 -- -- -- --
William A. Cox, Chief Operating 1996 $221,795(6) -- -- 300,000(7) $ 15,921
Officer
Todd S. Brown, Vice President, 1996 $115,700 $ 75,000 -- 124,800(9) --
Chief Financial Officer, and 1995 91,000 -- -- -- --
Treasurer(5) 1994 27,300(8) 9,000 -- -- --
Michael Larsen, Vice President(5) 1996 $135,470 -- -- 100,000(9) --
1995 150,020 -- -- -- --
1994 150,020 -- -- -- --
</TABLE>
- ------------------
(1) Each of the Named Executive Officers received certain perquisites, the
value of which did not exceed 10% of their salary during fiscal 1996.
(2) Amounts paid in fiscal 1996 represent (i) severance payments to Mr. Miller
in the amount of $115,385 and (ii) reimbursement of relocation expenses to
Mr. Cox in the amount of $15,921.
(3) Mr. Lloyd became the Company's President and Chief Executive Officer upon
consummation of the Merger on March 29, 1996, and became the Company's
Chairman of the Board on July 9, 1996. Amounts shown for periods prior to
March 29, 1996 represent payments to Mr. Lloyd for services as an executive
officer of DRC prior to the Merger. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Basis of
Presentation."
(4) Mr. Miller served as the President and Chief Executive Officer of the
Company or its predecessors from April 1986 until March 1996. Mr. Miller
also served as Chairman of the Board of the Company or its predecessors
from April 1986 until July 1996.
(5) Each of Messrs. Howard, Brown, and Larsen became executive officers of the
Company upon consummation of the Merger on March 29, 1996. Amounts shown
for periods prior to March 29, 1996 represent payments to each such person
for services as an executive officer of DRC prior to the Merger. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Basis of Presentation."
40
<PAGE> 43
(6) Represents amounts accrued or paid beginning on March 29, 1996, the date of
Mr. Cox's employment with the Company.
(7) The exercise price of options to acquire 60,000 shares of Common Stock is
$3.00 per share, which was less than the fair value of the Company's Common
Stock on the date of grant. The exercise price of the remaining options to
acquire 240,000 shares of Common Stock is $4.00 per share, which was the
fair value of the Company's Common Stock on the date of grant.
(8) Represents amounts accrued or paid beginning in September 1994, the date of
Mr. Brown's employment with DRC.
(9) The exercise prices of such options were equal to the fair value of the
Company's Common Stock on the date of grant.
OPTIONS GRANTS
The following table sets forth certain information with respect to stock
options granted to the Named Executive Officers during the fiscal year ended
January 1, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
PERCENTAGE AT ASSUMED ANNUAL
NUMBER OF OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE PRICE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE AT DATE EXPIRATION -----------------------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH)(1) OF GRANT($) DATE 0% 5% 10%
---- ----------- ----------- --------- ----------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack M. Lloyd ....... -- -- -- -- -- -- -- --
Jeffrey D. Miller(3) -- -- -- -- -- -- -- --
William J. Howard ... -- -- -- -- -- -- -- --
William A. Cox ...... 60,000 7.1% $ 3.00 $ 4.00 3/28/06 $ 60,000 $ 210,935 $ 442,498
240,000 28.4% $ 4.00 $ 4.00 3/28/06 $ 0 $ 603,738 $1,529,993
Todd S. Brown ....... 124,800 14.8% $ 4.00 $ 4.00 4/28/06 $ 0 $ 313,944 $ 795,596
Michael Larsen ...... 100,000 11.8% $ 4.00 $ 4.00 4/28/06 $ 0 $ 251,558 $ 637,496
</TABLE>
- ----------
(1) Twenty percent of the options were vested and exercisable on the date of
grant, and the remainder of the options vest and become exercisable in four
equal annual installments beginning on the first anniversary of the date of
grant.
(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.
(3) Mr. Miller served as the President and Chief Executive Officer of the
Company or its predecessors from April 1986 until March 1996. Mr. Miller
also served as Chairman of the Board of the Company or its predecessors
from April 1986 until July 1996.
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<PAGE> 44
OPTION HOLDINGS
The following table sets forth information concerning the number and value
of all options held at January 1, 1997, by the Named Executive Officers.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)(1)
---------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jack M. Lloyd..................... -- -- N/A N/A
Jeffrey D. Miller(2).............. -- -- N/A N/A
William J. Howard................. -- -- N/A N/A
William A. Cox.................... 60,000 240,000 $7,500 $0
Todd S. Brown .................... 24,960 99,840 $0 $0
Michael Larsen.................... 20,000 80,000 $0 $0
</TABLE>
- --------------------
(1) Calculated based upon the closing price of the Company's Common Stock on
December 31, 1996 of $3.125 per share, less the exercise prices of the
options held. Except as indicated, the exercise prices of all options held
by the Named Executive Officers were greater than $3.125 per share on that
date.
(2) Mr. Miller served as the President and Chief Executive Officer of the
Company or its predecessors from April 1986 until March 1996. Mr. Miller
also served as Chairman of the Board of the Company or its predecessors
from April 1986 until July 1996.
EMPLOYMENT AGREEMENTS
General
The Company currently is a party to employment agreements with each of
Jack M. Lloyd, William J. Howard, Todd S. Brown, and William G. Cox. 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. 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.
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, as recently amended, provides for a base
salary of $520,000 per year; the agreement with Mr. Howard, as recently amended,
provides for a base salary of $260,000 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,
42
<PAGE> 45
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.
STOCK OPTION PLANS
1996 Stock Option Plan
On December 10, 1996, the Company's Board of Directors adopted the
Company's 1996 Stock Option Plan (the "1996 Plan"), subject to shareholder
approval of the 1996 Plan prior to December 10, 1997. A total of 500,000 shares
of the Company's Common Stock has been reserved for issuance under the 1996
Plan. The 1996 Plan is intended to promote the interests of the Company by
encouraging key persons associated with the Company to acquire, or otherwise
increase, their proprietary interest in the Company and an increased personal
interest in its continued success and progress. The 1996 Plan provides for the
grant of options to acquire Common Stock of the Company ("Options"), the direct
grant of Common Stock ("Stock Awards"), the grant of stock appreciation rights
("SARs"), and the grant of other cash awards ("Cash Awards") (Stock Awards,
SARs, and Cash Awards are collectively referred to herein as "Awards"). If any
Option or SAR terminates or expires without having been exercised in full, stock
not issued under such Option or SAR will again be available for the purposes of
the 1996 Plan. The 1996 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 March 21, 1997, the Company has not granted any
Options under the 1996 Plan. Upon approval by the Company's shareholders, the
1996 Plan will remain in effect until December 9, 2006.
Options and Awards may be granted pursuant to the 1996 Plan only to persons
("Eligible Persons") who at the time of grant are either (i) key personnel
(including officers and directors) of the Company, or (ii) consultants or
independent contractors who provide valuable services to the Company. Options
granted pursuant to the 1996 Plan may be incentive stock options or
non-qualified stock options. Options that are incentive stock options may be
granted only to key personnel of the Company who are also employees of the
Company. To the extent that granted Options are incentive stock options, the
terms and conditions of those Options must be consistent with the qualification
requirements set forth in the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code").
The Eligible Persons under the 1996 Plan are divided into two groups, and
there is a separate administrator (each a "Plan Administrator") for each group.
One group consists of the executive officers and directors of the Company and
persons who own 10 percent or more of the Company's issued and outstanding
stock. The power to administer the 1996 Plan with respect to those persons is
vested exclusively with the Board of Directors or a committee (the "Senior
Committee") consisting of two or more non-employee directors who are appointed
by the Board of Directors. The power to administer the 1996 Plan with respect to
the remaining Eligible Persons is vested
43
<PAGE> 46
with the Board of Directors of the Company or with a committee of one or more
directors appointed by the Board of Directors. The maximum number of shares of
stock with respect to which Options or Awards may be granted to any employee
during the term of the 1996 Plan may not exceed 50 percent of the shares of
Common Stock covered by the 1996 Plan.
Each Plan Administrator will determine which of the Eligible Persons in its
group will be granted Options and Awards, the amount and timing of the grant of
such Options and Awards, the expiration date, maximum number of shares
purchasable, the exercise prices, and the other provisions of the Options or
Awards at the time of grant. The exercise price of any Option intended to be an
incentive stock option may not be less than 100 percent of the fair market value
of the Common Stock at the time of the grant (110 percent if the Option is
granted to a person who at the time the Option is granted owns stock possessing
more than 10 percent of the total combined voting power of all classes of stock
of the Company). Options may be granted for terms of up to 10 years and will
vest and become exercisable in whole or in one or more installments at such time
as may be determined by the Plan Administrator upon the grant of the Options. To
exercise an Option, the optionholder will be required to deliver to the Company
full payment of the exercise price for the shares as to which the Option is
being exercised. Generally, Options can be exercised by delivery of cash, check,
or shares of Common Stock of the Company.
SARs will entitle the recipient to receive a payment equal to the
appreciation in market value of a stated number of shares of Common Stock from
the price on the date the SAR was granted or became effective to the market
value of the Common Stock on the date the SARs are exercised or surrendered.
Stock Awards will entitle the recipient to receive shares of the Company's
Common Stock directly. Cash Awards will entitle the recipient to receive direct
payments of cash depending on the market value or the appreciation of the Common
Stock or other securities of the Company. The Plan Administrators may determine
such other terms, conditions, or limitations, if any, on any Awards granted
pursuant to the 1996 Plan.
Amended and Restated 1992 Stock Option Plan
A total of 1,000,000 shares of the Company's Common Stock have been
reserved for issuance under the Company's Amended and Restated 1992 Stock Option
Plan (the "1992 Plan"). 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 incentive stock
options or non-qualified options pursuant to the Internal Revenue Code. 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 March 21, 1997, there were outstanding options to acquire a
total of 851,500 shares of Common Stock under the 1992 Plan. 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.
The 1992 Stock Option Plan Committee (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. Incentive
stock options 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 incentive
stock option 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 incentive stock
options 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.
44
<PAGE> 47
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.
1995 Directors Stock Option Plan
A total of 300,000 shares of Common Stock have been reserved for issuance
under the Company's 1995 Directors Stock Option Plan (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.
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. 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 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 and
Smith. Each of Messrs. MacDonald and Smith 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, each of Messrs. McDonald, Smith, Holliman, and
Martin were automatically granted options to purchase 10,000 shares of Common
Stock at an exercise price of $3.94 per share under the 1995 Plan. The 1995 Plan
expires on January 16, 2005.
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 "Management - Stock
Option Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
C. Alan MacDonald, Fred W. Martin, and John M. Holliman, III served as
members of the Compensation Committee of the Board of Directors during fiscal
1996. None of such individuals had any contractual or other relationships with
the Company during fiscal 1996 except as directors.
45
<PAGE> 48
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.
46
<PAGE> 49
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 March 21, 1997 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)
- ---------------------------------------- ------------ ------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Jack M. Lloyd 3,180,504 23.7%
William J. Howard 1,553,752 11.6%
William G. Cox 120,000(3) *
Todd S. Brown 51,720(4) *
Michael Larsen 40,000(5) *
John M. Holliman, III 17,436(6) *
C. Alan MacDonald 37,500(7) *
Fred W. Martin 6,000(8) *
Philip B. Smith 92,500(9) *
All directors and executive officers as a group (9 persons) 5,099,412 37.1%
NON-MANAGEMENT 5% SHAREHOLDERS
BancBoston Ventures, Inc.(10) 2,124,352 15.8%
Jeffrey D. Miller(11) 689,451 5.1%
</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 March 21, 1997 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 March 21, 1997 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 120,000 shares issuable upon the exercise of vested options.
(4) Represents 1,800 shares of Common Stock and 49,920 shares issuable upon the
exercise of vested options.
(5) Represents 40,000 shares issuable upon the exercise of vested options.
(6) Represents 9,436 shares of Common Stock and 5,000 shares issuable upon
exercise of vested options held by Mr. Holliman and 3,000 shares of Common
Stock beneficially owned by Mr. Holliman as trustee under a trust for the
benefit of his mother.
(7) Represents 37,500 shares issuable upon the exercise of vested options.
(8) Represents 1,000 shares of Common Stock held by Mr. Martin and his spouse
and 5,000 shares issuable upon the exercise of vested options.
(9) Represents 92,500 shares issuable upon the exercise of vested options.
