Item 1. BUSINESS
General
TPI Enterprises, Inc. (the "Company") is a New Jersey Corporation, incorporated in 1970. Its principal executive offices are located at 3950 RCA Boulevard, Suite 5001, Palm Beach Gardens, Florida 33410, telephone (407) 691-8800.
Continuing Operations
General
The Company, through TPI Restaurants, Inc. ("Restaurants") is one of the largest restaurant franchisees in the United States. As of March 15, 1995, Restaurants owns and operates 256 restaurants including 187 Shoney's and 69 Captain D's in eleven states, primarily in the southern United States. TPI Restaurants is the largest Shoney's and Captain D's franchisee, operating more than four times as many Shoney's as the next largest Shoney's franchisee and more than three times as many Captain D's as the next largest Captain D's franchisee. The Company operates its Shoney's and Captain D's restaurants under license agreements with Shoney's, Inc., an unaffiliated public company. Approximately 83% and 17% of the Company's revenues from continuing operations in 1994 were from its Shoney's and Captain D's restaurants, respectively. "Shoney's" and "Captain D's" are registered trademarks of Shoney's, Inc. References to the Company include the operations of Restaurants.
Shoney's
Concept and Strategy. Shoney's are full-service, family-style restaurants which are generally open 18 hours per day, seven days per week, serving breakfast, lunch and dinner. Shoney's varied menu includes hamburgers, chicken, steaks, seafood and sandwiches, as well as salad bars and breakfast bars. Shoney's offers a high quality dining experience at attractive prices; the average check per customer at the Company's Shoney's restaurants (based on entrees served at a sampling of restaurants) was approximately $5.84 for the year ending December 25, 1994.
Shoney's has sought to differentiate themselves from similarly priced restaurants by providing a superior dining experience, excellent service and warm hospitality. Customers are greeted upon their arrival by a dining room manager who escorts them to their tables, where they are served by friendly waiters and waitresses. Shoney's restaurants are attractively styled. The Company places major emphasis on the quality, preparation and service of its food, the maintenance and repair of its premises and the appearance and conduct of its employees.
Menu. Shoney's varied menu is designed to appeal to a broad spectrum of customers. Shoney's restaurants offer health- oriented soup and salad bars, which allow customers to prepare fresh salads using over 30 different items, and to choose from home-made soups. Shoney's popular breakfast bars, containing 40 different items, feature a variety of fresh fruits and traditional breakfast selections, including eggs, bacon, sausage, grits, home-fried potatoes, gravy, biscuits, muffins and specially prepared preserves. The breakfast bars have helped secure Shoney's position as a leader in the breakfast segment of the market, enabling Shoney's restaurants to have significant sales during all three daily meal periods. Pie shops are also included in most of the Company's recently constructed Shoney's and are being added to most stores that are remodeled. TPI's Shoney's menu has been enhanced to add customer requested items such as rotisserie chicken, caesar salads, and chicken caesar salads.
The Company's menu strategy for its Shoney's restaurants is to provide distinctive, quality meals that represent good value and appeal to the varied dining preferences of its targeted customers. Shoney's strives to be sensitive
to emerging food trends in order to maximize their sales potential. The restaurants feature separate menus for the three meal periods, and offer a wide variety of selections. Each restaurant offers a feature dessert which changes monthly and home-made soups which change weekly. Shoney's provides a complete dining experience, emphasizing value, speed of service, hospitality and menu diversity to a broad spectrum of value- conscious customers.
In addition to its core menu, the Company has implemented a promotional program at its Shoney's restaurants offering a special feature entree at various times throughout the year. Successful promotional items may be later placed on the Shoney's regular daily menu. The Company also offers a senior citizen's discount and a children's menu at its Shoney's restaurants. The Company (in conjunction with its franchisor) continually modifies its Shoney's restaurant concept and menu in order to adapt to new market trends and to maintain its appeal to its traditional broad spectrum of customers. Management believes that, as a result of its diverse menu, its Shoney's restaurants are less dependent on the commercial success of any particular product than certain of its competitors.
History. Shoney's restaurants have been in operation in the southern United States since 1952 and enjoy a high level of name recognition in that region. Shoney's restaurants (including those operated by Shoney's, Inc. and other franchisees) are now located in 34 states extending as far west as California. As of February 19, 1995, there were 913 Shoney's in operation, 544 of which are franchised.
The Company currently operates 187 Shoney's which is approximately 34% of all franchised Shoney's restaurants and more than four times as many as the next largest Shoney's, Inc. franchisee. The Company's first Shoney's restaurant was opened in 1963. During 1994, the Company opened five newly constructed Shoney's restaurants. The Company closed fifteen underperforming Shoney's and relocated one restaurant in 1994 to a higher traffic location. Since December 25, 1994, no additional restaurants have been constructed as the Company evaluates the results of its test remodel program. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of our progress on the closure of underperforming Shoney's restaurants identified in 1993.
The Company has the exclusive right to develop Shoney's restaurants in more than 80% of the geographic territory of Texas, including the San Antonio, Corpus Christi, Austin, Amarillo, El Paso and Fort Worth metropolitan areas, most of Dallas County and portions of Houston. The Company also has exclusive rights to build Shoney's restaurants in the Orlando, Florida area and portions of Broward and Palm Beach Counties in south Florida. In addition, the Company has agreed to develop a territory in eastern Michigan jointly with Shoney's, Inc. The Company also has exclusive rights to build Shoney's restaurants in Maricopa County, Arizona. See "Reserved Area and License Agreements" for additional discussions of the Company's reserved areas.
Captain D's
Concept and Strategy. Captain D's are fast-service restaurants, specializing in seafood meals, and are generally open 11 hours per day, seven days per week. Captain D's restaurants project a nautical theme, with a distinctive wood or stucco exterior and an inviting interior decor featuring light wood tones, interior plants and brass accessories. The Captain D's concept also provides a take-out service including drive- through window service representing approximately 44% of its 1994 sales at Captain D's. The average check per customer at the Company's Captain D's (based on entrees served at a sampling of restaurants), including take-out, was approximately $4.63 during the year ended December 25, 1994.
The Company's operating strategy with respect to its Captain D's restaurants is to seek to increase same store sales averages through the continued introduction and promotion of distinctive, high quality menu items, and through increased emphasis on customer service, food quality and cost management.
Menu. The Captain D's menu is designed to capitalize on the trend of increased per capita consumption of seafood by serving fried fish fillets, broiled fish, shrimp, clams, stuffed crab in a natural shell and salads. To extend the appeal of its menu to all family members, Captain D's also serves hamburgers, chicken fillets, french fries, hush puppies and country style vegetables. Captain D's also offers broiled entrees to benefit from the increased health consciousness of its customers. The Company, in conjunction with Shoney's, Inc., continually
develops and tests new items for the Captain D's menu and seeks to improve existing products. This year, Captain D's has added new menu items including caesar salads, kabobs, and sandwich combos. The Company's Captain D's have experienced slightly rising prices on its shrimp supplies.
History. Captain D's restaurants have been in operation in the southeastern United States since 1969. As of February 19, 1995, there were 640 Captain D's in operation, 308 of which are franchised. TPI Restaurants operates approximately 22% of the franchised Captain D's restaurants. The Company opened its first Captain D's restaurant in 1973 and presently operates 69 Captain D's in Alabama, Arkansas, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. During 1994, the Company opened three newly constructed Captain D's restaurants and closed one underperforming restaurant.
Other Restaurants
During 1993, the Company closed all of its remaining Hungry Fisherman and Danver's restaurants. The Company recorded the estimated losses related to the disposition of these properties during 1992 and anticipates no future financial impact from these restaurants.
Employees
As of December 25, 1994, the Company had approximately 10,300 employees, including approximately 8,000 restaurant employees, 1,900 store management personnel (including field supervision and management-in-training), 150 headquarters personnel and 250 commissary personnel. Employment in Shoney's restaurants is seasonal and is highest in the second and third quarters.
Competition and Markets
The restaurant business is highly competitive. Key competitive factors in the industry are the quality, variety and value of the food products offered, quality and speed of service, advertising, name identification, restaurant location and attractiveness of facilities. There are a large number of national and regional chain operators, fast food restaurants and other family restaurants that compete directly and indirectly with the Company. Some of these entities have significantly greater financial resources and higher sales volume than does the Company. The restaurant business is often affected by changes in consumer tastes and discretionary spending priorities, national, regional or local economic conditions, demographic trends, consumer confidence in the economy, weather conditions, traffic patterns, employee availability, and the type, number and location of competing restaurants. Any change in these factors could adversely affect the Company. In addition, factors such as inflation and increased food, labor and other employee compensation costs could also adversely affect the Company.
Financial Controls
The Company maintains centralized accounting controls for all of its restaurants through the use of computerized management information systems. Weekly reports of individual restaurant sales, labor costs, food costs and other expenses and daily reports of sales, all with comparisons to prior periods, give the Company's management current operating results by restaurant as well as on a company-wide basis.
A new point of sale system was installed in 34 of the 69 Captain D's during 1994. This system enhances management's ability to evaluate sales, costs, and menu preferences and to quickly make modifications where warranted. As of March, 1995, an additional 17 units were installed with this system. The Company is in the process of testing the system.
The Company does not have significant receivables or inventory and receives trade credit based upon negotiated terms in purchasing food and supplies. Because funds available from cash sales are not needed immediately to pay for food and supplies or to finance receivables or inventory, they may be used for non- current capital expenditures. Therefore, the Company, like many other companies in the restaurant industry, normally operates with a working capital deficit.
Acquisition and Distribution of Food and Supplies
To achieve consistent food quality and control costs, the Company centrally purchases all major food and supply items used in its restaurants. These items, which account for approximately 98.7% of all food and supplies used, are delivered to the Company's commissary centers in Memphis, Tennessee and Charlotte, North Carolina, from which they are redistributed at least twice weekly to its restaurants. The Memphis distribution center contains 80,000 square feet of storage area, and the Charlotte distribution center contains 70,000 square feet of storage area. Since 1990, the range of products provided from the commissary has been significantly expanded from that provided in prior years. This strategy has led to reduced costs and consistent food quality and freshness and should continue to do so as the commissary operations are expanded to serve additional restaurants. The commissary centers are able to control costs by purchasing food and supply items in bulk quantities in anticipation of future needs and price increases.
The Company's ability to maintain consistent quality throughout its chain of restaurants depends in part upon the ability to acquire food products and related items from reliable sources. In situations when supplies may be expected to become unavailable or prices are expected to rise significantly, the Company may enter into purchase contracts or purchase quantities for future use. The Company is currently under one long-term contract for the purchase of food. This contract was entered into due to expected price increases. Adequate alternative sources are believed to be available for those items not covered under contracts or other agreements.
Reserved Area and License Agreements
Shoney's. The Company operates its Shoney's restaurants under a series of reserved area agreements, pursuant to which Shoney's, Inc. has granted the Company the exclusive right to develop Shoney's restaurants within specified geographic areas, and license agreements entered into between the Company and Shoney's, Inc. The existing license agreements for Shoney's generally provide for 20-year terms with 20-year renewal options subject to the satisfaction of certain conditions. The current expiration dates of the Shoney's license agreements, including renewals, range from 2016 to 2033. In 1994, the average royalty fee paid by the Company for its Shoney's restaurants was 1.9% of gross sales compared to 3.5% which new franchisees are currently being required to pay. Shoney's restaurants built by the Company pursuant to its reserved area agreements will be subject to varying royalty rates of up to 3.0% of sales.
The license agreements impose specifications as to the preparation of the products as well as general procedures, such as advertising, maintenance of records, protection of trademarks and provisions for inspection by the franchisor. The license agreements also require the prior approval of Shoney's, Inc. (not to be unreasonably withheld) in order for the Company to close any of its Shoney's restaurants. Termination of the license agreements may be effected for breach of conditions of the agreements, including sale of adulterated products or failure to meet proper standards of quality and sanitation. The Company has never been subjected to any involuntary termination of its license agreements.
Several of the Company's reserved area agreements include expansion schedules requiring the Company to develop a minimum number of stores over a defined period of time. The reserved area agreement for 28 counties in Texas, which covers Fort Worth and much of Dallas County, requires the development of 14 Shoney's restaurants over a nine year period amended during 1995 to end in 1999. To date, the Company has opened four restaurants in the reserved area. The Company's development agreements for expansion of the Shoney's concept in certain parts of Broward and Palm Beach Counties in south Florida, northwest Harris County, Texas, Maricopa County, Arizona, and Michigan were extended during 1995 resulting in new store building requirements to begin in 1996. The current amended agreement requires the development of six restaurants in the Florida area by 2004, six restaurants in the Harris County area by 1999, three stores in the Arizona area by 1999, and eleven stores in the Michigan area by 2001. During 1994, one store was opened in each of the Harris County, Texas area, the Florida area, and the Michigan area. If above schedules are not satisfied, Shoney's, Inc. has the right to terminate the Company's exclusive rights in these areas. The reserved area agreements permit the Company to open as many Shoney's restaurants as it deems desirable within such reserved territories in compliance with the terms of the reserved area
agreement, in addition to those required to be open in accordance with the development schedule.
The Company is a party to other exclusive territory agreements in the areas of its Shoney's operations, including agreements covering over 170 additional counties in Texas; all of Arkansas; over 75 counties in North Carolina; over 30 counties in Mississippi; over 20 counties in Tennessee; and several additional counties in Georgia, South Carolina, Florida and Alabama. With respect to the reserved areas described in the preceding sentence, the Company has no required development schedule and is entitled to open as many Shoney's restaurants in such reserved areas as it deems desirable in compliance with the terms of the reserved area agreements. Shoney's, Inc. may terminate any reserved area agreement upon the default by Restaurants under the terms of any license agreement for operation of a Shoney's restaurant within such reserved area. In addition, the reserved area agreement covering the 28 counties in Texas provides that Shoney's, Inc. may terminate such reserved area agreement upon the expiration of more than 10% of the Company's license agreements for Shoney's restaurants within such reserved area (without replacing those restaurants within two years following such expiration). The Company has never had a reserved area agreement involuntarily terminated by Shoney's, Inc.
Captain D's. The Company's Captain D's restaurants are operated under a master reserved area agreement with individual license agreements with Shoney's, Inc. The Company has the right to develop Captain D's in 124 counties in seven southeastern states (Alabama, Arkansas, Georgia, Mississippi, North Carolina, South Carolina and Tennessee). The Company must open an aggregate of 30 new Captain D's, by July 11, 2011, at a rate of two restaurants per year. The reserved area agreement permits the Company to open as many Captain D's restaurants as it deems desirable within its reserved territories in addition to those required to be opened in accordance with the development schedule. The reserved area agreement provides that Shoney's, Inc. may terminate the reserved area agreement (i) upon the default by Restaurants under the terms of any license agreement for operation of a Captain D's restaurant or (ii) after July 11, 2011, upon the expiration of more than 10% of Restaurants' license agreements for Captain D's (without replacing those restaurants within two years following such expiration).
The Company's existing license agreements for Captain D's generally provide for 20-year terms with two 20-year renewal options subject to the satisfaction of certain conditions. The current expiration dates of the license agreements, including renewals, assuming compliance with the expansion schedule in the Captain D's reserved area agreement, range from 2035 to 2052. In 1994, the average royalty paid to Shoney's, Inc. by the Company's Captain D's was 1.5% of sales.
Advertising and Promotion
The license agreements for the Company's Shoney's and Captain D's restaurants require that the Company pay fees equal to 0.35% and 0.65% of sales, respectively, in addition to its franchise fees, which are put into production funds and used by the franchisor to produce radio and television commercials and printed advertising materials. Shoney's, Inc. uses such commercials in its nationwide advertising and marketing programs. The Company is also required to spend for local marketing on its own behalf and through a cooperative in which other franchisees and Shoney's, Inc. participate. The aggregate amount spent by the Company in 1994 for such advertising, inclusive of the fee paid to the franchisor described above to the production funds, was approximately 3.5% of sales. As part of such local marketing, the Company purchases television and radio spots to air commercials produced by the franchisor. Through such advertising, management believes that Shoney's and Captain D's have a high level of name recognition and positive customer perceptions on key attributes of food quality, service and atmosphere. As part of its marketing program, the Company offers several weekly promotions, including free nights for children, a special senior citizens' menu and "all-you-care-to-eat" seafood buffets at Shoney's restaurants. In addition, the Company has increased its reliance on radio and television advertising and reduced its reliance on coupon and billboard advertising.
Regulation
The Company is subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wages, overtime and other working conditions. Significant numbers of the Company's food service personnel are paid at rates related to the federal and state minimum wage, and accordingly, increases in the minimum wage increase the Company's labor costs.
TPI Transportation, Inc., a wholly-owned subsidiary of Restaurants, obtained a license from the Interstate Commerce Commission to conduct interstate trucking and is subject to applicable federal regulations relating to interstate trucking.
Each Company restaurant is subject to licensing and regulation by state and local health, sanitation, safety, fire and other departments. Difficulties or failures in obtaining or renewing any required licensing or approval could affect the Company's restaurants.
The Company is also subject to various federal, state and local laws regulating the discharge of materials into the environment. The cost of developing restaurants has increased as a result of the Company's compliance with such laws. Such costs relate primarily to the necessity of obtaining more land, landscaping and below surface storm drainage and the cost of more expensive equipment necessary to decrease the amount of effluent emitted into the air and ground.
The Company believes it is in material compliance with the regulations to which it is subject.
Other Activities
Insurex Agency, Inc., a wholly-owned subsidiary of Restaurants, was organized as a Tennessee corporation in 1975 for the purpose of acting as agent for property and casualty, workers' compensation, life and health and other insurance policies for Restaurants, other corporations and the general public. Approximately 98% of the insurance premiums written by Insurex are for insured entities not affiliated with Restaurants.
Insurex Benefits Administrators, Inc., ("IBA") a wholly-owned subsidiary of Restaurants, was organized as a Tennessee corporation in 1989 for the purpose of operating as a third party administrator of medical and dental claims for Restaurants and other corporations. Approximately 91% of IBA's revenues are from other corporations.
TPI Transportation, Inc. and TPI Commissary, Inc. were a part of Restaurants' operations during 1993 and became wholly-owned subsidiaries of Restaurants during 1994.
TPI Insurance Corporation, a wholly-owned subsidiary of the Company, was incorporated in 1993 and is licensed as a pure captive insurance company in the state of Hawaii. Under the terms of its Certificate of Authority, it provides workers' compensation insurance for the Company.
Maxcell Telecom Plus, Inc.'s ("Maxcell"), a wholly-owned subsidiary of the Company, original business plan was to create a cellular telephone network that would operate throughout the southeastern United States. In 1986, Maxcell disposed of substantially all of its remaining interests in the cellular business. Since 1986, Maxcell has had no operations. Beginning in late 1988, and extending to 1989, Maxcell invested approximately $150,000 to participate in lotteries held by the Federal Communication Commission ("FCC") for rights to develop cellular systems for approximately 300 markets. Maxcell continues to have outstanding applications for markets which may be re-lotteried by the FCC. Maxcell does not intend to apply for any new permits from the FCC or to conduct any non-restaurant business other than in connection with the permits for which applications are pending. There can be no assurance that such markets will be re-lotteried or that Maxcell would win any such lottery. See Item 3 "Legal Proceedings".
Discontinued Operations
On February 24, 1989, the Company, through its wholly-owned subsidiary, TPI Entertainment, Inc. ("Entertainment"), acquired leasehold interests and other assets related to the operation of 55 movie theaters from American Multi-Cinema, Inc. ("AMC"), a wholly-owned subsidiary of AMC Entertainment Inc. ("AMCE"), subject to a management agreement and certain other agreements, which subsidiary at that time held 6,275,144 shares of the Company's common stock. On March 4, 1991, Entertainment entered into the General Partnership Agreement of Exhibition Enterprises Partnership (the "Partnership Agreement") with Cinema Enterprises, Inc. ("CENI"), a Missouri corporation and a wholly- owned subsidiary of AMC, forming Exhibition Enterprises Partnership, a New York general partnership (the "Partnership").
