UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 29, 2000
[ ] 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:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $1 per share
Common Stock Purchase Rights
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. [ ]
As of January 22, 2001, there were 47,650,194 shares of Shoney's,
Inc., $1 par value common stock held by non-affiliates with an aggregate
market value of $36,481,000.
As of January 22, 2001, there were 51,693,846 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 the 2001 Part III
Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission (the "Commission")
within 120 days after the fiscal year ended October
29, 2000 (hereinafter the "2001 Proxy Statement")
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 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 52
PART III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and Management 53
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 53
Signatures 55
The forward-looking statements included in this Annual Report on 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 affect the Company's markets, turnover and a variety of other
similar matters. Forward looking statements generally can be identified by
the use of forward looking terminology such as "may," "will," "expect,"
"intend," "estimate," "could," "anticipate," "believe," or "continue" (or the
negative thereof) or similar terminology. Actual results and experience
could differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements as a result of a number
of factors, including but not limited to those discussed in Part II, Item 7
of this Annual Report on Form 10-K 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 29, 2000, Shoney's, Inc., itself or through certain wholly-
owned subsidiaries collectively, in this Annual Report on Form 10-K, (the
"Company") operated and franchised a chain of 1,023 restaurants in 28 states.
The Company is a diversified food service chain that consists of Shoney's
Restaurants and Captain D's, Inc. 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 Company also owns
Commissary Operations, Inc., 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 2000. 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, which also feature an all you care to eat food, soup and
salad bar. The restaurants generally are open 16 hours each day except
Christmas and serve breakfast, lunch and dinner. At October 29, 2000, there
were 459 Shoney's Restaurants located in 24 states of which 245 were Company-
owned restaurants and 214 were franchised restaurants. The menu is
diversified to appeal to a broad spectrum of guests' tastes and includes
traditional items such as hamburgers, sandwiches, chicken, steak, seafood,
and desserts. Entree selections range in menu price from $3.99 to $10.99 at
lunch and dinner. The average guest check was $6.93 for Company-owned units
in 2000, compared to $6.58 in 1999 and $6.32 in 1998.
In April 2000 the Company hired a new President and CEO for the Shoney's
Concept. His first priority was to assemble a new senior management team.
This team developed a re-branding strategy, which enhanced the offerings on
the food bar while reducing the number of menu items in an effort to simplify
operations. A major component of this strategy was to create and nurture a
culture that provides a level of service perceived by the guest as
exceptional. This strategy is also available to franchised restaurants. To
date, nine franchised restaurants have converted to this menu. In November
2000 the Company hired a new Senior Vice President of Research and
Development who is a Certified Master Chef. His mission is to provide new
and innovative products for both the cook-to-order menu and the food bar.
The Company continued to focus on the use of Store Waste Attack Tool ("SWAT")
implemented in 1999 in its Shoney's restaurants. SWAT assists management in
identifying waste and theft. During 2000, the Company developed and tested
a new labor scheduling system, which schedules employees based on anticipated
hourly sales. The Company has begun to implement this labor scheduling
system in fiscal 2001.
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 ten Company-owned
Shoney's Restaurants during 2000. In addition to these closings, the Company
also sold 12 Shoney's Restaurants to franchisees.
During 2000, comparable restaurant sales declined 1.8% for all Company-owned
Shoney's Restaurants. This decline included the effects of a menu price
increase of
1
6.7%. Average sales volumes for Company-owned units open the entire year were
$1,475,000 in 2000, compared to $1,497,000 in 1999 and $1,413,000 in 1998.
Shoney's Restaurants generally have between 120 and 180 seats and employ
approximately 65 people, including management personnel. Please refer to Note
17 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 360 Company-owned and 204 franchised Captain D's
restaurants located in 22 states at October 29, 2000. 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 $3.69 to $7.99. The
average guest check for Company-owned units was $4.87, $4.71 and $4.47 in
2000, 1999 and 1998, respectively. During 2000, Captain D's posted its third
consecutive year of comparable store sales increases, which management
attributes to better marketing strategies and successful product promotions.
Captain D's continues to evolve into the "Fast Casual" arena. Fast Casual is
the look, feel, service quality and food variety of the restaurant. Fast
Casual restaurants offer the "Coastal Classics" menu that features a greater
variety of seafood items such as broiled salmon, orange roughy, flounder,
catfish and fried oysters. Captain D's has developed a new wharf-side look
that lends itself to more upscale decor when compared to the typical quick-
service look. The Montgomery, Alabama and West Virginia markets were selected
to evaluate the Fast Casual wharf-side exterior and interior package in their
entirety. The employees were retrained with the focus on service and food
quality. New uniforms, music, credit cards, the Coastal Classics menu and
TV's were also added to complete the Fast Casual feel. Interiors were
modified to provide drink stations in the dining rooms to save on labor costs
and give a more customer-friendly feeling. Advertising was concentrated on
more upscale menu items such as salmon, flounder, catfish and tilapia. By
introducing all of these aspects at one time, Captain D's can test the
customer's reaction to Captain D's entry into the Fast Casual arena.
Training is a continuing focus for Captain D's. During 1999, Captain D's
implemented D's University, which teaches operational procedures, human
resource issues, training modules of store procedures and other business
tools. As of the end of fiscal year 2000, 347 employees had attended D's
University. During 2000, Captain D's partnered with an outside firm to
assist in developing a computer-based training program for all on-site store
training modules. This is an interactive training tool that ensures
consistent and monitored training for all levels of the workforce, from entry
level through management. Management believes the focus on training
provides better service to the customer and reduces turnover in Captain D's
restaurants.
Food and labor costs are continually monitored by Captain D's management.
SWAT was implemented in Captain D's in 1999 and continues to be an important
tool in controlling waste and reducing food cost in the restaurant. During
2000, an industrial engineer was hired to assist in developing a labor
scheduling program that measures the time it takes to perform each task in
the restaurant and relates that time back to labor hours. While this program
is still in development, management believes that the program will assist in
scheduling the correct amount of labor hours needed to operate each store
efficiently while maintaining a high level of service.
Comparable store sales for Company-owned units increased 2.0% in 2000, which
included the effects of a 3.9% menu price increase. The average sales volume
for Company-owned Captain D's restaurants open the entire year was $873,000
in 2000, compared to $857,000 in 1999 and $831,000 in 1998. Please refer to
Note 17 of the Notes to Consolidated Financial Statements for certain segment
financial information.
2
COMMISSARY OPERATIONS, INC.
Commissary Operations, Inc. ("COI") includes three distribution facilities
and a food processing facility that supplies ground beef, steaks, and soups.
The objective of COI 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 2000, COI implemented new order entry and inventory control software.
The new software provides additional functionality in inventory management
and pricing flexibility that will allow COI to pursue customers outside of
historical Company-owned and franchised customers. These additional
customers will provide better utilization of the assets employed by COI.
COI's distribution centers served 316 franchised restaurants as of October
29, 2000. Please refer to Note 17 of the Notes to Consolidated Financial
Statements for certain segment financial information.
BUSINESS DEVELOPMENT AND FRANCHISING
The Company's current business plan for the Shoney's concept includes
focusing its available personnel and capital resources on improving the
operations of its existing store base. The Company closed ten under-
performing Shoney's Restaurants and sold 12 Company-owned Shoney's
Restaurants to franchisees during 2000. These closed 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 within what management considers a reasonable period of time. In
addition to store closings, the Company may choose to sell certain units to
franchisees. The Company's business plan for Captain D's includes building a
limited number of new restaurants in fiscal 2001 coupled with plans to sell
certain Company-owned units to franchisees. The Company's lending agreements,
under certain circumstances, permit proceeds from the sale of the closed
units, sales of Company restaurants to franchisees and surplus properties to
be retained and used in the Company's operations.
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 2000, by restaurant concept:
AT OCTOBER 31, 1999 OPENINGS CLOSINGS AT OCTOBER 29, 2000
COMPANY FRANCHISE TOTAL COMPANY FRANCHISE COMPANY FRANCHISE COMPANY FRANCHISE TOTAL
-------------------------- ------------------ ------------------ -------------------------
Shoney's 267 258 525 - 14(A) (22)(A) (58) 245 214 459
Captain D's 362 205 567 1 2 (3) (3) 360 204 564
--- --- ----- - -- ---- ---- --- --- -----
629 463 1,092 1 16 (25) (61) 605 418 1,023
=== === ===== = == ==== ==== === === =====
(A) Includes 12 Company-owned restaurants sold to franchisees.
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
3
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.
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 necessary.
SERVICE MARKS
The Company has registered the names "Shoney's", and "Captain D'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.
SEASONALITY
The Company's business is moderately seasonal. Restaurant sales are
generally higher in the second and third fiscal quarters (March through
August) than in the first and fourth calendar quarters (September through
February). Additionally, severe weather, storms and similar conditions may
impact sales volumes seasonally in some operating regions. Occupancy and
other operating costs, which remain relatively constant, have a
disproportionately greater negative effect on operating results during
quarters with lower restaurant sales.
4
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations have not
historically had a significant impact on the operations of the Company;
however, the Company cannot predict the effect on its operations or possible
future environmental legislation of regulations.
RESEARCH AND DEVELOPMENT
While research and development are important to the Company, these
expenditures have not been material due to the nature of the restaurant and
retail industry.
EMPLOYEES
At December 17, 2000, the Company employed approximately 19,000 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 29, 2000:
NUMBER OF PROPERTIES(1)
----------------------
USE TOTAL OWNED LEASED
--- ----- ----- ------
Office and Distribution Facilities(2) 6 5 1
Shoney's Restaurants 245 163 82
Captain D's Restaurants 360 247 113
Restaurants Under Construction 1 1
--- --- ---
612 416 196
=== === ===
(1) In addition, the Company owns or leases approximately 84 properties
that are in turn leased to others, owns 19 parcels of surplus land,
owns one parcel of land for future construction and leases 28
properties that are vacant.
(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
29, 2000, the Company also operated distribution facilities in
Ripley, West Virginia and Tifton, Georgia.
The following table sets forth the Company's operating restaurants, by state,
as of October 29, 2000:
COMPANY-OWNED RESTAURANTS BY STATE
SHONEY'S CAPTAIN D'S TOTAL
-------- ----------- -----
Alabama 34 56 90
Arkansas 7 11 18
Florida 14 16 30
Georgia 17 54 71
Illinois 1 5 6
Indiana 3 8 11
Kansas 2 2
Kentucky 19 17 36
Louisiana 29 29
Maryland 1 1
Mississippi 17 17 34
Missouri 9 23 32
No. Carolina 10 7 17
Ohio 4 21 25
Oklahoma 12 12
Pennsylvania 1 1
So. Carolina 10 20 30
Tennessee 36 65 101
Texas 1 8 9
Virginia 9 4 13
W. Virginia 23 14 37
--- --- ---
Total 245 360 605
=== === ===
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 $7.9
million in 2000, 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 121 of the
6
restaurant leases (62%) expire prior to October 31, 2005; however,
approximately 103 of these restaurant leases (85% of the 121 leases) provide
for renewal options. The lease for the distribution facility in Tifton,
Georgia expires in 2014 and has no renewal provision. Notes 8 and 10 of the
Notes to Consolidated Financial Statements on pages 38-42 and 46-47,
respectively, of Item 8 in this Annual Report on Form 10-K are incorporated
herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is a party to 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
On September 6, 2000, the Company completed a cash tender offer (the
"Tender Offer") and consent solicitation for certain of its convertible
subordinated notes, which previously consisted of $51.6 million principal
amount of 8-1/4% convertible Subordinated Debentures due 2002 (the
"Debentures") and $177.4 million principal amount at maturity of Liquid Yield
Option Notes due 2004 (the "LYONs"). As of the expiration of the tender
offers on September 6, 2000, the Company had received and, at that time,
accepted for payment $46.5 million aggregate principal amount of the
Debentures and $159.6 million aggregate principal amount at maturity of the
LYONs. Settlement of the tender offer was made on Thursday, September 7,
2000, by payment of the aggregate purchase price to the Depositary for the
offers, The Bank of New York. In connection with the tender offers, consents
were solicited and received to amend the terms of the indentures under which
the Debentures and the LYONs were issued. For the terms of the amendments to
the indentures, see Exhibits 4.5 and 4.8 to this Annual Report on Form 10-K.
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 54
J. Michael Bodnar President and Chief Executive Officer 56
Richard K. Arras President and Chief Executive Officer - Shoney's
Restaurants 49
James M. Beltrame Chief Financial Officer 57
David L. Gilbert Executive Vice President, Chief
Administrative Officer and Assistant Secretary 43
Bernard W. Gray Chief Information Officer 53
Haney A. Long, Jr. President and Chief Operating Officer - COI 55
Ronald E. Walker President and Chief Operating Officer -
Captain D's, Inc. 50
Richard D. Schafstall Senior Vice President, Secretary and General
Counsel 58
Except as indicated below, there is no 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.
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
7
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. Schoenbaum's brother, Jeffry, also serves on the Company's Board
of Directors.
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. ARRAS joined the Company in April 2000 as President and CEO of
Shoney's Restaurants. Prior to joining the Company, he served as a restaurant
consultant from December 1999 through March 2000. From October 1998 to
November 1999, he served as President and COO of Cracker Barrel Old Country
Store, Inc. He served as President and COO of Perkins Family Restaurants
from December 1988 to October 1998.
