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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 FEBRUARY 14, 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0799798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1727 ELM HILL PIKE, NASHVILLE, TN 37210
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 391-5201
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
As of March 30, 1999, there were 49,439,030 shares of Shoney's, Inc. $1
par value common stock outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
February 14, October 25,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,029,435 $ 16,277,722
Notes and accounts receivable, less allowance
for doubtful accounts of $1,135,000 in 1999
and $1,142,000 in 1998 8,978,613 10,263,490
Inventories 31,689,167 37,146,297
Refundable income taxes 14,005,359 14,005,359
Prepaid expenses and other current assets 3,081,179 3,390,458
Net property, plant and equipment held for sale 44,285,721 69,878,238
------------- -------------
Total current assets 116,069,474 150,961,564
Property, plant and equipment, at the lower of cost or market 665,543,815 677,978,782
Less accumulated depreciation and amortization (344,604,393) (350,673,367)
------------- -------------
Net property, plant and equipment 320,939,422 327,305,415
Other assets:
Goodwill (net of accumulated amortization of
$6,075,000 in 1999 and $5,465,000 in 1998) 28,800,225 29,819,721
Deferred charges and other intangible assets 9,120,707 10,581,373
Other assets 4,722,285 4,800,760
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Total other assets 42,643,217 45,201,854
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$ 479,652,113 $ 523,468,833
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 28,100,552 $ 37,522,186
Other accrued liabilities 118,839,826 126,444,583
Reserve for litigation settlements due within one year 14,872,961 372,961
Debt and capital lease obligations
due within one year 14,738,510 11,980,656
------------- -------------
Total current liabilities 176,551,849 176,320,386
Long-term senior debt and
capital lease obligations 245,873,652 282,354,696
Zero coupon subordinated convertible debentures 115,515,078 112,580,014
Subordinated convertible debentures, net of bond discount of $3,032,000
in 1999 and $3,255,000 in 1998 48,531,293 48,308,400
Reserve for litigation settlements 3,709,681 226,679
Deferred income and other liabilities 23,791,669 23,165,829
Shareholders' deficit:
Common stock, $1 par value: authorized
200,000,000; issued 49,439,030 in 1999
48,694,865 in 1998 49,439,030 48,694,865
Additional paid-in capital 137,613,893 137,296,111
Accumulated deficit (321,374,032) (305,478,147)
------------- -------------
Total shareholders' deficit (134,321,109) (119,487,171)
------------- -------------
$ 479,652,113 $ 523,468,833
============= =============
See notes to consolidated condensed financial statements
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SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Sixteen Weeks Ended
February 14, February 15,
1999 1998
------------- -------------
Revenues
Net sales $ 284,730,414 $ 332,223,895
Franchise fees 4,299,632 4,393,316
Other income 10,928,948 2,479,982
------------- -------------
299,958,994 339,097,193
Costs and expenses
Cost of sales 262,122,942 308,834,068
General and administrative expenses 25,281,619 25,665,871
Impairment write down of long-lived assets 2,593,482
Restructuring expense 1,210,681
Litigation settlement 14,500,000
Interest expense 13,950,318 15,887,488
------------- -------------
Total costs and expenses 315,854,879 354,191,590
------------- -------------
Loss before income taxes and extraordinary charge (15,895,885) (15,094,397)
Benefit from income taxes (5,479,000)
------------- -------------
Loss before extraordinary charge (15,895,885) (9,615,397)
Extraordinary charge on early extinguishment of debt,
net of income taxes of $806,000 (1,415,138)
------------- -------------
Net loss $ (15,895,885) $ (11,030,535)
============= =============
Earnings per common share
Basic
Net loss before extraordinary charge $ (.32) $ (0.20)
Extraordinary charge on the early extinguishment of debt (0.03)
------------- -------------
Net loss $ (.32) $ (0.23)
============= =============
Diluted:
Net loss before extraordinary charge $ (.32) $ (0.20)
Extraordinary charge on the early extinguishment of debt (0.03)
------------- -------------
Net loss $ (.32) $ (0.23)
============= =============
Weighted average shares outstanding
Basic 49,067,396 48,610,211
Diluted 49,067,396 48,610,211
Common shares outstanding 49,439,030 48,673,365
Dividends per share NONE NONE
See notes to consolidated condensed financial statements.
