UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to ___________
Commission File Number: 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
Hancock at Washington, Madison, GA 30650
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
706-342-4552
---------------------------------------
(Registrant's telephone number, including area code)
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.
X Yes No
--- ---
As of August 9, 2002, there were 33,101,929 shares of common stock of the
Registrant outstanding.
AVADO BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Part I - Financial Information
Item 1 - Consolidated Financial Statements:
Consolidated Statements of Earnings(Loss).......................3
Consolidated Balance Sheets.....................................4
Consolidated Statements of Shareholders' Equity (Deficit)
and Comprehensive Income........................................5
Consolidated Statements of Cash Flows...........................6
Notes to Consolidated Financial Statements......................7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..................16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.....22
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders............23
Item 6 - Exhibits and Reports on Form 8-K...............................23
Signature....................................................................24
Page 2
Avado Brands, Inc.
Consolidated Statements of Earnings (Loss)
(Unaudited)
(In thousands, except per share data) Quarter Ended Six Months Ended
- --------------------------------------------------------------------------------------------- ----------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------- ----------------------------
Restaurant sales:
Don Pablo's $ 69,539 73,484 138,755 147,155
Hops 46,271 48,081 96,569 100,215
- -------------------------------------------------------------------------------------------- ----------------------------
Total restaurant sales 115,810 121,565 235,324 247,370
- -------------------------------------------------------------------------------------------- ----------------------------
Restaurant operating expenses:
Food and beverage 32,554 34,067 66,444 69,156
Payroll and benefits 39,007 39,628 78,488 79,976
Depreciation and amortization 3,974 4,752 8,034 9,380
Other operating expenses 30,827 33,293 63,625 65,978
- -------------------------------------------------------------------------------------------- ----------------------------
Total restaurant operating expenses 106,362 111,740 216,591 224,490
- -------------------------------------------------------------------------------------------- ----------------------------
General and administrative expenses 6,576 6,794 12,992 13,295
Loss on disposal of assets 15 435 101 137
Asset revaluation and other special charges 4,448 850 4,448 1,250
- -------------------------------------------------------------------------------------------- ----------------------------
Operating income (loss) (1,591) 1,746 1,192 8,198
- -------------------------------------------------------------------------------------------- ----------------------------
Other income (expense):
Interest expense, net (8,084) (10,347) (16,317) (19,378)
Distribution expense on preferred securities (807) (1,202) (1,922) (2,446)
Gain on debt extinguishment 26,783 - 26,783 -
Other, net 201 (3,331) (211) (4,879)
- -------------------------------------------------------------------------------------------- ----------------------------
Total other income (expense) 18,093 (14,880) 8,333 (26,703)
- -------------------------------------------------------------------------------------------- ----------------------------
Earnings (loss) from continuing operations
before income taxes 16,502 (13,134) 9,525 (18,505)
Income tax expense (benefit) 1,500 (4,375) 375 (6,125)
- -------------------------------------------------------------------------------------------- ----------------------------
Net earnings (loss) from continuing operations 15,002 (8,759) 9,150 (12,380)
- -------------------------------------------------------------------------------------------- ----------------------------
Discontinued operations:
Earnings (loss) from discontinued operations, net of tax (406) 3,910 (272) 6,486
- -------------------------------------------------------------------------------------------- ----------------------------
Net earnings (loss) $ 14,596 (4,849) 8,878 (5,894)
============================================================================================ ===========================
Basic earnings (loss) per common share:
Basic earnings (loss) from continuing operations $ 0.49 (0.31) 0.31 (0.44)
Basic earnings (loss) from discontinued operations (0.01) 0.14 (0.01) 0.23
- -------------------------------------------------------------------------------------------- ---------------------------
Basic earnings (loss) per common share $ 0.48 (0.17) 0.30 (0.21)
============================================================================================ ===========================
Diluted earnings (loss) per common share:
Diluted earnings (loss) from continuing operations $ 0.46 (0.31) 0.30 (0.44)
Diluted earnings (loss) from discontinued operations (0.01) 0.14 (0.01) 0.23
- -------------------------------------------------------------------------------------------- ---------------------------
Diluted earnings (loss) per common share $ 0.45 (0.17) 0.29 (0.21)
============================================================================================ ===========================
See accompanying notes to consolidated financial statements
Page 3
Avado Brands, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------------
June 30, Dec. 30,
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 934 559
Restricted cash - 9,978
Accounts receivable 6,041 10,723
Inventories 5,752 5,870
Prepaid expenses and other 3,531 2,928
Assets held for sale 8,945 9,737
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 25,203 39,795
Premises and equipment, net 275,266 285,813
Goodwill, net 34,920 34,920
Deferred income tax benefit 11,620 11,620
Other assets 32,906 26,408
- ---------------------------------------------------------------------------------------------------------------------
$ 379,915 398,556
=====================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 9,840 15,766
Accrued liabilities 45,156 64,265
Current installments of long-term debt 26 13
Income taxes 34,021 33,773
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 89,043 113,817
Long-term debt 213,045 215,815
Other long-term liabilities 2,076 3,111
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 304,164 332,743
- ---------------------------------------------------------------------------------------------------------------------
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 3,179 68,559
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 shares in 2002 and 2001;
outstanding - 33,101,929 shares in 2002 and 28,682,140 shares in 2001 405 405
Additional paid-in capital 154,637 146,139
Retained earnings 14,189 5,311
Treasury stock at cost; 7,376,831 shares in 2002 and 11,796,620 in 2001 (96,659) (154,601)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 72,572 (2,746)
- ---------------------------------------------------------------------------------------------------------------------
$ 379,915 398,556
=====================================================================================================================
See accompanying notes to consolidated financial statements
Page 4
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Income
(Unaudited)
Additional Total
Common Stock Paid-in Retained Treasury Shareholders'
(In thousands) Shares Amount Capital Earnings Stock Equity (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 2001 40,479 $405 $146,139 $5,311 ($154,601) ($2,746)
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) - - - (5,718) - (5,718)
Conversion of convertible preferred securities - - 889 - 4,461 5,350
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 40,479 405 147,028 (407) (150,140) (3,114)
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) - - - 14,596 - 14,596
Conversion of convertible preferred securities - - 7,609 - 53,481 61,090
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 40,479 $405 $154,637 $14,189 ($96,659) $72,572
==============================================================================================================================
See accompanying notes to consolidated financial statements
Page 5
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) Six Months Ended
- ------------------------------------------------------------------------------------------------------------------------
June 30, July 1,
2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ 8,878 (5,894)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 10,775 12,561
Gain on debt extinguishment (26,783) -
Asset revaluation and other special charges 4,448 1,250
(Gain) loss on disposal of assets 101 136
(Earnings) loss from discontinued operations 272 (6,486)
Mark-to-market adjustment on interest rate swap 861 (86)
(Increase) decrease in assets:
Accounts receivable (26) (1,587)
Inventories 118 (263)
Prepaid expenses and other 514 (3,565)
Increase (decrease) in liabilities:
Accounts payable (5,511) (8,968)
Accrued liabilities (19,462) 11,125
Income taxes 248 (6,318)
Other long-term liabilities (192) 207
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (25,759) (7,888)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (3,340) (5,705)
Proceeds from disposal of assets and notes receivable, net - 5,389
Additions to noncurrent assets (886) (1,754)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (4,226) (2,070)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) revolving credit agreements 18,127 4,993
Proceeds from (repayment of) term credit agreement 12,898 -
Payment of financing costs (8,502) -
Payment of long-term debt (5,584) -
Principal payments on long-term debt (13) (13)
Settlement of interest rate swap agreement (1,704) -
Reduction in letter of credit collateral 9,978 -
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 25,200 4,980
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) discontinued operations 5,160 4,960
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 375 (18)
Cash and cash equivalents at the beginning of the period 559 402
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 934 384
========================================================================================================================
See accompanying notes to consolidated financial statements.
