Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File No. 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
- --------------------------- ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Hancock at Washington
Madison, Georgia 30650
- --------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (706) 342-4552
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K.[X]
------------------------------------------------------
As of March 21, 2001, the aggregate market value of the common stock of the
registrant held by non-affiliates of the registrant, as determined by the last
sales price on that day, was $11,116,000.
As of March 21, 2001, the number of shares of common stock outstanding was
28,447,264.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for use in connection with the 2001 Annual
Meeting of Shareholders (Part III of Form 10-K).
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................3
Item 2. Properties............................................................9
Item 3. Legal Proceedings....................................................11
Item 4. Submission of Matters to a Vote of Security Holders..................11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................................12
Item 6. Selected Financial Data..............................................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........21
Item 8. Financial Statements and Supplementary Data..........................22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................44
PART III
Item 10. Directors and Executive Officers of the Registrant...................44
Item 11. Executive Compensation...............................................44
Item 12. Security Ownership of Certain Beneficial Owners and Management.......44
Item 13. Certain Relationships and Related Transactions.......................44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....45
2
PART I
Item 1. Business
General
Avado Brands, Inc., including its wholly owned subsidiaries (the "Company"
or "Avado Brands"), is a leading full service, casual dining restaurant company,
which owns four decentralized, niche-leading restaurant brands. At December 31,
2000, the Company owned and operated restaurants in 33 states plus the District
of Columbia including 139 Don Pablo's Mexican Kitchen restaurants, 75 Hops
Restaurant o Bar o Brewery restaurants, 32 McCormick & Schmick's seafood dinner
houses and 17 Canyon Cafe restaurants. For the 52-week period ended December 31,
2000, total core brand restaurant sales were $685.8 million compared to 1999
core brand sales of $623.3 million. Each of the brands functions on a
decentralized basis with its own executive management, purchasing, recruiting,
training, marketing and restaurant operations. This consumer-based operating
philosophy allows the Company to gain competitive advantage by sharing best
practices and centralizing non-brand critical processes such as human resources,
finance, treasury, accounting and capital formation.
In 2000, the Company committed to strategies to reduce debt, improve
liquidity and increase profitability. These strategies resulted in a significant
decrease in new restaurant openings, from 37 in 1999 to 19 in 2000, to a planned
4 in 2001, and a focus on restaurant operations and marketing strategy. In the
second quarter, the Company relocated its corporate offices for Don Pablo's and
Canyon Cafe both from Texas to the Company's corporate headquarter's in Madison,
Georgia in order to reduce overhead costs. In the fourth quarter, the Company
completed a $28.4 million sale-leaseback transaction for 20 Hops properties with
$20.0 million of the proceeds used to permanently reduce debt. In addition, the
Company suspended the $2.0 million, quarterly dividend payment on its
convertible preferred securities. These payments may be suspended for up to 20
consecutive quarters. The Company also divested its 20-percent equity interest
in United Kingdom-based Belgo Group PLC for $8.5 million. Nine unprofitable
restaurant locations were closed in early January 2001 and four additional
restaurants were closed on March 29, 2001. Unprofitable U.S. joint venture
investments with Belgo Group PLC and PizzaExpress PLC were exited in February
2001 and the Company continues to aggressively pursue the sale of other non-core
assets in order to focus on the operations of its core restaurants.
In 1998, the Company changed its corporate name from "Apple South, Inc." to
"Avado Brands, Inc." The name change was made to reflect the evolution of the
nature and character of the business, including the divestiture of the Company's
Applebee's restaurants, which was completed in 1999, and the emphasis on a
multi-brand strategy. In connection with the corporate name change, the Company
changed the Nasdaq trading symbol of its common stock from "APSO" to "AVDO."
3
Avado Brands' Restaurant Concepts
Don Pablo's
The first Don Pablo's was opened in Lubbock, Texas in 1985. The restaurants
feature traditional Mexican dishes served in a distinctive, festive dining
atmosphere reminiscent of a Mexican village plaza. Each restaurant is staffed
with a highly experienced management team that is visible in the dining area and
interacts with both customers and staff to ensure attentive customer service and
consistent food quality. Items are prepared fresh on-site using high-quality
ingredients at relatively low prices. The diverse menu, generous portions and
attractive price/value relationship appeal to a broad customer base. The Don
Pablo's mission is to win every guest every day by delivering real guest
satisfaction through real people.
Don Pablo's is led by the brand's Chief Executive Officer Robert
Andreotolla. Mr. Andreotolla has over twenty years of experience in the
restaurant industry and has been with Avado Brands since 1987. Under his
direction in 2000, Don Pablo's continued to make strides to improve its
niche-leading position including the addition of several new members to the
senior management marketing and operational teams, development and
implementation of a new menu, implementation of a new more aggressive national
advertising campaign and an improved focus on operational synergies, including
the implementation of a new point-of-sale system and improved management
turnover rates.
Menu. The menu offers a wide variety of entrees including enchiladas and
tacos served with various sauces and homemade salsa plus mesquite-grilled items
such as chicken and beef fajitas. The menu also includes tortilla soup, a
selection of salads, Mexican-style appetizers such as quesadillas and unique
desserts. During 2000, the price of a typical meal was $4.99 to $6.99 for lunch
and $7.99 to $10.99 for dinner. In addition to its regular menu, Don Pablo's
offers 19 lunch specials priced from $4.99 each and a lower-priced children's
menu. Full bar service is also provided. Alcoholic beverages accounted for
approximately 19% of sales in 2000.
Restaurant Layout. Distinctive Mexican architecture and interior decor
provide a casual, fun dining atmosphere. The restaurants have an open, spacious
feel, created with the use of sky-lights and a Mexican village plaza design, and
are enhanced by an indoor fountain and the use of stucco, brick and tile, as
well as plants, signs and art work. Homemade tortillas cooked in the dining area
underscore the commitment to fresh, authentic Mexican food. Both one- and
two-story building designs are utilized. The two-story design features a balcony
which provides seating for bar patrons and dining customers waiting to be
seated. The one-story design incorporates a smaller bar adjacent to the dining
area. Both designs use high ceiling architecture and have similar dining
capacities. Restaurants range in size from 6,000 square feet to 9,900 square
feet with the average restaurant containing approximately 8,000 square feet. The
restaurants generally have dining room seating for approximately 230 customers
and bar seating for approximately 70 additional customers.
Unit Economics. In 2000, Don Pablo's opened two new restaurants. The
average cost of developing and opening these restaurants was approximately $1.7
million, excluding land, capitalized costs and preopening expenses. The cost of
land for the new sites averaged approximately $900,000. Preopening expenses,
which consist primarily of wages and salaries, hourly employee recruiting,
license fees, meals, lodging and travel plus the cost of hiring and training the
management teams, averaged $250,000.
Field Management. Management is shared by 17 directors of operations who
report to three regional vice presidents of operations. The strategy is to have
each director responsible for a limited number of restaurants, thus facilitating
a focus on quality of operations and unit profitability. The management staff of
a typical restaurant consists of one general manager, one kitchen manager and
three assistant managers. The restaurant management staff is eligible to receive
bonuses based on equaling or exceeding their individual restaurant's prior year
sales and profits.
Advertising and Marketing. Don Pablo's advertising and marketing strategy
combines the use of television and radio advertising in core markets along with
a focus on local efforts and community involvement at all locations. In 2000,
advertising expense was 5.6% of sales. Although Don Pablo's typically spends
approximately 3.5% to 4.0% of sales on advertising, a new aggressive national
advertising strategy was implemented in the second half of the year. Advertising
expenditures for 2001 are budgeted at 5.1% of sales, reflecting a continuation
of this campaign that will focus on efforts designed to increase traffic counts
and appeal to consumer desires for new and exciting tastes.
4
Hops Restaurant - Bar - Brewery
The first Hops was opened in Clearwater, Florida in 1989. Each restaurant
offers a diverse menu of popular foods, freshly prepared in a display kitchen
with a strict commitment to quality and value. Additionally, each restaurant
features an on-premises microbrewery. In 2000, a new Chief Executive Officer,
Ronald Magruder, joined the brand. Mr. Magruder has nearly 30 years of
experience in the restaurant industry and was formerly the Chairman of the Board
of the National Restaurant Association. He was also formerly the Chief Operating
Officer of CBRL Group's Cracker Barrel Old Country Store and Vice Chairman of
Darden Hospitality. Hops also made several new additions to its financial,
operating and marketing senior management teams during 2000, which should
continue to keep the brand focused on its niche-leading position.
Menu. The restaurants feature an American-style menu that includes top
choice steaks, smoked baby back ribs, fresh fish, chicken and pasta dishes,
deluxe burgers and sandwiches, hand-tossed salads with homemade dressings,
appetizers, soups and desserts. The menu offers separate selections for
children. The price of a typical meal, including beverages, ranges from $6.00 to
$9.00 per person for lunch and $13.00 to $16.00 per person for dinner. Each
restaurant offers four distinctive lager-style beers and ales, plus a variety of
blends of these beers as well as seasonal beers, that are brewed on-premises. An
observation microbrewery at each restaurant allows customers to view the entire
brewing process. Except for one non-alcoholic beer, the brewed beers are
typically the only beers served. Full bar service is also available at each
restaurant. Alcoholic beverages accounted for approximately 16% of sales in
2000.
Restaurant Layout. Restaurants range in size from approximately 5,000 to
7,300 square feet. With booth seating throughout approximately 70% of each
restaurant, guests enjoy the comfort of privacy and soft lighting amongst wood
and brick surfaces in a somewhat rustic design . The ambiance and decor
complements the on-premise copper and stainless steel brewing equipment which is
visible from both the bar and dining room. Customers are invited to tour the
brewery, which occupies from 450 to 750 square feet, with Hops' on premise
Brewmaster.
Unit Economics. In 2000, Hops opened ten new restaurants. The cost of
developing and opening these restaurants averaged approximately $1.8 million,
excluding land and preopening costs but including approximately $165,000 in
microbrewery equipment. Land costs ranged from $580,000 to $1,011,000 and
preopening costs averaged $234,000.
Field Management. Management is shared by five operating partners and eight
area supervisors who report to a regional vice president who reports to the
brand's Chief Operating Officer. Each operating partner or area supervisor is
ultimately responsible for four to seven restaurants, thus facilitating a focus
on quality of operations and unit profitability. The management staff of a
typical restaurant consists of one general manager, one kitchen manager and
three assistant managers. General managers and kitchen managers are eligible to
receive bonuses equal to a percentage of their restaurant's controllable income,
subject to operating above a minimum operating margin.
Advertising and Marketing. Hops' advertising and marketing strategy has
historically focused primarily on grassroots efforts utilizing special
promotions in local markets and special event equipment designed to increase
customer awareness and name recognition. In recent years, advertising and
marketing efforts were expanded to include television advertising in core
markets as well as the continued use of radio advertising, outdoor boards and
print media in regional editions of national publications. These strategies are
expected to continue into 2001 with the continued use of television and radio
advertising, print media, limited outdoor advertising as well as ongoing
grassroots programs. In 2000, advertising expense was 5.5% of sales.
5
McCormick & Schmick's
McCormick & Schmick's was established in 1972 by co-founders William P.
McCormick and Douglas L. Schmick, current Chairman and President of the brand,
respectively. Mr. McCormick also serves on the National Restaurant Association
Board of Directors and on the Board of the American Culinary Institute. In 2000,
Mr. McCormick was elected to the Avado Brands Board of Directors.
Each McCormick & Schmick's restaurant is designed to capture the
distinctive attributes of its local market. Varying in design from a
traditional, New England-style fish house to a more contemporary dinner house
with spectacular waterfront views, many of the restaurants are located in
historic buildings. Traditional-style bars are an integral component of each
restaurant. The same philosophy of distinctiveness and quality applies equally
to the bar operation and the dining rooms. Alcoholic beverages represented
approximately 27% of sales in 2000. Restaurants are operated under the names
McCormick & Schmick's, McCormick's Fish House, Harborside, Jake's, Jake's Famous
Crawfish, M&S Grill, McCormick & Kuleto's, Spenger's Fresh Fish Grotto and The
Heathman Hotel Restaurant. McCormick & Schmick's offers superior service to its
guests and is positioned in a price range at the upper end of moderate.
Menu. McCormick & Schmick's features a daily menu, offering the freshest
seafood available based on price and product availability. With 25 to 30
distinctive species and over 85 individual selections, the menu gives range in
culinary appeal as well as price selection. The price of a typical meal,
including beverage, is approximately $10.00 to $20.00 for lunch and $25.00 to
$35.00 for dinner.
Restaurant Layout. Restaurants typically range in size from 6,000 to 14,000
square feet with an average restaurant containing approximately 8,500 square
feet. The restaurants generally seat 200 to 350 customers in the dining room
with some locations having 40 to 60 additional patio seats available.
Unit Economics. In 2000, McCormick & Schmick's opened six new restaurants.
The average cost of developing these restaurants was approximately $3.5 million,
including leasehold improvements, fixtures and equipment. All restaurant real
estate is leased. Additionally, preopening expenses averaged $355,000.
Field Management. Management is shared by ten multi-unit senior managers,
three of which have regional responsibility, and two Vice Presidents of
Operations. Staffing levels vary depending on restaurant size. A typical
restaurant has a general manager, an executive chef, a sous chef and four
assistant managers and will employ 80 to 90 full- and part-time employees. The
McCormick & Schmick's operating philosophy encourages and trains the management
of individual restaurants to be creative by promoting a large degree of
self-sufficiency.
Advertising and Marketing. Advertising and marketing efforts are focused on
a grassroots philosophy. Each region utilizes the services of a public relations
firm and makes full use of media events targeting the local market. Advertising
strategies focus on existing and local customers, but also emphasize out-of-town
travelers as a key customer component. Marketing begins in each restaurant with
daily printed menus and other local efforts. A primary focus is to expand name
and location awareness through the use of promotional discount certificates and
periodic contact with organizations in the travel/convention industry such as
hotels, travel agents and convention centers. In 2000, advertising expense was
3.4% of sales.
Canyon Cafe
Canyon Cafe restaurants operate under the names Canyon Cafe, Desert Fire
and Sam's Cafe. The first restaurant was opened in Dallas, Texas in 1989. The
Canyon Cafe concept is dedicated to delivering the flavor and feel of the
American Southwest in a warm and sophisticated setting. The brand is led by
Chief Executive Officer Michael Liedberg. Mr. Liedberg has been with Avado
Brands for over 10 years serving in key management positions in both Applebee's
and Don Pablo's. He has a strong operations and human resources background and
serves on the University of Georgia Human Resource and Organizational
Development Academic Advisory Committee.
6
Menu. The menu offers a wide variety of unique items such as Pecan-crusted
Crab Cakes, Applewood Smoked Pecan Salmon and Buffalo Short Ribs. A variety of
more traditional items including chicken tacos and grilled chicken salad are
also offered. During 2000, the price of a typical meal, including beverages, was
$10.00 to $13.00 for lunch and $15.00 to $20.00 for dinner. Full bar service is
also provided. Alcoholic beverages accounted for approximately 19% of sales in
2000.
Restaurant Layout. The restaurants are based on a Santa Fe design which
reflects a strong southwestern influence through the use of heavy ponderosa pine
timbers. The walls, floors and furniture reflect surfaces and colors native to
the American Southwest. Restaurants are located in malls, in-line power centers
and as freestanding buildings. In-line and mall sites average 7,000 square feet
with some locations featuring an additional 800-1,000 square foot patio.
Freestanding buildings have 6,700 square feet with a 1,050 square foot patio.
All locations typically have a minimum of 190 interior dining seats, an average
of 26 bar seats and 45-50 patio seats.
