UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended October 1, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number: 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
------------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Hancock at Washington, Madison, GA 30650
------------------------------------ ---------------------------
(Address of principal executive offices) (Zip Code)
706-342-4552
---------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
As of November 14, 2000, there were 26,946,937 shares of common stock of
the Registrant outstanding.
<PAGE>
AVADO BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 1, 2000
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements:
Consolidated Statements of Earnings..........................3
Consolidated Balance Sheets..................................4
Consolidated Statements of Shareholders' Equity
and Comprehensive Income...............................5
Consolidated Statements of Cash Flows........................6
Notes to Consolidated Financial Statements...................7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations...............12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk...........................................16
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K............................17
Signature.....................................................................18
Page 2
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Earnings
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Quarter Ended Nine Months Ended
------------------------------------------------------------------------------------------ ------------------------------
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
------------------------------------------------------------------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Restaurant sales:
Canyon Cafe $ 9,468 10,050 29,491 33,128
Don Pablo's 75,700 78,461 228,383 236,916
Hops 47,040 36,348 139,994 104,053
McCormick & Schmick's 41,871 32,392 117,710 90,774
Applebee's - - - 21,176
------------------------------------------------------------------------------------------ ------------------------------
Total restaurant sales 174,079 157,251 515,578 486,047
------------------------------------------------------------------------------------------ ------------------------------
Restaurant operating expenses:
Food and beverage 51,436 44,303 149,039 137,283
Payroll and benefits 55,830 47,407 163,035 148,940
Depreciation and amortization 6,317 5,186 18,607 14,869
Other operating expenses 45,976 38,347 125,498 113,269
------------------------------------------------------------------------------------------ ------------------------------
Total restaurant operating expenses 159,559 135,243 456,179 414,361
------------------------------------------------------------------------------------------ ------------------------------
General and administrative expenses 8,956 9,096 27,294 27,950
Special charges 800 - 4,849 -
------------------------------------------------------------------------------------------ ------------------------------
Operating income 4,764 12,912 27,256 43,736
------------------------------------------------------------------------------------------ ------------------------------
Other income (expense):
Interest expense, net (10,455) (6,907) (28,979) (16,141)
Distributions on preferred securities (2,013) (2,013) (6,038) (6,038)
Gain (loss) on disposal of assets (1,350) - (3,051) 2,270
Income (loss) from investments carried at equity (77) (111) (54) (341)
Other, primarily goodwill amortization (1,060) (875) (3,102) (2,735)
------------------------------------------------------------------------------------------ ------------------------------
Total other income (expense) (14,955) (9,906) (41,224) (22,985)
------------------------------------------------------------------------------------------ ------------------------------
Earnings (loss) before income taxes (10,191) 3,006 (13,968) 20,751
Income taxes (1,925) 575 (3,500) 6,400
------------------------------------------------------------------------------------------ ------------------------------
Net earnings (loss) $ (8,266) 2,431 (10,468) 14,351
========================================================================================== ==============================
Earnings (loss) per common share $ (0.33) 0.10 (0.41) 0.51
========================================================================================== ==============================
Diluted earnings (loss) per common share $ (0.33) 0.10 (0.41) 0.51
========================================================================================== ==============================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Oct. 1, Jan. 2,
2000 2000
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 389 11,267
Accounts receivable 9,254 7,257
Inventories 9,647 9,097
Prepaid expenses and other 4,361 17,399
Assets held for sale 10,725 1,205
--------------------------------------------------------------------------------------------------------------------
Total current assets 34,376 46,225
Premises and equipment, net 443,565 424,968
Goodwill, net 132,884 135,176
Investments in and advances to unconsolidated affiliates 17,399 17,411
Other assets 41,135 32,816
--------------------------------------------------------------------------------------------------------------------
$ 669,359 656,596
====================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 32,019 21,620
Accrued liabilities 38,153 34,727
Current installments of long-term debt 41,024 11
Income taxes 27,566 28,159
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 138,762 84,517
Long-term debt 298,154 328,076
Deferred income taxes 8,943 8,943
Other long-term liabilities 7,264 7,436
