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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 9, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-4377
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SHONEY'S, INC.
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(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, Tennessee 37210
---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 391-5201
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
---- ----
As of June 21, 1999, there were 49,446,839 shares of Shoney's,
Inc. $1 par value common stock outstanding.
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Page 1 of 53 pages
Exhibit index at page 28
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
May 9, October 25,
1999 1998
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,728,464 $ 16,277,722
Notes and accounts receivable, less allowance
for doubtful accounts of $1,263,000 in 1999
and $1,142,000 in 1998 8,239,781 10,263,490
Inventories 32,394,531 37,146,297
Refundable income taxes 14,005,359
Prepaid expenses and other current assets 2,849,100 3,390,458
Net property, plant and equipment held for sale 29,832,387 69,878,238
------------- -------------
Total current assets 110,044,263 150,961,564
Property, plant and equipment, at lower of cost or market 669,087,765 677,978,782
Less accumulated depreciation and amortization (351,433,388) (350,673,367)
------------- --------------
Net property, plant and equipment 317,654,377 327,305,415
Other assets:
Goodwill (net of accumulated amortization of
$6,742,000 in 1999 and $5,465,000 in 1998) 28,129,485 29,819,721
Deferred charges and other intangible assets 7,792,276 10,581,373
Other assets 4,466,291 4,800,760
------------- --------------
Total other assets 40,388,052 45,201,854
------------- --------------
$ 468,086,692 $ 523,468,833
============= ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 33,143,377 $ 37,522,186
Other accrued liabilities 73,012,671 76,690,150
Reserve for litigation settlements due within one year 18,372,961 372,961
Debt and capital lease obligations due within one year 14,511,878 11,980,656
------------- --------------
Total current liabilities 139,040,887 126,565,953
Long-term senior debt and capital lease obligations 219,971,383 282,354,696
Zero coupon subordinated convertible debentures 117,743,304 112,580,014
Subordinated convertible debentures, net of bond discount
of $2,856,000 in 1999 and $3,255,000 in 1998 48,706,768 48,308,400
Reserve for litigation settlements 192,683 226,679
Other liabilities 71,632,390 72,920,262
Shareholders' deficit:
Common stock, $1 par value: authorized 200,000,000;
issued 49,446,839 in 1999, 48,694,865 in 1998 49,446,839 48,694,865
Additional paid-in capital 137,717,929 137,296,111
Accumulated deficit (316,365,491) (305,478,147)
------------- --------------
Total shareholders' deficit (129,200,723) (119,487,171)
------------- --------------
$ 468,086,692 $ 523,468,833
============= ==============
See notes to consolidated condensed financial statements.
-2-
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Twenty-eight Weeks Ended
May 9, May 10,
1999 1998
------------- -------------
Revenues
Net sales $ 515,799,445 $ 608,079,939
Franchise fees 7,801,042 7,881,276
Other income 16,375,260 4,275,261
------------- -------------
539,975,747 620,236,476
Costs and expenses
Cost of sales 469,440,369 558,666,630
General and administrative expenses 43,214,388 46,938,916
Impairment write down of long-lived assets 2,593,482
Restructuring expense 2,651,293
Litigation settlement 14,500,000
Interest expense 23,708,334 26,671,863
------------- -------------
Total costs and expenses 550,863,091 637,522,184
------------- -------------
Loss before income taxes and
extraordinary charge (10,887,344) (17,285,708)
Benefit from income taxes (6,274,000)
------------- -------------
Loss before extraordinary charge (10,887,344) (11,011,708)
Extraordinary charge on early extinguishment
of debt, net of income taxes of $806,000 (1,415,138)
------------- -------------
Net loss $ (10,887,344) $ (12,426,846)
============= =============
Earnings per common share
Basic:
Net loss before extraordinary charge ($0.22) ($0.23)
Extraordinary charge for the early
extinguishment of debt (0.03)
------- -------
Net loss ($0.22) ($0.26)
======= =======
Diluted:
Net loss before extraordinary charge ($0.22) ($0.23)
Extraordinary charge for the early
extinguishment of debt (0.03)
------- -------
Net loss ($0.22) ($0.26)
======= =======
Weighted average shares outstanding
Basic 49,228,581 48,636,019
Diluted 49,228,581 48,636,019
Common shares outstanding 49,446,839 48,690,365
Dividends per share NONE NONE
See notes to consolidated condensed financial statements.
-3-
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Twelve Weeks Ended
May 9, May 10,
1999 1998
------------- -------------
Revenues
Net sales $ 231,069,031 $ 275,856,044
Franchise fees 3,501,410 3,487,960
Other income 5,446,312 1,795,279
------------- -------------
240,016,753 281,139,283
Costs and expenses
Cost of sales 207,317,427 249,832,562
General and administrative expenses 17,932,769 21,273,045
Restructuring expense 1,440,612
Interest expense 9,758,016 10,784,375
------------- -------------
Total costs and expenses 235,008,212 283,330,594
------------- -------------
Income (loss) before income taxes 5,008,541 (2,191,311)
Benefit from income taxes (795,000)
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Net income (loss) $ 5,008,541 $ (1,396,311)
============= =============
Earnings per common share
Basic:
Net income (loss) $ 0.10 ($0.03)
======= =======
Diluted:
Net income (loss) $0.10 ($0.03)
======= =======
Weighted average shares outstanding
Basic 49,442,377 48,677,615
Diluted 49,681,688 48,677,615
Common shares outstanding 49,446,839 48,690,365
Dividends per share NONE NONE
See notes to consolidated condensed financial statements.
-4-
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Twenty-eight Weeks Ended
May 9, May 10,
1999 1998
------------- -------------
Operating activities
Net loss $ (10,887,344) $ (12,426,846)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 20,955,420 26,157,118
Amortization of deferred charges and other
non-cash charges 10,563,037 12,985,538
Gain on disposal of property, plant and equipment (15,382,099) (1,921,455)
Impairment write down of long-lived assets 2,593,482
Litigation settlement 14,500,000
Changes in operating assets and liabilities 16,278,327 (524,523)
-------------- -------------
Net cash provided by operating activities 36,027,341 26,863,314
Investing activities
Cash required for property, plant and equipment (11,754,378) (16,481,351)
Proceeds from disposal of property, plant and equipment 53,112,322 11,767,465
Cash provided by other assets 55,353 1,669,090
-------------- -------------
Net cash provided (used) by investing activities 41,413,297 (3,044,796)
Financing activities
Payments on long-term debt and
capital lease obligations (56,775,807) (298,584,220)
Proceeds from long-term debt 300,000,000
Payments on litigation settlement (33,996) (15,671,332)
Cash required for debt issue costs (180,093) (11,776,019)
Proceeds from exercise of employee stock options 21,775
-------------- -------------
Net cash used by financing activities (56,989,896) (26,009,796)
-------------- -------------
Change in cash and cash equivalents $ 20,450,742 $ (2,191,278)
============== =============
See notes to consolidated condensed financial statements.
-5-
SHONEY'S, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
May 9, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q. As a
result, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The Company, in management's opinion, has included all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
of the results of operations. Certain reclassifications have been made in
the consolidated condensed financial statements to conform to the 1999
presentation. Operating results for the twelve and twenty-eight week periods
ended May 9, 1999 are not necessarily indicative of the results that may be
expected for all or any balance of the fiscal year ending October 31, 1999.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended October 25, 1998.
NOTE 2 - ACQUISITIONS
On September 9, 1996, the Company completed the acquisition of substantially
all of the assets of TPI Enterprises, Inc. ("TPI") which, as the then largest
franchisee of the Company, operated 176 Shoney's Restaurants and 67 Captain
D's restaurants. The purchase price of $164.4 million consisted of the
issuance of 6,785,114 shares of the Company's common stock valued at $59.1
million, the assumption of $46.9 million of indebtedness under TPI's 8.25%
convertible subordinated debentures, the assumption or satisfaction of TPI's
outstanding debt of approximately $59.1 million and transaction costs of $3.0
million, net of cash acquired of $3.7 million.
The TPI acquisition was accounted for as a purchase and the purchase price
was allocated based on estimated fair values at the date of acquisition and
resulted in an excess of purchase price over net assets acquired (goodwill)
of approximately $50.6 million, which originally was amortized on a straight
line basis over 20 years. During 1997, the Company adjusted its preliminary
estimate of goodwill by $4.2 million relating to a revised estimate of
deferred tax assets. In addition, the Company wrote-off goodwill associated
with the TPI acquisition in conjunction with its impaired asset analysis of
approximately $7.0 million in 1997 and approximately $13.1 million in 1998
(see note 3). Effective with the first day of fiscal 1999, the Company
revised the estimated useful life of the TPI goodwill to a remaining period
of 10 years. The change in estimate resulted in $688,000 additional
amortization in the first twenty-eight weeks of 1999.
