SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2000 Commission File No. 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
- ------------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Hancock at Washington
Madison, Georgia 30650
- ---------------------------------------- ------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (706) 342-4552
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
--------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
------------------------------------------------------
As of March 31, 2000, the aggregate market value of the common stock of the
registrant held by non-affiliates of the registrant, as determined by the last
sales price on that day, was $48.4 million.
As of March 31, 2000, the number of shares of common stock outstanding was
25,321,047.
<PAGE>
PART I
Item 1. Business
- -----------------
General
Avado Brands, Inc., including its wholly owned subsidiaries (the "Company"
or "Avado Brands"), is a leading full service, casual dining restaurant company,
which acquires, develops and operates growth-oriented, niche-leading restaurant
brands. At January 2, 2000, the Company owned and operated restaurants in 30
states plus the District of Columbia including 137 Don Pablo's Mexican Kitchen
restaurants, 64 Hops Restaurant Bar & Brewery restaurants, 26 McCormick &
Schmick's seafood dinner houses and 16 Canyon Cafe restaurants. Each of these
proprietary brands functions on a decentralized basis with its own executive
management, real estate development, purchasing, recruiting, training,
marketing, accounting, and restaurant operations. This consumer-based operating
philosophy allows the Company to gain competitive advantage by sharing best
practices and centralizing non-brand critical processes such as human resources,
finance, treasury, accounting and capital formation. Avado Brands also owns a
20-percent equity interest in Belgo Group PLC, a 16-unit United Kingdom
restaurant company, a 25-percent equity interest in 11 Harrigans Grill and Bar
restaurants, and a 50-percent interest in two restaurants operated under
separate joint venture agreements with Belgo Group PLC and London-based
PizzaExpress PLC. For the 52-week period ended January 2, 2000 ("1999"), total
restaurant sales were $644.5 million which included revenue of $21.2 million
from 46 Applebee's restaurants which were sold during the first half of 1999.
In November 1995, 44 Don Pablo's restaurants and 12 Harrigans restaurants
were acquired through a pooling of interests transaction with DF&R Restaurants,
Inc. During 1997, three purchase business combinations were completed which
included the acquisition of 16 McCormick & Schmick's restaurants, 21 Hops
restaurants and 13 Canyon Cafe restaurants. Also in 1997, the Company announced
its decision to sell its franchised Applebee's restaurants in order to focus on
the continued development of its higher margin, better return, greater growth
proprietary concepts. The divestiture was substantially completed in 1998 with
the sale of 46 remaining locations completed in 1999. Gross proceeds from the
sale transactions totaled $514.0 million including $9.5 million in notes
outstanding at January 2, 2000 and other amounts due. Also during 1998, the
Company divested its Harrigans restaurants, retaining a 25-percent ownership in
the ongoing business, acquired a 20-percent interest in Belgo, established a
50/50 joint venture for the development of Belgo restaurants in the Western
Hemisphere and established a 50/50 joint venture with London-based PizzaExpress.
In January of 1999, the first Belgo restaurant in the United States was opened
in New York City and in March of 1999 the first restaurant under the joint
venture with PizzaExpress was opened in Philadelphia under the name San Marzano.
On October 13, 1998, the Company changed its corporate name from "Apple
South, Inc." to "Avado Brands, Inc." The name change was made to reflect the
evolution of the nature and character of the business, including the divestiture
of the Company's Applebee's brand, and the emphasis on a multi-brand strategy.
In connection with the corporate name change, the Company changed the Nasdaq
National Market trading symbol of its common stock from "APSO" to "AVDO."
2
<PAGE>
Avado Brands' Restaurant Concepts
Don Pablo's
The first Don Pablo's was opened in Lubbock, Texas in 1985. The restaurants
feature traditional Mexican dishes served in a distinctive, festive dining
atmosphere reminiscent of a Mexican village plaza. Each restaurant is staffed
with a highly experienced management team that is visible in the dining area and
interacts with both customers and the staff to ensure attentive customer service
and consistent food quality. Items are prepared fresh on-site using high-quality
ingredients at relatively low prices. The diverse menu, generous portions and
attractive price/value relationship appeal to a broad customer base.
Menu. The menu offers a wide variety of entrees, including enchiladas and
tacos served with various sauces and homemade salsa plus mesquite-grilled items
such as fajitas, carne asada and chicken. The menu also includes tortilla soup,
a selection of salads, Mexican-style appetizers such as quesadillas and unique
desserts. During 1999, the cost of a typical meal, including beverages, was
approximately $6.00 to $9.00 for lunch and $8.00 to $15.00 for dinner. In
addition to its regular menu, Don Pablo's offers 15 lunch specials priced from
$4.49 to $7.39 each and a lower-priced children's menu. Full bar service is also
provided. Alcoholic beverage sales accounted for approximately 18% of sales in
1999.
Restaurant Layout. Distinctive Mexican architecture and interior decor
provide a casual, fun dining atmosphere. The restaurants have an open, spacious
feel, created with the use of sky-lights and a Mexican village plaza design, and
are enhanced by an indoor fountain and the use of stucco, brick and tile, as
well as plants, signs and art work. Homemade tortillas cooked in the dining area
underscore the commitment to fresh, authentic Mexican food. Both one and
two-story building designs are utilized. The two-story design features a balcony
which provides seating for bar patrons and dining customers waiting to be
seated. The one-story design incorporates a smaller bar adjacent to the dining
area. Both designs use high ceiling architecture and have similar dining
capacities. Restaurants range in size from 6,000 square feet to 9,900 square
feet, with the average restaurant containing approximately 8,000 square feet.
The restaurants generally have dining room seating for approximately 230
customers and bar seating for approximately 70 additional customers.
Unit Economics. In 1999, the average cost of developing and opening a Don
Pablo's restaurant was approximately $1.8 million, excluding land costs and
preopening expenses. The cost of land for these restaurants ranged from
approximately $869,000 to $1,042,000; preopening expenses, which consist
primarily of wages and salaries, hourly employee recruiting, license fees,
meals, lodging and travel plus the cost of hiring and training the management
teams, averaged $211,000.
Field Management. Management is shared by 20 area managers who report to
two Regional Vice Presidents of Operations. The strategy is to have each area
manager responsible for a limited number of restaurants, thus facilitating a
focus on quality of operations and unit profitability. The management staff of a
typical restaurant consists of one general manager, one kitchen manager and
three assistant managers. The restaurant management staff is eligible to receive
bonuses based on equaling or exceeding their individual restaurant's prior year
sales and profits.
Advertising and Marketing. Don Pablo's advertising and marketing strategy
combines the use of television and radio advertising in core markets along with
a focus on local efforts and community involvement at all locations. In 1999,
advertising expense was 4.9% of revenue. Although Don Pablo's typically spends
approximately 3.5% of revenue on advertising, in the fourth quarter of 1999 a
special winter campaign was implemented and an additional $4.0 million in
advertising expense was incurred. The fourth quarter program drove customer
counts and traffic at the restaurants and helped improve same-store-sale
comparisons from 5% negative in September to 2% positive in December.
Advertising expenditures for 2000 are expected to return to a more typical 3.5%
level and will focus on efforts designed to increase traffic counts and appeal
to consumer desires for new and exciting tastes.
3
<PAGE>
Hops Restaurant Bar & Brewery
The first Hops was opened in Clearwater, Florida in 1989. Each restaurant
offers a diverse menu of popular foods, freshly prepared in a display kitchen
with a strict commitment to quality and value. Additionally, each restaurant
features an on-premises microbrewery.
Menu. The restaurants feature an American-style menu that includes top
choice steaks and prime rib, smoked baby back ribs, fresh fish, chicken and
pasta dishes, deluxe burgers and sandwiches, hand-tossed salads with homemade
dressings, appetizers, soups and desserts. The menu offers separate selections
for children. The cost of a typical meal, including beverages, ranges from $6.00
to $9.00 per person for lunch and $13.00 to $15.00 per person for dinner. Each
restaurant offers four distinctive lager-style beers and ales, plus a variety of
blends of these beers, that are brewed on-premises. An observation microbrewery
at each restaurant allows customers to view the entire brewing process. Except
for one non-alcoholic beer, the brewed beers are the only beers served in all
but one of the restaurants. Full bar service is also available at each
restaurant. Alcoholic beverages accounted for approximately 16% of sales in
1999.
Restaurant Layout. Restaurants range in size from approximately 5,000 to
7,300 square feet. With booth seating throughout approximately 70% of each
restaurant, guests enjoy the comfort of privacy and soft lighting amongst wood
and brick surfaces in a somewhat rustic design. The ambiance and decor
complements the on-premise copper and stainless steel brewing equipment which is
visible from both the bar and dining room. Customers are invited to tour the
brewery, which occupies from 450 to 750 square feet, with Hops' on premise
Brewmaster.
Unit Economics. The cost of developing and opening a restaurant averaged
approximately $1.6 million in 1999, excluding land and preopening costs but
including approximately $165,000 in microbrewery equipment. Land costs ranged
from $780,000 to $1,285,000 and preopening costs averaged $180,000.
Field Management. Management is shared by seven operating partners and
seven area supervisors who report to both the Vice President of Operations and
the Chief Executive Officer. Each operating partner or area supervisor is
ultimately responsible for four to five restaurants, thus facilitating a focus
on quality of operations and unit profitability. The management staff of a
typical restaurant consists of one general manager, one kitchen manager and two
assistant managers. Hops also added the new position of Service Specialist in
1999 to improve customer service and quality control at each restaurant. General
managers and kitchen managers are eligible to receive bonuses equal to a
percentage of their restaurant's controllable income, subject to operating above
a minimum operating margin.
Advertising and Marketing. Hops' advertising and marketing strategy has
historically focused primarily on grassroots efforts utilizing special
promotions in local markets and special event equipment designed to increase
customer awareness and name recognition. During 1999, advertising and marketing
efforts were expanded to include television advertising in core markets as well
as the continued use of radio advertising, outdoor boards and print media in
regional editions of national publications. Efforts are expected to continue
into 2000 with the continued use of television and radio advertising, print
media, limited outdoor advertising as well as ongoing grassroots programs.
McCormick & Schmick's
McCormick & Schmick's was established in 1972 by co-founders William P.
McCormick and Douglas L. Schmick, current Chairman and President, respectively.
Each restaurant is designed to capture the distinctive attributes of the local
market. Varying in design from a traditional, New England-style fish house to a
more contemporary dinner house with spectacular waterfront views, many of the
restaurants are located in historical buildings. Traditional-style bars are an
integral component of each restaurant. The same philosophy of distinctiveness
and quality applies equally to the bar operation and the dining rooms. Alcoholic
beverages represented approximately 29% of sales in 1999. Restaurants are
operated under the names McCormick & Schmick's, McCormick's Fish House,
Harborside, Jake's, Jake's Famous Crawfish, M&S Grill, McCormick & Kuleto's and
Spenger's Fresh Fish Grotto. McCormick & Schmick's offers superior service to
its guests and is positioned in a price range at the upper end of moderate.
4
<PAGE>
Menu. McCormick & Schmick's features a daily menu, offering the freshest
seafood available based on price and product availability. With 25 to 30
distinctive species and over 85 individual selections, the menu gives range in
culinary appeal as well as price selection. The cost of a typical meal,
including beverage, is approximately $10.00 to $20.00 for lunch and $25.00 to
$35.00 for dinner.
Restaurant Layout. Restaurants typically range in size from 6,000 to 13,000
square feet with an average restaurant containing approximately 8,500 square
feet. The restaurants generally seat 200 to 350 customers in the dining room
with some locations having 40 to 60 additional patio seats available.
Unit Economics. The average cost of developing a restaurant was
approximately $3.0 million in 1999, including leasehold improvements, fixtures
and equipment. All restaurant real estate is leased. Additionally, preopening
expenses averaged $397,000.
Field Management. Management is shared by ten multi-unit senior managers,
three of which have regional responsibility, and one Vice President of
Operations. Staffing levels vary depending on restaurant size. A typical
restaurant has a general manager, an executive chef, a sous chef and four
assistant managers and will employ 80 to 90 full- and part-time employees. The
McCormick & Schmick's operating philosophy encourages and trains the management
of individual restaurants to be creative by promoting a large degree of
self-sufficiency.
Advertising and Marketing. Advertising and marketing efforts are focused on
a grassroots philosophy. Each region utilizes the services of a public relations
firm and makes full use of media events targeting the local market. Advertising
strategies focus on existing and local customers, but also emphasize out-of-town
travelers as a key customer component. Marketing begins in each restaurant with
daily printed menus and other local efforts. A primary focus is to expand name
and location awareness through the use of promotional discount certificates and
periodic contact with organizations in the travel/convention industry such as
hotels, travel agents and convention centers.
Canyon Cafe
Canyon Cafe restaurants operate under the names Canyon Cafe, Desert Fire
and Sam's Cafe. The first restaurant was opened in Dallas, Texas in 1989. Canyon
Cafe is dedicated to the flavor and feel of the American Southwest.
Menu. The menu offers a wide variety of unique items such as Desert Fire
Pasta, Chile Rubbed Grilled Tuna and Chipotle Chicken. A variety of more
traditional items including chicken tacos and grilled chicken salad are also
offered. During 1999, the cost of a typical meal, including beverages, was $9.00
to $14.00 for lunch and $14.00 to $20.00 for dinner. Full bar service is also
provided. Alcoholic beverages accounted for approximately 18% of sales in 1999.
Restaurant Layout. The restaurants are based on a Santa Fe design which
reflects a strong southwestern influence through the use of heavy ponderosa pine
timbers. The walls, floors and furniture reflect surfaces and colors native to
the American Southwest. Restaurants are located in malls, in-line power centers
and as freestanding buildings. In-line and mall sites average 7,000 square feet
with some locations featuring an additional 800-1,000 square foot patio. The
freestanding buildings have 6,700 square feet with a 1,050 square foot patio.
All locations typically have a minimum of 190 interior dining seats, an average
of 26 bar seats and 45-50 patio seats.
Unit Economics. No new restaurants were opened in 1999. In 1998, the cost
of developing and opening a restaurant averaged $1,400,000 for in-line/mall
locations and $1,600,000 for freestanding locations, excluding land costs and
preopening expenses. Preopening expenses averaged $151,000.
5
<PAGE>
Field Management. Management is structured with a general manager, two to
three assistant managers, an executive chef and a sous chef. Regional Directors
are responsible for quality of operations and sales and profitability of four to
five restaurants and report to a Director of Operations. All managers are
eligible to receive bonuses based on individual restaurant operating
performance.
Advertising and Marketing. Advertising and marketing strategy relies on
grassroots efforts focused on developing a strong brand identity and strong
core-customer recommendations. Advertising and marketing efforts include local
radio, media appearances and event involvement as well as direct mail and other
print media. Additional local efforts, such as a system-wide "neighborhood
networking" program, are utilized to develop a direct relationship with targeted
customers.
Other Restaurant Operational Functions
Quality Control. All levels of management are responsible for ensuring that
restaurants are operated in accordance with strict quality standards. Management
structure allows restaurant general managers to spend a significant portion of
their time in the dining area of the restaurant supervising staff and providing
service to customers. Compliance with quality standards is monitored by periodic
on-site visits and formal periodic inspections by multi-unit management.
Training. Each brand requires employees to participate in formal training
programs. Management training programs generally last ten to 16 weeks and
encompass three general areas, including (i) all service positions, (ii)
management accounting, personnel management, and dining room and bar operations
and (iii) kitchen management. Management positions at new restaurants are
typically staffed with personnel who have had previous experience in a
management position at another of the respective brands' restaurants. In
addition, a highly experienced opening team assists in opening each restaurant.
Prior to opening, all personnel undergo intensive training conducted by the
restaurant opening team.
Purchasing. Avado Brands strives to obtain consistent quality items at
competitive prices from reliable sources for all of its brands. The Company
continually researches and tests various products in an effort to maintain the
highest quality products and to be responsive to changing customer tastes.
Purchasing is handled by each brand, which, with the exception of McCormick &
Schmick's, uses one primary distributor for food products other than locally
purchased produce. At McCormick & Schmick's, purchasing is under the direction
of each restaurants' executive chef in order to obtain the freshest, highest
quality seafood available with a focus on local tastes. All food and beverage
products are available on short notice from alternative, qualified suppliers.
The Company has not experienced any significant delays in receiving food and
beverage inventories, restaurant supplies or equipment.
Restaurant Reporting. Financial controls are maintained through a
centralized accounting system at each brands' headquarters. A point-of-sale
reporting system is utilized in each restaurant. Restaurant management submits
to brand headquarters various daily and weekly reports of cash, deposits, sales,
labor costs, etc. Physical inventories of all food, beverage and supply items
are taken at least monthly. Operating results compared to prior periods and
budgets are closely monitored by both brand and corporate personnel.
Trademarks and Licenses
Avado Brands has registered the principal trademarks and service marks used
by its restaurant brands with the United States Patent and Trademark Office. The
Company believes that its trademarks and service marks are integral and
important factors in establishing the identity and marketing of its restaurant
brands. Although the Company is aware of certain marks used by other persons in
certain geographical areas which may be similar in certain respects to the
Company's marks, the Company believes that these other marks will not adversely
affect the Company or its business.
The restaurant concepts for the Company's joint ventures with Belgo Group
PLC and PizzaExpress PLC are licensed from these joint venturers or their
affiliates. Such licenses are essential for the operation of these joint
ventures and include the licensing of related trademarks and service marks.
6
<PAGE>
Governmental Regulation
Alcoholic Beverage Regulation. Each restaurant is subject to licensing and
regulation by a number of governmental authorities, which include alcoholic
beverage control and health, safety and fire agencies in the state, county and
municipality in which the restaurant is located. Difficulties or failures in
obtaining the required licenses or approvals could delay or prevent the opening
of a new restaurant in a particular area. Alcoholic beverage control regulations
require restaurants to apply to a state authority and, in certain locations,
county or municipal authorities for a license or permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays. Some counties prohibit the sale of alcoholic beverages on Sundays.
Typically, licenses or permits must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of a restaurant's operations, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
The Company may be subject in certain states to "dram-shop" statutes which
generally provide a person injured by an intoxicated patron the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance.
Brewpub Regulation. Hops is subject to additional regulations as a result
of the on-premises microbrewery in each restaurant. Historically, the alcoholic
beverage laws of most states prohibited the manufacture and retail sale of beer
to consumers by a single person or entity or related persons or entities. At
present, all 50 states allow for the limited manufacture and retail sale of
microbrewed beer by restaurants and bars classified as "brewpubs" under state
law. The Hops restaurants are required to comply with such state brewpub laws in
order to obtain necessary state licenses and permits. Additionally, many states
impose restrictions on the operations of brewpubs, such as a prohibition on the
bottling of beer, a prohibition on the sale of beer for consumption off of
restaurant premises, and a limitation on the volume of beer that may be brewed
at any location, as well as certain geographic limitations. In addition, certain
states limit the number of brewpubs that may be owned by any person or entity or
a related group of entities. The Company's ability to own and operate Hops
restaurants in any state is and will continue to be dependent upon its ability
to operate within the regulatory scheme of such states.
Other Regulation. The Company's restaurant operations are also subject to
Federal and state laws governing such matters as minimum wage, working
conditions, overtime and tip credits.
Competition
The restaurant industry in the U.S. is highly competitive with respect to
price, service, location, and food type and quality, and competition is expected
to intensify. There are well-established competitors with greater financial and
other resources than Avado Brands. Some of these competitors have been in
existence for a substantially longer period than Avado Brands and may be better
established in the markets where the Company's restaurants are or may be
located. The restaurant business is often affected by changes in consumer
tastes, national, regional or local economic conditions, demographic trends,
traffic patterns, the availability and cost of suitable locations, and the type,
number and location of competing restaurants. The Company also experiences
competition in attracting and retaining qualified management level operating
personnel. In addition, factors such as inflation, increased food, labor and
benefits costs, and difficulty in attracting hourly employees may adversely
affect the restaurant industry in general and Avado Brands' restaurants in
particular.
Employees
As of January 2, 2000, Avado Brands employed approximately 20,000 persons
in 30 states plus the District of Columbia. Of those employees, approximately
280 held management or administrative positions, 1,600 were involved in
restaurant management, and the remainder were engaged in the operation of
restaurants. Management believes that the Company's continued success will
depend to a large degree on its ability to attract and retain good management
employees. While the Company will have to continually address a level of
employee attrition normally expected in the food-service industry, Avado Brands
has taken steps to attract and keep qualified management personnel through the
implementation of a variety of employee benefit plans, including an Employee
Stock Ownership Plan, a 401(k) Plan, and an incentive stock option plan for its
key employees. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
7
<PAGE>
Item 2. Properties
- -------------------
The Company owns a renovated historic building in Madison, Georgia,
containing approximately 19,000 square feet of office space and an adjoining
building containing approximately 41,000 square feet of office space. These
office buildings have served as the Company's corporate and Applebee's
headquarters. In 1997, the Company completed construction of a new 44,100 square
foot facility in Bedford, Texas, to house the Don Pablo's headquarters. The
headquarters for McCormick & Schmick's is located in approximately 17,600 square
feet of leased space in Portland, Oregon. The headquarters for Hops is located
in approximately 15,000 square feet of leased space in Tampa, Florida and the
headquarters for Canyon Cafe is located in approximately 7,500 square feet of
leased space in Dallas, Texas. The Company believes that its corporate and brand
headquarters are sufficient for its present needs.
In selecting restaurant sites, the Company attempts to acquire prime
locations in market areas to maximize both short- and long-term revenues. Site
selection is made by each brand's development department, subject to executive
officer approval and final approval by the Company's management committee.
Within the target market areas, the brands evaluate major retail and office
concentrations and major traffic arteries to determine focal points. Site
specific factors include visibility, ease of ingress and egress, proximity to
direct competition, accessibility to utilities, local zoning regulations, laws
regulating the sale of alcoholic beverages, and various other factors.
