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 OCTOBERAPRIL 1, 19971998
Commission File Number 1-13226
DENAMERICA CORP.
----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-1861457
- ---------------------------------------- -------------------------------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7373 N. SCOTTSDALE ROAD
SUITE D-120, SCOTTSDALE AZ 85253 85253
- ----------------------------------------- ----------------------------------------------------------------- ----------
(address of principal executive offices) (zip code)
(602) 483-7055
--------------
(registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The number of shares of the issuer's class of common stock as of the latest
practicable date, is as follows:
13,437,77713,447,777 shares of Common Stock, $.10 par value, as of November 12, 1997.May 15, 1998.
- -------------------------------------------------------------------------------------------------------------------------------------------------
DENAMERICA CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBERAPRIL 1, 19971998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
January 1, 1997 and OctoberApril 1, 1997 ........................................1998 ........................ 3
Condensed Consolidated Statements of Operations -
13-Week PeriodPeriods ended OctoberApril 1, 1998 and
April 2, 1997 and 13-Week Period ended
October 2, 1996 and 39-Week Period ended October 1,
1997 and 40-Week Period ended October 2, 1996 .......... 5............................................ 4
Condensed Consolidated Statements of Cash Flows -
13-Week PeriodPeriods ended OctoberApril 1, 1998 and April 2, 1997 and 13-Week Period ended
October 2, 1996 and 39-Week Period ended October 1,
1997 and 40-Week Period ended October 2, 1996 .......... 6.... 5
Notes to Condensed Consolidated Financial Statements ........ 7......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 9.......................... 7
PART II.II OTHER INFORMATION ........................................... 18................................................. 11
SIGNATURES .................................................. 20................................................... 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In(Dollars In thousands)
January 1, October 1,
Assets 1997 1997
------ ---------- ----------
Current assets:
Cash and cash equivalents ......... $ 2,609 $ 975
Receivables ....................... 4,102 4,132
Inventories ....................... 3,520 3,557
Deferred income taxes ............. 2,955 3,268
Other current assets .............. 1,196 1,629
-------- --------
Total current assets ......... 14,382 13,561
-------- --------
Property and equipment, net ............ 65,535 57,957
Intangibles, net ....................... 80,113 79,902
Deferred financing costs, net .......... 3,801 4,302
Deferred income taxes .................. 7,174 7,174
Other assets ........................... 8,184 8,672
-------- --------
$179,189 $171,568
======== ========
December 31, April 1,
ASSETS 1997 1998
CURRENT ASSETS:
Cash and cash equivalents $ 1,267 $ 1,599
Receivables 3,192 2,087
Inventories 3,244 3,064
Other current assets 5,564 5,968
Assets held for sale 28,700 --
--------- ---------
Total current assets 41,967 12,718
PROPERTY AND EQUIPMENT, net 61,328 59,719
INTANGIBLE ASSETS, net 51,545 51,018
DEFERRED INCOME TAXES 5,312 5,312
OTHER ASSETS 10,112 9,925
--------- ---------
TOTAL $ 170,264 $ 138,692
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,511 $ 16,084
Accrued compensation 6,354 6,619
Accrued taxes 4,522 4,870
Other current liabilities 8,363 7,607
Current portion of long term debt 42,634 17,994
--------- ---------
Total current liabilities 78,384 53,174
LONG-TERM DEBT, LESS CURRENT PORTION 78,418 72,242
OTHER LONG TERM LIABILITIES 12,214 10,688
--------- ---------
Total liabilities 169,016 136,104
--------- ---------
SHAREHOLDERS' EQUITY
Common stock $.10 par value; authorized, 40,000,000 shares;
13,447,777 shares issued and outstanding 1,344 1,344
Additional paid-in capital 35,799 35,799
Accumulated deficit (35,895) (34,555)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 1,248 2,588
--------- ---------
TOTAL $ 170,264 $ 138,692
========= =========
See accompanying notes to condensed consolidated financial statements.statements .
3
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued (Unaudited)
(In thousands)
January 1, October 1,
Liabilities and Shareholders' Equity 1997 1997
------------------------------------ ---------- ----------
Current liabilities:
Accounts payable ......................... $ 18,202 $ 17,046
Accrued compensation and related costs ... 8,487 6,292
Accrued taxes ............................ 4,636 3,989
Other current liabilities ................ 8,424 6,433
Current portion of long-term debt and
obligations under capital leases ........ 7,662 7,935
--------- ---------
Total current liabilities ............... 47,411 41,695
--------- ---------
Long-term debt, less current portion ....... 94,132 94,957
Deferred rent and other .................... 14,732 13,119
--------- ---------
Total liabilities ....................... 156,275 149,771
--------- ---------
Minority interest in joint ventures ........ 786 --
--------- ---------
Shareholders' equity:
Common stock ............................. 1,340 1,342
Additional paid-in capital ............... 35,706 35,781
Accumulated deficit ...................... (14,918) (15,326)
--------- ---------
Total shareholders' equity .............. 22,128 21,797
--------- ---------
$ 179,189 $ 171,568
========= =========
See accompanying notes to condensed consolidated financial statements.
