UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 2, 1997
Commission File Number 1-13226
DENAMERICA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-1861457
- ---------------------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7373 N. SCOTTSDALE ROAD
SUITE D-120, SCOTTSDALE AZ 85253 85253
- ---------------------------------------- --------------------------
(address of principal executive offices) (zip code)
(602) 483-7055
--------------
(registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of shares of the issuer's class of common stock as of the latest
practicable date, is as follows:
13,437,777 shares of Common Stock, $.10 par value, as of August 20, 1997.
- -------------------------------------------------------------------------
<PAGE>
DENAMERICA CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 2, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 1, 1997 and July 2, 1997 ................................................... 3
Condensed Consolidated Statements of Operations -
13-Week Period ended July 2, 1997 and 14-Week Period ended July 3, 1996 and
26-Week Period ended July 2, 1997 and 27-Week Period ended July 3, 1996............. 5
Condensed Consolidated Statements of Cash Flows -
13-Week Period ended July 2, 1997 and 14-Week Period ended July 3, 1996 and
26-Week Period ended July 2, 1997 and 27-Week Period ended July 3, 1996............. 6
Notes to Condensed Consolidated Financial Statements.................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 8
PART II. OTHER INFORMATION....................................................................... 18
SIGNATURES.............................................................................. 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
January 1, July 2,
Assets 1997 1997
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $2,609 $1,134
Receivables.......................................................... 4,102 3,579
Inventories.......................................................... 3,520 3,661
Deferred income taxes................................................ 2,955 3,582
Other current assets................................................. 1,196 2,026
-------- --------
Total current assets............................................ 14,382 13,982
-------- --------
Property and equipment, net.......................................... 73,724 68,865
Intangibles, net..................................................... 71,924 71,732
Deferred financing costs, net........................................ 3,801 3,514
Deferred income taxes................................................ 7,174 7,174
Other assets......................................................... 8,184 8,365
-------- --------
$179,189 $173,632
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
January 1, July 2,
Liabilities and Shareholders' Equity 1997 1997
------------------------------------ ------------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable........................................................ $18,202 $18,600
Accrued compensation and related costs.................................. 8,487 6,504
Accrued taxes........................................................... 4,636 3,852
Other current liabilities............................................... 8,424 5,799
Current portion of long-term debt and
obligations under capital leases....................................... 7,662 7,912
-------- --------
Total current liabilities.............................................. 47,411 42,667
-------- --------
Long-term debt, less current portion...................................... 94,132 94,441
Deferred rent and other................................................... 14,732 14,630
-------- --------
Total liabilities...................................................... 156,275 151,738
-------- --------
Minority interest in joint ventures....................................... 786 581
-------- --------
Shareholders' equity
Common stock ........................................................... 1,340 1,342
Additional paid-in capital.............................................. 35,706 35,781
Accumulated deficit..................................................... (14,918) (15,810)
-------- --------
Total shareholders' equity............................................. 22,128 21,313
-------- --------
$179,189 $173,632
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Period ended Period ended
-------------------------------- --------------------------------
July 3 July 2, July 3, July 2,
1996 1997 1996 1997
------------- ------------ ------------ -------------
(14 weeks) (13 weeks) (27 weeks) (26 weeks)
<S> <C> <C> <C> <C>
Restaurant sales....................................... $ 59,012 $ 76,185 $ 79,173 $152,299
---------- ---------- ---------- ----------
Restaurant operating expenses:
Cost of food and beverage............................ 16,339 20,840 21,971 41,453
Payroll and payroll related costs.................... 20,156 26,260 27,416 52,361
Depreciation and amortization........................ 1,920 2,324 2,836 4,590
Other restaurant operating expenses.................. 14,590 20,403 20,074 41,680
---------- ---------- ---------- ----------
Total restaurant operating expenses................. 53,006 69,827 72,298 140,084
---------- ---------- ---------- ----------
Restaurant operating income............................ 6,006 6,358 6,875 12,215
