UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 20, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 0-4377
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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
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 .
--- ---
As of March 17, 2000, there were 50,515,363 shares of Shoney's, Inc. $1
par value common stock outstanding.
Page 1 of 31 pages.
Exhibit Index at page 30.
The forward-looking statements included in this Form 10-Q relating to
certain matters involve risks and uncertainties, including the ability of
management to successfully implement its strategy for improving 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 affect 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.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
February 20, October 31,
2000 1999
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,856,171 $ 10,991,872
Notes and accounts receivable, less allowance
for doubtful accounts of $1,563,000 in 2000
and $1,497,000 in 1999 9,183,221 8,529,819
Inventories 46,507,328 37,638,826
Prepaid expenses and other current assets 3,489,155 5,066,660
Net property, plant and equipment held for sale 20,573,788 28,340,074
-------------- --------------
Total current assets 88,609,663 90,567,251
Property, plant and equipment, at lower of cost or market 632,738,595 632,769,332
Less accumulated depreciation and amortization (353,269,727) (346,639,533)
-------------- --------------
Net property, plant and equipment 279,468,868 286,129,799
Other assets:
Goodwill (net of accumulated amortization of
$7,669,000 in 2000 and $7,001,000 in 1999) 19,052,758 19,720,435
Deferred charges and other intangible assets 5,782,911 6,017,336
Other assets 4,037,585 4,170,551
-------------- --------------
Total other assets 28,873,254 29,908,322
-------------- --------------
$ 396,951,785 $ 406,605,372
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 28,519,167 $ 28,346,517
Other accrued liabilities 61,670,292 63,532,776
Reserve for litigation settlements due within one year 3,872,961 3,872,961
Debt and capital lease obligations
due within one year 29,190,256 29,436,016
-------------- --------------
Total current liabilities 123,252,676 125,188,270
Long-term senior debt and
capital lease obligations 186,024,496 187,197,230
Zero coupon subordinated convertible debentures 125,684,206 122,520,712
Subordinated convertible debentures, net of
bond discount of $2,236,000 in 2000
and $2,505,000 in 1999 49,327,102 49,057,719
Reserve for litigation settlements 136,023 158,687
Other liabilities 62,497,257 69,620,110
Shareholders' deficit:
Common stock, $1 par value: authorized
200,000,000; issued 50,515,363 in 2000,
49,492,514 in 1999 50,515,363 49,492,514
Additional paid-in capital 137,793,944 137,674,675
Accumulated deficit (338,279,282) (334,304,545)
-------------- --------------
Total shareholders' deficit (149,969,975) (147,137,356)
-------------- --------------
$ 396,951,785 $ 406,605,372
============== ==============
[FN]
See notes to consolidated condensed financial statements.
</FN>
2
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Sixteen Weeks Ended
February 20, February 14,
2000 1999
------------ ------------
Revenues
Net sales $ 243,567,763 $ 284,730,414
Franchise fees 4,140,748 4,299,632
Other income 3,927,941 10,928,948
-------------- --------------
251,636,452 299,958,994
Costs and expenses
Cost of sales 224,862,064 262,122,942
General and administrative expenses 18,875,330 25,281,619
Litigation settlement 14,500,000
Interest expense 11,761,795 13,950,318
-------------- --------------
Total costs and expenses 255,499,189 315,854,879
-------------- --------------
Loss before income taxes (3,862,737) (15,895,885)
Provision for income taxes 112,000
-------------- --------------
Net loss $ (3,974,737) $ (15,895,885)
============== ==============
Earnings per common share
Basic
Net loss ($0.08) ($0.32)
======= =======
Diluted
Net loss ($0.08) ($0.32)
======= =======
Weighted average shares outstanding
Basic 50,028,705 49,067,396
Diluted 50,028,705 49,067,396
Common shares outstanding 50,515,363 49,439,030
Dividends per share NONE NONE
[FN]
See notes to consolidated condensed financial statements.
</FN>
3
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Sixteen Weeks Ended
February 20, February 14,
2000 1999
------------ ------------
Operating activities
Net loss $ (3,974,737) $ (15,895,885)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization 11,235,526 12,806,875
Amortization of deferred charges and
other non-cash charges 4,647,403 4,934,319
Gain on disposal of property, plant
and equipment (3,690,137) (10,499,895)
Litigation settlement 14,500,000
Changes in operating assets
and liabilities (12,782,807) (4,332,984)
-------------- --------------
Net cash (used for) provided
by operating activities (4,564,752) 1,512,430
Investing activities
Cash required for property, plant and equipment (6,644,929) (5,772,076)
Proceeds from disposal of property, plant
and equipment 12,024,276 34,384,426
Cash provided by other assets 15,831 48,360
-------------- --------------
Net cash provided by
investing activities 5,395,178 28,660,710
Financing activities
Payments on long-term debt and
capital lease obligations (13,753,388) (32,224,336)
Proceeds from long-term debt 15,000,000
Net payments on short-term debt (3,444,000)
Payments on litigation settlements (22,664) (16,998)
Cash required for debt issue costs (746,075) (180,093)
-------------- ---------------
Net cash used by financing
activities (2,966,127) (32,421,427)
-------------- ---------------
Change in cash and cash equivalents $ (2,135,701) $ (2,248,287)
============== ===============
[FN]
See notes to consolidated condensed financial statements.