As of May 9, 1999, of the properties acquired in the TPI transaction, the
Company had closed 84 Shoney's Restaurants (eight of which were sold to
franchisees in the first quarter of 1999), 10 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. Certain of the restaurants had been targeted for closure during the
Company's due diligence process as under-performing units. Anticipated 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
TPI purchase price allocation was approximately $21.0 million. During the
second quarter and first twenty-eight weeks of 1999,
-6-
approximately $400,000 and $1.1 million, respectively, in costs were charged
against this liability. Approximately $10.6 million of anticipated exit
costs related to the TPI acquisition remain accrued at May 9, 1999.
NOTE 3 - IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR DISPOSAL
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), at the beginning of the first quarter of
1997. Based on a review of the Company's restaurants which had incurred
operating losses or negative cash flows during fiscal 1996 and a review of
the cash flows from individual properties rented to others ("rental
properties"), the Company determined that certain of its restaurant assets
and rental properties were impaired and recorded a loss to write them down to
their estimated fair values. The charge related to the initial adoption of
SFAS 121 in the first quarter of 1997 was $17.6 million. The Company's
initial asset impairment analysis did not include any of the restaurants
acquired from TPI in 1996. The Company recorded an additional asset
impairment charge of $36.4 million in the fourth quarter of 1997 as a result
of additional analysis by management and a full year's operating results from
the restaurants acquired from TPI. During the first quarter of 1998, the
Company recorded an additional impairment charge of $2.6 million of which
$0.9 million was related to assets held and used in the Company's operations
and $1.7 million related to the adjustment of fair values of assets held for
disposal. Based on the continued decline in operating performance of the
Company's restaurant operations, particularly the Shoney's Restaurants
division, the Company completed an asset impairment analysis during the third
quarter of 1998. As a result of this analysis, the Company recorded an asset
impairment charge of $45.8 million during the third quarter of 1998.
Approximately $42.9 million of the third quarter 1998 asset impairment charge
related to assets held and used in the Company's operations and approximately
$2.9 million related to assets held for disposal.
At May 9, 1999, the carrying value of the 64 properties to be disposed of was
$29.8 million and is reflected on the consolidated condensed balance sheet as
net assets held for sale. Under the provisions of SFAS 121, depreciation and
amortization are not recorded during the period in which assets are being
held for disposal.
NOTE 4 - RESTRUCTURING EXPENSE
When the decision to close a restaurant is made, the Company incurs certain
exit costs generally for the accrual of the remaining leasehold obligations
less anticipated sublease income related to leased units that are targeted to
be closed. These exit costs are included in the consolidated condensed
statement of operations in the restructuring expense caption. In addition to
amounts recorded in previous years, the Company recorded approximately $10.7
million in exit costs during 1998 ($1.2 million in the first quarter and $1.4
million in the second quarter), primarily associated with the accrual of the
remaining leasehold obligations on restaurants closed or to be closed. The
Company charged approximately $700,000 and $1.7 million against these exit
costs reserves in the second quarter and in the first twenty-eight weeks of
1999, respectively. Approximately $9.3 million of accrued exit costs remain
at May 9, 1999.
During 1998, the Company closed 104 restaurants. Forty-seven additional
restaurants were closed during the first quarter of 1999. Sixteen
restaurants were closed during the second quarter and one previously closed
restaurant was reopened. Below are sales and operating losses for the second
quarter and twenty-eight week periods of 1999 and the second quarter and
twenty-eight week periods of 1998 for the restaurants closed in each of those
years.
-7-
($ in thousands)
Twenty-eight Twenty-eight
Quarter Ended Quarter Ended Weeks Ended Weeks Ended
May 9, 1999 May 10, 1998 May 9, 1999 May 10, 1998
----------- ------------ ----------- ------------
Operating Operating Operating Operating
Sales Loss Sales Loss Sales Loss Sales Loss
----- ---- ----- ---- ----- ---- ----- ----
Stores closed during 1998 $ -- $(353) $19,476 $(2,847) $ -- $(1,195) $45,949 $(6,344)
Stores closed during 1999 1,389 (386) 18,874 (1,064) 14,629 (1,945) 41,478 (2,754)
----- ----- ------ ------- ------ ------- ------ -------
Total $1,389 $(739) $38,350 $(3,911) $14,629 $(3,140) $87,427 $(9,098)
===== ===== ====== ======= ====== ======= ====== =======
NOTE 5 - EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standard No. 128
"Earnings per Share" ("SFAS 128") at the beginning of the first quarter of
1998. SFAS 128 supersedes Accounting Principles Board Opinion No. 15
"Earnings per Share" ("APB 15") and was issued to simplify the computation of
earnings per share ("EPS") by replacing Primary EPS, which considers common
stock and common stock equivalents in its denominator, with Basic EPS, which
considers only the weighted-average common shares outstanding. SFAS 128 also
replaces Fully Diluted EPS with Diluted EPS, which considers all securities
that are exercisable or convertible into common stock and which would either
dilute or not affect Basic EPS.
The table below presents the computation of basic and diluted income (loss)
per share:
($ in thousands except EPS)
Twenty-eight Twenty-eight
Quarter Ended Quarter Ended Weeks Ended Weeks Ended
May 9, 1999 May 10, 1998 May 9, 1999 May 10, 1998
----------- ------------ ----------- ------------
Numerator:
- ----------
Income (loss) before extraordinary loss -
numerator for Basic EPS $ 5,009 $ (1,396) $(10,887) $(11,012)
Income (loss) before extraordinary loss after
assumed conversion of debentures -
numerator for Diluted EPS $ 5,009 $ (1,396) $(10,887) $(11,012)
Denominator:
- ------------
Weighted-average shares outstanding -
denominator for Basic EPS 49,442 48,678 49,229 48,636
Dilutive potential shares -
denominator for Diluted EPS 49,682 48,678 49,229 48,636
Basic EPS income (loss) $ 0.10 $ (0.03) $ (0.22) $ (0.23)
Diluted EPS income (loss) $ 0.10 $ (0.03) $ (0.22) $ (0.23)
As of May 9, 1999, the Company had outstanding approximately 5,641,000
options to purchase shares at prices ranging from $1.44 to $25.51. In
addition to options to purchase shares, the Company had approximately 155,000
common shares reserved for future distribution pursuant to certain employment
agreements, and approximately 6,000 common shares reserved for future
distribution under its stock bonus plan. 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 May 9, 1999, the Company had reserved 5,205,632 and
2,604,328 shares, respectively, related to these convertible debentures. The
zero coupon debentures are due in April 2004 and the 8.25% debentures are due
in July 2002. The effect of considering these potentially dilutive
convertible securities was anti-dilutive and was not included in the
calculation of Diluted EPS for the second quarter of 1999. Because the
Company reported a net loss for the first twenty-eight weeks of 1999 and 1998
and the second quarter of 1998, the
-8-
effect of the potentially dilutive securities was anti-dilutive and was not
included in the calculation of Diluted EPS.
NOTE 6 - INCOME TAXES
The Company is estimating an effective tax rate for fiscal 1999 of 0% and,
accordingly, has recorded no income tax provision or benefit for the twelve
and twenty-eight week periods ended May 9, 1999. This effective tax rate
differs from the Federal statutory rate of 35% primarily due to goodwill
amortization which is not deductible for Federal income taxes and an
adjustment in the valuation allowance against the gross deferred tax assets.
For the twelve and twenty-eight week periods ended May 10, 1998, the
Company's effective tax rate of 36.3% differed from the Federal statutory
rate of 35% primarily due to goodwill amortization which is not deductible
for Federal income taxes and state income taxes.
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 May
9, 1999, the Company increased the valuation allowance for gross deferred tax
assets for deductible temporary differences, tax credit carry forwards, and
net operating loss carry forwards. The deferred tax asset valuation
adjustment is in accordance with 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.
As of May 10, 1998, the Company maintained a valuation allowance for tax
credit carry forwards that were not expected to be realized. The Company
believed it was more likely than not that the remaining deferred tax assets
would be realized through the reversal of existing taxable temporary
differences within the carry forward period, the carry back of existing
temporary differences to prior years' taxable income, or through the use of
alternative tax planning strategies.
