UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended April 4, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number: 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Hancock at Washington, Madison, GA 30650
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(Address of principal executive offices) (Zip Code)
706-342-4552
------------------------
(Registrant's telephone number, including area code)
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.
X Yes No
As of May 17, 1999, there were 29,134,214 shares of common stock of the
Registrant outstanding.
<PAGE>
AVADO BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 4, 1999
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements:
Consolidated Statements of Earnings..........................3
Consolidated Balance Sheets..................................4
Consolidated Statements of Shareholders' Equity and
Comprehensive Income.........................................5
Consolidated Statements of Cash Flows........................6
Notes to Consolidated Financial Statements...................7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................9
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk.................................................13
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K............................15
Signature ............................................................16
2
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<TABLE>
Avado Brands, Inc.
Consolidated Statements of Earnings
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------
April 4, March 29,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Restaurant sales:
Canyon Cafe $ 11,899 11,981
Don Pablo's 74,372 59,263
Hops 32,532 23,327
McCormick & Schmick's 27,805 21,342
Applebee's 17,467 125,763
- ------------------------------------------------------------------------------------------------------------------------
Total restaurant sales 164,075 241,676
- ------------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 45,644 67,317
Payroll and benefits 51,187 78,648
Depreciation and amortization 4,892 4,204
Other operating expenses 36,702 56,458
- ------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 138,425 206,627
- ------------------------------------------------------------------------------------------------------------------------
General and administrative expenses 9,840 12,915
- ------------------------------------------------------------------------------------------------------------------------
Operating income 15,810 22,134
- ------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense, net (4,941) (7,139)
Distributions on preferred securities (2,012) (2,012)
Gain on disposal of assets held for sale 1,350 49,000
Income (loss) from investments carried at equity (133) 703
Other, primarily goodwill amortization (972) (1,322)
- ------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (6,708) 39,230
- ------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative
effect of change in accounting principle 9,102 61,364
Income taxes 3,150 22,825
- ------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of
change in accounting principle 5,952 38,539
- ------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle, net of tax benefit - 1,461
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,952 37,078
========================================================================================================================
Basic earnings per common share:
Basic earnings before cumulative effect of
change in accounting principle $ 0.19 0.99
Cumulative effect of change in accounting principle - (0.04)
- ------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.19 0.95
========================================================================================================================
Diluted earnings per common share:
Diluted earnings before cumulative effect of
change in accounting principle $ 0.19 0.85
Cumulative effect of change in accounting principle - (0.03)
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.19 0.82
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
Avado Brands, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
April 4, Jan. 3,
1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 794 7,216
Short-term investments 53 27
Accounts receivable 8,049 9,124
Inventories 8,960 8,599
Prepaid expenses and other 6,740 3,205
Assets held for sale 39,481 72,814
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 64,077 100,985
Premises and equipment, net 382,539 367,587
Goodwill, net 137,127 138,005
Investments in and advances to unconsolidated affiliates 17,095 16,106
Other assets 41,311 47,914
- ------------------------------------------------------------------------------------------------------------------------------------