</FN>
4
SHONEY'S, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
February 20, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q. As a
result, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The Company, in management's opinion, has included all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
of the results of operations. Certain reclassifications have been made in
the consolidated condensed financial statements to conform to the 2000
presentation. Operating results for the sixteen week period ended February
20, 2000 are not necessarily indicative of the results that may be expected
for all or any balance of the fiscal year ending October 29, 2000. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Shoney's, Inc. Annual Report on Form 10-K
for the year ended October 31, 1999.
NOTE 2 - ACQUISITIONS
On September 9, 1996, the Company completed the acquisition of substantially
all of the assets of TPI Enterprises, Inc. ("TPI") which, as the then 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 have been
included in the Company's Consolidated Condensed Financial Statements since
September 6, 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
originally was 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 period of 10 years.
As of February 20, 2000, 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 purchase accounting and consisted
principally of severance pay for certain employees and the accrual of future
minimum lease obligations in excess of anticipated sublease rental income.
The total amount of such liabilities included in the TPI purchase price
allocation was approximately $21.0 million. During the first quarter of 2000,
approximately $0.3 million in costs to exit restaurants acquired were charged
to this liability. Approximately $0.7 million
5
in costs were charged to this liability in the first quarter of 1999.
Approximately $7.5 million of anticipated exit costs related to the TPI
acquisition remain accrued at February 20, 2000.
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.
During the first quarter of 1998, the Company recorded an additional
impairment charge of $2.6 million of which $0.9 million was related to assets
held and used in the Company's operations and $1.7 million related to the
adjustment of fair values of assets held for disposal. Based on the continued
decline in operating performance of the Company's restaurant operations,
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.
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 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 February 20, 2000, the carrying value of the 39 properties to be disposed
of was $20.6 million and is reflected on the Consolidated Condensed Balance
Sheet as net property plant and equipment held for disposal. 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. There were no exit costs recorded in the first quarter of 2000 or
the first quarter of 1999. However, in addition to amounts recorded in
previous years, the Company recorded approximately $6.1 million in exit costs
during 1999, primarily associated with the accrual of the remaining leasehold
obligations on restaurants closed or to be closed. The Company charged
approximately $1.5 million and $1.0 million against these exit costs reserves
in the first quarter of
6
2000 and 1999, respectively. Approximately $10.5 million of accrued exit costs
remain at February 20, 2000.
During 1999, the Company closed 129 Company-owned restaurants and sold 19
Shoney's Restaurants to franchisees. Three Shoney's Restaurants were sold to
franchisees during the first quarter of 2000. Subsequent to the end of the
first quarter of 2000, the Company sold its 11 Pargo's restaurants and sold
five Shoney's Restaurants to franchisees. Below are sales and EBIT as defined,
which is defined by the Company as operating income before asset impairment
charges, restructuring charges and litigation settlements, for the restaurants
closed or sold prior to February 20, 2000 for the first quarter of 2000 and the
first quarter of 1999.
($ in thousands) Quarter Ending Quarter Ending
February 20, 2000 February 14, 1999
----------------- -----------------
EBIT as EBIT as
Sales defined Sales defined
----- ------- ----- -------
Stores closed or sold $ 840 $ (320) $ 39,953 $ (4,291)
===== ======= ======== =========
NOTE 5 - 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.
The table below presents the computation of basic and diluted loss per share:
Quarter Ending Quarter Ending
February 20, 2000 February 14, 1999
----------------- -----------------
Numerator:
- ----------
Net loss - numerator
for Basic EPS $ (3,974,737) $ (15,895,885)
Net loss after assumed
conversion of debentures - numerator
for Diluted EPS $ (3,974,737) $ (15,895,885)
Denominator:
- ------------
Weighted-average shares outstanding -
denominator for Basic EPS 50,028,705 49,067,396
Dilutive potential shares -
denominator for Diluted EPS 50,028,705 49,067,396
Basic EPS (loss) $ (.08) $ (.32)
============= ==============
Diluted EPS (loss) $ (.08) $ (.32)
============= ==============
As of February 20, 2000, the Company had outstanding approximately 5,495,000
options to purchase shares at prices ranging from $1.06 to $25.51. In
addition to options to purchase shares, the Company
7
had approximately 90,000 common shares reserved for future distribution
pursuant to certain employment agreements. 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 February 20, 2000, the Company had reserved 5,205,280
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. Because the Company reported a net loss for the first
quarter of 2000 and 1999, the effect of considering these potentially
dilutive securities was anti-dilutive and was not included in the calculation
of Diluted EPS.
NOTE 6 - INCOME TAXES
The Company is estimating an effective tax rate for the sixteen weeks ended
February 20, 2000 and February 14, 1999 of (3)% and 0%, respectively, and
accordingly, has recorded an income tax provision of $0.1 million for the
sixteen weeks ended February 20, 2000 and no income tax provision or benefit
for the sixteen weeks ended February 14, 1999. This effective tax rate
differs from the Federal statutory rate of 35% primarily due to goodwill
amortization which is not deductible for Federal income taxes and an increase
in the valuation allowance against the gross deferred tax assets.
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
February 20, 2000, 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 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.