NOTE 7 - SENIOR DEBT
On December 2, 1997, the Company completed a refinancing of approximately
$281.0 million of its senior debt. The new credit facility replaced the
Company's revolving credit facility, senior secured bridge loan, and other
senior debt mortgage financing agreements. The new credit facility provided
for up to $375.0 million ("1997 Credit Facility") and consist of a $75.0
million line of credit ("Line of Credit"), and two term notes of $100.0
million and $200.0 million ("Term A Note" and "Term B Note"), respectively,
due in April 2002. As of May 9, 1999, the 1997 Credit Facility provided for
interest at 2.5% over LIBOR or 1.5% over the prime rate for amounts
outstanding under the Line of Credit and Term A Note, and 3.0% over LIBOR or
2.0% over the prime rate for Term B Note. Based on certain defined financial
ratios, the applicable interest rates can increase an additional 0.25% which
is the maximum allowed under the 1997 Credit Facility.
At May 9, 1999, the Company had approximately $58.3 million and $144.7
million outstanding under its Term A Note and Term B Note, respectively.
During the next four fiscal quarters, principal reductions of $15.7 million
are scheduled for the Term A Note and principal reductions of $739,000 are
scheduled for the Term B Note. Of these amounts, $4.0 million was prepaid as
of May 9, 1999. At May 9, 1999, the effective interest rates on the term
notes were 8.3% and 8.5% for Term A Note and Term B Note, respectively.
The Company had no borrowings outstanding under its $75.0 million Line of
Credit at May 9, 1999. Available credit under the Line of Credit is reduced
by outstanding letters of credit, which totaled $25.6 million at May 9, 1999,
resulting in available credit of $49.4 million. The Company pays an annual
fee of 0.5% for unused available credit under the Line of Credit. Due to the
nature of the loan covenants discussed
-9-
below, as the financial covenants become more restrictive, the Company's
ability to draw under the Line of Credit could be restricted. Based on the
financial covenants at May 9, 1999, the Company could have drawn an additional
$29.4 million under the Line of Credit and remained in compliance with its
financial covenants. At May 9, 1999, the interest rate for the Line of Credit
was 10.25%.
The 1997 Credit Facility required the Company to enter into an interest rate
hedge program covering a notional amount of not less than $50.0 million and
not greater than $100.0 million within 60 days from the date of the loan
closing. A subsequent amendment to the 1997 Credit Facility allows the
Company to hedge up to a notional amount of $200 million. The amount of the
Company's debt covered by the hedge program was $100.0 million at May 9,
1999, which was comprised of two $40.0 million agreements, for which the
interest rates are fixed at approximately 6.1% plus the applicable margin,
and an additional $20.0 million hedge agreement which fixes the interest rate
on the covered amount of debt at 5.5% plus the applicable margin. At May 9,
1999, the estimated cost to exit the Company's interest rate swap agreements
was approximately $926,000. The fair value of the swap agreements and changes
in the fair value as a result of changes in market interest rates are not
recognized in the consolidated condensed financial statements.
Debt and obligations under capital leases at May 9, 1999 and October 25, 1998
consisted of the following:
($ in thousands)
May 9, 1999 October 25, 1998
----------- ----------------
Senior debt - Term A Note $ 58,267 $ 77,388
Senior debt - Term B Note 144,704 181,114
Subordinated zero coupon convertible debentures 117,743 112,580
Subordinated convertible debentures 48,707 48,308
Industrial revenue bonds 10,315 10,315
Notes payable to others 5,026 5,268
--------- ----------
384,762 434,973
Obligations under capital leases 16,171 20,251
--------- ----------
400,933 455,224
Less amounts due within one year 14,512 11,981
--------- ----------
Amount due after one year $ 386,421 $ 443,243
========= ==========
The 1997 Credit Facility is secured by substantially all of the Company's
assets. The 1997 Credit Facility (1) requires satisfaction of certain
financial ratios and tests (which become more restrictive during the term of
the credit facility); (2) imposes limitations on capital expenditures; (3)
limits the Company's ability to incur additional debt, leasehold obligations
and contingent liabilities; (4) prohibits dividends and distributions on
common stock; (5) prohibits mergers, consolidations or similar transactions;
and (6) includes other affirmative and negative covenants. During the third
quarter of 1998, management received approval from its lending group for
covenant modifications for the fourth quarter of 1998 and the first quarter
of 1999 that either maintained covenant ratios at existing levels or reduced
the restrictions. The financial covenant modifications were requested because
of lower than anticipated levels of sales of assets held for disposal and
lower than anticipated earnings from restaurant operations.
On March 20, 1999, the Company agreed to the material terms of a global
settlement of three class action lawsuits (see note 9 to the consolidated
condensed financial statements). The settlement is subject to the approval
of the Company's lenders and the Court. As part of the lender approval
process, the Company was required to seek certain financial covenant
modifications to the 1997 Credit Facility. Lender approval of the global
settlement has been received by the Company. As discussed in note 9,
however, the Company has not
-10-
yet received Court approval of the settlement and if the Company is unable to
secure Court approval of the settlement, the Company intends to vigorously
contest the claims made in the three cases.
Based on current operating results, forecasted operating trends, anticipated
levels of asset sales, and approval of the litigation settlement and related
covenant modifications requested by the Company for the litigation
settlement, management believes that the Company could possibly be forced to
seek additional financial covenant modifications as soon as the third quarter
of fiscal 1999. Based on preliminary discussions, management believes that
the additional covenant modifications could be obtained; however, no
assurance can be given that such covenant modifications could be obtained.
If the Company were unable to obtain the possible modifications to the 1997
Credit Facility, the Company's liquidity and financial position would be
materially adversely affected. At May 9, 1999, the Company was in compliance
with all of its debt covenants.
Prior to the refinancing in December 1997, the Company had unamortized debt
issue costs of $2.2 million related to the refinanced debt. The write-off of
these unamortized costs during the first quarter of 1998 resulted in an
extraordinary loss, net of tax, of approximately $1.4 million or $0.03 per
common share. The Company also incurred $1.1 million in additional interest
expense during the first quarter of 1998 to obtain waivers (for its inability
to make principal payments and comply with debt covenants) from its
predecessor lending group to facilitate the refinancing.
NOTE 8 - SETTLEMENT OF DISCRIMINATION LAWSUIT
In January 1993, Court approval was granted to a class action consent decree
settling certain employment litigation against the Company and its former
chairman. The majority of the payments required by the consent decree were
made as of March 1, 1998. Remaining payment obligations under the consent
decree are approximately $261,000.
NOTE 9 - LITIGATION
Belcher I
On December 1, 1995, five current and/or former Shoney's Restaurant managers
or assistant restaurant managers filed the case of "Robert Belcher, et al. v.
Shoney's, Inc." ("Belcher I") in the U.S. District Court for the Middle
District of Tennessee claiming that the Company had violated the overtime
provisions of the Fair Labor Standards Act. The Court granted provisional
class status and directed notice be sent to all former and current salaried
general managers and assistant restaurant managers who were employed by the
Company's Shoney's Restaurants during the three years prior to filing of the
suit. Approximately 900 potential class members opted to participate in the
suit as of the cutoff date set by the Court. After the cutoff date set by the
Court, approximately 240 additional potential class members opted to
participate in the suit, but the Court has not yet ruled on their
participation in the lawsuit. On or about April 7, 1998, the plaintiffs
filed a motion for partial summary judgment in Belcher I. The plaintiffs
moved for summary judgment on the issue of liability based on the Company's
alleged practice and policy of making allegedly improper deductions from the
pay of its general managers and assistant restaurant managers. In April
1998, plaintiffs made a demand to settle the case for $45 million plus costs
and attorney's fees, which the Company rejected. On December 21, 1998, the
Court granted plaintiffs' motion for partial summary judgment on liability,
dismissed 192 plaintiffs who did not satisfy the provisional class definition
established by the Court (which included 120 of the roughly 240 opt-in
plaintiffs who failed to timely file their consents), and set the case for a
trial on damages to commence on June 1, 1999. On January 21, 1999, the Court
denied the Company's motion to reconsider or certify the order for
interlocutory appeal.
