<PAGE> 1
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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 FEBRUARY 15, 1998
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 0-4377
---------------------------
SHONEY'S, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0799798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1727 ELM HILL PIKE, NASHVILLE, TN 37210
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 391-5201
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
As of March 30, 1998 there were 48,673,365 shares of Shoney's, Inc., $1
par value common stock outstanding.
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<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
February 15, October 26,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,213,523 $ 11,851,223
Notes and accounts receivable, less allowance
for doubtful accounts of $1,493,000 in 1998
and $1,596,000 in 1997 11,249,347 11,611,369
Inventories 36,605,389 38,382,843
Other current assets 8,344,114 4,840,539
Deferred income taxes 45,042,047 38,835,385
Net assets held for disposal 25,558,714 28,021,259
------------- -------------
Total current assets 134,013,134 133,542,618
Property, plant and equipment, at cost 791,897,178 790,076,204
Less accumulated depreciation and amortization (358,128,714) (343,645,369)
------------- -------------
Net property, plant and equipment 433,768,464 446,430,835
Other assets:
Goodwill (net of accumulated amortization of
$4,032,000 in 1998 and $3,230,000 in 1997) 46,279,439 47,803,815
Deferred charges and other intangible assets 12,044,618 5,889,044
Other assets 10,781,016 11,022,447
------------- -------------
Total other assets 69,105,073 64,715,306
------------- -------------
$ 636,886,671 $ 644,688,759
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 32,732,636 $ 34,156,943
Federal and state income taxes 112,319
Other accrued liabilities 108,357,421 110,501,665
Reserve for litigation settlement due within one year 10,372,961 16,010,297
Debt and capital lease obligations
due within one year 11,637,718 10,997,069
------------- -------------
Total current liabilities 163,100,736 171,778,293
Long-term senior debt and
capital lease obligations 322,642,185 314,802,187
Zero coupon subordinated convertible debentures 106,312,674 103,612,284
Subordinated convertible debentures (net of bond discount of $3,737,000
in 1998 and $3,939,000 in 1997) 47,825,792 47,624,146
Reserve for litigation settlement 272,008 294,672
Deferred income and other liabilities 19,796,238 18,922,137
Shareholders' deficit:
Common stock, $1 par value: authorized
200,000,000; issued 48,673,365 in 1998
48,568,109 in 1997 48,673,365 48,568,109
Additional paid-in capital 137,068,435 136,861,158
Accumulated deficit (208,804,762) (197,774,227)
------------- -------------
Total shareholders' deficit (23,062,962) (12,344,960)
------------- -------------
$ 636,886,671 $ 644,688,759
============= =============
</TABLE>
See notes to consolidated condensed financial statements
2
<PAGE> 3
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
February 15, February 16,
1998 1997
------------- -------------
<S> <C> <C>
Revenues
Net sales $ 332,223,895 $ 356,743,001
Franchise fees 4,393,316 4,354,776
Other income 2,479,982 2,192,556
------------- -------------
339,097,193 363,290,333
Costs and expenses
Cost of sales 310,044,749 328,274,313
General and administrative expenses 25,665,871 25,035,929
Impairment write down of long-lived assets 2,593,482 17,612,067
Interest expense 15,887,488 13,984,747
------------- -------------
Total costs and expenses 354,191,590 384,907,056
------------- -------------
Loss before income taxes and extraordinary charge (15,094,397) (21,616,723)
Benefit from income taxes (5,479,000) (7,847,000)
------------- -------------
Loss before extraordinary charge (9,615,397) (13,769,723)
Extraordinary charge for the early extinguishment
of debt, net of income taxes of $806,000 (1,415,138)
------------- -------------
Net loss $ (11,030,535) $ (13,769,723)
============= =============
Earnings per common share
Basic and diluted:
Loss before extraordinary charge $ (0.20) $ (0.28)
Extraordinary charge for the
early extinguishment of debt (0.03)
------------- -------------
Net loss $ (0.23) $ (0.28)
============= =============
Weighted average shares outstanding
Basic and diluted 48,610,211 48,491,508
Common shares outstanding 48,673,365 48,551,609
Dividends per share NONE NONE
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
February 15, February 16,
1998 1997
------------- ------------
<S> <C> <C>
Operating activities
Net loss $ (11,030,535) $(13,769,723)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 14,943,369 16,910,219
Amortization of deferred charges and other
non-cash charges 7,655,215 3,914,916
Impairment write down of long-lived assets 2,593,482 17,612,067
Changes in operating assets and liabilities (9,441,194) (20,245,917)
------------- ------------
Net cash provided by operating activities 4,720,337 4,421,562
Investing activities
Cash required for property, plant and equipment (8,230,383) (14,923,660)
Proceeds from disposal of property, plant and equipment 4,908,306 6,644,125
Cash required for other assets (36,192) (52,885)
------------- ------------
Net cash used by investing activities (3,358,269) (8,332,420)
Financing activities
Payments on long-term debt and
capital lease obligations (290,549,793) (6,974,985)
Proceeds from long-term debt 300,000,000
Net proceeds from short-term borrowings 1,143,000 12,672,000
Payments on litigation settlement (5,660,000) (5,740,600)
Cash required for debt issue costs (10,954,750) (239,604)
Proceeds from exercise of employee stock options 21,775 155,717
------------- ------------
Net cash used by financing activities (5,999,768) (127,472)
------------- ------------
Change in cash and cash equivalents $ (4,637,700) $ (4,038,330)
============= ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
SHONEY'S, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
February 15, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. As a result, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The Company, in
management's opinion, has included all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations. Certain reclassifications have been made in the consolidated
condensed financial statements to conform to the 1998 presentation. Operating
results for the sixteen week period ended February 15, 1998 are not necessarily
indicative of the results that may be expected for all or any balance of the
fiscal year ending October 25, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Shoney's, Inc. Annual Report on Form 10-K for the year ended October 26, 1997.