Unit Economics. One new restaurant was opened in 2000 at an approximate
cost of $1,900,000. Preopening costs for the location were approximately
$250,000.
Field Management. Management is structured with a general manager, two to
three assistant managers, an executive chef and a sous chef. Regional Directors
are responsible for quality of operations and sales and profitability of four to
five restaurants and report to the brands' Chief Executive Officer. All managers
are eligible to receive bonuses based on their individual restaurant's operating
performance.
Advertising and Marketing. Advertising and marketing strategy relies on
grassroots efforts focused on developing a strong brand identity and strong
core-customer recommendations. Advertising and marketing efforts include local
radio, media appearances and event involvement as well as direct mail and other
print media. Additional local efforts, such as system-wide neighborhood
networking programs, are utilized to develop a direct relationship with targeted
customers. In 2000, advertising expense was 5.4% of sales.
Other Restaurant Operational Functions
Quality Control. All levels of management are responsible for ensuring that
restaurants are operated in accordance with strict quality standards. Management
structure allows restaurant general managers to spend a significant portion of
their time in the dining area of the restaurant supervising staff and providing
service to customers. Compliance with quality standards is monitored by periodic
on-site visits and formal periodic inspections by multi-unit management as well
as brand executive management.
Training. Each brand requires employees to participate in formal training
programs. Management training programs generally last ten to 16 weeks and
encompass three general areas, including (i) all service positions, (ii)
management accounting, personnel management, and dining room and bar operations
and (iii) kitchen management. Management positions at new restaurants are
typically staffed with personnel who have had previous experience in a
management position at another of the respective brands' restaurants. In
addition, a highly experienced opening team assists in opening each restaurant.
Prior to opening, all personnel undergo intensive training conducted by the
restaurant opening team.
Purchasing. Avado Brands strives to take advantage of purchasing synergies
in all operational areas. In 2000, the national marketing strategies at Don
Pablo's and Hops were greatly enhanced through combined media purchasing
efforts. The Company also coordinates its food and beverage purchasing efforts
whenever possible in order to obtain consistent quality items at competitive
prices from reliable sources for all of its brands. The Company continually
researches and tests various products in an effort to maintain the highest
quality products and to be responsive to changing customer tastes. Overall,
purchasing is the responsibility of each brand, which, with the exception of
McCormick & Schmick's, uses one primary distributor for food products other than
locally purchased produce. At McCormick & Schmick's, purchasing is under the
direction of each restaurants' executive chef in order to obtain the freshest,
highest quality seafood available with a focus on local tastes. All food and
7
beverage products are available on short notice from alternative, qualified
suppliers. The Company has not experienced any significant delays in receiving
food and beverage inventories, restaurant supplies or equipment.
Restaurant Reporting. Financial controls are maintained through a
centralized accounting system at each brands' headquarters. A point-of-sale
reporting system is utilized in each restaurant. Restaurant management submits
to brand headquarters various daily and weekly reports of cash, deposits, sales,
labor costs, etc. Physical inventories of all food, beverage and supply items
are taken at least monthly. Operating results compared to prior periods and
budgets are closely monitored by both brand and corporate personnel.
Trademarks and Licenses
Avado Brands has registered the principal trademarks and service marks used
by its restaurant brands with the United States Patent and Trademark Office. The
Company believes that its trademarks and service marks are integral and
important factors in establishing the identity and marketing of its restaurant
brands. Although the Company is aware of certain marks used by other persons in
certain geographical areas which may be similar in certain respects to the
Company's marks, the Company believes that these other marks will not adversely
affect the Company or its business.
Governmental Regulation
Alcoholic Beverage Regulation. Each restaurant is subject to licensing and
regulation by a number of governmental authorities, which include alcoholic
beverage control and health, safety and fire agencies in the state, county and
municipality in which the restaurant is located. Difficulties or failures in
obtaining the required licenses or approvals could delay or prevent the opening
of a new restaurant in a particular area. Alcoholic beverage control regulations
require restaurants to apply to a state authority and, in certain locations,
county or municipal authorities for a license or permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays. Some counties prohibit the sale of alcoholic beverages on Sundays.
Typically, licenses or permits must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of a restaurant's operations, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
The Company may be subject in certain states to "dram-shop" statutes which
generally provide a person injured by an intoxicated patron the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance coverage.
Brewpub Regulation. Hops is subject to additional regulations as a result
of the on-premises microbrewery in each restaurant. Historically, the alcoholic
beverage laws of most states prohibited the manufacture and retail sale of beer
to consumers by a single person or entity or related persons or entities. At
present, all 50 states allow for the limited manufacture and retail sale of
microbrewed beer by restaurants and bars classified as "brewpubs" under state
law. The Hops restaurants are required to comply with such state brewpub laws in
order to obtain necessary state licenses and permits. Additionally, many states
impose restrictions on the operations of brewpubs, such as a prohibition on the
bottling of beer, a prohibition on the sale of beer for consumption off of
restaurant premises, and a limitation on the volume of beer that may be brewed
at any location, as well as certain geographic limitations. In addition, certain
states limit the number of brewpubs that may be owned by any person or entity or
a related group of entities. The Company's ability to own and operate Hops
restaurants in any state is and will continue to be dependent upon its ability
to operate within the regulatory scheme of such states.
Other Regulation. The Company's restaurant operations are also subject to
federal and state laws governing such matters as minimum wage, working
conditions, overtime and tip credits.
8
Competition
The restaurant industry in the U.S. is highly competitive with respect to
price, service, location, and food type and quality, and competition is expected
to intensify. There are well-established competitors with greater financial and
other resources than Avado Brands. Some of these competitors have been in
existence for a substantially longer period than Avado Brands and may be better
established in the markets where the Company's restaurants are or may be
located. The restaurant business is often affected by changes in consumer
tastes, national, regional or local economic conditions, demographic trends,
traffic patterns, the availability and cost of suitable locations, and the type,
number and location of competing restaurants. The Company also experiences
competition in attracting and retaining qualified management level operating
personnel. In addition, factors such as inflation, increased food, labor and
benefits costs, and difficulty in attracting hourly employees may adversely
affect the restaurant industry generally and Avado Brands' restaurants in
particular.
Employees
As of December 31, 2000, Avado Brands employed approximately 20,000 persons
in 33 states plus the District of Columbia. Of those employees, approximately
250 held management or administrative positions, 1,400 were involved in
restaurant management, and the remainder were engaged in the operation of
restaurants. Management believes that the Company's continued success will
depend to a large degree on its ability to attract and retain quality management
employees. While the Company will have to continually address a level of
employee attrition normally expected in the food-service industry, Avado Brands
has taken steps to attract and keep qualified management personnel through the
implementation of a variety of employee benefit plans, including an Employee
Stock Ownership Plan, a 401(k) Plan, and an incentive stock option plan for its
key employees. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
Item 2. Properties
The Company owns a renovated historic building in Madison, Georgia,
containing approximately 19,000 square feet of office space and an adjoining
building containing approximately 41,000 square feet of office space. These
office buildings serve as the Company's corporate headquarters. In 2000, the
headquarters of Don Pablo's and Canyon Cafe were relocated from Texas to the
office facility in Madison. The previous headquarters for Don Pablo's was
located in a Company owned 44,100 square foot facility in Bedford, Texas, which
is currently held for sale. Canyon Cafe was previously headquartered in a leased
facility in Dallas, Texas. The headquarters for McCormick & Schmick's is located
in approximately 17,600 square feet of leased space in Portland, Oregon. The
headquarters for Hops is located in approximately 15,000 square feet of leased
space in Tampa, Florida. The Company believes that its corporate and brand
headquarters are sufficient for its present needs.
In selecting restaurant sites, the Company attempts to acquire prime
locations in market areas to maximize both short- and long-term revenues. Site
selection is made by each brand's development department, subject to executive
officer approval and, beginning in 1999, final approval by the Company's
management committee. Within the target market areas, the brands evaluate major
retail and office concentrations and major traffic arteries to determine focal
points. Site specific factors include visibility, ease of ingress and egress,
proximity to direct competition, accessibility to utilities, local zoning
regulations, laws regulating the sale of alcoholic beverages, and various other
factors.
9
After the closing of 9 unprofitable restaurant locations in early January
2001, 254 restaurants were in operation. The Company leases the underlying real
estate on which 123 of the restaurants are located and leases both the buildings
and underlying real estate for an additional 74 restaurants. The remaining 57
restaurants and related real estate are owned by the Company. The following
table presents restaurant locations by brand as of January 10, 2001:
Don McCormick Canyon
Pablo's Hops & Schmick's Cafe Total
-----------------------------------------------------------------------------
Florida 18 32 50
Ohio 16 5 21
Texas 14 1 4 19
Georgia 5 5 1 1 12
Indiana 11 11
Virginia 7 3 1 11
Colorado 7 1 2 10
Pennsylvania 9 9
Minnesota 7 1 1 9
Tennessee 5 3 8
Maryland 5 1 2 8
Michigan 8 8
North Carolina 4 4 8
California 7 7
Arizona 3 1 3 7
South Carolina 3 4 7
Washington 5 2 7
Oregon 6 6
Kentucky 4 1 5
New York 5 5
Oklahoma 4 4
Missouri 1 1 2 4
Washington, D.C. 2 2
Illinois 1 1 2
New Jersey 2 2
Alabama 2 2
Connecticut 2 2
Rhode Island 2 2
Delaware 1 1
Iowa 1 1
Louisiana 1 1
Nevada 1 1
Massachusetts 1 1
Mississippi 1 1
-----------------------------------------------------------------------------
Totals 135 73 32 14 254
=============================================================================
10
Item 3. Legal Proceedings
In 1997, two lawsuits were filed by persons seeking to represent a class of
shareholders of the Company who purchased shares of the Company's common stock
between May 26, 1995 and September 24, 1996. Each plaintiff named the Company
and certain of its officers and directors as defendants. The complaints alleged
acts of fraudulent misrepresentation by the defendants which induced the
plaintiffs to purchase the Company's common stock and alleged illegal insider
trading by certain of the defendants, each of which allegedly resulted in losses
to the plaintiffs and similarly situated shareholders of the Company. The
complaints each sought damages and other relief. In 1998, one of these suits
(Artel Foam Corporation Pension Trust, et al. v. Apple South, Inc., et al.,
Civil Action No. CV-97-6189) was dismissed. An amended complaint, styled John
Bryant, et al. vs. Apple South, Inc., et al. consolidating previous actions was
filed in January 1998. During 1999, the Company received a favorable ruling from
the 11th Circuit Court of Appeals relating to the remaining suit. As a result of
the ruling, the District Court again considered the motion to dismiss the case,
and the defendants renewed their motion to dismiss in December 1999. In June
2000, the District Court dismissed with prejudice the remaining suit. The
plaintiffs have appealed the court's final decision. Although the ultimate
outcome of the suit cannot be determined at this time, the Company believes that
the allegations therein are without merit and intends to continue vigorously
defending itself.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of its security holders during
the fourth quarter of the fiscal year ended December 31, 2000.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Corporate Headquarters Independent Auditors
Avado Brands, Inc. KPMG LLP
Hancock at Washington 303 Peachtree Street, N.E.
Madison, GA 30650 Suite 2000
Telephone: (706) 342-4552 Atlanta, GA 30308
Investor Relations Transfer Agent and Registrar
Jillan Hatchett, Senior Investor SunTrust Bank, Atlanta
Relations Analyst Corporate Trust Division
Hancock at Washington P.O. Box 4625
Madison, GA 30650 Atlanta, GA 30302
Telephone: (706) 342-4552
Facsimile: (706) 343-2434
E-mail: jhatchett@corp.avado.com
Investor Information
The Company's common stock currently trades on the Nasdaq SmallCap Market under
the symbol "AVDO". The Company's Convertible Preferred Securities are traded on
the over the counter market.
Shareholder Information
As of March 1, 2001, there were approximately 5,200 shareholders of record of
the Company's common stock.
Stock Price Performance
A summary of the high and low sales prices per share for the Company's common
stock is presented below:
High Low
-------------------------------------------------------------------------
2000
First Quarter $ 5.63 $ 1.75
Second Quarter $ 2.53 $ 1.06
Third Quarter $ 2.19 $ 0.75
Fourth Quarter $ 1.06 $ 0.47
1999
First Quarter $ 9.75 $ 5.94
Second Quarter $ 9.50 $ 6.25
Third Quarter $ 9.44 $ 5.63
Fourth Quarter $ 6.00 $ 4.06
-------------------------------------------------------------------------
Dividends
A summary of cash dividends declared per share on the Company's common stock is
presented below:
Quarter ended 2000 1999 1998
-------------------------------------------------------------------------
March $ 0.00 0.0125 0.0100
June $ 0.00 0.0150 0.0125
September $ 0.00 0.0150 0.0125
December $ 0.00 0.0150 0.0125
-------------------------------------------------------------------------
Total $ 0.00 0.0575 0.0475
-------------------------------------------------------------------------
12
Item 6. Selected Financial Data
(In thousands, except per share data)
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF EARNINGS DATA
Total restaurant sales $ 685,795 644,459 862,692 808,320 546,022
Operating income before asset revaluation
and other special charges $ 28,594 44,647 75,571 74,823 59,296
Asset revaluation and other special charges $ 38,200 2,186 2,940 - 27,700
Net earnings (loss) $ (65,734) 5,470 66,283 28,448 11,674
- --------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings (loss) per common share $ (2.55) 0.20 1.81 0.74 0.30
Diluted earnings (loss) per common share $ (2.55) 0.20 1.62 0.73 0.30
Cash dividends per common share $ 0.00 0.0575 0.0475 0.038 0.030
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA
Total assets $ 609,681 656,596 670,597 804,289 457,827
Working capital (excluding assets held for sale) $ (120,357) (39,497) (210,947) (33,989) (21,439)
Long-term obligations $ 291,507 328,076 116,978 381,843 215,891
Convertible preferred securities $ 72,865 115,000 115,000 115,000 -
Shareholders' equity $ 87,952 112,624 112,029 220,782 191,429
- --------------------------------------------------------------------------------------------------------------------
See additional discussion of financial results at Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 8, "Financial Statements and Supplementary Data".
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For an understanding of the significant factors that influenced the
performance of Avado Brands, Inc. (the "Company") during the past three fiscal
years, the following discussion should be read in conjunction with the
consolidated financial statements appearing elsewhere in this Form 10-K. The
Company's fiscal year is a 52- or 53-week year ending on the Sunday closest to
December 31. Accordingly, the following discussion is for the 52 weeks ended
December 31, 2000 ("2000"), the 52 weeks ended January 2, 2000 ("1999") and the
53 weeks ended January 3, 1999 ("1998").
Consolidated Overview of 2000
In 2000, the Company committed to strategies to reduce debt, improve
liquidity and increase profitability. These strategies resulted in a significant
decrease in new restaurant openings, from 37 in 1999 to 19 in 2000, to a planned
4 in 2001, and a focus on restaurant operations and marketing strategy. In the
second quarter, the Company relocated its corporate offices for Don Pablo's and
Canyon Cafe both from Texas to the Company's corporate headquarter's in Madison,
Georgia in order to reduce overhead costs. In the fourth quarter, the Company
completed a $28.4 million sale-leaseback transaction for 20 Hops properties with
$20.0 million of the proceeds used to permanently reduce debt. In addition, the
Company suspended the $2.0 million, quarterly dividend payment on its
convertible preferred securities. These payments may be suspended for up to 20
consecutive quarters. The Company also divested its 20-percent equity interest
in United Kingdom-based Belgo Group PLC for $8.5 million. Nine unprofitable
restaurant locations were closed in early January 2001 and four additional
restaurants were closed on March 29, 2001. Unprofitable U.S. joint venture
investments with Belgo Group PLC and PizzaExpress PLC were exited in February
2001 and the Company continues to aggressively pursue the sale of other non-core
assets in order to focus on the operations of its core restaurants. These
actions, in addition to other related costs, resulted in asset revaluations and
other special charges of $38.2 million and a loss on disposal of assets of $22.8
million.
