UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Check One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For The Fiscal Year Ended June 29, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ___
Commission File Number: 0-22639
UNIQUE CASUAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Corporate Place, 55 Ferncroft Road, Danvers, MA 01923
(Address of principal executive offices) (Zip Code)
508-774-6606
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of the Common Stock of the registrant as
quoted on the National Association of Securities Dealers Automated Quotation
System on October 2, 1997 was $73,839,040 (for purposes of calculating this
amount only, directors, officers and beneficial owners of 10% or more of the
Common Stock of the registrant may be deemed affiliates).
Number of shares of Common Stock, $.01 par value, outstanding at October 2,
1997: 11,463,704
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The sections of the Company's definitive Proxy Statement, listed below, which
have been or will be filed by the Company with the Securities and Exchange
Commission, are incorporated in this Annual Report by reference and shall be
deemed to be a part hereof:
The Company's definitive Proxy Statement mailed in connection with its
Annual Meeting of Stockholders to be held on December 9, 1997 pursuant
to regulation 14A, which involves the election of directors.
Cross Reference Sheet between Items of
Registrant's Proxy Statement and Form 10-K
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<CAPTION>
FORM 10-K
Item No. Item in Form 10-K Item in Proxy Statement
<S> <C> <C>
PART III
10 Directors and Executive Election of Directors and Directors and Committees
Officers of the Registrant in the Company's Proxy Statement relating to its
Annual Meeting of Stockholders to be held on
December 9, 1997.
11 Executive Compensation Executive Compensation in the Company's Proxy
Statement relating to its Annual Meeting of
Stockholders to be held on December 9, 1997.
12 Security Ownership of Certain Principal Stockholders in the Company's Proxy
Beneficial Owners and Management Statement relating to its Annual Meeting of
Stockholders to be held on December 9, 1997.
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Copies of all documents incorporated by reference other than exhibits to such
documents will be provided without charge to each person who receives a copy of
this Annual Report upon written request addressed to Stockholder Relations,
Unique Casual Restaurants, Inc., One Corporate Place, 55 Ferncroft Road,
Danvers, Massachusetts 01923.
<PAGE>
FORM 10-K INDEX
PART I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Results of Operations and
Financial Condition
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
<PAGE>
From time to time, the Company may make certain statements that
contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995). Words such as
"believe", "anticipate", "estimate", "project", and similar
expressions are intended to identify such forward-looking
statements. Forward-looking statements may be made by management
orally or in writing, including, but not limited to, in press
releases, as part of Management's Discussion and Analysis of
Financial Condition and Results of Operations as contained in this
report and as part of other sections of this Report or other
filings. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their
respective dates, and are subject to certain risks, uncertainties
and assumptions including those set forth in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations under the heading "Forward-Looking Statements". Should
one or more of these risks or uncertainties materialize, or should
any of the underlying assumptions prove incorrect, actual results
of current and future operations may vary materially from those
anticipated, estimated or projected.
PART I
Item 1. Business.
Unique Casual Restaurants, Inc. (the "Company") is a Delaware corporation which
was formed on May 27, 1997 prior to its spin-off to holders of the common stock
of DAKA International, Inc. ("DAKA International") pursuant to the transactions
described under the heading "Spin-off Transaction" herein (the "Spin-off"). The
Company's principal executive offices are located at One Corporate Place, 55
Ferncroft Road, Danvers, Massachusetts 01923, and its telephone number is (508)
774-6606. The Company's principal business is to own, operate and franchise
Fuddruckers, Champps Americana and Great Bagel & Coffee Company restaurants.
The Company's Fuddruckers and Champps operations serve customers in casual and
upscale restaurant settings, respectively, throughout the United States and in
Canada and the Middle East. Great Bagel and Coffee serves coffee, bagels and
sandwich items in a cafe setting in western locations of the United States.
Restaurant operations are conducted through company-owned and franchised stores.
For purposes of this Form 10-K and financial reporting purposes, the Company has
been treated as if it was a stand-alone entity for all periods presented. The
Company's results of operations, as presented in the accompanying financial
statements, include allocations and estimates of certain expenses, including
corporate accounting, tax, cash management, information technology, legal, risk
management, purchasing and human resources, historically provided to the Company
by DAKA International.
Recent Trends in Operations
For fiscal 1997, the Company reported a net loss of $39 million compared with a
loss of $5.7 million in 1996. Refer to the Combined Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for information regarding the Company's financial performance in
fiscal 1997 and 1996.
<PAGE>
Fuddruckers
Operations
Fuddruckers restaurants, with an average bill of $6.45 per person and a "Kids
Eat Free" program after 4:00 p.m. on Monday through Thursday, are designed to
appeal to both families and adults seeking value in a casual dining atmosphere.
The restaurants offer a distinctive atmosphere created by an open grill area, a
glassed-in butcher shop, a display case featuring choice steaks and hamburgers
that have been freshly-cut or ground and an open bakery for hamburger buns,
brownies and cookies. Each restaurant offers a substantially similar menu that
prominently features Fuddruckers' signature hamburger in one-third pound and
one-half pound sizes. Hamburgers are made from fresh beef, cut and ground daily
at each restaurant and served on buns baked daily "from scratch" at each
restaurant. The hamburgers are available with optional specialty toppings from
the grill. While the menu is focused on Fuddruckers' signature hamburger, which
accounts for approximately 65% of sales, it also includes fresh-cut, ribeye
steak sandwiches, fresh-cut, ribeye, chopped steak and chicken platters with
baked potatoes, various grilled chicken breast sandwiches, hot dogs, a variety
of tossed and specially prepared salads and soups, fish sandwiches, french
fries, onion rings, soft drinks, high quality milkshakes and bakery items. Beer
and wine are served and, generally, account for approximately 3% of restaurant
sales. The restaurants permit guests to participate in the preparation of their
meals by allowing them to garnish their own entrees from a bountiful array of
fresh lettuce, tomatoes, onions, pickles, relish and a variety of condiments,
sauces and melted cheeses at the "fixin's bar." Guests generally place their own
orders and serve themselves, thereby minimizing waiting time.
Each restaurant contains a principal dining area from which guests may observe
the preparation of their meals, and, in some restaurants, an additional dining
area with a patio motif. Decor of the principal dining area of a Fuddruckers
restaurant generally includes an open warehouse style with neon beverage signs,
wood tables and chairs and, in some instances, original shipping containers from
certain foods sold by the restaurant. The open grill area enables guests to view
the preparation of their meals, all of which are cooked to order.
The typical Fuddruckers restaurant is located in a suburban area in a
free-standing building or in a shopping center. The area within a five-mile
radius of the restaurant is usually zoned for retail, office and residential
uses. Fuddruckers' guests have an average household income of approximately
$50,000. Fuddruckers' restaurants typically range in size from 6,000 to 8,000
square feet with 200 to 300 seats and parking for between 100 and 200 vehicles.
Restaurants built in fiscal years 1997 and 1996 are typically between 4,800 and
6,000 square feet with 160 to 220 seats.
The restaurants are open seven days a week, generally from 11:00 a.m. to 10:00
p.m., for lunch, dinner and late night meals. Certain restaurants are open
earlier to accommodate the sale of freshly-baked goods. Restaurants are designed
to enable guests to complete their visit within a convenient 40-minute period,
which attracts the business person on a limited luncheon schedule. This
contributes to Fuddruckers' higher percentage of lunch (45%) versus dinner (55%)
sales than the industry average for casual dining restaurants.
All restaurants are operated in accordance with strict standards and
specifications for the quality of ingredients, preparation of food, maintenance
of premises and associates conduct, as set forth in Fuddruckers' policy and
procedures manuals. At each restaurant, Fuddruckers emphasizes uniform standards
for product quality, portion control, courteous service and cleanliness.
<PAGE>
Fuddruckers establishes specifications and approves purchasing arrangements for
basic menu ingredients and supplies for all its restaurants in order to obtain
favorable prices and ensure consistent levels of quality and freshness. Food
products in Fuddruckers-owned and franchised restaurants are regularly and
systematically tested for quality and compliance with Fuddruckers' standards.
Fuddruckers emphasizes simplicity in its operations. Its restaurants generally
have a total staff of one General Manager, two or three Assistant Managers and
25 to 45 other associates, including full-time and part-time associates working
in overlapping shifts. Since Fuddruckers generally utilizes a self-service
concept, it typically does not employ waiters or waitresses.
During fiscal year 1996, Fuddruckers complemented its existing menu by
introducing "La Salsa Fresh Mexican Grill" in ten Fuddruckers restaurants in the
Los Angeles, San Antonio, Chicago and Milwaukee markets. Seven outlets were
opened in fiscal 1997 and one location was closed. The La Salsa concept features
fresh, healthy, authentic Mexican foods prepared in a stand-alone "outlet"
inside the restaurant. Under the terms of a 10-year license agreement with La
Salsa Holding, Fuddruckers will pay a franchise fee, royalty payments equal to
5% of gross sales, certain training costs and marketing fund fees for each
outlet opened. The Company does not plan to open any additional La Salsa
locations in fiscal 1998.
Management
Fuddruckers restaurant operations are currently divided into two regions, each
supervised by a Senior Vice President of Operations. The two regions are divided
into a total of fourteen districts, each supervised by a Director of Operations.
On average, each Director of Operations supervises eight restaurants and reports
to a Senior Vice President of Operations.
Marketing
Fuddruckers uses television, radio and print media to promote its various themes
in markets with a high concentration of Fuddruckers-owned restaurants. These
themes emphasize Fuddruckers' unique name and fresh baked buns which are unique
characteristics and help differentiate Fuddruckers from other restaurant
concepts.
Marketing research conducted by Fuddruckers indicates a strong consumer desire
for fresh, high-quality food. Fuddruckers restaurants, which feature fresh
produce available at the "fixin's bar," fresh beef ground daily and fresh buns
baked daily, address these consumer desires.
One of Fuddruckers' most successful marketing programs is the "Kids Eat Free"
program. This program is designed to increase guest traffic during traditionally
slow days by allowing a child under age 12 to eat free Monday through Thursday
when an accompanying adult purchases a meal.
Fuddruckers has developed local store marketing manuals to assist its managers
and franchisees in the development of a marketing and public relations strategy
for their geographic area. Workshops, seminars and marketing manuals are made
available to all franchisees. In addition, Fuddruckers allows its franchisees to
use its various television, radio and print advertising materials in the
franchisees' markets for a nominal fee intended to cover Fuddruckers' cost.
Site Selection
Fuddruckers uses its own personnel to analyze markets and sites for new
restaurants, obtain the required zoning and other permits, negotiate the leasing
or real estate purchase and oversee all aspects of the construction process.
Fuddruckers believes that location is a key factor in a restaurant's ability to
operate a profitable lunch and dinner business and considers several demographic
factors in selecting sites, including the average income of the neighboring
residential population, the proximity of retail, office and entertainment
facilities, traffic patterns and the visibility of the location.
<PAGE>
The average total cost to construct a typical Fuddruckers restaurant, where
Fuddruckers purchases real estate, depending upon its location, is approximately
$1.5 million, which includes $265,000 for furniture, fixtures and equipment,
$510,000 for building and improvements, $680,000 for land and site work, and
$50,000 related to pre-opening costs of the restaurant. Since 1995, Fuddruckers
has arranged for sale-leaseback financing whereby Fuddruckers acquires real
estate, constructs a new restaurant and then sells and leases back the property.
This has enabled Fuddruckers to open new restaurants on sites where a leasing
arrangement was not available, with a minimal capital investment.
The average total cost to construct a new Fuddruckers restaurant where
Fuddruckers enters into a leasing arrangement is approximately $800,000 which is
comprised of $265,000 for furniture, fixtures and equipment, $485,000 for
leasehold improvements, and $50,000 related to pre-opening costs associated with
the restaurant. Fuddruckers typically receives a contribution of between
$300,000 and $400,000 toward the construction and renovation costs from
landlords and believes that its growth enhances its ability to obtain attractive
leasing terms. Despite this favorable condition, there remains considerable
competition among restaurant businesses for desirable sites.
Future development of Fuddruckers restaurants will be accomplished through the
sale of franchises and the development of Fuddruckers-owned restaurants,
although no new Company-owned restaurants are planned for fiscal 1998. The
development of additional restaurants is contingent upon locating satisfactory
sites, financing, negotiating satisfactory leases or, alternatively, leasing and
converting existing restaurant sites into Fuddruckers restaurants. It is also
dependent upon securing appropriate governmental permits and obtaining beer and
wine licenses.
Franchising
Fuddruckers offers franchises in markets where it deems expansion to be
advantageous to the development of the Fuddruckers' concept and system of
restaurants. Franchise agreements typically grant franchisees an exclusive
territorial license to operate a single restaurant within a specified area,
usually a four-mile radius surrounding the franchised restaurant. Fuddruckers
has a close relationship with its franchisees and seeks to identify potential
franchisees with the capability and financial resources to operate multiple
restaurants. Of the 36 Fuddruckers franchisees, 17 operate multiple restaurants,
and 22 have operated Fuddruckers restaurants for more than five years.
Franchisees bear all direct costs involved in the development, construction and
operation of their restaurants. In exchange for a franchise fee, Fuddruckers
provides its franchisees assistance in the following areas: site selection,
prototypical architectural plans, interior and exterior design and layout,
training, marketing and sales techniques, assistance by a Fuddruckers "opening
team" at the time a franchised restaurant opens and operations and accounting
guidelines set forth in various policies and procedures manuals.
All franchisees are required to operate their restaurants in accordance with
Fuddruckers' standards and specifications, including controls over menu items,
food quality and preparation. Fuddruckers requires the successful completion of
its training program by a minimum of three managers for each franchised
restaurant. In addition, franchised restaurants are evaluated regularly by
Fuddruckers for compliance with franchise agreements, including standards and
specifications through the use of periodic, unannounced, on-site inspections and
standards evaluation reports.
The current standard franchise agreement provides for the payment to Fuddruckers
of a non-refundable franchise fee of between $25,000 and $50,000 per restaurant
and ongoing royalties of 5% of gross sales of each restaurant. Certain
multi-unit franchisees have entered into royalty buy-down agreements with
Fuddruckers, which reduce royalty payments required under the respective
franchise agreements. The royalty buy-down agreements generally provide for a
one-time payment to Fuddruckers covering a period of twelve to fourteen months,
and an amendment of the underlying franchise agreement to reduce the royalty to
3% of gross sales. Once a franchisee executes a buy-down agreement, the royalty
on any subsequent franchise agreement will be reduced to 3%. As of June 29,
1997, royalty buy-down agreements covered 53 franchise restaurants.
<PAGE>
Fuddruckers Locations - Company Owned
The following table sets forth the locations of restaurants owned and operated
by Fuddruckers as of October 1, 1997:
Domestic - Total 116 Domestic (Cont'd) Domestic (Cont'd)
ALABAMA INDIANA TEXAS
Birmingham Merrillville Austin (3)
ARIZONA KENTUCKY Clearlake
Flagstaff Florence Houston (11)
Glendale MARYLAND Irving
Mesa (2) Annapolis Kingwood
Phoenix (2) Baltimore Plano
Scottsdale Gaithersburg San Antonio (4)
Tempe Pikesville Stafford
Tucson Rockville Woodlands
CALIFORNIA MASSACHUSETTS UTAH
Burbank Boston Layton
Chula Vista North Andover Orem
La Mesa Saugus Sandy
Lake Forest MINNESOTA Taylorsville
Lakewood Bloomington VIRGINIA
Pasadena Brooklyn Center Alexandria
San Diego Burnsville Annandale
COLORADO Coon Rapids Chesapeake (2)
Aurora (2) Eden Prairie Colonial Heights
Marston Park Maple Grove Fairfax
Thornton Roseville Falls Church
GEORGIA St. Louis Park Fredericksburg
Alpharetta MISSOURI Herndon
Atlanta Maryland Heights Midlothian
Duluth St. Louis (2) Newport News
Kennasaw OHIO Richmond
Marietta Cincinnati (2) Vienna
Norcross Columbus (4) Virginia Beach
Peachtree City Fields Ertel Woodbridge
Snellville Forest Park WISCONSIN
Tucker Hilliard Brookfield
ILLINOIS Norwood
Addison
Aurora
Calumet City
Downers Grove N
Downers Grove S
Highland Park
Matteson
Orland Park
Palatine
Schaumburg (2)
<PAGE>
Fuddruckers Restaurants - Franchised Locations
The following table sets forth the locations of restaurants operated by
Fuddruckers franchisees as of October 1, 1997:
Domestic - Total 73 Domestic (Cont'd) Domestic (Cont'd)
CALIFORNIA NORTH CAROLINA TEXAS
Buena Park Asheville Beaumont
Citrus Heights Charlotte College Station
Concord Durham Killeen
Walnut Creek Greensboro Laredo
FLORIDA Hickory Lubbock
Altamonte Springs Huntersville McAllen
Clearwater Jacksonville Midland
Coconut Grove Matthews San Antonio (2)
Coral Springs Wilmington Temple
Ft. Lauderdale NORTH DAKOTA Waco
Miami Fargo
N. Miami Beach OHIO
Plantation Akron International - Total 10
Tallahassee Canton BAHRAIN
Tampa Cleveland Adliya
MARYLAND OREGON Manama
Owings Mills Lake Oswego CANADA
MICHIGAN Portland Edmonton
Flint PENNSYLVANIA Saskatoon
Kentwood Greensburg INDONESIA
Sterling Heights Harmarville Kelapa Gading
MONTANA Lancaster KUWAIT
Billings Philadelphia Kuwait City
Missoula Fairless Hill PUERTO RICO
NEBRASKA SOUTH CAROLINA Caguas
Omaha Columbia SAUDI ARABIA
NEW JERSEY Greenville (2) Al Khobar
New Brunswick Hilton Head Jeddah
Paramus Myrtle Beach Riyadh
Parsippany North Myrtle Beach
Tom's River Spartanburg
Turnersville SOUTH DAKOTA
Union Rapids City
Voorhees Sioux Falls
Wayne TENNESSEE
NEW YORK Kingsport
Amherst Nashville
Westbury
<PAGE>
Champps
Operations
The Champps Americana concept is based upon providing the best possible food,
value and service to its customers. Although food and service are the most
important parts of the Champps Americana concept, an atmosphere that is
entertaining and energetic, yet comfortable, is also critical. The food
offerings at Champps' restaurants combine a wide selection of appetizers, soups,
salads, innovative sandwiches, pizza, burgers, and entrees including chicken,
beef, fish, pasta and desserts. Selections reflect a variety of ethnic and
regional cuisines and traditional favorites. Because Champps' menu is not tied
to any particular type of food, Champps can introduce and eliminate items based
on current consumer trends without altering its theme. Portion sizes are
generous and each dish is attractively presented. Champps believes that these
qualities give customers a sense of value. Entree prices currently range from
$4.50 to $14.25. Champps emphasizes freshness and quality in its food
preparation. Fresh sauces, dressings, batters and mixes are prepared daily on
the premises, generally from original ingredients with fresh produce. Champps
invests substantial time in training and testing kitchen employees to maintain
consistent food preparation. Strict food standards at Champps-owned restaurants
have also been established to maintain quality.