$ 642,149 670,597
====================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 32,367 28,474
Accrued liabilities 34,714 42,053
Current installments of long-term debt 137,491 140,500
Income taxes 32,229 28,091
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 236,801 239,118
Long-term debt 116,957 116,978
Deferred income taxes 8,200 8,200
Other long-term liabilities 8,509 8,177
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 370,467 372,473
- ------------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred securities
of Avado Financing I, a subsidiary holding solely Avado
Brands, Inc. 7% convertible subordinated debentures
due March 1, 2027 115,000 115,000
Temporary equity, net 39,849 71,095
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized 75,000,000 shares;
40,478,760 issued in 1998 and 1997 405 405
Additional paid-in capital 94,588 63,431
Retained earnings 167,985 162,411
Accumulated other comprehensive income (317) 24
Treasury stock at cost; 11,344,546 shares in 1999 and 8,910,174
shares in 1998 (145,828) (114,242)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 116,833 112,029
- ------------------------------------------------------------------------------------------------------------------------------------
$ 642,149 670,597
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Unaudited)
(In thousands, except per share data)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 3, 1999 40,479 $405 $63,431 $162,411 $24 ($114,242) $112,029
Comprehensive income:
Net earnings - - - 5,952 - - 5,952
Foreign currency translation adjustment - - - - (341) - (341)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - 5,952 (341) - 5,611
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of common stock - - - - - (32,435) (32,435)
Common stock issued to ESOP and ESPP - - (264) - - 849 585
Temporary equity - - 31,421 - - - 31,421
Cash dividends ($0.0125 per share) - - - (378) - - (378)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at April 4, 1999 40,479 $405 $94,588 $167,985 ($317) ($145,828) $116,833
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------
April 4, March 29,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,952 37,078
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 6,332 5,665
Deferred income taxes - 1,769
Gain on disposal of assets (1,350) (49,000)
Loss (income) from investments carried at equity 133 (703)
(Increase) decrease in assets:
Accounts receivable 1,071 (3,012)
Inventories (772) (883)
Prepaid expenses and other (2,043) (2,233)
Increase (decrease) in liabilities:
Accounts payable 3,893 (3,080)
Accrued liabilities (8,861) 8,690
Income taxes 4,138 18,049
Other long-term liabilities 332 1,106
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,825 13,446
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (22,173) (40,088)
Proceeds from disposal of assets, net 45,643 414
(Increase) decrease in short-term investments (26) 10
Investments in and advances to unconsolidated affiliates (1,463) (6,079)
Additions to other assets (1,560) (370)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 20,421 (46,113)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit agreements (3,009) 32,966
Principal payments on long-term debt (21) (53)
Dividends declared and paid (378) (405)
Purchase of treasury stock (32,435) (113)
Net collateral payments on equity forward contracts 175 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (35,668) 32,395
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,422) (272)
Cash and cash equivalents at the beginning of the period 7,216 2,503
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 794 2,231
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended January 3, 1999, except
as disclosed herein. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation
have been included. Operating results for the quarter ended April 4, 1999 are
not necessarily indicative of the results that may be expected for the year
ending January 2, 2000.
NOTE 2 - ASSET DIVESTITURES
By the end of the first quarter of 1999, the Company had completed the
divestiture of 254 of its 279 Applebee's restaurants, including the divestiture
of 21 restaurants for proceeds of $35.1 million during the quarter. Subsequent
to the end of the first quarter, sale of the Applebee's brand was completed with
the divestiture of the remaining 25 locations. Gross proceeds related to the
Applebee's divestiture were $514.0 million including $11.3 million in notes.
NOTE 3 - SHAREHOLDERS' EQUITY
Cash dividends declared and paid in the quarter ended April 4, 1999 totaled
$0.0125 per share. On May 4, 1999, the Company declared a cash dividend of
$0.015 per share, payable on May 31, 1999 to shareholders of record on May 14,
1999.