Administrative expenses................................ 2,134 3,831 3,181 7,575
---------- ---------- ---------- ----------
Operating income....................................... 3,873 2,527 3,695 4,640
Interest expense, net.................................. 2,791 3,164 3,651 6,367
---------- ---------- ---------- ----------
Income (loss) before minority interest in joint
venture, income taxes, and extraordinary item........ 1,082 (637) 44 (1,727)
Minority interest in joint venture..................... 13 (53) 11 (162)
---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item................................... 1,069 (584) 33 (1,565)
Income tax (benefit) expense........................... 372 (234) 13 (626)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item............... 697 (350) 20 (939)
Extraordinary item - loss on
extinguishment of debt............................... ---- ---- (497) ----
---------- ---------- ---------- ----------
Net income (loss)...................................... 697 (350) (477) (939)
Preferred stock dividend and accretion................. ---- ---- (149) ----
---------- ---------- ---------- ----------
Net income (loss) applicable to common
shareholders.......................................... $ 697 $ (350) $ (626) $ (939)
========== ========== ========== ==========
Net income (loss) per common share
before extraordinary item............................ $ .05 $ (.03) $ (.01) $ (.07)
========== ========== ========== ==========
Net income (loss) per common share..................... $ .05 $ (.03) $ (.06) $ (.07)
========== ========== ========== ==========
Weighted average shares outstanding.................... 13,649,000 13,414,000 10,293,000 13,414,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Period ended Period ended
------------------------------ -------------------------------
July 3 July 2, July 3, July 2,
1996 1997 1996 1997
------------ ----------- ------------ ------------
(14 weeks) (13 weeks) (27 weeks) (26 weeks)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 697 $ (350) $ (477) $ (939)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization..................... 1,920 2,324 2,836 4,590
Amortization of deferred financing costs.......... 83 162 128 287
Minority interest in joint venture................ 13 (53) 11 (162)
Deferred income taxes............................. 372 (234) 13 (626)
Deferred rent - long term ........................ 51 341 132 417
Other............................................. 78 (263) 488 (133)
Changes in operating assets and liabilities:
Receivables..................................... (1,182) 721 (1,399) 756
Inventories..................................... (490) 65 (548) (141)
Prepaid expenses and other assets............... (574) (917) (1,009) (830)
Accounts payable and accrued liabilities........ (4,104) 465 (1,012) (5,547)
------ ------ ------ ------
Net cash provided by (used in)
operating activities.......................... (3,136) 2,261 (837) (2,328)
------ ------ ------ ------
Cash flows from investing activities:
Purchase of property and equipment................... (2,487) (1,528) (3,912) (3,006)
Purchase of intangibles.............................. (121) (313) (534) (1,498)
Payment for Acquisition of BEP and Merger,
net of cash acquired 2,412 ---- (231) ----
Proceeds from the sale of assets..................... ---- 498 ---- 6,734
------ ------ ------ ------
Net cash (used in) provided by investing
activities...................................... (196) (1,343) (4,677) 2,230
------ ------ ------ ------
Cash flows from financing activities:
Borrowings, net...................................... 9,711 759 13,361 2,230
Principal reductions on long-term obligations........ (6,331) (1,861) (7,675) (3,684)
Issuance of Common Stock and other, net.............. (48) 28 (172) 77
------ ------ ------ ------
Net cash provided by financing activities......... 3,332 (1,074) 5,514 (1,377)
------ ------ ------ ------
Net change in cash and cash equivalents........... ---- (156) ---- (1,475)
Cash and cash equivalents at beginning of period....... ---- 1,290 ---- 2,609
------ ------ ------ ------
Cash and cash equivalents at end of period............. $ ---- $1,134 $ ---- $1,134
====== ====== ====== ======
Supplemental schedule of cash flow information:
Cash paid during period for:
Interest............................................. $2,083 $2,326 $3,033 $5,480
====== ====== ====== ======
Income taxes......................................... $ 47 $ ---- $ 47 $ ----
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
(1) Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements of
DenAmerica Corp. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. These statements should be read in
conjunction with the consolidated financial statements and notes thereto and
management's discussion and analysis of financial condition and results of
operations included in the Company's Annual Report on Form 10-K for the fiscal
year ended January 2, 1997.
The three-month and six-month periods ended July 2, 1997, as explained below,
are not comparable to the prior periods.
Mergers
On March 29, 1996, Denwest Restaurant Corp. ("DRC") merged with and into the
Company, with the Company being the surviving corporation (the "Merger"). Upon
consummation of the Merger, the Company changed its name from American Family
Restaurants, Inc. ("AFR") to DenAmerica Corp. 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.