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SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Sixteen Weeks Ended
February 14, February 15,
1999 1998
------------- -------------
Operating activities
Net loss $ (15,895,885) $ (11,030,535)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 11,890,192 14,943,369
Amortization of deferred charges and other
non-cash charges 5,851,002 8,849,778
Gain on disposal of property, plant, and equipment (10,499,895) (1,194,563)
Impairment write down of long-lived assets 2,593,482
Litigation settlement 14,500,000
Changes in operating assets and liabilities (4,332,984) (9,441,194)
------------- -------------
Net cash provided by operating activities 1,512,430 4,720,337
Investing activities
Cash required for property, plant and equipment (5,772,076) (8,230,383)
Proceeds from disposal of property, plant and equipment 34,384,426 4,908,306
Cash provided by (required for) other assets 48,360 (36,192)
------------- -------------
Net cash provided (used) by investing activities 28,660,710 (3,358,269)
Financing activities
Payments on long-term debt and
capital lease obligations (32,224,336) (290,549,793)
Proceeds from long-term debt 300,000,000
Net payments on short-term borrowings 1,143,000
Payments on litigation settlement (16,998) (5,660,000)
Cash required for debt issue costs (180,093) (10,954,750)
Proceeds from exercise of employee stock options 21,775
------------- -------------
Net cash used by financing activities (32,421,427) (5,999,768)
------------- -------------
Change in cash and cash equivalents $ (2,248,287) $ (4,637,700)
============= =============
See notes to consolidated condensed financial statements.
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SHONEY'S, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
February 14, 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 sixteen week period ended February 14, 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
Shoney's, Inc. 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 Company borrowed $100.0 million under a
bridge loan (which was subsequently refinanced, see Note 7) to finance the
acquisition and to provide additional working capital for the Company.
Approximately $43.0 million of the bridge loan proceeds were utilized to retire
TPI debt at the date of closing.
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 $405,000 additional amortization in the first quarter of
1999.
As of February 14, 1999, of the properties acquired in the TPI transaction, the
Company has 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.
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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 first quarter of 1999, approximately $700,000 in costs were charged
to this liability, including approximately $500,000 in costs to exit restaurants
acquired, and $200,000 in lease payments associated with the former TPI
corporate headquarters. Approximately $11.0 million of anticipated exit costs
related to the TPI acquisition remain accrued at February 14, 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 February 14, 1999, the carrying value of the 89 properties to be disposed of
was $44.3 million and is reflected on the consolidated condensed balance sheet
as net assets held for disposal. 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), primarily associated with
the accrual of the remaining leasehold obligations on restaurants closed or to
be closed. The Company charged approximately $1.0 million against these exit
costs reserves in the first quarter of 1999. Approximately $10.0 million of
accrued exit costs remain at February 14, 1999.
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During 1998, the Company closed 104 restaurants. Forty-seven restaurants were
closed during the first quarter of 1999. As previously announced, management
expects to close sixteen additional restaurants before the end of the second
quarter of 1999. Below are sales and operating losses for the first quarter of
1999 and the first quarter of 1998 of the restaurants closed in 1998, and the
restaurants closed or to be closed or disposed of during 1999.
($ in thousands)
Quarter Ending Quarter Ending
February 14, 1999 February 15, 1998
---------------------- ---------------------
Operating Operating
Sales Loss Sales Loss
------- ------- ------- -------
Stores closed during 1998 $ -- $ (842) $26,473 $(3,497)
Stores closed or planned to be closed or
disposed of during 1999 13,240 (1,559) 22,604 (1,690)
------- ------- ------- -------
Total $13,240 $(2,401) $49,077 $(5,187)
======= ======= ======= =======
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 effect Basic EPS.
