UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 August 5, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-4377
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SHONEY'S, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-0799798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1727 Elm Hill Pike, Nashville, TN 37210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 391-5201
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
As of September 13, 2001, there were 51,709,122 shares of Shoney's, Inc.
$1 par value common stock outstanding.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
August 5, October 29,
2001 2000
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,510,129 $ 7,974,050
Notes and accounts receivable, less
allowance for doubtful accounts of
$736,000 in 2001 and $691,000 in 2000 6,049,609 6,052,524
Inventories 4,436,156 4,624,050
Prepaid expenses and other current assets 4,082,208 3,691,051
Net current assets of discontinued operations 9,721,688
Net property and equipment held for sale 20,553,408 19,932,444
--------------- ---------------
Total current assets 44,631,510 51,995,807
Property and equipment, at lower of
cost or market 489,339,246 525,898,139
Less accumulated depreciation and
amortization (293,205,308) (300,959,463)
--------------- ---------------
Net property and equipment 196,133,938 224,938,676
Other assets:
Goodwill (net of accumulated
amortization of $8,395,000 in 2001
and $7,318,000 in 2000) 9,659,977 13,200,847
Deferred charges and other
intangible assets 9,796,057 13,104,142
Net non-current assets of discontinued
operations 4,989,067
Restricted cash 2,956,836
Other assets 1,729,398 3,620,170
--------------- ---------------
Total other assets 24,142,268 34,914,226
--------------- ---------------
$ 264,907,716 $ 311,848,709
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 13,685,248 $ 18,121,253
Other accrued liabilities 48,391,945 55,198,337
Debt and capital lease obligations
due within one year 129,161,786 7,888,629
--------------- ---------------
Total current liabilities 191,238,979 81,208,219
Long-term debt and capital lease
obligations 126,899,626 263,341,756
Other liabilities 47,031,508 53,285,555
Shareholders' deficit:
Common stock, $1 par value: authorized
200,000,000; issued 51,709,122 in 2001
and 50,659,282 in 2000 51,709,122 50,659,282
Additional paid-in capital 136,917,455 137,521,843
Other accumulated comprehensive loss (1,518,746)
Accumulated deficit (287,370,228) (274,167,946)
--------------- ---------------
Total shareholders' deficit (100,262,397) (85,986,821)
--------------- ---------------
$ 264,907,716 $ 311,848,709
=============== ===============
See notes to consolidated condensed financial statements
2
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Forty Weeks Ended
August 5, August 6,
2001 2000
------------- -------------
Revenues
Net sales $ 504,449,408 $ 541,344,450
Franchise fees 9,579,305 11,622,980
Other income 10,446,293 7,507,706
-------------- --------------
524,475,006 560,475,136
Costs and expenses
Cost of sales 460,193,959 491,102,175
General and administrative expenses 41,263,653 45,296,330
Impairment write down of long-lived assets 4,969,463 12,845,777
Restructuring expense 1,177,533
Interest expense 26,164,673 28,604,561
-------------- --------------
Total costs and expenses 533,769,281 577,848,843
-------------- --------------
Loss from continuing operations
before income taxes (9,294,275) (17,373,707)
Provision for (benefit from) income taxes (233,000) 326,000
-------------- --------------
Net loss from continuing operations (9,061,275) (17,699,707)
Discontinued operations, net of income taxes (212,007) 3,793,453
Gain (loss) on sale of discontinued
operations, net of income taxes (3,929,000) 575,091
-------------- --------------
Net loss $ (13,202,282) $ (13,331,163)
============== ==============
Earnings per common share
Basic and diluted:
Net loss from continuing operations $ (0.18) $ (0.35)
Discontinued operations, net of
income taxes (0.00) 0.08
Gain (loss) on sale of discontinued
operations, net of income taxes (0.08) 0.01
-------------- --------------
Net loss $ (0.26) $ (0.26)
============== ==============
Weighted average shares outstanding
Basic and diluted 51,501,937 50,361,065
Common shares outstanding 51,709,122 50,625,410
Dividends per share NONE NONE
See notes to consolidated condensed financial statements
3
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Twelve Weeks Ended
August 5, August 6,
2001 2000
-------------- --------------
Revenues
Net sales $ 153,893,047 $ 166,288,025
Franchise fees 2,936,467 3,765,629
Other income 3,994,412 1,981,303
-------------- --------------
160,823,926 172,034,957
Costs and expenses
Cost of sales 138,124,662 152,619,320
General and administrative expenses 10,765,588 14,183,758
Impairment write down of long-lived assets 4,969,463 12,845,777
Restructuring expense 1,177,533
Interest expense 7,653,855 8,171,254
-------------- --------------
Total costs and expenses 162,691,101 187,820,109
-------------- --------------
Loss from continuing operations
before income taxes (1,867,175) (15,785,152)
Provision for (benefit from) income taxes (555,000) 109,000
-------------- --------------
Net loss from continuing operations (1,312,175) (15,894,152)
Discontinued operations, net of income taxes 1,088,420
-------------- --------------
Net loss $ (1,312,175) $ (14,805,732)
============== ==============
Earnings per common share
Basic and diluted:
Net loss from continuing operations $ (0.03) $ (0.31)
Discontinued operations, net
of income taxes 0.00 0.02
-------------- --------------
Net loss $ (0.03) $ (0.29)
============== ==============
Weighted average shares outstanding
Basic and diluted 51,709,122 50,611,911
Common shares outstanding 51,709,122 50,625,410
Dividends per share NONE NONE
See notes to consolidated condensed financial statements
4
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
For the Forty Weeks Ended
August 5, August 6,
2001 2000
-------------- --------------
Operating activities
Net loss $ (13,202,282) $ (13,331,163)
Adjustments to reconcile net loss to net
cash provided by operating activities:
(Income) loss from discontinued
operations, net of income taxes 212,007 (3,793,453)
(Gain) loss on sale of discontinued
operations, net of income taxes 3,929,000 (575,091)
Depreciation and amortization 21,147,794 26,030,480
Amortization of deferred charges and
other non-cash charges 6,058,661 10,564,791
Gain on disposal of property
and equipment (8,605,236) (6,146,368)
Impairment write down of
long-lived assets 4,969,463 12,845,777
Changes in operating assets
and liabilities (14,907,130) (17,478,847)
-------------- --------------
Net cash provided (used) by
continuing operating activities (397,723) 8,116,126
Net cash provided by discontinued
operating activities 7,050,470 6,412,917
-------------- --------------
Net cash provided by operating
activities 6,652,747 14,529,043
Investing activities
Cash required for property and equipment (10,794,930) (16,805,476)
Proceeds from disposal of property
and equipment 21,717,413 22,510,315
Cash provided (used) by other assets (975,935) 18,393
-------------- --------------
Net cash provided by continuing
investing activities 9,946,548 5,723,232
Net cash provided by discontinued
investing activities 8,087,390 11,789,228
-------------- --------------
Net cash provided by investing
activities 18,033,938 17,512,460
Financing activities
Payments on long-term debt and capital
lease obligations (95,662,510) (48,831,209)
Proceeds from long-term debt 81,000,028 18,500,000
Net payments on short-term debt (1,200,000) (2,168,490)
Payments on litigation settlements (3,726,680)
Cash required for debt issue costs (1,530,930) (1,693,905)
-------------- --------------
Net cash used by continuing
financing activities (17,393,412) (37,920,284)
Net cash used by discontinued
financing activities (5,757,194) (16,220)
-------------- --------------
Net cash used by financing activities (23,150,606) (37,936,504)
-------------- --------------
Change in cash and cash equivalents $ 1,536,079 $ (5,895,001)
============== ==============
See notes to consolidated condensed financial statements
5
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.