4
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Period ended Period ended
----------------------- ----------------------
October 2, October 1, October 2, October 1,
1996 1997 1996 1997
---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (40 weeks) (39 weeks)
Restaurant sales .............................. $ 84,599 $ 75,494 $ 163,772 $ 227,787
--------- --------- --------- ---------
Restaurant operating expenses:
Cost of food and beverage ................... 23,001 20,644 44,972 62,097
Payroll and payroll related costs ........... 28,069 25,637 55,485 77,998
Depreciation and amortization ............... 2,379 2,232 5,215 6,822
Other restaurant operating expenses ......... 22,030 19,892 42,104 61,567
--------- --------- --------- ---------
Total restaurant operating expenses ........ 75,479 68,405 147,776 208,484
--------- --------- --------- ---------
Restaurant operating income ................... 9,120 7,089 15,996 19,303
Administrative expenses ....................... 3,223 3,006 6,404 10,579
--------- --------- --------- ---------
Operating income .............................. 5,897 4,083 9,592 8,724
Interest expense, net ......................... 2,930 3,220 6,581 9,587
--------- --------- --------- ---------
Income (loss) before minority interest in joint
venture, income taxes, and extraordinary item 2,967 863 3,011 (863)
Minority interest in joint venture ............ (7) (23)13 Week Periods Ended
-----------------------
April 2, April 1,
1997 1998
RESTAURANT SALES $ 76,114 $ 72,880
-------- --------
RESTAURANT OPERATING EXPENSES:
Food and beverage cost 20,613 19,970
Payroll and payroll related costs 26,101 25,102
Depreciation and amortization 2,266 1,786
Other operating expenses 21,168 19,588
-------- --------
Total operating expenses 70,148 66,446
-------- --------
RESTAURANT OPERATING INCOME 5,966 6,434
ADMINISTRATIVE EXPENSES 3,744 3,056
-------- --------
OPERATING INCOME 2,222 3,378
INTEREST EXPENSE, net 3,203 3,426
-------- --------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (981) (48)
INCOME TAX BENEFIT (392) (17)
-------- --------
LOSS BEFORE EXTRAORDINARY ITEM (589) (31)
EXTRAORDINARY ITEM - GAIN ON EARLY
EXTINGUISHMENT OF DEBT - net of
income taxes of $914 -- 1,371
-------- --------
NET INCOME (LOSS) ($ 589) $ 1,340
======== ========
Basic and diluted income (loss) per share
Before extraordinary item ($ .04) ($ .00)
======== ========
Net income (loss) ($ .04) $ .10
======== ========
Basic and diluted weighted average shares
outstanding
Basic 13,424 13,447
Diluted 13,424 13,447
4 (184)
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item .......................... 2,974 886 3,007 (679)
Income tax (benefit) expense .................. 1,192 355 1,205 (271)
--------- --------- --------- ---------
Income (loss) before extraordinary item ...... 1,782 531 1,802 (408)
Extraordinary item - loss on
extinguishment of debt ...................... -- -- 497 --
--------- --------- --------- ---------
Net income (loss) income ...................... 1,782 531 1,305 (408)
Preferred stock dividend and accretion ........ -- -- 149 --
--------- --------- --------- ---------
Net income (loss) applicable to common
shareholders ................................. $ 1,782 $ 531 $ 1,156 ($ 408)
========= ========= ========= =========
Net income (loss) per common share
before extraordinary item ................... $ .13 $ .04 $ .15 ($ .03)
========= ========= ========= =========
Net income (loss) per common share ............ $ .13 $ .04 $ 0.10 ($ .03)
========= ========= ========= =========
Weighted average shares outstanding ........... 13,399 13,437 11,131 13,437
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
5
DENAMERICA CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Period ended Period ended
---------------------- ----------------------
October 2, October 1, October 2, October 1,
1996 1997 1996 1997
---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (40 weeks) (39 weeks)
Cash flows from operating activities:
Net income (loss) ............................ $ 1,782 $ 531 $ 1,305 ($ 408)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization ............. 2,379 2,232 5,215 6,822
Amortization of deferred financing costs .. 83 154 211 441
Minority interest in joint venture ........ (8) (356) 9 (518)
Deferred income taxes ..................... 549 313 547 (313)
Deferred rent - long term ................. 57 188 189 605
Other ..................................... 237 507 734 374
Changes in operating assets and liabilities:
Receivables ............................. 752 (786) (647) (30)
Inventories ............................. (54) 104 (602) (37)
Prepaid expenses and other assets ....... 188 397 (821) (433)
Accounts payable and accrued liabilities (1,432) (2,605) (2,444) (8,152)
-------- -------- -------- --------
Net cash provided by (used in)
operating activities .................. 4,533 679 3,696 (1,649)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment ........... (3,498) (2,261) (7,410) (5,267)
Purchase of intangibles ...................... (751) (198) (1,285) (1,696)
Payments for Acquisition of BEP and Merger,
net of cash acquired ........................ -- -- (231) --
Proceeds from the sale of assets ............. 2,422 1,774 2,422 8,508
-------- -------- -------- --------
Net cash (used in) provided by investing
activities .............................. (1,827) (685) (6,504) 1,545
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings, net .............................. -- 13,439 13,361 15,669
Dividends on preferred stock ................. -- -- (124) --
Principal reductions on long-term obligations (2,485) (13,592) (10,160) (17,276)
Issuance of Common Stock and other, net ...... (221) -- (269) 77
-------- -------- -------- --------
Net cash provided by financing activities . (2,706) (153) 2,808 (1,530)
-------- -------- -------- --------
Net change in cash and cash equivalents ... -- (159) -- (1,634)
Cash and cash equivalents at beginning of period -- 1,134 -- 2,609
-------- -------- -------- --------
Cash and cash equivalents at end of period ..... $ -- $ 975 $ -- $ 97513 Week Periods Ended
April 2, April 1,
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (589) $ 1,340
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,266 1,786
Amortization of deferred financing costs 125 247
Extraordinary item -- (1,371)
Deferred income taxes (392) (17)
Deferred rent 76 77
Other 20 (523)
Changes in operating assets and liabilities net of
dispositions:
Receivables 35 662
Inventories (206) 121
Other current assets 87 406
Accounts payable and accrued liabilities (6,012) (1,977)
-------- --------
Net cash provided by (used in)
operating activities (4,590) 751
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,478) (744)
Purchase of intangibles (1,185) (8)
Proceeds from the sale of assets 4,850 25,900
-------- --------
Net cash provided by investing
activities 2,187 25,148
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings, net 2,858 (900)
Principal reductions on long-term obligations (1,823) (24,667)
Other 49 --
-------- --------
Net cash provided by (used in) financing
activities 1,084 (25,567)
-------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (1,319) 332
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,609 1,267
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,290 $ 1,599
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,154 $ 2,268
======== ========
Income taxes $ -- $ 7
======== ======== ======== ========
Supplemental schedule of cash flow information:
Cash paid during period for:
Interest ..................................... $ 3,103 $ 2,480 $ 6,136 $ 7,960
======== ======== ======== ========
Income taxes ................................. $ 29 -- $ 76 --
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
65
DENAMERICA CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
(1) Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements of
DenAmerica Corp. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions torules and regulations of the Securities and Exchange
Commission Form 10-Q and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the Company's management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. However, these operating results are not
necessarily indicative of the results expected for the full year. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 1,December 31, 1997. Certain
reclassifications have been made in the 19961997 financial statements to conform to
the 19971998 presentation.