The customer's experience is enhanced by the attitude and attention of
restaurant personnel. Accordingly, Champps emphasizes prompt greeting of
arrivals, frequent visits to customer tables to monitor customer satisfaction
and service and friendly treatment of its customers. Service is based upon a
team concept so that customers are made to feel that any employee can help them
and they are never left unattended. Success of the Champps restaurants depends
upon employee adherence to these standards. To maintain these standards, Champps
seeks to hire and train personnel who will work in accordance with Champps'
philosophy and frequently rewards individual and restaurant achievement through
several recognition programs intended to build and maintain employee morale. All
of the service personnel at each Champps restaurant meet with the managers at
two daily pre-shift motivational meetings. Restaurant promotions, specials and
quality control are all discussed and explained during these meetings. Also,
employee enthusiasm is raised so that the employees can help increase the energy
level and excitement of the restaurant.
Champps-owned, franchised and licensed restaurants are designed and decorated in
a casual theme, although they differ somewhat from each other. Existing Champps
restaurants range in size from 7,000 to 12,000 square feet while the new Champps
restaurant prototype is approximately 10,000 square feet. Champps' standard
restaurant features a bar, open kitchen and dining on multiple levels including
a diner-type counter. Customers can also dine at the bar or outside on the
patio, where available. The spacious design facilitates efficient service,
encourages customer participation in entertainment and promotional events and
allows customers to view the kitchen, dining area, and bar. Strategically placed
television screens stimulate customer perception of activity and contribute to
the total entertainment experience and excitement of the restaurant.
An important part of the Champps Americana dining experience is the
entertainment. Patrons may watch one of several sporting events that are being
broadcast, or listen to a variety of music played by the disc jockey, music
which is changed for the time of day and season of the year. The exposed kitchen
offers customers the opportunity to observe the cooks, and, in certain
locations, a discreetly located game room is provided for arcade games. The
entertainment aspects of the Champps restaurants are designed to encourage
repeat visits, increase the length of a customer's stay and attract customers
outside of normal peak hours. In addition, a variety of creative promotions and
activities are conducted such as "Family Bingo," "Spring Time Big Bike
Give-Away" and Karaoke. These promotions and activities allow for customer
participation and are continually changing. Change of the ambiance is also
experienced in each restaurant when the restaurants are decorated for the
holidays and when the dress of the restaurant staff is changed for the seasons.
The different looks and activities of the restaurant provide customers a
different feel each time they visit, thus encouraging repeat business. Champps
sells merchandise such as T-shirts, hats and sweatshirts bearing the Champps
Americana name. Although not currently a significant source of revenue, the sale
of its merchandise is believed to be an effective means of promoting the Champps
name.
Champps restaurants are generally open from 11:00 a.m. to 1:00 a.m. seven days a
week serving lunch, dinner and late night appetizers. Closing times of Champps
restaurants will vary based upon state laws concerning operating hours. Sunday
brunch is served beginning at 10:00 a.m. Each Champps restaurant maintains
standardized food preparation and service manuals which are designed to enhance
consistency of operations among the restaurants. Although Champps restaurants
differ in some respects, Champps attempts to have each Champps-owned and
franchised restaurant operate under uniform standards and specifications.
Management
The management staff of a Champps restaurant is divided into three areas, the
General Manager, Front-of-House Managers and Back-of-House Managers. The General
Manager has responsibility for the entire restaurant. Front-of-House management
consists of an associate manager, two floor managers and a bar manager.
Back-of-House management consists of a kitchen manager, two to three assistant
kitchen managers and a daily specials chef. All General Managers report directly
to the Directors of Operations. Managers are compensated based on salary plus a
monthly bonus. The bonus is determined by means of monthly restaurant sales and
profit goals.
Marketing
Champps has achieved its historical success while expending minimal amounts on
advertising and marketing. Champps restaurants have relied on location and
customer word-of-mouth. However, Champps-owned restaurants expend a different
amount of resources on in-restaurant marketing and promotions.
Site Selection
Champps uses its own personnel to analyze markets and sites for new restaurants,
obtain the required zoning and other permits, negotiate the leasing or real
estate purchase and oversee all aspects of the construction process. Champps
believes that location is a key factor in a restaurant's ability to operate a
profitable lunch and dinner business and considers several demographic factors
in selecting sites, including the average income of the neighboring residential
population, the proximity of retail, office and entertainment facilities,
traffic patterns and the visibility of the location.
The average total cost to construct a typical Champps restaurant, where Champps
purchases real estate, depending upon its location, is approximately $4.5
million, which includes approximately $900,000 for furniture, fixtures and
equipment, $2.0 million for building and improvements, $1.2 million for land and
site work, and $400,000 related to pre-opening costs of the restaurant. In
fiscal 1996, Champps arranged for sale-leaseback financing whereby Champps would
acquire real estate, construct a new restaurant and then sell and lease back the
property. This has enabled Champps to open new restaurants on sites where a
leasing arrangement was not available, with minimal capital investment.
<PAGE>
The average total cost to construct a new Champps restaurant where Champps
enters into a leasing arrangement is approximately $3.3 million which is
comprised of approximately $900,000 for furniture, fixtures and equipment, $2.0
million for leasehold improvements, and $400,000 related to pre-opening costs of
the restaurant.
Future development of Champps restaurants will be accomplished primarily through
the development of Champps-owned restaurants. The development of additional
restaurants is contingent upon locating satisfactory sites, financing,
negotiating satisfactory leases or, alternatively, leasing and converting
existing restaurant sites into Champps restaurants. It is also dependent upon
securing appropriate governmental permits and obtaining liquor licenses. At June
29, 1997, the Company had three new Champps Company-owned restaurants under
construction and two Champps restaurants under development, which are expected
to open in fiscal 1998. Development of Champps-owned restaurants will be
concentrated in selected markets with population density levels sufficient to
support the restaurants.
Champps believes its concept can be adapted to a variety of locations, both in
terms of market demographics and configuration of the restaurant. The location
of Champps restaurants are very important. Potential sites are reviewed for a
variety of factors, including trading-area demographics, such as target
population density and household income levels; an evaluation of site
characteristics, including visibility, accessibility, traffic volume and
available parking; proximity to activity centers, such as shopping malls and
offices; and an analysis of potential competition.
Franchising
Champps has offered franchises in markets where it deems expansion to be
advantageous to the development of the Champps concept and a system of
restaurants. Franchise agreements grant franchisees an exclusive territorial
license to operate a single restaurant within a specified area. Currently, there
are two franchisees operating multiple restaurants.
A typical franchisee pays an initial fee of $75,000 per restaurant, of which a
part may be associated with a development fee, a continuing royalty fee of
3-1/4% of gross sales, and a regional and/or national advertising fee of 1/2% of
gross sales at such time as Champps establishes a regional/national advertising
program. Among the services and materials that Champps provides to franchisees
are site selection assistance, assistance in design development, an operating
manual that includes quality control and service procedures, training, on-site
pre-opening supervision and consultation relating to the operation of the
franchised restaurants. Champps has granted both single and multi-restaurant
development rights depending upon market factors and franchisee capabilities.
With respect to multi-restaurant agreements, the franchisee's continuing right
to obtain franchises is contingent upon the franchisee's continuing compliance
with the restaurant development schedule.
All franchisees are required to operate their restaurants in accordance with
Champps' standards and specifications, including controls over menu selection,
food quality and preparation. Champps approves all restaurant site selections
and applies the same criteria used for its own restaurant sites. Champps
requires all new franchisees to provide at least annual financial statements
reviewed by an independent certified public accountant. Periodic on-site
inspections are conducted to assure compliance with Champps standards and to
assist franchisees with operational issues. Franchisees bear all direct costs
involved in the development, construction and operation of their restaurants.
<PAGE>
Champps Restaurant Locations
The following table sets forth the locations of restaurants operated by Champps
and its franchisees as of October 1, 1997:
Company Owned Restaurant Locations Franchised Restaurant Locations
Domestic - Total 14 Domestic - Total 11
CALIFORNIA MINNESOTA
Irvine Burnsville
COLORADO Maple Grove
Denver Maplewood
FLORIDA Minneapolis
Ft. Lauderdale New Brighton
INDIANA Woodbury
Indianapolis St. Paul
OHIO NEBRASKA
Columbus (2) Omaha
Lyndhurst NORTH CAROLINA
MINNESOTA Charlotte
Minnetonka SOUTH DAKOTA
Richfield Sioux Falls
NEW JERSEY WISCONSIN
Edison Greenfield
Marlton
TEXAS
Addison
San Antonio
VIRGINIA
Reston
<PAGE>
Centralized Functions
The Company provides Fuddruckers and Champps with centralized purchasing,
accounting and management information services.
Purchasing
The Company capitalizes on the diversity of its businesses through a centralized
and coordinated purchasing program and food distribution network. On August 4,
1997, the Company entered into a six-year agreement with Alliant Foodservice,
Inc. ("Alliant", formerly Kraft Foodservice, Inc.) pursuant to which Alliant
will distribute approximately 85% of food and food-related purchases of
Fuddruckers and Champps. The agreement with Alliant is cancelable by either
party upon 90 days notice. Fuddruckers and Champps franchisees also have the
option of purchasing from Alliant. In addition, under the agreement, Alliant is
furnishing to the Company "Alliant-Link," Alliant's on-line product-ordering
software, which is installed in all Fuddruckers-owned and Champps-owned
restaurants.
The Company also acts as a restaurant equipment dealer, enabling it to take
advantage of dealer pricing, manufacturer discounts and rebates. The Company has
not experienced any difficulty in obtaining an adequate supply of quality food
products at acceptable prices from its suppliers.
Accounting and Management Information Systems
The Company provides Fuddruckers and Champps with centralized financial and
management controls through the use of an automated data processing system and
prescribed reporting procedures. The Company continues to upgrade its computer
hardware and financial software and has recently implemented a new point of sale
system for its Fuddruckers restaurants. The restaurants forward weekly sales
reports, vendor invoices, payroll information and other operating information to
the Company's corporate headquarters. The Company utilizes this data to
centrally monitor sales, product, labor and other costs and to prepare periodic
financial and management reports. The Company believes that its centralized
accounting, payroll, cash management and information systems improve its ability
to control and manage its operations efficiently. Subsequent to June 29, 1997,
the Company has outsourced certain of its data processing and management
information systems to a 50% owned subsidiary, Restaurant Consulting Services,
Inc. See Note 2 to combined financial statements.
Competition
The restaurant industry is highly competitive. Fuddruckers and Champps compete
with other national and international restaurant chains as well as local and
regional operations. Competition within the industry is based principally on the
quality, variety and price of food products served. Site location, quality of
service and attractiveness of facilities are also important factors for a
successful restaurant. The restaurant industry is affected by general economic
conditions, changing tastes, population, traffic patterns and spending habits of
guests. Fuddruckers believes that their competitive position is enhanced by
providing guests with moderately-priced quality food in a comfortable
atmosphere.
The Company believes that the businesses of Fuddruckers and Champps share
important characteristics in their desire to provide guests with discernible
value and the highest quality of customer service and dining atmosphere. Factors
such as service, cleanliness and atmosphere are as important in a guest's dining
decision as menu and food quality. In response to this trend, the Company has
provided training, education and motivational programs for its associates to
focus on providing quality service and to sustain a sensitivity to guest needs.
The Company believes that by operating in a professional, restaurant-style
manner where each of its associates place the guest first, Fuddruckers and
Champps can win guest loyalty.
Government Regulation
The Company is subject to various federal, state and local laws affecting its
business. Its operations are subject to various health, sanitation and safety
standards, federal and state labor laws, zoning restrictions and state and local
licensing. Federal and state environmental regulations have not had a material
effect on the Company's operations to date. Fuddruckers and Champps are also
subject to federal and state laws regulating franchise operations and sales.
Such laws impose registration and disclosure requirements on franchisors in the
offer and sale of franchises, or impose substantive standards on the
relationship between franchisor and franchisee.
Fuddruckers and Champps restaurants are subject to state and local licensing and
regulation with respect to selling and serving alcoholic beverages. The sale of
alcoholic beverages accounted for approximately 3% of Fuddruckers' and 37% of
Champps' total restaurants sales during fiscal year 1997. The failure to receive
or retain, or a delay in obtaining, a liquor license in a particular location
could adversely affect Fuddruckers', Champps' or a franchisee's operation in
that location and could impair Fuddruckers', Champps' or such franchisee's
ability to obtain licenses elsewhere. Typically, licenses must be renewed
annually and may be revoked or suspended for cause.
Fuddruckers and Champps restaurants are subject to "dram shop" statutes in
certain states. These statutes generally give a person injured by an intoxicated
person the right to recover damages from the establishment that has wrongfully
served alcoholic beverages to the intoxicated person. Fuddruckers and Champps
each carry liquor liability coverage in the amount of $1 million. However, a
judgment against Fuddruckers or Champps under a "dram shop" statute in excess of
Fuddruckers' or Champps' liability coverage, or any inability to continue to
obtain such insurance coverage at reasonable costs, could have a material
adverse effect on the Company, Fuddruckers or Champps.
Research and Development
The Company is engaged in research activities relating to the development or
improvement of new and existing products or services. Fuddruckers and Champps,
together with their franchisees, utilize test kitchen facilities to develop
recipes, test food products and equipment and set nutritional and quality
standards. Fuddruckers, Champps, and their franchisees test additional menu
items in various markets on an on-going basis. These tests are coordinated
through the corporate headquarters. Furthermore, the Company employs a
professional support staff to establish, maintain and enforce high standards of
sanitation and safety in all phases of food preparation and service. The cost of
research and development currently is not material to the Company's cost of
operations.
Service Marks
The Company, through its operating subsidiaries, has registered a number of
trademarks and service marks with the United States Patent and Trademark Office
and with certain states, including the trade names: "Fuddruckers" and the
"Fuddruckers -- World's Greatest Hamburgers" logo; "Champ's", "Champps",
"Champps American Sports Cafe" and "Champps Entertainment"; "The Great Bagel and
Coffee Company"; the "French Quarter Coffee Co.; and, "Leo's Deli", in
connection with providing bar and restaurant services, and in connection with
the sale of related food products (collectively, the "Marks").
<PAGE>
Pursuant to a Master Agreement dated February 1, 1994, whereby Champps acquired
certain "Champ's" and "Champps" service marks, trademarks and trade names from
Champs Restaurants, Inc. ("CRI"), Champps pays CRI an annual fee equal to the
lesser of approximately $260,000 or one-quarter percent ( 1/4%) of the gross
sales of Champps restaurants, but in no event less than $40,000. The maximum fee
payable by Champps is increased annually by the lesser of the increase in the
Consumer Price Index or 4%.
All of the service marks, trade names and trademarks are of significant
importance to the businesses of Fuddruckers and Champps. Fuddruckers and Champps
have also registered various service marks in several foreign countries. The
Company and its subsidiaries intend to protect their service marks through
registration with appropriate governmental authorities.
Seasonality
Fuddruckers and Champps sales are historically higher in the spring and
summer-time months, due primarily to dining habits of its guests and eating out
trends of the general public.
Corporate Offices and Associates
The Company is incorporated under the laws of the State of Delaware and employs
approximately 70 associates on a full-time basis, three who are executive
officers.
Fuddruckers is incorporated under the laws of the State of Texas and employs
approximately 5,000 associates on a full-time and part-time basis.
Champps is incorporated under the laws of the State of Minnesota and employs
approximately 2,000 associates on a full-time and part-time basis. Substantially
all restaurant associates, other than restaurant management, are compensated on
an hourly basis.
None of the Company's or its subsidiaries' employees are covered by collective
bargaining agreements. The Company considers its relations with its associates
to be good.
The Company, Fuddruckers and Great Bagel and Coffee maintain their principal
executive offices at One Corporate Place, 55 Ferncroft Road, Danvers,
Massachusetts 01923. The telephone number for the Company is (508) 774-6606.
Champps maintains its principal executive offices at 153 East Lake Street,
Wayzata, Minnesota, 55391. The telephone number for Champps is (602) 449-4841.
Spin-off Transaction
On May 27, 1997, DAKA International and its wholly-owned subsidiary, Daka, Inc.,
a Massachusetts corporation ("Daka"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Compass Interim, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Holdings, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Group PLC incorporated in
England and Wales (collectively "Compass"), pursuant to which Compass agreed,
upon the satisfaction of certain conditions, to commence a tender offer (the
"Offer") for all of the outstanding shares of DAKA International common stock
(the "Merger"). The Offer was consummated on July 17, 1997. Immediately prior to
the consummation of the Offer, pursuant to a plan of contribution and
distribution as described in the Reorganization Agreement (the "Reorganization
Agreement"), dated as of May 27, 1997, by and among DAKA International, Daka,
the Company and Compass, DAKA International and certain of its subsidiaries,
including Daka and the Company, made various contributions of assets and equity
interests to each other in the form of dividends and capital contributions (the
"Contribution") in order to divest DAKA International of its restaurant
businesses (the "Transferred Businesses") and such assets were contributed to
the Company. Following these transactions, the remaining business activities of
DAKA International consisted only of its foodservice operations. Following
consummation of the Offer, DAKA International became a wholly-owned subsidiary
of Compass. On or about the same time as the acceptance for the purchase of
shares of DAKA International common stock pursuant to the Offer, DAKA
International distributed to each holder of record of shares of DAKA
International common stock, one share of common stock of the Company for each
share of DAKA International owned by such shareholder (the "Distribution"), and
the Company became a separate public company with its shares of common stock
trading on the over the counter market through NASDAQ.
<PAGE>
Certain other non-restaurant operating assets and liabilities of DAKA
International were contributed (the "Additional Capital Contribution") to the
Company after the Distribution on July 18, 1997 (the "Transaction Date").
However, those assets and liabilities consisting of trade accounts receivable,
certain prepaid assets, property and equipment, accounts payable, accrued
expenses, contingent liabilities and deferred taxes have not been included in
the accompanying combined financial statements since those assets and
liabilities are principally related to DAKA International's Foodservice
Businesses and have not been used in the historical operations of the
Transferred Businesses. Pursuant to the terms of the Additional Capital
Contribution, Compass or its affiliates will act as an agent to process the
account receivable and accounts payable related to the Additional Capital
Contribution (the "Contributed Working Capital").
