<PAGE> 1
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 APRIL 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 May 13, 1997.
<PAGE> 2
DENAMERICA CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 2, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets -
January 1, 1997 and April 2, 1997 ...................................................... 3
Condensed Consolidated Statements of Operations -
13-Week Periods ended April 2, 1997 and March 27, 1996 ................................. 5
Condensed Consolidated Statements of Cash Flows -
13-Week Periods ended April 2, 1997 and March 27, 1996 ................................. 6
Notes to Condensed Consolidated Financial Statements........................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 13
PART II OTHER INFORMATION .......................................................................... 21
SIGNATURES.................................................................................. 22
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENAMERICA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, APRIL 2,
ASSETS 1997 1997
------ -------------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................... $ 2,609 $ 1,290
Receivables .................................. 4,102 4,067
Inventories .................................. 3,520 3,726
Deferred income taxes ........................ 2,955 3,344
Other current assets ......................... 1,196 1,109
-------- --------
Total current assets ...................... 14,382 13,536
-------- --------
Property and equipment, net .................... 73,724 68,901
Intangibles, net ............................... 71,924 72,270
Deferred financing costs net ................... 3,801 3,676
Deferred income taxes .......................... 7,174 7,174
Other assets ................................... 8,184 8,198
-------- --------
$179,189 $173,755
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
DENAMERICA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1, APRIL 2,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1997
---------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable ..................... $18, 202 $ 16,530
Accrued compensation and related costs 8,487 8,570
Accrued taxes ........................ 4,636 3,239
Other current liabilities ............ 8,424 5,119
Current portion of long-term debt and
obligations under capital leases ... 7,662 7,662
--------- ---------
Total current liabilities .......... 47,411 41,120
Long-term debt, less current portion ... 94,132 95,708
Deferred rent and other ................ 14,732 14,662
--------- ---------
Total liabilities .................. 156,275 151,490
--------- ---------
Minority interest in joint ventures .... 786 677
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Shareholders' equity:
Common stock ......................... 1,340 1,340
Additional paid-in capital ........... 35,706 35,755
Accumulated deficit .................. (14,918) (15,507)
--------- ---------
Total shareholders' equity ......... 22,128 21,588
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$ 179,189 $ 173,755
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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DENAMERICA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD ENDED
-----------------------
3/27/96 4/2/97
---------- ----------
(13 WEEKS) (13 WEEKS)
<S> <C> <C>
Restaurant sales ......................... $ 20,161 $ 76,114
-------- --------
Restaurant operating expenses:
Cost of food and beverage .............. 5,632 20,613
Payroll and payroll related costs ...... 7,260 26,101
Amortization depreciation .............. 916 2,266
Other restaurant operating expenses .... 5,484 21,277
-------- --------
Total restaurant operating expenses .. 19,292 70,257
-------- --------
Restaurant operating income .............. 869 5,857
Administrative expenses .................. 1,047 3,744
-------- --------
Operating income (loss) .................. (178) 2,113
Interest expense, net .................... 860 3,203
-------- --------
Loss before minority interest in joint
venture, income taxes, and extraordinary
item ................................... (1,038) (1,090)
Minority interest in joint venture ....... (2) (109)
-------- --------
Loss before income taxes and
extraordinary item ..................... (1,036) (981)
Income tax benefit ....................... (359) (392)
-------- --------
Loss before extraordinary item ........... (677) (589)
Extraordinary item - loss on
extinguishment of debt ................. (497) --
-------- --------
Net loss ................................. (1,174) (589)
Preferred stock dividend and accretion ... (149) --
-------- --------
Net loss applicable to common shareholders $ (1,323) $ (589)
======== ========
Net loss per common share
before extraordinary item .............. $ (.10) $ (.04)
======== ========
Net loss per common share ................ $ (.19) $ (.04)
======== ========
Weighted average shares outstanding ...... 6,938 13,424
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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DENAMERICA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD ENDED
------------------------------
MARCH 27, APRIL 2,
1996 1997
-------------- -----------
(13 WEEKS) (13 WEEKS)
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................... $(1,174) ($ 589)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization .............. 916 2,266
Amortization of deferred financing costs ... 45 125
Minority interest in joint venture ......... 2 (109)
Deferred income taxes ...................... (368) (392)
Deferred rent .............................. 81 76