Comparison of Historical Results - Fiscal Years 2000, 1999 and 1998
Restaurant Sales
In 2000, Avado Brands' sales were generated solely by the operations of its
four core brands. Total restaurant sales of $685.8 million exceeded 1999 core
brand sales by 10%. Total 1999 restaurant sales of $644.5 million included
non-core sales of $21.2 million from Applebee's, the divestiture of which was
completed in 1999. The increase in 2000 core brand sales was primarily
attributable to new-unit growth which increased core brand operating weeks by
10%. The increase in operating weeks was generated by a full-year's sales from
37 restaurants opened in 1999 and a partial-year's sales from 19 restaurants
opened in 2000. Same-store-sales comparisons (for restaurants open a full 18
months at the beginning of 2000) were approximately 7% higher at Hops, 3% higher
at McCormick & Schmick's, 4% lower at Don Pablo's and 9% lower at Canyon Cafe.
Increased marketing efforts during the second half of 2000 contributed to
sustaining strong same-store-sales comparisons at Hops and increased Don Pablo's
same-store-sales comparisons from negative 8% in the second quarter of 2000 to
slightly positive by the end of the third quarter. Positive results from
increased marketing were diminished in the fourth quarter by several factors
including economic uncertainty, political indecision generated by the
presidential election, unusually harsh winter weather conditions and negative
publicity related to genetically engineered yellow corn which prompted Don
Pablo's to switch to white corn products.
In 1999, restaurant sales for the Company's core brands increased 18% to
$623.3 million from $527.4 million in 1998. Total restaurant sales decreased to
$644.5 million in 1999 from $862.7 million in 1998 reflecting the divestiture of
Applebee's which accounted for 39% of sales in 1998 compared to only 3% in 1999.
Increased core brand sales, attributable primarily to new-unit growth, were
partially offset by a 52-week fiscal 1999 compared to a 53-week fiscal 1998.
Operating weeks increased by 21% in core brands due to a full-year's sales from
59 restaurants opened in 1998 and a partial-year's sales from 37 restaurants
opened in 1999. Sales increases attributable to new restaurant openings were
somewhat offset by the closing of six core brand restaurants during 1999.
Same-store-sales comparisons (for restaurants open a full 18 months at the
beginning of 1999) were approximately 6% higher at McCormick & Schmick's, 1%
higher at Hops, 1% lower at Don Pablo's and 4% lower at Canyon Cafe.
14
Core Brand Restaurant Operating Expenses
The following discussion of restaurant operating expenses focuses on the
percentages which certain items of expense bear to total restaurant sales for
the core brands. In 2000, consolidated operating expenses related solely to the
core brands. For comparison purposes, the 1999 and 1998 amounts presented in the
following table have been adjusted to exclude the non-core operations of
Applebee's.
Fiscal 2000 1999 1998
- --------------------------------------------------------------------------------
Restaurant sales:
Canyon Cafe 5.8% 7.0% 9.1%
Don Pablo's 43.4 49.7 51.3
Hops 27.2 23.2 20.2
McCormick & Schmick's 23.7 20.1 19.4
- --------------------------------------------------------------------------------
Total restaurant sales 100.0 100.0 100.0
- --------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 28.9 28.4 28.0
Payroll and benefits 32.0 31.1 30.4
Depreciation and amortization 3.6 3.3 3.2
Other operating expenses 25.7 24.6 23.4
- --------------------------------------------------------------------------------
Total restaurant operating expenses 90.3 87.4 85.0
- --------------------------------------------------------------------------------
Income from restaurant operations 9.7% 12.6% 15.0%
- --------------------------------------------------------------------------------
Core brand restaurant operating expenses for 2000 were 90.3% of sales
compared to 87.4% in 1999. The resulting decrease in 2000 restaurant operating
margins was primarily due to (i) increased marketing primarily at Don Pablo's
and Hops which increased other operating expenses, (ii) increased food and
beverage costs at Don Pablo's generated by the implementation of a new menu
coupled with the increased marketing initiatives which resulted in a shift in
sales mix to lower-priced, lower-margin items, (iii) additional increases in
food and beverage costs due to higher beef prices impacting primarily Don
Pablo's and Hops, (iv) a decline in average unit volumes at Don Pablo's and
Canyon Cafe which resulted in decreased leverage on fixed management labor
costs, depreciation and amortization, rent and other fixed operating expenses
and (v) additional increases in depreciation expense generated primarily by the
installation of new point-of-sale systems at Don Pablo's and McCormick &
Schmick's in the fourth quarter of 1999. Increased operating expenses were
somewhat offset by a decrease in preopening expenses due to a decline in new
restaurant openings and increasing average unit volumes at Hops and McCormick &
Schmick's which improved leverage on fixed operating expenses.
In 1999, core brand restaurant operating expenses were 87.4% of sales
compared to 85.0% in 1998. The resulting decrease in 1999 restaurant operating
margins was principally due to (i) the impact of increased marketing, including
the implementation of a new summer promotional menu at Don Pablo's, which
increased other operating expenses as well as food and beverage and payroll and
benefit costs due to higher cost promotional items and increased labor hours
generated by the menu changes, (ii) additional increases in payroll and benefits
related primarily to management base pay increases at Don Pablo's and Hops and
(iii) a decrease in average unit volumes at Don Pablo's, Hops and Canyon Cafe
which decreased leverage on certain fixed operating expenses as well as
depreciation and amortization.
Applebee's Restaurant Operating Expenses
For 1999 and 1998, sales from Applebee's accounted for 3% and 39%,
respectively, of consolidated restaurant sales. In 1999, consolidated operating
expenses were impacted slightly by Applebee's. Other operating expenses of 24.4%
on a consolidated basis were lower than core brand expenses of 24.6% due to the
absence of preopening expenses and limited marketing at Applebee's. In 1998,
Applebee's operations had a more significant impact on consolidated operating
results. Payroll and benefit expenses were 32.4% on a consolidated basis
compared to 30.4% for the core brands due to higher payroll and benefits
resulting from performance-based, pay-to-stay bonus programs implemented to
control management turnover and operating costs during the Applebee's
15
divestiture period. In addition, consolidated depreciation and amortization of
2.0% was lower than core brand expense of 3.2% due to the impact of Applebee's
for which depreciation was suspended in December 1997 when the related assets
were classified as assets held for sale.
General and Administrative Expenses
General and administrative expenses were 5.6% of total sales in 2000
compared to 5.9% in 1999 and 5.3% in 1998. The decrease in 2000 was primarily
attributable to synergies gained from the consolidation of the Don Pablo's and
Canyon Cafe headquarters into the Madison, Georgia corporate office facility and
leverage gained from increases in absolute size at Don Pablo's, Hops and
McCormick & Schmick's. General and administrative expenses increased from 1998
to 1999 reflecting a decline in leverage resulting from the divestiture of
Applebee's.
Asset Revaluation and Other Special Charges
Asset revaluation and other special charges totaled $38.2 million in 2000.
These charges, which were predominately noncash, reflect the fourth quarter
decision to close 13 underperforming core brand restaurants including four Don
Pablo's, three Canyon Cafes and two Hops restaurants which were closed in early
January 2001 and four additional Don Pablo's which were closed on March 29,
2001. In 2000, these 13 locations generated a combined operating loss of $3.2
million. The Company recorded a $22.3 million charge related to these closings
which included adjusting the underlying fixed assets to estimated net realizable
value as well as accruals for lease terminations and other related closing
costs. The Company also recorded an asset revaluation charge of $11.1 million
generated primarily by the lack of significant new restaurant development
planned for the next several years including the write off of costs associated
with sites that are no longer expected to be developed in addition to other
related development costs which are not anticipated to be fully recoverable. In
addition, in connection with the consolidation of the Don Pablo's and Canyon
Cafe office facilities and the conclusion of the strategic alternatives
evaluation, the Company recorded charges in the second and third quarters of
$3.2 million related to employee severance and other costs associated with the
office consolidations and $1.6 million associated with the completion of the
strategic alternatives evaluation.
In 1999 and 1998, the Company recorded special charges of $2.2 million and
$2.9 million, respectively. A portion of the 1999 charges reflected fees paid in
conjunction with the evaluation of strategic alternatives. The remainder of the
1999 special charge as well as the 1998 special charge related primarily to
programs initiated at Don Pablo's, Canyon Cafe and the Company's corporate
headquarters to reorganize management and reduce overhead costs, including
payroll and employee termination and severance costs.
Interest and Other Expenses
In 2000, interest expense increased to $38.3 million from $24.1 million in
1999. The increase was predominately attributable to (i) a full year's interest
expense associated with the $100 million 11.75% senior subordinated notes issued
in the second quarter of 1999, (ii) an increase of 3.2% in the weighted average
interest rate associated with revolving credit, plus the impact of payments made
under a fixed-to-floating interest rate swap, net of mark-to-market adjustments
related to the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
was adopted at the beginning of the fourth quarter of 2000, (iii) increased
amortization of deferred loan costs associated with the revolving credit
agreement amendment finalized in the second quarter of 2000 and (iv) a decrease
in interest income as a result of the collection of notes receivable from the
Applebee's divestiture.
The decrease in interest expense from $25.3 million in 1998 to $24.1
million in 1999 was a result of a decrease in average borrowings outstanding
under revolving credit facilities. This decrease was substantially offset by an
increase in interest rates under revolving facilities as well as the 11.75%
senior subordinated notes issued during 1999. The Company's weighted average
interest rate on borrowings was approximately 10.9% in 2000, 9.5% in 1999, and
8.0% in 1998.
16
Distribution expense on preferred securities relates to the 1997 issuance
of 2,300,000, $3.50 term convertible securities with a liquidation preference of
$50 per security and convertible into 3.3801 shares of Avado Brands common stock
for each security (the "Convertible Preferred Securities"). Distribution expense
related to the Convertible Preferred Securities decreased in 2000 as a result of
the fourth quarter conversion of 842,692 of the securities into 2,848,383 shares
of common stock issued from treasury. These conversions, which were made at the
option of holders, coupled with 82,123 additional conversions in the first
quarter of 2001, will result in a decrease in distribution expense of
approximately $3.2 million annually. In addition, the Company has the right to
defer quarterly distribution payments on the Convertible Preferred Securities
for up to 20 consecutive quarters. In the fourth quarter of 2000, at the
approval of the Board of Directors, the Company deferred its December
distribution payment and expects to continue to defer such payments as it
continues its ongoing process of reducing leverage and increasing profitability.
A loss on disposal of assets of $22.8 million in 2000 predominately
reflects the sale of a 20-percent equity interest in United Kingdom-based Belgo
Group PLC for $8.5 million and the commitment to exit its unprofitable U.S.
joint venture investments with Belgo Group PLC and PizzaExpress PLC. The Company
also recorded charges to adjust certain assets held for sale, including the
office facility in Bedford, Texas, to estimated net realizable value. In
addition, certain corporate assets which are not expected to have a future value
were written off. Gains on disposal of assets in 1999 and 1998 primarily reflect
amounts recognized on the Applebee's divestiture of $7.8 million and $81.3
million, respectively. Applebee's divestiture gains in both 1999 and 1998 were
partially offset by net losses incurred on the divestiture of other various
assets. The Applebee's divestiture was substantially completed in 1998 with the
sale of 233 of 279 Applebee's locations. Sale of the remaining 46 locations was
completed in 1999. Gross proceeds related to the divestiture were $514.0 million
including $5.6 million in notes outstanding at December 31, 2000, against which
an allowance of $1.8 million has been established.
Income from investments carried at equity reflects the pro-rata share of
earnings from the 20-percent equity interest in Belgo Group PLC which was more
than offset by losses associated with three restaurants opened in 1999 and 2000
under the joint venture agreements with Belgo Group PLC and PizzaExpress PLC.
Other expenses relate primarily to amortization of goodwill in addition to
other miscellaneous non-operating and typically non-recurring income and
expenses. These expenses increased in 2000 primarily due to the incurrence of
various tax penalties and the termination of an officer's life insurance policy.
Income Tax Expense
For 2000, the Company recorded a tax benefit equal to 30.1% of earnings
before income taxes and cumulative effect of change in accounting principle. The
benefit was generated primarily by losses associated with the asset revaluation
and other special charges of $38.2 million and loss on disposal of assets of
$22.8 million. The tax benefit recognized in 2000 was significantly reduced by a
$6.8 million valuation allowance for deferred tax assets which was recorded as
of December 31, 2000. In 1999 and 1998, income tax expense as a percent of
earnings before income taxes was 30.9% and 36.7%, respectively. The lower
effective tax rate in 1999 as compared to 1998 was due primarily to taxable
income generated by the gain on sale of assets in 1998 and a corresponding
decrease in the impact of FICA tip credits.
Liquidity and Capital Resources
The Company's historical growth and its historical preference to own the
real estate on which its restaurants are situated typically have caused it to be
a net user of cash, even after a significant amount of expansion financing was
internally generated from operations. In 2000, the Company committed to
strategies to reduce its leverage over time. New restaurant development for 2000
and plans for the next several years have been dramatically reduced from
historical levels; the leasing of new sites to reduce initial capital will take
preference over ownership; and an aggressive program to realize cash from
various operating and non-operating assets has been implemented. These
initiatives to reduce leverage in 2000 included a $28.4 million sale-leaseback
transaction which was completed in the fourth quarter with $20.0 million of the
proceeds used to permanently reduce debt under the revolving credit facility. In
addition, the Board of Directors approved the suspension of the quarterly $2.0
million dividend payment on its convertible preferred securities. The Company
17
deferred its December 1, 2000 payment and has the right to suspend payment for
up to 20 consecutive quarters.
Since substantially all sales in the Company's restaurants are for cash and
accounts payable are generally due in 15 to 45 days, the Company operates with
negative working capital. Fluctuations in accounts receivable, inventories,
prepaid expenses and other current assets, accounts payable and accrued
liabilities typically occur as a result of new restaurant openings and the
timing of settlement of liabilities. Additional increases in accounts payable
and accrued liabilities in 2000 were attributable primarily to (i) accrued
expenses related to the fourth quarter decision to close 13 underperforming core
brand restaurants, (ii) efforts to reduce leverage through improved cash
management which has resulted in an increase in liabilities (related primarily
to sales and property taxes and capital expenditures) and (iii) increased gift
certificate liabilities generated by marketing initiatives during the 2000
holiday season. Decreases in prepaid expenses and other assets occurred during
2000 due primarily to the reclassification of $11.0 million in notes receivable
from executive officers to other noncurrent assets. The maturity of the notes
was extended by the Board of Directors to June 30, 2002 and the interest rate
was increased to 11.5%. Additional increases in other assets were due to the
$6.8 million loss on the Hops sale-leaseback transaction which was deferred and
is being amortized over the initial 20-year term of the lease as an addition to
rent expense.
Principal financing sources in 2000 consisted of proceeds of $28.4 million
from the fourth quarter sale-leaseback transaction, cash generated from
operations of $28.0 million, and proceeds from the disposal of assets and
collection notes receivable of $14.1 million. The primary use of funds consisted
of capital expenditures of $53.8 million and repayment of $21.7 million under
revolving credit commitments.
