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 SEPTEMBER 30, 1998
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: 13,485,277 shares of Common Stock, $.10 par
value, as of November 10, 1998.
<PAGE>
DENAMERICA CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998....................... 3
Condensed Consolidated Statements of Operations -
13-Week and 39-Week Periods ended September 30, 1998
and October 1, 1997............................................ 4
Condensed Consolidated Statements of Cash Flows -
13-Week and 39-Week Periods ended September 30, 1998
and October 1, 1997............................................ 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
PART II. OTHER INFORMATION ............................................... 14
SIGNATURES ..................................................... 15
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
December 31, September 30,
1997 1998
ASSETS ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,267 $ 1,031
Receivables 3,192 2,001
Inventories 3,244 2,987
Other current assets 5,564 6,211
Assets held for sale 28,700 --
--------- ---------
Total current assets 41,967 12,230
PROPERTY AND EQUIPMENT, net 61,328 58,276
INTANGIBLE ASSETS, net 51,545 50,186
DEFERRED INCOME TAXES 5,312 5,312
OTHER ASSETS 10,112 9,040
--------- ---------
TOTAL $ 170,264 $ 135,044
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,511 $ 15,853
Accrued compensation 6,354 5,438
Accrued taxes 4,522 5,822
Other current liabilities 8,363 5,405
Current portion of long term debt 42,634 20,875
--------- ---------
Total current liabilities 78,384 53,393
LONG-TERM DEBT, LESS CURRENT PORTION 78,418 71,203
OTHER LONG TERM LIABILITIES 12,214 10,031
--------- ---------
Total liabilities 169,016 134,627
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized,
5,000,000 shares; issued and outstanding none
Common stock $.10 par value; authorized,
40,000,000 shares; 13,485,277 shares issued
and outstanding 1,344 1,350
Additional paid-in capital 35,799 35,871
Accumulated deficit (35,895) (36,804)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 1,248 417
--------- ---------
TOTAL $ 170,264 $ 135,044
========= =========
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
13-Week Periods Ended 39-Week Periods Ended
--------------------- ---------------------
October 1, September 30, October 1, September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
RESTAURANT SALES $75,494 $62,231 $227,787 $197,177
------- ------- -------- --------
RESTAURANT OPERATING EXPENSES:
Food and beverage costs 20,644 17,086 62,097 54,193
Payroll and payroll related costs 25,637 21,294 77,998 67,418
Depreciation and amortization 2,232 1,940 6,822 5,669
Other operating expenses 19,892 17,865 61,567 54,848
------- ------- -------- --------
Total operating expenses 68,405 58,185 208,484 182,128
------- ------- -------- --------
RESTAURANT OPERATING INCOME 7,089 4,046 19,303 15,049
ADMINISTRATIVE EXPENSES 3,006 3,142 10,579 9,193
------- ------- -------- --------
OPERATING INCOME 4,083 904 8,724 5,856
INTEREST EXPENSE, net 3,220 2,881 9,587 9,429
------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM 863 (1,977) (863) (3,573)
MINORITY INTEREST IN JOINT VENTURE 23 -- 184 --
INCOME TAX EXPENSE (BENEFIT) 355 (794) (271) (1,293)
------- ------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 531 (1,183) (408) (2,280)
EXTRAORDINARY ITEM - GAIN ON
EARLY EXTINGUISHMENT OF DEBT
net of income taxes of $914 -- -- -- 1,371
------- ------- -------- --------
NET INCOME (LOSS) $ 531 $(1,183) $ (408) $ (909)
======= ======= ======== ========
Basic and diluted income (loss)
per share Before extraordinary item $ .04 $ (.09) $ (.03) $ (.07)
======= ======= ======== ========
Net income (loss) $ .04 $ (.09) $ (.03) $ (.07)
======= ======= ======== ========
Basic and diluted weighted average
shares outstanding
Basic 13,437 13,485 13,437 13,453
Diluted 13,437 13,485 13,437 13,453
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13-Week Period Ended 39-Week Period Ended
-------------------- --------------------
October 1, September 30, October 1, September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 531 $(1,183) $ (408) $ (909)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,232 1,940 6,822 5,669
Amortization of deferred financing costs 154 246 441 738
Extraordinary item -- -- -- (1,371)
Deferred income taxes 313 (794) (313) (1,293)
Deferred rent 188 63 605 209