NOTE 7 -DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
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 provides
for up to $375.0 million ("1997 Credit Facility") and 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 1997 Credit Facility provides for interest under the
Line of Credit, Term A Note and Term B Note based on certain defined
financial ratios. At February 20, 2000, 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 B Note was 3.0% over Libor or 2.0% over the prime rate.
At February 20, 2000, the Company had approximately $42.2 million and $121.3
million outstanding under its Term A Note and Term B Note, respectively.
During the next four fiscal quarters, principal reductions of $14.7 million
are scheduled for the Term A Note and principal reductions of $.6 million are
scheduled for the Term B Note. Additionally, at February 20, 2000, the
Company held $4 million of proceeds from the sale of assets which were used
to reduce the Term A Note and the Term B Note subsequent to the end of the
quarter. Accordingly, of this $4 million, $1 million has been classified as
a current maturity for the Term A Note and $3 million has been classified as
a current maturity for the Term B Note. At February 20, 2000, the effective
interest rates on the Term A Note and the Term B Note were 8.4% and 9.1%,
respectively.
8
The Company had borrowed $22.4 million under the Line of Credit at February
20, 2000. The Line of Credit provides the Company with $15 million of short
term credit under a swing line (the "Swing Line") and $60 million (which is
reduced by outstanding letters of credit) of long term credit under a working
capital line (the "Working Capital Line"). Pursuant to the terms at the 1997
Credit Facility, the Swing Line provides the Company with day-to-day cash
needs and is required to be repaid with the Company's daily excess cash
flows. The Working Capital Line provides the Company with long term cash
requirements and, pursuant to the terms of the 1997 Credit Facility, is not
required to be repaid until the credit facility terminates. As of February
20, 2000, the Company had drawn $7.4 million under the Swing Line, $15
million under the Working Capital Line and had outstanding letters of credit
of $30.9 million, resulting in available credit under the Line of Credit of
$21.7 million. The Company pays an annual fee of 0.5% for unused available
credit under the Line of Credit. 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 could be restricted.
Based on the financial covenants at February 20, 2000, the Company could have
drawn an additional $3.5 million under the Line of Credit and remained in
compliance with its financial covenants. At February 20, 2000, the interest
rate for borrowings under the Line of Credit was 9.1%.
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 February 20, 2000, 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 hedge agreement which fixes the interest rate on the covered amount
of debt at 5.6% plus the applicable margin. At February 20, 2000, the
estimated positive market value of the interest rate swap agreements was
approximately $0.5 million. The fair value of the swap agreements and changes
in the fair value as a result of changes in market interest rates are not
recognized in the Consolidated Condensed Financial Statements.
Debt and obligations under capital leases at February 20, 2000 and October
31, 1999 consisted of the following:
($ in thousands) February 20, 2000 October 31, 1999
----------------- ----------------
Senior debt - Line of Credit $ 22,443 $ 10,887
Senior debt - Term A Note 42,201 45,672
Senior debt - Term B Note 121,272 130,801
Subordinated zero coupon convertible debentures 125,684 122,521
Subordinated convertible debentures 49,327 49,058
Industrial revenue bonds 10,315 10,315
Notes payable to others 4,150 4,420
--------- ---------
375,392 373,674
Obligations under capital leases 14,834 14,538
--------- ---------
390,226 388,212
Less amounts due within one year 29,191 29,436
--------- ---------
Amount due after one year $ 361,035 $ 358,776
========= =========
The 1997 Credit Facility is secured by substantially all of the Company's
assets. The 1997 Credit Facility (1) requires satisfaction of certain
financial ratios and tests (which become more restrictive
9
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.
In November 1999, the Company received approval from its lending group for
modifications to the 1997 Credit Facility that reduced or modified certain
restrictions contained in the credit 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 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 February 20, 2000,
the Company was in compliance with all of its debt covenants.
NOTE 8 - 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. After granting provisional class
action status, on December 21, 1998, the Court granted plaintiffs' motion for
partial summary judgment on liability. 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
10
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. The plaintiffs claimed 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. This case
also was provisionally certified as a class action.
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.
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 action status.
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 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 Condensed Financial
Statements.
11
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.
NOTE 9 - CONCENTRATION OF RISKS AND USE OF ESTIMATES
As of February 20, 2000, the Company operated and franchised a chain of
approximately 1,100 restaurants in 28 states, which consists of three
restaurant divisions: Shoney's Restaurants, Captain D's, and a Casual Dining
Group (which includes two distinct restaurant concepts). The majority of the
Company's restaurants are located in the southeastern United States. The
Company also operates Commissary Operations, Inc. ("COI"), a food service
business that manufactures and distributes food and supplies to Company-owned
restaurants, certain franchised restaurants and other customers. The Company's
principal restaurant 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. The Company believes
there is no concentration of risk with any single customer, supplier, or small
group of customers or suppliers whose failure or nonperformance would
materially affect the Company's results of operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to use judgment and make estimates
that affect the amounts reported in the Consolidated Condensed Financial
Statements. Management believes that such estimates have been based on
reasonable and supportable assumptions and that the resulting estimates are
reasonable for use in the preparation of the Consolidated Condensed Financial
Statements. Changes in such estimates will be made as appropriate as
additional information becomes available and may affect amounts reported in
future periods.