MR. BELTRAME joined the Company in May 2000 as Chief Financial Officer.
Prior to joining the Company, he served as President, Chief Executive Officer
and Director of Successories, Inc., a specialty retailer from March 1995
to June 1998.
MR. GILBERT joined the Company in January 1998 as Senior Vice
President - Real Estate. 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. 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.
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 Podiatry Insurance
Corporation of America as Chief Information Officer. Mr. Gray rejoined the
Company in December 1997 and was named Chief Information Officer.
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 Commissary Operations, Inc., a wholly-owned 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. 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 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, the operations of which were
placed in a wholly-owned subsidiary, Captain D's, Inc., during 2000.
MR. SCHAFSTALL joined the Company on February 1, 2000 as Senior Vice
President, General Counsel and Secretary. Prior to joining the Company, he
served as Senior Counsel for Cinergy Corporation, a diversified electric and
gas utility company, from June 1, 1995 to January 2000. Mr. Schafstall began
employment with Cinergy Corporation in August 1964.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock currently is traded on the Over the Counter
Bulletin Board under the symbol "SHOY". Prior to July 12, 2000, the common
stock had formerly traded on the New York Stock Exchange under the symbol
"SHN". Quotations provided subsequent to July 12, 2000 reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions. The following table sets forth the high and
low trading quotes of the Company's common stock as reported by the Over the
Counter Bulletin Board and the New York Stock Exchange during each of the
fiscal quarters of the 2000 and 1999 fiscal years:
Stock Stock
Market Market
High Low
------ ------
2000
First Quarter 1 1/2 1 1/16
Second Quarter 1 1/8 5/8
Third Quarter 1 5/8 15/32
Fourth Quarter 1 1/16 7/16
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
There were 8,355 shareholders of record of the Company's Common Stock
as of January 22, 2001.
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.
9
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED OCTOBER 2000 1999 1998 1997 1996(a)
- - ------------------------- ---- ---- ---- ---- -------
Revenues $ 835,845 $ 966,908 $1,098,691 $1,166,447 $1,030,829
Costs and expenses
Cost of sales 739,625 842,591 981,570 1,035,226 888,111
General and administrative 64,910 76,042 85,433 82,607 67,203
Interest expense 36,659 42,159 48,476 45,016 37,951
Litigation settlement - 14,500 3,500
Impairment of long-lived assets 17,120 18,422 47,161 48,446
Restructuring expense 1,031 4,462 10,059 1,301
--------- --------- ---------- ---------- ----------
859,345 998,176 1,176,199 1,212,596 993,265
Income (loss) from continuing
operations before income taxes
and extraordinary gain (loss) (23,500) (31,268) (77,508) (46,149) 37,564
Income taxes (benefit) (504) (1,135) 26,797 (12,851) 13,978
---------- ---------- ----------- ----------- ----------
Income (loss) from continuing
operations before extraordinary
gain (loss) (22,996) (30,133) (104,305) (33,298) 23,586
Discontinued operations, net of
income taxes 166 1,307 (1,984) (2,413) 2,858
Gain on sale of discontinued
operations, net of income taxes 489 22,080
Extraordinary gain (loss) on early
extinguishment of debt, net of
income taxes 82,477 (1,415)
--------- ---------- ----------- ----------- -----------
Net income (loss) $ 60,136 $ (28,826) $ (107,704) $ (35,711) $ 48,524
========= ========== =========== =========== ==========
Weighted average shares outstanding
(diluted) 50,427 49,339 48,666 48,540 42,706
Per share data--diluted
Income (loss) from continuing
operations before extraordinary
gain (loss) $ (0.46) $ (0.61) $ (2.14) $ (0.69) $ 0.55
Net income (loss) $ 1.19 $ (0.58) $ (2.21) $ (0.74) $ 1.14
Dividends -- -- -- -- --
Total assets $ 338,428 $ 405,655 $ 522,431 $ 643,576 $ 745,900
Long-term debt and obligations under
capital leases $ 263,342 $ 357,928 $ 442,293 $ 465,001 $ 475,428
Shareholders' equity (deficit) $ (85,987) $(147,137) $ (119,487) $ (12,345) $ 528
Number of restaurants at year-end
Company-owned 605 629 773 867 923
Franchised 418 463 472 494 519
---------- ---------- ----------- ----------- ----------
Total restaurants 1,023 1,092 1,245 1,361 1,442
========== ========== =========== =========== ==========
Notes: (a) - See Note 3 - Acquisitions of the Notes to Consolidated
Financial Statements included as Item 8 herein.
10
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 consisted of 53 weeks and fiscal 2000 and 1998
consisted of 52 weeks. The fourth quarter of fiscal 1999 consisted of 13
weeks compared to 12 weeks in the fourth quarter of 2000.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED REVENUES
Consolidated revenue for the last three fiscal years is as follows:
FISCAL YEAR ENDED
------------------------------------------------------
(IN MILLIONS) OCTOBER 29, OCTOBER 31, OCTOBER 25,
2000 1999 1998
----------- ----------- -----------
Net sales $ 811.6 $ 931.1 $ 1,072.0
Franchise fees 14.5 15.2 14.5
Other income 9.7 20.6 12.2
--------- --------- ----------
$ 835.8 $ 966.9 $ 1,098.7
========= ========= ==========
Changes in restaurants for 2000 and 1999 are as follows:
OCTOBER 29, RESTAURANTS RESTAURANTS OCTOBER 31, RESTAURANTS RESTAURANTS OCTOBER 25,
2000 OPENED CLOSED 1999 OPENED CLOSED 1998
-----------------------------------------------------------------------------------------
Shoney's
Company-owned 245 -- 22(1) 267 1 142(2) 408
Franchised 214 14(1) 58 258 20(2) 23 261
----- -- -- ----- -- --- ----
459 14 80 525 21 165 669
Captain D's
Company-owned 360 1 3 362 1 4 365
Franchised 204 2 3 205 1 7 211
----- -- -- ----- -- --- ----
564 3 6 567 2 11 576
----- -- -- ----- -- --- -----
1,023 17 86 1,092 23 176 1,245
===== == == ===== == === =====
(1) Includes 12 restaurants sold to franchisees
(2) Includes 19 restaurants sold to franchisees
Consolidated revenues in 2000 declined $131.1 million or 13.6%. Consolidated
revenues in 1999 declined $131.8 million or 12.0%. The components of the
change in consolidated revenues during 2000 and 1999 are summarized as
follows:
($ IN MILLIONS)
2000 1999
---- ----
Sales from restaurants opened or temporarily closed $ (0.5) $ 1.1
Higher menu prices 36.1 28.1
Sales at prior year prices (36.5) (34.9)
Closed restaurants (112.0) (134.3)
Restaurant sales for fifty-third week (12.9) 12.9
COI and other sales 6.3 (13.8)
Franchise revenues (0.7) 0.7
Other income (10.9) 8.4
--------- ---------
Total $ (131.1) $ (131.8)
========= =========
The declines in consolidated revenues in 2000 and 1999 were primarily
attributable to the closing of Company-owned restaurants. The increase in COI
and other sales in
11
2000 was primarily due to an increase in customers not associated with the
Company. The decline in COI and other sales in 1999 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 0.1%, 1.0% and 1.6% in 2000, 1999, and
1998, respectively. These results included menu price increases of 5.4%, 4.0%
and 1.8% in 2000, 1999, and 1998, respectively.
FRANCHISING -- Franchise revenues decreased by approximately $0.7 million in
2000 and increased by approximately $0.7 million in 1999. The decrease in
franchise revenue in 2000 was attributable to the fifty-third week in 1999 and
the closure of franchise restaurants. 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.
OTHER INCOME - Other income decreased $10.9 million in 2000 due primarily to
a decrease of $11.0 million in gains from asset sales. Other income increased
$8.4 million in 1999 when compared to 1998 due primarily to an increase of
$10.5 million in gains on asset sales. In 1999, the increase in gains from
asset sales was partially offset by lower rental income of approximately $0.5
million and a $1.7 million decline in revenue from an insurance subsidiary
that was acquired in 1996 and sold in 1998.
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:
2000 1999 1998
---- ---- ----
Food and supplies 38.9% 36.9% 38.0%
Restaurant labor 26.8% 27.3% 26.7%
Operating expenses 22.8% 22.9% 24.6%
-----------------------------
Total cost of sales 88.5% 87.1% 89.3%
=============================
As compared to restaurant revenues, COI 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 COI revenue have an
exaggerated effect on these expenses as a percentage of total revenues. Also,
the fluctuations in other income year to year affects the consolidated costs
and expenses when stated as a percentage of sales. Excluding the effects of
other income, food and supplies costs as a percentage of revenues increased by
1.7% in 2000 and declined by 0.8% in 1999 when compared to the prior year. The
increase, as a percentage of sales, in 2000 was primarily the result of the
increase in COI sales and increased food costs, as a percentage of sales, in
the Shoney's segment. 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 COI revenue. Food and supplies
costs, as a percentage of sales, declined in Shoney's and Captain D's in 1999.
Excluding the effects of other income, consolidated restaurant labor decreased
0.8% and increased 0.8% as a percentage of revenues in 2000 and 1999,
respectively, when compared to the prior year. The decline in restaurant
labor, as a percentage of sales, in 2000 was primarily attributable to the
increase in COI revenue. Restaurant labor, as a percentage of sales, increased
in both Shoney's and Captain D's in 2000. The increase in restaurant labor, as
a percentage of sales in 1999, was primarily attributable to the decline in
COI sales and increased labor cost as a percentage of sales in both Shoney's
and Captain D's. 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 2000 and 1999, 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
12
restaurant labor until meaningful improvements in consolidated comparable
restaurant sales are achieved.
Excluding the effects of other income, consolidated operating expenses
declined 0.4% as a percentage of revenues in 2000 as compared to the prior
year. The decline in consolidated operating expenses, as a percentage of
sales in 2000, was primarily the result of lower advertising, utilities and
depreciation expense. Excluding the effects of other income, operating
expenses declined 1.4%, as a percentage of sales in 1999, the result of lower
depreciation, utilities, insurance and advertising expenses. 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:
2000 1999 1998
---- ---- ----
Consolidated general and administrative 7.8% 7.9% 7.8%
Consolidated interest expense 4.4% 4.4% 4.4%
Excluding the effects of other income, consolidated general and administrative
expenses, as a percentage of revenues, decreased 0.1% and 0.2% during 2000 and
1999, respectively. The decline in consolidated general and administrative
costs in 2000 was primarily due to lower legal fees subsequent to the
settlement of certain employment litigation in 1999. 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.
Consolidated interest expense declined $5.5 million in 2000 compared to 1999.
The reduction in interest expense in 2000 is primarily the result of lower
senior debt outstanding for the first ten months of 2000 and the repurchase
of $164.2 million of subordinated debt on September 6, 2000. Consolidated
interest expense declined $6.3 million in 1999 when compared to 1998. 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 in 1999 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 incurred asset impairment charges of $17.1 million, $18.4
million, and $47.2 million, in 2000, 1999 and 1998, 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. The asset impairment charges recorded in 2000, 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
$11.3 million, $15.6 million and $42.7 million in 2000, 1999 and 1998,
respectively. If the Company's Shoney's Restaurants continue to experience
declines in comparable store sales and operating margins, the Company will
incur additional asset impairment charges in the future.
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 $1.0 million of restructuring charges in
2000 for the accrual of remaining leasehold obligations on restaurants closed
in 2000. The Company recorded
13
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 charges pertaining to severance
expenses expected to be incurred in the closing of the Company's distribution
center in Macon, Georgia. 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 projected. The Company incurred
$10.1 million of restructuring charges in 1998 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 within what management believes is a reasonable
time period. In the event management elects to close additional restaurants
during 2001, the Company will 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 Company had an effective tax rate of 1.5% in 2000. This rate is
primarily attributable to a decrease in the valuation allowance against the
Company's gross deferred tax assets of $25.9 million due to the utilization
of net operating loss carryforwards.
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 29, 2000, the Company decreased the valuation allowance for gross
deferred tax assets primarily the result of net operating loss carryforwards
utilized. 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.
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 subsequently were fully reserved.
Also during 1999, the Company increased its valuation allowance against the
Company's gross deferred tax assets by $5.8 million.
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.
On September 6, 2000, the Company completed a refinancing of approximately
$248.3 million in connection with the Tender Offer that resulted in the
purchase of approximately 90% of the outstanding Debentures and LYONs for an
aggregate price of approximately $71.8 million. The Tender Offer was subject
to the satisfaction of certain terms and conditions including receipt of
financing and the valid tender of at least 90% of the aggregate principal
amount of each of the debenture issues. In order to consummate the Tender
Offer, the Company was required to refinance the indebtedness outstanding
under the Company's 1997 Credit Facility in addition to receiving financing
necessary to effect the Tender Offer (the "Refinancing"). In
14
order to accommodate the timing of the Refinancing, the Tender Offer was
extended until September 6, 2000, at which time the Refinancing was completed
and the Tender Offer was consummated. Consummation of the Tender Offer and
the Refinancing resulted in an extraordinary gain on the early retirement of
debt of approximately $82.5 million in the Company's fourth quarter, net of
expenses and taxes.
The Company refinanced approximately $281.0 million of its senior debt in
December 1997 (see Liquidity and Capital Resources). 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 $.03 per share).
