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 29, 2002 Commission File No. 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
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(State of Incorporation) (I.R.S. Employer
Identification No.)
Hancock at Washington
Madison, Georgia 30650
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(Address of Principal (Zip Code)
Executive Offices)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
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.
[ ]
As of June 29, 2002, 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 $6,067,744.
As of February 10, 2003, the number of shares of common stock outstanding
was 33,101,929.
DOCUMENTS INCORPORATED BY REFERENCE:
The Definitive Proxy Statement for use in connection with the 2003 Annual
Meeting of Shareholders is incorporated by reference, to the extent indicated
under Items 10, 11, and 12 into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business............................................................3
Item 2. Properties..........................................................7
Item 3. Legal Proceedings...................................................8
Item 4. Submission of Matters to a Vote of Security Holders.................9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................10
Item 6. Selected Financial Data............................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........27
Item 8. Financial Statements and Supplementary Data........................28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................57
PART III
Item 10. Directors and Executive Officers of the Registrant.................57
Item 11. Executive Compensation.............................................57
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.........................57
Item 13. Certain Relationships and Related Transactions.....................57
Item 14. Controls and Procedures............................................58
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...59
2
PART I
Item 1. Business
General
Avado Brands, Inc., including its wholly owned subsidiaries (the "Company"
or "Avado Brands"), is a full service, casual dining restaurant company, which
owns three decentralized restaurant brands. At December 29, 2002, the Company
owned and operated restaurants in 29 states including 120 Don Pablo's Mexican
Kitchen restaurants, 66 Hops Restaurant o Bar o Brewery restaurants and four
Canyon Cafe restaurants, which were held for sale, effective December 30, 2001.
For the 52-week period ended December 29, 2002, restaurant sales for continuing
operations were $441.6 million compared to $589.4 million in 2001. Restaurant
sales for discontinued operations were $19.3 million compared to 2001 sales of
$28.8 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 2002, the Company continued to focus on its stated strategies of
reducing debt, improving liquidity and increasing profitability. These
strategies resulted in the execution of various management initiatives
including, (i) the completion of a $75.0 million credit facility, (ii) the
closure of under-performing restaurants, (iii) the divestiture of the Company's
Canyon Cafe brand, (iv) the repurchase of outstanding public debt and (v) the
induced conversion of the Company's Convertible Preferred Securities. During the
first quarter of 2002, the Company completed a $75.0 million credit facility to
replace its existing credit agreement and provide additional liquidity. The
agreement provides a $35.0 million revolving credit facility and a $40.0 million
term loan facility. Nineteen under-performing Don Pablo's and Hops locations
were closed during 2002 and 11 Canyon Cafe restaurants were either closed or
divested. Asset revaluation and other special charges of $67.5 million,
including $22.1 million related to discontinued operations, were recorded during
2002 primarily as a result of restaurant closures and a $35.0 million writedown
of goodwill pursuant to the Company's annual test of impairment of goodwill
required by Statement of Financial Accounting Standards ("SFAS") No. 142, which
the Company adopted effective at the beginning of 2002. No new restaurants were
opened during 2002 and only three restaurants were opened during 2001 enabling
the Company to focus on the operations of its existing restaurants. The
Company's debt reduction strategies included the repurchase of $52.4 million in
face value of its outstanding 11.75% Senior Subordinated Notes during 2002. In
addition the conversion of 1,307,591 shares of the Company's outstanding
Convertible Preferred Securities into common stock during 2002, reduced the
Company's outstanding obligation with respect to those securities by $65.4
million. The Company also received proceeds of $13.0 million (including $3.9
million from discontinued operations) from the sale of other non-core assets and
closed restaurant locations during the year.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144, which was adopted by the
Company in the first quarter of 2002, supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a "Segment" of a business as
defined in that Opinion. As a result of the adoption of SFAS 144, the Company
has classified the revenues, expenses and related assets and liabilities of 11
Don Pablo's restaurants and eight Hops restaurants which were closed in 2002,
plus one additional Don Pablo's restaurant which was under contract and held for
sale at December 29, 2002 and subsequently sold in February 2003, as
discontinued operations for all periods presented in the accompanying
consolidated financial statements. The revenues, expenses and related assets and
liabilities of Canyon Cafe, which was substantially divested during 2002,
including the revenues, expenses and related assets and liabilities for the four
Canyon Cafe locations which continue to be held for sale at December 29, 2002,
the McCormick & Schmick's brand, which was divested in August 2001, and eight
Don Pablo's and two Hops restaurants which were closed in 2001, have not been
classified as discontinued operations in the accompanying consolidated financial
statements. As the decision to divest these operations was made prior to the
implementation of SFAS 144 and they did not meet the criteria for classification
as discontinued operations under the provisions of APB Opinion No. 30, they are
required to be classified within continuing operations under the provisions of
SFAS 121.
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 President, Robert Andreotolla. Mr.
Andreotolla has over twenty years of experience in the restaurant industry and
has been with Avado Brands since 1987. In 2002, Don Pablo's continued to make
strides to improve its niche-leading position, including the addition of new
members to the management and operational teams. Other strides included the
development and implementation of new menu items, implementation of an
aggressive national advertising campaign, and an improved focus on operational
synergies, including improved expense category management.
Menu. The menu offers a wide variety of entrees and combination plates,
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 2002, the price of a typical meal was
$4.99 to $6.99 for lunch and $7.99 to $11.99 for dinner. In addition to its
regular menu, Don Pablo's offers lunch specials priced from $4.99 each and a
children's menu. Full bar service is also provided. Alcoholic beverages
accounted for approximately 17.9% of sales in 2002.
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 artwork. 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 2002, average unit volumes for the 120 restaurants that
were open for the full year were $2.1 million. In 2002, Don Pablo's did not open
any new restaurants and 11 under-performing restaurants were closed. These
restaurants were generally in single unit markets or markets which the Company
no longer intends to develop and were not generating positive cash flow.
Field Management. Management is shared by 18 directors of operations who
report to two regional vice presidents of operations. The strategy is to have
each director responsible for a limited number of restaurants, thus facilitating
a focus on guest satisfaction, operations and unit profitability. The management
staff of a typical restaurant consists of one general manager, an assistant
general manager and two to four assistant managers, depending on volume. The
restaurant management staff is eligible to receive bonuses based on achieving
budgeted PAC (profit after controllables) and sales as well as meeting several
internal quality assurance goals.
Advertising and Marketing. Don Pablo's advertising and marketing strategy
combines the use of television and radio and print advertising in core markets,
along with a focus on local efforts and community involvement at all locations
designed to increase traffic counts and appeal to consumer desires for new and
exciting tastes. In 2002, advertising expense was 5.0% of sales.
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. Hops is led by the brand's President,
Ronald Magruder. Mr. Magruder joined Hops in 2000, bringing with him nearly 30
years of experience in the restaurant industry. He was formerly the Chairman of
the Board of the National Restaurant Association, the Chief Operating Officer of
CBRL Group's Cracker Barrel Old Country Store, and Vice Chairman of Darden
Hospitality.
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
$10.00 per person for lunch and $13.00 to $18.00 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. Full bar service is also available at each restaurant.
Alcoholic beverages accounted for approximately 16.8% of sales in 2002.
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 2002, average unit volumes for the 66 restaurants that
were open for the full year were $2.5 million. In 2002, Hops did not open any
new restaurants and eight under-performing restaurants were closed. These
restaurants were generally in single unit markets and were not generating
positive cash flow.
Field Management. Management is shared by four operating partners and six
area supervisors who report to two regional vice presidents who report to the
brand's Chief Executive Officer. Each operating partner or area supervisor is
ultimately responsible for six to eight restaurants, thus facilitating a focus
on quality of operations and unit profitability. The management staff of a
typical restaurant consists of one managing partner and three assistant
managers. Managing Partners are eligible to receive bonuses equal to a
percentage of their restaurant's controllable income, subject to operating above
a minimum-operating margin. Assistant managers are eligible to receive bonuses
equal to a percentage of their budgeted controllable income achieved.
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. In 2002, Hops
introduced an aggressive coupon campaign focused on offering value and driving
guest count. These strategies are expected to continue into 2003 with the
continued use of television and radio advertising, print media, limited outdoor
advertising, as well as ongoing grassroots programs. Limited time coupon offers
will also be a part of the 2003 marketing efforts. In 2002, advertising expense
was 4.4% 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.
5
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. Each new Don Pablo's and Hops manager also spends
an additional week at the respective brand's headquarters to complete training
on guest service, sales building, cost controls and employee development.
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. The Company coordinates its food and beverage
purchasing efforts whenever possible in order to obtain consistent quality items
at competitive prices from reliable sources for 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 the brands, which use one primary
distributor for food products other than locally purchased produce. All food and
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 the corporate headquarters which includes
payroll, accounts payable, general ledger, treasury services and taxes. Each
brand maintains their own independent operational financial analysis and
support. A point-of-sale reporting system is utilized in each restaurant.
Restaurant management submits to corporate and 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
6
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.
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 29, 2002, Avado Brands employed approximately 12,500
persons. Of those employees, approximately 150 held non-restaurant management or
administrative positions, 850 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 retain
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 as well as the
headquarters of Don Pablo's. 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 the Company's development department, subject to executive
officer approval and final approval by the Company's management committee.
Within the target market areas, the Company evaluates 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.
7
As of February 10, 2003, the Company operated 119 Don Pablo's and 66 Hops
restaurants. The Company leases the underlying real estate on which 110 of the
restaurants are located and leases both the buildings and underlying real estate
for an additional 31 restaurants. The remaining 44 restaurants and related real
estate are owned by the Company. In addition, the Company continues to operate
four Canyon Cafe restaurants, which are held for sale. The Company leases the
underlying real estate on which these restaurants are located in the states of
Texas and Washington.
The following table presents restaurant locations by brand for Don Pablo's
and Hops:
Don Pablo's Hops Total
------------------------- --------------- ------------ -------------
Florida 16 31 47
Ohio 16 2 18
Texas 13 13
Indiana 11 11
Virginia 7 3 10
Minnesota 7 2 9
Pennsylvania 9 9
Michigan 8 8
Colorado 7 7
South Carolina 3 4 7
Maryland 5 1 6
Tennessee 4 2 6
Georgia 1 4 5
New York 5 5
North Carolina 1 4 5
Kentucky 4 4
Oklahoma 4 4
Connecticut 3 3
New Jersey 2 2
Delaware 1 1
Illinois 1 1
Iowa 1 1
Mississippi 1 1
Missouri 1 1
Rhode Island 1 1
------------------------- --------------- ------------ -------------
Totals 119 66 185
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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 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. The plaintiffs have made a settlement offer of $2.5 million, which
has been accepted by the Company's insurer. The Company believes that the
members of the class will give final consent to the insurer's offer and, in the
near future, the case will be dismissed as settled, at no additional cost to the
Company.
8
In September 2002, the Company was named as the Defendant in an action
filed in the U.S. District Court for the Middle District of Georgia. The
Plaintiff, Bank of America Securities, LLC, alleges that it is owed a fee of
approximately $1.0 million, relating to the Company's sale of the McCormick &
Schmick's brand. The Company believes that the allegations in the complaint are
without merit and plans to vigorously contest the complaint. This litigation is
currently at a preliminary stage and no discovery has occurred. Thus, it is not
possible for the Company to evaluate the likelihood of the plaintiff prevailing
on its claims. Because this claim is a suit on a contract, the Company's
existing insurance policies do not provide coverage. There can be no assurance
that an adverse determination in this litigation would not have a material
adverse effect on the Company's financial condition or results of operations.
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 29, 2002.
9
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 Relations Analyst SunTrust Bank, Atlanta
Hancock at Washington Corporate Trust Division
Madison, GA 30650 P.O. Box 4625
Telephone: (706) 342-4552 Atlanta, GA 30302
Facsimile: (706) 343-2434
E-mail: jhatchet@corp.avado.com
Investor Information
The Company's common stock currently trades on the Over-The-Counter
Bulletin Board, maintained by the National Association of Securities Dealers,
under the symbol "AVDO". The Company's Convertible Preferred Securities are
traded on the over the counter market under the symbol "AVDOP".
Shareholder Information
As of February 10, 2003, there were approximately 6,400 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
------------------------ ---------------- ---------------
2002
First Quarter $ 0.45 $ 0.16
Second Quarter $ 0.54 $ 0.19
Third Quarter $ 0.34 $ 0.18
Fourth Quarter $ 0.39 $ 0.16
2001
First Quarter $ 0.88 $ 0.38
Second Quarter $ 0.75 $ 0.35
Third Quarter $ 0.79 $ 0.25
Fourth Quarter $ 0.63 $ 0.08
------------------------- ---------------- ---------------
Dividends
The Company has not paid any cash dividends on its common stock during the
three year period ended December 29, 2002.
Item 12 of Part III contains information concerning securities authorized
for issuance under the Company's equity compensation plans.
10
Item 6. Selected Financial Data
(In thousands, except per share data)
2002 2001 2000 1999 1998
- ----------------------------------------------------- -------------- -------------- -------------- ------------ -----------
CONSOLIDATED STATEMENT OF EARNINGS DATA
Canyon Cafe $ 26,976 32,129 39,598 43,319 48,187
Don Pablo's $ 250,805 268,250 279,801 309,863 270,399
Hops $ 163,807 173,125 168,512 144,488 106,329
McCormick & Schmick's $ - 115,875 162,350 125,613 102,489
Applebee's $ - - - 21,176 335,288
- ----------------------------------------------------- -------------- -------------- -------------- ------------ ------------
Total restaurant sales $ 441,588 589,379 650,261 644,459 862,692
- ----------------------------------------------------- -------------- -------------- -------------- ------------ ------------
Asset revaluation and other special charges $ 45,431 61,546 35,667 2,186 2,940
- ----------------------------------------------------- -------------- -------------- -------------- ------------ ------------
Operating income (loss) $ (38,458) (26,154) (27,227) 42,461 72,631
- ----------------------------------------------------- -------------- -------------- -------------- ------------ ------------
Net earnings (loss) from continuing operations
before cumulative effect of change in
accounting principle $ (38,311) (86,405) (56,321) 5,470 67,744
- ----------------------------------------------------- -------------- -------------- -------------- ------------ ------------
PER SHARE DATA
Basic earnings (loss) per common share from
continued operations, before cumulative effect
of change in accounting principle $ (1.22) (3.02) (2.19) 0.20 1.85
Diluted earnings (loss) per common share from
continued operations, before cumulative effect
of change in accounting principle $ (1.22) (3.02) (2.19) 0.20 1.65
Cash dividends per common share $ 0.00 0.00 0.00 0.0575 0.0475
- ----------------------------------------------------- -------------- -------------- ------------- ------------ -----------
CONSOLIDATED BALANCE SHEET DATA
Total assets $ 301,295 398,556 609,681 656,596 670,597
Working capital (excluding assets held for sale) $ (118,542) (83,759) (120,357) (39,497) (210,947)
Long-term debt (excluding current installments) $ 164,031 215,815 291,507 328,076 116,978
Convertible preferred securities $ 3,179 68,559 72,865 115,000 115,000
Shareholders' equity (deficit) $ 265 (2,746) 87,952 112,624 112,029
- ------------------------------------------------------ -------------- -------------- ------------- ------------ -----------
Consolidated Statement of Earnings Data and Per Share Data are presented
for continuing operations with the exception of 1999 and 1998 which have not
been restated for the 12 Don Pablo's and eight Hops restaurants which are
included in discontinued operations pursuant to the Company's adoption of
Statement of Financial Accounting Standards ("SFAS") No. 144 (See Note 1 - Basis
of Presentation). The Company has also not restated 1999 and 1998 to reflect the
adoption of EITF 01-9 "Accounting for Consideration Given by a Vendor to a
Customer" as it was impractical to obtain the information.
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".
11
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 29, 2002 ("2002"), the 52 weeks ended December 30, 2001 ("2001") and
the 52 weeks ended December 31, 2000 ("2000").
