UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File Number 1-13226
PHOENIX RESTAURANT GROUP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-1861457
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7373 N. Scottsdale Road
Suite D-120, Scottsdale AZ 85253 85253
- ---------------------------------------- ----------
(address of principal executive offices) (zip code)
(602) 483-7055
(registrant's telephone number, including area code)
DenAmerica Corp.
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's class of common stock as of the latest
practicable date, is as follows: 13,485,277 shares of Common Stock, $.10 par
value, as of August 13, 1999.
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
(FORMERLY DENAMERICA CORP.)
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets -
December 30, 1998 and June 30, 1999.............................. 3
Condensed Consolidated Statements of Operations - 13-Week Periods
ended July 1, 1998 and June 30, 1999
and 26-Week Periods ended July 1, 1998 and June 30, 1999......... 4
Condensed Consolidated Statements of Cash Flows - 13-Week Periods
ended July 1, 1998 and June 30, 1999
and 26-Week Periods ended July 1, 1998 and June 30, 1999......... 5
Notes to Condensed Consolidated Financial Statements............... 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 9
PART II. OTHER INFORMATION.................................................. 16
SIGNATURES......................................................... 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
PHOENIX RESTAURANT GROUP, INC. AND SUBSIDIARIES
(FORMERLY DENAMERICA CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
DECEMBER 30, JUNE 30,
1998 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,330 $ 4,480
Receivables 2,636 3,165
Inventories 2,917 2,867
Other current assets 5,533 4,667
--------- ---------
Total current assets 13,416 15,179
PROPERTY AND EQUIPMENT, net 55,648 54,757
INTANGIBLE ASSETS, net 50,580 46,986
DEFERRED INCOME TAXES 5,578 6,995
OTHER ASSETS 9,285 8,088
--------- ---------
TOTAL $ 134,507 $ 132,005
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 18,026 $ 15,554
Accrued compensation 5,402 5,344
Accrued taxes 5,089 4,090
Other current liabilities 8,946 9,824
Current portion of long-term debt 20,791 6,791
--------- ---------
Total current liabilities 58,254 41,603
LONG-TERM DEBT, LESS CURRENT PORTION 72,494 92,922
OTHER LONG-TERM LIABILITIES 7,093 6,445
--------- ---------
Total liabilities 137,841 140,970
--------- ---------
SHAREHOLDERS' DEFICIT
Preferred stock, $.01 par value; authorized,
5,000,000 shares; issued and outstanding none
Common stock $.10 par value; authorized, 40,000,000
shares; 13,485,277 shares issued and outstanding 1,349 1,349
Additional paid-in capital 35,869 35,869
Accumulated deficit (40,552) (46,183)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT (3,334) (8,965)
--------- ---------
TOTAL $ 134,507 $ 132,005
========= =========
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
PHOENIX RESTAURANT GROUP, INC. AND SUBSIDIARIES
(FORMERLY DENAMERICA CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
13-Week Period Ended 26-Week Period Ended
---------------------- ----------------------
July 1, June 30, July 1, June 30,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
RESTAURANT SALES $ 62,066 $ 61,801 $ 134,946 $ 122,742
--------- --------- --------- ---------
RESTAURANT OPERATING EXPENSES:
Food and beverage costs 17,100 16,775 37,107 33,238
Payroll and payroll related costs 20,950 21,341 46,052 42,160
Depreciation and amortization 1,943 1,676 3,730 3,361
Other restaurant operating expenses 17,469 17,425 37,058 34,296
Charge for impaired assets -- 3,000 -- 3,000
--------- --------- --------- ---------
Total operating expenses 57,462 60,217 123,947 116,055
--------- --------- --------- ---------
RESTAURANT OPERATING INCOME 4,604 1,584 10,999 6,687
ADMINISTRATIVE EXPENSES 3,030 2,950 6,048 5,781
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 1,574 (1,366) 4,951 906
INTEREST EXPENSE, net 3,122 3,389 6,548 5,995
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS (1,548) (4,755) (1,597) (5,089)
INCOME TAX BENEFIT (487) (596) (504) (731)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY
ITEMS (1,061) (4,159) (1,093) (4,358)
EXTRAORDINARY ITEMS-(LOSS)/GAIN
ON EARLY EXTINGUISHMENT OF DEBT
net of income tax expense/(benefit)
of $914 and $(686) -- (1,273) 1,371 (1,273)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (1,061) $ (5,432) $ 278 $ (5,631)
