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 2, 2000
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
- ----------------------------------------- --------------------------
(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 16, 2000, there were 25,326,290 shares of common stock of the
Registrant outstanding.
<PAGE>
AVADO BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 2, 2000
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..........12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk............................................16
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K............................17
Signature.....................................................................18
Page 2
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Earnings
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------------
April 2, April 4,
2000 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Restaurant sales:
Canyon Cafe $ 10,292 11,899
Don Pablo's 75,585 74,372
Hops 46,182 32,532
McCormick & Schmick's 34,961 27,805
Applebee's - 17,467
- -------------------------------------------------------------------------------------------------------------
Total restaurant sales 167,020 164,075
- -------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 47,869 45,644
Payroll and benefits 52,515 51,187
Depreciation and amortization 5,994 4,892
Other operating expenses 39,124 36,702
- -------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 145,502 138,425
- -------------------------------------------------------------------------------------------------------------
General and administrative expenses 10,503 9,840
- -------------------------------------------------------------------------------------------------------------
Operating income 11,015 15,810
- -------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense, net (8,817) (4,941)
Distributions on preferred securities (2,012) (2,012)
Gain on disposal of assets - 1,350
Income (loss) from investments carried at equity 46 (133)
Other, primarily goodwill amortization (1,019) (972)
- -------------------------------------------------------------------------------------------------------------
Total other income (expense) (11,802) (6,708)
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (787) 9,102
Income taxes (250) 3,150
- -------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (537) 5,952
=============================================================================================================
Basic earnings (loss) per common share $ (0.02) 0.19
=============================================================================================================
Diluted earnings (loss) per common share $ (0.02) 0.19
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
April 2, Jan. 2,
2000 2000
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 277 11,267
Accounts receivable 7,555 7,257
Inventories 8,986 9,097
Prepaid expenses and other 15,387 17,399
Assets held for sale 12,115 1,205
- -------------------------------------------------------------------------------------------------------------
Total current assets 44,320 46,225
Premises and equipment, net 426,267 424,968
Goodwill, net 134,403 135,176
Investments in and advances to unconsolidated affiliates 17,438 17,411
Other assets 29,831 32,816
- -------------------------------------------------------------------------------------------------------------
$ 652,259 656,596
=============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 18,363 21,620
Accrued liabilities 34,896 34,727
Current installments of long-term debt 4,556 11
Income taxes 30,688 28,159
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 88,503 84,517
Long-term debt 320,597 328,076
Deferred income taxes 8,943 8,943
Other long-term liabilities 7,270 7,436
- -------------------------------------------------------------------------------------------------------------
Total liabilities 425,313 428,972
- -------------------------------------------------------------------------------------------------------------
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
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 1999 and 1998 405 405
Additional paid-in capital 144,825 144,872
Retained earnings 165,768 166,305
Accumulated other comprehensive income (441) (278)
Treasury stock at cost; 15,152,470 shares in 2000 and 15,157,713 in 1999 (198,611) (198,680)
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 111,946 112,624
- -------------------------------------------------------------------------------------------------------------
$ 652,259 656,596
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
<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 2, 2000 40,479 $405 $144,872 $166,305 ($278) ($198,680) $112,624
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings - - - (537) - - (537)
Foreign currency translation adjustment - - - - (163) - (163)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - (537) (163) - (700)
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued to benefit plans - - (47) - - 69 22
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at April 2, 2000 40,479 $405 $144,825 $165,768 ($441) ($198,611) $111,946
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------------