In 1998, third parties purchased a total of 8.3 million shares of the Company's
common stock at an average price per share of $13.36 (or a total acquisition
cost of $110.9 million) pursuant to four equity forward contracts. Upon
expiration of the contracts, the Company has the option to (i) acquire the
shares at the third parties' average acquisition cost as described above or (ii)
instruct the third parties to sell the shares in the market and settle in cash
any appreciation or depreciation in the market value of the stock at the sale
date compared to the acquisition cost described above. Any such appreciation or
depreciation in the value of the shares would be reflected in equity and would
not impact net earnings. One of these contracts for 2.0 million shares was
settled in December 1998, and the Company exercised its option to acquire the
related shares for $29.9 million. An additional contract for 2.5 million shares
was settled in March 1999, and the Company acquired the related shares for $32.4
million. At April 4, 1999, two equity forward contracts covering 3.8 million
shares were pending settlement. The third parties' total acquisition price for
these shares of $50.4 million, net of a $10.5 million collateral deposit made by
the Company with a third party, is reflected as "Temporary equity, net" in the
7
<PAGE>
April 4, 1999 consolidated balance sheet. The remaining two contracts expire,
unless renewed, in June and July of 1999.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
For the quarters ended April 4, 1999 and March 29, 1998, the following
supplements the consolidated statements of cash flows (amounts in thousands):
1999 1998
----------------------
Interest paid (net of amounts capitalized) $ 2,171 3,977
Distributions paid on preferred securities $ 2,012 2,012
Income taxes paid (refunded) $ (988) 2,254
As discussed in Note 2, during the first quarter of 1999 the Company sold 21
Applebee's restaurants. The accompanying consolidated balance sheet reflects
changes in asset and liability accounts related to the divestiture of these
restaurants as follows: decrease in assets held for sale of $32.8 million,
decreases in assets not classified as held for sale of $5.6 million and
increases in accrued liabilities of $1.3 million.
NOTE 5 - INCOME TAXES
Income tax expense as a percent of earnings before income taxes was 34.6% in the
first quarter of 1999 compared to 37.2% in the corresponding period of 1998.
Income tax reflects, for each period, the blend of taxes on operations provided
at 34.0% and taxes on the gain on disposal of assets held for sale provided at
38.0%.
NOTE 6 - CONTINGENCIES
During 1997, two lawsuits were filed by persons seeking to represent a class of
shareholders of the Company who purchased shares of the Company's common stock
between May 26, 1995 and September 24, 1996. Each plaintiff named the Company
and certain of its officers and directors as defendants. The complaints alleged
acts of fraudulent misrepresentation by the defendants which induced the
plaintiffs to purchase the Company's common stock and alleged illegal insider
trading by certain of the defendants, each of which allegedly resulted in losses
to the plaintiffs and similarly situated shareholders of the Company. The
complaints each sought damages and other relief. During 1998, one of these suits
was dismissed. Although the ultimate outcome of the remaining lawsuit cannot be
determined at this time, the Company believes that the allegations therein are
without merit and intends to vigorously defend itself.
8
<PAGE>
Item 2.
AVADO BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Quarter Ended April 4, 1999
Consolidated Overview
By the end of the first quarter of 1999, the Company had completed the
divestiture of 254 of its 279 Applebee's restaurants, including the divestiture
of 21 restaurants for proceeds of $35.1 million during the quarter. Subsequent
to the end of the first quarter, sale of the Applebee's brand was completed with
the divestiture of the remaining 25 locations. Gross proceeds related to the
Applebee's divestiture were $514.0 million including $11.3 million in notes.
Consolidated restaurant sales for the first quarter of 1999 were $164.1
million compared to $241.7 million for the same period of 1998, reflecting fewer
units in the Applebee's brand which comprised 11% of revenues in the first
quarter of 1999 compared to 52% in the first quarter of 1998. Restaurant
operating expenses decreased to 84.4% of sales compared to 85.5% for the
corresponding period of 1998. The decrease was primarily a result of a decrease
in payroll and benefits generated by the declining impact of increased payroll
and benefits incurred at Applebee's during 1998 and 1999 as a result of
performance-based, pay-to-stay bonus programs implemented to control management
turnover and operating costs during the divestiture period. This decrease was
partially offset by an increase in depreciation and amortization due primarily
to a decrease in the impact of Applebee's fixed assets which were not
depreciated due to their "held for sale" status.
Core Brands
During the first quarter, the Company opened 11 restaurants in its "Core"
brands, which include Canyon Cafe, Don Pablo's, Hops and McCormick & Schmick's.