6
SHONEY'S, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
August 5, 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 twelve and forty week periods ended
August 5, 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. On May 25, 2001, the Company announced the execution of a
definitive agreement to sell its wholly-owned subsidiary, Commissary
Operations, Inc. ("COI"), and on June 11, 2001, the Company sold its COI
common shares for cash consideration of $9.0 million less expenses. As a
result, the Company has presented the casual dining and COI lines of business
as discontinued operations in the accompanying financial statements, net of
any related income tax expense. All prior periods have been restated. These
discontinued lines of business had total revenue and net income (loss) as
follows:
Quarter Ended Forty Weeks Ended
($ in thousands) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
Total revenue $ 10,847 $ 28,911 $ 69,126 $ 105,189
Net income (loss) $ 0 $ 1,088 $ (212) $ 3,793
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 third
quarter and first forty weeks of 2001, approximately $0.1 million and $0.2
million in costs, respectively, to exit restaurants acquired were charged to
this liability. During the third quarter and first forty weeks of 2000,
approximately $0.3 million and $0.7 million, respectively, in costs were
charged to this liability.
7
Also during the third quarter of 2001, the Company revised its estimate of
previously accrued liabilities assumed in purchase accounting by $1.7
million. The change in estimate was 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. Approximately $2.5 million of anticipated exit
costs related to the TPI acquisition remain accrued at August 5, 2001.
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.
Because of continued declines in the operating performance of the Company's
Shoney's Restaurant division through the second quarter of 2001, the Company
completed an asset impairment analysis during the third quarter of 2001 and
recorded an asset impairment charge of $5.0 million. Approximately $2.3
million of the third quarter 2001 asset impairment charge related to assets
held and used in the Company's operations and approximately $2.7 million
related to assets held for sale. Of the $2.3 million relating to assets held
and used in the Company's operations, $2.2 million related to the Shoney's
Restaurant division.
During the third quarter of 2000, the Company completed an asset impairment
analysis on its operating restaurants and rental properties and recorded an
asset impairment charge of $12.8 million. Approximately $10.9 million of the
third quarter 2000 impairment charge was related to the Shoney's Restaurant
division.
At August 5, 2001, the carrying value of the 42 properties to be disposed of
was $20.6 million and is reflected on the Consolidated Condensed Balance
Sheet as net property 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.
If the Company's restaurants were to experience declines in comparable store
sales and operating margins, the Company could incur additional asset
impairment charges in the future.
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. These exit costs are included in the Consolidated Condensed
Statement of Operations in the restructuring expense caption. The Company
recorded approximately $1.7 million in exit costs during the third quarter of
2001, primarily associated with the accrual of the remaining leasehold
obligations on restaurants closed or to be closed. In addition, during the
third quarter of 2001, the Company revised its estimate of previously accrued
exit costs downward by $0.5 million. The change in estimate is the result of
assigning certain leases on terms more favorable to the Company than
originally estimated. The Company charged approximately $0.7 million and
$2.0 million against these exit cost reserves in the third quarter and first
forty weeks of 2001, respectively. During the third quarter and first forty
weeks of 2000, approximately $2.2 million and $5.5 million, respectively,
were charged to this liability. Approximately $5.9 million of accrued exit
costs remain at August 5, 2001.
During 2000, the Company closed 13 Company-owned restaurants and sold 12
Shoney's Restaurants to franchisees. During the first forty weeks of 2001, 25
Shoney's Restaurants and three Captain D's restaurants
8
were closed. In addition, two Shoney's Restaurants and six Captain D's
restaurants were sold to franchisees during the first forty weeks of 2001.
Management continually evaluates the operating performance of its restaurants
and may close additional restaurants if, in management's opinion, operating
results cannot be improved within what management believes is a reasonable
time period. In the event management elects to close additional leased
restaurants during 2001, the Company will incur additional restructuring
charges.
Below are sales and EBIT as defined, which is defined by the Company as
income before interest, taxes, asset impairment charges, restructuring
charges and litigation settlements, for the third quarter and first forty
weeks of 2001 and 2000 for restaurants closed or sold prior to August 5,
2001.
Quarter Ended Forty Weeks Ended
($ in thousands) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
EBIT as EBIT as EBIT as EBIT as
Sales defined Sales defined Sales defined Sales defined
----- ------- ----- ------- ----- ------- ----- -------
Stores closed or sold $2,361 $(787) $12,204 $(1,449) $18,029 $(2,967) $45,888 $(4,255)
====== ====== ======= ======== ======= ======== ======= ========
NOTE 6 - EARNINGS PER SHARE
The table below presents the computation of basic and diluted loss per share
in accordance with Financial Accounting Standards No. 128:
Quarter Ended Forty Weeks Ended
August 5, August 6, August 5, August 6,
($ in thousands except EPS) 2001 2000 2001 2000
--------- --------- --------- ---------
Numerator:
Loss from continuing operations -
numerator for Basic EPS $ (1,312) $(15,894) $ (9,061) $ (17,700)
Loss from continuing operations after
assumed conversion of debentures -
numerator for Diluted EPS $ (1,312) $(15,894) $ (9,061) $ (17,700)
Denominator:
Weighted-average shares outstanding -
denominator for Basic EPS 51,709 50,612 51,502 50,361
Dilutive potential shares -
denominator for Diluted EPS 51,709 50,612 51,502 50,361
Basic EPS loss from continuing
operations $ (0.03) $ (0.31) $ (0.18) $ (0.35)
Diluted EPS loss from continuing
operations $ (0.03) $ (0.31) $ (0.18) $ (0.35)
As of August 5, 2001, the Company had outstanding approximately 4,221,898
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 August 5, 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
the third quarters of 2001 and 2000 and the forty week
9
periods of 2001 and 2000, 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 has recorded income tax benefits of $0.6 million and $0.2
million for the twelve and forty week periods ended August 5, 2001. During
the third quarter of 2001, an adjustment was made to the TPI purchase price
allocation. As a result, deferred tax assets related to the TPI acquisition
were reduced by $0.6 million, and the valuation allowance related to the TPI
deferred tax assets was also reduced by $0.6 million, resulting in a decrease
in income tax expense. The Company recorded income tax provisions of $0.2
million and $0.4 million, respectively, for the twelve and forty week periods
ended August 6, 2000. The 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 a change 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
August 5, 2001, the Company increased the valuation allowance for gross
deferred tax assets. The deferred tax asset valuation adjustment is in
accordance with Statement of Financial Accounting Standards No. 109, which
requires that a deferred tax asset valuation allowance be established if
certain criteria are not met. If the deferred tax assets are realized in the
future, the related tax benefits will reduce income tax expense.
