<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM 10
------------------------
GENERAL FORM FOR
REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
UNIQUE CASUAL RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-3370491
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE CORPORATE PLACE
55 FERNCROFT ROAD
DANVERS, MASSACHUSETTS 01923
---------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) 774-9115
-------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE THE NASDAQ NATIONAL MARKET
</TABLE>
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<PAGE> 2
UNIQUE CASUAL RESTAURANTS, INC.
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
ITEM 1. BUSINESS.
The information required by this item is set forth under the captions
"Summary," "Risk Factors," "The Reorganization," "Management's Discussion and
Analysis of Results of Operations and Financial Condition of the Company," and
"Business" and in the Notes to the Combined Financial Statements in the
Information Statement, and is hereby incorporated by reference.
ITEM 2. FINANCIAL INFORMATION.
The information required by this item is set forth under the captions
"Summary," "Summary Historical Combined Financial Data," "Pro Forma
Capitalization," "Unaudited Pro Forma Combined Balance Sheet," "Selected
Historical Combined Financial Data," "Management's Discussion and Analysis of
Results of Operations and Financial Condition of the Company" and the Combined
Financial Statements in the Information Statement, and is hereby incorporated by
reference.
ITEM 3. PROPERTIES.
The information required by this item is set forth under the caption
"Business -- Properties" in the Information Statement, and is hereby
incorporated by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is set forth under the captions
"Summary," "The Reorganization" and "Security Ownership of Certain Beneficial
Owners and Management" in the Information Statement, and is hereby incorporated
by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item is set forth under the captions
"Summary" and "Management" in the Information Statement, and is hereby
incorporated by reference.
ITEM 6. EXECUTIVE COMPENSATION.
The information required by this item is set forth under the caption
"Management -- Executive Compensation" in the Information Statement, and is
hereby incorporated by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is set forth under the captions
"Summary," "The Offer, the Merger and Certain Related Transactions," "Other
Agreements," and "Certain Relationships and Related Transactions," and
"Management" in the Information Statement, and is hereby incorporated by
reference.
ITEM 8. LEGAL PROCEEDINGS.
The information required by this item is set forth under the caption
"Business -- Legal Proceedings" in the Information Statement, and is hereby
incorporated by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is set forth under the captions
"Summary," "Risk Factors," "The Reorganization," and "Dividend Policy" in the
Information Statement, and is hereby incorporated by reference.
<PAGE> 3
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On May 27, 1997, the Registrant issued and sold to DAKA International, Inc.
("DAKA International") 1,000 shares of its common stock, par value $.01 per
share (the "UCRI Common Stock"), for an aggregate consideration of $100 in
connection with the formation of Registrant. Such issuance did not involve an
underwriter, and no discount or commission was paid in connection therewith. The
Registrant relied on the exemption from registration contained in Section 4(2)
of the Securities Act of 1933, as amended.
Prior to the Distribution (as defined in the Information Statement), the
Registrant will issue a number of shares of UCRI Common Stock to DAKA
International in consideration for the Contribution (as defined in the
Information Statement) of certain assets to the Registrant in connection with
such Distribution. The number of shares of UCRI Common Stock issued to DAKA
International shall be equal to the number of shares necessary in order to
enable DAKA International to effect the Distribution. The Distribution of shares
of UCRI Common Stock by DAKA International to holders of its common stock will
be effected as a dividend, without consideration.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The information required by this item is set forth under the caption
"Description of Capital Stock" in the Information Statement, and is hereby
incorporated by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information required by this item is set forth under the caption
"Liability and Indemnification of Directors and Officers" in the Information
Statement, and is hereby incorporated by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth under the captions
"Summary," "Summary Historical Combined Financial Data," "Pro Forma
Capitalization," "Unaudited Pro Forma Combined Balance Sheet," "Selected
Historical Combined Financial Data," "Management's Discussion and Analysis of
Results of Operations and Financial Condition of the Company" and the Combined
Financial Statements in the Information Statement, and is hereby incorporated by
reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
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Index to Combined Financial Statements................................................ F-1
Report of Independent Auditors........................................................ F-2
Report of Independent Public Accountants.............................................. F-3
Combined Financial Statements:
Balance Sheets as of June 29, 1996, July 1, 1995 and March 29, 1997 (Unaudited)..... F-4
Statements of Operations for the fiscal years ended June 29, 1996, July 1, 1995
and July 2, 1994 and for the nine months ended March 29, 1997 (Unaudited) and
March 30, 1996 (Unaudited)....................................................... F-5
Statements of Cash Flows for the fiscal years ended June 29, 1996, July 1, 1995
and July 2, 1994 and for the nine months ended March 29, 1997 (Unaudited) and
March 30, 1996 (Unaudited)....................................................... F-6
Statements of Group Equity for the fiscal years ended June 29, 1996, July 1, 1995
and July 2, 1994 and for the nine months ended March 29, 1997 (Unaudited)........ F-7
Notes to Combined Financial Statements.............................................. F-8
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(b) Exhibits
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EXHIBIT
NUMBER DESCRIPTION PAGE
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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 Registrant, Parent and Compass
Holdings, together with certain exhibits thereto.............................