April 2, April 4,
2000 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (537) 5,952
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 7,929 6,749
Loss (gain) on disposal of assets - (1,350)
Loss (income) from investments carried at equity (46) 133
(Increase) decrease in assets:
Accounts receivable (298) 1,071
Inventories 111 (772)
Prepaid expenses and other 67 (2,069)
Increase (decrease) in liabilities:
Accounts payable (3,257) 3,893
Accrued liabilities 191 (8,861)
Income taxes 2,529 4,138
Other long-term liabilities (166) 332
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 6,523 9,216
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (16,797) (22,173)
Proceeds from notes receivable and disposal of assets, net 3,238 45,643
Investments in and advances to unconsolidated affiliates (144) (1,463)
Additions to noncurrent assets (876) (1,977)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (14,579) 20,030
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit agreements (2,934) (3,009)
Principal payments on long-term debt - (21)
Dividends declared and paid - (378)
Purchase of treasury stock - (32,435)
Net collateral payments on equity forward contracts - 175
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,934) (35,668)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,990) (6,422)
Cash and cash equivalents at the beginning of the period 11,267 7,216
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 277 794
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 2, 2000
(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 2, 2000, 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 2, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
NOTE 2 - LONG-TERM DEBT
On April 3, 2000, the Company finalized an amendment to its $125.0 million
revolving credit facility which, among other things, reduces the credit
availability under the facility by $10.0 million on each October 1, 2000 and
December 31, 2000. Additional quarterly commitment reductions of $7.5 million
begin on April 4, 2001 and continue until the quarter ended March 31, 2002. The
remaining commitment of $67.5 million matures on June 22, 2002. At April 2,
2000, the Company has classified as current debt that portion of the revolving
credit facility, $4.5 million, which is required to be repaid during the next 12
months.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
For the quarters ended April 2, 2000 and April 4, 1999, the following
supplements the consolidated statements of cash flows (amounts in thousands):
2000 1999
----------- -----------
Interest paid (net of amounts capitalized) $ 2,791 2,171
Distributions paid on preferred securities $ 2,012 2,012
Income taxes paid (refunded) $(2,779) (988)
NOTE 4 - INCOME TAXES
Income tax as a percent of earnings before income taxes was 31.8% in the
first quarter of 2000 compared to an effective rate of 30.9% for the full 1999
year. The higher effective tax rate for fiscal 2000 is due to an expected
increase in taxable income as compared to 1999 and a corresponding decrease in
the impact of FICA tip credits.
NOTE 5 - CONTINGENCIES
In November and December 1999, seven lawsuits were filed against the
Company alleging that a proposal made by a management group led by Tom E.
DuPree, Jr. to acquire the Company was unfair and that the price being proposed
as payment for Company common shares was inadequate. On April 24, 2000, the
Company announced that the most appropriate strategy at the present time is to
continue as a publicly traded company. In connection with this announcement, the
Company has been informed by the plaintiff's attorneys that the suits will be
dismissed.
Page 7
<PAGE>
In 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. In 1998, one of these suits was
dismissed. During 1999, the Company received a favorable ruling from the 11th
Circuit Court of Appeals relating to the remaining suit. As a result of the
ruling, the District Court will again consider the motion to dismiss the case,
and the defendants renewed their motion to dismiss in December 1999. The Company
is awaiting the court's ruling. 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.
NOTE 6 - GUARANTOR SUBSIDIARIES
The Company's senior notes and revolving credit facilities are fully and
unconditionally guaranteed on a joint and several basis by substantially all of
its wholly owned subsidiaries. The Company's indebtedness is not guaranteed by
its non-wholly owned subsidiaries. These non-guarantor subsidiaries primarily
include certain partnerships of which the Company is typically a 90% owner. At
April 2, 2000 and January 2, 2000, these partnerships in the non-guarantor
subsidiaries operated 53 and 51, respectively, of the Company's restaurants.
Accordingly, condensed consolidated balance sheets as of April 2, 2000 and
January 2, 2000, and condensed consolidated statements of earnings and cash
flows for the quarters ended April 2, 2000 and April 4, 1999 are provided for
such guarantor and non-guarantor subsidiaries. Separate financial statements and
other disclosures concerning the guarantor and non-guarantor subsidiaries are
not presented because management has determined that they are not material to
investors. There are no contractual restrictions on the ability of the guarantor
subsidiaries to make distributions to the Company.