NOTE 2 - IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR DISPOSAL
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"), at the beginning of the first quarter of fiscal
1997. Based on a review of the Company's restaurants which had incurred
operating losses or negative cash flows during fiscal 1996 and a review of the
cash flows from individual restaurant properties rented to others ("rental
properties"), the Company determined that certain of its restaurant assets and
rental properties were impaired and recorded a loss to write them down to their
estimated fair values. The charge related to the initial adoption of SFAS 121
was $17.6 million ($11.2 million, net of tax) and is included in the statement
of operations for the quarter ended February 16, 1997 in the caption titled
Impairment write down of long-lived assets. Approximately $11.2 million of the
asset impairment write down related to properties held for disposal and
approximately $6.4 million related to assets held and used in the Company's
operations. The Company recorded an asset impairment charge of $36.4 million in
the fourth quarter of 1997, of which $33.1 million was related to assets held
and used in the Company's operations and $3.3 million was related to assets held
for disposal. The fourth quarter 1997 impairment was the result of additional
analysis by management and a full years operating results from the restaurants
acquired from TPI Enterprises, Inc. in 1996. During the first quarter of 1998
the Company recorded an additional impairment loss of $2.6 million of which $0.9
million was related to assets held and used in the Company's operations and $1.7
million related to the adjustment of fair values of assets held for disposal.
During the first quarter of 1998, the Company incurred approximately $1.2
million in exit costs associated with the closure (or planned closure) of 15
leased restaurants. At February 15, 1998, the value of the 80 properties to be
disposed of was $25.6 million and is reflected on the balance sheet as net
assets held for disposal. Included in net assets held for disposal are 7
operating restaurants which management intends to close. These 7 restaurants
reported revenues of $1.6 million and $1.7 million and operating losses of
$284,000 and $306,000 for the first quarter of 1998 and 1997,
5
<PAGE> 6
respectively.
NOTE 3 - EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standard No. 128 ("SFAS
128") "Earnings per Share" at the beginning of the first quarter of 1998. SFAS
128 supersedes Accounting Principles Board Opinion No. 15 ("APB 15") "Earnings
per Share" and was issued to simplify the computation of earnings per share
("EPS") by replacing Primary EPS, which considers common stock and common stock
equivalents in its denominator, with Basic EPS, which considers only the
weighted-average common shares outstanding. SFAS 128 also replaces Fully Diluted
EPS with Diluted EPS, which considers all securities that are exercisable or
convertible into common stock and which would either dilute or not effect Basic
EPS. SFAS 128 requires that all prior periods presented be restated.
The table below presents the computation of basic and diluted loss per share:
<TABLE>
<CAPTION>
Quarter Ended February 15, 1998
-------------------------------
Loss Shares Per Share Amount
---- ------ ----------------
<S> <C> <C> <C>
Basic and diluted loss per share:
Loss before extraordinary charge $ (9,615,397) 48,610,211 $(0.20)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended February 16, 1997
-------------------------------
Loss Shares Per Share Amount
---- ------ ----------------
<S> <C> <C> <C>
Basic and diluted loss per share:
Net loss $(13,769,723) 48,491,508 $(0.28)
</TABLE>
For both the first quarter of 1998 and 1997 the Company reported a net loss,
therefore, any potentially dilutive securities considered in the computation of
diluted EPS would have been antidilutive. Accordingly, the denominator for both
basic and diluted EPS is the weighted-average number of common shares
outstanding. As of February 15, 1998, the Company had outstanding approximately
5,497,000 options to purchase shares at prices ranging from $3.06 to $25.51. In
addition to options to purchase shares, the Company had approximately 137,000
common shares reserved for future distribution pursuant to certain employment
agreements, and approximately 9,750 common shares reserved for future
distribution under its stock bonus plan. The Company also has subordinated zero
coupon convertible debentures and 8.25% subordinated convertible debentures
which are convertible into common stock at the option of the debenture holder.