OPERATING SEGMENTS
Shoney's Restaurants
FISCAL YEAR ENDED
-------------------------------------------------
($ IN THOUSANDS EXCEPT COMPARABLE STORE OCTOBER 29, OCTOBER 31, OCTOBER 25,
DATA AND GUEST CHECK AVERAGE) 2000 1999 1998
-------------------------------------------------
Restaurant sales $ 376,623 $ 500,041 $ 638,940
Franchise revenue 9,053 9,623 9,189
-------------------------------------------------
Total Shoney's revenue 385,676 509,664 648,129
Expenses 381,079 499,324 633,523
-------------------------------------------------
EBIT as defined (b) $ 4,597 $ 10,340 $ 14,606
=================================================
Average sales volume (a) $ 1,475 $ 1,497 $ 1,413
Comparable store sales (decrease) (a) (1.8%) (3.6%) (4.7%)
Average guest check (a) $ 6.93 $ 6.58 $ 6.32
Operating restaurants at year-end:
Company-owned 245 267 408
Franchised 214 258 261
-------------------------------------------------
Total 459 525 669
=================================================
(a) Prior year amounts have not been restated
for comparable restaurants
(b) EBIT which, when that term is used in this Annual Report on Form 10-K,
means operating income before asset impairment charges, restructuring
charges and litigation settlements. EBIT is not a measure of financial
performance under generally accepted accounting principles and should not
be considered as an alternative to net income (or any other measure of
performance under generally accepted accounting principles) as a measure
of performance or to cash flows from operating, investing or financing
activities as an indication of cash flows or as a measure of liquidity.
The Company evaluates performance based on several factors, of which the
primary financial measure is operating income before interest, taxes and
restructuring charges or EBIT as defined.
15
Shoney's concept total revenue declined $124.0 million, or 24.3%, and $138.5
million, or 21.4%, in 2000 and 1999, respectively, when compared to the
previous year. The components of the change in the Shoney's concept revenue
are summarized as follows:
($ IN MILLIONS) 2000 1999
------------------------
Sales from restaurants opened or temporarily closed $ -- $ 1.1
Higher menu prices 24.1 21.3
Closed restaurants (109.7) (132.2)
Sales at prior year prices (30.5) (36.4)
Sales from fifty-third week (7.3) 7.3
--------- ---------
Total change in restaurant sales (123.4) (138.9)
Franchise revenues (.6) 0.4
--------- ---------
Total $ (124.0) $ (138.5)
========= =========
Revenues were significantly reduced by the closing of 81, 123 and 10 under-
performing Company-owned restaurants in 1998, 1999 and 2000, respectively.
The change in revenues was also affected by the fifty-three week year in
1999. In addition, 12 and 19 Company-owned restaurants were sold to
franchisees in 2000 and 1999, respectively. Sales and EBIT (which, when that
term is used in this Annual Report on Form 10-K, means operating income
before asset impairment charges, restructuring charges and litigation
settlements) for Shoney's Restaurants closed or sold are as follows:
2000 1999 1998
EBIT AS EBIT AS EBIT AS
($ IN THOUSANDS) SALES DEFINED SALES DEFINED SALES DEFINED
-------------------- ---------------------- ----------------------
Stores closed during 1998 and prior $ -- $ (12) $ -- $ (2,014) $ 58,722 $ (7,981)
Stores closed or disposed of
during 1999 -- (239) 94,074 (9,831) 167,523 (5,660)
Stores closed or disposed of
during 2000 15,258 (2,112) 30,854 (305) 31,550 672
----------------------------------------------------------------------
Total $ 15,258 $ (2,363) $ 124,928 $ (12,150) $ 257,795 $ (12,969)
======================================================================
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 decreased $0.6 million in 2000 and increased $0.4
million in 1999 when compared to the prior year. The decline in franchise
revenue in 2000 was primarily the result of franchise restaurant closures and
the fifty-three week year in 1999. 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.
Expenses declined $118.2 million, or 23.7%, in 2000 when compared to 1999.
Expenses as a percentage of revenue were 98.8% in 2000 compared to 98.0% in
1999. As a percentage of revenues, food and supplies costs, restaurant
labor, operating expenses and multi-unit supervisory expenses all increased.
Expenses in 1999 declined $134.2 million, or 21.2%, 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, the concept incurred significant
increases in restaurant labor and multi-unit supervisory expenses that were
partially offset by a decline in food and supplies costs, operating expenses
and depreciation when compared to the prior year.
As a result of the above, EBIT for Shoney's Restaurants declined $5.7 million
and $4.3 million in 2000 and 1999, respectively.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
and/or sell additional restaurants in the future.
16
CAPTAIN D'S RESTAURANTS
FISCAL YEAR ENDED
-------------------------------------------------
($ IN THOUSANDS EXCEPT COMPARABLE STORE OCTOBER 29, OCTOBER 31, OCTOBER 25,
DATA AND GUEST CHECK AVERAGE) 2000 1999 1998
-------------------------------------------------
Restaurant sales $ 314,671 $ 316,996 $ 305,180
Franchise revenue 5,432 5,494 5,227
-------------------------------------------------
Total Captain D's revenue 320,103 322,490 310,407
Expenses 283,387 284,129 277,906
-------------------------------------------------
EBIT as defined (b) $ 36,716 $ 38,361 $ 32,501
=================================================
Average sales volume (a) $ 873 $ 857 $ 831
Comparable store sales increase (a) 2.0% 2.6% 4.8%
Average guest check (a) 4.87 $ 4.71 $ 4.47
Operating restaurants at year-end:
Company-owned 360 362 365
Franchised 204 205 211
--------------------------------------------------
Total 564 567 576
==================================================
(a) Prior year amounts have not been restated
for comparable restaurants
(b) See Note (b) under "Operating Segments--Shoney's Restaurants" on page 15
hereof.
Captain D's total revenue declined $2.4 million, or 0.7%, and increased $12.1
million, or 3.9%, in 2000 and 1999, respectively, when compared to the prior
year. The components of change in Captain D's concept revenue are summarized
as follows:
<CAPTAIN>
($ IN MILLIONS) 2000 1999
----------------------
Sales from restaurants opened and temporarily closed $ (0.5) $ -
Higher menu prices 12.0 6.8
Closed restaurants (2.3) (2.1)
Sales at prior year prices (6.0) 1.6
Sales from fifty-third week (5.5) 5.5
-------- --------
Total change in restaurant sales (2.3) 11.8
Franchise revenues (0.1) 0.3
-------- --------
Total $ (2.4) $ 12.1
======== ========
Revenue comparisons were affected by higher menu prices, the closing of
thirteen, four and three under-performing Company-owned restaurants in 1998,
1999 and 2000, respectively, and the fifty-three week year in 1999.
Sales and EBIT for Captain D's restaurants closed are as follows:
2000 1999 1998
EBIT AS EBIT AS EBIT AS
($ IN THOUSANDS) SALES DEFINED SALES DEFINED SALES DEFINED
----------------- ------------------ ------------------
Stores closed during 1998 and prior $ (1) $ -- $ (42) $ 1,863 $ (341)
Stores closed during 1999 -- 37 1,844 (156) 2,101 (60)
Stores closed during 2000 1,456 (87) 1,910 (21) 1,825 (44)
------------------------------------------------------------
Total $ 1,456 (51) $ 3,754 $ (219) $ 5,789 $ (445)
============================================================
Franchise revenue declined $0.1 million in 2000 and increased $0.3 million in
1999 when compared to the prior year. During 2000, Captain D's posted its
third year of comparable store sales increases. Captain D's continues to evolve
into the "Fast Casual" arena. Fast Casual is the look, feel, service quality
and food variety of the restaurant. Captain D's has developed a new wharf-side
look that lends itself
17
to more upscale decor when compared to the typical quick service look. The
Montgomery, Alabama and West Virginia markets were selected to evaluate the
whole Fast Casual package. Both markets were remodeled to the new wharf-side
exterior and interior package. The employees were retrained with the focus
on service and food quality. New uniforms, music, credit cards, the Coastal
Classics Menu and TV's were also added to complete the Fast Casual feel.
Interiors were modified to provide drink stations in the dining rooms to save
on labor costs and give a more customer-friendly feeling. Advertising was
concentrated on more upscale menu items such as salmon, flounder, catfish and
tilapia. By introducing all of these aspects at one time, Captain D's can
test the customer's reaction to the whole package.
Expenses declined $0.7 million, or 0.3%, in 2000 when compared to 1999.
Expenses as a percentage of revenues were 88.5% in 2000 compared to 88.1% in
1999. As a percentage of sales, decreases in food and supplies costs were
more than offset by increases in restaurant labor, operating expenses and
multi-unit supervisory costs.
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, declines in food and supplies costs and
operating expenses were partially offset by increases in restaurant labor and
multi-unit supervisory costs.
As a result of the above, EBIT for Captain D's restaurants decreased $1.6
million and increased $5.9 million in 2000 and 1999, respectively, when
compared to the prior year.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. Also, the Company may sell operating
restaurants to franchisees.
COMMISSARY OPERATIONS, INC.
FISCAL YEAR ENDED
-------------------------------------------------
($ IN THOUSANDS) OCTOBER 29, OCTOBER 31, OCTOBER 25,
2000 1999 1998
-------------------------------------------------
Outside sales $ 117,120 $ 109,258 $ 123,135
Inter-company sales 269,718 321,036 380,552
-----------------------------------------------
Total revenue 386,838 430,294 503,687
Expenses 382,325 422,375 491,855
-----------------------------------------------
EBIT as defined (a) $ 4,513 $ 7,919 $ 11,832
===============================================
Distribution centers at year-end 3 3 4
(a) See Note (b) under "Operating Segments--Shoney's Restaurants" on page 15
hereof.
Total revenue declined $43.5 million, or 10.1%, and $73.4 million, or 14.6%,
in 2000 and 1999, respectively, when compared to the prior year. Outside
revenues of COI increased by $7.9 million in 2000 and declined $13.9 million
in 1999 when compared to the prior year. The increase in outside revenue in
2000 was primarily the result of an increase in the number of outside
customers. The decline in outside sales in 1999 resulted primarily from a
loss of franchise restaurant customers resulting from franchise store
closures and increased competition. Inter-company sales declined in both
years as a result of closing Company-owned restaurants and the overall
decline in comparable store sales.
Expenses declined $40.1 million, or 9.5%, in 2000 when compared to the prior
year. Expenses, as a percentage of sales, were 98.8% in 2000 compared to
98.2% in 1999 due to higher costs of goods sold and operating expenses.
Expenses declined $69.5 million, or 14.1%, in 1999 when compared to the prior
year. Expenses as a percentage
18
of sales were 98.2% in 1999 compared to 97.7% in 1998 due to higher labor
and overhead expenses.
As a result of the above, EBIT for COI decreased $3.4 million and $3.9
million in 2000 and 1999, respectively, 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 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 credit facilities
include lines of credit that are available to cover short term working
capital requirements. Cash provided by operating activities declined $17.7
million in 2000 compared to 1999. Net income of $60.1 million in 2000
resulted primarily from a noncash extraordinary gain on the early
extinguishment of debt, partially offset by asset impairment charges of $17.1
million. Cash provided from operations in 2000 was negatively affected by
the decline in operating income from the Company's Shoney's Restaurants and
COI, lower depreciation and amortization and by cash required by other
liabilities and accrued expenses.
Cash provided by operating activities declined by approximately $20.5 million
during 1999 compared with 1998. The net loss of $28.8 million for 1999
resulted primarily from pre-tax noncash asset impairment charges of $18.4
million and the $14.5 million litigation settlement charge. Cash provided
from operations was negatively affected by the decline in operating income
from the Company's Shoney's Restaurants and COI, lower depreciation and
amortization and by cash required by accounts payable and accrued expenses
partially offset by the one time decline in refunded income taxes.
Cash provided by investing activities in 2000 was $19.0 million. During
2000, the Company received $29.6 million in cash proceeds from the sale of
closed and operating restaurant properties and $12.1 million from the
disposal of discontinued operations. Cash used for property, plant and
equipment additions was $22.4 million and cash used for assets held for sale
was $0.3 million.
Cash provided by investing activities in 1999 was $48.3 million. During 1999,
the Company received $70.9 million in cash proceeds from the sale of closed
and operating restaurant properties and $5.5 million from the disposal of
discontinued operations. Cash used for property, plant and equipment
additions in 1999 was $26.9 million and cash used for assets held for sale
was $1.2 million. Cash provided by investing activities during 1998 was $6.6
million. In 1998, the Company received cash proceeds of $29.6 million,
primarily from the sale of closed restaurant locations and the sale of rental
properties and $3.6 million from the disposal of discontinued operations.
Cash used for property, plant and equipment additions in 1998 was $28.0
million and cash used for assets held for sale was $0.9 million.
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 1998, the Company has closed or sold 234 under-performing
restaurants. These properties, as well as real estate from prior restaurant
closings, other surplus properties, rental properties and leasehold
interests, have been sold or are being actively marketed.