(10) The address of BancBoston Ventures, Inc. is c/o BancBoston Capital, Inc.,
100 Federal Street, Boston, Massachusetts 02110.
(11) Mr. Miller is a former officer and director of the Company. Mr. Miller's
address is 13845 East Laurel Lane, Scottsdale, Arizona 85259.
47
<PAGE> 50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Each of Jeffrey D. Miller and Haig V. Antranikian, former officers and
directors 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 associated with 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, a former officer and director of the Company, and his
wife have personally guaranteed repayment of certain of the Company's
obligations, including certain 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.
During 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 (Chairman of the Board and Chief Executive Officer of DRC at that
time) and William J. Howard (President and a director of DRC at that time).
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.
During 1996, Lloyd/Howard sold one of the properties to CNL and the Company
entered into a lease with CNL for that location. The Company paid Lloyd/Howard
rent of approximately $120,000 with respect to these two restaurant properties
during fiscal 1996.
During the term of his employment with the Company, the Company from time
to time made loans to Mr. Miller. The largest outstanding principal balance of
such loans during fiscal 1996 was $110,000. As of January 1, 1997, there was no
outstanding principal remaining on those loans.
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, Chairman of the Board and Chief Executive Officer
of DRC; (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, President and a director of DRC; 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. Upon
consummation of the Merger, Mr. Lloyd became President, Chief Executive Officer
and a Director of the Company and Mr. Howard became a Vice President and
Director of the Company. Mr. Lloyd became Chairman of the Board of the Company
on July 9, 1996 and Mr. Howard became Executive Vice President of the Company on
July 9, 1996.
In connection with the Merger, the Company entered into a registration
rights agreement with Mr. Lloyd, Mr. Howard, BancBoston, and the other former
shareholder of DRC with respect to the shares of Common Stock issued to them in
the Merger and the shares issuable upon exercise of the warrants. In connection
with the BEP Acquisition, the Company repaid all of the $6.0 million principal
amount outstanding on its Series A Notes held by BancBoston plus accrued and
unpaid interest thereon for $5.2 million in cash and 250,000 shares of the
Company's Common Stock. Upon payment of the Series A Notes, the related Series A
Warrants were automatically cancelled. The Company granted registration rights
to BancBoston for the 250,000 shares issued to it. Pursuant to various
contractual obligations, in November 1996 the Company registered for resale an
aggregate of 4,660,540 shares of Common Stock held by or issuable to certain
holders of the Company's Common Stock and various warrants and unit purchase
options, including 2,124,352 shares held by BancBoston and 999,190 shares held
by Jeffrey D. Miller, a former officer and director of the Company.
48
<PAGE> 51
In May 1996, Jeffrey D. Miller, the Company's Chairman of the Board at that
time, 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.
In connection with the financing of the BEP Acquisition, LH Leasing
Company, Inc. ("LH Leasing"), a corporation owned by Jack M. Lloyd and William
J. Howard, purchased from the Company for cash in the amount of $14.25 million
the equipment located at 62 Black-eyed Pea restaurants leased by BEP, a wholly
owned subsidiary of the Company, or Texas BEP, L.P. ("Texas BEP"), a limited
partnership in which BEP is the general partner and in which a wholly owned
subsidiary of BEP is the limited partner. Concurrently with the sale of the
equipment to LH Leasing, LH Leasing leased the equipment to the Company and the
Company subleased the equipment to BEP or Texas BEP. The equipment lease has a
term of five years and grants the Company an option to purchase the equipment at
its fair market value upon the expiration of the lease. The terms of the
subleases between the Company and each of BEP and Texas BEP are consistent with
the terms set forth in the equipment lease between the Company and LH Leasing.
Messrs. Lloyd and Howard formed LH Leasing as an accommodation to the Company to
enable it to satisfy the requirements of the Company's senior lenders. Messrs.
Lloyd and Howard received no material compensation for the transactions
involving the Company and LH Leasing.
In order to finance its sale and lease transaction with the Company, LH
Leasing borrowed cash in the amount of $14.25 million from FFCA. Messrs. Lloyd
and Howard jointly and severally guaranteed the repayment of the loan. In
addition, Messrs. Lloyd and Howard pledged their stock in LH Leasing to FFCA as
additional collateral for the loan.
Effective as of 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.
Antranikian, a Vice President and director of the Company at that time. 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 (i) 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, and (ii) requires Mid-American to make 60 equal installments of
$65,000 per month beginning on July 31, 1996, 12 equal installments of $75,000
per month beginning on July 31, 2001, and 11 equal installments of $85,000 per
month beginning on July 31, 2002. All unpaid principal and interest on the
Mid-American Note will be due and payable on June 30, 2003. The Mid-American
Note is secured by (a) all of the assets transferred to Mid-American, (b) the
personal guaranty of Mr. Antranikian and his wife, and (c) the pledge of all of
the outstanding stock of Mid-American owned by Mr. Antranikian. The Mid-American
Note also requires Mid-American to prepay all or a portion of the outstanding
principal under such note in the event of (1) an equity issuance or other
contribution to Mid-American's capital in excess of $500,000, in which case
Mid-American must make prepayments equal to 50% of Mid-American's net proceeds
from each such issuance or contribution up to $5.0 million and 100% of such net
proceeds in excess of $5.0 million, or (2) a sale by Mid-American of any of its
assets, to the extent that such sale results in net proceeds to Mid-American in
excess of $25,000.
In connection with the sale to Mid-American, the Company and Mid-American
entered into a master sublease agreement (the "Master Sublease") with respect to
the 23 restaurant properties pursuant to which Mid-American subleases each of
the restaurant properties on essentially the same terms as the terms of the
leases between the Company and the respective owners of those properties.
Mid-American's obligations under the Master Sublease are secured by Mr.
Antranikian's personal guaranty.
Also in connection with the sale to Mid-American, (i) Mr. Antranikian
repaid all outstanding principal and interest, totalling approximately $120,000,
under a loan made by the Company to Mr. Antranikian in April 1996; (ii) Mr.
Antranikian resigned as an officer and director of the Company; (iii) all of the
Company's obligations under Mr. Antranikian's employment agreement with the
Company were cancelled; and (iv) unvested employee stock options to purchase
28,667 shares of the Company's Common Stock held by Mr. Antranikian were
cancelled.
During fiscal 1996, the Company made various advances to Jack M. Lloyd.
Such advances totalled $400,000 as of January 1, 1997.
49
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES:
(1) Financial Statements are listed in the Index to Consolidated Financial
Statements on page F-1 of this Report.
(2) Financial Statement Schedule:
Schedule II, Valuation and Qualifying Accounts for the years ended December
28, 1994, December 27, 1995 and January 1, 1997, is set forth on page S-1
of this Report.
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.
(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)
2.4 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)
2.5 Stock Purchase Agreement dated May 31, 1996, between BEP Holdings, Inc. and DenAmerica
Corp.(2)
3.1 Articles of Restatement of the Articles of Incorporation of American Family Restaurants, Inc. and
Articles of Amendment thereto.(3)
3.2 Amended and Restated Bylaws of American Family Restaurants, Inc.(4)
3.3 Certificate of Merger of Denwest Restaurant Corp. into American Family Restaurants, Inc.(5)
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).(5)
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).(5)
4.3 Form of Series A Common Stock Purchase Warrant.(3)
4.4 Form of Series B Common Stock Purchase Warrant.(3)
4.5 Common Stock Purchase Warrant dated March 29, 1996, issued to Banque Paribas.(5)
4.6 Supplemental Indenture (Series B Notes) between DenAmerica Corp. and State Street Bank and
Trust Company, as trustee(2)
4.7 Common Stock Purchase Warrant dated July 3, 1996, issued to BEP Holdings, Inc.(2)
4.8 Common Stock Purchase Warrant dated July 3, 1996, issued to Banque Paribas(2)
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.(3)
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION OF EXHIBIT
- ---------- ----------------------
<S> <C>
10.1A American Family Restaurants, Inc. Amended and Restated 1992 Stock Option Plan.(3)
10.2 American Family Restaurants, Inc. Directors Stock Option Plan.(3)
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.)(3)
10.22A Schedule of warrants substantially identical to Exhibit 10.22.(3)
10.23 Joint Venture Agreement of Densouth Restaurants II 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.(3)
10.28 Letter Agreement between Great American Restaurants, Inc. and Denny's, Inc., dated August 25,
1992, regarding reorganization.(3)
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.) (3)
10.29A Schedule of registration rights agreements substantially identical to Exhibit 10.29.(3)
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.)(3)
10.30A Schedule of warrants substantially identical to Exhibit 10.30.(3)
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.)(3)
10.31A Schedule of unit purchase options substantially identical to Exhibit 10.31.(3)
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.)(3)
10.32A Schedule of warrants substantially identical to Exhibit 10.32.(3)
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.)(3)
10.33A Schedule of registration rights agreements substantially identical to Exhibit 10.33.(3)
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.)(3)
10.42A Schedule of warrants substantially identical to Exhibit 10.42.(3)
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.)(3)
10.47A Schedule of warrants substantially identical to Exhibit 10.47.(3)
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION OF EXHIBIT
- ---------- ----------------------
<S> <C>
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.(3)
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.(3)
10.49 Letter agreement between Spencer Trask Securities, Incorporated and Great American Restaurants,
Inc., dated November 18, 1993.(3)
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.(3)
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.(3)
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.)(3)
10.60A Letter Agreement between American Family Restaurants, Inc. and Denny's, Inc., dated September
13, 1994, regarding change of control provisions.(3)
10.60B Letter Agreement between American Family Restaurants, Inc. and Denny's, Inc., dated September
13, 1994, regarding non-compete provisions.(3)
10.60A Schedule of franchise agreements substantially identical to Exhibit 10.60.(3)
10.65 Form of Warrant Agreement between American Family Restaurants, Inc. and Fahnestock & Co.
Inc. for 290,000 shares of Common Stock.(3)
10.66 Stock Pledge and Assignment between American Family Restaurants, Inc., and Denny's, Inc.,
dated June 13, 1994.(3)
10.67 Letter Agreement between CNL Group, Inc. and American Family Restaurants, Inc. regarding
sale-leaseback transactions, dated August 18, 1994.(3)
10.68 Letter Agreement from CNL Group, Inc. to American Family Restaurants, Inc., dated October
13, 1994, regarding the commitment letter.(3)
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)
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION OF EXHIBIT
- ---------- ----------------------
<S> <C>
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)
10.89 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.(5)
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).(5)
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(2)
10.93 Security Agreement dated as of February 29, 1996, between DenAmerica Corp. and Banque
Paribas, as Agent.(5)
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.(5)
10.95 Stock Option Agreement dated March 29, 1996, between DenAmerica Corp. and William G.
Cox.(5)
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.(2)
10.97 Registration Rights Agreement dated as of July 3, 1996, between DenAmerica Corp. and BEP
Holdings, Inc.(2)
10.98 Intercreditor Agreement among DenAmerica Corp., certain holders of
DenAmerica's Series B Notes, and State Street Bank and Trust
Company(2)
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.(2)
10.100 Form of Lease dated July 3, 1996, between FFCA Acquisition Corp. and DenAmerica Corp.(2)
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION OF EXHIBIT
- ---------- ----------------------
<S> <C>
10.101 Form of Sublease dated July 3, 1996, between DenAmerica Corp. and Black-eyed Pea U.S.A.,
Inc.(2)
10.102 Form of Sublease dated July 3, 1996, between DenAmerica Corp. and Texas BEP, L.P.(2)
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.(2)
10.104 Equipment Purchase Agreement and Bill of Sale dated July 3, 1996, between LH Leasing
Company, Inc. and Texas BEP, L.P.(2)
10.105 Equipment Lease dated July 3, 1996, between LH Leasing Company, Inc. and DenAmerica
Corp.(2)
10.106 Equipment Sublease dated July 3, 1996, between DenAmerica Corp. and Black-eyed Pea, U.S.A.,
Inc.(2)
10.107 Equipment Sublease dated July 3, 1996, between DenAmerica Corp. and Texas BEP, L.P.(2) 10.108
Asset Purchase Agreement effective as of July 3, 1996, among Mid-American Restaurants, Inc.,
Haig V. Antranikian, and DenAmerica Corp.(2)
10.109 Stock Option Agreement dated April 29, 1996, between DenAmerica Corp. and Todd S. Brown(7)
10.110 DenAmerica Corp. 1996 Stock Option Plan.
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.(6)
21.2 List of Subsidiaries of DenAmerica Corp.(2)
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. 333-00216, 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 Current
Report on Form 8-K as filed on July 18, 1996, as amended by Form 8-K/A as
filed on September 16, 1996, Form 8-K/A as filed on November 1, 1996 and
Form 8-K/A as filed on November 6, 1996.
