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 July 2, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
---------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 August 16, 2000, there were 25,332,180 shares of common stock of
the Registrant outstanding.
<PAGE>
AVADO BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 2, 2000
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements:
Consolidated Statements of Earnings..........................3
Consolidated Balance Sheets..................................4
Consolidated Statements of Shareholders' Equity
and Comprehensive Income..................................5
Consolidated Statements of Cash Flows........................6
Notes to Consolidated Financial Statements...................7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations...............12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..16
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders.........17
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) Quarter Ended Six Months Ended
---------------------------------------------------------------------------------------------- -----------------------------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Restaurant sales:
Canyon Cafe $ 9,731 11,179 20,023 23,078
Don Pablo's 77,098 84,083 152,683 158,455
Hops 46,772 35,173 92,954 67,705
McCormick & Schmick's 40,878 30,577 75,839 58,382
Applebee's - 3,709 - 21,176
---------------------------------------------------------------------------------------------- -----------------------------------
Total restaurant sales 174,479 164,721 341,499 328,796
---------------------------------------------------------------------------------------------- -----------------------------------
Restaurant operating expenses:
Food and beverage 49,734 47,336 97,603 92,980
Payroll and benefits 54,690 50,346 107,205 101,533
Depreciation and amortization 6,296 4,791 12,290 9,683
Other operating expenses 40,398 38,220 79,522 74,922
---------------------------------------------------------------------------------------------- -----------------------------------
Total restaurant operating expenses 151,118 140,693 296,620 279,118
---------------------------------------------------------------------------------------------- -----------------------------------
General and administrative expenses 7,835 9,014 18,338 18,854
Special charges 4,049 - 4,049 -
---------------------------------------------------------------------------------------------- -----------------------------------
Operating income 11,477 15,014 22,492 30,824
---------------------------------------------------------------------------------------------- ----------------------------------
Other income (expense):
Interest expense, net (9,707) (4,293) (18,524) (9,234)
Distributions on preferred securities (2,013) (2,013) (4,025) (4,025)
Gain (loss) on disposal of assets (1,701) 920 (1,701) 2,270
Income (loss) from investments carried at equity (23) (97) 23 (230)
Other, primarily goodwill amortization (1,023) (888) (2,042) (1,860)
---------------------------------------------------------------------------------------------- ----------------------------------
Total other income (expense) (14,467) (6,371) (26,269) (13,079)
---------------------------------------------------------------------------------------------- ----------------------------------
Earnings (loss) before income taxes (2,990) 8,643 (3,777) 17,745
Income taxes (1,325) 2,675 (1,575) 5,825
---------------------------------------------------------------------------------------------- ----------------------------------
Net earnings (loss) $ (1,665) 5,968 (2,202) 11,920
============================================================================================== ==================================
Basic earnings (loss) per common share $ (0.07) 0.21 (0.09) 0.40
============================================================================================== ==================================
Diluted earnings (loss) per common share $ (0.07) 0.20 (0.09) 0.39
============================================================================================== ==================================
See accompanying notes to consolidated financial statements.
</TABLE>
Page 3
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
------------------------------------------------------------------------------------------------------------------------------------
July 2, Jan. 2,
2000 2000
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 390 11,267
Accounts receivable 10,022 7,257
Inventories 9,821 9,097
Prepaid expenses and other 4,115 17,399
Assets held for sale 10,638 1,205
------------------------------------------------------------------------------------------------------------------------------------
Total current assets 34,986 46,225
Premises and equipment, net 437,311 424,968
Goodwill, net 133,793 135,176
Investments in and advances to unconsolidated affiliates 17,238 17,411
Other assets 40,975 32,816
------------------------------------------------------------------------------------------------------------------------------------
$ 664,303 656,596
====================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 25,452 21,620
Accrued liabilities 31,754 34,727
Current installments of long-term debt 30,767 11
Income taxes 29,623 28,159
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 117,596 84,517
Long-term debt 305,625 328,076
Deferred income taxes 8,943 8,943
Other long-term liabilities 7,405 7,436
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 439,569 428,972
------------------------------------------------------------------------------------------------------------------------------------
