10-Q/A 1 q102-10qa.txt AMENDED QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (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 31, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ______ 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 incorporation or organization) Identification No.) Hancock at Washington, Madison, GA 30650 -------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) 706-342-4552 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- As of March 31, 2002, there were 29,022,516 shares of common stock of the Registrant outstanding. EXPLANATORY NOTE This Amendment No. 1 to the Quarterly Report on Form 10-Q for Avado Brands, Inc. (the "Company") for the quarter ended March 31, 2002 is being filed to amend and restate the items described below contained in the Company's Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission on May 3, 2002. This Amendment No. 1 makes changes to Item 1 (Consolidated Financial Statements), Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) and Item 6 (Exhibits and Reports on Form 8-K) for the following reason. In the Company's Form 10-Q filing for the quarter ended March 31, 2002, the Company improperly presented, for all periods, the revenues and expenses of Canyon Cafe and McCormick & Schmick's as discontinued operations. This Form 10-Q/A was filed to reclassify the operations of Canyon Cafe and McCormick & Schmick's to continuing operations in the Consolidated Statements of Earnings (Loss) and Consolidated Statements of Cash Flows. The reclassification had no impact on consolidated net loss and there were no changes to the Consolidated Balance Sheets or Consolidated Statements of Shareholders' Equity (Deficit). In order to preserve the nature and character of the disclosures set forth in such Items as originally filed, this report continues to speak as of the date of the original filing, and we have not updated the disclosures in this report to speak as of a later date. While this report primarily relates to the historical period covered, events may have taken place since the original filing that might have been reflected in this report if they had taken place prior to the original filing. All information contained in this Amendment No. 1 is subject to updating and supplementing as provided in our reports filed with the Securities and Exchange Commission subsequent to the date of the original filing of the Quarterly Report. Page 2 AVADO BRANDS, INC. QUARTERLY REPORT ON FORM 10-Q/A FOR THE QUARTER ENDED MARCH 31, 2002 INDEX Part I - Financial Information Page Item 1 - Consolidated Financial Statements: Consolidated Statements of Earnings(Loss)....................4 Consolidated Balance Sheets..................................5 Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Income............................6 Consolidated Statements of Cash Flows........................7 Notes to Consolidated Financial Statements...................8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations...............17 Item 3 - Quantitative and Qualitative Disclosures About Market Risk..22 Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K............................23 Signature.....................................................................24 Certifications................................................................25 Page 3 Avado Brands, Inc. Consolidated Statements of Earnings (Loss) (Unaudited)
(In thousands, except per share data) Quarter Ended ------------------------------------------------------------------------------------------------------------- Mar. 31, Apr. 1, 2002 2001 ------------------------------------------------------------------------------------------------------------- (As Restated) Restaurant sales: Canyon Cafe $ 7,725 8,868 Don Pablo's 69,216 73,671 Hops 50,298 52,134 McCormick & Schmick's - 42,710 -------------------------------------------------------------------------------------------------------------- Total restaurant sales 127,239 177,383 -------------------------------------------------------------------------------------------------------------- Restaurant operating expenses: Food and beverage 35,898 50,108 Payroll and benefits 42,435 57,222 Depreciation and amortization 4,060 5,929 Other operating expenses 35,122 45,012 -------------------------------------------------------------------------------------------------------------- Total restaurant operating expenses 117,515 158,271 -------------------------------------------------------------------------------------------------------------- General and administrative expenses 6,681 8,742 Gain on disposal of assets (524) (749) Asset revaluation and other special charges 650 400 -------------------------------------------------------------------------------------------------------------- Operating income 2,917 10,719 -------------------------------------------------------------------------------------------------------------- Other income (expense): Interest expense, net (8,233) (9,031) Distribution expense on preferred securities (1,115) (1,244) Other, net (412) (1,989) -------------------------------------------------------------------------------------------------------------- Total other income (expense) (9,760) (12,264) -------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes (6,843) (1,545) Income tax benefit (1,125) (500) -------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ (5,718) (1,045) ============================================================================================================== Basic earnings (loss) per common share $ (0.20) (0.04) ============================================================================================================== Diluted earnings (loss) per common share $ (0.20) (0.04) ==============================================================================================================
See accompanying notes to consolidated financial statements. Page 4 Avado Brands, Inc. Consolidated Balance Sheets (Unaudited)
(In thousands, except share data) ---------------------------------------------------------------------------------------------------------------------------- Mar. 31, Dec. 30, 2002 2001 ---------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 168 559 Restricted cash 8,813 9,978 Accounts receivable 7,927 10,723 Inventories 5,900 5,870 Prepaid expenses and other 3,991 2,928 Assets held for sale 9,071 9,737 ---------------------------------------------------------------------------------------------------------------------------- Total current assets 35,870 39,795 Premises and equipment, net 282,563 285,813 Goodwill, net 34,920 34,920 Deferred income tax benefit 11,620 11,620 Other assets 34,596 26,408 ---------------------------------------------------------------------------------------------------------------------------- $ 399,569 398,556 ============================================================================================================================ Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 10,036 15,766 Accrued liabilities 58,034 64,265 Current installments of long-term debt 7 13 Income taxes 32,586 33,773 ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities 100,663 113,817 Long-term debt 236,324 215,815 Other long-term liabilities 2,172 3,111 ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 339,159 332,743 ---------------------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of Avado Financing I, a subsidiary holding solely Avado Brands, Inc. 7% convertible subordinated debentures due March 1, 2027 63,524 68,559 Shareholders' equity: Preferred stock, $0.01 par value. Authorized 10,000,000 shares; none issued - - Common stock, $0.01 par value. Authorized - 75,000,000 shares; issued - 40,478,760 shares in 2002 and 2001; outstanding - 29,022,516 shares in 2002 and 28,682,140 shares in 2001 405 405 Additional paid-in capital 147,028 146,139 Retained earnings (accumulated deficit) (407) 5,311 Treasury stock at cost; 11,456,244 shares in 2002 and 11,796,620 in 2001 (150,140) (154,601) ---------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) (3,114) (2,746) ---------------------------------------------------------------------------------------------------------------------------- $ 399,569 398,556 ============================================================================================================================
See accompanying notes to consolidated financial statements. Page 5 Avado Brands, Inc. Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Income (Unaudited)
Additional Total Common Stock Paid-in Retained Treasury Shareholders' (In thousands) Shares Amount Capital Earnings Stock Equity (Deficit) ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 30, 2001 40,479 $405 $146,139 $5,311 ($154,601) ($2,746) ------------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) - - - (5,718) - (5,718) Conversion of convertible preferred securities - - 889 - 4,461 5,350 ------------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 2002 40,479 $405 $147,028 ($407) ($150,140) ($3,114) ====================================================================================================================================