(3) 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.
(4) Incorporated by reference to the Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 27, 1996, as filed on May
16, 1996.
(5) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on April 15, 1996, as amended by Form 8-K/A as
filed on June 12, 1996.
(6) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on May 3, 1996.
(7) 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.
54
<PAGE> 57
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 28th day of
March, 1997.
DenAmerica Corp.
By: /s/ Jack M. Lloyd
------------------------------------
Jack M. Lloyd
Chairman of the Board, 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/ Jack M. Lloyd Chairman of the Board, President, March 28, 1997
- --------------------------- and Chief Executive Officer,
Jack M. Lloyd (Principal Executive Officer)
/s/ William J. Howard Executive Vice President, Secretary, March 28, 1997
- --------------------------- and Director
William J. Howard
/s/ William G. Cox Chief Operating Officer and Director March 28, 1997
- ---------------------------
William G. Cox
/s/ Todd S. Brown Vice President, Chief Financial March 28, 1997
- --------------------------- Officer, Treasurer, and Director
Todd S. Brown (Principal Financial and Accounting
Officer)
/s/ John M. Holliman, III Director March 28, 1997
- ---------------------------
John M. Holliman, III
/s/ Fred W. Martin Director March 28, 1997
- ---------------------------
Fred W. Martin
/s/ C. Alan MacDonald Director March 28, 1997
- ---------------------------
C. Alan MacDonald
/s/ Philip B. Smith Director March 28, 1997
- ---------------------------
Philip B. Smith
</TABLE>
55
<PAGE> 58
DENAMERICA CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ................................................... F-2
Consolidated Balance Sheets as of December 27, 1995 and January 1, 1997 ........ F-3
Consolidated Statements of Operations for the periods ended
December 28, 1994, December 27, 1995 and January 1, 1997 ................. F-4
Consolidated Statements of Changes in Shareholders' Equity for the periods ended
December 28, 1994, December 27, 1995 and January 1, 1997 ................. F-5
Consolidated Statements of Cash Flows for the periods ended
December 28, 1994, December 27, 1995 and January 1, 1997 ................. F-6
Notes to Consolidated Financial Statements ..................................... F-8
</TABLE>
F-1
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
DenAmerica Corp.
Phoenix, Arizona
We have audited the consolidated balance sheets of DenAmerica Corp. and
subsidiaries (the "Company") as of December 27, 1995 and January 1, 1997, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended January 1, 1997. 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 financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DenAmerica Corp. and subsidiaries
at December 27, 1995 and January 1, 1997, and the results of their operations
and their cash flows for each of the three years in the period ended January 1,
1997, 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 21, 1997
Phoenix, Arizona
F-2
<PAGE> 60
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 27, JANUARY 1,
ASSETS 1995 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,181 $ 2,609
Receivables 989 4,102
Inventories 1,200 3,520
Deferred income taxes 249 2,955
Other current assets 215 1,196
-------- ---------
Total current assets 3,834 14,382
Property and equipment, net 33,817 73,724
Intangible assets, net 11,925 71,924
Deferred financing costs 653 3,801
Deferred taxes 380 7,174
Other assets 4,357 8,184
-------- ---------
TOTAL $ 54,966 $ 179,189
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,956 $ 18,202
Accrued compensation 2,114 8,487
Accrued taxes 1,356 4,636
Other current liabilities 2,527 8,424
Current portion of long-term obligations 2,287 7,662
-------- ---------
Total current liabilities 13,240 47,411
Long-term obligations, less current portion 30,252 94,132
Deferred rent and other 1,508 14,732
-------- ---------
Total liabilities 45,000 156,275
-------- ---------
Minority interest in joint ventures 1,901 786
-------- ---------
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 7,501
SHAREHOLDERS' EQUITY:
Common stock, par value $.10 per share; authorized 20,000,000
shares; issued and outstanding 13,399,277 shares at January 1, 1997 7 1,340
Additional paid-in capital 3,156 35,706
Accumulated deficit (2,599) (14,918)
-------- ---------
Total shareholders' equity 564 22,128
-------- ---------
TOTAL $ 54,966 $ 179,189
======== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 61
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except for Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JANUARY 1,
1994 1995 1997
(52 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C>
Restaurant revenues $ 47,323 $ 74,683 $ 241,480
Restaurant operating expenses:
Food and beverage cost 12,788 20,343 65,966
Payroll and payroll related costs 15,979 25,025 82,794
Charge for impaired assets 523
Depreciation and amortization 1,501 2,936 7,000
Other operating expenses 12,516 19,213 63,583
----------- ----------- ------------
Total operating expenses 42,784 68,040 219,343
----------- ----------- ------------
Restaurant operating income 4,539 6,643 22,137
Administrative expenses 2,619 3,380 10,303
Provision for restaurant closings 600
----------- ----------- ------------
Operating income 1,320 3,263 11,834
Interest expense, net 1,365 2,467 9,605
----------- ----------- ------------
Income (loss) before minority interest in joint
venture, income taxes, and extraordinary item (45) 796 2,229
Minority interest in joint venture 505 291 (256)
----------- ----------- ------------
Income (loss) before income taxes and extraordinary item (550) 505 2,485
Income tax (benefit) provision (209) 305 870
----------- ----------- ------------
Net income (loss) before extraordinary item (341) 200 1,615
Extraordinary item - loss on extinguishment of debt
(net of tax) 497
----------- ----------- ------------
Net income (loss) (341) 200 1,118
Preferred stock dividend and accretion (84) (593) (149)
----------- ----------- ------------
Net income (loss) applicable to common shareholders $ (425) $ (393) $ 969
=========== =========== ============
Net income (loss) per share before extraordinary item $ (0.06) $ (0.06) $ 0.14
=========== =========== ============
Net income (loss) per common share $ (0.06) $ (0.06) $ 0.08
=========== =========== ============
Weighted average common shares outstanding 6,937,500 6,937,500 11,698,000
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 62
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 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
Preferred stock accretion 26 (26) (26)
Preferred stock dividends (123) (123)
Merger related activity (7,527) 1,301 30,395 (13,314) 18,382
Value of warrants issued in connection
with financing 1,109 1,109
Issuance of common stock in
connection with Series A Subordinated
Notes repayment 25 975 1,000
Stock options exercised 7 97 104
Net income 1,118 1,118
------- ------- ------- -------- --------
BALANCE, JANUARY 1, 1997 $ $ 1,340 $35,706 $(14,918) $ 22,128
======= ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 63
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JANUARY 1,
1994 1995 1997
(52 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (341) $ 200 $ 1,118
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interest in joint ventures 505 291 (256)
Depreciation and amortization 1,501 2,936 7,000
Amortization of deferred financing costs 135 144 350
Extraordinary item - loss on extinguishment of debt, net 497
Charge for impaired assets 523
Deferred income taxes (209) 145 870
Deferred rent 121 196 249
Other - net (531) (708)
Changes in operating assets and liabilities:
Receivables (229) (75) (2,129)
Inventories (101) (394) (425)
Prepaid expenses 90 (14) (647)
Accounts payable and accrued liabilities 1,469 4,242 3,037
------- ------- --------
Net cash provided by operating activities 2,410 7,486 9,664
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,356) (7,003) (9,879)
Purchase of intangibles (712) (1,733) (1,705)
Net cash paid to acquire fair value of assets (4,999) (231)
Proceeds from sale of assets 2,422
Issuance of note receivable (2,600)
------- ------- --------
Net cash used in investing activities (9,667) (8,736) (9,393)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal reductions of long-term debt (6,241) (1,154) (11,655)
Proceeds from borrowings 7,588 4,031 13,361
Debt issuance costs (931)
Other (125)
Payment of obligations on behalf of shareholders (102)
Distributions to minority interest joint venture partners (605) (604) (424)
Issuance of preferred stock - net of expenses 7,383
------- ------- --------
Net cash provided by financing activities 7,092 2,273 1,157
------- ------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (165) 1,023 1,428
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 323 158 1,181
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 158 $ 1,181 $ 2,609
======= ======= ========
(Continued)
</TABLE>
F-6
<PAGE> 64
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JANUARY 1,
1994 1995 1997
(52 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 1,140 $ 2,397 $ 8,904
======== ======== ========
Income taxes $ 100 $ 36
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
Fair value of assets acquired 12,863 35,140
Working capital deficit acquired (28,750)
Intangible assets (goodwill) 69,799
Liabilities assumed (1,264) (2,785)
Notes issued (4,000) (64,222)
Common stock issued (2,600)
Capital expenditures financed through increase in obligations
under capital lease $ 3,664 $ 12,700 $ 2,927
======== ======== ========
Issuance of common stock in connection with series A
subordinated notes repayment $ 1,000
========
Purchase of BEP financed through sale/leaseback transaction $ 50,000
========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-7
<PAGE> 65
DENAMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1994 (52 WEEKS),
DECEMBER 27, 1995 (52 WEEKS) AND JANUARY 1, 1997 (53 WEEKS)
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - On March 29, 1996, Denwest Restaurant Corp.
("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. (the "Company").
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 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 outstanding voting power of the Company. As noted
below, the Merger was accounted for as a reverse acquisition with DRC
being the acquiring company.
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 $50,000, and (ii) a promissory note in the principal amount of
$15,000.
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 of this
reverse purchase accounting treatment, (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.
The consolidated financial statements include the accounts of DenAmerica
Corp., its wholly-owned subsidiaries and three 50% owned partnerships. The
joint venture partnerships are consolidated because DenAmerica Corp., 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
F-8
<PAGE> 66
"Company". All intercompany balances and transactions are eliminated in
these consolidated financial statements.
The Company operated 70, 102 and 307 restaurants at the end of 1994, 1995
and 1996, respectively. These restaurants are primarily operated as
Denny's restaurants, Black-eyed Pea restaurants, and various other
non-branded restaurants. The Denny's restaurants operate 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 7). The Company's restaurants are
located in 31 states, with the largest concentration in the West, Midwest
and Southeast regions.
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 Wednesday of December in 1994 and 1995 and the
first Wednesday of January 1997. The fiscal years ended December 28,
1994, and December 27, 1995 were 52 week years and the fiscal year
ended January 1, 1997 was a 53 week year. The fiscal year ended
January 1, 1997 is referred to as fiscal year 1996 throughout the
notes to the consolidated financial statements.
b. Cash equivalents consist of highly liquid investments, principally
certificates of deposit, purchased with initial maturities of three
months or less.
c. 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.
d. 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.
e. 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.
f. Franchise Revenue - The Company franchises the right to operate 29
Black-eyed Pea restaurants to third parties. Franchise royalties are
paid monthly by franchisees for the use of the Black-eyed Peas
proprietary trademarks, service marks and operating methods, and for
services provided by the Company to the franchisees consisting of
guidance in initial opening activities and ongoing operational
guidance as needed. Royalties are based on a percentage of franchise
restaurant sales and are recognized in the period in which services
are provided and the related franchisee sales occur. Royalty
revenues, which are included in restaurant revenues, were
approximately $621 during fiscal year 1996.
g. 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-9
<PAGE> 67
h. 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 evaluates the possible impairment of
goodwill based on estimates of future cash flows.
i. 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.
j. 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 27, 1995 and January 1, 1997, deferred rent
totaled $1,364 and $2,195, respectively.
k. Deferred financing costs are amortized using the effective interest
method over the terms of the related loans.
l. Earnings per share for the year ended January 1, 1997, has been
computed based upon the weighted average of (i) for the 13 weeks
from December 28, 1995 to March 27, 1996, the 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, and (ii) for the 40 weeks from March 28, 1996 to January 1,
1997, the total outstanding shares of the Company's common stock.
Earnings per share for the years ended December 28, 1994 and
December 27, 1995, was computed based upon the shares of DenAmerica
Corp. 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.
m. Reclassifications - Certain reclassifications have been made to the
1994 and 1995 financial statements to conform to the presentation in
the 1996 financial statements.
n. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets 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 those estimates.
o. Fair Value - Based on the borrowing rates currently available to the
Company, the fair value of notes receivable, long-term obligations,
and warrants approximate the carrying value.
p. New Accounting Pronouncements - In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123 Accounting for Stock
Based Compensation. The Company has not changed 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. Pro forma information reflecting the fair value method
is presented in Note 11.