========= ========= ========= =========
Basic and diluted income (loss) per share
Before extraordinary item $ (.08) $ (.31) $ .08 $ (.32)
========= ========= ========= =========
Net income (loss) $ (.08) $ (.39) $ .02 $ (.41)
========= ========= ========= =========
Basic and diluted weighted average shares
outstanding
Basic 13,447 13,485 13,447 13,485
Diluted 13,447 13,925 13,447 13,705
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PHOENIX RESTAURANT GROUP, INC. AND SUBSIDIARIES
(FORMERLY DENAMERICA CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13-Week Period Ended 26-Week Period Ended
-------------------- --------------------
July 1, June 30, July 1, June 30,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,061) $ (5,432) $ 278 $ (5,631)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,943 1,676 3,730 3,361
Amortization of deferred financing costs 245 90 491 181
Charge for impaired assets -- 3,000 -- 3,000
Extraordinary items -- 1,273 (1,371) 1,273
Deferred income taxes (487) (596) (729) (731)
Deferred rent 69 (8) 146 53
Other (381) (319) (189) (534)
Changes in operating assets and
liabilities net of dispositions:
Receivables (135) (558) 527 (529)
Inventories 71 99 192 50
Other current assets 263 424 669 590
Accounts payable and accrued liabilities (3,428) 395 (5,821) (698)
-------- -------- -------- --------
Net cash provided by (used in)
operating activities (2,901) 44 (2,077) 385
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (443) (948) (1,187) (2,407)
Purchase of intangibles (61) (84) (69) (120)
Proceeds from the sale of assets -- -- 25,900 --
-------- -------- -------- --------
Net cash provided by (used in) investing activities (504) (1,032) 24,644 (2,527)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings, net 4,738 5,521 3,671 6,378
Debt issuance costs -- (1,033) -- (1,033)
Note receivable collections 1,621 595 1,715 733
Principal reductions on long-term obligations (2,532) (878) (27,199) (1,786)
-------- -------- -------- --------
Net cash used in financing activities 3,827 4,205 (21,813) 4,292
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 422 3,217 754 2,150
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,599 1,263 1,267 2,330
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 2,021 $ 4,480 $ 2,021 $ 4,480
======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,187 $ 2,191 $ 5,233 $ 4,064
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
PHOENIX RESTAURANT GROUP, INC. AND SUBSIDIARIES
(FORMERLY DENAMERICA CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Phoenix Restaurant Group, Inc. and Subsidiaries (formerly DenAmerica Corp.) (the
"Company") have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Effective July 2, 1999, the Company changed
its name from DenAmerica Corp. to Phoenix Restaurant Group, Inc. In the opinion
of the Company's management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
However, these operating results are not necessarily indicative of the results
expected for the full year. These statements should be read in conjunction with
the consolidated financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1998.
The Company currently operates 200 family-oriented, full-service restaurants in
26 states, primarily in the southwestern, midwestern, western, and southeastern
United States. The Company owns and operates 101 Black-eyed Pea restaurants,
primarily in Texas, Georgia, Arizona, Oklahoma, and the Washington, D.C. area.
The Company also owns and operates 99 Denny's restaurants, which represents
approximately 5.8% of the Denny's system and makes the Company the largest
Denny's domestic franchisee in terms of revenue and the number of restaurants
operated.
(2) 1998 ASSET DIVESTITURES
In March 1998, the Company completed the sale of 63 Denny's and eight
non-branded restaurants, of which six were closed, to a Denny's franchisee for
gross proceeds of $28,700. Net cash proceeds of $25.2 million were used to repay
debt obligations at a $2,400 discount. The Company has included the $2,400
before-tax discount as an extraordinary item in the accompanying 1998 financial
statements.
In a separate transaction completed in March 1998, the Company also sold five
Denny's restaurants for cash of $700 plus a note in the principal amount of
$400. The Company has recorded a gain of approximately $575 on this transaction,
which is included as a partial offset to other restaurant operating expenses.