Page 6
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 30, 2001,
except as disclosed herein. The Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" in the first quarter of 2002. The
Company also adopted Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" in the second quarter of 2002. In the opinion
of management, all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation have been included. Operating
results for the quarter ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 29, 2002.
NOTE 2 - LONG-TERM DEBT AND LIQUIDITY
On March 25, 2002, the Company completed a $75.0 million credit facility to
replace its existing credit agreement. The facility, which matures on March 25,
2005, limits total borrowing capacity at any given time to an amount equal to
two and one quarter times the Company's trailing 12 months earnings before
interest, income taxes and depreciation and amortization as determined for the
most recently completed four quarters ("Borrowing Base EBITDA"). The calculation
of Borrowing Base EBITDA excludes the 2001 operations of McCormick & Schmick's,
gains and losses on the disposal of assets, asset revaluation and other special
charges, non-cash rent expense and preopening costs. The agreement provides a
$35.0 million revolving credit facility, which may be used for working capital
and general corporate purposes, and a $40.0 million term loan facility, which is
limited to certain defined purposes, excluding working capital and capital
expenditures. In certain circumstances, borrowings under the term loan facility
are required to be repaid to the lender and any such repayments are not
available to be re-borrowed by the Company. Events generating a required
repayment include, among other things, proceeds from asset dispositions,
casualty events, tax refunds and excess cash flow, each as defined in the credit
agreement. In addition, the lender reserves the right to impose certain reserves
against the Company's total borrowing availability under the facility which may
limit the Company's availability on both the revolving and term loans. Lender
imposed reserves against the Company's total borrowing availability, as of June
30, 2002, were $4.2 million. Subsequent to June 30, 2002, the lender reserve
amount was reduced to $3.1 million. Irrespective of future borrowings, certain
obligations will exist with respect to the agreement including annual
anniversary fees of $1.1 million and an additional fee payable at maturity of
$5.1 million. The loan is secured by substantially all of the Company's assets.
During the second quarter of 2002, Borrowing Base EBITDA was $25.9 million,
resulting in a maximum borrowing capacity of $58.3 million. At June 30, 2002,
the Company's trailing 12 months EBITDA totaled $24.7 million. Accordingly, the
Company's maximum borrowing capacity will be adjusted from $58.3 million to
$55.7 million in conjunction with the Company's filing of its quarterly reports
with the lender on or before August 14, 2002. At June 30, 2002, $18.1 million of
cash borrowings were outstanding under the revolving portion of the Company's
credit facility and $12.9 million was outstanding under the term portion of the
facility. During the first half of 2002, $10.0 million in restricted cash, which
was held as collateral to secure letters of credit which secure the Company's
insurance programs, was released and used to reduce the outstanding cash
borrowings under the revolving credit facility. Under the new credit agreement,
revolving loan capacity is used to secure the Company's letters of credit. At
June 30, 2002, in addition to the $18.1 million of cash borrowings outstanding
under the revolving facility, an additional $14.9 million of the facility was
utilized to secure letters of credit and $2.0 million of the revolving facility
remained unused and available. At June 30, 2002, $6.2 million remained unused
and available under the Company's term loan facility. As a result of the
upcoming reduction in the Company's borrowing base, which will be somewhat
offset by the $1.1 million lender reserve reduction, availability on the term
facility will be reduced by $1.5 million on or before August 14, 2002, while
availability on the revolving facility will remain unchanged.
Page 7
Borrowings under the term loan facility during the second quarter included
$7.5 million (including approximately $1.9 million in accrued interest) to
repurchase $34.2 million in face value of the Company's outstanding 11.75%
Senior Subordinated Notes, due June 2009. After a $1.8 million write-off
primarily of deferred loan costs and unamortized initial issue discount, the
Company recorded a gain on the extinguishment of $26.8 million. An additional
$5.4 million of term loan proceeds were used during the second quarter to make a
one-time payment of accrued interest, equal to $4.25 per share, to holders of
the Company's $3.50 term convertible securities, due March 2027 (the "TECONS").
The payment was conditional upon the holders of at least 90% of the outstanding
TECONS agreeing to convert their securities into shares of common stock of the
Company pursuant to the terms of the TECONS. According to the terms of the
securities, each TECON can be converted, at the holders' option, into 3.3801
shares of common stock. During the second quarter, holders representing
approximately 95% of the outstanding securities agreed to the terms of the offer
and, in connection with the $5.4 million payment, 1,200,391 TECONS were
converted into 4,057,442 shares of the Company's common stock. As a result of
this transaction, the outstanding balance of the TECONS was reduced by $60.0
million. Subsequent to the end of the second quarter, an additional $3.2 million
was borrowed under the term loan facility to repurchase $17.9 million in face
value of the Company's outstanding 11.75% Senior Subordinated Notes.
Principal financing sources in the first half of 2002 consisted of (i) term
loan proceeds of $12.9 million, (ii) proceeds from the revolving credit
agreement of $9.6 million, net of financing costs of $8.5 million, (iii) a $10.0
million refund of payments to collateralize letters of credit for the Company's
self-insurance programs and (iv) proceeds of $5.2 million from discontinued
operations related primarily to the McCormick & Schmick's divestiture. The
primary uses of funds consisted of (i) net cash used in operations of $25.8
million which included interest payments of $20.7 million primarily related to
the Company's 9.75% senior notes, 11.75% senior subordinated notes and the
one-time TECON payment, in addition to operating lease payments of $12.5
million, (ii) $5.6 million for the repurchase of $34.2 million in face value of
the Company's outstanding 11.75% Senior Subordinated Notes, (iii) capital
expenditures of $3.3 million, and (iv) settlement of the Company's interest rate
swap agreement for $1.7 million.
Interest payments on the Company's senior and subordinated notes are due
semi-annually in each June and December. Prior to the Company's repurchase of
$52.1 million in face value of its outstanding 11.75% Senior Subordinated Notes,
the Company's semi-annual interest payments totaled approximately $11.6 million.
Subsequent to the repurchase, the Company's semi-annual interest payments will
total approximately $8.5 million. Under the terms of the related note
indentures, the Company has an additional 30-day period from the scheduled
interest payment dates before an event of default is incurred and the Company
utilized these provisions with respect to its June 2002 interest payments as
well as its June and December 2001 interest payments. These provisions will
again be available to the Company, if needed, with respect to the December 2002
interest payments.
