UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 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)
(480) 483-7055
(registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's class of common stock as of the latest
practicable date, is as follows: 13,485,277 shares of Common Stock, $.10 par
value, as of November 15, 1999.
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 29, 1999
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1 Unaudited Financial Statements
Condensed Consolidated Balance Sheets -
December 30, 1998 and September 29, 1999....................... 3
Condensed Consolidated Statements of Operations - 13-Week
Periods ended September 30, 1998 and September 29, 1999
and 39-Week Periods ended September 30, 1998 and
September 29, 1999............................................. 4
Condensed Consolidated Statements of Cash Flows - 13-Week Periods
ended September 30, 1998 and September 29, 1999
and 39-Week Periods ended September 30, 1998 and
September 29, 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 30, September 29,
1998 1999
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,330 $ 1,696
Receivables 2,636 2,075
Inventories 2,917 1,227
Other current assets 5,533 4,645
Assets held for sale -- 42,105
--------- ---------
Total current assets 13,416 51,748
PROPERTY AND EQUIPMENT, Net 55,648 21,278
INTANGIBLE ASSETS, Net 50,580 12,654
DEFERRED INCOME TAXES 5,578 6,995
OTHER ASSETS 9,285 6,443
--------- ---------
TOTAL $ 134,507 $ 99,118
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 18,026 $ 15,994
Accrued compensation 5,402 5,829
Accrued taxes 5,089 4,289
Other current liabilities 8,946 13,942
Current portion of long-term debt 20,791 6,293
--------- ---------
Total current liabilities 58,254 46,347
LONG-TERM DEBT, Less current portion 72,494 75,058
OTHER LONG-TERM LIABILITIES 7,093 4,129
--------- ---------
Total liabilities 137,841 125,534
--------- ---------
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 issued and
outstanding 1,349 1,349
Additional paid-in capital 35,869 35,869
Accumulated deficit (40,552) (63,634)
--------- ---------
Total shareholders' deficit (3,334) (26,416)
--------- ---------
TOTAL $ 134,507 $ 99,118
========= =========
See accompanying notes to condensed consolidated financial statements
3
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PHOENIX RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
13-Week Periods Ended 39-Week Periods Ended
------------------------ ------------------------
September 30, September 29, September 30, September 29,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
RESTAURANT SALES $ 62,231 $ 60,078 $ 197,177 $ 182,820
--------- --------- --------- ---------
RESTAURANT OPERATING EXPENSES:
Food and beverage costs 17,086 16,307 54,193 49,545
Payroll and payroll related costs 21,294 20,691 67,418 62,851
Depreciation and amortization 1,940 1,789 5,669 5,150
Other restaurant operating expenses 17,865 18,640 54,848 52,936
Charge for impaired assets and other -- 13,826 -- 16,826
--------- --------- --------- ---------
Total operating expenses 58,185 71,253 182,128 187,308
--------- --------- --------- ---------
RESTAURANT OPERATING INCOME (LOSS) 4,046 (11,175) 15,049 (4,488)
ADMINISTRATIVE EXPENSES 3,142 3,014 9,193 8,795
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 904 (14,189) 5,856 (13,283)
INTEREST EXPENSE, Net 2,881 3,262 9,429 9,257
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,977) (17,451) (3,573) (22,540)
INCOME TAX BENEFIT (794) -- (1,293) (731)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY
ITEM (1,183) (17,451) (2,280) (21,809)
EXTRAORDINARY LOSS (GAIN),
Net of tax of ($914)and $686 -- -- (1,371) 1,273
--------- --------- --------- ---------
NET LOSS $ (1,183) $ (17,451) $ (909) $ (23,082)
========= ========= ========= =========
Basic and diluted (loss) per share:
Before extraordinary item $ (.09) $ (1.29) $ (.17) $ (1.62)
========= ========= ========= =========
Net (loss) $ (.09) $ (1.29) $ (.07) $ (1.71)
========= ========= ========= =========
Basic and diluted weighted average
shares outstanding:
Basic 13,485 13,485 13,453 13,485
Diluted 13,485 13,485 13,453 13,485
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PHOENIX RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13-Week Periods Ended 39-Week Periods Ended
------------------------ -----------------------
September 30, September 29, September 30, September 29,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,183) $(17,451) $ (909) $(23,082)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,940 1,789 5,669 5,150
Amortization of deferred financing costs 246 120 738 301
Charge for impaired assets and other 13,826 16,826
Extraordinary item -- -- (1,371) 1,273
Deferred income taxes (794) -- (1,293) (731)
Deferred rent 63 177 209 230
Other 263 349 (568) (305)
Changes in operating assets and
liabilities net of dispositions:
Receivables 221 42 748 (487)
Inventories 5 81 198 131
Other current assets (442) (32) 227 558
Accounts payable and accrued liabilities 52 437 (5,353) (261)