Consolidated Overview of 2002
In 2002, the Company continued to focus on its stated strategies of
reducing debt, improving liquidity and increasing profitability. These
strategies resulted in the execution of various management initiatives
including, (i) the completion of a $75.0 million credit facility, (ii) the
closure of under-performing restaurants, (iii) the divestiture of the Company's
Canyon Cafe brand, (iv) the repurchase of outstanding public debt and (v) the
induced conversion of the Company's Convertible Preferred Securities. During the
first quarter of 2002, the Company completed a $75.0 million credit facility to
replace its existing credit agreement and provide additional liquidity. The
agreement provides a $35.0 million revolving credit facility and a $40.0 million
term loan facility. Nineteen under-performing Don Pablo's and Hops locations
were closed during 2002 and 11 Canyon Cafe restaurants were either closed or
divested. Asset revaluation and other special charges of $67.5 million,
including $22.1 million related to discontinued operations, were recorded during
2002 primarily as a result of restaurant closures and a $35.0 million writedown
of goodwill pursuant to the Company's annual test of impairment of goodwill
required by Statement of Financial Accounting Standards ("SFAS") No. 142, which
the Company adopted effective at the beginning of 2002. No new restaurants were
opened during 2002 and only three restaurants were opened during 2001 enabling
the Company to focus on the operations of its existing restaurants. The
Company's debt reduction strategies included the repurchase of $52.4 million in
face value of its outstanding 11.75% Senior Subordinated Notes during 2002. In
addition the 2002 conversion of 1,307,591 shares of the Company's outstanding
Convertible Preferred Securities into common stock during 2002, reduced the
Company's outstanding obligation with respect to those securities by $65.4
million. The Company also received proceeds of $13.0 million (including $3.9
million from discontinued operations) from the sale of other non-core assets and
closed restaurant locations during the year.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144, which was adopted by the
Company in the first quarter of 2002, supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a "Segment" of a business as
defined in that Opinion. As a result of the adoption of SFAS 144, the Company
has classified the revenues and expenses of 11 Don Pablo's restaurants and eight
Hops restaurants which were closed in 2002, plus one additional Don Pablo's
restaurant which was under contract and held for sale at December 29, 2002 and
subsequently sold in February 2003, as discontinued operations for all periods
presented in the accompanying consolidated financial statements. The revenues,
expenses and related assets and liabilities of Canyon Cafe, which was
substantially divested during 2002, including the revenues, expenses and related
assets and liabilities for the four Canyon Cafe locations which continue to be
held for sale at December 29, 2002, the McCormick & Schmick's brand, which was
divested in August 2001, and eight Don Pablo's and two Hops restaurants which
were closed in 2001, have not been classified as discontinued operations in the
accompanying consolidated financial statements. As the decision to divest these
operations was made prior to the implementation of SFAS 144 and they did not
meet the criteria for classification as discontinued operations under the
provisions of APB Opinion No. 30, they are required to be classified within
continuing operations under the provisions of SFAS 121.
Comparison of Historical Results - Fiscal Years 2002, 2001 and 2000
Restaurant Sales
Restaurant sales for 2002 decreased 25.1% to $441.6 million from $589.4
million in 2001. Declining revenues were primarily due to the divestitures of
Canyon Cafe in 2002 and McCormick & Schmick's in 2001. For continuing operations
12
related to the Company's Don Pablo's and Hops brands, restaurant sales for 2002
were $414.6 million compared to $441.4 million in 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 eight Don Pablo's and two
Hops in 2001. The revenues and expenses related to 11 Don Pablo's restaurants
and eight Hops restaurants which were closed during 2002, plus one additional
Don Pablo's restaurant which is held for sale at December 29, 2002, have been
included in discontinued operations for all periods presented in the
accompanying consolidated statements of earnings. Same-store sales for 2002
decreased by approximately 6% at Don Pablo's and 5% at Hops as compared to 2001
(same-store sales comparisons included all restaurants open for 18 months as of
the beginning of 2002).
Restaurant sales for 2001 decreased 9.4% to $589.4 million from $650.3
million in 2000 reflecting decreased sales at Don Pablo's, Hops and Canyon Cafe
coupled with a decline in revenue associated with the divestiture of the
Company's McCormick & Schmick's brand. For continuing operations related to the
Company's Don Pablo's and Hops brands, restaurant sales for 2001 were $441.4
million compared to $448.3 million in 2000. The decrease in 2001 sales for these
brands, as well as Canyon Cafe sales, was attributable to a slight decrease in
operating capacity as well as declining same-store-sales. The decrease in Don
Pablo's and Hops' operating capacity was generated by the closure of 10
restaurants during the first quarter of 2001, which was partially offset by a
full-year's sales from 12 restaurants opened in 2000 and a partial year's sales
from 1 restaurant opened in the first quarter of 2001. Canyon Cafe's operating
capacity decreased by 15% due to the closure of 3 restaurants during the first
quarter of 2001, which was partially offset by a full-year's sales from 1
restaurant opened in 2000. Same-store-sales comparisons for 2001 (for
restaurants open a full 18 months at the beginning of 2001) were approximately
2% lower at Don Pablo's and 1% lower at Hops. Sales were adversely impacted
during the year by continued economic uncertainty as well as the terrorist
attacks on the United States.
Operating Expenses
The following table sets forth the percentages which certain items of
income and expense bear to total restaurant sales for the operations of the
Company's restaurants for the years ended 2002, 2001 and 2000.
Fiscal 2002 2001 2000
- -------------------------------------------------------------------------------
Restaurant sales:
Canyon Cafe 6.1 % 5.5 % 6.1 %
Don Pablo's 56.8 45.5 43.0
Hops 37.1 29.4 25.9
McCormick & Schmick's - 19.6 25.0
- -------------------------------------------------------------------------------
Total restaurant sales 100.0 100.0 100.0
- -------------------------------------------------------------------------------
Operating expenses:
Food and beverage 28.3 28.5 29.1
Payroll and benefits 33.8 32.4 31.8
Depreciation and amortization 3.4 3.3 3.6
Other operating expenses 26.8 26.6 25.0
General and administrative expenses 6.0 5.3 5.7
Loss (gain) on disposal of assets 0.1 (2.1) 3.5
Asset revaluation and other special charges 10.3 10.4 5.5
- -------------------------------------------------------------------------------
Total operating expenses 108.7 104.4 104.2
- -------------------------------------------------------------------------------
Operating loss (8.7)% (4.4) (4.2)%
- -------------------------------------------------------------------------------
Food and Beverage Costs
Food and beverage costs, as a percent of sales, decreased 0.2% in 2002 due
primarily to the divestiture of McCormick & Schmick's in the third quarter of
2001. Prior to divestiture, food and beverage costs, as a percent of sales, for
the McCormick & Schmick's brand were higher than the overall Company average.
For 2001, food and beverage costs as a percent of sales decreased by 0.6% as a
result of continued efforts to maximize purchasing synergies at Don Pablo's and
Hops.
13
Payroll and Benefit Costs
Payroll and benefit costs, as a percent of sales, increased 1.4% in 2002
predominately due to declining sales volumes at each of the Company's brands
which generated an increase in the fixed component of payroll and benefits. For
2001, payroll and benefits costs, as a percent of sales, increased 0.6%. This
increase was primarily a result of an increase in the number of management
positions at Hops coupled with the restructuring of management bonus programs
and an increase in hourly labor as a percent of sales resulting from a decline
in sales volumes at Canyon Cafe, Don Pablo's and Hops.
Depreciation and Amortization
Depreciation and amortization, as a percent of sales, increased 0.1% in
2002 primarily due to declining sales volumes. These increases were somewhat
offset by the discontinuation of depreciation expense on the fixed assets of 11
Don Pablo's and eight Hops restaurants which were closed during the year. In
2001, a 0.3% decrease in depreciation expense, as a percent of sales, was
related to (i) the discontinuation of depreciation expense on the fixed assets
of 13 under-performing restaurants which were closed in the first quarter of
2001, (ii) the discontinuation, beginning in June, of depreciation related to
the McCormick & Schmick's assets which were sold during the third quarter of
2001, (iii) a reduction in depreciation related to the Canyon Cafe assets which
were classified as held for sale at December 30, 2001 and (iv) the completion of
a sale-leaseback transaction, during the fourth quarter of 2000, which reduced
depreciation expense and increased rent expense.
Other Operating Expenses
Other operating expenses, as a percent of sales, increased 0.2% in 2002
primarily as a result of declining sales volumes which generated an increase in
the fixed component of other operating expenses. These increases were somewhat
offset by (i) decreases in utility costs as a result of 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 2001, other operating expenses, as a percent of sales, increased
1.6%. This increase was a result of (i) increased advertising expenditures at
Hops, (ii) an increase in rent expense, due in part to a sale-leaseback
transaction completed in the fourth quarter of 2000 that reduced debt and
related interest expense as well as depreciation expense, (iii) an increase in
utility costs affecting substantially all of the Company's restaurants and (iv)
an increase in training costs at Don Pablo's related to a focus on customer
service initiatives and the timing of new-manager training. Increased operating
expenses were somewhat offset by a decrease in preopening expenses resulting
from only one new restaurant opened in 2001 compared to 12 restaurants opened
during 2000.
General and Administrative Expenses
General and administrative expenses were 6.0% of sales in 2002 compared to
5.3% in 2001 and 5.7% in 2000. The increase in 2002 over 2001 was primarily due
to a decline in sales volumes. The decrease in 2001 over 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 in
the second quarter of 2000 and the elimination of certain management positions
in the first quarter of 2001. As a result, decreasing sales volumes did not
generate a corresponding increase in general and administrative expenses as a
percent of sales.
Loss (Gain) on Disposal of Assets
Loss on disposal of assets of $0.6 million for 2002 reflects a $0.7 million
loss related to the divestiture of Canyon Cafe and $0.5 million in losses on the
sale of various restaurant properties. These losses were partially offset by a
$0.6 million gain related to an adjustment to amounts receivable from the
divestiture of McCormick & Schmick's.
A gain on disposal of assets of $12.4 million in 2001 reflects the sale of
McCormick & Schmick's which was somewhat offset by the write off of deferred
loan costs associated with the Company's revolving credit facility which was
repaid with proceeds from the sales transaction, as well as the net result of
the sale of an office facility in Bedford, Texas and the sale of various closed
restaurant properties and miscellaneous assets. In addition, the Company
14
recorded a gain of $6.9 million generated by a 2001 amendment to its interest
rate swap agreement. In 2000, the loss on disposal of assets of $22.8 million
primarily 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
unprofitable U.S. joint venture investments with Belgo Group PLC and
PizzaExpress PLC. In 2000, 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
were not expected to have a future value, were written off.
Asset Revaluation and Other Special Charges
Asset revaluation and other special charges totaled $45.4 million in 2002.
These charges, which were predominately non-cash, included a $7.0 million asset
impairment charge related primarily to underperforming restaurants and costs
associated with sites that are no longer expected to be developed, a $3.2
million reduction to the carrying value of the Company's assets held for sale
related primarily to Canyon Cafe and a $35.0 million write off of goodwill
related to the Hops brand. The goodwill impairment charge was recorded as a
result of the Company's annual test of impairment as required by SFAS No. 142,
"Goodwill and Other Intangible Assets", which was adopted effective at the
beginning of 2002. Under SFAS 142, the Company is required to evaluate goodwill
for impairment by comparing the fair value of the related reporting unit to the
reporting unit's carrying value. Beginning in fiscal 2002, the Company
determined that Hops meets the requirements of a separate reporting unit and
assessed goodwill for possible transition impairment and concluded that there
was no impairment of goodwill. At the beginning of the fourth quarter of 2002,
the Company determined the fair value of the Hops brand based on an internal
valuation of its historical and projected operating performance and restaurant
development plans. Based on the Company's estimated fair value, it was
determined that the fair value of Hops exceeded its carrying value indicating
potential goodwill impairment. Under SFAS 142, the indication of goodwill
impairment requires the completion of an additional evaluation whereby an
"implied" fair value of goodwill is identified. This implied value is determined
by allocating the fair value of the reporting unit to all of the assets and
liabilities of the reporting unit in a manner similar to a purchase price
allocation. Any residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. Using this methodology, the Company
determined that the implied fair value of the Hops goodwill was $0. Accordingly,
an impairment charge was recorded to write off the full balance of Hops goodwill
as of December 29, 2002. The decrease in Hops' fair value and corresponding
goodwill impairment charge was a result of a decline in the brand's 2002 sales
and operating performance which prompted the Company to close eight
underperforming locations and to halt new restaurant development in the near
term. In addition, the fair value of the brand was impacted by overall economic
uncertainty which has negatively impacted the Company's restaurants.
In 2001, asset revaluation and other special charges totaled $61.5 million.
These charges, which were predominately non-cash, included a $45.0 million
non-cash asset impairment charge at Canyon Cafe. A continued deterioration of
sales and corresponding lack of operating performance improvement resulted in a
carrying amount of assets which exceeded the sum of expected future cash flows
associated with such assets. As a result, an impairment loss was recorded, under
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", based on the difference
between the estimated fair value and the carrying amount of the Canyon Cafe
assets. During the fourth quarter of 2001, the Company finalized its decision to
divest the Canyon Cafe brand. At December 29, 2002 and December 30, 2001, the
assets and liabilities of Canyon Cafe have been classified as assets held for
sale. The Company also recorded an asset impairment charge of $3.6 million
related primarily to under-performing Don Pablo's and Hops restaurants along
with an $11.1 million allowance against the ultimate realization of notes
receivable from Tom E. DuPree, Jr., the Company's Chairman and Chief Executive
Officer. The allowance on Mr. DuPree's notes was established based on the
estimated fair value of the underlying collateral which secured the notes. The
remaining $1.8 million in asset revaluation and other special charges was
attributable primarily to employee severance and other payroll related costs.
In 2000, asset revaluation and other special charges totaled $35.7 million.
These charges, which were predominately noncash, reflect the fourth quarter
decision to close 13 underperforming 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 in March 2001. 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 $8.6 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
15
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.
Interest and Other Expenses
Net interest expense for 2002 was $31.1 million compared to $35.3 million
in 2001. Decreased interest expense for 2002 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, and the Company's $52.4 million repurchase, during
2002, of its 11.75% Senior Subordinated Notes due 2009, which resulted in a $3.1
million reduction in interest expense during 2002. 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.
In 2001, interest expense decreased to $35.3 million from $38.3 million in
2000. The decrease was predominately attributable to (i) 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 on August 22, 2001 and
(ii) favorable mark-to-market adjustments under a fixed-to-floating interest
rate swap agreement. Decreases in interest expense were somewhat offset by
increased interest charges on extended payment terms related to accounts
payable.
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 have 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 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 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.
During 2002, other income related primarily to the abatement of previously
recorded sales, use and property tax penalties. In 2001 and 2000, other expense
included amortization of goodwill. As a result of the Company's first quarter
2002 adoption of SFAS 142, "Goodwill and Other Intangible Assets", no goodwill
amortization was recorded in 2002.
Other expenses during 2001 relate primarily to amortization of goodwill and
the incurrence of various tax penalties in addition to other miscellaneous
non-operating and typically non-recurring income and expenses. These expenses
increased in 2001 compared to 2000 primarily due to the incurrence of tax
penalties.
Income Tax Expense
Although the Company incurred a loss from continuing and discontinued
operations before income taxes of $63.1 million for 2002, the Company recorded
an income tax expense for the year of $0.4 million. This was principally due to
the write-down of the Hops goodwill of $35.0 million, including $20.8 million
that was not deductible for tax purposes. As a result of this permanent book-tax
basis difference, income tax benefit for 2002 was $15.0 million, before the
additional tax expense of $15.4 million for the increase in the valuation
allowance for deferred tax assets.
In 2001, the Company incurred a loss from continuing and discontinued
16
operations before income taxes of $84.1 million, however, the Company recorded
an income tax expense for the year of $11.2 million. This was partly due to the
sale of McCormick & Schmick's being treated as an asset sale for tax purposes.
For financial statement purposes, goodwill of approximately $49.6 million
relating to the assets sold reduced the reported gain on sale, but was not
deductible for tax purposes. In addition, the $45.0 million write down of Canyon
Cafe assets included approximately $33.5 million of goodwill that is
non-deductible for tax purposes. Primarily as a result of these significant
permanent book-tax basis differences, income tax expense for 2001 was $0.4
million, before the additional tax expense of $10.8 million for the increase in
the valuation allowance for deferred tax assets.
The Company's 1998 Federal income tax returns are currently being audited
by the Internal Revenue Service. The Company believes its recorded liability for
income taxes of $35.0 million as of December 29, 2002 is adequate to cover its
exposure that may result from the ultimate resolution of the audit. Although the
ultimate outcome of the audit cannot be determined at this time, the Company
does not have sufficient liquidity to pay any significant portion of its
recorded liability if resolution results in such amount being currently due and
payable. Management does not currently expect that this will be the result, or
that any resolution with respect to audit issues will be reached in the near
future. Because the audit is in process, and any amount that ultimately may be
payable has not been determined by the IRS, no amounts are shown in the
Contractual Cash Obligations table.
