UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-4377
SHONEY'S, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0799798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1727 ELM HILL PIKE, NASHVILLE, TN 37210
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 391-5201
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- ---------------------
Common Stock, par value $1 per share New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Liquid Yield Option Notes, Due 2004 New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to Form 10-K. [X]
As of January 20, 2000, there were 44,409,767 shares of Shoney's, Inc.,
$1 par value common stock held by non-affiliates with an aggregate market
value of $55,512,209.
As of January 20, 2000, there were 50,515,011 shares of Shoney's, Inc.,
$1 par value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated
Document Into
- -------- ------------
Portions of the Definitive Proxy Statement for Annual
Meeting of Shareholders on March 28, 2000, to be filed
with the Securities and Exchange Commission (the
"Commission") within 120 days after the fiscal year ended
October 31, 1999 (hereinafter the "2000 Proxy Statement") Part III
INDEX
Page
Referenced
Form 10-K
----------
PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 4A. Executive Officers of the Registrant 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 55
PART III
Item 10. Directors and Executive Officers of the Registrant 55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management 55
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 55
Signatures 57
The forward-looking statements included in this Form 10-K relating to certain
matters involve risks and uncertainties, including the ability of management
to successfully implement its strategy for improving Shoney's Restaurants
performance, 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 effect the
Company's markets, turnover and a variety of other similar matters. 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
MD&A and under the caption "Risk Factors" herein. 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.
PART I
ITEM 1. BUSINESS.
As of October 31, 1999, Shoney's, Inc. (the "Company") operated and
franchised a chain of 1,106 restaurants in 28 states. The Company was
incorporated under the laws of the State of Tennessee on November 1, 1968.
The Company is a diversified food service chain that consists of three
restaurant divisions: Shoney's Restaurants, Captain D's and a Casual Dining
Group. Shoney's Restaurants are family dining restaurants offering full table
service and a broad menu, and Captain D's are quick-service restaurants
specializing in seafood. The Casual Dining Group consists of two restaurant
concepts: Fifth Quarter, a steakhouse concept, and Pargo's, a contemporary
casual dining restaurant featuring a wide variety of fresh, made-from-scratch
dishes. The Company also operates a Distribution and Manufacturing operation
that includes three distribution centers that provide Company and certain
franchised restaurant operations with necessary food and supplies. The
Distribution and Manufacturing operation also includes a food processing
facility for ground beef, steaks, and soup products. The Company's fiscal
year ends on the last Sunday in October. Fiscal year 1999 included 53 weeks
compared to 52 weeks for fiscal 1998 and 1997. All references herein to
particular years refer to the Company's fiscal year unless otherwise noted.
RESTAURANT CONCEPTS
SHONEY'S RESTAURANTS
Shoney's Restaurants, which began operation in 1952, are full-service, family
dining restaurants that generally are open 16 hours each day and serve
breakfast, lunch and dinner. At October 31, 1999, there were 267 Company-
owned and 258 franchised Shoney's Restaurants located in 25 states. Shoney's
Restaurants' menu is diversified to appeal to a broad spectrum of customer
tastes and includes traditional items such as hamburgers, sandwiches,
chicken, seafood, home-style entrees and vegetables, and a variety of pastas,
steaks and desserts. Entree selections range in menu price from $2.49 to
$9.99 at lunch and dinner. The average guest check was $6.71 for Company-
owned units in 1999, compared to $6.32 in 1998 and $6.13 in 1997. During the
third and fourth quarters of 1999, Shoney's Restaurants introduced a new menu
(the "New Menu") into all Company-owned Shoney's Restaurants. The New Menu
features ten new sandwiches, nine blue plate specials that include a meat and
two vegetables and the addition of fresh vegetables and side dishes to the
all-you-care-to-eat soup, salad and fruit bar. The New Menu also retained the
most popular items from the prior menu. At the customers' request, the
number of soup rotations offered on the all-you-care-to-eat soup, salad and
fruit bar was doubled. Shoney's continues to serve its signature breakfast
bar that features eggs, bacon, sausage, biscuits and gravy, pancakes and hash
brown potatoes, along with a variety of fruits and pastries. A full
advertising campaign supporting the New Menu was launched in November 1999.
Management believes that the ultimate success of the New Menu on increasing
comparable store sales is dependent upon a variety of factors including
customer service, training and competition.
In addition to the New Menu, the Company continued to focus on improving
customer traffic and sales at its Shoney's Restaurants through a variety of
back to basics initiatives designed to re-establish Shoney's Restaurants as
a place for great tasting food and exceptional customer service. All
Company-owned Shoney's Restaurants were trained in the "Courteous Customer"
and "Service that Sells" programs. These programs reinforce the Company's
100% customer satisfaction guarantee. Shoney's Restaurant General Managers
are required to be in the dining room during all meal periods to insure the
100% guarantee. Restaurant personnel have been assigned to key stations in
the restaurant such as the soup, salad and fruit bar, the cash register and
front door in an effort to provide the customer with a better dining
experience.
The Company continues to enhance its food specifications on the majority of
its menu items by featuring name brand items such as Jimmy Dean(R) sausage,
Bryan(R) bacon, Heinz(R) ketchup and Folgers(R) coffee. Fresh ground chuck
was introduced into the
1
Shoney's system during the second quarter of 1999 as well as freshly prepared
mashed potatoes made with real butter and cream. Menu items and products are
continuously tested and upgraded to provide the customer with excellent food
quality. To aid in the Company's training, Shoney's purchased a recreational
type vehicle that was retrofitted with 10 computer stations. The vehicle
travels to each region providing on-site training for point of sale and back-
of-the-house applications. During 1999, the Company implemented a Store
Waste Attack Tool ("SWAT") in its Shoney's Restaurants. SWAT allows the food
costs of each individual restaurant to be measured against its theoretical
costs of sales. The SWAT tool helps management identify waste and theft.
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 this
improvement. This process resulted in the closure of 123 Company-owned
Shoney's Restaurants during 1999. In addition to these closings, the Company
also sold 19 Shoney's Restaurants to franchisees.
During 1999, comparable restaurant sales declined 3.6% for all Company-owned
Shoney's Restaurants. This decline included the effects of a menu price
increase of 5.2%. Average sales volumes for Company-owned units open the
entire year were $1,497,000 in 1999, compared to $1,413,000 in 1998 and
$1,418,000 in 1997. Shoney's Restaurants generally have between 120 and 180
seats and employ approximately 65 people, including management personnel.
Please refer to Note 16 of the Notes to Consolidated Financial Statements for
certain segment financial information.
CAPTAIN D'S
Captain D's restaurants, which began operation in 1969, are quick-service
seafood restaurants which offer in-store, carryout or drive-thru service and
are generally open seven days a week from 10:45 a.m. until 11 p.m., serving
lunch and dinner. There were 362 Company-owned and 205 franchised Captain D's
restaurants located in 22 states at October 31, 1999. The typical Captain D's
restaurant has 90 seats and employs approximately 20 people, including
management personnel. Captain D's menu includes a variety of broiled, fried,
and baked fish and shrimp dishes, stuffed crab, chicken and a variety of side
items including corn, baked potatoes, coleslaw, tossed salads, hushpuppies
and desserts. Entree selections range in menu price from $3.79 to $7.49. The
average guest check for Company-owned units was $4.71, $4.47 and $4.41 in
1999, 1998 and 1997, respectively. During 1999, Captain D's posted its second
consecutive year of record sales, which management attributes to better
marketing strategies, successful product promotions (catfish and crawfish)
and a strong Lenten season. Captain D's also continues to realize success
with its "Coastal Classics" menu, which features more upscale seafood items
(e.g., broiled salmon, orange roughy, catfish, and fried oysters) at price
points higher than the average guest check. As of October 31, 1999, the
Coastal Classics menu was in 183 Company-owned Captain D's restaurants.
Management plans to add the menu to another 124 restaurants during 2000.
Captain D's conducts on-going research and development to develop appealing
new menu items and improve the quality of existing items.
Captain D's recently opened a replacement unit in Muscle Shoals, Alabama with
a new interior and exterior design package. The "look and feel" of the
restaurant is more of a beach side, nautical decor and is intended to
position Captain D's into the "fast-casual" arena, a segment that preserves
the speed and convenience of quick service while combining them with a more
casual dining atmosphere. Televisions, credit cards and beer have been added
to some restaurants to upgrade the dining experience. Uniforms have been
changed to a new surf-shirt T-shirt with tropical designs. The Company's
operational strategy for Captain D's is to increase comparable restaurant
sales through the introduction and promotion of distinctive, high quality
menu items while providing an enjoyable dining experience with fast, reliable
service.
During 1999, Captain D's implemented D's University, which teaches
operational procedures, human resource issues, how to use in-store training
modules and how to handle certain personal issues such as finances,
insurance, stocks and bonds and mortgage rates. Supervisory, office and
administrative staff attended the school
2
during 1999 and franchisees and the Company's restaurant managers began to
attend during the fourth quarter of 1999. Management believes a focus
on training provides better service to the customer and reduces turnover in
Captain D's restaurants. During 1999, the Company implemented a Store Waste
Attack Tool ("SWAT") in its Captain D's restaurants. SWAT allows the food
costs of each individual restaurant to be measured against its theoretical
costs of sales.
Comparable store sales for Company-owned units increased 2.6% in 1999, which
included the effects of a 2.3% menu price increase. The average sales volume
for Company-owned Captain D's restaurants open the entire year was $857,000
in 1999, compared to $831,000 in 1998 and $780,000 in 1997. Please refer to
Note 16 of the Notes to Consolidated Financial Statements for certain segment
financial information.
CASUAL DINING GROUP
The Company has two casual dining concepts: Pargo's and Fifth Quarter. During
1998, a new President and Chief Operating Officer was hired for the Casual
Dining Group. Since his arrival, efforts have been made to upgrade the menu
offered at both concepts, to increase the staffing in the restaurants, and to
update the general appearance of each of the concepts.
PARGO'S -- Pargo's, founded in 1983 and acquired by the Company in 1986, are
mid-scale, casual dining restaurants that serve fresh, made-from-scratch
entrees designed to cater to a diverse range of customer tastes. As of
October 31, 1999, there were 11 Pargo's located in five states. Pargo's menu
includes a diverse variety of foods including chicken quesadilla, fresh
chicken dishes, traditional American sandwiches, steaks, and seafood. Pargo's
goal is to become the "favorite neighborhood restaurant" in each of its
markets.
Comparable restaurant sales for Pargo's restaurants during 1999 declined
2.7%, which included a menu price increase of 0.8%. During 1999, the average
sales volume of Pargo's restaurants open the entire year was $2,015,000
compared with $2,064,000 in 1998 and $1,944,000 in 1997.
FIFTH QUARTER -- Fifth Quarter restaurants, which began operation in 1973,
are special occasion steakhouses that operate in the mid-scale steakhouse
segment. Fifth Quarter restaurants are open seven days per week, and serve
lunch and dinner. There are three Fifth Quarter restaurants located in three
states. The Fifth Quarter's menu includes a wide range of USDA choice steaks,
a variety of chicken and seafood entrees and its signature slow-cooked prime
rib. Fifth Quarter restaurants also offer an extensive salad bar, featuring
fresh fruits, vegetables, toppings and salad dressings. Fifth Quarter
restaurants generally feature stucco exteriors with Tudor-style architectural
elements. Interiors are stucco and brick and generally include memorabilia
and photos relevant to each restaurant's marketplace. Fifth Quarter
restaurants are positioned as local neighborhood steakhouses and tend to have
a well established local clientele.
During 1999, the average sales volume of Fifth Quarter restaurants open the
entire year was $2,370,000 compared with $2,257,000 in 1998, and $2,157,000
in 1997. Comparable restaurant sales for the Fifth Quarter concept increased
0.7% in 1999, which included a menu price increase of 2.7%. Please refer to
Note 16 of the Notes to Consolidated Financial Statements for certain segment
financial information.
DISTRIBUTION AND MANUFACTURING
The Distribution and Manufacturing operation includes three distribution
facilities and a food processing facility that supplies ground beef, steaks,
and soups. The objective of the Distribution and Manufacturing operation is
to provide Company-owned restaurants, certain franchised restaurants and
other customers with a reliable source of quality food products at
competitive prices. The Company utilizes centralized purchasing of all major
food and supplies items for its restaurants to attempt to achieve consistent
quality and control costs.
During 1999, Distribution and Manufacturing began implementation of new order
entry and inventory control software. The new software will provide
additional
3
functionality in inventory management and pricing flexibility that will allow
Distribution and Manufacturing to pursue customers outside of historical
Company-owned and franchised customers. These additional customers will
provide better utilization of the assets employed by Distribution and
Manufacturing operations. The Company's distribution centers served 350
franchised restaurants as of October 31, 1999. Please refer to Note 16 of the
Notes to Consolidated Financial Statements for certain segment financial
information.
BUSINESS DEVELOPMENT AND FRANCHISING
The Company's business plan includes focusing its available personnel and
capital resources on improving the operations of its existing store base. The
Company closed 129 under-performing restaurants and sold 19 Company-owned
restaurants to franchisees during 1999. These properties, as well as real
estate from prior restaurant closings and other surplus properties and
leasehold interests, have been actively marketed. The Company continually
evaluates the operating performance of its restaurants, and may close
additional restaurants if, in management's opinion, operating results cannot be
improved in the near term. In addition to store closings, the Company may
choose to sell certain units to franchisees. Proceeds from the sale of the
closed units and surplus properties will be used to reduce outstanding debt, as
required by the Company's senior credit facility. The Company does not intend
to open a material number of new restaurants during 2000.
The Company franchises both Shoney's and Captain D's restaurants. Franchise
agreements generally have a term of 20 years and require payment of an initial
franchise fee and a royalty fee based on a percentage of the franchised
restaurant's sales. Franchise agreements also require restaurants to conform to
the Company's standards for appearance, service, food quality and menu content.
The following table presents the change in the number of restaurants, both
Company-owned and franchised, during 1999, by restaurant concept:
At October 25, 1998 Openings Closings At October 31, 1999
------------------- -------- -------- -------------------
Company Franchise Total Company Franchise Company Franchise Company Franchise Total
------- --------- ----- ------- --------- ------- --------- ------- --------- -----
Shoney's 408 261 669 1 20(A) (142)(A) (23) 267 258 525
Captain D's 365 211 576 1 1 (4) (7) 362 205 567
Fifth Quarter 4 0 4 0 0 (1) 0 3 0 3
Pargo's 12 0 12 0 0 (1) 0 11 0 11
--- --- ----- --- --- ----- ---- ---- ---- -----
789 472 1,261 2 21 (148) (30) 643 463 1,106
=== === ===== === === ===== ==== === === =====
[FN]
(A) Includes 19 Company-owned restaurants sold to franchisees.
</FN>
ADVERTISING AND MARKETING
The Company's marketing strategies continue to include a focus on advertising
designed to increase guest frequency and new guest trial. The marketing and
advertising strategies for the Shoney's Restaurant concept revolve around
utilization of television and radio advertising in the Company's larger markets
to attain the greatest media efficiency. In markets in which the number of
Shoney's Restaurants will not support a large media budget, marketing and
advertising strategies rely more on local advertising (i.e., contact
development with local hotels, civic organizations and tourism groups,
advertising in local newspapers and sponsorship of local events). The Company
utilizes this same general advertising strategy with its Captain D's concept,
except that Captain D's historically has more heavily utilized newspaper and
promotional coupons to support its marketing activities. Captain D's also
strives to maximize its advertising during the Lenten season to leverage its
market position during this season in which there is an increased demand for
fish. The Company's Casual Dining Group relies solely on local advertising and
limited radio and print exposure for its marketing activities.
4
RAW MATERIALS SOURCES AND AVAILABILITY
Essential supplies and raw materials are available from several sources, and
the Company is not dependent upon any single source of supplies or raw
materials. The Company's ability to maintain consistent quality throughout
its restaurant system depends in part upon its ability to acquire food
products and related items from reliable sources. When the supply of certain
products is uncertain or prices are expected to rise significantly, the
Company may enter into purchase contracts or purchase bulk quantities for
future use. The Company has purchase commitments for terms of one year or
less for food and supplies with a variety of vendors. Such commitments
generally include a pricing schedule for the period covered by the
agreements.
The Company has established long-term relationships with key seafood vendors
and brokers. Adequate alternative sources of supply are believed to exist for
substantially all products. While the supply and availability of certain
seafood species is volatile, the Company believes that it has the ability to
identify and access alternative seafood products as well as the ability to
adjust menus if needed.
SERVICE MARKS
The Company has registered the names "Shoney's," "Captain D's," "Fifth
Quarter," and "Pargo's," their respective logos and certain related items and
slogans, as trademarks and/or service marks with the United States Patent and
Trademark Office. The Company regards its service marks as having significant
value and being an important factor in the development and marketing of its
restaurants. The Company's policy is to pursue registration of its service
marks and trademarks whenever possible and to oppose vigorously any
infringement of its service marks and trademarks.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location, and food quality. The Company competes with a number of
national and regional restaurant chains as well as locally owned restaurants
that specialize in the sale of seafood, sandwiches, and other prepared foods.
The restaurant business is often affected by changes in consumer taste,
national, regional or local economic conditions, demographic trends, traffic
patterns, and the type, number, and location of competing restaurants. In
addition, factors such as inflation, increased food, labor and benefits costs
and the lack of experienced management and hourly employees may adversely
affect the restaurant industry in general and the Company's restaurants in
particular.
EMPLOYEES
At December 12, 1999, the Company employed approximately 21,000 persons. A
substantial number of the Company's restaurant personnel are employed on a
part-time basis. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be
good.
5
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Company's
restaurant and other properties, including those under construction, as of
October 31, 1999:
Number of Properties(1)
------------------------------
Use Total Owned Leased
--- ----- ----- ------
Office and Distribution Facilities(2) 6 6 0
Shoney's Restaurants 267 182 85
Captain D's Restaurants 362 245 117
Pargo's Restaurants 11 6 5
Fifth Quarter Restaurants 3 0 3
--- --- ---
649 439 210
=== === ===
[FN]
(1) In addition, the Company owns or leases approximately 70 properties that
are in turn leased to others, owns 64 parcels of surplus land and has 71
vacant leased properties.
(2) The Company's principal offices and distribution facility in Nashville,
Tennessee comprise four buildings of approximately 171,000 square feet on
twenty acres of land owned by the Company. At October 31, 1999, the Company
also operated distribution facilities in Ripley, West Virginia and Macon,
Georgia.
</FN>
The following table sets forth the Company's operating restaurants by state, as
of October 31, 1999:
COMPANY-OWNED RESTAURANTS BY STATE
Casual
Shoney's Captain D's Dining Total
-------- ----------- ------ -----
Alabama 35 56 91
Arkansas 7 11 18
Florida 19 16 35
Georgia 17 54 71
Illinois 1 5 6
Indiana 3 8 11
Kansas 2 2
Kentucky 19 17 1 37
Louisiana 31 31
Maryland 1 1 2
Mississippi 19 17 36
Missouri 9 23 32
No. Carolina 10 7 17
Ohio 4 21 25
Oklahoma 12 12
Pennsylvania 1 1 2
So. Carolina 15 20 35
Tennessee 43 67 3 113
Texas 1 8 9
Virginia 9 4 6 19
W. Virginia 23 14 2 39
--- --- --- ---
Total 267 362 14 643
=== === === ===
LEASES
Most of the leases for the Company's restaurant properties are for periods
of approximately 15 years, usually with renewal options ranging from 5 to 15
years. They provide for minimum rentals, totaling approximately $9.6 million in
1999, net of sublease rentals, plus an amount equal to a percentage of sales,
generally 3% to 6% in excess of an agreed sales volume. The Company is also
required to pay property taxes, maintenance and insurance under most of the
leases. Approximately 135 of the leases
6
(64%) expire prior to October 31, 2004; however, approximately 108 of these
leases (80% of the 135 leases) provide for renewal options. Notes 7 and 9 of
the Notes to Consolidated Financial Statements on pages 41-43 and 47-48,
respectively, of Item 8 in this Annual Report on Form 10-K are incorporated
herein by reference.
ITEM 3. LEGAL PROCEEDINGS.
REGINA GRIFFIN ET AL v. SHONEY'S, INC. - See paragraphs 8 and 9 of Note 12
of the Notes to Consolidated Financial Statements at page 50 of this Annual
Report on Form 10-K, which are incorporated herein by this reference. The Court
dismissed the case with prejudice on January 3, 2000.
WILKINSON v. SHONEY'S, INC. - See paragraph 10 of Note 12 of the Notes to
Consolidated Financial Statements at page 50 of this Annual Report on Form
10-K, which is incorporated herein by this reference.