The table below presents the computation of basic and diluted loss per share:
Quarter Ending Quarter Ending
February 14, 1999 February 15, 1998
----------------- -----------------
Numerator:
Loss before extraordinary loss - numerator
for Basic EPS $(15,895,885) $ (9,615,397)
Loss before extraordinary loss after assumed
conversion of debentures - numerator
for Diluted EPS $(15,895,885) $ (9,615,397)
Denominator:
Weighted-average shares outstanding -
denominator for Basic EPS 49,067,396 48,610,211
Dilutive potential shares -
denominator for Diluted EPS 49,067,396 48,610,211
============ ============
Basic EPS (loss) $ (.32) $ (0.20)
============ ============
Diluted EPS (loss) $ (.32) $ (0.20)
============ ============
As of February 14, 1999, the Company had outstanding approximately 5,995,000
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
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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 February 14, 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. Because the Company reported a net loss for the
first quarter of 1998 and 1999; the effect of considering these 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 sixteen
weeks ended February 14, 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 increase in the valuation allowance
against the gross deferred tax assets. For the sixteen weeks ended February 15,
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 February 14, 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 February 15, 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 provide for up to $375.0
million ("1997 Credit Facility") and consisted 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. Initially,
the 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 have increased 0.25%
which is the maximum allowed under the 1997 Credit Facility.
At February 14, 1999, the Company had approximately $68.0 million and $159.0
million outstanding under its Term A Note and Term B Note, respectively. During
the next four fiscal quarters, principal reductions of $16.5 million are
scheduled for the Term A Note and principal reductions of $828,000 are scheduled
for the Term B Note. Of these amounts, $4.8 million was prepaid as of February
14, 1999. At February 14, 1999, the effective interest rates on the term notes
were 8.3% and 8.6% for Term A Note and Term B Note, respectively.
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The Company had no borrowings outstanding under its $75.0 million Line of Credit
at February 14, 1999. Available credit under the Line of Credit is reduced by
outstanding letters of credit, which totaled $25.0 million at February 14, 1999,
resulting in available credit of $50.0 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 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 February 14, 1999, the Company
could have drawn approximately $50.0 million under the Line of Credit and
remained in compliance with its financial covenants. At February 14, 1999, the
interest rate for the Line of Credit was 10.5%.
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.
The amount of the Company's debt covered by the hedge program was $100.0 million
at February 14, 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
February 14, 1999, the estimated cost to exit the Company's interest rate swap
agreements was approximately $1.3 million. 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 February 14, 1999 and October 25,
1998 consisted of the following:
February 14, 1999 October 25, 1998
----------------- ----------------
Senior debt - Term A Note $ 67,957,754 $ 77,387,946
Senior debt - Term B Note 159,043,884 181,113,692
Subordinated zero coupon convertible debentures 115,515,078 112,580,014
Subordinated convertible debentures 48,531,293 48,308,400
Industrial revenue bonds 10,315,000 10,315,000
Notes payable to others 5,125,491 5,267,458
------------ ------------
406,488,500 434,972,510
Obligations under capital leases 18,170,033 20,251,256
------------ ------------
424,658,533 455,223,766
Less amounts due within one year 14,738,510 11,980,656
------------ ------------
Amount due after one year $409,920,023 $443,243,110
============ ============
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
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.
