UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 28, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-4377
SHONEY'S, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0799798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1727 ELM HILL PIKE, NASHVILLE, TN 37210
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 391-5201
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $1 per share
Common Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements in Part III of this Form 10-K or any amendment to Form
10-K. [X]
As of February 1, 2002, there were 49,189,709 shares of Shoney's, Inc.,
$1 par value common stock held by non-affiliates with an aggregate market
value of $16,626,122.
As of February 1, 2002, there were 52,031,248 shares of Shoney's, Inc.,
$1 par value common stock outstanding.
INDEX
Page
Referenced
Form 10-K
---------
PART I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Item 4A. Executive Officers of the Registrant 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 52
PART III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners
and Management 59
Item 13. Certain Relationships and Related Transactions 60
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 61
Signatures 63
The forward-looking statements included in this Annual Report on Form 10-K
relating to certain matters involve risks and uncertainties, including the
ability of management to successfully implement its strategy for improving
Shoney's Restaurants performance, the ability of management to effect asset
sales consistent with projected proceeds and timing expectations, the results
of pending and threatened litigation, adequacy of management personnel
resources, shortages of restaurant labor, commodity price increases, product
shortages, adverse general economic conditions, adverse weather conditions
that may affect the Company's markets, turnover and a variety of other
similar matters. Forward-looking statements generally can be identified by
the use of forward-looking terminology such as "may", "will", "expect",
"intend", "estimate", "could", "anticipate", "believe", or "continue" (or the
negative thereof) or similar terminology. Actual results and experience could
differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements as a result of a number
of factors, including but not limited to those discussed in Part II, Item 7
of this Annual Report on Form 10-K under the caption "Risk Factors" herein.
Forward-looking information provided by the Company pursuant to the safe
harbor established under the Private Securities Litigation Reform Act of 1995
should be evaluated in the context of these factors. In addition, the Company
disclaims any intent or obligation to update these forward-looking
statements.
PART I
ITEM 1. BUSINESS.
As of October 28, 2001, Shoney's, Inc., itself or through certain wholly-
owned subsidiaries (collectively, in this Annual Report on Form 10-K, the
"Company"), operated and franchised a chain of 951 restaurants in 27 states.
The Company is a diversified food service chain that consists of Shoney's
Restaurants and Captain D's restaurants. Shoney's Restaurants are family
dining restaurants offering full table service and a broad menu, and Captain
D's are quick-service restaurants specializing in seafood. The Company's
fiscal year ends on the last Sunday in October. Fiscal year 1999 included 53
weeks compared to 52 weeks for fiscal years 2000 and 2001. All references
herein to particular years refer to the Company's fiscal year unless
otherwise noted.
RESTAURANT CONCEPTS
Shoney's Restaurants
Shoney's Restaurants, which began operation in 1952, are full-service, family
dining restaurants, which also feature an all you care to eat food, soup and
salad buffet in addition to a cook-to-order menu. The restaurants generally
are open 16 hours each day except Christmas and serve breakfast, lunch and
dinner. At October 28, 2001, there were 389 Shoney's Restaurants located in
22 states. Of these, 194 were Company-owned restaurants and 195 were
franchised restaurants. The menu is diversified to appeal to a broad spectrum
of guests' tastes and includes traditional items such as hamburgers,
sandwiches, chicken, steak, seafood and desserts. Selections range in menu
price from $2.99 to $10.99. The average guest check was $7.00 for Company-
owned units in 2001, compared to $6.93 in 2000 and $6.58 in 1999.
In the third quarter of 2001, the Company implemented a strategy to improve
operating cash flows and return the concept to its traditional image. The
Company is executing this strategy by focusing on its core markets,
highlighting the food buffet offerings, enhancing food quality and customer
service and re-marketing the brand.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. This process resulted in the closure of 45 Company-owned
Shoney's Restaurants during 2001. In addition to these closings, the Company
also sold six Shoney's Restaurants to franchisees.
During 2001, comparable restaurant sales declined 1.0% for all Company-owned
Shoney's Restaurants open the entire year. This decline included the effects
of a menu price increase of 4.6%. Average sales volumes for Company-owned
units open the entire year were $1,526,000 in 2001, compared to $1,475,000 in
2000 and $1,497,000 in 1999. Shoney's Restaurants generally have between 120
and 180 seats and employ approximately 65 people, including management
personnel. Please refer to Note 17 of the Notes to Consolidated Financial
Statements for certain segment financial information.
Captain D's
Captain D's restaurants, which began operation in 1969, are quick-service
seafood restaurants which offer in-store, carryout or drive-thru service.
They generally are open seven days each week from 10:45 a.m. until 11 p.m.
and serve lunch and dinner. There were 342 Company-owned and 220 franchised
Captain D's restaurants located in 22 states at October 28, 2001. The typical
Captain D's restaurant has 90 seats and employs approximately 20 people,
including management personnel. Captain D's menu includes a variety of
broiled, fried, and baked fish and shrimp dishes,
1
stuffed crab, chicken and a variety of side items including corn, baked
potatoes, coleslaw, tossed salads, hushpuppies and desserts. Entree
selections range in menu price from $2.99 to $7.99. The average guest check
for Company-owned units was $5.00, $4.87 and $4.71 in 2001, 2000 and 1999,
respectively.
Captain D's has developed a new wharf-side look that lends itself to a more
comfortable decor when compared to the typical quick-service look. The
Montgomery, Alabama; Jackson, Mississippi and West Virginia markets were
selected to evaluate the wharf-side exterior and interior package in their
entirety. The employees were retrained with the focus on service and food
quality. New uniforms, music, the Coastal Classics menu and televisions were
also added. Some of the interior remodels were modified to provide drink
stations in the dining rooms to save on labor and give a more customer-friendly
feeling. Captain D's is exploring ways to reduce the cost of the remodels
that do not affect the customer appeal yet provide a higher return on
investment.
Captain D's opened its first "D's Express" in the fourth quarter of 2001.
The D's Express is a smaller square foot prototype that can be located at the
end of a strip center shopping area. Management believes this smaller
prototype will allow expansion in existing markets to achieve greater market
penetration and a higher sales to investment ratio.
Training is a continued focus for Captain D's. During 1999, Captain D's
implemented D's University, which teaches operational procedures, human
resource issues, training modules of store procedures and other business
tools. Since its inception, 521 employees have attended D's University.
During 2000, Captain D's partnered with an outside firm to assist in
developing a computer-based training program for all on-site store training
modules. This is an interactive training tool that is intended to ensure
consistent and monitored training for all levels of the workforce, from entry
level through management. Management believes a focus on training provides
better service to the customer and reduces turnover in Captain D's
restaurants. This training tool has been installed in all Company
restaurants and 80% of the current employees have trained on the program
orientation module. The hospitality and food preparation module is installed,
and about 79% of the current employees have completed these modules.
Captain D's management continually monitors food and labor costs. The Store
Waste Attack Tool ("SWAT"), a theoretical food cost system, was implemented
in 1999 and continues to be important in controlling waste and reducing food
cost in the restaurant. Sales forecasting is used to project the number of
labor hours needed in the restaurant to serve the guests properly.
Management on a daily basis monitors hours worked to hours projected.
Comparable store sales for Company-owned units decreased 2.9% in 2001, which
included the effects of a 3.6% menu price increase. The average sales volume
for Company-owned Captain D's restaurants open the entire year was $856,000
in 2001, compared to $873,000 in 2000 and $857,000 in 1999. Please refer to
Note 17 of the Notes to Consolidated Financial Statements for certain segment
financial information.
BUSINESS DEVELOPMENT AND FRANCHISING
The Company's current business plan for the Shoney's concept includes
focusing its available personnel and capital resources on improving the
operations of its existing store base. The Company closed 45 under-performing
Shoney's Restaurants and sold six Company-owned Shoney's Restaurants to
franchisees during 2001. These closed properties, as well as real estate from
prior restaurant closings and other surplus properties and leasehold
interests, have been actively marketed. The Company continually evaluates the
operating performance of its restaurants and may close additional restaurants
if, in management's opinion, operating results cannot be improved within what
management considers a reasonable period of time. In addition to store
closings, the Company may choose to sell certain units to franchisees.
Captain D's closed six under-performing Captain D's restaurants and sold 14
Company-owned Captain D's restaurants to franchisees during 2001. The
Company's lending agreements, under certain circumstances, permitted proceeds
from the sale of Company
2
restaurants to franchisees and surplus properties to be retained and used in
the Company's operations.
The Company franchises both Shoney's and Captain D's restaurants. Franchise
agreements generally have a term of 20 years and require payment of an
initial franchise fee and a royalty fee based on a percentage of the
franchised restaurant's sales. Franchise agreements also require restaurants
to conform to the Company's standards for appearance, service, food quality
and menu content.
The following table presents the change in the number of restaurants, both
Company-owned and franchised, during 2001, by restaurant concept:
AT OCTOBER 29, 2000 OPENINGS CLOSINGS AT OCTOBER 28, 2001
------------------- -------- -------- -------------------
COMPANY FRANCHISE TOTAL COMPANY FRANCHISE COMPANY FRANCHISE COMPANY FRANCHISE TOTAL
------- --------- ----- ------- --------- ------- ---------- ------- --------- -----
Shoney's 245 214 459 - 7(A) (51)(A) (26) 194 195 389
Captain D's 360 204 564 2 16(B) (20)(B) (0) 342 220 562
--- --- ----- - -- ---- ---- --- --- ---
605 418 1,023 2 23 (71) (26) 536 415 951
=== === ===== = == ==== ==== === === ===
(A) Includes 6 Company-owned restaurants sold to franchisees.
(B) Includes 14 Company-owned restaurants sold to franchisees.
ADVERTISING AND MARKETING
The Company's marketing strategies continue to include a focus on advertising
designed to increase guest frequency and new guest trial. The marketing and
advertising strategies for the Shoney's Restaurant concept revolve around
utilization of television and radio advertising in the Company's larger
markets to attain the greatest media efficiency. In markets in which the
number of Shoney's Restaurants will not support a large media budget,
marketing and advertising strategies rely more on local advertising (i.e.,
contact development with local hotels, civic organizations and tourism
groups, advertising in local newspapers and sponsorship of local events). The
Company utilizes this same general advertising strategy with its Captain D's
concept, except that Captain D's historically has more heavily utilized
newspaper and promotional coupons to support its marketing activities.
Captain D's also strives to maximize its advertising during the Lenten season
to leverage its market position during this season in which there is an
increased demand for fish.
RAW MATERIALS SOURCES AND AVAILABILITY
Prior to June 11, 2001, the Company owned Commissary Operations, Inc.,
("COI"), a food service business that manufactures and distributes food and
supplies to Company-owned restaurants, certain franchised restaurants and
other customers. 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 delivery of essentially all of its food
products. Prior to and after the sale of COI, both restaurant concepts
controlled the purchasing and delivery to COI of critical food and supply
items. The Company believes that essential supplies and raw materials are
available from several sources, and the Company is not dependent upon any
single source of supplies or raw materials. The Company's ability to maintain
consistent quality throughout its restaurant system depends in part upon its
ability to acquire food products and related items from reliable sources.
When the supply of certain products is uncertain or prices are expected to
rise significantly, the Company may enter into purchase contracts or purchase
bulk quantities for future use. The Company has purchase commitments for
terms of one year or less for food and supplies with a variety of vendors.
Such commitments generally include a pricing schedule for the period covered
by the agreements.
The Company has established long-term relationships with key seafood vendors
and brokers. Adequate alternative sources of supply are believed to exist for
substantially all products. While the supply and availability of certain
seafood
3
species is volatile, the Company believes that it has the ability to identify
and access alternative seafood products as well as the ability to adjust
menus if necessary. 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.
SERVICE MARKS
The Company has registered the names "Shoney's", and "Captain D's", their
respective logos and certain related items and slogans as trademarks and/or
service marks with the United States Patent and Trademark Office and certain
foreign countries. The Company regards its service marks as having
significant value and being an important factor in the development and
marketing of its restaurants. The Company's policy is to pursue registration
of its service marks and trademarks whenever possible and to oppose
vigorously any infringement of its service marks and trademarks.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality. The Company competes with a number of
national and regional restaurant chains as well as locally owned restaurants
that specialize in the sale of seafood, sandwiches and other prepared foods.
The restaurant business is often affected by changes in consumer taste;
national, regional or local economic conditions; demographic trends; traffic
patterns and the type, number and location of competing restaurants. In
addition, factors such as inflation, increased food, labor and benefits costs
and the lack of experienced management and hourly employees may adversely
affect the restaurant industry in general and the Company's restaurants in
particular.
SEASONALITY
The Company's business is moderately seasonal. Restaurant sales are
generally higher in the second and third fiscal quarters (March through
August) than in the first and fourth fiscal quarters (September through
February). Additionally, severe weather, storms and similar conditions may
impact sales volumes seasonally in some operating regions. Restaurant
management labor, overhead, occupancy and other operating costs, which remain
relatively constant, have a disproportionately greater negative effect on
operating results during quarters with lower restaurant sales.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations have not
historically had a significant impact on the operations of the Company;
however, the Company cannot predict the effect on its operations of possible
future legislation of environmental regulations.
RESEARCH AND DEVELOPMENT
While research and development are important to the Company, these
expenditures have not been material due to the nature of the restaurant and
retail industry.
EMPLOYEES
At December 23, 2001, the Company employed approximately 15,000 persons. A
substantial number of the Company's restaurant personnel are employed on a
part-time basis. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be
good.
4
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Company's
restaurant and other properties as of October 28, 2001:
NUMBER OF PROPERTIES(1)
-----------------------
USE TOTAL OWNED LEASED
--- ----- ----- ------
Offices (2) 2 2 0
Shoney's Restaurants 194 130 64
Captain D's Restaurants 342 234 108
--- --- ---
538 366 172
=== === ===
(1) In addition to the properties set forth in the table above, the
Company owns or leases approximately 82 properties that are in turn
leased to others, owns 35 parcels of surplus property (that include
one former corporate office property), and leases 27 properties that
are vacant.
(2) The Company's principal office in Nashville, Tennessee consists of
two buildings of approximately 128,000 square feet on nine acres of
land owned by the Company.
The following table sets forth the number of restaurants owned and/or
operated by the Company, by state, as of October 28, 2001:
COMPANY-OWNED RESTAURANTS BY STATE
SHONEY'S CAPTAIN D'S TOTAL
-------- ----------- -----
Alabama 24 57 81
Arkansas 3 11 14
Florida 12 16 28
Georgia 12 47 59
Illinois 5 5
Indiana 8 8
Kentucky 18 17 35
Louisiana 23 23
Maryland 1 1
Mississippi 15 17 32
Missouri 9 17 26
North Carolina 8 7 15
Ohio 4 21 25
Oklahoma 12 12
South Carolina 8 18 26
Tennessee 30 63 93
Texas 8 8
Virginia 7 4 11
West Virginia 20 14 34
--- --- ---
Total 194 342 536
=== === ===
LEASES
Most of the leases for the Company's restaurant properties are for
periods of approximately 15 years, usually with renewal options ranging from
5 to 15 years. They provide for minimum rentals, totaling approximately $6.5
million in 2001, net of sublease rentals, plus an amount equal to a
percentage of sales, generally 3% to 6% in excess of an agreed sales volume.
The Company also is required to pay property taxes, maintenance and insurance
under most of the leases. Approximately 120 of the restaurant leases (70%)
expire prior to October 31, 2006; however, approximately 105 of these
restaurant leases (88% of the 120 leases) provide for renewal options. Notes
8 and 10 on pages 37-42 and 46 of the Notes to Consolidated Financial
Statements of Item 8 in this Annual Report on Form 10-K are incorporated
herein by reference.
5
ITEM 3. LEGAL PROCEEDINGS
Although the Company is a party to legal proceedings incidental to its
business, in the opinion of management, the ultimate liability with respect
to these actions will not materially affect the operating results or the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2001, there were no matters
submitted to a vote of security holders.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company, in accordance with General Instruction G(3) to Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K, 17 C.F.R. ss. 229.401,
furnishes the following information with regard to its executive officers as
an additional item in Part I of this Annual Report on Form 10-K. The
following officers are those that the Company currently deems to be
"executive officers", as defined by the Securities and Exchange Commission.
NAME OFFICE AGE
---- ------ ---
William M. Wilson Chairman of the Board and President 53
V. Michael Payne Chief Financial Officer 50
F.E. McDaniel, Jr. Secretary, Treasurer and General Counsel 46
Bernard W. Gray Chief Information Officer 54
Richard K. Arras President and Chief Executive Officer - Shoney's 50
Restaurants
Ronald E. Walker President and Chief Operating Officer - 51
Captain D's, Inc.
Although all executive officers are employees at will of the Company,
each executive officer of the Company generally is elected each year for a
term of one year.
MR. WILSON has served as Chairman of the Board since May 8, 2001, and
additionally as President since June 19, 2001. Mr. Wilson, since 1984, has
served as President of Cherokee Equity Corporation, an investment holding
company. Since 1979, Mr. Wilson has also served as President of Cherokee
Properties, Inc., a real estate investment company.
MR. PAYNE has served as Chief Financial Officer since June 2001 and
previously as Senior Vice President and Controller since March 1998. He was
initially employed with the Company in May 1973 and, since that time, has
served the Company in various capacities including staff accountant, chief
accountant and payroll supervisor, and corporate controller. In 1992, he was
promoted to Vice President and Controller and served the Company in that
capacity until July 1995. From July 1995 until March 3, 1998, Mr. Payne was
not employed with the Company. He served as a financial consultant from July
1995 to June 1996 and served as Director of Accounting and Financial
Reporting for Coventry Corporation from June 1996 to March 2, 1998.
MR. MCDANIEL has served in various positions since joining the Company
in 1981. He was elected Assistant Secretary in December 1984 and Secretary in
August 1988 and was elected to the additional position of Treasurer in
December 1992. In March 1994, he was named a Vice President of the Company
and was named Senior Vice President, Secretary and Treasurer in October 1996.
In December 1997, he was named Chief Administrative Officer, Secretary and
General Counsel. In December 1998, he was named Secretary and General
Counsel. In February 2000, he was named Vice President of Finance, and
served in that capacity until his election to the offices of Secretary,
Treasurer and General Counsel in June 2001.
6
MR. GRAY first joined the Company in April 1994 and served as Vice
President- Management Information Systems until October 1997. Mr. Gray had
formerly served as Systems Development Manager from July 1992 to April 1994
with The Park City Group. In October 1997, Mr. Gray joined Podiatry Insurance
Corporation of America as Chief Information Officer. Mr. Gray rejoined the
Company in December 1997 and was named Chief Information Officer.
MR. ARRAS joined the Company in April 2000 as President and Chief
Executive Officer of Shoney's Restaurants. Prior to joining the Company, he
served as a restaurant consultant from December 1999 through March 2000.
From October 1998 to November 1999, he served as President and Chief
Operating Officer of Cracker Barrel Old Country Store, Inc. He served as
President and Chief Operating Officer of Perkins Family Restaurants from
December 1988 to October 1998.
MR. WALKER has held various positions since joining the Company in 1980,
becoming Director of Franchise Operations for the Captain D's division in
December 1984. He was elected Vice President of Franchise Operations in
December 1986 and was named Executive Vice President - Captain D's in January
1995. In March 1996, Mr. Walker was named President of the Company's Captain
D's division. In December 1997, Mr. Walker was named President and Chief
Operating Officer of the Captain D's division, the operations of which were
placed in a wholly-owned subsidiary, Captain D's, Inc., during 2000.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock currently is traded on the Over-the-Counter
Bulletin Board under the symbol "SHOY". Prior to July 12, 2000, the common
stock was traded on the New York Stock Exchange under the symbol "SHN".
Quotations provided subsequent to July 12, 2000 reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions. The following table sets forth the high and low trading quotes
of the Company's common stock as reported by the Over-the-Counter Bulletin
Board or the New York Stock Exchange, as applicable, during each of the
fiscal quarters of the 2001 and 2000 fiscal years:
STOCK STOCK
MARKET MARKET
HIGH LOW
---- ---
2001
First Quarter 1.01 0.28
Second Quarter 1.33 0.65
Third Quarter 0.89 0.61
Fourth Quarter 0.65 0.25
2000
First Quarter 1.50 1.06
Second Quarter 1.13 0.63
Third Quarter 1.63 0.47
Fourth Quarter 1.06 0.44
There were 8,522 shareholders of record of the Company's Common Stock as of
February 1, 2002.
The Company has not paid a dividend on its common shares since 1988. The
Company currently intends to retain all earnings to support the Company's
restaurant concepts and to retire its outstanding debt obligations. The
Company's senior debt issues prohibit dividends and distributions on common
stock. See "Liquidity and Capital Resources" contained in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein and "Loan Covenants" contained in Note 8 to the Notes to
Consolidated Financial Statements herein.
