UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2000
Commission File Number 1-13226
PHOENIX RESTAURANT GROUP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-1861457
------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7373 N. SCOTTSDALE ROAD
SUITE D-120, SCOTTSDALE AZ 85253
---------------------------------------- ----------
(address of principal executive offices) (zip code)
(480) 483-7055
----------------------------------------------------
(registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the issuer's class of common stock as of the
latest practicable date, is as follows: 13,485,277 shares of Common Stock, $.10
par value, as of November 20, 2000.
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 2000
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets -
December 29, 1999 and September 27, 2000............................. 3
Condensed Consolidated Statements of Operations - 13-Week Periods
ended September 29, 1999 and September 27, 2000 and 39-Week
Periods ended
September 29, 1999 and September 27, 2000............................. 4
Condensed Consolidated Statements of Cash Flows
13-Week Periods ended September 29, 1999 and
September 27, 2000 and 39-Week Periods ended
September 29, 1999 and September 27, 2000............................. 5
Notes to Condensed Consolidated Financial Statements.................. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........... 18
PART II. OTHER INFORMATION................................................... 19
SIGNATURES .................................................................. 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 27,
DECEMBER 29, 2000
ASSETS 1999 (UNAUDITED)
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,491 $ 2,120
Receivables 2,244 2,009
Inventories 1,087 1,093
Deferred income taxes 11,700 11,700
Other current assets 4,761 1,157
Net assets held for sale 42,128 42,644
--------- ---------
Total current assets 63,411 60,723
PROPERTY AND EQUIPMENT - Net 20,619 18,946
INTANGIBLE ASSETS - Net 11,117 10,528
OTHER ASSETS 3,220 3,040
--------- ---------
TOTAL $ 98,367 $ 93,237
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 17,778 $ 15,820
Accrued compensation 5,237 5,563
Accrued taxes 4,733 4,030
Other current liabilities 14,082 22,480
Current debt obligations 25,651 26,924
--------- ---------
Total current liabilities 67,481 74,817
LONG-TERM DEBT - Less current portion 54,908 51,395
OTHER LONG-TERM LIABILITIES 5,214 7,423
--------- ---------
TOTAL LIABILITIES 127,603 133,635
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred stock, $.01 par value; authorized,
5,000,000 shares; issued and outstanding none
Common stock $.10 par value; authorized,
40,000,000 shares; 13,485,277 shares issued
and outstanding 1,349 1,349
Additional paid-in capital 35,869 34,982
Treasury stock, at cost, 403,456 shares -- (252)
Accumulated deficit (66,454) (76,477)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT (29,236) (40,398)
--------- ---------
TOTAL $ 98,367 $ 93,237
========= =========
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
13-Week Periods Ended 39-Week Periods Ended
(Unaudited) (Unaudited)
---------------------------- ----------------------------
September 29, September 27, September 29, September 27,
1999 2000 1999 2000
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
RESTAURANT SALES $ 60,078 $ 54,906 $ 182,820 $ 166,900
-------- -------- --------- ---------
RESTAURANT OPERATING EXPENSES:
Food and beverage costs 16,307 15,052 49,545 45,536
Payroll and payroll related costs 20,691 19,641 62,851 58,215
Depreciation and amortization 1,789 673 5,150 1,982
Other restaurant operating expenses 18,640 15,386 52,936 44,937
Restructuring expense 8,326 6,750 8,326 6,750
Charge for impaired assets 5,500 1,080 8,500 1,080
-------- -------- --------- ---------
Total operating expenses 71,253 58,582 187,308 158,500
-------- -------- --------- ---------
RESTAURANT OPERATING INCOME (LOSS) (11,175) (3,676) (4,488) 8,400
ADMINISTRATIVE EXPENSES 3,014 3,504 8,795 9,578
-------- -------- --------- ---------
OPERATING (LOSS) (14,189) (7,180) (13,283) (1,178)
INTEREST EXPENSE - Net 3,262 2,931 9,257 8,845
-------- -------- --------- ---------
(LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (17,451) (10,111) (22,540) (10,023)
INCOME TAX (BENEFIT) -- -- (731) --
-------- -------- --------- ---------
(LOSS) BEFORE EXTRAORDINARY ITEMS (17,451) (10,111) (21,809) (10,023)
EXTRAORDINARY (LOSS) ON EARLY EXTINGUISHMENT OF
DEBT net of income tax benefit of $686 -- -- (1,273) --
-------- -------- --------- ---------
NET (LOSS) $(17,451) $(10,111) $ (23,082) $ (10,023)
======== ======== ========= =========
Basic and diluted (loss) per share before
extraordinary item $ (1.29) $ (.77) $ (1.62) $ (.77)
======== ======== ========= =========
Net (loss) $ (1.29) $ (.77) $ (1.71) $ (.77)
======== ======== ========= =========
Basic and diluted weighted average shares Outstanding:
Basic 13,485 13,081 13,485 13,081
======== ======== ========= =========
Diluted 13,485 13,081 13,485 13,081
======== ======== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
13-Week Periods Ended 39-Week Periods Ended
(Unaudited) (Unaudited)
---------------------------- ----------------------------
September 29, September 27, September 29, September 27,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(17,451) $(10,111) $(23,082) $(10,023)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,789 673 5,150 1,982
Amortization of deferred financing costs 120 4 301 191
Restructuring expense 8,326 6,750 8,326 6,750
Charge for impaired assets 5,500 1,080 8,500 1,080
Extraordinary items -- -- 1,273 --