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 will be required to seek certain financial covenant modifications to the
1997 Credit Facility. As discussed in Note 9, if the Company is unable to secure
Court or lender 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
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asset sales, and approval of the litigation settlement and related covenant
modifications to be requested by the Company, management believes that the
Company will be in compliance with its financial covenants during 1999 and the
first quarter of 2000. However, should operating trends, particularly in the
Shoney's Restaurant concept, vary from those forecasted or if anticipated levels
of asset sales are not met, or if the litigation settlement and related covenant
modifications are not approved, the Company may not achieve compliance with the
financial covenants and management could be forced to seek additional
modifications to the Company's 1997 Credit Facility. At February 14, 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 $278,000.
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 and approximately 240 additional potential class members
opted to participate in the suit, but their notice was not received by the Court
until after the cutoff date and 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 the 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. The settlement, which is subject to the approval of the Company's
lenders and 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 Company's lenders and the Court,
management expects to utilize the proceeds from the Company's refundable income
taxes, general working capital or Line of Credit to fund the proposed
settlement. If the Company is unable to secure Court or lender approval of the
settlement, the Company intends to vigorously contest the Belcher I damage
claims and appeal the Court's December 21, 1998 liability ruling once judgment
has been entered in the case, and vigorously contest the claims in Belcher II
and Edelen.
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. 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. Trial was scheduled to commence on January 4,
2000. 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.
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 plaintiffs may argue that the Court's December 21, 1998 ruling
on liability in Belcher I should apply to this case. On March 28, 1996, 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.
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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.
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
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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 granted plaintiff's motion
and on November 23, 1998, Shoney's and TPI filed a consolidated answer to
plaintiff's second amended complaint. Discovery is in a preliminary state. Trial
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 February 14, 1999, the Company operated and franchised a chain of 1,217
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
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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 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 February 14, 1999 to be approximately $7.6 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 February 14, 1999 to be approximately $6.9 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
first quarter of 1999 and 1998, the total comprehensive income amounted to
losses of $15.9 million and $11.0 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
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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 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, 1999.
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.
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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 condensed results of operations and financial condition.
The discussion should be read in conjunction with the consolidated condensed
financial statements and Notes thereto. The first quarter of fiscal 1999 and
1998 covered sixteen weeks each. 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 judgement
based on factors currently known, 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, 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 first quarter of 1999 declined to $300.0 million as
compared to revenues of $339.1 million in the first quarter of 1998. The
following table summarizes the components of the decline in revenues:
(In Millions)
First Quarter
1999
---------
Restaurant revenue $ (41.1)
Distribution and Manufacturing
and other sales (6.4)
Franchise revenue (0.1)
Other income 8.5
---------
$ (39.1)
=========
The decline in revenues during the first quarter of 1999 was
principally due to a net decrease of 151 restaurants in operation compared to
the beginning of the first quarter of 1998, a decline in Distribution and
Manufacturing revenue and a decline in comparable restaurant sales of 2.0%. The
comparable restaurant sales decrease of 2.0% during the first quarter of 1999
included the effects of a menu price increase of 4.2%, as compared with a
comparable store sales decline of 2.2% in the first quarter of 1998, which
included the effects of a 0.1% menu price increase.
The Company's Shoney's Restaurants continue to experience negative
overall comparable restaurant sales. Shoney's Restaurants reported a comparable
store sales decline of 5.7% for the first
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quarter of 1999, which included the effects of a menu price increase of 5.4%.
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
and has placed more emphasis on made-in-store entrees compared to preprepared
foods. New research and development personnel have been charged with upgrading
the quality of menu items and developing new menu offerings to broaden customer
appeal. In addition to introducing higher quality menu items during 1998, the
Company enhanced its popular breakfast bar featuring a more attractive
presentation and improved food quality.
The back-to-basics initiatives also will 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 quarter of 1999, the Shoney's Restaurants training function
concentrated on hospitality, server training and suggestive selling. For 1999,
the Company's advertising program will focus on food quality and new promotional
items. Restaurant operating standards are continually monitored in an effort to
bring them into compliance with management expectations.