NOTE 10- LEASEHOLD INTERESTS ASSIGNED TO OTHERS
Assigned Leases - The Company has assigned its leasehold interest to third
parties with respect to approximately 36 properties on which the Company
remains contingently liable to the landlord for the performance of all
obligations of the party to whom the lease was assigned in the event that
party does not perform its obligations under the lease. The assigned leases
are for restaurant sites that the Company has closed. The Company estimates
its contingent liability associated with these assigned leases as of February
20, 2000 to be approximately $12.7 million.
Property Sublet to Others - The Company subleases approximately 49 properties
to others. The Company remains liable for the leasehold obligation in the
event 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 or franchised. The Company estimates its contingent
liability associated with these sublet properties as of February 20, 2000 to
be approximately $8.6 million.
NOTE 11 - 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
12
those resulting from investments by owners and distributions to owners. As
of the first day of fiscal 1999, the Company adopted SFAS 130. The adoption
had no impact on the Company's results of operations because the Company had
no items of comprehensive income. For the first quarter of 2000 and the first
quarter of 1999, the total comprehensive loss amounted to losses of $4.0
million and $15.9 million, respectively.
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 which include certain financial and qualitative data about its
operating segments.
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 prior accounting policy expensed costs associated
with startup activities systematically over a period not to exceed twelve
months. The Company adopted SOP 98-5 effective the first day of fiscal 2000.
The adoption of SOP 98-5 did not affect the Company's results of operations
during the sixteen weeks ended February 20, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 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.
NOTE 12 - 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
13
restaurant concepts are Shoney's, Captain D's, and Casual Dining. The remaining
segment, COI, is a food service distribution and manufacturing operation. COI
operates three food service distribution centers and a food processing facility
that provides food and supplies 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, and 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 the Company's. Intersegment revenues consist of food and supply sales
by COI to Company-owned restaurants.
REVENUE QUARTERS ENDED
FEBRUARY 20, FEBRUARY 14,
(IN THOUSANDS) 2000 1999
-----------------------------
Shoney's Restaurants $ 109,130 $ 150,437
Franchise fees 2,562 2,676
--------- ---------
Total Shoney's 111,692 153,113
Captain D's restaurants 92,413 91,655
Franchise fees 1,579 1,580
--------- ---------
Total Captain D's 93,992 93,235
Pargo's restaurants 6,688 7,018
Fifth Quarter restaurants 2,320 2,996
--------- ---------
Total Casual Dining 9,008 10,014
COI 110,670 127,729
Corporate and other 4,894 12,434
--------- ---------
Total revenue for reportable segments 330,256 396,525
Elimination of intersegment revenue 78,620 96,566
--------- ---------
Total consolidated revenue $ 251,636 $ 299,959
========= =========
EBIT AS DEFINED QUARTERS ENDED
FEBRUARY 20, FEBRUARY 14,
(IN THOUSANDS) 2000 1999
-----------------------------
Shoney's $ 296 $ (501)
Captain D's 9,716 10,717
Casual Dining 9 179
COI 791 2,404
Corporate and other (2,913) (245)
---------- ----------
Total EBIT as defined for
reportable segments 7,899 12,554
Other Charges:
Interest expense 11,762 13,950
Litigation settlement - 14,500
---------- ----------
Consolidated loss before income taxes $ (3,863) $ (15,896)
========== ==========
14
DEPRECIATION AND AMORTIZATION QUARTERS ENDED
FEBRUARY 20, FEBRUARY 14,
(IN THOUSANDS) 2000 1999
-----------------------------
Shoney's $ 5,462 $ 6,688
Captain D's 3,356 3,491
Casual Dining 363 356
COI 479 596
Corporate and other 1,576 1,676
--------- ---------
Total consolidated depreciation
and amortization $ 11,236 $ 12,807
========= =========
15
ITEM 2. 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 Condensed Financial
Statements and Notes thereto. The first quarters of fiscal 2000 and 1999 each
consisted of sixteen weeks. All references are to fiscal years unless
otherwise noted.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED REVENUES
Consolidated revenue for the first quarter of 2000 and the first quarter of
1999 is as follows:
Quarter Ended
--------------
(in millions) February 20, February 14,
2000 1999
------------ ------------
Net sales $ 243.6 $ 284.8
Franchise fees 4.1 4.3
Other income 3.9 10.9
------- -------
$ 251.6 $ 300.0
======= =======
Changes in the number of restaurants for the first quarter of 2000 and the
first quarter of 1999 are as follows:
February 20, Restaurants Restaurants October 31, February 14, Restaurants Restaurants October 25,
2000 Opened Closed 1999 1999 Opened Closed 1998
-------------------------------------------------------------------------------------------------
Shoney's
Company-owned 264 - 3(1) 267 362 -- 46(2) 408
Franchised 257 3(1) 4 258 266 10(2) 5 261
--- - - --- --- -- -- ---
521 3 7 525 628 10 51 669
Captain D's
Company-owned 363 1 - 362 365 -- -- 365
Franchised 204 - 1 205 209 1 3 211
--- - - --- --- -- -- ---
567 1 1 567 574 1 3 576
Casual Dining
Pargo's 11 - - 11 11 -- 1 12
Fifth Quarter 3 - - 3 4 -- -- 4
--- - - --- --- -- -- --
14 - - 14 15 -- 1 16
--- - - --- --- -- -- --
1,102 4 8 1,106 1,217 11 55 1,261
===== = = ===== ===== == == =====
[FN]
(1) Includes 3 restaurants sold to franchisees
(2) Includes 10 restaurants sold to franchisees
</FN>
16
Consolidated revenues in the first quarter of 2000 declined $48.4 million or
16.1% when compared with the first quarter of 1999. The components of the
change in consolidated revenues are summarized as follows:
($ in millions)
Restaurant sales $ (41.6)
COI and other sales 0.4
Franchise revenues (0.2)
Other income (7.0)
--------
Total $ (48.4)
========
The decline in consolidated revenues was primarily attributable to the closing
of Company-owned restaurants and a decline in overall restaurant store sales.