At December 31, 2000, the Company had one revolving credit facility which
was entered into in 1999 with an initial total credit availability of $125.0
million and maturing in June 2002. On April 3, 2000, the Company executed an
amendment to the agreement which, among other things, reduced the credit
availability under the facility by $10.0 million on each October 1, 2000 and
December 31, 2000 with additional quarterly commitment reductions of $7.5
million beginning on April 4, 2001. In conjunction with the amendment, the
Company secured the facility with substantially all of its assets. As of
December 31, 2000, the commitment reduction requirements through April 4, 2001
had been satisfied and revolving credit availability totaled $96.8 million of
which $6.0 million was unused and available.
On April 2, 2001, the Company executed an amended and restated credit
agreement which, among other things, increases the commitment reductions to
$10.0 million on May 31, 2001, September 4, 2001 and December 31, 2001. The
remaining commitment of $65.8 million matures on March 29, 2002. The Company
also agreed to limit capital expenditures to $23.0 million in 2001 and to forgo
making any cash dividend payments on its common stock. In addition, the amended
facility contains certain restructuring fees, including approximately $0.9
million which will accrue during the period from April 2, 2001 through September
4, 2001, plus an additional fee equal to two percent of the total outstanding
obligation under the facility at September 4, 2001. Also on September 4, 2001,
the Company will be required to deliver to the lender, warrants to acquire Avado
common stock equal to five percent of the outstanding shares, subject to a call
feature, exercisable at the Company's option, to redeem the warrants at a fixed
price equal to two percent of the total outstanding obligation under the
facility at September 4, 2001. In addition, the Company has interest payments on
its senior and subordinated notes, which approximate $11.6 million in June and
December 2001.
The Company is investigating various alternatives to refinance its credit
facility and management anticipates it will be able to successfully complete
such refinancing prior to September 4, 2001. Should efforts to refinance the
facility be unsuccessful, management believes that cash flow from operations and
liquidation of other assets should be sufficient to satisfy its revolving credit
facility obligations of $30.0 million (including the $10.0 million December 31,
2001 payment), interest payments on its senior and subordinated notes of
approximately $23.1 million and capital expenditures of $23.0 million in 2001.
While management believes that cash flow from operations, supplemented by sales
of closed restaurant properties and other assets held for sale will be
sufficient to meet its obligations, these proposed sales of assets are not
presently subject to binding agreements. There can be no assurance that the
Company will be able to satisfy its revolving credit, interest payment and
capital expenditures in 2001, without generating proceeds from sales of these
assets.
As amended, terms of the Company's notes and revolving credit agreement
include various provisions which, among other things, require the Company to (i)
18
maintain defined net worth and coverage ratios, (ii) maintain defined leverage
ratios, (iii) limit the incurrence of certain liens or encumbrances in excess of
defined amounts and (iv) limit certain payments. The amended credit agreement
also requires that a defined quarterly earnings before interest, taxes,
depreciation and amortization amount be achieved. In addition, the revolving
credit agreement and notes contain cross-default provisions. As amended on April
2, 2001, the Company was in compliance with the various provisions.
Capital expenditures in 2000 provided for the opening of ten Hops, six
McCormick & Schmick's, two Don Pablo's and one Canyon Cafe restaurant in
addition to maintenance capital for existing restaurants. In 2001, the Company
anticipates opening four new restaurants including three McCormick & Schmick's
and one Hops restaurant. Capital requirements for the construction of these
restaurants are expected to approximate $8 to $12 million with maintenance
capital for existing restaurants expected to be an additional $8 to $10 million.
The Company does not currently have any capital commitments extending beyond
2001 and will evaluate potential new restaurant openings in 2002 based on its
capital availability.
Effect of Inflation
Management believes that inflation has not had a material effect on
earnings during the past several years. Inflationary increases in the cost of
labor, food and other operating costs could adversely affect the Company's
restaurant operating margins. In the past, however, the Company generally has
been able to modify its operations to offset increases in its operating costs.
Various federal and state laws increasing minimum wage rates have been
enacted over the past several years. Such legislation, however, has typically
frozen the wages of tipped employees at $2.13 per hour if the difference is
earned in tip income. Although the Company has experienced slight increases in
hourly labor costs in recent years, the effect of increases in minimum wage have
been significantly diluted due to the fact that the majority of the Company's
hourly employees are tipped and the Company's non-tipped employees have
historically earned wages greater than federal and state minimums. As such, the
Company's increases in hourly labor costs have not been proportionate to
increases in minimum wage rates.
Forward-Looking Information
Certain information contained in this annual report, particularly
information regarding the future economic performance and finances, restaurant
development plans, capital requirements and objectives of management, is forward
looking. In some cases, information regarding certain important factors that
could cause actual results to differ materially from any such forward-looking
statement appear together with such statement. In addition, the following
factors, in addition to other possible factors not listed, could affect the
Company's actual results and cause such results to differ materially from those
expressed in forward-looking statements. These factors include competition
within the casual dining restaurant industry, which remains intense; changes in
economic conditions such as inflation or a recession; consumer perceptions of
food safety; weather conditions; changes in consumer tastes; labor and benefit
costs; legal claims; the continued ability of the Company to obtain suitable
locations and financing for new restaurant development; government monetary and
fiscal policies; laws and regulations; and governmental initiatives such as
minimum wage rates and taxes. Other factors that may cause actual results to
differ from the forward-looking statements contained in this release and that
may affect the Company's prospects in general are described in Exhibit 99.1 to
the Company's Form 10-Q for the fiscal quarter ended April 2, 2000, and the
Company's other filings with the Securities and Exchange Commission.
New Accounting Pronouncements
As of the beginning of the fourth quarter of 2000, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and its amendments SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133" and SFAS No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities", (collectively referred to as SFAS
19
133). SFAS 133 requires all derivative financial instruments to be
recognized in the consolidated financial statements at fair value regardless of
the purpose or intent for holding the instrument. The adoption of SFAS 133 was
recorded as a cumulative effect of change in accounting principle and resulted
in a cumulative effect charge of $10.0 million ($6.3 million net of tax
benefit).
AICPA Statement of Position 98-5, "Reporting the Cost of Start-Up
Activities" was adopted at the beginning of 1998. This statement requires
entities to expense the costs of start-up activities as incurred. As a result of
the adoption of this change in accounting policy, from expensing preopening
costs in the first full month of a restaurant's operations to expensing them as
incurred, a cumulative effect charge from the change in accounting principle of
$2.2 million ($1.5 million net of tax benefit) was recorded in the first quarter
of 1998.
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", was issued. SFAS 140 is
effective for all transfers and servicing of financial assets and
extinguishments of liabilities after March 31, 2001, the Statement is effective
for recognition and reclassification of collateral and disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Due to the nature of its business, the Company does not
expect a material change to its results of operations as a result of adopting
SFAS 140.
20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and
changes in commodity prices. Exposure to interest rate risk relates primarily to
variable U.S.-based rates and foreign-based rate obligations on the Company's
revolving credit agreement and a fixed to floating interest rate swap agreement.
Interest rate swap agreements have historically been utilized to manage overall
borrowing costs and balance fixed and floating interest rate obligations.
Currently the Company has only one such swap agreement in place. Under the
agreement, which has a $115.0 million notional amount and terminates on March 1,
2008, the Company pays an average of certain foreign LIBOR-based variable rates
(8.5% at December 31, 2000) and receives a fixed 7% rate tied to the Convertible
Preferred Securities. The agreement has served to reduce the Company's exposure
to U.S. interest rates and also contains an interest rate cap which further
limits interest rate exposure.
At the beginning of the fourth quarter of 2000, the Company adopted SFAS
133. Although the Company's swap agreement is an effective diversification of
interest rate exposure, it does not qualify for fair value hedge accounting
under SFAS 133. As such, the Company has recorded the swap agreement at fair
value in the December 31, 2000 consolidated balance sheet and will record
fluctuations in the fair value on a mark-to-market basis as an adjustment to
interest expense. At December 31, 2000, the settlement or fair market value of
the agreement was $8.9 million. If interest rates related to the swap agreement
increased by 100 basis points over the rates in effect at December 31, 2000,
interest expense for fiscal 2001 would not be materially impacted due to the
interest rate cap protection which limits the rate paid by the Company to 8.5%.
However, a decrease in rates could result in a significant fair value increase.
Such a decrease followed by an increase in rates could result in significant
volatility in the fair value of the contract. If a 100 basis point interest rate
increase occurred in the Company's variable U.S.-based rate obligations,
interest expense in fiscal 2001 would increase by $0.9 million. This amount was
determined by considering the impact of hypothetical interest rates on the
Company's borrowing cost. In the event of a change of such magnitude, management
could take actions to further mitigate interest rate exposures.
The Company purchases certain commodities such as beef, chicken, flour and
cooking oil. Purchases of these commodities are generally based on vendor
agreements which often contain contractual features that limit the price paid by
establishing price floors or caps. As commodity price aberrations are generally
short-term in nature and have not historically had a significant impact on
operating performance, financial instruments are not used to hedge commodity
price risk.
21
Item 8. Financial Statements and Supplementary Data
Avado Brands, Inc.
Consolidated Statements of Earnings
(In thousands, except per share data)
Fiscal Year Ended 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Restaurant sales:
Canyon Cafe $ 39,598 43,319 48,187
Don Pablo's 297,347 309,863 270,399
Hops 186,500 144,488 106,329
McCormick & Schmick's 162,350 125,613 102,489
Applebee's - 21,176 335,288
- ------------------------------------------------------------------------------------------------------------------
Total restaurant sales 685,795 644,459 862,692
- ------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 198,527 182,896 241,689
Payroll and benefits 219,529 200,820 279,274
Depreciation and amortization 24,865 20,519 17,014
Other operating expenses 176,058 157,566 202,994
- ------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 618,979 561,801 740,971
- ------------------------------------------------------------------------------------------------------------------
General and administrative expenses 38,222 38,011 46,150
Asset revaluation and other special charges 38,200 2,186 2,940
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) (9,606) 42,461 72,631
- ------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense, net (38,262) (24,073) (25,313)
Distribution expense on preferred securities (7,195) (8,050) (8,205)
Gain (loss) on disposal of assets (22,828) 1,972 72,547
Income (loss) from investments carried at equity (69) (311) 1,025
Other, including goodwill amortization (7,119) (4,079) (5,641)
- ------------------------------------------------------------------------------------------------------------------
Total other income (expense) (75,473) (34,541) 34,413
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (85,079) 7,920 107,044
Income taxes (25,600) 2,450 39,300
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of change
in accounting principle (59,479) 5,470 67,744
- ------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
principle, net of tax benefit (6,255) - (1,461)
- ------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (65,734) 5,470 66,283
==================================================================================================================
Basic earnings (loss) per common share:
Basic earnings (loss) before cumulative effect of
change in accounting principle $ (2.31) 0.20 1.85
Cumulative effect of change in accounting principle (0.24) - (0.04)
- ------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ (2.55) 0.20 1.81
==================================================================================================================
Diluted earnings (loss) per common share:
Diluted earnings (loss) before cumulative effect of
change in accounting principle $ (2.31) 0.20 1.65
Cumulative effect of change in accounting principle (0.24) - (0.03)
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ (2.55) 0.20 1.62
==================================================================================================================
See accompanying notes to consolidated financial statements.
22
Avado Brands, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
Fiscal Year End 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 402 11,267
Accounts receivable 7,621 7,257
Inventories 9,418 9,097
Prepaid expenses and other 3,535 17,399
Assets held for sale 13,855 1,205
- --------------------------------------------------------------------------------------------------------------------
Total current assets 34,831 46,225
Premises and equipment, net 379,938 424,968
Goodwill, net 132,012 135,176
Investments in and advances to unconsolidated affiliates - 17,411
Deferred income tax benefit 18,900 -
Other assets 44,000 32,816
- --------------------------------------------------------------------------------------------------------------------
$ 609,681 656,596
====================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 31,568 17,923
Accrued liabilities 64,567 38,424
Current installments of long-term debt 15,034 11
Income taxes 30,164 28,159
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 141,333 84,517
Long-term debt 291,507 328,076
Deferred income tax liability - 8,943
Other long-term liabilities 16,024 7,436
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 448,864 428,972
- --------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred securities
of Avado Financing I, a subsidiary holding solely Avado
Brands, Inc. 7% convertible subordinated debentures
due March 1, 2027 72,865 115,000
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized - 75,000,000 shares;
issued - 40,478,760 in 2000 and 1999;
outstanding - 28,206,673 in 2000 and 25,321,047 in 1999 405 405
Additional paid-in capital 147,809 144,872
Retained earnings 100,571 166,305
Accumulated other comprehensive income - (278)
Treasury stock at cost; 12,272,087 shares in 2000 and 15,157,713 in 1999 (160,833) (198,680)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 87,952 112,624
- --------------------------------------------------------------------------------------------------------------------
$ 609,681 656,596
====================================================================================================================
See accompanying notes to consolidated financial statements.
23
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Shareholders'
(In thousands, except per share data) Shares Amount Capital Earnings Income Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1997 40,479 $405 $145,269 $97,905 - ($22,797) $220,782
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings - - - 66,283 - - 66,283
Foreign currency translation adjustment - - - - $24 - 24
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - 66,283 24 - 66,307
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase of common stock - - - - - (92,028) (92,028)
Common stock issued to benefit plans - - 36 - - 370 406
Exercise of options - - (65) - - 213 148
Settlement of equity forward contracts - - (81,809) - - - (81,809)
Cash dividends ($0.0475 per share) - - - (1,777) - - (1,777)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1999 40,479 405 63,431 162,411 24 (114,242) 112,029
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings - - - 5,470 - - 5,470
Foreign currency translation adjustment - - - - (302) - (302)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - 5,470 (302) - 5,168
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase of common stock - - - - - (85,538) (85,538)
Common stock issued to benefit plans - - (368) - - 1,100 732
Settlement of equity forward contracts - - 81,809 - - - 81,809
Cash dividends ($0.0575 per share) - - - (1,576) - - (1,576)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 2000 40,479 405 144,872 166,305 (278) (198,680) 112,624
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net earnings (loss) - - - (65,734) - - (65,734)
Foreign currency translation adjustment - - - - 278 - 278
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) - - - (65,734) 278 - (65,456)
- -----------------------------------------------------------------------------------------------------------------------------------
Conversion of convertible preferred securities - - 3,366 - - 37,335 40,701
Common stock issued to benefit plans - - (429) - - 512 83
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 40,479 $405 $147,809 $100,571 - ($160,833) $87,952
===================================================================================================================================
See accompanying notes to consolidated financial statements.
24
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Fiscal Year Ended 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (65,734) 5,470 66,283
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 33,122 26,176 23,221
Deferred income taxes (25,710) 743 (6,031)
Asset revaluation and other special charges 38,200 2,186 2,940
Loss (gain) on disposal of assets 22,828 (1,972) (72,547)
Cumulative effect of change in accounting principle, net of taxes 6,255 - 1,461
Loss (gain) on interest rate swap (1,150) - -
Loss (income) from investments carried at equity 69 311 (1,025)
(Increase) decrease in assets:
Accounts receivable (2,180) 1,863 (141)
Inventories (1,078) (1,472) (2,260)
Prepaid expenses and other 819 45 2,736
Increase (decrease) in liabilities:
Accounts payable 16,062 (7,511) 3,655
Accrued liabilities 3,037 (11,720) (7,665)
Income taxes 3,622 68 28,091
Other long-term liabilities (183) (565) 2,309
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,979 13,622 41,027
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (53,808) (84,394) (142,841)
Proceeds from sale-leaseback 28,371 - -
Proceeds from notes receivable and disposal of assets, net 14,074 87,152 373,814
Investments in and advances to unconsolidated affiliates (3,099) (2,475) (15,057)
Additions to noncurrent assets (2,692) (969) (24,633)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (17,154) (686) 191,283
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayment of revolving credit agreements (21,667) (27,920) (114,726)
Proceeds from issuance of long-term debt - 95,467 -
Principal payments on long-term debt (23) (32) (8,500)
Dividends declared and paid - (1,576) (1,777)
Proceeds from issuance of common stock - - 148
Purchase of treasury stock - (85,538) (92,028)
Net collateral payments on equity forward contracts - 10,714 (10,714)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (21,690) (8,885) (227,597)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,865) 4,051 4,713
Cash and cash equivalents at the beginning of the period 11,267 7,216 2,503
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 402 11,267 7,216
===========================================================================================================================
See accompanying notes to consolidated financial statements.