As of February 15, 1998, the Company had reserved 5,205,632 and 2,604,328
shares, respectively, related to these convertible debentures. The zero coupon
debentures are due in April 2004 and the 8.25% debentures are due in July 2002.
NOTE 4 - INCOME TAXES
Income taxes for the sixteen week periods ending February 15, 1998 and February
16, 1997 were provided based on the Company's estimate of its effective tax
rates of 36.3% for both periods for the entire respective fiscal years.
6
<PAGE> 7
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been established for tax credit carryforwards that are not expected to be
realized. The Company believes it is more likely than not that the remaining
deferred tax assets will be realized through the reversal of existing taxable
temporary differences within the carryforward period, the carryback of existing
deductible temporary differences to prior years' taxable income or through the
use of future pretax book income.
NOTE 5 - SENIOR DEBT
On December 2, 1997, the Company completed a refinancing of approximately $281.0
million of its senior debt. The new credit facility replaced the Company's
revolving credit facility, senior secured bridge loan, and other senior debt
mortgage financing agreements. The new credit facility of up to $375.0 million
consists of a $75.0 million line of credit ("Line of Credit"), and two term
notes of $100.0 million and $200.0 million ("Term A Note" and "Term B Note"),
respectively, due in April 2002. Initially, the credit facility bears interest
at 2.5% over LIBOR or 1.5% over the prime rate for amounts outstanding under the
Line of Credit and Term A Note, and bears interest at 3.0% over LIBOR or 2.0%
over the prime rate for Term B Note. Based on certain financial requirements,
the applicable margins could increase a maximum of .25% or decrease up to 1.0%
from the initial margins. In connection with the refinancing, the Company agreed
to terminate a $20.0 million bank line of credit which was replaced by the $75.0
million Line of Credit. At February 15, 1998, the amounts available under the
Line of Credit were reduced by letters of credit of approximately $24.2 million,
and $1.1 million outstanding under the Line of Credit, resulting in available
credit under the facility of approximately $49.7 million. The Company pays an
annual fee of 0.5% for unused available credit under the facility. The new
credit facility required the Company to enter into an interest rate hedge
program covering a notional amount of not less than $50.0 million and not
greater than $100.0 million within 60 days from the date of the loan closing.
The amount of the Company's debt covered by the hedge program was $80.0 million
at February 15, 1998, which was comprised of two $40.0 million agreements, for
which the interest rates are fixed at approximately 6.1% plus the applicable
margin. At February 15, 1998 the interest rate on the Line of Credit was 10.0%,
the interest rates on the term notes were 8.2% for Term A Note and 8.7% for Term
B Note.
7
<PAGE> 8
Debt and obligations under capital leases at February 15, 1998 and October 26,
1997 consisted of the following:
<TABLE>
<CAPTION>
February 15, 1998 October 26, 1997
----------------- ----------------
<S> <C> <C>
Senior debt - Line of Credit $ 1,143,000
Senior debt-reducing revolving credit facility $135,000,000
Senior debt - Term A Note 94,000,000
Senior debt - Term B Note 197,500,000
Senior secured bridge loan 72,900,000
Senior debt-taxable variable rate notes 27,650,000
Senior debt-various 44,857,523
Subordinated zero coupon debentures 106,312,674 103,612,284
Subordinated convertible debentures 47,825,792 47,624,146
Industrial revenue bonds 13,820,000 13,820,417
Notes payable to others 5,577,027 6,579,771
------------ ------------
466,178,493 452,044,141
Obligations under capital leases 22,239,876 24,991,545
------------ ------------
488,418,369 477,035,686
Less amounts due within one year 11,637,718 10,997,069
------------ ------------
Amount due after one year $476,780,651 $466,038,617
============ ============
</TABLE>
The Company's new credit facility is secured by substantially all of the
Company's assets. The Company's debt agreements (1) require satisfaction of
certain financial ratios and tests (which become more restrictive each year);
(2) impose limitations on capital expenditures; (3) limit the ability to incur
additional debt, leasehold obligations and contingent liabilities; (4) prohibit
dividends and distributions on common stock; (5) prohibit mergers,
consolidations or similar transactions; and (6) include other affirmative and
negative covenants. At February 15, 1998, the Company was in compliance with all
of its debt covenants.
Prior to the refinancing, the Company had unamortized debt issue costs of $2.2
million related to the refinanced debt. The write off of these unamortized costs
during the first quarter of 1998 resulted in an extraordinary loss, net of tax,
of approximately $1.4 million or $0.03 per common share. The Company
also incurred $1.1 million in additional interest expense to obtain waivers (for
its inability to make principal payments and comply with debt covenants) from
its predecessor lending group to facilitate the refinancing.
NOTE 6 - LITIGATION
On December 1, 1995, five current and/or former Shoney's Restaurant managers or
assistant restaurant managers filed the case of "Robert Belcher, et al. v.