8
<PAGE>
As of January 2, 2000, the Company operated 243 restaurants. The Company
leases the underlying real estate on which 120 of the restaurants are located
and leases both the buildings and underlying real estate for an additional 46
restaurants. The remaining 77 restaurants and related real estate are owned by
the Company. The following table presents restaurant locations by brand:
Don McCormick Canyon
Pablo's Hops & Schmick's Cafe Total
-----------------------------------------------------------------------------
Florida 18 31 49
Texas 15 1 4 20
Ohio 15 2 17
Indiana 11 1 12
Georgia 5 4 2 11
Pennsylvania 11 11
Virginia 7 2 1 10
Tennessee 5 3 1 9
California 7 1 8
Colorado 6 1 1 8
Maryland 5 1 2 8
Michigan 8 8
Minnesota 7 1 8
North Carolina 4 4 8
Arizona 3 1 3 7
South Carolina 3 4 7
Kentucky 4 2 6
New York 6 6
Washington 4 2 6
Oregon 5 5
Oklahoma 4 4
Missouri 1 2 3
Washington, D.C. 2 2
Illinois 1 1 2
New Jersey 2 2
Alabama 1 1
Connecticut 1 1
Delaware 1 1
Iowa 1 1
Louisana 1 1
Nevada 1 1
-----------------------------------------------------------------------------
Totals 137 64 26 16 243
=============================================================================
9
<PAGE>
Item 3. Legal Proceedings
- --------------------------
Seven lawsuits were filed against the Company and certain of its directors
and officers in November and December 1999 and are currently pending in the
Superior Court of Morgan County, Georgia. The cases are related purported class
action lawsuits brought on behalf of certain shareholders. The plaintiffs'
allegations are based on a proposal by a three-person management group to
acquire the Company. All seven lawsuits (which Company counsel believes may be
consolidated) generally allege that the offer being made by the management group
is unfair, and that the price being proposed as payment for Company common
shares is inadequate. The plaintiff shareholders allege that it would be a
breach of the Board's fiduciary duties to the Company and the shareholders to
approve the proposal and consummate the transaction being proposed by the
management group. The shareholders are seeking injunctive relief, an unspecified
amount of damages allegedly arising from the acts of the Defendants, and costs
and attorneys' fees. The Company's Board of Directors has appointed a special
committee of disinterested directors to evaluate the merits of the offer and to
consider other strategic alternatives for the Company.
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
(Artel Foam Corporation Pension Trust, et al. v. Apple South, Inc., et al.,
Civil Action No. CV-97-6189) was dismissed. An amended complaint, styled John
Bryant, et al. vs. Apple South, Inc., et al. consolidating previous actions was
filed in January 1998. 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.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year ended January 2, 2000.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Corporate Headquarters Independent Auditors
Avado Brands, Inc. KPMG LLP
Hancock at Washington 303 Peachtree Street, N.E.
Madison, GA 30650 Suite 2000
Telephone: (706) 342-4552 Atlanta, GA 30308
Investor Relations Transfer Agent and Registrar
Tony Shaffer, Director of Investor Relations SunTrust Bank, Atlanta
Hancock at Washington Corporate Trust Division
Madison, GA 30650 P.O. Box 4625
Telephone: (706) 342-4552 Atlanta, GA 30302
Facsimile: (706) 342-9283
E-mail: [email protected]
Investor Information
The Company's common stock and convertible preferred securities are traded
on the NASDAQ Stock Market (National Market) under the symbols "AVDO" and
"AVDOP", respectively. A list of the brokerage firms publishing research on
Avado Brands is available upon request by calling the Investor Relations
department or writing Investor Relations.
Shareholder Information
As of March 1, 2000, there were approximately 3,500 shareholders of record
of the Company's common stock.
Stock Price Performance
A summary of the high and low sales prices per share for the Company's
common stock is presented below:
High Low
------------------------------------------------------------------------
1999
First Quarter $ 9.75 $ 5.94
Second Quarter $ 9.50 $ 6.25
Third Quarter $ 9.44 $ 5.63
Fourth Quarter $ 6.00 $ 4.06
1998
First Quarter $ 15.44 $ 10.50
Second Quarter $ 16.00 $ 12.44
Third Quarter $ 15.44 $ 10.88
Fourth Quarter $ 11.13 $ 7.00
------------------------------------------------------------------------
Dividends
The following table shows cash dividends declared per share on the
Company's common stock
Quarter ended 1999 1998 1997
-----------------------------------------------------------------
March $0.0125 0.0100 0.008
June $0.0150 0.0125 0.010
September $0.0150 0.0125 0.010
December $0.0150 0.0125 0.010
-----------------------------------------------------------------
Total $0.0575 0.0475 0.038
-----------------------------------------------------------------
11
<PAGE>
Item 6. Selected Financial Data
- -------------------------------
<TABLE>
(In thousands, except per share data)
<CAPTION> 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF EARNINGS DATA
Total restaurant sales $644,459 862,692 808,320 546,022 440,190
Operating income $ 42,461 72,631 74,823 31,596 41,329
Net earnings $ 5,470 66,283 28,448 11,674 20,279
- --------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings per common share $ 0.20 1.81 0.74 0.30 0.54
Diluted earnings per common share $ 0.20 1.62 0.73 0.30 0.52
Cash dividends per common share $ 0.0575 0.0475 0.038 0.030 0.022
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA
Total assets $656,596 670,597 804,289 457,827 369,138
Working capital (excluding assets held for sale) $(39,497) (210,947) (33,989) (21,439) (17,778)
Long-term obligations $328,076 116,978 381,843 215,891 118,726
Convertible preferred securities $115,000 115,000 115,000 - -
Shareholders' equity $112,624 112,029 220,782 191,429 203,221
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See additional discussion of financial results at Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 8, "Financial Statements and Supplementary Data".
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
For an understanding of the significant factors that influenced the
performance of Avado Brands, Inc. (the "Company") during the past three fiscal
years, the following discussion should be read in conjunction with the
consolidated financial statements appearing elsewhere in this Form 10-K. The
Company acquired McCormick & Schmick Holding Corp. ("McCormick & Schmick's") and
Hops Restaurant Bar & Brewery ("Hops") in March 1997 and Canyon Cafes, Inc.
("Canyon Cafe") in July 1997. The pro forma information presented herein assumes
that these acquisitions had been completed at the beginning of the respective
periods. The Company's fiscal year is a 52 or 53-week year ending on the Sunday
closest to December 31. Accordingly, the following discussion is for the 52
weeks ended January 2, 2000 ("1999"), the 53 weeks ended January 3, 1999
("1998") and the 52 weeks ended December 28, 1997 ("1997").
Consolidated Overview of 1999
During 1999, Avado Brands, Inc. completed the divestiture of its franchised
Applebee's Neighborhood Grill & Bar ("Applebee's") restaurants, continued to
expand operations at its "core" brands which include Don Pablo's Mexican Kitchen
restaurants, Hops, McCormick & Schmick's and Canyon Cafe and continued to
explore new investment opportunities through the opening of two new restaurants
under joint venture agreements with United Kingdom-based Belgo Group PLC
("Belgo") and PizzaExpress PLC ("PizzaExpress").
In August 1999, the Company announced an initiative to evaluate strategic
alternatives which could enhance and maximize shareholder value. On November 10,
1999, a management group formed by Tom E. DuPree, Jr., the Company's Chairman
and Chief Executive Officer, filed a Schedule 13D with the Securities and
Exchange Commission indicating the management group was making a proposal to
acquire the Company. The Company received a letter outlining the proposal, which
is included as an exhibit to the Schedule 13D. In connection with this proposal,
a Special Committee of the Company's Board of Directors, comprised of two
independent directors, was formed. The Special Committee is awaiting
management's form of acquisition agreement setting forth the final proposed
terms and conditions of the acquisition and will evaluate the proposal along
with other strategic alternatives.
Comparison of Historical Results - Fiscal Years 1999, 1998 and 1997
Restaurant Sales
In 1999, restaurant sales for the Company's core brands increased 18% to
$623.3 million from $527.4 million in 1998. Total restaurant sales decreased to
$644.5 million in 1999 from $862.7 million in 1998 reflecting the divestiture of
the Applebee's brand which accounted for 39% of the Company's revenues in 1998
compared to only 3% in 1999. Increased core brand sales, attributable primarily
to new unit growth, were partially offset by a 52-week fiscal 1999 compared to a
53-week fiscal 1998. Operating weeks increased by 21% in core brands due to a
full-year's sales from 59 restaurants opened in 1998 and a partial-year's sales
from 37 restaurants opened in 1999. Sales increases attributable to new
restaurant openings were somewhat offset by the closing of six core brand
restaurants during 1999. Same-store-sale comparisons (for restaurants open a
full 18 months at the beginning of 1999) were approximately 6% higher at
McCormick & Schmick's, 1% higher at Hops, 1% lower at Don Pablo's and 4% lower
at Canyon Cafe.
Restaurant sales for 1998 increased 7% to $862.7 million from $808.3
million in 1997 reflecting increased core brand sales which were offset by
declining revenues associated with the divestitures of the Applebee's and
Harrigans brands. In core brands, 1998 sales increased 59% to $527.4 million
from $331.9 million in 1997. A full-year's sales attributable to the brands
acquired in 1997, new unit growth, increased average unit volumes in Hops and
McCormick & Schmick's and a 53-week fiscal 1998 compared to a 52-week fiscal
1997 contributed to the increase in core brand sales. Operating weeks increased
by 60% in core brands due to a full-year's sales from 50 restaurants acquired
and 41 restaurants opened in 1997 and a partial-year's sales from 59 restaurants
opened in 1998, partially offset by two Canyon Cafe restaurants closed in 1998.
Same-store-sale comparisons (for restaurants open a full 18 months at the
beginning of 1998) were approximately 5% higher at Hops, 4% higher at Canyon
Cafe and 2% higher at both Don Pablo's and McCormick & Schmick's. On a pro forma
basis, 1998 core brand restaurant sales increased by 44% and operating weeks
increased by 47% over 1997.
13
<PAGE>
Restaurant Operating Expenses
Consolidated restaurant operating expenses as a percent of sales increased
130 basis points to 87.2% in 1999 from 85.9% in 1998. The resulting 1999
decrease in restaurant operating margins was principally due to an increase in
depreciation from 2.0% of total 1998 sales to 3.2% of total 1999 sales as a
result of the declining impact of the Applebee's brand for which depreciation
was suspended in December 1997 when the related assets were classified as assets
held for sale.
The following discussion of restaurant operating expenses further focuses
on the percentages which certain items of expense bear to total restaurant sales
for (i) the Company's core brands and (ii) the Company's brands which have been
discontinued over the last three fiscal years which include Applebee's,
Harrigans, and Hardee's.
Core Brands
Actual Actual Actual Pro Forma
Fiscal 1999 1998 1997 1997
- --------------------------------------------------------------------------------
Restaurant sales:
Canyon Cafe 7.0% 9.1% 5.6% 9.3%
Don Pablo's 49.7 51.3 59.2 53.6
Hops 23.2 20.2 14.9 15.7
McCormick & Schmick's 20.1 19.4 20.3 21.4
- --------------------------------------------------------------------------------
Total restaurant sales 100.0 100.0 100.0 100.0
- --------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 28.4 28.0 27.8 27.9
Payroll and benefits 31.1 30.4 29.8 30.1
Depreciation and amortization 3.3 3.2 3.7 3.6
Other operating expenses 24.6 23.4 22.9 23.3
-------------------------------------------------------------------------------
Total restaurant operating expenses 87.4 85.0 84.1 84.9
-------------------------------------------------------------------------------
Income from restaurant operations 12.6% 15.0% 15.9% 15.1%
-------------------------------------------------------------------------------
Core brand restaurant operating expenses for 1999 were 87.4% of sales
compared to 85.0% in 1998. The resulting decrease in 1999 restaurant operating
margins was principally due to (i) the impact of increased marketing efforts
which increased other operating expenses as well as food and beverage and
payroll and benefit costs, (ii) additional increases in payroll and benefits
related primarily to management labor costs and (iii) a decrease in average unit
volumes at Don Pablo's, Hops and Canyon Cafe which decreased leverage on certain
fixed operating expenses as well as depreciation and amortization.
Increased marketing efforts impacted restaurant operating margins primarily
at Don Pablo's and Canyon Cafe. Don Pablo's typically spends approximately 3.5%
of revenue on advertising, compared to total 1999 advertising expense of 4.9% of
revenue which was a result of a special fourth quarter winter campaign which
increased advertising expense by $4.0 million. The fourth quarter program drove
customer counts and traffic at the restaurants and helped improve
same-store-sale comparisons from 5% negative in September to 2% positive in
December. The remainder of Don Pablo's 1999 marketing expenses were
predominately related to a new summer promotional menu implemented in the second
quarter. In addition to an impact on other operating expenses, the summer
promotion resulted in an increase in food and beverage expenses due to a focus
on higher cost food items and an increase in payroll and benefit costs resulting
from increased labor hours also associated with the menu changes. Marketing
expenses at Canyon Cafe were 5.8% of revenue in 1999 compared to 4.2% in 1998.
The 1999 increase was due to a combination of increased marketing efforts to
develop brand awareness and a decrease in revenue generated by decreases in
average unit volumes and restaurant closings. On a total core brand basis, the
increased food and beverage costs at Don Pablo's were substantially offset by
decreases at Hops gained through a combination of purchasing contracts for
chicken and red meat which stabilized prices during 1999 and an increase in the
percentage of revenue from beer which has a lower cost.
14
<PAGE>
Increases in management labor were predominately attributable to management
base pay increases at Don Pablo's and Hops resulting from initiatives
implemented in 1999 to increase management depth and improve retention rates. In
addition, in 1999 Hops added the new management position of Service Specialist
to enhance customer service and quality control at each restaurant.
Core brand restaurant operating expenses for 1998 were 85.0% of sales
compared to 84.1% in 1997. The increase was primarily attributable to a full
year of operations related to the brands acquired in 1997 which experienced
lower margins than the Don Pablo's brand. In addition, the following factors
also partially contributed to the 1998 decrease in margins, (i) an increase in
payroll and benefit costs related to an increase in the number of new unit
openings which typically experience higher labor costs during the first several
months of operations, (ii) an increase in food and beverage costs primarily
related to an increase in Hops' sales as a percentage of total core brand sales
compared to prior year (Hops experiences higher food and beverage costs due to a
larger percentage of beef sales and a smaller percentage of alcoholic beverage
sales as compared to the other brands), (iii) an increase in other operating
expenses related primarily to an increase in advertising in Don Pablo's and Hops
and (iv) other operating costs also associated with an increase in the number of
new unit openings coupled with the policy of expensing preopening costs as
incurred which was adopted at the beginning of 1998.
Discontinued Brands
For 1999 and 1998, revenues from the Company's discontinued brands were
solely attributable to Applebee's. In 1999, Applebee's accounted for only 3% of
the Company's consolidated revenues. Decreases in restaurant operating expenses
from 87.2% in 1998 to 81.8% in 1999 were attributable to a decrease in
preopening and training expenses due to no restaurant openings in 1999 compared
to 15 Applebee's openings in 1998. In addition, due to the Company's completion
of the Applebee's divestiture early in 1999, advertising expenditures were
substantially reduced from prior year levels.
For 1998, restaurant operating expenses as a percentage of sales for
discontinued brands increased to 87.2% from 87.0% in 1997. The resulting
decrease in 1998 restaurant operating margins was principally due to increased
payroll and benefits resulting from performance-based, pay-to-stay bonus
programs implemented to control management turnover and operating costs during
the Applebee's divestiture period.
General and Administrative Expenses
General and administrative expenses related to core brands were 6.0% of
total core brand sales in 1999 compared to 6.5% in 1998 and 7.7% on a pro forma
basis for 1997. The 1999 decrease was primarily attributable to leverage gained
from increases in absolute size at Don Pablo's, Hops and McCormick & Schmick's.
General and administrative expenses for all brands as a percent of sales were
5.9% in 1999 compared to 5.3% in 1998 and 4.9% in 1997. Deleveraging of
corporate expenses associated with the sales from the divested Applebee's brand
was the primary contribution to the change in these rates.
Other Special Charges
In 1999, the Company recorded a $2.2 million special charge reflecting fees
paid in conjunction with the evaluation of strategic alternatives and other
amounts associated with activities to reduce overhead costs, including payroll
and employee severance. In the fourth quarter of 1998, programs were initiated
at Don Pablo's, Canyon Cafe and the Company's corporate headquarters to
reorganize management and reduce overhead costs. A charge of $2.9 million was
recorded, the components of which related primarily to employee termination and
severance costs.
Interest and Other Expenses
Interest expense decreased to $24.1 million from $25.3 million in 1998 as a
result of a decrease in average borrowings outstanding under revolving credit
facilities. This decrease was substantially offset by an increase in interest
rates under revolving facilities as well as the 11.75% Senior Subordinated Notes
issued during 1999. Interest expense in 1998 increased to $25.3 million from
$20.5 million in 1997 due to higher average borrowings under revolving credit
facilities. These increased borrowings, related to the construction of new
restaurants and the 1997 acquisitions, were partially offset by proceeds from
various divestitures, a significant portion of which were used to reduce
revolving debt obligations. The Company's weighted average interest rate on
borrowings was approximately 9.5% in 1999, 8.0% in 1998 and 7.9% in 1997.
15
<PAGE>
"Gain on disposal of assets" primarily reflects the gains recognized on the
Applebee's divestiture of $7.8 million in 1999 and $81.3 million in 1998.
Applebee's divestiture gains in both 1999 and 1998 were offset by net losses
incurred on the divestiture of other various assets. The Applebee's divestiture
was substantially completed in 1998 with the sale of 233 of 279 Applebee's
locations. Sale of the remaining 46 locations was completed in 1999. Gross
proceeds related to the divestiture were $514.0 million including $9.5 million
in notes outstanding at January 2, 2000, against which an allowance of $2.5
million has been established.
Income from investments carried at equity reflects the Company's pro-rata
share of earnings from its 20-percent equity interest in Belgo offset by losses
associated primarily with the start-up phase of two restaurants opened in 1999
under the Company's joint venture agreements with Belgo and PizzaExpress. The
Company also holds a 25-percent equity interest in 11 Harrigans Grill & Bar
restaurants, owned by Pinnacle Restaurant Group, which are currently under
contract to be sold to a third party. The Company does not expect to realize a
significant gain or loss upon completion of this transaction.
Other expenses relate primarily to amortization of goodwill. Other
expenses decreased in 1999 as a result of an increase in miscellaneous income
related predominately to rental income received on various owned properties.
Total 1998 other expenses were comparable to 1997 as a result of increases in
amortization expense resulting from a full year of goodwill amortization from
the brands acquired in 1997 which was offset by goodwill amortization related to
the Applebee's division which was suspended in December 1997 when the related
assets were classified as assets held for sale.
Income Tax Expense
Income tax expense as a percent of earnings before income taxes was 30.9%
in 1999 compared to 36.7% in 1998 and 32.4% in 1997. The higher effective tax
rate in 1998 as compared to 1999 and 1997 is due primarily to taxable income
generated by the gain on sale of assets in 1998 and a corresponding decrease in
the impact of FICA tip credits.
Net Earnings
Net earnings as a percent of sales was 0.8% in 1999, 7.7% in 1998 and 3.5%
in 1997. The decrease from 1998 to 1999 and increase from 1997 to 1998 was
primarily a result of the $72.5 million pre-tax gain on disposal of assets held
for sale recorded in 1998. In addition, the 1999 completion of the Applebee's
divestiture resulted in a decrease in operating income as compared to 1998.
Liquidity and Capital Resources
The Company's historical growth and its preference to own the real estate
on which its restaurants are situated typically cause it to be a net user of
cash, even after a significant amount of expansion financing is internally
generated from operations. Based on the current and projected borrowing
environment, the Company has committed to strategies to reduce its leverage over
time. The extent of projected new restaurant development has been 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.
Principal financing sources in 1999 consisted of net proceeds of $95.5
million from the issuance of $100.0 million, 11.75% Senior Subordinated Notes
due June 15, 2009, proceeds of $87.2 million from completion of the Applebee's
divestiture and sale of other assets and cash generated from operations of $13.6
million. The principal uses of funds during 1999 consisted of capital
expenditures of $84.4 million, treasury stock acquired primarily through the
settlement of equity forward agreements of $74.8 million (net of collateral
payments on equity forward contracts) and net repayment of revolving credit
facilities of $27.9.
16
<PAGE>
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 as a
result of new restaurant openings and the timing of settlement of the Company's
liabilities. Further increases in prepaid expenses and other from 1998 to 1999
relate primarily to the reclassification of $8.0 million in notes receivable
from noncurrent to current and new officer loans of $3.0 million. Additional
decreases in other noncurrent assets occurred during 1999 primarily as a result
of the sale of various other assets including certain Applebee's properties
which were initially leased to several buyers.
In 1999, the Company completed the private placement of $100 million of
11.75% senior subordinated notes due June 15, 2009. The notes were priced at
98.561 to yield 12%. Subsequent to their issuance, the notes were exchanged for
identical notes registered under the Securities Act of 1933. Simultaneously with
the notes offering, a new, three-year $125 million bank revolving credit
facility was executed. The proceeds of the notes offering, the new bank facility
and the final Applebee's divestiture transactions were used to refinance
existing credit facilities, settle equity forward contracts and provide for
future working capital and other corporate purposes. At January 2, 2000,
revolving credit agreements aggregated $127.0 million of which $14.5 million was
unused and available. Terms of the Company's notes and revolving credit
agreements include various provisions which, among other things, require the
Company to (i) maintain defined net worth and coverage ratios, (ii) limit the
incurrence of certain liens or encumbrances in excess of defined amounts, (iii)
maintain defined leverage ratios and (iv) limit certain payments. In addition,
the revolving credit agreement and notes contain cross-default provisions which
allow maturity of the notes to be accelerated if the revolving credit agreement
maturity is accelerated.As amended on April 3, 2000, the Company was in
compliance with the various provisions.
The Board of Directors, from time to time and depending on market
conditions, authorizes the Company to purchase shares of its common stock
through open market transactions. In connection with these programs, during 1998
the Company paid $4.2 million to the holders of the 9.75% Senior Notes to allow
for additional share repurchases. During 1998, a total of 7.3 million shares
were repurchased. Also in 1998, third parties purchased a total of 8.3 million
shares of the Company's common stock pursuant to four equity forward contracts,
one of which was settled in 1998 with the remaining three settled in 1999.
Capital expenditures during 1999 provided for the opening of 18 Hops, 15
Don Pablo's and four McCormick & Schmick's in addition to ongoing refurbishments
of existing restaurants. The following table presents anticipated restaurant
openings for the core brands for 2000 and 2001:
2000 2001
----------------------------------------------------------------
Don Pablo's 5 5
Hops 11 11
McCormick & Schmick's 4 4
Canyon Cafe 2 2
----------------------------------------------------------------
Total 22 22
----------------------------------------------------------------
Capital requirements for the construction of new core restaurants is
expected to approximate $90 million in 2000 through 2001, a substantial portion
of which is expected to be generated internally. The remaining funds are
expected to be available under revolving credit facilities expected to be in
place as the Company completes its evaluation of alternatives to reduce its
leverage.
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 to offset increases in its operating costs.
17
<PAGE>
Various federal and state laws increasing minimum wage rates have been
enacted over the past several years. Such legislation, however, has typically
frozen the wages of tipped employees at $2.13 per hour if the difference is
earned in tip income. Although the Company has experienced slight increases in
hourly labor costs in recent years, the effect of increases in minimum wage have
been significantly diluted due to the fact that the majority of the Company's
hourly employees are tipped and the Company's non-tipped employees have
historically earned wages greater than federal and state minimums. As such, the
Company's increases in hourly labor costs have not been proportionate to
increases in minimum wage rates.