--------------------------------------------------------------------------------------------------------------------
Total liabilities 453,123 428,972
--------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred securities
of Avado Financing I, a subsidiary holding solely Avado
Brands, Inc. 7% convertible subordinated debentures
due March 1, 2027 115,000 115,000
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized 75,000,000 shares;
40,478,760 issued in 2000 and 1999 405 405
Additional paid-in capital 144,650 144,872
Retained earnings 155,837 166,305
Accumulated other comprehensive income (1,252) (278)
Treasury stock at cost; 15,136,666 shares in 2000 and 15,157,713 in 1999 (198,404) (198,680)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 101,236 112,624
--------------------------------------------------------------------------------------------------------------------
$ 669,359 656,596
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Unaudited)
(In thousands, except per share data)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income Stock Equity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 2, 2000 40,479 $405 $144,872 $166,305 ($278) ($198,680) $112,624
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings (loss) - - - (537) - - (537)
Foreign currency translation adjustment - - - - (163) - (163)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - (537) (163) - (700)
------------------------------------------------------------------------------------------------------------------------------------
Common stock issued to benefit plans - - (47) - - 69 22
------------------------------------------------------------------------------------------------------------------------------------
Balance at April 2, 2000 40,479 405 144,825 165,768 (441) (198,611) 111,946
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings (loss) - - - (1,665) - - (1,665)
Foreign currency translation adjustment - - - - (564) - (564)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - (1,665) (564) - (2,229)
------------------------------------------------------------------------------------------------------------------------------------
Common stock issued to benefit plans - - (60) - - 77 17
------------------------------------------------------------------------------------------------------------------------------------
Balance at July 2, 2000 40,479 405 144,765 164,103 (1,005) (198,534) 109,734
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings (loss) - - - (8,266) - - (8,266)
Foreign currency translation adjustment - - - - (247) - (247)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - (8,266) (247) - (8,513)
------------------------------------------------------------------------------------------------------------------------------------
Common stock issued to benefit plans - - (115) - - 130 15
------------------------------------------------------------------------------------------------------------------------------------
Balance at October 1, 2000 40,479 $405 $144,650 $155,837 ($1,252) ($198,404) $101,236
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
------------------------------------------------------------------------------------------------------------------------
Oct. 1, Oct. 3,
2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (10,468) 14,351
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 24,451 20,631
Loss (gain) on disposal of assets 3,051 (2,270)
Loss (income) from investments carried at equity 54 341
(Increase) decrease in assets:
Accounts receivable (1,871) (160)
Inventories (550) (1,101)
Prepaid expenses and other (7) (5,086)
Increase (decrease) in liabilities:
Accounts payable 6,716 (10,814)
Accrued liabilities 2,273 (5,765)
Income taxes (593) 829
Other long-term liabilities (172) (781)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,884 10,175
------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (44,707) (64,986)
Proceeds from notes receivable and disposal of assets, net 3,238 86,092
Investments in and advances to unconsolidated affiliates (1,016) (2,352)
Additions to noncurrent assets (2,260) (2,712)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (44,745) 16,042
------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit agreements 11,000 (49,585)
Proceeds from issuance of long-term debt - 95,467
Principal payments on long-term debt (17) (27)
Dividends declared and paid - (1,196)
Purchase of treasury stock - (85,538)
Net collateral payments on equity forward contracts - 10,714
------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,983 (30,165)
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,878) (3,948)
Cash and cash equivalents at the beginning of the period 11,267 7,216
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 389 3,268
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 1, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended January 2, 2000, except
as disclosed herein. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation
have been included. Operating results for the quarter and nine-month period
ended October 1, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
NOTE 2 - LONG-TERM DEBT
On April 3, 2000, the Company finalized an amendment to its $125.0 million
revolving credit facility which, among other things, reduces the credit
availability under the facility by $10.0 million on each October 1, 2000 and
December 31, 2000. Additional quarterly commitment reductions of $7.5 million
begin on April 4, 2001 and continue until the quarter ended March 31, 2002. The
remaining commitment of $67.5 million matures on June 22, 2002. At October 1,
2000, the Company has classified $41.0 million as current debt, representing the
portion of the revolving credit facility which is required to be repaid during
the next 12 months.
