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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 14, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-4377
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SHONEY'S, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-0799798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1727 Elm Hill Pike, Nashville, TN 37210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 391-5201
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No__.
As of June 23, 2000, there were 50,625,410 shares of Shoney's, Inc.
$1 par value common stock outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
May 14, October 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,699,384 $ 10,991,872
Notes and accounts receivable, less allowance
for doubtful accounts of $1,229,000 in 2000
and $1,497,000 in 1999 10,991,061 8,397,342
Inventories 40,144,425 37,347,025
Prepaid expenses and other current assets 4,795,165 5,038,982
Net current assets of discontinued operations 810,549 1,406,612
Net property, plant and equipment held for sale 12,982,877 27,282,950
----------- -----------
Total current assets 76,423,461 90,464,783
Property, plant and equipment, at lower of cost or market 600,714,849 608,937,944
Less accumulated depreciation and amortization (335,367,774) (332,728,963)
----------- -----------
Net property, plant and equipment 265,347,075 276,208,981
Other assets:
Goodwill (net of accumulated amortization of
$6,432,000 in 2000 and $7,001,000 in 1999) 18,596,085 19,720,435
Deferred charges and other intangible assets 4,970,838 5,930,275
Net non-current assets of discontinued operations 117,327 9,460,324
Other assets 4,071,577 3,870,368
----------- -----------
Total other assets 27,755,827 38,981,402
----------- -----------
$ 369,526,363 $ 405,655,166
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 27,632,216 $ 28,346,517
Other accrued liabilities 60,324,807 63,532,776
Reserve for litigation settlements due within one year 3,872,961
Debt and capital lease obligations due within one year 26,836,024 29,333,548
----------- -----------
Total current liabilities 114,793,047 125,085,802
Long-term senior debt and capital lease obligations 161,705,064 186,349,492
Zero coupon subordinated convertible debentures 128,102,631 122,520,712
Subordinated convertible debentures, net of bond
discount of $2,043,000 in 2000 and $2,505,000 in 1999 49,520,118 49,057,719
Reserve for litigation settlements 158,687
Other liabilities 59,983,632 69,620,110
Shareholders' deficit:
Common stock, $1 par value: authorized 200,000,000
issued 50,594,763 in 2000 and 49,492,514 in 1999 50,594,763 49,492,514
Additional paid-in capital 137,657,084 137,674,675
Accumulated deficit (332,829,976) (334,304,545)
----------- -----------
Total shareholders' deficit (144,578,129) (147,137,356)
----------- -----------
$ 369,526,363 $ 405,655,166
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
-2-
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Twenty-eight Weeks Ended
May 14, May 9,
2000 1999
------------- -------------
<S> <C> <C>
Revenues
Net sales $ 438,784,708 $ 498,658,478
Franchise fees 7,857,351 7,801,042
Other income 5,884,180 15,926,534
------------ ------------
452,526,239 522,386,054
Costs and expenses
Cost of sales 397,949,011 453,280,057
General and administrative expenses 33,502,664 42,477,874
Litigation settlement 14,500,000
Interest expense 20,433,307 23,708,334
------------ ------------
Total costs and expenses 451,884,982 533,966,265
------------ ------------
Income (loss) from continuing operations
before income taxes 641,257 (11,580,211)
Provision for income taxes 272,000
------------ ------------
Net income (loss) from continuing operations 369,257 (11,580,211)
Discontinued operations, net of income taxes 530,221 692,867
Gain on sale of discontinued operations, net
of income taxes 575,091
------------ ------------
Net income (loss) $ 1,474,569 $ (10,887,344)
============ ============
Earnings (loss) per common share
Basic
Net income (loss) from continuing operations $ 0.01 $(0.24)
Discontinued operations, net of income taxes 0.01 0.01
Gain on sale of discontinued operations, net
of income taxes 0.01
----- -----
Net income (loss) $ 0.03 $(0.22)
===== =====
Diluted:
Net income (loss) from continuing operations $ 0.01 $(0.24)
Discontinued operations, net of income taxes 0.01 0.01
Gain on sale of discontinued operations, net
of income taxes 0.01
----- -----
Net income (loss) $ 0.03 $(0.22)
===== =====
Weighted average shares outstanding
Basic 50,253,402 49,228,581
Diluted 50,312,907 49,228,581
Common shares outstanding 50,594,763 49,446,839
Dividends per share NONE NONE
</TABLE>
See notes to consolidated condensed financial statements.
-3-
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended
May 14, May 9,
2000 1999
------------- -------------
<S> <C> <C>
Revenues
Net sales $ 204,226,797 $ 223,945,468
Franchise fees 3,716,603 3,501,410
Other income 1,956,239 5,217,312
------------ ------------
209,899,639 232,664,190
Costs and expenses
Cost of sales 181,777,901 200,486,745
General and administrative expenses 14,961,720 17,738,393
Interest expense 8,671,512 9,758,016
------------ ------------
Total costs and expenses 205,411,133 227,983,154
------------ ------------
Income from continuing operations
before income taxes 4,488,506 4,681,036
Provision for income taxes 160,000
------------ ------------
Income from continuing operations 4,328,506 4,681,036
Discontinued operations, net of income taxes 545,709 327,505
Gain on sale of discontinued operations, net
of income taxes 575,091
------------ ------------
Net income $ 5,449,306 $ 5,008,541
============ ============
Earnings per common share
Basic:
Net income from continuing operations $ 0.09 $ 0.09
Discontinued operations, net of income taxes 0.01 0.01
Gain on sale of discontinued operations, net
of income taxes 0.01
----- -----
Net income $ 0.11 $ 0.10
===== =====
Diluted:
Net income from continuing operations $ 0.09 $ 0.09
Discontinued operations, net of income taxes 0.01 0.01
Gain on sale of discontinued operations, net
of income taxes 0.01
----- -----
Net income $ 0.11 $ 0.10
===== =====
Weighted average shares outstanding
Basic 50,552,996 49,442,377
Diluted 50,592,996 49,681,688
Common shares outstanding 50,594,763 49,446,839
Dividends per share NONE NONE
</TABLE>
See notes to consolidated condensed financial statements.
-4-
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Twenty-eight Weeks Ended
May 14, May 9,
2000 1999
------------- -------------
<S> <C> <C>
Operating activities
Net income (loss) $ 1,474,569 $ (10,887,344)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Income from discontinued operations,
net of income taxes (530,221) (692,867)
Gain on sale of discontinued operations,
net of income taxes (575,091)
Depreciation and amortization 18,951,562 21,903,120
Amortization of deferred charges and other
non-cash charges 7,687,204 8,963,685
Gain on disposal of property, plant and
equipment (4,960,860) (14,933,370)
Litigation settlement 14,500,000
Changes in operating assets and liabilities (16,213,736) 16,127,608
------------ ------------
Net cash provided by continuing operating
activities 5,833,427 34,980,832
Net cash provided by discontinued operating
activities 887,040 1,046,509
------------ ------------
Net cash provided by operating activities 6,720,467 36,027,341
Investing activities
Cash required for property, plant and equipment (10,582,247) (11,399,380)
Cash required for assets held for sale (275,533) (354,998)
Proceeds from disposal of property, plant and
equipment 20,064,182 50,062,905
Proceeds from disposal of discontinued operations 11,161,718 3,049,417
Cash (used for) provided by other assets (152,584) 55,353
------------ ------------
Net cash provided by investing activities 20,215,536 41,413,297
Financing activities
Payments on long-term debt and
capital lease obligations (34,291,754) (56,775,807)
Proceeds from long-term debt 18,500,000
Net payments on short-term debt (10,887,000)
Payments on litigation settlements (3,726,680) (33,996)
Cash required for debt issue costs (823,057) (180,093)
------------ ------------
Net cash used by financing activities (31,228,491) (56,989,896)
------------ ------------
Change in cash and cash equivalents $ (4,292,488) $ 20,450,742
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
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The forward-looking statements included in this Form 10-Q 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, adverse weather conditions that may affect the
Company's markets, turnover and a variety of other similar matters. Forward
looking statements generally can be identified by the use of forward looking
terminology such as "may," "will," "expect," "intend," "estimate,"
"anticipate," "believe," or "continue" (or the negative thereof) or similar
terminology. 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations and under the caption "Risk
Factors" therein. 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.