Forward-Looking Information
Certain information contained in this annual report, particularly
information regarding the 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. In addition, 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
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 were completed in
1999. 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 was also completed during 1999 and the Company has
developed contingency plans to address all aspects of operation level
functionality and vendor management in the event unforseen circumstances arise.
Currently, the Company has not experienced and does not anticipate any adverse
effects related to Year 2000.
New Accounting Pronouncements
AICPA Statement of Position 98-5, "Reporting the Cost of Start-Up
Activities" was adopted at the beginning of 1998. This statement requires
entities to expense the costs of start-up activities as incurred. As a result of
the adoption of this change in accounting policy, from expensing preopening
costs in the first full month of a restaurant's operations to expensing them as
incurred, a cumulative effect charge from the change in accounting principle of
$2.2 million ($1.5 million net of tax benefit) was recorded in the first quarter
of 1998.
Also at the beginning of fiscal 1998, AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" was adopted. This statement requires that certain costs related to
the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software. The adoption of this
statement did not have a material effect on the Company's consolidated financial
position or results of operations in 1998 or 1999.
Also at the beginning of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", which established standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income primarily consists of net income and net unrealized gains
(losses) on foreign currency and is presented in the consolidated statements of
stockholders' equity and comprehensive income. The Statement requires only
additional disclosures in the consolidated financial statements, it does not
affect the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
18
<PAGE>
In 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
operation.
Item 7A. 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 January 2,
2000, interest expense for fiscal 2000, after considering the effects of
interest rate swap agreements, would increase by approximately $2.1 million. If
an additional 100 basis point interest rate increase occurred in the Company's
foreign LIBOR-based obligations, interest expense in fiscal 2000 would increase
by an additional $1.2 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.
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Earnings
(In thousands, except per share data)
<CAPTION>
Fiscal Year Ended 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restaurant sales:
Canyon Cafe $ 43,319 48,187 18,577
Don Pablo's 309,863 270,399 196,457
Hops 144,488 106,329 49,511
McCormick & Schmick's 125,613 102,489 67,373
Applebee's 21,176 335,288 454,127
Other - - 22,275
- ----------------------------------------------------------------------------------------------------------------------------
Total restaurant sales 644,459 862,692 808,320
- ----------------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 182,896 241,689 225,302
Payroll and benefits 200,820 279,274 249,356
Depreciation and amortization 20,519 17,014 31,441
Other operating expenses 157,566 202,994 187,781
- ----------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 561,801 740,971 693,880
- ----------------------------------------------------------------------------------------------------------------------------
General and administrative expenses 38,011 46,150 39,617
Asset revaluation and other special charges 2,186 2,940 -
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 42,461 72,631 74,823
- ----------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense, net (24,073) (25,313) (20,504)
Distributions on preferred securities (8,050) (8,205) (6,412)
Gain on disposal of assets 1,972 72,547 -
Income (loss) from investments carried at equity (311) 1,025 -
Other, primarily goodwill amortization (4,079) (5,641) (5,834)
- ----------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (34,541) 34,413 (32,750)
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and cumulative
effect of change in accounting principle 7,920 107,044 42,073
Income taxes 2,450 39,300 13,625
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of
change in accounting principle 5,470 67,744 28,448
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle, net of tax benefit - 1,461 -
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,470 66,283 28,448
============================================================================================================================
Basic earnings per common share:
Basic earnings before cumulative effect of
change in accounting principle $ 0.20 1.85 0.74
Cumulative effect of change in accounting principle - (0.04) -
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.20 1.81 0.74
============================================================================================================================
Diluted earnings per common share:
Diluted earnings before cumulative effect of
change in accounting principle $ 0.20 1.65 0.73
Cumulative effect of change in accounting principle - (0.03) -
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.20 1.62 0.73
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
<CAPTION>
Fiscal Year End 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,267 7,216
Accounts receivable 7,257 9,124
Inventories 9,097 8,599
Prepaid expenses and other 17,399 3,232
Assets held for sale 1,205 72,814
- -----------------------------------------------------------------------------------------------------------
Total current assets 46,225 100,985
Premises and equipment, net 424,968 367,587
Goodwill, net 135,176 138,005
Investments in and advances to unconsolidated affiliates 17,411 16,106
Other assets 32,816 47,914
- -----------------------------------------------------------------------------------------------------------
$ 656,596 670,597
===========================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 21,620 28,474
Accrued liabilities 34,727 42,053
Current installments of long-term debt 11 140,500
Income taxes 28,159 28,091
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 84,517 239,118
Long-term debt 328,076 116,978
Deferred income taxes 8,943 8,200
Other long-term liabilities 7,436 8,177
- -----------------------------------------------------------------------------------------------------------
Total liabilities 428,972 372,473
- -----------------------------------------------------------------------------------------------------------
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 - 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 1999 and 1998 405 405
Additional paid-in capital 144,872 63,431
Retained earnings 166,305 162,411
Accumulated other comprehensive income (278) 24
Treasury stock at cost; 15,157,713 shares in 1999 and 8,910,174
shares in 1998 (198,680) (114,242)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 112,624 112,029
- -----------------------------------------------------------------------------------------------------------
$ 656,596 670,597
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Shareholders'
(In thousands, except per share data) Shares Amount Capital Earnings Income Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 39,125 $391 $132,976 $70,981 - ($12,919) $191,429
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings - - - 28,448 - - 28,448
Purchase of common stock - - - - - (22,995) (22,995)
Issuance of common stock for acquisitions 1,298 13 16,323 - - - 16,336
Issuance of treasury stock for acquisitions - - (922) - - 6,078 5,156
Common stock issued to benefit plans 46 1 688 - - - 689
Exercise of options 10 - (4,814) - - 7,039 2,225
Tax effect of exercise of options by employees - - 1,018 - - - 1,018
Cash dividends ($0.038 per share) - - - (1,524) - - (1,524)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 40,479 405 145,269 97,905 - (22,797) 220,782
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings - - - 66,283 - - 66,283
Foreign currency translation adjustment - - - - $24 - 24
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - 66,283 24 - 66,307
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase of common stock - - - - - (92,028) (92,028)
Common stock issued to benefit plans - - 36 - - 370 406
Exercise of options - - (65) - - 213 148
Settlement of equity forward contracts - - (81,809) - - - (81,809)
Cash dividends ($0.0475 per share) - - - (1,777) - - (1,777)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1999 40,479 405 63,431 162,411 24 (114,242) 112,029
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings - - - 5,470 - - 5,470
Foreign currency translation adjustment - - - - (302) - (302)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - 5,470 (302) - 5,168
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase of common stock - - - - - (85,538) (85,538)
Common stock issued to benefit plans - - (368) - - 1,100 732
Settlement of equity forward contracts - - 81,809 - - - 81,809
Cash dividends ($0.0575 per share) - - - (1,576) - - (1,576)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 2000 40,479 $405 $144,872 $166,305 ($278) ($198,680) $112,624
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Fiscal Year Ended 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,470 66,283 28,448
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 26,176 23,221 39,972
Deferred income taxes 743 (6,031) 3,905
Gain on disposal of assets (1,972) (72,547) 54
Loss (income) from investments carried at equity 311 (1,025) -
(Increase) decrease in assets:
Accounts receivable 1,863 (141) (2,441)
Inventories (1,472) (2,260) (2,592)
Prepaid expenses and other 45 4,197 (1,965)
Increase (decrease) in liabilities:
Accounts payable (7,511) 3,655 703
Accrued liabilities (9,534) (4,725) (1,447)
Income taxes 68 28,091 (2,050)
Other long-term liabilities (565) 2,309 164
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,622 41,027 62,751
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (84,394) (142,841) (172,963)
Proceeds from disposal of assets, net 87,152 373,814 5,798
Investments in and advances to unconsolidated affiliates (2,475) (15,057) -
Additions to noncurrent assets (969) (24,633) (5,676)
Acquisition of businesses, net of cash acquired - - (146,444)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (686) 191,283 (319,285)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) revolving credit agreements, net (27,920) (114,726) 165,500
Proceeds from issuance of long-term debt, net 95,467 - 823
Principal payments on long-term debt (32) (8,500) (865)
Proceeds from issuance of preferred securities, net of issue costs - - 111,261
Proceeds from issuance of common stock - 148 2,914
Dividends declared and paid (1,576) (1,777) (1,524)
Purchase of treasury stock (85,538) (92,028) (22,995)
Collateral receipts (payments) on equity forward contracts 10,714 (10,714) -
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (8,885) (227,597) 255,114
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,051 4,713 (1,420)
Cash and cash equivalents at the beginning of the period 7,216 2,503 3,923
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 11,267 7,216 2,503
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Avado Brands, Inc., including its wholly owned subsidiaries (the "Company"), is
a multi-concept restaurant company owning and operating restaurants in 30 states
plus the District of Columbia. At January 2, 2000, the Company operated 137 Don
Pablo's Mexican Kitchen restaurants ("Don Pablo's"), 64 Hops Restaurant Bar &
Brewery restaurants ("Hops"), 26 McCormick & Schmick's seafood dinner houses
("McCormick & Schmick's") and 16 Canyon Cafe restaurants ("Canyon Cafe"). All of
these brands are owned on a proprietary basis. The Company also owns a
20-percent equity interest in Belgo Group PLC ("Belgo"), a 16-unit United
Kingdom-based restaurant company, a 25-percent equity interest in 11 Harrigans
Grill and Bar Restaurants, and a 50-percent interest in two new restaurants
operated under separate joint venture agreements with Belgo and London-based
PizzaExpress PLC ("PizzaExpress").
Basis of Presentation - The consolidated financial statements include the
accounts of Avado Brands, Inc. and its wholly owned subsidiaries. Investments in
20% to 50% owned affiliates and partnerships are accounted for on the equity
method. All significant intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates - Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions related to the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities. Actual results may ultimately
differ from estimates.
Fiscal Year - The Company's fiscal year is a 52 or 53-week year ending on the
Sunday closest to December 31. Accordingly, the accompanying consolidated
financial statements are as of and for the 52 weeks ended January 2, 2000
("1999"), the 53 weeks ended January 3, 1999 ("1998") and the 52 weeks ended
December 28, 1997 ("1997"). All general references to years relate to fiscal
years unless otherwise noted.
Cash Equivalents - Cash equivalents include all highly liquid investments, which
have original maturities of three months or less.
Inventories - Inventories consist primarily of food, beverages and supplies and
are stated at the lower of cost (using the first-in, first-out method) or
market.
Assets Held for Sale - Assets held for sale are stated at the lower of cost or
estimated net realizable value and include various properties held for sale at
January 2, 2000. At January 3, 1999, assets held for sale was primarily
comprised of premises and equipment, franchise costs and goodwill related to the
Company's Applebee's division (Note 2). In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company does
not recognize depreciation or amortization expense during the period in which
assets are being held for sale.
Premises and Equipment - Premises and equipment are stated at cost. Depreciation
of premises and equipment is calculated using the straight-line method over the
estimated useful lives of the related assets, which approximates 30 years for
buildings and seven years for equipment. Leasehold improvements are depreciated
using the straight-line method over the shorter of the lease term, including
renewal periods, or the estimated useful life of the asset.
Franchise Costs - Franchise agreements for the divested Applebee's restaurants
required royalty fees equal to 4% of sales and advertising fees equal to 1 1/2%
of sales. Such fees were expensed as incurred. Total royalty and advertising
fees paid under franchise agreements were $1.2 million in 1999, $18.4 million in
1998 and $25.0 million in 1997.
Goodwill - Goodwill represents the excess of purchase price over fair value of
net assets acquired and is amortized over the expected period to be benefitted,
typically 40 years, using the straight-line method. Recoverability of this
intangible asset is determined by assessing whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operations. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
Accumulated amortization of goodwill amounted to $9.4 million at January 2, 2000
and $ 5.9 million at January 3, 1999. Amortization expense was $3.5 million in
1999, $3.4 million in 1998 and $4.8 million in 1997.
24
<PAGE>
Development Costs - Certain direct and indirect costs are capitalized in
conjunction with acquiring land and leaseholds and developing new restaurant
sites and amortized over the life of the related building. Development costs
were capitalized as follows: $4.1 million in 1999, $5.0 million in 1998 and $4.7
million in 1997.
Preopening Costs - Preopening costs consist primarily of wages and salaries,
hourly employee recruiting, license fees, meals, lodging and travel plus the
cost of hiring and training the management teams. AICPA Statement of Position
98-5, "Reporting the Cost of Start-Up Activities", which requires the costs of
start-up activities to be expensed as incurred, was adopted at the beginning of
1998. As a result of the adoption of this change in accounting policy, from
expensing preopening costs in the first full month of a restaurant's operations
to expensing them as incurred, a cumulative effect charge from the change in
accounting principle of $2.2 million ($1.5 million net of tax benefit) was
recorded in the first quarter of 1998.
Advertising - Advertising is expensed in the period covered by the related
promotions. Total advertising expense included in other operating expenses was
$28.7 million in 1999, $32.6 million in 1998 and $29.0 million in 1997, in
addition to amounts paid to the franchisor of Applebee's.
Foreign Currency Translation - Investments in foreign affiliates are translated
into U.S. Dollars at the period-end exchange rate, while net earnings are
translated at the average exchange rate during the period. The resulting
translation adjustments are recorded as a separate component of shareholders'
equity and comprehensive income.
Stock-Based Compensation - Stock-based compensation is determined using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock (Note 14).
Interest Rate Contracts - Interest rate contracts are used principally for the
management of interest rate exposures. Differentials to be received or paid
under contracts designated as hedges are recognized in income over the life of
the contracts as adjustments to interest expense.
Occasionally, interest rate swap contracts are used for trading purposes. These
contracts are carried at fair value. Fair value for interest rate swap contracts
is based on pricing models intended to approximate the amounts that would be
received from or paid to a third party in settlement of the contracts. Factors
taken into consideration include credit spreads, market liquidity,
concentrations, and funding and administrative costs incurred over the life of
the instruments. At January 2, 2000, no interest rate swap contracts were
classified as trading instruments.
Counterparties to interest rate contracts are major financial institutions with
which the Company also has other financial relationships. Exposure to credit
loss exists in the event of nonperformance by these counterparties. However, the
Company does not anticipate nonperformance by the other parties and no material
loss would be expected from their nonperformance.
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Reclassifications - Certain accounts have been reclassified in the 1998 and 1997
financial statements to conform with the 1999 classifications.
25
<PAGE>
Note 2 - Applebee's Divestiture
In December 1997, the Company announced the decision to sell its franchised
Applebee's restaurants in order to focus on the development of proprietary
restaurant concepts and other investment opportunities. During 1998, the
divestiture was substantially completed with the sale of 233 of 279 Applebee's
locations. Sale of the remaining 46 locations was completed in 1999. Gross
proceeds related to the divestiture were $514.0 million including $9.5 million
in notes outstanding at January 2, 2000. The current portion of the notes, $2.3
million, is included in "Prepaid expenses and other" in the accompanying
consolidated balance sheet; the remaining notes, net of a $2.5 million
allowance, are included in "Other assets".
"Gain on disposal of assets" in the accompanying consolidated statements of
earnings primarily reflects the gains recognized on the Applebee's divestiture
of $7.8 million in 1999 and $81.3 million in 1998. Gains on the completion of
the Applebee's divestiture in both 1999 and 1998 were offset by net losses
incurred on the divestiture of other various assets.
Note 3 - Other Special Charges
In 1999, the Company recorded a $2.2 million special charge reflecting fees
paid in conjunction with the evaluation of strategic alternatives and other
amounts associated with activities to reduce overhead costs, including payroll
and employee severance. In the fourth quarter of 1998, programs were initiated
at Don Pablo's, Canyon Cafe and the Company's corporate headquarters to
reorganize management and reduce overhead costs. A charge of $2.9 million was
recorded, the components of which related primarily to employee termination and
severance costs.
Note 4 - Equity Investments and Acquisitions
During 1998, the Company acquired a 20-percent interest in Belgo Group PLC, a
public restaurant company based in the United Kingdom that owned and operated
two Belgo restaurants in London. The Company has invested $15.2 million,
including $0.4 million invested in 1999, to acquire and maintain is 20-percent
interest. Since the Company's initial investment, Belgo has grown to 16
restaurants, including six which were acquired in two separate transactions. The
investment in Belgo is accounted for under the equity method of accounting. The
investment is translated into U.S. dollars at the period-end exchange rate,
while net earnings are translated at the average exchange rate during the
period. The resulting translation adjustments are recorded as a separate
component of shareholders' equity and comprehensive income.
In 1998, the Company sold its Harrigans brand to Pinnacle Restaurant Group,
receiving $3.0 million in cash plus a $4.0 million note and retaining a
25-percent equity interest in the ongoing business. The transaction resulted in
a $0.6 million gain. Harrigans is currently under contract to be sold to a third
party. The Company does not expect to realize a significant gain or loss upon
completion of this transaction.
In 1997, the Company acquired Canyon Cafes, Inc., Hops Restaurant Bar & Brewery
and McCormick & Schmick Holding Corp. Each of the acquisitions was accounted for
using the purchase method. Accordingly, a portion of the purchase consideration
was allocated to the net assets acquired based on their estimated fair values.
The aggregate fair value of identifiable assets acquired and liabilities assumed
was $68.0 million and $37.5 million, respectively. The remaining excess of
purchase prices over net assets acquired, $142.5 million, was recorded as
goodwill and is being amortized on a straight-line basis over 40 years.
26
<PAGE>
Note 5 - Premises and Equipment
A summary of premises and equipment at January 2, 2000 and January 3, 1999
follows (amounts in thousands):
1999 1998
------------------------------------------------------------------------------
Land $ 71,930 69,154
Buildings 250,108 198,554
Equipment 109,314 79,371
Leasehold improvements 45,764 51,217
Construction in progress 19,395 23,628
------------------------------------------------------------------------------
Total premises and equipment 496,511 421,924
Less accumulated depreciation
and amortization 71,543 54,337
------------------------------------------------------------------------------
Premises and equipment, net $ 424,968 367,587
------------------------------------------------------------------------------
Note 6 - Long-Term Debt
Long-term debt at January 2, 2000 and January 3, 1999 consisted of the following
(amounts in thousands):
1999 1998
----------------------------------------------------------------------------
Revolving credit agreements, unsecured,
with variable rate interest
(9.84% at January 2, 2000) $112,500 140,500
Senior notes, unsecured 116,500 116,500
Senior subordinated notes, unsecured 98,633 -
Other 454 478
----------------------------------------------------------------------------
Total long-term debt 328,087 257,478
Less current installments 11 140,500
----------------------------------------------------------------------------
Long-term debt, excluding
current installments $328,076 116,978
----------------------------------------------------------------------------
In June 1999, the Company completed the private placement of $100.0 million
of 11.75% Senior Subordinated Notes due June 15, 2009. The notes were priced at
98.561 to yield 12.0%. Subsequent to issuance, the notes were exchanged for
identical notes registered under the Securities Act of 1933. Simultaneously with
the notes offering, a new, three year $125.0 million bank revolving credit
facility was executed. The proceeds of the notes offering, the new bank facility
and the final Applebee's divestiture transactions were used to refinance
existing credit facilities, settle equity forward contracts and provide for
future working capital purposes. At January 2, 2000, revolving credit agreements
aggregated $127.0 million of which $14.5 million was unused and available. Terms
of the Company's notes and revolving credit agreements include various
provisions which, among other things, require the Company to (i) maintain
defined net worth and coverage ratios, (ii) limit the incurrence of certain
liens or encumbrances in excess of defined amounts, (iii) maintain defined
leverage ratios and (iv) limit certain payments. In addition, the revolving
credit agreement and notes contain cross-default provisions which allow maturity
of the notes to be accelerated if the revolving credit agreement maturity is
accelerated. As amended on April 3, 2000, the Company was in compliance with the
various provisions.
In 1996, $125.0 million of 9.75% Senior Notes were issued under a $200.0 million
shelf registration. The notes are due June 2006 with interest payable
semi-annually. In 1998, the Company repurchased $8.5 million of these notes.
Based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of long-term debt
approximates the book value recorded.
The aggregate annual maturities of long-term debt for the years subsequent to
January 2, 2000 are as follows: 2002 - $112.5 million, 2006 - $116.5 million,
2009 - $98.6 million and $0.5 million thereafter.
27
<PAGE>
During 1999 and 1998, the Company was party to various interest rate swap
agreements with notional amounts ranging from $75.0 million to $115.0 million.
At January 2, 1999, three interest rate swap agreements were in place, two with
$100.0 million notional amounts and the third with a $115.0 million notional
amount. The Company's $100.0 million swap agreements are a hedge of U.S. LIBOR
obligations relating to revolving credit facilities. Under the terms of the
first agreement, the Company pays an average of certain foreign LIBOR-based
variable rates (6.0% at January 2,2000) and receives a U.S. LIBOR-based variable
rate (6.2% at January 2, 2000). Under the terms of the second agreement, the
Company pays a floating U.S. LIBOR-based variable rate (6.1% at January 2,2000)
and receives a fixed rate of 6.2%. The remaining swap agreement relates to the
7.0% fixed interest obligation on the Convertible Preferred Securities (Note 7).
Under the agreement, the Company pays an average of certain foreign LIBOR-based
variable rates (5.9% at January 2, 2000) and receives a 7.0% fixed rate. At
January 2, 2000, the Company estimates that it would have paid approximately
$9.3 million to terminate its swap agreements. Amounts received on interest rate
swap agreements accounted for as hedges totaled $1.7 million in 1999 and $0.1
million in 1998.
On April 3, 2000, the Company amended certain covenants related to its
revolving credit agreement and secured the amount that would have been necessary
to settle one of its interest rate swap agreements.
Note 7 - Convertible Preferred Securities
In 1997, Avado Financing I (formerly Apple South Financing I) (the "Trust")
issued 2,300,000, $3.50 term convertible securities, Series A (the "Convertible
Preferred Securities"), having a liquidation preference of $50 per security. The
Trust, a statutory business trust, is a wholly owned, consolidated subsidiary of
the Company with its sole asset being $115.0 million aggregate principal amount
of 7% convertible subordinated debentures due March 1, 2027 of Avado Brands,
Inc. (the "Convertible Debentures").
The Convertible Preferred Securities are convertible until 2027 at an initial
rate of 3.3801 shares of Avado Brands common stock for each security (equivalent
to a conversion price of $14.793 per share). A guarantee has been executed with
regard to the Convertible Preferred Securities. The guarantee, when taken
together with the obligations under the Convertible Debentures, the indenture
pursuant to which the Convertible Debentures were issued, and the declaration of
trust of Avado Financing I, provides a full and unconditional guarantee of
amounts due under the Convertible Preferred Securities.