The following summary of certain provisions of the Agreements with Compass does
not purport to be complete and is qualified in its entirety by reference to the
full text of such Agreements (copies of which have been filed as an exhibit to
the Registration Statement on Form 10 filed June 3, 1997.
The Tax-Allocation Agreement
The Company, DAKA International and Compass have entered into a tax allocation
agreement which sets forth each party's rights and obligations with respect to
payments and refunds, if any, of federal, state, local or foreign taxes for
periods before and after the Merger and related matters such as the filing of
tax returns and the conduct of audits and other tax proceedings. In general,
under the tax allocation agreement, the Company will be responsible for all tax
liabilities of DAKA International and Daka and the Company for periods (or
portions of periods) ending on or before the effective date of the Distribution
and will have the benefit of any tax refunds, tax credits or loss carryforwards
arising in such pre-Distribution periods. For periods (or portions of periods)
beginning after the effective date of the Distribution, in general, the Company
will be responsible for tax liabilities of the Company, and DAKA International
will be responsible for tax liabilities of DAKA International and Daka.
Post-Closing Covenants Agreement
The Post-Closing Covenants Agreement entered into by the Company and Compass in
connection with the Spin-off includes significant undertakings on the part of
the Company with respect to its operations after the Spin-off and potential
liability and payments due to International and Compass. While the amount of
payments, if any, which might be payable to DAKA International by the Company
under the Post-Closing Covenants Agreement cannot be quantified at this time,
the aggregate amount of such payments is currently expected to range from $10 to
$15 million. Further, such amounts payable are subject to possible offsets
against future tax benefits available to Compass, and further calculation and
negotiation.
Indemnification by the Company.
The Post-Closing Covenants Agreement provides that except as otherwise
specifically provided the Company, will indemnify, defend and hold harmless
Compass, from and against, and pay or reimburse Compass for, all losses,
liabilities, damages, deficiencies, obligations, fines, expenses, claims,
demands, actions, suits, proceedings, judgments or settlements, including
certain interest and penalties, out-of-pocket expenses and reasonable attorneys'
and accountants' fees and expenses incurred in the investigation or defense of
any of the same or in asserting, preserving or enforcing any of Compass' rights
suffered by Compass ("Indemnifiable Losses"), as incurred relating to or arising
from (i) the Assumed Liabilities, including without limitation the Special
Liabilities (as defined in the Post Closing Covenants Agreement) (including the
failure by the Company or any of its subsidiaries to pay, perform or otherwise
discharge such Assumed Liabilities in accordance with their terms), whether such
Indemnifiable Losses relate to or arise from events, occurrences, actions,
omissions, facts or circumstances occurring, existing or asserted before, at or
after the Spin-off; (ii) a claim by any person who is not the Company or an
affiliate of the Company (a "Third Party Claim") that there is any untrue
statement or alleged untrue statement of a material fact contained in any of the
documents filed or with the Securities and Exchange Commission in connection
with the Spin-off (the "Filings"), or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, with certain stated exceptions; (iii) the breach by the Company
or any of its subsidiaries of any agreement or covenant or from an inaccuracy in
any representation or warranty of DAKA International or Daka contained in the
Merger Agreement or an ancillary agreement (iv) any Special Liability (as
defined in the Post-Closing Covenants Agreement), including, among others, any
civil action or any action by a Governmental Entity (as defined in the
Post-Closing Covenants Agreement) where such Indemnifiable Losses relate to or
arise from events, occurrences, actions, omissions, facts or circumstances
occurring or existing prior to the Offer Closing Time and relating to DAKA
International, including, but not limited to, Venturino etal. v. DAKA
International, Inc. and William H. Baumhauer, Civil Action No. 96-12109-GAO (the
"Venturino Lawsuit") and any other litigation pending as of or relating to a
time period prior to the Offer Closing Time, as well as claims and action
relating to or arising from actions or omissions occurring prior to the Offer
Closing Time by DAKA International, Daka or their affiliates in connection with
the performance of the transactions contemplated by the Merger Agreement or the
Ancillary Agreements or any other matter set forth in the Post-Closing Covenant
Agreement; (v) any actual or alleged criminal violation of any law, rule or
regulation of any Governmental Entity ("Criminal Matters") by DAKA International
or any of its subsidiaries, including Daka, or any director, officer, employee
or agent of DAKA International or any of its subsidiaries, including Daka,
occurring or alleged to have occurred prior to the Offer Closing Time or any
Criminal Matters by the Company or any of its subsidiaries, or any director,
officer, employee or agent of the Company or any of its subsidiaries, occurring
or alleged to have occurred prior to or after the Spin-off; (vi) any claim that
the execution, delivery or performance by the Company, DAKA International or
Daka of each of the Merger Agreement or the ancillary agreements or the
consummation of the transactions contemplated thereby results in a violation or
breach of, or constitutes a default or impermissible transfer under, or gives
rise to any right of termination, first refusal or consent under or gives rise
to any right of amendment, cancellation or acceleration of any material benefit
under, any material contract other than a customer contract; (vii) (a) the
benefit plans or multi-employer plans sponsored or contributed to by any member
of the DAKA International Group, but only with regard to events, occurrences,
actions, omissions, facts or circumstances occurring, existing or asserted prior
to the Spin-off or occurring in connection with or as a result of the
consummation of certain transactions contemplated by the Merger Agreement and
the Reorganization Agreement, (b) the employment of any Foodservice Employee
during the period ending at the Spin-off, or (c) the employment or termination
of any employee of the Company whether before, on or after the Spin-off; (viii)
the collection of trade receivables or the payment of trade payables, provided,
the Company will have no obligation to indemnify for Indemnifiable Losses that
are finally determined to have resulted primarily from the gross negligence or
willful misconduct of Compass (ix) the repayment by Compass or its subsidiaries
of any bonus or similar payments paid to DAKA International or Daka prior to the
Spin-off under the purchasing contacts set forth in the Post-Closing Covenants
Agreement on a prorated basis, as further provided therein; and (x) relating to
the lease agreement by which DAKA International leases its headquarters. The
scope and amount of such liabilities is subject to a high degree of uncertainty
and risk. Although the Company has estimated the amount of liabilities due,
there can be no assurance that such amounts to be ultimately paid will not
differ from the Company's estimate and such difference could be material. Under
the terms of the Merger Agreement and related agreements, the Company is
required to collateralize or otherwise ensure for the benefit of Compass its
ability to meet its obligations with respect to its indemnification obligations
and other liabilities. Such requirement may reduce the Company's access to cash
balances for a significant period of time after the Spin-off and may also
constrain the Company's cash flow.
<PAGE>
The amount of any Indemnifiable Loss or other liability for which
indemnification is provided in the Post-Closing Covenants Agreement will be net
of any amounts actually recovered by the indemnitee from third parties
(including amounts actually received under insurance policies). In addition, the
Company will not have any liability for indemnification for Indemnifiable Losses
unless the aggregate of all Indemnifiable Losses for which it would be liable,
but for certain limitations described therein exceeds on a cumulative pre-tax
basis $250,000 (the "Basket Amount") and then only the amount by which such
Indemnifiable Losses exceed the Basket Amount provided that the Basket Amount
will not apply to amounts paid in connection with certain Special Liabilities
(which amounts will be paid in their entirety).
Transitional Arrangements.
The Company and Compass have agreed to enter into an agreement or agreements
with respect to certain transitional arrangements effective upon the
consummation of the Spin-off. Such arrangements address, among other things, the
allocation of employees; overhead support services; the sublease by Compass of a
portion of the Company's leased headquarters office facilities; information
support services; licensed software; representations and covenants as to the
nature and extent of the Company's software resources and the software necessary
for the conduct of the foodservice business; accounting and payroll business
practices; division of headquarters assets; and records retention issues. Such
arrangements could place significant strain on the Company's management,
customer service and support, operations and administrative personnel and
resources for a considerable period of time. The Company's ability to manage the
arrangements depends on the Company's success in organizing, managing and
structuring operating, management, information and financial systems, which may
adversely impact the Company's ability to reorganize its corporate and support
functions and to reduce its selling, general and administrative expenses. Under
the terms of the Merger Agreement, the Company will assume the obligations of
DAKA International under the lease with respect to the Company's headquarters in
Danvers, Massachusetts.
Covenant Not to Compete.
In the Post-Closing Covenants Agreement, the Company agreed that, for a period
of five years following the Spin-off, it would directly or indirectly, either
individually or as an agent, partner, shareholder, investor, consultant or in
any other capacity, (i) participate or engage in, or assist others in
participating or engaging in, the business of providing contract catering,
contract food and vending services to business and industry, educational
institutions, airports, healthcare or museums or similar leisure facilities in
the continental United States but excluding food service at certain retail
outlets (the "Restricted Business"); (ii) influence or attempt to influence any
customer of Compass or Daka to divert its business from Compass or Daka to any
person then engaged in any aspect of the Restricted Business in competition with
Compass or Daka; or (iii) solicit or hire any of the foodservice employees at
the district manager level or above, either during the term of such person's
employment by DAKA International or Daka or within 12 months after such person's
employment has ceased for any reason, to work for the Company or any person in
any aspect of foodservice (including vending service) in competition with
Compass, or Daka.
<PAGE>
Net Worth.
The Post-Closing Covenants Agreement provides that for a period ending on the
later of July 18, 2000 or the final resolution of certain claims for
indemnification thereunder, the Company will maintain a consolidated net worth
(determined in accordance with generally accepted accounting principles,
consistently applied) of not less than $50,000,000 (the "Minimum Net Worth").
During the same period, the Company will provide to Compass, within 45 days
following the end of each of the Company's fiscal quarters, a certificate of the
chief financial officer of the Company certifying the Company's continuing
compliance with such covenant. If the Company fails to meet the Minimum Net
Worth, it will immediately provide alternative secured collateral for such
deficiency in a form reasonably satisfactory to Compass .
Trade Receivables and Trade Obligations.
The Reorganization Agreement provides that the trade receivables and payables
have been assigned and transferred to the Company. Pursuant to the Post-Closing
Covenants Agreement, the Company appointed Daka as its agent after the Spin-off
for the purposes of collection of the trade receivables and payment of the trade
obligations, and authorized Daka to pay the obligations and to collect the trade
receivables. Daka will serve in such capacity for a period of not more than four
months after July 18, 1997 using prompt, diligent and reasonable efforts,
consistent with its regular collection practices, for its own trade receivables,
to collect those trade receivables owned by the Company. Daka will have no
obligation to institute any action or other litigation before any court, agency,
arbitrator or tribunal to collect or enforce any right of the Company with
respect to its trade receivables. In each instance where the institution of an
action or a lawsuit is appropriate, Daka will allow the Company to collect such
trade receivables and to pursue any such remedies. However, Daka will not,
without the Company's prior written consent, compromise or settle for less than
full value of any trade receivables unless Daka pays the Company the full amount
of any deficiency. In connection with Daka's collection efforts, the Company
will assist Daka, subject to certain limitations, with special collection
efforts on selected trade teceivables if Daka in reasonable discretion requests
such efforts. With respect to trade obligations, for a period of not more than
four months after July 18, 1997, Daka will pay when due certain trade
obligations of the Company. Daka will pay such Obligations from the collected
Trade Receivables, and the obligation of Daka to pay such Obligations will be
limited to the actual amount of trade receivables collected by Daka. The Company
may elect to provide to Daka, from time to time, a schedule of proposed payments
of trade obligations, which Daka will follow, unless Daka determines adherence
to such schedule will have a material adverse effect on its ability to operate
the foodservice business in the ordinary course or impair the credit of Daka.
Daka shall not be obligated to remit to the Company any net proceeds from the
collection of trade receivables for eight weeks after the Spin-off. Not later
than the business day following the last day of the eighth week after the
Spin-off, Daka is obligated to remit to the Company the amount of collected
trade receivables in excess of the aggregate amount of trade obligations paid by
Daka, provided that Compass may retain an amount sufficient to cover any
payments that Compass in good faith determines to be due to Compass from the
Company under the terms of the Post Closing Covenants Agreement (including
certain post-closing purchase price adjustments, now being negotiated by the
Company with Compass), even if the amount of such payments or the obligations of
the Company to make such payments has not been finally established. The Company
does not anticipate Compass remitting any excess receivables pending final
resolution of the Post-Closing Covenants Purchase Price Adjustments. See
"Post-Closing Covenants". The extent to which Compass can control the timing and
amount of cash payments to the Company from the collection of trade receivables,
such control could have a material adverse effect on the Company's cash flow and
financial condition.
<PAGE>
Item 2. Properties
As of June 29, 1997, the Company leased approximately 40,000 square feet of
office space at its corporate headquarters in Danvers, Massachusetts, at an
average annual rental of $722,000 through November 30, 2001. Under the terms of
various agreements with Compass, on a transitional basis the Company will
sublease to DAKA International one half of the leased space for a term up to 18
months after the Spin-off.
Fuddruckers owns the land and related improvements at 13 of the 123
Fuddruckers-owned restaurants with the balance of the restaurants operated
pursuant to long-term leases.
Champps leases approximately 4,000 square feet for its corporate office, located
in Wayzata, Minnesota, pursuant to a five-year lease at an average annual rental
of $70,800. Champps also leases approximately 1,200 square feet adjacent to the
Minnetonka restaurant, pursuant to a lease expiring in 2000. This space is used
by Champps' management and support staff.
Item 3. Legal Proceedings
On October 18, 1996, the Venturino Lawsuit was filed against DAKA International
in the United States District Court for the District of Massachusetts on behalf
of persons who acquired DAKA Common Stock between October 30, 1995 and September
9, 1996. The complaint alleges violations of federal and state securities laws
by, among other things, allegedly misrepresenting and/or omitting material
information concerning the results and prospects of Fuddruckers during that
period and seeks compensatory damages and reasonable costs and expenses,
including counsel fees. On May 22, 1997, DAKA International filed with the court
a motion to dismiss plaintiffs' complaint. The Company has agreed to indemnify
Compass for any losses or expenses associated with the Venturino Lawsuit. The
Company believes the Venturino Lawsuit is without merit and intends to defend
itself vigorously unless the litigation is settled. Settlement negotiations are
in process. While the outcome of the case is not presently determinable, the
Company believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
From time to time, the Company has been involved in other disputes and/or
litigation with respect to the operations of the Transferred Assets encountered
in its normal course of business. In the opinion of management, however, none of
these legal proceedings would result in final judgments which would have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted by the Company to a vote of Stockholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year for which this report is filed.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The Common Stock of the Company is traded over-the-counter and is quoted on the
Nasdaq Stock Market National Market under the symbol "UNIQ." The Company became
a public company on July 15, 1997 and had no history of market price for its
common stock prior to that date.
The Company has never paid cash dividends on shares of its Common Stock and does
not expect to pay dividends in the foreseeable future. The Company intends to
retain all of its available funds for the operation and expansion of its
business.
Item 6. Selected Financial Data.
SELECTED COMBINED FINANCIAL DATA
(In thousands, except per share data)
The following table presents selected combined statement of operations and
balance sheet data of the Company. The balance sheet data presented below as of
June 29, 1997 and 1996 and July 1, 1995 and the statement of operations data
presented below for each of the fiscal years in the four-year period ended June
29, 1997 are derived from the Company's audited combined financial statements.
The balance sheet data as of July 2, 1994 and June 26, 1993 and the statement of
operations data for the year ended June 26, 1993 were derived from the Company's
accounting records, which, in the opinion of the Company's management, have been
prepared on the same basis as the Company's audited historical combined
financial statements and include all adjustments (consisting only of normal
recurring adjustments and accruals) necessary for a fair presentation thereof.
For purposes of this Form 10-K and financial reporting purposes, the Company has
been treated as if it was a stand-alone entity for all periods presented. The
Company's results of operations, as presented in the accompanying financial
statements, include allocations and estimates of certain expenses, including
corporate accounting, tax, cash management, information technology, legal, risk
management, purchasing and human resources, historically provided to the Company
by DAKA International.
The selected combined financial data should be read in conjunction with the
combined financial statements and related notes thereto of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
As of and for the Fiscal Year Ended
-------------------------------------------------------
June 29, June 29, July 1, July 2, June 26,
1997 1996 1995 1994 1993
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Total revenues $205,884 $183,755 $137,730 $100,677 $ 83,723
Income (loss) from continuing operations before
income taxes and minority interests (42,832) (6,931) 4,697 3,980 (38)
Net income (loss) (39,043) (5,670) 1,798 1,300 361
Pro forma loss per share (3.42) - - - -
Balance Sheet Data:
Total assets 125,209 142,348 102,431 78,365 52,517
Long-term debt, including current portion 5,128 6,366 4,009 3,372 3,253
Group equity 79,053 108,894 73,979 57,666 39,921
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations is based upon the historical combined financial statements
of the Company, which present the Company's results of operations, financial
position and cash flow. The Company historically operated as part of DAKA
International. These historical combined financial statements include the
assets, liabilities, income and expenses that were directly related to the
restaurant business as it was operated within DAKA International prior to the
Spin-off. The Company's statement of operations includes all of the related
costs of doing business, including charges for the use of facilities and for
employee benefits, and includes an allocation of certain general corporate
expenses, including costs for corporate logistics, information technologies,
finance, legal and corporate executives. These allocations of general corporate
expenses were based on a number of factors including, for example, personnel,
labor costs and sales volumes. Management believes these allocations as well as
the assumptions underlying the preparation of the Company's separate combined
financial statements to be reasonable.
Certain other non-restaurant operating assets and liabilities of DAKA
International were contributed to the Company (the "Additional Capital
Contribution"). However, those assets and liabilities consisting of trade
accounts receivable, certain prepaid assets, property and equipment, accounts
payable, accrued expenses, contingent liabilities and deferred taxes have not
been included in the accompanying combined financial statements since those
assets and liabilities are principally related to DAKA International's
Foodservice Businesses and have not been used in the historical operation of the
Transferred Businesses. Pursuant to the terms of the Additional Capital
Contribution, Compass or its affiliates will act as an agent to process the
accounts receivable and accounts payable related to the Additional Capital
Contribution.
The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Company as it
will operate in the future or what the results of operations, financial position
and cash flows would have been had the Company been a separate, stand-alone
entity during the periods presented. This is due, in part, to the historical
operation of the Company as an integral part of DAKA International.
Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in
the following Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company and elsewhere in this Annual Report on Form
10-K are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Words such as "believe",
"anticipate", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
respective dates. Forward-looking statements involve risks and uncertainties,
many of which may be beyond the Company's control. Should one or more of these
risks or uncertainties materialize, or should any of the underlying assumptions
prove incorrect, actual results of current and future operations may vary
materially from those anticipated, estimated or projected. Factors that may
cause such a difference include, among others, the following: the ability of the
Company to successfully implement strategies to improve overall profitability;
the Company's ability to manage the Transitional Arrangements; the ultimate
resolution and disposition of the Company's assumed obligations and
indemnifications pursuant to the Contribution; the impact of increasing
competition in the casual and upscale casual dining segments of the restaurant
industry; changes in general economic conditions which impact consumer spending
for restaurant occasions; adverse weather conditions, competition among
restaurant companies for attractive sites and unforeseen events which increase
the cost to develop and/or delay the development and opening of new restaurants;
increases in the costs of product, labor, and other resources necessary to
operate the restaurants; unforeseen difficulties in integrating acquired
businesses; the amount and rate of growth of general and administrative expenses
associated with building a strengthened corporate infrastructure to support
operations; the availability and terms of financing for the Company and any
changes to that financing; the revaluation of any of the Company's assets (and
related expenses); and the amount of, and any changes to, tax rates.
<PAGE>
RESULTS OF OPERATIONS
Overview
The Company has incurred significant operating losses over the past two years
and had a loss before income tax benefit and minority interests of approximately
$42.8 million for the fiscal year ended June 29, 1997. While the Company
believes it has strategies that will give it the best opportunity to return to
overall profitability, there can be no assurance that such strategies will be
implemented within the anticipated time frame or at all, or if implemented, will
be successful. Accordingly, the Company may continue to incur substantial and
increasing operating losses over the next several years. The amount of net
operating losses and the time required by the Company to reach sustained
profitability are highly uncertain and to achieve profitability the Company
must, among other things, address operational issues in the Fuddruckers
restaurant chain, successfully reduce selling, general and administrative
expenses as a percentage of sales from historical levels while continuing to
increase net revenues from its existing restaurants and successfully execute its
growth strategy for the Champps Americana restaurant chain. There can be no
assurance that the Company will be able to achieve profitability at all or on a
sustained basis.
Notwithstanding these risks, the Company believes that its near-term strategies,
including, but not limited to, product and menu introductions, marketing,
improving operational excellence in Fuddruckers, and anticipated lower selling,
general and administrative expenses resulting from actions taken since June 29,
1997 and the effects of the Spin-off and related transactions, should provide it
with the best opportunity for improved overall profitability.
In recent periods the Company's Fuddruckers restaurant chain has experienced
operational difficulties which have impacted its profitability. The Company also
believes certain of its Fuddruckers opened in fiscal 1995, 1996 and 1997 have
underperformed principally due to poor real estate selection and, in certain new
markets, consumer confusion over the Fuddruckers core concept of the "World's
Greatest Hamburger". The Company believes such consumer confusion was due in
part to design changes to its restaurants opened in the last three fiscal years
which de-emphasized the Butcher Shop and Bakery which, the Company believes,
resulted in new customers not realizing the quality of the ingredients and
freshness of the products used in making its sandwiches and other menu items
when compared with its competitors. The Company believes it has addressed these
issues for future Fuddruckers locations, although no Company restaurants are
presently planned to open in fiscal 1998. As discussed further below, the
Company has decided to close or refranchise certain of these underperforming
Fuddruckers locations in fiscal 1998.
The Company's Champps Americana restaurant chain is in the expansion phase. The
timing of revenues and expenses associated with the opening of new restaurants
or the closing or repositioning of existing restaurants are expected to result
in fluctuations in the Company's quarterly results. In addition, the Company's
results, and the results of the restaurant industry as a whole, may be adversely
affected by changes in consumer tastes, discretionary spending priorities,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, traffic patterns, weather conditions, employee
availability and the type, number and location of competing restaurants. Changes
in any of these factors could adversely affect the Company.
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and, particularly for Champps Americana restaurants, the
mix between food and liquor revenues. Various factors beyond the Company's
control, such as adverse weather changes, may affect food costs and increases in
federal, state and local taxes may affect liquor costs. While in the past
Fuddruckers and Champps have been able to manage their exposure to the risk of
increasing food and liquor costs through certain purchasing practices, menu
changes and price adjustments, there can be no assurance that the Company will
be able to do so in the future or that changes in its sales mix or its overall
buying power will not adversely affect the Company's results of operations.
<PAGE>
In February 1996, CEI Acquisition Corp., a wholly-owned subsidiary of DAKA
International, merged with Champps whereupon Champps became a wholly-owned
subsidiary of DAKA International. In April 1996, DAKA International also merged
with Great Bagel and Coffee whereupon Great Bagel and Coffee became a
wholly-owned subsidiary of DAKA International. Both transactions have been
accounted for as poolings-of-interests, and accordingly, the combined financial
statements and this Management's Discussion and Analysis reflect the accounts of
Champps and Great Bagel and Coffee for all periods presented.
Overall Results of Operations
The Company incurred a net loss of $39.0 million for fiscal 1997 compared with a
net loss of $5.7 million for fiscal 1996. Included within these amounts are
impairment, exit costs and other charges aggregating $21.7 million and $5.9
million for 1997 and 1996, respectively.
In the fourth quarter of fiscal 1997, the Company made decisions to close its
non-traditional Specialty Concepts segment restaurants and to close or
refranchise certain underperforming Fuddruckers restaurants which resulted in a
pre-tax charge of approximately $16.2 million. Included in these costs are
charges for impairment to the carrying value of assets now expected to be closed
or refranchised within fiscal 1998, reacquired franchise rights, lease
termination fees and other exit costs, including severance costs, associated
with the restaurants to be closed. The Company estimates $2.5 million of these
charges will result in future cash outlays with the balance representing
write-offs of carrying value.
Exclusive of impairment, exit costs and other charges and merger costs, the loss
from operations before income taxes and minority interests would have been $21.2
million in 1997 and $1.0 million in 1996. This increase in operating losses was
primarily attributable to significantly higher selling, general and
administrative expenses between years, lower average store sales in the
Fuddruckers segment which reduced the Company's ability to leverage fixed costs,
lower Fuddruckers franchise income, losses from operations in the Specialty
Concepts segment and higher depreciation and amortization charges.
Total revenues for the fiscal year ended June 29, 1997, increased 12% to $205.9
million compared with $183.8 million last year.
The Company recorded a loss before income taxes and minority interests in fiscal
1996 of $6.9 million compared with income before income taxes and minority
interests of $4.7 million in fiscal 1995. Operations in 1996 were impacted by
non-recurring charges relating to merger costs and impairment charges associated
with the adoption of a new accounting standard, along with poor operating
performance in the Fuddruckers' segment and increased corporate selling, general
and administrative expenses. Income after income taxes and minority interests
decreased $7.5 million to a loss of $5.7 million in 1996 compared with income of
$1.8 million in 1995.
In fiscal 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," which resulted in a third
quarter fiscal 1996 pretax charge of approximately $3.0 million. The provision
included charges for impairments to the carrying value of certain restaurant
assets, reacquired franchise rights, investments and certain other assets. In
addition, fiscal 1996 combined operating results include a non-tax deductible
charge of $2.9 million relating to the mergers with Champps and Great Bagel and
Coffee. Included in these costs are legal, investment banking and professional
fees associated with the transactions, and costs associated with combining the
operations of previously separate companies and instituting certain operating
efficiencies.
<PAGE>
Fuddruckers
The following table sets forth, for the periods presented, certain financial
information for Fuddruckers.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Restaurant sales $137,624 $131,592 $110,703
======== ======== ========
Sales from Fuddruckers-owned restaurants 100.0% 100.0% 100.0%
Operating expenses:
Labor costs (32.8) (31.9) (30.9)
Product costs (28.0) (29.0) (28.5)
Other operating expenses (28.1) (23.3) (22.9)
Depreciation and amortization (6.6) (6.1) (4.8)
Impairment, exit costs and other charges (6.6) (1.9) -
-------- -------- --------
Restaurant unit contribution (2.1)% 7.8% 12.9%
======== ======== ========
Restaurant unit contribution $ (2,952) $ 10,323 $ 14,251
Franchising and royalty income 4,021 6,574 5,372
-------- -------- --------
Restaurant unit, franchising and royalty contribution $ 1,069 $ 16,897 $ 19,623
======== ======== ========
</TABLE>
Comparison of Fiscal Years Ended June 29, 1997 and June 29, 1996
Sales from Fuddruckers-owned restaurants increased approximately $6.0 million,
or 4.6%, to $137.6 million for fiscal 1997 compared with $131.6 million for the
comparable period last year. This increase reflects the addition of six new
Fuddruckers-owned restaurants during fiscal 1997 and the impact of a full year
of operations of 26 restaurants opened in fiscal 1996, offset by a 6.6% decline
in comparable restaurant sales.
Restaurant unit contribution, excluding impairment, exit costs and other
charges, decreased approximately $6.7 million. Operating margins continued to be
negatively impacted by poor sales levels, higher labor and other operating
costs, and higher depreciation and amortization expenses offset, in part, by the
impact of menu changes, a 3% price increase effective in early December 1996 and
improved product costs as a percentage of sales. Changes between years in labor
costs, other operating expenses and depreciation and amortization expressed as a
percent of sales reflect the impact of lower average sales which reduced the
ability of the Company to leverage these relatively fixed expenses.
Franchising and royalty income decreased approximately $2.6 million for fiscal
1997. During fiscal 1997, the Company did not execute any international
multi-unit development agreements. Royalty income from domestic franchised
restaurants remained consistent for fiscal 1997 compared to last year.
Comparison of Fiscal Years Ended June 29, 1996 and July 1, 1995
Sales in Fuddruckers-owned restaurants increased $20.9 million or 18.9% to
$131.6 million in 1996 compared with $110.7 million in 1995. This increase is
due to $3.3 million of incremental sales for a full year from five restaurants
acquired from franchisees during 1995 and $30.3 million of sales at restaurants
during their first year of operation, including 26 new restaurants opened in
1996 offset, in part, by a 4.9% decrease in comparable restaurant sales and a
$4.4 million decrease in sales due to the closing and/or sale of three
restaurants. Comparable restaurant sales decreased primarily as a result of
inclement weather in many Fuddruckers major markets throughout the third
quarter.
<PAGE>
Restaurant unit contribution, excluding impairment, exit costs and other
charges, decreased $1.5 million or 10.4% to $12.8 million in 1996 compared with
$14.3 million in 1995 while margins as a percentage of sales decreased from
12.9% in 1995 to 9.7% in 1996 exclusive of impairment charges of 1.9%. Higher
costs as a percentage of sales in all cost components reflect the large number
of new restaurants, lower than anticipated sales levels and start-up costs
associated with new concepts. Operating margins decreased by 3.2% in 1996
principally due to weather-related expenses. Depreciation and amortization in
1996 increased significantly as a percentage of sales compared with 1995 due
primarily to increased pre-opening costs associated with new restaurants,
pre-opening costs related to the "La Salsa Fresh Mexican Grill" concept and
continued installation of new point-of-sale equipment.
Franchising and royalty income increased $1.2 million in 1996 compared with
1995, primarily due to revenue generated from sales of domestic and
international multi-unit development agreements. The remaining increase
represents additional royalty income relating to 13 new franchised restaurants
opened, partially offset, by the closing of 7 franchised restaurants during
1996.
Champps
The following table sets forth certain financial information for Champps
restaurants.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Restaurant sales $ 57,832 $ 41,593 $ 19,257
======== ======== ========
Sales from Champps restaurants 100.0% 100.0% 100.0%
Operating expenses:
Labor costs (33.0) (33.1) (31.0)
Product costs (28.9) (28.8) (29.0)
Other operating expenses (25.7) (23.2) (21.7)
Depreciation and amortization (8.2) (8.6) (5.5)
Impairment, exit costs and other charges - (0.2) -
Merger costs - (6.3) -
-------- -------- --------
Restaurant unit contribution 4.2% (0.2)% 12.8%
======== ======== ========
Restaurant unit contribution $ 2,435 $ (74) $ 2,463
Franchising and royalty income 539 555 636
-------- -------- --------
Restaurant unit, franchising and royalty contribution $ 2,974 $ 481 $ 3,099
======== ======== ========
</TABLE>
Comparison of Fiscal Years Ended June 29, 1997 and June 29, 1996
Sales in Champps-owned restaurants increased approximately $16.2 million, or
39%, to $57.8 million for fiscal 1997 compared with $41.6 million a year ago.
The increase primarily reflects the addition of six new Champps-owned
restaurants in fiscal 1996 (open for all of 1997), three new Champps-owned
restaurants opened in 1997, and higher per restaurant average sales volumes.
Same store sales increased approximately 1% in 1997.
<PAGE>
Restaurant unit contribution, excluding impairment, exit costs and other charges
and merger costs, for fiscal 1997 decreased approximately $0.2 million to $2.4
million compared with $2.6 million a year ago. Operating margins for 1997 were
impacted by higher other operating expenses, primarily occupancy, lease and bank
charges and initial higher operating expenses expressed as a percent of sales
for new restaurants opened in 1997 during their first few months of operations.
Comparison of Fiscal Years Ended June 29, 1996 and July 1, 1995
Sales in Champps-owned restaurants increased $22.3 million or 115.5% to $41.6
million in 1996 as compared to $19.3 million in 1995 primarily due to the
opening of six new restaurants, increased comparable restaurant sales of 8.7%,
offset by the sale of one restaurant in the last quarter of 1996.
Restaurant unit contribution, excluding impairment, exit costs and other charges
and merger costs, increased 5.1% to $2.6 million in 1996 as compared to $2.5
million in 1995. This increase is due to increased revenues derived from six new
restaurants, increased comparable restaurant sales of 8.7%, offset by increased
labor, overhead and depreciation and amortization expenses associated with these
new restaurants. In addition, one restaurant was sold in the last quarter of
1996.
Specialty Concepts
The following table sets forth certain financial information for Specialty
Concepts. Specialty Concepts has historically included the operations of the
Great Bagel and Coffee Company and the operations of certain non-traditional
foodservice venues such as restaurant operations conducted by the Company in
Home Depot locations under the names Leo's Delicatessen and Fudd Cafes. During
the fourth quarter, the Company decided to terminate its non-traditional
restaurant operations.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Unit sales $ 5,285 $ 2,865 $ 1,738
======== ======== ========
Sales from unit operations 100.0% 100.0% 100.0%
Operating expenses:
Labor costs (50.3) (29.5) (37.0)
Product costs (41.3) (42.7) (24.8)
Other operating expenses (income) (12.8) 6.6 (7.9)
Depreciation and amortization (18.6) (5.3) (3.0)
Impairment, exit costs and other charges (134.8) (17.9) -
Merger costs - (10.5) -
-------- -------- --------
Unit contribution (157.8)% 0.7% 27.3%
======== ======== ========
Unit contribution $ (8,339) $ 19 $ 475
Franchising and royalty income 583 576 24
-------- -------- --------
Unit and franchising contribution $ (7,756) $ 595 $ 499
======== ======== ========
</TABLE>
<PAGE>
Comparison of Fiscal Years Ended June 29, 1997 and June 29, 1996
Sales in Specialty Concepts units increased approximately $2.4 million to $5.3
million for fiscal 1997 compared with $2.9 million for last year. This increase
reflects the expansion initiatives in nontraditional restaurant venues in late
fiscal 1996 and throughout most of fiscal 1997. Unit contribution, excluding
impairment charges and merger costs, within the Specialty Concepts segment were
unprofitable in fiscal 1997 due to higher operating costs in the Fudd Cafe units
and the development and construction of the Company's "Leo's Deli" concept.
Comparison of Fiscal Years Ended June 29, 1996 and July 1, 1995
Sales in Specialty Concepts units increased approximately $1.2 million to $2.9
million in 1996 compared with $1.7 million in 1995. These increases primarily
reflect the on-going expansion initiatives in nontraditional restaurant venues
and the opening of one Great Bagel and Coffee unit in 1996. No units were opened
in 1995. Unit contribution, excluding impairment, exit costs and other charges
and merger costs, increased $0.3 million to $0.8 million in 1996 compared with
unit contribution of approximately $0.5 million in 1995.
Franchising and royalty income increased approximately $0.5 million in 1996
compared with 1995 amounts due to an increased number of multi-unit franchise
agreements signed with Great Bagel and Coffee franchisees.
Selling, General and Administrative Expenses
As noted above, included within the Company's historical selling, general and
administrative expenses are allocations of certain general corporate expenses of
DAKA International. Management believes these allocations as well as the
assumptions underlying the development of the Company's separate combined
financial statements to be reasonable although not relevant to the anticipated
selling, general and administrative costs of the Company in fiscal 1998.
Management believes that its overall selling, general and administrative
expenses in 1998 will approximate 9% to 10% of total revenue although the
percentage in the first half of fiscal 1998 may exceed these overall levels.
Comparison of Fiscal Year Ended June 29, 1997 and June 29, 1996
Selling, general and administrative expenses, including a component of
depreciation and amortization related to corporate assets of DAKA International
allocated to the Company, increased approximately $8.8 million to $33.4 million
for fiscal 1997. This increase primarily reflects the impact of increased
marketing efforts and costs for Fuddruckers, higher overhead, including
severance costs, associated with the Specialty Concepts segment and ongoing
investment in corporate infrastructures. Amounts for 1997 also include
write-downs of assets and establishment of legal and other reserves which became
effective in connection with the overall organization of the Company.
Comparison of Fiscal Years Ended June 29, 1996 and July 1, 1995
Selling, general and administrative expenses, including a component of
depreciation and amortization related to corporate assets of DAKA International
allocated to the Company, amounted to $24.6 million and $18.8 million in 1996
and 1995, respectively. Selling, general and administrative expenses as a
percentage of total restaurant and unit sales of approximately $176 million and
$132 million in 1996 and 1995, respectively, aggregated 14.0% and 14.2%,
respectively.
<PAGE>
The $5.6 million increase in selling, general and administrative expenses in
1996, compared with 1995, was primarily due to additional corporate staff hired
to support Champps' expansion plans, ongoing investment in information systems
and divisional infrastructures, and the pursuit of nontraditional restaurant
venues within the Specialty Concepts segment.
Income Taxes
The operations of the Company are generally included in the consolidated U.S.