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As a result of the Court's ruling on liability, the Company recorded a charge
of $3.5 million in the fourth quarter of fiscal 1998, representing an
estimated amount of potential damages, fees, and costs that it might be
required to pay if the Court's December 21, 1998 ruling on liability
ultimately had been upheld and damages awarded. On January 21, 1999, the
Court also ordered the parties to mediate in an attempt to determine whether
this case, Belcher II and Edelen (discussed below) could be resolved through
settlement. On March 20, 1999, the parties agreed to the material terms of
a global settlement of Belcher I, Belcher II and Edelen. Under the
agreement, in exchange for the dismissal of the three cases with prejudice
and a release by the plaintiffs relating to the subject matter of the cases,
the Company agreed to pay $18 million in three installments as follows: $11
million upon Court approval of the settlement and dismissal of the cases,
$3.5 million on October 1, 1999 and $3.5 million on March 1, 2000. In light
of the parties' agreement on settlement, the Court canceled the damages trial
scheduled to commence on June 1, 1999, and stayed all proceedings in the case
while the parties draft the necessary settlement documentation, a process
that is nearing completion. The settlement, which is subject to the approval
of the Court, required the Company to record an additional charge of $14.5
million for the first quarter ended February 14, 1999 (in addition to the
$3.5 million previously recorded in the fourth quarter of fiscal 1998). If
the proposed settlement is approved by the Court, management expects to
utilize the proceeds from the Company's income tax refund, general
working capital or Line of Credit to fund the proposed settlement. If the
Court does not approve the settlement and dismiss each of the cases, the
Company intends to vigorously contest and defend against the unresolved
claims remaining in such cases and, if necessary, to pursue all available
avenues of appeal once final judgment in such cases has been entered.
Belcher II
On January 2, 1996, five current and/or former Shoney's hourly and/or
fluctuating work week employees filed the case of "Bonnie Belcher, et al. v.
Shoney's, Inc." ("Belcher II") in the U.S. District Court for the Middle
District of Tennessee claiming that the Company violated the Fair Labor
Standards Act by either not paying them for all hours worked or improperly
paying them for regular and/or overtime hours worked. The Court granted
provisional class status and directed notice be sent to all current and
former Shoney's concept hourly and fluctuating work week employees who were
employed during the three years prior to filing of the suit. Approximately
18,000 potential class members opted to participate in the suit as of the
cutoff date set by the Court. After the cutoff date set by the Court,
approximately 1,800 additional potential class members opted to participate
in the suit, but the Court has not yet ruled on their participation in the
lawsuit. On or about July 10, 1998, plaintiffs filed a motion to amend their
complaint to add state law class action allegations of fraud, breach of
contract, conversion, and civil conspiracy; add the Company's Senior Vice
President and Controller and certain unnamed individuals as defendants; and
include a prayer for $100 million in punitive damages. That motion was
granted by the Court on January 4, 1999, and trial was scheduled to commence
on January 4, 2000. In ruling on plaintiffs' motion, the Court did not
address any of the arguments that the Company raised in opposing that motion,
indicating that it would consider those arguments if the Company presented
them in a dispositive motion. On February 2, 1999, the Company filed a
motion to dismiss the claims added by plaintiffs' amended complaint. Prior
to the Court's ruling on the Company's motion, however, as noted above in the
description of Belcher I, on March 20, 1999, the parties agreed to a global
settlement of this case, Belcher I and Edelen. In light of that agreement,
the Court has stayed all proceedings in the case.
Edelen
On December 3, 1997, two former Captain D's restaurant general managers or
assistant managers filed the case "Jerry Edelen, et al. v. Shoney's, Inc.
d/b/a Captain D's" ("Edelen") in the U.S. District Court for the Middle
District of Tennessee. Plaintiffs' claims in this case are very similar to
those made in Belcher I and the
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plaintiffs may argue that the Court's December 21, 1998 ruling on liability
in Belcher I should apply to this case. On March 28, 1998, the Court granted
provisional class status and directed notice be sent to all former and
current salaried general managers and assistant general managers who were
employed at the Company's Captain D's concept restaurants during the three
years prior to the filing of the suit. Notice was issued to potential class
members on or about July 28, 1998. Approximately 250 potential class members
opted to participate in the suit as of the cutoff date set by the Court.
After the cutoff date, approximately 90 additional potential class members
opted to participate in the suit, but the Court has not yet ruled on their
participation in the lawsuit. On December 21, 1998, the Court transferred 11
persons who filed consents in Belcher I from that case to Edelen. As noted
above in the description of Belcher I, on March 20, 1999, the parties agreed
to a global settlement of this case, Belcher I and Belcher II. In light of
that agreement, the Court has stayed all proceedings in the case.
Baum
On April 17, 1998, five former TPI hourly and/or fluctuating work week
employees filed the case "Deborah Baum, et al. v. Shoney's, Inc. f/k/a TPI,
Inc." ("Baum") in the U.S. District Court for the Middle District of Florida.
TPI was the Company's largest franchisee and was acquired by the Company in
September 1996. Plaintiffs purported to represent themselves and a class of
other similarly situated former and current employees of TPI. Specifically,
plaintiffs allege that defendant failed to compensate properly certain
employees who were paid on a fluctuating work week basis, failed to
compensate employees properly at the required minimum wage, and improperly
required employees to work off the clock. Plaintiffs allege that such acts
deprived plaintiffs of their rightful compensation, including minimum wages,
overtime pay, and bonus pay. On December 3, 1998, the Court denied
plaintiffs' motion to provisionally certify the class and issue notice to
putative class members. On January 4, 1999, plaintiffs filed a notice of
appeal regarding the Court's ruling denying class certification. On February
18, 1999, the plaintiffs filed a motion in the Court of Appeals to
voluntarily dismiss their appeal with prejudice, and on February 23, 1999,
the parties filed a joint stipulation in the District Court to dismiss the
plaintiffs' complaint with prejudice. On March 16, 1999, the District Court
granted the parties joint stipulation to dismiss the plaintiffs' complaint
with prejudice, and on March 17, 1999 the case was closed. The Company is
awaiting entry of an order by the Court of Appeals dismissing the plaintiffs'
appeal.
In December 1997, plaintiffs' counsel in Belcher I, Belcher II, and Edelen
indicated that it may file a lawsuit that would involve the Captain D's
concept and would purportedly involve allegations similar to those in Belcher
II. To date, plaintiffs' counsel has not served the Company or the Company's
counsel with such a suit, nor has plaintiffs' counsel provided any further
indication that it may file such a suit. The Company is presently unable to
assess the likelihood of assertion of this threatened litigation.
Griffin
On August 5, 1997, an hourly employee filed the case of "Regina Griffin v.
Shoney's, Inc. d/b/a Fifth Quarter" ("Griffin") in the U.S. District Court
for the Northern District of Alabama. Plaintiff claimed the Company failed
to pay her minimum wages and overtime pay in violation of the Fair Labor
Standards Act, and claimed to be entitled to an injunction, unpaid wages,
interest, and expenses. On February 24, 1998 the plaintiff served the
Company with a Motion for Leave to Amend Complaint with an accompanying
proposed Amended Complaint for Violation of Fair Labor Standards Act seeking
to pursue the case as a class action on behalf of plaintiff and "all persons
who have performed the services of waiter or waitress for Shoney's (d/b/a
Fifth Quarter)." On August 24, 1998, the Company filed a Motion to Dismiss
or, in the Alternative, for Summary Judgment as to the plaintiffs' claims.
Prior to a decision on that motion, plaintiff filed a motion to amend her
amended complaint, in order to substitute Shoney's and TPI as defendants in
the case. The Court
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granted plaintiff's motion and on November 23, 1998, Shoney's and TPI filed
a consolidated answer to plaintiff's second amended complaint. On April 9,
1999, plaintiff moved for collective action certification, which the Company
opposed. At this time, the Court has denied, without prejudice, plaintiff's
motion to proceed on a collective action basis. The plaintiff, however, has
been permitted to conduct discovery on this issue, with leave to refile a
request for collective action certification at a later date. Trial presently
is scheduled to commence in September 1999. Management believes it has
substantial defenses to the claims made in this case and intends to vigorously
defend the case. However, neither the likelihood of an unfavorable outcome
nor the amount of ultimate liability, if any, with respect to this case can
be determined at this time. Accordingly, no provision for any potential
liability has been made in the consolidated condensed financial statements
with respect to this case.
Wilkinson
On December 20, 1996, a jury in Wyandotte County, Kansas returned a verdict
against the Company in the case of "Wilkinson v. Shoney's, Inc." for $458,000
on a malicious prosecution and a wrongful discharge claim which was based on
the Company's unsuccessful challenge to plaintiff's application for
unemployment benefits after he was terminated. The jury also found the
Company liable for punitive damages on the malicious prosecution claim in an
amount to be set by the trial Court. Although the trial Court judge stated
that she did not find sufficient evidence to support punitive damages, the
trial judge overruled the Company's motion for judgment as a matter of law
and set punitive damages in the amount of $800,000. The Company has appealed
the total judgment of approximately $1.3 million. Management believes it has
substantial defenses to the claims made and that the Company will likely
prevail on appeal. Accordingly, no provision for any potential liability has
been made in the consolidated condensed financial statements.