Proceeds, after deducting underwriters' fees and other offering expenses of
approximately $3.7 million, of $111.3 million were used to repay revolving loan
advances used for the acquisition of McCormick & Schmick's and to finance the
acquisition of Hops Restaurant Bar & Brewery, including in each case, retirement
of acquired company debt.
Note 8 - Leases
Various leases are utilized for restaurant land, buildings, equipment and office
facilities. Land and building lease terms typically range from 10 to 20 years,
with renewal options ranging from five to 20 years. Equipment lease terms
generally range from four to eight years. In the normal course of business, some
leases are expected to be renewed or replaced by leases on other properties.
Future minimum lease payments do not include amounts payable for maintenance
costs, real estate taxes, insurance, etc., or contingent rentals payable based
on a percentage of sales in excess of stipulated amounts for restaurant
facilities.
The Company has a $30.0 million master equipment lease agreement. The agreement
provides for the rental of restaurant equipment for a five-year period, subject
to renewal at the Company's option. Pursuant to terms of the agreement, the
Company acted as purchasing agent for the lessor. Equipment was procured for new
restaurants, with payment coming from the lessor. This agreement has been
accounted for as an operating lease for financial reporting purposes. At January
2, 2000, the $30.0 million commitment had been fully utilized.
28
<PAGE>
Future minimum lease payments under noncancelable operating leases at January 2,
2000 are as follows (amounts in thousands):
2000 $ 27,387
2001 27,899
2002 28,013
2003 25,101
2004 20,959
Later years 113,028
------------------------------------------------------------
Total minimum payments $242,387
------------------------------------------------------------
Total rental expense related to cancelable and noncancelable operating leases
was $27.9 million in 1999, $ 27.5 million in 1998 and $24.3 million in 1997.
Rental expense included contingent rentals of $2.1 million in 1999, $2.3 million
in 1998 and $1.0 million in 1997.
Note 9 - Accrued Liabilities
A summary of accrued liabilities at January 2, 2000 and January 3, 1999 follows
(amounts in thousands):
1999 1998
-----------------------------------------------------------------
Payroll and related benefits $13,417 13,584
Insurance 5,210 6,615
Gift certificates 4,794 4,797
Property taxes 2,527 2,659
Acquisition and divestiture costs 1,529 5,778
Other 7,250 8,620
-----------------------------------------------------------------
$34,727 42,053
-----------------------------------------------------------------
29
<PAGE>
Note 10 - Earnings Per Share Information
The following table presents a reconciliation of weighted average shares and
earnings per share amounts (amounts in thousands, except per share data):
1999 1998 1997
------------------------------------------------------------------------------
Average number of common
shares used in basic calculation 27,576 36,612 38,620
Additional shares issuable
pursuant to employee stock option
plans at period-end market price - 9 206
Shares issuable on assumed conversion
of Convertible Preferred Securities - * 7,774 6,101
------------------------------------------------------------------------------
Average number of common
shares used in diluted calculation 27,576 44,395 44,927
------------------------------------------------------------------------------
Earnings before cumulative effect
of change in accounting principle $ 5,470 67,744 28,448
Cumulative effect of change in
accounting principle, net of tax - 1,461 -
------------------------------------------------------------------------------
Net earnings 5,470 66,283 28,448
Distribution savings on assumed
conversion of Convertible Preferred
Securities, net of income taxes - * 5,415 4,336
------------------------------------------------------------------------------
Net earnings for computation of
diluted earnings per common share $ 5,470 71,698 32,784
==============================================================================
Basic earnings before cumulative effect
of change in accounting principle $ 0.20 1.85 0.74
Cumulative effect of change in
accounting principle - (0.04) -
------------------------------------------------------------------------------
Basic earnings per common share $ 0.20 1.81 0.74
==============================================================================
Diluted earnings before cumulative effect
of change in accounting principle $ 0.20 1.65 0.73
Cumulative effect of change in
accounting principle - (0.03) -
------------------------------------------------------------------------------
Diluted earnings per common share $ 0.20 1.62 0.73
==============================================================================
*Diluted earnings (loss) per share ("EPS") for fiscal 1999 increases from
$0.20 to $0.31 when the 7.8 million shares related to the Convertible Preferred
Securities are included in the calculation. As those shares are antidilutive,
they are excluded from the computation of diluted EPS.
30
<PAGE>
Note 11 - Supplemental Cash Flow Information
The following supplements the consolidated statements of cash flows (amounts in
thousands):
1999 1998 1997
-------------------------------------------------------------------------------
Interest paid $23,322 25,739 20,452
-------------------------------------------------------------------------------
Distributions on preferred securities $ 8,050 8,050 5,944
-------------------------------------------------------------------------------
Income taxes paid $ 1,639 14,487 9,022
-------------------------------------------------------------------------------
Business acquisitions, net of cash acquired:
Fair value of assets acquired, other than cash - - 64,861
Liabilities assumed - - (37,504)
Merger consideration payable - - (1,890)
Stock issued - - (21,492)
Purchase price in excess of net assets acquired - - 142,469
-------------------------------------------------------------------------------
Net cash used for acquisitions $ - - 146,444
-------------------------------------------------------------------------------
As discussed in note 2, during 1999 and 1998 the Company sold 46 and 233
Applebee's restaurants, respectively. 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
$68.6 million and $281.3 million, decreases in assets not classified as held for
sale of $1.1 million and $5.5 million and increases in accrued liabilities of
$1.0 million and $2.9 million, respectively.
Note 12 - Income Taxes
The components of the provision for income taxes for the years ended January 2,
2000, January 3, 1999 and December 28, 1997 are as follows (amounts in
thousands):
Current Deferred Total
----------------------------------------------------------------
1999:
Federal $ 1,346 596 1,942
State 361 147 508
----------------------------------------------------------------
Total $ 1,707 743 2,450
----------------------------------------------------------------
1998:
Federal $ 36,035 (3,861) 32,174
State 9,296 (2,170) 7,126
----------------------------------------------------------------
Total $ 45,331 (6,031) 39,300
----------------------------------------------------------------
1997:
Federal $ 8,090 3,850 11,940
State 1,630 55 1,685
----------------------------------------------------------------
Total $ 9,720 3,905 13,625
----------------------------------------------------------------
31
<PAGE>
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate applied to earnings before income taxes in the accompanying
consolidated statements of earnings for the years ended January 2, 2000, January
3, 1999 and December 28, 1997 follows:
1999 1998 1997
----------------------------------------------------------------------------
Tax at federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) in taxes due to:
State income tax, net of
federal benefit 2.8 4.1 4.0
FICA tip and targeted
jobs tax credits (25.7) (3.4) (10.1)
Nondeductible goodwill 13.5 1.0 2.0
Other, net 5.3 - 1.5
----------------------------------------------------------------------------
Effective tax rate 30.9% 36.7% 32.4%
----------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at January 2, 2000 and
January 3, 1999 are presented below (amounts in thousands):
1999 1998
----------------------------------------------------------------------------
FICA tip credits not yet taken for
federal tax purposes $ 13,492 2,392
Asset impairment charges recorded
for financial statement purposes
but not yet taken for tax purposes 5,919 10,311
Other 6,412 7,092
----------------------------------------------------------------------------
Total deferred tax assets 25,823 19,795
----------------------------------------------------------------------------
Depreciation and amortization taken for
tax purposes in excess of amounts taken
for financial reporting purposes (30,474) (25,499)
Other (4,292) (2,496)
----------------------------------------------------------------------------
Deferred tax liability $ (8,943) (8,200)
----------------------------------------------------------------------------
A valuation allowance for deferred tax assets has not been recorded as of
January 2, 2000 or January 3, 1999. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon these factors, management believes it is more
likely than not the Company will realize the benefits of the deductible
differences.
Note 13 - Interest Expense
Following is a summary of interest cost incurred and interest cost capitalized
as a component of the cost of construction in progress (amounts in thousands):
1999 1998 1997
---------------------------------------------------------------------
Interest cost capitalized $ 1,374 1,426 2,509
Interest cost expensed 24,073 25,313 20,504
---------------------------------------------------------------------
Total $ 25,447 26,739 23,013
=====================================================================
32
<PAGE>
Note 14 - Stock Option Plans
The 1988 stock option plan (the "Stock Option Plan") and the 1993 and 1995 Stock
Incentive Plans (the "Stock Incentive Plans") provide for the granting of
nonqualified and incentive options for up to 1,974,375 shares, 450,000 shares
and 3,600,000 shares, respectively, of common stock of the Company to key
officers, directors and employees. Generally, options awarded under the Stock
Option Plan and Stock Incentive Plans are granted at prices which equal fair
market value on the date of the grant, are exercisable over three to 10 years,
and expire 10 years subsequent to grant.
The 1992 DF&R Stock Option Plan (the "DF&R Option Plan") provides for the
granting of 1,000,000 shares of common stock to key officers, directors and
employees. Options awarded under the DF&R Option Plan prior to the merger were
adjusted based on the exchange ratio of 1.5 shares of the Company's common stock
for each share of DF&R common stock. Options awarded under the DF&R Option Plan
are generally granted at prices which equate to fair market value on the date of
grant. With limited exceptions, all options are generally exercisable beginning
one year from the date of grant with annual vesting periods and terminate not
later than five years from the date of grant. Management does not anticipate
granting any additional options under the DF&R Option Plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock option plans. Accordingly, no compensation expense has been recognized for
its stock-based compensation plans. Had compensation cost for the Company's
stock option plans been determined based upon the fair value methodology
prescribed under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
diluted earnings per share would have been reduced by approximately $2.3
million, or $0.08 per share in 1999, $0.6 million, or $0.01 per share in 1998
and $2.3 million, or $0.05 per share in 1997. The effects of either recognizing
or disclosing compensation cost under SFAS 123 may not be representative of the
effects on reported net earnings for future years. The fair value of the options
granted during 1999 is estimated as $5.22 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield 1.4%, volatility of 70%, risk-free interest rate of 6.5%, and an expected
life of 6.5 years. Further information relating to total options is as follows:
Options
Average Exercisable
Shares Price at Year End
- --------------------------------------------------------------------------------
Outstanding at December 29, 1996 2,494,192 $17.66 470,135
Granted in 1997 1,412,694 14.46
Exercised in 1997 (334,296) 6.66
Canceled in 1997 (574,460) 19.15
- --------------------------------------------------------------------------------
Outstanding at December 28, 1997 2,998,130 17.04 273,339
Granted in 1998 183,425 13.15
Exercised in 1998 (15,885) 9.42
Canceled in 1998 (1,149,880) 17.10
- --------------------------------------------------------------------------------
Outstanding at January 3, 1999 2,015,790 16.60 191,075
Granted in 1999 1,486,105 9.16
Exercised in 1999 - -
Canceled in 1999 (418,721) 15.65
- --------------------------------------------------------------------------------
Outstanding at January 2, 2000 3,083,174 $13.15 194,371
================================================================================
33
<PAGE>
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
------------------------------------------ ----------------------
Average
Exercise Average Exercise Exercise
Price Range Shares Life Price Shares Price
- --------------------------------------------------------- ----------------------
$ 5.01 - $10.00 1,489,123 9.15 $ 9.16 375 $ 8.33
$10.01 - $15.00 762,358 6.91 13.43 41,165 12.74
$15.01 - $20.00 527,191 6.12 19.23 90,309 19.94
$20.01 - $25.00 285,102 6.03 21.12 60,582 21.23
$25.01 - $30.00 19,400 6.41 25.68 1,940 25.68
- --------------------------------------------------------- ----------------------
Total 3,083,174 7.77 $ 13.15 194,371 $18.85
========================================================= ======================
15 - Employee Benefit Plans
A noncontributory Employee Stock Ownership Plan (the "Plan") covers
substantially all full-time employees. In accordance with the terms of the Plan,
the Company may make contributions to the Plan in amounts as determined by the
Board of Directors. Participants become 20% vested in their accounts after three
years of service, escalating 20% each year thereafter until they are fully
vested. Contribution expense related to the Plan was $0 in 1999, $0.5 million in
1998, $0 in 1997.
The Avado Brands, Inc. Profit Sharing Plan and Trust, established in accordance
with Section 401(k) of the Internal Revenue Code, allows eligible participating
employees to defer receipt of a portion of their compensation and contribute
such amount to one or more investment funds. Employee contributions are matched
by the Company dollar for dollar for the first 2% of the employee's income
deferred. Matching funds vest at the rate of 20% each year, beginning after
three years of service. Company contributions were $0.5 million in 1999, $0.4
million in 1998, $0.5 million in 1997.
The Supplemental Deferred Compensation Plan ("Supplemental Plan"), effective
January 1, 1999, is a nonqualified plan which allows eligible employees to defer
receipt of a portion of their compensation and contribute such amounts to one or
more investment funds or to invest their contributions in shares of Company
stock. The maximum aggregate amount deferred under the Supplemental Plan and the
401(k) Plan may not exceed 15% of compensation. Company matching contributions
to the Supplemental Plan may not exceed 2% of compensation. The Company, in its
discretion, may make matching contributions to the Supplemental Plan in the form
of Company stock. No Company matching contributions were made in 1999.
Note 16 - Shareholders' Equity and Equity Forward Contracts
The Board of Directors, from time to time and depending on market conditions,
authorizes the Company to purchase shares of its common stock. In connection
with these programs, during 1999 the Company purchased $6.3 million shares of
its common stock for $85.5 million primarily through the settlement of equity
forward contracts. During 1998, the Company paid $4.2 million to the holders of
the 9.75% Senior Notes to allow for additional share repurchases and purchased
7.3 million of its common shares for $92.0 million through a combination of open
market transactions and equity forward contracts. At January 3, 1999, third
party acquisition costs for shares held under equity forward contracts, net of
collateral deposits made by the Company, are reflected in the accompanying
consolidated balance sheet as "Temporary equity, net". At January 2, 2000, no
equity forward contracts remained outstanding.
34
<PAGE>
Note 17 - Commitments and Contingencies
Under the Company's insurance programs, coverage is obtained for significant
exposures as well as those risks required to be insured by law or contract. It
is the Company's preference to retain a significant portion of certain expected
losses related primarily to workers' compensation, physical loss to property,
and comprehensive general liability. Provisions for losses expected under these
programs are recorded based on estimates of the aggregate liability for claims
incurred.
The Company is contingently liable for letters of credit aggregating
approximately $4.0 million and is co-guarantor of a $5.0 million revolving
credit facility relating to its joint ventures with Belgo. At January 2, 2000,
$4.6 million was outstanding under this facility. In connection with Applebee's
divestiture transactions completed during 1999 and 1998, the Company remains
contingently liable for lease obligations relating to 85 restaurants. Assuming
that each respective purchaser became insolvent, an event management believes to
be highly unlikely, the Company could be liable for lease payments extending
through 2035 with minimum lease payments totaling $46.9 million. Management
believes that the ultimate disposition of these contingent liabilities will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
Seven lawsuits were filed against the Company and certain of its directors and
officers in November and December 1999 and are currently pending in the Superior
Court of Morgan County, Georgia. The cases are related purported class action
lawsuits brought on behalf of certain shareholders. The plaintiffs' allegations
are based on a proposal by a three-person management group to acquire the
Company. All seven lawsuits (which Company counsel believes may be consolidated)
generally allege that the offer being made by the management group is unfair,
and that the price being proposed as payment for Company common shares is
inadequate. The plaintiff shareholders allege that it would be a breach of the
Board's fiduciary duties to the Company and the shareholders to approve the
proposal and consummate the transaction being proposed by the management group.
The shareholders are seeking injunctive relief, an unspecified amount of damages
allegedly arising from the acts of the Defendants, and costs and attorneys'
fees. The Company's Board of Directors has appointed a special committee of
disinterested directors to evaluate the merits of the offer and to consider
other strategic alternatives for the Company.
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
(Artel Foam Corporation Pension Trust, et al. v. Apple South, Inc., et al.,
Civil Action No. CV-97-6189) was dismissed. An amended complaint, styled John
Bryant, et al. vs. Apple South, Inc., et al. consolidating previous actions was
filed in January 1998. 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.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Note 18 - Related Party Transactions
At January 2, 2000 and January 3, 1999, the Company held three notes receivable
from Tom E. DuPree, Jr., the Chairman of the Board and Chief Executive Officer
of the Company, totaling $7,851,500. These notes are due in November and
December of 2000, or earlier upon demand of the Company, and bear interest at
7.0% per annum with interest payable at maturity. In addition, the Company held
notes receivable from Erich J. Booth, Chief Financial Officer and Treasurer,
totaling $107,000 and from Margaret E. Waldrep, Chief Administrative Officer,
totaling $41,500. These notes are due on June 30, 2000 and bear interest at
9.84% with interest payment due at maturity. The Company also holds an
additional note receivable from Mr. DuPree in the amount of $3,000,000 due on
June 30, 2000, bearing interest at 9.84% per annum and secured by real estate
owned by Mr. DuPree. At January 2, 2000, the $11.0 million in notes receivable
were included in "Prepaid expenses and other" in the accompanying consolidated
balance sheet. At January 3, 1999, the $8.0 million in notes receivable was
included in "Other assets".
35
<PAGE>
Note 19 - Quarterly Financial Data (unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------
1999:
Restaurant sales $ 164,075 164,721 157,251 158,412 644,459
Gross profit* $ 67,244 67,039 65,541 60,919 60,743
Net earnings (loss) $ 5,952 5,968 2,431 (8,881) 5,470
Basic earnings
(loss) per share $ 0.19 0.21 0.10 (0.35) 0.20
Diluted earnings
(loss) per share $ 0.19 0.20 0.10 (0.35)** 0.20**
1998:
Restaurant sales $ 241,676 239,843 204,442 176,731 862,692
Gross profit* $ 95,711 95,136 79,965 70,917 341,729
Net earnings (loss) $ 38,539 6,325 24,438 (1,558) 67,744
Basic earnings
(loss) per share*** $ 0.99 0.17 0.67 (0.05) 1.85
Diluted earnings
(loss) per share*** $ 0.85 0.17 0.58 (0.05) 1.65
* The Company defines gross profit as total restaurant sales
less the cost of food and beverage and payroll and benefits. These costs
represent the expenses associated directly with providing the Company's
products and services.
** Diluted earnings (loss) per share ("EPS") for the fourth
quarters of 1999 and 1998 and for the fiscal year ended 1999
increases from $(0.35) to $(0.23), $(0.05) to $0.00, and $0.20 to $0.31,
respectively, when the Convertible Preferred Securities are included in
the calculation. As those shares are antidilutive, they are excluded
from the computation of diluted EPS.
*** Amounts are presented before the cumulative effect of change
in accounting principle related to preopening expenses.
NOTE 20 - 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
January 2, 2000 and January 3, 1999, these partnerships in the non-guarantor
subsidiaries operated 51 and 36, respectively, of the Company's restaurants.
Accordingly, condensed consolidated balance sheets as of January 2, 2000 and
January 3, 1999, and condensed consolidated statements of earnings and cash
flows for the fiscal years ended January 2, 2000, January 3, 1999 and December
29, 1998 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.
36
<PAGE>
<TABLE>
Condensed Consolidated Statement of Earnings
Fiscal Year Ended 1999
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 535,691 108,768 - 644,459
Restaurant operating expenses 465,712 96,089 - 561,801
General and administrative expenses 32,649 5,362 38,011
Other special charges 2,186 - - 2,186
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 35,144 7,317 - 42,461
- ----------------------------------------------------------------------------------------------------------------------------
Other income (expense) (32,091) (2,450) - (34,541)
Earnings before income taxes 3,053 4,867 - 7,920
Income taxes 950 1,500 - 2,450
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 2,103 3,367 - 5,470
============================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Statement of Earnings
Fiscal Year Ended 1998
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 785,300 77,392 - 862,692
Restaurant operating expenses 673,968 67,003 - 740,971
General and administrative expenses 42,385 3,765 - 46,150
General and administrative expenses 2,940 - - 2,940
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 66,007 6,624 - 72,631
- ----------------------------------------------------------------------------------------------------------------------------
Other income (expense) 35,427 (1,014) - 34,413
Earnings before income taxes and cumulative effect
of change in accounting principle 101,434 5,610 - 107,044
Income taxes 37,400 1,900 - 39,300
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of change in
accounting principle 64,034 3,710 - 67,744
Cumulative effect of change in accounting principle,
net of tax benefit 1,461 - - 1,461
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 62,573 3,710 - 66,283
============================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Statement of Earnings
Fiscal Year Ended 1997
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 776,410 31,910 - 808,320
Restaurant operating expenses 665,347 28,533 - 693,880
General and administrative expenses 38,136 1,481 - 39,617
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 72,927 1,896 - 74,823
- ----------------------------------------------------------------------------------------------------------------------------
Other income (expense) (32,085) (665) - (32,750)
Earnings before income taxes 40,842 1,231 - 42,073
Income taxes 13,200 425 - 13,625
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 27,642 806 - 28,448
============================================================================================================================
</TABLE>
37
<PAGE>
<TABLE>
Condensed Consolidated Balance Sheet
Fiscal Year End 1999
(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 Balance Sheet
Fiscal Year End 1998
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 99,129 1,856 - 100,985
Premises and equipment, net 309,919 57,668 - 367,587
Goodwill, net 116,014 21,991 - 138,005
Investments carried at equity 16,106 - - 16,106
Other assets 47,588 326 - 47,914
Intercompany investments 44,699 - (44,699) -
Intercompany advances 33,103 - (33,103) -
- ----------------------------------------------------------------------------------------------------------------------------
$ 666,558 81,841 (77,802) 670,597
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 235,497 3,621 - 239,118
Long-term liabilities 132,937 418 - 133,355
Intercompany payables - 33,103 (33,103) -
Convertible preferred securities 115,000 - - 115,000
Temporary equity, net 71,095 - - 71,095
Shareholders' equity 112,029 44,699 (44,699) 112,029
- ----------------------------------------------------------------------------------------------------------------------------
$ 666,558 81,841 (77,802) 670,597
============================================================================================================================
</TABLE>
38
<PAGE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 1999
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 5,426 8,196 - 13,622
Cash flows from investing activities:
Capital expenditures (75,572) (8,822) - (84,394)
Proceeds from disposal of assets, net 87,152 - - 87,152
Other investing activities (2,788) (656) - (3,444)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 8,792 (9,478) - (686)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements (27,920) - - (27,920)
Proceeds from issuance of long-term debt 95,467 - - 95,467
Purchase of treasury stock (74,824) - - (74,824)
Proceeds from (payment of) intercompany advances (1,305) 1,305 - -
Other financing activities (1,608) - - (1,608)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (10,190) 1,305 - (8,885)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,028 23 - 4,051
Cash and cash equivalents at the beginning of the period 7,162 54 - 7,216
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 11,190 77 - 11,267
============================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 1998
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 32,266 8,761 - 41,027
Cash flows from investing activities:
Capital expenditures (113,166) (29,675) - (142,841)
Proceeds from disposal of assets, net 373,814 - - 373,814
Other investing activities (39,690) - - (39,690)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 220,958 (29,675) - 191,283
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements (114,726) - - (114,726)
Purchase of treasury stock (92,028) - - (92,028)
Proceeds from (payment of) intercompany advances (20,936) 20,936 - -
Other financing activities (20,843) - - (20,843)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (248,533) 20,936 - (227,597)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,691 22 - 4,713
Cash and cash equivalents at the beginning of the period 2,471 32 - 2,503
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 7,162 54 - 7,216
============================================================================================================================
</TABLE>
39
<PAGE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 1997
(In thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 61,360 1,391 - 62,751
Cash flows from investing activities:
Capital expenditures (159,890) (13,073) - (172,963)
Proceeds from disposal of assets, net 5,798 - - 5,798
Other investing activities (151,515) (605) - (152,120)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (305,607) (13,678) - (319,285)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements 165,500 - - 165,500
Purchase of treasury stock (22,995) - - (22,995)
Proceeds from (payment of) intercompany advances (12,299) 12,299 - -
Other financing activities 112,609 - - 112,609
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 242,815 12,299 - 255,114
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,432) 12 - (1,420)
Cash and cash equivalents at the beginning of the period 3,903 22 - 3,923
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 2,471 32 - 2,503
============================================================================================================================
</TABLE>
40
<PAGE>
Report of Management
The management of Avado Brands, Inc. has prepared the consolidated
financial statements and all other financial information appearing in this Form
10-K and is responsible for their integrity. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles and, accordingly, include certain amounts based on management's best
judgments and estimates.