In addition, the Company opened one restaurant with each of its joint venture
partners Belgo Group PLC and PizzaExpress PLC and closed three core brand
restaurants. The following table presents core brand restaurants open as of the
end of the first quarters of 1999 and 1998:
1999 1998
-------------------------------------------------------------------------
Canyon Cafe 18 17
Don Pablo's 129 98
Hops 51 35
McCormick & Schmick's 22 19
=========================================================================
Total 220 169
=========================================================================
9
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The following table sets forth the percentages which certain items of
income and expense bear to total restaurant sales for the quarters ended April
4, 1999 and March 29, 1998 on a pro forma basis (assuming sale of the Applebee's
brand was completed by December 28, 1997):
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
Quarter Ended Quarter Ended
April 4, March 29,
1999 1998
- --------------------------------------------------------------------------------
Restaurant sales:
Canyon Cafe 8.1% 10.3%
Don Pablo's 50.7% 51.1%
Hops 22.2% 20.1%
McCormick & Schmick's 19.0% 18.4%
- --------------------------------------------------------------------------------
Total restaurant sales 100.0% 100.0%
- --------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 27.9% 28.1%
Payroll and benefits 30.8% 30.3%
Depreciation and amortization 3.3% 3.6%
Other operating expenses 22.5% 23.0%
- --------------------------------------------------------------------------------
Total restaurant operating expenses 84.5% 85.0%
- --------------------------------------------------------------------------------
Income from restaurant operations 15.5% 15.0%
General and administrative expenses 6.4% 7.7%
- --------------------------------------------------------------------------------
Operating income 9.1% 7.3%
================================================================================
Restaurant sales in core brands increased 26% to $146.6 million in the
first quarter of 1999 compared to $115.9 million for the same period of 1998.
Increased core brand revenues were primarily attributable to a full quarters'
sales from 59 restaurants opened in 1998 and a partial quarters' sales from 11
restaurants opened in 1999. On a consolidated core brand basis, same-store sales
for the first quarter of 1999 were 1% positive compared to the same period of
1998 (same-store sales comparisons include all restaurants open for 18 months as
of the beginning of the quarter). Adjusted for the impact of the Easter holiday,
same-store sales comparisons were positive for the first quarter in three core
brands which represent 92% of first quarter core brand revenues.
Restaurant operating expenses in core brands decreased 0.5% to 84.5% compared
to the corresponding period of the prior year. The resulting increase in core
brand income from restaurant operations was primarily attributable to (i) a
0.5% decrease in other operating expenses resulting from lower manager
training costs associated with the Don Pablo's reduced 1999 development schedule
and lower preopening costs at McCormick & Schmick's and Canyon Cafe as a result
of no openings in the first quarter of 1999 compared to two openings for each
brand in the first quarter of 1998 and (ii) a 0.2% decrease in food and beverage
expenses generated primarily by cost reductions at Hops associated with
centralized distribution and buying. These expense decreases were partially
offset by a 0.5% increase in payroll and benefit costs related primarily with
initiatives to increase guest satisfaction which included increased management
staffing at Hops and Don Pablo's.
10
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General and administrative expenses for the pro forma quarter ended April 4,
1999 versus pro forma 1998 decreased 1.3% to 6.4%. The resulting increase in
operating income was primarily attributable to initiatives begun in the fourth
quarter of 1998 to reorganize management and reduce overhead costs as well as
leverage gained from increased sales in core brands.
Interest and Other Expenses
Interest expense was $4.9 million in the first quarter of 1999 compared to
$7.1 million for the first quarter of 1998. The decrease was primarily
attributable to lower average borrowings under revolving credit agreements,
somewhat offset by higher average borrowing rates.
Loss from investments carried at equity for the first quarter of 1999
primarily reflects income from the Company's 20% equity interest in Belgo Group
PLC which was more that offset by preopening expenses associated with the
opening of a Belgo restaurant in New York under the Company's joint venture
agreement with Belgo Group PLC.