Cash used by financing activities was $38.9 million, $88.2 million and $57.2
million in 2000, 1999 and 1998, respectively. On June 28, 2000, the Company
announced its intention to commence the Tender Offer to purchase all of its
outstanding subordinated Debentures and LYONs for an aggregate price of
approximately $80 million. The Tender Offer was subject to the satisfaction
of certain terms and conditions including receipt of financing and the valid
tender of at least 90% of the aggregate principal amount of each of the
debenture issues. In order to consummate the Tender Offer, the Company was
required to effect the Refinancing. In order to accommodate the timing of
the Refinancing, the Tender Offer was extended until September 6, 2000 at
which time the Refinancing was completed and the Tender Offer was
consummated. Upon consummation of the Tender Offer the Company repurchased
approximately 90% of each of the Debentures and the LYONS. Consummation of
the Tender Offer and the Refinancing
19
resulted in an extraordinary gain on the early retirement of debt of
approximately $82.5 million in the Company's fourth quarter, net of expenses
and income taxes.
Financing activities in 2000 included $261.8 million of borrowings under the
Company's credit agreements and $284.5 million of payments on indebtedness
that included $201.5 million of payments under the 1997 Credit Facility that
was refinanced, $71.8 million of payments for the subordinated debt
repurchased, $2.3 million of payments on capital leases and other debt and
$9.0 million of payments on the debt incurred in the Refinancing. Financing
activities for 2000 also included $3.7 million of payments on litigation
settlements and $14.8 million of payments for debt issue costs.
In order to complete the Refinancing, the Company restructured its restaurant
operations by separating its Shoney's and Captain D's operations (the
"Reorganization"). In the Reorganization, all of the assets comprising the
Company's Captain D's operations were transferred to Captain D's, Inc., a
wholly-owned subsidiary of the Company. The Reorganization of the Company
operations allowed each of the Company's operating segments (Shoney's,
Captain D's, and COI) to be separately financed. As a result of the
Reorganization and the Refinancing, each operating segment is intended to
operate as an independent business unit and be responsible for its own
indebtedness and debt service. The new senior lending agreements generally
prohibit the movement of cash and other assets between the operating segments
except for payments under certain tax sharing arrangements and payments for
goods and services.
Below is a brief description of the Company's new senior indebtedness.
SEGMENT DESCRIPTION OF FINANCING TERM INTEREST RATE
- - ------------------------------------------------------------------------------------------------
Shoney's $99 million mortgage financing 20 years $22.5 million floating rate
of 4.1% over LIBOR
$67.7 million fixed rate
of 10.23%
$8.8 million fixed rate of 10.35%
$40 million revolving credit Two years 4.25% over LIBOR
facility under an amendment or 3.25% over the prime rate
and restatement of the 1997
Credit Facility
Captain D's $115 million term loans 16 months 4% over LIBOR
or 3% over the prime rate
$20 million revolving credit facility 16 months 3% to 4% over LIBOR or 2% to 3% over
the prime rate, based on certain
defined financial ratios
COI $30 million revolving credit facility Three years 2.75% over LIBOR or .5% over
the prime rate
In anticipation of the completion of the Refinancing, the Company requested
and received waivers for permission to begin the Restructuring of the
Company's operations and to waive all third quarter financial covenants under
the 1997 Credit Facility until September 30, 2000.
The Company's new senior loan agreements are secured by substantially all of
the Company's assets. The new debt agreements (1) require satisfaction of
certain financial ratios and tests (some of which become more restrictive
each year); (2) impose limitations on capital expenditures; (3) limit the
ability to incur additional debt and contingent liabilities; (4) prohibit
dividends and distributions on common stock; (5) prohibit mergers,
consolidations or similar transactions; and (6) include other affirmative and
negative covenants.
20
The Company's new senior debt structure requires that working capital sources
be available for each operating segment. The Shoney's Restaurant segment's
liquidity is provided by a $40.0 million working capital line of credit (the
"Shoney's Line of Credit"). Availability under the Shoney's Line of Credit
is reduced by outstanding letters of credit of approximately $19.1 million,
resulting in approximately $20.9 million of availability of which $6.3
million was drawn at October 29, 2000. During fiscal 2001, the Company has
agreed to sell up to $10 million of properties serving as collateral for the
Shoney's Line of Credit, pay down outstanding amounts under the line and
permanently reduce the availability. As of January 25, 2001 the Company had
sold $2.3 million of the $10 million of collateral properties resulting in
$18.1 million of availability (after letters of credit) under the Shoney's
Line of Credit of which $13.5 million was drawn. Liquidity for the Shoney's
segment should also be enhanced by proceeds of up to $15.0 million from
certain asset sales following the Company's retention of $15 million from
asset sales, that the Company is allowed to retain for its working
capital needs. Also, the Company may sell certain other properties serving
as collateral for the Shoney's Line of Credit and use the cash proceeds to
either repay drawings under the line, which will also permanently reduce
availability, or cash collateralize the line. As of January 22, 2001 the
Company had sold $5.4 million of properties under the $15.0 million provision
and retained the proceeds to use in the Company's operations. If the Shoney's
segment's operating trends vary from those forecasted or if anticipated timing
and levels of asset sales are not met by the Company, the liquidity,
financial condition and results of operations could be materially adversely
affected. Management expects liquidity for the Shoney's segment to improve
in the second quarter of 2001 over the first quarter as sales and cash flows
have historically improved during the spring and summer.
Liquidity for the Captain D's segment will be provided by a $20 million line
of credit (the "Captain D's Line of Credit"). Availability under the Captain
D's Line of Credit is reduced by outstanding letters of credit of
approximately $4.0 million resulting in availability of approximately $16.0
million, of which $7.5 million was drawn at October 29, 2000.
Liquidity for COI is provided by a line of credit (the "COI Line of Credit")
of up to $30.0 million. The COI Line of Credit is an asset-based loan under
which the availability will increase or decrease as inventory and accounts
receivable change. Availability under the line is reduced by $1.8 million of
letters of credit, other reserves determined to be reasonably necessary by
the lender and $13.2 million of drawings at October 29, 2000.
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 were 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 credit facility of up to $375.0 million consisted of
a $75.0 million line of credit and two term notes of $100.0 million and
$200.0 million, respectively, due in April 2002. Proceeds from the term notes
were used to retire the $281 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.
On March 20, 1999, the parties to three lawsuits that had been provisionally
certified as class actions 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 recorded 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. On
July 14, 1999, October 1, 1999, and March 1, 2000 the Company paid $11
million, $3.5 million and $3.5 million, respectively, into a qualified
21
settlement fund in accordance with the Court approved settlement, utilizing
funds from the Company's refunded income taxes and general working capital.
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 eight
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 four 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 consistently increase its
comparable restaurant sales.
The Company is highly leveraged and, under the terms of its new credit
agreements, generally is not permitted to incur additional debt and is
limited to annual capital expenditures of approximately $18.5 million after
fiscal 2000. Management believes the annual capital expenditures permitted
under the credit agreements are sufficient for the execution of its business
plan. The Captain D's indebtedness, incurred as part of the Refinancing,
matures on December 31, 2001. The Company expects to refinance this
indebtedness prior to maturity. However, no assurance can be given that the
refinancing could be obtained on terms satisfactory to the Company. If the
Company were unable to refinance the Captain D's indebtedness on terms
satisfactory to the Company, the Company's financial condition, results of
operations and liquidity would be materially adversely affected.
Based on current operating results and forecasted operating trends, it is
probable that a covenant violation could occur in November 2001 under the
Shoney's mortgage financing debt agreements. The Company has available to it
remedies which can prevent probable covenant violations and additionally,
management believes that loan covenant modifications, if required, could be
obtained. Remedies available to the Company to prevent covenant violations
are as follows: 1) under-performing properties may be replaced by properties
with better fixed charge coverage ratios and 2) properties may be sold to
franchisees or converted to rental properties if the franchise and rental
income streams improve the fixed charge coverage. Historically, the Company
has been able to secure financial covenant modifications when needed;
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. Except as noted above, the
Company expects to be in compliance with its remaining financial covenants in
2001 and was in compliance with its financial covenants at the end of 2000.
22
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 the Company's new senior
indebtedness. 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 called for
interest at rates which varied with changes in the London Interbank Offered
Rate (LIBOR) and the prime rate. The Company's new senior indebtedness also
bears interest at rates which vary with changes in LIBOR and the prime rate.
As of October 29, 2000, $165.5 million of the Company's debt bore interest at
variable rates. The Company has entered into agreements to effectively swap
$87.5 million of the floating rate debt to fixed rate debt. In 2000, these
agreements decreased the Company's interest expense by $0.3 million. 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 include among others fish, coffee, beef, pork, produce and
eggs.
23
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 on pages 24 through 52 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 29, 2000 and October 31, 1999,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three fiscal years in the period
ended October 29, 2000. 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 29, 2000 and October
31, 1999, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended October 29,
2000, 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 14, 2000 /s/ ERNST & YOUNG LLP
24
CONSOLIDATED BALANCE SHEET
SHONEY'S, INC. AND SUBSIDIARIES
OCTOBER 29, OCTOBER 31,
2000 1999
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 7,980,996 $ 10,991,872
Notes and accounts receivable,
less allowance for doubtful
accounts of $1,221,000 in 2000
and $1,497,000 in 1999 11,318,035 8,397,342
Inventories 29,552,651 37,347,025
Prepaid expenses and other current assets 5,406,559 5,038,982
Net current assets of discontinued
operations 1,406,612
Net current assets held for sale 22,887,211 27,282,950
------------- -------------
Total current assets 77,145,452 90,464,783
Property, plant and equipment, at lower
of cost or market
Land 83,475,511 87,588,125
Buildings 177,602,560 192,408,177
Buildings under capital leases 11,503,162 13,690,456
Restaurant and other equipment 217,151,719 239,175,686
Leasehold improvements 45,736,664 55,831,570
Rental properties 7,521,677 16,446,432
Construction in progress
(estimated cost to complete:
$431,000 in 2000 and $950,000 in 1999) 3,280,580 3,797,498
------------- -------------
546,271,873 608,937,944
Less accumulated depreciation and
amortization (315,773,546) (332,728,963)
-------------- --------------
Net property, plant and equipment 230,498,327 276,208,981
Other assets
Goodwill (net of accumulated amortization
of $7,318,000 in 2000
and $7,001,000 in 1999) 13,200,847 19,720,435
Deferred charges and other intangible assets 13,673,118 5,930,275
Net non-current assets of
discontinued operations 9,460,324
Other 3,910,392 3,870,368
------------- -------------
Total other assets 30,784,357 38,981,402
------------- -------------
$ 338,428,136 $ 405,655,166
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
CONSOLIDATED BALANCE SHEET
SHONEY'S, INC. AND SUBSIDIARIES
OCTOBER 29, OCTOBER 31,
2000 1999
---- ----
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 26,655,872 $ 28,346,517
Taxes other than income taxes 8,902,100 10,662,326
Employee compensation and related items 30,573,124 30,864,741
Accrued interest expense 2,452,890 3,295,724
Other accrued liabilities 15,882,005 18,709,985
Reserve for litigation settlement
due within one year 3,872,961
Debt and capital lease obligations
due within one year 21,106,938 29,333,548
------------- -------------
Total current liabilities 105,572,929 125,085,802
Long-term debt 254,199,846 345,884,820
Obligations under capital leases 9,141,910 12,043,103
Reserve for litigation settlement 158,687
Other liabilities 24,612,414 28,568,820
Self insurance reserves 30,887,858 41,051,290
Commitments and contingencies
Shareholders' deficit
Common stock, $1 par value: authorized
200,000,000 shares; issued 50,659,282
in 2000 and 49,492,514 in 1999 50,659,282 49,492,514
Additional paid-in capital 137,521,843 137,674,675
Accumulated deficit (274,167,946) (334,304,545)
-------------- --------------
Total shareholders' deficit (85,986,821) (147,137,356)
-------------- --------------
$ 338,428,136 $ 405,655,166
============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26
CONSOLIDATED STATEMENT OF OPERATIONS
SHONEY'S, INC. AND SUBSIDIARIES
YEARS ENDED
-----------
OCTOBER 29, OCTOBER 31, OCTOBER 25,
2000 1999 1998
---- ---- ----
Revenues
Net sales $ 811,668,853 $ 931,138,588 $ 1,072,021,551
Franchise fees 14,484,990 15,198,094 14,468,561
Other income 9,691,350 20,571,142 12,200,615
--------------- --------------- ---------------
Total revenues 835,845,193 966,907,824 1,098,690,727
Costs and expenses
Cost of sales
Food and supplies 325,169,020 356,505,748 417,512,841
Restaurant labor 224,096,609 263,805,277 293,880,518
Operating expenses 190,359,509 222,279,852 270,176,319
--------------- --------------- ---------------
739,625,138 842,590,877 981,569,678
General and administrative expenses 64,909,623 76,042,520 85,432,973
Impairment of long-lived assets 17,119,822 18,422,554 47,160,980
Interest expense 36,658,947 42,158,716 48,476,518
Restructuring expenses 1,031,586 4,461,670 10,058,769
Litigation settlement 14,500,000 3,500,000
--------------- --------------- ---------------
Total costs and expenses 859,345,116 998,176,337 1,176,198,918
Loss from continuing operations before income
taxes and extraordinary gain (loss) (23,499,923) (31,268,513) (77,508,191)
Provision for (benefit from) income taxes
Current 477,000 755,000 (11,291,000)
Deferred (981,000) (1,890,000) 38,088,000
---------------- ---------------- ----------------
Total income taxes (504,000) (1,135,000) 26,797,000