Discontinued Operations
As discussed in Note 1 - Basis of Presentation, discontinued operations
includes the revenues, expenses and related assets and liabilities of 11 Don
Pablo's and eight Hops restaurants which were closed during 2002, plus one
additional Don Pablo's restaurant which was under contract and held for sale at
December 29, 2002 and subsequently sold in February 2003. The decision to
dispose of these 20 locations reflects the Company's ongoing process of
evaluating the performance and cash flows of its various restaurant locations
and its desire to use the proceeds from the sale of under performing restaurants
to reduce debt. The Company expects to complete the divestiture of these
locations in 2003.
Net loss from discontinued operations for 2002, for which no taxes have
been allocated, of $25.1 million primarily reflects non-cash asset impairment
charges of $22.1 million, primarily to reduce the carrying value of the
restaurant assets, which are held for sale, to estimated fair value. Operating
losses were $25.1 million for 2002, on total restaurant sales from discontinued
operations of $19.3 million.
Net loss from discontinued operations for 2001, for which no taxes have
been allocated, of $8.9 million primarily reflects non-cash asset impairment
charges of $4.8 million, primarily to reduce the carrying value of the
restaurant assets to estimated fair value. Operating losses were $8.9 million
for 2001, on total restaurant sales from discontinued operations of $28.8
million.
Net loss from discontinued operations for 2000 of $3.2 million (net of
income tax benefit of $2.1 million) primarily reflects non-cash asset impairment
charges of $2.5 million, primarily to reduce the carrying value of the
restaurant assets to estimated fair value. Operating losses were $5.2 million
for 2000, on total restaurant sales from discontinued operations of $30.3
million.
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 restaurant openings and
closings and the timing of settlement of liabilities. Decreases in accounts
payable during 2002 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 occurred as a
result of (i) a reduction in accrued interest due to the retirement of $52.4
million in outstanding debt related to the Company's 11.75% Senior Subordinated
Notes, (ii) 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) the payment of previously deferred
payments related to sales, use, property and other taxes.
17
On March 25, 2002, the Company completed a $75.0 million credit facility
(the "Credit Facility") to replace its existing credit agreement. The Credit
Facility 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
Facility. In addition, the lender has 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. The loan
is secured by substantially all of the Company's assets.
In June 2002, the Company obtained an amendment to the Credit Facility
which allowed the use of proceeds from the term loan facility to make the
one-time payment of accrued interest related to the Company's $3.50 term
convertible securities, due 2027. In the third quarter, the Company completed a
second amendment to the Credit Facility which amended certain definitions
relating to the payment of delinquent taxes and made other technical corrections
to the agreement. During the fourth quarter, the Company completed a third
amendment, dated November 11, 2002, and fourth amendment, dated December 27,
2002, to the Credit Facility. The third amendment made additional technical
corrections to the agreement. Under the fourth amendment, the Credit Facility
lenders agreed to forbear from exercising their remedies until May 31, 2003 with
respect to certain events of default related to the Company's failure to meet
its September 29, 2002 EBITDA target. The amendment increased the interest rate
to 15.75% for revolving and term borrowings and to 7.5% for letter of credit
accommodations. The fourth amendment also revised certain financial covenants
and added a new covenant which requires the Company to reduce its obligations
(including cash borrowings and letter of credit commitments) under the facility
to $0 by May 25, 2003 in accordance with the following schedule.
Date Maximum Obligations
------------------ -------------------
January 26, 2003 $50,000,000
February 23, 2003 $41,000,000
March 30, 2003 $31,000,000
April 27, 2003 $15,000,000
May 25, 2003 $0
In connection with the fourth amendment, the Company incurred an amendment
and waiver fee of $8.5 million. The fee was paid-in-kind by being added to the
principal balance of the Company's outstanding term borrowings. Under the terms
of the fourth amendment, $6.5 million of the waiver fee will be refunded by the
lender by reducing the principal balance of the outstanding term loans by $6.5
million if (i) by April 27, 2003 the Company has reduced all cash borrowings
(excluding the refundable $6.5 million fee) to $0, (ii) by April 27, 2003 the
Company has collateralized its letter of credit commitments either with cash
collateral of 105% or through back-up letters of credit and (iii) by May 25,
2003 all letters of credit secured by the Credit Facility have been returned to
the issuer without being drawn. Subsequent to December 29, 2002, the Company
successfully reduced its obligations to comply with the maximum obligations
requirement for the periods ended January 26, 2003 and February 23, 3003.
Due to the Company's requirement to reduce the outstanding balance of the
Credit Facility to $0 by May 25, 2003, the balance of the facility at December
29, 2002 has been classified as a current liability in the accompanying
consolidated balance sheet. At December 29, 2002, $11.6 million of cash
borrowings were outstanding under the revolving portion of the Credit Facility
and $19.2 million was outstanding under the term portion of the facility,
including the $6.5 million refundable portion of the amendment and waiver fee.
In addition to the $11.6 million of cash borrowings outstanding under the
revolving facility, an additional $15.3 million of the facility was utilized to
secure letters of credit. Lender imposed reserves against the Company's total
borrowing availability, as of December 29, 2002, were $5.8 million. At December
29, 2002, $7.8 million of the total facility remained unused and available.
18
During the fourth quarter of 2002, Borrowing Base EBITDA resulted in a
maximum borrowing capacity of $53.3 million. At December 29, 2002, the Company's
trailing 12 months EBITDA will result in the Company's maximum borrowing
capacity being adjusted from $53.3 million to $49.3 million in conjunction with
the Company's filing of its required reports with the lender on or about
February 27, 2003. As a result of the upcoming reduction in the Company's
borrowing base, total availability on the facility will be reduced by $4.0
million on or about February 27, 2003, however the availability cannot exceed
the maximum borrowing obligations, as amended, noted in the table above at the
respective dates. Subsequent to December 29, 2002, the Company used revolving
loan advances to make the interest payments under its 9.75% Senior Notes due
2006 ("Senior Notes") and 11.75% Senior Subordinated Notes due 2009
("Subordinated Notes") of $5.7 million and $2.8 million, respectively. In
addition to its currently outstanding borrowings, the Company will be required
to pay an anniversary fee of $1.1 million on March 25, 2003 and will be required
to pay a termination fee of $1.7 million if the Credit Facility is terminated
prior to March 25, 2003. This fee escalates to $3.6 million if the Credit
Facility termination occurs subsequent to March 25, 2003.
The Company has suffered from recurring losses from operations, has an
accumulated deficit and has a secured credit facility which is due May 25, 2003
that raise substantial doubt about the Company's ability to continue as a going
concern. Sufficient liquidity to make the scheduled debt reductions under the
amended Credit Facility and other required debt service and lease payments is
dependent primarily on the realization of proceeds from the sale of assets, cash
flow from operations and obtaining alternative financing sources. There can be
no assurance that these initiatives will be successful.
In the event the Company is not able to meet its debt reduction obligations
or other financial covenant targets under the Credit Facility, an event of
default would occur. During the continuance of an event of default, the Company
would be subject to a post-default interest rate under the Credit Facility which
increases the otherwise effective interest rates by three percentage points. As
a result, the Company's per annum interest rate on revolving and term loans
would be 18.75% and the rate on letter of credit accommodations would be 10.50%.
In addition to the right to declare all obligations immediately due and payable,
the Credit Facility lender also has additional rights during the continuance of
an event of default including, among other things, the right to (i) make and
collect certain payments on the Company's behalf, (ii) require cash collateral
to secure letters of credit, (iii) make certain investigations into the
Company's activities, (iv) receive reimbursement for certain expenses incurred
and (v) sell any of the collateral securing the obligations or settle, on the
Company's behalf, any legal proceedings related to the collateral. In addition,
in the event the amounts due under the Credit Facility are accelerated,
cross-default provisions contained in the indentures to the Company's Senior
Notes and Subordinated Notes would be triggered, creating an event of default
under those agreements as well. At December 29, 2002, the outstanding balances
of the Senior and Subordinated Notes were $116.5 million and $47.6 million
respectively. An event of default under the Credit Facility would result in a
cross-default under the master equipment lease but would not result in a
cross-default under the sale-leaseback agreement. In the event some or all of
the obligations under the Company's credit agreements become immediately due and
payable, the Company does not currently have sufficient liquidity to satisfy
these obligations and it is likely that the Company would be forced to seek
protection from its creditors.
The terms of the amended Credit Facility, the Company's Senior Notes and
Subordinated Notes, master equipment lease and Hops sale-leaseback transaction
collectively 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 closing of the Credit Facility,
the Company terminated its interest rate swap agreement thereby eliminating any
aforementioned restrictions contained in that agreement. In addition, in March
2002 the master equipment lease agreement was amended to substantially conform
the covenants to the Credit Facility. At December 29, 2002, the Company was in
compliance with the requirements contained in the Credit Facility, as amended.
The Company was also in compliance with the terms of the Senior Notes and
Subordinated Notes. The Company was not in compliance with a net worth
requirement contained in its sale-leaseback agreement. The lessor, however, has
waived this requirement until March 31, 2004 at which time the minimum net worth
requirement will be $150.0 million. The Company is also not in compliance with
certain financial covenants contained in the master equipment lease. Under the
master equipment lease, the failure to meet the financial covenants represents
an event of default whereby the creditor has the right to, among other things,
declare all obligations under the agreement immediately due and payable and to
repossess the leased equipment, which is located primarily in the Company's
restaurants. Although the lessor has not notified the Company of its intent to
do so, acceleration of the obligations would have a material adverse effect on
the Company. At December 29, 2002, remaining obligations under the master
19
equipment lease totaled $7.6 million. The continuing event of default under the
master equipment lease does not result in cross-defaults under the Company's
Senior Notes, Subordinated Notes or sale-leaseback agreement and the cross
default under the Credit Agreement has been waived. Although the lessor has not
notified the Company of any intent to accelerate its obligations, there can be
no assurances that the lessor will not exercise such remedies.
The following table summarizes the Company's future contractual cash
obligations:
Contractual Cash Obligations 2003 2004 2005 2006 2007 Thereafter
- -------------------------------------------------------------------------------------------------------------------------
Credit Facility - principal payment $30,809 - - - - -
Credit Facility - interest payments 1,645 - - - - -
Credit Facility - anniversary fee 1,100 - - - - -
Credit Facility - termination fee 1,700 - - - - -
Senior Notes - principal payment - - - $116,500 - -
Senior Notes - interest payments 11,359 $11,359 $11,359 5,679 - -
Subordinated Notes -
principal payment - - - - - $47,625
Subordinated Notes -
interest payments 5,596 5,596 5,596 5,596 $5,596 8,394
Convertible Preferred Securities
- principal payments - - - - - 3,179
Convertible Preferred Securities
- distribution payments 223 223 531 223 223 4,283
Minimum operating lease
payments 24,094 16,073 14,819 13,186 11,494 71,577
- -------------------------------------------------------------------------------------------------------------------------
Total $76,526 $33,251 $32,305 $141,184 $17,313 $135,058
- -------------------------------------------------------------------------------------------------------------------------
The preceding schedule summarizes the Company's contractual payment
obligations as they existed at December 29, 2002. Actual payments may differ
from these amounts due primarily to interest and principal payments on the
Credit Facility and additional operating lease payments for new development as
well as the extension of existing lease agreements. Further, the Company's
minimum lease payment obligations under its sale-leaseback agreement, included
above, totaled $69.5 million at December 29, 2002. On March 31, 2004, the
covenants of such agreement will require that the Company have a minimum net
worth, as defined, of $150.0 million. The approximate amount of minimum lease
payments due at that date are $65.2 million.
Interest payments on the Company's Senior Notes and Subordinated Notes are
due semi-annually in each June and December. Prior to the Company's repurchase
of $52.4 million in face value of its outstanding Subordinated Notes in the
second and third quarters of 2002, 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, due to late payment of interest, and the Company utilized these
provisions with respect to its June and December 2002 interest payments as well
as its June and December 2001 interest payments. The Company's ability to make
its June 2003 interest payments is dependent on the outcome of its initiatives
to sell assets and obtain alternative lending sources.
Principal financing sources in 2002 consisted of (i) term loan proceeds of
$19.2 million including $8.5 million borrowed to pay the Credit Facility fourth
amendment fee, (ii) a $10.0 million refund of payments to collateralize letters
of credit for the Company's self-insurance programs, (iii) proceeds of $9.1
million from disposition of assets related primarily to the McCormick &
Schmick's and Canyon Cafe divestitures, and (iv) revolving loan proceeds of $3.1
million, net of financing costs of $8.5 million, The primary uses of funds
consisted of (i) net cash used in operations of $26.0 million which included
interest payments of $29.4 million primarily related to the Senior Notes,
Subordinated Notes and the one-time TECON payment, a credit facility amendment
and waiver fee of $8.5 million, and operating lease payments of $24.6 million,
(ii) $8.5 million, net of accrued interest of $2.2 million, for the repurchase
of $52.4 million in face value of the Company's outstanding Subordinated Notes,
(iii) capital expenditures of $5.4 million, and (v) settlement of the Company's
interest rate swap agreement for $1.7 million.
20
The Company incurs various capital expenditures related to existing
restaurants and restaurant equipment in addition to capital requirements for
developing new restaurants. The Company does not have any contractual
obligations to open any new restaurants during 2003. Capital expenditures for
existing restaurants are expected to be approximately $4.5 million in 2003.
Capital expenditures of $5.4 million for 2002 relate primarily to capital
spending for existing restaurants. Capital expenditures for during 2001 were
$17.6 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. In connection
with the Applebee's, Harrigan's and Canyon Cafe divestiture transactions
completed during 2002, 1999 and 1998, the Company remains contingently liable
for lease obligations relating to 86 Applebee's restaurants eight Harrigan's
restaurants and eight Canyon Cafe restaurants. Assuming that each respective
purchaser became insolvent, an event management believes to be remote, the
Company could be liable for lease payments extending through 2017 with minimum
lease payments totaling $34.7 million. 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.
The Company has increased the amounts of its deductibles for workers'
compensation and general liability to $500,000 per claim in 2002 compared to
$250,000 per claim in 2001. Losses in excess of these risk retention levels are
covered by insurance which management considers as adequate. Provision for
losses expected under these programs are recorded based upon estimates of the
liability for claims incurred. Such estimates are based on management's
evaluation of the nature and severity of claims and future development based on
the Company's historical experience, information provided by the Company's third
party administrators and certain actuarial assumptions used by the insurance
industry. For 2002, claims paid under the Company's self-insurance programs
totaled $4.9 million. In addition, at December 29, 2002, the Company was
contingently liable for letters of credit aggregating approximately $15.3
million, relating primarily to its insurance programs. 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
The Company's 1998 Federal income tax returns are currently being audited
by the Internal Revenue Service. The Company believes its recorded liability for
income taxes of $35.0 million as of December 29, 2002 is adequate to cover its
exposure that may result from the ultimate resolution of the audit. Although the
ultimate outcome of the audit cannot be determined at this time, the Company
does not have sufficient liquidity to pay any significant portion of its
recorded liability if resolution of the audit results in such amount being
currently due and payable. Management does not currently expect that this will
be the result, or that any resolution with respect to audit issues will be
reached in the near future. Because the audit is in process, and any amount that
ultimately may be payable has not been determined by the IRS, no amounts are
shown in the Contractual Cash Obligations table above.
Management has taken steps to improve cash flow from operations, including
changing the Company's marketing strategy to be less reliant on expensive
broadcast media, reducing overhead through consolidation of functions and
personnel reductions and adjusting supervisory management level personnel in its
restaurant operations. There is no assurance these efforts will be successful in
improving cash flow from operations sufficiently to enable the Company to
continue to meet its obligations, including scheduled interest and other
required payments under its debt and lease agreements and capital expenditures
necessary to maintain its existing restaurants. During 2002, the Company
realized $13.0 million from the sale of assets (including $3.9 from discontinued
operations), which supplemented its cash provided by financing activities and
enabled the Company to meet its obligations. For the near term, cash flow from
operations will need to be supplemented by asset sales and other liquidity
improvement initiatives including obtaining new financing sources. There is no
assurance the Company will be able to generate proceeds from these efforts in
sufficient amounts to supplement cash flow from operations, thereby enabling the
Company to meet its debt and lease obligations. In addition, there is no
assurance the Company will be able to comply with the financial covenants of its
debt and lease agreements.