Note receivable collections -- 269 -- 1,983
Other 151 263 (144) (568)
Changes in operating assets and liabilities
net of dispositions:
Receivables (786) 221 (30) 748
Inventories 104 5 (37) 198
Other current assets 397 (442) (433) 227
Accounts payable and accrued liabilities (2,605) 52 (8,152) (5,353)
-------- ------- -------- --------
Net cash provided by (used in)
operating activities 679 640 (1,649) 278
-------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,261) (875) (5,267) (2,062)
Purchase of intangibles (198) (220) (1,696) (289)
Proceeds from the sale of assets 1,774 -- 8,508 25,900
-------- ------- -------- --------
Net cash provided by (used in)
investing activities (685) (1,095) 1,545 23,549
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings, net 13,439 325 15,669 3,996
Principal reductions on long-term obligations (13,592) (935) (17,276) (28,134)
Other -- 75 77 75
-------- ------- -------- --------
Net cash used in financing activities (153) (535) (1,530) (24,063)
-------- ------- -------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (159) (990) (1,634) (236)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,134 2,021 2,609 1,267
-------- ------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 975 $ 1,031 $ 975 $ 1,031
======== ======= ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 2,480 $ 2,205 $ 7,960 $ 7,438
======== ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
DenAmerica Corp. and Subsidiaries (the "Company") have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission 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. However, these operating results are not
necessarily indicative of the results expected for the full year. 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 December 31, 1997. Certain
reclassifications have been made in the 1997 financial statements to conform to
the 1998 presentation.
The Company currently operates 203 family-oriented, full-service restaurants in
26 states, primarily in the southwestern, midwestern, western, and southeastern
United States. The Company owns and operates 102 Black-eyed Pea restaurants,
primarily in Texas, Georgia, Arizona, Oklahoma, Florida, and the Washington,
D.C. area. The Company also owns and operates 101 Denny's restaurants, which
represents approximately 6.4% of the Denny's system and makes the Company the
largest Denny's franchisee in terms of revenue and the number of restaurants
operated.
(2) ASSET DIVESTITURES
In March 1998, the Company completed the sale of 63 Denny's and eight
non-branded restaurants, of which six were closed, to a Denny's franchisee for
gross proceeds $28,700. Net cash proceeds of $25,200 were used to (i) repay the
promissory note (the "BEP Note") payable to the seller of Black-eyed Pea U.S.A.,
Inc. ("BEP") at a $2,400 discount from its outstanding principal amount of
approximately $15,285; (ii) cancel outstanding warrants to acquire approximately
1,000,000 shares of Common Stock at an exercise price of $1.90 per share, which
were issued in connection with the BEP Note; (iii) permanently reduce the
Company's outstanding borrowings under the term loan of the Credit Facility to
$1,500; and (iv) repay certain equipment operating leases associated with the
restaurants sold in this transaction. The Company has included the $2,300 before
tax discount on the BEP note as an extraordinary item in the accompanying
financial statements.
In a separate transaction completed in March 1998, the Company also sold five
Denny's restaurants located in Wyoming to an unrelated party for cash of $700
plus a note in the principal amount of $400. The Company utilized the proceeds
from this transaction to permanently reduce its outstanding borrowings under the
term loan portion of its Credit Facility. The Company has recorded a gain of
approximately $575 on this transaction, which is included as an offset to other
operating expenses.
6
<PAGE>
(3) OTHER MATTERS
In July 1998, the Company entered into an Agreement and Plan of Merger
("Agreement") with Tech Electro Industries, Inc. ("Tech Electro"). The proposed
merger was subject to various contingencies including financing, shareholder
approval, regulatory approvals, and other matters. On October 26, 1998, the
Company terminated the Agreement, because the Company determined that Tech
Electro would not be able to obtain adequate financing necessary to consummate
the transaction. The Company has no ongoing obligations under the Agreement.