8
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS)
FISCAL YEAR ENDED OCTOBER 2001 2000 1999 1998 1997
- ------------------------- ---- ---- ---- ---- ----
Revenues $ 665,508 $ 718,076 $ 857,407 $ 974,482 $ 1,028,339
Costs and expenses
Cost of sales 582,131 631,228 746,522 874,983 915,553
General and administrative 52,487 60,043 71,997 81,885 78,950
Interest expense 33,713 36,429 42,159 48,477 45,016
Litigation settlement 14,500 3,500
Impairment of long-lived assets 4,969 15,221 18,422 46,124 48,446
Restructuring expense 1,267 1,032 4,020 9,755 1,301
---------- ---------- ----------- ----------- ------------
Loss from continuing
operations before income taxes
and extraordinary gain (loss) (9,059) (25,877) (40,213) (90,242) (60,927)
Income taxes (benefit) (317) (796) (1,413) 22,832 (18,550)
---------- ---------- ----------- ----------- ------------
Loss from continuing operations
before extraordinary gain (loss) (8,742) (25,081) (38,800) (113,074) (42,377)
Discontinued operations, net of
income taxes (212) 2,251 9,973 6,785 6,666
Gain (loss) on sale of discontinued
operations, net of income taxes (3,929) 489
Extraordinary gain (loss) on early
extinguishment of debt, net of
income taxes 82,477 (1,415)
---------- ---------- ----------- ----------- ------------
Net income (loss) $ (12,883) $ 60,136 $ (28,827) $ (107,704) $ (35,711)
========== ========== =========== =========== ============
Weighted average shares outstanding
(diluted) 51,550 50,427 49,339 48,666 48,540
Per share data--diluted
Loss from continuing operations
before extraordinary gain (loss) $ (0.17) $ (0.50) $ (0.79) $ (2.32) $ (0.96)
Net income (loss) $ (0.25) $ 1.19 $ (0.58) $ (2.21) $ (0.74)
Dividends -- -- -- -- --
Total assets $ 254,257 $ 311,849 $ 382,455 $ 504,582 $ 627,087
Long-term debt and obligations
under capital leases $ 240,024 $ 263,342 $ 357,928 $ 442,293 $ 463,357
Shareholders' deficit $ (99,572) $ (85,987) $ (147,137) $ (119,487) $ (12,345)
Number of restaurants at year-end
Company-owned 536 605 629 773 867
Franchised 415 418 463 472 494
---------- ---------- ----------- ----------- -----------
Total restaurants 951 1,023 1,092 1,245 1,361
========== ========== =========== =========== ===========
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto. 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.
Fiscal 1999 consisted of 53 weeks and fiscal 2001 and 2000 consisted of 52
weeks.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED REVENUES
Consolidated revenues for the last three fiscal years are as follows:
FISCAL YEAR ENDED
-----------------------------------------------
(IN MILLIONS) OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2000 1999
------------ ----------- -----------
Net sales $ 640.7 $ 694.5 $ 821.8
Franchise fees 12.6 14.5 15.2
Other income 12.2 9.1 20.4
------- ------- -------
$ 665.5 $ 718.1 $ 857.4
======= ======= =======
Changes in restaurants for 2001 and 2000 are as follows:
OCTOBER 28, RESTAURANTS RESTAURANTS OCTOBER 29, RESTAURANTS RESTAURANTS OCTOBER 31,
2001 OPENED CLOSED 2000 OPENED CLOSED 1999
-----------------------------------------------------------------------------------
Shoney's
Company-owned 194 - 51(1) 245 - 22(3) 267
Franchised 195 7(1) 26 214 14(3) 58 258
--- -- -- ----- -- -- -----
389 7 77 459 14 80 525
Captain D's
Company-owned 342 2 20(2) 360 1 3 362
Franchised 220 16(2) 0 204 2 3 205
--- -- -- ----- -- -- -----
562 18 20 564 3 6 567
--- -- -- ----- -- -- -----
951 25 97 1,023 17 86 1,092
=== == == ===== == == =====
(1) Includes 6 restaurants sold to franchisees
(2) Includes 14 restaurants sold to franchisees
(3) Includes 12 restaurants sold to franchisees
10
Consolidated revenues in 2001 declined $52.6 million or 7.3%. Consolidated
revenues in 2000 declined $139.3 million or 16.2%. The components of the
change in consolidated revenues during 2001 and 2000 are summarized as
follows:
(IN MILLIONS)
2001 2000
---- ----
Sales from restaurants opened or temporarily closed $ 3.3 $ (0.5)
Higher menu prices 24.6 36.1
Sales at prior year prices (36.3) (36.5)
Closed restaurants (46.0) (112.0)
Restaurant sales for fifty-third week (-) (12.9)
Other revenues 0.6 (1.5)
Franchise revenues (1.9) (0.7)
Other income 3.1 (11.3)
-------- ---------
Total $ (52.6) $ (139.3)
======== =========
Net Sales - The declines in net sales in 2001 and 2000 were primarily
attributable to the closing of Company-owned restaurants, the decline in
comparable store sales and the fifty-third week in 1999. Comparable
restaurant sales of all of the Company's restaurant concepts declined 2.0%,
0.1% and 1.0% in 2001, 2000 and 1999, respectively. These results included
menu price increases of 4.2%, 5.4% and 4.0% in 2001, 2000 and 1999,
respectively.
Franchising - Franchise revenues decreased by approximately $1.9 million in
2001 and by approximately $0.7 million in 2000. The decrease in franchise
revenue in 2001 was primarily attributable to the lower number of Shoney's
franchised restaurants in operation. The decrease in franchise revenue in
2000 was attributable to the fifty-third week in 1999 and the lower number of
franchised restaurants in operation.
Other Income - Other income increased $3.1 million in 2001 when compared to
2000 due primarily to an increase of $2.7 million in gains on asset sales and
higher rental income. Other income decreased $11.3 million in 2000 due to a
decrease of $11.3 million in gains on asset sales.
CONSOLIDATED COSTS AND EXPENSES
Consolidated cost of sales includes food and supplies, restaurant labor and
operating expenses. A summary of cost of sales as a percentage of
consolidated revenues for the last three fiscal years is shown below:
2001 2000 1999
---- ---- ----
Food and supplies 34.1% 34.8% 34.2%
Restaurant labor 31.5% 31.2% 30.8%
Operating expenses 21.9% 21.9% 22.1%
---------------------------
Total cost of sales 87.5% 87.9% 87.1%
===========================
Fluctuations in other income year to year affects the consolidated costs and
expenses when stated as a percentage of sales. Excluding the effects of other
income, food and supplies costs as a percentage of revenues decreased 0.5% in
2001 and increased by 0.2% in 2000 when compared to the prior year. The
decline in 2001 was principally a result of higher menu prices and continuing
benefits from the implementation of theoretical food costs systems in both
Shoney's and Captain D's. Food and supplies costs, as a percentage of
restaurant sales, declined in Shoney's and Captain D's in 2001. The
increase, as a percentage of sales, in 2000 was primarily the result of
increased food costs, as a percentage of sales, in the Shoney's segment.
Excluding the effects of other income, consolidated restaurant labor
increased 0.5% and 0.1% as a percentage of revenues in 2001 and
2000, respectively, when compared to the prior year. The increase in
restaurant labor, as a percentage of sales, in 2001 was attributable to
higher labor cost at the restaurant level and the decline in comparable store
sales. Restaurant labor, as a percentage of restaurant sales, increased in
both Shoney's and Captain D's in 2001. The increase in restaurant labor, as
a percentage of sales in 2000, was primarily attributable to increased labor
cost as a percentage of sales in both Shoney's and Captain D's. Wage rates
11
increased during each of these periods as a result of low unemployment
conditions in many markets and a very competitive restaurant labor market.
During 2000, the Company increased the staffing levels at its Shoney's
Restaurants in an effort to achieve the desired level of customer service as
one means by which to attempt to reverse the comparable store sales trend.
The Company expects continued upward pressure on consolidated restaurant
labor until meaningful improvements in consolidated comparable restaurant
sales are achieved.
Excluding the effects of other income, consolidated operating expenses
increased 0.1% as a percentage of revenues in 2001 as compared to the prior
year. The increase in consolidated operating expenses, as a percentage of
sales in 2001, was primarily the result of higher utilities partially offset
by lower depreciation and lower insurance expense. The decline in insurance
expense is primarily the result of a change in estimate of previously accrued
workers compensation and general liability insurance that reduced operating
expenses by $3.3 million in 2001, $1.5 million of which was recorded in the
fourth quarter. Excluding the effects of other income, operating expenses
declined 0.5%, as a percentage of sales in 2000, as a result of lower
depreciation, utilities and advertising expenses.
A summary of consolidated general and administrative expenses and interest
expense as a percentage of consolidated revenues for the last three fiscal
years is shown below:
2001 2000 1999
---- ---- ----
Consolidated general and
administrative expenses 7.9% 8.4% 8.4%
Consolidated interest expense 5.1% 5.1% 4.9%
Excluding the effects of other income, consolidated general and
administrative expenses, as a percentage of revenues, decreased 0.5% and 0.1%
during 2001 and 2000, respectively, when compared to the previous year. The
decline in consolidated general and administrative costs in 2001 was
primarily due to lower salaries and related expenses resulting from a
concentrated effort to lower administrative costs. General and administrative
expenses in 2001 were also reduced as a result of the elimination of a $1.1
million reserve for estimated legal expenses to defend potential legal claims
incurred in the acquisition of TPI Enterprises, Inc. ("TPI"). The decline in
consolidated general and administrative expenses, as a percentage of sales, in
2000 was primarily due to lower legal fees subsequent to the settlement of
certain employment litigation in 1999.
Consolidated interest expense declined $2.7 million in 2001 compared to 2000.
The reduction in interest expense in 2001 is principally the result of lower
debt outstanding in 2001 primarily due to the repurchase of approximately 90%
of the Company's subordinated debt on September 6, 2000 and the related
refinancing. The effect of the decrease in debt in 2001 was partially offset
by higher interest rates on the new indebtedness. Consolidated interest
expense declined $5.7 million in 2000 when compared to 1999, primarily
resulting from lower senior debt outstanding for the first forty weeks of
2000 and the repurchase of the subordinated debt in September 2000.
The Company incurred asset impairment charges of $5.0 million, $15.2 million
and $18.4 million, in 2001, 2000 and 1999, respectively. Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121")
requires restaurant companies to evaluate the recoverability of long-lived
assets on an individual restaurant basis. When a determination is made that
the carrying value of our asset is not recoverable, it is written down to its
estimated fair value. The asset impairment charges recorded in 2001, 2000 and
1999 were primarily the result of continued declines in comparable store
sales and operating margins at the Company's Shoney's Restaurants when
compared to the prior year. Shoney's Restaurants accounted for asset
impairment charges of $2.2 million, $11.3 million and $15.6 million, in 2001,
2000 and 1999, respectively. Impairment charges of $1.3 million, $2.1 million
and $2.7 million, in 1999, 2000 and 2001, respectively, related to assets
held for sale. If the Company's Shoney's Restaurants continue to experience
declines in comparable store sales and operating margins, the Company will
incur additional asset impairment charges in the future.
12
The Company has recorded restructuring charges, primarily attributable to
exit costs incurred when the decision to close a leased restaurant is made,
for the accrual of remaining leasehold obligations, net of anticipated
sublease rental income. The Company recorded $1.8 million of restructuring
charges in 2001 for the accrual of remaining leasehold obligations on
restaurants closed in 2001. Also during 2001, the Company revised its
estimate of previously accrued exit costs downward by $0.5 million. The
change in estimate in 2001 was the result of assigning or terminating certain
leases on terms more favorable than the Company originally estimated. The
Company recorded approximately $1.0 million of restructuring charges in 2000
primarily for remaining leasehold obligations on restaurants closed in 2000.
The Company recorded approximately $5.7 million of restructuring charges in
1999 primarily for remaining leasehold obligations on stores closed in 1999,
net of estimated sublease income. In addition, during 1999, the Company
revised its estimate of previously accrued exit costs downward by $1.7
million. The change in estimate in 1999 was the result of assigning certain
leases on terms more favorable to the Company than originally projected.
Management continually evaluates the operating performance of its restaurants
and may close additional restaurants if, in management's opinion, operating
results cannot be improved within what management believes is a reasonable
time period. In the event management elects to close additional restaurants
during 2002, the Company will incur additional restructuring charges.
On March 20, 1999, the Company agreed to the material terms of a global
settlement in three class action lawsuits which alleged that the Company had
violated certain provisions of the Fair Labor Standards Act (see Note 12 to
the Consolidated Financial Statements and Liquidity and Capital Resources).
The Company agreed to pay $18.0 million in exchange for the dismissal of all
three cases with prejudice and a release by the plaintiffs relating to the
subject matter of the cases. As a result of the settlement, the Company
recorded a litigation settlement charge of $14.5 million in the first quarter
of 1999 ($3.5 million had been recorded previously in the fourth quarter of
1998).
The Company had an effective tax rate of 2.4% in 2001, primarily due to an
increase of $2.7 million in the valuation allowance against the Company's
gross deferred tax assets. The effective tax rate of 1.5% in 2000 was
attributable to a decrease in the valuation allowance against the Company's
gross deferred tax assets of $26.0 million and the utilization of net
operating loss carryforwards. The effective tax rate in 1999 of 3.8% was
primarily attributable to the reversal of certain deferred tax assets
acquired in the purchase of TPI, which subsequently were fully reserved. Also
during 1999, the Company increased its valuation allowance against the
Company's gross deferred tax assets by $5.3 million.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of
October 28, 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 ("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.
On September 6, 2000, the Company completed a refinancing of approximately
$248.3 million in connection with a repurchase of approximately 90% of its
outstanding subordinated indebtedness for an aggregate price of approximately
$71.8 million. Consummation of the debt repurchase and the refinancing
resulted in an extraordinary gain on the early retirement of debt of
approximately $82.5 million, net of expenses and taxes, in the Company's
fourth quarter of 2000.
13
OPERATING SEGMENTS
Shoney's Restaurants
FISCAL YEAR ENDED
---------------------------------------------
($ IN THOUSANDS EXCEPT COMPARABLE STORE OCTOBER 28, OCTOBER 29, OCTOBER 31,
DATA AND GUEST CHECK AVERAGE) 2001 2000 1999
---------------------------------------------
Restaurant sales $ 336,462 $ 376,623 $ 500,041
Franchise revenues 6,700 9,053 9,623
Other revenues 9,412 1,937 2,808
-------------------------------------------
Total Shoney's revenues 352,574 387,613 512,472
Expenses 347,917 394,227 516,254
-------------------------------------------
EBIT (as defined) (b) $ 4,657 $ (6,614) $ (3,782)
===========================================
Average sales volume (a) $ 1,526 $ 1,475 $ 1,497
Comparable store sales decrease (a) (1.0%) (1.8%) (3.6%)
Average guest check (a) $ 7.00 $ 6.93 $ 6.58
Operating restaurants at year-end:
Company-owned 194 245 267
Franchised 195 214 258
-------------------------------------------
Total 389 459 525
===========================================
(a) Prior year amounts have not been restated for comparable restaurants
(b) EBIT, which, when that term is used in this Annual Report on Form 10-K,
means income before asset impairment charges, restructuring charges and
litigation settlements. Effective with the first quarter of 2001, the Company
began allocating its general corporate or Restaurant Support Center ("RSC")
overhead expenses to its operating segments. All prior periods have been
restated. In addition, in 2001, certain asset gains or losses may be
recognized in segment EBIT as defined where previously all gains or losses
had been reported in "corporate and other". (See Note 17--Segment Information).
Gains or losses on asset sales presented in segment information represent
internal presentation and may not equal gains and losses as presented in GAAP.
The Company's corporate and other income and expenses consist primarily of
gains from the sale of property and equipment, rental income, interest income
and miscellaneous income or expense and do not constitute a reportable segment
of the Company as contemplated by SFAS No. 131. 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 and
restructuring charges or EBIT as defined.
14
Shoney's concept total revenue declined $35.0 million, or 9.0%, and $124.9
million, or 24.4%, in 2001 and 2000, respectively, when compared to the
previous year. The components of the change in the Shoney's concept revenue
are summarized as follows:
(IN MILLIONS) 2001 2000
---------------------
Sales from restaurants opened or temporarily closed $ 0.7 $ --
Higher menu prices 13.9 24.1
Closed or sold restaurants (37.8) (109.7)
Sales at prior year prices (16.9) (30.5)
Sales from fifty-third week -- (7.3)
---------------------
Total change in restaurant sales (40.1) (123.4)
Franchise revenues (2.4) (0.6)
Other revenues 7.5 (0.9)
---------------------
Total $ (35.0) $ (124.9)
=====================
Revenues were significantly reduced by the closing of 45, 10 and 123 under-
performing Company-owned restaurants in 2001, 2000 and 1999, respectively.
The change in revenues in 2000 was also affected by the fifty-three week year
in 1999. In addition, six, 12 and 19 Company-owned restaurants were sold to
franchisees in 2001, 2000 and 1999, respectively. Sales and EBIT as defined
for Shoney's Restaurants closed or sold are as follows:
2001 2000 1999
EBIT AS EBIT AS EBIT AS
(IN THOUSANDS) SALES DEFINED SALES DEFINED SALES DEFINED
---------------------------------------------------------------
Stores closed during 2000 and prior years $ -- $ (232) $ 15,258 $ (2,773) $ 124,928 $ (15,594)
Stores closed during 2001 40,418 (5,285) 63,019 (5,072) 68,274 (729)
---------------------------------------------------------------
Total $ 40,418 $ (5,517) $ 78,277 $ (7,845) $ 193,202 $ (16,323)
===============================================================
Management believes that the decline in comparable restaurant sales at its
Shoney's Restaurants is the result of numerous factors including increased
competition and the lingering effects of the Company's loss of operational
focus. Franchise revenue decreased $2.4 million in 2001 and $0.6 million in
2000 when compared to the prior year. The decline in franchise revenue in
2001 was primarily the result of a lower number of franchise restaurants in
operation and a decline of 1.8% in franchise comparable store sales. The
decline in franchise revenue in 2000 was primarily the result of a lower
number of franchise restaurants in operation and the fifty-three week year in
1999. Other revenues increased $7.5 million in 2001 when compared to 2000,
primarily due to gains on asset sales of $5.9 million in 2001 compared to no
gains in 2000 and higher rental income. Other revenues declined $0.9 million
in 2000 compared to 1999.
Expenses declined $46.3 million, or 11.7%, in 2001 when compared to 2000.
Expenses as a percentage of revenues were 98.7% in 2001 compared to 101.7% in
2000. As a percentage of revenues, food and supplies costs, operating
expenses, multi-unit supervisory expenses and RSC expenses declined and
restaurant labor increased slightly.
Expenses in 2000 declined $122.0 million, or 23.6%, compared to 1999.
Expenses as a percentage of revenues were 101.7% in 2000 compared to 100.7%
in 1999. As a percentage of revenues, food and supplies costs, restaurant
labor, operating expenses, and multi-unit supervisory expenses all increased.
As a result of the above, EBIT for Shoney's Restaurants increased $11.3
million and declined $2.8 million in 2001 and 2000, respectively.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of
15
these evaluations, the Company could close and/or sell additional restaurants
in the future.
CAPTAIN D'S RESTAURANTS
FISCAL YEAR ENDED
-----------------------------------------
($ IN THOUSANDS EXCEPT COMPARABLE STORE DATA OCTOBER 28, OCTOBER 29, OCTOBER 31,
AND GUEST CHECK AVERAGE) 2001 2000 1999
-----------------------------------------
Restaurant sales $ 300,415 $ 314,671 $ 316,996
Franchise revenues 5,927 5,432 5,494
Other revenues 3,033 265 364
----------------------------------------
Total Captain D's revenues 309,375 320,368 322,854
Expenses 285,650 293,874 295,463
----------------------------------------
EBIT (as defined) (b) $ 23,725 $ 26,494 $ 27,391
========================================
Average sales volume (a) $ 856 $ 873 $ 857
Comparable store sales increase (decrease)(a) (2.9%) 2.0% 2.6%
Average guest check (a) $ 5.00 $ 4.87 $ 4.71
Operating restaurants at year-end:
Company-owned 342 360 362
Franchised 220 204 205
----------------------------------------
Total 562 564 567
========================================
(a) Prior year amounts have not been restated for comparable restaurants
(b) See Note (b) under "Operating Segments-Shoney's Restaurants" on page 14
hereof.
Captain D's total revenues declined $11.0 million, or 3.4%, and decreased
$2.5 million, or 0.8%, in 2001 and 2000, respectively, when compared to the
prior year. The components of change in Captain D's concept revenues are
summarized as follows:
(IN MILLIONS) 2001 2000
---------------------
Sales from restaurants opened and temporarily closed $ 2.6 $ (0.5)
Higher menu prices 10.7 12.0
Closed or sold units (8.2) (2.3)
Sales at prior year prices (19.4) (6.0)
Sales from fifty-third week -- (5.5)
-------- -------
Total change in restaurant sales (14.3) (2.3)
Franchise revenues 0.5 (0.1)
Other revenues 2.8 (0.1)
-------- -------
Total $ (11.0) $ (2.5)
======== =======
Revenue comparisons were affected by higher menu prices, the change in
comparable store sales, the closing of four, three and six under-performing
Company-owned restaurants in 1999, 2000 and 2001, respectively, and the
fifty-three week year in 1999. In addition, during 2001, 14 Company-owned
Captain D's were sold to franchisees. Sales and EBIT as defined for Captain
D's restaurants closed or sold are as follows:
16
2001 2000 1999
EBIT AS EBIT AS EBIT AS
(IN THOUSANDS) SALES DEFINED SALES DEFINED SALES DEFINED
-----------------------------------------------------
Stores closed during 2000 and prior years $ -- $ (12) $ 1,457 $ (90) $ 3,755 $ (318)
Stores closed or sold during 2001 7,403 (338) 14,125 267 14,013 208
-----------------------------------------------------
Total $ 7,403 $ (350) $ 15,582 $ 177 $ 17,768 $ (110)
=====================================================
Management attributes part of the decline in comparable restaurant sales during
2001 to price increases implemented during fiscal 2000. As a result of the
continued decline in customer traffic, Captain D's began promoting certain
value-driven meals and other promotional items in an effort to reverse the
comparable store sales trends. Comparable store sales improved in the fourth
quarter of 2001 compared to the earlier periods of 2001 and increased 2.7% for
the first twelve weeks of fiscal 2002. Franchise revenues increased $0.5
million in 2001 and declined $0.1 million in 2000 when compared to the prior
year. The increase in franchise revenues in 2001 is primarily due to the
initial fees from the sale of 14 Company-owned restaurants to franchisees.