In connection with a sale-leaseback transaction which was closed on October
19, 2000, for 20 Hops restaurants and net proceeds of $27.7 million, the Company
completed an additional amendment to its revolving credit facility which, among
other things, modified certain financial covenants. The Company has also agreed
to limit capital expenditures to a total of $50 million in 2000 and $25 million
in 2001 and has agreed to forgo making any cash dividend payments on its common
stock. As of October 1, 2000, the Company was in compliance with all terms of
the credit facility as amended on October 13, 2000.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
For the nine-month period ended October 1, 2000 and October 3, 1999, the
following supplements the consolidated statements of cash flows (amounts in
thousands):
1999 2000
------------ ----------
Interest paid (net of amounts capitalized) $ 20,671 10,602
Distributions paid on preferred securities $ 6,038 6,038
Income taxes paid (refunded) $ (2,907) 5,571
NOTE 4 - SPECIAL CHARGES
In connection with the consolidation of office facilities and the
conclusion of the strategic alternatives evaluation which were announced in the
second quarter of 2000, the Company recorded a special charge of $4.0 million.
This charge reflected expenses of $2.5 million related to employee severance
agreements and other costs associated with the consolidation of the Don Pablo's
and Canyon Cafe corporate offices into the Company's corporate headquarters in
Madison, Georgia and $1.5 million associated with the completion of the
strategic alternatives evaluation. In the third quarter, the Company recorded an
additional $0.8 million charge relating predominately to additional hiring and
relocation costs associated with the second quarter office consolidation.
NOTE 5 - LOSS ON DISPOSAL OF ASSETS
Gain (loss) on disposal of assets for the quarter and nine months ended
October 1, 2000 primarily reflects actual and anticipated disposal of assets
primarily related to Don Pablo's, including the office facility located in
Bedford, Texas which is held for sale.
Page 7
<PAGE>
NOTE 6 - INCOME TAXES
Income tax benefit represents the effective rate of benefit on loss before
income taxes for the first nine months of 2000. The tax rate is based on the
Company's expected rate for the full fiscal 2000 year.
NOTE 7 - CONTINGENCIES
In November and December 1999, seven lawsuits were filed against the
Company alleging that a proposal made by a management group led by Tom E.
DuPree, Jr. to acquire the Company was unfair and that the price being proposed
as payment for Company common shares was inadequate. On April 24, 2000, the
Company announced that the most appropriate strategy at the present time was to
continue as a publicly traded company. In connection with this announcement,
these suits have been withdrawn.
In 1997, two lawsuits were filed by persons seeking to represent a class of
shareholders of the Company who purchased shares of the Company's common stock
between May 26, 1995 and September 24, 1996. Each plaintiff named the Company
and certain of its officers and directors as defendants. The complaints alleged
acts of fraudulent misrepresentation by the defendants which induced the
plaintiffs to purchase the Company's common stock and alleged illegal insider
trading by certain of the defendants, each of which allegedly resulted in losses
to the plaintiffs and similarly situated shareholders of the Company. The
complaints each sought damages and other relief. In 1998, one of these suits was
dismissed. In June 2000, the U.S. District Court for the Middle District of
Georgia dismissed with prejudice the remaining suit. The plaintiffs have
appealed the court's final decision. Although the ultimate outcome of the suit
cannot be determined at this time, the Company believes that the allegations
therein are without merit and intends to continue vigorously defending itself.
NOTE 8 - 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
October 1, 2000 and January 2, 2000, these partnerships in the non-guarantor
subsidiaries operated 58 and 51, respectively, of the Company's restaurants.
Accordingly, condensed consolidated balance sheets as of October 1, 2000 and
January 2, 2000, and condensed consolidated statements of earnings and cash
flows for the nine months ended October 1, 2000 and October 3, 1999 are provided
for such guarantor and non-guarantor subsidiaries. Separate financial statements
and other disclosures concerning the guarantor and non-guarantor subsidiaries
are not presented because management has determined that they are not material
to investors. There are no contractual restrictions on the ability of the
guarantor subsidiaries to make distributions to the Company.
