THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED AS OF APRIL 12, 2000
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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 29, 1999
Commission File Number 1-13226
PHOENIX RESTAURANT GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1861457
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7373 N. Scottsdale Road
Suite D-120, Scottsdale, AZ 85253
- ----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (480) 483-7055
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on Which Registered
- ---------------------------- ------------------------------------
Common Stock, $.10 par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant (6,623,169) shares on March 31, 2000 was
$2,483,688. 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, 2000:
13,485,277 shares of Common Stock, $.10 par value.
Documents incorporated by reference: None.
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 29, 1999
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS........................................................ 1
ITEM 2. PROPERTIES...................................................... 17
ITEM 3. LEGAL PROCEEDINGS............................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................. 18
ITEM 6. SELECTED FINANCIAL DATA......................................... 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................. 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 27
ITEM 11. EXECUTIVE COMPENSATION.......................................... 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................. 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K........................................................ 36
SIGNATURES ................................................................ 39
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 OUR
"EXPECTATIONS," "ANTICIPATION," "INTENTIONS," "BELIEFS," OR "STRATEGIES"
REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS ALSO INCLUDE STATEMENTS
REGARDING REVENUE, MARGINS, EXPENSES, AND EARNINGS ANALYSIS FOR FISCAL 2000 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 US AS OF THE FILING DATE OF THIS
REPORT, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS. OUR 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.
OUR COMPANY
We currently operate 190 family-oriented, full-service restaurants in
20 states, primarily in the southwestern, midwestern, western, and southeastern
United States. Our restaurants include 93 Black-eyed Pea restaurants, located
primarily in Texas, Arizona, Oklahoma, and the Washington, D.C. area, and 97
Denny's restaurants, which represents approximately 5.4% of the Denny's system
and makes us the largest Denny's franchisee in terms of revenue and the number
of restaurants operated. We have sold or converted to the Denny's concept all of
the restaurants we previously operated under various other restaurant concepts,
or "non-branded restaurants."
We began operations in 1986 through one or more predecessor entities
under common control. We initially pursued an aggressive program of growth
through acquisitions of Denny's and other restaurants and through development of
new Denny's restaurants. Our current company resulted from the March 29, 1996
merger of Denwest Restaurant Corp., or DRC, and American Family Restaurants,
Inc., or AFR. We acquired Black-eyed Pea U.S.A., Inc., or BEP, in July 1996. In
July 1999 we changed our corporate name from "DenAmerica Corp." to "Phoenix
Restaurant Group, Inc." to reflect the fact that we operate more than one
restaurant concept. Our principal executive offices are located at 7373 N.
Scottsdale Road, Suite D-120, Scottsdale, Arizona 85253, and our telephone
number is (480) 483-7055.
The table below sets forth information regarding the number of
restaurants that we have acquired, developed, converted to the Denny's concept,
and sold or closed in each year since the beginning of fiscal 1994, including
restaurants developed, sold, or closed by BEP prior to the BEP acquisition.
RESTAURANTS ACQUIRED, DEVELOPED, CONVERTED, SOLD, OR CLOSED
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BLACK-EYED PEA RESTAURANTS:
Number open beginning of period .... 97 103 105 93 104 101
Acquired ........................... 0 0 0 9 2 0
Developed .......................... 6 5 0 4 0 8
Sold or closed ..................... 0 (3) (12) (2) (5) (16)
---- ---- ---- ---- ---- ----
Number open at end of period ....... 103 105 93 104 101 93
==== ==== ==== ==== ==== ====
DENNY'S RESTAURANTS:
Number open beginning of period .... 102 148 168 182 174 100
Acquired ........................... 40 3 0 0 0 0
Developed .......................... 6 8 5 1 0 0
Converted from other concept ....... 1 10 15 10 0 0
Sold or closed ..................... (1) (1) (6) (19) (74) (3)
---- ---- ---- ---- ---- ----
Number open at end of period ....... 148 168 182 174 100 97
==== ==== ==== ==== ==== ====
NON-BRANDED RESTAURANTS:
Number open beginning of period .... 59 56 82 20 3 0
Acquired ........................... 1 36 0 0 0 0
Converted .......................... (1) (10) (15) (10) 0 0
Sold or closed ..................... (3) (0) (47) (7) (3) 0
---- ---- ---- ---- ---- ----
Number open at end of period ....... 56 82 20 3 0 0
==== ==== ==== ==== ==== ====
TOTAL NUMBER OF RESTAURANTS OPEN AT
END OF PERIOD ......................... 307 355 295 283 201 190
==== ==== ==== ==== ==== ====
</TABLE>
<PAGE>
The following table sets forth number of restaurants in each state
where we conduct operations as of March 31, 2000.
BLACK-EYED BLACK-EYED
PEA DENNY'S PEA DENNY'S
---------- ------- ---------- -------
Arizona...... 9 12 Nebraska....... 4
Arkansas..... 1 Nevada......... 1
Colorado..... 7 New Mexico..... 2
Florida...... 19 Oklahoma....... 6 7
Idaho........ 5 Oregon......... 1
Iowa......... 4 South Dakota... 1
Kansas....... 2 1 Texas.......... 66 23
Louisiana.... 1 Utah........... 8
Maryland..... 3 Virginia....... 4
Missouri..... 1 1 Wisconsin...... 1
----- -----
Totals.... 93 97
===== =====
STRATEGY
Our business strategy is to (a) concentrate on developing the
Black-eyed Pea concept and brand identity; (b) focus on restaurants that achieve
operating efficiencies; and (c) sell or close certain restaurants and refinance
existing indebtedness.
CONCENTRATE ON DEVELOPING THE BLACK-EYED PEA CONCEPT AND BRAND IDENTITY
We have determined to concentrate our efforts on developing the
Black-eyed Pea restaurant concept and brand identity because we believe the
concept provides unit economics and opportunities for profitability that are
more desirable than the Denny's concept. We have committed to restructuring our
company to divest our remaining Denny's restaurants and to focus our resources
on enhancing the profitability of the Black-eyed Pea concept. We opened eight
new Black-eyed Pea restaurants in 1999. We intend to pursue opportunities to
develop additional Black-eyed Pea restaurants as we identify favorable locations
and acceptable sources of financing for new restaurants. We continue to enhance
and refine the Black-eyed Pea restaurant concept in order to improve the unit
economics of our Black-eyed Pea restaurants. We currently are emphasizing
refinements to our "prototype" Black-eyed Pea restaurant that is designed to
improve unit economics. We also are exploring joint venture opportunities for
the Black-eyed Pea concept and we plan to explore opportunities to franchise or
license the Black-eyed Pea concept to third parties in the future.
FOCUS ON RESTAURANTS THAT ACHIEVE OPERATING EFFICIENCIES
We intend to focus on operating restaurants in selected markets in
order to capitalize on certain operating efficiencies that such concentration
generally provides. Our 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 cost savings as a
result of lower overall management costs, lower cost of goods sold as a result
of lower distribution costs, more efficient use of advertising and marketing
programs, and other administrative savings.
SELL OR CLOSE UNDERPERFORMING RESTAURANTS AND REFINANCE EXISTING INDEBTEDNESS
Over the last two years, we have sold or closed underperforming
restaurants, refinanced certain of our debt obligations, and refinanced certain
assets in an effort to reduce our outstanding indebtedness and to better match
our cash flows from operations with our debt service obligations. In June 1999,
we completed a financing transaction in which CNL APF Partners, LP purchased the
remaining indebtedness under our previous senior credit facility and advanced to
us an additional $5.4 million.
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In October 1999, we retained CNL Advisory Services to act as our agent
in the sale of our remaining Denny's restaurants. As of March 31, 2000, we have
received letters of interest for the proposed sale of all of our remaining
Denny's restaurants. These proposals are subject to usual and customary
conditions to closing, including the buyers' obtaining financing for such
transactions. To the extent that we sell some or all of our remaining Denny's
restaurants, we intend to apply a large portion of the proceeds to permanently
reduce our outstanding indebtedness.
We will continue to evaluate the operating results of our restaurants
remaining after our currently anticipated sales. We will sell or close any of
those restaurants that do not meet our criteria for operating results.
BLACK-EYED PEA RESTAURANTS
CONCEPT
We currently operate 93 Black-eyed Pea restaurants in 8 states.
Black-eyed Pea restaurants are full-service, casual dining establishments
featuring wholesome home-style meals. We believe 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 29, 1999, the average check per customer at
the Company's Black-eyed Pea restaurants was approximately $8.08. In fiscal
1999, 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. We regularly review and revise the existing
Black-eyed Pea restaurant menu and conduct consumer tests of new menu items in
order to improve the quality and breadth of food offerings and to encourage
repeat business. We maintain a test kitchen facility, which includes a full
Black-eyed Pea restaurant cookline, for use in our 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.
Our 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.
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UNIT ECONOMICS
We estimate that our 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. We
currently plan to lease substantially all of our new Black-eyed Pea restaurant
sites.
DENNY'S RESTAURANTS
We currently operate 97 Denny's restaurants in 17 states, representing
approximately 5.4% of the Denny's system. We are the largest Denny's franchisee
in terms of revenue and the number of restaurants operated.
DENNY'S, INC.
We operate our Denny's restaurants pursuant to franchise agreements
with Denny's, Inc. Denny's, Inc. is a wholly owned subsidiary of Advantica
Restaurant Group, Inc., which emerged from bankruptcy protection in late 1997 as
the successor to Flagstar Companies, Inc. Advantica currently conducts its
restaurant operations through several principal chains, the largest of which is
Denny's. Denny's is 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 recently announced that it
intends to sell its Coco's and Carrows restaurants and to concentrate on the
Denny's brand.
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, and
chicken strips. 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 29,
1999, the average check per customer at our Denny's restaurants was
approximately $5.62.
RESTAURANT DESIGN
Our Denny's restaurants generally operate in freestanding 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
We estimate that our 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
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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. We lease substantially all of our
restaurant sites in order to minimize the costs of acquiring and developing new
restaurants.
THE DENNY'S SYSTEM
We operate our Denny's restaurants pursuant to a specific system
developed by Denny's, Inc. 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 also includes established, detailed requirements regarding
* the quality and uniformity of products and services offered;
* 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
* 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.
DENNY'S FRANCHISE AGREEMENTS
We are a party to a separate franchise agreement with Denny's, Inc. for
each of our Denny's restaurants. The franchise agreements generally require us
to pay an initial franchise fee, a royalty equal to 4% of weekly gross sales (as
defined in the franchise agreements), and an advertising contribution of 2% to
3% of weekly gross sales. The franchise agreements generally have terms of 20
years or the earlier expiration of the relevant building lease, including
options for extensions. We may terminate franchise agreements only upon the
occurrence of a material breach by Denny's, Inc.
The franchise agreements entitle us 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 franchise agreements require us to operate our Denny's restaurants
in compliance with the Denny's system. We are free to establish our own prices
at our Denny's restaurants, which may differ by location and are influenced by
geographic and other considerations.
The franchise agreements impose other restrictions on our business and
give Denny's, Inc. the right to terminate those agreements under certain
circumstances, which could have a material adverse effect on our
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business. See Item 1, "Special Considerations - The Denny's franchise agreements
impose restrictions and obligations on us."
EXPANSION OF OPERATIONS
In prior years we have developed and acquired restaurants in an effort
to achieve cost savings by taking advantage of certain economies of scale
associated with administrative overhead and management personnel and systems. We
currently are focusing our resources on selling our Denny's restaurants and
developing the Black-eyed Pea concept and brand identity. We developed eight new
Black-eyed Pea restaurants in 1999 and we plan to pursue opportunities to
develop new Black-eyed Pea restaurants as we identify such opportunities. In the
future, we may develop or acquire additional restaurants in order to
* enhance our presence in our target markets;
* establish the necessary base from which we can further penetrate
these markets; and
* capitalize on purchasing, advertising, managerial,
administrative, and other efficiencies that result from the
concentration of restaurants in specific markets.
The specific time frame in which we will develop or acquire any additional
restaurants will depend upon our ability to
* identify suitable sites;
* obtain financing for restaurant acquisitions, construction,
tenant improvements, furniture, fixtures, and equipment;
* negotiate acceptable lease or purchase terms;
* secure the appropriate governmental permits and approvals,
including those relating to zoning, environmental, health, and
liquor licenses;
* manage restaurant construction; and
* recruit and train qualified personnel.
We cannot assure you that we will open or acquire a specific number of
restaurants or whether any such restaurants will be successful. The development
of 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 or acquired restaurants may operate
at a loss for a period following their initial opening or acquisition. The
length of this period will depend upon a number of factors, including the time
of year the facility is opened or acquired, sales volume, and our ability to
control costs. We have in the past franchised or licensed a number of Black-eyed
Pea restaurants to third parties. As part of our strategy to enhance and develop
the Black-eyed Pea brand, we plan to explore opportunities to resume franchising
or licensing activities in the future.