25
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Avado Brands, Inc., including its wholly owned subsidiaries (the "Company"), is
a multi-concept restaurant company owning and operating restaurants in 33 states
plus the District of Columbia. At December 31, 2000, the Company operated 139
Don Pablo's Mexican Kitchen restaurants ("Don Pablo's"), 75 Hops Restaurant o
Bar o Brewery restaurants ("Hops"), 32 McCormick & Schmick's seafood dinner
houses ("McCormick & Schmick's") and 17 Canyon Cafe restaurants ("Canyon Cafe").
All of these brands (the "core" brands) are owned on a proprietary basis. At
year end, the Company also operated three restaurants under joint venture
agreements with Belgo Group PLC ("Belgo") and PizzaExpress PLC ("PizzaExpress").
Subsequent to year end, the Company closed 13 core brand restaurant locations
including eight Don Pablo's, three Canyon Cafes and two Hops restaurants and
exited from both of its joint venture investments.
Basis of Presentation - The consolidated financial statements include the
accounts of Avado Brands, Inc. and its wholly owned subsidiaries. Investments in
20%- to 50%-owned affiliates and partnerships, over which the Company has
limited or shared control, are accounted for on the equity method. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates - Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions related to the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities. Actual results may ultimately
differ from estimates.
Fiscal Year - The Company's fiscal year is a 52- or 53-week year ending on the
Sunday closest to December 31. Accordingly, the accompanying consolidated
financial statements are as of and for the 52 weeks ended December 31, 2000
("2000"), the 52 weeks ended January 2, 2000 ("1999") and the 53 weeks ended
January 3, 1999 ("1998"). All general references to years relate to fiscal years
unless otherwise noted.
Cash Equivalents - Cash equivalents include all highly liquid investments which
have original maturities of three months or less.
Inventories - Inventories consist primarily of food, beverages and supplies and
are stated at the lower of cost (using the first-in, first-out method) or
market.
Assets Held for Sale - Assets held for sale are stated at the lower of cost or
estimated net realizable value and include primarily office facilities,
non-operating restaurants and undeveloped real estate. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of",
the Company does not recognize depreciation or amortization expense during the
period in which assets are being held for sale.
Premises and Equipment - Premises and equipment are stated at cost. Depreciation
of premises and equipment is calculated using the straight-line method over the
estimated useful lives of the related assets, which approximates 30 years for
buildings and seven years for equipment. Leasehold improvements are depreciated
using the straight-line method over the shorter of the lease term, including
renewal periods, or the estimated useful life of the asset (Note 4).
Development Costs - Certain direct and indirect costs are capitalized in
conjunction with acquiring land and leaseholds and developing new restaurant
sites and amortized over the life of the related building. Development costs
were capitalized as follows: $2.9 million in 2000, $4.1 million in 1999 and $5.0
million in 1998.
Goodwill - Goodwill represents the excess of purchase price over fair value of
net assets acquired and is amortized over the expected period to be benefitted,
typically 40 years, using the straight-line method. Recoverability of this
intangible asset is determined by assessing whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operations. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
26
cash flows using a discount rate reflecting the Company's average cost of funds.
Accumulated amortization of goodwill amounted to $12.9 million at December 31,
2000 and $9.4 million at January 2, 2000. Amortization expense was $3.6 million
in 2000, $3.5 million in 1999 and $3.4 million in 1998.
Deferred Loan and Lease Costs - Deferred loan costs include the costs associated
with obtaining revolving credit commitments and the issuance of public debt
instruments and the Company's Convertible Preferred Securities (Notes 6 and 8).
These costs are amortized on a straight-line basis over the term of the related
security. Deferred lease costs are related to the Company's master equipment
lease and 2000 sale-leaseback transaction (Note 9). Deferred lease costs are
amortized on a straight-line basis over the base lease terms (Note 5).
Preopening Costs - Preopening costs consist primarily of wages and salaries,
hourly employee recruiting, license fees, meals, lodging and travel plus the
cost of hiring and training the management teams. AICPA Statement of Position
98-5, "Reporting the Cost of Start-Up Activities", which requires the costs of
start-up activities to be expensed as incurred, was adopted at the beginning of
1998. As a result of the adoption of this change in accounting policy, from
expensing preopening costs in the first full month of a restaurant's operations
to expensing them as incurred, a cumulative effect charge from the change in
accounting principle of $2.2 million ($1.5 million net of tax benefit) was
recorded in the first quarter of 1998.
Advertising - Advertising is expensed in the period covered by the related
promotions. Total advertising expense included in other operating expenses was
$34.6 million in 2000, $28.7 million in 1999 and $32.6 million in 1998, in
addition to amounts paid to the franchisor of Applebee's in 1999 and 1998.
Foreign Currency Translation - Investments in foreign affiliates are translated
into U.S. Dollars at the period-end exchange rate, while net earnings are
translated at the average exchange rate during the period. The resulting
translation adjustments are recorded as a separate component of shareholders'
equity and comprehensive income.
Stock-Based Compensation - Stock-based compensation is determined using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock (Note 15).
Derivative Financial Instruments - As of the beginning of the fourth quarter of
2000, the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities", and its
amendments SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138,
"Accounting for Derivative Instruments and Certain Hedging Activities",
(collectively referred to as SFAS 133). SFAS 133 requires all derivative
financial instruments to be recognized in the consolidated financial statements
at fair value regardless of the purpose or intent for holding the instrument.
The adoption of SFAS 133 was recorded as a cumulative effect of change in
accounting principle and resulted in a charge of $10.0 million ($6.3 million net
of tax benefit).
Accounting for the changes in the fair value of derivative financial instruments
under SFAS 133 is dependent on whether the instrument qualifies for hedge
accounting. The Company has one fixed-to-floating interest rate swap transaction
which was impacted by the adoption of SFAS 133. This swap transaction represents
a diversification of the Company's interest rate exposures but does not qualify
for fair value hedge accounting under SFAS 133. As such, changes in fair value
of the instrument are recognized as a component of interest expense as they
occur. In the fourth quarter, the Company recognized a $1.1 million reduction to
interest expense generated by changes in the instrument's fair value.
The counterparty to the Company's interest rate contract is a major financial
institution with which the Company also has other financial relationships.
Exposure to credit loss exists in the event of nonperformance by the
counterparty. However, the Company does not anticipate nonperformance by the
other party and no material loss would be expected from their nonperformance.
27
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date (Note 13).
Reclassifications - Certain accounts have been reclassified in the 1999 and 1998
financial statements to conform with the 2000 classifications.
Note 2 - Asset Revaluation and Other Special Charges
Asset revaluation and other special charges totaled $38.2 million in 2000. These
charges, which were predominately noncash, reflect the fourth quarter decision
to close 13 underperforming core brand restaurants including four Don Pablo's,
three Canyon Cafes and two Hops restaurants which were closed in early January
2001 and four additional Don Pablo's which were closed on March 29, 2001. In
2000, these 13 locations generated a combined operating loss of $3.2 million.
The Company recorded a $22.3 million charge related to these closings which
included adjusting the underlying fixed assets to estimated net realizable value
as well as accruals for lease terminations and other related closing costs. The
Company also recorded an asset revaluation charge of $11.1 million generated
primarily by the lack of significant new restaurant development planned for the
next several years including the write off of costs associated with sites that
are no longer expected to be developed in addition to other related development
costs which are not anticipated to be fully recoverable. In addition, in
connection with the consolidation of the Don Pablo's and Canyon Cafe office
facilities and the conclusion of the strategic alternatives evaluation, the
Company recorded charges in the second and third quarters of $3.2 million
related to employee severance and other costs associated with the office
consolidations and $1.6 million associated with the completion of the strategic
alternatives evaluation.
In 1999 and 1998, the Company recorded special charges of $2.2 million and $2.9
million, respectively. A portion of the 1999 charges reflected fees paid in
conjunction with the evaluation of strategic alternatives. The remainder of the
1999 special charge as well as the 1998 special charge related primarily to
programs initiated at Don Pablo's, Canyon Cafe and the Company's corporate
headquarters to reorganize management and reduce overhead costs, including
payroll and employee termination and severance costs. At December 31, 2000, all
amounts related to the 1999 and 1998 charges had been paid.
The major components of asset revaluation and other special charges follow
(amounts in thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
Write down of premises and equipment for
restaurant closings $ 16,499 - -
Accruals for lease termination and other
closing costs 5,776 - -
Asset revaluations 11,076 - -
Office consolidation expenses 1,919 - -
Strategic alternatives evaluation expenses 1,645 776 -
Severance and other payroll related costs 1,285 1,410 2,160
Other - - 780
- --------------------------------------------------------------------------------
Total asset revaluation and other special charges $ 38,200 2,186 2,940
- --------------------------------------------------------------------------------
Note 3 - Equity and Joint Venture Investments
During 1998, the Company acquired a 20-percent interest in Belgo Group PLC, a
public restaurant company based in the United Kingdom. The Company invested a
total of $15.2 million to acquire and maintain its 20-percent interest. In the
fourth quarter of 2000, the Company sold its interest for total proceeds of $8.5
million. The transaction, including the write off of undistributed earnings and
the recognition of foreign currency translation losses, resulted in a $9.1
28
million loss which is included in "Gain (loss) on disposal of assets" in the
accompanying consolidated statement of earnings.
Also in the fourth quarter of 2000, the Company committed to exit from its
unprofitable U.S. joint-venture investments with Belgo Group PLC and
PizzaExpress PLC. The venture with Belgo Group PLC operated one Belgo restaurant
in New York city while the venture with PizzaExpress PLC operated two San
Marzano restaurants located in Philadelphia and Washington D.C. In the first
quarter of 2001, the Belgo location was closed and the Company sold its interest
in the two San Marzano restaurants to PizzaExpress for $0.3 million. The fourth
quarter commitment to exit these businesses resulted in a loss on disposal of
assets of $3.6 million.
Note 4 - Premises and Equipment
A summary of premises and equipment at December 31, 2000 and January 2, 2000
follows (amounts in thousands):
2000 1999
- --------------------------------------------------------------------------------
Land $ 48,547 71,930
Buildings 85,123 110,808
Buildings subject to ground leases 145,275 139,300
Equipment 124,440 109,314
Leasehold improvements 56,942 45,764
Construction in progress 12,135 19,395
- --------------------------------------------------------------------------------
Total premises and equipment 472,462 496,511
Less accumulated depreciation and amortization 92,524 71,543
- --------------------------------------------------------------------------------
Premises and equipment, net $ 379,938 424,968
- --------------------------------------------------------------------------------
Note 5 - Other Assets
A summary of other assets at December 31, 2000 and January 2, 2000 follows
(amounts in thousands):
2000 1999
- --------------------------------------------------------------------------------
Deferred loan and lease costs $ 16,010 17,461
Officer notes receivable 11,000 -
Deferred loss on sale-leaseback 6,828 -
Liquor licenses 2,906 2,799
Long-term portion of notes receivable 3,210 4,683
Other 4,046 7,873
- --------------------------------------------------------------------------------
Total other assets $ 44,000 32,816
- --------------------------------------------------------------------------------
Note 6 - Long-Term Debt
Long-term debt at December 31, 2000 and January 2, 2000 consisted of the
following (amounts in thousands):
2000 1999
- --------------------------------------------------------------------------------
Revolving credit agreement, secured
(11.5% at December 31, 2000) $ 90,832 112,500
Senior Notes, unsecured 116,500 116,500
Senior Subordinated Notes, unsecured 98,777 98,633
Other 432 454
- --------------------------------------------------------------------------------
Total long-term debt 306,541 328,087
Less current installments 15,034 11
- --------------------------------------------------------------------------------
Total long-term debt, excluding current installments $291,507 328,076
- --------------------------------------------------------------------------------
29
At December 31, 2000, the Company had one revolving credit facility which was
entered into in 1999 with an initial total credit availability of $125.0 million
and maturing in June 2002. On April 3, 2000, the Company executed an amendment
to the agreement which, among other things, reduced the credit availability
under the facility by $10.0 million on each October 1, 2000 and December 31,
2000 with additional quarterly commitment reductions of $7.5 million beginning
on April 4, 2001. In conjunction with the amendment, the Company secured the
facility with substantially all of its assets. As of December 31, 2000, the
commitment reduction requirements through April 4, 2001 had been satisfied and
revolving credit availability totaled $96.8 million of which $6.0 million was
unused and available.
In 1999, the Company issued $100.0 million of 11.75% Senior Subordinated Notes
priced to yield 12.0% and due in June 2009. In 1996, $125.0 million of 9.75%
Senior Notes were issued under a $200.0 million shelf registration and are due
in June 2006. In 1998, the Company repurchased $8.5 million of these notes.
Interest on both note issues are payable semi-annually in June and December.
At December 31, 2000, the aggregate estimated fair value, based on trading
prices, of the unsecured Senior Notes and Senior Subordinated Notes was $47.3
million compared to the carrying value of $215.3 million. The Company believes
the fair value of its current assets and liabilities and its revolving credit
facility, approximates book value since the current assets and liabilities are
short-term in nature and the revolving credit facility is secured by
substantially all assets of the Company.
The aggregate annual maturities of long-term debt for the years subsequent to
December 31, 2000 are as follows: 2001 - $15.0 million, 2002 - $75.8 million,
2006 - $116.5 million, 2009 - $98.8 million and $0.4 million thereafter.
Note 7 - Liquidity
On April 2, 2001, the Company executed an amended and restated credit agreement
which, among other things, increases the commitment reductions to $10.0 million
on May 31, 2001, September 4, 2001 and December 31, 2001. The remaining
commitment of $65.8 million matures on March 29, 2002. The Company also agreed
to limit capital expenditures to $23.0 million in 2001 and to forgo making any
cash dividend payments on its common stock. In addition, the amended facility
contains certain restructuring fees, including approximately $0.9 million which
will accrue during the period from April 2, 2001 through September 4, 2001, plus
an additional fee equal to two percent of the total outstanding obligation under
the facility at September 4, 2001. Also on September 4, 2001, the Company will
be required to deliver to the lender, warrants to acquire Avado common stock
equal to five percent of the outstanding shares, subject to a call feature,
exercisable at the Company's option, to redeem the warrants at a fixed price
equal to two percent of the total outstanding obligation under the facility at
September 4, 2001. In addition, the Company has interest payments on its senior
and subordinated notes, which approximate $11.6 million in June and December
2001.
The Company is investigating various alternatives to refinance its credit
facility and management anticipates it will be able to successfully complete
such refinancing prior to September 4, 2001. Should efforts to refinance the
facility be unsuccessful, management believes that cash flow from operations and
liquidation of other assets should be sufficient to satisfy its revolving credit
facility obligations of $30.0 million (including the $10.0 million December 31,
2001 payment), interest payments on its senior and subordinated notes of
approximately $23.2 million and capital expenditures of $23.0 million in 2001.