<TABLE>
Condensed Consolidated Statement of Earnings
Nine Months Ended October 1, 2000
(In thousands)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 406,484 109,094 - 515,578
Restaurant operating expenses 358,384 97,795 - 456,179
General and administrative expenses 21,402 5,892 - 27,294
Special charges 4,849 - - 4,849
-----------------------------------------------------------------------------------------------------------------
Operating income 21,849 5,407 - 27,256
-----------------------------------------------------------------------------------------------------------------
Other income (expense) (33,933) (7,291) - (41,224)
Earnings (loss) before income taxes (12,084) (1,884) - (13,968)
Income taxes (3,000) (500) - (3,500)
-----------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (9,084) (1,384) - (10,468)
=================================================================================================================
</TABLE>
Page 8
<PAGE>
NOTE 8 - GUARANTOR SUBSIDIARIES (Continued)
<TABLE>
Condensed Consolidated Statement of Earnings
Nine Months Ended October 3, 1999
(In thousands)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 408,361 77,686 - 486,047
Restaurant operating expenses 345,861 68,500 - 414,361
General and administrative expenses 24,067 3,883 - 27,950
-----------------------------------------------------------------------------------------------------------------
Operating income 38,433 5,303 - 43,736
-----------------------------------------------------------------------------------------------------------------
Other income (expense) (21,140) (1,845) - (22,985)
Earnings before income taxes 17,293 3,458 - 20,751
Income taxes 5,375 1,025 - 6,400
-----------------------------------------------------------------------------------------------------------------
Net earnings $ 11,918 2,433 - 14,351
=================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Balance Sheet
October 1, 2000
(In thousands)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 32,408 1,968 - 34,376
Premises and equipment, net 384,316 59,249 - 443,565
Goodwill, net 112,076 20,808 - 132,884
Investments carried at equity 17,399 - - 17,399
Other assets 40,504 631 - 41,135
Intercompany investments 46,400 - (46,400) -
Intercompany advances 33,845 - (33,845) -
-----------------------------------------------------------------------------------------------------------------
$ 666,948 82,656 (80,245) 669,359
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 136,599 2,163 - 138,762
Long-term liabilities 314,113 248 - 314,361
Intercompany payables - 33,845 (33,845) -
Convertible preferred securities 115,000 - - 115,000
Shareholders' equity 101,236 46,400 (46,400) 101,236
-----------------------------------------------------------------------------------------------------------------
$ 666,948 82,656 (80,245) 669,359
=================================================================================================================
</TABLE>
Page 9
<PAGE>
NOTE 8 - GUARANTOR SUBSIDIARIES (Continued)
<TABLE>
Condensed Consolidated Balance Sheet
January 2, 2000
(In thousands)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 44,245 1,980 - 46,225
Premises and equipment, net 363,280 61,688 - 424,968
Goodwill, net 113,161 22,015 - 135,176
Investments carried at equity 17,411 - - 17,411
Other assets 32,534 282 - 32,816
Intercompany investments 47,784 - (47,784) -
Intercompany advances 34,408 - (34,408) -
-----------------------------------------------------------------------------------------------------------------
$ 652,823 85,965 (82,192) 656,596
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 81,024 3,493 - 84,517
Long-term liabilities 344,175 280 - 344,455
Intercompany payables - 34,408 (34,408) -
Convertible preferred securities 115,000 - - 115,000
Shareholders' equity 112,624 47,784 (47,784) 112,624
-----------------------------------------------------------------------------------------------------------------
$ 652,823 85,965 (82,192) 656,596
=================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
Nine Months Ended October 1, 2000
(In thousands)
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor Elimin-
Subsidiaries Subsidiaries ations Consolidated
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 19,837 3,047 - 22,884
Cash flows from investing activities:
Capital expenditures (42,978) (1,729) - (44,707)
Proceeds from disposal of assets, net 3,238 - - 3,238
Other investing activities (2,531) (745) - (3,276)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (42,271) (2,474) - (44,745)
----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements 11,000 - - 11,000
Principal payments on long-term debt (17) - - (17)
Proceeds from (payment of) interco. advances 563 (563) - -
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 11,546 (563) - 10,983
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,888) 10 - (10,878)
Cash and cash equivalents at beginning of the period 11,190 77 - 11,267
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 302 87 - 389
======================================================================================================================
</TABLE>
Page 10
<PAGE>
NOTE 8 - GUARANTOR SUBSIDIARIES (Continued)
<TABLE>
Condensed Consolidated Statement of Cash Flows
Nine Months Ended October 3, 1999
(In thousands)
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor Elimin-
Subsidiaries Subsidiaries ations Consolidated
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 5,397 4,778 - 10,175
Cash flows from investing activities:
Capital expenditures (56,996) (7,990) - (64,986)
Proceeds from disposal of assets, net 86,092 - - 86,092