Deferred income taxes -- -- (731) --
Deferred rent 177 103 230 300
Other - net 349 74 (305) 40
Changes in operating assets and liabilities,
net of dispositions:
Receivables 42 120 (487) 185
Inventories 81 (50) 131 26
Other current assets (32) 378 558 280
Accounts payable and accrued liabilities 437 910 (261) 1,844
-------- -------- -------- --------
Net cash (used in) provided by operating
activities (662) (69) (397) 2,655
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,317) (201) (3,724) (1,215)
Proceeds from sale of assets -- -- -- 145
-------- -------- -------- --------
Net cash (used in) investing activities (1,317) (201) (3,724) (1,070)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 450 142 6,828 142
Debt issuance costs (304) -- (1,337) --
Note receivable collections 90 103 823 300
Principal reductions on long-term obligations (1,041) (320) (2,827) (1,398)
-------- -------- -------- --------
Net cash (used in) provided by financing
activities (805) (75) 3,487 (956)
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,784) (345) (634) 629
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,480 2,465 2,330 1,491
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,696 $ 2,120 $ 1,696 $ 2,120
======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,980 $ 679 $ 6,044 $ 2,546
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Exchange of note receivable for stock and note payable:
Subordinated debenture $ 1,456
Note receivable $ 2,600
Treasury stock $ 252
Additional paid-in capital $ 887
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
PHOENIX RESTAURANT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Phoenix Restaurant Group, Inc. and subsidiaries have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission for
Form 10-Q and do not include all of the information and footnotes required by
generally accepted accounting principles for audited financial statements. In
management's opinion, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. However, these
operating results are not necessarily indicative of the results expected for the
full year. These statements should be read in conjunction with the consolidated
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations included in our Annual Report
on Form 10-K for the fiscal year ended December 29, 1999 and in Part I, Item 2
of this Quarterly Report on Form 10-Q. Certain reclassifications have been made
in the Condensed Consolidated Financial Statements to conform to the September
27, 2000 basis of presentation.
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. From 1997 through 1999, we have
experienced net losses aggregating approximately $51.5 million, which includes
restructuring charges and asset impairment losses of $33.4 million. In the first
three fiscal quarters of 2000 there has been a net loss of $10.0 million. As a
result, at September 27, 2000, we had a shareholders' deficit of $40.4 million
and our current liabilities exceeded our current assets by $14.1 million. These
factors, among others, may indicate that at some point in the foreseeable
future, we will be unable to continue as a going concern.
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 we be unable to
continue as a going concern. Our continuation as a going concern depends upon
our ability to generate sufficient cash flow to meet our obligations on a timely
basis, to comply with the terms and covenants of our financing agreements, to
obtain additional financing or refinancing as may be required, and ultimately to
attain profitable operations. We are continuing our efforts to obtain additional
funds so that we can meet our obligations and sustain our operations. There can
be no assurance that additional financing will be available to us or available
on satisfactory terms.
(2) RECLASSIFICATION
Included in other current assets at December 29, 1999 was a $2.6 million note
receivable collateralized by 403,456 shares of the Company's common stock. In
August 1999, the Company entered into a foreclosure and settlement agreement
whereby the $2.6 million note receivable was exchanged for $1.5 million in
Series B Notes Payable and the 403,456 shares of the Company's common stock. The
effective date of this transaction was January 3, 2000 at which time the Company
recorded the cancellation of the $2.6 million note receivable and the $1.5
million in Series B Notes Payable at face value while reflecting the transfer of
403,456 shares of common stock as treasury stock. Originally, the common stock
thus
6
<PAGE>
acquired was classified as treasury stock with a value of $1.1 million
representing the difference in the carrying value of the note receivable and the
Series B Notes Payable. The Company has determined that the transaction should
have been reflected as an acquisition of treasury stock for $252 representing
its market value at the effective date. Consequently, the Company has reduced
the previously reported carrying value of the treasury stock by $887 with a
corresponding reduction of additional paid-in capital of $887. This
reclassification has been reflected in the accompanying financial statements for
the period ended September 27, 2000.
(3) ACQUISITIONS AND DIVESTITURES
We sold or closed two Denny's and sixteen Black-eyed Pea restaurants in 1999 and
one Denny's and one Black-eyed Pea restaurant in the first thirty-nine weeks of
2000. All of these restaurants were underperforming. We will continue to
evaluate the operating results of all remaining restaurants after the completion
of the disposition of certain properties currently held for sale. We intend to
sell or close any of those restaurants that do not meet our criteria for
operating results.