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.
In accordance with the accounting rules for a purchase and a reverse
acquisition, the consolidated financial statements presented herein are as
follows:
(i) Consolidated Statements of Operations of the Company for the
periods ended July 2, 1997 (which include the results of
operations of the Company following the Merger and the BEP
Acquisition) and July 3, 1996 (which include the results of
operations of the AFR restaurants since the March 27, 1996
accounting date of the Merger and the results of operations of
BEP since the June 24, 1996 accounting date of the BEP
Acquisition); and
7
<PAGE>
(ii) Consolidated Statements of Cash Flows of the Company for the
periods ended July 2, 1997 (which include the results of
operations of the Company following the Merger and the BEP
acquisition) and July 3, 1996 (which include the results of
operations of the AFR restaurants since the March 27, 1996
accounting date of the Merger and the results of operations of
BEP since the June 24, 1996 accounting date of the BEP
Acquisition).
(2) Earnings Per Share
Earnings per share for the period ended July 3, 1996 has been computed
based upon the weighted average of (i) 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) the Company's Common Stock outstanding
after the Merger. Earnings per share for the period ended July 2, 1997 has been
computed based upon the weighted average of the common shares outstanding as of
July 2, 1997.
(3) Subsequent Events
In July 1997, the Company sold fourteen Denny's and two non-Denny's
restaurants to an unrelated party for $2.1 million. In addition, in August 1997
the Company entered into an agreement to sell 61 Denny's and 10 non-Denny's
restaurants for gross cash proceeds of $28.4 million, a $3.0 million promissory
note due within 90 days of close, and a promissory note in the principle amount
of $6.0 million which matures in 2000. The consummation of this transaction is
subject to various matters, including obtaining landlord and lender consents.
ITEM 2. 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. Accordingly, the Merger has been accounted for as a reverse purchase
under generally accepted accounting principles with an effective accounting date
of March 27, 1996, the last day of DRC's first quarter for fiscal 1996. In
addition, 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 the 1997 periods were materially impacted
by the Merger and the BEP Acquisition. During the second quarter of 1997 and for
the six month period then ended, revenue and related expenses increased
significantly over prior years primarily as a result of these acquisitions. As a
result, the 1997 operating results are not comparable to prior periods. In
addition, the 1997 second quarter contains thirteen weeks while the 1996 second
quarter contains fourteen weeks.
8
<PAGE>
General
The 1996 operating results reflect fourteen-week and twenty-seven week
periods versus thirteen-week and twenty-six week periods in 1997. The additional
week in the 1996 periods is significant in that revenues are included without a
corresponding increase in certain fixed costs, including occupancy, utilities
and administrative expenses.
As set forth below, the Company's restaurant operating income and
operating income increased by $5.3 million and $945,000 for the twenty-six week
period ended July 2, 1997 as compared with the twenty-seven week period ended
July 3, 1996. For the thirteen week period ended July 2, 1997, these amounts
increased $350,000 and decreased $1.4 million, respectively as compared with the
fourteen-week period ended July 3, 1996. The decrease in operating income for
the thirteen-week period ended July 2, 1997 would have been $2.0 million without
the gain on sale of restaurants of $650,000. These changes result primarily from
the Merger and the BEP Acquisition, the additional week of operating results in
1996, and the decline in Denny's same-store sales in 1997, as described below.
Denny's
- -------
As of July 2, 1997, the Company operated 190 Denny's restaurants in 31
states. In January 1996, the Company and Denny's, Inc. adopted the "Breakaway
Breakfast" value pricing promotion, which offered five breakfast items for $1.99
or less. In September 1996, the Company withdrew from the Breakaway Breakfast
and increased the price of the Grand Slam breakfast to $2.99. The withdrawal
from the Breakaway Breakfast resulted in the decline of comparable Denny's
restaurant sales of 5.6% during the thirteen week period ending July 2, 1997
compared with the prior year. The average guest check increased from $4.99
during the second quarter 1996 to $5.31 for the second quarter of 1997; however,
guest counts for the same period declined. These operating results are
consistent with the results reported for Denny's restaurants operated by
Denny's, Inc. In order to mitigate the possible material negative impact of the
continued decline in the Denny's sales levels, the Company has adopted a
selective restaurant disposition strategy described below.