The terms of the Company's new credit facility, senior and subordinated
notes, $30.0 million master equipment lease and $28.4 million Hops
sale-leaseback transaction include various provisions which, among other things,
require the Company to (i) achieve certain EBITDA targets, (ii) maintain defined
net worth and coverage ratios, (iii) maintain defined leverage ratios, (iv)
limit the incurrence of certain liens or encumbrances in excess of defined
amounts and (v) limit certain payments. In conjunction with the March 25, 2002
closing of the Company's refinanced credit facility, the Company terminated its
interest rate swap agreement thereby eliminating any aforementioned restrictions
on the Company contained in that agreement. In addition, in March 2002 the
Company amended its master equipment lease agreement to substantially conform
the covenants to the refinanced credit facility and also obtained an amendment
of certain provisions contained in its sale-leaseback agreement. In June 2002,
the Company also obtained an amendment to its new credit agreement which allowed
the Company to use proceeds from the term loan facility to make the one-time
payment of accrued interest related to the TECONS. The amendment also increased
the interest rate on revolving loans by 1.5% and increased the fees related to
letter of credit accommodations by 1.0%. The Company was in compliance with the
various provisions of its agreements at June 30, 2002.
The Company incurs various capital expenditures related to existing
restaurants and restaurant equipment in addition to capital requirements for
developing new restaurants. In 2002, the Company anticipates opening two to four
new restaurants. Capital requirements for the construction of these restaurants
are expected to approximate $2 to $3 million with capital for existing
restaurants expected to be an additional $5 to $6 million. Capital expenditures
of $3.3 million for the first half of 2002 relate primarily to capital spending
for existing restaurants. Capital expenditures in 2001 were $17.9 million and
provided for the opening of three new restaurants, as well as capital for
existing restaurants.
The Company's 1998 Federal income tax returns are currently in the early
stages of an audit by the Internal Revenue Service. The Company believes its
recorded liability for income taxes is adequate to cover its exposure that may
result from the ultimate resolution of the audit. Although no assessment has
been made, in the event the Company is required to pay its recorded liability,
Page 8
or additional income taxes and related interest amounts become due, the
Company's liquidity position would be negatively impacted. The Company
anticipates that any significant amounts due would be payable over time.
As described herein, the Company has a number of situations which could
result in amounts due when the Company does not have sufficient availability
from working capital or under its borrowing arrangements to satisfy such
liabilities. Material adverse changes in the Company's assessment of these
matters could have a negative impact on the Company's liquidity.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
For the six months ended June 30, 2002 and July 1, 2001, the following
supplements the consolidated statements of cash flows (amounts in thousands):
2002 2001
---------- ----------
Interest paid (net of amounts capitalized) $ 15,285 11,501
Distributions paid on preferred securities $ 5,372 -
Income taxes paid (refunded) $ 127 193
NOTE 4 - ASSET REVALUATION AND OTHER SPECIAL CHARGES
Asset revaluation and other special charges of $4.4 million in 2002, which
were predominately non-cash, were the result of the second quarter decision to
close two Don Pablo's restaurants and two Hops restaurants as well as the
decision to write-off various capitalized costs related to future restaurant
development. The aforementioned restaurants were subsequently closed in July
2002.
In the first six months of 2001, asset revaluation and other special
charges totaled $1.3 million. These charges included $0.7 million in severance
costs associated with the elimination of certain management positions at the
Company's corporate headquarters and $0.6 million related to an abandoned site.
NOTE 5 - DISPOSAL OF ASSETS
Loss on disposal of assets of $0.1 million for the six months ended June
30, 2002 primarily reflects fees incurred in connection with the first quarter
termination of the Company's interest rate swap agreement.
Loss on disposal of assets of $0.1 million for the six months ended July 1,
2001 reflects the net result of the sale of an office facility in Bedford, Texas
and the sale of various other closed restaurant properties and miscellaneous
assets.
NOTE 6 - GAIN ON DEBT EXTINGUISHMENT
Gain on debt extinguishment for the quarter and six months ended June 30,
2002 reflects the retirement of $34.2 million in face value of the Company's
11.75% Senior Subordinated Notes for $5.6 million plus $1.9 million in accrued
interest. After a $1.8 million write-off primarily of deferred loan costs and
unamortized initial issue discount, the Company recorded a gain on the
extinguishment of $26.8 million.
NOTE 7 - INCOME TAXES
Income tax expense represents the effective rate of expense on earnings
before income taxes for the first six months of 2002. The tax rate is based on
the Company's expected rate for the full fiscal 2002 year.
NOTE 8 - DISCONTINUED OPERATIONS
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 extends the requirement of
APB Opinion No. 30, of reporting separately discontinued operations, to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. The Company
adopted SFAS 144 in the first quarter of 2002 and reclassified its Canyon Cafe
brand, which has been held for sale since December 30, 2001, and its McCormick &
Schmick's brand, which was divested in August 2001, as discontinued operations
for all periods presented in the consolidated financial statements.
Page 9
Net loss from discontinued operations of $0.4 million for the quarter ended
June 30, 2002 primarily reflects a loss on disposal of assets related to the
closure and sale of a Canyon Cafe location.
Net loss from discontinued operations of $0.3 million for the six months
ended June 30, 2002 reflects (i) operating income of $0.2 million before asset
revaluation and other special charges and (gain) loss on disposal of assets,
(ii) non-cash asset impairment charges of $0.7 million to reduce the carrying
value of the assets of the Canyon Cafe brand to estimated fair value, and (iii)
a gain on disposal of assets of $0.2 million which reflects adjustments to
amounts receivable from the divestiture of McCormick & Schmick's which were
partially offset by a loss on disposal of assets related to the sale of a Canyon
Cafe location.
Net earnings from discontinued operations of $3.9 million for the quarter
ended July 1, 2001 reflects (i) operating income of $6.2 million, before asset
revaluation and other special charges and (gain) loss on disposal of assets,
(ii) goodwill amortization of $0.4 million related to McCormick & Schmick's and
(iii) income tax expense of $1.9 million. Net earnings from discontinued
operations of $6.5 million for the six months ended July 1, 2001 reflects (i)
operating income of $10.0 million, before asset revaluation and other special
charges and (gain) loss on disposal of assets, (ii) a gain on disposal of assets
of $0.5 million related to the sale of a closed Canyon Cafe location, (iii)
goodwill amortization of $0.8 million related to McCormick & Schmick's and (iv)
income tax expense of $3.2 million.
NOTE 9 - CONTINGENCIES
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 appealed the court's final decision. Upon hearing the appeal, a
three-judge panel reversed the motion to dismiss and gave the plaintiffs the
opportunity to amend their suit and state with more particularity their
allegations. 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.
NOTE 10 - INTEREST RATE SWAP
During the first quarter of 2002, the Company terminated its only interest
rate swap agreement. The settlement or fair market value of the interest rate
swap on the date of termination was $1.7 million. Prior to termination,
mark-to-market adjustments of $0.9 million were recorded as an increase to
interest expense, which increased the settlement or fair market value of the
interest rate swap to $1.7 million from $0.8 million at December 30, 2001.