F-10
<PAGE> 68
2. ACQUISITIONS AND DIVESTITURES
During 1994, 1995 and 1996, the Company has expanded the number of
restaurants it operates by i) acquisition of companies; ii) opening new
Denny's restaurants; and iii) converting existing non-branded restaurants
into Denny's restaurants. In addition, over the same period the Company
has sold several restaurants and has, in certain situations, continued to
remain contingently liable for the performance of certain leases (Note 9).
A summary of the significant acquisitions and disposals is as follows:
1996 TRANSACTIONS
THE MERGER
As described in Note 1 herein, the Merger has been accounted for as a
reverse acquisition, utilizing the purchase method of accounting, in
which DRC acquired control of AFR for accounting purposes.
The total purchase price of the Merger was $31,400, 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 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. Restaurant closing costs of $6,000 were recorded
in connection with the Merger. During fiscal 1996, $810 was charged
against such liability for continuing lease costs of closed stores.
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 $65,000. The purchase price consisted of (i)
cash of approximately $50,000 and (ii) a promissory note in the
principal amount of $15,000 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. Restaurant closing costs
of $1,500 were recorded in connection with the acquisition. The Company
believes that most of these estimates have been finalized by the end of
fiscal 1996, and therefore the Company does not believe that such
amounts will materially change.
In conjunction with the BEP Acquisition, the Company repaid all of the
$6,000 outstanding principal amount of Series A Notes (face amount
$6,000) and related accrued interest for cash of $5,200 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
canceled upon repayment of the Series A Notes.
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"). As payment for the
restaurants, Mid-American issued to the Company a promissory note in
the principal amount of $4,600 (the "Mid-American Note"). The
Mid-American Note is secured by the assets sold, requires monthly
payments of $65 to $85, 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
F-11
<PAGE> 69
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.
PRO FORMA RESULTS OF OPERATIONS
The following represents the summary pro forma results of operations as
if the Merger and the BEP Acquisition had occurred at the beginning of
fiscal 1995. The historical accounts of BEP include (i) store closing
costs of $10,200 during the period ended December 27, 1995, and (ii)
losses on the disposition of assets of $717 and $229 for the periods
ended December 27, 1995 and January 1, 1997, respectively. These
amounts are included in the pro forma results of operations shown
below. The pro forma results are not necessarily indicative of the
results that will occur in the future.
<TABLE>
<CAPTION>
Period Ending
-----------------------------
December 27, January 1,
1995 1997
(52 weeks) (53 weeks)
<S> <C> <C>
Restaurant revenues $ 327,035 $ 336,589
Income (loss) before extraordinary item (1,634) (3,952)
Net income (loss) (1,634) (4,449)
Earnings (loss) per share (0.13) (0.38)
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment including assets under capitalized leases as of the
fiscal years ended consist of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Buildings $19,288 $21,440
Restaurant equipment 13,481 27,690
Leasehold improvements 4,716 27,657
Other 1,837 7,951
------- -------
Total 39,322 84,738
Less accumulated depreciation and amortization 5,505 11,014
------- -------
Equipment and leasehold improvement - net $33,817 $73,724
======= =======
</TABLE>
F-12
<PAGE> 70
Assets recorded under capital leases as of the fiscal years ended consist
of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Buildings $17,305 $19,457
Other 4,845 7,059
------- -------
Total 22,150 26,516
Less accumulated amortization 2,529 4,021
------- -------
Total $19,621 $22,495
======= =======
</TABLE>
Depreciation and amortization expense was $1,072, $1,977 and $4,594 for
the fiscal years ended 1994, 1995 and 1996, respectively.
4. INTANGIBLE ASSETS
Intangible assets as of the fiscal years ended consist of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Goodwill $10,285 $70,106
Franchise rights 1,126 2,238
Pre-opening costs 1,059 1,058
Favorable lease arrangements 958 2,382
------- -------
Total 13,428 75,784
Less accumulated amortization 1,503 3,860
------- -------
Intangible assets - net $11,925 $71,924
======= =======
</TABLE>
Amortization expense was $429, $959 and $2,406 for the fiscal years ended
1994, 1995 and 1996, respectively.
5. OTHER CURRENT LIABILITIES
Other current liabilities as of the fiscal years ended consist of the
following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Accrued insurance $ 366 $1,500
Estimated closed restaurant obligations 348 1,000
Rent 78 1,402
Due to franchisor 323 1,068
Interest 615
Advertising 574
Other 1,412 2,265
------ ------
Total accrued liabilities $2,527 $8,424
====== ======
</TABLE>
In 1996, deferred rent and other liabilities includes long-term reserves
of $5,690 and $5,100 for estimated obligations for closed restaurants and
accrued insurance, respectively.
F-13
<PAGE> 71
6. LONG-TERM OBLIGATIONS
Long-term obligations as of the fiscal years ended consist of the
following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Term loan, interest at prime (8.25% at January 1, 1997)
plus 1.5%, maturing December 31, 2001 $ 5,597 $ 32,500
Revolving credit loan, interest at prime (8.25% at January 1, 1997)
plus 1.5%, maturing December 31, 2001 5,000 12,190
Series B subordinated notes, interest at 13%, maturing
March 29, 2003 (face value $18,250) (Note 1) 15,204
BEP purchase note, interest at 12%, maturing March 31, 2002 14,901
Other notes payable 1,145 891
Capital lease obligations (Note 9) 20,797 26,108
------- --------
Total 32,539 101,794
Less current maturities 2,287 7,662
------- --------
Total long-term obligations $30,252 $ 94,132
======= ========
</TABLE>
During 1996, the Company entered into the following new financial
arrangements:
(a) Credit Facility
In connection with the Merger and the BEP Acquisition, the Company entered
into a $65,000 credit facility with Banque Paribas, as agent, and the
Company's other senior lenders (the "Credit Facility"). The Credit
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 Credit 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 Credit Facility are
secured by substantially all of the tangible and intangible assets of the
Company, including all of the stock of BEP and certain of BEP's
subsidiaries. The Company will be required to make mandatory prepayments
of amounts borrowed under the Credit Facility in the event of certain
asset sales, equity issuances, excess cash flows, and under certain other
circumstances.
In connection with the Merger, the Company borrowed $35,000 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 Credit Facility. The
Company is required to repay the Term Loan in quarterly payments of
principal and interest.
The Credit Facility includes a $15,000 Revolver that the Company may
utilize to finance working capital needs, to repay the Term Loan, to make
capital expenditures, and to support letters of credit. At January 1, the
Company had approximately $2,800 available for borrowings under the
Revolver.
Provided that certain conditions are met, the Company will be permitted to
make draws of all or a part of the $15,000 available under the Delayed
Term Loan to finance acquisitions of additional restaurants through
December 31, 1997, and will be permitted to make draws under the Delayed
Term Loan to repay
F-14
<PAGE> 72
the BEP Purchase Note and Series B Notes beginning December 31, 1996 and
ending on December 31, 1997. As of January 1, 1997, borrowings under the
Delayed Term Loan are not available to the Company.
The Company paid fees for loan origination and amendment, investment
banking services, legal services, prepayment of existing debt, and other
fees of approximately $4,700 in connection with the negotiation and
execution of the Credit Facility at the time of the Merger and the
negotiation and execution of amendments to the Credit Facility at the time
of the BEP Acquisition. During the term of the Credit Facility, the
Company will be required to pay an annual fee of $75 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
Credit Facility. In addition, the Company issued to Banque Paribas
six-year warrants to acquire 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. Such warrants have been valued at $1,109.
The Credit Facility contains certain provisions and restrictive covenants
that, among other things, require the maintenance of cash flow and
interest coverage ratios. In addition, the provisions 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
expenditures. At January 1, 1997, the Company was not in compliance with
certain financial covenants for which waivers have been obtained.
(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 Credit
Facility. The BEP Purchase Note bears interest at 12% per annum. 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 $15,000 available under
the Delayed Term Loan to repay the BEP Purchase Note beginning on January
1, 1997 and ending on December 31, 1997.
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, limit 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 sale.
In conjunction with the BEP Purchase Note, the Company entered into a
commitment to issue BEP Holdings a Common Stock Purchase Warrant which
will entitle BEP Holdings to purchase approximately 7.5% of the Company's
common stock outstanding on March 31, 1997 if the BEP Purchase Note is not
paid on that date. The Company may repurchase the warrants for
approximately $250 by September 30, 1997, if the BEP Purchase Note is
repaid. The Company currently intends to repurchase the warrants prior to
September 1997.
F-15
<PAGE> 73
The aggregate annual maturities of long-term debt, excluding capital lease
obligations, based upon contractual maturities, for the years subsequent
to January 1, 1997, are as follows:
<TABLE>
<S> <C>
1997 $ 5,783
1998 6,178
1999 7,014
2000 8,012
2001 6,013
Thereafter 42,686
---------
Total $ 75,686
=========
</TABLE>
7. TRANSACTIONS WITH FRANCHISOR
As of January 1, 1997, the Company operates 182 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 (.5%-2%) based upon gross sales. For the
fiscal years ended 1994, 1995 and 1996, franchise fees are $2,748, $4,172
and $8,811, respectively.
8. INCOME TAXES
Income taxes (benefit) provisions as of the fiscal years ended consist of
the following:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Current:
Federal $ 160
State
-----
Total current 160
Deferred:
Federal $(164) 123 680
State (45) 22 190
----- ----- -----
Total deferred (209) 145 870
----- ----- -----
Total income tax (benefit) provisions $(209) $ 305 $ 870
===== ===== =====
</TABLE>
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 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Computed expected tax (benefit) expense $(187) $177 $869
State income taxes - net of federal benefit (31) 25 124
Nondeductible expenses 11 20 267
Adjustment from prior years 83
Credits (390)
Other - net (2)
----- ---- ----
Total $(209) $305 $870
===== ==== ====
</TABLE>
F-16
<PAGE> 74
Deferred income tax assets for the fiscal years ended are as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Current deferred income tax assets:
Accrued self insurance and contingent losses $ 111 $ 2,701
Accrued vacation 39 192
Accrued interest 99
Other accrued expenses 62
------- -------
Total current deferred income tax assets $ 249 $ 2,955
======= =======
Non-current deferred income tax assets (liabilities):
Deferred rent $ 543 $ 881
Store closing 139 2,721
Intangibles (257) (3,044)
Net operating loss carryforward 52 4,862
Valuation allowance (1,525)
Alternative minimum tax credit carryforward 189 1,370
Depreciation, capitalized leases and deferred gain (494) 1,909
Other - net 208
------- -------
Net non-current deferred income tax assets $ 380 $ 7,174
======= =======
</TABLE>
As of January 1, 1997, the Company has approximately $12,156 of net
operating loss carryforwards that expire beginning in 2004 and alternative
minimum tax credit carryforwards of approximately $1,370. The Company
established a valuation allowance of $1,525 relating to certain net
operating loss carryforwards acquired in connection with the Merger.
The extraordinary item for loss on extinguishment of debt is stated net of
the income tax benefit of $331.
9. LEASES
The Company's operations utilize leased property, facilities and
equipment. At January 1, 1997, substantially all of the Company's
restaurants are operated under lease arrangements which provide for a
fixed base 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 June 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.
F-17
<PAGE> 75
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 January 1, 1997, are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASE SUBLEASE
LEASES PAYMENTS PAYMENTS
<S> <C> <C> <C>
1997 $ 4,502 $ 21,050 $ (910)
1998 4,349 19,992 (898)
1999 3,864 19,484 (909)
2000 3,194 19,453 (910)
2001 2,982 19,421 (910)
Subsequent years 36,203 174,462 (6,651)
------- -------- --------
Total 55,094 $273,862 $(11,188)
======== ========
Less imputed interest - interest rates ranging from 11% to 13% 28,986
-------
Present value of minimum capital lease obligation 26,108
Less current portion of capital lease obligation 1,879
-------
Long-term portion of capital lease obligation $24,229
=======
</TABLE>
Obligations under operating leases related to restaurants sold which are
being paid directly by the purchaser but for which the Company continues
to be contingently liable are included in minimum sublease payments.
The following is a summary of rental expense, excluding sublease amounts,
under all operating leases for the fiscal years ended:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Minimum rentals $3,475 $5,150 $17,852
Contingent rentals 145 282 823
------ ------ -------
Total rent expense $3,620 $5,432 $18,675
====== ====== =======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Litigation - Beginning in November 1996, the Company entered into a
self-insured program whereby the Company is obligated for the first $100
of individual health insurance claims. 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 or results of
operations.