Management maintains a system of internal accounting controls and
procedures designed to provide reasonable assurance, at an appropriate
cost/benefit relationship, regarding the reliability of the published
consolidated financial statements and the safeguarding of assets against
unauthorized acquisition, use or disposition.
The independent auditors, KPMG LLP, were recommended by the Audit Committee
of the Board of Directors, and that recommendation was ratified by the Company's
shareholders. The Audit Committee, which is composed solely of directors who are
not officers of the Company, meets periodically with the independent auditors
and management to ensure that they are fulfilling their obligations and to
discuss internal accounting controls, auditing and financial reporting matters.
The Audit Committee also reviews with the independent auditors the scope and
results of the audit effort. The independent auditors periodically meet alone
with the Audit Committee and have full and unrestricted access to the Audit
Committee at any time.
The recommendations of the independent auditors are reviewed by management.
Control procedures have been implemented or revised as appropriate to respond to
these recommendations. No material weaknesses in internal controls have been
brought to the attention of management.
The Company assessed its internal control system as of January 2, 2000, in
relation to criteria for effective internal control over financial reporting
described in "Internal Control Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on its assessment,
the Company believes that, as of January 2, 2000, its system of internal control
over financial reporting and over safeguarding of assets against unauthorized
acquisition, use or disposition, met those criteria.
Tom E. DuPree, Jr.
Chairman of the Board and Chief Executive Officer
Erich J. Booth
Chief Financial Officer and Corporate Treasurer
41
<PAGE>
Independent Auditors' Report
The Board of Directors
Avado Brands, Inc.
We have audited the accompanying consolidated balance sheets of Avado
Brands, Inc. and subsidiaries as of January 2, 2000 and January 3, 1999, and the
related consolidated statements of earnings, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended January 2, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Avado
Brands, Inc. and subsidiaries at January 2, 2000 and January 3, 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 2, 2000, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1998
the Company adopted the provisions of AICPA Statement of Position 98-5,
"Reporting the Cost of Start-Up Activities."
KPMG LLP
Atlanta, Georgia
January 28, 2000, except for the last paragraph of Note 6, which is as of April
3, 2000
42
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ---------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable
Part III
Item 10. Directors and Executive Officers of the Registrant
DIRECTORS
Tom E. DuPree, Jr. founded the Company and has been Chairman of the Board
of Directors and Chief Executive Officer of the Company since its formation in
1986. Mr. DuPree has been actively involved in developing and managing
restaurants since 1978. He is a graduate of the Georgia Institute of Technology
and holds a Master's degree in Accounting from Georgia State University. Mr.
DuPree is 47 years old.
Erich J. Booth became a director of the Company in June 1997. Mr. Booth has
served as the Chief Financial Officer and Treasurer of the Company since 1991.
In addition, in 1998 he became Acting Group President of the Company's Hops and
McCormick & Schmick's brands. Before joining the Company, Mr. Booth had been
Vice President of Finance of Dun & Bradstreet Software (formerly Management
Science America, Inc.) since 1989. From 1984 to 1989, he served as Vice
President and Chief Financial Officer of Ward White USA Holding, Inc., a
diversified, United Kingdom-based parent, specialty retailer. Mr. Booth, a
Certified Public Accountant, worked from 1973 to 1984 for Peat, Marwick,
Mitchell & Co. He is a graduate of the University of North Carolina at
Greensboro. Mr. Booth is 51 years old.
Dr. Ruth G. Shaw became a director of the Company in May 1996. She also
serves as Chairperson of the Compensation and Human Resources Committee. Dr.
Shaw is Executive Vice President and Chief Administrative Officer for Duke
Energy Corporation. She joined Duke Energy in 1992 as Vice President of
Corporate Communications, was named Senior Vice President in 1994 and Executive
Vice President in 1997. Prior to joining Duke Energy, she was President of
Charlotte's Central Piedmont Community College from 1986 to 1992. Dr. Shaw is a
director of First Union Corporation and of TEPPCO. Dr. Shaw is 52 years old.
John L. Moorhead became a director of the Company in January 1997. He also
serves as Chairperson of the Audit Committee. Mr. Moorhead is President of
Bestfoods Affiliates. He joined Bestfoods in 1992 as Vice President of Business
Management and Marketing. Prior to joining Bestfoods, he was with PepsiCo, Inc.
from 1979 to 1991 and last served as Vice President of Marketing Services for
the Pepsi-Cola Company, a division of PepsiCo, Inc. Prior to establishing
Pepsi-Cola's Marketing Services Group, Mr. Moorhead had served as Vice President
of Marketing for the Taco Bell Worldwide Division, Marketing Director at Frito
Lay and within the brand management system at General Mills. Mr. Moorhead is 57
years old.
DIRECTOR COMPENSATION
Directors, who are not officers of the Company, receive an annual retainer
of $20,000, plus $1,000 for each Board meeting attended, $1,000 for each
committee meeting attended, $500 for each special meeting in which he or she
participates by telephone and reimbursement of out-of-pocket expenses. Directors
also receive an annual retainer of $3,000 for serving as chairperson of a Board
committee.
43
<PAGE>
In 1999, the Committee recommended and the Board approved a temporary
amendment to the outside director compensation plan, the effect of which was to
eliminate the committee meeting fee and provide for a fee of $1,500 per
committee meeting attended for the committee chairperson. Under the basic
compensation plan as amended, described above, the Company's outside directors
received total meeting fees and retainers of approximately $38,000 each in 1999.
Directors may elect annually to defer receipt of their cash compensation,
or any portion thereof, and receive credits of deferred stock units, pursuant to
the Company's Outside Director Deferred Stock Unit Plan.
The Board established a Special Committee in 1999 consisting of the
Company's outside directors for the purpose of evaluating alternatives for the
future ownership, financing and operation of the Company including a proposal
involving the acquisition of the Company by certain members of management. The
Board approved a separate plan for compensating the outside directors for their
service on the Special Committee (the "Committee") as follows:
a monthly retainer of $10,000 for the first month following formation of
the Committee, $5,000 for each of the second and third months following the
formation of the Committee and $2,500 for each month thereafter;
a meeting fee of $1,000 for each meeting attended;
a retainer of $10,000 for Dr. Shaw as lead Director of the Special
Committee;
reimbursement of out of pocket expenses incurred in attending meetings.
The Company paid retainers and meeting fees to Dr. Shaw of $31,000 and Mr.
Moorhead of $21,000 for their service on the Special Committee in 1999.
The Special Committee retained the services of James W. Rowe, a former
member of the Board of Directors of the Company, as an advisor to the Committee.
Mr. Rowe receives $5,000 per month for each of the first three months of service
and $2,500 per month thereafter plus $1,000 per meeting attended and
reimbursement of expenses. In 1999, the Company paid Mr. Rowe $14,000 for his
service as advisor to the Committee.
In addition to cash compensation, each outside director received stock
option grants of 7,832 shares at the market price of the stock on the date of
grant and vested at the rate of 33% per year for three years.
Directors who are also officers of the Company do not receive any
additional compensation for serving as directors.
EXECUTIVE OFFICERS
In addition to the directors named above, the following persons also serve
as executive officers of the Company.
John G. McLeod, Jr. has served as Senior Vice President of Human Resources
since 1992, Vice President of Human Resources from 1987 to 1992, and a director
and Secretary of the Company since its formation in 1986. Mr. McLeod rotated off
the Board of Directors in December 1997, but continues to serve as Corporate
Secretary and Senior Vice President of Human Resources. From 1983 to 1987, Mr.
McLeod was the Personnel Director of a predecessor of the Company. He is a
graduate of Wofford College. Mr. McLeod is 56 years old.
Margaret E. Waldrep was elected to the position of Chief Administrative
Officer of the Company in May 1997. In addition, in 1998 she became Acting Group
President of the Company's Don Pablo's and Canyon Cafe brands. Ms. Waldrep
joined the Company in 1985. From 1978 to 1985, Ms. Waldrep was a long-range
planner with the Greenville Planning Commission in Greenville, S.C. She earned a
Bachelor's degree in Political Science in 1977 and a Master's degree in City and
Regional Planning in 1979 from Clemson University in Clemson, S.C. Ms. Waldrep
is 43 years old.
44
<PAGE>
Louis J. Profumo joined the Company in July 1997 as Senior Vice President
of Planning and Acquisitions and was appointed to the position of Senior Vice
President of Finance and Chief Accounting Officer in November 1998. Mr. Profumo
ended his employment with the Company in March 2000. From 1974 to 1997, Mr.
Profumo worked for KPMG Peat Marwick LLP serving as an Audit Partner since 1986
in the firm's manufacturing, retailing and distribution practice. He received
both a bachelor's of science degree in hotel administration in 1973 and a
master's of business administration in 1974 from Cornell University. Mr. Profumo
is 48 years old.
There are no family relationships among the Company's executive officers
and directors. Officers of the Company serve at the pleasure of the Board of
Directors. The term of office for each director of the Company ends at the next
annual meeting of the Company's shareholders or when his or her successor is
elected and has qualified.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, officers,
directors and beneficial owners of more than ten percent of the outstanding
Common Stock are required to file reports with the Securities and Exchange
Commission reporting their beneficial ownership of the Common Stock at the time
that they become subject to the reporting requirements and changes in beneficial
ownership occurring thereafter. Based on a review of reports submitted to the
Company and written representations from persons known to the Company to be
subject to these reporting requirements, the Company believes that all such
reports due in 1999 were filed on a timely basis with the exception that the
Company filed a Form 4 on behalf of each Messrs. DuPree, McLeod, Booth, Profumo,
and Ms. Waldrep, approximately one month late. Each of these forms related
solely to the granting of stock options pursuant to the Company's 1995 Stock
Incentive Plan and were filed late as a result of the timing of grant approval
by the Company's Compensation and Human Resources Committee.
45
<PAGE>
Item 11. Executive Compensation
- --------------------------------
The following table summarizes the compensation paid or accrued by the
Company for services rendered during the years indicated to the Chief Executive
Officer and the four most highly compensated executive officers, other than the
Chief Executive Officer. The Company did not grant any stock appreciation rights
or make any long-term incentive plan payouts during the years indicated. In
1999, the Company's Compensation and Human Resources Committee approved a
Management Severance Plan that provides severance benefits to any named
executive officer, in addition to certain other management employees, whose
employment is terminated within one year of and due to a change in control of
the Company. The amount of severance payment depends on the participant's
position in the Company and is calculated as a multiple of base salary. No
benefits were paid pursuant to this plan in 1999.
<TABLE>
Long-Term
Compensation
-----------------------
Annual Compensation Restricted Securities All Other
--------------------------- Stock Underlying Compensation
Name and Principle Position Year Salary ($)(1) Bonus ($)(2) Awards Options (#) ($) (3)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tom E. DuPree, Jr. 1999 525,000 255,398 - 805,594 397,744
Chairman and Chief Executive 1998 525,000 269,600 - - 265,762
Officer 1997 425,000 - - - 195,470
Erich J. Booth 1999 335,000 118,977 - 112,447 1,744
Chief Financial Officer and 1998 245,000 141,000 - - 5,226
Treasurer 1997 230,000 - - 10,125 4,600
Margaret E. Waldrep 1999 335,000 83,045 - 112,448 1,744
Chief Administrative Officer 1998 220,000 82,950 - - 5,226
1997 171,291 - - 6,835 3,426
Louis J. Profumo (4) 1999 240,000 64,261 - 33,566 1,744
Chief Accounting Officer 1998 259,965 45,740 - - 5,226
1997 111,635 - 72,500 65,000 -
John G. McLeod, Jr. 1999 126,000 67,045 - 17,622 1,744
Senior Vice President of Human 1998 120,000 82,950 - - 3,919
Resources and Secretary 1997 120,000 - - - 2,400
</TABLE>
(1) 1999 salary amounts for Mr. Booth and Ms. Waldrep reflect the
additional responsibilities of Acting Group President of the Hops and McCormick
& Schmicks's brands and Acting Group President of the Don Pablo's and Canyon
Cafe brands, respectively.
(2) Amounts shown in the Bonus column for 1999 consist primarily of
payments to the named executive officers pursuant to the Company's Special
Transition Bonus Plan which was instituted in connection with the divestiture of
the Applebee's brand which was completed in 1999.
(3) Except for Mr. DuPree, the amounts shown in this column consist of
contributions by the Company to its 401(k) savings plan on behalf of the named
executive officers, and the fair market value of shares of Common Stock
allocated to the executive officer's account pursuant to the Company's Employee
Stock Ownership Plan and Trust ("ESOP"). Mr. DuPree does not participate in
either the ESOP or the 401(k) plan. The amount shown in this column for Mr.
DuPree includes $397,744 reflecting the current dollar value of the benefit to
Mr. DuPree of the unreimbursed portion of the premiums paid by the Company with
respect to a split-dollar insurance agreement (See "Certain Relationships and
Related Transactions" below for a description of such agreement), which benefit
was determined by calculating the time value of money (using the Company's 1999
weighted average borrowing rate of 9.54%) of the unreimbursed portion of the
premiums paid by the Company for the period ended January 2, 2000.
(4) Mr. Profumo ended his employment with the Company in March 2000.
46
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted
during the fiscal year ended January 2, 2000, under the Company's 1995 Stock
Incentive Plan to the executives named in the Summary Compensation Table:
<TABLE>
Individual Grants
----------------------------
Percentage of
Number of Total Options
Securities Granted to Exercise or Grant Date
underlying Employees in Base Price Expiration Present
Name Options Granted 1999 ($/share) Date Value ($)(1)
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tom E. DuPree, Jr. 600,000 40.3% 9.29 05/04/09 3,498,000
205,594 13.8% 9.70 01/04/09 1,252,067
Erich J. Booth 112,447 7.6% 8.94 01/04/09 630,828
Margaret E. Waldrep 112,448 7.6% 8.94 01/04/09 630,833
Louis J. Profumo 33,566 2.3% 8.94 01/04/09 188,305
John G. McLeod, Jr. 17,622 1.2% 8.94 01/04/09 98,859
</TABLE>
(1) Grant date present value was determined using the
Black-Scholes option-pricing model with the following
assumptions: dividend yield 1.39%, volatility 70%, risk-free
interest rate 6.5% and an expected option life of 6.5 years.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the value of
unexercised options as of January 2, 2000 held by the executives named in the
Summary Compensation Table. No options were exercised during the fiscal year
ended January 2, 2000 by the executives named in the summary compensation table
and no stock appreciation rights were outstanding during fiscal 1999.
<TABLE>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Options at
Acquired January 2, 2000 (#) January 2, 2000 ($)
on Value ------------------------- ------------------------
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tom E. DuPree, Jr. - - 46,305 / 959,005 - / -
Erich J. Booth - - 18,143 / 179,304 - / -
Margaret E. Waldrep - - 15,266 / 167,182 - / -
Louis J. Profumo - - - / 98,566 - / -
John G. McLeod, Jr. - - - / 17,622 - / -
</TABLE>
47
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 28, 2000 by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each director and executive officer of the Company and (iii)
all executive officers and directors of the Company as a group.
Shares Beneficially
Owned(1)(2)
----------------------------
Name Number Percent
- -----------------------------------------------------------------------------
Tom E. DuPree, Jr. (3) 7,982,855 31.5%
John G. McLeod, Jr. (4) 258,448 *
Erich J. Booth (5) 68,254 *
Margaret E. Waldrep (6) 51,318 *
Louis J. Profumo (7) 7,357 *
Dr. Ruth G. Shaw (8) 4,000 *
John L. Moorhead (9) 1,249 *
State of Wisconsin Investment Board (10) 3,786,000 15.0
All directors and executive officers
as a group (7 persons) (11) 8,193,388 32.3%
Mr. DuPree and the State of Wisconsin Investment Board are the only
shareholders known by the Company to be the beneficial owners of more than 5% of
the Company's Common Stock. Mr. DuPree's address is Hancock at Washington,
Madison, Georgia 30650. The address of the State of Wisconsin Investment Board
is P.O. Box 7842, Madison, Wisconsin 53707.
- -------------------------------------------------
*Less than one percent.
(1) The named shareholders have sole voting and investing power with
respect to all shares shown as being beneficially owned by them except with
respect to the shares owned by the Company's Employee Stock Ownership Plan and
Trust ("ESOP"). Each participant in the ESOP has the right to direct voting of
all shares allocated to his account on all matters. Power to direct the
investment of shares held by the ESOP presently rests with the Company's
Employee Benefit Committee, whose members are Messrs. DuPree and McLeod;
however, each ESOP participant, age 55 and with 10 years of service, may elect
to direct the investment of 25% of shares allocated to his account.
(2) Except as indicated below, does not include shares issuable upon
exercise of stock options.
(3) Includes 645,812 shares held by various Foundations, Partnerships and
Trusts of which Mr. Dupree's wife is the sole trustee. Includes 232,500 shares
held by DuPree Holdings, LLC. Includes 46,305 shares which Mr. DuPree has the
right to acquire within 60 days upon the exercise of stock options at an average
exercise price of $20.39. Includes 171,631 shares held by the ESOP which are
allocated to other employees and for which Mr. DuPree has shared investment
power. See Footnote (1) above. Mr. DuPree is the Chairman of the Board of
Directors and Chief Executive Officer of the Company.
(4) Includes 11,477 shares held by the ESOP which are vested and allocated
to Mr. McLeod and 160,154 shares held by the ESOP which are allocated to other
employees and for which Mr. McLeod has shared investment power. See Footnote (1)
above. Also includes 1,962 shares held in the Avado Brands, Inc. Supplemental
Deferred Compensation Plan. Mr. McLeod is the Senior Vice President of Human
Resources and the Secretary of the Company.
48
<PAGE>
(5) Includes 1,166 shares held by the ESOP which are vested and allocated
to Mr. Booth. Includes 18,143 shares which Mr. Booth has the right to acquire
within 60 days upon the exercise of stock options at an average exercise price
of $19.64. Mr. Booth is Chief Financial Officer and Treasurer and a Director of
the Company.
(6) Includes 7,296 shares held by the ESOP which are vested and allocated
to Ms. Waldrep. Includes 15,266 shares which Ms. Waldrep has the right to
acquire within 60 days upon the exercise of stock options at an average exercise
price of $20.00. Ms. Waldrep is Chief Administrative Officer of the Company.
(7) Includes 3,000 shares held under a Restricted Stock Agreement. Also
includes 1,357 shares held in the Avado Brands, Inc. Supplemental Deferred
Compensation Plan. Does not include 264 shares held by the ESOP which are
allocated to Mr. Profumo but are unvested. Mr. Profumo is the former Senior Vice
President of Finance and Chief Accounting Officer of the Company.
(8) Includes 2,000 shares which Dr. Shaw has the right to acquire within 60
days upon the exercise of stock options at an average exercise price of $21.25.
Dr. Shaw is a director of the Company.
(9) Includes 1,174 deferred stock units credited to Mr. Moorhead's account
in the Company's Outside Director Deferred Stock Unit Plan, which are
convertible to shares of common stock upon termination of Board service. Mr.
Moorhead is a director of the Company.
(10) Based on a Form 13G/A dated January 26, 2000, filed by the State of
Wisconsin Investment Board.
(11) Includes 81,714 shares which the officers and directors have the right
to acquire within 60 days upon the exercise of stock options at an average
exercise price of $20.13 per share, 20,203 shares held by the ESOP which are
vested and allocated to executive officers, and 151,428 shares held by the ESOP
which are unvested or allocated to other employees. See Footnote (1) above.
49
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
In March 1995, the Company entered into a Split Dollar Insurance Agreement
(the "Agreement") with The DuPree Insurance Trust (the "Trust") whereby the
Company agreed to make premium payments on certain life insurance policies of
which the Trust is the owner and beneficiary. These policies provide a total of
$50 million in death proceeds payable upon death of the survivor of Tom E.
DuPree, Jr., and his wife. The devisees under the wills of Mr. DuPree and his
wife are the beneficiaries of the Trust.
The Trust has agreed to reimburse the Company on an annual basis for that
portion of the premiums which equals the current value of the economic benefit,
as defined by the Internal Revenue Service, attributable to the life insurance
protection provided.
The premiums due under the policies total $850,000 per year. Reimbursements
for the current value of the economic benefit attributable to the life insurance
provided in fiscal 1999 totaled $2,847. There were no reimbursements due to the
Company from the Trust at January 2, 2000.
The Company or the Trust can cancel the Agreement at any time. Upon
cancellation, the Trust is obligated to repay the Company an amount equal to the
lesser of either the cash surrender value of the policies or the total amount of
unreimbursed premiums paid by the Company. Upon receipt of the death proceeds
under the policies, the Trust is required to repay the Company for all
unreimbursed premium payments. The policies have been assigned to the Company to
secure the repayment obligations of the Trust.