Prior to the Agreement's termination, the Company delayed its plans to refinance
its senior indebtedness and to sell or close certain underperforming
restaurants. In October 1998, the Company closed three underperforming
Black-eyed Pea restaurants located in its non-core markets.
The Company is currently negotiating with a financing source to provide $17.1
million of new financing. The proceeds of this financing will be used to repay
$7.5 million of indebtedness to its senior lenders and to purchase equipment
currently leased under off-balance sheet leasing arrangements. The new financing
will amortize at a fixed rate over 15 years and include prepayment penalties. In
addition, the lender will advance approximately $4.2 million of equipment
financing, which will be used to meet short-term working capital requirements to
the Company.
The Company was not in compliance with certain of its senior bank debt covenants
at September 30, 1998, and has reclassified its senior bank debt as current,
even though its maturity date is December 2001. The Company has not received
waivers and does not expect to receive such waivers until the $17.1 million
financing described above is completed. As a result, the senior lenders could,
among other actions, accelerate the Company's obligations, which as of
September, 1998 totaled approximately $14.7 million. Although the Company
believes that the new financing commitment will be available, there is no
assurance that such financing will be consummated on terms and conditions
acceptable to the Company.
The Company was not in compliance with several other agreements as of September
30, 1998, including the Series B Notes. The Company is currently working to cure
its non-compliance associated with the agreements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company currently operates 102 Black-eyed Pea restaurants in 14 states.
Currently there are no remaining franchise restaurants. The Company operates 73
Black-eyed Pea restaurants in Texas, Oklahoma and Arizona, which the Company
considers to be its core market for Black-eyed Pea restaurants. For the thirteen
and thirty-nine week periods ended September 30, 1998, comparable same-store
sales decreased 1.6% and 1.5% for all of the Company's Black-eyed Pea
restaurants. Comparable same-store sales decreased .3% in the thirteen-week
period and did not change in the thirty-nine week period for Black-eyed Pea
restaurants in the core market. The guest check average at the Company's
Black-eyed Pea restaurants for the third quarter of 1998 was $7.95, versus $7.84
for the third quarter of 1997. Alcohol and carry-out sales account for
approximately 2.0% and 11.3% of sales for the thirty-nine week period ended
September 30, 1998, respectively.
As of September 30, 1998, the Company operated 101 Denny's restaurants in 19
states. For the thirteen weeks ended September 30, 1998, comparable store sales
increased 5.1% as a result of an increase in guest counts and an increase in the
average guest check to approximately $5.41 versus $5.21 for the third quarter of
1997. Comparable same store sales for the thirty-nine weeks ended September 30,
1998 increased 3.0%.
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>
13-Week Period Ended 39-Week Period Ended
-------------------- --------------------
October 1, September 30, October 1, September 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Restaurant sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Restaurant operating expenses:
Food and beverage cost 27.4 27.5 27.3 27.5
Payroll and payroll related costs 34.0 34.2 34.2 34.2
Depreciation and amortization 3.0 3.1 3.0 2.9
Other operating cost 26.2 28.7 27.0 27.8
----- ----- ----- -----
Total operating expenses 90.6 93.5 91.5 92.4
----- ----- ----- -----
Restaurant operating income 9.4 6.5 8.5 7.6
Administrative expenses 4.0 5.1 4.6 4.7
----- ----- ----- -----
Operating income 5.4 1.4 3.9 2.9
Interest expense 4.2 4.6 4.2 4.8
----- ----- ----- -----
Income (Loss) before income taxes
and extraordinary item 1.2 (3.2) (.3) (1.9)
Income tax (benefit) .5 (1.3) (.1) (.7)
----- ----- ----- -----
Income (Loss) before extraordinary
item .7 (1.9) (.2) (1.2)
Extraordinary item -- -- -- .7
----- ----- ----- -----
Net income (loss) 0.7% (1.9%) (0.2%) (0.5%)
===== ===== ===== =====
</TABLE>
8
<PAGE>
THIRTEEN-WEEK PERIOD ENDED SEPTEMBER 30, 1998 COMPARED WITH THIRTEEN-WEEK
PERIOD ENDED OCTOBER 1, 1997
RESTAURANT SALES. Restaurant sales decreased $13.3 million, or 17.6%,
to $62.2 million for the thirteen-week period ended September 30, 1998 as
compared with restaurant sales of $75.5 million for the thirteen-week period
ended October 1, 1997. This decrease was primarily attributable to the sale of
63 Denny's and eight non-branded restaurants on March 25, 1998. As a result of
this sale, restaurant sales attributable to the Black-eyed Pea restaurants
increased to 56% of total sales in the 1998 period versus 42% in the 1997
period.