Black-eyed Pea
- --------------
As of July 2, 1996, the Company operated 91 Black-eyed Pea restaurants
in 13 states and franchised 25 Black-eyed pea restaurants in 5 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. For the
twenty-six week period ended July 2, 1997, comparable same-store sales decreased
4.6% for all of the Company's Black-eyed Pea restaurants, although only 2.4% in
the core market. The guest check average at the Company's Black-eyed Pea
restaurants is approximately $7.90. For the second quarter, alcohol and
carry-out sales accounted for approximately 2.3% and 10.1%, respectively, of
total sales at the Company's Black-eyed Pea restaurants.
9
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
in the condensed consolidated statements of operations as a percentage of total
restaurant sales. As discussed above, as a result of the Merger and BEP
Acquisition, these results are not comparable.
<TABLE>
<CAPTION>
Period ended Period ended
--------------------------- --------------------------
July 3, July 2, July 3, July 2,
1996 1997 1996 1997
------------ ----------- ----------- -----------
(14 weeks) (13 weeks) (27 weeks) (26 weeks)
<S> <C> <C> <C> <C>
Restaurant sales: 100.0 % 100.0 % 100.0 % 100.0 %
Restaurant operating expenses:
Cost of food and beverages.................... 27.7 27.4 27.8 27.2
Payroll and payroll related costs............. 34.2 34.5 34.6 34.4
Depreciation and amortization................. 3.3 3.1 3.6 3.0
Other restaurant operating cost............... 24.6 26.8 25.3 27.4
----- ----- ----- -----
Total restaurant operating expenses.. 89.8 91.7 91.3 92.0
----- ----- ----- -----
Restaurant operating income...................... 10.2 8.3 8.7 8.0
Administrative expenses.......................... 3.6 5.0 4.0 5.0
----- ----- ----- -----
Operating income................................. 6.6 3.3 4.7 3.0
Interest expense................................. 4.8 4.2 4.6 4.1
----- ----- ----- -----
Income (loss) before minority interest in joint
ventures, income taxes, and extraordinary
item........................................... 1.8 (.9) .1 (1.1)
Minority interest in joint ventures.............. .0 (.1) .0 (.1)
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item............................. 1.8 (.8) .1 (1.0)
Income tax expense (benefit)..................... .6 (.3) .0 (.4)
----- ----- ----- -----
Income (loss) before extraordinary item.......... 1.2 (.5) .1 (.6)
Extraordinary item - loss on extinguishment
of debt................................... ---- --- (.6) % ---
----- ----- ----- -----
Net income (loss)................................ 1.2 % (.5) % (.5) % (.6) %
===== ===== ===== =====
</TABLE>
10
<PAGE>
THIRTEEN-WEEK PERIOD ENDED JULY 2, 1997 COMPARED WITH FOURTEEN-WEEK PERIOD ENDED
JULY 3, 1996
Restaurant sales. Restaurant sales increased $17.2 million, or 29%, to
$76.2 million for the thirteen-week period ended July 2, 1997 as compared with
restaurant sales of $59.0 million for the fourteen-week period ended July 3,
1996. This increase was primarily attributable to the BEP Acquisition.
Cost of Food and Beverage. Cost of food and beverage decreased to 27.4%
of restaurant sales for the thirteen-week period ended July 2, 1997 as compared
with 27.7% of restaurant sales for the fourteen-week period ended July 3, 1996,
primarily as the result of discontinuing several Denny's promotional programs
implemented in January 1996 and the conversion or sale of certain of the
Company's non-branded restaurants.
Payroll and Payroll Costs. Payroll and payroll related costs were 34.5%
of restaurant sales for the thirteen-week period ended July 2, 1997 as compared
with 34.2% of restaurant sales for the fourteen-week period ended July 3, 1996.
This increase was primarily attributable to a decrease in comparable store sales
as well as increased training and employee turnover costs in the Denny's
restaurants.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs, and other items decreased to 3.1% of restaurant sales for the
thirteen-week period ended July 2, 1997 as compared with 3.3% of restaurant
sales for the fourteen-week period ended July 3, 1996. The increase of $400,000
was primarily attributable to the amortization of intangible assets associated
with the 1996 acquisitions.