Shoney's, Inc." ("Belcher I") in the U.S. District Court for the Middle District
of Tennessee claiming that the Company had violated the overtime provisions of
the Fair Labor Standards Act. Plaintiffs sought to have the Court grant class
status to the case. The Court granted provisional class status and directed
notice be sent to all former and current salaried general managers and assistant
general managers who were employed by the Company's Shoney's Restaurants during
the three years prior to filing of the suit. Approximately 900 potential class
members opted to participate in the suit as of the cutoff date set by the Court
and approximately
8
<PAGE> 9
230 additional potential class members opted to participate in the suit, but
their notice was not received by the Court until after the cutoff date and the
Court has not yet ruled on their participation in the lawsuit.
On January 2, 1996, five current and/or former Shoney's hourly and/or
fluctuating work week employees filed the case of "Bonnie Belcher, et al. v.
Shoney's, Inc." ("Belcher II") in the U.S. District Court for the Middle
District of Tennessee claiming that the Company violated the Fair Labor
Standards Act by either not paying them for all hours worked or improperly
paying them for regular and/or overtime hours worked. Plaintiffs sought to have
the Court grant class status to the case. The Court granted provisional class
status and directed notice be sent to all current and former Shoney's concept
hourly and fluctuating work week employees who were employed during the three
years prior to filing of the suit. Approximately 18,000 potential class members
opted to participate in the suit as of the cutoff date set by the Court. After
the cutoff date set by the Court, approximately 1,700 additional potential class
members opted to participate in the suit, but the Court has not yet ruled on
their participation in the lawsuit.
On December 3, 1997, two former Captain D's restaurant general managers or
assistant managers filed the case "Jerry Edelen, et al. v. Shoney's, Inc. d/b/a
Captain D's" ("Edelen") in the U.S. District Court for the Middle District of
Tennessee. Plaintiffs made claims in this case that are very similar to those
made in Belcher I. Plaintiffs purported to act on behalf of similarly situated
current and former employees and requested Court-supervised notice of their
lawsuit be sent to other potential plaintiffs. On March 26, 1998, the Court
granted provisional class status and directed notice be sent to all former and
current salaried general managers and assistant general managers who were
employed at the Company's Captain D's concept restaurants during the three years
prior to the filing of the suit. The Court ordered the Company to file no later
than April 3, 1998 any objections to the plaintiffs' proposed notice and to
submit to the plaintiffs no later than April 27, 1998 a list of names and
addresses of potential plaintiffs.
By virtue of the provisional class status, in either of the Belcher cases or
Edelen, the Court could subsequently amend its decision and either reduce or
increase the scope of those individuals who are determined to be similarly
situated or determine that certification as a class is altogether unwarranted.
In all three lawsuits, the plaintiffs claim to be entitled to recover unpaid
wages, liquidated damages, attorneys' fees and expenses for an unspecified
period of time claiming that certain of Shoney's acts resulted in a tolling of
the statute of limitations. Discovery is proceeding in all cases, but is in a
preliminary stage.
Management believes it has substantial defenses to the claims made and intends
to vigorously defend the cases. However, neither the likelihood of an
unfavorable outcome nor the amount of ultimate liability, if any, with respect
to these cases can be determined at this time. Accordingly, no provision for any
potential liability has been made in the consolidated financial statements.
In December 1997, plaintiffs' counsel in Belcher I, Belcher II and Edelen
indicated that they may file a lawsuit that would involve the Captain D's
concept and would purportedly involve allegations similar to those in Belcher
II. To date, plaintiffs' counsel has not served the Company or the Company's
counsel with such a suit, nor has plaintiffs' counsel provided any further
indication that it may file such a suit. The Company is presently unable to
assess the likelihood of assertion of this threatened litigation.
On August 5, 1997, a Fifth Quarter hourly employee filed the case of "Regina
Griffin v. Shoney's, Inc. d/b/a Fifth Quarter" in the U.S. District Court for
the Northern District of Alabama. Plaintiff claimed the Company failed to pay
her minimum wages and overtime pay in violation of the Fair Labor Standards Act.
On February 24, 1998, subsequent to the Company's quarter end, the plaintiff
served
9
<PAGE> 10
the Company with a Motion for Leave to Amend Complaint with an accompanying
proposed Amended Complaint for Violation of Fair Labor Standards Act seeking to
pursue the case as a class action on behalf of plaintiff and "all persons who
have performed the services of waiter or waitress for Shoney's (d/b/a Fifth
Quarter)". The Company objected to the proposed amendment and, on March 16,
1998, the court denied plaintiff's Motion for Leave to Amend Complaint. The
Company anticipates the plaintiff will renew her attempt to have the court grant
class status to the case.
Management believes it has substantial defenses to the class action claims
plaintiffs are seeking to assert and would vigorously defend such claims.
However, neither the likelihood of an unfavorable outcome nor the amount of
ultimate liability , if any, with respect to these claims can be determined at
this time. Accordingly, no provision for any potential liability has been made
in the consolidated financial statements.
