<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 25, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-4377
SHONEY'S, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 391-5201
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $1 per share New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Liquid Yield Option Notes, Due 2004 New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to Form 10-K. [X]
As of January 20, 1999, there were 43,696,285 shares of Shoney's, Inc.,
$1 par value common stock held by non-affiliates with an aggregate market value
of $95,585,623.
As of January 20, 1999, there were 49,439,030 shares of Shoney's, Inc., $1 par
value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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<CAPTION>
DOCUMENT INCORPORATED INTO
<S> <C>
Portions of the Definitive Proxy Statement for Annual Meeting of
Shareholders on March 23, 1999, to be filed with the Securities and
Exchange Commission (the "Commission") within 120 days after the
fiscal year ended October 25, 1998
(hereinafter the "1999 Proxy Statement") Part III
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Referenced
Form 10-K
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PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 7
Item 3. Legal Proceedings............................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 9
Item 4A. Executive Officers of the Registrant......................................................... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 13
Item 6. Selected Financial Data...................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... 26
Item 8. Financial Statements and Supplementary Data.................................................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................................................... 57
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 58
Item 11. Executive Compensation....................................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 58
Item 13. Certain Relationships and Related Transactions............................................... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 58
Signatures................................................................................... 63
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
As of October 25, 1998, Shoney's, Inc. (the "Company") operated and franchised a
chain of 1,261 restaurants in 28 states. The Company was incorporated under the
laws of the State of Tennessee on November 1, 1968. The Company is a diversified
food service chain that consists of three restaurant divisions: Shoney's
Restaurants, Captain D's and a Casual Dining Group. Shoney's Restaurants are
family dining restaurants offering full table service and a broad menu, and
Captain D's are quick-service restaurants specializing in seafood. The Company
also operates two casual dining restaurant concepts: Fifth Quarter, a steakhouse
concept, and Pargo's, a contemporary casual dining restaurant featuring a wide
variety of fresh, made-from-scratch dishes. The Company also operates a
distribution and manufacturing operation which, for 1998, included four
distribution centers that service Company and certain franchised restaurant
operations by providing most of the necessary food and supplies. In December
1998, the Company closed the distribution center located in Wichita, Kansas. In
the near term, the Company intends to continue to service all Company and
certain franchised operations from the remaining three centers. The distribution
and manufacturing operation includes a food processing facility for ground beef,
steaks, and soup products. The Company's fiscal year ends on the last Sunday in
October. Fiscal years 1998, 1997 and 1996 each included 52 weeks. All references
herein to particular years refer to the Company's fiscal year unless otherwise
noted.
RESTAURANT CONCEPTS
Shoney's Restaurants
Shoney's Restaurants, which began operation in 1952, are full-service, family
dining restaurants that generally are open 18 hours each day and serve
breakfast, lunch and dinner. At October 25, 1998, there were 408 Company-owned
and 261 franchised Shoney's Restaurants located in 26 states. Shoney's
Restaurants' menu is diversified to appeal to a broad spectrum of customer
tastes and includes traditional items such as hamburgers, sandwiches, chicken,
seafood, home-style entrees and vegetables, a variety of pasta and stir-fry
dishes, steaks and desserts. Entree selections range in menu price from $2.99 to
$8.99 at dinner and $2.99 to $7.99 at lunch. The average guest check was $6.32
for Company-owned units in 1998, compared to $6.13 in 1997 and $5.95 in 1996.
Shoney's Restaurants also offer the signature all-you-care-to-eat breakfast bar
and the soup, salad and fruit bar. In addition to its regular menu, Shoney's
Restaurants often feature promotional menus offering special entrees for a
limited time. These promotional menu items are used to generate new guest trials
and to increase guests' dining frequency. Promotions also serve as a vehicle to
test new items that, if popular, may be added to the regular menu. Shoney's
Restaurants generally have between 120 and 180 seats and employ approximately 65
people, including management personnel.
The Company seeks to differentiate its Shoney's Restaurants from competitors by
offering excellent food and service, warm hospitality and a good value to its
customers. Shoney's Restaurants place significant emphasis on the quality of
food ingredients, proper preparation methods, attractive food presentation and
competitive prices. Buildings are generally brick veneer or dryvit exteriors and
usually include exterior awnings along with halide lighting for greater
visibility at night.
1
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During 1998, management implemented a number of "back-to-basics" initiatives
designed to enhance the reputation of Shoney's Restaurants as a place for great
food and exceptional customer service. These initiatives resulted in major
developments in the Shoney's Restaurant concept during 1998. These developments
included:
(1) the completion of the Company's restaurant performance evaluation
process;
(2) redesign of the research and development process;
(3) the development of a new core menu; and
(4) realignment of restaurant supervisors to focus management resources on
strong restaurant operations.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. This process resulted in the closure of eighty-one Company-owned
Shoney's Restaurants during 1998. In addition to these closings, the Company
entered into contracts with non-affiliates whereby thirty-eight operating
Shoney's Restaurants will be sold and closed. These sales are expected to take
place in stages over the first two quarters of 1999. Management also plans to
close an additional twenty-one Shoney's Restaurants during the first quarter of
1999, some of which are expected to be sold to franchisees. These properties, as
well as real estate from prior restaurant closings and other surplus properties
and leasehold interest, are being actively marketed. After these planned
closures and divestitures, management currently plans to continue to operate the
remaining group of approximately 349 Company-owned Shoney's Restaurants,
although the Company may choose to sell certain units to franchisees.
During 1998, the Company redesigned the research and development process for the
Shoney's Restaurant concept. This redesign involved, among other things, the
hiring of experienced culinary personnel and the designation of three research
and development restaurants. These research and development restaurants serve as
a vehicle for testing new menu items, preparation methods, plate presentations
and menu design. Management believes that the redesigned research and
development process will result in food quality improvement and menu items that
better suit customer preferences, and serve as a vehicle to develop new items
for promotions and new core menu items.
The Company tested a number of menus during 1998 with the intent of developing a
new core menu. The main differences between the test menus and the menu
previously offered in the Shoney's Restaurants center around the a la carte
pricing for french fries, onion rings, sandwich items and the soup, salad and
fruit bar. The data generated from the test menus indicated that Shoney's
customers prefer to have the soup, salad and fruit bar included in the price of
entrees. Therefore, the core menu will include this feature for the evening meal
period. The lunch menu will feature the a la carte pricing. Management plans to
complete implementation of the core menu during the first quarter of 1999.
Management is committed to a program designed to improve all aspects of the
operations of the Company's Shoney's Restaurants. During 1998, the Company hired
a new President and Chief Operating Officer for the Shoney's Restaurant concept.
A primary focus of this officer will be to implement minimum operating standards
that must be met at each restaurant. Another facet of the operational
improvement plan involves improving the quality of multi-unit supervision.
During 1998, multi-unit supervisory personnel were added to reduce the ratio of
number of restaurants per supervisor. Additionally, management is realigning
these positions to reduce the geographical area for which they are responsible.
These initiatives are intended to increase the amount of time multi-unit
supervisory personnel spend in each restaurant.
2
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During 1998, comparable restaurant sales declined 4.7% for all Company-owned
Shoney's Restaurants, which included the effects of a menu price increase of
1.7%. Average sales volumes for Company-owned units open the entire year were
$1,413,000 in 1998, compared to $1,418,000 in 1997 and $1,498,000 in 1996.
Captain D's
Captain D's restaurants, which began operation in 1969, are quick-service
seafood restaurants which offer in-store, carryout or drive-thru service and are
generally open seven days a week from 10:45 a.m. until 11 p.m, serving lunch and
dinner. There were 365 Company-owned and 211 franchised Captain D's restaurants
located in 22 states at October 25, 1998. The typical Captain D's restaurant has
90 seats and employs 20 people, including management personnel. Captain D's menu
includes a variety of broiled, fried, and baked fish and shrimp dishes, stuffed
crab, chicken and a variety of side items including corn, baked potatoes,
coleslaw, tossed salads, hushpuppies and desserts. Entree selections range in
menu price from $3.29 to $7.29. The average guest check for Company-owned units
was $4.47, $4.41 and $4.35 in 1998, 1997 and 1996, respectively. During fiscal
1998, Captain D's posted record sales, which management attributes to increased
advertising expenditures, better marketing strategies, successful product
promotions (catfish and shrimp) and a strong Lenten season. Captain D's also
continues to realize success with its "Coastal Classics" menu which features
more upscale seafood items (e.g., broiled salmon, orange roughy, catfish, and
fried oysters) at price points higher than the average guest check. As of
October 25, 1998, the Coastal Classics menu was in over 100 Captain D's
restaurants, and management plans to add the menu to another 70 restaurants
during 1999. Captain D's conducts on-going research and development to develop
appealing new menu items and improve the quality of existing items.
Captain D's units generally are 2,400 square foot buildings with wood siding
exteriors. The typical restaurant has a nautical appearance with a "seaberry"
exterior color and redesigned, graphics-oriented drive-thru menus. The Company's
operational strategy for Captain D's is to increase comparable restaurant sales
through the continued introduction and promotion of distinctive, high quality
menu items, emphasis on fast and reliable service, and maintaining a strong
commitment to high food quality at an affordable price. Comparable store sales
for Company-owned units increased 4.8% in 1998, which included the effects of a
2.1% menu price increase. The average sales volume for Company-owned Captain D's
restaurants open the entire year was $831,000 in 1998, compared to $780,000 in
1997 and $797,000 in 1996.
Casual Dining Group
The Company has two distinct casual dining concepts: Pargo's and Fifth Quarter.
During 1998, a new President and Chief Operating Officer was hired for the
Casual Dining Group. Since his arrival, efforts have been made to upgrade the
menu offered at both concepts, to increase the staffing in the restaurants, and
to update the general appearance of the concepts. Management plans to close
three casual dining restaurants in the first two quarters of 1999.
Pargo's -- Pargo's, founded in 1983 and acquired by the Company in 1986, are
mid-scale, casual dining restaurants that serve fresh, made-from-scratch entrees
designed to cater to a diverse range of customer tastes. As of October 25, 1998,
there were 12 Pargo's located in five states. Pargo's menu includes a diverse
variety of popular foods including chicken quesadilla, fresh chicken dishes,
traditional American sandwiches, hand-cut steaks, and seafood. Pargo's goal is
to become the "favorite neighborhood restaurant" in each of its markets.
3
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Comparable restaurant sales for Pargo's restaurants during 1998 declined 5.3%,
which included a menu price increase of 0.9%. During 1998, the average sales
volume of Pargo's restaurants open the entire year was $2,064,000, compared with
$1,944,000 in 1997 and $2,201,000 in 1996.
Fifth Quarter -- Fifth Quarter restaurants, which began operation in 1973, are
special occasion steakhouses that operate in the mid-scale steakhouse segment.
Fifth Quarter restaurants are open seven days a week, and serve lunch and
dinner. There are four Fifth Quarter restaurants located in three states. The
Fifth Quarter's menu includes a wide range of USDA choice steaks, a variety of
chicken and seafood entrees, and its signature slow-cooked prime rib. Fifth
Quarter restaurants also offer an extensive salad bar, featuring a vast array of
fresh fruits, vegetables, toppings and salad dressings. Fifth Quarter
restaurants generally feature stucco exteriors with Tudor-style architectural
elements. Interiors are stucco and brick and generally include memorabilia and
photos relevant to each restaurant's marketplace. Fifth Quarter restaurants are
positioned as local neighborhood steakhouses and tend to have a well established
local clientele.
During 1998, the average sales volume of Fifth Quarter restaurants open the
entire year was $2,257,000, compared with $2,157,000 in 1997, and $2,185,000 in
1996. Comparable restaurant sales for the Fifth Quarter concept decreased 3.8%
in 1998 which included a menu price increase of 1.4%.
The following table presents revenues and earnings (loss) before interest and
taxes for each of the Company's restaurant concepts for the last three fiscal
years:
<TABLE>
<CAPTION>
($ in Millions)
Shoney's Restaurants Captain D's Restaurants
----------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
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<S> <C> <C> <C> <C> <C> <C>
Average Number of
Operating restaurants 468 507 396 368 378 320
Revenues $ 638.9 $ 705.8 $ 580.3 $ 305.2 $ 295.4 $ 254.5
Earnings (loss) before
interest and taxes $ (10.2) $ 10.0 $ 15.1 $ 20.9 $ 20.3 $ 20.6
<CAPTION>
Pargo's Restaurants Fifth Quarter Restaurants
----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Number of
Operating Restaurants 16 19 18 6 7 8
Revenues $ 30.5 $ 36.9 $ 39.7 $ 13.1 $ 15.6 $ 17.5
Earnings (loss) before
interest and taxes $ (1.8) $ (0.6) $ 1.8 $ (0.3) $ 0.7 $ 1.1
</TABLE>
4
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Distribution and Manufacturing
The Distribution and Manufacturing Operation included four distribution
facilities and a food processing facility which supplies ground beef, steaks,
and soups to Company-owned and certain franchised restaurants. In December 1998,
the Company closed the distribution center located in Wichita, Kansas. In the
near term, the Company intends to continue to service all Company and certain
franchised operations from the remaining three centers. The objective of the
Distribution and Manufacturing Operation is to provide Company-owned and
franchised restaurants with a reliable source of quality food products at the
competitive prices. The Company utilizes central purchasing of all major food,
supply and equipment items for its restaurants to attempt to achieve consistent
quality and control costs.
Total revenues for the Distribution and Manufacturing Operation, including
intercompany sales, were $503,687,000 in 1998, $542,576,000 in 1997 and
$502,893,000 in 1996. Revenues for the Distribution and Manufacturing Operation,
excluding intercompany sales, were $123,135,000 in 1998, $137,866,000 in 1997
and $158,661,000 in 1996. Earnings before interest and taxes for the
Distribution and Manufacturing Operation were $10,468,000 in 1998, $11,214,000
in 1997 and $10,137,000 in 1996. The Company's distribution centers served 360
franchised restaurants as of October 25, 1998.
BUSINESS DEVELOPMENT AND FRANCHISING
The Company's business plan is to focus its available personnel and capital
resources on improving the operations of its existing store base. The Company
closed 104 Company-owned restaurants during 1998. In addition to these closings,
the Company entered into contracts with non-affiliates whereby thirty-eight
operating Shoney's Restaurants will be sold and closed. These sales are expected
to occur in stages over the first two quarters of 1999. Management also plans to
close an additional twenty-one Shoney's Restaurants during the first quarter of
1999 (some of which are expected to be sold to franchisees) and three Casual
Dining units during the first two quarters of 1999. These properties, as well as
real estate from prior restaurant closings and other surplus properties and
leasehold interests, are being actively marketed. After these planned closures
and divestitures, management currently plans to continue to operate the
remaining group of Company-operated restaurants, although the Company may choose
to sell certain units to franchisees. Proceeds from the sale of the closed units
and surplus properties will be used to reduce outstanding debt, as required by
the Company's senior credit facility. The Company does not intend to open a
material number of new restaurants during 1999.
The Company franchises both Shoney's and Captain D's restaurants. Franchise
agreements generally have a term of 20 years and require payment of an initial
franchise fee and a royalty based on a percentage of the franchised restaurants'
sales. Franchise agreements also require restaurants to conform to the Company's
standards for appearance, service, food quality and menu content.
5
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The following table presents the change in the number of restaurants, both
Company-owned and franchised, during 1998, by restaurant concept:
<TABLE>
<CAPTION>
At October 26, 1997 Openings Closings At October 25, 1998
-------------------------- ------------------ ------------------- -------------------------
Company Franchise Total Company Franchise Company Franchise Company Franchise Total
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Shoney's 489 281 770 0 13 (81) (33) 408 261 669
Captain D's 378 213 591 0 1 (13) (3) 365 211 576
Fifth Quarter 7 0 7 0 0 (3) 0 4 0 4
Pargo's 19 0 19 0 0 (7) 0 12 0 12
------- --------- ----- ------- --------- ------- --------- ------- --------- -----
893 494 1,387 0 14 (104) (36) 789 472 1,261
======= ========= ===== ======= ========= ======= ========= ======= ========= =====
</TABLE>
ADVERTISING AND MARKETING
The Company's marketing strategies continue to include a focus on advertising
designed to both increase guest frequency and new guest trial. The marketing and
advertising strategies for the Shoney's Restaurant concept revolve around
utilization of television and radio advertising in the Company's larger markets
to attain the greatest media efficiency. In markets in which the number of
Shoney's Restaurants will not support a large media budget, marketing and
advertising strategies rely more on local advertising (i.e., contact development
with local hotels, civic organizations and tourism groups, advertising in local
newspapers and sponsorship of local events). The Company utilizes this same
general advertising strategy with its Captain D's concept, except that Captain
D's has historically more heavily utilized newspaper and promotional coupons to
support its marketing activities. Captain D's also strives to maximize its
advertising during the Lenten season to leverage its market position during this
seasonal increase in demand for fish. The Company's Casual Dining Group relies
solely on local advertising and limited radio and print exposure for its
marketing activities.
RAW MATERIALS SOURCES AND AVAILABILITY
Essential supplies and raw materials are available from several sources and the
Company is not dependent upon any single source of supplies or raw materials.
The Company's ability to maintain consistent quality throughout its restaurant
system depends in part upon its ability to acquire food products and related
items from reliable sources. When the supply of certain products is uncertain or
prices are expected to rise significantly, the Company may enter into purchase
contracts or purchase bulk quantities for future use. The Company has purchase
commitments for terms of one year or less for food and supplies with a variety
of vendors. Such commitments generally include a pricing schedule for the period
covered by the agreements.
The Company has established long-term relationships with key seafood vendors and
brokers. Adequate alternative sources of supply are believed to exist for
substantially all products. While the supply and availability of certain seafood
species is volatile, the Company believes that it has the ability to identify
and access alternative seafood products as well as the ability to adjust menus
if needed.
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SERVICE MARKS
The Company has registered the names "Shoney's," "Captain D's," "Fifth Quarter,"
and "Pargo's," and their respective logos, as service marks with the United
States Patent and Trademark Office. The Company regards its service marks as
having significant value and being an important factor in the development and
marketing of its restaurants. The Company's policy is to pursue registration of
its service marks and trademarks whenever possible and to oppose vigorously any
infringement of its service marks and trademarks.
COMPETITION
The restaurant industry is intensely competitive with respect to price, service,
location, and food quality. The Company competes with a number of national and
regional restaurant chains as well as locally owned restaurants that specialize
in the sale of seafood, sandwiches, and other prepared foods. The restaurant
business is often affected by changes in consumer taste, national, regional or
local economic conditions, demographic trends, traffic patterns, and the type,
number, and location of competing restaurants. In addition, factors such as
inflation, increased food, labor and benefits costs and the lack of experienced
management and hourly employees may adversely affect the restaurant industry in
general and the Company's restaurants in particular.
EMPLOYEES
At December 20, 1998, the Company employed approximately 26,000 persons. A
substantial number of the Company's restaurant personnel are employed on a
part-time basis. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Company's
restaurant and other properties, (1) including those under construction, as of
October 25, 1998:
<TABLE>
<CAPTION>
Number of Properties(2)
Use Total Owned Leased
<S> <C> <C> <C>
Office and Distribution Facilities(3) 7 7 0
Shoney's Restaurants 408 241 167
Captain D's Restaurants 365 238 127
Pargo's Restaurants 12 6 6
Fifth Quarter Restaurants 4 1 3
--- ---- ---
796 493 303
=== === ===
</TABLE>
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(1) The Company's 789 restaurant properties in operation as of
October 25, 1998 were located in 23 states.
(2) In addition, the Company owns or leases 63 properties that are in
turn leased to others, owns 75 parcels of land and has 44 vacant
leased properties.
(3) The Company's principal offices and distribution facility at
Nashville, Tennessee comprise four buildings of approximately 171,000
square feet on twenty acres of land owned by the Company. At October
25, 1998, the Company also operated distribution facilities in
Ripley, West Virginia; Macon, Georgia; and Wichita, Kansas.
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The following table sets forth the Company's operating restaurants by state, as
of October 25, 1998:
UNITS BY STATE
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<CAPTION>
SHONEY'S CAPTAIN D CASUAL DINING TOTAL
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<S> <C> <C> <C> <C>
Alabama 40 56 96
Arkansas 13 11 24
Florida 31 16 47
Georgia 21 54 75
Illinois 4 5 9
Indiana 7 8 15
Kansas 3 2 5
Kentucky 23 17 2 42
Louisiana 34 34
Maryland 6 2 8
Michigan 3 3
Mississippi 23 17 40
Missouri 33 24 57
New Mexico 3 3
No. Carolina 33 7 40
Ohio 7 21 28
Oklahoma 12 12
Pennsylvania 4 1 5
So. Carolina 19 20 39
Tennessee 54 68 3 125
Texas 12 9 21
Virginia 12 4 6 22
W. Virginia 23 14 2 39
---- --- --- ---
Total 408 365 16 789
==== ==== ==== ===
</TABLE>
Leases
Most of the leases for the Company's restaurant properties are for
periods of approximately 15 years, usually with renewal options ranging from 5
to 15 years. They provide for minimum rentals, totaling approximately $12.3
million in 1998, net of sublease rentals, plus an amount equal to a percentage
of sales, generally 3% to 6% in excess of an agreed sales volume. The Company is
also required to pay property taxes and insurance under most of the leases.
Approximately 187 of the leases (62%) expire prior to October 31, 2003; however,
approximately 152 of these leases (81% of the 187 leases) provide for renewal
options. Notes 8 and 10 of the Notes to Consolidated Financial Statements on
pages 43-46 and 50-51, respectively, of Item 8 in this Annual Report on Form
10-K are incorporated herein by reference.
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ITEM 3. LEGAL PROCEEDINGS.
Robert Belcher, et al. v. Shoney's, Inc. - See paragraphs 1 through 10
of Note 13 of the Notes to Consolidated Financial Statements at pages 53 through
55 of this Annual Report on Form 10-K, which is incorporated herein by this
reference.
Bonnie Belcher, et al. v. Shoney's, Inc. - See paragraphs 1 through 10
of Note 13 of the Notes to Consolidated Financial Statements at pages 53 through
55 of this Annual Report on Form 10-K, which is incorporated herein by this
reference.
Jerry Edelen, et al. v. Shoney's, Inc. - See paragraphs 1 through 10 of
Note 13 of the Notes to Consolidated Financial Statements at pages 53 through
55 of this Annual Report on Form 10-K, which is incorporated herein by this
reference.
Deborah Baum et al. v. Shoney's, Inc. - See paragraphs 1 through 10 of
Note 13 of the Notes to Consolidated Financial Statements at pages 53 through 55
of this Annual Report on Form 10-K, which are incorporated herein by this
reference.
Regina Griffin et al. v. Shoney's, Inc. - See paragraphs 1 through 10
of Note 13 of the Notes to Consolidated Financial Statements at pages 53 through
55 of this Annual Report on Form 10-K, which are incorporated herein by this
reference.
Wilkinson v. Shoney's, Inc. - See paragraph 11 of Note 13 of the Notes
to Consolidated Financial Statements at page 55 of this Annual Report on Form
10-K, which is incorporated herein by this reference.