6
<PAGE>
(3) OTHER MATTERS
On June 30, 1999, the Company completed the initial phase of a $20.1 million
financing agreement with CNL APF Partners, LP ("CNL") whereby CNL purchased the
remaining outstanding indebtedness under the Company's existing senior credit
facility and advanced an additional $5.4 million to the Company. As of June 30,
1999, the Company was in compliance with the terms and conditions of its various
debt agreements.
In conjunction with the aforementioned transaction, the Company and Denny's,
Inc. entered into an agreement whereby approximately $2.6 million of royalty and
advertising obligations were converted into notes payable. Approximately
$950,000 of these notes payable will be satisfied through the cancellation of a
Denny's development rights agreement and the transfer or assignment of three
restaurant leasehold properties from the Company to Denny's, Inc. The remaining
note payable of $1.7 million bears interest at 11%, is due in November 2000, and
is secured by the leasehold interests and equipment in four Denny's restaurants.
In connection with these transactions the Company has recognized a gain of
approximately $182,000 which was included in other operating restaurant expenses
in the accompanying financial statements. This transaction has been reflected as
a non-cash transaction in the accompanying statement of cash flows.
As of June 30, 1999, in connection with the CNL transaction described above, the
Company wrote off approximately $2.0 million of deferred financing costs. The
Company has included the $2.0 million before-tax amount as an extraordinary item
in the accompanying financial statements.
During the second quarter of 1999, the Company has identified certain Denny's
restaurants which may be sold over the next several quarters. The Company has
determined that the carrying value of the assets exceeds the probable purchase
price attributable to these restaurants and has recorded a charge for impaired
goodwill and intangible assets of $3.0 million in the accompanying financial
statements.
7
<PAGE>
(4) BUSINESS SEGMENTS
The Company operates family-oriented, full-service restaurants under two
separate concepts, Black-eyed Pea and Denny's. The Company owns the Black-eyed
Pea brand and operates the Denny's restaurants under the terms of franchise
agreements. The two concepts have separate management teams and reporting
infrastructures. The Company's revenue and restaurant operating income for the
thirteen-week and twenty six-week periods ended June 30, 1999 and July 1, 1998
are as follows:
13-WEEK PERIOD 26-WEEK PERIOD
ENDED JUNE 30 ENDED JUNE 30
------------------- -------------------
REVENUE 1998 1999 1998 1999
-------- -------- -------- --------
Black-eyed Pea $ 35,992 $ 35,288 $ 71,861 $ 70,901
Denny's 25,988 26,513 62,669 51,841
Non-branded 86 -- 416 --
-------- -------- -------- --------
Total revenues $ 62,066 $ 61,801 $134,946 $122,742
======== ======== ======== ========
RESTAURANT OPERATING INCOME (LOSS)
Black-eyed Pea $ 3,200 $ 2,504 $ 6,800 $ 5,946
Denny's 1,474 1,898 3,739 3,559
Non-branded (70) -- (115) --
Charge for impaired assets -- (3,000) -- (3,000)
Gain on sale of assets -- 182 575 182
-------- -------- -------- --------
Total restaurant operating income 4,604 1,584 10,999 6,687
Administrative expenses 3,030 2,950 6,048 5,781
-------- -------- -------- --------
Total operating income (loss) $ 1,574 $ (1,366) $ 4,951 $ 906
======== ======== ======== ========
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In two separate transactions in March 1998, the Company sold 68 Denny's
restaurants and eight non-branded restaurants to unrelated parties. As a result,
the operating results for the 26-week period ending June 30, 1999 are not
comparable with the 1998 results.
COMPARISON OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
in the condensed consolidated statements of operations expressed as a percentage
of total restaurant sales.