In addition to the litigation described in the preceding paragraphs, the Company
is a party to other legal proceedings incidental to its business. In the opinion
of management, based upon information currently available, the ultimate
liability with respect to these actions will not materially affect the operating
results or the financial position of the Company.
NOTE 7 - RESERVE FOR LITIGATION SETTLEMENT
In January 1993, court approval was granted for a consent decree settling
litigation against the Company and a former chairman. The litigation was
certified a class, under Title VII of the Civil Rights Act of 1964, consisting
of black restaurant employees, to represent claims of alleged discriminatory
failure to hire, harassment, failure to promote, discharge and retaliation. This
class consisted only of employees from the Company's "Shoney's" and "Captain
D's" restaurant concepts and the class period was from February 4, 1988 through
April 19, 1991.
Under the consent decree, the Company will pay $105 million to settle these
claims. The settlement covered all of the Company's restaurant concepts and the
corporate offices from February 4, 1985 through November 3, 1992. In addition,
the Company agreed to pay $25.5 million in plaintiffs' attorneys fees and an
estimated $2.3 million in applicable payroll taxes and administrative costs. The
settlement resulted in a charge of $77.2 million, net of insurance recoveries
and applicable taxes, in the fourth quarter of 1992. The Company made its final
material payment under the consent decree on March 1, 1998 in the amount of
$10.0 million.
NOTE 8 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 ("SFAS 130") "Reporting Comprehensive
Income." SFAS 130 requires that companies report comprehensive income in either
the Statement of Shareholders' Equity or in the Statement of Operations.
Comprehensive income is the change in shareholders' equity from nonowner
sources. Comprehensive income includes all changes in equity during a period
except those resulting from investments by owners and distributions to owners.
SFAS 130 is effective for fiscal years beginning after December 15, 1997. The
Company plans to adopt SFAS 130 in fiscal 1999 and does not anticipate its
adoption to have a material impact on the presentation of the financial position
or
10
<PAGE> 11
results of operations of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.131 ("SFAS 131") "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131, which supersedes Statement of
Financial Accounting Standards No.14 "Financial Reporting for Segments of a
Business Enterprise," changes financial reporting requirements for business
segments from an Industry Segment approach to an Operating Segment approach.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance. SFAS 131 is effective for fiscal years beginning after December 15,
1997; therefore the Company plans to adopt its provisions in fiscal 1999.
SFAS 131 will require the Company to provide disclosures regarding its segments
which it has not previously been required to provide. The disclosures include
certain financial and qualitative data about its operating segments. Management
is unable at this time to assess whether adding this disclosure will have a
material effect upon a reader's assessment of the financial performance and the
financial condition of the Company.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated condensed
financial statements and notes thereto. The first quarter of fiscal 1998 and
1997 covered sixteen weeks. All references are to fiscal years unless otherwise
noted. The forward-looking statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A") relating to
certain matters, which reflect management's best judgment based on factors
currently known, involve risks and uncertainties, including anticipated
financial performance, adequacy of management personnel resources, shortages of
restaurant labor, commodity price increases, product shortages, adverse general
economic conditions, turnover and retention of key management personnel and a
variety of other factors. Actual results and experience could differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements as a result of a number of factors, including but not
limited to those discussed in MD&A. Forward-looking information provided by the
Company pursuant to the safe harbor established under the Private Securities
Litigation Reform Act of 1995 should be evaluated in the context of these
factors. In addition, the Company disclaims any intent or obligation to update
these forward-looking statements.
RESULTS OF OPERATIONS
REVENUES
Revenues for the first quarter of 1998 declined to $339.1 million as
compared to revenues of $363.3 million in the first quarter of 1997. The
following table summarizes the components of the decline in revenues:
<TABLE>
<CAPTION>
First Quarter
1998
----
(In millions)
<S> <C>
Restaurant revenue $(21.7)
Distribution and Manufacturing
and other sales (2.8)
Other income 0.3
------
$(24.2)
======
</TABLE>
The decline in revenues during the first quarter of 1998 was
principally due to a comparable store sales decline of 2.2% and a net decline of
83 restaurants in operation compared to the beginning of the first quarter of
1997. The comparable store sales decrease of 2.2% during the first quarter of
1998 included a menu price increase of 0.1%, as compared with a comparable store
sales decline of 1.9% in the first quarter of 1997, which included a 2.0% menu
price increase.