Pursuant to the Partnership Agreement, effective April 19, 1991, (a) Entertainment contributed to the Partnership its interest in the assets (subject to certain exclusions) relating to the 57 movie theaters Entertainment then owned and other leasehold interests, subject to obligations under notes, loans and capital leases, (b) the Partnership assumed certain liabilities of Entertainment and (c) CENI contributed to the Partnership 3,800,000 shares (the "Shares") of common stock. Thereafter, the Partnership distributed the shares and cash to Entertainment.
On May 28, 1993, the Company completed the sale of its 50% interest in the Partnership to AMC for $17,500,000. See Item 3 "Legal Proceedings".
Item 2.
Item 2. PROPERTIES
General
The Company is currently in the process of moving its Tennessee operations and its West Palm Beach headquarters facility to a new facility at 3950 RCA Boulevard, Suite 5001, Palm Beach Gardens, Florida. This facility consists of 38,000 square feet under a lease expiring in 2004 and provides for an annual base rental of $331,000. The lease requires the Company to pay certain operating expenses and contains escalation clauses relating to real estate taxes and the like.
The Company's executive offices were located at 777 South Flagler Drive, West Palm Beach, Florida, where it occupied approximately 4,800 square feet of space under a lease expiring in 1999 and providing for an annual base rent of approximately $119,000.
Restaurants' corporate headquarters were located in Memphis, Tennessee in a leased building consisting of approximately 48,000 square feet. The lease agreement, which expires December 1995, provides for an annual rent of $84,000 and requires the Company to pay certain expenses of approximately $95,000 annually. Restaurants operates its commissary centers in leased facilities in Memphis, Tennessee and Charlotte, North Carolina consisting of 80,000 and 70,000 square feet of storage area in each location, respectively.
Restaurants
The majority of the Company's Shoney's restaurants are free standing buildings of approximately 5,000 square feet and 170 seats. The Company opened five new Shoney's in 1994 at an average cost of $1,061,000 for building and equipment and $526,000 for land costs.
Each Captain D's is a free standing building of approximately 2,200 square feet and 70 seats. The Company opened three new Captain D's in 1994 at an average cost of $582,000 for the building and equipment and $182,000 for land costs.
A majority of the operating restaurant properties used by Restaurants are leased from others under noncancelable agreements. The following table sets forth certain information regarding Restaurants' restaurant properties as of March 15, 1995:
Land and Land Leased Land and Building Building Building Type of Restaurant Owned Owned Owned Total ----------------------- --------- ----------- -------- ------
Shoney's . . . . . . . 69 39 79 187 Captain D's . . . . . 29 26 14 69 ---- ---- ---- ---- 98 65 93 256 ==== ==== ==== ====
Most of the restaurant leases provide for 10 to 25 year initial terms, with renewal options by Restaurants for additional periods ranging from 5 to 15 years. The leases generally have rents which are the greater of a fixed minimum amount or a percentage of gross sales ranging from 1.0% to 6.5%. The following table summarizes the expiration dates of the original or current terms of all of Restaurants' leases and the number of related leases currently having renewal options.
Number of Number with Lease Term Expires Leases Renewal Options
1995 . . . . . . . . . . . . 2 2 1996-2000 . . . . . . . . . . . . 69 54 2001-2005 . . . . . . . . . . . . 37 31 2006-2010 . . . . . . . . . . . . 46 45 2011-2014 . . . . . . . . . . . . 4 2
The Company's experience has been that where leases do not contain renewal options and Restaurants desires to continue operating at the same location, negotiating a new lease at competitive terms has been possible. However, prior to negotiating a new lease (or exercising a renewal option ), the Company carefully reviews the site location to determine if it continues to be optimal. The Company has from time to time found alternative locations in the same area to be more desirable. The amount of rent varies considerably from lease to lease. Restaurants' philosophy is to own its restaurant sites in each situation where possible and to utilize lease financing, as necessary, to supplement other financing sources.
Item 3.
Item 3. LEGAL PROCEEDINGS
Maxcell Telecom Plus, Inc., et al., v. McCaw Cellular Communications, Inc., et al.
On November 1, 1993, the Company and its wholly-owned subsidiary, Maxcell Telecom Plus, Inc., filed a complaint in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. The complaint against McCaw Cellular Communications, Inc. ("McCaw"), Charisma Communications Corp. ("Charisma") and various related parties, relates to McCaw's failure to disclose the existence of a side agreement between McCaw and Charisma to share in the net profits from the resale of certain cellular properties which were sold by the Company to McCaw. The Company seeks recision of the sales contract and damages based upon the defendants alleged fraudulent misrepresentation, breach of fiduciary duty, conspiracies and tortious interference with contracts. The Company's attorneys are unable at this time to state the likelihood of a favorable outcome.
Reading Company and James J. Cotter v. TPI Enterprises, Inc.
On March 7, 1995, a civil action captioned James J. Cotter v. TPI Enterprises, Inc., 95 Civ. 1579 was filed in the United States District Court for the Southern District of New York. The plaintiffs allege inter alia breach of contract and seek damages of $1,250,000 plus interest, punitive damages and attorney's fees in connection with the sale to a subsidiary of American Multi- Cinema, Inc. of TPI Entertainment, Inc.'s interest in Exhibition Enterprises Partnership in April 1991. The Company's attorneys are unable at this time to state the likelihood of an unfavorable outcome.
Other Proceedings
The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. It is the opinion of the management of the Company that the outcome of such litigation will not have a material adverse effect on the consolidated financial statements.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the registrant during the fourth quarter of the fiscal year ended December 25, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in its entirety in the Proxy Statement.
The following sets forth certain information regarding the Company's executive officers as of March 15, 1995:
Name Age Positions held with the Company
J. Gary Sharp . 48 President and Chief Executive Officer of TPI Enterprises; President of TPI Restaurants; Director of TPI Enterprises and TPI Restaurants
Frederick W. 44 Executive Vice President, Chief Burford . . . . Financial Officer of TPI Enterprises ; Vice President, Chief Financial Officer and Treasurer of TPI Restaurants; Director of TPI Enterprises and TPI Restaurants
Robert A. 46 Executive Vice President and Kennedy . . . . Secretary of TPI Enterprises; Vice Chairman of the Board and Secretary of TPI Restaurants; Director of TPI Restaurants; Vice President of Human Resources
Haney A. Long, 49 Senior Vice President, Procurement Jr. . . . . . . and Distribution of TPI Restaurants; Director of TPI Restaurants
J. Gary Sharp was an employee of Shoney's, Inc. from 1969 through 1986 holding positions ranging from store manager to group Vice President of all of Shoney's, Inc.'s operations. He left Shoney's, Inc. in 1986 to own and operate franchises in Orlando, Florida and was President of Sharp Concepts, Inc. from 1985 through September 1989. Mr. Sharp has served as President, Chief Operating Officer and a Director of TPI Restaurants since 1989. Mr. Sharp was elected a Director of TPI Enterprises in April 1992. He was named Chief Executive Officer of TPI Enterprises in March 1993.
Frederick W. Burford joined TPI Restaurants in November 1991, after 14 years in top management positions at The Promus Companies (formerly Holiday Corporation). Mr. Burford was a Corporate Vice President and served in capacities as both Treasurer and Controller at the Promus Companies. Mr. Burford was elected Vice President, Chief Financial Officer, Treasurer and a Director of TPI Restaurants in November 1991. He was named Executive Vice President, Chief Financial Officer, and a Director of TPI Enterprises, Inc. in March 1993.
Robert A. Kennedy joined TPI Enterprises in February 1977 as a Vice President and was elected Executive Vice President in February 1985 and Secretary in September 1988. Mr. Kennedy was a Director of TPI Enterprises between August 1984 and March 1993. Mr. Kennedy was elected Vice Chairman of the Board and Assistant Secretary of TPI Restaurants in 1989, Secretary in 1991, a Director in 1988, and Vice President of Human Resources in 1995.
Haney A. Long, Jr., joined TPI Restaurants in November, 1989 as Senior Vice President of Procurement and Distribution. Prior to joining the Company, Mr. Long served as Senior Vice President of Procurement at Rich SeaPak Corporation between 1979 and 1989. He also served as Executive Director of Commissary Operations for Shoney's, Inc., between 1975 and 1977. He was elected Director of TPI Restaurants in June 1993.
Stephen R. Cohen announced his retirement from the Company and as Chairman of the Board of TPI Enterprises effective January 31, 1995. He continues to serve as President and Director of Maxcell.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common shares are traded in the National Market System of the over-the-counter market (NASDAQ symbol: TPIE). As of March 15, 1995, there were 2,118 shareholders of record of the Company's common shares. The following table sets forth, for the periods indicated, the high and low sales prices, as reported by the National Quotation Bureau, Incorporated. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The Company has never paid any dividends on its common shares. The Company currently intends to retain all earnings, if any, to support the development and growth of the Company's restaurant business. Accordingly, the Company does not anticipate that any cash dividends will be declared on its common shares for the foreseeable future. The indentures covering the 8 1/4% Convertible Subordinated Debentures and the 5% Convertible Senior Subordinated Debentures prohibit the payment of cash dividends while the debentures remain outstanding. The Company's credit facility also limits the payment of dividends by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
1994 1993 1992 -------------------- -------------------- --------------------- High Low High Low High Low -------------------- -------------------- --------------------- First Quarter $10 7/8 $6 7/8 $10 7/8 $ 8 1/8 $7 3/8 $5 3/4
Second Quarter 9 3/16 5 3/4 10 1/2 7 1/2 7 1/8 5 7/8
Third Quarter 7 9/16 6 12 9 3/8 6 7/8 5 1/8
Fourth Quarter 6 1/2 3 1/2 12 1/2 9 3/4 8 7/8 6 1/4
Item 6.
Item 6. SELECTED FINANCIAL DATA
The Company recognized a $5,273,000 gain, net of tax, in 1993 following the sale of its remaining 20interest in Exhibition Enterprises Partnership (the "Partnership"). During 1992, the Company recorded an extraordinary loss, net of tax, of $11,949,000 in connection with an early extinguishment of debt. (See Note 6 to the Consolidated Financial Statements.) During 1990, the Company recognized an after-tax gain of approximately $11,600,000 from the sale of a cellular telephone construction permit by its wholly-owned subsidiary Maxcell Telecom Plus, Inc. Discontinued operations include the results of TPI Entertainment, Inc. ("Entertainment") since February 24, 1989. Discontinued operations also include the gains or losses resulting from the disposal of the discontinued operations of Entertainment, as well as the Company's telecommunication business discontinued in 1986. See Note 3 to the Consolidated Financial Statements for a discussion of the disposal of discontinued operations including the sale of Entertainment's interest in its movie theater operations.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1994 Compared to 1993
Revenues Revenues decreased .7% or $2.0 million to $287.4 million due primarily to softness in same store sales at the Shoney's concept. New restaurants accounted for $7.3 million of 1994 revenues, while comparable store sales declined $9.3 million, or 4.3%, in the Shoney's concept and increased $2.6 million or 6.0% in the Captain D's concept. The first twelve weeks of a new restaurants' operations are excluded from the comparable store sales computation. Revenues for 1993 include $19.9 million relating primarily to 27 underperforming units, which were either closed subsequent to the second quarter of 1993 or are scheduled to be closed in accordance with the Company's restructuring plan adopted in 1993. Revenues and expenses related to units provided for in the reserve for restructuring have been excluded from the 1994 statement of operations. In fiscal 1995, the Company's comparable store sales have declined 5.5 % in the Shoney's concept and .9% in the Captain D's concept through March 19, 1995.
Costs and Expenses Cost of sales includes food, supplies and uniforms, restaurant labor and benefits, restaurant depreciation and amortization, and other restaurant operating expenses. A summary of cost of sales as a percentage of revenues for 1994 and 1993 is shown below.
1994 1993
Food, supplies and uniforms. . . . . . . . . . . . . . . . 35.8% 35.2%
Restaurant labor and benefits. . . . . . . . . . . . . . . 30.5% 31.2%
Restaurant depreciation and amortization . . . . . . . . . 4.9% 4.7%
Other restaurant operating expenses. . . . . . . . . . . . 18.3% 17.7%
89.5% 88.8%
The Company's food costs suffered from price increases in several high volume commodities during 1994, including shrimp and cooking oil. These increases, along with relatively fixed costs for supplies and uniforms, resulted in increased food costs as a percentage of revenues. The decrease in labor costs during the current year at the restaurants is due to a decline in workers' compensation. This decline in workers' compensation expense is primarily due to a $4.5 million adjustment to workers' compensation in the fourth quarter of 1993 to increase the Company's reserves to better reflect the likely outcome of its liabilities. Restaurant depreciation and amortization increased in relation to the prior year due to the full year of depreciation expense related to the 18 newly constructed units during 1993. Other restaurant operating expenses increased as a percentage of revenues primarily due to increased repairs and maintenance expenses along with increased advertising costs. The increase in repairs and maintenance expenses in relation to 1993 is primarily due to the increased aging of the buildings, cleaning and repair costs of the carpets installed in various store locations during 1993, and increased restocking of smallwares. The increase in advertising is primarily due to promotional outdoor advertising begun during 1994.
General and administrative expenses decreased $4.7 million in relation to 1993 due to decreased workers' compensation and general liability expense for the Company and decreased salary expense associated with a reduction in corporate staff along with a decrease in executive compensation. The decrease in workers' compensation and general liability expense is primarily due to an increase in the reserves at the end of 1993
to better reflect the likely outcome of its liabilities.
Operating income rose 84.8% or $2.4 million excluding the restructuring charges in 1994 and 1993. This increase was primarily driven by a 16.5% decrease in general and administrative expenses which was somewhat offset by slightly higher food costs and other restaurant operating expenses.
Other Income and Expenses Interest income decreased $.26 million primarily due to a reduction in the investment balance held during the current year. Interest expense declined $.3 million primarily due to a lower weighted average interest rate during 1994 as compared to 1993.
Restructuring Charges
The Company adopted a restructuring plan at the end of the fourth quarter of 1993 which included closing or relocating 31 of its restaurants by the end of 1994, not exercising options to renew leases with respect to an additional 19 of its restaurants upon expiration of the current lease terms, and the restructuring of divisional management as well as consolidation of the Company's two corporate offices. With respect to the restaurants to be closed or relocated, the Company recorded $19.8 million of restructuring charges in 1993 consisting primarily of the write-off of assets and the accrual of lease and other expenses, net of projected sales proceeds and sublease income. As of December 25, 1994, the Company has closed 22 restaurants with plans to close an additional 4 restaurants during the first half of 1995. During the fourth quarter of 1994, management determined that improved operations at 5 of the restaurants, previously included in the restructure plan, indicated the locations should not be closed. Accordingly, the Company reduced its reserve by approximately $2.5 million related to these 5 locations. During 1994, the reserve was also charged $3.5 million for expenditures and asset write-offs related to the other 26 units.
With respect to the 19 restaurants projected to be closed no later than the expiration of their current lease terms, the Company determined that the recoverability of the assets had been permanently impaired, and accordingly, recorded a charge of $4.5 million primarily for the write-down of assets at the end of 1993. During 1994, three of these units were closed prior to or upon the expiration of their current lease terms. The reserve was charged approximately $.7 million for the write-down of assets.
With respect to the Company's restructuring of its divisional management and consolidation of its corporate offices, the Company recorded approximately $1.8 million for the cost of moving the Memphis office, $1.3 million for the write-off of assets and accrual of remaining lease obligations at the Company's present facilities and $1.2 million for severance costs and other costs relating to the restructuring of divisional and corporate overhead. During 1994, the Company paid out approximately $1.1 million related to the restructure of which $.3 million was for severance.
In addition to the amounts paid, management determined that an additional $1.2 million should be provided for the write-off of assets at its Memphis location. The Company expects to pay the majority of the remaining relocation obligations during 1995 as the consolidation of the corporate offices is completed. In addition to these reserves, the Company also recorded approximately $6.5 million in the prior year related to units that were closed prior to 1993 and for the sale of vacant properties. During 1994, the reserve had charges of approximately $1.7 million resulting from expenditures and asset write-offs and an increase of $.3 million related to changes in original estimates for the costs of disposal.
1993 Compared to 1992
Revenues Revenues for 1993 increased to $289.4 million, 4.3% over the $277.4 million earned in 1992. New restaurants accounted for $30.4 million of 1993 revenues, while comparable store sales declined $7.2 million, or 3.3%, in the Shoney's concept and remained flat in the Captain D's concept. The first twelve weeks of new
restaurants' operations are excluded from the comparable store sales computation. Revenues from closed stores, primarily Hungry Fisherman and Danver's restaurants, which are excluded from 1993 sales, totalled $11.2 million in 1992.
Costs and Expenses Cost of sales includes food, supplies and uniforms, restaurant labor and benefits, restaurant depreciation and amortization, and other restaurant operating expenses. A summary of cost of sales as a percentage of revenues for 1993 and 1992 is shown below.
1994 1993
Food, supplies and uniforms. . . . . . . . . . . . . . . . 35.2% 34.6%
Restaurant labor and benefits. . . . . . . . . . . . . . . 31.2% 29.2%
Restaurant depreciation and amortization . . . . . . . . . 4.7% 4.1%
Other restaurant operating expenses. . . . . . . . . . . . 17.7% 16.2%
88.8% 84.1%
The Company's food costs suffered from significant price increases in several high volume commodities during 1993, including pork, eggs and shrimp. These increases were partially offset by a decrease in white fish prices, which contributed to a decrease in food costs as a percentage of revenues in the Company's Captain D's restaurants. Most restaurant operating expenses, including restaurant labor, restaurant depreciation and amortization, repairs and maintenance, utilities and advertising, are relatively fixed, and accordingly, a decrease in same store sales results in an unfavorable margin impact. Management completed anextensive review of the Company's exposure resulting from its self insurance program for workers' compensation and general liability in 1993. The review, which was based on improved data available to the Company relating to the trend in claims development, indicated that the Company's reserves for retained losses were near the lower end of the expected range of possible losses. Management determined it would be appropriate to increase the Company's reserves to better reflect the likely outcome of its liability within the possible range of losses. Accordingly, as of the end of the fourth quarter of 1993, workers' compensation insurance reserves were increased by charging $4.5 million to restaurant labor and benefits and $0.7 million to general and administrative expenses. Also, a charge of $1.8 million was made to other restaurant operating expenses and $0.6 million to the gain on sale of discontinued operations (theater operations) to increase the general liability insurance reserves.
General and administrative expenses declined as a percentage of revenues from 10.2% in 1992 to 9.9% in 1993. The Company experienced savings during 1993 from the restructuring and relocation of TPI Enterprises, Inc.'s headquarters in the latter half of 1992. In addition to the workers' compensation reserve adjustment described above, the Company recorded charges of $1.2 million following the termination and settlement of its retirement plan in December 1993 and $0.9 million resulting from the reduction in the discount rate used to compute the Company's deferred compensation obligations. General and administrative expenses for 1992 include a $1.1 million charge to pension expense resulting from the early retirement of a senior executive officer.
Restructuring Charges The Company adopted a restructuring plan as of the end of the fourth quarter of 1993 which included closing or relocating 31 of its restaurants by the end of 1994, not exercising options to renew leases with respect to an additional 19 of its restaurants upon expiration of the current lease terms and restructuring divisional management and consolidating the Company's two corporate offices. After an in-depth evaluation of the Company's Shoney's and Captain D's restaurants, management identified 31 restaurants, which had not
performed well and appeared to have limited potential for improvement in the future, to be closed or relocated. Included in these restaurants were five Shoney's and four Captain D's closed in December 1993. With respect to the restaurants closed or to be closed, the Company recorded $19.8 million of restructuring charges consisting primarily of the write-off of assets and the accrual of lease and other expenses, net of projected sales proceeds and sublease income. With respect to the 19 restaurants projected to be closed no later than the expiration of their current lease terms, the Company determined that the recoverability of the assets has been permanently impaired, and accordingly, recorded a charge of $4.5 million primarily for the write-down of assets. The Company is continuing its efforts to restructure and downsize corporate overhead by consolidating its Memphis, Tennessee corporate office with its headquarters office in West Palm Beach, Florida. The Company recorded approximately $1.8 million for the cost of moving the Memphis office and $1.3 million for the write-off of assets and accrual of remaining lease obligations at the Company's present facilities. In addition, the Company accrued $1.2 million for severance costs and other costs relating to the restructuring of divisional and corporate overhead. Further, the Company wrote down vacant properties to net realizable value and revised its estimated loss with respect to units closed prior to 1993 by increasing its restructuring charge and related reserve by $6.5 million.