-6-
SHONEY'S, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
May 14, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q. As a
result, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The Company, in management's opinion, has included all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
of the results of operations. Certain reclassifications have been made in
the consolidated condensed financial statements to conform to the 2000
presentation. Operating results for the twelve and twenty-eight week periods
ended May 14, 2000 are not necessarily indicative of the results that may be
expected for all or any balance of the fiscal year ending October 29, 2000.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Shoney's, Inc. Annual Report on Form 10-K
for the year ended October 31, 1999.
NOTE 2 - DISCONTINUED OPERATIONS
During the second quarter of 2000, the Company sold its remaining Pargo's
restaurants. In addition, on April 24, 2000 the Company made the decision to
either close or sell its remaining Fifth Quarter restaurants. As a result,
the Company has presented the casual dining line of business as discontinued
operations in the accompanying financial statements, net of any related
income tax expense. All prior periods have been restated. This discontinued
line of business had net income and gains on sales of discontinued operations
as follows:
<TABLE>
<CAPTION>
Twenty-eight Twenty-eight
Quarter Ended Quarter Ended Weeks Ended Weeks Ended
($ in thousands) May 14, 2000 May 9, 1999 May 14, 2000 May 9, 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 546 $ 328 $ 530 $ 693
Gains on sale of
discontinued operations $ 575 - $ 575 -
</TABLE>
NOTE 3 - ACQUISITIONS
On September 9, 1996, the Company completed the acquisition of substantially
all of the assets of TPI Enterprises, Inc. ("TPI") which, as the then 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 then 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 TPI acquisition was accounted for as a purchase and the results have been
included in the Company's Consolidated Condensed Financial Statements since
September 6, 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
originally
-7-
was amortized on a straight line basis over 20 years. Effective
with the first day of fiscal 1999, the Company revised the estimated useful
life of the TPI goodwill to a remaining period of 10 years.
As of May 14, 2000, of the properties acquired in the TPI transaction, the
Company has closed 111 under-performing Shoney's Restaurants, 11 under-
performing 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. In addition, 17 of the
acquired Shoney's Restaurants were sold to franchisees. Twenty-eight 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 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 TPI purchase price
allocation was approximately $21.0 million. During the second quarter and
first twenty-eight weeks of 2000, approximately $0.1 million and $0.4
million, respectively, in costs to exit restaurants acquired were charged to
this liability. During the second quarter and first twenty-eight weeks of
1999, approximately $0.4 million and $1.1 million, respectively, in costs
were charged to this liability. Approximately $7.4 million of anticipated
exit costs related to the TPI acquisition remain accrued at May 14, 2000.
NOTE 4 -IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR DISPOSAL
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), at the beginning of the first quarter of
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. The Company's
initial asset impairment analysis did not include any of the restaurants
acquired from TPI in 1996. The Company recorded an additional asset
impairment charge of $36.4 million in the fourth quarter of 1997 as a result
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.
Because of continued declines in the operating performance of the Company's
Shoney's Restaurant division during 1999, the Company completed an asset
impairment analysis during the third quarter of 1999 and recorded an asset
impairment charge of $18.4 million. Approximately $17.1 million of the third
quarter 1999 asset impairment charge related to assets held and used in the
Company's operations and approximately $1.3 million related to assets held
for sale. Of the $17.1 million relating to assets held and used in the
Company's operations, $15.6 million related to the Shoney's Restaurant
division.
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At May 14, 2000, the carrying value of the 26 properties to be disposed of
was $13.0 million and is reflected on the Consolidated Condensed Balance
Sheet as net property, plant and equipment held for sale. Under the
provisions of SFAS 121, depreciation and amortization are not recorded during
the period in which assets are being held for disposal.
NOTE 5 - RESTRUCTURING EXPENSE
When the decision to close a restaurant is made, the Company incurs certain
exit costs generally for the accrual of the remaining leasehold obligations
less anticipated sublease income related to leased units that are targeted to
be closed. There were no exit costs recorded in the periods presented.
However, in addition to amounts recorded in previous years, the Company
recorded approximately $6.1 million in exit costs during 1999, primarily
associated with the accrual of the remaining leasehold obligations on
restaurants closed or to be closed. The Company charged approximately $1.8
million and $0.7 million against these exit costs reserves in the second
quarter of 2000 and 1999, respectively. Approximately $3.3 million and $1.7
million were charged against this liability in the first twenty-eight weeks
of 2000 and 1999, respectively. Approximately $8.7 million of accrued exit
costs remain at May 14, 2000.
During 1999, the Company closed 127 Company-owned restaurants and sold 19
Shoney's Restaurants to franchisees. Twelve Shoney's Restaurants were sold
to franchisees during the first twenty-eight weeks of 2000 and one Shoney's
Restaurant was closed. Below are sales and EBIT as defined, which is defined
by the Company as operating income before asset impairment charges,
restructuring charges and litigation settlements, for the second quarter and
first twenty-eight weeks of 2000 and 1999, respectively, for the restaurants
closed or sold prior to May 14, 2000.
<TABLE>
<CAPTION>
Twenty-eight Twenty-eight
Quarter Ended Quarter Ended Weeks Ended Weeks Ended
($ in thousands) May 14, 2000 May 9, 1999 May 14,2000 May 9, 1999
------------- ------------- ----------- ------------
EBIT as EBIT as EBIT as EBIT as
Sales defined Sales defined Sales defined Sales defined
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Stores closed or sold $1,051 $(371) $27,254 $(2,114) $5,869 $(830) $70,333 $(6,602)
====== ====== ======= ======== ====== ====== ======= ========
</TABLE>
NOTE 6 - EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards 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 affect Basic EPS.
-9-
The table below presents the computation of basic and diluted income (loss)
per share:
<TABLE>
<CAPTION>
Twenty-eight Twenty-eight
(in thousands except EPS) Quarter Ended Quarter Ended Weeks Ended Weeks Ended
May 14, 2000 May 9, 1999 May 14, 2000 May 9, 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) -
numerator for Basic EPS $ 5,449 $ 5,009 $ 1,475 $(10,887)
Net income (loss) after assumed
conversion of debentures -
numerator for Diluted EPS $ 5,449 $ 5,009 $ 1,475 $(10,887)
Denominator:
Weighted-average shares outstanding -
denominator for Basic EPS 50,553 49,442 50,253 49,229
Dilutive potential shares -
denominator for Diluted EPS 50,593 49,682 50,313 49,229
Basic EPS income (loss) $ 0.11 $ 0.10 $ 0.03 $ (0.22)
Diluted EPS income (loss) $ 0.11 $ 0.10 $ 0.03 $ (0.22)
</TABLE>
As of May 14, 2000, the Company had outstanding approximately 5,760,000
options to purchase shares at prices ranging from $1.00 to $25.51. In
addition to options to purchase shares, the Company had approximately 40,000
common shares reserved for future distribution pursuant to certain employment
agreements. 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
May 14, 2000, the Company had reserved 5,205,280 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 effect of considering these potentially dilutive convertible
securities was anti-dilutive and was not included in the calculation of
Diluted EPS for the second quarter of 2000 and 1999 and the twenty-eight week
period of 2000. Because the Company reported a net loss for the first twenty-
eight weeks of 1999, the effect of considering these potentially dilutive
convertible securities was anti-dilutive and was not included in the
calculation of Diluted EPS.