3.1 -- Certificate of Incorporation of the Registrant...............................
3.2 -- By-laws of the Registrant....................................................
3.3 -- Form of Amended and Restated Certificate of Incorporation of the
Registrant...................................................................
3.4 -- Form of Amended and Restated By-laws of the Registrant.......................
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
International, Daka, the Registrant, Champps Entertainment, Inc. ("Champps"),
Fuddruckers, Inc. ("Fuddruckers"), Purchaser and Parent......................
10.2 -- Post-Closing Covenants Agreement, dated as of May 27, 1997, by and among DAKA
International, Daka, the Registrant, Champps, Fuddruckers, Purchaser and
Parent.......................................................................
10.3 -- Stock Purchase Agreement, dated as of May 26, 1997, between DAKA
International, Parent, Compass Interim, First Chicago Equity Corporation,
Cross Creek Partners I and the other holders of Series A Preferred Stock of
DAKA International...........................................................
10.4 -- Form of the Registrant's 1997 Stock Option and Incentive Plan................
10.5 -- Form of the Registrant's 1997 Stock Purchase Plan............................
10.6 -- Form of Indemnification Agreement, by and between the Registrant and
directors and officers of DAKA International.................................
10.7 -- Employment Agreement, dated as of January 1, 1997, by and between DAKA
International and William H. Baumhauer.......................................
10.8 -- Employment Agreement, dated as of January 1, 1997, by and between DAKA
International and Allen R. Maxwell...........................................
10.9 -- Employment Agreement, dated as of May 23, 1997, by and among Compass Group
USA, Inc., DAKA International, Daka and Allen R. Maxwell.....................
10.10 -- Employment Agreement, dated as of February 21, 1996, by and among Dean P.
Vlahos, DAKA International and Champps.......................................
20.1 -- Form of Letter to Stockholders of DAKA International, as amended.............
21.1 -- List of Subsidiaries of the Registrant.......................................
*23.1 -- Consent of Deloitte & Touche LLP.............................................
*23.2 -- Consent of Arthur Andersen LLP...............................................
27.1 -- Financial Data Schedule......................................................
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* Filed herewith.
<PAGE> 5
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
UNIQUE CASUAL RESTAURANTS, INC.
By: /s/ WILLIAM H. BAUMHAUER
------------------------------------
Name: William H. Baumhauer
Title: Chairman, Chief Executive
Officer and President
Date: July 15, 1997
<PAGE> 6
INFORMATION STATEMENT
UNIQUE CASUAL RESTAURANTS, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by DAKA International, Inc. ("DAKA
International") to holders of record as of June 24, 1997 or such later date that
is the earliest reasonably practicable date after Purchaser (as defined below)
notifies DAKA International of the Offer Closing Time (as defined below) (the
"Distribution Record Date") of shares of common stock (the "DAKA Common Stock")
of DAKA International, par value $.01 per share (the "DAKA Shares") and the
holders of record as of the Distribution Record Date of shares of Series A
Preferred Stock of DAKA International, par value .01 per share (the "Series A
Preferred Stock"), of one share of common stock (the "UCRI Common Stock"), par
value $.01 per share (the "UCRI Shares"), of Unique Casual Restaurants, Inc.
(the "Company"), a Delaware corporation and wholly owned subsidiary of DAKA
International recently formed for the purpose of effecting the Distribution with
no prior operations as a separate entity, for each DAKA Share, and 22.222 UCRI
Shares for each share of Series A Preferred Stock, owned on the Distribution
Record Date.