The Company's Captain D's restaurants reported a comparable restaurant
sales increase of 4.9% for the first quarter of 1999, which included the effects
of a menu price increase of 2.3%. Management is pleased with the continued
positive operating results of its Captain D's restaurants and has as a goal
continued improved performance through a variety of initiatives including
advertising, promotional menu items and the continued introduction of the
"Coastal Classics" menu. 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 and are priced from $4.99 to $6.49.
These prices are higher than the concept's average guest check. As of the end of
the first quarter of 1999, the Coastal Classics menu had been placed in
approximately 125 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.
The following table summarizes the change in the number of restaurants
operated by the Company and its franchisees during the first quarter of 1999 and
1998:
First Quarter First Quarter
1999 1998
--- ---
Company-owned restaurants opened 0 0
Company-owned restaurants closed (1) (47) (19)
Franchised restaurants opened (1) 11 9
Franchised restaurants closed (8) (17)
--- ---
(44) (27)
=== ===
(1) The First Quarter of 1999 included 10 Company-owned restaurants
sold to franchisees.
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Distribution and Manufacturing and other revenues declined $6.4 million
or 16.3% during the first quarter of 1999 compared to the first quarter of 1998.
The decline in Distribution and Manufacturing revenues is principally due to
increased competition, a decline in the number of franchised restaurants in
operation and a decline in the comparable unit sales of franchised Shoney's
Restaurants.
Franchise revenues totaled $4.3 million for the first quarter of 1999
compared to $4.4 million in the first quarter of 1998. Franchise fees declined
due to fewer franchised restaurants in operation and a decline in comparable
unit sales of franchised Shoney's Restaurants, which was partially offset by an
increase in initial fees associated with the opening of 11 franchised Shoney's
Restaurants in the first quarter of 1999, compared to nine franchised
restaurants opened during the first quarter of 1998.
Other income increased $8.5 million to $10.9 million in the first
quarter of 1999 as compared to the same period in 1998. The increase in other
income was due principally to an increase of $9.3 million in net gains realized
on asset sales. The principal components of other income for the first quarter
of 1999 were gains on asset sales ($10.5 million), income from rental properties
($241,000), and interest on short-term investments ($188,000).
COSTS AND EXPENSES
Costs of sales declined $46.7 million during the first quarter of 1999
compared to the same period last year principally as a result of the decline in
restaurant and Distribution and Manufacturing sales. Cost of sales as a
percentage of revenues decreased for the first quarter of 1999 to 87.4% compared
to 91.1% for the same quarter of 1998.
Food and supply costs declined $23.5 million principally as a result of
lower restaurant and Distribution and Manufacturing revenues. Food and supply
costs declined as a percentage of revenues from 39.0% in 1998 to 36.2% in 1999,
primarily as a result of the increase in other income, higher menu prices, and
the decline in Distribution and Manufacturing sales which historically have a
higher percentage of food and supply costs. Food and supply costs, as a
percentage of sales, were also reduced by 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 is fully operational
in the Company's Captain D's restaurants and should be fully operational in the
Shoney's Restaurants by the end of the second quarter. As a percentage of
restaurant sales, food costs declined in each of the Company's restaurant
concepts during the first quarter of 1999.
Although reduced by the increase in other income, restaurant labor
increased as a percentage of total revenues because of higher wages for
restaurant employees brought on by tight labor market conditions in the majority
of markets in which the Company operates. Restaurant labor also was affected by
increased 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 unit sales trend. The Company experienced increased labor
costs as a percentage of revenues at all of its restaurant concepts. Restaurant
labor as a percentage of revenues was 27.0% in the first quarter of 1999
compared to 26.8% in 1998.
