UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 18, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission file number 0-4377
--------------------------
SHONEY'S, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-0799798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1727 Elm Hill Pike, Nashville, TN 37210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 391-5201
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
---- ----
As of March 28, 2001, there were 51,693,846 shares of Shoney's, Inc. $1
par value common stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
February 18, October 29,
2001 2000
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,969,523 $ 7,980,996
Notes and accounts receivable, less allowance
for doubtful accounts of $1,233,000 in 2001
and $1,221,000 in 2000 10,997,747 11,318,035
Inventories 26,552,280 29,552,651
Prepaid expenses and other current assets 5,643,168 5,406,559
Net property, plant and equipment held for sale 21,584,398 22,887,211
--------------- ---------------
Total current assets 73,747,116 77,145,452
Property, plant and equipment, at lower of cost or market 541,520,040 546,271,873
Less accumulated depreciation and amortization (317,906,908) (315,773,546)
--------------- ---------------
Net property, plant and equipment 223,613,132 230,498,327
Other assets:
Goodwill (net of accumulated amortization of
$7,656,000 in 2001 and $7,318,000 in 2000) 12,708,128 13,200,847
Deferred charges and other intangible assets 12,624,076 13,673,118
Other assets 3,693,085 3,910,392
--------------- ---------------
Total other assets 29,025,289 30,784,357
--------------- ---------------
$ 326,385,537 $ 338,428,136
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 27,085,435 $ 26,655,872
Other accrued liabilities 54,689,318 57,810,119
Debt and capital lease obligations
due within one year 141,923,118 21,106,938
--------------- ---------------
Total current liabilities 223,697,871 105,572,929
Long-term debt and
capital lease obligations 145,536,983 263,341,756
Other liabilities 52,792,619 55,500,272
Shareholders' deficit:
Common stock, $1 par value: authorized
200,000,000; issued 51,693,846 in 2001
and 50,659,282 in 2000 51,693,846 50,659,282
Additional paid-in capital 136,921,990 137,521,843
Accumulated other comprehensive loss (997,629)
Accumulated deficit (283,260,143) (274,167,946)
--------------- ---------------
Total shareholders' deficit (95,641,936) (85,986,821)
--------------- ---------------
$ 326,385,537 $ 338,428,136
=============== ===============
See notes to consolidated condensed financial statements.
2
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Sixteen Weeks Ended
February 18, February 20,
2001 2000
------------ ------------
Revenues
Net sales $ 219,018,686 $ 234,557,911
Franchise fees 3,782,236 4,140,748
Other income 3,728,068 3,927,941
-------------- --------------
226,528,990 242,626,600
Costs and expenses
Cost of sales 205,511,409 216,171,110
General and administrative expenses 18,990,543 18,540,944
Interest expense 11,047,235 11,761,795
-------------- --------------
Total costs and expenses 235,549,187 246,473,849
-------------- --------------
Loss from continuing operations before income taxes (9,020,197) (3,847,249)
Provision for income taxes 72,000 112,000
-------------- --------------
Net loss from continuing operations (9,092,197) (3,959,249)
Discontinued operations, net of income taxes (15,488)
-------------- --------------
Net loss $ (9,092,197) $ (3,974,737)
============== ==============
Earnings per common share
Basic and diluted
Net loss from continuing operations ($0.18) ($0.08)
Discontinued operations, net of income taxes 0.00 0.00
------- -------
Net loss ($0.18) ($0.08)
======= =======
Weighted average shares outstanding
Basic and diluted 51,196,068 50,028,705
Common shares outstanding 51,693,846 50,515,363
Dividends per share NONE NONE
See notes to consolidated condensed financial statements.
3
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Sixteen Weeks Ended
February 18, February 20,
2001 2000
------------ ------------
Operating activities
Net loss $ (9,092,197) $ (3,974,737)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss from discontinued operations, net of income taxes 15,488
Depreciation and amortization 9,167,916 10,872,296
Amortization of deferred charges and other
non-cash charges 2,202,919 4,630,811
Gain on disposal of property, plant and equipment (2,980,001) (3,690,137)
Changes in operating assets and liabilities (1,471,157) (12,911,558)
-------------- --------------
Net cash used by continuing operating activities (2,172,520) (5,057,837)
Net cash provided by discontinued operating activities 493,085
-------------- --------------
Net cash used by operating activities (2,172,520) (4,564,752)
Investing activities
Cash required for property, plant and equipment (4,507,593) (6,411,460)
Cash required for assets held for sale (233,469)
Proceeds from disposal of property, plant and equipment 5,368,071 12,024,276
Cash provided by other assets 174,814 15,831
-------------- --------------
Net cash provided by investing activities 1,035,292 5,395,178
Financing activities
Payments on long-term debt and
capital lease obligations (19,339,237) (13,753,388)
Proceeds from long-term debt 23,000,000 15,000,000
Net payments on short-term debt (747,300) (3,444,000)
Payments on litigation settlements (22,664)
Cash required for debt issue costs (787,708) (746,075)
-------------- --------------
Net cash provided (used) by financing activities 2,125,755 (2,966,127)
-------------- --------------
Change in cash and cash equivalents $ 988,527 $ (2,135,701)
============== ==============
See notes to consolidated condensed financial statements.
4
The forward-looking statements included in this Form 10-Q relating to certain
matters involve risks and uncertainties, including the ability of management
to successfully implement its strategy for improving Shoney's Restaurants
performance, the ability of management to effect asset sales consistent with
projected proceeds and timing expectations, the results of pending and
threatened litigation, adequacy of management personnel resources, shortages
of restaurant labor, commodity price increases, product shortages, adverse
general economic conditions, adverse weather conditions that may affect the
Company's markets, turnover and a variety of other similar matters. 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations and under the caption "Risk
Factors" therein. 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.