Critical Accounting Policies
Management's Discussion and Analysis discusses the results of operations
and financial condition as reflected in the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. As discussed in Note 1 to the Company's
Consolidated Financial Statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. On an ongoing basis,
21
management evaluates its estimates and judgments, including those related to
depreciation, amortization and recoverability of long-lived assets, including
intangible assets, capitalization of development costs, self-insurance reserves,
and income taxes. Management bases its estimates and judgments on its
substantial historical experience and other relevant factors, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. While the
Company believes that the historical experience and other factors considered
provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated financial statements, the Company cannot
guarantee that its estimates and assumptions will be accurate, which could
require the Company to make adjustments to these estimates in future periods.
Premises and Equipment. The Company records premises and equipment at
historical cost and depreciates these assets on a straight-line basis over their
estimated useful lives. Costs capitalized by the Company also include certain
direct costs associated with acquiring land and leaseholds and developing new
restaurant sites. In most instances, the Company estimates the useful lives of
buildings to be 30 years and equipment to be 7 years. 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. Impairment
of assets is recorded in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which supersedes SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS 144 requires
the Company to review the carrying value of long-lived assets for impairment
when events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. The Company can be impacted by changes in the
estimated useful lives of its assets or impairment resulting from assets being
carried in excess of fair value.
Discontinued Operations. Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", which was adopted by the Company in the first quarter of 2002,
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the disposal of
a "Segment" of a business as defined in that Opinion. As a result of the
adoption of SFAS 144, the Company has classified the revenues, expenses and
related assets and liabilities of 11 Don Pablo's restaurants and eight Hops
restaurants which were closed in 2002, plus one additional Don Pablo's
restaurant which was under contract and held for sale at December 29, 2002 and
subsequently sold in February 2003, as discontinued operations for all periods
presented in the accompanying consolidated financial statements. The revenues,
expenses and related assets and liabilities of Canyon Cafe which is also held
for sale, the McCormick & Schmick's brand, which was divested in August 2001,
and eight Don Pablo's and two Hops restaurants which were closed in 2001, have
not been classified as discontinued operations in the accompanying consolidated
financial statements. As the decision to divest these operations was made prior
to the implementation of SFAS 144 and they did not meet the criteria for
classification as discontinued operations under the provisions of APB Opinion
No. 30, they will continue to be classified within continuing operations under
the provisions of SFAS 121.
Intangible Assets. The 1997 acquisitions of Canyon Cafe, Hops and McCormick
& Schmick's generated significant goodwill balances (representing the excess of
purchase price over fair value of net assets acquired). Goodwill was amortized
over the expected period to be benefited, typically 40 years, using the
straight-line method. In 2001, in accordance with the provisions of SFAS No.
121, the Company recorded a $38.1 million impairment charge at Canyon Cafe which
reflected the impairment of the goodwill associated with that acquisition. In
addition, the 2001 divestiture of McCormick & Schmick's resulted in the
elimination of the goodwill generated by that acquisition. At December 30, 2001
and during 2002 the Company's recorded goodwill balance related solely to Hops.
Beginning in fiscal 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and ceased amortizing goodwill. Under SFAS 142, the Company
is required to annually evaluate goodwill for impairment by comparing the fair
value of the related reporting unit to the reporting unit's carrying value.
Beginning in fiscal 2002, the Company determined that Hops meets the
requirements of a separate reporting unit and assessed goodwill for possible
transition impairment and concluded that there was no impairment of goodwill. At
the beginning of the fourth quarter of 2002, the Company determined the fair
value of the Hops brand based on an internal valuation of its historical and
projected operating performance and restaurant development plans. Based on the
Company's estimated fair value, it was determined that the fair value of Hops
exceeded its carrying value indicating potential goodwill impairment. Under SFAS
142, the indication of goodwill impairment requires the completion of an
additional evaluation whereby an "implied" fair value of goodwill is identified.
22
This implied value is determined by allocating the fair value of the reporting
unit to all of the assets and liabilities of the reporting unit in a manner
similar to a purchase price allocation. Any residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Using this
methodology, the Company determined that the implied fair value of the Hops
goodwill was $0. Accordingly, an impairment charge was recorded to write off the
full balance of Hops goodwill as of December 29, 2002. The decrease in Hops'
fair value and corresponding goodwill impairment charge was a result of a
decline in the brand's 2002 sales and operating performance which prompted the
Company to close eight underperforming locations and to halt new restaurant
development in the near term. In addition, the fair value of the brand was
impacted by overall economic uncertainty which has negatively impacted the
Company's restaurants.
Insurance Programs. 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 losses related primarily to workers' compensation, physical
loss to property, and comprehensive general liability. The Company has increased
the amounts of its deductibles for workers' compensation and general liability
to $500,000 per claim in 2002 compared to $250,000 per claim in 2001. Losses in
excess of these risk retention levels are covered by insurance which management
considers as adequate. Provision for losses expected under these programs are
recorded based upon estimates of the liability for claims incurred. Such
estimates are based on management's evaluation of the nature and severity of
claims and future development based on the Company's historical experience,
information provided by the Company's third party administrators and certain
actuarial assumptions used by the insurance industry. Management continually
evaluates the potential for changes in loss estimates and the potential for
future adverse loss developments in these areas is highly uncertain.
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. 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.
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.
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
23
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 the outcome of
the Company's discussion with its creditors concerning events of default; future
compliance with debt covenants; the ability to meet principal and interest
payments as well as pay fees due in 2003; the outcome of the IRS audit of the
Company's 1998 Federal income tax returns, 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.
Recent Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standard
("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 (see Note 2), 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 consolidated losses, assuming
it excluded goodwill amortization for the periods ended:
2002 2001 2000
- --------------------------------------------------------------------------------------------
Net loss $ (63,429) (95,260) (65,734)
Add back:
Goodwill amortization, net of income taxes - 2,194 2,581
Trademark amortization, net of income taxes - 14 14
- --------------------------------------------------------------------------------------------
Adjusted net loss $ (63,429) (93,052) (63,139)
- --------------------------------------------------------------------------------------------
Basic loss per share $ (2.02) (3.33) (2.55)
Add back:
Goodwill amortization, net of income taxes - 0.08 0.10
Trademark amortization, net of income taxes - - -
- --------------------------------------------------------------------------------------------
Adjusted basic loss per share $ (2.02) (3.25) (2.45)
- --------------------------------------------------------------------------------------------
Diluted loss per share $ (2.02) (3.33) (2.55)
Add back:
Goodwill amortization, net of income taxes - 0.08 0.10
Trademark amortization, net of income taxes - - -
- --------------------------------------------------------------------------------------------
Adjusted diluted loss per share $ (2.02) (3.25) (2.45)
- --------------------------------------------------------------------------------------------
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 will adopt SFAS 143 in the first quarter of fiscal 2003 and
does not expect the adoption of this standard to have a material impact on its
results of operations or financial position.
24
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144, which was adopted by the
Company in the first quarter of 2002, supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a "Segment" of a business as
defined in that Opinion. As a result of the adoption of SFAS 144, the Company
has classified the revenues and expenses of 11 Don Pablo's restaurants and eight
Hops restaurants which were closed in 2002, plus one additional Don Pablo's
restaurant which was held for sale at December 29, 2002, as discontinued
operations for all periods presented in the accompanying consolidated financial
statements. The revenues and expenses of Canyon Cafe which is also held for
sale, the McCormick & Schmick's brand, which was divested in August 2001, and
eight Don Pablo's and two Hops restaurants which were closed in 2001, have not
been classified as discontinued operations in the accompanying consolidated
financial statements. As the decision to divest these operations was made prior
to the implementation of SFAS 144 and they did not meet the criteria for
classification as discontinued operations under the provisions of APB Opinion
No. 30, they are required to be classified within continuing operations under
the provisions of SFAS 121.
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, for
fiscal 2002, the Company's $41.4 million gain, related to the repurchase of
$52.4 million of its Subordinated Notes is not presented as an extraordinary
item in the accompanying Consolidated Statements of Loss. The Company has not
reported any extraordinary items in prior periods and, accordingly, no prior
period reclassifications were required.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 supersedes Emerging
Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)". SFAS 146 eliminates the provisions
of EITF 94-3 that required a liability to be recognized for certain exit or
disposal activities at the date an entity committed to an exit plan. SFAS 146
requires a liability for costs associated with an exit or disposal activity to
be recognized when the liability is incurred. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Although the
Company does not expect the adoption of this statement to have a material
adverse impact on its results of operations or financial position, it may impact
the timing of expense recognition as the Company continues to execute its
strategy of reducing debt with proceeds from the sale of assets.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, the statement amends the disclosure
requirements of SFAS 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
provisions of the statement are effective for financial statements for fiscal
years ending after December 15, 2002. As the Company accounts for stock-based
compensation using the intrinsic value method prescribed in APB No. 25,
"Accounting for Stock Issued to Employee's", the adoption of SFAS 148 has no
impact on the Company's financial condition or results of operations.
In November 2001, the EITF reached a consensus on Issue 01-9, "Accounting
for Consideration Given by a Vendor to a Customer". EITF 01-9 addresses the
recognition, measurement and income statement classification for sales
incentives offered to customers. Sales incentives include discounts, coupons,
free products and generally any other offers that entitle a customer to receive
a reduction in the price of a product. Under EITF 01-9, the reduction in the
selling price of the product resulting from any sales incentives should be
classified as a reduction of revenue. The Company adopted EITF 01-9 in fiscal
2002. Prior to adopting this pronouncement, the Company recognized sales
incentives as restaurant operating expenses. As a result of adopting EITF 01-9,
sales incentives were reclassified as a reduction of sales for all periods
presented. Amounts reclassified were $7.1 million, $5.4 million and $5.2 million
in 2002, 2001 and 2000, respectively.
25
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 expands the disclosure
requirements to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The Interpretation also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. Certain guarantees, including (i) an
original lessee's guarantee of the lease payments when that lessee remains
secondarily liable in conjunction with being relieved from being the primary
obligor and (ii) a parent's guarantee of a subsidiary's debt to a third party,
and a subsidiary's guarantee of debt owed to a third party by either its parent
or another subsidiary of that parent, are excluded from the provisions related
to liability recognition. These guarantees, however, are subject to the
disclosure requirements of the Interpretation. The liability recognition
provisions of FIN 45 are applicable to guarantee's issued after December 31,
2002. The disclosure requirements of the Interpretation are effective for
financial statements of interim and annual periods ending after December 15,
2002. Historically, the only guarantees issued by the Company relate to lease
guarantees where the Company is no longer the primary obligor and guarantees
between Avado Brands, Inc. and its wholly-owned subsidiaries related to debt
owed to third parties. Currently under such guarantees, the Company could be
liable for lease payments extending through 2017 with minimum lease payments
totaling $34.7 million. The Company does not anticipate issuing any guarantee's
which would be required to be recognized as a liability under the provisions of
FIN 45 and thus does not expect the adoption of this Interpretation to have a
material impact on its results of operations or financial position. The Company
has adopted the disclosure requirements of FIN 45 effective for fiscal year
ended December 29, 2002.
26
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. 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 rate 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.
27
Avado Brands, Inc.
Consolidated Statements of Loss
(In thousands, except per share data)
Fiscal Year Ended 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Restaurant sales:
Canyon Cafe $ 26,976 32,129 39,598
Don Pablo's 250,805 268,250 279,801
Hops 163,807 173,125 168,512
McCormick & Schmick's - 115,875 162,350
- ------------------------------------------------------------------------------------------------------------
Total restaurant sales 441,588 589,379 650,261
- ------------------------------------------------------------------------------------------------------------
Operating expenses:
Food and beverage 125,190 168,222 189,363
Payroll and benefits 149,140 191,034 207,091
Depreciation and amortization 14,861 19,639 23,140
Other operating expenses 118,281 156,517 162,433
General and administrative expenses 26,580 31,011 36,976
Loss (gain) on disposal of assets 563 (12,436) 22,818
Asset revaluation and other special charges (including goodwill
write offs of $35.0 million in 2002 and $38.1 million in 2001) 45,431 61,546 35,667
- ------------------------------------------------------------------------------------------------------------
Operating loss (38,458) (26,154) (27,227)
- ------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense, net (31,050) (35,305) (38,262)
Credit facility amendment and waiver fee (8,500) - -
Distribution expense on preferred securities (2,033) (4,864) (7,195)
Gain on debt extinguishment 41,412 - -
Other, net 693 (8,932) (7,165)
- ------------------------------------------------------------------------------------------------------------
Total other income (expense) 522 (49,101) (52,622)
- ------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes
and cumulative effect of change in accounting principle (37,936) (75,255) (79,849)
Income tax expense (benefit) 375 11,150 (23,528)
- ------------------------------------------------------------------------------------------------------------
Loss from continuing operations before
cumulative effect of change in accounting principle (38,311) (86,405) (56,321)
- ------------------------------------------------------------------------------------------------------------
Loss from discontinued operations, net of tax in 2000 (25,118) (8,855) (3,158)
- ------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in
accounting principle (63,429) (95,260) (59,479)
- ------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle,
net of tax benefit - - (6,255)
- ------------------------------------------------------------------------------------------------------------
Net loss $ (63,429) (95,260) (65,734)
============================================================================================================
Basic loss per common share:
Basic loss from continuing operations before
cumulative effect of change in accounting principle $ (1.22) (3.02) (2.19)
Basic loss from discontinued operations (0.80) (0.31) (0.12)
Cumulative effect of change in accounting principle - - (0.24)
- ------------------------------------------------------------------------------------------------------------
Basic loss per common share $ (2.02) (3.33) (2.55)
============================================================================================================
Diluted loss per common share:
Diluted loss from continuing operations before
cumulative effect of change in accounting principle $ (1.22) (3.02) (2.19)
Diluted loss from discontinued operations (0.80) (0.31) (0.12)
Cumulative effect of change in accounting principle - - (0.24)
- ------------------------------------------------------------------------------------------------------------
Diluted loss per common share $ (2.02) (3.33) (2.55)
============================================================================================================
See accompanying notes to consolidated financial statements.
28
Avado Brands, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
Fiscal Year End 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 636 559
Restricted cash - 9,978
Accounts receivable 5,087 10,723
Inventories 5,283 5,870
Prepaid expenses and other 2,129 2,928
Assets held for sale 10,920 9,737
- --------------------------------------------------------------------------------------------------------------------
Total current assets 24,055 39,795
Premises and equipment, net 236,950 283,028
Goodwill, net - 34,920
Deferred income tax benefit 11,620 11,620
Other assets 28,670 29,193
- --------------------------------------------------------------------------------------------------------------------
$ 301,295 398,556
====================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 11,509 15,766
Accrued liabilities 54,292 64,265
Current installments of long-term debt 30,838 13
Income taxes 35,038 33,773
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 131,677 113,817
Long-term debt 164,031 215,815
Other long-term liabilities 2,143 3,111
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 297,851 332,743
- --------------------------------------------------------------------------------------------------------------------
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 (deficit):
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 in 2001 405 405
Additional paid-in capital 154,637 146,139
Retained earnings (accumulated deficit) (58,118) 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 (deficit) 265 (2,746)
- --------------------------------------------------------------------------------------------------------------------
$ 301,295 398,556
====================================================================================================================
See accompanying notes to consolidated financial statements.
29
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Loss
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 (Deficit)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 2000 40,479 $405 $144,872 $166,305 $(278) $(198,680) $112,624
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss - - - (65,734) - - (65,734)
Foreign currency translation adjustment - - - - 278 - 278
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive 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
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss - - - (95,260) - - (95,260)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss - - - (95,260) - - (95,260)
- ----------------------------------------------------------------------------------------------------------------------------------
Conversion of convertible preferred securities - - 648 - - 3,816 4,464
Common stock issued to benefit plans - - (2,318) - - 2,416 98
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 2001 40,479 405 146,139 5,311 - (154,601) (2,746)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss - - - (63,429) - - (63,429)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss - - - (63,429) - - (63,429)
- ----------------------------------------------------------------------------------------------------------------------------------
Conversion of convertible preferred securities - - 8,498 - - 57,942 66,440
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 2002 40,479 $405 $154,637 $(58,118) - $(96,659) $265
==================================================================================================================================
See accompanying notes to consolidated financial statements.