Other Restaurant Operating Costs. Other restaurant operating costs were
26.8% of restaurant sales for the thirteen-week period ended July 2, 1997 as
compared with 24.6% of restaurant sales for the fourteen-week period ended July
3, 1996. Included in the 1997 results is a gain of $650,000 relating to the sale
of eleven non-branded restaurants. Excluding this gain, other restaurant
operating costs, expressed as a percentage of revenue, would have been 27.6%.
This increase was primarily attributable to the inclusion of the BEP operating
results in 1997 (where other restaurant operating costs as a percentage of
revenues are higher than operating costs at the Company's Denny's restaurants),
a decrease in comparable stores sales in the Denny's restaurants, and the impact
of a thirteen-week operating period in 1997 versus a fourteen-week operating
period in 1996.
Restaurant Operating Income. Restaurant operating income increased
$352,000 to $6.4 million for the thirteen-week period ended July 2, 1997, as
compared with $6.0 million for the fourteen-week period ended July 3, 1996. This
increase was principally the result of the factors described above.
11
<PAGE>
Administrative Expenses. Administrative expenses increased to 5.0% of
restaurant sales for the thirteen-week period ended July 2, 1997 as compared
with 3.6% of restaurant sales for the fourteen-week period ended July 3, 1996.
This increase was primarily the result of declining same store sales, the impact
of the thirteen-week operating period in 1997 versus a fourteen-week operating
period in 1996, as well as the greater administrative support required to
operate as a franchisor as opposed to operating solely as a franchisee.
Interest Expense. Interest expense was $3.2 million, or 4.2% of
restaurant sales, for the thirteen-week period ended July 2, 1997 as compared
with $2.8 million, or 4.8% of restaurant sales, for the fourteen-week period
ended July 3, 1996. The increase is the result of increased debt levels
associated with the 1996 acquisitions.
Income Tax Benefit. The Company recorded an income tax benefit of
approximately $234,000, an effective rate of 40%, for the thirteen-week period
ended July 2, 1997 as compared with income tax expense of approximately
$372,000, or an effective rate of 35%, for the fourteen-week period ended July
3, 1996.
Net Income (Loss). The Company recorded a net loss of approximately
$350,000 for the thirteen-week period ended July 2, 1997 as compared with net
income of $697,000 for the fourteen-week period ended July 3, 1996, as a result
of the factors described above.
TWENTY-SIX WEEK PERIOD ENDED JULY 2, 1997 COMPARED WITH TWENTY-SEVEN WEEK PERIOD
ENDED JULY 3, 1996
Restaurant sales. Restaurant sales increased $73.1 million, or 92.3%,
to $152.3 million for the twenty-six week period ended July 2, 1997 as compared
with restaurant sales of $79.2 million for the twenty-seven week period ended
July 3, 1996. This increase was primarily attributable to the Merger and the BEP
Acquisition.
Cost of Food and Beverage. Cost of food and beverage decreased to 27.2%
of restaurant sales for the twenty-six week period ended July 2, 1997 as
compared with 27.8% of restaurant sales for the twenty-seven week period ended
July 3, 1996, primarily as the result of discontinuing several Denny's
promotional programs implemented in January 1996 and the conversion or sale of
certain of the Company's non-branded restaurants.
Payroll and Payroll Costs. Payroll and payroll related costs were 34.4%
of restaurant sales for the twenty-six week period ended July 2, 1997 as
compared with 34.6% of restaurant sales for the twenty-seven week period ended
July 3, 1996. This decrease was primarily attributable to the impact in the
first quarter of staffing efficiencies created by discontinuing the promotional
program implemented in the first quarter of 1996 and the conversion or sale of
certain of the Company's non-branded restaurants.
12
<PAGE>
Amortization and Depreciation. Amortization and depreciation of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs and other items decreased to 3.0% of restaurant sales for the twenty-six
week period ended July 2, 1997 as compared with 3.6% of restaurant sales for the
twenty-seven week period ended July 3, 1996. The increase of $1.8 million was
primarily attributable to the amortization of intangible assets associated with
the 1996 acquisitions.
Other Restaurant Operating Costs. Other restaurant operating costs were
27.4% of restaurant sales for the twenty-six week period ended July 2, 1997 as
compared with 25.3% of restaurant sales for the twenty-seven week period ended
July 3, 1996. Included in the 1997 results is a gain of $650,000 relating to the
sale of eleven non-branded restaurants. Excluding this gain, other restaurant
operating costs expressed as a percentage of revenue, would have been 27.8%.