In October 1999, we retained CNL Advisory Services to act as our agent in the
sale of our remaining Denny's restaurants. In June 2000, we announced an
agreement to sell certain of our Denny's restaurants. We also announced the
receipt of letters of interest for the sale of the remaining Denny's
restaurants. Both the agreement and the purchase proposals were subject to usual
and customary conditions to closing, including buyer's satisfactory completion
of due diligence and buyer's obtaining financing for such transactions. The
agreement for sale of restaurants has expired on its terms, although discussions
regarding the purchase of restaurants are continuing with that party.
In October 2000, we reaffirmed our intent to move forward with the announced
strategy of selling our Denny's restaurants. We are at various stages of
discussions with several potential buyers for the restaurants. We anticipate
that the sale of certain Denny's restaurants will occur by the end of the fiscal
year and the sale of the remaining Denny's restaurants will occur by the end of
the first quarter of fiscal 2001. All such transactions are subject to usual and
customary conditions to closing. To the extent the sale of the Denny's occur, we
anticipate using the proceeds to reduce outstanding indebtedness along with
payment of the costs associated with the transactions.
(4) DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
On June 30, 1999, CNL APF Partners, LP acquired the remaining outstanding
indebtedness under our existing senior credit facility and advanced an
additional $5.4 million to us. As part of this transaction, we issued to CNL a
$20.1 million interim balloon note. In August 1999, this debt was modified to be
interest only through January 31, 2000. As of January 31, 2000 the entire
principal balance was due. We are currently in default on the note and have
classified it as a current liability. As of September 27, 2000 accrued and
unpaid interest due to CNL totals $3.8 million. In May 2000, we entered into a
non-binding letter of intent with CNL to extend the maturity date of the note to
September 30, 2000. We are currently negotiating an extension in the maturity
date and waiver of default on this note. We cannot provide assurance, however,
that CNL will agree to any further extension or waiver or that other revisions
in the payment terms of the note will be acceptable to us.
At June 28, 2000, we had outstanding $15.7 million book value of Series B 13%
Subordinated Notes due 2003. We are in default due to non-payment of interest
since March 31, 1997. As of September
7
<PAGE>
27, 2000 accrued and unpaid interest due to these holders totals $9.2 million.
Waivers for non-payment were received through June 1999 but not since that date.
No formal notice of default has been received. The par value of the Series B
Notes at September 27, 2000 is $16.8 million.
(5) RESTRUCTURING EXPENSE
When the decision to close a restaurant is made, the Company incurs exit costs,
generally for the accrual of the remaining leasehold obligations less
anticipated sublease income related to leased units that are to be closed.
During the third quarter of 1999, the Company recorded $8.3 million in such
costs, primarily associated with the accrual of the remaining leasehold
obligations on restaurants closed or to be closed.
In the third quarter of 2000, the Company recorded approximately $6.8 million in
exit costs, primarily associated with $600 related to three Black-eyed Pea
restaurants which the Company anticipates closing by the end of the fiscal year
and $6.2 million to reflect increased estimates of liabilities related to
Black-eyed Pea and Denny's restaurants closed in prior periods because the
Company determined that the cost of subleasing those properties will exceed
previous estimates. Approximately $9.2 million of accrued exit costs remain at
September 27, 2000.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future.
(6) IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR DISPOSAL
During the third fiscal quarter of 2000, the Company completed an asset
impairment analysis on its operating restaurants and rental properties and
recorded an asset impairment charge of approximately $1.1 million. The entire
amount of this impairment charge was related to the Black-eyed Pea restaurant
division. In the third fiscal quarter of 1999, the Company recorded an asset
impairment charge of $5.5 million related to the Denny's restaurant division.
At September 27, 2000, the carrying value of the 97 Denny's restaurants to be
disposed of was $42.6 million and is reflected on the Consolidated Condensed
Balance Sheet as net assets held for sale. Under the provisions of SFAS 121,
depreciation and amortization are not recorded during the period in which assets
are being held for disposal.
(7) LITIGATION
During the third quarter of 2000, the Company increased its litigation reserve
by $750. This additional reserve primarily relates to a court settlement
achieved during the third quarter with regard to an employment lawsuit filed in
Florida. This expense is reflected in administrative expenses.
In addition to the litigation described above, the Company is a party to other
legal proceedings incidental to its business. In the opinion of management,
based upon information currently available, the ultimate
8
<PAGE>
liability with respect to these other actions will not materially affect the
operating results or the financial position of the Company.
(8) CONCENTRATION OF RISKS AND USE OF ESTIMATES
As of September 27, 2000, the Company operated 189 restaurants in 20 states,
which consists of two separate concepts, Black-eyed Pea and Denny's. The
majority of the Company's restaurants are located in Texas, Arizona, Florida and
Oklahoma. Both concepts are family-oriented restaurants offering full table
service and a broad menu. The Company believes there is no concentration of risk
with any single customer, supplier, or small group of customers or suppliers
whose failure or nonperformance would materially affect the Company's results of
operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to use judgment and make estimates
that affect the amounts reported in the Consolidated Condensed Financial
Statements. Management believes that such estimates have been based on
reasonable and supportable assumptions and that the resulting estimates are
reasonable for use in the preparation of the Consolidated Condensed Financial
Statements. Changes in such estimates will be made as appropriate as additional
information becomes available and may affect amounts reported in future periods.