Operating expenses declined $13.2 million primarily as a result of the
decline in restaurant sales. Operating expenses as a percentage of revenues
declined to 24.2% for the first quarter of 1999 compared to 25.3% in the first
quarter of 1998. The decrease in operating expenses as a percentage of
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revenues was 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 $384,000 to $25.3 million
in the first quarter of 1999 as compared to the first quarter of 1998. General
and administrative expenses as a percentage of revenues increased from 7.6% in
the first quarter of 1998 to 8.4% in the first quarter of 1999. The decrease in
general and administrative expenses was principally due to decreases in salary
and related expenses and professional fees. The decrease in salary related
expenses was due in large part to the fact that, generally in 1999, there were
no expenses corresponding with the severance and related expenses associated
with the termination or realignment of certain executives during the first
quarter of 1998, which totaled $1.5 million. The decreases discussed above 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 $1.2 million in restructuring charges associated
with the closure (or planned closure) of 15 leased restaurants incurred during
the first quarter of 1998.
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).
The Company refinanced approximately $281.0 million of its senior debt
in December 1997 (the "1997 Credit Facility"). Interest expense for the first
quarter of 1999 decreased $1.9 million, or 12.2%, as compared to the same period
last year, principally due to 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 will 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 operates 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. The Company's Line
of Credit is available to cover any short term working capital requirements. The
Company's cash provided by operating activities declined during fiscal 1998, as
compared to fiscal 1997, and declined during the first quarter of 1999 as
compared to the prior year period.
During the first quarter of 1999, cash provided by operating activities
was $1.5 million, a decrease of $3.2 million, as compared to the first quarter
of 1998. This decrease in cash provided by operations was due primarily to a
decline in depreciation and amortization, amortization of deferred charges and
other non-cash charges and the asset impairment write down in 1998, offset by
less cash required in operating activities in 1999 as compared to 1998.
Cash provided by investing activities during the first quarter of 1999
totaled $28.7 million as compared to cash used by investing activities of $3.4
million in the same quarter of 1998. The change
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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 $35.0 million, the maximum amount permitted under its
credit agreement. 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 $13.8 million for
remodeling and refurbishment of restaurants, $12.2 million for additions to
existing restaurants and $9.0 million for other assets. Capital expenditures
totaled $5.8 million for the first quarter of 1999.
During 1998, the Company closed 104 restaurants. The Company also
closed an additional 47 restaurants in the first quarter 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 February 14, 1999, the Company had
approximately 89 properties classified as assets held for sale with a carrying
value of $44.3 million. Cash proceeds from asset disposals were $34.4 million
for the first quarter of 1999 compared to $4.9 million for the first quarter 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 ("Line of Credit") and two term notes of $100.0 million ("Term A 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 new debt facility provides the Company with
additional liquidity and a debt amortization schedule which better supports the
Company's business improvement plans.
During the first quarter of 1999, the Company's cash used by financing
activities was $32.4 million compared with cash used by financing activities of
$6.0 million for the same period in 1998. Payments on the Term A and Term B
Notes of $31.5 million were required as a result of the sale of surplus property
in 1999. Significant financing activities for the first quarter 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, $10.9
million was used to fund debt issue costs on the new debt facility, and $8.7
million was used for additional working capital. The Company also made payments
of $5.7 million on its litigation settlement in the first quarter of 1998.
The Company had approximately $68.0 million and $159.0 million
outstanding under Term A Note and Term B Note, respectively, at February 14,
1999. The amounts available under the Line of Credit are reduced by letters of
credit of approximately $25.0 million resulting in available credit under the
Line of Credit of approximately $50.0 million at February 14, 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 February 14, 1999, the Company could have
drawn approximately $50.0 million under the Line of Credit and remained in
compliance with its loan agreement. At February 14, 1999, the Company had cash
and cash equivalents of approximately $14.0 million.
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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 have been provisionally certified as class actions.