13-Week 26-Week
Period Ended Period Ended
--------------- ---------------
1998 1999 1998 1999
----- ----- ----- -----
Restaurant Sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Restaurant operating expenses:
Food and beverage costs 27.6 27.1 27.5 27.1
Payroll and payroll related costs 33.8 34.5 34.1 34.4
Depreciation and amortization 3.1 2.7 2.8 2.7
Other restaurant operating expenses 28.1 28.2 27.4 28.0
Charge for impaired assets -- 4.9 -- 2.4
----- ----- ----- -----
Total operating expenses 92.6 97.4 91.8 94.6
----- ----- ----- -----
Restaurant operating income 7.4 2.6 8.2 5.4
Administrative expenses 4.9 4.8 4.5 4.7
----- ----- ----- -----
Operating income (loss) 2.5 (2.2) 3.7 0.7
Interest expense 5.0 5.5 4.9 4.9
----- ----- ----- -----
Loss before income taxes and
extraordinary items (2.5) (7.7) (1.2) (4.2)
Income tax benefit (0.8) (1.0) (0.4) (0.6)
----- ----- ----- -----
Loss before extraordinary items (1.7) (6.7) (0.8) (3.6)
Extraordinary items -- (2.1) 1.0 (1.0)
----- ----- ----- -----
Net income (loss) (1.7)% (8.8)% 0.2% (4.6)%
===== ===== ===== =====
9
<PAGE>
THIRTEEN-WEEK PERIOD ENDED JUNE 30, 1999 COMPARED WITH THIRTEEN-WEEK PERIOD
ENDED JULY 1, 1998
RESTAURANT SALES. Restaurant sales decreased $265,000, or 0.4%, to $61.8
million for the thirteen-week period ended June 30, 1999 as compared with
restaurant sales of $62.1 million for the thirteen-week period ended July 1,
1998. The Company operated 101 and 104 Black-eyed Pea restaurants in 13 states,
in the second quarter of 1999 and 1998, respectively. For the 13-week period
ended June 30, 1999, comparable Black-eyed Pea same-store sales decreased 3.1%
as compared with the same period in fiscal 1998. The Company operated 99 and 101
Denny's restaurants in 18 states in the second quarter of 1999 and 1998,
respectively. For the 13-week period ended June 30, 1999, comparable Denny's
same-store sales increased 3.5% as compared with the same period in fiscal 1998.
The overall decrease is primarily attributable to the decrease in the total
number of restaurants operated during the respective periods.
FOOD AND BEVERAGE COSTS. Food and beverage costs decreased to 27.1% of
restaurant sales for the thirteen-week period ended June 30, 1999 as compared
with 27.6% of restaurant sales for the thirteen-week period ended July 1, 1998.
This decrease is primarily a result of same-store sales increases and
management's ongoing efforts to reduce food costs by implementing more efficient
and cost effective practices in food preparation, as well as favorable commodity
prices.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs were
34.5% of restaurant sales for the thirteen-week period ended June 30, 1999 as
compared with 33.8% of restaurant sales for the thirteen-week period ended July
1, 1998. This increase was primarily attributable to increased employee benefits
costs and a slight increase in the average hourly wage rates.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, pre-opening costs, and
other items was $1.7 million for the thirteen-week period ended June 30, 1999,
as compared with $1.9 million for the thirteen-week period ended July 1, 1998.
This decrease of $267,000 was primarily attributable to a decrease in the
amortization of store opening costs.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses
were 28.2% of restaurant sales for the thirteen-week period ended June 30, 1999
as compared with 28.1% of restaurant sales for the thirteen-week period ended
July 1, 1998. Included in the 1999 results is a gain of $182,000 related to the
transfer of certain restaurants to Denny's, Inc. In addition, in 1999 the
Company adopted Statement of Position 98-5 which requires that the Company
expense preopening costs as they are incurred. Prior to 1999, such expenses were
capitalized and amortized over a period of one year. As a result of the change,
new store opening costs of approximately $380,000 were expensed when incurred in
the second quarter. Excluding these items, other restaurant operating expenses,
expressed as a percentage of revenue, would have been 27.9% and 28.1% in fiscal
1999 and 1998, respectively.
RESTAURANT OPERATING INCOME. Restaurant operating income decreased to $1.6
million for the thirteen-week period ended June 30, 1999, as compared with $4.6
million for the thirteen-week period ended July 1, 1998. This decrease was
principally the result of the $3.0 million charge for impaired assets and the
factors described above.
ADMINISTRATIVE EXPENSES. Administrative expenses of $3.0 million were
comparable for each of the thirteen-week periods ended June 30, 1999 and July 1,
1998.