OTHER LITIGATION - The Company is a party to other legal proceedings
incidental to its business. In the opinion of management, the ultimate
liability with respect to these actions will not materially affect the
operating results or the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1999, there were no matters submitted
to a vote of security holders.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company, in accordance with General Instruction G (3) to Form 10-K and
Instruction 3 to Item 401(b) of Regulation S-K, 17 C.F.R. ss. 229.401,
furnishes the following information with regard to its executive officers as an
additional item in Part I of this Annual Report on Form 10-K. The following
officers are those that the Company currently deems to be "executive officers",
as defined by the Securities and Exchange Commission.
Name Office Age
---- ------ ---
Raymond D. Schoenbaum Chairman of the Board 53
J. Michael Bodnar President and Chief Executive Officer 55
David L. Gilbert Executive Vice President, Chief Administrative
Officer and Assistant Secretary 42
Bernard W. Gray Chief Information Officer 52
Kevin P. Carey President and Chief Operating Officer -
Casual Dining 42
Haney A. Long, Jr. President and Chief Operating Officer -
Distribution and Manufacturing 54
Stephen C. Sanders President and Chief Operating Officer -
Shoney's Restaurants 49
Ronald E. Walker President and Chief Operating Officer -
Captain D's 49
F.E. McDaniel, Jr. Secretary and General Counsel 44
Rebecca A. Fine Chief Administrative Officer -
Shoney's Restaurants 37
Betty J. Marshall Senior Vice President - Corporate
Communications and Community Relations 49
V. Michael Payne Senior Vice President and Controller 48
Kent M. Smith Senior Vice President - Marketing, Purchasing
and Research and Development - Shoney's
Restaurants 59
Robert A. Speck Senior Vice President - Strategic Planning 45
Gary W. Wilson Senior Vice President - Captain D's 40
RAYMOND D. SCHOENBAUM and Jeffry F. Schoenbaum, a director, are brothers.
There is no other family relationship among any of the executive officers or
any of the directors of the Company. Although all executive officers are
employees at will of the Company, each executive officer of the Company
generally is elected each year for a term of one year.
7
MR. SCHOENBAUM has been President of Schoenbaum Limited, a restaurant
management company, since April 1995. Mr. Schoenbaum has also served since
March 1996 as the President and Chief Executive Officer of Just Having Fun
Restaurants, Inc., a restaurant company currently developing a restaurant
concept in Atlanta, Georgia. From June 1984 to March 1995, he served as
Chairman of the Board of Innovative Restaurant Concepts, Inc., a restaurant
management company which owned and operated Rio Bravo, Ray's on the River, and
Green Hills Grille restaurants. Mr. Schoenbaum sold this company to Applebee's
International, Inc. in March 1995. Mr. Schoenbaum was a member of the board of
directors of Applebee's International, Inc. from March 1995 to August 1997. He
also serves as a member of the board of directors of the Schoenbaum Family
Foundation. Mr. Schoenbaum was elected to the Board of Directors in August
1997. In June 1998, Mr. Schoenbaum was elected Vice Chairman of the Company's
Board of Directors and became Chairman of the Board of Directors effective
January 1, 1999.
MR. BODNAR was elected President and Chief Executive Officer of the
Company in November 1997, having previously been elected to the Board of
Directors in August 1997. Mr. Bodnar has served as President of Bodnar
Investment Group, Inc., a real estate investment company focusing primarily
on the restaurant industry, since 1984. From January 1986 to May 1996, Mr.
Bodnar served as President of Triangle Management Group, Inc., a restaurant
management company.
MR. GILBERT joined the Company in January 1998 as Senior Vice President
- - Real Estate. Mr. Gilbert formerly served as Director of Development and
Purchasing for Innovative Restaurant Concepts, Inc. from October 1989 to
March 1995 and as Executive Director of Development for Applebee's
International, Inc. from March 1995 to January 1998. In December 1998, Mr.
Gilbert was named Executive Vice President and Chief Administrative Officer.
In March 1999, Mr. Gilbert was also named Assistant Secretary.
MR. GRAY first joined the Company in April 1994 and served as Vice
President, Management Information Systems until October 1997. Mr. Gray had
formerly served as Systems Development Manager from July 1992 to April 1994
with The Park City Group. In October 1997, Mr. Gray joined Podiatrist
Insurance Corporation of America as Chief Information Officer. Mr. Gray
rejoined the Company in December 1997 and was named Chief Information
Officer.
MR. CAREY was named President and Chief Operating Officer of the
Company's Casual Dining Group in December 1997 and had served as a consultant
to the Company since November 1997. From October 1996 to October 1997, Mr.
Carey served as Area Director and consultant for Innovative Restaurant
Concepts, Inc., responsible for Ray's on the River, an Atlanta Restaurant,
Rio Bravo and Green Hills Grille. Mr. Carey served as managing partner of
three one-of-a-kind concepts for Liberty House Restaurant Corporation from
April 1992 to June 1996 and served in various positions with Houston's
Restaurants, Inc. from May 1982 to April 1992.
MR. LONG joined the Company as Senior Vice President of Purchasing and
Distribution in September 1996 and was named President and Chief Operating
Officer of the Company's Distribution and Manufacturing subsidiary in December
1997. Prior to joining the Company, Mr. Long served as Senior Vice President
of Purchasing and Distribution for TPI Restaurants, Inc. (at that time the
Company's largest franchisee which was acquired by the Company in 1996) from
November 1989 to September 1996.
MR. SANDERS has served as President and Chief Operating Officer of
Shoney's Restaurants since August 1998. He was initially employed with the
Company in March 1965, and, thereafter, served the Company in various
capacities including Area Supervisor, Director of Training, Director of
Personnel, Divisional Director, Operational and Regional Vice President and
Vice President of Operations. In 1990 he was promoted to President of
Shoney's Restaurants and served in that capacity until March 1993. From March
1993 until August 1998, Mr. Sanders was not employed by the Company and owned
and operated an independent restaurant management consulting company
operating both Copeland's of New Orleans restaurants and Shoney's Restaurants
as a franchisee. He continues to own those restaurants following his
rejoining the Company in 1998.
MR. WALKER has held various positions since joining the Company in 1980,
becoming Director of Franchise Operations for the Captain D's division in
December 1984. He was elected Vice President of Franchise Operations in
December 1986 and was named
8
Executive Vice President - Captain D's in January 1995. In March 1996, Mr.
Walker was named President of the Company's Captain D's division. In December
1997, Mr. Walker was named President and Chief Operating Officer of the Captain
D's division.
MR. MCDANIEL has served in various positions since joining the Company
in 1981. He was elected Assistant Secretary in December 1984 and Secretary
in August 1988 and was elected to the additional position of Treasurer in
December 1992. In March 1994, he was named a Vice President of the Company
and was named Senior Vice President, Secretary and Treasurer in October 1996.
In December 1997, he was named Chief Administrative Officer, Secretary and
General Counsel. In December 1998, Mr. McDaniel was named Secretary and
General Counsel.
MS. FINE joined the Company in April 1996. She has served in various
capacities, including Director of Human Resources, Senior Director of Human
Resources and Vice President of Field Human Resources and Training. In March
1998, Ms. Fine was elected Senior Vice President - Human Resources for
Shoney's Restaurants. In March 1999, she became the Chief Administrative
Officer of Shoney's Restaurants. Ms. Fine served as Director of Human
Resources for Hardee's Food Systems from August 1987 until March 1996.
MS. MARSHALL joined the Company in March 1990 as Director of Purchasing.
She was named Vice President of Corporate and Community Affairs in January
1991. Ms. Marshall was elected to her present position as Senior Vice
President of Corporate Communications and Community Relations in October
1996.
MR. PAYNE has served as Senior Vice President and Controller since March
1998. He was initially employed with the Company in May 1973 and, thereafter,
served the Company in various capacities including staff accountant, chief
accountant and payroll supervisor, and corporate controller. In 1992, he was
promoted to Vice President and Controller and served the Company in that
capacity until July 1995. From July 1995 until March 1998, Mr. Payne was not
employed with the Company. He served as a financial consultant from July 1995
to June 1996, and served as Director of Accounting and Financial Reporting
for Coventry Corporation from June 1996 until March 1998.
MR. SMITH joined the Company in October 1998 as Senior Vice President of
Marketing for Shoney's Restaurants. In November 1998, he also was assigned the
responsibility for the Research and Development and Purchasing for Shoney's
Restaurants. Mr. Smith served as Senior Vice President and Assistant to the
CEO and Chairman with Flagstar Corporation from January 1995 to January 1998.
Mr. Smith was Senior Vice President - Worldwide Marketing for Burger King
Corporation from April 1991 to January 1995.
MR. SPECK joined the Company in December 1995 and was elected Division
President - Shoney's Restaurants at that time. In January 1997, Mr. Speck was
elected Senior Vice President - Strategic Planning. Prior to joining the
Company, Mr. Speck had served as Chief Operating Officer of Grandy's, Inc.
since 1989.
MR. WILSON joined the Company in December 1975 and has served in various
positions in the Captain D's division. He was promoted to Division Director
in February 1987, to Regional Director in December 1991 and to Regional Vice
President of Operations in February 1995. He was elected Senior Vice
President - Operations of the Captain D's division in December 1997.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol "SHN." The following table sets forth the high and low trading prices
of the Company's common stock as reported by the New York Stock Exchange
during each of the fiscal quarters of the 1999 and 1998 fiscal years:
Stock Stock
Market Market
High Low
------ ------
1999
First Quarter 3 5/8 1 5/16
Second Quarter 2 15/16 1 13/16
Third Quarter 2 1/2 2
Fourth Quarter 2 1/2 1 7/16
1998
First Quarter 5 3
Second Quarter 5 7/8 3 5/8
Third Quarter 5 1/16 2 3/4
Fourth Quarter 3 7/16 1 1/2
There were 8,553 shareholders of record of the Company's Common Stock as
of January 20, 2000.
The Company has not paid a dividend on its common shares during the last two
years. The Company currently intends to retain all earnings to support the
Company's restaurant concepts and to retire its outstanding debt obligations.
The Company's senior debt issues prohibit dividends and distributions on
common stock.
10
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS EXCEPT PER SHARE DATA)
Fiscal year ended October 1999 1998 1997 1996(a) 1995(a)
- ------------------------- ------------- ------------ ----------- ------------ ------------
Revenues $ 999,373 $ 1,143,362 $ 1,227,076 $ 1,099,742 $ 1,053,332
Costs and expenses
Cost of sales 872,376 1,024,383 1,092,488 951,565 922,545
General and administrative 77,389 87,345 84,401 68,227 63,905
Interest expense 42,159 48,476 45,016 37,951 39,816
Litigation settlement 14,500 3,500
Impairment of long-lived assets 18,424 48,403 53,967
Restructuring expense 4,486 10,747 1,301 7,991
------------ ------------ ------------ ------------ ------------
1,029,334 1,222,854 1,277,173 1,057,743 1,034,257
Income (loss) from continuing
operations before income taxes
and extraordinary charge (29,961) (79,492) (50,097) 41,999 19,075
Income taxes (benefit) (1,135) 26,797 (14,386) 15,953 7,873
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before extraordinary
charge (28,826) (106,289) (35,711) 26,046 11,202
Discontinued operations, net of
income taxes 398 8,137
Gain on sale of discontinued
operations, net of income taxes 22,080 5,533
Extraordinary charge on early
extinguishment of debt, net of
income tax benefit (1,415)
------------ ----------- ----------- ------------ ------------
Net income (loss) $ (28,826) $ (107,704) $ (35,711) $ 48,524 $ 24,872
============ =========== =========== ============ ============
Weighted average shares outstanding
(diluted) 49,339 48,666 48,540 42,706 41,551
Per share data--diluted
Income (loss) from continuing
operations before extraordinary
charge $ (0.58) $ (2.18) $ (0.74) $ 0.61 $ 0.27
Net income (loss) $ (0.58) $ (2.21) $ (0.74) $ 1.14 $ 0.60
Dividends -- -- -- -- --
Total assets $ 406,605 $ 523,469 $ 644,689 $ 747,081 $ 535,016
Long-term debt and obligations
under capital leases $ 358,776 $ 443,243 $ 466,039 $ 476,540 $ 406,032
Shareholders' equity (deficit) $ (147,137) $ (119,487) $ (12,345) $ 528 $ (108,307)
Number of restaurants at year-end
Company-owned 643 789 893 957 698
Franchised 463 472 494 519 826
------------ ----------- ----------- ------------ -----------
Total restaurants 1,106 1,261 1,387 1,476 1,524
============ =========== =========== ============ ===========
[FN]
Notes: (a) - See Note 2 - Acquisitions of the Notes to Consolidated Financial
Statements included as Item 8 herein.
</FN>
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto. Fiscal 1999 includes 53 weeks and fiscal 1998 and 1997 included
52 weeks. The fourth quarter of fiscal 1999 includes 13 weeks compared to 12
weeks in the fourth quarter of 1998 and 1997.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED REVENUES
Consolidated revenue for the last three fiscal years is as follows:
Fiscal Year Ended
-----------------------------------------
(in millions) October 31, October 25, October 26,
1999 1998 1997
----------- ----------- -----------
Net sales $ 962.2 $ 1,115.6 $ 1,202.8
Franchise fees 15.2 14.5 14.9
Other income 22.0 13.3 9.4
------- --------- ---------
$ 999.4 $ 1,143.4 $ 1,227.1
======= ========= =========
Changes in restaurants for 1999 and 1998 are as follows:
October 31, Restaurants Restaurants October 25, Restaurants Restaurants October 26,
1999 Opened Closed 1998 Opened Closed 1997
-----------------------------------------------------------------------------------------
Shoney's
Company-owned 267 1 142(1) 408 - 81 489
Franchised 258 20(1) 23 261 13 33 281
----- -- --- ----- -- --- -----
525 21 165 669 13 114 770
Captain D's
Company-owned 362 1 4 365 - 13 378
Franchised 205 1 7 211 1 3 213
----- -- --- ----- -- --- -----
567 2 11 576 1 16 591
Casual Dining
Pargo's 11 - 1 12 - 7 19
Fifth Quarter 3 - 1 4 - 3 7
----- -- --- ----- -- --- -----
14 - 2 16 - 10 26
----- -- --- ----- -- --- -----
1,106 23 178 1,261 14 140 1,387
===== == === ===== == === =====
[FN]
(1) Includes 19 restaurants sold to franchisees
</FN>
Consolidated revenues in 1999 declined $144.0 million or 12.6%. Consolidated
revenues in 1998 declined $83.7 million or 6.8%. The components of the change
in consolidated revenues during 1999 and 1998 are summarized as follows:
($ in millions)
1999 1998
---- ----
Sales from restaurants opened or acquired $ 1.1 $ 3.3
Higher menu prices 28.5 16.4
Sales at prior year prices (35.9) (32.6)
Closed restaurants (146.8) (60.4)
Restaurant sales for fifty-third week 13.4
Distribution and Manufacturing and other sales (13.7) (13.8)
Franchise revenues 0.7 (.5)
Other income 8.7 3.9
--------- --------
Total $ (144.0) $ (83.7)
========= ========
12
The declines in consolidated revenues in 1999 and 1998 were primarily
attributable to the closing of Company-owned restaurants, a decline in overall
restaurant store sales and a decline in Distribution and Manufacturing and
other sales. The decline in Distribution and Manufacturing and other sales was
primarily attributable to a loss of franchised restaurant customers resulting
from franchise store closures and increased competition. Comparable restaurant
sales of all of the Company's restaurant concepts declined 1.0%, 1.8% and 3.4%
in 1999, 1998 and 1997, respectively. These results include menu price
increases of 3.9%, 1.8% and 1.2% in 1999, 1998 and 1997, respectively.
FRANCHISING -- Franchise revenues increased by approximately $0.7 million in
1999 and declined by approximately $0.5 million in 1998. The increase in
franchise revenue in 1999 was primarily attributable to the fifty-third week
and initial fees from the 20 new franchised restaurants, 19 of which
previously were Company-owned units. The decline in franchise revenues during
1998 was primarily the result of a decline in the number of franchised
restaurants in operation as compared to 1997 and declines in comparable store
sales at franchised Shoney's Restaurants.
OTHER INCOME - Other income increased $8.7 million in 1999 due primarily to
increased gains of $10.8 million from asset sales. The increase in gains from
asset disposals was partially offset by lower rental income of approximately
$0.5 million and a $1.7 million decline in revenues from an insurance
subsidiary that was acquired in 1996 and sold in 1998. Other income increased
$3.9 million in 1998 when compared to 1997 due primarily to increased gains on
asset disposals of $4.6 million.
CONSOLIDATED COSTS AND EXPENSES
Consolidated cost of sales includes food and supplies, restaurant labor and
operating expenses. A summary of cost of sales as a percentage of consolidated
revenues for the last three fiscal years is shown below:
1999 1998 1997
---- ---- ----
Food and supplies 36.9% 38.0% 39.0%
Restaurant labor 27.5% 27.0% 26.0%
Operating expenses 22.9% 24.6% 24.0%
----- ----- -----
Total cost of sales 87.3% 89.6% 89.0%
===== ===== =====
As compared to restaurant revenues, Distribution and Manufacturing revenues
have a higher percentage of food and supplies costs, a lower percentage of
operating expenses and have no associated restaurant labor. As a result,
changes in Distribution and Manufacturing revenue have an exaggerated effect on
these expenses as a percentage of total revenues. Food and supplies costs as a
percentage of revenues declined by 1.1% in 1999 and 1.0% in 1998. The decline
in 1999 was principally a result of higher menu prices, the implementation of
theoretical food costs systems in Shoney's and Captain D's restaurants and the
decline in Distribution and Manufacturing revenue. Food and supplies costs, as
a percentage of sales, declined in all three restaurant concepts in 1999 and in
1998 when compared to the prior year. Food and supplies costs in 1998 declined
primarily as a result of higher menu prices and the decline in Distribution and
Manufacturing revenue.
Consolidated restaurant labor increased 0.5% and 1.0% as a percentage of total
revenues in 1999 and 1998, respectively, as a result of higher wages and
declining comparable restaurant sales in Shoney's Restaurants. Wage rates
increased during each of these periods as a result of low unemployment
conditions in many markets and a very competitive restaurant labor market.
During 1999 and 1998, the Company increased the staffing levels at its
Shoney's Restaurants in an effort to achieve the desired level of customer
service as one means by which to attempt to reverse the comparable store sales
trend. The Company expects continued upward pressure on consolidated
restaurant labor until meaningful improvements in consolidated comparable
restaurant sales are achieved.
Consolidated operating expenses declined 1.7% as a percentage of total revenues
in 1999 as compared to the prior year. The decline in consolidated operating
expenses, as a percentage of sales in 1999, was primarily the result of lower
depreciation,
13
utilities, insurance and advertising expenses. The increase of 0.6%, as a
percentage of sales in 1998, was the result of pressure on operating margins
due to declines in comparable restaurant sales and higher repairs and
maintenance and advertising expenditures as a percentage of revenues. The
Company anticipates continued pressure on consolidated restaurant operating
margins until meaningful improvements in consolidated comparable restaurant
sales are achieved.
A summary of consolidated general and administrative expenses and interest
expense as a percentage of consolidated revenues for the last three fiscal
years is shown below:
1999 1998 1997
---- ---- ----
Consolidated general and administrative 7.7% 7.6% 6.9%
Consolidated interest expense 4.2% 4.2% 3.7%
Consolidated general and administrative expenses, as a percentage of revenues,
increased 0.1% and 0.7% during 1999 and 1998, respectively. Consolidated
general and administrative expenses remained at historically high levels, as a
percentage of sales, in 1999 due to continued high legal expenses of $3.6
million in the first half of 1999 associated with defending and settling
certain employment litigation (see Note 12 to the Consolidated Financial
Statements), continued high levels of multi-unit supervisory expenses in the
Shoney's Restaurant concept, the closing of under-performing restaurants and
the decline in consolidated comparable store sales. General and administrative
expenses increased during 1998, as a percentage of sales, principally due to
the addition of a layer of multi-unit restaurant supervisory staff in the
Shoney's Restaurant concept and due to increases in severance costs associated
with the termination of certain executives.
Consolidated interest expense declined $6.3 million in 1999 compared to 1998.
The reduction in interest expense is primarily the result of lower senior debt
outstanding. During 1999, the Company made $11.5 million of scheduled payments
and $70.5 million of required prepayments on its senior bank debt. The
prepayments resulted from proceeds from asset sales. Of the $11.5 million of
scheduled payments, $3.7 million had been prepaid as of October 31, 1999. The
decline in interest expense on the Company's senior debt was partially offset
by an increase in interest expense on the Company's zero coupon subordinated
convertible debentures of approximately $1.0 million.