<TABLE>
Condensed Consolidated Statement of Earnings
Quarter Ended April 2, 2000
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 132,111 34,909 - 167,020
Restaurant operating expenses 114,577 30,925 - 145,502
General and administrative expenses 8,511 1,992 - 10,503
- --------------------------------------------------------------------------------------------------------------------
Operating income 9,023 1,992 - 11,015
- --------------------------------------------------------------------------------------------------------------------
Other income (expense) (9,608) (2,194) - (11,802)
Earnings (loss) before income taxes (585) (202) - (787)
Income taxes (185) (65) - (250)
- --------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (400) (137) - (537)
====================================================================================================================
</TABLE>
Page 8
<PAGE>
NOTE 6 - GUARANTOR SUBSIDIARIES (Continued)
<TABLE>
Condensed Consolidated Statement of Earnings
Quarter Ended April 4, 1999
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 140,188 23,887 - 164,075
Restaurant operating expenses 117,698 20,727 - 138,425
General and administrative expenses 8,624 1,216 - 9,840
- --------------------------------------------------------------------------------------------------------------------
Operating income 13,866 1,944 - 15,810
- --------------------------------------------------------------------------------------------------------------------
Other income (expense) (6,432) (276) - (6,708)
Earnings before income taxes 7,434 1,668 - 9,102
Income taxes 2,575 575 - 3,150
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,859 1,093 - 5,952
====================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Balance Sheet
April 2, 2000
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 42,308 2,012 - 44,320
Premises and equipment, net 363,909 62,358 - 426,267
Goodwill, net 112,329 22,074 - 134,403
Investments carried at equity 17,438 - - 17,438
Other assets 29,562 269 - 29,831
Intercompany investments 48,403 - (48,403) -
Intercompany advances 35,471 - (35,471) -
- --------------------------------------------------------------------------------------------------------------------
$ 649,420 86,713 (83,874) 652,259
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 85,948 2,555 - 88,503
Long-term liabilities 336,526 284 - 336,810
Intercompany payables - 35,471 (35,471) -
Convertible preferred securities 115,000 - - 115,000
Shareholders' equity 111,946 48,403 (48,403) 111,946
- --------------------------------------------------------------------------------------------------------------------
$ 649,420 86,713 (83,874) 652,259
====================================================================================================================
</TABLE>
Page 9
<PAGE>
NOTE 6 - GUARANTOR SUBSIDIARIES (Continued)
<TABLE>
Condensed Consolidated Balance Sheet
January 2, 2000
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 44,245 1,980 - 46,225
Premises and equipment, net 363,280 61,688 - 424,968
Goodwill, net 113,161 22,015 - 135,176
Investments carried at equity 17,411 - - 17,411
Other assets 32,534 282 - 32,816
Intercompany investments 47,784 - (47,784) -
Intercompany advances 34,408 - (34,408) -
- --------------------------------------------------------------------------------------------------------------------
$ 652,823 85,965 (82,192) 656,596
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 81,024 3,493 - 84,517
Long-term liabilities 344,175 280 - 344,455
Intercompany payables - 34,408 (34,408) -
Convertible preferred securities 115,000 - - 115,000
Shareholders' equity 112,624 47,784 (47,784) 112,624
- --------------------------------------------------------------------------------------------------------------------
$ 652,823 85,965 (82,192) 656,596
====================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
Quarter Ended April 2, 2000
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor Elimin-
Subsidiaries Subsidiaries ations Consolidated
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 5,663 860 - 6,523
Cash flows from investing activities:
Capital expenditures (14,988) (1,809) - (16,797)
Proceeds from disposal of assets, net 3,238 - - 3,238
Other investing activities (909) (111) - (1,020)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (12,659) (1,920) - (14,579)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements (2,934) - - (2,934)
Proceeds from (payment of) interco. advances (1,063) 1,063 - -
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (3,997) 1,063 - (2,934)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,993) 3 - (10,990)
Cash and cash equivalents at beginning of the period 11,190 77 - 11,267
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 197 80 - 277
====================================================================================================================
</TABLE>
Page 10
<PAGE>
NOTE 6 - GUARANTOR SUBSIDIARIES (Continued)
<TABLE>
Condensed Consolidated Statement of Cash Flows
Quarter Ended April 4, 1999
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor Elimin-
Subsidiaries Subsidiaries ations Consolidated
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 7,583 1,633 - 9,216
Cash flows from investing activities:
Capital expenditures (15,808) (6,365) - (22,173)
Proceeds from disposal of assets, net 45,643 - - 45,643
Other investing activities (3,440) - - (3,440)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 26,395 (6,365) - 20,030
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements (3,009) - - (3,009)
Purchase of treasury stock (32,435) - - (32,435)
Proceeds from (payment of) interco. advances (4,738) 4,738 - -
Other financing activities (224) - - (224)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (40,406) 4,738 - (35,668)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,428) 6 - (6,422)
Cash and cash equivalents at beginning of the period 7,162 54 - 7,216
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 734 60 - 794
====================================================================================================================
</TABLE>
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to the end of the quarter ended April 2, 2000, the Company
finalized the decision to consolidate the corporate offices of its Don Pablo's
and Canyon Cafe brands into its corporate headquarters in Madison, Georgia. A
charge of approximately $2-3 million representing severance and other related
costs is expected to be included in second quarter results. The Company
estimates that this consolidation and elimination of other overhead costs will
generate general and administrative expense savings of approximately $6-7
million annually.