5
SHONEY'S, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
February 18, 2001
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q. As a
result, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The Company, in management's opinion, has included all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
of the results of operations. Certain reclassifications have been made in
the Consolidated Condensed Financial Statements to conform to the 2001
presentation. Operating results for the sixteen-week period ended February
18, 2001 are not necessarily indicative of the results that may be expected
for all or any balance of the fiscal year ending October 28, 2001. For
further information, refer to the Consolidated Financial Statements and
Footnotes thereto included in the Shoney's, Inc. Annual Report on Form 10-K
for the year ended October 29, 2000.
NOTE 2 - DISCONTINUED OPERATIONS
During the second quarter of 2000, the Company sold its Pargo's restaurants
and 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. This discontinued line of business had total revenue and net
loss as follows:
Quarter Ended Quarter Ended
($ in thousands) February 18, 2001 February 20, 2000
----------------- -----------------
Total revenue $ -- $ 9,010
Net loss $ -- $ (15)
NOTE 3 - ACQUISITIONS
On September 9, 1996, the Company completed the acquisition of substantially
all of the assets of TPI Enterprises, Inc. ("TPI") which, as the then largest
franchisee of the Company, operated 176 Shoney's Restaurants and 67 Captain
D's restaurants.
Twenty-eight of TPI's restaurants had been targeted for closure during the
Company's due diligence process as under-performing units. Costs to exit
these businesses were accrued as liabilities assumed in purchase accounting
and consisted principally of severance pay for certain employees and the
accrual of future minimum lease obligations in excess of anticipated sublease
rental income. The total amount of such liabilities included in the TPI
purchase price allocation was approximately $21.0 million. During the first
quarter of 2001, approximately $0.1 million in costs to exit restaurants
acquired were charged to this liability. During the first quarter of 2000,
approximately $0.3 million in costs were charged to this liability.
Approximately $4.3 million of anticipated exit costs related to the TPI
acquisition remain accrued at February 18, 2001.
6
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.
At February 18, 2001, the carrying value of the 44 properties to be disposed
of was $21.6 million and is reflected on the Consolidated Condensed Balance
Sheet as net property, plant and equipment held for sale. Under the
provisions of SFAS 121, depreciation and amortization are not recorded on
assets held for sale during the period in which such assets are being held
for disposal.
NOTE 5 - RESTRUCTURING EXPENSE
When the decision to close a restaurant is made, the Company incurs certain
exit costs generally for the accrual of the remaining leasehold obligations
less anticipated sublease income related to leased units that are targeted to
be closed. There were no exit costs recorded in the first quarter of 2001 or
the first quarter of 2000. The Company charged approximately $0.8 million and
$1.5 million against these exit costs reserves in the first quarter of 2001
and the first quarter of 2000, respectively. Approximately $5.9 million of
accrued exit costs remain at February 18, 2001.
During 2000, the Company closed 13 Company-owned restaurants and sold 12
Shoney's Restaurants to franchisees. During the first sixteen weeks of 2001,
three Shoney's and two Captain D's restaurants were closed. Six Captain D's
were sold to franchisees during the first quarter of 2001. Below are sales
and EBIT as defined, which is defined by the Company as operating income
before asset impairment charges, restructuring charges and litigation
settlements, for the first sixteen weeks of 2001 and 2000 for restaurants
closed or sold prior to February 18, 2001.
Quarter Ended Quarter Ended
($ in thousands) February 18, 2001 February 20, 2000
----------------- -----------------
EBIT as EBIT as
Sales defined Sales defined
----- ------- ----- -------
Stores closed or sold $ 867 $ (234) $ 10,681 $ (1,117)
===== ======= ======== =========
7
NOTE 6 - EARNINGS PER SHARE
The table below presents the computation of basic and diluted loss per share
in accordance with Financial Accounting Standards No. 128:
(in thousands except EPS) Quarter Ended Quarter Ended
February 18, 2001 February 20, 2000
----------------- -----------------
Numerator:
- ----------
Loss from continuing operations -
numerator for Basic EPS $ (9,092) $ (3,959)
Loss from continuing operations after assumed
conversion of debentures -
numerator for Diluted EPS $ (9,092) $ (3,959)
Denominator:
- ------------
Weighted-average shares outstanding -
denominator for Basic EPS 51,196 50,029
Dilutive potential shares -
denominator for Diluted EPS 51,196 50,029
Basic EPS loss from continuing operations $ (0.18) $ (0.08)
Diluted EPS loss from continuing operations $ (0.18) $ (0.08)
As of February 18, 2001, the Company had outstanding approximately 6,907,882
options to purchase shares at prices ranging from $0.44 to $25.51. The
Company also has outstanding subordinated zero coupon convertible debentures
and 8.25% subordinated convertible debentures, which are convertible into
common stock at the option of the debenture holder. As of February 18, 2001,
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. Because the Company
reported a net loss from continuing operations before extraordinary items for
both periods presented, the effect of considering these potentially dilutive
convertible securities was anti-dilutive and was not included in the
calculation of Diluted EPS.