See accompanying notes to consolidated financial statements. Page 6 Avado Brands, Inc. Consolidated Statements of Cash Flows (Unaudited)
(In thousands) Quarter Ended ----------------------------------------------------------------------------------------------------------------------- Mar. 31, Apr. 1, 2002 2001 ----------------------------------------------------------------------------------------------------------------------- (As Restated) Cash flows from operating activities: Net earnings (loss) $ (5,718) (1,045) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 5,088 8,108 Gain on disposal of assets (524) (749) Asset revaluation and other special charges 650 400 Mark-to-market adjustment on interest rate swap 861 (532) (Increase) decrease in assets: Accounts receivable 191 (1,147) Inventories (30) 170 Prepaid expenses and other 54 (584) Increase (decrease) in liabilities: Accounts payable (5,730) (3,674) Accrued liabilities (7,487) 3,682 Income taxes (1,187) (741) Other long-term liabilities (96) (379) ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (13,928) 3,509 ----------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (1,060) (8,422) Proceeds from disposal of assets and notes receivable, net 3,666 2,727 Additions to noncurrent assets (495) (824) ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 2,111 (6,519) ----------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from revolving credit agreements 20,473 2,992 Payment of financing costs (8,502) - Principal payments on long-term debt (6) (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 11,426 2,986 ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (391) (24) Cash and cash equivalents at the beginning of the period 559 402 ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of the period $ 168 378 =======================================================================================================================
See accompanying notes to consolidated financial statements. Page 7 AVADO BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statement reporting purposes. However, there has been no material change in the information disclosed in the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 30, 2001, except as disclosed herein. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", and Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in the first quarter of 2002. 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 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 29, 2002. Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which was adopted by the Company in the first quarter of 2002, supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a "Segment" of a business as defined in that Opinion. For the quarter ended March 31, 2002, the Company did not have any operations that met the necessary criteria to be classified as discontinued operations under the provisions of SFAS 144. The revenues and expenses of Canyon Cafe which is held for sale (including three restaurants closed in 2001), the McCormick & Schmick's brand, which was divested in August 2001, and eight Don Pablo's and two Hops restaurants which were closed in 2001 have been classified as continuing operations in the accompanying consolidated financial statements. As the decision to divest these operations was made prior to the implementation of SFAS 144 and they did not meet the criteria for classification as discontinued operations under the provisions of APB Opinion No. 30, they will continue to be classified within continuing operations under the provisions of SFAS 121. Page 8 NOTE 2 - RESTATEMENT OF CONSOLIDATED STATEMENT OF EARNINGS (LOSS) The Company's Form 10-Q for the quarter ended March 31, 2002 was filed with the Securities and Exchange Commission on May 3, 2002. In that filing, the Company improperly presented, for all periods, the revenues and expenses of Canyon Cafe and McCormick & Schmick's as discontinued operations. This Form 10-Q/A was filed to reclassify the operations of Canyon Cafe and McCormick & Schmick's to continuing operations in the Consolidated Statements of Earnings (Loss) and Consolidated Statements of Cash Flows. The reclassification had no impact on consolidated net loss and there were no changes to the Consolidated Balance Sheets or Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Income. The following table presents the Company's Consolidated Statements of Earnings (Loss) for the quarters ended March 31, 2002 and April 1, 2001 as amended by this Form 10-Q/A compared to the amounts originally reported on Form 10-Q for the quarter ended March 31, 2002.
(In thousands, except per share data) Quarter Ended Quarter Ended ------------------------------------------------------------------------------------- ---------------------------- As As Originally As As Originally Restated Reported Restated Reported Mar. 31, Mar. 31, Apr. 1, Apr. 1, 2002 2002 2001 2001 ------------------------------------------------------------------------------------- ---------------------------- Restaurant sales: Canyon Cafe $ 7,725 - 8,868 - Don Pablo's 69,216 69,216 73,671 73,671 Hops 50,298 50,298 52,134 52,134 McCormick & Schmick's - - 42,710 - ------------------------------------------------------------------------------------- ---------------------------- Total restaurant sales 127,239 119,514 177,383 125,805 ------------------------------------------------------------------------------------- ---------------------------- Restaurant operating expenses: Food and beverage 35,898 33,890 50,108 35,089 Payroll and benefits 42,435 39,481 57,222 40,348 Depreciation and amortization 4,060 4,060 5,929 4,628 Other operating expenses 35,122 32,798 45,012 32,685 ------------------------------------------------------------------------------------- ---------------------------- Total restaurant operating expenses 117,515 110,229 158,271 112,750 ------------------------------------------------------------------------------------- ---------------------------- General and administrative expenses 6,681 6,416 8,742 6,501 (Gain) loss on disposal of assets (524) 86 (749) (298) Asset revaluation and other special charges 650 - 400 400 ------------------------------------------------------------------------------------- ---------------------------- Operating income 2,917 2,783 10,719 6,452 ------------------------------------------------------------------------------------- ---------------------------- Other income (expense): Interest expense, net (8,233) (8,233) (9,031) (9,031) Distribution expense on preferred securities (1,115) (1,115) (1,244) (1,244) Other, net (412) (412) (1,989) (1,548) ------------------------------------------------------------------------------------- ---------------------------- Total other income (expense) (9,760) (9,760) (12,264) (11,823) ------------------------------------------------------------------------------------- ---------------------------- Earnings (loss) from continuing operations before income taxes (6,843) (6,977) (1,545) (5,371) Income tax benefit (1,125) (1,125) (500) (1,750) ------------------------------------------------------------------------------------- ---------------------------- Net earnings (loss) from continuing operations (5,718) (5,852) (1,045) (3,621) ------------------------------------------------------------------------------------- ---------------------------- Discontinued operations: Earnings (loss) from discontinued operations, net of tax - 134 - 2,576 ------------------------------------------------------------------------------------- ---------------------------- Net earnings (loss) $ (5,718) (5,718) (1,045) (1,045) ===================================================================================== ============================ Basic earnings (loss) per common share: Basic earnings (loss) from continuing operations $ (0.20) (0.20) (0.04) (0.13) Basic earnings (loss) from discontinued operations - - - 0.09 ------------------------------------------------------------------------------------- -------------------------- Basic earnings (loss) per common share $ (0.20) (0.20) (0.04) (0.04) ===================================================================================== ========================== Diluted earnings (loss) per common share: Diluted earnings (loss) from continuing operations $ (0.20) (0.20) (0.04) (0.13) Diluted earnings (loss) from discontinued operations - - - 0.09 ------------------------------------------------------------------------------------- -------------------------- Diluted earnings (loss) per common share $ (0.20) (0.20) (0.04) (0.04) ===================================================================================== ==========================
Page 9 NOTE 3 - RESTATEMENT OF CONSOLIDATED STATEMENTS OF CASH FLOWS The following table presents the Company's Consolidated Statements of Cash Flows for the quarters ended March 31, 2002 and April 1, 2001 as amended by this form 10-Q/A compared to the amounts originally reported on Form 10-Q for the quarter ended March 31, 2002.
