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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 30, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to ___________
Commission File Number: 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
Hancock at Washington, Madison, GA 30650
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
706-342-4552
---------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
--- ---
Indicate by check mark whether or not the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
As of May 13, 2003, there were 33,101,929 shares of common stock of the
Registrant outstanding.
AVADO BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 30, 2003
INDEX
Part I - Financial Information
Item 1 - Consolidated Financial Statements:
Consolidated Statements of Loss.................................3
Consolidated Balance Sheets.....................................4
Consolidated Statements of Shareholders' Equity (Deficit)
and Comprehensive Loss..........................................5
Consolidated Statements of Cash Flows...........................6
Notes to Consolidated Financial Statements......................7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..................19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.....25
Item 4 - Controls and Procedures........................................25
Part II - Other Information
Item 5 - Other Information..............................................26
Item 6 - Exhibits and Reports on Form 8-K...............................26
Signature....................................................................27
Certifications...............................................................28
Page 2
Avado Brands, Inc.
Consolidated Statements of Loss
(Unaudited)
(In thousands, except per share data) Quarter Ended
- -----------------------------------------------------------------------------------------------------------
Mar. 30, Mar. 31,
2003 2002
- -----------------------------------------------------------------------------------------------------------
Restaurant sales:
Canyon Cafe $ 1,574 7,725
Don Pablo's 57,640 61,879
Hops 37,889 45,549
- -----------------------------------------------------------------------------------------------------------
Total restaurant sales 97,103 115,153
- -----------------------------------------------------------------------------------------------------------
Operating expenses:
Food and beverage 27,824 32,801
Payroll and benefits 33,602 37,759
Depreciation and amortization 3,539 3,541
Other operating expenses 24,579 30,528
General and administrative expenses 6,034 6,333
Loss (gain) on disposal of assets 1,631 (524)
Asset revaluation and other special charges 4,416 650
- -----------------------------------------------------------------------------------------------------------
Operating income (loss) (4,522) 4,065
- -----------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense, net (12,510) (8,233)
Forgiveness of credit facility amendment and waiver fee 6,500 -
Distribution expense on preferred securities (56) (1,115)
Other, net 389 (412)
- -----------------------------------------------------------------------------------------------------------
Total other income (expense) (5,677) (9,760)
- -----------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes (10,199) (5,695)
Income tax benefit - (936)
- -----------------------------------------------------------------------------------------------------------
Net loss from continuing operations (10,199) (4,759)
- -----------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations (7,602) (959)
- -----------------------------------------------------------------------------------------------------------
Net loss $ (17,801) (5,718)
===========================================================================================================
Basic loss per common share:
Basic loss from continuing operations $ (0.31) (0.17)
Basic loss from discontinued operations (0.23) (0.03)
- -----------------------------------------------------------------------------------------------------------
Basic loss per common share $ (0.54) (0.20)
===========================================================================================================
Diluted loss per common share:
Diluted loss from continuing operations $ (0.31) (0.17)
Diluted loss from discontinued operations (0.23) (0.03)
- -----------------------------------------------------------------------------------------------------------
Diluted loss per common share $ (0.54) (0.20)
===========================================================================================================
See accompanying notes to consolidated financial statements.
Page 3
Avado Brands, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
- ----------------------------------------------------------------------------------------------------
Mar. 30, Mar. 31,
2003 2002
- ----------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 226 636
Accounts receivable 6,102 5,087
Inventories 4,911 5,283
Prepaid expenses and other 6,637 2,129
Assets held for sale 2,902 10,920
- ----------------------------------------------------------------------------------------------------
Total current assets 20,778 24,055
Premises and equipment, net 187,973 236,950
Deferred income tax benefit 11,620 11,620
Other assets 32,527 28,670
- ----------------------------------------------------------------------------------------------------
$ 252,898 301,295
====================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 12,833 11,509
Accrued liabilities 43,879 54,292
Current installments of long-term debt and
capital lease obligations 4,958 30,838
Income taxes 35,599 35,038
- ----------------------------------------------------------------------------------------------------
Total current liabilities 97,269 131,677
Long-term debt 164,041 164,031
Caital lease obligations 3,840 -
Other long-term liabilities 2,105 2,143
- ----------------------------------------------------------------------------------------------------
Total liabilities 267,255 297,851
- ----------------------------------------------------------------------------------------------------
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 3,179
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized - 75,000,000 shares;
issued - 40,478,760 shares in 2003 and 2002;
outstanding - 33,101,929 shares in 2003 and 2002 405 405
Additional paid-in capital 154,637 154,637
Accumulated deficit (75,919) (58,118)
Treasury stock at cost; 7,376,831 shares in 2003 and 2002 (96,659) (96,659)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (17,536) 265
- -----------------------------------------------------------------------------------------------------
$ 252,898 301,295
=====================================================================================================
See accompanying notes to consolidated financial statements.
Page 4
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Loss
(Unaudited)
Additional Total
Common Stock Paid-in Accumulated Treasury Shareholders'
(In thousands) Shares Amount Capital Deficit Stock Equity (Deficit)
- ------------------------------------------------------------------------------------------------------------
Balance at December 29, 2002 40,479 $405 $154,637 ($58,118) ($96,659) $265
- ------------------------------------------------------------------------------------------------------------
Net loss - - - (17,801) - (17,801)
- ------------------------------------------------------------------------------------------------------------
Balance at March 30, 2003 40,479 $405 $154,637 ($75,919) ($96,659) ($17,536)
============================================================================================================
See accompanying notes to consolidated financial statements.
Page 5
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(In thousands) Quarter Ended
- ---------------------------------------------------------------------------------------------------------
Mar. 30, Mar. 31,
2003 2002
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (17,801) (5,718)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation of premises and equipment 3,762 3,776
Amortization and write off of deferred costs 7,142 794
Forgiveness of credit facility amendment and waiver fee (6,500) -
Asset revaluation and other special charges 4,416 650
Loss (gain) on disposal of assets 1,631 (524)
Loss from discontinued operations 7,602 959
Mark-to-market adjustment on interest rate swap - 861
(Increase) decrease in assets:
Accounts receivable (850) 185
Inventories 366 (30)
Prepaid expenses and other (865) 54
Increase (decrease) in liabilities:
Accounts payable 1,568 (5,730)
Accrued liabilities (11,616) (7,639)
Income taxes 561 (1,187)
Other long-term liabilities (38) (96)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (10,622) (13,645)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (246) (949)
Proceeds from disposal of assets and notes receivable, net 1,524 3,666
Proceeds from sale-leaseback 20,000 -
Other, net (943) (497)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 20,335 2,220
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) revolving credit agreements (6,761) 20,473
Proceeds from (repayment of) term credit agreement (12,736) -
Payment of financing costs (3,396) (8,502)
Principal payments on long-term debt (7) (6)
Settlement of interest rate swap agreement - (1,704)
Reduction in letter of credit collateral - 1,165
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (22,900) 11,426
- ----------------------------------------------------------------------------------------------------------
Cash provided by (used in) discontinued operations 12,777 (392)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (410) (391)
Cash and cash equivalents at the beginning of the period 636 559
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 226 168
==========================================================================================================
See accompanying notes to consolidated financial statements.