The Company refinanced approximately $281.0 million of its senior debt in
December 1997 (see Liquidity and Capital Resources). Interest rates on the new
credit facility are generally 50 to 100 basis points higher than those on the
refinanced debt. As a result of the refinancing, the Company expensed
unamortized costs of $2.2 million related to the refinanced debt, which
resulted in an extraordinary loss, net of tax, of approximately $1.4 million
(or $.03 per share). Consolidated interest expense increased $3.5 million in
1998. The increased interest expense in 1998 was due to higher rates on the
refinanced debt, a $1.1 million fee to obtain waivers (resulting from the
Company's inability to make principal payments and comply with debt covenants)
from its former lending group to facilitate the refinancing, and higher
amortization of deferred financing costs related to the new debt structure.
The Company incurred asset impairment charges of $18.4 million, $48.4 million,
and $54.0 million in 1999, 1998 and 1997, respectively. Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" ("SFAS 121") requires
restaurant companies to evaluate the recoverability of long-lived assets on an
individual restaurant basis. When a determination is made that the carrying
value is not recoverable, the assets are written down to their estimated fair
value. Since the adoption of SFAS 121 in the first quarter of 1997, the Company
has recorded $120.8 million in asset impairment charges. The asset impairment
charges recorded in 1999 and 1998 were primarily the result of continued
declines in comparable store sales and operating margins in the Company's
Shoney's Restaurants when compared to the prior year. Shoney's Restaurants
accounted for asset impairment charges of $15.6 million, $42.7 million and
$23.6 million in 1999, 1998 and 1997, respectively. If the Company's Shoney's
Restaurants continue to experience declines in comparable store sales and
operating margins,the Company could incur additional asset impairment charges
in the future.
14
The Company has recorded restructuring charges, primarily attributable to
exit costs incurred when the decision to close a restaurant is made, for the
accrual of remaining leasehold obligations, net of anticipated sublease
rental income. The Company recorded approximately $6.1 million of
restructuring charges in 1999 that included $5.7 million of exit costs on
restaurants closed in the fourth quarter of 1999 and $0.4 million of
restructuring expense pertaining to severance expenses expected to be
incurred in the closing of the Company's distribution center in Macon,
Georgia. The Company plans to open a larger and more efficient center in
Tifton, Georgia in the second quarter of 2000. The new distribution
center is expected to operate with lower labor and outside storage costs than
the current facility. In addition, during 1999, the Company revised its
estimate of previously accrued exit costs downward by $1.6 million. The
change in estimate is the result of assigning certain leases on terms more
favorable to the Company than originally estimated. The Company incurred
$10.7 and $1.3 million of restructuring charges in 1998 and 1997,
respectively, primarily attributable to remaining leasehold obligations on
restaurants closed or planned to close.
Management continually evaluates the operating performance of its restaurants
and may close additional restaurants if, in management's opinion, operating
results cannot be improved in the near term. In the event management elects
to close additional restaurants during 2000, the Company may incur additional
restructuring charges.
On March 20, 1999, the Company agreed to the material terms of a global
settlement in three class action lawsuits which alleged that the Company had
violated certain provisions of the Fair Labor Standards Act (see Note 12 to
the Consolidated Financial Statements and Liquidity and Capital Resources).
The Company agreed to pay $18.0 million in exchange for the dismissal of all
three cases with prejudice and a release by the plaintiffs relating to the
subject matter of the cases. As a result of the settlement, the Company
recorded a litigation settlement charge of $14.5 million in the first quarter
of 1999 ($3.5 million had previously been recorded in the fourth quarter of
1998). The Court approved the settlement agreement and entered final orders
on July 7, 1999 (Belcher I and Edelen) and August 20, 1999 (Belcher II).
The Company had an effective tax rate for 1999 of 3.8%. This rate is
primarily attributable to the reversal of certain deferred tax assets
acquired in the purchase of TPI, which had subsequently been fully reserved.
Also during 1999, the Company increased its valuation allowance against the
Company's gross deferred tax assets by $5.8 million.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of
October 31, 1999, the Company increased the valuation allowance for gross
deferred tax assets for deductible temporary differences, tax credit carry
forwards, and net operating loss carry forwards. The deferred tax asset
valuation adjustment is in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires
that a deferred tax asset valuation allowance be established if certain
criteria are not met. If the deferred tax assets are realized in the future,
the related tax benefits will reduce income tax expense.
During 1998, the Company recorded a deferred tax asset valuation adjustment
of $51.3 million in the third quarter and an additional $1.2 million in the
fourth quarter. The deferred tax asset valuation adjustment was in accordance
with SFAS 109. The Company considered these criteria in connection with the
asset impairment charges recorded during 1998 and, accordingly, increased the
deferred tax asset valuation allowance.
During the third quarter of 1997, recorded income tax liabilities totaling
approximately $26.5 million related to a 1993 transaction were determined to
be no longer appropriate and were reversed. Approximately $22.5 million of
the reduction in tax liability was credited to additional paid-in capital
since the related deferred tax liability arose from an equity transaction.
The remaining $4.0 million decrease in the tax liability, which represented
accrued interest, reduced income tax expense for 1997. This income tax
reduction was offset by a $5.9 million increase in the Company's valuation
allowance for deferred tax assets resulting from a reassessment of the
realizability of those assets.
15
OPERATING SEGMENTS
Shoney's Restaurants
Fiscal Year Ended
----------------------------------------------
($ in thousands except comparable store October 31, October 25, October 26,
data and guest check average) 1999 1998 1997
----------------------------------------------
Restaurant sales $ 500,041 $ 638,940 $ 705,772
Franchise revenue 9,623 9,189 9,658
----------------------------------------------
Total Shoney's revenue 509,664 648,129 715,430
Expenses 499,324 633,523 679,374
----------------------------------------------
EBIT as defined $ 10,340 $ 14,606 $ 36,056
==============================================
Average sales volume (a) $ 1,497 $ 1,413 $ 1,418
Comparable store sales (decrease) (a) (3.6%) (4.7%) (4.0%)
Average guest check (a) $ 6.71 $ 6.32 $ 6.13
Operating restaurants at year-end:
Company-owned 267 408 489
Franchised 258 261 281
----------------------------------------------
Total 525 669 770
==============================================
[FN]
(a) Prior year amounts have not been restated for comparable restaurants
</FN>
Shoney's concept total revenue declined $138.5 million, or 21.4%, and $67.3
million, or 9.4%, in 1999 and 1998, respectively, when compared to the previous
year. The components of the change in the Shoney's concept revenue are
summarized as follows:
($ in millions) 1999 1998
----------------------------
Sales from restaurants opened or acquired $ 1.1 $ 2.6
Higher menu prices 21.3 9.9
Closed restaurants (132.2) (41.2)
Sales at prior year prices (36.4) (38.1)
Sales from fifty-third week 7.3
--------- --------
Total change in restaurant sales (138.9) (66.8)
Franchise revenues 0.4 (0.5)
--------- --------
Total $ (138.5) $ (67.3)
========= ========
Revenues were significantly reduced by the closing of 65, 81 and 123 under-
performing Company-owned restaurants in 1997, 1998 and 1999, respectively. In
addition, in 1999, 19 Company-owned restaurants were sold to franchisees. Sales
and EBIT as defined, which is defined by the Company as operating income before
asset impairment charges, restructuring charges and litigation settlements, for
Shoney's Restaurants closed or sold in the last three years is as follows:
1999 1998 1997
EBIT as EBIT as EBIT as
($ in thousands) Sales defined Sales defined Sales defined
---------------------------------------------------------------
Stores closed during 1997 $ - $ (294) $ - $ (723) $ 17,673 $ (4,266)
Stores closed during 1998 - (1,720) 58,722 (6,798) 82,494 (4,011)
Stores closed or disposed of during the
first two quarters of 1999 13,425 (1,636) 74,602 (1,783) 78,896 12
Stores closed or disposed of during the
fourth quarter of 1999 80,649 (8,195) 92,921 (3,877) 98,361 2
---------------------------------------------------------------
Total $ 94,074 $ (11,845) $ 226,245 $ (13,181) $ 277,424 $ (8,263)
===============================================================
16
Management believes that the decline in comparable restaurant sales at its
Shoney's Restaurants is the result of numerous factors including increased
competition and a decline in operational focus occasioned by high management
turnover. Franchise revenue increased $0.4 million in 1999 and declined $0.5
million in 1998 when compared to the prior year. The increase in franchise
revenue in 1999 is a result of the fifty-third week and initial fees from the
nineteen Company-owned restaurants sold to franchisees. The decline in
franchise revenue in 1998 was a result of franchise closings and a decline in
comparable store sales at Shoney's franchised restaurants.
The Company is striving to improve customer traffic and sales at its Shoney's
Restaurants through a variety of back-to-basics initiatives designed to
enhance the reputation of Shoney's Restaurants as a place for great-tasting
food and exceptional customer service. During 1998, the Company enhanced its
food specifications on the majority of its menu items. Also, during 1998,
management allocated a higher percentage of planned capital expenditures to
kitchen equipment and other related enhancements to support higher quality
food preparation. In 1998 new research and development personnel were charged
with upgrading the quality of menu items and developing new menu offerings to
broaden customer appeal.
During the third and fourth quarters of 1999, Shoney's Restaurants introduced
a new menu (the "New Menu") into all Company-owned restaurants. The New Menu
features ten new sandwiches, nine blue plate specials that include a meat and
two vegetables and the addition of fresh vegetables and side dishes to the
all-you-care-to-eat soup, salad and fruit bar as well as favorite items from
the prior menu. At the customers' request, the number of soup rotations
offered on the all-you-care-to-eat soup, salad and fruit bar was doubled. A
full advertising campaign was launched in November 1999. Management believes
that the ultimate success of the New Menu on increasing comparable store
sales is dependent upon a variety of factors including customer service,
training and competition.
In addition to the New Menu, the Company is focusing on improving customer
traffic and sales at its Shoney's Restaurants through exceptional customer
service. Personnel of all Company-owned Shoney's Restaurants were trained in
the "Courteous Customer" and "Service that Sells" programs. These programs
reinforce the Company's 100% customer satisfaction guarantee. Shoney's
Restaurant General Managers are required to be in the dining room during all
meal periods to insure the 100% guarantee and restaurant personnel have been
assigned to key stations in the restaurant such as the soup, salad and fruit
bar, the cash register and front door in an effort to provide the customer
with a better dining experience. To aid in the Company's training, Shoney's
purchased a recreational type vehicle that was retrofitted with 10 computer
stations. The vehicle travels to each region providing on-site training for
point of sale and back-of-the-house applications.
Expenses declined $134.2 million, or 21.2%, in 1999 when compared to 1998.
Expenses as a percentage of revenue were 98.0% in 1999 compared to 97.7% in
1998. As a percentage of revenues, significant increases in restaurant labor
and multi-unit supervisory expenses were partially offset by lower food and
supplies costs, operating expenses and depreciation.
Expenses in 1998 declined $45.9 million, or 6.7%, compared to 1997. Expenses
as a percentage of revenue were 97.7% in 1998 compared to 95.0% in 1997. As
a percentage of revenues, the concept incurred significant increases in
restaurant labor, operating expenses and multi-unit supervisory expenses that
were only slightly offset by a decline in food and supplies costs when
compared to the prior year.
As a result of the above, EBIT as defined, which is defined by the Company as
operating income before asset impairment charges, restructuring charges and
litigation settlements, declined $4.3 million and $21.5 million in 1999 and
1998, respectively.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell additional
operating restaurants to franchisees.
17
CAPTAIN D'S RESTAURANTS
Fiscal Year Ended
---------------------------------------
($ in thousands except comparable store data October 31, October 25, October 26,
and guest check average) 1999 1998 1997
---------------------------------------
Restaurant sales $ 316,996 $ 305,180 $ 295,380
Franchise revenue 5,494 5,227 5,178
---------------------------------------
Total Captain D's revenue 322,490 310,407 300,558
Expenses 284,129 277,906 269,271
---------------------------------------
EBIT as defined $ 38,361 $ 32,501 $ 31,287
=======================================
Average sales volume (a) $ 857 $ 831 $ 780
Comparable store sales increase (decrease) (a) 2.6% 4.8% (1.1%)
Average guest check (a) $ 4.71 $ 4.47 $ 4.41
Operating restaurants at year-end:
Company-owned 362 365 378
Franchised 205 211 213
----------------------------------------
Total 567 576 591
========================================
[FN]
(a) Prior year amounts have not been restated for comparable restaurants
</FN>
Captain D's total revenue increased $12.1 million, or 3.9%, and $9.8 million,
or 3.3%, in 1999 and 1998, respectively, when compared to the prior year. The
components of change in Captain D's concept revenue are summarized as follows:
($ in millions) 1999 1998
---------------------
Sales from restaurants opened or acquired $ - $ 0.7
Higher menu prices 6.8 6.1
Closed restaurants (2.1) (4.6)
Sales at prior year prices 1.6 7.6
Sales from fifty-third week 5.5 -
------- -------
Total change in restaurant sales 11.8 9.8
Franchise revenues 0.3 -
------- -------
Total $ 12.1 $ 9.8
======= =======
Revenues were reduced by the closing of two, thirteen and four under-performing
Company-owned restaurants in 1997, 1998 and 1999, respectively. Sales and EBIT
as defined, which is defined by the Company as operating income before asset
impairment charges, restructuring charges and litigation settlements, for
Captain D's restaurants closed in the last three years is as follows:
1999 1998 1997
EBIT as EBIT as EBIT as
($ in thousands) Sales defined Sales defined Sales defined
-----------------------------------------------------------
Stores closed during 1997 $ - $ - $ - $ (1) $ 495 $ (96)
Stores closed during 1998 - (40) 1,863 (340) 6,044 (645)
Stores closed during fourth
quarter of 1999 1,844 (156) 2,101 (66) 2,115 (33)
-----------------------------------------------------------
Total $ 1,844 $ (196) $ 3,964 $ (407) $ 8,654 $ (774)
===========================================================
18
Franchise revenue increased $0.3 million in 1999 and was basically unchanged
in 1998 when compared to the prior year. Captain D's realized increases in
customer traffic and average guest check in 1999 and 1998. Management
attributes the increase in sales during 1999 and 1998 to more effective
advertising, better promotional menu items, and a strong Lenten season. Captain
D's has continued the implementation of its "Coastal Classics" menu, which
features more upscale items at higher price points. Items offered include
broiled salmon, orange roughy, catfish, and fried oysters. Management hopes to
continue the success of the Captain D's concept by continuing to feature
promotional menu items aimed at driving customer traffic and by the continued
development of effective advertising programs.
Expenses increased $6.2 million, or 2.2%, in 1999 when compared to 1998.
Expenses as a percentage of revenues were 88.1% in 1999 compared to 89.5% in
1998. As a percentage of sales, decreases in food and supplies costs and
operating expenses were partially offset by increases in restaurant labor and
multi-unit supervisory costs.
Expenses increased $8.6 million, or 3.2%, in 1998 when compared to 1997.
Expenses as a percentage of revenues were 89.5% in 1998 compared to 89.6% in
1997. As a percentage of sales, declines in food and supplies costs and
depreciation were substantially offset by increases in restaurant labor and
multi-unit supervisory costs.
As a result of the above, EBIT as defined, which is defined by the Company as
operating income before asset impairment charges, restructuring costs and
litigation settlements, increased $5.9 million and $1.2 million in 1999 and
1998, respectively, when compared to the prior year.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell operating
restaurants to franchisees.
19
CASUAL DINING RESTAURANTS
Fiscal Year Ended
-------------------------------------------
($ in thousands except comparable store data October 31, October 25, October 26,
and guest check average) 1999 1998 1997
-------------------------------------------
Pargo's restaurant sales $ 22,973 $ 30,454 $ 36,936
Fifth Quarter restaurant sales 8,078 13,137 15,596
Barbwire's restaurant sales 7,385
-------------------------------------------
Total Casual Dining revenue 31,051 43,591 59,917
Expenses 31,032 44,759 59,073
-------------------------------------------
EBIT as defined $ 19 $ (1,168) $ 844
===========================================
Pargo's average sales volume (a) $ 2,015 $ 2,064 $ 1,944
Fifth Quarter average sales volume (a) $ 2,370 $ 2,257 $ 2,157
Pargo's comparable store sales (decrease) (a) (2.7%) (5.3%) (8.9%)
Fifth Quarter comparable store sales increase
(decrease) (a) 0.7% (3.8%) (4.7%)
Operating restaurants at year-end:
Pargo's 11 12 19
Fifth Quarter 3 4 7
------------------------------------------
Total 14 16 26
==========================================
[FN]
(a) Prior year amounts have not been restated for comparable restaurants
</FN>
Casual Dining total revenues declined $12.5 million, or 28.8%, in 1999 and
$16.3 million, or 27.2%, in 1998 when compared to the prior year. The
components of the change in Casual Dining revenue are as follows:
($ in millions) 1999 1998
----------------------
Higher menu prices $ 0.4 $ 0.4
Closed Pargo's and Fifth Quarter restaurants (12.5) (7.2)
Closed Barbwire's restaurants (7.4)
Sales at prior year prices (1.0) (2.1)
Sales from fifty-third week 0.6 -
-------- --------
Total change in restaurant sales $ (12.5) $ (16.3)
======== ========
Revenues were significantly reduced by the closing of eight (including the sale
of Barbwire's), ten, and two under-performing Company-owned restaurants in
1997, 1998 and 1999, respectively. Sales and EBIT as defined, which is defined
by the Company as operating income before asset impairment charges,
restructuring charges and litigation settlements, for Casual Dining restaurants
closed in the last three years is as follows:
1999 1998 1997
EBIT as EBIT as EBIT as
($ in thousands) Sales defined Sales defined Sales defined
---------------- ------------------- -----------------
Stores closed during 1997 $ - $ - $ - $ (32) $ 7,880 $ (478)
Stores closed during 1998 - 105 9,791 (1,275) 16,503 (616)
Stores closed or disposed of during
the first two quarters of 1999 1,204 (50) 3,922 (296) 4,323 187
---------------------------------------------------------
Total $ 1,204 $ 55 $ 13,713 $ (1,603) $ 28,706 $ (907)
=========================================================
20
The decline in comparable restaurant sales for the Casual Dining Group is the
result of a number of factors including increased competition, significant
management turnover and organizational changes and uncertainty as to the
potential sale of these concepts. The Company expects to dispose of its
Pargo's restaurants during the second quarter of 2000.
Expenses declined $13.7 million, or 30.7%, in 1999 when compared to 1998.
Expenses, as a percentage of revenues, were 99.9% in 1999 compared to 102.7%
in 1998. As a percentage of sales, declines in food and supplies costs,
operating expenses and multi-unit supervisory costs were partially offset by
increases in restaurant labor.
Expenses declined $14.3 million, or 24.2%, in 1998 when compared to 1997.
Expenses, as a percentage of sales, were 102.7% in 1998 compared to 98.6% in
1997. As a percentage of sales, the concept incurred increases in restaurant
labor, operating expenses and multi-unit supervisory costs partially offset
by a decrease in food and supplies costs.
As a result of the above, EBIT as defined, which is defined by the Company as
operating income before asset impairment charges, restructuring charges and
litigation settlements, increased $1.2 million and declined $2.0 million in
1999 and 1998, respectively.
DISTRIBUTION AND MANUFACTURING
Fiscal Year Ended
-------------------------------------------------
October 31, October 25, October 26,
($ in thousands) 1999 1998 1997
-------------------------------------------------
Outside sales $ 109,258 $ 123,135 $ 137,866
Inter-company sales 321,036 380,552 404,710
-------------------------------------------------
Total Distribution
and Manufacturing revenue 430,294 503,687 542,576
Expenses 422,375 491,855 529,975
-------------------------------------------------
EBIT as defined $ 7,919 $ 11,832 $ 12,601
=================================================
Distribution centers at year-end 3 4 4
Total revenue declined $73.4 million, or 14.6%, and $38.9 million, or 7.2%,
in 1999 and 1998, respectively, when compared to the prior year. Outside
revenues of the Distribution and Manufacturing operation declined by $13.9
million in 1999 and $14.7 million in 1998. The decline in outside sales for
these periods has resulted primarily from a loss of franchised restaurant
customers resulting from franchise store closures and increased competition.
During 1997, the Company closed its Atlanta distribution facility. The
Company shifted distribution activities to the remaining four distribution
centers to increase efficiency. In December 1998, the Company closed the
distribution center located in Wichita, Kansas. Inter-company sales declined
in both years as a result of closing Company-owned restaurants, the overall
decline in comparable store sales and the loss of inter-company sales to the
Casual Dining concept in 1999.
Expenses declined $69.5 million, or 14.1%, in 1999 when compared to the prior
year. Expenses, as a percentage of sales, were 98.2% in 1999 compared to
97.7% in 1998 due to higher labor and overhead expenses. Expenses declined
$38.1 million, or 7.2%, in 1998 when compared to the prior year. Expenses as
a percentage of sales were 97.7% in both 1998 and 1997 as increases in labor
were offset by lower operating expenses.