Comparable restaurant sales of all of the Company's restaurant concepts
declined 2.1% and 2.0% in the first quarter of 2000 and the first quarter of
1999, respectively. These results include menu price increases of 4.3% and
4.2% in the first quarter of 2000 and the first quarter of 1999, respectively.
Franchise revenues declined by approximately $0.2 million in the first quarter
of 2000 when compared to the first quarter of 1999. The decline in franchise
revenue was primarily attributable to a decline in initial fees from new
franchised restaurants.
Other income decreased $7.0 million in the first quarter of 2000 when compared
to the first quarter of 1999, due primarily to lower gains from asset sales of
$6.8 million, lower interest income of $0.1 million and lower outside rental
income of $0.1 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 first quarter of 2000 and the first quarter of 1999 is shown
below:
FIRST QUARTER FIRST QUARTER
2000 1999
---- ----
Food and supplies 38.5% 36.2%
Restaurant labor 27.3% 27.0%
Operating expenses 23.6% 24.2%
----- -----
Total cost of sales 89.4% 87.4%
===== =====
As compared to restaurant revenues, COI revenues have a higher percentage of
food and supply costs, a lower percentage of operating expenses and have no
associated restaurant labor. As a result, changes in COI revenue relative to
the change in restaurant revenue can have an exaggerated effect on these
expenses as a percentage of total revenues. Food and supply costs as a
percentage of revenues increased 2.3% in the first quarter of 2000 when
compared to the first quarter of 1999. The increase in food and supply costs
in the first quarter of 2000, as a percentage of sales, was a result of higher
food and supply costs in all reportable segments except Captain D's and an
increase in COI revenue relative to the decline in restaurant revenue.
Consolidated restaurant labor increased 0.3% as a percentage of total revenues
in the first quarter of 2000 as a result of higher wages and declining
comparable restaurant sales in Shoney's Restaurants.
17
Wage rates increased during the first quarter of 2000 as a result of low
unemployment conditions in many markets and a very competitive restaurant
labor market. Restaurant labor increased as a percentage of sales in both
Shoney's and Captain D's. The increase in restaurant labor in Shoney's and
Captain D's was mitigated somewhat by the increase in outside sales of COI
sales relative to the decline in restaurant revenue. The Company expects
continued upward pressure on consolidated restaurant labor until meaningful
improvements in consolidated comparable restaurant sales are achieved.
Consolidated operating expenses declined 0.6% as a percentage of total
revenues in 2000 as compared to the prior year. The decline in consolidated
operating expenses, as a percentage of sales, was primarily the result of
lower utilities, insurance, and repair and maintenance expenses.
A summary of consolidated general and administrative expenses and interest
expense as a percentage of consolidated revenues is shown below:
FIRST QUARTER FIRST QUARTER
2000 1999
---- ----
Consolidated general and administrative 7.5% 8.4%
Consolidated interest expense 4.6% 4.7%
Consolidated general and administrative expenses, as a percentage of
revenues, declined 0.9% in the first quarter of 2000 when compared to the first
quarter of 1999 due to legal expenses of $2.3 million incurred in the
first quarter of 1999 associated with defending and settling certain
employment litigation, lower levels of multi-unit supervisory expenses in the
Shoney's Restaurant concept during the first quarter of 2000 and an overall
effort to reduce general and administrative costs as restaurants are closed.
Consolidated interest expense declined $2.2 million in the first quarter of
2000 compared to the first quarter of 1999. The reduction in interest
expense is primarily the result of lower senior debt outstanding. During the
first quarter of 2000, the Company made $13.0 million of required prepayments
on its senior bank debt. The prepayments resulted from proceeds from asset
sales. 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 $0.2 million and
borrowings under the Company's Line of Credit.
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 8 to
the Consolidated Condensed 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 ($3.5 million had previously been recorded in the
fourth quarter of 1998). The Court approved the settlement agreement and
entered final orders on July 7, 1999 (Belcher I and Edelen) and August 20,
1999 (Belcher II).
The Company had an effective tax rate of (3)% and 0% in the first quarter of
2000 and in the first quarter of 1999, respectively. This effective federal
tax rate differs from the federal statutory rate of 35% primarily due to the
goodwill amortization which is not deductible for federal income tax purposes
and an adjustment in the valuation allowance against deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
18
As of October 31, 1999, the Company increased the valuation allowance for gross
deferred tax assets for deductible temporary differences, tax credit carry
forwards, and net operating loss carry forwards. The deferred tax asset
valuation adjustment is in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires
that a deferred tax asset valuation allowance be established if certain
criteria are not met. If the deferred tax assets are realized in the future,
the related tax benefits will reduce income tax expense.