Other investing activities (3,836) (1,228) - (5,064)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 25,260 (9,218) - 16,042
----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements (49,585) - - (49,585)
Proceeds from issuance of long-term debt 95,467 - - 95,467
Purchase of treasury stock (74,824) - - (74,824)
Proceeds from (payment of) interco. advances (4,457) 4,457 - -
Other financing activities (1,223) - - (1,223)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (34,622) 4,457 - (30,165)
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,965) 17 - (3,948)
Cash and cash equivalents at beginning of the period 7,162 54 - 7,216
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 3,197 71 - 3,268
======================================================================================================================
</TABLE>
NOTE 9 - SUBSEQUENT EVENTS
On October 19, 2000, the Company completed a sale-leaseback transaction
representing 20 Hops restaurants for net proceeds of $27.7 million. The Company
used proceeds from the completed sale-leaseback transaction to satisfy its
revolving credit commitment reductions through December 31, 2000, thereby
reducing total revolving credit availability to $105 million.
Page 11
<PAGE>
Item 2.
AVADO BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Third Quarter and Nine Months Ended October 1, 2000
Restaurant Sales
Consolidated restaurant sales for the third quarter and nine months ended
October 1, 2000 were $174.1 million and $515.6 million, respectively, compared
to $157.3 million and $486.0 million for the same respective periods of 1999.
Sales from "core" brands which include Don Pablo's Mexican Kitchen restaurants,
Hops Restaurant Bar & Brewery restaurants, McCormick & Schmick's seafood dinner
houses and Canyon Cafe restaurants increased 11% from prior year for both the
quarter and nine-month period. Increased core brand sales were somewhat offset
by sales from the divested Applebee's brand which comprised 4% of total sales in
the first nine months of 1999 compared to no sales in 2000. Increased core brand
sales were attributable to increased operating capacity from 16 new restaurants
opened in 2000 and 37 restaurants opened in 1999, somewhat offset by the closing
of six core restaurants in 1999. Additional sales generated from increased
operating capacity were slightly offset by a 0.6% decrease in same-store sales
for the third quarter as compared to the third quarter of 1999 (same-store-sales
comparisons include all restaurants open for 18 months as of the beginning of
the quarter). Same-store-sales increases of 5.8% at Hops and 1.7% at McCormick &
Schmick's were offset by decreases of 10.7% and 2.8% at Canyon Cafe and Don
Pablo's, respectively. On a year-to-date basis, same-store sales were
approximately equal to 1999.
During the first nine months of 2000, the Company opened 16 restaurants
including eight Hops, five McCormick & Schmick's, two Don Pablo's and one Canyon
Cafe. The following table presents core brand restaurants open at the end of the
third quarters of 2000 and 1999:
October 1, October 3,
2000 1999
----------------------------------------------------------------------------
Canyon Cafe 17 16
Don Pablo's 139 137
Hops 72 59
McCormick & Schmick's 31 24
----------------------------------------------------------------------------
Total 259 236
============================================================================
Page 12
<PAGE>
Restaurant Operating Expenses
The following table sets forth the percentages which certain items of
income and expense bear to total restaurant sales for the quarter and nine-month
periods ended October 1, 2000 and October 3, 1999:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales:
Canyon Cafe 5.4% 6.4% 5.7% 6.8%
Don Pablo's 43.5% 49.9% 44.3% 48.7%
Hops 27.0% 23.1% 27.2% 21.4%
McCormick & Schmick's 24.1% 20.6% 22.8% 18.7%
Applebee's - - - 4.4%
--------------------------------------------------------------------------------------------------------------
Total restaurant sales 100.0% 100.0% 100.0% 100.0%
--------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 29.5% 28.2% 28.9% 28.2%
Payroll and benefits 32.1% 30.1% 31.6% 30.6%
Depreciation and amortization 3.6% 3.3% 3.6% 3.1%
Other operating expenses 26.4% 24.4% 24.3% 23.3%
--------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 91.7% 86.0% 88.5% 85.3%
--------------------------------------------------------------------------------------------------------------
Income from restaurant operations 8.3% 14.0% 11.5% 14.7%
General and administrative expenses 5.1% 5.8% 5.3% 5.8%
--------------------------------------------------------------------------------------------------------------
Operating income before special charges 3.2% 8.2% 6.2% 9.0%
==============================================================================================================
</TABLE>
Restaurant operating expenses for the third quarter of 2000 were 91.7% of
sales compared to 86.0% in the corresponding period of 1999. The increase was
primarily attributable to (i) increased marketing initiatives at Don Pablo's and
Hops, (ii) increased food and beverage costs at Don Pablo's generated by the
implementation of a new menu coupled with the increased marketing initiatives
which resulted in a shift in sales mix to lower priced items, (iii) increased
payroll and benefits at Hops generated by management structure changes which
converted certain assistant management positions to hourly positions whereby
increasing hourly labor in the short-term and (iv) rising energy prices which
have had a negative impact on utility expenses and food and beverage costs due
to increased freight costs.