As a result of the above, EBIT as defined, which is defined by the Company as
operating income before asset impairment charges, restructuring charges, and
litigation settlements, decreased $3.9 million and $0.8 million in 1999 and
1998, respectively, when compared to the prior year.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its liquidity requirements with cash
provided by operating activities supplemented by external borrowing. The
Company historically has operated with a substantial working capital deficit.
Management does not believe that the deficit hinders the Company's ability to
meet its obligations as they become due as the Company's 1997 Credit Facility
includes a revolving line of credit ("Line of Credit") that is available to
cover any short term working capital requirements. Cash provided by operating
activities declined $20.5 million in 1999 compared to 1998. The net loss of
$28.8 million in 1999 resulted primarily from the noncash asset impairment
charge of $18.4 million and the $14.5 million charge for litigation
settlement. Cash provided from operations in 1999 was negatively affected by
the decline in operating income for the Company's Shoney's Restaurants and
Distribution and Manufacturing, lower depreciation and amortization and by
cash required by accounts payable and accrued expenses.
Cash provided by operating activities declined by approximately $14.3 million
during 1998 compared with 1997. The net loss of $107.7 million for 1998
resulted primarily from pre-tax noncash asset impairment charges of $48.4
million and noncash deferred tax asset valuation allowance charges of $52.5
million. Cash provided from operations was negatively affected by lower
income from restaurant operations in 1998 when compared to 1997. The effect
of the decline in income from restaurant operations was partially offset by
$17.8 million of cash provided by changes in operating assets and liabilities.
The net loss of $35.7 million for 1997 resulted primarily from pre-tax noncash
asset impairment charges of $54.0 million.
Cash provided by investing activities in 1999 was $48.3 million. During 1999,
the Company received $76.4 million in cash proceeds from the sale of closed
and operating restaurant properties. Cash used for property, plant and
equipment additions in 1999 was $28.1 million. Cash provided by investing
activities during 1998 was $6.6 million, compared to cash used by investing
activities of $5.4 million in 1997. In 1998, the Company received cash proceeds
of $33.2 million, primarily from the sale of closed restaurant locations and
the sale of rental properties. Cash used for property, plant and equipment
additions in 1998 was $28.9 million. Cash used by investing activities during
1997 totaled $5.4 million and included $40.2 million of capital expenditures
and $35.2 million of cash proceeds from asset sales.
The Company is permitted capital expenditures of $35.0 million annually under
its credit facility. The Company balances its capital spending plan
throughout the year based on operating results and may from time to time
decrease capital spending to balance cash from operations and debt service
requirements. Since the beginning of 1997, the Company has closed or sold 327
under-performing restaurants. These properties, as well as real estate from
prior restaurant closings, other surplus properties and leasehold interests,
have been sold or are being actively marketed. The Company's credit agreement
requires that net proceeds from asset disposals be applied to reduce senior
debt.
Cash used by financing activities was $88.2 million, $57.2 million and $66.1
million in 1999, 1998 and 1997, respectively. Financing activities in 1999
included $84.3 million of payments on senior indebtedness, $14.6 million of
payments on litigation settlements and net borrowings under the Company's
line of credit of $10.9 million. Of the $84.3 million of payments on senior
indebtedness, $70.5 million was from the sale of property, plant and
equipment, $10.1 million were scheduled payments and $3.7 million were
prepayments of scheduled fiscal 2000 payments. On December 2, 1997, the
Company completed a refinancing of approximately $281.0 million of its senior
debt. The new credit facility replaced the Company's revolving credit
facility, senior secured bridge loan, and other senior debt mortgage
financing agreements. The new credit facility ("1997 Credit Facility") of up
to $375.0 million consists of a $75.0 million Line of Credit and two term
notes of $100.0 million ("Term A Note") and $200.0 million ("Term B Note"),
respectively, due in April 2002.
The proceeds from the term notes were used to retire the $281.0 million of
refinanced debt and for general working capital. Also, during 1998, the
Company made its last substantial payments of $15.7 million on its 1992
litigation settlement and paid debt issue costs of $12.8 million in connection
with its refinancing in December 1997.
22
Subsequent to the refinancing, the Company has retired approximately $123.5
million of the Term A and Term B Notes and approximately $9.6 million of other
indebtedness. Significant 1997 financing activities included payments to reduce
debt and capital lease obligations of $39.8 million, scheduled payments of
$22.6 million on the Company's 1992 litigation settlement and a net reduction
in short-term borrowings of $2.1 million.
The Company's senior debt facility requires satisfaction of certain financial
covenants as well as other affirmative and negative covenants which were to
become more restrictive over the term of the loan. During the third quarter of
1998, management received approval from its lending group for covenant
modifications for the fourth quarter of 1998 and the first quarter of 1999 that
either maintain covenant ratios at existing levels or reduce the restrictions.
The financial covenant modifications were requested because of lower than
anticipated levels of sales of assets held for disposal and lower than
anticipated earnings from restaurant operations. On November 19, 1999, the
Company received approval for covenant modifications on the senior debt
facility that revised the covenant restrictions over the remaining term of the
facility. The revisions were required because of lower than anticipated levels
of earnings from restaurant operations.
The Company had $45.7 million and $130.8 million outstanding under the Term A
Note and Term B Note, respectively, and had $10.9 million outstanding under the
Line of Credit at October 31, 1999. The amounts available under the Line of
Credit are reduced by letters of credit of approximately $29.1 million,
resulting in available credit under the facility of approximately $35.0 million
at October 31, 1999. Based on the financial covenants at October 31, 1999,
before the November modifications, the Company could have drawn an additional
$16.0 million under the Line of Credit and remained in compliance with its
financial covenants. Due to the nature of the loan covenants discussed below,
as the financial covenants become more restrictive, the Company's ability to
draw under the Line of Credit in the future could be limited. At October 31,
1999, the Company had cash and cash equivalents of approximately $11.0 million
and had prepaid the next quarterly payment on the Term A Note and Term B Note
of approximately $3.7 million.
On March 20, 1999, the parties to three lawsuits that had been provisionally
certified as class actions (Belcher I, Belcher II and Edelen) agreed to the
material terms of a global settlement of the cases. The settlement agreement,
which was executed by the parties to the litigation on June 24, 1999, requires
the Company to pay $18 million as follows: $11 million upon Court approval of
the settlement and dismissal of the cases, $3.5 million on October 1, 1999 and
$3.5 million on March 1, 2000. As a result of the settlement, the Company was
required to record a charge of $14.5 million in the first quarter ended
February 14, 1999, which was in addition to a $3.5 million charge recorded in
the fourth quarter of 1998. The Court approved the settlement agreement and
entered final orders dismissing the cases on July 7, 1999 (Belcher I and
Edelen) and August 20, 1999 (Belcher II). On July 14, 1999 and October 1,
1999, the Company paid $11 million and $3.5 million, respectively, into a
qualified settlement fund in accordance with the Court approved settlement,
utilizing funds from the Company's refunded income taxes and general working
capital. The Company will fund the remaining $3.5 million utilizing an
irrevocable letter of credit in the amount of $3.5 million that was issued on
July 13, 1999.
Two other cases (Baum and Griffin) also have been resolved. Baum was dismissed
with prejudice on March 16, 1999 and the Court of Appeals dismissed a related
appeal on July 21, 1999, thereby closing out the case. The Griffin case was
settled on December 13, 1999 and the Court dismissed the case with prejudice on
January 3, 2000. The settlement agreement required the Company to pay $10,500.
RISK FACTORS
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 compared to the Company. The Company's Shoney's Restaurants
have experienced declining customer traffic during the past seven years as a
result of intense competition and a decline in operational focus occasioned by
high management turnover. The Company has initiated a number of programs to
address the decline in customer traffic; however, performance
23
improvement efforts for the Shoney's Restaurants during the past three years
have not resulted in improvements in sales and margins and there can be no
assurance that the current programs will be successful. The Company has
experienced increased costs for labor and operating expenses at its restaurant
concepts which, coupled with a decrease in average restaurant sales volumes in
its Shoney's Restaurants, have reduced its operating margins. The Company does
not expect to be able to significantly improve Shoney's Restaurants operating
margins until it can increase its comparable restaurant sales.
The Company is highly leveraged and, under the terms of its credit agreement,
generally is not permitted to incur additional debt and is limited to annual
capital expenditures of $35.0 million. The Company completed a refinancing of
approximately $281.0 million of its senior debt in December 1997. The
interest rates for the new debt agreement are higher than those for the debt
refinanced and resulted in increased interest costs in 1998. Proceeds from
asset sales have reduced the total debt outstanding and have reduced the
impact of the higher interest rates. Management believes the annual capital
expenditures permitted under the new credit agreement are sufficient for the
execution of its business plan. The 1997 Credit Facility requires, among
other terms and conditions, payments in the first half of fiscal 2002 of
approximately $138.2 million. In addition, $51.6 million of 8.25%
subordinated convertible debentures are due in July 2002. Further, the
Company's zero coupon subordinated debentures mature in 2004. The Company
plans to refinance these obligations as they become due. However, no
assurance can be given that the indebtedness can be refinanced on terms
satisfactory to the Company. If the Company is unable to refinance the
indebtedness, the Company's financial condition, results of operations and
liquidity would be materially adversely affected.
Based on current operating results, forecasted operating trends and anticipated
levels of asset sales, management believes that the Company will be in
compliance with its financial covenants during fiscal 2000. However, should
operating trends, particularly in the Shoney's Restaurant concept, vary from
those forecasted or if anticipated levels of asset sales are not met by the
Company, the Company may not be in compliance with the modified financial
covenants and management could be forced to seek additional modifications to
the Company's credit agreement. Management believes that additional loan
covenant modifications, if required in 2000, could be obtained. However, no
assurance can be given that the modifications could be obtained on terms
satisfactory to the Company. If the Company were unable to obtain
modifications, the Company's financial condition, results of operations and
liquidity would be adversely affected. The Company was in compliance with its
financial covenants at the end of the fourth quarter of 1999 before the
November modifications.
From 1991 until 1998, the Company had significant turnover of its senior
management. In August 1997, the Company settled a shareholder proxy contest
that had sought to replace the Company's Board of Directors. These changes
have resulted in disruption to its business operations, increased costs for
executive recruitment, relocation, salaries, and severance costs.
YEAR 2000 ISSUES AND CONTINGENCIES
Year 2000 issues were the result of computer programs written using two
rather than four digits to define the applicable year. Any computer programs
or operating systems that had date-sensitive software could have recognized
a date using "00" as the year 1900 rather than the year 2000. This could have
resulted in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
restaurant transactions, process orders from the Company's Distribution and
Manufacturing operation, or engage in normal business activities.
The Company conducts its business with a great degree of reliance on
internally-operated software systems. The Company's primary information
technology systems are 1) point of sale cash register systems 2) Distribution
and Manufacturing system 3) general ledger system and 4) payroll system.
As of January 2000, management is not aware of any significant Year 2000
issues with the Company's internally operated software systems.
24
The Company does not have any material relationships with third parties
that involve the transmittal of data electronically which would affect the
results of operations or financial position of the Company. The Company does
have material relationships with certain suppliers of food products. The
Company surveyed its critical suppliers as to their Year 2000 readiness;
however, the Company had no way of assuring that its major suppliers were
Year 2000 compliant and was unable to estimate the effect of their
noncompliance on the delivery of the necessary food products. The Company is
dependent upon overseas suppliers for certain critical food products. In
response to this concern, the Company, since the end of the second quarter of
1999, increased its inventory of white fish and shrimp and has maintained
higher than historical inventories of these products. Management expects these
inventory levels to return to more historical levels by mid-year. As of
January 2000, management is not aware of any significant Year 2000 issues with
critical suppliers.
The Company also relies on numerous financial institutions for the
repository of monies from the Company's restaurant locations located mainly
across the southeastern United States. These funds are generally transferred
nightly to the Company's main depository bank. While management was
comfortable with the Company's main depository bank with respect to Year 2000
issues, there was no assurance that the many institutions with which the
Company does business would be Year 2000 compliant. Such non-compliance could
have had a material effect on the Company's liquidity or financial position.
As of January 2000, management is not aware of any significant Year 2000
issues with its financial institutions.
The Company relies on a number of other systems that could have been
affected by Year 2000 related failures. The corporate phone system was
upgraded to be Year 2000 compliant. The operating system for the corporate
and regional office network required software and hardware upgrades to become
Year 2000 compliant. The Company received assurance from its credit card
processor that it was Year 2000 compliant. The Year 2000 issue did divert
information systems resources from other projects. This diversion did not
have a material effect on the Company's financial position or results of
operations. As of January 2000, management is not aware of any significant
Year 2000 issues with its other systems.
The Company utilized both external and internal resources to reprogram
or replace, test and implement the software needed for Year 2000
modifications. The total cost incurred for Year 2000 software related
readiness was approximately $0.5 million. The hardware upgrade for the
corporate and regional office network was approximately $1.2 million.
In order to minimize the Company's Year 2000 risk, in late 1999, the
Company developed contingency plans to provide backup hardware, software and
electrical power for its corporate systems, accumulate payroll data manually
if necessary, provide operating instructions should restaurants lose power,
telephone or cash register systems and to provide additional shifts in its
technical support group on December 31, 1999 and January 1, 2000.
Management believes it had an effective program in place to resolve Year
2000 issues in a timely manner. As of January 2000, the Company cannot
quantify any potential impact of any Year 2000 failures. The Company's Year
2000 program was developed to address issues that were within the Company's
control. The program minimized, but did not eliminate, the issues of external
parties.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK. The Company has exposure to interest rate changes
primarily relating to outstanding indebtedness under its 1997 Credit
Facility. From time to time the Company enters into agreements to reduce its
interest rate risks. The Company does not speculate on the future direction
of interest rates. The Company's 1997 Credit Facility bears interest at rates
which vary with changes in the London Interbank Offered Rate (LIBOR) and the
prime rate. As of October 31, 1999, $188.5 million of the Company's debt bore
interest at variable rates. The Company has entered into agreements to
effectively swap $100 million of the floating rate debt to fixed rate debt.
In 1999 and 1998, these agreements increased the Company's interest expense
by $0.7 million and $0.3 million, respectively. The Company believes that the
effect, if any, of reasonably possible near-term changes in interest rates on
the Company's consolidated financial position, results of operations or cash
flows would not be material.
COMMODITY PRICE RISK. Many of the food products purchased by the Company are
affected by commodity pricing and are, therefore, subject to price volatility
caused by weather, production problems, delivery difficulties and other
factors which are outside the control of the Company. Essential supplies and
raw materials are available from several sources and the Company is not
dependent upon any single source of supplies or raw materials. The Company's
ability to maintain consistent quality throughout its restaurant system
depends in part upon its ability to acquire food products and related items
from reliable sources. When the supply of certain products is uncertain or
prices are expected to rise significantly, the Company may enter into
purchase contracts or purchase bulk quantities for future use. The Company
has purchase commitments for terms of one year or less for food and supplies
with a variety of vendors. Such commitments generally include a pricing
schedule for the period covered by the agreements. The Company has
established long-term relationships with key seafood vendors and brokers.
Adequate alternative sources of supply are believed to exist for
substantially all products. While the supply and availability of certain
seafood species is volatile, the Company believes that it has the ability to
identify and access alternative seafood products as well as the ability to
adjust menu prices if needed. Significant items that could be subject to
price fluctuations are fish, coffee, beef, pork, produce and eggs among
others.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the registrant and its subsidiaries,
together with all Notes thereto, are set forth immediately following this
page as pages 28 through 54 of this Annual Report on Form 10-K.
REPORT OF ERNST & YOUNG LLP
Independent Auditors
Shareholders and Board of Directors
Shoney's, Inc.