(In thousands) Quarter Ended Quarter Ended --------------------------------------------------------------------------------------- ---------------------------- As As Originally As As Originally Restated Reported Restated Reported Mar. 31, Mar. 31, Apr. 1, Apr. 1, 2002 2002 2001 2001 --------------------------------------------------------------------------------------- ---------------------------- Net cash provided by (used in) operating activities $ (13,928) (13,495) 3,509 (451) Net cash provided by (used in) investing activities 2,111 (1,555) (6,519) (4,715) Net cash provided by (used in) financing activities 11,426 11,426 2,986 2,986 Net cash provided by (used in) discontinued operations - 3,233 - 2,156 --------------------------------------------------------------------------------------- ---------------------------- Net increase (decrease) in cash and cash equivalents $ (391) (391) (24) (24) ======================================================================================= ============================
NOTE 4 - LONG-TERM DEBT AND LIQUIDITY On March 25, 2002, the Company completed a $75.0 million credit facility (the "Credit Facility") to replace its existing credit agreement. The Credit Facility, which matures on March 25, 2005, limits total borrowing capacity at any given time to an amount equal to two and one quarter times the Company's trailing 12 months earnings before interest, income taxes and depreciation and amortization as determined for the most recently completed four quarters ("Borrowing Base EBITDA"). The calculation of Borrowing Base EBITDA excludes the 2001 operations of McCormick & Schmick's, gains and losses on the disposal of assets, asset revaluation and other special charges, non-cash rent expense and preopening costs. The agreement provides a $35.0 million revolving credit facility, which may be used for working capital and general corporate purposes, and a $40.0 million term loan facility, which is limited to certain defined purposes, excluding working capital and capital expenditures. In certain circumstances, borrowings under the term loan facility are required to be repaid to the lender and any such repayments are not available to be re-borrowed by the Company. Events generating a required repayment include, among other things, proceeds from asset dispositions, casualty events, tax refunds and excess cash flow, each as defined in the Credit Facility. In addition, the lender has the right to impose certain reserves against the Company's total borrowing availability under the facility, which may limit the Company's availability on both the revolving and term loans. Lender imposed reserves against the Company's total borrowing availability, as of March 31, 2002, were $9.8 million. Irrespective of future borrowings, certain obligations will exist with respect to the agreement, including annual anniversary fees of $1.1 million and an additional fee payable at maturity of $5.1 million. The loan is secured by substantially all of the Company's assets. The terms of the Credit Facility, the Company's 9.75% Senior Notes due 2006 ("Senior Notes") and 11.75% Senior Subordinated Notes due 2009 ("Subordinated Notes"), $30.0 million master equipment lease and $28.4 million Hops sale-leaseback transaction collectively include various provisions which, among other things, require the Company to (i) achieve certain EBITDA targets, (ii) maintain defined net worth and coverage ratios, (iii) maintain defined leverage ratios, (iv) limit the incurrence of certain liens or encumbrances in excess of defined amounts and (v) limit certain payments. In conjunction with the closing of the Credit Facility, the Company terminated its interest rate swap agreement thereby eliminating any aforementioned restrictions contained in that agreement. In addition, in March 2002 the master equipment lease agreement was amended to substantially conform the covenants to the Credit Facility and certain provisions contained in the sale-leaseback agreement were also amended. The Company was in compliance with the various provisions of its agreements at March 31, 2002. At March 31, 2002, $20.5 million of cash borrowings were outstanding under the revolving credit facility and no amounts were outstanding under the term loan facility. Subsequent to March 31, 2002, $8.8 million in restricted cash, which was held as collateral to secure letters of credit which secure the Company's insurance programs, was released and used to reduce the amount outstanding under the revolving credit facility. Under the new credit agreement, revolving loan capacity is used to secure the Company's letters of credit. At March 31, 2002, in addition to the $20.5 million of cash borrowings outstanding under the revolving facility, an additional $11.6 million of the facility was utilized for the Company's letters of credit and $2.9 million of the revolving facility remained unused and available. Page 10 Principal financing sources in the first quarter of 2002 consisted of (i) proceeds of $12.0 million, net of expenses of $8.5 million, from the revolving credit agreement, (ii) proceeds of $3.7 million related to the McCormick & Schmick's divestiture and (iii) a $1.2 million partial refund of payments to collateralize letters of credit for the Company's self-insurance programs. The primary uses of funds consisted of (i) capital expenditures of $1.1 million, (ii) settlement of the Company's interest rate swap agreement for $1.7 million and (iii) net cash used in operations of $13.9 million which included interest payments of $7.2 million primarily related to the Company's 11.75% senior subordinated notes and operating lease payments of $6.2 million. Interest payments totaling approximately $11.6 million on the Company's senior and subordinated notes are due semi-annually in each June and December. Under the terms of the related note indentures, the Company has an additional 30-day period from the scheduled interest payment dates before an event of default is incurred and the Company utilized these provisions with respect to its 2001 interest payments. These provisions will again be available to the Company, if needed, with respect to the June 2002 interest payments. The Company incurs various capital expenditures related to existing restaurants and restaurant equipment in addition to capital requirements for developing new restaurants. Capital expenditures of $1.1 million for the first quarter of 2002 relate primarily to capital for existing restaurants. Capital expenditures in 2001 were $17.9 million and provided for the opening of three new restaurants, as well as capital for existing restaurants. NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION For the quarters ended March 31, 2002 and April 1, 2001, the following supplements the consolidated statements of cash flows (amounts in thousands): 2002 2001 ---------- ---------- Interest paid (net of amounts capitalized) $ 7,236 2,952 Income taxes paid (refunded) $ 62 241 The increase in interest paid during the first quarter of 2002 compared to the first quarter of 2001 was primarily due to the January payment of the semi-annual interest due to holders of the Company's 11.75% senior subordinated notes, which was deferred from December 2001. NOTE 6 - ASSET REVALUATION AND OTHER SPECIAL CHARGES For the quarter ended March 31, 2002, asset revaluation and other special charges 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 brand to estimated fair value. In the first quarter of 2001, the Company eliminated certain management positions at