In addition to the litigation described in the preceding paragraphs, the
Company is a party to other legal proceedings incidental to its business. In
the opinion of management, based upon information currently available, the
ultimate liability with respect to these other actions will not materially
affect the operating results or the financial position of the Company.
NOTE 10 - CONCENTRATION OF RISKS AND USE OF ESTIMATES
As of May 9, 1999, the Company operated and franchised a chain of 1,197
restaurants in 28 states which consists of three restaurant divisions:
Shoney's Restaurants, Captain D's, and a Casual Dining Group (which includes
two distinct restaurant concepts). The majority of the Company's restaurants
are located in the southeastern United States. The Company also operates a
distribution and manufacturing business that supplies food and supplies to
Company and certain franchised restaurants. The Company's principal concepts
are Shoney's Restaurants, which are family dining restaurants offering full
table service and a broad menu, and Captain D's restaurants, which are quick-
service restaurants specializing in seafood. The Company extends credit to
franchisee customers for franchise fees and the sale of food and supplies on
customary credit terms. The Company believes there is no concentration of
risk with any single customer, supplier, or small group of customers or
suppliers whose failure or nonperformance would materially affect the
Company's results of operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to use judgment and make estimates
that affect the amounts reported in the consolidated condensed financial
statements. Management believes that such estimates have been based on
reasonable and supportable assumptions and that the resulting estimates are
reasonable for use in the preparation of the
-14-
consolidated condensed financial statements. Changes in such estimates will
be made as appropriate as additional information becomes available and may
affect amounts reported in future periods.
NOTE 11- LEASEHOLD INTERESTS ASSIGNED TO OTHERS
Assigned Leases - The Company has assigned its leasehold interest to third
parties with respect to approximately 12 properties on which the Company
remains contingently liable to the landlord for the performance of all
obligations of the party to whom the lease was assigned in the event that
party does not perform its obligations under the lease. The assigned leases
are for restaurant sites that the Company has closed. Although the Company
has received guarantees of performance under the assigned leases from a
majority of the assignees, the Company estimates its contingent liability
associated with these assigned leases as of May 9, 1999 to be approximately
$7.1 million.
Property Sublet to Others - The Company subleases approximately 39 properties
to others. The Company remains liable for the leasehold obligation in the
event these third parties do not make the required lease payments. The
majority of the sublet properties are former restaurant sites that the
Company has closed or franchised. The Company estimates its contingent
liability associated with these sublet properties as of May 9, 1999 to be
approximately $5.8 million.
NOTE 12 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.130 "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires that companies report comprehensive income in either
the Statement of Shareholders' Equity or in the Statement of Operations.
Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. As
of the first day of fiscal 1999, the Company adopted SFAS 130. The adoption
had no impact on the Company's results of operations or shareholders'
deficit. For the second quarter of 1999 and 1998, the total comprehensive
income and/or loss amounted to income of $5.0 million and a loss of $1.4
million, respectively. For the twenty-eight week periods of 1999 and 1998
comprehensive losses were $10.9 million and $12.4 million, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, which supersedes
Statement of Financial Accounting Standard No.14 "Financial Reporting for
Segments of a Business Enterprise," changes financial reporting requirements
for business segments from an Industry Segment approach to an Operating
Segment approach. Operating Segments are components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision-maker in deciding how to allocate resources
and in assessing performance. SFAS 131 is effective for fiscal years
beginning after December 15, 1997.
SFAS 131 will require the Company to provide disclosures regarding its
segments which it has not previously been required to provide. The
disclosures include certain financial and qualitative data about the
Company's operating segments. Management is unable at this time to assess
whether adding this disclosure will have a material effect upon a reader's
assessment of the financial performance and the financial condition of the
Company.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP
98-1 is effective for fiscal years beginning after December 15, 1998 and will
require the
-15-
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use after the date of adoption. The Company
adopted this statement on the first day of fiscal 1999 and management does
not anticipate that the adoption of SOP 98-1 will have a material effect on
the results of operations or financial position of the Company.
In May 1998, the AICPA issued Statement of Position 98-5 "Reporting on the
Costs of Startup Activities" ("SOP 98-5"). SOP 98-5 requires companies to
expense the costs of startup activities (including organization costs) as
incurred. The Company's present accounting policy is to expense costs
associated with startup activities systematically over a period not to exceed
twelve months. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. Management does not anticipate that the adoption of SOP
98-5 will have a material effect on the Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Earlier adoption is permitted. Management does not
anticipate that the adoption of SFAS 133 will have a material effect on the
Company's results of operations or financial position.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated condensed
financial statements and notes thereto. The second quarter and first two
quarters of both fiscal 1999 and 1998 covered periods of twelve and twenty-
eight weeks, respectively. All references are to fiscal years unless
otherwise noted. The forward-looking statements included in Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") relating to certain matters, which reflect management's best
judgment based on factors currently known, involve risks and uncertainties,
including the ability of management to implement successfully 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 legislation, adequacy of
management personnel resources, shortages of restaurant labor, commodity
price increases, product shortages, adverse general economic conditions, the
effect of Year 2000 issues on the Company and its key suppliers, turnover and
a variety of other similar matters. Actual results and experience could
differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements as a result of a number
of factors, including but not limited to those discussed in MD&A and under
the caption "Risk Factors" herein. Forward-looking information provided by
the Company pursuant to the safe harbor established under the Private
Securities Litigation Reform Act of 1995 should be evaluated in the context
of these factors. In addition, the Company disclaims any intent or
obligation to update these forward-looking statements.
RESULTS OF OPERATIONS
REVENUES
Revenues for the second quarter of 1999 declined $41.1 million, or 14.6%
to $240.0 million, as compared to revenues of $281.1 million in the second
quarter of 1998. For the first two quarters of 1999, revenues decreased 12.9%
to $540.0 million as compared to the same period in 1998. The following table
summarizes the components of the decline in revenues:
(In Millions) Twelve weeks Twenty-eight
ended weeks ended
May 9, 1999 May 9, 1999
----------------------------
Restaurant Revenue $ (40.4) $ (81.5)
Distribution and Manufacturing and Other Sales (4.4) (10.8)
Franchise Fees ---- (.1)
Other Income 3.7 12.1
----------------------------
$ (41.1) $ (80.3)
============================
The decline in revenues during the second quarter and the first two
quarters of 1999 was principally due to a net decline in the number of
restaurants in operation and negative overall comparable store sales. Since
the beginning of the first quarter of 1998, there has been a net decline of
167 Company-owned restaurants in operation. The table below presents
comparable store sales for Company-owned restaurants for the second quarter
and first two quarters of 1999 by restaurant concept:
-17-
Twelve weeks Twenty-eight
ended weeks ended
May 9, 1999 May 9, 1999
----------------------------
Comparable Comparable
Store Sales Store Sales
----------------------------
Shoney's Restaurants (5.8)% (5.7)%
Captain D's 3.3 4.1
Fifth Quarter 3.0 0.9
Pargo's (3.5) (4.5)
----------------------------
All Concepts (2.3)% (2.0)%
============================
As reflected in the table above, the Company's Shoney's Restaurants
continue to experience negative overall comparable store sales. The Company
is focusing on improving customer traffic and sales at its Shoney's
Restaurants through a variety of back-to-basics initiatives designed to re-
establish Shoney's Restaurants as a place for great-tasting food and
exceptional customer service. The Company has enhanced its food
specifications on the majority of its menu items and continued to improve the
quality of its ingredients with the introduction of fresh ground chuck into
the Shoney's system during the second quarter of 1999. Research and
development personnel have been given the responsibility for upgrading the
quality of menu items and developing new menu offerings to broaden customer
appeal. As of June 17, 1999, the Company was testing a new menu (the "Test
Menu") in 62 Company-owned restaurants. The Test Menu includes items from the
current menu, ten new sandwiches, nine blue plate specials that feature
a meat and two vegetables and the addition of fresh vegetables and side
dishes to the all you care to eat soup, salad, and fruit bar. In addition,
at the customers request, the number of soup rotations offered on the all you
care to eat soup, salad, and fruit bar have been doubled. Preliminary
results in the 62 test stores have been favorable and management anticipates
that the Test Menu will be implemented in all Company-owned restaurants by
the fall of 1999.
The back-to-basics initiatives also focus on improving the training
function at the Shoney's Restaurants to train restaurant-level personnel on
delivering high-quality food with exceptional customer service. During the
first two quarters of 1999, the Shoney's Restaurants training function
concentrated on hospitality, server training and customer satisfaction.
Shoney's Restaurant General Managers are required to be in the dining room
during meal periods to reinforce the 100% customer satisfaction guarantee.