DAKA International entered into an Agreement and Plan of Merger dated as of
May 27, 1997 (the "Merger Agreement") with Compass Group PLC, a public limited
company incorporated in England and Wales ("Parent"), Compass Holdings, Inc., a
Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and
Compass Interim, Inc., a Delaware corporation and a wholly owned subsidiary of
Purchaser ("Compass Interim"), pursuant to which Purchaser agreed, upon the
satisfaction of certain conditions, to commence a tender offer (the "Offer") for
all of the outstanding DAKA Shares. Immediately prior to the consummation of the
Offer (the "Offer Closing Time"), 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,
Inc., a Massachusetts corporation and a wholly owned subsidiary of DAKA
International ("Daka"), the Company and Parent, DAKA International intends to
undertake a series of transactions to (i) transfer all of the restaurant
operations and franchising businesses of DAKA International and its
subsidiaries, including the Fuddruckers and Champps restaurant chains and
certain other assets and liabilities of DAKA International and Daka (the
"Restaurant Business") to the Company (the "Contribution"), (ii) make a one-time
contribution of certain current foodservice net assets to the Company to provide
the Company with additional working capital to fund operations as such assets
and liabilities are liquidated (the "Additional Capital Contribution") and (iii)
to effect the Distribution. After giving effect to the foregoing transactions,
the assets of DAKA International will consist only of the food catering,
contract catering and vending businesses of DAKA International as conducted
primarily by Daka, excluding accounts receivable and accounts payable (the
"Foodservice Business").
Following consummation of the Offer, and subject to certain conditions
(including stockholder approval, if required by applicable law), Compass Interim
will merge with and into DAKA International (the "Merger") and DAKA
International will become a wholly owned subsidiary of Purchaser. The Company
contemplates that the date on which DAKA International will effect the
Distribution will be on or about the same date on which DAKA Shares are accepted
for purchase and paid for by Purchaser pursuant to the Offer. At the effective
time of the Merger (the "Merger Effective Time") each DAKA Share then
outstanding (other than DAKA Shares held by Parent, Purchaser or any other
wholly owned subsidiary of Parent and DAKA Shares held by stockholders who
perfect their dissenters' rights under Delaware law) will be converted into the
right to receive $7.50 in cash or any higher price per DAKA Share paid in the
Offer.
The Distribution is conditioned upon, among other things, the satisfaction
or waiver of all of the conditions to the Offer other than the condition that
the Distribution shall have become effective in accordance with the terms of the
Reorganization Agreement. The Offer is conditioned upon, among other things,
there being validly tendered and not withdrawn DAKA Shares which, when added to
the shares then beneficially owned by Parent and its affiliates, constitute at
least two-thirds of the sum of the total number of DAKA Shares then outstanding
plus the number of DAKA Shares then issuable upon conversion of the Series A
Preferred Stock and represent at least two-thirds of the voting power of all
shares of capital stock of DAKA International that would be entitled to vote on
the Merger. In order to receive UCRI Shares in the Distribution, record holders
of DAKA Shares and shares of Series A Preferred Stock must either tender such
shares pursuant to the Offer (and not subsequently withdraw and sell or
otherwise transfer such shares) or otherwise remain the record holder of such
shares on the Distribution Record Date. In addition, holders of options to
purchase DAKA Shares ("DAKA Stock Options") who exercise options on or prior to
the Distribution Record Date will be entitled to receive UCRI Shares in the
Distribution, in addition to the DAKA Shares issuable upon such exercise. If the
conditions to the Offer other than the condition that the Distribution shall
have become effective in accordance with the terms of the Reorganization
Agreement are not satisfied or waived in accordance with the Merger Agreement,
DAKA International does not presently intend to effect the Distribution.
No consideration will be paid by DAKA International's stockholders for the
UCRI Shares. As a result of the Distribution, the Company will cease to be a
subsidiary of DAKA International and will operate as an independent,
publicly-held company. There is no current public trading market for the UCRI
Shares, although it is expected that a "when-issued" trading market will develop
on or about the Distribution Record Date. The Company has applied for listing of
the UCRI Common Stock on the Nasdaq National Market ("Nasdaq") under the symbol
"UCRI."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CONSIDERED BY RECIPIENTS OF UCRI SHARES.
A copy of this Information Statement may be obtained without charge by
writing to Unique Casual Restaurants, Inc., One Corporate Place, 55 Ferncroft
Road, Danvers, Massachusetts 01923, Attention: General Counsel.
------------------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE ARE
NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
------------------------
The date of this Information Statement is June 3, 1997.
