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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 30, 1998
Commission File Number 1-13226
DENAMERICA CORP.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (480) 483-7055
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on Which Registered
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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. [X]
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant (6,620,869 shares) on March 31, 1999 was
$6,620,869. 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, 1999:
13,485,277 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
FISCAL YEAR ENDED DECEMBER 30, 1998
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS...........................................................1
ITEM 2. PROPERTIES........................................................21
ITEM 3. LEGAL PROCEEDINGS.................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.......................................22
ITEM 6. SELECTED FINANCIAL DATA...........................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................................30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................31
ITEM 11. EXECUTIVE COMPENSATION............................................33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................................38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...............................................40
SIGNATURES ..................................................................43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
----------
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF APPLICABLE
SECURITIES LAWS. FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING THE
COMPANY'S "EXPECTATIONS," "ANTICIPATION," "INTENTIONS," "BELIEFS," OR
"STRATEGIES" REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS ALSO INCLUDE
STATEMENTS REGARDING REVENUE, MARGINS, EXPENSES, AND EARNINGS ANALYSIS FOR
FISCAL 1999 AND THEREAFTER; FUTURE RESTAURANT OPERATIONS AND NEW RESTAURANT
ACQUISITIONS OR DEVELOPMENT; THE RESTAURANT INDUSTRY IN GENERAL; AND LIQUIDITY
AND ANTICIPATED CASH NEEDS AND AVAILABILITY. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF
THE FILING DATE OF THIS REPORT, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FACTORS DISCUSSED IN ITEM 1,
"SPECIAL CONSIDERATIONS."
-i-
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PART I
ITEM 1. BUSINESS.
GENERAL
The Company currently operates 201 family-oriented, full-service
restaurants in 25 states, primarily in the southwestern, midwestern, western,
and southeastern United States. The restaurants include 101 Black-eyed Pea
restaurants, located primarily in Texas, Georgia, Arizona, Oklahoma, Florida,
and the Washington, D.C. area, and 100 Denny's restaurants, which represents
approximately 5.8% 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 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 and Denny's restaurants.
In addition, the Company may expand its operations through the acquisition of
one or more restaurant chains or multiple restaurant locations. Any 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 predecessors,
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 (480) 483-7055.
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>
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 2
Developed ........................... 15 6 5 0 4 0
Sold or closed ...................... 0 0 (3) (12) (2) (5)
---- ---- ---- ---- ---- ----
Number open at end of period ........ 97 103 105 93 104 101
==== ==== ==== ==== ==== ====
DENNY'S RESTAURANTS:
Number open beginning of period ..... 89 102 148 168 182 174
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) (19) (74)
---- ---- ---- ---- ---- ----
Number open at end of period ........ 102 148 168 182 174 100
==== ==== ==== ==== ==== ====
NON-BRANDED RESTAURANTS:
Number open beginning of period ..... 43 59 56 82 20 3
Acquired ............................ 21 1 36 0 0 0
Converted ........................... (7) (1) (10) (15) (10) 0
Sold or closed ...................... (1) (3) (0) (47) (7) (3)
---- ---- ---- ---- ---- ----
Number open at end of period ........ 59 56 82 20 3 0
==== ==== ==== ==== ==== ====
TOTAL NUMBER OF RESTAURANTS OPEN AT END
OF PERIOD .............................. 258 307 355 295 283 201
==== ==== ==== ==== ==== ====
</TABLE>
<PAGE>
The following table sets forth certain information with respect to the
Company's restaurants as of March 31, 1999.
BLACK-EYED PEA DENNY'S BLACK-EYED PEA DENNY'S
-------------- ------- -------------- -------
Alabama....... 1 Nebraska...... 4
Arizona....... 7 13 Nevada........ 1
Arkansas...... 1 New Mexico.... 2
Colorado...... 7 North Carolina 1
Florida....... 3 19 Oklahoma...... 5 7
Georgia....... 8 Oregon........ 1
Idaho......... 5 South Carolina 1
Iowa.......... 4 South Dakota.. 1
Kansas........ 2 1 Tennessee..... 1
Louisiana..... 1 Texas......... 61 23
Maryland...... 4 Utah.......... 8
Minnesota..... 1 Virginia...... 5
Missouri...... 1 1 Wisconsin..... 1
---- ----
Totals... 101 100
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STRATEGY
The Company's business strategy is to (i) enhance its operational
efficiencies; (ii) refinance existing indebtedness and match cash flows from
operations with debt service obligations; (iii) enhance and refine the
Black-eyed Pea restaurant concept; (iv) continue to develop new restaurants; (v)
sell or close certain underperforming restaurants; and (vi) acquire additional
restaurants.
ENHANCEMENT OF OPERATING EFFICIENCIES
The Company 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 Texas, Oklahoma, and Arizona,
where the Company operates the majority of its Black-eyed Pea restaurants. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - General."
REFINANCING EXISTING INDEBTEDNESS
During 1998, the Company sold or refinanced certain assets in an effort
to reduce its outstanding indebtedness and better match its cash flows from
operations with its debt service obligations. To that end, the Company sold 76
restaurants in March 1998 and applied the proceeds from those sales to reduce
its outstanding debt. The Company also refinanced certain of its existing
obligations during 1998.
In April 1999, the Company obtained a commitment for new borrowings
totaling $20.1 million. The Company intends to use the proceeds from these
borrowings primarily to permanently retire its existing credit facility and to
repay other outstanding obligations. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Company intends to continue to pursue various
alternatives to refinance other assets during 1999 in an effort to further match
its cash flows to its debt service obligations.
2
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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. During 1998, the Company completed development of a
number of changes to its "prototype" Black-eyed Pea restaurant. These changes
are designed to improve unit economics by reducing the costs required to develop
and equip each new restaurant. The changes include the following:
* de-emphasizing bar sales, which currently account for only 2.0% of
sales at Black-eyed Pea restaurants, in order to eliminate the costs
associated with installing, equipping, and stocking a full bar;
* 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
* increasing emphasis on take-out sales, which grew to approximately
11.4% of per-store sales in fiscal 1998 from approximately 11% in
fiscal 1997.
The Company currently plans to open eight new Black-eyed Pea restaurants during
1999 utilizing the new prototype design. Although the Company acquired all of
the remaining franchised Black-eyed Pea restaurants during 1998, it may resume
its franchising activities in the future.
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 development efforts will concentrate on Black-eyed Pea
restaurants because of the better unit economics provided by those restaurants.
The Company believes that it is positioned for growth as a result of the
development of the new Black-eyed Pea prototype and anticipates that it will
open eight new Black-eyed Pea restaurants by the end of 1999. The Company also
has a development arrangement with Denny's, Inc., the franchiser of Denny's
restaurants, under which the Company will develop seven new Denny's restaurants
at specific sites over the next several years.
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 restaurants that do not meet criteria
based on operating results, location, renovation costs, or other competitive
factors. Based on these criteria, during 1997 and 1998 the Company sold or
closed a total of seven Black-eyed Pea restaurants, 93 Denny's restaurants, and
10 non-branded restaurants, including the 76 restaurants sold in March 1998. The
Company applied the proceeds from certain of those sales to reduce its
outstanding indebtedness to a level that the Company believes its operations can
support profitably or to provide capital for additional growth. As a result of
those sales and debt reduction and its current commitments for additional
financing, the Company believes that it is now positioned to resume growth
through development and acquisitions of additional restaurants. To the extent
that the Company deems it appropriate to sell additional restaurants in the
future, the Company intends to apply the proceeds from such sales to further
reduce its outstanding indebtedness.
RESTAURANT ACQUISITIONS
The Company plans to acquire restaurants when it believes it can take
advantage of its organizational infrastructure and management expertise to bring
improved quality and operating efficiencies to the acquired restaurants. 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 and 1998, the Company acquired a total of 11 Black-eyed Pea
restaurants from the franchisees operating
3
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those 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
CONCEPT
The Company currently operates 101 Black-eyed Pea restaurants in 13
states. Black-eyed Pea restaurants are full-service, casual dining
establishments featuring wholesome home-style meals. 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.
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 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 30, 1998, the average check per customer at
the Company's Black-eyed Pea restaurants was approximately $7.95. In fiscal
1998, liquor sales accounted for approximately 2.0% 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
Black-eyed Pea restaurants feature a casual and comfortable dining
atmosphere that appeals to a broad customer base, including families. 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 $400,000 to $450,000, exclusive
of annual operating costs and assuming that the land and buildings are obtained
under a lease arrangement. These costs include approximately (i) $350,000 to
$400,000 for furniture, fixtures, and equipment, and (ii) $50,000 for
pre-opening costs, including hiring and training costs, employee wages, and
advertising. The Company currently plans to lease substantially all of its new
Black-eyed Pea restaurant sites. See Item 1, "Business - Financing and Leasing"
and Item 2, "Properties."
4
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SITE SELECTION
The Company believes that proper site selection is critical to
maximizing the success of a particular Black-eyed Pea restaurant. Therefore,
senior management devotes significant time and resources in selecting and
evaluating each prospective site. The Company analyzes a variety of factors 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. The Company develops stand-alone
Black-eyed Pea restaurants as well as in-line store front restaurants in
locations that offer visibility and convenient customer access.
FRANCHISING
The Company previously franchised or licensed a number of Black-eyed
Pea restaurants to third parties. The Company acquired all of the remaining
franchised Black-eyed Pea restaurants during fiscal 1998. The Company may resume
its franchising activities in the future.
DENNY'S RESTAURANTS
The Company currently operates 100 Denny's restaurants in 19 states,
representing approximately 5.8% of the Denny's system. The Company is the
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 1,700
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 - The Company relies 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, which
include Denny's popular breakfast combinations consisting of a variety of eggs,
omelets, pancakes, waffles, cereals, and muffins, are served 24 hours a day.
Lunch and dinner entrees include a broad range of hamburgers and other
sandwiches, steaks, pork chops, and chicken pot pies. 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. 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. As of December 30,
1998, the average check per customer at the Company's Denny's restaurants was
approximately $5.45.
5
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RESTAURANT DESIGN
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 seating capacity ranging from 90
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 to 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 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 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.
6
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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% to 3% of
weekly gross sales in markets where Denny's, Inc. conducts significant
institutional advertising. Initial franchise fees for the Denny's restaurants
operated by the Company have ranged from $0 to $35,000. The Company currently
pays a franchise fee of $20,000 for each new Denny's restaurant that it opens.
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 materials 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 Banque Paribas takes certain actions while 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 that the
Company assigns its rights under any of the Denny's Franchise Agreements, those
agreements give Denny's, Inc. the option to purchase the interest being
transferred. As long as the Company is a publicly held corporation, an
assignment 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.
NON-BRANDED RESTAURANTS
The Company previously operated a number of non-branded restaurants
under various names. During fiscal 1998, the Company closed its remaining
non-branded restaurant.
EXPANSION OF OPERATIONS
The Company's current growth plan is to develop Black-eyed Pea
restaurants, primarily in Texas, Oklahoma, and Arizona. In addition, the Company
currently plans to develop seven Denny's restaurants over the
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next several years. The Company also may acquire or develop restaurants
operating under different concepts, but currently has no plans to do so. 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. The Company intends to continue developing new 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.
RESTAURANT DEVELOPMENT
Since 1986, the Company has developed and/or converted 67 Denny's
restaurants. 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 has
accelerated the development of additional Black-eyed Pea restaurants and
anticipates that it will open eight new Black-eyed Pea restaurants during 1999.
The Company also has a development arrangement with Denny's, Inc., the
franchiser of Denny's restaurants, under which the Company will develop seven
new Denny's restaurants at specific sites over the next several years. The
following table sets forth certain information with respect to the Company's
current restaurant development plans.
PLANNED DEVELOPMENT -
NUMBER OF RESTAURANTS
---------------------
STATE BLACK-EYED PEA DENNY'S
----- -------------- -------
Arizona ............ 2 1
Colorado ........... -- 2
Florida ............ -- 2
Oklahoma ........... 1 --
Texas .............. 5 2
-- --
Totals .......... 8 7
== ==
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
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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 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, in the case of its Denny's restaurants, those
mandated by Denny's, Inc.
One vice president of operations currently administers the operations
of Black-eyed Pea restaurants. 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 two regional vice presidents for Denny's restaurants
currently administer the operations of the Company's Denny's restaurants.
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.
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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.
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.
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 generally 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 restaurants maintains "par stock" inventory levels. 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 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Compliance."
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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 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 pre-opening 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 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 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.
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 in 1996. The Company took a number of steps during fiscal
1998 that reduced its outstanding indebtedness under the credit facility in
order to better match its cash flows from operations with its debt service
obligations. 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.
In April 1999, the Company obtained financing commitments in amounts
that it believes will be sufficient for its ongoing operations and anticipated
restaurant development activities during 1999. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
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'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 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 has a supply agreement with its primary
supplier.
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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 4.3% of Black-eyed Pea restaurant sales
during fiscal 1998.
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.
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 2.0% and 1.0%,
respectively, of restaurant sales in its Black-eyed Pea and Denny's restaurants
during fiscal 1998. 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 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" statutes.
The Company has in the past franchised Black-eyed Pea restaurants to
third parties and may in the future resume its franchising efforts. If the
Company resumes franchising activities, it would be subject to Federal Trade
Commission regulations and state laws that regulate the offer and sale of
restaurant franchises, as well as state laws that regulate substantive aspects
of the franchisor-franchisee relationship. Certain of such laws also may
restrict the Company's ability to terminate the franchise agreements for its
franchised restaurants.
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TRADEMARKS AND SERVICE MARKS
The Company has registered or has applied for registration of 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 essential 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.
EMPLOYEES
At March 31, 1999, the Company had approximately 10,000 employees, of
whom approximately 75 were corporate personnel, approximately 450 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 35 employees, including approximately 15 kitchen personnel and 20
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 $5.15 to $8.00 an hour for kitchen personnel. The Company generally
pays service personnel the applicable minimum wage plus tips.
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SPECIAL CONSIDERATIONS
THE FOLLOWING FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
REPORT, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS
BUSINESS.
THE COMPANY CANNOT PROVIDE ASSURANCE OF PROFITABILITY
The Company has not been profitable in the last two years and cannot
provide assurance that its operations will be profitable in the future. The
Company's ability to generate operating profits will depend upon
* the Company's ability to refinance, restructure, or repay its
outstanding debt;
* general economic and demographic conditions;
* the Company's capital resources; and
* the nature and extent of any future developments and acquisitions.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 1 to the Consolidated Financial Statements.
THE COMPANY HAS SIGNIFICANT INDEBTEDNESS
The development of new restaurants and the acquisition of existing
restaurants requires funds for construction, tenant improvements, furniture,
fixtures, equipment, training of employees, permits, any applicable 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 debt to develop new
restaurants, to acquire additional restaurants, and to convert certain
restaurants to the Denny's concept. The Company may incur substantial additional
debt in the future in order to implement its business plan and growth strategy.
As of December 30, 1998, the Company had long-term debt of $23.5 million,
subordinated notes of $16.2 million, obligations under capital leases
aggregating $32.8 million, and a working capital deficit of $44.8 million.
The Company utilized the proceeds from sales of restaurants during
fiscal 1997 and fiscal 1998 to reduce its outstanding debt. In April 1999 the
Company obtained financing commitments in amounts that it believes will be
sufficient for its ongoing operations and anticipated restaurant development
activities during 1999. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." The Company may seek additional equity or debt financing in the
future, however, to provide funds to develop or acquire additional restaurants.
The Company, however, cannot provide assurance that
* such financing will be available or will be available on
satisfactory terms;
* the Company will be able to develop or acquire new restaurants or to
otherwise expand its restaurant operations; or
* the Company will be able to refinance, restructure, or satisfy its
obligations as they become due.
See Item 1, "Special Considerations - The Company faces risks associated with
the expansion of its operations" and "Special Considerations -The Company may be
unable to develop restaurants." While debt financing enables the Company to add
more restaurants than it would otherwise be able to do, such financing increases
expenses and must be repaid by the Company regardless of the Company's operating
results. Future equity financings could result in dilution to existing
shareholders.
THE COMPANY FACES RISKS ASSOCIATED WITH THE EXPANSION OF ITS OPERATIONS
The Company currently intends to pursue a strategy of growth primarily
through the development of new Black-eyed Pea and Denny's restaurants. The
Company also may acquire additional Denny's or other restaurants in the future.
See Item 1, "Business - Strategy" and "Business - Expansion of Operations." The
rate at which the Company will be able to increase the number of restaurants it
operates will vary depending upon whether the
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Company acquires existing restaurants or develops new restaurants. Unforeseen
expenses, difficulties, and delays frequently encountered in connection with the
rapid expansion of operations 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, many of which
will be beyond the Company's control. These factors include the Company's
ability to:
* locate suitable restaurant development 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;
* identify and acquire existing restaurants on satisfactory
terms and conditions;
* obtain financing for restaurant acquisitions, building
construction, tenant improvements, furniture, fixtures, and
equipment;
* negotiate acceptable leases or terms of purchase;
* obtain any required consents from Denny's, Inc., or the
Company's lenders for such developments and acquisitions;
* secure liquor licenses and zoning, environmental, health, and
similar regulatory approvals;
* recruit and train qualified management and other personnel;
* continue development and implementation of management
information systems; and
* 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. The Company cannot provide assurance
* that it will be successful in developing new restaurants or
acquiring existing restaurants on acceptable terms and
conditions;
* 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 Company will require substantial funds in order to successfully
execute its business strategy. These funds historically have been provided by
sale-leaseback financing arrangements. The Company currently has financing
commitments available in amounts that it believes will be sufficient for its
ongoing operations and anticipated restaurant development activities during
1999. The Company cannot provide assurance, however, that adequate financing
will continue to be available on terms acceptable to the Company.
THE COMPANY RELIES ON DENNY'S, INC.
The Company currently operates 100 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;
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* 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.
Advantica Restaurant Group, Inc., the parent of Denny's, Inc., emerged
from bankruptcy protection in 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. A variety of factors affecting Denny's, Inc. could
have a material adverse effect on the Company, including the following:
* 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;
* the failure to operate successfully the Denny's restaurants that
Denny's, Inc. itself owns; or
* negative publicity with respect to Denny's, Inc. or the Denny's
name.
DENNY'S FRANCHISE AGREEMENTS IMPOSE RESTRICTIONS AND OBLIGATIONS ON THE COMPANY
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% to 3% of weekly gross sales. The Company
must pay or accrue such amounts 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. These requirements and
specifications relate 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.
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. See Item 1, "Business - Denny's
Restaurants - Denny's Franchise Agreements."
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 Banque Paribas takes certain actions while the Company is in
default under the terms of its credit facility with Banque Paribas and the
Company's other senior lenders. If the Company fails to satisfy the requirements
described above or otherwise 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. At December 30, 1998, the Company
was not in compliance with certain financial covenants under its credit
facility. In April 1999, however, the Company obtained financing commitments in
amounts that it believes will be sufficient for its ongoing operations and
anticipated restaurant development activities during 1999. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The cancellation of the Denny's
Franchise Agreements, which include the right to what the Company believes are
favorable franchise arrangements and the right to use the "Denny's" trademarks
and trade styles, would have a material adverse effect on the Company.
16
<PAGE>
The Denny's Franchise Agreements also provide that, in the event the
Company assigns its rights under any of those agreements, 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.
THE COMPANY FACES CERTAIN RISKS AFFECTING THE RESTAURANT INDUSTRY
The ownership and operation of restaurants may be affected by a variety
of factors over which the Company has no control. These factors include the
following:
* adverse changes in national, * changing consumer tastes, habits,
regional, or local economic or and spending priorities;
market conditions;
* the cost and availability of
* increased costs of labor or food insurance coverage;
products;
* management problems;
* fuel shortages and price
increases; * uninsured losses;
* competitive factors; * limited alternative uses for
properties and equipment;
* the number, density, and location
of competitors; * changes in government regulation;
and
* changing demographics;
* weather conditions.
* changing traffic patterns;
Third parties may file lawsuits against the Company based on discrimination,
personal injury, claims for injuries or damages caused by serving alcoholic
beverages to an intoxicated person or to a minor, or other claims. As a
multi-unit restaurant operator, the Company can be adversely affected by
publicity about food quality, illness, injury, or other health and safety
concerns or operating issues at one restaurant or a limited number of
restaurants operated under the same name, whether or not the Company actually
owns the restaurants in question. The Company cannot predict any of these
factors with any degree of certainty. Any one or more of these factors could
have a material adverse effect on the Company.
THE COMPANY FACES RISKS ASSOCIATED WITH 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 desirable restaurant sites and the availability of
restaurant personnel and managers. The Company has many well-established
competitors that have financial and other resources that are 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.
17
<PAGE>
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.