OPERATING SEGMENTS
SHONEY'S RESTAURANTS
QUARTER ENDED
($ IN THOUSANDS EXCEPT COMPARABLE STORE FEBRUARY 20, FEBRUARY 14,
SALES AND OPERATING RESTAURANT DATA) 2000 1999
------------------------------
Restaurant sales $ 109,130 $ 150,437
Franchise revenue 2,562 2,676
----------------------------
Total Shoney's revenue 111,692 153,113
Expenses 111,396 153,614
----------------------------
EBIT as defined $ 296 $ (501)
============================
Comparable store sales decrease (a) (3.8)% (5.7)%
Operating restaurants at end of quarter:
Company-owned 264 362
Franchised 257 266
-----------------------------
Total 521 628
=============================
[FN]
(a) Prior year amounts have not been restated
for comparable restaurants
</FN>
Shoney's concept total revenue declined $41.4 million, or 27.1%, in the first
quarter of 2000 when compared to the comparable period of the previous year.
The components of the change in Shoney's concept revenue are summarized as
follows:
($ in millions) February 20,
2000
------------
Sales from operating restaurants $ (3.8)
Closed restaurants (37.5)
--------
Total change in restaurant sales (41.3)
Franchise revenues (0.1)
--------
Total $ (41.4)
========
Revenues were significantly reduced by the closing of 123 under-performing
Company-owned restaurants in 1999 and the decline in comparable store sales.
In addition, 19 Company-owned restaurants were sold to franchisees during 1999
and three Company-owned restaurants were sold to franchisees in the first
quarter of 2000. Shoney's Restaurants sales also were affected by inclement
weather in a number of the Company's markets when compared to the prior year
quarter. 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 are as follows:
19
First Quarter First Quarter
2000 1999
--------------------------------------------------
EBIT as EBIT as
($ in thousands) Sales defined Sales defined
--------------------------------------------------
Stores closed or sold $ 840 $ (320) $ 38,308 $ (4,383)
==================================================
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. In addition, during the first quarter, Shoney's Restaurants
experienced a decline in comparable store sales for the breakfast day part.
The decline in comparable store sales at breakfast is the result of increased
breakfast bar competition in many of the Company's markets. Franchise revenue
decreased $0.1 million in the first quarter of 2000 when compared to the
prior year first quarter. The decrease in franchise revenue in the first
quarter of 2000 is primarily a result of lower initial franchise fees on new
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 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. Although initial results were
positive, comparable store sales declined during the first quarter primarily
as a result of a decline in breakfast traffic. 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 $42.2 million, or 27.5%, in the first quarter of 2000 when
compared to the first quarter of 1999. Expenses as a percentage of revenue
were 99.7% in the first quarter of 2000 compared to 100.3% in the first
quarter of 1999. As a percentage of revenues, significant increases in
restaurant labor were more than offset by lower multi-unit supervisory
expenses and 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, increased $0.8 million in 2000 when compared to the
comparable prior year quarter.
20
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell additional
operating restaurants to franchisees.
CAPTAIN D'S RESTAURANTS
QUARTER ENDED
($ IN THOUSANDS EXCEPT COMPARABLE STORE
SALES AND OPERATING RESTAURANT DATA ) FEBRUARY 20, FEBRUARY 14,
2000 1999
-----------------------------
Restaurant sales $ 92,413 $ 91,655
Franchise revenue 1,579 1,580
-------------------------
Total Captain D's revenue 93,992 93,235
Expenses 84,276 82,518
-------------------------
EBIT as defined $ 9,716 $ 10,717
=========================
Comparable store sales increase (decrease) (a) (0.1)% 4.9%
Operating restaurants at end of quarter:
Company-owned 363 365
Franchised 204 209
-------------------------
Total 567 574
==========================
[FN]
(a) Prior year amounts have not been restated
for comparable restaurants
</FN>
Captain D's total revenue increased $0.8 million, or 0.8%, in 2000 when
compared with the comparable prior year period. The components of the change
in Captain D's concept revenue are summarized as follows:
($ IN MILLIONS) FEBRUARY 20,
2000
------------
Sales from operating restaurants $ 1.4
Closed restaurants (0.6)
-------
Total change in restaurant sales 0.8
Franchise revenues -
-------
Total $ 0.8
=======
Revenues were reduced by the closing of four under-performing Company-owned
restaurants in 1999. Captain D's comparable store sales for the first
quarter of 2000 were affected by inclement weather in
21
a number of the Company's markets when compared to the comparable prior year
quarter and the timing of the Lenten season which started later in 2000 than
in 1999. 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 are as follows:
First Quarter First Quarter
2000 1999
---------------------------------------------
EBIT as EBIT as
($ in thousands) Sales defined Sales defined
---------------------------------------------
Stores closed $ -- $ (9) $ 597 $ (44)
=============================================
Franchise revenue was virtually unchanged in the first quarter of 2000 when
compared to the prior year quarter. 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 $1.8 million, or 2.1%, in the first quarter of 2000 when
compared to the first quarter of 1999. Expenses as a percentage of revenues
were 89.7% in the first quarter of 2000 compared to 88.5% in the first
quarter of 1999. As a percentage of sales, decreases in food and supply
costs and operating expenses were more than 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, declined $1.0 million in the first quarter of 2000
when compared to the comparable prior year quarter.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell operating
restaurants to franchisees.