NOTE 8 -DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Debt and obligations under capital leases at August 5, 2001 and October 29,
2000 consisted of the following:
2001 2000
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Shoney's - Mortgage Financing $ 97,519,255 $ 99,000,000
Shoney's - Line of Credit 6,345,000
Captain D's - Term Notes 115,000,000 115,000,000
Captain D's - Line of Credit 5,300,000 7,500,000
Subordinated zero coupon convertible debentures,
due April 2004 14,662,359 13,753,168
Subordinated convertible debentures,
due July 2002 5,182,505 5,109,530
Industrial revenue bonds 5,765,000 10,165,000
Notes payable to others 3,405,775 3,763,744
------------- -------------
246,834,894 260,636,442
Obligations under capital leases 9,226,518 10,593,943
------------- -------------
256,061,412 271,230,385
Less amounts due within one year 129,161,786 7,888,629
------------- -------------
Amounts due after one year $ 126,899,626 $ 263,341,756
============= =============
10
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 and
Captain D's) 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
services.
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 (the "Shoney's Mortgage
Financing") which is secured by the land, buildings and equipment of 142
Shoney's Restaurants. The carrying value of the collateral for the Shoney's
Mortgage Financing was $83.7 million at August 5, 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 August 5, 2001, the effective interest rates on this debt
were as follows:
Principal Amount Fixed/Floating Interest Rate
---------------- -------------- -------------
$ 66,821,746 Fixed 10.23%
$ 8,636,826 Fixed 10.35%
$ 22,060,683 Floating 8.05%
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 $19.5 million at August
5, 2001. The Company had 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.
As of August 5, 2001, the Company had sold $11.8 million of these collateral
properties and reduced the availability by $10.0 million. Also, pursuant to
the terms of the Shoney's Line of Credit, the Company may sell certain other
assets, retain
11
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 August 5, 2001, the Company had sold and retained in the
business $15.0 million of asset sale proceeds since September 6, 2000 and had
cash collateralized the line of credit in the amount of $3.0 million.
Available credit under the Shoney's Line of Credit is reduced by letters of
credit. At August 5, 2001, the Company had no borrowings under the Shoney's
Line of Credit and had outstanding letters of credit of $23.5 million,
resulting in available credit of $6.5 million. 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).
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 $88.9 million at August 5, 2001.
At August 5, 2001, there was $115.0 million outstanding under the term notes
and $5.3 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. Available credit under the
line of credit is reduced by outstanding letters of credit. At August 5,
2001, Captain D's outstanding letters of credit totaled $4.9 million,
resulting in available credit of $9.8 million. Captain D's pays a commitment
fee of 0.50% 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 August 5, 2001,
the effective interest rate for the term notes and the line of credit was
10.6% and 8.4%, respectively.
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.
12
The Captain D's Facility required Captain D's 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 fixed the interest rate at
6.7% plus the applicable margin for the term of the Captain D's Facility.
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 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
Facility. At August 5, 2001, the estimated cost to Captain D's to exit the
interest rate swap agreements was approximately $1.5 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 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; (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 financial covenant violation will occur in November 2001
under the Shoney's Mortgage Financing agreements. The Company has available
to it remedies which may prevent probable covenant violations. Alternatively,
management believes that loan covenant modifications, if required, could be
obtained. Potential remedies available to the Company which may 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. No
assurance can be given, however, that these potential remedies will prevent
probable covenant violations.
In addition, since May 21, 2001, 25 of the restaurants that the Company
closed ("Closures") secure the borrowings under the Shoney's Mortgage
Financing. When the units were closed, it was the intention of the Company
to sell the properties and apply the proceeds to indebtedness under the
Shoney's Mortgage Financing. The Company received preliminary verbal
approval from the Shoney's Mortgage Financing lender for the Closures, with
a further agreement that, in addition to the debt reduction, the lender would
accept a one percent (1%) prepayment penalty with respect to the debt
prepaid under the Shoney's Mortgage Financing.
To date, the Company has not sold or disposed of any of the closed properties
that secure the Shoney's Mortgage Financing. The Company presently has three
of the properties under contract to sell. The Shoney's Mortgage Financing loan
agreements provide that each property must be continuously operated, excepting
a 120 day period every three years. Some of the closed units will not be sold
within that 120 day
13
period. Absent a waiver or forbearance from the Shoney's
Mortgage Financing lender, the Closures would result in a default under the
Shoney's Mortgage Financing as early as September 18, 2001.
The Company has been in discussions with the Shoney's Mortgage Financing lender
and expects to receive agreements that the Closures will not be deemed a
default under the Shoney's Mortgage Financing loan documents. The Company
further expects the agreements to provide for the lender to forbear through
March 14, 2002 from exercising any rights that it might have under the Shoney's
Mortgage Financing loan documents resulting from the Closures. No assurances
can be given that the properties will be sold on or before March 14, 2002 or
that the Shoney's Mortgage Financing lenders would agree to additional waivers
or forbearances. A default under the Shoney's Mortgage Financing loans would
allow the lenders to accelerate payment of the loans and would have a
material adverse effect upon the Company's liquidity and financial position.
Based on current operating results and forecasted operating trends, it is
probable that a financial covenant violation will occur under the Captain D's
Facility after October 28, 2001, the end of the current fiscal year. If the
covenant violation were to occur, however, it would not be determinable until
approximately when the total indebtedness under the Captain D's Facility
becomes due. By that time, the Company expects to refinance this indebtedness.
Accordingly, the Company does not believe that a covenant violation will cause
additional material adverse consequences to the Company given the fact that the
indebtedness matures on December 31, 2001. The Company can give no assurances
that this indebtedness will be refinanced by this date. Without such
refinancing, the Company's financial position and liquidity will be materially
and adversely affected.
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 prevent covenant violations or obtain modifications,
the Company's financial condition, results of operations and liquidity would
be materially adversely affected. The Company was in compliance with its
financial covenants at the end of the third 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.
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 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.
14
Other Debt Information
The Company's industrial revenue bonds are at fixed interest rates ranging
from 9.0% to 10.0%.
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. In 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. The remainder was accrued during
1999. The settlement payments of $11.0 million, $3.5 million and $3.5
million were made on July 14, 1999, October 1, 1999 and March 1, 2000,
respectively.
NOTE 10 - 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 11 - CONCENTRATION OF RISKS AND USE OF ESTIMATES
As of August 5, 2001, the Company operated and franchised a chain of 977
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'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 also owned COI, a food service business that manufactures and
distributes food and supplies to Company-owned restaurants, certain
franchised restaurants and other customers. On June 11, 2001 the Company
completed the sale of COI. The Company has entered into long term purchase
agreements with COI for essentially all of its food products for both the
Shoney's and Captain D's restaurant concepts. The Company believes that
these contracts contain purchasing terms that are competitive in today's
marketplace, but the Company will be dependent on COI for essentially all
of its food products. The Company extends credit to franchisee customers for
franchise fees on customary credit terms which generally do not require
customers to provide collateral or other security to the Company. Except for
the contracts with COI, the Company believes there is no concentration of risk
with any single customer, supplier, or small group of customers or suppliers
whose failure or nonperformance would materially affect the Company's results
of operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to use judgment and make estimates
that affect the amounts reported in the Consolidated Condensed Financial
Statements. Management believes that such estimates have been based on
reasonable and supportable assumptions and that the resulting estimates are
reasonable for use in the preparation of the Consolidated Condensed Financial
Statements. Changes in such estimates will be made as appropriate as
additional information becomes available and may affect amounts reported in
future periods.