NOTE 7 - INCOME TAXES
The Company is estimating an effective tax rate for the twelve and twenty-
eight week periods ended May 14, 2000 of 3.6% and 42.4%, respectively, and
has recorded an income tax provision of $0.2 million and $0.3 million for the
twelve and twenty-eight week periods ended May 14, 2000. The Company
estimated an effective tax rate of 0% for the twelve and twenty-eight week
periods ended May 9, 1999 and accordingly, recorded no income tax provision
or benefit. This effective tax rate differs from the Federal statutory rate
of 35% primarily due to goodwill amortization which is not deductible for
Federal income taxes and an adjustment to the valuation allowance against the
gross deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of May
14, 2000, the Company increased the valuation allowance for gross deferred
tax assets for deductible temporary differences, tax credit carry forwards,
and net operating loss carry forwards. The deferred tax asset valuation
adjustment is in accordance with Statement of Financial
-10-
Accounting Standards No. 109 which requires that a deferred tax asset
valuation allowance be established if certain criteria are not met. If the
deferred tax assets are realized in the future, the related tax benefits will
reduce income tax expense.
NOTE 8 -DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
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 provides
for up to $375.0 million ("1997 Credit Facility") and 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. The 1997 Credit Facility provides for interest under the
Line of Credit, Term A Note and Term B Note based on certain defined
financial ratios. At May 14, 2000, the applicable margin for amounts
outstanding under the Line of Credit and Term A Note was 2.5% over Libor or
1.5% over the prime rate and the applicable margin for amounts outstanding
under the Term B Note was 3.0% over Libor or 2.0% over the prime rate.
At May 14, 2000, the Company had approximately $35.0 million and $108.5
million outstanding under its Term A Note and Term B Note, respectively.
During the next four fiscal quarters, principal reductions of $13.9 million
are scheduled for the Term A Note and principal reductions of $1.3 million
are scheduled for the Term B Note. Additionally, at May 14, 2000, the Company
held $5.0 million of proceeds from the sale of assets which were used to
reduce the Term A Note and the Term B Note subsequent to the end of the
quarter. Accordingly, of this $5.0 million, $1.2 million has been classified
as a current maturity for the Term A Note and $3.8 million has been
classified as a current maturity for the Term B Note. At May 14, 2000, the
effective interest rates on the Term A Note and the Term B Note were 8.5% and
9.3%, respectively.
The Company had borrowed $18.5 million under the Line of Credit at May 14,
2000. The Line of Credit provides the Company with $15 million of short term
credit under a swing line (the "Swing Line") and $60 million (which is
reduced by outstanding letters of credit) of long term credit under a working
capital line (the "Working Capital Line"). Pursuant to the terms of the 1997
Credit Facility, the Swing Line provides the Company with day-to-day cash
needs and is required to be repaid with the Company's daily excess cash
flows. The Working Capital Line provides the Company with long term cash
requirements and, pursuant to the terms of the 1997 Credit Facility, is not
required to be repaid until the credit facility terminates. As of May 14,
2000, the Company had no drawings under the Swing Line, $18.5 million under
the Working Capital Line and had outstanding letters of credit of $27.2
million, resulting in available credit under the Line of Credit of $29.3
million. The Company pays an annual fee of 0.5% for unused available credit
under the Line of Credit. Due to the nature of the loan covenants discussed
below, as the financial covenants become more restrictive, the Company's
ability to draw under the Line of Credit could be restricted. Based on the
financial covenants at May 14, 2000, the Company could have drawn an
additional $2.9 million under the Line of Credit and remained in compliance
with its financial covenants. At May 14, 2000, the interest rate for
borrowings under the Line of Credit was 8.8%.
The 1997 Credit Facility requires the Company to have in place an interest
rate hedge program covering a notional amount of not less than $50 million
and not greater than $200 million. Prior to May 11, 2000, the Company had
interest rate swap agreements in place covering a notional amount of $100
million which effectively swapped floating rate debt for fixed rate debt. On
May 11, 2000, the Company sold $50 million of interest rate swap agreements,
$40 million of which carried a fixed
-11-
interest rate of 5.9% plus the applicable margin and $10 million of which
carried a fixed interest rate of 6.1% plus the applicable margin, for $0.3
million. Substantially all of this amount will be recognized as a reduction
in interest expense through January 8, 2001, the original termination date of
the swap agreements. Therefore, as of May 14, 2000, the amount of the
Company's debt covered by interest rate swap agreements was $50 million. This
amount was comprised of a $20 million agreement and a $30 million agreement
with fixed interest rates of 5.6% and 6.1%, respectively, plus the applicable
margin. At May 14, 2000, the estimated positive market value of the interest
rate swap agreements was approximately $0.2 million. The fair value of the
swap agreements and changes in the fair value as a result of changes in market
interest rates are not recognized in the Consolidated Condensed Financial
Statements.
Debt and obligations under capital leases at May 14, 2000 and October 31,
1999 consisted of the following:
<TABLE>
<CAPTION>
($ in thousands) May 14, 2000 October 31, 1999
------------ ----------------
<S> <C> <C>
Senior debt - Line of Credit $ 18,500 $ 10,887
Senior debt - Term A Note 34,973 45,672
Senior debt - Term B Note 108,485 130,801
Subordinated zero coupon convertible debentures 128,103 122,521
Subordinated convertible debentures 49,520 49,058
Industrial revenue bonds 10,315 10,315
Notes payable to others 4,052 4,420
----------- -----------
353,948 373,674
Obligations under capital leases 12,216 13,587
----------- -----------
366,164 387,261
Less amounts due within one year 26,836 29,334
----------- -----------
Amount due after one year $ 339,328 $ 357,927
=========== ===========
</TABLE>
The 1997 Credit Facility is secured by substantially all of the Company's
assets. The 1997 Credit Facility (1) requires satisfaction of certain
financial ratios and tests (which become more restrictive during the term of
the credit facility); (2) imposes limitations on capital expenditures; (3)
limits the Company's ability to incur additional debt, leasehold obligations
and contingent liabilities; (4) prohibits dividends and distributions on
common stock; (5) prohibits mergers, consolidations or similar transactions;
and (6) includes other affirmative and negative covenants.
In November 1999, the Company received approval from its lending group for
modifications to the 1997 Credit Facility that reduced or modified certain
restrictions contained in the credit agreement for the fourth quarter of 1999
and the remainder of the loan agreement. Based on current operating results,
forecasted operating trends and anticipated levels of asset sales, management
believes that additional financial covenant modifications could be required
during the current fiscal year. Management believes that additional loan
covenant modifications, if required in 2000, could be obtained. However, no
assurance can be given that the modifications could be obtained on terms
satisfactory to the Company. If the Company were unable to obtain
modifications, the Company's financial condition, results of operations and
liquidity would be adversely affected. At May 14, 2000, the Company was in
compliance with all of its debt covenants.
-12-
NOTE 9 - 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. After granting provisional class
action status, on December 21, 1998, the Court granted plaintiffs' motion for
partial summary judgment on liability.
On January 21, 1999, the Court denied the Company's motion to reconsider or
certify the order for interlocutory appeal. As a result of the Court's ruling
on liability, the Company recorded a charge of $3.5 million in the fourth
quarter of fiscal 1998. On January 21, 1999, the Court also ordered the
parties to mediate in an attempt to determine whether this case, Belcher II
and Edelen (discussed below) could be resolved through settlement.
On March 20, 1999, the parties agreed to the material terms of a global
settlement of Belcher I, Belcher II and Edelen. Under the agreement, in
exchange for the dismissal of the three cases with prejudice and a release by
the plaintiffs relating to the subject matter of the cases, the Company
agreed to pay $18 million in three installments as follows: $11 million upon
Court approval of the settlement and dismissal of the cases, $3.5 million on
October 1, 1999 and $3.5 million on March 1, 2000. The settlement required
the Company to record an additional charge of $14.5 million for the quarter
ended February 14, 1999 (in addition to the $3.5 million previously recorded
in the fourth quarter of fiscal 1998). On July 7, 1999, the Court entered
final judgment approving the settlement and dismissing with prejudice the
Belcher I action against the Company. In accordance with the approved
settlement of Belcher I, Belcher II, and Edelen, the Company paid $11
million, $3.5 million and $3.5 million into a qualified settlement fund on
July 14, 1999, October 1, 1999 and March 1, 2000, respectively.