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 144,765 144,872
Retained earnings 164,103 166,305
Accumulated other comprehensive income (1,005) (278)
Treasury stock at cost; 15,146,580 shares in 2000 and 15,157,713 in 1999 (198,534) (198,680)
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 109,734 112,624
------------------------------------------------------------------------------------------------------------------------------------
$ 664,303 656,596
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
Page 4
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Unaudited)
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
------------------------------------------------------------------------------------------------------------------------------------
<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
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
Page 5
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) Six Months Ended
------------------------------------------------------------------------------------------------------------------------------------
July 2, July 4,
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (2,202) 11,920
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 16,181 12,555
Loss (gain) on disposal of assets 1,701 (2,270)
Loss (income) from investments carried at equity (23) 230
(Increase) decrease in assets:
Accounts receivable (2,515) 1,366
Inventories (724) (1,395)
Prepaid expenses and other 339 (8,922)
Increase (decrease) in liabilities:
Accounts payable 769 4,519
Accrued liabilities (3,273) (12,348)
Income taxes 1,464 1,428
Other long-term liabilities (31) (294)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 11,686 6,789
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (31,547) (45,928)
Proceeds from notes receivable and disposal of assets, net 3,238 85,445
Investments in and advances to unconsolidated affiliates (531) (2,144)
Additions to noncurrent assets (1,956) (778)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (30,796) 36,595
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit agreements 8,244 (69,487)
Proceeds from issuance of long-term debt - 95,467
Principal payments on long-term debt (11) (21)
Dividends declared and paid - (815)
Purchase of treasury stock - (85,337)
Net collateral payments on equity forward contracts - 10,714
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 8,233 (49,479)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,877) (6,095)
Cash and cash equivalents at the beginning of the period 11,267 7,216
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 390 1,121
====================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
Page 6
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended January 2, 2000, except
as disclosed herein. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation
have been included. Operating results for the quarter and six-month period ended
July 2, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000.
NOTE 2 - LONG-TERM DEBT
On April 3, 2000, the Company finalized an amendment to its $125.0 million
revolving credit facility which, among other things, reduces the credit
availability under the facility by $10.0 million on each October 1, 2000 and
December 31, 2000. Additional quarterly commitment reductions of $7.5 million
begin on April 4, 2001 and continue until the quarter ended March 31, 2002. The
remaining commitment of $67.5 million matures on June 22, 2002. At July 2, 2000,
the Company has classified $30.8 million as current debt, representing the
portion of the revolving credit facility which is required to be repaid during
the next 12 months.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
For the quarters ended July 2, 2000 and July 4, 1999, the following supplements
the consolidated statements of cash flows (amounts in thousands):
2000 1999
-------------- -----------
Interest paid (net of amounts capitalized) $ 17,702 9,313
Distributions paid on preferred securities $ 4,025 4,025
Income taxes paid (refunded) $ (3,039) 4,397
NOTE 4 - SPECIAL CHARGES
In connection with the consolidation of office facilities in April and May 2000
and the conclusion of the strategic alternatives evaluation which was announced
on April 24, 2000, the Company recorded a special, one-time charge of $4.0
million. This charge reflects 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.
NOTE 5 - LOSS ON DISPOSAL OF ASSETS
Gain (loss) on disposal of assets for the quarter and six months ended July 2,
2000 reflects the write down of assets associated with the Don Pablo's office
facility located in Bedford, Texas which is held for sale. The Company recorded
this charge based upon a contract for sale of the facility which is expected to
close in the third quarter of 2000, generating net proceeds of approximately
$5.2 million.
Page 7
<PAGE>
NOTE 6 - INCOME TAXES
Income tax benefit represents the effective rate of benefit on loss before
income taxes for the first six 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
July 2, 2000 and January 2, 2000, these partnerships in the non-guarantor
subsidiaries operated 56 and 51, respectively, of the Company's restaurants.
Accordingly, condensed consolidated balance sheets as of July 2, 2000 and
January 2, 2000, and condensed consolidated statements of earnings and cash
flows for the six months ended July 2, 2000 and July 4, 1999 are provided for
such guarantor and non-guarantor subsidiaries. Separate financial statements and
other disclosures concerning the guarantor and non-guarantor subsidiaries are
not presented because management has determined that they are not material to
investors. There are no contractual restrictions on the ability of the guarantor
subsidiaries to make distributions to the Company.