Extraordinary item - loss on
extinguishment of debt ................... 497 --
Other ...................................... (25) 129
Changes in operating assets and liabilities:
Receivables .............................. (217) 35
Inventories .............................. (58) (206)
Prepaid expenses and other assets ........ (542) 87
Accounts payable and accrued liabilities . 449 (6,012)
------- -------
Net cash provided by (used in)
operating activities ................... (344) (4,590)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ............ (1,425) (1,478)
Purchase of intangibles ....................... (413) (1,185)
Proceeds from the sale of assets .............. -- 4,850
------- -------
Net cash (used in) provided by investing
activities ................................ (1,838) 2,187
------- -------
Cash flows from financing activities:
Borrowings, net ................................ 3,650 2,858
Principal reductions on long-term obligations .. (1,344) (1,823)
Issuance of Common Stock and other, net ........ (124) 49
------- -------
Net cash provided by financing activities . 2,182 1,084
------- -------
Net change in cash and cash equivalents ... -- (1,319)
Cash and cash equivalents at beginning of period . -- 2,609
------- -------
Cash and cash equivalents at end of period ....... $ -- $ 1,290
======= =======
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ..................................... $ 950 $ 3,154
======= -------
Income taxes ................................. $ 45 $ --
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
DENAMERICA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
General
The accompanying unaudited condensed consolidated financial statements of
DenAmerica Corp. 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 Company currently operates 297 restaurants in 31
states.
The three-month period ended April 2, 1997, as explained below, is not
comparable to the prior period.
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.
BEP operates 93 casual dining restaurants in 13 states under the "Black-Eyed
Pea" concept and franchises the right to operate an additional 29 Black-eyed Pea
restaurants to third parties. The Company currently intends to continue to
operate most of these restaurants as Black-eyed Pea restaurants.
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 April 2, 1997 (which include the results of
operations of the Company following the Merger and the BEP
Acquisition) and March 27, 1996 (which do not include the
results of operations of AFR or BEP); and
7
<PAGE> 8
(ii) Consolidated Statements of Cash Flows of the Company for the
periods ended April 2, 1997 (which include the results of
operations of the Company following the Merger and the BEP
acquisition) and March 27, 1996 (which do not include the
results of operations of AFR or BEP).
(2) EARNINGS PER SHARE
Earnings per share for the period ended March 27, 1996 has been computed based
upon weighted average shares of the Company's Common Stock received in
connection with the Merger by the former shareholders of DRC after deducting
preferred stock dividends and accretion on preferred stock of DRC outstanding
prior to the Merger. Earnings per share for the period ended April 2, 1997 has
been computed based upon the weighted average of the common shares outstanding
as of April 2, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
BASIS OF PRESENTATION
Upon consummation of the Merger with AFR, 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, 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 the first quarter of 1997 are materially
impacted by the Merger and the BEP Acquisition. During the first quarter of
1997, revenue and related expenses increased significantly over prior years
primarily as a result of these acquisitions. As a result, the first quarter of
fiscal 1997 operating results are not comparable to those comparable prior
period.
8
<PAGE> 9
GENERAL
As set forth below, the Company's restaurant operating income and
operating income increased by $5.0 million and $2.3 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 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 Company's non-Denny's, non-Black-eyed Pea
restaurants ("non-branded restaurant") 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 April 2, 1997, the Company operated 188 Denny's restaurants in 31
states. 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. In September 2, 1996, the Company withdrew from the Breakaway Breakfast
promotional special and increased the price of the Grand Slam breakfast to
$2.99, during certain day parts. The withdrawal from the Breakaway Breakfast
special has resulted in the decline of comparable Denny's restaurant sales of
3.9% during the thirteen week period end April 2, 1997 as compared to the same
thirteen week period end in 1996. Margins were positively impacted, however,
primarily as a result of decreased food and labor costs expressed as a
percentage of sales. The average guest check increased from $4.60 during the
thirteen week period ended March 29, 1996 to $5.17 for the thirteen week period
ended April 2, 1997. However, guest counts for the period from January 2, 1997
through April 2, 1997 decreased approximately 15% 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. For the thirteen
week period ended April 2, 1997, comparable same-store sales decreased 3.2% for
all of the Company's Black-eyed Pea restaurants, while comparable same store
sales decreased by 1.0% for Black-eyed Pea restaurants in the core market. The
guest check average at the Company's Black-eyed Pea restaurants is $8.10. For
the period, 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.