While management believes that cash flow from operations, supplemented by sales
of closed restaurant properties and other assets held for sale will be
sufficient to meet its obligations, these proposed sales of assets are not
presently subject to binding agreements. There can be no assurance that the
Company will be able to satisfy its revolving credit, interest payment and
capital expenditures in 2001, without generating proceeds from sales of these
assets.
As amended, terms of the Company's notes and revolving credit agreement include
various provisions which, among other things, require the Company to (i)
maintain defined net worth and coverage ratios, (ii) maintain defined leverage
ratios, (iii) limit the incurrence of certain liens or encumbrances in excess of
defined amounts and (iv) limit certain payments. The amended credit agreement
also requires that a defined quarterly earnings before interest, taxes,
depreciation and amortization amount be achieved. In addition, the revolving
credit agreement and notes contain cross-default provisions. As amended on April
2, 2001, the Company was in compliance with the various provisions.
30
Note 8 - Convertible Preferred Securities
In 1997, Avado Financing I (formerly Apple South Financing I) (the "Trust")
issued 2,300,000, $3.50 term convertible securities, Series A (the "Convertible
Preferred Securities"), having a liquidation preference of $50 per security. The
Trust, a statutory business trust, is a wholly owned, consolidated subsidiary of
the Company with its sole asset being $115.0 million aggregate principal amount
of 7% convertible subordinated debentures due March 1, 2027 of Avado Brands,
Inc. (the "Convertible Debentures"). Proceeds, after deducting underwriters'
fees and other offering expenses of approximately $3.7 million, were $111.3
million.
The Convertible Preferred Securities are convertible until 2027 at an initial
rate of 3.3801 shares of Avado Brands common stock for each security (equivalent
to a conversion price of $14.793 per share). A guarantee has been executed by
Avado Brands with regard to the Convertible Preferred Securities. The guarantee,
when taken together with the obligations under the Convertible Debentures, the
indenture pursuant to which the Convertible Debentures were issued, and the
declaration of trust of Avado Financing I, provides a full and unconditional
guarantee of amounts due under the Convertible Preferred Securities.
Distribution expense related to the Convertible Preferred Securities decreased
in 2000 as a result of the fourth quarter conversion, at the holders' option, of
842,692 of the securities into 2,848,383 shares of common stock which were
issued from treasury. An additional 82,123 of the securities were converted in
the first quarter of 2001. The Company, consistent with its right to defer
quarterly distribution payments on the Convertible Preferred Securities for up
to 20 consecutive quarters, deferred its December distribution payment and
expects to continue to defer such payments during its ongoing process of
reducing debt and increasing profitability.
Note 9 - Leases
Various leases are utilized for land, buildings, equipment and office
facilities. Land and building lease terms typically range from 10 to 20 years,
with renewal options ranging from five to 20 years. Equipment lease terms
generally range from four to eight years. In the normal course of business, some
leases are expected to be renewed or replaced by leases on other properties.
In October 2000, the Company completed a sale-leaseback transaction involving 20
Hops restaurant properties. The transaction included the sale of the land and
buildings for total consideration of $28.4 million. The lease covers an initial
term of 20 years with options to extend the lease for four periods of five years
each. Rent expense during the first year of the initial term will be
approximately $3.4 million and will escalate by 1.2% each year thereafter. The
transaction, which has been accounted for as an operating lease, resulted in a
$6.8 million loss which is being amortized over the initial 20 year term of the
lease as an addition to rent expense. The Company used $20.0 million of the
proceeds from the sale-leaseback to permanently reduce the obligation under its
revolving credit facility.
The Company also has a $30.0 million master equipment lease agreement. The
agreement provides for the rental of restaurant equipment for a five-year
period. This agreement has been accounted for as an operating lease for
financial reporting purposes.
Future minimum lease payments under noncancelable operating leases, including
the sale-leaseback transaction, at December 31, 2000 are as follows (amounts in
thousands):
2001 $ 34,266
2002 34,680
2003 31,781
2004 27,673
2005 26,117
Later years 173,133
-------------------------------------------------------
Total minimum payments $ 327,650
-------------------------------------------------------
31
Future minimum lease payments do not include amounts payable for maintenance
costs, real estate taxes, insurance, etc., or contingent rentals payable based
on a percentage of sales in excess of stipulated amounts for restaurant
facilities. Total rental expense related to cancelable and noncancelable
operating leases was $32.6 million in 2000, $27.9 million in 1999 and $ 27.5
million in 1998. Rental expense included contingent rentals of $3.1million in
2000, $2.1 million in 1999 and $2.3 million in 1998.
Note 10 - Accrued Liabilities
A summary of accrued liabilities at December 31, 2000 and January 2, 2000
follows (amounts in thousands):
2000 1999
- --------------------------------------------------------------------------------
Payroll and related benefits $ 14,490 13,417
Taxes other than payroll and income 15,817 6,224
Restaurant closings and divestitures 7,257 840
Insurance 5,813 5,210
Gift certificates 5,584 4,794
Interest 4,708 2,764
Other 10,898 5,175
- --------------------------------------------------------------------------------
Total accrued liabilities $ 64,567 38,424
- --------------------------------------------------------------------------------
Note 11 - Earnings Per Share Information
The following table presents a reconciliation of weighted average shares and
earnings per share amounts (amounts in thousands, except per share data):
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Average number of common shares used in basic calculation 25,729 27,576 36,612
Additional shares issuable pursuant to employee stock
option plans at period-end market price - - 9
Shares issuable on assumed conversion of Convertible
Preferred Securities -* -* 7,774
- --------------------------------------------------------------------------------------------------------------------
Average number of common shares used in diluted calculation 25,729 27,576 44,395
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of change in
accounting principle $ (59,479) 5,470 67,744
Cumulative effect of change in accounting principle, net of tax (6,255) - (1,461)
- --------------------------------------------------------------------------------------------------------------------
Net earnings (loss) (65,734) 5,470 66,283
Distribution savings on assumed conversion of Convertible
Preferred Securities, net of income taxes -* -* 5,415
- --------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for computation of diluted earnings
per common share $ (65,734) 5,470 71,698
- --------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) before cumulative effect of change in
accounting principle $ (2.31) 0.20 1.85
Cumulative effect of change in accounting principle (0.24) - (0.04)
- --------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ (2.55) 0.20 1.81
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) before cumulative effect of change in
accounting principle $ (2.31) 0.20 1.65
Cumulative effect of change in accounting principle (0.24) - (0.03)
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ (2.55) 0.20 1.62
- --------------------------------------------------------------------------------------------------------------------
* Inclusion of the shares related to the Convertible Preferred Securities
results in an increase to earnings (loss) per share ("EPS") in 2000 and 1999. As
those shares are antidilutive, they are excluded from the computation of diluted
EPS.
32
Note 12 - Supplemental Cash Flow Information
The following supplements the consolidated statements of cash flows (amounts in
thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
Interest paid (net of amounts capitalized) $ 35,849 23,322 25,739
Distributions on preferred securities $ 6,038 8,050 8,050
Income taxes paid (refunded) $ (3,512) 1,639 14,487
- --------------------------------------------------------------------------------
During 1999, the Company sold 46 Applebee's restaurants. The 1999 consolidated
balance sheet reflects changes in asset and liability accounts related to the
divestiture of these restaurants as follows: decrease in assets held for sale of
$68.6 million, decrease in assets not classified as held for sale of $1.1
million and increase in accrued liabilities of $1.0 million.
Note 13 - Income Taxes
The components of the provision for income taxes for the years ended December
31, 2000, January 2, 2000 and January 3, 1999 are as follows (amounts in
thousands):
Current Deferred Total
- --------------------------------------------------------------------------------
2000:
Federal $ (3,806) (19,238) (23,044)
State 166 (2,722) (2,556)
- --------------------------------------------------------------------------------
Total $ (3,640) (21,960) (25,600)
- --------------------------------------------------------------------------------
1999:
Federal $ 1,346 596 1,942
State 361 147 508
- --------------------------------------------------------------------------------
Total $ 1,707 743 2,450
- --------------------------------------------------------------------------------
1998:
Federal $ 36,035 (3,861) 32,174
State 9,296 (2,170) 7,126
- --------------------------------------------------------------------------------
Total $ 45,331 (6,031) 39,300
- --------------------------------------------------------------------------------
A reconciliation of the Federal statutory income tax expense (benefit) rate to
the effective income tax rate applied to earnings (loss) before income taxes in
the accompanying consolidated statements of earnings for the years ended
December 31, 2000, January 2, 2000 and January 3, 1999 follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Tax (benefit) at federal statutory rate (35.0)% 35.0% 35.0%
Increase (decrease) in taxes due to:
State income tax, net of federal benefit (2.6) 2.8 4.1
FICA tip and targeted jobs tax credits (2.8) (25.7) (3.4)
Valuation allowance for deferred tax assets 8.0 - -
Nondeductible goodwill 1.2 13.5 1.0
Other, net 1.1 5.3 -
- --------------------------------------------------------------------------------
Effective tax (benefit) rate (30.1)% 30.9% 36.7%
- --------------------------------------------------------------------------------
33
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
January 2, 2000 are presented below (amounts in thousands):
2000 1999
- --------------------------------------------------------------------------------
FICA tip credits not yet taken for federal tax purposes $ 24,554 13,492
Asset impairment charges recorded for financial statement
purposes but not yet taken for tax purposes 18,760 5,919
Net operating loss carryforwards not yet taken for tax
purposes 8,628 -
Other 7,912 6,412
Valuation allowance for deferred tax assets (6,821) -
- --------------------------------------------------------------------------------
Total deferred tax assets 53,033 25,823
- --------------------------------------------------------------------------------
Depreciation and amortization taken for tax purposes in
excess of amounts taken for financial reporting purposes (29,790) (30,474)
Other (4,343) (4,292)
- --------------------------------------------------------------------------------
Deferred tax asset (liability) $ 18,900 (8,943)
- --------------------------------------------------------------------------------
A $6.8 million valuation allowance for deferred tax assets was initially
recorded for the year ended December 31, 2000, whereas none was recorded as of
January 2, 2000. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon these factors, management believes it is more likely than
not the Company will realize the benefits of the deductible differences for
which no valuation allowance is provided.
The Company has $18.7 million of net operating loss carryforwards for federal
income tax purposes as of December 31, 2000 that will expire in 2020. The
Company has $24.6 million of FICA tip tax credit carryforwards for federal
income tax purposes as of December 31, 2000 that will expire between 2010 and
2020.
Note 14 - Interest Expense
Following is a summary of interest cost incurred and interest cost capitalized
as a component of the cost of construction in progress (amounts in thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
Interest cost capitalized $ 924 1,374 1,426
Interest cost expensed 38,262 24,073 25,313
- --------------------------------------------------------------------------------
Total $ 39,186 25,447 26,739
- --------------------------------------------------------------------------------
Note 15 - Stock Option Plans
The 1988 stock option plan (the "Stock Option Plan") and the 1993 and 1995 Stock
Incentive Plans (the "Stock Incentive Plans") provide for the granting of
nonqualified and incentive options for up to 1,974,375 shares, 450,000 shares
and 3,600,000 shares, respectively, of common stock of the Company to key
officers, directors and employees. Generally, options awarded under the Stock
Option Plan and Stock Incentive Plans are granted at prices which equal fair
market value on the date of the grant, are exercisable over three to 10 years,
and expire 10 years subsequent to grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock option plans. Accordingly, no compensation expense has been recognized for
its stock-based compensation plans. Had compensation cost for the Company's
stock option plans been determined based upon the fair value methodology
prescribed under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings (loss) and
diluted earnings (loss) per share would have been increased by approximately
$0.4 million, or $0.01 per share in 2000 and decreased by $2.3 million, or $0.08
per share in 1999 and $0.6 million, or $0.01 per share in 1998. The effects of
34
either recognizing or disclosing compensation cost under SFAS 123 may not be
representative of the effects on reported net earnings for future years. The
fair value of the options granted during 2000 is estimated as $1.37 on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of zero, volatility of 70%, risk-free interest rate
of 5.1%, and an expected life of 6.5 years. Further information relating to
total options is as follows:
Options
Average Exercisable
Shares Price at Year End
- --------------------------------------------------------------------------------
Outstanding at December 28, 1997 2,998,130 $ 17.04 273,339
Granted in 1998 183,425 13.15
Exercised in 1998 (15,885) 9.42
Canceled in 1998 (1,149,880) 17.10
- --------------------------------------------------------------------------------
Outstanding at January 3, 1999 2,015,790 16.60 191,075
- --------------------------------------------------------------------------------
Granted in 1999 1,486,105 9.16
Exercised in 1999 - -
Canceled in 1999 (418,721) 15.65
- --------------------------------------------------------------------------------
Outstanding at January 2, 2000 3,083,174 13.15 194,371
- --------------------------------------------------------------------------------
Granted in 2000 1,511,121 2.00
Exercised in 2000 - -
Canceled in 2000 (1,559,811) 11.78
- --------------------------------------------------------------------------------
Outstanding at December 31, 2000 3,034,484 $ 7.95 390,994
- --------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
----------------------------------------- -------------------
Average Average
Exercise Average Exercise Exercise
Price Range Shares Life Price Shares Price
- --------------------------------------------------------------------------------
$ 1.01 - $5.00 1,515,697 9.32 $ 2.00 - $ -
$ 5.01 - $10.00 528,295 8.02 8.91 169,434 8.94
$10.01 - $15.00 499,035 6.30 13.37 50,195 13.41
$15.01 - $20.00 347,620 5.25 18.90 125,607 19.74
$20.01 - $25.00 130,187 4.96 21.36 43,028 21.13
$25.01 - $30.00 13,650 5.41 25.68 2,730 25.68
- --------------------------------------------------------------------------------
Total 3,034,484 7.93 $ 7.95 390,994 $ 14.44
- --------------------------------------------------------------------------------
Note 16 - Employee Benefit Plans
The Avado Brands, Inc. Profit Sharing Plan and Trust, established in accordance
with Section 401(k) of the Internal Revenue Code (the "401(k) Plan"), allows
eligible participating employees to defer receipt of a portion of their
compensation and contribute such amount to one or more investment funds.
Employee contributions are matched by the Company dollar for dollar for the
first 2% of the employee's income deferred. Matching funds vest at the rate of
20% each year, beginning after three years of service. Company contributions to
the 401(k) Plan were $0.5 million in 2000, $0.5 million in 1999 and $0.4 million
in 1998.
The Supplemental Deferred Compensation Plan ("Supplemental Plan"), effective
January 1, 1999, is a nonqualified plan which allows eligible employees to defer
receipt of a portion of their compensation and contribute such amounts to one or
more investment funds or to invest their contributions in shares of Avado Brands
common stock. The maximum aggregate amount deferred under the Supplemental Plan
and the 401(k) Plan may not exceed 15% of compensation. Company matching
contributions to the Supplemental Plan may not exceed 2% of compensation. The
Company, in its discretion, may make matching contributions to the Supplemental
Plan in the form of Company stock. Company matching contributions were $47,000
in 2000 and $0 in 1999.
35
A noncontributory Employee Stock Ownership Plan (the "ESOP Plan") covers
substantially all full-time employees. In accordance with the terms of the ESOP
Plan, the Company may make contributions in amounts as determined by the Board
of Directors. Participants become 20% vested in their accounts after three years
of service, escalating 20% each year thereafter until they are fully vested.
Contribution expense related to the ESOP Plan was $0 in 2000 and 1999 and $0.5
million in 1998.