NOTE 7 - INCOME TAXES
The Company is estimating an effective tax rate for the sixteen weeks ended
February 18, 2001 and February 20, 2000 of (0.8)% and (2.9)%, respectively,
and has recorded an income tax provision of $0.1 million and $0.1 million for
the sixteen weeks ended February 18, 2001 and February 20, 2000,
respectively. This effective tax rate differs from the Federal statutory rate
of 35% primarily due to goodwill amortization, which is not deductible for
Federal income taxes, and an increase in the valuation allowance against the
gross deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of
February 18, 2001, the Company increased the valuation allowance for gross
deferred tax assets for tax credit carry forwards and net operating loss
carry forwards. The deferred tax asset valuation adjustment is in accordance
with Statement of Financial Accounting Standards No. 109 which requires
8
that a deferred tax asset valuation allowance be established if certain
criteria are not met. If the deferred tax assets are realized in the future,
the related tax benefits will reduce income tax expense.
NOTE 8 -DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Debt and obligations under capital leases at February 18, 2001 and October
29, 2000 consisted of the following:
2001 2000
---- ----
Shoney's - Mortgage Financing $ 98,540,365 $ 99,000,000
Shoney's - Line of Credit 12,014,959 6,345,000
Captain D's - Term Notes 115,000,000 115,000,000
Captain D's - Line of Credit 7,750,000 7,500,000
COI - Line of Credit 11,221,009 13,218,309
Subordinated zero coupon convertible debentures,
due April 2004 14,111,382 13,753,168
Subordinated convertible debentures, due July 2002 5,137,917 5,109,530
Industrial revenue bonds 10,165,000 10,165,000
Notes payable to others 3,648,388 3,763,744
------------- -------------
277,589,020 273,854,751
Obligations under capital leases 9,871,081 10,593,943
------------- -------------
287,460,101 284,448,694
Less amounts due within one year 141,923,118 21,106,938
------------- -------------
Amounts due after one year $ 145,536,983 $ 263,341,756
============= =============
SENIOR DEBT REFINANCING
On September 6, 2000, the Company completed 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. 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"). 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 of fiscal
2000, 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 comprising the Company's Captain D's restaurant operations
to a wholly-owned subsidiary, Captain D's, Inc. ("Captain D's"). The
reorganization allowed each of the Company's operating segments (Shoney's,
Captain D's, and Commissary Operations, Inc. ("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 working capital needs. 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.
9
SHONEY'S - MORTGAGE FINANCING
In connection with the Refinancing, on September 6, 2000 the Company entered
into a $99.0 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 $91.4 million at February
18, 2001. Principal reductions of approximately $1.6 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 February 18, 2001, the effective
interest rates on this debt were as follows:
Principal Amount Fixed/Floating Interest Rate
---------------- -------------- -------------
$ 67,391,595 Fixed 10.23%
$ 8,709,458 Fixed 10.35%
$ 22,439,312 Floating 10.00%
SHONEY'S - LINE OF CREDIT
On September 6, 2000, the Company entered into an amendment and restatement
of the 1997 Credit Facility, which provided Shoney's with a $40.0 million
line of credit ("the Shoney's Line of Credit"). The Shoney's 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 Shoney's Line of Credit was $27.7 million at
February 18, 2001. The Company has agreed to sell up to $10.0 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 during 2001. As of February 18, 2001, the Company had sold $2.8
million of the $10.0 million of collateral properties and had reduced
availability accordingly. Available credit under the Shoney's Line of Credit
is also reduced by letters of credit. At February 18, 2001, the Company had
borrowings under the Shoney's Line of Credit of $12.0 million and had
outstanding letters of credit of $19.7 million, resulting in available credit
of $5.5 million. Also, pursuant to the terms of the Shoney's Line of Credit,
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 $15.0
million of the sale proceeds, and, thereafter, use the sale proceeds to
either repay drawings under the line, which will also permanently reduce
availability, or cash collateralize the line. As of February 18, 2001, the
Company had sold and retained in the business $6.1 million of asset sale
proceeds since September 6, 2000. The Company pays a commitment fee of 0.50%
for unused available credit under the facility. The interest rate for this
facility is at floating rates (4.25% over LIBOR or 3.25% over the prime rate)
and at February 18, 2001 the interest rate on this line of credit was 11.10%.
CAPTAIN D'S - TERM NOTES AND LINE OF CREDIT
Captain D's, in connection with the Refinancing, entered into a credit
facility on September 6, 2000 for up to $135.0 million consisting of term
notes totaling $115.0 million and a $20.0 million line of credit (the
"Captain D's Facility"). 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 Facility was $86.2 million at February 18,
2001. At February 18, 2001, there was $115.0 million outstanding under the
term notes and $7.8 million outstanding under the line of credit. There are
no scheduled payments under the term notes or the line of credit prior to the
termination date of the Captain D's Facility.
10
Available credit under the line of credit is reduced by outstanding letters
of credit. At February 18, 2001, Captain D's outstanding letters of credit
totaled $4.0 million, resulting in available credit of $8.2 million. Captain
D's pays a commitment fee of .50% for unused available credit under the line
of credit. The interest rate on term notes totaling $85.0 million is at
floating rates (4% over LIBOR or 3% over the prime rate) and, in respect of
term notes totaling $30.0 million, the initial interest rate was at
floating rates of 4% over LIBOR or 3% over the prime rate. On January 1,
2001, the interest rate for the $30.0 million term notes increased by 0.50%
and is scheduled to increase by 0.50% on the last day of each calendar
quarter thereafter. 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 February 18, 2001, the effective interest rate for the
term notes and the line of credit was 10.20% and 10.71%, respectively.
COI - REVOLVING CREDIT FACILITY
As part of the refinancing, on August 31, 2000, COI entered into a $30.0
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 $27.8 million at February 18, 2001. The 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 $11.2
million of drawings at February 18, 2001. At February 18, 2001, available
credit under this facility was approximately $2.3 million. COI pays a
commitment fee of .50% for unused credit under the facility. At February 18,
2001, the effective interest rate on this line of credit was 9.19%.
