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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 1-13226
DENAMERICA CORP.
----------------
(Exact name of registrant as specified in its charter)
Georgia 58-1861457
----------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7373 N. Scottsdale Road
Suite D-120, Scottsdale, AZ 85253
----------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 483-7055
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on Which Registered
------------------- ------------------------------------
Common Stock, $.10 par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [____]
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant (6,570,933 shares) on March 31, 1998 was
$14,373,916. The aggregate market value was computed by reference to the closing
price of the Common Stock on such date. For purposes of this computation, all
directors, executive officers, and 10% beneficial owners of the registrant are
deemed to be affiliates. Such determination should not be deemed an admission
that such directors, executive officers, or 10% beneficial owners are, in fact,
affiliates of the registrant.
Number of shares of Common Stock outstanding as of March 31, 1998:
13,447,777 shares of Common Stock, $.10 par value.
Documents incorporated by reference: None.
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<PAGE>
DENAMERICA CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS..............................................................1
ITEM 2. PROPERTIES...........................................................22
ITEM 3. LEGAL PROCEEDINGS....................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................23
ITEM 6. SELECTED FINANCIAL DATA..............................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................34
ITEM 11. EXECUTIVE COMPENSATION...............................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....45
SIGNATURES....................................................................49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
<PAGE>
PART I
ITEM 1. BUSINESS.
General
The Company currently operates 208 family-oriented, full-service
restaurants in 25 states, primarily in the southwestern, midwestern, western,
and southeastern United States. The Company owns and operates 104 Black-eyed Pea
restaurants, primarily in Texas, Georgia, Arizona, Oklahoma, Florida, and the
Washington, D.C. area, and franchises to third parties the rights to operate
three Black-eyed Pea restaurants in two states. The Company also owns and
operates 103 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. The Company has sold or
converted to the Denny's concept substantially all of the restaurants it
previously operated under various other restaurant concepts ("non-branded
restaurants").
The Company currently intends to increase the number of its restaurants
primarily through the development of new Black-eyed Pea restaurants and
acquisitions of franchised Black-eyed Pea restaurants from the franchisees. The
Company also plans to sell or close certain of its restaurants as appropriate
based on performance and other considerations. In addition, the Company may
expand its operations through the acquisition of one or more restaurant chains
or multiple restaurant locations. Such acquisitions would be made only if they
can be integrated with the Company's existing restaurant operations and only if
they would have a meaningful impact on the Company's operations. See Item 1,
"Business - Strategy." As used in this Report, the term "Company" refers to
DenAmerica Corp. and its subsidiaries and operating divisions. The Company's
principal executive offices are located at 7373 N. Scottsdale Road, Suite D-120,
Scottsdale, Arizona 85253, and its telephone number is (602) 483-7055.
Development of the Company
The Company began operations in 1986 through one or more predecessor
entities under common control. The Company was incorporated in 1989 and
initially pursued an aggressive program of growth through acquisitions of
Denny's and other restaurants and through development of new Denny's
restaurants. The Company resulted from the March 29, 1996, merger (the "Merger")
of Denwest Restaurant Corp. ("DRC") and American Family Restaurants, Inc.
("AFR"). The Company acquired Black-eyed Pea U.S.A., Inc. ("BEP") in July 1996
(the "BEP Acquisition"). The table below sets forth information regarding the
number of restaurants that the Company has acquired, developed, converted to the
Denny's concept, and sold or closed in each year since the beginning of fiscal
1993, including restaurants developed, sold, or closed by BEP prior to the BEP
Acquisition.
Restaurants Acquired, Developed, Converted, Sold, or Closed
<TABLE>
<CAPTION>
As of
March 31,
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Black-eyed Pea restaurants:
Number open beginning of period... 82 97 103 105 93 104
Acquired.......................... 0 0 0 0 9 0
Developed......................... 15 6 5 0 4 0
Sold or closed.................... 0 0 (3) (12) (2) 0
--- --- --- --- --- ---
Number open at end of period...... 97 103 105 93 104 104
=== === === === === ===
Denny's restaurants:
Number open beginning of period... 89 102 148 168 182 176
Acquired.......................... 2 40 3 0 0 0
Developed......................... 4 6 8 5 1 0
Converted from other concept...... 7 1 10 15 10 0
Sold or closed.................... 0 (1) (1) (6) (17) (73)
--- --- --- --- --- ---
Number open at end of period...... 102 148 168 182 176 103
=== === === === === ===
Non-branded restaurants:
Number open beginning of period... 43 59 56 82 20 3
Acquired.......................... 24 1 36 0 0 0
Converted......................... (7) (1) (10) (15) (2) 0
Sold or closed.................... (1) (3) (0) (47) (15) (2)
--- --- --- --- --- ---
Number open at end of period...... 59 56 82 20 3 1
=== === === === === ===
</TABLE>
<PAGE>
In March 1998, the Company completed the sale of 63 Denny's restaurants
and eight non-branded restaurants located in 13 states to an existing Denny's
franchisee for gross proceeds of $28.7 million. The Company utilized the cash
proceeds of approximately $25.2 million from this transaction to repay
outstanding indebtedness and operating leases and to cancel outstanding warrants
to acquire approximately 1,000,000 shares of the Company's Common Stock. The
Company has included a charge for impaired assets associated with the
restaurants sold of approximately $14.1 million, due primarily to the reduction
of intangibles of approximately $29.0 million, in its consolidated financial
statements for fiscal 1997. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and related notes thereto included elsewhere herein.
The following table sets forth certain information with respect to the
Company's restaurants as of March 31, 1998 and current plans for future
restaurant activity.
<TABLE>
<CAPTION>
Planned
Current Restaurants Development
------------------------------------------------------ ---------------------
Company-Owned Restaurants
--------------------------------------- Franchised Black-eyed Peas to be
Black-eyed Black-eyed Developed Through
Pea Denny's Other Pea 12/31/98
--- ------- ----- --- --------
<S> <C> <C> <C> <C> <C>
Arizona.............. 7 14 2
Arkansas............. 1 2
Colorado............. 8
Florida.............. 3 19 1
Georgia.............. 9
Idaho................ 5
Iowa................. 5
Kansas............... 2 1
Louisiana............ 1
Maryland............. 4
Minnesota............ 1
Missouri............. 1 1
Nebraska............. 4
Nevada............... 1
New Mexico........... 2
North Carolina....... 1
Oklahoma............. 5 7 1
Oregon............... 1
South Carolina....... 1
South Dakota......... 1
Tennessee............ 2
Texas................ 61 23 1 5
Utah................. 8
Virginia............. 5 2
Wisconsin............ 1
----- ----- ----- ----- -----
Totals........... 104 103 1 3 8
===== ===== ===== ===== =====
</TABLE>
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Strategy
The Company's business strategy is to (i) enhance its operational
efficiencies; (ii) sell or close certain underperforming restaurants; (iii)
enhance and refine the Black-eyed Pea restaurant concept; (iv) continue to
develop new restaurants; and (v) acquire additional restaurants.
Enhancement of Operating Efficiencies
The Company plans to take steps necessary to enhance its operating
efficiencies. In October 1997, the Company divided its administrative functions
between its Black-eyed Pea and Denny's restaurants in order to reduce general
and administrative costs. The Company anticipates that personnel and other
reductions associated with these changes will result in annual savings of
approximately $3.0 million. The Company also intends to enhance its operating
efficiencies by concentrating its restaurant development and acquisition
efforts, as described below, in selected markets where it operates existing
restaurants in order to capitalize on certain operating efficiencies that such
concentration generally provides. The Company's experience indicates that
operating multiple restaurant locations in targeted markets enables each
restaurant within the market to achieve increased customer recognition and to
obtain greater benefits from advertising and marketing expenditures than can be
obtained by single restaurants in isolated markets. In addition, concentration
of restaurants in specific markets generally produces economies of scale and
costs savings as a result of lower overall management costs, lower costs of
goods sold as a result of lower distribution costs, more efficient utilization
of advertising and marketing programs, and other administrative savings. The
Company believes that this strategy has been particularly successful in the core
market areas for its Black-eyed Pea restaurants. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
General."
Sale or Closure of Certain Restaurants
The Company continually evaluates the operating results of each of its
restaurants and seeks to sell or close any underperforming restaurants.
Subsequent to the Merger and the BEP Acquisition, the Company has sold or closed
a total of six Black-eyed Pea restaurants, 96 Denny's restaurants, and 64
non-branded restaurants, including the 71 restaurants sold in March 1998. The
Company determined that these restaurants had below-average operating results
and could not be operated profitably because of their location, renovation
costs, competitive factors, or inability to convert the brand. The Company
intends to apply the proceeds from the sale of additional underperforming
restaurants to reduce its outstanding indebtedness to a level that its
then-current operations will support profitably. The Company believes that it
will then be positioned to resume growth through development and acquisitions of
additional restaurants.
Enhancement of and Refinements to the Black-eyed Pea Concept
The Company has initiated a program to enhance and refine the Black-eyed
Pea restaurant concept in order to improve the unit economics of its Black-eyed
Pea restaurants, to increase the appeal of the Black-eyed Pea concept to current
customers, to attract new customers, and to encourage its customers to dine at
Black-eyed Pea restaurants with greater frequency and regularity. The Company
began implementing a number of changes to its "prototype" Black-eyed Pea
restaurant during 1997. These changes are designed to improve unit economics by
reducing the costs required to develop and equip each new restaurant. The
changes include (i) de-emphasizing bar sales, which currently account for only
2.1% of sales at Black-eyed Pea restaurants, in order to eliminate the costs
associated with installing, equipping, and stocking a full bar; (ii) reducing
the overall size of its prototype restaurant to between approximately 4,900 and
5,400 square feet from the previous average of 5,400 square feet, which reduces
construction, furnishing, and equipment costs; and (iii) increasing emphasis on
take-out sales, which grew to approximately 11% of per-store sales in fiscal
1997 from approximately 9% in fiscal 1996. The Company significantly reduced the
number of its franchised Black-eyed Pea restaurants during 1997 and may acquire
additional franchised restaurants during fiscal 1998. The Company may resume its
franchising activities after implementing the enhancements to and refinements of
the Black-eyed Pea concept throughout the Company-owned Black-eyed Pea
restaurants.
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As part of its program to enhance and refine the Black-eyed Pea concept,
in February 1998 the Company began testing and marketing breakfast at three
Black-eyed Pea restaurants in one market area. The success of this test will
depend upon various factors, including the addition of incremental sales without
reducing guest counts during other parts of the day and the costs associated
with equipment modifications required to accommodate breakfast preparation.
New Restaurant Development
The Company plans to continue to develop new restaurants, particularly in
markets where it currently operates restaurants, in order to capitalize on
positive demographic and traffic patterns, an existing management structure,
established advertising programs, and reduced distribution costs of food and
beverages. The Company currently intends to concentrate its efforts on
developing additional Black-eyed Pea restaurants because of the better unit
economics provided by those restaurants and anticipates that it will develop
approximately six to eight new Black-eyed Pea restaurants by the end of 1998.
The Company developed four new Black-eyed Pea restaurants and one new Denny's
restaurant during fiscal 1997. During the three-year period ended December 31,
1997, the Company developed four new Black-eyed Pea restaurants and 14 new
Denny's restaurants. See Item 1, "Special Considerations - Inability to Develop
Restaurants."
Restaurant Acquisitions
The Company plans to acquire restaurants when it believes it can improve
their performance through better management and greater operating efficiencies
or through conversion to the Black-eyed Pea or Denny's concept. The Company
believes it can take advantage of its organizational and management expertise to
bring improved quality and operating efficiencies to the restaurants it
acquires. From January 1, 1994 through July 3, 1996, the Company acquired a
total of 179 restaurants in nine transactions. Of these restaurants, 99 were
Black-eyed Pea restaurants purchased in the BEP Acquisition and 43 were Denny's
restaurants acquired either from Denny's, Inc. or from other Denny's
franchisees. During fiscal 1997, the Company acquired nine Black-eyed Pea
restaurants in Arizona and Florida from the franchisees operating these
restaurants. These strategic acquisitions increased market share in existing
marketplaces or extended geographic coverage and generally resulted in a
decrease in administrative expenses as a percentage of sales without a
proportionate cost increase.
Black-eyed Pea Restaurants
The Company currently operates 104 Black-eyed Pea restaurants in 12
states. The Company also currently franchises to third parties the rights to
operate three Black-eyed Pea restaurants in two states.
Concept
Black-eyed Pea restaurants are full-service, casual dining establishments
featuring wholesome home-style meals, including traditional favorites such as
pot roast, chicken fried steak, roast turkey, vegetable dishes, and freshly
baked breads and desserts. The Company believes that the emphasis of Black-eyed
Pea restaurants on quality food, comfortable atmosphere, friendly service, and
reasonable prices attracts a broad range of customers, including families and
business people.
Black-eyed Pea restaurants generally are open for lunch and dinner seven
days a week, typically from 11:00 a.m. to 10:00 p.m. On average, sales before
4:30 p.m. account for approximately 48% of total sales per restaurant. During
fiscal 1997, the Company introduced expanded store hours and a breakfast menu at
one Black-eyed Pea restaurant. In February 1998, the Company began testing and
marketing breakfast at three Black-eyed Pea restaurants in another market area.
Menu
Black-eyed Pea restaurants offer a variety of entrees accompanied by a
broad selection of fresh vegetables and freshly baked breads, large servings of
iced tea and soft drinks (with complimentary refills), and fruit
4
<PAGE>
cobblers, pies, and other freshly prepared desserts. Entrees include chicken
fried steak, grilled chicken, seasoned meat loaf, pot roast with gravy, and
roast turkey with dressing. Black-eyed Pea restaurants also offer a range of
freshly made soups, salads, appetizers, and sandwiches. In addition to its
standard menu items, Black-eyed Pea restaurants offer regular daily specials,
such as chicken pot pie, fried fish, and chicken and dumplings. Vegetable
offerings are an important component of the Black-eyed Pea restaurant menu. Each
restaurant features a dozen vegetables daily, from which customers can make two
or three selections to accompany their meals, as well as a vegetable plate
entree, which consists of up to five vegetable selections. To encourage family
dining, Black-eyed Pea restaurants feature a children's menu, which offers
smaller portions of regular menu items, as well as special items such as peanut
butter and jelly and grilled cheese sandwiches. As of December 31, 1997, the
average check per customer at the Company's Black-eyed Pea restaurants was
$7.90. In fiscal 1997, liquor sales accounted for approximately 2.1% of total
revenue of Black-eyed Pea restaurants.
Each Black-eyed Pea restaurant has a full-service kitchen, which gives it
the flexibility to prepare daily and seasonal specials and to otherwise expand
its food offerings. The Company regularly reviews and revises the existing
Black-eyed Pea restaurant menu and conducts consumer tests of new menu items in
order to improve the quality and breadth of food offerings and to encourage
repeat business. The Company maintains a test kitchen facility, which includes a
full Black-eyed Pea restaurant cookline, for use in its product development
efforts.
Restaurant Layout
The distinctive, turn-of-the-century "General Store" appearance of
Black-eyed Pea restaurants is designed to create a casual and comfortable dining
atmosphere, which appeals to their broad customer base, including families.
Restaurant interiors are usually decorated with turn-of-the-century artifacts,
which line the walls and shelves. Most Black-eyed Pea restaurants have booth and
table seating as well as a small lunch counter/bar on one side of the dining
room, which also provides take-out service.
Black-eyed Pea restaurants generally range in size from approximately
4,000 square feet to 6,000 square feet and have dining room seating for 160 to
210 customers and counter/bar seating for approximately 10 additional guests.
The Company's current prototype restaurant is approximately 4,900 to 5,400
square feet and has dining room seating for approximately 170 to 200 customers
plus a take-out service counter.
Unit Economics
The Company estimates that its total costs of developing a new Black-eyed
Pea restaurant currently ranges from $350,000 to $400,000, exclusive of annual
operating costs and assuming that the land and buildings are obtained under a
lease arrangement. These costs include approximately (i) $300,000 to $350,000
for furniture, fixtures, and equipment; (ii) $50,000 for pre-opening costs,
including hiring and training costs, employee wages, and advertising; and (iii)
$30,000 for the initial franchise fee in the case of franchisees. The Company
currently plans to lease substantially all of its new Black-eyed Pea restaurant
sites in order to minimize the costs of developing new restaurants. See Item 1,
"Business - Financing and Leasing" and Item 2, "Properties."
Site Selection
The Company believes that proper site selection is critical to maximizing
the success of a particular Black-eyed Pea restaurant and, therefore, senior
management devotes significant time and resources in selecting and evaluating
each prospective site. A variety of factors are analyzed in the site selection
process, including local market demographics, acquisition cost, site visibility
and accessibility, and proximity to significant generators of potential
customers such as major retailers, retail centers, office complexes, hotels and
entertainment centers. In most instances, the Company prefers the stand-alone
Black-eyed Pea prototype because it enhances the restaurant's visibility and
customer access.
5
<PAGE>
Franchises
The Company significantly reduced the number of its franchised Black-eyed
Pea restaurants during 1997 and may acquire additional franchised restaurants
during fiscal 1998. The Company currently intends to resume its franchising
activities after implementing various enhancements to and refinements of the
Black-eyed Pea concept throughout the Company-owned Black-eyed Pea restaurants.
See Item 1, "Business - Strategy." As of December 31, 1997, the Company had two
Black-eyed Pea franchisees operating three restaurants in two states. The
Company has typically offered development agreements to franchisees for
construction of one or more restaurants over a defined period of time within a
specific geographic area. Under the current form of development agreement, a
franchisee is required to pay, at the time the agreement is signed, a
nonrefundable fee of $5,000 per restaurant committed to be developed. The
Company's current development agreement also requires franchisees to pay a
franchise fee of $30,000 per restaurant upon signing a franchise agreement for a
specific location before construction begins. The Company's current form of
franchise agreement has a 15 year initial term with certain renewal rights and
provisions for payment to the Company of royalties equal to 3.5% of gross sales
and advertising fees and required marketing expenditures of up to 2.75% of gross
sales. The Company requires each franchisee to have an approved full-time
principal operator who is responsible for the supervision and operation of the
franchise.
Denny's Restaurants
The Company currently operates 103 Denny's restaurants, representing
approximately 6.4% of the Denny's system and making the Company the world's
largest Denny's franchisee in terms of revenue and the number of restaurants
operated.
Denny's, Inc.
The Company operates its Denny's restaurants pursuant to franchise
agreements with Denny's, Inc. See Item 1, "Business - Denny's Restaurants -
Denny's Franchise Agreements." Denny's, Inc. is a wholly owned subsidiary of
Advantica Restaurant Group, Inc., the successor to Flagstar Companies, Inc.
("Advantica"), one of the largest restaurant companies in the United States.
Advantica currently conducts its restaurant operations through several principal
chains, the largest of which is Denny's, the largest family-oriented,
full-service restaurant chain in the United States, with more than 1,600
corporate-owned or franchised units in 49 states and six foreign countries.
Advantica emerged from bankruptcy protection in late 1997. See Item 1, "Special
Considerations - Reliance on Denny's, Inc."
Concept
Denny's are family-oriented, full-service restaurants, featuring a wide
variety of traditional family fare. The restaurants are designed to provide a
casual dining atmosphere with moderately priced food and quick, efficient
service. Denny's restaurants generally are open 24 hours a day, seven days a
week.
Menu and Pricing
All Denny's restaurants throughout the United States have uniform menus
with some regional and seasonal variations. Denny's restaurants serve breakfast,
lunch, and dinner and also feature a "late night" menu. Breakfasts include
Denny's popular "Original Grand Slam Breakfast" combinations, consisting of a
variety of eggs, breakfast meats, pancakes, biscuits, muffins, and other items,
as well as traditional breakfast items, such as eggs, omelets, pancakes,
waffles, cereals, and muffins. Lunch and dinner entrees include prime rib, roast
beef, fried shrimp, fish, roast turkey, grilled or fried chicken, sirloin tips,
and liver. The restaurants also offer a variety of soups, salads, sandwiches,
appetizers, side orders, beverages, and desserts. Appetizers include mozzarella
sticks, buffalo wings, chili, chicken strips, and quesadillas; and desserts
include cakes, pies, ice cream, and sundaes. The restaurants offer free refills
on coffee, soft drinks, lemonade, and tea. Special menus are available for
senior citizens and children. In December 1997, the average check per customer
at the Company's Denny's restaurants was $5.30.
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<PAGE>
Restaurant Layout
The Company's Denny's restaurants generally operate in free-standing
locations in high-traffic commercial areas. The restaurants average
approximately 4,800 to 5,200 square feet, with an average seating capacity of
180 to 210 people. Generally, the dining areas are fully carpeted and informal
in design and contain booths, tables, and counter seating. The layout of each
restaurant is designed to easily accommodate both smaller groups of two and four
as well as large groups of guests. All guests are greeted and seated by a host
or hostess when they enter the restaurant.
Unit Economics
The Company estimates that its total cost of developing a new Denny's
restaurant currently ranges from $290,000 to $390,000, exclusive of annual
operating costs and assuming that the land and buildings are obtained under a
lease arrangement. These costs include approximately (i) $230,000 to $330,000
for furniture, fixtures, and equipment; (ii) $40,000 for pre-opening costs,
including hiring and training costs, employee wages, and advertising; and (iii)
$20,000 for the initial franchise fee. The Company estimates that its total cost
of converting an acquired restaurant to the Denny's concept currently ranges
from approximately $160,000 to $480,000, exclusive of annual operating costs and
assuming that the land and building are obtained under a lease arrangement.
These costs include approximately (a) $110,000 to $430,000 for remodeling and
improvements; (b) $30,000 for pre-opening costs, including hiring costs,
employee wages, and advertising; and (c) $20,000 for the initial franchise fee.
The Company leases substantially all of its restaurant sites in order to
minimize the costs of acquiring and developing new restaurants. The Company
currently intends to lease its restaurant sites in the future. See Item 1,
"Business - Financing and Leasing" and Item 2, "Properties."
Site Selection
When evaluating whether and where to develop a new Denny's restaurant,
the Company conducts an internal screening process to determine a restaurant's
estimated profit potential. The Company considers the location of a restaurant
to be one of the most critical elements of the restaurant's long-term success.