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 371 (662) (1,705) (397)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (875) (1,317) (2,062) (3,724)
Purchase of intangibles (220) -- (289) --
Proceeds from the sale of assets -- -- 25,900 --
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (1,095) (1,317) 23,549 (3,724)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings, net 325 450 3,996 6,828
Debt issuance costs -- (304) -- (1,337)
Note receivable collections 269 90 1,983 823
Principal reductions on long-term obligations (935) (1,041) (28,134) (2,827)
Other 75 -- 75 --
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (266) (805) (22,080) 3,487
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (990) (2,784) (236) (634)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,021 4,480 1,267 2,330
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,031 $ 1,696 $ 1,031 $ 1,696
======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,205 $ 1,980 $ 7,556 $ 6,044
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
PHOENIX RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Phoenix Restaurant Group, Inc. and Subsidiaries (the "Company") have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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 194 family-oriented, full-service restaurants in
23 states, primarily in the southwestern, midwestern, western, and southeastern
United States. The Company owns and operates 95 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 $28.7 million. Net cash proceeds of $25.2 million were used to
repay debt obligations at a $2.4 million discount. The Company has included the
$2.4 million 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 $700,000 plus a note in the principal amount of
$400,000. The Company has recorded a gain of approximately $575,000 on this
transaction, which is included as a partial offset to other restaurant operating
expenses.
(3) OTHER MATTERS
On June 30, 1999, the Company consummated 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. In August 1999, this debt
was modified to be interest only through January 31, 2000. As a result of the
Company's decision to sell the remaining Denny's restaurants, the Company and
CNL have agreed to modify the financing agreement. As of September 29, 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
$800,000 of these notes payable were satisfied through the cancellation of
6
<PAGE>
a Denny's development rights agreement and the transfer or assignment of two
restaurant leasehold properties from the Company to Denny's, Inc. The remaining
note payable of $1.8 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, consideration received approximated the
Company's carrying value.
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 included the $2.0 million before-tax amount as an extraordinary item in
the accompanying financial statements.
During the second and third quarters of 1999, the Company identified certain
Denny's restaurants which will be sold over the next several quarters. The
Company 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 and $5.5 million in the second
and third quarters, respectively, in the accompanying financial statements.
In the third quarter of 1999, the Company recorded charges of (1) $3.0 million
related to four Black-eyed Pea restaurants and one Denny's restaurant closed
during the quarter, and (2) $1.4 million to reflect increased estimates of
liabilities related to restaurants closed in prior periods because the Company
determined that the cost and timing of subleasing those properties will exceed
previous estimates. The Company recorded an additional charge of $3.9 million
related to 16 Denny's restaurants sold during 1997 and 1998 where the Company
remains contingently liable for equipment leases, rents, and property taxes as a
result of a pending bankruptcy filing by one buyer and non-performance by the
other buyer.
(4) SUBSEQUENT EVENTS
In October 1999, the Company entered into an agreement to transfer the assets
and certain liabilities associated with 21 Denny's restaurants to William
Howard, the Company's Executive Vice President, in exchange for consideration
valued at approximately $19.5 million. Under the agreement, Mr. Howard will
contribute to the Company approximately 1.7 million shares of the Company's
common stock and approximately 147,000 common stock purchase warrants, having a
combined fair market value of $1.3 million; Mr. Howard will assume approximately
$7.5 million in principal and interest under a subordinated note payable to Mr.
Howard; and the Company will contribute other liabilities totaling approximately
$1.9 million. The transaction is subject to usual and customary conditions to
closing, including arrangements for financing and obtaining consents of various
lenders, landlords, and the Denny's franchisor. The Company recorded a charge of
$3.0 million for impaired assets associated with these restaurants in the second
quarter and increased the charge in the third quarter by $402,000.