Federal Income tax return and certain combined and separate state and local tax
returns of DAKA International. A charge (credit) in lieu of taxes has been
presented as if the Company was a separate taxpayer. The Company's effective tax
benefit rate was approximately 8.7% for 1997, compared with an effective tax
benefit rate of approximately 7.7% for the comparable period last year. As of
June 29, 1997 the Company had net operating loss carryforwards of approximately
$12.8 million. The carryforwards expire at various dates through 2012 and a
portion of such carryforwards can only be applied against the taxable income of
Fuddruckers and a portion against the earnings of the Company's 63% owned
subsidiary, Atlantic Restaurant Ventures, Inc.
Accounting Pronouncements Not Yet Adopted
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which the
Company will adopt in fiscal 1998. Had SFAS No. 128 been effective for the
fiscal year ended June 29, 1997, there would be an immaterial effect to the
Company's reported pro forma loss per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company will adopt these
statements during fiscal year 1998 and does not expect that the adoption of
these statements will have a material impact on the combined financial
statements.
FINANCIAL CONDITION AND LIQUIDITY
At June 29, 1997, the Company had a working capital deficiency of $14.5 million,
a decrease of $16.0 million compared to working capital of $1.5 million at June
29, 1996. The decrease in working capital is principally due to the loss
incurred by the Company during the period and accrued transaction costs of
approximately $6.3 million incurred in connection with the transactions
discussed under the heading "Spin-off Transaction". Capital expenditures for
restaurant expansion during fiscal 1997 were funded primarily through $11.5
million of sale-leaseback and equipment financing under existing facilities and
$9.1 million in cash contributions of group equity by DAKA International.
The working capital needs of companies engaged in the restaurant industry are
generally low as sales are made for cash and inventory and labor costs and other
operating expenses are generally paid on terms. Given the Company's limited
plans for expansion of its Fuddruckers restaurant chain and existing sources of
financing through sale-leaseback facilities, the Company does not anticipate any
significant need for working capital for its primary business over the next
twelve months. However, as discussed further below, the Company is subject to
certain payments to be made pursuant to provisions of agreements entered into
with respect to the Spin-off and other costs on payments to be made as a result
of the Spin-off. The Company expects the Additional Capital Contribution will be
sufficient to cover these payments; although the timing of converting the
Additional Capital Contribution into cash and the ultimate amount of cash to be
collected is uncertain. See Pro Forma Combined Balance Sheet at June 29, 1997,
below.
DAKA International historically funded the Company's operations and capital
expenditures. As a result of the Offer, Compass assumed such debt and repaid it
in full upon consummation of the Offer. As a result, the Company has no bank
debt. The Company continues to be obligated under sale-leaseback financing and
equipment financing in connection with Company-owned restaurants. While the
Company currently believes that a curtailment of Fuddruckers restaurant
expansion, improved cash flows from operations, existing cash balances and
working capital, available sale-leaseback financing and equipment financing will
provide sufficient liquidity to meet its short-term obligations and fund
Fuddruckers capital expenditures, the Company expects to be required to raise
additional funds through bank financing or other means to meet its longer term
needs. The Company is seeking to obtain a line-of-credit on its own behalf and
is optimistic that a line-of-credit between $5.0 million and $10.0 million can
be obtained, although the timing and amount of any such facility cannot be
assured.
<PAGE>
At June 29, 1997, the Company had three new Champps-owned restaurants under
construction and two Champps restaurants under development which are expected to
open in fiscal 1998. The Company had no new Fuddruckers-owned restaurants under
construction or development. There are no other restaurant expansion or
development efforts planned by the Company for fiscal 1998.
In January 1997, Fuddruckers obtained $7.5 million of sale-leaseback financing
for the construction of up to six new Fuddruckers restaurants from Franchise
Financing Corporation of America. Any unused commitment expires on January 30,
1998. In December 1995, Champps obtained $40 million of sale- leaseback
financing for the construction of up to 10 new Champps restaurants. At June 29,
1997, $32.8 million was available for use. Any unused commitment expires in
December 1997.
The Company and Compass have entered into a post closing covenant agreement
which provides for Compass to act as agent for the Company in collecting
receivables and paying payables included as part of the Additional Capital
Contribution for 120 days after the Spin-off. After 120 days, the net
uncollected receivables and unpaid payables, if any, will be returned to the
Company. The extent to which Compass can control the timing and amount of cash
payments to the Company from the collection of trade accounts receivable can
have a material adverse effect on the Company's cash flow and financial
condition.
Below is a Pro Forma Combined Balance Sheet as of June 29, 1997, which gives
effect to the Additional Capital Contribution as if it had been consummated on
June 29, 1997. This one-time contribution of certain current foodservice net
assets to the Company (the "Additional Capital Contribution") is to provide the
Company with additional working capital to fund operations as such assets and
liabilities are liquidated either by the Company, or in the case of accounts
receivable and accounts payable, by DAKA International pursuant to an agency
relationship set forth in the Post-Closing Covenants Agreement. See Note 2 of
Notes to Combined Financial Statements. Due to the nature of the Additional
Capital Contribution and the effect that such a non-continuing contribution
would have on the historical financial statements of the Company, the Additional
Capital Contribution is presented on a pro forma basis as part of "group
equity".
<PAGE>
<TABLE>
<CAPTION>
Net
Pro Forma Combined Balance Sheet Contributed Combined
as of June 29, 1997 Historical Assets Assets
---------- ------ ------
(Dollars in
thousands)
<S> <C> <C> <C>
Assets:
Total current assets $ 14,910 $ 19,409 $ 34,319
Other assets 110,299 4,097 114,396
--------- --------- ---------
Total assets $ 125,209 $ 23,506 $ 148,715
========= ========= =========
Liabilities:
Total current liabilities 29,394 29,394
Other liabilities 16,762 2,133 18,895
--------- --------- ---------
Total liabilities 46,156 2,133 48,289
--------- --------- ---------
Group equity* 79,053 21,373 100,426
--------- --------- ---------
Total liabilities & equity $ 125,209 $ 23,506 $ 148,715
========= ========== =========
</TABLE>
* The pro forma balance sheet reflects a net contribution of assets of
approximately $21.4 million, and pro forma group equity of
approximately $100 million before any purchase price adjustments
payable by the Company to Compass. Such purchase price adjustments are
to be calculated pursuant to provisions contained in the post-closing
covenants agreement. Management currently estimates these adjustments
will range between $10 and $15 million, although such amount is subject
to offsets against future tax benefits available to Compass, and
further calculation and negotiation which have not been completed at
this time. There can be no assurance that the ultimate amount of the
purchase price adjustments paid to Compass as finally determined will
not differ from Management's estimate and such difference could be
material.
Item 8. Financial Statements and Supplementary Data.
The information required under this Item 8 is set forth on pages F-1 through
F-26 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors of the Registrant
There is incorporated in this Item 10 by reference that portion of the Company's
definitive Proxy Statement relating to its Annual Meeting to be held on December
9, 1997, appearing therein under the captions "Election of Directors" and
"Directors and Committees."
<PAGE>
Executive Officers of the Registrant
Certain information is set forth below concerning the executive officers of the
Company, each of whom has been elected to serve until the regular meeting of the
Board of Directors and until his successor is duly elected and qualified. The
executive officers of the Company are as follows:
Name Age Position
William H. Baumhauer 49 Chairman of the Board,
President and Chief
Executive Officer
Donald C. Moore 43 Senior Vice President,
Chief Financial Officer
and Treasurer
Charles W. Redepenning, Jr. 41 Senior Vice President,
General Counsel and
Secretary
William H. Baumhauer has served as Chairman of the Board, President and Chief
Executive Officer Chairman of the Board and Chief Executive Officer of the
Company since May 1997. He served as Chairman of the Board Chief Executive
Officer Chairman of the Board and Chief Executive Officer of DAKA International
from November 1990 to July 1997. Mr. Baumhauer also serves Fuddruckers as
Chairman of the Board and President since 1985 and previously in other executive
officer capacities since joining Fuddruckers in 1983.
Donald C. Moore has served as Senior Vice President and Chief Financial Officer
and Treasurer of the Company since May, 1997. He served as Senior Vice President
and Chief Financial Officer and Treasurer of DAKA International from January
1997 to May 1997. From November 1995 through October 1996 he served as Senior
Vice President and Chief Financial Officer for Al Copeland Investments, a
multi-business, privately held corporation. From August 1990 until August 1995
he served principally as Senior Vice President and Chief Financial Officer of
Rally's Hamburgers, Inc., a publicly held multi-unit quick service hamburger
operator and franchiser.
Charles W. Redepenning, Jr. has served as Secretary, Senior Vice President and
General Counsel of the Company since July 1997. He served as Secretary, Senior
Vice President and General Counsel of DAKA International from January 1991 to
July 1997 and as General Counsel and Secretary of DAKA International from
November 1988 to July 1997. He also served as Vice President, General Counsel
and Secretary of Fuddruckers since July 1987.
Item 11. Executive Compensation.
There are incorporated in this Item 11 by reference those portions of the
Company's definitive Proxy Statement relating to its Annual Meeting to be held
on December 9, 1997, appearing therein under the caption "Executive
Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
There is incorporated in this Item 12 by reference that portion of the Company's
definitive Proxy Statement relating to its Annual Meeting to be held on December
9, 1997, appearing therein under the caption "Principle Stockholders."
Item 13. Certain Relationships And Related Transactions.
There are no items that are required to be disclosed pursuant to this item.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following are being filed as part of this Annual Report on Form 10-K.
A. Financial Statements:
Independent Auditors' Report
Combined Balance Sheets - June 29, 1997 and 1996.
Combined Statements of Operations - Years ended June 29, 1997 and
1996 and July 1, 1995.
Combined Statements of Cash Flows - Years ended June 29, 1997 and
1996, and July 1, 1995.
Combined Statements of Stockholders' Equity - Years ended June 29,
1997 and 1996, and July 1, 1995.
Notes to Combined Financial Statements - Years ended June 29, 1997
and 1996, and July 1, 1995.
B. Financial Statement Schedules:
There are no Financial Statement Schedules required to be filed.
Information required by Article 12 of Regulation S-X with respect
to Valuation and Qualifying Accounts has been included in the
Notes to the Consolidated Financial Statements.
C. Exhibits:
* 2.1 Agreement and Plan of Merger, dated as of May 27, 1997, by and
among Compass Interim, Inc. ("Compass Interim"), Compass Holdings,
Inc. ("Purchaser"), Compass Group PLC ("Parent") and DAKA
International, Inc. ("DAKA International").
* 2.2 Reorganization Agreement dated as of May 27, 1997, by and among
DAKA International, Daka, Inc. ("Daka"), the Company, Parent and
Compass Holdings, together with certain exhibits thereto.
2.3 Agreement and Plan of Merger among Champps Entertainment, Inc.
("Champps"), DAKA and CEI Acquisition Corp., dated as of October
10, 1995, incorporated herein by reference to DAKA's Registration
Statement on Form S-4 (File No. 33-65425) ("1996 DAKA Form S-4").
** 2.4 Series D Convertible Preferred Stock and Warrant Purchase
Agreement, dated as of January 12, 1996, by and among La Salsa
Holding Co. and Casual Dining Ventures, Inc. Pursuant to Item
601(b)(2) of Regulation S-K, the Schedules to the Series D
Convertible Preferred Stock and Warrant Purchase Agreement are
omitted. The Company hereby undertakes to furnish supplementally a
copy of any omitted Schedule to the Commission upon request.
** 2.5 Stock Purchase Agreement, dated as of March 18, 1996, by and among
Casual Dining Ventures, Inc., DAKA, Champps Development Group,
Inc., Steven J. Wagenheim, Arthur E. Pew, III, PDS Financial
Corporation, Douglas B. Tenpas and certain other stockholders of
Americana Dining Corp. Pursuant to Item 601(b)(2) of Regulation
S-K, the Schedules to the Stock Purchase Agreement are omitted.
The Company hereby undertakes to furnish supplementally a copy of
any omitted Schedule to the Commission upon request.
<PAGE>
** 2.6 Asset Purchase Agreement, dated March 18, 1996, between Americana
Dining Corp., as Seller, and New Brighton Ventures, Inc., as
Buyer. Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules
to the Asset Purchase Agreement are omitted. The Company hereby
undertakes to furnish supplementally a copy of any omitted
Schedule to the Commission upon request.
** 2.7 Stock Purchase Agreement, dated as of March 29, 1996, by and among
DAKA, The Great Bagel and Coffee Franchising Corp., GBC Credit
Company, Gemini Production Facility, Inc., The Great Bagel and
Coffee Company, Mark C. Gordon, Brian H. Loeb, Jason R. Olivier,
Michael F. Zerbib, Nicholas D. Zerbib, and Thierry E. Zerbib.
Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules to the
Stock Purchase Agreement are omitted. The Company hereby
undertakes to furnish supplementally a copy of any omitted
Schedule to the Commission upon request.
** 2.8 Stock Purchase Agreement, dated as of March 31, 1996, by and among
Casual Dining Ventures, Inc., DAKA and Edgebrook, Inc. Pursuant to
Item 601(b)(2) of Regulation S-K, the Schedules to the Stock
Purchase Agreement are omitted. The Company hereby undertakes to
furnish supplementally a copy of any omitted Schedule to the
Commission upon request.
* 3.1 Certificate of Incorporation of the Company.
* 3.2 By-laws of the Company
* 3.3 Form of Amended and Restated Certificate of Incorporation of the
Company.
* 3.4 Form of Amended and Restated By-laws of the Company.
* 4.1 Specimen Stock Certificate for shares of the UCRI Common Stock.
* 10.1 Tax Allocation Agreement dated as of May 27, 1997, by and among
DAKA, the Company, and Parent.
* 10.2 Post-Closing Covenants Agreement, dated as of May 27, 1997, by and
among DAKA, Daka, Inc., the Company, Champps, Fuddruckers, Inc.,
Purchaser and Parent.
* 10.3 Stock Purchase Agreement, dated as of May 26, 1997, between DAKA,
Parent, Purchaser, First Chicago Equity Corporation, Cross Creek
Partners I and the other holders of Series A Preferred Stock of
DAKA.
* 10.4 Form of the Company's 1997 Stock Option and Incentive Plan.
* 10.5 Form of the Company's 1997 Stock Purchase Plan.
* 10.6 Form of Indemnification Agreement, by and between the Company and
directors and officers of DAKA.
* 10.7 Employment Agreement, dated as of January 1, 1997, by and between
DAKA and William H. Baumhauer.
* 10.8 Employment Agreement, dated as of January 1, 1997, by and between
DAKA and Allen R. Maxwell.
* 10.9 Employment Agreement, dated as of May 23, 1997, by and among
Compass Group USA, Inc., DAKA, Daka, Inc. and Allen R. Maxwell.
* 10.10 Employment Agreement, dated as of February 21, 1996, by and among
Dean P. Vlahos, DAKA and Champps.
** 10.11 Third Amended and Restated Registration Rights Agreement, dated as
of January 12, 1996, by and among La Salsa Holding Co., FMA High
Yield Income L.P., WSIS Flexible Income Partners L.P., WSIS High
Income L.P., Howdy S. Kabrins, La Salsa, Inc., Crown Associates
III, L.P., Crown-Glynn Associates, L.P., Nueberger & Berman as
Trustee for the Crown Trust, Theodore H. Ashford, Noro-Moseley
Partners II, L.P., Seidler Salsa, L.P., Bankers Trust Company as
Master Trustee for Hughes Aircraft Retirement Plans, Charles A.
Lynch, Sienna Limited Partnership I, Sienna Limited Partnership
II, Sienna Holdings, Inc., as Nominee, InterWest Partners IV,
Donald Benjamin, Vicki Tanner, Ronald D. Weinstock, Inc., Frank
Holdraker, and Casual Dining Ventures, Inc.
** 10.12 Fourth Amended and Restated Restricted Stock Agreement, dated as
of January 12, 1996, by and among La Salsa Holding Co., Howdy S.
Kabrins, La Salsa, Inc., InterWest Partners IV, Sienna Holding,
Inc., Sienna Limited Partnership I, Charles A. Lynch, Theodore H.
Ashford, Crown Associates III, L.P., Crown-Glynn Associates, L.P.,
Nueberger & Berman as Trustee for The Crown Trust, Noro-Moseley
Partners II, L.P., Seidler Salsa, L.P., Bankers Trust Company, as
Master Trustee, for Hughes Aircraft Retirement Plans, FMA High
Yield Income L.P., WSIS Flexible Income Partners L.P., WSIS High
Yield Income L.P., Sienna Limited Partnership II, Donald Benjamin,
Vicki Tanner, Ronald D. Weinstock, Inc., Frank Holdraker, and
Casual Dining Ventures, Inc.
** 10.13 La Salsa Holding Co. Warrant to Purchase Shares of Series D
Convertible Preferred Stock, dated as of January 12, 1996, issued
to Casual Dining Ventures, Inc. by La Salsa Holding Co.
** 10.14 Severance, Non-Competition and Confidentiality Agreement, dated as
of March 18, 1996, between Steven J. Wagenheim and Americana
Dining Corp.
** 10.15 La Salsa License Agreement, dated as of February 14, 1996, by and
between La Salsa Franchise, Inc. and La Salsa Holding Co.
<PAGE>
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Arthur Andersen LLP
24.1 Powers of Attorney.
- ------------
* Incorporated herein by reference to the Company's Registration Statement on
Form 10 filed June 3, 1997, as amended.
** Incorporated herein by reference to the Annual Report on Form 10-K of DAKA
International for the year ended June 29, 1996.
D. Reports on Form 8-K
Not applicable.
<PAGE>
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.
UNIQUE CASUAL RESTAURANTS, INC.
(Registrant)
By: /s/Donald C. Moore
--------------------
Donald C. Moore
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Principal
Accounting Officer)
Date: October 13, 1997
Pursuant to the requirement 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 date indicated.
Signature Title
/s/William H. Baumhauer Chairman of the Board and
William H. Baumhauer Chief Executive Officer (Principal
Executive Officer)
Allen R. Maxwell* Director
E. L. Cox* Director
Joseph W. O'Donnell* Director
Erline Belton* Director
Alan D. Schwartz* Director
/s/Donald C. Moore Senior Vice President, Chief
Donald C. Moore Financial Officer and Treasurer
(Principal Financial and Principal
Accounting Officer)
*By: /s/William H. Baumhauer Date: October 13, 1997
--------------------------
William H. Baumhauer
Attorney-In-Fact
<PAGE>
INDEPENDENT AUDITORS' REPORT
Unique Casual Restaurants, Inc.:
We have audited the accompanying combined balance sheets of Unique Casual
Restaurants, Inc. as of June 29, 1997 and 1996 and the related combined
statements of operations, cash flows and group equity for each of the three
years in the period ended June 29, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit for
the year ended July 1, 1995 the consolidated financial statements of Champps
Entertainment, Inc. (an acquisition by the Company accounted for as a
pooling-of-interests), which statements reflect total revenues constituting
14.4% of combined total revenues for the year ended July 1, 1995, and net income
constituting 11.7% of combined total net income for the year ended July 1, 1995.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for
Champps Entertainment, Inc., is based solely on the report of such other
auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
combined financial statements present fairly, in all material respects, the
financial position of Unique Casual Restaurants, Inc. as of June 29, 1997 and
1996 and the results of its operations and its cash flows for each of the three
years in the period ended June 29, 1997, in conformity with generally accepted
accounting principles.