10
<PAGE>
INTEREST EXPENSE. Interest expense was $3.4 million, for the thirteen-week
period ended June 30, 1999 as compared with $3.1 million for the thirteen-week
period ended July 1, 1998. The change is the result of the decrease in
outstanding debt following the sale of certain restaurants in 1998 and the
recording of approximately $600,000, which represents the accrual of the
compound effect of the interest associated with the Series B Notes.
INCOME TAX EXPENSE (BENEFIT). The Company recorded an income tax benefit of
approximately $596,000, or an effective rate of 12.5%, for the thirteen-week
period ended June 30, 1999 and $487,000, or an effective rate of 31.6%, for the
thirteen-week period ended July 1, 1998. The Company has not recorded a tax
benefit associated with the change for impaired assets.
EXTRAORDINARY ITEMS. The extraordinary item relates to the expensing of
certain deferred financing costs associated with the early payoff of certain
debt obligations.
11
<PAGE>
TWENTY-SIX WEEK PERIOD ENDED JUNE 30, 1999 COMPARED WITH TWENTY-SIX WEEK PERIOD
ENDED JULY 1, 1998
RESTAURANT SALES. Restaurant sales decreased $12.2 million, or 9.0%, to
$122.7 million for the twenty-six week period ended June 30, 1999 as compared
with restaurant sales of $134.9 million for the twenty-six week period ended
July 1, 1998. This decrease was primarily attributable to the sale of certain
restaurants during 1998. For the twenty-six week period ended June 30, 1999,
comparable same-store sales decreased 1.3% and increased 3.3% for the Company's
Black-eyed Pea and Denny's restaurants, respectively as compared with the same
period in fiscal 1998. The overall decrease is primarily attributable to the
decrease in the total number of restaurants operated during the respective
periods.
FOOD AND BEVERAGE COSTS. Cost of food and beverage decreased to 27.1% of
restaurant sales for the twenty-six week period ended June 30, 1999 as compared
with 27.5% of restaurant sales for the twenty-six week period ended July 1,
1998, primarily as the result of the sale of restaurants in the first quarter of
1998, same-store sale increases, and management's ongoing efforts to reduce food
costs by implementing more efficient and cost-effective practices in food
preparation, as well as favorable commodity prices.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs were
34.4% of restaurant sales for the twenty-six week period ended June 30, 1999 as
compared with 34.1% of restaurant sales for the twenty-six week period ended
July 1, 1998. This increase was primarily attributable to higher employee
benefits costs and a slight increase in the average hourly wage rates.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, pre-opening costs and
other items decreased to 2.7% of restaurant sales for the twenty-six week period
ended June 30, 1999 as compared with 2.8% of restaurant sales for the twenty-six
week period ended July 1, 1998. The decrease of $369,000 was primarily
attributable to a decrease in the amortization of store opening costs and the
reduction of depreciation and amortization associated with the restaurants sold
in March 1998.
OTHER RESTAURANT OPERATING COSTS. Other restaurant operating costs were
28.0% of restaurant sales for the twenty-six week period ended June 30, 1999 as
compared with 27.4% of restaurant sales for the twenty-six week period ended
July 1, 1998. Included in the 1999 and 1998 results are gains of $182,000 and
$575,000, respectively relating to the sale of restaurants. In addition, in 1999
the Company adopted Statement of Position 98-5 which requires that the Company
expense preopening costs as they are incurred. Prior to 1999 such expenses were
capitalized and amortized over a period of one year. As a result of the change
in accounting principles, new store opening costs of approximately $600,000 were
expensed when incurred in fiscal 1999. Excluding these items, other restaurant
operating costs expressed as a percentage of revenue, would have been 27.6% and
27.9% for 1999 and 1998, respectively.
RESTAURANT OPERATING INCOME. Restaurant operating income decreased $4.3
million to $6.7 million for the twenty-six week period ended June 30, 1999 as
compared with $11.0 million for the twenty-six week period ended July 1, 1998.
This decrease was principally the result of the $3.0 million charge for impaired
assets and the factors described above.
ADMINISTRATIVE EXPENSES. Administrative expenses increased to 4.7% of
restaurant sales for the twenty-six week period ended June 30, 1999 as compared
with 4.5% of restaurant sales for the twenty-six week period ended July 1, 1998.
This increase is primarily attributable to the decrease in revenue without a
proportional decrease in administrative expenses.