The three-monthCompany currently operates 207 family-oriented, full-service restaurants in
18 states, primarily in the southwestern, midwestern, western, and nine-month periods ended October 1, 1997, as explained
below, are not comparablesoutheastern
United States. The Company owns and operates 104 Black-eyed Pea restaurants,
primarily in Texas, Georgia, Arizona, Oklahoma, Florida, and the Washington,
D.C. area, and franchises to third parties the rights to operate three
Black-eyed Pea restaurants in two states. The Company also owns and operates 102
Denny's restaurants, which represents approximately 6.4% of the Denny's system
and makes the Company the largest Denny's franchisee in terms of revenue and the
number of restaurants operated.
(2) Other Matters
In March 1998, the Company completed the sale of 63 Denny's and eight
non-branded restaurants, of which six were closed, to a Denny's franchisee for
gross proceeds $28,700. Net cash proceeds of $25,200 were used to (i) repay the
promissory note (the "BEP Note") payable to the prior periods.
Mergers
On March 29, 1996, Denwest Restaurant Corp. ("DRC") merged with and into the
Company, with the Company being the surviving corporation (the "Merger"). Upon
consummation of the Merger, the Company changed its name from American Family
Restaurants, Inc. ("AFR") to DenAmerica Corp. The Merger has been accounted for
as a reverse purchase under generally accepted accounting principles as a result
of which DRC is considered to be the acquiring entity and AFR the acquired
entity for accounting purposes.
On July 3, 1996, the Company acquired all of the issued and outstanding common
stockseller of Black-eyed Pea U.S.A.,
Inc. ("BEP") at a $2,400 discount from BEP Holdings, Inc. ("BEP
Holdings") pursuantits outstanding principal amount of
approximately $15,285; (ii) cancel outstanding warrants to aacquire approximately
1,000,000 shares of Common Stock Purchase Agreement (the "BEP Acquisition"). In
accordance with the terms and conditionsat an exercise price of the Stock Purchase Agreement, the
effective accounting date of the BEP Acquisition was June 24, 1996.
In accordance with the accounting rules for a purchase and a reverse
acquisition, the consolidated financial statements presented herein are as
follows:
(i) Consolidated Statements of Operations of the Company for the
periods ended October 1, 1997 (which include the results of
operations of the Company following the Merger and the BEP
Acquisition) and October 2, 1996 (which include the results of
operations of the AFR restaurants since the March 27, 1996
accounting date of the Merger and the results of operations of
BEP since the June 24, 1996 accounting date of the BEP
Acquisition); and
7
(ii) Consolidated Statements of Cash Flows of the Company for the
periods ended October 1, 1997 (which include the results of
operations of the Company following the Merger and the BEP
acquisition) and October 2, 1996 (which include the results of
operations of the AFR restaurants since the March 27, 1996
accounting date of the Merger and the results of operations of
BEP since the June 24, 1996 accounting date of the BEP
Acquisition).
(2) Earnings Per Share
Earnings$1.90 per share, for the period ended October 2, 1996 has been
computed based upon the weighted average shares of (i) the Company's Common
Stock receivedwhich
were issued in connection with the Merger by the former shareholders of DRC
after deducting preferred stock dividends and accretion on preferred stock of
DRC outstanding prior to the Merger and (ii)BEP Note; (iii) permanently reduce the
Company's common stock
outstanding afterborrowings under the Merger. Earnings per share for the period ended October 1,
1997 has been computed based upon the weighted averageterm loan of the common shares
outstanding.
(3) Other Matters
On July 31, 1997,Credit Facility to
$1,500; and (iv) repay certain equipment operating leases associated with the
restaurants sold in this transaction. The Company has included the $2,400
discount on the BEP note as an extraordinary item in the accompanying financial
statements.
In a separate transaction completed in March 1998, the Company also sold its leasehold interestsfive
Denny's restaurants located in fourteen
Denny's and two non-Denny's restaurantsWyoming to an unrelated party for $2.1 million.
Proceeds from this transaction were used to repay $1.0 millioncash of
senior debt
obligations and for working capital purposes. In conjunction with this
transaction, the Company recognized$700,000 plus a gain of $250,000, which is included as a
reduction of other restaurant operating expenses.
On October 1, 1997 the Company purchased from a BEP franchisee certain
assets and leasehold interests in six Black-eyed Pea restaurants located in
Arizona. In connection with this transaction, the Company and the franchisee
settled certain threatened litigation. Under this settlement, the Company will
forego future royalty payments from thirteen franchised restaurants located in
Colorado operated by the franchisee. The effect of the loss of royalty income
will be partially offset by operating income from the restaurants acquired. In
conjunction with the closing of this transaction, CNL Group, Inc. and certain
affiliates ("CNL") acquired certain assets directly from the BEP franchisee and
entered into operating leases with the Company. The value of the leases exceeded
the purchase price, resultingnote in the Company receiving approximately $2.5
million in cash that has been recorded as a deferred gain to be amortized over
the lifeprincipal amount of the leases.
As described below, on October 1, 1997, the Company entered into a
series of transactions with CNL.$400,000. The Company utilized
the proceeds from these
transactions, which totaled approximately $25.0 million,this transaction to repay senior debt
obligationspermanently reduce its outstanding
borrowings under the term loan portion of the Company. The following is a summary of the transactions with
CNL:
A.its Credit Facility. The Company and CNL each hadhas
recorded a 50% interest in three joint
ventures,gain of approximately $575,000 on this transaction, which operated a total of 16 Denny's restaurants, of which nine
restaurant locations were leased from CNL.is included
as an offset to other operating expenses.
(3) Subsequent Event
On OctoberMay 1, 1997,1998, the Company
purchased CNL's 50% interest in these joint ventures and the land and buildings
for the nine Denny's restaurants for $12.1 million. Consideration consisted of a
$7.7 million promissory note, which amortizes over 10 years with an interest
rate of 9%, and a $4.4 million subordinated convertible debenture. The
subordinated convertible debenture bears interest of 5%, payable quarterly, and
is convertible at the holder's option through October 2002 into the Company's
common stock at 90% of the share price immediately prior to the conversion. The
Company subsequently entered into 15-year sale/leaseback arrangements with CNL
for the nine Denny's restaurants described above and received $8.0 million. No
gain or loss was recognized on these transactions.