Accordingly, the Company expends significant time and effort in the
investigation and evaluation of potential restaurant sites. In conducting the
site selection process, the Company primarily evaluates site characteristics
(such as visibility, accessibility, and traffic volume), considers the
restaurant's proximity to demand generators (such as shopping malls, lodging,
and office complexes), reviews potential competition, and analyzes detailed
demographic information (such as population characteristics, density, and
household income levels). Because Denny's restaurants are often impulse rather
than destination restaurants, the Company emphasizes visibility and high traffic
patterns in its site selection and places somewhat less importance on population
demographics. Senior corporate management evaluates and approves each restaurant
site prior to its development. Denny's, Inc. provides site selection guidelines
and criteria as well as site selection counseling and assistance and must
approve sites selected by the Company.
The Denny's System
Denny's restaurants are developed and operated pursuant to a specified
system developed by Denny's, Inc. (the "Denny's System"). Denny's, Inc. prepares
and maintains the detailed standards, policies, procedures, manuals, and other
requirements that constitute the Denny's System in order to facilitate the
consistent operation and success of all Denny's restaurants. The Denny's System
includes distinctive interior and exterior designs, decors, color schemes,
furnishings, and employee uniforms; uniform specifications and procedures for
restaurant operations; standardized menus featuring unique recipes and menu
items; procedures for inventory and management control; formal training and
assistance programs; advertising and promotional programs; and special
promotional items. The Denny's System includes established, detailed
requirements regarding (i) the quality and uniformity of products and services
offered; (ii) the purchase or lease, from suppliers approved by Denny's, Inc.,
of equipment, fixtures, furnishings, signs, inventory, ingredients, and other
products and materials that conform with the standards and specifications of the
Denny's System; and (iii) standards for the maintenance, improvement, and
modernization of restaurants, equipment, furnishings, and decor. To ensure that
the highest
7
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degree of quality and service is maintained, each franchisee must operate each
Denny's restaurant in strict conformity with the methods, standards, and
specifications designated by Denny's, Inc.
Denny's Franchise Agreements
The Company is a party to a separate franchise agreement with Denny's,
Inc. for each of its Denny's restaurants (the "Denny's Franchise Agreements").
The Denny's Franchise Agreements generally require payment of an initial
franchise fee and a royalty equal to 4% of weekly gross sales (as defined in the
Denny's Franchise Agreements) and an advertising contribution of 2% of weekly
gross sales in markets where Denny's, Inc. conducts significant institutional
advertising. In markets where Denny's, Inc. does not conduct significant
institutional advertising, the Denny's Franchise Agreements require the Company
to pay Denny's, Inc. 0.5% of weekly gross sales and to spend an additional 1.5%
of weekly gross sales on local advertising. Initial franchise fees for the
Denny's restaurants operated by the Company have ranged from $0 to $35,000. The
Company negotiates the initial franchise fees, which vary based upon such
factors as involvement of Denny's, Inc. personnel in the training of the
Company's employees and the number of Denny's restaurants being developed or
acquired. Shorter development periods will result in lower initial franchise
fees. The Denny's Franchise Agreements generally have a term of 20 years or the
earlier expiration of the relevant building lease (including options for
extensions). A Denny's Franchise Agreement may be terminated by the Company only
upon the occurrence of a material breach by Denny's, Inc.
The Denny's Franchise Agreements entitle the Company to use the "Denny's"
name, trade symbols, and intellectual property, including menus, symbols,
labels, and designs, to promote the restaurants and the Denny's affiliation.
Denny's, Inc. also furnishes training and supervisory services for maintaining
modern and efficient operation of the restaurants and helps fund a national
advertising campaign. The Company generally is required to maintain a standard
exterior decor and exterior signs and a consistent interior color scheme and
layout at its Denny's restaurants. Each Denny's restaurant employee is required
to wear a standard uniform. The Company is free to establish its own prices at
its Denny's restaurants, which may differ by location and are influenced by
geographic and other considerations.
An agreement between the Company and Denny's, Inc. gives Denny's, Inc.
the right to terminate substantially all of the Denny's Franchise Agreements 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. The cancellation of
the Denny's Franchise Agreements as a result of a default by the Company under
its credit facility would have a material adverse effect on the Company. In the
event of a "change of control" of the Company, the Denny's Franchise Agreements
give Denny's, Inc. the option to purchase within one year after the date of such
change of control all of the Denny's restaurants owned or operated by the
Company for their fair market value. As long as the Company is a publicly held
corporation, a change of control will be deemed to have occurred only if any
person, entity, or group of persons (other than a group which includes Jack M.
Lloyd, William J. Howard, and William G. Cox, each of whom is an officer and
director of the Company, Jeffrey D. Miller, a former officer and director of the
Company, or BancBoston Ventures, Inc. ("BancBoston"), a significant shareholder
of the Company) acquires voting control of the Company's Board of Directors.
Without the consent of Denny's, Inc., the Company may not directly or
indirectly own, operate, control, or have any financial interest in any coffee
shop or family-style restaurant business or any other business that would
compete with the business of any Denny's restaurant, Denny's, Inc., or any
affiliate, franchisee, or subsidiary of Denny's, Inc. (other than restaurants
currently operated by the Company). For two years after the expiration or
termination of a Denny's Franchise Agreement, the Company will not be permitted,
without the consent of Denny's, Inc., directly or indirectly to own, operate,
control, or have any financial interest in any coffee shop or family-style
restaurant substantially similar to a Denny's located within a 15-mile radius of
a Denny's restaurant subject to the expired or terminated agreement. These
restrictions will not apply to the operation of another Denny's restaurant or
the ownership of less than 5% of the publicly traded stock of any other company.
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Non-branded Restaurants
The Company currently operates one non-branded restaurant. During fiscal
1997, the Company sold 12 non-branded restaurants, converted two non-branded
restaurants to the Denny's concept, and closed three other non-branded
restaurants.
Expansion of Operations
The Company's current growth plan is to develop or acquire restaurants in
its core market areas, primarily in Texas, Oklahoma, and Arizona. See Item 7,
"Management Discussion and Analysis of Financial Condition and Results of
Operations - General." This growth plan emphasizes a continued focus on
restaurant locations and operations. Before developing or acquiring any
restaurants in a particular location within its target market, the Company
evaluates factors such as the size of the market area, demographic and
population trends, competition, and the availability and cost of suitable
restaurant locations. See Item 1, "Business - Black-eyed Pea Restaurants - Site
Selection" and "Business - Denny's Restaurants - Site Selection."
The Company believes it is able to achieve significant cost savings when
it incorporates newly developed or acquired restaurants into its operations by
taking advantage of certain economies of scale associated with administrative
overhead and management personnel and systems. As a result, the Company believes
that its corporate infrastructure enables it to eliminate administrative and
managerial redundancies and to reduce the overall operating costs on a
per-restaurant basis. Historically, the Company generally has been able to
increase sales volume at acquired or converted restaurants through remodeling
and improved service. The Company intends to continue developing new Black-eyed
Pea restaurants in order to enhance its presence in its target markets; to
establish the necessary base from which it can further penetrate these markets;
and to capitalize on purchasing, advertising, managerial, administrative, and
other efficiencies that result from the concentration of restaurants in specific
markets. The Company also may acquire or develop restaurants operating under
different concepts, but currently has no plans to do so.
Restaurant Development
Since 1986, the Company has developed and opened more Denny's restaurants
than either Denny's, Inc. or any other franchisee. In the three and one-half
year period prior to the BEP Acquisition, BEP developed 11 and franchised four
Black-eyed Pea restaurants. The Company currently plans to accelerate the
development of additional Black-eyed Pea restaurants. The specific time frame in
which the Company is able to develop new restaurants will be determined by the
Company's success in identifying suitable sites; obtaining financing for
construction, tenant improvements, furniture, fixtures, and equipment;
negotiating acceptable lease or purchase terms; securing the appropriate
governmental permits and approvals (including those relating to zoning,
environmental, health, and liquor licenses); managing restaurant construction;
and recruiting and training qualified personnel. There can be no assurance as to
the number of new restaurants that the Company will be able to open or the
ultimate success of any such restaurants. The development of new restaurants
also may be affected by increased construction costs and delays resulting from
governmental regulatory approvals, strikes or work stoppages, and adverse
weather conditions. Newly developed restaurants may operate at a loss for a
period following their initial opening. The length of this period will depend
upon a number of factors, including the time of year the facility is opened,
sales volume, and the Company's ability to control costs. There can be no
assurance that the Company will be successful in achieving its expansion goals
through the opening of additional restaurants or that any additional restaurants
that are opened will be profitable.
Restaurant Acquisitions
The Company actively evaluates the opportunities to acquire additional
restaurants or franchise rights to existing restaurants that it can operate
profitably by integrating the acquired restaurants with the Company's existing
operations. The Company evaluates such opportunities based on numerous factors,
including location, operating history, future potential, acquisition price, and
the terms and availability of financing for such restaurants or additional
franchise rights. The acquisition of any such existing restaurants or additional
franchise
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rights may require the approval of Denny's, Inc. and the Company's lenders.
There can no be assurance that the Company will be able to acquire additional
restaurants, or that any such restaurants that are acquired will be profitable
to the Company.
Restaurant Operations
Management Services
The Company believes that successful execution of basic restaurant
operations is essential to achieve and maintain a high level of customer
satisfaction in order to enhance the Company's success and future growth.
Therefore, the Company devotes significant efforts to ensure that all of its
restaurants offer quality food and service. The Company maintains standards for
the preparation and service of quality food, the maintenance and repair of
restaurant facilitates, and the appearance and conduct of employees.
Once a restaurant is integrated into its operations, the Company provides
a variety of corporate services to assure the operational success of the
restaurant and the proper execution of standards required by the Company for all
of its restaurants and by Denny's, Inc. in the case of its Denny's restaurants.
The Company's executive management continually monitors restaurant operations;
maintains management controls; inspects individual restaurants to assure the
quality of products and services and the maintenance of facilities; develops
employee programs for efficient staffing, motivation, compensation, and career
advancement; institutes procedures to enhance efficiency and reduce costs; and
provides centralized support systems.
The Company also maintains quality assurance procedures designed to
ensure compliance with the high quality of products and services mandated by it
and by Denny's, Inc. in the case of its Denny's restaurants. Company personnel
make unannounced visits to its restaurants to evaluate the facilities, products,
employees, and services. The Company believes that its quality review program
and executive oversight enhance restaurant operations, reduce operating costs,
improve customer satisfaction, and facilitate the highest level of compliance
with the Company's standards and those mandated by Denny's, Inc. in the case of
its Denny's restaurants.
Responsibility for managing the operations of Black-eyed Pea restaurants
is currently the responsibility of one vice president of operations. The
Black-eyed Pea restaurant system has two regional vice presidents, who report to
the vice president of operations. Each regional vice president is responsible
for eight to nine districts, each of which is in turn supervised by a district
manager. Most district managers are responsible for six or seven restaurant
locations. The management staff of a typical Black-eyed Pea restaurant consists
of a general manager, an assistant general manager, and one or two assistant
managers. Each Black-eyed Pea restaurant employs approximately 60 persons.
The Company's three regional vice presidents for Denny's restaurants are
responsible for the maintenance of the operational standards of the Company's
Denny's restaurants as specified by Denny's, Inc. District managers are
responsible for the six to eight restaurants within their district. Restaurant
managers are responsible for day-to-day operations, including customer
relations, food preparation and service, cost control, restaurant maintenance,
and personnel relations. As required by Denny's, Inc., the Company staffs each
of its Denny's restaurants with an on-site general manager, two assistant
managers, and 20 to 50 full-time or part-time hourly employees.
Training
The Company seeks to attract and retain high-quality individuals with
prior restaurant experience for restaurant management positions. The Company
believes that the training of its management and other restaurant employees is
important to its ability to maintain the quality and consistency of its food and
service and to develop the personnel necessary to achieve its expansion plans.
Newly hired employees are reviewed at regular intervals during their first year,
and all restaurant personnel receive annual performance reviews. The Company
generally seeks to promote existing employees to fill restaurant management
positions.
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The Company employs a full-time training director to oversee training for
its Black-eyed Pea restaurants. The Company requires each restaurant management
employee to participate in a training program at designated training
restaurants. The restaurant management training program utilizes manuals, tests,
and a scheduled evaluation process. In addition, the Company has developed
procedures for coordinating and overseeing the opening of new Black-eyed Pea
restaurants in order to maintain quality and consistency of food and service.
Special training teams are on hand at new locations, generally for a period of
one week before and one week after each restaurant opens.
The Company maintains a comprehensive training program that provides all
instructors, facilities, and required training materials necessary to train its
Denny's restaurant managers and other restaurant management personnel. The
training covers all aspects of management philosophy and overall restaurant
operations, including supervisory skills, customer interaction, operating
standards, cost control techniques, accounting procedures, employee selection
and training, risk management, and the skills required to perform all duties
necessary for restaurant operations. New managers work closely with experienced
managers and district managers to solidify their skills and expertise. The
Company designates certain experienced employees as "Certified Trainers" who are
responsible for training newly hired Denny's restaurant employees. The Company's
district managers and general managers regularly participate in on-going
training efforts. By training its own management personnel and opening its own
restaurants, the Company reduces its initial franchise fee per Denny's
restaurant from $35,000 to $20,000.
Maintenance and Improvement of Restaurants
The Company maintains its Black-eyed Pea and Denny's restaurants and all
associated fixtures, furnishings, and equipment in conformity with the
Black-eyed Pea and the Denny's System concepts, respectively. The Company
operates a centralized call-in center that restaurant managers can contact to
report maintenance or repair requirements. The Company then dispatches service
technicians that it employs or independent contractors with which it has
maintenance contracts. The Company also makes necessary additions, alterations,
repairs, and replacements to its restaurants, such as periodic repainting or
replacement of obsolete signs, furnishings, equipment, and decor, including
those required by Denny's, Inc. in the case of its Denny's restaurants. The
Company may be required, subject to certain limitations, to modernize its
Denny's restaurants to the then-current standards and specifications of Denny's,
Inc.
Management Information Systems
The Company maintains a centralized, computerized accounting system for
financial controls and reporting functions for all of its Black-eyed Pea and
Denny's restaurants. The Company has a point-of-sale reporting system in each of
its Black-eyed Pea and Denny's restaurants, which provides sales mix
information, labor scheduling functions, and weekly close-out processes. The
Company's point-of-sale compliance center at its headquarters in Scottsdale,
Arizona, handles point-of-sale hardware, software, and training issues.
Restaurant managers submit weekly reports on sales volume and mix, customer
counts, and labor costs to the Company's corporate management. The Company's
Black-eyed Pea restaurants perform weekly inventory counts. Each of the
Company's Denny's restaurant maintains "par stock" inventory levels and the
restaurant manager takes monthly physical inventories of all food, beverage, and
supply items. The Company's accounting department prepares monthly profit and
loss statements, which operational managers review and compare with the
Company's prepared budgets. See Item 1, "Special Considerations - Year 2000
Compliance."
Financing and Leasing
It is the Company's current strategy to lease, rather than own, the land
and buildings associated with the operations of its restaurants. Historically,
the Company has entered into sale-leaseback transactions or joint ventures under
which the financing company purchases the identified parcel of land and funds
the costs of the restaurant construction, excluding the initial franchise fee,
equipment costs, and restaurant preopening expenses. The financing company then
leases the restaurant property back to the Company for up to 30 years, including
renewal option periods, under the terms of a triple-net lease. The Company's
ability to effect its new restaurant
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development strategy depends on the availability of financing on terms and
conditions that the Company believes are appropriate for the risk of the
development. The Company currently has financing commitments available from
various lenders in amounts that it believes will be sufficient for its
anticipated restaurant development and acquisition activities during 1998. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources." The inability of the Company
to secure sufficient additional sale-leaseback or other financing in the future
could have a significant impact on its ability to acquire or develop new
restaurants.
Through September 30, 1997, the Company and CNL Group, Inc. and certain
of its affiliates ("CNL") were parties to three joint venture agreements for the
purpose of acquiring, developing, owning, and operating a total of 16
restaurants. The Company and CNL each had a 50% interest in each of the joint
ventures. The Company was responsible for day-to-day operations of the
restaurants owned by each joint venture, and CNL paid the Company a management
fee of approximately 3.5% of sales for its services. Under the terms of the
joint ventures, CNL contributed 100% of the initial capital required for land,
building, and site development costs, and a subsidiary of CNL contributed 100%
of the capital required to equip the restaurants, acquire the franchises, train
the staff, stock the inventory, and open the restaurants. On October 1, 1997,
the Company and CNL entered into a series of transactions in which the Company
(i) purchased CNL's 50% interest in each of the joint ventures; (ii) purchased
from CNL the land and buildings for nine of the 16 restaurants; (iii) entered
into sale/leaseback transactions with CNL with respect to eight buildings
located on ground leases; and (iv) entered into equipment notes payable with
CNL. See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
The Company entered into a credit facility with Banque Paribas, as agent,
and the Company's other senior lenders in connection with the Merger and the BEP
Acquisition. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Reference is made to Item 13, "Certain Relationships and Related Transactions"
for additional information regarding sale and lease transactions in connection
with the BEP Acquisition.
Equipment, Food Products, and Other Supplies
A purchasing director coordinates purchasing decisions with respect to
the Company's Black-eyed Pea restaurants. The Company strives to obtain supplies
of a high and consistent quality at competitive prices from reliable sources.
The Company negotiates directly with food manufacturers for the majority of its
purchases and with local suppliers for fresh produce, dairy, and meat products.
In addition, the Company contracts with a centralized distribution company to
store and deliver substantially all of the products and supplies it purchases
(other than fresh produce, meat and dairy products). The Company offers its
Black-eyed Pea franchisees the option to participate in its purchasing and
distribution program. Franchisees may purchase products and supplies from other
sources as long as the products meet Company specifications.
The Company's ability to maintain consistent quality throughout its
Denny's restaurants depends in part upon its ability to acquire from reliable
sources the equipment, food products, and related items necessary to meet the
standards set by Denny's, Inc. The Company believes the maintenance of this
uniformity and consistency enables it to capitalize on the name recognition and
goodwill associated with Denny's restaurants. As a result, the Company leases or
purchases all fixtures, furnishings, equipment, signs, food products, supplies,
inventory, and other products and materials required for the development and
operation of its Denny's restaurants from suppliers approved by Denny's, Inc. In
order to be approved as a supplier, a prospective supplier must demonstrate to
the reasonable satisfaction of Denny's, Inc. its ability to meet the
then-current standards and specifications of Denny's, Inc. for such items, must
possess adequate quality controls, and must possess the capacity to provide
supplies promptly and reliably. Although the Company is not required to acquire
its equipment or supplies from any specified supplier, it must obtain the
approval of Denny's, Inc. before purchasing or leasing any items from an
unapproved supplier.
The Company's Denny's restaurants operate on a par stock system, which
enables restaurant managers to place weekly inventory orders based on historical
sales volumes, thereby focusing on customer service rather than
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on purchasing decisions. The Company purchases most of its food inventory for
its Denny's restaurants from a single supplier that specializes in providing
food products to Denny's franchisees. The Company believes that its purchases
from this supplier enable the Company to maintain a high level of quality
consistent with Denny's restaurants; to realize convenience and dependability in
the receipt of its supplies; to avoid the costs of maintaining a large
purchasing department, large inventories, and product warehouses; and to attain
cost advantages as a result of volume purchases. The Company does not have a
supply agreement or other contractual arrangement with its primary supplier and
effects purchases through purchase orders. The Company believes that food goods
could be readily purchased from a large number of vendors throughout its regions
of operation in the event that it is unable to purchase sufficient inventory
from its primary supplier. Each of the Company's Denny's restaurants purchases
dairy, bakery, and produce goods from approved local vendors.
Advertising and Marketing
The Company uses television, radio and print advertising, and special
promotions to increase the traffic and sales at its Black-eyed Pea restaurants.
The Company's strategy is to develop a sufficient number of Black-eyed Pea
restaurants in its markets to permit the cost-effective use of television and
radio advertising. The Company's advertising campaigns are designed to
communicate the distinctive aspects of the Black-eyed Pea concept and are
targeted to appeal to its customer base. The Company employs a full-time vice
president of marketing who plans, develops, and implements advertising campaigns
for its Black-eyed Pea restaurants. The Company also uses full service
advertising agencies. Expenditures for Black-eyed Pea advertising (including
local promotions) were approximately 4.2% of Black-eyed Pea restaurant sales
during fiscal 1997.
As generally required under the terms of the Denny's Franchise
Agreements, the Company contributes 2% of its Denny's restaurant sales to an
advertising and marketing fund controlled by Denny's, Inc. Denny's, Inc. uses
this fund primarily to develop system-wide advertising, sale promotions, and
marketing materials and programs. The Denny's Franchise Agreements prohibit
franchisees, including the Company, from conducting any local, regional, or
national advertising without the prior written consent of Denny's, Inc. From
time to time, Denny's, Inc. may establish advertising cooperatives for
geographic areas not covered by existing advertising campaigns. In the event
that the Company participates in such a cooperative, any contribution that it
makes to a cooperative is in addition to the 2% of gross sales that the Company
is required to contribute to Denny's, Inc. Cooperatives have been established in
several of the Company's markets.
Government Regulation
The restaurant business is subject to extensive federal, state, and local
government regulation relating to the development and operation of restaurants.
Each of the Company's restaurants is subject to licensing and regulation by
state and local departments and bureaus of alcohol control, health, sanitation,
and fire and to periodic review by the state and municipal authorities for areas
in which the restaurants are located. In addition, the Company is subject to
local land use, zoning, building, planning, and traffic ordinances and
regulations in the selection and acquisition of suitable sites for constructing
new restaurants. Delays in obtaining, or denials of, revocation of, or temporary
suspension of, necessary licenses or approvals could have a material adverse
impact upon the Company's development or acquisition of restaurants or the
Company's operations generally. The Company also is subject to regulation under
the Fair Labor Standards Act, which governs such matters as working conditions
and minimum wages. An increase in the minimum wage rate, such as the increases
enacted during 1996 and 1997, changes in tip-credit provisions, employee benefit
costs (including costs associated with mandated health insurance coverage), or
other costs associated with employees could adversely affect the Company. In
addition, the Company is subject to the Americans with Disabilities Act of 1990
which, among other things, may require certain installations in new restaurants
or renovations to its existing restaurants to meet federally mandated
requirements.
Sales of alcoholic beverages comprised less than 2.1% and 1.0%,
respectively, of restaurant sales in its Black-eyed Pea and Denny's restaurants
during fiscal 1997. The sale of alcoholic beverages is subject to extensive
regulations. The Company may be subject to "dram-shop" statues, which generally
provide an individual injured by an intoxicated person the right to recover
damages from the establishment that wrongfully
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served alcoholic beverages to that person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance and
has never been a defendant in a lawsuit involving "dram-shop" statues.