Other Litigation - The Company is a party to other legal proceedings
incidental to its business. In the opinion of management, the ultimate liability
with respect to these actions will not materially affect the operating results
or the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1998, there were no matters submitted to a
vote of security holders.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company, in accordance with General Instruction G(3) to Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K, 17 C.F.R. ss. 229.401,
furnishes the following information with regard to its executive officers as an
additional item in Part I of this Annual Report on Form 10-K. The following
officers are those that the Company currently deems to be "executive officers",
as defined by the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Name Office Age
---- ------ ---
<S> <C> <C>
Raymond D. Schoenbaum Chairman of the Board 52
J. Michael Bodnar President and Chief Executive Officer 54
David L. Gilbert Executive Vice President and Chief Administrative Officer 41
Bernard W. Gray Chief Information Officer 51
Kevin P. Carey President and Chief Operating Officer - Casual Dining 41
Haney A. Long, Jr. President and Chief Operating Officer - Distribution
and Manufacturing 53
Stephen C. Sanders President and Chief Operating Officer - Shoney's 48
Ronald E. Walker President and Chief Operating Officer - Captain D's 48
F.E. McDaniel, Jr. Secretary and General Counsel 43
David L. Early Senior Vice President - Shoney's Restaurants 39
Rebecca A. Fine Senior Vice President - Shoney's Restaurants 36
Michael J. Hufler Senior Vice President - Research and Development 47
Betty J. Marshall Senior Vice President - Corporate Communications and
Community Relations 48
V. Michael Payne Senior Vice President and Controller 47
Kent M. Smith Senior Vice President - Shoney's Restaurants 58
Robert A. Speck Senior Vice President - Strategic Planning 44
Gary W. Wilson Senior Vice President - Captain D's 39
</TABLE>
Raymond D. Schoenbaum is the brother of director Jeffry F. Schoenbaum.
There is no other family relationship among any of the executive officers or any
of the directors of the Company. Although all executive officers are employees
at will of the Company, each executive officer of the Company generally is
elected each year for a term of one year.
Mr. Schoenbaum has been President of Schoenbaum Limited, a restaurant
management company, since April 1995. Mr. Schoenbaum has also served since March
1996 as the President and Chief Executive Officer of Just Having Fun
Restaurants, Inc., a restaurant company currently developing a new restaurant
concept in Atlanta, Georgia. From June 1984 to March 1995, he served as Chairman
of the Board of Innovative Restaurant Concepts, Inc., a restaurant management
company which owned and operated Rio Bravo, Ray's on the River, and Green Hills
Grille restaurants. Mr. Schoenbaum sold this company to Applebee's
International, Inc. in March 1995. Mr. Schoenbaum was a member of the board of
directors of Applebee's International, Inc. from March 1995 to August 1997. He
also serves as a member of the board of directors of the Schoenbaum Family
Foundation. Mr. Schoenbaum was elected to the Board of Directors in August 1997.
In June 1998, Mr. Schoenbaum was elected Vice Chairman of the Company's Board of
Directors and became Chairman of the Board of Directors effective January 1,
1999.
10
<PAGE> 13
Mr. Bodnar was elected President and Chief Executive Officer of the
Company in November 1997, having previously been elected to the Board of
Directors in August 1997. Mr. Bodnar has served as President of Bodnar
Investment Group, Inc., a real estate investment company focusing primarily on
the restaurant industry, since 1984. From January 1986 to May 1996, Mr. Bodnar
served as President of Triangle Management Group, Inc., a restaurant management
company.
Mr. Gilbert joined the Company in January 1998 as Senior Vice President
- - Real Estate. Mr. Gilbert formerly served as Director of Development and
Purchasing for Innovative Restaurant Concepts, Inc. from October 1989 to March
1995 and as Executive Director of Development for Applebee's International,
Inc., from March 1995 to January 1998. In December 1998, Mr. Gilbert was named
Executive Vice President and Chief Administrative Officer.
Mr. Gray first joined the Company in April 1994 and served as Vice
President, Management Information Systems until October 1997. Mr. Gray had
formerly served as Systems Development Manager from July 1992 to April 1994 with
The Park City Group. In October 1997, Mr. Gray joined Podiatry Insurance
Company of America as Chief Information Officer. Mr. Gray rejoined the
Company in December 1997 and was named Chief Information Officer.
Mr. Carey was named President and Chief Operating Officer of the
Company's Casual Dining Group in December 1997 and had served as a consultant to
the Company since November 1997. From October 1996 to October 1997, Mr. Carey
served as Area Director and consultant for Innovative Restaurant Concepts, Inc.,
responsible for Ray's on the River, an Atlanta Restaurant, Rio Bravo and Green
Hills Grille. Mr. Carey served as managing partner of three one-of-a-kind
concepts for Liberty House Restaurant Corporation from April 1992 to June 1996
and served in various positions with Houston's Restaurants, Inc. from May 1982
to April 1992.
Mr. Long joined the Company as Senior Vice President of Purchasing and
Distribution in September 1996 and was named President and Chief Operating
Officer of the Company's Distribution and Manufacturing division in December
1997. Prior to joining the Company, Mr. Long served as Senior Vice President of
Purchasing and Distribution for TPI Restaurants, Inc. (at that time the
Company's largest franchisee which was acquired by the Company in 1996) from
November 1989 to September 1996.
Mr. Sanders has served as President and Chief Operating Officer of
Shoney's Restaurants since August 1998. He was initially employed with the
Company in March 1965, and, thereafter, served the Company in various capacities
including President of Shoney's Restaurants until March 1993. From March 1993
until August 1998, Mr. Sanders was not employed by the Company and owned and
operated an independent restaurant management consulting company operating both
Copeland's of New Orleans restaurants and Shoney's Restaurants as a franchisee.
He continued to own those restaurants following his rejoining the Company in
1998.
Mr. Walker has held various positions since joining the Company in
1980, becoming Director of Franchise Operations for the Captain D's division in
December 1984. He was elected Vice President of Franchise Operations in December
1986 and was named Executive Vice President - Captain D's in January 1995. In
March 1996, Mr. Walker was named as President of the Company's Captain D's
division. In December 1997, Mr. Walker was named President and Chief Operating
Officer of the Captain D's division.
Mr. McDaniel has served in various positions since joining the Company
in 1981. He was elected Assistant Secretary in December 1984 and Secretary in
August 1988 and was elected to the additional position
11
<PAGE> 14
of Treasurer in December 1992. In March 1994, he was named a Vice President of
the Company and was named Senior Vice President, Secretary and Treasurer in
October 1996. In December 1997, he was named Chief Administrative Officer,
Secretary and General Counsel. In December 1998, Mr. McDaniel was named
Secretary and General Counsel.
Mr. Early has served as Senior Vice President of Franchise Services for
Shoney's Restaurants since May 1998. He originally joined the Company in 1973
but left the Company in 1990 to work with a Shoney's franchisee. He rejoined the
Company in March 1993. He has served the Company in various capacities including
Director of Training, Director of Franchise Operations and Regional Vice
President of Operations for Shoney's Northern Region.
Ms. Fine joined the Company as Director of Field Human Resources for
Shoney's Restaurants in April 1996. She was elected Vice President of Field
Human Resources for Shoney's Restaurants in December 1997. In May 1998, Ms. Fine
was elected Senior Vice President - Human Resources and Training for Shoney's
Restaurants. Ms. Fine served as Director of Field Human Resources for Hardee's
Food Systems from August 1987 until March 1996.
Mr. Hufler joined the Company in May 1998 as Senior Vice President -
Research and Development. Mr. Hufler operated Hufler Food Consulting from
February 1997 to May 1998. Previously, Mr. Hufler served as Director of Research
and Development with Rio Bravo from November 1992 to February 1997.
Ms. Marshall joined the Company in March 1990 as Director of
Purchasing. She was named Vice President of Corporate and Community Affairs in
January 1991. Ms. Marshall was elected to her present position as Senior Vice
President of Corporate Communications and Community Relations in October 1996.
Mr. Payne has served as Senior Vice President and Controller since
March 1998. He was initially employed with the Company in May 1973 and,
thereafter, served the Company in various capacities including staff accountant,
chief accountant, and corporate controller. In 1992, he was promoted to Vice
President and Controller and served the Company in that capacity until July
1995. From July 1995, until March 1998, Mr. Payne was not employed with the
Company. He served as a financial consultant from July 1995 to June 1996, and
served as Director of Accounting and Financial Reporting for Coventry
Corporation from June 1996 until March 1998.
Mr. Smith joined the Company as Senior Vice President - Shoney's
Marketing and Purchasing in October 1998. Mr. Smith served as Senior Vice
President and Assistant to the CEO and Chairman with Flagstar Corporation from
January 1995 to January 1998. Mr. Smith was Senior Vice President - Worldwide
Marketing for Burger King from April 1991 to January 1995.
Mr. Speck joined the Company in December 1995 and was elected Division
President - Shoney's Restaurants at that time. In January 1997, Mr. Speck was
elected Senior Vice President - Strategic Planning. Prior to joining the
Company, Mr. Speck had served as Chief Operating Officer of Grandy's, Inc. since
1989.
Mr. Wilson joined the Company in December 1975 and has served in
various positions in the Captain D's division. He was promoted to Division
Director in February 1987, to Regional Director in December 1991 and to Regional
Vice President of Operations in February 1995. He was elected Senior Vice
President - Captain D's in December 1997.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol "SHN." The following table sets forth the high and low trading prices of
the Company's common stock as reported by the New York Stock Exchange during
each of the fiscal quarters of the prior two fiscal years:
<TABLE>
<CAPTION>
Stock Stock
Market Market
High Low
------ ------
<S> <C> <C>
1998
First Quarter 5 3
Second Quarter 5 7/8 3 5/8
Third Quarter 5 1/16 2 3/4
Fourth Quarter 3 7/16 1 1/2
1997
First Quarter 8 3/4 6 3/4
Second Quarter 8 1/4 4 3/8
Third Quarter 6 5/8 5 1/4
Fourth Quarter 6 1/4 4 1/2
</TABLE>
There were 8,652 shareholders of record of the Company's Common Stock
as of January 20, 1999.
The Company has not paid a dividend on its common shares during the last two
years. The Company currently intends to retain all earnings to support the
Company's restaurant concepts and to retire its outstanding debt obligations.
The Company's senior debt issues prohibit dividends and distributions on common
stock.
13
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal year ended October 1998 1997 1996 (a) 1995 (a) 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $1,143,362 $1,227,076 $1,099,742 $1,053,332 $1,072,459
Costs and expenses
Cost of sales 1,035,130 1,093,789 951,565 922,545 895,893
General and administrative 90,845 84,401 68,227 63,905 55,397
Interest expense 48,476 45,016 37,951 39,816 41,237
Litigation settlement (1,700)
Impairment of long-lived assets 48,403 53,967
Restructuring expense 7,991
---------- ---------- ---------- ---------- ---------
1,222,854 1,277,173 1,057,743 1,034,257 990,827
Income (loss) from continuing operations
before income taxes, extraordinary charge, and
cumulative effect of change in accounting principle (79,492) (50,097) 41,999 19,075 81,632
Income taxes (benefit) 26,797 (14,386) 15,953 7,873 29,314
---------- ---------- ---------- ---------- ---------
Income (loss) from continuing operations before
extraordinary charge and cumulative effect of
change in accounting principle (106,289) (35,711) 26,046 11,202 52,318
Discontinued operations, net of income taxes 398 8,137 10,277
Gain on sale of discontinued operations,
net of income taxes 22,080 5,533
Extraordinary charge on early extinguishment
of debt, net of income tax benefit (1,415) (1,038)
Cumulative effect of change in accounting for
income taxes 4,468
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (107,704) $ (35,711) $ 48,524 $ 24,872 $ 66,025
========== ========== ========== =========== ==========
Weighted average shares outstanding (diluted) 48,666 48,540 42,706 41,551 46,586
Per share data--diluted
Income (loss) from continuing operations before
extraordinary charge and cumulative effect of change
in accounting principle $ (2.18) $ (0.74) $ 0.61 $ 0.27 $ 1.21
Net income (loss) $ (2.21) $ (0.74) $ 1.14 $ 0.60 $ 1.51
Dividends -- -- -- -- --
Total assets $ 523,469 $ 644,689 $ 747,081 $ 535,016 $ 554,978
Long-term debt and obligations under
capital leases $ 443,243 $ 466,039 $ 476,540 $ 406,032 $ 414,026
Shareholders' equity (deficit) $ (119,487) $ (12,345) $ 528 $ (108,307) $ (136,764)
Number of restaurants at year-end
Company-owned 789 893 957 698 719
Franchised 472 494 519 826 874
---------- ---------- ---------- ---------- ----------
Total restaurants 1,261 1,387 1,476 1,524 1,593(b)
========== ========== ========== ========== ==========
</TABLE>
Notes: (a) - See Note 2 - Acquisitions and Note 3 - Discontinued Operations
and Restructuring of the Notes to Consolidated Financial
Statements included as Item 8 herein.
(b) - Continuing operations.
14
<PAGE> 17
ITEM 7. 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 Financial Statements and
Notes thereto. The forward-looking statements included in Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") relating to certain matters involve risks and uncertainties, including
the ability of management to successfully implement its strategy for improving
Shoney's Restaurants performance, the ability of management to effect asset
sales consistent with projected proceeds and timing expectations, the results of
pending and threatened litigation, adequacy of management personnel resources,
shortages of restaurant labor, commodity price increases, product shortages,
adverse general economic conditions, the effect of Year 2000 issues on the
Company and its key suppliers, turnover and a variety of other similar matters.
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 and under the caption "Risk Factors" herein.
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.
On September 9, 1996, the Company completed the acquisition of substantially all
of the operating assets of TPI Enterprises, Inc. ("TPI"), including TPI
Restaurants, Inc., a franchisee which operated 176 Shoney's Restaurants and 67
Captain D's restaurants. The acquisition was accounted for as a purchase and the
1996 financial statements include the results of operations of the acquired
business for only seven weeks.
RESULTS OF OPERATIONS
REVENUES
The components of the change in revenues from continuing operations during 1998,
1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
($ in millions)
1998 1997 1996
--------- ----------- ----------
<S> <C> <C> <C>
Sales from restaurants opened or acquired $ 3.3 $ 220.0 $ 65.1
Higher menu prices 16.4 9.7 16.5
Sales at prior year prices (32.6) (38.9) (9.1)
Closed restaurants (60.4) (33.2) (30.1)
Distribution and manufacturing and other sales (13.8) (20.9) (5.6)
Franchise revenues (.5) (11.7) 2.7
Other income 3.9 2.3 6.9
--------- ----------- ----------
Total $ (83.7) $ 127.3 $ 46.4
========= =========== ==========
</TABLE>
Comparable restaurant sales of all the Company's restaurant concepts declined
1.8% and 3.4% in 1998 and 1997, respectively, and increased 0.2% in 1996. These
results include menu price increases of 1.8%, 1.2% and 2.0% for 1998, 1997 and
1996, respectively. Restaurant revenues were also negatively affected by the
closure of under-performing restaurants in 1998, 1997 and 1996. During this time
period the Company closed 194 Company-owned restaurants. Overall restaurant
revenues increased in 1997 and 1996 despite
15
<PAGE> 18
the decline in comparable restaurant sales and the closure of restaurants, as a
result of additional revenues from restaurants acquired from TPI in the fourth
quarter of 1996.
SHONEY'S RESTAURANTS -- Comparable restaurant sales for the Company's Shoney's
Restaurants declined 4.7%, 4.0% and 0.9% during 1998, 1997 and 1996,
respectively, which included the effects of menu price increases of 1.7%, 1.4%
and 2.7% for 1998, 1997 and 1996, respectively. Average sales volume of
Company-owned Shoney's Restaurants open the entire year was $1,413,000 in 1998,
$1,418,000 in 1997 and $1,498,000 in 1996. Management believes that the declines
in comparable restaurant sales at its Shoney's Restaurants are the result of
numerous factors, including increased competition, and a decline in operational
focus occasioned by high management turnover which contributed to declines in
customer traffic.
The Company is striving to improve customer traffic and sales at its Shoney's
Restaurants through a variety of back-to-basics initiatives designed to enhance
the reputation of Shoney's Restaurants as a place for great-tasting food and
exceptional customer service. The Company has enhanced its food specifications
on the majority of its menu items. During 1998, management allocated 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.
During 1998, the Company has been testing revised versions of its menu ("Test
Menus"). Most of the Test Menus differ from the Company's regular menu primarily
due to the a la carte pricing for side items (e.g. french fries and onion rings)
and the soup, salad and fruit bar. Management believes that there has been some
degree of resistance from the price sensitive segment of the Company's current
customer base that is directly related to this feature of the Test Menu,
particularly as to the soup, salad and fruit bar. The data generated from the
Test Menus indicated that Shoney's customers prefer to have the soup, salad and
fruit bar included in the price of entrees. Therefore, management intends to
include this feature in the core menu for the evening meal period. The lunch
menu will feature the a la carte pricing.
The Company introduced an upgraded version of its breakfast bar featuring a new
presentation and certain "brand name" breakfast items such as Jimmy Dean(R)
sausage, Bryan(R) bacon, and Pillsbury(R) biscuits, etc. The Company did realize
positive comparable store sales during the breakfast meal period during 1998 at
its Shoney's Restaurants. These increased comparable store sales were realized
despite declines in customer traffic during the breakfast meal period.
Management attributes the decrease in customer traffic to resistance to higher
price points on the breakfast bar from the price sensitive segment of the
Company's current customer base. During 1997, price points on the breakfast bar
ranged from $3.99 to $4.29 on weekdays and $4.99 to $5.29 on weekends as
compared to $4.29 to $4.59 during the week and $5.29 to $5.49 on weekends in
1998.
Since the beginning of 1997, the Company has closed 146 Shoney's Restaurants.
Additionally, management has entered into contracts whereby 38 operating
Shoney's Restaurants will be sold and closed. These sales are expected to occur
in stages during the first two quarters of 1999. Management plans to close
another 21 Shoney's Restaurants during the first quarter of 1999, some of which
are expected to be sold to franchisees. After these closings and planned
divestitures, management currently intends to continue to operate the remaining
base of Shoney's Restaurants, which are located primarily in the southeastern
United States. However, the Company may sell certain Company-owned restaurants
to franchisees.
16
<PAGE> 19
CAPTAIN D'S RESTAURANTS -- Comparable restaurant sales increased 4.8% in 1998,
declined 1.1% in 1997, and increased 4.0% in 1996. These results include the
effects of menu price increases of 2.1%, 1.0% and 0.9% in 1998, 1997 and 1996,
respectively. Captain D's average sales volume was $831,000 in 1998, $780,000 in
1997, and $797,000 in 1996. Captain D's realized increases in customer traffic
and average guest check prices in 1998. Management attributes the increase in
sales during 1998 to more effective advertising, better promotional menu items,
and a strong Lenten season. Captain D's has continued the implementation of its
"Coastal Classics" menu, which features more upscale items at higher price
points. Items offered include broiled salmon, orange roughy, catfish, and fried
oysters. Management hopes to continue the success of the Captain D's concept by
continuing to feature promotional menu items aimed at driving customer traffic
and by developing effective advertising programs.
CASUAL DINING -- Revenues for the Company's casual dining restaurants declined
to $43.6 million in 1998 from $59.9 million in 1997 and $68.5 million in 1996.
The decline in revenue resulted from the closure of restaurants, declines in
comparable store sales and the closure and sale of the seven BarbWire's
restaurants during 1997. For 1998, comparable store sales declined 5.3% and 3.8%
at Pargo's and Fifth Quarter restaurants, respectively, which included the
effects of menu price increases of 0.9% and 1.4%, respectively. For 1997,
comparable restaurant sales declined 8.9% at Pargo's and 4.7% at Fifth Quarter
restaurants. Comparable restaurant sales declined in 1996 for Pargo's and Fifth
Quarter restaurants by 5.2% and 6.6%, respectively. The decline in comparable
restaurant sales for the Casual Dining Group is the result of a number of
factors including increased competition, significant management turnover and
organizational changes and uncertainty as to the potential sale of these
concepts.
DISTRIBUTION & MANUFACTURING -- Revenues of the distribution and manufacturing
operation declined by $14.7 million in 1998, $20.8 million in 1997, and $5.0
million in 1996. The decline in sales for these periods has resulted primarily
from a loss of franchised restaurant customers resulting from store closures,
increased competition and a decline in purchases by existing customers resulting
from negative comparable restaurant sales of franchisees. In late 1996, the
Company closed two leased distribution facilities obtained in the acquisition of
TPI and, during 1997, closed the Company's Atlanta distribution facility. The
Company shifted distribution activities to the remaining four distribution
centers to increase efficiency. In December 1998, the Company closed the
distribution center located in Wichita, Kansas. In the near term, the Company
intends to service all Company and certain franchised operations from the
remaining three centers.
FRANCHISING -- Franchise revenues declined by $500,000 in 1998 and by $11.7
million in 1997 and increased $2.7 million in 1996. The decline in franchise
revenues during 1998 is primarily the result of declines in the number of
franchised restaurants in operation as compared to 1997 and declines in
comparable store sales at franchised Shoney's Restaurants. The decline in
franchise revenue during 1997 is primarily the result of the loss of franchise
fees from TPI following the 1996 acquisition of its 243 franchised Shoney's and
Captain D's restaurants, a decline in comparable restaurant sales of
franchisees, fewer franchised restaurants in operation (excluding TPI) and $5.2
million of nonrecurring franchise revenues earned in 1996. Franchise revenues
increased $2.7 million during 1996 as a result of $5.2 million of nonrecurring
franchise revenues offset by lower franchise revenues resulting from the
acquisition of franchised restaurants, franchised restaurant closures and a
decline in comparable restaurant sales of franchisees.
OTHER INCOME -- Other income increased $3.9 million in 1998 due primarily to
increased gains on asset disposals ($4.2 million). During 1997, other income
increased by $2.3 million as a result of increased gains from asset disposals
($2.9 million), revenues from an insurance services subsidiary acquired in 1996
($1.9 million), offset by the inclusion of a realized gain in 1996 ($2.0
million). Other income increased in 1996 by $6.9 million as a result of
increased gains on asset disposals ($200,000), additional interest income
17
<PAGE> 20
($300,000), and a gain from the sale of investments in ShoLodge ($2.5 million).
In addition, the Company had a $3.9 million unrealized loss on ShoLodge
securities in 1995 with no comparable loss in 1996.
COSTS AND EXPENSES
Cost of sales includes food and supplies, restaurant labor and operating
expenses. A summary of cost of sales as a percentage of total revenues for the
last three fiscal years is shown below:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Food and supplies 38.0% 39.0% 40.1%
Restaurant labor 27.0% 26.0% 24.6%
Operating expenses 25.5% 24.1% 21.8%
- --------------------------------------------------------------------------------------------
Total Cost of sales 90.5% 89.1% 86.5%
============================================================================================
</TABLE>
As compared to restaurant revenues, distribution and manufacturing revenues have
a higher percentage of food and supplies costs, a lower percentage of operating
expenses and have no associated restaurant labor. As a result, changes in
distribution and manufacturing revenue have an exaggerated effect on these
expenses as a percentage of total revenues. Food and supplies costs as a
percentage of revenues declined by 1.0% in 1998, 1.1% in 1997, and 0.8% in 1996,
principally as a result of the decline in distribution and manufacturing revenue
in each year and the increase in franchise and other revenues in 1996. Food
cost, as a percentage of sales, declined in all three restaurant concepts in
1998 when compared to 1997. When compared to 1996, 1997 food cost, as a
percentage of sales, increased in Shoney's Restaurants and Casual Dining and
declined slightly in Captain D's.
Restaurant labor increased 1.0%, 1.4% and 0.8% as a percentage of total revenues
in 1998, 1997 and 1996, respectively, as a result of higher wages, declining
comparable restaurant sales and a decline in distribution and manufacturing
revenues. Wage rates increased during each of these periods as a result of low
unemployment conditions in many markets and a very competitive restaurant labor
market. During 1998, the Company increased the staffing levels at its Shoney's
Restaurants in an effort to achieve the desired level of customer service as one
means by which to attempt to reverse the comparable store sales trend.
Operating expenses increased as a percentage of total revenues during both 1998
and 1997 by 1.4 % and 2.3%, respectively, as compared to the prior year. These
increases during 1998 and 1997 are partially the result of pressure on operating
margins due to declines in comparable restaurant sales and the closure of 179
Company-owned restaurants since the beginning of 1997. Operating expenses in
1998 were also affected by higher repairs and maintenance and advertising
expenditures as a percentage of revenues. The Company anticipates continued
pressure on restaurant operating margins until meaningful improvements in
comparable restaurant sales are achieved. The increased operating expenses in
1998 and 1997 are also the result of higher rent expense due primarily to
increases in exit costs associated with the closure (or planned closures) of
restaurants. These costs were $10.7 million in 1998 as compared to $1.3 million
in 1997. Operating expenses, as a percentage of revenues, declined 1.0% during
1996 as a result of a small net increase in operating expenses offset by
increased revenues from restaurants acquired from TPI.