CERTAIN SHAREHOLDERS MAY CONTROL THE COMPANY OR HAVE CONFLICTS OF INTEREST
The directors and officers of the Company currently own approximately
35.1% of the Company's outstanding Common Stock. 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, also hold
warrants to acquire an additional 439,834 shares of Common Stock at an exercise
price of $.01 per share. 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.
Messrs. Lloyd and Howard currently hold an aggregate of $16,794,000 in
principal amount of the Company's Series B Notes in addition to their Common
Stock and warrants. 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. 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 due
on the Series B Notes. See Item 13, "Certain Relationships and Related
Transactions."
THE COMPANY DEPENDS 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 adverse effect on the Company.
THE COMPANY MUST COMPLY WITH VARIOUS GOVERNMENT REGULATIONS
Various federal, state, and local laws affect the Company's 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
* state and local licensing of the sale of alcoholic beverages in
those restaurants operated by the Company at which alcoholic
beverages are served.
18
<PAGE>
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, 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. In the event that the Company resumes
franchising Black-eyed Pea restaurants or any other restaurants in the future,
the Company will be subject to regulation by the Federal Trade Commission and
will be required to comply with certain state laws governing the offer, sale,
and termination of franchises and the refusal to renew franchises.
THE COMPANY FACES RISKS ASSOCIATED WITH "YEAR 2000" COMPLIANCE
Many currently installed computer systems and software products may not
function properly when processing transactions that include dates on and after
January 1, 2000. The Company engaged an outside consulting firm to address its
internal Year 2000 issues and is converting or upgrading its internal accounting
system and restaurant-level point-of-sale and accounting systems to ensure Year
2000 compliance. The Company also has obtained Year 2000 compliance
certifications from significant 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 of up to $250,000 related to
making its computer systems Year 2000 compliant. The Company will expense these
costs as incurred. Because the appropriate course of action may include
replacing or upgrading certain equipment or software, the Company may incur
costs in excess of that amount in resolving its Year 2000 issues. The Company
cannot provide assurance that it will be able to make its computer system Year
2000 compliant in a timely manner. In addition, the Company cannot provide
assurance that computer systems operated by third parties with which the
Company's systems interface will continue to properly interface with the
Company's 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. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Operating Results - Year 2000 Compliance."
THE COMPANY'S STOCK IS THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY
The market price of the Company's Common Stock could be subject to wide
fluctuations as a result of a variety of factors, including the following:
* 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.
THE EXISTENCE OF STOCK OPTIONS AND WARRANTS MAY ADVERSELY AFFECT THE TERMS OF
FUTURE FINANCINGS
Employee and director stock options to acquire an aggregate of
1,016,300 shares of Common Stock currently are outstanding. An additional
821,667 shares have been reserved for issuance upon exercise of options
19
<PAGE>
that may be granted under the Company's existing stock option plans. In
addition, warrants to acquire 1,560,981 shares of Common Stock currently are
outstanding. During the terms of such options and warrants, the holders of those
securities 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.
SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF THE
COMPANY'S COMMON STOCK
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, 1999, there were outstanding
13,485,277 shares of the Company's Common Stock. Of these shares, 6,204,560
shares are freely transferable without restriction under the securities laws,
unless they are held by "affiliates" of the Company, as that term is defined in
the securities laws or unless transfer of certain shares is restricted as a
result of contractual obligations. The remaining 7,280,717 shares of Common
Stock currently outstanding are "restricted securities," as that term is defined
in Rule 144 under the securities laws, and may be sold only in compliance with
Rule 144, pursuant to registration under the securities laws, or pursuant to an
exemption from registration. Affiliates also are subject to certain of the
resale limitations of Rule 144. 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 744,800 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.
THE COMPANY DOES NOT ANTICIPATE THAT IT WILL PAY DIVIDENDS
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 MAY ADVERSELY AFFECT EXISTING SHAREHOLDERS
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.
ACTUAL RESULTS MAY DIFFER FROM FORWARD-LOOKING STATEMENTS IN THIS REPORT
Certain statements and information contained in this Report 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 under
20
<PAGE>
applicable securities laws. 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."
ITEM 2. PROPERTIES.
The Company leases for a term expiring in September 2001 approximately
20,000 square feet of office space in Scottsdale, Arizona, for use as its
principal corporate offices. The Company currently believes that these
facilities are adequate for its reasonably anticipated needs. 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 operations and facilities
maintenance operations.
The Company's restaurants generally are located in one-story,
freestanding buildings with a capacity of between 90 and 210 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 5% of total rent
expense for each of fiscal 1996, 1997, and 1998. 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.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the American Stock
Exchange (the "AMEX") under the symbol "DEN" since the Company's initial public
offering on October 18, 1994. 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.
COMMON STOCK
-----------------
HIGH LOW
----- -----
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
Second Quarter ........................ 3.38 2.13
Third Quarter.......................... 3.50 1.75
Fourth Quarter......................... 2.38 0.88
1999
----
First Quarter.......................... $1.31 $0.88
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, 1999, there were 107 holders of record and
approximately 1,200 beneficial owners of the Company's Common Stock. On March
31, 1999, the closing sales price of the Company's Common Stock on the AMEX was
$1.00 per share.
22
<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,
1998 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 30, 1995 are derived from historical financial
statements that 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)
----------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Restaurant sales ................................. $47,323 $74,683 $241,480 $300,579 $255,956
Charge for impaired assets ....................... -- 523 -- 14,100 --
Restaurant operating income ...................... 4,539 6,643 22,137 9,101 18,116
Administrative expenses .......................... 2,619 3,380 10,303 13,684 12,423
Operating income (loss) .......................... 1,320 3,263 11,834 (4,583) 5,693
Interest expense, net ............................ (1,301) (2,467) (9,605) (13,655) (12,635)
Net income (loss) ................................ (341) 200 1,118 (20,977) (4,657)
OTHER DATA:
EBITDA(3) ........................................ $ 2,821 $ 6,722 $ 18,834 $ 18,884 $ 13,283
Cash interest expense ............................ 1,140 2,397 8,904 10,033 8,221
Cash provided by (used in) operating activities... 2,410 7,486 9,664 (1,458) (1,357)
Cash (used in) provided by investing activities... (9,667) (8,736) (9,393) (6,316) 22,622
Cash provided by (used in) financing activities... 7,092 2,273 1,157 6,432 (20,202)
Capital expenditures ............................. 6,355 7,003 9,879 8,147 2,891
Depreciation and amortization .................... 1,501 2,936 7,000 9,367 7,590
Ratio of earnings to fixed charges(4) ............ -- 1.10 1.14 -- --
Number of restaurants, end of period ............. 70 102 307 283 201
BALANCE SHEET DATA:
Working capital (deficit) ........................ $(6,107) $(9,406) $(33,029) $(36,417) $(44,838)
Total assets ..................................... 35,028 53,785 179,189 170,264 134,507
Long-term debt, less current portion ............. 7,552 10,371 69,903 39,022 39,666
Obligations under capital leases,
less current obligations ....................... 7,151 19,881 24,229 39,396 32,828
Redeemable convertible preferred stock ........... 7,397 7,501 -- -- --
Shareholders' equity (deficit) ................... 957 564 22,128 1,248 (3,334)
</TABLE>
- ----------
(1) The Company's fiscal years 1994 through 1998 ended on December 28, 1994,
December 27, 1995, January 1, 1997, December 31, 1997, and December 30,
1998, respectively.
(2) From fiscal 1994 through 1998, the Company consummated various
acquisitions, opened new restaurants, and closed or sold certain
restaurants. Revenue increases in each year from 1994 through 1997 arose
primarily from restaurant acquisitions and openings in each year. The
Company sold or closed an aggregate of 82 restaurants during fiscal 1998,
which contributed to the overall revenue decrease in that year from prior
years.
(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), fiscal 1997 ($17,719,000), and fiscal 1998 ($6,942,000).
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company's fiscal 1996 and 1997 results of operations were
materially impacted by the Merger and the BEP Acquisition. During these years,
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. During 1998 the Company
(i) sold or closed a total of 74 Denny's restaurants; (ii) sold or closed three
non-branded restaurants; (iii) purchased the leasehold interests in two
Black-eyed Pea restaurants from franchisees; and (iv) closed five Black-eyed Pea
restaurants. 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. As a result of the acquisitions and
dispositions of restaurants during past fiscal periods, operating results during
a particular year are not comparable to those of other fiscal years. 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.
The Company currently operates 101 Black-eyed Pea restaurants in 13
states, including 73 Black-eyed Pea restaurants in Texas, Oklahoma, and Arizona.
The average unit sales for all Company-owned Black-eyed Pea restaurants was $1.4
million in each of fiscal 1997 and 1998 as compared with average unit sales at
restaurants in Texas and Oklahoma of $1.6 million during each of those periods.
Through December 30, 1998, comparable same-store sales decreased 1.0% for all of
the Company's Black-eyed Pea restaurants, while comparable same-store sales
decreased by 0.3% for Black-eyed Pea restaurants in Texas and Oklahoma. The
guest check average at the Company's Black-eyed Pea restaurants is approximately
$7.95, and alcohol and carry-out sales account for approximately 2.0% and 11.4%
of sales, respectively.
As of December 30, 1998, the Company operated 100 Denny's restaurants
in 19 states. The Company's Denny's restaurants that were open for a 12-month
period had average restaurant sales of $1,030,000 in fiscal 1998 as compared
with $917,000 in fiscal 1997. Excluding the results of the restaurants sold in
March 1998, average restaurant sales in fiscal 1997 would have been $997,000.
Comparable store sales increased approximately 3.0% in fiscal 1998 and the
average guest check was approximately $5.45. Food and labor costs as a
percentage of revenue decreased in 1998 due to the withdrawal from promotional
value pricing and an increase in comparable store sales.
24
<PAGE>
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.
FISCAL YEAR
--------------------------
1996 1997 1998
---- ---- ----
Restaurant sales:
Denny's restaurants .......................... 62.7% 54.9% 45.2%
Black-eyed Pea restaurants ................... 28.6 42.9 54.6
Other restaurants ............................ 8.7 2.2 0.2
----- ----- -----
Total restaurant sales ..................... 100.0% 100.0% 100.0%
----- ----- -----
Restaurant operating expenses:
Food and beverage costs ...................... 27.3 27.4 27.4
Payroll and payroll related costs ............ 34.3 34.4 34.4
Depreciation and amortization ................ 2.9 3.1 3.0
Other operating expenses ..................... 26.3 27.4 28.1
Charge for impaired assets ................... -- 4.7 --
----- ----- -----
Total restaurant operating expenses ........ 90.8 97.0 92.9
----- ----- -----
Restaurant operating income ..................... 9.2 3.0 7.1
Administrative expenses ......................... 4.3 4.6 4.9
----- ----- -----
Operating income (loss) ......................... 4.9 (1.5) 2.2
Interest expense, net ........................... (4.0) (4.6) (4.9)
Minority interest in joint ventures ............. 0.1 0.2 --
----- ----- -----
Income before income taxes and
extraordinary item ............................. 1.0 (5.9) (2.7)
Income tax provision (benefit) .................. 0.4 1.1 (0.4)
----- ----- -----
Income (loss) before extraordinary item ......... 0.6 (7.0) (2.3)
Extraordinary (loss) gain ....................... (0.2) -- 0.5
----- ----- -----
Net income (loss) ............................... 0.4% (7.0)% (1.8)%
===== ===== =====
FISCAL 1998 COMPARED WITH FISCAL 1997
RESTAURANT SALES. Restaurant sales decreased $44.6 million, or 14.8%,
to $256.0 million in fiscal 1998 as compared with restaurant sales of $300.6
million in fiscal 1997. This decrease was primarily attributable to the sale of
Denny's restaurants in March 1998 and an approximately $1.1 million decrease in
Black-eyed Pea franchise revenue. In 1998, the Black-eyed Pea restaurants
accounted for 54.6% of total sales as compared with 42.9% in fiscal 1997. The
Company expects this percentage to continue to increase.
FOOD AND BEVERAGE COSTS. Food and beverage costs were 27.4% of
restaurant sales in each of fiscal 1998 and 1997. Food costs at the Company's
Denny's restaurants decreased from 26.6% of restaurant sales in fiscal 1997 to
26.0% in fiscal 1998, primarily due to the sale of lower volume restaurants and
same store sales increases. Food costs attributable to the Black-eyed Pea
restaurants decreased from 28.8% of restaurant sales in fiscal 1997 to 28.6% in
fiscal 1998, as a result of lower commodity prices and improved operational
controls.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs
were 34.4% of restaurant sales in each of fiscal 1998 and fiscal 1997. Payroll
and payroll related costs at the Company's Denny's restaurants decreased from
35.3% of restaurant sales in fiscal 1997 to 34.5% in fiscal 1998. This decrease
is attributable to the sale of lower volume restaurants and same store sales
increases. Payroll and payroll related costs attributable to the Black-eyed Pea
restaurants increased from 32.9% of restaurant sales in fiscal 1997 to 33.8% in
fiscal 1998 due principally to increased fringe benefits.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
restaurant equipment and leasehold improvements, intangible assets, and
pre-opening costs totaled $7.6 million, or 3.0% of restaurant sales, in fiscal
1998 as compared with $9.4 million, or 3.1% of restaurant sales, in fiscal 1997.
The $1.8 million decrease was attributable to the reduced amortization of
goodwill associated with the sale of restaurants in March 1998 and reduced
amortization of pre-opening costs related to restaurants opened in 1997. These
decreases were partially offset by increased depreciation associated with the
acquisition of certain Black-eyed Pea restaurants in September 1997.
OTHER OPERATING EXPENSES. Other operating expenses were 28.1% of
restaurant sales in fiscal 1998 as compared with 27.4% of restaurant sales in
fiscal 1997. This increase was attributable to (a) an increase in occupancy
costs as a percentage of restaurant sales associated with the Company's
remaining Denny's restaurants subsequent
25
<PAGE>
to the sale of restaurants in March 1998, and (b) an increase in costs
associated with Denny's promotional items, offset by (c) a decrease in utility
costs.
RESTAURANT OPERATING INCOME. Restaurant operating income increased $9.0
million to $18.1 million in fiscal 1998 as compared with $9.1 million in fiscal
1997. This increase was principally the result of the charge for impaired assets
of $14.1 million in fiscal 1997, offset by the factors described above.
ADMINISTRATIVE EXPENSES. Administrative expenses decreased $1.3 million
to $12.4 million in fiscal 1998 as compared with $13.7 million in fiscal 1997.
This decrease is attributable to a reduction in the administrative costs
associated with the restaurants sold in March 1998 and various cost reduction
initiatives implemented in 1997, offset by the costs associated with the
proposed merger and a reduction in overall restaurant sales.
INTEREST EXPENSE. Interest expense decreased $1.1 million to $12.6
million in fiscal 1998 from $13.7 million in fiscal 1997. Expressed as a
percentage of restaurant sales, interest expense increased from 4.6% in fiscal
1997 to 4.9% in fiscal 1998. This increase is the result of reduced restaurant
sales in fiscal 1998.
INCOME TAXES. The income tax benefit was $0.9 million for fiscal 1998
as compared with an income tax provision of $3.3 million in fiscal 1997. This
change was the result of a non-deductible expense associated with the charge for
impaired assets in fiscal 1997 as compared with the tax benefit associated with
the net loss in fiscal 1998.
EXTRAORDINARY ITEMS. The extraordinary item in fiscal 1998 resulted
from the discount associated with the repayment of the BEP Purchase Note, which
was realized in March 1998.
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, partially 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
26
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
In order to provide the Company with the flexibility to (a) refinance
certain debt obligations to better match operating cash flows with debt
amortization, (b) improve its portfolio of operating restaurants, and (c)
position itself for growth, the Company has pursued a strategy to repay its
senior debt obligations. During 1998, the Company reduced its total liabilities
from $169.0 million to $137.8 million. Included in this $31.2 million reduction
was a decrease in long-term debt obligations, including current portion, of
$27.8 million. This decrease in indebtedness was primarily attributable to the
Company's reduction of its obligations under the terms of a credit facility with
Banque Paribas, as agent for several banks (the "Credit Facility"), as well as
the early repayment of an outstanding promissory note issued to the seller of
BEP. As described below, in April 1999 the Company executed commitment letters
for new financing that will allow the Company to repay its remaining obligation
under the Credit Facility. The following paragraphs describe certain
transactions the Company completed in fiscal 1998 in its effort to decrease its
long-term debt obligations.
In March 1998, the Company sold 63 Denny's restaurants and eight
non-branded restaurants to an unrelated party for $28.7 million, consisting
initially of cash of $25.2 million and notes totaling $3.5 million. The Company
collected $1.7 million on those notes during 1998. The Company utilized the cash
proceeds from this transaction primarily to (1) permanently reduce its
outstanding borrowings under the Credit Facility; and (2) repay an outstanding
promissory note issued to the seller of BEP at a $2.3 million discount from its
outstanding principal amount of approximately $15.3 million. The Company also
canceled outstanding warrants to acquire approximately 1.0 million shares of
Common Stock when it repaid the note.
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
collected $200,000 on this note in September 1998. The Company utilized the
proceeds from this transaction to permanently reduce its outstanding borrowings
under the Credit Facility.
27
<PAGE>
In April 1999, the Company executed commitment letters (the
"Commitments") that provide for borrowings totaling $20.1 million. Under the
terms of the Commitments, the Company will enter into (a) $3.0 million of new
equipment financing, and (b) a loan not to exceed $17.1 million. The $3.0
million new equipment financing will be made in conjunction with the
modification and consolidation of existing equipment loans totaling
approximately $15.4 million to create a total term loan of $18.4 million, which
will amortize monthly over a seven-year period.
To facilitate the $17.1 million loan, the Company formed a
special-purpose subsidiary and will contribute to that subsidiary the assets and
liabilities associated with approximately 34 Denny's restaurants. The newly
formed subsidiary will be the borrower under the loan, which will be evidenced
by 34 individual promissory notes secured by the leasehold properties. The terms
of the notes will vary based upon the term of the leaseholds, which approximate
15 years. The notes will amortize monthly at a fixed rate.
The Company will use the proceeds from the new loans (1) to permanently
retire the Credit Facility; (2) to purchase certain restaurant equipment
currently encumbered by equipment leases; (3) to pay various fees and expenses;
and (4) to provide working capital. The Company believes that it will complete
the financing transactions contemplated by the Commitments in the second quarter
of 1999 and that the funds provided by these financings will be sufficient for
its ongoing operations and anticipated restaurant development activities during
1999.
At December 30, 1998, the Company was not in compliance with certain
financial covenants and payment terms in various debt and other agreements,
including the Credit Facility and Series B Notes. See Item 13, "Certain
Relationships and Related Transactions." The Company believes that the financing
transaction provided for in the Commitments will enable it to repay the
remaining obligations under its Credit Facility and to cure the covenant
defaults under its other agreements. In addition, the Company intends to pursue
various alternatives to refinance other assets during 1999. If the Company
cannot complete the financing contemplated under the Commitments, it would
continue to be in default under the Credit Facility until other acceptable
refinancing or restructuring alternatives become available. The Company cannot
provide assurance, however, that additional financing will be available to the
Company or available on satisfactory terms.
The sale of restaurants described above significantly impacted the
Company's liquidity during 1998 because (a) the Company repaid the negative
working capital attributable to the restaurants that it sold from cash flows
generated by its remaining restaurants; and (b) the Company did not immediately
realize the beneficial effects of reduced administrative costs. The Company
believes, however, that the sale of these underperforming restaurants has
improved its overall asset base and positioned it for improved operating results
in fiscal 1999. In particular, the Company's remaining Denny's restaurants
posted improved same-store sales during the fourth quarter of fiscal 1998 and
the first quarter of fiscal 1999. In addition, the Company's Denny's restaurants
and Black-eyed Pea restaurants recorded improved cash flows during the same
periods.
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 $36.4 million
at December 31, 1997 and $44.8 million at December 30, 1998. The Company expects
that it will operate with a working capital deficit in the future.
The Company historically has satisfied its capital requirements through
credit facilities and sale-leaseback financings. The Company currently requires
capital principally for the development of new restaurants and maintenance
expenditures on existing restaurants. Expenditures for property and equipment
totaled approximately $9.9 million, $8.1 million, and $2.9 million for fiscal
1996, fiscal 1997, and fiscal 1998, respectively. The Company intends to develop
a total of eight new Black-eyed Pea restaurants during 1999, including three new
Black-eyed Pea restaurants opened to date. The Company believes that it
currently has commitments that it believes will be adequate to meet its
financing needs during 1999. The following paragraphs describe the Company's
cash flow activities during fiscal 1998.