The Company is subject to Federal Trade Commission ("FTC") regulations
and state laws, which regulate the offer and sale of Black-eyed Pea restaurant
franchises. The Company also is subject to state laws, which regulate
substantive aspects of the franchisor-franchisee relationship. The FTC requires
the Company to furnish to prospective Black-eyed Pea franchisees a franchise
offering circular containing prescribed information. A number of states in which
the Company offers Black-eyed Pea franchises also regulate the offer and sale of
franchises and require registration of the franchise offering with state
authorities. State laws that regulate the franchisor-franchisee relationship
presently exist in a substantial number of states, and bills have been
introduced in Congress and in a number of state legislatures from time to time
(some of which are now pending) that would provide for federal and state
regulation of the franchisor-franchisee relationship in certain respects.
Certain of such laws may restrict the Company's ability to terminate the
franchise agreements for its franchised Black-eyed Pea restaurants, although
these provisions have not had a significant effect on the Company's operations
to date.
Trademarks
The Company has registered a number of service marks, including the names
"Black-eyed Pea," "Dixie House," and the slogan "Home Cookin' Worth Going Out
For," with the United States Patent and Trademark Office and in various states
in connection with its Black-eyed Pea operations. The Company regards these
service marks as having significant value and being an important factor in the
marketing of its restaurants. The Company licenses the right to use the
"Denny's" trademark directly from Denny's, Inc. The Company believes that the
continued right to use the "Denny's" trademark is important to its success. The
Company also owns or licenses the right to use certain other trademarks that it
does not consider important to its success.
Competition
The restaurant industry is highly competitive with respect to price,
service, and food type and quality. In addition, restaurants compete for the
availability of restaurant personnel and managers. The Company's restaurants
compete with a large number of other restaurants, including national and
regional restaurant chains and franchised restaurant systems, many of which have
greater financial resources, more experience, and longer operating histories
than the Company, as well as with locally owned independent restaurants. Changes
in factors such as consumer tastes, local, regional, or national economic
conditions, demographic trends, traffic patterns, cost and availability of food
products or labor, inflation, and purchasing power of consumers also could have
a material adverse effect on the Company's operations.
The Company's restaurants also compete with various types of food
businesses, as well as other businesses, for restaurant locations. The Company
believes that site selection is one of the most crucial decisions required in
connection with the development of restaurants. As a result of the presence of
competing restaurants in the Company's target markets, the Company devotes great
attention to obtaining what it believes will be premium locations for new
restaurants, although no assurances can be given that it will be successful in
this regard.
The Company's Black-eyed Pea restaurants compete in both the casual
mid-scale dining segment and the family dining segment. Competitors of the
Company's Black-eyed Pea restaurants include Applebee's and Chili's. As part of
the nation's largest family-oriented, full-service restaurant chain, the
Company's Denny's restaurants compete primarily with regional restaurant chains
such as International House of Pancakes, Big Boy, Shoney's, Friendly's, and
Perkins.
Insurance
The Company maintains general liability and property insurance and an
umbrella and excess liability policy in amounts it considers adequate and
customary for businesses of its kind. There can be no assurance, however, that
future claims will not exceed insurance coverage.
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Employees
At March 31, 1998, the Company had approximately 13,000 employees, of
whom approximately 75 were corporate personnel, approximately 900 were
restaurant management personnel, and the remainder were hourly personnel. The
Company is not a party to any collective bargaining agreement. The Company
believes that its relationship with its employees is good.
Each of the Company's typical Black-eyed Pea restaurants employs
approximately 60 persons. Each of the Company's typical Denny's restaurants has
approximately 50 employees, including approximately 20 kitchen personnel and 30
service personnel. Many of the Company's employees work part-time. Restaurant
personnel, other than regional, district and restaurant managers, are paid on an
hourly basis. Hourly rates vary according to geographical location, generally
ranging from $5.00 to $6.00 an hour for kitchen personnel. The Company generally
pays service personnel the applicable minimum wage plus tips.
SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in this
Report, should be considered carefully in evaluating the Company and its
business.
No Assurance of Profitability
The Company's ability to generate operating profits will depend upon the
nature and extent of any future developments and acquisitions; the Company's
capital resources; general economic and demographic conditions; and the
Company's ability to refinance, restructure, or repay its outstanding
indebtedness. There can be no assurance that the Company will be profitable in
the future. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Significant Borrowings and Future Financings
The development of new restaurants and the acquisition of existing
restaurants requires funds for construction, tenant improvements, furniture,
fixtures, equipment, training of employees, permits, initial franchise fees, and
additional expenditures. See Item 1, "Business - Black-eyed Pea Restaurants -
Unit Economics" and "Business - Denny's Restaurants - Unit Economics." The
Company has incurred substantial indebtedness to effect its restaurant
developments, acquisitions, and conversions 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 $23.4
million, subordinated notes of $18.3 million, obligations under capital leases
aggregating $39.4 million, and a working capital deficit of $36.5 million as of
December 31, 1997.
The Company utilized the proceeds from sales of restaurants during fiscal
1997 and the first quarter of fiscal 1998 to reduce its outstanding
indebtedness. The Company may seek additional equity or debt financing in the
future, however, to provide funds to develop or acquire additional 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 Series B 13% Subordinated Notes due 2003 in the principal
amount of approximately $18.3 million (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 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 the Series B
Notes before the related Series B Warrants are exercised. See Item 1, "Special
Considerations - Expansion of Operations" and "Special Considerations -
Inability to Develop Restaurants." While debt financing enables the Company to
add more restaurants than it would otherwise be able to do, expenses are
increased by such financing and such financing must be repaid by the Company
regardless of the Company's operating results. Future equity financings could
result in dilution to shareholders.
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Risks Associated with Business Strategy
The Company intends to pursue a strategy of growth primarily through the
development of new Black-eyed Pea restaurants 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, or that any restaurants
that it develops or acquires 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.
The Company currently has financing commitments available from various lenders
in amounts that it believes will be sufficient for its anticipated restaurant
development and acquisition activities during 1998. There can be no assurance,
however, that adequate financing will continue to be available on terms
acceptable to the Company. See Item 1, "Special Considerations - Significant
Borrowings and Future Financings."
Unforeseen expenses, difficulties, and delays frequently encountered in
connection with the rapid expansion of operations also could hinder the Company
from executing its business strategy. The magnitude, timing, and nature of
future restaurant developments and acquisitions 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 and
acquisitions and general economic and business conditions. Many of these factors
will be beyond the control of the Company.
Expansion of Operations
The Company's operations have expanded significantly since 1990. The
Company's success in the future will depend on its ability to expand the number
of its restaurants either through increasing the number of its Black-eyed Pea
and Denny's 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.
16
<PAGE>
Reliance On Denny's, Inc.
The Company currently operates 103 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, Advantica Restaurant Group, Inc., the successor to Flagstar Companies,
Inc. ("Flagstar"), recently emerged from bankruptcy protection and announced
that Flagstar recorded a loss of approximately $134.5 million in fiscal 1997.
Any financial reversals or illiquidity on the part of Advantica could have a
material adverse effect on Denny's, Inc. The Company has no control over the
management or operation of Denny's, Inc. or other Denny's franchisees. Negative
publicity with respect to Denny's, Inc. or the Denny's name could adversely
affect the Company. For example, the Company experienced a decline in traffic
and restaurant sales in certain of its Denny's restaurants as a result of the
negative publicity that arose in 1993 relating to claims of alleged racial
discrimination against customers in certain Denny's, Inc. restaurants and a
subsequent investigation of such claims by the United States Department of
Justice.
Inability to Develop Restaurants
The Company currently intends to focus on developing new Black-eyed Pea
restaurants. See Item 1, "Business - Strategy" and "Business - Expansion of
Operations." The Company's ability to develop new Black-eyed Pea or other
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 Black-eyed Pea or
other restaurants on such sites on terms and conditions it considers favorable
in order to meet its growth objectives.
Restrictions Imposed By Denny's Franchise Agreements
The Denny's Franchise Agreements impose a number of restrictions and
obligations on the Company. The Denny's Franchise Agreements require the Company
to pay an initial franchise fee and royalties equal to 4% of weekly gross sales
and an advertising contribution of 2% of weekly gross sales. Such amounts must
be paid or expended regardless of the profitability of the Company's Denny's
restaurants. The Denny's Franchise Agreements also require the Company to
operate its Denny's restaurants in accordance with the requirements and
specifications established by Denny's, Inc. relating to the exterior and
interior design, decor, and furnishings of Denny's restaurants, menu selection,
the preparation of food products, and quality of service as well as general
operating procedures, advertising, maintenance of records, and protection of
trademarks. In addition, from time to time, Denny's, Inc. may require the
Company to modify its restaurants to conform with the then-existing Denny's
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. See Item 1, "Business - Denny's Restaurants - Denny's
Franchise Agreements."
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.
17
<PAGE>
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.
An agreement between the Company and Denny's, Inc. gives Denny's, Inc.
the right to terminate substantially all of the Denny's Franchise Agreements 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. The cancellation of
the Denny's Franchise Agreements as a result of a default by the Company under
its credit facility would have a material adverse effect on the Company. The
Denny's Franchise Agreements also provide that, in the event an assignment is
deemed to have occurred thereunder, Denny's, Inc. will have the option to
purchase the interest being transferred. An assignment under the Denny's
Franchise Agreements will be deemed to have occurred if a person, entity, or
group of persons (other than a group including any of Jack M. Lloyd, William J.
Howard, and William G. Cox, each of whom is an officer and director of the
Company; Jeffrey D. Miller, a former officer and director of the Company; or
BancBoston) acquires voting control of the Board of Directors of the Company.
Certain Factors Affecting the Restaurant Industry
The ownership and operation of restaurants may be affected by adverse
changes in national, regional, or local economic or market conditions; increased
costs of labor (including those which may result from the increases in
applicable minimum wage requirements enacted in 1996 and 1997); increased costs
of food products; fuel shortages and price increases; competitive factors; the
number, density, and location of competitors; limited alternative uses for
properties and equipment; changing consumer tastes, habits, and spending
priorities; the cost and availability of insurance coverage; management
problems; uninsured losses; changing demographics; changes in government
regulation; changing traffic patterns; weather conditions; and other factors.
The Company may be the subject of litigation based on discrimination, personal
injury, or other claims, including claims that may be based upon legislation
that imposes liability on restaurants or their employees for injuries or damages
caused by the negligent service of alcoholic beverages to an intoxicated person
or to a minor. Multi-unit restaurant operators, such as the Company, can be
adversely affected by publicity resulting from food quality, illness, injury, or
other health and safety concerns or operating issues resulting from one
restaurant or a limited number of restaurants operated under the same name,
including those not owned by the Company. None of these factors can be predicted
with any degree of certainty, and any one or more of these factors could have a
material adverse effect on the Company.
Competition
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. 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 restaurant industry is intensely competitive with respect to price,
service, location, personnel, and type and quality of food. In addition,
restaurants compete for attractive restaurant sites and the availability of
restaurant personnel and managers. The Company has many well-established
competitors with financial and other resources substantially greater than those
of the Company. Certain competitors have been in existence for a substantially
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.
18
<PAGE>
Control by Certain Shareholders; Conflicts of Interest
The directors and officers of the Company currently own approximately
35.3% of the Company's outstanding Common Stock. In addition, BancBoston, a
former shareholder of DRC, currently owns approximately 15.8% of the Company's
outstanding Common Stock. Accordingly, such shareholders collectively have the
power to elect all of the members of the Company's Board of Directors and
thereby control the business and policies of the Company.
Jack M. Lloyd, the Chairman of the Board, President, and Chief Executive
Officer of the Company, and William J. Howard, Executive Vice President and a
director of the Company, currently hold an aggregate of $16,794,000 in principal
amount of the Company's Series B Notes in addition to their Common Stock. As a
result of such shareholders' ability, together with the Company's other
directors and officers, to direct the policies of the Company, an inherent
conflict of interest may arise in connection with decisions regarding the timing
of and the allocation of assets of the Company for the purposes of interest
payments on, or redemption of, the Series B Notes. In addition, the Series B
Notes contain restrictive covenants relating to the operation of the Company and
the maintenance of certain financial ratios and tests. There can be no assurance
that the holders of the Series B Notes will waive any default under the notes. A
default not waived by a majority of the holders of the Series B Notes could have
a material adverse effect on the holders of the Company's Common Stock. Messrs.
Lloyd and Howard have deferred certain payments of interest and have granted
waivers with respect to non-compliance of certain debt covenants under the
Series B Notes as of September 30, 1997 and March 31, 1998. See Item 13,
"Certain Relationships and Related Transactions."
Dependence Upon Key Personnel
The Company's success depends, in large part, upon the services of its
senior management. The Company currently has employment agreements with certain
members of its senior management. See Item 11, "Executive Compensation -
Employment Agreements." The loss of the services of the Company's senior
management team could have a material and adverse affect on the Company.
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 and 1997), employee benefit costs (including costs
associated with mandated health insurance coverage), or other costs associated
with employees could adversely 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.
19
<PAGE>
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries to represent years in the date code field.
Computer systems and products that do not accept four-digit year entries will
need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years. The Company has determined that
certain of its software programs are not "Year 2000" compliant. The vendor for
those software programs currently is developing modifications to the software
code in order to enable those programs to function properly on and after January
1, 2000. The Company currently is evaluating the Year 2000 issue as it relates
to its entire internal computer system as well as computer systems operated by
third parties, including suppliers, credit card transaction processors, and
financial institutions, with which the Company's systems interface. The Company
anticipates that it will incur internal staff costs as well as consulting and
other expenses related to making its computer systems Year 2000 compliant. The
Company will expense these costs as incurred. The Company has not yet completed
the evaluation of its Year 2000 compliance and therefore currently is not able
to quantify the costs that may be incurred to bring its computer system into
Year 2000 compliance. Because the appropriate course of action may include
replacing or upgrading certain equipment or software, the Company may incur
significant costs in resolving its Year 2000 issues. Furthermore, there can be
no assurance that the Company will be able to make its computer system Year 2000
compliant in a timely manner. In addition, there can be no assurance that
computer systems operated by third parties with which the Company systems
interface will continue to properly interface with the Company systems and will
otherwise be compliant on a timely basis with Year 2000 requirements. Any
failure of the Company's computer system or the systems of third parties to
timely achieve Year 2000 compliance could have a material adverse effect on the
Company's business, financial condition, and operating results.
Possible Volatility of Stock Price
The market price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in the operating results of the
Company or other restaurant companies, changes in analysts' estimates of the
Company's financial performance, changes in national and regional economic
conditions, the financial markets, or the restaurant industry, natural
disasters, or other developments affecting the Company or other restaurant
companies. The trading volume of the Company's Common Stock has been limited,
which may increase the volatility of the market price for such stock. In
addition, the stock market has experienced extreme price and volume fluctuation
in recent years. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons not necessarily
related to the operating performances of these companies.
Rights to Acquire Shares
Employee and director stock options to acquire an aggregate of 1,145,300
shares of Common Stock currently are outstanding. An additional 821,667 shares
have been reserved for issuance upon exercise of options that may be granted
under the Company's existing stock option plans. See Item 11, "Executive
Compensation - Stock Option Plans." In addition, warrants to acquire 1,083,026
shares of Common Stock currently are outstanding. Series B Warrants to acquire
an additional 477,953 shares of Common Stock will become exercisable on March
29, 1999 unless the Company repays all of the outstanding Series B Notes prior
to that date. During the terms of such options and warrants, the holders thereof
will have the opportunity to profit from an increase in the market price of the
Company's Common Stock. The existence of such options and warrants may adversely
affect the terms on which the Company can obtain additional financing in the
future, and the holders of such options and warrants can be expected to exercise
such options and warrants at a time when the Company, in all likelihood, would
be able to obtain additional capital by offering shares of Common Stock on terms
more favorable to it than those provided by the exercise of such options and
warrants.
20
<PAGE>
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market, or
even the potential for such sales, could adversely affect prevailing market
prices for the Company's Common Stock and could adversely affect the Company's
ability to raise capital. As of March 31, 1998, there were outstanding
13,447,777 shares of the Company's Common Stock. Of these shares, approximately
6,141,900 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 obligations. The remaining
approximately 7,305,900 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
greater of 1% of the Company's then-outstanding Common Stock or the average
weekly trading volume for the four weeks prior to the proposed sale of such
shares.
An aggregate of approximately 2,900,800 shares of Common Stock that are
currently outstanding or that are issuable upon exercise of certain warrants
have been registered for resale pursuant to an effective registration statement.
The 6,937,500 shares of Common Stock issued to the former shareholders of DRC in
connection with the Merger generally are freely tradeable under Rule 145 under
the Securities Act, unless held by an affiliate, in which case such shares will
be subject to the volume and manner of sale restrictions under Rule 144. The
former shareholders of DRC have certain rights with respect to registration of
the shares of Common Stock issued in connection with the Merger or upon exercise
of the warrants issued in connection with the Merger.
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 credit facility and the indenture
governing its Series B Notes limit the ability of the Company to pay dividends
on its Common Stock.
Change in Control Provisions
The Company's Restated Articles of Incorporation and Amended and Restated
Bylaws and certain provisions of the Georgia Business Corporation Code contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of the Company, even when these attempts
may be in the best interests of shareholders.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Report under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Item 1, "Business" concerning future, proposed, and anticipated
activities of the Company, certain trends with respect to the Company's
operating results, capital resources, and liquidity or with respect to the
restaurant industry in general, and other statements contained in this Report
regarding matters that are not historical facts are forward-looking statements,
as such term is defined in the Securities Act. Forward-looking statements, by
their very nature, include risks and uncertainties. Accordingly, actual results
may differ, perhaps materially, from those expressed in or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include those discussed elsewhere under this Item 1, "Special
Considerations."
21
<PAGE>
ITEM 2. PROPERTIES.
The Company leases for a term expiring in September 1998 approximately
20,000 square feet of office space in Scottsdale, Arizona, for use as its
principal corporate offices. The Company also leases for a term expiring in 1999
approximately 3,000 square feet of office space in Dallas, Texas, that it
utilizes for regional sales, facilities, and maintenance operations. The Company
currently believes that these facilities are adequate for its reasonably
anticipated needs.
The Company's restaurants generally are located in single-purpose,
one-story, freestanding buildings with a capacity of between 90 and 150
customers. The Company leases substantially all the land and buildings for its
restaurants. The initial lease terms range from 10 to 20 years and include
renewal options for up to 30 years. All of the Company's current leases have
remaining initial terms or renewal options that extend for more than five years
from the date of this Report. The leases generally provide for a minimum annual
rent and additional rental payments if restaurant sales volume exceeds specified
amounts. In addition, the leases generally require the Company to pay real
estate taxes, insurance premiums, maintenance costs, and certain other of the
landlords' operating costs. Contingent rentals have represented less than 15% of
total rent expense for each of fiscal 1995, 1996, and 1997. Annual base rent for
each location ranges up to approximately $180,000 a year.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings to which the Company is a party or to
which any of its properties are subject other than routine litigation incident
to the Company's business which is covered by insurance or an indemnity, or
which is not expected to have a material adverse effect on the Company's
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the American Stock Exchange (the
"AMEX") under the symbol "DEN." The following table sets forth the high and low
sales prices per share of the Company's Common Stock as reported on the AMEX for
the calendar periods indicated since the Company's initial public offering on
October 18, 1994.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
---- ---
<S> <C> <C>
1994
----
Fourth Quarter (beginning October 18, 1994)............. $5.13 $3.50
1995
----
First Quarter........................................... $4.13 $2.63
Second Quarter.......................................... 4.75 3.13
Third Quarter........................................... 5.25 4.00
Fourth Quarter.......................................... 6.00 4.00
1996
----
First Quarter........................................... $5.63 $3.94
Second Quarter ......................................... 5.69 3.00
Third Quarter........................................... 5.50 3.50
Fourth Quarter.......................................... 5.13 3.13
1997
----
First Quarter........................................... $3.63 $3.00
Second Quarter ......................................... 3.25 2.19
Third Quarter........................................... 2.69 1.63
Fourth Quarter.......................................... 3.25 1.81
1998
----
First Quarter........................................... $2.75 $1.81
</TABLE>
The Company has never declared or paid any dividends. The Company
intends to retain earnings, if any, to fund the growth of its business and does
not anticipate paying any cash dividends in the foreseeable future. In addition,
the payment of dividends on the Company's Common Stock is prohibited under the
Company's existing credit facility with Banque Paribas and other outstanding
debt obligations.
As of March 31, 1998, there were approximately 110 holders of record
of the Company's Common Stock. On March 31, 1998, the closing sales price of the
Company's Common Stock on the AMEX was $2.19 per share.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical consolidated financial data of the
Company for each of the fiscal years in the three-year period ended December 31,
1997 have been derived from and should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
herein. The selected historical summary consolidated financial data for the two
fiscal years ended December 31, 1994 are derived from DRC's historical financial
statements, which are not included elsewhere herein. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Basis
of Presentation" and Note 1 to the consolidated financial statements.
<TABLE>
<CAPTION>
As of and for Fiscal Year(1)
--------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data(2):
Restaurant sales.............................. $32,584 $47,323 $74,683 $241,480 $300,579
Charge for impaired assets.................... -- -- 523 -- 14,100
Restaurant operating income................... 3,147 4,539 6,643 22,137 9,101
Administrative expenses....................... 2,050 2,619 3,380 10,303 13,684
Operating income (loss)....................... 1,328 1,320 3,263 11,834 (4,583)
Interest expense, net......................... (736) (1,301) (2,467) (9,605) (13,655)
Net income (loss)............................. 140 (341) 200 1,118 (20,977)
Other Data:
EBITDA(3)..................................... $ 2,656 $ 2,821 $ 6,722 $18,834 $18,884
Cash interest expense......................... 669 1,140 2,397 8,904 10,033
Cash provided by (used in) operating activities 2,493 2,410 7,486 9,664 (1,458)
Cash used in investing activities ............ (1,002) (9,667) (8,736) (9,393) (6,316)
Cash provided by (used in) financing activities (1,168) 7,092 2,273 1,157 6,432
Capital expenditures.......................... 1,574 9,667 8,736 11,584 10,449
Depreciation and amortization................. 1,328 1,501 2,936 7,000 9,367
Ratio of earnings to fixed charges(4)......... 1.15 -- 1.10 1.14 --
Number of restaurants, end of period.......... 37 70 102 307 283
Balance Sheet Data:
Working capital (deficit) .................... $(3,568) $(6,107) $(9,406) $(33,029) $(36,417)
Total assets ................................. 14,529 35,028 53,785 179,189 170,264
Long-term debt, less current portion ......... 2,135 7,552 10,371 69,903 39,022
Obligations under capital leases,
less current obligations................... 4,307 7,151 19,881 24,229 39,396
Redeemable convertible preferred stock ....... -- 7,397 7,501 -- --
Shareholders' equity (deficit) ............... (1,218) 957 564 22,128 1,248
</TABLE>
- ---------------
(1) The Company's fiscal years 1993 through 1997 ended on December 30, 1993,
December 28, 1994, December 27, 1995, January 1, 1997, and December 31,
1997, respectively.