Page 30
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (63,429) (95,260) (65,734)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 21,010 27,032 31,397
Deferred income taxes - 10,530 (25,710)
Gain on debt extinguishment (41,412) - -
Asset revaluation and other special charges 45,431 61,546 35,667
Loss (gain) on disposal of assets 563 (12,436) 22,818
Loss from discontinued operations 25,118 8,855 3,158
Cumulative effect of change in accounting principle, net of taxes - - 6,255
Mark-to-market adjustment on interest rate swap 861 (739) (1,150)
Loss from investments carried at equity - - 69
(Increase) decrease in assets:
Accounts receivable 773 (994) (2,313)
Inventories 115 1,170 (1,102)
Prepaid expenses and other 756 (2,942) 682
Increase (decrease) in liabilities:
Accounts payable (4,006) (4,946) 16,091
Accrued liabilities (12,898) 5,913 4,103
Income taxes 1,265 359 3,622
Other long-term liabilities (183) (4,273) (183)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (26,036) (6,185) 27,670
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,426) (17,595) (46,945)
Proceeds from sale-leaseback - - 28,371
Proceeds from disposal of assets and notes receivable, net 9,111 128,752 14,074
Investments in and advances to unconsolidated affiliates - - (3,099)
Other, net (430) (2,402) (2,700)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,255 108,755 (10,299)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) revolving credit agreements 11,563 (90,831) (21,667)
Proceeds from term credit agreement 19,236 - -
Payment of financing costs (8,502) - -
Purchase of long-term debt, net (8,489) - -
Principal payments on long-term debt (28) (26) (23)
Settlement of interest rate swap agreement (1,704) - -
Reduction in (payments of) letter of credit collateral 9,978 (9,978) -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 22,054 (100,835) (21,690)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) discontinued operations 804 (1,578) (6,546)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 77 157 (10,865)
Cash and cash equivalents at the beginning of the period 559 402 11,267
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 636 559 402
===========================================================================================================================
See accompanying notes to consolidated financial statements
Page 31
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 29 states. At December 29, 2002, the Company operated 120 Don
Pablo's Mexican Kitchen restaurants ("Don Pablo's"), 66 Hops Restaurant Bar
Brewery restaurants ("Hops") and four Canyon Cafe restaurants ("Canyon Cafe"),
which were held for sale effective December 30, 2001. All of these brands are
owned on a proprietary basis.
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 had
limited or shared control, were accounted for using the equity method until
disposed of in 2001. All significant intercompany accounts and transactions are
eliminated in consolidation. As a result of the adoption of Statement of
Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", the Company has classified the revenues,
expenses and related assets and liabilities of 11 Don Pablo's restaurants and
eight Hops restaurants which were closed in 2002, plus one additional Don
Pablo's restaurant which was under contract and held for sale at December 29,
2002 and subsequently sold in February 2003, as discontinued operations for all
periods presented in the accompanying consolidated financial statements. The
revenues, expenses and related assets and liabilities of Canyon Cafe which is
also held for sale, the McCormick & Schmick's brand, which was divested in
August 2001, and eight Don Pablo's and two Hops restaurants which were closed in
2001, have not been classified as discontinued operations in the accompanying
consolidated financial statements. As the decision to divest these operations
was made prior to the implementation of SFAS 144 and they did not meet the
criteria for classification as discontinued operations under the provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", they are required to be
classified within continuing operations under the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Use of Estimates - Preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 29, 2002
("2002"), the 52 weeks ended December 30, 2001 ("2001") and the 52 weeks ended
December 31, 2000 ("2000"). All general references to years relate to fiscal
years unless otherwise noted.
Revenue Recognition - The Company records revenue from the sale of food,
beverage and alcohol as products are sold. Proceeds from the sale of gift cards
are recorded as a current liability and recognized as income when redeemed by
the holder.
The Company adopted EITF 01-9, "Accounting for Consideration Given by a
Vendor to a Customer" in fiscal 2002. EITF 01-9 addresses the recognition,
measurement and income statement classification for sales incentives offered to
customers. Sales incentives include discounts, coupons, free products and
generally any other offers that entitle a customer to receive a reduction in the
price of a product. Under EITF 01-9, the reduction in the selling price of the
product resulting from any sales incentives should be classified as a reduction
of revenue. Prior to adopting this pronouncement, the Company recognized sales
incentives as restaurant operating expenses. As a result of adopting EITF 01-9,
sales incentives were reclassified as a reduction of sales for all periods
presented. Amounts reclassified were $7.1 million, $5.4 million and $5.2 million
in 2002, 2001 and 2000, respectively.
Cash Equivalents - Cash equivalents include all highly liquid investments
which have original maturities of three months or less. At December 30, 2001,
$10.0 million in restricted cash was held as collateral to secure letters of
credit which secured the Company's insurance programs. The restricted cash was
released in 2002 in conjunction with the completion of the Company's new credit
facility which provided revolving loan capacity to secure the letters of credit.
32
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 discontinued restaurants,
non-operating restaurants and undeveloped real estate. The Company classifies
long-lived assets as held for sale in the period in which all of the criteria of
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", are
met. Accordingly, the Company does not recognize depreciation or amortization
expense during the period in which assets are classified as 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 6).
Beginning in 2002, impairment of assets has been recorded in accordance with
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
which supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 requires the Company
to review the carrying value of long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable.
Development Costs - Certain direct 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: $0.5 million in 2001 and $2.9 million in 2000. No
development costs were capitalized in 2002.
Goodwill - The Company adopted Statement of Financial Accounting Standard
("SFAS") No. 142, "Goodwill and Other Intangible Assets", effective at the
beginning of its fiscal 2002 year. SFAS 142 requires nonamortization of goodwill
and intangible assets that have indefinite useful lives and annual tests of
impairments of those assets. As of December 29, 2002, the Company had written
off all of its recorded goodwill (see Note 2).
Goodwill represented the excess of purchase price over fair value of net
assets acquired and, prior to the adoption of SFAS No. 142, was amortized over
the expected period to be benefited, typically 40 years, using the straight-line
method. Recoverability of this intangible asset, prior to SFAS No. 142, was
determined by assessing whether the amortization of the goodwill balance over
its remaining life could be recovered through undiscounted future operating cash
flows of the acquired operations. The amount of goodwill impairment, if any, was
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. Accumulated
amortization of goodwill amounted to $4.4 million at December 30, 2001 and $12.9
million at December 31, 2000. Amortization expense was $2.6 million in 2001 and
$3.6 million in 2000 and has been recorded as other, net in the accompanying
consolidated statements of loss.
The following table discloses the Company's consolidated losses, assuming
it excluded goodwill amortization for the periods ended:
2002 2001 2000
- --------------------------------------------------------------------------------------------
Net loss $ (63,429) (95,260) (65,734)
Add back:
Goodwill amortization, net of income taxes - 2,194 2,581
Trademark amortization, net of income taxes - 14 14
- --------------------------------------------------------------------------------------------
Adjusted net loss $ (63,429) (93,052) (63,139)
- --------------------------------------------------------------------------------------------
Basic loss per share $ (2.02) (3.33) (2.55)
Add back:
Goodwill amortization, net of income taxes - 0.08 0.10
Trademark amortization, net of income taxes - - -
- --------------------------------------------------------------------------------------------
Adjusted basic loss per share $ (2.02) (3.25) (2.45)
- --------------------------------------------------------------------------------------------
Diluted loss per share $ (2.02) (3.33) (2.55)
Add back:
Goodwill amortization, net of income taxes - 0.08 0.10
Trademark amortization, net of income taxes - - -
- --------------------------------------------------------------------------------------------
Adjusted diluted loss per share $ (2.02) (3.25) (2.45)
- --------------------------------------------------------------------------------------------
33
Insurance Programs - 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 losses related primarily to workers' compensation, physical
loss to property, and comprehensive general liability. The Company has increased
the amounts of its deductible for workers' compensation and general liability to
$500,000 per claim in 2002 compared to $250,000 per claim in 2001. Losses in
excess of these risk retention levels are covered by insurance which management
considers as adequate. Provision for losses expected under these programs are
recorded based upon estimates of the liability for claims incurred. Such
estimates are based on management judgements and utilize the Company's
historical experience, information provided by the Company's third party
administrators and certain actuarial assumptions followed in the insurance
industry.
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 8 and 10). 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 11). Deferred
lease costs are amortized on a straight-line basis over the lease terms (Note
7).
Preopening Costs - Preopening costs consist of costs incurred prior to
opening a restaurant location including wages and salaries, hourly employee
recruiting and training, initial license fees, advertising, preopening parties,
lease expense, food cost, utilities, meals, lodging, and travel plus the cost of
hiring and training the management teams. The costs of such start-up activities
are expensed as incurred.
Advertising - Advertising is expensed in the period covered by the related
promotions. Total advertising expense included in other operating expenses was
$20.8 million in 2002, $27.5 million in 2001 and $29.1 million in 2000.
Rent - Rent is expensed using the straight-line method over the lease term.
Total rent expense included in other operating expenses was $24.0 million in
2002, $33.4 million in 2001 and $31.6 million in 2000.
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. No compensation
expense has been recognized for the Company's stock-based compensation plans.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation during 2002, 2001 and 2000.
2002 2001 2000
- -------------------------------------------------------------------------------------------------
Net loss, as reported $(63,429) $(95,260) $(65,734)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects 300 (1,296) (251)
------------------------------------------------------------------------------------------------
Pro forma net loss $(63,729) $(93,964) $(65,483)
- -------------------------------------------------------------------------------------------------
Loss per share:
Basic - as reported $ (2.02) $ (3.33) $ (2.55)
- -------------------------------------------------------------------------------------------------
Basic - pro forma $ (2.03) $ (3.29) $ (2.55)
- -------------------------------------------------------------------------------------------------
Diluted - as reported $ (2.02) $ (3.33) $ (2.55)
- -------------------------------------------------------------------------------------------------
Diluted - pro forma $ (2.03) $ (3.29) $ (2.55)
- -------------------------------------------------------------------------------------------------
The effects of 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 2002 is estimated as
$0.14 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 3.0%, and an expected life of 6.5 years.
34
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) in 2000.
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 had one fixed-to-floating interest rate swap
transaction which was impacted by the adoption of SFAS 133. This swap
transaction represented a diversification of the Company's interest rate
exposures but did not qualify for fair value hedge accounting under SFAS 133. As
such, changes in fair value of the instrument were recognized as a component of
interest expense as they occurred. The Company recognized a $0.9 million
increase to interest expense generated by changes in the instrument's fair value
in 2002, a $0.7 million reduction to interest expense in 2001 and a $1.1 million
reduction to interest expense in the fourth quarter of 2000. In March 2002, the
Company terminated its fixed-to-floating interest rate swap.
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 15).
Reclassifications - Certain accounts have been reclassified in the 2000 and
2001 financial statements to conform with the 2002 classifications.
Note 2 - Asset Revaluation and Other Special Charges
Asset revaluation and other special charges totaled $45.4 million in 2002.
These charges, which were predominately non-cash, included a $7.0 million asset
impairment charge related primarily to underperforming restaurants and costs
associated with sites that are no longer expected to be developed, a $3.2
million reduction to the carrying value of the Company's assets held for sale
related primarily to Canyon Cafe and a $35.0 million write off of goodwill
related to the Hops brand. The goodwill impairment charge was recorded as a
result of the Company's annual test of impairment as required by SFAS No. 142,
"Goodwill and Other Intangible Assets", which was adopted effective at the
beginning of 2002. Under SFAS 142, the Company is required to evaluate goodwill
for impairment by comparing the fair value of the related reporting unit to the
reporting unit's carrying value. Beginning in fiscal 2002, the Company
determined that Hops meets the requirements of a separate reporting unit and
assessed goodwill for possible transition impairment and concluded that there
was no impairment of goodwill. At the beginning of the fourth quarter of 2002,
the Company determined the fair value of the Hops brand based on an internal
valuation of its historical and projected operating performance and restaurant
development plans. Based on the Company's estimated fair value, it was
determined that the fair value of Hops exceeded its carrying value indicating
potential goodwill impairment. Under SFAS 142, the indication of goodwill
impairment requires the completion of an additional evaluation whereby an
"implied" fair value of goodwill is identified. This implied value is determined
by allocating the fair value of the reporting unit to all of the assets and
liabilities of the reporting unit in a manner similar to a purchase price
allocation. Any residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. Using this methodology, the Company
determined that the implied fair value of the Hops goodwill was $0. Accordingly,
an impairment charge was recorded to write off the full balance of Hops goodwill
as of December 29, 2002. The decrease in Hops' fair value and corresponding
goodwill impairment charge was a result of a decline in the brand's 2002 sales
and operating performance which prompted the Company to close eight
underperforming locations and to halt new restaurant development in the near
term. In addition, the fair value of the brand was impacted by overall economic
uncertainty which has negatively impacted the Company's restaurants.
In 2001, asset revaluation and other special charges totaled $61.5 million.
These charges, which were predominately non-cash, included a $45.0 million
non-cash asset impairment charge at Canyon Cafe. A continued deterioration of
35
sales and corresponding lack of operating performance improvement resulted in a
carrying amount of assets which exceeded the sum of expected future cash flows
associated with such assets. As a result, an impairment loss was recorded, under
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", based on the difference
between the estimated fair value and the carrying amount of the Canyon Cafe
assets. During the fourth quarter of 2001, the Company finalized its decision to
divest the Canyon Cafe brand. At December 29, 2002 and December 30, 2001, the
assets and liabilities of Canyon Cafe have been classified as assets held for
sale. The Company also recorded an asset impairment charge of $3.6 million
related primarily to under-performing Don Pablo's and Hops restaurants along
with an $11.1 million allowance against the ultimate realization of notes
receivable from Tom E. DuPree, Jr., the Company's Chairman and Chief Executive
Officer. The allowance on Mr. DuPree's notes was established based on the
estimated fair value of the underlying collateral which secured the notes. The
remaining $1.8 million in asset revaluation and other special charges was
attributable primarily to employee severance and other payroll related costs.
In 2000, asset revaluation and other special charges totaled $35.7 million.
These charges, which were predominately noncash, reflect the fourth quarter
decision to close 13 under-performing restaurants including four Don Pablo's,
three Canyon Cafe's and two Hops restaurants which were closed in early January
2001 and four additional Don Pablo's which were closed in March 2001. 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 $8.6 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.
The major components of asset revaluation and other special charges follow
(amounts in thousands):
2002 2001 2000
- ----------------------------------------------------------------------------------------------
Write down of premises and equipment
of assets held for sale, to net realizable value $ 3,171 6,190 16,499
Impairment of Canyon Cafe goodwill - 38,059 -
Impairment of Hops goodwill 35,028 - -
Accruals for lease termination and other closing costs - 776 5,776
Allowance against realization of officer notes - 11,076 -
Asset revaluation 6,999 3,654 8,543
Office consolidation expenses 188 - 1,919
Strategic alternative evaluation expenses - - 1,645
Severance and other payroll related costs 45 1,649 1,285
Other - 142 -
- ----------------------------------------------------------------------------------------------
Total asset revaluation and other special charges $ 45,431 61,546 35,667
- ----------------------------------------------------------------------------------------------
Note 3 - Gain on Debt Extinguishment
For the year ended December 29, 2002, gain on debt extinguishment reflects
the retirement of $52.4 million in face value of Subordinated Notes for $8.5
million plus $2.2 million in accrued interest. After a $2.5 million write-off
primarily of deferred loan costs and unamortized initial issue discount, the
Company recorded a gain on extinguishment during 2002, of $41.4 million. The
gain was recorded in operating income in accordance with SFAS No. 145, which
rescinded SFAS No. 4, "Reporting Gains and Losses from the Extinguishment of
Debt".
Note 4 - Discontinued Operations
As discussed in Note 1 - Basis of Presentation, discontinued operations
includes the revenues, expenses and related assets and liabilities of 11 Don
Pablo's and eight Hops restaurants which were closed in during 2002, plus one
36
additional Don Pablo's restaurant which was under contract and held for sale at
December 29, 2002 and subsequently sold in February 2003. The decision to
dispose of these 20 locations reflects the Company's ongoing process of
evaluating the performance and cash flows of its various restaurant locations
and its desire to use the proceeds from the sale of under-performing restaurants
to reduce debt. The Company expects to complete the divestiture of these
locations in 2003.