In August 1999, the Company announced an initiative to evaluate strategic
alternatives which could enhance and maximize shareholder value, including a
proposal by a management group led by Tom E. DuPree, Jr. to acquire the Company.
On April 24, 2000, the Company announced the completion of the evaluation of
strategic alternatives and concluded that the most appropriate strategy at the
present time is to continue as a publicly traded company.
Page 11
<PAGE>
Item 2.
AVADO BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the First Quarter Ended April 2, 2000
Restaurant Sales
Consolidated restaurant sales for the first quarter of fiscal 2000
increased to $167.0 million compared to $164.1 million for the same period of
fiscal 1999. The increase reflects a 14% increase in sales from "core" brands
which include Don Pablo's Mexican Kitchen restaurants, Hops Restaurant Bar &
Brewery restaurants, McCormick & Schmick's seafood dinner houses and Canyon Cafe
restaurants. Increased core brand revenues were substantially offset by the
divested Applebee's brand which comprised 11% of total revenues in the first
quarter of 1999 compared to no revenue in 2000. Increased core brand sales were
attributable to increased operating capacity from three new restaurants opened
in 2000 and 37 restaurants opened in 1999, somewhat offset by the closing of six
core restaurants in 1999. In addition, same-store sales increased 1.5% compared
to the first quarter of 1999 (same-store-sales comparisons include all
restaurants open for 18 months as of the beginning of the quarter).
Same-store-sales increases of 9.7% at Hops and 4.5% at McCormick & Schmick's
were somewhat offset by decreases of 3.8% and 2.2% at Canyon Cafe and Don
Pablo's, respectively.
During the first quarter of 2000, the Company opened three core restaurants
including two Hops and one McCormick & Schmick's restaurant. The following table
presents core brand restaurants open as of the end of the first quarters of 2000
and 1999:
April 2, April 4,
2000 1999
--------------------------------------------------------------------
Canyon Cafe 16 18
Don Pablo's 137 129
Hops 66 51
McCormick & Schmick's 27 22
--------------------------------------------------------------------
Total 246 220
====================================================================
Page 12
<PAGE>
Restaurant Operating Expenses
The following table sets forth the percentages which certain items of
income and expense bear to total restaurant sales for the quarters ended April
2, 2000 and April 4, 1999:
--------------------------------------------------------------------------
Quarter Quarter
Ended Ended
April 2, 2000 April 4, 1999
--------------------------------------------------------------------------
Restaurant sales:
Canyon Cafe 6.2% 7.3%
Don Pablo's 45.3% 45.3%
Hops 27.7% 19.8%
McCormick & Schmick's 20.9% 16.9%
Applebee's - 10.6%
--------------------------------------------------------------------------
Total restaurant sales 100.0% 100.0%
--------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 28.7% 27.8%
Payroll and benefits 31.4% 31.2%
Depreciation and amortization 3.6% 3.0%
Other operating expenses 23.4% 22.4%
--------------------------------------------------------------------------
Total restaurant operating expenses 87.1% 84.4%
--------------------------------------------------------------------------
Income from restaurant operations 12.9% 15.6%
General and administrative expenses 6.3% 6.0%
--------------------------------------------------------------------------
Operating income 6.6% 9.6%
==========================================================================
Restaurant operating expenses for the first quarter of 2000 were 87.1% of
sales compared to 84.4% in the corresponding period of 1999. The increase was
primarily attributable to (i) an increase in other restaurant operating expenses
generated by increased advertising expense at Hops, Don Pablo's and Canyon Cafe,
(ii) an increase in food and beverage costs due primarily to a focus on higher
cost protein items at Don Pablo's, increased beef prices impacting primarily Don
Pablo's and Hops and a bar mix shift away from beer to higher priced alcohol at
Hops and (iii) increased depreciation and amortization due primarily to a
decrease in the impact of Applebee's fixed assets which were not depreciated in
1999 due to their "held for sale" status and additional depreciation associated
with the installation of new point-of-sale systems at Don Pablo's and McCormick
& Schmick's which was completed in the fourth quarter of 1999.