12
<PAGE>
INTEREST EXPENSE. Interest expense was $6.0 million, or 4.9% of restaurant
sales, for the twenty-six week period ended June 30, 1999 as compared with $6.5
million, or 4.9% of restaurant sales, for the twenty-six week period ended July
1, 1998. The decrease is the result of the decrease in long-term debt following
the sale of certain restaurants in 1998 and the recording of approximately
$600,000, which represents the accrual of the compound effect of the interest
associated with the Series B Notes.
INCOME TAX BENEFIT. The Company recorded an income tax benefit of
approximately $731,000 or an effective rate of 14.4%, for the twenty-six week
period ended June 30, 1999 as compared with income tax benefit of approximately
$504,000, or an effective rate of 31.6%, for the twenty-six week period ended
July 1, 1998. The Company has not recorded a tax benefit associated with the
charge for impaired assets.
EXTRAORDINARY ITEMS. The extraordinary items relate to expensing of certain
deferred financing costs in 1999 and the gain associated with the early
extinguishment of debt in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategy has been to (i) focus on restaurants that achieve certain
operational and geographic efficiencies; (ii) refinance certain debt obligations
to better match operating cash flows with debt amortization; and (iii) position
itself for growth. During the first quarter of 1998, the Company sold 76
underperforming restaurants and used the proceeds form these transactions to
repay certain debt obligations. The Company believes that these transactions
improved its overall portfolio of operating restaurants and has positioned it
for improved operating results in 1999. Excluding the effect of gains from asset
sales of $182,000 and $575,000 in 1999 and 1998, respectively, net cash provided
from operating activities increased from approximately $2.1 million used in
operations in fiscal 1998 to $385,000 provided from operations in fiscal 1999.
In an effort to continue to improve its operating asset base, the Company
currently is negotiating letters of intent with unrelated parties to purchase
certain underperforming or closed restaurants. The Company believes that these
transactions will be completed over the next several quarters. The Company
cannot provide assurance, however, regarding whether it will complete all or any
of these transactions or the timing of any transactions that are completed.
On June 30, 1999, the Company completed the initial phase of a $20.1 million
financing agreement with CNL whereby CNL purchased the approximately $14.7
million of indebtedness remaining outstanding under the Company's senior credit
facility and advanced an additional $5.4 million to the Company. The Company
believes that its current cash resources and expected cash flows from operations
will be sufficient to fund the Company's capital needs during the next 12 months
at its current level of operations, apart from the capital needs resulting from
additional development of restaurants.
The Company receives substantially all of its revenue in cash with a relatively
small amount of receivables. Therefore, like many other companies in the
restaurant industry, the Company operates with a working capital deficit. The
Company's working capital deficit was $26.4 million at June 30, 1999 and $44.8
million at December 30, 1998. Included in the December 1998 working capital
deficit is approximately $15.0 million of debt obligations under the senior
credit facility which was in default at that time. The Company anticipates that
it will continue to operate with a working capital deficit.
The Company has historically satisfied its capital requirements through credit
facilities and sale-leaseback financings. The Company requires capital
principally for the development of new restaurants and maintenance expenditures
on its existing restaurants. Currently, the Company is in various stages of
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<PAGE>
development of nine Black-eyed Pea restaurants, which it expects to open over
the next several quarters. The Company estimates that its costs to develop and
open new Black-eyed Pea restaurants, excluding real estate and building costs,
will be approximately $350,000 to $450,000 per restaurant. The Company believes
that its financing commitments will be adequate to meet its financing needs
during the remainder of 1999. During the period ended June 30, 1999, the Company
borrowed approximately $800,000 to finance its development activities associated
with new Black-eyed Pea restaurants.
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.
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
Many currently installed computer systems and software products may not function
properly when processing dates that begin on or after January 1, 2000. The
Company currently is upgrading its internal computer network to improve its
management information systems in general, as well as to ensure that its systems
will not malfunction as a result of "Year 2000" issues. The Company currently
does not anticipate any material adverse effects related to the Year 2000
issues. The Company has identified four primary systems that could be adversely
impacted by the Year 2000 issue. These systems are (1) point-of-sale and
restaurant back-office accounting systems in each of its Black-eyed Pea
restaurants; (2) point-of-sale and restaurant back-office accounting systems in
each of its Denny's restaurants; (3) the Company's internal accounting systems
and software; and (4) third-party systems, including computer systems used by
the Company's food suppliers, financial institutions, credit card processors,
and utility companies. The Company is in the process of converting the
point-of-sale and back-office accounting systems at its Black-eyed Pea and
Denny's restaurants. The Company currently anticipates that this conversion,
which includes upgrading existing software, will be completed by December 1999.