Income tax expense as a percent of earnings before income taxes was 34.6%
in the first quarter of 1999 compared to 37.2% in the corresponding period of
1998. Income tax reflects, for each period, the blend of taxes on operations
provided at 34.0% and taxes on the gain on disposal of assets held for sale
provided at 38.0%.
Net earnings for the first quarter of 1999 was $6.0 million and included a
$0.8 million after-tax gain on disposal of assets held for sale. Net earnings
for the first quarter of 1998 was $37.1 million and included a $30.4 million
after-tax gain on disposal of assets held for sale and a $1.5 million after-tax
charge related to a change in accounting principle requiring the expensing of
preopening costs as incurred.
Liquidity and Capital Resources
The Company's historical and projected growth and its preference to own its real
estate cause it to be a net user of cash, even after a significant amount of
expansion financing is internally generated from operations. Principal sources
of funds in the first quarter of 1999 consisted of proceeds from disposal of
assets of $45.6 million and cash generated from operations of $8.8 million. The
primary uses of funds consisted of treasury stock acquired through settlement of
an equity forward agreement of $32.4 million and capital expenditures of $22.2
million.
Since substantially all sales in the Company's restaurants are for cash and
accounts payable are generally due in 15 to 45 days, the Company operates with
negative working capital. Increases in accounts receivable, prepaid expenses and
other, inventory, accounts payable and accrued liabilities occurred during the
first quarter of 1999 primarily as a result of new restaurant openings. In some
instances, these increases were more than offset by decreases resulting from
divested Applebee's restaurants. Further increases in current asset and
liability accounts are expected as the Company continues its restaurant
development program. In the first quarter of 1999, the decrease in other assets
was primarily related to the sale of properties which had been initially leased
to the buyers of certain Applebee's markets.
Capital expenditures during the first quarter of 1999 provided for the opening
of seven Don Pablo's and four Hops restaurants in addition to ongoing
refurbishments of existing restaurants. Capital requirements for the
construction of new core restaurants are expected to approximate $58 million for
the remainder of 1999 and $120 million in 2000, over half of which is expected
11
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to be generated internally. In addition, the process for a private placement of
$100 million of senior subordinated notes is currently underway. The proposed
sale of the notes is expected to close contemporaneously with a new $125 million
bank revolving credit facility during the second quarter of 1999. Management
believes that the proceeds from the senior subordinated note offering, together
with proceeds from the new revolving credit facility and cash flow from
operations will provide funding sufficient to satisfy the Company's expansion
plans through fiscal 2000.
In 1998, third parties purchased a total of 8.3 million shares of the Company's
common stock at an average price per share of $13.36 (or a total acquisition
cost of $110.9 million) pursuant to four equity forward contracts. Upon
expiration of the contracts, the Company has the option to (i) acquire the
shares at the third parties' average acquisition cost as described above or (ii)
instruct the third parties to sell the shares in the market and settle in cash
any appreciation or depreciation in the market value of the stock at the sale
date compared to the acquisition cost described above. Any such appreciation or
depreciation in the value of the shares would be reflected in equity and would
not impact net earnings. One of these contracts for 2.0 million shares was
settled in December 1998, and the Company exercised its option to acquire the
related shares for $29.9 million. An additional contract for 2.5 million shares
was settled in March 1999, and the Company acquired the related shares for $32.4
million. At April 4, 1999, two equity forward contracts covering 3.8 million
shares were pending settlement. The third parties' total acquisition price for
these shares of $50.4 million, net of a $10.5 million collateral deposit made by
the Company with a third party, is reflected as "Temporary equity, net" in the
April 4, 1999 consolidated balance sheet. The remaining two contracts expire,
unless renewed, in June and July of 1999. The Company currently intends to
acquire these shares on or before the expiration dates.