The Company's Shoney's Restaurants continue to experience negative
overall comparable store sales. Shoney's Restaurants reported a comparable store
sales decline of 4.0% for the first quarter of 1998, including the effects of a
menu price decrease of 0.6%. The Company is focusing on improving customer
traffic and sales at its Shoney's Restaurants through a variety of
back-to-basics initiatives designed to re-establish Shoney's Restaurants as a
place for great-tasting food and exceptional customer service. The
12
<PAGE> 13
Company has enhanced its food specifications and has placed more emphasis on
made-in-store entrees compared to preprepared foods. Management also plans to
allocate a higher percentage of planned capital expenditures to kitchen
equipment and other related enhancements to support higher quality food
preparation. New research and development personnel have been charged with
upgrading the quality of menu items and developing new menu offerings to broaden
customer appeal. In addition to higher quality menu items, the Company has
introduced an enhanced version of its popular breakfast bar featuring a more
attractive presentation and improved food quality. The enhanced breakfast bar
has been introduced in approximately 200 Company-owned Shoney's Restaurants as
of the end of the first quarter and should be installed in all Company-owned
Shoney's Restaurants (approximately 477 restaurants) by the end of the second
quarter of 1998.
The back-to-basics initiatives will also focus on improving the
training function at the Shoney's Restaurant concept to train restaurant-level
personnel on delivering high-quality food with exceptional customer service.
During the first quarter of 1998, the Shoney's Restaurants training function was
realigned making operating management responsible for all training at the
restaurants. Additionally, approximately 34 multiunit supervisory personnel
have been added to improve training, operational execution and to minimize
employee turnover.
The Company's Captain D's restaurants reported a comparable store
sales increase of 2.2% for the first quarter of 1998, including the effects of
menu price increase of 1.7%. Management is pleased with the continued positive
operating results of its Captain D's restaurants and plans to improve
performance further through a variety of initiatives including a new advertising
campaign, promotional menu items and the continued introduction of the "Coastal
Classics" menu. The Coastal Classics menu features items such as southern style
catfish, broiled salmon, orange roughy and rainbow trout, shrimp scampi,
fried flounder and gulf oysters priced from $5.49 and up, which is higher than
the concepts average guest check. As of the end of the first quarter of 1998,
the Coastal Classics menu had been placed in approximately 43 stores, with
approximately 80 units planned to have the menu by the end of 1998. For the
stores that have the Coastal Classics menu implemented, the menu accounts for
approximately 5-6% of total unit sales.
The following table summarizes the change in number of restaurants
operated by the Company and its franchisees during the first quarter of 1998 and
1997:
<TABLE>
<CAPTION>
First Quarter First Quarter
1998 1997
---- ----
<S> <C> <C>
Company-owned restaurants opened (1) 0 5
Company-owned restaurants closed (19) (51)
Franchised restaurants opened 9 2
Franchised restaurants closed (17) (10)
---- ----
(27) (54)
==== =====
</TABLE>
(1) The First Quarter of 1997 included 4 units acquired from Franchisees.
13
<PAGE> 14
Distribution and Manufacturing revenues declined $2.8 million or 7.0%
during the first quarter of 1998 compared to the first quarter of 1997. The
decline in Distribution and Manufacturing revenues is principally due to a
decline in the number of franchised restaurants in operation and a decline in
the comparable store sales of franchised Shoney's Restaurants.
Franchise revenues totaled $4.4 million for both the first quarter of
1998 and 1997. Franchise fees declined due to fewer franchised restaurants in
operation and a decline in the comparable store sales of franchised Shoney's
Restaurants, which was offset by an increase in initial fees associated with the
opening of nine franchised Shoney's Restaurants in the first quarter of 1998,
compared to only two franchised restaurants opened during the first quarter of
1997.
Other income increased $287,000 to $2.5 million in the first quarter of
1998 as compared to the same period last year. The increase in other income was
due principally to an increase in net gains realized on asset sales. The
principal components of other income for the first quarter of 1998 were gains on
asset sales ($1.2 million), income from rental properties ($371,000), and
interest on short-term investments ($312,000).
COSTS AND EXPENSES
Costs of sales declined $18.2 million during the first quarter of 1998
compared to the same period last year principally as a result of a decline in
restaurant sales. Cost of sales as a percentage of revenues increased for the
first quarter of 1998 to 91.4% compared to 90.4% for the same quarter of 1997.
Food and supplies costs remained stable as a percentage of revenues at 39.0% for
both the first quarter of 1998 and 1997.
Restaurant labor increased as a percentage of total revenues because of
higher wages for restaurant employees brought on by tight labor market
conditions in the majority of markets in which the Company operates. The Company
has experienced increased labor costs at all of its restaurant concepts.
Restaurant labor as a percentage of restaurant revenues was 26.8% in the first
quarter of 1998 compared to 26.6% in 1997.
Operating expenses as a percentage of revenues increased to 25.6% for
the first quarter of 1998 compared to 24.8% in the first quarter of 1997. The
increase in operating expenses was due principally to increased advertising
costs and higher rent expense, due in large part to the accrual of $1.2 million
in exit costs associated with the closure (or planned closure) of 15 leased
restaurants during the first quarter of 1998.