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<PAGE>
Net cash used in operating activities decreased from $1.5 million in
fiscal 1997 to $1.4 million in fiscal 1998. Net cash used in operating
activities included a reduction of accounts payable and accrued liabilities of
$7.0 million and $3.4 million in fiscal 1997 and fiscal 1998, respectively. This
reduction was primarily attributable to the payment of certain liabilities
associated with restaurants sold or closed.
Net cash from investing activities increased from $6.3 million used in
fiscal 1997 to $22.5 million provided in fiscal 1998. In fiscal 1997, the
Company opened four new Black-eyed Pea restaurants and purchased seven
franchised Black-eyed Pea restaurants. The cash used in these transactions was
offset by the proceeds from the sale of assets. In fiscal 1998, the Company
purchased the two remaining franchised Black-eyed Pea restaurants and began the
construction of several new Black-eyed Pea restaurants to be opened in 1999.
These expenditures were offset by the proceeds from the restaurant sales
described above.
Net cash from financing activities changed from $6.4 million provided
by financing activities in fiscal 1997 to $20.2 million used in financing
activities in fiscal 1998. In fiscal 1997, the Company refinanced certain
indebtedness and used the proceeds to repay obligations under its Credit
Facility and to acquire the franchised Black-eyed Pea restaurants described
above. In fiscal 1998, the Company sold restaurants and used the proceeds
primarily to reduce its long-term debt obligations.
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.
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 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 September 30, 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 June 30, 1999. The Company currently anticipates
that its costs to bring its computer systems into Year 2000 compliance will not
exceed $250,000.
29
<PAGE>
The Company has obtained Year 2000 compliance certifications 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
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 Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up Activities." The
Company early adopted SOP 98-5 in fiscal 1998 and now expenses as incurred all
pre-opening costs. The effect of this change did not have a material impact on
the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING Activities. This standard is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including those imbedded in other
contracts, and for hedging activities. It requires all derivatives to be
recognized as either assets or liabilities in the statement of financial
position and measured at fair value. The Company has not yet determined the
effect the adoption of SFAS No. 133 will have on its financial statements.
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 herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
30
<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.
NAME AGE POSITION
---- --- --------
Jack M. Lloyd........... 49 Chairman of the Board, President, and Chief
Executive Officer
William J. Howard....... 54 Executive Vice President, Secretary, and Director
William G. Cox.......... 50 Chief Operating Officer and Director
Robert J. Gentz......... 49 Executive Vice President
Todd S. Brown........... 42 Senior Vice President, Chief Financial Officer,
Treasurer, and Director
Fred W. Martin.......... 68 Director
Robert H. Manschot...... 55 Director
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.
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.
ROBERT J. GENTZ has served as Executive Vice President of the Company
since January 1997. 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.
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<PAGE>
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.
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.
ROBERT H. MANSCHOT has served as a director of the Company since
January 1999. Mr. Manschot currently serves as the Managing Director and
Chairman of Manschot Investment Group L.L.C., an investment fund that is in the
business of identifying and investing in companies that have significant
potential for growth. Mr. Manschot also serves as Chairman of Seceurop Security
Services in the United Kingdom and engages in business consulting services and
venture capital activities as Chairman of RHEM International Enterprises, Inc.
Mr. Manschot served as President and Chief Executive Officer of Rural/Metro
Corporation ("Rural/Metro"), a publicly held provider of ambulance and fire
protection services, from October 1988 until March 1995. Mr. Manschot joined
Rural/Metro in October 1987 as Executive Vice President, Chief Operating
Officer, and a member of its Board of Directors. Mr. Manschot was with the Hay
Group, an international consulting firm, from 1978 until October 1987, serving
as Vice President and a partner from 1984, where he led strategic consulting
practices in Europe, Asia, and the western United States. Prior to joining the
Hay Group, Mr. Manschot spent 10 years with several leading international hotel
chains in senior operating positions in Europe, the Middle East, Africa, and the
United States. Mr. Manschot currently serves as a director of Samoth Capital
Corporation and Action Performance Companies, Inc., which are publicly traded
companies, and as a director of Silicon Entertainment, Inc., Thomas Pride
Development, Inc., First Wave, Inc., Motorsports Promotions, Inc., and Sports
Southwest, Inc., all of which are privately held companies.
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. During fiscal 1998, John M. Holliman and
C. Alan MacDonald, former directors of the Company, constituted the Audit
Committee; Messrs. Holliman, MacDonald, and Fred W. Martin constituted the
Compensation Committee and 1992 Stock Option Plan Committee; and Messrs. Lloyd
and Howard constituted 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 December 30, 1998, 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.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation
of the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers whose cash salary and bonuses exceeded $100,000
during the fiscal year ended December 30, 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
---------------------- ------------
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY$(1) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Jack M. Lloyd, Chairman of the 1998 $520,000 -- -- --
Board, President, and Chief 1997 520,000 -- -- --
Executive Officer(2) 1996 375,200 -- -- --
William J. Howard, Executive 1998 $260,000 -- -- --
Vice President and Secretary (2) 1997 260,000 -- -- --
1996 187,600 -- -- --
William G. Cox, Chief Operating 1998 $220,000 $50,000 -- --
Officer 1997 220,000 -- -- --
1996 221,795(3) -- 300,000 $15,921
Robert J. Gentz, Executive Vice 1998 $175,000 $50,000 -- --
President 1997 166,027(4) -- 100,000 --
Todd S. Brown, Senior Vice 1998 $160,000 $50,000 -- --
President, Chief Financial 1997 127,372 -- -- --
Officer, and Treasurer(2) 1996 115,700 75,000 124,800 --
</TABLE>
- ----------
(1) Each of the Named Executive Officers received certain perquisites, the
value of which did not exceed 10% of their salary during fiscal 1998.
(2) Each of Messrs. Lloyd, Howard, and Brown became executive officers of the
Company upon consummation of the Merger on March 29, 1996. Amounts shown
for fiscal 1996 include payments to each such person for services as an
executive officer of DRC prior to the Merger.
(3) Represents amounts accrued or paid beginning on March 29, 1996, the date of
Mr. Cox's employment with the Company.
(4) Represents amounts accrued or paid beginning on January 6, 1997, the date
of Mr. Gentz' employment with the Company.
OPTION GRANTS
The Company did not grant any stock options to the Named Executive
Officers during the fiscal year ended December 30, 1998.
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<PAGE>
OPTION HOLDINGS
The following table sets forth information concerning the number and
value of all options held at December 30, 1998, by the Named Executive Officers.
None of the Named Executive Officers exercised any options during fiscal 1998.
YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)(1)
-------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Jack M. Lloyd........ -- -- N/A N/A
William J. Howard.... -- -- N/A N/A
William G. Cox....... 180,000 120,000 $0 $0
Robert J. Gentz...... 50,000 50,000 $0 $0
Todd S. Brown........ 74,880 49,920 $0 $0
- ----------
(1) The exercise prices of all options held by the Named Executive Officers
were greater than the closing price of the Company's Common Stock of $1.13
per share on December 30, 1998.
401(K) PLAN
In April 1998, the Company established a defined contribution plan (the
"401(k) Plan") that qualifies as a cash or deferred profit sharing plan under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). Under the 401(k) Plan, participating employees may
defer from 1% to 15% of their pre-tax compensation, subject to the maximum
dollar amount allowed under the Internal Revenue Code. In addition, the 401(k)
Plan provides that the Company may make discretionary contributions to
participating employees in such amounts as may be determined by the Company's
Board of Directors. Highly compensated employees of the Company, including
executive officers, are not eligible to participate in the 401(k) Plan.
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.
34
<PAGE>
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.
Effective January 1, 1998, Mr. Cox and the Company amended the original
employment agreement. 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, as
amended, 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 prior to the end of the
then-current term. 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
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 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
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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. 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 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.
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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 the remainder vest and become exercisable 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."
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
1998. None of such individuals had any contractual or other relationships with
the Company during fiscal 1998 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)
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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.
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, 1999 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.
NUMBER PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL HOLDER(1) OF SHARES(2) OWNERSHIP(2)
- ---------------------------------------- ------------ ------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Jack M. Lloyd 3,469,727(3) 25.2%
William J. Howard 1,700,363(4) 12.5%
William G. Cox 241,000(5) 1.8%
Robert J. Gentz 75,000(6) *
Todd S. Brown 102,640(7) *
Fred W. Martin 31,000(8) *
Robert H. Manschot 10,000(9) *
All directors and executive officers
as a group (seven persons) 5,629,730 39.2%
NON-MANAGEMENT 5% SHAREHOLDER
- -----------------------------
BancBoston Ventures, Inc.(10) 2,124,352 15.8%
- ----------
* 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 D-120, Scottsdale, Arizona 85253.
(2) The numbers and percentages shown include the shares of Common Stock
actually owned as of March 31, 1999 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, 1999 upon the exercise of options or warrants 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 3,176,504 shares of Common Stock and 293,223 shares issuable
upon exercise of Series B Warrants.
(4) Represents 1,553,752 shares of Common Stock and 146,611 shares issuable
upon exercise of Series B Warrants.
(5) Represents 1,000 shares of Common Stock and 240,000 shares of Common Stock
issuable upon the exercise of vested options.
(6) Represents 75,000 shares of Common Stock issuable upon exercise of vested
options.
(7) Represents 2,800 shares of Common Stock and 99,840 shares issuable upon the
exercise of vested options.
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(8) Represents 6,000 shares of Common Stock held by Mr. Martin and his spouse
and 25,000 shares issuable upon the exercise of vested options.
(9) Represents 10,000 shares of Common Stock 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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.
In addition to the loan from FFCA to LH Leasing as described above,
Jack M. Lloyd and William J. Howard each have personally guaranteed certain of
the Company's indebtedness and other obligations under leases and franchise
agreements.
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. Mr. Lloyd and
Mr. Howard have deferred interest due on the Series B Notes as of each of
September 30, 1997, March 31, 1998, September 30, 1998, and March 31, 1999. As
of December 30, 1998, the Company was in technical default of certain financial
covenants in the Series B Notes, owed Mr. Lloyd deferred interest totaling
approximately $2,546,000, and owed Mr. Howard deferred interest totaling
approximately $1,274,000. Although the Company believes that the financing
transaction provided for in the Commitments will enable it to cure the financial
covenant defaults under the Series B Notes.
During fiscal 1998, the Company made various advances to Jack M. Lloyd.
Such advances totaled approximately $800,000 as of December 30, 1998.
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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
EXHIBIT NO DESCRIPTION OF EXHIBIT
- ---------- ----------------------
3.1 Articles of Restatement of the Articles of Incorporation of
American Family Restaurants, Inc. and Articles of Amendment
thereto.(1)
3.1A Articles of Amendment to the Articles of Incorporation of
DenAmerica Corp., as filed on July 2, 1997.(2)
3.2 Amended and Restated Bylaws of American Family Restaurants,
Inc.(3)
3.3 Certificate of Merger of Denwest Restaurant Corp. into American
Family Restaurants, Inc.(4)
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).(4)
4.4 Form of Series B Common Stock Purchase Warrant.(5)
4.5 Common Stock Purchase Warrant dated March 29, 1996, issued to
Banque Paribas.(4)
4.6 Supplemental Indenture (Series B Notes) between DenAmerica Corp.
and State Street Bank and Trust Company, as trustee(6)
4.8 Common Stock Purchase Warrant dated July 3, 1996, issued to
Banque Paribas(6)
10.1 American Family Restaurants, Inc. 1992 Stock Option Plan.(1)
10.1A American Family Restaurants, Inc. Amended and Restated 1992 Stock
Option Plan.(1)
10.2 American Family Restaurants, Inc. Directors Stock Option Plan.(1)
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.)(1)
10.32A Schedule of warrants substantially identical to Exhibit 10.32.(1)
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.)(1)
10.33A Schedule of registration rights agreements substantially
identical to Exhibit 10.33.(1)
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.)(1)
10.60A Letter Agreement between American Family Restaurants, Inc. and
Denny's, Inc., dated September 13, 1994, regarding change of
control provisions.(1)
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10.60B Letter Agreement between American Family Restaurants, Inc. and
Denny's, Inc., dated September 13, 1994, regarding non-compete
provisions.(1)
10.60A Schedule of franchise agreements substantially identical to
Exhibit 10.60.(1)
10.65 Form of Warrant Agreement between American Family Restaurants,
Inc. and Fahnestock & Co. Inc. for 290,000 shares of Common
Stock.(1)
10.73 Employment Agreement dated December 8, 1995 between American
Family Restaurants, Inc. and William G. Cox.(5)
10.73A Amendment Agreement dated as of January 1, 1998, between
DenAmerica Corp. and William G. Cox, amending the Employment
Agreement dated December 8, 1995, between American Family
Restaurants, Inc. and William G. Cox.(7)
10.78 Amendment to American Family Restaurants, Inc. Amended and
Restated 1992 Stock Option Plan.(5)
10.79 Letter Agreement, dated December 20, 1995, from American Family
Restaurants, Inc. to Denny's, Inc. and Denwest Restaurant
Corp.(5)
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.(5)
10.82 Executive Employment Agreement, dated November 9, 1994, between
Jack M. Lloyd and Denwest Restaurant Corp.(5)
10.83 Executive Employment Agreement, dated November 9, 1994, between
William J. Howard and Denwest Restaurant Corp.(5)
10.90 Intercreditor Agreement among DenAmerica Corp., certain holders
of DenAmerica's Series B Notes, and State Street Bank and Trust
Company.(4)
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).(4)
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.(6)
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.(2)
10.92C Amendment and Limited Consent and Waiver dated as of March 25,
1998 among DenAmerica Corp., the Banks (as defined), and Banque
Paribas, as agent.(7)
10.93 Security Agreement dated as of February 29, 1996, between
DenAmerica Corp. and Banque Paribas, as Agent.(4)
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.(4)
10.95 Stock Option Agreement dated March 29, 1996, between DenAmerica
Corp. and William G. Cox.(4)
10.98 Intercreditor Agreement among DenAmerica Corp., certain holders
of DenAmerica's Series B Notes, and State Street Bank and Trust
Company.(6)
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.(6)
10.100 Form of Lease dated July 3, 1996, between FFCA Acquisition Corp.
and DenAmerica Corp.(6)
10.101 Form of Sublease dated July 3, 1996, between DenAmerica Corp. and
Black-eyed Pea U.S.A., Inc.(6)
10.102 Form of Sublease dated July 3, 1996, between DenAmerica Corp. and
Texas BEP, L.P.(6)
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.(6)
10.104 Equipment Purchase Agreement and Bill of Sale dated July 3, 1996,
between LH Leasing Company, Inc. and Texas BEP, L.P.(6)
10.105 Equipment Lease dated July 3, 1996, between LH Leasing Company,
Inc. and DenAmerica Corp.(6)
10.106 Equipment Sublease dated July 3, 1996, between DenAmerica Corp.
and Black-eyed Pea, U.S.A., Inc.(6)
10.107 Equipment Sublease dated July 3, 1996, between DenAmerica Corp.
and Texas BEP, L.P.(6)
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10.109 Stock Option Agreement dated April 29, 1996, between DenAmerica
Corp. and Todd S. Brown.(8)
10.110 DenAmerica Corp. 1996 Stock Option Plan.(9)
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.(2)
10.112 5-Year 5% Convertible Redeemable Debenture dated September 30,
1997 in the principal amount of $4,400,000.(2)
10.113 Subordinated Promissory Note dated September 30, 1997 in the
principal amount of $7,700,000.(2)
10.114 Registration Rights Agreement dated as of September 30, 1997
between DenAmerica Corp., and CNL Growth Corp.(2)
10.115 Agreement dated as of September 30, 1997 by and among DenAmerica
Corp., Beck Holdings, Inc. and Unigate Holdings, NV.(2)
10.116 Asset Purchase Agreement dated January 27, 1998, among DenAmerica
Corp., Olajuwon Holdings, Inc., and Akinola Olajuwon.(10)
10.117 First Amendment to Asset Purchase Agreement dated March 16, 1998
between DenAmerica Corp., Olajuwon Holdings, Inc., and Akinola
Olajuwon.(10)
10.118 Promissory Note dated March 25, 1998, from Olajuwon Holdings,
Inc. to DenAmerica Corp. in the principal amount of
$1,800,000.(10)
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.(10)
10.120 Executive Employment Agreement dated as of December 27, 1997,
between DenAmerica Corp. and Todd S. Brown.(8)
10.121 Commitment Letter dated April 13, 1999, from CNL Fund Advisors,
Inc. to DenAmerica Corp. regarding $3,000,000 of new equipment
financing and modification and consolidation with $15,400,000
existing equipment financing.
10.122 Commitment Letter dated April 13, 1999 from CNL Financial
Services, Inc. to DenAmerica Corp. regarding total cumulative
loan not to exceed $17,000,000.
12.1 DenAmerica Corp. Ratio of Income to Fixed Charges.
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.(5)
27.1 Financial Data Schedule.
- ----------
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) Incorporated by reference to the Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 1, 1998, as filed on May
15, 1998.
(8) 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.
(9) 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.
(10) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on April 9, 1998.
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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 13th day of
April, 1999.
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jack M. Lloyd Chairman of the Board, President, April 13, 1999
- ------------------------- and Chief Executive Officer
Jack M. Lloyd (Principal Executive Officer)
/s/ William J. Howard Executive Vice President, April 13, 1999
- ------------------------- Secretary, and Director
William J. Howard
/s/ William G. Cox Chief Operating Officer and April 13, 1999
- ------------------------- Director
William G. Cox
/s/ Todd S. Brown Senior Vice President, Chief April 13, 1999
- ------------------------- Financial Officer, Treasurer, and
Todd S. Brown Director (Principal Financial and
Accounting Officer)
/s/ Fred W. Martin Director April 13, 1999
- -------------------------
Fred W. Martin
/s/ Robert H. Manschot Director April 13, 1999
- -------------------------
Robert H. Manschot
43
<PAGE>
DENAMERICA CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1998..................................................... F-3
Consolidated Statements of Operations for each of three years
in the period ended December 31, 1998................................. F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
each of the three years in the period ended December 31, 1998......... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998........................... F-6
Notes to Consolidated Financial Statements................................. F-8
F-1
<PAGE>
DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
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, 1997 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the three fiscal years in the period ended December 31, 1998.