Page 6
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 30, 2003
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 29, 2002,
except as disclosed herein. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the quarter ended March
30, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 28, 2003.
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 nine Don Pablo's restaurants and one Hops restaurant which
were closed during the first quarter of 2003, plus 11 additional Don Pablo's
restaurants and eight additional Hops restaurants which were closed in 2002, 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 has been divested with the exception of two
locations that are held for sale, have not been classified as discontinued
operations in the accompanying consolidated financial statements. As the
decision to divest the operations of Canyon Cafe was made prior to the
implementation of SFAS 144 and it 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", it is 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".
NOTE 2 - STOCK BASED COMPENSATION
The Company accounts for its 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 ("APB
25"), and has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation".
Under APB 25, no stock-based compensation cost is reflected in net income for
grants of stock options to employees as the Company grants stock options with an
exercise price equal to the market value of the stock on the date of grant.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation for the quarters ended March 30, 2003 and
March 31, 2002.
Mar. 31, Mar. 30,
2003 2002
- ---------------------------------------------------- ------------ -----------
Net loss, as reported $ (17,801) $ (5,718)
- ---------------------------------------------------- ------------ -----------
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (210) (61)
- ---------------------------------------------------- ------------ -----------
Pro forma net loss $ (18,011) $ (5,779)
- ---------------------------------------------------- ------------ -----------
Loss per share:
Basic - as reported $ (0.54) $ (0.20)
- ---------------------------------------------------- ------------ -----------
Basic - pro forma $ (0.54) $ (0.20)
- ---------------------------------------------------- ------------ -----------
Diluted - as reported $ (0.54) $ (0.20)
- ---------------------------------------------------- ------------ -----------
Diluted - pro forma $ (0.54) $ (0.20)
- ---------------------------------------------------- ------------ -----------
Page 7
NOTE 3 - LONG-TERM DEBT
On March 24, 2003, the Company obtained new financing which included a
$39.0 million revolving credit facility (the "Credit Facility") and a $20.0
million sale-leaseback transaction covering 15 Don Pablo's locations (the "Don
Pablo's sale-leaseback"). Proceeds from the new financing were used to pay
amounts outstanding under the Company's previously existing credit agreement
totaling $19.5 million and fees associated with the closing of the new financing
agreements totaling $4.3 million.
The Credit Facility limits total borrowing capacity at any given time to an
amount equal to the lesser of $39.0 million or 1.95 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 as
defined in the agreement. A portion of the facility, totaling $17.0 million, is
restricted for the purchase of the Company's 9.75% Senior Notes due 2006
("Senior Notes") and 11.75% Senior Subordinated Notes due June 2009
("Subordinated Notes"). The agreement limits the amount the Company may pay to
acquire Senior Notes and Subordinated Notes to $0.50 and $0.30 per one dollar
outstanding, respectively. In addition, any unused availability under the
restricted portion of the facility terminates on May 31, 2003. The Credit
Facility matures on March 24, 2004 but may be extended for one year at the
lender's option and subject to an extension fee equal to five percent of the
total commitment amount. In certain circumstances, borrowings under the Credit
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 (other
than Assets Held for Sale as defined in the agreement), casualty events and tax
refunds, 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 liquidity. The
loan is secured by substantially all of the Company's assets.
At March 30, 2003, $4.8 million in cash borrowings were outstanding under
the Credit Facility and an additional $14.0 million of the facility was utilized
to secure letters of credit which primarily secure the Company's insurance
programs. Although the Company had not borrowed any amounts related to the $17.0
million restricted portion of the facility, total Credit Facility availability
was reduced by lender reserves of $4.0 million. These reserves relate to
specific conditions the Company is required to satisfy to perfect the lender's
security interest in certain properties. Although the lender reserves have
reduced the total availability, the lender has not limited the Company's
unrestricted availability. At March 30, 2003, $16.2 million of the facility
remained unused and available, of which $13.0 million was restricted and $3.2
million was unrestricted. Subsequent to March 30, 2002, the Company satisfied
certain of the required conditions related to the lender reserves and $2.0
million of the reserves were eliminated. Also subsequent to the end of the first
quarter, the Company used restricted loan proceeds of $4.9 million to acquire
$9.9 million in face value of its Senior Notes. The Company will recognize a
gain of approximately $5.0 million during the second quarter of 2003 related to
the repurchases.
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 $9.9 million in face value of its outstanding Senior Notes subsequent to
March 30, 2003 and $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
repurchases, the Company's semi-annual interest payments will total
approximately $8.0 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 generate cash flow from
operations.
NOTE 4 - LIQUIDITY
The Company has suffered from recurring losses from operations, has an
accumulated deficit and a Credit Facility which is due March 24, 2004 that raise
substantial doubt about the Company's ability to continue as a going concern.
Sufficient liquidity to make required debt service and lease payments is
dependent primarily on the realization of proceeds from the sale of assets and
cash flow from operations. There can be no assurance that these efforts will be
successful.
In the event the Company is not able to meet its financial covenant targets
under the Credit Facility, an event of default would occur. An event of default
would entitle the lender to, among other things, declare all obligations
immediately due and payable. In the event the amounts due under the Credit
Facility are accelerated, cross-default provisions contained in the indentures
Page 8
to the Senior Notes and Subordinated Notes would be triggered, creating an event
of default under those agreements as well. At March 30, 2003, the outstanding
balances of the Senior Notes 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 Company's two sale-leaseback agreements. In the
event some or all of the obligations under the Company's financing 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 Credit Facility, the Company's Senior Notes and
Subordinated Notes, the Don Pablo's sale-leaseback, the 2000 Hops sale-leaseback
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, (iii) maintain defined leverage
ratios, (iv) limit the incurrence of certain liens or encumbrances in excess of
defined amounts and (v) limit certain payments. At March 30, 2003, the Company
was in compliance with the requirements contained in the Credit Facility, the
Don Pablo's sale-leaseback and terms of the Senior Notes and Subordinated Notes.