Net loss from discontinued operations for 2002, for which no taxes have
been allocated, of $25.1 million primarily reflects non-cash asset impairment
charges of $22.1 million, primarily to reduce the carrying value of the
restaurant assets, which are held for sale, to estimated fair value. Operating
losses were $25.1 million for 2002, on total restaurant sales from discontinued
operations of $19.3 million.
Net loss from discontinued operations for 2001, for which no taxes have
been allocated, of $8.9 million primarily reflects non-cash asset impairment
charges of $4.8 million, primarily to reduce the carrying value of the
restaurant assets to estimated fair value. Operating losses were $8.9 million
for 2001, on total restaurant sales from discontinued operations of $28.8
million.
Net loss from discontinued operations for 2000 of $3.2 million (net of
income tax benefit of $2.1 million) primarily reflects non-cash asset impairment
charges of $2.5 million, primarily to reduce the carrying value of the
restaurant assets to estimated fair value. Operating losses were $5.2 million
for 2000, on total restaurant sales from discontinued operations of $30.3
million.
Note 5 - 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
million loss which is included in "Loss (gain) on disposal of assets" in the
accompanying 2000 consolidated statement of loss.
In the first quarter of 2001, the Company completed its fourth quarter 2000
commitment to exit from its two unprofitable U.S. joint-venture investments with
Belgo Group PLC and PizzaExpress PLC, respectively. 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. The Belgo restaurant was closed and the Company also sold
its interest in the two San Marzano restaurants, to PizzaExpress for $0.4
million. The commitment to exit these businesses resulted in a loss on disposal
of assets of $3.6 million in 2000.
Note 6 - Premises and Equipment
A summary of premises and equipment at December 29, 2002 and December 30,
2001 follows (amounts in thousands):
2002 2001
- --------------------------------------------------------------------------
Land $ 38,750 47,110
Buildings 64,226 84,287
Buildings subject to ground leases 134,094 139,198
Equipment 91,087 97,428
Leasehold improvements 8,854 5,688
Construction in progress 722 1,997
- --------------------------------------------------------------------------
Total premises and equipment 337,733 375,708
Less accumulated depreciation and amortization 100,783 92,680
- --------------------------------------------------------------------------
Premises and equipment, net $ 236,950 283,028
- --------------------------------------------------------------------------
37
Note 7 - Other Assets
A summary of other assets at December 29, 2002 and December 30, 2001
follows (amounts in thousands):
2002 2001
- ---------------------------------------------------------------------
Deferred loan and lease costs $ 13,107 12,264
Officer notes receivable, net of reserve 2,650 2,854
Prepaid rent 8,689 9,146
Liquor licenses 1,909 1,931
Long-term portion of notes receivable 301 1,123
Other 2,014 1,875
- ---------------------------------------------------------------------
Total other assets $ 28,670 29,193
- ---------------------------------------------------------------------
Note 8 - Long-Term Debt
Long-term debt at December 29, 2002 and December 30, 2001 consisted of the
following (amounts in thousands):
2002 2001
- -----------------------------------------------------------------------------
Senior secured credit facility
(15.75% at December 29, 2002) $ 30,809 -
9.75% Senior Notes, unsecured 116,500 116,500
11.75% Senior Subordinated Notes, unsecured 47,179 98,921
Other 381 407
- -----------------------------------------------------------------------------
Total long-term debt 194,869 215,828
Less current installments 30,838 13
- -----------------------------------------------------------------------------
Total long-term debt, excluding current installments $ 164,031 215,815
- -----------------------------------------------------------------------------
On March 25, 2002, the Company completed a $75.0 million credit facility
(the "Credit Facility") to replace its existing credit agreement. The Credit
Facility 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
Facility. In addition, the lender has 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. The loan
is secured by substantially all of the Company's assets.
In June 2002, the Company obtained an amendment to the Credit Facility
which allowed the use of proceeds from the term loan facility to make the
one-time payment of accrued interest related to the Company's $3.50 term
convertible securities, due 2027. In the third quarter, the Company completed a
second amendment to the Credit Facility which amended certain definitions
relating to the payment of delinquent taxes and made other technical corrections
to the agreement. During the fourth quarter, the Company completed a third
amendment, dated November 11, 2002, and fourth amendment, dated December 27,
2002, to the Credit Facility. The third amendment made additional technical
corrections to the agreement. Under the fourth amendment, the Credit Facility
lenders agreed to forbear from exercising their remedies until May 31, 2003 with
respect to certain events of default related to the Company's failure to meet
its September 29, 2002 EBITDA target. The amendment increased the interest rate
to 15.75% for revolving and term borrowings and to 7.5% for letter of credit
accommodations. The amendment also revised certain financial covenants and added
a new covenant which requires the Company to reduce its obligations
38
(including cash borrowings and letter of credit commitments) under the facility
to $0 by May 25, 2003 in accordance with the following schedule.
Date Maximum Obligations
----------------- --------------------
January 26, 2003 $50,000,000
February 23, 2003 $41,000,000
March 30, 2003 $31,000,000
April 27, 2003 $15,000,000
May 25, 2003 $0
In connection with the fourth amendment, the Company incurred an amendment
and waiver fee of $8.5 million. The fee was paid-in-kind by being added to the
principal balance of the Company's outstanding term borrowings. Under the terms
of the fourth amendment, $6.5 million of the waiver fee will be refunded by the
lender by reducing the principal balance of the outstanding term loans by $6.5
million if (i) by April 27, 2003 the Company has reduced all cash borrowings
(excluding the refundable $6.5 million fee) to $0, (ii) by April 27, 2003 the
Company has collateralized its letter of credit commitments either with cash
collateral of 105% or through back-up letters of credit and (iii) by May 25,
2003 all letters of credit secured by the Credit Facility have been returned to
the issuer without being drawn. Subsequent to December 29, 2002, the Company
successfully reduced its obligations to comply with the maximum obligations
requirement for the periods ended January 26, 2003 and February 23, 2003.
Due to the Company's requirement to reduce the outstanding balance of the
Credit Facility to $0 by May 25, 2003, the balance of the facility at December
29, 2002 has been classified as a current liability in the accompanying
consolidated balance sheet. At December 29, 2002, $11.6 million of cash
borrowings were outstanding under the revolving portion of the Credit Facility
and $19.2 million was outstanding under the term portion of the facility,
including the $6.5 million refundable portion of the amendment and waiver fee.
In addition to the $11.6 million of cash borrowings outstanding under the
revolving facility, an additional $15.3 million of the facility was utilized to
secure letters of credit. Lender imposed reserves against the Company's total
borrowing availability, as of December 29, 2002, were $5.8 million. At December
29, 2002, $7.8 million of the total facility remained unused and available.
During the fourth quarter of 2002, Borrowing Base EBITDA resulted in a
maximum borrowing capacity of $53.3 million. At December 29, 2002, the Company's
trailing 12 months EBITDA will result in the Company's maximum borrowing
capacity being adjusted from $53.3 million to $49.3 million in conjunction with
the Company's filing of its required reports with the lender on or about
February 27, 2003. As a result of the upcoming reduction in the Company's
borrowing base, total availability on the facility will be reduced by $4.0
million on or about February 27, 2003, however the availability cannot exceed
the maximum borrowing obligations, as amended, noted in the table above at the
respective dates. Subsequent to December 29, 2002, the Company used revolving
loan advances to make the interest payments under its Senior Notes and
Subordinated Notes of $5.7 million and $2.8 million, respectively. In addition
to its currently outstanding borrowings, the Company will be required to pay an
anniversary fee of $1.1 million on March 25, 2003 and will be required to pay a
termination fee of $1.7 million if the Credit Facility is terminated prior to
March 25, 2003. This fee escalates to $3.6 million if the Credit Facility
termination occurs subsequent to March 25, 2003.
In 1999, the Company issued $100.0 million of 11.75% Senior Subordinated
Notes due June 2009 ("Subordinated Notes") and priced to yield 12.0%. In 2002,
the Company repurchased $52.4 million of these notes and recognized a gain on
extinguishment of $41.4 million. In 1996, $125.0 million of 9.75% Senior Notes
due June 2006 ("Senior Notes") were issued under a $200.0 million shelf
registration. In 1998, the Company repurchased $8.5 million of these notes.
Interest on both note issues are payable semi-annually in June and December.
Interest payments on the Company's Senior Notes and Subordinated Notes are
due semi-annually in each June and December. Prior to the Company's repurchase
of $52.4 million in face value of its outstanding Subordinated Notes in the
second and third quarters of 2002, 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, due to late payment of interest, and the Company utilized these
provisions with respect to its June and December 2002 interest payments as well
as its June and December 2001 interest payments. The Company's ability to make
its June 2003 interest payments is dependent on the outcome of its initiatives
to sell assets and obtain alternative lending sources.
39
The Company's unsecured Senior Notes and Subordinated Notes are not
actively traded and the determination of the estimated fair value is based on
trades dating back to June 2002. At December 29, 2002, the aggregate estimated
fair value of the Senior Notes and Subordinated Notes was $47.5 million compared
to the carrying value of $163.7 million. The Company believes the fair value of
its current assets and liabilities along with its refinanced revolving credit
facility, approximate 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 29, 2002 are as follows: 2003 - $30.8 million, 2006 - $116.5
million, 2009 - $47.2 million and $0.4 million thereafter.
Note 9 - Liquidity
The Company has suffered from recurring losses from operations, has an
accumulated deficit and has a secured credit facility which is due May 25, 2003
that raise substantial doubt about the Company's ability to continue as a going
concern. Sufficient liquidity to make the scheduled debt reductions under the
amended Credit Facility and other required debt service and lease payments is
dependent primarily on the realization of proceeds from the sale of assets, cash
flow from operations and obtaining alternative financing sources. There can be
no assurance that these initiatives will be successful.
In the event the Company is not able to meet its debt reduction obligations
or other financial covenant targets under the Credit Facility, an event of
default would occur. During the continuance of an event of default, the Company
would be subject to a post-default interest rate under the Credit Facility which
increases the otherwise effective interest rates by three percentage points. As
a result, the Company's per annum interest rate on revolving and term loans
would be 18.75% and the rate on letter of credit accommodations would be 10.50%.
In addition to the right to declare all obligations immediately due and payable,
the Credit Facility lender also has additional rights during the continuance of
an event of default including, among other things, the right to (i) make and
collect certain payments on the Company's behalf, (ii) require cash collateral
to secure letters of credit, (iii) make certain investigations into the
Company's activities, (iv) receive reimbursement for certain expenses incurred
and (v) sell any of the collateral securing the obligations or settle, on the
Company's behalf, any legal proceedings related to the collateral. In addition,
in the event the amounts due under the Credit Facility are accelerated,
cross-default provisions contained in the indentures to the Company's Senior
Notes and Subordinated Notes would be triggered, creating an event of default
under those agreements as well. At December 29, 2002, the outstanding balances
of the Senior and Subordinated Notes were $116.5 million and $47.6 million
respectively. An event of default under the Credit Facility would result in a
cross-default under the master equipment lease but would not result in a
cross-default under the sale-leaseback agreement. In the event some or all of
the obligations under the Company's credit agreements become immediately due and
payable, the Company does not currently have sufficient liquidity to satisfy
these obligations and it is likely that the Company would be forced to seek
protection from its creditors.
The terms of the amended Credit Facility, the Company's Senior Notes and
Subordinated Notes, master equipment lease and Hops sale-leaseback transaction
collectively 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 closing of the Credit Facility,
the Company terminated its interest rate swap agreement thereby eliminating any
aforementioned restrictions contained in that agreement. In addition, in March
2002 the master equipment lease agreement was amended to substantially conform
the covenants to the Credit Facility. At December 29, 2002, the Company was in
compliance with the requirements contained in the Credit Facility, as amended.
The Company was also in compliance with the terms of the Senior Notes and
Subordinated Notes. The Company was not in compliance with a net worth
requirement contained in its sale-leaseback agreement. The lessor, however, has
waived this requirement until March 31, 2004 at which time the minimum net worth
requirement will be $150.0 million. The Company is also not in compliance with
certain financial covenants contained in the master equipment lease. Under the
master equipment lease, the failure to meet the financial covenants represents
an event of default whereby the creditor has the right to, among other things,
declare all obligations under the agreement immediately due and payable and to
repossess the leased equipment, which is located primarily in the Company's
restaurants. Although the lessor has not notified the Company of its intent to
do so, acceleration of the obligations would have a material adverse effect on
the Company. At December 29, 2002, remaining obligations under the master
equipment lease totaled $7.6 million. The continuing event of default under the
master equipment lease does not result in cross-defaults under the Company's
Senior Notes, Subordinated Notes or sale-leaseback agreement and the cross
default under the Credit Agreement has been waived. Although the lessor has not
40
notified the Company of any intent to accelerate its obligations, there can be
no assurances that the lessor will not exercise such remedies.
The Company is also exposed to certain contingent payments. In connection
with the Applebee's, Harrigan's and Canyon Cafe divestiture transactions
completed during 2002, 1999 and 1998, the Company remains contingently liable
for lease obligations relating to 86 Applebee's restaurants eight Harrigan's
restaurants and eight Canyon Cafe restaurants. Assuming that each respective
purchaser became insolvent, an event management believes to be remote, the
Company could be liable for lease payments extending through 2017 with minimum
lease payments totaling $34.7 million. 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.
The Company has increased the amounts of its deductibles for workers'
compensation and general liability to $500,000 per claim in 2002 compared to
$250,000 per claim in 2001. Losses in excess of these risk retention levels are
covered by insurance which management considers as adequate. Provisions for
losses estimated under these programs are recorded based on estimates of the
aggregate liability for claims incurred. Such estimates are based on
management's evaluation of the nature and severity of claims and future
development based on the Company's historical experience, information provided
by the Company's third party administrators and certain actuarial assumptions
used by the insurance industry. In addition, at December 29, 2002, the Company
was contingently liable for letters of credit aggregating approximately $15.3
million, relating primarily to its insurance programs. 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.
The Company's 1998 Federal income tax returns are currently being audited
by the Internal Revenue Service. The Company believes its recorded liability for
income taxes of $35.0 million as of December 29, 2002 is adequate to cover its
exposure that may result from the ultimate resolution of the audit. Although the
ultimate outcome of the audit cannot be determined at this time, the Company
does not have sufficient liquidity to pay any significant portion of its
recorded liability if resolution of the audit results in such amount being
currently due and payable. Management does not currently expect that this will
be the result, or that any resolution with respect to audit issues will be
reached in the near future.
Management has taken steps to improve cash flow from operations, including
changing the Company's marketing strategy to be less reliant on expensive
broadcast media, reducing overhead through consolidation of functions and
personnel reductions and adjusting supervisory management level personnel in its
restaurant operations. There is no assurance these efforts will be successful in
improving cash flow from operations sufficiently to enable the Company to
continue to meet its obligations, including scheduled interest and other
required payments under its debt and lease agreements and capital expenditures
necessary to maintain its existing restaurants. During 2002, the Company
realized $13.0 million from the sale of assets (including $3.9 from discontinued
operations), which supplemented its cash provided by financing activities and
enabled the Company to meet its obligations. For the near term, cash flow from
operations will need to be supplemented by asset sales and other liquidity
improvement initiatives including obtaining new financing sources. There is no
assurance the Company will be able to generate proceeds from these efforts in
sufficient amounts to supplement cash flow from operations, thereby enabling the
Company to meet its debt and lease obligations. In addition, there is no
assurance the Company will be able to comply with the financial covenants of its
debt and lease agreements.
Note 10 - 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 "TECONS"),
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
41
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.
The Company, consistent with its right to defer quarterly distribution
payments on the Convertible Preferred Securities for up to 20 consecutive
quarters, deferred each of its 2002 and 2001quarterly distribution payments as
well as its December 2000 distribution payment. The Company may pay all or any
part of the interest accrued during the extension period at any time. Total
deferred payments for 2002, 2001 and 2000 were $0.3 million, $4.9 million and
$2.3 million respectively and are included in accrued liabilities in the
accompanying balance sheets.
The decrease in deferred payments for 2002 is a result of a one-time
payment of accrued interest, equal to $4.25 per share, which was paid to holders
of the Company's TECONS in 2002. 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.
During the second quarter of 2002, 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, which were issued from treasury. As a result of
this transaction, the outstanding balance of the TECONS was reduced by $60.0
million. A total of 1,307,591 TECONS were converted during 2002, which resulted
in a decrease to distribution expense. As of December 29, 2002, 63,589 TECONS
remained outstanding.