Acquisition of the shares represented by the remaining equity forward contracts
is contingent on the Company's ability to obtain financing and maintain
compliance with various provisions of its Senior Notes and revolving credit
agreements. Management believes that the Company will be able to acquire all
shares pending settlement and that proceeds from the completed Applebee's
divestiture together with credit availability under new and existing credit
facilities and cash flow from operations will be sufficient to satisfy the
Company's obligations upon expiration of the remaining contracts.
Effect of Inflation
Management believes that inflation has not had a material effect on earnings
during the past several years. Inflationary increases in the cost of labor, food
and other operating costs could adversely affect the Company's restaurant
operating margins. In the past, however, the Company generally has been able to
modify its operations, including raising prices, to offset increases in its
operating costs.
Forward-Looking Information
Certain information contained in this Form 10-Q, particularly information
regarding future economic performance and finances, restaurant development
plans, capital requirements and objectives of management, is forward looking. In
some cases, information regarding certain important factors that could cause
actual results to differ materially from any such forward-looking statement
appear together with such statement. Furthermore, the following factors, in
addition to other possible factors not listed, could affect the Company's actual
results and cause such results to differ materially from those expressed in
forward-looking statements. These factors include competition within the casual
12
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dining restaurant industry, which remains intense; changes in economic
conditions such as inflation or a recession; consumer perceptions of food
safety; weather conditions; changes in consumer tastes; labor and benefit costs;
legal claims; the continued ability of the Company to obtain suitable locations
and financing for new restaurant development; government monetary and fiscal
policies; laws and regulations and governmental initiatives such as minimum wage
rates and taxes. Other factors that may cause actual results to differ from the
forward-looking statements contained in this release and that may affect the
Company's prospects in general are described in Exhibit 99.1 to the Company's
Form 10-Q for the fiscal quarter ended June 29, 1997, and the Company's other
filings with the Securities and Exchange Commission.
Year 2000
Historically, certain computer programs were written and certain computer chips
were designed using two-digit year designations. These programs and chips may
experience problems handling dates beyond 1999. Incomplete or untimely
resolution of these problems by the Company, by its critical suppliers, or by
governmental entities could have a material adverse effect on the Company's
consolidated financial position or results of operations. Work on Year 2000
related issues began in 1997 with executive awareness programs and the
engagement of outside consultants to assist in developing a consistent Year 2000
methodology, time line and project plan. An inventory and assessment of
information technology ("IT") systems as well as non-IT systems was completed
during 1998, and the solution implementation and testing phases have been
substantially completed. As the Company has invested primarily in licensed
software rather than developing it internally, remediation efforts and related
expenditures have not been material. An evaluation of key suppliers to determine
the status of their Year 2000 compliance programs is also in process. Currently,
management does not anticipate any material adverse effects related to the Year
2000. Contingency plans, however, are being developed to address all aspects of
operation level functionality and vendor management in the event unforeseen
circumstances arise.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, which is effective for the
Company's first quarter financial statements in fiscal 2000, establishes
standards for the accounting and reporting of derivative instruments and hedging
activities. The Company has not completed its evaluation of the impact, if any,
that adoption of this statement will have on its consolidated financial position
or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and changes
in commodity prices. Exposure to interest rate risk relates primarily to
variable rate U.S. LIBOR obligations on revolving credit agreements. Interest
rate swap agreements are utilized to manage overall borrowing costs and reduce
exposure to adverse fluctuations in interest rates. Two interest rate swap
agreements are currently in place under which the Company pays an average of
certain foreign LIBOR-based variable rates. These agreements also contain
interest rate caps which further limit interest rate exposures. If interest
rates related to the Company's U.S. LIBOR obligations increased by 100 basis
points over the rates in effect at April 4, 1999, interest expense for the
remainder of fiscal 1999, after considering the effects of interest rate swap
agreements, would increase by approximately $1.0 million. If an additional 100
13
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basis point interest rate increase occurred in the Company's foreign LIBOR-based
obligations, interest expense in 1999 would increase by an additional $0.9
million. These amounts were determined by considering the impact of hypothetical
interest rates on the Company's borrowing cost and interest rate swap
agreements. The analyses do not consider the effects of the overall reduced debt
levels anticipated in 1999. Further, in the event of a change of such magnitude,
management would likely take actions to further mitigate interest rate
exposures.