The Company was not in compliance with a net worth requirement contained in its
2000 Hops 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 March 30, 2003, remaining obligations under the master equipment
lease totaled $4.9 million. The continuing event of default under the master
equipment lease does not result in cross-defaults under the Company's Credit
Facility, Senior Notes, Subordinated Notes or two sale-leaseback agreements.
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. Subsequent to March 30, 2003, the lessor drew down a $2.0 million
letter of credit which secured the Company's obligations under the agreement,
thereby reducing the Company's remaining payment obligations. This letter of
credit was secured by borrowing availability under the Credit Facility thus the
drawing had no net impact on the Company's overall availability.
Principal financing sources in the first quarter of 2003 consisted of (i)
proceeds of $20.0 million from the Don Pablo's sale-leaseback, (ii) cash
provided by discontinued operations, primarily related to the sale of assets, of
$12.8 million, and (iii) other proceeds from the sale of assets of $1.5 million.
The primary uses of funds consisted of (i) net cash used in operations of $10.6
million which included interest payments of $10.7 million primarily related to
the Senior and Subordinated Notes and Credit Facility along with operating lease
payments of $5.3 million, (ii) net repayments of credit agreements of $19.5
million, and (iii) payment of financing costs related to the Credit Facility and
Don Pablo's sale-leaseback totaling $4.3 million.
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.
The Company is also exposed to certain contingent payments. In connection
with the Applebee'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 and nine 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 $34.6 million. The
Company also remains contingently liable for lease obligations relating to eight
Harrigan's restaurants which were divested in 1999. Minimum lease payment
obligations for those eight restaurants total $5.5 million and extend through
2012. On March 14, 2003, Harrigan's filed a bankruptcy petition under Chapter 11
of the Unites States Bankruptcy Code. Harrigan's is continuing to operate under
Chapter 11 and the Company has not been notified of any intent by the respective
landlords to hold the Company liable for lease obligations pertaining to any of
the eight locations.
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's deductibles
for workers' compensation and general liability are $500,000 per claim. Losses
Page 9
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. In the first quarter of
2003, claims paid under the Company's self-insurance programs totaled $1.0
million. In addition, at March 30, 2003, the Company was contingently liable for
letters of credit aggregating approximately $14.0 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 ("IRS"). The Company believes its recorded
liability for income taxes of $35.6 million as of March 30, 2003 is adequate to
cover its exposure that may result from the ultimate resolution of the audit.
During the first quarter of 2003, the Company submitted an Offer in Compromise
to the IRS whereby the Company offered to settle its potential obligations at a
discounted amount. The Offer in Compromise process is a mechanism available to
taxpayers to potentially reduce amounts otherwise payable to the IRS based on
analysis of a taxpayer's ability to pay, the value of its assets versus its
liabilities and other economic factors. Although the ultimate outcome of the
audit or the Offer in Compromise 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 primarily from the first quarter relocation of its Hops
corporate headquarters 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. For the near term,
cash flow from operations will need to be supplemented by asset sales. 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 5 - SUPPLEMENTAL CASH FLOW INFORMATION
For the quarters ended March 30, 2003 and March 31, 2002, the following
supplements the consolidated statements of cash flows (amounts in thousands):
2003 2002
------------ -----------
Interest paid $ 10,726 7,236
Income taxes paid (refunded) $ (561) 62
NOTE 6 - ASSET REVALUATION AND OTHER SPECIAL CHARGES
For the quarter ended March 30, 2003, asset revaluation and other special
charges of $4.4 million, which were predominately non-cash, include asset
impairment charges of $2.9 million recorded to reduce the carrying value of the
assets of four Don Pablo's restaurants to estimated fair value and $1.5 million
in special charges related to costs associated with the relocation of the Hops
corporate office to Madison, Georgia. Asset revaluation and other special
charges for the quarter ended March 31, 2002 reflected a non-cash asset
impairment charge of $0.7 million to reduce the carrying value of the assets of
the Company's Canyon Cafe restaurants to estimated fair value.
NOTE 7 - DISPOSAL OF ASSETS
Loss on disposal of assets of $1.6 million for the quarter ended March 30,
2003, primarily reflects losses related to the sale of 15 Don Pablo's
restaurants included in the Company's Don Pablo's sale-leaseback transaction
which occurred during the quarter.
Page 10
Gain on disposal of assets of $0.5 million for the quarter ended March 31,
2002 primarily reflects an adjustment to amounts receivable from the divestiture
of McCormick & Schmick's which was somewhat offset by fees incurred in
connection with the first quarter termination of the Company's interest rate
swap agreement.
NOTE 8 - INCOME TAXES
No income tax benefit was recorded related to the loss before income taxes
for the quarter ended March 30, 2003. The income tax benefit recorded for the
quarter ended March 31, 2002 represents the effective rate of benefit on loss
before income taxes for the quarter. The tax rate was based on the Company's
expected rate for the full fiscal 2002 year. (See Note 4).
NOTE 9 - DISCONTINUED OPERATIONS
As discussed in Note 1 - Basis of Presentation, discontinued operations
includes the revenues and expenses of nine Don Pablo's and one Hops restaurant
which were closed in the first quarter of 2003, plus 11 additional Don Pablo's
restaurants and eight additional Hops restaurants which were closed during 2002.
The decision to dispose of these 29 locations reflects the Company's ongoing
process of evaluating the performance and cash flows of its various restaurant
locations and using the proceeds from the sale of closed restaurants to reduce
outstanding debt.
Net loss from discontinued operations for the quarter ended March 30, 2003,
for which no tax benefit has been provided, of $7.6 million primarily reflects
losses on the disposal of closed restaurants. Operating losses were $7.6 million
for the quarter on total restaurant sales from discontinued operations of $2.2
million.
Net loss from discontinued operations for the quarter ended March 31, 2002
of $1.0 million (net of income tax benefit of $0.2 million), reflects operating
losses of $1.2 million on total restaurant sales from discontinued operations of
$10.6 million.
NOTE 10 - SALE-LEASEBACK TRANSACTIONS
On March 24, 2003, the Company completed a sale-leaseback transaction
covering 15 Don Pablo's locations (the "Don Pablo's sale-leaseback"). The
transaction included the sale of the land and buildings for total consideration
of $20.0 million. The term of the lease is 20 years with two 10-year renewal
options. Total annual payments due under the lease are $2.4 million at inception
and will escalate by 10% every five years. The portion of the lease attributable
to the buildings has been accounted for as a capital lease while the portion
attributable to the land has been accounted for as an operating lease. As a
result, at March 30, 2003 the Company recorded a capital lease obligation of
$3.9 million. Depreciation on the related assets will be recorded on a
straight-line basis over the 20 year base-term of the lease. In addition, the
Company recorded $10.3 million of prepaid interest, included in other assets in
the accompanying consolidated balance sheet, which will be amortized to interest
expense over the 20 year term of the lease. This prepaid interest represents the
excess of estimated fair value of the 15 locations over the proceeds received
from the transaction. A loss of $1.6 million, representing the excess of
recorded net book value over estimated fair value for the 15 locations was
recorded as a loss on disposal of assets during the quarter.