18
<PAGE> 21
A summary of general and administrative expenses and interest expense as a
percentage of revenues for the last three fiscal years is shown below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
General and administrative 7.9% 6.9% 6.2%
Interest expense 4.3% 3.7% 3.5%
</TABLE>
General and administrative expenses, as a percentage of revenues, increased
1.0%, 0.7%, and 0.1% during 1998, 1997, and 1996, respectively. General and
administrative expenses increased during 1998 principally due to the addition of
a layer of multi-unit restaurant supervisory staff in the Shoney's Restaurant
concept and due to increases in severance costs associated with the termination
of certain executives. General and administrative expenses for 1998 also include
$3.5 million for a contingent loss accrued with respect to certain pending
litigation. See Note 13 to the Notes to Consolidated Financial Statements.
General and administrative expenses increased during 1997 due principally to
$5.3 million in legal and professional costs associated with the settlement of a
shareholder proxy contest and increased professional fees of $1.2 million
related to the Company's refinancing of its senior debt. During 1997, the
Company realized a full year of goodwill amortization expense associated with
the TPI acquisition. Less than two months of goodwill amortization expense was
associated with this acquisition in 1996. The increase in general and
administrative expenses in 1996 resulted from increased management costs and
increased expenses related to the TPI acquisition, including goodwill
amortization.
Interest expense increased $3.5 million in 1998. The increased interest expense
in 1998 is due to higher rates on the refinanced debt, a $1.1 million fee to
obtain waivers (resulting from the Company's inability to make principal
payments and comply with debt covenants) from its former lending group 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 those on the refinanced debt. As a result of the
refinancing, 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 share). Interest expense increased $7.1
million in 1997 compared to 1996 principally as a result of additional debt and
capital lease obligations incurred in conjunction with the purchase of
substantially all of the assets of TPI in 1996. Interest expense declined by
approximately $1.9 million during 1996, principally as a result of lower
outstanding debt balances during the first three quarters of 1996.
The Company incurred asset impairment charges of $48.4 million during 1998
compared to $54.0 million in 1997. There were no asset impairment charges
recorded by the Company in 1996. Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of" ("SFAS 121") requires companies to evaluate the
recoverability of long-lived assets on an individual restaurant basis. When a
determination is made that the carrying value is not recoverable, the assets are
written down to their estimated fair value. Since the adoption of SFAS 121 in
the first quarter of 1997, the Company has recorded $102.4 million in asset
impairment charges. The asset impairment charges recorded in 1998 were primarily
the result of continued declines in comparable store sales and operating margins
in the Company's Shoney's Restaurants, which account for $42.7 million of the
1998 asset impairment charge. If the Company's Shoney's Restaurants continue to
experience declines in comparable store sales and operating margins, the Company
could incur additional asset impairment charges in the future.
19
<PAGE> 22
The following table summarizes the components of pretax income (loss) from
continuing operations before noncash asset impairment charges:
<TABLE>
<CAPTION>
($ in millions)
Fiscal Year
----------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C>
Restaurants $ 8.6 $ 29.8 $ 37.9
Distribution & Manufacturing 10.5 11.2 10.1
Franchising 9.3 10.5 21.6
Other (7.5) (2.6) 10.3
----------------------------------------------------------------
Total 20.9(1) 48.9(2) 79.9
Interest Expense (48.5) (45.0) (37.9)
----------------------------------------------------------------
$ (27.6) $ 3.9 $ 42.0
================================================================
</TABLE>
(1) Excludes the $48.4 million noncash charge for asset impairment charges
recorded during 1998.
(2) Excludes the $54.0 million noncash charge for asset impairment charges
recorded during 1997.
During 1998, the Company recorded a deferred tax asset valuation adjustment of
$51.3 million in the third quarter and an additional $1.2 million in the fourth
quarter. The deferred tax asset valuation adjustment is in accordance with
Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes"
("SFAS 109"), which requires that a deferred tax asset valuation allowance be
established if certain criteria are not met. The Company considered these
criteria in connection with the asset impairment charges recorded during 1998
and, accordingly, increased the deferred tax asset valuation allowance. During
the third quarter of 1997, recorded income tax liabilities totaling
approximately $26.5 million related to a 1993 transaction were determined to be
no longer appropriate and were reversed. Approximately $22.5 million of the
reduction in tax liability was credited to additional paid-in capital since the
related deferred tax liability arose from an equity transaction. The remaining
$4.0 million decrease in the tax liability, which represented accrued interest,
reduced income tax expense for 1997. Offsetting such reduction was a $5.9
million increase in the Company's valuation allowance for deferred tax assets
resulting from a reassessment of the realizability of those assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has met its liquidity requirements with cash provided
by operating activities supplemented by external borrowing. Cash provided by
continuing operating activities declined by approximately $14.3 million during
1998 compared with 1997. The net loss of $107.7 million for 1998 resulted
primarily from pre-tax noncash asset impairment charges of $48.4 million and
noncash deferred tax asset valuation allowance charges of $52.5 million. Cash
provided from operations was negativity affected by lower income from restaurant
operations in 1998 when compared to 1997. The effect of the decline in income
from restaurant operations was partially offset by $17.8 million of cash
provided by changes in operating assets and liabilities. Cash provided by
continuing operating activities declined by approximately $21.0 million during
1997 compared with 1996. The net loss of $35.7 million for 1997 resulted
primarily from pre-tax noncash asset impairment charges of $54.0 million. Cash
provided by continuing operating activities in 1997 when compared to 1996
increased as a result of higher levels of depreciation, noncash interest expense
and other noncash charges and was reduced by a decline in deferred income taxes
and the change in operating assets and liabilities. Operating cash flow from
continuing operations declined by $10.1 million in 1996 as compared to 1995,
principally as a result of a decline in the profitability of
20
<PAGE> 23
the Company's Shoney's Restaurants and an increase in other income in 1996,
partially offset by the effect of nonrecurring restructuring expenses incurred
in 1995.
Cash provided by investing activities during 1998 was $6.6 million, compared to
cash used by investing activities of $5.4 million in 1997. The Company received
$33.2 million, primarily from the sale of closed restaurant locations and the
sale of rental properties. Cash used for property, plant and equipment additions
in 1998 was $28.9 million. Cash used by investing activities during 1997 totaled
$5.4 million compared to $55.6 million in 1996. The Company received $51.3
million in proceeds from the sale of a discontinued operation (Mike Rose Foods,
Inc.) during 1996 with no comparable amount in 1997. This decrease in cash flow,
as compared with 1996, was offset by a decrease in capital spending for
property, plant and equipment and goodwill arising from franchise acquisitions,
and an increase in proceeds from property disposals. Cash used by investing
activities in 1996 totaled $55.6 million and included $119.2 million used to
acquire property, plant and equipment, franchised restaurants and substantially
all of the assets of TPI. The disposal of Mike Rose Foods and the sale of
property, plant and equipment during 1996 provided a source of cash of $51.3
million and $12.4 million, respectively.
The Company balances its capital spending plan throughout the year based on
operating results and may from time to time decrease capital spending to balance
cash from operations, capital expenditures and debt service requirements. The
Company had originally planned capital expenditures for 1998 of $35.0 million,
the maximum amount permitted under its credit agreement. Actual capital
expenditures totaled $30.0 million for 1998. Since the beginning of 1997, the
Company has closed 179 under-performing restaurants. These properties, as well
as real estate from prior restaurant closings, other surplus properties and
leasehold interests, are being actively marketed. The Company's credit agreement
requires that net proceeds from asset disposals be applied to reduce senior
debt. The Company currently plans to close an additional 24 restaurants (21
Shoney's Restaurants and three casual dining restaurants) during the first two
quarters of 1999 (some of which are expected to be sold to franchisees). The
Company has also entered into contracts to sell 38 operating Shoney's
Restaurants. Management expects these transactions to occur in stages during the
first two quarters of 1999.
Cash used by financing activities was $57.2 million compared to $66.1 in 1997.
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 ("1997 Credit Facility")
of up to $375.0 million 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 April 2002. The proceeds
from the term notes were used to retire the $281.0 million of refinanced debt
and for general working capital. Also, during 1998, the Company made its last
substantial payments of $15.7 million on the 1992 litigation settlement and paid
debt issue costs of $12.8 million in connection with its refinancing in December
1997. Subsequent to the refinancing, the Company has retired approximately $41.5
million of the Term A and Term B Notes and approximately $7.3 million of other
indebtedness. During 1997, the Company's cash used by financing activities was
$66.1 million compared with $27.7 million in 1996. Significant 1997 financing
activities included payments to reduce debt and capital lease obligations of
$39.8 million, scheduled payments of $22.6 million on the Company's litigation
settlement liability and net reduction in short-term borrowings of $2.1 million.
During 1996, the Company borrowed $100.0 million under a senior secured bridge
loan ("Bridge Loan") to provide working capital and a source of financing for
the acquisition of the assets of TPI. Approximately $43.0 million of the Bridge
Loan proceeds were used to retire indebtedness of TPI and the remainder was used
to reduce debt and to provide working capital. The Company also made payments in
1996 of $23.2 million on its litigation settlement liability.
21
<PAGE> 24
The Company had $77.4 million and $181.1 million outstanding under Term A Note
and Term B Note, respectively, and had no amounts outstanding under the Line of
Credit at October 25, 1998. Except for one day in December 1998, the Company has
not borrowed amounts under the Line of Credit since the first quarter of 1998.
The amounts available under the Line of Credit are reduced by letters of credit
of approximately $19.8 million resulting in available credit under the facility
of approximately $55.2 million at October 25, 1998. At October 25, 1998, the
Company had cash and cash equivalents of approximately $16.3 million and had
prepaid the next two quarterly payments on the Term A Note and Term B Note of
approximately $7.4 million.
RISK FACTORS
The Company's business is highly competitive with respect to food quality,
concept, location, service and price. In addition, there are a number of
well-established food service competitors with substantially greater financial
and other resources compared to the Company. The Company's Shoney's Restaurants
have experienced declining customer traffic during the past five years as a
result of intense competition and a decline in operational focus occasioned by
high management turnover. The Company has initiated a number of programs to
address the decline in customer traffic; however, performance improvement
efforts for the Shoney's Restaurants during the past three years have not
resulted in improvements in sales and margins and there can be no assurance that
the current programs will be successful. The Company has experienced increased
costs for labor and operating expenses at its restaurant concepts which, coupled
with a decrease in average restaurant sales volumes, have reduced its operating
margins. The Company does not expect to be able to significantly improve
operating margins until it can increase its comparable restaurant sales and
restaurant average sales volumes.
The Company is highly leveraged and, under the terms of its credit agreements,
generally is not permitted to incur additional debt and its annual capital
expenditures are limited to $35.0 million. The Company completed a refinancing
of approximately $281.0 million of its senior debt in December 1997. The
interest rates for the new debt agreements are higher than those for the debt
refinanced and have resulted in increased interest costs. Management believes
that planned asset sales will permit a reduction in total debt outstanding and
should reduce the impact of the higher interest rates. However, there is no
assurance that such asset sales will occur as quickly as management anticipates
or that actual sales proceeds will correspond to management's estimates.
Management believes the annual capital expenditures permitted under the new
credit agreement will be sufficient for the execution of its business plan;
however, the restrictions on capital spending will cause delay in the
implementation of certain improvement initiatives. The 1997 Credit Facility
requires, among other terms and conditions, payments in the first half of fiscal
2002 of approximately $195.2 million. In addition, $51.6 million of 8.25%
subordinated convertible debentures are due in July 2002. Further, the Company's
zero coupon subordinated debentures mature in 2004. The Company plans to
refinance these obligations as they become due.
The Company's senior debt facility requires satisfaction of certain financial
covenants, as well as other affirmative and negative covenants, which were to
become more restrictive in the fourth quarter of 1998 and during 1999. During
the third quarter of 1998, management received approval from its lending group
for covenant modifications in the fourth quarter of 1998 and the first quarter
of 1999 that either maintain covenant ratios at existing levels or reduce the
restrictions. The financial covenant modifications were requested because of
lower than anticipated levels of sales of assets held for disposal and lower
than anticipated earnings from restaurant operations. Based on current operating
results, forecasted operating trends and anticipated levels of asset sales,
management believes that the Company will be in compliance
22
<PAGE> 25
with its financial covenants during fiscal 1999. However, should operating
trends, particularly in the Shoney's Restaurant concept, vary from those
forecasted or if anticipated levels of asset sales are not met by the Company,
the Company may not be in compliance with the modified financial covenants and
management could be forced to seek additional modifications to the Company's
credit agreements. The Company was in compliance with its financial covenants at
the end of the fourth quarter of 1998.
In the past six years, the Company has had significant turnover of its senior
management. In August 1997, the Company settled a shareholder proxy contest that
had sought to replace the Company's Board of Directors. These changes have
resulted in disruption to its business operations, increased costs for executive
recruitment, relocation, salaries, and severance costs.
Since 1995, the Company has closed, or announced the closing or expected sale
of, a number of under-performing restaurants. Management plans to sell or lease
these restaurant properties and will be required to utilize the proceeds to
reduce its indebtedness. These restaurants have not been profitable and
generally have had negative cash flow so that their closure is expected to have
a positive effect on profitability and cash flow in future periods. Upon
completion of the announced closings or sales, management currently expects to
operate its remaining Company-owned restaurants except for certain restaurants
the Company may choose to sell to franchisees. However, in the event management
elects to close additional restaurants during 1999, the Company may incur
additional charges for exit costs.
WAGE LITIGATION
As more fully discussed in Note 13 to the Consolidated Financial Statements, the
Company is a defendant in five lawsuits, three of which have been provisionally
certified as class actions, which allege that the Company violated certain
provisions of the Fair Labor Standards Act (the "FLSA").
In one of the cases, on or about April 7, 1998, the plaintiffs filed a motion
for partial summary judgment. The plaintiffs moved for summary judgment on the
issue of liability based on the Company's alleged practice and policy of making
allegedly improper deductions from the pay of its restaurant general managers
and assistant managers. In April 1998, plaintiffs made a demand to settle the
case for $45 million plus costs and attorney's fees, which the Company rejected.
The Court, on December 21, 1998, granted plaintiffs' motion for partial summary
judgment on liability and concluded that certain managerial employees were not
exempt from the overtime provisions of the FLSA. A trial on damages in this case
is scheduled to begin on June 1, 1999. The Company intends to appeal the ruling
and vigorously defend against plaintiffs' damage claims. If the Court's ruling
as to liability is upheld, the Company will be liable for damages. Based upon
the Court's December 21 ruling and as discussed in Note 13 to the Consolidated
Financial Statements, a charge of $3.5 million was recorded in the fourth
quarter of 1998. If the ruling were to be upheld, the Company's ultimate
liability could be greater than the amount that has been recorded and could be
materially adverse to the Company's financial position, results of operations
and liquidity.
In the four remaining cases, discovery is proceeding but is in a preliminary
stage. The second case certified as a class action has been set for trial in
2000, and one of the cases, in which the Court denied class certification, has
been set for trial in September 1999. The remaining cases have not been set for
trial. Management believes that it has substantial defenses to the claims made
in these cases and intends to vigorously defend them. 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 made in the Consolidated
Financial Statements. In the event of an unfavorable outcome in these cases
resulting in a material award for the plaintiffs, the Company's financial
position, results of operations and liquidity could be adversely affected.
23
<PAGE> 26
YEAR 2000 ISSUES AND CONTINGENCIES
The Year 2000 issue is the result of computer programs which have been written
using two rather than four digits to define the applicable year. Any of the
computer programs or operating systems that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
restaurant transactions, process orders from the Company's distribution and
manufacturing operation, or engage in normal business activities.
The Company conducts its business with a great degree of reliance on the
appropriate functioning of various internally-operated software systems. The
Company's primary information technology systems are as follows:
Point of Sale Cash Register system ("POS system")- This system has been fully
operational in the Company's Shoney's Restaurants and Captain D's since January
1998. The POS system affords the Company many efficiencies, including electronic
recording of transactions such as restaurant sales, product mix, payroll time
and attendance and cash accounting. The POS system also serves as the means by
which restaurants process orders with the Company's distribution and
manufacturing operation, transmit hours worked for hourly employees resulting in
the recording of restaurant labor costs for these personnel, as well as
providing numerous information uses for management in the operation of the
Company's business.
Distribution and Manufacturing system ("Distribution system")- This system
provides information for the management of inventory at the Company's three
distribution centers, which provide Company-operated and certain franchised
restaurants the majority of the necessary food and supplies. This system also
processes transactions for the Company's purchasing function, order processing,
sales forecasting and inventory management. This system has a major impact on
the food cost recorded by the Company.
General Ledger, Accounts Payable and Accounts Receivable system ("General Ledger
system")- This system facilitates the maintenance of all financial transactions
to the Company's financial statements (general ledger), as well as the
processing of the Company's accounts payable, accounts receivable, and property,
plant and equipment records.
Payroll system ("Payroll system")- This system accumulates, records and
processes all payroll related transactions.
At present, management has completed the assessment of its Year 2000 issues for
all of the systems discussed above. The Company has completed the remediation,
testing, and implementation phases for the POS and General Ledger systems. The
remediation and programming phase has begun for the Distribution and Payroll
systems. Management believes it is Year 2000 compliant with respect to the POS
and General Ledger systems. Management anticipates that all phases of the Year
2000 project will be completed by June 30, 1999. At present, management
estimates the Distribution system to be 70% complete and the Payroll system to
be 10% complete.
Third Party Relationships- The Company does not have any material relationships
with third parties that involve the transmittal of data electronically, which
would affect the results of operations or financial position of the Company. The
Company does have material relationships with certain suppliers of food
products. Management is not aware of Year 2000 issues with these suppliers;
however, the Company has
24
<PAGE> 27
no way of assuring that its major suppliers will be Year 2000 compliant and is
unable to estimate the effect of their noncompliance on the delivery of the
necessary food products.
The Company also relies on numerous financial institutions for the repository of
monies from the Company's restaurant locations located mainly across the
southeastern United States. These funds are generally transferred nightly to the
Company's main depository bank. While management is comfortable with the
Company's main depository bank with respect to Year 2000 issues, there can be no
assurance that the many institutions with which the Company does business will
be Year 2000 compliant. Such non-compliance could have a material effect on the
Company's liquidity or financial position.
Other systems affected by the Year 2000 issue-The Company relies on a number of
other systems that could be affected by Year 2000 related failures. The
corporate phone system has been upgraded to be Year 2000 compliant. The
operating system for the corporate and regional office network will require
software and hardware upgrades to become Year 2000 compliant. The Company has
received assurance from its credit card processor that they will be compliant by
April 1999. The Year 2000 issue has and will divert information systems
resources from other projects. This diversion is not expected to have a material
effect on the Company's financial position or results of operations.
Management's Estimate of Costs to be Year 2000 Compliant
The Company will utilize both external and internal resources to reprogram or
replace, test and implement the software needed for Year 2000 modifications. The
total cost for Year 2000 software related readiness is estimated to be
approximately $450,000. To date, the Company has incurred approximately $235,000
of these costs. The majority of the remaining costs relate to the completion of
the compliance of the Company's Payroll system. The hardware upgrade for the
corporate and regional office network is estimated to be approximately $1.2
million of which approximately $400,000 has been spent.
Contingency Plans
As of December 1998, the Company has not developed contingency plans for the
Year 2000 issue. The POS and General Ledger systems are Year 2000 compliant.
Additional testing will be performed on the two systems to insure compliance.
The Company has received the Year 2000 compliant upgrade for its Payroll system
and has begun the remediation and programming phase. The remediation and
programming stage for the Distribution system is near completion. If Year 2000
compliance issues arise, contingency plans will be developed.
Risks Associated with the Company's Remaining Year 2000 Compliance Program
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
yet to complete all necessary phases of the Year 2000 program, mainly with
respect to its Payroll system. Should management be unable to complete the
additional phases, the Company would be unable to efficiently process its
payroll transactions. Additionally, such non-compliance could result in
liability associated with various labor related laws. The amount of this
potential liability cannot be assessed at this time. There is still uncertainty
around the scope of the Year 2000 issue. At this time, the Company cannot
quantify the potential impact of these failures. The Company's Year 2000 program
is being developed to address issues that are within the Company's control. The
program minimizes, but does not eliminate, the issues of external parties.
25
<PAGE> 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk. The Company has exposure to interest rate changes primarily
relating to outstanding indebtedness under its 1997 Credit Facility. From time
to time the Company enters into agreements to reduce its interest rate risks.
The Company does not speculate on the future direction of interest rates. The
Company's 1997 Credit Facility bears interest at rates which vary with changes
in the London Interbank Offered Rate (LIBOR). As of October 25, 1998, $259.6
million of the Company's debt bore interest rates at variable rates. The Company
has entered into agreements to effectively swap $100 million of the floating
rate debt to fixed rate debt. In 1998, these agreements increased the Company's
interest expense by $267,000. The Company believes that the effect, if any, of
reasonably possible near-term changes in interest rates on the Company's
consolidated financial position, results of operations or cash flows would not
be material.
Commodity Price Risk. Many of the food products purchased by the company are
affected by commodity pricing and are, therefore, subject to price volatility
caused by weather, production problems, delivery difficulties and other factors
which are outside the control of the Company. Essential supplies and raw
materials are available from several sources and the Company is not dependent
upon any single source of supplies or raw materials. The Company's ability to
maintain consistent quality throughout its restaurant system depends in part
upon its ability to acquire food products and related items from reliable
sources. When the supply of certain products is uncertain or prices are expected
to rise significantly, the Company may enter into purchase contracts or purchase
bulk quantities for future use. The Company has purchase commitments for terms
of one year or less for food and supplies with a variety of vendors. Such
commitments generally include a pricing schedule for the period covered by the
agreements. The Company has established long-term relationships with key seafood
vendors and brokers. Adequate alternative sources of supply are believed to
exist for substantially all products. While the supply and availability of
certain seafood species is volatile, the Company believes that it has the
ability to identify and access alternative seafood products as well as the
ability to adjust menu prices if needed. Significant items that could be subject
to price fluctuations are fish, coffee, beef, pork, produce and eggs among
others. The Company believes that any changes in commodity pricing which cannot
be adjusted for by changes in menu pricing or other product delivery strategies,
would not be material.
26
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the registrant and its
subsidiaries, together with all notes thereto, are set forth immediately
following this page as pages 28 through 57 of this Annual Report on Form 10-K.
REPORT OF ERNST & YOUNG LLP
Independent Auditors
Shareholders and Board of Directors
Shoney's, Inc.
We have audited the accompanying consolidated balance sheets of
Shoney's, Inc. and subsidiaries as of October 25, 1998 and October 26, 1997, and
the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three fiscal years in the period ended
October 25, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Shoney's, Inc. and subsidiaries at October 25, 1998 and October 26,
1997, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended October 25, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 4 to the consolidated financial statements, the
Company changed its method of accounting for impairment of long-lived assets and
for long-lived assets to be disposed of in the year ended October 26, 1997.