its corporate headquarters. Other special charges of $0.4 million reflect severance costs associated with these terminations, $0.3 million of which were paid in the first quarter. NOTE 7 - DISPOSAL OF ASSETS 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. Gain on disposal of assets for the quarter ended April 1, 2001 reflects gains recognized from the first quarter sale of two closed restaurant locations and various other non-operating assets. NOTE 8 - INCOME TAXES Income tax benefit represents the effective rate of benefit on loss before income taxes for the first quarter of 2002. The tax rate is based on the Company's expected rate for the full fiscal 2002 year. NOTE 9 - CONTINGENCIES In 1997, two lawsuits were filed by persons seeking to represent a class of shareholders of the Company who purchased shares of the Company's common stock between May 26, 1995 and September 24, 1996. Each plaintiff named the Company and certain of its officers and directors as defendants. The complaints alleged Page 11 acts of fraudulent misrepresentation by the defendants which induced the plaintiffs to purchase the Company's common stock and alleged illegal insider trading by certain of the defendants, each of which allegedly resulted in losses to the plaintiffs and similarly situated shareholders of the Company. The complaints each sought damages and other relief. In 1998, one of these suits (Artel Foam Corporation Pension Trust, et al. v. Apple South, Inc., et al., Civil Action No. CV-97-6189) was dismissed. An amended complaint, styled John Bryant, et al. vs. Apple South, Inc., et al. consolidating previous actions was filed in January 1998. During 1999, the Company received a favorable ruling from the 11th Circuit Court of Appeals relating to the remaining suit. As a result of the ruling, the District Court again considered the motion to dismiss the case, and the defendants renewed their motion to dismiss in December 1999. In June 2000, the District Court dismissed with prejudice the remaining suit. The plaintiffs appealed the court's final decision. Upon hearing the appeal, a three-judge panel reversed the motion to dismiss and gave the plaintiffs the opportunity to amend their suit and state with more particularity their allegations. Although the ultimate outcome of the suit cannot be determined at this time, the Company believes that the allegations therein are without merit and intends to continue vigorously defending itself. In connection with the Applebee's and Harrigan's divestiture transactions completed during 1999 and 1998, the Company remains contingently liable for lease obligations relating to 86 Applebee's restaurants and nine Harrigan's 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 approximately $37.0 million. Management believes that the ultimate disposition of these contingent liabilities will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 10 - INTEREST RATE SWAP During the first quarter of 2002, the Company terminated its only interest rate swap agreement. The settlement or fair market value of the interest rate swap on the date of termination was $1.7 million. Prior to termination, mark-to-market adjustments of $0.9 million were recorded as an increase to interest expense, which increased the settlement or fair market value of the interest rate swap to $1.7 million from $0.8 million at December 30, 2001. At April 1, 2001, the settlement or fair market value of the interest rate swap was $6.7 million and is included in other long-term liabilities in the accompanying consolidated balance sheet. For the quarter ended April 1, 2001, mark-to-market adjustments of $0.5 million were recorded as a reduction of interest expense. NOTE 11 - RELATED PARTY TRANSACTIONS At December 30, 2001, the Company held several notes receivable, one of which was secured by real estate, from Tom E. DuPree, Jr., Chairman of the Board and Chief Executive Officer of the Company (the "Chairman Notes" and the "Chairman"). At December 30, 2001, the due date of the Chairman Notes was June 30, 2002 with an interest rate of 11.5% payable at maturity. At December 30, 2001, total amounts owed to the Company under the Chairman Notes were $10.9 million in principal and $3.0 million in accrued interest. At that time, the Company recorded an allowance against the ultimate realization of amounts due totaling $11.1 million, yielding a net balance of $2.8 million, the fair value of the real estate collateral held by the Company. 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. Page 12 NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which requires nonamortization of goodwill and intangible assets that have indefinite useful lives and annual tests of impairments of those assets. The statement also provides specific guidance about how to determine and measure goodwill and intangible asset impairments, and requires additional disclosure of information about goodwill and other intangible assets. The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001 and applied to all goodwill and other intangible assets recognized in financial statements at that date. The Company adopted SFAS 142 effective at the beginning of its fiscal 2002 year. The following table discloses the Company's earnings, assuming it excluded goodwill amortization for the period ended: (In thousands, except per share data) Quarter Ended ------------------------------------------------------------------------------- March 31, April 1, 2002 2001 ------------------------------------------------------------------------------- Net earnings (loss) $ (5,718) (1,045) Add back: Goodwill amortization, net of income taxes - 620 Trademark amortization, net of income taxes - 2 ------------------------------------------------------------------------------- Adjusted net earnings (loss) $ (5,718) (423) =============================================================================== Basic earnings (loss) per share: $ (0.20) (0.04) Add back: Goodwill amortization, net of income taxes - 0.02 Trademark amortization, net of income taxes - 0.00 ------------------------------------------------------------------------------- Adjusted basic earnings (loss) per share $ (0.20) (0.02) =============================================================================== Diluted earnings (loss) per share: $ (0.20) (0.04) Add back: Goodwill amortization, net of income taxes - 0.02 Trademark amortization, net of income taxes - 0.00 ------------------------------------------------------------------------------- Adjusted diluted earnings (loss) per share $ (0.20) (0.02) =============================================================================== In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which requires entities to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The statement is effective for fiscal years beginning after June 15, 2002. The Company is assessing the impact of adoption of the statement on its consolidated financial position and results of operations. 