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 August 6, 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
---------------------------
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 September 15, 2000, there were 50,659,082 shares of Shoney's,
Inc. $1 par value common stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheet
(Unaudited)
August 6, October 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,096,871 $ 10,991,872
Notes and accounts receivable, less allowance
for doubtful accounts of $1,220,000 in 2000
and $1,497,000 in 1999 10,408,286 8,397,342
Inventories 34,688,497 37,347,025
Prepaid expenses and other current assets 4,743,424 5,038,982
Net current assets of discontinued operations 870,773 1,406,612
Net property, plant and equipment held for sale 9,838,468 27,282,950
-------------- --------------
Total current assets 65,646,319 90,464,783
Property, plant and equipment, at lower of cost or market 588,901,223 608,937,944
Less accumulated depreciation and amortization (335,799,620) (332,728,963)
--------------- ---------------
Net property, plant and equipment 253,101,603 276,208,981
Other assets:
Goodwill (net of accumulated amortization of
$6,888,000 in 2000 and $7,001,000 in 1999) 15,583,078 19,720,435
Deferred charges and other intangible assets 5,248,412 5,930,275
Net non-current assets of discontinued operations 0 9,460,324
Other assets 3,885,979 3,870,368
-------------- ---------------
Total other assets 24,717,469 38,981,402
-------------- ---------------
$ 343,465,391 $ 405,655,166
============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 23,062,216 $ 28,346,517
Other accrued liabilities 60,842,753 63,532,776
Reserve for litigation settlements due within one year 3,872,961
Debt and capital lease obligations
due within one year 27,029,070 29,333,548
-------------- --------------
Total current liabilities 110,934,039 125,085,802
Long-term senior debt and
capital lease obligations 154,629,713 186,349,492
Zero coupon subordinated convertible debentures 130,582,386 122,520,712
Subordinated convertible debentures, net of
bond discount of $1,848,000 in 2000 and
$2,505,000 in 1999 49,715,169 49,057,719
Reserve for litigation settlements 158,687
Other liabilities 25,419,955 28,568,820
Self insurance reserves 31,521,958 41,051,290
Shareholders' deficit:
Common stock, $1 par value: authorized
200,000,000; issued 50,625,410 in 2000
and 49,492,514 in 1999 50,625,410 49,492,514
Additional paid-in capital 137,672,469 137,674,675
Accumulated deficit (347,635,708) (334,304,545)
--------------- ---------------
Total shareholders' deficit (159,337,829) (147,137,356)
--------------- ---------------
$ 343,465,391 $ 405,655,166
=============== ===============
</TABLE>
See notes to consolidated condensed financial statements.
2
<TABLE>
<CAPTION>
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Forty Weeks Ended
August 6, August 1,
2000 1999
------------- -------------
<S> <C> <C>
Revenues
Net sales $ 633,620,084 $ 715,636,463
Franchise fees 11,622,980 11,491,143
Other income 8,050,295 17,569,532
------------- -------------
653,293,359 744,697,138
Costs and expenses
Cost of sales 576,744,891 649,613,363
General and administrative expenses 48,758,674 58,832,813
Impairment write down of long-lived assets 12,845,777 18,422,554
Restructuring expenses 441,365
Litigation settlement 14,500,000
Interest expense 28,604,561 32,800,556
------------- -------------
Total costs and expenses 666,953,903 774,610,651
------------- -------------
Loss from continuing operations before income taxes (13,660,544) (29,913,513)
Provision for income taxes 436,000
-------------- --------------
Net loss from continuing operations (14,096,544) (29,913,513)
Discontinued operations, net of income taxes 190,290 1,508,339
Gain on sale of discontinued operations, 575,091
net of income taxes -------------- --------------
Net loss $ (13,331,163) $ (28,405,174)
============== ==============
Earnings per common share
Basic
Net loss from continuing operations $ (0.28) $ (0.61)
Discontinued operations, net of income taxes 0.00 0.03
Gain on sale of discontinued operations,
net of income taxes 0.01
Net loss $ (0.26) $ (0.58)
Diluted:
Net loss from continuing operations $ (0.28) $ (0.61)
Discontinued operations, net of income taxes 0.00 0.03
Gain on sale of discontinued operations,
net of income taxes 0.01
-------------- -------------
Net loss $ (0.26) $ (0.58)
============== =============
Weighted average shares outstanding
Basic 50,361,065 49,295,460
Diluted 50,361,065 49,295,460
Common shares outstanding 50,625,410 49,455,016
Dividends per share NONE NONE
</TABLE>
See notes to consolidated condensed financial statements.
3
<TABLE>
<CAPTION>
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
(Unaudited)
Twelve Weeks Ended
August 6, August 1,
2000 1999
------------- -------------
<S> <C> <C>
Revenues
Net sales $ 194,835,376 $ 216,977,985
Franchise fees 3,765,629 3,690,101
Other income 2,166,115 1,642,998
------------- -------------
200,767,120 222,311,084
Costs and expenses
Cost of sales 178,795,880 196,333,306
General and administrative expenses 15,256,010 16,354,939
Impairment write down of long-lived assets 12,845,777 18,422,554
Restructuring expenses 441,365
Interest expense 8,171,254 9,092,222
------------- -------------
Total costs and expenses 215,068,921 240,644,386
------------- -------------
Loss from continuing operations before income taxes (14,301,801) (18,333,302)
Provision for income taxes 164,000 -
-------------- --------------
Loss from continuing operations (14,465,801) (18,333,302)
Discontinued operations, net of income taxes (339,931) 815,472
-------------- --------------
Net loss $ (14,805,732) $ (17,517,830)
============== ==============
Earnings per common share
Basic:
Net loss from continuing operations $ (0.29) $ (0.37)
Discontinued operations, net of income taxes (0.01) 0.02
-------------- --------------
Net loss $ (0.29) $ (0.35)
============== ==============
Diluted:
Net loss from continuing operations $ (0.29) $ (0.37)
Discontinued operations, net of income taxes (0.01) 0.02
-------------- --------------
Net loss $ (0.29) $ (0.35)
============== ==============
Weighted average shares outstanding
Basic 50,611,911 49,451,512
Diluted 50,611,911 49,451,512
Common shares outstanding 50,625,410 49,455,016
Dividends per share NONE NONE
</TABLE>
See notes to consolidated condensed financial statements.