For 1999, the Company's advertising program will focus on food quality and
new promotional items and the Test Menu. Restaurant operating standards are
continually monitored in an effort to bring them into compliance with
management's expectations.
The Company's Captain D's restaurants reported comparable store sales
increases for the second quarter and first two quarters of 1999. Management
is pleased with the continued positive operating results of its Captain D's
restaurants and has as a goal continued improvement in performance through a
variety of initiatives including advertising, promotional menu items and the
continued introduction of "Coastal Classics" menu items.
The "Coastal Classics" menu features items such as southern style
catfish, broiled salmon, orange roughy and rainbow trout, shrimp scampi,
fried flounder and gulf oysters. The "Coastal Classics" menu is priced from
$4.99 to $6.49 which is higher than the concept's average guest check. As of
the end of the second quarter of 1999, the "Coastal Classics" menu had been
placed in approximately 129 units, with approximately 170 units scheduled to
have the menu by the end of 1999. For the stores that have the "Coastal
Classics" menu implemented, the menu accounts for approximately 3-7% of total
unit sales.
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The following table summarizes the change in number of restaurants
operated by the Company and its franchisees during the first two quarters of
1999 and 1998:
Twenty-eight Weeks Ended
-------------------------------------
May 9, 1999 May 10, 1998
-------------------------------------
Company-owned restaurants opened 1 0
Company-owned restaurants closed (1) (63) (36)
Franchised restaurants opened (1) 11 11
Franchised restaurants closed (13) (18)
-------------------------------------
(64) (43)
=====================================
(1) The first two quarters of 1999 included 10 units sold to franchisees.
Distribution and manufacturing and other revenues declined $4.4 million
during the second quarter of 1999 compared to the second quarter of 1998 and
declined $10.8 million for the first two quarters of 1999 as compared to the
same period in 1998. The decline in distribution and manufacturing revenues
is principally due to a decline in the number of franchised restaurants in
operation, increased competition, and a decline in the comparable store sales
of franchised Shoney's Restaurants.
Franchise revenues increased approximately $13,000 during the second
quarter of 1999 and declined approximately $80,000 for the first two quarters
of 1999, as compared to the same periods last year. The decline in franchise
fee revenue for the twenty-eight week period is due principally to fewer
franchised restaurants in operation and a decline in comparable store sales
at franchised Shoney's Restaurants.
Other income increased $3.7 million during the second quarter of 1999
and approximately $12.1 million for the first two quarters of 1999 as
compared to the same periods in 1998. The increase in other income during the
second quarter and first twenty-eight weeks of 1999 was due principally to
increased net gains on asset sales. The principal components of other income
for the second quarter of 1999 were net gains on asset sales ($4.9 million),
interest income ($351,000) and rental income ($204,000). For the first two
quarters of 1999, the principal components of other income were net gains on
asset sales ($15.4 million), interest income ($539,000) and rental income
($445,000).
COSTS AND EXPENSES
Costs of sales declined during the second quarter and first two quarters of
1999 compared to the same periods in 1998 principally as a result of a
decline in restaurant sales. Cost of sales as a percentage of revenues
decreased for the second quarter of 1999 to 86.4% compared to 88.9% for the
same quarter of 1998. Cost of sales as a percentage of revenues was 86.9% for
the first two quarters of 1999 compared to 90.1% for the same period in 1998.
Food and supplies costs as a percentage of total revenues declined to 37.0%
and 36.6%, respectively, for the second quarter and first two quarters of
1999 compared to 38.6% and 38.8%, respectively, in the second quarter and
first two quarters of 1998. The decline in food and supplies costs as a
percentage of revenues was primarily the result of the increase in other
income, higher menu prices and the implementation of a Store Waste Attack
Tool ("SWAT") that allows the food costs of each individual restaurant to be
measured against its own theoretical cost of sales. SWAT was fully
implemented in the Company's Captain D's restaurants at the end of the first
quarter of 1999 and was fully implemented in the Shoney's Restaurants by the
end of the second quarter of 1999. Despite a 10% increase in the cost of
white fish to Captain D's during the second quarter, as a percentage of
restaurant sales, food
-19-
costs declined in each of the Company's restaurant concepts during the second
quarter and first two quarters when compared to the prior year periods.
Although reduced by the increase in other income, restaurant labor
increased as a percentage of total revenues for both the second quarter and
first two quarters of 1999 because of higher wages for restaurant employees.
The higher wages were a result of tight labor market conditions in the
majority of markets in which the Company operates and increases in staffing
levels at the Company's Shoney's Restaurants in an effort to achieve the
desired level of customer service as one means by which to attempt to reverse
the negative comparable unit sales trend. This increase in staffing in the
Shoney's Restaurants and resulting higher labor costs are expected to continue
for the remainder of the 1999 fiscal year. Restaurant labor as a percentage
of revenues was 26.5% for the second quarter of 1999, as compared to 26.4%
for the second quarter of 1998. For the first two quarters of 1999 restaurant
labor, as a percentage of revenues, was 26.8% as compared to 26.7% for the
same period in 1998.
Operating expenses as a percentage of revenues decreased to 22.9% for
the second quarter of 1999 compared to 23.9% in the second quarter of 1998.
Operating expenses decreased to 23.5% for the first two quarters of 1999 as
compared to 24.6% in the same period in 1998. The decrease in operating
expenses as a percentage of revenues in both the second quarter and twenty-
eight week period were due principally to the increase in other income, lower
depreciation, insurance and advertising costs partially offset by higher
repairs and maintenance expenses.
General and administrative expenses decreased $3.3 million and $3.7
million in the second quarter and first two quarters of 1999, respectively.
General and administrative expenses as a percentage of revenues decreased
from 7.6% in the second quarter of 1998 to 7.5% in the second quarter of 1999
and increased from 7.6% for the first two quarters of 1998 to 8.0% for the
first two quarters of 1999. The decrease in general and administrative
expenses in the second quarter of 1999 was principally due to decreases in
salary and related expenses and professional fees. The decrease in salary
and related expenses was due in large part to a decrease in severance and
related expenses associated with the termination or realignment of certain
executives during the first two quarters of 1998, which totaled $2.7 million.
The decreases in salary and related expenses in the twenty-eight weeks were
offset by increased legal expenses relating to certain employment litigation.
The Company incurred asset impairment charges of $2.6 million, in the
first quarter of 1998. Asset impairment charges incurred during the first
quarter of 1998 were the result of additional analysis and the reassessment
of management's intentions as to the future disposition of certain assets.
The Company incurred approximately $1.4 million and $2.6 million, in
restructuring charges associated with the accrual of the remaining leasehold
obligations on restaurants closed (or planned closure) during the second
quarter and first twenty-eight weeks of 1998, respectively.
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 9 to
the consolidated condensed financial statements and Liquidity and Capital
Resources). The Company agreed to pay $18.0 million in exchange for the
dismissal of all three cases with prejudice and a release by the plaintiffs
relating to the subject matter of the cases. As a result of the settlement,
the Company recorded a litigation settlement charge of $14.5 million in the
first quarter of fiscal 1999 ($3.5 million had previously been recorded in
the fourth quarter of 1998).
-20-
The Company refinanced approximately $281.0 million of its senior debt
in December 1997 (the "1997 Credit Facility"). Interest expense for the
second quarter of 1999 decreased $1.0 million, or 9.5%, as compared to the
same period last year, principally due to lower average debt outstanding.
Interest expense declined $3.0 million in the first two quarters of 1999, as
compared to the prior year period, principally the result of lower average
debt outstanding and a $1.1 million fee to obtain waivers (for its inability
to make principal payments and comply with debt covenants) from its prior
lenders to facilitate the 1997 Credit Facility in the first quarter of 1998.
The Company expects the increased interest costs incurred in 1998 as a result
of higher interest rates to be offset during 1999 by a reduction of debt
outstanding. The reduction in debt outstanding is expected to result from
proceeds from the sale of surplus restaurant properties and other real
estate. During the first quarter of 1998, the Company expensed unamortized
costs of $2.2 million related to the refinanced debt, which resulted in an
extraordinary loss, net of tax, of approximately $1.4 million (or $.03 per
common share outstanding).
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its liquidity requirements with cash
provided by operating activities supplemented by external borrowings from
lending institutions. The Company historically has operated with a
substantial net working capital deficit. Management does not believe that
the deficit hinders the Company's ability to meet its obligations as they
become due as the Company's 1997 Credit Facility includes a line of credit
("Line of Credit") that is available to cover any short term working capital
requirements. During the first two quarters of 1999, cash provided by
operating activities was $36.0 million, an increase of $9.2 million, as
compared to the first two quarters of 1998. This increase in cash provided
by operating activities was primarily the result of changes in operating
assets and liabilities partially offset by lower depreciation and
amortization.