As discussed in Notes 1,2 and 3, the combined financial statements include the
accounts of certain majority controlled subsidiaries of DAKA International which
were transferred to the Company prior to July 17, 1997. In addition, the
combined results of operations include allocations and estimates of certain
expenses provided to the Company by DAKA International. The accompanying
combined financial statements may not necessarily be indicative of the
conditions that would have existed or the results of operations if the Company
had been operated as an unaffiliated company.
As discussed in Note 3 to the combined financial statements, during the year
ended June 29, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed of."
Deloitte & Touche LLP
Boston, Massachusetts
September 17, 1997
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Champps Entertainment, Inc.:
We have audited the consolidated statements of operations and shareholders'
investment and cash flows of Champps Entertainment, Inc. (a Minnesota
corporation) for the year ended July 2, 1995, not included herein. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of their operations and cash flows of Champps
Entertainment, Inc. and Subsidiaries for the year ended July 2, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 5, 1996
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
COMBINED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 29, June 29,
1997 1996
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 172 $ 5,281
Accounts receivable, net 4,376 5,509
Inventories 3,975 3,488
Prepaid expenses and other current assets 6,387 2,174
--------- ---------
Total current assets 14,910 16,452
--------- ---------
Property and equipment:
Land 8,039 10,587
Buildings and leasehold improvements 82,260 80,787
Equipment 35,084 42,073
--------- ---------
125,383 133,447
Accumulated depreciation and amortization (30,710) (26,168)
--------- ---------
Property and equipment, net 94,673 107,279
--------- ---------
Investments in, and advances to, affiliates 5,000 5,000
Deferred tax assets -- 682
Other assets, net 10,626 12,935
--------- ---------
$ 125,209 $ 142,348
========= =========
LIABILITIES AND GROUP EQUITY:
Current liabilities:
Accounts payable $ 10,397 $ 6,305
Accrued expenses 11,548 7,177
Accrued transaction costs 6,347 --
Current portion of long-term debt 1,102 1,299
Deferred tax liabilities -- 228
--------- ---------
Total current liabilities 29,394 15,009
Long-term debt 4,026 5,067
Other long-term liabilities 11,036 12,210
Minority interests 1,100 1,168
Commitments and contingencies (Note 11)
Group equity 79,053 108,894
--------- ---------
$ 125,209 $ 142,348
========= =========
</TABLE>
See notes to combined financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
COMBINED STATEMENTS OF OPERATIONS
Fiscal Years Ended June 29, 1997 and 1996 and July 1, 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales $ 200,741 $ 176,050 $ 131,698
Franchising and royalty income 5,143 7,705 6,032
--------- --------- ---------
Total 205,884 183,755 137,730
--------- --------- ---------
Costs and expenses:
Cost of sales and operating expenses 178,638 148,155 108,126
Selling, general and administrative expenses 32,603 24,181 18,566
Depreciation and amortization 15,547 12,136 6,632
Impairment, exit costs and other charges 21,671 3,026 --
Merger costs -- 2,900 --
Interest expense 744 641 331
Interest income (487) (353) (622)
--------- --------- ---------
Total 248,716 190,686 133,033
--------- --------- ---------
Income (loss) before income taxes (benefit) and
minority interests (42,832) (6,931) 4,697
Income tax expense (benefit) (3,721) (536) 3,068
Minority interests (68) (725) (169)
--------- --------- ---------
Net income (loss) $ (39,043) $ (5,670) $ 1,798
========= ========= =========
Pro forma loss per share $ (3.42)
Pro forma weighted average common shares
outstanding 11,425
</TABLE>
See notes to combined financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
COMBINED STATEMENTS OF CASH FLOWS
Fiscal Years Ended June 29, 1997 and 1996 and July 1, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(39,043) $ (5,670) $ 1,798
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 15,547 12,136 6,632
Impairment, exit costs and other charges 21,671 3,026 --
Deferred income taxes 454 763 (36)
Minority interests (68) (725) (169)
Change in assets and liabilities, net of acquisitions:
Accounts receivable 1,133 (2,733) (657)
Inventories (1,312) (855) (705)
Prepaid expenses and other assets (6,428) (7,849) (3,140)
Accounts payable and accrued expenses 8,481 (845) 3,700
Other long-term liabilities 398 1,385 1,889
-------- -------- --------
Net cash provided by (used in)
operating activities 833 (1,367) 9,312
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (23,865) (51,572) (32,146)
Cash paid for acquisitions, net -- -- (623)
Investment in, and advances to affiliates -- (5,000) --
-------- -------- --------
Net cash used in investing activities (23,865) (56,572) (32,769)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale-leaseback facility 11,489 18,651 5,742
Contributed capital 9,080 39,932 14,179
Repayments of capital lease obligations (2,646) (1,090) (1,588)
-------- -------- --------
Net cash provided by financing activities 17,923 57,493 18,333
-------- -------- --------
Net decrease in cash (5,109) (446) (5,124)
Cash, beginning of year 5,281 5,727 10,851
-------- -------- --------
Cash, end of year $ 172 $ 5,281 $ 5,727
======== ======== ========
</TABLE>
See notes to combined financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
COMBINED STATEMENTS OF GROUP EQUITY
Fiscal Years Ended June 29, 1997 and 1996 and July 1, 1995
(Dollars in thousands)
Balance, July 2, 1994 $ 57,666
Contributed capital:
Cash 14,179
Non-cash 336
Net income 1,798
-------
Balance, July 1, 1995 73,979
Contributed capital:
Cash 39,932
Non-cash 653
Net loss (5,670)
--------
Balance, June 29, 1996 108,894
Contributed capital:
Cash 9,080
Non-cash 122
Net loss (39,043)
--------
Balance, June 29, 1997 $ 79,053
========
See notes to combined financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Fiscal Years Ended June 29, 1997 and 1996 and July 1, 1995
(Dollars in thousands, except per share amounts)
1. Background and Basis of Presentation
Background
Unique Casual Restaurants, Inc. (the "Company") is a Delaware corporation formed
on May 27, 1997 in anticipation of a spin-off to holders of the common stock of
DAKA International, Inc. ("DAKA International") pursuant to the transactions
described below in Note 2 (the "Spin-off"). The Company's principal business
activities will be to own and operate the restaurant operations, previously
operated by various subsidiaries and divisions of DAKA International prior to
the formation and the Spin-off of the Company.
Basis of Presentation and Business
The accompanying combined financial statements include the accounts of the
following DAKA International majority controlled subsidiaries transferred to the
Company prior to the Spin-off, Fuddruckers, Inc. ("Fuddruckers"), Champps
Entertainment, Inc. ("CEI" or "Champps"), The Great Bagel and Coffee Company
("Great Bagel and Coffee"), Casual Dining Ventures, Inc. ("CDVI") and Atlantic
Restaurant Ventures, Inc. ("ARVI"). The historical DAKA International basis in
the assets and liabilities transferred to the Company in connection with the
transactions described in Note 2 have been recorded as the Company's initial
cost basis. In addition, the combined statements of operations and cash flows
include the combined financial statements of the Company, Fuddruckers, CEI,
Great Bagel and Coffee, CDVI and ARVI in a manner similar to a
pooling-of-interests. Minority shareholders' equity in earnings (losses) of less
than 100% owned subsidiaries is presented as minority interests in the
accompanying combined financial statements. Significant intercompany balances
and transactions have been eliminated in combination.
2. Formation of the Company
On May 27, 1997, DAKA International and its wholly-owned subsidiary, Daka, Inc.,
a Massachusetts corporation ("Daka"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Compass Interim, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Holdings, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Group PLC (collectively
"Compass"), pursuant to which the Compass agreed, upon the satisfaction of
certain conditions, to commence a tender offer (the "Offer") for all of the
outstanding shares of DAKA International common stock (the "Merger"). The Offer
was consummated on July 17, 1997. Immediately prior to the consummation of the
Offer, pursuant to a plan of contribution and distribution as described in the
Reorganization Agreement (the "Reorganization Agreement"), dated as of May 27,
1997, by and among DAKA International, Daka, the Company and Compass, DAKA
International and certain of its subsidiaries, including Daka and the Company,
made various contributions of assets and equity interests to each other in the
form of dividends and capital contributions in order to divest DAKA
International of its restaurant businesses (the "Transferred Businesses") and
such assets were contributed to the Company. Following these transactions, the
remaining business activities of DAKA International consists of its foodservice
operations.
<PAGE>
Following the consummation of the Offer, Compass merged with and into DAKA
International. Pursuant to the Offer, DAKA International distributed to each
holder of record shares of DAKA International common stock, one share of common
stock of the Company for each share of DAKA International owned by such
stockholder (the "Distribution"). No consideration was paid by DAKA
International's stockholders for the shares of the Company's common stock. As a
result of the Distribution, the Company ceased to be a subsidiary of DAKA
International and began operating as an independent, publicly-held company on
July 17, 1997.
Certain other non-restaurant operating assets and liabilities of DAKA
International were contributed (the "Additional Capital Contribution") to the
Company prior to the Distribution on July 17, 1997 (the "Transaction Date").
However, those assets and liabilities consisting of trade accounts receivable,
certain prepaid assets, property and equipment, accounts payable, accrued
expenses, contingent liabilities and deferred taxes have not been included in
the accompanying combined financial statements since those assets and
liabilities are principally related to DAKA International's Foodservice
Businesses and have not been used in the historical operation of the Transferred
Businesses. Pursuant to the terms of the Additional Capital Contribution, the
Purchaser or its affiliates will act as an agent to process the accounts
receivable and accounts payable related to the Additional Capital Contribution
(the "Contributed Working Capital").
The Company entered into a sale and services agreements with Restaurant
Consulting Services, Inc. ("RCS") (a Delaware Corporation) whereby the Company
sold to RCS for an aggregate purchase price of $2.3 million certain data
processing equipment which had been contributed to the Company by DAKA
International as part of the Additional Capital Contribution. The sales and
services agreements were effective as of July 1, 1997. The purchase price will
be satisfied through the repayment of a promissory note due June 30, 2002 which
bears interest at 6% per annum. The Company also received DAKA International's
50% interest in RCS at the Transaction Date. In connection with this sale, the
Company has entered into a management agreement with RCS whereby the Company has
agreed to provide certain managerial services to RCS. In addition, the Company
has entered into a two year service agreement with RCS for data processing and
consulting services for an annual fee of $1.8 million. The Company has also
provided RCS with a $300 line-of-credit agreement which bears interest at 6% and
is payable in full on or before December 31, 1999. The Company will consolidate
RCS's operations until such time as the obligations of RCS to the Company are
satisfied.
3. Summary of Significant Accounting Policies
Business Activities of the Company
Following the consummation of the transactions described in Notes 1 and 2, which
are collectively referred to as "the Transaction" for purposes of these combined
financial statements, the Company will be a diversified restaurant company
serving customers through a variety of venues. The Company's Fuddruckers and
Champps operations serve customers in casual and upscale restaurant settings,
respectively, throughout the United States and in Canada and the Middle East.
The Company's Specialty Concepts business unit consists principally of French
Quarter Coffee and Great Bagel and Coffee, which serves coffee, bagels and
sandwich items in a cafe setting in western locations of the United States.
Restaurant operations are conducted through Company-owned and franchised stores.
<PAGE>
During the fiscal years ended June 29, 1997 and 1996, respectively, the Company
incurred losses before income tax benefit and minority interests of $42,832 and
$6,931, respectively. Management expects to significantly reduce selling,
general and administrative expenses as a percentage of sales, from levels
reflected in the Company's historical combined financial statements, while
continuing to increase net revenues, resulting in improvement in overall
operating results. However, the ultimate attainment of profitable operations is
dependent upon favorable events including obtaining adequate financing to
continue to expand Champps and revitalize the Fuddruckers concept. Management
believes that its existing cash balances, together with the Additional Capital
Contribution, will be sufficient to fund the Company's cash flow requirements
and operating activities through fiscal 1998, although the Company expects to be
required to raise additional funds through bank financing; or other means to
meet its long-term needs.
Fiscal Year
Beginning in fiscal 1997, the Company's fiscal year ends on the Sunday closest
to June 30th. Prior to fiscal 1997, the Company's fiscal year ended on the
Saturday closest to June 30th. For purposes of these notes to the combined
financial statements, the fiscal years ended June 29, 1997, June 29, 1996 and
July 1, 1995 are referred to as 1997, 1996 and 1995, respectively. Fiscal 1997,
1996 and 1995 contain 52 weeks.
Allocation of Certain Expenses
The restaurant operations, as presented herein, include allocations and
estimates of certain expenses, principally corporate accounting and tax, cash
management, corporate information technology, legal, risk management, purchasing
and human resources, historically provided to the Company by DAKA International.
The amount of such allocated expenses in these combined financial statements
have been allocated by management based upon a variety of factors including, for
example, personnel, labor costs and sales volumes. Such allocations have been
reported within selling, general and administrative expenses and aggregate
$9,828, $7,790 and $6,550 for 1997, 1996 and 1995, respectively. Management
believes these allocations have been made on a reasonable basis and the expenses
associated with such activities should not increase following the Transaction.
However, the accompanying combined financial statements may not necessarily be
indicative of the conditions that would have existed, the financial position, or
results of operations, if the restaurant operations had been operated as a
separate entity.
The accompanying combined financial statements do not include an allocation of
interest expense associated with DAKA International's revolving line-of-credit
agreements as such obligations were assumed by the Purchaser pursuant to the
terms of the Transaction. Interest on long-term obligations transferred to the
Company has been included in the Company's statement of operations for all
periods presented.
Significant Estimates
In the process of preparing its combined financial statements, the Company
estimates the appropriate carrying value of certain assets and liabilities which
are not readily apparent from other sources. The primary estimates underlying
the Company's combined financial statements include allowances for potential bad
debts on accounts and notes receivable, the useful lives and recoverability of
its assets such as property and intangibles, fair values of financial
instruments, the realizable value of its tax assets and accruals for workers
compensation, general liability and health insurance programs. Management bases
its estimates on certain assumptions, which they believe are reasonable in the
present circumstances and while actual results could differ from those
estimates, management does not believe that any change in those assumptions in
the near term would have a material effect on the Company's combined financial
position or the results of operations.
<PAGE>
Concentration of Credit Risk
The Company extends credit to its franchisees on an unsecured basis in the
normal course of business. No individual franchisee is significant to the
Company's franchisee base. The Company has policies governing the extension of
credit and collection of amounts due from franchisees.
The Company's allowance for uncollectible accounts receivable and related bad
debt expense are not material for each period presented.
Inventories
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market value. Inventories include the initial cost of
smallwares with replacements charged to expense when purchased.
The components of inventories are as follows:
1997 1996
---- ----
Food and liquor $ 1,234 $ 1,109
Smallwares 1,871 1,970
Supplies 870 409
-------- --------
$ 3,975 $ 3,488
======== ========
Prepaid Expenses and Other Current Assets
Included in prepaid expenses and other current assets is a $5 million insurance
deposit.
Property and Equipment
Property and equipment is stated at cost and includes an allocation of the
purchase price for assets acquired in connection with the purchase of certain
restaurant businesses. The allocation of the purchase price is generally based
upon independent appraisals of the assets acquired. Property and equipment is
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements and assets capitalized pursuant to capital
lease obligations are amortized over the shorter of the lease term, contract
term or the estimated useful life. Useful lives range from 20 to 30 years for
buildings and leasehold improvements and three to ten years for equipment.
Interest costs incurred by DAKA International during the construction of new, or
the expansion and major remodeling of existing restaurants are capitalized as a
component of the cost of the property and allocated to the Company in the form
of a credit to the group equity account. During 1997, 1996 and 1995, $122, $653
and $336 of interest costs were capitalized.
Accrued Transaction Costs
Accrued Transaction costs include legal, accounting and other costs associated
with completing the Spin-off.
<PAGE>
Accrued Insurance Costs
The Company is self-insured for workers' compensation, general liability and
various other risks up to specified limits. In addition, the Company is
self-insured up to certain limits for risks associated with the healthcare plan
provided for its employees. The Company's share of workers' compensation and
general liability programs of DAKA International were allocated using labor
costs and the aggregate costs of such programs was determined through actuarial
studies which determine the estimated amount required to provide for incurred
incidents. Management has allocated expenses associated with these liability
programs to the Company based upon labor costs. In connection with the
Transaction, the Company is obligated to indemnify the Purchaser for all claims
arising subsequent to the Transaction, including claims related to employees of
DAKA International not continuing with the Company after the Transaction, that
relate to events occurring prior to the Transaction.
Other Long-Term Liabilities
Other long-term liabilities are comprised of deferred royalty buydown payments,
the liability under the long-term incentive compensation plan, deferred rent
liabilities and management's estimate of the non-current portion of the
liability related to the Company's workers' compensation and general liability
self-insurance program.
Deferred Rent Assets and Liabilities
Deferred rent assets, included in other assets, represent the difference between
the cost and the net proceeds received related to property sold pursuant to
sale-leaseback agreements and are amortized on a straight-line basis over the
initial term of the lease. For leases which contain rent escalations, the
Company records the total rent payable during the lease term on a straight-line
basis over the term of the lease. In addition, lease incentive payments received
from landlords are recorded as deferred rent liabilities and are amortized on a
straight-line basis over the lease term as a reduction of rent expense.
Group Equity
Group equity represents the net intercompany activities between the Company and
DAKA International. As of June 29, 1997, the Company had issued 1,000 shares of
its common stock, par value $.01 per share, to DAKA International for $0.1 in
connection with its formation. Such shares are reported within group equity for
purposes of these combined financial statements.
Revenue Recognition
The Company records sales from its restaurant operations and franchise and
royalty fees as earned.