We have audited the accompanying consolidated balance sheets of Shoney's,
Inc. and subsidiaries as of October 31, 1999 and October 25, 1998, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the three fiscal years in the period ended October
31, 1999. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Shoney's, Inc. and subsidiaries at October 31, 1999 and October 25, 1998,
and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended October 31, 1999, in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Nashville, Tennessee
December 17, 1999 /s/ ERNST & YOUNG LLP
27
CONSOLIDATED BALANCE SHEET
Shoney's, Inc. and Subsidiaries
October 31 October 25
1999 1998
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 10,991,872 $ 16,277,722
Notes and accounts receivable, less allowance
for doubtful accounts of $1,497,000 in 1999 and
$1,142,000 in 1998 8,529,819 10,263,490
Inventories 37,638,826 37,146,297
Refundable income taxes 14,005,359
Prepaid expenses and other current assets 5,066,660 3,390,458
Net current assets held for sale 28,340,074 69,878,238
-------------- --------------
Total current assets 90,567,251 150,961,564
Property, plant and equipment, at lower of cost or market
Land 90,492,354 100,136,968
Buildings 197,693,950 215,112,056
Buildings under capital leases 14,701,656 17,605,400
Restaurant and other equipment 247,256,906 261,081,978
Leasehold improvements 62,380,536 69,020,663
Rental properties 16,446,432 13,848,502
Construction in progress (estimated cost to complete:
$950,000 in 1999 and $608,000 in 1998) 3,797,498 1,173,215
-------------- --------------
632,769,332 677,978,782
Less accumulated depreciation and amortization (346,639,533) (350,673,367)
-------------- --------------
Net property, plant and equipment 286,129,799 327,305,415
Other assets
Goodwill (net of accumulated amortization of
$7,001,000 in 1999 and $5,465,000 in 1998) 19,720,435 29,819,721
Deferred charges and other intangible assets 6,017,336 10,581,373
Other 4,170,551 4,800,760
-------------- --------------
Total other assets 29,908,322 45,201,854
-------------- --------------
$ 406,605,372 $ 523,468,833
============== ==============
See notes to consolidated financial statements
28
CONSOLIDATED BALANCE SHEET
Shoney's, Inc. and Subsidiaries
October 31 October 25
1999 1998
------------- -------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 28,346,517 $ 37,522,186
Taxes other than income taxes 10,662,326 12,354,844
Employee compensation and related items 30,864,741 36,176,855
Accrued interest expense 3,295,724 3,799,970
Other accrued liabilities 18,709,985 23,201,481
Reserve for litigation settlement due within one year 3,872,961 372,961
Debt and capital lease obligations due within one year 29,436,016 11,980,656
-------------- --------------
Total current liabilities 125,188,270 125,408,953
Long-term debt 345,884,820 424,966,962
Obligations under capital leases 12,890,841 18,276,148
Reserve for litigation settlement 158,687 226,679
Other liabilities 22,774,820 24,322,829
Self insurance reserves 46,845,290 49,754,433
Commitments and contingencies
Shareholders' deficit
Common stock, $l par value: authorized 200,000,000 shares;
issued 49,492,514 in 1999 and 48,694,865 in 1998 49,492,514 48,694,865
Additional paid-in capital 137,674,675 137,296,111
Accumulated deficit (334,304,545) (305,478,147)
-------------- --------------
Total shareholders' deficit (147,137,356) (119,487,171)
-------------- --------------
$ 406,605,372 $ 523,468,833
============== ==============
See notes to consolidated financial statements
29
CONSOLIDATED STATEMENT OF OPERATIONS
Shoney's, Inc. and Subsidiaries
Years Ended
----------------------------------------------
October 31 October 25 October 26
1999 1998 1997
----------------------------------------------
Revenues
Net sales $ 962,200,372 $1,115,634,349 $1,202,755,479
Franchise fees 15,198,094 14,468,561 14,921,918
Other income 21,974,464 13,259,553 9,398,968
--------------- --------------- ---------------
Total revenues 999,372,930 1,143,362,463 1,227,076,365
Costs and expenses
Cost of sales
Food and supplies 368,610,377 434,764,523 478,673,418
Restaurant labor 274,511,734 308,465,116 319,367,035
Operating expenses 229,253,962 281,152,931 294,447,383
--------------- --------------- ---------------
872,376,073 1,024,382,570 1,092,487,836
General and administrative expenses 77,389,573 87,344,956 84,401,341
Impairment of long-lived assets 18,424,046 48,403,158 53,967,244
Interest expense 42,158,716 48,476,518 45,015,794
Restructuring expenses 4,485,920 10,747,043 1,301,454
Litigation settlement 14,500,000 3,500,000
--------------- --------------- ---------------
Total costs and expenses 1,029,334,328 1,222,854,245 1,277,173,669
Loss before income taxes and extraordinary
charge (29,961,398) (79,491,782) (50,097,304)
Provision for (benefit from) income taxes:
Current 755,000 (11,291,000) (8,076,550)
Deferred (1,890,000) 38,088,000 (6,309,912)
--------------- --------------- ---------------
Total income taxes (1,135,000) 26,797,000 (14,386,462)
Loss before extraordinary charge (28,826,398) (106,288,782) (35,710,842)
Extraordinary charge on early extinguishment
of debt, net of income tax benefit (1,415,138)
--------------- --------------- ---------------
Net loss $ (28,826,398) $ (107,703,920) $ (35,710,842)
=============== =============== ===============
Earnings per common share
Basic:
Loss before extraordinary charge $ (0.58) $ (2.18) $ (0.74)
Extraordinary charge on early
extinguishment of debt, net of income
tax benefit (0.03)
--------------- --------------- ---------------
Net loss $ (0.58) $ (2.21) $ (0.74)
=============== =============== ===============
Diluted:
Loss before extraordinary charge $ (0.58) $ (2.18) $ (0.74)
Extraordinary charge on early
extinguishment of debt, net of income
tax benefit (0.03)
--------------- --------------- ---------------
Net loss $ (0.58) $ (2.21) $ (0.74)
=============== =============== ===============
Weighted average shares outstanding
Basic 49,339,259 48,665,685 48,539,573
Diluted 49,339,259 48,665,685 48,539,573
See notes to consolidated financial statements
30
CONSOLIDATED STATEMENT OF CASH FLOWS
Shoney's, Inc. and Subsidiaries
Years Ended
----------------------------------------------
October 31 October 25 October 26
1999 1998 1997
----------------------------------------------
Operating activities
Net loss $ (28,826,398) $ (107,703,920) $ (35,710,842)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 41,162,155 49,340,252 56,464,813
Interest expense on zero coupon
convertible debentures and other noncash
charges 16,329,932 18,508,713 15,554,981
Deferred income taxes (1,890,000) 38,088,000 (6,309,912)
Gain on disposal of property, plant and
equipment (20,230,756) (9,417,828) (4,843,734)
Impairment of long-lived assets 18,424,046 48,403,158 53,967,244
Changes in operating assets and liabilities:
Notes and accounts receivable 1,834,878 1,966,717 1,799,103
Inventories (492,529) 1,236,546 5,865,217
Prepaid expenses (1,676,202) 1,450,081 1,959,272
Accounts payable (10,850,662) 2,524,508 (10,660,082)
Accrued expenses (7,324,161) 11,240,256 621,144
Federal and state income taxes 1,612,557 (3,491,062)
Litigation settlement 14,500,000 3,500,000
Refundable income taxes 14,005,359 (9,928,809) (4,076,550)
Deferred income and other liabilities (444,616) 4,243,692 (1,802,652)
--------------- --------------- --------------
Net cash provided by operating activities 34,521,046 55,063,923 69,336,940
Investing activities
Purchases of property, plant and equipment (28,134,832) (28,935,977) (40,205,993)
Proceeds from disposal of property, plant
and equipment 76,401,965 33,236,036 35,220,651
(Increase) decrease in other assets 76,718 2,251,102 (409,322)
--------------- --------------- --------------
Net cash provided by (used in) investing
activities 48,343,851 6,551,161 (5,394,664)
Financing activities
Proceeds of long-term debt 300,533,143 484,390
Payments on long-term debt and capital
lease obligations (84,289,662) (329,304,224) (39,829,540)
Proceeds from line of credit and short
term debt 51,868,000 16,399,000 192,535,000
Payments on line of credit and short term
debt (40,981,000) (16,399,000) (194,667,000)
Exercise of employee stock options 39,495 155,717
Payments on litigation settlements (14,567,992) (15,705,329) (22,582,554)
Payments for debt issue costs (180,093) (12,751,670) (2,155,948)
--------------- --------------- --------------
Net cash used by financing activities (88,150,747) (57,188,585) (66,059,935)
Increase (decrease) in cash and cash
equivalents (5,285,850) 4,426,499 (2,117,659)
Cash and cash equivalents at beginning of
year 16,277,722 11,851,223 13,968,882
--------------- --------------- --------------
Cash and cash equivalents at end of year $ 10,991,872 $ 16,277,722 $ 11,851,223
=============== =============== ==============
See notes to consolidated financial statements
31
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Shoney's, Inc. and Subsidiaries
Other Total
Additional Accumulated Shareholders'
Common Paid-in Comprehensive Accumulated Equity
Stock Capital Income (Loss) Deficit (Deficit)
------------------------------------------------------------------------
Balances at October 27,1996 $ 48,458,231 $ 113,889,253 $ 243,481 $ (162,063,385) $ 527,580
Net loss (35,710,842) (35,710,842)
Change in unrealized gain
on securities available
for sale (243,481) (243,481)
---------------
Comprehensive loss (35,954,323)
Issuance of common shares
pursuant to employee stock
option and stock benefit
plans 109,878 471,014 580,892
Tax benefits related to
compensation plans 10,638 10,638
Reversal of deferred tax
liability 22,501,840 22,501,840
Compensation related to
grant of restricted shares
of common stock (11,587) (11,587)
------------ -------------- ---------- --------------- ---------------
Balances at October 26,1997 48,568,109 136,861,158 0 (197,774,227) (12,344,960)
Net loss (107,703,920) (107,703,920)
Tax benefits related to
compensation plans 1,078 1,078
Issuance of common shares
pursuant to employee stock
option and stock benefit
plans 126,756 201,754 328,510
Compensation related to
grant of restricted shares
of common stock 232,121 232,121
------------ -------------- ---------- --------------- ---------------
Balances at October 25,1998 48,694,865 137,296,111 0 (305,478,147) (119,487,171)
Net loss (28,826,398) (28,826,398)
Issuance of common shares
for employee and director
compensation 543,242 264,522 807,764
Issuance of common shares
pursuant to employee stock
benefit plans 189,407 32,896 222,303
Compensation related to grant
of restricted shares of
common stock 65,000 81,146 146,146
------------ -------------- ---------- --------------- ---------------
Balances at October 31,1999 $ 49,492,514 $ 137,674,675 $ 0 $ (334,304,545) $ (147,137,356)
============ ============= ========= =============== ===============
See notes to consolidated financial statements
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shoney's, Inc. and Subsidiaries
October 31, 1999, October 25, 1998 and October 26, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The Consolidated Financial Statements include
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made in the Consolidated Financial Statements to
conform to the 1999 basis of presentation.
PROPERTY, PLANT AND EQUIPMENT -- Land, buildings, leasehold improvements and
restaurant and other equipment are recorded at cost, including a provision
for capitalized interest. Depreciation and amortization are provided
principally on the straight-line method over the following estimated useful
lives: restaurant buildings--20 years; certain office buildings and
warehouses--20 to 40 years; real property leased to others--over the term of
the lease, generally 15 to 20 years; restaurant and other equipment--3 to 10
years; and capital leases and leasehold improvements--lesser of life of
assets or the term of the lease.
GAINS ON ASSET SALES -- Gains on asset sales that include real estate owned
by the Company are recognized in accordance with Statement of Financial
Accounting Standards No, 66, "Accounting for Sales of Real Estate." In this
regard, gains on such sales are recognized when the cash proceeds from the
sale exceed 20 percent of the sales price. For restaurant sale transactions
that do not include real estate owned by the Company, gains are recognized at
the time of sale, if the collection of the sale price is reasonably assured.
GOODWILL -- The excess of cost over the fair market value of net identifiable
assets of acquired companies and acquired restaurant operations are amortized
on a straight-line basis over various periods ranging from 10 to 20 years.
The Company evaluates goodwill for impairment at least annually. In
completing this evaluation, the Company compares its best estimates of future
cash flows, excluding interest costs, with the carrying value of goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company evaluates the recoverability
of its long-lived assets in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires periodic
assessment of certain long-lived assets for possible impairment when events
or circumstances indicate that the carrying amounts may not be recoverable.
Long-lived assets are grouped and evaluated for impairment at the lowest
level for which there are identifiable cash flows that are independent of the
cash flows of other groups of assets. The Company evaluates cash flows for
individual restaurants. If it is determined that the carrying amounts of such
long-lived assets are not recoverable, the assets are written down to their
fair value. The Company considers fair value to either be the real estate
value for the respective restaurant or the discounted value of the estimated
cash flows associated with the respective restaurant. The Company transfers
long-lived assets to net property, plant and equipment held for sale when a
plan to dispose of the assets has been committed to by management. Assets
transferred to net property, plant and equipment held for sale is recorded at
the lesser of its fair value, less estimated costs to sell or carrying
amount.
CASH EQUIVALENTS -- The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
REVENUE RECOGNITION - Restaurant revenues are recognized when food and
service are rendered. Revenue for Distribution and Manufacturing sales are
recognized when products are shipped. Initial franchise fees and market
development fees are recorded as revenues when the restaurants begin
operations and the cash payment has been received. Franchise fees based on
sales of franchisees are accrued as earned.
33
INVENTORIES -- Inventories, consisting of food items, beverages and supplies,
are stated at the lower of weighted average cost (which approximates first-
in, first-out) or market.
PRE-OPENING COSTS -- Pre-opening costs including direct incremental costs
relating to opening new restaurants, such as training costs for new employees
and related travel expenses incurred before a new restaurant opens. These
costs are capitalized and then amortized over a period not to exceed one
year.
MARKETABLE SECURITIES - The Company's marketable securities were categorized
as available for sale securities, as defined by Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). Unrealized gains and losses were reflected
as a net amount in a separate component of shareholders' equity (deficit)
until realized. The Company used the average cost method for purposes of
determining realized gains and losses on the sale of investment securities.
ADVERTISING COSTS -- The Company charges the costs of production and
distribution of advertising to expense at the time the costs are incurred.
Advertising expense was $32.8 million, $43.7 million, and $45.0 million in
1999, 1998 and 1997, respectively.
INTEREST RATE HEDGE PROGRAM -- As a hedge against fluctuations in interest
rates, the Company has entered into interest rate exchange agreements to swap
a portion of its variable rate interest payment obligations for fixed rates
without the exchange of the underlying principal amounts. The Company does
not speculate on the future direction of interest rates nor does the Company
use these derivative financial instruments for trading purposes. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt (the
accrual accounting method).
FISCAL YEAR -- The Company's fiscal year ends on the last Sunday in October.
Fiscal 1999 included 53 weeks compared to fiscal years 1998 and 1997 that
were comprised of 52 weeks each.
BUSINESS SEGMENTS - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131,
which supersedes Statement of Financial Accounting Standards No. 14
"Financial Reporting for Segments of a Business Enterprise," changes
financial reporting requirements for business segments from an Industry
Segment approach to an Operating Segment approach. Operating Segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker
in deciding how to allocate resources and in assessing performance. SFAS 131
is effective for fiscal years beginning after December 15, 1997 and was
adopted by the Company on October 31, 1999.
SFAS 131 requires the Company to provide disclosures regarding its segments,
which it has not previously been required to provide. The disclosures
include certain financial and qualitative data about the Company's operating
segments.
STOCK-BASED COMPENSATION -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its stock-based
compensation plans. Under APB 25, because the Company generally grants stock
under its stock-based compensation plans at an exercise price equal to the
fair value of the shares at the date of grant, no material compensation
expense is recorded. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No.123 "Accounting for Stock-
Based Compensation" ("SFAS 123"), (see Note 8).
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The following methods and assumptions
were used by the Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
34
Long-term debt: The carrying amounts of the Company's borrowings under its
Senior Debt-Line of Credit, and Senior Debt Term A and Term B Notes which
have variable interest rates approximate their fair value. The fair values of
the Company's subordinated zero coupon convertible debentures and 8.25%
subordinated convertible debentures were determined based on quoted market
prices. The fair value of other long-term debt, industrial revenue bonds and
notes payable was estimated using discounted cash flow analyses utilizing the
Company's incremental borrowing rates for similar types of borrowing
arrangements. The fair value of the interest rate swap agreements was
determined based on quoted market prices (see Note 7).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No.130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that
companies report comprehensive income in either the Statement of
Shareholders' Equity or in the Statement of Operations. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. Effective October 26, 1998,
the Company adopted SFAS 130. The adoption had no impact on the Company's
results in 1999 and 1998 because the Company had no items of comprehensive
income in those years. In 1997, comprehensive loss differed from net loss due
to a realized gain on securities available for sale.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, which supersedes
Statement of Financial Accounting Standards No.14 "Financial Reporting for
Segments of a Business Enterprise," changes financial reporting requirements
for business segments from an Industry Segment approach to an Operating
Segment approach. Operating Segments are components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision-maker in deciding how to allocate resources
and in assessing performance. SFAS 131 is effective for fiscal years
beginning after December 15, 1997.
The Company adopted SFAS 131 effective October 31, 1999 and appropriately
restated prior year disclosures. SFAS 131 requires the Company to provide
disclosures regarding its segments which it has not previously been required
to provide. The disclosures include certain financial and qualitative data
about its operating segments. Management is unable at this time to assess
whether adding this disclosure will have a material effect upon a reader's
assessment of the financial performance and the financial condition of the
Company.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP
98-1 is effective for fiscal years beginning after December 15, 1998 and
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use after the date of adoption.
The Company adopted this statement on the first day of fiscal 1999 and
management does not anticipate that the adoption of SOP 98-1 will have a
material effect on the results of operations or financial position of the
Company.
In May 1998, the AICPA issued Statement of Position 98-5 "Reporting on the
Costs of Startup Activities" ("SOP 98-5"). SOP 98-5 requires companies to
expense the costs of startup activities (including organization costs) as
incurred. The Company's present accounting policy is to expense costs
associated with startup activities systematically over a period not to exceed
twelve months. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. Management does not anticipate that the adoption of SOP
98-5 will have a material effect on the Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or
35
liabilities in the statement of financial position and measure those
instruments at fair value.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Earlier adoption is permitted. Management does not
anticipate that the adoption of SFAS 133 will have a material effect on the
Company's results of operations or financial position.
CONCENTRATION OF RISKS AND USE OF ESTIMATES -- As of October 31, 1999, the
Company operated and franchised a chain of 1,106 restaurants in 28 states,
which consists of three restaurant divisions: Shoney's Restaurants, Captain
D's, and a Casual Dining Group (which includes two restaurant concepts). The
majority of the Company's restaurants are located in the southeastern United
States. The Company also operates a Distribution and Manufacturing business
that supplies food and supplies to Company and certain franchised
restaurants. The Company's principal concepts are Shoney's Restaurants, which
are family dining restaurants offering full table service and a broad menu,
and Captain D's restaurants, which are quick-service restaurants specializing
in seafood. The Company extends credit to franchisee customers for franchise
fees and the sale of food and supplies on customary credit terms.
Additionally, the Company believes there is no concentration of risk with any
single customer, supplier, or small group of customers or suppliers whose
failure or non-performance 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 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 Financial Statements. Changes in
such estimates will be made as appropriate as additional information becomes
available and may affect amounts reported in future periods.
NOTE 2 - ACQUISITIONS
As of September 9, 1996, the Company completed the acquisition of
substantially all the assets of TPI Enterprises, Inc. ("TPI") which, as the
largest franchisee of the Company, operated 176 Shoney's Restaurants and 67
Captain D's restaurants. The purchase price of $164.4 million consisted of
the issuance of 6,785,114 shares of the Company's common stock valued at
$59.1 million, the assumption of $46.9 million of indebtedness under TPI's
8.25% convertible subordinated debentures, the assumption or satisfaction of
TPI's outstanding debt of approximately $59.1 million and transaction costs
of $3.0 million net of cash acquired of $3.7 million.
The TPI acquisition was accounted for as a purchase and the results of TPI's
operations have been included in the Company's Consolidated Financial
Statements since September 9, 1996. The purchase price was allocated based on
estimated fair values at the date of acquisition and resulted in an excess of
purchase price over net assets acquired (goodwill) of approximately $50.6
million, which was originally being amortized on a straight line basis over
20 years. Effective with the first day of fiscal 1999, the Company revised
the estimated useful life of the TPI goodwill to a remaining life of 10
years. The change in estimate resulted in $1.2 million of additional
amortization in 1999. During 1997, the Company adjusted its preliminary
estimate of goodwill by $4.2 million relating to a revised estimate of
deferred tax assets. In addition, the Company wrote-off goodwill associated
with the TPI acquisition in conjunction with its impaired asset analysis of
approximately $4.0 million in 1999, $13.1 million in 1998 and $7.0 million in
1997.
As of October 31, 1999, of the properties acquired in the TPI transaction,
the Company has closed 110 under-performing Shoney's Restaurants, 11 under-
performing Captain D's restaurants, two distribution facilities that had
provided TPI's restaurants with food and supplies, and the former TPI
corporate headquarters in West Palm Beach, Florida. In addition, 17 of the
acquired Shoney's Restaurants were sold to franchisees. Twenty-eight of the
restaurants had been targeted for closure during the Company's due diligence
process as under-performing units. Costs to exit these businesses were
accrued as liabilities assumed in the purchase accounting and consisted
principally of severance pay for certain employees and the accrual of future
minimum lease
36
obligations in excess of anticipated sublease rental income. The total amount
of such liabilities included in the purchase price allocation was
approximately $21.0 million.
Approximately $1.9 million was charged to this liability in 1999, including
approximately $1.7 million in cost to exit restaurants acquired and $0.2
million in lease payments associated with the former TPI corporate
headquarters. Also during 1999, the Company revised its estimate of
previously accrued liabilities assumed in purchase accounting by $2.0
million. The change in estimate is the result of assigning or terminating
certain leases on terms more favorable to the Company than originally
estimated. The reduction in liabilities assumed in purchase accounting
reduced goodwill.
During 1998, approximately $2.3 million in costs were charged to this
liability, including approximately $1.6 million to exit restaurants acquired,
and $0.7 million in lease payments associated with the former TPI corporate
headquarters. During 1997, approximately $4.5 million in costs were charged
to this liability, including approximately $1.9 million to exit restaurants
acquired, and $2.6 million in severance costs and lease payments associated
with the former TPI corporate headquarters. Approximately $7.8 million of
exit costs related to the TPI acquisitions remain accrued at October 31,
1999.
The Company made no acquisitions of restaurants during 1999 or 1998. The
Company acquired four franchised restaurants during 1997, each of which was
accounted for as a purchase, for an aggregate purchase price of $3.6 million.
The Consolidated Financial Statements reflect the results of operations of
each restaurant acquired since the date of acquisition. Pro forma results of
operations with respect to restaurants acquired in 1997 have not been
presented because the effect of these acquisitions was not material.
NOTE 3 - IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR DISPOSAL
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), at the beginning of the first quarter of
1997. Based on a review of the Company's restaurants which had incurred
operating losses or negative cash flows during fiscal 1996 and a review of
the cash flows from individual properties rented to others ("rental
properties"), the Company determined that certain of its restaurant assets
and rental properties were impaired and recorded a loss to write them down to
their estimated fair values. The charge related to the initial adoption of
SFAS 121 in the first quarter of 1997 was $17.6 million. The Company's
initial asset impairment analysis did not include any of the restaurants
acquired from TPI in 1996. The Company recorded an additional asset
impairment charge of $36.4 million in the fourth quarter of 1997 as a result
of additional analysis by management and a full year's operating results from
the restaurants acquired from TPI. Of the $54.0 million of asset impairment
charges in 1997, $37.3 million related to assets held and used in the Company's
operations and $16.6 million related to assets held for sale. Of the $37.3
million relating to assets held and used in the Company's operations, $23.6
million related to the Shoney's division, $4.6 million related to Captain D's,
$5.5 million related to Casual Dining and $3.6 million related to rental and
other properties.
During the first quarter of 1998, the Company recorded an additional impairment
charge of $2.6 million. Based on the continued decline in operating performance
of the Company's restaurant operations during 1998, particularly the Shoney's
Restaurants division, the Company completed an asset impairment analysis during
the third quarter of 1998. As a result of this analysis, the Company recorded
an asset impairment charge of $45.8 million during the third quarter of 1998.
Approximately $42.9 million of the third quarter 1998 asset impairment charge
related to assets held and used in the Company's operations and approximately
$2.9 million related to assets held for disposal. Of the $42.9 million relating
to assets held and used in the Company's operations, $42.7 millions related to
the Shoney's Restaurant division.
Because of continued declines in the operating performance of the Company's
Shoney's Restaurant division during 1999, the Company completed an asset
impairment analysis during the third quarter of 1999 and recorded an asset
impairment charge of $18.4 million. Approximately $17.1 million of the third
quarter 1999 asset impairment
37
charge related to assets held and used in the Company's operations and
approximately $1.3 million related to assets held for sale. Of the $17.1
million relating to assets held and used in the Company's operations, $15.6
million related to the Shoney's Restaurant division.
At October 31, 1999, the carrying value of the 58 properties to be disposed
of was $28.3 million and is reflected on the consolidated balance sheet as net
assets held for sale. Assets held for sale are included in Corporate and other
for certain segment financial information disclosed in Note 16 to the
Consolidated Financial Statements. Under the provisions of SFAS 121,
depreciation and amortization are not recorded during the period in which
assets are being held for disposal.