Cash provided by investing activities during the first two quarters of
1999 totaled $41.4 million as compared to cash used by investing activities
of $3.0 million in the same period of 1998. The change in cash provided by
investing activities was due principally to an increase in proceeds from
disposal of property, plant and equipment and a decrease in cash required for
property, plant and equipment.
The Company balances its capital spending throughout the year based on
operating results and will decrease capital spending, if needed, to balance
cash from operations, and debt service requirements. The Company has planned
capital expenditures for 1999 of $30.0 million. The Company does not plan to
build a significant number of new restaurants during 1999 and will invest its
capital in improvements to existing operations. Budgeted capital
expenditures for 1999 include $11.7 million for remodeling and refurbishment
of restaurants, $10.0 million for additions to existing restaurants and $8.3
million for other assets. Cash required for capital expenditures totaled
$11.8 million for the first two quarters of 1999.
During 1998, the Company closed 104 restaurants and has also closed an
additional 63 restaurants in the first two quarters of 1999. These
properties, as well as real estate from prior restaurant closings and other
surplus properties and leasehold interests, are being actively marketed. The
Company's 1997 Credit Facility requires that net proceeds from asset
disposals be applied to reduce its senior debt. At May 9, 1999, the Company
had approximately 64 properties classified as assets held for sale with a
carrying value of $29.8 million. Cash proceeds from asset disposals were
$53.1 million for the first two quarters of 1999 compared to $11.8 million
for the first two quarters of 1998.
The Company completed a refinancing of its senior debt on December 2,
1997. The 1997 Credit Facility consisted of a $75.0 million revolving Line
of Credit and two term notes of $100.0 million ("Term A
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Note") and $200.0 million ("Term B Note"), respectively, due in 2002. The
term notes replaced the Company's reducing revolving credit facility (the
"Revolver"), the senior secured bridge loan which was obtained in 1996 to
provide financing for the acquisition of substantially all the assets of TPI
Enterprises, Inc., and a series of mortgage financings. The 1997 Credit
Facility provides the Company with additional liquidity and a debt
amortization schedule which better supports the Company's business
improvement plans.
During the first two quarters of 1999, cash used by financing activities
was $57.0 million compared with cash used by financing activities of $26.0
million for the same period in 1998. Of the $55.5 million of payments on the
Term A and Term B Notes in 1999, $51.5 million were required payments as a
result of the sale of surplus property. Significant financing activities for
the first two quarters of 1998 included the refinancing of the Company's
senior debt which provided cash of $300.0 million, of which $280.4 million
was used to retire the refinanced debt. The Company also made payments of
$15.7 million on its litigation settlement in the first two quarters of 1998.
The Company had approximately $58.3 million and $144.7 million
outstanding under Term A Note and Term B Note, respectively, at May 9, 1999.
The amounts available under the Line of Credit are reduced by letters of
credit of approximately $25.6 million resulting in available credit under the
Line of Credit of approximately $49.4 million at May 9, 1999. Due to the
nature of the loan covenants contained in the Company's 1997 Credit Facility,
the Company's ability to draw under the Line of Credit could be restricted.
Based upon the financial covenants at May 9, 1999, the Company could have
drawn an additional $29.4 million under the Line of Credit and remained in
compliance with its loan agreement. At May 9, 1999, the Company had cash and
cash equivalents of approximately $36.7 million.
As more fully discussed in note 9 to the consolidated condensed
financial statements, the Company is a defendant in certain litigation
alleging that the Company violated certain provisions of the Fair Labor
Standards Act (the "FLSA"). Three cases had been provisionally certified as
class actions.
On March 20, 1999, the parties agreed to the material terms of a global
settlement of these three cases. The settlement requires the Company to pay
$18 million as follows: $11 million upon Court approval of the settlement
and dismissal of the cases, $3.5 million on October 1, 1999 and $3.5 million
on March 1, 2000. The settlement, which remains subject to approval of the
Court, required the Company to take a charge of $14.5 million in the first
quarter ended February 14, 1999 in addition to the $3.5 million recorded in
the fourth quarter of 1998. If the proposed settlement is approved by the
Court, management expects to utilize the proceeds from the Company's
income tax refund, general working capital or Line of Credit to fund
the proposed settlement. If the Company is unable to secure the required
approval, management would vigorously contest the claims made in the cases.
There can be no assurance that the Company will be able to secure the
required approval of the settlement together with the dismissal of each of
the three cases. If the required approval is not secured and each case
dismissed, the Company's ultimate liability in these cases could exceed the
amount presently recorded as a liability ($18 million). Such a result could
be materially adverse to the Company's financial position, results of
operations and liquidity.
Another case (Baum) was dismissed with prejudice on March 16, 1999.
The Company is awaiting entry of an appropriate order by the Court of Appeals
dismissing the appeal which will conclude the litigation. In the remaining
case (Griffin), the Court, at this time, has denied plaintiff's request for
class action certification. Trial presently is set for September 1999.
Management believes that it has substantial defenses to the claims made in
this case and intends to vigorously defend the claims made in the case.
However, neither the likelihood of an unfavorable outcome nor the amount of
ultimate liability, if any, with respect to this case can currently be
determined and accordingly, no provision for any potential liability has been
made in the consolidated condensed financial statements. In the event that an
unfavorable outcome in this case results in a material
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award to the plaintiffs, the Company's financial position, results of
operations and liquidity could be adversely affected.
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 six years as a result of intense competition and a decline in
operational focus occasioned by high management turnover. The Company has
initiated a number of programs to address the decline in customer traffic;
however, performance improvement efforts for the Shoney's Restaurants during
the past three years have not resulted in improvements in sales and profit
margins and there can be no assurance that the current programs will be
successful. The Company has experienced increased costs for labor and
operating expenses at its Shoney's Restaurants concept which, coupled with a
decrease in average restaurant sales volumes, have reduced its operating
margins. The Company does not expect to be able to significantly improve
operating margins until it can increase its comparable restaurant sales and
restaurant average sales volumes.
The Company is highly leveraged and, under the terms of its 1997 Credit
Facility, generally is not permitted to incur additional debt and its annual
capital expenditures are limited to $35.0 million. The Company completed a
refinancing of approximately $281.0 million of its senior debt in December
1997. The interest rates under the 1997 Credit Facility are higher than those
for the debt refinanced which resulted in increased interest costs in 1998.
Management believes that proceeds from planned asset sales will result in a
reduction of total debt outstanding and should offset the impact of the
higher interest rates. However, there is no assurance that such asset sales
will occur as quickly as management anticipates or that actual sales proceeds
will correspond to management's estimates. As of May 9, 1999, the 1997
Credit Facility requires, among other terms and conditions, payments in the
first half of fiscal 2002 of approximately $154.2 million. In addition, $51.6
million of 8.25% subordinated convertible debentures are due in July 2002.
Further, the Company's zero coupon subordinated debentures mature in 2004.
The Company plans to refinance these obligations as they become due.
However, there can be no assurance that the debt can be refinanced on terms
acceptable to the Company. If the Company is unable to refinance the
indebtedness, the Company's financial condition, results of operations and
liquidity would be adversely affected.
The 1997 Credit Facility requires satisfaction of certain financial
covenants, as well as other affirmative and negative covenants, which were to
become more restrictive in the fourth quarter of 1998 and during 1999. During
the third quarter of 1998, management received approval from its lending
group for covenant modifications in the fourth quarter of 1998 and the first
quarter of 1999 that either maintain covenant ratios at existing levels or
reduce the restrictions. The financial covenant modifications were requested
because of lower than anticipated levels of sales of assets held for disposal
and lower than anticipated earnings from restaurant operations. Based on
current operating results, forecasted operating trends and anticipated levels
of asset sales, management believes that the Company possibly could be forced
to seek additional financial covenant modifications in the third quarter of
fiscal 1999. Based on preliminary discussions, management believes that the
additional covenant modifications could be obtained; however, no assurance
can be given that such covenant modifications could be obtained if needed.
If the Company were unable to obtain the possible modifications to its
existing credit agreement, the Company's liquidity and financial position
would be materially adversely affected. As of May 9, 1999, the Company was
in compliance with its financial covenants.