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. The plaintiffs claimed 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. This case
also was provisionally certified as a class action.
As noted above in the description of Belcher I, on March 20, 1999, the
parties agreed to a global settlement of this case, Belcher I and Edelen. On
July 7, 1999, the Court entered an order preliminarily approving the
settlement with respect to the Belcher II plaintiffs. On August 20, 1999,
the Court entered an order for final judgment approving the settlement and
dismissing with prejudice the Belcher II action against the Company.
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. On March 28, 1998, the Court granted provisional
class action status.
-13-
As noted above in the description of Belcher I, on March 20, 1999, the
parties agreed to a global settlement of this case, Belcher I and Belcher II.
On July 7, 1999, the Court entered final judgment approving the settlement
and dismissing with prejudice the Edelen action against the Company.
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
approximately $0.5 million 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 $0.8 million.
The Company appealed the total judgment of approximately $1.3 million. On
April 28, 2000, the Kansas Supreme Court reversed the judgment in part. The
punitive damage award was eliminated and the jury verdict was reduced to
$158,271. The Company paid this judgement on May 16, 2000.
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.
NOTE 10 - CONCENTRATION OF RISKS AND USE OF ESTIMATES
As of May 14, 2000, the Company operated and franchised a chain of 1,084
restaurants in 28 states, which consists of two restaurant divisions:
Shoney's Restaurants and Captain D's. The majority of the Company's
restaurants are located in the southeastern United States. The Company also
operates Commissary Operations, Inc. ("COI"), a food service business that
manufactures and distributes food and supplies to Company-owned restaurants,
certain franchised restaurants and other customers. The Company's principal
restaurant 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. The Company believes
there is no concentration of risk with any single customer, supplier, or
small group of customers or suppliers whose failure or nonperformance 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 Condensed 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 Condensed 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 11- LEASEHOLD INTERESTS ASSIGNED TO OTHERS
Assigned Leases - The Company has assigned its leasehold interest to third
parties with respect to approximately 43 properties on which the Company
remains contingently liable to the landlord for the
-14-
performance of all obligations of the party to whom the lease was assigned
in the event that party does not perform its obligations under the lease. The
assigned leases are for restaurant sites that the Company has closed. The
Company estimates its contingent liability associated with these assigned
leases as of May 14, 2000 to be approximately $15.1 million.
Property Sublet to Others - The Company subleases approximately 52 properties
to others. The Company remains liable for the leasehold obligation in the
event 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 or franchised. The Company estimates its contingent
liability associated with these sublet properties as of May 14, 2000 to be
approximately $7.3 million.
NOTE 12 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. As
of the first day of fiscal 1999, the Company adopted SFAS 130. The adoption
had no impact on the Company's results of operations because the Company had
no items of comprehensive income. For the second quarter of 2000 and the
second quarter of 1999, the total comprehensive income amounted to income of
$5.4 million and $5.0 million, respectively. For the first twenty-eight
weeks of 2000 and 1999, comprehensive income (loss) amounted to income of
$1.5 million and a loss of $10.9 million, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, which superseded
Statement of Financial Accounting Standards No.14 "Financial Reporting for
Segments of a Business Enterprise," changes financial reporting requirements
for business segments from an Industry Segment approach to an Operating
Segment approach. Operating Segments are components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision-maker in deciding how to allocate resources
and in assessing performance. SFAS 131 is effective for fiscal years
beginning after December 15, 1997.
The Company adopted SFAS 131 effective October 31, 1999 and appropriately
restated prior year disclosures. SFAS 131 requires the Company to provide
disclosures which include certain financial and qualitative data about its
operating segments.
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
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use after the date of adoption.
The Company adopted this statement on the first day of fiscal 1999 and
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.
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 prior accounting policy expensed costs
-15-
associated with startup activities systematically over a period not to
exceed twelve months. The Company adopted SOP 98-5 effective the first day
of fiscal 2000. The adoption of SOP 98-5 did not affect the Company's results
of operations during the twenty-eight weeks ended May 14, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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, 2000. 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.
Note 13 - SEGMENT INFORMATION
The Company operates entirely in the food service industry with substantially
all revenues resulting from the sale of menu products from restaurants
operated by the Company. The Company has operations principally in three
industry segments, two of which are restaurant concepts. The restaurant
concepts are Shoney's and Captain D's. The remaining segment, COI, is a food
service distribution and manufacturing operation. COI operates three food
service distribution centers and a food processing facility that provide food
and supplies to Company-owned restaurants, certain franchised restaurants and
other customers. The Company's corporate and other income and expenses
consist primarily of corporate headquarters costs, gains from the sale of
property, plant, and equipment, and rental and interest income and do not
constitute a reportable segment of the Company as contemplated by SFAS No.
131. The Company evaluates performance based on several factors, of which the
primary financial measure is operating income before interest, taxes,
restructuring charges, litigation settlements and impairment charges. The
accounting policies of the business segments are the same as the Company's.
Intersegment revenues consist of food and supply sales by COI to Company-
owned restaurants.
-16-
<TABLE>
<CAPTION>
Revenue
Quarters Ended Twenty-eight Weeks Ended
($ in thousands) May 14, May 9, May 14, May 9,
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
Shoney's restaurants $ 92,333 $ 117,506 $ 201,463 $ 267,943
Franchise fees 2,382 2,147 4,944 4,823
---------------------------------------------------------
Total Shoney's 94,715 119,653 206,407 272,766
Captain D's restaurants 79,249 78,824 171,662 170,479
Franchise fees 1,335 1,342 2,913 2,922
----------------------------------------------------------
Total Captain D's 80,584 80,166 174,575 173,401
COI 98,113 104,580 208,783 232,309
Corporate and other 2,958 6,360 7,851 18,571
---------------------------------------------------------
Total revenue for reportable
segments 276,370 310,759 597,616 697,047
Elimination of intersegment revenue 66,470 78,095 145,090 174,661
---------------------------------------------------------
Total consolidated revenue $ 209,900 $ 232,664 $ 452,526 $ 522,386
=========================================================
</TABLE>
<TABLE>
<CAPTION>
EBIT as Defined
Quarters Ended Twenty-eight Weeks Ended,
($ in thousands) May 14, May 9, May 14, May 9,
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
Shoney's $ 4,102 $ 3,290 $ 4,397 $ 2,789
Captain D's 11,039 11,123 20,754 21,840
COI 1,258 2,558 2,049 4,962
Corporate and other (3,239) (2,532) (6,126) (2,963)
---------------------------------------------------------
Total EBIT as defined for
reportable segments 13,160 14,439 21,074 26,628
Other Charges:
Interest expense 8,671 9,758 20,433 23,708
Litigation settlement -- 14,500
---------------------------------------------------------
Consolidated income (loss) from
continuing operations before
income taxes $ 4,489 $ 4,681 $ 641 $ (11,580)
==========================================================
</TABLE>
<TABLE>
<CAPTION>
Depreciation and Amortization
Quarters Ended Twenty-eight Weeks Ended
($ in thousands) May 14, May 9, May 14, May 9,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Shoney's $ 4,038 $ 4,946 $ 9,500 $ 11,634
Captain D's 2,566 2,591 5,922 6,082
COI 351 440 830 1,036
Corporate and other 1,124 1,475 2,700 3,151