11. STOCK OPTIONS
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. A total of 1,000,000 shares of
common stock have been reserved for issuance under the 1992 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. On December 10, 1996, the
Company's
F-18
<PAGE> 76
Board of Directors adopted the Company's 1996 Stock Option Plan (the "1996
Plan"), subject to shareholder approval of the 1996 Plan prior to December
10, 1997. A total of 500,000 shares of the Company's common stock has been
reserved for issuance under the 1996 Plan. Options granted under these
plans expire up to ten years after the date of grant.
A summary of changes in stock options is as follows:
<TABLE>
<CAPTION>
OPTION WEIGHTED AVERAGE
SHARES OPTION PRICE
<S> <C> <C>
AFR Outstanding at March 29, 1996 366,500 $ 4.07
Granted 874,800 4.15
Exercised 70,000 2.00
Canceled -- --
--------- --------
Outstanding at January 1, 1997 1,311,300 $ 4.13
</TABLE>
The following table summarizes information about stock options outstanding
at January 1, 1997:
<TABLE>
<S> <C> <C>
Range of exercise prices $2.00 - $4.00 $4.75 - $6.00
Shares outstanding in range 913,800 397,500
Weighted-average exercise price $ 3.63 $ 5.26
Weighted-average remaining contractual life 8.53 8.48
Shares currently exercisable 403,960 162,500
Weighted-average exercise price of shares currently exercisable $ 3.29 $ 5.71
Weighted-average fair value of options granted during the year $ 2.04 $ 2.53
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under the plans
consistent with the method of Statement of Financial Accounting Standards
No. 123, the Company's net income and net income per share for the year
ended January 1, 1997 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<S> <C>
Net income - as reported $ 969
Net income - pro forma $ 707
Income per share - as reported $ 0.08
Income per share - pro forma $ 0.06
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for grants: no dividend yield; expected volatility of
50%; risk free interest rates ranging from 6% to 7%; and expected lives of
five years.
F-19
<PAGE> 77
12. RESTAURANT CLOSINGS
During the fiscal year ended December 27, 1995, the Company formulated a
plan to close several restaurants over the next fiscal year. In connection
with the plan, a provision of $450 and $150 was charged to income for the
cost of asset write-offs and estimated lease costs, respectively.
The cost of asset write-offs represents 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 1996, the Company closed 3 restaurants, resulting in charges of
$450 to cost of asset write-offs and $150 of estimated lease costs.
As explained in Note 2, the Company recorded restaurant closing reserves
of $6,000 and $1,500 in connection with the Merger and the BEP
Acquisition. Lease costs of closed stores aggregating $810 were charged
against such liabilities in 1996.
13. RELATED PARTY TRANSACTIONS
During fiscal years ended December 28, 1994, December 27, 1995, and
January 1, 1997, 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>
1994 1995 1996
<S> <C> <C> <C>
Advances due from officers and shareholders $ 35 $ 35 $ 435
====== ====== ======
Note receivable from shareholders $2,600 $2,600 $2,600
====== ====== ======
LH Leasing (described below) $1,902
======
Lease expense paid to shareholders $ 40 $ 120
====== ======
</TABLE>
In connection with the financing of the BEP Acquisition, LH Leasing
Company, Inc. ("LH Leasing"), a corporation owned by Jack M. Lloyd and
William J. Howard, purchased from the Company for cash in the amount of
$14,250 the equipment located at 62 Black-eyed Pea restaurants leased by
BEP, a wholly owned subsidiary of the Company, or Texas BEP, L.P. ("Texas
BEP"), a limited partnership in which BEP is the general partner and in
which a wholly owned subsidiary of BEP is the limited partner.
Concurrently with the sale of the equipment to LH Leasing, LH Leasing
leased the equipment to the Company and the Company subleased the
equipment to BEP or Texas BEP. The equipment lease has a term of five
years and grants the Company an option to purchase the equipment at its
fair market value upon the expiration of the lease. The terms of the
subleases between the Company and each of BEP and Texas BEP are consistent
with the terms set forth in the equipment lease between the Company and LH
Leasing. Messrs. Lloyd and Howard formed LH Leasing as an accommodation to
the Company to enable it to satisfy the requirements of the Company's
senior lenders. Messrs. Lloyd and Howard received no material compensation
for the transactions involving the Company and LH Leasing.
14. MINORITY INTEREST IN JOINT VENTURES
The Company has executed three joint venture agreements with CNL Income
and Growth Fund, a Florida partnership ("CNL"), for the purpose of
acquiring, developing or owning restaurants. The Company and CNL each has
a 50% interest in the joint venture and the Company is responsible for
day-to-day operations and receives a management fee, paid by CNL, equal to
3.5% of operating revenues. Under the terms of the joint venture
agreement, CNL financed the land, building, and site development costs
under
F-20
<PAGE> 78
real estate leases with terms of 20 years and two five-year options to
extend. The Company amended its agreements with its joint venture partner
whereby the partner agreed to reimburse the Company for administrative
fees of $435, which has been recorded as a reduction in minority interest.
Minority interest in the joint ventures for the fiscal years ended are as
follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Minority interest, beginning of period $ 2,214 $ 1,901
Distributions (604) (424)
Reimbursement of management fees (435)
Minority interest in income of consolidated joint ventures 291 (256)
------- -------
Minority interest, end of period $ 1,901 $ 786
======= =======
</TABLE>
15. SUBSEQUENT EVENT
During 1997, the Company has entered into a letter of intent to acquire
Good Eats Holding Company, Inc., a Texas based operator of 13 Good Eats
restaurants, a concept similar to BEP. Consideration for the proposed
acquisition will be 1,500,000 shares of the Company's common stock plus
certain cash considerations.
* * * * * *
F-21
<PAGE> 79
DENAMERICA CORP. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
(Dollars in thousands)
Years ended December 28, 1994, December 27, 1995 and January 1, 1997
<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>
1994 - Restaurant closings n/a $ 600 -- $ 16 $ 584
======= ======= ======= ======= =======
1995 - Restaurant closings
and SFAS 121 $ 584 $ 523 -- $ 236 $ 871(1)
======= ======= ======= ======= =======
1996 - Restaurant closings $ 871 -- $ 7,150 $ 1,045 $ 6,976
======= ======= ======= ======= =======
</TABLE>
(1) Included in accrued liabilities $348 and accumulated depreciation $523.
S-1
<PAGE> 1
EXHIBIT 10.110
DENAMERICA CORP.
1996 STOCK OPTION PLAN
ARTICLE I
GENERAL
1.1 PURPOSE OF PLAN; TERM
(a) ADOPTION. On December 10, 1996, the Board of Directors (the
"Board") of DenAmerica Corp., a Georgia corporation (the "Company"), adopted
this stock option plan to be known as the DenAmerica Corp. 1996 Stock Option
Plan (the "Plan").
(b) DEFINED TERMS. All initially capitalized terms used hereby shall
have the meaning set forth in Article V hereto.
(c) GENERAL PURPOSE. The purpose of the Grant Program is to further
the interests of the Company and its shareholders by encouraging key persons
associated with the Company (or Parent or Subsidiary Corporations) to acquire
shares of the Company's Stock, thereby acquiring a proprietary interest in its
business and an increased personal interest in its continued success and
progress. Such purpose shall be accomplished by providing for the granting of
options to acquire the Company's Stock ("Options"), the direct granting of the
Company's Stock ("Stock Awards"), the granting of stock appreciation rights
("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards,
SARs and Cash Awards shall be collectively referred to herein as "Awards").
(d) CHARACTER OF OPTIONS. Options granted under this Plan to
employees of the Company (or Parent or Subsidiary Corporations) that are
intended to qualify as "incentive stock options" as defined in Code section 422
("Incentive Stock Options") will be specified in the applicable stock option
agreement. All other Options granted under this Plan will be nonqualified
options.
(e) RULE 16b-3 PLAN. The Company is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and therefore the Plan is intended to comply with all applicable
conditions of Rule 16b-3 (and all subsequent revisions thereof) promulgated
under the 1934 Act. To the extent any provision of the Plan or action by a Plan
Administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by such Plan Administrator. In
addition, the Board may amend the Plan from time to time as it deems necessary
in order to meet the requirements of any amendments to Rule 16b-3 without the
consent of the shareholders of the Company.
(f) DURATION OF PLAN. The term of the Plan is 10 years commencing on
the date of adoption of the original Plan by the Board as specified in Section
1.1(a) hereof. No Option or Award shall be granted under the Plan unless granted
within 10 years of the adoption of the Plan by the Board, but Options or Awards
outstanding on that date shall not be terminated or otherwise affected by virtue
of the Plan's expiration.
1.2 STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN.
(a) DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. The shares of
stock subject to the provisions of the Plan and issuable upon the grant of Stock
Awards or upon the exercise of SARs or Options granted under the Plan are shares
of the Company's common stock, $.10 par value per share (the "Stock"), which may
be either unissued or treasury shares. The Company may not issue more than
500,000 shares of Stock pursuant to the Plan, unless the Plan is amended as
provided in Section 1.3 or the maximum number of shares subject to the Plan is
adjusted as provided in Section 3.1.
<PAGE> 2
(b) CALCULATION OF AVAILABLE SHARES. The number of shares of Stock
available under the Plan shall be reduced (i) by any shares of Stock issued
(including any shares of Stock withheld for tax withholding requirements) upon
exercise of an Option and (ii) by any shares of Stock issued (including any
shares of Stock withheld for tax withholding requirements) upon the grant of a
Stock Award or the exercise of a SAR.
(c) RESTORATION OF UNPURCHASED SHARES. If an Option or SAR expires
or terminates for any reason prior to its exercise in full and before the term
of the Plan expires, the shares of Stock subject to, but not issued under, such
Option or SAR shall, without further action or by or on behalf of the Company,
again be available under the Plan.
1.3 APPROVAL; AMENDMENTS.
(a) APPROVAL BY SHAREHOLDERS. The Plan shall be submitted to the
shareholders of the Company for their approval at a regular or special meeting
to be held within 12 months after the adoption of the Plan by the Board.
Shareholder approval shall be evidenced by the affirmative vote of the holders
of a majority of the shares of the Company's Common Stock present in person or
by proxy and voting at the meeting. The date such shareholder approval has been
obtained shall be referred to herein as the "Effective Date."
(b) COMMENCEMENT OF THE GRANT PROGRAM. The Grant Program is
effective immediately, but if the Plan is not approved by the shareholders
within 12 months after its adoption by the Board, the Plan and all Options and
Awards made under the Grant Program will automatically terminate and be
forfeited to the same extent and with the same effect as though the Plan had
never been adopted.
(c) AMENDMENTS TO PLAN. The Board may, without action on the part of
the Company's shareholders, make such amendments to, changes in and additions to
the Plan as it may, from time to time, deem necessary or appropriate and in the
best interests of the Company; provided, the Board may not, without the consent
of the applicable Optionholder, take any action which disqualifies any Option
previously granted under the Plan for treatment as an Incentive Stock Option or
which adversely affects or impairs the rights of the Optionholder of any Option
outstanding under the Plan, and further provided that, except as provided in
Article III hereof, the Board may not, without the approval of the Company's
shareholders, (i) increase the aggregate number of shares of Stock subject to
the Plan, (ii) reduce the exercise price at which Options may be granted or the
exercise price at which any outstanding Option may be exercised, (iii) extend
the term of the Plan, (iv) change the class of persons eligible to receive
Options or Awards under the Plan, or (v) materially increase the benefits
accruing to participants under the Plan. Notwithstanding the foregoing, Options
or Awards may be granted under this Plan to purchase shares of Stock in excess
of the number of shares then available for issuance under the Plan if (A) an
amendment to increase the maximum number of shares issuable under the Plan is
adopted by the Board prior to the initial grant of any such Option or Award and
within one year thereafter such amendment is approved by the Company's
shareholders and (B) each such Option or Award granted does not become
exercisable or vested, in whole or in part, at any time prior to the obtaining
of such shareholder approval.