At January 2, 2000 and January 3, 1999, the Company held three notes
receivable from Tom E. DuPree, Jr., the Chairman of the Board and Chief
Executive Officer of the Company, totaling $7,851,500. These notes are due in
November and December of 2000, or earlier upon demand of the Company, and bear
interest at 7.0% per annum with interest payable at maturity. In addition, the
Company held notes receivable from Erich J. Booth, Chief Financial Officer and
Treasurer, totaling $107,000 and from Margaret E. Waldrep, Chief Administrative
Officer, totaling $41,500. These notes are due on June 30, 2000 and bear
interest at 9.84% with interest payment due at maturity. The Company also holds
an additional note receivable from Mr. DuPree in the amount of $3,000,000 due on
June 30, 2000, bearing interest at 9.84% per annum and secured by real estate
owned by Mr. DuPree.
50
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. Financial Statements
Consolidated Statements of Earnings for the years ended January 2, 2000,
January 3, 1999 and December 28, 1997
Consolidated Balance Sheets as of January 2, 2000 and January 3, 1999
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended January 2, 2000, January 3, 1999, December 28, 1997
Consolidated Statements of Cash Flows for the years ended January 2, 2000,
January 3, 1999 and December 28, 1997
Notes to Consolidated Financial Statements
Report of Management
Independent Auditors' Report
2. Financial Statement Schedules
None
3. Exhibits
2.1 Agreement and Plan of Merger, dated August 15, 1995, by and among the
Company, SALSA Acquisition Corp., and DF&R Restaurants, Inc. (4)
2.2 Agreement and Plan of Merger among Apple South, Inc., M&S Acquisition
of Delaware Inc., and McCormick & Schmick Holding Corp., et. al., dated February
6, 1997. (6)
2.3 Agreements and Plan of Merger among Apple South, Inc., HG Acquisition
Corp., and Mason and Schelldorf Leasing Company, Hops Restaurants, Inc., et.
al., dated February 6, 1997. (6)
2.4 Agreement and Plan of Merger among Apple South, Inc., Coyote
Acquisition Corp., and Canyon Cafes, Inc., et. al., dated June 19, 1997. (7)
2.5 Asset Purchase Agreement dated December 23, 1997 by and among
Applebee's International, Inc. and Apple South, Inc. (8)
2.6 Asset Purchase Agreement dated March 16, 1998 by and among Quality
Restaurant Concepts, L.L.C., and Apple South, Inc. (10)
2.7 Asset purchase agreement dated April 23, 1998, by an among Apple South,
Inc. and Whit-Mart, Inc. (12)
51
<PAGE>
2.8 Asset purchase agreement dated May 1, 1998, by and among Apple South,
Inc. and T.S.S.O., Inc., and Lois Sedowicz. (12)
2.9 Asset purchase agreement dated May 4, 1998, by and among Apple South,
Inc. and Florida Apple North, LLC.,Florida Apple South, LLC., Florida Apple
West, LLC., and Wigel Partnership. (12)
2.10 Asset purchase agreement dated June 19, 1998, by and among Apple
South, Inc. and U.S. Restaurant Properties Operating LP. (12)
2.11 Asset purchase agreement dated June 19, 1998, by and among Apple
South, Inc. and Darrel L. Rolph. (12)
2.12 Asset purchase agreement dated July 31, 1998, by and among Apple
South, Inc. Delta Bluff , LLC. (13)
2.13 Asset purchase agreement dated August 20, 1998, by and among Apple
South, Inc. and WHG Real Estate South, LLC. and Wisconsin Hospitality Group,
LLC. (14)
2.14 Asset purchase agreement dated August 20, 1998, by and among Apple
South, Inc. and WHG Real Estate East, LLC. and Wisconsin Hospitality Group, LLC.
(14)
2.15 Asset purchase agreement dated April 6, 1998, by and among Apple
South, Inc. and Woodland Group, Inc. (14)
2.16 Asset purchase agreement dated May 15, 1998, by and among Apple South,
Inc. and Bloomin' Apple, LLC. (14)
2.17 Asset purchase agreement dated June 26, 1998, by and among Apple
South, Inc. and Apple J, L.P. (14)
2.18 Asset purchase agreement dated September 15, 1998, by and among Apple
South, Inc., and WHG Real Estate North, LLC and Wisconsin Hospitality Group,
LLC. (17)
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended October 13, 1998. (3)
3.2 By-laws of the Company. (1)
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Amended and
Restated Articles of Incorporation and by-laws defining the rights of holders of
the Company's Common Stock. (1) (3)
4.2 Trust Agreement of Apple South Financing I, dated as of February 18,
1997, among Apple South, Inc., First Union National Bank of Georgia, First Union
Bank of Delaware and Lansing S. Patterson. (9)
4.3 Amended and Restated Declaration of Trust of Apple South Financing I,
dated as of March 11, 1997, among Apple South, Inc., as Sponsor, First Union
National Bank of Georgia, as Institutional Trustee, First Union Bank of
Delaware, as Delaware Trustee, and the Regular Trustees named therein. (9)
4.4 Indenture for the 7% Convertible Subordinated Debentures, dated as of
March 6, 1997, between Apple South, Inc. and First Union National Bank of
Georgia, as Trustee. (9)
4.5 Form of $3.50 Term Convertible Security, Series A (included in Exhibit
4.3).
52
<PAGE>
4.6 Form of 7% Convertible Subordinated Debenture (included in Exhibit
4.4).
4.7 Preferred Securities Guarantee Agreement, dated as of March 11, 1997,
between Apple South, Inc., as Guarantor, and First Union National Bank of
Georgia, as Preferred Guarantee Trustee. (9)
4.8 Registration Rights Agreement, dated as of March 11, 1997 among Apple
South, Inc., Apple South Financing I, J.P. Morgan Securities, Inc., and Smith
Barney, Inc. (9)
4.9 Solicitation of Consents to Proposed Amendments to 9.75% Senior Notes
due 2006 of Apple South, Inc. (12)
4.10 Indenture, dated as of June 22, 1999, among the Company, certain
guaranteeing subsidiaries and SunTrust Bank, Atlanta, as Trustee (including the
form of Note). (15)
4.11 Registration Rights Agreement, dated as of June 22, 1999, among the
Company, certain guaranteeing subsidiaries and the initial purchasers of the
Notes. (15)
10.1 Apple South, Inc. 1988 Stock Option Plan. (1)
10.2 Form of Stock Option Agreement under the Apple South, Inc. 1988 Stock
Option Plan. (1) (5)
10.3 Form of Apple South, Inc. Director's Indemnification Agreement
executed by and between the Company and each member of its Board of Directors.
(1)
10.4 Form of Apple South, Inc. Officer's Indemnification Agreement executed
between the Company and each of its executive officers. (1)
10.5 Apple South, Inc. Employee Stock Ownership Plan and Trust. (1) (5)
10.6 Apple South, Inc. Profit Sharing Plan and Trust. (1) (5)
10.7 Amendment No. 2 to the Apple South, Inc. Employee Stock Ownership Plan
and Trust, dated November 22, 1993. (2)
10.8 Apple South, Inc. [Restated] Profit Sharing Plan and Trust dated
October 26, 1993. (2)
10.9 Amended form of Stock Option Agreement under the Apple South, Inc.
1988 Stock Option Plan. (2)
10.10 Apple South, Inc. 1993 Stock Incentive Plan. (2)
10.11 Form of Stock Option Agreement under the Apple South, Inc. 1993 Stock
Incentive Plan. (2)
10.12 Participation Agreement (Apple South Trust No. 97-1), dated September
24, 1997, among Apple South, Inc., as lessee, First Security Bank, National
Association, as lessor, SunTrust Bank, Atlanta, as administrative agent, and the
holders and lenders signatory thereto. (10)
10.13 First amendment, dated as of March 27, 1998, to Participation
Agreement (Apple South Trust No 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (11)
10.14 Second amendment, dated as of August 14, 1998, to Participation
Agreement (Apple South Trust No 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (17)
53
<PAGE>
10.15 Third amendment, dated as of November 13, 1998, to Participation
Agreement (Apple South Trust No 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (17)
10.16 Fourth amendment, dated as of February 22, 1999, to Participation
Agreement (Apple South Trust No 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (17)
10.17 $125 million Credit Agreement, dated as of June 22, 1999, among Avado
Brands, Inc. as borrower and Wachovia Bank, National Association and BankBoston,
N.A. (16)
10.18 First amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (16)
10.19 Second amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (16)
10.20 Third amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (16)
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule (EDGAR version only).
99.1 Safe harbor under the Private Securities Litigation Reform Act of
1995. (7)
(1) Incorporated by reference to the corresponding exhibit number filed
with the registrant's Registration Statement on Form S-1, File No. 33-42662.
(2) Incorporated by reference to the registrant's Annual Report on Form
10-K for its fiscal year ended December 31, 1993.
(3) Incorporated by reference to the registrant's Current Report on Form
8-K dated October 13, 1998.
(4) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended October 1, 1995.
(5) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(6) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended March 30, 1997.
(7) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended June 29, 1997.
(8) Incorporated by reference to the registrant's Report on Form 8-K dated
January 15, 1998.
54
<PAGE>
(9) Incorporated by reference to the registrants's registration statement
on Form S-3, File No. 333-25205.
(10) Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended December 28, 1997.
(11) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended March 29, 1998.
(12) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended June 28, 1998.
(13) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended September 27, 1998.
(14) Incorporated by reference to the registrant's Report on Form 8-K dated
September 14, 1998.
(15) Incorporated by reference to the Company's Registration Statement on
Form S-4, File No. 333-82345, filed on July 6, 1999.
(16) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended July 4, 1999
(17) Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended January 3, 1999.
(b) Reports on Form 8-K
None
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AVADO BRANDS, INC.
By:/s/ Tom E. DuPree, Jr.
---------------------------
Tom E. DuPree, Jr.
Chief Executive Officer and
Chairman of the Board
March 21, 2000
Atlanta, Georgia
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Tom E. Dupree, Jr. Chairman of the Board of March 21, 2000
- ----------------------- Directors and Chief Executive
Tom E. DuPree, Jr. Officer (principal executive officer)
/s/ Erich J. Booth Director and Chief Financial Officer March 21, 2000
- ----------------------- (principal financial officer)
Erich J. Booth
/s/ John G. McLeod, Jr. Senior Vice President - Human March 21, 2000
- ----------------------- Resources, and Secretary
John G. McLeod, Jr.
/s/ Margaret E. Waldrep Chief Administrative Officer March 21, 2000
- -----------------------
Margaret E. Waldrep
/s/ Dr. Ruth G. Shaw Director March 21, 2000
- -----------------------
Dr. Ruth G. Shaw
/s/ John L. Moorhead Director March 21, 2000
- -----------------------
John L. Moorhead
56
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated August 15, 1995, by and among the
Company, SALSA Acquisition Corp., and DF&R Restaurants, Inc. (4)
2.2 Agreement and Plan of Merger among Apple South, Inc., M&S Acquisition
of Delaware Inc., and McCormick & Schmick Holding Corp., et. al., dated February
6, 1997. (6)
2.3 Agreements and Plan of Merger among Apple South, Inc., HG Acquisition
Corp., and Mason and Schelldorf Leasing Company, Hops Restaurants, Inc., et.
al., dated February 6, 1997. (6)
2.4 Agreement and Plan of Merger among Apple South, Inc., Coyote
Acquisition Corp., and Canyon Cafes, Inc., et. al., dated June 19, 1997. (7)
2.5 Asset Purchase Agreement dated December 23, 1997 by and among
Applebee's International, Inc. and Apple South, Inc. (8)
2.6 Asset Purchase Agreement dated March 16, 1998 by and among Quality
Restaurant Concepts, L.L.C., and Apple South, Inc. (10)
2.7 Asset purchase agreement dated April 23, 1998, by an among Apple South,
Inc. and Whit-Mart, Inc. (12)
2.8 Asset purchase agreement dated May 1, 1998, by and among Apple South,
Inc. and T.S.S.O., Inc., and Lois Sedowicz. (12)
2.9 Asset purchase agreement dated May 4, 1998, by and among Apple South,
Inc. and Florida Apple North, LLC.,Florida Apple South, LLC., Florida Apple
West, LLC., and Wigel Partnership. (12)
2.10 Asset purchase agreement dated June 19, 1998, by and among Apple
South, Inc. and U.S. Restaurant Properties Operating LP. (12)
2.11 Asset purchase agreement dated June 19, 1998, by and among Apple
South, Inc. and Darrel L. Rolph. (12)
2.12 Asset purchase agreement dated July 31, 1998, by and among Apple
South, Inc. Delta Bluff , LLC. (13)
2.13 Asset purchase agreement dated August 20, 1998, by and among Apple
South, Inc. and WHG Real Estate South, LLC. and Wisconsin Hospitality Group,
LLC. (14)
2.14 Asset purchase agreement dated August 20, 1998, by and among Apple
South, Inc. and WHG Real Estate East, LLC. and Wisconsin Hospitality Group, LLC.
(14)
2.15 Asset purchase agreement dated April 6, 1998, by and among Apple
South, Inc. and Woodland Group, Inc. (14)
2.16 Asset purchase agreement dated May 15, 1998, by and among Apple South,
Inc. and Bloomin' Apple, LLC. (14)
2.17 Asset purchase agreement dated June 26, 1998, by and among Apple
South, Inc. and Apple J, L.P. (14)
2.18 Asset purchase agreement dated September 15, 1998, by and among Apple
South, Inc., and WHG Real Estate North, LLC and Wisconsin Hospitality Group,
LLC. (17)
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended October 13, 1998. (3)
57
<PAGE>
3.2 By-laws of the Company. (1)
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Amended and
Restated Articles of Incorporation and by-laws defining the rights of holders of
the Company's Common Stock. (1) (3)
4.2 Trust Agreement of Apple South Financing I, dated as of February 18,
1997, among Apple South, Inc., First Union National Bank of Georgia, First Union
Bank of Delaware and Lansing S. Patterson. (9)
4.3 Amended and Restated Declaration of Trust of Apple South Financing I,
dated as of March 11, 1997, among Apple South, Inc., as Sponsor, First Union
National Bank of Georgia, as Institutional Trustee, First Union Bank of
Delaware, as Delaware Trustee, and the Regular Trustees named therein. (9)
4.4 Indenture for the 7% Convertible Subordinated Debentures, dated as of
March 6, 1997, between Apple South, Inc. and First Union National Bank of
Georgia, as Trustee. (9)
4.5 Form of $3.50 Term Convertible Security, Series A (included in Exhibit
4.3).
4.6 Form of 7% Convertible Subordinated Debenture (included in Exhibit
4.4).
4.7 Preferred Securities Guarantee Agreement, dated as of March 11, 1997,
between Apple South, Inc., as Guarantor, and First Union National Bank of
Georgia, as Preferred Guarantee Trustee. (9)
4.8 Registration Rights Agreement, dated as of March 11, 1997 among Apple
South, Inc., Apple South Financing I, J.P. Morgan Securities, Inc., and Smith
Barney, Inc. (9)
4.9 Solicitation of Consents to Proposed Amendments to 9.75% Senior Notes
due 2006 of Apple South, Inc. (12)
4.10 Indenture, dated as of June 22, 1999, among the Company, certain
guaranteeing subsidiaries and SunTrust Bank, Atlanta, as Trustee (including the
form of Note). (15)
4.11 Registration Rights Agreement, dated as of June 22, 1999, among the
Company, certain guaranteeing subsidiaries and the initial purchasers of the
Notes. (15)
10.1 Apple South, Inc. 1988 Stock Option Plan. (1)
10.2 Form of Stock Option Agreement under the Apple South, Inc. 1988 Stock
Option Plan. (1) (5)
10.3 Form of Apple South, Inc. Director's Indemnification Agreement
executed by and between the Company and each member of its Board of Directors.
(1)
10.4 Form of Apple South, Inc. Officer's Indemnification Agreement executed
between the Company and each of its executive officers. (1)
10.5 Apple South, Inc. Employee Stock Ownership Plan and Trust. (1) (5)
10.6 Apple South, Inc. Profit Sharing Plan and Trust. (1) (5)
10.7 Amendment No. 2 to the Apple South, Inc. Employee Stock Ownership Plan
and Trust, dated November 22, 1993. (2)
10.8 Apple South, Inc. [Restated] Profit Sharing Plan and Trust dated
October 26, 1993. (2)
58
<PAGE>
10.9 Amended form of Stock Option Agreement under the Apple South, Inc.
1988 Stock Option Plan. (2)
10.10 Apple South, Inc. 1993 Stock Incentive Plan. (2)
10.11 Form of Stock Option Agreement under the Apple South, Inc. 1993 Stock
Incentive Plan. (2)
10.12 Participation Agreement (Apple South Trust No. 97-1), dated September
24, 1997, among Apple South, Inc., as lessee, First Security Bank, National
Association, as lessor, SunTrust Bank, Atlanta, as administrative agent, and the
holders and lenders signatory thereto. (10)
10.13 First amendment, dated as of March 27, 1998, to Participation
Agreement (Apple South Trust No 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (11)
10.14 Second amendment, dated as of August 14, 1998, to Participation
Agreement (Apple South Trust No 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (17)
10.15 Third amendment, dated as of November 13, 1998, to Participation
Agreement (Apple South Trust No 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (17)
10.16 Fourth amendment, dated as of February 22, 1999, to Participation
Agreement (Apple South Trust No 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (17)
10.17 $125 million Credit Agreement, dated as of June 22, 1999, among Avado
Brands, Inc. as borrower and Wachovia Bank, National Association and BankBoston,
N.A. (16)
10.18 First amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (16)
10.19 Second amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (16)
10.20 Third amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (16)
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule (EDGAR version only).
99.1 Safe harbor under the Private Securities Litigation Reform Act of
1995. (7)
- --------------------------------------------------------------------------------
59
<PAGE>
(1) Incorporated by reference to the corresponding exhibit number filed
with the registrant's Registration Statement on Form S-1, File No. 33-42662.
(2) Incorporated by reference to the registrant's Annual Report on Form
10-K for its fiscal year ended December 31, 1993.
(3) Incorporated by reference to the registrant's Current Report on Form
8-K dated October 13, 1998.
(4) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended October 1, 1995.
(5) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(6) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended March 30, 1997.
(7) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended June 29, 1997.
(8) Incorporated by reference to the registrant's Report on Form 8-K dated
January 15, 1998.
(9) Incorporated by reference to the registrants's registration statement
on Form S-3, File No. 333-25205.
(10) Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended December 28, 1997.
(11) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended March 29, 1998.
(12) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended June 28, 1998.
(13) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended September 27, 1998.
(14) Incorporated by reference to the registrant's Report on Form 8-K dated
September 14, 1998.
(15) Incorporated by reference to the Company's Registration Statement on
Form S-4, File No. 333-82345, filed on July 6, 1999.
(16) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended July 4, 1999
(17) Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended January 3, 1999.
60
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of September 15, 1999,
is made among AVADO BRANDS, INC., as "Borrower"; WACHOVIA BANK, NATIONAL
ASSOCIATION, BANKBOSTON, N.A., and the other parties listed as a "Bank" or the
"Banks" on the signature page(s) hereof, as "Banks"; WACHOVIA BANK, NATIONAL
ASSOCIATION, as "Administrative Agent" for the Banks, the "Syndication Agent,"
the "Arranger," the "Co-Arranger" (each as defined below) and itself;
BANKBOSTON, N.A., as "Syndication Agent " for the Banks; WACHOVIA SECURITIES,
INC., as "Arranger"; and BANCBOSTON ROBERTSON STEPHENS, INC., as "Co-Arranger."
The Borrower, the Banks, the Administrative Agent, the Syndication Agent, the
Arranger and the Co-Arranger are hereinafter called, collectively, the
"Parties." The Parties are parties to a Credit Agreement, dated as of June 22,
1999 (the "Credit Agreement"), and are entering into this Amendment for the
purpose of amending the Credit Agreement in the manner specified below.
Accordingly, for value received, the Parties agree as follows:
1. Definitions.
1.1 Terms Incorporated by Reference. Capitalized terms used herein, but not
expressly defined herein, shall have the meanings given to such terms in the
Credit Agreement.
1.2 Change to Accounting Terms and Determinations . The last sentence of
Section 1.2 of the Credit Agreement, which presently reads as follows:
In determining compliance of the Borrower with the financial covenants set
forth in Sections 5.4 through 5.7 hereof, and, in making such calculations for
any other purposes hereunder, including, without limitation, the determination
of the Applicable Margin pursuant to the definition thereof and the
determination of the unused commitment fee pursuant to Section 2.6.2, (i) there
shall be excluded from the calculations of Consolidated Net Income, depreciation
and amortization expense and operating lease and rent expense any amounts
attributable to Applebee's Neighborhood Grill & Bar restaurants which were sold
prior to the Closing Date, and [(ii)] for the Fiscal Quarters of Borrower ending
closest to June 30, 1999, September 30, 1999, December 31, 1999 and March 31,
2000, interest expense shall be "annualized," rather than presented
historically; e.g., for the four (4) Fiscal Quarters ending closest to each such
date, interest expense shall be computed by multiplying interest expense for the
Fiscal Quarter ending closest to such date, and multiplying by four (4).
shall be deleted in its entirety and the following revised last sentence
shall be substituted in its place:
In determining compliance of the Borrower with the financial covenants set
forth in Sections 5.4 through 5.7 hereof, and, in making such calculations for
any other purposes hereunder, including, without limitation, the determination
of the Applicable Margin pursuant to the definition thereof and the
determination of the unused commitment fee pursuant to Section 2.6.2, there
shall be excluded from the calculations of Consolidated Net Income, depreciation
and amortization expense and operating lease and rent expense any amounts
attributable to Applebee's Neighborhood Grill & Bar restaurants which were sold
prior to the Closing Date.