NOTE 12- CONTINGENCIES
Assigned Leases - The Company has assigned its leasehold interest to third
parties with respect to approximately 42 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
15
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 August 5, 2001 to be
approximately $14.2 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 August 5, 2001 to be
approximately $10.3 million.
Lease Guaranty - The Company is a party to a guaranty agreement which
guarantees the obligations under a master lease pursuant to which COI, the
lessee and a former wholly-owned subsidiary of the Company, leases 24 tractors
and 20 trailers. The Company sold COI on June 11, 2001, but remains
contingently liable for these leasehold obligations in the event that COI
does not make the required lease payments. The Company estimates its
contingent liability associated with this master lease to be $3.0 million
as of August 5, 2001.
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", as amended ("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. See
Note 15 - Adoption of Statement of Financial Accounting Standards No. 133.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and
Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 will require
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and that the use of the pooling-of-interest
method is no longer allowed. SFAS 142 requires that upon adoption,
amortization of goodwill will cease, and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis. Identifiable
intangible assets will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 142 is effective for fiscal years beginning after December 15, 2001. As
of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $8.1 million which will be subject to the transition
provisions of SFAS 142. Amortization expense related to goodwill was $0.4
million and $1.2 million, respectively, for the twelve and forty week periods
ended August 5, 2001. Because of the extensive effort needed to comply with
adopting SFAS 142, it is not practicable to reasonably estimate the impact of
adopting this statement on the Company's financial statements at the date of
this report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
16
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 two
industry segments which are restaurant concepts. The restaurant concepts are
Shoney's and Captain D's. Effective with the first quarter of 2001, the
Company began allocating its general corporate overhead expenses to its
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 and equipment, rental and interest and miscellaneous income
and do not constitute a reportable segment of the Company as contemplated by
SFAS No. 131. Additionally, other income and expense for the periods
presented includes an estimate of the general corporate overhead allocated to
COI that in the opinion of management would not be eliminated when COI was
sold. 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.
Revenue
Quarter Ended Forty Weeks Ended
($ in thousands) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
Shoney's Restaurants $ 83,691 $ 92,163 $ 268,413 $ 293,626
Franchise fees 1,617 2,495 5,099 7,438
Other income 3,620 331 7,605 1,507
-------------- -------------- -------------- --------------
Total Shoney's 88,928 94,989 281,117 302,571
Captain D's Restaurants 69,358 73,578 233,341 245,240
Franchise fees 1,319 1,271 4,480 4,185
Other income 458 35 2,412 176
-------------- -------------- -------------- --------------
Total Captain D's 71,135 74,884 240,233 249,601
Other 761 2,162 3,125 8,303
-------------- -------------- -------------- --------------
Total consolidated revenue $ 160,824 $ 172,035 $ 524,475 $ 560,475
============== ============== ============== ==============
17
EBIT as Defined
Quarter Ended Forty Weeks Ended
($ in thousands) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
Shoney's operations $ 2,665 $ (1,900) $ (3,701) $ (2,947)
Shoney's gains on asset sales 2,735 - 5,070 -
-------------- -------------- -------------- --------------
Total Shoney's 5,400 (1,900) 1,369 (2,947)
-------------- -------------- -------------- --------------
Captain D's operations 4,587 5,442 16,987 20,957
Captain D's gains on asset sales 244 - 1,882 -
-------------- -------------- -------------- --------------
Total Captain D's 4,831 5,442 18,869 20,957
-------------- -------------- -------------- --------------
Other income 1,166 176 1,155 94
Other gains on asset sales 537 1,514 1,625 5,973
-------------- -------------- -------------- --------------
Total other income 1,703 1,690 2,780 6,067
-------------- -------------- -------------- --------------
Total EBIT as defined for
reportable segments 11,934 5,232 23,018 24,077
Other Charges:
Interest expense 7,654 8,171 26,165 28,605
Asset impairment charges 4,969 12,846 4,969 12,846
Restructuring charges 1,178 - 1,178 -
-------------- -------------- -------------- --------------
Consolidated loss from continuing
operations before income taxes $ (1,867) $ (15,785) $ (9,294) $ (17,374)
============== ============== ============== ==============
Depreciation and Amortization
Quarter Ended Forty Weeks Ended
($ in thousands) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
Shoney's $ 2,906 $ 4,402 $ 10,802 $ 14,578
Captain D's 2,662 2,853 9,173 9,222
Other 330 653 1,173 2,230
-------------- -------------- -------------- --------------
Total consolidated depreciation
and amortization $ 5,898 $ 7,908 $ 21,148 $ 26,030
============== ============== ============== ==============
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
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value
18
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 credit to other comprehensive income of
$0.1 million. At August 5, 2001, the fair value of the Company's derivatives
was $1.5 million, resulting in a charge to other comprehensive income of $1.6
million.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Condensed Financial
Statements and Notes thereto. The third quarter and first three quarters of
fiscal 2001 and 2000 covered periods of twelve and forty weeks, respectively.
All references are to fiscal years unless otherwise noted.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED REVENUES
Consolidated revenue for the third quarter of 2001 and 2000 and the first
forty weeks of 2001 and 2000 is as follows:
Quarter Ended Forty Weeks Ended
($ in millions) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
Net sales $ 153.9 $ 166.3 $ 504.5 $ 541.4
Franchise fees 2.9 3.7 9.6 11.6
Other income 4.0 2.0 10.4 7.5
-------------- -------------- -------------- --------------
$ 160.8 $ 172.0 $ 524.5 $ 560.5
============== ============== ============== ==============
Changes in the number of restaurants for the first forty weeks of 2001 and
the first forty weeks of 2000 are as follows:
August 5, Restaurants Restaurants October 29,
2001 Opened Closed 2000
----------------------------------------------------------------
Shoney's
Company-owned 218 - 27(1) 245
Franchised 195 2(1) 21 214
----------------------------------------------------------------
413 2 48 459
================================================================
Captain D's
Company-owned 352 1 9(2) 360
Franchised 212 8(2) - 204
----------------------------------------------------------------
564 9 9 564
================================================================
August 6, Restaurants Restaurants October 31,
2000 Opened Closed 1999
----------------------------------------------------------------
Shoney's
Company-owned 254 - 13(3) 267
Franchised 229 12(3) 41 258
----------------------------------------------------------------
483 12 54 525
================================================================
Captain D's
Company-owned 362 1 1 362
Franchised 203 - 2 205
----------------------------------------------------------------
565 1 3 567
================================================================
(1) Includes two restaurants sold to franchisees
(2) Includes six restaurants sold to franchisees
(3) Includes twelve restaurants sold to franchisees
20
Revenues for the third quarter of 2001 declined $11.2 million, or 6.5%, to
$160.8 million, as compared to revenues of $172.0 million in the third
quarter of 2000. Revenues for the first forty weeks of 2001 declined $36.0
million, or 6.4%, to $524.5 million, as compared to revenues of $560.5
million in the first forty weeks of 2000.