8
B. The Company entered into equipment notes payablea letter of intent to merge with CNL
totaling approximately $12.5 million.Tech
Electro Industries, Inc. ("Tech Electro"). Under the terms of the letter of
intent, the Company's shareholders will receive $4.00 in
6
cash and $.90 in newly issued preferred stock in Tech Electro for each share of
the Company's Common Stock that they own. The notes payable are secured by certain
equipment located in 44 Denny's restaurants, bear interest at 10%,proposed merger is subject to
various contingencies including financing, negotiation and amortize
over a seven-year period. No gain or loss was recognized in connection with this
transaction.
C. The Company sold eight buildings located on ground leases
to CNL for proceedsexecution of
$4.6 milliondefinitive agreements, shareholder approval, regulatory approvals, and entered into operating leases for these
locations. No gain or loss was recognized on this transaction.other
matters.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Basis of Presentation
Upon consummation of the Merger with AFR, the former shareholders of
DRC owned an aggregate of approximately 53.0% of the outstanding voting power of
theOPERATIONS
General
The Company immediately following the Merger. Accordingly, the Merger has been
accounted for as a reverse purchase under generally accepted accounting
principles with an effective accounting date of March 29, 1996, the last day of
DRC's first quarter for fiscal 1996. In addition, on July 3, 1996 the Company
acquired all of the issued and outstanding common stock of BEP. The effective
accounting date of the BEP Acquisition was June 24, 1996.
The results of operations for the 1997 periods have been materially
impacted by the Merger and the BEP Acquisition. For the nine-month period ended
October 1, 1997, revenue and related expenses increased significantly over prior
years primarily as a result of these acquisitions. As a result, the 1997
operating results are not comparable to prior periods. In addition, the 1997
period contains thirty-nine weeks while the 1996 nine-month period contains
forty weeks.
General
As set forth below, the Company's restaurant operating income increased
by approximately $3.3 million and operating income decreased by approximately
$900,000 for the thirty-nine week period ended October 1, 1997 as compared with
the forty-week period ended October 2, 1996. For the thirteen-week period ended
October 1, 1997, restaurant operating income and operating income decreased by
approximately $2.0 million and $1.8 million, respectively, as compared with the
thirteen-week period ended October 2, 1996. The decrease in operating income for
the thirty-nine week period ended October 1, 1997 would have been approximately
$2.5 million without the gain on sale of restaurants of $900,000 and the gain on
other disposals of approximately $700,000 during this period. These changes
result primarily from the Merger and the BEP Acquisition, the additional week of
operating results in 1996, and the decline in same store sales in 1997, which
have negatively impacted the Company's operating results due to fixed cost
structure.
Denny's
For the thirteen-week period ended October 1, 1997, the Company
operated 176 Denny's restaurants in 31 states as compared with operating 182
Denny's restaurants in the comparable prior year period. In January 1996, the
Company and Denny's, Inc. adopted the "Breakaway Breakfast" value pricing
promotion, which offered five breakfast items for $1.99 or less. In September
1996, the Company withdrew from the Breakaway Breakfast and increased the price
of the Grand Slam breakfast to $2.99. The withdrawal from the Breakaway
Breakfast resulted in the decline of comparable Denny's restaurant sales of 5.8%
during the thirty-nine week period ending October 1, 1997 compared with the
prior year. The average guest check increased from $4.97 in the third quarter
1996 to $5.21 for the
9
third quarter of 1997; however, guest counts for the same period declined. In
order to mitigate the possible material negative impact of the continued decline
in the Denny's sales levels, the Company has adopted a selective restaurant
disposition strategy described below.
Black-eyed Pea
For the thirteen-week period ended October 1, 1997, the Company
operated 92currently operates 104 Black-eyed Pea restaurants in 1314 states and
franchised 25 Black-eyed
pea restaurants in 5 states, as compared with operating 99franchises three Black-eyed Pea restaurants in the comparable prior year period. As previously described, the
Company purchased six franchised restaurant locations in Arizona during the
third quarter of 1997. The Company also opened three new Black-eyed Pea
restaurants during the third quarter of fiscal 1997. Subsequent to October 1,
1997, the Company opened an additional one restaurant in its core market of
Texas and has five locations in various stages of development. In addition, the
Company is under contract to purchase three restaurant locations in the Orlando,
Florida market from its Flordia franchisees.two states. The Company operates
6466 Black-eyed Pea restaurants in Texas and Oklahoma, which the Company considers
to be its core market for Black-eyed Pea restaurants. For the thirty-nine week period ended OctoberThrough April 1, 1997,1998,
comparable same-store sales decreased 4.6%3.0% for all of the Company's Black-eyed
Pea restaurants. Comparablerestaurants, while comparable same-store sales decreased 1.7% for Black-eyed
Pea restaurants in the core market decreased only 2.5%,
however, during the thirty-nine week period ended October 1, 1997.market. The guest check average at the Company's
Black-eyed Pea restaurants is approximately
$7.90. Forfor the thirdfirst quarter of 1997,1998 was $7.90, and alcohol
and carry-out sales accountedaccount for approximately 2.0%2.1% and 11.2%, respectively,11.0% of total sales,
atrespectively.
As of April 1, 1998, the Company's
Black-eyed Pea restaurants.
10
Company operated 102 Denny's restaurants in 18 states.
Comparable store sales increased 1.0% as a result of an increase in the average
guest check to approximately $5.30 in March 1998.
COMPARISON OF RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items
in the condensed consolidated statements of operations as a percentage of total
restaurant sales.
As discussed above, as a result of the MergerApril 2, April 1,
1997 1998
---------- ----------
(13 weeks) (13 weeks)
Restaurant sales 100.0% 100.0%
Restaurant operating expenses:
Food and BEP
Acquisition, these results are not comparable.