22
CASUAL DINING RESTAURANTS
QUARTER ENDED
($ IN THOUSANDS EXCEPT COMPARABLE STORE
SALES AND OPERATING RESTAURANT DATA) FEBRUARY 20, FEBRUARY 14,
2000 1999
-----------------------------
Pargo's restaurant sales $ 6,688 $ 7,018
Fifth Quarter restaurant sales 2,320 2,996
--------------------------
Total Casual Dining revenue 9,008 10,014
Expenses 8,999 9,835
--------------------------
EBIT as defined $ 9 $ 179
==========================
Pargo's comparable store sales increase (decrease) (a) 0.6% (5.3)%
Fifth Quarter comparable store sales (decrease) (a) (1.8)% (0.9)%
Operating restaurants at end of quarter:
Pargo's 11 11
Fifth Quarter 3 4
--------------------------
Total 14 15
==========================
[FN]
(a) Prior year amounts have not been restated
for comparable restaurants
</FN>
Casual Dining total revenues declined $1.0 million, or 10.0%, in the first
quarter of 2000 when compared with the comparable period in the prior year.
The components of the change in Casual Dining revenue are as follows:
($ IN MILLIONS) FEBRUARY 20,
2000
------------
Operating Pargo's and Fifth Quarter restaurants $ --
Closed Pargo's and Fifth Quarter restaurants (1.0)
-------
Total change in restaurant sales $ (1.0)
=======
Revenues were reduced by the closing of two under-performing Company-owned
restaurants in 1999. 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 are
as follows:
First Quarter First Quarter
2000 1999
----------------------------------------------
EBIT as EBIT as
($ in thousands) Sales defined Sales defined
----------------------------------------------
Stores closed $ -- $ 9 $ 1,048 $ 136
============================================
The Company closed the sale of its Pargo's restaurants effective March 1, 2000.
Expenses declined $0.8 million, or 8.5%, in the first quarter of 2000 when
compared to the first quarter of 1999. Expenses, as a percentage of revenues,
were 99.9% in the first quarter of 2000 compared to 98.2% in the first quarter
of 1999. As a percentage of sales, increases in food and supply costs and
operating expenses were partially offset by decreases in multi-unit supervisory
costs and restaurant labor.
23
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 $0.2 million in the first quarter of 2000
when compared to the first quarter of 1999.
COI
QUARTER ENDED
FEBRUARY 20, FEBRUARY 14,
($ IN THOUSANDS) 2000 1999
-----------------------------
Outside sales $ 32,050 $ 31,163
Inter-company sales 78,620 96,566
-----------------------------
Total COI revenue 110,670 127,729
Expenses 109,879 125,325
-----------------------------
EBIT as defined $ 791 $ 2,404
=============================
Distribution centers at end of quarter 3 3
Total revenue declined $17.1 million, or 13.4%, in the first quarter of 2000
when compared to the prior year quarter. Outside revenues of the COI
operation increased by $0.9 million in the first quarter of 2000. The increase
in outside sales for the first quarter of 2000 resulted primarily from an
increase in franchised restaurant customers. In December 1998, COI closed the
distribution center located in Wichita, Kansas. Inter-company sales declined
in the first quarter of 2000 when compared to the first quarter of 1999 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. In addition, during the first quarter of 2000, COI entered into a
five-year service agreement with Captain D's. The agreement is expected to
lower Captain D's purchasing costs by approximately $1.4 million annually.
Expenses declined $15.4 million, or 12.3%, in the first quarter of 2000 when
compared to the prior year. Expenses, as a percentage of sales, were 99.3% in
2000 compared to 98.1% in the first quarter of 1999. The increase in
expenses as a percentage of sales is due to higher cost of goods sold, labor
and 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 $1.6 million in the first quarter of 2000
when compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its liquidity requirements with cash
provided by operating activities supplemented by external borrowings from
lending institutions. The Company operates with a substantial net working
capital deficit. Management does not believe that the deficit hinders the
Company's ability to meet its obligations as they become due. The Company's
Line of Credit is available to cover short and long term working capital
requirements. The Company's cash provided by operating activities declined
during fiscal 1999, as compared to fiscal 1998, and declined $6.1 million
during the first quarter of 2000 when compared to the prior year period. This
decrease in cash provided by operations was due primarily to changes in
inventory. During the first quarter of 2000 the Company significantly
increased its inventory of white fish and shrimp. The increase in inventory
of white fish was
24
the result of Year 2000 concerns as the Company is reliant on overseas
shipments for its white fish. The shrimp inventory was increased due to price
and availability concerns.
Cash provided by investing activities during the first quarter of 2000
totaled $5.4 million as compared to cash provided by investing activities of
$28.7 million in the same quarter of 1999. The change in cash provided by
investing activities was due principally to a decrease in proceeds from the
disposal of property, plant and equipment.