At July 1, 2001, the settlement or fair market value of the interest rate
swap was $8.8 million and is included in other long-term liabilities in the
accompanying consolidated balance sheet. For the six months ended July 1, 2001,
mark-to-market adjustments of $0.1 million were recorded as a reduction of
interest expense.
NOTE 11 - RELATED PARTY TRANSACTIONS
At December 30, 2001, the Company held several notes receivable, one of
which was secured by real estate, from Tom E. DuPree, Jr., Chairman of the Board
and Chief Executive Officer of the Company (the "Chairman Notes" and the
"Chairman"). At December 30, 2001, the due date of the Chairman Notes was June
30, 2002 with an interest rate of 11.5% payable at maturity. At December 30,
2001, total amounts owed to the Company under the Chairman Notes were $10.9
million in principal and $3.0 million in accrued interest. At that time, the
Company recorded an allowance against the ultimate realization of amounts due
totaling $11.1 million, yielding a net balance of $2.8 million, the fair value
of the real estate collateral held by the Company.
Page 10
In March 2002, The Board of Directors approved a series of transactions
whereby the Chairman sold the real estate collateral securing one of the
Chairman Notes and, with the $2.8 million in proceeds, purchased $14.0 million
in face value of the Company's 11.75% Senior Subordinated Notes (the "Sub
Notes"), maturing in June 2009. The Sub Notes were pledged as collateral by the
Chairman to secure amounts owed by him to the Company under the Chairman Notes.
On March 6, 2002 the principal and interest due on the several Chairman
Notes were consolidated into one note with a principal balance of $14.1 million
(the "New Chairman Note"), and the interest payment terms, interest rate and due
date of the note were changed to match the terms and due date of the Sub Notes.
All amounts of interest and principal paid by the Company on the Sub Notes owned
by the Chairman and pledged as collateral to the Company, will be used to make
simultaneous payments to the Company on amounts due to the Company under the New
Chairman Note.
In conjunction with the Company's July 10, 2002 payment of the semi-annual
interest due to holders of its Sub Notes, the Chairman made a simultaneous
payment of principal and interest under the New Chairman Note in the amount of
$0.8 million. As a result, the principal balance of the New Chairman Note was
reduced to $13.7 million.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires nonamortization of goodwill and intangible assets that
have indefinite useful lives and annual tests of impairments of those assets.
The statement also provides specific guidance about how to determine and measure
goodwill and intangible asset impairments, and requires additional disclosure of
information about goodwill and other intangible assets. The provisions of the
statement are required to be applied starting with fiscal years beginning after
December 15, 2001 and applied to all goodwill and other intangible assets
recognized in financial statements at that date. The Company adopted SFAS 142
effective at the beginning of its fiscal 2002 year.
The following table discloses the Company's earnings (loss), assuming it
excluded goodwill amortization for the periods ended:
Quarter Ended Six Months Ended
- ----------------------------------------------------------------------------------------- --------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------- --------------------------
Net earnings (loss) $ 14,596 (4,849) 8,878 (5,894)
Add back:
Goodwill amortization, net of income taxes - 458 - 915
Trademark amortization, net of income taxes - 3 - 5
- ----------------------------------------------------------------------------------------- --------------------------
Adjusted net earnings (loss) $ 14,596 (4,388) 8,878 (4,974)
========================================================================================= ==========================
Basic earnings (loss) per share: $ 0.48 (0.17) 0.30 (0.21)
Add back:
Goodwill amortization, net of income taxes - 0.02 - 0.03
Trademark amortization, net of income taxes - 0.00 - 0.00
- ----------------------------------------------------------------------------------------- --------------------------
Adjusted basic earnings (loss) per share $ 0.48 (0.15) 0.30 (0.18)
========================================================================================= ==========================
Diluted earnings (loss) per share: $ 0.45 (0.17) 0.29 (0.21)
Add back:
Goodwill amortization, net of income taxes - 0.02 - 0.03
Trademark amortization, net of income taxes - 0.00 - 0.00
- ------------------------------------------------------------------------------------------ --------------------------
Adjusted diluted earnings (loss) per share $ 0.45 (0.15) 0.29 (0.18)
========================================================================================== ==========================
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires entities to recognize the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. The statement is effective for fiscal years beginning after June 15,
2002. The Company is assessing the impact of adoption of the statement on its
consolidated financial position and results of operations.
Page 11
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 extends the requirement of
APB Opinion No. 30, of reporting separately discontinued operations, to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. The Company
adopted SFAS 144 in the first quarter of 2002 and reclassified its Canyon Cafe
brand, which has been held for sale since December 30, 2001, and its McCormick &
Schmick's brand, which was divested in August 2001, as discontinued operations
for all periods presented in the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", which eliminates the requirement to report gains and losses
related to extinguishments of debt as extraordinary items. The statement also
included other amendments and technical corrections which will not have a
material impact on the Company. The provisions of the statement related to the
treatment of debt extinguishments are required to be applied in fiscal years
beginning after May 15, 2002. The Company elected to adopt SFAS 145 in the
second quarter of 2002. As a result of the application of the statement, the
Company's $26.8 million gain related to the repurchase of $34.2 million of its
11.75% Senior Subordinated Notes was not presented as an extraordinary item in
the accompanying Consolidated Statements of Earnings (Loss). The Company has not
reported any extraordinary losses in prior periods and, accordingly, no prior
period reclassifications were required.