In addition to the sale described above, in October 1999 the Company retained
CNL Advisory Services to act as its agent in the disposition of the Company's
remaining 78 Denny's restaurants. A charge of $5.5 million for the impaired
assets was recorded in the third quarter in connection with this planned
disposition.
The Company intends to use the proceeds from the sales of these restaurants to
reduce its outstanding debt and for other corporate purposes. The Company
believes that these steps will better position the Company for profitability and
enhanced shareholder value.
7
<PAGE>
(5) 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 thirty nine-week periods ended September 30, 1998 and
September 29, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
13-Week Periods Ended 39-Week Periods Ended
---------------------------- ----------------------------
September 30, September 29, September 30, September 29,
REVENUE 1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Black-eyed Pea $ 34,866 $ 33,467 $ 106,727 $ 104,368
Denny's 27,311 26,611 89,980 78,452
Non-branded 54 -- 470 --
--------- --------- --------- ---------
Total revenues $ 62,231 $ 60,078 $ 197,177 $ 182,820
========= ========= ========= =========
RESTAURANT OPERATING INCOME (LOSS)
Black-eyed Pea $ 1,996 $ 1,514 $ 8,796 $ 7,460
Denny's 2,081 1,539 5,824 5,098
Non-branded (31) -- (146) --
Charge for impaired assets and other -- (13,826) -- (16,826)
Gain (loss) on sale of assets -- (402) 575 (220)
--------- --------- --------- ---------
Restaurant operating income (loss) 4,046 (11,175) 15,049 (4,488)
Administrative expenses 3,142 3,014 9,193 8,795
--------- --------- --------- ---------
Operating income (loss) $ 904 ($ 14,189) $ 5,856 ($ 13,283)
========= ========= ========= =========
</TABLE>
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 39-week period ending September 29, 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.
<TABLE>
<CAPTION>
13-Week Periods Ended 39-Week Periods Ended
---------------------------- ----------------------------
September 30, September 29, September 30, September 29,
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Restaurant Sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Restaurant operating expenses:
Food and beverage costs 27.5 27.1 27.5 27.1
Payroll and payroll related costs 34.2 34.5 34.2 34.3
Depreciation and amortization 3.1 3.0 2.9 2.8
Other restaurant operating expenses 28.7 31.0 27.8 29.0
Charge for impaired assets and other -- 23.0 -- 9.2
----- ----- ----- -----
Total operating expenses 93.5 118.6 92.4 102.4
----- ----- ----- -----
Restaurant operating income (loss) 6.5 (18.6) 7.6 (2.4)
Administrative expenses 5.1 5.0 4.7 4.8
----- ----- ----- -----
Operating income (loss) 1.4 (23.6) 2.9 (7.2)
Interest expense, net 4.6 5.4 4.8 5.1
----- ----- ----- -----
Loss before income taxes and
extraordinary item (3.2) (29.0) (1.9) (12.3)
Income tax benefit (1.3) -- (0.7) (0.4)
----- ----- ----- -----
Loss before extraordinary item (1.9) (29.0) (1.2) (11.9)
Extraordinary loss (gain) -- -- (.7) .7
----- ----- ----- -----
Net loss (1.9)% (29.0)% (0.5)% (12.6)%
===== ===== ===== =====
</TABLE>
9
<PAGE>
THIRTEEN-WEEK PERIOD ENDED SEPTEMBER 29, 1999 COMPARED WITH THIRTEEN-WEEK PERIOD
ENDED SEPTEMBER 30, 1998
RESTAURANT SALES. Restaurant sales decreased $2.2 million, or 3.5%, to
$60.1 million for the thirteen-week period ended September 29, 1999 as compared
with restaurant sales of $62.2 million for the thirteen-week period ended
September 30, 1998. The Company operated 95 Black-eyed Pea restaurants in 10
states in the third quarter of 1999 and 104 Black-eyed Pea restaurants in 14
states during the third quarter of 1998. For the 13-week period ended September
29, 1999, comparable Black-eyed Pea same-store sales decreased 2.9% as compared
with the same period in fiscal 1998. The Company operated 99 Denny's restaurants
in 18 states in the third quarter of 1999 and 101 Denny's restaurants in 19
states during the third quarter of 1998. For the 13-week period ended September
29, 1999, comparable Denny's same-store sales decreased 0.4% 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 September 29, 1999 as
compared with 27.5% of restaurant sales for the thirteen-week period ended
September 30, 1998. This decrease is primarily a result of 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 September 29, 1999
as compared with 34.2% of restaurant sales for the thirteen-week period ended
September 30, 1998. This increase was primarily attributable to increased
employee benefit costs and a slight increase in the average hourly wage rates.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, and other items was $1.8
million for the thirteen-week period ended September 29, 1999, as compared with
$1.9 million for the thirteen-week period ended September 30, 1998. This
decrease of $151,000 was primarily attributable to a reduction in the number of
restaurants due to store closings and store sales.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses
were 31.0% of restaurant sales for the thirteen-week period ended September 29,
1999 as compared with 28.7% of restaurant sales for the thirteen-week period
ended September 30, 1998. Included in the 1999 results is a loss of $402,000
related to the proposed sale of 21 Denny's restaurants to William Howard, the
Company's Executive Vice President. 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 $611,000 were expensed when incurred in the third
quarter. Excluding these items, other restaurant operating expenses, expressed
as a percentage of revenue, would have been 29.3% and 28.7% in fiscal 1999 and
1998, respectively.