NOTE 4- RESTRUCTURING EXPENSE
When the decision to close a restaurant is made, the Company incurs certain
exit costs generally for the accrual of the remaining leasehold obligations
less anticipated sublease income related to leased units that are targeted to
be closed. These exit costs are included in the consolidated statement of
operations in the restructuring expense caption. The Company accrued $1.3
million in exit costs during 1997 associated with leasehold obligations on
leased units that were closed during the year. The Company recorded
approximately $10.7 million in exit costs during 1998, primarily associated
with the accrual of the remaining leasehold obligations on restaurants closed
or to be closed. During the third quarter of 1999, the Company recorded
approximately $0.4 million in severance and related costs pertaining to the
planned closure of its distribution center in Macon, Georgia. The Company
recorded an additional $5.7 million of exit costs in the fourth quarter of 1999
as a result of 76 additional restaurant closures. The Company charged
approximately $3.5 million and $1.0 million against these exit costs reserves
in 1999 and 1998, respectively. In addition, during 1999, the Company revised
its estimate of previously accrued exit costs downward by $1.6 million. The
change in estimate is the result of assigning certain leases on terms more
favorable to the Company than originally estimated. Approximately $12.0
million of accrued exit costs remain at October 31, 1999.
During 1997 and 1998, the Company closed 75 and 104 under-performing
restaurants, respectively. Thirty-seven additional under-performing
restaurants were closed during the first quarter of 1999 and ten restaurants
were sold to franchisees. Sixteen restaurants were closed during the second
quarter and one previously closed restaurant was reopened. An additional 76
under-performing restaurants were closed in the fourth quarter of 1999, nine
restaurants were sold to franchisees and one Captain D's was opened. Below are
sales and EBIT as defined, which is defined by the Company as operating income
before asset impairment charges, restructuring charges, and litigation
settlements, for the restaurants closed or sold in each of the last three years.
1999 1998 1997
EBIT as EBIT as EBIT as
($ in thousands) Sales defined Sales defined Sales defined
--------------------- ---------------------- ---------------------
Stores closed during 1997 $ - $ (294) $ - $ (756) $ 26,048 $ (4,840)
Stores closed during 1998 - (1,655) 70,376 (8,413) 105,041 (5,272)
Stores closed or disposed
of during the first two
quarters of 1999 14,629 (1,686) 78,524 (2,079) 83,219 199
Stores closed or disposed
of during the fourth
quarter of 1999 82,493 (8,351) 95,022 (3,943) 100,476 (31)
-----------------------------------------------------------------------
Total $ 97,122 $ (11,986) $ 243,922 $ (15,191) $ 314,784 $ (9,944)
=======================================================================
NOTE 5 - DEBT ISSUE COSTS
Debt issue costs are capitalized and amortized using the effective interest
method over the term of the related debt issues. Issue costs of approximately
$0.2 million, $12.8 million, and $2.2 million relating to various financings
during 1999, 1998 and
38
1997, respectively, have been paid and deferred. Amortization of debt issue
costs during 1999, 1998 and 1997 was approximately $4.6 million, $4.1 million,
and $3.4 million, respectively. Debt issue costs of $1.1 million were incurred
during the fourth quarter of 1997 to obtain various waivers of payments and
financial covenants to facilitate the Company's refinancing and were deferred
at October 26, 1997. These debt issue costs were charged to interest expense
during 1998.
The Company had unamortized debt issue costs deferred at October 26, 1997
totaling $2.2 million related to debt refinanced on December 2, 1997, which
resulted in an extraordinary loss, net of tax, totaling approximately $1.4
million (or $0.03 per share) in the first quarter of 1998.
NOTE 6 - INCOME TAXES
The components of the Company's deferred tax assets and liabilities as of
October 31, 1999 and October 25, 1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Reserve for lawsuit settlement $ 1,428,355 $ 1,454,362
Reserve for self insurance 17,908,048 23,344,229
Reserve for restructuring and closed stores 7,376,846 8,430,906
Amortization of intangibles 2,409,639 4,269,359
Net operating loss, contribution and tax
credit carryforwards 39,673,959 19,280,458
Book over tax depreciation 0 2,298,495
Other - net 1,712,412 4,069,134
------------- -------------
Deferred tax assets 70,509,259 63,146,943
Less valuation allowance (68,942,469) (63,146,943)
------------- -------------
Net deferred tax assets 1,566,790 0
Deferred tax liabilities:
Tax over book depreciation 1,566,790 0
------------- -------------
Deferred tax liabilities 1,566,790 0
------------- -------------
Total net deferred tax asset $ 0 $ 0
============= =============
At October 31, 1999, the Company had net operating loss (NOL) and contribution
carryforwards of approximately $23.1 million and $0.1 million, respectively,
which expire during the years 2000 through 2010. The Company also had targeted
jobs and tip credit carryforwards of approximately $4.6 million which expire
during the years 2002 through 2010 and alternative minimum tax credit
carryforwards of $0.9 million which have no expiration. These carryforward
items were acquired in the acquisition of TPI. The utilization of these
carryforwards is subject to limitations imposed by the Internal Revenue Code.
In addition, the Company generated an NOL of approximately $44.4 million and
targeted jobs and tip credits of approximately $1.8 million during 1999
which will be carried forward to offset future years' taxable income. In
addition, the Company has state net operating loss carryforwards of
approximately $173.4 million which expire from 2001 to 2016.
During the third quarter of 1998, the Company recorded a deferred tax asset
valuation adjustment of $51.3 million. The deferred tax asset valuation
adjustment is in accordance with SFAS 109, which requires that a deferred tax
asset valuation allowance be established if certain criteria are not met. The
Company considered these criteria in connection with the asset impairment
charges recorded in the third quarter of 1998 and, accordingly, increased the
deferred tax asset valuation allowance. The Company recorded an additional
$1.2 million valuation allowance in the fourth quarter of 1998.
In the fourth quarter of 1999, an adjustment was made to the TPI purchase
price allocation. As a result, deferred tax assets related to the TPI
acquisition were reduced by $1.9 million, and the valuation allowance related
to the TPI deferred tax assets was also reduced by $1.9 million, resulting in
a decrease in income tax expense. The total deferred tax asset valuation
allowance at October 31, 1999 was $68.9 million and increased $5.8 million
during 1999. If the deferred tax assets are realized in the future, the
related tax benefits will reduce income tax expense.
39
The components of the provision for (benefit from) income taxes are as
follows:
1999 1998 1997
---- ---- ----
Current:
FederaL $ 0 $ (14,892,000) $ (8,076,000)
State 755,000 2,795,000 0
------------- -------------- --------------
755,000 (12,097,000) (8,076,000)
------------- -------------- --------------
Deferred:
Federal (821,000) 38,996,000 (3,384,000)
State (1,069,000) (908,000) (2,926,000)
------------- -------------- --------------
(1,890,000) 38,088,000 (6,310,000)
------------- -------------- --------------
Total income tax provision (benefit) $ (1,135,000) $ 25,991,000 $ (14,386,000)
============= ============== ==============
The income statement classification of the provision for (benefit from)
income taxes is as follows:
1999 1998 1997
---- ---- ----
Income tax provision (benefit)
attributable to continuing operations $ (1,135,000) $ 26,797,000 $ (14,386,000)
Extraordinary charge on early
extinguishment of debt (806,000)
------------- -------------- --------------
Total income tax provision (benefit) $ (1,135,000) $ 25,991,000 $ (14,386,000)
============= ============== ==============
A reconciliation of the difference between total income tax provision
(benefit) and the amount computed using the statutory federal income tax rate
is as follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 35% 35% 35%
Federal income taxes (benefit) based
on the statutory tax rate $ (10,486,489) $ (28,599,522) $ (17,534,056)
State and local income taxes, net of
federal tax benefit (1,961,864) (3,882,840) (1,883,836)
Targeted jobs and tip credits (1,175,886) (963,706) (1,011,929)
Goodwill amortization and impairment
write-down 2,391,232 5,056,781 3,218,100
Change in valuation allowance 5,795,526 52,538,000 5,860,309
Reversal of income tax reserves (4,000,000)
Other 4,302,481 1,842,287 965,412
-------------- -------------- --------------
Total income tax provision (benefit) $ (1,135,000) $ 25,991,000 $ (14,386,000)
============== ============= ==============
The Company made income tax payments, (net of refunds), of approximately
($19.6 million), ($3.1 million) and $0.2 million during 1999, 1998 and 1997,
respectively.
40
NOTE 7 - DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Debt and obligations under capital leases at October 31, 1999 and October 25,
1998 consisted of the following:
1999 1998
---- ----
Senior debt - Line of Credit $ 10,887,000 $ --
Senior debt - Term A Note 45,672,524 77,387,946
Senior debt - Term B Note 130,800,859 181,113,692
Subordinated zero coupon debentures, due April 2004 122,520,712 112,580,014
Subordinated convertible debentures, 8.25% due
July 2002, (net of discount of $3,254,600 in 1998
and $2,505,281 in 1999) 49,057,719 48,308,400
Industrial revenue bonds, due in varying annual
installments to May 2006 collateralized by land,
buildings, equipment and restricted cash 10,315,000 10,315,000
Notes payable to others, 6.0% to 10.25%, maturing
at varying dates to 2009 (the balance of the notes
are fully secured by land, buildings and equipment) 4,420,602 5,267,458
------------- -------------
373,674,416 434,972,510
Obligations under capital leases 14,537,261 20,251,256
------------- -------------
388,211,677 455,223,766
Less amounts due within one year 29,436,016 11,980,656
------------- -------------
Amounts due after one year $ 358,775,661 $ 443,243,110
============= =============
SENIOR DEBT REFINANCING
On December 2, 1997, the Company completed a refinancing of approximately
$281.0 million of its senior debt. The new credit facility replaced the
Company's revolving credit facility, senior secured bridge loan, and other
senior debt mortgage financing agreements. The new credit facility of up to
$375.0 million ("1997 Credit Facility") consists of a $75.0 million line of
credit ("Line of Credit"), and two term notes of $100.0 million and $200.0
million ("Term A Note" and "Term B Note"), respectively, due in April 2002.
The credit facility provides for interest on amounts outstanding under the
Line of Credit, Term A Note and Term B Note based on certain defined
financial ratios. At October 31, 1999, the applicable margin for amounts
outstanding under the Line of Credit and Term A Note was 2.5% over Libor or
1.5% over the prime rate and the applicable margin for amounts outstanding
under the Term Note B was 3.0% over Libor or 2.0% over the prime rate.
TERM NOTES
At October 31, 1999, the Company had approximately $45.7 million and $130.8
million outstanding under its Term A Note and Term B Note, respectively.
During 2000, principal reductions of $15.8 million are scheduled for the Term
A Note and principal reductions of $0.7 million are scheduled for the Term B
Note. Of these amounts, $3.7 million was prepaid as of October 31, 1999. At
October 31, 1999, the effective interest rates on the term notes were 8.4%
and 8.6% for the Term A Note and Term B Note, respectively.
LINE OF CREDIT
The Company had borrowings outstanding on its $75.0 million Line of Credit at
October 31, 1999 of $10.9 million. Available credit under the Line of Credit
is reduced by letters of credit, which totaled $29.1 million at October 31,
1999, resulting in available credit of $35.0 million. Based on the financial
covenants at October 31, 1999, before the November 1999 modifications, the
Company could have drawn an additional $16.0 million under the Line of Credit
and remained in compliance with its financial covenants. Due to the nature of
the loan covenants discussed below, as the financial covenants become more
restrictive, the Company's ability to draw under the Line of Credit in the
future could be limited. The Company pays an annual fee of 0.5% for unused
available credit under the facility. At October 31, 1999, the interest rate
for the Line of Credit was 9.75%.
41
INTEREST RATE HEDGE PROGRAM
The 1997 Credit Facility required the Company to enter into an interest rate
hedge program covering a notional amount of not less than $50.0 million and
not greater than $100.0 million within 60 days from the date of the loan
closing. The amount of the Company's debt covered by the hedge program was
$100.0 million at October 31, 1999, which was comprised of two $40.0 million
agreements, for which the interest rates are fixed at approximately 6.1% and
5.9%, respectively, plus the applicable margin and an additional $20.0
million agreement which fixes the interest rate on the covered amount of debt
at 5.6% plus the applicable margin. At October 31, 1999, the estimated profit
to the Company to exit the interest rate swap agreements was approximately
$0.1 million. The fair value of the swap agreements and changes in the fair
value as a result of changes in market interest rates are not recognized in
the Consolidated Financial Statements.
LOAN COVENANTS
The Company's senior credit facility is secured by substantially all of the
Company's assets. The Company's debt agreement (1) requires satisfaction of
certain financial ratios and tests (which become more restrictive during the
term of the credit facility); (2) imposes limitations on capital
expenditures; (3) limits the Company's ability to incur additional debt,
leasehold obligations and contingent liabilities; (4) prohibits dividends and
distributions on common stock; (5) prohibits mergers, consolidations or
similar transactions; and (6) includes other affirmative and negative
covenants. During the third quarter of 1998, management received approval
from its lending group for covenant modifications in the fourth quarter of
1998 and the first quarter of 1999 that either maintain covenant ratios at
existing levels or reduce the restrictions. The financial covenant
modifications were requested because of lower than anticipated levels of
sales of assets held for disposal and lower than anticipated earnings from
restaurant operations. In November 1999, the Company received approval from
its lending group for modifications to the 1997 Credit Facility that reduced
or modified the restrictions contained in the debt agreement for the fourth
quarter of 1999 and the remainder of the loan agreement. Based on current
operating results, forecasted operating trends and anticipated levels of
asset sales, management believes that the Company will be in compliance with
its financial covenants during 2000. However, should operating trends,
particularly in the Shoney's Restaurant concept, vary from those forecasted
or if anticipated levels of asset sales are not met by the Company, the
Company may not achieve compliance with the modified financial covenants and
management could be forced to seek additional modifications to the Company's
credit agreement. Management believes that additional loan covenant
modifications, if required in 2000, could be obtained. However, no assurance
can be given that the modifications could be obtained on terms satisfactory to
the Company. If the Company were unable to obtain modifications, the Company's
financial condition, results of operations and liquidity would be adversely
affected. At October 31, 1999, the Company was in compliance with all
of its debt covenants before the November 1999 modifications.
SUBORDINATED ZERO COUPON CONVERTIBLE DEBENTURES, DUE APRIL 2004
The subordinated zero coupon convertible debentures were issued at $286.89
per $1,000 note (aggregate amount of $57.7 million). There are no periodic
cash payments of interest. The issue price represents a yield to maturity of
8.5% based on a semiannual bond equivalent basis. At maturity each note is
convertible into 29.349 shares of the Company's common stock, at the option
of the holder. The Company has reserved 5,205,632 shares for future issuance
pursuant to these debentures.
SUBORDINATED CONVERTIBLE DEBENTURES, 8.25%, DUE JULY 2002
In connection with the acquisition of substantially all of the assets of TPI
in September 1996, the Company assumed, through a supplemental indenture,
$51.6 million (principal amount) of 8.25% subordinated convertible debentures
due July 15, 2002. The bonds are convertible at the holders' option, subject
to compliance with the provisions of the supplemental indenture, into 50.508
shares of the Company's stock for each $1,000 debenture. In addition, upon
conversion, debenture holders are entitled to a cash distribution per share
equal to the cash distributions made by TPI
42
to its common shareholders in connection with the liquidation and dissolution
of TPI. Interest on the bonds is due semi-annually in January and July.
OTHER DEBT INFORMATION
The Company's industrial revenue bonds include $9.2 million at fixed interest
rates ranging from 9% to 10% and $1.1 million at a floating interest rate
subject to a floor of 7.5% and a ceiling of 15.0%.
Debt and obligations under capital leases maturing in each of the next five
fiscal years are as follows:
($ in millions)
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
$ 29.4 $ 28.5 $ 193.5 $ 6.6 $ 179.5(1)
<FN>
(1) Includes accreted value of subordinated zero coupon convertible
debentures at maturity.
</FN>
Net interest costs of approximately $0.0 million, $0.1 million and $0.3 were
capitalized as a part of building costs during 1999, 1998 and 1997,
respectively. Interest paid was approximately $27.4 million, $32.6 million
and $33.8 million during 1999, 1998 and 1997, respectively.
The Company has standby letters of credit of $29.1 million outstanding at
October 31, 1999 which are principally utilized to support the Company's
self-insurance programs. All of the outstanding letters of credit are
supported by the Company's $75 million Line of Credit.
The carrying value and estimated fair value of the Company's debt are
summarized in the following table:
October 31, 1999
----------------
Estimated
Carrying Value Fair Value
-------------- ----------
Senior debt-Line of Credit $ 10,887,000 $ 10,887,000
Senior debt-Term A Note 45,672,524 45,672,524
Senior debt-Term B Note 130,800,859 130,800,859
Subordinated zero coupon convertible debentures 122,520,712 33,700,299
Subordinated convertible debentures 49,057,719 29,648,725
Industrial revenue bonds 10,315,000 10,501,488
Notes payable to others 4,420,603 4,467,242
Interest rate swap agreements 0 (101,284)
------------- --------------
Total Debt $ 373,674,417 $ 265,576,853
============= ==============
See Note 1 - Summary of Significant Accounting Policies for a further
discussion of the basis for management's estimates of the fair value of
financial instruments.
NOTE 8 - STOCK BASED COMPENSATION
The stock option plan adopted by the Company in 1981 (the "1981 Plan"), and as
subsequently amended, provided for the issuance of options to purchase
7,501,431 shares of the common stock of the Company and included 930,828 and
2,202,208 shares reserved for future grants as of October 25, 1998 and October
31, 1999, respectively. On September 9, 1996, options to purchase 615,146
shares of the Company's common stock were issued in exchange for the
outstanding TPI options in connection with the Company's acquisition of the
assets of TPI ("the 1996 Plan"). The 1996 Plan provided for the issuance of
options to purchase 620,000 shares of which 40,433 were outstanding as of
October 31, 1999.
The plans provide for the issuance of options having terms of up to 10 years
and which become exercisable generally at a rate of 20% per year or as
determined by the Company's Human Resources and Compensation Committee of the
Board of Directors, but
43
not to exceed 33 1/3% per year. Option prices may not be less than the market
price on the date of grant.
The stock plan adopted by the Company in 1998 (the "1998 Stock Plan")
provided for the issuance of 2,000,000 shares of the Company's common stock
to employees or to non-employee Board members as stock incentives and/or
other equity interests or equity-based incentives in the Company. As of
October 25, 1998 and October 31, 1999, there were 2,000,000 and 1,456,758
shares, respectively, available for future issuance under the plan.
The Company has a stock option plan for directors (the "Directors Plan")
under which options to purchase 200,000 shares of common stock may be granted
to non-employee directors. The Directors Plan covered 195,000 shares of the
common stock of the Company and included 165,000 and 160,000 shares available
for future grant at October 25, 1998 and October 31, 1999, respectively. Each
non-employee director receives an option to purchase 5,000 shares upon their
initial election to the Board and every five years thereafter receives an
option to purchase an additional 5,000 shares. The option price is the market
price of the Company's common stock on the date that the option is granted.
Each option has a term not to exceed ten years and is exercisable at the rate
of 20% per year and in full in the event of death or disability.
On December 9, 1997, the Company repriced 333,500 stock options that were
granted between June 8, 1995 and September 2, 1997 with the exercise prices
ranging from $5.375 to $10.625. The new exercise price for these options is
$3.9375, which was the fair market value as of December 9, 1997. These
options retained their original term and vesting schedule. Additionally,
442,889 stock options were canceled and regranted at $3.9375 on that same
date. The original options were granted between November 11, 1989 and October
13, 1994 with exercise prices ranging from $13.875 to $25.51. Of these,
404,950 have a five year term and vest 20% per year after one year and fully
vest after four years and eight months. The remaining 37,939 options have a
ten year term and vest 20% per year after one year and fully vest after five
years.
On January 15, 1998, the Company canceled 1,000,000 options that were
exercisable based on the market price appreciation of the Company's common
shares or six years of continuous employment and had an exercise price of
$9.625. In exchange, 100,000 options, having a ten year term, were granted
with an exercise price of $3.125 and vest 20% per year after one year and
fully vest after five years.
A summary of activity under the plans is as follows:
Weighted-
Average
Options Exercise Price
------- --------------
Outstanding at October 27, 1996 6,073,899 $ 12.66
Issued 1,077,500 9.45
Exercised (20,373) 6.14
Expired or canceled (1,300,542) 15.22
-----------
Outstanding at October 26, 1997 5,830,484 11.52
Issued 4,218,634 4.64
Exercised (4,500) 3.94
Expired or canceled (3,191,828) 11.20
-----------
Outstanding at October 25, 1998 6,852,790 7.17
Issued 1,391,987 2.34
Exercised 0 --
Expired or canceled (2,870,121) 9.76
-----------
Outstanding at October 31, 1999 5,374,656 $ 4.54
===========
At October 31, 1999, October 25, 1998, and October 26, 1997 the number of
options exercisable was 1,282,559, 941,347, and 1,194,383, respectively, and
the weighted-average exercise price of those options was $6.07, $12.69, and
$16.20, respectively.