4
<TABLE>
<CAPTION>
SHONEY'S, INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Forty Weeks Ended
August 6, August 1,
2000 1999
-------------- --------------
<S> <C> <C>
Operating activities
Net loss $ (13,331,163) $ (28,405,174)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Income from discontinued operations,
net of income taxes (190,290) (1,508,339)
Gain on sale of discontinued operations,
net of income taxes (575,091)
Depreciation and amortization 27,199,240 31,195,961
Amortization of deferred charges and other
non-cash charges 10,564,791 12,981,083
Gain on disposal of property, plant and equipment (6,627,111) (16,122,391)
Impairment write down of long-lived assets 12,845,777 18,422,554
Litigation settlement 14,500,000
Changes in operating assets and liabilities (15,970,341) 8,984,544
-------------- --------------
Net cash provided by continuing
operating activities 13,915,812 40,048,238
Net cash provided by discontinued
operating activities 613,231 763,788
-------------- --------------
Net cash provided by operating activities 14,529,043 40,812,026
Investing activities
Cash required for property, plant and equipment (17,278,229) (18,973,306)
Cash required for assets held for sale (275,533) (510,008)
Proceeds from disposal of property, plant and equipment 23,193,690 57,239,566
Proceeds from disposal of discontinued operations 11,854,139 5,519,429
Cash provided by other assets 18,393 40,704
-------------- --------------
Net cash provided by investing activities 17,512,460 43,316,385
Financing activities
Payments on long-term debt and
capital lease obligations (48,831,209) (73,800,428)
Proceeds from long-term debt 18,500,000
Net payments on short-term debt (2,168,490)
Payments on litigation settlements (3,726,680) (11,050,994)
Cash required for debt issue costs (1,710,125) (180,093)
-------------- --------------
Net cash used by financing activities (37,936,504) (85,031,515)
-------------- --------------
Change in cash and cash equivalents $ (5,895,001) $ (903,104)
============== ==============
</TABLE>
See notes to consolidated condensed financial statements.
5
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
August 6, 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 forty week periods ended
August 6, 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>
Forty Forty
Quarter Ended Quarter Ended Weeks Ended Weeks Ended
($ in thousands) August 6, 2000 August 1, 1999 August 6, 2000 August 1, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ (340) $ 815 $ 190 $ 1,508
Gains on sale of
discontinued operations $ - - $ 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 August 6, 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 third quarter and
first forty weeks of 2000, approximately $0.3 million and $0.7 million,
respectively, in costs to exit restaurants acquired were charged to this
liability. During the third quarter and first forty weeks of 1999,
approximately $0.3 million and $1.4 million, respectively, in costs were
charged to this liability. Approximately $7.1 million of anticipated exit
costs related to the TPI acquisition remain accrued at August 6, 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 Restaurant 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.
8
During the third quarter of 2000, the Company completed an asset impairment
analysis on its operating restaurants and rental properties and recorded an
asset impairment charge of $12.8 million. Approximately $10.9 million of the
third quarter 2000 impairment charge was related to the Shoney's Restaurant
division.
At August 6, 2000, the carrying value of the 19 properties to be disposed of
was $9.8 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. During the third quarter of 1999, the Company recorded $0.4
million in severance and related costs pertaining to the planned closure of
its distribution center in Macon, Georgia. There were no restructuring costs
recorded in the third quarter of 2000. 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 $2.2 million and $0.6 million against these exit costs reserves
in the third quarter of 2000 and 1999, respectively. Approximately $5.5
million and $2.3 million were charged against this liability in the first
forty weeks of 2000 and 1999, respectively. Approximately $6.5 million of
accrued exit costs remain at August 6, 2000.
During 1999, the Company closed 127 Company-owned restaurants and sold 19
Shoney's Restaurants to franchisees. Twelve Shoney's Restaurants were sold
to franchisees during the first forty weeks of 2000 and one Shoney's and one
Captain D's Restaurant were closed. Below are sales and EBIT as defined,
which is defined by the Company as operating income before asset impairment
charges, restructuring charges and litigation settlements, for the third
quarter and first forty weeks of 2000 and 1999, respectively, for the
restaurants closed or sold prior to August 6, 2000.
<TABLE>
<CAPTION>
Forty Forty
Quarter Ended Quarter Ended Weeks Ended Weeks Ended
($ in thousands) August 6, 2000 August 1, 1999 August 6, 2000 August 1, 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 $124 $(189) $26,157 $(1,879) $6,425 $(983) $96,926 $(8,455)
========================================================================
</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>
Forty Forty
(in thousands except EPS) Quarter Ended Quarter Ended Weeks Ended Weeks Ended
August 6, 2000 August 1, 1999 August 6, 2000 August 1, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
----------
Net loss -
numerator for Basic EPS $ (14,806) $ (17,518) $ (13,331) $ (28,405)
Net loss after assumed
conversion of debentures -
numerator for Diluted EPS $ (14,806) $ (17,518) $ (13,331) $ (28,405)
Denominator:
------------
Weighted-average shares outstanding -
denominator for Basic EPS 50,612 49,452 50,361 49,295
Dilutive potential shares -
denominator for Diluted EPS 50,612 49,452 50,361 49,295
Basic EPS loss $ (0.29) $ (0.35) $ (0.26) $ (0.58)
Diluted EPS loss $ (0.29) $ (0.35) $ (0.26) $ (0.58)
</TABLE>
As of August 6, 2000, the Company had outstanding approximately 6,023,000
options to purchase shares at prices ranging from $0.62 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 (see Note
14). As of August 6, 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. Because the Company reported a net loss for all periods
presented, 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 forty week
periods ended August 6, 2000 of (1.1)% and (3.2)%, respectively, and has
recorded an income tax provision of $0.2 million and $0.4 million for the
twelve and forty week periods ended August 6, 2000. The Company estimated an
effective tax rate of 0% for the twelve and forty week periods ended August 1,
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
August 6, 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 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.