<TABLE>
Condensed Consolidated Statement of Earnings
Six Months Ended July 2, 2000
(In thousands)
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 270,021 71,478 - 341,499
Restaurant operating expenses 233,340 63,280 - 296,620
General and administrative expenses 14,432 3,906 - 18,338
Special charges 4,049 - - 4,049
-------------------------------------------------------------------------------------------------------------------
Operating income 18,200 4,292 - 22,492
-------------------------------------------------------------------------------------------------------------------
Other income (expense) (21,678) (4,591) - (26,269)
Earnings (loss) before income taxes (3,478) (299) - (3,777)
Income taxes (1,490) (85) - (1,575)
-------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (1,988) (214) - (2,202)
===================================================================================================================
</TABLE>
Page 8
<PAGE>
<TABLE>
NOTE 8 - GUARANTOR SUBSIDIARIES (Continued)
Condensed Consolidated Statement of Earnings
Six Months Ended July 4, 1999
(In thousands)
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 277,940 50,856 - 328,796
Restaurant operating expenses 234,536 44,582 - 279,118
General and administrative expenses 16,328 2,526 - 18,854
-------------------------------------------------------------------------------------------------------------------
Operating income 27,076 3,748 - 30,824
-------------------------------------------------------------------------------------------------------------------
Other income (expense) (11,470) (1,609) - (13,079)
Earnings before income taxes 15,606 2,139 - 17,745
Income taxes 5,150 675 - 5,825
-------------------------------------------------------------------------------------------------------------------
Net earnings $ 10,456 1,464 - 11,920
===================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Balance Sheet
July 2, 2000
(In thousands)
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 32,843 2,143 - 34,986
Premises and equipment, net 376,665 60,646 - 437,311
Goodwill, net 111,596 22,197 - 133,793
Investments carried at equity 17,238 - - 17,238
Other assets 40,381 594 - 40,975
Intercompany investments 45,595 - (45,595) -
Intercompany advances 36,028 - (36,028) -
-------------------------------------------------------------------------------------------------------------------
$ 660,346 85,580 (81,623) 664,303
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 114,045 3,551 - 117,596
Long-term liabilities 321,567 406 - 321,973
Intercompany payables - 36,028 (36,028) -
Convertible preferred securities 115,000 - - 115,000
Shareholders' equity 109,734 45,595 (45,595) 109,734
-------------------------------------------------------------------------------------------------------------------
$ 660,346 85,580 (81,623) 664,303
===================================================================================================================
</TABLE>
Page 9
<PAGE>
<TABLE>
NOTE 8 - GUARANTOR SUBSIDIARIES (Continued)
Condensed Consolidated Balance Sheet
January 2, 2000
(In thousands)
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
Six Months Ended July 2, 2000
(In thousands)
Guarantor Non-Guarantor Elimin-
Subsidiaries Subsidiaries ations Consolidated
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 11,377 309 - 11,686
Cash flows from investing activities:
Capital expenditures (30,333) (1,214) - (31,547)
Proceeds from disposal of assets, net 3,238 - - 3,238
Other investing activities (1,779) (708) - (2,487)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (28,874) (1,922) - (30,796)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements 8,244 - - 8,244
Principle payments on long-term debt (11) - - (11)
Proceeds from (payment of) interco. advances (1,620) 1,620 - -
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,613 1,620 - 8,233
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,884) 7 - (10,877)
Cash and cash equivalents at beginning of the period 11,190 77 - 11,267
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 306 84 - 390
===================================================================================================================
</TABLE>
Page 10
<PAGE>
<TABLE>
NOTE 8 - GUARANTOR SUBSIDIARIES (Continued)
Condensed Consolidated Statement of Cash Flows
Six Months Ended July 4, 1999
(In thousands)
Guarantor Non-Guarantor Elimin-
Subsidiaries Subsidiaries ations Consolidated
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 1,225 5,537 - 6,762
Cash flows from investing activities:
Capital expenditures (38,120) (7,808) - (45,928)
Proceeds from disposal of assets, net 85,445 - - 85,445
Other investing activities (2,399) (496) - (2,895)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 44,926 (8,304) - 36,622
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving
credit agreements (69,487) - - (69,487)
Proceeds from issuance of long-term debt 95,467 - - 95,467
Purchase of treasury stock (85,337) - - (85,337)
Proceeds from (payment of) interco. advances (2,779) 2,779 - -
Other financing activities 9,878 - - 9,878
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (52,258) 2,779 - (49,479)
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,107) 12 - (6,095)
Cash and cash equivalents at beginning of the period 7,162 54 - 7,216
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 1,055 66 - 1,121
===================================================================================================================
</TABLE>
Page 11
<PAGE>
Item 2.