(2) The Company has consummated various acquisitions and has opened new
restaurants during each of the five fiscal years shown. Accordingly,
revenue increases in each of the years shown arise primarily from
restaurant acquisitions and openings in each year.
(3) EBITDA represents income (loss) before minority interest in joint ventures,
interest, income taxes, depreciation and amortization plus the charge for
impaired assets. EBITDA is not intended to represent cash flows from
operations as defined by generally accepted accounting principles and
should not be considered as an alternative to net income (loss) as an
indication of the Company's operating performance or to cash flows from
operations as a measure of liquidity. EBITDA is included in this Report
because it is a basis upon which the Company assesses its financial
performance.
(4) Earnings consist of pre-tax income after minority interests plus fixed
charges, excluding capitalized interest. The Company's fixed charges
consist of (a) interest, whether expensed or capitalized; (b) amortization
of debt expense, including any discount or premium whether expensed or
capitalized; and (c) a portion of rental expense representing the interest
factor. Earnings were inadequate to cover fixed charges in fiscal 1994
$(550,000) and fiscal 1997 ($17,719,000).
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Basis of Presentation
Upon consummation of the Merger, the former shareholders of DRC owned an
aggregate of approximately 53.0% of the outstanding voting power of the Company
immediately following the Merger. See Item 1, "Business - Development of the
Company." Accordingly, the Merger has been accounted for as a reverse purchase
under generally accepted accounting principles, pursuant to which DRC is
considered to be the acquiring entity and AFR the acquired entity for accounting
purposes, even though the Company is the surviving legal entity. In addition, as
permitted under generally accepted accounting principles, for accounting
purposes the Merger was deemed to have occurred on March 27, 1996, the last day
of DRC's first quarter for fiscal 1996. As a result, (i) the historical
financial statements of AFR for periods prior to the date of the Merger are no
longer the historical financial statements of the Company and therefore are no
longer presented; (ii) the historical financial statements of the Company for
periods prior to the Merger are those of DRC; (iii) all references to the
financial statements of the "Company" apply to the historical financial
statements of DRC prior to and subsequent to the Merger; and (iv) any references
to "AFR" apply solely to American Family Restaurants, Inc. and its financial
statements prior to the Merger. On July 3, 1996, the Company acquired all of the
issued and outstanding common stock of BEP. The effective accounting date of the
BEP Acquisition was June 24, 1996.
The results of operations for 1996 were materially impacted by the Merger
and the BEP Acquisition. During fiscal 1996 and 1997, revenue and related
expenses increased significantly over prior years primarily as a result of these
acquisitions. In particular, the Company's operating results for fiscal 1997
reflect 52 "restaurant operating weeks" associated with 91 Black-eyed Pea
restaurants acquired in the BEP Acquisition, which was completed in July 1996,
as compared with 27 restaurant operating weeks associated with those restaurants
during fiscal 1996. As a result, fiscal 1997 operating results are not
comparable to those of fiscal 1995 and fiscal 1996. The following discussion and
analysis should be read in conjunction with the information set forth under Item
6, "Selected Financial Data" and the consolidated financial statements and notes
thereto included elsewhere herein.
General
During 1997 the Company (i) converted 10 non-branded restaurants to the
Denny's concept; (ii) sold 11 non-branded restaurants; (iii) sold or closed 17
Denny's restaurants; (iv) developed four new Black-eyed Pea restaurants and one
new Denny's restaurant; (v) purchased the leasehold interests in nine Black-eyed
Pea restaurants from franchisees; and (vi) closed two Black-eyed Pea restaurants
and sold the related leasehold interests. These transactions follow the
Company's strategy of focusing on the Black-eyed Pea concept as well as those
Denny's restaurants that achieve certain operational and geographic
efficiencies.
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
$28.7 million. Cash proceeds of $25.2 million were used to (i) repay an
outstanding promissory note issued to the seller of BEP (the "BEP Purchase
Note") at a $2.3 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 at an exercise price of $1.90 per
share, which were issued in connection with the BEP Purchase Note; (iii)
permanently reduce its outstanding borrowings under the "Term Loan" of the
credit facility described below to $1.5 million; and (iv) repay certain
equipment operating leases associated with the restaurants sold in this
transaction. The Company has included a charge for impaired assets associated
with the restaurants sold of approximately $14.1 million, due primarily to the
reduction of intangibles of $29.0 million, in its consolidated financial
statements for fiscal 1997.
The Company currently operates 104 Black-eyed Pea restaurants in 14
states and franchises three Black-eyed Pea restaurants in two states. The
Company operates 66 Black-eyed Pea restaurants in Texas and Oklahoma, which the
Company considers to be its core market for Black-eyed Pea restaurants. The
average unit sales for all company-owned Black-eyed Pea restaurants was $1.5
million and $1.4 million in fiscal 1996 and 1997, respectively, as compared with
average unit sales at restaurants in the core market of $1.6 million during both
of
25
<PAGE>
those periods. Through December 31, 1997, comparable same-store sales decreased
5.3% for all of the Company's Black-eyed Pea restaurants, while comparable
same-store sales decreased by 3.3% for Black-eyed Pea restaurants in the core
market. During 1997, however, the Company did not increase menu prices at its
Black-eyed Pea restaurants. The guest check average at the Company's Black-eyed
Pea restaurants is $7.90, and alcohol and carry-out sales account for
approximately 2.1% and 11.0% of sales, respectively. In order to accommodate the
Company's senior lenders, in connection with the BEP Acquisition the Company
entered into a five-year equipment lease with LH Leasing Company, Inc. Annual
payments related to these leases total approximately $3.8 million and are
included in other restaurant operating costs in the Company's consolidated
financial statements. See Item 13, "Certain Relationships and Related
Transactions."
As of December 31, 1997, the Company operated 176 Denny's restaurants in
28 states. The Company's Denny's restaurants that were open for a 12-month
period had average restaurant sales of $917,000 in fiscal 1997 as compared with
$911,000 in fiscal 1996. Excluding the results of the restaurants sold in March
1998, average restaurant sales in fiscal 1997 would have been $997,000.
Comparable store sales declined 4.6% as a result of lower guest counts, offset
somewhat by a 3.6% increase in the average guest check to approximately $5.30 in
December 1997. Food costs as a percentage of revenue decreased in 1997 due to
the withdrawal from promotional value pricing. Labor costs increased as a
percentage of revenue, however, due to minimum wage increases and the
implementation of certain health benefits for restaurant level management during
fiscal 1997.
Comparison of Results of Operations
The following table presents, for the periods indicated, certain items in
the historical consolidated statements of operations as a percentage of total
restaurant sales.
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Restaurant sales:
Denny's restaurants........................................ 94.2% 62.7% 54.9%
Black-eyed Pea restaurants................................. -- 28.6 42.9
Other restaurants.......................................... 5.8 8.7 2.2
----- ----- -----
Total restaurant sales................................... 100.0% 100.0% 100.0%
----- ----- -----
Restaurant operating expenses:
Food and beverage costs.................................... 27.2 27.3 27.4
Payroll and payroll related costs.......................... 33.5 34.3 34.4
Depreciation and amortization.............................. 3.9 2.9 3.1
Other operating expenses................................... 25.7 26.3 27.4
Charge for impaired assets................................. 0.7 -- 4.7
----- ----- -----
Total restaurant operating expenses...................... 91.0 90.8 97.0
----- ----- -----
Restaurant operating income................................... 9.0 9.2 3.0
Administrative expenses....................................... 4.5 4.3 4.6
----- ----- -----
Operating income (loss)....................................... 4.5 4.9 (1.5)
Interest expense, net......................................... (3.3) (4.0) (4.6)
Minority interest in joint ventures........................... (0.4) 0.1 0.2
----- ----- -----
Income before income taxes and extraordinary item............. 0.8 1.0 (5.9)
Income tax provision.......................................... 0.5 0.4 1.1
----- ----- -----
Income (loss) before extraordinary item....................... 0.3 0.6 (7.0)
Extraordinary loss............................................ -- (0.2) --
----- ----- -----
Net income (loss)............................................. 0.3% 0.4% (7.0)%
===== ===== =====
</TABLE>
26
<PAGE>
Fiscal 1997 Compared with Fiscal 1996
Restaurant Sales. Restaurant sales increased 24.5% to $300.6 million in
fiscal 1997 as compared with restaurant sales of $241.5 million in fiscal 1996.
This increase was primarily attributable to 52 restaurant operating weeks
associated with 91 Black-eyed Pea restaurants acquired in the BEP Acquisition in
1996, as compared with 27 restaurant operating weeks for those restaurants
during fiscal 1996.
Food and Beverage Costs. Food and beverage costs increased to 27.4% of
restaurant sales in fiscal 1997 as compared with 27.3% of restaurant sales in
fiscal 1996. This increase was attributable to the higher food costs associated
with the Black-eyed Pea restaurants, offset by a decrease in food costs at the
Company's Denny's restaurants. Food costs at the Company's Denny's restaurants
decreased from 27.6% of restaurant sales in fiscal 1996 to 26.6% in fiscal 1997,
primarily due to the withdrawal from promotional value pricing in October 1996.
Payroll and Payroll Related Costs. Payroll and payroll related costs were
34.4% of restaurant sales in fiscal 1997 as compared with 34.3% of restaurant
sales in fiscal 1996. This increase was attributable to increased management
labor costs, primarily related to certain health care benefits implemented by
the Company during 1997 as part of its continuing effort to increase management
retention and to remain competitive with other companies in the restaurant
industry. In addition, restaurant labor costs increased as a percentage of sales
in fiscal 1997 as a result of the effects of minimum wage increases.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment and leasehold improvements, intangible assets, and
pre-opening costs totaled $9.4 million, or 3.1% of restaurant sales, in fiscal
1997 as compared with $7.0 million, or 2.9% of restaurant sales, in fiscal 1996.
The increase of approximately $2.4 million was attributable to the amortization
of the capital leases associated with new restaurants and the amortization of
intangible assets associated with the fiscal 1996 acquisitions. In addition, the
amortization of pre-opening costs increased from $894,000 in fiscal 1996 to $1.4
million in fiscal 1997.
Other Operating Expenses. Other operating expenses were 27.4% of
restaurant sales in fiscal 1997 as compared with 26.3% of restaurant sales in
fiscal 1996. The increase was attributable to higher operating costs at the
Company's Black-eyed Pea restaurants and the increased number of restaurant
operating weeks in 1997 versus 1996. In particular, the Company's costs of
leased equipment increased from 0.5% of restaurant sales in fiscal 1996 to 1.9%
in fiscal 1997 and advertising costs increased from 1.1% of restaurant sales in
fiscal 1996 to 2.4% in fiscal 1997 as a result of increases associated with the
Company's Black-eyed Pea restaurants.
Restaurant Operating Income. Restaurant operating income decreased from
$22.1 million in fiscal 1996 to $9.1 million in fiscal 1997, primarily as a
result of the $14.1 million charge for impaired assets relating to assets
associated with the sale of 71 restaurants in March 1998 and the other factors
described above.
Administrative Expenses. Administrative expenses increased to 4.6% of
restaurant sales in fiscal 1997 as compared with 4.3% of restaurant sales in
fiscal 1996. This increase was primarily the result of greater administrative
support required as the franchisor of the Black-eyed Pea concept as opposed to
operating solely as a franchisee of Denny's restaurants.
Interest Expense. Interest expense increased to $13.7 million, or 4.6% of
restaurant sales, in fiscal 1997 as compared with $9.6 million, or 4.0% of
restaurant sales, in fiscal 1996. This increase was attributable to the
increased level of long-term debt associated with the restaurant acquisitions in
1996 and the increase in capitalized lease obligations.
Income Taxes. The provision for income tax was $3.3 million in fiscal
1997 as compared with the provision for income tax of $870,000 in fiscal 1996.
The increased provision for income tax in fiscal 1997 resulted from certain
permanent differences associated with goodwill and other intangible assets
created in connection with the Merger.
27
<PAGE>
Fiscal 1996 Compared with Fiscal 1995
Restaurant Sales. Restaurant sales increased $166.8 million, or 223.3%,
to $241.5 million in fiscal 1996 as compared with restaurant sales of $74.7
million in fiscal 1995. This increase was primarily attributable to restaurant
sales associated with restaurants acquired as a result of the Merger and the BEP
Acquisition during 1996.
Food and Beverage Costs. Food and beverage costs increased to 27.3% of
restaurant sales in fiscal 1996 as compared with 27.2% of restaurant sales in
fiscal 1995, primarily due to higher food costs at the Black-eyed Pea
restaurants and the non-branded restaurants. Excluding the food and beverage
costs at the non-branded restaurants but including food and beverage costs at
Black-eyed Pea restaurants, food and beverage costs for fiscal 1996 would have
been 27.0% of restaurant sales, a decrease of 0.2% from fiscal 1995.
Payroll and Payroll Related Costs. Payroll and payroll related costs were
34.3% of restaurant sales in fiscal 1996 as compared with 33.5% of restaurant
sales in fiscal 1995. This increase was primarily attributable to the
non-branded restaurants, where payroll and payroll related costs were 38.0% of
restaurant sales. In addition, the payroll and payroll related costs associated
with the AFR Denny's restaurants were 35.7% of restaurant sales.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment and leasehold improvements, intangible assets, and
pre-opening costs totaled $7.0 million, or 2.9% of restaurant sales, in fiscal
1996 as compared with $2.9 million, or 3.9% of restaurant sales, in fiscal 1995.
The increase of approximately $4.1 million was attributable to the amortization
of the capital leases associated with new restaurants, the amortization of
intangible assets associated with the 1996 acquisitions, and the amortization of
pre-opening costs.
Other Operating Expenses. Other operating expenses were 26.3% of
restaurant sales in fiscal 1996 as compared with 25.7% of restaurant sales in
fiscal 1995. The increase was primarily attributable to the operating costs of
36.2% of restaurant sales at the non-branded restaurants, which include no
franchise costs. If the non-branded restaurant results were excluded, other
operating costs for fiscal 1996 would have been 25.3% of restaurant sales, a
decrease of 0.4% from fiscal 1995.
Restaurant Operating Income. Restaurant operating income increased $8.5
million to $11.8 million in fiscal 1996 as compared with $3.3 million in fiscal
1995. This increase was principally the result of increased restaurant sales and
the factors described above.
Administrative Expenses. Administrative expenses decreased to 4.3% of
restaurant sales in fiscal 1996 as compared with 4.5% of restaurant sales in
fiscal 1995. This decrease was primarily the result of increased sales volume
without proportionate cost increases. Administrative expenses in fiscal 1996
included non-recurring Merger-related costs of approximately $1.1 million.
Interest Expense. Interest expense increased to $9.6 million, or 4.0% of
restaurant sales, in fiscal 1996 as compared with $2.5 million, or 3.3% of
restaurant sales in fiscal 1995. This increase was attributable to the increased
level of long-term debt associated with the 1996 acquisitions and the
capitalized lease obligations associated with new store development.
Income Taxes. The income tax provision was $870,000 for fiscal 1996 as
compared with the income tax provision of $305,000 for fiscal 1995. Due to
certain tax credits, the tax rate decreased from 60.3% to 35.0% in fiscal 1995
and 1996, respectively.
Liquidity and Capital Resources
The Company, and the restaurant industry generally, operate principally
on a cash basis with a relatively small amount of receivables. Therefore, like
many other companies in the restaurant industry, the Company operates with a
working capital deficit. The Company's working capital deficit was $9.4 million
at December 27, 1995, $33.0 million at January 1, 1997, and $36.4 million at
December 31, 1997. The Company believes that it
28
<PAGE>
has funded the excessive working capital deficit acquired in the Merger and that
its current working capital deficit is consistent with the working capital
position of restaurant companies 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 totaled approximately $8.7 million, $11.6 million, and
$10.5 million for fiscal 1995, fiscal 1996, and fiscal 1997, respectively. As
described below, the Company currently has commitments that it believes will be
adequate to meet its financing needs during 1998.
Net cash provided by (used in) operating activities increased from $7.5
million in fiscal 1995 to $9.7 million in fiscal 1996 and decreased to $(1.5
million) in fiscal 1997. The increase in fiscal 1996 over fiscal 1995 is
attributable to an increase in net income and the increase in depreciation and
amortization arising from the various acquisitions completed during fiscal 1996.
The decrease in fiscal 1997 is attributable to the reduction in accounts payable
associated with restaurants sold or closed and the payment of certain
liabilities assumed in connection with the Merger and the BEP Acquisition.
Net cash used in investing activities increased from $8.7 million in
fiscal 1995 to $9.4 million in fiscal 1996 and decreased to $6.3 million in
fiscal 1997. These changes are primarily attributable to the acquisition of
property and equipment or the purchase of restaurants. In addition, during
fiscal 1997 the Company disposed of approximately $4.1 million of various assets
acquired in the Merger and the BEP Acquisition.
Net cash provided by financing activities decreased from $2.3 million in
fiscal 1995 to $1.2 million in fiscal 1996 and increased to $6.4 million in
fiscal 1997. Cash provided by financing activities arose primarily from the
proceeds of borrowing activities associated with certain Black-eyed Pea
locations, net of the principal reductions in long-term debt.
In April 1997, the Company sold 11 non-branded restaurants to an
unrelated party for cash and notes totaling $850,000. The Company utilized the
proceeds from this transaction for working capital purposes. The Company
recognized a gain of approximately $600,000 on this transaction, which is
included as a reduction of other restaurant operating expenses.
On July 31, 1997, the Company sold its leasehold interests in 14 Denny's
and two non-branded restaurants to an unrelated party for $2.1 million. The
Company utilized the proceeds from this transaction to permanently repay $1.0
million of senior debt obligations and for working capital purposes. In
conjunction with this transaction, the Company recognized a gain of $250,000,
which is included as a reduction of other restaurant operating expenses.
In two separate transactions completed in October and November 1997, the
Company purchased from two franchisees certain assets and leasehold interests in
nine Black-eyed Pea restaurants located in Arizona and Florida. In connection
with this transaction, the Company and one of the franchisees settled certain
threatened litigation. Under this settlement, the Company will forego future
royalty payments from 13 franchised restaurants located in Colorado operated by
the franchisee. The effect of the loss of royalty income will be partially
offset by operating income from the restaurants acquired. Under the settlement
agreement, the Company also agreed that it will not operate any restaurant in
Colorado that competes with the Black-eyed Pea concept prior to October 2002,
provided that the franchisee continues to utilize the "Black-eyed Pea"
trademarks and is not otherwise in default under the settlement agreement during
that period. In conjunction with the closing of this transaction, CNL acquired
certain assets directly from the franchisees and entered into capital leases
with the Company. The value of the leases exceeded the purchase price, resulting
in the Company receiving approximately $2.7 million in cash that has been
recorded as a deferred gain to be amortized over the life of the leases.
On October 1, 1997, the Company entered into a series of transactions
with CNL. The Company utilized the proceeds from these transactions, which
totaled approximately $25.0 million, to repay senior debt obligations
29
<PAGE>
of the Company. In connection with these transactions, on October 1, 1997, the
Company purchased CNL's 50% interest in three joint ventures, which operated a
total of 16 Denny's restaurants, and the land and buildings for nine of the
restaurants that were previously leased from CNL. Consideration consisted of a
$7.7 million promissory note, which amortizes over 10 years with an interest
rate of 9% per annum, and a $4.4 million subordinated convertible debenture. The
subordinated convertible debenture bears interest of 5% per annum, payable
quarterly, and is convertible at the holder's option through October 2002 into
the Company's Common Stock at 90% of the share price immediately prior to the
conversion. The Company subsequently entered into 15-year sale-leaseback
arrangements with CNL for the nine Denny's restaurants described above and
received $8.0 million. No gain or loss was recognized on these transactions. The
Company also entered into equipment notes payable with CNL totaling
approximately $12.5 million. The notes payable are secured by certain equipment
located in 44 Denny's restaurants, bear interest at 10% per annum, and amortize
over a seven-year period. No gain or loss was recognized in connection with this
transaction. In addition, the Company sold eight buildings located on ground
leases to CNL for proceeds of $4.6 million and entered into capital leases for
these locations. No gain or loss was recognized on this transaction.
In March 1998, the Company sold 63 Denny's restaurants and eight
non-branded restaurants located in 13 states to an unrelated party for $28.7
million, consisting of cash of $25.2 million and notes totaling $3.5 million.
The Company utilized the proceeds from this transaction to (i) repay the BEP
Purchase Note at a $2.3 million discount from its outstanding principal amount
of approximately $15.3 million; (ii) cancel outstanding warrants to acquire
approximately 1.0 million shares of Common Stock at an exercise price of $1.90
per share; (iii) permanently reduce its outstanding borrowings under the Term
Loan portion of its credit facility, as described below; and (iv) repay certain
equipment operating leases associated with the sold restaurants. The Company has
included a charge for impaired assets associated with the restaurants sold of
approximately $14.1 million, due primarily to the reduction of intangibles of
approximately $29.0 million, in its consolidated financial statements for fiscal
1997.
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
$700,000 plus a note in the principal amount of $400,000. The Company utilized
the proceeds from this transaction to permanently reduce its outstanding
borrowings under the Term Loan portion of its credit facility.
During fiscal 1997, the Company converted 10 non-branded restaurants to
the Denny's concept. In addition, during 1997 the Company closed nine
restaurants. The Company intends to continue to evaluate its existing restaurant
portfolio and to close or sell restaurants as appropriate. As described above,
the operating results of the Company's Denny's restaurants have been negatively
impacted by same-store sales declines. The Company intends to pursue a strategy
to lessen its dependence on the Denny's brand and has identified certain
geographic markets where restaurant dispositions may be appropriate. Proceeds
from such dispositions will be used to retire debt and to reduce the working
capital deficit.
The Company intends to continue to expand the number of its Black-eyed
Pea restaurants in its core market through the development of new restaurants.