As noted above, the Company's initiatives for the Shoney's Restaurant
concept are to re-establish Shoney's Restaurants as a place for great-tasting
food. These initiatives will result in higher food and labor costs in the
future. One facet of these initiatives is a strategy to de-emphasize the
Company's reliance on its all-you-care-to-eat food bars, specifically at the
lunch and dinner day parts, once food quality is improved. Following
implementation of improved food quality and service, marketing will emphasize
redirecting customers to menu items which will have higher margins and afford
the Company better food cost management, as the portions of food served are more
controllable. Management also believes that the increased food and labor costs
will be offset by the ability to raise the price of menu items, once the
initiatives are fully implemented.
14
<PAGE> 15
General and administrative expenses increased $630,000 to $25.7 million
in the first quarter of 1998 as compared with the same period last year. General
and administrative expenses as a percentage of revenues increased from 6.9% in
the first quarter of 1997 to 7.6% in the first quarter of 1998. The increase in
general and administrative expenses was principally due to increases in salary
and related expenses and professional fees. The increase in salary related
expenses was due in large part to an increase in severance and related expenses
associated with the termination or realignment of certain executives during the
first quarter of 1998, which totaled $1.5 million. The increases discussed above
were offset by declines in travel related expenses and relocation expenses.
Interest expense for the first quarter of 1998 increased $1.9 million,
or 14%, as compared to the same period last year, principally due to higher
rates on the refinanced debt, a $1.1 million fee to obtain waivers (for its
inability to make principal payments and comply with debt covenants) from its
lenders to facilitate the refinancing, and higher amortization of deferred
financing costs related to the new debt structure. The Company refinanced
approximately $281.0 million of its senior debt in December 1997 (see Liquidity
and Capital Resources). Interest rates on the new credit facility are generally
50 to 100 basis points higher than the refinanced debt. The Company expects the
increased costs to be incurred in 1998 as a result of higher interest rates will
be partially offset by a reduction of debt outstanding from proceeds from the
sale of surplus restaurant properties and other real estate. During the first
quarter of 1998, the Company expensed unamortized costs of $2.2 million related
to the refinanced debt, which resulted in an extraordinary loss, net of tax, of
approximately $1.4 million (or $.03 per common share outstanding).
The Company incurred asset impairment charges of $2.6 million in the
first quarter of 1998 compared to $17.6 million in the first quarter of 1997.
The decline in asset impairment charges is due to the fact that the first
quarter of 1997 reflects the initial adoption of Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of" which changed the method by which the
Company measures asset impairments. Asset impairment charges incurred during the
first quarter of 1998 are the result of additional analysis and the reassessment
of our intentions as to the future disposition of assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its liquidity requirements with cash
provided by operating activities supplemented by external borrowings from
lending institutions. The Company's cash provided by operating activities
declined during 1997 and increased slightly during the first quarter of 1998 as
compared to the same period in the prior year.
During the first quarter of 1998, cash provided by operating activities
was $4.7 million, an increase of $299,000, as compared to the first quarter of
1997. This slight increase in cash provided was due to reduced cash requirements
for inventory and accrued expense funding compared to the prior quarter which
more than offset the continued decline in the profitability of the Company's
restaurant concepts.
Cash used by investing activities during the first quarter of 1998
totaled $3.4 million as compared to cash used by investing activities of $8.3
million in the same quarter of 1997. The decline in cash used by investing
activities was due principally to a reduction in capital spending for property,
plant, and equipment which was offset by a decrease in proceeds from asset
disposals.
15
<PAGE> 16
The Company balances its capital spending plan throughout the year
based on operating results and will decrease capital spending, if needed, to
balance cash from operations, capital expenditures and debt service
requirements. The Company has planned capital expenditures for 1998 of $35.0
million, the maximum amount permitted under its new credit agreement. The
Company does not plan to build new restaurants during 1998 and will invest its
capital on improvements to existing operations. Budgeted capital expenditures
for 1998 include $16.6 million for remodeling and refurbishment of restaurants,
$10.1 million for additions to existing restaurants and $8.3 million for other
assets. Capital expenditures totaled $8.2 million for the first quarter of 1998,
which included $2.2 million for remodeling and refurbishment of restaurants,
$3.8 million for additions to existing restaurants, and $2.2 million for other
assets.
During 1997, the Company closed 75 under performing restaurants. These
properties, as well as real estate from prior restaurant closings and other
surplus properties and leasehold interests, are being actively marketed. The
Company's loan agreements require that net proceeds from asset disposals be
applied to reduce its senior debt. At February 15, 1998, the Company had
approximately 138 properties which were being marketed for sale. As mentioned
previously, the Company closed 19 restaurants during the quarter, and management
expects additional restaurant closures for the remainder of the fiscal year to
be at or near this number. Proceeds from asset disposals were $4.9 million for
the first quarter of 1998 compared to $6.6 million for the first quarter of
1997.