On or about December 21, 1998, the Court, in one of the cases
(Belcher I), granted plaintiffs' motion for partial summary judgment on
liability and concluded that certain managerial employees were not exempt from
the overtime provisions of the FLSA. Based upon the Court's December 21 ruling,
a charge of $3.5 million was recorded in the fourth quarter of 1998. A trial on
damages in this case was scheduled to begin on June 1, 1999; however, on January
21, 1999, the Court ordered the parties to engage in mediation in an attempt to
determine whether this case, together with two others (Belcher II and Edelen),
could be resolved through settlement. On March 20, 1999, the parties agreed to
the material terms of a global settlement of Belcher I and the two other 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 by the Company's lenders and the Court, required the
Company to take an additional 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 Company's
lenders and the Court, management expects to utilize the proceeds from the
Company's refundable income taxes, general working capital or Line of Credit to
fund the proposed settlement. If the Company is unable to secure the required
approvals, 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
approvals of the settlement. If the required approvals are not secured, 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), discovery is proceeding but is in a preliminary stage. Trial has been
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 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 restaurant
concepts 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.
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The Company is highly leveraged and, under the terms of its credit
agreement, 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 for the new debt agreement are higher than those for the debt
refinanced and 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 February 14, 1999, the 1997 Credit Facility requires, among
other terms and conditions, payments in the first half of fiscal 2002 of
approximately $171.4 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.
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 Company's lenders and the Court. As part of the approval process, the
Company will be required to seek certain financial covenant modifications to the
1997 Credit Facility. If the Company is unable to secure lender or Court
approval of the settlement, the Company intends to vigorously contest the claims
made in the cases. There can be no assurance that the Company will be able to
secure the required approvals of the settlement. If the required approvals are
not secured, 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.
Based on current operating results, forecasted operating trends,
anticipated levels of asset sales, and approval of the litigation settlement and
related covenant modifications, management believes that the Company will be in
compliance with its financial covenants during fiscal 1999 and the first quarter
of 2000. However, should operating trends, particularly in the Shoney's
Restaurant concept, vary from those forecasted, or if anticipated levels of
asset sales are not met by the Company, or if the litigation settlement and
related covenant modifications are not approved, the Company may not be in
compliance with the modified financial covenants and management could be forced
to seek additional modifications to the Company's 1997 Credit Facility. The
Company was in compliance with its financial covenants at the end of the first
quarter of 1999.
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
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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 (except for certain
hardware upgrades) and General Ledger systems. The remediation and programming
phase has been completed for the Distribution system. Management estimates that
the remediation and programming phase for the Payroll system should be completed
by mid April 1999. Management believes it is Year 2000 compliant with respect to
the POS and General Ledger systems. Management anticipates that all phases of
the Year 2000 project will be completed by June 30, 1999. As of February 14,
1999, management estimated the Distribution system to be 90% complete and the
Payroll system to be 30% 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
plans to survey 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 compliant by April 1999. The Year 2000 issue has and will
divert information systems
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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 $298,000 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 $633,000 has been spent.
As of February 1999, the Company has not developed contingency plans
for the Year 2000 issue. The POS (except for certain hardware upgrades) and
General Ledger systems are Year 2000 compliant. Additional testing will be
performed on the two systems to insure compliance. The Company has received the
Year 2000 compliant upgrade for its Payroll system and has begun the remediation
and programming phase. The remediation and programming for the Distribution
system is complete. If Year 2000 compliance issues arise, contingency plans will
be developed.
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, 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
10 through 13 of this Quarterly Report on Form 10-Q, which is incorporated
herein by this reference.
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:
10.1 Addendum to employment agreement with Stephen C. Sanders
27 Financial Data Schedule (For SEC Use Only)
(b) On January 6, 1999, the Company filed a Current Report on Form 8-K
dated December 21, 1998 reporting under Item 5 thereof developments in certain
litigation involving the Company. See also Part II Item I of this Quarterly
Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized both on behalf of the registrant and in
his capacity as principal financial officer of the registrant.
Date: March 30, 1999 By: /s/ V. Michael Payne
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V. Michael Payne
Senior Vice President and Controller,
Principal Financial and Chief
Accounting Officer
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