FOOD AND BEVERAGE COST. Food and beverage cost increased to 27.5% of
restaurant sales for the thirteen-week period ended September 30, 1998 as
compared with 27.4% of restaurant sales for the thirteen-week period ended
October 1, 1997, primarily as a result of higher food costs associated with the
operation of the Black-eyed Pea restaurants.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs
were 34.2% of restaurant sales for the thirteen-week period ended September 30,
1998 as compared with 34.0% of restaurant sales for the thirteen-week period
ended October 1, 1997. This increase was primarily the result of higher payroll
and payroll related costs associated with the operation of the Black-eyed Pea
restaurants offset by the sale and closure in 1997 and 1998 of Denny's
restaurants, which operated with higher payroll costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs, and other items was $1.9 million for the thirteen-week period ended
September 30, 1998, as compared with $2.2 million for the thirteen-week period
ended October 1, 1997. This decrease is attributable to a decrease in the
amortization of store opening costs and the reduction of depreciation and
amortization associated with the restaurants sold in March 1998.
OTHER RESTAURANT OPERATING COSTS. Other restaurant operating costs were
28.7% of restaurant sales for the thirteen-week period ended September 30, 1998
as compared with 26.2% of restaurant sales for the thirteen-week period ended
October 1, 1997. Excluding a $650,000 gain relating to the sale of eleven
non-branded restaurants in 1997, other operating costs would have been 27.2% of
revenue. The remainder of the increase was attributable to higher restaurant
operating costs associated with the Black-eyed Pea restaurants.
RESTAURANT OPERATING INCOME. Restaurant operating income decreased to
$4.1 million for the thirteen-week period ended September 30, 1998, as compared
with $7.1 million for the thirteen-week period ended October 1, 1997. This
decrease was principally the result of the factors described above.
ADMINISTRATIVE EXPENSES. Administrative expenses were $3.1 million, or
5.1% of restaurant sales, for the thirteen-week period ended September 30, 1998,
which is an increase of $100,000 from $3.0 million, or 4.0% of restaurant sales,
for the thirteen-week period ended October 1, 1997. This increase is
attributable to costs associated with the terminated merger.
INTEREST EXPENSE. Interest expense was $2.9 million for the
thirteen-week period ended September 30, 1998 as compared with $3.2 million for
the thirteen-week period ended October 1, 1997. The decrease is the result of
the reduction in long-term obligations.
9
<PAGE>
INCOME TAX EXPENSE (BENEFIT). The Company recorded an income tax
benefit of approximately $794,000, or an effective rate of 40.0%, for the
thirteen-week period ended September 30, 1998 as compared with an income tax
expense of approximately $355,000, or an effective rate of 41%, for the thirteen
week period ended October 1, 1997.
NET INCOME (LOSS). The Company recorded a net loss of approximately
$1.2 million for the thirteen week period ended September 30, 1998 as compared
with net income of $531,000 for the thirteen-week period ended October 1, 1997,
as a result of the factors described above.
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 30, 1998 COMPARED WITH THIRTY-NINE
WEEK PERIOD ENDED OCTOBER 1, 1997
RESTAURANT SALES. Restaurant sales decreased $30.6 million, or 13.4%,
to $197.2 million for the thirty-nine week period ended September 30, 1998 as
compared with restaurant sales of $227.8 million for the thirty-nine week period
ended October 1, 1997. This decrease was primarily attributable to the sale and
closure of certain restaurants during 1997 and 1998.