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 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.
NOTE 11 - 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's deductibles
for workers' compensation and general liability are $500,000 per claim. 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 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
Page 11
actuarial assumptions used by the insurance industry. At March 30, 2003, the
Company was contingently liable for letters of credit aggregating approximately
$14.0 million related primarily to its insurance programs.
The Company is also exposed to certain contingent payments. In connection
with the Applebee'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 and nine 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 $34.6 million. The
Company also remains contingently liable for lease obligations relating to eight
Harrigan's restaurants which were divested in 1999. Minimum lease payment
obligations for those eight restaurants total $5.5 million and extend through
2012. On March 14, 2003, Harrigan's filed a bankruptcy petition under Chapter 11
of the Unites States Bankruptcy Code. Harrigan's is continuing to operate under
Chapter 11 and the Company has not been notified of any intent by the respective
landlords to hold the Company liable for lease obligations pertaining to any of
the eight locations.
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. 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.
On April 3, 2003, the Company received a communication from counsel
claiming to represent an ad hoc committee ("the Committee") of holders of a
majority of the Company's 9.75% Senior Notes ("the Senior Notes"). The
communication set forth concerns of the Committee with respect to certain
actions of the Company and threatened to cause a notice of default under the
indenture covering the Senior Notes to be issued and other legal action to be
taken if the Committee's concerns were not addressed. On May 5, 2003, counsel
for the Committee issued a press release announcing the Committee's intention to
cause a notice of default to be issued, asserting that certain transactions with
the Company's Chairman and CEO constituted violations of covenants in the
Indenture governing the Senior Notes. Should it ultimately be determined that an
event of default exists, the Senior Notes would become currently due and
payable. As of May 14, 2003, the Company has not received any notice from the
trustee for the Senior Notes that a notice of default has been filed, nor, to
the Company's knowledge has the Committee taken any formal legal action. If the
Committee were to initiate action to declare a default and to accelerate the
Senior Notes, the Company intends to vigorously contest such action. While the
outcome of any potential litigation is inherently uncertain, the Company does
not believe that the Committee would prevail in any such attempt to accelerate
the Senior Notes. In the event the Senior Notes are accelerated cross-default
provisions would be triggered in the Company's Credit Facility and Subordinated
Notes.
Page 12
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 12 - 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, resulting in a net book value 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.
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 December 29, 2002. 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. The balance of the New Chairman Note at March 30,
2003 was $2.6 million, net of the valuation allowance established in 2001.
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
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 adopted SFAS 143 in the first quarter of fiscal 2003. The
adoption of this standard did not have a material impact on its results of
operations or financial position.
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. The adoption of
this statement did not have a material adverse impact on the Company's results
of operations or financial position during the quarter ended March 30, 2003,
however 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.
Page 13
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends SFAS No. 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 (see Note 2). 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 had 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 $2.0 million for the quarter ended March
30, 2003 and $1.5 million for the quarter ended March 31, 2002.
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 $40.1 million (see Note 11). The Company does not anticipate issuing
any guarantees 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.
NOTE 14 - 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. Such indebtedness is not guaranteed by the
Company's non-wholly owned subsidiaries. These non-guarantor subsidiaries
primarily include certain partnerships of which the Company is typically a 90%
owner. At March 30, 2003 and March 31, 2002, these partnerships in the
non-guarantor subsidiaries operated 19 and 20 of the Company's restaurants,
respectively. Accordingly, condensed consolidated balance sheets as of March 30,
2003 and December 29, 2002, and condensed consolidated statements of earnings
(loss) and cash flows for the quarter ended March 30, 2003 and March 31, 2002
are provided for such guarantor and non-guarantor subsidiaries. Corporate costs
associated with the maintenance of a centralized administrative function for the
benefit of all Avado restaurants, as well as goodwill, have not been allocated
to the non-guarantor subsidiaries. In addition, interest expense has not been
allocated to the non-guarantor subsidiaries. Separate financial statements and
other disclosures concerning the guarantor and non-guarantor subsidiaries are
not presented because management has determined that they are not material to
investors. There are no contractual restrictions on the ability of the guarantor
subsidiaries to make distributions to the Company.
Page 14
Condensed Consolidated Statement of Earnings (Loss)
Quarter Ended March 30, 2003
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Restaurant sales $ 92,720 4,383 - 97,103
Operating expenses 85,491 4,053 - 89,544
General and administrative expenses 5,833 201 - 6,034
(Gain) loss on disposal of assets 1,631 - - 1,631
Asset revaluation and other special charges 4,416 - - 4,416
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Operating income (loss) (4,651) 129 - (4,522)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Other income (expense) (5,677) - - (5,677)
Earnings (loss) before income taxes
for continuing operations (10,328) 129 - (10,199)
Income taxes - - - -
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) from continuing operations (10,328) 129 - (10,199)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net loss from discontinued operations (7,602) - - (7,602)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) $ (17,930) 129 - (17,801)
================================================ ================ ================= =============== ================
Condensed Consolidated Statement of Earnings (Loss)
Quarter Ended March 31, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Restaurant sales $ 101,725 13,428 - 115,153
Operating expenses 92,638 11,991 - 104,629
General and administrative expenses 5,721 612 - 6,333
(Gain) loss on disposal of assets (524) - - (524)
Asset revaluation and other special charges 650 - - 650
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Operating income 3,240 825 - 4,065
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Other income (expense) (9,760) - - (9,760)
Earnings (loss) before income taxes
for continuing operations (6,520) 825 - (5,695)
Income taxes (1,072) 136 - (936)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) from continuing operations (5,448) 689 - (4,759)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net loss from discontinued operations (914) (45) - (959)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings (loss) $ (6,362) 644 - (5,718)
================================================ ================ ================= =============== ================
Page 15
Condensed Consolidated Balance Sheet
March 30, 2003
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
ASSETS
Current assets $ 20,032 746 - 20,778
Premises and equipment, net 165,094 22,879 - 187,973
Deferred income tax benefit 11,620 - - 11,620
Other assets 32,509 18 - 32,527
Intercompany advances 12,370 - (12,370) -
Intercompany investments 11,017 - (11,017) -
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
$ 252,642 23,643 (23,387) 252,898
================================================ ================ ================= =============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 97,013 256 - 97,269
Long-term liabilities 169,986 - - 169,986