9
<PAGE> 10
COMPARISON OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
in the condensed consolidated statements of operations as a percentage of total
restaurant sales.
<TABLE>
<CAPTION>
Thirteen Week Period Ended
--------------------------
March 27, April 2,
1996 1997
---------- -----------
<S> <C> <C>
Restaurant sales:
Denny's restaurants 90.0% 52.5%
Black-eyed Pea restaurants -- 43.2
Non-branded restaurants 10.0 4.3
----- -----
Total restaurant sales 100.0 100.0
----- -----
Restaurant operating expenses:
Cost of food and beverages 27.9 27.1
Payroll and payroll related costs 36.0 34.3
Amortization and depreciation 4.5 3.0
Other restaurant operating cost 27.2 27.9
----- -----
Total restaurant operating expenses 95.7 92.3
----- -----
Restaurant operating income 4.3 7.7
Administrative expenses 5.2 4.9
----- -----
Operating income (loss) (.9) 2.8
Interest expense (4.2) (4.2)
----- -----
Loss before minority interest in joint ventures,
income taxes, and extraordinary item (5.1) (1.4)
Minority interest in joint ventures -- .1
----- -----
Loss before income taxes and
extraordinary item (5.1) (1.3)
Income tax benefit (1.8) (.5)
----- -----
Loss before extraordinary item (6.9) (.8)
Extraordinary item - loss on extinguishment of
debt (2.5) --
----- -----
Net loss (9.4)% (.8)%
===== =====
</TABLE>
10
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THIRTEEN-WEEK ENDED APRIL 2, 1996 COMPARED WITH THIRTEEN-WEEK ENDED
MARCH 27, 1996
Restaurant sales. Restaurant sales increased $56.0 million, or 278%, to
$76.1 million for the thirteen week period ended April 2, 1997 as compared with
restaurant sales of $20.1 million for the thirteen week period ended March 27,
1996. 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 decreased to 27.1%
of restaurant sales for the thirteen week period ended April 2, 1997 as compared
with 27.9% of restaurant sales for the thirteen week period ended March 27,
1996, primarily as the result of discontinuing several Denny's promotional
programs implemented in January 1996 and the conversion or sale of the Company's
non-branded restaurants.
Payroll and Payroll Costs. Payroll and payroll related costs were 34.3%
of restaurant sales for the thirteen week period ended April 2, 1997 as compared
with 36.0% of restaurant sales for the thirteen week period ended March 27,
1996. This decrease was primarily attributable to staffing efficiencies created
by discontinuing the promotional programs implemented in the first quarter of
1996 and the conversion or sale of the Company's non-branded restaurants.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs and other items decreased to 3.0% of restaurant sales for the thirteen
week period ended April 2, 1997 as compared with 4.5% of restaurant sales for
the thirteen week period ended March 27, 1996. The increase of $1.4 million was
primarily attributable to the amortization of intangible assets associated with
the 1996 acquisitions.
Other Restaurant Operating Costs. Other restaurant operating costs were
27.9% of restaurant sales for the thirteen week period ended April 2, 1997 as
compared with 27.2% of restaurant sales for the thirteen week period ended March
27, 1996. This increase was primarily attributable to increased restaurant
operating costs associated with restaurants acquired as a result of the Merger
and the BEP acquisition during 1996.