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, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the uncertainty relating to the Company's
completion of its refinancing raises substantial doubt about its ability to
continue as a going concern. Management's plan concerning this matter is also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
April 14, 1999
F-2
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
DECEMBER 31,
ASSETS 1997 1998
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,267 $ 2,330
Receivables 3,192 2,636
Inventories 3,244 2,917
Other current assets 5,564 5,533
Assets held for sale 28,700
--------- ---------
Total current assets 41,967 13,416
PROPERTY AND EQUIPMENT - Net 60,060 55,648
INTANGIBLE ASSETS - Net 52,101 50,580
DEFERRED INCOME TAXES 5,312 5,578
OTHER ASSETS 10,824 9,285
--------- ---------
TOTAL $ 170,264 $ 134,507
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 16,511 $ 18,026
Accrued compensation 6,354 5,402
Accrued taxes 4,522 5,089
Other current liabilities 8,363 8,946
Current debt obligations 42,634 20,791
--------- ---------
Total current liabilities 78,384 58,254
LONG-TERM DEBT OBLIGATIONS - Less current portion 78,418 72,494
OTHER LONG-TERM LIABILITIES 12,214 7,093
--------- ---------
Total liabilities 169,016 137,841
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (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; issued and outstanding,
13,447,777 and 13,485,277 shares, respectively 1,344 1,349
Additional paid-in capital 35,799 35,869
Accumulated deficit (35,895) (40,552)
--------- ---------
Total shareholders' equity (deficit) 1,248 (3,334)
--------- ---------
TOTAL $ 170,264 $ 134,507
========= =========
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,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
RESTAURANT SALES $ 241,480 $ 300,579 $ 255,956
------------ ------------ ------------
RESTAURANT OPERATING EXPENSES:
Food and beverage costs 65,966 82,255 70,046
Payroll and payroll related costs 82,794 103,451 88,118
Other operating expenses 63,583 82,305 72,086
Depreciation and amortization 7,000 9,367 7,590
Charge for impaired assets 14,100
------------ ------------ ------------
Total operating expenses 219,343 291,478 237,840
------------ ------------ ------------
RESTAURANT OPERATING INCOME 22,137 9,101 18,116
ADMINISTRATIVE EXPENSES 10,303 13,684 12,423
------------ ------------ ------------
OPERATING INCOME (LOSS) 11,834 (4,583) 5,693
INTEREST EXPENSE - Net 9,605 13,655 12,635
MINORITY INTEREST IN JOINT VENTURES (256) (519)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 2,485 (17,719) (6,942)
INCOME TAX PROVISION (BENEFIT) 870 3,258 (914)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,615 (20,977) (6,028)
EXTRAORDINARY LOSS (GAIN) - Net of tax
of $331 and $(914) 497 (1,371)
------------ ------------ ------------
NET INCOME (LOSS) 1,118 (20,977) (4,657)
PREFERRED STOCK DIVIDEND AND ACCRETION (149)
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ 969 $ (20,977) $ (4,657)
============ ============ ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Before extraordinary item $ .14 $ (1.56) $ (.45)
============ ============ ============
Applicable to common shareholders $ .08 $ (1.56) $ (.35)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic 11,698,000 13,437,000 13,485,000
============ ============ ============
Diluted 11,844,000 13,437,000 13,485,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
-------- -------- -------- --------
BALANCE, JANUARY 1, 1996 $ 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, DECEMBER 31, 1996 1,340 35,706 (14,918) 22,128
Stock options exercised 4 93 97
Net loss (20,977) (20,977)
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 1,344 35,799 (35,895) 1,248
Stock options exercised 5 70 75
Net loss (4,657) (4,657)
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $ 1,349 $ 35,869 $(40,552) $ (3,334)
======== ======== ======== ========
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,
1996 1997 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 1,118 $(20,977) $ (4,657)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Extraordinary item 497 (1,371)
Depreciation and amortization 7,000 9,367 7,590
Amortization of deferred financing costs 350 763 983
Charge for impaired assets 14,100
Deferred income taxes 870 3,221 (927)
Deferred rent 249 645 279
Other - net (256) (1,368) (505)
Changes in operating assets and liabilities:
Receivables (2,129) 910 113
Inventories (425) (439) 184
Other current assets (647) (727) 309
Accounts payable and accrued liabilities 3,037 (6,953) (3,355)
-------- -------- --------
Net cash provided by (used in) operating
activities 9,664 (1,458) (1,357)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,879) (8,147) (2,891)
Purchase of intangibles (1,705) (2,302) (479)
Net cash paid to acquire fair value of assets (231)
Proceeds from sale of assets 2,422 4,133 25,992
-------- -------- --------
Net cash (used in) provided by investing
activities (9,393) (6,316) 22,622
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note receivable collections 2,258
Principal reductions of long-term debt (11,655) (25,018) (28,908)
Proceeds from borrowings 13,361 31,353 6,373
Other (549) 97 75
-------- -------- --------
Net cash provided by (used in) financing
activities 1,157 6,432 (20,202)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,428 (1,342) 1,063
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,181 2,609 1,267
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,609 $ 1,267 $ 2,330
======== ======== ========
</TABLE>
(Continued)
F-6
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S> <C> <C> <C>
Cash paid for:
Interest $ 8,904 $ 10,033 $ 8,221
======== ======== ========
Income taxes $ 36 $ 37 $ 96
======== ======== ========
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 $ 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>
(Concluded)
See notes to consolidated financial statements.
F-7
<PAGE>
DENAMERICA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE FISCAL YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
(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 25 states.
At December 31, 1998, the Company operated 100 Denny's restaurants and 101
Black-eyed Pea 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.
Over the past two years the Company has experienced net losses aggregating
approximately $25,600, which includes an asset impairment loss of $14,100.
As a result, at December 31, 1998, the Company had a shareholders' deficit
of approximately $3,300.
The Company has pursued a strategy to repay its senior lender debt
obligations in order to provide the Company with the flexibility to (i)
refinance certain debt obligations to better match operating cash flows
with debt amortization, (ii) improve its portfolio of operating
restaurants, and (iii) position it to grow. During 1998, the Company
reduced its total debt obligations by $27,767 primarily from the sale of
restaurants. The Company believes that the sale of underperforming
restaurants has improved its overall asset base. In addition, the Company's
Denny's restaurants have experienced same store sales increases of 5% in
the fourth quarter of 1998, a trend which has continued in the first
quarter of 1999. Higher sales volumes allow the Company to better leverage
its fixed cost structure and have positioned the Company for improved
operating results in the future.
At December 31, 1998, the Company was not in compliance with certain
financial debt covenants under its senior credit facility. These financial
covenants were established in July 1996 and have not been modified to
reflect the reduction in outstanding obligations or the sale of
restaurants. As discussed in Note 15, in April 1999, the Company received
commitments from lenders to provide new borrowings of $20,100. The Company
believes that the financing transaction outlined in the commitments will
enable it to repay the remaining obligations under its senior credit
facility and to cure its defaults. If the Company cannot complete the
financing contemplated under the commitments, it would continued to be in
default with the senior credit facility until other acceptable refinancing
or restructuring alternatives are available. There can be no assurance,
however, that additional financing will be available to the Company or
available on satisfactory terms.
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 1996, 1997 and 1998 fiscal years, which
represent the 53 week period ended January 1, 1997, the 52 week period
ended December 31, 1997 and the 52 week period ended December 30,
1998, have been described in the financial statements as the years
ended December 31, 1996, 1997 and 1998.
b. CASH AND CASH EQUIVALENTS consist of cash held in bank demand deposits
and highly liquid investments purchased with initial maturities of
three months or less.
c. INVENTORIES consist primarily 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 in 1997 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 that were sold in March 1998.
e. PROPERTY AND EQUIPMENT are recorded at cost. Depreciation is computed
under the straight-line depreciation method over the estimated useful
lives of the assets. 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. FRANCHISE RIGHTS - The Denny's franchise agreements require the
Company to pay a franchise fee for each unit opened. The fees are
capitalized and amortized using the straight-line method over the 20
year terms of the franchise agreements. 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.
F-8
<PAGE>
g. FRANCHISE REVENUE - During 1998, the Company acquired all remaining
Black-eyed Pea franchised restaurants. Royalty revenues, which are
included in restaurant revenues, were approximately $1,142 and $45
during fiscal years 1997 and 1998, respectively.
h. PREOPENING COSTS, GOODWILL AND INTANGIBLE ASSETS - In April 1998, the
Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position ("SOP") No.
98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES. The Company
early-adopted SOP 98-5 at the beginning of fiscal year 1998 and now
expenses all preopening costs as incurred. This change in accounting
principal did not have a material effect on the Company's financial
statements. 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.
i. DEFERRED FINANCING COSTS are included in other assets and are
amortized using the effective interest method over the terms of the
related loans. Deferred financing costs, net of amortization, totaled
$4,456 and $3,670 at December 31, 1997 and 1998, respectively.
j. DEFERRED RENT represents the accrual resulting from recording rental
expense on a straight-line basis. As of December 31, 1997 and 1998,
deferred rent totaled $2,511 and $2,487, respectively, and is included
in other liabilities in the accompanying consolidated balance sheets.
k. EARNINGS PER SHARE - Basic earnings per share is calculated utilizing
only weighted average common shares outstanding and diluted earnings
per share gives effect to all dilutive potential common shares
outstanding during the reporting periods.
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, plus the total outstanding shares of the Company's common
stock held by other shareholders.
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.
m. 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.
n. FAIR VALUE - The fair value of notes receivable, payables and accrued
liabilities approximates carrying value due to the short-term nature
of the instruments. 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.
F-9
<PAGE>
o. NEW ACCOUNTING STANDARDS - During 1998, the Company adopted Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, and No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130 changes the reporting of certain items
currently reported in the shareholders' equity section of the balance
sheet and requires that comprehensive income and its components be
prominently displayed in the financial statements. There were no items
which qualified for treatment as components of comprehensive income
for the periods presented. 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.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This standard is effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments
including those imbedded in other contracts and for hedging
activities. It requires all derivatives to be recognized as either
assets or liabilities in the statement of financial position and
measured at fair value. The Company has not yet determined the effect
the adoption of SFAS No. 133 will have on its financial statements.
p. RECLASSIFICATIONS - Certain reclassifications have been made to the
1996 and 1997 financial statements to conform to the 1998
presentation.
2. ACQUISITIONS AND DIVESTITURES
During 1996, the Company expanded the number of restaurants it operates
through certain mergers and acquisitions, including the merger with AFR
described in Note 1 and the acquisition of Black-eyed Pea U.S.A., Inc. (the
"BEP Acquisition") pursuant to a stock purchase agreement. Additionally,
during 1996, the Company sold the assets related to 23 restaurants in
exchange for a promissory note from the buyer in the principal amount of
$4,600. The promissory note, which is included in other assets, is secured
by the assets sold and requires monthly payments through June 2003.
During 1997, the Company implemented a strategy of focusing on the
Black-eyed Pea concept as well as those Denny's restaurants that achieve
certain operational and geographic efficiencies by completing a series of
transactions including: (i) converting 10 nonbranded restaurants to the
Denny's concept and selling 11 nonbranded restaurants, (ii) selling or
closing 17 Denny's restaurants, (iii) entering into an agreement to sell 63
Denny's and eight nonbranded restaurants, of which six were closed, to a
Denny's franchisee, (iv) developing four new Black-eyed Pea and one new
Denny's restaurants, (v) purchasing the leasehold interests in nine
Black-eyed Pea restaurants from franchisees (the "BEP Franchisee
Acquisition") and selling the related leasehold interests. The sale of the
restaurants in 1997 resulted in a gain of approximately $850, which is
included as a reduction of other operating expenses. The Company included
in its 1997 financial statements a charge for impaired assets of
approximately $14,100 associated with the sale of the 71 restaurants
described under (iii) above, which the Company completed in March 1998.
In connection with the closing of the BEP Franchisee Acquisition, the
Company and one of the franchisees settled threatened litigation and CNL
Group, Inc. ("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 $2,700 in cash that has been recorded as a deferred gain
which is being amortized over the life of the leases.
During 1997, the Company also entered into a series of transactions with
CNL, including the purchase of 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 nine Denny's restaurants
F-10
<PAGE>
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 $12,500. No gain or loss was
recognized on these transactions and the Company utilized the proceeds,
which totaled approximately $25,000, to repay senior debt obligations of
the Company.
In March 1998, the Company completed the sale of 71 restaurants, as
described above, for gross proceeds of $28,700. Net cash proceeds of
$25,200 were used to (i) repay indebtedness of the Company, including a
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 the Company's common stock at an exercise
price of $1.90 per share, which were issued in connection with the repaid
note, (iii) permanently reduce the Company's outstanding borrowings under
the term loan portion of its credit facility to $1,500, and (iv) repay
certain equipment operating leases associated with restaurants sold.
In a separate transaction completed in March 1998, the Company sold five
Denny's restaurants for cash of $700 plus a note in the principal amount of
$400. The Company used the cash proceeds from this transaction to
permanently reduce its outstanding borrowings under the term loan portion
of its credit facility.
3. PROPERTY AND EQUIPMENT
Property and equipment including assets under capitalized leases as of the
fiscal years ended consist of the following:
ESTIMATED
USEFUL LIVES 1997 1998
------------ ------- -------
Buildings 5 - 20 years $35,585 $34,641
Restaurant equipment 3 - 11 years 22,310 22,353
Leasehold improvements Life of lease 11,942 12,538
Other 3 - 7 years 2,451 3,346
------- -------
Total 72,288 72,878
Less accumulated depreciation
and amortization 12,228 17,230
------- -------
Equipment and leasehold
improvement - net $60,060 $55,648
======= =======
Assets recorded under capital leases as of the fiscal years ended consist
of the following:
1997 1998
------- -------
Buildings $33,600 $32,878
Other 7,138 6,440
------- -------
Total 40,738 39,318
Less accumulated amortization 5,147 7,325
------- -------
Total $35,591 $31,993
======= =======
Depreciation and amortization expense was $4,594, $5,324 and $5,598 for the
fiscal years ended 1996, 1997 and 1998, respectively.
4. INTANGIBLE ASSETS
Intangible assets as of the fiscal years ended consist of the following:
F-11
<PAGE>
1997 1998
------- -------
Goodwill $52,650 $52,879
Franchise rights 3,217 2,989
Favorable lease arrangements 1,130 883
------- -------
Total 56,997 56,751
Less accumulated amortization 4,896 6,171
------- -------
Intangible assets -- net $52,101 $50,580
======= =======
Amortization expense was $2,406, $4,043 and $1,992 for the fiscal years
ended 1996, 1997 and 1998, respectively.
5. OTHER CURRENT LIABILITIES
Other current liabilities as of the fiscal years ended consist of the
following:
1997 1998
------ ------
Accrued insurance $2,022 $1,125
Estimated closed restaurant obligations 1,000 1,570
Interest 2,544 4,432
Other 2,797 1,819
------ ------
Total accrued liabilities $8,363 $8,946
====== ======
The majority of the accrued interest relates to the deferral of interest
payments on the Company's Series B Subordinated Notes, which are held by
related parties (see Notes 7 and 13) .
6. RESERVES FOR STORE CLOSINGS
In 1997 and 1998, other long-term liabilities includes long-term reserves
of $3,491 and $1,737, respectively, for estimated obligations for closed
restaurants. Other long-term liabilities includes $1,473 for estimated
obligations for insurance in 1997.
The following is a summary of store closing reserves including additions
recorded in connection with mergers and acquisitions:
1996 1997 1998
------ ------ ------
Beginning Balance $ 871 $6,971 $4,491
Additions 7,150 1,208
Less charges 1,050 2,480 2,392
------ ------ ------
Ending Balance $6,971 $4,491 $3,307
====== ====== ======
F-12
<PAGE>
7. DEBT OBLIGATIONS
Debt obligations as of the fiscal years ended consist of the following:
1997 1998
------- -------
LONG-TERM DEBT OBLIGATIONS:
CNL obligations $22,673 $22,873
Series B subordinated notes (face value $18,250) 15,690 16,176
Other notes payable 659 617
Capital lease obligations (Note 8) 39,396 32,828
------- -------
Total long-term obligations $78,418 $72,494
======= =======
CURRENT PORTION OF LONG-TERM DEBT OBLIGATIONS:
Obligations under credit facility $22,777 $14,772
CNL obligations 1,885 4,205
BEP purchase note (repaid in 1998) 15,285
Other notes payable 206 85
Capital lease obligations (Note 8) 2,481 1,729
------- -------
Total current obligations $42,634 $20,791
======= =======
A summary of the Company's debt obligations is as follows:
(a) CREDIT FACILITY
The Company has 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 $15,000 revolving credit
loan. These loans bear interest at 150 basis points over prime, which
was 7.75% at December 31, 1998. As of December 31, 1998, the Company
had $14,772 of outstanding borrowings under the revolving credit loan,
which matures in December 2001. 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, 1998, the fair value of the warrants is $998.
The Company was not in compliance with certain of its debt covenants
under the Credit Facility at December 31, 1998, and has classified the
entire balance of the revolving credit loan as current (See Note 15).
(b) CNL OBLIGATIONS
In October 1997 and November 1998, the Company entered into a series
of transactions with CNL. As a result, the Company is obligated to CNL
under certain promissory notes totaling $23,216. The notes bear
interest at rates from 9% to 10% payable monthly and quarterly, mature
in November 2004 and September 2007, and are collateralized with
certain equipment assets located in 54 Denny's restaurants. At
December 31, 1998, the fair value of the promissory notes approximate
carrying value as the interest rate approximates borrowing rates
currently available to the Company. The Company is also obligated to
CNL under a $4,400 face value convertible redeemable debenture bearing
interest at 5%, recorded net of a $538 discount at December 31, 1998,
with interest only payable quarterly and maturing in September 2002.
The fair value of the convertible redeemable debenture is $4,400.
F-13
<PAGE>
(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 springing warrants to purchase an
aggregate of 478,000 shares of the Company's common stock at an
exercise price of $0.01 per share. The warrants become exercisable if
the Company does not repay the Series B Notes in full prior to March
29, 1999. Certain holders of the Series B Notes have not received
interest payments since March 31, 1997. As of December 31, 1998,
accrued and unpaid interest due to these holders totals $3,821. The
Company has not received waivers from these holders for noncompliance
of certain of the debt covenants under the Series B Notes (see Note
15). The fair value of the Series B Notes at December 31, 1998 is
$18,250.
The aggregate annual maturities of long-term debt, excluding capital
lease obligations, for the years subsequent to December 31, 1998 are
as follows:
1999 $19,062
2000 2,258
2001 2,488
2002 2,741
2003 19,193
Thereafter 12,986
-------
Total $58,728
=======
8. LEASES
The Company's operations utilize leased property, facilities and equipment.
At December 31, 1998, 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 15 years,
exclusive of options to renew. The leases have expiration dates through
2018 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, 1998 consist of the
following:
OPERATING LEASES
-------------------
MINIMUM MINIMUM
CAPITAL LEASE SUBLEASE
LEASES PAYMENTS PAYMENTS
-------- -------- --------
1999 $ 5,326 $ 26,700 $ 5,483
2000 5,058 25,935 5,320
2001 4,916 23,381 5,185
2002 4,924 20,025 4,931
2003 4,745 18,692 4,661
Subsequent years 41,561 178,469 59,571
-------- -------- -------
Total 66,530 $293,202 $85,151
======== =======
Less imputed interest - interest rates
ranging from 10% to 15% (31,973)
--------
Present value of minimum capital lease
obligation 34,557
Less current portion of capital lease
obligation 1,729
--------
Long-term portion of capital lease
obligation $ 32,828
========
F-14
<PAGE>
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 (see Note
2).
Included in minimum operating lease payments are payments attributable to
equipment leases which typically extend for a period of five to seven
years. Annual payments attributable to these leases are: $4,397 (1999);
$4,314 (2000); $2,069 (2001) and none thereafter. These payments are
included in other operating expenses in the accompanying financial
statements.
The following is a summary of rental expense, excluding sublease amounts,
under all operating leases for the fiscal years ended:
1996 1997 1998
------- ------- -------
Minimum rentals $17,852 $19,060 $16,432
Contingent rentals 823 510 513
------- ------- -------
Total rent expense $18,675 $19,570 $16,945
======= ======= =======
9. INCOME TAXES
The Income tax provision (benefit) as of the fiscal years ended consists of
the following:
1996 1997 1998
---- ---- ----
Current:
Federal $ 37 $ 13
Deferred:
Federal $680 2,727 (621)
State 190 494 (306)
---- ------ -----
Total deferred 870 3,221 (927)
---- ------ -----
Total income tax provision (benefit) $870 $3,258 $(914)
==== ====== =====
A reconciliation of the provision (benefit) for income taxes and the
amounts that would be computed using federal statutory tax rates for the
fiscal years ended are as follows:
1996 1997 1998
------- -------- -------
Computed expected tax expense (benefit) $ 869 $ (6,205) $(2,430)
State income taxes - net of federal benefit 124 (886) (347)
Nondeductible expenses (primarily goodwill) 267 11,191 323
FICA tip credits and other (390) (842) (595)
Change in valuation allowance 2,135
------- -------- -------
Total $ 870 $ 3,258 $ (914)
======= ======== =======
Deferred income tax assets for the fiscal years ended are as follows:
F-15
<PAGE>
1997 1998
------- -------
Current deferred income tax assets:
Accrued self insurance and contingent losses $ 827 $ 478
Other accrued expenses 264 360
------- -------
Total current deferred income tax assets included in
other current assets $ 1,091 $ 838
======= =======
Noncurrent deferred income tax assets (liabilities):
Store closing $ 1,991 $ 695
Intangibles (4,214) (4,546)
Net operating loss carryforward 9,716 9,296
Valuation allowance (2,789) (4,924)
Various tax credit carryforward 2,073 2,891
Depreciation, capitalized leases and deferred gain 1,584 1,173
Impairment of assets (4,588)
Other 1,539 993
------- -------
Net noncurrent deferred income tax assets $ 5,312 $ 5,578
======= =======
As of December 31, 1998, the Company has approximately $23,454 of net
operating loss carryforwards that expire beginning in 2004 and alternative
minimum tax credit carryforwards of approximately $2,891. The Company has a
valuation allowance of $4,924 relating to certain net operating loss
carryforwards.
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
--------- --------
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
Granted 30,000 3.06
Exercised (37,500) 2.00
Canceled (239,000) 4.26
--------- -----
Outstanding at December 31, 1998 1,016,300 4.06
========= =====
F-16
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
Range of exercise prices $2.00 - $4.00 $4.75 - $6.00
Shares outstanding in range 788,800 227,500
Weighted-average exercise price $ 3.73 $ 5.21
Weighted-average remaining contractual life 7.19 6.35
Shares currently exercisable 516,880 167,500
Weighted-average exercise price of shares
currently exercisable $ 3.69 $ 5.31
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 SFAS 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, 1997
and 1998 would have been adjusted to the pro forma amounts indicated below:
1996 1997 1998
-------- -------- --------
Net income (loss) applicable to common
shareholders - as reported $ 969 $(20,977) $ (4,657)
======= ======== =========
Net income (loss) applicable to common
shareholders - pro forma $ 707 $(21,239) $ (4,974)
======= ======== =========
Basic and diluted income (loss) per
share - as reported $ 0.08 $ (1.56) $ (0.35)
======= ======== =========
Basic and diluted income (loss) per
share - pro forma $ 0.06 $ (1.58) $ (0.37)
======= ======== =========
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 67%; risk free
interest rate of 5%; and expected lives of two to five years.