For the nine months ended October 1, 2000, restaurant operating expenses
were further impacted by increased food and beverage costs due primarily to a
focus on higher cost protein items at Don Pablo's, increased beef prices
impacting primarily Don Pablo's and Hops and a bar mix shift away from beer to
higher priced alcohol at Hops. Year-to-date increases in depreciation expenses
were generated primarily by the installation of new point-of-sale systems at Don
Pablo's and McCormick & Schmick's which was completed in the fourth quarter of
1999. Increased operating expenses were somewhat offset by a decrease in
preopening expenses due to fewer new restaurant openings in 2000 as compared to
1999.
General and Administrative Expenses
General and administrative expenses for the quarter and nine months ended
October 1, 2000 decreased to 5.1% from 5.8% and to 5.3% from 5.8%, respectively,
compared to the corresponding periods of 1999. The decrease was due primarily to
savings generated by the consolidation of the corporate offices for Don Pablo's
and Canyon Cafe, both in Texas, into the Company's corporate headquarters in
Madison, Georgia. The Company estimates that this consolidation and elimination
of other overhead costs will generate general and administrative expense savings
of approximately $6-7 million annually.
Page 13
<PAGE>
Special Charges
In connection with the consolidation of office facilities and the
conclusion of the strategic alternatives evaluation which were announced in the
second quarter of 2000, the Company recorded a special charge of $4.0
million.This charge reflected expenses of $2.5 million related to employee
severance agreements and other costs associated with the consolidation of the
Don Pablo's and Canyon Cafe corporate offices into the Company's corporate
headquarters in Madison, Georgia and $1.5 million associated with the completion
of the strategic alternatives evaluation. In the third quarter, the Company
recorded an additional $0.8 million charge relating predominately to additional
hiring and relocation costs associated with the second quarter office
consolidation.
Interest and Other Expenses
Interest expense for the third quarter and nine-month period ended October
1, 2000 was $10.5 million and $29.0 million, respectively, compared to $6.9
million and $16.1 million for the corresponding periods of the prior year. The
increase from prior year was predominately attributable to (i) interest expense
associated with the Company's $100 million 11.75% senior subordinated notes
issued in the second quarter of 1999, (ii) an increase in interest rates
associated with the revolving credit agreement, including a fixed to floating
interest rate swap, (iii) increased amortization of deferred loan costs
associated with the revolving credit agreement amendment finalized at the
beginning of the second quarter of 2000 and (iv) a decrease in interest income
as a result of the collection of notes receivable from the Applebee's
divestiture.
Gain(loss) on disposal of assets for the quarter and nine months ended
October 1, 2000 primarily reflects actual and anticipated disposal of assets
primarily related to Don Pablo's, including the office facility located in
Bedford, Texas which is held for sale.
Income (loss) from investments carried at equity primarily reflects income
from a 20% equity interest in Belgo Group PLC which was more than offset by 50%
of the losses associated with two restaurants opened in 1999 under the Company's
joint venture agreements with PizzaExpress PLC and Belgo Group PLC in addition
to start up expenses associated with a third joint venture restaurant opened in
the second quarter of 2000.