During 1997, the Company opened four new Black-eyed Pea restaurants and
purchased nine franchised restaurants located in Arizona, including the
associated development rights, and purchased three franchised restaurants
located in Florida. The Company believes that the Arizona market provides
significant growth opportunities. The Company believes that its future capital
requirements will be primarily for the development of new Black-eyed Pea
restaurants, for continued restaurant acquisitions, and for capital expenditures
related to restaurant maintenance. 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 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. Expenditures for property and equipment
and intangibles totaled approximately $10.5 million during fiscal 1997. The
Company currently has commitments available from
30
<PAGE>
various lenders in amounts that it believes will be sufficient for its
anticipated restaurant development and acquisition activities during 1998.
In connection with the Merger and the BEP Acquisition, the Company
entered into a credit facility with Banque Paribas, as agent, and the Company's
other senior lenders (the "Credit Facility"). The Credit Facility was
subsequently amended and certain waivers were granted by the lenders in
connection with transactions completed by the Company during 1997 and 1998. The
Credit Facility currently consists of a term loan (the "Term Loan") and
revolving loans (the "Revolver"). In connection with the Merger, the Company
borrowed $35.0 million under the Term Loan, which was used to refinance certain
indebtedness of AFR and DRC existing prior to the Merger and to pay certain
transaction expenses incurred in connection with the Merger and the Credit
Facility. The Company used the proceeds from various transactions during fiscal
1997, as described above, to repay a portion of the Term Loan. As of December
31, 1997, the Company had outstanding borrowings of approximately $10.1 million
under the Term Loan. The Company used a portion of the proceeds of the sale of
71 restaurants in March 1998 to permanently repay additional amounts outstanding
under the Term Loan. As of March 31, 1998, the Company had outstanding
borrowings of approximately $1.5 million under the Term Loan, as amended, which
will mature and become payable on June 30, 1998. The Credit Facility also
includes a $15.0 million Revolver that the Company may utilize to finance
working capital needs, to repay the Term Loan, to make capital expenditures, and
to support letters of credit. As of December 31, 1997, the Company had
approximately $2.3 million available for borrowings under the Revolver. The
Revolver will mature and become payable December 31, 2001. A Delayed Draw Term
Loan that was previously part of the Credit Facility was cancelled during fiscal
1997 in connection with certain amendments to the Credit Facility and certain
waivers by the lenders.
The Company was not in compliance with certain of its debt covenants
under the Credit Facility at December 31, 1997, for which the Company has
received waivers. Based upon information currently available, the Company does
not believe that it will be in compliance with its debt covenants as of March
31, 1998. Therefore, the Company has classified its obligations under its Credit
Facility as current in its consolidated financial statements as of December 31,
1997. The Company intends to pursue various alternatives to either restructure
its current Credit Facility or to seek additional lenders. There can be no
assurance that any refinancing or restructuring alternatives will be available
to the Company or that such alternatives, if any, will be available on
satisfactory terms. In addition, certain holders of the Series B Notes have
deferred the interest due as of September 30, 1997 and March 31, 1998 and the
Company has received waivers from those holders for non-compliance of certain of
the debt covenants under the Series B Notes. See Item 13, "Certain Relationships
and Related Transactions."
The Company plans to further increase its working capital as necessary
through equity or debt financings in the public or private securities markets,
additional sale-leaseback transactions, the disposition of underperforming
restaurants, and additional credit facilities. The Company also intends to use
its best efforts to redeem all of the Series B Notes prior to the date on which
the Series B Warrants become exercisable. The Company currently anticipates that
it will be required to obtain the funds needed to repay the Series B Notes
through the sale of equity securities or by increasing its debt financing. There
can be no assurance that financing for any of these purposes will be available
or will be available on satisfactory terms.
Seasonality
The Company's operating results fluctuate from quarter to quarter as a
result of the seasonal nature of the restaurant industry 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.
31
<PAGE>
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.
Year 2000 Compliance
The Company currently is evaluating the Year 2000 issue as it relates
to its entire internal computer system. The Company anticipates that it will
incur internal staff costs as well as consulting and other expenses related to
making its computer systems Year 2000 compliant. The Company will expense these
costs as incurred. The Company has not yet completed the evaluation of its Year
2000 compliance and therefore currently is not able to quantify the cost that
may be incurred to bring its computer system into Year 2000 compliance. Because
the appropriate course of action may include replacing or upgrading certain
equipment or software, the Company may incur significant costs in resolving its
Year 2000 issues. See Item 1, "Special Considerations - Year 2000 Compliance."
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 adopted SFAS No. 128 in fiscal 1997 and earnings per
share for fiscal 1995 and 1996 have been restated in accordance with SFAS No.
128 in the consolidated financial statements included elsewhere in this Report.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
The statement changes the reporting of certain items currently reported in the
stockholders' equity section of the balance sheet and establishes standards for
reporting of comprehensive income and its components in a full set of general
purpose financial statements. The Company will comply with the disclosure
requirements set forth by this standard beginning in 1998.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This standard requires segments
of a business enterprise to be reported based on the way management organizes
and evaluates segments within the Company. The standard also requires
disclosures regarding products and services, geographical areas, and major
customers. The Company plans to adopt SFAS No. 131 in 1998. The Company
currently is evaluating the impact of this standard on its disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements, the report thereon, and
the notes thereto commencing at page F-1 of this Report, which financial
statements, report, and notes are incorporated by reference.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
As a result of the reverse purchase accounting treatment described in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Basis of Presentation," the Company determined that it was in
its best interests that Deloitte & Touche LLP ("Deloitte & Touche"), DRC's
independent public accountants prior to the Merger, serve as the Company's
independent public accountants following the Merger. Accordingly, effective
April 29, 1996, the Company ceased its client-auditor relationship with KPMG
Peat Marwick LLP ("Peat Marwick") and on April 29, 1996, the Company retained
Deloitte & Touche as its independent public accountants. The change in
independent public accountants was approved by the Board of Directors of the
Company, including all of the members of the Audit Committee of the Board of
Directors.
Peat Marwick's report on the financial statements of AFR, which are not
included in this Report, for the years ended September 28, 1994 and September
27, 1995 did not contain an adverse opinion or a disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles. In connection with the two audits for the years ended September 28,
1994 and September 27, 1995, and subsequently to April 29, 1996, there were no
disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Peat Marwick, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report. Prior to retaining Deloitte & Touche, no discussions took place between
the Company and Deloitte & Touche regarding the application of accounting
principles or the type of opinion that might be rendered on the Company's
financial statements since the historical financial statements of DRC, as
audited by Deloitte & Touche, will be the continuing historical financial
statements of the Company. The Company has authorized Peat Marwick to respond
fully to inquiries from Deloitte & Touche.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to each
of the Company's directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jack M. Lloyd.......................... 48 Chairman of the Board, President, and Chief
Executive Officer
William J. Howard...................... 53 Executive Vice President, Secretary, and Director
William G. Cox......................... 49 Chief Operating Officer and Director
Robert J. Gentz........................ 48 Executive Vice President - Franchising and
Development
Todd S. Brown.......................... 41 Senior Vice President, Chief Financial Officer,
Treasurer, and Director
Michael Larsen......................... 43 Vice President
John M. Holliman, III.................. 44 Director
C. Alan MacDonald...................... 64 Director
Fred W. Martin......................... 67 Director
</TABLE>
Jack M. Lloyd has served as Chairman of the Board of the Company since
July 9, 1996 and as President, Chief Executive Officer, and a director of the
Company since March 29, 1996. Mr. Lloyd served as Chairman of the Board and
Chief Executive Officer of DRC from 1987 until March 1996 and served as
President of DRC from 1987 until November 1994. Mr. Lloyd engaged in commercial
and residential real estate development and property management as President of
First Federated Investment Corporation during the early and mid-1980s. Mr. Lloyd
also currently serves as a director of Action Performance Companies, Inc. and
Star Buffet, Inc., which are publicly held companies, and Masterview Window
Company, a privately held company.
William J. Howard has served as Executive Vice President of the Company
since July 9, 1996 and as Secretary and a director of the Company since March
29, 1996. Mr. Howard served as a Vice President of the Company from March 29,
1996 until July 9, 1996. Mr. Howard served as President of DRC from November
1994 until March 1996 and as a director of DRC from 1990 until March 1996. Mr.
Howard served as Vice President of DRC from 1990 until November 1994 and as
Chief Financial Officer of DRC from 1990 until August 1994. Prior to joining
DRC, Mr. Howard held numerous senior management positions with Citicorp and
Citibank, including Senior Vice President and Senior Credit Officer with
Citicorp Mortgage, Inc.
William G. Cox has served as Chief Operating Officer and a director of
the Company since March 29, 1996. Mr. Cox served as Vice President - Operations
for Denny's, Inc. from June 1993 until November 1995, with responsibility for
approximately 590 company-owned and franchised Denny's restaurants located
throughout the United States. Mr. Cox served as a Senior Vice President of
Flagstar and as Chief Operating Officer of Flagstar's "Quincy's" restaurant
chain from May 1992 to June 1993. Mr. Cox served as Vice President of Eastern
Operations of Denny's, Inc. from March 1991 to May 1992 and as a Regional
Manager and Division Leader for Denny's, Inc. from 1981 to March 1991. Mr. Cox
joined Denny's, Inc. as a Manager-in-Training in September 1977 and had advanced
to the position of Regional Manager by 1981.
34
<PAGE>
Robert J. Gentz has served as Executive Vice President - Franchising and
Development of the Company since January 1997. Mr. Gentz oversees restaurant
acquisitions and sales, franchise operations, new restaurant development
activities, and related financings. Prior to joining the Company, Mr. Gentz
spent nine years as Executive Vice President for CNL Group, Inc., a diversified
investment company that specializes in providing financing to the restaurant
industry. Mr. Gentz also served as Director of Development for Wendy's
International, Inc. from 1982 through 1987, where he was responsible for
company-owned and franchised restaurants in various regions.
Todd S. Brown has served as Senior Vice President of the Company since
December 1997 and as Chief Financial Officer, Treasurer, and a director of the
Company since March 29, 1996. Mr. Brown served as a Vice President of the
Company from March 1996 to December 1997. Mr. Brown served as Vice President,
Chief Financial Officer, and a director of DRC from September 1994 until March
1996. Mr. Brown was employed by Deloitte & Touche LLP from 1980 to September
1994, most recently as a Senior Manager. Mr. Brown is a Certified Public
Accountant in the state of Arizona.
Michael Larsen has served as a Vice President of the Company since March
29, 1996. From 1993 until March 1996, Mr. Larsen served as Vice President of
Real Estate and Development of DRC. Mr. Larsen directs the due diligence of site
and building acquisitions and coordinates the construction of new restaurants.
From April 1984 to April 1993, Mr. Larsen was the Operations Manager for B&B
Properties, an advisor to several publicly traded real estate investment trusts.
John M. ("Jock") Holliman, III has served as a director of the Company
since March 29, 1996. Mr. Holliman served as a director of DRC from January 1995
until March 1996. Mr. Holliman is the sole general partner of AGP Management,
L.P., which is the managing general partner of Valley Ventures, L.P., a limited
partnership formed in 1993 to purchase the venture capital portfolio of Valley
National Bank of Arizona. From 1985 to 1993, Mr. Holliman served as Senior
Managing Director of Valley National Investors, Inc., a wholly owned Small
Business Investment Corporation subsidiary of Valley National Bank of Arizona.
Mr. Holliman also currently serves as a director of Voxel, OrthoLogic Corp., and
Pilgrim America Capital Corp., each of which are publicly held corporations, and
several other privately held corporations. Mr. Holliman also serves as a
director of several non-profit organizations.
C. Alan MacDonald has served as a director of the Company since July
1993. Mr. MacDonald currently is a General Partner of the Marketing Partnership
Inc., a packaged goods marketing consulting firm. From 1992 through 1994, Mr.
MacDonald was Chairman of the Board and Chief Executive Officer of Lincoln
Snacks Company and continues to serve on that company's Board of Directors. From
1983 to 1995, Mr. MacDonald served as President and Chief Executive Officer of
the Nestle Foods Corporation. From 1955 through 1982, Mr. MacDonald was employed
by the Stouffers Corporation, serving as President of The Stouffer Frozen Food
Company from 1971 through 1982. Mr. MacDonald currently serves as a director of
several privately held corporations.
Fred W. Martin has served as a director of the Company since March 29,
1996. Mr. Martin served as a director of DRC from November 1994 until March
1996. Mr. Martin served as Western Regional Director of Franchise Development
with Denny's, Inc. from 1985 to 1994, during which time he approved and
developed 400 franchise and company locations for Denny's, Inc. throughout the
western United States. Mr. Martin served as Western Real Estate Representative
with Denny's, Inc. from 1979 until 1985.
All directors of the Company hold office until the Company's next annual
meeting of shareholders or the election and qualification of their successors.
The former shareholders of DRC collectively own a sufficient number of shares of
the Company's Common Stock to elect all of the members of the Board of
Directors. There is no agreement or understanding between the Company and any of
the persons who constitute the Company's Board of Directors as to their serving
on the Company's Board of Directors in the future.
The Company's Board of Directors maintains an Audit Committee, a
Compensation Committee, a 1992 Stock Option Plan Committee, and a 1995
Directors' Stock Option Plan Committee. Messrs. Holliman and
35
<PAGE>
MacDonald constitute the Audit Committee; Messrs. Holliman, MacDonald, and
Martin constitute the Compensation and 1992 Stock Option Plan Committees; and
Messrs. Lloyd and Howard constitute the 1995 Directors' Stock Option Plan
Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors, executive officers, and
persons who own more than 10 percent of a registered class of the Company's
equity securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Directors, executive officers,
and greater than 10 percent shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely upon the Company's review of the copies of such forms received by it
during the fiscal year ended January 1, 1997, and written representations that
no other reports were required, the Company believes that each person who, at
any time during such fiscal year, was a director, officer, or beneficial owner
of more than 10 percent of the Company's Common Stock complied with all Section
16(a) filing requirements during such fiscal year except that (i) William G. Cox
filed a late report on Form 4 covering two transactions, and (ii) Robert J.
Gentz filed a late report on Form 5 with respect to his ownership of the
Company's securities as of the date on which he became an executive officer of
the Company.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation of
each of the Company's Chief Executive Officers and the four other most highly
compensated executive officers whose cash salary and bonuses exceeded $100,000
during the fiscal year ended December 31, 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
--------------------------------------- --------------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary$(1) Bonus($) Options(#) Compensation($)
- --------------------------- ---- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Jack M. Lloyd, Chairman of the 1997 $520,000 -- -- --
Board, President, and Chief 1996 375,200 -- -- --
Executive Officer(2) 1995 312,000 -- -- --
William J. Howard, Executive 1997 $260,000 -- -- --
Vice President and Secretary (3) 1996 187,600 -- -- --
1995 156,000 -- -- --
William G. Cox, Chief Operating 1997 $220,000 -- -- --
Officer 1996 221,795(4) -- 300,000 $15,921
Robert J. Gentz, Executive Vice 1997 $166,027(5) -- 100,000 --
President - Franchising and
Development
Todd S. Brown, Vice President, 1997 $127,372 -- -- --
Chief Financial Officer, and 1996 115,700 $75,000 124,800 --
Treasurer(3) 1995 91,000 -- -- --
</TABLE>
- ------------------
(1) Each of the Named Executive Officers received certain perquisites, the
value of which did not exceed 10% of their salary during fiscal 1997.
(2) Mr. Lloyd became the Company's President and Chief Executive Officer upon
consummation of the Merger on March 29, 1996, and became the Company's
Chairman of the Board on July 9, 1996. Amounts shown for periods prior to
March 29, 1996 represent payments to Mr. Lloyd for services as an executive
officer of DRC prior to the Merger. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Basis of
Presentation."
(3) Each of Messrs. Howard and Brown became executive officers of the Company
upon consummation of the Merger on March 29, 1996. Amounts shown for
periods prior to March 29, 1996 represent payments to each such person for
services as an executive officer of DRC prior to the Merger. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Basis of Presentation."
(4) Represents amounts accrued or paid beginning on March 29, 1996, the date of
Mr. Cox's employment with the Company.
(5) Represents amounts accrued or paid beginning on January 6, 1997, the date
of Mr. Gentz' employment with the Company.
37
<PAGE>
Option Grants
The following table sets forth certain information with respect to stock
options granted to the Named Exectuive Officers during the fiscal year ended
December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------- Potential Realizable Value
Percentage at Assumed Annual
Number of of Total Rates of Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term(2)
Options Employees in Price Expiration --------------------------
Name Granted(#) Fiscal Year ($/Sh)(1) Date 5% 10%
---- ---------- ------------ --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Jack M. Lloyd......... -- -- -- -- -- --
William J. Howard..... -- -- -- -- -- --
William G. Cox........ -- -- -- -- -- --
Robert J. Gentz....... 100,000 100% $3.44 1/6/07 $216,183 $547,849
Todd S. Brown......... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Twenty-five percent of the options were vested and exercisable on the
date of grant. The remainder of the options vest and become exercisable
in three equal annual installments beginning on the first anniversary of
the date of grant.
(2) Potential gains are net of the exercise price, but before taxes
associated with the exercise. Amounts represent hypothetical gains that
could be achieved for the respective options if exercised at the end of
the option term. The assumed 5% and 10% rates of stock price appreciation
are provided in accordance with the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future price of the Company's Common Stock. Actual gains, if any, on
stock option exercises will depend upon the future market prices of the
Company's Common Stock.
Option Holdings
The following table sets forth information concerning the number and
value of all options held at December 31, 1997, by the Named Executive Officers.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options
Options at Fiscal Year-End at Fiscal Year-End ($)(1)
-------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jack M. Lloyd..................................... -- -- N/A N/A
William J. Howard................................. -- -- N/A N/A
William G. Cox.................................... 120,000 180,000 $0 $0
Robert J. Gentz................................... 25,000 75,000 $0 $0
Todd S. Brown..................................... 49,920 74,880 $0 $0
</TABLE>
- ---------------
(1) The exercise prices of all options held by the Named Executive Officers
were greater than the Company's Common Stock of $1.9375 per share on
December 31, 1997.
38
<PAGE>
Employment Agreements
General
The Company currently is a party to employment agreements with each of
William G. Cox, Robert J. Gentz, and Todd S. Brown. In addition to the
provisions of the individual employment agreements as described below, the
employment agreements generally require the Company to provide each person with
certain medical and life insurance benefits; to reimburse them for all travel,
entertainment, and other ordinary and necessary expenses incurred in connection
with the Company's business and their duties under their respective employment
agreements; and to provide such other fringe benefits that the Company makes
generally available to all of its employees on a non-discriminatory basis. The
employment agreements with Messrs. and Cox, Gentz, and Brown require the Company
to provide each such officer with an automobile for use in connection with the
Company's business. In addition, in the event of a "change of control" of the
Company, as defined in employment agreements, the Company will be required to
pay each of Messrs. Cox, Gentz, and Brown a lump sum equal to their respective
fixed salaries for the greater of one year or the balance of the then-current
term of employment under the applicable agreement, and all of Messrs. Cox's,
Gentz's, and Brown's unvested stock options, if any, will immediately vest and
become exercisable in full. The agreements also contain provisions that prohibit
the respective officer from (i) competing with the business of the Company, (ii)
taking certain actions intended to solicit other persons to terminate their
business relationship with the Company or to terminate his or her employment
relationship with the Company, and (iii) making unauthorized use or disclosure
of the Company's trade names, fictitious names, or confidential information.
William G. Cox
In December 1995, the Company entered into an employment agreement with
William G. Cox, which became effective upon consummation of the Merger. Pursuant
to his agreement with the Company, Mr. Cox serves as the Chief Operating Officer
of the Company at a base salary of $220,000 per year. The agreement also
provides that Mr. Cox will be eligible to receive an annual bonus of up to 50%
of his annual base salary pursuant to a bonus pool plan to be established by and
administered in the sole discretion of the Company. Pursuant to the agreement,
the Company granted to Mr. Cox options to purchase 300,000 shares of the
Company's Common Stock. Mr. Cox's agreement provides for his employment until
March 29, 1999, subject to extension for additional one-year periods under
mutually agreeable terms and conditions. The Company may terminate the agreement
only for cause, as defined in the agreement.
Robert J. Gentz
In January 1997, the Company entered into an employment agreement with
Robert J. Gentz pursuant to which Mr. Gentz serves as Executive Vice President -
Franchising and Development of the Company. The employment agreement provides
for a base salary of $175,000 per year. In addition, the agreement provides that
Mr. Gentz will be eligible to receive an annual bonus of up to $50,000 per year
based upon standards to be agreed upon between the Company and Mr. Gentz.
Pursuant to the agreement, the Company reimbursed Mr. Gentz for certain
relocation expenses and granted to Mr. Gentz options to purchase 100,000 shares
of the Company's Common Stock. Mr. Gentz' agreement provides for an initial
employment term of three years, subject to extension for additional one-year
periods under mutually agreeable terms and conditions.
Todd S. Brown
In December 1997, the Company entered into an employment agreement with
Todd S. Brown pursuant to which Mr. Brown serves as Senior Vice President,
Treasurer, and Chief Financial Officer of the Company. The employment agreement
provides for a base salary of $160,000, $175,000, and $190,000 in calendar 1998,
1999, and 2000, respectively. In addition, the agreement provides that Mr. Brown
will be eligible to receive an annual bonus in an amount to be determined by the
Company's Board of Directors, in its sole discretion. Mr. Brown's employment
agreement continues until December 31, 2000 and will renew automatically from
year to year thereafter, unless and until either party terminates by giving the
other party written notice not less than 60 days
39
<PAGE>
prior to the end of the then-current term. In the event that the Company
terminates Mr. Brown's employment without cause, Mr. Brown will continue to
receive his base salary for a period of 12 months following the date of such
termination.