COST OF FOOD AND BEVERAGE. Cost of food and beverage increased to 27.5%
of restaurant sales for the thirty-nine week period ended September 30, 1998 as
compared with 27.3% of restaurant sales for the thirty-nine week period ended
October 1, 1997, primarily as the result of higher food costs associated with
the operation of the Black-eyed Pea restaurants.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs
were 34.2% of restaurant sales for the thirty-nine week periods ended September
30, 1998 and October 1, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs and other items decreased to 2.9% of restaurant sales for the thirty-nine
week period ended September 30, 1998 as compared with 3.0% of restaurant sales
for the thirty-nine week period ended October 1, 1997. The decrease of $1.2
million was primarily attributable to a decrease in the amortization of store
opening costs and the reduction of depreciation and amortization associated with
the restaurants sold in March 1998.
OTHER RESTAURANT OPERATING COSTS. Other restaurant operating costs were
27.8% of restaurant sales for the thirty-nine week period ended September 30,
1998 as compared with 27.0% of restaurant sales for the thirty-nine week period
ended October 1, 1997. Included in the 1998 and 1997 results are gains of
$579,000 and $1.7 million, respectively, relating to the sale of restaurants.
Excluding these gains, other restaurant operating costs would have been 28.1%
and 27.8% of revenue, respectively. This increase was primarily attributable to
increased restaurant operating costs associated with Black-eyed Pea restaurants,
including advertising.
RESTAURANT OPERATING INCOME. Restaurant operating income decreased $4.2
million to $15.1 million for the thirty-nine week period ended September 30,
1998 as compared with $19.3 million for the thirty-nine week period ended
October 1, 1997. This decrease was principally the result of the factors
described above.
ADMINISTRATIVE EXPENSES. Administrative expenses increased to 4.7% of
restaurant sales for the thirty-nine week period ended September 30, 1998 as
compared with 4.6% of restaurant sales for the thirty-nine week period ended
October 1, 1997. This increase is attributable to the sale of certain
restaurants during 1997 and 1998 and the reduction in related revenues.
10
<PAGE>
INTEREST EXPENSE. Interest expense was $9.4 million, or 4.8% of
restaurant sales, for the thirty-nine week period ended September 30, 1998 as
compared with $9.6 million, or 4.2% of restaurant sales, for the thirty-nine
week period ended October 1, 1997. The percentage increase is the result of the
reduction in revenues due to restaurant sales.
INCOME TAX (BENEFIT). The Company recorded an income tax benefit of
approximately $1.3 million, or an effective rate of 36.3%, for the thirty-nine
week period ended September 30, 1998 as compared with an income tax benefit of
approximately $271,000, or an effective rate of 40.0%, for the thirty-nine week
period ended October 1, 1997. In 1998, the Company established a valuation
allowance of $135,000.
NET INCOME (LOSS). The Company recorded net loss of approximately
$909,000, after the extraordinary gain associated with the early extinguishment
of debt for the thirty-nine week period ended September 30, 1998 as compared
with net loss of $408,000 for the thirty-nine week period ended October 1, 1997,
as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company, and the restaurant industry generally, receives substantially all
of its revenue 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 $41.2
million at September 30, 1998 and $36.4 million at December 31, 1997. 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 sale/leaseback financing. The Company requires capital
principally for the development of new restaurants and to fund the acquisition
and conversion of existing restaurants. Currently, the Company is in various
stages of development of nine Black-eyed Pea restaurants, which it expects to
open over the next six months. The Company estimates that its costs to develop
and open new Black-eyed Pea restaurants, excluding real estate and building
costs, will be approximately $350,000 to $450,000 per restaurant. The Company
believes that its financing commitments will be adequate to meet its financing
needs associated with its new store development.
Net cash provided by (used in) operating activities was ($1.6 million) in the
first thirty-nine weeks of 1997 and $278,000 in the first thirty-nine weeks of
1998. This change is primarily attributable to the collection of notes
receivable and increases in receivables.
Net cash provided by investing activities increased from $1.5 million in the
first thirty-nine weeks of 1997 to $23.5 million in the first thirty-nine weeks
of 1998. This change is primarily attributable to the sale of certain
restaurants in March 1998.