This increase was primarily attributable to increased restaurant operating costs
associated with restaurants acquired as a result of the BEP Acquisition (where
other restaurant operating costs as a percentage of revenues are higher than
operating costs at the Company's Denny's restaurants), a decrease in comparable
store sales in the Company's Denny's restaurants, and the impact of a twenty-six
week operating period in 1997 versus a twenty-seven week operating period in
1996.
Restaurant Operating Income. Restaurant operating income increased $5.3
million to $12.2 million for the twenty-six week period ended July 2, 1997. as
compared with $6.9 million for the twenty-seven week period ended July 3, 1996.
This increase was principally the result of the factors described above.
Administrative Expenses. Administrative expenses increased to 5.0% of
restaurant sales for the twenty-six week period ended July 2, 1997 as compared
with 4.0% of restaurant sales for the twenty-seven week period ended July 3,
1996. This increase was primarily the result of declining same store sales, the
impact of the twenty-six week operating period in 1997 versus a twenty-seven
week operating period in 1996, as well as the greater administrative support
required to operate as a franchisor as opposed to operating solely as a
franchisee.
Interest Expense. Interest expense was $6.4 million, or 4.1% of
restaurant sales, for the twenty-six week period ended July 2, 1997 as compared
with $3.7 million, or 4.6% of restaurant sales, for the twenty-seven week period
ended July 3, 1996. The increase is the result of the increased level of
long-term debt associated with the 1996 acquisitions.
Income Tax Benefit. The Company recorded an income tax benefit of
approximately $626,000, an effective rate of 40%, for the twenty-six week period
ended July 2, 1997 as compared with income tax expense of approximately $13,000,
or an effective rate of 40%, for the twenty-seven week period ended July 3,
1996.
Net Loss. The Company recorded a net loss of approximately $939,000 for
the twenty-six week period ended July 2, 1997 as compared with net loss of
$626,000 after the extraordinary item for the twenty-seven week period ended
July 3, 1996, as a result of the factors described above.
13
<PAGE>
Liquidity and Capital Resources
The Company, and the restaurant industry generally, receives
substantially all of its revenues in cash 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 $28.7 million at July 2, 1997 and $33.0 million at January
1, 1997. The Company believes that it has funded the excessive working capital
deficit acquired in the Merger and that its current 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.
Over the past two quarters, the Company has converted ten non-Denny's
and non-Black-eyed Pea restaurants to the Denny's concept. In addition, during
1997 the Company has closed ten restaurants that were not achieving minimum cash
flow requirements. The Company intends to continue to evaluate its existing
restaurant portfolio and to close or sell restaurants as appropriate. As
described above, the Denny's operating results have been negatively impacted by
same-store sales declines. The Company intends to pursue a strategy to lessen
its dependence on the Denny's brand, and has identified certain geographic
markets as available for disposition. Proceeds from such dispositions will be
used to retire debt and to reduce the working capital deficit. As part of this
strategy, in April 1997 the Company sold eleven non-branded restaurants for cash
and notes totaling $850,000. This transaction resulted in a gain of $650,000,
which has been included in the accompanying financial statements as a reduction
of other restaurant operating expenses.
The Company intends to continue to expand the number of its Black-eyed
Pea restaurants in its core market through the development of new restaurants.
As of July 2, 1997, the Company has four stores under development, which are
anticipated to open prior to year-end. In addition, the Company his entered into
two agreements to purchase a total of nine franchised restaurants located in
Arizona and Florida. These acquisitions are a part of an overall settlement of
threatened litigation by these franchisees. Under these agreements, the Company
will forego future royalty payments from an additional thirteen franchised
restaurants in Colorado in exchange for various releases and indemnifications.
The effect of the loss of royalty income of approximately $1.4 million per annum
will be partially offset by operating income from the restaurants to be
acquired. These acquisitions require the approval of the Company's senior
lenders. The Company's currently is negotiating with its lenders to obtain such
approvals.