CHARGE FOR IMPAIRED ASSETS AND OTHER. The Company recorded charges of (1)
$3.0 million related to four Black-eyed Pea restaurants and one Denny's
restaurant closed during the quarter, and (2) $1.4 million to reflect increased
estimates of liabilities related to restaurants closed in prior periods because
the Company determined that the cost and timing of subleasing those properties
will exceed previous estimates. The Company recorded an additional charge of
$3.9 million related to 16 Denny's restaurants sold during 1997 and 1998 where
the Company remains contingently liable for equipment leases, rents and property
taxes as a result of a pending bankruptcy filing by one buyer and
non-performance by the other buyer. During the third quarter, the Company
approved a plan to sell its remaining Denny's restaurants. The Company
determined that the carrying value of the assets to be sold exceeds the probable
purchase price attributable to these restaurants and has recorded a charge for
impaired goodwill and intangible assets of $5.5 million. The total charge for
impaired assets and other for the third quarter was $13.8 million.
RESTAURANT OPERATING INCOME (LOSS). Restaurant operating income decreased
to a loss of $11.2 million for the thirteen-week period ended September 29,
1999, as compared with income of $4.0 million for the thirteen-week period ended
September 30, 1998. This decrease was principally the result of the $13.8
million Charge for Impaired Assets and Other and the factors described above.
10
<PAGE>
ADMINISTRATIVE EXPENSES. Administrative expenses were $3.0 million, or 5.0%
of restaurant sales, for the thirteen-week period ended September 29, 1999 as
compared with $3.1 million, or 5.1% of restaurant sales, for the thirteen-week
period ended September 30, 1998. This decrease of $128,000 is primarily
attributable to efforts by management to reduce administrative costs and improve
efficiency.
INTEREST EXPENSE, NET. Net interest expense was $3.3 million for the
thirteen-week period ended September 29, 1999 as compared with $2.9 million for
the thirteen-week period ended September 30, 1998. The change is the result of
both an increase in the outstanding debt and a higher interest rate associated
with the debt transaction negotiated during the second quarter of fiscal 1999.
INCOME TAX BENEFIT. The Company has not recorded a tax benefit associated
with the charge for impaired assets and for operating losses due to the
uncertainty of the future utilization of the existing deferred income tax asset.
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 29, 1999 COMPARED WITH THIRTY-NINE WEEK
PERIOD ENDED SEPTEMBER 30, 1998
RESTAURANT SALES. Restaurant sales decreased $14.4 million, or 7.3%, to
$182.8 million for the thirty-nine week period ended September 29, 1999 as
compared with restaurant sales of $197.2 million for the thirty-nine week period
ended September 30, 1998. This decrease was primarily attributable to the sale
and/or closing of certain restaurants during 1998 and 1999. For the thirty-nine
week period ended September 29, 1999, comparable same-store sales decreased 1.7%
and increased 2.1% for the Company's Black-eyed Pea and Denny's restaurants,
respectively as compared with the same period in fiscal 1998.