Effective January 1, 2001, the Company changed the vesting schedule for all of
its employee benefit plans. Beginning in 2001, participants become 20% vested
after one year of service escalating 20% each year thereafter. In addition, the
maximum Company matching contribution related to the 401(k) Plan and
Supplemental Plan was increased from 2% to 3%. Under the new structure,
participants are matched dollar for dollar for the first 2% of the employee's
income deferred plus an additional $0.25 on the dollar up to 6% of compensation
for a potential total match of 3%.
Note 17 - Shareholders' Equity
The Board of Directors, from time to time and depending on market conditions,
authorizes the Company to purchase shares of its common stock. In connection
with these programs, during 1999 the Company purchased 6.3 million shares of its
common stock for $85.5 million and in 1998 the Company purchased 7.3 million
shares for $92.0 million. The Company made no share repurchases in 2000.
Note 18 - Commitments and Contingencies
Under the Company's insurance programs, coverage is obtained for significant
exposures as well as those risks required to be insured by law or contract. It
is the Company's preference to retain a significant portion of certain expected
losses related primarily to workers' compensation, physical loss to property,
and comprehensive general liability. Provisions for losses expected under these
programs are recorded based on estimates of the aggregate liability for claims
incurred. The Company is contingently liable for letters of credit aggregating
approximately $10.9 million related primarily to its insurance programs.
In connection with Applebee's divestiture transactions completed during 1999 and
1998, the Company remains contingently liable for lease obligations relating to
86 restaurants. Assuming that each respective purchaser became insolvent, an
event management believes to be highly unlikely, the Company could be liable for
lease payments extending through 2035 with minimum lease payments totaling $40.2
million. Management believes that the ultimate disposition of these contingent
liabilities will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
In 1997, two lawsuits were filed by persons seeking to represent a class of
shareholders of the Company who purchased shares of the Company's common stock
between May 26, 1995 and September 24, 1996. Each plaintiff named the Company
and certain of its officers and directors as defendants. The complaints alleged
acts of fraudulent misrepresentation by the defendants which induced the
plaintiffs to purchase the Company's common stock and alleged illegal insider
trading by certain of the defendants, each of which allegedly resulted in losses
to the plaintiffs and similarly situated shareholders of the Company. The
complaints each sought damages and other relief. In 1998, one of these suits
(Artel Foam Corporation Pension Trust, et al. v. Apple South, Inc., et al.,
Civil Action No. CV-97-6189) was dismissed. An amended complaint, styled John
Bryant, et al. vs. Apple South, Inc., et al. consolidating previous actions was
filed in January 1998. During 1999, the Company received a favorable ruling from
the 11th Circuit Court of Appeals relating to the remaining suit. As a result of
the ruling, the District Court again considered the motion to dismiss the case,
and the defendants renewed their motion to dismiss in December 1999. In June
2000, the District Court dismissed with prejudice the remaining suit. The
plaintiffs have appealed the court's final decision. Although the ultimate
outcome of the suit cannot be determined at this time, the Company believes that
the allegations therein are without merit and intends to continue vigorously
defending itself.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
36
Note 19 - Related Party Transactions
At December 31, 2000 and January 2, 2000, the Company held notes receivable from
Tom E. DuPree, Jr., the Chairman of the Board and Chief Executive Officer of the
Company, totaling $10,851,500. In 2000, the maturity of the notes was extended
by the Board of Directors to June 30, 2002 and the interest rate was increased
from 7.0% to 11.5% with interest payable at maturity. In addition, $3.0 million
of these notes are secured by real estate owned by Mr. DuPree. The Company also
holds notes receivable from Erich J. Booth, Chief Financial Officer and
Treasurer, totaling $107,000 and from Margaret E. Waldrep, Chief Administrative
Officer, totaling $41,500. These notes are also due on June 30, 2002 and bear
interest at 11.5%. At December 31, 2000, the officer notes receivable were
included in "Other assets" in the accompanying consolidated balance sheet. At
January 2, 2000, the notes were included in "Prepaid expenses and other".
Note 20 - Quarterly Financial Data (unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------
2000:
Restaurant sales $167,020 174,479 174,079 170,217 685,795
Gross profit* $ 66,636 70,055 66,813 64,235 267,739
Earnings (loss) before cumulative
effect of change in accounting principle $ (537) (1,665) (8,266) (49,011) (59,479)
Net earnings (loss) $ (537) (1,665) (8,266) (55,266) (65,734)
Basic earnings (loss) per share before
cumulative effect of change in
accounting principle $ (0.02) (0.07) (0.33) (1.82) (2.31)
Basic earnings (loss) per share $ (0.02) (0.07) (0.33) (2.05) (2.55)
Diluted earnings (loss) per share
before cumulative effect of change in
accounting principle** $ (0.02) (0.07) (0.33) (1.82) (2.31)
Diluted earnings (loss) per share** $ (0.02) (0.07) (0.33) (2.05) (2.55)
1999:
Restaurant sales $164,075 164,721 157,251 158,412 644,459
Gross profit* $ 67,244 67,039 65,541 60,919 260,743
Net earnings (loss) $ 5,952 5,968 2,431 (8,881) 5,470
Basic earnings (loss) per share $ 0.19 0.21 0.10 (0.35) 0.20
Diluted earnings (loss) per share** $ 0.19 0.20 0.10 (0.35) 0.20
- ---------------------------------------------------------------------------------------------------------
* The Company defines gross profit as total restaurant sales less the cost
of food and beverage and payroll and benefits. These costs represent the
expenses associated directly with providing the Company's products and services.
** Diluted earnings (loss) per share ("EPS") for all quarters in 2000 and
for the fourth quarter of 1999 increases when the Convertible Preferred
Securities are included in the calculation. As those shares are antidilutive,
they are excluded from the computation of diluted EPS.
Note 21 - Guarantor Subsidiaries
The Company's senior notes and revolving credit facilities are fully and
unconditionally guaranteed on a joint and several basis by substantially all of
its wholly owned subsidiaries. The Company's indebtedness is not guaranteed by
its non-wholly owned subsidiaries. These non-guarantor subsidiaries primarily
include certain partnerships of which the Company is typically a 90% owner. At
December 31, 2000 and January 2, 2000, these partnerships in the non-guarantor
subsidiaries operated 61 and 51, respectively, of the Company's restaurants.
Accordingly, condensed consolidated balance sheets as of December 31, 2000 and
37
January 2, 2000, and condensed consolidated statements of earnings and cash
flows for the fiscal years ended December 31, 2000, January 2, 2000 and January
3, 1999 are provided for such guarantor and non-guarantor subsidiaries. Separate
financial statements and other disclosures concerning the guarantor and
non-guarantor subsidiaries are not presented because management has determined
that they are not material to investors. There are no contractual restrictions
on the ability of the guarantor subsidiaries to make distributions to the
Company.
Condensed Consolidated Statement of Earnings
Fiscal Year Ended 2000
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Restaurant sales $ 539,852 145,943 - 685,795
Restaurant operating expenses 485,539 133,440 - 618,979
General and administrative expenses 31,651 6,571 38,222
Asset revaluation and other special charges 30,748 7,452 - 38,200
- --------------------------------------------------------------------------------------------------------------------
Operating income (8,086) (1,520) - (9,606)
- --------------------------------------------------------------------------------------------------------------------
Other income (expense) (73,684) (1,789) - (75,473)
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle (81,770) (3,309) - (85,079)
Income taxes (23,550) (2,050) - (25,600)
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of
change in accounting principle (58,220) (1,259) - (59,479)
Cumulative effect of change in accounting
principle, net of tax benefit (6,255) - - (6,255)
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ (64,475) (1,259) - (65,734)
====================================================================================================================
Condensed Consolidated Statement of Earnings
Fiscal Year Ended 1999
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Restaurant sales $ 535,691 108,768 - 644,459
Restaurant operating expenses 465,712 96,089 - 561,801
General and administrative expenses 32,649 5,362 38,011
Other special charges 2,186 - - 2,186
- --------------------------------------------------------------------------------------------------------------------
Operating income 35,144 7,317 - 42,461
- --------------------------------------------------------------------------------------------------------------------
Other income (expense) (32,091) (2,450) - (34,541)
Earnings before income taxes 3,053 4,867 - 7,920
Income taxes 950 1,500 - 2,450
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 2,103 3,367 - 5,470
====================================================================================================================
Condensed Consolidated Statement of Earnings
Fiscal Year Ended 1998
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Restaurant sales $ 785,300 77,392 - 862,692
Restaurant operating expenses 673,968 67,003 - 740,971
General and administrative expenses 42,385 3,765 - 46,150
Other special charges 2,940 - - 2,940
- --------------------------------------------------------------------------------------------------------------------
Operating income 66,007 6,624 - 72,631
- --------------------------------------------------------------------------------------------------------------------
Other income (expense) 35,427 (1,014) - 34,413
Earnings before income taxes and cumulative
effect of change in accounting principle 101,434 5,610 - 107,044
Income taxes 37,400 1,900 - 39,300
- --------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of change in
accounting principle 64,034 3,710 - 67,744
Cumulative effect of change in accounting
principle, net of tax benefit (1,461) - - (1,461)
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 62,573 3,710 - 66,283
====================================================================================================================
38
Condensed Consolidated Balance Sheet
Fiscal Year End 2000
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets $ 32,449 2,382 - 34,831
Premises and equipment, net 347,646 32,292 - 379,938
Goodwill, net 110,164 21,848 - 132,012
Deferred income tax benefit 18,900 - - 18,900
Other assets 38,419 5,581 - 44,000
Intercompany investments 46,525 - (46,525) -
Intercompany advances 12,010 - (12,010) -
- --------------------------------------------------------------------------------------------------------------------
$ 606,113 62,103 (58,535) 609,681
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 138,011 3,322 - 141,333
Long-term liabilities 307,285 246 - 307,531
Intercompany payables - 12,010 (12,010) -
Convertible preferred securities 72,865 - - 72,865
Shareholders' equity 87,952 46,525 (46,525) 87,952
- --------------------------------------------------------------------------------------------------------------------
$ 606,113 62,103 (58,535) 609,681
====================================================================================================================
Condensed Consolidated Balance Sheet
Fiscal Year End 1999
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets $ 44,245 1,980 - 46,225
Premises and equipment, net 363,280 61,688 - 424,968
Goodwill, net 113,161 22,015 - 135,176
Investments carried at equity 17,411 - - 17,411
Other assets 32,534 282 - 32,816
Intercompany investments 47,784 - (47,784) -
Intercompany advances 34,408 - (34,408) -
- --------------------------------------------------------------------------------------------------------------------
$ 652,823 85,965 (82,192) 656,596
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 81,024 3,493 - 84,517
Long-term liabilities 344,175 280 - 344,455
Intercompany payables - 34,408 (34,408) -
Convertible preferred securities 115,000 - - 115,000
Shareholders' equity 112,624 47,784 (47,784) 112,624
- --------------------------------------------------------------------------------------------------------------------
$ 652,823 85,965 (82,192) 656,596
====================================================================================================================
39
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 2000
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 24,438 3,541 - 27,979
Cash flows from investing activities:
Capital expenditures (52,615) (1,193) - (53,808)
Proceeds from sale-leaseback 8,055 20,316 - 28,371
Proceeds from disposal of assets, net 14,074 - - 14,074
Other investing activities (5,540) (251) - (5,791)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (36,026) 18,872 - (17,154)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayment of revolving credit agreements (21,667) - - (21,667)
Proceeds from (payment of) intercompany advances 22,398 (22,398) - -
Other financing activities (23) - - (23)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 708 (22,398) - (21,690)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,880) 15 - (10,865)
Cash and equivalents at the beginning of the period 11,190 77 - 11,267
- --------------------------------------------------------------------------------------------------------------------
Cash and equivalents at the end of the period $ 310 92 - 402
====================================================================================================================
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 1999
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 5,426 8,196 - 13,622
Cash flows from investing activities:
Capital expenditures (75,572) (8,822) - (84,394)
Proceeds from disposal of assets, net 87,152 - - 87,152
Other investing activities (2,788) (656) - (3,444)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 8,792 (9,478) - (686)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayment of revolving credit agreements (27,920) - - (27,920)
Proceeds from issuance of long-term debt 95,467 - - 95,467
Purchase of treasury stock (74,824) - - (74,824)
Proceeds from (payment of) intercompany advances (1,305) 1,305 - -
Other financing activities (1,608) - - (1,608)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (10,190) 1,305 - (8,885)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,028 23 - 4,051
Cash and equivalents at the beginning of the period 7,162 54 - 7,216
- --------------------------------------------------------------------------------------------------------------------
Cash and equivalents at the end of the period $ 11,190 77 - 11,267
====================================================================================================================
40
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 1998
- --------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 32,266 8,761 - 41,027
Cash flows from investing activities:
Capital expenditures (113,166) (29,675) - (142,841)
Proceeds from disposal of assets, net 373,814 - - 373,814
Other investing activities (39,690) - - (39,690)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 220,958 (29,675) - 191,283
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayment of revolving credit agreements (114,726) - - (114,726)
Purchase of treasury stock (92,028) - - (92,028)
Proceeds from (payment of) intercompany advances (20,936) 20,936 - -
Other financing activities (20,843) - - (20,843)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (248,533) 20,936 - (227,597)
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,691 22 - 4,713
Cash and equivalents at the beginning of the period 2,471 32 - 2,503
- --------------------------------------------------------------------------------------------------------------------
Cash and equivalents at the end of the period $ 7,162 54 - 7,216
====================================================================================================================
41
Report of Management
The management of Avado Brands, Inc. has prepared the consolidated
financial statements and all other financial information appearing in this Form
10-K and is responsible for their integrity. The consolidated financial
statements were prepared in conformity with generally accepted accounting
principles and, accordingly, include certain amounts based on management's best
judgments and estimates.
Management maintains a system of internal accounting controls and
procedures designed to provide reasonable assurance, at an appropriate
cost/benefit relationship, regarding the reliability of the published
consolidated financial statements and the safeguarding of assets against
unauthorized acquisition, use or disposition.
The independent auditors, KPMG LLP, were recommended by the Audit Committee
of the Board of Directors, and that recommendation was ratified by the Company's
shareholders. The Audit Committee, which is composed solely of directors who are
not officers of the Company, meets periodically with the independent auditors
and management to ensure that they are fulfilling their obligations and to
discuss internal accounting controls, auditing and financial reporting matters.
The Audit Committee also reviews with the independent auditors the scope and
results of the audit effort. The independent auditors periodically meet alone
with the Audit Committee and have full and unrestricted access to the Audit
Committee at any time.
The recommendations of the independent auditors are reviewed by management.
Control procedures have been implemented or revised as appropriate to respond to
these recommendations. No material weaknesses in internal controls have been
brought to the attention of management.
The Company assessed its internal control system as of December 31, 2000,
in relation to criteria for effective internal control over financial reporting
described in "Internal Control Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on its assessment,
the Company believes that, as of December 31, 2000, its system of internal
control over financial reporting and over safeguarding of assets against
unauthorized acquisition, use or disposition, met those criteria.
Tom E. DuPree, Jr.
Chairman of the Board and Chief Executive Officer
Erich J. Booth
Chief Financial Officer and Corporate Treasurer
42
Independent Auditors' Report
The Board of Directors
Avado Brands, Inc.
We have audited the accompanying consolidated balance sheets of Avado
Brands, Inc. and subsidiaries as of December 31, 2000 and January 2, 2000, and
the related consolidated statements of earnings, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Avado
Brands, Inc. and subsidiaries at December 31, 2000 and January 2, 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
October 2, 2000 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and its amendments, SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", and SFAS No. 138, "Accounting for Derivative Instruments and Certain
Hedging Activities." In 1998, the Company adopted the provisions of AICPA
Statement of Position 98-5, "Reporting the Cost of Start-Up Activities."