INTEREST RATE HEDGE PROGRAMS
The 1997 Credit Facility, which was amended and restated to become 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 were scheduled to terminate on January 8, 2001. The
gain was deferred and amortized over the remaining term of the interest rate
swap agreements. Of the remaining $50.0 million of interest rate swaps, $20.0
million of the interest rate swaps with a fixed interest rate of 5.6%
terminated on October 8, 2000 and $30.0 million of the interest rate swaps
with a fixed rate of 6.1% terminated on January 8, 2001. The Shoney's Line
of Credit does not require a hedge program.
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 6.7% plus the applicable margin for the term of the Captain D's
credit agreement. Additionally on December 29, 2000 and January 2, 2001,
Captain D's entered into interest rate swap agreements covering $25.0 million
and $32.5 million of
11
debt, respectively, which fixed the interest rate at 5.9% and 5.8%,
respectively, plus the applicable margin for the term of the Captain D's
credit agreement. At February 18, 2001, the estimated cost to Captain D's to
exit the interest rate swap agreements was approximately $1.0 million.
In July and August 2000, the Company entered into forward agreements 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.
LOAN COVENANTS
The Company's senior debt agreements (consisting of the Shoney's Line of
Credit, the Captain D's Facility, the COI Revolving Credit Facility and the
Shoney's Mortgage Financing) are secured by substantially all of the
Company's assets. These 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
Shoney's Mortgage Financing agreements. The Company has available to it
remedies which may prevent probable covenant violations and, alternatively,
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 royalty 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 the
first quarter of 2001.
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 semi-annual bond equivalent basis. Each note is convertible
into 29.349 shares of the Company's common stock at the option of the holder.
Following completion of the Tender Offer, the Company has reserved 537,908
shares for future issuance pursuant to these debentures.
12
SUBORDINATED ZERO COUPON 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 holder's 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. Following completion of the
Tender Offer, the Company has reserved 266,581 shares for future issuance
pursuant to the debentures.
OTHER DEBT INFORMATION
The Company's industrial revenue bonds include $9.2 million at fixed interest
rates ranging from 9.0% to 10.0% and $0.9 million at a floating interest rate
subject to a floor of 7.5% and a ceiling of 15.0%.
NOTE 9 - LITIGATION SETTLEMENT
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 $18.0
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
$11.0 million, $3.5 million and $3.5 million on July 14, 1999, October 1,
1999 and March 1, 2000, respectively.
NOTE 10 - LITIGATION
The Company is a party to other legal proceedings incidental to its business.
In the opinion of management, based upon information currently available, the
ultimate liability with respect to these other actions will not materially
affect the operating results or the financial position of the Company.
NOTE 11 - CONCENTRATION OF RISKS AND USE OF ESTIMATES
As of February 18, 2001, the Company operated and franchised a chain of 1,006
restaurants in 27 states, which consists 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 COI, a food service business that manufactures and distributes food
and supplies to Company-owned restaurants, certain franchised restaurants and
other customers. The Company's restaurant concepts are Shoney's Restaurants,
which are family dining restaurants offering full table service and a broad
menu, and Captain D's restaurants, which are quick-service restaurants
specializing in seafood. The Company extends credit to franchisee customers
for franchise fees and the sale of food and supplies on customary credit
terms which generally do not require customers to provide collateral or other
security to the Company. The Company believes there is no concentration of
risk with any single customer, supplier, or small group of customers or
suppliers whose failure or nonperformance would materially affect the
Company's results of operations.
13
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to use judgment and make estimates
that affect the amounts reported in the Consolidated Condensed Financial
Statements. Management believes that such estimates have been based on
reasonable and supportable assumptions and that the resulting estimates are
reasonable for use in the preparation of the Consolidated Condensed Financial
Statements. Changes in such estimates will be made as appropriate as
additional information becomes available and may affect amounts reported in
future periods.
NOTE 12 - LEASEHOLD INTERESTS ASSIGNED OR SUBLET TO OTHERS
Assigned Leases - The Company has assigned its leasehold interest to third
parties with respect to approximately 45 properties on which the Company
remains contingently liable to the landlord for the performance of all
obligations of the party to whom the lease was assigned in the event that
party does not perform its obligations under the lease. The assigned leases
are for restaurant sites that the Company has closed. The Company estimates
its contingent liability associated with these assigned leases as of February
18, 2001 to be approximately $14.0 million.
Property Sublet to Others - The Company subleases approximately 57 properties
to others. The Company remains liable for the leasehold obligations in the
event these third parties do not make the required lease payments. The
majority of the sublet properties are former restaurant sites that the
Company has closed or franchised. The Company estimates its contingent
liability associated with these sublet properties as of February 18, 2001 to
be approximately $6.6 million.
NOTE 13 - 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 expensed costs associated
with startup activities systematically over a period not to exceed twelve
months. The Company adopted SOP 98-5 effective the first day of fiscal 2000.
The adoption of SOP 98-5 did not have a material effect on the Company's
results of operations during 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. The Company
adopted SFAS 133 effective the first day of fiscal 2001.
NOTE 14 - 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, COI, is a food
service distribution and manufacturing operation. COI operates three food
service distribution centers and a food processing facility that provide food
and supplies to Company-owned restaurants, certain franchised restaurants and
other customers. Effective with the first quarter of 2001, the Company began
allocating its general
14
corporate overhead expenses to the three operating segments. All prior
periods have been restated. In addition, certain asset gains or losses may
be recognized in segment EBIT as defined where previously all gains or losses
had been reported in "other" revenue. The Company's other income and expenses
consist primarily of gains from the sale of property, plant, and equipment,
rental and interest and miscellaneous income and do not constitute a
reportable segment of the Company as contemplated by SFAS No. 131. EBIT,
when that term is used in this Quarterly Report on Form 10-Q, means
income before interest, taxes, 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 income before interest, taxes, restructuring charges,
litigation settlements and impairment charges ("EBIT as defined"). The
accounting policies of the business segments are the same as the Company's.