ARTICLE II
GRANT PROGRAM
2.1 PARTICIPANTS; ADMINISTRATION.
(a) ELIGIBILITY AND PARTICIPATION. Options and Awards may be granted
only to persons ("Eligible Persons") who at the time of grant are (i) key
personnel (including officers and directors) of the Company or Parent or
Subsidiary Corporations, or (ii) consultants or independent contractors who
provide valuable services to the Company or Parent or Subsidiary Corporations;
provided that (1) Incentive Stock Options may only be granted to key personnel
of the Company (and its Parent or Subsidiary Corporation) who are also employees
of the Company (or its Parent or Subsidiary Corporation) and (2) the maximum
number of shares of stock with respect
2
<PAGE> 3
to which Options or SARs may be granted to any employee during the term of the
Plan shall not exceed 50 percent of the shares of stock covered by the Plan. A
Plan Administrator shall have full authority to determine which Eligible Persons
in its administered group are to receive Option grants under the Plan, the
number of shares to be covered by each such grant, whether or not the granted
Option is to be an Incentive Stock Option, the time or times at which each such
Option is to become exercisable, and the maximum term for which the Option is to
be outstanding. A Plan Administrator shall also have full authority to determine
which Eligible Persons in such group are to receive Awards under the Grant
Program and the conditions relating to such Award.
(b) GENERAL ADMINISTRATION. The Eligible Persons under the Grant
Program shall be divided into two groups and there shall be a separate
administrator for each group. One group will be comprised of Eligible Persons
that are Affiliates. For purposes of this Plan, the term "Affiliates" shall mean
all "officers" (as that term is defined in Rule 16a-1(f) promulgated under the
1934 Act) and directors of the Company and all persons who own ten percent or
more of the Company's issued and outstanding equity securities. Initially, the
power to administer the Grant Program with respect to Eligible Persons that are
Affiliates shall be vested with the Board. At any time, however, the Board may
vest the power to administer the Grant Program with respect to Persons that are
Affiliates exclusively with a committee (the "Senior Committee") comprised of
two or more Non-Employee Directors who are appointed by the Board. The Senior
Committee, in its sole discretion, may require approval of the Board for
specific grants of Options or Awards under the Grant Program. The administration
of all Eligible Persons that are not Affiliates ("Non-Affiliates") shall be
vested exclusively with the Board. The Board, however, may at any time appoint a
committee (the "Employee Committee") of one or more persons who are members of
the Board and delegate to such Employee Committee the power to administer the
Grant Program with respect to the Non-Affiliates. In addition, the Board may
establish an additional committee or committees of persons who are members of
the Board and delegate to such other committee or committees the power to
administer all or a portion of the Grant program with respect to all or a
portion of the Eligible Persons. Members of the Senior Committee, Employee
Committee or any other committee allowed hereunder shall serve for such period
of time as the Board may determine and shall be subject to removal by the Board
at any time. The Board may at any time terminate all or a portion of the
functions of the Senior Committee, the Employee Committee, or any other
committee allowed hereunder and reassume all or a portion of powers and
authority previously delegated to such committee. The Board in its discretion
may also require the members of the Senior Committee, the Employee Committee or
any other committee allowed hereunder to be "outside directors" as that term is
defined in any applicable regulations promulgated under Code section 162(m).
(c) PLAN ADMINISTRATORS. The Board, the Employee Committee, Senior
Committee, and/or any other committee allowed hereunder, whichever is
applicable, shall be each referred to herein as a "Plan Administrator." Each
Plan Administrator shall have the authority and discretion, with respect to its
administered group, to select which Eligible Persons shall participate in the
Grant Program, to grant Options or Awards under the Grant Program, to establish
such rules and regulations as they may deem appropriate with respect to the
proper administration of the Grant Program and to make such determinations
under, and issue such interpretations of, the Grant Program and any outstanding
Option or Award as they may deem necessary or advisable. Unless otherwise
required by law or specified by the Board with respect to any committee,
decisions among the members of a Plan Administrator shall be by majority vote.
Decisions of a Plan Administrator shall be final and binding on all parties who
have an interest in the Grant Program or any outstanding Option or Award.
(d) GUIDELINES FOR PARTICIPATION. In designating and selecting
Eligible Persons for participation in the Grant Program, a Plan Administrator
shall consult with and give consideration to the recommendations and criticisms
submitted by appropriate managerial and executive officers of the Company. A
Plan Administrator also shall take into account the duties and responsibilities
of the Eligible Persons, their past, present and potential contributions to the
success of the Company and such other factors as a Plan Administrator shall deem
relevant in connection with accomplishing the purpose of the Plan.
3
<PAGE> 4
2.2 TERMS AND CONDITIONS OF OPTIONS
(a) ALLOTMENT OF SHARES. A Plan Administrator shall determine the
number of shares of Stock to be optioned from time to time and the number of
shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant
of an Option to a person shall neither entitle such person to, nor disqualify
such person from, participation in any other grant of Options or Stock Awards
under this Plan or any other stock option plan of the Company.
(b) EXERCISE PRICE. Upon the grant of any Option, a Plan
Administrator shall specify the option price per share. If the Option is
intended to qualify as an Incentive Stock Option under the Code, the option
price per share may not be less than 100 percent of the fair market value per
share of the stock on the date the Option is granted (110 percent if the Option
is granted to a shareholder who at the time the Option is granted owns or is
deemed to own stock possessing more than 10 percent of the total combined voting
power of all classes of stock of the Company or of any Parent or Subsidiary
Corporation). The determination of the fair market value of the Stock shall be
made in accordance with the valuation provisions of Section 3.5 hereof.
(c) INDIVIDUAL STOCK OPTION AGREEMENTS. Options granted under the
Plan shall be evidenced by option agreements in such form and content as a Plan
Administrator from time to time approves, which agreements shall substantially
comply with and be subject to the terms of the Plan, including the terms and
conditions of this Section 2.2. As determined by a Plan Administrator, each
option agreement shall state (i) the total number of shares to which it
pertains, (ii) the exercise price for the shares covered by the Option, (iii)
the time at which the Options vest and become exercisable and (iv) the Option's
scheduled expiration date. The option agreements may contain such other
provisions or conditions as a Plan Administrator deems necessary or appropriate
to effectuate the sense and purpose of the Plan, including covenants by the
Optionholder not to compete and remedies for the Company in the event of the
breach of any such covenant.
(d) OPTION PERIOD. No Option granted under the Plan that is intended
to be an Incentive Stock Option shall be exercisable for a period in excess of
10 years from the date of its grant (five years if the Option is granted to a
shareholder who at the time the Option is granted owns or is deemed to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or any Subsidiary Corporation),
subject to earlier termination in the event of termination of employment,
retirement or death of the Optionholder. An Option may be exercised in full or
in part at any time or from time to time during the term of the Option or
provide for its exercise in stated installments at stated times during the
Option's term.
(e) VESTING; LIMITATIONS. The time at which Options may be exercised
with respect to an Optionholder shall be in the discretion of that
Optionholder's Plan Administrator. Notwithstanding the foregoing, to the extent
an Option is intended to qualify as an Incentive Stock Option, the aggregate
fair market value (determined as of the respective date or dates of grant) of
the Stock for which one or more Options granted to any person under this Plan
(or any other option plan of the Company or its Parent or Subsidiary
Corporations) may for the first time become exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000
(referred to herein as the "$100,000 Limitation"). To the extent that any person
holds two or more Options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which such
Options are granted.
(f) NO FRACTIONAL SHARES. Options shall be exercisable only for
whole shares; no fractional shares will be issuable upon exercise of any Option
granted under the Plan.
(g) METHOD OF EXERCISE. To exercise an Option with respect to any
vested Optioned Shares, an Optionholder (or in the case of an exercise after an
Optionholder's death, such Optionholder's executor, administrator, heir or
legatee, as the case may be) must take the following action:
4
<PAGE> 5
(i) execute and deliver to the Company a written notice of
exercise signed in writing by the person exercising the Option specifying the
number of shares of Stock with respect to which the Option is being exercised;
(ii) pay the aggregate Option Price in one of the alternate
forms as set forth in Section 2.2(h) below; and
(iii) furnish appropriate documentation that the person or
persons exercising the Option (if other than the Optionholder) has the right to
exercise such Option.
As soon as practicable after the Exercise Date, the Company will mail or deliver
to or on behalf of the Optionholder (or any other person or persons exercising
an Option under the Plan) a certificate or certificates representing the Stock
acquired upon exercise of the Option.
(h) PAYMENT OF OPTION PRICE. The aggregate Option Price shall be
payable in one of the alternative forms specified below:
(i) Full payment in cash or check made payable to the
Company's order; or
(ii) Full payment in shares of Stock held for the requisite
period necessary to avoid a charge to the Company's reported earnings and valued
at fair market value on the Exercise Date (as determined in accordance with
Section 3.5 hereof); or
(iii) If a cashless exercise program has been implemented by
the Board, full payment through a sale and remittance procedure pursuant to
which the Optionholder (A) shall provide irrevocable written instructions to a
designated brokerage firm to effect the immediate sale of the Optioned Shares to
be purchased and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price payable
for the Optioned Shares to be purchased and (B) shall concurrently provide
written directives to the Company to deliver the certificates for the Optioned
Shares to be purchased directly to such brokerage firm in order to complete the
sale transaction.
(i) RIGHTS OF A SHAREHOLDER. An Optionholder shall not have any of
the rights of a shareholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid the Option Price for the
Optioned Shares. No adjustment will be made for dividends or other rights for
which the record date is prior to the date of such exercise and full payment for
the Optioned Shares.
(j) REPURCHASE RIGHT. The Plan Administrator may, in its sole
discretion, set forth other terms and conditions upon which the Company (or its
assigns) shall have the right to repurchase shares of Stock acquired by an
Optionholder pursuant to an Option. Any repurchase right of the Company shall be
exercisable by the Company (or its assignees) upon such terms and conditions as
the Plan Administrator may specify in the Stock Repurchase Agreement evidencing
such right. The Plan Administrator may also in its discretion establish as a
term and condition of one or more Options granted under the Plan that the
Company shall have a right of first refusal with respect to any proposed sale or
other disposition by the Optionholder of any shares of Stock issued upon the
exercise of such Options. Any such right of first refusal shall be exercisable
by the Company (or its assigns) in accordance with the terms and conditions set
forth in the Stock Repurchase Agreement.
(k) TERMINATION OF INCENTIVE STOCK OPTIONS.
(i) TERMINATION OF SERVICE. If any Optionholder ceases to be
in Service to the Company for a reason other than permanent disability or death
and any vested Option held by such Optionholder is an Incentive Stock Option,
then such Optionholder may, within three months after the date of termination of
such
5
<PAGE> 6
Service, but in no event after the Incentive Stock Option's stated expiration
date, exercise some or all of the Incentive Stock Options that the Optionholder
was entitled to exercise on the date the Optionholder's Service terminated;
provided, that if the Optionholder is discharged for Cause or commits acts
detrimental to the Company's interests after the Service of the Optionholder has
been terminated, then the Incentive Stock Options will thereafter be void for
all purposes. "Cause" shall mean a termination of Service based upon a finding
by the applicable Plan Administrator that the Optionholder: (i) has committed a
felony involving dishonesty, fraud, theft or embezzlement; (ii) after written
notice from the Company has repeatedly failed or refused, in a material respect,
to follow reasonable policies or directives established by the Company; (iii)
after written notice from the Company, has willfully and persistently failed to
attend to material duties or obligations; (iv) has performed an act or failed to
act, which, if he were prosecuted and convicted, would constitute a theft of
money or property of the Company; or (v) has misrepresented or concealed a
material fact for purposes of securing employment with the Company. If any
Optionholder ceases to be in Service to the Company by reason of permanent
disability within the meaning of section 22(e)(3) of the Code (as determined by
the applicable Plan Administrator), the Optionholder will have 12 months after
the date of termination of Service, but in no event after the stated expiration
date of the Optionholder's Incentive Stock Options, to exercise Incentive Stock
Options that the Optionholder was entitled to exercise on the date the
Optionholder's Service terminated as a result of the disability.
(ii) DEATH OF OPTIONHOLDER. If an Optionholder dies while in
the Company's Service, any vested Options that are Incentive Stock Options that
the Optionholder was entitled to exercise on the date of death will be
exercisable within three months after such date or until the stated expiration
date of the Optionholder's Incentive Stock Options, whichever occurs first, by
the person or persons ("successors") to whom the Optionholder's rights pass
under a will or by the laws of descent and distribution. As soon as practicable
after receipt by the Company of the notice of exercise and of payment in full of
the Option Price as specified in Sections 2.2(g) and (h) hereof, a certificate
or certificates representing the Optioned Shares shall be registered in the name
or names specified by the successors in the written notice of exercise and shall
be delivered to the successors.