Nashville, Tennessee
December 10, 1998, except for /s/ ERNST & YOUNG LLP
paragraphs one through ten of Note 13,
as to which the date is December 31, 1998
27
<PAGE> 30
CONSOLIDATED BALANCE SHEET
Shoney's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
October 25 October 26
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 16,277,722 $ 11,851,223
Notes and accounts receivable, less allowance for doubtful
accounts of $1,142,000 in 1998 and $1,596,000 in 1997 10,263,490 11,611,369
Inventories 37,146,297 38,382,843
Deferred income taxes 34,758,835
Refundable income taxes 14,005,359 4,076,550
Prepaid expenses and other current assets 3,390,458 4,840,539
Net property, plant and equipment held for sale 69,878,238 28,021,259
------------- -------------
Total current assets 150,961,564 133,542,618
Property, plant and equipment, at cost
Land 100,136,968 134,119,937
Buildings 215,112,056 254,888,645
Buildings under capital leases 17,605,400 24,803,349
Restaurant and other equipment 261,081,978 281,930,600
Leasehold improvements 69,020,663 70,277,951
Rental properties 13,848,502 20,818,708
Construction in progress (estimated cost to complete:
$608,000 in 1998 and $971,000 in 1997) 1,173,215 3,237,014
------------- -------------
677,978,782 790,076,204
Less accumulated depreciation and amortization (350,673,367) (343,645,369)
------------- -------------
Net property, plant and equipment 327,305,415 446,430,835
Other assets
Goodwill (net of accumulated amortization of $5,465,000 in 1998
and $3,230,000 in 1997) 29,819,721 47,803,815
Deferred charges and other intangible assets 10,581,373 5,889,044
Other 4,800,760 11,022,447
------------- -------------
Total other assets 45,201,854 64,715,306
------------- -------------
$ 523,468,833 $ 644,688,759
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28
<PAGE> 31
CONSOLIDATED BALANCE SHEET
Shoney's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
October 25 October 26
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 37,522,186 $ 34,156,943
Taxes other than income taxes 12,354,844 13,343,991
Employee compensation and related items 67,712,551 62,026,864
Accrued interest expense 3,799,970 2,708,585
Other accrued liabilities 42,577,218 32,534,544
Reserve for litigation settlement due within one year 372,961 16,010,297
Debt and capital lease obligations due within one year 11,980,656 10,997,069
------------- -------------
Total current liabilities 176,320,386 171,778,293
Long-term debt 424,966,962 443,284,483
Obligations under capital leases 18,276,148 22,754,134
Reserve for litigation settlement 226,679 294,672
Deferred income and other liabilities 23,165,829 18,922,137
Commitments and contingencies
Shareholders' deficit
Common stock, $1 par value: 200,000,000 shares authorized;
issued and outstanding 48,694,865 in 1998 and 48,568,109 in 1997 48,694,865 48,568,109
Additional paid-in capital 137,296,111 136,861,158
Accumulated deficit (305,478,147) (197,774,227)
------------- -------------
Total shareholders' deficit (119,487,171) (12,344,960)
------------- -------------
$ 523,468,833 $ 644,688,759
============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29
<PAGE> 32
CONSOLIDATED STATEMENT OF OPERATIONS
Shoney's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------
October 25 October 26 October 27
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Revenues
Net sales $ 1,115,634,349 $ 1,202,755,479 $1,066,049,153
Franchise fees 14,468,561 14,921,918 26,615,679
Other income 13,259,553 9,398,968 7,076,957
--------------- --------------- --------------
Total revenues 1,143,362,463 1,227,076,365 1,099,741,789
Costs and expenses
Cost of sales
Food and supplies 434,764,523 478,673,418 440,500,493
Restaurant labor 308,465,116 319,367,035 270,138,654
Operating expenses 291,899,974 295,748,837 240,926,289
--------------- --------------- --------------
1,035,129,613 1,093,789,290 951,565,436
General and administrative expenses 90,844,956 84,401,341 68,226,580
Impairment of long-lived assets 48,403,158 53,967,244
Interest expense 48,476,518 45,015,794 37,950,879
--------------- --------------- --------------
Total costs and expenses 1,222,854,245 1,277,173,669 1,057,742,895
--------------- --------------- --------------
Income (loss) from continuing operations before income
taxes and extraordinary charge (79,491,782) (50,097,304) 41,998,894
Provision for (benefit from) income taxes
Current (11,291,000) (8,076,550) 7,315,000
Deferred 38,088,000 (6,309,912) 8,638,000
--------------- --------------- --------------
Total income taxes 26,797,000 (14,386,462) 15,953,000
Income (loss) from continuing operations
before extraordinary charge (106,288,782) (35,710,842) 26,045,894
Discontinued operations, net of income taxes 397,816
Gain on sale of discontinued operations, net of
income taxes 22,080,375
Extraordinary charge on the early extinguishment of debt,
net of income tax benefit (1,415,138)
--------------- --------------- --------------
Net income (loss) $ (107,703,920) $ (35,710,842) $ 48,524,085
=============== =============== ==============
Earnings (loss) per common share
Basic:
Income (loss) from continuing operations
before extraordinary charge $ (2.18) $ (0.74) $ 0.61
Discontinued operations, net of income taxes 0.01
Gain on sale of discontinued operations, net of income taxes 0.52
Extraordinary charge on the early extinguishment of
debt, net of income tax benefit (0.03)
--------------- --------------- --------------
Net income (loss) $ (2.21) $ (0.74) $ 1.14
=============== =============== ==============
Diluted:
Income (loss) from continuing operations
before extraordinary charge $ (2.18) $ (0.74) $ 0.61
Discontinued operations, net of income taxes 0.01
Gain on sale of discontinued operations, net of income taxes 0.52
Extraordinary charge on the early extinguishment of
debt, net of income tax benefit (0.03)
--------------- --------------- --------------
Net income (loss) $ (2.21) $ (0.74) $ 1.14
=============== =============== ==============
Weighted average shares outstanding
Basic 48,665,685 48,539,573 42,590,581
Diluted 48,665,685 48,539,573 42,705,790
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30
<PAGE> 33
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Shoney's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Total
Additional Shareholders'
Common Paid-in Accumulated Equity
Stock Capital Other Deficit (Deficit)
------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at October 29, 1995 $ 41,510,659 $ 60,770,176 $ 0 $(210,587,470) $(108,306,635)
Net income 48,524,085 48,524,085
Tax benefits related to
compensation plans 66,334 66,334
Issuance of common shares pursuant to
employee stock option and
stock benefit plans 162,458 1,098,411 1,260,869
Common shares issued to acquire TPI assets 6,785,114 51,755,763 58,540,877
Compensation related to grant
of restricted shares
of common stock 198,569 198,569
Unrealized gain on securities available
for sale 243,481 243,481
------------- ------------- ----------- ------------- -------------
Balances at October 27, 1996 48,458,231 113,889,253 243,481 (162,063,385) 527,580
Net loss (35,710,842) (35,710,842)
Tax benefits related to
compensation plans 10,638 10,638
Issuance of common shares pursuant to
employee stock option and
stock benefit plans 109,878 471,014 580,892
Reversal of deferred tax liability 22,501,840 22,501,840
Compensation related to grant
of restricted shares
of common stock (11,587) (11,587)
Change in unrealized gain on securities
available for sale (243,481) (243,481)
------------- ------------- ----------- ------------- -------------
Balances at October 26, 1997 48,568,109 136,861,158 0 (197,774,227) (12,344,960)
Net loss (107,703,920) (107,703,920)
Tax benefits related to
compensation plans 1,078 1,078
Issuance of common shares pursuant to
employee stock option and
stock benefit plans 126,756 201,754 328,510
Compensation related to grant
of restricted shares
of common stock 232,121 232,121
------------- ------------- ----------- ------------- -------------
Balances at October 25, 1998 $ 48,694,865 $ 137,296,111 $ 0 $(305,478,147) $(119,487,171)
============= ============= =========== ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31
<PAGE> 34
CONSOLIDATED STATEMENT OF CASH FLOWS
Shoney's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------
October 25 October 26 October 27
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(107,703,920) $ (35,710,842) $ 48,524,085
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Income from discontinued operations, net of taxes (397,816)
Gain on sale of discontinued operations, net of taxes (22,080,375)
Depreciation and amortization 46,979,482 53,857,415 46,351,634
Interest expense on subordinated zero coupon
convertible debt and other noncash charges 19,584,712 15,588,438 10,985,921
Deferred income taxes 38,088,000 (6,309,912) 8,691,000
(Gain) loss on disposal of property, plant and equipment (8,133,057) (2,269,793) 93,000
Impairment of long-lived assets 48,403,158 53,967,244
Changes in operating assets and liabilities:
Notes and accounts receivable 1,966,717 1,799,103 2,557,721
Inventories 1,236,546 5,865,217 (3,441,744)
Prepaid expenses 1,450,081 1,959,272 13,843
Accounts payable 2,524,508 (10,660,082) 13,265,352
Accrued expenses 14,740,256 621,144 5,421,151
Federal and state income taxes 1,612,557 (3,491,062) (17,904,149)
Refundable income taxes (9,928,809) (4,076,550)
Deferred income and other liabilities 4,243,692 (1,802,652) (1,736,308)
------------- ------------- -------------
Net cash provided by continuing operating activities 55,063,923 69,336,940 90,343,315
Net cash used in discontinued operating activities (655,622)
------------- ------------- -------------
Net cash provided by operating activities 55,063,923 69,336,940 89,687,693
Investing activities
Purchases of property, plant and equipment (28,935,977) (40,205,993) (69,658,547)
Purchase of TPI assets, net of cash acquired (42,842,647)
Proceeds from disposal of discontinued operations 51,279,601
Proceeds from disposal of property, plant
and equipment 33,236,036 35,220,651 12,375,718
(Increase) decrease in other assets 2,251,102 (409,322) (6,716,860)
------------- ------------- -------------
Net cash provided by (used in) investing activities 6,551,161 (5,394,664) (55,562,735)
Financing activities
Proceeds from long-term debt 300,533,143 484,390 127,335,626
Payments on long-term debt and capital lease obligations (329,304,224) (39,829,540) (122,077,514)
Proceeds from line of credit and short-term debt 16,399,000 192,535,000 224,914,000
Payments on line of credit and short-term debt (16,399,000) (194,667,000) (231,824,508)
Exercise of employee stock options 39,495 155,717 578,002
Payments on litigation settlement (15,705,329) (22,582,554) (23,212,800)
Payments for debt issue costs (12,751,670) (2,155,948) (3,382,470)
------------- ------------- -------------
Net cash used by financing activities (57,188,585) (66,059,935) (27,669,664)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 4,426,499 (2,117,659) 6,455,294
Cash and cash equivalents at beginning of year 11,851,223 13,968,882 7,513,588
------------- ------------- -------------
Cash and cash equivalents at end of year $ 16,277,722 $ 11,851,223 $ 13,968,882
============= ============= =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shoney's, Inc. and Subsidiaries
October 25, 1998, October 26, 1997 and October 27, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The Consolidated Financial Statements include
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
reclassifications have been made in the Consolidated Financial Statements to
conform to the 1998 basis of presentation.
PROPERTY, PLANT AND EQUIPMENT -- Land, buildings, leasehold improvements and
restaurant and other equipment are recorded at cost, including a provision for
capitalized interest. Depreciation and amortization are provided principally on
the straight-line method over the following estimated useful lives: restaurant
buildings--20 years; certain office buildings and warehouses--20 to 40 years;
real property leased to others--over the term of the lease, generally 15 to 20
years; restaurant and other equipment--3 to 10 years; and capital leases and
leasehold improvements--lesser of life of assets or the term of the lease.
GOODWILL -- The excess of cost over the fair market value of net identifiable
assets of acquired companies and acquired restaurant operations are amortized on
a straight-line basis over various periods ranging from 10 to 20 years. The
Company evaluates goodwill for impairment at least annually. In completing this
evaluation, the Company compares its best estimates of future cash flows,
excluding interest costs, with the carrying value of goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company evaluates the recoverability of
its long-lived assets in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires periodic
assessment of certain long-lived assets for possible impairment when events or
circumstances indicate that the carrying amounts may not be recoverable.
Long-lived assets are grouped and evaluated for impairment at the lowest level
for which there are identifiable cash flows that are independent of the cash
flows of other groups of assets. The Company evaluates cash flows for individual
restaurants. If it is determined that the carrying amounts of such long-lived
assets are not recoverable, the assets are written down to their fair value. The
Company considers fair value to either be the real estate value for the
respective restaurant or the discounted value of the estimated cash flows
associated with the respective restaurant. The Company transfers long-lived
assets to net property, plant and equipment held for sale when a plan to dispose
of the assets has been committed to by management. Assets transferred to net
property, plant and equipment held for sale is recorded at the lesser of its
fair value, less estimated costs to sell or carrying amount.
CASH EQUIVALENTS -- The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
FRANCHISE FEES -- Initial franchise fees and market development fees are
recorded as revenues when the restaurants begin operations and the cash payment
has been received. Franchise fees based on sales of franchisees are accrued as
earned.
33
<PAGE> 36
INVENTORIES -- Inventories, consisting of food items, beverages and supplies,
are stated at the lower of weighted average cost (which approximates first-in,
first-out) or market.
PRE-OPENING COSTS -- Pre-opening costs include only direct incremental costs
relating to opening new restaurants, such as training costs for new employees
and related travel expenses incurred before a new restaurant opens. These costs
are capitalized and then amortized from the opening date over a period not to
exceed one year.
MARKETABLE SECURITIES -- The Company's marketable securities are categorized as
available for sale securities, as defined by Statement of Financial Accounting
Standards No.115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Unrealized holding gains and losses are reflected as a
net amount in a separate component of shareholders' equity until realized. The
Company uses the average cost method for purposes of determining realized gains
and losses on the sale of investment securities.
ADVERTISING COSTS -- The Company charges the costs of production and
distribution of advertising to expense at the time the costs are incurred.
Advertising expense was $43.7 million, $45.0 million and $31.9 million in 1998,
1997 and 1996, respectively.
INTEREST RATE HEDGE PROGRAM -- As a hedge against fluctuations in interest
rates, the Company has entered into interest rate exchange agreements to swap a
portion of its variable rate interest payment obligations for fixed rates
without the exchange of the underlying principal amounts. The Company does not
speculate on the future direction of interest rates nor does the Company use
these derivative financial instruments for trading purposes. The differential
to be paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt (the accrual accounting
method).
FISCAL YEAR -- The Company's fiscal year ends on the last Sunday in October.
Fiscal years 1998, 1997 and 1996 were comprised of 52 weeks each.
BUSINESS SEGMENTS -- The Company's restaurant operations constitute a dominant
segment in accordance with Statement of Financial Accounting Standards No. 14
"Financial Reporting for Segments of a Business Enterprise." ("SFAS 14")
STOCK-BASED COMPENSATION -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its stock-based
compensation plans. Under APB 25, because the Company generally grants stock
under its stock-based compensation plans at an exercise price equal to the fair
value of the shares at the date of grant, no material compensation expense is
recorded. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No.123 "Accounting for Stock-Based Compensation"
("SFAS 123"), (see Note 9).
EARNINGS PER SHARE -- The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128") at the beginning of 1998.
SFAS 128 supersedes Accounting Principles Board Opinion No. 15 "Earnings per
Share" ("APB 15") 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
34
<PAGE> 37
are exercisable or convertible into common stock and which would either dilute
or not affect Basic EPS. The Company has restated all prior periods presented.
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The following methods and assumptions
were used by the Company in estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for
cash and cash equivalents approximates fair value.
Long-term debt: The carrying amounts of the Company's borrowings under its
Senior Debt-Line of Credit, and Senior Debt Term A and Term B Notes which have
variable interest rates approximate their fair value. The fair values of the
Company's subordinated zero coupon convertible debentures and 8.25% subordinated
convertible debentures were determined based on quoted market prices. The fair
value of other long-term debt, industrial revenue bonds and notes payable was
estimated using discounted cash flow analyses utilizing the Company's
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the interest rate swap agreements was determined based on quoted
market prices.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard
No.130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that
companies report comprehensive income in either the Statement of Shareholders'
Equity or in the Statement of Operations. 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 and management does not anticipate its
adoption will have a material impact on the presentation of the financial
position or results of operations of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, which supersedes
Statement of Financial Accounting Standard 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.
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.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is
effective for fiscal years beginning after December 15, 1998 and will require
the capitalization of certain costs incurred in connection with developing or
obtaining software for internal use after the date of adoption. Management does
not anticipate that the adoption of SOP 98-1 will have a material effect on the
results of operations or financial position of the Company.
35
<PAGE> 38
In May 1998, the AICPA issued Statement of Position 98-5 "Reporting on the Costs
of Startup Activities" ("SOP 98-5"). SOP 98-5 requires companies to expense the
costs of startup activities (including organization costs) as incurred. The
Company's present accounting policy is to expense costs associated with startup
activities systematically over a period not to exceed twelve months. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. Management does
not anticipate that the adoption of SOP 98-5 will have a material effect on the
Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier adoption is permitted. Management does not anticipate that the adoption
of SFAS 133 will have a material effect on the Company's results of operations
or financial position.
CONCENTRATION OF RISKS AND USE OF ESTIMATES -- As of October 25, 1998, the
Company operated and franchised a chain of 1,261 restaurants in 28 states, which
consists of three restaurant divisions: Shoney's Restaurants, Captain D's, and a
Casual Dining Group (which includes two distinct restaurant concepts). The
majority of the Company's restaurants are located in the southeastern United
States. The Company also operates a distribution and manufacturing business that
supplies food and supplies to Company and franchised restaurants. The Company's
principal concepts are Shoney's Restaurants, which are family dining restaurants
offering full table service and a broad menu, and Captain D's restaurants, which
are quick-service restaurants specializing in seafood. The Company extends
credit to franchisee customers for franchise fees and the sale of food and
supplies on customary credit terms. Additionally, the Company believes there is
no concentration of risk with any single customer, supplier, or small group of
customers or suppliers whose failure or non-performance would materially affect
the Company's results of operations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to use judgment and make estimates
that affect the amounts reported in the Consolidated Financial Statements.
Management believes that such estimates have been based on reasonable and
supportable assumptions and that the resulting estimates are reasonable for use
in the preparation of the Consolidated Financial Statements. Changes in such
estimates will be made as appropriate as additional information becomes
available and may affect amounts reported in future periods.
NOTE 2 - ACQUISITIONS
As of September 9, 1996, the Company completed the acquisition of substantially
all the assets of TPI Enterprises, Inc. ("TPI") which, as the largest franchisee
of the Company, operated 176 Shoney's Restaurants and 67 Captain D's
restaurants. The purchase price of $164.4 million consisted of the issuance of
6,785,114 shares of the Company's common stock valued at $59.1 million, the
assumption of $46.9 million of indebtedness under TPI's 8.25% convertible
subordinated debentures, the assumption or satisfaction of TPI's outstanding
debt of approximately $59.1 million and transaction costs of $3.0 million net of
cash acquired of $3.7 million. The Company borrowed $100.0 million under a
bridge loan (which has been subsequently refinanced, see Note 8) to finance the
acquisition and to provide additional working capital for the Company.
36
<PAGE> 39
Approximately $43.0 million of the bridge loan proceeds were utilized to retire
TPI debt at the date of closing.
The TPI acquisition was accounted for as a purchase and the results of TPI's
operations have been included in the Company's Consolidated Financial Statements
since September 9, 1996. The purchase price was allocated based on estimated
fair values at the date of acquisition and resulted in an excess of purchase
price over net assets acquired (goodwill) of approximately $50.6 million, which
is being amortized on a straight line basis over 20 years. During 1997, the
Company adjusted its preliminary estimate of goodwill by $4.2 million relating
to a revised estimate of deferred tax assets. In addition, the Company wrote-off
goodwill associated with the TPI acquisition in conjunction with its impaired
asset analysis of approximately $7.0 million in 1997 and approximately $13.1
million in 1998 (see Note 4).
The following unaudited pro forma information presents a summary of consolidated
results of operations of the acquired operations of TPI and the Company as if
the acquisition had occurred as of the beginning of 1996, with pro forma
adjustments to give effect to amortization of goodwill, interest expense,
acquisition-related debt, and certain other adjustments, together with the
related tax effects.
<TABLE>
<CAPTION>
Amounts in thousands,
except per share amounts
October 27
1996
------------
<S> <C>
Net revenues $ 1,337,430
Income from continuing operations $ 14,713
Net income $ 37,191
Earnings per common share (diluted)
Continuing operations $ 0.30
Net income $ 0.75
</TABLE>
As of October 25, 1998, of the properties acquired in the TPI transaction, the
Company has closed 65 Shoney's Restaurants, 10 Captain D's restaurants, two
distribution facilities that had provided TPI's restaurants with food and
supplies, and the former TPI corporate headquarters in West Palm Beach, Florida.
Certain of the restaurants had been targeted for closure during the Company's
due diligence process as under-performing units. Costs to exit these businesses
were accrued as liabilities assumed in the purchase accounting and consisted
principally of severance pay for certain employees, and the accrual of future
minimum lease obligations in excess of anticipated sublease rental income. The
total amount of such liabilities included in the purchase price allocation was
approximately $21.0 million. During 1998, approximately $2.3 million in costs
were charged to this liability, including approximately $1.6 million in cost to
exit restaurants acquired, and $0.7 million in lease payments associated with
the former TPI corporate headquarters. During 1997, approximately $4.5 million
in costs were charged to this liability, including approximately $1.9 million in
costs to exit restaurants acquired, and $2.6 million in severance costs and
lease payments associated with the former TPI corporate headquarters.
Approximately $2.5 million in costs were charged to this liability during 1996.
Approximately $11.7 million of exit costs related to the TPI acquisitions remain
accrued at October 25, 1998.
The Company made no acquisitions of restaurants during 1998. The Company
acquired four franchised restaurants during 1997, each of which was accounted
for as a purchase, for an aggregate purchase price of $3.6 million. In addition
to restaurants acquired from TPI, the Company acquired 18 franchised restaurants
during 1996 for an aggregate purchase price of $18.1 million, each of which was
accounted for as a purchase.
37
<PAGE> 40
The Consolidated Financial Statements reflect the results of operations of each
restaurant acquired since the date of acquisition. Pro forma results of
operations with respect to these additional restaurants have not been presented
because the effect of these acquisitions was not material.
NOTE 3 - DISCONTINUED OPERATIONS AND RESTRUCTURING
In January 1995, the Company's Board of Directors announced a reorganization
designed to improve the performance and growth of the Shoney's Restaurant
concept. The reorganization included the decision to divest certain non-core
lines of business including the Lee's Famous Recipe restaurant division and Mike
Rose Foods, Inc. ("MRF"), a private label manufacturer of food products.
The Company sold its Lee's Famous Recipe restaurants in October 1995 for $24.5
million cash and a $4.0 million promissory note, resulting in a gain of $5.5
million, net of tax. The promissory note is due in monthly installments over
five years, and is further secured by perfected security interests in the Lee's
Famous Recipe trademarks and in the franchise agreements of Lee's Famous Recipe.
The sale of MRF was completed in November 1995 for $55.0 million cash and
resulted in a gain of approximately $22.1 million, net of tax.
The results of operations of the lines of business divested have been treated as
discontinued operations in the accompanying financial statements and are
presented net of any related income tax expense.
During the fourth quarter of 1995, the Company implemented a plan to close 41
under-performing restaurants (17 Shoney's Restaurants, 22 Captain D's and two
Fifth Quarters). The Company accrued approximately $6.6 million of restructuring
expenses related to those planned closures, consisting principally of the
write-down of assets to their net realizable value and the accrual of leases and
other costs associated with closure in excess of anticipated sublease income. In
addition, during 1995 the Company accrued severance costs of $1.4 million
related to the restructuring. Amounts charged to these liabilities were
approximately $54,000, $353,000, and $1,207,000 in 1998, 1997 and 1996,
respectively. In addition, during 1997, the restructuring liability was reduced
by $493,000 as a result of a change in estimate for certain exit costs.
NOTE 4 - IMPAIRMENT OF LONG-LIVED ASSETS, ASSETS HELD FOR DISPOSAL AND EXIT
COSTS
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 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 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 in the first quarter of
1997 was $17.6 million. 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's initial asset impairment analysis did not include any of the
restaurants acquired from TPI in 1996 (see Note 2). 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 charge of $36.4 million was the result
38
<PAGE> 41
of additional analysis by management and a full year's operating results from
the restaurants acquired from TPI. During the first quarter of 1998, the Company
recorded an additional impairment charge 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. Based on
the continued decline in operating performance of the Company's restaurant
operations, particularly the Shoney's Restaurants division, the Company
completed an asset impairment analysis during the third quarter of 1998. As a
result of this analysis, the Company recorded an asset impairment charge of
$45.8 million during the third quarter of 1998. Approximately $42.9 million of
the third quarter 1998 asset impairment charge related to assets held and used
in the Company's operations and approximately $2.9 million related to assets
held for disposal.