10
NOTE 8 -DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
The Company had a credit facility with a syndicate of financial institutions
which provided for up to $375 million (the "1997 Credit Facility") consisting
of a $75 million line of credit ("Line of Credit") and two term notes of $100
million and $200 million ("Term A Note" and "Term B Note"), respectively, due
in April 2002. On June 28, 2000 the Company announced a restructuring and
refinancing of the Company that included the commencement of a tender offer
for all of the Company's subordinated debentures and the refinancing of
substantially all of the Company's senior debt (see Note 14).
The 1997 Credit Facility provided for interest under the Line of Credit, Term
A Note and Term B Note based on certain defined financial ratios. At August
6, 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 August 6, 2000, the Company had approximately $30.0 million and $103.0
million outstanding under its Term A Note and Term B Note, respectively, and
had borrowed $23.7 million under the Line of Credit. The Line of Credit
provided the Company with $15 million of short term credit under a swing line
(the "Swing Line") and $60 million (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
provided the Company with day-to-day cash needs and was required to be repaid
with the Company's daily excess cash flows. The Working Capital Line
provided the Company with long term cash requirements and, pursuant to the
terms of the 1997 Credit Facility, was not required to be repaid until the
credit facility terminated. As of August 6, 2000, the Company had drawings
of $8.7 million under the Swing Line, $15.0 million under the Working Capital
Line and had outstanding letters of credit of $27.9 million, resulting in
available credit under the Line of Credit of $23.4 million. The Company paid
an annual fee of 0.5% for unused available credit under the Line of Credit.
The 1997 Credit Facility required 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 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. As of August 6, 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 August 6, 2000, the estimated positive market
value of the interest rate swap agreements was approximately $0.2 million.
The fair value of the swap agreements and changes in the fair value as a
result of changes in market interest rates are not recognized in the
Consolidated Condensed Financial Statements.
11
Debt and obligations under capital leases at August 6, 2000 and October 31,
1999 consisted of the following:
<TABLE>
<CAPTION>
($ in thousands) August 6, 2000 October 31, 1999
-------------- ----------------
<S> <C> <C>
Senior debt - Line of Credit $ 23,719 $ 10,887
Senior debt - Term A Note 29,994 45,672
Senior debt - Term B Note 103,022 130,801
Subordinated zero coupon convertible debentures 130,582 122,521
Subordinated convertible debentures 49,715 49,058
Industrial revenue bonds 10,165 10,315
Notes payable to others 3,938 4,420
--------- ---------
351,135 373,674
Obligations under capital leases 10,821 13,587
--------- ---------
361,956 387,261
Less amounts due within one year 27,029 29,334
--------- ---------
Amount due after one year $ 334,927 $ 357,927
========= =========
</TABLE>
On September 6, 2000, the Company completed a refinancing of its new senior
bank debt and its cash tender offer for its subordinated zero coupon
convertible debentures due April 2004 and its subordinated convertible
debentures due July 2002 (see Note 14). In anticipation of the refinancing,
the Company requested and received waivers for permission to begin the
restructuring of the Company's operations and to waive, until September 30,
2000, all third quarter financial covenants under the 1997 Credit Facility.
The Company's senior bank debt, which was subsequently refinanced, has been
classified on the Company's balance sheet at August 6, 2000 based upon the
maturity schedules provided in the Company's new senior indebtedness. Based
on current operating results, forecasted operating trends and anticipated
levels of asset sales, the Company expects to be in compliance with the
covenants contained in the new credit agreements.
The Company's new senior indebtedness is secured by substantially all of the
Company's assets and (1) requires satisfaction of certain financial ratios
and tests (some of which become more restrictive during the term of the
credit facilities); (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.
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
12
$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 had 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 of "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.
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 the plaintiff was
terminated. The jury also found the Company liable for punitive damages on
the malicious prosecution claim in an amount to be
13
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 judgment 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 August 6, 2000, the Company operated and franchised a chain of 1,048
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 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 42 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
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 August
6, 2000 to be approximately $13.3 million.
Property Sublet to Others - The Company subleases approximately 51 properties
to others. The Company remains liable for the leasehold obligations 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 August 6, 2000 to be
approximately $7.2 million.
14
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 third quarter of 2000 and the
third quarter of 1999, the total comprehensive loss amounted to $14.8 million
and $17.5 million, respectively. For the first forty weeks of 2000 and 1999,
comprehensive loss amounted to $13.3 million and $28.4 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 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 forty weeks ended August 6, 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.
15
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.
<TABLE>
<CAPTION>
REVENUE
Quarters Ended Forty Weeks Ended
($ in thousands) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
------------------------------------------------
<S> <C> <C> <C> <C>
Shoney's Restaurants $ 92,162 $ 118,988 $ 293,625 $ 386,931
Franchise fees 2,494 2,407 7,438 7,230
-----------------------------------------------
Total Shoney's 94,656 121,395 301,063 394,161
Captain D's restaurants 73,579 71,830 245,241 242,309
Franchise fees 1,272 1,259 4,185 4,181
-----------------------------------------------
Total Captain D's 74,851 73,089 249,426 246,490
COI 92,515 100,222 301,298 332,531
Corporate and other 2,722 2,685 10,573 21,256
-----------------------------------------------
Total revenue for reportable segments 264,744 297,391 862,360 994,438
Elimination of inter-segment revenue 63,977 75,080 209,067 249,741
-----------------------------------------------
Total consolidated revenue $ 200,767 $ 222,311 $ 653,293 $ 744,697
===============================================
</TABLE>
16
<TABLE>
<CAPTION>
EBIT as Defined
Quarters Ended Forty Weeks Ended
($ in thousands) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Shoney's $ 1,306 $ 4,497 $ 5,703 $ 7,286
Captain D's 7,866 7,675 28,620 29,515
COI 1,512 1,731 3,561 6,693
Corporate and other (3,969) (4,721) (10,094) (7,684)
-------------------------------------------------------
Total EBIT as defined for
reportable segments 6,715 9,182 27,790 35,810
Other Charges:
Interest expense 8,171 9,092 28,605 32,801
Impairment of long-lived assets 12,846 18,423 12,846 18,423
Litigation settlement -- -- -- 14,500
-------------------------------------------------------
Consolidated loss from continuing
operations before income taxes $(14,302) $(18,333) $(13,661) $(29,914)
=======================================================
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION
Quarters Ended Forty Weeks Ended
($ in thousands) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Shoney's $ 4,092 $ 4,865 $ 13,592 $ 16,499
Captain D's 2,662 2,583 8,584 8,665
COI 339 393 1,169 1,429
Corporate and other 1,154 1,452 3,854 4,603
------------------------------------------------------
Total consolidated depreciation
and amortization $ 8,247 $ 9,293 $ 27,199 $ 31,196
======================================================
</TABLE>
Note 14 - SUBSEQUENT EVENT
On June 28, 2000, the Company announced its intention to commence a cash
tender offer (the "Tender Offer") to purchase any or all of the outstanding
subordinated convertible debentures (the "TPI Debentures") and zero coupon
convertible debentures (the "LYONs") for an aggregate price of approximately
$80 million. The Tender Offer was subject to the satisfaction of certain
terms and conditions including receipt of financing and the valid tender of
at least 90% of the aggregate principal amount of each of the debenture
issues. In order to consummate the Tender Offer, the Company was required to
refinance the indebtedness outstanding under the Company's 1997 Credit Facility
in addition to receiving financing necessary to effect the Tender Offer (the
"Refinancing"). In order to accommodate the timing of the Refinancing, the
Tender Offer was extended a number of times until September 6, 2000 at which
time the Refinancing was completed and the Tender Offer was consummated.