Other revenues increased $2.8 million in 2001 when compared to the prior year,
primarily due to $2.3 million of gains on asset sales in 2001 compared to no
gains in 2000 and higher rental income. Other revenues declined $0.1 million in
2000 when compared to 1999.
Expenses declined $8.2 million, or 2.8%, in 2001 when compared to 2000.
Expenses as a percentage of revenues were 92.3% in 2001 compared to 91.7% in
2000. As a percentage of sales, decreases in food and supplies costs and RSC
expenses were more than offset by increases in restaurant labor, operating
expenses and multi-unit supervisory costs.
Expenses decreased $1.6 million, or 0.5%, in 2000 when compared to 1999.
Expenses as a percentage of revenues were 91.7% in 2000 compared to 91.5% in
1999. As a percentage of sales, declines in food and supplies costs were
more than offset by increases in restaurant labor, operating expenses and
multi-unit supervisory costs.
As a result of the above, EBIT for Captain D's restaurants decreased $2.8
million and $0.9 million in 2001 and 2000, respectively, when compared to the
prior year.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. Also, the Company may sell operating
restaurants to franchisees.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its liquidity requirements with cash
provided by operating activities supplemented by external borrowing. The
Company historically has operated with a substantial working capital deficit.
Management does not believe that the deficit hinders the Company's ability to
meet its obligations as they become due, as the Company's credit facilities
include lines of credit that are available to cover short term working
capital requirements.
Cash provided by continuing operating activities declined $3.9 million in
2001 compared to 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 non-cash interest expense on the
Company's zero coupon convertible debentures. The use of cash by operating
assets and liabilities in 2001 was primarily the result of a reduction of
accrued expenses and deferred income and other liabilities. Cash provided by
discontinued operating activities decreased by $5.2 million in 2001 when
compared to 2000. The decrease in cash provided by discontinued operating
activities in 2001 was primarily the result of lower operating income from
COI and the decline in inventory at COI during 2000.
17
Cash provided by continuing operating activities declined by $23.7 million in
2000 when compared to 1999. Net income of $60.1 million in 2000 resulted
primarily from an $82.5 million noncash extraordinary gain on the early
extinguishment of debt, partially offset by asset impairment charges of $15.2
million. Cash provided from continuing operations in 2000 was negatively
affected by the decline in operating income from the Company's Shoney's
Restaurants, lower depreciation and amortization and by cash required by
other liabilities and accrued expenses. Cash provided by discontinued
operating activities increased by $5.3 million in 2000 when compared to 1999.
The increase in cash provided by discontinued operating activities was
primarily the result of a reduction of inventory and an increase in accounts
payable partially offset by a decline in operating income of COI.
Cash provided by continuing operating activities during 1999 was $30.0
million. The net loss of $28.8 million for 1999 resulted primarily from pre-
tax noncash asset impairment charges of $18.4 million and the $14.5 million
litigation settlement charge. Cash provided from continuing operations was
negatively affected by the decline in operating income from the Company's
Shoney's Restaurants, lower depreciation and amortization and by cash
required by accounts payable and accrued expenses partially offset by the one
time decline in refunded income taxes. Cash provided by discontinued
operating activities was $7.0 million in 1999.
Cash provided by continuing investing activities during 2001 was $9.6
million. In addition, during 2001, the Company received cash proceeds of
$27.8 million, primarily from the sale of closed restaurant locations and
rental properties. Cash used for property and equipment additions in 2001 was
$12.7 million and cash used for other assets was $5.5 million. Cash used by
other assets of $5.5 million was primarily the result of $6.8 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 2000 was $5.8 million.
During 2000, the Company received $28.8 million in cash proceeds from the
sale of closed and operating restaurant properties. Cash used for property
and equipment additions was $21.8 million and cash used for other assets was
$1.2 million.
Cash provided by continuing investing activities in 1999 was $43.4 million.
During 1999, the Company received $70.7 million in cash proceeds from the
sale of closed and operating restaurant properties. Cash used for property
and equipment additions in 1999 was $25.6 million and cash used for other
assets was $1.7 million.
Cash provided by discontinued investing activities was $8.1 million, $11.5
million and $2.5 million in 2001, 2000 and 1999, respectively. Cash provided
by discontinued investing activities in 2001 was primarily the result of the
sale of COI. Cash provided by discontinued investing activities in 2000 and
1999 was primarily the result of the sale of the casual dining concept.
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 1999, the Company has closed or sold 242 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 $23.8 million, $51.5 million
and $88.2 million in 2001, 2000 and 1999, respectively. In 2001, continuing
financing activities included net payments on long-term debt of $21.9 million
and $1.9 million of payments for debt issue costs.
On September 6, 2000, the Company repurchased approximately 90% of its then
outstanding subordinated debentures. Consummation of this repurchase and the
related refinancing resulted in an extraordinary gain on the early retirement
of debt of approximately $82.5 million, net of expenses and taxes, in the
Company's fourth quarter of 2000.
18
At the time of the debenture repurchase and related refinancing, the Company
restructured its restaurant operations by separating its Shoney's and Captain
D's operations (the "Reorganization"). In the Reorganization, substantially
all of the assets comprising the Company's Captain D's operations were
transferred to Captain D's, Inc., a wholly-owned subsidiary of the Company.
The Reorganization of the Company operations allowed the Company's operating
segments (Shoney's and Captain D's) to be separately financed. As a result of
the Reorganization and the refinancing of the Company's senior indebtedness,
each operating segment is intended to operate as an independent business unit
and be responsible for its own indebtedness and debt service. The Company's
credit 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 administrative services. Effective January 24,
2002, under certain circumstances, Captain D's, Inc. is allowed to make
distributions of up to $5.0 million to the Company. (See "Recent
Developments").
Financing activities in 2000 included $261.8 million of borrowings under the
Company's credit agreements and $284.5 million of payments on indebtedness
that included $201.5 million of payments under the previously existing credit
facility that was refinanced, $71.8 million of payments for the subordinated
debentures repurchased, $2.3 million of payments on capital leases and other
debt and $9.0 million of payments on the new debt incurred in the refinancing.
Financing activities for 2000 also included $3.7 million of payments on
litigation settlements and $14.2 million of payments for debt issue costs.
Financing activities in 1999 included $84.3 million of payments on senior
indebtedness, $14.6 million of payments on litigation settlements and net
borrowings under the Company's line of credit of $10.9 million. Of the $84.3
million of payments on senior indebtedness, $70.5 million was from the sale
of property and equipment, $10.1 million was scheduled payments and $3.7
million was prepayments of scheduled fiscal 2000 payments.
On March 20, 1999, the parties to three lawsuits that had been provisionally
certified as class actions agreed to the material terms of a global
settlement of the cases. The settlement agreement, which was executed by the
parties to the litigation on June 24, 1999, required the Company to pay $18.0
million as follows: $11.0 million upon Court approval of the settlement and
dismissal of the cases, $3.5 million on October 1, 1999 and $3.5 million on
March 1, 2000. As a result of the settlement, the Company recorded a charge
of $14.5 million in the first quarter ended February 14, 1999, which was in
addition to a $3.5 million charge recorded in the fourth quarter of 1998. On
July 14, 1999, October 1, 1999, and March 1, 2000 the Company paid $11
million, $3.5 million and $3.5 million, respectively, into a qualified
settlement fund in accordance with the Court-approved settlement, utilizing
funds from the Company's refunded income taxes and general working capital.
The Company's credit agreements are secured by substantially all of the
Company's assets. The 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 (provided, however,
that effective January 24, 2002, under certain circumstances, Captain D's,
Inc. is allowed to make certain distributions of up to $5.0 million to
the Company); (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") which, as a result of the receipt of the
extension of the September 6, 2002 maturity date on February 11, 2002, has a
termination date of November 29, 2002. 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 Shoney's Line
of Credit and permanently reduce the availability. As of October 28, 2001, the
Company had sold $13.4 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
19
outstanding letters of credit of approximately $24.3 million, resulting in
approximately $5.7 million of availability of which none was drawn at October
28, 2001. Subsequent to the September 2000 debenture repurchase and related
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
Shoney's Line of Credit. As of October 28, 2001, since September 6, 2000,
the Company had sold and retained in the business $15.0 million of asset sale
proceeds and had cash collateralized the Shoney's Line of Credit in the amount
of $6.8 million. As of February 1, 2002, there were $5.7 million of drawings
under the Shoney's Line of Credit, resulting in $1.4 million of availability
after deducting outstanding letters of credit. 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 Shoney's Line of Credit
(which will also permanently reduce availability) or cash collateralize the
Shoney's Line of Credit. Also, following the retention of $15.0 million from
asset sales, the Company's only current sources of liquidity for the Shoney's
concept are from the availability under the Shoney's Line of Credit, operating
cash flows, payments under the tax sharing agreement with Captain D's, payments
for administrative services from Captain D's, and, effective January 24, 2002,
under certain circumstances, distributions from Captain D's, Inc. of up to
$5.0 million. Management expects liquidity for the Shoney's segment to improve
in the second quarter of 2002 over the first quarter of 2002, as sales and cash
flows have historically improved during the spring and summer. If the Shoney's
segment's operating trends and working capital requirements 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"). The Captain D's Line of Credit and
the Captain D's term notes (the "Captain D's Facility") were scheduled to
mature on December 31, 2001. On December 27, 2001, Captain D's received an
extension of the Captain D's Facility to March 31, 2002. On January 24, 2002,
the maturity date of the Captain D's Facility was further extended to October
31, 2002. 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 $2.0 million was drawn at
October 28, 2001. In connection with the January 24, 2002 extension, the
Captain D's Line of Credit was reduced to $15.0 million. As of February 1,
2002, there were $1.9 million of borrowings under the Captain D's Line of
Credit, resulting in $6.7 million of availability after deducting amounts
attributable to letters of credit. (See "Recent Developments" and Note 20 -
Subsequent Events).
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 nine 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 five years have not
resulted in sales increases, and there can be no assurance that the current
programs will be successful in the future. However, comparable store sales in
the Shoney's concept for the third and fourth quarters of 2001 only declined
0.8% and 1.0%, respectively. As of January 20, 2002 (12 weeks into the first
quarter of 2002), comparable store sales had declined 0.4%. 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
20
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 resulted in improved margins compared to the prior year periods
during the third and fourth quarters of 2001 and management expects the margin
improvement to continue into the first two quarters of 2002. 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 the 2001 operating results of the Shoney's concept, it was probable
that a covenant violation would occur under the Shoney's Mortgage Financing
debt agreements. In addition, as of February 1, 2002, 31 of the restaurants
that the Company had closed ("Closures") secure the borrowings under the
Shoney's Mortgage Financing. As the units were closed, the Company intended
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 prepayment penalty with respect to the debt prepaid
under the Shoney's Mortgage Financing.
As of February 1, 2002, the Company had sold 11 of the closed properties that
secure the Shoney's Mortgage Financing and repaid $6.1 million of the
existing indebtedness. In addition, the Company presently has contracts to
sell three additional properties. The Shoney's Mortgage Financing agreements
provide that each property must be continuously operated, except for a 120 day
period every three years. The Company has received from the Shoney's
Mortgage Financing lender agreements in which the lenders agree to forebear,
until October 27, 2002, from taking any action with respect to the Closures
and the failure of the Company to meet the fixed charge coverage covenant on
certain closed or under-performing restaurants for 2001 and 2002. As part of
the agreement, the Company received approval from the lender to move certain
collateral properties among the various collateral pools and to replace three
existing properties with better performing properties in an effort to
strengthen certain collateral pools' financial ratios. This reallocation of
collateral has begun and is required to be completed by September 30, 2002.
With these arrangements in place, the Company expects to be in compliance
through 2002 with the financial covenants on the remaining restaurants under
the Shoney's Mortgage Financing.
Based on the 2001 operating results of Captain D's, Inc., it was probable that
financial covenant violations would have occurred under the Captain D's
Facility after October 28, 2001. In addition to a 90 day extension of the
maturity on the Captain D's Facility, Captain D's, Inc. received financial
covenant modifications that should enable Captain D's to be in compliance
with the financial covenants for the remainder of the term.
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 and fourth quarters of 2001, operating margins
improved in the Shoney's Restaurant 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
Restaurant concept.
CRITICAL ACCOUNTING POLICIES
As discussed in Note 1 to the Consolidated Financial Statements, land,
buildings, leasehold improvements, rental properties and restaurant and other
equipment are
21
recorded at the lower of cost or market. The Company evaluates the
recoverability of its long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS
121 requires periodic assessment of certain long-lived assets for possible
impairment when events and circumstances indicate that the carrying amounts
may not be recoverable.
The assessment of long-lived assets for possible impairment requires certain
judgments and estimates to be made by management, including the real estate
values and the estimated cash flows for the respective restaurants.
As discussed in Note 5 to the Consolidated Financial Statements, when the
decision to close a restaurant is made, the Company incurs certain exit costs
generally for the accrual of the remaining leasehold obligations less
anticipated sublease income related to leased units that are targeted to be
closed. These exit costs are included in the Consolidated Statement of
Operations in the restructuring expense caption.
Inherent in the accrual for exit costs are certain significant management
judgments and estimates including, among others, sublease income related to
leased units to be closed, marketing time in which to sublease a leased unit or
sell a closed unit and amounts due for taxes and property maintenance. The
Company periodically reviews and reevaluates the assumptions used for the
accrual of exit costs and adjusts the accrual as necessary.
RECENT DEVELOPMENTS
On January 24, 2002, the Company entered into a definitive merger agreement
(the "Merger Agreement") with Lone Star U.S. Acquisitions LLC, U.S.
Restaurant Properties Operating Limited Partnership and LSF4 Acquisition,
LLC. Pursuant to the terms of the Merger Agreement, the outstanding common
shares of the Company will be acquired for $0.36 per share in cash. The
Merger Agreement, which remains subject to regulatory approval, approval by
shareholders of the Company and other customary closing conditions, is
expected to close in the second quarter of 2002. No assurance can be given
that the merger will be completed.
Immediately prior to the execution of the Merger Agreement, Lone Star Funds,
through certain of its affiliates, assumed the outstanding indebtedness under
the Captain D's Facility. The Captain D's Facility, which was then scheduled
to mature on March 31, 2002, was extended to October 31, 2002. In connection
with the debt assumption, the Captain D's Line of Credit was reduced to $15.0
million, and the interest rate on the facility was increased to 12.5% until
May 15, 2002. On May 15, 2002, Captain D's will be required to pay an
extension fee equal to 2% of the facility, and the interest rate will
increase to 15%. As of February 1, 2002, there were $1.9 million of
borrowings under the Captain D's Line of Credit, resulting in $6.7 million of
availability after deducting amounts attributable to letters of credit.
Additionally, in connection with the assumption of the Captain D's Facility
by certain affiliates of Lone Star Funds, Captain D's, Inc. may, under
certain circumstances, make distributions of up to $5.0 million to the
Company.
On February 11, 2002, the Company received an extension of the maturity date of
the Shoney's Line of Credit from September 6, 2002 to November 29, 2002. In
addition, the expiration date of the letters of credit issued under the
Shoney's Line of Credit was extended to October 30, 2002.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk. The Company has exposure to interest rate changes
primarily relating to outstanding senior indebtedness. From time to time the
Company enters into agreements to reduce its interest rate risks. The Company
does not speculate on the future direction of interest rates. A portion of
the Company's senior indebtedness bears interest at rates which vary with
changes in LIBOR and the prime rate. As of October 28, 2001, $137.3 million
of the Company's debt bore interest at variable rates. The Company had
entered into agreements to effectively swap $115.0 million of the floating
rate debt to fixed rate debt through December 31, 2001. In 2001, these
agreements increased the Company's interest expense by $1.4 million. In 2000
and 1999, interest rate swap agreements decreased the Company's interest
expense by $0.3 million and $0.7 million, respectively. The Company believes
that the effect, if any, of reasonably possible near-term changes in interest
rates on the Company's consolidated financial position, results of operations
or cash flows would not be material.
Commodity Price Risk. Prior to June 11, 2001, the Company owned Commissary
Operations, Inc. ("COI"), a food service business that manufactures and
distributes food and supplies to Company-owned restaurants, certain
franchised restaurants and other customers. On June 11, 2001 the Company
completed the sale of COI. The Company has entered into long term purchase
agreements with COI for delivery of 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 delivery of
essentially all of its food products. Prior to and after the sale of COI,
both restaurant concepts controlled the purchasing and delivery to COI of
critical food and supply items. Many of the food products purchased by the
Company are affected by commodity pricing and are, therefore, subject to
price volatility caused by weather, production problems, delivery
difficulties and other factors which are outside the control of the Company.
Essential supplies and raw materials are available from several sources and
the Company is not dependent upon any single source of supplies or raw
materials. The Company's ability to maintain consistent quality throughout
its restaurant system depends in part upon its ability to acquire food
products and related items from reliable sources. When the supply of certain
products is uncertain or prices are expected to rise significantly, the
Company may enter into purchase contracts or purchase bulk quantities for
future use. The Company has purchase commitments for terms of one year or
less for food and supplies with a variety of vendors. Such commitments
generally include a pricing schedule for the period covered by the
agreements. The Company has established long-term relationships with key
seafood vendors and brokers. Adequate alternative sources of supply are
believed to exist for substantially all products. While the supply and
availability of certain seafood species is volatile, the Company believes
that it has the ability to identify and access alternative seafood products
as well as the ability to adjust menu prices if needed. Significant items
that could be subject to price fluctuations include, among others, fish,
coffee, beef, pork, produce and eggs. 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.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the registrant and its subsidiaries,
together with the Notes thereto, and the independent auditors' report
thereon, are set forth on pages 25 through 52 of this Annual Report on Form
10-K.
REPORT OF ERNST & YOUNG LLP
Independent Auditors
Shareholders and Board of Directors
Shoney's, Inc.