The components of the change in consolidated revenues are summarized as
follows:
Quarter Ended Forty Weeks Ended
($ in millions) August 5, 2001 August 5, 2001
-------------- -----------------
Restaurant revenue $ (12.7) $ (37.1)
Other sales 0.3 0.2
Franchise revenue (0.8) (2.0)
Other income 2.0 2.9
-------------- -----------------
$ (11.2) $ (36.0)
============== =================
The decline in restaurant revenue during the third quarter and first forty
weeks of 2001, when compared to the third quarter and first forty weeks of
2000, was principally due to a net decline in the number of restaurants in
operation, the decline in overall comparable store sales 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 forty
weeks of 2001, 25 Shoney's Restaurants and three Captain D's restaurants were
closed, one Captain D's restaurant was opened, and two Shoney's Restaurants
and six Captain D's restaurants were sold to franchisees. The table below
presents comparable store sales for Company-owned restaurants for the third
quarter and first forty weeks of 2001:
Quarter Ended Forty Weeks Ended
August 5, 2001 August 5, 2001
-------------- -----------------
Shoney's Restaurants (0.8)% (1.6)%
Captain D's (4.1)% (3.2)%
Combined (2.3)% (2.4)%
Franchise revenues decreased $0.8 million and $2.0 million during the third
quarter and first forty weeks of 2001, respectively, when compared to the
same period last year. The decrease in franchise revenue was primarily the
result of a net decline of 63 Shoney's franchise restaurants since the
beginning of fiscal 2000 and the receipt of fees during the third quarter of
2000 from a franchisee in exchange for termination of several franchise
agreements.
Other income increased $2.0 million and $2.9 million during the third quarter
and first forty weeks of 2001, respectively, when compared to the same period
in 2000. The increase in other income during the third quarter and first
forty weeks of 2001 was primarily the result of higher gains from asset sales
when compared to the prior year and higher rental income. The principal
components of other income for the third quarter of 2001 were net gains on
asset sales ($3.5 million), interest and other income ($0.1 million) and
rental income ($0.4 million). For the first forty weeks of 2001, the
principal components of other income were net gains on asset sales ($8.6
million), interest and other income ($0.3 million) and rental income ($1.5
million).
21
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 Forty Weeks Ended
August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
Food and supplies 33.6% 34.9% 34.1% 34.8%
Restaurant labor 31.0% 31.7% 31.5% 30.9%
Operating expenses 21.3% 22.1% 22.2% 21.9%
-------------- -------------- -------------- --------------
Total cost of sales 85.9% 88.7% 87.8% 87.6%
============== ============== ============== ==============
Fluctuations in other income year-to-year affect the consolidated costs and
expenses when stated as a percentage of sales. Excluding the effects of
other income, food and supply costs, as a percentage of revenues, decreased
0.8% and 0.5% in the third quarter and first forty weeks of 2001,
respectively, when compared to the prior year. The decrease in food and
supply costs in the third quarter of 2001, as a percentage of revenues, was
primarily the result of lower food and supply costs as a percentage of sales
in both Shoney's Restaurants and Captain D's. The decline in food cost in
Shoney's Restaurants was a combination of an emphasis by operations on
controlling costs, selective menu price increases, and the result of the
promotion during the third quarter of 2001 of the breakfast bar that
historically has lower food costs as a percentage of sales than other meal
periods. The decline in food cost in Captain D's for the first forty weeks
of 2001 compared to 2000 was primarily the result of higher menu prices.
Excluding the effects of other income, consolidated restaurant labor
decreased 0.3% and increased 0.9% as a percentage of revenues in the third
quarter and first forty weeks of 2001, respectively, when compared to the
prior year. Wage rates increased during the third quarter of 2001 because of
low unemployment conditions in many markets and a very competitive restaurant
labor market. Consolidated restaurant labor declined, as a percentage of
sales in the third quarter of 2001 when compared to the third quarter of 2000,
due to labor scheduling initiatives designed to reduce labor costs as a
percentage of sales in Shoney's Restaurants. Restaurant labor increased, as
a percentage of sales, in both Shoney's Restaurants and Captain D's in the
first forty weeks of 2001 when compared to the prior year period. Restaurant
labor, as a percentage of sales, was also affected by the overall decline in
comparable store sales.
Excluding the effects of other income, consolidated operating expenses
decreased 0.6% and increased 0.3% as a percentage of total revenues in the
third quarter and first forty weeks of 2001, respectively, when compared to
the prior year. The decline in operating expenses, as a percentage of sales,
for the third quarter of 2001 when compared to the third quarter of 2000, was
the result of lower insurance and depreciation costs partially offset by
higher utility costs. The increase in consolidated operating expenses, as a
percentage of sales, for the first forty weeks of 2001 was primarily caused
by higher utilities costs and the effect of the overall decline in comparable
store revenue.
22
A summary of consolidated general and administrative expenses and interest
expense as a percentage of consolidated revenue is shown below:
Quarter Ended Forty Weeks Ended
August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
Consolidated general and
administrative expenses 6.7% 8.2% 7.9% 8.1%
Consolidated interest expense 4.8% 4.7% 5.0% 5.1%
Excluding the effects of other income, consolidated general and
administrative expenses decreased 1.5% and 0.2%, as a percentage of revenue,
in the third quarter and first forty weeks of 2001, respectively, when
compared to the same period in 2000. The decrease in general and
administrative expenses, as a percentage of sales, was primarily due to the
elimination of a $1.1 million reserve for estimated legal expenses to defend
legal claims incurred as a result of the acquisition of TPI and administrative
staff reductions.
Consolidated interest expense declined $0.5 million and $2.4 million in the
third quarter and first forty weeks of 2001, respectively, 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 periods, largely
offset by the effect of higher interest rates on the debt incurred in the
Refinancing.
The Company recorded an income tax benefit of $0.6 million and an income tax
provision of $0.2 million in the third quarter of 2001 and third quarter of
2000, respectively. During the third quarter of 2001, an adjustment was made
to the TPI purchase price allocation. As a result, deferred tax assets
related to the TPI acquisition were reduced by $0.6 million, and the
valuation allowance related to the TPI deferred tax assets was also reduced
by $0.6 million, resulting in a decrease in income tax expense. The Company
recorded an income tax benefit of $0.2 million and an income tax provision of
$0.4 million in the first forty weeks of 2001 and 2000, respectively. The
effective tax rates differ from the federal statutory rate primarily due to
goodwill amortization which is not deductible for federal income tax purposes
and an adjustment in the valuation allowance against deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of
August 5, 2001, the Company increased the valuation allowance for gross
deferred tax assets. The deferred tax asset valuation adjustment is in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), which requires that a deferred
tax asset valuation allowance be established if certain criteria are not met.