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. For the quarter ended March 31, 2002, the Company did not have any operations that met the necessary criteria to be classified as discontinued operations under the provisions of SFAS 144. The revenues and expenses of Canyon Cafe which is held for sale (including three restaurants closed in 2001), the McCormick & Schmick's brand, which was divested in August 2001, and eight Don Pablo's and two Hops restaurants which were closed in 2001 have been classified as continuing operations in the accompanying consolidated financial statements. As the decision to divest these operations was made prior to the implementation of SFAS 144 and they did not meet the criteria for classification as discontinued operations under the provisions of APB Opinion No. 30, they will continue to be classified within continuing operations under the provisions of SFAS 121. Page 13 NOTE 13 - GUARANTOR SUBSIDIARIES The Company's senior notes and revolving credit facility are fully and unconditionally guaranteed on a joint and several basis by substantially all of its wholly owned subsidiaries. Such indebtedness is not guaranteed by the Company's non-wholly owned subsidiaries. These non-guarantor subsidiaries primarily include certain partnerships of which the Company is typically a 90% owner. At March 31, 2002 and December 30, 2001, these partnerships in the non-guarantor subsidiaries operated 20 of the Company's restaurants. At April 1, 2001, these partnerships in the non-guarantor subsidiaries operated 60 of the Company's restaurants. Accordingly, condensed consolidated balance sheets as of March 31, 2002 and December 30, 2001, and condensed consolidated statements of earnings and cash flows for the quarters ended March 31, 2002 and April 1, 2001 are provided for such guarantor and non-guarantor subsidiaries. Corporate costs associated with the maintenance of a centralized administrative function for the benefit of all Avado restaurants, as well as goodwill, have not been allocated to the non-guarantor subsidiaries. In addition, interest expense has not been allocated to the non-guarantor subsidiaries. Separate financial statements and other disclosures concerning the guarantor and non-guarantor subsidiaries are not presented because management has determined that they are not material to investors. There are no contractual restrictions on the ability of the guarantor subsidiaries to make distributions to the Company. Condensed Consolidated Statement of Earnings (Loss) Quarter Ended March 31, 2002 (As Restated)
Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Restaurant sales $ 113,390 13,849 - 127,239 Restaurant operating expenses 105,068 12,447 - 117,515 General and administrative expenses 6,049 632 - 6,681 (Gain) loss on disposal of assets (524) - - (524) Asset revaluation and other special charges 650 - - 650 ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Operating income 2,147 770 - 2,917 ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Other income (expense) (9,760) - - (9,760) Earnings (loss) before income taxes (7,613) 770 - (6,843) Income taxes (1,252) 127 - (1,125) ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Net earnings (loss) $ (6,361) 643 - (5,718) ================================================ ================ ================= =============== ================
Condensed Consolidated Statement of Earnings (Loss) Quarter Ended April 1, 2001 (As Restated)
------------------------------------------------ ---------------- ----------------- --------------- ---------------- Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Restaurant sales $ 136,657 40,726 - 177,383 Restaurant operating expenses 121,324 36,947 - 158,271 General and administrative expenses 6,910 1,832 - 8,742 (Gain) loss on disposal of assets (749) - - (749) Asset revaluation and other special charges 400 - - 400 ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Operating income 8,772 1,947 - 10,719 ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Other income (expense) (12,019) (245) - (12,264) Earnings (loss) before income taxes (3,247) 1,702 - (1,545) Income taxes (1,050) 550 - (500) ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Net earnings (loss) $ (2,197) 1,152 - (1,045) ================================================ ================ ================= =============== ================
Page 14 Condensed Consolidated Balance Sheet March 31, 2002
Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated ------------------------------------------------ ---------------- ----------------- --------------- ---------------- ASSETS Current assets $ 35,006 865 - 35,870 Premises and equipment, net 258,001 24,562 - 282,563 Goodwill, net 34,920 - - 34,920 Deferred income tax benefit 11,620 - - 11,620 Other assets 34,578 18 - 34,596 Intercompany investments 12,370 - (12,370) - Intercompany advances 12,655 - (12,655) - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- $ 399,149 25,445 (25,025) 399,569 ================================================ ================ ================= =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 100,244 419 - 100,663 Long-term liabilities 238,496 - - 238,496 Intercompany payables - 12,370 (12,370) - Convertible preferred securities 63,524 - - 63,524 Shareholders' equity (deficit) (3,114) 12,655 (12,655) (3,114) ------------------------------------------------ ---------------- ----------------- --------------- ---------------- $ 399,149 25,445 (25,025) 399,569 ================================================ ================ ================= =============== ================
Condensed Consolidated Balance Sheet December 30, 2001
Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated ------------------------------------------------ ---------------- ----------------- --------------- ---------------- ASSETS Current assets $ 38,927 868 - 39,795 Premises and equipment, net 260,957 24,856 - 285,813 Goodwill, net 34,920 - - 34,920 Deferred income tax benefit 11,620 - - 11,620 Other assets 26,390 18 - 26,408 Intercompany investments 12,370 - (12,370) - Intercompany advances 12,647 - (12,647) - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- $ 397,831 25,742 (25,017) 398,556 ================================================ ================ ================= =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 113,092 725 - 113,817 Long-term liabilities 218,926 - - 218,926 Intercompany payables - 12,370 (12,370) - Convertible preferred securities 68,559 - - 68,559 Shareholders' equity (deficit) (2,746) 12,647 (12,647) (2,746) ------------------------------------------------ ---------------- ----------------- --------------- ---------------- $ 397,831 25,742 (25,017) 398,556 ================================================ ================ ================= =============== ================
Page 15 Condensed Consolidated Statement of Cash Flows Quarter Ended March 31, 2002 (As Restated)
Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) operating activities $ (15,043) 1,115 - (13,928) ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash flows from investing activities: Capital expenditures (917) (143) - (1,060) Proceeds from disposal of assets, net 3,666 - - 3,666 Other investing activities (495) - - (495) ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) investing activities 2,254 (143) - 2,111 ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- 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) Reduction in letter of credit collateral 1,165 - - 1,165 Proceeds from (payment of) intercompany advances (8) 8 - - Settlement of interest rate swap agreement (1,704) - - (1,704) ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) financing activities 11,418 8 - 11,426 ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents (1,371) 980 - (391) Cash and equivalents at the beginning of the period 530 29 - 559 ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash and equivalents at the end of the period $ (841) 1,009 - 168 ==================================================== ================ ================= =============== ================