Income tax benefit represents the effective rate of benefit on loss before
income taxes for the first nine months of 2000. The tax rate is based on the
Company's expected rate for the full fiscal 2000 year.
Net loss for the nine-month period ended October 1, 2000 was $10.5 million
compared to net earnings of $14.4 million for the comparable prior-year period.
The decrease in net earnings was primarily attributable to (i) a $12.8 million
increase in interest expense as compared to the prior year, (ii) a decrease in
operating income before special charges of $11.6 million, (iii) special charges
of $4.8 million and (iv) a $3.1 million loss on disposal of assets compared to a
$2.3 million gain recorded in the prior year.
Liquidity and Capital Resources
The Company's historical and projected growth and its historical preference
to own the real estate on which its restaurants are situated typically have
caused it to be a net user of cash, even after a significant amount of expansion
financing was internally generated from operations. Based on current and
expected market conditions, the Company has committed to strategies to reduce
its leverage over time. New restaurant development has been dramatically reduced
in 2000 and 2001; the leasing of new sites to reduce initial capital will take
preference over ownership; and an aggressive program to realize cash from
various operating and non-operating assets has been implemented. Other
initiatives to reduce leverage are being employed, including a $27.7 million
sale-leaseback transaction which was completed on October 19, 2000 with $20
million of the proceeds used to permanently reduce debt. In addition, the
Company's Board of Directors has approved the suspension of the quarterly
dividend payment of $2.0 million on its convertible preferred securities. The
Company has the right to suspend these payments for up to 20 consecutive
quarters.
Page 14
<PAGE>
Principal sources of funds in the first nine months of 2000 consisted of
cash generated from operations of $22.9 million, proceeds from revolving credit
facilities of $11.0 million and proceeds from notes receivable of $3.2 million.
The primary use of funds consisted of capital expenditures of $44.7 million.
Capital expenditures in 2000 have provided for the opening of eight Hops, five
McCormick & Schmick's, two Don Pablo's and one Canyon Cafe restaurant in
addition to maintenance capital for existing restaurants. In the fourth quarter
of 2000 and in 2001, the primary uses of funds will be debt service payments and
capital expenditures. Capital expenditures for the construction of new
restaurants, which are predominately of a discretionary nature, are expected to
approximate $5 million for the remainder of 2000 and $20 million to $25 million
in 2001. Management believes that cash flow from operations, liquidation of
other assets and liquidity generated by the sale-leaseback transaction will
provide funding sufficient to satisfy the Company's debt service obligations and
expansion plans through fiscal 2001.
On April 3, 2000, the Company finalized an amendment to its $125.0 million
revolving credit facility which, among other things, reduces the credit
availability under the facility by $10.0 million on each October 1, 2000 and
December 31, 2000. Additional quarterly commitment reductions of $7.5 million
begin on April 4, 2001 and continue until the quarter ended March 31, 2002. The
remaining commitment of $67.5 million matures on June 22, 2002. At October 1,
2000, $123.5 million was outstanding on the facility and the Company has
classified $41.0 million as current debt, representing the portion of the
revolving credit facility which is required to be repaid during the next 12
months.
In October, the Company used proceeds from the completed sale-leaseback
transaction to satisfy its revolving credit commitment reductions through
December 31, 2000, thereby reducing total revolving credit availability to $105
million. In connection with the sale-leaseback transaction, the Company
completed an additional amendment to its revolving credit facility which, among
other things, modified certain financial covenants. The Company has also agreed
to limit capital expenditures to a total of $50 million in 2000 and $25 million
in 2001 and has agreed to forgo making any cash dividend payments on its common
stock. As of October 1, 2000, the Company was in compliance with all terms of
the credit facility as amended on October 13, 2000.
Since substantially all sales in the Company's restaurants are for cash and
accounts payable are generally due in 15 to 45 days, the Company operates with
negative working capital. Fluctuations in accounts receivable, inventories,
prepaid expenses and other, accounts payable and accrued liabilities occur
primarily as a result of new restaurant openings and the timing of settlement of
the Company's liabilities. Decreases in prepaid expenses and other occurred
during 2000 due primarily to the reclassification of $11.0 million in notes
receivable from executive officers to other assets. The maturity of the notes
was extended by the Board of Directors to June 30, 2002 and the interest rate
was increased to 11.5%.