We have audited the accompanying consolidated balance sheets of
Shoney's, Inc. and subsidiaries as of October 28, 2001 and October 29, 2000,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three fiscal years in the period
ended October 28, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Shoney's, Inc. and subsidiaries at October 28, 2001 and October 29, 2000,
and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended October 28, 2001, in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Nashville, Tennessee
February 11, 2002 /s/ ERNST & YOUNG LLP
24
CONSOLIDATED BALANCE SHEET
SHONEY'S, INC. AND SUBSIDIARIES
OCTOBER 28, OCTOBER 29,
2001 2000
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 5,621,180 $ 7,974,050
Notes and accounts receivable,
less allowance for doubtful
accounts of $649,000 in 2001
and $691,000 in 2000 4,424,791 6,052,524
Inventories 4,539,419 4,624,050
Prepaid expenses and other current assets 1,530,790 1,634,217
Net current assets of discontinued
operations 9,721,688
Net current assets held for sale 19,451,708 19,932,444
--------------- --------------
Total current assets 35,567,888 49,938,973
Property and equipment, at lower
of cost or market
Land 71,359,719 82,653,652
Buildings 149,792,774 171,890,366
Buildings under capital leases 9,807,479 11,503,162
Restaurant and other equipment 181,250,462 203,312,038
Leasehold improvements 44,858,182 45,736,664
Rental properties 21,071,775 7,521,677
Construction in progress 3,280,580
--------------- --------------
478,140,391 525,898,139
Less accumulated depreciation and
amortization (288,218,396) (300,959,463)
--------------- --------------
Net property and equipment 189,921,995 224,938,676
Other assets
Goodwill (net of accumulated amortization
of $8,523,000 in 2001
and $7,318,000 in 2000) 9,237,219 13,200,847
Deferred charges and other intangible assets 8,684,963 13,104,142
Net non-current assets of
discontinued operations 4,989,067
Restricted cash 6,849,639
Other 3,995,353 5,677,004
-------------- --------------
Total other assets 28,767,174 36,971,060
-------------- --------------
$ 254,257,057 $ 311,848,709
============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
CONSOLIDATED BALANCE SHEET
SHONEY'S, INC. AND SUBSIDIARIES
OCTOBER 28, OCTOBER 29,
2001 2000
---- ----
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 15,083,156 $ 18,121,253
Taxes other than income taxes 7,288,924 8,412,697
Employee compensation and related items 21,546,679 28,397,818
Accrued interest expense 2,212,887 2,354,004
Other accrued liabilities 11,704,418 16,033,818
Debt and capital lease obligations
due within one year 10,320,962 7,888,629
--------------- ---------------
Total current liabilities 68,157,026 81,208,219
Long-term debt 232,623,822 254,199,846
Obligations under capital leases 7,400,660 9,141,910
Other liabilities 19,776,712 24,612,414
Insurance reserves 25,870,452 28,673,141
Commitments and contingencies
Shareholders' deficit
Common stock, $1 par value: authorized
200,000,000 shares; issued 51,709,122
in 2001 and 50,659,282 in 2000 51,709,122 50,659,282
Additional paid-in capital 136,861,557 137,521,843
Other comprehensive loss (1,091,364)
Accumulated deficit (287,050,930) (274,167,946)
--------------- ---------------
Total shareholders' deficit (99,571,615) (85,986,821)
--------------- ---------------
$ 254,257,057 $ 311,848,709
=============== ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26
CONSOLIDATED STATEMENT OF OPERATIONS
SHONEY'S, INC. AND SUBSIDIARIES
YEARS ENDED
-----------
OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2000 1999
---- ---- ----
Revenues
Net sales $ 640,674,456 $ 694,476,038 $ 821,787,102
Franchise fees 12,627,509 14,484,990 15,198,094
Other income 12,206,043 9,115,348 20,422,242
-------------- -------------- --------------
Total revenues 665,508,008 718,076,376 857,407,438
Costs and expenses
Cost of sales
Food and supplies 226,774,496 249,901,266 293,104,695
Restaurant labor 209,637,869 224,096,609 263,805,277
Operating expenses 145,718,823 157,230,060 189,611,553
-------------- -------------- --------------
582,131,188 631,227,935 746,521,525
General and administrative expenses 52,486,589 60,043,474 71,997,208
Impairment of long-lived assets 4,969,463 15,221,484 18,422,554
Interest expense 33,712,508 36,428,770 42,158,716
Restructuring expenses 1,267,237 1,031,586 4,020,305
Litigation settlement 14,500,000
-------------- -------------- --------------
Total costs and expenses 674,566,985 743,953,249 897,620,308
Loss from continuing operations before income
taxes and extraordinary gain (9,058,977) (25,876,873) (40,212,870)
Provision for (benefit from) income taxes
Current 327,000 185,000 477,000
Deferred (644,000) (981,000) (1,890,000)
-------------- -------------- --------------
Total income taxes (317,000) (796,000) (1,413,000)
-------------- -------------- --------------
Loss from continuing operations
before extraordinary gain (8,741,977) (25,080,873) (38,799,870)
Discontinued operations, net of income taxes (212,007) 2,251,069 9,973,472
Gain (loss) on sale of discontinued
operations, net of income taxes (3,929,000) 489,260
Extraordinary gain on early
extinguishment of debt, net of income taxes 82,477,143
-------------- -------------- --------------
Net income (loss) $ (12,882,984) $ 60,136,599 $ (28,826,398)
============== ============== ==============
Earnings per common share
Basic and diluted:
Loss from continuing operations
before extraordinary gain $ (0.17) $ (0.50) $ (0.79)
Discontinued operations, net
of income taxes 0.04 0.20
Gain (loss) on sale of discontinued
operations, net of income taxes (0.08) 0.01
Extraordinary gain on the early extinquish-
ment of debt, net of income taxes 1.64
-------------- -------------- --------------
Net income (loss) $ (0.25) $ 1.19 $ (0.58)
============== ============== ==============
Weighted average shares outstanding
Basic and diluted 51,549,748 50,427,186 49,339,259
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
SHONEY'S, INC. AND SUBSIDIARIES
Additional Total
Common Paid-in Accumulated Shareholders'
Stock Capital Other Deficit Equity (Deficit)
----- ------- ----- ------- ----------------
Balances at October 25, 1998 $ 48,694,865 $ 137,296,111 $ $ (305,478,147) $ (119,487,171)
Net loss (28,826,398) (28,826,398)
Issuance of common shares
for employee and director
compensation 543,242 264,522 807,764
Issuance of common shares
pursuant to employee stock
benefit plans 189,407 32,896 222,303
Compensation related to
grant of restricted shares
of common stock 65,000 81,146 146,146
------------- -------------- ------------- --------------- ---------------
Balances at October 31, 1999 49,492,514 137,674,675 (334,304,545) (147,137,356)
Net income 60,136,599 60,136,599
Issuance of common shares
for employee and director
compensation 809,216 45,234 854,450
Issuance of common shares
pursuant to employee stock
benefit plans 267,200 46,592 313,792
Compensation related to
grant of restricted shares
of common stock 90,000 (252,692) (162,692)
Conversions of subordinated
convertible debentures 352 8,034 8,386
------------- -------------- ------------- --------------- ---------------
Balances at October 29, 2000 50,659,282 137,521,843 (274,167,946) (85,986,821)
Net loss (12,882,984) (12,882,984)
Other comprehensive loss
related to interest rate
swap agreements, net (1,091,364) (1,091,364)
---------------
Comprehensive loss (13,974,348)
Issuance of common shares
for employee and
director compensation 647,542 (356,068) 291,474
Issuance of common shares
pursuant to employee stock
benefit plans 362,298 (208,321) 153,977
Compensation related to
grant of restricted
shares of common stock 40,000 (95,897) (55,897)
------------- -------------- ------------- --------------- ---------------
Balances at October 28, 2001 $ 51,709,122 $ 136,861,557 $ (1,091,364) $ (287,050,930) $ (99,571,615)
============= ============== ============= =============== ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28
CONSOLIDATED STATEMENT OF CASH FLOWS
SHONEY'S, INC. AND SUBSIDIARIES
YEARS ENDED
-----------
OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2000 1999
---- ---- ----
Operating activities
Net income (loss) $ (12,882,984) $ 60,136,599 $ (28,826,398)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
(Income) loss from discontinued
operations, net of income taxes 212,007 (2,251,069) (9,973,472)
(Gain) loss on sale of discontinued
operations, net of income taxes 3,929,000 (489,260)
Depreciation and amortization 26,394,086 33,059,190 38,168,237
Interest expense on zero coupon convertible
debentures and other noncash charges 9,443,769 14,035,342 15,830,550
Deferred income taxes (644,000) (981,000) (1,890,000)
Gain on disposal of property and equipment (10,082,984) (7,388,217) (18,659,051)
Extraordinary gain on early
extinguishment of debt (82,477,143)
Payment for debt retirement costs (3,175,257)
Impairment of long-lived assets 4,969,463 15,221,484 18,422,554
Changes in operating assets and liabilities:
Notes and accounts receivable 1,627,221 (164,214) 946,640
Inventories 84,631 (98,631) 728,933
Prepaid expenses 103,427 1,008,171 787,577
Accounts payable (1,941,057) (1,678,634) (6,571,249)
Accrued expenses (11,463,239) (6,002,907) (6,908,170)
Litigation settlement 14,500,000
Refundable income taxes 14,005,359
Other liabilities (7,309,820) (12,394,556) (537,855)
-------------- --------------- -------------
Net cash provided by continuing
operating activities 2,439,520 6,359,898 30,023,655
Net cash provided by discontinued
operating activities 7,050,470 12,217,265 6,952,668
-------------- --------------- -------------
Net cash provided by operating activities 9,489,990 18,577,163 36,976,323
Investing activities
Purchases of property and equipment (12,733,166) (21,837,682) (25,588,907)
Proceeds from disposal of
property and equipment 27,849,243 28,834,942 70,714,788
Increase in other assets (5,538,620) (1,225,709) (1,740,211)
-------------- --------------- -------------
Net cash provided by continuing
investing activities 9,577,457 5,771,551 43,385,670
Net cash provided by discontinued
investing activities 8,087,390 11,521,343 2,499,031
-------------- --------------- -------------
Net cash provided by investing activities 17,664,847 17,292,894 45,884,701
Financing activities
Proceeds of long-term debt 125,650,028 261,845,000
Payments on long-term debt and capital
capital lease obligations (147,532,990) (284,531,721) (84,289,662)
Proceeds from line of credit
and short-term debt 4,200,000 177,241,268 51,868,000
Payments on line of credit
and short-term debt (4,200,000) (188,128,268) (40,981,000)
Payments on litigation settlement (3,726,680) (14,567,992)
Payments for debt issue costs (1,867,551) (14,189,913) (180,093)
-------------- --------------- -------------
Net cash used by continuing
financing activities (23,750,513) (51,490,314) (88,150,747)
Net cash provided (used) by
discontinued financing activities (5,757,194) 12,616,045
-------------- --------------- -------------
Net cash used by financing activities (29,507,707) (38,874,269) (88,150,747)
-------------- --------------- -------------
Decrease in cash and cash equivalents (2,352,870) (3,004,212) (5,289,723)
Cash and cash equivalents at
beginning of year 7,974,050 10,978,262 16,267,985
-------------- --------------- -------------
Cash and cash equivalents at end of year $ 5,621,180 $ 7,974,050 $ 10,978,262
============== =============== =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHONEY'S, INC. AND SUBSIDIARIES
OCTOBER 28, 2001, OCTOBER 29, 2000 AND OCTOBER 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The Consolidated Financial Statements include
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made in the Consolidated Financial Statements to
conform to the 2001 basis of presentation.
PROPERTY AND EQUIPMENT -- Land, buildings, leasehold improvements, rental
properties and restaurant and other equipment are recorded at the lower of
cost, including a provision for capitalized interest, or market. Depreciation
and amortization are provided principally on the straight-line method over
the following estimated useful lives: restaurant buildings--20 years; certain
office buildings--20 years; real property leased to others--over the term of
the lease, generally 15 to 20 years; restaurant and other equipment--3 to 10
years; and capital leases and leasehold improvements--lesser of life of
assets or the term of the lease.
GAINS ON ASSET SALES -- Gains on asset sales that include real estate owned
by the Company are recognized in accordance with Statement of Financial
Accounting Standards No. 66 "Accounting for Sales of Real Estate" ("SFAS
66"). For restaurant sale transactions that do not include real estate owned
by the Company, gains are recognized at the time of sale, if the collection
of the sales price is reasonably assured and the Company does not remain
contingently liable in the case of a leased property.
GOODWILL -- The excess of cost over the fair market value of net identifiable
assets of acquired companies and acquired restaurant operations are amortized
on a straight-line basis over various periods ranging from 10 to 20 years.
The Company evaluates goodwill for impairment at least annually. In
completing this evaluation, the Company compares its best estimates of future
cash flows, excluding interest costs, with the carrying value of goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company evaluates the recoverability
of its long-lived assets in accordance with Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires periodic
assessment of certain long-lived assets for possible impairment when events
or circumstances indicate that the carrying amounts may not be recoverable.
Long-lived assets are grouped and evaluated for impairment at the lowest
level for which there are identifiable cash flows that are independent of the
cash flows of other groups of assets. The Company evaluates cash flows for
individual restaurants and related goodwill. If it is determined that the
carrying amounts of such long-lived assets are not recoverable, the assets
are written down to their fair value. The Company considers fair value to
either be the real estate value for the respective restaurant or the
discounted value of the estimated cash flows associated with the respective
restaurant. The Company transfers net property and equipment to assets held
for sale when a plan to dispose of the assets has been committed to by
management. Assets transferred to net property and equipment held for sale
are recorded at the lesser of its fair value, less estimated costs to sell,
or carrying amount.
CASH EQUIVALENTS -- The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
REVENUE RECOGNITION - Restaurant revenues are recognized when food and
service are rendered. Initial franchise fees and market development fees are
recorded as revenues when the restaurants begin operations and the cash
payment has been received. Franchise fees based on sales of franchisees are
accrued as earned.
INVENTORIES -- Inventories, consisting of food items, beverages and supplies,
are stated at the lower of cost or market.
PRE-OPENING COSTS -- Pre-opening costs include direct incremental costs
relating to opening new restaurants, such as training costs for new employees
and related travel expenses incurred before a new restaurant opens. Effective
November 1, 1999, these
30
costs are expensed as incurred. Prior to fiscal 2000, such costs were
capitalized and amortized over a period not to exceed one year. No
pre-opening costs were capitalized as of October 31, 1999.
ADVERTISING COSTS -- The Company charges the costs of production and
distribution of advertising to expense at the time the costs are incurred.
Advertising expense was $28.1 million, $29.3 million and $32.4 million in
2001, 2000 and 1999, respectively.
INTEREST RATE HEDGE PROGRAM -- As a hedge against fluctuations in interest
rates, the Company has entered into interest rate exchange agreements to swap
a portion of its variable rate interest payment obligations for fixed rates
without the exchange of the underlying principal amounts. The differential to
be paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt (the accrual accounting
method). The Company does not speculate on the future direction of interest
rates nor does the Company use these derivative financial instruments for
trading purposes.
FISCAL YEAR -- The Company's fiscal year ends on the last Sunday in October.
Fiscal 1999 included 53 weeks compared to fiscal years 2001 and 2000 that
were comprised of 52 weeks each.
STOCK-BASED COMPENSATION -- The Company has elected to follow Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its stock-based
compensation plans. Under APB 25, because the Company generally grants stock
under its stock-based compensation plans at an exercise price equal to the
fair value of the shares at the date of grant, no material compensation
expense is recorded. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No.123 "Accounting for Stock-
Based Compensation" ("SFAS 123"). (See Note 9 - Stock Based Compensation).
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The following methods and assumptions
were used by the Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
Long-term debt: The carrying amounts of the Company's borrowings under the
variable rate portion of the Shoney's mortgage financing, Shoney's line of
credit, Captain D's term notes and Captain D's line of credit which have
variable interest rates approximate their fair value. The fair value of the
Company's subordinated zero coupon convertible debentures was determined
based on the price offered by the Company in a tender offer which resulted in
the redemption of approximately 90% of these debentures on September 6, 2000,
and because of the near term maturity of the 8.25% subordinated convertible
debentures, the fair value of these debentures has been determined to be face
value. Since September 6, 2000, there has not been an active market for
these bonds and, therefore, fair value has not been determined by market
quotes for either issue. The fair value of other long-term debt, including
the fixed rate portion of the Shoney's mortgage financing, industrial revenue
bonds and notes payable, was estimated using discounted cash flow analyses
utilizing the Company's incremental borrowing rates for similar types of
borrowing arrangements. The fair value of the interest rate swap agreements
was determined based on quoted market prices. (See Note 8 - Debt and
Obligations Under Capital Leases.)
31
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS--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 requires 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 $8.0 million, which will be subject to the transition provisions
of SFAS 142. Amortization expense related to goodwill was $1.6 million for the
fiscal year ended October 28, 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.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144") which provides clarifications of certain implementation issues within
SFAS 121, along with additional guidance on the accounting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and applies to
all long-lived assets (including discontinued operations) and consequently
amended APB 30 "Reporting the Effects of Disposal of a Segment of a Business."
SFAS 144 develops one accounting model (based on the model in SFAS 121) for
long-lived assets that are to be disposed of by sale, as well as addresses the
principal implementation issues. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
early application is encouraged. The Company is evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption
on its financial position and results of operations.
CONCENTRATION OF RISKS AND USE OF ESTIMATES -- As of October 28, 2001, the
Company operated and franchised a chain of 951 restaurants in 27 states. The
chain consisted of two restaurant divisions: Shoney's Restaurants and Captain
D's. The majority of the Company's restaurants are located in the
southeastern United States. The Company's principal concepts are Shoney's
Restaurants, which are family dining restaurants offering full table service
and a broad menu, and Captain D's restaurants, which are quick-service
restaurants specializing in seafood. The Company extends credit to franchisee
customers for franchise fees on customary credit terms which generally do not
require customers to provide collateral or other security to the Company. The
Company has entered into long term purchase agreements with Commissary
Operations, Inc. ("COI") for delivery of 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. 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 non-
performance would materially affect the Company's results of operations.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to use
judgment and make estimates that affect the amounts reported in the
Consolidated Financial Statements. Management believes that such estimates
have been based on reasonable and supportable assumptions and that the
resulting estimates are reasonable for use in the preparation of the
Consolidated Financial Statements. Changes in such estimates will be made as
appropriate as additional information becomes available and may affect
amounts reported in future periods.
32
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 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, net income (loss) and gain (loss) on sale of discontinued
operations as follows:
2001 2000 1999
(in thousands) ---- ---- ----
Total revenue $ 69,126 $ 130,189 $ 141,965
Net income (loss) $ (212) $ 2,251 $ 9,973
Gain (loss) on sale of
discontinued operations $ (3,929) $ 489 $ --
NOTE 3 - ACQUISITIONS
As of September 9, 1996, the Company completed the acquisition of
substantially all the assets of TPI Enterprises, Inc. ("TPI") which, as the
then largest franchisee of the Company, operated 176 Shoney's Restaurants and
67 Captain D's restaurants. The purchase price of $164.4 million consisted of
the issuance of 6,785,114 shares of the Company's common stock valued at
$59.1 million, the assumption of $46.9 million of indebtedness under TPI's
8.25% convertible subordinated debentures, the assumption or satisfaction of
TPI's outstanding debt of approximately $59.1 million and transaction costs
of $3.0 million net of cash acquired of $3.7 million.
The TPI acquisition was accounted for as a purchase, and the results of TPI's
operations have been included in the Company's Consolidated Financial
Statements since September 9, 1996. The purchase price was allocated based on
estimated fair values at the date of acquisition and resulted in an excess of
purchase price over net assets acquired (goodwill) of approximately $50.6
million, which was originally being amortized on a straight line basis over
20 years. Effective with the first day of fiscal 1999, the Company revised
the estimated useful life of the TPI goodwill to a remaining life of 10
years. The change in estimate resulted in $1.2 million of additional
amortization in 1999. In addition, the Company wrote-off goodwill associated
with the TPI acquisition in conjunction with its impaired asset analysis of
approximately $1.3 million in 2001, $2.8 million in 2000 and $4.0 million in
1999.
As of October 28, 2001, of the properties acquired in the TPI transaction,
the Company has closed 123 under-performing Shoney's Restaurants, 14 under-
performing Captain D's restaurants, two distribution facilities that had
provided TPI's restaurants with food and supplies, and the former TPI
corporate headquarters in West Palm Beach, Florida. In addition, 17 of the
acquired Shoney's Restaurants were sold to franchisees. Twenty-eight of the
restaurants had been targeted for closure during the Company's due diligence
process as under-performing units. Costs to exit these businesses were
accrued as liabilities assumed in the purchase accounting and consisted
principally of severance pay for certain employees and the accrual of future
minimum lease obligations in excess of anticipated sublease rental income.
The total amount of such liabilities included in the purchase price
allocation was approximately $21.0 million.
Approximately $1.9 million was charged to this liability in 1999, including
approximately $1.7 million in costs to exit restaurants acquired and $0.2
million in lease payments associated with the former TPI corporate
headquarters. Also during 1999, the Company revised its estimate of
previously accrued liabilities assumed in purchase accounting by $2.0
million. The changes in estimates were the result of assigning or
terminating certain leases on terms more favorable to the Company than
originally estimated. During 2000, approximately $0.8 million was charged
to this
33
account, including $0.1 million in lease payments associated with the former
TPI corporate headquarters. Also during 2000, the Company revised its
estimate of previously accrued liabilities in connection with purchase
accounting by $2.6 million. The reduction in liabilities accrued in
connection with purchase accounting reduced goodwill.
During 2001, approximately $0.3 million in costs was charged to this
liability. Also during 2001, the Company revised its estimate of previously
accrued liabilities assumed in purchase accounting by $1.7 million. The
changes in estimates were the result of assigning or terminating certain
leases on terms more favorable to the Company than originally estimated. The
reduction in liabilities accrued in connection with purchase accounting
reduced goodwill. Approximately $2.4 million of exit costs related to the
TPI acquisition remains accrued at October 28, 2001.
The Company made no acquisitions of restaurants during 2001, 2000 or 1999.
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 during 1999, the Company completed an
asset impairment analysis during the third quarter of 1999 and recorded an
asset impairment charge of $18.4 million. Approximately $17.1 million of the
third quarter 1999 asset impairment charge related to assets held and used in
the Company's operations and approximately $1.3 million related to assets
held for sale. Of the $17.1 million relating to assets held and used in the
Company's operations, $15.6 million related to the Shoney's Restaurant
division.
During 2000, the performance of the Company's Shoney's Restaurant segment
continued to decline. The Company completed an asset impairment analysis
during the third quarter of 2000 and recorded an asset impairment charge of
$12.8 million. During the fourth quarter of 2000, the Company recorded an
additional asset impairment charge of $2.4 million. The fourth quarter
impairment charge was the result of the Company's decision to actively market
additional real estate that resulted in the write down of certain properties to
market less costs to sell. Approximately $13.1 million of the 2000 asset
impairment charges related to assets held and used in the Company's operations.
Of the $13.1 million of charges relating to assets held and used in the
Company's operations, $11.3 million related to Shoney's Restaurants.
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.
At October 28, 2001, the carrying value of the 45 properties to be disposed
of was $19.5 million and is reflected on the Consolidated Balance Sheet as
net assets held for sale. The Company believes that it is probable that the
sale will occur and proceeds will be collected within one year. Under the
provisions of SFAS 121, depreciation and amortization are not recorded during
the period in which assets are being held for disposal.