Period ended Period ended
---------------------- ----------------------
October 2, October 1, October 2, October 1,
1996 1997 1996 1997
---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (40 weeks) (39 weeks)
Restaurant sales: .......................... 100.0% 100.0% 100.0% 100.0%
Restaurant operating expenses:
Cost of food and beverages .............. 27.2 27.4 27.5 27.3
Payroll and payroll related costs ....... 33.2 34.0 33.9 34.2
Depreciation and amortization ........... 2.8 3.0 3.2 3.0
Other restaurant operating cost ......... 26.0 26.2 25.7 27.0
----- ----- ----- -----
Total restaurant operating expenses . 89.2 90.6 90.3 91.5
----- ----- ----- -----
Restaurant operating income ................ 10.8 9.4 9.7 8.5
Administrative expenses .................... 3.8 4.0 3.9 4.6
----- ----- ----- -----
Operating income ........................... 7.0 5.4 5.8 3.9
Interest expense ........................... 3.5 4.2 4.0 4.2
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item ....................... 3.5 1.2 1.8 (.3)
Income tax expense (benefit) ............... 1.4 .5 0.7 (.1)
----- ----- ----- -----
Income (loss) before extraordinary item .... 2.1 .7 1.1 (.2)
Extraordinary item - loss on extinguishment
of debt ............................. -- -- 0.3% --
----- ----- ----- -----
Net income (loss) .......................... 2.1% .7% 0.8% (.2)%
===== =====beverage cost 27.1 27.4
Payroll and payroll related costs 34.3 34.4
Depreciation and amortization 3.0 2.5
Other operating cost 27.8 26.9
----- -----
Total operating expenses 92.2 91.2
----- -----
Restaurant operating income 7.8 8.8
Administrative expenses 4.9 4.2
----- -----
Operating income 2.9 4.6
Interest expense 4.2 4.7
----- -----
Loss before income taxes and
extraordinary item (1.3) (.1)
Income tax (benefit) (.5) (.1)
----- -----
Loss before extraordinary item (.8) (.0)
Extraordinary item -- 1.9
----- -----
Net income (loss) (.8)% 1.9%
===== =====
7
THIRTEEN-WEEK PERIOD ENDED OCTOBERAPRIL 1, 19971998 COMPARED WITH THIRTEEN-WEEK PERIOD
ENDED OCTOBERAPRIL 2, 19961997
Restaurant sales. Restaurant sales decreased $9.1$3.2 million, or 11%4.2%, to
$75.5$72.9 million for the thirteen-week period ended OctoberApril 1, 19971998 as compared with
restaurant sales of $84.6$76.1 million for the thirteen-week period ended OctoberApril 2,
1996.1997. This decrease was primarily attributable to the sale or closure of certain
underperforming restaurants during fiscal 1997. Restaurant sales attributable to
the Black-eyed Pea restaurants for the 1998 and same-store sales decline
Cost of1997 period totaled 49% and 42%,
respectively.
Food and Beverage. Cost of foodBeverage Cost. Food and beverage cost increased to 27.4% of
restaurant sales for the thirteen-week period ended OctoberApril 1, 19971998 as compared
with 27.2%27.1% of restaurant sales for the thirteen-week period ended OctoberApril 2, 1996,1997,
primarily as the result of several promotional programs
implemented in July 1997.higher food costs associated with the operation of
the Black-eyed Pea restaurants.
Payroll and Payroll Costs. Payroll and payroll related costs were 34.0%34.4%
of restaurant sales for the thirteen-week period ended OctoberApril 1, 19971998 as compared
with 33.2%34.3% of restaurant sales for the thirteen-week period ended OctoberApril 2, 1996.1997.
This increase was primarily attributable to the increased cost
of health insurance benefits for the Denny's restaurant employees, as well as the impact of minimum wage rate
increases.
Depreciation and Amortization. Depreciation and amortization of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs, and other items was $2.2$1.8 million, or 2.5% of restaurant sales, for the
thirteen-week period ended April 1, 1998, as compared with $2.3 million, or 3.0%
of restaurant sales, for the thirteen-week period ended October 1, 1997, whichApril 2, 1997. This
decrease is comparableattributable to $2.4 million,
or 2.8%a decrease in the amortization of restaurant sales, forstore opening
costs and the thirteen-week period ended October 2, 1996.reduction of depreciation and amortization associated with the
restaurants sold in March 1998.
Other Restaurant Operating Costs. Other restaurant operating costs were
26.2%26.9% of restaurant sales for the thirteen-week period ended OctoberApril 1, 19971998 as
compared with 26.0%27.8% of restaurant sales for the thirteen-week period ended OctoberApril
2, 1996.1997. Included in the 19971998 results is a gain of $250,000$575,000 relating to the sale
of a non-branded restaurant. Excluding this gain, other restaurant
operating costs, expressed as percentage of revenue, would have been 26.7%. This
increase was primarily attributable to the increased restaurant operating costs
associated with restaurants acquired as a result of the BEP acquisition (where
other restaurant operating costs as a percentage of revenue are higher than
Denny's operating costs) and a decrease in comparable same-store sales in the
Company's Denny's restaurants.
Restaurant Operating Income. Restaurant operating income decreased $2.0
million to $7.1 million for the thirteen-week period ended October 1, 1997, as
compared with $9.1 million for the thirteen-week period ended October 2, 1996.
This decrease was principally the result of the factors described above.
Administrative Expenses. Administrative expenses were $3.0 million, or
4.0% of restaurant sales, for the thirteen-week period ended October 1, 1997,
which is comparable with $3.2 million, or 3.8% of restaurant sales, for the
thirteen-week period ended October 2, 1996.
Interest Expense. Interest expense was $3.2 million, or 4.2% of
restaurant sales, for the thirteen-week period ended October 1, 1997 as compared
with $2.9 million, or 3.5% of restaurant sales, for the thirteen-week period
ended October 2, 1996. The increase is the result of amortization of warrants
issued in connection with the BEP Acquisition and the increase in outstanding
capital lease obligations.
12
Income Tax Expense. The Company recorded an income tax expense of
approximately $355,000, an effective rate of 40%, for the thirteen-week period
ended October 1, 1997 as compared with income tax expense of approximately $1.2
million, or an effective rate of 40%, for the thirteen week period ended October
2, 1996.
Net Income. The Company recorded net income of approximately $531,000
for the thirteen week period ended October 1, 1997 as compared with net income
of $1.8 million for the thirteen-week period ended October 2, 1996, as a result
of the factors described above.
THIRTY-NINE WEEK PERIOD ENDED OCTOBER 1, 1997 COMPARED WITH FORTY- WEEK PERIOD
ENDED OCTOBER 2, 1996
Restaurant sales. Restaurant sales increased $64.0 million, or 39.1%,
to approximately $227.8 million for the thirty-nine week period ended October 1,
1997 as compared with restaurant sales of $163.8 million for the forty-week
period ended October 2, 1996. This increase was primarily attributable to the
Merger and the BEP Acquisition.