The Company balances its capital spending throughout the year based on
operating results and will decrease capital spending, if needed, to balance
cash from operations and debt service requirements. The Company has planned
capital expenditures for 2000 of approximately $27.0 million. The Company
does not plan to build a significant number of new restaurants during 2000
and will invest its capital in improvements to existing operations.
Budgeted capital expenditures for 2000 include $6.6 million for remodeling
and refurbishment of restaurants, $10.3 million for additions to existing
restaurants and $10.1 million for other assets. Cash required for capital
expenditures totaled $6.6 million for the first quarter of 2000.
During 1999, the Company closed 129 restaurants. These properties, as well
as real estate from prior restaurant closings and other surplus properties
and leasehold interests, have been actively marketed. The Company's 1997
Credit Facility requires that net proceeds from asset dispositions be applied
to reduce its senior debt. At February 20, 2000, the Company had
approximately 39 properties classified as assets held for sale with a
carrying value of $20.6 million. Cash proceeds from asset dispositions were
$12.0 million for the first quarter of 2000 compared to $34.4 million for the
first quarter of 1999.
The Company completed a refinancing of its senior debt on December 2, 1997.
The 1997 Credit Facility consisted of a $75.0 million revolving line of
credit ("Line of Credit") and two term notes of $100.0 million ("Term A
Note") and $200.0 million ("Term B Note"), respectively, due in 2002. The
term notes replaced the Company's reducing revolving credit facility, the
senior secured bridge loan which was obtained in 1996 to provide financing for
the acquisition of substantially all the assets of TPI Enterprises, Inc., and
a series of mortgage financings. The new debt facility provides the Company
with additional liquidity and a debt amortization schedule which better
supports the Company's business improvement plans.
During the first quarter of 2000, the Company's cash used by financing
activities was $3.0 million compared with cash used by financing activities
of $32.4 million for the same period in 1999. Payments on the Term A and
Term B Notes of $13.0 million were required as a result of the sale of
surplus property. The debt reductions from property sales were offset by
Significant financing activities for the first quarter of 1999 included
payments on the Term A and Term B Notes of $31.5 million resulting from the
sale of restaurant properties.
The Company had approximately $42.2 million and $121.3 million outstanding
under Term A Note and Term B Note, respectively, at February 20, 2000. The
amounts available under the Line of Credit are reduced by letters of credit
of approximately $30.9 million and borrowings of $22.4 million resulting in
available credit under the Line of Credit of approximately $21.7 million at
February 20, 2000. Due to the nature of the loan covenants contained in the
Company's 1997 Credit Facility, the Company's ability to draw under the Line
of Credit could be restricted. Based upon the financial covenants at
February 20, 2000, the Company could have drawn approximately $3.5 million
under the Line of Credit and remained in compliance with its loan agreement.
At February 20, 2000, the
25
Company had cash and cash equivalents of approximately $8.9 million.
Management expects the Company's liquidity to improve during the second
quarter of 2000. The improvement is expected from a reduction in inventory,
$10.4 million of debt reduction resulting from proceeds from the sale of its
Pargo's restaurants and improved cash flow during the second quarter.
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, required 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 funded the remaining
$3.5 million on March 1, 2000.
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 when 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 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. 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 $137.3 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
recently retained Banc of America Securities LLC to assist it in
restructuring its balance sheet which could include refinancing its current
indebtedness. 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
26
indebtedness, either in the near future or at maturity, 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 its financial
covenants and management could be forced to seek modifications to the
Company's credit agreement. Management believes that 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
materially adversely affected. The Company was in compliance with its financial
covenants at the end of the first quarter of 2000.
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 and 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 COI Foodservice
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) COI
system 3) general ledger system and 4) payroll system. As of March 2000,
management is not aware of any significant Year 2000 issues with the Company's
internally operated software systems.
The Company does have material relationships with certain suppliers of food
products and depends upon certain 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.
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 and hardware upgrades were approximately $1.2
million.
Management believes it had an effective program in place to resolve Year 2000
issues in a timely manner. As of March 2000, other than inventory increase,
the Company cannot quantify any impact of any Year 2000 issues.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A of the Company's Annual Report on Form 10-K, filed with the
Commission on January 31, 2000, is incorporated herein by this reference.
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Item 3 of the Company's Annual Report on Form 10-K, filed with the
Commission on January 31, 2000, is incorporated herein by this reference. See
also Note 8 to the Notes to Consolidated Condensed Financial Statements at
pages 10 through 12 of this Quarterly Report on Form 10-Q, which is
incorporated herein by this reference.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) In accordance with the provisions of Item 601 of Regulation S-K,
the following have been furnished as Exhibits to this Quarterly Report on
Form 10-Q:
27 Financial Data Schedule (For SEC Use Only).
(b) During the quarter ended February 20, 2000, the Company has
not filed any reports on Form 8-K.
28
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized both on behalf of the registrant and in
his capacity as principal financial officer of the registrant.
Date: March 22, 2000 By: /s/ V. Michael Payne
---------------------
V. Michael Payne
Senior Vice President and Controller,
Principal Financial and Chief
Accounting Officer
29
EXHIBIT INDEX
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
27 Financial Data Schedule (for SEC use only) 31
30