The vendor for the Company's internal corporate accounting systems has advised
the Company that it will be able to modify those systems to be Year 2000
compliant during 1999. The vendor currently is modifying the line code for those
software products. The Company previously engaged a third-party consultant to
evaluate those systems and has retained another third-party consultant to assess
and test the vendor's modifications to the systems by September 1999. The
Company currently anticipates that its costs to bring its computer systems into
Year 2000 compliance will not exceed $250,000. The Company has obtained Year
2000 compliance certification from all significant third-parties that the
Company depends upon, including food suppliers, financial institutions, and
credit card transaction processors. All significant third-parties have advised
the Company that their systems are or will be Year 2000 compliant during 1999.
The Company intends to continue to identify technology systems that may be
subject to Year 2000 risks and to monitor and test those systems throughout
1999. The Company currently does not anticipate any material adverse effects
related to Year 2000 issues. As of the filing date of this Report, the Company
has not developed a contingency plan to address Year 2000 issues. Following
14
<PAGE>
completion of the third-party assessment and testing of modifications to its
internal accounting systems, the Company will develop contingency plans to
address those potential adverse consequences, if any, identified as remaining
with respect to Year 2000 issues.
NEW ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-5 "Reporting the Cost of Start-up Activities".
This statement requires companies to expense the cost of start-up activities as
incurred. The Company adopted this statement in fiscal 1998.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133") that is effective for fiscal years
beginning after June 15, 1999. The FASB subsequently delayed the effective date
of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. The
delay, published as Statement of Financial Accounting Standards No. 137, applies
to quarterly and annual financial statements. The Company has not completed the
process of evaluating the impact that will result form the adoption of SFAS No.
133; however, on a preliminary basis, management does not believe that eventual
adoption will have a significant impact on the Company's financial statements.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements, including
statements regarding the Company's business strategies, the Company's business,
and the industry in which the Company operates. These forward-looking statements
are based primarily on the Company's expectations and are subject to a number of
risks and uncertainties, some of which are beyond the Company's control. Actual
results could differ materially from the forward-looking statements as a result
of numerous factors, including those set forth in Item 1 - "Special
Considerations" in the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1998.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Shareholders was held on June 29, 1999. The
following nominees were elected to the Company's Board of Directors to serve as
directors until the Company's next annual meeting of Shareholders, or until
their successors are elected and qualified, or until their earlier resignation
or removal:
Nominee Votes in Favor Votes Against
------- -------------- -------------
Jack M. Lloyd 9,637,608 2,539,058
William J. Howard 9,637,608 2,539,058
William G. Cox 9,637,608 2,539,058
Todd S. Brown 9,637,608 2,539,058
Fred W. Martin 9,637,608 2,539,058
Robert H. Manschot 9,637,608 2,539,058
The following additional items were voted upon by the Company's shareholders:
(a) Proposal to approve an amendment to the Company's Restated Articles of
Incorporation, as amended, to change the name of the Company to
"Phoenix Restaurant Group, Inc."
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
9,792,003 487,700 1,896,963 -0-
(b) Proposal to ratify the appointment of Deloitte & Touche LLP as the
independent auditors of the Company for the fiscal year ending
December 29, 1999.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
9,978,603 303,600 1,894,463 -0-
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
Not applicable.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHOENIX RESTAURANT GROUP, INC.
Dated: August 13, 1999 By: /s/ Todd S. Brown
------------------------------------
Todd S. Brown
Senior Vice President, Chief
Financial Officer, and Treasurer
(Duly authorized officer of the
registrant, principal financial
and accounting officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR PURPOSES OF SECTION 11 OF
THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF
1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE
DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE,
UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
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<FISCAL-YEAR-END> DEC-29-1999
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<PERIOD-END> JUN-30-1999
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0
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