12. EARNINGS PER SHARE
Earnings per share is calculated as follows:
1996 1997 1998
-------- -------- --------
Income (loss) before extraordinary item $ 1,615 $(20,977) $ (6,028)
Less: Extraordinary gain (loss) (497) 1,371
Preferred stock dividend and accretion (149)
-------- -------- --------
Net income (loss) applicable to common
shareholders $ 969 $(20,977) $ (4,657)
======== ======== ========
Shares - basic income (loss) per share 11,698 13,437 13,485
Dilutive effect of common stock
equivalents 146
-------- -------- --------
Shares - diluted income (loss) per share 11,844 13,437 13,485
======== ======== ========
Basic and diluted income (loss) per share:
Before extraordinary item $ .14 $ (1.56) $ (.45)
======== ======== ========
Applicable to common shareholders $ .08 $ (1.56) $ (.35)
======== ======== ========
F-17
<PAGE>
13. RELATED PARTY TRANSACTIONS
During fiscal years ended December 31, 1996, 1997 and 1998, the Company
entered into a number of transactions with officers and/or shareholders of
the Company or affiliated companies. Advances due from officers are
included in receivables in the accompanying financial statements. The
following summarizes the related party transactions as of and for the
fiscal years then ended:
1996 1997 1998
------ ------ ------
Advances due from officers and shareholders $ 435 $ 378 $ 802
====== ====== ======
Note receivable from shareholders $2,600 $2,600 $2,600
====== ====== ======
LH Leasing (described below) $1,902 $3,804 $3,804
====== ====== ======
Lease expense paid to shareholders $ 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.
A note receivable from shareholder, which is included in other current
assets at December 31, 1998, bears interest at 6%. The note is secured by
Series B Notes with a face amount of approximately $1,500 and approximately
403,000 shares of the Company's common stock. The Company has entered into
an agreement with the holder of the note whereby the securities
collateralizing the note will be used to redeem the receivable. The Company
expects this transaction to close in 1999.
Related parties of the Company are the holders of $18,250 of the Series B
Notes (discussed in Note 7).
14. EMPLOYEE BENEFIT PLANS
In 1998, the Company adopted a defined contribution plan under Section
401(k) of the Internal Revenue Code covering all eligible employees (the
"401(k) Plan"). Eligible participants may contribute up to 15% of their
total compensation. The Company provides matching contributions to the
401(k) Plan in amounts determined by the Board of Directors. Participants
will be immediately vested in their personal contributions and over a
five-year graded schedule for amounts contributed by the Company. The
Company did not make any matching contributions to the 401(k) Plan in 1998.
15. SUBSEQUENT EVENTS
In April 1999, the Company executed commitment letters with a lender (the
"Commitments") that provide for new borrowings totaling $20,100. Under the
terms of the Commitments, the Company will enter into (i) $3,000 of new
equipment financing, and (ii) a cumulative loan not to exceed $17,100. The
$3,000 new equipment financing will modify and consolidate existing
equipment notes payable totaling approximately $15,400, which will create a
total term loan of $18,400. The new $18,400 term loan will amortize monthly
over a seven year period and will bear interest at a fixed rate. The new
term
F-18
<PAGE>
loan will be secured by a first security interest in restaurant equipment
in certain of the Company's Denny's and Black-eyed Pea restaurants.
To facilitate the $17,100 cumulative loan, the Company formed a
special-purpose subsidiary and will contribute to that subsidiary the
assets and liabilities associated with approximately 34 Denny's
restaurants. The cumulative loan will be evidenced by individual promissory
notes secured by the leasehold properties. The terms of the notes will vary
based upon the term of the leaseholds which approximate 15 years. The notes
will amortize monthly at a fixed rate of interest.
The Company will use the proceeds from the new loans to (i) permanently
retire the Company's revolving loans under its existing Credit Facility;
(ii) purchase certain restaurant equipment currently encumbered by
equipment leases; (iii) pay various fees and expenses; and (iv) provide
working capital to the Company. The Company believes that it will complete
the financing transactions contemplated by the Commitments in the second
quarter of 1999 and that the funds provided by these financings will be
sufficient for its ongoing operations and anticipated restaurant
development activities during 1999.
At December 31, 1998, the Company was not in compliance with several debt
agreements, including its Credit Facility. The Company believes that the
financing transaction outlined in the Commitments will provide the Company
with sufficient liquidity to enable it to repay the remaining obligations
under its Credit Facility and to cure its defaults under its other
agreements. In addition, the Company intends to pursue various alternatives
to refinance other assets during 1999. If the Company cannot complete the
financing contemplated under the Commitments, it would continue to be in
default and other acceptable refinancing or restructuring alternatives may
not be available to the Company.
16. BUSINESS SEGMENTS
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION effective January 1, 1998. The Company
operates family-oriented, full-service restaurants primarily under two
separate concepts, Denny's and the Black-eyed Pea. 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 accounting policies for each concept are
the same as those described in Note 1. During each fiscal period, the
Company also operated
F-19
<PAGE>
several non-branded restaurants. As of December 31, 1998, all of the
non-branded restaurants have been closed or converted to the Denny's or
Black-eyed Pea concept. The concept distribution of the Company's revenues,
restaurant operating income, depreciation and amortization and identifiable
assets for the three-year period ended December 31 is as follows:
1996 1997 1998
--------- --------- ---------
REVENUES:
Denny's $ 149,476 $ 165,167 $ 115,787
Black-eyed Pea 71,613 130,304 139,699
Non-branded 20,391 5,108 470
--------- --------- ---------
Total revenues $ 241,480 $ 300,579 $ 255,956
========= ========= =========
RESTAURANT OPERATING INCOME:
Denny's 11,347 (4,886) 7,583
Black-eyed Pea 11,150 14,444 10,684
Non-branded (360) (457) (151)
--------- --------- ---------
Total restaurant operating income 22,137 9,101 18,116
Administrative expenses 10,303 13,684 12,423
--------- --------- ---------
Total operating income (loss) $ 11,834 $ (4,583) $ 5,693
========= ========= =========
DEPRECIATION AND AMORTIZATION:
Denny's 6,103 8,321 4,808
Black-eyed Pea 584 1,009 2,780
Non-branded 313 37 2
--------- --------- ---------
Total depreciation and amortization $ 7,000 $ 9,367 $ 7,590
========= ========= =========
IDENTIFIABLE ASSETS:
Denny's 122,916 124,736 93,723
Black-eyed Pea 39,505 41,670 40,784
Non-branded 16,768 3,858
--------- --------- ---------
Total identifiable assets $ 179,189 $ 170,264 $ 134,507
========= ========= =========
Administrative expenses, which are not allocated to the individual
concepts, are shown as a reconciling item to calculate total operating
income (loss) for the periods presented.
F-20
<PAGE>
17. QUARTERLY DATA (UNAUDITED)
The following table presents selected unaudited quarterly operating results
for the two-year period ended December 31, 1998. The Company believes that
all necessary adjustments have been included in the amounts shown below to
present fairly the related quarterly results.
1997
-------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
(13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS)
---------- ---------- ---------- ----------
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)
1998
-------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
(13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS)
---------- ---------- ---------- ----------
Restaurant sales $ 72,880 $ 62,066 $ 62,231 $ 58,779
Operating income (loss) 3,378 1,574 904 (163)
Net income (loss) applicable
to common shareholders 1,340 (1,061) (1,183) (3,753)
Basic and diluted income (loss)
per share applicable to common
shareholders .10 (.08) (.09) (.28)
* * * * * *
F-21
April 13, 1999
VIA TELECOPY AND
FEDERAL EXPRESS
Mr. Robert Gentz
DenAmerica Corp.
7373 N. Scottsdale Road, Suite D-120
Scottsdale, Arizona 85253
RE: $3,000,000.00 OF NEW EQUIPMENT FINANCING AND MODIFICATION AND
CONSOLIDATION WITH $15,400,000.00 EXISTING EQUIPMENT FINANCING
FOR A TOTAL LOAN NOT TO EXCEED $18,400,000.00 OF EQUIPMENT
FINANCING FOR DENNY'S AND BLACK-EYED PEA RESTAURANTS (THE
"PROPERTIES")
Dear Mr. Gentz:
CNL Fund Advisors, Inc. (the "Company") hereby issues this commitment
letter ("Commitment") by which it agrees to enter, or cause an affiliate to
enter, into equipment financing transactions (the " Loan") with DenAmerica Corp.
and Black-eyed Pea, U.S.A. ("Borrower") as follows: (a) a new Three Million
Dollars ($3,000,000.00) Balloon Promissory Note, to be consolidated with (a) an
existing Eight Million Seven Hundred Twenty-five Thousand Dollars
($8,725,000.00) Balloon Promissory Note, (b) an existing Four Million Five
Hundred Thousand Dollars ($4,500,000.00) Balloon Promissory Note, and (c) an
existing Two Million Two Hundred Thousand Dollars ($2,200,000.00) Balloon
Promissory Note, into a Consolidated Promissory Note not to exceed Eighteen
Million Four Hundred Thousand Dollars ($18,400,000.00) for equipment which is
incorporated into Black-eyed Pea and Denny's Restaurants (the "Equipment"), all
of which is secured by a first security interest in restaurant equipment in
Denny's Restaurants and Black-eyed Pea Restaurants (the locations of which are
listed on Schedule A attached hereto and made a part hereof by this reference
thereto).
This Commitment provides funding beginning as of the date hereof and
ending not later than May 15, 1999. Funding under this Commitment and the
obligations of the Company hereunder are both expressly conditioned upon there
being no unanticipated disruptions in Company's funding sources.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 2
1. Adverse Conditions. This Commitment shall be contingent upon no
material adverse change in the financial condition of Borrower or the occurrence
of any event which may, in the Company's reasonable judgment, have a material
adverse effect upon the Borrower. In addition, the Company's obligation
hereunder is subject to the ongoing review of Borrower's financial statements.
To that end, the Company shall have the right to review (a) monthly unaudited
statements of Borrower, (b) monthly profit and loss statements of the
Restaurants in which the Equipment is located, and (c) quarterly unaudited
statements of Borrower, along with any other financial information the Company
may reasonably require.
2. Legal Documents. Company's counsel will prepare all notes, security
agreements, financing statements, and related documents. Borrower agrees that
approval of such documents shall not be unreasonably withheld and that Borrower
shall provide the following.
A. Such documentation as is necessary to evidence the
fact that it is validly organized and in good
standing under the laws of the state of its formation
and that it is authorized to do business in the state
where the Equipment is located, together with such
resolutions or approvals as are required for it to
enter into this Commitment and to consummate the
transactions contemplated hereby.
B. A copy of Borrower's equipment financing documents
relating to and encumbering the Property, if any.
C. Lien waivers and other documentation requested by
Company executed by Borrower's Landlords and other
parties to perfect Company's interest in the
Equipment, free and clear of other liens and
encumbrances.
D. Such other reasonable information or documentation as
the Company might request as a prudent lender in
order to finalize the transactions contemplated
hereby and to comply with the requirements of all
local, state and federal agencies, and all
regulations and laws to which the Company and its
affiliates are subject.
3. Opinion of Counsel. As a condition to closing, Company's counsel
shall require the opinion of Borrower's counsel as to such matters as Company's
counsel may deem appropriate, including but not limited to:
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 3
(a) Borrower is duly organized and validly existing under the laws of
the state of their formation; has the power and its representatives have been
duly authorized to enter into the transactions contemplated by this Commitment;
and all necessary approvals required to consummate the transactions contemplated
hereby have been obtained.
(b) The Loan Documents have been duly authorized, executed and
delivered by Borrower and are the legal, binding, valid and enforceable
obligations of Borrower in accordance with their respective terms, except as the
enforcement of them may be limited by bankruptcy, insolvency, moratorium and
other applicable debtor relief laws, which should not make them inadequate for
the practical realization of the benefits to be afforded Company by them.
(c) Each of the Loan Documents to be recorded is in appropriate form
for recordation in the applicable recording office.
(d) To counsel's knowledge, there are no material legal actions or
proceedings pending or threatened against or with reference to Borrower or the
Property, as applicable, before any court, quasi-judicial or administrative body
or regulatory agency.
(e) The Loan does not violate in any manner the usury laws of the
State, and the manner and payment of interest under the Loan and all charges
required to be paid under the Loan (including any prepaid interest, service
charges, participation payments, additional interest, Loan commitment fees, Loan
processing fees, and other charges contemplated, if any) are neither illegal nor
usurious in any manner under the laws of the State.
(f) The execution and delivery of the Loan Documents by Borrower, do
not violate, conflict with, result in a breach of or default under any
applicable statute, regulation, rule, order, or other legal requirement
applicable to Borrower or any material agreement by which Borrower or its
properties are bound, or result in the creation or imposition of any lien,
charge or encumbrance upon the assets of Borrower other than as contemplated by
the Loan Documents.
(g) All taxes and recording, registration or filing fees required to be
paid to any governmental authority with respect to the execution, recording,
registration or filing of any of the documents securing the Loan have been duly
paid in full except for nominal fees to be paid with respect to the recording of
the Loan Documents.
4. Closing. At closing, Borrower shall execute and/or deliver to the
Company all documents, monies, instruments and other items required by this
Commitment. The Company's obligation to close is conditioned upon its receipt
and approval of all such documents, monies, instruments and items.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 4
5. Loan Financing. The Company agrees to enter or cause an affiliate to
enter into equipment loan financing transactions in accordance with the terms
and conditions of this Commitment. The Borrower and the Company shall execute a
Note or Notes and other documents as may be required by the Company
(collectively, the "Financing Documents"), which Financing Documents shall be in
form and contain terms satisfactory to the Company and Borrower. The Company
acknowledges that it has agreed to provide new equipment loan financing in an
amount not to exceed Three Million Dollars ($3,000,000.00) (the "New Note"), and
to consolidate the New Note with (a) an Eight Million Seven Hundred Twenty-five
Thousand Dollars ($8,725,000.00) Balloon Promissory Note, (b) a Four Million
Five Hundred Thousand Dollars ($4,500,000.00) Balloon Promissory Note, and (c) a
Two Million Two Hundred Thousand Dollars ($2,200,000.00) Balloon Promissory
Note, into a term note with a term not to exceed seven (7) years, and with
monthly payments based upon an interest rate of ten and one-half percent (10.5%)
per annum and a seven (7) year amortization schedule. In connection with any
such Loan provided by the Company, Borrower shall be required to pay all
customary equipment financing fees and costs, including without limitation, a
two percent (2.0%) commitment/origination fee for the New Note payable to the
Company, taxes, and all closing costs, along with any applicable documentary
stamp taxes, filing fees, and attorney's fees and costs. The Consolidated
Balloon Promissory Note or any loan agreement associated therewith shall be
modified to provide that it shall become due and payable upon a "Change of
Control" as defined in that certain Indenture (Series B Notes) between
DenAmerica Corp. and State Street Bank and Trust Company dated March 29, 1996,
which may be waived by Company's in its sole discretion.
Company acknowledges that the terms of the Financing Documents shall
not include a prepayment premium so long as the Borrower prepays the loan while
the Company or one of its affiliates is the holder of the Financing Documents.
In the event the Company or one of its affiliates sells or assigns the Financing
Documents, the Lender shall give Borrower one hundred and twenty (120) days
prior written notice of such proposed sale or assignment, and during such one
hundred and twenty (120) day period the Borrower shall have the right to prepay
the entire unpaid principal balance of the loan, plus accrued interest and any
other sums due Company at the time of prepayment, without payment of a
prepayment premium. The Financing Documents shall provide that in the event the
Company or one of its affiliates sells or assigns the Financing Documents, then
the Borrower shall pay to the holder of the Financing Documents a prepayment
premium equal to the entire unpaid principal balance, accrued interest, and any
other sums due Company at the time of prepayment, plus the greater of (A)
Breakage Costs (as defined below) or (B) (i) the present value of all remaining
payments of principal and interest, discounted at the Treasury Rate, less (ii)
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 5
the amount of principal being prepaid, but shall not be less than one percent
(1%) of the then outstanding principal balance of the Loan (the "Prepayment
Premium"). The "Treasury Rate" shall be the yield on securities issued by the
United States Treasury having a maturity equal to the remaining term of the
Loan, as quoted in Federal Reserve Statistical Release [H.15(519)] under the
heading "U.S. Government Securities-Treasury Constant Maturity" for the date
most nearly two (2) weeks before the prepayment date (or a comparable rate if
this rate is no longer published) [adjusted to reflect a monthly payment
interval]. If the above rate is not available for a term equal to the remaining
stated term of the Loan as of the date of such prepayment, the Treasury Rate
shall be determined by interpolating between the yields on securities of the
next longer and next shorter maturity. "Breakage Costs" shall mean an amount
equal to the greater of:
(a) 1% of the entire unpaid principal balance of the
Note; or
(b) (i) the present value of all remaining payments
of principal and interest discounted at a
discount rate equal to the "Swap Rate on
Date of Prepayment,"
MINUS
(ii) the present value of all remaining payments
of principal and interest discounted at a
discount rate equal to the "Swap Rate on
Date of Note".
"Swap Rate on Date of Note" shall be defined herein as the fixed rate,
as determined by Company in its reasonable discretion, which is paid by
Company (or which otherwise would be required to be received by an
established and active interest rate swap counterparty, whether or not
a swap transaction is actually entered into) on the date of the Note
for a fixed rate swap in the notional amount and with the amortization
terms of the Loan, in exchange for a floating rate equal to the 30-day
LIBOR (London Inter-Bank Offering Rate).
"Swap Rate on Date of Prepayment" shall be defined herein as the fixed
rate, as determined by Company in its reasonable discretion as of the
date and time of any prepayment hereunder, which the Company can
contract to receive (or which otherwise would be paid by an established
and active interest rate swap counterparty, whether or not a swap
transaction is actually entered into) under a fixed rate swap in the
notional amount and with the remaining amortization terms of the amount
being prepaid, in exchange for a floating rate equal to the 30-day
LIBOR (London Inter-Bank Offering Rate), minus one-quarter of one
percent (25 Basis Points).
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 6
6. Special Conditions. The Company's obligations to fund under this
Commitment shall be contingent upon occurrence of all of the following special
conditions:
A. SELECTION OF RESTAURANT EQUIPMENT FOR PURPOSES OF PROVIDING
EQUIPMENT COLLATERAL. Selection of the restaurant equipment
for purposes of providing equipment collateral shall be by
mutual agreement of the parties.
B. CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Borrower shall
maintain a Consolidated Fixed Charge Coverage Ratio of not
less than 1.1:1 on an aggregate basis for all Denny's or
Black-eyed Pea Restaurants whose equipment serves as
collateral for the Loan based on an EBITDA calculation (the
"EBITDA FCCR"). The EBITDA FCCR means, for the trailing twelve
(12) month period, the ratio of (a) the Borrower Cash Flow for
such period to (b) the Borrower's Debt Service for such
period. "Cash Flow" means only as to the EBITDA FCCR, for any
period, an amount equal to (a) the sum of (i) pre-tax income
(less general and administrative expenses not to exceed 3 1/2%
of gross sales), (ii) interest expense, (iii) all non-cash
amounts in respect of depreciation and amortization, and (iv)
Non-Recurring Expenses less (b) Non-Recurring Income, all as
reflected on the Borrower's financial statement for such
period. "Debt Service" means only as to the EBITDA FCCR all of
the Borrower's interest, the current portion of principal, and
current portion of capital lease obligations.
C. REPORTING. Borrower shall keep books and records reflecting
its financial condition including, but not limited to, the
operation of the Premises in accordance with generally
accepted accounting principles consistently applied. The
Company shall have the right, from time to time at all times
during normal business hours, to examine such books, records
and accounts at the offices of the Borrower or other entity
maintaining such books, records and accounts and to make such
copies or extracts thereof as the Company shall desire. During
the term of the Loan, the Borrower must furnish or cause to be
furnished to the Company within one hundred twenty (120) days
of the close of each of their respective fiscal years, fiscal
year end audited current signed financial statements (annual
balance sheet and a profit/loss statement) of Borrower, and an
income and expense statement of the operation of the Premises,
all which must be "Presented To" the Company. Borrower shall
also annually furnish to the Company (i) annual U.S. Income
Tax Returns, (ii) a statement disclosing all contingent
liabilities, and (iii) such interim statements as may
reasonably be required by Company, from time to time. Borrower
shall advise Company of its respective fiscal year-end dates
and shall notify Company in writing, of any change in such
year-end dates. During the term of the Loan, the Borrower
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 7
shall furnish to Company within forty-five (45) days after the
end of each fiscal quarter of Borrower an unaudited financial
statement of Borrower and a statement of income and expenses
of the Premises. Finally, Borrower shall furnish to Company
within thirty (30) days after the end of each fiscal month of
Borrower an unaudited financial statement of Borrower and a
profit and loss statement relating to each of the 65
restaurants on which the equipment is located.