The Company's restructuring charges of $3.6 million in 1992 consisted of a $4.0 million provision forclosed units relating primarily to the closings of the remaining Hungry Fisherman restaurants, and a $0.4 million reduction in previously accrued reserves relating to the 1991 charge of $2.8 million for restructuring the Company's operations and moving its headquarters.
Other Income and Expenses Interest income decreased $3.0 million, primarily due to interest earned in 1992 on income tax refunds. During the third quarter of 1992, the Company refinanced Restaurants' 14 1/4% Senior Subordinated Notes. Primarily as a result of this debt restructuring, and the investment by the Airlie Group, L.P., and other related parties (the "Airlie Group"), in March 1993, interest expense decreased $3.8 million in 1993 compared to 1992.
Discontinued Operations The Company realized a $5.3 million gain, net of $2.7 million of income tax expense, on the sale of its investment in Exhibition Enterprises Partnership in 1993.
Extraordinary Item and Cumulative Effect of Accounting Changes The Company recorded a charge to income of $11.9 million during 1992 in connection with the refinancing of Restaurants' 14 1/4% Senior Subordinated Notes. The Company also recorded charges of $2.8 million during 1992 relating to the implementation of Financial Accounting Standard No. 112, "Employers' Accounting for Postemployment Benefits" and Financial Accounting Standard No. 109, "Accounting for Income Taxes".
LIQUIDITY AND CAPITAL RESOURCES
Working capital declined from a deficiency of $10.8 million in 1993 to a deficiency of $18.0 million in 1994 due primarily to the utilization of cash on hand for capital expenditures in the Company's restaurant operations and an increase in current liabilities due to an increase in the current portion of long term debt. Approximately 88% of the Company's restaurant sales are for cash and the remainder are for credit card receivables which are generally collected within 3 days. Since the Company's payables, including amounts forinventory and other operating expenses, are paid over a longer period of time, it is not unusual for the Company, like many others in the restaurant industry, to operate with a working capital deficit.
Net cash provided by operating activities decreased from $19.6 million in 1993 to $12.7 million in 1994. A significant factor contributing to this net decrease is a decrease in accounts payable trade of $4.3 million in 1994 compared to an increase of $4.7 million in 1993 due to significant amounts relating to construction payables at the end of 1993. Another factor relating to this change is an increase of $3.4 million in accrued expenses and current liabilities in 1994 compared to an increase of $7.4 million in 1993. Also, inventories
increased by $.5 million over 1993, largely due to increased purchases of fish, compared to a net decrease in inventories of $3.5 million in 1993. The decrease in the restructuring reserve in 1994 includes $2.3 million in payments relating to the payment of lease obligations and related expenses for closed units and $1.1 million in payments relating to the consolidation of the corporate offices and restructure of divisional and corporate overhead. As of December 25, 1994, restructuring charges included in accrued expenses and other current liabilities includes $3.7 million relating to the consolidation of the corporate offices and approximately $2.0 million relating to the ongoing costs of closed restaurants expected to be expended over the next year. The above decreases in cash were partially offset by the receipt of a federal income tax refund of $2.5 million in 1994.
Net cash used in investing activities decreased $28.8 million from 1993. The decrease in cash used is primarily the result of the Company building fewer restaurants in 1994 compared to 1993. The Company has invested $19.4 million in capital expenditures in 1994 compared to $48.5 million in 1993. Of the $19.4 million invested in the current year, $8.2 million was for the acquisition of sites and construction of five new Shoney's restaurants and three new Captain D's, $3.3 million for the remodeling of six Shoney's and 22 Captain D's, $3.6 million for maintenance type capital expenditures, $.8 million for sites to be constructed in coming years, and $.8 million relating to the new point of sale system. The remaining $2.7 million relates primarily to the purchase of commissary equipment and to the relocation of the Company's headquarters to Florida. Proceeds in 1994 include $2.7 million from the disposal of restaurants, $1.9 million from the sale of excess property and other property and equipment, and $.5 million from a sale leaseback.
The Company has various reserved areas with minimum development requirements. Aggregate commitments beyond 1994 require 35 restaurants to be constructed in the Company's reserved areas in Phoenix, West Palm Beach, Michigan, Houston, and certain other counties in Texas prior to October 6, 2004. The Company has delayed building any more Shoney's restaurants during 1995 as Shoney's, Inc. evaluates the Shoney's concept and how best to update it to meet customer preferences.
The Company has the right to develop Captain D's restaurants in 124 counties in seven Southeastern states (Alabama, Arkansas, Georgia, Mississippi, North Carolina, South Carolina and Tennessee). To avoid termination of the reserved area agreement, the Company is required to open 30 additional Captain D's by July 11, 2011. The Company anticipates investing $1.0 million on remodels and incurring maintenance and other capital expenditures of less than $3.5 million in 1995. The Company does not intend to build any Captain D's restaurants during 1995.
Financing activities provided $2.3 million in 1994 compared to $6.5 million in the prior year. The Company used proceeds of $3.4 million under its credit facility and proceeds of $.6 million from the issuance of stock pursuant to employee stock plans primarily to fund capital expenditures during 1994. Other long-term debt payments during 1994 related to payments on capital lease obligations and other long-term debt. In 1993, the Airlie Group L.P. and certain related parties made an investment in the Company which resulted in net proceeds of $29.1 million from the issuance of $15 million of convertible debentures and $15 million of common stock and warrants. These proceeds were used to reduce borrowings under the Company's credit facility and pay other long-term debt.
The Credit Facility which previously consisted of a $50,000,000 Revolving Credit Facility was amended as of December 23, 1994. This amendment and waiver restricted the total borrowings available under the facility to $40,000,000 and waived compliance with certain financial ratios through January 31, 1995. The Credit Facility was amended and restated as of January 31, 1995. The amendment to the facility limits borrowings to $40,000,000, revises certain financial covenant ratios and requires the collateralization of additional properties. The Credit Facility matures on June 3, 1996, unless extended by the Banks. The Credit Facility continues to bear interest at either a defined base rate or a rate based on the London Interbank Offered Rate. The amount available for borrowing under the Credit Facility is reduced by any outstanding letters of credit. The Company pays a fee of 2.0% on outstanding letters of credit and a commitment fee of .5% on the average daily unused Credit Facility. The terms of the Second Amended and Restated Credit Agreement require that
the fee paid on borrowings and letters of credit be increased by .50% effective January 31, 1995.
Borrowings under the Credit Facility are secured by all shares of the capital stock of Restaurants, whenever issued, intercompany debt of Restaurants owed to the Company and ground lease mortgages with respect to certain premises in which the land is currently leased but the building located thereon is owned by Restaurants. In addition, the banks have exercised their right to obtain, as security, assignments of other leases and/or mortgages on real property currently owned or subsequently acquired. However, the Company has rights to finance certain of these properties and obtain a release of the collateral under certain conditions. The Company has also agreed to reduce the outstanding Credit Facility whereby any amounts received by Restaurants in excess of $5 million from any asset sales, mortgage financings or sale/leasebacks will be applied 50% for general corporate purposes and 50% to the paydown of the revolving credit facility and commitment. The appropriate release of collateral will be made at the time of paydown. Restaurants may repay intercompany borrowings but may not transfer amounts to the Company except for the payment of a management fee not to exceed $2.5 million in each fiscal year and a dividend in an amount sufficient to pay interest on the Company's 5% Convertible Senior Subordinated Debentures and 8 1/4% Convertible Subordinated Debentures, in each case provided that no defaults under the Credit Facility exist either immediately before or after the transfer. Restaurants must also maintain certain financial ratios. At December 25, 1994, $22.4 million was outstanding on the Credit Facility and letters of credit in the amount of $11.0 million were outstanding, resulting in a remaining balance available to borrow of $6.6 million under the Agreement, as revised.
The Company has outstanding $15 million of 5% Convertible Senior Subordinated Debentures, due 2003, convertible into common stock at $11 per share (the "Senior Debentures"). The Senior Debenture holders may require the Company to repurchase the Senior Debentures, in whole or in part, in certain circumstances involving a change in control of the Company. Restaurants has guaranteed the repayment of the Senior Debentures on a subordinated basis.
In addition, the Company has outstanding $51.6 million of 8 1/4% Convertible Subordinated Debentures (the "Debentures"). The Debentures are convertible at the option of the holder into common shares of the Company at any time prior to maturity, unless previously redeemed or repurchased, at a conversion price of $6.50 per share, subject to adjustment in certain events. The Debentures mature on July 15, 2002 and are redeemable, in whole or in part, at the option of the Company at any time on or after July 15, 1995, initially at 105.775% of their principal amount and declining to 100% of their principal amount on July 15, 2002, together with accrued and unpaid interest. The Debenture holders may also require the Company to repurchase the Debentures, in whole or in part, in certain circumstances involving a change in control of the Company as defined in the indenture covering the Debentures (the "Indenture"). However, a change in control, as defined in the Indenture, will create an event of default under the Credit Facility and, as a result, any repurchase would, absent a waiver, be blocked by the subordination provisions of the Indenture until the Credit Facility (and any other senior indebtedness of the Company and senior indebtedness of Restaurants with respect to which there is a payment default) has been repaid in full. The Debentures are unconditionally guaranteed (the "Guarantee") on a subordinated basis by Restaurants. The Debentures and the Guarantee are subordinated to all existing and future senior indebtedness, as defined in the Indenture, of the Company. The Indenture does not prohibit or limit the ability of the Company or any of its subsidiaries to incur additional indebtedness, including that which will rank senior to the Debentures.
Management believes sufficient funds will be available from cash on hand, cash flow from operations and borrowings under the Credit Facility to meet its debt service requirements, as well as its capital expenditure and working capital requirements in the foreseeable future. The Company believes that there are several alternatives available when the current Credit Facility matures, including a new Credit Facility, sale/leaseback financing, and/or securitization.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of TPI Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of TPI Enterprises, Inc., and its subsidiaries as of December 25, 1994 and December 26, 1993, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 25, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in al material respects, the financial position of TPI Enterprises, Inc. and its subsidiaries as of December 25, 1994 and December 26, 1993, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 25, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1992 the Company changed its method of accounting for income taxes and postemployment benefits to conform with Statement of Financial Accounting Standards Nos. 109 and 112. The Company reflected the cumulative effect of these changes in 1992.
/s/ Deloitte & Touche LLP
March 10, 1995 Memphis, Tennessee
TPI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
See notes to consolidated financial statements.
TPI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to consolidated financial statements.
TPI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
TPI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
See notes to consolidated financial statements.
TPI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
TPI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
See notes to consolidated financial statements.
See notes to consolidated financial statements.
TPI ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of TPI Enterprises, Inc. (the "Company") and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. During 1993, the Company changed its fiscal year from a calendar year to a 52-53 week period, ending on the last Sunday in December in order to be consistent with the year end of its wholly-owned subsidiary, TPI Restaurants, Inc., ("Restaurants"). The Company's quarters end as of the end of the 16th, 28th, and 40th weeks of each fiscal year.
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, certificates of deposit and short-term marketable securities with maturities of 90 days or less when purchased, as cash and cash equivalents.
Restaurants utilizes a cash management system under which cash overdrafts exist in the book balances of its primary disbursing accounts. These overdrafts represent the uncleared checks in the disbursing accounts. The cash amounts presented in the consolidated financial statements represent balances on deposit at other locations prior to their transfer to the primary disbursing accounts. Uncleared checks of $7,229,000 and $7,393,000 are included in accounts payable at December 25, 1994 and December 26, 1993, respectively.
Inventories
Inventories, consisting of food items, beverages and supplies, are stated at the lower of weighted average cost (which approximates first-in, first-out) or market.
Pre-opening Costs
Direct costs incidental to the opening of new restaurants are capitalized and amortized over the restaurants' first year of operations.
Depreciation and Amortization
Depreciation and amortization of property and equipment is provided on the straight-line method over the estimated useful lives of the assets or, in the case of leasehold improvements and certain property under capital leases, over the lesser of the useful life or the lease term.
Goodwill related to the acquisition of Restaurants is amortized on a straight-line basis over a thirty- six year period. The costs of franchise license agreements which govern the individual Shoney's and Captain D's restaurants and reserved area agreements are amortized on a straight-line basis over the lives of the related franchise license agreements, up to 40 years.
Postemployment Benefits
The Company recognizes the cost of postemployment benefits on an accrual basis in accordance with Financial Accounting Standard No. 112, "Employers Accounting for Postemployment Benefits." The adoption of this statement during the year ended December 31, 1992 resulted in an increase of $102,000 in 1992 income from continuing operations. The cumulative effect on years prior to January 1, 1992 of $716,000, or $.04 per share, is included in 1992 net income.
Income Taxes
Effective January 1, 1992, the Company adopted Financial Accounting Standard No. 109, "Accounting for Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Prior to 1992, income taxes were accounted for under Accounting Principles Board Opinion No. 11.
The effect of adopting Statement 109 on 1992 net income (loss) was a decrease of $697,000, or $.04 per share. This effect consists of an increase of $898,000, or $.05 per share, relating to continuing operations, an increase of $500,000, or $.03 per share, relating to the extraordinary item and $27,000 relating to the cumulative effect of adopting Statement 112. The cumulative effect of the change on years prior to January 1, 1992 of $2,122,000, or $.12 per share, decreased 1992 net income.
Income (Loss) Per Share
Primary earnings per share amounts are computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding during the period. Reported primary per share amounts include common equivalents relating to dilutive stock options of 80,000, 514,000 and 165,000 shares in 1994, 1993 and 1992, respectively.
Fully diluted earnings per share amounts are similarly computed, but also include the effect, when dilutive, of the Company's 8 1/4% Convertible Subordinated Debentures issued in July and August of 1992 and 5% Convertible Senior Subordinated Debentures issued March 1993, after the elimination of the related interest requirements, net of income taxes. The Company's convertible debentures are excluded from the fiscal 1994 and 1993 computation due to their antidilutive effect during that period. The inclusion of the Company's dilutive outstanding options in the calculation, determined based on market values at the end of each period, as applicable, is either antidilutive or does not result in a material dilution of earnings per share for 1994, 1993 and 1992.
Reclassification
Certain amounts in prior years have been reclassified to conform to the 1994 presentation.
NOTE 2 - RESTRUCTURING CHARGES
The Company adopted a restructuring plan at the end of the fourth quarter of 1993 which included closing or relocating 31 of its restaurants by the end of 1994, not exercising options to renew leases with respect to an additional 19 of its restaurants upon expiration of the current lease terms, and the restructuring of divisional management as well as consolidating the Company's two corporate offices. With respect to the restaurants to be closed or relocated, the Company recorded $19,800,000 of restructuring charges in 1993 consisting primarily of the write-off of assets and the accrual of lease and other expenses, net of projected sales proceeds and sublease income. As of December 25, 1994, the Company has closed 22 restaurants with plans to close an additional 4 restaurants during the first half of 1995. During the fourth quarter of 1994, management determined that improved operations at 5 of the restaurants, previously included in the restructure plan, indicated the locations should not be closed. Accordingly, the Company reduced its reserve by approximately $2,500,000 related to these 5 locations. During 1994, the reserve was also charged $3,500,000 for expenditures and asset write-offs related to the other 26 units.
With respect to the 19 restaurants projected to be closed no later than the expiration of their current lease terms, the Company determined that the recoverability of the assets had been permanently impaired, and accordingly, recorded a charge of $4,500,000 primarily for the write-down of assets at the end of 1993. During 1994, three of these units were closed prior to or upon the expiration of their current lease terms. The reserve was charged approximately $700,000 for the write-down of assets.
With respect to the Company's restructuring of its divisional management and consolidation of its corporate offices, the Company recorded approximately $1,800,000 for the cost of moving the Memphis office, $1,300,000 for the write-off of assets and accrual of remaining lease obligations at the Company's present facilities and $1,200,000 for severance costs and other costs relating to the restructuring of divisional and corporate overhead. Severance costs included amounts to be paid to approximately 80 employees at the divisional level and at the Memphis corporate office whose employment would be terminated as a result of the restructuring of its divisional management and consolidation of its corporate offices. During 1994, the Company paid out approximately $1,100,000 related to the restructure of which $300,000 was for severance.
In addition to the amounts paid, management determined that an additional $1,200,000 should be provided for the write-off of assets at its Memphis location. The Company expects to pay the majority of the remaining relocation obligations during 1995 as the consolidation of the corporate offices is completed. In addition to these reserves, the Company also recorded approximately $6,500,000 in the prior year related to units that were closed prior to 1993 and for the sale of vacant properties. During 1994, the reserve had charges of approximately $1,700,000 resulting from expenditures and asset write-offs and an increase of $300,000 related to changes in original estimates for the costs of disposal.
NOTE 3 - DISCONTINUED OPERATIONS
TPI Entertainment, Inc.
During the period from March 1991 through May 1993, TPI Entertainment, Inc. ("Entertainment"), a wholly- owned subsidiary of the Company, owned a 50% interest in a partnership, Exhibition Enterprises Partnership, (the "Partnership"), with Cinema Enterprises, Inc., a wholly-owned subsidiary of American Multi-Cinema, Inc. ("AMC"). At the end of 1991, the Company resolved to offer for sale its 50% interest in the Partnership. Accordingly, all theater operations are classified as discontinued operations in the financial statements. The Company's proportionate share of the Partnership loss was not recorded in 1993 or 1992, as the Company anticipated proceeds from the sale of its interest in the Partnership would exceed its carrying value.
On May 28, 1993, the Company completed the sale of its 50% interest in the Partnership to AMC for $17,500,000. As a result of this transaction, the Company recognized a gain of $5,273,000, net of income taxes of $2,717,000 for the year ended December 26, 1993.
The following condensed balance sheet reflects the financial position of the Partnership as of May 28, 1993, the date of the completion of the sale of the Company's interest in the Partnership.
Results of theater operations are as follows:
The Company received an administrative fee of 1/4% of theater revenue from the theater operations which was deducted from the carrying value of the Partnership. Such fees were $230,000 and $370,000 for 1993 and 1992, respectively.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Property and equipment with a net book value of approximately $22,233,000 and $22,681,000 were pledged as collateral for the Company's debt facilities as of December 25, 1994 and December 26, 1993, respectively.
Depreciation and amortization are calculated using the straight-line method and are based on the estimated useful lives of the assets as follows: buildings, 30 years; equipment and furnishings, 3-15 years; and leasehold improvements, primarily representing buildings constructed on leased property, the lesser of the term of the lease or 30 years. Depreciation and amortization of property and equipment, exclusive of depreciation and amortization included in discontinued operations, totalled approximately $14,985,000, $14,104,000 and $12,880,000 during 1994, 1993 and 1992, respectively. In 1994, 1993 and 1992, approximately $1,643,000, $1,716,000 and $1,843,000, respectively, related to capitalized leases. Property and equipment includes capitalized interest on construction of $425,000, $374,000 and $172,000 at December 25, 1994, December 26, 1993 and December 31, 1992, respectively.
NOTE 5 - OTHER INTANGIBLE ASSETS
Other intangible assets consists of the following:
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
Scheduled annual principal maturities of long-term debt, excluding obligations under capital leases, for the five years subsequent to December 25, 1994, are as follows: $2,224,000 in 1995; $24,010,000 in 1996; $41,000 in 1997; $46,000 in 1998 and $51,000 in 1999.
Interest expense from continuing operations for 1994, 1993 and 1992 includes interest on obligations under capital leases of $1,952,000, $2,334,000 and $2,610,000, respectively.