-----------------------------------------------------------
Total consolidated depreciation
and amortization $ 8,079 $ 9,452 $ 18,952 $ 21,903
===========================================================
</TABLE>
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Condensed Financial
Statements and Notes thereto. The second quarter and first two quarters of
fiscal 2000 and 1999 covered periods of twelve and twenty-eight weeks,
respectively. All references are to fiscal years unless otherwise noted.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED REVENUES
Consolidated revenue for the second quarter of 2000 and 1999, and the first
twenty-eight weeks of 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Quarters Ended Twenty-eight Weeks Ended
($ in millions) May 14, May 9, May 14, May 9,
2000 1999 2000 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 204.2 $ 224.0 $ 438.8 $ 498.7
Franchise fees 3.7 3.5 7.8 7.8
Other income 2.0 5.2 5.9 15.9
------------------------------------------------------
$ 209.9 $ 232.7 $ 452.5 $ 522.4
======================================================
</TABLE>
Changes in the number of restaurants for the first twenty-eight weeks of 2000
and the first twenty-eight weeks of 1999 are as follows:
<TABLE>
<CAPTION>
May 14, Restaurants Restaurants October 31, May 9, Restaurants Restaurants October 25,
2000 Opened Closed 1999 1999 Opened Closed 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shoney's
Company-owned 254 - 13 (1) 267 348 1 61 (2) 408
Franchised 263 12 (1) 7 258 262 10 (2) 9 261
--------------------------------------------------------------------------------------------
517 12 20 525 610 11 70 669
============================================================================================
Captain D's
Company-owned 363 1 - 362 365 - - 365
Franchised 204 - 1 205 208 1 4 211
--------------------------------------------------------------------------------------------
567 1 1 567 573 1 4 576
============================================================================================
(1) Includes 12 restaurants sold to franchisees
(2) Includes 10 restaurants sold to franchisees
</TABLE>
Revenues for the second quarter of 2000 declined $22.8 million, or 9.8%, to
$209.9 million, as compared to revenues of $232.7 million in the second
quarter of 1999. For the first two quarters of
-18-
2000, revenues decreased $69.9, million or 13.4%, to $452.5 million as
compared to the same period in 1999. The following table summarizes the
components of the decline in revenues:
<TABLE>
<CAPTION>
($ in millions) Quarter Twenty-eight weeks
ended ended
May 14, 2000 May 14, 2000
--------------------------------------
<S> <C> <C>
Restaurant revenue $ (24.7) $ (65.3)
COI and other sales 5.0 5.4
Franchise revenues .2 --
Other income (3.3) (10.0)
--------------------------------------
$ (22.8) $ (69.9)
======================================
</TABLE>
The decline in revenues during the second quarter and the first two quarters
of 2000 was principally due to a net decline in the number of restaurants in
operation. Since the beginning of the first quarter of 1999, there has been
a net decline of 159 Company-owned restaurants in operation. The table below
presents comparable store sales for Company-owned restaurants for the second
quarter and first two quarters of 2000 by restaurant concept:
<TABLE>
<CAPTION>
Quarter Twenty-eight weeks
ended ended
May 14, 2000 May 14, 2000
--------------------------------------
<S> <C> <C>
Shoney's Restaurants 1.4% (1.5)%
Captain D's 3.0% 1.3 %
Combined 2.2% (0.2)%
</TABLE>
Franchise revenues essentially were unchanged during the second quarter of
2000 and for the first two quarters of 2000, as compared to the same periods
last year.
Other income decreased $3.3 million during the second quarter of 2000 and
approximately $10 million for the first two quarters of 2000 as compared to
the same periods in 1999. The decrease in other income during the second
quarter and first twenty-eight weeks of 2000 was due principally to lower net
gains on asset sales. The principal components of other income for the
second quarter of 2000 were net gains on asset sales ($1.3 million), interest
and other income ($0.4 million) and rental income ($0.3 million). For the
first two quarters of 2000, the principal components of other income were net
gains on asset sales ($5.0 million), interest and other income ($0.4 million)
and rental income ($0.5 million).
-19-
CONSOLIDATED COSTS AND EXPENSES
Consolidated cost of sales includes food and supplies, restaurant labor and
operating expenses. A summary of cost of sales as a percentage of
consolidated revenues is shown below:
<TABLE>
<CAPTION>
Quarters Ended Twenty-eight Weeks Ended
May 14, 2000 May 9, 1999 May 14, 2000 May 9, 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Food and supplies 39.7% 37.0% 39.0% 36.6%
Restaurant labor 25.2% 26.3% 26.2% 26.6%
Operating expenses 21.8% 22.9% 22.7% 23.6%
----- ----- ----- -----
Total cost of sales 86.7% 86.2% 87.9% 86.8%
===== ===== ===== =====
</TABLE>
As compared to restaurant revenues, COI revenues have a higher percentage of
food and supply costs, a lower percentage of operating expenses and have no
associated restaurant labor. As a result, changes in COI revenue relative to
the change in restaurant revenue can have an exaggerated effect on these
expenses as a percentage of total revenues. Excluding the effect of other
income, food and supply costs, as a percentage of revenues, increased 2.2% in
the second quarter of 2000 when compared to the second quarter of 1999. The
increase in food and supply costs in the second quarter of 2000, as a
percentage of sales, was primarily the result of the increase in COI revenue
relative to the decline in restaurant revenue and higher food and supply cost
in Shoney's Restaurants. Excluding the effect of other income, food and
supply costs increased 1.8%, as a percentage of revenues, in the first
twenty-eight weeks, primarily due to the increase in COI revenue relative to
the decline in restaurant revenue to higher food costs, as a percentage of
sales in Shoney's Restaurants and COI.
Excluding the effect of other income, consolidated restaurant labor decreased
1.5% and .9%, as a percentage of revenues, in the second quarter and the
first twenty-eight weeks of 2000, respectively, primarily the result of the
increase in COI revenue relative to the decline in restaurant revenue and the
closure or sale of low volume unprofitable restaurants. Wage rates increased
during the second quarter of 2000 as a result of low unemployment conditions
in many markets and a very competitive restaurant labor market. Restaurant
labor increased as a percentage of sales in both Shoney's and Captain D's.
The Company expects continued upward pressure on consolidated restaurant
labor in both restaurant concepts.
Excluding the effect of other income, consolidated operating expenses
declined 1.4% and 1.4%, as a percentage of total revenues, in the second
quarter and first twenty-eight weeks of 2000, respectively, as compared to
the prior year. The decline in consolidated operating expenses, as a
percentage of sales, was primarily the result of lower utilities, insurance,
advertising, and repair and maintenance expenses.
A summary of consolidated general and administrative expenses and interest
expense as a percentage of consolidated revenues is shown below:
<TABLE>
<CAPTION>
Quarters Ended Twenty-eight Weeks Ended
May 14, 2000 May 9, 1999 May 14, 2000 May 9, 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Consolidated general and
administrative expenses 7.1% 7.6% 7.4% 8.1%
Consolidated interest expense 4.1% 4.2% 4.6% 4.5%
</TABLE>
-20-
Excluding the effect of other income, consolidated general and administrative
expenses, as a percentage of revenues, declined 0.6% and 0.9% in the second
quarter and first twenty-eight weeks of 2000, respectively, when compared to
the same period in 1999. This decline was principally due to legal expenses
of $1.1 million incurred in the second quarter of 1999 and $3.4 million in
the first twenty-eight weeks of 1999, associated with defending and settling
certain employment litigation, lower levels of multi-unit supervisory
expenses in the Shoney's Restaurant concept during the first quarter of 2000
and an overall effort to reduce general and administrative costs as
restaurants are closed.
Consolidated interest expense declined $1.1 million and $3.3 million in the
second quarter and first twenty-eight weeks of 2000, respectively, compared
to the same time period of 1999. The reduction in interest expense is
primarily the result of lower senior debt outstanding. During the second
quarter of 2000, the Company made $16.4 million of required prepayments and
$3.6 million of scheduled payments on its senior bank debt. The prepayments
resulted from proceeds from asset sales. The decline in interest expense on
the Company's senior debt in the second quarter of 2000 was partially offset
by an increase in interest expense on the Company's zero coupon subordinated
convertible debentures of approximately $0.2 million and borrowings under the
Company's Line of Credit.