Upon consummation of the Tender Offer, the Company repurchased approximately
90% of each of the TPI Debentures and the LYONs. Consummation of the Tender
Offer and the Refinancing is expected to result in an extraordinary gain on
the early retirement of debt of approximately $80 million in the Company's
fourth quarter, net of expenses and taxes.
17
In order to complete the Refinancing, the Company restructured its restaurant
operations by separating its Shoney's and Captain D's operations (the
"Reorganization"). The Reorganization of the Company operations allowed each
of the Company's operating segments (Shoney's, Captain D's, and COI) to be
separately financed. As a result of the Reorganization and the Refinancing,
each operating segment is intended to operate as an independent business unit
and be responsible for its own indebtedness and debt service. The new senior
lending agreements generally prohibit the movement of cash between the
operating segments except for payments under certain tax sharing arrangements
and payments for goods and services.
Below is a brief description of the Company's senior indebtedness upon
completion of the Refinancing.
<TABLE>
<CAPTION>
AMOUNT FINANCED
SEGMENT DESCRIPTION OF FINANCING AT CLOSING TERM INTEREST RATE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shoney's $99 million mortgage financing $99 million 20 years $31.3 million floating
rate of 4.1% over Libor
$67.7 million fixed rate
of 10.23%
$40 million revolving credit $23.4 million for Two years 4.25% over Libor
facility under an amendment and letters of credit, or 3.25% over the
restatement of the 1997 Credit $8.4 million funded prime rate
Facility
Captain D's $115 million term loans $115 million 16 months 4% over Libor
or 3% over the prime rate
$20 million revolving credit $4.0 million for 16 months 3% to 4% over Libor or 2%
facility letters of credit, to 3% over the prime rate,
$10 million funded based on certain defined
financial ratios
COI $30 million revolving credit $1.8 million for Three years 2.75% over Libor or .5%
facility letters of credit, over the prime rate
$16 million funded
</TABLE>
In anticipation of the completion of the Refinancing, the Company requested
and received waivers for permission to begin the Restructuring of the
Company's operations and to waive, until September 30, 2000, all third
quarter financial covenants under the 1997 Credit Facility.
The Company's new senior loan agreements are secured by substantially all of
the Company's assets. The new debt agreements (1) require satisfaction of
certain financial ratios and tests (some of which become more restrictive
each year); (2) impose limitations on capital expenditures; (3) limit the
ability to incur additional debt and contingent liabilities; (4) prohibit
dividends and distributions on common stock; (5) prohibit mergers,
consolidations or similar transactions; and (6) include other affirmative and
negative covenants.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Consolidated Condensed Financial
Statements and Notes thereto. The third quarter and first three quarters of
each of fiscal 2000 and 1999 covered periods of twelve and forty weeks,
respectively. All references are to fiscal years unless otherwise noted.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED REVENUES
Consolidated revenue for the third quarter of 2000 and 1999, and the first
forty weeks of 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Quarters Ended Forty Weeks Ended
($ in millions) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 194.8 $ 217.0 $ 633.6 $ 715.6
Franchise fees 3.8 3.7 11.6 11.5
Other income 2.2 1.6 8.1 17.6
----------------------------------------------------------
$ 200.8 $ 222.3 $ 653.3 $ 744.7
==========================================================
</TABLE>
Changes in the number of restaurants for the first forty weeks of 2000 and
the first forty weeks of 1999 are as follows:
<TABLE>
<CAPTION>
August 6, Restaurants Restaurants October 31, August 1, 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 229 12(1) 41 258 255 10(2) 16 261
---------------------------------------------------------------------------------------------
483 12 54 525 603 11 77 669
=============================================================================================
Captain D's
Company-owned 362 1 1 362 365 - - 365
Franchised 203 - 2 205 206 1 6 211
---------------------------------------------------------------------------------------------
565 1 3 567 571 1 6 576
=============================================================================================
<FN>
(1) Includes 12 restaurants sold to franchisees
(2) Includes 10 restaurants sold to franchisees
</FN>
</TABLE>
19
Revenues for the third quarter of 2000 declined $21.5 million, or 9.7%, to
$200.8 million, as compared to revenues of $222.3 million in the third
quarter of 1999. For the first three quarters of 2000, revenues decreased
$91.4 million, or 12.3%, to $653.3 million as compared to the same period in
1999. The following table summarizes the components of the decline in
revenues:
<TABLE>
<CAPTION>
($ in millions) Quarter Forty weeks
ended ended
August 6, 2000 August 6, 2000
-------------------------------------
<S> <C> <C>
Restaurant revenue $ (25.0) $ (90.4)
COI and other sales 2.9 8.4
Franchise revenues .1 .1
Other income .5 (9.5)
-----------------------------------
$ (21.5) $ (91.4)
===================================
</TABLE>
The decline in restaurant revenues during the third quarter and the first
three 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 157 Company-owned restaurants in operation.