FOOD AND BEVERAGE COSTS. Cost of food and beverage decreased to 27.1% of
restaurant sales for the thirty-nine week period ended September 29, 1999 as
compared with 27.5% of restaurant sales for the thirty-nine week period ended
September 30, 1998, primarily as the result of 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
34.3% of restaurant sales for the thirty-nine week period ended September 29,
1999 as compared with 34.2% of restaurant sales for the thirty-nine week period
ended September 30, 1998. This increase was primarily attributable to higher
employee benefit costs and a slight increase in the average hourly wage rates.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, and other items decreased
to 2.8% of restaurant sales for the thirty-nine week period ended September 29,
1999 as compared with 2.9% of restaurant sales for the thirty-nine week period
ended September 30, 1998. The decrease of $519,000 was primarily attributable to
a reduction in the number of restaurants due to store closings and store sales.
OTHER RESTAURANT OPERATING COSTS. Other restaurant operating costs were
29.0% of restaurant sales for the thirty-nine week period ended September 29,
1999 as compared with 27.8% of restaurant sales for the thirty-nine week period
ended September 30, 1998. Included in the 1999 and 1998 results are gains and
11
<PAGE>
(losses) of ($220,000) 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 $1.2 million were expensed when incurred in
fiscal 1999. Excluding these items, other restaurant operating costs, expressed
as a percentage of revenue, would have been 28.2% for 1999 and 28.1% for 1998.
CHARGE FOR IMPAIRED ASSETS AND OTHER. The Company recorded charges of (1)
$3.0 million related to four Black-eyed Pea restaurants and one Denny's
restaurant closed during the period, and (2) $1.4 million to reflect increased
estimates of liabilities related to restaurants closed in prior periods because
the Company determined that the cost and timing of subleasing those properties
will exceed previous estimates. The Company recorded an additional charge of
$3.9 million related to 16 Denny's restaurants sold during 1997 and 1998 where
the Company remains contingently liable for equipment leases, rents and property
taxes as a result of a pending bankruptcy filing by one buyer and
non-performance by the other buyer. During the period, the Company approved a
plan to sell its remaining Denny's restaurants. The Company determined that the
carrying value of the assets to be sold 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 second quarter and $5.5
million in the third quarter. The total charge for impaired assets and other for
the thirty-nine week period ended September 29, 1999 was $16.8 million.
RESTAURANT OPERATING INCOME (LOSS). Restaurant operating income decreased
$19.5 million to a loss of $4.5 million for the thirty-nine week period ended
September 29, 1999 as compared with income of $15.0 million for the thirty-nine
week period ended September 30, 1998. This decrease was principally the result
of the $16.8 million Charge for Impaired Assets and Other and the factors
described above.
ADMINISTRATIVE EXPENSES. Administrative expenses decreased $398,000 to 4.8%
of restaurant sales for the thirty-nine week period ended September 29, 1999 as
compared with 4.7% of restaurant sales for the thirty-nine week period ended
September 30, 1998. This increase in administrative expenses as a percent of
restaurant sales is primarily attributable to the decrease in revenue without a
proportional decrease in administrative expenses.
INTEREST EXPENSE, NET. Net interest expense was $9.3 million, or 5.1% of
restaurant sales, for the thirty-nine week period ended September 29, 1999 as
compared with $9.4 million, or 4.8% of restaurant sales, for the thirty-nine
week period ended September 30, 1998. The net decrease of $172,000 is the result
of the decrease in long term debt following the sale of certain restaurants in
1998 offset by new financing with CNL in June 1999. These factors resulted in an
increase in interest expense of $267,000 and $381,000 in the second and third
quarters of 1999 as compared to the same periods in 1998.
INCOME TAX BENEFIT. The Company recorded an income tax benefit of
approximately $731,000, or an effective rate of 12.8%, for the thirty-nine week
period ended September 29, 1999 as compared with income tax benefit of
approximately $1.3 million, or an effective rate of 36.2%, for the thirty-nine
week period ended September 30, 1998. The Company has not recorded a tax benefit
associated with the charges for impaired assets and the operating loss in the
third quarter of 1999 due to the uncertainty of the future utilization of the
existing deferred income tax asset.