Franchising and Royalty Income
Franchise fees for new franchises are recognized as revenue when substantially
all commitments and obligations have been fulfilled, which is generally upon
commencement of operations by the franchisee. The Company also enters into
development agreements granting franchisees the exclusive right to develop and
operate Fuddruckers restaurants in certain territories in exchange for a
development fee. Amounts received in connection with such development agreements
are recognized as franchise fee revenues when earned since the Company is not
required to provide any future services and such fees are non-refundable.
Franchisees entering into development agreements are also required to execute
franchise agreements and pay the standard franchise fee which is sufficient to
cover the Company's contractual obligations to the franchisee. To the extent
that the Company provides services beyond its contractual obligation, the
Company charges the franchisee a fee for such additional services. The Company
recognized development and franchise fee revenues of $690, $3,406 and $2,205
during 1997, 1996 and 1995, respectively.
Royalty revenues from franchised restaurants are recognized as revenues when
earned in accordance with the respective franchise agreement. Advance payments
received in connection with royalty buy-down agreements are deferred and
recognized at the reduced royalty rate during the royalty buy-down period
specified in the agreements. The remaining balance of the advance payments is
recognized on a straight-line basis over the remaining term of the agreement.
The Company recognized royalty revenues of $4,453, $4,299 and $3,827 during
1997, 1996, and 1995, respectively.
Preopening Expenses
Direct incremental preopening costs associated with the opening of new, or the
expansion and major remodeling of existing restaurants are capitalized and
amortized over twelve months. Net preopening costs included in other assets
amounted to $1,176 and $3,310 at June 29, 1997 and 1996, respectively.
Income Taxes
The restaurant operations of the Transferred Businesses are generally included
in the consolidated U.S. Federal income tax return and certain combined and
separate state and local income tax returns of DAKA International. For purposes
of these combined financial statements, a charge (credit) in lieu of taxes has
been presented as if the Company was a separate taxpayer. Current income tax
liabilities (assets) are considered to have been paid (received) from DAKA
International and are recorded through the group equity account.
The Company recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the carrying value for
financial reporting purposes and the tax basis of assets and liabilities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are recorded
using the enacted tax rates expected to apply to taxable income in the years in
which such differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities, resulting from a change in tax rates, is
recognized as a component of income tax expense in the period that such change
occurs. Targeted jobs tax credits and foreign tax credits are treated as a
reduction of income tax expense in the year such credits are utilized.
The Company has entered into an indemnification agreement, whereby the Company
has agreed to indemnify Compass against all state and federal income and other
tax liabilities of DAKA International for any period before the Transaction is
consummated as well as any tax consequences resulting from the Transaction.
Accounting for Stock-Based Compensation
Effective June 30, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
Accounting Principles Board ("APB") Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma effect
on results from operations and net income (loss) per share.
<PAGE>
Adjustments resulting from the Transaction to stock options for common stock of
DAKA International held by employees of the Company will be determined in
accordance with Emerging Issues Task Force Abstract 90-9 and, accordingly, such
adjustments will have no effect on the Company's combined financial position or
results of operations.
Subsequent to June 29, 1997, the Company purchased from certain option holders,
an aggregate of 172,044 options for aggregate consideration of $236, one-third
of which was paid in cash in the form of withholding tax and two-thirds in stock
of the Company, except for those individuals requiring no withholding tax, in
which case the entire amount of the consideration was paid in Company stock. The
Company will record the aggregate consideration in the first quarter of fiscal
1998.
Cash Flow Information
The Company participated in DAKA International's centralized cash management
system. As a result, the amount reported as cash in the accompanying combined
financial statements consists principally of cash funds held at restaurant unit
levels and funds not transferred into the centralized cash management system.
Cash payments for interest associated with long-term obligations that will be
transferred to the Company aggregated $454, $641 and $331 in 1997, 1996 and
1995, respectively.
Capital lease obligations of $1,605, $3,447 and $2,225 were incurred when the
Company entered into leases for new restaurant and office equipment in 1997,
1996 and 1995, respectively.
Significant other non-cash investing and financing transactions are as follows:
1997
The Company sold a restaurant under construction with a book
value of $1,205, in exchange for a $1,200 promissory note.
1996
The Company sold a restaurant with a book value of $1,306, in
exchange for a $1,280 promissory note.
1995
The Company sold three-Fuddruckers restaurants, with an
aggregate book value of $1,944, in exchange for various notes
receivable.
Equity and Pro Forma Loss Per Share
The authorized capital stock of the Company consists of 30,000,000 shares of
common stock, of which 1,000 shares were issued and outstanding as of June 29,
1997 and approximately 11,425,000 shares were issued and outstanding upon the
consummation of the Transaction, and 5,000,000 shares of preferred stock, of
which no shares are issued and outstanding as of June 29, 1997.
<PAGE>
Pro forma loss per share for 1997 is computed using the weighted average number
of shares outstanding as of June 29, 1997 for DAKA International after giving
effect to the anticipated conversion, in connection with the Transaction, of
11,912 shares of convertible preferred stock into 264,701 additional shares of
common stock.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which the
Company will adopt in fiscal 1998. Had SFAS No. 128 been effective for 1997,
there would be an immaterial effect to the Company's reported pro forma loss per
share.
Impairment of Long-Lived Assets, Exit Costs and Other Charges
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires the Company to evaluate the carrying value of long-lived assets
including property, equipment and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Under
SFAS No. 121, an assessment is made to determine if the sum of the expected
future undiscounted cash flows from the use of the assets and eventual
disposition is less than the carrying value. If the sum of the expected
undiscounted cash flows is less than the carrying value, an impairment loss is
recognized by measuring the excess of carrying value over fair value (generally
estimated by projected future discounted cash flows from the applicable
operation or independent appraisal).
In the third quarter of 1996, the Company adopted the provisions of SFAS No. 121
which resulted in a pretax charge of approximately $3.0 million. The provision
includes charges for impairments to the carrying value of certain restaurant
assets, reacquired franchise rights, and certain other assets.
In the fourth quarter of 1997 the Company recorded a pre-tax charge of $21.7
million of which $13.7 million represented impairment of net assets at
restaurants which have been or will be closed, $2.6 million related to exit
costs associated with lease settlements and identified employee termination
benefits and $5.4 million consisting primarily of legal costs associated with
the Spin-off and the sale of the Foodservice business.
Reclassifications
Certain amounts in the 1996 and 1995 combined financial statements have been
reclassified to conform to the 1997 presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company will adopt these
statements during fiscal year 1998 and does not expect that the adoption of
these statements will have a material impact on the combined financial
statements.
4. Merger with Champps and Great Bagel and Coffee
On February 21, 1996, CEI Acquisition Corp., a wholly-owned subsidiary of DAKA
International, merged with and into Champps whereupon Champps became a
wholly-owned subsidiary of DAKA International pursuant to an Agreement and Plan
of Merger dated October 10, 1995 (the "Champps Merger Agreement"). Under the
terms of the Champps Merger Agreement, the Champps common stockholders exchanged
their holdings in Champps' common stock for 2,181,722 shares of DAKA
International common stock valued at approximately $49,634 on the merger date.
On April 3, 1996, DAKA International merged with Great Bagel and Coffee whereby
DAKA International exchanged 339,236 shares of its common stock valued at
approximately $8,566 for all outstanding shares of Great Bagel and Coffee common
stock (collectively the "1996 Mergers" and the "1996 Merged Companies").
<PAGE>
The 1996 Mergers were accounted for as poolings-of-interests and, accordingly,
the accompanying combined financial statements include the accounts of Champps
and Great Bagel and Coffee for all periods presented.
In connection with the 1996 Mergers, the Company recorded a charge for merger
costs of $2,900. Included in these costs are legal, investment banking and
professional fees associated with the transactions, and costs associated with
combining the operations of previously separate companies and instituting
certain operational efficiencies.
Transactions between the Company and the Merged Companies prior to the Mergers
were not significant. The Company has not recorded an adjustment to conform the
accounting policies of the Merged companies to the Company's, as such policies
were generally comparable.
5. Acquisition and Disposition Transactions
Business transactions accounted for using the purchase method of accounting
present the results of operations and cash flows of the acquired business from
the date of acquisition in the Company's combined financial statements. The
following presents the business acquisitions accounted for as purchases and
dispositions occurring during the three-year period ended June 29, 1997:
1996 Transactions
On March 31, 1996, DAKA International entered into separate Stock Purchase
Agreements (the "Stock Agreements") with two stockholders of Americana Dining
Corporation ("ADC") (the "Selling Stockholders") to acquire the 43% voting
interest in ADC not held by DAKA International. Based upon an independent
valuation, the fair market value of the 43% voting interest acquired
approximated the consideration given by DAKA International.
On March 31, 1996, DAKA International sold a restaurant to one of the Selling
Stockholders of ADC in exchange for a $1,280 promissory note collateralized by
the assets of the restaurant. Interest accrues at the rate of 8.5% per annum and
is payable in monthly installments. The note matures on March 31, 2003, at which
time the outstanding balance, $1,180, will be due. Based on an independent
valuation, the book value of the restaurant assets sold approximated their fair
market value at March 31, 1996.
1995 Transactions
On February 1, 1995, the Company acquired the assets, operations and certain
working capital items of a Fuddruckers restaurant in Texas from a franchisee for
a purchase price of $623 which was paid in cash. On June 23, 1995, the Company
acquired the assets of four Fuddruckers restaurants located in Canada from a
franchisee for a purchase price of $961 and the issuance of a 19% interest in
the acquired restaurants to the former franchisee. The purchase price for the
four restaurants in Canada consisted of offsets to amounts receivable from the
franchisee.
Also during 1995, the Company sold, at book value which approximated fair market
value, three Fuddruckers restaurants located in the Kansas City and Omaha
markets for a purchase price of $1,300, substantially all of which is payable in
the form of notes receivable collateralized by all of the assets of the
restaurants sold. During 1997, these restaurants were placed into receivership,
and the Company was given operating control by the courts as the result of the
non-performance of the purchaser under the terms of the aforementioned note
agreements and the franchise agreements.
<PAGE>
6. Investments
In January 1996, the Company acquired a 16.7% equity interest in the form of
convertible redeemable preferred stock (the "La Salsa Preferred Stock") in La
Salsa Holding Co. ("La Salsa"), a franchisor and operator of La Salsa Mexican
restaurants for approximately $5,000. Each share of La Salsa Preferred Stock may
be converted into La Salsa's Class D Common Stock at $1.50 per share and is
redeemable at face value in installments beginning on March 3, 2000. The
warrants expired during fiscal 1997. In addition, the Company received warrants
to acquire, within 18 months, shares of convertible redeemable preferred stock
representing an additional 13.3% equity interest for approximately $7,100. In
addition, the Company entered into a 10-year license agreement with La Salsa to
operate La Salsa outlets within certain existing Fuddruckers restaurants whereby
the Company will pay a franchise fee, royalty payments equal to 5% of the La
Salsa outlets' gross sales, certain training costs and marketing fund fees for
each outlet opened. The Company's investment in La Salsa is accounted for under
the cost method of accounting.
7. Long-Term Debt
Obligations Transferred to the Company
The components of long-term debt transferred to the Company are as follows:
1997 1996
---- ----
Notes payable $ 442 $ 687
Capital lease obligations 4,686 5,679
-------- --------
5,128 6,366
Less current portion (1,102) (1,299)
-------- --------
Total $ 4,026 $ 5,067
======== ========
Notes payable include several notes bearing interest ranging from 6% to 11%,
require monthly or quarterly payments of principal and interest and mature at
various times ranging from July 1997 to July 2002. Maturities of long-term debt,
including capital lease obligations, at June 29, 1997 are as follows:
Maturities of long-term debt, including capital lease obligations, are as
follows:
1998 $ 1,102
1999 1,141
2000 1,114
2001 1,119
2002 652
-------
$ 5,128
=======
Company Assets Serving as Collateral
All of the assets of the Company were pledged as collateral under DAKA
International's various debt agreements pursuant to such agreements through the
Transaction Date. Subsequent to the transaction, the security interests in these
assets were released. In connection with the Transaction, the Company has
pledged eight Fuddruckers restaurants, furniture, fixtures and equipment of
certain Champps and Fuddruckers restaurants and future royalties as collateral
to creditors and to Compass pending the Company's release of certain guarantees
(see Note 11) and the Company's payment of deposits ($3.5 million) and trade
payables ($15.8 million). Subsequent to year end, approximately $14.5 million in
payments have been made.
<PAGE>
In connection with the Transaction, the Purchaser assumed $110 million of the
outstanding DAKA International debt. At June 29, 1997, DAKA International had
approximately $109.9 million outstanding under its Principal Credit Agreements.
8. Other Assets
The components of other assets are as follows:
1997 1996
---- ----
Preopening costs $ 3,628 $ 5,567
Reacquired franchise rights 2,862 4,488
Notes receivable 4,558 3,320
Deferred rent 1,983 1,673
Other 1,528 2,332
-------- --------
14,559 17,380
Less accumulated amortization (3,933) (4,445)
-------- --------
$ 10,626 $ 12,935
======== ========
Notes Receivable include various notes bearing interest ranging form 8% to 10%,
require monthly payments and interest and mature at various dates ranging from
September 1997 to April 2004.
9. Accrued Expenses
The components of accrued expenses are as follows:
1997 1996
---- ----
Salaries, wages and related taxes $ 4,163 $ 3,096
Taxes 3,511 2,134
Other 3,874 1,947
-------- -------
$ 11,548 $ 7,177
======== =======
10. Income Taxes
Income tax (benefit) expense is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Currently (receivable) payable:
Federal $(4,175) $(1,299) $ 2,328
State -- -- 776
Deferred income tax (benefit) expense 454 763 (36)
------- ------- -------
Income tax expense (benefit) $(3,721) $ (536) $ 3,068
======= ======= =======
</TABLE>
<PAGE>
Deferred tax assets and (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Accrued expenses $ 1,635 $ 321 $ 428
Prepaid expenses (330) (1,467) (821)
Net operating loss carryforwards 327 327 342
Other 412 591 421
Less valuation allowance (2,044) -- --
-------- -------- --------
$ 0 $ (228) $ 370
======== ======== ========
Noncurrent:
Net operating loss carryforwards $ 4,704 $ 4,876 $ 4,924
Depreciation and amortization 6,069 470 (400)
Deferred income 300 166 163
Accrued expenses 1,967 729 1,184
Less valuation allowance (13,040) (5,559) (5,024)
-------- -------- --------
$ 0 $ 682 $ 847
======== ======== ========
</TABLE>
The following is a reconciliation of income taxes at the federal statutory rate
to the Company's income tax expense (benefit):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax provision (benefit) computed
at statutory federal income tax rates $(14,970) $ (2,172) $ 1,703
Non-deductible costs 865 1,175 --
State income taxes, net of federal tax benefit -- -- 269
Increase in the valuation allowance 9,525 535 822
Other, net 859 (74) 274
-------- -------- --------
Income tax (benefit) expense $ (3,721) $ (536) $ 3,068
======== ======== ========
</TABLE>
As of June 29, 1997, the Company had federal net operating loss carryforwards of
approximately $12,812 expiring at various dates through 2012. Approximately
$9,786 of the losses are related to Fuddruckers and $3,026 are related to
Fuddruckers' 63% owned subsidiary, ARVI. Both the Fuddruckers' and ARVI loss
carryforwards are limited on an annual basis. For the fiscal years ended 1997,
1996 and 1995, the Company provided a valuation allowance for the tax benefit of
the deferred tax assets not expected to be utilized based on historical
operating results and other available evidence. During the fiscal years ended
1997, 1996 and 1995 the valuation allowance was increased by $9,525, $535 and
$822, respectively.
11. Commitments and Contingencies
Transaction Indemnifications
The Company has agreed to assume certain liabilities in connection with the
Transaction including all losses or damages related to the purported class
action lawsuit discussed further below. In addition, the Company has entered
into Post-Closing Covenants Agreement which provides for post-closing payments
by the Company to Compass under certain circumstances. To the extent there is
any amount owing from the Company to Compass for post-closing payments relating
to any Foodservice Current Asset shortfall, outstanding share value calculation
or Managed Volume/Profitability Adjustment, Compass will have a right of set-off
against any amounts owing to the Company with respect to Compass's obligations
to remit the net proceeds from the liquidation of the Contributed Working
Capital.
Leases
Pursuant to the terms of the Transaction, the Company assumed the existing lease
obligations and purchase commitments of DAKA International consisting
principally of the corporate headquarters in Danvers, Massachusetts which
expires during 2001.
The Company has entered into lease agreements for certain restaurant facilities
and office space. The fixed terms of the leases range up to 20 years and, in
general, contain multiple renewal options for various periods ranging from 5 to
25 years. Certain leases contain provisions which require additional payments
based on sales performance and the payment of common area maintenance charges
and real estate taxes. Finally, the Company also leases certain restaurant and
computer equipment under operating leases which expire at various dates through
June 2001.
In October 1995, Fuddruckers obtained a commitment for a $25 million
sale-leaseback financing facility from Franchise Finance Corporation of America
("FFCA"). Pursuant to the terms of the facility, the Company was permitted to
sell and lease-back from FFCA up to 20 Fuddruckers restaurants to be constructed
for which the Company paid a commitment fee of 1.5% of the sale price of each
property sold to FFCA. The sale price was limited to the lesser of 80% of the
fair market value of the property or $1.25 million. The unused commitment
expired on October 31, 1996. The leases provide for a fixed minimum rent plus
additional rent based on a percentage of sales and provide for an initial lease
term of 20 years with two 5-year renewal options exercisable at the option of
the Company. The terms and conditions of the leases were such that they are
accounted for as operating leases. As of June 29, 1997, 25 Fuddruckers
restaurants have been sold to FFCA. In January 1997, the Company obtained a
commitment for an additional $7.5 million of sale-leaseback financing from FFCA
for the construction of up to six new Fuddruckers restaurants. Any unused
commitment expires on January 30, 1998.
In December 1995, CEI obtained a commitment for a $40 million development and
sale-leaseback financing facility from AEI Fund Management, Inc. ("AEI").
Pursuant to the terms of the agreement, the Company will sell and lease-back
from AEI, Champps restaurants to be constructed and will pay a commitment fee of
1% of the sale price of each property sold to AEI. The purchase price will be
equal to the total project cost of the property, as defined in the agreement,
not to exceed its appraised value (the "Purchase Price"). The unused commitment,
if any, expires on December 6, 1997. The leases provide for a fixed minimum rent
based on a percentage of the respective property's Purchase Price, subject to
subsequent increases based on the Consumer Price Index. The leases also provide
for an initial term of 20 years with two 5-year renewal options exercisable at
the option of CEI. The terms and conditions of the leases are such that they are
accounted for as operating leases. As of June 29, 1997, four Champps restaurants
have been sold to AEI.