On March 20, 1999, the Company agreed to the material terms of a global
settlement in three class action lawsuits which alleged that the Company had
violated certain provisions of the Fair Labor Standards Act (see Note 9 to
the Consolidated Condensed Financial Statements and Liquidity and Capital
Resources). The Company agreed to pay $18.0 million in exchange for the
dismissal of all three cases with prejudice and a release by the plaintiffs
relating to the subject matter of the cases. As a result of the settlement,
the Company recorded a litigation settlement charge of $14.5 million in the
first quarter of 1999 ($3.5 million had previously been recorded in the
fourth quarter of 1998). The Court approved the settlement agreement and
entered final orders on July 7, 1999 (Belcher I and Edelen) and August 20,
1999 (Belcher II).
The Company had an effective tax rate of 3.6% and 42.4% in the second quarter
and first twenty-eight weeks of 2000 and 0% in the second quarter and first
twenty-eight weeks of 1999. This effective federal tax rate differs from the
federal statutory rate of 35% primarily due to the goodwill amortization
which is not deductible for federal income tax purposes and an adjustment in
the valuation allowance against deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of
October 31, 1999, the Company increased the valuation allowance for gross
deferred tax assets for deductible temporary differences, tax credit carry
forwards, and net operating loss carry forwards. The deferred tax asset
valuation adjustment is in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires
that a deferred tax asset valuation allowance be established if certain
criteria are not met. If the deferred tax assets are realized in the future,
the related tax benefits will reduce income tax expense.
-21-
OPERATING SEGMENTS
Shoney's Restaurants
<TABLE>
<CAPTION>
Quarters Ended Twenty-eight Weeks Ended
($ in thousands) May 14, 2000 May 9, 1999 May 14, 2000 May 9, 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 92,333 $ 117,506 $ 201,463 $ 267,943
Franchise revenue 2,382 2,147 4,944 4,823
-----------------------------------------------------------------
Total Shoney's revenue 94,715 119,653 206,407 272,766
Expenses 90,613 116,363 202,010 269,977
-----------------------------------------------------------------
EBIT as defined $ 4,102 $ 3,290 $ 4,397 $ 2,789
=================================================================
Comparable store sales increase
(decrease) (a) 1.4% (5.8)% (1.5)% (5.9)%
Operating restaurants at end of
quarter
Company-owned 254 348
Franchised 263 262
-----------------------------------------------------------------
Total 517 610
================================================================
</TABLE>
(a) Prior year amounts have not been restated for comparable restaurants
Shoney's concept total revenue declined $24.9 million, or 20.8%, and $66.4
million, or 24.3%, in the second quarter and first twenty-eight weeks of
2000, respectively, when compared to the comparable period of the previous
year. The components of the change in Shoney's concept revenue are
summarized as follows:
<TABLE>
(CAPTION>
Quarter Ended Twenty-eight Weeks Ended
($ in millions) May 14, 2000 May 14, 2000
------------- ------------------------
<S> <C> <C>
Sales from operating restaurants $ .6 $ (3.2)
Closed restaurants (25.7) (63.3)
------------- ------------------------
Total change in restaurant sales (25.1) (66.5)
Franchise revenues .2 .1
------------- ------------------------
Total $ (24.9) $ (66.4)
============= ========================
</TABLE>
Revenues were significantly reduced by the closing of 123 under-performing
Company-owned restaurants in 1999 and one additional restaurant in 2000. In
addition, 19 Company-owned restaurants were sold to franchisees during 1999
and 12 Company-owned restaurants were sold to franchisees in the first
twenty-eight weeks of 2000. Sales and EBIT as defined, which is defined by
the Company as operating income before asset impairment charges,
restructuring charges and litigation settlements, for Shoney's Restaurants
closed or sold are as follows:
<TABLE>
<CAPTION>
Quarters Ended Twenty-eight Weeks Ended
($ in thousands) May 14, May 20, May 14, May 20,
2000 1999 2000 1999
-----------------------------------------------------------------------------------
EBIT as EBIT as EBIT as EBIT as
Sales defined Sales defined Sales defined Sales defined
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores closed or sold $1,051 $(367) $26,736 $(2,100) $5,869 $(818) $69,217 $(6,544)
</TABLE>
Shoney's Restaurants recorded positive comparable store sales in the second
quarter of 2000 of 1.4%. Management believes that the increase in comparable
store sales is attributable to its successful Lent
-22-
promotion, which included an all you care to eat seafood bar on Friday and
Saturday nights. Franchise revenue increased $0.2 million in the second quarter
of 2000 when compared to the prior year second quarter. The increase in
franchise revenue in the second quarter of 2000 is primarily a result of
initial franchise fees on new franchised restaurants. Franchise revenue
increased $0.1 million for the first twenty-eight weeks of 2000 when compared
to the prior year. The increase for the twenty-eight week period was primarily
the result of higher initial fees.
During the third and fourth quarters of 1999, Shoney's Restaurants introduced
a new menu (the "New Menu") into all Company-owned restaurants. The New Menu
features ten new sandwiches, nine blue plate specials that include a meat and
two vegetables and the addition of fresh vegetables and side dishes to the
all-you-care-to-eat soup, salad and fruit bar as well as favorite items from
the prior menu. Management believes that the ultimate success of the New
Menu on increasing comparable store sales is dependent upon a variety of
factors including customer service, training and competition.
In April 2000, the Company hired a new President and CEO for its Shoney's
Restaurant division. His focus is to redefine the culture of Shoney's into
providing great service and operational execution. He has implemented a new
training program that has "legendary service" at its core and will raise the
operational expectations at all levels within the organization. The menu
will put more emphasis on the bar by adding certain entree items to the bar
and a special item on the bar each night. The guest will also be able to
order from the menu, while getting their accompaniments from our "all you
care to eat" soup, salad, fruit and vegetable bar. Implementation of the
enhanced menu will include retraining of all restaurant personnel. Continuous
retraining will be done through a new satellite system that allows for web-
based training and real time video training. Utilizing this new technology
should help to insure that all employees are trained at standards consistent
with senior management expectations.
Expenses declined $25.8 million, or 22.1%, and $68.0 million, or 25.2%, in
the second quarter and the first twenty-eight weeks of 2000, respectively,
when compared to the same period in 1999. Expenses as a percentage of
revenue were 95.7% in the second quarter of 2000 compared to 97.3% in the
second quarter of 1999. In the second quarter of 2000, as a percentage of
revenues, increases in food and supply costs, restaurant labor and multi-unit
supervisory expenses were more than offset by lower operating expenses. For
the twenty-eight week periods, expenses as a percentage of sales were 97.9%
in 2000 compared to 99.0% in 1999. For the first twenty-eight weeks, as a
percentage of sales, higher food and supply costs and higher labor costs were
offset by lower operating expenses.
As a result of the above, EBIT as defined, which is defined by the Company as
operating income before asset impairment charges, restructuring charges and
litigation settlements, increased $0.8 million and $1.6 million in the second
quarter and first twenty-eight weeks of 2000, respectively, when compared to
the comparable prior year period.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell additional
operating restaurants to franchisees.