<PAGE> 7
ADDITIONAL INFORMATION
Upon completion of the Distribution, the Company will be, and until the
effective date of the Merger, DAKA International is expected to be subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith reports, proxy
statements and other information have been or will be filed with the Securities
and Exchange Commission (the "Commission"). The reports, proxy statements and
other information filed by the Company or DAKA International with the Commission
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the Regional Offices of the Commission at Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, Suite 1300, 13th Floor, New York, New York 10048. The Commission also
maintains a web site (http://www.sec.gov) containing reports, proxy statements
and other information regarding registrants that file such material
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. Copies of such information can be obtained by mail
from the Public Reference Branch of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Application has been made for
listing of the Common Stock on Nasdaq. When listed, certain reports, proxy
statements and certain other information filed by the Company can also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
The Company has filed a Registration Statement on Form 10 with the
Commission under the Exchange Act with respect to the UCRI Shares being received
by DAKA International stockholders in the Distribution. This Information
Statement does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Statements made in this Information Statement as to the contents of any
contract, agreement or other document referred to herein are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Company expects
to request that the Commission accelerate the effective date of the Registration
Statement and in connection with such request the Commission may have comments
on the Registration Statement. The Company reserves the right to supplement or
amend this Registration Statement based on comments received from the Commission
or otherwise.
The Registration Statement and the exhibits thereto filed by the Company
with the Commission may be inspected and copied at prescribed rates at the
public reference facilities of the Commission described above and are also
publicly available through the Commission's web site (http://www.sec.gov).
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF DAKA
INTERNATIONAL OR THE COMPANY SINCE THE DATE HEREOF.
<PAGE> 8
INFORMATION STATEMENT
TABLE OF CONTENTS
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SUMMARY............................................................................... 1
SUMMARY HISTORICAL COMBINED FINANCIAL DATA............................................ 5
RISK FACTORS.......................................................................... 6
THE OFFER, THE MERGER AND CERTAIN RELATED TRANSACTIONS................................ 11
THE REORGANIZATION.................................................................... 20
OTHER AGREEMENTS...................................................................... 24
MARKET FOR SHARES..................................................................... 30
DIVIDEND POLICY....................................................................... 30
FEDERAL INCOME TAX CONSIDERATIONS..................................................... 31
PRO FORMA CAPITALIZATION.............................................................. 33
UNAUDITED PRO FORMA COMBINED BALANCE SHEET............................................ 34
SELECTED HISTORICAL COMBINED FINANCIAL DATA........................................... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 38
BUSINESS.............................................................................. 48
MANAGEMENT............................................................................ 61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 72
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 73
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK............................................ 75
HART-SCOTT-RODINO FILING REQUIREMENT.................................................. 77
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS............................... 78
INDEPENDENT AUDITORS.................................................................. 78
INDEX TO COMBINED FINANCIAL STATEMENTS................................................ F-1
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
by, the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, (i)
references in this Information Statement to DAKA International and the Company
shall include DAKA International's and the Company's respective subsidiaries
after the Distribution and (ii) references in this Information Statement to the
Company prior to the Distribution Date shall refer to the Restaurant Business as
operated by DAKA International.
This Information Statement contains forward-looking statements. The
Company's actual results could differ materially from those set forth in such
forward-looking statements. Certain factors, among others, which may cause such
a difference are set forth below under the heading "Risk Factors" and under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The safe harbor for forward-looking statements provided in Section
27A of the Securities Act and Section 21E of the Exchange Act is unavailable to
the Company since it currently is not subject to the reporting requirements of
Section 13(a) or Section 15(d) of the Exchange Act.
THE COMPANY
The Company is a Delaware corporation, which, following the Contribution,
will own all of the assets (the "Transferred Assets") previously used by DAKA
International and its subsidiaries to operate the Restaurant Business as well as
the trade accounts receivable, subject to the trade accounts payable and certain
other obligations of Daka. The Company will be a diversified restaurant company
serving primarily the casual dining market and conducting most of its operations
through its wholly owned subsidiaries, Fuddruckers, Inc., a Texas corporation,
("Fuddruckers") and Champps Entertainment, Inc., a Minnesota corporation,
("Champps"). Fuddruckers owns, operates and franchises "Fuddruckers"
restaurants, which specialize in moderately priced, casual dining for families
and adults. Champps owns, licenses and franchises "Champps Americana"
restaurants, which specialize in providing an entertaining, energetic and casual
theme dining experience to a broad customer base. Following the Distribution,
the Company will own other restaurant business assets formerly owned directly or
indirectly by DAKA International, including equity interests in La Salsa Holding
Co. ("La Salsa Holding"), French Quarter Coffee Co. ("French Quarter"), and The
Great Bagel and Coffee Company ("Great Bagel and Coffee"). La Salsa is the
franchisor and operator of "La Salsa" Mexican restaurants. Great Bagel and
Coffee owns, operates and franchises its concept, featuring a full line of
fresh-baked bagels and distinctive cream cheeses, gourmet coffees and sandwiches
in a cafe setting.
The Company's principal executive offices are located at One Corporate
Place, 55 Ferncroft Road, Danvers, Massachusetts 01923, and its telephone number
is (508) 774-9115.