Strategic Alternatives
In August 1999, the Company announced an initiative to evaluate strategic
alternatives which could enhance and maximize shareholder value, including a
proposal by a management group led by Tom E. DuPree, Jr. to acquire the Company.
On April 24, 2000, the Company announced the completion of the evaluation of
strategic alternatives and concluded that the most appropriate strategy at the
present time was to continue as a publicly traded company. In connection with
these announcements, seven lawsuits filed against the Company, alleging the
offer made by the management group to acquire the Company was inadequate, have
been withdrawn.
Effect of Inflation
Management believes that inflation has not had a material effect on
earnings during the past several years. Inflationary increases in the cost of
labor, food and other operating costs could adversely affect the Company's
restaurant operating margins. In the past, however, the Company generally has
been able to modify its operations, including raising prices, to offset
increases in its operating costs.
Page 15
<PAGE>
Forward-Looking Information
Certain information contained in this Form 10-Q, particularly information
regarding future economic performance and finances, restaurant development
plans, capital requirements and objectives of management, is forward looking. In
some cases, information regarding certain important factors that could cause
actual results to differ materially from any such forward-looking statement
appear together with such statement. Furthermore, the following factors, in
addition to other possible factors not listed, could affect the Company's actual
results and cause such results to differ materially from those expressed in
forward-looking statements. These factors include competition within the casual
dining restaurant industry, which remains intense; changes in economic
conditions such as inflation or a recession; consumer perceptions of food
safety; weather conditions; changes in consumer tastes; labor and benefit costs;
legal claims; the continued ability of the Company to obtain suitable locations
and financing for new restaurant development; government monetary and fiscal
policies; laws and regulations and governmental initiatives such as minimum wage
rates and taxes. Other factors that may cause actual results to differ from the
forward-looking statements contained in this release and that may affect the
Company's prospects in general are described in Exhibit 99.1 to Form 10-Q for
the quarter ended April 2, 2000 and the Company's other filings with the
Securities and Exchange Commission.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." As amended by SFAS No. 137, "Deferral of
the Effective Date of FASB Statement No. 133", SFAS 133 will be effective for
the Company's first quarter financial statements in fiscal 2001. The Company has
not completed its evaluation of the impact, if any, that adoption of this
statement will have on its consolidated financial position or results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and
changes in commodity prices. Exposure to interest rate risk relates primarily to
variable rate U.S. LIBOR obligations on revolving credit and interest rate swap
agreements. Interest rate swap agreements are utilized to manage overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
Two 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 October 1, 2000,
interest expense for the remainder of fiscal 2000, after considering the effects
of interest rate swap agreements, would increase by approximately $0.6 million.
The Company's exposure related to foreign LIBOR-based obligations is currently
limited by interest rate caps contained in the swap agreements and additional
interest rate increases would have no material impact on interest expense for
the remainder of 2000. The amount related to the Company's U.S. LIBOR
obligations was determined by considering the impact of hypothetical interest
rates on the Company's borrowing cost and interest rate swap agreements. In the
event of a change of such magnitude, management would likely take actions to
further mitigate interest rate exposures.
The Company purchases certain commodities such as beef, chicken, flour and
cooking oil. Purchases of these commodities are generally based on vendor
agreements which often contain contractual features that limit the price paid by
establishing price floors or caps. As commodity price aberrations are generally
short term in nature and have not historically had a significant impact on
operating performance, financial instruments are not used to hedge commodity
price risk.
Page 16
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Fourth amendment to $125 million Credit Agreement, dated as of
June 22, 1999, among Avado Brands, Inc. as borrower and
Wachovia Bank, National Association and Fleet National Bank,
successor in interest to BankBoston, N.A.
11.1 Computation of earnings per common share
27.1 Financial Data Schedule (EDGAR version only)
99.1 Safe Harbor Under the Private Securities Litigation Reform Act
of 1995*
* Incorporated by reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter
ended April 2, 2000.
(b) Reports on Form 8-K.
None
Page 17
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Avado Brands, Inc.
(Registrant)
Date: November 15, 2000 By: /s/ Erich J. Booth
-------------------------
Erich J. Booth
Chief Financial Officer
and Corporate Treasurer
Page 18