Loss from continuing operation
before extraordinary gain (loss) (22,995,923) (30,133,513) (104,305,191)
Discontinued operations, net of income taxes 166,119 1,307,115 (1,983,591)
Gain on sale of discontinued
operations, net of income taxes 489,260
Extraordinary gain (loss) on early
extinguishment of debt, net of income taxes 82,477,143 (1,415,138)
--------------- ---------------- ----------------
Net income (loss) $ 60,136,599 $ (28,826,398) $ (107,703,920)
=============== ================ ================
Earnings per common share
Basic and diluted:
Loss from continuing operations
before extraordinary items $ (0.46) $ (0.61) $ (2.14)
Discontinued operations, net of income taxes 0.03 (0.04)
Gain on sale of discontinued
operations, net of income taxes 0.01
Extraordinary gain (loss) on the early
extinguishment of debt, net of income taxes 1.64 (0.03)
---------------- ---------------- ----------------
Net income (loss) $ 1.19 $ (0.58) $ (2.21)
================ ================ ================
Weighted average shares outstanding
Basic and diluted 50,427,186 49,339,259 48,665,685
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
SHONEY'S, INC. AND SUBSIDIARIES
TOTAL
ADDITIONAL SHAREHOLDERS'
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
----- ------- ------- ---------
Balances at October 26, 1997 $ 48,568,109 $ 136,861,158 $ (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 (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 (334,304,545) (147,137,356)
Net income 60,136,599 60,136,599
Issuance of common shares
for employee
and director compensation 809,216 45,234 854,450
Issuance of common shares
pursuant to employee
stock benefit plans 267,200 46,592 313,792
Compensation related
to grant of restricted
shares of common stock 90,000 (252,692) (162,692)
Conversions of subordinated
convertible debentures 352 8,034 8,386
------------ -------------- ---------------- ---------------
Balances at October 29, 2000 $ 50,659,282 $ 137,521,843 $ (274,167,946) $ (85,986,821)
============ ============== ================ ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28
CONSOLIDATED STATEMENT OF CASH FLOWS
SHONEY'S, INC. AND SUBSIDIARIES
YEARS ENDED
-----------
OCTOBER 29, OCTOBER 31, OCTOBER 25,
2000 1999 1998
---- ---- ----
Operating activities
Net income (loss) $ 60,136,599 $ (28,826,398) $ (107,703,920)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
(Income) loss from discontinued
operations, net of income taxes (166,119) (1,307,115) 1,983,591
Gain on sale of discontinued
operations, net of income taxes (489,260)
Depreciation and amortization 34,589,391 39,976,843 47,869,818
Interest expense on zero coupon convertible
debentures and other noncash charges 13,174,010 15,790,371 18,241,660
Deferred income taxes (981,000) (1,890,000) 38,088,000
Gain on disposal of
property, plant and equipment (7,863,680) (18,827,435) (8,358,890)
Extraordinary gain on
early extinguishment of debt (82,477,143)
Payments for debt retirement costs (3,175,257)
Impairment of long-lived assets 17,119,822 18,422,254 47,160,980
Changes in operating assets and liabilities:
Notes and accounts receivable (2,382,204) 1,746,576 1,991,904
Inventories 7,794,374 (497,326) 1,135,568
Prepaid expenses (123,042) (1,730,640) 1,450,678
Accounts payable 153,121 (10,850,662) 2,524,508
Accrued expenses (6,457,076) (7,324,160) 12,852,813
Litigation settlement 14,500,000 3,500,000
Refundable income taxes 14,005,359 (9,928,809)
Other liabilities (12,601,497) (444,616) 4,243,692
-------------- ---------------- ----------------
Net cash provided by continuing
operating activities 16,251,039 32,743,051 55,051,593
Net cash provided by discontinued
operating activities 611,109 1,777,995 12,330
-------------- ---------------- ----------------
Net cash provided by operating activities 16,862,148 34,521,046 55,063,923
Investing activities
Purchases of property, plant and equipment (22,410,298) (26,930,895) (27,981,649)
Purchase of assets held for sale (275,533) (1,203,937) (954,328)
Proceeds from disposal of
property, plant and equipment 29,577,309 70,863,688 29,574,228
Proceeds from disposal of
discontinued operations 12,120,272 5,538,277 3,661,808
(Increase) decrease in other assets (10,505) 76,718 2,251,102
-------------- ---------------- ----------------
Net cash provided by investing activities 19,001,245 48,343,851 6,551,161
Financing activities
Proceeds of long-term debt 261,845,000 300,533,143
Payments on long-term debt
and capital lease obligations (284,531,721) (84,289,662) (329,304,224)
Proceeds from line of credit
and short-term debt 204,084,983 51,868,000 16,399,000
Payments on line of credit
and short-term debt (201,753,674) (40,981,000) (16,399,000)
Exercise of employee stock options 39,495
Payments on litigation settlement (3,726,680) (14,567,992) (15,705,329)
Payments for debt issue costs (14,792,177) (180,093) (12,751,670)
-------------- ---------------- ----------------
Net cash used by financing activities (38,874,269) (88,150,747) (57,188,585)
-------------- ---------------- ----------------
Increase (decrease) in cash
and cash equivalents (3,010,876) (5,285,850) 4,426,499
Cash and cash equivalents at beginning of year 10,991,872 16,277,722 11,851,223
-------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 7,980,996 $ 10,991,872 $ 16,277,722
============== ================ ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHONEY'S, INC. AND SUBSIDIARIES
OCTOBER 29, 2000, OCTOBER 31, 1999 AND OCTOBER 25, 1998
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 2000 basis of presentation.
PROPERTY, PLANT AND EQUIPMENT -- Land, buildings, leasehold improvements,
rental properties 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" ("SFAS
66"). 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 sales price is reasonably assured and the Company does not
remain contingently liable in the case of a leased property.
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 and related goodwill. 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 net property, plant and equipment to assets
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 are 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 is
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.
30
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 include 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. Effective
November 1, 1999 these costs are expensed as incurred. Prior to fiscal 2000,
such costs were capitalized and amortized over a period not to exceed one
year. No preopening costs were capitalized as of October 31, 1999.
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 $29.3 million, $32.4 million, and $43.1 million in
2000, 1999 and 1998, 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 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). The Company does not speculate on the future direction of interest
rates nor does the Company use these derivative financial instruments for
trading purposes.
FISCAL YEAR -- The Company's fiscal year ends on the last Sunday in October.
Fiscal 1999 included 53 weeks compared to fiscal years 2000 and 1998 that
were comprised of 52 weeks each.
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 9).
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.
LONG-TERM DEBT: The carrying amounts of the Company's borrowings under the
variable rate portion of the Shoney's mortgage financing, Shoney's line of
credit, Captain D's term notes, Captain D's line of credit and COI line of
credit 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 the
price offered by the Company in a tender offer which resulted in the
redemption of approximately 90% of each bond issued on September 6, 2000.
Since September 6, 2000 there has not been an active market for these bonds
and therefore, fair value is not determined by market quotes. The fair value
of other long-term debt including the fixed rate portion of the Shoney's
Mortgage Financing, 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 8.)
31
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- 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 was 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. The
adoption of SOP 98-5 did not have a material effect on the Company's results
of operations during the year ended October 29, 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.
CONCENTRATION OF RISKS AND USE OF ESTIMATES -- As of October 29, 2000, the
Company operated and franchised a chain of 1,023 restaurants in 28 states.
The chain consisted of two restaurant divisions: Shoney's Restaurants and
Captain D's. The majority of the Company's restaurants are located in the
southeastern United States. The Company also operates Commissary Operations,
Inc. ("COI"), a distribution and manufacturing business that provides 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 which generally do not
require customers to provide collateral or other security to the Company.
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 accounting
principles generally accepted in the United States 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 - DISCONTINUED OPERATIONS
During the second quarter of 2000, the Company sold its remaining Pargo's
restaurants. In addition, on April 24, 2000 the Company made the decision to
either close or sell its remaining Fifth Quarter restaurants. As a result,
the Company has presented the casual dining line of business as discontinued
operations in the accompanying financial statements, net of any related
income tax expense. All prior periods have been restated.
32
Net current assets of discontinued operations consisted primarily of net
current assets held for sale. Net non-current assets of discontinued
operations consisted primarily of net property, plant and equipment. This
discontinued line of business had total revenue, net income and gains on
sales of discontinued operations as follows:
2000 1999 1998
---- ---- ----
($ in thousands)
Total revenue $ 12,420 $ 32,465 $ 44,672
Net income (loss) $ 166 $ 1,307 $ (1,984)
Gains on sale of
discontinued operations $ 489 $ -- $ --
NOTE 3 - ACQUISITIONS
As of September 9, 1996, the Company completed the acquisition of
substantially all 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 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 $2.8 million
in 2000, $4.0 million in 1999 and $13.1 million in 1998.
As of October 29, 2000, of the properties acquired in the TPI transaction,
the Company has closed 111 under-performing Shoney's Restaurants, 12 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 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.
During 2000, approximately $0.8 million was charged to this account,
including $0.1 million in lease payments associated with the former TPI
corporate headquarters. Also during 2000, the Company revised its estimate
of previously accrued liabilities in connection with purchase accounting by
$2.6 million. Approximately $1.9 million was charged to this liability in
1999, including approximately $1.7 million in costs 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 changes in estimates were the result of assigning or
terminating certain leases on terms more favorable to the Company than
originally estimated. The reduction in liabilities accrued in connection
with purchase accounting reduced goodwill.
33
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. Approximately $4.4 million of exit costs related to the TPI
acquisition remains accrued at October 29, 2000.
The Company made no acquisitions of restaurants during 2000, 1999 or 1998.
NOTE 4 - 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.
During the first quarter of 1998, the Company recorded an 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 $44.6 million during the third quarter
of 1998. Approximately $42.7 million of the third quarter 1998 asset
impairment charge 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 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. During 2000, the performance of the Company's Shoney's Restaurant
segment continued to decline. The Company completed an asset impairment
analysis during the third quarter of 2000 and recorded an asset impairment
charge of $12.8 million. During the fourth quarter of 2000, the Company
recorded an additional asset impairment charge of $4.3 million. The fourth
quarter impairment charge was the result of the Company's decision to
actively market additional real estate that resulted in the write down of
certain properties to market less costs to sell. Approximately $13.1 million
of the 2000 asset impairment charges related to assets held and used in the
Company's operations. Of the $13.1 million of charges relating to assets
held and used in the Company's operations, $11.4 million related to Shoney's
Restaurants.
At October 29, 2000, the carrying value of the 48 properties to be disposed
of was $22.9 million and is reflected on the Consolidated Balance Sheet as
net assets held for sale. The Company believes that it is probable that the
sale will occur and proceeds will be collected within one year. Assets held
for sale are included in Corporate and Other for certain segment financial
information disclosed in Note 17 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 5 - RESTRUCTURING EXPENSES
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 expenses caption. The Company recorded
approximately $10.7 million in exit costs during 1998 ($0.6 million has
subsequently been reclassified to discontinued operations), primarily
associated with the accrual of the remaining
34
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 $5.7 million of exit costs in
the fourth quarter of 1999 as a result of 76 additional restaurant closures.
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. During the fourth quarter of 2000, the Company
recorded an additional $1.0 million of exit costs as a result of restaurant
closures in 2000. The Company charged approximately $6.3 million, $3.5
million and $1.0 million against these exit cost reserves in 2000, 1999 and
1998, respectively. The increase in charges against the exit cost reserves in
2000 was partially the result of $2.2 million of lump sum payments to settle
all remaining obligations of certain leases. Approximately $6.7 million of
accrued exit costs remain at October 29, 2000.
During 1998, the Company closed 94 under-performing restaurants. Thirty-six
additional under-performing restaurants were closed during the first quarter
of 1999 and ten restaurants were sold to franchisees. Fifteen restaurants
were closed during the second quarter and one previously closed restaurant
was reopened. An additional 76 under-performing restaurants were closed in
the fourth quarter of 1999, nine restaurants were sold to franchisees and one
Captain D's was opened. In 2000, the Company closed thirteen under-performing
restaurants, sold twelve restaurants to franchisees and opened one Captain
D's. Below are sales and EBIT (which, when that term is used in this Annual
Report on Form 10-K, means operating income before asset impairment charges,
restructuring charges, and litigation settlements) for all restaurants closed
or sold.
2000 1999 1998
EBIT AS EBIT AS EBIT AS
($ IN THOUSANDS) SALES DEFINED SALES DEFINED SALES DEFINED
------------------ -------------------- --------------------
Stores closed during 1998 and prior years $ -- $ (13) $ -- $ (2,056) $ 60,585 $ (8,322)
Stores closed or sold during 1999 -- (202) 95,918 (9,987) 169,624 (5,720)
Stores closed or sold during 2000 16,714 (2,199) 32,764 (326) 33,375 628
---------------------------------------------------------------
Total $ 16,714 $(2,414) $ 128,682 $(12,369) $ 263,584 $(13,414)
================================================================
NOTE 6 - 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
$14.8 million, $0.2 million, and $12.8 million relating to various financings
during 2000, 1999 and 1998, respectively, have been paid and deferred.