At October 25, 1998, the carrying value of the 123 properties to be disposed of
was $69.9 million and is reflected on the balance sheet as net assets held for
disposal. Under the provisions of SFAS 121, depreciation and amortization are
not recorded during the period in which assets are being held for disposal.
The Company also incurs certain exit costs when the decision to close a
restaurant is made, generally for the accrual of the remaining leasehold
obligations on leased units that are closed. Exit costs associated with the
accrual of remaining leasehold obligations, net of anticipated sublease rental
income, are included in the Consolidated Statement of Operations in the
Operating Expense caption. The Company recorded approximately $10.7 million in
exit costs during 1998, primarily associated with the accrual of the remaining
leasehold obligations on restaurants closed (or to be closed). The Company
accrued $1.3 million in exits costs during 1997 associated with leasehold
obligations on leased units that were closed during the year. The Company
charged $1.0 million against these exit costs reserves in 1998. Approximately
$11.0 million of accrued exit costs remain at October 25, 1998.
During 1998, the Company closed 104 restaurants and management currently plans
to close or dispose of an additional 62 restaurants during the first two
quarters of 1999. Below are sales and operating income or loss for 1998, 1997,
and 1996 on the restaurants closed in 1998 or to be closed or disposed of in
1999.
($ in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ----------------------- ---------------------
Operating
Operating Operating Income
Sales loss Sales loss Sales (loss)
----- --------- ----- ---------- ----- ---------
<C> <C> <C> <C> <C> <C> <C>
Stores closed during
1998 $ 70,376 $ (10,486) $ 105,041 $ (8,510) $112,862 $(5,640)
Stores planned to be
closed or disposed of
during 1999
78,520 ( 3,762) 82,925 (2,016) 83,672 112
--------- --------- --------- --------- -------- -------
Total $ 148,896 $ (14,248) $ 187,966 $ (10,526) $196,534 $(5,528)
========= ========= ========= ========= ======== =======
</TABLE>
39
<PAGE> 42
NOTE 5 - INVESTMENTS IN SHOLODGE
During 1997 and 1996, the Company owned common shares and (during 1996) warrants
to acquire additional common stock of ShoLodge, Inc. ("ShoLodge"), a Company
which had acquired the Company's Shoney's Inn motel chain in 1991. The Company
disposed of all its investment in common stock of ShoLodge during 1997. Proceeds
from sales of shares of ShoLodge common stock during 1997 and 1996 were $500,000
and $1.1 million, respectively, resulting in realized gross gains of $200,000
and $500,000, respectively. During 1996, the Company sold its ShoLodge common
stock warrants for $2.0 million, which was equal to the unrealized gain on the
sale of these securities based on the difference in the fair market value of
ShoLodge common stock and the exercise price of the warrants. During 1996, the
Company recorded an unrealized gain on ShoLodge common stock and warrants of
$243,000, which was included as a separate component of shareholders' equity.
Concurrent with the agreement for the sale of the Company's ShoLodge common
stock warrants during 1996, the Company agreed to accept payment of $5.2 million
from ShoLodge to terminate future royalty license fees owed to the Company
related to the operation and franchising of Shoney's Inns by ShoLodge. The
payment represented the present value of the estimated future license fees to
have been received by the Company through October 2001 pursuant to the terms of
its licensing agreement for Shoney's Inns. The payment was recorded as franchise
revenue in 1996 since the Company has no future performance obligations under
the agreement.
NOTE 6 - DEBT ISSUE COSTS
Debt issue costs are capitalized and amortized using the effective interest
method over the term of the related debt issues. Issue costs of $12,752,000,
$2,156,000, and $3,382,000 relating to various financings during 1998, 1997 and
1996, respectively, have been paid and deferred. Amortization of debt issue
costs during 1998, 1997 and 1996 was $4,072,000, $3,441,000, and $2,956,000
respectively. Debt issue costs of $1.1 million were incurred during the fourth
quarter of 1997 to obtain various waivers of payments and financial covenants to
facilitate the Company's refinancing (see Note 8) and were deferred at October
26, 1997. These debt issue costs were charged to interest expense during 1998.
The Company had unamortized debt issue costs deferred at October 26, 1997
totaling $2.2 million related to debt refinanced on December 2, 1997, which
resulted in an extraordinary loss, net of tax, totaling approximately $1.4
million (or $0.03 per share) in the first quarter of 1998.
40
<PAGE> 43
NOTE 7 - INCOME TAXES
The components of the Company's deferred tax assets and liabilities as of
October 25, 1998 and October 26, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Reserve for lawsuit settlement $ 1,454,362 $ 6,236,651
Reserve for self insurance 23,344,229 21,614,138
Reserve for exit costs 4,325,586 4,964,291
Amortization of intangibles 4,269,359 4,579,318
Net operating loss, contribution and tax
credit carryforwards 19,280,458 16,097,216
Book over tax depreciation 2,298,495
Other - net 8,174,454 7,313,234
------------ ------------
Deferred tax assets 63,146,943 60,804,848
Less valuation allowance (63,146,943) (10,608,943)
------------ ------------
Net deferred tax asset 0 50,195,905
------------ ------------
Deferred tax liabilities:
Tax over book depreciation 10,596,029
Other - net 1,511,876
------------ ------------
Deferred tax liabilities 12,107,905
------------
Total net deferred tax asset $ 0 $ 38,088,000
============ ============
</TABLE>
At October 25, 1998, the Company had net operating loss (NOL) and contribution
carryforwards of approximately $22.5 million and $341,000, respectively, which
expire during the years 1999 through 2011. The Company also had targeted jobs
and tip credit carryforwards of approximately $4.6 million which expire during
the years 2003 through 2010 and alternative minimum tax credit carryforwards of
$873,000 which have no expiration. These carryforward items were acquired in the
acquisition of TPI. The utilization of these carryforwards is subject to
limitations imposed by the Internal Revenue Code. In addition, the Company
generated an NOL of approximately $35.8 million and targeted jobs and tip
credits of approximately $1.5 million during fiscal 1998 which will be carried
back to prior years' taxable income to recover previously paid taxes. In
addition, the Company has state net operating loss carryforwards of
approximately $84.2 million which expire from 2012 to 2013.
During the third quarter of 1998, the Company recorded a deferred tax asset
valuation adjustment of $51.3 million. The deferred tax asset valuation
adjustment is in accordance with SFAS 109, which requires that a deferred tax
asset valuation allowance be established if certain criteria are not met. The
Company considered these criteria in connection with the asset impairment
charges recorded in the third quarter (see Note 4) and, accordingly, increased
the deferred tax asset valuation allowance. The Company recorded an additional
$1.2 million valuation allowance in the fourth quarter of 1998. Of the $63.1
million valuation allowance at October 25, 1998, $4.7 million relates to
deferred tax assets acquired from TPI in 1996. If those assets are realized in
the future, the related tax benefits will be recorded as a reduction of
goodwill. The remaining $58.4 million relates to assets which arose after the
acquisition. If the assets are realized in the future, the related tax benefits
will reduce income tax expense.
During the third quarter of 1997, excess income tax liabilities totaling
approximately $26.5 million related
41
<PAGE> 44
to a fiscal 1993 transaction were reversed. Approximately $22.5 million of the
reduction in tax liability was credited to additional paid in capital since the
related deferred tax liability arose from an equity transaction. The remaining
$4.0 million, which represented accrued interest, was reversed as a reduction to
income tax expense.
The balance sheet classification of the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Current deferred tax asset $ 0 $34,758,835
Noncurrent deferred tax asset 3,329,165
---------- -----------
Net deferred tax asset $ 0 $38,088,000
========== ===========
</TABLE>
The components of the provision for (benefit from) income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Current:
Federal $(14,892,000) $ (8,076,000) $18,441,000
State 2,795,000 3,166,000
------------ ------------ -----------
(12,097,000) (8,076,000) 21,607,000
------------ ------------ -----------
Deferred:
Federal 38,996,000 (3,384,000) 7,623,000
State (908,000) (2,926,000) 1,068,000
------------ ------------ -----------
38,088,000 (6,310,000) 8,691,000
------------ ------------ -----------
Total income tax provision (benefit) $ 25,991,000 $(14,386,000) $30,298,000
============ ============ ===========
</TABLE>
The income statement classification of the provision for (benefit from) income
taxes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Income tax provision (benefit) attributable
to continuing operations $ 26,797,000 $(14,386,000) $ 15,953,000
Discontinued operations 244,000
Gain on sale of discontinued operations 14,101,000
Extraordinary charge on early
extinguishment of debt (806,000)
------------ ------------ -------------
Total income tax provision (benefit) $ 25,991,000 $(14,386,000) $ 30,298,000
============ ============ =============
</TABLE>
42
<PAGE> 45
A reconciliation of the difference between total income tax provision (benefit)
and the amount computed using the statutory federal income tax rate is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 35%
Federal income taxes (benefit) based
on the statutory tax rate $(28,599,522) $(17,534,056) $ 27,587,730
State and local income taxes, net of
federal tax benefit (3,882,840) (1,883,836) 2,752,100
Targeted jobs and tip credits (963,706) (1,011,929) (941,378)
Goodwill amortization and impairment
write-down 5,056,781 3,218,100
Change in valuation allowance 52,538,000 5,860,309 (153,000)
Reversal of income tax reserves (4,000,000)
Other 1,842,287 965,412 1,052,548
------------ ------------ ------------
Total income tax provision
(benefit) $ 25,991,000 $(14,386,000) $ 30,298,000
============ ============ ============
</TABLE>
The Company made income tax payments, net of refunds, of approximately $(3.1
million), $203,000 and $25.9 million during 1998, 1997 and 1996, respectively.
NOTE 8 - DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Debt and obligations under capital leases at October 25, 1998 and October 26,
1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Senior debt - reducing revolving credit facility $ $ 135,000,000
Senior debt - Term A Note 77,387,946
Senior debt - Term B Note 181,113,692
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, due April
2004 112,580,014 103,612,284
Subordinated convertible debentures, 8.25% due
July 2002, (net of discount of $3,254,600 in 1998
and 3,938,854 in 1997) 48,308,400 47,624,146
Industrial revenue bonds, due in varying annual
installments to May 2006 collateralized by land,
buildings, equipment and restricted cash 10,315,000 13,820,417
Notes payable to others, 6.0% to 10.25%, maturing
at varying dates to 2009 (the balance of the notes
are fully secured by land, buildings and equipment) 5,267,458 6,579,771
------------- -------------
434,972,510 452,044,141
Obligations under capital leases 20,251,256 24,991,545
------------- -------------
455,223,766 477,035,686
Less amounts due within one year 11,980,656 10,997,069
------------- -------------
Amounts due after one year $ 443,243,110 $ 466,038,617
============= =============
</TABLE>
43
<PAGE> 46
SENIOR DEBT REFINANCING
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
("1997 Credit Facility") 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 provided for 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 3.0% over
LIBOR or 2.0% over the prime rate for Term B Note. Based on certain defined
financial ratios, the applicable margins have increased 0.25% which is the
maximum required under the credit agreement. 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.
TERM NOTES
At October 25, 1998, the Company had approximately $77.4 million and $181.1
million outstanding under its Term A Note and Term B Note, respectively. During
1999, principal reductions of $16.0 million are scheduled for the Term A Note
and principal reductions of $921,000 are scheduled for the Term B Note. Of these
amounts, $7.4 million was prepaid as of October 25, 1998. At October 25, 1998,
the effective interest rates on the term notes were 8.4% and 8.9% for the Term A
Note and Term B Note, respectively.
LINE OF CREDIT
The Company had no borrowings outstanding on its $75.0 million Line of Credit at
October 25, 1998. Available credit under the Line of Credit is reduced by
letters of credit, which totaled $19.8 million at October 25, 1998, resulting in
available credit of $55.2 million. The Company pays an annual fee of 0.5% for
unused available credit under the facility. At October 25, 1998, the interest
rate for the Line of Credit was 10.75%.
INTEREST RATE HEDGE PROGRAM
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 $100.0 million
at October 25, 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 and an additional $20.0 million hedge agreement which fixes the interest
rate on the covered amount of debt at 5.5% plus the applicable margin. At
October 25, 1998, the estimated cost to exit the Company's interest rate swap
agreements was approximately $2.7 million. The fair value of the swap agreements
and changes in the fair value as a result of changes in market interest rates
are not recognized in the Consolidated Financial Statements.
LOAN COVENANTS
The Company's senior 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 during the
term of the credit facility); (2) impose limitations on capital expenditures;
(3) limit
44
<PAGE> 47
the Company's 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. During the third quarter of
1998, management received approval from its lending group for covenant
modifications in the fourth quarter of 1998 and the first quarter of 1999 that
either maintain covenant ratios at existing levels or reduce the restrictions.
The financial covenant modifications were requested because of lower than
anticipated levels of sales of assets held for disposal and lower than
anticipated earnings from restaurant operations. Based on the Company's
financial leverage covenant ratio as of the end of the second quarter of 1998,
the interest rate margin on the term notes and Line of Credit increased .25%
effective June 24, 1998. Based on current operating results, forecasted
operating trends and anticipated levels of asset sales, management believes that
the Company will be in compliance with its financial covenants during 1999.
However, should operating trends, particularly in the Shoney's Restaurant
concept, vary from those forecasted or if anticipated levels of asset sales are
not met by the Company, the Company may not achieve compliance with the modified
financial covenants and management could be forced to seek additional
modifications to the Company's credit agreements. At October 25, 1998, the
Company was in compliance with all of its debt covenants.
SUBORDINATED ZERO COUPON CONVERTIBLE DEBENTURES, DUE APRIL 2004
The subordinated zero coupon convertible debentures were issued at $286.89 per
$1,000 note (aggregate amount of $57.7 million). There are no periodic cash
payments of interest. The issue price represents a yield to maturity of 8.5%
based on a semiannual bond equivalent basis. At maturity each note is
convertible into 29.349 shares of the Company's common stock, at the option of
the holder. The Company has reserved 5,205,632 shares for future issuance
pursuant to these debentures.
SUBORDINATED CONVERTIBLE DEBENTURES, 8.25%, DUE JULY 2002
In connection with the acquisition of substantially all of the assets of TPI in
September 1996, the Company assumed, through a supplemental indenture, $51.6
million (principal amount) of 8.25% subordinated convertible debentures due July
15, 2002. The bonds are convertible at the holders' option, subject to
compliance with the provisions of the supplemental indenture, into 50.508 shares
of the Company's stock for each $1,000 debenture. In addition, upon conversion,
debenture holders are entitled to a cash distribution per share equal to the
cash distributions made by TPI to its common shareholders in connection with the
liquidation and dissolution of TPI. Interest on the bonds is due semi-annually
in January and July.
OTHER DEBT INFORMATION
The Company's industrial revenue bonds include $9.2 million at fixed interest
rates ranging from 9% to 10% and $1.1 million at a floating interest rate
subject to a floor of 7.5% and a ceiling of 15.0%.
Debt and obligations under capital leases maturing in each of the next five
fiscal years are as follows:
($ in millions)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$12.0 $24.9 $38.0 $250.8 $2.4
</TABLE>
45
<PAGE> 48
Net interest costs of approximately $65,000, $300,000, and $400,000 were
capitalized as a part of building costs during 1998, 1997 and 1996,
respectively. Interest paid was approximately $32.6 million, $33.8 million, and
$26.5 million during 1998, 1997 and 1996, respectively.
The Company has standby letters of credit of $19.8 million outstanding at
October 25, 1998 which are principally utilized to support the Company's
self-insurance programs. All of the outstanding letters of credit are supported
by the Company's $75 million line of credit.
The carrying value and estimated fair value of the Company's debt are summarized
in the following table:
<TABLE>
<CAPTION>
October 25, 1998
-------------------------------
Estimated
Carrying Value Fair Value
-------------- ----------
<S> <C> <C>
Senior debt-Term A Note $ 77,387,946 $ 77,387,946
Senior debt-Term B Note 181,113,692 181,113,692
Subordinated zero coupon convertible debentures 112,580,014 49,885,311
Subordinated convertible debentures 48,308,400 48,665,159
Industrial revenue bonds 10,315,000 10,698,719
Notes payable to others 5,267,458 5,268,045
Interest rate swap agreements 0 2,696,386
------------- -------------
Total Debt $ 434,972,510 $ 375,715,258
============= =============
</TABLE>
See Note 1 - Summary of Significant Accounting Policies for a further discussion
of the basis for management's estimates of the fair value of financial
instruments.
NOTE 9 - STOCK BASED COMPENSATION
The stock option plan adopted by the Company in 1969, and as subsequently
amended, provided for the granting of options to purchase 0 and 54,335 shares of
the common stock of the Company as of October 25, 1998 and October 26, 1997,
respectively. No options are available for future grant under this plan. A
second stock option plan adopted by the Company in 1981 (the "1981 Plan"), and
as subsequently amended, provided for the issuance of options to purchase
7,501,431 shares of the common stock of the Company and included 930,828 and
2,078,431 shares reserved for future grants as of October 25, 1998 and October
26, 1997, respectively. On September 9, 1996, options to purchase 615,146 shares
of the Company's common stock were issued in exchange for the outstanding TPI
options in connection with the Company's acquisition of the assets of TPI ("the
1996 Plan"). The 1996 Plan provided for the issuance of options to purchase
620,000 shares of which 252,187 were outstanding as of October 25, 1998.
The Company has a stock plan (the "1998 Stock Plan") under which options to
purchase 2,000,000 shares of the Company's common stock may be granted at
October 25, 1998. Options under this plan may be granted to employees or to
non-employee Board members as equity-based stock incentives and /or other
equity, or equity-based incentives in the Company. As of October 25, 1998 no
options had been awarded under the plan.
The plans provide for the issuance of options having terms of up to 10 years and
which become exercisable generally at a rate of 20% per year or as determined by
the Company's Human Resources and Compensation
46
<PAGE> 49
Committee of the Board of Directors, but not to exceed 33 1/3% per year. Option
prices may not be less than the market price on the date of grant.
The Company has a stock option plan for directors (the "Directors Plan") under
which options to purchase 200,000 shares of common stock may be granted to
non-employee directors. The Directors Plan covered 195,000 shares of the common
stock of the Company and included 165,000 and 140,000 shares available for
future grant at October 25, 1998 and October 26, 1997, respectively. Each
non-employee director receives an option to purchase 5,000 shares upon their
initial election to the Board and every five years thereafter receives an option
to purchase 5,000 shares. The option price is the market price of the Company's
common stock on the date that the option is granted. Each option has a term not
to exceed ten years and is exercisable at the rate of 20% per year and in full
in the event of death or disability.
On December 9, 1997, the Company repriced 333,500 stock options that were
granted between June 8, 1995 and September 2, 1997 with the exercise prices
ranging from $5.375 to $10.625. The new exercise price for these options is
$3.9375, which was the fair market value, as of December 9, 1997. These options
retained their original term and vesting schedule. Additionally, 442,889 stock
options were canceled and regranted at $3.9375 on that same date. The original
options were granted between November 11, 1989 and October 13, 1994 with
exercise prices ranging from $13.875 to $25.51. Of these, 404,950 have a five
year term and vest 20% per year after one year and fully vest after five years.
On January 15, 1998, the Company canceled 1,000,000 options that were
exercisable based on the market price appreciation of the Company's common
shares or six years of continuous employment and had an exercise price of
$9.625. In exchange, 100,000 options, having a ten year term, were granted with
an exercise price of $3.125 and vest 20% per year after one year and fully vest
after five years. The remaining 37,939 options have a ten year term and vest 20%
per year after one year and fully vest after five years.
A summary of activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Options Exercise Price
------------ -------------
<S> <C> <C>
Outstanding at October 29, 1995 2,816,105 $ 14.14
Issued 3,912,146 11.95
Exercised (51,832) 7.01
Expired or canceled (602,520) 15.54
------------
Outstanding at October 27, 1996 6,073,899 12.66
Issued 1,077,500 9.45
Exercised (20,373) 6.14
Expired or canceled (1,300,542) 15.22
------------
Outstanding at October 26, 1997 5,830,484 11.52
Issued 4,218,634 4.64
Exercised (4,500) 3.94
Expired or canceled (3,191,828) 11.20
------------
Outstanding at October 25, 1998 6,852,790 $ 7.17
============
</TABLE>
47
<PAGE> 50
At October 25, 1998, October 26, 1997 and October 27, 1996, the number of
options exercisable was 941,347, 1,194,383, and 1,216,502, respectively, and the
weighted-average exercise price of those options was $12.69, $16.20 and $17.85,
respectively.
The following table summarizes information about stock options outstanding at
October 25, 1998:
<TABLE>
<CAPTION>
Range of Number Weighted- Weighted-Average
Exercise Outstanding Average Remaining Contractual
Prices at October 25, 1998 Exercise Price Life (Years)
--------- ------------------- -------------- ------------------------
<S> <C> <C> <C>
$1.81-$3.31 722,600 $ 3.15 8.2
$3.69-$6.50 3,573,337 $ 4.78 8.2
$7.38-$11.75 1,898,666 $ 9.55 6.0
$13.88-$25.51 658,187 $17.72 4.4
</TABLE>
The following table presents the fair value of options granted during 1998,
1997, and 1996:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Number of Weighted-Average Weighted-Average
Options Exercise Price Fair Value
--------- ---------------- ----------------
<S> <C> <C> <C>
Where exercise price:
Exceeds market price 500,000 $6.55 $1.95
Equals market price 3,718,634 4.39 2.25
--------- ----- -----
4,218,634 $4.64 $2.21
=========
<CAPTION>
1997
--------------------------------------------------------------------
Number of Weighted-Average Weighted-Average
Options Exercise Price Fair Value
--------- ---------------- ----------------
<S> <C> <C> <C>
Where exercise price:
Exceeds market price 749,000 $ 10.82 $ 3.48
Equals market price 328,500 6.34 3.23
---------- ------- ------
1,077,500 $ 9.45 $ 3.40
==========
<CAPTION>
1996
--------------------------------------------------------------------
Number of Weighted-Average Weighted-Average
Options Exercise Price Fair Value
--------- ---------------- ----------------
<S> <C> <C> <C>
Where exercise price:
Exceeds market price 250,000 $ 15.25 $ 4.71
Equals market price 3,662,146 11.73 4.26
--------- ------- ------
3,912,146 $ 11.95 $ 4.28
=========
</TABLE>
The Company also has an Employee Stock Purchase Plan under which 1,646,814
shares of the Company's common
48
<PAGE> 51
stock may be issued at October 25, 1998. Under the terms of this plan, employees
may purchase the Company's common stock through payroll deductions. The purchase
price is 85% of the lower of (i) the average of the closing market prices on the
first trading day of each calendar month or (ii) the closing market price on the
last trading day of each calendar year. The exercise date under this plan is the
last trading day of each calendar year and the Company issued common shares to
employees of 98,556, 68,685 and 76,506 in 1998, 1997 and 1996, respectively, and
issued at $2.76, $5.95, and $8.71, per share for the same periods, respectively.
There have been no charges to income in connection with the plan other than
incidental expenses in the administration of the plan. The weighted-average fair
value of shares purchased during 1998, 1997 and 1996 was $0.99, $2.10 and $3.02
per share, respectively.
The Company has an Employee Stock Bonus Plan under which 597,183 shares of the
Company's common stock may be issued at October 25, 1998. The awards under this
plan consist of both a stock and a cash bonus. The stock bonuses vest 10% per
year after one year and in full after five years and are distributed upon
vesting. On each vesting date, a cash bonus equal to 25% of the market value of
the shares being distributed also will be paid. A maximum of 1,000 shares may be
awarded to any employee annually. As of October 25, 1998, grants of bonuses
under this plan of 9,750 shares were outstanding. The Company has recognized
compensation expense related to this plan of approximately $0, $130,000 and
$174,000 for 1998, 1997 and 1996, respectively.