Inter-segment revenues consist of food and supply sales by COI to Company-
owned restaurants.
REVENUE
Quarter Ended
($ in thousands) February 18, February 20,
2001 2000
-------------------------------
Shoney's Restaurants $ 100,117 $ 109,130
Franchise fees 1,994 2,562
Other income 2,333 543
------------------------------
Total Shoney's 104,444 112,235
Captain D's restaurants 89,300 92,413
Franchise fees 1,788 1,579
Other income 1,050 87
------------------------------
Total Captain D's 92,138 94,079
COI 102,048 110,695
Other 1,191 4,238
------------------------------
Total revenue for reportable segments 299,821 321,247
Elimination of inter-segment revenue 73,292 78,620
------------------------------
Total consolidated revenue $ 226,529 $ 242,627
==============================
15
EBIT AS DEFINED
Quarter Ended
($ in thousands) February 18, February 20,
2001 2000
-------------------------------
Shoney's operations $ (5,664) $ (2,895)
Shoney's gains on asset sales 1,480 -
-------------------------------
Total Shoney's (4,184) (2,895)
Captain D's operations 5,672 6,758
Captain D's gains on asset sales 939 -
-------------------------------
Total Captain D's 6,611 6,758
COI (1,483) 248
Other income 554 237
Other gains on asset sales 529 3,567
-------------------------------
Total EBIT as defined for
reportable segments 2,027 7,915
Other Charges:
Interest expense 11,047 11,762
-------------------------------
Consolidated loss from continuing
operations before income taxes $ (9,020) $ (3,847)
===============================
DEPRECIATION AND AMORTIZATION
Quarter Ended
($ in thousands) February 18, February 20,
2001 2000
-------------------------------
Shoney's $ 4,649 $ 5,874
Captain D's 3,724 3,612
COI 305 479
Other 490 907
-------------------------------
Total consolidated depreciation
and amortization $ 9,168 $ 10,872
===============================
NOTE 15 - ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", as amended ("SFAS 133"). This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000 and
accordingly, the Company adopted SFAS 133 effective October 30, 2000.
SFAS 133 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 on the balance sheet and measure those instruments at
fair value. Derivatives that are not hedges must be adjusted to fair value
16
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivatives will either be offset
against the change in the fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of
a derivative's change in fair value will be immediately recognized in
earnings.
On October 30, 2000, the date of the Company's adoption of SFAS 133, the
cumulative effect of adoption was a charge to other comprehensive income of
$0.1 million. At February 18, 2001, the fair value of the Company's
derivatives was ($1.0 million), resulting in an additional charge to other
comprehensive income of $0.9 million.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Condensed Financial
Statements and Notes thereto. The first quarter of fiscal 2001 and 2000
covered periods of sixteen weeks. All references are to fiscal years unless
otherwise noted.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED REVENUES
Consolidated revenue for the first quarter of 2001 and 2000 is as follows:
Quarter Ended
($ in millions) February 18, February 20,
2001 2000
-------------------------------
Net sales $ 219.0 $ 234.6
Franchise fees 3.8 4.1
Other income 3.7 3.9
--------- ---------
$ 226.5 $ 242.6
========= =========
Changes in the number of restaurants for the first sixteen weeks of 2001 and
the first sixteen weeks of 2000 are as follows:
February 18, Restaurants Restaurants October 29, February 20, Restaurants Restaurants October 31,
2001 Opened Closed 2000 2000 Opened Closed 1999
-------------------------------------------------------------------------------------------------
Shoney's
Company-owned 242 - 3 245 264 - 3(2) 267
Franchised 201 - 13 214 257 3(2) 4 258
-------------------------------------------------------------------------------------------------
443 - 16 459 521 3 7 525
=================================================================================================
Captain D's
Company-owned 352 - 8(1) 360 363 1 - 362
Franchised 211 7(1) - 204 204 - 1 205
-------------------------------------------------------------------------------------------------
563 7 8 564 567 1 1 567
=================================================================================================
(1) Includes six restaurants sold to franchisees
(2) Includes three restaurants sold to franchisees
18
Revenues for the first quarter of 2001 declined $16.1 million, or 6.6%, to
$226.5 million, as compared to revenues of $242.6 million in the first
quarter of 2000.
The components of the change in consolidated revenues are summarized as
follows:
($ in millions) Quarter Ended
February 18, 2001
-----------------
Restaurant revenue $ (12.1)
COI and other sales (3.4)
Franchise revenue (.4)
Other income (.2)
--------
$ (16.1)
========
The decline in restaurant revenue during the first quarter of 2001 when
compared to the first quarter of 2000 was principally due to a net decline in
the number of restaurants in operation and the effect of unfavorable weather
conditions in many of the Company's markets in the first quarter of 2001 when
compared to the first quarter of 2000. During 2000, the Company closed 13
Company-owned restaurants, sold 12 Shoney's Restaurants to franchisees and
opened one Captain D's restaurant. During the first sixteen weeks of 2001,
three Shoney's and two Captain D's restaurants were closed and six Captain
D's were sold to franchisees. The table below presents comparable store sales
for Company-owned restaurants for the first quarter of 2001:
Quarter Ended
February 18, 2001
-----------------
Shoney's Restaurants (1.3)%
Captain D's (2.0)%
Combined (1.6)%
COI and other sales decreased $3.4 million in the first quarter of 2001. The
decrease in COI and other revenues was primarily due to a loss of franchise
customers serviced by COI.