RESTAURANT OPERATIONS
RESTAURANT MANAGEMENT
We believe that successful execution of basic restaurant operations is
essential to achieve and maintain a high level of customer satisfaction in order
to enhance our success and future growth. Therefore, we devote significant
efforts to ensure that all of our restaurants offer quality food and service. We
maintain 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 our operations, we provide a
variety of corporate services and quality assurance procedures designed to
assure the operational success of the restaurant and compliance with standards
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that we require for all of our restaurants and that Denny's, Inc. requires in
the case of our Denny's restaurants. Our 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.
We believe that our quality review program and executive oversight
enhance restaurant operations, reduce operating costs, improve customer
satisfaction, and facilitate the highest level of compliance with our standards
and, in the case of our Denny's restaurants, those mandated by Denny's, Inc.
The Black-eyed Pea restaurant system has two regional vice presidents,
who report to our President. Each regional vice president is responsible for
eight 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.
Our vice president of operations currently administers the operations
of our Denny's restaurants. The two regional vice presidents for Denny's
restaurants report to the vice president and are responsible for seven to eight
districts, each of which is in turn supervised by a district manager. 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., we staff
each of our Denny's restaurants with an on-site general manager, one to two
assistant managers, and 20 to 50 full-time or part-time hourly employees.
TRAINING
We seek to attract and retain high-quality individuals with prior
restaurant experience for restaurant management positions. We believe that the
training of our management and other restaurant employees is important to our
ability to maintain the quality and consistency of our food and service and to
develop the personnel necessary to achieve our expansion plans. Newly hired
employees are reviewed at regular intervals during their first year, and all
restaurant personnel receive annual performance reviews.
We employ four full-time regional training managers to oversee training
for our Black-eyed Pea restaurants. We require 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, we have 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.
We maintain a comprehensive training program that provides all
instructors, facilities, and required training materials necessary to train our
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
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responsible for training newly hired Denny's restaurant employees. Our district
managers and general managers regularly participate in on-going training
efforts.
MAINTENANCE AND IMPROVEMENT OF RESTAURANTS
We maintain our 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. We operate a
centralized call-in center that restaurant managers can contact to report
maintenance or repair requirements. We then dispatch service technicians that we
employ or independent contractors with which we have maintenance contracts. We
also make necessary additions, alterations, repairs, and replacements to our
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 our Denny's restaurants. We may be required, subject to certain
limitations, to modernize our Denny's restaurants to the then-current standards
and specifications of Denny's, Inc.
MANAGEMENT INFORMATION SYSTEMS
We maintain a centralized, computerized accounting system for financial
controls and reporting functions for most of our Black-eyed Pea and Denny's
restaurants. We generally have a point-of-sale reporting system in each of our
Black-eyed Pea and Denny's restaurants, which provides sales mix information,
labor scheduling functions, and weekly closeout processes. Our point-of-sale
compliance center at our 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 our corporate management. Our Black-eyed Pea restaurants perform weekly
inventory counts. Each of our Denny's restaurants maintains "par stock"
inventory levels. Our accounting department prepares monthly profit and loss
statements, which operational managers review and compare with prior period
results.
SITE SELECTION
When evaluating whether and where to develop a new restaurant, we
conduct an internal screening process to determine a restaurant's estimated
profit potential. We consider the location of a restaurant to be one of the most
critical elements of the restaurant's long-term success. Accordingly, we expend
significant time and effort in selecting and evaluating potential restaurant
sites. In conducting the site selection process, we primarily
* evaluate acquisition costs as well as site characteristics, such
as visibility, accessibility, and traffic volume,
* consider the restaurant's proximity to demand generators, such as
shopping malls and other retail centers, lodging, entertainment
centers, and office complexes,
* review potential competition, and
* analyze detailed demographic information, such as population
characteristics, density, and household income levels.
Our senior management evaluates and approves each restaurant site prior to
development.
FINANCING AND LEASING
It is our current strategy to lease, rather than own, the land and
buildings associated with the operations of our restaurants. Historically, we
have 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 us for up to 30 years, including renewal option
periods, under the terms of a triple-net lease. Our ability to effect our new
restaurant development strategy depends on the availability of financing on
terms and conditions that we believe are appropriate for the risk of the
development. Our inability to secure sufficient additional sale-leaseback or
other financing in the future could have a significant impact on our ability to
acquire or develop new restaurants.
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We took a number of steps during fiscal 1998 and 1999 to reduce and
restructure our outstanding indebtedness in order to better match our cash flows
from operations with our 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 acquisition of BEP.
EQUIPMENT, FOOD PRODUCTS, AND OTHER SUPPLIES
A purchasing director coordinates purchasing decisions with respect to
our Black-eyed Pea restaurants. We strive to obtain supplies of a high and
consistent quality at competitive prices from reliable sources. We negotiate
directly with food manufacturers for the majority of our purchases and with
local suppliers for fresh produce, dairy, and meat products. In addition, we
contract with a centralized distribution company to store and deliver
substantially all of the products and supplies we purchase (other than fresh
produce, meat and dairy products).
Our ability to maintain consistent quality throughout our Denny's
restaurants depends in part upon our ability to acquire from reliable sources
the equipment, food products, and related items necessary to meet the standards
set by Denny's, Inc. We believe the maintenance of this uniformity and
consistency enables us to capitalize on the name recognition and goodwill
associated with Denny's restaurants. As a result, we lease or purchase all
fixtures, furnishings, equipment, signs, food products, supplies, inventory, and
other products and materials required for the development and operation of our
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,
* possess adequate quality controls, and
* possess the capacity to provide supplies promptly and reliably.
Although we are not required to acquire our equipment or supplies from any
specified supplier, we must obtain the approval of Denny's, Inc. before
purchasing or leasing any items from an unapproved supplier.
Our 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. We purchase most of our food inventory for our Denny's restaurants
from a single supplier that specializes in providing food products to Denny's
franchisees. We believe that our purchases from this supplier enable us to
* maintain a high level of quality consistent with Denny's
restaurants;
* realize convenience and dependability in the receipt of our
supplies;
* avoid the costs of maintaining a large purchasing department,
large inventories, and product warehouses; and
* attain cost advantages as a result of volume purchases.
We have a supply agreement with our primary supplier. We believe that food goods
could be readily purchased from a large number of vendors throughout our regions
of operation in the event that we are unable to purchase sufficient inventory
from our primary supplier. Each of our Denny's restaurants purchases dairy,
bakery, and produce goods from approved local vendors.
ADVERTISING AND MARKETING
We use television, radio, print advertising, and special promotions to
increase the traffic and sales at our Black-eyed Pea restaurants. Our
advertising campaigns are designed to communicate the distinctive aspects of the
Black-eyed Pea concept and are targeted to appeal to our customer base. We
employ a full-time vice president of
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marketing who plans, develops, and implements advertising campaigns for our
Black-eyed Pea restaurants. We also use full-service advertising agencies.
Expenditures for Black-eyed Pea advertising, including local promotions, were
approximately 4.2% of Black-eyed Pea restaurant sales during fiscal 1999. In
2000, we reallocated our marketing resources to focus on local store marketing,
which will significantly reduce television advertising of Black-eyed Pea
restaurants. Although we anticipate that this will result in lower same-store
sales, we expect that the decreased expenditures will result in overall improved
cash flows for our Black-eyed Pea restaurants. This change in marketing strategy
could, however, have an adverse impact on our Black-eyed Pea average unit
volume.
As generally required under the terms of the Denny's franchise
agreements, we contribute 2% to 3% of our 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 us, 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
Extensive federal, state, and local government regulation affect the
development and operation of restaurants. Each of our 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, we are 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 our development, acquisition or remodeling
of restaurants or our operations generally.
We also are 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, or changes in tip-credit provisions, employee benefit
costs, overtime regulations, workers' compensation insurance rates, unemployment
and other taxes, working and safety condition regulations, citizenship
requirements or other costs associated with employees could adversely affect our
business. In addition, we are subject to the Americans with Disabilities Act of
1990 that, among other things, may require certain installations in new
restaurants or renovations to our existing restaurants to meet federally
mandated requirements.
During fiscal 1999, sales of alcoholic beverages comprised less than
2.0% of restaurant sales in our Black-eyed Pea restaurants and 1.0% of
restaurant sales in our Denny's restaurants. The sale of alcoholic beverages is
subject to extensive regulations. We may be subject to "dram-shop" statutes,
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. We carry liquor liability coverage as part of our
existing comprehensive general liability insurance and have never been a
defendant in a lawsuit involving "dram-shop" statutes.
We have in the past franchised or licensed Black-eyed Pea restaurants
to third parties and may in the future resume our franchising efforts. If we
resume franchising or licensing activities, we 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 our ability to terminate the franchise agreements for our franchised
restaurants.
TRADEMARKS AND SERVICE MARKS
We have registered or have 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 our Black-eyed Pea
operations. We regard these service marks as having significant value and being
an important factor in the marketing of our restaurants.
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We license the right to use the "Denny's" trademark directly from Denny's, Inc.
We believe that the continued right to use the "Denny's" trademark is important
to our success. We also own or license the right to use certain other trademarks
that we do not consider essential to our success.
COMPETITION
Our Black-eyed Pea restaurants compete in both the casual mid-scale
dining segment and the family-dining segment. Competitors of our Black-eyed Pea
restaurants include Applebee's and Chili's. As part of the nation's largest
family-oriented, full-service restaurant chain, our Denny's restaurants compete
primarily with regional restaurant chains such as International House of
Pancakes, Big Boy, Shoney's, Friendly's and Perkins.
Our restaurants also compete with various types of food businesses, as
well as other businesses, for restaurant locations. We believe 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 our target markets, we devote great attention to obtaining what we believe
will be premium locations for new restaurants, although no assurances can be
given that we will be successful in this regard.
INSURANCE
We maintain general liability and property insurance and an umbrella
and excess liability policy in amounts we consider adequate and customary for
businesses of our kind. Future claims, however, may exceed insurance coverage.
EMPLOYEES
At March 31, 2000, we had approximately 9,500 employees, of whom
approximately 75 were corporate personnel, approximately 500 were restaurant
management personnel, and the remainder were hourly personnel. We are not a
party to any collective bargaining agreement. We believe that our relationship
with our employees is good.
Each of our typical Black-eyed Pea restaurants employs approximately 55
to 60 persons. Each of our typical Denny's restaurants has approximately 40
employees, including approximately 15 kitchen personnel and 25 service
personnel. Many of our 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 $9.75 an hour for kitchen personnel. We generally pay service personnel
the applicable minimum wage plus tips.
SPECIAL CONSIDERATIONS
THE FOLLOWING FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
REPORT, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING OUR COMPANY AND OUR
BUSINESS.
WE MAY NOT BE PROFITABLE AND OUR AUDITORS' REPORT EXPRESSES SUBSTANTIAL DOUBT
REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have not been profitable in the last three years and our operations
may not be profitable in the future. Our ability to generate operating profits
will depend upon
* our ability to refinance, restructure, or repay our outstanding
debt;
* general economic and demographic conditions;
* our capital resources; and
* the nature and extent of any future developments and
acquisitions.
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We cannot provide assurance that we will be able to sell our remaining
Denny's restaurants, restructure our debt, and improve the performance of our
Black-eyed Pea restaurants so as to achieve profitability in the future. In
addition, the report by our independent auditors on our financial statements for
the year ended December 29, 1999, states that the uncertainty relating to our
continuing losses, our shareholders' deficit, the sale of our Denny's
restaurants, and/or our ability to refinance our debt raises substantial doubt
about our ability to continue as a going concern. As of the filing date of this
Report, we are in default on the payment of a $22.3 million promissory note to
our senior lender. See Item 7, "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Liquidity and Capital
Reserves."
WE HAVE SIGNIFICANT INDEBTEDNESS.
We have incurred substantial debt to develop and acquire restaurants
and to operate our business. Our business could be materially and adversely
affected if our cash flows from operations are not sufficient to meet our
obligations as they become due. We took a number of steps in 1998 and 1999 to
reduce and restructure our outstanding indebtedness. We also intend to sell our
remaining Denny's restaurants and to use a large portion of the proceeds from
those sales to retire our existing debt. As of December 29, 1999, we had a
working capital deficit of $4.1 million and total debt obligations of $80.6
million, including subordinated notes of $16.7 million and obligations under
capital leases aggregating $32.2 million.
We may seek additional equity or debt financing in the future, however,
to provide funds to support our operations or to develop or acquire additional
restaurants. We, however, cannot provide assurance that
* such financing will be available or will be available on
satisfactory terms;
* we will be able to develop or acquire new restaurants or to
otherwise expand our restaurant operations; or
* we will be able to refinance, restructure, or satisfy our
obligations as they become due.
Any additional debt financing will increase expenses and must be repaid
regardless of our operating results. Future equity financings could result in
dilution to existing shareholders.
WE MAY HAVE SIGNIFICANT CONTINGENT LIABILITIES ASSOCIATED WITH RESTAURANTS THAT
WE HAVE SOLD OR THAT WE SELL IN THE FUTURE.