Stock Option Plans
1996 Stock Option Plan
On December 10, 1996, the Company's Board of Directors adopted the
Company's 1996 Stock Option Plan (the "1996 Plan"). The Company's shareholders
approved the 1996 Plan on June 26, 1997. A total of 500,000 shares of the
Company's Common Stock has been reserved for issuance under the 1996 Plan. The
1996 Plan is intended to promote the interests of the Company by encouraging key
persons associated with the Company to acquire, or otherwise increase, their
proprietary interest in the Company and an increased personal interest in its
continued success and progress. The 1996 Plan provides for the grant of options
to acquire Common Stock of the Company ("Options"), the direct grant of Common
Stock ("Stock Awards"), the grant of stock appreciation rights ("SARs"), and the
grant of other cash awards ("Cash Awards") (Stock Awards, SARs, and Cash Awards
are collectively referred to herein as "Awards"). If any Option or SAR
terminates or expires without having been exercised in full, stock not issued
under such Option or SAR will again be available for the purposes of the 1996
Plan. The 1996 Plan is intended to comply with Rule 16b-3 as promulgated under
the Exchange Act with respect to persons subject to Section 16 of the Exchange
Act. As of March 31, 1998, the Company has not granted any Options under the
1996 Plan. The 1996 Plan will remain in effect until December 9, 2006.
Options and Awards may be granted pursuant to the 1996 Plan only to
persons ("Eligible Persons") who at the time of grant are either (i) key
personnel (including officers and directors) of the Company, or (ii) consultants
or independent contractors who provide valuable services to the Company. Options
granted pursuant to the 1996 Plan may be incentive stock options or
non-qualified stock options. Options that are incentive stock options may be
granted only to key personnel of the Company who are also employees of the
Company. To the extent that granted Options are incentive stock options, the
terms and conditions of those Options must be consistent with the qualification
requirements set forth in the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). The maximum number of shares of stock with respect to
which Options or Awards may be granted to any employee during the term of the
1996 Plan may not exceed 50 percent of the shares of Common Stock covered by the
1996 Plan.
The exercise price of any Option intended to be an incentive stock option
may not be less than 100 percent of the fair market value of the Common Stock at
the time of the grant (110 percent if the Option is granted to a person who at
the time the Option is granted owns stock possessing more than 10 percent of the
total combined voting power of all classes of stock of the Company). Options may
be granted for terms of up to 10 years and will vest and become exercisable in
whole or in one or more installments as may be determined at the time the
Options are granted. To exercise an Option, the optionholder will be required to
deliver to the Company full payment of the exercise price for the shares as to
which the Option is being exercised. Generally, Options can be exercised by
delivery of cash, check, or shares of Common Stock of the Company.
SARs will entitle the recipient to receive a payment equal to the
appreciation in market value of a stated number of shares of Common Stock from
the price on the date the SAR was granted or became effective to the market
value of the Common Stock on the date the SARs are exercised or surrendered.
Stock Awards will entitle the recipient to receive shares of the Company's
Common Stock directly. Cash Awards will entitle the recipient to receive direct
payments of cash depending on the market value or the appreciation of the Common
Stock or other securities of the Company. The plan administrators may determine
such other terms, conditions, or limitations, if any, on any Awards granted
pursuant to the 1996 Plan.
Amended and Restated 1992 Stock Option Plan
A total of 1,000,000 shares of the Company's Common Stock have been
reserved for issuance under the Company's Amended and Restated 1992 Stock Option
Plan (the "1992 Plan"). The 1992 Plan limits the persons
40
<PAGE>
eligible to receive options to directors, consultants, and key employees,
including officers, of the Company or a subsidiary of the Company and "key
persons" who are not employees but have provided valuable services, have
incurred financial risk on behalf of the Company, or have extended credit to the
Company or its subsidiaries. The 1992 Plan provides that options granted to
employees may be incentive stock options or non-qualified options pursuant to
the Internal Revenue Code. Key persons who are not employees are eligible to
receive only non-qualified options. The 1992 Plan is intended to comply with
Rule 16b-3 as promulgated under the Exchange Act with respect to persons subject
to Section 16 of the Exchange Act. As of March 31, 1998, there were outstanding
options to acquire a total of 728,000 shares of Common Stock under the 1992
Plan. The 1992 Plan terminates on April 1, 2002.
Incentive stock options may not have an exercise price less than the fair
market value of the Common Stock on the grant date, except that, in the case of
an incentive stock option granted to any participant who owns more than 10% of
the Company's outstanding voting shares, the exercise price must be at least
110% of the fair market value of the Common Stock on the date of grant and the
term of the option may be no longer than five years. Options that are not
incentive stock options may not have an exercise price less than the greater of
the minimum price required by applicable state law, by the Company's Restated
Articles of Incorporation, or the par value of the Common Stock. Options
generally may be exercised by delivery of any combination of cash, shares of
Common Stock, or by delivering to the Company a promissory note upon such terms
and conditions as the Board of Directors may determine.
1995 Directors Stock Option Plan
A total of 300,000 shares of Common Stock have been reserved for issuance
under the Company's 1995 Directors Stock Option Plan (the "1995 Plan"). The
purpose of the 1995 Plan is to promote the interests of the Company and its
shareholders by strengthening the Company's ability to attract and retain the
services of experienced and knowledgeable non-employee directors and by
encouraging such directors to acquire an increased proprietary interest in the
Company. As of March 31, 1998, there were outstanding options to acquire a total
of 70,000 shares of Common Stock under the 1995 Plan. The 1995 Plan terminates
on January 16, 2005.
Options to purchase 10,000 shares of Common Stock are automatically
granted to each non-employee director of the Company on the date of his or her
initial election to the Board of Directors or re-election at an annual meeting
of the Company's shareholders. Directors who are first elected or appointed to
the Board of Directors on a date other than an annual meeting date are
automatically granted options to purchase the number of shares of Common Stock
equal to the product of 10,000 multiplied by a fraction, the numerator of which
is the number of days during the period beginning on such grant date and ending
on the date of the next annual meeting, and the denominator of which is 365. If
no meeting is scheduled at a time a director is first elected or appointed to
the Board of Directors, the date of the next annual meeting is deemed to be the
120th day of the fiscal year next following the interim grant date. The exercise
price of each option is the fair market value of the Company's Common Stock on
the business day preceding the date of grant, and the term of each option may
not exceed ten years. One-half of the options granted vest and become
exercisable after the first year of continuous service as a director following
the automatic grant date, and 100% vest after two years of continuous service on
the Board of Directors.
Director Compensation
Employees of the Company do not receive compensation for serving as
members of the Company's Board of Directors. Non-employee members of the Board
of Directors receive cash compensation in the amount of $10,000 per annum.
Non-employee directors receive automatic grants of stock options under the 1995
Directors Stock Option Plan. See Item 11, "Executive Compensation - Stock Option
Plans."
41
<PAGE>
Compensation Committee Interlocks and Insider Participation
C. Alan MacDonald, Fred W. Martin, and John M. Holliman, III served as
members of the Compensation Committee of the Board of Directors during fiscal
1997. None of such individuals had any contractual or other relationships with
the Company during fiscal 1997 except as directors.
Indemnification and Limitation of Personal Liability of Directors
The Company's Amended and Restated Bylaws require the Company to
indemnify its directors and officers against liabilities that they may incur
while serving in such capacities, to the full extent permitted and in the manner
required by the Georgia Business Corporation Code (the "GBCC"). Pursuant to
these provisions, the Company will indemnify its directors and officers against
any losses incurred in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director or
officer of the Company or served with another corporation, partnership, joint
venture, trust or other enterprise at the request of the Company. In addition,
the Company will provide advances for expenses incurred in defending any such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such advances if it is ultimately determined
that he or she is not entitled to indemnification by the Company. The Company
has entered into indemnification agreements with certain of its directors and
executive officers pursuant to the foregoing provisions of its Amended and
Restated Bylaws.
As permitted by the GBCC, the Company's Restated Articles of
Incorporation contain provisions that eliminate the personal liability of
directors for monetary damages to the Company or its shareholders for breach of
their fiduciary duties as directors. In accordance with the GBCC, these
provisions do not limit the liability of a director for (i) any appropriation of
a business opportunity of the Company in violation of the director's duty, (ii)
acts or omissions that involve intentional misconduct or a knowing violation of
law, (iii) any dividend payment, stock repurchase, stock redemption or
distribution in liquidation that is prohibited under Georgia law, or (iv) any
merger from which the director derived an improper personal benefit. These
provisions do not limit or eliminate the rights of the Company or any
shareholder to seek an injunction or any other non-monetary relief in the event
of a breach of a director's fiduciary duty. In addition, these provisions apply
only to claims against a director arising out of his or her role as a director
and do not relieve a director from liability for violations of statutory law,
such as certain liabilities imposed on a director under the federal securities
laws.
42
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information regarding the shares
of the Company's Common Stock beneficially owned as of March 31, 1998 by (i)
each of the Company's directors and executive officers; (ii) all directors and
executive officers of the Company as a group; and (iii) each person known by the
Company to be the beneficial owner of 5% or more of the Company's Common Stock.
<TABLE>
<CAPTION>
Number Percentage
Name and Address of Beneficial Holder(1) of Shares(2) Ownership(2)
- ---------------------------------------- ------------ ------------
Directors and Executive Officers
- --------------------------------
<S> <C> <C>
Jack M. Lloyd 3,176,504 23.6%
William J. Howard 1,553,752 11.6%
William G. Cox 181,000(3) 1.3%
Robert J. Gentz 50,000(4) *
Todd S. Brown 77,680(5) *
Michael Larsen 60,000(6) *
John M. Holliman, III 22,436(7) *
C. Alan MacDonald 47,500(8) *
Fred W. Martin 16,000(9) *
All directors and executive officers as a group (9 persons) 5,188,872 37.4%
Non-Management 5% Shareholders
- ------------------------------
BancBoston Ventures, Inc.(10) 2,124,352 15.8%
Jeffrey D. Miller (11) 689,451 5.1%
</TABLE>
- --------------
* Less than 1.0% of the outstanding shares of Common Stock.
(1) Except as otherwise indicated, each person named in the table has sole
voting and investment power with respect to all Common Stock beneficially
owned by him, subject to applicable community property law. Except as
otherwise indicated, each of such persons may be reached through the
Company at 7373 N. Scottsdale Road, Suite C-240, Scottsdale, Arizona 85253.
(2) The numbers and percentages shown include the shares of Common Stock
actually owned as of March 31, 1998 and the shares of Common Stock which
the person or group had the right to acquire within 60 days of such date.
In calculating the percentage of ownership, all shares of Common Stock
which the identified person or group had the right to acquire within 60
days of March 31, 1998 upon the exercise of options are deemed to be
outstanding for the purpose of computing the percentage of the shares of
Common Stock owned by such person or group, but are not deemed to be
outstanding for the purpose of computing the percentage of the shares of
Common Stock owned by any other person.
(3) Represents 1,000 shares of Common Stock and 180,000 shares of Common Stock
issuable upon the exercise of vested options.
(4) Represents 50,000 shares of Common Stock issuable upon exercise of vested
options.
(5) Represents 2,800 shares of Common Stock and 74,880 shares issuable upon the
exercise of vested options.
(6) Represents 60,000 shares of Common Stock issuable upon the exercise of
vested options.
(7) Represents 9,436 shares of Common Stock and 10,000 shares issuable upon
exercise of vested options held by Mr. Holliman and 3,000 shares of Common
Stock beneficially owned by Mr. Holliman as trustee under a trust for the
benefit of his mother.
(8) Represents 47,500 shares of Common Stock issuable upon the exercise of
vested options.
(9) Represents 6,000 shares of Common Stock held by Mr. Martin and his spouse
and 10,000 shares issuable upon the exercise of vested options.
(10) The address of BancBoston Ventures, Inc. is c/o BancBoston Capital, Inc.,
100 Federal Street, Boston, Massachusetts 02110.
43
<PAGE>
(11) Mr. Miller is a former officer and director of the Company. Mr. Miller's
address is 13845 East Laurel Lane, Scottsdale, Arizona 85259.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1995, DRC entered into leases for two restaurant properties owned
by Lloyd/Howard L.L.C. ("Lloyd/Howard"), a limited liability company controlled
by Jack M. Lloyd (Chairman of the Board and Chief Executive Officer of DRC at
that time) and William J. Howard (President and a director of DRC at that time).
Lloyd/Howard acquired these two properties and certain other properties from
Kettle Restaurants, Inc. in consideration of the assumption by Lloyd/Howard of
environmental liabilities associated with the two properties leased by DRC.
During 1996, Lloyd/Howard sold one of the properties to CNL and the Company
entered into a lease with CNL for that location. The second restaurant was sold
to a third party during fiscal 1997. Prior to that sale, the Company did not pay
any rent to Lloyd/Howard with respect to that restaurant during fiscal 1997.
In connection with the financing of the BEP Acquisition, LH Leasing
Company, Inc. ("LH Leasing"), a corporation owned by Jack M. Lloyd and William
J. Howard, purchased from the Company for cash in the amount of $14.25 million
the equipment located at 62 Black-eyed Pea restaurants leased by BEP, a wholly
owned subsidiary of the Company, or Texas BEP, L.P. ("Texas BEP"), a limited
partnership in which BEP is the general partner and in which a wholly owned
subsidiary of BEP is the limited partner. Concurrently with the sale of the
equipment to LH Leasing, LH Leasing leased the equipment to the Company and the
Company subleased the equipment to BEP or Texas BEP. The equipment lease has a
term of five years and grants the Company an option to purchase the equipment at
its fair market value upon the expiration of the lease. The terms of the
subleases between the Company and each of BEP and Texas BEP are consistent with
the terms set forth in the equipment lease between the Company and LH Leasing.
Messrs. Lloyd and Howard formed LH Leasing as an accommodation to the Company to
enable it to satisfy the requirements of the Company's senior lenders. Messrs.
Lloyd and Howard received no material compensation for the transactions
involving the Company and LH Leasing.
In order to finance its sale and lease transaction with the Company, LH
Leasing borrowed cash in the amount of $14.25 million from FFCA. Messrs. Lloyd
and Howard jointly and severally guaranteed the repayment of the loan. In
addition, Messrs. Lloyd and Howard pledged their stock in LH Leasing to FFCA as
additional collateral for the loan.
Jack M. Lloyd and William J. Howard hold $11,196,000 and $5,598,000 in
principal amount of the Company's Series B Notes, respectively. On September 30,
1997 and March 31, 1998, Messrs. Lloyd and Howard deferred interest of
approximately $728,000 and $364,000, respectively, due as of each of those dates
on the Series B Notes and granted waivers with respect to non-compliance of
certain of the debt covenants under the Series B Notes as of each of those
dates.
During fiscal 1997, the Company made various advances to Jack M. Lloyd.
Such advances totaled $378,000 as of December 31, 1997.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Financial Statements and Financial Statement Schedules:
(1) Financial Statements are listed in the Index to Consolidated
Financial Statements on page F-1 of this Report.
(2) No Financial Statement Schedules are included because they are not
applicable or are not required or the information required to be set
forth therein is included in the consolidated financial statements or
notes thereto.
(b) Reports on Form 8-K.
Not applicable.
(c) Exhibits - Index of Exhibits
<TABLE>
<CAPTION>
Exhibit No Description of Exhibit
- ---------- ----------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of August 9, 1995, between American
Family Restaurants, Inc. and Denwest Restaurant Corp.(1)
2.4 List of Schedules to Amended and Restated Agreement and Plan of Merger, dated as of August 9,
1995, between American Family Restaurants, Inc. and Denwest Restaurant Corp.(1)
2.5 Stock Purchase Agreement dated May 31, 1996, between BEP Holdings, Inc. and DenAmerica Corp.(2)
3.1 Articles of Restatement of the Articles of Incorporation of American Family Restaurants, Inc. and
Articles of Amendment thereto.(3)
3.1A Articles of Amendment to the Articles of Incorporation of DenAmerica Corp., as filed on July 2,
1997.(4)
3.2 Amended and Restated Bylaws of American Family Restaurants, Inc.(5)
3.3 Certificate of Merger of Denwest Restaurant Corp. into American Family Restaurants, Inc.(6)
4.1 Form of Indenture between DenAmerica Corp. and State Street Bank and Trust Company, as trustee,
relating to the Series A Notes (including the Form of Series A Note).(6)
4.2 Form of Indenture between DenAmerica Corp. and State Street Bank and Trust Company, as trustee,
relating to the Series B Notes (including the Form of Series B Note).(6)
4.4 Form of Series B Common Stock Purchase Warrant.(1)
4.5 Common Stock Purchase Warrant dated March 29, 1996, issued to Banque Paribas.(6)
4.6 Supplemental Indenture (Series B Notes) between DenAmerica Corp. and State Street Bank and
Trust Company, as trustee(2)
4.7 Common Stock Purchase Warrant dated July 3, 1996, issued to BEP Holdings, Inc.(2)
4.8 Common Stock Purchase Warrant dated July 3, 1996, issued to Banque Paribas(2)
10.1 American Family Restaurants, Inc. 1992 Stock Option Plan.(3)
10.1A American Family Restaurants, Inc. Amended and Restated 1992 Stock Option Plan.(3)
10.2 American Family Restaurants, Inc. Directors Stock Option Plan.(3)
10.23 Joint Venture Agreement of Densouth Restaurants II Joint Venture, entered into September 4, 1992
and effective January 2, 1992, by and between Great Restaurants of the Midsouth, Inc. and
Densouth Foods II, Ltd., including First Amendment thereto, dated September 4, 1992, and
Amendment thereto, dated April 15, 1993.(3)
10.28 Letter Agreement between Great American Restaurants, Inc. and Denny's, Inc., dated August 25,
1992, regarding reorganization.(3)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit No Description of Exhibit
- ---------- ----------------------
<S> <C>
10.32 Warrant No. W-0527933 issued by Great American Restaurants, Inc. to Merl Trust for 33,333.33
shares of Common Stock, dated June 2, 1993. (Three additional warrants were issued and are
substantially identical in all material respects except as to the warrantholder and the number
of shares.)(3)
10.32A Schedule of warrants substantially identical to Exhibit 10.32.(3)
10.33 Registration Rights Agreement between Great American Restaurants, Inc. and Merl Trust, dated June
2, 1993 covering warrants issued in connection with 9% subordinated notes. (Registration Rights
Agreements entered into by other holders of warrants issued in connection with the 9%
subordinated notes are substantially identical in all material respects except as to the name of
the holder.)(3)
10.33A Schedule of registration rights agreements substantially identical to Exhibit 10.33.(3)
10.60 Form of Franchise Agreement between American Family Restaurants, Inc. and Denny's, Inc.
(American Family Restaurants, Inc. has 78 franchise agreements which are substantially
identical in all material respects except as to location of restaurants and date of
agreement.)(3)
10.60A Letter Agreement between American Family Restaurants, Inc. and Denny's, Inc., dated September
13, 1994, regarding change of control provisions.(3)
10.60B Letter Agreement between American Family Restaurants, Inc. and Denny's, Inc., dated September
13, 1994, regarding non-compete provisions.(3)
10.60A Schedule of franchise agreements substantially identical to Exhibit 10.60.(3)
10.65 Form of Warrant Agreement between American Family Restaurants, Inc. and Fahnestock & Co. Inc.
for 290,000 shares of Common Stock.(3)
10.66 Stock Pledge and Assignment between American Family Restaurants, Inc., and Denny's, Inc., dated
June 13, 1994.(3)
10.67 Letter Agreement between CNL Group, Inc. and American Family Restaurants, Inc. regarding
sale-leaseback transactions, dated August 18, 1994.(3)
10.68 Letter Agreement from CNL Group, Inc. to American Family Restaurants, Inc., dated October 13,
1994, regarding the commitment letter.(3)
10.73 Employment Agreement dated December 8, 1995 between American Family Restaurants, Inc. and
William G. Cox.(1)
10.75 Asset Purchase Agreement, dated as of September 8, 1995, by and among Fables-Innkeepers
Management, Inc. and American Family Restaurants, Inc.(1)
10.76 General Bill of Sale and Assignment of Assets, Properties and Business of Certain Restaurants,
dated as of January 1, 1995, by and between DenGlass Foods Joint Venture and American Family
Restaurants, Inc.(1)
10.78 Amendment to American Family Restaurants, Inc. Amended and Restated 1992 Stock Option Plan.(1)
10.79 Letter Agreement, dated December 20, 1995, from American Family Restaurants, Inc. to Denny's,
Inc. and Denwest Restaurant Corp.(1)
10.80 Form of Registration Rights Agreement to be entered into between American Family Restaurants,
Inc. and certain of the existing shareholders of Denwest Restaurant Corp.(1)
10.81 Franchise Development Agreement, dated November 9, 1994, between Denny's, Inc. and Denwest
Restaurant Corp.(1)
10.82 Executive Employment Agreement, dated November 9, 1994, between Jack M. Lloyd and Denwest
Restaurant Corp.(1)
10.83 Executive Employment Agreement, dated November 9, 1994, between William J. Howard and Denwest
Restaurant Corp.(1)
10.84 Executive Employment Agreement, dated November 9, 1994, between William S. Leto and Denwest
Restaurant Corp.(1)
10.85 Executive Employment Agreement, dated as of November 9, 1994, between Todd S. Brown and Denwest
Restaurant Corp.(1)
10.86 Amended and Restated Joint Venture Agreement of Denwest Joint Venture between Denwest Corp. and
Denwest Foods, Ltd. dated December 30, 1991.(1)
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit No Description of Exhibit
- ---------- ----------------------
<S> <C>
10.87 Joint Venture Agreement of Denwest II Joint Venture between L&H Restaurant Corp. and Denwest
Foods II, Ltd. dated December 30, 1991.(1)
10.89 Commitment Letter, dated as of January 5, 1996, by and among American Family Restaurants, Inc.,
Denwest Restaurant Corp. and Banque Paribas.(1)
10.90 Intercreditor Agreement among DenAmerica Corp., certain holders of DenAmerica's Series B Notes,
and State Street Bank and Trust Company.(6)
10.92 Credit Agreement dated as of February 29, 1996, among DenAmerica Corp., the Banks named therein,
and Banque Paribas, as Agent (including the Form of Term Note, Form of Revolving Note, and Form
of Delayed Draw Term Note).(6)
10.92A Amended and Restated Credit Agreement dated as of July 3, 1996, among DenAmerica Corp., the Banks
named therein, and Banque Paribas, as Agent(2)
10.92B Amendment and Limited Consent and Waiver dated as of September 30, 1997 among DenAmerica Corp.,
the Banks (as defined), and Banque Paribas, as agent.(4)
10.93 Security Agreement dated as of February 29, 1996, between DenAmerica Corp. and Banque Paribas,
as Agent.(6)
10.94 Form of Senior Intercreditor Agreement among Banque Paribas, as Agent, the holders of Series A
Notes, and State Street Bank and Trust Company.(6)
10.95 Stock Option Agreement dated March 29, 1996, between DenAmerica Corp. and William G. Cox.(6)
10.96 Senior Subordinated Promissory Note dated July 3, 1996, in the principal sum of $15,000,000,
payable by DenAmerica Corp. to BEP Holdings, Inc.(2)
10.97 Registration Rights Agreement dated as of July 3, 1996, between DenAmerica Corp. and BEP
Holdings, Inc.(2)
10.98 Intercreditor Agreement among DenAmerica Corp., certain holders of DenAmerica's Series B Notes,
and State Street Bank and Trust Company(2)
10.99 Sale and Lease Agreement dated July 3, 1996, among FFCA Acquisition Corporation, Black-eyed Pea
U.S.A., Inc., and Texas BEP, L.P.(2)
10.100 Form of Lease dated July 3, 1996, between FFCA Acquisition Corp. and DenAmerica Corp.(2)
10.101 Form of Sublease dated July 3, 1996, between DenAmerica Corp. and Black-eyed Pea U.S.A., Inc.(2)
10.102 Form of Sublease dated July 3, 1996, between DenAmerica Corp. and Texas BEP, L.P.(2)
10.103 Equipment Purchase Agreement and Bill of Sale dated July 3, 1996, between LH Leasing Company,
Inc. and Black-eyed Pea U.S.A., Inc.(2)
10.104 Equipment Purchase Agreement and Bill of Sale dated July 3, 1996, between LH Leasing Company,
Inc. and Texas BEP, L.P.(2)
10.105 Equipment Lease dated July 3, 1996, between LH Leasing Company, Inc. and DenAmerica Corp.(2)
10.106 Equipment Sublease dated July 3, 1996, between DenAmerica Corp. and Black-eyed Pea, U.S.A.,
Inc.(2)
10.107 Equipment Sublease dated July 3, 1996, between DenAmerica Corp. and Texas BEP, L.P.(2)
10.108 Asset Purchase Agreement effective as of July 3, 1996, among Mid-American Restaurants, Inc., Haig
V. Antranikian, and DenAmerica Corp.(2)
10.109 Stock Option Agreement dated April 29, 1996, between DenAmerica Corp. and Todd S. Brown(7)
10.110 DenAmerica Corp. 1996 Stock Option Plan.(8)
10.111 Loan and Security Agreement dated as of September 30, 1997 by and among DenAmerica Corp., CNL
Growth Corp., Midsouth Foods I, Ltd., and Midsouth Foods II, Ltd.(4)
10.112 5-Year 5% Convertible Redeemable Debenture dated September 30, 1997 in the principal amount of
$4,400,000.(4)
10.113 Subordinated Promissory Note dated September 30, 1997 in the principal amount of $7,700,000.(4)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Exhibit No Description of Exhibit
- ---------- ----------------------
<S> <C>
10.114 Registration Rights Agreement dated as of September 30, 1997 between DenAmerica Corp., and CNL
Growth Corp.(4)
10.115 Agreement dated as of September 30, 1997 by and among DenAmerica Corp., Beck Holdings, Inc. and
Unigate Holdings, NV.(4)
10.116 Asset Purchase Agreement dated January 27, 1998, among DenAmerica Corp., Olajuwon Holdings, Inc.,
and Akinola Olajuwon(9)
10.117 First Amendment to Asset Purchase Agreement dated March 16, 1998 between DenAmerica Corp.,
Olajuwon Holdings, Inc., and Akinola Olajuwon(9)
10.118 Promissory Note dated March 25, 1998, from Olajuwon Holdings, Inc. to DenAmerica Corp. in the
principal amount of of $1,800,000(9)
10.119 Negative Working Capital Note dated March 25, 1998, from Olajuwon Holdings, Inc. to DenAmerica
Corp. in the principal amount of $1,700,000(9)