Franchise revenues decreased $0.4 million during the first quarter of 2001
when compared to the same period last year. The decrease in franchise
revenue was primarily the result of a net decline of 57 Shoney's franchise
restaurants since the beginning of fiscal 2000.
Other income decreased $0.2 million during the first quarter of 2001 when
compared to the same period in 2000. The decrease in other income during the
first quarter was primarily the result of lower gains from asset sales when
compared to the prior year partially offset by higher rental income. The
principal components of other income for the first quarter of 2001 were net
gains on asset sales ($3.0 million), interest and other income ($0.1 million)
and rental income ($0.6 million).
19
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 is shown below:
Quarter Ended Quarter Ended
February 18, 2001 February 20, 2000
----------------- -----------------
Food and supplies 37.8% 38.5%
Restaurant labor 28.1% 27.0%
Operating expenses 24.8% 23.6%
----------------- -----------------
Total cost of sales 90.7% 89.1%
================= =================
As compared to restaurant revenues, COI revenues have a higher percentage of
food and supply costs, a lower percentage of operating expenses and have no
associated restaurant labor. As a result, changes in COI revenue relative to
the change in restaurant revenue can have an exaggerated effect on these
expenses as a percentage of total revenues. Food and supply costs, as a
percentage of revenues, decreased 0.7% in the first quarter of 2001 when
compared to the first quarter of 2000. The decrease in food and supply costs
in the first quarter of 2001, as a percentage of sales, was primarily the
result of the decrease in COI revenue relative to the decline in restaurant
revenue and lower food and supply costs as a percentage of sales in Captain
D's.
Consolidated restaurant labor increased 1.1% as a percentage of revenues in
the first quarter of 2001 when compared to the prior year, primarily the
result of higher labor costs as a percentage of sales at the restaurant
level. Wage rates increased during the first quarter of 2001 because of
low unemployment conditions in many markets and a very competitive restaurant
labor market. Restaurant labor increased, as a percentage of sales, in both
Shoney's and Captain D's in the first quarter when compared to the prior year
period. The Company expects continued upward pressure on consolidated
restaurant labor in both restaurant concepts as part of its ongoing strategy
to enhance customer service in an attempt to improve comparable store sales.
Consolidated operating expenses increased 1.2% as a percentage of total
revenues in the first quarter of 2001 when compared to the prior year. The
increase in consolidated operating expenses, as a percentage of sales, was
primarily caused by higher utilities, labor costs at COI, rent expense
and the effect of the decline in comparable store revenue.
A summary of consolidated general and administrative expenses and interest
expense as a percentage of consolidated revenue is shown below:
Quarter Ended Quarter Ended
February 18, 2001 February 20, 2000
----------------- -----------------
Consolidated general and
administrative expenses 8.4% 7.6%
Consolidated interest expense 4.9% 4.9%
Consolidated general and administrative expenses increased 0.8% as a
percentage of revenue in the first quarter of 2001 when compared to the same
period in 2000. The increase in general and administrative expenses, as a
percentage of sales, was primarily due to $0.4 million of severance costs
incurred in the first quarter of 2001 and the effect of the overall decline
in comparable store revenue. The severance costs in the first quarter of
2001 resulted from the elimination of thirty-four administrative positions.
20
Consolidated interest expense declined $0.7 million in the first quarter of
2001 compared to the same period of 2000. The reduction in interest expense
is primarily due to lower debt outstanding when compared to the prior
year period, largely offset by the effect of higher interest rates on the
debt incurred in the Refinancing.
The Company had an effective tax rate of (0.8)% and (2.9)% in the first
quarter of 2001 and first quarter of 2000, respectively. This effective
tax rate differs from the federal statutory rate of 35% primarily due
to goodwill amortization which is not deductible for federal income tax
purposes and an adjustment in the valuation allowance against deferred tax
assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of
February 18, 2001, the Company increased the valuation allowance for gross
deferred tax assets for tax credit carry forwards and net operating loss
carry forwards. The deferred tax asset valuation adjustment is in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"), which requires that a deferred tax asset
valuation allowance be established if certain criteria are not met. If the
deferred tax assets are realized in the future, the related tax benefits will
reduce income tax expense.
OPERATING SEGMENTS
SHONEY'S RESTAURANTS
($ in thousands except comparable Quarter Ended
store sales and operating data) February 18, February 20,
2001 2000
----------------------------------
Restaurant revenue $ 100,117 $ 109,130
Franchise revenue 1,994 2,562
Other income 2,333 543
----------------------------------
Total Shoney's revenue 104,444 112,235
Expenses 108,628 115,130
----------------------------------
EBIT as defined(b) $ (4,184) $ (2,895)
==================================
Comparable store sales decrease(a) (1.3)% (3.8)%
Operating restaurants at end of quarter:
Company-owned 242 264
Franchised 201 257
----------------------------------
Total 443 521
==================================
(a) Prior year amounts have not been restated for comparable restaurants.
(b) EBIT, when that term is used in this Quarterly Report on Form 10-
Q, means income before interest, taxes, 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 income before interest, taxes, asset
impairment charges, litigation settlements and restructuring charges, or EBIT
as defined.