NOTE 13 - GUARANTOR SUBSIDIARIES
The Company's senior notes and revolving credit facility are fully and
unconditionally guaranteed on a joint and several basis by substantially all of
its wholly owned subsidiaries. Such indebtedness is not guaranteed by the
Company's non-wholly owned subsidiaries. These non-guarantor subsidiaries
primarily include certain partnerships of which the Company is typically a 90%
owner. At June 30, 2002 and December 30, 2001, these partnerships in the
non-guarantor subsidiaries operated 20 of the Company's restaurants. At July 1,
2001, these partnerships in the non-guarantor subsidiaries operated 60 of the
Company's restaurants. Accordingly, condensed consolidated balance sheets as of
June 30, 2002 and December 30, 2001, and condensed consolidated statements of
earnings and cash flows for the six months ended June 30, 2002 and July 1, 2001
are provided for such guarantor and non-guarantor subsidiaries. Corporate costs
associated with the maintenance of a centralized administrative function for the
benefit of all Avado restaurants, as well as goodwill, have not been allocated
to the non-guarantor subsidiaries. In addition, interest expense has not been
allocated to the 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 (Loss)
Six Months Ended June 30, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Restaurant sales $ 208,109 27,215 - 235,324
Restaurant operating expenses 192,049 24,542 - 216,591
General and administrative expenses 11,759 1,233 - 12,992
(Gain) loss on disposal of assets 101 - - 101
Other special charges 4,448 - - 4,448
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Operating income (248) 1,440 - 1,192
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Other income (expense) 8,333 - - 8,333
Earnings (loss) before income taxes
for continuing operations 8,085 1,440 - 9,525
Income taxes 319 56 - 375
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) from continuing operations 7,766 1,384 - 9,150
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) from discontinued (272) - - (272)
operations
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) $ 7,494 1,384 - 8,878
================================================ ================ ================= =============== ================
Page 12
Condensed Consolidated Statement of Earnings (Loss)
Six Months Ended July 1, 2001
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Restaurant sales $ 168,369 79,001 - 247,370
Restaurant operating expenses 151,828 72,662 - 224,490
General and administrative expenses 9,741 3,554 - 13,295
(Gain) loss on disposal of assets 137 - - 137
Other special charges 1,250 - - 1,250
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Operating income 5,413 2,785 - 8,198
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Other income (expense) (26,267) (436) - (26,703)
Earnings (loss) before income taxes
for continuing operations (20,854) 2,349 - (18,505)
Income taxes (6,900) 775 - (6,125)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) from continuing operations (13,954) 1,574 - (12,380)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) from discontinued 6,486 - - 6,486
operations
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) $ (7,468) 1,574 - (5,894)
================================================ ================ ================= =============== ================
Condensed Consolidated Balance Sheet
June 30, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
ASSETS
Current assets $ 24,243 960 - 25,203
Premises and equipment, net 250,937 24,329 - 275,266
Goodwill, net 34,920 - - 34,920
Deferred income tax benefit 11,620 - - 11,620
Other assets 32,888 18 - 32,906
Intercompany investments 12,370 - (12,370) -
Intercompany advances 12,838 - (12,838) -
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
$ 379,816 25,307 (25,208) 379,915
================================================ ================ ================= =============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 88,944 99 - 89,043
Long-term liabilities 215,121 - - 215,121
Intercompany payables - 12,370 (12,370) -
Convertible preferred securities 3,179 - - 3,179
Shareholders' equity 72,572 12,838 (12,838) 72,572
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
$ 379,816 25,307 (25,208) 379,915
================================================ ================ ================= =============== ================
Condensed Consolidated Balance Sheet
December 30, 2001
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
ASSETS
Current assets $ 38,927 868 - 39,795
Premises and equipment, net 260,957 24,856 - 285,813
Goodwill, net 34,920 - - 34,920
Deferred income tax benefit 11,620 - - 11,620
Other assets 26,390 18 - 26,408
Intercompany investments 12,370 - (12,370) -
Intercompany advances 12,647 - (12,647) -
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
$ 397,831 25,742 (25,017) 398,556
================================================ ================ ================= =============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 113,092 725 - 113,817
Long-term liabilities 218,926 - - 218,926
Intercompany payables - 12,370 (12,370) -
Convertible preferred securities 68,559 - - 68,559
Shareholders' equity (2,746) 12,647 (12,647) (2,746)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
$ 397,831 25,742 (25,017) 398,556
================================================ ================ ================= =============== ================
Page 13
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) operating $ (27,890) 2,131 - (25,759)
activities
- ----------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash flows from investing activities:
Capital expenditures (2,990) (350) - (3,340)
Other investing activities (886) - - (886)
- ----------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) investing (3,876) (350) - (4,226)
activities
- ----------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from revolving credit agreements 18,127 - - 18,127
Proceeds from term credit agreement 12,898 - - 12,898
Payment of financing costs (8,502) - - (8,502)
Payment of long-term debt (5,584) - - (5,584)
Principal payments on long-term debt (13) - - (13)
Reduction in letter of credit collateral 9,978 - - 9,978
Proceeds from (payment of) intercompany
advances 277 (277) - -
Settlement of interest rate swap agreement (1,704) - - (1,704)
- ----------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) financing activities 25,477 (277) - 25,200
- ----------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash provided by (used in) discontinued operations 5,160 - - 5,160
- ----------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (1,129) 1,504 - 375
Cash and equivalents at the beginning of the period 530 29 - 559
- ----------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash and equivalents at the end of the period $ (599) 1,533 - 934
===================================================== ================ ================= =============== ================
Condensed Consolidated Statement of Cash Flows
Six Months Ended July 1, 2001
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by operating activities $ (12,820) 4,932 - (7,888)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash flows from investing activities:
Capital expenditures (4,944) (761) - (5,705)
Proceeds from disposal of assets, net 5,389 - - 5,389
Other investing activities (1,754) - - (1,754)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) investing (1,309) (761) - (2,070)
activities
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from revolving credit agreements 4,993 - - 4,993
Proceeds from (payment of) intercompany
advances 4,173 (4,173) - -
Other financing activities (13) - - (13)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) financing activities 9,153 (4,173) - 4,980
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash provided by (used in) discontinued operations 4,960 - - 4,960
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (16) (2) - (18)
Cash and equivalents at the beginning of the period 310 92 - 402
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash and equivalents at the end of the period $ 294 90 - 384
==================================================== ================ ================= =============== ================
NOTE 14 - SUBSEQUENT EVENTS
On August 6, 2002, the Company's Board of Directors adopted a Shareholder
Rights Plan. Under the plan, Rights will be distributed as a dividend at the
rate of one Right for each share of Avado common stock, par value $.01 per
share, held by shareholders of record as of the close of business on September
4, 2002. The Rights Plan was not adopted in response to any effort to acquire
control of Avado Brands.
Page 14
The Rights Plan is designed to deter coercive takeover tactics, including
the accumulation of shares in the open market or through private transactions
and to prevent an acquirer from gaining control of Avado without offering a fair
and adequate price and terms to all of Avado's shareholders. The Rights will
expire on September 4, 2007.
Each Right initially will entitle stockholders to buy one unit of a share
of a series of preferred stock for $9.50. The Rights generally will be
exercisable only if a person or group acquires beneficial ownership of 15% or
more of Avado's common stock or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more of
Avado's common stock.
Page 15
Item 2.
AVADO BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Second Quarter and Six Months Ended June 30, 2002
Consolidated Overview of Operations
Consolidated restaurant sales for the second quarter and six months ended
June 30, 2002 were $115.8 million and $235.3 million, respectively, compared to
$121.6 million and $247.4 million for the same respective periods of 2001.
Declining revenues were primarily a result of a decrease in same-store sales at
Don Pablo's and Hops and a decrease in operating capacity from the closure of
four Don Pablo's restaurants at the end of the first quarter of 2001.
Same-store-sales for the second quarter decreased by 5.4% at Don Pablo's and
3.5% at Hops as compared to the corresponding period of the prior year
(same-store-sales comparisons include all restaurants open for 18 months as of
the beginning of the quarter). On a year-to-date basis, same-store sales
decreased by 5.1% at Don Pablo's and 3.0% at Hops. Declining revenues for the
six months ended June 30, 2002 were slightly offset by increased operating
capacity from one new Hops restaurant opened in 2001.