General and administrative expenses for the quarter ended April 2, 2000
increased to 6.3% from 6.0% in the corresponding period of 1999. The increase
was primarily attributable to a decrease in leverage generated by the decline in
sales from Applebee's which incurred lower general and administrative expenses
in 1999 due to the pending divestiture. Subsequent to the end of the first
quarter, the Company finalized the decision to consolidate the corporate offices
of its Don Pablo's and Canyon Cafe brands into its corporate headquarters in
Madison, Georgia. The Company estimates that this consolidation and elimination
of other overhead costs will generate general and administrative expense savings
of approximately $6-7 million annually.
In connection with the consolidation of office facilities and the
conclusion of the strategic alternatives evaluation which was announced on April
24, 2000, the Company anticipates incurring a special one-time charge of
approximately $2-3 million in the second quarter of 2000. This charge will
primarily reflect expenses related to employee severance agreements in addition
to other costs related to the office consolidation and completion of the
strategic alternatives evaluation.
Interest and Other Expenses
Interest expense for the quarter ended April 2, 2000 was $8.8 million
compared to $4.9 million for the corresponding period of the prior year. The
Page 13
<PAGE>
increase from prior year was predominately attributable to interest expense
associated with the Company's $100 million 11.75% senior subordinated notes
issued in the second quarter of 1999.
Income (loss) from investments carried at equity for the first quarter of
2000 primarily reflects income from the Company's 20% equity interest in Belgo
Group PLC which was partially offset by the Company's portion of losses
associated with two restaurants opened in 1999 under the Company's joint venture
agreements with PizzaExpress PLC and Belgo Group PLC.
Income tax as a percent of earnings before income taxes was 31.8% in the
first quarter of 2000 compared to an effective rate of 30.9% for the full 1999
year. The higher effective tax rate for fiscal 2000 is due to an expected
increase in taxable income as compared to 1999 and a corresponding decrease in
the impact of FICA tip credits.
Net loss for the quarter ended April 2, 2000 was $0.5 million compared to
net earnings of $6.0 million for the corresponding quarter of 1999. The net
earnings decrease was primarily attributable to a decrease in operating income
margin, an increase in interest expense and a decrease in gain on disposal of
assets as compared to 1999.
Liquidity and Capital Resources
The Company's historical and projected growth and its historical preference
to own the real estate on which its restaurants are situated typically has
caused it to be a net user of cash, even after a significant amount of expansion
financing is internally generated from operations. Based on current and expected
market conditions, the Company has committed to strategies to reduce its
leverage over time. The extent of projected new restaurant development has been
dramatically reduced in 2000 and 2001; the leasing of new sites to reduce
initial capital will take preference over ownership; an aggressive program to
realize cash from various non-operating assets has been implemented and other
initiatives to reduce leverage are being evaluated, including the approval by
the Board of Directors for a sale-leaseback transaction of up to $225 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. Fluctuations in accounts receivable, inventories,
prepaid expenses and other, accounts payable and accrued liabilities occur
primarily as a result of new restaurant openings and the timing of settlement of
the Company's liabilities. Further decreases in prepaid expenses and other
occurred in the first quarter of 2000 due to the collection of notes receivable
related to the Applebee's divestiture.