Debentures
On March 19, 1993, the Airlie Group, L.P., and certain related parties (the "Airlie Group") made an investment in the Company of $30,000,000 including $15,000,000 of 5% Convertible Senior Subordinated Debentures (the "Senior Debentures"), due 2003, the issuance of 1,500,000 shares of the Company's common stock at $10 per share and the issuance of warrants to purchase an additional 1,000,000 shares of common stock at $11 per share. The Senior Debentures are senior to the 8 % Convertible Subordinated Debentures (the "Debentures"). The Senior Debentures are convertible at the option of the holder into common shares of the Company at any time prior to maturity at $11 per share, subject to adjustment in certain events. The Senior Debentures mature on April 15, 2003 and are redeemable, in whole or in part, at the option of the Company at any time on or after April 15, 1996, initially at 103.5% of their principal amount and declining to 100% of their principal amount on April 15, 2003. The Debenture holders may require the Company to repurchase the Senior Debentures, in whole or in part, in certain circumstances involving a change in control
NOTE 6 - LONG-TERM DEBT (Continued)
Debentures (Continued)
of the Company as defined in the Debenture Purchase Agreement (the "Agreement"). However, a change in control, as defined in the Agreement, will create an event of default under the Credit Facility (described below) and, as a result, any repurchase would, absent a waiver, be blocked by the subordination provisions of the Agreement until the Credit Facility (and any other senior indebtedness of the Company and senior indebtedness of Restaurants with respect to which there is a payment default) has been repaid in full. The Senior Debentures are unconditionally guaranteed on a subordinated basis by Restaurants. They are subordinated to all existing and future senior indebtedness of the Company and Restaurants, excluding the Debentures.
The 8 1/4% Convertible Subordinated Debentures (the "Debentures"), which provided proceeds to the Company of $47,948,000, net of $3,802,000 in deferred debt costs, are convertible at the option of the holder into common shares of the Company at any time prior to maturity at a conversion price of $6.50 per share subject to adjustment in certain events. The Debentures mature on July 15, 2002, and are redeemable at the option of the Company at any time on or after July 15, 1995, at a premium which declines as the Debentures approach maturity. The Debenture holders may also require the Company to repurchase the Debentures, in whole or in part, in certain circumstances involving a change in control of the Company as defined in the indenture covering the Debentures (the "Indenture"). However, a change in control, as defined in the Indenture, will create an event of default under the Credit Facility and, as a result, any repurchase would, absent a waiver, be blocked by the subordination provisions of the Indenture until the Credit Facility (and any other senior indebtedness of the Company and senior indebtedness of Restaurants with respect to which there is a payment default) has been repaid in full. The Debentures are unconditionally guaranteed on a subordinated basis by Restaurants. They are subordinated to all existing and future senior indebtedness of the Company and Restaurants.
During 1992, the Company recorded a charge of $11,949,000 following the repurchase of $98,526,000 principal amount of the 14 % Senior Subordinated Notes of Restaurants (the "Notes"). The costs of the repurchased Notes in excess of their principal amounts, together with the related deferred finance costs and expenses related to the repurchase, were charged to income as an extraordinary item, net of income tax of $6,170,000. The remaining $l,474,000 principal amount of the Notes was repurchased on November 15, 1993. Premiums on the purchases and the write-off of deferred debt costs resulted in a charge of $109,000 to other income and expense during 1993.
Credit Facility
The Credit Facility which previously consisted of a $50,000,000 Revolving Credit Facility was amended as of December 23, 1994. This amendment and waiver restricted the total borrowings available under the facility to $40,000,000 and waived compliance with certain financial ratios through January 31, 1995. The Credit Facility was amended and restated as of January 31, 1995. The amendment to the facility limits borrowings to $40,000,000, revises certain financial covenant ratios and requires the collateralization of additional properties. The Credit Facility matures on June 3, 1996, unless extended by the Banks.
NOTE 6 - LONG-TERM DEBT (continued)
Credit Facility (continued)
Borrowings under the Credit Facility, at the Company's option, bear interest at either a defined base rate or a rate based on the London Interbank Offered Rate. The weighted average interest rate on the amount outstanding was 8.2% and 5.72% for 1994 and 1993, respectively. The Company paid certain fees and expenses to the Banks in connection with the original commitment letter, which along with other costs associated with the Original Credit Facilities, totalled approximately $2,000,000 and also agreed to indemnify the Banks against certain liabilities. The Company also paid an amendment fee of $80,000 for its Second Amended and Restated Credit Agreement dated January 31, 1995. The Company also pays a fee based on the Eurodollar rate, 2.0% at December 25, 1994, in connection with letters of credit issued and a commitment fee equal to 0.50% per annum on the average daily unused amount of the Credit Facility. The terms of the Second Amended and Restated Credit Agreement require that the fee paid on borrowings and letters of credit be increased by .50% effective January 31, 1995.
Borrowings under the Credit Facility are secured by all shares of the capital stock of Restaurants, whenever issued, intercompany debt of Restaurants owed to the Company and ground lease mortgages with respect to certain premises in which the land is currently leased but the building located thereon is owned by Restaurants. In addition, the Banks have exercised their right to obtain, as security, assignments of other leases and/or mortgages on real property currently owned or subsequently acquired. However, the Company has rights to finance certain of these properties and obtain a release of the collateral under certain conditions. The Credit Facility limits the amount of additional indebtedness which the Company and its subsidiaries may incur and the aggregate annual amount to be spent on capital expenditures. In addition, the Credit Facility limits, among other things, the ability of the Company and its subsidiaries to pay dividends, create liens, sell assets, engage in mergers or acquisitions and make investments in subsidiaries. Restaurants may not transfer amounts to the Company except for the payment of a management fee not to exceed $2,500,000 in each fiscal year and a dividend in an amount sufficient to pay interest on the Senior Debentures and the Debentures, in each case provided that no defaults under the Credit Facility exist either immediately before or after the transfer. Restaurants must also maintain certain financial ratios.
At December 25, 1994, $22,400,000 was drawn on the facility and letters of credit in the amount of $10,951,000 were outstanding, resulting in a remaining available balance of $6,649,000 under the revised Agreement.
Notes Payable
Notes payable as of December 25, 1994 consist of obligations secured by buildings, land, equipment, and cash value life insurance policies with a net book value of $8,381,000.
Fair Value of Financial Instruments
The estimated fair value of the Company's Debentures, based on the quoted market price, is $39,200,000 and $86,900,000 for December 25, 1994 and December 26, 1993, respectively. The estimated fair value of the Company's Senior Debentures at December 25, 1994 is $11,600,000, based on the estimated borrowing rates available to the Company. The Credit Facility reprices frequently at market rates; therefore, the carrying amount of this facility is a reasonable estimate of its fair value at December 25, 1994 and December 26, 1993. The estimated fair value of the Company's notes payable approximates the principal amount of such notes outstanding at December 25, 1994 and December 26, 1993, which is based upon the estimated borrowing rates available to the Company.
The fair value estimates presented herein are based on pertinent information available to management as of December 25, 1994 and December 26, 1993. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.
NOTE 7 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The Company is primarily self insured for general liability and workers' compensation risks supplemented by stop loss type insurance policies. The self insurance liabilities, related to continuing operations, included in accrued insurance at December 25, 1994 and December 26, 1993 were approximately $17,022,000 and $12,300,000, respectively.
In 1993, management completed an extensive review of the Company's exposure resulting from its self insurance program for workers' compensation and general liability. The review, which was based on improved data available to the Company relating to the trend in claims development, indicated that the Company's reserves for retained losses were near the lower end of the expected range of possible losses. Management determined it would be appropriate to increase the Company's reserves to better reflect the likely outcome of its liability within the possible range of losses. Accordingly, as of the end of the fourth quarter of 1993, workers' compensation insurance reserves were increased by charging $4,500,000 to restaurant labor and benefits and $700,000 to general and administrative expenses. Also a charge of $1,800,000 was made to other restaurant operating expenses and $600,000 to the gain on sale of discontinued operations (theater operations) to increase the general liability insurance reserves.
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes on continuing operations is as follows:
The provision (benefit) for income taxes on continuing operations is different from the amount that would be computed by multiplying the income (loss) from continuing operations before provision (benefit) for income taxes by the statutory U.S. federal income tax rates for the following reasons:
NOTE 8 - INCOME TAXES (continued)
The tax effects of principal temporary differences in 1994 are shown in the following table:
Other current assets include income tax refund receivable of $132,000 and $3,171,000 in 1994 and 1993, respectively.
The valuation allowance at December 25, 1994 of $10,818,000 resulted from an increase in net operating losses in excess of deferred liabilities.
NOTE 8 - INCOME TAXES (continued)
The tax effects of principal temporary differences in 1993 are shown in the following table:
The Company increased its deferred tax asset and liability in 1993 as a result of legislation enacted during 1993, increasing the corporate tax rate from 34% to 35% commencing in 1993. The valuation allowance at December 26, 1993 of $9,502,000 resulted from a change in circumstances during 1993 surrounding the likelihood of the realization of the deferred tax assets in future years.
NOTE 8 - INCOME TAXES (continued)
The tax effects of principal temporary differences in 1992 are shown in the following table:
NOTE 8 - INCOME TAXES (continued)
The Company has tax carryforwards at December 25, 1994 expiring as follows:
The use of these carryforwards is limited to future taxable income. Alternative minimum tax credits total $2,222,000 and may be carried forward indefinitely.
NOTE 8 - INCOME TAXES (continued)
The overall (benefit) provision for income taxes, during 1994, 1993 and 1992 is as follows:
NOTE 9 - LEASE COMMITMENTS
The Company leases certain of its restaurant locations under long-term lease arrangements. Lease terms generally range from 10 to 25 years and normally contain renewal options ranging from 5 to 15 years, but do not contain purchase options. The Company is generally obligated for the cost of property taxes and insurance. Some of these leases contain contingent rental clauses based on a percentage of revenue. The building portions of such leases are capitalized and the land portions are accounted for as operating leases. Contingent rentals on capital leases in continuing operations were $389,000, $526,000 and $581,000 during 1994, 1993 and 1992, respectively.
Rent expense under operating leases included in continuing operations is as follows:
A summary of future minimum lease payments under capital leases, non-cancelable operating leases, and leases reserved for in the provision for restructuring recorded as of the fourth quarter of 1993 with remaining terms in excess of one year at December 25, 1994 follows:
Future minimum lease payments on operating leases in continuing operations have been reduced for sublease rental income of approximately $158,000 to be received in the future under non-cancelable subleases.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Several of the Company's reserved area agreements include expansion schedules requiring it to develop a minimum number of Shoney's restaurants in the reserved areas over a defined period of time. Pursuant to these agreements, the Company is required to open a minimum of 36 Shoney's restaurants through October 6, 2004. In 1991, the Company entered into an agreement with Shoney's, Inc., to develop 38 new Captain D's restaurants over 20 years, at the approximate rate of two per year. The Company has constructed eight restaurants with respect to this agreement.
During 1994, the Company entered into a long-term purchase commitment to purchase 8 million pounds of french fries, annually, over a two year period beginning on December 1, 1994 through November 30, 1996. The total estimated cost related to this commitment totals approximately $5,800,000. As of December 25, 1994, approximately 570,000 pounds, or $208,000, was purchased under the current contract.
NOTE 11 - LITIGATION
Maxcell Telecom Plus, Inc., et al., v. McCaw Cellular Communications, Inc., et al.
On November 1, 1993, the Company and its wholly-owned subsidiary, Maxcell Telecom Plus, Inc., filed a complaint in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. The complaint against McCaw Cellular Communications, Inc. ("McCaw"), Charisma Communications Corp. ("Charisma") and various related parties, relates to McCaw's failure to disclose the existence of a side agreement between McCaw and Charisma to share in the net profits from the resale of certain cellular properties which were sold by the Company to McCaw. The Company seeks recision of the sales contract and damages based upon the defendant's alleged fraudulent misrepresentation, breach of fiduciary duty, conspiracies and tortious interference with contracts. The Company's attorneys are unable at this time to state the likelihood of a favorable outcome.
Reading Company and James J. Cotter v. TPI Enterprises, Inc.
On March 7, 1995, a civil action captioned James J. Cotter v. TPI Enterprises, Inc., 95 Civ. 1579 was filed in the United States District Court for the Southern District of New York. The plaintiffs allege inter alia breach of contract and seek damages of $1,250,000 plus interest, punitive damages and attorney's fees in connection with the sale to a subsidiary of American Multi-Cinema, Inc. of TPI Entertainment, Inc.'s interest in Exhibition Enterprises Partnership in April 1991. The Company's attorneys are unable at this time to state the likelihood of an unfavorable outcome.
Other
The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. It is the opinion of the management of the Company that the outcome of such litigation will not have a material adverse effect on the consolidated financial statements.
NOTE 12 - SHAREHOLDERS' EQUITY
Stock Option Plans
Officers and other key employees have been granted options to purchase common shares under non- qualified stock option plans adopted in 1982, 1983, 1984 and 1992. In addition, 165,000 shares of the Company's common stock are reserved under the 1992 stock option plan for non-employee directors. At December 25, 1994, an aggregate of 3,127,360 common shares were reserved under these plans. The number of shares available for future grants was 890,000 at December 25, 1994. Options are generally granted at the market price on the date of grant and generally become exercisable in 20% increments over a five year period and expire ten years from the date of grant. At December 25, 1994, options were exercisable to purchase 1,386,920 shares at prices ranging from $5.00 to $10.88. The Company's stock option transactions are summarized as follows:
Number Exercise Price of Options per Option -------------- -----------------
Outstanding at December 31, 1991 . . . . . . . 1,831,600 $5.00 - $7.00
Granted . . . . . . . . . . . . . . . . . 1,631,900 $6.63 - $8.38
Exercised . . . . . . . . . . . . . . . . (2,000) $6.25
Cancelled or lapsed . . . . . . . . . . . (918,750) $6.25 - $7.00
Outstanding at December 31, 1992 . . . . . . . 2,542,750 $5.00 - $8.38
Granted . . . . . . . . . . . . . . . . . 57,500 $9.38 - $10.88
Exercised . . . . . . . . . . . . . . . . (426,140) $5.00 - $8.38
Cancelled or lapsed . . . . . . . . . . . (29,850) $6.25 - $8.38
Outstanding at December 26, 1993 . . . . . . . 2,144,260 $5.00 - $10.88
Granted . . . . . . . . . . . . . . . . . 117,500 $9.18 - $9.75
Exercised . . . . . . . . . . . . . . . . (6,650) $6.25 - $7.00
Cancelled or lapsed . . . . . . . . . . . (17,750) $6.25 - $8.38
Outstanding at December 25, 1994 . . . . . . . 2,237,360 $5.00 - $10.88
The Company has warrants outstanding at December 25, 1994 to purchase 1,000,000 shares of the Company's common stock at $11 per share.
NOTE 12 - SHAREHOLDERS' EQUITY (continued)
Employee Stock Purchase Plan
On August 16, 1989, the Company adopted the 1989 Employee Stock Purchase Plan (the "Employee Plan") pursuant to which up to 500,000 common shares of the Company may be purchased at 85% of the fair market value of common shares on the first or last business day of each of thirteen purchase periods. This Employee Plan will terminate on April 16, 1995. On December 16, 1994, the Company and certain subsidiaries adopted the 1995 Employee Stock Purchase Plan (the new Employee Plan) pursuant to which 1,000,000 common shares of the Company may be purchased at 85% of the fair market value of common shares on the first or last business day of each of thirteen purchase periods. The new Employee Plan is open to all active adult employees of the Company and Restaurants who have been employed for at least six months, customarily work more than 20 hours per week and more than five months per year, and are not directors or 5% shareholders of the Company or any subsidiary, as defined in the Employee Plan. Employees can designate up to 10% of their compensation for the purchase of common shares, which is consistent with the prior plan. During 1994, 1993 and 1992, 90,932, 73,419 and 83,394 shares, respectively, were issued under the Employee Plan at prices ranging from $3.77 to $8.29 per Common Share in 1994, $6.91 to $9.14 per common share in 1993 and $4.78 to $6.59 per common share in 1992. Aggregate purchases were approximately $532,000, $582,000 and $444,000 in 1994, 1993 and 1992, respectively.
NOTE 13 - EMPLOYMENT AGREEMENTS, DEFERRED COMPENSATION AND RETIREMENT PLAN Employment Agreements
The Company has agreements with two executive officers which expire at various dates through January 13, 1999. The aggregate minimum commitment for future salaries under these agreements is approximately $1,855,000. Additionally, three key employees of Restaurants are covered by agreements with two expiring on January 1, 1996 and one containing a self-renewing term of three years. The aggregate minimum commitment for future salaries under Restaurants' agreements is $902,000. In addition to salaries, the Company will pay minimum annual bonuses in connection with the above agreements of $127,000. The Company also is required to pay incentive bonuses equal to an aggregate of 4.2% of the annual increase in operating income over the prior year and $44,000 for each percentage point increase, or portion thereof, in the Company's same store sales. Additional bonuses are at the discretion of the Board of Directors. All of the above agreements provide severance benefits in the event of a change of control or an involuntary termination of the officer or key employee. The maximum contingent liability related to these severance benefits at December 25, 1994 was $2,904,000.
The Company also has an agreement with Robert A. Kennedy which stipulates that the Company will pay Mr. Kennedy, upon a favorable outcome of the courts, .50% or 1% of the gross proceeds relating to the McCaw Cellular Communications, Inc. lawsuit. See further discussion of the lawsuit included in Note 11.
In addition, the 1994 results of operations include a charge of $1,600,000 resulting from the retirement of the Company's Chairman, effective January 31, 1995. The provision includes all amounts due under his current employment contracts. The agreement also stipulates that the Company will pay the former Chairman of the Board, upon a favorable outcome of the courts, 3% or 5% of the gross proceeds relating to the McCaw Cellular Communications, Inc. lawsuit. See further discussion of the lawsuit included in Note 11.
Deferred Compensation Agreements
Deferred compensation of $1,619,000 and $2,382,000 included in other liabilities at December 25, 1994 and December 26, 1993, respectively, relates to agreements with two former officers of Restaurants. Due to interest rate fluctuations occuring at the measurment date, the Company recorded a $913,000 charge to operations and a $562,000 increase in operations during the fourth quarter of 1993 and 1994, respectively.
NOTE 13 - EMPLOYMENT AGREEMENTS, DEFERRED COMPENSATION AND RETIREMENT PLAN (continued)
Retirement Plan
In December 1993, the Board of Directors authorized the termination of the Company's non-qualified retirement plan for certain senior executives. Prior to December 31, 1992, the plan had four participants selected by the Board of Directors to participate in the plan. Three participants became eligible during 1992 to begin receiving retirement benefits under the early retirement provisions of the plan. In February 1993, one of these participants informed the Company of his intentions to retire prior to the end of 1993. The Company paid a lump sum benefit payment to this officer of $1,850,000 during March 1993. Operations was charged $1,148,000 for the year ended December 31, 1992 in connection with this curtailment. Upon termination of the plan, the Company made total lump sum benefit payments of $4,225,000 to the three remaining participants in the plan. These payments were determined through negotiations with the participants and were less than the aggregate actuarial present value of the retirement benefits otherwise payable under the plan. This termination resulted in a charge to operations of $1,220,000 during the year ended December 26, 1993.
Net periodic pension cost for the fiscal years ended December 26, 1993 and December 31, 1992 consists of the following:
1993 1992 ----------------------- (Dollars in thousands)
Service cost - benefits earned during the period . . . $ 254 $ 282
Interest cost on projected benefit obligations . . . . 335 343
Amortization of unrecognized prior service costs . . . 195 261
Effect of curtailment and settlements. . . . . . . . . 1,220 1,148 -------- --------- Net periodic pension costs . . . . . . . . . . . . . . $ 2,004 $ 2,034 ======== ========= Assumed rates of increase in compensation levels . . . 6.0% 6.0% ======== ========= Assumed discount rate. . . . . . . . . . . . . . . . . 6.0% 8.0% ======== ========= NOTE 14 - RELATED PARTY TRANSACTIONS
Restaurants
On July 21, 1993, the Company, through a wholly-owned subsidiary, acquired the stock of a company which operated three Shoney's restaurants, including one owned and two leased locations. Included in the acquisition were the exclusive rights to operate Shoney's restaurants in the surrounding northern Palm Beach County, Florida area. The purchase price of $3,860,000 included the issuance of 94,300 shares of the Company's common stock at $9.49 per share, the weighted average price for the prior twenty days. In conjunction with this transaction, the Company purchased the land and building at one of the leased restaurant locations for $1,240,000. The President and Chief Executive Officer of the Company was a 20% shareholder of the acquired company and had a 50% interest in the land and building the Company purchased. The Company engaged the services of an independent appraisal company to review the fairness of the transaction.