Consolidated operating income before asset revaluation and other special
charges and gain/loss on the disposal of assets for the quarter and six months
ended June 30, 2002 was $2.9 million and $5.7 million, respectively, compared to
$3.0 million and $9.6 million for the corresponding periods of 2001. Decreased
operating income for the six months ended June 30, 2002 was predominately
related to (i) declining sales volumes which generated an increase in fixed
operating expenses as a percentage of sales and (ii) higher operating expenses
associated with increased marketing initiatives. While marketing related
expenses increased during the first half of 2002, in June, the Company revised
its overall marketing strategy to encompass a more regional focus and
dramatically reduced its marketing expenditures. As a result, management
believes that consolidated marketing expense as a percent of sales will be
approximately 4.5% to 5.5% for the full year 2002. Decreases in operating income
were somewhat offset by (i) decreases in utility costs as a result of the
unseasonably warm weather during the first quarter of 2002 and (ii) decreases in
costs associated with new manager training at Don Pablo's and Hops due to
improved management retention.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 extends the requirement of
APB Opinion No. 30, of reporting separately discontinued operations, to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. The Company
adopted SFAS 144 in the first quarter of 2002 and reclassified its Canyon Cafe
brand, which has been held for sale since December 2001, and its McCormick &
Schmick's brand, which was divested in August 2001, as discontinued operations
for all periods presented in the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", which eliminates the requirement to report gains and losses
related to extinguishments of debt as extraordinary items. The provisions of the
statement related to the treatment of debt extinguishments are required to be
applied in fiscal years beginning after May 15, 2002. The Company elected to
adopt SFAS 145 in the second quarter of 2002. As a result of the application of
the statement, the Company's $26.8 million gain related to the repurchase of
$34.2 million of its 11.75% Senior Subordinated Notes was not presented as an
extraordinary item in the accompanying Consolidated Statements of Earnings
(Loss). The Company has not reported any extraordinary losses in prior periods
and, accordingly, no prior period reclassifications were required.
Page 16
Restaurant Operating Expenses
The following table sets forth the percentages, which certain items of
income and expense bear to total restaurant sales for the Company's continuing
operations for the quarter and six month periods ended June 30, 2002 and July 1,
2001.
- ---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
- ---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Restaurant sales:
Don Pablo's 60.0% 60.4% 59.0% 59.5%
Hops 40.0% 39.6% 41.0% 40.5%
- ---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Total restaurant sales 100.0% 100.0% 100.0% 100.0%
- ---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Restaurant operating expenses:
Food and beverage 28.1% 28.0% 28.2% 28.0%
Payroll and benefits 33.7% 32.6% 33.4% 32.3%
Depreciation and amortization 3.4% 3.9% 3.4% 3.8%
Other operating expenses 26.6% 27.4% 27.0% 26.7%
- ---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Total restaurant operating expenses 91.8% 91.9% 92.0% 90.8%
- ---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Income from restaurant operations 8.2% 8.1% 8.0% 9.2%
General and administrative expenses 5.7% 5.6% 5.5% 5.4%
- ---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Operating income before special charges and
(gain) loss on disposal of assets 2.5% 2.5% 2.4% 3.9%
============================================== ================ ================= ================ =================
Restaurant operating expenses for the quarter and six months ended June 30,
2002 were 91.8% and 92.0% of sales, respectively, compared to 91.9% and 90.8% of
sales for the corresponding periods of 2001. The resulting decrease in
restaurant operating margins for the six months ended June 30, 2002 was
predominately due to increases in operating expenses generated by (i) declining
sales volumes which generated an increase in fixed operating expenses as a
percentage of sales and (ii) ongoing advertising strategies designed to build
sales volumes over time at Don Pablo's and Hops which increased advertising
expenditures to 5.9% and 5.4% of sales at Don Pablo's and Hops, respectively,
compared to 5.3% and 3.9%, respectively, for the same periods of 2001. While
marketing related expenses increased during the first half of 2002, in June, the
Company revised its overall marketing strategy to encompass a more regional
focus and dramatically reduced its marketing expenditures. As a result,
management believes that consolidated marketing expense, as a percent of sales,
will be approximately 4.5% to 5.5% for the full year 2002. Decreases in
operating margins were somewhat offset by (i) decreases in utility costs as a
result of the unseasonably warm weather during the first quarter of 2002 and
(ii) decreases in costs associated with new manager training at Don Pablo's and
Hops due to improved management retention.
General and Administrative Expenses
General and administrative expenses of 5.7% and 5.5% of sales for the
quarter and six months ended June 30, 2002, respectively, increased slightly
over the comparable periods of the prior year due primarily to a decline in
sales volumes.
Discontinued Operations
Net loss from discontinued operations of $0.4 million for the quarter ended
June 30, 2002 primarily reflects a loss on disposal of assets related to the
closure and sale of a Canyon Cafe location.
Net loss from discontinued operations of $0.3 million for the six months
ended June 30, 2002 reflects (i) operating income of $0.2 million before asset
revaluation and other special charges and (gain) loss on disposal of assets,
(ii) non-cash asset impairment charges of $0.7 million to reduce the carrying
value of the assets of the Canyon Cafe brand to estimated fair value, and (iii)
a gain on disposal of assets of $0.2 million which reflects adjustments to
amounts receivable from the divestiture of McCormick & Schmick's which were
partially offset by a loss on disposal of assets related to the sale of a Canyon
Cafe location.
Page 17
Net earnings from discontinued operations of $3.9 million for the quarter
ended July 1, 2001 reflects (i) operating income of $6.2 million, before asset
revaluation and other special charges and (gain) loss on disposal of assets,
(ii) goodwill amortization of $0.4 million related to McCormick & Schmick's and
(iii) income tax expense of $1.9 million.
Net earnings from discontinued operations of $6.5 million for the six
months ended July 1, 2001 reflects (i) operating income of $10.0 million, before
asset revaluation and other special charges and (gain) loss on disposal of
assets, (ii) a gain on disposal of assets of $0.5 million related to the sale of
a closed Canyon Cafe location, (iii) goodwill amortization of $0.8 million
related to McCormick & Schmick's and (iv) income tax expense of $3.2 million.
Asset Revaluation and Other Special Charges
Asset revaluation and other special charges of $4.4 million in 2002, which
were predominately non-cash, were the result of the second quarter decision to
close two Don Pablo's restaurants and two Hops restaurants as well as the
decision to write-off various capitalized costs related to future restaurant
development. The aforementioned restaurants were subsequently closed in July
2002.
In the first six months of 2001, asset revaluation and other special
charges totaled $1.3 million. These charges included $0.7 million in severance
costs associated with the elimination of certain management positions at the
Company's corporate headquarters and $0.6 million related to an abandoned site.
Interest and Other Expenses
Net interest expense for the second quarter and six months ended June 30,
2002 was $8.1 million and $16.3 million, respectively, compared to $10.3 million
and $19.4 million for the corresponding periods of the prior year. Decreased
interest expense was primarily due to the divestiture of McCormick & Schmick's,
the proceeds of which were used to repay $95.8 million outstanding under the
Company's revolving credit facility during the third quarter of 2001. Decreases
in interest expense were somewhat offset by unfavorable mark-to-market
adjustments recorded during the first quarter of 2002 under a fixed-to-floating
interest rate swap agreement, which was terminated on March 25, 2002, and by
increased interest charges incurred primarily during the first quarter of 2002
related to past due sales and use, property and other taxes. Due to the timing
of the Company's $34.2 million repurchase of 11.75% Senior Subordinated Notes,
which occurred near the end of the second quarter, no significant reduction in
interest expense was realized during the first half of 2002.