Intercompany payables - 12,370 (12,370) -
Convertible preferred securities 3,179 - - 3,179
Shareholders' equity (deficit) (17,536) 11,017 (11,017) (17,536)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
$ 252,642 23,643 (23,387) 252,898
================================================ ================ ================= =============== ================
Condensed Consolidated Balance Sheet
December 29, 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
================================================ ================ ================= =============== ================
Page 16
Condensed Consolidated Statement of Cash Flows
Quarter Ended March 30, 2003
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) operating activities $ (10,904) 282 - (10,622)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash flows from investing activities:
Capital expenditures (246) - - (246)
Proceeds from disposal of assets, net 1,524 - - 1,524
Proceeds from sale-leaseback 20,000 - - 20,000
Other investing activities (943) - - (943)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) investing activities 20,335 - - 20,335
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash flows from financing activities:
Repayment of revolving credit agreements (6,761) - - (6,761)
Repayment of term credit agreement (12,736) - - (12,736)
Payment of financing costs (3,396) - - (3,396)
Principal payments on long-term debt (7) - - (7)
Proceeds from (payment of) intercompany
advances 282 (282) - -
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) financing activities (22,618) (282) - (22,900)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash provided by (used in) discontinued operations 12,777 - - 12,777
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (410) - - (410)
Cash and equivalents at the beginning of the period 607 29 - 636
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash and equivalents at the end of the period $ 197 29 - 226
==================================================== ================ ================= =============== ================
Condensed Consolidated Statement of Cash Flows
Quarter Ended March 31, 2002
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) operating activities $ (14,760) 1,115 - (13,645)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash flows from investing activities:
Capital expenditures (806) (143) - (949)
Proceeds from disposal of assets, net 3,666 - - 3,666
Other investing activities (497) - - (497)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) investing activities 2,363 (143) - 2,220
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from revolving credit agreements 20,473 - - 20,473
Payment of financing costs (8,502) - - (8,502)
Principal payments on long-term debt (6) - - (6)
Settlement of interest rate swap agreement (1,704) - - (1,704)
Reduction in letter of credit collateral 1,165 - - 1,165
Proceeds from (payment of) intercompany
advances 918 (918) - -
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net cash provided by (used in) financing activities 12,344 (918) - 11,426
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash provided by (used in) discontinued operations (338) (54) - (392)
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (391) - - (391)
Cash and equivalents at the beginning of the period 530 29 - 559
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Cash and equivalents at the end of the period $ 139 29 - 168
==================================================== ================ ================= =============== ================
Page 17
NOTE 15 - 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):
(In thousands, except per share data) Quarter Ended
- --------------------------------------------------------------------------------------------
Mar. 30, Mar. 31,
2003 2002
- --------------------------------------------------------------------------------------------
Average number of common shares used in basic calculation 33,102 29,009
Net 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 33,102 29,009
============================================================================================
Net loss from continuing operations $ (10,199) (4,759)
Net loss from discontinued operations (7,602) (959)
- --------------------------------------------------------------------------------------------
Net loss (17,801) (5,718)
Distribution savings on assumed conversion of convertible
preferred securities, net of income taxes - * - *
- --------------------------------------------------------------------------------------------
Net loss for computation of diluted earnings per common share $ (17,801) (5,718)
============================================================================================
- --------------------------------------------------------------------------------------------
Basic loss per common share from continuing operations $ (0.31) (0.17)
Basic loss per common share from discontinued operations (0.23) (0.03)
- --------------------------------------------------------------------------------------------
Basic loss per common share $ (0.54) (0.20)
============================================================================================
- --------------------------------------------------------------------------------------------
Diluted loss per common share from continuing operations $ (0.31) (0.17)
Diluted loss per common share from discontinued operations (0.23) (0.03)
- --------------------------------------------------------------------------------------------
Diluted loss per common share $ (0.54) (0.20)
============================================================================================
* Inclusion of 771,557 shares issuable pursuant to employee stock option
plans results in an increase to earnings (loss) per share ("EPS") for the
quarter ended March 31, 2002. As those shares are antidilutive, they are
excluded from the computation of diluted EPS. Inclusion of 214,944 shares for
the quarter ended March 30, 2003 and 4,307,762 shares for the quarter ended
March 31, 2002 related to the Convertible Preferred Securities results in an
increase to EPS in each respective quarter. As those shares are antidilutive,
they are excluded from the computation of diluted EPS.
NOTE 16 - SUBSEQUENT EVENTS
Subsequent to the end of the quarter, the Company repurchased $9.9 million
in face value of its 9.75% Senior Notes, due 2006, for $4.5 million plus $0.4 in
accrued interest. The Company will recognize a gain on debt extinguishment of
approximately $5.0 million during the second quarter of 2003 related to the
repurchases.
Page 18
Item 2.
AVADO BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the First Quarter Ended March 30, 2003
Presentation
In October 2001, the FASB issued Statement of Financial Accounting
Standards ("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 nine Don Pablo's
restaurants and one Hops restaurant which were closed during the first quarter
of 2003, plus 11 additional Don Pablo's restaurants and eight additional Hops
restaurants which were closed in 2002, 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 has
been divested with the exception of two locations that are held for sale, have
not been classified as discontinued operations in the accompanying consolidated
financial statements. As the decision to divest the operations of Canyon Cafe
was made prior to the implementation of SFAS 144 and it 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", it is required to be classified
within continuing operations under the provisions of SFAS 121.
Restaurant Sales
Restaurant sales for the quarter ended March 30, 2003 were $97.1 million
compared to $115.2 million for the corresponding period of 2002. Declining
revenues were primarily due to the divestiture of Canyon Cafe which was
substantially completed in the fourth quarter of 2002 and a decrease in
same-store sales at Don Pablo's and Hops. Sales were adversely impacted during
the quarter by the Company's limited ability to market, as well as the war in
Iraq and a generally sluggish economy. The revenues and expenses related to nine
Don Pablo's restaurants and one Hops restaurant which were closed during the
first quarter of 2003, plus 11 additional Don Pablo's restaurants and eight Hops
restaurants which were closed in 2002, have been included in discontinued
operations for all periods presented in the accompanying consolidated statements
of loss and consolidated statements of cash flows. Same-store sales for the
first quarter of 2003 decreased by approximately 7% at Don Pablo's and 17% at
Hops as compared to 2002 (same-store sales comparisons included all restaurants
classified as continuing operations and open for 18 months as of the beginning
of 2003).
Page 19
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 quarters ended March 30, 2003 and March 31, 2002.