KPMG LLP
Atlanta, Georgia
January 26, 2001, except for Note 7 which is as of April 2, 2001
43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
Part III
Item 10. Directors and Executive Officers of the Registrant
Information in response to this item is incorporated by reference to the
information contained under the headings "Nominees for Director", Executive
Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for use in connection with the 2001 Annual
Meeting of Shareholders, filed with the Commission on April 3, 2001.
Item 11. Executive Compensation
Information in response to this item is incorporated by reference to the
information contained under the heading "Compensation of Executive Officers" in
the Company's definitive Proxy Statement for use in connection with the 2001
Annual Meeting of Shareholders, filed with the Commission on April 3, 2001. In
no event shall the information contained in the Proxy Statement under the
heading "Comparison of Five-Year Cumulative Shareholder Return" be deemed
incorporated herein by such reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information in response to this item is incorporated by reference to the
information contained under the heading "Voting Securities and Principal Holders
Thereof" in the Company's definitive Proxy Statement for use in connection with
the 2001 Annual Meeting of Shareholders, filed with the Commission on April 3,
2001.
Item 13. Certain Relationships and Related Transactions
In March 1995, the Company entered into a Split Dollar Insurance Agreement
(the "Agreement") with The DuPree Insurance Trust (the "Trust") whereby the
Company agreed to make premium payments on certain life insurance policies of
which the Trust was the owner and beneficiary. In 2000, the insurance policies
were canceled and no premium payments were made by the Company.
At December 31, 2000 and January 2, 2000, the Company held notes receivable
from Tom E. DuPree, Jr., the Chairman of the Board and Chief Executive Officer
of the Company, totaling $10,851,500. In 2000, the maturity of the notes was
extended by the Board of Directors to June 30, 2002 and the interest rate was
increased to from 7.0% to 11.5% with interest payable at maturity. In addition,
$3.0 million of these notes are secured by real estate owned by Mr. DuPree. The
Company also holds notes receivable from Erich J. Booth, Chief Financial Officer
and Treasurer, totaling $107,000 and from Margaret E. Waldrep, Chief
Administrative Officer, totaling $41,500. These notes are also due on June 30,
2002 and bear interest at 11.5%.
44
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
Consolidated Statements of Earnings for the years ended December 31, 2000,
January 2, 2000 and January 3, 1999
Consolidated Balance Sheets as of December 31, 2000 and January 2, 2000
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 2000, January 2, 2000 and January 3, 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2000, January 2, 2000 and, January 3, 1999
Notes to Consolidated Financial Statements
Report of Management
Independent Auditors' Report
2. Financial Statement Schedules
None
3. Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended October 13, 1998. (3)
3.2 By-laws of the Company. (1)
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Amended and
Restated Articles of Incorporation and by-laws defining the rights of holders of
the Company's Common Stock. (1) (3)
4.2 Trust Agreement of Apple South Financing I, dated as of February 18,
1997, among Apple South, Inc., First Union National Bank of Georgia and First
Union Bank of Delaware. (5)
4.3 Amended and Restated Declaration of Trust of Apple South Financing I,
dated as of March 11, 1997, among Apple South, Inc., as Sponsor, First Union
National Bank of Georgia, as Institutional Trustee, First Union Bank of
Delaware, as Delaware Trustee, and the Regular Trustees named therein. (5)
4.4 Indenture for the 7% Convertible Subordinated Debentures, dated as of
March 6, 1997, between Apple South, Inc. and First Union National Bank of
Georgia, as Trustee. (5)
4.5 Form of $3.50 Term Convertible Security, Series A (included in Exhibit
4.3).
4.6 Form of 7% Convertible Subordinated Debenture (included in Exhibit
4.4).
4.7 Preferred Securities Guarantee Agreement, dated as of March 11, 1997,
between Apple South, Inc., as Guarantor, and First Union National Bank of
Georgia, as Preferred Guarantee Trustee. (5)
45
4.8 Registration Rights Agreement, dated as of March 11, 1997 among Apple
South, Inc., Apple South Financing I, J.P. Morgan Securities, Inc., and Smith
Barney, Inc. (5)
4.9 Solicitation of Consents to Proposed Amendments to 9.75% Senior Notes
due 2006 of Apple South, Inc. (8)
4.10 Indenture, dated as of June 22, 1999, among the Company, certain
guaranteeing subsidiaries and SunTrust Bank, Atlanta, as Trustee (including the
form of Note). (9)
4.11 Registration Rights Agreement, dated as of June 22, 1999, among the
Company, certain guaranteeing subsidiaries and the initial purchasers of the
Notes. (9)
4.12 The Hops Grill & Bar, Inc. MP Equity Investment Plan (14)
10.1 Apple South, Inc. 1988 Stock Option Plan. (1)
10.2 Form of Stock Option Agreement under the Apple South, Inc. 1988 Stock
Option Plan. (1) (4)
10.3 Form of Apple South, Inc. Director's Indemnification Agreement
executed by and between the Company and each member of its Board of Directors.
(1)
10.4 Form of Apple South, Inc. Officer's Indemnification Agreement executed
between the Company and each of its executive officers. (1)
10.5 Apple South, Inc. Employee Stock Ownership Plan and Trust. (1) (4)
10.6 Apple South, Inc. Profit Sharing Plan and Trust. (1) (4)
10.7 Amendment No. 2 to the Apple South, Inc. Employee Stock Ownership Plan
and Trust, dated November 22, 1993. (2)
10.8 Apple South, Inc. [Restated] Profit Sharing Plan and Trust dated
October 26, 1993. (2)
10.9 Amended form of Stock Option Agreement under the Apple South, Inc.
1988 Stock Option Plan. (2)
10.10 Apple South, Inc. 1993 Stock Incentive Plan. (2)
10.11 Form of Stock Option Agreement under the Apple South, Inc. 1993 Stock
Incentive Plan. (2)
10.12 Participation Agreement (Apple South Trust No. 97-1), dated September
24, 1997, among Apple South, Inc., as lessee, First Security Bank, National
Association, as lessor, SunTrust Bank, Atlanta, as administrative agent, and the
holders and lenders signatory thereto. (6)
10.13 First amendment, dated as of March 27, 1998, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (7)
10.14 Second amendment, dated as of August 14, 1998, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (11)
10.15 Third amendment, dated as of November 13, 1998, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (11)
46
10.16 Fourth amendment, dated as of February 22, 1999, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (11)
10.17 Fifth amendment, dated as of August 24, 1999, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto.
10.18 Sixth amendment, dated as of December 20, 2000, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto.
10.19 $125 million Credit Agreement, dated as of June 22, 1999, among Avado
Brands, Inc. as borrower and Wachovia Bank, National Association and BankBoston,
N.A. (10)
10.20 First amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (15)
10.21 Second amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (15)
10.22 Third amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (15)
10.23 Fourth amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBostion, N.A. (13)
10.24 Master lease agreement, dated as of October 19, 2000, by and between
Pubs Property, LLC and Hops Grill & Bar, Inc.
10.25 Sale-leaseback agreement, dated as of October 19, 2000, by and among
Pubs Property, LLC, Avado Brands, Inc. and Hops Grill & Bar Inc.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule (EDGAR version only).
99.1 Safe harbor under the Private Securities Litigation Reform Act of
1995. (12)
47
(1) Incorporated by reference to the corresponding exhibit number filed
with the registrant's Registration Statement on Form S-1, File No.
33-42662.
(2) Incorporated by reference to the registrant's Annual Report on Form
10-K for its fiscal year ended December 31, 1993.
(3) Incorporated by reference to the registrant's Current Report on Form
8-K dated October 13, 1998.
(4) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(5) Incorporated by reference to the registrants's registration statement
on Form S-3, File No. 333-25205.
(6) Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended December 28, 1997.
(7) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended March 29, 1998.
(8) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended June 28, 1998.
(9) Incorporated by reference to the Company's Registration Statement on
Form S-4, File No. 333-82345, filed on July 6, 1999.
(10)Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended July 4, 1999
(11)Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended January 3, 1999.
(12)Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended April 2, 2000.
(13)Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 1, 2000.
(14)Incorporated by reference to the Company's Registration Statement on
Form S-8, File No. 333-56138, filed on February 23, 2001.
(15)Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended January 2, 2000.
(b) Reports on Form 8-K
None
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AVADO BRANDS, INC.
By: /s/ Tom E. DuPree, Jr.
---------------------------
Tom E. DuPree, Jr.
Chief Executive Officer and
Chairman of the Board
March 27, 2001
Atlanta, Georgia
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Tom E. DuPree, Jr. Chairman of the Board of March 27, 2001
- --------------------------- Directors and Chief Executive
Tom E. DuPree, Jr. Officer (principal executive officer)
/s/ Erich J. Booth Director and Chief Financial Officer March 27, 2001
- --------------------------- (principal financial officer)
Erich J. Booth
/s/ Margaret E. Waldrep Director and Chief Administrative March 27, 2001
- --------------------------- Officer
Margaret E. Waldrep
/s/ Percy V. Williams Director March 27, 2001
- ---------------------------
Percy V. Williams
/s/ Jerome A. Atkinson Director March 27, 2001
- ---------------------------
Jerome A. Atkinson
/s/ William V. Lapham Director March 27, 2001
- ---------------------------
William V. Lapham
/s/ Emilio Alvarez-Recio Director March 27, 2001
- ---------------------------
Emilio Alvarez-Recio
/s/ Robert Sroka Director March 27, 2001
- ---------------------------
Robert Sroka
49
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended October 13, 1998. (3)
3.2 By-laws of the Company. (1)
4.1 See Exhibits 3.1 and 3.2 for provisions in the Company's Amended and
Restated Articles of Incorporation and by-laws defining the rights of holders of
the Company's Common Stock. (1) (3)
4.2 Trust Agreement of Apple South Financing I, dated as of February 18,
1997, among Apple South, Inc., First Union National Bank of Georgia and First
Union Bank of Delaware. (5)
4.3 Amended and Restated Declaration of Trust of Apple South Financing I,
dated as of March 11, 1997, among Apple South, Inc., as Sponsor, First Union
National Bank of Georgia, as Institutional Trustee, First Union Bank of
Delaware, as Delaware Trustee, and the Regular Trustees named therein. (5)
4.4 Indenture for the 7% Convertible Subordinated Debentures, dated as of
March 6, 1997, between Apple South, Inc. and First Union National Bank of
Georgia, as Trustee. (5)
4.5 Form of $3.50 Term Convertible Security, Series A (included in Exhibit
4.3).
4.6 Form of 7% Convertible Subordinated Debenture (included in Exhibit
4.4).
4.7 Preferred Securities Guarantee Agreement, dated as of March 11, 1997,
between Apple South, Inc., as Guarantor, and First Union National Bank of
Georgia, as Preferred Guarantee Trustee. (5)
4.8 Registration Rights Agreement, dated as of March 11, 1997 among Apple
South, Inc., Apple South Financing I, J.P. Morgan Securities, Inc., and Smith
Barney, Inc. (5)
4.9 Solicitation of Consents to Proposed Amendments to 9.75% Senior Notes
due 2006 of Apple South, Inc. (8)
4.10 Indenture, dated as of June 22, 1999, among the Company, certain
guaranteeing subsidiaries and SunTrust Bank, Atlanta, as Trustee (including the
form of Note). (9)
4.11 Registration Rights Agreement, dated as of June 22, 1999, among the
Company, certain guaranteeing subsidiaries and the initial purchasers of the
Notes. (9)
4.12 The Hops Grill & Bar, Inc. MP Equity Investment Plan (14)
10.1 Apple South, Inc. 1988 Stock Option Plan. (1)
10.2 Form of Stock Option Agreement under the Apple South, Inc. 1988 Stock
Option Plan. (1) (4)
10.3 Form of Apple South, Inc. Director's Indemnification Agreement
executed by and between the Company and each member of its Board of Directors.
(1)
10.4 Form of Apple South, Inc. Officer's Indemnification Agreement executed
between the Company and each of its executive officers. (1)
10.5 Apple South, Inc. Employee Stock Ownership Plan and Trust. (1) (4)
10.6 Apple South, Inc. Profit Sharing Plan and Trust. (1) (4)
50
10.7 Amendment No. 2 to the Apple South, Inc. Employee Stock Ownership Plan
and Trust, dated November 22, 1993. (2)
10.8 Apple South, Inc. [Restated] Profit Sharing Plan and Trust dated
October 26, 1993. (2)
10.9 Amended form of Stock Option Agreement under the Apple South, Inc.
1988 Stock Option Plan. (2)
10.10 Apple South, Inc. 1993 Stock Incentive Plan. (2)
10.11 Form of Stock Option Agreement under the Apple South, Inc. 1993 Stock
Incentive Plan. (2)
10.12 Participation Agreement (Apple South Trust No. 97-1), dated September
24, 1997, among Apple South, Inc., as lessee, First Security Bank, National
Association, as lessor, SunTrust Bank, Atlanta, as administrative agent, and the
holders and lenders signatory thereto. (6)
10.13 First amendment, dated as of March 27, 1998, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (7)
10.14 Second amendment, dated as of August 14, 1998, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (11)
10.15 Third amendment, dated as of November 13, 1998, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (11)
10.16 Fourth amendment, dated as of February 22, 1999, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto. (11)
10.17 Fifth amendment, dated as of August 24, 1999, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto.
10.18 Sixth amendment, dated as of December 20, 2000, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Apple
South, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto.
10.19 $125 million Credit Agreement, dated as of June 22, 1999, among Avado
Brands, Inc. as borrower and Wachovia Bank, National Association and BankBoston,
N.A. (10)
10.20 First amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (15)
10.21 Second amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (15)
51
10.22 Third amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBoston, N.A. (15)
10.23 Fourth amendment to $125 million Credit Agreement, dated as of June
22, 1999, among Avado Brands, Inc. as borrower and Wachovia Bank, National
Association and BankBostion, N.A. (13)
10.24 Master lease agreement, dated as of October 19, 2000, by and between
Pubs Property, LLC and Hops Grill & Bar, Inc.
10.25 Sale-leaseback agreement, dated as of October 19, 2000, by and among
Pubs Property, LLC, Avado Brands, Inc. and Hops Grill & Bar Inc.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule (EDGAR version only).
99.1 Safe harbor under the Private Securities Litigation Reform Act of
1995. (12)
--------------------------------------------------------------------------
(1) Incorporated by reference to the corresponding exhibit number filed
with the registrant's Registration Statement on Form S-1, File No.
33-42662.
(2) Incorporated by reference to the registrant's Annual Report on Form
10-K for its fiscal year ended December 31, 1993.
(3) Incorporated by reference to the registrant's Current Report on Form
8-K dated October 13, 1998.
(4) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(5) Incorporated by reference to the registrants's registration statement
on Form S-3, File No. 333-25205.
(6) Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended December 28, 1997.
(7) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended March 29, 1998.
(8) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended June 28, 1998.
(9) Incorporated by reference to the Company's Registration Statement on
Form S-4, File No. 333-82345, filed on July 6, 1999.
(10)Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended July 4, 1999
(11)Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended January 3, 1999.
(12)Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended April 2, 2000.
(13)Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended October 1, 2000.
(14)Incorporated by reference to the Company's Registration Statement on
Form S-8, File No. 333-56138, filed on February 23, 2001.
(15)Incorporated by reference to the registrant's Annual Report on form
10-K for the fiscal year ended January 2, 2000.
51