Distribution expense on preferred securities relates to the Company's $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 "TECONS"). Expenses related to these securities decreased as a
result of the conversion of 86,128 of the securities into 291,115 shares of
common stock during 2001, coupled with 1,307,591 additional conversions in the
first half of 2002 into 4,419,789 shares of common stock all of which were
issued from treasury stock. The Company has the right to defer quarterly
distribution payments on the Convertible Preferred Securities for up to 20
consecutive quarters and has deferred all such payments beginning with the
December 1, 2000 payment until December 1, 2005. The Company may pay all or any
part of the interest accrued during the extension period at any time.
In June 2002, the Company made a one-time distribution payment of accrued
interest, totaling $5.4 million or $4.25 per share, to holders of its TECONS. Of
the 1,307,591 shares converted during the first half of 2002, 1,200,391 were
converted in conjunction with this distribution payment. As a result of these
conversions, annual distribution expense on the remaining TECONS outstanding
will be approximately $0.2 million.
Loss on disposal of assets of $0.1 million for the six months ended June
30, 2002 primarily reflects fees incurred in connection with the first quarter
termination of the Company's interest rate swap agreement.
During the six months ended June 30, 2002, other expenses related primarily
to the incurrence of various tax penalties. The decrease in other expenses for
the six months ended June 30, 2002 was primarily related to a reduction in the
incurrence of various tax penalties as compared to the first six months of 2001
and the non-amortization of goodwill as a result of the Company's first quarter
2002 adoption of SFAS 142 , "Goodwill and Other Intangible Assets". For the six
months ended July 1, 2001, the Company recorded goodwill amortization of $1.0
million.
Page 18
Income tax expense represents the effective rate of expense on earnings
before income taxes for the first half of 2002. The tax rate is based on the
Company's expected rate for the full fiscal 2002 year.
Liquidity and Capital Resources
Generally, the Company operates with negative working capital since
substantially all restaurant sales are for cash while payment terms on accounts
payable typically range from 0 to 45 days. 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. Decreases in accounts payable during
the first half occurred as a result of a planned reduction in various
outstanding obligations with borrowings from the Company's $75.0 million
refinanced credit facility. Decreases in accrued liabilities during the first
half of 2002 occurred (i) as a result of a reduction in accrued interest due to
the retirement of $34.2 million in outstanding debt related to the Company's
11.75% Senior Subordinated Notes (ii) as a result of a reduction in accrued
interest due to the payment of accrued interest and conversion of 1,307,591
shares, or $65.4 million, of the Company's Convertible Preferred Securities, and
(iii) as a result of the payment of previously deferred payments related to
sales, use, property and other taxes.
On March 25, 2002, the Company completed a $75.0 million credit facility to
replace its existing credit agreement. The facility, which matures on March 25,
2005, limits total borrowing capacity at any given time to an amount equal to
two and one quarter times the Company's trailing 12 months earnings before
interest, income taxes and depreciation and amortization as determined for the
most recently completed four quarters ("Borrowing Base EBITDA"). The calculation
of Borrowing Base EBITDA excludes the 2001 operations of McCormick & Schmick's,
gains and losses on the disposal of assets, asset revaluation and other special
charges, non-cash rent expense and preopening costs. The agreement provides a
$35.0 million revolving credit facility, which may be used for working capital
and general corporate purposes, and a $40.0 million term loan facility, which is
limited to certain defined purposes, excluding working capital and capital
expenditures. In certain circumstances, borrowings under the term loan facility
are required to be repaid to the lender and any such repayments are not
available to be re-borrowed by the Company. Events generating a required
repayment include, among other things, proceeds from asset dispositions,
casualty events, tax refunds and excess cash flow, each as defined in the credit
agreement. In addition, the lender reserves the right to impose certain reserves
against the Company's total borrowing availability under the facility which may
limit the Company's availability on both the revolving and term loans. Lender
imposed reserves against the Company's total borrowing availability, as of June
30, 2002, were $4.2 million. Subsequent to June 30, 2002, the lender reserve
amount was reduced to $3.1 million. Irrespective of future borrowings, certain
obligations will exist with respect to the agreement including annual
anniversary fees of $1.1 million and an additional fee payable at maturity of
$5.1 million. The loan is secured by substantially all of the Company's assets.
During the second quarter of 2002, Borrowing Base EBITDA was $25.9 million,
resulting in a maximum borrowing capacity of $58.3 million. At June 30, 2002,
the Company's trailing 12 months EBITDA totaled $24.7 million. Accordingly, the
Company's maximum borrowing capacity will be adjusted from $58.3 million to
$55.7 million in conjunction with the Company's filing of its quarterly reports
with the lender on or before August 14, 2002. At June 30, 2002, $18.1 million of
cash borrowings were outstanding under the revolving portion of the Company's
credit facility and $12.9 million was outstanding under the term portion of the
facility. During the first half of 2002, $10.0 million in restricted cash, which
was held as collateral to secure letters of credit which secure the Company's
insurance programs, was released and used to reduce the outstanding cash
borrowings under the revolving credit facility. Under the new credit agreement,
revolving loan capacity is used to secure the Company's letters of credit. At
June 30, 2002, in addition to the $18.1 million of cash borrowings outstanding
under the revolving facility, an additional $14.9 million of the facility was
utilized to secure letters of credit and $2.0 million of the revolving facility
remained unused and available. At June 30, 2002, $6.2 million remained unused
and available under the Company's term loan facility. As a result of the
upcoming reduction in the Company's borrowing base, which will be somewhat
offset by the $1.1 million lender reserve reduction, availability on the term
facility will be reduced by $1.5 million on or before August 14, 2002, while
availability on the revolving facility will remain unchanged.
Borrowings under the term loan facility during the second quarter included
$7.5 million (including approximately $1.9 million in accrued interest) to
repurchase $34.2 million in face value of the Company's outstanding 11.75%
Senior Subordinated Notes, due June 2009. After a $1.8 million write-off
primarily of deferred loan costs and unamortized initial issue discount, the
Company recorded a gain on the extinguishment of $26.8 million. An additional
$5.4 million of term loan proceeds were used during the second quarter to make a
one-time payment of accrued interest, equal to $4.25 per share, to holders of
the Company's $3.50 term convertible securities, due March 2027 (the "TECONS").
The payment was conditional upon the holders of at least 90% of the outstanding
TECONS agreeing to convert their securities into shares of common stock of the
Company pursuant to the terms of the TECONS. According to the terms of the
securities, each TECON can be converted, at the holders' option, into 3.3801
shares of common stock. During the second quarter, holders representing
Page 19
approximately 95% of the outstanding securities agreed to the terms of the offer
and, in connection with the $5.4 million payment, 1,200,391 TECONS were
converted into 4,057,442 shares of the Company's common stock. As a result of
this transaction, the outstanding balance of the TECONS was reduced by $60.0
million. Subsequent to the end of the second quarter, an additional $3.2 million
was borrowed under the term loan facility to repurchase $17.9 million in face
value of the Company's outstanding 11.75% Senior Subordinated Notes.