Since 1996, we have sold a total of 144 restaurants. We have assigned
or subleased the real property leases and other obligations to the buyers of
these restaurants, but we generally remain liable under those obligations if the
buyers default. During 1999, three buyers of restaurants that we sold during
1997 and 1998 filed for bankruptcy or failed to perform on their obligations to
third parties. As a result, we recorded charges of $2.5 million for equipment
leases, rents, property taxes, and other obligations for which we remain
contingently liable. As we sell our remaining Denny's restaurants and any other
underperforming restaurants that we sell in the future, we may remain
contingently liable for obligations on those restaurants. Any further defaults
by buyers of restaurants that we have sold in the past or that we sell in the
future could have a material adverse effect on our operating results and
financial condition.
WE RELY ON DENNY'S, INC.
We currently operate 97 Denny's restaurants as a Denny's franchisee. As
a result of the nature of franchising and our franchise agreements with Denny's,
Inc., for so long as we operate Denny's restaurants the success of our company
depends, to a significant extent, on
* the continued vitality of the Denny's restaurant concept and the
overall success of the Denny's system;
* the ability of Denny's, Inc. to identify and react to new trends
in the restaurant industry, including the development of popular
menu items;
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* the ability of Denny's, Inc. to develop and pursue appropriate
marketing strategies in order to maintain and enhance the name
recognition, reputation, and market perception of Denny's
restaurants;
* the goodwill associated with the Denny's trademark;
* the quality, consistency, and management of the overall Denny's
system; and
* the successful operation of Denny's restaurants owned by Denny's,
Inc. and other Denny's franchisees.
Any financial reversals or illiquidity on the part of Advantica, the
parent of Denny's, Inc., could have a material adverse effect on Denny's, Inc.
We have 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 our 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 our 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.
THE DENNY'S FRANCHISE AGREEMENTS IMPOSE RESTRICTIONS AND OBLIGATIONS ON US.
So long as we operate Denny's restaurants, the cancellation of the
Denny's franchise agreements, which include the right to what we believe are
favorable franchise arrangements and the right to use the "Denny's" trademarks
and trade styles, would have a material adverse effect on our business. The
Denny's franchise agreements impose a number of restrictions and obligations on
us. We must pay to Denny's, Inc. or accrue royalties and an advertising
contribution regardless of the profitability of our Denny's restaurants. The
Denny's franchise agreements also require us to operate our Denny's restaurants
in accordance with the requirements and specifications established by Denny's,
Inc. In addition, Denny's, Inc. has the right to require us to modify our
restaurants to conform to 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 our Denny's restaurants.
An agreement between us and Denny's, Inc. gives Denny's, Inc. the right
to terminate substantially all of the Denny's franchise agreements in the event
that CNL, as the successor to our previous senior lender, takes certain actions
while we are in default under the terms of our credit facility with CNL. If we
fail to satisfy the requirements described above or otherwise default under the
Denny's franchise agreements, we could be subject to potential damages for
breach of contract and could lose our rights under those agreements.
The Denny's franchise agreements also provide that, in the event we
assign our 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 our company, or BancBoston Ventures, Inc., a significant shareholder of our
company) acquires voting control of our Board of Directors.
Without the consent of Denny's, Inc., we 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 we currently
operate. For two years after the expiration or termination of a Denny's
franchise agreement, we 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
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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.
WE FACE CERTAIN RISKS AFFECTING THE RESTAURANT INDUSTRY.
The ownership and operation of restaurants may be affected by a variety
of factors over which we have no control. These factors include the following:
* adverse changes in national, * changing consumer tastes,
regional, or local economic habits, and spending
or market conditions; priorities;
* increased costs of labor or * management problems;
food products;
* uninsured losses;
* fuel shortages and price
increases; * limited alternative uses
for properties and
* the number, density, and equipment;
location of competitors;
* changes in government
* changing demographics; regulation; and
* changing traffic patterns; * weather conditions.
Third parties may file lawsuits against us 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, we 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 we actually own the restaurants in question. We 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 our business.
WE FACE RISKS ASSOCIATED WITH COMPETITION.
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. We have many well-established competitors,
including national restaurant chains and franchised restaurant systems, which
have financial and other resources that are substantially greater than ours.
Certain competitors have been in existence for a substantially longer period
than we have and may be better established in markets where our restaurants are
or may be located. The restaurant business often is affected by
* changes in consumer tastes or the purchasing power of consumers;
* national, regional, or local economic conditions;
* demographic trends;
* traffic patterns; and
* the type, number and location of competing restaurants.
Changes in these factors could have a material adverse effect on our business.
Our success will depend, in part, on our ability (and Denny's, Inc. in the case
of our 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 our restaurants.
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WE WILL FACE RISKS IF WE EXPAND OUR OPERATIONS.
We currently are focusing our resources on selling our Denny's and
underperforming Black-eyed Pea restaurants and are not planning to develop or
acquire a significant number of restaurants in the near future. To the extent
that we develop or acquire restaurants, however, unforeseen expenses,
difficulties, and delays frequently encountered in connection with the rapid
expansion of operations could hinder us from executing an expansion strategy.
Expanding our operations also would be likely to cause us to increase our
borrowings, which could adversely impact our operating results. The magnitude,
timing, and nature of future restaurant developments and acquisitions will
depend upon various factors, many of which will be beyond our control. These
factors include our ability to:
* locate and acquire suitable restaurant sites or existing
restaurants;
* obtain adequate financing on acceptable terms;
* negotiate acceptable leases or terms of purchase;
* obtain any required consents or approvals;
* secure licenses and regulatory approvals;
* recruit and train qualified management and other personnel; and
* manage successfully the rate of expansion and our expanded
operations.
We cannot provide assurance that
* we will be successful in developing new restaurants or acquiring
existing restaurants on acceptable terms and conditions;
* any additional restaurants we develop or acquire will be
effectively and profitably managed and integrated into our
operations; or
* any restaurants that we develop or acquire will operate
profitably.
CERTAIN SHAREHOLDERS MAY CONTROL OUR COMPANY AND CERTAIN OF OUR DIRECTORS MAY
HAVE CONFLICTS OF INTEREST.
The directors and officers of our company currently own approximately
35.1% of our outstanding common stock. Jack M. Lloyd, the Chairman of the Board
and Chief Executive Officer of our company, and William J. Howard, Executive
Vice President and a director of our 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 our outstanding common stock. Accordingly, such
shareholders collectively have the power to elect all of the members of our
Board of Directors and thereby control the business and policies of our 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 our
other directors and officers, to direct the policies of our company, an inherent
conflict of interest may arise in connection with decisions regarding the timing
of and the allocation of assets of our 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 our 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 our common stock. Messrs. Lloyd and Howard have
deferred certain payments of interest due on the Series B Notes.
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WE DEPEND UPON KEY PERSONNEL.
Our success depends, in large part, upon the services of our senior
management. We currently have employment agreements with certain members of our
senior management. The loss of the services of our senior management team could
have a material adverse effect on our business.
WE MUST COMPLY WITH VARIOUS GOVERNMENT REGULATIONS.
Various federal, state, and local laws affect our business. The delay
or failure to obtain or maintain any licenses or permits necessary for
operations could have a material adverse effect on our business. In addition, an
increase in the minimum wage rate, employee benefit costs, or other costs
associated with employees could adversely affect our business.
We also are subject to the Americans with Disabilities Act of 1990
that, among other things, may require the installation of certain fixtures or
accommodations in new restaurants or renovations to our existing restaurants to
meet federally mandated requirements. In the event that we resume franchising or
licensing Black-eyed Pea restaurants or any other restaurants in the future, we
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.
OUR STOCK IS THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY.
The market price of our 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 our company or
other restaurant companies;
* changes in analysts' estimates of our company's financial
performance;
* changes in national and regional economic conditions, the
financial markets, or the restaurant industry;
* natural disasters; or
* other developments affecting our company or other restaurant
companies.
The trading volume of our company's common stock has been limited, which may
increase the volatility of the market price for such stock. We currently do not
meet the requirements for continued listing on the American Stock Exchange. In
the event that our common stock is delisted by the American Stock Exchange and
we are unable to have our stock listed on another well-recognized exchange or
trading market, the market for our stock may become more illiquid than it
currently is.
SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR 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 our common stock and could adversely affect our ability to raise
capital. As of March 31, 2000, there were outstanding 13,485,277 shares of our
common stock. Of these shares, 6,285,462 shares are freely transferable without
restriction under the securities laws, unless they are held by "affiliates" of
our 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 7,199,815 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 our company or an affiliate of our 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 our company's then-outstanding common stock
or the average weekly trading volume for the four weeks prior to the proposed
sale of such shares.
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The 6,937,500 shares of common stock issued to the former shareholders
of DRC in connection with the merger of DRC and AFR 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.
WE DO NOT ANTICIPATE THAT WE WILL PAY DIVIDENDS.
We have never paid any dividends on our common stock and do not
anticipate that we will pay dividends in the foreseeable future. We intend to
apply any earnings to the expansion and development of our business. In
addition, the terms of our credit facility and the indenture governing our
Series B Notes limit our ability to pay dividends on our common stock.
CHANGE IN CONTROL PROVISIONS MAY ADVERSELY AFFECT EXISTING SHAREHOLDERS.
Our Articles of Incorporation, 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 our
company, even when these attempts may be in the best interests of shareholders.
ITEM 2. PROPERTIES.
We lease for a term expiring in September 2001 approximately 20,000
square feet of office space in Scottsdale, Arizona, for use as our principal
corporate offices. We currently believe that these facilities are adequate for
our reasonably anticipated needs. We also lease approximately 3,000 square feet
of office space in Dallas, Texas, on a month-to-month basis. We use this office
for regional operations and facilities maintenance operations.
Our restaurants generally are located in one-story, freestanding
buildings with a capacity of between 90 and 210 customers. We lease
substantially all the land and buildings for our restaurants. The initial lease
terms range from 10 to 20 years and include renewal options for up to 30 years.
Substantially all of our 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 us 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 1997, 1998, and 1999. Annual base rent for each location ranges up to
approximately $245,000 a year.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings to which we are a party or to which any
of our properties are subject other than routine litigation incident to our
business which is covered by insurance or an indemnity, or which is not expected
to have a material adverse effect on our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the American Stock Exchange, or AMEX,
under the symbol "PRG." The following table sets forth the high and low sales
prices per share of our 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
Second Quarter ....................... 1.06 0.81
Third Quarter......................... 1.13 0.56
Fourth Quarter........................ 0.75 0.44
2000
----
First Quarter......................... $0.69 $0.25
As of March 31, 2000, there were 91 holders of record of our common
stock. On March 31, 2000, the closing sales price of our common stock on the
AMEX was $0.375 per share.
We have never declared or paid any dividends. We intend to retain
earnings, if any, to fund the growth of our business and do not anticipate
paying any cash dividends in the foreseeable future. In addition, the payment of
dividends on our common stock is prohibited under our credit facility with CNL
and other outstanding debt obligations.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical consolidated financial data of our
company for each of the fiscal years in the three-year period ended December 29,
1999 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 fiscal
1995 and 1996 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)
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Restaurant sales ................................. $74,683 $241,480 $300,579 $255,956 $238,673
Charge for impaired assets ....................... 523 -- 14,100 -- 19,264
Restaurant operating income (loss) ............... 6,643 22,137 9,101 18,116 (3,148)
Administrative expenses .......................... 3,380 10,303 13,684 12,423 12,105
Operating income (loss) .......................... 3,263 11,834 (4,583) 5,693 (15,253)
Interest expense, net ............................ (2,467) (9,605) (13,655) (12,635) (13,495)
Net income (loss) ................................ 200 1,118 (20,977) (4,657) (25,902)
OTHER DATA:
EBITDA(3) ........................................ $ 6,722 $ 18,834 $ 18,884 $ 13,283 $ 10,096
Cash interest expense ............................ 2,397 8,904 10,033 8,221 9,988
Cash provided by (used in) operating activities... 7,486 9,664 (1,458) (1,357) 762
Cash (used in) provided by investing activities... (8,736) (9,393) (6,316) 22,622 (4,345)
Cash provided by (used in) financing activities... 2,273 1,157 6,432 (20,202) 2,744
Capital expenditures ............................. 7,003 9,879 8,147 2,891 4,732
Depreciation and amortization .................... 2,936 7,000 9,367 7,590 6,085
Ratio of earnings to fixed charges(4) ............ 1.10 1.14 -- -- --
Number of restaurants, end of period ............. 355 295 283 201 190
BALANCE SHEET DATA:
Working capital (deficit) ........................ $(9,406) $(33,029) $(36,417) $(44,838) $ (4,070)
Total assets ..................................... 53,785 179,189 170,264 134,507 98,367
Long-term debt, less current portion ............. 10,371 69,903 39,022 39,666 41,538
Obligations under capital leases,
less current obligations ....................... 19,881 24,229 39,396 32,828 13,370
Redeemable convertible preferred stock ........... 7,501 -- -- -- --
Shareholders' equity (deficit) ................... 564 22,128 1,248 (3,334) (29,236)
</TABLE>
- ----------
(1) Our fiscal years 1995 through 1999 ended on December 27, 1995, January 1,
1997, December 31, 1997, December 30, 1998, and December 29, 1999,
respectively.