Condensed Consolidated Statement of Cash Flows Quarter Ended April 1, 2001 (As Restated)
Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) operating activities $ (712) 4,221 - 3,509 ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash flows from investing activities: Capital expenditures (8,107) (315) - (8,422) Proceeds from disposal of assets, net 2,727 - - 2,727 Other investing activities (824) - - (824) ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) investing activities (6,204) (315) - (6,519) ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash flows from financing activities: Proceeds from revolving credit agreements 2,992 - - 2,992 Proceeds from (payment of) intercompany advances 3,816 (3,816) - - Other financing activities (6) - - (6) ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) financing activities 6,802 (3,816) - 2,986 ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents (114) 90 - (24) Cash and equivalents at the beginning of the period 310 92 - 402 ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash and equivalents at the end of the period $ 196 182 - 378 ==================================================== ================ ================= =============== ================
Page 16 Item 2. AVADO BRANDS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Quarter Ended March 31, 2002 Management's Discussion and Anaylsis of Financial Condition and Results of Operations for the quarter ended March 31, 2002 has been revised to reflect the restatement of the Company's Consolidated Statements of Earnings (Loss) and the Consolidated Statements of Cash Flows. Consolidated Overview of Operations Consolidated restaurant sales for the first quarter ended March 31, 2002 were $127.2 million compared to $177.4 million for the corresponding period of fiscal 2001. Declining revenues were primarily a result of (i) the divestiture of the Company's McCormick & Schmick's brand in August 2001, (ii) a decrease in same-store sales at Canyon Cafe, Don Pablo's and Hops and (iii) a decrease in operating capacity from the closure of four Don Pablo's restaurants at the end of the first quarter of fiscal 2001. Same-store-sales for the first quarter decreased by 12.7% at Canyon Cafe, 4.5% at Don Pablo's and 2.6% at Hops as compared to the corresponding period of the prior year (same-store-sales comparisons include all restaurants open for 18 months as of the beginning of the quarter). Declining revenues were slightly offset by increased operating capacity from one new Hops restaurant opened in 2001. Consolidated operating income before asset revaluation and other special charges and gain/loss on the disposal of assets for the quarter ended March 31, 2002 was $3.0 million, compared to $10.4 million for the corresponding period of 2001. Decreased operating income for the quarter was predominately related to (i) declining sales volumes which generated an increase in fixed operating expenses as a percentage of sales, (ii) the divestiture of McCormick & Schmick's, which generated $3.5 million in operating income during the first quarter of 2001, and (iii) higher operating expenses associated with increased marketing initiatives. Decreases in operating income were somewhat offset by (i) decreases in utility costs as a result of the unseasonably warm weather during the first quarter of 2002 and (ii) decreases in costs associated with new manager training at Don Pablo's and Hops. Restaurant Operating Expenses The following table sets forth the percentages, which certain items of income and expense bear to total restaurant sales for the Company's Don Pablo's and Hops brands for the quarters ended March 31, 2002 and April 1, 2001. --------------------------------------------- ----------------- ---------------- Quarter Quarter Ended Ended Mar. 31, 2002 Apr. 1, 2001 --------------------------------------------- ----------------- ---------------- Restaurant sales: Don Pablo's 57.9% 58.6% Hops 42.1% 41.4% --------------------------------------------- ----------------- ---------------- Total restaurant sales 100.0% 100.0% --------------------------------------------- ----------------- ---------------- Restaurant operating expenses: Food and beverage 28.4% 27.9% Payroll and benefits 33.0% 32.1% Depreciation and amortization 3.4% 3.7% Other operating expenses 27.4% 25.9% --------------------------------------------- ----------------- ---------------- Total restaurant operating expenses 92.2% 89.6% --------------------------------------------- ----------------- ---------------- Pro forma income from restaurant operations 7.8% 10.4% General and administrative expenses 5.4% 5.2% --------------------------------------------- ----------------- ---------------- Pro forma operating income before special charges and (gain) loss on disposals 2.4% 5.2% ============================================= ================= ================ Page 17 Pro forma income from restaurant operations for Don Pablo's and Hops for the quarter ended March 31, 2002 was 7.8% of sales compared to 10.4% for the corresponding period of 2001. The decrease in restaurant operating margins for the quarter was predominately due to increases in operating expenses generated by (i) declining sales volumes which generated an increase in fixed operating expenses as a percentage of sales and (ii) ongoing advertising strategies designed to build sales volumes over time at Don Pablo's and Hops which increased advertising expenditures to 6.9% and 7.1% of sales at Don Pablo's and Hops, respectively, compared to 5.4% and 4.6%, respectively, for the same periods of 2001. Decreases in operating margins were somewhat offset by (i) decreases in utility costs as a result of the unseasonably warm weather during the first quarter of 2002 and (ii) decreases in costs associated with new manager training at Don Pablo's and Hops. General and Administrative Expenses General and administrative expenses for the quarter ended March 31, 2002 were 5.3% of sales compared to 4.9% of sales for the corresponding period of 2001. The resulting increase in general and administrative expenses as a percent of sales is a result of decreased leverage on fixed overhead costs due to declining sales volumes. Interest and Other Expenses Net interest expense for the quarter ended March 31, 2002 was $8.2 million compared to $9.0 million for the corresponding period of the prior year. Decreased interest expense was primarily due to the divestiture of McCormick & Schmick's, the proceeds of which were used to repay $95.8 million outstanding under the Company's revolving credit facility during the third quarter of 2001. Decreases in interest expense were somewhat offset by unfavorable mark-to-market adjustments under a fixed-to-floating interest rate swap agreement, which was terminated on March 25, 2002, and by increased interest charges 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 "Convertible Preferred Securities"). Expenses related to these securities decreased as a result of the conversion of 86,128 of the securities into 291,115 shares of common stock issued from treasury stock during 2001, coupled with 100,700 additional conversions in the first quarter of 2002. 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. 