(9) BUSINESS SEGMENTS
We currently operate 189 family-oriented, full-service restaurants in 20 states.
We own and operate 92 Black-eyed Pea restaurants including 81 restaurants in
Texas, Oklahoma, and Arizona. We also own and operate 97 Denny's restaurants
including 54 restaurants in Texas, Florida, and Arizona. We own the Black-eyed
Pea brand and operate the Denny's restaurants under the terms of franchise
agreements.
Our revenue and restaurant operating income for the thirteen-week and
thirty-nine week periods ended September 27, 2000 and September 29, 1999 are as
follows:
<TABLE>
<CAPTION>
13-WEEK PERIOD ENDED 39-WEEK PERIOD ENDED
---------------------------- ----------------------------
September 29, September 27, September 29, September 27,
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
-------- -------- --------- ---------
REVENUES
Black-eyed Pea $ 33,467 $ 28,159 $ 104,368 $ 89,249
Denny's 26,611 26,747 78,452 77,651
-------- -------- --------- ---------
Total revenues $ 60,078 $ 54,906 $ 182,820 $ 166,900
======== ======== ========= =========
RESTAURANT OPERATING INCOME
Black-eyed Pea $ 1,514 $ 1,542 $ 7,460 $ 7,700
Denny's 1,539 2,520 5,098 8,344
Restructuring expense (8,326) (6,750) (8,326) (6,750)
Charge for impaired assets (5,500) (1,080) (8,500) (1,080)
Gain (loss) on sale of assets (402) 92 (220) 186
-------- -------- --------- ---------
Restaurant operating income (loss) (11,175) (3,676) (4,488) 8,400
Administrative expenses 3,014 3,504 8,795 9,578
-------- -------- --------- ---------
Operating (loss) $(14,189) $ (7,180) $ (13,283) $ (1,178)
======== ======== ========= =========
</TABLE>
9
<PAGE>
(10) SUBSEQUENT EVENTS
On October 18, 2000 we received notification from The American Stock Exchange
(AMEX) that AMEX intends to file an application to remove our securities from
listing and registration with AMEX. As previously disclosed, our common stock
has not maintained the minimum requirements for continued listing on the AMEX.
We have notified AMEX that we intend to appeal the decision to seek delisting.
However, there can be no assurance that an appeal of any action by AMEX to
delist our securities would be successful. The Company presently is exploring
alternative venues for the trading of its securities.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As of September 27, 2000, we operated 92 Black-eyed Pea restaurants in 8 states,
including 81 restaurants in Texas, Oklahoma, and Arizona. Through September 27,
2000, comparable store sales decreased 12.9%, and average weekly sales decreased
7.0% as compared with the first three fiscal quarters of 1999. We believe that
the decrease in comparable store sales is attributable primarily to the
elimination of television advertising. Carry-out sales accounted for
approximately 12.6% and 11.3% of restaurant sales for the 13-week period and
12.8% and 11.4% for the 39-week period ended September 27, 2000 and September
29, 1999, respectively.
As of September 27, 2000, we operated 97 Denny's restaurants in 17 states,
including 54 restaurants in Texas, Florida, and Arizona. Through September 27,
2000, comparable store sales increased 1.2%, and average weekly sales increased
2.4% as compared with the first three fiscal quarters of 1999. We believe that
the increases are the result of the disposal of certain underperforming
restaurants and the improvement in the operations of the remaining restaurants.
COMPARISON OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in
the condensed consolidated statements of operations expressed as a percentage of
total restaurant sales.
<TABLE>
<CAPTION>
13-WEEK PERIOD ENDED 39-WEEK PERIOD ENDED
---------------------------- ----------------------------
September 29, September 27, September 29, September 27,
------------- ------------- ------------- -------------
All amounts in percentages (%) 1999 2000 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Restaurant sales
Restaurant operating expenses: 100.0 100.0 100.0 100.0
Food and beverage costs 27.1 27.4 27.1 27.3
Payroll and payroll related costs 34.5 35.8 34.3 34.9
Depreciation and amortization 3.0 1.2 2.8 1.2
Other restaurant operating expenses 31.0 28.0 29.0 27.0
Restructuring expense 13.9 12.3 4.6 4.0
Charge for impaired assets 9.1 2.0 4.6 .6
----- ----- ----- -----
Total operating expenses 118.6 106.7 102.4 95.0
----- ----- ----- -----
Restaurant operating income (loss) (18.6) (6.7) (2.4) 5.0
Administrative expenses 5.0 6.4 4.8 5.7
----- ----- ----- -----
Operating (loss) (23.6) (13.1) (7.2) (.7)
Interest expense - net 5.4 5.3 5.1 5.3
----- ----- ----- -----
(Loss) before income taxes and
extraordinary items (29.0) (18.4) (12.3) (6.0)
Income tax benefit -- -- (.4) --
----- ----- ----- -----
(Loss) before extraordinary items (29.0) (18.4) (11.9) (6.0)
Extraordinary items -- -- (.7) --
----- ----- ----- -----
Net (Loss) (29.0) (18.4) (12.6) (6.0)
===== ===== ===== =====
</TABLE>
11
<PAGE>
THIRTEEN-WEEK PERIOD ENDED SEPTEMBER 27, 2000 COMPARED WITH THIRTEEN-WEEK PERIOD
ENDED SEPTEMBER 29, 1999
RESTAURANT SALES. Restaurant sales decreased $5.2 million, or 8.6%, to
$54.9 million for the thirteen-week period ended September 27, 2000 as compared
with restaurant sales of $60.1 million for the thirteen-week period ended
September 29, 1999. This decrease was attributable primarily to a decline in
comparable store sales of $4.3 million for the Black-eyed Pea restaurants. We
believe the decrease in comparable store sales is attributable primarily to the
elimination of television advertising. Restaurant sales were also impacted by a
decline of $2.3 million due to the closure or sale of restaurants offset by
sales from restaurants opened during fiscal 1999. Our Denny's restaurants
increased comparable store sales by 1.7% during the third fiscal quarter of
2000.