(2) From fiscal 1995 through 1999, we 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. We sold or closed an aggregate of
82 and 19 restaurants during fiscal 1998 and 1999, respectively, which
contributed to the overall revenue decreases in these years from prior
years.
(3) EBITDA represents operating income (loss) before 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 our 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 we assess our financial
performance.
(4) Earnings consist of pre-tax income after minority interests plus fixed
charges, excluding capitalized interest. Our 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 1997
($17,719,000), fiscal 1998 ($6,942,000), and fiscal 1999 ($28,748,000).
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Our fiscal 1997 and 1998 results of operations were materially impacted
by the sale of over 100 restaurants. During these years, revenue and related
expenses decreased significantly over prior years primarily as a result of these
divestitures. During 1999 we
* sold or closed a total of 3 Denny's restaurants;
* sold or closed 16 Black-eyed Pea restaurants; and
* opened eight new Black-eyed Pea restaurants.
These transactions follow our strategy of focusing on the Black-eyed Pea concept
as well as closing or selling underperforming restaurants that failed to achieve
certain operational and financial goals. As a result of the construction 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.
We currently operate 93 Black-eyed Pea restaurants in 8 states,
including 81 Black-eyed Pea restaurants in Texas, Oklahoma, and Arizona. The
average unit sales for all Black-eyed Pea restaurants was $1.4 million in each
of fiscal 1998 and 1999 as compared with average unit sales at restaurants in
Texas and Oklahoma of $1.6 and $1.5 million during fiscal 1998 and 1999,
respectively. Through December 29, 1999, comparable same-store sales decreased
2.5% for all of our Black-eyed Pea restaurants, while comparable same-store
sales decreased by 2.0% for Black-eyed Pea restaurants in Texas and Oklahoma.
The guest check average at our Black-eyed Pea restaurants is approximately
$8.08. At our Black-eyed Pea restaurants, alcohol sales account for
approximately 2.0% of sales, and carryout sales account for approximately 11.7%
of sales.
As of December 29, 1999, we operated 97 Denny's restaurants in 17
states. Our Denny's restaurants that were open for a 12-month period had average
restaurant sales of $1.1 million in fiscal 1999 as compared with $1.0 million in
fiscal 1998. Comparable store sales increased approximately 1.4% in fiscal 1999
and the average guest check was approximately $5.62.
20
<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
--------------------------------
1997 1998 1999
------ ------ ------
Restaurant sales:
Black-eyed Pea restaurants .............. 43.4% 54.6% 56.6%
Denny's restaurants ..................... 54.9 45.2 43.4
Other restaurants ....................... 1.7 0.2 --
------ ------ ------
Total restaurant sales ................ 100.0% 100.0% 100.0%
------ ------ ------
Restaurant operating expenses:
Food and beverage costs ................. 27.4 27.4 27.1
Payroll and payroll related costs ....... 34.4 34.4 34.7
Other operating expenses ................ 27.4 28.1 28.9
Depreciation and amortization ........... 3.1 3.0 2.5
Charge for impaired assets ................. 4.7 -- 8.1
------ ------ ------
Total restaurant operating expenses ... 97.0 92.9 101.3
------ ------ ------
Restaurant operating income (loss) ......... 3.0 7.1 (1.3)
Administrative expenses .................... 4.6 4.9 5.1
------ ------ ------
Operating income (loss) .................... (1.6) 2.2 (6.4)
Interest expense, net ...................... (4.5) (4.9) (5.7)
Minority interest in joint ventures ........ 0.2 -- --
------ ------ ------
Income (loss) before income taxes and
extraordinary item ....................... (5.9) (2.7) (12.1)
Income tax provision (benefit) ............. 1.1 (0.4) (1.8)
------ ------ ------
Income (loss) before extraordinary item .... (7.0) (2.3) (10.3)
Extraordinary gain (loss) .................. -- 0.5 (0.6)
------ ------ ------
Net income (loss) .......................... (7.0)% (1.8)% (10.9)%
====== ====== ======
FISCAL 1999 COMPARED WITH FISCAL 1998
RESTAURANT SALES. Restaurant sales decreased 6.8% to $238.7 million in
fiscal 1999 as compared with restaurant sales of $256.0 million in fiscal 1998.
This decrease was primarily attributable to the sale of 71 restaurants in March
1998.
FOOD AND BEVERAGE COSTS. Food and beverage costs decreased to 27.1% of
restaurant sales in fiscal 1999 as compared with 27.4% of restaurant sales in
fiscal 1998. This decrease was attributable to (a) efforts by our Black-eyed Pea
research and development and purchasing departments to renegotiate contracts and
achieve cost savings through use of current food technology, and (b) lower food
costs at our Denny's restaurants.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs
were 34.7% of restaurant sales in fiscal 1999 as compared with 34.4% of
restaurant sales in fiscal 1998. This increase was attributable to higher
unemployment rates and increased workers' compensation costs.
OTHER OPERATING EXPENSES. Other operating expenses were 28.9% of
restaurant sales in fiscal 1999 as compared with 28.1% of restaurant sales in
fiscal 1998. The increase of $3.1 million was primarily attributable to start-up
costs associated with the eight new Black-eyed Pea restaurants opened in 1999.
Due to an accounting change in 1999, we now expense these costs immediately
instead of amortizing them over 12 months as we did in prior years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
restaurant equipment and leasehold improvements, intangible assets, and
pre-opening costs totaled $6.1 million, or 2.5% of restaurant sales, in fiscal
1999 as compared with $7.6 million, or 3.0% of restaurant sales, in fiscal 1998.
The decrease of $1.5 million was attributable to the reclassification of assets
as being held for sale. In accordance with SFAS No. 121,
21
<PAGE>
we ceased depreciation of the assets associated with our Denny's restaurants at
the end of September 1999 after we determined to sell all of those restaurants.
CHARGE FOR IMPAIRED ASSETS. During 1999, we recorded total charges for
impaired assets of $19.3 million. These charges consisted of (a) $2.9 million
related to 16 Black-eyed Pea restaurants that we closed during the year, (b)
$1.5 million to reflect increased estimates of liabilities related to
restaurants closed in prior periods where we determined that the cost and timing
of subleasing those properties will exceed previous estimates, (c) $4.8 million
related to 68 Denny's and 19 non-branded restaurants that we sold in 1997 and
1998 where we remain contingently liable for equipment leases, rents, property
taxes, and other obligations on which three buyers filed for bankruptcy or
failed to perform their obligations to third parties, (d) $8.9 million related
to the write down of goodwill and intangible assets associated with our
remaining Denny's restaurants, which we decided to sell during 1999, and (e)
$1.2 million related to the write down of a Black-eyed Pea investment in a joint
venture.
RESTAURANT OPERATING INCOME (LOSS). Restaurant operating income of
$18.1 million in fiscal 1998 decreased by $21.2 million to an operating loss of
$3.1 million in fiscal 1999. This decrease was primarily as a result of the
$19.3 million charge for impaired assets described above.
ADMINISTRATIVE EXPENSES. Administrative expenses increased to 5.1% of
restaurant sales in fiscal 1999 as compared with 4.9% of restaurant sales in
fiscal 1998. This increase was primarily the result of increased legal expenses
associated with EEOC claims.
INTEREST EXPENSE-NET. Net interest expense increased to $13.5 million,
or 5.7% of restaurant sales, in fiscal 1999 as compared with $12.6 million, or
4.9% of restaurant sales, in fiscal 1998. This increase was attributable to an
increase in long term debt of $5.4 million and an increase in amortization of
deferred financing costs of $409,000.
INCOME TAXES. The benefit from income tax was $4.3 million in fiscal
1999 as compared with the benefit from income tax of $914,000 in fiscal 1998.
The benefit from income tax in fiscal 1999 resulted from the tax benefit
associated with the charge for impaired assets.
EXTRAORDINARY LOSS. The extraordinary loss in fiscal 1999 resulted
primarily from the expensing of certain deferred financing costs associated with
the early payoff of certain debt obligations.
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. We
expect 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 our 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 our 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.
22
<PAGE>
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 our remaining Denny's
restaurants subsequent 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.
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.
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-NET. Net 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 4.5% 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 GAIN. The extraordinary gain in fiscal 1998 resulted from
the discount associated with the repayment of a promissory note in March 1998.
LIQUIDITY AND CAPITAL RESOURCES
In order to provide us with the flexibility to
* refinance certain debt obligations to better match operating cash
flows with debt amortization,
* improve our portfolio of operating restaurants, and
* position our company for growth,
we have pursued a strategy to repay our senior debt obligations. During 1999, we
reduced our total liabilities from $137.8 million to $127.6 million. Included in
this $10.2 million reduction was a decrease in long-term debt obligations,
including current portion, of $12.7 million. This decrease in indebtedness was
primarily attributable to the reclassification of $17.9 million of capital
leases to assets held for sale. The following paragraphs describe certain
transactions we completed in fiscal 1999 that affect our liquidity and capital
resources.
On June 30, 1999, we consummated a $20.1 million financing agreement
with CNL APF Partners, LP whereby CNL purchased the remaining outstanding
indebtedness under our existing senior credit facility and advanced an
additional $5.4 million to us. As a result of our decision to sell our remaining
Denny's restaurants, we and CNL have
23
<PAGE>
agreed to modify the financing agreement. In August 1999, this debt was modified
to be interest only through January 31, 2000. As of December 29, 1999, we were
in compliance with the terms and conditions of our various debt agreements. As
of January 31, 2000, the entire principal balance was due. As no principal
payments have been made we are currently in default on the note. We are
currently negotiating with CNL to modify the payment terms of the note. We
cannot provide assurance, however, that we and CNL will agree to an extension or
other revisions of the payment terms of the note that will be acceptable to us.
In conjunction with the aforementioned transaction, we entered into an
agreement with Denny's, Inc. whereby approximately $2.6 million of royalty and
advertising obligations were converted into notes payable. Approximately
$800,000 of these notes payable were satisfied through the cancellation of a
Denny's development rights agreement and the transfer or assignment of three
restaurant leasehold properties from our company to Denny's, Inc. The remaining
note payable of $1.8 million bears interest at 11%, is due in November 2000, and
is secured by the leasehold interests and equipment in four Denny's restaurants.
The consideration we received in connection with these transactions approximated
our carrying value. We anticipate that the $1.8 million note will be paid upon
the sale of the Denny's restaurants.
In connection with the CNL transaction described above, as of June 30,
1999, we wrote off approximately $2.0 million of deferred financing costs. We
have included the $2.0 million before-tax amount as an extraordinary item in the
accompanying financial statements.
In October 1999, we retained CNL Advisory Services to act as our agent
in the disposition of our remaining 97 Denny's restaurants. We intend to use the
proceeds from the sale of these restaurants to reduce our outstanding debt and
for other corporate purposes. We believe that these steps will better position
our company for profitability and enhanced shareholder value. We cannot provide
assurance, however, that we will be able to sell our remaining Denny's
restaurants, restructure our debt, and improve the performance of our Black-eyed
Pea restaurants so as to achieve profitability in the future. In addition, the
report by our independent auditors on our financial statements for the year
ended December 29, 1999, states that the uncertainty relating to our continuing
losses, our shareholders' deficit, the sale of our Denny's restaurants, and/or
our ability to refinance our debt raises substantial doubt about our ability to
continue as a going concern.
We, 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, we operate with a working capital
deficit. Our working capital deficit was $44.8 million at December 30, 1998 and
$4.1 million at December 29, 1999. We expect that we will operate with a working
capital deficit in the future.
Historically, we have satisfied our capital requirements through credit
facilities and sale-leaseback financings. We currently require capital
principally for the development of new restaurants and maintenance expenditures
on existing restaurants. Expenditures for property and equipment totaled
approximately $8.1 million for fiscal 1997, $2.9 million for fiscal 1998, and
$4.7 million for fiscal 1999. We intend to pursue opportunities to develop
additional Black-eyed Pea restaurants as we identify favorable locations and
acceptable sources of financing for new restaurants. The following paragraphs
describe our cash flow activities during fiscal 1999.
Net cash from operating activities increased from $1.4 million used in
fiscal 1998 to $762,000 provided by operations in fiscal 1999. Net cash provided
by operating activities in 1999 included an increase of accounts payable and
accrued liabilities of $2.2 million in fiscal 1999. This increase was primarily
attributable to certain liabilities associated with restaurants sold or closed.
Net cash from investing activities decreased from $22.6 million
provided in fiscal 1998 to $4.3 million used in fiscal 1999. In fiscal 1999, we
opened eight new Black-eyed Pea restaurants. In 1998, we had proceeds of $26.0
million from the sale of assets, primarily the sale of 71 restaurants in March
1998.
Net cash from financing activities changed from $20.2 million used by
financing activities in fiscal 1998 to $2.7 million provided by financing
activities in fiscal 1999. In fiscal 1998, we used the majority of the proceeds
from sale of assets to reduce our long term debt obligations. In fiscal 1999, we
used construction lease financing to build eight new Black-eyed Pea restaurants.