If the deferred tax assets are realized in the future, the related tax
benefits will reduce income tax expense.
23
OPERATING SEGMENTS
Shoney's Restaurants
($ in thousands except comparable Quarter Ended Forty Weeks Ended
store sales and operating data) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
Restaurant revenue $ 83,691 $ 92,163 $ 268,413 $ 293,626
Franchise revenue 1,617 2,495 5,099 7,438
Other income 3,620 331 7,605 1,507
-------------- -------------- -------------- --------------
Total Shoney's revenue 88,928 94,989 281,117 302,571
Expenses 83,528 96,889 279,748 305,518
-------------- -------------- -------------- --------------
EBIT as defined (a) $ 5,400 $ (1,900) $ 1,369 $ (2,947)
============== ============== ============== ==============
Comparable store sales decrease (b) (0.8)% (2.4)% (1.6%) (1.8)%
Operating restaurants at end
of quarter:
Company-owned 218 254
Franchised 195 229
-------------- --------------
Total 413 483
============== ==============
(a) 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.
(b) Prior year amounts have not been restated for comparable restaurants.
Shoney's concept total revenue declined $6.1 million, or 6.4%, and $21.5
million, or 7.1%, in the third quarter of 2001 and first forty weeks of 2001,
respectively, when compared to the prior year. The components of the change
in Shoney's concept revenue are summarized as follows:
Quarter Ended Forty Weeks Ended
($ in millions) August 5, 2001 August 6, 2001
-------------- -----------------
Sales from operating restaurants $ (0.7) $ (3.4)
Closed restaurants (7.8) (21.8)
-------------- -----------------
Total change in restaurant sales (8.5) (25.2)
Franchise revenue (0.9) (2.4)
Other income 3.3 6.1
-------------- -----------------
Total $ (6.1) $ (21.5)
============== =================
Revenues were significantly reduced by the closing of ten under-performing
Company-owned restaurants in 2000 and 25 additional restaurants in 2001. In
addition, twelve Company-owned restaurants were sold to franchisees in fiscal
2000 and two were sold to
24
franchisees in fiscal 2001. 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 and the decline in overall comparable
store sales. Sales and EBIT as defined for Shoney's Restaurants closed or
sold are as follows:
Quarter Ended Forty Weeks Ended
($ in thousands) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
--------------- ---------------- ----------------- -----------------
EBIT as EBIT as EBIT as EBIT as
Sales defined Sales defined Sales defined Sales defined
------ ------- ------ -------- ------- -------- ----- ---------
Stores closed or sold $2,361 $(771) $10,121 $(1,484) $17,058 $(2,878) $38,862 $(4,468)
====== ======= ======= ======== ======= ======== ======= ========
Shoney's Restaurants comparable store sales declined 0.8% in the third
quarter and 1.6% for the first forty weeks of 2001. Franchise revenue
decreased $0.9 million in the third quarter and $2.4 million for the first
forty weeks of 2001 when compared to the prior year. The decrease in
franchise revenue is primarily the result of a net decline of 63 franchise
restaurants since the beginning of the first quarter of 2000 and fees
received in the third quarter of 2000 from a franchisee in exchange for
termination of several franchise agreements. Other income increased $3.3
million in the third quarter and increased $6.1 million for the first forty
weeks, primarily due to gains on asset sales of $2.7 million and $5.1 million
in the third quarter and first forty weeks of 2001, respectively, compared to
no gains in the third quarter and first forty weeks of 2000 and higher rental
income in each period when compared to the prior year.
Expenses declined $13.4 million, or 13.8%, and $25.8 million, or 8.4%, in the
third quarter and first forty weeks of 2001, respectively, when compared to
the same period in 2000. Expenses as a percentage of revenue were 93.9% in
the third quarter of 2001 compared to 102.0% in the third quarter of 2000.
The decrease in expenses in the third quarter of 2001, as a percentage of
revenues, was the result of lower food and supply costs, restaurant labor,
operating expenses, multi unit supervisory costs and the increase in gains on
asset sales. For the forty week periods, expenses as a percentage of sales
were 99.5% in 2001 compared to 101.0% in 2000. The decrease in expenses for
the first forty weeks of 2001 when compared to the prior year, as a
percentage of sales, was the result of higher labor costs and higher
operating expenses offset by the increase in gains on asset sales.
As a result of the above, EBIT as defined increased $7.3 million and $4.3
million in the third quarter and first forty weeks of 2001, respectively,
when compared to the comparable prior year period.
During the third quarter of 2001, the Shoney's concept initiated a plan
designed specifically to improve the concept's operating cash flows. The
operating plan included further reduction in corporate office staff,
increasing the span of control for restaurant supervision, adjusting labor
schedules to reduce hourly labor, lower advertising expenditures and the
closure of certain under-performing restaurants. These initiatives did
improve cash flows in the third quarter and management believes that these
initiatives will continue to improve cash flow in the fourth quarter.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. In the event management elects to
close additional leased restaurants during 2001, the Company will incur
additional restructuring charges. The Company also may sell additional
operating restaurants to franchisees.
25
Captain D's Restaurants
($ in thousands except comparable Quarter Ended Forty Weeks Ended
store sales and operating data) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
Restaurant revenue $ 69,358 $ 73,578 $ 233,341 $ 245,240
Franchise revenue 1,319 1,271 4,480 4,185
Other income 458 35 2,412 176
-------------- -------------- -------------- --------------
Total Captain D's revenue 71,135 74,884 240,233 249,601
Expenses 66,304 69,442 221,364 228,644
-------------- -------------- -------------- --------------
EBIT as defined (a) $ 4,831 $ 5,442 $ 18,869 $ 20,957
============== ============== ============== ==============
Comparable store sales increase
(decrease) (b) (4.1)% 3.0% (3.2)% 1.8%
Operating restaurants at end
of quarter:
Company-owned 352 362
Franchised 212 203
-------------- --------------
Total 564 565
============== ==============
(a) See Note (a) "Operating Segments - Shoney's Restaurants" on page 24
hereof.
(b) Prior year amounts have not been restated for comparable restaurants.
Captain D's total revenue decreased $3.8 million, or 5.0%, and $9.4 million,
or 3.8%, in the third quarter and first forty weeks of 2001, respectively,
when compared with the comparable prior year period. The components of the
change in Captain D's concept revenue are summarized as follows:
Quarter Ended Forty Weeks Ended
($ in millions) August 5, 2001 August 5, 2001
-------------- -----------------
Sales from operating restaurants $ (2.1) $ (5.8)
Closed or sold restaurants (2.1) (6.1)
-------------- -----------------
Total change in restaurant sales (4.2) (11.9)
Franchise revenues - 0.3
Other income 0.4 2.2
-------------- -----------------
Total $ (3.8) $ (9.4)
============== =================
Revenues were reduced by closing three under-performing Company-owned
restaurants in 2000 and three under-performing restaurants in 2001.