AVADO BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Second Quarter and Six Months Ended July 2, 2000
Restaurant Sales
Consolidated restaurant sales for the second quarter and six months ended July
2, 2000 were $174.5 million and $341.5 million, respectively, compared to $164.7
million and $328.8 million for the same respective periods of 1999. The
increases reflect 8% and 11% increases from prior year for the quarter and
six-month period, respectively, in sales from "core" brands which include Don
Pablo's Mexican Kitchen restaurants, Hops Restaurant Bar & Brewery restaurants,
McCormick & Schmick's seafood dinner houses and Canyon Cafe restaurants.
Increased core brand sales were somewhat offset by sales from the divested
Applebee's brand which comprised 6% of total sales in the first half of 1999
compared to no sales in 2000. Increased core brand sales were attributable to
increased operating capacity from 11 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 partially offset by a 2.2% decrease in same- store sales for the
second quarter as compared to the second 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 8.2% at Hops and 3.8% at McCormick &
Schmick's were offset by decreases of 7.8% and 6.3% at Don Pablo's and Canyon
Cafe, respectively. On a year-to-date basis, same-store sales were approximately
equal to 1999.
During the first six months of 2000, the Company opened 11 restaurants including
six Hops, four McCormick & Schmick's and one Don Pablo's. The following table
presents core brand restaurants open at the end of the second quarters of 2000
and 1999:
July 2, July 4,
2000 1999
-------------------------------------------------------------------------------
Canyon Cafe 16 17
Don Pablo's 138 137
Hops 70 55
McCormick & Schmick's 30 22
-------------------------------------------------------------------------------
Total 254 231
===============================================================================
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 six-month periods
ended July 2, 2000 and July 4, 1999:
<TABLE>
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales:
Canyon Cafe 5.6% 6.8% 5.9% 7.0%
Don Pablo's 44.2% 51.0% 44.7% 48.2%
Hops 26.8% 21.4% 27.2% 20.6%
McCormick & Schmick's 23.4% 18.6% 22.2% 17.8%
Applebee's - 2.3% - 6.4%
----------------------------------------------------------------------------------------------------------
Total restaurant sales 100.0% 100.0% 100.0% 100.0%
----------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 28.5% 28.7% 28.6% 28.3%
Payroll and benefits 31.3% 30.6% 31.4% 30.9%
Depreciation and amortization 3.6% 2.9% 3.6% 2.9%
Other operating expenses 23.2% 23.2% 23.3% 22.8%
----------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 86.6% 85.4% 86.9% 84.9%
----------------------------------------------------------------------------------------------------------
Income from restaurant operations 13.4% 14.6% 13.1% 15.1%
General and administrative expenses 4.5% 5.5% 5.4% 5.7%
----------------------------------------------------------------------------------------------------------
Operating income before special charges 8.9% 9.1% 7.8% 9.4%
==========================================================================================================
</TABLE>
Restaurant operating expenses for the second quarter of 2000 were 86.6% of sales
compared to 85.4% in the corresponding period of 1999. The increase was
primarily attributable to (i) increased staffing, predominately at the
management level, at Don Pablo's and Hops and (ii) increased depreciation
associated with the installation of new point- of-sale systems at Don Pablo's
and McCormick & Schmick's which was completed in the fourth quarter of 1999. For
the six months ended July 2, 2000, increased food and beverage costs were 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. In the second quarter, food and beverage
costs compared favorably to the prior year due to increased costs in 1999
associated with the Don Pablo's summer promotional menu. Other operating
expenses for the first half of 2000 increased over the prior year due to
increased advertising expense at Hops, Don Pablo's and Canyon Cafe. The
increased advertising costs were substantially 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 ended July 2, 2000 decreased
to 4.5% from 5.5% in the corresponding period 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.
Special Charges
In connection with the consolidation of office facilities in April and May 2000
and the conclusion of the strategic alternatives evaluation which was announced
on April 24, 2000, the Company recorded a special, one-time charge of $4.0
million. This charge reflects expenses of $2.5 million related to employee
severance agreements and other costs related to the Don Pablo's and Canyon Cafe
office consolidations and $1.5 million associated with the completion of the
strategic alternatives evaluation.
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Interest and Other Expenses
Interest expense for the second quarter and six-month period ended July 2, 2000
was $9.7 million and $18.5 million, respectively, compared to $4.3 million and
$9.2 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 six months ended July 2,
2000 reflects the write down of assets associated with the Don Pablo's office
facility located in Bedford, Texas which is held for sale. The Company recorded
this charge based upon a contract for sale of the facility which is expected to
close in the third quarter of 2000, generating net proceeds of approximately
$5.2 million.