The table below presents comparable store sales for Company-owned restaurants
for the third quarter and first forty weeks of 2000 by restaurant concept:
<TABLE>
<CAPTION>
Quarter Forty weeks
ended ended
August 6, 2000 August 6, 2000
----------------------------------------
<S> <C> <C>
Shoney's Restaurants (2.4)% (1.8)%
Captain D's 3.0 % 1.8 %
Combined (0.1)% (0.2)%
</TABLE>
COI and other sales increased $2.9 million and $8.4 million in the third
quarter and first forty weeks, respectively. The increase in COI and other
revenues was primarily due to additional customers serviced by COI.
Franchise revenues increased $0.1 million during the third quarter of 2000
and for the first three quarters of 2000, as compared to the same periods
last year. The increase in franchise revenue was primarily the result of fees
received from a franchisee in exchange for termination of several franchise
agreements. The franchise agreements covered thirty-one Shoney's
Restaurants and will result in a loss of franchise revenue of approximately
$1.0 million annually.
Other income increased $0.5 million during the third quarter of 2000 and
decreased approximately $9.5 million for the first three quarters of 2000 as
compared to the same periods in 1999. The increase in other income during
the third quarter was primarily the result of higher gains from asset sales
when compared to the prior year. The decline in other income for the first
forty weeks of 2000 was due principally to lower net gains on asset sales
when compared to the prior year. The principal components of other income
for the third quarter of 2000 were net gains on asset sales ($1.7 million),
interest and other income ($0.1 million) and rental income ($0.4 million).
For the first three quarters of 2000, the principal components of other
income were net gains on asset sales ($6.6 million), interest and other
income ($0.6 million) and rental income ($0.9 million).
20
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 Forty Weeks Ended
August 6, 2000 August 1, 1999 August 6, 2000 August 1, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Food and supplies 39.1% 37.1% 39.1% 36.7%
Restaurant labor 27.2% 27.9% 26.5% 27.0%
Operating expenses 22.7% 23.3% 22.7% 23.5%
----- ----- ----- -----
Total cost of sales 89.0% 88.3% 88.3% 87.2%
===== ===== ===== =====
</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 2.3% in
the third quarter of 2000 when compared to the third quarter of 1999. The
increase in food and supply costs in the third 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
costs as a percentage of sales in Shoney's Restaurants. Excluding the effect
of other income, food and supply costs increased 1.9%, as a percentage of
revenues, in the first forty weeks, primarily due to the increase in COI
revenue relative to the decline in restaurant revenue and due 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
.6% and .8%, as a percentage of revenues, in the third quarter and the first
forty 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
third 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 in the
third quarter and forty weeks when compared to the prior year period. The
Company expects continued upward pressure on consolidated restaurant labor in
both restaurant concepts.
Excluding the effect of other income, consolidated operating expenses
declined .6% and 1.1%, as a percentage of total revenues, in the third
quarter and first forty 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, 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 Forty Weeks Ended
August 6, 2000 August 1, 1999 August 6, 2000 August 1, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Consolidated general
and administrative expenses 7.6% 7.4% 7.5% 7.9%
Consolidated interest expense 4.1% 4.1% 4.4% 4.4%
</TABLE>
21
Excluding the effect of other income, consolidated general and administrative
expenses, as a percentage of revenues, declined 0.3% and 0.5% in the third
quarter and first forty weeks of 2000, respectively, when compared to the
same period in 1999. This decline was principally due to legal expenses of
$0.2 million incurred in the third quarter of 1999 and $3.6 million in the
first forty weeks of 1999, associated with defending and settling certain
employment litigation and an overall effort to reduce general and
administrative costs as restaurants are closed.
Consolidated interest expense declined $.9 million and $4.2 million in the
third quarter and first forty weeks of 2000, respectively, compared to the
same period of 1999. The reduction in interest expense is primarily the
result of lower senior debt outstanding. During the third quarter of 2000,
the Company made $7.0 million of required prepayments and $3.4 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 third 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 ($3.5 million had previously been recorded in the
fourth quarter of 1998). The Court approved the settlement agreement and
entered final orders on July 7, 1999 (Belcher I and Edelen) and August 20,
1999 (Belcher II).
The Company had an effective tax rate of (1.1)% and (3.2)% in the third
quarter and first forty weeks of 2000 and 0% in the third quarter and first
forty weeks of 1999. This effective federal tax rate differs from the
federal statutory rate of 35% primarily due to the goodwill amortization
which is not deductible for federal income tax purposes and an adjustment in
the valuation allowance against deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of
August 6, 2000, the Company increased the valuation allowance for gross
deferred tax assets for deductible temporary differences, tax credit carry
forwards, and net operating loss carry forwards. The deferred tax asset
valuation adjustment is in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires
that a deferred tax asset valuation allowance be established if certain
criteria are not met. If the deferred tax assets are realized in the future,
the related tax benefits will reduce income tax expense.
22
OPERATING SEGMENTS
SHONEY'S RESTAURANTS
<TABLE>
<CAPTION>
Quarters Ended Forty Weeks Ended
($ in thousands) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
-----------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 92,162 $ 118,988 $ 293,625 $ 386,931
Franchise revenue 2,494 2,407 7,438 7,230
-----------------------------------------------------
Total Shoney's revenue 94,656 121,395 301,063 394,161
Expenses 93,350 116,898 295,360 386,875
-----------------------------------------------------
EBIT as defined $ 1,306 $ 4,497 $ 5,703 $ 7,286
=====================================================
Comparable store sales increase
(decrease) (a) (2.4)% (4.4)% (1.8)% (5.3)%
Operating restaurants at end of quarter:
Company-owned 254 348
Franchised 229 255
------------------------------------------------------
Total 483 603
======================================================
<FN>
(a) Prior year amounts have not been restated for comparable
restaurants
</FN>
</TABLE>
Shoney's concept total revenue declined $26.7 million, or 22.0%, and $93.1
million, or 23.6%, in the third quarter and first forty weeks of 2000,
respectively, when compared to the comparable period of the previous year.