FOOD AND BEVERAGE COSTS. Food and beverage costs increased to 27.4% of
restaurant sales for the thirteen-week period ended September 27, 2000 as
compared with 27.1% of restaurant sales for the thirteen-week period ended
September 29, 1999. This increase is due primarily to increases in pork, steak
and coffee costs.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs were
35.8% of restaurant sales for the thirteen-week period ended September 27, 2000
as compared with 34.5% of restaurant sales for the thirteen-week period ended
September 29, 1999. This increase was attributable primarily to the lower sales
volumes at the Black-eyed Pea restaurants and higher average wages generally,
both of which were partially offset by the closure of under-performing
restaurants.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, and other items was
$673,000 for the thirteen-week period ended September 27, 2000, as compared with
$1.8 million for the thirteen-week period ended September 29, 1999. In September
1999, we committed to a plan to sell all of our Denny's restaurants. In
accordance with SFAS No. 121, the assets of these restaurants were reclassified
as being held for sale and depreciation ceased. The decrease in depreciation and
amortization of $1.1 million is due primarily to the cessation of depreciation
on these assets.
OTHER RESTAURANT OPERATING EXPENSES. Other restaurant operating expenses
were 28.0% of restaurant sales for the thirteen-week period ended September 27,
2000 as compared with 31.0% of restaurant sales for the thirteen-week period
ended September 29, 1999. New store opening costs of approximately $-0- and
$611,000 were expensed when incurred in the third fiscal quarters of 2000 and
1999, respectively. Occupancy costs were reduced by $813,000 in the third fiscal
quarter of 2000 due to the renegotiation of an equipment lease in April 2000.
Excluding these items, other restaurant operating expenses would have been $16.2
million, or 29.5% of sales, for the thirteen-week period ended September 27,
2000 and $18.0 million, or 30.0% of sales, for the thirteen-week period ended
September 29, 1999. The remaining decrease of $1.8 million is due primarily to
the reduction in spending for television advertising at the Black-eyed Pea
restaurants.
RESTRUCTURING EXPENSE. In the third fiscal quarter of 2000, the Company
recorded a restructuring expense of $6.75 million comprised of $550,000 related
to three Black-eyed Pea restaurants which the Company anticipates closing by the
end of the fiscal year and $6.2 million related to the increase in the estimated
liabilities related to Black-eyed Pea and Denny's restaurants closed in prior
periods. The increase in estimated liabilities is the result of the Company's
determination that the costs associated with subleasing those properties will
exceed previous estimates.
12
<PAGE>
In the third fiscal quarter of 1999, the Company recorded a restructuring
expense of $8.3 million comprised of $3.0 million related to the closure of four
Black-eyed Pea restaurants and one Denny's restaurant during the quarter, $1.4
million to reflect the increase in estimated liabilities related to restaurants
closed in prior periods and $3.9 million related to 16 Denny's restaurants sold
in 1997 and 1998 for which the Company remains contingently liable for
equipment, leases, rents and property taxes as a result of bankruptcy filings by
two buyers.
CHARGE FOR IMPAIRED ASSETS. In the third fiscal quarter of 2000, the
Company recorded a charge of approximately $1.1 million for impaired assets
related to the Black-eyed Pea restaurant division. In the third fiscal quarter
of 1999, the Company recorded a charge of $5.5 million for impaired assets
related to the Denny's restaurant division.
RESTAURANT OPERATING (LOSS). Restaurant operating loss was $(3.7) million
or 6.7% of restaurant sales, for the thirteen-week period ended September 27,
2000, as compared with $(11.2) million, or 18.6% of restaurant sales, for the
thirteen-week period ended September 29, 1999. Restaurant operating loss
included restructuring expenses and charges for impaired assets of $7.8 million
and $13.8 million in fiscal 2000 and 1999, respectively.
ADMINISTRATIVE EXPENSES. Administrative expenses were $3.5 million, or 6.4%
of restaurant sales for the thirteen week period ended September 27, 2000 as
compared with $3.0 million or 5.0% of restaurant sales for the thirteen-week
period ended September 29, 1999. The increase of $490,000 was due primarily to
the settlement of an employment lawsuit along with increases in legal and
professional fees.