21
Shoney's concept total revenue declined $7.8 million, or 6.9%, in the first
quarter of 2001 when compared to the prior year. The components of the
change in Shoney's concept revenue are summarized as follows:
Quarter Ended
($ in millions) February 18, 2001
-----------------
Sales from operating restaurants $ (0.9)
Closed restaurants (8.1)
-----------------
Total change in restaurant sales (9.0)
Franchise revenue (.6)
Other income 1.8
-----------------
Total $ (7.8)
=================
Revenues were significantly reduced by the closing of ten under-performing
Company-owned restaurants in 2000 and three additional restaurants in 2001.
In addition, twelve Company-owned restaurants were sold to franchisees in
fiscal 2000. Sales were also affected by unfavorable weather conditions in
many of the Company's markets in the first quarter of 2001 when compared to
the first quarter of 2000. Sales and EBIT as defined for Shoney's
Restaurants closed or sold are as follows:
Quarter Ended
($ in thousands) February 18, February 20,
2001 2000
-----------------------------------------
Sales EBIT as Sales EBIT as
defined defined
-----------------------------------------
Stores closed or sold $ 99 $ (203) $ 8,232 $ (1,125)
Shoney's Restaurants comparable store sales declined in the first quarter of
2001 by 1.3%. Franchise revenue decreased $0.6 million in the first quarter
of 2001 when compared to the prior year. The decrease in franchise revenue
in the first quarter of 2001 is primarily the result of a net decline of 57
franchise restaurants since the beginning of the first quarter of 2000.
Other income increased $1.8 million primarily due to gains on asset sales of
$1.5 million in the first quarter of 2001 compared to no gains in the first
quarter of 2000 and higher rental income.
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. As
of February 18, 2000, 152 company-owned and ten franchised restaurants have
converted to this menu. In November 2000, Shoney's Restaurants 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.
Expenses declined $6.5 million, or 5.6%, in the first quarter of 2001, when
compared to the same period in 2000. Expenses as a percentage of revenue
were 104.0% in the first quarter of 2001 compared to 102.6% in
22
the first quarter of 2000. The increase in expenses in the first quarter of
2001, as a percentage of revenues, was the result of increases in food and
supply costs, restaurant labor, operating expenses and multi-unit supervisory
expenses.
As a result of the above, EBIT as defined decreased $1.3 million in the first
quarter of 2001, when compared to the comparable prior year period.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell additional
operating restaurants to franchisees.
CAPTAIN D'S RESTAURANTS
($ in thousands except comparable store Quarter Ended
sales and operating data) February 18, February 20,
2001 2000
----------------------------
Restaurant revenue $ 89,300 $ 92,413
Franchise revenue 1,788 1,579
Other income 1,050 87
----------------------------
Total Captain D's revenue 92,138 94,079
Expenses 85,527 87,321
----------------------------
EBIT as defined(b) $ 6,611 $ 6,758
============================
Comparable store sales decrease(a) (2.0)% (0.1)%
Operating restaurants at end of quarter:
Company-owned 352 363
Franchised 211 204
----------------------------
Total 563 567
============================
(a) Prior year amounts have not been restated for comparable restaurants.
(b) See Note (b) "Operating Segments - Shoney's Restaurants" on page 21
hereof.
Captain D's total revenue decreased $1.9 million, or 2.1%, in the first
quarter of 2001, when compared with the comparable prior year period. The
components of the change in Captain D's concept revenue are summarized as
follows:
($ in millions) Quarter Ended
February 18, 2001
-----------------
Sales from operating restaurants $ (1.4)
Closed or sold restaurants (1.7)
-----------------
Total change in restaurant sales (3.1)
Franchise revenues 0.2
Other income 1.0
-----------------
Total $ (1.9)
=================
23
Revenues were reduced by closing three under-performing Company-owned
restaurants in 2000 and two under-performing restaurants in 2001. Restaurant
revenues were also reduced by the sale of six Company-owned restaurants in
the first quarter of 2001 and unfavorable weather conditions in many of the
Company's markets in the first quarter of 2001 when compared to the first
quarter of 2000. Sales and EBIT as defined for Captain D's restaurants
closed or sold are as follows:
Quarter Ended
($ in thousands) February 18, February 20,
2001 2000
----------------------------------------
Sales EBIT as Sales EBIT as
defined defined
----------------------------------------
Stores closed or sold $ 768 $ (31) $ 2,449 $ 8
========================================
Franchise revenue increased $0.2 million in the first quarter of 2001 when
compared to the same period in 2000. The increase was primarily the result
of initial fees from the six Company-owned restaurants sold to franchisees
during the quarter. Other income increased $1.0 million over the prior year
quarter primarily due to $0.9 million of gains on asset sales in the first
quarter of 2001 compared to no gains in the first quarter of 2000.
Expenses decreased $1.8 million, or 2.1%, in the first quarter of 2001, when
compared to the same period in 2000. However, as a percentage of sales,
decreases in food and supply costs in the first quarter were more than offset
by increases in restaurant labor, operating expenses and multi-unit
supervisory costs.
As a result of the above, EBIT as defined decreased $0.1 million in the first
quarter of 2001 when compared to the comparable prior year quarter.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell operating
restaurants to franchisees.
COI
Quarter Ended
($ in thousands) February 18, February 20,
2001 2000
----------------------------
Outside sales $ 28,756 $ 32,075
Inter-company sales 73,292 78,620
----------------------------
Total COI revenue 102,048 110,695
Expenses 103,531 110,447
----------------------------
EBIT as defined(a) $ (1,483) $ 248
============================
Distribution centers at end of quarter 3 3
============================
(a) See Note (b) "Operating Segments-Shoney's Restaurants" on page 21 hereof.