The shares distributed and cash bonuses paid pursuant to this plan during the
past three fiscal years were as follows:
<TABLE>
<CAPTION>
Shares Cash Bonuses
------ ------------
<S> <C> <C>
1996 4,040 $ 10,353
1997 3,450 $ 6,038
1998 6,700 $ 5,444
</TABLE>
On November 12, 1997, the Company's Board of Directors approved the employment
agreement of the Company's President and CEO, the terms of which require an
award of 120,000 restricted shares of Shoney's, Inc. common stock. These shares
vest on December 31, 1998 (40,000 shares); December 31, 1999 (40,000); and
December 31, 2000 (40,000) and are reflected in compensation expense based on
the vesting schedule. In addition, upon distribution of the restricted shares,
the employee receives a tax equalization bonus.
On August 3, 1998, the Company's Board of Directors approved the employment
agreement of the President and COO of Shoney's Restaurants, the terms of which
require an award of 75,000 restricted shares of Shoney's, Inc. common stock.
These shares vest on April 2, 1999 (25,000); April 2, 2000 (25,000); and April
2, 2001 (25,000) and are reflected in compensation expense based on the vesting
schedule. In addition, upon distribution of the restricted shares, the employee
receives a tax equalization bonus.
The Company applies APB 25 and the related interpretations in accounting for its
stock-based compensation plans; accordingly, the Company recognizes no
compensation expense for its stock option plans or Employee Stock Purchase Plan.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 as if the Company had accounted for its stock-based compensation plans
under the fair value method prescribed by that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1998, 1997 and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate 4.88% 5.87% 6.41%
Dividend yield None None None
Volatility factor .410 .382 .382
Weighted-average expected option life 7 years 7 years 7 years
</TABLE>
49
<PAGE> 52
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's actual
and pro forma net earnings (loss) and earnings (loss) per share are presented in
the following table (in thousands, except for per share data.)
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $ (107,704) $ (35,711) $ 48,524
Net income (loss) - pro forma $ (110,704) $ (37,780) $ 47,942
Basic earnings (loss) per share - as reported $ (2.21) $ (0.74) $ 1.14
Basic earnings (loss) per share - pro forma $ (2.27) $ (0.78) $ 1.13
Diluted earnings (loss) per share - as reported $ (2.21) $ (0.74) $ 1.14
Diluted earnings (loss) per share - pro forma $ (2.27) $ (0.78) $ 1.12
</TABLE>
Because SFAS 123 provides for pro forma amounts for options granted beginning in
fiscal 1996, the pro forma compensation expense will likely increase in future
years as new option grants are included in the pricing model.
NOTE 10 - LEASES
The Company has noncancellable lease agreements for certain restaurant land and
buildings. Substantially all lease agreements may be renewed for periods ranging
from five to fifteen years, and provide for contingent rentals based on
percentages of net sales (generally 3% to 6%) against which minimum rentals are
applied.
Buildings under capital leases of $17,605,000 at October 25, 1998 and
$24,803,000 at October 26, 1997 and accumulated amortization of $11,078,000 and
$10,797,000 at October 25, 1998 and October 26, 1997, respectively, relate to
the building portion of capital leases involving land and buildings.
Amortization of buildings under capital leases is included in depreciation
expense.
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<PAGE> 53
At October 25, 1998, minimum rental commitments under capital leases and
operating leases having an initial or remaining noncancellable term of one year
or more are shown in the following table:
<TABLE>
<CAPTION>
Capital Operating Sublease
Leases Leases Amounts Total
<S> <C> <C> <C> <C>
1999 $ 4,029,759 $11,890,582 $(1,001,629) $ 14,918,712
2000 3,677,105 11,166,801 (914,450) 13,929,456
2001 3,512,581 10,048,607 (724,929) 12,836,259
2002 3,394,514 8,988,838 (578,750) 11,804,602
2003 2,732,697 7,761,720 (463,630) 10,030,787
Thereafter 14,962,426 27,342,054 (2,062,414) 40,242,066
- ----------------------------------------------------------------------------------------------------
Total minimum rentals 32,309,082 $77,198,602 $(5,745,802) $103,761,882
=========== =========== ============
Amount representing interest (12,057,826)
------------
Present value of net minimum rentals $ 20,251,256
============
</TABLE>
Contingent rental expense relating to the land and building portion of capital
leases was $1,154,000, $1,268,000 and $1,250,000 in 1998, 1997 and 1996,
respectively.
Total rental expense for all operating leases not capitalized is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Minimum rentals $ 8,749,142 $11,905,514 $7,640,511
Contingent rentals 1,416,702 1,609,439 577,386
----------- ----------- ----------
Subtotal 10,165,844 13,514,953 8,217,897
Sublease rentals (1,234,546) (1,092,823) (674,087)
----------- ----------- ----------
Total $ 8,931,298 $12,422,130 $7,543,810
=========== =========== ==========
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS - In connection with the sale of Mike Rose Foods, Inc.
("MRF") in 1995, the Company has committed to certain minimum purchase
obligations with respect to food products supplied by MRF. Under the terms of
the sales agreement, the Company entered into a five year supply agreement under
which MRF will continue to be the supplier, for all Company-owned restaurants,
of salad dressings, mayonnaise, sauces, condiments, breadings, and a variety of
food products. The supply agreement contains minimum purchase commitments
generally equal to the actual quantities of various products the Company
purchased from MRF during 1994 for Company-owned restaurants, which was
approximately $14.5 million. The contract includes certain price adjustments for
changes in commodity prices which will cause the actual amount of annual
purchases to change over time. Actual purchases from MRF by the Company during
1998 were approximately $24.8 million. The
51
<PAGE> 54
Company's purchases are expected to exceed the minimum purchase volume required
under the supply agreement for the foreseeable future.
SEVERANCE AGREEMENTS - The Company has employment agreements with two executive
officers that provide severance pay under certain circumstances. The contracts
expire at dates between 2000 and 2001. One of the agreements provides for an
automatic two year extension of the term in the event of a change in control.
The maximum contingent liability under these employment agreements is $2.9
million.
On July 15, 1997, a committee of the Board of Directors of the Company
authorized the execution of Management Retention Agreements with certain
officers of the Company to assist in the retention of key management personnel.
The agreement, which covers 17 officers, provides for payment of between one and
two years of base salary in the event that the executives were terminated
without good cause or if the executives resigned for "good reason" (as defined
in the agreements) within a one year period following a change in control of the
Company. The Company's total contingent liability with respect to these
agreements is approximately $3.2 million. The Company's policy for officers not
party to the Management Retention Agreements is to provide severance benefits of
up to twelve months salary for such officers in the event they are terminated
without cause.
GUARANTEES OF INDEBTEDNESS OF OTHERS - The Company guarantees certain
twenty-year leases of franchisees for a quarterly fee of approximately $25,000
and is required to offer to purchase the properties for an amount equal to the
investor's unpaid mortgage ($212,500) at its maturity in 1999.
LEASEHOLD INTERESTS ASSIGNED TO OTHERS - The Company has assigned to third
parties its leasehold interest with respect to approximately eight (8)
properties on which, the Company remains contingently liable to the landlord for
the performance of all obligations of the party to whom the lease was assigned
in the event that the assignee does not perform its obligations under the lease.
The assigned leases are for restaurant sites that the Company has closed.
Although the Company has received guarantees of performance under each of the
assigned leases from a majority of the assignees, the Company estimates its
contingent liability associated with these assigned leases to be approximately
$5.0 million.
PROPERTY SUBLET TO OTHERS - The Company subleases approximately 32 properties to
others. In general, the Company remains liable for the leasehold obligation in
the event that these third parties do not make the required lease payments. The
majority of the sublet properties are former restaurant sites that the Company
has closed. The Company estimates its contingent liability associated with these
sublet properties to be approximately $7.6 million.
LITIGATION - See Notes 12 and 13.
NOTE 12 - SETTLEMENT OF DISCRIMINATION LAWSUIT
In January 1993, court approval was granted to a class action consent decree
settling certain employment litigation against the Company and its former
chairman. This class consisted only of employees from the Company's "Shoney's"
and "Captain D's" restaurant concepts from February 4, 1988 through April 19,
1991. Under the consent decree, the Company agreed to pay $105.0 million to
settle these claims. In addition, the Company agreed to pay $25.5 million in
plaintiffs' attorneys fees and an estimated $4.0 million in payroll taxes (which
was subsequently reduced to $2.3 million) as well as certain administrative
costs. The majority of the payments were made as of March 1, 1998. Under the
terms of the consent decree, the remaining payments are made on a quarterly
basis, without interest, on March 1, June 1, September 1 and December 1.
Remaining payment obligations under the consent decree for the next five fiscal
years are approximately $295,000.
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<PAGE> 55
NOTE 13 - LITIGATION
Belcher I
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. The Court granted provisional class status and
directed notice be sent to all former and current salaried general managers and
assistant restaurant 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 240 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 or about April 7, 1998, the plaintiffs filed a
motion for partial summary judgment in Belcher I. The plaintiffs moved for
summary judgment on the issue of liability based on the Company's alleged
practice and policy of making allegedly improper deductions from the pay of its
general managers and assistant restaurant managers. In April 1998, plaintiffs
made a demand to settle the case for $45 million plus costs and attorney's fees,
which the Company rejected. On December 21, 1998, the Court granted plaintiffs'
motion for partial summary judgment on liability and set the case for a trial on
damages to commence on June 1, 1999. On January 21, 1999, the Court denied the
Company's motion to reconsider or certify the order for interlocutory appeal.
The Company disagrees with the Court's ruling on liability and intends to appeal
the ruling and defend vigorously against plaintiffs' damage claims. The Company
has recorded a non-cash expense of $3.5 million in the fourth quarter of fiscal
1998, representing the estimated amount of potential damages, fees, and costs
that it might be required to pay if the Court's ruling on liability ultimately
is upheld and damages are awarded. If the court's ruling is upheld, however, the
damages awarded could exceed the amount presently recorded as a liability and
could be materially adverse to the Company's financial position, results of
operations and liquidity.
Belcher II
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. 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 1,800
additional potential class members opted to participate in the suit, but the
Court has not yet ruled on their participation in the lawsuit. On or about July
10, 1998, plaintiffs filed a motion to amend their complaint to add state law
class action allegations of fraud, breach of contract, conversion, and civil
conspiracy; add the Company's Senior Vice President and Controller and certain
unnamed individuals as defendants; and include a prayer for $100 million in
punitive damages. That motion was granted by the Court on January 4, 1999. In
ruling on plaintiffs' motion, the Court did not address any of the arguments
that the Company raised in opposing that motion, indicating that it would
consider those arguments if the Company presented them in a dispositive motion.
Trial has been scheduled to commence on January 4, 2000. If the Court later
decides to bifurcate liability and damages for purposes of trial, the trial on
liability will commence on January 4, 2000, and the trial on damages will not
commence until June 1, 2000.
53
<PAGE> 56
Edelen
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' claims in this case are very similar to those made in
Belcher I and the plaintiffs may argue that the Court's December 21, 1998 ruling
on liability in Belcher I should apply to this case. On March 28, 1996, 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. Notice was issued to potential class members on
or about July 28, 1998. Approximately 250 potential class members opted to
participate in the suit as of the cutoff date set by the Court. After the cutoff
date, approximately 90 additional potential class members opted to participate
in the suit, but the Court has not yet ruled on their participation in the
lawsuit.
Baum
On April 17, 1998, five former TPI hourly and/or fluctuating work week employees
filed the case "Deborah Baum, et al. v. Shoney's, Inc. f/k/a TPI, Inc." ("Baum")
in the U.S. District Court for the Middle District of Florida. TPI was the
Company's largest franchisee and was acquired by the Company in September 1996.
Plaintiffs purported to represent themselves and a class of other similarly
situated former and current employees of TPI. Specifically, plaintiffs allege
that defendant failed to compensate properly certain employees who were paid on
a fluctuating work week basis, failed to compensate employees properly at the
required minimum wage, and improperly required employees to work off the clock.
Plaintiffs allege that such acts deprived plaintiffs of their rightful
compensation, including minimum wages, overtime pay, and bonus pay. On December
3, 1998, the Court denied plaintiffs' motion to provisionally certify the class
and issue notice to putative class members. On January 4, 1999, plaintiffs filed
a notice of appeal regarding the Court's ruling denying class certification. The
Company intends to vigorously oppose the appeal, which is interlocutory in
nature, as premature. If the appeal is denied or the Court's ruling is upheld,
the case will proceed on only the claims of the five named 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 unwarranted.
In Belcher I, Belcher II, Edelen and Baum, the plaintiffs claim to be entitled
to unpaid wages, liquidated damages, attorney's fees and expenses for an
unspecified period of time claiming that certain of the Company's and TPI's acts
resulted in a tolling of the statute of limitations. On December 21, 1998, the
Court in Belcher I ruled that the applicable statute of limitations was not
tolled as a result of the Company's acts and entered an order in the Company's
favor on that issue. The Court has yet to rule on plaintiffs' equitable tolling
claims in the other two cases before it. In Belcher II, Edelen, and Baum,
discovery is in a preliminary state.
54
<PAGE> 57
In December 1997, plaintiffs' counsel in Belcher I, Belcher II, and Edelen
indicated that it 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.
Griffin
On August 5, 1997, an hourly employee filed the case of "Regina Griffin v.
Shoney's, Inc. d/b/a Fifth Quarter" ("Griffin") 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 the plaintiff served 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)." On August 24, 1998, the Company
filed a Motion to Dismiss or, in the Alternative, for Summary Judgment as to the
plaintiffs' claims. Prior to a decision on that motion, plaintiff filed a motion
to amend her amended complaint, in order to substitute Shoney's and TPI as
defendants in the case. The Court granted plaintiff's motion and on November 23,
1998, Shoney's and TPI filed a consolidated answer to plaintiff's second amended
complaint. Discovery is in a preliminary state. Trial is scheduled to commence
in September 1999.
With respect to Belcher II, Edelen, Baum, and Griffin, management continues to
believe 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 with respect to those
cases. However, if the Court's ruling in Belcher I were applied in Edelen to
determine liability, or otherwise in the event of an unfavorable outcome in any
of these cases resulting in a material award for the plaintiffs, the Company's
financial position, results of operations and liquidity could be adversely
affected.
Wilkinson
On December 20, 1996, a jury in Wyandotte County, Kansas returned a verdict
against the Company in the case of "Wilkinson v. Shoney's, Inc." for $458,000 on
a malicious prosecution and a wrongful discharge claim which was based on the
Company's unsuccessful challenge to plaintiff's application for unemployment
benefits after he was terminated. The jury also found the Company liable for
punitive damages on the malicious prosecution claim in an amount to be set by
the trial court. Although the trial court judge stated that she did not find
sufficient evidence to support punitive damages, the trial judge overruled the
Company's motion for judgment as a matter of law and set punitive damages in the
amount of $800,000. The Company has appealed the total judgment of approximately
$1.3 million. Management believes it has substantial defenses to the claims made
and that the Company will likely prevail on appeal. 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 other actions will not materially affect the
operating results or the financial position of the Company.
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<PAGE> 58
NOTE 14 - RETIREMENT PLAN
The Company established the Shoney's, Inc. 401(k) Retirement Savings Plan (the
"Plan") effective January 1, 1996. The Plan covers all employees who meet
certain age and minimum service hour requirements. The Company matches employee
contributions at 25%, up to a maximum of 4% of the participants' base pay. Total
expense recognized by the Company under the Plan was approximately $341,000,
$341,000 and $154,000 for 1998, 1997 and 1996, respectively.
NOTE 15 - EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standard No. 128 "Earnings
per Share" ("SFAS 128") at the beginning of the first quarter of 1998. SFAS 128
supersedes Accounting Principles Board Opinion No. 15 "Earnings per Share" ("APB
15") 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. As required
by SFAS 128, EPS amounts for all prior periods have been restated.
The table below presents the computation of basic and diluted earnings (loss)
per share:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations
before extraordinary loss - numerator
for Basic EPS $(106,288,782) $(35,710,842) $26,045,894
Income (loss) from continuing operations
before extraordinary loss after assumed
conversion of debentures - numerator for
Diluted EPS $(106,288,782) $(35,710,842) $26,045,894
Denominator:
Weighted-average shares outstanding -
Denominator for Basic EPS 48,665,685 48,539,573 42,590,581
Effect of dilutive securities:
Stock-options 115,209
Dilutive potential shares - denominator
for Diluted EPS 48,665,685 48,539,573 42,705,790
============= ============ ===========
Basic EPS (loss) $ (2.18) $ (0.74) $ 0.61
============= ============ ===========
Diluted EPS (loss) $ (2.18) $ (0.74) $ 0.61
============= ============ ===========
</TABLE>
As of October 25, 1998, the Company had outstanding 6,852,790 options to
purchase shares at prices ranging from $1.81 to $25.51. In addition to options
to purchase shares, the Company had approximately 195,000 common shares reserved
for future distribution pursuant to certain employment agreements, and 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 October 25, 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. The Company reported a net loss for 1997
and 1998; therefore, the effect of considering these potentially dilutive
securities would have been anti dilutive.
56
<PAGE> 59
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except per share data)
<TABLE>
<CAPTION>
Per Share
-----------------------
Income Income
(Loss) (Loss)
Before Net Before Net
No. Of Gross Extraordinary Income Extraordinary Income Stock Market
Weeks Revenues Profit Charge (Loss) Charge (Loss) High Low
----- -------- ------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
First Quarter 16 $ 339,097 $ 29,053 $ (9,616)(c) $ (11,031)(c) $ (.20) $ (.23) $5.00 $3.00
Second Quarter 12 281,139 29,866 (1,396) (1,396) (.03) (.03) 5.88 3.63
Third Quarter 12 277,287 31,210 (83,133)(c) (83,133)(c) (1.71) (1.71) 5.06 2.75
Fourth Quarter 12 245,839 18,104 (12,144)(c) (12,144)(c) (.25) (.25) 3.44 1.50
------------------------------------------------------------------------------------------
52 $1,143,362 $108,233 $(106,289) $(107,704) $(2.18)(b) $(2.21)(b)
==========================================================================================
1997
First Quarter 16 $ 363,290 $ 35,016 $ (13,770)(a) $ (13,770)(a) $ (.28) $ (.28) $8.75 $6.75
Second Quarter 12 295,409 37,123 5,293 5,293 .11 .11 8.25 4.38
Third Quarter 12 294,209 36,166 8,767 8,767 .18 .18 6.63 5.25
Fourth Quarter 12 274,168 24,982 (36,001)(a) (36,001)(a) (.74) (.74) 6.25 4.50
------------------------------------------------------------------------------------------
52 $1,227,076 $133,287 $ (35,711) $ (35,711) $ (.74)(b) $ (.74)(b)
==========================================================================================
(a) The first quarter of 1997 included an asset impairment charge resulting from
the Company's adoption of SFAS 121 of $17.6 million. The fourth quarter
included an additional asset impairment charge of $36.4 million.
(b) Quarterly earnings per share amounts for 1998 and 1997 do not sum to the
earnings per share for 1998 and 1997.
(c) The first quarter of 1998 included an asset impairment charge of $2.6
million. The third quarter of 1998 included an asset impairment charge of
$45.8 million and an income tax valuation allowance charge of $51.3 million.
The fourth quarter of 1998 included an income tax valuation allowance charge
of $1.2 million.
</TABLE>
NOTE 17 - SHAREHOLDER RIGHTS PLAN
The Company's Board of Directors has adopted a shareholder rights plan to
protect the interests of the Company's shareholders if the Company is confronted
with coercive or unfair takeover tactics by encouraging third parties interested
in acquiring the Company to negotiate with the Board of Directors. The
shareholder rights plan is a plan by which the Company has distributed rights
("Rights") to purchase (at the rate of one Right per four shares of common
stock) shares of common stock at an exercise price of $60.00 per Right. The
Rights are attached to the common stock and may be exercised only if a person or
group acquires 20% or more of the outstanding common stock or initiates a tender
or exchange offer that would result in such person or group acquiring 30% or
more of the outstanding common stock. Upon such an event, the Rights "flip-in"
and each holder of a Right will thereafter have the right to receive, upon
exercise, common stock having a value equal to two times the exercise price. All
Rights beneficially owned by the acquiring person or group triggering the
"flip-in" will be null and void. Additionally, if a third party were to take
certain action to acquire the Company, such as a merger or other business
combination, the Rights would "flip-over" and entitle the holder to acquire
shares of the acquiring person with a value of two times the exercise price. The
Rights are redeemable by the Company at any time before they become exercisable
for $0.01 per Right and expire in 2004. In order to prevent dilution, the
exercise price and number of Rights per share of common stock will be adjusted
to reflect splits and combinations of, and common stock dividends on, the common
stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There are no Company disclosures required by Item 304 of
Regulation S-K, 17 C.F.R. ss. 229.304.
57
<PAGE> 60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
"Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the 1999 Proxy Statement is incorporated
herein by reference. See also, "Executive Officers of the Registrant" in
Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
"Executive Compensation" contained in the 1999 Proxy Statement is
incorporated herein by reference. The matters labeled "Human Resources and
Compensation Committee Report" and "Shareholder Return Performance Graph"
contained in the 1999 Proxy Statement shall not be deemed incorporated by
reference into this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
"Security Ownership of Certain Beneficial Owners and Management"
contained in the 1999 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
"Certain Transactions" contained in the 1999 Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are included in or filed as a part of this
Annual Report on Form 10-K:
(1) Financial Statements:
Consolidated Balance Sheet - October 25, 1998 and
October 26, 1997.
Consolidated Statement of Operations - Years ended
October 25, 1998, October 26, 1997 and October 27,
1996
Consolidated Statement of Shareholders' Equity
(Deficit) -Years ended October 25, 1998, October 26,
1997 and October 27, 1996
Consolidated Statement of Cash Flows -Years ended
October 25, 1998, October 26, 1997, and
October 27, 1996
Notes to Consolidated Financial Statements -Years
ended October 25, 1998, October 26, 1997 and
October 27, 1996
(2) Schedule II-Valuation and qualifying accounts and
reserves, included as Exhibit 99.1.
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<PAGE> 61
All other schedules for which provision is made in the
applicable accounting regulation of the Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
(3) Those exhibits required to be filed as Exhibits to
this Annual Report on Form 10-K pursuant to Item 601 of Regulation S-K,
17 C.F.R. ss. 229.601, as follows:
3.2, 4.1 Charter of Shoney's, Inc., as amended, filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (File No.
333-11715) filed with the Commission on September 11, 1996,
and incorporated herein by this reference.
3.2, 4.2 Restated Bylaws of Shoney's, Inc., as amended, filed as
Exhibit 3.2 and Exhibit 4.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 10, 1998, and
incorporated herein by this reference.
4.3 Amended and Restated Rights Agreement, dated as of May 25,
1994, between Shoney's, Inc. and Harris Trust and Savings
Bank, as Rights Agent, filed as Exhibit 4 to the Company's
Current Report on Form 8-K filed with the Commission on June
9, 1994, and incorporated herein by this reference, as amended
by Amendment No.1, dated as of April 18, 1995, filed as
Exhibit 4 to the Company's Current Report on Form 8-K filed
with the Commission on May 4, 1995, and incorporated herein by
this reference, and Amendment No. 2, dated as of June 14,
1996, filed as Exhibit 4.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 12, 1996, and
incorporated herein by this reference, and Amendment No. 3,
dated as of April 20, 1998, filed as Exhibit 4 to the
Company's Current Report on Form 8-K filed with the Commission
on April 20, 1998, and incorporated herein by this reference.