The Company historically has satisfied its capital requirements through
credit facilities and the sale and leaseback of Denny's restaurants. 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 and intangibles totaled approximately $1.8 million and
$4.5 million for the thirteen-week and twenty-six week periods ended July 2,
1997. As described below, the Company currently has commitments for
approximately $65.0 million of sale-leaseback financing through August 1998,
which the Company believes will be adequate to meet its financing needs during
that period.
14
<PAGE>
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 Black-eyed Pea concepts. The
Company estimates that its costs to develop and open new Denny's and Black-eyed
Pea restaurants, excluding real estate and building costs, will be approximately
$350,000 to $450,000 per restaurant, and that its costs associated with the
conversion of a non-branded restaurant to the Denny's concept will be
approximately $160,000 to $450,000 per restaurant.
The Company was not in compliance with certain of its debt covenants at
July 2, 1997, for which the Company has received waivers. The Company has
obtained a sale-leaseback commitment of $25.0 million, the proceeds of which
will be used to repay a portion of its obligations under its senior credit
facility, which as of August 16, 1997 total approximately $42.0 million. The
Company believes that it can obtain an amendment to its existing covenants to be
consistent with its current operating results subsequent to the repayment
described above.
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 $65.0 million
over the twelve-month period commencing August 30, 1997 in order to finance the
development of new Company restaurants. 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 under a triple-net lease. 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 after the expiration of the fifth lease year.
Net cash used in operating activities increased from $837,000 in the
first twenty-seven weeks of 1996 to $2.3 million in the first twenty-six weeks
of 1997. This increase is attributable to a reduction of accounts payable, the
payment of property taxes, and costs associated with the closing and conversion
of certain restaurants.
Net cash (used in) provided by investing activities increased from
($4.7 million) in the first twenty-seven weeks of 1996 to $2.2 million in the
first twenty-six weeks of 1997. This change primarily is attributable to the
disposal of approximately $4.9 million of various assets acquired in the BEP
Acquisition, which were sold at their carrying value.
Net cash provided by (used in) financing activities decreased from $5.5
million in the first twenty-seven weeks of 1996 to $1.4 million in the first
twenty-six weeks of 1997. Cash (used in) financing activities arose primarily
from the proceeds of borrowing activities, net of the principal reductions in
long-term debt.
15
<PAGE>
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
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", effective for both interim and annual periods ending after December
15, 1997. This statement specifies the computation, presentation and disclosure
of earnings per share for entities with publicly held common stock or potential
common stock. The Company will provide the required disclosures in its year-end
report. The effect on the Company's earning per share disclosure will not be
material for the periods presented.
In June 1997 the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 31, 1997.
The statement changes the reporting of certain items currently reported in the
stockholders' equity section of the balance sheet and establishes standards for
reporting of comprehensive income and its components in a full set of general
purpose financial statements. The Company does not expect this standard to have
a material effect on the its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 31, 1997. This standard requires segments
of a business enterprise to be reported based on the way management organizes
and evaluates segments within the company. The standard also requires
disclosures regarding products and services, geographical areas and major
customers. The Company currently is evaluating the impact of this standard on
its disclosures.
The Company plans to adopt both SFAS No. 130 and No. 131 in 1998.
16
<PAGE>
Forward Looking Statements
This Report on Form 10-Q contains forward-looking statements, including
statements regarding the Company's business strategies, the Company's business,
and the industry in which the Company operates. These forward-looking statements
are based primarily on the Company's expectations and are subject to a number of
risks and uncertainties, some of which are beyond the Company's control. Actual
results could differ materially from the forward-looking statements as a result
of numerous factors, including those set forth under "Special Considerations" in
the Company's report on Form 10-K for the year ended January 1, 1997.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1997, the Company filed a lawsuit against Beck Holdings,
Inc. f/k/a/ BEP Holdings, Inc., and Unigate Holdings, N.V. (the "defendants") in
the United States District Court for the District of Arizona (Civil Action No.