On January 19, 1993, Restaurants purchased an airplane from a corporation owned by the President and Chief Executive Officer of the Company for $650,000. Prior to this purchase, Restaurants leased the airplane for approximately $87,000 during 1992. In addition, Resturants paid chartering fees and expenses to the corporation of approximately $42,000 during 1992. The cost of the charter arrangements and the lease arrangement were comparable to similar arrangements available from unrelated third parties. A mortgage on the airplane was obtained in 1994.
NOTE 14 - RELATED PARTY TRANSACTIONS (continued)
Exhibition Enterprises Partnership
On May 28, 1993, the Company completed the sale of its 50% interest in the Partnership to American Multi-Cinema, Inc. ("AMC"), the parent company of Entertainment's partner in the Partnership and the original owner of 56 of the 57 theaters owned by the Partnership, for $17,500,000. In addition, AMC retired the bank loan owed by the Partnership, which was guaranteed by Entertainment. For the year ended December 31, 1992, the Partnership incurred AMC management fees of $8,876,000. For the approximate five month period prior to the completion of the sale of Entertainment's 50% interest in the Partnership on May 28, 1993 to AMC, the Partnership incurred AMC management fees of $3,428,000.
During the period ended May 28, 1993 and the year ended December 31, 1992, the Partnership incurred interest expense on notes payable to AMC of $2,061,000 and $5,084,000, respectively.
Additionally, during the period ended May 28, 1993 and the year ended December 31, 1992, the Partnership recorded charges of $133,000 and $370,000, respectively, for an administrative fee payable to the Company.
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (unaudited)
Summarized quarterly financial information for 1994 and 1993 reflects the results of operations of Restaurants as continuing operations and the Company's interest in theater operations as discontinued operations (Note 3). Restaurants' fiscal year is comprised of fifty-two or fifty-three weeks divided into four quarters of sixteen, twelve, twelve, twelve or thirteen weeks, respectively. Both 1994 and 1993 were fifty-two week years. During the fourth quarter of 1994, the Company recorded $1,600,000 related to the retirement of the Company's Chairman (Note 13), $562,000 for adjustments to the Company's deferred compensation obligation (Note 13), and a $1,000,000 reduction to the Company's restructure reserve (Note 2).During 1993, the Company changed its fiscal year from a calendar year end to Restaurants' fiscal year. During the fourth quarter of 1993, the Company recorded restructuring charges of $35,082,000 (Note 2). Other unusual charges during the fourth quarter of 1993 include $7,000,000 for additions to insurance reserves (Note 7), $1,220,000 for termination of the Company's retirement plan (Note 13), and $913,000 for adjustments to the Company's deferred compensation obligation (Note 13). The second and third quarters of 1993 include gains on the disposal of discontinued operations of $6,115,000, and $85,000, respectively. The fourth quarter of 1993 includes a loss on the disposal of discontinued operations of $927,000.
First Second Third Fourth Quarter ended - 1994 Quarter Quarter Quarter Quarter - -------------------- --------- --------- ---------- ------- (Dollars in thousands, except per share data)
Net sales, previously reported . $87,397 $68,730 $67,325 $63,932
Effect of change in estimate . 1,026 799 761 (2,586)
Net sales, restated . . . . . . 88,423 69,529 68,086 61,346
Gross profit . . . . . . . . . . 10,714 8,474 6,589 4,267
Net income (loss) from continuing operations . . . . . 847 336 (1,246) (3,654)
Net income (loss). . . . . . . . 847 336 (1,246) (3,654)
Primary earnings per share:
Continuing operations . . . . . 0.04 0.02 (0.06) (0.18)
Net income (loss) . . . . . . . 0.04 0.02 (0.06) (0.18)
Quarter ended - 1993 - -------------------- Net sales. . . . . . . . . . . . $ 85,133 $69,850 $70,326 $64,130
Gross profit . . . . . . . . . . 12,008 10,093 9,355 817
Net income (loss) from continuing operations . . . . 976 1,125 491 (39,080)
Net income (loss). . . . . . . . 976 7,240 576 (40,007)
Primary earnings per share: Continuing operations . . . . . 0.05 0.06 0.02 (1.93)
Net income (loss) . . . . . . . 0.05 0.36 0.03 (1.98)
Fully diluted earnings per share: Continuing operations . . . . . 0.05 0.06 0.02 (1.93)
Net income (loss) . . . . . . . 0.05 0.27 0.03 (1.98)
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (Continued)
The quarters ended April 17, 1994, July 10, 1994, and October 2, 1994 have been restated as indicated above for a change in an accounting estimate related to the Company's restructuring plan. See Note 2.
Gross profit equals revenues less food, supplies and uniforms, restaurant labor and benefits, restaurant depreciation and amortization and other restaurant operating expenses. Net income (loss) per share is computed separately for each period and, therefore, the sum of such quarterly per share amounts may differ from the total for the year. The effect of convertible debentures and stock options on the fully- diluted earnings per share computation for all of 1994 and for the first, third, and fourth quarters of 1993 were either antidilutive or did not result in a material dilution of earnings per share and, therefore, primary and fully-diluted earnings per share are equivalent.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, accountants during 1994.
PART III
Items 10, 11, 12, and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these Items is omitted because the Company will file a definitive proxy statement pursuant to Regulation 14A, which information is herein incorporated by reference as if set out in full.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Page -----
The following financial statements of the Company have been filed under Item 8 hereto:
Independent Auditors' Report. . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets as of December 25, 1994 and December 26, 1993. . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Operations for each of the Three Fiscal Years in the Period Ended December 25, 1994 . . . . . 25
Consolidated Statements of Cash Flows for each of the Three Fiscal Years in the Period Ended December 25, 1994 . . . . . 27
Consolidated Statements of Shareholders' Equity for each of the Three Fiscal Years in the Period Ended December 25, 1994. 29
Notes to Consolidated Financial Statements. . . . . . . . . 30
2. Financial Statement Schedules Page ----
The following financial statement schedules for the three years ended December 25, 1994 are filed herewith at the page indicated:
Schedule I -- Condensed Financial Information of the Registrant S-1
Schedule II -- Reserves . . . . . . . . . . . . . . . . . . S-7
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (continued)
The following financial statements and schedules of the Company's wholly-owned subsidiary, TPI Restaurants, Inc. are filed herewith at the page indicated:
Page ------ Independent Auditors' Report. . . . . . . . . . . . . . . . W-1
Consolidated Balance Sheets as of December 25, 1994 and December 26, 1993 . . . . . . . . . . . . . . . . . . . . . W-2
Consolidated Statements of Operations for each of the Three Fiscal Years in the Period Ended December 25, 1994 . . . . . W-4
Consolidated Statements of Cash Flows for each of the Three Fiscal Years in the Period Ended December 25, 1994 . . . . . W-5
Consolidated Statements of Stockholder's Equity for each of the Three Fiscal Years in the Period Ended December 25, 1994 W-7
Notes to Consolidated Financial Statements . . . . . . . . . W-8
Schedule II -- Reserves . . . . . . . . . . . . . . . . . . WS-1
All other schedules have been omitted because they are inapplicable or the information required is shown in the consolidated financial statements or the notes thereto.
3. Exhibits
A list of exhibits required to be filed as part of this report on Form 10-K is set forth in the "Exhibit Index," which immediately precedes such exhibits, and is incorporated herein by reference.
(b). Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during the last quarter of the period covered by this report.
(c). Exhibits
All exhibits required by item 601 are listed on the accompanying "Exhibit Index" described in (a) 3 above.
(d). Financial Statements of Subsidiary
The financial statements of the Company's wholly-owned subsidiary, TPI Restaurants, Inc. are filed under (a) 2 above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TPI ENTERPRISES, INC. ------------------------ Registrant
Date:
By: /s/ J. GARY SHARP ----------------------- J. Gary Sharp President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Schedule I TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET
December 25, December 26, ---------------- --------------- 1994 1993 ---------------- --------------- (Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents. . . . . $ 11,976 $ 10,637 Deferred tax benefit . . . . . . . 5,666 6,734 Income tax refund. . . . . . . . . 779 3,171 Other current assets . . . . . . . 45 64 -------- -------- Total Current Assets . . . 18,466 20,606 -------- -------- Property and Equipment, net. . . . . 245 291 -------- -------- Other Assets: Investments in and advances to subsidiaries, net . . . . . . . 139,924 142,834 Other. . . . . . . . . . . . . . 3 8 -------- -------- 139,927 142,842 -------- -------- Total Assets . . . . . . . . . . . $158,638 $163,739 ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities: Accounts payable-trade . . . . . $ 77 $ 40 Accrued expenses and other current liabilities . . . . . . 2,652 2,311 Income taxes currently payable . 718 649 -------- -------- Total Current Liabilities. 3,447 3,000 -------- -------- Due to subsidiary. . . . . . . . . . 15,104 15,954 -------- -------- Long-term debt . . . . . . . . . . . 66,563 66,725 -------- -------- Deferred income taxes. . . . . . . . 5,663 6,734 -------- -------- Other liabilities. . . . . . . . . . 291 767 Shareholders' Equity: -------- --------
Preferred shares, no par value; 20,000,000 shares authorized; none issued and outstanding. . . --- ---
Common shares, $.01 par value; 100,000,000 shares authorized; 33,241,118 and 33,118,614 issued . 332 331
Additional paid-in capital . . . . 226,144 225,417 Deficit. . . . . . . . . . . . . . (88,961) (85,244) -------- -------- 137,515 140,504
Less treasury stock, at cost: 12,846,094 common shares in 1994 and 1993 69,945 69,945 -------- --------
Total Shareholders' Equity . . . . . 67,570 70,559 -------- -------- Total Liabilities and Shareholders' Equity . $158,63820 $163,739 -------- -------- See notes to condensed financial statements.
S-1
Schedule I TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year Ended ----------------------------------------- December 25, December 26, December 31, 1994 1993 1992 ------------- ------------- ----------- (Dollars in thousands) Revenue: Management fee income. . . . $2,500 $2,455 $1,714 Interest income. . . . . . 267 428 3,414 Equity in subsidiary earnings. . --- 30 215 Other. . . . . . . . . . . . . . --- --- 381 ------ ------ ------ 2,767 2,913 5,724 ------ ------ ------
Expenses: Equity in subsidiary losses. . . 2,838 39,348 17,726 General and administrative . . . 3,589 4,803 5,937 Depreciation and amortization. . 57 235 357 Corporate restructuring. . . . . --- 511 (465) Interest expense . . . . . . . . --- 340 433 ------ ------ ------ 6,484 45,237 23,988 ------ ------ ------
Loss from continuing operations before income taxes. . . . . . . . (3,717) (42,324) (18,264)
Income tax benefit . . . . . . . . --- 5,836 6,261 ------ ------ ------ Loss from continuing operations. . (3,717) (36,488) (12,003)
Discontinued operations: Gain on disposal, net. . . . . . --- 5,273 --- ------ ------ ------ Loss before cumulative effect of accounting changes . . . . . (3,717) (31,215) (12,003) Cumulative effect of accounting changes. . . . . . . . . . . . . --- --- (2,122) ------ ------ ------ Net loss . . . . . . . . . . . . $(3,717) $(31,215) $(14,125) ======= ======== ========
See notes to condensed financial statements.
S-2
Schedule I TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ----------------------------------------- December 25, December 26, December 31, 1994 1993 1992 ------------- ------------- ----------- (Dollars in thousands)
Cash Flows From Operating Activities: Net loss . . . . . . . . . . . . . $(3,717) $(31,215) $(14,125)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization. . 57 235 357 Equity in subsidiary losses. . . 2,838 39,318 17,511 Equity in subsidiary earnings from discontinued operations . . --- (7,990) ---
Deferred income taxes. . . . . . (3) (2,444) (5,566) Cumulative effect of accounting changes. . . . . . . --- --- 2,122
Changes in assets and liabilities, net of effects of discontinued operations:
Income tax refund . . . . . . . 2,392 (3,171) --- Other current assets . . . . . . 19 1,655 4,609 Intangible pension asset. . . . --- 330 50 Other . . . . . . . . . . . . . 5 15 --- Accounts payable-trade. . . . . 37 (50) (283) Accrued expenses and other current liabilities. . . . . . 341 (474) (742) Income taxes currently payable. 69 (1,016) (647) Other liabilities . . . . . . . (476) (1,996) 89 -------- --------- ------- Net cash provided by (used in) operating activities . . . . . $ 1,562 $ (6,803) $ 3,375 -------- --------- -------
S-3
Schedule I
TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (Continued)
Fiscal Year Ended ------------------------------------------ December 25, December 26, December 31, 1994 1993 1992 ------------- ------------- ----------- (Dollars in thousands)
Cash flows from investing activities:
Investment in and advances to subsidiaries, net. . . . . . $ 72 $(32,926) $(102,576) Acquisition of property and equipment. . . . . . . . . . . . (11) --- (391) Dividends received from subsidiary . --- 5,254 9,000 Disposition of property and equipment. . . . . . . . . . . . . --- --- 386 -------- --------- --------- Net cash provided by (used in) investing activities. . . . . . . 61 (27,672) (93,581) -------- --------- --------- Cash flows from financing activities:
Payment of advances from subsidiaries . (850) --- --- Proceeds of 8 1/4% Convertible Subordinated Debentures . . . . . . . --- --- 51,750 Restricted cash deposits . . . . . . . --- --- 11,700 Common shares issued . . . . . . . . . 566 17,204 457 Proceeds from 5% Convertible Senior Subordinated Debentues. . . . . . . . --- 15,000 --- -------- --------- --------- Net cash provided by (used in) financing activities. . . . . . . . . (284) 32,204 63,907 -------- --------- --------- Increase (decrease) in cash and cash equivalents . . . . . . . . . . . 1,339 (2,271) (26,299) Cash and cash equivalents, beginning of period . . . . . . . . 10,637 12,908 39,207 -------- --------- --------- Cash and cash equivalents, end of period . . . . . . . . . . . $ 11,976 $10,637 $12,908 ======== ======= ======= Supplemental Disclosure of Cash Flow Information:
Non-cash transactions:
Conversion of 8 1/4% Subordinated Debentures . . . . . . .. . . . $ 165 $ --- $ --- Cash payments (refunds) during the year for: Income taxes . . . . . . . . . $(2,164) $2,810 $(5,046)
See notes to condensed financial statements.
S-4
Schedule I
TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data)
S-5
Schedule I
TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Note 1 - Accounting Policies The investments in the Company's subsidiaries are carried at the Company's equity in the subsidiary which represents amounts invested less the Company's equity in the earnings and losses to date. Significant intercompany balances and activities have not been eliminated in this unconsolidated financial information.
Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principals have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with the Company's consolidated financial statements.
Note 2 - Cash Dividend Paid by Subsidiary Subsequent to the sale of its interest in the Partnership, the Company's wholly-owned subsidiary, TPI Entertainment, Inc., paid a dividend of $5,254,000 to the Company. On September 30, 1992, the Company's wholly-owned subsidiary, Maxcell Telecom Plus, Inc., paid a dividend of $9,000,000 to the Company.
S-6
S-7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of TPI Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of TPI Restaurants, Inc., (a wholly-owned subsidiary of TPI Enterprises, Inc.) and its subsidiaries as of December 25, 1994 and December 26, 1993, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three fiscal years in the period ended December 25, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14 (a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of TPI Restaurants, Inc. and its subsidiaries as of December 25, 1994 and December 26, 1993, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 25, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1992 the Company changed its method of accounting for income taxes and postemployment benefits to conform with Statements of Financial Accounting Standards No. 109 and 112. The Company has reflected the cumulative effect of these changes in 1992.
/s/ Deloitte & Touche LLP
March 10, 1995 Memphis, Tennessee
W-1
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS
See notes to consolidated financial statements.
W-2
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
See notes to consolidated financial statements.
W-3
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
W-4
TPI RESTAURANTS, INC. SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
W-5
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
See notes to consolidated financial statements.
W-6
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (Dollars in thousands)
See notes to consolidated financial statements.
W-7
TPI RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of TPI Restaurants, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions are eliminated in consolidation. The Company maintains its books on a 52-53 week fiscal year ending on the last Sunday in December.
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, certificates of deposit and short-term marketable securities with maturities of 90 days or less when purchased, as cash and cash equivalents.
The Company utilizes a cash management system under which cash overdrafts exist in the book balances of its primary disbursing accounts. These overdrafts represent the uncleared checks in the disbursing accounts. The cash amounts presented in the consolidated financial statements represent balances on deposit at other locations prior to their transfer to the primary disbursing accounts. Uncleared checks of $7,229,000 and $7,393,000 are included in accounts payable at December 25, 1994 and December 26, 1993, respectively.
Inventories
Inventories, consisting of food items, beverages and supplies, are stated at the lower of weighted average cost (which approximates first-in, first-out) or market.
Preopening Costs
Direct costs incidental to the opening of new restaurants are capitalized and amortized over the restaurants' first year of operation.
Depreciation and Amortization
Depreciation and amortization of property and equipment is provided on the straight-line method over the estimated useful lives of the assets or, in the case of leasehold improvements and certain property under capital leases, over the lesser of the useful life or the lease term.
Goodwill related to the acquisition of the Company by TPI Enterprises, Inc. is amortized on a straight-line basis over a thirty-six year period. The costs of franchise license agreements which govern the individual Shoney's and Captain D's restaurants and reserved area agreements are amortized on a straight-line basis over the lives of the related franchise license agreements, up to 40 years.
Postemployment Benefits
The Company recognizes the cost of postemployment benefits on an accrual basis in accordance with Financial Accounting Standard 112, "Employers' Accounting for Postemployment Benefits." The adoption of this statement during the year ended December 27, 1992 resulted in an increase of $79,000 in 1992 income before extraordinary item and cumulative effect of account charges. The cumulative effect on years prior to December 30, 1991 of $968,000 is included in 1992 net income.
W-8
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Income Taxes The Company's income taxes are computed in accordance with a tax sharing and payment agreement with its parent company.
Effective December 30, 1991, the Company adopted Financial Accounting Standard No. 109, "Accounting for Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Prior to 1992, income taxes were accounted for under Accounting Principles Board Opinion No. 11.
The effect of adopting Statement 109 was an increase of $646,000, relating to income before extraordinary item and cumulative effect of accounting changes, an increase of $849,000 relating to the extraordinary item and the cumulative effect of adopting Statement 112. The cumulative effect of the change on years prior to December 30, 1991 of $1,495,000 is a decrease in 1992 net income. The adoption of Statement 109 had no effect on 1992 net income.
Working Capital Deficiency The Company had a working capital deficiency of $28,086,000 and $24,753,000 at December 25, 1994 and December 26, 1993, respectively. The Company does not have significant receivables or inventory and receives trade credit based upon negotiated terms in purchasing food and supplies. Because funds available from cash sales are not needed immediately to pay for food and supplies or to finance receivables or inventory, they may be used for non-current capital expenditures.
Reclassification Certain amounts in prior years have been reclassified to conform to the 1994 presentation.
NOTE 2 - RESTRUCTURING CHARGES
The Company approved a restructuring plan as of the end of the fourth quarter of 1993 which includes closing or relocating 31 of its restaurants by the end of 1994, not exercising options to renew leases with respect to an additional 19 of its restaurants upon expiration of the current lease terms and the restructuring of divisional management as well as consolidating the Company's corporate office with its parent company's office. With respect to the restaurants to be closed or relocated, the Company recorded $19,800,000 of restructuring charges in 1993 consisting primarily of the write-off of assets and the accrual of lease and other expenses, net of projected sales proceeds and sublease income. As of December, 1994, the Company has closed 22 restaurants with plans to close an additional 4 restaurants during the first half of 1995. During the fourth quarter of 1994, management determined that improved operations at 5 of the restaurants, previously included in the restructure plan, indicated the locations should not be closed. Accordingly, the Company reduced its reserve by approximately $2,500,000 related to these 5 locations. During 1994, the reserve was also charged $3,500,000 for expenditures and asset write-offs related to the other 26 units.