Mar. 30, Mar. 31,
2003 2002
- ---------------------------------------------- -------------- --------------
Restaurant sales:
Canyon Cafe 1.6 % 6.7 %
Don Pablo's 59.4 % 53.7 %
Hops 39.0 % 39.6 %
- ---------------------------------------------- -------------- --------------
Total restaurant sales 100.0 % 100.0 %
- ---------------------------------------------- -------------- --------------
Operating expenses:
Food and beverage 28.7 % 28.5 %
Payroll and benefits 34.6 % 32.8 %
Depreciation and amortization 3.6 % 3.1 %
Other operating expenses 25.3 % 26.5 %
General and administrative expenses 6.2 % 5.5 %
Loss (gain) on disposal of assets 1.7 % (0.5)%
Asset revaluation and other special charges 4.5 % 0.6 %
- ---------------------------------------------- -------------- --------------
Total operating expenses 104.7 % 96.5 %
- ---------------------------------------------- -------------- --------------
Operating income (loss) (4.7)% 3.5 %
- ---------------------------------------------- -------------- --------------
Certain operating expenses for the quarter ended March 30, 2003, including
food and beverage costs, payroll and benefit costs, depreciation and
amortization, and other operating expenses increased by 1.3%, as a percent of
sales, over the prior period of 2002. This increase was largely due to decreased
leverage on fixed costs due to declining sales volumes at Don Pablo's and Hops
which was somewhat offset by reduced marketing expenditures.
General and Administrative Expenses
General and administrative expenses decreased by $0.3 million for the
quarter ended March 30, 2003 compared to the quarter ended March 31, 2002 but
increased as a percent of sales to 6.2% from 5.5% due to declining sales
volumes.
Loss (Gain) on Disposal of Assets
Loss on disposal of assets of $1.6 million for the quarter ended March 30,
2003, primarily reflects losses related to the sale of 15 Don Pablo's
restaurants included in the Company's Don Pablo's sale-leaseback transaction
which occurred during the quarter.
Gain on disposal of assets of $0.5 million for the quarter ended March 31,
2002 primarily reflects an adjustment to amounts receivable from the divestiture
of McCormick & Schmick's which was somewhat offset by fees incurred in
connection with the 2002 first quarter termination of the Company's interest
rate swap agreement.
Asset Revaluation and Other Special Charges
For the quarter ended March 30, 2003, asset revaluation and other special
charges of $4.4 million, which were predominately non-cash, include asset
impairment charges of $2.9 million recorded to reduce the carrying value of the
assets of four Don Pablo's restaurants to estimated fair value and $1.5 million
in special charges related to costs associated with the relocation of the Hops
corporate office to Madison, Georgia. Asset revaluation and other special
charges for the quarter ended March 31, 2002 reflected a non-cash asset
impairment charge of $0.7 million to reduce the carrying value of the assets of
the Company's Canyon Cafe restaurants to estimated fair value.
Interest and Other Expenses
Net interest expense for the quarter ended March 30, 2003 was $12.5 million
compared to $8.2 million for the quarter ended March 31, 2002. The increase in
interest expense included $6.5 million in deferred loan costs which were charged
to interest expense as a result of the Company's March 25, 2003 termination of
Page 20
its previously existing credit agreement. Interest expense for the quarter ended
March 31, 2002 included unfavorable mark-to-market adjustments recorded during
the quarter under a fixed-to-floating interest rate swap agreement, which was
terminated on March 25, 2002, and increased interest charges incurred related to
past due sales and use, property and other taxes.
Distribution expense on preferred securities relates to the Company's $3.50
term convertible securities with a liquidation preference of $50 per security
and convertible into 3.3801 shares of Avado Brands common stock for each
security (the "TECONS"). Expenses related to these securities decreased as a
result of the conversion of 1,307,591 of the securities into 4,419,478 shares of
common stock during 2002, 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 shares were converted in conjunction with this
distribution payment.
During the quarter ended March 30, 2003, other income was recognized as a
result of the abatement of previously incurred tax penalties. For the quarter
ended March 31, 2002, other expenses related primarily to the incurrence of
various tax penalties.
No income tax benefit was recorded related to the loss before income taxes
for the quarter ended March 30, 2003. The income tax benefit recorded for the
quarter ended March 31, 2002 represents the effective rate of benefit on loss
before income taxes for the quarter. The tax rate was based on the Company's
expected rate for the full fiscal 2002 year.
Discontinued Operations
As discussed in Note 1 - Basis of Presentation, discontinued operations
includes the revenues and expenses of nine Don Pablo's and one Hops restaurant
which were closed in the first three months of 2003, plus 11 additional Don
Pablo's restaurants and eight additional Hops restaurants which were closed
during 2002. The decision to dispose of these 29 locations reflects the
Company's ongoing process of evaluating the performance and cash flows of its
various restaurant locations and using the proceeds from the sale of closed
restaurants to reduce outstanding debt.
Net loss from discontinued operations for the quarter ended March 30, 2003,
for which no tax benefit has been provided, of $7.6 million primarily reflects
losses on the disposal of closed restaurants. Operating losses were $7.6 million
for the quarter on total restaurant sales from discontinued operations of $2.2
million.
Net loss from discontinued operations for the quarter ended March 31, 2002
of $1.0 million (net of income tax benefit of $0.2 million), reflects operating
losses of $1.2 million on total restaurant sales from discontinued operations of
$10.6 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 accrued
liabilities occurred during the first quarter of 2003 primarily as a result of
interest payments made during the first quarter on the Company's Senior and
Subordinated Notes.
On March 24, 2003, the Company obtained new financing which included a
$39.0 million revolving credit facility (the "Credit Facility") and a $20.0
million sale-leaseback transaction covering 15 Don Pablo's locations (the "Don
Pablo's sale-leaseback"). Proceeds from the new financing were used to pay
amounts outstanding under the Company's previously existing credit agreement
totaling $19.5 million and fees associated with the closing of the new financing
agreements totaling $4.3 million. Placement of the new financing allowed the
Company to avoid approximately $9.5 million in fees associated with its previous
credit agreement.
The Credit Facility limits total borrowing capacity at any given time to an
amount equal to the lesser of $39.0 million or 1.95 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 as
defined in the agreement. A portion of the facility, totaling $17.0 million, is
restricted for the purchase of the Company's 9.75% Senior Notes due 2006
Page 21
("Senior Notes") and 11.75% Senior Subordinated Notes due 2009("Subordinated
Notes"). The agreement limits the amount the Company may pay to acquire Senior
Notes and Subordinated Notes to $0.50 and $0.30 per one dollar outstanding,
respectively. In addition, any unused availability under the restricted portion
of the facility terminates on May 31, 2003. The Credit Facility matures on March
24, 2004 but may be extended for one year at the lender's option and subject to
an extension fee equal to five percent of the total commitment amount. In
certain circumstances, borrowings under the Credit 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 (other than Assets Held for Sale as
defined in the agreement), casualty events and tax refunds, 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 liquidity. The loan is secured by substantially
all of the Company's assets.