4.4 Indenture, dated as of April 1, 1989, between the Company and
Sovran Bank/Central South, as Trustee relating to $201,250,000
in principal amount of liquid yield option notes due 2004,
filed as Exhibit 4.8 to Amendment No. 1 to the Company's
Registration Statement on Form S-3 filed with the Commission
on April 3, 1989 (No. 33-27571), and incorporated herein by
this reference.
4.5 Indenture, dated as of July 15, 1992, among TPI Enterprises,
Inc., TPI Restaurants, Inc., as Guarantor, and NationsBank of
Tennessee (now The Bank of New York, as successor trustee), as
trustee, relating to 8.25% Convertible Subordinated Debentures
due 2002, filed as Exhibit 10 (a) to the Current Report on
Form 8-K of TPI Restaurants, Inc. filed with the Commission on
July 29, 1992 (Commission File No. 0-12312), and incorporated
herein by this reference.
4.6 First Supplemental Indenture, dated as of September 9, 1996,
among TPI Enterprises, Inc., TPI Restaurants, Inc., as
Guarantor, The Bank of New York, as trustee, and Shoney's,
Inc., relating to 8.25% Convertible Subordinated Debentures
due 2002, filed as Exhibit 4.2 to the Company's Current Report
on
59
<PAGE> 62
Form 8-K filed with the Commission on September 11, 1996, and
incorporated herein by this reference.
10.1 Consent Decree entered by the United States District Court for
the Northern District of Florida on January 25, 1993 in
Haynes, et al. v. Shoney's, Inc., et al., filed as Exhibit 28
to the Company's Current Report on Form 8-K filed with the
Commission on February 3, 1993, and incorporated herein by
this reference.
10.2 Shoney's, Inc. 1981 Stock Option Plan, as amended through
October 28, 1996, filed as Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended October
27, 1996, and incorporated herein by this reference.
10.3 Shoney's, Inc. 1996 Stock Option Plan, filed as Exhibit 10.13
to the Company's Annual Report on Form 10-K for the fiscal
year ended October 27, 1996, and incorporated herein by this
reference.
10.4 Shoney's, Inc. Employee Stock Purchase Plan, as amended and
restated, filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 27,
1996, and incorporated herein by this reference.
10.5 Shoney's, Inc. Employee Stock Bonus Plan, filed as Exhibit
10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1993, and incorporated herein by
this reference.
10.6 Shoney's, Inc. Directors' Stock Option Plan, filed as Exhibit
4.38 to the Company's Registration Statement on Form S-8 (File
No. 33-45076) filed with the Commission on January 14, 1992,
and incorporated herein by this reference.
10.7 Shoney's, Inc. 1998 Stock Plan, as amended and restated.
10.8 Shoney's, Inc. Director Share Compensation Arrangement adopted
pursuant to the 1998 Stock Plan.
10.9 Shoney's Ownership Plan 1977, filed as Exhibit 10.47 to Post
Effective Amendment No. 5 to the Company's Registration
Statement on Form S-8 (File No. 2-64257) filed with the
Commission on January 25, 1993, and incorporated herein by
this reference.
10.10 Captain D's Ownership Plan 1976, filed as Exhibit 10.48 to
Post Effective
60
<PAGE> 63
Amendment No. 5 to the Company's Registration Statement on
Form S-8 (File No. 2-64257) filed with the Commission on
January 25, 1993, and incorporated herein by this reference.
10.11 Captain D's Ownership Plan 1978-1979, filed as Exhibit 10.49
to Post Effective Amendment No. 5 to the Company's
Registration Statement on Form S-8 (File No. 2-64257) filed
with the Commission on January 25, 1993, and incorporated
herein by this reference.
10.12 Employment Agreement, dated as of November 12, 1997, between
the Company and J. Michael Bodnar, filed as Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the fiscal year
ended October 26, 1997, and incorporated herein by this
reference.
10.13 Amended and Restated Employment Agreement, dated as of
November 2, 1997, between the Company and C. Stephen Lynn,
filed as Exhibit 10.18 to the Company's Annual Report on Form
10-K for the fiscal year ended October 26, 1997, and
incorporated herein by this reference.
10.14 Employment Agreement, dated as of August 3, 1998, between the
Company and Stephen C. Sanders, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
August 2, 1998, and incorporated herein by this reference.
10.15 Management Retention Agreement, dated as of July 15, 1997,
between the Company and Betty J. Marshall, filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1997, and incorporated herein by this
reference.
10.16 Management Retention Agreement, dated as of July 15, 1997,
between the Company and Haney A. Long, Jr., filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1997, and incorporated herein by this
reference.
10.17 Management Retention Agreement, dated as of July 15, 1997,
between the Company and Robert A. Speck, filed as Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter
ended August 3, 1997, and incorporated herein by this
reference.
10.18 Management Retention Agreement, dated as of July 15, 1997,
between the Company and Ronald E. Walker, filed as Exhibit
10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1997, and incorporated herein by this
reference.
61
<PAGE> 64
10.19 Management Retention Agreement, dated as of July 15, 1997,
between the Company and F. E. McDaniel, Jr., filed as Exhibit
10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1997, and incorporated herein by this
reference.
10.20 Supply Agreement, dated as of November 17, 1995, between the
Company and Mike Rose Foods, Inc., filed as Exhibit 10.25 to
the Company's Annual Report on Form 10-K for the fiscal year
ended October 29, 1995, and incorporated herein by this
reference.
10.21 $375,000,000 Credit Agreement, dated as of November 28, 1997,
among Shoney's, Inc., as Borrower, NationsBank, N.A., as
Administrative Agent for the lenders, NationsBank Montgomery
Securities, Inc., as Syndication Agent, and various other
financial institutions now or hereafter parties thereto, filed
as Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 26, 1997, and incorporated
herein by this reference, as amended by Amendment No.1, dated
as of June 16, 1998, filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 2,
1998, and incorporated herein by this reference.
10.22 Registration Rights Agreement, dated as of December 1, 1997,
by and between Shoney's, Inc. and Raymond L. Danner, filed as
Exhibit 10.32 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 26, 1997, and incorporated
herein by this reference.
21 Subsidiaries of Shoney's, Inc.
23 Consent of Ernst & Young LLP, independent auditors.
27 Financial Data Schedule.
99.1 Schedule II - Valuation and qualifying accounts and reserves.
(b) The Company has not filed any reports on Form 8-K during the last
quarter of the period covered by this Annual Report on Form 10-K.
(c) Exhibits -- the response to this portion of Item 14 is submitted
as a separate section of this Report. See Item 14(a).
(d) Financial Statement Schedules -- the response to this portion of
Item 14 is submitted as a separate section of this Report. See Item 14(a).
62
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized, on this 22nd day
January, 1998.
SHONEY'S, INC.
By: /s/ V. Michael Payne
---------------------------------------
V. Michael Payne
Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 22nd day of January, 1998.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Raymond D. Schoenbaum Chairman of the Board and Director
- -----------------------------------
(Raymond D. Schoenbaum)
/s/ J. Michael Bodnar Chief Executive Officer, President and Director
- -----------------------------------
(J. Michael Bodnar)
/s/ V. Michael Payne Senior Vice President and Controller (Principal Financial and
- ----------------------------------- Accounting Officer)
(V. Michael Payne)
/s/ Jeffry F. Schoenbaum Director
- -----------------------------------
(Jeffry F. Schoenbaum)
/s/ William A. Schwartz Director
- -----------------------------------
(William A. Schwartz)
/s/ Carroll D. Shanks Director
- -----------------------------------
(Carroll D. Shanks)
/s/ Felker W. Ward, Jr, Director
- -----------------------------------
(Felker W. Ward, Jr.)
/s/ William M. Wilson Director
- -----------------------------------
(William M. Wilson)
/s/ James D. Yancey Director
- -----------------------------------
(James D. Yancey)
</TABLE>
63
<PAGE> 66
EXHIBIT INDEX
3.2, 4.1 Charter of Shoney's, Inc., as amended, filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (File No.
333-11715) filed with the Commission on September 11, 1996,
and incorporated herein by this reference.
3.2, 4.2 Restated Bylaws of Shoney's, Inc., as amended, filed as
Exhibit 3.2 and Exhibit 4.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 10, 1998, and
incorporated herein by this reference.
4.3 Amended and Restated Rights Agreement, dated as of May 25,
1994, between Shoney's, Inc. and Harris Trust and Savings
Bank, as Rights Agent, filed as Exhibit 4 to the Company's
Current Report on Form 8-K filed with the Commission on June
9, 1994, and incorporated herein by this reference, as amended
by Amendment No. 1, dated as of April 18, 1995, filed as
Exhibit 4 to the Company's Current Report on Form 8-K filed
with the Commission on May 4, 1995, and incorporated herein by
this reference, and Amendment No. 2, dated as of June 14,
1996, filed as Exhibit 4.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 12, 1996, and
incorporated herein by this reference, and Amendment No. 3,
dated as of April 20, 1998, filed as Exhibit 4 to the
Company's Current Report on Form 8-K filed with the Commission
on April 20, 1998, and incorporated herein by this reference.
4.4 Indenture, dated as of April 1, 1989, between the Company and
Sovran Bank/Central South, as Trustee relating to $201,250,000
in principal amount of liquid yield option notes due 2004,
filed as Exhibit 4.8 to Amendment No. 1 to the Company's
Registration Statement on Form S-3 filed with the Commission
on April 3, 1989 (No. 33-27571), and incorporated herein by
this reference.
4.5 Indenture, dated as of July 15, 1992, among TPI Enterprises,
Inc., TPI Restaurants, Inc., as Guarantor, and NationsBank of
Tennessee (now The Bank of New York, as successor trustee), as
trustee, relating to 8.25% Convertible Subordinated Debentures
due 2002, filed as Exhibit 10 (a) to the Current Report on
Form 8-K of TPI Restaurants, Inc. filed with the Commission on
July 29, 1992 (Commission File No. 0-12312), and incorporated
herein by this reference.
4.6 First Supplemental Indenture, dated as of September 9, 1996,
among TPI Enterprises, Inc., TPI Restaurants, Inc., as
Guarantor, The Bank of New York, as trustee, and Shoney's,
Inc., relating to 8.25% Convertible Subordinated Debentures
due 2002, filed as Exhibit 4.2 to the Company's Current Report
on
<PAGE> 67
Form 8-K filed with the Commission on September 11, 1996, and
incorporated herein by this reference.
10.1 Consent Decree entered by the United States District Court for
the Northern District of Florida on January 25, 1993 in
Haynes, et al. v. Shoney's, Inc., et al., filed as Exhibit 28
to the Company's Current Report on Form 8-K filed with the
Commission on February 3, 1993, and incorporated herein by
this reference.
10.2 Shoney's, Inc. 1981 Stock Option Plan, as amended through
October 28, 1996, filed as Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended October
27, 1996, and incorporated herein by this reference.
10.3 Shoney's, Inc. 1996 Stock Option Plan, filed as Exhibit 10.13
to the Company's Annual Report on Form 10-K for the fiscal
year ended October 27, 1996, and incorporated herein by this
reference.
10.4 Shoney's, Inc. Employee Stock Purchase Plan, as amended and
restated, filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 27,
1996, and incorporated herein by this reference.
10.5 Shoney's, Inc. Employee Stock Bonus Plan, filed as Exhibit
10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1993, and incorporated herein by
this reference.
10.6 Shoney's, Inc. Directors' Stock Option Plan, filed as Exhibit
4.38 to the Company's Registration Statement on Form S-8 (File
No. 33-45076) filed with the Commission on January 14, 1992,
and incorporated herein by this reference.
10.7 Shoney's, Inc. 1998 Stock Plan, as amended and restated.
10.8 Shoney's, Inc. Director Share Compensation Arrangement adopted
pursuant to the 1998 Stock Plan.
10.9 Shoney's Ownership Plan 1977, filed as Exhibit 10.47 to Post
Effective Amendment No. 5 to the Company's Registration
Statement on Form S-8 (File No. 2-64257) filed with the
Commission on January 25, 1993, and incorporated herein by
this reference.
10.10 Captain D's Ownership Plan 1976, filed as Exhibit 10.48 to
Post Effective
<PAGE> 68
Amendment No. 5 to the Company's Registration Statement on
Form S-8 (File No. 2-64257) filed with the Commission on
January 25, 1993, and incorporated herein by this reference.
10.11 Captain D's Ownership Plan 1978-1979, filed as Exhibit 10.49
to Post Effective Amendment No. 5 to the Company's
Registration Statement on Form S-8 (File No. 2-64257) filed
with the Commission on January 25, 1993, and incorporated
herein by this reference.
10.12 Employment Agreement, dated as of November 12, 1997, between
the Company and J. Michael Bodnar, filed as Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the fiscal year
ended October 26, 1997, and incorporated herein by this
reference.
10.13 Amended and Restated Employment Agreement, dated as of
November 2, 1997, between the Company and C. Stephen Lynn,
filed as Exhibit 10.18 to the Company's Annual Report on Form
10-K for the fiscal year ended October 26, 1997, and
incorporated herein by this reference.
10.14 Employment Agreement, dated as of August 3, 1998, between the
Company and Stephen C. Sanders, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
August 2, 1998, and incorporated herein by this reference.
10.15 Management Retention Agreement, dated as of July 15, 1997,
between the Company and Betty J. Marshall, filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1997, and incorporated herein by this
reference.
10.16 Management Retention Agreement, dated as of July 15, 1997,
between the Company and Haney A. Long, Jr., filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1997, and incorporated herein by this
reference.
10.17 Management Retention Agreement, dated as of July 15, 1997,
between the Company and Robert A. Speck, filed as Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarter
ended August 3, 1997, and incorporated herein by this
reference.
10.18 Management Retention Agreement, dated as of July 15, 1997,
between the Company and Ronald E. Walker, filed as Exhibit
10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1997, and incorporated herein by this
reference.
<PAGE> 69
10.19 Management Retention Agreement, dated as of July 15, 1997,
between the Company and F. E. McDaniel, Jr., filed as Exhibit
10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1997, and incorporated herein by this
reference.
10.20 Supply Agreement, dated as of November 17, 1995, between the
Company and Mike Rose Foods, Inc., filed as Exhibit 10.25 to
the Company's Annual Report on Form 10-K for the fiscal year
ended October 29, 1995, and incorporated herein by this
reference.
10.21 $375,000,000 Credit Agreement, dated as of November 28, 1997,
among Shoney's, Inc., as Borrower, NationsBank, N.A., as
Administrative Agent for the lenders, NationsBank Montgomery
Securities, Inc., as Syndication Agent, and various other
financial institutions now or hereafter parties thereto, filed
as Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 26, 1997, and incorporated
herein by this reference, as amended by Amendment No. 1, dated
as of June 16, 1998, filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 2,
1998, and incorporated herein by this reference.
10.22 Registration Rights Agreement, dated as of December 1, 1997,
by and between Shoney's, Inc. and Raymond L. Danner, filed as
Exhibit 10.32 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 26, 1997, and incorporated
herein by this reference.
21 Subsidiaries of Shoney's, Inc.
23 Consent of Ernst & Young LLP, independent auditors.
27 Financial Data Schedule.
99.1 Schedule II - Valuation and qualifying accounts and reserves.
<PAGE>
SHONEY'S, INC.
1998 STOCK PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the Shoney's, Inc. 1998 Stock Plan (the "Plan") is to
enable Shoney's, Inc. (the "Company") to attract, retain, and reward key
employees of the Company and its Subsidiaries and Affiliates, and directors
who are not also employees of the Company, and to strengthen the mutuality of
interests between such key employees and directors and the shareholders of
the Company by awarding such key employees and directors stock incentives
and/or other equity interests or equity-based incentives in the Company. The
provisions of the Plan are intended to satisfy the requirements of Section
16(b) of the Exchange Act, and shall be interpreted in a manner consistent
with the requirements thereof, as now or hereafter construed, interpreted,
and applied by regulations, rulings, and cases. The Plan is also designed so
that awards granted hereunder intended to comply with the requirements for
"performance based" compensation under Section 162(m) of the Code may comply
with such requirements. The creation of the Plan shall not diminish or
prejudice other compensation programs approved from time to time by the
Board.
For purposes of the Plan, the following terms shall be defined as set
forth below:
A. "Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board as a
participating employer under the Plan, provided that the
Company directly or indirectly owns at least 20% of the
combined voting power of all classes of stock of such entity
or at least 20% of the ownership interests in such entity.
B. "Board" means the Board of Directors of the Company.
C. "Change in Control" has the meaning provided in Section 7(b)
of the Plan.
D. "Change in Control Price" has the meaning provided in
Section 7(d) of the Plan.
E. "Common Stock" means the Company's common stock, par value
$1.00 per share.
F. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
G. "Committee" means the Committee referred to in Section 2 of
the Plan.
H. "Company" means Shoney's, Inc., a corporation organized
under the laws of the State of Tennessee, or any successor
corporation.
-1-
<PAGE>
I. "Disability" means disability as determined under the
Company's Group Long-Term Disability Insurance Plan.
J. "Early Retirement" means retirement, for purposes of this
Plan with the express consent of the Company at or before
the time of such retirement, from active employment with the
Company and any Subsidiary or Affiliate prior to age 65, in
accordance with any applicable early retirement policy of
the Company then in effect or as may be approved by the
Committee.
K. "Effective Date" has the meaning provided in Section 11 of
the Plan.
L. "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.
M. "Fair Market Value" means with respect to the Common Stock,
as of any given date or dates, unless otherwise determined
by the Committee in good faith, the reported closing price
of a share of Common Stock on The New York Stock Exchange
(the "NYSE") or such other market or exchange as is the
principal trading market for the Common Stock, or, if no
such sale of a share of Common Stock is reported on the NYSE
or other exchange or principal trading market on such date,
the fair market value of a share of Common Stock as
determined by the Committee in good faith.
N. "Non-Employee Director" means a member of the Board who is
a Non-Employee Director within the meaning of Rule 16b-
3(b)(3) promulgated under the Exchange Act and an outside
director within the meaning of Treasury Regulation Sec. 162-
27(e)(3) promulgated under the Code.
O. "Normal Retirement" means retirement from active employment
with the Company and any Subsidiary or Affiliate on or after
age 65.
P. "Other Stock-Based Award" means an award under Section 6
below that is valued in whole or in part by reference to, or
is otherwise based on, the Common Stock.
Q. "Outside Director" means a member of the Board who is not an
officer or employee of the Company or any Subsidiary or
Affiliate of the Company.
R. "Plan" means this Shoney's, Inc. 1998 Stock Plan, as amended
from time to time.
S. "Performance Goals" means performance goals based on one or
more of the following criteria: (i) pre-tax income or after-
tax income; (ii) operating cash flow; (iii) operating
profit; (iv) return on equity, assets, capital, or
investment; (v) earnings or book value per share; (vi) sales
or revenues; (vii) operating expenses; (viii) Common Stock
price appreciation; and (ix) implementation, management,
-2-
<PAGE>
or completion of critical projects or processes. Where
applicable, the Performance Goals may be expressed in terms
of attaining a specified level of the particular criteria or
the attainment of a percentage increase or decrease in the
particular criteria, and may be applied to one or more of
the Company or any Subsidiary, or a division or strategic
business unit of the Company, or may be applied to the
performance of the Company relative to a market index, a
group of other companies, or a combination thereof, all as
determined by the Committee. The Performance Goals may
include a threshold level of performance below which no
payment will be made (or no vesting will occur), levels of
performance at which specified payments will be made (or
specified vesting will occur), and a maximum level of
performance above which no additional payment will be made
(or at which full vesting will occur). Each of the
foregoing Performance Goals shall be determined, to the
extent applicable, in accordance with generally accepted
accounting principles and shall be subject to certification
by the Committee; provided, that the Committee or the Board,
as applicable, shall have the authority to make equitable
adjustments to the Performance Goals in recognition of
unusual or non-recurring events affecting the Company or any
Subsidiary or the financial statements of the Company or any
Subsidiary, in response to changes in applicable laws or
regulations, or to account for items of gain, loss, or
expense determined to be extraordinary or unusual in nature
or infrequent in occurrence or related to the disposal of a
segment of business or related to a change in accounting
principles.
T. "Regular Compensation" means the salary, fees and bonus
payable to officers, other employees, and Outside Directors
eligible under Section 4 of the Plan.
U. "Restricted Stock" means an award of shares of Common Stock
that is subject to restrictions under Section 5 of the Plan.
V. "Restriction Period" has the meaning provided in Section 5
of the Plan.
W. "Retirement" means Normal or Early Retirement.
X. "Section 162(m) Maximum" has the meaning provided in Section
3(a) hereof.
Y. "Subsidiary" means any company (other than the Company) in
an unbroken chain of companies beginning with the Company if
each of the companies (other than the last company in the
unbroken chain) owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one
of the other companies in the chain.
-3-
<PAGE>
SECTION 2. ADMINISTRATION.
The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall
serve at the pleasure of the Board. The functions of the Committee specified
in the Plan may be exercised by an existing Committee of the Board composed
exclusively of Non-Employee Directors. The initial Committee shall be the
Human Resources and Compensation Committee of the Board. In the event there
are not at least two Non-Employee Directors on the Board, the Plan shall be
administered by the Board and all references herein to the Committee shall
refer to the Board.
The Committee shall have authority to: (i) grant, pursuant to the
terms of the Plan, to officers, other employees, and Outside Directors
eligible under Section 4: (x) Restricted Stock and/or (y) Other Stock-Based
Awards; provided, however, that the power to grant and establish the terms
and conditions of awards to Outside Directors under the Plan shall be
reserved to the Board; and/or (ii) pay any Regular Compensation or Other
Stock-Based Award in the form of Common Stock.
In particular but not in limitation of the foregoing authority, the
Committee, or the Board, as the case may be, shall have the authority,
consistent with the terms of the Plan:
(a) to select the officers, key employees, and Outside Directors
of the Company and its Subsidiaries and Affiliates to whom
Restricted Stock and/or Other Stock-Based Awards may from
time to time be granted hereunder;
(b) to determine whether and to what extent Restricted Stock
and/or Other Stock-Based Awards, or any combination thereof,
are to be granted hereunder to one or more eligible persons;
(c) to determine the number of shares to be covered by each such
award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any
restriction or limitation, or any vesting acceleration or
waiver of forfeiture restrictions regarding any award and/or
the shares of Common Stock relating thereto, based in each
case on such factors as the Committee or the Board, as
applicable, shall determine, in its sole discretion); and to
amend or waive any such terms and conditions to the extent
permitted by Section 8 hereof;
(e) to determine whether, to what extent, and under what
circumstances shares of Common Stock and other amounts
payable with respect to an award under this Plan shall be
deferred either automatically or at the election of the
participant (including providing for and determining the
amount (if any) of any deemed earnings on any deferred
amount during any deferral period);
-4-
<PAGE>
(f) to determine the terms, conditions, and restrictions of any
Performance Goals and the number of shares of Restricted
Stock or other awards subject thereto;
(g) to determine whether to require payment of tax withholding
requirements in shares of Common Stock subject to the award;
and
(h) to impose any holding period required to satisfy Section 16
under the Exchange Act.
The Committee shall have the authority to adopt, alter, and repeal
such rules, guidelines, and practices governing the Plan as it shall, from
time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating
thereto); and to otherwise supervise the administration of the Plan; and,
except as expressly set forth herein or otherwise required by law, all
decisions made by the Committee pursuant to the provisions of the Plan shall
be made in the Committee's sole discretion and shall be final and binding on
all persons, including the Company and Plan participants.
SECTION 3. SHARES OF COMMON STOCK SUBJECT TO PLAN.
(a) As of the Effective Date, the aggregate number of shares of
Common Stock that may be issued under the Plan shall be 2,000,000 shares.
The shares of Common Stock issuable under the Plan may consist, in whole or
in part, of authorized and unissued shares or treasury shares. No officer of
the Company or other person whose compensation may be subject to the
limitations on deductibility under Section 162(m) of the Code shall be
eligible to receive awards of Restricted Stock or Other Stock-Based Awards
pursuant to this Plan relating to in excess of 200,000 shares of Common Stock
in any fiscal year (the "Section 162(m) Maximum").