34
NOTE 5- RESTRUCTURING EXPENSES
When the decision to close a restaurant is made, the Company incurs certain
exit costs generally for the accrual of the remaining leasehold obligations
less anticipated sublease income related to leased units that are targeted to
be closed. These exit costs are included in the Consolidated Statement of
Operations in the restructuring expenses caption. The Company recorded $5.7
million of exit costs in the fourth quarter of 1999 as a result of 76
restaurant closures. In addition, during 1999, the Company revised its
estimate of previously accrued exit costs downward by $1.7 million. The change
in estimate is the result of assigning certain leases on terms more favorable
to the Company than originally estimated. During the fourth quarter of 2000,
the Company recorded an additional $1.0 million of exit costs as a result of
restaurant closures in 2000. The Company recorded $1.7 million and $0.1
million of exit costs in the third and fourth quarters of 2001, respectively,
as a result of restaurant closures. Also during 2001, the Company revised its
estimate of previously accrued exit costs downward by $0.5 million. The change
in estimate in 2001 was the result of assigning or terminating certain leases
on terms more favorable to the Company than originally estimated. The Company
charged approximately $2.6 million, $5.9 million and $3.2 million against these
exit cost reserves in 2001, 2000 and 1999, respectively. The increase in
charges against the exit cost reserves in 2000 was partially the result of
$2.2 million of lump sum payments to settle all remaining obligations of
certain leases. Approximately $5.3 million of accrued exit costs remains at
October 28, 2001.
Thirty-six additional under-performing restaurants were closed during the first
quarter of 1999 and ten restaurants were sold to franchisees. Fifteen
restaurants were closed during the second quarter of 1999. During 1999, the
Company closed a total of 127 under-performing restaurants (including the 76
restaurants closed in the fourth quarter) and 19 restaurants were sold to
franchisees. In 2000, the Company closed thirteen under-performing restaurants
and sold twelve restaurants to franchisees. In 2001, the Company closed 51
under-performing restaurants and sold 20 restaurants to franchisees. Below are
sales and EBIT (which, when that term is used in this Annual Report on Form
10-K, means operating income before asset impairment charges, restructuring
charges and litigation settlements) for all restaurants closed or sold.
2001 2000 1999
EBIT AS EBIT AS EBIT AS
(IN THOUSANDS) SALES DEFINED SALES DEFINED SALES DEFINED
----- ------- ----- ------- ----- -------
Stores closed during 2000 and prior years $ -- $ (244) $ 16,715 $ (2,863) $ 128,683 $ (15,912)
Stores closed or sold during 2001 47,821 (5,623) 77,144 (4,805) 82,287 (521)
-------- --------- -------- --------- --------- ----------
Total $ 47,821 $ (5,867) $ 93,859 $ (7,668) $ 210,970 $ (16,433)
======== ========= ======== ========= ========= ==========
NOTE 6 - DEBT ISSUE COSTS
Debt issue costs are capitalized and amortized using the effective interest
method over the term of the related debt issues. Issue costs for continuing
operations were approximately $1.9 million, $14.2 million and $0.2 million
relating to various financings during 2001, 2000 and 1999, respectively, have
been paid and deferred. Amortization of debt issue costs during 2001, 2000
and 1999 for continuing operations was approximately $6.4 million, $3.2
million and $4.6 million, respectively.
The Company had unamortized debt issue costs deferred at September 6, 2000 of
$3.7 million related to the 1997 Credit Facility and the subordinated debt
repurchased during fiscal 2000. These costs were charged against the
extraordinary gain on early extinguishment of debt in the fourth quarter of
2000.
35
NOTE 7 - INCOME TAXES
The components of the Company's deferred tax assets and liabilities as of
October 28, 2001 and October 29, 2000 are as follows:
2001 2000
---- ----
Deferred tax assets:
Reserve for insurance $ 13,706,512 $ 15,472,285
Reserve for restructuring and closed stores 3,039,255 4,326,768
Amortization of intangibles 1,338,227 1,878,081
Net operating loss, contribution and tax
credit carryforwards 21,076,091 15,915,045
Book over tax depreciation 6,680,994 4,100,386
Other - net (1,262,115) 197,125
-------------- --------------
Deferred tax assets 44,578,964 41,889,690
Less valuation allowance (44,578,964) (41,889,690)
-------------- --------------
Total net deferred tax asset $ 0 $ 0
============== ==============
At October 28, 2001, the Company had targeted jobs and tip credit
carryforwards of approximately $4.6 million which expire during the years
2002 through 2010. These carryforward items were acquired in the acquisition
of TPI, and the utilization of these carryforwards is subject to limitations
imposed by the Internal Revenue Code. The Company also has a net operating
loss carryforward of $14.5 million and targeted jobs and tip credit
carryforwards of $4.7 million, which expire from 2015 to 2021 and are not
subject to limitations imposed by the Internal Revenue Code. The Company also
has an alternative minimum tax credit carryforward of $1.0 million, which has
no expiration period. The Company has state net operating loss carryforwards
of approximately $135.0 million, which expire from 2003 to 2021.
In the fourth quarter of 2000, an adjustment was made to the TPI purchase
price allocation. As a result, deferred tax assets related to the TPI
acquisition were reduced by $1.0 million, and the valuation allowance related
to the TPI deferred tax assets was also reduced by $1.0 million, resulting in
a decrease in income tax expense. The total deferred tax asset valuation
allowance at October 29, 2000 was $41.9 million and decreased $25.9 million
during 2000. The decrease in the valuation allowance was primarily the
result of utilization of net operating loss carryforwards in that fiscal
year. If the deferred tax assets are realized in the future, the related tax
benefits will reduce income tax expense.
In 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 relating
to the TPI deferred tax assets was also reduced by $0.6 million, resulting in
a decrease in income tax expense. The total deferred tax asset valuation
allowance at October 28, 2001 was $44.6 million and increased $2.7 million
during fiscal year 2001. If the deferred tax assets are realized in the
future, the related tax benefits will reduce income tax expense.
The components of the provision for (benefit from) income taxes are as
follows:
2001 2000 1999
---- ---- ----
Current:
Federal $ 0 $ 945,000 $ 0
State 327,000 967,000 755,000
----------- ------------ -------------
327,000 1,912,000 755,000
----------- ------------ -------------
Deferred:
Federal (560,000) (853,000) (821,000)
State (84,000) (128,000) (1,069,000)
----------- ------------ -------------
(644,000) (981,000) (1,890,000)
----------- ------------ -------------
Total income tax provision (benefit) $ (317,000) $ 931,000 $ (1,135,000)
=========== ============ =============
36
The income statement classification of the provision for (benefit from)
income taxes is as follows:
2001 2000 1999
---- ---- ----
Income tax benefit
attributable to continuing
operations $ (317,000) $ (796,000) $ (1,413,000)
Income tax provision
attributable to discontinued
operations 0 292,000 278,000
Extraordinary gain on early
extinguishment of debt 0 1,435,000 0
----------- ------------ -------------
Total income tax provision (benefit) $ (317,000) $ 931,000 $ (1,135,000)
=========== ============ =============
A reconciliation of the difference between total income tax provision
(benefit) and the amount computed using the statutory federal income tax rate
is as follows:
2001 2000 1999
---- ---- ----
Statutory federal income tax rate 35% 35% 35%
Federal income taxes (benefit)
based on the statutory tax rate $ (4,619,994) $ 21,373,659 $ (10,486,489)
State and local income taxes, net
of federal tax benefit (206,292) 2,867,590 (1,961,864)
Targeted jobs and tip credits (916,170) (944,957) (1,175,886)
Goodwill amortization and
impairment write down 978,891 1,715,482 2,391,232
Loss on sale of subsidiary 1,325,230 0 0
Change in valuation allowance 2,689,276 (25,975,420) 5,328,453
Other 432,059 1,894,646 4,769,554
------------- ------------- --------------
Total income tax provision $ (317,000) $ 931,000 $ (1,135,000)
(benefit) ============= ============= ==============
The Company made income tax payments, (net of refunds), of approximately $1.1
million, $0.7 million and ($19.6 million) during 2001, 2000 and 1999,
respectively.
NOTE 8 - DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Debt and obligations under capital leases at October 28, 2001 and October 29,
2000 consisted of the following:
2001 2000
---- ----
Shoney's - Mortgage Financing $ 95,538,337 $ 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 2,000,000 7,500,000
Subordinated zero coupon convertible
debentures, due April 2004 14,943,615 13,753,168
Subordinated convertible debentures, due July 2002 5,205,761 5,109,530
Industrial revenue bonds 5,765,000 10,165,000
Notes payable to others 2,988,828 3,763,744
------------ ------------
241,441,541 260,636,442
Obligations under capital leases 8,903,903 10,593,943
------------ ------------
250,345,444 271,230,385
Less amounts due within one year 10,320,962 7,888,629
------------ ------------
Amounts due after one year $240,024,482 $263,341,756
============ ============
37
SENIOR DEBT REFINANCING
On September 6, 2000, the Company completed a refinancing of approximately
$248.3 million in connection with a repurchase of approximately 90% of its
outstanding subordinated indebtedness for an aggregate price of approximately
$71.8 million. Consummation of the debt repurchase and the related
refinancing resulted in an extraordinary gain on the early retirement of debt
of approximately $82.5 million, net of expenses and taxes, in the Company's
fourth quarter of 2000.
At the time of the debt repurchase and related refinancing, the Company
restructured its restaurant operations by separating its Shoney's and Captain
D's operations (the "Reorganization"). The Reorganization included
transferring substantially all of the assets of the Company's Captain D's
restaurants to a wholly-owned subsidiary, Captain D's, Inc. The
reorganization allowed each of the Company's operating segments (Shoney's and
Captain D's) to be separately financed. As a result of the Reorganization
and the refinancing of the Company's senior indebtedness, each operating
segment is intended to operate as an independent business unit and be
responsible for its own indebtedness and debt service. The new senior
lending agreements generally prohibit the movement of cash between the
operating segments except for payments under certain tax sharing arrangements
and payments for administrative services. Effective January 24, 2002, under
certain circumstances, Captain D's, Inc. is allowed to make distributions of
up to $5.0 million to the Company.
SHONEY'S - MORTGAGE FINANCING
In connection with the refinancing, on September 6, 2000, the Company entered
into a $99 million, twenty-year mortgage financing (the "Mortgage Financing")
which was secured by the land, buildings and equipment of 142 Shoney's
Restaurants. The carrying value of the collateral for the Mortgage Financing
was $80.9 million at October 28, 2001. Principal reductions of approximately
$1.9 million are scheduled during 2002. Portions of this debt carry a fixed
rate of interest and the remainder is at a floating rate which is reset
monthly based on the London Interbank Offered Rate (LIBOR). As of October
28, 2001, the effective interest rates on this debt were as follows:
PRINCIPAL AMOUNT FIXED/FLOATING INTEREST RATE
---------------- -------------- -------------
$ 66,638,437 Fixed 10.23%
$ 8,613,497 Fixed 10.35%
$ 20,286,403 Floating 7.48%
SHONEY'S - LINE OF CREDIT
On September 6, 2000, the Company entered into an amendment and restatement
of the 1997 Credit Facility which provides Shoney's with a $40.0 million line
of credit (the "Shoney's Line of Credit"). The Shoney's Line of Credit is
secured by 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 term of the
Shoney's Line of Credit was scheduled to expire on September 6, 2002. In
addition, the letters of credit issued under the Shoney's Line of Credit were
scheduled to expire 60 days prior to the September 6, 2002 maturity, or July 8,
2002. On February 11, 2002, the Shoney's Line of Credit was amended to extend
the termination date to November 29, 2002 and to extend the expiration of the
letters of credit issued under the Shoney's Line of Credit to October 30, 2002.
The carrying value of the collateral for the Shoney's Line of Credit was $17.7
million at October 28, 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 October 28, 2001, the Company had sold $13.4 million of
collateral properties and has reduced availability
38
by $10.0 million. The Company paid the remaining $3.4 million into a cash
collateral account. Available credit under the Shoney's Line of Credit is also
reduced by letters of credit. At October 28, 2001, the Company had no
borrowings under the Shoney's Line of Credit and had outstanding letters of
credit of $24.3 million, resulting in available credit of $5.7 million. Also,
pursuant to the terms of the Shoney's Line of Credit, the Company has sold
certain other assets serving as collateral for the Shoney's Line of Credit and
retained and used in the business $15.0 million of the sale proceeds. Proceeds
from the sale of certain other assets will be used to either repay drawings
under the line, which will also permanently reduce availability, or cash
collateralize the line. As of October 28, 2001, the Company had cash
collateralized the Shoney's Line of Credit in the amount of $6.8 million, which
is classified as restricted cash on the balance sheet. 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, Inc. ("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 two term notes totaling $115.0 million and a $20.0 million line
of credit (the "Captain D's Facility"). This facility is secured by all of the
assets owned by Captain D's including owned land, buildings and equipment,
certain leased restaurant properties, and a pledge of certain other assets of
Captain D's. The carrying value of the collateral for the Captain D's Facility
was $86.8 million at October 28, 2001. The Captain D's Facility had been
scheduled to mature on December 31, 2001. On December 27, 2001, Captain D's
received an extension of the facility to March 31, 2002. On January 24, 2002,
the maturity date of the Captain D's Facility was further extended to
October 31, 2002. At October 28, 2001, there was $115.0 million
outstanding under the term notes and $2.0 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 October 28, 2001, Captain D's outstanding letters of credit
totaled $4.9 million, resulting in available credit of $13.1 million.
Captain D's pays a commitment fee of .50% for unused available credit under
the line of credit. The interest rate on term notes totaling $85.0 million
is at floating rates (4% over LIBOR or 3% over the prime rate) and, with
respect to term notes totaling $30.0 million, the interest rate was initially
at floating rates of 4% over LIBOR and 3% over the prime rate. On January
1, 2001, the interest rate for the $30.0 million term notes increased by
0.50% and, pursuant to the terms of the Captain D's Facility, increased by
0.50% on the last day of each calendar quarter. The interest rate for the
line of credit ranges from 3% to 4% over LIBOR or 2% to 3% over the prime
rate, based on certain defined financial ratios. At October 28, 2001, the
effective interest rates for the term notes and the line of credit were 9.8%
and 6.4%, respectively. (See Note 20 - Subsequent Events).
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
39
million of the interest rate swaps with a fixed rate of 6.1% terminated on
January 8, 2001. The Shoney's Line of Credit no longer requires a hedge
program.
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 rates at 5.9% and 5.8%,
respectively, plus the applicable margin through December 31, 2001. At
October 28, 2001, the estimated cost to Captain D's to exit the interest rate
swap agreements was approximately $1.1 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 (provided, however, that effective January 24,
2002, under certain circumstances, Captain D's, Inc. is allowed to make certain
distributions of up to $5.0 million to the Company); (5) prohibit mergers,
consolidations or similar transactions; and (6) include other affirmative and
negative covenants.
Based on operating results for the fiscal year ended October 28, 2001, it was
probable that a covenant violation would occur under the Shoney's Mortgage
Financing agreements. As a result of this probability, the Company received
agreements in which the lenders agree to forebear, until October 31, 2002,
from taking any action with respect to the failure of the Company to meet the
fixed charge coverage covenant and continuous operating covenants on certain
closed or under-performing restaurants for 2001 and 2002. In addition, the
Company received approval from the lenders to move certain collateral
properties among the various collateral pools and to substitute three
properties into the pools in an effort to strengthen certain collateral
pools' financial ratios. This reallocation of collateral has begun and is
required to be completed by September 30, 2002. As of October 28, 2001, the
Company had sold three of the restaurants which secured the Mortgage
Financing and reduced the outstanding indebtedness in the amount of $1.6
million. Further, the Lender has agreed to accept a one percent prepayment
penalty with respect to the debt prepaid under the Mortgage Financing.
Based on results for 2001, it was probable that Captain D's would have
violated certain financial covenants contained in the Captain D's Facility.
Additionally, Captain D's was required to seek an extension of the December
31, 2001 scheduled maturity of the indebtedness because a refinancing had not
been completed. Pursuant to a modification to the Captain D's Facility which
became effective on December 27, 2001, Captain D's secured the necessary
modifications to the financial covenants and received an extension of the
maturity of the indebtedness until March 31, 2002. (See Note 20 - Subsequent
Events).
40
SUBORDINATED ZERO COUPON CONVERTIBLE DEBENTURES, 8.5%, DUE APRIL 2004
The subordinated zero coupon convertible debentures were issued at $286.89 per
$1,000 note (aggregate amount of $57.7 million). There are no periodic cash
payments of interest. The issue price represents a yield to maturity of 8.5%
based on a semiannual bond equivalent basis. Each note is convertible into
29.349 shares of the Company's common stock, at the option of the holder.
Following consummation of the Tender Offer during 2000, the Company has
reserved 537,908 shares for future issuance pursuant to the subordinated zero
coupon convertible debentures.
SUBORDINATED CONVERTIBLE DEBENTURES, 8.25%, DUE JULY 2002
In connection with the acquisition 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 debentures are
convertible at the holders' option, subject to compliance with the provisions
of the supplemental indenture, into 50.508 shares of the Company's stock for
each $1,000 debenture. The Company has reserved 266,581 shares for future
issuance pursuant to these debentures. In addition, upon conversion, debenture
holders are entitled to a cash distribution per share equal to the cash
distributions made by TPI to its common shareholders in connection with the
liquidation and dissolution of TPI. Interest on the bonds is due semi-annually
in January and July.
OTHER DEBT INFORMATION
The Company's industrial revenue bonds include $5.8 million at October 28,
2001, at fixed interest rates ranging from 9% to 10%.
Debt and obligations under capital leases maturing in each of the next five
fiscal years are as follows:
(IN MILLIONS)
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
$10.3 $125.2 $22.5(1) $4.2 $4.3
(1) Includes accreted value of subordinated zero coupon convertible
debentures at maturity.
Net interest costs of approximately $0.0 million, $0.1 million and $0.0
million were capitalized as a part of building costs during 2001, 2000 and
1999, respectively. Interest paid for continuing operations was approximately
$26.2 million, $24.3 million and $27.4 million during 2001, 2000 and 1999,
respectively.
The Company has standby letters of credit of $29.2 million outstanding at
October 28, 2001, which are principally utilized to support the Company's
self-insurance programs. The outstanding letters of credit are supported by
the Shoney's and Captain D's Lines of Credit in the amounts set forth in the
table below.
Line of Credit Outstanding Letters of Credit
-------------- -----------------------------
Shoney's $ 24,316,168
Captain D's 4,856,000
------------
$ 29,172,168
============
41
The carrying value and estimated fair value of the Company's debt are
summarized in the following table:
OCTOBER 28, 2001
----------------
ESTIMATED
CARRYING VALUE FAIR VALUE
-------------- ----------
Shoney's - Mortgage Financing $ 95,538,337 $ 97,812,213
Captain D's - Term Notes 115,000,000 115,000,000
Captain D's - Line of Credit 2,000,000 2,000,000
Subordinated zero coupon convertible debentures 14,943,615 4,582,000
Subordinated convertible debentures 5,205,761 5,205,761
Industrial revenue bonds 5,765,000 5,738,705
Notes payable to others 2,988,828 2,953,815
Interest rate swap agreements 0 1,091,364
------------- -------------
Total Debt $ 241,441,541 $ 234,383,858
============= =============
See Note 1 - Summary of Significant Accounting Policies for a further
discussion of the basis for management's estimates of the fair value of
financial instruments.
NOTE 9 - STOCK BASED COMPENSATION
The stock option plan adopted by the Company in 1981 (the "1981 Plan"), and
as subsequently amended, provided for the issuance of options to purchase
7,501,431 shares of the common stock of the Company and included 1,596,653
and 4,004,931 shares reserved for future grants as of October 29, 2000 and
October 28, 2001, respectively. On September 9, 1996, options to purchase
615,146 shares of the Company's common stock were issued in exchange for the
outstanding TPI options in connection with the Company's acquisition of the
assets of TPI (the "1996 Plan"). The 1996 Plan provided for the issuance of
options to purchase 620,000 shares of which 3,152 were outstanding as of
October 28, 2001.
The plans provide for the issuance of options having terms of up to 10 years
and which become exercisable generally at a rate of 20% per year or as
determined by the Company's Management Development and Compensation Committee
of the Board of Directors, but not to exceed 33 1/3% per year. Option prices
may not be less than the market price on the date of grant.
The stock plan adopted by the Company in 1998 (the "1998 Stock Plan")
provided for the issuance of 2,000,000 shares of the Company's common stock
to employees or to non-employee Board members as stock incentives and/or
other equity interests or equity-based incentives in the Company. As of
October 29, 2000 and October 28, 2001 there were 647,542 and 0 shares,
respectively, available for future issuance under the plan.
The Company has a stock option plan for directors (the "Directors Plan")
under which options to purchase 200,000 shares of common stock may be granted
to non-employee directors. The Directors Plan covered 195,000 shares of the
common stock of the Company and included 160,000 shares available for future
grant at each of October 29, 2000 and October 28, 2001. Each non-employee
director receives an option to purchase 5,000 shares upon their initial
election to the Board and every five years thereafter receives an option to
purchase an additional 5,000 shares. The option price is the market price of
the Company's common stock on the date that the option is granted. Each
option has a term not to exceed ten years and is exercisable at the rate of
20% per year and in full in the event of death or disability.