At March 30, 2003, $4.8 million in cash borrowings were outstanding under
the Credit Facility and an additional $14.0 million of the facility was utilized
to secure letters of credit which primarily secure the Company's insurance
programs. Although the Company had not borrowed any amounts related to the $17.0
million restricted portion of the facility, total Credit Facility availability
was reduced by lender reserves of $4.0 million. These reserves relate to
specific conditions the Company is required to satisfy to perfect the lender's
security interest in certain properties. Although the lender reserves have
reduced the total availability, the lender has not limited the Company's
unrestricted availability. At March 30, 2003, $16.2 million of the facility
remained unused and available, of which $13.0 million was restricted and $3.2
million was unrestricted. Subsequent to March 30, 2002, the Company satisfied
certain of the required conditions related to the lender reserves and $2.0
million of the reserves were eliminated. Also subsequent to the end of the first
quarter, the Company used restricted loan proceeds of $4.9 million to acquire
$9.9 million in face value of its Senior Notes. The Company will recognize a
gain on debt extinguishment of approximately $5.0 million during the second
quarter of 2003 related to the repurchases.
The terms of the Credit Facility, the Company's Senior Notes and
Subordinated Notes, the Don Pablo's sale-leaseback, the 2000 Hops sale-leaseback
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, (iii) maintain defined leverage
ratios, (iv) limit the incurrence of certain liens or encumbrances in excess of
defined amounts and (v) limit certain payments. At March 30, 2003, the Company
was in compliance with the requirements contained in the Credit Facility, the
Don Pablo's sale-leaseback and terms of the Senior Notes and Subordinated Notes.
The Company was not in compliance with a net worth requirement contained in its
2000 Hops 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 March 30, 2003, remaining obligations under the master equipment
lease totaled $4.9 million. The continuing event of default under the master
equipment lease does not result in cross-defaults under the Company's Credit
Facility, Senior Notes, Subordinated Notes or two sale-leaseback agreements.
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. Subsequent to March 30, 2003, the lessor drew-down a $2.0 million
letter of credit which secured the Company's obligations under the agreement
thereby reducing the Company's remaining payment obligations. This letter of
credit was secured by borrowing availability under the Credit Facility thus the
drawing had no net impact on the Company's overall availability.
The Company has suffered from recurring losses from operations, has an
accumulated deficit and a Credit Facility which is due March 24, 2004 that raise
substantial doubt about the Company's ability to continue as a going concern.
Sufficient liquidity to make required debt service and lease payments is
dependent primarily on the realization of proceeds from the sale of assets and
cash flow from operations. There can be no assurance that these efforts will be
successful.
In the event the Company is not able to meet its financial covenant targets
under the Credit Facility, an event of default would occur. An event of default
would entitle the lender to, among other things, declare all obligations
immediately due and payable. In the event the amounts due under the Credit
Facility are accelerated, cross-default provisions contained in the indentures
to the Senior Notes and Subordinated Notes would be triggered, creating an event
of default under those agreements as well. At March 30, 2003, the outstanding
Page 22
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 Company's two sale-leaseback agreements. In the event
some or all of the obligations under the Company's financing 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.
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 $9.9 million in face value of its outstanding Senior Notes subsequent to
March 30, 2003 and $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
repurchases, the Company's semi-annual interest payments will total
approximately $8.0 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 generate cash flow from
operations.
Principal financing sources in the first quarter of 2003 consisted of (i)
proceeds of $20.0 million from the Don Pablo's sale-leaseback, (ii) cash
provided by discontinued operations, primarily related to the sale of assets, of
$12.8 million, and (iii) other proceeds from the sale of assets of $1.5 million.
The primary uses of funds consisted of (i) net cash used in operations of $10.6
million which included interest payments of $10.7 million primarily related to
the Senior and Subordinated Notes and Credit Facility along with operating lease
payments of $5.3 million, (ii) net repayments of credit agreements of $19.5
million, and (iii) payment of financing costs related to the Credit Facility and
Don Pablo's sale-leaseback totaling $4.3 million.
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.
The Company is also exposed to certain contingent payments. In connection
with the Applebee'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 and nine 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 $34.6 million. The
Company also remains contingently liable for lease obligations relating to eight
Harrigan's restaurants which were divested in 1999. Minimum lease payment
obligations for those eight restaurants totals $5.5 million and extends through
2012. On March 14, 2003, Harrigan's filed a bankruptcy petition under Chapter 11
of the Unites States Bankruptcy Code. Harrigan's is continuing to operate under
Chapter 11 and the Company has not been notified of any intent by the respective
landlords to hold the Company liable for lease obligations pertaining to any of
the eight locations.
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's deductibles
for workers' compensation and general liability are $500,000 per claim. 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. In the first quarter of
2003, claims paid under the Company's self-insurance programs totaled $1.0
million. In addition, at March 30, 2003, the Company was contingently liable for
letters of credit aggregating approximately $14.0 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 ("IRS"). The Company believes its recorded
liability for income taxes of $35.6 million as of March 30, 2003 is adequate to
cover its exposure that may result from the ultimate resolution of the audit.
Page 23
During the first quarter of 2003, the Company submitted an Offer in
Compromise to the IRS whereby the Company offered to settle its potential
obligations at a discounted amount. The Offer in Compromise process is a
mechanism available to taxpayers to potentially reduce amounts otherwise payable
to the IRS based on analysis of a taxpayer's ability to pay, the value of its
assets versus its liabilities and other economic factors. Although the ultimate
outcome of the audit or the Offer in Compromise 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.
On April 3, 2003, the Company received a communication from counsel
claiming to represent an ad hoc committee ("the Committee") of holders of a
majority of the Company's 9.75% Senior Notes ("the Senior Notes"). The
communication set forth concerns of the Committee with respect to certain
actions of the Company and threatened to cause a notice of default under the
indenture covering the Senior Notes to be issued and other legal action to be
taken if the Committee's concerns were not addressed. On May 5, 2003, counsel
for the Committee issued a press release announcing the Committee's intention to
cause a notice of default to be issued, asserting that certain transactions with
the Company's Chairman and CEO constituted violations of covenants in the
Indenture governing the Senior Notes. Should it ultimately be determined that an
event of default exists, the Senior Notes would become currently due and
payable. As of May 14, 2003, the Company has not received any notice from the
trustee for the Senior Notes that a notice of default has been filed, nor, to
the Company's knowledge has the Committee taken any formal legal action. If the
Committee were to initiate action to declare a default and to accelerate the
Senior Notes, the Company intends to vigorously contest such action. While the
outcome of any potential litigation is inherently uncertain, the Company does
not believe that the Committee would prevail in any such attempt to accelerate
the Senior Notes. In the event the Senior Notes are accelerated cross-default
provisions would be triggered in the Company's Credit Facility and Subordinated
Notes.