In March 1998, we sold 63 Denny's restaurants and eight non-branded
restaurants to Olajuwon Holdings, Inc. ("OHI"). The restaurants were subleased
under a master sublease agreement (the "Sublease Agreement"). Subsequent to the
consummation of the transaction, OHI defaulted on its obligations under the
Sublease Agreement. As a result of the default, we took legal action to protect
our interest in the underlying leased properties. On January 7, 2000, OHI filed
for protection under Chapter 11 of the bankruptcy code. In February 2000, we and
OHI entered into a mediated settlement agreement. Under the terms of the
settlement agreement, the Sublease Agreement has been amended to reduce the
number of restaurants subject to the Sublease Agreement by 22. All right, title
and interest to the 22 subleases and associated property will be transferred to
us. We will have sole responsibility to negotiate the termination or the
continuation of the 22 subleases. OHI and its lender will place $1.5 million in
escrow to be released to us upon termination of the 22 subleases. As a result of
the settlement, we recorded an allowance against the entire $1.8 million note
receivable from OHI.
24
<PAGE>
SEASONALITY
Our operating results fluctuate from quarter to quarter as a result of
the seasonal nature of the restaurant industry and other factors. Our 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. Our working capital requirements also fluctuate
seasonally, with our greatest needs occurring during our first and fourth
quarters.
INFLATION
We do 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 our operations, we generally have been able to
modify our operating procedures or to increase prices to offset increases in our
operating costs.
YEAR 2000 COMPLIANCE
Prior to January 1, 2000, we engaged an outside consulting firm to
address our internal Year 2000 issues and to convert or upgrade our internal
accounting system and restaurant-level point-of-sale and accounting systems to
ensure Year 2000 compliance. As of the filing date of this Report, we have not
experienced and are not aware of any material disruption to our operations as a
result of any failure of any of our systems to function properly as of January
1, 2000. We also have not experienced any Year 2000 failures related to any of
our third-party vendors. To date we have not received any notification from any
of our key vendors of any year 2000 problems or disruptions. Year 2000
compliance has many elements and potential consequences, some of which may not
be foreseeable or may be realized in future periods. In addition, unforeseen
circumstances may arise, and we may not in the future identify equipment or
systems that are not Year 2000 compliant.
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, or SOP 98-5, "Reporting on the Costs of Start-up Activities." We
elected early adoption of SOP 98-5 in fiscal 1998 and now expense as incurred
all pre-opening costs. The effect of this change did not have a material impact
on our financial statements.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING Activities. This standard, as amended, is effective for
fiscal years beginning after June 15, 2000. 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. We have not completed the process of
evaluating the impact that will result from adopting SFAS No. 133. We are
therefore unable to disclose the impact that adopting SFAS No. 133 will have on
our financial position and results of operations when such statement is adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 29, 1999, we did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under Statement of Financial Accounting
Standards No. 107. We do not hold investment securities that would require
disclosure of market risk and we do not engage in currency speculation or use
derivative instruments to hedge against known or forecasted market exposures.
25
<PAGE>
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.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to each
of our directors and executive officers.
NAME AGE POSITION
---- --- --------
Jack M. Lloyd.......... 50 Chairman of the Board and Chief Executive Officer
William G. Cox......... 51 President, Chief Operating Officer, and Director
William J. Howard...... 55 Executive Vice President, Secretary, and Director
Robert J. Gentz........ 50 Executive Vice President and Director
Brian S. McAlpine...... 38 Acting Chief Financial Officer
Fred W. Martin......... 69 Director
Robert H. Manschot..... 56 Director
JACK M. LLOYD has served as our Chairman of the Board since July 9,
1996 and as Chief Executive Officer and a director of our company since March
29, 1996. Mr. Lloyd served as our President from March 1996 until October 1999.
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 G. COX has served as our Chief Operating Officer and a director
of our company since March 29, 1996 and as our President since October 1999. 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.
WILLIAM J. HOWARD has served as Executive Vice President of our company
since July 9, 1996 and as Secretary and a director of our company since March
29, 1996. Mr. Howard served as a Vice President of our 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.
ROBERT J. GENTZ has served as our Executive Vice President since
January 1997 and as a director of our company since October 1999. Prior to
joining our 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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BRIAN S. MCALPINE has served as our Acting Chief Financial Officer
since October 1999. Mr. McAlpine served as Vice President - Finance of our
company from October 1997 to October 1999, and as our Director of Planning from
July 1996 until October 1997. Mr. McAlpine served as Manager of Planning for
Denny's, Inc. from April 1993 to July 1996 and as Senior Financial Analyst from
June 1991 to April 1993.
FRED W. MARTIN has served as a director of our 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 our 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; as Chairman of Silicon Entertainment, Inc., which develops
entertainment centers that employ interactive virtual-reality technology for
simulated stock car racing; as Chairman and Chief Executive Officer of Seceurop
Security Services and GeldNet, which are privately held emergency services
companies operating in Europe; as Chairman of RHEM International Enterprises,
Inc., which engages in business consulting services and venture capital
activities; and as Chairman of Motorsports Promotions, Inc. Mr. Manschot served
as President and Chief Executive Officer of Rural/Metro Corporation, 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 Action Performance Companies, Inc., a publicly traded company, and
as a director of Thomas Pride Development, Inc., First Wave, Inc., TouchScape
Corporation, WAM Interactive UK, and Sports Southwest, Inc., all of which are
privately held companies.
All of our directors hold office until our 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 our common
stock to elect all of the members of our Board of Directors. There is no
agreement or understanding between us and any of the persons who constitute our
Board of Directors as to their serving on our Board of Directors in the future.
Our 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 1999, Messrs. Martin and Manschot
constituted the Audit Committee, the Compensation Committee, and the 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,
requires our directors, executive officers, and persons who own more than 10
percent of a registered class of our equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Directors, executive officers, and greater than 10 percent shareholders are
required by SEC regulations to furnish us with copies of all Section 16(a) forms
they file. Based solely upon our review of the copies of such forms received by
us during the fiscal year ended December 29, 1999, and written representations
that no other reports were required, we believe that each person who, at any
time during such fiscal year, was a director, officer, or beneficial owner of
more than 10 percent of our common stock complied with all Section 16(a) filing
requirements during such fiscal year, except that Brian S. McAlpine filed a late
Form 5 to report his beneficial ownership of our securities as of the date that
he became subject to the reporting requirements of Section 16.
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ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation
of our Chief Executive Officer and each of the four other most highly
compensated executive officers whose cash salary and bonuses exceeded $100,000
during the fiscal year ended December 29, 1999.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
FISCAL ---------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY$(1) BONUS($) OPTIONS(#)
- --------------------------- ---- ---------- -------- ------------
Jack M. Lloyd, Chairman of the 1999 $520,000 $ -- --
Board and Chief Executive 1998 520,000 -- --
Officer 1997 520,000 -- --
William G. Cox, President and 1999 $220,000 $ -- --
Chief Operating Officer 1998 220,000 50,000 --
1997 220,000 -- --
William J. Howard, Executive 1999 $260,000 $ -- --
Vice President and Secretary 1998 260,000 -- --
1997 260,000 -- --
Robert J. Gentz, Executive 1999 $175,000 $ -- --
Vice President 1998 175,000 50,000 --
1997 166,027(3) -- 100,000
Todd S. Brown, Senior Vice 1999 $145,384 $ -- --
President, Chief Financial 1998 160,000 50,000 --
Officer, and Treasurer(2) 1997 127,372 -- --
- ----------
(1) Each of officers listed received certain perquisites, the value of which
did not exceed 10% of their salary during fiscal 1999.
(2) Mr. Brown resigned as an executive officer and director of our company in
October 1999.
(3) Represents amounts accrued or paid beginning on January 6, 1997, the date
of Mr. Gentz's employment with the Company.
OPTION GRANTS
We did not grant any stock options to the officers listed during the
fiscal year ended December 29, 1999.
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OPTION HOLDINGS
The following table sets forth information concerning the number and
value of all options held at December 29, 1999, by the officers listed. None of
the officers listed exercised any options during fiscal 1999.
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 G. Cox......... 240,000 60,000 $ 0 $ 0
William J. Howard...... -- -- -- --
Robert J. Gentz........ 100,000 -- $ 0 $ 0
Todd S. Brown(2)....... -- -- N/A N/A
- ----------
(1) The exercise prices of all options held by the officers listed were greater
than the closing price of our common stock of $0.50 per share on December
29, 1999.
(2) Options held by Mr. Brown expired pursuant to their terms following his
resignation as an officer and director of our company.
401(k) PLAN
In April 1998, we established a defined contribution plan, or 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. 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 we may make
discretionary contributions to participating employees in such amounts as may be
determined by our Board of Directors. Highly compensated employees of our
company, including executive officers, are not eligible to participate in the
401(k) Plan.
EMPLOYMENT AGREEMENTS
GENERAL
We currently are a party to employment agreements with William G. Cox
and Robert J. Gentz. In addition to the provisions of the individual employment
agreements as described below, the employment agreements generally require us to
* provide each person with certain medical and life insurance
benefits;
* reimburse them for all travel, entertainment, and other ordinary
and necessary expenses incurred in connection with our business
and their duties under their respective employment agreements;
and
* provide such other fringe benefits that we make generally
available to all of our employees on a non-discriminatory basis.
The employment agreements with Messrs. Cox and Gentz require us to provide each
such officer with an automobile for use in connection with our business. In
addition, in the event of a "change of control" of our company, as defined in
employment agreements, we will be required to pay each of Messrs. Cox and Gentz
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 and Gentz's unvested stock options, if
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any, will immediately vest and become exercisable in full. The agreements also
contain provisions that prohibit the respective officer from
* competing with us,
* taking certain actions intended to solicit other persons to
terminate their business relationship with us or to terminate his
or her employment relationship with us, and
* making unauthorized use or disclosure of our trade names,
fictitious names, or confidential information.
WILLIAM G. COX
In December 1995, we entered into an employment agreement with William
G. Cox, which became effective upon consummation of the merger of AFR and DRC.
Effective January 1, 1998, we amended the original employment agreement with Mr.
Cox. Pursuant to his agreement with us, Mr. Cox serves as our Chief Operating
Officer 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 our company. Pursuant to the agreement, we granted to
Mr. Cox options to purchase 300,000 shares of our 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. We may terminate the agreement only for
cause, as defined in the agreement.
ROBERT J. GENTZ
In January 1997, we entered into an employment agreement with Robert J.
Gentz pursuant to which Mr. Gentz serves as our Executive Vice President. 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 Mr. Gentz and us. Pursuant to the agreement, we reimbursed Mr. Gentz for
certain relocation expenses and granted to Mr. Gentz options to purchase 100,000
shares of our common stock. Mr. Gentz' agreement expires in January 2001,
subject to extension for additional one-year periods under mutually agreeable
terms and conditions.
STOCK OPTION PLANS
1996 STOCK OPTION PLAN
On December 10, 1996, our Board of Directors adopted our 1996 Stock
Option Plan. Our shareholders approved the 1996 Plan on June 26, 1997. A total
of 500,000 shares of our common stock have been reserved for issuance under the
1996 Plan. The 1996 Plan is intended to promote the interests of our company by
encouraging key persons associated with our company to acquire, or otherwise
increase, their proprietary interest in our company and an increased personal
interest in our continued success and progress. The 1996 Plan provides for
* the grant of options to acquire our common stock,
* the direct grant of awards of common stock,
* the grant of stock appreciation rights, or SARs, and
* the grant of other cash 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 29, 2000, there were outstanding
options to acquire 20,000 shares of common stock under the 1996 Plan. The 1996
Plan will remain in effect until December 9, 2006.
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Options and awards may be granted pursuant to the 1996 Plan only to
persons who at the time of grant are either
* key personnel (including officers and directors) of our company,
or
* consultants or independent contractors who provide valuable
services to our 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 our key personnel who are also employees of our 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 our 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 our stock). 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 our 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 our common stock.
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 our 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 our 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 our common stock have been reserved for
issuance under our Amended and Restated 1992 Stock Option Plan. The 1992 Plan
limits the persons eligible to receive options to directors, consultants, and
key employees, including officers, of our company or a subsidiary of our company
and "key persons" who are not employees but have provided valuable services,
have incurred financial risk on behalf of our company, or have extended credit
to our company or our 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 29, 2000, we have issued 217,833
shares of common stock and there were outstanding options to acquire a total of
501,500 shares of common stock under the 1992 Plan. An aggregate of 280,667
shares of common stock remains available for option grants 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 our 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 our outstanding voting shares, the exercise price must be at least 110%
of the fair market value of our 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 our Articles of
Incorporation, or the par value of our common stock. Options generally may be
exercised by delivery of any combination of cash, shares of our common stock, or
by delivering to us a promissory note upon such terms and conditions as our
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 our 1995 Directors Stock Option Plan. The purpose of the 1995
Plan is to promote the interests of our company and our shareholders by
strengthening our 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 our company. As of March 31, 1999,
there were outstanding options to acquire a total of 43,068 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 of our non-employee directors on the date of his or her initial
election to our Board of Directors or re-election at an annual meeting of our
shareholders. Directors who are first elected or appointed to our 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 our 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 our 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 our Board of Directors.