INTEREST EXPENSE - NET. Net interest expense was $2.9 million, or 5.3% of
restaurant sales, for the thirteen-week period ended September 27, 2000 as
compared with $3.3 million, or 5.4% of restaurant sales, for the thirteen-week
period ended September 29, 1999. The reduction in interest expense is due
primarily to deferred financing costs being completely amortized by the end of
1999 and no additional expense being incurred in 2000.
INCOME TAX (BENEFIT). We did not record additional tax expense (benefit)
associated with the operating loss in 2000 due to the uncertainty of the future
utilization of the deferred income tax asset.
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 27, 2000 COMPARED WITH THIRTY-NINE WEEK
PERIOD ENDED SEPTEMBER 29, 1999
RESTAURANT SALES. Restaurant sales decreased $15.9 million, or 8.7%, to
$166.9 million for the thirty-nine week period ended September 27, 2000 as
compared with restaurant sales of $182.8 million for the thirty-nine week period
ended September 29, 1999. This decrease was attributable primarily to a decline
in comparable store sales of $12.1 million for our Black-eyed Pea restaurants.
We believe the decrease in comparable store sales is attributable primarily to
the elimination of television advertising. Restaurant sales were also impacted
by a decline of $9.6 million due to the closure or sale of 16 restaurants offset
by sales from eight restaurants opened during 1999. Our Denny's restaurants
increased comparable store sales by 1.2% during the first three fiscal quarters
of 2000.
13
<PAGE>
FOOD AND BEVERAGE COSTS. Food and beverage costs increased to 27.3% of
restaurant sales for the thirty-nine week period ended September 27, 2000 as
compared with 27.1% of restaurant sales for the thirty-nine week period ended
September 29, 1999. This increase is due primarily to increases in pork, steak
and coffee costs.
PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs
increased to 34.9% of restaurant sales for the thirty-nine week period ended
September 27, 2000 as compared with 34.3% of restaurant sales for the
thirty-nine week period ended September 27, 1999. The increase in payroll costs
as a percentage of sales was attributable primarily to the lower sales volumes
at the Black-eyed Pea restaurants and higher average wages generally, both of
which were partially offset by the closing of underperforming restaurants.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant
equipment, leasehold improvements, intangible assets, and other items decreased
to $2.0 million for the thirty-nine week period ended September 27, 2000 as
compared with $5.2 million for the thirty-nine week period ended September 29,
1999. In September 1999, we committed to a plan to sell all of our Denny's
restaurants. In accordance with SFAS No. 121, the assets of these restaurants
were reclassified as being held for sale and depreciation ceased. The decrease
in depreciation and amortization of $3.2 million is due primarily to the
cessation of depreciation on these assets.
OTHER RESTAURANT OPERATING COSTS. Other restaurant operating costs were
27.0% of restaurant sales for the thirty-nine week period ended September 27,
2000 as compared with 29.0% of restaurant sales for the thirty-nine week period
ended September 29, 1999. New store opening costs of approximately $-0- and $1.2
million were expensed when incurred in the thirty-nine week periods ended
September 27, 2000 and September 29, 1999, respectively. Occupancy costs were
reduced by $1.6 million in the second and third fiscal quarters of 2000 due to
the renegotiation of an equipment lease in April, 2000. Excluding these items,
other restaurant operating expenses would have been $46.6 million, or 27.9% of
sales, for the thirty-nine-week period ended September 27, 2000 and $51.7
million, or 28.3% of sales, for the thirty-nine-week period ended September 29,
1999. The remaining decrease of $5.1 million is due primarily to the reduction
in spending for television advertising at the Black-eyed Pea restaurants.
RESTRUCTURING EXPENSE. In the first three fiscal quarters of 2000, the
Company recorded a restructuring expense of $6.75 million comprised of $550,000
related to three Black-eyed Pea restaurants which the Company anticipates
closing by the end of the year and $6.2 million related to the increase in the
estimated liabilities related to Denny's restaurants closed in prior periods.
The increase in the estimated liabilities is the result of the Company's
determination that the cost associated with subleasing those properties will
exceed previous estimates. In the first three fiscal quarters of 1999, the
Company recorded charges of $8.3 million comprised of $3.0 million related to
the closure of four Black-eyed Pea restaurants and one Denny's restaurant during
the third quarter, $1.4 million to reflect the increase in estimated liabilities
related to restaurants closed in prior periods and $3.9 million related to 16
Denny's restaurants sold in 1997 and 1998 for which the Company remains
contingently liable for equipment, leases, rents and property taxes as a result
of a pending bankruptcy filing by two buyers.
CHARGE FOR IMPAIRED ASSETS. In the first three fiscal quarters of 2000, the
Company recorded a charge of approximately $1.1 million for impaired assets
related to the Black-eyed Pea restaurant division. In the first three fiscal
quarters of 1999, the Company recorded a charge of $8.5 million for impaired
assets related to the Denny's restaurant division.