Amortization of debt issue costs during 2000, 1999 and 1998 was approximately
$3.3 million, $4.6 million, and $4.1 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 September 6, 2000 of
$3.7 million related to the 1997 Credit Facility and the subordinated debt
repurchased during fiscal 2000. These costs were charged against the
extraordinary gain on early extinguishments of debt in the fourth quarter of
2000.
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.
35
NOTE 7 - INCOME TAXES
The components of the Company's deferred tax assets and liabilities as of
October 29, 2000 and October 31, 1999 are as follows:
2000 1999
---- ----
Deferred tax assets:
Reserve for lawsuit settlement $ 0 $ 1,428,355
Reserve for self insurance 16,352,017 17,908,048
Reserve for restructuring and closed stores 4,326,768 7,376,846
Amortization of intangibles 1,878,081 2,409,639
Net operating loss, contribution and tax
credit carryforwards 15,915,045 39,673,959
Book over tax depreciation 4,010,542 0
Other - net 596,319 1,712,412
------------ -----------
Deferred tax assets 43,078,772 70,509,259
Less valuation allowance (43,078,772) (68,942,469)
------------- ------------
Net deferred tax assets 0 1,566,790
Deferred tax liabilities:
Tax over book depreciation 0 1,566,790
------------ -----------
Deferred tax liabilities 0 1,566,790
------------ -----------
Total net deferred tax asset $ 0 $ 0
============ ===========
At October 29, 2000, the Company had targeted jobs and tip credit
carryforwards of approximately $4.6 million which expire during the years
2002 through 2010. These carryforward items were acquired in the acquisition
of TPI, and the utilization of these carryforwards is subject to limitations
imposed by the Internal Revenue Code. The Company also has a net operating
loss carryforward of $6.1 million and targeted jobs and tip credit
carryforwards of $3.3 million, which expire in the years 2019 and 2020 and
are not subject to limitations imposed by the Internal Revenue Code. The
Company also has alternative minimum tax credit carryforwards of $0.9
million, which have no expiration period. The Company has state net
operating loss carryforwards of approximately $119.0 million, which expire
from 2001 to 2019.
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.
In the fourth quarter of 2000, an adjustment was made to the TPI purchase
price allocation. As a result, deferred tax assets related to the TPI
acquisition were reduced by $1.0 million, and the valuation allowance related
to the TPI deferred tax assets was also reduced by $1.0 million, resulting in
a decrease in income tax expense. The total deferred tax asset valuation
allowance at October 29, 2000 was $43.1 million and decreased $25.8 million
during 2000. The decrease in the valuation allowance is primarily the result
of utilization of net operating loss carryforwards in the current fiscal
year. If the deferred tax assets are realized in the future, the related tax
benefits will reduce income tax expense.
36
The components of the provision for (benefit from) income taxes are as
follows:
2000 1999 1998
---- ---- ----
Current:
Federal $ 945,000 $ 0 $(14,892,000)
State 967,000 755,000 2,795,000
----------- ----------- -------------
1,912,000 755,000 (12,097,000)
----------- ----------- -------------
Deferred:
Federal (853,000) (821,000) 38,996,000
State (128,000) (1,069,000) (908,000)
------------ ------------ -------------
(981,000) (1,890,000) 38,088,000
------------ ------------ -------------
Total income tax provision (benefit) $ 931,000 $(1,135,000) $ 25,991,000
============ ============ =============
The income statement classification of the provision for (benefit from) income
taxes is as follows:
2000 1999 1998
---- ---- ----
Income tax provision (benefit)
attributable to continuing
operations $ (504,000) $(1,135,000) $ 26,797,000
Extraordinary gain (loss) on early
extinguishment of debt 1,435,000 (806,000)
------------ ------------ -------------
Total income tax provision (benefit) $ 931,000 $(1,135,000) $ 25,991,000
============ ============ =============
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:
2000 1999 1998
____ ____ ____
Statutory federal income tax rate 35% 35% 35%
Federal income taxes (benefit) based
on the statutory tax rate $ 21,373,659 $(10,486,489) $(28,599,522)
State and local income taxes, net of
federal tax benefit 2,866,720 (1,961,864) (3,882,840)
Targeted jobs and tip credits (944,957) (1,175,886) (963,706)
Goodwill amortization and impairment
write-down 1,715,482 2,391,232 5,056,781
Change in valuation allowance (25,863,697) 5,795,526 52,538,000
Other 1,783,793 4,302,481 1,842,287
------------- ------------- -------------
Total income tax provision (benefit) $ 931,000 $ (1,135,000) $ 25,991,000
============= ============= =============
The Company made income tax payments, (net of refunds), of approximately $0.7
million, ($19.6 million) and ($3.1 million) during 2000, 1999 and 1998,
respectively.
37
NOTE 8 - DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Debt and obligations under capital leases at October 29, 2000 and October 31,
1999 consisted of the following:
2000 1999
---- ----
Senior debt - Line of Credit $ -- $ 10,887,000
Senior debt - Term A Note -- 45,672,524
Senior debt - Term B Note -- 130,800,859
Shoney's - Mortgage Financing 99,000,000 --
Shoney's - Line of Credit 6,345,000 --
Captain D's - Term Notes 115,000,000 --
Captain D's - Line of Credit 7,500,000 --
COI - Line of Credit 13,218,309 --
Subordinated zero coupon debentures, due
April 2004 13,753,168 122,520,712
Subordinated convertible debentures, 8.25% due
July 2002, (net of discount of $2,505,281 in
1999 and $168,470 in 2000) 5,109,530 49,057,719
Industrial revenue bonds, due in varying annual
installments to December 2002 collateralized by
land, buildings, equipment and restricted cash 10,165,000 10,315,000
Notes payable to others, 6.0% to 10.25%, maturing
at varying dates to 2009 (the notes are
fully secured by land, buildings and equipment) 3,763,744 4,420,602
------------- -------------
273,854,751 373,674,416
Obligations under capital leases 10,593,943 13,587,055
------------- -------------
284,448,694 387,261,471
Less amounts due within one year 21,106,938 29,333,548
------------- -------------
Amounts due after one year $ 263,341,756 $ 357,927,923
============= =============
SENIOR DEBT REFINANCING
On September 6, 2000, the Company completed a refinancing of approximately
$248.3 million in connection with a cash tender offer (the "Tender Offer")
that resulted in the purchase of approximately 90% of the outstanding
subordinated convertible debentures (the "TPI Debentures") and zero coupon
convertible debentures (the "LYONs") for an aggregate price of approximately
$71.8 million. The Tender Offer was subject to the satisfaction of certain
terms and conditions including receipt of financing and the valid tender of
at least 90% of the aggregate principal amount of each of the debenture
issues. In order to consummate the Tender Offer, the Company was required to
refinance the indebtedness outstanding under the Company's 1997 Credit
Facility in addition to receiving financing necessary to effect the Tender
Offer (the "Refinancing"). In order to accommodate the timing of the
Refinancing, the Tender Offer was extended until September 6, 2000 at which
time the Refinancing was completed and the Tender Offer was consummated.
Upon consummation of the Tender Offer, the Company repurchased approximately
90% of each of the TPI Debentures and the LYONS. Consummation of the Tender
Offer and the Refinancing resulted in an extraordinary gain on the early
retirement of debt of approximately $82.5 million in the Company's fourth
quarter, net of expenses and taxes.
In order to complete the Refinancing, the Company restructured its restaurant
operations by separating its Shoney's and Captain D's operations (the
"Reorganization"). The Reorganization included transferring substantially
all of the assets of the Company's Captain D's restaurants to a wholly-owned
subsidiary, Captain D's, Inc. The reorganization allowed each of the
Company's operating segments (Shoney's, Captain D's, and COI) to be
separately financed. As a result of the Reorganization and the Refinancing,
each operating segment is intended to operate as an independent business unit
and be responsible for its own indebtedness and debt service. The new senior
lending agreements generally prohibit the movement of cash between the
operating segments except for payments under certain tax sharing arrangements
and payments for goods and services.
38
SHONEY'S - MORTGAGE FINANCING
In connection with the Refinancing, on September 6, 2000 the Company entered
into a $99 million, twenty-year mortgage financing which is secured by the
land, buildings and equipment of 142 Shoney's Restaurants. The carrying value
of the collateral for the mortgage financing was $93.6 million at October 29,
2000. Principal reductions were scheduled to commence on November 1, 2000 and
therefore no payments were made during fiscal 2000. Principal reductions of
approximately $1.5 million are scheduled during 2001. A portion of this debt
carries a fixed rate of interest and the remainder is at a floating rate
which is reset monthly based on the London Interbank Offered Rate
(LIBOR). As of October 29, 2000 the effective interest rates on this debt
were as follows:
Principal Amount Fixed/Floating Interest Rate
---------------- -------------- -------------
$ 67,711,000 Fixed 10.23%
$ 8,750,000 Fixed 10.35%
$ 22,539,000 Floating 10.72%
SHONEY'S - LINE OF CREDIT
On September 6, 2000, the Company entered into an amendment and restatement
of the 1997 Credit Facility which provides Shoney's with a $40 million line
of credit. This line of credit has a two-year term expiring on September 6,
2002 and is secured by all of the Shoney's Restaurant properties not serving
as collateral for the Shoney's Mortgage Financing or other debt and certain
surplus, office and miscellaneous properties owned and leased by the Company.
The carrying value of the collateral for the line of credit was $29.5 million
at October 29, 2000. Available credit under the line of credit is reduced by
letters of credit. At October 29, 2000, the Company had borrowings under the
line of credit of $6.3 million and had outstanding letters of credit of $19.1
million, resulting in available credit of $14.6 million. The Company has
agreed to sell during 2001 up to $10 million of certain properties serving as
collateral for the Shoney's Line of Credit, pay down outstanding amounts
under the line and permanently reduce the availability. Also, the Company may
sell certain other properties serving as collateral for the Shoney's Line of
Credit, retain and use in the business the first $15 million in the sale
proceeds, and thereafter, use the cash proceeds to either repay drawings
under the line, which also permanently reduce availability, or cash
collateralize the line. The Company pays a commitment fee of 0.50% for unused
available credit under the facility. The interest rate for this line of
credit is at floating rates (4.25% over LIBOR or 3.25% over the prime rate)
and at October 29, 2000 the interest rate on this line of credit was 12.75%.
CAPTAIN D'S - TERM NOTES AND REVOLVER
Captain D's, Inc. ("Captain D's"), in connection with the Refinancing,
entered into a credit facility on September 6, 2000 for up to $135 million
consisting of two term notes totaling $115 million and a $20 million line of
credit. This facility, which terminates on December 31, 2001, is secured by
all of the assets owned by Captain D's including owned land, buildings and
equipment, certain leased restaurant properties, and a pledge of certain
other assets of Captain D's. The carrying value of the collateral for the
Captain D's term notes and line of credit was $87.3 million at October 29,
2000. At October 29, 2000 there was $115 million outstanding under the term
notes and $7.5 million outstanding under the line of credit. There are no
scheduled payments under the term notes or the revolver prior to the
termination date of the credit facility. Available credit under the line of
credit is reduced by outstanding letters of credit. At October 29, 2000,
Captain D's outstanding letters of credit totaled $4.0 million, resulting in
available credit of $8.5 million. Captain D's pays a commitment fee of .50%
for unused available credit under the line of credit. The interest rate on
the term notes is at floating rates (4% over LIBOR or 3% over the prime rate)
and the interest rate for the line of credit ranges from 3% to 4% over LIBOR
or 2% to 3% over the prime rate, based on certain defined financial ratios.
At October 29, 2000, the effective interest rate for the term notes and the
line of credit was 10.64% and 12.25%, respectively.
39
COI - REVOLVING CREDIT FACILITY
As part of the refinancing, on August 31, 2000, COI entered into a $30
million revolving credit facility which is secured by substantially all of
COI's assets including land, buildings and equipment, inventory and accounts
receivable. The carrying value of the collateral for the COI revolving credit
facility was $30.5 million at October 29, 2000. This revolving credit
facility has a three-year term expiring on August 31, 2003. Available credit
under this facility is based on a formula, which allows for borrowings on
predetermined percentages of eligible accounts receivable and inventory.
Available credit is reduced by $1.8 million outstanding letters of credit,
other reserves determined to be reasonably necessary by the lender and $13.2
million of drawings at October 29, 2000. At October 29, 2000, available
credit under this facility was approximately $3.0 million. COI pays a
commitment fee of .50% for unused credit under the facility. At October 29,
2000, the effective interest rate on this line of credit was 9.45%.
INTEREST RATE HEDGE PROGRAMS
The 1997 Credit Facility, which facility has been amended and restated and
now provides the Shoney's Line of Credit, 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 original 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 were
fixed at approximately 6.1% and 5.9%, respectively, plus the applicable
margin, and an additional $20.0 million agreement which fixed the interest
rate on the covered amount of debt at 5.6% plus the applicable margin. On May
11, 2000, the Company sold $50.0 million of swap agreements for a gain of
$0.3 million. The interest rate swap agreements which were sold consisted of
notional amounts of $10.0 million and $40.0 million with fixed interest rates
of 6.1% and 5.9%, respectively, and which were scheduled to terminate on
January 8, 2001. The gain was deferred and is being amortized over the
remaining term of the interest rate swap agreements. Of the remaining $50
million of interest rate swaps, $20 million of the interest rate swaps with a
fixed interest rate of 5.55% terminated on October 8, 2000 and $30 million of
the interest rate swaps with a fixed rate of 6.12% will terminate on
January 8, 2001. The 1997 Credit Facility, as amended and restated, does not
require a hedge program. At October 29, 2000, the estimated profit to the
Company to exit its remaining interest rate swap agreements was approximately
$0.1 million.