DIRECTOR COMPENSATION
Employees of our company do not receive compensation for serving as
members of our Board of Directors. Non-employee members of our 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Fred W. Martin and Robert H. Manschot served as members of the
Compensation Committee of our Board of Directors during fiscal 1999. None of
such individuals had any contractual or other relationships with us during
fiscal 1999 except as directors.
INDEMNIFICATION AND LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Our Bylaws require us to indemnify our 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, or GBCC. Pursuant to these provisions, we will indemnify our 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 our company or served with another corporation, partnership, joint
venture, trust or other enterprise at our request. In addition, we will advance
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 us. We have entered into indemnification agreements with
certain of our directors and executive officers pursuant to the foregoing
provisions of our Bylaws.
As permitted by the GBCC, our Articles of Incorporation contain
provisions that eliminate the personal liability of directors for monetary
damages to our company or our 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
* any appropriation of a business opportunity of our company in
violation of the director's duty,
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* acts or omissions that involve intentional misconduct or a
knowing violation of law,
* any dividend payment, stock repurchase, stock redemption or
distribution in liquidation that is prohibited under Georgia law,
or
* any merger from which the director derived an improper personal
benefit.
These provisions do not limit or eliminate our rights or the rights of 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 our common stock beneficially owned as of March 31, 2000 by each of our
directors and executive officers, all directors and executive officers of our
company as a group, and each person known by us to be the beneficial owner of 5%
or more of the our 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 G. Cox 301,000(4) 2.2%
William J. Howard 1,700,363(5) 12.5%
Robert J. Gentz 100,000(6) *
Brian S. McAlpine 3,500(7) *
Fred W. Martin 37,000(8) *
Robert H. Manschot 11,534(9) *
All directors and executive officers as a
group (seven persons) 5,623,124 39.1%
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 us 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, 2000 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 1,000 shares of common stock and 300,000 shares of common stock
issuable upon the exercise of vested options.
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(5) Represents 1,553,752 shares of common stock and 146,611 shares issuable
upon exercise of Series B warrants.
(6) Represents 100,000 shares of common stock issuable upon exercise of vested
options.
(7) Represents 500 shares of common stock and 3,000 shares issuable upon the
exercise of vested options.
(8) Represents 7,000 shares of common stock held by Mr. Martin and his spouse
and 30,000 shares issuable upon the exercise of vested options.
(9) Represents 11,534 shares of common stock issuable upon the exercise of
vested options.
(10) BancBoston Ventures, Inc. is a subsidiary of Fleet Boston Corporation,
which may be deemed to be the beneficial owner of such shares. The address
of BancBoston Ventures, Inc. and Fleet Boston Corporation are 100 Federal
Street, Boston, Massachusetts 02110.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the financing of our acquisition of BEP, LH Leasing
Company, Inc., a corporation owned by Jack M. Lloyd and William J. Howard,
purchased from us for cash in the amount of $14.25 million the equipment located
at 62 Black-eyed Pea restaurants leased by BEP, our wholly owned subsidiary, or
Texas BEP, L.P., 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
us and we subleased the equipment to BEP or Texas BEP. The equipment lease has a
term of five years and grants us an option to purchase the equipment at its fair
market value upon the expiration of the lease. The terms of the subleases
between us and each of BEP and Texas BEP are consistent with the terms set forth
in the equipment lease between us and LH Leasing. Messrs. Lloyd and Howard
formed LH Leasing as an accommodation to us to enable our company to satisfy the
requirements of our senior lenders. Messrs. Lloyd and Howard received no
material compensation for the transactions involving us and LH Leasing.
In order to finance its sale and lease transaction with us, LH Leasing
borrowed cash in the amount of $14.25 million from Franchise Finance Corporation
of America, or 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
our indebtedness and other obligations under leases and franchise agreements.
Jack M. Lloyd holds $11,196,000 in principal amount of our Series B
notes, and William J. Howard holds $5,598,000 in principal amount of our Series
B notes. 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,
March 31, 1999, and September 30, 1999. As of December 29, 1999, we were in
technical default of certain financial covenants in the Series B notes, owed Mr.
Lloyd deferred interest totaling approximately $4,556,672, and owed Mr. Howard
deferred interest totaling approximately $2,321,012.
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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)
10.60 Form of Franchise Agreement between American Family Restaurants,
Inc. and Denny's, Inc.(1)
10.60A Letter Agreement between American Family Restaurants, Inc. and
Denny's, Inc., dated September 13, 1994, regarding change of
control provisions.(1)
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)
10.73 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)
36
<PAGE>
10.90 Intercreditor Agreement among DenAmerica Corp., certain holders
of DenAmerica's Series B 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)
10.110 DenAmerica Corp. 1996 Stock Option Plan.(8)
10.111 Loan and Security Agreement dated as of September 30, 1997 by
and among DenAmerica Corp., CNL Growth Corp., Midsouth Foods I,
Ltd., and Midsouth Foods II, Ltd.(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.(9)
10.117 First Amendment to Asset Purchase Agreement dated March 16, 1998
between DenAmerica Corp., Olajuwon Holdings, Inc., and Akinola
Olajuwon.(9)
10.118 Promissory Note dated March 25, 1998, from Olajuwon Holdings,
Inc. to DenAmerica Corp. in the principal amount of
$1,800,000.(9)
10.119 Negative Working Capital Note dated March 25, 1998, from
Olajuwon Holdings, Inc. to DenAmerica Corp. in the principal
amount of $1,700,000.(9)
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)
10.122 Commitment Letter dated April 13, 1999 from CNL Financial
Services, Inc. to DenAmerica Corp. regarding total cumulative
loan not to exceed $17,100,000.(10)
12.1 DenAmerica Corp. Ratio of Income to Fixed Charges.
21.2 List of Subsidiaries of DenAmerica Corp.(10)
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.
- ----------
37
<PAGE>
(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 Annual Report
on Form 10-K for the year ended January 1, 1997, as filed on March 31,
1997.
(9) Incorporated by reference to the Exhibits to the Registrant's Current
Report on Form 8-K as filed on April 9, 1998.
(10) Incorporated by reference to the Exhibits to the Registrant's Annual Report
on Form 10-K for the year ended December 30, 1998, as filed on April 14,
1999.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 11th day of
April, 2000.
DenAmerica Corp.
By: /s/ Jack M. Lloyd
-------------------------------------
Jack M. Lloyd
Chairman of the Board 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 and April 11, 2000
- ------------------------ Chief Executive Officer
Jack M. Lloyd (Principal Executive Officer)
/s/ William G. Cox President, Chief Operating April 11, 2000
- ------------------------ Officer, and Director
William G. Cox
/s/ William J. Howard Executive Vice President, April 11, 2000
- ------------------------ Secretary, and Director
William J. Howard
/s/ Robert J. Gentz Executive Vice President and April 11, 2000
- ------------------------ Director
Robert J. Gentz
/s/ Brian S. McAlpine Acting Chief Financial Officer April 11, 2000
- ------------------------ (Principal Financial and
Brian S. McAlpine Accounting Officer)
/s/ Fred W. Martin Director April 11, 2000
- ------------------------
Fred W. Martin
/s/ Robert H. Manschot Director April 11, 2000
- ------------------------
Robert H. Manschot
39
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.................F-3
Consolidated Statements of Operations for each of three years
in the period ended December 31, 1999......................................F-4
Consolidated Statements of Changes in Shareholders' (Deficit)
Equity for each of the three years in the period ended
December 31, 1999..........................................................F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1999................................F-6
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Phoenix Restaurant Group, Inc.
Scottsdale, Arizona
We have audited the consolidated balance sheets of Phoenix Restaurant Group,
Inc. (formerly DenAmerica Corp.) and subsidiaries (the "Company") as of December
31, 1998 and 1999, 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, 1999. 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 Phoenix Restaurant Group, Inc. at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, 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
continuing losses, shareholders' deficit, the sale of its Denny's restaurants
and/or ability to refinance its debt 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
Phoenix, Arizona
April 11, 2000
F-2
<PAGE>
PHOENIX RESTAURANT GROUP, INC
AND SUBSIDIARIES
(Formerly DenAmerica Corp.)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
December 31,
----------------------
ASSETS 1998 1999
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 2,330 $ 1,491
Receivables 2,636 2,244
Inventories 2,917 1,087
Deferred income taxes 838 11,700
Other current assets 4,695 4,761
Net assets held for sale 42,128
--------- ---------
Total current assets 13,416 63,411
PROPERTY AND EQUIPMENT - Net 55,648 20,619
INTANGIBLE ASSETS - Net 50,580 11,117
DEFERRED INCOME TAXES 5,578
OTHER ASSETS 9,285 3,220
--------- ---------
TOTAL $ 134,507 $ 98,367
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 18,026 $ 17,778
Accrued compensation 5,402 5,237
Accrued taxes 5,089 4,733
Other current liabilities 8,946 14,082
Current debt obligations 20,791 25,651
--------- ---------
Total current liabilities 58,254 67,481
LONG-TERM DEBT OBLIGATIONS - Less current portion 72,494 54,908
OTHER LONG-TERM LIABILITIES 7,093 5,214
--------- ---------
Total liabilities 137,841 127,603
--------- ---------
COMMITMENTS AND CONTINGENCIES (notes 9, 11, and 15)
SHAREHOLDERS' DEFICIT:
Preferred stock, $.01 par value; authorized,
5,000,000 shares; issued and outstanding, none
Common stock, $.10 par value; authorized,
40,000,000 shares; issued and outstanding,
13,485,277 shares 1,349 1,349
Additional paid-in capital 35,869 35,869
Accumulated deficit (40,552) (66,454)
--------- ---------
Total shareholders' deficit (3,334) (29,236)
--------- ---------
TOTAL $ 134,507 $ 98,367
========= =========
See notes to consolidated financial statements.
F-3
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
AND SUBSIDIARIES
(Formerly DenAmerica Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except for Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
RESTAURANT SALES $ 300,579 $ 255,956 $ 238,673
------------ ------------ ------------
RESTAURANT OPERATING EXPENSES:
Food and beverage costs 82,255 70,046 64,740
Payroll and payroll related costs 103,451 88,118 82,725
Other operating expenses 82,305 72,086 69,007
Depreciation and amortization 9,367 7,590 6,085
Charge for impaired assets 14,100 19,264
------------ ------------ ------------
Total operating expenses 291,478 237,840 241,821
------------ ------------ ------------
RESTAURANT OPERATING INCOME (LOSS) 9,101 18,116 (3,148)
ADMINISTRATIVE EXPENSES 13,684 12,423 12,105
------------ ------------ ------------
OPERATING INCOME (LOSS) (4,583) 5,693 (15,253)
INTEREST EXPENSE - Net 13,655 12,635 13,495
MINORITY INTEREST IN JOINT VENTURES (519)
------------ ------------ ------------
(LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (17,719) (6,942) (28,748)
INCOME TAX PROVISION (BENEFIT) 3,258 (914) (4,291)
------------ ------------ ------------
(LOSS) BEFORE EXTRAORDINARY ITEM (20,977) (6,028) (24,457)
EXTRAORDINARY LOSS (GAIN) - Net of tax
of $(914) and $963, respectively (1,371) 1,445
------------ ------------ ------------
NET (LOSS) $ (20,977) $ (4,657) $ (25,902)
============ ============ ============
BASIC AND DILUTED (LOSS) PER SHARE:
Before extraordinary item $ (1.56) $ (.45) $ (1.81)
============ ============ ============
Applicable to common shareholders $ (1.56) $ (.35) $ (1.92)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic 13,437,000 13,485,000 13,485,000
============ ============ ============
Diluted 13,437,000 13,485,000 13,485,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
AND SUBSIDIARIES
(Formerly DenAmerica Corp.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
-------- -------- -------- --------
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)
Net loss (25,902) (25,902)
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 $ 1,349 $ 35,869 $(66,454) $(29,236)
======== ======== ======== ========
See notes to consolidated financial statements.