Restaurant revenues were also reduced by the sale of six Company-owned
restaurants to a franchisee in the first quarter of 2001, unfavorable weather
conditions in many of the Company's markets in the first quarter of 2001 when
compared to the first quarter of 2000 and a decline in comparable store sales
of 4.1% and 3.2% for the third quarter and first forty weeks of 2001,
respectively. Management attributes part of the decline in comparable store
sales to price increases taken during fiscal 2000. As a result of the
continued decline in customer traffic, Captain D's began promoting certain
everyday value meals and other promotional items in an effort to reverse the
comparable store sales trends. Although comparable store sales did not
improve in the third quarter of 2001 compared to the second quarter of 2001,
substantial improvement was realized in the last few weeks of the third
quarter and continued into the early weeks of the fourth quarter.
26
Sales and EBIT as defined for Captain D's restaurants closed or sold are as
follows:
Quarter Ended Forty Weeks Ended
($ in thousands) August 5, 2001 August 6, 2000 August 5, 2001 August 6, 2000
-------------- -------------- -------------- --------------
EBIT as EBIT as EBIT as EBIT as
Sales defined Sales defined Sales defined Sales defined
----- ------- ----- ------- ----- ------- ----- -------
Stores closed or sold $ 0 $ (16) $2,083 $ 35 $971 $ (89) $7,026 $213
===== ======= ====== ======= ===== ======= ====== =======
Franchise revenue was basically unchanged and increased $0.3 million in the
third quarter and first forty weeks of 2001, respectively, 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
first quarter of 2001. Other income increased $0.4 million in the third
quarter and $2.2 million in the first forty weeks of 2001, respectively, when
compared to the comparable prior year periods, primarily due to $0.2 million
of gains on asset sales in the third quarter of 2001 compared to no gains in
the third quarter of 2000 and $1.9 million of gains on asset sales in the
first forty weeks of 2001 compared to no gains in the first forty weeks of
2000.
Expenses decreased $3.1 million, or 4.5%, and $7.3 million, or 3.2%, in the
third quarter and first forty weeks of 2001, respectively, when compared to
the same periods in 2000. Expenses as a percentage of sales were 93.2% in the
third quarter of 2001 compared to 92.7% in the third quarter of 2000. As a
percentage of sales, decreases in food and supply costs in the third quarter
were more than offset by increases in restaurant labor, operating expenses
and administrative costs. For the forty week periods, expenses as a
percentage of sales were 92.1% in 2001 compared to 91.6% in 2000. For the
first forty weeks of 2001, as a percentage of sales, lower food and supply
costs were offset by higher labor costs, higher operating expenses and higher
administrative costs.
As a result of the above, EBIT as defined decreased $0.6 million and $2.1
million in the third quarter and first forty weeks of 2001, respectively,
when compared to the comparable 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 have historically been available to cover short
term working capital requirements. However, in 2001, current liabilities
include $129.2 million of current maturities of long-term debt. This current
portion of long-term debt includes $120.3 million of Captain D's term notes
and revolver that mature on December 31, 2001 (see Risk Factors). Cash
provided by continuing operating activities declined by $8.5 million in the
first forty weeks of 2001 compared to the first forty weeks of 2000. The
decline in cash provided by continuing operating activities in 2001, when
compared to 2000, was primarily the result of the decline in operating income
from restaurant operations, lower depreciation and amortization and the
decline in amortization of deferred charges and other non-cash charges. The
decline in amortization of deferred charges and other non-cash charges is
primarily due to lower, non-cash interest expense in 2001 on the Company's
subordinated zero coupon convertible debentures. Cash used by continuing
operating activities was positively affected by $14.9 million use of cash by
operating assets and liabilities during the first forty weeks of 2001
compared to a use of $17.5 million in the first forty weeks of 2000. The use
of cash by operating assets and liabilities in the first forty weeks of 2001
was primarily the result of cash required for a reduction of accounts
payable, accrued expenses and other long-term liabilities. The use of cash
by operating assets and liabilities in the first forty weeks of 2000 was
primarily the result of a decline in accrued expenses and other long-term
liabilities. Cash provided by discontinued operating activities increased by
$0.6 million in 2001 when compared to 2000. The increase in cash provided by
discontinued operating activities was primarily the result of lower inventory
and an increase in accounts payable.
27
Cash provided by continuing investing activities in the first forty weeks of
2001 was $9.9 million. During 2001, the Company received $21.7 million in
cash proceeds from the sale of closed and operating restaurant properties.
Cash used for property and equipment additions was $10.8 million. Cash used
by other assets of $1.0 million was primarily the result of $3.0 million of
cash deposits into a cash collateral account as required by the Shoney's Line
of Credit partially offset by the redemption of certain insurance policies
for their cash surrender values. Cash provided by continuing investing
activities in the first forty weeks of 2000 was $5.7 million. During the
first forty weeks of 2000, the Company received $22.5 million in cash
proceeds from the sale of closed and operating restaurant properties. Cash
used for property and equipment additions in the first forty weeks of 2000
was $16.8 million.
Cash provided by discontinued investing activities was $8.1 million in 2001
compared to cash provided by discontinued investing activities of $11.8
million in 2000. Cash provided by discontinued investing activities in 2001
was primarily the result of the sale of COI during the third quarter. Cash
provided by discontinued investing activities in 2000 of $11.8 million was
primarily the result of the sale of the casual dining concept during the
second quarter of 2000.
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 41 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 continuing financing activities was $17.4 million in the first
forty weeks of 2001 compared to a use of cash of $37.9 million in the first
forty weeks 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 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 $77.0 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 $83.4
million of payments under the Shoney's Line of Credit, $7.3 million of
payments on Industrial Revenue Bonds and other debt and $5.0 million of
payments under the Captain D's revolver. Financing activities for 2001 also
include $1.5 million of payments for debt issue costs. Cash used by
discontinued financing activities was $5.8 million in 2001 and is primarily
due to a reduction in debt outstanding at COI.
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 and Captain D's) to be separately financed. As a result of the
28
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 services.
The Company's senior loan agreements (consisting of the Shoney's Line of
Credit, the Captain D's 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 had 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 August 5, 2001, the Company had sold $11.8
million of the designated collateral properties resulting in $30.0 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 $23.5 million, resulting in approximately $6.5
million of availability of which none was drawn at August 5, 2001. Subsequent
to the Refinancing, liquidity for the Shoney's segment was enhanced by
proceeds of $15.0 million from certain asset sales that the Company was
allowed to retain for its working capital needs. The terms of the Shoney's Line
of Credit allowed the Company to use the cash proceeds from the sale of COI
towards the $15.0 million retention for working capital and required the
Company, at its option, to apply the excess ($2.8 million) to either repay
debt and permanently reduce the Shoney's Line of Credit or cash collateralize
the line. As of August 5, 2001, the Company had sold and retained in the
business $15.0 million of asset sale proceeds since September 6, 2000 and had
cash collateralized the line of credit in the amount of $3.0 million. At
August 5, 2001 the Company held $2.5 million of asset sale proceeds that was
funded into the cash collateral account on August 9, 2001. As of September
14, 2001, there were no drawings under the Shoney's Line of Credit, resulting
in $6.5 million of availability. Following the Company's retention of $15.0
million from 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. Also, following
retention of $15.0 million from asset sales, the Company's only current
sources of liquidity for the Shoney's concept will be from the availability
under the Shoney's Line of Credit, operating cash flows, payments under the
tax sharing agreement with Captain D's and payments for administrative
services from Captain D's. If the Shoney's segment's operating trends vary
from those forecasted, the liquidity, financial condition and results of
operations will be materially adversely affected.