The Company purchases certain commodities such as beef, chicken, flour and
cooking oil. Purchases of these commodities are generally based on vendor
agreements which often contain contractual features that limit the price paid by
establishing price floors or caps. As commodity price aberrations are generally
short term in nature and have not historically had a significant impact on
operating performance, financial instruments are not used to hedge commodity
price risk.
14
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11.1 Computation of earnings per common share
27.1 Financial Data Schedule (EDGAR version only)
99.1 Safe Harbor Under the Private Securities Litigation Reform Act
of 1995*
*Incorporated by reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, as amended by
a Form 10-Q/A filed on August 27, 1997
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated May 17, 1999, which
disclosed, pursuant to Item 2 of Form 8-K, the Company's completion of the
sale of its franchised Applebee's Neighborhood Grill & Bar restaurants.
15
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Avado Brands, Inc.
(Registrant)
Date: May 19, 1999 By: /s/ Erich J. Booth
-----------------------------------
Erich J. Booth
Chief Financial Officer and
Corporate Treasurer
/s/ Louis J. Profumo
-----------------------------------
Louis J. Profumo
Senior Vice President of Finance
and Chief Accounting Officer
16
<TABLE>
Exhibit 11.1
Computation of Earnings Per Common Share
(In thousands, except per share data)
<CAPTION>
Quarter Ended
- --------------------------------------------------------------------------------------------------------------------------------
April 4, March 29,
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average number of common shares used in basic calculation 30,891 38,820
Net additional shares issuable pursuant to employee stock
option plans at period-end market price - 139
Shares issuable on assumed conversion of convertible
preferred securities 7,774 7,774
================================================================================================================================
Average number of common shares used in diluted calculation 38,665 46,733
================================================================================================================================
Earnings before cumulative effect of change in accounting principle $ 5,952 38,539
Cumulative effect of change in accounting principle, net of tax benefit - (1,461)
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings 5,952 37,078
Distribution savings on assumed conversion of convertible
preferred securities, net of income taxes 1,328 1,328
================================================================================================================================
Net earnings for computation of diluted earnings per common share $ 7,280 38,406
================================================================================================================================
Basic earnings before cumulative effect of change in accounting principle $ 0.19 0.99
Cumulative effect of change in accounting principle - (0.04)
================================================================================================================================
Basic earnings per common share $ 0.19 0.95
================================================================================================================================
Diluted earnings before cumulative effect of change in accounting principle $ 0.19 0.85
Cumulative effect of change in accounting principle - (0.03)
================================================================================================================================
Diluted earnings per common share $ 0.19 0.82
================================================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE PERIOD ENDING APRIL 4, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS).
</LEGEND>
<CIK> 0000849101
<NAME> Avado Brands, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Jan-02-2000
<PERIOD-START> Jan-04-1999
<PERIOD-END> Apr-04-1999
<CASH> 794
<SECURITIES> 53
<RECEIVABLES> 8,049
<ALLOWANCES> 0
<INVENTORY> 8,960
<CURRENT-ASSETS> 64,077
<PP&E> 382,539
<DEPRECIATION> 0
<TOTAL-ASSETS> 642,149
<CURRENT-LIABILITIES> 236,801
<BONDS> 116,500
115,000
0
<COMMON> 405
<OTHER-SE> 116,428
<TOTAL-LIABILITY-AND-EQUITY> 642,149
<SALES> 164,075
<TOTAL-REVENUES> 164,075
<CGS> 45,644
<TOTAL-COSTS> 138,425
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,941
<INCOME-PRETAX> 9,102
<INCOME-TAX> 3,150
<INCOME-CONTINUING> 5,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,952
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