1.3 Change to Defined Term. The defined term "Fixed Charge Coverage Ratio,"
set forth in Section 1.1 of the Credit Agreement, which presently reads:
"Fixed Charge Coverage Ratio" shall mean, for any fiscal period, the ratio
which (A) the sum of (i) EBITDAR for such period; plus (ii) the sum (without
duplication) of (a) any dividends paid in respect of Redeemable Preferred Stock
during such period, plus (b) any payments made (howsoever denominated or
construed) in respect of any TECONS in such period, regardless of maturity or
<PAGE>
the timing of any redemption or repurchase rights granted in regard thereto (the
sum of (a) and (b) above being called, collectively, "Investment Costs" herein);
bears to (B) the sum (without duplication) of: (i) all Investment Costs; plus
(ii) operating lease expense; plus (iii) interest expense; in each case, for the
Borrower and its Consolidated Subsidiaries for the same such period; all as
determined under GAAP.
shall be deleted in its entirety and the following revised definition of
"Fixed Charge Coverage Ratio" shall be substituted in its place (emphasis added
to reflect additions):
"Fixed Charge Coverage Ratio" shall mean, for any fiscal period, the ratio
which (A) the sum of (i) EBITDAR for such period; plus (ii) the sum (without
duplication) of (a) any dividends paid in respect of Redeemable Preferred Stock
during such period, plus (b) any payments made (howsoever denominated or
construed) in respect of any TECONS in such period, regardless of maturity or
the timing of any redemption or repurchase rights granted in regard thereto (the
sum of (a) and (b) above being called, collectively, "Investment Costs" herein);
bears to (B) the sum (without duplication) of: (i) all Investment Costs; plus
(ii) operating lease expense; plus (iii) interest expense; in each case, for the
Borrower and its Consolidated Subsidiaries for the same such period; all as
determined under GAAP; provided, however, that for the Fiscal Quarters of
Borrower ending closest to June 30, 1999, September 30, 1999, December 31, 1999
and March 31, 2000, interest expense shall be "annualized," rather than
presented historically; that is, computed as follows: (i) for the Fiscal Quarter
ending closest to June 30, 1999, multiply interest expense for such Fiscal
Quarter by four (4); (ii) for the Fiscal Quarter ending closest to September 30,
1999, add together interest expense for such Fiscal Quarter and the preceding
Fiscal Quarter, divide the sum obtained by two (2), and multiply the quotient
resulting by four (4); (iii) for the Fiscal Quarter ending closest to December
31, 1999, add together interest expense for such Fiscal Quarter and the two (2)
preceding Fiscal Quarters, divide the sum obtained by three (3), and multiply
the quotient resulting by four (4); and (iv) for the Fiscal Quarter ending
closest to March 31, 2000, add together interest expense for such Fiscal Quarter
and the three (3) preceding Fiscal Quarters, divide the sum obtained by four (4)
and multiply the quotient resulting by four (4).
1.4 Certain Designations. Section 9.20 of the Credit Agreement (Certain
Designations) shall be amended by adding thereto, at the present end thereof,
the following sentence:
Without limitation of the foregoing, neither the "Arranger" nor the
"Co-Arranger" shall be necessary parties to any consent, waiver or amendment to
this Agreement which may be made hereafter, and any requirement for their
signatures to any such document are hereby waived by the other parties hereto.
2. Miscellaneous.
2.1 Effect and Effective Date of Amendments. The effective date of the
amendments to the Credit Agreement set forth in Sections 1.2 and 1.3 above shall
be the Closing Date. Except as set forth expressly herein, all terms of the
Credit Agreement shall remain unchanged. It is not intended by the Parties that
this Amendment constitute, and this Amendment, shall not constitute a novation
2.2 Georgia Law. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAW OF THE STATE OF GEORGIA.
2.3 Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
2.4 Entire Agreement. This Amendment shall constitute the entire agreement
among the parties with respect to the subject matter hereof.
<PAGE>
2.5 Restatement of Representations and Warranties. To induce all other
Parties to enter into this Amendment (A) Borrower hereby restates and renews
each and every representation and warranty heretofore made by it under, or in
connection with, the execution and delivery of, the Credit Agreement; (B)
Borrower hereby restates, ratifies and reaffirms each and every term and
condition set forth in the Credit Agreement, as amended hereby, and in the Loan
Documents, as amended hereby, effective as of the date hereof; and (C) Borrower
hereby certifies that no Event of Default or Default Condition has occurred and
is continuing.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed, under seal, by their respective authorized officers, as of the
day and year first above written.
"BORROWER"
AVADO BRANDS, INC. (SEAL)
By:_________________________________
Louis J. Profumo
Senior Vice President of Finance
Attest:_____________________________
John G. McLeod, Jr.
Secretary
"BANKS"
WACHOVIA BANK, NATIONAL
ASSOCIATION, as the Administrative Agent and as
a Bank (SEAL)
By:________________________________
W. Tompkins Rison, Vice President
BANKBOSTON, N.A., as Syndication Agent
and as a Bank (SEAL)
By:________________________________
Name:__________________________
Title:___________________________
SUNTRUST BANK, ATLANTA,
as a Bank
By:________________________________
Name:___________________________
Title:____________________________
By:________________________________
Name:___________________________
Title:____________________________
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK INTERNATIONAL,"
NEW YORK BRANCH
<PAGE>
By:________________________________
Name:___________________________
Title:____________________________
By:________________________________
Name:___________________________
Title:____________________________
COMERICA BANK,
as a Bank
(SEAL)
By:________________________________
Name:___________________________
Title:____________________________
SOUTHTRUST BANK, NATIONAL ASSOCIATION, as a Bank
(SEAL)
By:________________________________
Name:___________________________
Title:____________________________
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of October 4, 1999, is
made among AVADO BRANDS, INC., as "Borrower"; WACHOVIA BANK, NATIONAL
ASSOCIATION, BANKBOSTON, N.A., and the other parties listed as a "Bank" or the
"Banks" on the signature page(s) hereof, as "Banks"; WACHOVIA BANK, NATIONAL
ASSOCIATION, as "Administrative Agent" for the Banks, the "Syndication Agent,"
the "Arranger," the "Co-Arranger" (each as defined below) and itself; and
BANKBOSTON, N.A., as "Syndication Agent" for the Banks. The Borrower, the Banks,
the Administrative Agent and the Syndication Agent are hereinafter called,
collectively, the "Parties." The Parties are parties to a Credit Agreement,
dated as of June 22, 1999, as amended to date (the "Credit Agreement"), and are
entering into this Amendment for the purpose of further amending the Credit
Agreement in the manner specified below.
Accordingly, for value received, the Parties agree as follows:
1. Definitions.
1.1 Terms Incorporated by Reference. Capitalized terms used herein, but not
expressly defined herein, shall have the meanings given to such terms in the
Credit Agreement.
2. Amendments.
2.1 Other Advances. Section 5.20 of the Credit Agreement is amended by
adding to existing clause (ix) thereof ("Other Advances"), the following
proviso:
provided, however, that, in addition to and separate from the foregoing,
the Borrower may make an additional loan to Tom E. Dupree, Jr., in an amount not
to exceed Three Million Dollars ($3,000,000), on or about October 4, 1999, so
long as, and provided that, (A) no Default then has occurred and is continuing
or would be caused thereby, (B) such loan is repaid in full by not later than
December 31, 1999, (C) such loan bears a market rate of interest until paid in
full, (D) repayment of such loan is secured by a lien on otherwise unencumbered
real property owned by Tom E. Dupree, Jr. or his spouse personally (or by a
Person, other than the Borrower or any of its Subsidiaries owned or controlled
by Tom E. Dupree, Jr. or his spouse), having a fair market value of at least
Three Million Dollars ($3,000,000), and evidence thereof (including the
recordation of a mortgage, deed to secure debt or deed of trust upon such real
property favoring the Borrower) shall be provided to the Administrative Agent on
the date that the loan is made or as soon as practicable thereafter, but not
later than October 8, 1999, and (D) the proceeds of such loan are used by Tom E.
Dupree, Jr. to repay certain personal indebtedness then due secured by his
equity interests in the Borrower.
3. Miscellaneous.
3.1 Effect and Effective Date of Amendments. The effective date of the
amendments to the Credit Agreement set forth in Section 2 above shall be the
Closing Date. Except as set forth expressly herein, all terms of the Credit
Agreement shall remain unchanged. It is not intended by the Parties that this
Amendment constitute, and this Amendment, shall not constitute a novation
3.2 Georgia Law. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAW OF THE STATE OF GEORGIA.
3.3 Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
<PAGE>
3.4 Entire Agreement. This Amendment shall constitute the entire agreement
among the parties with respect to the subject matter hereof.
3.5 Restatement of Representations and Warranties. To induce all other
Parties to enter into this Amendment (A) Borrower hereby restates and renews
each and every representation and warranty heretofore made by it under, or in
connection with, the execution and delivery of, the Credit Agreement; (B)
Borrower hereby restates, ratifies and reaffirms each and every term and
condition set forth in the Credit Agreement, as amended hereby, and in the Loan
Documents, as amended hereby, effective as of the date hereof; and (C) Borrower
hereby certifies that no Default has occurred and is continuing.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed, under seal, by their respective authorized officers, as of the
day and year first above written.
"BORROWER"
AVADO BRANDS, INC. (SEAL)
By:_________________________________
Louis J. Profumo
Senior Vice President of Finance
Attest:_____________________________
John G. McLeod, Jr.
Secretary
"BANKS"
WACHOVIA BANK, NATIONAL
ASSOCIATION, as the Administrative Agent and as
a Bank (SEAL)
By:________________________________
W. Tompkins Rison, Vice President
BANKBOSTON, N.A., as Syndication Agent
and as a Bank (SEAL)
By:________________________________
Name:__________________________
Title:___________________________
SUNTRUST BANK, ATLANTA,
as a Bank
By:________________________________
Name:___________________________
Title:____________________________
By:________________________________
Name:___________________________
Title:____________________________
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK INTERNATIONAL,"
NEW YORK BRANCH
<PAGE>
By:________________________________
Name:___________________________
Title:____________________________
By:________________________________
Name:___________________________
Title:____________________________
COMERICA BANK,
as a Bank
(SEAL)
By:________________________________
Name:___________________________
Title:____________________________
SOUTHTRUST BANK, NATIONAL ASSOCIATION, as a Bank
(SEAL)
By:________________________________
Name:___________________________
Title:____________________________
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of March 31, 2000 (the
"Amendment Date"), is made among AVADO BRANDS, INC., as "Borrower"; WACHOVIA
BANK, NATIONAL ASSOCIATION; FLEET NATIONAL BANK, successor in interest to
BANKBOSTON, N.A., and the other parties listed as a "Bank" or the "Banks" on the
signature page(s) hereof, as "Banks"; WACHOVIA BANK, NATIONAL ASSOCIATION, as
"Administrative Agent" for the Banks, the "Syndication Agent," and itself; and
FLEET NATIONAL BANK, successor in interest to BANKBOSTON, N.A., as "Syndication
Agent" for the Banks. The Borrower, the Banks, the Administrative Agent and the
Syndication Agent, are hereinafter called, collectively, the "Parties." The
Parties are parties to a Credit Agreement, dated as of June 22, 1999 (which, as
modified and amended to date, as more particularly described below, is
hereinafter called the "Credit Agreement"). Heretofore, the Parties modified and
amended the Credit Agreement as follows: (i) pursuant to a First Amendment to
Credit Agreement, dated as of September 15, 1999, between the Parties
("Amendment No. 1"); (ii) pursuant to a Second Amendment to Credit Agreement,
dated as of October 4, 1999, between the Parties ("Amendment No. 2"; Amendment
No. 2 and Amendment No. 1 hereinafter sometimes called, collectively, the
"Amendments"); (iii) pursuant to a Consent and Waiver No. 1 into Credit
Agreement, dated as of November 17, 1999, between the Parties; ("Waiver No. 1");
(iv) pursuant to a Consent and Waiver No. 2 to Credit Agreement, dated as of
December 31, 1999, between the Parties ("Waiver No. 2"); and (v) pursuant to a
Consent and Waiver No. 3 to Credit Agreement, dated as of February 29, 2000,
between the Parties (Waiver No. 3"; Waiver No. 3, Waiver No. 2 and Waiver No. 1
hereinafter sometimes called, collectively, the "Waivers"). The Parties, are
entering into this Amendment for the purpose of further amending the Credit
Agreement in the manner specified below.
Accordingly, for value received, the Parties agree as follows:
1. Definitions.
Terms Incorporated by Reference. Capitalized terms used herein, but not
expressly defined herein, shall have the meanings given to such terms in the
Credit Agreement or, as appropriate, in the Amendments or the Waivers.
2. Amendments.
2.1 Definition of Fixed Charge Coverage Ratio. The existing definition of
Fixed Charge Coverage Ratio, set forth in Section 1.1 of the Credit Agreement,
shall be amended by adding to existing clause (B) thereof; i.e., the
denominator, a new subclause (iv), immediately after existing subclause (iii)
thereof, to read as follows:
plus (iv) without duplication, all payments made (including payments made
in settlement of existing obligations or claims) under, or in respect of,
interest rate "hedge," "swap," "collar" or similar arrangements, whether now or
hereafter existing, including, but not limited to, those expressly permitted to
exist under clause (ix) of Section 5.21.
The remainder of said definition shall remain unchanged, however. In
respect of the foregoing amendment, Borrower specifically acknowledges and
agrees that any payments to Morgan under or in respect of the Morgan Agreement
(as those terms "Morgan" and "Morgan Agreement," are defined and described in
Section 2.15 of this Amendment), howsoever denominated, shall, without
limitation, be included within the payments described in the above-referenced,
newly added, clause (iv).
2.2 Interest Rate. Notwithstanding any term of Section 2.5 of the Credit
Agreement to the contrary, unless and until the Total Debt/EBITDA Ratio,
determined as of the end of any Fiscal Quarter subsequent to the Fiscal Quarter
ending closest to March 31, 2000, is less than 3.50:1, (i) all Loans shall
continue to be made (or continued) as Base Rate Loans, and (ii) all Loans
<PAGE>
(including all Swing Loans) shall continue to bear interest at the Base Rate
plus two percent (2%) per annum, subject, however, to increase (A) as provided
in the Waivers, to the extent the Borrower fails to timely comply with certain
conditions set forth therein, and (B) to the Default Rate pursuant to the
operation of Section 6.1 of the Credit Agreement subsequent to the occurrence of
an Event of Default. To the extent that, subsequent to the Fiscal Quarter ending
closest to March 31, 2000, the Total Debt/EBITDA Ratio, determined as of the end
of any Fiscal Quarter, is less than, 3.50:1, then and for so long thereafter
such ratio shall be so maintained from Fiscal Quarter-to-Fiscal Quarter (i) the
right of Borrower to select between Base Rate Loans and Euro-Dollar Rate Loans,
as provided in Section 2.5, shall be re-established, and (ii) the interest rate
payable on any Loans then outstanding or made shall be determined in accordance
with said Section 2.5, as originally provided therein.
2.3 Mandatory Reductions in Line of Credit. Existing Section 2.7.3 of the
Credit Agreement shall be deleted in its entirety and the following revised
version of Section 2.7.3 shall be substituted in its place:
2.7.3. Mandatory Ratable Reductions in Commitments. The Commitments of the
Banks shall reduce ratably, beginning with the Fiscal Quarter of Borrower ending
closest to September 30, 2000, and continuing thereafter at the end of each
succeeding Fiscal Quarter, by the amounts prescribed below as of each quarterly
reduction date prescribed below corresponding thereto:
- --------------------------------------------------------------------------------
Quarterly Reduction Date: Quarterly Reduction Amount
- --------------------------------------------------------------------------------
October 1, 2000 $10,000,000
- --------------------------------------------------------------------------------
December 31, 2000 $10,000,000
- --------------------------------------------------------------------------------
April 4, 2001 $7,500,000
- --------------------------------------------------------------------------------
July 1, 2001 $7,500,000
- --------------------------------------------------------------------------------
September 30, 2001 $7,500,000
- --------------------------------------------------------------------------------
December 30, 2001 $7,500,000
- --------------------------------------------------------------------------------
March 31, 2002 $7,500,000
- --------------------------------------------------------------------------------
Effective with each mandatory reduction in the Commitments prescribed
above, the Borrower shall be required to repay the Loans by that amount
necessary to cause total Loans then outstanding not to exceed the total amount
of the Commitments, as so reduced each quarter, in accordance with the terms of
Section 2.9.1. If the Borrower should fail at any time or from time to time to
repay its Borrowings by the amounts required to be made in conjunction with any
reduction in Commitments prescribed hereinabove, as and when so required to be
made, its failure to do so shall constitute an Event of Default and permit the
Administrative Agent, on behalf of the Banks, to exercise the rights and
remedies provided herein and in the Loan Documents attendant upon such Event of
Default occurring. Without limitation of such attendant rights and remedies, the
Borrower acknowledges and agrees that the Administrative Agent may, as the
Borrower's attorney-in-fact, cause the Capital Stock of Belgo, PLC, then being
held by it as collateral hereunder, or such portions thereof as the
Administrative Agent determines, in its sole discretion, to be sold by the most
expeditious means practicable, after first giving Borrower three (3) Business
Days advance notice thereof (which notice period shall supersede and replace any
notice period otherwise set forth in the Loan Documents in respect of such
action), and apply any cash proceeds (net of all expenses of sale) derived
therefrom to the Borrowings, without necessity of further notice to, or demand
upon, the Borrower to do so, and without any liability to the Borrower for the
price obtained in any such sale or any tax liability of the Borrower resulting
<PAGE>
from any such sale. The Commitments of the Banks shall also reduce ratably by
the amount of any mandatory prepayments of Borrowings from Asset Sales or Asset
Recoveries made subsequent to the Amendment Date pursuant to Section 2.9.2; it
being understood and agreed in connection therewith that any such reductions to
the Commitments made from Asset Sales or Asset Recoveries occurring subsequent
to the Amendment Date shall be counted against the amount of the quarterly
reductions in the Commitments prescribed in the table set forth above. For
example, and without limitation, if the total amount of Asset Recoveries and Net
Cash Proceeds from Asset Sales made during the period from the Amendment Date
through September 29, 2000 equals $9,000,000, and the Commitments have been
reduced accordingly by such amount as of such date, then, on September 30, 2000,
only an additional $1,000,000 of the Commitments shall be required to be reduced
in order that total reductions in Commitments by such date amount to
$10,000,000. The Commitments, once reduced pursuant to the operation of this
Section 2.7.3, shall not be reinstated by the Banks.
The unused commitment fees, payable to each Bank in respect of its Unused
Commitment shall continue to be due and payable at the times and in the amounts
prescribed in Section 2.6.1, notwithstanding implementation of the foregoing
reductions in Commitments (however, in accordance with the definition thereof,
the Unused Commitments shall adjust consistent with each reduction in the
Commitments and the amounts of the unused commitment fees shall be adjusted
accordingly).
2.4 Asset Sales and Asset Recoveries. Existing Section 2.9.2 of the Credit
Agreement shall be deleted in its entirety and the following revised version of
said Section 2.9.2 shall be substituted in its place:
2.9.2. Asset Sales and Asset Recoveries. To th e extent that, (i) in
accordance with the provisions of Section 5.11, the Borrower or any of its
Subsidiaries consummates any Asset Sale on or subsequent to March 31, 2000, or
(ii) the Borrower or any of its Subsidiaries collects any loan or advance made
pursuant to clause (xi) of Section 5.20 or otherwise makes any recoveries in
respect of any "investments" (as that term is defined in the introductory
paragraph to Section 5.20, and including particularly, but without limitation,
the "Real Receivable," as that term is defined in Section 2.2(f) of Waiver No.
3) (the foregoing herein called, individually and collectively, "Asset
Recoveries"), on or subsequent to March 31, 2000, then, as soon as received, the
Borrower shall apply an amount equal to one hundred percent (100%) of the Net
Cash Proceeds from such Asset Sale, in the case of clause (i) above, and one
hundred percent (100%) of the amount of such Asset Recovery, in the case of
clause (ii) above, to repay (or prepay) outstanding Revolving Loans and, if
Revolving Loans are reduced to zero, Swing Loans, plus, in each case, accrued
interest thereon to the date of prepayment and any compensation required by
Section 8.6. In each such case, the Commitments of the Banks shall also be
simultaneously reduced as provided in Section 2.7.3.
2.5 Modifications to Existing Financial Covenants. Existing Sections 5.5,
5.6 and 5.7 of the Credit Agreement shall be deleted, each in its entirety, and
the following revised versions of said Sections 5.5, 5.6 and 5.7, respectively,
shall be substituted in their place:
SECTION 5.5 Fixed Charge Coverage Ratio.
Borrower's Fixed Charge Coverage Ratio, measured on a rolling four (4) Fiscal
Quarters' basis, as of the end of each Fiscal Quarter, commencing with the
Fiscal Quarter ending closest to December 31, 1999, shall be not less than the
ratio prescribed below for each Fiscal Quarter prescribed below corresponding
thereto:
<PAGE>
- --------------------------------------------------------------------------------
Fiscal Quarter Ending: Ratio
- --------------------------------------------------------------------------------
December 31, 1999 1.25:1
- --------------------------------------------------------------------------------
March 31, 2000 1.25:1
- --------------------------------------------------------------------------------
June 30, 2000 1.25:1
- --------------------------------------------------------------------------------
October 1, 2000 1.25:1
- --------------------------------------------------------------------------------
December 31, 2000 1.25:1
- --------------------------------------------------------------------------------
April 4, 2001 1.50:1
- --------------------------------------------------------------------------------
July 1, 2001 1.50:1
- --------------------------------------------------------------------------------
September 30, 2001 1.50:1
- --------------------------------------------------------------------------------
December 30, 2001 1.50:1
- --------------------------------------------------------------------------------
March 31, 2002 1.75:1
and thereafter
- --------------------------------------------------------------------------------
SECTION 5.6 Total Debt/EBITDA Ratio.
The ratio which (i) the Total Debt of the Borrower and its Consolidated
Subsidiaries at the end of any Fiscal Quarter, commencing with the Fiscal
Quarter ended closest to December 31, 1999, bears to (ii) the EBITDA of the
Borrower and its Consolidated Subsidiaries, measured on a rolling four (4)
Fiscal Quarters' basis as of the end of such Fiscal Quarter (the "Total
Debt/EBITDA Ratio"), shall be not more than the ratio prescribed below as of the
end of each Fiscal Quarter corresponding thereto:
- --------------------------------------------------------------------------------
Fiscal Quarter Ending: Ratio
- --------------------------------------------------------------------------------
December 31, 1999 5.50:1
- --------------------------------------------------------------------------------
March 31, 2000 5.50:1
- --------------------------------------------------------------------------------
June 30, 2000 5.50:1
- --------------------------------------------------------------------------------
October 1, 2000 5.00:1
- --------------------------------------------------------------------------------
December 31, 2000 4.50:1
- --------------------------------------------------------------------------------
April 4, 2001 4.50:1
- --------------------------------------------------------------------------------
July 1, 2001 4.50:1
- --------------------------------------------------------------------------------
September 30, 2001 4.00:1
- --------------------------------------------------------------------------------
December 30, 2001 4.00:1
- --------------------------------------------------------------------------------
March 31, 2002 3.50:1
and thereafter
- --------------------------------------------------------------------------------
In computing EBITDA in respect of the foregoing ratio and the ratio set
forth in Section 5.7 below, (a) any asset or stock dispositions by the Borrower
consisting of the sale of a business line, segment or other group of related
<PAGE>
restaurants occurring within a Fiscal Quarter shall be accounted for by reducing
EBITDA by the individual EBITDA attributable to each store within such group for
such Fiscal Quarter and the three (3) preceding Fiscal Quarters or, in the event
that any such restaurant had negative individual EBITDA for such periods, by
increasing EBITDA by the amount of such negative EBITDA; and (b) any asset or
stock acquisitions by the Borrower, to the extent otherwise then permitted to
occur hereunder (and without implying such permission), consisting of the
purchase of a business, line, segment or other group of related restaurants
occurring within a Fiscal Quarter shall be accounted for by increasing EBITDA by
the individual EBITDA attributable to each store within such group for such
Fiscal Quarter and for the three (3) preceding Fiscal Quarters or, in the event
that any such store had negative individual EBITDA for such periods, by
decreasing EBITDA by the amount of such negative EBITDA; in each instance, on an
historical basis, in a manner which the Borrower shall determine, but subject to
prior review with, and approval by, the Administrative Agent.