The Captain D's credit agreement required Captain D's, Inc. to enter into an
interest rate hedge program covering a notional amount of not less than 50%
of the term notes outstanding ($57.5 million) within 45 days of the date of
the loan closing. On October 16, 2000, Captain D's entered into an interest
rate swap agreement covering $57.5 million of debt which fixes the interest
rate at 6.65% plus the applicable margin for the term of the Captain D's
credit agreement. At October 29, 2000, the estimated cost to Captain D's to
exit the interest rate swap agreement was approximately $0.1 million.
In July and August 2000, the Company entered into a forward agreement to lock
the interest rate on a portion of the Shoney's Mortgage Financing. The
interest rate on this fixed rate debt was to be based on the ten year U.S.
Treasury Note rate between two and ten days prior to the closing of the
transaction. Because the ten year U.S. Treasury Note rate decreased between
the date of the agreement and the date the financing was consummated
(September 6, 2000), the Company paid the interest rate differential between
the agreed upon interest rate and the market rate of the ten year U.S.
Treasury Note. This amount is being amortized and recognized as an
adjustment to interest expense over the 20 year term of the financing.
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.
40
LOAN COVENANTS
In anticipation of the completion of the Refinancing, the Company requested
and received waivers for permission to begin the Restructuring of the
Company's operations and to waive, until September 30, 2000, all third
quarter financial covenants under the 1997 Credit Facility.
The Company's new senior loan agreements are secured by substantially all of
the Company's assets. These new debt agreements (1) require satisfaction of
certain financial ratios and tests (some of which become more restrictive
each year); (2) impose limitations on capital expenditures; (3) limit the
ability to incur additional debt and contingent liabilities; (4) prohibit
dividends and distributions on common stock; (5) prohibit mergers,
consolidations or similar transactions; and (6) include other affirmative and
negative covenants.
Based on current operating results and forecasted operating trends, it is
probable that a covenant violation could occur in November 2001 under the
Company's mortgage financing debt agreements. Although the Company has
available to it remedies which may prevent probable covenant violations,
management believes that loan covenant modifications, if required, could be
obtained. Remedies available to the Company to prevent covenant violations
are as follows: 1) under-performing properties may be replaced by properties
with better fixed charge coverage ratios and 2) properties may be sold to
franchisees or converted to rental properties if the franchise and rental
income streams improve the fixed charge coverage. Historically, the Company
has been able to secure financial covenant modifications when needed;
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. Except as noted above,
the Company expects to be in compliance with its remaining financial
covenants in 2001 and was in compliance with its financial covenants at the
end of 2000.
SUBORDINATED ZERO COUPON CONVERTIBLE DEBENTURES, 8.5%, 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. Each note is convertible
into 29.349 shares of the Company's common stock, at the option of the
holder. Following consummation of the Tender Offer during 2000, the Company
has reserved 537,908 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 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 $0.9 million at a floating interest rate
subject to a floor of 7.5% and a ceiling of 15.0%.
41
Debt and obligations under capital leases maturing in each of the next five
fiscal years are as follows:
($ IN MILLIONS)
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
$21.1 $139.3 $8.2 $22.1(1) $3.7
(1) Includes accreted value of subordinated zero coupon convertible
debentures at maturity.
Net interest costs of approximately $0.1 million, $0.0 million and $0.1
million were capitalized as a part of building costs during 2000, 1999, and
1998, respectively. Interest paid was approximately $24.4 million, $27.4
million and $32.6 million during 2000, 1999 and 1998, respectively.
The Company has standby letters of credit of $24.9 million outstanding at
October 29, 2000, which are principally utilized to support the Company's
self-insurance programs. The outstanding letters of credit are supported by
the Shoney's, Captain D's, and COI Lines of Credit in the amounts set forth
in the table below:
Outstanding
Line of Credit Letters of Credit
-------------- -----------------
Shoney's $19,062,000
Captain D's 4,036,000
COI 1,842,000
-----------
$24,940,000
===========
The carrying value and estimated fair value of the Company's debt are
summarized in the following table:
OCTOBER 29, 2000
----------------
ESTIMATED
CARRYING VALUE FAIR VALUE
-------------- -------------
Shoney's - Mortgage Financing $ 99,000,000 $ 97,168,683
Shoney's - Line of Credit 6,345,000 6,345,000
Captain D's - Term Notes 115,000,000 115,000,000
Captain D's - Line of Credit 7,500,000 7,500,000
COI - Line of Credit 13,218,309 13,218,309
Subordinated zero coupon convertible debentures 13,753,168 4,582,000
Subordinated convertible debentures 5,109,530 3,650,212
Industrial revenue bonds 10,165,000 9,988,158
Notes payable to others 3,763,744 3,597,472
Interest rate swap agreements 0 6,263
------------- -------------
Total Debt $ 273,854,751 $ 261,056,097
============= =============
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 9 - 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 2,202,208
and 1,596,653 shares reserved for future grants as of October 31, 1999 and
October 29, 2000, 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 33,815 were outstanding as of
October 29, 2000.
42
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 Management Development and Compensation Committee
of the Board of Directors, but 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 31, 1999 and October 29, 2000 there were 1,456,758 and 647,542
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 160,000 shares available for future
grant at each of October 31, 1999 and October 29, 2000. 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 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. These options 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 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
Issued 1,789,500 1.01
Exercised 0
Expired or canceled (1,190,563) 3.55
----------
Outstanding at October 29, 2000 5,973,593 $ 3.68
===========
43
At October 29, 2000, October 31, 1999, and October 25, 1998 the number of
options exercisable was 1,974,585, 1,282,559, and 941,347, respectively, and
the weighted-average exercise price of those options was $5.50, $6.07, and
$12.69, respectively.
The following table summarizes information about stock options outstanding at
October 29, 2000:
WEIGHTED-
AVERAGE
NUMBER WEIGHTED- REMAINING
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL
EXERCISE PRICES OCTOBER 29, 2000 EXERCISE PRICE LIFE(YEARS)
--------------- ---------------- -------------- -----------
$0.63-$1.45 1,694,087 $ 0.9864 9.3
$1.46-$3.94 1,708,873 $ 2.9581 6.5
$3.95-$5.75 1,952,085 $ 4.8989 7.1
$5.76-$25.51 618,548 $ 9.2344 5.7
The following table presents the fair value of options granted during 2000,
1999, and 1998:
2000
----
NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE FAIR VALUE
--------- ---------------- ----------------
Where exercise price:
Exceeds market price 250,000 $ 1.50 $ .55
Equals market price 1,539,500 0.93 .59
--------- ------ ------
1,789,500 $ 1.01 $ .59
=========
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
=========
The Company also has an Employee Stock Purchase Plan under which 1,199,307
shares of the Company's common stock may be issued at October 29, 2000. 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
261,500, 186,007, and 98,556 in 2000, 1999 and 1998, respectively, and issued
these shares at prices of $1.17, $1.17 and $2.76 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 2000, 1999
and 1998, was $0.34, $0.30 and $0.99 per share, respectively.
44
The Company has an Employee Stock Bonus Plan under which 588,083 shares of
the Company's common stock may be issued at October 29, 2000. 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.
As of October 29, 2000, there were no outstanding grants of bonus shares
under this plan. The Company has not recognized compensation expense related
to this plan during 2000, 1999 or 1998.
The shares distributed and cash bonuses paid pursuant to this plan during the
past three fiscal years were as follows:
SHARES CASH BONUSES
------ ------------
1998 6,700 $ 5,444
1999 3,400 $ 1,169
2000 5,700 $ 1,959
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 and December 31, 1999. The remaining shares vest on
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.
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 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Risk-free interest rate 5.49% 6.42% 4.88%
Dividend yield None None None
Volatility factor .574 .487 .410
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.
45
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 income (loss) and income (loss) per share
are presented in the following table (in thousands, except for per share
data):
2000 1999 1998
---- ---- ----
Net income (loss) - as reported $ 60,137 $ (28,826) $ (107,704)
Net income (loss) - pro forma $ 58,976 $ (30,095) $ (110,704)
Basic income (loss) per share -
as reported $ 1.19 $ (0.58) $ (2.21)
Basic income (loss) per share -
pro forma $ 1.17 $ (0.61) $ (2.27)
Diluted income (loss) per share -
as reported $ 1.19 $ (0.58) $ (2.21)
Diluted income (loss) per share -
pro forma $ 1.17 $ (0.61) $ (2.27)
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 10 - 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 $11.5 million at October 29, 2000 and $13.7
million at October 31, 1999 and accumulated amortization of $8.3 million and
$9.9 million at October 29, 2000 and October 31, 1999, 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 29, 2000, 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
------- --------- -------- -----
2001 $ 2,503,390 $ 11,267,044 $ (2,260,600) $ 11,509,834
2002 2,467,386 10,477,005 (1,956,954) 10,987,437
2003 2,274,764 9,297,468 (1,701,799) 9,870,433
2004 2,251,125 7,539,670 (1,395,041) 8,395,754
2005 1,708,924 5,995,824 (1,022,396) 6,682,352
Thereafter 3,764,460 21,066,602 (3,268,181) 21,562,881
------------- ------------ -------------- ------------
Total minimum rentals $ 14,970,049 $ 65,643,613 $ (11,604,971) $ 69,008,691
============= ============ ============== ============
Amount representing
interest (4,376,106)
-------------
Present value of net
minimum rentals $ 10,593,943
=============
46
Contingent rental expense relating to the land and building portion of
capital leases was $1.1 million, $1.0 million, and $1.1 million in 2000, 1999
and 1998, respectively.
Total rental expense for all operating leases not capitalized is as follows:
2000 1999 1998
---- ---- ----
Minimum rentals $ 5,816,622 $ 6,574,972 $ 8,389,383
Contingent rentals 643,371 834,926 1,114,751
------------ ------------ -------------
Subtotal 6,459,993 7,409,898 9,504,134
Sublease rentals (1,191,502) (1,219,595) (1,234,546)
------------ ------------ -------------
Total $ 5,268,491 $ 6,190,303 $ 8,269,588
============ ============ =============
NOTE 11 - COMMITMENTS AND CONTINGENCIES
SEVERANCE AGREEMENTS - The Company has an employment agreement with one
executive officer that provides severance pay under certain circumstances.
The contract expires on December 31, 2000 and provides for an automatic two
year extension of the term in the event of a change in control. The maximum
contingent liability under this employment agreement is $1.3 million.
The Company has Management Retention Agreements with certain officers of the
Company to assist in the retention of key management personnel. The
agreements, which cover 19 officers, provide for payment of between one and
two years of base salary and, with respect to certain executive officers,
bonus and incentive plan payments, 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 or, with
respect to certain executive officers, a two year period, following a
change in control of the Company. The Company's total contingent liability
with respect to these agreements is approximately $8.6 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 44 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 $13.9 million.
PROPERTY SUBLET TO OTHERS - The Company subleases approximately 54 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 $6.8
million.
LITIGATION - See Note 13.
NOTE 12 - SETTLEMENT OF LAWSUITS
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. Pursuant to the terms of the consent decree, on
February 15, 2000, the Company petitioned the Court to terminate the decree.
The Court found that the Company had made all contributions required
47
under the decree and otherwise met all requirements for early termination.
On February 29, 2000, the Court ordered that the consent decree be terminated.
In 1999, the court entered final judgment approving a global settlement of
three class action cases that claimed that the Company had violated the Fair
Labor Standards Act. Under the settlement, the Company agreed to pay $18
million to settle these claims. Of this amount, $3.5 million was accrued as
a liability during the fourth quarter of 1998 following an adverse ruling in
one of the cases on the issue of liability. In accordance with the approved
settlement, the Company made payments into a qualified settlement fund of $11
million, $3.5 million and $3.5 million on July 14, 1999, October 1, 1999 and
March 1, 2000, respectively.
NOTE 13 - LITIGATION
The Company is a party to legal proceedings incidental to its business. In
the opinion of management, based upon information currently available, the
ultimate liability with respect to these actions will not materially affect
the operating results or the financial position of the Company.
NOTE 14 - 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 $0.0 million, $0.3 million and $0.3 million for 2000, 1999 and
1998, respectively.
NOTE 15 - EARNINGS PER SHARE
The table below presents the computation of basic and diluted loss per share
in accordance with Financial Accounting Standards No. 128:
2000 1999 1998
---- ---- ----
NUMERATOR:
Loss from continuing operations before
extraordinary gain (loss)-
numerator for Basic EPS $ (22,995,923) $ (30,133,513) $ (104,305,191)
Loss from continuing operations before
extraordinary gain (loss)-
numerator for Diluted EPS $ (22,995,923) $ (30,133,513) $ (104,305,191)
DENOMINATOR:
Weighted-average shares outstanding -
denominator for Basic EPS 50,427,186 48,339,259 48,665,685
Dilutive potential shares -
denominator for Diluted EPS 50,427,186 48,339,259 48,665,685
-----=-------- -------------- ---------------
Basic EPS loss from continuing operations
before extraordinary gain (loss) $ (0.46) $ (0.61) $ (2.14)
============== ============== ===============
Diluted EPS loss from continuing
operations before extraordinary
gain (loss) $ (0.46) $ (0.61) $ (2.14)
============== ============== ===============
As of October 29, 2000, the Company had outstanding 5,973,593 options to
purchase shares at prices ranging from $0.63 to $25.51. In addition to
options to purchase shares, the Company had approximately 40,000 common
shares reserved for future distribution pursuant to an employment
agreement. 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 29, 2000, the Company had reserved 537,908 and 266,581 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 losses from continuing operations before
extraordinary items during 2000, 1999 and 1998; therefore, the effect of
considering these potentially dilutive securities on loss per share from
continuing operations before extraordinary gain (loss) would have been anti-
dilutive.