Net cash used in financing activities was $1.5 million in the first thirty-nine
weeks of 1997 and $24.1 million in the first thirty-nine weeks of 1998. Cash
used in financing activities was primarily attributable to the principal
reductions in long-term debt.
In March 1998, the Company completed the sale of 63 Denny's and eight
non-branded restaurants, of which six were closed, to a Denny's franchisee for
gross proceeds of $28.7 million. Net cash proceeds of $25.2 million were used to
(i) repay the promissory note (the "BEP Note") payable to the seller of
Black-eyed Pea U.S.A., Inc. ("BEP") at a $2.4 million discount from its
outstanding principal amount of approximately $15.3 million; (ii) cancel
outstanding warrants to acquire approximately 1,000,000 shares of Common Stock
11
<PAGE>
at an exercise price of $1.90 per share, which were issued in connection with
the BEP Note; (iii) permanently reduce the Company's outstanding borrowings
under the term loan of the Credit Facility to $1.5 million; and (iv) repay
certain equipment operating leases associated with the restaurants sold in this
transaction. The Company has included the $2.3 million before tax discount on
the BEP note as an extraordinary item in the accompanying financial statements.
In March 1998, the Company sold five Denny's restaurants for cash and notes
totaling $1.1 million, to an unrelated party. This transactions resulted in a
gain of $575,000, which has been included in the accompanying financial
statements as a reduction of other restaurant operating expenses. In addition,
during fiscal 1998, the Company has closed six (five in the first quarter and
one in the second quarter) Denny's restaurants that were not achieving
acceptable cash flow requirements. In October 1998, the Company closed three
Black-eyed Pea restaurants. The Company intends to continue to evaluate its
existing restaurant portfolio and to close or sell restaurants as appropriate.
The Company was not in compliance with certain of its senior bank debt covenants
at September 30, 1998, and has reclassified its senior bank debt as current. The
Company has not received waivers, but is currently working to repay this
indebtedness. Should the Company be unable to repay this indebtedness the senior
lenders could, among other actions, accelerate the Company's obligations, which
as of September 30, 1998 totaled approximately $14.7 million. The Company is
currently negotiating with a financing source, the proceeds of which will be
used to retire $7.5 million of its senior bank debt. Although the Company
believes that such financing will be available, there is no assurance that such
financing will be consummated on terms and conditions acceptable to the Company.
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.
12
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 problem has become an issue for all companies. To the extent that
the Company does not identify and upgrade, modify or replace computer hardware
and software systems that are not designed to distinguish years beginning with
2000 from prior years, those systems will interpret January 1, 2000 as January
1, 1900. The untimely identification and resolution of this technology problem
by the Company could have a material adverse effect on the Company's operating
results and financial position. The Company has hired an outside consulting firm
to determine the risk that the Year 2000 problem poses to the operations of the
Company, to lower that risk to an acceptable level, and to develop and implement
backup plans so that the Company will be prepared to deal with internal and
external technology failures that may arise as a result of Year 2000 issues. An
inventory and assessment of information technology hardware and software has
been completed and the Company is determining a course of action for each item
with date-related deficiencies. The Company will continue to identify technology
systems and monitor and test those systems throughout 1998 and into 1999. The
Company does not currently anticipate any material adverse effects related to
Year 2000 issues.
NEW ACCOUNTING STANDARDS
At the beginning of fiscal 1998 the AICPA issued Statement of Position 98-5
"Reporting the Cost of Start-up Activities". This statement requires Companies
to expense the cost of start-up activities as incurred. The Company plans to
adopt this statement in fiscal 1999 and does not expect the cumulative effect of
this adoption to be material.
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 Item 1 - "Special
Considerations" in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
13
<PAGE>
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.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
14
<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: November 12, 1998 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)
<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
SEPTEMBER 30, 1998 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>
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<CURRENCY> U.S. DOLLARS
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<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-01-1998
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0
0
<COMMON> 1,350
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<TOTAL-LIABILITY-AND-EQUITY> 135,044
<SALES> 197,177
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<OTHER-EXPENSES> 9,193
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<INTEREST-EXPENSE> 9,429
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<INCOME-CONTINUING> (2,280)
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