The components of the change in Shoney's concept revenue are summarized as
follows:
<TABLE>
<CAPTION>
Quarter Ended Forty Weeks Ended
($ in millions) August 6, 2000 August 6, 2000
-------------- -----------------
<S> <C> <C>
Sales from operating restaurants $ (1.3) $ (4.4)
Closed restaurants (25.5) (88.9)
-------------- -----------------
Total change in restaurant sales (26.8) (93.3)
Franchise revenues .1 .2
-------------- -----------------
Total $ (26.7) $ (93.1)
============== =================
</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 forty
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 Forty Weeks Ended
($ in thousands) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
Sales EBIT as Sales EBIT as Sales EBIT as Sales EBIT as
defined defined defined defined
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores closed or sold $ - $ (184) $ 25,533 $ (1,829) $ 5,869 $ (1,003) $ 94,750 $ (8,373)
=====================================================================================
</TABLE>
23
Shoney's Restaurants comparable store sales declined in the third quarter of
2000 by 2.4%. Franchise revenue increased $0.1 million in the third quarter
of 2000 when compared to the prior year third quarter. The increase in
franchise revenue in the third quarter of 2000 is primarily a result of fees
received from a franchisee in exchange for termination of several franchise
agreements. The franchise agreements covered thirty-one Shoney's Restaurants
and will result in a loss of franchise revenue of approximately $1.0 million
annually. Franchise revenue increased $0.2 million for the first forty weeks
of 2000 when compared to the prior year. The increase for the forty week
period was primarily the result of the previously mentioned termination fee.
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. Under his leadership, the
division 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 "all you care to
eat" soup, salad, fruit and vegetable bar by adding certain entree items to
the bar and a special item on the bar each night. The guests will also be
able to order from the menu while getting their accompaniments from the 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 ensure that all employees are trained at
standards consistent with senior management expectations.
Expenses declined $23.5 million, or 20.1%, and $91.5 million, or 23.7%, in
the third quarter and the first forty weeks of 2000, respectively, when
compared to the same period in 1999. Expenses as a percentage of revenue
were 98.6% in the third quarter of 2000 compared to 96.3% in the third
quarter of 1999. The increase in expenses in the third quarter of 2000, as
a percentage of revenues, was the result of increases in food and supply
costs, restaurant labor, operating expenses and multi-unit supervisory
expenses. For the forty week period, expenses as a percentage of sales were
98.1% in 2000 compared to 98.2% in 1999. For the first forty 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, decreased $3.2 million and $1.6 million in the third
quarter and first forty weeks of 2000, respectively, when compared to the
comparable prior year period.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from that
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell additional
operating restaurants to franchisees.
24
CAPTAIN D'S RESTAURANTS
<TABLE>
<CAPTION>
Quarters Ended Forty Weeks Ended
($ in thousands) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 73,579 $ 71,830 $ 245,241 $ 242,309
Franchise revenue 1,272 1,259 4,185 4,181
------------------------------------------------------
Total Captain D's revenue 74,851 73,089 249,426 246,490
Expenses 66,985 65,414 220,806 216,975
------------------------------------------------------
EBIT as defined $ 7,866 $ 7,675 $ 28,620 $ 29,515
======================================================
Comparable store sales increase (a) 3.0% 0.5% 1.8% 3.0%
Operating restaurants at end of quarter:
Company-owned 362 365
Franchised 203 206
-------------------------------------------------------
Total 565 571
=======================================================
<FN>
(a) Prior year amounts have not been
restated for comparable restaurants
</FN>
</TABLE>
Captain D's total revenue increased $1.8 million, or 2.4%, and $2.9 million,
or 1.2%, in the third quarter and first forty weeks of 2000, respectively,
when compared with the comparable prior year period. The components of the
change in Captain D's concept revenue are summarized as follows:
<TABLE>
<CAPTION>
($ in millions) Quarter Ended Forty Weeks Ended
August 6, 2000 August 6, 2000
-------------- -----------------
<S> <C> <C>
Sales from operating restaurants $ 2.3 $ 4.5
Closed restaurants (0.5) (1.6)
-------------- -----------------
Total change in restaurant sales 1.8 2.9
Franchise revenues - -
-------------- -----------------
Total $ 1.8 $ 2.9
============== =================
</TABLE>
Revenues were reduced by the closing of four under-performing Company-owned
restaurants in 1999 and one closure in 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 Captain D's
restaurants closed are as follows:
<TABLE>
<CAPTION>
Quarters Ended Forty Weeks Ended
($ in thousands) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
Sales EBIT as Sales EBIT as Sales EBIT as Sales EBIT as
defined defined defined defined
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stores closed $ 124 $ (5) $ 624 $ (51) $ 555 $ 19 $ 2,176 $ (82)
==============================================================================
</TABLE>
Franchise revenue was virtually unchanged in the third quarter and the first
forty 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.
25
Expenses increased $1.6 million, or 2.4%, and $3.8 million, or 1.8%, in the
third quarter and the first forty weeks of 2000, respectively, when compared
to the same period in 1999. Expenses as a percentage of revenues were 89.5%
in the third quarter of 2000 compared to 89.5% in the third quarter of 1999.
As a percentage of sales, decreases in food and supply costs in the third
quarter were offset by increases in restaurant labor, operating expenses and
multi-unit supervisory costs. For the first forty weeks, as a percentage of
sales, expenses were 88.5% in 2000 compared to 88.0% in 1999. As a
percentage of sales, higher labor and operating 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, increased $0.2 million in the third quarter of 2000
when compared to the comparable prior year quarter and declined $.9 million
for the first forty weeks of 2000 when compared to the prior year period.
The Company continually evaluates the operating performance of each of its
restaurants. This evaluation process takes into account the anticipated
resources required to improve the operating performance of under-performing
restaurants to acceptable standards and the expected benefit from this
improvement. As a result of these evaluations, the Company could close
additional restaurants in the future. The Company also may sell operating
restaurants to franchisees.