Income (loss) from investments carried at equity primarily reflects income from
a 20% equity interest in Belgo Group PLC which was partially 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 six months of 2000. The tax rate is based on the
Company's expected rate for the full fiscal 2000 year.
Net loss for the six-month period ended July 2, 2000 was $2.2 million compared
to net earnings of $11.9 million for the comparable prior-year period. The
decrease in net earnings was primarily attributable to (i) a $9.3 million
increase in interest expense as compared to the prior year, (ii) special charges
of $4.0 million recorded in the second quarter of 2000 and (iii) a $1.7 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; an aggressive program to realize cash from various
non-operating assets has been implemented; and other initiatives to reduce
leverage are being evaluated, including the approval by the Board of Directors
for a sale-leaseback transaction anticipated to be in the $50 million to $75
million range.
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 in
the second quarter of 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%.
Principal sources of funds in the first six months of 2000 consisted of cash
generated from operations of $11.7 million, proceeds from revolving credit
facilities of $8.2 million and proceeds from notes receivable of $3.2 million.
The primary uses of funds consisted of capital expenditures of $31.5 million.
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Capital expenditures during the first six months of 2000 provided for the
opening of six Hops, four McCormick & Schmick's and one Don Pablo's restaurant
in addition to maintenance capital for existing restaurants. Capital
requirements for the construction of new restaurants are expected to approximate
$13 million for the remainder of 2000 and $30 million to $40 million in 2001.
Management believes that cash flow from operations and liquidation of other
assets will provide funding sufficient to satisfy expansion plans through fiscal
2001.
On April 3, 2000, the Company finalized an amendment to its $125.0 million
revolving credit facility which, among other things, reduces the credit
availability under the facility by $10.0 million on each October 1, 2000 and
December 31, 2000. Additional quarterly commitment reductions of $7.5 million
begin on April 4, 2001 and continue until the quarter ended March 31, 2002. The
remaining commitment of $67.5 million matures on June 22, 2002. At July 2, 2000,
$120.7 million was outstanding on the facility and the Company has classified
$30.8 million as current debt, representing the portion of the revolving credit
facility which is required to be repaid during the next 12 months. In accordance
with the April 3, 2000 amendment, the Company's total credit availability will
be reduced to $115.0 million on October 1, 2000. Management believes that cash
flow from operations and liquidation of other assets, including net proceeds in
excess of $5.0 million from the sale of the Don Pablo's office facility which is
under contract and expected to close by the end of August, will be sufficient to
meet its obligations under the revolving credit facility.
Strategic Alternatives
In August 1999, the Company announced an initiative to evaluate strategic
alternatives which could enhance and maximize shareholder value, including a
proposal by a management group led by Tom E. DuPree, Jr. to acquire the Company.
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.
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.
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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 July 2, 2000, interest
expense for the remainder of fiscal 2000, after considering the effects of
interest rate swap agreements, would increase by approximately $1.1 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 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.
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Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on June 30, 2000, at which the
following proposals were voted upon by shareholders: (1) the election of six
members of the Board of Directors, (2) a proposal to approve an amendment to the
Company's Articles of Incorporation to effect a one-for-four reverse split of
the Company's common stock and (3) ratification of the selection of KPMG LLP as
the Company's independent auditors.
Each of the six members of the Company's Board of Directors was elected to serve
a term of one year and until his successor is elected, and has qualified by the
following votes:
Affirmative Negative
Tom E. DuPree, Jr. 21,607,626 1,698,132
Erich J. Booth 21,871,869 1,433,889
William P. McCormick 21,919,465 1,386,293
Robert Sroka 21,885,367 1,420,391
William V. Lapham 21,882,342 1,423,416
Emilio Alvarez-Recio 21,883,191 1,422,567
The remaining proposals voted on at the June 30, 2000 annual meeting of
shareholders were approved as follows:
Affirmative Negative Abstaining
Approval of reverse stock split 22,276,316 995,415 34,027
Appointment of KPMG LLP 23,033,780 237,634 34,344
Subsequent to the annual meeting of shareholders, the Board of Directors voted
to abandon the one-for-four reverse stock split.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11.1 Computation of earnings per common share
27.1 Financial Data Schedule (EDGAR version only)
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of
1995*
* Incorporated by reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter
ended April 2, 2000.
(b) Reports on Form 8-K.
None
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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: August 16, 2000 By: /s/ Erich J. Booth
---------------------------
Erich J. Booth
Chief Financial Officer and
Corporate Treasurer
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