(l) TERMINATION OF NONQUALIFIED OPTIONS. Any Options that are not
Incentive Stock Options and that are exercisable at the time an Optionholder
ceases to be in Service to the Company shall remain exercisable for such period
of time thereafter as determined by the Plan Administrator at the time of grant
and set forth in the documents evidencing such Options. In the absence of any
provision in the documents evidencing such Options, the Options shall remain
exercisable (i) for a period of three months after termination as a result of
the Optionholder's death; (ii) for a period of 12 months if the Optionholder
ceases to be in service to the Company by reason of permanent disability within
the meaning of section 22(e)(3) of the Code (as determined by the applicable
Plan Administrator); and (iii) for a period of three months after termination
for any other reason; provided, that no Option shall be exercisable after the
Option's stated expiration date, and provided further, that if the Optionholder
is discharged for Cause (as defined in Section 2.2(k)(i)) or commits acts
detrimental to the Company's interests after the Service of the Optionholder has
been terminated, then the Option will thereafter be void for all purposes.
(m) OTHER PLAN PROVISIONS STILL APPLICABLE. If an Option is
exercised upon the termination of Service or death of an Optionholder under this
Section 2.2, the other provisions of the Plan will continue to apply to such
exercise, including the requirement that the Optionholder or its successor may
be required to enter into a Stock Repurchase Agreement.
(n) DEFINITION OF "SERVICE". For purposes of this Plan, unless it is
evidenced otherwise in the option agreement with the Optionholder, the
Optionholder is deemed to be in "Service" to the Company so long as such
individual renders continuous services on a periodic basis to the Company (or to
any Parent or Subsidiary Corporation) in the capacity of an employee, director,
or an independent consultant or advisor. In the discretion of the applicable
Plan Administrator, an Optionholder will be considered to be rendering
continuous services to the Company even if the type of services change, e.g.,
from employee to independent consultant. The Optionholder
6
<PAGE> 7
will be considered to be an employee for so long as such individual remains in
the employ of the Company or one or more of its Parent or Subsidiary
Corporations.
2.3 TERMS AND CONDITIONS OF STOCK AWARDS
(a) ELIGIBILITY. All Eligible Persons shall be eligible to receive
Stock Awards. The Plan Administrator of each administered group shall determine
the number of shares of Stock to be awarded from time to time to any Eligible
Person in such group. Except as otherwise provided in this Plan, the grant of a
Stock Award to a person (a "Grantee") shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) AWARD FOR SERVICES RENDERED. Stock Awards shall be granted in
recognition of an Eligible Person's services to the Company. The grantee of any
such Stock Award shall not be required to pay any consideration to the Company
upon receipt of such Stock Award, except as may be required to satisfy any
applicable Arizona corporate law, employment tax and/or income tax withholding
requirements.
(c) CONDITIONS TO AWARD. All Stock Awards shall be subject to such
terms, conditions, restrictions, or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the Company,
or payment by the recipient of any applicable employment or withholding taxes.
Such Plan Administrator may modify or accelerate the termination of the
restrictions applicable to any Stock Award under the circumstances as it deems
appropriate.
(d) AWARD AGREEMENTS. A Plan Administrator may require as a
condition to a Stock Award that the recipient of such Stock Award enter into an
award agreement in such form and content as that Plan Administrator from time to
time approves.
2.4 TERMS AND CONDITIONS OF SARS
(a) ELIGIBILITY. All Eligible Persons shall be eligible to receive
SARs. The Plan Administrator of each administered group shall determine the SARs
to be awarded from time to time to any Eligible Person in such group. The grant
of a SAR to a person shall neither entitle such person to, nor disqualify such
person from participation in, any other grant of options or awards by the
Company, whether under this Plan or under any other stock option or award plan
of the Company.
(b) AWARD OF SARS. Concurrently with or subsequent to the grant of
any Option to purchase one or more shares of Stock, the Plan Administrator may
award to the Optionholder with respect to each share of Stock underlying the
Option, a related SAR permitting the Optionholder to be paid any appreciation on
that Stock in lieu of exercising the Option. In addition, a Plan Administrator
may award to any Eligible Person a SAR permitting the Eligible Person to be paid
the appreciation on a designated number of shares of the Stock, whether or not
such shares are actually issued.
(c) CONDITIONS TO SAR. All SARs shall be subject to such terms,
conditions, restrictions or limitations as the applicable Plan Administrator
deems appropriate, including, by way of illustration but not by way of
limitation, restrictions on transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
7
<PAGE> 8
(d) SAR AGREEMENTS. A Plan Administrator may require as a condition
to the grant of a SAR that the recipient of such SAR enter into a SAR agreement
in such form and content as that Plan Administrator from time to time approves.
(e) EXERCISE. An Eligible Person who has been granted a SAR may
exercise such SAR subject to the conditions specified by the Plan Administrator
in the SAR agreement.
(f) AMOUNT OF PAYMENT. The amount of payment to which the grantee of
a SAR shall be entitled upon the exercise of each SAR shall be equal to the
amount, if any, by which the fair market value of the specified shares of Stock
on the exercise date exceeds the fair market value of the specified shares of
Stock on the date the Option related to the SAR was granted or became effective,
or, if the SAR is not related to any Option, on the date the SAR was granted or
became effective.
(g) FORM OF PAYMENT. The SAR may be paid in either cash or Stock, as
determined in the discretion of the applicable Plan Administrator and set forth
in the SAR agreement. If the payment is in Stock, the number of shares to be
paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 2.4(f) by the fair market value of a
share of Stock on the exercise date of such SAR. As soon as practical after
exercise, the Company shall deliver to the SAR grantee a certificate or
certificates for such shares of Stock.
(h) TERMINATION OF EMPLOYMENT; DEATH. Section 2.2(k), applicable to
Incentive Stock Options, and Section 2.2(l), applicable to all other Options,
shall apply equally to SARs issued in tandem with such Options. Section 2.2(l)
shall apply equally to SARs that are not issued in tandem with any Options.
2.5 OTHER CASH AWARDS
(a) IN GENERAL. The Plan Administrator of each administered group
shall have the discretion to make other awards of cash to Eligible Persons in
such group ("Cash Awards"). Such Cash Awards may relate to existing Options or
to the appreciation in the value of the Stock or other Company securities.
(b) CONDITIONS TO AWARD. All Cash Awards shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content as the Plan Administrator from time to
time approves.
ARTICLE III
MISCELLANEOUS
3.1 CAPITAL ADJUSTMENTS. The aggregate number of shares of Stock subject
to the Plan, the number of shares of Stock covered by outstanding Options and
Awards, and the price per share stated in all outstanding Options and Awards
shall be proportionately adjusted for any increase or decrease in the number of
outstanding shares of Stock of the Company resulting from a subdivision or
consolidation of shares or any other capital adjustment or the payment of a
stock dividend or any other increase or decrease in the number of such shares
effected without the Company's receipt of consideration therefor in money,
services or property.
3.2 MERGERS, ETC. If the Company is the surviving corporation in any
merger or consolidation (not including a Corporate Transaction), any Option or
Award granted under the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to the Option or Award
would have been entitled prior to the merger or consolidation. Except as
provided in Section 3.3 hereof, a dissolution or liquidation of the Company
shall cause every Option or Award outstanding hereunder to terminate.
8
<PAGE> 9
3.3 CORPORATE TRANSACTION. In the event of shareholder approval of a
Corporate Transaction, the Plan Administrator shall have the discretion and
authority, exercisable at any time, to provide for the automatic acceleration of
one or more of the outstanding Options or Awards granted by it under the Plan.
Upon the consummation of the Corporate Transaction, all Options shall, to the
extent not previously exercised, terminate and cease to be outstanding.
3.4 CHANGE IN CONTROL.
(a) GRANT PROGRAM. In the event of a Change in Control, a Plan
Administrator shall have the discretion and authority, exercisable at any time,
whether before or after the Change in Control, to provide for the automatic
acceleration of one or more outstanding Options or Awards granted by it under
the Plan upon the occurrence of such Change in Control. A Plan Administrator may
also impose limitations upon the automatic acceleration of such Options or
Awards to the extent it deems appropriate. Any Options or Awards accelerated
upon a Change in Control will remain fully exercisable until the expiration or
sooner termination of the Option term.
(b) INCENTIVE STOCK OPTION LIMITS. The exercisability of any Options
which are intended to qualify as Incentive Stock Options and which are
accelerated by the Plan Administrator in connection with a pending Corporation
Transaction or Change in Control shall, except as otherwise provided in the
discretion of the Plan Administrator and the Optionholder, remain subject to the
$100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
3.5 CALCULATION OF FAIR MARKET VALUE OF STOCK. The fair market value of a
share of Stock on any relevant date shall be determined in accordance with the
following provisions:
(a) If the Stock is not at the time listed or admitted to trading on
any stock exchange but is traded in the over-the-counter market, the fair market
value shall be the mean between the highest bid and lowest asked prices (or, if
such information is available, the closing selling price) per share of Stock on
the date in question in the over-the-counter market, as such prices are reported
by the National Association of Securities Dealers through its Nasdaq system or
any successor system. If there are no reported bid and asked prices (or closing
selling price) for the Stock on the date in question, then the mean between the
highest bid price and lowest asked price (or the closing selling price) on the
last preceding date for which such quotations exist shall be determinative of
fair market value.
(b) If the Stock is at the time listed or admitted to trading on any
stock exchange, then the fair market value shall be the closing selling price
per share of Stock on the date in question on the stock exchange determined by
the Board to be the primary market for the Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If there is no
reported sale of Stock on such exchange on the date in question, then the fair
market value shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate, including one or more
independent professional appraisals.
3.6 USE OF PROCEEDS. The proceeds received by the Company from the sale of
Stock pursuant to the exercise of Options or Awards hereunder, if any, shall be
used for general corporate purposes.
3.7 CANCELLATION OF OPTIONS. Each Plan Administrator shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Options
granted under the Plan by that Plan Administrator and to grant in substitution
therefore new Options under
9
<PAGE> 10
the Plan covering the same or different numbers of shares of Stock as long as
such new Options have an exercise price per share of Stock no less than the
minimum exercise price as set forth in Section 2.2(b) hereof on the new grant
date.
3.8 REGULATORY APPROVALS. The implementation of the Plan, the granting of
any Option or Award hereunder, and the issuance of Stock upon the exercise of
any such Option or Award shall be subject to the procurement by the Company of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the Options or Awards granted under it, and the Stock issued
pursuant to it.
3.9 INDEMNIFICATION. In addition to such other rights of indemnification
as they may have, the members of a Plan Administrator shall be indemnified and
held harmless by the Company, to the extent permitted under applicable law, for,
from and against all costs and expenses reasonably incurred by them in
connection with any action, legal proceeding to which any member thereof may be
a party by reason of any action taken, failure to act under or in connection
with the Plan or any rights granted thereunder and against all amounts paid by
them in settlement thereof or paid by them in satisfaction of a judgment of any
such action, suit or proceeding, except a judgment based upon a finding of bad
faith.
3.10 PLAN NOT EXCLUSIVE. This Plan is not intended to be the exclusive
means by which the Company may issue options or warrants to acquire its Stock,
stock awards or any other type of award. To the extent permitted by applicable
law, any such other option, warrants or awards may be issued by the Company
other than pursuant to this Plan without shareholder approval.
3.11 COMPANY RIGHTS. The grants of Options shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
3.12 ASSIGNMENT. The right to acquire Stock or other assets under the Plan
may not be assigned, encumbered or otherwise transferred by any Optionholder
except as specifically provided herein. Except as specifically allowed by the
Plan Administrator at the time of grant and set forth in the documents
evidencing an Option or Award, no Option or Award granted under the Plan or any
of the rights and privileges conferred thereby shall be assignable or
transferable by an Optionholder or grantee other than by will or the laws of
descent and distribution, and such Option or Award shall be exercisable during
the Optionholder's or grantee's lifetime only by the Optionholder or grantee.
The provisions of the Plan shall inure to the benefit of, and be binding upon,
the Company and its successors or assigns, and the Optionholders, the legal
representatives of their respective estates, their respective heirs or legatees
and their permitted assignees.