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 primarily from the first quarter relocation of its Hops
corporate headquarters 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. For the near term,
cash flow from operations will need to be supplemented by asset sales. 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 or that it will be successful in defending itself
against any potential legal actions that may arise.
Effect of Inflation
Management believes that inflation has not had a material effect on
earnings during the past several years. Future inflationary increases in the
cost of labor, food and other operating costs could adversely affect the
Company's restaurant operating margins. In the past, however, the Company
generally has been able to modify its operations to offset increases in its
operating costs.
Various federal and state laws increasing minimum wage rates have been
enacted over the past several years. Such legislation, however, has typically
frozen the wages of tipped employees at $2.13 per hour if the difference is
earned in tip income. Although the Company has experienced slight increases in
hourly labor costs in recent years, the effect of increases in minimum wage have
been significantly diluted due to the fact that the majority of the Company's
hourly employees are tipped and the Company's non-tipped employees have
historically earned wages greater than federal and state minimums. As such, the
Company's increases in hourly labor costs have not been proportionate to
increases in minimum wage rates.
Forward-Looking Information
Certain information contained in this quarterly report, particularly
information regarding the future economic performance and finances, restaurant
development plans, capital requirements and objectives of management, is forward
looking. In some cases, information regarding certain important factors that
Page 24
could cause actual results to differ materially from any such forward-looking
statement appear together with such statement. In addition, the following
factors, in addition to other possible factors not listed, could affect the
Company's actual results and cause such results to differ materially from those
expressed in forward-looking statements. These factors include future compliance
with debt covenants; the outcome of the 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and
changes in commodity prices. The Company's exposure to interest rate risk
relates primarily to foreign-based rate obligations on the Company's revolving
credit agreement. Interest swap agreements have historically been utilized to
manage overall borrowing costs and balance fixed and floating interest rate
obligations. As of March 25, 2002 the Company terminated the one such swap
agreement it had in place and no further obligation remains after that date.
The Company purchases certain commodities such as beef, chicken, flour and
cooking oil. Purchases of these commodities are generally based on vendor
agreements, which often contain contractual features that limit the price paid
by establishing price floors or caps. As commodity price aberrations are
generally short-term in nature and have not historically had a significant
impact on operating performance, financial instruments are not used to hedge
commodity price risk.
Item 4. 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 as defined in the federal securities laws.
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. 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 their last evaluation.
Page 25
Part II. Other Information
Item 5. Other Information
On April 18, 2003 the Company received a comment letter from the Securities
and Exchange Commission ("SEC") covering its 2002 annual report on Form 10-K.
The Company responded to the SEC's letter on May 2, 2003. The SEC's comments
focused on the Company providing expanded disclosure of certain matters. On
April 25, 2003 the Company filed a Form 8-K addressing certain of those matters.
While the Company has not received additional correspondence from the SEC, the
Company will provide the requested disclosures in its quarterly reports on Form
10-Q, future annual reports on Form 10-K, and filings of Form 8-K, as
applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4.1 Indenture dated May 1, 1996, between the Company and SunTrust Bank,
Atlanta, as Trustee. (1)
4.2 Prospectus Supplement dated May 1, 1996. (2)
4.3 Resolution of the Pricing Committee, dated May 23, 2996, pursuant to
Section 2.1 and 2.3 of the Indenture dated as of May 1, 1996, between the
Company and SunTrust Bank, Atlanta, as Trustee.
4.4 First Supplemental Indenture, dated as of June 29, 1998, to Indenture
dated May 1, 1996, between the Company and SunTrust Bank, Atlanta, as Trustee.
4.5 Second Supplemental Indenture, dated as of May 26, 1999, to Indenture
dated May 1, 1996, between the Company and SunTrust Bank, Atlanta, as Trustee,
as amended by a First Supplemental Indenture dated as of June 29, 1998.
10.1 Third Amended and Restated Credit Agreement dated as of March 21, 2003
by and among Avado Brands, Inc., as Borrower, the lenders signatory thereto,
Drawbridge Special Opportunities Fund LP, as Collateral Agent, and Hilco Capital
LP, as Administrative Agent.
10.2 First Amendment, dated May 9, 2003, to Third Amended and Restated
Credit Agreement dated as of March 21, 2003 by and among Avado Brands, Inc., as
Borrower, the lenders signatory thereto, Drawbridge Special Opportunities Fund
LP, as Collateral Agent, and Hilco Capital LP, as Administrative Agent.
10.3 Master Land and Building Lease dated as of March 24, 2003 by and
between Don Pablo's Operating Corp., a wholly owned subsidiary of Avado Brands,
Inc., as Tenant and Skyline-Fri 8, L.P., as Landlord.
10.4 Purchase and Sale Agreement dated as of March 19, 2003 by and between
Don Pablo's Operating Corp., a wholly owned subsidiary of Avado Brands, Inc., as
Seller and Skyline-Fri 8, L.P., as Buyer.
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of
1995. (3)
99.2 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to Exhibit 4.1 to the registrant's
registration statement on Form S-3/A (SEC File No. 333-02958), filed on May 6,
1996.
(2) Incorporated by reference to Prospectus Supplement dated May 23, 1996,
filed pursuant to Rule 424B2 on May 24, 1996 (SEC File No. 333-02958).
(3) Incorporated by reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 2, 2000.
(b) Reports on Form 8-K.
None
Page 26
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Avado Brands, Inc.
(Registrant)
Date: May 14, 2003 By: /s/Louis J. Profumo
-------------------------
Louis J. Profumo
Chief Financial Officer
Page 27
CERTIFICATIONS
I, Tom E. DuPree, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avado Brands,
Inc.,
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly report is being covered.
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
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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
quarterly 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: May 14, 2003 By: /s/Tom E. DuPree, Jr.
-------------------------
Tom E. DuPree, Jr.
Chairman and Chief Executive Officer
Page 28
CERTIFICATIONS
I, Louis J. Profumo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avado Brands,
Inc.,
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly report is being covered.
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
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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
quarterly 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: May 14, 2003 By: /s/Louis J. Profumo
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Louis J. Profumo
Chief Financial Officer
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