Principal sources of funds in the first quarter of 2000 consisted of cash
generated from operations of $6.5 million and proceeds from notes receivable of
$3.2 million. The primary uses of funds consisted of capital expenditures of
$16.8 million and repayment of revolving credit agreements of $2.9 million.
Capital expenditures during the first quarter of 2000 provided for the
opening of two Hops and one McCormick & Schmick's restaurant in addition to
ongoing refurbishments of existing restaurants. Capital requirements for the
construction of new restaurants are expected to approximate $28 million for the
remainder of 2000 and $45 million in 2001. Management believes that cash flow
from operations and liquidation of other assets will provide funding sufficient
to satisfy expansion plans through fiscal 2001.
On April 3, 2000, the Company finalized an amendment to its $125.0 million
revolving credit facility which, among other things, reduces the credit
availability under the facility by $10.0 million on each October 1, 2000 and
December 31, 2000. Additional quarterly commitment reductions of $7.5 million
begin on April 4, 2001 and continue until the quarter ended March 31, 2002. The
remaining commitment of $67.5 million matures on June 22, 2002. At April 2,
2000, the Company has classified as current debt that portion of the revolving
credit facility, $4.5 million, which is required to be repaid during the next 12
months. Management believes that cash flow from operations will be sufficient to
meet its obligations under the revolving credit facility.
Strategic Alternatives
In August 1999, the Company announced an initiative to evaluate strategic
alternatives which could enhance and maximize shareholder value, including a
proposal by a management group led by Tom E. DuPree, Jr. to acquire the Company.
Page 14
<PAGE>
On April 24, 2000, the Company announced the completion of the evaluation of
strategic alternatives and concluded that the most appropriate strategy at the
present time is to continue as a publicly traded company. In connection with
this announcement, the Company has been informed by the plaintiff's attorneys
that seven lawsuits filed against the Company alleging the offer made by the
management group to acquire the Company was inadequate, will be dismissed.
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
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 this Form 10-Q
and the Company's other filings with the Securities and Exchange Commission.
New Accounting Pronouncements
June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." As amended by SFAS No. 137, "Deferral of
the Effective Date of FASB Statement No. 133", SFAS 133 will be effective for
the Company's first quarter financial statements in fiscal 2001. 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.
Page 15
<PAGE>
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 and interest rate swap
agreements. Interest rate swap agreements are utilized to manage overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
Three interest rate swap agreements are currently in place under which the
Company pays an average of certain foreign or U.S. 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 2,
2000, interest expense for the remainder of fiscal 2000, after considering the
effects of interest rate swap agreements, would increase by approximately $1.6
million. If an additional 100 basis point interest rate increase occurred in the
Company's foreign LIBOR-based obligations, interest expense in 2000 would
increase by an additional $0.5 million. These amounts were determined by
considering the impact of hypothetical interest rates on the Company's borrowing
cost and interest rate swap agreements. 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.