During the first quarter of 1998, the Company's cash used by financing
activities was $6.0 million compared with cash used by financing activities of
$127,000 for the same period in 1997. Significant financing activities for the
first quarter of 1998 included the refinancing of the Company's senior debt
which provided cash of $300.0 million, of which $280.4 million was used to
retire the refinanced debt, $10.9 million was used to fund debt issue costs on
the new debt facility, and $8.7 million for additional working capital. The
Company also made payments of $5.7 million on its litigation settlement. On
March 1, 1998, the Company made its final material payment under the consent
decree litigation settlement in the amount of $10.0 million. Significant
financing activities during the first quarter of 1997 included net borrowings of
$12.7 million from short-term credit facilities offset by payments on long-term
debt and capital lease obligations of $7.0 million and payments on the Company's
litigation settlement of $5.7 million.
The Company completed a refinancing of its senior debt on December 2,
1997. The new $375.0 million credit facility consists of a $75.0 million
revolving line of credit ("Line of Credit") and two term notes of $100.0 million
("Term A Note") and $200.0 million ("Term B Note"), respectively, due in 2002.
The term notes replace the Company's reducing revolving credit facility (the
"Revolver"), the senior secured bridge loan which was obtained in 1996 to
provide financing for the acquisition of substantially all the assets of TPI
Enterprises, Inc., and a series of mortgage financings. The new debt facility
provides the Company with additional liquidity and a debt amortization schedule
which better supports the Company's business improvement plans.
The Company had $94.0 million and $197.5 million outstanding under Term
A Note and Term B Note, respectively, and had $1.1 million outstanding under the
Line of Credit at February 15, 1998. The amounts available under the Line of
Credit are reduced by letters of credit of approximately $24.2 million resulting
in available credit under the facility of approximately $49.7 million at
February 15, 1998. At February 15, 1998, the Company had cash and cash
equivalents of approximately $7.2 million.
16
<PAGE> 17
The Company is a defendant in three lawsuits which have been
provisionally certified as class actions and which allege the Company violated
certain provisions of the Fair Labor Standards Act. Discovery is proceeding in
two cases but is in a preliminary stage. The third case was filed in December
1997 and discovery in that case has not yet commenced. Management believes that
it has substantial defenses to the claims made and intends to vigorously defend
these cases. However, neither the likelihood of an unfavorable outcome nor the
amount of ultimate liability, if any, with respect to these cases can currently
be determined and, accordingly, no provision for any potential liability has
been accrued in the financial statements. In the event of an unfavorable outcome
in these cases that results in a material award for the plaintiffs, the
Company's financial position, results of operations and liquidity could be
adversely affected.
IMPACT OF THE YEAR 2000
The Company has completed an assessment of its Year 2000 information
systems compliance issues and has begun implementation of a plan to ensure its
systems are fully Year 2000 compliant. Management believes that the Company has
resolved its material Year 2000 compliance issues, and the cost of such
compliance has not had a material impact on the Company's results of operations,
nor does management believe that future costs will have a material impact on the
Company's future results of operations.
17
<PAGE> 18
Part II Other Information
Item 1 - LEGAL PROCEEDINGS
Item 3 of the Company's Annual Report on Form 10-K, filed with the
Commission on January 23, 1998, is incorporated herein by this reference. See
also Note 6 to the Notes to Consolidated Condensed Financial Statements at pages
8 through 10 of this Quarterly Report on Form 10-Q.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) In accordance with the provisions of Item 601 of Regulation S-K,
the following have been furnished as Exhibits to this quarterly report on Form
10-Q:
27 Financial Data Schedule (For SEC Use Only)
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized both on behalf of the registrant and in
his capacity as principal financial officer of the registrant.
Date: April 1, 1998 By: /s/ V. Michael Payne
----------------------------
V. Michael Payne
Senior Vice President and Controller,
Principal Financial and Chief
Accounting Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SHONEY'S, INC. FOR THE PERIOD ENDED FEBRUARY 15, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-25-1998
<PERIOD-START> OCT-27-1997
<PERIOD-END> FEB-15-1998
<CASH> 7,213,523
<SECURITIES> 0
<RECEIVABLES> 12,741,936
<ALLOWANCES> 1,492,589
<INVENTORY> 36,605,389
<CURRENT-ASSETS> 134,013,134
<PP&E> 791,897,178
<DEPRECIATION> 358,128,714
<TOTAL-ASSETS> 636,886,671
<CURRENT-LIABILITIES> 163,100,736
<BONDS> 476,780,651
0
0
<COMMON> 48,673,365
<OTHER-SE> (71,736,327)
<TOTAL-LIABILITY-AND-EQUITY> 636,886,671
<SALES> 332,223,895
<TOTAL-REVENUES> 339,097,193
<CGS> 310,044,749
<TOTAL-COSTS> 354,191,590
<OTHER-EXPENSES> 28,259,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,887,488
<INCOME-PRETAX> (15,094,397)
<INCOME-TAX> (5,479,000)
<INCOME-CONTINUING> (9,615,397)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,415,138)
<CHANGES> 0
<NET-INCOME> (11,030,535)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