CIV 97-1546 PHX RGS). The lawsuit alleges that the defendants breached a stock
purchase agreement and guaranty and violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10(b)5, as well as A.R.S. s.s. 44-1991
et seq. (the Arizona securities fraud statute). The lawsuit also asserts common
law claims for breach of the implied covenant of good faith and fair dealing,
fraudulent misrepresentation and negligent misrepresentation. All of these
claims relate to the Company's acquisition on July 3, 1996 of the outstanding
capital stock of BEP. The claims arise from the defendants' failure to indemnify
the Company in connection with a settlement it reached in July 1997 with Arizona
and Colorado franchisees. As part of this settlement, the Company agreed to
acquire six Arizona Black-eyed Pea restaurants for a purchase price of $3.25
million. Other claims included in the lawsuit involve misrepresentations made by
the defendants in connection with the 1996 acquisition of BEP. The lawsuit was
served upon Beck Holdings, Inc. on July 28, 1997 and, as of August 20, 1997,
Unigate Holdings, N.V. has not been served. The Company has requested monetary
damages, including the cancellation of a $15 million promissory note, from the
defendants.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Shareholders was held on June
26, 1997. The following nominees were elected to the Company's Board of
Directors, to serve until their successors are elected or have been qualified,
or until their earlier resignation or removal:
Nominee Votes in Favor Withheld
------- -------------- --------
Jack M. Lloyd 10,636,261 0
William J. Howard 10,652,566 0
William G. Cox 10,651,566 0
Todd S. Brown 10,651,566 0
John M. Holliman, III 10,651,566 0
C. Alan MacDonald 10,651,566 0
Fred W. Martin 10,651,566 0
18
<PAGE>
The following items were voted upon by the Company's shareholders:
(a) Proposal to approve the Company's 1996 Stock Option Plan.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
10,356,569 956,501 54,446 0
(b) Proposal to approve an amendment to the Company's Restated
Articles of Incorporation to increase the number of shares of
the Company's Common Stock that are authorized for issuance from
the current maximum of 20,000,000 shares to a maximum 40,000,000
shares, and (b) authorize 5,000,000 shares of serial preferred
stock, par value $.01 per share.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
7,672,499 909,817 275,563 2,509,637
(c) Proposal to ratify the appointment of Deloitte & Touche LLP as
the independent auditors of the Company for the fiscal year
ending December 31, 1997.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
10,910,053 428,072 29,391 0
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.1 Statement regarding computation of per share income
27.1 Financial Data Schedule
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DENAMERICA CORP.
Dated: August 20, 1997 By: /s/ Todd S. Brown
------------------
Todd S. Brown
Vice President, Chief Financial
Officer, and Treasurer
(Duly authorized officer of the
registrant, principal financial
and accounting officer)
20
EXHIBIT 11.1
DENAMERICA CORP. AND SUBSIDIARIES
Statement re: computation of per share income (loss)
(In thousands, except share and per share data)
Period ended
------------
July 3, July 2,
Description 1996 1997
----------- ----------- ----------
(14 weeks) (13 weeks)
Income (loss) before extraordinary item............ $697 $(350)
Extraordinary item - loss on extinguishment
of debt........................................ ---- ----
---- ----
Net Income (loss) ................................. 697 (350)
Less: Preferred stock dividend and accretion...... ---- ----
---- ----
Net income (loss) applicable to common shareholders $697 $(350)
==== ======
Income (loss) before extraordinary item per
common and common equivalent share.............. $.05 $(.03)
Extraordinary item - loss on extinguishment
of debt per common and common equivalent
share........................................... ---- ----
---- ----
Net income (loss) per common and common
equivalent share................................... $.05 $(.03)
==== ======
Weighted average common and common equivalent
shares outstanding.............................. 13,649,000 13,414,000
========== ==========
21
<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 July 2, 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 other filing expressly
incorporates this Exhibit by reference.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> JUL-02-1997
<EXCHANGE-RATE> 1
<CASH> 1,134
<SECURITIES> 0
<RECEIVABLES> 3,579
<ALLOWANCES> 0
<INVENTORY> 3,661
<CURRENT-ASSETS> 13,982
<PP&E> 73,455
<DEPRECIATION> 4,590
<TOTAL-ASSETS> 173,632
<CURRENT-LIABILITIES> 42,667
<BONDS> 94,441
0
0
<COMMON> 1,342
<OTHER-SE> 19,971
<TOTAL-LIABILITY-AND-EQUITY> 173,632
<SALES> 152,299
<TOTAL-REVENUES> 152,299
<CGS> 41,453
<TOTAL-COSTS> 41,453
<OTHER-EXPENSES> 98,631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,367
<INCOME-PRETAX> (1,565)
<INCOME-TAX> (626)
<INCOME-CONTINUING> (939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (939)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