48
NOTE 16 - 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 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.
49
NOTE 17 - 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 three
industry segments, two of which are restaurant concepts. The restaurant
concepts are Shoney's and Captain D's. The remaining segment is COI, a food
distribution and manufacturing business. COI includes the Company's three
distribution centers and a food processing facility that provide 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 COI to Company-owned restaurants.
REVENUE YEARS ENDED
---------------------------------------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 25,
(IN THOUSANDS) 2000 1999 1998
---------------------------------------------------------
Shoney's Restaurants $ 376,623 $ 500,041 $ 638,940
Franchise fees 9,053 9,623 9,189
----------- ----------- -----------
Total Shoney's 385,676 509,664 648,129
Captain D's restaurants 314,671 316,996 305,180
Franchise fees 5,432 5,494 5,227
----------- ----------- -----------
Total Captain D's 320,103 322,490 310,407
COI 386,838 430,294 503,687
Corporate and other 12,946 25,496 17,020
----------- ----------- -----------
Total revenue for reportable segments 1,105,563 1,287,944 1,479,243
Elimination of Intersegment revenue 269,718 321,036 380,552
----------- ----------- -----------
Total consolidated revenue $ 835,845 $ 966,908 $ 1,098,691
=========== =========== ===========
50
EBIT AS DEFINED YEARS ENDED
-----------------------------------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 25,
(IN THOUSANDS) 2000 1999 1998
-----------------------------------------------------
Shoney's $ 4,597 $ 10,340 $ 14,606
Captain D's 36,716 38,361 32,501
COI 4,513 7,919 11,832
Corporate and other (14,516) (8,345) (27,251)
---------- ---------- ----------
Total EBIT as defined for reportable segments 31,310 48,275 31,688
Other Charges:
Interest Expense 36,659 42,159 48,476
Asset impairment charges 17,120 18,422 47,161
Litigation settlements -- 14,500 3,500
Restructuring charges 1,031 4,462 10,059
---------- ---------- ---------
Consolidated loss on continuing operations
before income taxes and extraordinary item $ (23,500) $ (31,268) $ (77,508)
========== ========== ==========
DEPRECIATION AND AMORTIZATION
(IN THOUSANDS)
Shoney's $ 17,013 $ 20,952 $ 27,505
Captain D's 11,175 11,196 11,688
COI 1,530 1,809 2,361
Corporate and other 4,871 6,020 6,316
---------- ---------- ----------
Total consolidated depreciation and
amortization $ 34,589 $ 39,977 $ 47,870
========== ========== ==========
CAPITAL EXPENDITURES
(IN THOUSANDS)
Shoney's $ 5,034 $ 13,013 $ 14,247
Captain D's 11,824 10,561 8,572
COI 510 577 1,311
Corporate and other 4,368 5,433 4,947
---------- ---------- ----------
Total consolidated capital expenditures $ 21,736 $ 29,584 $ 29,077
========== ========== ==========
51
ASSETS OCTOBER 29, OCTOBER 31,
(IN THOUSANDS) 2000 1999
------------------------------------
Shoney's $ 144,844 $ 170,457
Captain D's 118,057 106,732
COI 38,335 46,951
Corporate and other (1) 37,192 82,465
----------- ----------
Total consolidated assets $ 338,428 $ 406,605
=========== ==========
(1) Corporate and other includes assets held for sale of $22.9
million and $27.3 million in 2000 and 1999, respectively.
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 GAIN (LOSS) GAIN (LOSS) HIGH LOW
----- -------- ------ ------------- ------ ------------- ------ ---- ---
2000
First Quarter 16 $242,626(a) $ 26,455(a) $ (3,974) $ (3,974) $ (.08) $(.08) $1.50 $1.06
Second Quarter 12 209,900 28,122 5,449 5,449 .09 .11 1.12 .63
Third Quarter 12 200,767 21,971 (14,806)(b) (14,806)(b) (.29) (.29) 1.63 .47
Fourth Quarter 12 182,552 19,672 (9,009)(b) 73,468(b)(c) (.18) 1.45 1.06 .44
-- -------- -------- --------- --------- ------- ------
52 $835,845 $ 96,220 $(22,340) $ 60,137 $ (.46) $1.19
== ======== ======== ========= ========= ======= ======
1999
First Quarter 16 $289,722(a) $ 36,929(a) $(15,896)(d) $(15,896)(d) $ (.32) $ (.32) $3.63 $1.31
Second Quarter 12 232,664 32,177 5,009 5,009 .10 .10 2.94 1.81
Third Quarter 12 222,311 25,978 (17,518)(d) (17,518)(d) (.35) (.35) 2.50 2.00
Fourth Quarter 13 222,211 29,233 (421) (421) (.01) (.01) 2.50 1.44
-- -------- -------- --------- --------- ------- -------
53 $966,908 $124,317 $(28,826) $(28,826) $ (.58) $ (.58)
== ======== ======== ========= ========= ======= =======
(a) The first quarter of 2000 and first quarter of 1999 have been
restated to reflect discontinued operations.
(b) The third quarter of 2000 and fourth quarter of 2000 included asset
impairment charges of $12.8 million and $4.3 million, respectively.
(c) The fourth quarter of 2000 included an extraordinary gain on
retirement of debt of $82.5 million.
(d) 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.
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.
52
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 2001 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 2001 Proxy Statement is
incorporated herein by reference. The matters labeled "Human Resources and
Compensation Committee Report" and "Shareholder Return Performance Graph"
contained in the 2001 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 2001 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
"Certain Transactions" contained in the 2001 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 29, 2000 and
October 31, 1999.
Consolidated Statement of Operations - Years ended
October 29, 2000, October 31, 1999 and October 25,
1998
Consolidated Statement of Shareholders' Equity (Deficit)
- Years ended October 29, 2000, October 31, 1999
and October 25, 1998
Consolidated Statement of Cash Flows - Years ended
October 29, 2000, October 31, 1999, and October 25,
1998
Notes to Consolidated Financial Statements - Years ended
October 29, 2000, October 31, 1999 and October 25,
1998
(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 56 through 59 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).
(d) Financial Statement Schedules - set forth below is Schedule II -
Valuation and Qualifying Accounts and Reserves.
53
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 29, 2000:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 1,497,000 $ (224,000) $ 8,000(B) $ 60,000(A) $ 1,221,000
Valuation
allowance for
deferred tax
assets $ 68,942,000 $ (25,863,000)(D) $ 0 $ 0 $ 43,079,000
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
(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.
(D) Decrease in the valuation allowance for deferred tax assets.
54
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 29th day
January 2001.
SHONEY'S, INC.
By: /s/ JAMES M. BELTRAME
---------------------
James M. Beltrame
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 29th 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/ JAMES M. BELTRAME Chief Financial Officer and
- - ------------------------- Principal Accounting Officer
(James M. Beltrame)
/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)
55
EXHIBIT INDEX
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, filed as
Exhibits 3.2, 4.2 to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1999, and
incorporated herein by this reference.
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 First Supplemental Indenture, dated as of August 29, 2000,
by and between the Company and the Bank of New York,
as trustee, relating to $201,250,000 in principal amount of
liquid yield option notes due 2004, filed as Exhibit 4.2
to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 6, 2000, and incorporated herein by
this reference.
4.6 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.
4.7 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.
4.8 Second Supplemental Indenture, dated as of August 29, 2000,
between and among TPI Restaurants, Inc., as guarantor, the
Bank of New York, as trustee, and the Company relating to
8.25% Convertible Subordinated Debentures due 2002, filed as
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 6, 2000, and incorporated
herein by this reference.
10.1 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.*
56
10.2 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.*
10.3 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 the fiscal year ended October 27,
1996, and incorporated herein by this reference.*
10.4 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.*
10.5 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.*
10.6 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.*
10.7 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.*
10.8 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.*
10.9 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.*
10.10 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.*
10.11 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.*
10.12 Management Retention Agreement, dated as of June 14, 2000,
by and between the Company and Raymond D. Schoenbaum.*
10.13 Management Retention Agreement, dated as of June 14, 2000,
by and between the Company and J. Michael Bodnar.*(1)
10.14 Management Retention Agreement, dated as of June 16, 2000,
by and between the Company and Richard K. Arras.*(1)
10.15 Management Retention Agreement, dated as of June 15, 2000,
by and between the Company and James M. Beltrame.*(1)
10.16 Management Retention Agreement, dated as of June 14, 2000,
by and between the Company and Bernard W. Gray.*(1)
10.17 Management Retention Agreement, dated as of June 14, 2000,
by and between the Company and David L. Gilbert.*(1)
57
10.18 Management Retention Agreement, dated as of June 21, 2000,
by and between the Company and Haney A. Long, Jr.*(1)
10.19 Management Retention Agreement, dated as of June 14, 2000,
by and between the Company and Richard D. Schafstall.*(1)
10.20 Management and Retention Agreement, dated as of June 29,
2000, by and between the Company and Ronald E. Walker.*(1)
10.21 Management and Retention Agreement, dated as of July 15,
1997, by and 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.*
10.22 Supply Agreement, dated as of January 20, 2000, by and
between the Company and International DiverseFoods, Inc.
10.23 Supply Agreement, dated as of January 19, 2000, by and
between Captain D's, Inc. and International DiverseFoods,
Inc.
10.24 Loan Agreement, dated as of October 1, 2000,
between Shoney's, Inc. and FFCA Acquisition Corporation
relating to $8.75 million in indebtedness.
10.25 Loan Agreement, dated as of September 6, 2000,
between Shoney's Properties Group 1, LLC and FFCA
Funding Corporation relating to $7.455 million in
indebtedness.
10.26 Master Lease between Shoney's Properties Group 1, LLC and
Shoney's Inc., relating to 12 properties.
10.27 Loan Agreement, dated as of September 6, 2000,
between Shoney's Properties Group 2, LLC and FFCA
Funding Corporation relating to $19.886 million in
indebtedness.(2)
10.28 Master Lease between Shoney's Properties Group 2, LLC and
Shoney's Inc., relating to 28 properties.(3)
10.29 Loan Agreement, dated as of September 6, 2000,
between Shoney's Properties Group 3, LLC and FFCA
Acquisition Corporation relating to $23.992 million in
indebtedness.(2)
10.30 Master Lease between Shoney's Properties Group 3, LLC and
Shoney's Inc., relating to 34 properties.(3)
10.31 Loan Agreement, dated as of September 6, 2000,
between Shoney's Properties Group 4, LLC and FFCA
Acquisition Corporation relating to $23.833 million in
indebtedness.(2)
10.32 Master Lease between Shoney's Properties Group 4, LLC and
Shoney's Inc., relating to 34 properties.(3)
10.33 Loan Agreement, dated as of September 6, 2000,
between Shoney's Properties Group 5, LLC and FFCA
Funding Corporation relating to $7.219 million in
indebtedness.(2)
10.34 Master Lease between Shoney's Properties Group 5, LLC and
Shoney's Inc., relating to 12 properties.(3)
10.35 Loan Agreement, dated as of September 6, 2000,
between Shoney's Properties Group 6, LLC and FFCA
Funding Corporation relating to $7.865 million in
indebtedness.(2)
58
10.36 Master Lease between Shoney's Properties Group 6, LLC and
Shoney's Inc., relating to 12 properties.(3)
10.37 Amended and Restated Credit Agreement, dated as of September
6, 2000, among Shoney's, Inc., as borrower, Bank of America,
N.A., as administrative agent, Banc of America Securities,
L.L.C., as syndication agent, and certain other banks,
financial institutions and institutional lenders.
10.38 $135 million Credit Agreement (the "Credit Agreement"),
dated as of September 6, 2000, among Captain D's, Inc., as
borrower, Bank of America, N.A., as administrative agent,
Banc of America Securities LLC, as sole lead arranger and
sole book manager, and certain other initial lenders,
initial issuing bank and swing line bank named therein.
10.39 Amendment No. 1 and Waiver to the Credit Agreement, dated
as of January 26, 2001, among Captain D's, Inc., the banks,
financial institutions and other institutional lenders
parties to the Credit Agreement, and Bank of America, N.A.,
as Administrative Agent.
10.40 Loan and Security Agreement, dated as of August 31, 2000,
between Commissary Operations, Inc. and Bank of America, N.A.
10.41 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.
23 Consent of Ernst & Young LLP, independent auditors.
27 Financial Data Schedule.
- - --------------------------------
* Management contract or compensatory plan or agreement.
(1) Document not filed because substantially identical to
Exhibit 10.12.
(2) Document not filed because substantially identical to
Exhibit 10.25.
(3) Document not filed because substantially identical to
Exhibit 10.26.
59