In January, 1996, the Company obtained a $5,000 capital lease facility from a
third party lender to fund the cost of certain restaurant, audio/visual and
point-of-sale equipment related to new restaurant construction. The lease
facility has a five-year term and an implicit interest rate of 10.2%. As of June
29, 1997, the third party lender has suspended this facility pending their
review of the Company after giving effect to the Spin-off.
Included in property and equipment in 1997, 1996 and 1995 are $5,813, $5,794 and
$3,271, respectively, of equipment held pursuant to capital lease arrangements.
The related accumulated amortization was $1,868, $1,208 and $424, respectively.
<PAGE>
Future minimum lease payments pursuant to leases with noncancelable lease terms
in excess of one year at June 29, 1997 are as follows:
Fiscal
Years Operating Capital
Ending Leases Leases
- ------ ------ ------
1998 $ 17,331 $ 1,408
1999 17,076 1,429
2000 16,397 1,298
2001 16,129 945
2002 14,776 214
Thereafter 115,070 20
---------- ---------
Total future minimum lease payments $ 196,779 5,314
========== (628)
Less amount representing interest ---------
Present value of future minimum
lease payments $ 4,686
=========
Total rent expense in 1997, 1996 and 1995 amounted to $21,019, $16,755 and
$12,182, respectively. Contingent rentals included in rent expense are not
material for the periods presented.
Put/Call Agreements
On October 22, 1993, the Company entered into an agreement with a partnership
affiliated with the president of a majority-owned subsidiary of the Company
pursuant to which the partnership has agreed to purchase substantially all
shares of common stock of the subsidiary not currently owned by the Company. The
partnership also invested $1,100 in shares of the subsidiary's preferred stock.
Additionally, the Company and the partnership entered into a put/call agreement
whereby the Company has an option to purchase and the partnership has the right
to require the Company to purchase all the common and preferred stock of the
subsidiary owned by the partnership for a purchase price of $5,400 plus a
premium based on the subsidiary's future financial performance. The put/call
option is exercisable by either the Company or the partnership between March 15,
1999 and February 15, 2000. On the date of the put/call agreement, the fair
market value of the subsidiary's common stock plus the redemption value of the
preferred stock was greater than the present value of the put/call price of
$5,400 based upon an independent valuation of the common stock obtained by the
Company from an investment banking firm. Similarly, at June 29, 1997 and June
29, 1996, based upon independent valuations, the value of ARVI not owned by the
Company was in excess of the present value of the put/call price. DAKA
International's guarantee of the purchase price has been assumed by Compass for
which the Company has pledged as collateral to Compass 5 restaurants with a net
book value of $7.9 million in lieu of obtaining a release of the guarantee by
DAKA International.
Purchase Commitments
In July 1995, the Company entered into a five-year Exclusive Coffee
Manufacturing Agreement (the "Coffee Agreement") with a third-party supplier of
ground and whole bean coffees, including flavored and gourmet coffee products.
Purchase prices to be paid by the Company are based on commodity market exchange
prices. At June 29, 1997 and June 29, 1996, the Company's commitments under the
Coffee Agreement were approximately $360 and $400, respectively.
<PAGE>
Litigation
On October 18, 1996, a purported class action lawsuit was filed in the United
States District Court for the District of Massachusetts on behalf of persons who
acquired DAKA International's common stock between October 30, 1995 and
September 9, 1996 (Venturino et al. V. DAKA International, Inc. and William H.
Baumhauer, Civil Action No. 96-12109-GAO). The complaint alleges violations of
federal and state securities laws by, among other things, allegedly
misrepresenting and/or omitting material information concerning the results and
prospects of Fuddruckers during that period and seeks compensatory damages and
reasonable costs and expenses, including counsel fees. On May 22, 1997, DAKA
International filed with the court a motion to dismiss plaintiffs' complaint.
The Company has agreed to indemnify Compass for any losses or expenses
associated with the complaint. The Company believes this suit is without merit
and intends to defend itself vigorously unless the litigation is settled.
Settlement negotiations are in process. While the outcome of the case is not
presently determinable, the Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's combined
financial condition, results of operations or cash flows.
The Company and DAKA International are also engaged in various other actions
arising in the ordinary course of business. The Company believes, based upon
consultation with legal counsel, that the ultimate collective outcome of these
other matters will not have a material adverse effect on the Company's combined
financial condition, results of operations or cash flows.
12. Stock Options and Employee Benefit Plans
Stock Options
Through the Transaction date, the Company's employees participated in various
incentive and non-qualified stock option plans sponsored by DAKA International
(the "Plans"). The Plans have provided for the granting of options for terms of
up to ten years to eligible employees at exercise prices equal to the fair
market value of the DAKA International common stock on the date of the grant. At
June 29, 1997 and 1996, 445,980 and 539,146 options to purchase shares of DAKA
International common stock under the Plans were exercisable by the Company's
employees at exercise prices ranging from $2.50 to $35.94 per share.
DAKA International and the Company apply APB Opinion No. 25 to account for its
various stock plans. Accordingly, pursuant to the terms of the plans, no
compensation cost has been recognized for the stock plans. However, if
compensation cost for stock option grants issued to Company employees during
1997 and 1996 had been determined using the fair value method under the
provisions of SFAS No. 123, the Company's net loss and pro forma net loss per
share would have been reduced to the pro forma amounts shown below:
1997 1996
---- ----
Net loss:
As reported $ 39,043 $ 5,670
Pro forma 39,943 6,470
Net loss per share:
Pro forma - as reported $ 3.42
Pro forma - as adjusted $ 3.50
<PAGE>
The pro forma net loss reflects the compensation cost only for those options
granted during 1997 and 1996. Compensation cost is reflected over a stock
option's vesting period and compensation cost for options granted prior to July
2, 1995 is not considered. Therefore, the full potential impact of compensation
cost of DAKA International's stock plans under SFAS No. 123 is not reflected in
the pro forma net loss amounts presented above for the Company.
The fair value of each stock option granted in 1997 and 1996 under DAKA
International stock option plans was estimated on the date of grant using the
Black-Scholes option-pricing model. The following key assumptions were used to
value grants issued for each year:
Weighted- Average
Average Expected Dividend
Risk Free Rate Life Volatility Yield
-------------- ---- ---------- -----
1996 6.28% 4 years 50.00% 0%
1997 6.28% 4 years 50.00% 0%
The weighted-average fair values per share of stock options granted during 1997
and 1996 were $4.13 and $10.74, respectively. It should be noted that the option
pricing model used was designed to value readily tradable stock options with
relatively short lives. The options granted to employees are not tradable and
have contractual lives of up to ten years. However, management believes that the
assumptions used and the model applied to value the awards yields a reasonable
estimate of the fair value of the grants made under the circumstances.
Concurrent with the consummation of the Transaction, a stock option and
restricted stock plans for the benefit of the employee and non-employee
directors of the Company were adopted pursuant to which the Company authorized
and reserved for issuance 1,250,000 shares. In connection with the Transaction,
each outstanding option held by a Company employee to acquire DAKA International
common stock was converted into an option to acquire one share of common stock
of the Company and one share of common stock of DAKA International (the
"Adjusted Options"). The exercise prices of the Adjusted Options were determined
such that each option holder will remain in an equivalent economic position
before and after the Transaction.
Employee Benefit Plan
Through the Transaction date the Company's employees participated in a 401(k)
retirement plan sponsored by DAKA International. The Plan enabled employees to
contribute up to 15% of their annual compensation. The Company's discretionary
contributions to the Plan have been determined by DAKA International. The
Company contributed $25, $204 and $251 to the Plan in 1997, 1996 and 1995,
respectively. After the consummation of the Transaction, plans similar to those
previously offered by DAKA International were adopted and made available to the
Company's employees.
Long-Term Incentive Plan
Effective July 3, 1994, the Company implemented a long-term incentive
compensation plan ("LTIP") for its Chief Executive Officer whereby a portion of
the increase in the market value of DAKA International's common stock over
predefined amounts, is payable in either cash or stock at the option of the
Company. Amounts payable under the LTIP were scheduled to vest on June 30, 1997.
<PAGE>
On May 22, 1997, the Board of Directors of DAKA International amended the LTIP.
Under the terms of the amendment, the Chief Executive Officer's right to receive
a performance award was amended to provide for the granting of an option which
would vest on June 30, 1997 to acquire 228,260 shares of DAKA International
Common Stock at an exercise price of $12.07 (the "Deemed LTIP Option"). Upon
consummation of the Transaction, the Deemed LTIP Option was converted in a
manner similar to the Adjusted Options and the Company purchased the Chief
Executive Officer's Deemed LTIP Option. At June 29, 1997, $265 had been accrued
representing the expected payment to be made after the consummation of the
Transaction.
13. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. The following methods and assumptions were used to estimate the
fair value of the Company's financial instruments for which it was practicable
to estimate that value:
Current Assets and Liabilities -- The carrying amount of cash, accounts
receivables, accounts payable and accrued expenses approximates fair value
because of the short maturity of these instruments.
Notes Receivable -- The carrying value of notes receivable approximates fair
value and was estimated based on discounted cash flows expected to be received
using interest rates at which similar loans are made to borrowers with similar
credit ratings, or if the loan is collateral dependent, management's estimate of
the fair value of the collateral.
<PAGE>
14. Business Information
Income from restaurant and franchising operations have been determined applying
the accounting policies in Note 3. Revenue and costs as shown below are directly
related to each business and do not include an allocation of corporate expenses,
non-operating income, interest expense and income taxes. There are no sales
among the Company's three businesses. The table below presents certain financial
information for the Company's Fuddruckers, Champps and Specialty Concepts
businesses, for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total Revenues:
Sales from Fuddruckers-owned restaurants $ 137,624 $ 131,592 $ 110,703
Franchising and royalty income - Fuddruckers 4,021 6,574 5,372
Sales from Champps-owned restaurants 57,832 41,593 19,257
Franchising and royalty income - Champps 539 555 636
Sales from Specialty Concepts unit operations 5,285 2,865 1,738
Franchising and royalty income - Specialty Concepts 583 576 24
--------- --------- ---------
Total revenues $ 205,884 $ 183,755 $ 137,730
========= ========= =========
Fuddruckers:
Sales from Fuddruckers-owned restaurants $ 137,624 $ 131,592 $ 110,703
Operating expenses:
Labor costs 45,204 41,944 34,206
Product costs 38,524 38,203 31,559
Other operating expenses 38,731 30,719 25,414
Depreciation and amortization 9,010 7,953 5,273
Impairment and exit costs 9,107 2,450 --
--------- --------- ---------
Restaurant unit contribution (2,952) 10,323 14,251
Franchising and royalty income 4,021 6,574 5,372
--------- --------- ---------
Restaurant unit, franchising and royalty contribution $ 1,069 $ 16,897 $ 19,623
========= ========= =========
Champps:
Sales from Champps-owned restaurants $ 57,832 $ 41,593 $ 19,257
Operating expenses:
Labor costs 19,048 13,797 5,971
Product costs 16,735 11,981 5,590
Other operating expenses 14,880 9,631 4,177
Depreciation and amortization 4,734 3,596 1,056
Impairment and exit costs -- 62 --
Merger costs -- 2,600 --
--------- --------- ---------
Restaurant unit contribution 2,435 (74) 2,463
Franchising and royalty income 539 555 636
--------- --------- ---------
Restaurant unit, franchising and royalty contribution $ 2,974 $ 481 $ 3,099
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Specialty Concepts:
Sales from Specialty Concepts unit operations $ 5,285 $ 2,865 $ 1,738
Operating expenses:
Labor costs 2,658 846 643
Product costs 2,180 1,225 431
Other operating expenses (income) 676 (190) 137
Depreciation and amortization 985 152 52
Impairment and exit costs 7,125 513 --
Merger costs -- 300 --
-------- -------- --------
Restaurant unit contribution (8,339) 19 475
Franchising and royalty income 583 576 24
-------- -------- --------
Restaurant unit, franchising and royalty contribution $ (7,756) $ 595 $ 499
======== ======== ========
Restaurant unit, franchising and royalty contributions $ (3,713) $ 17,973 $ 23,221
Selling, general and administrative expenses (1) 33,423 24,616 18,815
-------- -------- --------
Other charges 5,439 -- --
Interest expense 744 641 331
Interest income (487) (353) (622)
-------- -------- --------
Income (loss) before income taxes and minority interests (42,832) (6,931) 4,697
-------- -------- --------
Income tax expense (benefit) (3,721) (536) 3,068
Minority interests (68) (725) (169)
-------- -------- --------
Net income (loss) $(39,043) $ (5,670) $ 1,798
======== ======== ========
</TABLE>
(1) Selling, general and administrative expenses include depreciation
expense on corporate assets of $820, $435 and $249 in 1997, 1996 and
1995, respectively.
Corporate assets include computer equipment and deposits. The following table
presents total assets for each of the businesses of the Company:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fuddruckers $ 86,080 $109,177 $ 83,835
Champps $ 30,512 $ 27,386 $ 15,729
Specialty Concepts $ 2,282 $ 2,845 $ 756
Corporate $ 6,335 $ 2,940 $ 2,111
-------- -------- --------
$125,209 $142,348 $102,431
======== ======== ========
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-32501 and 333-32503 of Unique Casual Restaurants, Inc. on Form S-8 of our
report dated September 17, 1997 (which includes an unqualified opinion and
includes explanatory paragraphs describing that, as a result of the basis used
to prepare the Company's combined financial statements, the combined financial
statements may not necessarily be indicative of the conditions that would have
existed or the results of operations if the Company had been operated as an
unaffiliated Company and an explanatory paragraph relating to the Company's
adoption of Statement of Financial Accounting Standards No. 121 during the year
ended June 29, 1996), appearing in this Annual Report on Form 10-K of Unique
Casual Restaurants, Inc. for the year ended June 29, 1997.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040328
<NAME> UNIQUE CASUAL RESTAURANTS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-END> JUN-29-1997
<CASH> 172
<SECURITIES> 0
<RECEIVABLES> 5,368
<ALLOWANCES> 992
<INVENTORY> 3,975
<CURRENT-ASSETS> 14,910
<PP&E> 125,383
<DEPRECIATION> 30,710
<TOTAL-ASSETS> 125,209
<CURRENT-LIABILITIES> 29,394
<BONDS> 4,026
0
0
<COMMON> 0
<OTHER-SE> 79,053
<TOTAL-LIABILITY-AND-EQUITY> 125,209
<SALES> 200,741
<TOTAL-REVENUES> 205,884
<CGS> 178,638
<TOTAL-COSTS> 178,638
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 744
<INCOME-PRETAX> (42,832)
<INCOME-TAX> (3,721)
<INCOME-CONTINUING> (39,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,043)
<EPS-PRIMARY> (3.42)
<EPS-DILUTED> (3.42)
</TABLE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 5, 1996 on the consolidated financial statements of Champps
Entertainment, Inc. (which are included in the restated combined financial
statements of Unique Casual Restaurants, Inc.) It should be noted we have
performed no audit procedures subsequent to April 5, 1996, the date of our
report. Furthermore, we have not audited any financial statements of Champps
Entertainment, Inc. as of any date or for any period subsequent to July 2, 1995.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 13, 1997
SPECIAL POWER OF ATTORNEY
The undersigned hereby constitutes and appoints, William H. Baumhauer and Donald
C. Moore and each of them, jointly and severally, his true and lawful
attorneys-in-fact and agents with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report on
Form 10-K of Unique Casual Restaurants, Inc. for the fiscal year ended June 29,
1997, and any an all amendments thereto, and to file the same with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/Erline Belton
----------------
Erline Belton
Dated: October 7, 1997
<PAGE>
SPECIAL POWER OF ATTORNEY
The undersigned hereby constitutes and appoints, William H. Baumhauer and Donald
C. Moore and each of them, jointly and severally, his true and lawful
attorneys-in-fact and agents with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report on
Form 10-K of Unique Casual Restaurants, Inc. for the fiscal year ended June 29,
1997, and any an all amendments thereto, and to file the same with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/Allen R. Maxwell
-------------------
Allen R. Maxwell
Dated: October 7, 1997
<PAGE>
SPECIAL POWER OF ATTORNEY
The undersigned hereby constitutes and appoints, William H. Baumhauer and Donald
C. Moore and each of them, jointly and severally, his true and lawful
attorneys-in-fact and agents with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report on
Form 10-K of Unique Casual Restaurants, Inc. for the fiscal year ended June 29,
1997, and any an all amendments thereto, and to file the same with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/Alan D. Schwartz
-------------------
Alan D. Schwartz
Dated: October 7, 1997
<PAGE>
SPECIAL POWER OF ATTORNEY
The undersigned hereby constitutes and appoints, William H. Baumhauer and Donald
C. Moore and each of them, jointly and severally, his true and lawful
attorneys-in-fact and agents with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report on
Form 10-K of Unique Casual Restaurants, Inc. for the fiscal year ended June 29,
1997, and any an all amendments thereto, and to file the same with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/E.L. Cox
-----------
E. L. Cox
Dated: October 7, 1997
<PAGE>
SPECIAL POWER OF ATTORNEY
The undersigned hereby constitutes and appoints, William H. Baumhauer and Donald
C. Moore and each of them, jointly and severally, his true and lawful
attorneys-in-fact and agents with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign the Annual Report on
Form 10-K of Unique Casual Restaurants, Inc. for the fiscal year ended June 29,
1997, and any an all amendments thereto, and to file the same with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/Joseph W. O'Donnell
----------------------
Joseph W. O'Donnell
Dated: October 7, 1997
Exhibit 21.1
Unique Casual Restaurants, Inc.
Subsidiaries of the Registrant
As of June 29, 1997 the Company had no subsidiaries. However, upon the closing
of the Transaction on July 18, 1997, the Company had the following subsidiaries:
Company State of Incorporation
- ------- ----------------------
Champps Entertainment, Inc. Minnesota
Champps Americana, Inc. Minnesota
Champps Entertainment of Edison, Inc. New Jersey
Champps Entertainment of Texas, Inc. Texas
Americana Dining Corp. Delaware
Fuddruckers, Inc. Texas
Fuddruckers Europe, Inc. Texas
Atlantic Restaurant Ventures, Inc. Virginia
ARIV-Rockville Inc. Maryland
ARIV-Pikesville Inc. Maryland
Specialty Concepts, Inc. Delaware
The Great Bagel and Coffee Company Delaware
French Quarter Coffee Company Delaware
Casual Dining Ventures, Inc. Delaware
Restaurant Consulting Services, Inc. Massachusetts
Pulseback, Inc. Vermont