Page 16
<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
(b) Reports on Form 8-K. None
Page 17
<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 17, 2000 By: /s/ Erich J. Booth
------------------
Erich J. Booth
Chief Financial Officer
and Corporate Treasurer
Page 18
<TABLE>
Exhibit 11.1
Computation of Earnings Per Common Share
(In thousands, except per share data)
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------------
April 2, April 4,
2000 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average number of common shares used in basic calculation 25,326 30,891
Net additional shares issuable pursuant to employee stock
option plans at period-end market price - -
Shares issuable on assumed conversion of convertible
preferred securities - * 7,774
- -------------------------------------------------------------------------------------------------------------
Average number of common shares used in diluted calculation 25,326 38,665
=============================================================================================================
Net earnings $ (537) 5,952
Distribution savings on assumed conversion of convertible
preferred securities, net of income taxes - * 1,328
- -------------------------------------------------------------------------------------------------------------
Net earnings for computation of diluted earnings per common share $ (537) 7,280
=============================================================================================================
- -------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ (0.02) 0.19
=============================================================================================================
- -------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ (0.02)* 0.19
=============================================================================================================
</TABLE>
* Diluted earnings (loss) per share ("EPS") for the first quarter of 2000
increases from $(0.02) to $0.02 when the Convertible Preferred Securities are
included in the calculation. As those shares are antidilutive, they are excluded
from the computation of diluted EPS.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 2, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS)
</LEGEND>
<CIK> 0000849101
<NAME> Avado Brands, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-03-2000
<PERIOD-END> Apr-02-2000
<CASH> 277
<SECURITIES> 0
<RECEIVABLES> 7,555
<ALLOWANCES> 0
<INVENTORY> 8,986
<CURRENT-ASSETS> 44,320
<PP&E> 426,267
<DEPRECIATION> 0
<TOTAL-ASSETS> 652,259
<CURRENT-LIABILITIES> 88,503
<BONDS> 215,169
115,000
0
<COMMON> 405
<OTHER-SE> 111,541
<TOTAL-LIABILITY-AND-EQUITY> 652,259
<SALES> 167,020
<TOTAL-REVENUES> 167,020
<CGS> 47,869
<TOTAL-COSTS> 145,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,817
<INCOME-PRETAX> (787)
<INCOME-TAX> (250)
<INCOME-CONTINUING> (537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (537)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
EXHIBIT 99.1
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward- looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance and finances, and
plans and objectives of management, contained, or incorporated by reference, in
this Form 10-Q 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. Also, 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:
Competition.
The casual dining restaurant industry is intensely competitive with respect
to price, service, location, personnel, and type and quality of food. The
Company competes with national, regional and local organizations primarily
through the quality, variety and value perception of food products offered. The
number and location of units, quality of service, attractiveness of facilities
and effectiveness of advertising and marketing programs are also important
factors.
Economic, Market and Other Conditions.
The casual dining restaurant industry is affected by changes in national,
regional and local economic conditions, consumer preferences and spending
patterns, demographic trends, consumer perceptions of food safety, weather,
traffic patterns and the type, number and location of competing restaurants.
Factors such as inflation, food costs, labor and benefit costs, legal claims,
and the availability of management and hourly employees also affect restaurant
operations and administrative expenses. The ability of the Company to finance
new restaurant development, improvements and additions to existing restaurants
and the acquisition of additional restaurant concepts is affected by economic
conditions, including interest rates and other government policies impacting
land and construction costs and the cost and availability of borrowed funds.
Importance of Locations.
The success of Company restaurants is dependent in substantial part on
location. There can be no assurance that current locations will continue to be
attractive, as demographic patterns change. It is possible the neighborhood or
economic conditions where restaurants are located could decline in the future,
thus resulting in potentially reduced sales in those locations.
Government Regulation.
The Company is subject to various federal, state and local laws affecting
its business. The development and operation of restaurants depend to a
significant extent on the selection and acquisition of suitable sites, which are
subject to zoning, land use, environmental, traffic and other regulations.
Restaurant operations are also subject to licensing and regulation by state and
local departments relating to health, sanitation and safety standards, alcoholic
beverage control laws, federal and state labor laws (including applicable
minimum wage requirements, overtime, working and safety conditions, and
citizenship requirements), state "dram-shop" statutes, and federal and state
laws which prohibit discrimination and other laws regulating the design and
operation of facilities, such as the Americans With Disabilities Act of 1990.
Changes in these laws and regulations, particularly increases in applicable
minimum wages, may adversely affect financial results. The Company cannot
predict the effect on its operations of the future enactment of additional
legislation .
Growth Plans.
The Company plans to increase the number of its restaurants open or under
construction. There can be no assurance that the Company will be able to achieve
growth objectives or that new restaurants opened or acquired will be profitable.
The opening and success of restaurants depends on various factors, including the
identification and availability of suitable and economically viable locations,
sales levels at existing restaurants, the negotiation of acceptable lease or
purchase terms for new locations, permitting and regulatory compliance, the
ability to meet construction schedules, the ability of the Company to hire and
train qualified management personnel, and general economic and business
conditions.