Distribution expense related to the Convertible Preferred Securities also
decreased in 2001 and 2000 as a result of the conversion, at the holders'
option, of 86,128 and 842,692 of the securities, respectively, into common
stock.
Note 11 - 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 related to the sale-leaseback during
both 2002 and 2001 was $3.4 million and escalates by 1.2% each year. The
transaction, which has been accounted for as an operating lease, resulted in
prepaid rent, which is being amortized over the lease term as additional rent
expense.
The Company also has a fully utilized master equipment lease agreement
under which $23.9 million of equipment (original cost) is currently leased. 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.
The terms of the sale-leaseback transaction and master equipment lease
collectively include various provisions which among other things, require the
Company to (i) achieve certain EBITDA targets, (ii) maintain defined net worth
and coverage ratios and (iii) maintain defined leverage ratios. At December 29,
2002, the company was not in compliance with a net worth requirement contained
in its sale-leaseback agreement. The lessor, however, has waived this
requirement until March 31, 2004 at which time the minimum net worth requirement
will be $150.0 million. The Company was also not in compliance with certain
financial covenants contained in the master equipment lease. Under the master
equipment lease, the failure to meet the financial covenants represents an event
of default whereby the creditor has the right to, among other things, declare
all obligations under the agreement immediately due and payable and to repossess
the leased equipment, which is located primarily in the Company's restaurants.
The lessor has not notified the Company of its intent to accelerate the
obligations.
42
Future minimum lease payments under noncancellable operating leases,
including the sale-leaseback transaction, at December 29, 2002 are as follows
(amounts in thousands):
2003 $ 24,094
2004 16,073
2005 14,819
2006 13,186
2007 11,494
Later years 71,577
----------------------------------
Total minimum payments $ 151,243
----------------------------------
Future minimum lease payments do not include amounts payable for
maintenance costs, real estate taxes, insurance 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 noncancellable
operating leases was $24.0 million in 2002, $33.4 million in 2001 and $ 31.6
million in 2000. Rental expense included contingent rentals of $0.1 million in
2002, $0.9 million in 2001 and $3.1 million in 2000.
Note 12 - Accrued Liabilities
A summary of accrued liabilities at December 29, 2002 and December 30, 2001
follows (amounts in thousands):
2002 2001
---------------------------------------------------------------
Payroll and related benefits $ 10,013 12,269
Taxes other than payroll and income 7,377 15,734
Restaurant closings and divestitures 4,397 2,237
Insurance 7,889 6,710
Gift certificates 2,678 2,841
Interest 12,499 14,106
Accrued rent 4,245 3,642
Other 5,194 6,726
---------------------------------------------------------------
Total accrued liabilities $ 54,292 64,265
---------------------------------------------------------------
43
Note 13 - 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):
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Average number of common shares used in basic calculation 31,331 28,568 25,729
Additional shares issuable pursuant to employee stock
option plans at period-end market price -* - -
Shares issuable on assumed conversion of Convertible
Preferred Securities -* -* -*
- ----------------------------------------------------------------------------------------------------------
Average number of common shares used in diluted calculation 31,331 28,568 25,729
- ----------------------------------------------------------------------------------------------------------
Net loss from continuing operations $ (38,311) (86,405) (56,321)
Net loss from discontinued operations (25,118) (8,855) (3,158)
Cumulative effect of change in accounting principle, net of tax - - (6,255)
- ----------------------------------------------------------------------------------------------------------
Net loss (63,429) (95,260) (65,734)
Distribution savings on assumed conversion of Convertible
Preferred Securities, net of income taxes -* -* -*
- ----------------------------------------------------------------------------------------------------------
Net loss for computation of diluted loss per common share $ (63,429) (95,260) (65,734)
==========================================================================================================
Basic loss per common share from continuing operations $ (1.22) (3.02) (2.19)
Basic loss per common share from discontinued operations (0.80) (0.31) (0.12)
Cumulative effect of change in accounting principle - - (0.24)
- ----------------------------------------------------------------------------------------------------------
Basic loss per common share $ (2.02) (3.33) (2.55)
- ----------------------------------------------------------------------------------------------------------
Diluted loss per common share from continuing operations $ (1.22) (3.02) (2.19)
Diluted loss per common share from discontinued operations (0.80) (0.31) (0.12)
Cumulative effect of change in accounting principle - - (0.24)
- ----------------------------------------------------------------------------------------------------------
Diluted loss per common share $ (2.02) (3.33) (2.55)
- ----------------------------------------------------------------------------------------------------------
* Inclusion of 734,138 shares issuable pursuant to employee stock option
plans results in an increase to earnings (loss) per share ("EPS") in 2002. As
those shares are antidilutive, they are excluded from the computation of diluted
EPS. Inclusion of 1,986,084 shares in 2002, 4,696,931 shares in 2001 and
7,384,844 shares in 2000 related to the Convertible Preferred Securities results
in an increase to EPS in each respective year. As those shares are antidilutive,
they are excluded from the computation of diluted EPS.
Note 14 - Supplemental Cash Flow Information
The following supplements the consolidated statements of cash flows
(amounts in thousands):
2002 2001 2000
- -----------------------------------------------------------------------------
Interest paid (net of amounts capitalized) $ 24,026 26,376 35,849
Distribution on preferred securities $ 5,371 - 6,308
Credit facility amendment and waiver fee $ 8,500 - -
Income taxes paid (refunded) $ (499) 261 (3,512)
- -----------------------------------------------------------------------------
During 2001, the Company sold its McCormick & Schmick's brand, consisting
of 34 restaurants. The 2001 consolidated balance sheet reflects changes in asset
and liability accounts related to the divestiture of these restaurants as
follows: decrease in total current assets of $6.1 million, decrease in non
current assets of $141.6 million, decrease in current liabilities of $24.0
million and a decrease in long term liabilities of $1.0 million.
44
Note 15 - Income Taxes
The components of the provision for income taxes for the years ended
December 29, 2002, December 30, 2001 and December 31, 2000 are as follows
(amounts in thousands):
Current Deferred Total
-----------------------------------------------------------------------
2002:
Federal - - -
State $ 375 - 375
-----------------------------------------------------------------------
Total $ 375 - 375
-----------------------------------------------------------------------
2001:
Federal $ 221 9,542 9,763
State 399 988 1,387
-----------------------------------------------------------------------
Total $ 620 10,530 11,150
-----------------------------------------------------------------------
2000:
Federal $ (3,806) (17,707) (21,513)
State 166 (2,181) (2,015)
-----------------------------------------------------------------------
Total $ (3,640) (19,888) (23,528)
-----------------------------------------------------------------------
A reconciliation of the Federal statutory income tax expense (benefit) rate
to the effective income tax rate applied to loss before income taxes in the
accompanying consolidated statements of loss for the years ended December 29,
2002, December 30, 2001 and December 31, 2000 follows:
2002 2001 2000
- -----------------------------------------------------------------------------------------
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) (2.6) (2.6)
FICA tip and target jobs tax credit (2.4) (2.7) (2.8)
Valuation allowance for deferred tax assets 24.4 12.8 8.5
Nondeductible goodwill and basis difference in goodwill 12.4 38.0 1.3
Other, net 3.8 2.8 1.1
- -----------------------------------------------------------------------------------------
Effective tax (benefit) rate 0.6% 13.3% (29.5)%
- -----------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 29,
2002 and December 30, 2001 are presented below (amounts in thousands):
2002 2001
- --------------------------------------------------------------------------------------------
FICA tip credits not yet taken for federal tax purposes $ 20,691 18,303
Asset impairment charges recorded for financial statement
purposes but not yet taken for tax purposes 25,688 16,348
Net operating loss carryforwards not yet taken for tax purposes 20,344 19,292
Other 8,803 7,468
- --------------------------------------------------------------------------------------------
Total deferred tax assets 75,526 61,411
Less: Valuation allowance for deferred tax assets (32,989) (17,605)
- --------------------------------------------------------------------------------------------
Net deferred tax assets 42,537 43,806
- --------------------------------------------------------------------------------------------
Depreciation and amortization taken for tax purposes in excess
of amounts taken for financial reporting purposes (27,629) (28,457)
Other (3,288) (3,729)
- --------------------------------------------------------------------------------------------
Total deferred tax liabilities (30,917) (32,186)
- --------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 11,620 11,620
- --------------------------------------------------------------------------------------------
The valuation allowance for deferred tax assets increased by $15.4 million
for the year ended December 29, 2002, adding to the $17.6 million valuation
allowance balance as of December 30, 2001. In assessing the realizability of
45
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 $51.8 million of net operating loss carryforwards for
federal income tax purposes as of December 29, 2002 that will expire in 2020.
The Company has $20.7 million of FICA tip tax credit carryforwards for federal
income tax purposes as of December 29, 2002 that will expire between 2017 and
2022.
The Company's 1998 Federal income tax returns are currently being audited
by the Internal Revenue Service. The Company believes its recorded liability for
income taxes of $35.0 million as of December 29, 2002 is adequate to cover its
exposure that may result from the ultimate resolution of the audit. Although the
ultimate outcome of the audit cannot be determined at this time, the Company
does not have sufficient liquidity to pay any significant portion of its
recorded liability if resolution of the audit results in such amount being
currently due and payable. Management does not currently expect that this will
be the result, or that any resolution with respect to audit issues will be
reached in the near future.
Note 16 - 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):
2002 2001 2000
-------------------------------------------------------------------
Interest cost capitalized $ - 155 924
Interest cost expensed 31,050 35,305 38,262
-------------------------------------------------------------------
Total $ 31,050 35,460 39,186
-------------------------------------------------------------------
Note 17 - 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.
Information relating to total options is as follows:
Options
Average Exercisable
Shares Price At Year End
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
Granted in 2001 902,539 0.66
Exercised in 2001 - -
Canceled in 2001 (1,240,198) 8.49
- -------------------------------------------------------------------------------
Outstanding at December 30, 2001 2,696,825 5.26 809,133
- -------------------------------------------------------------------------------
Granted in 2002 2,069,580 0.20
Exercised in 2002 - -
Canceled in 2002 (786,799) 5.77
- -------------------------------------------------------------------------------
Outstanding at December 29, 2002 3,979,606 $ 2.53 1,870,759
- -------------------------------------------------------------------------------
46
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
- --------------------------------------------------- -------------------------
$ 0.00 - $ 5.00 3,471,590 7.98 $ 0.73 1,515,037 $ 1.00
$ 5.01 - $10.00 194,794 6.02 8.94 194,794 8.94
$10.01 - $15.00 61,685 4.44 13.28 29,867 13.34
$15.01 - $20.00 216,240 3.04 19.22 108,514 19.21
$20.01 - $25.00 26,647 3.01 21.34 18,222 21.42
$25.01 - $30.00 8,650 3.43 25.63 4,325 25.63
- --------------------------------------------------- ------------------------
Total 3,979,606 7.50 $ 2.53 1,870,759 $ 3.33
- --------------------------------------------------- ------------------------
The Company calculates stock-based compensation by 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. No compensation
expense has been recognized for the Company's stock-based compensation plans.
Note 18 - 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.
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%. Company contributions to the 401(k) Plan were
$0.5 million in 2002, $0.4 million in 2001 and $0.5 million in 2000. 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 $0 in
2002, $97,000 in 2001 and $47,000 in 2000.
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 one year of
service, escalating 20% each year thereafter until they are fully vested. There
was no contribution expense related to the ESOP Plan in 2002 or 2000.
Contribution expense related to the ESOP Plan was $0.1 million in 2001.
Note 19 - 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. The Company has increased
the amounts of its deductibles for workers' compensation and general liability
to $500,000 per claim in 2002 compared to $250,000 per claim in 2001. Losses in
excess of these risk retention levels are covered by insurance which management
considers as adequate. Provisions for losses expected under these programs are
recorded based on estimates of the liability for claims incurred. Such estimates
47
are based on management's evaluation of the nature and severity of claims and
future development based on the Company's historical experience, information
provided by the Company's third party administrators and certain actuarial
assumptions used by the insurance industry. At December 29, 2002, the Company
was contingently liable for letters of credit aggregating approximately $15.3
million related primarily to its insurance programs.
In connection with the Applebee's, Harrigan's and Canyon Cafe divestiture
transactions completed during 2002, 1999 and 1998, the Company remains
contingently liable for lease obligations relating to 86 Applebee's restaurants
eight Harrigan's restaurants and eight Canyon Cafe restaurants. Assuming that
each respective purchaser became insolvent, an event management believes to be
remote, the Company could be liable for lease payments extending through 2017
with minimum lease payments totaling $34.7 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 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. The plaintiffs have made a settlement demand of $2.5 million, which
has been accepted by the Company's insurer. The Company believes that the
members of the class will give final consent to the insurer's offer and, in the
near future, the case will be dismissed as settled, at no additional cost to the
Company.
In September 2002, the Company was named as the Defendant in an action
filed in the U.S. District Court for the Middle District of Georgia. The
Plaintiff, Bank of America Securities, LLC, alleges that it is owed a fee of
approximately $1.0 million, relating to the Company's sale of the McCormick &
Schmick's brand. The Company believes that the allegations in the complaint are
without merit and plans to vigorously contest the complaint. This litigation is
currently at a preliminary stage and no discovery has occurred. Thus, it is not
possible for the Company to evaluate the likelihood of the plaintiff prevailing
on its claims. Because this claim is a suit on a contract, the Company's
existing insurance policies do not provide coverage. There can be no assurance
that an adverse determination in this litigation would not have a material
adverse effect on the Company's financial condition or results of operations.
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 20 - Related Party Transactions
At December 31, 2000, 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.
48
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, due June 2009
(the "Subordinated Notes"). The Subordinated 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
Subordinated Notes. All amounts of interest and principal paid by the Company on
the Subordinated 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 semi-annual
interest due to holders of its Subordinated 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 at year-end. The balance of the New
Chairman Note at December 29, 2002 was $2.7 million, net of the valuation
allowance established in 2001. Subsequent to year-end, in conjunction with the
Company's January 9, 2003 payment of semi-annual interest to holders of its
Subordinated Notes, the Chairman made a simultaneous payment of interest in the
amount of $0.8 million.
Note 21 - Shareholder Rights Plan
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 common stock, par value $0.01 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
the Company.
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 the Company without offering
a fair and adequate price and terms to all of the Company'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 the Company'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
the Company's common stock.
49
Note 22 - Quarterly Financial Data (unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------
2002:
Restaurant sales $ 118,788 115,540 104,809 102,451 441,588
Net earnings (loss) from continued
operations $ (4,666) 19,209 7,780 (60,634) (38,311)
Net loss from discontinued operations $ (1,052) (4,613) (9,713) (9,740) (25,118)
Net loss $ (5,718) 14,596 (1,933) (70,374) (63,429)
Basic earnings (loss) per share
from continued operations $ (0.16) 0.64 0.23 (1.83) (1.22)
Basic loss per share from
discontinued operations $ (0.04) (0.16) (0.29) (0.30) (0.80)
Basic earnings (loss) per share $ (0.20) 0.48 (0.06) (2.13) (2.02)
Diluted earnings (loss) per share
from continued operations $ (0.16) 0.58 0.23 (1.83) (1.22)
Diluted loss per share from
discontinued operations $ (0.04) (0.13) (0.29) (0.30) (0.80)
Diluted earnings (loss) per share $ (0.20) 0.45 (0.06) (2.13) (2.02)
2001:
Restaurant sales $ 167,828 168,052 141,519 111,978 589,379
Net loss from continued operations $ (407) (3,854) (63,093) (19,047) (86,405)
Net loss from discontinued operations $ (638) (995) (1,279) (5,947) (8,855)
Net loss $ (1,045) (4,849) (64,372) (24,994) (95,260)
Basic loss per share from continued
operations $ (0.02) (0.13) (2.20) (0.66) (3.02)
Basic loss per share from discontinued
operations $ (0.02) (0.04) (0.04) (0.21) (0.31)
Basic loss per share $ (0.04) (0.17) (2.24) (0.87) (3.33)
Diluted loss per share from continued
operations $ (0.02) (0.13) (2.20) (0.66) (3.02)
Diluted loss per share from discontinued
operations $ (0.02) (0.04) (0.04) (0.21) (0.31)
Diluted loss per share $ (0.04) (0.17) (2.24) (0.87) (3.33)
- ------------------------------------------------------------------------------------------------------------
Diluted loss per share ("EPS") for all quarters in 2002 and 2001 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.