-23-
Captain D's Restaurants
<TABLE>
<CAPTION>
Quarters Ended Twenty-eight Weeks Ended
($ in thousands) May 14, May 9, May 14, May 9,
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 79,249 $ 78,824 $ 171,662 $ 170,479
Franchise revenue 1,335 1,342 2,913 2,922
-----------------------------------------------------------
Total Captain D's revenue 80,584 80,166 174,575 173,401
Expenses 69,545 69,043 153,821 151,561
-----------------------------------------------------------
EBIT as defined $ 11,039 $ 11,123 $ 20,754 $ 21,840
===========================================================
Comparable store sales increase (a) 3.0% 3.3% 1.3% 1.4%
Operating restaurants at end of
quarter:
Company-owned 363 365
Franchised 204 208
----------------------------------------------------------
Total 567 573
==========================================================
</TABLE>
(a) Prior year amounts have not been restated for comparable restaurants
Captain D's total revenue increased $0.4 million, or 0.5%, and $1.2 million,
or 0.7%, in the second quarter and first twenty-eight weeks of 2000,
respectively, when compared with the comparable prior year period. The
components of the change in Captain D's concept revenue are summarized as
follows:
<TABLE>
<CAPTION>
($ in millions) Quarter Ended Twenty-eight Weeks Ended
May 14, 2000 May 14, 2000
------------- ------------------------
<S> <C> <C>
Sales from operating restaurants $ 0.9 $ 2.3
Closed restaurants (0.5) (1.1)
------------- ------------------------
Total change in restaurant sales 0.4 1.2
Franchise revenues - -
------------- ------------------------
Total $ 0.4 $ 1.2
============= ========================
</TABLE>
Revenues were reduced by the closing of four under-performing Company-owned
restaurants in 1999. Sales and EBIT as defined, which is defined by the
Company as operating income before asset impairment charges, restructuring
charges and litigation settlements, for Captain D's restaurants closed are as
follows:
<TABLE>
<CAPTION>
Quarters Ended Twenty-eight Weeks Ended
($ in thousands) May 14, May 9, May 14, May 9,
2000 1999 2000 1999
----------------------------------------------------------------------
EBIT as EBIT as EBIT as EBIT as
Sales defined Sales defined Sales defined Sales defined
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores closed $ - $ (3) $519 $(14) $ - $(12) $1,116 $(58)
</TABLE>
Franchise revenue was virtually unchanged in the second quarter and the first
twenty-eight weeks of 2000, when compared to the same period in 1999.
Management plans to continue the success of the Captain D's concept by
continuing to feature promotional menu items aimed at increasing customer
traffic and by the continued development of effective advertising programs.
-24-
Expenses increased $0.5 million, or 0.7%, and $2.3 million, or 1.5%, in the
second quarter and the first twenty-eight weeks of 2000, respectively, when
compared to the same period in 1999. Expenses as a percentage of revenues
were 86.3% in the second quarter of 2000 compared to 86.1% in the second
quarter of 1999. As a percentage of sales, decreases in food and supply
costs were more than offset by increases in restaurant labor, operating
expenses and multi-unit supervisory costs. For the first twenty-eight weeks,
as a percentage of sales, expenses were 88.1% in 2000 compared to 87.4% in
1999. As a percentage of sales, higher labor costs were partially offset by
lower food and supply costs.
As a result of the above, EBIT as defined, which is defined by the Company as
operating income before asset impairment charges, restructuring costs and
litigation settlements, declined $0.1 million in the second quarter of 2000
when compared to the comparable prior year quarter and declined $1.1 million
for the first twenty-eight weeks of 2000 when compared to the prior year
period.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell operating
restaurants to franchisees.
COI
<TABLE>
<CAPTION>
Quarters Ended Twenty-eight Weeks Ended
($ in thousands) May 14, May 9, May 14, May 9,
2000 1999 2000 1999
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Outside sales $ 31,643 $ 26,485 $ 63,693 $ 57,648
Inter-company sales 66,470 78,095 145,090 174,661
---------------------------------------------------------------
Total COI revenue 98,113 104,580 208,783 232,309
Expenses 96,855 102,022 206,734 227,347
---------------------------------------------------------------
EBIT as defined $ 1,258 $ 2,558 $ 2,049 $ 4,962
===============================================================
Distribution centers at
end of quarter 3 3
</TABLE>
Total revenue declined $6.4 million, or 6.2%, and $23.5 million, or 10.1%, in
the second quarter and first twenty-eight weeks of 2000, respectively, when
compared to the prior year period. Outside revenues of COI increased by $5.2
million and $6.0 million in the second quarter and first twenty-eight weeks
of 2000, respectively. The increase in outside sales for the second quarter
of 2000 resulted primarily from an increase in the number of outside
customers. Inter-company sales declined in the second quarter and first
twenty-eight weeks of 2000 when compared to the prior year period primarily
as a result of closing Company-owned restaurants. In addition, during the
first quarter of 2000, COI entered into a five-year service agreement with
Captain D's. The agreement is expected to lower Captain D's purchasing costs
by approximately $1.4 million annually.
Expenses declined $5.1 million, or 5.1%, and $20.6 million, or 9.1%, in the
second quarter and first twenty-eight weeks of 2000, respectively, when
compared to the prior year period. Expenses, as a percentage of sales, were
98.7% and 99.0% in the second quarter and first twenty-eight weeks of
2000, respectively, compared to 97.6% and 97.9% in the second quarter and
first twenty-eight weeks of 1999, respectively. The increase in expenses as
a percentage of sales is due to higher cost of goods sold, labor and
operating expenses.
-25-
As a result of the above, EBIT as defined, which is defined by the Company as
operating income before asset impairment charges, restructuring charges and
litigation settlements, decreased $1.3 million and $2.9 million in the second
quarter and first twenty-eight weeks of 2000, respectively, when compared to
the prior year period.
Liquidity and Capital Resources
The Company historically has met its liquidity requirements with cash
provided by operating activities supplemented by external borrowings from
lending institutions. The Company operates with a substantial net working
capital deficit. Management does not believe that the working capital
deficit hinders the Company's ability to meet its obligations as they become
due. The Company's Line of Credit is available to cover short and long term
working capital requirements. The Company's cash provided by operating
activities declined during fiscal 1999, as compared to fiscal 1998, and
declined $29.3 million during the first twenty-eight weeks of 2000 when
compared to the prior year period. This decrease in cash provided by
operations was due primarily to changes in operating assets and liabilities.
The change in operating assets and liabilities during 2000 was the result of
increases in inventory and accounts receivable and a decline in accrued
expenses and other liabilities. The decline in accrued expenses and other
liabilities was in large part due to cash required for the reduction of self-
insurance reserves, exit cost reserves and other employee compensation and
related liabilities. The change in operating assets and liabilities in 1999
was primarily due to a non-recurring change in refundable income taxes.
Cash provided by investing activities during the first twenty-eight weeks of
2000 totaled $20.2 million as compared to cash provided by investing
activities of $41.4 million in the same period of 1999. The change in cash
provided by investing activities was due principally to a decrease in
proceeds from the disposal of property, plant and equipment.
The Company balances its capital spending throughout the year based on
operating results and will decrease capital spending, if needed, to balance
cash from operations and debt service requirements. The Company has planned
capital expenditures for 2000 of approximately $27.0 million. The Company
does not plan to build a significant number of new restaurants during 2000
and will invest its capital in improvements to existing operations.
Budgeted capital expenditures for 2000 include $6.6 million for remodeling
and refurbishment of restaurants, $10.3 million for additions to existing
restaurants and $10.1 million for other assets. Cash required for capital
expenditures totaled $10.6 million for the first twenty-eight weeks of 2000.
During 1999, the Company closed 127 restaurants. These properties, as well
as real estate from prior restaurant closings and other surplus properties
and leasehold interests, have been actively marketed. The Company's 1997
Credit Facility requires that net proceeds from asset dispositions be applied
to reduce senior debt. At May 14, 2000, the Company had approximately 26
properties classified as assets held for sale with a carrying value of $13.0
million. Cash proceeds from asset dispositions were $31.2 million for the
first twenty-eight weeks of 2000 compared to $53.1 million for the first
twenty-eight weeks of 1999.
The Company completed a refinancing of its senior debt on December 2, 1997.
The 1997 Credit Facility consisted of a $75.0 million revolving line of
credit ("Line of Credit") and two term notes of $100.0 million ("Term A
Note") and $200.0 million ("Term B Note"), respectively, due in 2002. The
term notes replaced the Company's reducing revolving credit facility, the
senior secured bridge loan which was obtained in 1996 to provide financing
for the acquisition of substantially all the assets
-26-
of TPI Enterprises, Inc., and a series of mortgage financings. The new debt
facility provided the Company with additional liquidity and a debt
amortization schedule which better supported the Company's business
improvement plans.