44
The following table summarizes information about stock options outstanding at
October 31, 1999:
Weighted-
Average
Number Weighted- Remaining
Range of Outstanding at Average Contractual
Exercise Prices October 31, 1999 Exercise Price Life (Years)
--------------- ---------------- -------------- ------------
$ 1.43 - $ 2.75 1,303,671 $ 2.31 9.3
$ 3.06 - $ 3.94 1,239,709 $ 3.61 6.0
$ 4.06 - $ 7.75 2,492,843 $ 5.20 8.1
$ 9.50 - $ 25.51 338,433 $ 11.69 5.5
The following table presents the fair value of options granted during 1999,
1998, and 1997:
1999
Number of Weighted-Average Weighted-Average
Options Exercise Price Fair Value
--------- ---------------- ----------------
Where exercise price:
Equals market price 1,391,987 $ 2.34 $ 1.39
=========
1998
Number of Weighted-Average Weighted-Average
Options Exercise Price Fair Value
--------- ---------------- ----------------
Where exercise price:
Exceeds market price 500,000 $ 6.55 $ 1.95
Equals market price 3,718,634 4.39 2.25
--------- ------- ------
4,218,634 $ 4.64 $ 2.21
=========
1997
Number of Weighted-Average Weighted-Average
Options Exercise Price Fair Value
--------- ---------------- ----------------
Where exercise price:
Exceeds market price 749,000 $ 10.82 $ 3.48
Equals market price 328,500 6.34 3.23
--------- ------- ------
1,077,500 $ 9.45 $ 3.40
=========
The Company also has an Employee Stock Purchase Plan under which 1,460,807
shares of the Company's common stock may be issued at October 31, 1999. Under
the terms of this plan, employees may purchase the Company's common stock
through payroll deductions. The purchase price is 85% of the lower of (i) the
average of the closing market prices on the first trading day of each calendar
month or (ii) the closing market price on the last trading day of each calendar
year. The exercise date under this plan is the last trading day of each
calendar year and the Company issued common shares to employees of 186,007,
98,556, and 68,685 in 1999, 1998 and 1997, respectively, and issued at $1.17,
$2.76, and $5.95 per share for the same periods, respectively. There have been
no charges to income in connection with the plan other than incidental expenses
in the administration of the plan. The weighted-average fair value of shares
purchased during 1999, 1998 and 1997 was $0.30, $0.99 and $2.10 per share,
respectively.
The Company has an Employee Stock Bonus Plan under which 593,783 shares of the
Company's common stock may be issued at October 31, 1999. The awards under this
plan consist of both a stock and a cash bonus. The stock bonuses vest 10% per
year after one year and in full after five years and are distributed upon
vesting. On each vesting date, a cash bonus equal to 25% of the market value of
the shares being distributed also will be paid. A maximum of 1,000 shares may
be awarded to any employee annually.
45
As of October 31, 1999, grants of bonuses under this plan of 5,700 shares
were outstanding. The Company has recognized compensation expense related to
this plan of approximately $0, $0 and $0.1 million for 1999, 1998 and 1997,
respectively.
The shares distributed and cash bonuses paid pursuant to this plan during the
past three fiscal years were as follows:
Shares Cash Bonuses
------ ------------
1997 3,450 $ 6,038
1998 6,700 $ 5,444
1999 3,400 $ 1,169
On November 12, 1997, the Company's Board of Directors approved the
employment agreement of the Company's President and CEO, the terms of which
require an award of 120,000 restricted shares of Shoney's, Inc. common stock.
Pursuant to the terms of the agreement, the employee received 40,000 shares
on December 31, 1998. The remaining shares vest on December 31, 1999
(40,000); and December 31, 2000 (40,000) and are reflected in compensation
expense based on the vesting schedule. In addition, upon distribution of the
restricted shares, the employee receives a tax equalization bonus.
On August 3, 1998, the Company's Board of Directors approved the employment
agreement of the President and COO of Shoney's Restaurants, the terms of
which require an award of 75,000 restricted shares of Shoney's, Inc. common
stock. Pursuant to the terms of the agreement, the employee received a
distribution of 25,000 shares on August 2, 1999. The remaining shares vest
on August 2, 2000 (25,000); and August 2, 2001 (25,000) and are reflected in
compensation expense based on the vesting schedule. In addition, upon
distribution of the restricted shares, the employee receives a tax
equalization bonus.
The Company applies APB 25 and the related interpretations in accounting for
its stock-based compensation plans; accordingly, the Company recognizes no
compensation expense for its stock option plans or Employee Stock Purchase
Plan. Pro forma information regarding net income and earnings per share is
required by SFAS 123 as if the Company had accounted for its stock-based
compensation plans under the fair value method prescribed by that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Risk-free interest rate 6.42% 4.88% 5.87%
Dividend yield None None None
Volatility factor .487 .410 .382
Weighted-average expected option life 7 years 7 years 7 years
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
46
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's actual and pro forma net loss and loss per share are presented in
the following table (in thousands, except for per share data.)
1999 1998 1997
---- ---- ----
Net loss - as reported $ (28,826) $ (107,704) $ (35,711)
Net loss - pro forma $ (30,095) $ (110,704) $ (37,780)
Basic loss per share - as reported $ (0.58) $ (2.21) $ (0.74)
Basic loss per share - pro forma $ (0.61) $ (2.27) $ (0.78)
Diluted loss per share - as reported $ (0.58) $ (2.21) $ (0.74)
Diluted loss per share - pro forma $ (0.61) $ (2.27) $ (0.78)
Because SFAS 123 provides for pro forma amounts for options granted beginning
in fiscal 1996, the pro forma compensation expense could increase in future
years as new option grants are included in the pricing model.
NOTE 9 - LEASES
The Company has noncancellable lease agreements for certain restaurant land
and buildings. Substantially all lease agreements may be renewed for periods
ranging from five to fifteen years, and provide for contingent rentals based
on percentages of net sales (generally 3% to 6%) against which minimum
rentals are applied.
Buildings under capital leases of $14.7 million at October 31, 1999 and $17.6
million at October 25, 1998 and accumulated amortization of $10.8 million and
$11.1 million at October 31, 1999 and October 25, 1998, respectively, relate
to the building portion of capital leases involving land and buildings.
Amortization of buildings under capital leases is included in depreciation
expense.
At October 31, 1999, minimum rental commitments under capital leases and
operating leases having an initial or remaining noncancellable term of one
year or more are shown in the following table:
Capital Operating Sublease
Leases Leases Amounts Total
------- --------- -------- -----
2000 $ 3,176,702 $ 12,042,980 $ (1,734,373) $ 13,485,309
2001 3,013,574 10,915,945 (1,410,660) 12,518,859
2002 2,890,957 9,833,451 (1,200,968) 11,523,440
2003 2,609,022 8,428,985 (1,054,293) 9,983,714
2004 2,555,744 6,497,030 (875,454) 8,177,320
Thereafter 7,678,183 22,522,863 (3,064,431) 27,136,615
------------- ------------ ------------- -------------
Total minimum rentals $ 21,924,182 $ 70,241,254 $ (9,340,179) $ 82,825,257
============= ============ ============= ============
Amount representing
interest (7,386,921)
-------------
Present value of net
minimum rentals $ 14,537,261
=============
47
Contingent rental expense relating to the land and building portion of
capital leases was $1.0 million, $1.2 million and $1.3 million in 1999, 1998
and 1997, respectively.
Total rental expense for all operating leases not capitalized is as follows:
1999 1998 1997
---- ---- ----
Minimum rentals $ 6,831,304 $ 8,749,142 $ 11,905,514
Contingent rentals 965,348 1,416,702 1,609,439
------------- ------------- -------------
Subtotal 7,796,652 10,165,844 13,514,953
Sublease rentals (1,219,595) (1,234,546) (1,092,823)
------------- ------------- -------------
Total $ 6,577,057 $ 8,931,298 $ 12,422,130
============= ============= =============
NOTE 10 - COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS - In connection with the sale of Mike Rose Foods, Inc.
("MRF") in 1995, the Company has committed to certain minimum purchase
obligations with respect to food products supplied by MRF. Under the terms of
the sales agreement, the Company entered into a five year supply agreement
under which MRF will continue to be the supplier, for all Company-owned
restaurants, of salad dressings, mayonnaise, sauces, condiments, breadings,
and a variety of food products. The supply agreement contains minimum
purchase commitments generally equal to the actual quantities of various
products the Company purchased from MRF during 1994 for Company-owned
restaurants, which was approximately $14.5 million. The contract includes
certain price adjustments for changes in commodity prices which will cause
the actual amount of annual purchases to change over time. Actual purchases
from MRF by the Company during 1999 were approximately $22.9 million. The
Company's purchases are expected to exceed the minimum purchase volume
required under the supply agreement for the foreseeable future.
SEVERANCE AGREEMENTS - The Company has employment agreements with two
executive officers that provide severance pay under certain circumstances.
The contracts expire at dates between December 2000 and August 2001. One of
the agreements provides for an automatic two year extension of the term in
the event of a change in control. The maximum contingent liability under
these employment agreements is $2.3 million.
On July 15, 1997, a committee of the Board of Directors of the Company
authorized the execution of Management Retention Agreements with certain
officers of the Company to assist in the retention of key management
personnel. The agreement, which covers 14 officers, provides for payment of
between one and two years of base salary in the event that the executives
were terminated without good cause or if the executives resigned for "good
reason" (as defined in the agreements) within a one year period following a
change in control of the Company. The Company's total contingent liability
with respect to these agreements is approximately $2.8 million. The Company's
policy for officers not party to the Management Retention Agreements is to
provide severance benefits of up to twelve months salary for such officers in
the event they are terminated without cause.
LEASEHOLD INTERESTS ASSIGNED TO OTHERS - The Company has assigned to third
parties its leasehold interest with respect to approximately thirty-four (34)
properties on which the Company remains contingently liable to the landlord
for the performance of all obligations in the event that the assignee does
not perform its obligations under the lease. The assigned leases are for
restaurant sites that the Company has closed. The Company estimates its
contingent liability associated with these assigned leases to be
approximately $12.4 million.
PROPERTY SUBLET TO OTHERS - The Company subleases approximately 50 properties
to others. In general, the Company remains liable for the leasehold
obligation in the event that these third parties do not make the required
lease payments. The majority of the sublet properties are former restaurant
sites that the Company has closed. The Company estimates its contingent
liability associated with these sublet properties to be approximately $8.3
million.
LITIGATION - See Note 12.
48
NOTE 11 - SETTLEMENT OF DISCRIMINATION LAWSUIT
In January 1993, court approval was granted to a class action consent decree
settling certain employment litigation against the Company and its former
chairman. This class consisted only of employees from the Company's
"Shoney's" and "Captain D's" restaurant concepts from February 4, 1988
through April 19, 1991. Under the consent decree, the Company agreed to pay
$105.0 million to settle these claims. In addition, the Company agreed to pay
$25.5 million in plaintiffs' attorney's fees and an estimated $4.0 million in
payroll taxes (which was subsequently reduced to $2.3 million) as well as
certain administrative costs. Substantially all of the payments were made as
of March 1, 1998. Under the terms of the consent decree, the remaining
payments are made on a monthly basis, without interest. Remaining payment
obligations under the consent decree for the next three years and four months
are approximately $0.2 million.
NOTE 12 - LITIGATION
Belcher I
On December 1, 1995, five current and/or former Shoney's Restaurant managers
or assistant restaurant managers filed the case of "Robert Belcher, et al. v.
Shoney's, Inc." ("Belcher I") in the U.S. District Court for the Middle
District of Tennessee claiming that the Company had violated the overtime
provisions of the Fair Labor Standards Act. The Court granted provisional
class status and directed notice be sent to all former and current salaried
general managers and assistant restaurant managers who were employed by the
Company's Shoney's Restaurants during the three years prior to filing of the
suit. On December 21, 1998, the Court granted plaintiffs' motion for partial
summary judgment on liability, and set the case for a trial on damages to
commence on June 1, 1999. On January 21, 1999, the Court denied the
Company's motion to reconsider or certify the order for interlocutory appeal.
As a result of the Court's ruling on liability, the Company recorded a charge
of $3.5 million in the fourth quarter of fiscal 1998. On January 21, 1999,
the Court also ordered the parties to mediate in an attempt to determine
whether this case, Belcher II and Edelen (discussed below) could be resolved
through settlement.
On March 20, 1999, the parties agreed to the material terms of a global
settlement of Belcher I, Belcher II and Edelen. Under the agreement, in
exchange for the dismissal of the three cases with prejudice and a release by
the plaintiffs relating to the subject matter of the cases, the Company
agreed to pay $18 million in three installments as follows: $11 million upon
Court approval of the settlement and dismissal of the cases, $3.5 million on
October 1, 1999 and $3.5 million on March 1, 2000. The settlement required
the Company to record an additional charge of $14.5 million for the first
quarter ended February 14, 1999 (in addition to the $3.5 million previously
recorded in the fourth quarter of fiscal 1998). On July 7, 1999, the Court
entered final judgment approving the settlement and dismissing with prejudice
the Belcher I action against the Company. In accordance with the approved
settlement of Belcher I, Belcher II, and Edelen, the Company paid $11 million
and $3.5 million into a qualified settlement fund on July 14, 1999 and
October 1, 1999, respectively.
Belcher II
On January 2, 1996, five current and/or former Shoney's hourly and/or
fluctuating work week employees filed the case of "Bonnie Belcher, et al. v.
Shoney's, Inc." ("Belcher II") in the U.S. District Court for the Middle
District of Tennessee claiming that the Company violated the Fair Labor
Standards Act by either not paying them for all hours worked or improperly
paying them for regular and/or overtime hours worked. The Court granted
provisional class status and directed notice be sent to all current and
former Shoney's concept hourly and fluctuating work week employees who were
employed during the three years prior to filing of the suit.
As noted above in the description of Belcher I, on March 20, 1999, the
parties agreed to a global settlement of this case, Belcher I and Edelen. On
July 7, 1999, the Court entered an order preliminarily approving the
settlement with respect to the Belcher II plaintiffs. On August 20, 1999,
the Court entered an order for final judgment approving the settlement and
dismissing with prejudice the Belcher II action against the Company.
49
Edelen
On December 3, 1997, two former Captain D's restaurant general managers or
assistant managers filed the case "Jerry Edelen, et al. v. Shoney's, Inc.
d/b/a Captain D's" ("Edelen") in the U.S. District Court for the Middle
District of Tennessee. Plaintiffs' claims in this case are very similar to
those made in Belcher I. On March 28, 1998, the Court granted provisional
class status and directed notice be sent to all former and current salaried
general managers and assistant managers who were employed at the Company's
Captain D's concept restaurants during the three years prior to the filing of
the suit.
As noted above in the description of Belcher I, on March 20, 1999, the
parties agreed to a global settlement of this case, Belcher I and Belcher II.
On July 7, 1999, the Court entered final judgment approving the settlement
and dismissing with prejudice the Edelen action against the Company.
Griffin
On August 5, 1997, an hourly employee filed the case of "Regina Griffin v.
Shoney's, Inc. d/b/a Fifth Quarter" ("Griffin") in the U.S. District Court
for the Northern District of Alabama. Plaintiff claimed the Company failed
to pay her minimum wages and overtime pay in violation of the Fair Labor
Standards Act, and claimed to be entitled to an injunction, unpaid wages,
interest, and expenses. On February 24, 1998 the plaintiff served the
Company with a Motion for Leave to Amend Complaint with an accompanying
proposed Amended Complaint for Violation of Fair Labor Standards Act seeking
to pursue the case as a class action on behalf of plaintiff and "all persons
who have performed the services of waiter or waitress for Shoney's (d/b/a
Fifth Quarter)." On August 24, 1998, the Company filed a Motion to Dismiss
or, in the Alternative, for Summary Judgment as to the plaintiffs' claims.
Prior to a decision on that motion, plaintiff filed a motion to amend her
amended complaint, in order to substitute Shoney's and TPI as defendants in
the case. The Court granted plaintiff's motion and on November 23, 1998,
Shoney's and TPI filed a consolidated answer to plaintiff's second amended
complaint.
On April 9, 1999, plaintiff moved for collective action certification, which
the Company opposed. The Court denied, without prejudice, plaintiff's motion
to proceed on a collective action basis. On December 13, 1999, the parties
agreed to a settlement in this case which required the Company to pay
$10,500.
Wilkinson
On December 20, 1996, a jury in Wyandotte County, Kansas returned a verdict
against the Company in the case of "Wilkinson v. Shoney's, Inc." for
approximately $0.5 million on a malicious prosecution and a wrongful
discharge claim which was based on the Company's unsuccessful challenge to
plaintiff's application for unemployment benefits after he was terminated.
The jury also found the Company liable for punitive damages on the malicious
prosecution claim in an amount to be set by the trial Court. Although the
trial Court judge stated that she did not find sufficient evidence to support
punitive damages, the trial judge overruled the Company's motion for judgment
as a matter of law and set punitive damages in the amount of $0.8 million.
The Company has appealed the total judgment of approximately $1.3 million.
Management believes it has substantial defenses to the claims made and that
the Company will likely prevail on appeal. Accordingly, no provision for any
potential liability has been made in the Consolidated Financial Statements.
In addition to the litigation described in the preceding paragraphs, 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 liability with respect to these other actions will not materially
affect the operating results or the financial position of the Company (see
Note 10).
50
NOTE 13 - RETIREMENT PLAN
The Company established the Shoney's, Inc. 401(k) Retirement Savings Plan (the
"Plan") effective January 1, 1996. The Plan covers all employees who meet
certain age and minimum service hour requirements. The Company matches employee
contributions at 25%, up to a maximum of 4% of the participants' base pay.
Total expense recognized by the Company under the Plan was approximately $0.3
million, $0.3 million and $0.3 million for 1999, 1998 and 1997, respectively.
NOTE 14 - EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("SFAS 128") at the beginning of the first quarter of
1998. SFAS 128 supersedes Accounting Principles Board Opinion No. 15 "Earnings
per Share" ("APB 15") and was issued to simplify the computation of earnings
per share ("EPS") by replacing Primary EPS, which considers common stock and
common stock equivalents in its denominator, with Basic EPS, which considers
only the weighted-average common shares outstanding. SFAS 128 also replaces
Fully Diluted EPS with Diluted EPS, which considers all securities that are
exercisable or convertible into common stock and which would either dilute or
not affect Basic EPS. As required by SFAS 128, EPS amounts for all prior
periods have been restated.
The table below presents the computation of basic and diluted loss per share:
1999 1998 1997
---- ---- ----
Numerator:
Loss before extraordinary
loss - numerator for Basic EPS $ (28,826,398) $ (106,288,782) $ (35,710,842)
Loss before extraordinary loss
after assumed conversion of
debentures - numerator for
Diluted EPS $ (28,826,398) $ (106,288,782) $ (35,710,842)
Denominator:
Weighted-average shares outstanding -
Denominator for Basic EPS 49,339,259 48,665,685 48,539,573
Dilutive potential shares -
denominator for Diluted EPS 49,339,259 48,665,685 48,539,573
============== =============== ==============
Basic EPS loss $ (0.58) $ (2.18) $ (0.74)
============== =============== ==============
Diluted EPS loss $ (0.58) $ (2.18) $ (0.74)
============== =============== ==============
As of October 31, 1999, the Company had outstanding 5,374,656 options to
purchase shares at prices ranging from $1.43 to $25.51. In addition to options
to purchase shares, the Company had approximately 130,000 common shares
reserved for future distribution pursuant to certain employment agreements, and
5,700 common shares reserved for future distribution under its stock bonus
plan. The Company also has subordinated zero coupon convertible debentures and
8.25% subordinated convertible debentures which are convertible into common
stock at the option of the debenture holder. As of October 31, 1999, the
Company had reserved 5,205,632 and 2,604,328 shares, respectively, related to
these convertible debentures. The zero coupon debentures are due in April 2004
and the 8.25% debentures are due in July 2002. The Company reported a net loss
for 1999 and 1998; therefore, the effect of considering these potentially
dilutive securities would have been anti-dilutive.