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. During the quarter ended March 31, 2002, other expenses related primarily to the incurrence of various tax penalties. The decrease in other expenses for the quarter ended March 31, 2002 is primarily related to the non-amortization of goodwill as a result of the Company's first quarter 2002 adoption of SFAS 142 , "Goodwill and Other Intangible Assets". For the quarter ended April 1, 2001, the Company recorded goodwill amortization of $0.9 million. Income tax benefit represents the effective rate of benefit on loss before income taxes for the first quarter of 2002. The tax rate is based on the Company's expected rate for the full fiscal 2002 year. Liquidity and Capital Resources Generally, the Company operates with negative working capital since substantially all restaurant sales are for cash while payment terms on accounts payable typically range from 0 to 45 days. Fluctuations in accounts receivable, inventories, prepaid expenses and other current assets, accounts payable and accrued liabilities typically occur as a result of new restaurant openings and the timing of settlement of liabilities. Decreases in accounts payable during the first quarter occurred as a result of a planned reduction in various outstanding obligations with borrowings from the Company's $75.0 million refinanced credit facility. Decreases in accrued liabilities during the first quarter occurred primarily as a result of the payment of previously deferred payments related to sales, use, property and other taxes. On March 25, 2002, the Company completed a $75.0 million credit facility (the "Credit Facility") to replace its existing credit agreement. The Credit Facility, which matures on March 25, 2005, limits total borrowing capacity at any given time to an amount equal to two and one quarter times the Company's trailing 12 months earnings before interest, income taxes and depreciation and Page 18 amortization as determined for the most recently completed four quarters ("Borrowing Base EBITDA"). The calculation of Borrowing Base EBITDA excludes the 2001 operations of McCormick & Schmick's, gains and losses on the disposal of assets, asset revaluation and other special charges, non-cash rent expense and preopening costs. The agreement provides a $35.0 million revolving credit facility, which may be used for working capital and general corporate purposes, and a $40.0 million term loan facility, which is limited to certain defined purposes, excluding working capital and capital expenditures. In certain circumstances, borrowings under the term loan facility are required to be repaid to the lender and any such repayments are not available to be re-borrowed by the Company. Events generating a required repayment include, among other things, proceeds from asset dispositions, casualty events, tax refunds and excess cash flow, each as defined in the Credit Facility. In addition, the lender has the right to impose certain reserves against the Company's total borrowing availability under the facility, which may limit the Company's availability on both the revolving and term loans. Lender imposed reserves against the Company's total borrowing availability, as of March 31, 2002, were $9.8 million. Irrespective of future borrowings, certain obligations will exist with respect to the agreement, including annual anniversary fees of $1.1 million and an additional fee payable at maturity of $5.1 million. The loan is secured by substantially all of the Company's assets. The terms of the Credit Facility, the Company's 9.75% Senior Notes due 2006 ("Senior Notes") and 11.75% Senior Subordinated Notes due 2009 ("Subordinated Notes"), $30.0 million master equipment lease and $28.4 million Hops sale-leaseback transaction collectively include various provisions which, among other things, require the Company to (i) achieve certain EBITDA targets, (ii) maintain defined net worth and coverage ratios, (iii) maintain defined leverage ratios, (iv) limit the incurrence of certain liens or encumbrances in excess of defined amounts and (v) limit certain payments. In conjunction with the closing of the Credit Facility, the Company terminated its interest rate swap agreement thereby eliminating any aforementioned restrictions contained in that agreement. In addition, in March 2002 the master equipment lease agreement was amended to substantially conform the covenants to the Credit Facility and certain provisions contained in the sale-leaseback agreement were also amended. The Company was in compliance with the various provisions of its agreements at March 31, 2002. At March 31, 2002, $20.5 million of cash borrowings were outstanding under the revolving credit facility and no amounts were outstanding under the term loan facility. Subsequent to March 31, 2002, $8.8 million in restricted cash, which was held as collateral to secure letters of credit which secure the Company's insurance programs, was released and used to reduce the amount outstanding under the revolving credit facility. Under the new credit agreement, revolving loan capacity is used to secure the Company's letters of credit. At March 31, 2002, in addition to the $20.5 million of cash borrowings outstanding under the revolving facility, an additional $11.6 million of the facility was utilized for the Company's letters of credit and $2.9 million of the revolving facility remained unused and available. Principal financing sources in the first quarter of 2002 consisted of (i) proceeds of $12.0 million, net of expenses of $8.5 million, from the revolving credit agreement, (ii) proceeds of $3.7 million related to the McCormick & Schmick's divestiture and (iii) a $1.2 million partial refund of payments to collateralize letters of credit for the Company's self-insurance programs. The primary uses of funds consisted of (i) capital expenditures of $1.1 million, (ii) settlement of the Company's interest rate swap agreement for $1.7 million and (iii) net cash used in operations of $13.9 million which included interest payments of $7.2 million primarily related to the Company's 11.75% senior subordinated notes and operating lease payments of $6.2 million. Interest payments totaling approximately $11.6 million on the Company's senior and subordinated notes are due semi-annually in each June and December. Under the terms of the related note indentures, the Company has an additional 30-day period from the scheduled interest payment dates before an event of default is incurred and the Company utilized these provisions with respect to its 2001 interest payments. These provisions will again be available to the Company, if needed, with respect to the June 2002 interest payments. The Company incurs various capital expenditures related to existing restaurants and restaurant equipment in addition to capital requirements for developing new restaurants. Capital expenditures of $1.1 million for the first quarter of 2002 relate primarily to capital for existing restaurants. Capital expenditures in 2001 were $17.9 million and provided for the opening of three new restaurants, as well as capital for existing restaurants. The Company is also exposed to certain contingent payments. Under the Company's insurance programs, coverage is obtained for significant exposures as well as those risks required to be insured by law or contract. It is the Company's preference to retain a significant portion of certain expected losses related primarily to workers' compensation, physical loss to property, and comprehensive general liability. Provisions for losses estimated under these programs are recorded based on estimates of the aggregate liability for claims Page 19 incurred. For the quarter ended March 31, 2002, claims paid under the Company's self-insurance programs totaled $1.8 million. In addition, at March 31, 