On December 9, 1997, the Company repriced 333,500 stock options that were
granted between June 8, 1995 and September 2, 1997 with exercise prices
ranging from $5.375 to $10.625. The new exercise price for these options is
$3.9375, which was the fair market value as of December 9, 1997. These
options retained their original term and vesting schedule. Additionally,
442,889 stock options were canceled and regranted at $3.9375 on that same
date. The original options were granted between November 11, 1989 and October
13, 1994 with exercise prices ranging from $13.875 to $25.51. Of these,
404,950 have a five year term and vest 20% per year after one year and fully
vest after four years and eight months. The remaining 37,939 options have a
ten year term and vest 20% per year after one year and fully vest after five
years.
42
On January 15, 1998, the Company canceled 1,000,000 options that were
exercisable based on the market price appreciation of the Company's common
shares or six years of continuous employment and had an exercise price of
$9.625. In exchange, 100,000 options, having a ten year term, were granted
with an exercise price of $3.125. These options vest 20% per year after one
year and fully vest after five years.
A summary of activity under the plans is as follows:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at October 25, 1998 6,852,790 $ 7.17
Issued 1,391,987 2.34
Exercised 0 --
Expired or canceled (2,870,121) 9.76
-----------
Outstanding at October 31, 1999 5,374,656 4.54
Issued 1,789,500 1.01
Exercised 0 --
Expired or canceled (1,190,563) 3.55
-----------
Outstanding at October 29, 2000 5,973,593 3.68
Issued 2,115,000 0.47
Exercised 0 --
Expired or canceled (4,553,941) 2.53
-----------
Outstanding at October 28, 2001 3,534,652 $ 3.25
===========
At October 28, 2001, October 29, 2000 and October 31, 1999 the number of
options exercisable was 1,696,483, 1,974,585 and 1,282,559, respectively, and
the weighted-average exercise price of those options was $4.34, $5.50 and
$6.07, respectively.
The following table summarizes information about stock options outstanding at
October 28, 2001:
WEIGHTED-
AVERAGE
NUMBER WEIGHTED- REMAINING
RANGE OF OUTSTANDING AT AVERAGE CONTRACTUAL
EXERCISE PRICES OCTOBER 28, 2001 EXERCISE PRICE LIFE(YEARS)
--------------- ---------------- -------------- -----------
$0.45-$1.44 1,094,987 $ 0.9582 8.4
$1.45-$3.94 1,291,528 $ 2.9126 5.7
$3.95-$5.00 933,585 $ 4.9175 6.2
$5.01-$25.51 214,552 $ 9.6783 4.2
43
The following table presents the fair value of options granted during 2001,
2000 and 1999:
2001
----
NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE FAIR VALUE
------- -------------- ----------
Where exercise price:
Equals market price 2,115,000 $0.47 $0.32
=========
2000
----
NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE FAIR VALUE
------- -------------- ----------
Where exercise price:
Exceeds market price 250,000 $1.50 $0.55
Equals market price 1,539,500 0.93 0.59
--------- ----- -----
1,789,500 $1.01 $0.59
=========
1999
----
NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE FAIR VALUE
------- -------------- ----------
Where exercise price:
Equals market price 1,391,987 $2.34 $1.39
=========
The Company also has an Employee Stock Purchase Plan under which 837,009
shares of the Company's common stock may be issued at October 28, 2001. Under
the terms of this plan, employees may purchase the Company's common stock
through payroll deductions. The purchase price is 85% of the lower of (i) the
average of the closing market prices on the first trading day of each
calendar month or (ii) the closing market price on the last trading day of
each calendar year. The exercise date under this plan is the last trading day
of each calendar year and the Company issued common shares to employees of
362,298, 261,500 and 186,007, in 2001, 2000 and 1999, respectively, and
issued these shares at prices of $0.43, $1.17 and $1.17 per share for the
same periods, respectively. There have been no charges to income in
connection with the plan other than incidental expenses in the administration
of the plan. The weighted-average fair value of shares purchased during 2001,
2000 and 1999, was $0.12, $0.34 and $0.30 per share, respectively.
The Company has an Employee Stock Bonus Plan under which 588,083 shares of
the Company's common stock may be issued at October 28, 2001. The awards
under this plan consist of both a stock and a cash bonus. The stock bonuses
vest 10% per year after one year and in full after five years and are
distributed upon vesting. On each vesting date, a cash bonus equal to 25% of
the market value of the shares being distributed also will be paid. A maximum
of 1,000 shares may be awarded to any employee annually.
As of October 28, 2001, there were no outstanding grants of bonus shares
under this plan. The Company has not recognized compensation expense related
to this plan during 2001, 2000 or 1999.
The shares distributed and cash bonuses paid pursuant to this plan during the
past three fiscal years were as follows:
SHARES CASH BONUSES
------ ------------
1999 3,400 $ 1,169
2000 5,700 $ 1,959
2001 0 $ 0
44
On November 12, 1997, the Company's Board of Directors approved the
employment agreement of the Company's former President and CEO, the terms of
which require an award of 120,000 restricted shares of Shoney's, Inc. common
stock. Pursuant to the terms of the agreement, the employee received 40,000
shares on December 31, 1998, December 31, 1999 and December 31, 2000. The
stock shares are reflected in compensation expense based on the vesting
schedule. In addition, upon distribution of the restricted shares, the
employee received a tax equalization bonus.
The Company applies APB 25 and the related interpretations in accounting for
its stock-based compensation plans; accordingly, the Company recognizes no
compensation expense for its stock option plans or Employee Stock Purchase
Plan. Pro forma information regarding net income and earnings per share is
required by SFAS 123 as if the Company had accounted for its stock-based
compensation plans under the fair value method prescribed by that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Risk-free interest rate 5.12% 5.49% 6.42%
Dividend yield None None None
Volatility factor .672 .574 .487
Weighted-average expected option life 7 years 7 years 7 years
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's actual and pro forma net income (loss) and income (loss) per share
are presented in the following table (in thousands, except for per share
data):
2001 2000 1999
---- ---- ----
Net income (loss) - as reported $ (12,883) $ 60,137 $ (28,826)
Net income (loss) - pro forma $ (13,548) $ 58,976 $ (30,095)
Basic income (loss) per share -
as reported $ (0.25) $ 1.19 $ (0.58)
Basic income (loss) per share -
pro forma $ (0.26) $ 1.17 $ (0.61)
Diluted income (loss) per share -
as reported $ (0.25) $ 1.19 $ (0.58)
Diluted income (loss) per share -
pro forma $ (0.26) $ 1.17 $ (0.61)
Because SFAS 123 provides for pro forma amounts for options granted beginning
in fiscal 1996, the pro forma compensation expense could increase in future
years as new option grants are included in the pricing model.
45
NOTE 10 - LEASES
The Company has noncancellable lease agreements for certain restaurant land
and buildings. Substantially all lease agreements may be renewed for periods
ranging from five to fifteen years, and provide for contingent rentals based
on percentages of net sales (generally 3% to 6%) against which minimum
rentals are applied.
Buildings under capital leases of $9.8 million at October 28, 2001 and $11.5
million at October 29, 2000 and accumulated amortization of $7.9 million and
$8.3 million at October 28, 2001 and October 29, 2000, respectively, relate
to the building portion of capital leases involving land and buildings.
Amortization of buildings under capital leases is included in depreciation
expense.
At October 28, 2001, minimum rental commitments under capital leases and
operating leases having an initial or remaining noncancellable term of one
year or more are shown in the following table:
CAPITAL OPERATING SUBLEASE
LEASES LEASES AMOUNTS TOTAL
------ ------ ------- -----
2002 $ 2,379,154 $ 8,456,501 $ (2,733,749) $ 8,101,906
2003 2,186,532 7,294,755 (2,506,578) 6,974,709
2004 2,101,393 5,921,291 (2,127,878) 5,894,806
2005 1,693,330 4,909,476 (1,847,137) 4,755,669
2006 1,380,294 4,025,854 (1,539,324) 3,866,824
Thereafter 2,483,291 8,995,724 (3,191,831) 8,287,184
------------- ------------ -------------- ------------
Total minimum rentals $ 12,223,994 $ 39,603,601 $ (13,946,497) $ 37,881,098
============ ============== ============
Amount representing interest (3,320,091)
-------------
Present value of net
minimum rentals $ 8,903,903
=============
Contingent rental expense relating to the land and building portion of capital
eases was $0.8 million, $1.1 million and $1.0 million in 2001, 2000 and 1999,
respectively.
Total rental expense for all operating leases not capitalized is as follows:
2001 2000 1999
---- ---- ----
Minimum rentals $ 4,867,849 $ 4,379,125 $ 5,785,788
Contingent rentals 523,237 643,371 834,926
------------- ------------- -------------
Subtotal 5,391,086 5,022,496 6,620,714
Sublease rentals (1,130,726) (1,191,502) (1,219,595)
------------- ------------- -------------
Total $ 4,260,360 $ 3,830,994 $ 5,401,119
============= ============= =============
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Management Retention Agreements - The Company has Management Retention
Agreements with certain officers and key employees of the Company to assist in
the retention of key management personnel. Agreements which cover 14 officers
provide for payment of between one and two years of base salary and, with
respect to certain executive officers, bonus and incentive plan payments, in
the event that the executives are terminated without good cause or if the
executives resign for "good reason" (as defined in the agreements) within a one
year period or, with respect to certain executive officers, a two year period,
following a change in control of the Company. The Company, through its
subsidiary Captain D's, Inc., also has Management Retention Agreements with
certain officers and key employees of Captain D's that provide for special
payments in the event of a change in control, on the earliest to occur of (a)
one year following the occurrence of a change in control, (b) the termination
of employment for any reason other than "good cause" (as defined in the
agreements) or (c) the termination of employment by the employee for "good
reason" (as defined in the agreements). The Company's total contingent
liability with respect to the Management Retention Agreements is approximately
$3.6 million. The Company's policy for officers not party to the Management
Retention Agreements is to provide severance benefits of up to six months
salary for such officers in the event they are terminated without cause.
46
Leasehold Interests Assigned to Others - The Company has assigned to third
parties its leasehold interest with respect to approximately 41 properties on
which the Company remains contingently liable to the landlord for the
performance of all obligations in the event that the assignee does not
perform its obligations under the lease. The assigned leases are for
restaurant sites that the Company has closed. The Company estimates its
contingent liability associated with these assigned leases to be
approximately $13.3 million.
Property Sublet to Others - The Company subleases approximately 59 properties
to others. In general, the Company remains liable for the leasehold
obligation in the event that these third parties do not make the required
lease payments. The majority of the sublet properties are former restaurant
sites that the Company has closed. The Company estimates its contingent
liability associated with these sublet properties to be approximately $12.4
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 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 $2.8 million as
of October 28, 2001.
Litigation - (See Note 13 -- Litigation.)
NOTE 12 - SETTLEMENT OF LAWSUITS
In 1999, the court entered final judgment approving a global settlement of
three class action cases that claimed that the Company had violated the Fair
Labor Standards Act. Under the settlement, the Company agreed to pay $18
million to settle these claims. Of this amount, $3.5 million was accrued as
a liability during the fourth quarter of 1998 following an adverse ruling in
one of the cases on the issue of liability. 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 13 - LITIGATION
The Company is a party to legal proceedings incidental to its business. In
the opinion of management, based upon information currently available, the
ultimate liability with respect to these actions will not materially affect
the operating results or the financial position of the Company.
NOTE 14 - RETIREMENT PLAN
The Company established the Shoney's, Inc. 401(k) Retirement Savings Plan
(the "Plan") effective January 1, 1996. The Plan covers all employees who
meet certain age and minimum service hour requirements. The Company matches
employee contributions at 25%, up to a maximum of 4% of the participants'
base pay. Total expense recognized by the Company under the Plan was
approximately $0.0 million, $0.0 million and $0.3 million for 2001, 2000 and
1999, respectively.
NOTE 15 - EARNINGS PER SHARE
As of October 28, 2001, the Company had outstanding 3,534,652 options to
purchase shares at prices ranging from $0.45 to $25.51. The Company also has
subordinated zero coupon convertible debentures and 8.25% subordinated
convertible debentures which are convertible into common stock at the option
of the debenture holder. As of October 28, 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. The Company reported losses from continuing
operations before extraordinary items during 2001, 2000 and 1999;
47
therefore, the effect of considering these potentially dilutive securities on
loss per share from continuing operations before extraordinary gain would have
been anti-dilutive and, as a result, has not been included.
NOTE 16 - SHAREHOLDER RIGHTS PLAN
The Company's Board of Directors has adopted a shareholder rights plan to
protect the interests of the Company's shareholders if the Company is
confronted with coercive or unfair takeover tactics by encouraging third
parties interested in acquiring the Company to negotiate with the Board of
Directors. The shareholder rights plan is a plan by which the Company has
distributed rights ("Rights") to purchase (at the rate of one Right per four
shares of common stock) shares of common stock at an exercise price of $20.00
per Right. The Rights are attached to the common stock and may be exercised
only if a person or group acquires 20% or more of the outstanding common
stock or initiates a tender or exchange offer that would result in such
person or group acquiring 30% or more of the outstanding common stock. Upon
such an event, the Rights "flip-in" and each holder of a Right will
thereafter have the right to receive, upon exercise, common stock having a
value equal to two times the exercise price. All Rights beneficially owned by
the acquiring person or group triggering the "flip-in" will be null and void.
Additionally, if, after the rights had "flipped in", a third party were to
take certain action to acquire the Company, such as a merger or other
business combination, the Rights would "flip-over" and entitle the holder to
acquire shares of the acquiring person with a value of two times the exercise
price. The Rights are redeemable by the Company at any time before they
become exercisable for $0.01 per Right and expire in 2004. In order to
prevent dilution, the exercise price and number of Rights per share of common
stock will be adjusted to reflect splits and combinations of, and common
stock dividends on, the common stock.
48
NOTE 17 - SEGMENT INFORMATION
The Company operates entirely in the food service industry with substantially
all revenues resulting from the sale of menu products from restaurants
operated by the Company. The Company has operations principally in two
industry segments, both of 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 or Restaurant
Support Center ("RSC") overhead expenses to its operating segments. All
prior periods have been restated. In addition, in 2001, certain asset gains
or losses may be recognized in segment EBIT as defined where previously all
gains or losses had been reported in "corporate and other". Gains or losses
on asset sales presented in segment information represent internal
presentation and may not equal gains and losses as presented in GAAP. The
Company's corporate and other income and expenses consist primarily of gains
from the sale of property and equipment, rental income, interest income and
miscellaneous income or expense and do not constitute a reportable segment of
the Company as contemplated by SFAS No. 131. The Company evaluates
performance based on several factors, of which the primary financial measure
is operating income before interest, taxes, restructuring charges, litigation
settlements and impairment charges ("EBIT as defined"). The accounting
policies of the business segments are the same as those described in the
summary of significant accounting policies in Note 1 to the Consolidated
Financial Statements.
REVENUE YEARS ENDED
---------------------------------------------
OCTOBER 28, OCTOBER 29, OCTOBER 31,
(IN THOUSANDS) 2001 2000 1999
---------------------------------------------
Shoney's Restaurants $ 336,462 $ 376,623 $ 500,041
Franchise fees 6,700 9,053 9,623
Other revenue 9,412 1,937 2,808
--------- --------- ---------
Total Shoney's 352,574 387,613 512,472
Captain D's restaurants 300,415 314,671 316,996
Franchise fees 5,927 5,432 5,494
Other revenue 3,033 265 364
--------- --------- ---------
Total Captain D's 309,375 320,368 322,854
Corporate and other revenue 3,559 10,095 22,081
--------- --------- ---------
Total consolidated revenue $ 665,508 $ 718,076 $ 857,407
========= ========= =========
49
EBIT (AS DEFINED) YEARS ENDED
-------------------------------------------
OCTOBER 28, OCTOBER 29, OCTOBER 31,
(IN THOUSANDS) 2001 2000 1999
-------------------------------------------
Shoney's operations $ (1,261) $ (6,614) $ (3,782)
Shoney's asset gains 5,918 -- --
--------- ---------- ----------
Total Shoney's EBIT 4,657 (6,614) (3,782)
Captain D's operations 21,424 26,494 27,391
Captain D's asset gains 2,301 -- --
--------- ---------- ----------
Total Captain D's EBIT 23,725 26,494 27,391
Corporate and other income (expense) 692 (189) (3,137)
Corporate and other asset gains 1,816 7,114 18,417
--------- ---------- ----------
Total corporate and other income 2,508 6,925 15,280
--------- ---------- ----------
Total EBIT for reportable segments 30,890 26,805 38,889
Other charges:
Interest expense 33,713 36,429 42,159
Asset impairment charges 4,969 15,221 18,423
Litigation settlements 14,500
Restructuring charges 1,267 1,032 4,020
--------- ---------- ----------
Consolidated loss from continuing operations
before income taxes and extraordinary item $ (9,059) $ (25,877) $ (40,213)
========= ========== ==========
DEPRECIATION AND AMORTIZATION
(IN THOUSANDS)
Shoney's $ 13,214 $ 18,239 $ 22,855
Captain D's 11,652 12,002 12,173
Corporate and other 1,528 2,818 3,140
---------- ---------- ----------
Total consolidated depreciation and
amortization $ 26,394 $ 33,059 $ 38,168
========== ========== ==========
CAPITAL EXPENDITURES
(IN THOUSANDS)
Shoney's $ 2,489 $ 5,034 $ 13,013
Captain D's 8,966 11,824 10,561
Corporate and other - 4,368 5,433
---------- ---------- ----------
Total consolidated capital expenditures $ 11,455 $ 21,226 $ 29,007
========== ========== ==========
50
ASSETS OCTOBER 28, OCTOBER 29,
(IN THOUSANDS) 2001 2000
---------------------------
Shoney's $ 129,768 $ 161,871
Captain D's 107,120 118,217
Corporate and other 17,369 31,761
---------- ----------
Total consolidated assets $ 254,257 $ 311,849
========== ==========
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
PER SHARE
---------
INCOME INCOME
(LOSS) (LOSS)
BEFORE NET BEFORE NET
NO. OF GROSS EXTRAORDINARY INCOME EXTRAORDINARY INCOME STOCK MARKET
WEEKS REVENUES PROFIT GAIN (LOSS) GAIN (LOSS) HIGH LOW
----- -------- ------ ---- ------ ---- ------ ---- ---
2001
First Quarter(a) 16 $197,772 $20,458 $ (9,092) $ (9,092) $(0.18) $(0.18) $1.01 $0.28
Second Quarter 12 165,879 21,124 (2,798) (2,798) (0.05) (0.05) 1.33 0.65
Third Quarter 12 160,824 22,699 (1,312)(b) (1,312)(b) (0.03) (0.03) 0.89 0.61
Fourth Quarter 12 141,033 19,096 319 319 0.01 0.01 0.65 0.25
-- -------- -------- --------- --------- ------- -------
52 $665,508 $83,377 $(12,883) $(12,883) $(0.25) $(0.25)
== ======== ======= ========= ========= ======= =======
2000
First Quarter(a) 16 $210,552 $24,451 $ (3,975) $ (3,975) $(0.08) $(0.08) $1.50 $1.06
Second Quarter 12 177,888 25,506 5,449 5,449 0.11 0.11 1.13 0.63
Third Quarter 12 172,035 19,416 (14,806)(c) (14,806)(c) (0.29) (0.29) 1.63 0.47
Fourth Quarter 12 157,601 17,475 (9,009)(c) 73,468(c)(d) (0.18) 1.45 1.06 0.44
-- -------- ------- --------- --------- ------- -------
52 $718,076 $86,848 $(22,341) $ 60,136(c) $(0.45)(e) $ 1.19
== ======== ======= ========= ========= ======= =======
(a) The first quarter of 2001 and first quarter of 2000 have been restated to
reflect discontinued operations.
(b) The third quarter of 2001 included an asset impairment charge of $5.0
million.
(c) The third quarter of 2000 and fourth quarter of 2000 included asset
impairment charges of $12.8 million and $2.4 million, respectively.
(d) The fourth quarter of 2000 included an extraordinary gain on retirement
of debt of $82.5 million.
(e) Earnings per share before extraordinary gain does not sum to the total.
NOTE 19 - ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
The Company adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities", as amended
("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 of the derivatives are either offset
51
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 is 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 October 28, 2001, the cost to exit the Company's
derivatives was $1.1 million, resulting in a charge to other comprehensive
income of $1.2 million.
NOTE 20 - SUBSEQUENT EVENTS
On January 24, 2002, the Company entered into a definitive merger agreement
(the "Merger Agreement") with Lone Star U.S. Acquisitions LLC, U.S.
Restaurant Properties Operating Limited Partnership and LSF4 Acquisition,
LLC. Pursuant to the terms of the Merger Agreement, the outstanding common
shares of Shoney's, Inc. will be acquired for $0.36 per share in cash. The
Merger Agreement, which was unanimously approved by the Company's Board of
Directors, is subject to regulatory approval, approval by Shoney's, Inc.
shareholders and other customary closing conditions, and is expected to close
in the second quarter of 2002. Following the consummation of the merger,
Shoney's, Inc. will become a private company.