In connection with the foregoing amendment to Section 5.6, the Banks hereby
waive the Covenant Default.
SECTION 5.7. Total Senior Debt/EBITDA Ratio.
The ratio which (i) the Total Senior Debt of the Borrower and its
Consolidated Subsidiaries at the end of any Fiscal Quarter, commencing with the
Fiscal Quarter ended closest to December 31, 1999, bears to (ii) EBITDA of the
Borrower and its Consolidated Subsidiaries, measured on a rolling four (4)
Fiscal Quarters' basis as of the end of such Fiscal Quarter (adjusted, however,
as reflected in Section 5.6), shall be not more than the amounts prescribed
below for each Fiscal Quarter prescribed below corresponding thereto:
- --------------------------------------------------------------------------------
Fiscal Quarter Ending: Ratio
- --------------------------------------------------------------------------------
December 31, 1999 4.00:1
- --------------------------------------------------------------------------------
March 31, 2000 4.00:1
- --------------------------------------------------------------------------------
June 30, 2000 4.00:1
- --------------------------------------------------------------------------------
October 1, 2000 3.50:1
- --------------------------------------------------------------------------------
December 31, 2000 3.25:1
- --------------------------------------------------------------------------------
April 4, 2001 3.00:1
- --------------------------------------------------------------------------------
July 1, 2001 3.00:1
- --------------------------------------------------------------------------------
September 30, 2001 2.50:1
- --------------------------------------------------------------------------------
December 30, 2001 2.50:1
- --------------------------------------------------------------------------------
March 31, 2002 2.50:1
and thereafter
- --------------------------------------------------------------------------------
2.6 Asset Sales. The entire existing second proviso to Section 5.11 of the
Credit Agreement, beginning with the words "provided, further, that the Borrower
may consummate Asset Sales ..." and ending at the end of existing Section 5.11
shall be deleted in its entirety and the following revised version of said
second proviso shall be substituted in its place:
provided, further, that the Borrower may consummate Asset Sales so long as,
unless otherwise approved in writing by the Required Banks, each of the
following conditions is met: (i) the Asset Sales are to Persons other than
Affiliates, (ii) the Asset Sales are made for cash, (iii) the Net Cash Proceeds
<PAGE>
from all such Asset Sales are applied in the manner provided in Section 2.9.2,
and for no other purpose, (iv) no Default has occurred which is then continuing
or otherwise would result from such sale occurring, and (v) if the Asset Sale
concerns the sale of any collateral then held as security for the Revolving
Loans and Swing Loans, the prior written consent of the Required Banks or, to
the extent required under clause (vii) of Section 9.6, all Banks, shall be
required as a condition to such sale. The term "Asset Sales," as used herein,
shall extend to and include, without limitation, sale-leaseback transactions,
provided that the Administrative Agent first shall have separately approved the
terms of the "leaseback" portion of such transaction as a further condition to
the Borrower or any Subsidiary entering into such transaction.
In connection with the foregoing, and with Section 2.9.2 of the Credit
Agreement (as revised pursuant to Section 2.3 above), it is understood and
agreed by the Borrower that any provisions of the Waivers governing Asset Sales
or Asset Recoveries (and applications of the proceeds derived therefrom), to the
extent in conflict herewith (or with revised Section 2.9.2) shall be superseded
and replaced hereby (and thereby).
2.7 New Limit on Capital Expenditures. Clause (ii) of Section 5.20 of the
Credit Agreement shall be deleted in its entirety and the following revised
version of said clause (ii) of Section 5.20 shall be substituted in its place:
(ii) Capital Expenditures. Make capital expenditures in the ordinary course
of business; provided, however, commencing with the Fiscal Year ending closest
to December 31, 2000, capital expenditures shall be limited as follows: (i) for
the Fiscal Year ending closest to December 31, 2000, the sum of (A) $45,000,000,
plus (B) an additional amount, equal, dollar-for-dollar, to the Net Cash
Proceeds received by the Borrower within such Fiscal Year, not to exceed,
however, $20,000,000, from any sale-leaseback transaction permitted under
Section 5.11 occurring during the period from the Fiscal Quarter ending March
31, 2000 through the Fiscal Quarter ending December 31, 2000, effective upon
such permitted sale-leaseback transaction occurring, and provided that Borrower
has complied with Section 2.7.2 in regard thereto, and (ii) $40,000,000, in each
Fiscal Year occurring after the Fiscal Year ending closest to December 31, 2000.
In addition to the foregoing, to the extent the Borrower's actual capital
expenditures in any such Fiscal Year are less than the maximum amount prescribed
hereinabove for such Fiscal Year, the Borrower shall be entitled to carry over
the amount of such shortfall to the next Fiscal Year, provided that the amount
of such shortfall that may be carried over from year-to-year shall not exceed
$10,000,000, per year, and provided, further, that the aggregate amount of all
such carryovers shall not exceed $15,000,000 during the term of this Agreement.
2.8 Restaurant Concepts and Acquisitions. Carrying forward the restrictions
thereon imposed under Section 2.2(g) of Waiver No. 3, concerning "investments"
by Borrower which are described and covered by existing Section 5.20 of the
Credit Agreement, the exceptions to the prohibition contained therein, relative
to "restaurant concepts," described in and permitted by clause (x) thereof, and
"acquisitions," described in and permitted by clause (xii) thereof, have been
discontinued, and no further such "investments" may be made. Without limitation
of the foregoing, neither Borrower nor any Consolidated Subsidiary shall acquire
any equity interests in Belgo, PLC, subsequent to the Amendment Date; but,
notwithstanding the foregoing, Borrower or its Consolidated Subsidiaries may
continue to make investments in any restaurants under construction in
furtherance of any joint ventures under contract as of the date of Waiver No. 3;
i.e., February 29, 2000, provided that the total amount of these investments
shall not exceed, in any event, $3,000,000;
2.9 New Limits on Other Advances. Clause (xi) to existing Section 5.20 of
the Credit Agreement, which clause was amended pursuant to Section 2 of the
Second Amendment (which contained an inadvertent reference to clause (xi) as
clause " (ix)" (by transposition of letters), is hereby deleted in its entirety
such that, from and after the Amendment Date, no loans or advances to Affiliates
(excluding therefrom, however, Subsidiaries), shareholders, directors, officers
or employees (in addition to those described in clause (i) through (x) of
<PAGE>
Section 5.20; and, in connection with the foregoing, all such loans and advances
shall be repaid as soon as practicable but in any event not later than as
follows: (i) as to the $3,000,000 loan made to Tom E. Dupree, Jr. pursuant to
Section 2 of the Second Amendment, by not later than March 31, 2001; as to all
other such loans and advances, which the Borrower hereby certifies to the Banks
are presently limited to those set forth on Schedule "2.8" annexed hereto, not
later than the dates prescribed on said Schedule "2.8" relative thereto; it
being understood and agreed that the foregoing revision of said clause (xi)
shall supersede and replace any provision of any Amendment or Waiver governing
the subject matter thereof to the extent in conflict therewith.
2.10 Further Restrictions on Dividends and Distributions. Clause (A) to the
proviso to Section 5.22 of the Credit Agreement is deleted and the following
revised version of said clause (A) shall be substituted in its place:
(A) provided that no Default has occurred and is continuing or would be
caused thereby, the Borrower may pay cash dividends on its Capital Stock in each
Fiscal Year in an aggregate amount not to exceed (1) $3,000,000 in the Fiscal
Year ending on or about December 31, 1999 and (2) $400,000 per Fiscal Year, in
each Fiscal Year thereafter; provided, however, that if the Borrower's Total
Debt/EBITDA Ratio, measured at the end of any such subsequent Fiscal Year is
less than or equal to 3.50:1, then, the amount of such cash dividends permitted
to be paid by Borrower in the Fiscal Year following shall be increased to
$3,000,000 subject to the foregoing proviso as to the absence of any Default.
2.11 Further Restrictions on Debt. Clauses (vii), (viii) (limited, however,
to clauses (ix) and (x) Section 5.8) and (ix) of Section 5.21, permitting the
incurrence of Debt under certain conditions described therein, are hereby
eliminated prospectively as of the Amendment Date such that, subsequent to the
Amendment Date, no additional Debt may be occurred in reliance upon said clauses
(vii), (viii) or (ix). Furthermore, henceforth, no Debt shall be repaid by
Borrower or any Subsidiary prior to its scheduled maturity nor may any such
Person take (or acquiesce in) any action having substantially the same effect,
such as, but not limited to, by terminating early any Debt arrangement or making
any settlement or accord and satisfaction in regard thereto, except, in each
case, with the prior written consent of the Required Banks thereto.
2.12 Stock Purchases. The exceptions set forth in clauses (i) and (ii) of
Section 5.25 of the Credit Agreement, relative to purchases of Capital Stock
(and including the execution of Equity Forward Contracts), are hereby
eliminated, effective as of the Amendment Date, such that the actions described
in such exceptions shall no longer be permitted, on a prospective basis.
2.13 Other or Stepped Up Reports. In furtherance of Section 5.1.9 of the
Credit Agreement, concerning the delivery of additional information regarding
the financial position or business of the Borrower and its Subsidiaries, and in
addition to the reports required under Section 2.2(i) of Waiver No. 3, the
Borrower agrees to deliver the following to each of the Banks:
(a) on the Amendment Date, a draft copy of the Borrower's SEC 10-K report
for its 1999 fiscal year, in draft form;
(b) on the Amendment Date, if then available, but otherwise as soon as
available after the Amendment Date, a listing of all Properties which the
Borrower intends to be part of the currently proposed sale-leaseback transaction
mentioned in Section 2.6 hereof, the projected transaction date, the projected
amount thereof, and the projected Net Cash Proceeds to be derived therefrom;
(c) on the Amendment Date, a listing of all other Properties which the
Borrower intends to sell during the remaining term of the Credit Agreement, the
projected date of sale thereof, the projected amounts thereof, and the projected
Net Cash Proceeds to be derived therefrom;
<PAGE>
(d) on the Amendment Date, a listing of all Asset Recoveries which the
Borrower anticipates receiving during the remaining term of the Credit
Agreement, and the projected date of their recovery;
(e) monthly, subsequent to the Amendment Date, an update in respect of all
actual and projected Asset Sales (including sale-leaseback transactions) and
Asset Recoveries, including reconciliations to date.
In addition to the foregoing, beginning with the Amendment Date, the
interim financial statements and corresponding compliance certificates presently
required to be delivered quarterly under Sections 5.12 and 5.13, respectively,
of the Credit Agreement, henceforth shall be delivered monthly by Borrower
within twenty-five (25) days after the end of each Fiscal Month (except that,
until further notice, compliance with financial covenants shall continue to be
certified on a quarterly basis only).
2.14 Collateral. The "Second Mortgage Condition" and "Third Mortgage
Condition," as each such term is defined in Waiver No. 3, which, pursuant to
said Waiver No. 3, were required to be completed by not later than May 31, 2000,
henceforth, shall be required to be completed by not later than April 28, 2000;
and all mortgages executed in furtherance of the "Interim Mortgages Condition,"
as such term is likewise defined in Waiver No. 3, shall be perfected on March
31, 2000 or as soon as practicable thereafter, but not later than April 7, 2000
in any event. In addition thereto, Borrower hereby certifies to the Banks that
the taking of such collateral by the Banks, together with the taking of all
other collateral by the Banks prior hereto pursuant to the Waiver, does not
require that, and shall not result in any requirement that, Borrower or any
Subsidiary cause to be granted to the holders of Borrower's senior notes due
2006 ($150,000,000), or any other Person, a Lien on such collateral or any other
property of Borrower. To that end, henceforth, and notwithstanding any term of
any Amendment or Waiver to the contrary (including, particularly, Section 2.2(b)
of Waiver No. 1), the Banks shall be under no obligation to consent to any
other, additional Lien on such collateral favoring the holders of the aforesaid
senior notes or any other such Person.
2.15 Morgan Guaranty Default. Heretofore, the Borrower notified the
Administrative Agent and the Bank that, by letter dated March 27, 2000, Morgan
Guaranty Trust Company of New York ("Morgan") had declared a default to exist
(the "Morgan Default") under its Master Agreement, dated as of June 3, 1996,
with the Borrower concerning certain interest rate "swap," "hedge," "collar" or
similar arrangements (as modified or amended to date or from time to time
hereafter, and including all schedules, supplements, riders and additions
thereto, the "Morgan Agreement"), based on the Borrower's failure to comply with
certain covenants incorporated by reference therein pursuant to Section 5(a)(ix)
thereof (the "Morgan Covenants"). The existence and continuation of the Morgan
Default constitutes an Event of Default under the Credit Agreement pursuant to
Section 6.1.5 thereof (the "Cross-Default"). The Banks have agreed, as an
accommodation to Borrower, to waive the Cross-Default, and the Banks do hereby
waive the Cross-Default, subject, however, to the following terms and
conditions:
(a) so long as the Morgan Default is continuing, then, notwithstanding any
term hereof or of the Credit Agreement to the contrary, the total amount of
Revolving Loans and Swing Loans outstanding at any one time cannot exceed One
Hundred Fifteen Million Dollars ($115,000,000) or such lesser amount as shall
equal the outstanding Commitments from time to time; and
(b) if, at any time hereafter, whether as a result of the existence or
continuation of the Morgan Default or otherwise, any of the following (herein
called a "Reinstitution Event") shall occur: (i) Morgan designates any day as an
"Early Termination Date" (as that term is defined in the Morgan Agreement) in
respect of all outstanding "Transactions" (as that term is defined in the Morgan
Agreement); or (ii) any "Automatic Early Termination" (as that term is defined
in the Morgan Agreement) occurs; (iii) any acceleration of, or demand for,
payment occurs with respect to any Debts arising under the Morgan Agreement; or
<PAGE>
(iv) Borrower enters into any settlement, accord and satisfaction or other
arrangement with Morgan, or Morgan otherwise exercises any rights or remedies,
in each instance, having substantially the same effect as if either clauses (i),
(ii) or (iii) above had occurred; then, automatically, upon any one of such
conditions being met, and without the necessity of any further act or deed on
the part of the Banks, the Morgan Default shall constitute an Event of Default
under the Credit Agreement; i.e., the Cross Default shall be re-instituted,
effective immediately; and
(c) the waiver of the Cross-Default contained herein shall be limited
solely to Section 6.1.5 of the Credit Agreement as it relates to the Morgan
Default and, then, only with respect to the Morgan Covenants, and not to any
other Event of Default, and nothing contained herein is intended, or shall be
construed, to suggest that the Banks have waived, or would be willing to waive,
any other Event of Default, whether related or unrelated, or whether now or
hereafter existing.
In addition to the foregoing, Borrower acknowledges and agrees that any
waiver of the Morgan Default or other arrangement substantially similar in
effect thereto (herein, a "Morgan Waiver"), shall require the separate, written
consent of the Required Banks, if and to the extent any term, covenant or
condition of the Morgan Waiver conflicts with, contravenes or contradicts any
term, covenant or condition of the Credit Agreement or any Loan Document. To
facilitate the foregoing, Borrower agrees to keep the Administrative Agent
informed as to the status of its ongoing discussions with Morgan concerning the
Morgan Default; to notify the Administrative Agent promptly in writing if any
Reinstitution Event occurs; and to provide Administrative Agent with a copy,
prior to its becoming effective, of any Morgan Waiver proposed for execution or
acceptance by Borrower or Morgan. Further to facilitate the foregoing, Borrower
hereby certifies to the Banks that attached hereto as Schedule 2.15A is a true,
correct and complete copy of the Morgan Agreement as in effect on the Amendment
Date, and Borrower agrees not to enter into any amendment or other modification
to the Morgan Agreement hereafter which has, or could reasonably be expected to
have, the effect of increasing the amount or frequency of payment of any Debts
thereunder except with the prior written consent of the Required Banks. At
Borrower 's further request, and without in any way limiting any of the
foregoing provisions, the Banks are willing to consent to the granting of Liens
to Morgan in support of the Debts to Morgan under the Morgan Agreement on the
four (4) parcels of real property owned or operated by Borrower's "Hops"
Subsidiary described on Schedule 2.15B attached hereto, provided, however, that
such Liens are granted only in conjunction with, and as an integral part of, the
issuance of a Morgan Waiver which is otherwise granted on terms and conditions
acceptable to the Required Banks. If such Liens are granted to Morgan on the
foregoing conditions, then, to the extent in conflict therewith, the Banks shall
waive any requirement under Waiver No. 3 that Liens on those four (4) parcels be
granted, instead, to the Banks.
3. Miscellaneous.
3.1 Effect and Effective Date of Amendments. The effective date of the
amendments to the Credit Agreement set forth hereinabove shall be the Amendment
Date. Except as set forth expressly herein, all terms of the Credit Agreement
shall remain unchanged. Without limitation of the foregoing, the provisions of
each of the Waivers, including, particularly, but without limitation, those
relating to the provision of collateral, shall continue in full force and
effect. It is not intended by the Parties that this Amendment constitute, and
this Amendment, shall not constitute a novation.
3.2 Georgia Law. This Amendment shall be construed in accordance with and
governed by the law of the State of Georgia.
3.3 Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
<PAGE>
3.4 Entire Agreement. This Amendment shall constitute the entire agreement
among the parties with respect to the subject matter hereof, and shall supersede
and replace any agreements or commitments to agree, whether oral or written,
heretofore existing in regard thereto.
3.5 Restatement of Representations and Warranties. To induce all other
Parties to enter into this Amendment (A) Borrower hereby restates and renews
each and every representation and warranty heretofore made by it under, or in
connection with, the execution and delivery of, the Credit Agreement; (B)
Borrower hereby restates, ratifies and reaffirms each and every term and
condition set forth in the Credit Agreement, as amended hereby, and in the Loan
Documents, as amended hereby, effective as of the date hereof; and (C) Borrower
hereby certifies that, after giving effect to this Amendment, no Default has
occurred which is continuing, other than the Morgan Default, which, subject to
Section 2.15 hereof, the Banks have waived.
3.6 Borrower as Agent. In executing this Amendment, Borrower is acting for
itself individually and as agent for each Subsidiary which is party to any Loan
Document, and, in the latter regard, binding each such Subsidiary to the terms
hereof without necessity of giving further notice to, or obtaining any further
consent from, any such Subsidiary.
4. Conditions Precedent.
The following shall constitute express conditions precedent to any
obligations of the Banks hereunder: (i) the Administrative Agent shall have
received from the Borrower a duly executed counterpart of this Amendment
together with each other document, instrument, certificate or agreement required
to be delivered by March 31, 2000 under any of the Waivers; (ii) the
Administrative Agent shall have received from the Secretary (or Assistant
Secretary) of the Borrower, an incumbency and authority certificate in respect
of the officer(s) executing this Amendment on behalf of the Borrower, in form
and substance satisfactory to the Administrative Agent, (iii) the Administrative
Agent shall have received from the Borrower's legal counsel an opinion of
counsel as to the transactions contemplated hereby, and (iv) the Administrative
Agent shall have received from the Borrower (A) an amendment fee, equal to
one-fourth of one percent (1/4%) of the Commitments of those Banks executing
this Amendment by not later than noon (Atlanta time) on April 3, 2000, to be
shared pro rata among them, and (B) the separate structuring fee payable to the
Arranger in connection herewith, as provided in the fee letter executed by the
Borrower with the Arranger on or prior to the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed, under seal, by their respective authorized officers, as of the
day and year first above written.
"BORROWER"
AVADO BRANDS, INC. (SEAL)
By:_________________________________
Name:
Title:
Attest:
Name:
Title:
<PAGE>
"BANKS"
WACHOVIA BANK, NATIONAL
ASSOCIATION, as the Administrative Agent and as
a Bank (SEAL)
By:________________________________
W. Tompkins Rison, Vice President
FLEET NATIONAL BANK, as successor
to BANKBOSTON, N.A., as Syndication Agent
and as a Bank (SEAL)
By:________________________________
Name:__________________________
Title:___________________________
SUNTRUST BANK, as a Bank
By:________________________________
Name:___________________________
Title:____________________________
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK B.A.,
"RABOBANK INTERNATIONAL,"
NEW YORK BRANCH, as a Bank
By:________________________________
Name:___________________________
Title:____________________________
By:________________________________
Name:___________________________
Title:____________________________
COMERICA BANK, as a Bank (SEAL)
By:________________________________
Name:___________________________
Title:____________________________
SOUTHTRUST BANK, NATIONAL
ASSOCIATION, as a Bank (SEAL)
By:________________________________
Name:___________________________
Title:____________________________
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Avado Brands, Inc.:
We consent to the incorporation by reference in the registration statements
on Form S-8 (Nos. 33-49748, 33-68978, 333-3764, and 333-3736) and the
registration statement on Form S-3 (No. 333-25205) of Avado Brands, Inc. of our
report dated January 28, 2000, except for the last paragraph of Note 6, which is
as of April 3, 2000, relating to the consolidated balance sheets of Avado
Brands, Inc. as of January 2, 2000 and January 3, 1999 and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
January 2, 2000, which report appears in the January 2, 2000 annual report on
Form 10-K of Avado Brands, Inc.
Atlanta, Georgia
April 3, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-K 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> Jan-02-2000
<PERIOD-START> Jan-04-1999
<PERIOD-END> Jan-02-2000
<CASH> 11,267
<SECURITIES> 0
<RECEIVABLES> 7,257
<ALLOWANCES> 0
<INVENTORY> 9,097
<CURRENT-ASSETS> 46,225
<PP&E> 424,968
<DEPRECIATION> 0
<TOTAL-ASSETS> 656,596
<CURRENT-LIABILITIES> 84,517
<BONDS> 215,133
115,000
0
<COMMON> 405
<OTHER-SE> 112,219
<TOTAL-LIABILITY-AND-EQUITY> 656,596
<SALES> 644,459
<TOTAL-REVENUES> 644,459
<CGS> 182,896
<TOTAL-COSTS> 561,801
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,073
<INCOME-PRETAX> 7,920
<INCOME-TAX> 2,450
<INCOME-CONTINUING> 5,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,470
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
</TABLE>