With respect to the 19 restaurants projected to be closed no later than the expiration of their current lease terms, the Company determined that the recoverability of the assets had been permanently impaired, and accordingly, recorded a charge of $4,500,000 primarily for the write-down of assets at the end of 1993. During 1994, three of these units were closed prior to or upon the expiration of their current lease terms. The reserve was charged approximately $700,000 for the write-down of assets.
W-9
NOTE 2 - RESTRUCTURING CHARGES (Continued)
With respect to the Company's restructuring of its divisional management and consolidation of its corporate offices, the Company recorded approximately $1,800,000 for the cost of moving the Memphis office, $800,000 for the write-off of assets and accrual of remaining lease obligations at the Company's present facilities and $1,200,000 for severance costs and other costs relating to the restructuring of divisional and corporate overhead. Severance costs included amounts to be paid to approximately 80 employees at the divisional level and at the Memphis corporate office who would be terminated as a result of the restructuring of its divisional management and consolidation of its corporate offices. During 1994, the Company paid out approximately $1,100,000 related to the restructure of which $300,000 was for severance.
In addition to the amounts paid, management determined that an additional $1,200,000 should be provided for the write-off of assets at its Memphis location. The Company expects to pay the majority of the remaining relocation obligations during 1995 as the consolidation of the corporate offices is completed. In addition to these reserves, the Company also recorded approximately $6,500,000 in the prior year related to units that were closed prior to 1993 and for the sale of vacant properties. During 1994, the reserve had charges of approximately $1,700,000 resulting from expenditures and asset write-offs and an increase of $300,000 related to changes in original estimates for the costs of disposal.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Property and equipment with a net book value of approximately $22,233,000 and $22,681,000 were pledged as collateral for the Company's debt facilities as of December 25, 1994 and December 26, 1993, respectively.
Depreciation and amortization are calculated using the straight-line method and are based on the estimated useful lives of the assets as follows: buildings, 30 years; equipment and furnishings, 3-15 years; and leasehold improvements, primarily representing buildings constructed on leased property, the lesser of the term of the lease or 30 years. Depreciation and amortization of property and equipment totalled approximately $14,928,000, $14,048,000 and $12,833,000 during 1994, 1993 and 1992 respectively. In 1994, 1993 and 1992, approximately $1,643,000, $1,649,000 and $1,844,000, respectively, related to capitalized leases. Property and equipment includes capitalized interest on construction of $425,000, $374,000 and $172,000 at December 25, 1994, December 26, 1993 and December 27, 1992, respectively.
W-10
NOTE 4 - OTHER INTANGIBLE ASSETS
Other intangible assets consists of the following:
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
Scheduled annual principal maturities of long-term debt, excluding capital leases, for the five years subsequent to December 25, 1994, are as follows: $2,224,000 in 1995; $24,010,000 in 1996; $41,000 in 1997; $46,000 in 1998 and $51,000 in 1999.
Interest expense for 1994, 1993, and 1992 includes interest on obligations under capital leases of $1,952,000, $2,334,000 and $2,610,000 respectively.
W-11
NOTE 5 - LONG-TERM DEBT (Continued)
Debentures
On March 19, 1993, the Airlie Group, L.P. and certain related parties (the "Airlie Group") made an investment in TPI Enterprises, Inc. ("Enterprises") of $30,000,000 including $15,000,000 of 5% Convertible Senior Subordinated Debentures (the "Senior Debentures"), due 2003, the issuance of 1,500,000 shares of Enterprises' common stock at $10 per share and the issuance of warrants to purchase an additional 1,000,000 shares of common stock at $11 per share. The Senior Debentures are senior to the 8 1/4% Convertible Subordinated Debentures (described below). The Senior Debentures are convertible at the option of the holder into common shares of Enterprises at any time prior to maturity at $11 per share, subject to adjustment in certain events. The Senior Debentures mature on April 15, 2003 and are redeemable, in whole or in part, at the option of Enterprises at any time on or after April 15, 1996, initially at 103.5% of their principal amount and declining to 100% of their principal amount on April 15, 2003. The Senior Debenture holders may require Enterprises to repurchase the Senior Debentures, in whole or in part, in certain circumstances involving a change in control of Enterprises as defined in the Debenture Purchase Agreement (the "Agreement"). However, a change in control, as defined in the Agreement, will create an event of default under the Credit Facility (described below) and, as a result, any repurchase would, absent a waiver, be blocked by the subordination provision of the Agreement until the Credit Facility (and any other senior indebtedness of Enterprises and senior indebtedness of the Company with respect to which there is a payment default) have been repaid in full. The Senior Debentures are unconditionally guaranteed on a subordinated basis by the Company. They are subordinated to all existing and future senior indebtedness of Enterprises and the Company.
The 8 1/4% Convertible Subordinated Debentures (the "Debentures"), which provided proceeds to Enterprises of $47,948,000, net of $3,802,000 in deferred debt costs, are convertible at the option of the holder into common shares of Enterprises at any time prior to maturity at a conversion price of $6.50 per share subject to adjustment in certain events. The Debentures mature on July 15, 2002, and are redeemable at the option of Enterprises at any time on or after July 15, 1995, at a premium which declines as the Debentures approach maturity. The Debenture holders may also require Enterprises to repurchase the Debentures, in whole or in part, in certain circumstances involving a change in control of Enterprises as defined in the indenture covering the Debentures (the "Indenture"). However, a change in control, as defined in the Indenture, will create an event of default under the Credit Facility and, as a result, any repurchase would, absent a waiver, be blocked by the subordination provisions of the Indenture until the Credit Facility (and any other senior indebtedness of Enterprises and senior indebtedness of the Company with respect to which there is a payment default) have been repaid in full.
During 1992, the Company recorded a charge of $16,069,000 following the repurchase of $82,676,000 principal amount of it's 14 1/4% Senior Subordinated Notes (the "Notes"). The Company had previously purchased $15,850,000 aggregate principal amount of the Notes in the open market. The costs of all repurchased Notes in excess of their principal amounts, together with the related deferred finance costs and expenses related to the repurchase, were charged to income as extraordinary items, net of income tax of $2,050,000. The remaining $1,474,000 principal amount was repurchased on November 15, 1993. Premiums on the purchases and the write-off of deferred debt costs resulted in a charge of $109,000 to other income and expense during 1993.
W-12
NOTE 5 - LONG-TERM DEBT (Continued)
Credit Facility
The Credit Facility which previously consisted of a $50,000,000 Revolving Credit Facility was amended as of December 23, 1994. This amendment and waiver restricted total borrowings available under the facility to $40,000,000 and waived compliance with certain financial ratios through January 31, 1995. The Credit Facility was amended and restated as of January 31, 1995. The amendment to the facility limits borrowings to $40,000,000, revises certain financial covenant ratios and requires the collateralization of additional properties. The Credit Facility matures on June 3, 1996, unless extended by the Banks.
Borrowings under the Credit Facility, at the Company's option, bear interest at either a defined base rate or a rate based on the London Interbank Offered Rate. The weighted average interest rate on the amount outstanding was 8.2% and 5.2% for 1994 and 1993, respectively. The Company paid certain fees and expenses to the Banks in connection with the original commitment letter, which along with other costs associated with the Original Credit Facilities, totalled approximately $2,000,000 and also agreed to indemnify the Banks against certain liabilities. The Company also pays a fee based on the Eurodollar rate, 2.00% at December 25, 1994, in connection with letters of credit issued and a commitment fee equal to 0.50% per annum on the average daily unused amount of the Credit Facility. The terms of the Second Amended and Restated Credit Agreement requires that the fee paid on borrowings and letters of credit be increased by .50% effective January 31, 1995.
Borrowings under the Credit Facility are secured by all shares of the capital stock of the Company, whenever issued, intercompany debt of the Company owed to Enterprises and ground lease mortgages with respect to certain premises in which the land is currently leased but the building located thereon is owned by the Company. In addition, the Banks have the right to obtain, as security, assignments of other leases and/or mortgages on real property currently owned or subsequently acquired. However, the Company has rights to finance certain of these properties and obtain a release of the collateral under certain conditions. The Credit Facility limits the amount of additional indebtedness which Enterprises, the Company and its subsidiaries may incur and the aggregate annual amount to be spent on capital expenditures. In addition, the Credit Facility limits, among other things, the ability of Enterprises, the Company and its subsidiaries to pay dividends, create liens, sell assets, engage in mergers or acquisitions and make investments in subsidiaries. The Company may not transfer amounts to Enterprises except for the payment of a management fee not to exceed $2,500,000 in each fiscal year and a dividend in an amount sufficient to pay interest on the Senior Debentures and the Debentures, in each case provided that no defaults under the Credit Facility exist either immediately before or after the transfer. The Company must also maintain certain financial ratios and defined levels of net worth.
At December 25, 1994, $22,400,000 was drawn on the facility and letters of credit in the amount of $10,951,000 were outstanding, resulting in a remaining available balance of $6,649,000.
Notes Payable
Notes payable as of December 25, 1994 consists of obligations secured by buildings, land, equipment, and cash value life insurance policies with a net book value of $8,381,000.
W-13
NOTE 5 - LONG-TERM DEBT (Continued)
Fair Value of Financial Instruments
The estimated fair value of the Company's Debentures, based on the quoted market price, is $39,200,000 and $86,900,000 at December 25, 1994 and December 26, 1993, respectively. The estimated fair value of the Company's Senior Debentures at December 25, 1994 is $11,600,000, based on the estimated borrowing rates available to the Company. The Credit Facility reprices frequently at market rates; therefore, the carrying amount of the Credit Facility is a reasonable estimate of its fair value at December 25, 1994 and December 26, 1993. The estimated fair value of the Company's notes payable approximates the principal amount of such notes outstanding at December 25, 1994 and December 26, 1993, which is based upon the estimated borrowing rates available to the Company.
The fair value estimates presented herein are based on pertinent information available to management as of December 25, 1994 and December 26, 1993. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.
W-14
NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
1994 1993 -------------- ------------- (Dollars in thousands)
Reserve for restructuring. . . . . . . . . . $ 5,177 $ 2,005
Insurance. . . . . . . . . . . . . . . . . . 14,578 10,520
Taxes other than income taxes. . . . . . . . 4,463 3,790
Interest . . . . . . . . . . . . . . . . . . 2,407 2,401
Payroll. . . . . . . . . . . . . . . . . . . 1,524 1,987
Other. . . . . . . . . . . . . . . . . . . . 3,507 4,056 --------- --------- $ 31,656 $ 24,759 ========= =========
The Company is primarily self insured for general liability and workers' compensation risks supplemented by stop loss type insurance policies. The self-insurance liabilities included in accrued insurance at December 25, 1994 and December 26, 1993 were approximately $14,232,000 and $9,451,000, respectively.
During 1993, management completed an extensive review of the Company's exposure resulting from its self insurance program for workers' compensation and general liability. The review, which was based on improved data available to the Company relating to the trend in claims development, indicated that the Company's reserves for retained losses were near the lower end of the expected range of possible losses. Management determined it would be appropriate to increase the Company's reserves to better reflect the likely outcome of its liability within the possible range of losses. Accordingly, as of the end of the fourth quarter of 1993, workers' compensation insurance reserves were increased by charging $2,900,000 to restaurant labor and benefits and $1,800,000 to other operating expenses, respectively.
W-15
NOTE 7 - INCOME TAXES
The provision (benefit) for income taxes on income before extraordinary item and cumulative effect of accounting changes is as follows:
1994 1993 1992 --------- -------- ------- (Dollars in thousands)
Current:
Federal . . . . . . . . . . . . . . . . $ --- $ --- $1,803
State and local . . . . . . . . . . . . . --- --- --- ------- ------- ----- --- --- 1,803 ------- ------- ----- Deferred:
Federal . . . . . . . . . . . . . . . . --- --- (1,349)
State and local . . . . . . . . . . . . . --- 85 215 ------- ------- -----
--- 85 (1,134) ------- ------- -----
$ --- $ 85 $ 669 ======= ======= =====
The provision (benefit) for income taxes is different from the amount that would be computed by multiplying the income (loss) before provision (benefit) for income taxes by the statutory U.S. federal income tax rates for the following reasons:
1994 1993 1992 --------- -------- ------ (Dollars in thousands) Income (loss) before provision (benefit) for income taxes. . . . . . . . . . . . . . $ (2,748) $(37,782) $ 1,474
Provision (benefit) at statutory rate of 34%. . . . . . . . . . . . . . . . . . .. (935) (12,845) 501
State and local income taxes, net of federal income tax benefit . . . . . . . . . --- --- 142
Goodwill and other nondeductible items . . . . 475 476 449
Targeted jobs tax credit . . . . . . . . . . . (318) (105) (446)
Tip credits. . . . . . . . . . . . . . . . . . (388) --- ---
Valuation allowance. . . . . . . . . . . . . . 1,284 12,474 ---
Other. . . . . . . . . . . . . . . . . . . . . (118) 85 23 ------- ------ ------ Total provision (benefit) for income taxes on continuing operations. . . . . . . $ --- $ 85 $ 669 ======= ====== ======
W-16
NOTE 7 - INCOME TAXES (Continued)
The tax effects of principal temporary differences in 1994 are shown in the following table:
W-17
NOTE 7 - INCOME TAXES (Continued)
The tax effects of principal temporary differences in 1993 are shown in the following table:
W-18
NOTE 7 - INCOME TAXES (Continued)
The tax effects of principal temporary differences in 1992 are shown in the following table:
The Company increased its deferred tax asset and liability in 1993 as a result of legislation enacted during 1993 increasing the corporate tax rate from 34% to 35% commencing in 1993. The net change in the valuation for deferred tax assets was an increase of $12,357,000.
W-19
NOTE 7 - INCOME TAXES (Continued)
The Company's share of Enterprises' consolidated tax carryforwards at December 25, 1994 expire as follows:
The use of these carryforwards is limited to future taxable income. Alternative minimum tax credits total $873,000 and may be carried forward indefinitely.
W-20
NOTE 7 - INCOME TAXES (Continued)
The overall (benefit) provision for income taxes, during 1992 is as follows:
The Company entered into a tax sharing and payment agreement with Enterprises (the "Agreement"), effective as of April 17, 1988, and applicable to the consolidated federal income tax returns filed by Enterprises for its taxable year beginning January 1, 1988. This Agreement provides that the Company, acting for itself and its subsidiaries, shall be allocated and shall reimburse Enterprises for their share of the consolidated federal income tax liability of the Enterprises consolidated group, and such share shall be determined by comparing the separate taxable incomes (as defined for consolidated federal income tax reporting purposes) of the Company and its subsidiaries to the sum of the separate taxable incomes of members of the Enterprises consolidated group. Enterprises will have the right to assess the Company on a quarterly basis for its share of the estimated consolidated federal income tax liability.
Through December 25, 1994, deferred income taxes have not been provided with respect to timing differences which gave rise to approximately $1,800,000 of net operating losses, for tax purposes. The losses were utilized by Enterprises in the computation of its consolidated federal income tax liability in accordance with the Agreement. However, Enterprises has agreed to credit the Company with tax benefits related to such net operating losses to offset future federal income taxes otherwise payable by the Company under the Agreement.
W-21
NOTE 8 - LEASE COMMITMENTS
The Company leases certain of its restaurant locations under long-term lease arrangements. Lease terms generally range from 10 to 25 years and normally contain renewal options ranging from 5 to 15 years, but do not contain purchase options. The Company is generally obligated for the cost of property taxes and insurance. Some of these leases contain contingent rental clauses based on a percentage of revenue. The building portions of such leases are capitalized and the land portions are accounted for as operating leases. Contingent rentals on capital leases were $389,000, $526,000 and $581,000 during 1994, 1993 and 1992, respectively.
Rent expense under operating leases included in continuing operations is as follows:
1994 1993 1992 ------------ -------------- ------------ (Dollars in thousands)
Land and buildings:
Minimum . . . . . . $ 4,777 $ 5,018 $ 4,825
Contingent. . . . . 686 714 840 ------- ------- -------
5,463 5,732 5,665
Equipment leases . . . . 2,338 2,060 1,610 ------- ------- -------
$ 7,801 $ 7,792 $ 7,275 ======= ======= =======
A summary of future minimum lease payments under capital leases, non-cancelable operating leases, and leases reserved for in the provision for closed units recorded in the fourth quarter of 1993 with remaining terms in excess of one year at December 25, 1994 follows:
Capital Operating Reserved Leases Leases Leases ------------ -------------- ------------ (Dollars in thousands) 1995. . . . . . . . $ 3,268 $ 7,092 $ 1,206
1996. . . . . . . . 3,157 6,717 1,216
1997. . . . . . . . 3,011 6,429 1,177
1998. . . . . . . . 2,706 6,021 941
1999. . . . . . . . 2,279 5,149 931
Thereafter. . . . . 16,331 24,233 4,948
30,752 55,641 10,419
Less interest . . . 13,365 --- ---
$ 17,387 $ 55,641 $10,419
Future minimum lease payments on operating leases have been reduced for sublease rental income of approximately $158,000 to be received in the future under non-cancelable subleases.
W-22
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Several of the Company's reserved area agreements include expansion schedules requiring the Company to develop a minimum number of Shoney's restaurants in the reserved areas over a defined period of time. Pursuant to these agreements, the Company is required to open a minimum of 36 Shoney's restaurants through October 6, 2004. In 1991, the Company entered into an agreement with Shoney's, Inc. to develop 38 new Captain D's restaurant over 20 years, at the approximate rate of two per year. The Company has constructed eight restaurants with respect to this agreement.
During 1994, the Company entered into a long-term commitment to purchase 8 million pounds of french fries, annually, over a two year period beginning on December 1, 1994 and continuing through November 30, 1996. The total estimated cost related to this commitment totals approximately $5,800,000. As of December 25, 1994, approximately 570,000 pounds, or $208,000, was purchased under the current contract.
NOTE 10 - LITIGATION
The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. It is the opinion of the management of the Company that the outcome of such litigation will not have a material adverse effect on the consolidated financial statements.
NOTE 11 - STOCKHOLDER'S EQUITY
The authorized capital stock of the Company consists of 10,000 shares of Series A Preferred Stock, par value $.01, which are issued and outstanding and 1,000 shares, par value $.01, of common stock which are issued and outstanding.
Dividends are payable on the Series A Preferred Stock at the annual rate of $400 per share. The dividends begin to accrue and are cumulative from the date of issue and are payable when and if declared by the Board of Directors. As of December 25, 1994, there had been no dividends declared and the aggregate cumulative dividends were approximately $24,942,000. Cumulative dividends in arrears also have a liquidation preference and must be satisfied upon the redemption of the preferred stock by the Company.
The payment of dividends on the Company's stock is limited as described in Note 5.
W-23
NOTE 12 - TRANSACTIONS WITH RELATED PARTIES
On October 5, 1988, the Company and Enterprises entered into a management services agreement, pursuant to which Enterprises agreed to provide certain management services to the Company on an ongoing basis. These services include financial and tax advice and assistance, auditing and accounting advice and services, advice relating to personnel, including benefit plans, and assistance with the administration and operation of the Company in general. The management services agreement originally provided that the Company pay an annual fee of $1,000,000 to Enterprises as compensation for rendering management services. As of August 1, 1992, this fee was increased to $2,500,000. Enterprises will also be reimbursed for its out-of-pocket expenses incurred in connection with rendering the management services. The management services agreement is effective until December 31, 1998, at which time it may be renewed for succeeding one-year terms by mutual agreement of the parties. During the years ended December 25, 1994, December 26, 1993 and December 27, 1992, the Company accrued and expensed $2,500,000, $2,487,000 and $1,693,000, respectively, pursuant to this agreement.