Prior to the execution of the Merger Agreement, Lone Star Funds, through
certain of its affiliates, assumed the outstanding indebtedness under the
Captain D's Facility. The Captain D's Facility, previously scheduled to
mature on March 31, 2002, was extended to October 31, 2002. In connection
with the debt assumption, the Captain D's line of credit was reduced to $15.0
million, and the interest rate on the facility was increased to 12.5% until
May 15, 2002. On May 15, 2002, Captain D's will be required to pay an
extension fee equal to 2% of the facility, and the interest rate will
increase to 15%. As a result of the extension of the maturity date to
October 31, 2002, the Captain D's Line of Credit and term notes are presented
as long term debt at October 28, 2001. Additionally, in connection with the
assumption of the Captain D's Facility, Captain D's, Inc. may, under certain
circumstances, make distributions of up to $5.0 million to the Company.
On February 11, 2002, the Company received an extension of the maturity date of
the Shoney's Line of Credit from September 6, 2002 to November 29, 2002. In
addition, the expiration date of the letters of credit issued under the
Shoney's Line of Credit was extended to October 30, 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no Company disclosures required by Item 304 of Regulation S-K, 17
C.F.R. ss. 229.304.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF SHONEY'S, INC.
The Company's Board of Directors consists of the following six directors:
Stephen E. Macadam, Jeffry F. Schoenbaum, Raymond D. Schoenbaum, Carroll D.
Shanks, Felker W. Ward, Jr., and William M. Wilson.
STEPHEN E. MACADAM Age - 41
President and Chief Executive Officer Director since 1999
Consolidated Container Co., LLC
Mr. Macadam has served as President and Chief Executive Officer of
Consolidated Container Co., LLC since August 13, 2001. He previously served
as Executive Vice President, Containerboard & Packaging and Purchasing from
March 2000 to August 2001 and as Senior Vice President, Containerboard &
Packaging and Purchasing from March 1998 to March 2000 for Georgia-Pacific
Corporation. From 1988 to February 1998, Mr. Macadam was a principal with
McKinsey & Company, Inc.
JEFFRY F. SCHOENBAUM Age - 54
Private Investor Director since 1996
Mr. Schoenbaum is a private investor and serves as Vice President of Nurad
Investments, Inc., which was formed in 1987 to manage the historic
redevelopment of commercial properties in Sarasota and Tampa, Florida. He
also serves as a member of the board of directors of the Schoenbaum Family
Foundation. Mr. Schoenbaum is the brother of Raymond D. Schoenbaum.
RAYMOND D. SCHOENBAUM Age - 55
President Director since 1997
Schoenbaum Limited
Since April 1995, Mr. Schoenbaum has been President of Schoenbaum Limited, a
restaurant management company. Mr. Schoenbaum also has served since March
1996 as the President and Chief Executive Officer of Just Having Fun
Restaurants, Inc., a restaurant company currently developing a new restaurant
concept in Atlanta, Georgia. From June 1984 to March 1995, he served as the
Chairman of the Board of Innovative Restaurant Concepts, Inc., a restaurant
management company which owned and operated Rio Bravo, Ray's on the River and
Green Hills Grille restaurants. Mr. Schoenbaum sold this company to
Applebee's International, Inc. in March 1995. Mr. Schoenbaum was a member of
the board of directors of Applebee's International, Inc. from March 1995 to
August 1997. He also serves as a member of the board of directors of the
Schoenbaum Family Foundation. Mr. Schoenbaum was elected to the Board of
Directors of the Company in August 1997 pursuant to the Settlement Agreement
between the Company and Raymond D. Schoenbaum and Betty J. Schoenbaum. In
June 1998, Mr. Schoenbaum was elected Vice Chairman of the Board and became
Chairman of the Board effective January 1999 and served in such capacity
until May 2001. Mr. Schoenbaum is the brother of Jeffry F. Schoenbaum.
CARROLL D. SHANKS Age - 74
Retired Director since 1997
Mr. Shanks retired in December 1992 as Vice Chairman of American General Life
& Accident Insurance Company. He served as a member of the board of directors
of Bank of America, a subsidiary of Bank of America N.A. from 1992 until
2001. From April 1993 until June 1996, Mr. Shanks also was a member of the
board of directors of American Progressive Corporation, an insurance company.
53
FELKER W. WARD, JR. Age - 68
Chairman of the Board and Director since 1998
Chief Executive Officer
Pinnacle Investment Advisors, Inc.
Mr. Ward has served as Chairman of the Board and Chief Executive Officer of
Pinnacle Investment Advisors, Inc., an investment advisor, since its
formation in April 1994. From December 1992 to July 1996, Mr. Ward also
served as Chairman of Ward Bradford & Co., L.P., a financial services
company. Since 1979, Mr. Ward has served as the President and Vice Chairman
of Concessions International, Inc., an owner and operator of food, beverage,
gift and duty-free shops in airports. Mr. Ward has served on the board of
directors of Abrams Industries, Inc., a nonresidential construction company,
fixture manufacturer and property management company, since 1990 and on the
respective boards of directors of AGL Resources Inc., a natural gas
distributing utility, since 1988, and Smith Garden Products, Inc. since 1997.
Mr. Ward also served on the Board of Directors of Fidelity National
Corporation, a bank holding company, from 1997 until August 30, 2001.
WILLIAM M. WILSON Age - 53
President and Chairman of the Board Director since 1997
Shoney's, Inc.
Mr. Wilson has served as Chairman of the Board of Shoney's, Inc. since May 8,
2001 and additionally as President since June 19, 2001. He also has served as
President of Cherokee Equity Corporation, an investment holding company,
since 1984, and as President of Cherokee Properties, Inc., a real estate
investment company, since 1979.
EXECUTIVE OFFICERS OF SHONEY'S, INC.
See "Executive Officers of the Registrant" in Part I of this Annual Report on
Form 10-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than 10% of a
registered class of the Company's equity securities to file with the SEC
reports of ownership and changes in ownership of the Company's common stock.
Directors, executive officers and greater than 10% shareholders are required
by SEC regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of these reports
furnished to the Company or written representations that no other reports
were required, the Company believes that during fiscal year 2001 all of the
Company's directors, executive officers and greater than 10% beneficial
owners complied with these requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following tables discuss the compensation earned in fiscal years 2001,
2000 and 1999 by all persons who served or functioned as the Company's Chief
Executive Officer in fiscal year 2001 and the Company's four most highly
compensated executive officers (the "Named Executive Officers"). In
particular, the table entitled "Option Grants in Last Fiscal Year" sets forth
all options to acquire the Company's common stock granted to the Named
Executive Officers during the fiscal year ended October 28, 2001, and the
table entitled "Aggregated Fiscal Year-End Option Values" sets forth the
number and value of unexercised options held by these officers at the fiscal
year end. Fiscal year 1999 included 53 weeks compared to 52 weeks for fiscal
years 2000 and 2001.
54
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
OTHER ANNUAL RESTRICTED SECURITIES
FISCAL COMPENSATION STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) (1) AWARDS($) OPTIONS COMPENSATION
- ----------------------------------------------------------------------------------------------------------
J. Michael Bodnar(2) 2001 350,000 -- 11,250(3) 20,000(4) 550,000(5) 546,000(6)
Former President and 2000 500,000 175,000 30,938 55,000 -- 49,707
Chief Executive 1999 509,615 70,000 30,938 55,000 -- 44,278
Officer
William M. Wilson 2001 185,714 -- -- -- -- 56,000(7)
Chairman of the Board
and President
Richard K. Arras 2001 375,000 -- -- -- -- --
President and Chief 2000 209,135 10,000 28,125 50,000 500,000 --
Executive Officer --
Shoney's Restaurants
Ronald E. Walker 2001 250,000 5,000 -- -- -- 4,251(8)
President and Chief 2000 230,279 202,499 -- -- 25,000 4,997
Operating Officer -- 1999 213,096 223,991 -- -- 50,000 4,658
Captain D's
V. Michael Payne 2001 190,962 92,648 -- -- 50,000 --
Chief Financial 2000 156,809 193,248 -- -- 50,000 --
Officer 1999 137,596 50,625 -- -- 60,000 --
Bernard W. Gray 2001 147,182 83,893 -- -- 15,000 --
Chief Information 2000 144,972 139,305 -- -- 10,000 --
Officer 1999 142,692 28,000 -- -- 25,000 --
(1) As to "Other Annual Compensation", although executive officers receive
perquisites and other personal benefits (e.g. automobile allowances), the
aggregate amount of such perquisites or other personal benefits does not
exceed the lesser of $50,000 or 10% of the annual salary and bonus for
any of the persons listed in the Summary Compensation Table.
(2) Mr. Bodnar ceased to serve as our President and CEO effective June 19,
2001. Accordingly, the 2001 compensation amounts set forth for Mr.
Bodnar represent partial year compensation.
(3) Represents tax equalization bonus paid with respect to the receipt of
restricted shares distributed pursuant to Mr. Bodnar's employment
agreement, which expired as of December 31, 2000.
(4) Represents the value of 40,000 shares received by Mr. Bodnar pursuant to
his employment agreement with a fair market value on the date of
distribution of $20,000 ($0.50 per share).
(5) As of the date of Mr. Bodnar's resignation, Mr. Bodnar had no options to
purchase shares of the Company's common stock that were vested.
Accordingly, Mr. Bodnar relinquished any right to exercise any rights or
options that he had to purchase the Company's common stock.
(6) Represents $500,000 which was accrued for severance benefits for Mr.
Bodnar pursuant to a severance agreement entered into by the Company and
Mr. Bodnar on June 19, 2001, of which $86,538 was paid during fiscal 2001.
See "--Management Retention and Severance Agreements with Named Executive
Officers--Severance Agreements". This amount also includes insurance
premiums ($35,000) and financial services fees ($11,000).
(7) Represents fees paid Mr. Wilson for serving on the Company's Board of
Directors and its committees.
(8) Represents amounts paid pursuant to our restaurant group ownership plans
established in prior years, in which partnerships composed of employees
have acquired up to a 30% interest in groups of restaurants.
55
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL OR BASE EXPIRATION ----------------------
NAME GRANTED YEAR PRICE ($/SH)(1) DATE 5%($) 10%($)
- ---- ------- ---- --------------- ---- ----- ------
Mr. Bodnar(2) 550,000 26.00% $0.4375 12/28/10 $151,328 $383,494
Mr. Payne 50,000 2.36% $0.4531 12/19/10 $ 14,248 $ 36,106
Mr. Gray 15,000 0.71% $0.4531 12/19/10 $ 4,274 $ 10,832
- ---------------------
(1) The exercise price of the options granted is at least 100% of the fair
market value of the shares on the date of grant. The options vest
(become exercisable) at a cumulative rate of 33 1/3% per year and in full
after three years. The options also become fully vested and immediately
exercisable if (a) the fair market value of a share of the Company's stock
increases by 150% over the Exercise or Base price; and (b) the Company
sells substantially all of the assets comprising one of its two restaurant
concepts.
(2) As of the date of Mr. Bodnar's resignation, Mr. Bodnar had no options to
purchase shares of the Company's common stock that were vested.
Accordingly, Mr. Bodnar relinquished any right to exercise any rights or
options that he had to purchase the Company's common stock.
AGGREGATED FISCAL YEAR-END OPTION VALUES
----------------------------------------
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT
FISCAL YEAR-END
----------------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------------------------------
Mr. Walker 123,500 99,000
Mr. Arras 100,000 400,000
Mr. Payne 58,000 142,000
Mr. Gray 72,000 78,000
The Company has never awarded stock appreciation rights to any employee, has
no long-term incentive plans, as that term is defined in SEC regulations, and
has no defined benefit or actuarial plans covering any of its employees. In
addition, no Named Executive Officer exercised an option in fiscal 2001 or
held an option that had any value as of the 2001 fiscal year end.
56
MANAGEMENT RETENTION AND SEVERANCE AGREEMENTS WITH NAMED EXECUTIVE OFFICERS.
The Company has management retention agreements with the following Named
Executive Officers: Richard K. Arras, Bernard W. Gray, V. Michael Payne and
Ronald E. Walker. The Company also entered into a severance agreement
with Mr. Bodnar upon his termination as President and Chief Executive Officer
and a letter agreement with Mr. Arras regarding increased benefits pursuant
to the Company's severance policy.
MANAGEMENT RETENTION AGREEMENTS. Each of Mr. Arras', Mr. Gray's and Mr.
Walker's management retention agreement provides that if such executive's
employment is terminated by the Company without "good cause" or by the
executive for "good reason" within a two-year period following a "change in
control", such executive shall be entitled to: (a) two times the sum of his
base salary and Incentive Plan Payments; (b) coverage for the executive and his
family by the Company's welfare plans until the earlier of: (i) the expiration
of 36 months following such employment termination; or (ii) coverage of the
executive and his family by the plans of a new employer without being excluded
from full coverage because of any actual pre-existing condition; (c) complete
vesting of all stock options; and (d) an amount equal to the federal excise
tax, if any, incurred by reason of the payments under the agreement
constituting excess parachute payments and an amount equal to all excise taxes
and federal, state and local income taxes incurred with respect to the receipt
of the federal excise tax amount. Each of these management retention
agreements also contains confidentiality and non-compete covenants.
Mr. Payne's management retention agreement provides that if Mr. Payne's
employment is terminated by the Company without "good cause" or by Mr. Payne
for "good reason" within a one-year period following a "change in control", Mr.
Payne shall be entitled to: (a) two times the sum of his base salary; (b)
coverage for Mr. Payne and his family by the Company's welfare plans until the
earlier of: (i) the expiration of 12 months following such employment
termination; or (ii) coverage of Mr. Payne and his family by the plans of a new
employer without being excluded from full coverage because of any actual
pre-existing condition; and (c) service credit for all purposes, and deemed
employee status, for a one-year period following such employment termination
for purposes of any Incentive Plans. Mr. Payne's management retention agreement
also contains confidentiality and non-compete covenants.
For purposes of these agreements, "good cause" generally includes, with
certain exceptions and limitations, personal dishonesty, willful misconduct,
breach of fiduciary duty involving personal profit, conviction for a felony
or crime involving moral turpitude, material intentional breach of the
agreement, or unsatisfactory performance as a result of alcohol or drug use.
"Good reason" generally includes a significant change in the nature of the
executive's duties or scope of authority, a reduction in base salary, a
nonconsensual change in the location of work assignments to a location that
is further than 35 miles away, the executive's reasonable determination that
he is unable to exercise the authority, powers, function or duties attached
to his position as a result of changed circumstances, or the termination or
amendment of any incentive plan so that it fails to provide a level of
benefits equivalent to at least 75% of the value of the terminated or amended
plan, with certain exceptions. A "change in control" for purposes of these
agreements generally would occur under those circumstances described below
under the heading "Severance Agreements".
SEVERANCE AGREEMENTS. The severance agreement with Mr. Bodnar provides for
the payment to Mr. Bodnar of severance pay in the amount of $500,000, payable
over 104 weeks beginning the week ended June 22, 2001. All unpaid sums due
Mr. Bodnar pursuant to this agreement become due and payable immediately upon
a "change in control". A "change in control" generally would occur if (a)
any person became the owner of at least 50% of the combined voting power of
the Company's common stock, (b) less than a majority of the combined voting
power of the Company's common stock after any tender or exchange offer,
merger, combination, sale of substantially all of the Company's assets or
contested election, is held by persons who were the Company's shareholders
immediately prior to the applicable transaction, or (c) a majority of the
Company's Board of Directors ceases to include those persons who were
members of the Board of Directors as of the date of the severance agreement,
57
unless the election or nomination was approved by at least 2/3 of the
directors still in office who were directors on the date of the severance
agreement.
The letter agreement entered into with Mr. Arras regarding severance benefits
governs benefits to be received by Mr. Arras following his termination from
the Company under circumstances covered by the Company's severance policy,
but not otherwise covered by Mr. Arras' management retention agreement. The
letter provides that under those circumstances, Mr. Arras will receive a
severance benefit in the amount of at least 52 weeks of his base salary.
DIRECTOR COMPENSATION
Directors (other than William M. Wilson, as discussed below) who also are
officers do not receive additional compensation for service on the Board of
Directors. Directors (other than William M. Wilson) who are not officers
receive a quarterly retainer of $4,000 in addition to $1,000 plus expenses
for each Board or committee meeting they attend. Each director was required,
pursuant to our Share Compensation Arrangement for Non-Employee Directors, to
be paid at least 35% or, at the individual director's election, up to 100% of
the director's quarterly fees, in shares of the Company's common stock rather
than in cash. The Share Compensation Arrangement expired by its terms, however,
in the first quarter of fiscal year 2001 upon 250,000 shares having been issued
pursuant thereto. Accordingly, that portion of first quarter fees paid in
shares of the Company's stock was prorated among the participating directors.
In addition, non-employee directors receive an option for 5,000 shares upon
their election to the Board of Directors pursuant to the Shoney's, Inc.
Director's Stock Option Plan. Non-employee directors are awarded an additional
option for 5,000 shares on the fifth anniversary of the grant of their most
recent option under this plan. As of the end of the Company's 2001 fiscal year,
there were seven participants under this plan who held options covering an
aggregate of 35,000 shares at exercise prices ranging from $2.25 to $9.50 per
share. During our 2001 fiscal year, there were no exercises of options granted
under this plan.
William M. Wilson, a director, was appointed to serve as the Company's
Chairman of the Board on May 8, 2001 and, in addition, as President on June
19, 2001. Until Mr. Wilson's appointment as the Chairman of the Board, he was
a non-employee director and, as such, participated in the Company's
Director's Stock Option Plan and received all fees and expenses to which non-
employee directors are entitled. After Mr. Wilson's appointment as Chairman
of the Board, he was granted additional compensation of $250,000 for his
services in his executive capacities through December 31, 2001, and continued
to receive the fees to which non-employee directors are entitled through the
fiscal year end. Mr. Wilson ceased receiving the non-employee director fees
after the fiscal year end. After December 31, 2001, Mr. Wilson continues to
be compensated at an annual rate of $382,353 for his services in his
executive capacities.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as members of the Management Development and
Compensation Committee of the Company's Board of Directors during the 2001
fiscal year: Stephen E. Macadam, Chairperson, Carroll D. Shanks, William M.
Wilson and James D. Yancey. Mr. Yancey resigned from the Company's Board of
Directors on December 15, 2001.
As discussed above under "Director Compensation", Mr. Wilson served as the
President and Chairman of the Board of Shoney's, Inc., as well as the
Chairman of the Board of Captain D's, Inc., during part of the 2001 fiscal
year. No other member of the Management Development and Compensation
Committee is or has been an officer or employee of the Company or any of
its subsidiaries, nor had any relationship requiring disclosure in this
document under applicable rules of the Securities and Exchange Commission.
58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of the Company's common
stock directly or indirectly beneficially owned, as of February 1, 2002 by
all directors, the Named Executive Officers and by all current directors and
executive officers as a group, together with the percentage of the
outstanding shares of the Company's common stock which such ownership
represents. Unless otherwise indicated, beneficial ownership consists of
sole voting and dispositive power based on 52,031,248 shares of common stock
issued and outstanding as of February 1, 2002.
PERCENT OF
NAME OF BENEFICIAL OWNERS SHARES BENEFICIALLY OWNED (1) CLASS
- -------------------------------------------------------------------------
Stephen E. Macadam 44,407 *
Jeffry F. Schoenbaum 610,595(2) 1.16%
Raymond D. Schoenbaum 1,691,309(3) 3.21%
Carroll D. Shanks 47,489 *
Felker W. Ward, Jr. 67,808 *
William M. Wilson 62,798 *
J. Michael Bodnar --(4) --
V. Michael Payne 152,380(5) *
Bernard W. Gray 201,192 *
Richard K. Arras 150,000 *
Ronald E. Walker 360,429 *
All current directors and executive
officers as a group (11 persons) 3,513,706 6.68%
*Less than 1%
(1) Includes shares subject to options to purchase shares which are
exercisable within 60 days of the date hereof, and are held by the
following persons: Stephen E. Macadam (2,000), Jeffry F. Schoenbaum
(5,000), Carroll D. Shanks (4,000), Felker W. Ward, Jr. (4,000), William
M. Wilson (4,000), V. Michael Payne (104,667), Bernard W. Gray (104,000),
Richard K. Arras (100,000) and Ronald E. Walker (163,000). Such shares are
deemed to be outstanding for the purpose of computing the percentage of
outstanding shares owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage owned by any
other person.
(2) Includes 17,340 shares held by Chase Manhattan Bank as custodian for Mr.
Schoenbaum's children, 2,953 shares held by Mr. Schoenbaum's wife,
432,902 shares held in a trust for the benefit of Mr. Schoenbaum, 20,043
shares held in a revocable trust with Mr. Schoenbaum and his wife as
co-trustees, and 35,750 shares owned by the Schoenbaum Family Foundation,
of which Mr. Schoenbaum is a director. Mr. Schoenbaum disclaims
beneficial ownership of the shares owned by the Schoenbaum Family
Foundation.
(3) Includes 490,900 shares held in a trust for the benefit of Mr.
Schoenbaum, 10,267 shares owned by Mr. Schoenbaum's wife, an aggregate of
6,294 shares held in trusts for the benefit of Mr. Schoenbaum's sons and
35,750 shares owned by the Schoenbaum Family Foundation, of which Mr.
Schoenbaum is a director. Mr. Schoenbaum disclaims beneficial ownership
of the shares owned by the Schoenbaum Family Foundation.
(4) Mr. Bodnar ceased serving as a director and an executive officer of the
Company prior to February 1, 2002. He is included in this table solely
because he was the Company's CEO during part of the 2001 fiscal year. Mr.