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 $4.9 million resulting in availability of approximately $15.1
million, of which $5.3 million was drawn at August 5, 2001.
Financing activities in the first forty weeks of 2000 included $48.8 million
of payments on long-term debt and capital lease obligations, long-term
borrowings under the Company's line of credit of $18.5 million, net payments
on short-term debt of $2.2 million and cash required for debt issue costs and
litigation settlements of $5.4 million.
29
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
did not result in sales increases and there can be no assurance that the
current programs will be successful in the future. However, comparable store
sales for the third quarter of 2001 only declined 0.8% and as of September 9,
2001 (five weeks into the fourth quarter) comparable store sales were
positive. In recent years, 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. During the third quarter of 2001, the
Shoney's concept initiated a plan designed specifically to improve the
concept's operating cash flows. The operating plan included further
reduction in corporate staff, increasing the span of control for restaurant
supervision, adjusting labor schedules to reduce hourly labor, lower
advertising expenditures and the closure of certain under-performing
restaurants. These initiatives did result in improved margins during
the third quarter of 2001 and management expects the margin improvement
to continue into the fourth quarter of 2001. The Company does not expect
to be able to further 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.
Based on current operating results and forecasted operating trends, it is
probable that a covenant violation will occur in November 2001 under the
Shoney's Mortgage Financing debt agreements. The Company has available to it
remedies which may prevent probable covenant violations. Alternatively,
management believes that loan covenant modifications or waivers, if required,
could be obtained. Potential remedies available to the Company which may
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. No
assurance can be given, however, that these potential remedies will prevent
probable covenant violations.
In addition, since May 21, 2001, 25 of the restaurants that the Company closed
("Closures") secure the borrowings under the Shoney's Mortgage Financing.
When the units were closed, it was the intention of the Company to sell the
properties and apply the proceeds to indebtedness under the Shoney's Mortgage
Financing. The Company received preliminary verbal approval from the Shoney's
Mortgage Financing lender for the Closures, with a further agreement that, in
addition to the debt reduction, the lender would accept a one percent (1%)
prepayment penalty with respect to the debt prepaid under the Shoney's
Mortgage Financing.
To date, the Company has not sold or disposed of any of the closed properties
that secure the Shoney's Mortgage Financing. The Company presently has three
of the properties under contract to sell. The Shoney's Mortgage Financing loan
agreements provide that each property must be continuously operated, excepting
a 120 day period every three years. Some of the closed units will not be sold
within that 120 day period. Absent a waiver or forbearance from the Shoney's
Mortgage Financing lender, the Closures would result in a default under the
Shoney's Mortgage Financing as early as September 18, 2001.
30
The Company has been in discussions with the Shoney's Mortgage Financing lender
and expects to receive agreements that the Closures will not be deemed a default
under the Shoney's Mortgage Financing loan documents. The Company further
expects the agreements to provide for the lender to forbear through March 14,
2002 from exercising any rights that it might have under the Shoney's Mortgage
Financing loan documents resulting from the Closures. No assurances can be
given that the properties will be sold on or before March 14, 2002 or that the
Shoney's Mortgage Financing lenders would agree to additional waivers or
forbearances. A default under the Shoney's Mortgage Financing loans would
allow the lenders to accelerate payment of the loans and would have a material
adverse effect upon the Company's liquidity and financial position.
Based on current operating results and forecasted operating trends, it is
probable that a financial covenant violation will occur under the Captain D's
Facility after October 28, 2001, the end of the current fiscal year. If the
covenant violation were to occur, however, it would not be determinable until
approximately when the total indebtedness under the Captain D's Facility
becomes due. By that time, the Company expects to refinance this indebtedness.
Accordingly, the Company does not believe that a covenant violation will cause
additional material adverse consequences to the Company given the fact that the
indebtedness matures on December 31, 2001. The Company can give no assurances
that this indebtedness will be refinanced by this date. Without such
refinancing, the Company's financial position and liquidity will be materially
and adversely affected.
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 prevent covenant violations or obtain modifications, the
Company's financial condition, results of operations and liquidity would be
materially adversely affected. The Company was in compliance with its financial
covenants at the end of the third quarter of 2001.
The Company continues to focus on improving its comparable store sales,
controlling food and labor costs, reducing general and administrative
expenses, selling closed restaurant properties, and increasing operating cash
flows. During the third quarter of 2001, operating margins improved in the
Shoney's Restaurants concept. Unless the Company's efforts to increase
comparable store sales in its Shoney's concept and to maintain the
improvement in Shoney's operating margins are successful, the Company could
continue to experience negative operating cash flows from the Shoney's
concept in the future.
31
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. See Exhibit Index immediately following the signatures
hereto.
(b) Reports on Form 8-K. The Company filed a Form 8-K dated June 11,
2001 with the Commission on June 26, 2001 to report pursuant to Item 2 the
sale by the Company of Commissary Operations, Inc. The following pro forma
financial information was filed pursuant to Item 7 of Form 8-K:
(1) Unaudited Pro Forma Consolidated Condensed Balance Sheet at
February 18, 2001;
(2) Unaudited Pro Forma Consolidated Condensed Statement of
Operations for the Fiscal Year Ended October 29, 2000;
(3) Unaudited Pro Forma Consolidated Condensed Statement of
Operations for the Sixteen Weeks Ended February 18, 2001; and
(4) Notes to Unaudited Pro Forma Consolidated Condensed
Financial Statements.
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.
SHONEY'S, INC.
Date: September 14, 2001 By: /s/ V. Michael Payne
-------------------------
V. Michael Payne
Chief Financial Officer,
Principal Financial and Chief
Accounting Officer
32
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Distribution Service Agreement, entered into as of
November 18, 1999 and effective as of November 28,
1999, by and between Commissary Operations, Inc.
and Captain D's, Inc.
10.2 Modification Agreement dated as of June 11, 2001 by
and between Captain D's, Inc. and Commissary
Operations, Inc.
10.3 Customized Distribution Service Agreement, entered
into as of October 23, 2000 and effective as of
October 30, 2000, by and between Commissary
Operations, Inc. and Shoney's Restaurants.
10.4 Modification Agreement dated as of June 11, 2001 by
and between Shoney's, Inc. and Commissary
Operations, Inc.
10.5 Stock Purchase Agreement, dated May 15, 2001, by
and between COI Acquisition Company and Shoney's,
Inc., filed as Exhibit 2 to the Company's Form 8-K
dated June 11, 2001, filed with the Commission on
June 26, 2001, and incorporated herein by this
reference.
10.6 Severance Agreement dated as of June 19, 2001, by
and between J. Michael Bodnar and Shoney's, Inc.
10.7 Agreement dated as of June 22, 2001, by and between
Shoney's, Inc. and V. Michael Payne
33