F-5
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
AND SUBSIDIARIES
(Formerly DenAmerica Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(20,977) $ (4,657) $(25,902)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary item (1,371) 1,445
Depreciation and amortization 9,367 7,590 6,085
Amortization of deferred financing costs 763 983 1,392
Charge for impaired assets 14,100 19,264
Deferred income taxes 3,221 (927) (4,291)
Deferred rent 645 279 598
Other - net (1,368) (505) (229)
Changes in operating assets and liabilities:
Receivables 910 113 (304)
Inventories (439) 184 101
Other current assets (727) 309 367
Accounts payable and accrued liabilities (6,953) (3,355) 2,236
-------- -------- --------
Net cash provided by (used in) operating activities (1,458) (1,357) 762
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,147) (2,891) (4,732)
Purchase of intangibles (2,302) (479)
Proceeds from sale of assets 4,133 25,992 387
-------- -------- --------
Net cash (used in) provided by investing activities (6,316) 22,622 (4,345)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note receivable collections 2,258 941
Principal reductions of long-term debt (25,018) (28,908) (3,679)
Proceeds from borrowings 31,353 6,373 5,482
Other 97 75
-------- -------- --------
Net cash provided by (used in) financing activities 6,432 (20,202) 2,744
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,342) 1,063 (839)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,609 1,267 2,330
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,267 $ 2,330 $ 1,491
======== ======== ========
</TABLE>
(Continued)
F-6
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
AND SUBSIDIARIES
(FORMERLY DENAMERICA CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------
1997 1998 1999
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $10,033 $ 8,221 $ 9,988
======= ======= =======
Income taxes $ 37 $ 96 $ 42
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital expenditures financed through increase
in obligations under capital leases $ 2,409
=======
Purchase of BEP and Franchisees financed
through sale/leaseback transactions $ 5,440
=======
See notes to consolidated financial statements. (Concluded)
F-7
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
AND SUBSIDIARIES
(Formerly DenAmerica Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE FISCAL YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
(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. In July 1999, DenAmerica Corp. changed
its name to Phoenix Restaurant Group, Inc. (the "Company"). The Company is
a multi-concept restaurant company, which operates restaurants in 20
states. At December 31, 1999, the Company operated 93 Black-eyed Pea and 97
Denny's restaurants. The Company owns its Black-eyed Pea brand and operates
the Denny's restaurants under the terms of franchise agreements whereby it
is obligated to remit advertising and royalty fees to the franchisor.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, over the past three years the Company has experienced net
losses aggregating approximately $51,536, which includes asset impairment
losses of $33,364. As a result, as of December 31, 1999, the Company had a
shareholders' deficit of $29,236 and its current liabilities exceeded its
current assets by $4,070. These factors, among others, may indicate that
the Company will be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern depends upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply
with the terms and covenants of its financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately to
attain successful operations. The Company is continuing its efforts to
obtain additional funds so that the Company can meet its obligations and
sustain operations. There can be no assurance that additional financing
will be available to the Company or available on satisfactory terms.
The Company has pursued a strategy to repay its senior debt obligations in
order to provide the Company with the flexibility to (i) better match
operating cash flows with debt amortization, (ii) improve its portfolio of
operating restaurants, and (iii) position it to grow. The Company has also
retained CNL Advisory Services to act as its agent in the sale of its
remaining Denny's restaurants and has received letters of interest from
potential buyers for such sale. These proposals are subject to usual and
customary conditions to closing, including the potential buyers' obtaining
financing for such transactions. To the extent the transactions are
completed, the Company plans to use the estimated proceeds of approximately
$60,000 to (i) repay existing senior debt, (ii) pay certain liabilities
related to the Denny's restaurants, and (iii) use the balance as follows:
F-8
<PAGE>
* fund Black-eyed Pea new store growth;
* close underperforming restaurants;
* increase advertising for Black-eyed Pea restaurants; and
* fund seasonal variations in cash flow.
At December 31, 1999, the Company was in compliance with certain financial
debt covenants under its senior credit facility. These financial covenants
were modified in June 1999 and state that the note is due in full on
January 31, 2000. The Company has begun discussions with its senior
lender and is currently negotiating an extension on the maturity of the
debt to September 2000.
The consolidated financial statements include the accounts of Phoenix
Restaurant Group, Inc. 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 1997, 1998 and 1999 fiscal years, which
represent the 52 week period ended December 31, 1997, the 52 week
period ended December 30, 1998 and the 52 week period ended December
29, 1999 have been described in the financial statements as the years
ended December 31, 1997, 1998 and 1999.
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. NET ASSETS HELD FOR SALE are stated at the lower of cost or estimated
net realizable value and include certain property, equipment,
franchise costs and goodwill less capitalized lease obligations and
deferred rent liabilities.
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.
g. FRANCHISE REVENUE - During 1998, the Company acquired all of the
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.
F-9
<PAGE>
h. GOODWILL AND INTANGIBLE ASSETS. 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
$3,670 and $186 at December 31, 1998 and 1999, respectively.
j. DEFERRED RENT represents the accrual resulting from recording rental
expense on a straight-line basis. As of December 31, 1998 and 1999,
deferred rent totaled $2,487 and $2,965, respectively, and is included
in other liabilities in 1998 and in other liabilities ($810) and
assets held for sale ($2,155) in 1999 in the accompanying consolidated
balance sheets.
k. EARNINGS PER SHARE - Basic earnings per share is calculated utilizing
weighted average common shares outstanding during the period. The
Company has no dilutive potential common shares outstanding, and
therefore, only basic earnings per share is presented.
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 12.
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.
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, No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
and American Institute of Certified Public Accountants Statement of
Position ("SOP") No. 98-5, Reporting on the Costs of Start-Up
Activities. SFAS No. 130 changed the reporting of certain items
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. 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.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This standard as amended, is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments,
F-10
<PAGE>
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 completed the process of
evaluating the impact that will result from adopting SFAS No. 133. The
Company is therefore unable to disclose the impact that adopting SFAS
No. 133 will have on its financial position and results of operations
when such statement is adopted.
p. RECLASSIFICATIONS - Certain reclassifications have been made to the
1997 and 1998 financial statements to conform to the 1999
presentation.
2. ACQUISITIONS AND DIVESTITURES
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. The Company converted 10 non-branded restaurants to Denny's,
sold or closed 28 restaurants, developed five new restaurants, acquired
nine Black-eyed Pea restaurants from franchisees, and entered into an
agreement to sell 63 Denny's and eight non-branded restaurants. 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 above, which the Company completed in March 1998.
In connection with the closing of the acquisition of franchised Black-eyed
Pea restaurants in 1997, the Company and one of the franchisees settled
threatened litigation and CNL Group, Inc. and affiliates ("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.
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.
Subsequent to the consummation of the transaction, OHI defaulted on its
obligations under the Sublease Agreement. As a result of the default, the
Company took legal action to protect its interest in the underlying leased
properties. On January 7, 2000, OHI filed for protection under Chapter 11
of the bankruptcy code. In February 2000, the Company and OHI entered into
a mediated settlement agreement. Under the terms of the settlement
agreement, the Sublease Agreement has been amended to reduce the number of
restaurants subject to the Sublease Agreement by 22. All right, title and
interest to the 22 subleases and associated property will be transferred to
the Company. The Company will have sole responsibility to negotiate the
termination or the continuation of the 22 subleases. OHI and its lender
will place $1,500 in escrow to be released to the Company upon termination
of the 22 subleases. As a result of the settlement, the Company recorded an
allowance against the entire $1,800 note receivable from OHI.
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.
During 1999, the Company sold or closed three Denny's and 16 Black-eyed Pea
restaurants. All of these restaurants were underperforming and
geographically undesirable. The Company believes that these sales and
closures have improved its restaurant portfolio.
F-11
<PAGE>
During 1999, the Company decided to sell all of its Denny's restaurants.
The Company determined that the carrying value of the assets exceeds the
undiscounted future cash flows attributable to these restaurants and has
recorded a charge for impaired goodwill and intangible assets of $8,900, in
the accompanying financial statements.
Additionally during 1999, the Company recorded charges of (1) $2,900
related to 16 Black-eyed Pea restaurants, and (2) $1,500 to reflect
increased estimates of liabilities related to restaurants closed in prior
periods because the Company determined that the cost and timing of
subleasing those properties will exceed previous estimates. The Company
recorded an additional charge of $4,800 related to 68 Denny's and 19
non-branded restaurants sold during 1997 and 1998 where the Company remains
contingently liable for equipment leases, rents, and property taxes as a
result of a pending bankruptcy filing by one buyer and non-performance by
the other buyer. Finally, the Company also recorded a charge of $1,200
related to the write-down of Black-eyed Pea's investment in a Joint
Venture.
3. NET ASSETS HELD FOR SALE
Net assets held for sale at December 31, 1999 consist of the following:
Cash on hand $ 127
Food inventory 1,534
Property and equipment 34,376
Intangible assets 26,661
--------
Total assets held for sale 62,698
--------
Accrued liabilities (362)
Deferred rent and other (2,356)
Capital lease obligations (17,852)
--------
Total liabilities (20,570)
Net assets held for sale $ 42,128
========
F-12
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment including assets under capitalized leases as of the
fiscal years ended consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1998 1999
------------ ------- -------
<S> <C> <C> <C>
Buildings 5 - 20 years $34,641 $14,088
Restaurant equipment 3 - 11 years 22,353 7,549
Leasehold improvements Life of lease 12,538 3,646
Other 3 - 7 years 3,346 1,393
------- -------
Total 72,878 26,676
Less accumulated depreciation and amortization 17,230 6,057
------- -------
Equipment and leasehold improvement - net $55,648 $20,619
======= =======
</TABLE>
Assets recorded under capital leases as of the fiscal years ended consist
of the following:
1998 1999
------- -------
Buildings $32,878 $14,088
Other 6,440 2,277
------- -------
Total 39,318 16,365
Less accumulated amortization 7,325 3,300
------- -------
Total $31,993 $13,065
======= =======
Depreciation and amortization expense was $5,324, $5,598 and $4,677 for the
fiscal years ended 1997, 1998 and 1999, respectively.
5. INTANGIBLE ASSETS
Intangible assets as of the fiscal years ended consist of the following:
1998 1999
------- -------
Goodwill $52,879 $12,001
Franchise rights 2,989
Favorable lease arrangements 883
------- -------
Total 56,751 12,001
Less accumulated amortization 6,171 884
------- -------
Intangible assets - net $50,580 $11,117
======= =======
Amortization expense was $4,043, $1,992 and $1,408 for the fiscal years
ended 1997, 1998 and 1999, respectively.
6. OTHER CURRENT LIABILITIES
Other current liabilities as of the fiscal years ended consist of the
following:
F-13
<PAGE>
1998 1999
------- -------
Accrued insurance $ 1,125 $ 769
Estimated closed restaurant obligations 1,570 3,465
Interest 4,432 7,647
Other 1,819 2,201
------- -------
Total accrued liabilities $ 8,946 $14,082
======= =======
The majority of the accrued interest relates to the deferral of interest
payments on the Company's Series B 13% Subordinated Notes, which are held
by related parties (see Notes 8 and 14).
7. RESERVES FOR STORE CLOSINGS
In 1998 and 1999, other long-term liabilities includes long-term reserves
of $1,737 and $1,951, respectively, for estimated obligations for closed
restaurants. The following is a summary of store closing reserves:
1997 1998 1999
------ ------ ------
Beginning Balance $6,971 $4,491 $3,307
Additions 1,208 6,900
Less charges 2,480 2,392 4,791
------ ------ ------
Ending Balance $4,491 $3,307 $5,416
====== ====== ======
8. DEBT OBLIGATIONS
Debt obligations as of the fiscal years ended consist of the following:
1998 1999
------- -------
LONG-TERM DEBT OBLIGATIONS:
CNL obligations $22,873 $22,618
Series B 13% Subordinated Notes (face value $18,250) 16,176 16,661
Other notes payable 617 2,259
Capital lease obligations (Note 8) 32,828 13,370
------- -------
Total long-term obligations $72,494 $54,908
======= =======
CURRENT PORTION OF LONG-TERM DEBT OBLIGATIONS:
Obligations under credit facility $14,772
CNL obligations 4,205 $24,595
Other notes payable 85 62
Capital lease obligations (Note 8) 1,729 994
------- -------
Total current obligations $20,791 $25,651
======= =======
A summary of the Company's debt obligations is as follows:
F-14
<PAGE>
(a) 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 $20,900. 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, 1999, the fair value of the promissory notes approximate
carrying value as the interest rate approximates borrowing rates
currently available to the Company.
The Company had a credit facility agreement with Banque Paribas, as
agent, and the Company's other senior lenders (the "Credit Facility").
In June 1999, the Company entered into a new $22,300 financing
agreement with CNL whereby CNL purchased the remaining outstanding
indebtedness under the Credit Facility of $14,700, advanced an
additional $5,400 to the Company and consolidated certain other debt
held by CNL prior to June 1999 of $2,200. A portion of the note,
$17,100, bears interest at 11.5%, and the remaining $5,200 bears
interest at 10.5%. The note, as amended, requires interest only
payments which are due monthly through January 31, 2000, at which time
the entire principal balance is due and payable. As of April 11, 2000,
no principal payments have been made on the note. As a result, the
Company is in default under the terms of the note. Therefore, the
principal balance has been included in current liabilities on the
Company's balance sheet. The Company is currently in the process of
negotiating with CNL to modify the payment terms of the note.
The Company is also obligated to CNL under a $4,400 face value
convertible redeemable debenture bearing interest at 5%, recorded net
of a $406 discount at December 31, 1999, with interest only payable
quarterly and maturing in September 2002. The fair value of the
convertible redeemable debenture is $4,400.
(b) SERIES B 13% SUBORDINATED NOTES
The Series B 13% Subordinated Notes ("Series B Notes") bear interest
at 13% and mature in March 2003. In connection with the issuance of
the Series B Notes, the Company issued warrants to purchase an
aggregate of 478,000 shares of the Company's common stock at an
exercise price of $0.01 per share. The warrants became exercisable on
March 29, 1999. Certain holders of the Series B Notes have not
received interest payments since March 31, 1997. As of December 31,
1999, accrued and unpaid interest due to these holders totals $7,493.