NOTE 15 - SHAREHOLDER RIGHTS PLAN
The Company's Board of Directors has adopted a shareholder rights plan to
protect the interests of the Company's shareholders if the Company is
confronted with coercive or unfair takeover tactics by encouraging third
parties interested in acquiring the Company to negotiate with the Board of
Directors. The shareholder rights plan is a plan by which the Company has
distributed rights ("Rights") to purchase (at the rate of one Right per four
shares of common stock) shares of common stock at an exercise price of $60.00
per Right. The Rights are attached to the common stock and may be exercised
only if a person or group acquires 20% or more of the outstanding common
stock or initiates a tender or exchange offer that would result in such
person or group acquiring 30% or more of the outstanding common stock. Upon
such an event, the
51
Rights "flip-in" and each holder of a Right will thereafter have the right to
receive, upon exercise, common stock having a value equal to two times the
exercise price. All Rights beneficially owned by the acquiring person or
group triggering the "flip-in" will be null and void. Additionally, if a
third party were to take certain action to acquire the Company, such as a
merger or other business combination, the Rights would "flip-over" and
entitle the holder to acquire shares of the acquiring person with a value of
two times the exercise price. The Rights are redeemable by the Company at any
time before they become exercisable for $0.01 per Right and expire in 2004.
In order to prevent dilution, the exercise price and number of Rights per
share of common stock will be adjusted to reflect splits and combinations of,
and common stock dividends on, the common stock.
NOTE 16 - SEGMENT INFORMATION
The Company operates entirely in the food service industry with substantially
all revenues resulting from the sale of menu products from restaurants
operated by the Company. The Company has operations principally in four
industry segments, three of which are restaurant concepts. The restaurant
concepts are Shoney's, Captain D's, and Casual Dining. The remaining segment
is Distribution and Manufacturing. Distribution and Manufacturing includes
the Company's three distribution centers and a food processing facility that
provides food and supplies items to Company-owned restaurants, certain
franchised restaurants and other customers. The Company's corporate and
other income and expenses consist primarily of corporate headquarters costs,
gains from the sale of property, plant, and equipment, rental and interest
income and do not constitute a reportable segment of the Company as
contemplated by SFAS No. 131. The Company evaluates performance based on
several factors, of which the primary financial measure is operating income
before interest, taxes, restructuring charges, litigation settlements and
impairment charges ("EBIT as defined"). The accounting policies of the
business segments are the same as those described in the summary of
significant accounting policies in Note 1 to the Consolidated Financial
Statements. Intersegment revenues consist of food and supplies sales by
Distribution and Manufacturing to Company-owned restaurants.
Revenue Years Ended
--------------------------------------------------
October 31, October 25, October 26,
(In Thousands) 1999 1998 1997
--------------------------------------------------
Shoney's Restaurants $ 500,041 $ 638,940 $ 705,772
Franchise fees 9,623 9,189 9,658
----------- ----------- -----------
Total Shoney's 509,664 648,129 715,430
Captain D's restaurants 316,996 305,180 295,380
Franchise fees 5,494 5,227 5,178
----------- ----------- -----------
Total Captain D's 322,490 310,407 300,558
Pargo's restaurants 22,973 30,454 36,936
Fifth Quarter restaurants 8,078 13,137 15,596
Barbwire's restaurants 7,385
----------- ----------- -----------
Total Casual Dining 31,051 43,591 59,917
Distribution and Manufacturing 430,294 503,687 542,576
Corporate and other 26,910 18,100 13,305
----------- ----------- -----------
Total revenue for reportable segments 1,320,409 1,523,914 1,631,786
Elimination of Intersegment revenue 321,036 380,552 404,710
----------- ----------- -----------
Total consolidated revenue $ 999,373 $ 1,143,362 $ 1,227,076
=========== =========== ===========
52
EBIT as defined Years Ended
--------------------------------------------------
October 31, October 25, October 26,
(In Thousands) 1999 1998 1997
--------------------------------------------------
Shoney's $ 10,340 $ 14,606 $ 36,056
Captain D's 38,361 32,501 31,287
Casual Dining 19 (1,168) 844
Distribution and Manufacturing 7,919 11,832 12,601
Corporate and other (7,031) (26,136) (30,601)
------------ ------------ --------------
Total EBIT as defined for reportable
segments 49,608 31,635 50,187
Other Charges:
Interest Expense 42,159 48,477 45,016
Asset impairment charges 18,424 48,403 53,967
Litigation settlements 14,500 3,500
Restructuring charges 4,486 10,747 1,301
------------ ------------ --------------
Consolidated loss before
income taxes and extraordinary item $ (29,961) $ (79,492) $ (50,097)
============ ============ ==============
Depreciation and amortization
(In Thousands)
Shoney's $ 20,952 $ 27,505 $ 31,159
Captain D's 11,196 11,688 12,393
Casual Dining 1,185 1,470 2,743
Distribution and Manufacturing 1,809 2,361 2,395
Corporate and other 6,020 6,316 7,775
------------- ------------ --------------
Total consolidated depreciation and
amortization $ 41,162 $ 49,340 $ 56,465
============= ============ ==============
Capital expenditures
(in Thousands)
Shoney's $ 13,013 $ 14,247 $ 24,808
Captain D's 10,561 8,572 5,193
Casual Dining 699 922 352
Distribution and Manufacturing 577 1,311 457
Corporate and other 5,433 4,947 9,317
------------- ------------ --------------
Total consolidated capital expenditures $ 30,283 $ 29,999 $ 40,127
============= ============ ==============
53
Assets October 31, October 25,
(in Thousands) 1999 1998
-------------- --------------
Shoney's $ 170,250 $ 220,064
Captain D's 107,940 110,992
Casual Dining 10,765 11,989
Distribution and Manufacturing 47,425 47,610
Corporate and other (1) 70,225 132,814
------------- -------------
Total consolidated assets $ 406,605 $ 523,469
============= =============
[FN]
(1) Corporate and other includes assets held for sale of $28.3 million and
$69.9 million in 1999 and 1998, respectively.
</FN>
NOTE 17 - INVESTMENTS IN SHOLODGE
During 1997 and 1996, the Company owned common shares and (during 1996)
warrants to acquire additional common stock of ShoLodge, Inc. ("ShoLodge"), a
Company which had acquired the Company's Shoney's Inn motel chain in 1991. The
Company disposed of its remaining investment common stock of ShoLodge during
1997. Proceeds from sales of shares of ShoLodge common stock during 1997 was
$0.5 million resulting in a realized gain of $0.2 million. During 1996, the
Company recorded an unrealized gain on ShoLodge common stock and warrants of
$.2 million which was included as a separate component of shareholders' equity.
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except per share data)
Per Share
---------------------
Income Income
(Loss) (Loss)
Before Net Before Net
No. of Gross Extraordinary Income Extraordinary Income Stock Market
Weeks Revenues Profit Charge (Loss) Charge (Loss) High Low
----- -------- ------ -------- ------ --------- ------ ------ -----
1999
First Quarter 16 $ 299,959 $ 37,836 $ (15,896)(a) $ (15,896)(a) $ (.32) $ (.32) $ 3.63 $ 1.31
Second Quarter 12 240,017 32,700 5,009 5,009 .10 .10 2.94 1.81
Third Quarter 12 229,885 27,115 (17,518)(a) (17,518)(a) (.35) (.35) 2.50 2.00
Fourth Quarter 13 229,512 29,346 (421) (421) (.01) (.01) 2.50 1.44
-- ----------- --------- -------------- -------------- -------- --------
53 $ 999,373 $ 126,997 $ (28,826) $ (28,826) $ (.58) $ (.58)
== =========== ========= ============== ============== ======== ========
1998
First Quarter 16 $ 339,097 $ 30,263 $ (9,616)(c) $ (11,031)(c) $ (.20) $ (.23) $ 5.00 $ 3.00
Second Quarter 12 281,139 31,306 (1,396) (1,396) (.03) (.03) 5.88 3.63
Third Quarter 12 277,287 34,313 (83,133)(c) (83,133)(c) (1.71) (1.71) 5.06 2.75
Fourth Quarter 12 245,839 23,097 (12,144)(c) (12,144)(c) (.25) (.25) 3.44 1.50
-- ----------- --------- -------------- -------------- -------- ------- ----- ------
52 $ 1,143,362 $ 118,979 $ (106,289) $ (107,704) $ (2.18)(b) $(2.21)(b)
== =========== ========= ============== ============== ======== ========
[FN]
(a) The first quarter of 1999 included a litigation settlement charge of
$14.5 million. The third quarter of 1999 included an asset impairment
charge of $18.4 million.
(b) Quarterly earnings per share amounts for 1998 do not sum to the
earnings per share for 1998.
(c) The first quarter of 1998 included an asset impairment charge of $2.6
million. The third quarter of 1998 included an asset impairment charge
of $45.8 million and an income tax valuation allowance charge of $51.3
million. The fourth quarter of 1998 included a litigation settlement
charge of $3.5 million and an income tax valuation allowance charge of
$1.2 million.
</FN>
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no Company disclosures required by Item 304 of Regulation S-K,
17 C.F.R. ss. 229.304.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the 2000 Proxy Statement is incorporated herein by
reference. See also, "Executive Officers of the Registrant" in Part I of
this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" contained in the 2000 Proxy Statement is
incorporated herein by reference. The matters labeled "Human Resources and
Compensation Committee Report" and "Shareholder Return Performance Graph"
contained in the 2000 Proxy Statement shall not be deemed incorporated by
reference into this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
"Stock Ownership of Management and Certain Beneficial Owners" contained in
the 2000 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
"Certain Transactions" contained in the 2000 Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are included in or filed as a part of this Annual Report on
Form 10-K:
(1) Financial Statements:
Consolidated Balance Sheet - October 31, 1999 and October 25, 1998.
Consolidated Statement of Operations - Years ended October 31, 1999,
October 25, 1998 and October 26, 1997
Consolidated Statement of Shareholders' Equity (Deficit) - Years
ended October 31, 1999, October 25, 1998 and October 26, 1997
Consolidated Statement of Cash Flows - Years ended October 31, 1999,
October 25, 1998, and October 26, 1997
Notes to Consolidated Financial Statements - Years ended October 31,
1999, October 25, 1998 and October 26, 1997
(2) Schedule II-Valuation and qualifying accounts and reserves, included
in item 14d. All other schedules for which provision is made in the
applicable accounting regulation of the Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
(3) Those exhibits required to be filed as Exhibits to this Annual Report
on Form 10-K pursuant to Item 601 of Regulation S-K, 17 C.F.R. ss.
229.601, as indicated on the Exhibit Index on pages 58-60 of this
Annual Report on Form 10-K, which is incorporated herein by this
reference.
(b) The Company has not filed any reports on Form 8-K during the last
quarter of the period covered by this Annual Report on Form 10-K.
(c) Exhibits -- the response to this portion of Item 14 is submitted as a
separate section of this Report. See Item 14(a).
55
(d) Financial Statement Schedules -- set forth below is Schedule II -
Valuation and Qualifying Accounts and Reserves.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Shoney's, Inc. and Subsidiaries
Charged
Balance at to Costs Charged Balance at
Beginning and to Other End of
of Period Expenses Accounts Deductions Period
---------- -------- -------- ---------- ----------
Fiscal year ended
October 31, 1999:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 1,142,000 $ 544,000 $ 161,000(B) $ 350,000(A) $ 1,497,000
Valuation
allowance for
deferred tax
assets $ 63,147,000 $ 5,795,000(C) $ 0 $ 0 $ 68,942,000
Fiscal year ended
October 25, 1998:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 1,596,000 $ 297,000 $ 70,000(B) $ 821,000(A) $ 1,142,000
Valuation
allowance for
deferred tax
assets $ 10,609,000 $ 52,538,000(C) $ 0 $ 0 $ 63,147,000
Fiscal year ended
October 26, 1997:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 1,504,000 $ 110,000 $ 209,000(B) $ 227,000(A) $ 1,596,000
Valuation
allowance for
deferred tax
assets $ 4,749,000 $ 5,860,000(C) $ 0 $ 0 $ 10,609,000
[FN]
(A) Accounts written off.
(B) Recoveries from accounts written off in prior year.
(C) Increased the valuation allowance for deferred tax assets which are not
expected to be realized.
</FN>
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized, on this 31st day
January, 2000.
SHONEY'S, INC.
By: /s/ V. MICHAEL PAYNE
--------------------
V. Michael Payne
Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 31st day of January, 2000.
Signature Title
- --------- -----
/s/ RAYMOND D. SCHOENBAUM Chairman of the Board and Director
- -------------------------
(Raymond D. Schoenbaum)
/s/ J. MICHAEL BODNAR Chief Executive Officer, President and
- --------------------- Director
(J. Michael Bodnar)
/s/ V. MICHAEL PAYNE Senior Vice President and Controller
- -------------------- (Principal Financial and Accounting
(V. Michael Payne) Officer)
/s/ STEPHEN E. MACADAM Director
- ----------------------
(Stephen E. Macadam)
/s/ JEFFRY F. SCHOENBAUM Director
- ------------------------
(Jeffry F. Schoenbaum)
/s/ WILLIAM A. SCHWARTZ Director
- -----------------------
(William A. Schwartz)
/s/ CARROLL D. SHANKS Director
- ---------------------
(Carroll D. Shanks)
/s/ FELKER W. WARD, JR, Director
- -----------------------
(Felker W. Ward, Jr.)
/s/ WILLIAM M. WILSON Director
- ---------------------
(William M. Wilson)
/s/ JAMES D. YANCEY Director
- -------------------
(James D. Yancey)
57
EXHIBIT INDEX
EXHIBIT PAGE
NO. DOCUMENT NO.
- ------- -------- ----
3.2, 4.1 Charter of Shoney's, Inc., as amended, filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (File No. 333-11715)
filed with the Commission on September 11, 1996, and incorporated
herein by this reference.
3.2, 4.2 Restated Bylaws of Shoney's, Inc., as amended. 61
4.3 Amended and Restated Rights Agreement, dated as of May 25, 1994,
between Shoney's, Inc. and Harris Trust and Savings Bank, as Rights
Agent, filed as Exhibit 4 to the Company's Current Report on Form 8-K
filed with the Commission on June 9, 1994, and incorporated herein
by this reference, as amended by Amendment No. 1, dated as of April
18, 1995, filed as Exhibit 4 to the Company's Current Report on Form
8-K filed with the Commission on May 4, 1995, and incorporated herein
by this reference, and Amendment No. 2, dated as of June 14, 1996,
filed as Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 12, 1996, and incorporated herein by this
reference, and Amendment No. 3, dated as of April 20, 1998, filed as
Exhibit 4 to the Company's Current Report on Form 8-K filed with the
Commission on April 20, 1998, and incorporated herein by this
reference.
4.4 Indenture, dated as of April 1, 1989, between the Company and Sovran
Bank/Central South, as Trustee relating to $201,250,000 in principal
amount of liquid yield option notes due 2004, filed as Exhibit 4.8
to Amendment No. 1 to the Company's Registration Statement on Form
S-3 filed with the Commission on April 3, 1989 (No. 33-27571), and
incorporated herein by this reference.
4.5 Indenture, dated as of July 15, 1992, among TPI Enterprises, Inc.,
TPI Restaurants, Inc., as Guarantor, and NationsBank of Tennessee
(now The Bank of New York, as successor trustee), as trustee,
relating to 8.25% Convertible Subordinated Debentures due 2002, filed
as Exhibit 10 (a) to the Current Report on Form 8-K of TPI
Restaurants, Inc. filed with the Commission on July 29, 1992
(Commission File No. 0-12312), and incorporated herein by this
reference.
4.6 First Supplemental Indenture, dated as of September 9, 1996, among
TPI Enterprises, Inc., TPI Restaurants, Inc., as Guarantor, The Bank
of New York, as trustee, and Shoney's, Inc., relating to 8.25%
Convertible Subordinated Debentures due 2002, filed as Exhibit 4.2
to the Company's Current Report on Form 8-K filed with the Commission
on September 11, 1996, and incorporated herein by this reference.
10.1 Consent Decree entered by the United States District Court for the
Northern District of Florida on January 25, 1993 in Haynes, et al.
v. Shoney's, Inc., et al., filed as Exhibit 28 to the Company's
Current Report on Form 8-K filed with the Commission on February 3,
1993, and incorporated herein by this reference.
10.2 Shoney's, Inc. 1981 Stock Option Plan, as amended through October
28, 1996, filed as Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 27, 1996, and
incorporated herein by this reference.*
10.3 Shoney's, Inc. 1996 Stock Option Plan, filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 27, 1996, and incorporated herein by this reference.*
10.4 Shoney's, Inc. Employee Stock Purchase Plan, as amended and
restated, filed as Exhibit 10.15 to the Company's Annual Report on
Form 10-K for
58
EXHIBIT PAGE
NO. DOCUMENT NO.
- ------- -------- ----
the fiscal year ended October 27, 1996, and incorporated herein by
this reference.*
10.5 Shoney's, Inc. Employee Stock Bonus Plan, filed as Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1993, and incorporated herein by this reference.*
10.6 Shoney's, Inc. Directors' Stock Option Plan, filed as Exhibit 4.38
to the Company's Registration Statement on Form S-8 (File No. 33-
45076) filed with the Commission on January 14, 1992, and
incorporated herein by this reference.*
10.7 Shoney's, Inc. 1998 Stock Plan, as amended and restated, filed as
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 25, 1998, and incorporated herein by this
reference.
10.8 Shoney's, Inc. Director Share Compensation Arrangement adopted
pursuant to the 1998 Stock Plan, filed as Exhibit 10.8 to the
Company's Annual Report as Form 10-K for the fiscal year ended
October 25, 1998, and incorporated herein by this reference.*
10.9 Shoney's Ownership Plan 1977, filed as Exhibit 10.47 to Post
Effective Amendment No. 5 to the Company's Registration Statement on
Form S-8 (File No. 2-64257) filed with the Commission on January 25,
1993, and incorporated herein by this reference.*
10.10 Captain D's Ownership Plan 1976, filed as Exhibit 10.48 to Post
Effective Amendment No. 5 to the Company's Registration Statement on
Form S-8 (File No. 2-64257) filed with the Commission on January 25,
1993, and incorporated herein by this reference.*
10.11 Captain D's Ownership Plan 1978-1979, filed as Exhibit 10.49 to Post
Effective Amendment No. 5 to the Company's Registration Statement on
Form S-8 (File No. 2-64257) filed with the Commission on January 25,
1993, and incorporated herein by this reference.*
10.12 Employment Agreement, dated as of November 12, 1997, between the
Company and J. Michael Bodnar, filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 26, 1997, and incorporated herein by this reference.*
10.13 Employment Agreement, dated as of August 3, 1998, between the
Company and Stephen C. Sanders, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August
2, 1998, and incorporated herein by this reference, as amended by
that certain Addendum to Employment Agreement filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
February 14, 1999, and incorporated herein by this reference.*
10.14 Management Retention Agreement, dated as of July 15, 1997, between
the Company and Betty J. Marshall, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August
3, 1997, and incorporated herein by this reference.*
10.15 Management Retention Agreement, dated as of July 15, 1997, between
the Company and Haney A. Long, Jr., filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August
3, 1997, and incorporated herein by this reference.*
10.16 Management Retention Agreement, dated as of July 15, 1997, between
the Company and Robert A. Speck, filed as Exhibit 10.3 to the
Company's
59
EXHIBIT PAGE
NO. DOCUMENT NO.
- ------- -------- ----
Quarterly Report on Form 10-Q for the quarter ended August 3, 1997,
and incorporated herein by this reference.*
10.17 Management Retention Agreement, dated as of July 15, 1997, between
the Company and Ronald E. Walker, filed as Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August
3, 1997, and incorporated herein by this reference.*
10.18 Management Retention Agreement, dated as of July 15, 1997, between
the Company and F. E. McDaniel, Jr., filed as Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August
3, 1997, and incorporated herein by this reference.*
10.19 Supply Agreement, dated as of November 17, 1995, between the Company
and Mike Rose Foods, Inc., filed as Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 29,
1995, and incorporated herein by this reference.
10.20 $375,000,000 Credit Agreement, dated as of November 28, 1997, among
Shoney's, Inc., as Borrower, NationsBank, N.A., as Administrative
Agent for the lenders, NationsBank Montgomery Securities, Inc., as
Syndication Agent, and various other financial institutions now or
hereafter parties thereto, filed as Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 26,
1997, and incorporated herein by this reference, as amended by
Amendment No. 1, dated as of June 16, 1998, filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
August 2, 1998, and incorporated herein by this reference, as amended
by Amendment No. 2, dated as of April 6, 1999, filed as Exhibit 10.1
to the Company's Quarterly Report as Form 10-Q for the quarter ended
May 9, 1999, and incorporated herein by this reference, and as
amended by Amendment No. 3, dated as of November 19, 1999. 71
10.21 Registration Rights Agreement, dated as of December 1, 1997, by and
between Shoney's, Inc. and Raymond L. Danner, filed as Exhibit 10.32
to the Company's Annual Report on Form 10-K for the fiscal year ended
October 26, 1997, and incorporated herein by this reference.
21 Subsidiaries of Shoney's, Inc. 88
23 Consent of Ernst & Young LLP, independent auditors. 90
27 Financial Data Schedule. 92
* Management contract or compensatory plan or agreement.
60