14
<PAGE>
RESTAURANT OPERATING INCOME (LOSS). Restaurant operating income (loss)
increased to $8.4 million, or 5.0% of restaurant sales, for the thirty-nine week
period ended September 27, 2000 as compared with $(4.5) million, or 2.4% of
restaurant sales, for the thirty-nine week period ended September 29, 1999.
Restaurant operating income (loss) included restructuring expenses and impaired
asset charges of $7.8 million and $16.8 million in 2000 and 1999, respectively.
ADMINISTRATIVE EXPENSES. Administrative expenses were $9.6 million, or 5.7%
of restaurant sales for the thirty-nine week periods ended September 27, 2000 as
compared with $8.8 million, or 4.8% of restaurant sales for the thirteen-week
period ended September 29, 1999. The increase of $783,000 was due primarily to
the settlement of an employment lawsuit along with increases in legal and
professional fees.
INTEREST EXPENSE - NET. Net interest expense was $8.8 million, or 5.3% of
restaurant sales, for the thirty-nine week period ended September 27, 2000 as
compared with $9.3 million, or 5.1% of restaurant sales, for the thirty-nine
week period ended September 29, 1999. The reduction in interest expense is
primarily due to deferred financing costs being completely amortized by the end
of 1999 and no additional expense being incurred in 2000.
INCOME TAX BENEFIT. We did not record tax expense (benefit) associated with
the operating loss in 2000 due to the uncertainty of the future utilization of
the deferred income tax asset.
EXTRAORDINARY ITEMS. The extraordinary items related to expensing of
certain deferred financing costs associated with the early payoff of certain
debt obligations.
LIQUIDITY AND CAPITAL RESOURCES
Our strategy has been to: (a) concentrate on developing the Black-eyed Pea
concept and building it's brand identity; (b) focus on restaurants that achieve
certain operational and geographic efficiencies; (c) sell or close
underperforming restaurants; and (d) refinance our indebtedness. We sold or
closed two Denny's and sixteen Black-eyed Pea restaurants in 1999 and one
Denny's and one Black-eyed Pea restaurant in the first three fiscal quarters of
2000. All of these restaurants were underperforming.
In October 1999, we retained CNL Advisory Services to act as our agent in the
sale of our remaining Denny's restaurants. In June 2000, we announced an
agreement to sell certain of our Denny's restaurants. We also announced the
receipt of letters of interest for the sale of the remaining Denny's
restaurants. Both the agreement and the purchase proposals were subject to usual
and customary conditions to closing, including buyer's satisfactory completion
of due diligence and buyer's obtaining financing for such transactions. The
agreement for sale of restaurants has expired on its terms, although discussions
regarding the purchase of restaurants are continuing with that party.
In October 2000, we reaffirmed our intent to move forward with the announced
strategy of selling our Denny's restaurants. We are at various stages of
discussions with several potential buyers for the restaurants. We anticipate
that the sale of certain Denny's restaurants will occur by the end of the fiscal
year and the sale of the remaining Denny's restaurants will occur by the end of
the first quarter of fiscal 2001. All such transactions are subject to usual and
customary conditions to closing. To the extent the sale of the Denny's occur, we
anticipate using the proceeds to reduce outstanding indebtedness along with
payment of the costs associated with the transactions.
15
<PAGE>
The assets and liabilities related to the Denny's restaurants have been reported
as net assets held for sale. We continue to review net assets held for sale to
determine whether events or changes in circumstances indicate that the carrying
value of the net assets may not be recoverable. 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.
We operate primarily on a cash basis with a relatively small amount of
receivables and inventory. Therefore, we believe that we are like many other
companies in the restaurant industry that operate with a working capital
deficit. Our working capital deficit was $14.1 million at September 27, 2000 and
$4.1 million at December 29, 1999. Our working capital deficit increased $10.0
million due primarily to a charge for impaired assets of $8.5 million which is
reflected in other current liabilities and the exchange of a current note
receivable and a long-term subordinated note payable in the first fiscal quarter
of 2000 (which is described in Note 2 to the Condensed Consolidated Financial
Statements included in Part II, Item 1 of this Quarterly Report on Form 10-Q.)
We anticipate that we will continue to operate with a working capital deficit.
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. From 1997 through 1999, we have
experienced net losses aggregating approximately $51.5 million, which includes
restructuring charges and asset impairment losses of $33.4 million. In the first
three fiscal quarters of 2000 there has been a net loss of $10.0 million. As a
result, at September 27, 2000, we had a shareholders' deficit of $40.4 million
and our current liabilities exceeded our current assets by $14.1 million. These
factors, among others, may indicate that at some point in the foreseeable
future, we will be unable to continue as a going concern.
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 we be unable to
continue as a going concern. Our continuation as a going concern depends upon
our ability to generate sufficient cash flow to meet our obligations on a timely
basis, to comply with the terms and covenants of our financing agreements, to
obtain additional financing or refinancing as may be required, and ultimately to
attain profitable operations. We are continuing our efforts to obtain additional
funds so that we can meet our obligations and sustain our operations. There can
be no assurance that additional financing will be available to us or available
on satisfactory terms.