The Company has not received waivers from these holders for
noncompliance of certain of the debt covenants under the Series B
Notes. The fair value of the Series B Notes at December 31, 1999 is
$18,250.
The aggregate annual maturities of long-term debt, excluding capital
lease obligations, for the years subsequent to December 31, 1999 are
as follows:
2000 $24,657
2001 4,344
2002 7,255
2003 19,919
2004 3,571
Thereafter 6,449
-------
Total $66,195
=======
F-15
<PAGE>
9. LEASES
The Company's operations utilize leased property, facilities and equipment.
At December 31, 1999, 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
2036 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, 1999 consist of the
following:
<TABLE>
<CAPTION>
Operating Leases
--------------------
Minimum Minimum
Capital Lease Sublease
Leases Payments Payments
-------- -------- --------
<S> <C> <C> <C>
2000 $ 5,487 $ 25,372 $ 5,626
2001 5,326 22,811 5,537
2002 5,333 19,444 5,298
2003 5,156 18,108 4,979
2004 4,721 15,637 4,734
Subsequent years 38,308 117,241 32,076
-------- -------- --------
Total 64,331 $218,613 $ 58,250
======== ========
Less imputed interest - interest rates ranging from 10% to 15% (32,115)
Less capital leasess included in assets held for sale (17,852)
--------
Present value of minimum capital lease obligation 14,364
Less current portion of capital lease obligation 994
--------
Long-term portion of capital lease obligation $ 13,370
========
</TABLE>
Obligations under operating leases related to restaurants sold which are
being paid directly by the purchaser but for which the Company continues to
be contingently liable are included in minimum sublease payments (see Note
2).
Included in minimum operating lease payments are payments attributable to
equipment leases which have remaining terms of one to three years. Annual
payments attributable to these leases are: $4,659 (2000), $2,704 (2001) and
$14 (2002) 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:
1997 1998 1999
------- ------- -------
Minimum rentals $19,060 $16,881 $16,863
Contingent rentals 510 513 381
------- ------- -------
Total rent expense $19,570 $17,394 $17,244
======= ======= =======
F-16
<PAGE>
10. INCOME TAXES
The income tax provision (benefit) as of the fiscal years ended consists of
the following:
1997 1998 1999
------- ------- -------
Current:
Federal $ 37 $ 13
Deferred:
Federal 2,727 (621) $(3,782)
State 494 (306) (509)
------- ------- -------
Total deferred 3,221 (927) (4,291)
------- ------- -------
Total income tax provision (benefit) $ 3,258 $ (914) $(4,291)
======= ======= =======
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:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit) $ (6,205) $ (2,430) $(10,066)
State income taxes - net of federal benefit (886) (347) (1,438)
Nondeductible expenses (primarily goodwill) 11,191 323 1,249
FICA tip credits and other (842) (595) (555)
Change in valuation allowance 2,135 6,519
-------- -------- --------
Total $ 3,258 $ (914) $ (4,291)
======== ======== ========
</TABLE>
Deferred income tax assets for the fiscal years ended are as follows:
1998 1999
-------- --------
Current deferred income tax assets:
Assets held for sale $ 1,805
Accrued self insurance and contingent losses $ 478 323
Other accrued expenses 360 1,580
Receivables Reserve 756
Net operating loss carryforward 7,236
-------- --------
Total current deferred income tax assets included
in other current assets $ 838 $ 11,700
======== ========
Noncurrent deferred income tax assets (liabilities):
Store closing $ 695 $ 780
Intangibles (4,546) (3,882)
Net operating loss carryforward 9,296 10,488
Valuation allowance (4,924) (11,443)
Various tax credit carryforward 2,891 3,448
Depreciation, capitalized leases and deferred gain 1,173 299
Impairment of assets
Other 993 310
-------- --------
Net noncurrent deferred income tax assets $ 5,578 $ --
======== ========
As of December 31, 1999, the Company has approximately $44,758 of net
operating loss carryforwards that expire beginning in 2004 and alternative
minimum tax credit carryforwards of approximately
F-17
<PAGE>
$3,448. The Company has a valuation allowance of $11,443 relating to
certain net operating loss carryforwards.
11. COMMITMENTS AND CONTINGENCIES
In November 1996, the Company entered into a self-insured program whereby
the Company was obligated for the first $100 of individual health insurance
claims. On December 1, 1999, the Company converted to a fully insured
health insurance plan whereby the Company is obligated to share in the cost
of health insurance premiums.
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.
12. 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 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
Granted 33,068 1.07
Exercised
Canceled (184,800) 4.30
---------- -------
Outstanding at December 31, 1999 864,568 3.89
========== =======
The following table summarizes information about stock options outstanding
at December 31, 1999:
F-18
<PAGE>
<TABLE>
<S> <C> <C>
Range of exercise prices $0.94 - $4.00 $4.75 - $6.00
Shares outstanding 697,068 167,500
Weighted-average exercise price $ 3.55 $ 5.31
Weighted-average remaining contractural life 6.18 4.41
Shares currently exercisable 588,000 151,500
Weighted-average exercise price of shares currently exercisable $ 3.60 $ 5.35
</TABLE>
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, 1997, 1998
and 1999 would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) applicable to common
shareholders - as reported $ (20,977) $ (4,657) $ (25,902)
========== ========== ==========
Net income (loss) applicable to common
shareholders - pro forma $ (21,239) $ (4,974) $ (26,189)
========== ========== ==========
Basic and diluted income (loss)
per share - as reported $ (1.56) $ (0.35) $ (1.92)
========== ========== ==========
Basic and diluted income (loss)
per share - pro forma $ (1.58) $ (0.37) $ (1.94)
========== ========== ==========
</TABLE>
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 88%; risk free
interest rate of 6%; and expected lives of two to five years.
13. EARNINGS PER SHARE
Earnings per share is calculated as follows:
F-19
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
(Loss) before extraordinary item $(20,977) $ (6,028) $(24,457)
Extraordinary loss (gain) (1,371) 1,445
Preferred stock dividend and accretion
-------- -------- --------
Net (loss) applicable to common shareholders $(20,977) $ (7,399) $(25,902)
======== ======== ========
Shares - basic income (loss) per share 13,437 13,485 13,485
Dilutive effect of common stock equivalents
-------- -------- --------
Shares - diluted income (loss) per share 13,437 13,485 13,485
======== ======== ========
Basic and diluted loss per share:
Before extraordinary item $ (1.56) $ (.45) $ (1.81)
======== ======== ========
Applicable to common shareholders $ (1.56) $ (.55) $ (1.92)
======== ======== ========
</TABLE>
14. RELATED PARTY TRANSACTIONS
During fiscal years ended December 31, 1997, 1998 and 1999, 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:
1997 1998 1999
------- ------- -------
Advances due from officers and shareholders $ 378 $ 802 $ 802
======= ======= =======
Note receivable from shareholders $ 2,600 $ 2,600 $ 2,473
======= ======= =======
LH Leasing (described below) $ 3,804 $ 3,804 $ 3,804
======= ======= =======
Lease expense paid to shareholders $ 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, 1999, bears interest at 6%. The note is secured by
Series B Notes with a face amount of approximately
F-20
<PAGE>
$1,500 and approximately 403,000 shares of the Company's common stock. At
December 31, 1999, 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. This transaction closed in fiscal 2000. The
Company recorded an extraordinary loss of $127 in 1999 as the result of the
transaction.
Related parties of the Company are the holders of $18,250 of the Series B
Notes (discussed in Note 8).
15. 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
and 1999.
F-21
<PAGE>
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, the Black-eyed Pea and Denny's. The Company owns the
Black-eyed Pea brand and operates the Denny's restaurants under the terms
of franchise agreements. The accounting policies for each concept are the
same as those described in Note 1. During fiscal 1997 and 1998, the Company
also operated several non-branded restaurants. During 1998 all remaining
non-branded restaurants were closed or converted to the Black-eyed Pea or
Denny's 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:
<TABLE>
<S> <C> <C> <C>
REVENUES:
1997 1998 1999
--------- --------- ---------
Black-eyed Pea $ 130,304 $ 139,699 $ 135,159
Denny's 165,167 115,787 103,514
Non-branded 5,108 470
--------- --------- ---------
Total revenues $ 300,579 $ 255,956 $ 238,673
========= ========= =========
RESTAURANT OPERATING INCOME (LOSS):
Black-eyed Pea $ 14,444 $ 10,684 $ 4,088
Denny's (4,886) 7,583 (7,236)
Non-branded (457) (151)
--------- --------- ---------
Total restaurant operating income (loss) 9,101 18,116 (3,148)
Administrative expenses 13,684 12,423 12,105
Total operating income (loss) $ (4,583) $ 5,693 $ (15,253)
========= ========= =========
DEPRECIATION AND AMORTIZATION:
Black-eyed Pea $ 1,009 $ 2,780 $ 2,416
Denny's 8,321 4,808 3,669
Non-branded 37 2
--------- --------- ---------
Total depreciation and amortization $ 9,367 $ 7,590 $ 6,085
========= ========= =========
IDENTIFIABLE ASSETS:
Black-eyed Pea $ 41,670 $ 40,784 $ 59,542
Denny's 124,736 93,723 38,825
Non-branded 3,858 0 0
--------- --------- ---------
Total identifiable assets $ 170,264 $ 134,507 $ 98,367
========= ========= =========
</TABLE>
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-22
<PAGE>
17. QUARTERLY DATA (UNAUDITED)
The following table presents selected unaudited quarterly operating results
for the two-year period ended December 31, 1999. The Company believes that
all necessary adjustments have been included in the amounts shown below to
present fairly the related quarterly results.
<TABLE>
<CAPTION>
1999
--------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
(13 weeks) (13 weeks) (13 weeks) (13 weeks)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Restaurant sales $ 60,941 $ 61,801 $ 60,078 $ 55,853
Operating income (loss) 2,272 (1,366) (14,189) (1,970)
Net loss applicable to common
shareholders (199) (5,432) (17,451) (2,820)
Basic and diluted loss per share applicable
to common shareholders $ (0.02) $ (0.39) $ (1.29) $ (0.22)
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 $ 0.10 $ (0.08) $ (0.09) $ (0.28)
</TABLE>
* * * * * *
F-23
EXHIBIT 12.1
DENAMERICA CORP.
RATIO OF INCOME TO FIXED CHARGES
(000 OMITTED)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------
1995 1996 1997 1998 1999
------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (Loss) Before Income Taxes
and Extraordinary Item ...... $ 505 $ 2,485 $(17,719) $ (6,942) $(28,748)
Fixed Charges:
Rental Expense .............. 2,499 7,660 10,132 9,094 8,825
Interest .................... 2,467 9,255 11,962 11,070 11,528
Debt Expense Amortization ... 144 350 1,939 1,722 2,061
------ ------- -------- -------- --------
Total Fixed Charges ...... 5,110 17,265 24,023 21,886 22,414
------ ------- -------- -------- --------
Net Income as Adjusted .......... $5,615 $19,750 $ 6,314 $ 14,944 $ (6,334)
====== ======= ======== ======== ========
Ratio ........................... 1.10 1.14
====== =======
Amount Inadequate to Cover
Fixed Charges ............... $ 17,719 $ 6,942 $ 28,748
======== ======== ========
</TABLE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
33-93192 and Registration Statement No. 333-09731 of Phoenix Restaurant Group,
Inc. (formerly DenAmerica Corp.) on Forms S-8, and the incorporation by
reference in the Registration Statement No. 333-07019 of Phoenix Restaurant
Group, Inc. (formerly DenAmerica Corp.) on Form S-3 of our report dated April
11, 2000, (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 Phoenix Restaurant Group, Inc.
(formerly DenAmerica Corp.) for the year ended December 29, 1999.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
April 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PHOENIX RESTAURANT GROUP, INC. AND
SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 29, 1999 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-29-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> DEC-29-1999
<EXCHANGE-RATE> 1
<CASH> 1,491
<SECURITIES> 0
<RECEIVABLES> 2,244
<ALLOWANCES> 0
<INVENTORY> 1,087
<CURRENT-ASSETS> 63,411
<PP&E> 26,676
<DEPRECIATION> 6,057
<TOTAL-ASSETS> 98,367
<CURRENT-LIABILITIES> 67,481
<BONDS> 54,908
0
0
<COMMON> 1,349
<OTHER-SE> (30,585)
<TOTAL-LIABILITY-AND-EQUITY> 98,367
<SALES> 238,673
<TOTAL-REVENUES> 238,673
<CGS> 64,740
<TOTAL-COSTS> 64,740
<OTHER-EXPENSES> 189,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,495
<INCOME-PRETAX> (28,748)
<INCOME-TAX> (4,291)
<INCOME-CONTINUING> (24,457)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,445)
<CHANGES> 0
<NET-INCOME> (25,902)
<EPS-BASIC> (1.92)
<EPS-DILUTED> (1.92)
</TABLE>