(b) If any shares of Common Stock that are subject to any
Restricted Stock or Other Stock-Based Award granted hereunder are forfeited
prior to the payment of any dividends, if applicable, with respect to such
shares of Common Stock, or any such award otherwise terminates without a
payment being made to the participant in the form of Common Stock, such
shares shall again be available for distribution in connection with future
awards under the Plan.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split,
or other change in corporate structure affecting the Common Stock, an
appropriate substitution or adjustment shall be made in the maximum number of
shares that may be awarded under the Plan, in the Section 162(m) Maximum, and
in the number of shares subject to other outstanding awards granted under the
Plan as may be determined to be appropriate by the Committee, in its sole
discretion, provided that the number of shares subject to any award shall
always be a whole number.
-5-
<PAGE>
SECTION 4. ELIGIBILITY.
Officers and other key employees of the Company and its Subsidiaries
and Affiliates who are responsible for or contribute to the management,
growth and/or profitability of the business of the Company and/or its
Subsidiaries and Affiliates and Outside Directors are eligible to be granted
awards under the Plan.
SECTION 5. RESTRICTED STOCK.
(a) Administration. Shares of Restricted Stock may be issued
either alone, in addition to, or in tandem with other awards granted under
the Plan and/or cash awards made outside the Plan. The Committee or the
Board, as the case may be, shall determine the eligible persons to whom, and
the time or times at which, grants of Restricted Stock will be made, the
number of shares of Restricted Stock to be awarded to any person, the price
(if any) to be paid by the recipient of Restricted Stock (subject to Section
5(b)), the time or times within which such awards may be subject to
forfeiture, and the other terms, restrictions, and conditions of the awards
in addition to those set forth in Section 5(c). The Committee or the Board
may condition the grant of Restricted Stock upon the attainment of specified
Performance Goals or such other factors as the Committee or the Board may
determine, in its sole discretion. The provisions of Restricted Stock awards
need not be the same with respect to each recipient.
(b) Awards and Certificates. The prospective recipient of a
Restricted Stock award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the
award and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such award:
(i) The purchase price for shares of Restricted Stock shall be
established by the Committee or the Board, as applicable,
and may be zero.
(ii) Awards of Restricted Stock must be accepted within a period
of 60 days (or such shorter period as the Committee or the
Board may specify at grant) after the award date, by
executing a Restricted Stock Award Agreement and paying
whatever price (if any) is required under Section 5(b)(i).
(iii) Each participant receiving a Restricted Stock award shall be
issued a stock certificate in respect of such shares of
Restricted Stock. Such certificate shall be registered in
the name of such participant (or a transferee permitted by
Section 10(h) hereof), and shall bear an appropriate legend
referring to the terms, conditions, and restrictions
applicable to such award.
(iv) The Committee or the Board, as the case may be, may require
that the stock certificates evidencing such shares be held
in custody by the Company until the restrictions thereon
shall have lapsed, and that, as a condition of any
Restricted
-6-
<PAGE>
Stock award, the participant shall have delivered a stock
power, endorsed in blank, relating to the shares of Common
Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock
awarded pursuant to this Section 5 shall be subject to the following
restrictions and conditions:
(i) In accordance with the provisions of this Plan and the award
agreement, during a period set by the Committee or the
Board, as the case may be, commencing with the date of such
award (the "Restriction Period"), the participant shall not
be permitted to sell, transfer, pledge, assign, or otherwise
encumber shares of Restricted Stock awarded under the Plan.
Within these limits, the Committee or the Board, as
applicable, in its sole discretion, may provide for the
lapse of such restrictions in installments and may
accelerate or waive such restrictions, in whole or in part,
based on service, the attainment of Performance Goals, or
such other factors or criteria as the Committee or the Board
may determine in its sole discretion.
(ii) Except as provided in this paragraph (ii) and Section
5(c)(i), the participant shall have, with respect to the
shares of Restricted Stock, all of the rights of a
shareholder of the Company, including the right to vote the
shares, and the right to receive any cash dividends. The
Committee or the Board, as applicable, in its sole
discretion, as determined at the time of award, may permit
or require the payment of cash dividends to be deferred and,
if the Committee or the Board so determines, reinvested,
subject to Section 10(e), in additional Restricted Stock to
the extent shares are available under Section 3, or
otherwise reinvested. Pursuant to Section 3 above, stock
dividends issued with respect to Restricted Stock shall be
treated as additional shares of Restricted Stock that are
subject to the same restrictions and other terms and
conditions that apply to the shares with respect to which
such dividends are issued. If the Committee or the Board,
as the case may be, so determines, the award agreement may
also impose restrictions on the right to vote and the right
to receive dividends.
(iii) Subject to the applicable provisions of the award agreement
and this Section 5, upon termination of a participant's
employment with the Company and any Subsidiary or Affiliate
for any reason during the Restriction Period, all shares
still subject to restriction will vest, or be forfeited, in
accordance with the terms and conditions established by the
Committee at or after grant.
(iv) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such
Restriction Period, certificates for an appropriate number
of unrestricted shares shall be delivered to the participant
(or a transferee permitted by Section 10(h) hereof)
promptly.
-7-
<PAGE>
(d) Minimum Value Provisions. In order to better ensure that
award payments actually reflect the performance of the Company and service of
the participant, the Committee or the Board, as applicable, may provide, in
its sole discretion, for a tandem performance-based or other award designed
to guarantee a minimum value, payable in cash or Common Stock to the
recipient of a restricted stock award, subject to such performance, future
service, deferral, and other terms and conditions as may be specified by the
Committee or the Board.
SECTION 6. OTHER STOCK-BASED AWARDS.
(a) Administration. Other Stock-Based Awards, including, without
limitation, performance shares and Common Stock awards valued by reference to
earnings per share or Subsidiary performance, may be granted either alone, in
addition to, or in tandem with Restricted Stock granted under the Plan and
cash awards made outside of the Plan. Subject to the provisions of the Plan,
the Committee or the Board, as the case may be, shall have authority to
determine the persons to whom and the time or times at which such awards
shall be made, the number of shares of Common Stock to be awarded pursuant to
such awards, and all other conditions of the awards. The Committee or the
Board may also provide for the grant of Common Stock upon the completion of
a specified performance period. The provisions of Other Stock-Based Awards
need not be the same with respect to each recipient.
(b) Terms and Conditions. Other Stock-Based Awards made pursuant
to this Section 6 shall be subject to the following terms and conditions:
(i) Shares subject to awards under this Section 6 and the award
agreement referred to in Section 6(b)(v) below, may not be
sold, assigned, transferred, pledged, or otherwise
encumbered prior to the date on which the shares are issued,
or, if later, the date on which any applicable restriction,
performance, or deferral period lapses.
(ii) Subject to the provisions of this Plan and the award
agreement and unless otherwise determined by the Committee
or the Board at grant, the recipient of an award under this
Section 6 shall be entitled to receive, currently or on a
deferred basis, interest or dividends or interest or
dividend equivalents with respect to the number of shares
covered by the award, as determined at the time of the award
by the Committee or the Board, as the case may be, in its
sole discretion, and the Committee or the Board may provide
that such amounts (if any) shall be deemed to have been
reinvested in additional shares of Common Stock or otherwise
reinvested.
(iii) Any award under Section 6 and any shares of Common Stock
covered by any such award shall vest or be forfeited to the
extent so provided in the award agreement, as determined by
the Committee or the Board, as applicable, in its sole
discretion.
-8-
<PAGE>
(iv) In the event of the participant's Retirement, Disability, or
death, or in cases of special circumstances, the Committee
may, in its sole discretion, waive in whole or in part any
or all of the remaining limitations imposed hereunder (if
any) with respect to any or all of an award under this
Section 6.
(v) Each award under this Section 6 shall be confirmed by, and
subject to the terms of, an agreement or other instrument by
the Company and the participant.
(vi) Common Stock (including securities convertible into Common
Stock) issued on a bonus basis under this Section 6 may be
issued for no cash consideration. Common Stock (including
securities convertible into Common Stock) purchased pursuant
to a purchase right awarded under this Section 6 shall be
priced at least 85% of the Fair Market Value of the Common
Stock on the date of grant.
SECTION 7. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. In the event of:
(1) a "Change in Control" as defined in Section 7(b); or
(2) a "Potential Change in Control" as defined in Section 7(c),
but only if and to the extent so determined by the Committee
or the Board at or after grant (subject to any right of
approval expressly reserved by the Committee or the Board at
the time of such determination),
(i) Subject to the limitations set forth below in this
Section 7(a), the restrictions applicable to any
Restricted Stock and Other Stock-Based Awards, in
each case to the extent not already vested under
the Plan, shall lapse and such shares and awards
shall be deemed fully vested.
(ii) Subject to the limitations set forth below in this
Section 7(a), the value of all outstanding
Restricted Stock and Other Stock-Based Awards, in
each case to the extent vested, shall, unless
otherwise determined by the Board or by the
Committee in its sole discretion prior to any
Change in Control, be cashed out on the basis of
the "Change in Control Price" as defined in Section
7(d) as of the date such Change in Control or such
Potential Change in Control is determined to have
occurred or such other date as the Board or
Committee may determine prior to the Change in
Control.
(iii) The Board or the Committee may impose additional
conditions on the acceleration or valuation of any
award in the award agreement.
(b) Definition of Change in Control. For purposes of Section
7(a), a "Change in Control" means the happening of any of the following:
-9-
<PAGE>
(1) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Company
or a wholly-owned subsidiary thereof or any employee benefit
plan of the Company or any of its Subsidiaries, becomes the
beneficial owner of the Company's securities having 50% or
more of the combined voting power of the then outstanding
securities of the Company that may be cast for the election
of directors of the Company (other than as a result of an
issuance of securities initiated by the Company in the
ordinary course of business); or
(2) as the result of, or in connection with, any cash tender or
exchange offer, merger, or other business combination, sales
of assets or contested election, or any combination of the
foregoing transactions, less than a majority of the combined
voting power of the then outstanding securities of the
Company or any successor Company or entity entitled to vote
generally in the election of the directors of the Company or
such other company or entity after such transaction are held
in the aggregate by the holders of the Company's securities
entitled to vote generally in the election of directors of
the Company immediately prior to such transaction; or
(3) during any period of two consecutive years, individuals who
at the beginning of any such period constitute the Board
cease for any reason to constitute at least a majority
thereof, unless the election, or the nomination for election
by the Company's shareholders, of each director of the
Company first elected during such period was approved by a
vote of at least two-thirds of the directors of the Company
then still in office who were directors of the Company at
the beginning of any such period.
(c) Definition of Potential Change in Control. For purposes of
Section 7(a), a "Potential Change in Control" means the happening of any one
of the following:
(1) the approval by shareholders of an agreement by the Company,
the consummation of which would result in a Change in
Control of the Company as defined in Section 7(b); or
(2) the acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the
Company or a Subsidiary or any Company employee benefit plan
(including any trustee of such plan acting as such trustee))
of securities of the Company representing 50% or more of the
combined voting power of the Company's outstanding
securities and the adoption by the Committee or the Board of
a resolution to the effect that a Potential Change in
Control of the Company has occurred for purposes of this
Plan.
-10-
<PAGE>
(d) Change in Control Price. For purposes of this Section 7,
"Change in Control Price" means the highest price per share of Common Stock
paid in any transaction reported on the NYSE or such other exchange or market
as is the principal trading market for the Common Stock, or paid or offered
in any bona fide transaction related to a Potential or actual Change in
Control of the Company at any time during the 60 day period immediately
preceding the occurrence of the Change in Control (or, where applicable, the
occurrence of the Potential Change in Control event), in each case as
determined by the Committee or the Board.
SECTION 8. AMENDMENTS AND TERMINATION.
The Board may at any time amend, alter, or discontinue the Plan
without shareholder approval to the fullest extent permitted by the Exchange
Act and the Code; provided, however, that no amendment, alteration, or
discontinuation shall be made which would impair the rights of a participant
under a Restricted Stock or Other Stock-Based Award theretofore granted,
without the participant's consent.
The Committee or the Board, as the case may be, may amend the terms
of any award theretofore granted, prospectively or retroactively, but,
subject to Section 3 above, no such amendment shall impair the rights of any
holder without the holder's consent. Solely for purposes of computing the
Section 162(m) Maximum, if any awards previously granted to a participant are
canceled and new awards having a lower exercise price or other more favorable
terms for the participant are substituted in their place, both the initial
awards and the replacement awards will be deemed to be outstanding (although
the canceled awards will not be exercisable or deemed outstanding for any
other purposes).
SECTION 9. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive
and deferred compensation. With respect to any payments not yet made to a
participant by the Company, nothing contained herein shall give any such
participant any rights that are greater than those of a general creditor of
the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created
under the Plan to deliver Common Stock or payments in lieu of or with respect
to awards hereunder; provided, however, that, unless the Committee otherwise
determines with the consent of the affected participant, the existence of
such trusts or other arrangements is consistent with the "unfunded" status of
the Plan.
SECTION 10. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares
pursuant to an award under the Plan to represent to and agree with the
Company in writing that the participant is acquiring the shares without a
view to distribution thereof. The certificates for such shares may include
any legend which the Committee deems appropriate to reflect any restrictions
on transfer. All certificates for shares of Common Stock or other securities
delivered under the
-11-
<PAGE>
Plan shall be subject to such stop-transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Common
Stock is then listed, and any applicable Federal or state securities law, and
the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements may
be either generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee
of the Company or any Subsidiary or Affiliate any right to continued
employment with the Company or a Subsidiary or Affiliate, as the case may be,
nor shall it interfere in any way with the right of the Company or a
Subsidiary or Affiliate to terminate the employment of any of its employees
at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay
to the Company, or make arrangements satisfactory to the Committee regarding
the payment of, any Federal, state, or local taxes of any kind required by
law to be withheld with respect to such amount. The Committee may require
withholding obligations to be settled with Common Stock, including Common
Stock that is part of the award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company and its
Subsidiaries or Affiliates shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to
the participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or other types of Plan awards) at
the time of any dividend payment shall only be permissible if sufficient
shares of Common Stock are available under Section 3 for such reinvestment
(taking into account other awards then outstanding under the Plan).
(f) The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the State
of Tennessee.
(g) The members of the Committee and the Board shall not be
liable to any employee or other person with respect to any determination made
hereunder in a manner that is not inconsistent with their legal obligations
as members of the Board. In addition to such other rights of indemnification
as they may have as directors or as members of the Committee, the members of
the Committee shall be indemnified by the Company against the reasonable
expenses, including attorneys' fees actually and necessarily incurred in
connection with the defense of any action, suit, or proceeding, or in
connection with any appeal therefrom, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan, and against all amounts paid by them in settlement thereof
(provided
-12-
<PAGE>
such settlement is approved by independent legal counsel selected by the
Company) or paid by them in satisfaction of a judgment in any such action,
suit, or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit, or proceeding that such Committee member is
liable for negligence or misconduct in the performance of his or her duties;
provided that within 60 days after institution of any such action, suit, or
proceeding, the Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
(h) In addition to any other restrictions on transfer that may
be applicable under the terms of this Plan or the applicable award agreement,
no Restricted Stock award or Other Stock-Based Award or other right issued
under this Plan is transferable by the participant without the prior written
consent of the Committee other than transfers by will or by the laws of
descent and distribution. The designation of a beneficiary will not
constitute a transfer.
(i) The Committee may, at or after grant, condition the receipt
of any payment in respect of any award or the transfer of any shares subject
to an award on the satisfaction of a six-month holding period, if such
holding period is required for compliance with Section 16 under the Exchange
Act.
SECTION 11. EFFECTIVE DATE OF PLAN.
The Plan shall be effective as of the date of approval of the Plan
by a majority of the votes cast by the holders of the Company's Common Stock.
SECTION 12. TERM OF PLAN.
No Restricted Stock award or Other Stock-Based Award shall be granted
nor shall any Common Stock be issued in payment of Regular Compensation
pursuant to the Plan on or after the tenth anniversary of the Effective Date
of the Plan, but awards granted prior to such tenth anniversary may be
extended beyond that date.
-13-
<PAGE>
SHARE COMPENSATION ARRANGEMENT FOR
NON-EMPLOYEE DIRECTORS OF SHONEY'S, INC.
(December 1998)
(Pursuant to the Shoney's, Inc. 1998 Stock Plan)
ELIGIBILITY: All directors of Shoney's, Inc. (the "Corporation") who are
not full time employees of the Corporation ("Participating
Directors") shall participate to the extent of the minimum
specified below and may participate further at his/her
election. For the purposes of this Share Compensation
Arrangement, "aggregate fees" in respect of any director
shall include: (i) such director's quarterly retainer; (ii)
if such director is the Chairman of a committee of the
Board, the quarterly retainer, if any, paid to such director
in respect of such service; (iii) all quarterly fees paid to
such director in respect of attendance at regular meetings
of the Board or committees thereof; and (iv) if such
director is also Chairman of the Board, to the extent such
director elects to receive compensation for services
performed as Chairman in lieu of any retainers or fees to
which he/she is entitled by virtue of his/her services as a
director, all such compensation.
AMOUNT OF Participating Directors shall receive at least thirty-five
PARTICIPATION: percent (35%) and, at their election, may receive up to one
hundred percent of their aggregate fees in shares of the
Corporation's One Dollar ($1.00) par value common stock
("Shares") instead of cash. At or prior to the first
regular directors' meeting held in a calendar year, each
Participating Director must make an election, which will be
irrevocable during the remaining portion of that year, to
receive a specified percentage up to 100% of such directors'
aggregate fees in Shares. Any director who does not make
such an election will be deemed to have elected to receive
thirty-five percent (35%) of such director's aggregate fees
in Shares during the applicable year.
METHOD Notice of a director's election to receive a specified
OF ELECTION: percentage of such Director's aggregate fees in Shares
instead of cash must be provided in writing to the Secretary
of the Corporation at or prior to the first regular
directors' meeting in a calendar year.
NUMBER OF The number of Shares which a Participating Director will be
SHARES: issued following each regular quarterly board meeting will
be equal to: the amount of aggregate fees then due for which
such director has elected to be paid in Shares, divided by
the average closing price of the Shares on the New York
Stock Exchange during the last five trading days preceding
such board meeting.
FORM OF Compensation in the form of a share certificate will be sent
PAYMENT: to the Participating Directors as soon as practicable
following each regular quarterly meeting of the
Corporation's board of directors.
TERMINATION: The Share Compensation Arrangement will expire on the
earlier of: (i) its termination by the board of directors,
or (ii) 250,000 Shares having been issued to directors
pursuant to the Arrangement.
<PAGE>
Exhibit 21
Jurisdiction
of
Subsidiary Formation
- --------------------------------------------------------------------------
Commissary Operations, Inc. TN
Corporate Benefit Services, Incorporated of Nashville TN
Pargo's of Frederick, Inc. TN
Pargo's of York, Inc. TN
Shoney's of Canada, Inc. Canada
Shoney's Equipment Corporation TN
Shoney's Investments, Inc. NV
Shoney's of Michigan, Inc. TN
TPI Commissary, Inc. (1) TN
TPI Entertainment, Inc. DE
TPI Insurance Corporation HA
TPI Properties, Inc. (1) TN
TPI Restaurants, Inc. TN
TPI Transportation, Inc. (1) TN
SHN Properties, LLC (2) DE
- -----------------
(1) Subsidiary of TPI Restaurants, Inc.
(2) Members: Corporate Benefit Services, Incorporated of
Nashville (Managing Member) and Shoney's Investments, Inc.
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement on
Form S-8 (File No. 333-64091) and related Prospectus pertaining to the
Shoney's, Inc. 1998 Stock Plan; in Registration Statement on Form S-8 (File
No. 333-11717) and related Prospectus pertaining to the Shoney's, Inc. 1996
Stock Option Plan; in Registration Statement on Form S-8 (File No. 333-11715)
and related Prospectus pertaining to the Shoney's, Inc. 1981 Stock Option
Plan; in Post-Effective Amendment No. 4 to the Registration Statement on Form
S-8 (File No. 33-605) and related Prospectus pertaining to the Shoney's, Inc.
Employee Stock Purchase Plan; in Post-Effective Amendment No. 3 to the
Registration Statement on Form S-8 (File No. 2-84763) and related Prospectus
pertaining to the Shoney's, Inc. 1981 Stock Option Plan; in Post-Effective
Amendment No. 2 to the Registration Statement on Form S-8 (File No. 33-25725)
and related Prospectus pertaining to the Shoney's, Inc. 1981 Stock Option
Plan; and in Registration Statement on Form S-8 (File No. 33-45076) and
related Prospectus pertaining to the Shoney's, Inc. Directors' Stock Option
Plan; of our report dated December 10, 1998, except for paragraphs one
through ten of Note 13, as to which the date is December 31, 1998 with
respect to the consolidated financial statements and schedule of Shoney's,
Inc. included in the Annual Report (Form 10-K) for the year ended October 25,
1998.
/s/ Ernst & Young LLP
Nashville, Tennessee
January 18, 1999
<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 OCTOBER 25, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-25-1998
<PERIOD-START> OCT-27-1997
<PERIOD-END> OCT-25-1998
<CASH> 16,277,722
<SECURITIES> 0
<RECEIVABLES> 11,405,561
<ALLOWANCES> 1,142,071
<INVENTORY> 37,146,297
<CURRENT-ASSETS> 150,961,564
<PP&E> 677,978,782
<DEPRECIATION> 350,673,367
<TOTAL-ASSETS> 523,468,833
<CURRENT-LIABILITIES> 176,320,386
<BONDS> 443,243,110
0
0
<COMMON> 48,694,865
<OTHER-SE> (168,182,036)
<TOTAL-LIABILITY-AND-EQUITY> 523,468,833
<SALES> 1,115,634,349
<TOTAL-REVENUES> 1,143,362,463
<CGS> 1,035,129,613
<TOTAL-COSTS> 1,222,854,245
<OTHER-EXPENSES> 139,248,114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,476,518
<INCOME-PRETAX> (79,491,782)
<INCOME-TAX> 26,797,000
<INCOME-CONTINUING> (106,288,782)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,415,138)
<CHANGES> 0
<NET-INCOME> (107,703,920)
<EPS-PRIMARY> (2.21)
<EPS-DILUTED> (2.21)
</TABLE>
<PAGE> 1
Exhibit 99.1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Shoney's, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Charged
Balance at to Costs Charged Balance at
Beginning and to Other End of
of Period Expenses Accounts Deductions Period
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Fiscal year ended
October 25, 1998:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 1,596,000 $ 297,000 $ 70,000 (B) $ 821,000 (A) $ 1,142,000
=========== =========== =========== ============ ===========
Valuation
allowance for
deferred tax
assets $10,609,000 $52,538,000 (E) $ 0 $ 0 $63,147,000
=========== =========== =========== ============ ===========
Fiscal year ended
October 26, 1997:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 1,504,000 $ 110,000 $ 209,000(B) $ 227,000 (A) $ 1,596,000
=========== =========== =========== ============ ===========
Valuation
allowance for
deferred tax
assets $ 4,749,000 $ 5,860,000(E) $ 0 $ 0 $10,609,000
=========== =========== =========== ============ ===========
Fiscal year ended
October 27, 1996:
Reserves and
allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 1,645,000 $ 481,000 $ 282,000(B) $ 904,000 (A) $ 1,504,000
=========== =========== =========== ============ ===========
Valuation
allowance for
deferred tax
assets $ 0 $ 0 $ 4,902,000(C) $ 153,000 (D) $ 4,749,000
=========== =========== =========== ============ ===========
</TABLE>
(A) Accounts written off.
(B) Recoveries from accounts written off in prior year.
(C) Deferred tax valuation allowance established as part of the purchase price
allocation for the Company's acquisition of TPI.
(D) Expiration of tax credit carryforwards.
(E) Increased the valuation allowance for deferred tax assets
which are not expected to be realized.