D. DEBT FINANCING COMMITMENT. Company's and Borrower's
obligations hereunder are contingent on DenAmerica Corp.'s, or
a special purpose bankruptcy remote entity's, execution
simultaneously herewith of a Commitment for debt financing
from CNL Financial Services, Inc. or one of its affiliates in
an amount not to exceed Seventeen Million One Hundred Thousand
Dollars ($17,100,000.00) to be secured by first priority
leasehold mortgage and security interests in approximately
thirty-four (34) Denny's located in Texas, Arizona, Colorado,
Idaho, Utah, Missouri, Oklahoma, Louisiana, Arkansas and
Florida (the "Debt Financing Commitment"). All applicable
special conditions of the Debt Financing Commitment are hereby
incorporated by reference.
E. CNL GROWTH CORP. NOTES. DenAmerica Corp. has an outstanding
promissory note in the original principal amount of Seven
Million Seven Hundred Thousand Dollars ($7,700,000.00), of
which there remains outstanding approximately $6,900,000.00
and an outstanding Convertible Debenture Agreement in the
original principal amount of Four Million Four Hundred
Thousand Dollars ($4,400,000.00) (together the "Growth Corp.
Notes"). DenAmerica Corp. agrees to (i) execute documentation
necessary such that all rights and remedies available to Jack
Lloyd and William Howard under those certain Series B Notes
shall also be available to CNL Growth Corp. under the Growth
Corp. Notes (the "Remedies"); (ii) execute a tri-party
agreement, intercreditor agreement or other appropriate
documentation with the Company, Jack Lloyd, William Howard,
and Banque Paribas, if necessary, to effectuate the Remedies;
and (iii) provide a guaranty from Black-eyed Pea, U.S.A. of
the Growth Corp. Notes.
F. POST-CLOSING DOCUMENTATION. Delivery by Borrower of all
documentation due to the Company, CNL Growth Corp., or one of
their affiliates, including but not limited to Landlord
Estoppels, Real Property Waivers, UCC Financing Statements,
and Lease Amendments.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 8
G. PROCEEDS OF LOAN. The proceeds of the Loan shall be applied
first to payment of, including but not limited to, all past
due principal and interest payments, taxes, rents, insurance
premiums, property taxes, and any other sums due the Company,
CNL American Property Funds, LP, or one of their affiliates,
under any existing loans or leases.
H. ESCROW OF PROPERTY TAXES. Beginning on the first day of the
first full month following closing of the Loan contemplated
hereunder, and continuing on the first day of each month
thereafter during the term of the applicable loan or lease,
Borrower shall escrow one-twelfth (1/12) of the annual amount
necessary to pay ad valorem and real property taxes due on the
real and personal property which is the subject of any lease
or collateral for any loan by Lender or one of its affiliates
to Borrower or one of Borrower's affiliates (the "Escrow
Payment"). On the first day of the second full month following
closing, Borrower shall pay those amounts necessary to fully
fund the escrow account, to date. Failure to make any monthly
Escrow Payment shall constitute a default under the applicable
loan or lease. Lender's obligations hereunder are contingent
on Borrower's or Borrower's affiliates executing modifications
to any and all such leases or loans as may be required by
Lender in its reasonable discretion to effectuate the
requirements of this paragraph.
7. Applicable Law. This Commitment shall be construed in accordance
with the laws of the State of Florida. It is agreed that time shall be of the
essence all terms and provisions of this Commitment.
8. Survival. The terms and conditions of this Commitment shall survive
closing with respect to the transaction contemplated herein.
9. Commitment Period. This Commitment shall expire unless, on or before
ten (10) business days from the date of this Commitment set forth above, this
Commitment is accepted and returned to the Company.
10. Assignment of Commitment. This Commitment is not assignable by
Borrower. The Company may assign this Commitment in whole or part to an
affiliate of the Company without Borrower's consent.
If this Commitment is acceptable to you, please sign in the space
provided below and return one executed original letter to my office. Following
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 9
receipt of the executed Commitment, I shall instruct our legal counsel to
prepare definitive documents consistent with the foregoing terms and conditions.
If you have any questions, please do not hesitate to call me.
Very truly yours,
CNL FUND ADVISORS, INC.
By: /s/ John T. Walker
--------------------------------------
John T. Walker, Chief Operating Officer
ACCEPTED AND AGREED:
As to Borrower
BLACK-EYED PEA, U.S.A.
By: /s/ Robert J. Gentz
----------------------------
Name:
---------------------------
As its:
------------------------
Date:
---------------------------
As to BORROWER on $18,4000,000.00 Consolidated Note
and GUARANTOR on the Growth Corp. Notes
DENAMERICA CORP.
By: /s/ Robert J. Gentz
----------------------------
Name:
---------------------------
As its:
------------------------
Date:
---------------------------
CNL FINANCIAL SERVICES, INC.
April 13, 1999
Mr. Robert Gentz
DenAmerica Corp.
7373 North Scottsdale Road, D-120
Scottsdale, Arizona 85253
RE: TOTAL CUMULATIVE LOAN NOT TO EXCEED $17,100,000.00 TO BE
SECURED BY APPROXIMATELY THIRTY-FOUR (34) DENNY'S RESTAURANTS
LOCATED IN TEXAS, ARIZONA, COLORADO, IDAHO, UTAH, MISSOURI,
OKLAHOMA, LOUISIANA, ARKANSAS, AND FLORIDA
Dear Mr. Gentz:
I am pleased to inform you that CNL Financial Services, Inc., a Florida
corporation ("Lender") has agreed to make available loan financing to you in a
total cumulative amount not to exceed $17,100,000.00 (the "Loan") on the
following terms and conditions:
1. BORROWER
The Borrower shall be a special purpose bankruptcy remote entity
approved by Lender in Lender's reasonable discretion ("SPE").
2. LOAN AMOUNT AND USE OF PROCEEDS
The Loan will be evidenced by secured promissory notes (singularly
referred to as a "Note" and collectively referred to as the "Notes") in
a total cumulative amount not to exceed $17,100,000.00 or such lesser
amount, as necessary, so that the same shall not exceed sixty percent
(60%) of the business enterprise value for the Mortgaged Premises (as
hereafter defined) secured by leasehold properties (the "Loan Amount").
The proceeds from the Loan shall be used solely for the purpose of
acquiring the Mortgaged Premises from DenAmerica Corp., or paying off
or paying down all or a portion of the loans of DenAmerica Corp. and
Black-eyed Pea U.S.A., Inc., or certain of their respective affiliates.
Each site is subject to the approval of Lender in Lender's sole and
absolute discretion.
3. INTEREST RATE
Provided the loan closes prior to April 30, 1999, the interest rate on
the Loan, prior to an event of default, shall accrue at a fixed rate
per annum established on the day of closing equal to five hundred and
fifty-five (555) basis points over the Applicable Treasury Rate, which
will be the yield (determined by interpolating, if necessary) for
non-callable U.S. Treasuries with a maturity date of ten (10) years
(one longer and one shorter, if interpolating), as quoted by Bloomberg
Financial Markets on the date of funding of the Loan (the "Closing").
If the Loan is funded after April 30, 1999, the interest rate shall be
equal to the number of basis points over the Applicable Treasury Rate
as set by Lender for such calendar month as its market spread.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 2
The Note(s) shall include provisions for a default interest rate during
the term of any Loan default which is four percent (4%) above the
interest rate set forth in the Loan Documents ("Default Interest Rate")
and for late charges on any payments not made when due and payable. If
any payment fails to reach Lender within ten (10) days after the due
date, Borrower shall pay to Lender an additional charge equal to five
percent (5%) of the payment amount.
4. TERM
The term of Borrower's Loan will be for fifteen (15) years, measured
from the first day of the first full month from and after the Loan
Closing, or as adjusted by Lender to match the term of any leasehold
serving as Collateral for a specific Note.
5. GUARANTIES
Payment of the Loan will be guaranteed by the following guarantor(s)
(together the "Guarantor"):
BLACK-EYED PEA U.S.A., INC., A TEXAS CORPORATION
DENAMERICA CORP., A GEORGIA CORPORATION
6. PAYMENTS
Borrower will pay a monthly principal and interest payment (the
"Monthly Payment") in the amount necessary to fully amortize the entire
Loan amount in equal monthly payments over the Loan term. Unless the
Loan closes on the first (1st) day of the month, an initial
interest-only payment for each site (the "Closing Payment") will be due
on the date that the Loan closes and will be withheld from the Loan
proceeds to be disbursed to Borrower at Closing. The Closing Payment
will equal the sum of the interest payable on the Loan from the Closing
Date to the first (1st) day of the next month (unless Borrower's Loan
closes on the first (1st) day of the month). Borrower's regular Monthly
Payments will then be due and payable on the first (1st) day of each
month (each a "Payment Date") beginning on the first (1st) day
following the first (1st) full calendar month of the Loan.
7. PREPAYMENT
PREPAYMENT IN FULL
A. SWAP BREAKAGE. At any time prior to the Loan being included as
an asset of a Securitization by Lender or any of its
Affiliates, and upon giving Lender sixty (60) days prior
written notice, the Borrower may prepay the entire unpaid
principal balance of the Note in full on the last Business Day
before a scheduled monthly payment date. Upon any such
prepayment, the Borrower agrees to pay the Lender hereof, in
addition to the entire unpaid principal balance, accrued
interest, and any other sums due Lender at the time of
prepayment, a prepayment premium (the "Prepayment Premium")
equal to Breakage Costs (as defined below).
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 3
"Breakage Costs" shall mean amount equal to the greater of:
(a) 1% of the entire unpaid principal balance of the
Note; or
(b) (i) the present value of all remaining payments of
principal and interest discounted at a discount rate
equal to the "Swap Rate on Date of Prepayment,"
MINUS
(ii) the present value of all remaining payments of
principal and interest discounted at a discount rate
equal to the "Swap Rate on Date of Note."
"Swap Rate on Date of Note" shall be defined herein as the
fixed rate, as determined by holder in its reasonable
discretion, which is paid by holder (or which otherwise would
be required to be received by an established and active
interest rate swap counterparty, whether or not a swap
transaction is actually entered into) on the date of this Note
for a fixed rate swap in the notional amount and with the
amortization terms of the Loan, in exchange for a floating
rate equal to the 30-day LIBOR (London Inter-Bank Offering
Rate).
"Swap Rate on Date of Prepayment" shall be defined herein as
the fixed rate, as determined by holder in its reasonable
discretion as of the date and time of any prepayment
hereunder, which the holder can contract to receive (or which
otherwise would be paid by an established and active interest
rate swap counterparty, whether or not a swap transaction is
actually entered into) under a fixed rate swap in the notional
amount and with the remaining amortization terms of the amount
being prepaid, in exchange for a floating rate equal to the
30-day LIBOR (London Inter-Bank Offering Rate), minus
one-quarter of one percent (25 Basis Points).
No Prepayment Premium shall be due for any full prepayment
made by the undersigned, upon not less than five (5) days
prior written notice to holder, within ninety (90) days of the
maturity date of the Note.
B. MAKE WHOLE. At any time after the Loan is included as an asset
of a Securitization by Lender or any of its Affiliates, and
upon giving Lender sixty (60) days prior written notice, the
Borrower may prepay the entire unpaid principal balance of the
Note in full on the last Business Day before a scheduled
monthly payment date as set forth below. The Loan may be
prepaid subject to certain restrictions and payment of a
Prepayment Premium (as described below), if due, and interest
for the balance of the month in which any prepayment occurs,
which shall be paid in order to compensate Lender for costs
and losses which will be incurred as a result of any
prepayment under the Loan (including the breakage costs which
could be incurred by Lender for the interest rate swap
agreements and similar interest rate undertakings of Lender
required to support the fixed rate on the Loan and the profits
lost by Lender notwithstanding any reinvestment of the
prepayment proceeds).
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 4
Upon giving Lender sixty (60) days prior written notice, the
Borrower may prepay the entire unpaid principal balance of the
Note in full on the last business day before a scheduled
monthly payment date. Upon any such prepayment, the Borrower
agrees to pay the Lender hereof, in addition to the entire
unpaid principal balance, accrued interest, and any other sums
due Lender at the time of prepayment, a prepayment premium
equal to (i) the present value of all remaining payments of
principal and interest, discounted at the Treasury Rate, less
(ii) the amount of principal being prepaid, but shall not be
less than one percent (1%) of the then outstanding principal
balance of the Loan (the "Prepayment Premium"). The "Treasury
Rate" shall be the yield on securities issued by the United
States Treasury having a maturity equal to the remaining term
of the Loan, as quoted in Federal Reserve Statistical Release
[H.15(519)] under the heading "U.S. Government
Securities-Treasury Constant Maturity" for the date most
nearly two (2) weeks before the prepayment date (or a
comparable rate if this rate is no longer published) [adjusted
to reflect a monthly payment interval]. If the above rate is
not available for a term equal to the remaining stated term of
the Loan as of the date of such prepayment, the Treasury Rate
shall be determined by interpolating between the yields on
securities of the next longer and next shorter maturity.
The principal sum of the Loan may not be prepaid, in whole or
in part, at any time during the term hereof except as
specifically allowed under this section. In addition, during
the ninety (90) day period immediately preceding the Loan
Maturity Date, the Loan may be prepaid at any time in whole
but not in part after Borrower has given thirty (30) days
prior written notice to the holder of the Loan without payment
of a Prepayment Premium. In the event that the Loan is
accelerated then Borrower shall also pay the amount of the
Prepayment Premium that would have been due had Borrower
voluntarily prepaid the Loan. The Lender or holder shall have
no obligation to accept any prepayment of principal under the
Loan except as expressly stated in this section.
PARTIAL PREPAYMENT
The Borrower shall have no right to make a partial prepayment of the
outstanding indebtedness during the Note term.
8. COLLATERAL
The Loan will be secured by a first priority leasehold mortgage and
security interest in approximately thirty-four (34) Denny's located in
Texas, Arizona, Colorado, Idaho, Utah, Missouri, Oklahoma, Louisiana,
Arkansas, and Florida, including all real property and/or ground or
restaurant leases, all personal property (including equipment) and any
and all other property and/or interests relating to and used or
necessary for the operation of the restaurant business (unless
specifically excluded by Lender) (the "Mortgaged Premises"), together
with certain guarantees of the guarantor(s) identified above, if any,
to the extent and in form and substance satisfactory to Lender and its
counsel. At the time of closing the Loan, the Mortgaged Premises shall
not be in violation of growth management statutes, concurrency laws and
regulations, zoning ordinances, building codes or restrictions, or
present or future encumbrances not shown by the public records. Any
applicable Franchise Agreement shall be in a form acceptable to Lender
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 5
and be for a term at least equal to the term of the Loan (including any
renewal term(s) exercisable by Borrower upon meeting the franchisor's
standard conditions). If Lender has approved the Loan on a ground lease
or other leasehold basis, then the Lease shall be subject to Lender's
approval in all respects and must include, or Borrower must provide, an
undertaking by the Landlord in form acceptable to Lender allowing
Lender notice of and an opportunity (but not the obligation) to cure
any default and the right, in the event of a termination of the Lease
for any reason, for Lender to enter into a substitute lease on
equivalent economic terms for the remainder of the Lease term,
including all renewals. Further, any ground lease or other leasehold
interest shall be for a term, or include unilateral options for
Borrower to extend the term of the Lease, for a period equivalent to or
longer than the term of the Loan related thereto. The Loan described
herein shall be cross-collateralized such that any collateral securing
any obligations of Borrower under the Loan shall be deemed to secure
the obligations of the Borrower or Guarantors, if any, under the notes,
mortgages, and documents executed in connection with the other loans,
if any, from the Lender and that a default by Borrower or Guarantors in
their respective obligations under any other notes, mortgages, and
documents executed in connection with any other loans from Lender to
Borrower or Guarantors, as the case may be, shall entitle Lender to
seek any and all remedies available to it under any or all of the
documents executed in connection with the Loan and all applicable laws.
9. REQUIRED COVERAGE RATIOS
Throughout the term of the Loan, Borrower is obligated to maintain a
Consolidated Fixed Charge Coverage Ratio of not less than 1.2:1, based
on an EBITDAR calculation (the "EBITDAR FCCR"). The EBITDAR FCCR means,
for the trailing twelve (12) month period, the ratio of (a) the
Borrower's Cash Flow for such period to (b) the Borrower's Debt Service
for such period. "Cash Flow" means, for any period, an amount equal to
(a) the sum of (i) pre-tax income, (ii) interest expense, (iii) all
non-cash amounts in respect of depreciation and amortization, (iv) all
operating lease and/or rent expense, and (v) Non-Recurring Expenses
less (b) Non-Recurring Income, all as reflected on the Borrower's
financial statement for such period. "Non-Recurring Expenses" and
"Non-Recurring Income" mean expenses or income, as the case may be,
that is extraordinary and generally not reflected in any prior period
or reasonably anticipated to be incurred in any subsequent period.
"Debt Service" means all of the Borrower's interest, the current
portion of principal, rental payments and current portion of capital
lease obligations. Borrower shall be entitled to make distributions to
Guarantor only after Borrower has met the EBITDAR FCCR requirement set
forth herein.
10. RADIUS RESTRICTION
Neither the Borrower nor any Guarantor, or any of their commonly
controlled affiliates, shall own an interest in, or operate, any other
Denny's restaurant within a three (3) mile radius of the Mortgaged
Premises.
11. DOCUMENTATION OF LOAN
The documents used to evidence and to secure the Loan contemplated
herein shall be those documents customarily used by Lender in
connection with loan transactions of the type, character, and size
contemplated herein and/or such other documents as Lender , Borrower,
and their attorneys, in their reasonable discretion, may deem necessary
or desirable for Lender's protection (collectively, the "Loan
Documents"). At the Closing Borrower must execute and deliver all such
Loan Documents as Lender may reasonably require, in form and substance
satisfactory to Lender.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 6
12. VALUATION OF BORROWER'S REAL PROPERTY AND BUSINESS ASSETS
Lender shall engage Deloitte and Touche, L.L.P., or another Lender
approved valuation firm, to prepare a business enterprise valuation for
all of the Borrower's restaurant operations in the event the Lender
shall obtain an assignment of a restaurant operation lease as
collateral for the Loan contemplated herein. The valuation and the
appraisal methodology and conclusions included therein shall be subject
to Lender's review and approval. All costs and fees associated with the
preparation of the valuation shall be the responsibility of the
Borrower, and Borrower hereby agrees to immediately pay or prepay such
valuation costs or fees upon the request of Lender.
13. CROSS-DEFAULT
A default in the Loan contemplated by this commitment shall constitute
a default in all of Borrower's and Guarantors', if any, other loans
with Lender. A default in any of Borrower's or Guarantors', if any,
other loans with Lender or under any commitment and/or loan made by any
lending institution with the amount in controversy exceeding $25,000.00
shall constitute a default in the Loan contemplated by this commitment.
In the event of any default of the Loan or other loans covered by this
"cross-default" provision, Lender shall be entitled to the Default
Interest Rate during the term of any Loan default, and any of
Borrower's monies deposited with Lender shall be immediately and
irrevocably assigned to Lender to apply to the obligations in any
manner Lender deems necessary. The Loan Documents shall provide that
the mortgage shall secure the prompt and timely delivery of any
promissory or other notes from Borrower to Lender. In the event of
default, Lender will be entitled, at its option, to cease making
advances after the occurrence of any such event of default.
Notwithstanding the foregoing, the cross-default and related
cross-collateralization provisions of the Loan Documents shall not
apply to any related party loans outside of a given single loan pool
within the loan securitization financing structure of the holder of the
Loan.