Restaurant Operating Income. Restaurant operating income increased $5.0
million to $5.9 million for the thirteen week period ended April 2, 1997. as
compared with $.9 million for the thirteen week period ended March 27, 1996.
This increase was principally the result of factors described above.
Administrative Expenses. Administrative expenses decreased to 4.9% of
restaurant sales for the thirteen week period ended April 2, 1997 as compared
with 5.2% of restaurant sales for the thirteen week period ended March 27, 1996.
This decrease was primarily the result of increased sales volumes without
proportionate cost increases.
11
<PAGE> 12
Interest Expense. Interest expense was $3.2 million, or 4.2% of
restaurant sales, for the thirteen week period ended April 2, 1997 as compared
with $860,000, or 4.3% of restaurant sales, for the thirteen week period ended
March 27, 1996. The increase is the result of increased debt levels, associated
with the increased level of long-term debt associated with the 1996
acquisitions.
Income Tax Benefit. The Company recorded an income tax benefit of
approximately $400,000, an effective rate of 40%, for the thirteen week period
ended April 2, 1997 as compared with income tax benefit of approximately
$359,000, or an effective rate of 35%, for the thirteen week period ended March
27, 1996.
Net Loss. The Company recorded a net loss of approximately $600,000 for
the thirteen week period ended April 2, 1997 as compared with net loss of $1.3
million after the extra ordinary item for the thirteen week period ended March
27, 1996, as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company, and the restaurant industry generally, operates
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 $27.6 million at April 2, 1997, 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.
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 and intangibles totaled approximately $2.7 million for
the thirteen-week periods ended April 2, 1997. 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.
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.
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.
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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.
Net cash used in operating activities increased from $400,000 million
in the first quarter of 1996 to $4.6 million in the first quarter of 1997. This
increase is attributable to a reduction of accounts payables, 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
($1.8 million) in the first quarter of 1996 to $2.2 million in the first quarter
of 1997. This change is primarily 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 financing activities decreased from $2.2 million
in the first quarter of 1996 to $1.1 million in the first quarter of 1997. Cash
provided by financing activities arose primarily from the proceeds of borrowing
activities, net of the principal reductions in long-term debt.
On July 3, 1996, the Company completed the BEP Acquisition. The
purchase price for BEP consisted of (i) cash of approximately $50.0 million
provided from sale/leaseback financing, and (ii) a promissory note (the "BEP
Purchase Note") in the principal amount of $15.0 million. The Company has
outstanding $18.5 million principal amount of 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 an all
premiums, fees, costs, expenses, and liabilities arising under and in connection
with 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 BEP Purchase Note. Subject to
certain limitations, the Company, at its option, may redeem the BEP Purchase
Note in whole or in part at any time prior to maturity. As of April 2, 1997,
because certain financial covenants have not been met, borrowings under the
Delayed Term Loan portion of its Credit Facility are not available to the
Company. Upon the occurrence of certain equity issuance's, the Company will be
required to offer to redeem the maximum principal amount of BEP Purchase Note
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.
13
<PAGE> 14
The Company's Credit Facility contains certain provisions and
restrictive convenants 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 April 2, 1997, the Company was not in compliance with certain financial
convenants for which waivers have been obtained.
The Company plans to pursue increasing 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 also intends to use
its best efforts to redeem the BEP Purchase Note prior to September 30, 1997, on
which the BEP Warrants become exercisable. The Company currently anticipates
that it will be required to obtain the funds needed to repay the BEP Purchase
Note 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.
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 their
year-end report. The effect on the Company's earning per share disclosure is not
material for the periods presented.