Bodnar's shareholdings are not included in the shareholdings and percentage
reported for all current directors and executive officers as a group.
(5) Includes 12,678 shares owned by Mr. Payne's children.
59
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
This table shows how much of the Company's common stock is owned by persons,
other than our directors and executive officers, who, as of February 1, 2002,
were known to management to be the beneficial owners of more than 5% of the
Company's outstanding common stock. The Company has no other class of equity
securities outstanding.
Name and Address of Beneficial Shares Beneficially Owned Percent of
Owner Class
- ---------------------------------------------------------------------------
R.L. Danner 4,249,303(1) 8.2%
2 International Plaza, Suite 510
Nashville, TN 37217
Chase Manhattan Corporation 4,243,459(2) 8.2%
270 Park Avenue
New York, NY 10017
(1) Includes 83,068 shares owned by Mr. Danner's wife and 7,101 shares held
by Mr. Danner's wife as custodian for their son. Mr. Danner has sole
voting and dispositive power over 4,159,134 shares and shared voting and
dispositive power over 90,169 shares. The information regarding shares
beneficially owned is based on the Schedule 13D filed by Mr. Danner with
the SEC on April 18, 1997.
(2) Chase Manhattan Bank Delaware, Chase Manhattan Private Bank, National
Association, and Chase Manhattan Bank are subsidiaries of Chase Manhattan
Corporation, a holding company. Chase Manhattan Corporation has
disclaimed beneficial ownership of all 4,243,459 shares. Chase Manhattan
Bank Delaware has sole voting power over 3,098,730 shares, shared voting
power over 308,508 shares, sole dispositive power over 3,116,338 shares
and shared dispositive power over 290,900 shares. Chase Manhattan Private
Bank, National Association, has shared voting and dispositive power over
432,902 shares and sole dispositive power over 343,319 shares. Chase
Manhattan Bank has shared dispositive power over 60,000 shares. The
information regarding shares beneficially owned is based upon the
Schedule 13G jointly filed by Chase Manhattan Corporation, Chase
Manhattan Bank Delaware, Chase Manhattan Private Bank, National
Association, and Chase Manhattan Bank with the SEC on February 14, 2000.
CHANGE IN CONTROL
On January 24, 2002, the Company entered into a definitive merger agreement
(the "Merger Agreement") with Lone Star U.S. Acquisitions LLC, U.S.
Restaurant Properties Operating Limited Partnership, and LSF4 Acquisition,
LLC. Pursuant to the terms of the Merger Agreement, LSF4 Acquisition will be
merged with and into the Company, and each outstanding share of the Company's
common stock will be converted into the right to receive $0.36 in cash. The
Merger Agreement, which remains subject to regulatory approval, approval of
the Company's shareholders and other customary closing conditions, is
expected to close in the second quarter of the 2002 fiscal year. No
assurances can be given, however, that the conditions to the merger will be
met or that the merger will otherwise be completed. If the merger is
consummated, the Company will be a private company controlled by Lone Star
U.S. Acquisitions LLC and U.S. Restaurant Properties Operating Limited
Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Except as disclosed in Item 11 of this Annual Report on Form 10-K, the
Company's executive officers, directors and 5% or greater shareholders did not
have significant business relationships with the Company which would require
disclosure under applicable SEC regulations, and no such transactions are
anticipated during the 2002 fiscal year.
60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are included in or filed as a part of this Annual
Report on Form 10-K:
(1) Financial Statements:
Consolidated Balance Sheet - October 28, 2001 and October 29,
2000.
Consolidated Statement of Operations - Years ended October
28, 2001, October 29, 2000, and October 31, 1999
Consolidated Statement of Shareholders' Equity (Deficit) -
Years ended October 28, 2001, October 29, 2000, and October
31, 1999
Consolidated Statement of Cash Flows - Years ended October
28, 2001, October 29, 2000, and October 31, 1999
Notes to Consolidated Financial Statements - Years ended
October 28, 2001, October 29, 2000, and October 31, 1999
(2) Schedules: Schedule II-Valuation and Qualifying Accounts and
Reserves, is set forth below. All other schedules for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(3) Exhibits: The exhibits listed on the Exhibit Index on pages 64
through 68 are filed as part of this Annual Report on Form 10-K.
(b) On August 20, 2001, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K dated August 20, 2001 to report,
pursuant to Item 5, certain amendments to the Company's Rights Agreement.
61
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SHONEY'S, INC. AND SUBSIDIARIES
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE AT
BEGINNING AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------- -------- -------- ---------- ------
FISCAL YEAR ENDED
OCTOBER 28, 2001:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 691,000 $ 55,000 $ 4,000(B) $ 101,000(A) $ 649,000
Valuation
allowance for
deferred tax
assets $ 41,890,000 $ 2,689,000(C) $ 0 $ 0 $ 44,579,000
FISCAL YEAR ENDED
OCTOBER 29, 2000:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 949,000 $ (224,000) $ 7,000(B) $ 41,000(A) $ 691,000
Valuation
allowance for
deferred tax
assets $ 67,865,000 $(25,975,000)(D) $ 0 $ 0 $ 41,890,000
FISCAL YEAR ENDED
OCTOBER 31, 1999:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 614,000 $ 500,000 $ 161,000(B) $ 326,000(A) $ 949,000
Valuation
allowance for
deferred tax
assets $ 62,537,000 $ 5,328,000(C) $ 0 $ 0 $ 67,865,000
(A) Accounts written off.
(B) Recoveries from accounts written off in prior year.
(C) Increased the valuation allowance for deferred tax assets, which are not
expected to be realized.
(D) Decrease in the valuation allowance for deferred tax assets.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized, on this 12th day of
February 2002.
SHONEY'S, INC.
By: /s/ V. MICHAEL PAYNE
-----------------------------------
V. Michael Payne
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 12th day of February 2002.
SIGNATURE TITLE
- --------- -----
/s/ WILLIAM M. WILSON Chairman of the Board, President and
- ------------------------ Director
(William M. Wilson)
/s/ V. MICHAEL PAYNE Chief Financial Officer and Principal
- ------------------------ Accounting Officer
(V. Michael Payne)
/s/ STEPHEN E. MACADAM Director
- ------------------------
(Stephen E. Macadam)
/s/ JEFFRY F. SCHOENBAUM Director
- ------------------------
(Jeffry F. Schoenbaum)
/s/ RAYMOND D. SCHOENBAUM Director
- -------------------------
(Raymond D. Schoenbaum)
/s/ CARROLL D. SHANKS Director
- -------------------------
(Carroll D. Shanks)
/s/ FELKER W. WARD, JR. Director
- -------------------------
(Felker W. Ward, Jr.)
63
EXHIBIT INDEX
2.1 Agreement and Plan of Merger dated January 24, 2002, by and
among Lone Star U.S. Acquisitions LLC, U.S. Restaurant
Properties Operating Limited Partnership, LSF4 Acquisition,
LLC and Shoney's, Inc., filed as Exhibit 2.1 to the
Company's Current Report on form 8-K filed with the
Commission on January 31, 2002, and incorporated herein by
this reference.
3.1, 4.1 Charter of Shoney's, Inc., as amended, filed as Exhibit 4.1
to the Company's Registration Statement on Form S-8 (File
No. 333-11715) filed with the Commission on September 11,
1996, and incorporated herein by this reference.
3.2, 4.2 Restated Bylaws of Shoney's, Inc., as amended, filed as
Exhibit 3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 13, 2001, and incorporated herein by
this reference.
4.3 Amended and Restated Rights Agreement, dated as of December
4, 2000, and effective as of August 8, 2001 between Shoney's,
Inc. and Registrar and Transfer Company, as Rights Agent
(including as Exhibit A thereto the forms of Rights
Certificate and Election to Exercise), filed as Exhibit 1 to
Amendment No. 6 to the Company's Registration Statement on
Form 8-A (File No. 001-10208), filed with the Commission on
August 20, 2001, and incorporated herein by this reference,
as amended by Amendment No. 1, dated as of August 20, 2001,
filed as Exhibit 2 to the Company's Registration Statement
on Form 8-A (File No. 001-10208) filed with the Commission
on August 20, 2001, and incorporated herein by this
reference.
4.4 Indenture, dated as of April 1, 1989, between the Company
and Sovran Bank/Central South, as Trustee, relating to
$201,250,000 in principal amount of Liquid Yield Option
Notes due 2004, filed as Exhibit 4.8 to Amendment No. 1 to
the Company's Registration Statement on Form S-3 filed with
the Commission on April 3, 1989 (File No. 33-27571), and
incorporated herein by this reference.
4.5 First Supplemental Indenture, dated August 29, 2000, by and
between the Company and the Bank of New York, as Trustee,
relating to $201,250,000 in principal amount of Liquid Yield
Option Notes due 2004, filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
6, 2000, and incorporated herein by this reference.
4.6 Indenture, dated as of July 15, 1992, among TPI Enterprises,
Inc., TPI Restaurants, Inc., as Guarantor, and NationsBank
of Tennessee (now The Bank of New York, as successor
trustee), as Trustee, relating to 8.25% Convertible
Subordinated Debentures due 2002, filed as Exhibit 10(a) to
the Current Report on Form 8-K of TPI Restaurants, Inc.
filed with the Commission on July 29, 1992 (File No. 0-12312),
and incorporated herein by this reference.
4.7 First Supplemental Indenture, dated as of September 9, 1996,
among TPI Enterprises, Inc., TPI Restaurants, Inc., as
Guarantor, The Bank of New York, as Trustee, and the
Company, relating to 8.25% Convertible Subordinated
Debentures due 2002, filed as Exhibit 4.2 to the Company's
Current Report on Form 8-K filed with the Commission on
September 11, 1996, and incorporated herein by this
reference.
4.8 Second Supplemental Indenture, dated as of August 29, 2000,
between and among TPI Restaurants, Inc., as Guarantor, the
Bank of New York, as Trustee, and the Company, relating to
8.25% Convertible Subordinated Debentures due 2002, filed as
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 6, 2000, and incorporated
herein by this reference.
10.1 Shoney's, Inc. 1981 Stock Option Plan, as amended through
October 28, 1996, filed as Exhibit 10.11 to the Company's
Annual Report on Form 10-K
64
for the fiscal year ended October 27, 1996, and incorporated
herein by this reference.*
10.2 Shoney's, Inc. 1996 Stock Option Plan, filed as Exhibit
10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 27, 1996, and incorporated herein
by this reference.*
10.3 Shoney's, Inc. Employee Stock Purchase Plan, as amended and
restated, filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 27,
1996, and incorporated herein by this reference.*
10.4 Shoney's, Inc. Employee Stock Bonus Plan, filed as Exhibit
10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1993, and incorporated herein
by this reference.*
10.5 Shoney's, Inc. Directors' Stock Option Plan, filed as
Exhibit 4.38 to the Company's Registration Statement on Form
S-8 (File No. 33-45076) filed with the Commission on January
14, 1992, and incorporated herein by this reference.*
10.6 Shoney's, Inc. 1998 Stock Plan, as amended and restated,
filed as Exhibit 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended October 25, 1998, and
incorporated herein by this reference.*
10.7 Shoney's, Inc. Director Share Compensation Arrangement
adopted pursuant to the 1998 Stock Plan, filed as Exhibit
10.8 to the Company's Annual Report as Form 10-K for the
fiscal year ended October 25, 1998, and incorporated herein
by this reference.*
10.8 Shoney's Ownership Plan 1977, filed as Exhibit 10.47 to Post
Effective Amendment N0. 5 to the Company's Registration
Statement on Form S-8 (File No. 2-64257), filed with the
Commission on January 25, 1993, and incorporated herein by
this reference.*
10.9 Captain D's Ownership Plan 1976, filed as Exhibit 10.48 to
Post Effective Amendment No. 5 to the Company's Registration
Statement on Form S-8 (File No. 2-64257), filed with the
Commission on January 25, 1993, and incorporated herein by
this reference.*
10.10 Captain D's Ownership Plan 1978-1979, filed as Exhibit 10.49
to Post Effective Amendment No. 5 to the Company's
Registration Statement on Form S-8 (File No. 2-64257), filed
with the Commission and incorporated herein by this
reference.*
10.11 Severance Agreement, dated as of June 19, 2001, by and
between J. Michael Bodnar and the Company, filed as Exhibit
10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 5, 2001, and incorporated herein by
this reference.*
10.12 Management Retention Agreement, dated as of June 14, 2000,
by and between the Company and Raymond D. Schoenbaum, filed
as Exhibit 10.12 to the Company's Annual Report on form 10-K
for the fiscal year ended October 29, 2000, and incorporated
herein by this reference.*
10.13 Agreement, dated as of June 22, 2001, by and between the
Company and V. Michael Payne, filed as Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 5, 2001, and incorporated herein by this
reference.*
10.14 Management Retention Agreement, dated as of June 16, 2000,
by and between the Company and Richard K. Arras.*(1)
10.15 Management Retention Agreement, dated as of June 14, 2000,
by and between the Company and Bernard W. Gray.*(1)
65
10.16 Management Retention Agreement, dated as of June 29, 2000,
by and between the Company and Ronald E. Walker.*(1)
10.17 Management Retention Agreement, dated as of July 15, 1997,
by and between the Company and F. E. McDaniel, Jr., filed as
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 3, 1997, and incorporated
herein by this reference.*
10.18 Letter Agreement dated as of June 12, 2001, by and between
the Company and Richard K. Arras.*
10.19 Supply Agreement, dated as of January 20, 2000, by and
between the Company and International DiverseFoods, Inc.,
filed as Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 29, 2000, and
incorporated herein by this reference.
10.20 Supply Agreement, dated as of January 19, 2000, by and
between Captain D's, Inc. and International DiverseFoods,
Inc., filed as Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 29, 2000, and
incorporated herein by this reference.
10.21 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.,
filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended August 5, 2001, and
incorporated herein by this reference.
10.22 Amended and Restated Loan Agreement, dated as of October 1,
2000, between the Company and FFCA Acquisition Corporation,
relating to $8.75 million in indebtedness, filed as Exhibit
10.24 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 29, 2000, and incorporated herein
by this reference.
10.23 Loan Agreement, dated as of September 6, 2000, between
Shoney's Properties Group 1, LLC and FFCA Funding
Corporation relating to $7.455 million in indebtedness,
filed as Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 29, 2000, and
incorporated herein by this reference.
10.24 Master Lease between Shoney's Properties Group 1, LLC and
the Company, relating to 12 properties, filed as Exhibit
10.26 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 29, 2000, and incorporated herein
by this reference.
10.25 Loan Agreement, dated as of September 6, 2000, between
Shoney's Properties Group 2, LLC and FFCA Funding
Corporation, relating to $19.886 million in indebtedness.
(2)
10.26 Master Lease between Shoney's Properties Group 2, LLC and
the Company, relating to 28 properties. (3)
10.27 Loan Agreement, dated as of September 6, 2000, between
Shoney's Properties Group 3, LLC and FFCA Acquisition
Corporation, relating to $23.992 million in indebtedness.(2)
10.28 Amendment to Loan Agreement, dated as of October 26, 2001,
by and between Shoney's Properties Group 3, LLC and LaSalle
Bank National Association.
10.29 Master Lease between Shoney's Properties Group 3, LLC and
the Company, relating to 34 properties. (3)
10.30 Amendment to Master Lease, dated as of October 26, 2001, by
and between Shoney's Properties Group 3, LLC and the
Company.
66
10.31 Loan Agreement, dated as of September 6, 2000, between
Shoney's Properties Group 4, LLC and FFCA Acquisition
Corporation, relating to $23.833 million in indebtedness.
(2)
10.32 Master Lease between Shoney's Properties Group 4, LLC and
the Company, relating to 34 properties. (3)
10.33 Loan Agreement, dated as of September 6, 2000, between
Shoney's Properties Group 5, LLC and FFCA Funding
Corporation, relating to $7.219 million in indebtedness. (2)
10.34 Amendment to Loan Agreement, effective as of October 9,
2001, by and between Shoney's Properties Group 5, LLC and GE
Capital Franchise Finance Corporation (successor to FFCA
Funding Corporation).
10.35 Amendment to Loan Agreement, effective as of October 18,
2001, by and between Shoney's Properties Group 5, LLC and GE
Capital Franchise Finance Corporation (successor to FFCA
Funding Corporation).
10.36 Master Lease between Shoney's Properties Group 5, LLC and
the Company, relating to 12 properties. (3)
10.37 Partial Termination of Master Lease and Partial Mutual
Release, effective as of October 9, 2001 by and between
Shoney's Properties Group 5, LLC and the Company.
10.38 Partial Termination of Master Lease and Partial Mutual
Release, effective as of October 18, 2001, by and between
Shoney's Properties Group 5, LLC and the Company.
10.39 Loan Agreement, dated as of September 6, 2000, between
Shoney's Properties Group 6, LLC and FFCA Funding
Corporation, relating to $7.865 million in indebtedness. (2)
10.40 Amendment to Loan Agreement, dated as of October 26, 2001 by
and between Shoney's Properties Group 6, LLC and GE Capital
Franchise Finance Corporation (successor to FFCA Funding
Corporation).
10.41 Master Lease between Shoney's Properties Group 6, LLC and
the Company, relating to 12 properties. (3)
10.42 Partial Termination of Master Lease and Partial Mutual
Release, dated as of October 26, 2001, by and between
Shoney's Properties Group 6, LLC and the Company.
10.43 Amended and Restated Credit Agreement, dated as of September
6, 2000, among the Company, as borrower, Bank of America,
N.A., as administrative agent, Banc of America Securities,
L.L.C., as syndication agent, and certain other banks,
financial institutions and institutional lenders, filed as
Exhibit 10.37 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 29, 2000, and incorporated
herein by this reference.
10.44 $135 million Credit Agreement (the "Captain D's Credit
Agreement"), dated as of September 6, 2000, among Captain
D's, Inc., as borrower, Bank of America, N.A., as
administrative agent, Banc of America Securities LLC, as
sole lead arranger and sole book manager, and certain other
initial lenders initial issuing bank and swing line bank
named therein, filed as Exhibit 10.38 to the Company's
Annual Report on Form 10-K for the fiscal year ended October
29, 2000 and incorporated herein by this reference.
10.45 Amendment No. 1 and Waiver to the Captain D's Credit
Agreement, dated as of January 26, 2001, among Captain D's,
Inc., the banks, financial institutions and other
institutional lenders parties to the Captain D's Credit
Agreement, and Bank of America, N.A., as Administrative
Agent,
67
filed as Exhibit 10.39 to the Company's Annual Report on Form
10-K for the fiscal year ended October 29, 2000, and
incorporated herein by this reference.
10.46 Amendment No. 2 to the Captain D's Credit Agreement, dated
as of April 2, 2001, among Captain D's, Inc., the banks,
financial institutions and other institutional lenders
parties to the Captain D's Credit Agreement, and Bank of
America, N.A., as Administrative Agent, filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 18, 2001, and incorporated herein by
this reference.
10.47 Amendment No. 3 to the Captain D's Credit Agreement, dated
as of August 31, 2001, among Captain D's, Inc., the banks,
financial institutions and other institutional lenders
parties to the Captain D's Credit Agreement, and Bank of
America, N.A., as Administrative Agent.
10.48 Amendment No. 4 to the Captain D's Credit Agreement, dated
as of December 27, 2001, among Captain D's, Inc., the
Lenders (as defined therein) and Bank of America, N.A., as
Administrative Agent.
10.49 Amendment No. 5 to the Captain D's Credit Agreement, dated
as of January 24, 2002, among Captain D's, Inc., the Lenders
(as defined therein), and Hudson Advisors, L.L.C., as
Administrative Agent, filed as Exhibit 99.3 to the Company's
Current Report on Form 8-K filed with the Commission on
January 31, 2002, and incorporated herein by this reference.
10.50 Voting Agreement dated as of January 24, 2002, by and among
the Company, LSF4 Acquisition, LLC, Lone Star U.S.
Acquisitions LLC, U.S. Restaurant Properties Operating
Limited Partnership and the Shareholders (as defined
therein), filed as Exhibit 99.1 to the Company's Current
Report on Form 8-K filed with the Commission on January 31,
2002, and incorporated herein by this reference.
10.51 Voting Agreement dated as of January 24, 2002, by and among
the Company, LSF4 Acquisition, LLC, Lone Star U.S.
Acquisitions LLC, U.S. Restaurant Properties Operating
Limited Partnership and the Shareholders (as defined
therein), filed as Exhibit 99.2 to the Company's Current
Report on Form 8-K filed with the Commission on January 31,
2002, and incorporated herein by this reference.
10.52 Loan and Security Agreement dated as of August 31, 2000,
between Commissary Operations, Inc. and Bank of America,
N.A., filed as Exhibit 10.40 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 29, 2000, and
incorporated herein by this reference.
10.53 Registration Rights Agreement, dated as of December 1, 1997,
by and between the Company and Raymond L. Danner, filed as
Exhibit 10.32 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 26, 1997, and incorporated
herein by this reference.
21 Subsidiaries of Shoney's, Inc.
23 Consent of Ernst & Young LLP, independent auditors.
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* Management contract or compensatory plan or agreement.
(1) Document not filed because substantially identical to Exhibit 10.12.
(2) Document not filed because substantially identical to Exhibit 10.23.
(3) Document not filed because substantially identical to Exhibit 10.24.
68