12.1 DenAmerica Corp. Ratio of Income to Fixed Charges.
16. Letter Re: Change in Certifying Accountant.(10)
21.2 List of Subsidiaries of DenAmerica Corp.
23.1 Consent of Deloitte & Touche LLP.
25.2 Form T-1 statement of eligibility and qualification of State Street Bank and Trust Company
relating to the Series B Notes.(1)
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-4, No. 333-00216, and Amendment No. 1 thereto, as
filed on January 10, 1996 and February 1, 1996, respectively.
(2) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on July 18, 1996, as amended by Form 8-K/A as
filed on September 16, 1996, Form 8-K/A as filed on November 1, 1996, and
Form 8-K/A as filed on November 6, 1996.
(3) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-1, File No. 33-80550, and Amendments 1-3 thereto,
filed on June 22, 1994, September 16, 1994, October 13, 1994, and October
17, 1994, respectively.
(4) Incorporated by reference to the Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended October 1, 1997, as filed on
November 17, 1997.
(5) Incorporated by reference to the Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 27, 1996, as filed on May
16, 1996.
(6) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on April 15, 1996, as amended by Form 8-K/A as
filed on June 12, 1996.
(7) Incorporated by reference to the Exhibits to the Registrant's Registration
Statement on Form S-8, No. 333-09731 as filed on August 7, 1996.
(8) Incorporated by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended January 1, 1997, as filed on March
31, 1997.
(9) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on April 9, 1998.
(10) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on May 3, 1996.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 14th day of
April, 1998.
DenAmerica Corp.
By: /s/ Jack M. Lloyd
------------------------------------
Jack M. Lloyd
Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack M. Lloyd Chairman of the Board, President, and April 14, 1998
- -------------------------------------- Chief Executive Officer, (Principal
Jack M. Lloyd Executive Officer)
/s/ William J. Howard Executive Vice President, Secretary, April 14, 1998
- -------------------------------------- and Director
William J. Howard
/s/ William G. Cox Chief Operating Officer and Director April 14, 1998
- --------------------------------------
William J. Howard
/s/ Todd S. Brown Vice President, Chief Financial April 14, 1998
- -------------------------------------- Officer, Treasurer, and Director
Todd S. Brown (Principal Financial and Accounting
Officer)
/s/ John M. Holliman, III Director April 14, 1998
- --------------------------------------
John M. Holliman, III
/s/ Fred W. Martin Director April 14, 1998
- --------------------------------------
Fred W. Martin
/s/ C. Alan MacDonald Director April 14, 1998
- --------------------------------------
C. Alan MacDonald
</TABLE>
49
<PAGE>
DENAMERICA CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report....................................................................................F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997.......................................F-3
Consolidated Statements of Operations for each of three years in the period ended
December 31, 1997......................................................................................F-5
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in
the period ended December 31, 1997.....................................................................F-6
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1997......................................................................................F-7
Notes to Consolidated Financial Statements......................................................................F-8
</TABLE>
F-1
<PAGE>
Deloitte &
Touche LLP
- ------------ -------------------------------------------------------
Suite 1200 Telephone: (602) 234-5100
2901 North Central Avenue Facsimile: (602) 234-5186
Phoenix, Arizona 85012-2799
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
DenAmerica Corp.
Phoenix, Arizona
We have audited the consolidated balance sheets of DenAmerica Corp. and
subsidiaries (the "Company") as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DenAmerica Corp. and subsidiaries
at December 31, 1996 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
March 27, 1998
F-2
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,609 $ 1,267
Receivables 4,102 3,192
Inventories 3,520 3,244
Other current assets 4,151 5,564
Assets held for sale 28,700
--------- ---------
Total current assets 14,382 41,967
PROPERTY AND EQUIPMENT - Net 65,535 61,328
INTANGIBLE ASSETS - Net 80,618 51,545
DEFERRED INCOME TAXES 6,669 5,312
OTHER ASSETS 11,985 10,112
--------- ---------
TOTAL $ 179,189 $ 170,264
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 18,202 $ 16,511
Accrued compensation 8,487 6,354
Accrued taxes 4,636 4,522
Other current liabilities 8,424 8,363
Current portion of long-term obligations 7,662 42,634
--------- ---------
Total current liabilities 47,411 78,384
LONG-TERM OBLIGATIONS - Less current portion 94,132 78,418
OTHER LONG-TERM LIABILITIES 15,518 12,214
--------- ---------
Total liabilities 157,061 169,016
--------- ---------
COMMITMENTS AND CONTINGENCIES
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;
issued and outstanding, 13,399,277 and 13,447,777 shares, respectively 1,340 1,344
Additional paid-in capital 35,706 35,799
Accumulated deficit (14,918) (35,895)
--------- ---------
Total shareholders' equity 22,128 1,248
--------- ---------
TOTAL $ 179,189 $ 170,264
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except for Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
RESTAURANT SALES $ 74,683 $ 241,480 $ 300,579
------------ ------------ ------------
RESTAURANT OPERATING EXPENSES:
Food and beverage cost 20,343 65,966 82,255
Payroll and payroll related costs 25,025 82,794 103,451
Other operating expenses 19,213 63,583 82,305
Depreciation and amortization 2,936 7,000 9,367
Charge for impaired assets 523 14,100
------------ ------------ ------------
Total operating expenses 68,040 219,343 291,478
------------ ------------ ------------
RESTAURANT OPERATING INCOME 6,643 22,137 9,101
ADMINISTRATIVE EXPENSES 3,380 10,303 13,684
------------ ------------ ------------
OPERATING INCOME (LOSS) 3,263 11,834 (4,583)
INTEREST EXPENSE - Net 2,467 9,605 13,655
MINORITY INTEREST IN JOINT VENTURES 291 (256) (519)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 505 2,485 (17,719)
INCOME TAX PROVISION 305 870 3,258
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 200 1,615 (20,977)
EXTRAORDINARY LOSS - Net of tax of $331 497
------------ ------------ ------------
NET INCOME (LOSS) 200 1,118 (20,977)
PREFERRED STOCK DIVIDEND AND ACCRETION (593) (149)
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ (393) $ 969 $ (20,977)
============ ============ ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Before extraordinary item $ (0.06) $ 0.14 $ (1.56)
============ ============ ============
Applicable to common shareholders $ (0.06) $ 0.08 $ (1.56)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic 6,937,500 11,698,000 13,437,000
============ ============ ============
Diluted 6,937,500 11,844,000 13,437,000
============ ============ ============
</TABLE>
F-4
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
<S> <C> <C> <C> <C>
BALANCE, 1994 $ 7 $ 3,260 $ (2,310) $ 957
Preferred stock accretion (104) (104)
Preferred stock dividends (489) (489)
Net income 200 200
-------- -------- -------- --------
BALANCE, 1995 7 3,156 (2,599) 564
Preferred stock accretion (26) (26)
Preferred stock dividends (123) (123)
Merger related activity 1,301 30,395 (13,314) 18,382
Value of warrants issued in connection
with financing 1,109 1,109
Issuance of common stock in connection
with Series A Subordinated Notes repayment 25 975 1,000
Stock options exercised 7 97 104
Net income 1,118 1,118
-------- -------- -------- --------
BALANCE, 1996 1,340 35,706 (14,918) 22,128
Stock options exercised 4 93 97
Net loss (20,977) (20,977)
-------- -------- -------- --------
BALANCE, 1997 $ 1,344 $ 35,799 $(35,895) $ 1,248
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 200 $ 1,118 $(20,977)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,936 7,000 9,367
Amortization of deferred financing costs 144 350 763
Charge for impaired assets 523 14,100
Deferred income taxes 145 870 3,221
Deferred rent 196 249 645
Other - net (417) 241 (1,368)
Changes in operating assets and liabilities:
Receivables (75) (2,129) 910
Inventories (394) (425) (439)
Other current assets (14) (647) (727)
Accounts payable and accrued liabilities 4,242 3,037 (6,953)
-------- -------- --------
Net cash provided by (used in) operating activities 7,486 9,664 (1,458)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,003) (9,879) (8,147)
Purchase of intangibles (1,733) (1,705) (2,302)
Net cash paid to acquire fair value of assets (231)
Proceeds from sale of assets 2,422 4,133
-------- -------- --------
Net cash used in investing activities (8,736) (9,393) (6,316)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal reductions of long-term debt (1,154) (11,655) (25,018)
Proceeds from borrowings 4,031 13,361 31,353
Other (604) (549) 97
-------- -------- --------
Net cash provided by financing activities 2,273 1,157 6,432
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,023 1,428 (1,342)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 158 1,181 2,609
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,181 $ 2,609 $ 1,267
======== ======== ========
</TABLE>
(Continued)
F-6
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 2,397 $ 8,904 $ 10,033
-------- -------- --------
Income taxes $ 100 $ 36 $ 37
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Acquisitions:
Fair value of assets acquired $ 35,140
--------
Working capital deficit acquired $(28,750)
--------
Intangible assets (goodwill) $ 69,799
--------
Liabilities assumed $ (2,785)
--------
Notes issued $(64,222)
--------
Common stock issued
Capital expenditures financed through increase in obligations
under capital leases $ 12,700 $ 2,927 $ 2,409
-------- -------- --------
Issuance of common stock in connection with Series A
subordinated notes repayment $ 1,000
--------
Purchase of BEP and Franchisees financed through
sale/leaseback transactions $ 50,000 $ 5,440
-------- --------
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-7
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE FISCAL YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
(In Thousands Except for Share and Per Share Data)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - On March 29, 1996, Denwest Restaurant Corp.
("DRC") merged with and into American Family Restaurants ("AFR") with AFR
being the surviving corporation (the "Merger"). Upon consummation of the
Merger, AFR changed its name to DenAmerica Corp. (the "Company). The
Company is a multi-concept restaurant company, which operates restaurants
in 31 states. At December 31, 1997, the Company operated 176 Denny's
restaurants, 104 Black-eyed Pea restaurants and three other restaurants.
The Company owns its Black-eyed Pea brand and operates the Denny's
restaurants under the terms of franchise agreements whereby it is
obligated to remit advertising and royalty fees to the franchisor.
The consolidated financial statements include the accounts of DenAmerica
Corp., and its wholly-owned subsidiaries. All intercompany balances and
transactions are eliminated in these consolidated financial statements.
Significant Accounting Policies - A summary of significant accounting
policies is as follows:
a. Fiscal years - The Company's fiscal year is the 52 or 53 week period
ending the Wednesday closest to December 31. For clarity of
presentation, the Company's 1995, 1996 and 1997 fiscal years, which
represent the 52 week period ended December 25, 1995, the 53 week
period ended January 1, 1997 and the 52 week period ended December
31, 1997, have been described in the financial statements as the
years ended December 31, 1995, 1996 and 1997.
b. Cash equivalents consist of highly liquid investments, principally
certificates of deposit, purchased with initial maturities of three
months or less.
c. Inventories consist of food and beverages in restaurants and are
carried at the lower of cost or market. Cost is determined under a
method which approximates the last-in, first-out ("LIFO") method.
d. Assets held for sale are stated at the lower of cost or estimated
net realizable value and include certain property and equipment,
franchise costs and goodwill associated with certain restaurants
which were sold in March 1998 (Note 14).
e. Property, equipment and leased properties are recorded at cost.
Depreciation is computed under the straight-line depreciation method
over the estimated useful lives of the assets which range from 4-20
years. Leased properties consist of capitalized buildings and
equipment and leasehold improvements. Amortization is recorded
principally on the straight-line method over the lesser of the
estimated useful lives or the lives of the leases.
F-8
<PAGE>
f. Franchise rights - The franchise agreements with Denny's Inc.
require the Company to pay a franchise fee for each unit opened. The
fees are capitalized and amortization is recorded on the
straight-line method over the lives of the franchise agreements. The
franchise agreements provide for a term of 20 years. Upon expiration
of the franchise agreements, the franchisor may grant the Company
the right to extend the term of the franchise agreement. Also, at
termination the franchisor has the right, at its option, to purchase
the restaurant equipment at the lesser of the Company's cost (as
defined) or fair value.
g. Franchise revenue - The Company franchises the right to operate 29
and 3 Black-eyed Pea restaurants at the end of 1996 and 1997,
respectively, to third parties. Royalties are based on a percentage
of franchise restaurant sales and are recognized in the period in
which services are provided and the related franchisee sales occur.
Royalty revenues, which are included in restaurant revenues, were
approximately $621 and $1,142 during fiscal years 1996 and 1997,
respectively.
h. Preopening costs, goodwill and intangible assets - Preopening costs
are direct costs incurred in connection with the opening of new
restaurants are deferred and amortized on a straight-line basis over
a one-year period following the opening of the restaurant. Deferred
costs and intangible assets are recorded at cost. Goodwill
represents the excess of the cost of restaurants acquired over the
fair value of the net assets at the date of acquisition. Goodwill is
amortized using the straight-line method ranging from 12 to 40
years. The Company evaluates the possible impairment of goodwill and
intangible assets based on estimates of future undiscounted cash
flows allocated on an individual restaurant basis. As a result of
the planned disposition of assets (Note 14), the Company recorded an
impairment loss of $14,100.
i. Deferred financing costs are amortized using the effective interest
method over the terms of the related loans and included in other
assets. Deferred financing costs, net of amortization, totaled
$3,801 and $4,456 at December 31, 1996 and 1997, respectively.
j. Deferred rent represents the accrual resulting from recording rental
expense on a straight-line basis. As of December 31, 1996 and 1997,
deferred rent totaled $2,195 and $2,511, respectively.
k. Earnings per share - The Company presents earnings per share in
accordance with Statement of Financial Standards No. 128, Earnings
per Share ("SFAS No. 128"). SFAS No. 128 prescribes a presentation
of basic earnings per share, which is calculated utilizing only
weighted average common shares outstanding, and a diluted earnings
per share, which gives effect to all dilutive potential common
shares outstanding during the reporting periods. Earnings per share
for 1995 and 1996 has been restated in accordance with SFAS No. 128.
Earnings per share for the year ended December 31, 1996, has been
computed based upon the weighted average of the shares of the
Company's common stock received in connection with the Merger by the
former shareholders of DRC after deducting preferred stock dividends
and accretion on preferred stock of DRC outstanding prior to the
Merger, and the total outstanding shares of the Company's common
stock. Earnings per share for the year ended December 31, 1995, was
computed based upon the shares of DenAmerica Corp. common stock
received in connection with the Merger by the former shareholders of
DRC after deducting preferred stock dividends and accretion on
preferred stock of DRC outstanding prior to the Merger.
l. Stock based compensation - The Company applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for
its stock option plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Pro forma information
reflecting the fair value method is presented in Note 11.
F-9
<PAGE>
m. Reclassifications - Certain reclassifications have been made to the
1995 and 1996 financial statements to conform to the 1997
presentation.
n. Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
o. Fair value - The fair value of notes receivable approximates
carrying value due to the short-term nature of the notes. The fair
value of debt obligations is determined based on current borrowings
and repayment transactions. The fair value of the warrants were
determined using the Black-Scholes option pricing model.
p. New accounting standards - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS No. 130"), and No.
131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131"). Both of these standards are effective
for fiscal years beginning after December 15, 1997. SFAS No. 130
changes the reporting of certain items currently reported in the
stockholders' equity section of the balance sheet and requires that
comprehensive income and its components be prominently displayed in
the financial statements. SFAS No. 131 requires public companies to
report certain information about operating segments in their
financial statements, and establishes related disclosures about
products and services, geographic areas and major customers. The
Company will implement the interim and annual disclosures required
under these standards during 1998.
2. ACQUISITIONS AND DIVESTITURES
During 1996, the company primarily expanded the number of restaurants it
operates through certain mergers and acquisitions as discussed below:
The total purchase price of the Merger in 1996 was $31,400. This
amount was allocated to the assets of AFR acquired and liabilities
of AFR assumed, based upon their estimated fair value as of March
27, 1996. Assets acquired and liabilities assumed were deemed to
have fair values substantially equal to their historic book values,
except for property and equipment, certain intangible assets, and
certain liabilities related to the costs associated with closing
certain restaurants. Restaurant closing costs of $6,000 were
recorded in connection with the Merger.
On July 3, 1996, the Company acquired all of the issued and
outstanding common stock of Black-eyed Pea U.S.A., Inc. ("BEP") from
BEP Holdings, Inc. ("BEP Holdings") pursuant to a Stock Purchase
Agreement (the "BEP Acquisition"). In accordance with the terms and
conditions of the Stock Purchase Agreement, the effective accounting
date of the BEP Acquisition was June 24, 1996. The purchase price
for the stock of BEP consisted of (i) cash of $50,000, and (ii) a
promissory note in the principal amount of $15,000.
The BEP Acquisition has been accounted for using the purchase method
of accounting with the total purchase price of $65,000. Assets
acquired and liabilities assumed were deemed to have fair values
substantially equal to their historic book values, except for
property and equipment, intangible assets, deferred and current tax
accounts and certain liabilities associated with closing certain
restaurants. Restaurant closing costs of $1,500 were recorded in
connection with the acquisition.
F-10
<PAGE>
Additionally, during 1996, the Company sold the assets related to 23
restaurants operated under the "Ike's" and "Jerry's" trade names to
Mid-American Restaurants, Inc. ("Mid-American"). As payment for the
restaurants, Mid-American issued to the Company a promissory note in
the principal amount of $4,600 (the "Mid-American Note"). The
Mid-American Note is secured by the assets sold, requires monthly
payments of $65 to $85, and bears interest at the rate of 10% per
annum through June 30, 2001, 11% per annum through June 30, 2002,
and 12% per annum through June 30, 2003. All unpaid principal and
interest on the Mid-American Note will be due and payable on June
30, 2003.
The following represents the summary pro forma results of operations as if
the Merger and the BEP Acquisition had occurred at the beginning of fiscal
1995. The historical accounts of BEP include (i) store closing costs of
$10,200 during the period ended December 31, 1995, and (ii) losses on the
disposition of assets of $717 and $229 for the periods ended December 31,
1995 and December 31, 1996, respectively. These amounts are included in
the pro forma results of operations shown below. The pro forma results are
not necessarily indicative of the results that will occur in the future.
1995 1996
(52 weeks) (53 weeks)
Restaurant revenues $ 327,035 $ 336,589
Income (loss) before extraordinary item (1,634) (3,952)
Net income (loss) (1,634) (4,449)
Earnings (loss) per share (0.13) (0.38)
During 1997, the Company (i) converted 10 non-branded restaurants to the
Denny's concept; (ii) sold 11 non-branded restaurants; (iii) sold or
closed 17 Denny's restaurants; (iv) developed four new Black-eyed Pea and
one new Denny's restaurants; (v) purchased the leasehold interests in nine
Black-eyed Pea restaurants from franchisees; and (vi) closed two
Black-eyed Pea restaurants and sold the related leasehold interests. These
transactions follow the Company's strategy of focusing on the Black-eyed
Pea concept as well as those Denny's restaurants that achieve certain
operational and geographic efficiencies. See Note 14 for information
regarding the disposition of additional restaurants subsequent to December
31, 1997.
In connection with the restaurant sales, the Company recognized a gain of
approximately $850, which is included as a reduction of other restaurant
operating expenses.