14. HAZARDOUS AND REGULATED SUBSTANCES; ENVIRONMENTAL SITE ASSESSMENT
STANDARDS
Upon acceptance of this Commitment by Borrower, Borrower shall complete
and return to Lender a Customer Environmental Questionnaire ("CEQ") in
the form attached hereto for the Mortgaged Premises. In the event
Borrower's interest in the Mortgaged Premises is fee simple or a ground
lease, Lender shall also require preparation of a Phase I Environmental
Site Assessment Report for each Mortgaged Premises to serve as
collateral for the Loan by a Lender-approved environmental engineer. In
the event Borrower's interest in the Mortgaged Premises is a lease in a
free standing unit, Lender shall require a Transaction Screen Report
(i.e., an ERRIS or VISTA report) by a Lender-approved information
source. Thereafter, and at its sole discretion, Lender shall determine
whether it will require further investigation, including but not
limited to, a non-technical inspection and/or preparation of a Phase I
or Phase II Environmental Site Assessment Report or a Transaction
Screen Report for each Mortgaged Premises to serve as collateral for
the Loan; provided, however, that Lender shall obtain Borrower's prior
written consent to any such further investigation. All reports shall be
prepared at Borrower's sole cost and expense, in accordance with
Lender's environmental risk management standards and shall be certified
to Lender.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 7
Borrower shall furnish evidence satisfactory to Lender, that the
Mortgaged Premises and operations at the Mortgaged Premises are in
compliance with all applicable Federal, State, and local environmental
statutes, laws, and regulations. Borrower agrees to forward a copy of
any such notices received after this date to Lender within five (5)
days of their receipt. Borrower acknowledges that Lender shall not be
obligated to proceed to closing or settlement or to make any
disbursements if, in Lender's sole discretion, an environmental
regulatory violation or other environmental problem presents a material
risk to Borrower's financial condition or to the value or marketability
of the Mortgaged Premises.
This Commitment is contingent upon the Lender's approval of the
environmental condition of the Mortgaged Premises as set forth in the
CEQ, the Phase I or Phase II Environmental Site Assessment Report(s),
or Environmental Audit Reports, as applicable, and any subsequent
findings, test results, consultant recommendations and/or reports
generated as a result of such further investigation(s).
15. SURVEYS AND FLOOD HAZARD CERTIFICATION
If Borrower's interest in the Mortgaged Premises is fee simple, a
ground lease or free-standing space lease, at least ten (10) days prior
to the closing of the Loan, Borrower shall furnish to Lender two (2)
sealed copies of a current survey (done within sixty (60) days of
closing or as approved by Lender and title agent) of the Mortgaged
Premises, including all adjoining alleys and appurtenant easements,
prepared by a registered surveyor or licensed professional civil
engineer. All surveys shall be ALTA surveys certified to "CNL Financial
I, Inc., a Florida corporation, CNL Financial Services, Inc., a Florida
corporation, CNL Financial IV, LP, a Delaware limited partnership, and
CNL Financial V, LP, a Delaware limited partnership, CNL APF Partners,
LP, a Delaware limited partnership, their affiliates, and their
successors and/or assigns," and the title insurance company insuring
the lien of Lender's mortgage in accordance with Lender's standard
Survey Requirements.
16. INSURANCE REQUIREMENTS
Borrower, subject to applicable rules and regulations of the State (or
States) in which the Mortgaged Premises are located (herein, as to each
separate site, the "State"), has the right to contract insurance with
an insurance agent or company of Borrower's choice, provided the
company or companies meet Lender's reasonable requirements.
1. Borrower shall strictly comply in all respects with Lender's
standard Insurance Requirements in connection with the hazard,
liability and other insurance required by Lender, as follows:
1. Standard Fire and Hazard Insurance, with All-Risk
(including Builder's Risk and worker's compensation
coverage on all construction loans) Extended Coverage
Endorsement including Vandalism and Malicious
Mischief, without co-insurance, in an amount equal to
at least 100% of the replacement cost of the
improvements existing on the real property described
in the Loan Documents contemplated by this
commitment. The deductible clause, if any, of the
fire and extended coverage policy may not exceed the
lesser of (i) one percent (1.0%) of the face amount
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 8
of the policy, (ii) $25,000.00 and (iii) unless
included in a blanket policy for all of the
Properties, five percent (5.0%) of the gross annual
income of or revenues from the Property. If Borrower
leases any portion of the Mortgaged Premises, or any
interest therein, to a third party, Rental Loss
Insurance should be required if any lease provides
for the abatement of rent. Rental Loss Insurance
shall be required if any lease provides for the
abatement of rent. Business Interruption Insurance
shall be required. Either type of insurance must
cover debt service, real estate taxes, and insurance
premiums for a period of at least twelve (12) months.
2. If any Improvements on the Mortgaged Premises are or
will be located in an area identified by the U.S.
Department of Housing and Urban Development (H.U.D.)
as an area having "special flood hazards" (zones
beginning with "A" or "V"), flood insurance must be
purchased and maintained in the amount equal to the
product of (a) the amount of the Note and (b) a
fraction, the numerator of which is the number of
buildings located in such flood hazard area and the
denominator of which is the number of buildings
located on the Property, but in no event less then
the maximum limit of coverage available under the
National Flood Insurance Act of 1968, the Flood
Disaster Protection Act of 1973, and the Housing and
Community Development Acts of 1974 and 1977, all as
amended, whichever is less. Further, if the Mortgaged
Premises is located in an high earthquake risk area
and earthquake insurance is available, Borrower shall
purchase and maintain earthquake insurance in an
amount equal to at least 100% of the replacement cost
of the improvements existing on the real property
described in the Loan Documents contemplated by this
commitment.
3. Borrower shall also maintain employer and workers'
compensation insurance, single limit commercial
general liability for not less than one million
dollars ($1,000,000.00), and if Borrower serves
alcoholic beverages on the Mortgaged Premises, liquor
liability insurance for not less than two million
dollars ($2,000,000.00) against claims and liability
for bodily injury or property damage to persons or
property occurring on each site constituting the
Mortgaged Premises, with umbrella liability coverage
of not less than five million dollars
($5,000,000.00). Evidence of such coverage shall be
provided to Lender in the form of a certified copy of
the policy or an insurance certificate.
1. All policies must be issued by insurance companies and
agencies licensed or authorized by the Insurance Commissioner
of the State in which the Mortgaged Premises are located (the
"State") to conduct business in the State.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 9
2. All policies shall be in the amounts, form and content
(including mortgagee clauses) as are acceptable to Lender and
issued by insurance carriers which have a long-term debt
rating of claims paying in the category "A-" or better as
rated by Best's Insurance Rating Agency.
3. Lender will require evidence that all policy premiums for all
coverages (including personal property if given as security)
are in effect for the Collateral and paid through June 30,
1999.
E. In the event the terms of Borrower's franchise agreement
require that the amount of insurance be greater than that set
forth above, Borrower shall provide evidence acceptable to
Lender of its compliance with the insurance requirements of
the Franchise Agreement.
17. TITLE INSURANCE
Lender, at Borrower's cost and expense, shall obtain a satisfactory
ALTA Mortgagee Title Insurance Commitment ("Title Commitment") from the
national title insurance company offices selected by Lender, in an
amount equal to the full amount of the Loan contemplated by this
commitment letter naming "CNL Financial I, Inc., a Florida corporation,
CNL Financial Services, Inc., a Florida corporation, CNL Financial IV,
LP., a Delaware limited partnership, CNL Financial V, LP, a Delaware
limited partnership, CNL APF Partners, LP, a Delaware limited
partnership, their affiliates, and their successors and/or assigns" as
the proposed insured. The title insurance company and the form must be
satisfactory to Lender. In addition to any affirmative coverages,
special endorsements, or affirmative insurance coverages required by
Lender or its counsel, a Form 9 (Comprehensive) Endorsement
(Restrictions, Easements, Minerals) or its equivalent shall be required
for all Mortgaged Premises. Lender shall receive a marked-up Title
Commitment at the closing of the Loan at Borrower's sole cost and
expense.
After the closing of the Loan, Borrower, at its sole cost and expense,
shall furnish Lender with such title endorsements or updates to said
ALTA Title Insurance Policy or any other title documentation as Lender
may reasonably require, from time to time, to insure Lender that no
other matters of record affect the condition of title or the priority
of Lender's lien.
Prior to closing, as reasonably requested by Lender, Borrower, at its
sole cost and expense, shall furnish Lender with UCC (Financing
Statement), judgment and tax lien searches and reports for the
Mortgaged Premises, Borrower and each Guarantor.
18. REAL ESTATE TAXES, ASSESSMENTS AND TAX SERVICE
All taxes and assessments payable in connection with the Mortgaged
Premises must be paid to the time of closing if due. Before the closing
of the Loan, Borrower must furnish evidence satisfactory to Lender that
the Mortgaged Premises are (or are not) separately assessed for real
estate taxation purposes. Borrower shall provide Lender with evidence
satisfactory to Lender that all real estate taxes are paid in a timely
fashion. The Loan Documents will contain a provision requiring Borrower
to keep all taxes and assessments against the Mortgaged Premises fully
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 10
paid before the same become delinquent, and the failure to do so will
be an event of default under the Loan; provided, however, that in the
event that Borrower's interest in the Mortgaged Premises is a leasehold
interest, and such Mortgaged Premises are not separately assessed for
real estate taxation purposes, Borrower is not in default under the
lease with respect to the payment to lessor/owner in connection with
such real estate taxes or assessments (if required under the terms of
the lease) and the lessor/owner of such Mortgaged Premises is
responsible for the payment of such taxes or assessments therefor, then
the non-payment shall not be an event of default under the Loan
Documents.
19. COSTS AND EXPENSES
Lender shall not be put to any expense whatsoever in connection with
the issuance of this commitment or the closing of the Loan contemplated
hereby. Accordingly Borrower shall pay directly or reimburse Lender for
all costs and expenses incurred in connection with the preparation for
and the closing of the Loan, whether the Loan is closed or not. In the
event it is determined subsequently that additional costs relating to
the transaction are due, Borrower agrees to pay such costs immediately
upon demand, so long as such costs are not the result of errors or
omissions of Lender.
20. GOVERNMENTAL AUTHORITY
At least ten (10) days prior to closing, upon Lender's request,
Borrower shall provide Lender with any or all of the following
governmental documentation:
A. A letter describing the land-use classification, the permitted
uses in that land-use classification, the zoning
classification, and the uses permitted in that zoning
classification for the Mortgaged Premises (described therein
by legal description), which property shall be the same as the
property described in the survey and Title Commitment
described herein. In lieu of zoning letters, Lender will
accept certification by the surveyor on the face of the survey
as to the properties zoning classification and the uses
permitted by this classification; and
B. A certificate of occupancy for the entire project or as
otherwise designated by Lender; and
C. Any and all licenses and permits necessary for the use,
development and operation of the Mortgaged Premises, including
those licenses and permits required to serve food, beer, wine
and liquor, if applicable.
21. COMPLIANCE WITH LAWS
The Loan contemplated hereunder, as well as the Mortgaged Premises and
the proposed and actual use thereof, must comply with all laws,
statutes, ordinances, rules and regulations of all governmental
authorities having jurisdiction over such matters. By its acceptance of
the commitment, Borrower certifies, and upon Lender's request, will
furnish evidence satisfactory to Lender, that the Mortgaged Premises
are currently in compliance and will comply with all applicable laws
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 11
(including, without limitation, the Americans with Disabilities Act of
1990, Public Law 101-336, 42 USC 12101), ordinances, rules and
regulations, and with all covenants, conditions, easements and
restrictions to which the Mortgaged Premises are subject. At the time
of the Loan closing and at the time of any disbursement by Lender,
there must be no action or proceeding pending before any court,
quasi-judicial or administrative body or regulatory agency relating to
the validity of the Loan, the Mortgaged Premises or Borrower's proposed
or actual use of the Mortgaged Premises. All rights to appeal from any
decision rendered in connection with the Loan, the Mortgaged Premises
or the proposed or actual use of the Mortgaged Premises must have
expired prior to the closing date and pertinent disbursement dates.
22. LEASES
The following provisions shall apply if the Mortgaged Premises are
leased to any third party: (i) all leases must be provided to Lender
for its review and approval prior to closing or execution thereof; (ii)
all rents, leases, and profits involving any portion of the Mortgaged
Premises shall be assigned to Lender as additional collateral; (iii)
Lender reserves the right to review and approve any and all leases of
any portion of the Mortgaged Premises; (iv) after approval by Lender,
no such lease can be modified or canceled without the prior written
consent of Lender; (v) Lender may require that all tenants must agree
in writing to give Lender both a written notice of any default by
landlord(s) under the lease(s) and a reasonable opportunity to cure the
same; (vi) Lender shall require all tenants to execute a Subordination,
Non-Disturbance and Attornment Agreement pursuant to which each tenant
shall (a) agree to subordinate its lease to the lien of Lender's
Mortgage, (b) agree to recognize Lender or its assigns as the landlord
under the lease in the event that Lender or its assigns becomes owner
of the Mortgaged Premises, and (c) acknowledge that tenant shall be
permitted to occupy the Mortgaged Premises so long as tenant is not in
default under the lease, subject to the terms and conditions of its
lease and the Subordination, Non-Disturbance and Attornment Agreement;
and (vii) prior to closing, Lender may require that Borrower furnish
tenant estoppel certificates and other proof satisfactory to Lender
that the leases of the Mortgaged Premises are in force and effect in
accordance with their respective terms and no defaults presently exist
or are contemplated by any party to the leases.
23. REPORTING
A. Guarantor and Borrower shall keep books and records reflecting
its financial condition including, but not limited to, the
operation of the Mortgaged Premises in accordance with
generally accepted accounting principles consistently applied.
Lender shall have the right, from time to time at all times
during normal business hours, to examine such books, records
and accounts at the offices of the Guarantor or other entity
maintaining such books, records and accounts and to make such
copies or extracts thereof as the Lender shall desire.
B. During the term of the Loan, the Borrower and Guarantor
(collectively, the "Reporting Entities") on a consolidated
basis at the Guarantor level must furnish or cause to be
furnished to the Lender within one hundred twenty (120) days
of the close of each of their respective fiscal years, fiscal
year end audited current signed financial statements (annual
balance sheet and a profit/loss statement) of the Borrower and
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 12
Guarantor and an income and expense statement of the operation
of the Mortgaged Premises, all which must be "Presented To"
CNL Financial I, Inc., a Florida corporation, CNL Financial
Services, Inc., a Florida corporation, CNL Financial IV, LP.,
a Delaware limited partnership, CNL Financial V, LP, a
Delaware limited partnership, and CNL APF Partners, LP, a
Delaware limited partnership. All Borrowers and Guarantors, if
applicable, shall also annually furnish to Lender: (i) annual
U.S. Income Tax Returns, (ii) a statement disclosing all
contingent liabilities, and (iii) such interim statements as
may reasonably be required by Lender, from time to time.
Borrower and Guarantor shall advise Lender of its respective
fiscal year-end dates and shall notify Lender, in writing, of
any change in such year-end dates. Borrower shall also furnish
to Lender current signed rent rolls or lease digests prior to
the Closing and annually thereafter, no later than one hundred
twenty (120) days after the close of Borrower's fiscal year,
certified to be correct by Borrower.
C. During the term of the Loan, the Borrower and Guarantors shall
also furnish to Lender within thirty (30) days after the end
of each fiscal month of Borrower and Guarantors an unaudited
financial statement of Borrower and Guarantors and a profit
and loss statement relating to each restaurant comprising the
Mortgaged Premises.
D. Finally, during the term of the Loan, the Borrower shall also
furnish to Lender, in addition to the annual and monthly
reports required above, within forty-five (45) days after the
end of each fiscal quarter of Borrower an unaudited financial
statement of Borrower and a statement of income and expenses
of the Mortgaged Premises.
24. PROHIBITION AGAINST SECONDARY FINANCING
This commitment is conditioned upon there existing at the time of the
Loan, and during the term of the Loan, except as previously approved by
Lender, no secondary or supplementary financing, no other lien, charge,
or security interest upon or affecting any of the property (real or
personal, tangible or intangible) in which Lender has a security
interest and no agreement to grant any such interest other than liens
or charges which will be discharged from the proceeds of the Loan.
However, it shall not be a default for Borrower to obtain purchase
money financing in an amount not to exceed $25,000.00 for any site and
grant a security interest in such equipment purchased to replace
existing equipment or to comply with the terms of Borrower's franchise
agreement so long as Borrower has obtained the prior approval of
Lender, which approval shall not be unreasonably withheld, delayed, or
conditioned.
25. NON-ASSIGNABILITY AND THIRD PARTY BENEFICIARY RIGHTS
Neither this commitment nor the proceeds of the Loan contemplated
herein shall be assignable by Borrower without the prior written
consent of Lender and any attempt at such assignment without Lender's
prior written consent shall be void. All third-party beneficiary rights
of Borrower are expressly negated. No person who is not a party to this
commitment shall have or enjoy any rights under this commitment.
Furthermore, without limiting the generality of the foregoing, no one
other than Borrower shall have any rights to obtain or compel a
disbursement of the proceeds of the Loan contemplated under this
commitment.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 13
26. SECURITIZATION OR OTHER ASSIGNMENT AND/OR PARTICIPATION BY LENDER
Lender reserves the right to assign, transfer, participate, pledge,
hypothecate or encumber, or any combination thereof, all or any part of
Lender's interest in this commitment or any of the collateral and
security instruments and documents mentioned herein without Borrower's
consent. Without limiting the generality of the foregoing, Borrower
acknowledges that the Loan is being offered by Lender as part of a Loan
securitization program. Borrower agrees to cooperate in good faith with
Lender's reasonable requests relating to the securitization program
process and requirements and agrees and acknowledges that all
information relating to Borrower and this Loan may be made available by
Lender to the other participants in the loan securitization. Borrower
understands and agrees that Lender intends to and may, from time to
time, sell, pledge, grant a security interest in and collaterally
assign, take, and deliver or otherwise encumber or dispose of the Note
or other Loan Documents and its rights and powers thereunder in
connection with the loan securitization or otherwise and Borrower
agrees to assist Lender in completing any documents necessary to
accomplish any such transfer and/or securitization transaction.
Borrower(s) and Guarantor(s) hereby authorize Lender to provide any
information regarding Borrower(s) and Guarantor(s) in all reports
required as part of a loan securitization program or by any
governmental body regulating Lender.
27. SEVERABILITY AND WAIVER OF RIGHTS OF LENDER
If Lender chooses to waive any covenant, paragraph, or provision of
this commitment, or if any covenant, paragraph, or provision of this
commitment is construed by a court of competent jurisdiction to be
invalid or unenforceable, it shall not affect the applicability,
validity, or enforceability of the remaining covenants, paragraphs, or
provisions. The failure or delay of Lender to insist upon strict
performance of any term, condition, or requirement of this commitment,
or to exercise any right herein conferred in any one or more instances
shall not be deemed a waiver or relinquishment of any term, condition,
requirement, or right that Lender may have and shall not be deemed a
waiver of any subsequent term, condition, requirement, or right.
28. MISCELLANEOUS
A. The paragraph headings herein are for information only and in
no way limit, define or modify Borrower's obligation under the
provisions, covenants, terms and conditions hereof.
B. All of the agreements, terms and conditions shall be binding
upon and inure to the benefit of each of the parties hereto,
their respective successors, heirs, legal representatives and
assigns.
C. Time shall be of the essence of this commitment. No waiver of
any of the terms and provisions of this commitment, and no
waiver of any default or failure to comply with the commitment
shall be effective, unless made by Lender in writing.
D. The closing shall occur in the State (or by mail through a
closing agent in the State designated by Lender) at a time and
place to be determined by Lender.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 14
E. Any notice required or permitted to be given shall be deemed
to have been duly given when addressed and mailed by
Registered or Certified United States mail, return receipt
requested, to Lender at the address on the letterhead of this
commitment and to the attention of the individual signing this
commitment letter on behalf of Lender, or to Borrower at the
address to which this commitment is addressed, or to such
other place as either of the parties may for themselves
designate in writing for the purposes of receiving notices.
F. All personal pronouns used in this commitment shall include
the other genders whether used in the masculine, feminine or
neuter gender, and the singular shall include the plural
whenever and as often as may be appropriate.
G. Borrower(s) and Guarantor(s) shall have joint and several
liability for all obligations imposed upon Borrower(s) and
Guarantor(s) under this commitment.
H. This commitment is conditioned upon continuation of the
assets, liquidity, net worth, and credit standing of all
persons to be obligated to Lender at substantially as
favorable a level as disclosed initially by the financial
statements and other credit information submitted to Lender.
So long as this commitment remains in force and effect, Lender
shall have the right to demand current and complete financial
statements of any or all persons to be obligated to Lender.
These statements shall be prepared in a manner and a level of
detail satisfactory to Lender. This commitment is also
conditioned upon there being no unanticipated disruptions in
Lender's commercial paper conduit or no material adverse
changes in Lender's capital market funding sources.
I. At the time Lender closes or acquires the Loan, Borrower's
obligations either under this commitment or under any existing
security instrument affecting the Mortgaged Premises shall not
be in default in any respect, and no event shall have occurred
which, subject to either the passage of time or the giving of
notice, or both, would result in such a default.