As part of the refinancing completed in August 1992, Enterprises purchased $15,850,000 aggregate principal amount of the Company's Notes. The Company paid approximately $798,000 of interest relating to these Notes to Enterprises during the year ended December 27, 1992.
On July 21, 1993, Enterprises acquired, for a purchase price of $3,860,000, the stock of a company which operated three Shoney's restaurants, including one owned and two leased locations. Included in the acquisition were the exclusive rights to operate Shoney's restaurants in the surrounding northern Palm Beach County, Florida area. Enterprises subsequently contributed all assets and related liabilities acquired in the transaction to the Company. In conjunction with this transaction, the Company purchased the land and building at one of the leased restaurant locations for $1,240,000. The President and Chief Executive Officer of the Company was a 20% shareholder of the acquired company and had a 50% interest in the land and building the Company purchased. The Company engaged the service of an independent appraisal company to review the fairness of the transaction.
On January 19, 1993, the Company purchased an airplane from a corporation owned by the President and Chief Executive Officer of the Company for $650,000. Prior to this purchase, the Company leased the airplane for approximately $87,000 during 1992. In addition, the Company paid chartering fees and expenses to the corporation of approximately $42,000 during 1992. The cost of the charter arrangements and the lease arrangement were comparable to similar arrangements available from unrelated third parties. A mortgage on the airplane was obtained in 1994.
W-24
NOTE 13 - QUARTERLY FINANCIAL INFORMATION (unaudited)
During the fourth quarter of 1994, the Company recorded $562,000 for adjustments to the Company's deferred compensation obligation (Note 13) and a $1,000,000 reduction to the Company's restructure reserve (Note 2). During the fourth quarter of 1993, the Company recorded restructuring charges of $34,571,000 relating primarily to a provision for closed units (Note 2). The Company's fiscal year is comprised of fifty-two or fifty-three weeks divided into four quarters of sixteen, twelve, twelve and twelve or thirteen weeks, respectively.
First Second Third Fourth Quarter Quarter Quarter Quarter -------- --------- --------- -------- (Dollars in thousands)
Quarter ended - 1994 - --------------------
Net sales, previously reported $ 87,397 $ 68,730 $ 67,325 $ 63,932
Effect of change in estimate 1,026 799 761 (2,586)
Net sales, restated 88,423 69,529 68,086 61,346
Gross profit 10,729 8,486 6,602 4,404
Net income (loss) 608 140 (1,416) (2,080)
Quarter ended - 1993 - --------------------
Net sales $ 85,133 $ 69,850 $ 70,326 $ 64,130
Gross profit 12,008 10,093 9,355 2,387
Net income (loss) 1,320 1,414 1,424 (41,940)
The quarters ended April 17, 1994, July 10, 1994, and October 2, 1994 have been restated as indicated above for a change in an accounting estimate related to the Company's restructuring plan. See Note 2.
Gross profit equals revenues less food, supplies and uniforms, restaurant labor and benefits, restaurant depreciation and amortization and other restaurant operating expense.
W-25
WS-1
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Page -----
The following financial statements of the Company have been filed under Item 8 hereto:
Independent Auditors' Report. . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets as of December 25, 1994 and December 26, 1993. . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Operations for each of the Three Fiscal Years in the Period Ended December 25, 1994 . . . . . 25
Consolidated Statements of Cash Flows for each of the Three Fiscal Years in the Period Ended December 25, 1994 . . . . . 27
Consolidated Statements of Shareholders' Equity for each of the Three Fiscal Years in the Period Ended December 25, 1994. 29
Notes to Consolidated Financial Statements. . . . . . . . . 30
2. Financial Statement Schedules Page ----
The following financial statement schedules for the three years ended December 25, 1994 are filed herewith at the page indicated:
Schedule I -- Condensed Financial Information of the Registrant S-1
Schedule II -- Reserves . . . . . . . . . . . . . . . . . . S-7
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (continued)
The following financial statements and schedules of the Company's wholly-owned subsidiary, TPI Restaurants, Inc. are filed herewith at the page indicated:
Page ------ Independent Auditors' Report. . . . . . . . . . . . . . . . W-1
Consolidated Balance Sheets as of December 25, 1994 and December 26, 1993 . . . . . . . . . . . . . . . . . . . . . W-2
Consolidated Statements of Operations for each of the Three Fiscal Years in the Period Ended December 25, 1994 . . . . . W-4
Consolidated Statements of Cash Flows for each of the Three Fiscal Years in the Period Ended December 25, 1994 . . . . . W-5
Consolidated Statements of Stockholder's Equity for each of the Three Fiscal Years in the Period Ended December 25, 1994 W-7
Notes to Consolidated Financial Statements . . . . . . . . . W-8
Schedule II -- Reserves . . . . . . . . . . . . . . . . . . WS-1
All other schedules have been omitted because they are inapplicable or the information required is shown in the consolidated financial statements or the notes thereto.
3. Exhibits
A list of exhibits required to be filed as part of this report on Form 10-K is set forth in the "Exhibit Index," which immediately precedes such exhibits, and is incorporated herein by reference.
(b). Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during the last quarter of the period covered by this report.
(c). Exhibits
All exhibits required by item 601 are listed on the accompanying "Exhibit Index" described in (a) 3 above.
(d). Financial Statements of Subsidiary
The financial statements of the Company's wholly-owned subsidiary, TPI Restaurants, Inc. are filed under (a) 2 above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TPI ENTERPRISES, INC. ------------------------ Registrant
Date:
By: /s/ J. GARY SHARP ----------------------- J. Gary Sharp President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Schedule I TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET
December 25, December 26, ---------------- --------------- 1994 1993 ---------------- --------------- (Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents. . . . . $ 11,976 $ 10,637 Deferred tax benefit . . . . . . . 5,666 6,734 Income tax refund. . . . . . . . . 779 3,171 Other current assets . . . . . . . 45 64 -------- -------- Total Current Assets . . . 18,466 20,606 -------- -------- Property and Equipment, net. . . . . 245 291 -------- -------- Other Assets: Investments in and advances to subsidiaries, net . . . . . . . 139,924 142,834 Other. . . . . . . . . . . . . . 3 8 -------- -------- 139,927 142,842 -------- -------- Total Assets . . . . . . . . . . . $158,638 $163,739 ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities: Accounts payable-trade . . . . . $ 77 $ 40 Accrued expenses and other current liabilities . . . . . . 2,652 2,311 Income taxes currently payable . 718 649 -------- -------- Total Current Liabilities. 3,447 3,000 -------- -------- Due to subsidiary. . . . . . . . . . 15,104 15,954 -------- -------- Long-term debt . . . . . . . . . . . 66,563 66,725 -------- -------- Deferred income taxes. . . . . . . . 5,663 6,734 -------- -------- Other liabilities. . . . . . . . . . 291 767 Shareholders' Equity: -------- --------
Preferred shares, no par value; 20,000,000 shares authorized; none issued and outstanding. . . --- ---
Common shares, $.01 par value; 100,000,000 shares authorized; 33,241,118 and 33,118,614 issued . 332 331
Additional paid-in capital . . . . 226,144 225,417 Deficit. . . . . . . . . . . . . . (88,961) (85,244) -------- -------- 137,515 140,504
Less treasury stock, at cost: 12,846,094 common shares in 1994 and 1993 69,945 69,945 -------- --------
Total Shareholders' Equity . . . . . 67,570 70,559 -------- -------- Total Liabilities and Shareholders' Equity . $158,63820 $163,739 -------- -------- See notes to condensed financial statements.
S-1
Schedule I TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year Ended ----------------------------------------- December 25, December 26, December 31, 1994 1993 1992 ------------- ------------- ----------- (Dollars in thousands) Revenue: Management fee income. . . . $2,500 $2,455 $1,714 Interest income. . . . . . 267 428 3,414 Equity in subsidiary earnings. . --- 30 215 Other. . . . . . . . . . . . . . --- --- 381 ------ ------ ------ 2,767 2,913 5,724 ------ ------ ------
Expenses: Equity in subsidiary losses. . . 2,838 39,348 17,726 General and administrative . . . 3,589 4,803 5,937 Depreciation and amortization. . 57 235 357 Corporate restructuring. . . . . --- 511 (465) Interest expense . . . . . . . . --- 340 433 ------ ------ ------ 6,484 45,237 23,988 ------ ------ ------
Loss from continuing operations before income taxes. . . . . . . . (3,717) (42,324) (18,264)
Income tax benefit . . . . . . . . --- 5,836 6,261 ------ ------ ------ Loss from continuing operations. . (3,717) (36,488) (12,003)
Discontinued operations: Gain on disposal, net. . . . . . --- 5,273 --- ------ ------ ------ Loss before cumulative effect of accounting changes . . . . . (3,717) (31,215) (12,003) Cumulative effect of accounting changes. . . . . . . . . . . . . --- --- (2,122) ------ ------ ------ Net loss . . . . . . . . . . . . $(3,717) $(31,215) $(14,125) ======= ======== ========
See notes to condensed financial statements.
S-2
Schedule I TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ----------------------------------------- December 25, December 26, December 31, 1994 1993 1992 ------------- ------------- ----------- (Dollars in thousands)
Cash Flows From Operating Activities: Net loss . . . . . . . . . . . . . $(3,717) $(31,215) $(14,125)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization. . 57 235 357 Equity in subsidiary losses. . . 2,838 39,318 17,511 Equity in subsidiary earnings from discontinued operations . . --- (7,990) ---
Deferred income taxes. . . . . . (3) (2,444) (5,566) Cumulative effect of accounting changes. . . . . . . --- --- 2,122
Changes in assets and liabilities, net of effects of discontinued operations:
Income tax refund . . . . . . . 2,392 (3,171) --- Other current assets . . . . . . 19 1,655 4,609 Intangible pension asset. . . . --- 330 50 Other . . . . . . . . . . . . . 5 15 --- Accounts payable-trade. . . . . 37 (50) (283) Accrued expenses and other current liabilities. . . . . . 341 (474) (742) Income taxes currently payable. 69 (1,016) (647) Other liabilities . . . . . . . (476) (1,996) 89 -------- --------- ------- Net cash provided by (used in) operating activities . . . . . $ 1,562 $ (6,803) $ 3,375 -------- --------- -------
S-3
Schedule I
TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (Continued)
Fiscal Year Ended ------------------------------------------ December 25, December 26, December 31, 1994 1993 1992 ------------- ------------- ----------- (Dollars in thousands)
Cash flows from investing activities:
Investment in and advances to subsidiaries, net. . . . . . $ 72 $(32,926) $(102,576) Acquisition of property and equipment. . . . . . . . . . . . (11) --- (391) Dividends received from subsidiary . --- 5,254 9,000 Disposition of property and equipment. . . . . . . . . . . . . --- --- 386 -------- --------- --------- Net cash provided by (used in) investing activities. . . . . . . 61 (27,672) (93,581) -------- --------- --------- Cash flows from financing activities:
Payment of advances from subsidiaries . (850) --- --- Proceeds of 8 1/4% Convertible Subordinated Debentures . . . . . . . --- --- 51,750 Restricted cash deposits . . . . . . . --- --- 11,700 Common shares issued . . . . . . . . . 566 17,204 457 Proceeds from 5% Convertible Senior Subordinated Debentues. . . . . . . . --- 15,000 --- -------- --------- --------- Net cash provided by (used in) financing activities. . . . . . . . . (284) 32,204 63,907 -------- --------- --------- Increase (decrease) in cash and cash equivalents . . . . . . . . . . . 1,339 (2,271) (26,299) Cash and cash equivalents, beginning of period . . . . . . . . 10,637 12,908 39,207 -------- --------- --------- Cash and cash equivalents, end of period . . . . . . . . . . . $ 11,976 $10,637 $12,908 ======== ======= ======= Supplemental Disclosure of Cash Flow Information:
Non-cash transactions:
Conversion of 8 1/4% Subordinated Debentures . . . . . . .. . . . $ 165 $ --- $ --- Cash payments (refunds) during the year for: Income taxes . . . . . . . . . $(2,164) $2,810 $(5,046)
See notes to condensed financial statements.
S-4
Schedule I
TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data)
S-5
Schedule I
TPI ENTERPRISES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Note 1 - Accounting Policies The investments in the Company's subsidiaries are carried at the Company's equity in the subsidiary which represents amounts invested less the Company's equity in the earnings and losses to date. Significant intercompany balances and activities have not been eliminated in this unconsolidated financial information.
Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principals have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with the Company's consolidated financial statements.
Note 2 - Cash Dividend Paid by Subsidiary Subsequent to the sale of its interest in the Partnership, the Company's wholly-owned subsidiary, TPI Entertainment, Inc., paid a dividend of $5,254,000 to the Company. On September 30, 1992, the Company's wholly-owned subsidiary, Maxcell Telecom Plus, Inc., paid a dividend of $9,000,000 to the Company.
S-6
S-7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of TPI Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of TPI Restaurants, Inc., (a wholly-owned subsidiary of TPI Enterprises, Inc.) and its subsidiaries as of December 25, 1994 and December 26, 1993, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three fiscal years in the period ended December 25, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14 (a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of TPI Restaurants, Inc. and its subsidiaries as of December 25, 1994 and December 26, 1993, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 25, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1992 the Company changed its method of accounting for income taxes and postemployment benefits to conform with Statements of Financial Accounting Standards No. 109 and 112. The Company has reflected the cumulative effect of these changes in 1992.
/s/ Deloitte & Touche LLP
March 10, 1995 Memphis, Tennessee
W-1
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS
See notes to consolidated financial statements.
W-2
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
See notes to consolidated financial statements.
W-3
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
W-4
TPI RESTAURANTS, INC. SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
W-5
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
See notes to consolidated financial statements.
W-6
TPI RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (Dollars in thousands)
See notes to consolidated financial statements.
W-7
TPI RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of TPI Restaurants, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions are eliminated in consolidation. The Company maintains its books on a 52-53 week fiscal year ending on the last Sunday in December.
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, certificates of deposit and short-term marketable securities with maturities of 90 days or less when purchased, as cash and cash equivalents.
The Company utilizes a cash management system under which cash overdrafts exist in the book balances of its primary disbursing accounts. These overdrafts represent the uncleared checks in the disbursing accounts. The cash amounts presented in the consolidated financial statements represent balances on deposit at other locations prior to their transfer to the primary disbursing accounts. Uncleared checks of $7,229,000 and $7,393,000 are included in accounts payable at December 25, 1994 and December 26, 1993, respectively.
Inventories
Inventories, consisting of food items, beverages and supplies, are stated at the lower of weighted average cost (which approximates first-in, first-out) or market.
Preopening Costs
Direct costs incidental to the opening of new restaurants are capitalized and amortized over the restaurants' first year of operation.
Depreciation and Amortization
Depreciation and amortization of property and equipment is provided on the straight-line method over the estimated useful lives of the assets or, in the case of leasehold improvements and certain property under capital leases, over the lesser of the useful life or the lease term.
Goodwill related to the acquisition of the Company by TPI Enterprises, Inc. is amortized on a straight-line basis over a thirty-six year period. The costs of franchise license agreements which govern the individual Shoney's and Captain D's restaurants and reserved area agreements are amortized on a straight-line basis over the lives of the related franchise license agreements, up to 40 years.
Postemployment Benefits
The Company recognizes the cost of postemployment benefits on an accrual basis in accordance with Financial Accounting Standard 112, "Employers' Accounting for Postemployment Benefits." The adoption of this statement during the year ended December 27, 1992 resulted in an increase of $79,000 in 1992 income before extraordinary item and cumulative effect of account charges. The cumulative effect on years prior to December 30, 1991 of $968,000 is included in 1992 net income.
W-8
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Income Taxes The Company's income taxes are computed in accordance with a tax sharing and payment agreement with its parent company.
Effective December 30, 1991, the Company adopted Financial Accounting Standard No. 109, "Accounting for Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Prior to 1992, income taxes were accounted for under Accounting Principles Board Opinion No. 11.
The effect of adopting Statement 109 was an increase of $646,000, relating to income before extraordinary item and cumulative effect of accounting changes, an increase of $849,000 relating to the extraordinary item and the cumulative effect of adopting Statement 112. The cumulative effect of the change on years prior to December 30, 1991 of $1,495,000 is a decrease in 1992 net income. The adoption of Statement 109 had no effect on 1992 net income.
Working Capital Deficiency The Company had a working capital deficiency of $28,086,000 and $24,753,000 at December 25, 1994 and December 26, 1993, respectively. The Company does not have significant receivables or inventory and receives trade credit based upon negotiated terms in purchasing food and supplies. Because funds available from cash sales are not needed immediately to pay for food and supplies or to finance receivables or inventory, they may be used for non-current capital expenditures.
Reclassification Certain amounts in prior years have been reclassified to conform to the 1994 presentation.
NOTE 2 - RESTRUCTURING CHARGES
The Company approved a restructuring plan as of the end of the fourth quarter of 1993 which includes closing or relocating 31 of its restaurants by the end of 1994, not exercising options to renew leases with respect to an additional 19 of its restaurants upon expiration of the current lease terms and the restructuring of divisional management as well as consolidating the Company's corporate office with its parent company's office. With respect to the restaurants to be closed or relocated, the Company recorded $19,800,000 of restructuring charges in 1993 consisting primarily of the write-off of assets and the accrual of lease and other expenses, net of projected sales proceeds and sublease income. As of December, 1994, the Company has closed 22 restaurants with plans to close an additional 4 restaurants during the first half of 1995. During the fourth quarter of 1994, management determined that improved operations at 5 of the restaurants, previously included in the restructure plan, indicated the locations should not be closed. Accordingly, the Company reduced its reserve by approximately $2,500,000 related to these 5 locations. During 1994, the reserve was also charged $3,500,000 for expenditures and asset write-offs related to the other 26 units.
With respect to the 19 restaurants projected to be closed no later than the expiration of their current lease terms, the Company determined that the recoverability of the assets had been permanently impaired, and accordingly, recorded a charge of $4,500,000 primarily for the write-down of assets at the end of 1993. During 1994, three of these units were closed prior to or upon the expiration of their current lease terms. The reserve was charged approximately $700,000 for the write-down of assets.
W-9
NOTE 2 - RESTRUCTURING CHARGES (Continued)
With respect to the Company's restructuring of its divisional management and consolidation of its corporate offices, the Company recorded approximately $1,800,000 for the cost of moving the Memphis office, $800,000 for the write-off of assets and accrual of remaining lease obligations at the Company's present facilities and $1,200,000 for severance costs and other costs relating to the restructuring of divisional and corporate overhead. Severance costs included amounts to be paid to approximately 80 employees at the divisional level and at the Memphis corporate office who would be terminated as a result of the restructuring of its divisional management and consolidation of its corporate offices. During 1994, the Company paid out approximately $1,100,000 related to the restructure of which $300,000 was for severance.
In addition to the amounts paid, management determined that an additional $1,200,000 should be provided for the write-off of assets at its Memphis location. The Company expects to pay the majority of the remaining relocation obligations during 1995 as the consolidation of the corporate offices is completed. In addition to these reserves, the Company also recorded approximately $6,500,000 in the prior year related to units that were closed prior to 1993 and for the sale of vacant properties. During 1994, the reserve had charges of approximately $1,700,000 resulting from expenditures and asset write-offs and an increase of $300,000 related to changes in original estimates for the costs of disposal.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Property and equipment with a net book value of approximately $22,233,000 and $22,681,000 were pledged as collateral for the Company's debt facilities as of December 25, 1994 and December 26, 1993, respectively.
Depreciation and amortization are calculated using the straight-line method and are based on the estimated useful lives of the assets as follows: buildings, 30 years; equipment and furnishings, 3-15 years; and leasehold improvements, primarily representing buildings constructed on leased property, the lesser of the term of the lease or 30 years. Depreciation and amortization of property and equipment totalled approximately $14,928,000, $14,048,000 and $12,833,000 during 1994, 1993 and 1992 respectively. In 1994, 1993 and 1992, approximately $1,643,000, $1,649,000 and $1,844,000, respectively, related to capitalized leases. Property and equipment includes capitalized interest on construction of $425,000, $374,000 and $172,000 at December 25, 1994, December 26, 1993 and December 27, 1992, respectively.