14
<PAGE> 15
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 in Exhibit 99 to this report on
Form 10-Q, which is incorporated herein by reference.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
11.1 Statement regarding computation of per share income
27.1 Summary Financial Information
99 Special Considerations
16
<PAGE> 17
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: May 15, 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)
17
<PAGE> 1
EXHIBIT 11.1
DENAMERICA CORP. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD ENDED
------------------------------
MARCH 27, APRIL 2,
DESCRIPTION 1996 1997
----------- ------------
(13 weeks) (13 weeks)
<S> <C> <C>
Loss before extraordinary item .................... $ (677) $ (589)
Extraordinary item - loss on extinguishment of debt (497) --
----------- ------------
Net loss .......................................... (1,174) (589)
Less: Preferred stock dividend and accretion ..... (149) --
----------- ------------
Net loss applicable to common shareholders ........ $ (1,323) $ (589)
=========== ============
Loss before extraordinary item per
common and common equivalent share .............. $ (.10) $ (.04)
Extraordinary item - loss on extinguishment
of debt per common and common equivalent share .. (.09) --
----------- ------------
Net loss per common and common
equivalent share ................................ $ (.19) $ (.04)
=========== ============
Weighted average common and common equivalent
shares outstanding ............................. 6,938,000 13,424,000
=========== ============
</TABLE>
<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
APRIL 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> APR-02-1997
<EXCHANGE-RATE> 1
<CASH> 1,290
<SECURITIES> 0
<RECEIVABLES> 4,067
<ALLOWANCES> 0
<INVENTORY> 3,726
<CURRENT-ASSETS> 13,536
<PP&E> 68,901
<DEPRECIATION> 2,266
<TOTAL-ASSETS> 173,755
<CURRENT-LIABILITIES> 41,120
<BONDS> 95,708
0
0
<COMMON> 1,340
<OTHER-SE> 20,248
<TOTAL-LIABILITY-AND-EQUITY> 173,755
<SALES> 76,114
<TOTAL-REVENUES> 76,114
<CGS> 20,613
<TOTAL-COSTS> 20,613
<OTHER-EXPENSES> 49,644
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,203
<INCOME-PRETAX> (981)
<INCOME-TAX> (392)
<INCOME-CONTINUING> (589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (589)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
<PAGE> 1
EXHIBIT 99
SPECIAL CONSIDERATIONS
The following factors 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;
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.
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 restaurant 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, 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 commitment 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.
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.
<PAGE> 2
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 whether through increasing the number of its Denny's and
Black-eyed Pea 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.
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. 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 $44.5 million, subordinated notes of $30.6 million, obligations under capital
leases aggregating $28.0 million, and a working capital deficit of $ 27.6
million as of April 2, 1997.
<PAGE> 3
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. 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., ("Flagstar") 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 subsequent investigation of
such claims by the United States Department of Justice.
<PAGE> 4
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. 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 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 that Company to
convert a total of 25 Kettle's restaurants to the Denny's concept by September
1997. As of April 2, 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 Company's franchise agreements for its Denny's restaurants (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 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.
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.
<PAGE> 5
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 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 Ventures, Inc.) ("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 operations, 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 form 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.
<PAGE> 6
The restaurant industry is intensely competitive with respect to price,
service, locations, personnel, and type and quality of food. In addition,
restaurants compete for attractive restaurant sites and the availability of
restaurant personnel and managers. The Company has many well-established
competitors with financial and other resources substantially greater than those
of the Company. Certain competitors have been in existence for a substantially
longer period than the Company and may be better established in markets where
the Company's restaurants are or may be located. The restaurant business often
is affected by changes in consumer tastes, national, regional, or local economic
conditions, demographic trends, traffic patterns, and the type, number and
location of competing restaurants. The Company's success will depend, in part,
on the ability of 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
poser 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.
<PAGE> 7
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 aversely affect the Company. The Company also is subject to the Americans
with Disabilities Act of 1990 which, among other things, may require the
installation of certain fixtures or accommodations in new restaurants or
renovations to its existing restaurants to meet federally mandated requirements.
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 those companies.
<PAGE> 8
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. 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 Shares 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.
SHARE 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 April 2, 1997, there were outstanding 13,409,277
shares of the Company's Common Stock. Of these shares, approximately 12,375,840
shares are freely transferable 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 obligation. 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 one year has 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 grater 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.
<PAGE> 9
The 6,937,500 shares of Common Stock issued pursuant to the Merger
generally are freely tradable 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 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 PROVISION
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.