In connection with the BEP franchisee transaction, the Company and one of
the franchisees settled certain threatened litigation. Under this
settlement, the Company will forego future royalty payments from 13
franchised restaurants located in Colorado operated by the franchisee. The
effect of the loss of royalty income will be partially offset by operating
income from the restaurants acquired. In conjunction with the closing of
the BEP franchisee transaction, CNL acquired certain assets directly from
the BEP franchisees and entered into capital leases with the Company. The
value of the leases exceeded the purchase price, resulting in the Company
receiving approximately $2,700 in cash that has been recorded as a
deferred gain to be amortized over the life of the leases.
F-11
<PAGE>
In October 1997, the Company entered into a series of transactions with
CNL Group, Inc. ("CNL"). The Company utilized the proceeds from these
transactions, which totaled approximately $25,000, to repay senior debt
obligations of the Company. In connection with these transactions, the
Company purchased CNL's 50% interest in three joint ventures, which
operated a total of 16 Denny's restaurants, and the land and buildings for
nine of the restaurants that were previously leased from CNL. The Company
subsequently entered into 15-year sale-leaseback arrangements with CNL for
the nine Denny's restaurants described above and received $8,000. In
addition, the Company sold eight buildings located on ground leases to CNL
for proceeds of $4,600 and entered into capital leases for these
locations. The Company also entered into equipment notes payable with CNL
totaling approximately $12.5 million. No gain or loss was recognized on
these transactions.
3. PROPERTY AND EQUIPMENT
Property and equipment including assets under capitalized leases as of the
fiscal years ended consist of the following:
1996 1997
Buildings $21,440 $32,093
Restaurant equipment 27,690 29,069
Leasehold improvements 19,468 12,360
Other 7,951 2,451
------- -------
Total 76,549 75,973
Less accumulated depreciation and amortization 11,014 14,645
------- -------
Equipment and leasehold improvement - net $65,535 $61,328
======= =======
Assets recorded under capital leases as of the fiscal years ended consist
of the following:
1996 1997
Buildings $19,457 $30,110
Other 7,059 11,368
------- -------
Total 26,516 41,478
Less accumulated amortization 4,021 6,106
------- -------
Total $22,495 $35,372
======= =======
Depreciation and amortization expense was $1,977, $4,594 and $5,324 for
the fiscal years ended 1995, 1996 and 1997, respectively.
In connection with the disposition of restaurants subsequent to December
31, 1997 described in Note 14, the Company reclassified $11,616 of
property and equipment to assets held for sale.
F-12
<PAGE>
4. INTANGIBLE ASSETS
Intangible assets as of the fiscal years ended consist of the following:
1996 1997
Goodwill $78,799 $52,653
Franchise rights 2,238 1,960
Pre-opening costs 2,382 3,697
Favorable lease arrangements 1,059 1,130
------- -------
Total 84,478 59,440
Less accumulated amortization 3,860 7,895
------- -------
Intangible assets - net $80,618 $51,545
======= =======
Amortization expense was $959, $2,406 and $4,043 for the fiscal years
ended 1995, 1996 and 1997, respectively.
In connection with the disposition of restaurants subsequent to December
31, 1997 described in Note 14, the Company reclassified $29,000 of
goodwill to assets held for sale.
5. OTHER CURRENT LIABILITIES
Other current liabilities as of the fiscal years ended consist of the
following:
1996 1997
Accrued insurance $1,500 $2,022
Estimated closed restaurant obligations 1,000 1,000
Rent 1,848 452
Due to franchisor 1,068 315
Interest 615 2,544
Other 2,393 2,030
------ ------
Total accrued liabilities $8,424 $8,363
====== ======
In 1996 and 1997, other long-term liabilities includes long-term reserves
of $5,690 and $3,491, respectively, for estimated obligations for closed
restaurants and $5,100 and $1,473, respectively, for estimated obligations
for insurance.
6. RESERVES FOR STORE CLOSINGS
The following is a summary of store closing reserves including additions
recorded in connection with mergers and acquisitions:
1995 1996 1997
Beginning Balance $ 584 $ 871 $6,971
Additions (Note 2) 523 7,150
Less charges 236 1,050 2,480
------ ------ ------
Ending Balance $ 871 $6,971 $4,491
====== ====== ======
F-13
<PAGE>
7. DEBT OBLIGATIONS
Debt obligations as of the fiscal years ended consist of the following:
1996 1997
LONG-TERM OBLIGATIONS:
Obligations under credit facility $39,190
CNL obligations 22,673
Series B subordinated notes (face value $18,250) 15,204 15,690
BEP purchase note 14,901
Other notes payable 608 659
Capital lease obligations (Note 8) 24,229 39,396
------- -------
Total long-term obligations $94,132 $78,418
======= =======
CURRENT PORTION OF LONG-TERM OBLIGATIONS:
Obligations under credit facility $ 5,500 $22,777
CNL obligations 1,885
BEP purchase note 15,285
Other notes payable 283 206
Capital lease obligations (Note 8) 1,879 2,481
------- -------
Total current obligations $ 7,662 $42,634
======= =======
A summary of the Company's debt obligations is as follows:
(a) Credit Facility
In conjunction with the Merger and the BEP acquisition (Note 2), the
Company entered into a credit facility with Banque Paribas, as
agent, and the Company's other senior lenders (the "Credit
Facility"). The Credit Facility currently consists of a term loan
and a $15,000 revolving credit loan. These loans bear interest at
150 basis points over prime, which was 8.5% at December 31, 1997. As
of December 31, 1997, the Company had outstanding borrowings of
$10,050 under the term loan and $12,727 under the revolving credit
loan. In connection with the sale of certain restaurants in March
1998 (Note 14), the Company repaid $8,550 of the term loan. The
remaining balance of the term loan is due as of June 30, 1998 and
the revolving credit loan matures in December 2001. At December 31,
1997, the fair value of the Credit Facility approximates carrying
value as the balance due is current. In connection with the Credit
Facility, the Company issued to the lender six-year warrants to
acquire an aggregate of 738,028 shares of the Company's common
stock. The exercise prices for the shares range from $4.30 to $6.45
per share. At the date of issuance, the warrants were valued at
$1,109. At December 31, 1997, the fair value of the warrants is
$889.
The Company was not in compliance with certain of its debt covenants
under the Credit Facility at December 31, 1997, for which the
Company has received waivers through March 25, 1998. Based upon
information currently available, the Company does not believe that
it will be in compliance
F-14
<PAGE>
with its debt covenants beyond the date of its waiver. Therefore,
the Company has classified its obligations under the Credit Facility
as current in the consolidated financial statements as of December
31, 1997. The Company intends to pursue various alternatives to
either restructure its current Credit Facility or seek additional
lenders.
(b) CNL Obligations
As described in Note 2, in October 1997, the Company entered into a
series of transactions with CNL. As a result, the Company entered
into certain promissory notes totaling $13,250. The notes bear
interest at 10% payable monthly, mature in November 2004, and are
collateralized with certain equipment assets located in 44 Denny's
restaurants. At December 31, 1997, the fair value of the promissory
notes approximate carrying value as the interest rate approximates
borrowing rates currently available to the Company.
In addition, in October 1997 the Company purchased CNL's interest in
three joint ventures, which operated a total of 16 Denny's
restaurants, for consideration of (i) a $7,700 subordinated
promissory note, bearing interest at 9%, payable quarterly and
maturing in September 2007; and (ii) a $4,400 face value Convertible
Redeemable Debenture bearing interest at 5%, recorded net of a $658
discount at December 31, 1997, with interest only payable quarterly
and maturing in September 2002. At December 31, 1997, the fair value
of the subordinated promissory note approximates carrying value as
the rate approximates borrowing rates currently available to the
Company. The fair value of the convertible redeemable debenture is
$4,400.
(c) Series B Subordinated Notes
The Series B subordinated notes ("Series B Notes") bear interest at
13% and mature in March 2003. In connection with the issuance of the
Series B Notes, the Company issued warrants to purchase an aggregate
of 666,000 shares of the Company's common stock at an exercise price
of $0.01 per share. Certain holders of the Series B Notes have
deferred the interest due as of September 30, 1997 and March 31,
1998 and the Company has received waivers from those holders for
noncompliance of certain of the debt covenants under the Series B
Notes. The fair value of the Series B Notes at December 31, 1997, is
$18,250.
(d) BEP Purchase Note
The BEP purchase note ("BEP Note") is an unsecured obligation of the
Company in the principal amount of $15,285. The BEP Note bears
interest at 12% and matures March 31, 2002. As part of a litigation
settlement agreement with the holder of the BEP Note in September
1997, the Company has the option to repurchase the promissory note
for $13,000 on or before March 27, 1998. In addition, if repaid by
March 27, 1998, common stock purchase warrants to acquire
approximately 1,000,000 shares of Common Stock at an exercise price
of $1.90 per share will be canceled. Because of the Company's
intention to repay the BEP Note to obtain the discount, the BEP Note
was classified as current at December 31, 1997. The BEP Note was
repaid and the warrants canceled as of March 27, 1998 (Note 14). The
fair value of the BEP Note at December 31, 1997, is $13,000.
F-15
<PAGE>
The aggregate annual maturities of long-term debt, excluding capital lease
obligations, for the years subsequent to December 31, 1997, are as
follows:
1998 $40,153
1999 2,091
2000 2,300
2001 2,534
2002 2,791
Thereafter 29,306
-------
Total $79,175
=======
8. LEASES
The Company's operations utilize leased property, facilities and
equipment. At December 31, 1997, substantially all of the Company's
restaurants are operated under lease arrangements which provide for a
fixed base rent and, in some instances, contingent rentals based on a
percentage of gross revenues. Initial terms of the leases generally are
not less than 20 years, exclusive of options to renew. The leases have
expiration dates through June 2015 and contain various renewal and
purchase options. Future minimum lease payments do not include amounts
payable by the Company for maintenance costs, real estate taxes or
contingent rentals payable based on a percentage of sales in excess of
stipulated amounts of the leases. Future minimum lease payments under
noncancelable operating leases and the present value of future minimum
capital lease payments, including certain leases relating to restaurants
sold as of December 31, 1997, and restaurants sold as described in Note 14
are as follows:
<TABLE>
<CAPTION>
Operating Leases
----------------------
Minimum Minimum
Capital Lease Sublease
Leases Payments Payments
<S> <C> <C> <C>
1998 $ 6,853 $ 25,555 $ (5,731)
1999 6,405 24,729 (5,406)
2000 5,687 24,063 (5,356)
2001 5,467 23,817 (5,368)
2002 5,481 23,301 (5,227)
Subsequent years 54,748 208,562 (21,090)
-------- -------- --------
Total 84,641 $330,027 $(48,178)
Less imputed interest - interest rates ranging from 10% to 17% 42,764 ======== ========
--------
Present value of minimum capital lease obligation 41,877
Less current portion of capital lease obligation 2,481
--------
Long-term portion of capital lease obligation $ 39,396
========
</TABLE>
Obligations under operating leases related to restaurants sold which are
being paid directly by the purchaser but for which the Company continues
to be contingently liable are included in minimum sublease payments. Sold
units are discussed in Notes 2 and 14.
F-16
<PAGE>
The following is a summary of rental expense, excluding sublease amounts,
under all operating leases for the fiscal years ended:
1995 1996 1997
Minimum rentals $ 5,150 $17,852 $19,060
Contingent rentals 282 823 510
------- ------- -------
Total rent expense $ 5,432 $18,675 $19,570
======= ======= =======
9. INCOME TAXES
Income taxes (benefit) provisions as of the fiscal years ended consist of
the following:
1995 1996 1997
Current:
Federal $ 160 $ 37
Deferred:
Federal 123 $ 680 2,727
State 22 190 494
------ ------ ------
Total deferred 145 870 3,221
------ ------ ------
Total income tax provision $ 305 $ 870 $3,258
====== ====== ======
A reconciliation of the (benefit) provisions for income taxes and the
amounts that would be computed using Federal statutory tax rates for the
fiscal years ended are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Computed expected tax expense (benefit) $ 177 $ 869 $ (6,205)
State income taxes - net of federal benefit 25 124 (886)
Nondeductible expenses/(primarily goodwill) 267 11,191
FICA tip credits and other 103 (390) (842)
-------- -------- --------
Total $ 305 $ 870 $ 3,258
======== ======== ========
</TABLE>
Deferred income tax assets for the fiscal years ended are as follows:
1996 1997
Current deferred income tax assets:
Accrued self insurance and contingent losses $ 2,701 $ 827
Other accrued expenses 254 264
------- -------
Total current deferred income tax assets included in
other current assets $ 2,955 $ 1,091
======= =======
Non-current deferred income tax assets (liabilities):
Store closing $ 2,721 $ 1,991
Intangibles (3,549) (4,214)
Net operating loss carryforward 6,126 9,716
Valuation allowance (2,789) (2,789)
Alternative minimum tax credit carryforward 1,370 2,073
Depreciation, capitalized leases and deferred gain 1,909 1,584
Impairment of assets (Note 14) (4,588)
Other 881 1,539
------- -------
Net non-current deferred income tax assets $ 6,669 $ 5,312
======= =======
F-17
<PAGE>
As of December 31, 1997, the Company has approximately $24,502 of net
operating loss carryforwards that expire beginning in 2004 and alternative
minimum tax credit carryforwards of approximately $2,073. The Company
maintains a valuation allowance of $2,789 relating to certain net
operating loss carryforwards acquired in connection with the Merger.
10. COMMITMENTS AND CONTINGENCIES
In November 1996, the Company entered into a self-insured program whereby
the Company is obligated for the first $100 of individual health insurance
claims. The Company is involved in various legal matters that management
considers to be in the normal course of business. In management's opinion,
all matters will be settled without material effect on the Company's
financial position or results of operations.
11. STOCK OPTIONS
The Company has three stock option plans, the 1992, 1995 and 1996 plans
under which 1,000,000, 300,000, and 500,000, respectively, shares of the
Company's common stock have been reserved for issuance. Options granted
under these plans expire up to ten years after the date of grant.
A summary of changes in stock options is as follows:
Weighted
Average
Option Option
Shares Price
AFR Outstanding at March 29, 1996 506,500 $4.07
Granted 774,800 4.15
Exercised (70,000) 2.00
---------- -----
Outstanding at December 31, 1996 1,211,300 $4.13
Granted 100,000 3.44
Exercised (48,500) 2.00
---------- -----
Outstanding at December 31, 1997 1,262,800 $4.21
========== =====
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<S> <C> <C>
Range of exercise prices $2.00 - $4.00 $4.75 - $6.00
Shares outstanding in range 865,300 397,500
Weighted-average exercise price $ 3.73 $ 5.26
Weighted-average remaining contractual life 7.68 7.48
Shares currently exercisable 480,420 229,500
Weighted-average exercise price of shares currently exercisable $ 3.58 $ 5.49
</TABLE>
F-18
<PAGE>
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under the plans
consistent with the method of Statement of Financial Accounting Standards
No. 123, the Company's net income (loss) applicable to common shareholders
and net income (loss) applicable to common shareholders per share for the
years ended December 31, 1996 and 1997 would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Net income (loss) applicable to common shareholders - as reported $ 969 $ (20,977)
======= ==========
Net income (loss) applicable to common shareholders - pro forma $ 707 $ (21,239)
======= ==========
Basic and diluted income (loss) per share - as reported $ 0.08 $ (1.56)
======= ==========
Basic and diluted income (loss) per share - pro forma $ 0.06 $ (1.56)
======= ==========
</TABLE>
For 1996, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants: no dividend yield; expected volatility of
50%; risk free interest rates ranging from 6% to 7%; and expected lives of
five years.
12. EARNINGS PER SHARE
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Income (loss) before extraordinary item $ 200 $ 1,615 $(20,977)
Less: Extraordinary loss (497)
Preferred stock dividend and accretion (593) (149)
-------- -------- --------
Net (loss) income applicable to common shareholders (393) 969 (20,977)
Shares basic income per share 6,938 11,698 13,437
Dilutive effect of common stock equivalents 146
-------- -------- --------
Shares diluted income per share $ 6,938 $ 11,844 $ 13,437
======== ======== ========
Basic and diluted (loss) income per share:
Before extraordinary item $ (0.06) $ 0.14 $ (1.56)
======== ======== ========
Applicable to common shareholders $ (0.06) $ 0.08 $ (1.56)
======== ======== ========
</TABLE>
F-19
<PAGE>
13. RELATED PARTY TRANSACTIONS
During fiscal years ended December 31, 1995, 1996 and 1997, the Company
entered into a number of transactions with officers and/or shareholders of
the Company or affiliated companies. The following summarizes those
transactions for the fiscal years then ended:
1995 1996 1997
Advances due from officers and shareholders $ 35 $ 435 $ 378
====== ====== ======
Note receivable from shareholders $2,600 $2,600 $2,600
====== ====== ======
LH Leasing (described below) $1,902 $3,804
====== ======
Lease expense paid to shareholders $ 40 $ 100 $ 35
====== ====== ======
In connection with the financing of the BEP Acquisition, LH Leasing
Company, Inc. ("LH Leasing"), a corporation owned by Jack M. Lloyd and
William J. Howard, purchased from the Company for cash in the amount of
$14,250 the equipment located at 62 Black-eyed Pea restaurants leased by
BEP, a wholly owned subsidiary of the Company, or Texas BEP, L.P. ("Texas
BEP"), a limited partnership in which BEP is the general partner and in
which a wholly owned subsidiary of BEP is the limited partner.
Concurrently with the sale of the equipment to LH Leasing, LH Leasing
leased the equipment to the Company and the Company subleased the
equipment to BEP or Texas BEP. The equipment lease has a term of five
years and grants the Company an option to purchase the equipment at its
fair market value upon the expiration of the lease. The terms of the
subleases between the Company and each of BEP and Texas BEP are consistent
with the terms set forth in the equipment lease between the Company and LH
Leasing. Messrs. Lloyd and Howard formed LH Leasing as an accommodation to
the Company to enable it to satisfy the requirements of the Company's
senior lenders. Messrs. Lloyd and Howard received no material compensation
for the transactions involving the Company and LH Leasing.
The note receivable from shareholder, which is included in other current
assets at December 31, 1997, bears interest at 6% and is due in November
1998. Related parties of the Company are the holders of $18,250 of the
Series B Notes (discussed in Note 7).
14. SUBSEQUENT EVENTS
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 BEP Note 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 a charge for impaired assets
associated with the restaurants sold of approximately $14,100,
representing the write-off of intangibles.
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 $700,000 plus a note in the principal amount of $400,000. The Company
utilized the proceeds from this transaction to permanently reduce its
outstanding borrowings under the term loan portion of its Credit Facility.
F-20
<PAGE>
15. QUARTERLY DATA (UNAUDITED)
The following table presents selected unaudited quarterly operating
results for the two-year period ended December 31, 1997. The Company
believes that all necessary adjustments have been included in the amounts
shown below to present fairly the related quarterly results.
<TABLE>
<CAPTION>
1996
----------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
(13 weeks) (14 weeks) (13 weeks) (13 weeks)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Restaurant sales $ 20,161 $ 59,012 $ 84,599 $ 77,708
Operating (loss) income (178) 3,873 5,897 2,242
(Loss) income before
extraordinary item (677) 697 1,782 (187)
Net (loss) income (1,174) 697 1,782 (187)
Net (loss) income applicable to
common shareholders (1,323) 697 1,782 (187)
Basic and diluted (loss) income per share:
Before extraordinary item $ (0.10) $ 0.05 $ 0.13 $ (0.01)
Applicable to common shareholders $ (0.19) $ 0.05 $ 0.13 $ (0.01)
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
(13 weeks) (13 weeks) (13 weeks) (13 weeks)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Restaurant sales $ 76,114 $ 76,185 $ 75,494 $ 72,786
Operating income (loss) 2,113 2,527 4,083 (13,306)
Net (loss) income applicable to common
shareholders (589) (350) 531 (20,569)
Basic and diluted (loss) income per share
applicable to common shareholders $ (0.04) $ (0.03) $ 0.04 $ (1.53)
</TABLE>
* * * * * *
F-21
EXHIBIT 12.1
DENAMERICA CORP.
RATIO OF INCOME TO FIXED CHARGES
(000 omitted)
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (Loss) Before Income Taxes
and Extraordinary Item ...... $ 284 $ (550) $ 505 $ 2,485 $(17,719)
Fixed Charges:
Rental Expense .............. 1,111 1,584 2,499 7,660 10,132
Interest .................... 736 1,301 2,467 9,255 11,962
Debt Expense Amortization ... -- 15 144 350 1,939
-------- -------- -------- -------- --------
Total Fixed Charges ...... 1,847 2,900 5,110 17,265 24,023
-------- -------- -------- -------- --------
Net Income as Adjusted .......... $ 2,131 $ 2,350 $ 5,615 $ 19,750 $ 6,314
======== ======== ======== ======== ========
Ratio ........................... 1.15 1.10 1.14
======== ======== ========
Amount Inadequate to Cover
Fixed Charges ............... $ 550 $ 17,719
======== ========
</TABLE>
EXHIBIT 21.2
SUBSIDIARIES OF DENAMERICA CORP.
State of Incorporation
Subsidiary or Organization
- ------------------------------------- ----------------------
Phoenix Foods, Inc. Florida
Black-eyed Pea U.S.A., Inc.(1) Texas
- -------------------------
(1) Black-eyed Pea U.S.A., Inc. has complete or majority ownership of eight
subsidiaries that operate in the United States.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
33-93192 and Registration Statement No. 333-09731 of DenAmerica Corp. on Forms
S-8, and the incorporation by reference in the Registration Statement No.
333-07019 of DenAmerica Corp. on Form S-3 of our report dated March 27, 1998,
appearing in this Annual Report on Form 10-K of DenAmerica Corp. for the year
ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP.
Phoenix, Arizona
April 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR PURPOSES OF SECTION 11 OF THE
SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR
OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A
PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS
SUCH FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,267
<SECURITIES> 0
<RECEIVABLES> 3,192
<ALLOWANCES> 0
<INVENTORY> 3,244
<CURRENT-ASSETS> 41,967
<PP&E> 75,973
<DEPRECIATION> 14,645
<TOTAL-ASSETS> 170,264
<CURRENT-LIABILITIES> 78,384
<BONDS> 78,418
0
0
<COMMON> 1,344
<OTHER-SE> (96)
<TOTAL-LIABILITY-AND-EQUITY> 170,264
<SALES> 300,579
<TOTAL-REVENUES> 300,579
<CGS> 82,255
<TOTAL-COSTS> 82,255
<OTHER-EXPENSES> 222,907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,655
<INCOME-PRETAX> (17,719)
<INCOME-TAX> 3,258
<INCOME-CONTINUING> (20,977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,977)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