COI
<TABLE>
<CAPTION>
Quarters Ended Forty Weeks Ended
($ in thousands) August 6, August 1, August 6, August 1,
2000 1999 2000 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Outside sales $ 28,538 $ 25,142 $ 92,231 $ 82,790
Inter-company sales 63,977 75,080 209,067 249,741
------------------------------------------------------
Total COI revenue 92,515 100,222 301,298 332,531
Expenses 91,003 98,491 297,737 325,838
------------------------------------------------------
EBIT as defined $ 1,512 $ 1,731 $ 3,561 $ 6,693
======================================================
Distribution centers at end of quarter 3 3
</TABLE>
Total revenue declined $7.7 million, or 7.7%, and $31.2 million, or 9.4%, in
the third quarter and first forty weeks of 2000, respectively, when compared
to the prior year period. Outside revenues of COI increased by $3.4 million
and $9.4 million in the third quarter and first forty weeks of 2000,
respectively. The increase in outside sales for the third quarter of 2000
resulted primarily from an increase in the number of outside customers.
Inter-company sales declined in the third quarter and first forty 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.
Expenses declined $7.5 million, or 7.6%, and $28.1 million, or 8.6%, in the
third quarter and first forty weeks of 2000, respectively, when compared to
the prior year period. Expenses, as a percentage of sales, were 98.4% and
98.8% in the third quarter and first forty weeks of 2000, respectively,
compared to 98.3% and 98.0% in the third quarter and first forty 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.
26
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 $0.2 million and $3.1 million in the third
quarter and first forty 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 was available to cover short and long term
working capital requirements. The Company's cash provided by continuing
operating activities declined during fiscal 1999, as compared to fiscal 1998,
and declined $26.1 million during the first forty weeks of 2000 when compared
to the prior year period. This decrease in cash provided by continuing
operations was due primarily to changes in operating assets and liabilities.
The change in operating assets and liabilities during 2000 was primarily the
result of an increase in 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 employee compensation and related
liabilities. The change in operating assets and liabilities in 1999 was
primarily due to a non-recurring reduction in refundable income taxes.
Cash provided by investing activities during the first forty weeks of 2000
totaled $17.5 million as compared to cash provided by investing activities of
$43.3 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 $17.3 million for the first forty 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 required that net proceeds from asset dispositions be applied
to reduce senior debt. At August 6, 2000, the Company had approximately 19
properties classified as assets held for sale with a carrying value of $9.8
million. Cash proceeds from asset dispositions were $35.0 million for the
first forty weeks of 2000 compared to $62.8 million for the first forty weeks
of 1999.
During the first forty weeks of 2000, the Company's cash used by financing
activities was $37.9 million compared with cash used by financing activities
of $85.0 million for the same period in 1999. Payments on the Term A and
Term B Notes of $36.4 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 $12.8 million under the Company's Line
of Credit.
27
On June 28, 2000, the Company announced its intention to commence a cash
tender offer (the "Tender Offer") to purchase any or all of the outstanding
subordinated convertible debentures (the "TPI Debentures") and zero coupon
convertible debentures (the "LYONs") for an aggregate price of approximately
$80 million. The tender offer was subject to the satisfaction of certain
terms and conditions including receipt of financing and the valid tender of
at least 90% of the aggregate principal amount of each of the debenture
issues. In order to consummate the Tender Offer, the Company was required to
refinance the indebtedness outstanding under the Company's 1997 Credit
Facility in addition to receiving financing necessary to effect the Tender
Offer (the "Refinancing"). In order to accommodate the timing of the
Refinancing, the Tender Offer was extended a number of times until September
6, 2000 at which time the Refinancing was completed and the Tender Offer was
consummated. Upon consummation of the Tender Offer the Company repurchased
approximately 90% of each of the TPI Debentures and the LYONs. Consummation
of the Tender Offer and the Refinancing is expected to result in an
extraordinary gain on the early retirement of debt of approximately $80
million in the Company's fourth quarter, net of expenses and taxes.
In order to complete the Refinancing, the Company restructured its restaurant
operations by separating its Shoney's and Captain D's operations (the
"Reorganization"). The Reorganization of the Company operations allowed each
of the Company's operating segments (Shoney's, Captain D's, and COI) to be
separately financed. As a result of the Reorganization and the Refinancing,
each operating segment is intended to operate as an independent business unit
and be responsible for its own indebtedness and debt service. The new senior
lending agreements generally prohibit the movement of cash between the
operating segments except for payments under certain tax sharing arrangments
and payments for goods and services. Based on current operating results,
forecasted operating trends and anticipated levels of asset sales, the
Company expects to be in compliance with the covenants contained in the new
credit agreements.
28
Below is a brief description of the Company's senior indebtedness upon
completion of the Refinancing.
<TABLE>
<CAPTION>
AMOUNT FINANCED
SEGMENT DESCRIPTION OF FINANCING AT CLOSING TERM INTEREST RATE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shoney's $99 million mortgage financing $99 million 20 years $31.3 million floating
rate of 4.1% over Libor
$67.7 million fixed rate
of 10.23%
$40 million revolving credit $23.4 million for Two years 4.25% over Libor
facility under an amendment and letters of credit, or 3.25% over the
restatement of the 1997 Credit $8.4 million funded prime rate
Facility
Captain D's $115 million term loans $115 million 16 months 4% over Libor
or 3% over the prime rate
$20 million revolving credit $4.0 million for 16 months 3% to 4% over Libor or 2%
facility letters of credit, to 3% over the prime rate,
$10 million funded based on certain defined
financial ratios
COI $30 million revolving credit $1.8 million for Three years 2.75% over Libor or .5%
facility letters of credit, over the prime rate
$16 million funded
</TABLE>
In anticipation of the completion of the Refinancing, the Company requested
and received waivers for permission to begin the Restructuring of the
Company's operations and to waive all third quarter financial covenants under
the 1997 Credit Facility until September 30, 2000.
The Company's new senior loan agreements are secured by substantially all of
the Company's assets. The new debt agreements (1) require satisfaction of
certain financial ratios and tests (some of which become more restrictive
each year); (2) impose limitations on capital expenditures; (3) limit the
ability to incur additional debt and contingent liabilities; (4) prohibit
dividends and distributions on common stock; (5) prohibit mergers,
consolidations or similar transactions; and (6) include other affirmative
and negative covenants.