W-10
NOTE 4 - OTHER INTANGIBLE ASSETS
Other intangible assets consists of the following:
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
Scheduled annual principal maturities of long-term debt, excluding capital leases, for the five years subsequent to December 25, 1994, are as follows: $2,224,000 in 1995; $24,010,000 in 1996; $41,000 in 1997; $46,000 in 1998 and $51,000 in 1999.
Interest expense for 1994, 1993, and 1992 includes interest on obligations under capital leases of $1,952,000, $2,334,000 and $2,610,000 respectively.
W-11
NOTE 5 - LONG-TERM DEBT (Continued)
Debentures
On March 19, 1993, the Airlie Group, L.P. and certain related parties (the "Airlie Group") made an investment in TPI Enterprises, Inc. ("Enterprises") of $30,000,000 including $15,000,000 of 5% Convertible Senior Subordinated Debentures (the "Senior Debentures"), due 2003, the issuance of 1,500,000 shares of Enterprises' common stock at $10 per share and the issuance of warrants to purchase an additional 1,000,000 shares of common stock at $11 per share. The Senior Debentures are senior to the 8 1/4% Convertible Subordinated Debentures (described below). The Senior Debentures are convertible at the option of the holder into common shares of Enterprises at any time prior to maturity at $11 per share, subject to adjustment in certain events. The Senior Debentures mature on April 15, 2003 and are redeemable, in whole or in part, at the option of Enterprises at any time on or after April 15, 1996, initially at 103.5% of their principal amount and declining to 100% of their principal amount on April 15, 2003. The Senior Debenture holders may require Enterprises to repurchase the Senior Debentures, in whole or in part, in certain circumstances involving a change in control of Enterprises as defined in the Debenture Purchase Agreement (the "Agreement"). However, a change in control, as defined in the Agreement, will create an event of default under the Credit Facility (described below) and, as a result, any repurchase would, absent a waiver, be blocked by the subordination provision of the Agreement until the Credit Facility (and any other senior indebtedness of Enterprises and senior indebtedness of the Company with respect to which there is a payment default) have been repaid in full. The Senior Debentures are unconditionally guaranteed on a subordinated basis by the Company. They are subordinated to all existing and future senior indebtedness of Enterprises and the Company.
The 8 1/4% Convertible Subordinated Debentures (the "Debentures"), which provided proceeds to Enterprises of $47,948,000, net of $3,802,000 in deferred debt costs, are convertible at the option of the holder into common shares of Enterprises at any time prior to maturity at a conversion price of $6.50 per share subject to adjustment in certain events. The Debentures mature on July 15, 2002, and are redeemable at the option of Enterprises at any time on or after July 15, 1995, at a premium which declines as the Debentures approach maturity. The Debenture holders may also require Enterprises to repurchase the Debentures, in whole or in part, in certain circumstances involving a change in control of Enterprises as defined in the indenture covering the Debentures (the "Indenture"). However, a change in control, as defined in the Indenture, will create an event of default under the Credit Facility and, as a result, any repurchase would, absent a waiver, be blocked by the subordination provisions of the Indenture until the Credit Facility (and any other senior indebtedness of Enterprises and senior indebtedness of the Company with respect to which there is a payment default) have been repaid in full.
During 1992, the Company recorded a charge of $16,069,000 following the repurchase of $82,676,000 principal amount of it's 14 1/4% Senior Subordinated Notes (the "Notes"). The Company had previously purchased $15,850,000 aggregate principal amount of the Notes in the open market. The costs of all repurchased Notes in excess of their principal amounts, together with the related deferred finance costs and expenses related to the repurchase, were charged to income as extraordinary items, net of income tax of $2,050,000. The remaining $1,474,000 principal amount was repurchased on November 15, 1993. Premiums on the purchases and the write-off of deferred debt costs resulted in a charge of $109,000 to other income and expense during 1993.
W-12
NOTE 5 - LONG-TERM DEBT (Continued)
Credit Facility
The Credit Facility which previously consisted of a $50,000,000 Revolving Credit Facility was amended as of December 23, 1994. This amendment and waiver restricted total borrowings available under the facility to $40,000,000 and waived compliance with certain financial ratios through January 31, 1995. The Credit Facility was amended and restated as of January 31, 1995. The amendment to the facility limits borrowings to $40,000,000, revises certain financial covenant ratios and requires the collateralization of additional properties. The Credit Facility matures on June 3, 1996, unless extended by the Banks.
Borrowings under the Credit Facility, at the Company's option, bear interest at either a defined base rate or a rate based on the London Interbank Offered Rate. The weighted average interest rate on the amount outstanding was 8.2% and 5.2% for 1994 and 1993, respectively. The Company paid certain fees and expenses to the Banks in connection with the original commitment letter, which along with other costs associated with the Original Credit Facilities, totalled approximately $2,000,000 and also agreed to indemnify the Banks against certain liabilities. The Company also pays a fee based on the Eurodollar rate, 2.00% at December 25, 1994, in connection with letters of credit issued and a commitment fee equal to 0.50% per annum on the average daily unused amount of the Credit Facility. The terms of the Second Amended and Restated Credit Agreement requires that the fee paid on borrowings and letters of credit be increased by .50% effective January 31, 1995.
Borrowings under the Credit Facility are secured by all shares of the capital stock of the Company, whenever issued, intercompany debt of the Company owed to Enterprises and ground lease mortgages with respect to certain premises in which the land is currently leased but the building located thereon is owned by the Company. In addition, the Banks have the right to obtain, as security, assignments of other leases and/or mortgages on real property currently owned or subsequently acquired. However, the Company has rights to finance certain of these properties and obtain a release of the collateral under certain conditions. The Credit Facility limits the amount of additional indebtedness which Enterprises, the Company and its subsidiaries may incur and the aggregate annual amount to be spent on capital expenditures. In addition, the Credit Facility limits, among other things, the ability of Enterprises, the Company and its subsidiaries to pay dividends, create liens, sell assets, engage in mergers or acquisitions and make investments in subsidiaries. The Company may not transfer amounts to Enterprises except for the payment of a management fee not to exceed $2,500,000 in each fiscal year and a dividend in an amount sufficient to pay interest on the Senior Debentures and the Debentures, in each case provided that no defaults under the Credit Facility exist either immediately before or after the transfer. The Company must also maintain certain financial ratios and defined levels of net worth.
At December 25, 1994, $22,400,000 was drawn on the facility and letters of credit in the amount of $10,951,000 were outstanding, resulting in a remaining available balance of $6,649,000.
Notes Payable
Notes payable as of December 25, 1994 consists of obligations secured by buildings, land, equipment, and cash value life insurance policies with a net book value of $8,381,000.
W-13
NOTE 5 - LONG-TERM DEBT (Continued)
Fair Value of Financial Instruments
The estimated fair value of the Company's Debentures, based on the quoted market price, is $39,200,000 and $86,900,000 at December 25, 1994 and December 26, 1993, respectively. The estimated fair value of the Company's Senior Debentures at December 25, 1994 is $11,600,000, based on the estimated borrowing rates available to the Company. The Credit Facility reprices frequently at market rates; therefore, the carrying amount of the Credit Facility is a reasonable estimate of its fair value at December 25, 1994 and December 26, 1993. The estimated fair value of the Company's notes payable approximates the principal amount of such notes outstanding at December 25, 1994 and December 26, 1993, which is based upon the estimated borrowing rates available to the Company.
The fair value estimates presented herein are based on pertinent information available to management as of December 25, 1994 and December 26, 1993. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.
W-14
NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
1994 1993 -------------- ------------- (Dollars in thousands)
Reserve for restructuring. . . . . . . . . . $ 5,177 $ 2,005
Insurance. . . . . . . . . . . . . . . . . . 14,578 10,520
Taxes other than income taxes. . . . . . . . 4,463 3,790
Interest . . . . . . . . . . . . . . . . . . 2,407 2,401
Payroll. . . . . . . . . . . . . . . . . . . 1,524 1,987
Other. . . . . . . . . . . . . . . . . . . . 3,507 4,056 --------- --------- $ 31,656 $ 24,759 ========= =========
The Company is primarily self insured for general liability and workers' compensation risks supplemented by stop loss type insurance policies. The self-insurance liabilities included in accrued insurance at December 25, 1994 and December 26, 1993 were approximately $14,232,000 and $9,451,000, respectively.
During 1993, management completed an extensive review of the Company's exposure resulting from its self insurance program for workers' compensation and general liability. The review, which was based on improved data available to the Company relating to the trend in claims development, indicated that the Company's reserves for retained losses were near the lower end of the expected range of possible losses. Management determined it would be appropriate to increase the Company's reserves to better reflect the likely outcome of its liability within the possible range of losses. Accordingly, as of the end of the fourth quarter of 1993, workers' compensation insurance reserves were increased by charging $2,900,000 to restaurant labor and benefits and $1,800,000 to other operating expenses, respectively.
W-15
NOTE 7 - INCOME TAXES
The provision (benefit) for income taxes on income before extraordinary item and cumulative effect of accounting changes is as follows:
1994 1993 1992 --------- -------- ------- (Dollars in thousands)
Current:
Federal . . . . . . . . . . . . . . . . $ --- $ --- $1,803
State and local . . . . . . . . . . . . . --- --- --- ------- ------- ----- --- --- 1,803 ------- ------- ----- Deferred:
Federal . . . . . . . . . . . . . . . . --- --- (1,349)
State and local . . . . . . . . . . . . . --- 85 215 ------- ------- -----
--- 85 (1,134) ------- ------- -----
$ --- $ 85 $ 669 ======= ======= =====
The provision (benefit) for income taxes is different from the amount that would be computed by multiplying the income (loss) before provision (benefit) for income taxes by the statutory U.S. federal income tax rates for the following reasons:
1994 1993 1992 --------- -------- ------ (Dollars in thousands) Income (loss) before provision (benefit) for income taxes. . . . . . . . . . . . . . $ (2,748) $(37,782) $ 1,474
Provision (benefit) at statutory rate of 34%. . . . . . . . . . . . . . . . . . .. (935) (12,845) 501
State and local income taxes, net of federal income tax benefit . . . . . . . . . --- --- 142
Goodwill and other nondeductible items . . . . 475 476 449
Targeted jobs tax credit . . . . . . . . . . . (318) (105) (446)
Tip credits. . . . . . . . . . . . . . . . . . (388) --- ---
Valuation allowance. . . . . . . . . . . . . . 1,284 12,474 ---
Other. . . . . . . . . . . . . . . . . . . . . (118) 85 23 ------- ------ ------ Total provision (benefit) for income taxes on continuing operations. . . . . . . $ --- $ 85 $ 669 ======= ====== ======
W-16
NOTE 7 - INCOME TAXES (Continued)
The tax effects of principal temporary differences in 1994 are shown in the following table:
W-17
NOTE 7 - INCOME TAXES (Continued)
The tax effects of principal temporary differences in 1993 are shown in the following table:
W-18
NOTE 7 - INCOME TAXES (Continued)
The tax effects of principal temporary differences in 1992 are shown in the following table:
The Company increased its deferred tax asset and liability in 1993 as a result of legislation enacted during 1993 increasing the corporate tax rate from 34% to 35% commencing in 1993. The net change in the valuation for deferred tax assets was an increase of $12,357,000.
W-19
NOTE 7 - INCOME TAXES (Continued)
The Company's share of Enterprises' consolidated tax carryforwards at December 25, 1994 expire as follows:
The use of these carryforwards is limited to future taxable income. Alternative minimum tax credits total $873,000 and may be carried forward indefinitely.
W-20
NOTE 7 - INCOME TAXES (Continued)
The overall (benefit) provision for income taxes, during 1992 is as follows:
The Company entered into a tax sharing and payment agreement with Enterprises (the "Agreement"), effective as of April 17, 1988, and applicable to the consolidated federal income tax returns filed by Enterprises for its taxable year beginning January 1, 1988. This Agreement provides that the Company, acting for itself and its subsidiaries, shall be allocated and shall reimburse Enterprises for their share of the consolidated federal income tax liability of the Enterprises consolidated group, and such share shall be determined by comparing the separate taxable incomes (as defined for consolidated federal income tax reporting purposes) of the Company and its subsidiaries to the sum of the separate taxable incomes of members of the Enterprises consolidated group. Enterprises will have the right to assess the Company on a quarterly basis for its share of the estimated consolidated federal income tax liability.
Through December 25, 1994, deferred income taxes have not been provided with respect to timing differences which gave rise to approximately $1,800,000 of net operating losses, for tax purposes. The losses were utilized by Enterprises in the computation of its consolidated federal income tax liability in accordance with the Agreement. However, Enterprises has agreed to credit the Company with tax benefits related to such net operating losses to offset future federal income taxes otherwise payable by the Company under the Agreement.
W-21
NOTE 8 - LEASE COMMITMENTS
The Company leases certain of its restaurant locations under long-term lease arrangements. Lease terms generally range from 10 to 25 years and normally contain renewal options ranging from 5 to 15 years, but do not contain purchase options. The Company is generally obligated for the cost of property taxes and insurance. Some of these leases contain contingent rental clauses based on a percentage of revenue. The building portions of such leases are capitalized and the land portions are accounted for as operating leases. Contingent rentals on capital leases were $389,000, $526,000 and $581,000 during 1994, 1993 and 1992, respectively.
Rent expense under operating leases included in continuing operations is as follows:
1994 1993 1992 ------------ -------------- ------------ (Dollars in thousands)
Land and buildings:
Minimum . . . . . . $ 4,777 $ 5,018 $ 4,825
Contingent. . . . . 686 714 840 ------- ------- -------
5,463 5,732 5,665
Equipment leases . . . . 2,338 2,060 1,610 ------- ------- -------
$ 7,801 $ 7,792 $ 7,275 ======= ======= =======
A summary of future minimum lease payments under capital leases, non-cancelable operating leases, and leases reserved for in the provision for closed units recorded in the fourth quarter of 1993 with remaining terms in excess of one year at December 25, 1994 follows:
Capital Operating Reserved Leases Leases Leases ------------ -------------- ------------ (Dollars in thousands) 1995. . . . . . . . $ 3,268 $ 7,092 $ 1,206
1996. . . . . . . . 3,157 6,717 1,216
1997. . . . . . . . 3,011 6,429 1,177
1998. . . . . . . . 2,706 6,021 941
1999. . . . . . . . 2,279 5,149 931
Thereafter. . . . . 16,331 24,233 4,948
30,752 55,641 10,419
Less interest . . . 13,365 --- ---
$ 17,387 $ 55,641 $10,419
Future minimum lease payments on operating leases have been reduced for sublease rental income of approximately $158,000 to be received in the future under non-cancelable subleases.
W-22
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Several of the Company's reserved area agreements include expansion schedules requiring the Company to develop a minimum number of Shoney's restaurants in the reserved areas over a defined period of time. Pursuant to these agreements, the Company is required to open a minimum of 36 Shoney's restaurants through October 6, 2004. In 1991, the Company entered into an agreement with Shoney's, Inc. to develop 38 new Captain D's restaurant over 20 years, at the approximate rate of two per year. The Company has constructed eight restaurants with respect to this agreement.
During 1994, the Company entered into a long-term commitment to purchase 8 million pounds of french fries, annually, over a two year period beginning on December 1, 1994 and continuing through November 30, 1996. The total estimated cost related to this commitment totals approximately $5,800,000. As of December 25, 1994, approximately 570,000 pounds, or $208,000, was purchased under the current contract.
NOTE 10 - LITIGATION
The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. It is the opinion of the management of the Company that the outcome of such litigation will not have a material adverse effect on the consolidated financial statements.
NOTE 11 - STOCKHOLDER'S EQUITY
The authorized capital stock of the Company consists of 10,000 shares of Series A Preferred Stock, par value $.01, which are issued and outstanding and 1,000 shares, par value $.01, of common stock which are issued and outstanding.
Dividends are payable on the Series A Preferred Stock at the annual rate of $400 per share. The dividends begin to accrue and are cumulative from the date of issue and are payable when and if declared by the Board of Directors. As of December 25, 1994, there had been no dividends declared and the aggregate cumulative dividends were approximately $24,942,000. Cumulative dividends in arrears also have a liquidation preference and must be satisfied upon the redemption of the preferred stock by the Company.
The payment of dividends on the Company's stock is limited as described in Note 5.
W-23
NOTE 12 - TRANSACTIONS WITH RELATED PARTIES
On October 5, 1988, the Company and Enterprises entered into a management services agreement, pursuant to which Enterprises agreed to provide certain management services to the Company on an ongoing basis. These services include financial and tax advice and assistance, auditing and accounting advice and services, advice relating to personnel, including benefit plans, and assistance with the administration and operation of the Company in general. The management services agreement originally provided that the Company pay an annual fee of $1,000,000 to Enterprises as compensation for rendering management services. As of August 1, 1992, this fee was increased to $2,500,000. Enterprises will also be reimbursed for its out-of-pocket expenses incurred in connection with rendering the management services. The management services agreement is effective until December 31, 1998, at which time it may be renewed for succeeding one-year terms by mutual agreement of the parties. During the years ended December 25, 1994, December 26, 1993 and December 27, 1992, the Company accrued and expensed $2,500,000, $2,487,000 and $1,693,000, respectively, pursuant to this agreement.
As part of the refinancing completed in August 1992, Enterprises purchased $15,850,000 aggregate principal amount of the Company's Notes. The Company paid approximately $798,000 of interest relating to these Notes to Enterprises during the year ended December 27, 1992.
On July 21, 1993, Enterprises acquired, for a purchase price of $3,860,000, the stock of a company which operated three Shoney's restaurants, including one owned and two leased locations. Included in the acquisition were the exclusive rights to operate Shoney's restaurants in the surrounding northern Palm Beach County, Florida area. Enterprises subsequently contributed all assets and related liabilities acquired in the transaction to the Company. In conjunction with this transaction, the Company purchased the land and building at one of the leased restaurant locations for $1,240,000. The President and Chief Executive Officer of the Company was a 20% shareholder of the acquired company and had a 50% interest in the land and building the Company purchased. The Company engaged the service of an independent appraisal company to review the fairness of the transaction.
On January 19, 1993, the Company purchased an airplane from a corporation owned by the President and Chief Executive Officer of the Company for $650,000. Prior to this purchase, the Company leased the airplane for approximately $87,000 during 1992. In addition, the Company paid chartering fees and expenses to the corporation of approximately $42,000 during 1992. The cost of the charter arrangements and the lease arrangement were comparable to similar arrangements available from unrelated third parties. A mortgage on the airplane was obtained in 1994.
W-24
NOTE 13 - QUARTERLY FINANCIAL INFORMATION (unaudited)
During the fourth quarter of 1994, the Company recorded $562,000 for adjustments to the Company's deferred compensation obligation (Note 13) and a $1,000,000 reduction to the Company's restructure reserve (Note 2). During the fourth quarter of 1993, the Company recorded restructuring charges of $34,571,000 relating primarily to a provision for closed units (Note 2). The Company's fiscal year is comprised of fifty-two or fifty-three weeks divided into four quarters of sixteen, twelve, twelve and twelve or thirteen weeks, respectively.
First Second Third Fourth Quarter Quarter Quarter Quarter -------- --------- --------- -------- (Dollars in thousands)
Quarter ended - 1994 - --------------------
Net sales, previously reported $ 87,397 $ 68,730 $ 67,325 $ 63,932
Effect of change in estimate 1,026 799 761 (2,586)
Net sales, restated 88,423 69,529 68,086 61,346
Gross profit 10,729 8,486 6,602 4,404
Net income (loss) 608 140 (1,416) (2,080)
Quarter ended - 1993 - --------------------
Net sales $ 85,133 $ 69,850 $ 70,326 $ 64,130
Gross profit 12,008 10,093 9,355 2,387
Net income (loss) 1,320 1,414 1,424 (41,940)
The quarters ended April 17, 1994, July 10, 1994, and October 2, 1994 have been restated as indicated above for a change in an accounting estimate related to the Company's restructuring plan. See Note 2.
Gross profit equals revenues less food, supplies and uniforms, restaurant labor and benefits, restaurant depreciation and amortization and other restaurant operating expense.
W-25
WS-1