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On March 20, 1999 the Company agreed to the material terms of a global
settlement in three class action lawsuits (see note 9 to the consolidated
condensed financial statements). The settlement is subject to the approval
of the Court. If the Company is unable to secure Court approval of the
settlement and dismissal of each of the cases, the Company intends to
vigorously contest the unresolved claims made in such cases. There can be no
assurance that the Company will be able to secure the required approval of
the settlement. If the required approval is not secured and each of the
cases dismissed, the Company's ultimate liability in these cases could exceed
the amount presently recorded as a liability ($18 million). Such a result
could be materially adverse to the Company's financial position, results of
operations and liquidity.
YEAR 2000 ISSUES AND CONTINGENCIES
The Year 2000 issue is the result of computer programs which have been
written using two rather than four digits to define the applicable year. Any
of the computer programs or operating systems that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process restaurant transactions, process orders from the
Company's distribution and manufacturing operation, or engage in normal
business activities.
The Company conducts its business with a great degree of reliance on
internally-operated software systems. The Company's primary information
technology systems are as follows:
Point of Sale Cash Register system ("POS system")-This system has been
fully operational in the Company's Shoney's Restaurants and Captain D's since
January 1998. The POS system affords the Company many efficiencies, including
electronic recording of transactions such as restaurant sales, product mix,
payroll time and attendance and cash accounting. The POS system also serves
as the means by which restaurants process orders with the Company's
Distribution and Manufacturing operation, transmit hours worked for hourly
employees resulting in the recording of restaurant labor costs for these
personnel, as well as providing numerous information uses for management in
the operation of the Company's business.
Distribution and Manufacturing system ("Distribution system")-This
system provides information for the management of inventory at the Company's
three distribution centers, which provide Company-operated and certain
franchised restaurants the majority of the necessary food and supplies. This
system also processes transactions for the Company's purchasing function,
order processing, sales forecasting and inventory management. This system has
a major impact on the food cost recorded by the Company.
General Ledger, Accounts Payable and Accounts Receivable system
("General Ledger system")-This system facilitates the maintenance of all
financial transactions to the Company's financial statements (general
ledger), as well as the processing of the Company's accounts payable,
accounts receivable, and property, plant and equipment records.
Payroll system ("Payroll system")-This system accumulates, records and
processes all payroll related transactions.
At present, management has completed the assessment of its Year 2000
issues for all of the systems discussed above. The Company has completed the
remediation, testing, and implementation phases for the POS, Distribution and
General Ledger systems. The remediation and programming phase has been
completed for the Payroll system. Management believes it is Year 2000
compliant with respect to the POS, Distribution and General Ledger systems.
Management anticipates that all phases of the Year 2000 project will be
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completed by July 31, 1999. As of May 9, 1999, management estimated the
Payroll system to be 80% complete.
The Company does not have any material relationships with third parties
that involve the transmittal of data electronically, which would affect the
results of operations or financial position of the Company. The Company does
have material relationships with certain suppliers of food products. The
Company has surveyed its critical suppliers as to their Year 2000 readiness;
however, the Company has no way of assuring that its major suppliers will be
Year 2000 compliant and is unable to estimate the effect of their
noncompliance on the delivery of the necessary food products.
The Company also relies on numerous financial institutions for the
repository of monies from the Company's restaurant locations located mainly
across the southeastern United States. These funds are generally transferred
nightly to the Company's main depository bank. While management is
comfortable with the Company's main depository bank with respect to Year 2000
issues, there can be no assurance that the many institutions with which the
Company does business will be Year 2000 compliant. Such non-compliance could
have a material effect on the Company's liquidity or financial position.
The Company relies on a number of other systems that could be affected
by Year 2000 related failures. The corporate phone system has been upgraded
to be Year 2000 compliant. The operating system for the corporate and
regional office network will require software and hardware upgrades to become
Year 2000 compliant. The Company has received assurance from its credit card
processor that they will be Year 2000 compliant by July 1, 1999. The Year 2000
issue has and will divert information systems resources from other projects.
This diversion is not expected to have a material effect on the Company's
financial position or results of operations.
The Company will utilize both external and internal resources to
reprogram or replace, test and implement the software needed for Year 2000
modifications. The total cost for Year 2000 software related readiness is
estimated to be approximately $450,000. To date, the Company has incurred
approximately $406,000 of these costs. The majority of the remaining costs
relate to the completion of the compliance of the Company's Payroll system.
The hardware upgrade for the corporate and regional office network is
estimated to be approximately $1.2 million of which approximately $1.1
million has been spent.
As of May 1999, the Company has not developed contingency plans for the
Year 2000 issue. The POS, Distribution and General Ledger systems are Year
2000 compliant. Additional testing will be performed on the three systems to
insure compliance. The Company has received the Year 2000 compliant upgrade
for its Payroll system and has completed the remediation and programming
phase. For the remainder of 1999, in addition to continued testing, the
Company will evaluate the systems that may require contingency plans and
develop them if needed.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has yet to complete all necessary phases of the Year 2000 program,
mainly with respect to its Payroll system. Should management be unable to
complete the additional phases required by the Payroll system, the Company
would be unable to efficiently process its payroll transactions.
Additionally, such non-compliance could result in liability associated with
various labor related laws. The amount of this potential liability cannot be
assessed at this time. There is still uncertainty around the scope of the
Year 2000 issue. At this time, the Company cannot quantify the potential
impact of these failures. The Company's Year 2000 program is being developed
to address issues that are within the Company's control. The program
minimizes, but does not eliminate, the issues of external parties.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A of the Company's Annual Report on Form 10-K, filed with the
Commission on January 22, 1999, is incorporated herein by this reference.
PART II OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
Item 3 of the Company's Annual Report on Form 10-K, filed with the
Commission on January 22, 1999, is incorporated herein by this reference. See
also note 9 to the notes to consolidated condensed financial statements at
pages 11 through 14 of this Quarterly Report on Form 10-Q, which is
incorporated herein by this reference.
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The annual meeting of the Company's shareholders (the "Annual Meeting")
was held on March 23, 1999.
(b) At the meeting, only the election of directors was submitted to a vote
of shareholders. The name of each director elected at the Annual meeting is
set forth below.
(c) The results of voting for the election of directors at the Annual
Meeting were as follows:
Nominee For Withheld
- --------------------------------------------------------
J. Michael Bodnar 38,768,823 381,058
Jeffry F. Schoenbaum 38,786,724 363,157
Raymond D. Schoenbaum 38,785,285 364,596
William A. Schwartz 38,736,286 413,595
Carroll D. Shanks 38,695,670 454,211
Felker W. Ward, Jr. 38,709,835 440,046
William M. Wilson 38,722,725 427,156
James D. Yancey 38,771,425 378,456
There were no abstentions or broker non-votes in the election of directors.
ITEM 5. OTHER INFORMATION
Following notification by the New York Stock Exchange ("NYSE") that the
Company was not in compliance with the NYSE's continuing listing criteria, on
May 5, 1999, the Company submitted a plan to the NYSE in support of the
continued listing of the Company's common stock. On May 21, 1999, the
NYSE notified the Company that the Company's stock, at this time, would
continue to trade on the NYSE; however, the Company's continued listing will
be reviewed on a quarterly basis. Failure by the Company to meet the plan
submitted to the NYSE could result in suspension from trading, and subsequent
delisting, of the Company's stock from the NYSE.
The NYSE also indicated to the Company that the NYSE is in the process
of revising its continued listing standards and, upon implementation of these
standards, will notify the Company of its listing status and determine an
appropriate action plan at that time. There is no assurance that the Company
will be successful
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in its efforts to return to the NYSE's original listing standards or that, if
it fails to do so, its stock will continue to trade on the NYSE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) In accordance with the provisions of Item 601 of Regulation S-K, the
following have been furnished as Exhibits to this Quarterly Report
on Form 10- Q.
Exhibit
Number Description
------- ---------------------------------------------
3(ii), 4.1 Amended and Restated Bylaws of Shoney's, Inc.
10.1 Amendment No. 2 to the 1997 Credit Facility
27 Financial Data Schedule (For SEC Use Only)
(b) During the quarter ended May 9, 1999, the Company has not filed any
reports on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized both on behalf of the registrant and in
his capacity as principal financial officer of the registrant.
SHONEY'S, INC.
Date: June 23, 1999 By: /s/ V. Michael Payne
----------------------------
V. Michael Payne
Senior Vice President and Controller,
Principal Financial and Chief
Accounting Officer
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EXHIBIT INDEX
Sequential
Exhibit No. Description Page Number
- ---------- ---------------------------------- -----------
3(ii), 4.1 Amended and Restated Bylaws of Shoney's, Inc. 29
10.1 Amendment No. 2 to the 1997 Credit Facility 39
27 Financial Data Schedule (For SEC Use Only) 52