Principal financing sources in the first half of 2002 consisted of (i) term
loan proceeds of $12.9 million, (ii) proceeds from the revolving credit
agreement of $9.6 million, net of financing costs of $8.5 million, (iii) a $10.0
million refund of payments to collateralize letters of credit for the Company's
self-insurance programs and (iv) proceeds of $5.2 million from discontinued
operations related primarily to the McCormick & Schmick's divestiture. The
primary uses of funds consisted of (i) net cash used in operations of $25.8
million which included interest payments of $20.7 million primarily related to
the Company's 9.75% senior notes, 11.75% senior subordinated notes and the
one-time TECON payment, in addition to operating lease payments of $12.5
million, (ii) $5.6 million for the repurchase of $34.2 million in face value of
the Company's outstanding 11.75% Senior Subordinated Notes, (iii) capital
expenditures of $3.3 million, and (iv) settlement of the Company's interest rate
swap agreement for $1.7 million.
Interest payments on the Company's senior and subordinated notes are due
semi-annually in each June and December. Prior to the Company's repurchase of
$52.1 million in face value of its outstanding 11.75% Senior Subordinated Notes,
the Company's semi-annual interest payments totaled approximately $11.6 million.
Subsequent to the repurchase, the Company's semi-annual interest payments will
total approximately $8.5 million. Under the terms of the related note
indentures, the Company has an additional 30-day period from the scheduled
interest payment dates before an event of default is incurred and the Company
utilized these provisions with respect to its June 2002 interest payments as
well as its June and December 2001 interest payments. These provisions will
again be available to the Company, if needed, with respect to the December 2002
interest payments.
The terms of the Company's new credit facility, senior and subordinated
notes, $30.0 million master equipment lease and $28.4 million Hops
sale-leaseback transaction include various provisions which, among other things,
require the Company to (i) achieve certain EBITDA targets, (ii) maintain defined
net worth and coverage ratios, (iii) maintain defined leverage ratios, (iv)
limit the incurrence of certain liens or encumbrances in excess of defined
amounts and (v) limit certain payments. In conjunction with the March 25, 2002
closing of the Company's refinanced credit facility, the Company terminated its
interest rate swap agreement thereby eliminating any aforementioned restrictions
on the Company contained in that agreement. In addition, in March 2002 the
Company amended its master equipment lease agreement to substantially conform
the covenants to the refinanced credit facility and also obtained an amendment
of certain provisions contained in its sale-leaseback agreement. In June 2002,
the Company also obtained an amendment to its new credit agreement, which
allowed the Company to use proceeds from the term loan facility to make the
one-time payment of accrued interest related to the TECONS. The amendment also
increased the interest rate on revolving loans by 1.5% and increased the fees
related to letter of credit accommodations by 1.0%. The Company was in
compliance with the various provisions of its agreements at June 30, 2002.
The Company incurs various capital expenditures related to existing
restaurants and restaurant equipment in addition to capital requirements for
developing new restaurants. In 2002, the Company anticipates opening two to four
new restaurants. Capital requirements for the construction of these restaurants
are expected to approximate $2 to $3 million with capital for existing
restaurants expected to be an additional $5 to $6 million. Capital expenditures
of $3.3 million for the first half of 2002 relate primarily to capital spending
for existing restaurants. Capital expenditures in 2001 were $17.9 million and
provided for the opening of three new restaurants, as well as capital for
existing restaurants.
The Company is also exposed to certain contingent payments. 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 estimated under these
programs are recorded based on estimates of the aggregate liability for claims
incurred. For the six months ended June 30, 2002, claims paid under the
Company's self-insurance programs totaled $2.6 million. In addition, at June 30,
2002, the Company was contingently liable for letters of credit aggregating
approximately $14.9 million, relating to its insurance programs.
Page 20
The Company's 1998 Federal income tax returns are currently in the early
stages of an audit by the Internal Revenue Service. The Company believes its
recorded liability for income taxes is adequate to cover its exposure that may
result from the ultimate resolution of the audit. Although no assessment has
been made, in the event the Company is required to pay its recorded liability,
or additional income taxes and related interest amounts become due, the
Company's liquidity position would be negatively impacted. The Company
anticipates that any significant amounts due would be payable over time.
As described herein, the Company has a number of situations which could
result in amounts due when the Company does not have sufficient availability
from working capital or under its borrowing arrangements to satisfy such
liabilities. Material adverse changes in the Company's assessment of these
matters could have a negative impact on the Company's liquidity.
Effect of Inflation
Management believes that inflation has not had a material effect on
earnings during the past several years. Future 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 quarterly 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.
Page 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and
changes in commodity prices. Historically the Company's exposure to interest
rate risk has related 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 swap agreements have
historically been utilized to manage overall borrowing costs and balance fixed
and floating interest rate obligations. As of March 25, 2002 the Company
terminated the one such swap agreement it had in place and no further obligation
remains after that date.
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.
Page 22
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on May 23, 2002, at which the
following proposals were voted upon by shareholders: (1) the election of six
members to the Board of Directors, and (2) ratification of the selection of KPMG
LLP as the Company's independent auditors.
Each of the six members of the Company's Board of Directors was elected to
serve a term of one year and until his or her successor is elected, and has
qualified by the following votes:
Affirmative Negative
----------- --------
Tom E. DuPree, Jr. 25,744,601 665,732
Margaret E. Waldrep 25,765,429 644,904
Emilio Alvarez-Recio 26,024,194 383,139
Jerome A. Atkinson 26,026,505 383,828
William V. Lapham 26,025,467 384,866
Robert Sroka 26,023,967 386,366
The remaining proposal, voted on at the May 23, 2002 annual meeting of
shareholders, was approved as follows:
Affirmative Negative Abstaining
----------- -------- ----------
Appointment of KPMG LLP 26,239,148 145,548 25,637
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Amendment Number One, dated as of June 4, 2002, to Second Amended and
Restated Credit Agreement dated as of March 20, 2002 by and among Avado Brands,
Inc., as Borrower, the lenders signatory thereto, Foothill Capital Corporation,
as Administrative Agent, and Ableco Finance LLC, as Collateral Agent.
10.2 Eighth amendment, dated as of March 25, 2002, to Participation
Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Avado
Brands, Inc., as lessee, First Security Bank, National Association, as lessor,
SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders
signatory thereto.
11.1 Computation of earnings per common share
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of
1995*
99.2 Certification of Corporate Officers
* Incorporated by reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 2, 2000.
(b) Reports on Form 8-K.
None
Page 23
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Avado Brands, Inc.
(Registrant)
Date: August 13, 2002 By:/s/Louis J. Profumo
-------------------------
Louis J. Profumo
Chief Financial Officer
Page 24