Cost of Food and Beverage. Cost of food and beverage decreased to 27.3%
of restaurant sales for the thirty-nine week period ended October 1, 1997 as
compared with 27.5% of restaurant sales for the forty-week period ended October
2, 1996, primarily as the result of discontinuing several Denny's promotional
programs implemented in January 1996 and the conversion or sale of certain of
the Company's non-branded restaurants.
Payroll and Payroll Costs. Payroll and payroll related costs were 34.2%
of restaurant sales for the thirty-nine week period ended October 1, 1997 as
compared with 33.9% of restaurant sales for the forty week period ended October
2, 1996. This increase was primarily attributable to the costs of group
insurance benefits provided to employees of the Company's Denny's restaurants,
as well as the impact of minimum wage increases.
Depreciation and Amortization. Amortization and depreciation of
restaurant equipment, leasehold improvements, intangible assets, pre-opening
costs and other items decreased to 3.0% of restaurant sales for the thirty-nine
week period ended October 1, 1997 as compared with 3.2% of restaurant sales for
the forty-week period ended October 2, 1996. The increase of $1.6 million was
primarily attributable to the amortization of intangible assets associated with
the 1996 acquisitions and an increase of $600,000 in amortization of pre-opening
costs.
Other Restaurant Operating Costs. Other restaurant operating costs were
27.0% of restaurant sales for the thirty-nine week period ended October 1, 1997
as compared with 25.7% of restaurant sales for the forty-week period ended
October 2, 1996. Included in the 1997 results is a gain of $1.7 million relating
to the sale of restaurants and other assets. Excluding this gain, other restaurant operating costs, expressed
as a percentage of revenue, would have been 27.8%27.7%. This increasedecrease was primarily
attributable to increasedthe restaurant operating costs associated with Black-eyed Pea
restaurants acquired as a result of the BEP
Acquisition (where other restaurant operating costs as a percentage of revenues
are higher than Denny's operating costs), a decreaseand an increase in comparable same storesame-store sales in the Company's
Denny's restaurants, and the impact of a thirty-nine week
operating period in 1997 versus a forty-week operating period in 1996.
13
restaurants.
Restaurant Operating Income. Restaurant operating income increased $3.3
million to
approximately $19.3$6.4 million for the thirty-nine weekthirteen-week period ended OctoberApril 1, 1997,1998, as compared with
$16.0$6.0 million for the forty-weekthirteen-week period ended OctoberApril 2, 1996.1997. This increase was
principally the result of the factors described above.
Administrative Expenses. Administrative expenses increased to 4.6% of
restaurant sales for the thirty-nine week period ended October 1, 1997 as
compared with 3.9% of restaurant sales for the forty- week period ended October
2, 1996. This increase was primarily the result of declining same store-sales,
the impact of the thirty-nine week operating period in 1997 versus a forty-week
operating period in 1996, as well as the greater administrative support required
as a franchisor as opposed to operating solely as a franchisee.
Interest Expense. Interest expense was $9.6were $3.1 million, or
4.2% of restaurant sales, for the thirty-nine weekthirteen-week period ended OctoberApril 1, 19971998,
which is a decrease of $700,000 as compared with $6.6 million, or 4.0%4.9% of restaurant sales for
the forty weekthirteen-week period ended OctoberApril 2, 1996.1997. This decrease is attributable to
the sale of certain restaurants during 1997 and the division and restructuring
of administration functions between the Company's Black-eyed Pea and Denny's
restaurant concepts.
Interest Expense. Interest expense was $3.4 million, or 4.7% of
restaurant sales, for the thirteen-week period ended April 1, 1998 as compared
with $3.2 million, or 4.2% of restaurant sales, for the thirteen-week period
ended April 2, 1997. The increase is the result of the increased level
of long-term debt associated with the 1996 acquisitions.increase in outstanding
capital lease obligations.
8
Income Tax Expense (Benefit).Benefit. The Company recorded an income tax benefit of
approximately $271,000,$17,000, or an effective rate of 35%, for the thirteen-week period
ended April 1, 1998 as compared with an income tax benefit of approximately
$392,000, or an effective rate of 40%, for the thirty-ninethirteen week period ended October 1, 1997 as compared with income tax expense of
approximately $1.2 million, an effective rate of 40%, for the forty week period
ended OctoberApril
2, 1996.1997.
Net Income (Loss)(loss). The Company recorded net income of approximately
$1.3 million for the thirteen week period ended April 1, 1998 as compared with a
net loss of approximately
$408,000$589,000 for the thirty-nine weekthirteen-week period ended October 1,April 2, 1997, as compared with
net income of $1.2 million after the extraordinary item for the forty week
period ended October 2, 1996, as a
result of the factors described above.above and the extraordinary gain associated with
the early extinguishment of debt.
Liquidity and Capital Resources
The Company, and the restaurant industry generally, receives substantially all
of its revenuesrevenue in cash with a relatively small amount of receivables. Therefore,
like many other companies in the restaurant industry, the Company operates with
a working capital deficit. The Company's working capital deficit was $28.1$40.5
million at OctoberApril 1, 19971998 and $33.0$36.4 million at January 1, 1997. The Company
believes that it has funded the excessive working
capital deficit acquired in the Merger and that its current working capital deficit is consistent with the working
capital position of restaurant operators of similar size. The Company
anticipates that it will continue to operate with a working capital deficit.
Over the past three quarters, the Company has converted ten non-Denny's
and non-Black-eyed Pea restaurants to the Denny's concept. In addition, during
1997 the Company has closed ten restaurants that were not achieving designated
cash flow requirements. The Company intends to continue to evaluate its existing
restaurant portfolio and to close or sell restaurants as appropriate. As
described above, the Denny's operating results have been negatively impacted by
same-store sales declines. The Company intends to pursue a strategy to lessen
its dependence on the Denny's brand and has identified certain geographic
markets where restaurants are available for disposition. Proceeds from such
dispositions will be used to retire debt and to reduce the working capital
deficit. As part of this strategy, in April 1997 the Company sold eleven
non-branded restaurants for cash and notes totaling $850,000, and in July 1997
the Company sold fourteen Denny's and two non-Denny's restaurants to an
unrelated party for $2.1 million. These transactions resulted in a gain of
$900,000, which has been included in the accompanying financial statements as a
reduction of other restaurant operating expenses.