During the first twenty-eight weeks of 2000, the Company's cash used by
financing activities was $31.2 million compared with cash used by financing
activities of $57.0 million for the same period in 1999. Payments on the
Term A and Term B Notes of $29.4 million were required as a result of the
sale of surplus property. The debt reductions from property sales were
partially offset by additional net borrowings of $7.6 million under the
Company's Line of Credit.
The Company had approximately $35.0 million and $108.5 million outstanding
under Term A Note and Term B Note, respectively, at May 14, 2000. The
amounts available under the Line of Credit are reduced by letters of credit
of approximately $27.2 million and borrowings of $18.5 million resulting in
available credit under the Line of Credit of approximately $29.3 million at
May 14, 2000. Due to the nature of the loan covenants contained in the
Company's 1997 Credit Facility, the Company's ability to draw under the Line
of Credit could be restricted. Based upon the financial covenants at May 14,
2000, the Company could have drawn approximately $2.9 million under the Line
of Credit and remained in compliance with its loan agreement. At May 14,
2000, the Company had cash and cash equivalents of approximately $6.7
million.
On March 20, 1999, the parties to three lawsuits that had been provisionally
certified as class actions (Belcher I, Belcher II and Edelen) agreed to the
material terms of a global settlement of the cases. The settlement
agreement, which was executed by the parties to the litigation on June 24,
1999, required the Company to pay $18 million as follows: $11 million upon
Court approval of the settlement and dismissal of the cases, $3.5 million on
October 1, 1999 and $3.5 million on March 1, 2000. As a result of the
settlement, the Company was required to record a charge of $14.5 million in
the first quarter ended February 14, 1999, which was in addition to a $3.5
million charge recorded in the fourth quarter of 1998. The Court approved
the settlement agreement and entered final orders dismissing the cases on
July 7, 1999 (Belcher I and Edelen) and August 20, 1999 (Belcher II). On
July 14, 1999 and October 1, 1999, the Company paid $11 million and $3.5
million, respectively, into a qualified settlement fund in accordance with
the Court approved settlement, utilizing funds from the Company's refunded
income taxes and general working capital. The Company funded the remaining
$3.5 million on March 1, 2000.
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 when compared to the Company. The Company's
Shoney's Restaurants have experienced declining customer traffic during the
past seven 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 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 in its Shoney's Restaurants, have reduced its operating
margins. The Company does not expect to be able to significantly improve
Shoney's Restaurants operating margins until it can consistently increase its
comparable restaurant sales.
-27-
The Company is highly leveraged and, under the terms of its credit agreement,
generally is not permitted to incur additional debt and is limited to annual
capital expenditures of $35.0 million. Management believes the annual capital
expenditures permitted under the credit agreement are sufficient for the
execution of its business plan. As of May 18, 2000, the 1997 Credit Facility
requires, among other terms and conditions, payments in the first half of
fiscal 2002 of approximately $131.9 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. On March 7,
2000, the Company announced it had retained Banc of America Securities LLC to
assist it in restructuring its balance sheet. On March 27, 2000, the Company
commenced a purchase offer and consent solicitation, (the "Purchase Offer")
for its outstanding subordinated debt. The Purchase Offer (including the
consent solicitation) was $250 per $1,000 principal amount of the Company's
subordinated convertible debentures and $250 per $1,000 of accreted value of
the Company's zero coupon convertible debentures, and required 90% acceptance
from the bondholders. The Purchase Offer expired on April 24, 2000 with only
4.9% of holders tendering their debentures. Subsequent to expiration of the
Purchase Offer, dialogue continued with certain bondholders regarding the
possibility of purchasing this indebtedness at a discount. On June 28, 2000,
the Company announced its intention to commence a cash tender offer to
purchase any and all of the outstanding subordinated convertible debentures
and zero coupon convertible debentures for an aggregate price of approximately
$80 million. The Company has received written agreements from holders of 58%
of the zero coupon convertible debentures and 72% of the subordinated
convertible debentures to tender their debentures in the offer when it is
commenced. The Company expects the tender offer to be subject to the
satisfaction of certain conditions, including receipt of financing and the
valid tender of at least 90% of the aggregate principal amount of each of the
debenture issues. No assurance can be given that the debentures can be
repurchased or refinanced or that the Company's remaining indebtedness can
be refinanced on terms satisfactory to the Company. If the Company is unable
to repurchase the debentures or refinance its indebtedness, either in the
near future or at maturity, the Company's financial condition, results of
operations and liquidity would be materially adversely affected.
Based on current operating results, forecasted operating trends and
anticipated levels of asset sales, management believes that additional
financial covenant modifications could be required during the current fiscal
year. Management believes that loan covenant modifications, if required in
2000, could be obtained. However, no assurance can be given that the
modifications could be obtained on terms satisfactory to the Company. If
the Company were unable to obtain modifications, the Company's financial
condition, results of operations and liquidity would be materially adversely
affected. The Company was in compliance with its financial covenants at the
end of the second quarter of 2000.
As previously announced, the Company received notification from the New York
Stock Exchange (the "NYSE") that it had fallen below the NYSE's continued
listing standards. The notification stated that the Company is "below
criteria" with respect to the NYSE's requirements for total market
capitalization (minimum of $50 million) and stockholders' equity (minimum of
$50 million). In addition, the Company received notice that it had
fallen below the minimum share price of $1 over a thirty trading-day period.
As required by the notification, the Company submitted to the NYSE a business
plan that sets forth definitive action that the Company intends to take that
would demonstrate progress toward meeting the NYSE's listing criteria within
18 months. If the NYSE accepts the business plan, the Company will be
subject to quarterly monitoring for compliance with the plan and the
Company's stock would continue to trade on the NYSE; however, failure by the
Company to meet the plan could result in suspension from trading, and
subsequent delisting, of the Company's stock from the NYSE. If the NYSE
rejects the business plan, the Company's stock would be subject to NYSE
trading suspension and delisting by the Securities and Exchange Commission.
-28-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A of the Company's Annual Report on Form 10-K, filed
with the Commission on January 31, 2000, is incorporated herein by this
reference.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Company's shareholders (the "Annual
Meeting") was held on March 28, 2000.
(b) At the meeting, only the election of directors was submitted to a
vote of shareholders. The name of each director elected at the
Annual meeting is set forth below.
(c) The results of voting for the election of directors at the Annual
Meeting were as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
---------------------------------------------------------
<S> <C> <C>
J. Michael Bodnar 37,925,734 1,418,919
Stephen E. Macadam 38,206,287 1,138,366
Jeffry F. Schoenbaum 38,148,024 1,196,629
Raymond D. Schoenbaum 38,149,917 1,194,736
William A. Schwartz 38,203,125 1,141,528
Carroll D. Shanks 38,186,422 1,158,231
Felker W. Ward, Jr. 38,205,162 1,139,491
William M. Wilson 38,189,869 1,154,784
James D. Yancey 38,218,026 1,126,627
</TABLE>
There were no abstentions or broker non-votes in the election of directors.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) In accordance with the provisions of Item 601 of Regulation S-K,
the following have been furnished as Exhibits to this Quarterly Report on
Form 10-Q:
27 Financial Data Schedule (For SEC Use Only)
(b) On May 5, 1999 the Company filed a Current Report on Form 8-K
reporting the receipt of a commitment letter for additional senior financing
and the receipt of notification from the New York Stock Exchange ("NYSE")
that the Company had fallen below the NYSE continued listing criteria.
-29-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereto duly authorized both on behalf of the registrant
and in his capacity as principal financial officer of the registrant.
Date: June 28, 2000 By: /s/ James M. Beltrame
---------------------
James M. Beltrame
Chief Financial Officer,
Principal Financial and Chief
Accounting Officer
-30-
EXHIBIT INDEX
Sequential
Exhibit No. Description Page Number
---------- ---------------------------------- -----------
27 Financial Data Schedule (For SEC Use Only) 32