J. So long as this commitment or any Loan made or acquired
pursuant hereto remains in force and effect, Lender and
Lender's agents and/or consultants shall have the right at all
reasonable times to enter and to inspect and test the
Mortgaged Premises on 24 hours or more prior notice.
K. Lender may upon receipt of consent from Borrower announce and
publicize the source of the financing contemplated hereunder,
by means and media selected by Lender.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 15
L. In the event Lender is named in any legal action brought
against Borrower(s) and/or Guarantor(s), Borrower(s) and
Guarantor(s) shall, jointly and severally, defend all claims,
losses or liabilities, including attorneys' fees, paralegal
fees, and all related legal costs and expenses arising out of
this commitment and/or the Loan contemplated by the commitment
and shall indemnify and hold Lender harmless from and against
any act or omission of Borrower or of Borrower's agents
resulting in any loss or damage because of a claim by anyone
for a brokerage fee, commission, or finder's fee alleged to be
due as a result of the issuance of this commitment or making
of the Loan. Prior to the closing of the Loan, Lender may
request Borrower to furnish evidence satisfactory to Lender
that Borrower has paid in full all fees or charges due any
mortgage banker, mortgage broker or other party assisting
Borrower in arranging this financing.
M. Borrower represents that there is no litigation, legal or
administrative proceeding, investigation, condemnation or
other action of any nature commenced, pending, or, to the
knowledge of Borrower, threatened against or affecting the
Mortgaged Premises or Borrower or any Guarantor which has not
been disclosed in detail in writing to Lender and which may
involve the possibility of any judgment or liability not fully
covered by insurance, or materially or adversely affect
Borrower's interest in the Mortgaged Premises or any of the
assets of Borrower or Borrower's right to carry on business as
now conducted, or affect the continued employment of any
officer, or director of Borrower.
N. Borrower and each Guarantor hereby separately warrant to
Lender that all representations, circumstances, accounts,
reports, and all other information supplied to Lender in
connection with the Loan are true and accurate in all material
respects. Borrower and each Guarantor agree that each separate
warranty shall survive the closing of the Loan and further
agree to notify Lender of any material change in any of the
information submitted to Lender.
O. This letter supersedes any and all prior commitments,
agreements, provisions, offers and statements, whether written
or oral, made by Lender or anyone acting with its
authorization. No change, amendment, or modification hereof
shall be valid unless made in writing and signed by a duly
authorized officer of Lender. This letter and the rights
hereunder may not be assigned by Borrower to any other party.
29. CANCELLATION AND TERMINATION OF COMMITMENT BY LENDER
Lender reserves the right to cancel this commitment and to terminate
its obligations thereunder at any time in any of the following
circumstances:
A. Failure of Borrower or of any Guarantor to comply with any of
the provisions, conditions, or requirements of the commitment;
or
B. Nonpayment within the prescribed time of any fees or expenses
called for in the commitment; or
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 16
C. Insufficiency of title or failure of Lender to approve either
the state of title to the Mortgaged Premises or any Loan
Documents delivered to it; or
D. Damage to existing improvements which has not been repaired or
restored to the satisfaction of Lender, or for which
satisfactory provisions for repair or restoration have not
been made at the time Lender is called upon to act pursuant to
this commitment; or
E. The filing by or against any Borrower, Guarantor or other
persons required to execute any of the Loan Documents of: any
petition in bankruptcy, trusteeship, insolvency, or
reorganization; any action for the appointment of a receiver
or trustee; or an assignment or arrangement for the benefit of
creditors, which petition, appointment, assignment, or
arrangement is not withdrawn, dismissed, canceled, or
terminated prior to the expiration of this commitment; or
F. If Borrower's business is discontinued or suspended for any
reason or if Borrower is in default under the terms of any
applicable Franchise Agreement; or
G. If there have been any material misrepresentations, material
errors, or the withholding of material information incident to
the Loan contemplated by this commitment; or
H. If any information previously submitted to Lender proves to be
false or incorrect; or
I. Any change subsequent to the date of this commitment deemed by
Lender to be a material or substantial adverse change in the
assets, liquidity, net worth, or credit standing of any
Borrower, Guarantor, or other person who shall become
obligated in any way to Lender under this commitment or the
Loan contemplated by this commitment; or
J. The taking of a judgment against any Borrower or Guarantor
which in the sole discretion of Lender materially affects his
credit standing; or
K. If Borrower or any Guarantor defaults on any other obligation
to Lender; or
L. In the event the Mortgaged Premises are (i) contaminated with
hazardous materials, chemicals, substances or toxic wastes,
(ii) not in compliance with applicable environmental statutes,
laws, or regulations, or Lender is not satisfied with any
environmental assessment report or any further investigations,
tests, results, findings, recommendations, and /or
conclusions; or
M. The death of any Borrower or Guarantor.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 17
30. WAIVER OF JURY TRIAL
BORROWER, GUARANTORS (IF ANY) AND LENDER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY WITH REGARDS TO
ANY LITIGATION BASED ON THIS LETTER, THE LOAN CONTEMPLATED HEREBY AND
ANY OBLIGATION RESULTING FROM OR RELATED TO ANY LOAN OR GUARANTY
RELATING TO THIS LETTER, OR ANY AGREEMENT CONTEMPLATED TO BE EXECUTED
IN CONJUNCTION HEREWITH, OR ANY COURSE OF DEALING, COURSE OF CONDUCT,
STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF BORROWER, ANY
GUARANTOR OR LENDER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER
OFFERING THE LOAN CONTEMPLATED HEREBY.
31. BROKERAGE COMMISSION
The Lender shall assume no responsibility for payments to any broker,
finder or similar agent in connection with the Loan. The Borrower shall
indemnify and hold the Lender harmless for any such amounts or claims.
It is further agreed that the Lender shall not be obligated to pay for
any prior commitment fees to other lending institutions and/or any of
Borrower's liquidated damages arising therefrom.
32. GOVERNING LAW
The terms and conditions of this commitment letter shall survive the
closing of the Loan contemplated by the commitment. In the event of a
conflict between the terms and conditions of this commitment letter and
the Loan Documents used to close the Loan, the Loan Documents used to
close the Loan shall prevail. This commitment is subject to full
compliance with all applicable State and Federal laws, rules and
regulations which may govern Lender and with all formal directives of
State and Federal agencies implementing and enforcing such laws,
regulations and rules. This commitment shall be construed according to
and governed by the laws of the State of Florida, provided that from
and after closing the parties' obligations and rights under the Loan
Documents executed pursuant hereto, as to each separate restaurant
property site constituting any of the Mortgaged Premises, shall be
construed according to and governed by the laws of the State in which
the Mortgaged Premises are located. In addition, Lender may choose to
avail itself of any applicable Federal law. Borrower and Lender agree
that any dispute arising out of this Commitment shall be subject to the
jurisdiction of both the state and federal courts in Florida. For that
purpose, Borrower hereby submits to the jurisdiction of the state and
federal courts of Florida. Borrower further agrees to accept service of
process out of any of the aforesaid courts in any such dispute by
registered or certified mail addressed to Borrower. Nothing herein
contained, however, shall prevent Lender from bringing any action or
exercising any rights against Borrower or any security within any other
state or jurisdiction.
33. CONDITIONS TO ACCEPTANCE
This offer is subject to the following additional conditions:
A. This offer to enter a loan commitment will expire unless, on
or before ten (10) business days from the date of this letter
as set forth above, Borrower signs, dates and returns the
enclosed copy of this letter, and deliver Borrower's check to
Lender in the amount equal $10,000.00 for a non-refundable
loan commitment fee (the "Commitment Fee")(which Commitment
Fee has been paid), and
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 18
Borrower shall also pay to Lender an amount equal to one
percent (1.0%) of the Loan Amount, less the $10,000.00
previously paid as the Commitment Fee, for a non-refundable
loan origination fee (the "Origination Fee"), which amount
shall be due at the closing.
B. Lender's counsel must be satisfied with the documentation,
title condition, proceedings and legal opinions, engineering
conditions and environmental conditions incident to this
transaction. Borrower will provide to Lender such attorney's
opinions as Lender may deem necessary opining as to the
enforceability of and Borrower's qualifications and ability to
enter into the Loans contemplated herein in the jurisdiction
in which the Mortgaged Premises are located.
C. Lender's obligations hereunder are contingent upon its receipt
of a credit reference of Borrower acceptable to Lender in its
sole and absolute discretion.
D. The preceding terms and conditions are not exhaustive, and the
Loan shall be subject to Lender's standard loan closing
procedures and requirements. Lender's commitment will expire
sixty (60) days from the date of this letter.
34. SPECIAL CONDITIONS
Additional conditions and/or requirements, or permitted variations from
Lender's standard loan conditions and requirements, if any, are as
follows:
A. SPE shall conform to Lender's requirements (including loan
covenants) for qualification as a tax neutral, Bankruptcy
Remote Special Purpose Entity ("BRE") and shall be acceptable
to Lender, in Lender's discretion. Further, Borrower shall
provide a legal opinion, in a form acceptable to Lender in
Lender's discretion, that such entity is not subject to
consolidation by virtue of the bankruptcy of another
corporation, entity, company or partnership.
B. Lender's and Borrower's obligations hereunder are contingent
on Borrower's and Black-Eyed Pea U.S.A., Inc.'s execution
simultaneously herewith and subsequent simultaneous closing
related thereto, of a commitment for debt financing from CNL
Fund Advisors, Inc. or one of its affiliates for Three Million
and no/100 Dollars ($3,000,000.00) of new equipment financing
and the modification of Fifteen Million Four Hundred Thousand
and no/100 Dollars ($15,400,000.00) of existing equipment
financing, in an aggregate amount not to exceed Eighteen
Million Four Hundred Thousand Dollars $18,400,000.00 to be
secured by a first priority security interest in certain
furniture, fixtures and equipment ("ff&e") in various Denny's
and Black-Eyed Pea restaurants.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 19
C. During such time as Borrower is not meeting EBITDAR FCCR as
set forth in paragraph 9 of this commitment, Borrower shall be
required to obtain Lender's prior written consent to any of
the following: paying cash dividends on capital stock,
repurchasing shares of capital stock, making any preferred
return payments and incurring additional indebtedness which is
not specifically related to the acquisition or development of
Denny's restaurant units. Failure of Borrower to obtain
Lender's prior written consent to any of the above shall
constitute a default under the Loan Documents entitling Lender
to any and all available remedies.
D. Any proceeds from the sales of any restaurant site(s) of
Borrower, including but not limited to the Mortgaged Premises,
shall be used to pay off Borrower's existing debt associated
with such site(s). Lender shall not accept partial prepayment.
Therefore, any such sales and resulting payoff must be of each
and every unit securing any one Note. Borrower's failure to do
so shall constitute a default under the Loan Documents
entitling Lender to any and all available remedies. Borrower
shall be entitled to transfer the Mortgaged Premises to
Denny's Inc., or to Advantica, Inc. ("Franchisor") without
paying off Borrower's existing debt, provided however, that
(1) Franchisor's financial condition, creditworthiness and
ability to operate the Mortgaged Premises are satisfactory to
Lender in its reasonable discretion, (2) Franchisor assumes in
writing all obligations of the Borrower under the Note the
other Loan Documents; and (3) Franchisor shall pay all costs
and expenses in connection with such transfer and assumption,
including without limitation all fees and expenses incurred by
Lender. Lender shall release the Guarantors from their
obligations under the Guaranties upon any such sale to
Franchisor as approved by Lender. Further, Borrower shall be
entitled to transfer the Mortgaged Premises to any Affiliate
of Borrower, or any other franchisee acceptable to Franchisor
whose financial condition, creditworthiness and ability to
operate the Mortgage Premises are satisfactory to Lender in
its sole discretion, provided however, that (1) Borrower
obtains Lender's prior written consent to such transfer; (2)
the proposed transferee assumes in writing all obligations of
the Borrower under the Loan Documents; (3) Lender receives a
transfer fee in the amount of one percent (1%) of the then
outstanding principal balance of the Note and all accrued but
unpaid interest due thereunder; (4) Lender shall receive for
its review and approval copies of all transfer documents; and
(5) Borrower or the transferee shall pay all costs and
expenses in connection with such transfer and assumption,
including without limitation all fees and expenses incurred by
Lender.
E. Throughout the term of the Loan, Borrower shall not execute
any guarantees in favor of Guarantor, any affiliate, parent
company, or third party without the prior written consent of
Lender.
F. Lender's and Borrower's obligations hereunder are contingent
on the execution of a management and remarketing agreement by
and among Lender, Borrower, DenAmerica and franchisor relating
to the operation and management by franchisor of the
restaurants located at the Mortgaged Premises and remarketing
of the Mortgaged Premises by Lender or its affiliate upon an
event of default under the Loan Documents.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 20
G. Lender's and Borrower's obligations hereunder are contingent
on the execution of (i) a release by Banque Paribas of any
rights and interest in the Mortgaged Premises.
H. Lender's and Borrower's obligations hereunder are contingent
on the execution of a waiver of all defaults and consent to
the assignment to Borrower by the franchisor of Denny's
restaurants with respect to the franchise agreements related
to restaurants operating at the Mortgaged Premises .
I. 100% of Borrower's capital stock shall be pledged to Lender by
DenAmerica Corp. and Lender shall be given a blanket power of
attorney with respect to voting rights with respect to such
capital stock which shall be exercised in the event of a
default.
J. Borrower shall execute one or more management agreements with
DenAmerica Corp. to provide all management and non-store level
services for a fee, which together with all general and
administrative expenses, shall not to exceed 3 1/2% of gross
sales without the prior written consent of Lender. The rights
of DenAmerica (or other management company) to such management
fees and general and administrative expenses shall be
subordinated to the rights of Lender and Lender's security
interest in the Mortgaged Premises securing Borrower's
obligations under the Note.
K. Regardless of the provisions of paragraph 6 herein, the
Borrower shall pay to Lender the monthly payment by electronic
transfer and in connection therewith shall deliver to Lender
an electronic funds transfer authorization in a form
satisfactory to Lender. Lender agrees to notify Borrower
within 48 hours, in the event that electronic funds transfer
does not take place on the payment due date.
L. Notwithstanding the provisions of paragraph 20A to the
contrary, in lieu of zoning letters, Borrower shall be
required to provide zoning representations on the surveys and
zoning endorsements to the mortgagee title insurance polices,
when available.
M. Notwithstanding the provisions of paragraph 10 herein, the
Borrower or Guarantor shall be permitted to construct a
Denny's within a three (3) mile radius of the Mortgaged
Premises provided the Borrower provides demographic data to
Lender which supports, in Lender's sole discretion, the
additional restaurant.
N. Notwithstanding the provisions of paragraph 23 herein to the
contrary, Lender agrees:
i. That prior to examining the Borrower's books,
records, and accounts, at Borrower's office, Lender
will provide Borrower and Guarantor with seven(7)
days written notice of the date on which Lender
wishes to conduct said examination.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 21
ii. Lender will accept fiscal year end audited statements
on the Guarantor, company prepared financial
statements for the SPE, and company prepared income
and expense statements for each individual unit.
iii. The rent roll and lease digest referred to in
paragraph B will be required only if Borrower has
leased units to operators other than the lessee
affiliate contemplated by the creation of the SPE.
O. Notwithstanding the provisions of paragraph 26 herein, Lender
agrees that it will reimburse Borrower and/or Guarantor for
any out of pocket expenses (including attorneys fees) incurred
in complying with the provisions of this paragraph.
P. Lender agrees to provide notice to Guarantor in the event of
default by the Borrower on any Loan or Loans. Failure to
provide said notice will not constitute a waiver of any rights
or remedies of the Lender under the term and conditions of the
Loan Documents.
Q. Notwithstanding the provisions of paragraph 28H herein, Lender
agrees that in the event Lender fails to fund the loans
contemplated herein for the reasons enumerated in paragraph
28, Lender will refund the commitment fee described in
paragraph 33A.
R. Borrower agrees that the previous Commitment Letter issued by
Lender and dated July 1, 1998 is of no further force and
effect.
S. Beginning on the first day of the first full month following
Closing and continuing on the first day of each month
thereafter during the term of the Loan, Borrower shall escrow
one-twelfth (1/12) of the annual amount necessary to pay ad
valorem and real property taxes due on the Mortgaged Premises
(the "Escrow Payment"). On the first day of the second full
month following Closing, Borrower shall pay those amounts
necessary to fully fund the escrow account, to date. Failure
to make any monthly Escrow Payment shall constitute a default
under the Loan entitling Lender to pursue any and all
available remedies.
T. Prior to Lender or any of its Affiliates including the Loan as
an asset of a Securitization, Lender agrees to provide
Borrower ninety (90) days prior written notice. During such
ninety (90) day period, Borrower shall have the right to
prepay the entire unpaid principal balance of the Loan, plus
(i) accrued interest, (ii) any other sums due Lender, and
(iii) the Prepayment Premium as set forth in paragraph 7A
hereof.
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 22
If this letter and the proposed Loan are acceptable to Borrower and
Guarantors, if any, on the terms and conditions provided herein, please have an
original counterpart properly executed in the space provided below by an
authorized signatory and return a fully executed counterpart to us at the
address noted above on or before the outside acceptance date provided above. If
Borrower has any questions about the proposed Loan, please feel free to contact
Brent Heaton, Senior Vice President at (972) 387-1721.
Sincerely,
CNL FINANCIAL SERVICES, INC., a
Florida corporation
By: /s/ John L. Farren
---------------------------------
JOHN L. FARREN, Vice President of
Transaction Management
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 23
BORROWER'S ACCEPTANCE
By execution hereof as provided below, Borrower accepts the offer for
the loan as set forth in this loan application acceptance letter, agrees to all
terms and conditions to such loan as described above.
By: /s/ Robert J. Gentz
----------------------------
Name:
---------------------------
As its:
------------------------
Date:
---------------------------
In the event that additional information is necessary for the closing
of the Loan transaction, please contact the following Borrower representative:
Name:_____________________________
Telephone:________________________
<PAGE>
Mr. Robert Gentz
DenAmerica Corp.
April 13, 1999
Page 24
GUARANTOR'S ACCEPTANCE
By execution hereof as provided below, the undersigned Guarantor(s)
agree to join in the terms and conditions of this Loan Commitment.
DENAMERICA CORP., A GEORGIA CORPORATION
By: /s/ Robert J. Gentz
----------------------------
Name:
---------------------------
As its:
------------------------
Date:
---------------------------
EXHIBIT 12.1
DENAMERICA CORP.
RATIO OF INCOME TO FIXED CHARGES
(000 OMITTED)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (Loss) Before Income Taxes
and Extraordinary Item ........ $ (550) $ 505 $ 2,485 $(17,719) $ (6,942)
Fixed Charges:
Rental Expense ................ 1,584 2,499 7,660 10,132 9,094
Interest ...................... 1,301 2,467 9,255 11,962 11,070
Debt Expense Amortization ..... 15 144 350 1,939 1,722
-------- -------- -------- -------- --------
Total Fixed Charges ......... 2,900 5,110 17,265 24,023 21,886
-------- -------- -------- -------- --------
Net Income as Adjusted .......... $ 2,350 $ 5,615 $ 19,750 $ 6,314 $ 14,944
======== ======== ======== ======== ========
Ratio ........................... 1.10 1.14
======== ========
Amount Inadequate to Cover
Fixed Charges ............... $ 550 $ 17,719 $ 6,942
======== ======== ========
</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
DenAm, Inc. Delaware
DenFlorida, Inc. Delaware
- ----------
(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 April 14, 1999,
(which expresses an unqualified opinion and includes an explanatory paragraph
related to the Company's ability to continue as a going concern) appearing in
this Annual Report on Form 10-K of DenAmerica Corp. for the year ended December
30, 1998.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF WORLD WIDE STONE CORPORATION FOR THE YEAR
ENDED DECEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE 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> 12-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,330
<SECURITIES> 0
<RECEIVABLES> 2,636
<ALLOWANCES> 0
<INVENTORY> 2,917
<CURRENT-ASSETS> 13,416
<PP&E> 72,878
<DEPRECIATION> 17,230
<TOTAL-ASSETS> 134,507
<CURRENT-LIABILITIES> 58,254
<BONDS> 72,494
0
0
<COMMON> 1,349
<OTHER-SE> (4,683)
<TOTAL-LIABILITY-AND-EQUITY> 134,507
<SALES> 255,956
<TOTAL-REVENUES> 255,956
<CGS> 70,046
<TOTAL-COSTS> 70,046
<OTHER-EXPENSES> 180,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,635
<INCOME-PRETAX> (6,942)
<INCOME-TAX> (914)
<INCOME-CONTINUING> (6,028)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,371
<CHANGES> 0
<NET-INCOME> (4,657)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