3.13 SECURITIES RESTRICTIONS
(a) LEGEND ON CERTIFICATES. All certificates representing shares of
Stock issued under the Plan shall be endorsed with a legend reading as follows:
The shares of Common Stock evidenced by this certificate have
been issued to the registered owner in reliance upon written
representations that these shares have been purchased solely
for investment. These shares may not be sold, transferred or
assigned unless in the opinion of the Company and its legal
counsel such sale, transfer or assignment will not be in
violation of the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
(b) PRIVATE OFFERING FOR INVESTMENT ONLY. The Options and Awards are
and shall be made available only to a limited number of present and future key
personnel and their permitted transferees who have
10
<PAGE> 11
knowledge of the Company's financial condition, management and its affairs. The
Plan is not intended to provide additional capital for the Company, but to
encourage ownership of Stock among the Company's key personnel or their
permitted transferees. By the act of accepting an Option or Award, each grantee
or permitted transferees agrees (i) that, any shares of Stock acquired will be
solely for investment and not with any intention to resell or redistribute those
shares and (ii) such intention will be confirmed by an appropriate certificate
at the time the Stock is acquired if requested by the Company. The neglect or
failure to execute such a certificate, however, shall not limit or negate the
foregoing agreement.
(c) REGISTRATION STATEMENT. If a Registration Statement covering the
shares of Stock issuable under the Plan is filed under the Securities Act of
1933, as amended, and is declared effective by the Securities Exchange
Commission, the provisions of Sections 3.13(a) and (b) shall terminate during
the period of time that such Registration Statement, as periodically amended,
remains effective.
3.14 TAX WITHHOLDING.
(a) GENERAL. The Company's obligation to deliver Stock under the
Plan shall be subject to the satisfaction of all applicable federal, state and
local income tax withholding requirements.
(b) SHARES TO PAY FOR WITHHOLDING. The Board may, in its discretion
and in accordance with the provisions of this Section 3.14(b) and such
supplemental rules as it may from time to time adopt, provide any or all
Optionholders or Grantees with the right to use shares of Stock in satisfaction
of all or part of the federal, state and local income tax liabilities incurred
by such Optionholders or Grantees in connection with the receipt of Stock
("Taxes"). Such right may be provided to any such Optionholder or Grantee in
either or both of the following formats:
(i) STOCK WITHHOLDING. An Optionholder or Grantee may be
provided with the election, which may be subject to approval by the Plan
Administrator, to have the Company withhold, from the Stock otherwise issuable,
a portion of those shares of Stock with an aggregate fair market value equal to
the percentage (not to exceed 100 percent) of the applicable Taxes designated by
the Optionholder or Grantee.
(ii) STOCK DELIVERY. The Board may, in its discretion, provide
the Optionholder or Grantee with the election to deliver to the Company, at the
time the Option is exercised or Stock is awarded, one or more shares of Stock
previously acquired by such individual (other than pursuant to the transaction
triggering the Taxes) with an aggregate fair market value equal to the
percentage of the taxes (not to exceed 100 percent) incurred in connection with
such Option exercise or Stock Award designated by the Optionholder or Grantee.
3.15 GOVERNING LAW. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Arizona.
ARTICLE IV
DEFINITIONS
The following capitalized terms used in this Plan shall have the meaning
described below:
"AFFILIATES" shall mean all "officers" (as that term is defined in Rule
16a-1(f) promulgated under the 1934 Act) and directors of the Company and all
persons who own ten percent or more of the Company's issued and outstanding
Stock.
"AWARD" shall mean a Stock Award, SAR or Cash Award under the Grant
Program.
"BOARD" shall mean the Board of Directors of the Company.
11
<PAGE> 12
"CASH AWARD" shall mean an award to be paid in cash and granted under
Section 2.5 hereunder.
"CHANGE IN CONTROL" shall mean and include the following transactions or
situations:
(i) A sale, transfer, or other disposition by the Company through a
single transaction or a series of transactions of securities of the Company
representing 30 percent or more of the combined voting power of the Company's
then outstanding securities to any "Unrelated Person" or "Unrelated Persons"
acting in concert with one another. For purposes of this definition, the term
"Person" shall mean and include any individual, partnership, joint venture,
association, trust corporation, or other entity (including a "group" as referred
to in Section 13(d)(3) of the 1934 Act). For purposes of this definition, the
term "Unrelated Person" shall mean and include any Person other than the
Company, a wholly-owned subsidiary of the Company, or an employee benefit plan
of the Company.
(ii) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(iii) A change in the ownership of the Company through a single
transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing at
least 30 percent of the combined voting power of the Company's then outstanding
securities. For purposes of this definition, the term "Beneficial Owner" shall
have the same meaning as given to that term in Rule 13d-3 promulgated under the
1934 Act, provided that any pledgee of voting securities is not deemed to be the
Beneficial Owner thereof prior to its acquisition of voting rights with respect
to such securities.
(iv) Any consolidation or merger of the Company with or into an
Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the surviving
corporation representing at least 50 percent of the combined voting power of the
surviving corporation's then outstanding securities.
(v) During any period of two years, individuals who, at the
beginning of such period, constituted the Board of Directors of the Company
cease, for any reason, to constitute at least a majority thereof, unless the
election or nomination for election of each new director was approved by the
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period.
(vi) A change in control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the 1934 Act, or any successor regulation of similar
import, regardless of whether the Company is subject to such reporting
requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the General
Bankruptcy Code or any successor or other statute of similar import shall not be
deemed to be a Change of Control for purposes of this Plan.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMPANY" shall mean DenAmerica Corp., a Georgia corporation.
"CORPORATE TRANSACTION" shall mean (a) a merger or consolidation in which
the Company is not the surviving entity, except for a transaction the principal
purposes of which is to change the state in which the Company is incorporated;
(b) the sale, transfer of or other disposition of all or substantially all of
the assets of the Company and complete liquidation or dissolution of the
Company, or (c) any reverse merger in which the Company
12
<PAGE> 13
is the surviving entity but in which the securities possessing more than 50
percent of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from those who held
such securities immediately prior to such merger.
"EFFECTIVE DATE" shall mean the date that the Plan has been approved by
the shareholders as required by Section 1.3(a) hereof.
"ELIGIBLE PERSONS" shall mean, with respect to the Grant Program, those
persons who, at the time that the Option or Award is granted, are (i) key
personnel (including officers and directors) of the Company or Parent or
Subsidiary Corporations, or (ii) consultants or independent contractors who
provide valuable services to the Company or Parent or Subsidiary Corporations.
"EMPLOYEE COMMITTEE" shall mean that committee appointed by the Board to
administer the Plan with respect to the Non-Affiliates and comprised of one or
more persons who are members of the Board.
"EXERCISE DATE" shall be the date on which written notice of the exercise
of an Option and payment of the Option Price is delivered to the Company in
accordance with the requirements of the Plan.
"GRANTEE" shall mean an Eligible Person who has received an Award.
"GRANT PROGRAM" shall mean the program described in Article II of this
Agreement pursuant to which certain Eligible Persons are granted Options or
Awards in the discretion of the Plan Administrator.
"INCENTIVE STOCK OPTION" shall mean an Option that is intended to qualify
as an "incentive stock option" under Code section 422.
"NON-AFFILIATES" shall mean all persons who are not Affiliates.
"NON-EMPLOYEE DIRECTORS" shall mean those Directors who satisfy the
definition of "Non-Employee Director" under Rule 16b-3(b)(3)(i) promulgated
under the 1934 Act.
"$100,000 LIMITATION" shall mean the limitation pursuant to which the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock Options
during any one calendar year shall not exceed the sum of $100,000.
"OPTIONHOLDER" shall mean an Eligible Person to whom Options have been
granted.
"OPTIONED SHARES" shall be those shares of Stock to be optioned from time
to time to any Eligible Person.
"OPTION PRICE" shall mean the exercise price per share as specified by the
Plan Administrator or by the terms of the Plan.
"OPTIONS" shall mean options to acquire Stock granted under the Plan.
"PARENT CORPORATION" shall mean any corporation in the unbroken chain of
corporations ending with the employer corporation, where, at each link of the
chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below.
"PLAN" shall mean this stock option plan for DenAmerica Corp.
13
<PAGE> 14
"PLAN ADMINISTRATOR" shall mean (a) either the Board, the Senior
Committee, or any other committee, whichever is applicable, with respect to the
administration of the Grant Program as it relates to Affiliates and (b) either
the Board, the Employee Committee, or any other committee, whichever is
applicable, with respect to the administration of the Grant Program as it
relates to Non-Affiliates.
"SAR" shall mean stock appreciation rights granted pursuant to Section 2.4
hereof.
"SENIOR COMMITTEE" shall mean that committee appointed by the Board to
administer the Grant Program with respect to the Affiliates and comprised of two
or more Non-Employee Directors.
"SERVICE" shall have the meaning set forth in Section 2.2(n) hereof.
"STOCK" shall mean shares of the Company's common stock, $.01 par value
per share, which may be unissued or treasury shares, as the Board may from time
to time determine.
"STOCK AWARDS" shall mean Stock directly granted under the Grant Program.
"SUBSIDIARY CORPORATION" shall mean any corporation in the unbroken chain
of corporations starting with the employer corporation, where, at each link of
the chain, the corporation and the link above owns at least 50 percent of the
combined voting power of all classes of stock in the corporation below.
EXECUTED as of the 10th day of December, 1996.
DENAMERICA CORP.
By:______________________________
Name:____________________________
Its:_____________________________
ATTESTED BY:
_____________________________
Secretary
14
<PAGE> 1
EXHIBIT 11.1
DENAMERICA CORP.
CALCULATION OF EARNINGS PER SHARE
(000 OMITTED)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
DECEMBER 27, JANUARY 1,
1995 1997
----------- ------------
<S> <C> <C>
Net Income Before Extraordinary Item ........................ $ 200 $ 1,615
Net Income (Loss) ........................................... 200 1,118
Less: Preferred Stock Dividend and Accretion ................ (593) (149)
----------- ------------
Net Income (Loss) Applicable to Common Shareholders ......... $ (393) $ 969
=========== ============
Net Income (Loss) Per Common Share Before Extraordinary Item $ (.06) $ .14
=========== ============
Net Income (Loss) Per Common Share .......................... $ (.06) $ .08
=========== ============
Weighted Average Common and
Common Equivalent Shares Outstanding ...................... 6,937,500 11,698,000
=========== ============
</TABLE>
<PAGE> 1
EXHIBIT 12.1
DENAMERICA CORP.
RATIO OF INCOME TO FIXED CHARGES
(000 OMITTED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DEC. 31, DEC. 30, DEC. 28, DEC. 27, JAN. 1,
1992 1993 1994 1995 1997
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Income (Loss) Before Income Taxes
and Extraordinary Item $ 162 $ 284 $ (550) $ 505 $ 2,485
Fixed Charges:
Rental Expense ................. 1,028 1,111 1,584 2,499 7,660
Interest ....................... 449 736 1,301 2,467 9,255
Debt Expense Amortization ...... -- -- 15 144 350
------ ------ ------- ------ -------
Total Fixed Charges ......... 1,477 1,847 2,900 5,110 17,265
------ ------ ------- ------ -------
Net Income as Adjusted ............ $1,639 $2,131 $ 2,350 $5,615 $19,750
====== ====== ======= ====== =======
Ratio ............................. 1.11 1.15 .81 1.10 1.14
====== ====== ======= ====== =======
Amount Inadequate to Cover
Fixed Charges .................. $ 550
=======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
33-93192 and Registration Statement No. 333-09731 of DenAmerica Corp. on Forms
S-8, and the incorporation by reference in the Registration Statement No.
333-07019 of DenAmerica Corp. on Form S-3 of our report dated March 21, 1997,
appearing in the Annual Report on Form 10-K of DenAmerica Corp. for the year
ended January 1, 1997.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
JANUARY 1, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR PURPOSES OF SECTION 11
OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF
1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE
DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE,
UNLESS SUCH FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1997
<PERIOD-START> DEC-28-1995
<PERIOD-END> JAN-01-1997
<EXCHANGE-RATE> 1
<CASH> 2,609
<SECURITIES> 0
<RECEIVABLES> 4,102
<ALLOWANCES> 0
<INVENTORY> 3,520
<CURRENT-ASSETS> 14,382
<PP&E> 84,738
<DEPRECIATION> 11,014
<TOTAL-ASSETS> 179,189
<CURRENT-LIABILITIES> 47,411
<BONDS> 94,132
0
0
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<SALES> 241,480
<TOTAL-REVENUES> 241,480
<CGS> 65,966
<TOTAL-COSTS> 65,966
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<INTEREST-EXPENSE> 9,605
<INCOME-PRETAX> 2,485
<INCOME-TAX> 870
<INCOME-CONTINUING> 1,615
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<EXTRAORDINARY> (497)
<CHANGES> 0
<NET-INCOME> 969
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