29
Debt and obligations under capital leases at August 6, 2000 and immediately
following the consummation of the cash Tender Offer, Refinancing and
Restructuring on September 6, 2000 consist of the following:
<TABLE>
<CAPTION>
Pro Forma as of
($ in thousands) August 6,2000 September 6, 2000
------------- -----------------
<S> <C> <C>
Senior debt - Line of Credit $ 23,719 $ 1,921
Senior debt - Term A Note 29,994 --
Senior debt - Term B Note 103,022 --
Shoney's Inc. Line of Credit -- 8,345
Shoney's Inc. Mortgage financing -- 99,000
Captain D's Line of Credit -- 10,000
Captain D's term notes -- 115,000
COI Line of Credit -- 16,000
Subordinated zero coupon convertible debentures 130,582 13,130
Subordinated convertible debentures 49,715 4,902
Industrial revenue bonds 10,165 10,165
Notes payable to others 3,938 3,938
--------- ---------
351,135 282,401
Obligations under capital leases 10,821 10,821
--------- ---------
$ 361,956 $ 293,222
========= =========
</TABLE>
The Company's new senior debt structure requires that working capital sources
be available for each operating segment. The Shoney's Restaurant segment's
liquidity will be provided by a $40.0 million working capital line of credit
(the "Shoney's Line of Credit"). Availability under the Shoney's Line of
Credit is reduced by outstanding letters of credit of approximately $23.5
million, resulting in approximately $16.5 million of availability of which
$8.3 million was drawn at closing. Liquidity for the Shoney's segment will
also be provided by proceeds of up to $15.0 million from certain asset sales
that the Company is allowed to retain for its working capital needs.
Liquidity for the Captain D's segment will be provided by a $20 million line
of credit (the "Captain D's Line of Credit"). Availability under the Captain
D's Line of Credit is reduced by outstanding letters of credit of
approximately $4.0 million resulting in availability of approximately $16.0
million, of which $10.0 million was drawn at closing. Liquidity for COI is
provided by a line of credit (the "COI Line of Credit") of up to $30.0
million. The COI Line of Credit is an asset based loan under which the
availability will increase or decrease as inventory and accounts receivable
change. Availability under the line is reduced by $1.8 million of letters of
credit and $16.0 million of drawings at closing.
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
30
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.
The Company is highly leveraged and, under the terms of its new credit
agreements, generally is not permitted to incur additional debt and is
limited to annual capital expenditures of approximately $18.0 million after
fiscal 2000. Management believes the annual capital expenditures permitted
under the credit agreements are sufficient for the execution of its business
plan. The Captain D's indebtedness, incurred as part of the Refinancing,
matures in sixteen months. The Company expects to refinance this
indebtedness prior to maturity. However, no assurance can be given that the
refinancing could be obtained on terms satisfactory to the Company. If the
Company were unable to refinance the Captain D's indebtedness on terms
satisfactory to the Company, the Company's financial condition, results of
operations and liquidity would be materially adversely affected.
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 was "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, the Company submitted to the NYSE a business plan that set forth
definitive action that the Company intended to take that would have
demonstrated progress toward meeting the NYSE's listing criteria within 18
months. The Company's plan to show compliance with the NYSE's continued
listing standards was not sufficient to show conformity within eighteen
months of notice from the NYSE. On July 6, 2000 the NYSE announced that
trading of the Company's common stock would be suspended prior to the opening
of trading on July 12, 2000 and that the NYSE intends to apply to the
Securities and Exchange Commission to delist the Company's common stock. On
July 12, 2000 the Company's common stock began trading on the Over the
Counter Bulletin Board under the symbol SHOY.
31
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
See Part II, Item 4 of this Quarterly Report on Form 10-Q, which is
incorporated herein by this reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 18, 2000, the Company commenced a solicitation of consents
(the "Consent Solicitation") of the holders of the Company's TPI Debentures
and LYONs (collectively, the "Notes") to certain Amendments (the
"Amendments") to each of the indentures pursuant to which the TPI Debentures
and the LYONs were respectively issued (respectively, the "TPI Indenture" and
the "LYONs Indenture"). The Consent Solicitation was made in conjunction
with the Company's tender offer for the Notes described in Part I, Item 2
hereof under the caption "Liquidity and Capital Resources" which is
incorporated herein by this reference. The Company obtained consents to the
Amendments from the holders of $159,649,000, or approximately 90.0%,
principal amount at maturity of the LYONs and $46,480,000, or approximately
90.1%, principal amount of the TPI Debentures. The Amendments have been set
forth in supplemental indentures to each of the TPI Indenture and the LYONs
Indenture, which supplemental indentures became operative on September 6,
2000.
The Amendments to both the TPI Indenture and the LYONs Indenture
deleted the restrictions on the Company's ability and, with respect to the
TPI Indenture, the guarantor's (TPI Restaurants, Inc.) ability, to merge into
or consolidate with, or convey, transfer or lease all of substantially all of
its assets to, another person. The Amendments to the TPI Indenture also (i)
eliminated as events of default cross-defaults and judgments entered against
the Company and/or its subsidiaries; (ii) deleted provisions requiring the
Company and the guarantor to preserve their respective existences, rights,
corporate licenses and franchises; (iii) deleted requirements that the
Company maintain its and its subsidiaries' respective properties and pay
taxes and other claims and that the Company and the guarantor maintain
insurance; and (iv) eliminated limitations on the ability of the Company and
its subsidiaries to make certain restricted payments and investments and to
create any encumbrance or restriction on the ability of certain of the
Company's subsidiaries to make to the Company any distributions, loans or
advances, pay to the Company any dividends, or transfer to the Company any of
its property or assets.
For a complete description of the Amendments, reference is made to
the supplemental indentures to each of the TPI Indenture and the LYONs
Indenture, copies of which are filed as Exhibits 4.1 and 4.2 to this
Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Ex. 4.1 Second Supplemental Indenture, dated August 29, 2000,
between and among the Company, TPI Restaurants, Inc. and the
Bank of New York, as trustee.
Ex. 4.2 First Supplemental Indenture, dated August 29, 2000, by and
between the Company and the Bank of New York, as successor
trustee to Sovran Bank/Central South.
Ex. 27 Financial Data Schedule
32
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: September 20, 2000 By: /s/ James M. Beltrame
----------------------------
James M. Beltrame
Chief Financial Officer,
Principal Financial and Chief
Accounting Officer
33