14
The Company intends to continue to expand the number of its Black-eyed
Pea restaurants in its core market through the development of new restaurants.
To date in 1997, the Company has opened four new Black-eyed Pea restaurants and
purchased six franchised restaurants located in Arizona, including the
associated development rights, and has entered into an agreement to purchase
three franchised restaurants located in Florida. The Company believes that the
Arizona market provides significant growth opportunities. These acquisitions are
a part of an overall settlement of threatened litigation by these franchisees.
Under the Arizona agreement, the Company will forego future royalty payments
from an additional thirteen franchise restaurants located in Colorado in
exchange for various releases and indemnifications. The loss of royalty income
will be partially offset by operating income from the restaurants acquired.
The Company historically has satisfied its capital requirements through credit
facilities and sale/leaseback financing. The Company requires capital
principally for the development of new restaurants and to fund the acquisition
and conversion of existing restaurants. Expenditures for property and equipment
and intangibles totaled approximately $2.5 million and $7.0 million for the
thirteen-week and thirty-nine week periods ended October 1, 1997, respectively.
The Company currently has commitments for approximately $40.0 million of
sale-leaseback financing through August 1998, whichCurrently, the Company believes will be
adequate to meet its financing needs during that period.
The Company believes that its future capital requirements will be
primarily for theis in various
stages of development of new restaurants, for continued restaurant
acquisitions, and for conversion of restaurants to the Denny's ornine Black-eyed Pea concepts.restaurants, which it expects to
open during 1998. The Company estimates that its costs to develop and open new
Denny's
and Black-eyed Pea restaurants,restaurant, excluding real estate and building costs, will be
approximately $350,000 to $450,000 per restaurant, andrestaurant. The Company believes that its
costsfinancing commitments will be adequate to meet its financing needs during the
remainder of 1998.
Net cash provided by (used in) operating activities increased from ($4.6
million) in the first thirteen weeks of 1997 to $.8 million in the first
thirteen weeks of 1998. This increase is attributable to improved restaurant
operations.
Net cash provided by investing activities increased from $2.2 million in the
first thirteen weeks of 1997 to $25.2 million in the first thirteen weeks of
1998. This change primarily is attributable to the sale of certain restaurants
in March 1998.
Net cash provided by (used in) financing activities decreased from $1.1 million
in the first thirteen weeks of 1997 to ($25.6 million) in the first thirteen
weeks of 1998. Cash (used in) financing activities arose primarily from the
principal reductions in long-term debt.
In March 1998, the Company completed the sale of 63 Denny's and eight
non-branded restaurants, of which six were closed, to a Denny's franchisee for
gross proceeds $28,700. Net cash proceeds of $25,200 were used to (i) repay the
promissory note (the "BEP Note") payable to the seller of Black-eyed Pea U.S.A.,
Inc. ("BEP") 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 Common Stock at an exercise price of $1.90 per share, which
were issued in connection with the BEP Note; (iii) permanently reduce the
Company's outstanding borrowings under the term loan of the Credit Facility to
$1,500; and (iv) repay certain equipment operating leases associated with the
conversionrestaurants sold in this transaction. The Company has included the $2,400
discount on the BEP note as an extraordinary item in the accompanying financial
statements.
9
In March 1998, the Company sold five Denny's restaurants for cash and notes
totaling $1.1 million, to an unrelated party. This transactions resulted in a
gain of $575,000, which has been included in the accompanying financial
statements as a non-brandedreduction of other restaurant operating expenses. In addition,
over the past quarter, the Company has closed five Denny's restaurants that were
not achieving designated cash flow requirements. The Company intends to the Denny's
concept will be approximately $160,000continue
to $450,000 per restaurant.evaluate its existing restaurant portfolio and to close or sell restaurants
as appropriate. The Company was not in compliance with certain of its debt
covenants at OctoberApril 1, 1997, for which the1998 and has reclassified its senior bank debt as current.
The Company has not received waivers. In addition,
certain holders of the Series B Notes agreed to defer the interest due as of
September 30, 1997 until March 31, 1998.
Net cash provided by (used in) operating activities decreased from $3.7
millionwaivers, but is currently working with its Senior
Lenders and anticipates receiving them in the first forty-weeks of 1996 to ($1.6 million) in the first
thirty-nine weeks of 1997. This decrease is attributable to a reduction of
accounts payable, the payment of property taxes, and costs associated with the
closing and conversion of certain restaurants.
Net cash (used in) provided by investing activities increased from
($6.5 million) in the first forty-weeks of 1996 to $1.5 million in the first
thirty-nine weeks of 1997. This change primarily is attributable to the disposal
of approximately $5.2 million of various assets acquired in the BEP Acquisition.
Net cash provided by (used in) financing activities decreased from $2.8
million in the first forty-weeks of 1996 to ($1.5 million) in the first
thirty-nine weeks of 1997. Cash (used in) financing activities arose primarily
from the proceeds of borrowing activities, net of the principal reductions in
long-term debt.
15
shortly.
Seasonality
The Company's operating results fluctuate from quarter to quarter as a result of
the seasonal nature of the restaurant industry, the temporary closing of
existing restaurants for conversion, and other factors. The Company's restaurant
sales are generally greater in the second and third fiscal quarters (April
through September) than in the first and fourth fiscal quarters (October through
March). Occupancy and other operating costs, which remain relatively constant,
have a disproportionately negative effect on operating results during quarters
with lower restaurant sales. The Company's working capital requirements also
fluctuate seasonally, with its greatest needs occurring during its first and
fourth quarters.
Inflation
The Company does not believe that inflation has had a material effect on
operating results in past years. Although increases in labor, food or other
operating costs could adversely affect the Company's operations, the Company
generally has been able to modify its operating procedures or to increase prices
to offset increases in its operating costs.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", effective for both interim and annual periods ending after December
15, 1997. This statement specifies the computation, presentation and disclosure
of earnings per share for entities with publicly held common stock or potential
common stock. The Company will provide the required disclosures in its year-end
report. The effect on the Company's earning per share disclosure will not be
material for the periods presented.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 31, 1997.