On June 30, 1999, CNL APF Partners, LP acquired the remaining outstanding
indebtedness under our existing senior credit facility and advanced an
additional $5.4 million to us. As part of this transaction, we issued to CNL a
$20.1 million interim balloon note. In August 1999, this debt was modified to be
interest only through January 31, 2000. As of January 31, 2000 the entire
principal balance was due. We are currently in default on the note and have
classified it as a current liability. In May 2000, we entered into a non-binding
letter of intent with CNL to extend the maturity date of the note to September
30, 2000. We are currently negotiating an extension in the maturity date and
waiver of default on this note. We cannot provide assurance, however, that CNL
will agree to an extension or waiver or that other revisions of the payment
terms of the note that will be acceptable to us.
At June 28, 2000, we had outstanding $15.7 million book value of Series B 13%
Subordinated Notes due 2003. We are in default due to non-payment of interest
since March 31, 1997. As of September
16
<PAGE>
27, 2000 accrued and unpaid interest due to these holders totals $9.2 million.
Waivers for non-payment were received through June 1999 but not since that date.
No formal notice of default has been received. The par value of the Series B
Notes at September 27, 2000 is $16.8 million.
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). In 2000, restaurant sales declined in the second and third fiscal
quarters due to a change in the marketing program for Black-eyed Pea restaurants
and a reduction in the number of restaurants. 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.
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 menu prices to offset increases in operating
costs.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. This standard, as amended, is effective for the Company
on January 1, 2001. 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 do not anticipate that the effects of this pronouncement will
have a material impact on our reported operating results or our financial
position.
At September 27, 2000, 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.
FORWARD LOOKING STATEMENTS
The forward-looking statements included in this Form 10-Q relating to certain
matters involve risks and uncertainties, including the ability of management to
successfully implement its strategy for improving the performance of the
Black-eyed Pea restaurants, the ability of management to effect asset sales
consistent with projected proceeds and timing expectations, the results of
pending and threatened litigation, adequacy of management personnel resources,
shortages of restaurant labor, commodity price increases, product shortages,
adverse general economic conditions, adverse weather conditions that may affect
the Company's markets, turnover and a variety of other similar matters. Forward
looking statements generally can be identified by the use of forward looking
terminology such as "may", "will", "expect", "intend", "estimate", "anticipate",
"believe", or "continue" (or the negative thereof) or similar
17
<PAGE>
terminology. Actual results and experience could differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements as a result of a number of factors, including but not
limited to those discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations and under the caption "Special
Considerations" included in Part 1., Item 1., of the Company's Annual Report on
Form 10-K. Forward-looking information provided by the Company pursuant to the
safe harbor established under the Private Securities Litigation Reform Act of
1995 should be evaluated in the context of these factors. In addition, the
Company disclaims any intent or obligation to update these forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's business is highly competitive with respect to food quality,
concept, location, service and price. In addition, there are a number of
well-established food service competitors with substantially greater financial
and other resources when compared to the Company. The Company's Black-eyed Pea
restaurants have experienced declining customer traffic during the past three
years as a result of intense competition and a change in marketing strategy
regarding television advertising. The Company does not expect to be able to
significantly improve Black-eyed Pea's operating margins until it can
consistently increase its comparable restaurant sales.
The Company has assigned its leasehold interest to third parties with respect to
approximately 87 properties on which the Company remains contingently liable to
the landlord for the performance of all obligations of the party to whom the
lease was assigned in the event that party does not perform its obligations
under the lease. The assigned leases are for restaurant sites that the Company
has sold. The Company currently estimates that there will be no liability
associated with these assigned leases as of September 27, 2000.
The Company subleases four properties to others. The Company remains liable for
the leasehold obligations in the event these third parties do not make the
required lease payments. The sublet properties are former restaurant sites that
the Company has closed. The Company estimates its contingent liability
associated with these sublet properties as of September 27, 2000 to be
approximately $1.1 million.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Note 4 of the Notes to the Condensed Consolidated Financial Statements is
incorporated herein by this reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Effective October 11, 2000, Robert M. Langford was named the Company's Chairman,
Chief Executive Officer and Director. William J. Howard resigned as Interim
Chief Executive Officer and will remain with the Company as Executive Vice
President and Director.
Effective October 11, 2000, W. Craig Barber was named as the Company's President
and Director. William G. Cox formerly President and Chief Operating Officer will
continue as Chief Operating Officer and Director.
On October 18, 2000 we received notification from The American Stock Exchange
(AMEX) that AMEX intends to file an application to remove our securities from
listing and registration with AMEX. As previously disclosed, our common stock
has not maintained the minimum requirements for continued listing on the AMEX.
We have notified AMEX that we intend to appeal the decision to seek delisting.
However, there can be no assurance that an appeal of any action by AMEX to
delist our securities would be successful. The Company presently is exploring
alternative venues for the trading of its securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27.1 Financial Data Schedule.
(b) REPORTS ON FROM 8-K.
Not applicable.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHOENIX RESTAURANT GROUP, INC.
Dated: November 20, 2000 By: /s/ James C. Todd
------------------------------------
James C. Todd, Acting Chief
Financial Officer (Duly authorized
officer of the registrant, principal
financial and accounting officer)
20