Total revenue declined $8.6 million, or 7.8%, in the first quarter of 2001
when compared to the prior year period. Outside revenues of COI decreased by
$3.3 million in the first quarter of 2001. The decrease in
24
outside revenues for the first quarter of 2001 resulted primarily from a
decrease in the number of outside customers. Inter-company sales declined in
the first quarter of 2001 when compared to the prior year period primarily as
a result of closing Company-owned restaurants.
Expenses declined $6.9 million, or 6.3%, in the first quarter of 2001, when
compared to the prior year period. Expenses, as a percentage of sales, were
101.5% and 99.8% in the first quarter of 2001 and 2000, respectively. The
increase in expenses, as a percentage of sales, is due to higher cost of
goods sold, labor and administrative expenses.
As a result of the above, EBIT as defined decreased $1.7 million in the first
quarter of 2001 when compared to the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its liquidity requirements with cash
provided by operating activities supplemented by external borrowings. 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. However, in 2001, current liabilities include $141.9
million of current maturities of long-term debt. This current portion of
long-term debt includes $122.8 million of Captain D's term notes and
revolver that matures on December 31, 2001 (see Risk Factors). Cash used by
continuing operating activities improved by $2.9 million in the first quarter
of 2001 compared to the first quarter of 2000. Cash used by continuing
operating activities was positively affected by a $1.5 million use of cash by
operating assets and liabilities compared to a use of $12.9 million in the
first quarter of 2000. The use of cash by operating assets and liabilities
in the first quarter of 2000 was primarily the result of cash required for
increased levels of inventory and cash required for a reduction of other
liabilities. Cash used by operating activities in 2001, when compared to
2000, was negatively affected by the decline in operating income from the
Company's Shoney's Restaurants and COI and lower depreciation and
amortization.
Cash provided by investing activities in the first quarter of 2001 was $1.0
million. During 2001, the Company received $5.4 million in cash proceeds
from the sale of closed and operating restaurant properties. Cash used for
property, plant and equipment additions was $4.5 million.
Cash provided by investing activities in the first quarter of 2000 was $5.4
million. During the first quarter of 2000, the Company received $12.0 million
in cash proceeds from the sale of closed and operating restaurant properties.
Cash used for property, plant and equipment additions in the first quarter of
2000 was $6.4 million and cash used for assets held for sale was $0.2
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 2000, the Company has closed or sold 36 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 provided by financing activities was $2.1 million in the first quarter
of 2001 compared to a use of cash of $3.0 million in the first quarter of
2000. 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
25
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
completion 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 resulted in an extraordinary gain on the early retirement of
debt of approximately $82.5 million in the fourth quarter of 2000, net of
expenses and income taxes.
Proceeds from long-term debt in 2001 included $19.0 million of long-term
borrowings under the Shoney's Line of Credit and $4.0 million of borrowings
under the Captain D's revolver. Payments on long-term debt included $13.3
million of payments under the Shoney's Line of Credit and $5.0 million of
payments under the Captain D's revolver. Financing activities for 2001 also
included $0.8 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 restaurant operations were transferred to Captain D's,
Inc., a wholly-owned subsidiary of the Company. The Reorganization of the
Company's 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 working capital needs. 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.
The Company's senior loan agreements (consisting of the Shoney's Line of
Credit, the Captain D's Facility, the COI Revolving Credit Facility and the
Shoney's Mortgage Financing) are secured by substantially all of the
Company's assets. The 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.
The Company's 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"). The Company has agreed to sell during fiscal
2001 up to $10.0 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 February 18, 2001, the Company had sold $2.8
million of the $10.0 million of collateral properties resulting in $37.2
million of aggregate availability under the Shoney's Line of Credit.
Availability under the Shoney's Line of Credit is further reduced by
outstanding letters of credit of approximately $19.7 million, resulting in
approximately $17.5 million of availability of which $12.0 million was drawn
at February 18, 2001. As of March 24, 2001 the Company had sold $5.0 million
of the $10.0 million of collateral properties resulting in $15.3 million of
aggregate availability (after letters of credit) under the Shoney's Line of
Credit of which $10.4 million was drawn. Liquidity for the Shoney's segment
is expected to be enhanced by proceeds of up to $15.0 million from certain
asset sales that the Company is allowed to retain for its working capital
needs. Following the Company's retention of $15.0 million from expected
asset sales, 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 March 24, 2001 the
Company had sold
26
$6.4 million of properties subject to the $15.0 million limitations 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 will 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
historically have improved during the spring and summer.
Liquidity for the Captain D's segment is provided by a $20.0 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 $7.8 million was drawn at February 18, 2001.
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 $11.2 million of drawings at February 18, 2001. At February
18, 2001, availability under the COI facility was approximately $2.3 million.
Financing activities in the first quarter of 2000 included $13.8 million of
payments on senior indebtedness, net borrowings under the Company's line of
credit of $11.6 million and cash required for debt issue costs of $0.7
million.
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 credit
agreements, generally is not permitted to incur additional debt and is
limited to annual capital expenditures of approximately $18.5 million.
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 can 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
27
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 the
first quarter of 2001.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A of the Company's Annual Report on Form 10-K, filed with the
Commission on January 29, 2001 (as amended by Form 10-K/A, filed with the
Commission on February 26, 2001), is incorporated herein by this reference.
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
10.1 Amendment No. 2 to the Credit Agreement, dated as of
April 2, 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.
(b) Reports on Form 8-K. None
--------------------
29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereto duly authorized both on behalf of the registrant
and in his capacity as principal financial officer of the registrant.
Date: April 4, 2001 By: /s/ James M. Beltrame
----------------------------
James M. Beltrame
Chief Financial Officer,
Principal Financial and Chief
Accounting Officer
30
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Amendment No. 2 to the Credit Agreement, dated as
of April 2, 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.