The statement changes the reporting of certain items currently reported in the
stockholders' equity section of the balance sheet and establishes standards for
reporting of comprehensive income and its components in a full set of general
purpose financial statements. The Company does not expect this standard to have
a material effect on the its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 31, 1997. This standard requires segments
of a business enterprise to be reported based on the way management organizes
and evaluates segments within the company. The standard also requires
disclosures regarding products and services, geographical areas and major
customers. The Company currently is evaluating the impact of this standard on
its disclosures.
The Company plans to adopt both SFAS No. 130 and No. 131 in 1998.
16
Forward Looking Statements
This Report on Form 10-Q contains forward-looking statements, including
statements regarding the Company's business strategies, the Company's business,
and the industry in which the Company operates. These forward-looking statements
are based primarily on the Company's expectations and are subject to a number of
risks and uncertainties, some of which are beyond the Company's control. Actual
results could differ materially from the forward-looking statements as a result
of numerous factors, including those set forth in Item 1 - "Special
Considerations" in the Company's Annual Report on Form 10-K for the fiscal year
ended January 1,December 31, 1997.
1710
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1997 the Company filed a lawsuit against Beck Holdings,
Inc. f/k/a/ BEP Holdings, Inc., and Unigate Holdings, N.V. (the "defendants") in
the United States District Court for the District of Arizona (Civil Action No.
CIV 97-1546 PHX RGS). The lawsuit alleged that the defendants breached a stock
purchase agreement and guaranty and violated Sections 10(b) and 20(a) and Rule
10b-5 of the Securities Exchange Act of 1934, as well as A.R.S. Sections 44-1991
et seq. (the Arizona securities fraud statute). The lawsuit also asserted common
law claims for breach of the implied covenant of good faith and fair dealing,
fraudulent misrepresentation and negligent misrepresentation. All of these
claims related to the Company's July 3, 1996 acquisition of the outstanding
capital stock of BEP and the defendants' failure to indemnify the Company in
connection with a settlement the Company reached in July 1997 with Arizona and
Colorado Black-eyed Pea restaurant franchisees. As part of the settlement with
these franshisees, the Company agreed to acquire six Arizona Black-eyed Pea
restaurants for a purchase price of $3.25 million. Other claims included in the
lawsuit involved alleged misrepresentations made by the defendants in connection
with the 1996 acquisition of BEP.
On September 30, 1997, the Company, BEP, and the defendants agreed to
settle this lawsuit. As part of the settlement, the Company has the option to
repurchase the promissory note issued to Beck Holdings, Inc. in connection with
the purchase of BEP (the "BEP Purchase Note") for approximately $13.0 million on
or before March 27, 1998. The BEP Purchase Note had an outstanding principal
amount of approximately $15.3 million as of September 30, 1997. In addition, the
common stock purchase warrant issued to Beck Holdings, Inc. was amended to
provide that (i) the warrant will not become exercisable until April 1, 1998,
and (ii) if any or all of the BEP Purchase Note is repaid on or before March 31,
1998, the warrant will be canceled pro rata based on the amount of the
outstanding principal that is repaid. As part of the settlement, the Company and
BEP on the one hand and the defendants on the other hand released one another
for any injury, damage, or loss arising directly or indirectly from the
Company's purchase of BEP, including claims that may be brought in the future by
past, present, or future Black-eyed Pea franchisees. The terms of the release do
not, however, relieve the defendants from their obligations to indemnify the
Company and BEP with respect to claims made by former Black-eyed Pea franchisees
whose status as a franchisee terminated prior to the Company's purchase of BEP.
On October 23, 1997, the court issued its final order dismissing the lawsuit
with prejudice.None
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
18
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1A Articles10.73A Amendment Agreement dated as of Amendment toJanuary 1, 1998, between DenAmerica
Corp. and William G. Cox, amending the Articles of Incorporation of
DenAmerica Corp., as filed on July 2, 1997.
10.92.BEmployment Agreement dated
December 8, 1995, between American Family Restaurants, Inc. and
William G. Cox.
10.92C Amendment and Limited Consent and Waiver dated as of September
30, 1997March 25, 1998
among DenAmerica Corp., the Banks (as defined), and Banque Paribas,
as agent.
10.111 Loan and Security10.116 Asset Purchase Agreement dated as of September 30, 1997 by
andJanuary 27, 1998, among DenAmerica
Corp., CNL GrowthOlajuwon Holdings, Inc., and Akinola Olajuwon (1).
10.117 First Amendment to Asset Purchase Agreement dated March 16, 1998
between DenAmerica Corp., Midsouth Foods
I, Ltd.Olajuwon Holdings, Inc., and Midsouth Foods II, Ltd.
10.112 5-Year 5% Convertible Redeemable DebentureAkinola
Olajuwon (1).
10.118 Promissory Note dated September 30,
1997March 25, 1998, from Olajuwon Holdings, Inc.
to DenAmerica Corp. in the principal amount of $4,400,000.
10.113 Subordinated Promissory$1,700,000 (1).
10.119 Negative Working Capital Note dated September 30, 1997date March 25, 1998, from Olajuwon
Holdings, Inc. to DenAmerica Corp. in the principal amount of
$7,700,000.
10.114 Registration Rights$1,700,000 (1).
10.120 Executive Employment Agreement dated as of September 30,December 27, 1997,
between DenAmerica Corp., and CNL Growth Corp.
10.115 AgreementTodd S. Brown.
27.1 Financial Data Schedule.
(1) Incorporated by reference to exhibits to the Registrant's Current
Report on Form 8-K as filed on April 9, 1998.
(b) Reports on Form 8-K
On April 9, 1998, the Company filed a Current Report on Form 8-K
dated asMarch 25, 1998, reporting the sale of September 30, 1997 by63 Denny's restaurants
and among
DenAmerica Corp., Beck Holdings, Inc. and Unigate Holdings,
NV.
11.1 Statement regarding computation of per share income
27.1 Summary Financial Information
19eight non-branded restaurants.
11
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.
DENAMERICA CORP.
Dated: November 14, 1997May 15, 1998 By: /s/ Todd S. Brown
-------------------------------------------------------
Todd S. Brown
Vice President, Chief Financial
Officer, and Treasurer
(Duly authorized officer of the
registrant, principal financial
and accounting officer)
2012