2002, the Company was contingently liable for letters of credit aggregating approximately $11.6 million, relating to its insurance programs. Effect of Inflation Management believes that inflation has not had a material effect on earnings during the past several years. Future inflationary increases in the cost of labor, food and other operating costs could adversely affect the Company's restaurant operating margins. In the past, however, the Company generally has been able to modify its operations to offset increases in its operating costs. Various federal and state laws increasing minimum wage rates have been enacted over the past several years. Such legislation, however, has typically frozen the wages of tipped employees at $2.13 per hour if the difference is earned in tip income. Although the Company has experienced slight increases in hourly labor costs in recent years, the effect of increases in minimum wage have been significantly diluted due to the fact that the majority of the Company's hourly employees are tipped and the Company's non-tipped employees have historically earned wages greater than federal and state minimums. As such, the Company's increases in hourly labor costs have not been proportionate to increases in minimum wage rates. Forward-Looking Information Certain information contained in this quarterly report, particularly information regarding the future economic performance and finances, restaurant development plans, capital requirements and objectives of management, is forward looking. In some cases, information regarding certain important factors that could cause actual results to differ materially from any such forward-looking statement appear together with such statement. In addition, the following factors, in addition to other possible factors not listed, could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include competition within the casual dining restaurant industry, which remains intense; changes in economic conditions such as inflation or a recession; consumer perceptions of food safety; weather conditions; changes in consumer tastes; labor and benefit costs; legal claims; the continued ability of the Company to obtain suitable locations and financing for new restaurant development; government monetary and fiscal policies; laws and regulations; and governmental initiatives such as minimum wage rates and taxes. Other factors that may cause actual results to differ from the forward-looking statements contained in this release and that may affect the Company's prospects in general are described in Exhibit 99.1 to the Company's Form 10-Q for the fiscal quarter ended April 2, 2000, and the Company's other filings with the Securities and Exchange Commission. New Accounting Pronouncements In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which requires nonamortization of goodwill and intangible assets that have indefinite useful lives and annual tests of impairments of those assets. The statement also provides specific guidance about how to determine and measure goodwill and intangible asset impairments, and requires additional disclosure of information about goodwill and other intangible assets. The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001 and applied to all goodwill and other intangible assets recognized in financial statements at that date. The Company adopted SFAS 142 effective at the beginning of its fiscal 2002 year. As a result of the adoption of SFAS 142, no amortization expense related to the Company's intangible assets was recorded during the first quarter of 2002 compared to $0.9 million, which was recorded during the first quarter of 2001. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which requires entities to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The statement is effective for fiscal years beginning after June 15, 2002. The Company is assessing the impact of adoption of the statement on its consolidated financial position and results of operations. 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 Page 20 Opinion. For the quarter ended March 31, 2002, the Company did not have any operations that met the necessary criteria to be classified as discontinued operations under the provisions of SFAS 144. The revenues and expenses of Canyon Cafe which is held for sale (including three restaurants closed in 2001), the McCormick & Schmick's brand, which was divested in August 2001, and eight Don Pablo's and two Hops restaurants which were closed in 2001 have been classified as continuing operations in the accompanying consolidated financial statements. As the decision to divest these operations was made prior to the implementation of SFAS 144 and they did not meet the criteria for classification as discontinued operations under the provisions of APB Opinion No. 30, they will continue to be classified within continuing operations under the provisions of SFAS 121. Page 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in interest rates and changes in commodity prices. Historically the Company's exposure to interest rate risk has related primarily to variable U.S.-based rates and foreign-based rate obligations on the Company's revolving credit agreement and a fixed to floating interest rate swap agreement. Interest swap agreements have historically been utilized to manage overall borrowing costs and balance fixed and floating interest rate obligations. As of March 25, 2002 the Company terminated the one such swap agreement it had in place and no further obligation remains after that date. The Company purchases certain commodities such as beef, chicken, flour and cooking oil. Purchases of these commodities are generally based on vendor agreements, which often contain contractual features that limit the price paid by establishing price floors or caps. As commodity price aberrations are generally short-term in nature and have not historically had a significant impact on operating performance, financial instruments are not used to hedge commodity price risk. Page 22 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 10.1 Second Amended and Restated Credit Agreement dated as of March 20, 2002 by and among Avado Brands, Inc., as Borrower, the lenders signatory hereto, Foothill Capital Corporation, as Administrative Agent, and Ableco Finance LLC, as Collateral Agent * 11.1 Computation of earnings per common share 99.1 Safe Harbor Under the Private Securities Litigation Reform Act of 1995** 99.2 Certification of Corporate Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Incorporated by reference to the corresponding exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. ** Incorporated by reference to the corresponding exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended April 2, 2000. (b) Reports on Form 8-K. None Page 23 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Avado Brands, Inc. (Registrant) Date: December 10, 2002 By: /s/ Louis J. Profumo ------------------------ Louis J. Profumo Chief Financial Officer Page 24 CERTIFICATIONS I, Tom E. DuPree, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q/A 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; Date: December 10, 2002 By: /s/ Tom E. DuPree, Jr. -------------------------- Tom E. DuPree, Jr. Chairman and Chief Executive Officer Page 25 CERTIFICATIONS I, Louis J. Profumo, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A 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; Date: December 10, 2002 By: /s/ Louis J. Profumo ------------------------ Louis J. Profumo Chief Financial Officer Page 26