EXTRAORDINARY ITEM. The extraordinary item relates to expensing 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 from these transactions to
repay certain debt obligations. The Company believes that these transactions
improved its overall portfolio of operating restaurants. Net cash used in
operating activities improved from approximately $1.7 million used in operations
in fiscal 1998 to $397,000 used in 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
12
<PAGE>
transactions will be completed over the next several quarters. The Company
cannot provide assurance, however, regarding whether it will complete any or all
of these transactions or the timing of these transactions.
On June 30, 1999, the Company consummated a $20.1 million financing agreement
with CNL whereby CNL purchased 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, expected cash flows from operations, and additional borrowings,
as necessary, 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 was $5.4 million at September 29, 1999 due to
reclassifying assets as held for sale, as compared with a working capital
deficit of $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
after the sale of assets held for sale.
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
development of seven 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 39-week period ended September 29,
1999, the Company borrowed approximately $1.3 million to finance its development
activities associated with new Black-eyed Pea restaurants.
In October 1999, the Company entered into an agreement to transfer the assets
and certain liabilities associated with 21 Denny's restaurants to William
Howard, the Company's Executive Vice President, in exchange for consideration
valued at approximately $19.5 million. Under the agreement, Mr. Howard will
contribute to the Company approximately 1.7 million shares of the Company's
common stock and approximately 147,000 common stock purchase warrants, having a
combined fair market value of $1.3 million; Mr. Howard will assume approximately
$7.5 million in principal and interest under a subordinated note payable to Mr.
Howard; and the Company will contribute other liabilities totaling approximately
$1.9 million. The transaction is subject to usual and customary conditions to
closing, including arrangements for financing and obtaining consents of various
lenders, landlords, and the Denny's franchisor. The Company recorded a charge of
$3.0 million for impaired assets associated with these restaurants in the second
quarter and increased the charge in the third quarter by $402,000.
In addition to the sale described above, in October 1999 the Company retained
CNL Advisory Services to act as its agent in the disposition of the Company's
remaining 78 Denny's restaurants. A charge of $5.5 million for the impaired
assets was recorded in the third quarter in connection with this planned
disposition.
The Company intends to use the proceeds from the sales of these restaurants to
reduce its outstanding debt and for other corporate purposes. The Company
believes that these steps will better position the Company for profitability and
enhanced shareholder value.
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.
13
<PAGE>
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 is currently 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 all of its Black-eyed Pea
restaurants; (2) point-of-sale and restaurant back-office accounting systems in
all 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. This conversion, which includes upgrading existing
software, is scheduled to 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 has modified the line code for those software products. The Company
currently anticipates that its costs to bring its computer systems into Year
2000 compliance should not exceed $500,000. 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. Following
completion of the third-party assessment and testing of modifications to its
internal accounting systems, the Company will continue to 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 1999.
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 from 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
14
<PAGE>
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
Not applicable.
ITEM 5. OTHER INFORMATION
On October 15, 1999, Todd S. Brown resigned as the Company's Senior Vice
President, Chief Financial Officer, Treasurer, and as a director of the Company.
Brian McAlpine, the Company's Vice President - Finance, was named Acting Chief
Financial Officer. Mr. McAlpine has served as Vice President - Finance since
October 1997 and served as Director of Planning from July 1996 until October
1997.
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: November 18, 1999 By: /s/ Brian McAlpine
------------------------------------
Brian McAlpine
Vice President - Finance and
Acting Chief Financial Officer
(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
SEPTEMBER 29, 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>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> SEP-29-1999
<EXCHANGE-RATE> 1
<CASH> 1,696
<SECURITIES> 0
<RECEIVABLES> 2,075
<ALLOWANCES> 0
<INVENTORY> 1,227
<CURRENT-ASSETS> 51,748
<PP&E> 26,428
<DEPRECIATION> 5,150
<TOTAL-ASSETS> 99,118
<CURRENT-LIABILITIES> 46,347
<BONDS> 75,058
0
0
<COMMON> 1,349
<OTHER-SE> (27,765)
<TOTAL-LIABILITY-AND-EQUITY> 99,118
<SALES> 182,820
<TOTAL-REVENUES> 182,820
<CGS> 49,545
<TOTAL-COSTS> 187,308
<OTHER-EXPENSES> 8,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,257
<INCOME-PRETAX> (22,540)
<INCOME-TAX> (731)
<INCOME-CONTINUING> (21,809)
<DISCONTINUED> 0
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