50
Note 23 - Guarantor Subsidiaries
The Company's Senior Notes and Credit Facility 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 29, 2002 and December 30, 2001, these partnerships in the non-guarantor
subsidiaries operated 19 and 20, respectively, of the Company's restaurants. At
December 31, 2000 these partnerships operated 61 of the Company's restaurants.
Accordingly, condensed consolidated balance sheets as of December 29, 2002 and
December 30, 2001, and condensed consolidated statements of earnings and cash
flows for the fiscal years ended December 29, 2002, December 30, 2001 and
December 31, 2000 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 (Loss)
Fiscal Year Ended 2002
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Restaurant Sales $ 391,309 50,279 - 441,588
Operating expenses 361,946 45,526 - 407,472
General and administrative expenses 24,313 2,267 - 26,580
Loss (gain) on disposal of assets 563 - - 563
Asset revaluation and other special charges 45,431 - - 45,431
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (40,944) 2,486 - (38,458)
- ----------------------------------------------------------------------------------------------------------------------------
Other income (expense) 522 - - 522
Earnings (loss) before income taxes
for continuing operations (40,422) 2,486 - (37,936)
Income taxes 361 14 - 375
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations (40,783) 2,472 - (38,311)
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) from discontinued operations (24,960) (158) - (25,118)
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (65,743) 2,314 - (63,429)
============================================================================================================================
Condensed Consolidated Statement of Earnings (Loss)
Fiscal Year Ended 2001
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Restaurant Sales $ 536,528 52,851 - 589,379
Operating expenses 488,251 47,161 - 535,412
General and administrative expenses 28,636 2,375 - 31,011
Loss (gain) on disposal of assets (12,436) - - (12,436)
Asset revaluation and other special charges 61,546 - - 61,546
- ----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (29,469) 3,315 - (26,154)
- ----------------------------------------------------------------------------------------------------------------------------
Other income (expense) (48,942) (159) - (49,101)
Earnings before income taxes
for continuing operations (78,411) 3,156 - (75,255)
Income taxes 10,127 1,023 - 11,150
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations (88,538) 2,133 - (86,405)
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) from discontinued operations (8,622) (233) - (8,855)
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (97,160) 1,900 - (95,260)
============================================================================================================================
51
Condensed Consolidated Statement of Loss
Fiscal Year Ended 2000
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------- ------------------- -----------------------------------
Restaurant Sales $ 505,239 145,022 - 650,261
Operating expenses 449,777 132,250 - 582,027
General and administrative expenses 30,452 6,524 - 36,976
Loss (gain) on disposal of assets 22,818 - - 22,818
Asset revaluation and other special charges 28,215 7,452 - 35,667
- ----------------------------------------------------------------------------------------------------------------------------
Operating loss (26,023) (1,204) - (27,227)
- ----------------------------------------------------------------------------------------------------------------------------
Other income (expense) (50,833) (1,789) - (52,622)
Loss before income taxes
from continuing operations (76,856) (2,993) - (79,849)
Income taxes (21,603) (1,925) - (23,528)
- ----------------------------------------------------------------------------------------------------------------------------
Net loss from continuing operations (55,253) (1,068) - (56,321)
Net loss from discontinued operations (2,967) (191) - (3,158)
Cumulative effect of change in accounting
principle, net of tax benefit (6,255) - - (6,255)
- ----------------------------------------------------------------------------------------------------------------------------
Net loss $ (64,475) (1,259) - (65,734)
============================================================================================================================
Condensed Consolidated Balance Sheet
Fiscal Year Ended 2002
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets $ 23,255 800 - 24,055
Premises and equipment, net 213,130 23,820 - 236,950
Deferred income tax benefit 11,620 - - 11,620
Other assets 28,652 18 - 28,670
Intercompany advances 12,370 - (12,370) -
Intercompany investments 12,131 - (12,131) -
- ----------------------------------------------------------------------------------------------------------------------------
$ 301,158 24,638 (24,501) 301,295
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 131,540 137 - 131,677
Long-term liabilities 166,174 - - 166,174
Intercompany payables - 12,370 (12,370) -
Convertible preferred securities 3,179 - - 3,179
Shareholders' equity (deficit) 265 12,131 (12,131) 265
- ----------------------------------------------------------------------------------------------------------------------------
$ 301,158 24,638 (24,501) 301,295
============================================================================================================================
52
Condensed Consolidated Balance Sheet
Fiscal Year Ended 2001
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets $ 38,927 868 - 39,795
Premises and equipment, net 258,172 24,856 - 283,028
Goodwill, net 34,920 - - 34,920
Deferred income tax benefit 11,620 - - 11,620
Other assets 29,175 18 - 29,193
Intercompany advances 12,370 - (12,370) -
Intercompany investments 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 (deficit) (2,746) 12,647 (12,647) (2,746)
- ----------------------------------------------------------------------------------------------------------------------------
$ 397,831 25,742 (25,017) 398,556
============================================================================================================================
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 2002
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (29,948) 3,912 - (26,036)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (4,832) (594) - (5,426)
Proceeds from disposal of assets, net 9,111 - - 9,111
Other investing activities (430) - - (430)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,849 (594) - 3,255
---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from revolving credit agreements 11,563 - - 11,563
Proceeds from term credit agreement 19,236 - - 19,236
Payment of financing costs (8,502) - - (8,502)
Payment of long-term debt (8,489) - - (8,489)
Principal payments on long-term debt (28) - - (28)
Reduction in letter of credit collateral 9,978 - - 9,978
Proceeds from (payment of) intercompany
advances 3,158 (3,158) - -
Settlement of interest rate swap agreement (1,704) - - (1,704)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 25,212 (3,158) - 22,054
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) discontinued operations 962 (158) - 804
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 75 2 - 77
Cash and equivalents at the beginning of the period 532 27 - 559
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at the end of the period $ 607 29 - 636
============================================================================================================================
53
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 2001
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (11,343) 5,158 - (6,185)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (17,084) (511) - (17,595)
Proceeds from disposal of assets, net 128,752 - - 128,752
Other investing activities (2,402) - - (2,402)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 109,266 (511) - 108,755
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net repayment of revolving credit agreements (90,831) - - (90,831)
Proceeds from (payment of) intercompany
advances 4,415 (4,415) - -
Payments to collateralize letters of credit (9,978) - - (9,978)
Other financing activities (26) - - (26)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (96,420) (4,415) - (100,835)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) discontinued operations (1,345) (233) - (1,578)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 158 (1) - 157
Cash and equivalents at the beginning of the period 372 30 - 402
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at the end of the period $ 530 29 - 559
============================================================================================================================
Condensed Consolidated Statement of Cash Flows
Fiscal Year Ended 2000
- ----------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 23,938 3,732 - 27,670
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (45,752) (1,193) - (46,945)
Proceeds from sale-leaseback 8,055 20,316 - 28,371
Proceeds from disposal of assets, net 14,074 - - 14,074
Other investing activities (5,548) (251) - (5,799)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (29,171) 18,872 - (10,299)
- ----------------------------------------------------------------------------------------------------------------------------
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)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) discontinued operations (6,355) (191) - (6,546)
- ----------------------------------------------------------------------------------------------------------------------------
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
============================================================================================================================
54
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 Board of Directors of the Company, upon the recommendation of the Audit
Committee, appointed the firm of KPMG LLP to serve as independent auditors of
the Company for the fiscal year ending December 29, 2002, and that appointment
was ratified by the Company's shareholders. The Audit Committee, which is
composed solely of independent 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 Report
of the Audit Committee will appear in the Company's Proxy Statement for its 2003
Annual Meeting of Shareholders.
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 29, 2002,
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 29, 2002, 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
Louis J. Profumo
Chief Financial Officer and Treasurer
55
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 29, 2002 and December 30, 2001, and
the related consolidated statements of loss, shareholders' equity (deficit) and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 29, 2002. 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 as of December 29, 2002 and December 30, 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 29, 2002, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
9 to the consolidated financial statements, the Company has suffered recurring
losses from operations, has a working capital deficit, an accumulated deficit,
and a secured credit facility which is due May 25, 2003 that raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 9. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, effective
December 31, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
KPMG LLP
Atlanta, Georgia
February 27, 2003
56
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 2003 Annual
Meeting of Shareholders.
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 2003
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission. 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 and
Related Stockholder Matters
Information in response to this item is incorporated by reference to the
information contained under the headings "Voting Securities and Principal
Holders Thereof" and "Equity Compensation Plans" in the Company's definitive
Proxy Statement for use in connection with the 2003 Annual Meeting of
Shareholders.
Item 13. Certain Relationships and Related Transactions
At December 31, 2000, 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.
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, due June 2009
(the "Subordinated Notes"). The Subordinated 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
Subordinated Notes. All amounts of interest and principal paid by the Company on
the Subordinated 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.
57
In conjunction with the Company's July 10, 2002 payment of semi-annual
interest due to holders of its Subordinated 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 at year-end. The balance of the New
Chairman Note at December 29, 2002 was $2.7 million, net of the valuation
allowance established in 2001. Subsequent to year-end, in conjunction with the
Company's January 9, 2003 payment of semi-annual interest to holders of its
Subordinated Notes, the Chairman made a simultaneous payment of interest in the
amount of $0.8 million.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed in Company reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
However, the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of the evaluation. 67
58
Part IV
Item 15. 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 Loss for the years ended December 29, 2002,
December 30, 2001 and December 31, 2000
Consolidated Balance Sheets as of December 29, 2002 and December 30, 2001
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive
Loss for the years ended December 29, 2002, December 30, 2001 and December
31, 2000
Consolidated Statements of Cash Flows for the years ended December 29,
2002, December 30, 2001 and December 31, 2000
Notes to Consolidated Financial Statements
Report of Management
Independent Auditors' Report
2. Financial Statement Schedules
None
3. Exhibits
2.1 Asset Purchase Agreement dated June 7, 2001 by and among Avado Brands,
Inc., McCormick & Schmick Holding Corp., each of the McCormick & Schmick Holding
Corp. subsidiaries and McCormick & Schmick Acquisition Corp. (18)
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).
59
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)
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 Avado Brands, Inc. Employee Stock Purchase Plan. (19)
10.13 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)
10.14 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)
10.15 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)
60
10.16 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)
10.17 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)
10.18 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. (16)
10.19 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. (16)
10.20 Seventh amendment, dated as of April 2, 2001, 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. (17)
10.21 $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)
10.22 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)
10.23 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)
10.24 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)
10.25 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 BankBoston, N.A. (13)
10.26 Amended and Restated Credit Agreement Dated as of April 2, 2001 among
Avado Brands, Inc. as borrower, Wachovia Bank, National Association and Fleet
National Bank. (17)
10.27 Master lease agreement, dated as of October 19, 2000, by and between
Pubs Property, LLC and Hops Grill & Bar, Inc. (16)
10.28 Sale-leaseback agreement, dated as of October 19, 2000, by and among
Pubs Property, LLC, Avado Brands, Inc. and Hops Grill & Bar, Inc. (16)
10.29 Second Amended and Restated Credit Agreement dates as of March 20,
2002 by and among Avado Brands, Inc., as Borrower, the lenders signatory hereto,
Foothill Capital Corporation, as Administrative Agent, and Ableco Finance LLC,
as Collateral Agent. (20)
10.30 First amendment, 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. (21)
61
10.31 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. (21)
10.32 Second amendment, dated as of September 23, 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. (22)
10.33 Third amendment, dated as of November 11, 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. (22)
10.34 Fourth amendment, dated as of December 27, 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. (23)
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
99.1 Safe harbor under the Private Securities Litigation Reform Act of
1995. (12)
99.2 Certification of Corporate Officers pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(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 registrant'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.
62
(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.
(16) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.
(17) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended April 1, 2001.
(18) Incorporated by reference to the registrant's Current Report on Form
8-K dated June 7, 2001.
(19) Incorporated by reference to the Company's Registration Statement on
Form S-8, File No. 333-74422, filed on December 3, 2001.
(20) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, as amended on Form 10-Q/A dated
December 10, 2002.
(21) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, as amended on Form 10-Q/A dated
December 10, 2002.
(22) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 29, 2002.
(23) Incorporated by reference to the registrant's Current Report on Form
8-K dated December 27, 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated August 6, 2002, which
disclosed, pursuant to Item 5, the Company's adoption of a shareholders
rights plan pursuant to a Rights Agreement.
The Company filed a Current Report on Form 8-K, dated December 27, 2002,
which disclosed, pursuant to Item 5, the Company's execution of a fourth
amendment, dated December 27, 2002, to its 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.
63
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/ Louis J. Profumo
-----------------------
Louis J. Profumo
Chief Financial Officer and Treasurer
February 28, 2003
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 Directors February 28, 2003
- ------------------------ and Chief Executive Officer
Tom E. DuPree, Jr. (principal executive officer)
/s/ Louis J. Profumo Chief Financial Officer and February 28, 2003
- ------------------------ Treasurer (principal financial
Louis J. Profumo officer)
/s/ Margaret E. Waldrep Director and Chief Administrative February 28, 2003
- ------------------------ Officer
Margaret E. Waldrep
/s/ Percy V. Williams Secretary February 28, 2003
- ------------------------
Percy V. Williams
/s/ Emilio Alvarez-Recio Director February 28, 2003
- ------------------------
Emilio Alvarez-Recio
/s/ Jerome A. Atkinson Director February 28, 2003
- ------------------------
Jerome A. Atkinson
/s/ William V. Lapham Director February 28, 2003
- ------------------------
William V. Lapham
/s/ Robert Sroka Director February 28, 2003
- ------------------------
Robert Sroka
64
CERTIFICATIONS
I, Tom E. DuPree, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Avado Brands, Inc.,
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared.
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 28, 2003 /s/ Tom E. DuPree, Jr.
-------------------------
Tom E. DuPree, Jr.
Chairman of the Board and
Chief Executive Officer
65
CERTIFICATIONS
I, Louis J. Profumo, certify that:
1. I have reviewed this annual report on Form 10-K of Avado Brands, Inc.,
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared.
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 28, 2003 /s/ Louis J. Profumo
---------------------------
Louis J. Profumo
Chief Financial Officer and
Treasurer
66
EXHIBIT INDEX
2.1 Asset Purchase Agreement dated June 7, 2001 by and among Avado Brands,
Inc., McCormick & Schmick Holding Corp., each of the McCormick & Schmick Holding
Corp. subsidiaries and McCormick & Schmick Acquisition Corp. (18)
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)
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 Avado Brands, Inc. Employee Stock Purchase Plan. (19)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
10.18 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. (16)
10.19 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. (16)
10.20 Seventh amendment, dated as of April 2, 2001, 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. (17)
10.21 $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)
10.22 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)
10.23 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)
10.24 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)
10.25 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 BankBoston, N.A. (13)
10.26 Amended and Restated Credit Agreement Dated as of April 2, 2001 among
Avado Brands, Inc. as borrower, Wachovia Bank, National Association and Fleet
National Bank. (17)
10.27 Master lease agreement, dated as of October 19, 2000, by and between
Pubs Property, LLC and Hops Grill & Bar, Inc. (16)
10.28 Sale-leaseback agreement, dated as of October 19, 2000, by and among
Pubs Property, LLC, Avado Brands, Inc. and Hops Grill & Bar, Inc. (16)
10.29 Second Amended and Restated Credit Agreement dates as of March 20,
2002 by and among Avado Brands, Inc., as Borrower, the lenders signatory hereto,
Foothill Capital Corporation, as Administrative Agent, and Ableco Finance LLC,
as Collateral Agent. (20)
10.30 First amendment, 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. (21)
10.31 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. (21)
10.32 Second amendment, dated as of September 23, 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. (22)
10.33 Third amendment, dated as of November 11, 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. (22)
10.34 Fourth amendment, dated as of December 27, 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. (23)
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
99.1 Safe harbor under the Private Securities Litigation Reform Act of
1995. (12)
99.2 Certification of Corporate Officers pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(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 registrant'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.
(16) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2000.
(17) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended April 1, 2001.
(18) Incorporated by reference to the registrant's Current Report on Form
8-K dated June 7, 2001.
(19) Incorporated by reference to the Company's Registration Statement on
Form S-8, File No. 333-74422, filed on December 3, 2001.
(20) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, as amended on Form 10-Q/A dated
December 10, 2002.
(21) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, as amended on Form 10-Q/A dated
December 10, 2002.
(22) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 29, 2002.
(23) Incorporated by reference to the registrant's Current Report on Form
8-K dated December 27, 2002.