THE REORGANIZATION, THE OFFER, THE MERGER AND CERTAIN RELATED TRANSACTIONS
The Offer
Pursuant to the Merger Agreement, Purchaser agreed to commence, and on May
29, 1997 did commence, the Offer, pursuant to which Purchaser offered to
purchase all outstanding DAKA Shares at $7.50 per share, net to the seller in
cash, upon the terms and subject to the conditions set forth in the Merger
Agreement. The Offer is conditioned upon, among other things, there being
validly tendered and not withdrawn DAKA Shares which, when added to the shares
then beneficially owned by Parent and its affiliates, constitute at least
two-thirds of the sum of the total number of DAKA Shares then outstanding plus
the number of shares then issuable upon conversion of the Series A Preferred
Stock and represent at least two-thirds of the voting power of all shares of
capital stock of DAKA International that would be entitled to vote on the
Merger. Conditioned upon consummation of the Offer, Purchaser also agreed to
purchase all outstanding shares of Series A Preferred Stock at a price equal to
$7.50 in cash multiplied by the number of DAKA Shares issuable upon conversion
of the Series A Preferred Stock. It is expected that the Distribution will be
made immediately prior to the time at which the DAKA Shares are accepted and
paid for by Purchaser pursuant to the Offer.
- --------------------------------------------------------------------------------
<PAGE> 10
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The Contribution and Distribution
Pursuant to the provisions of the Reorganization Agreement, immediately
prior to the consummation of the Offer, DAKA International intends to transfer
all of the Transferred Assets to the Company. DAKA International will declare a
dividend (conditioned upon consummation of the Offer) of one UCRI Share for each
DAKA Share of record as of the Distribution Record Date. After giving effect to
the foregoing transactions, the assets of DAKA International will consist only
of the Foodservice Business and the accounts receivable of Daka. The
Distribution is conditioned upon the satisfaction or waiver of a number of
conditions, including, without limitation, the satisfaction or waiver of the
conditions to the consummation of the Offer other than the condition that the
Distribution shall have become effective in accordance with the terms of the
Reorganization Agreement. See "The Reorganization." As a result, in the Offer
and Distribution taken together, each stockholder of DAKA International who
tenders DAKA Shares pursuant to the Offer will receive $7.50 in cash from
Purchaser and one UCRI Share from DAKA International for each DAKA Share
tendered.
The Merger
The Merger Agreement provides that, following the completion of the Offer
and the satisfaction or waiver of the other conditions to the Merger, Compass
Interim will be merged with and into DAKA International, with DAKA International
being the surviving corporation (the "Surviving Corporation"). At the Merger
Effective Time each DAKA Share then outstanding (other than DAKA Shares held by
Parent, Purchaser or any other wholly owned subsidiary of Parent and DAKA Shares
held by stockholders who perfect their dissenters' rights under Delaware law)
will be converted into the right to receive $7.50 in cash or any higher price
per DAKA Share paid in the Offer. See "The Offer, the Merger and Certain Related
Transactions -- The Merger."
Conditions
Consummation of the Offer is conditioned upon, among other things, (i)
there being validly tendered and not withdrawn DAKA Shares which, when added to
the shares then beneficially owned by Parent and its affiliates, constitute at
least two-thirds of the sum of the total number of DAKA Shares then outstanding
plus the number of shares then issuable upon conversion of the Series A
Preferred Stock and represent at least two-thirds of the voting power of all
shares of capital stock of DAKA International that would be entitled to vote on
the Merger, (ii) the Distribution Record Date having been set, and (iii) the
satisfaction or waiver of the conditions to the Distribution.
The Distribution is conditioned upon, among other things, (i) the
satisfaction or waiver of all of the conditions to the Offer other than the
condition that the Distribution shall have become effective in accordance with
the terms of the Reorganization Agreement, (ii) the Distribution Record Date
having been set by the Board of Directors of DAKA International (the "DAKA
International Board"), and (iii) notification to DAKA International by Purchaser
that it is prepared to immediately consummate the Offer. Accordingly, it is
expected that the Distribution will be effected on or about the same time as the
consummation of the Offer.
The Merger is conditioned upon, among other things, the Distribution and
consummation of the Offer. If the conditions to the Offer, other than the
condition that the Distribution shall have become effective in accordance with
the terms of the Reorganization Agreement, are not satisfied or waived in
accordance with the Merger Agreement, DAKA International does not presently
intend to effect the Distribution.
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RISK FACTORS
Stockholders should carefully consider the matters detailed elsewhere in
this Information Statement under the caption "Risk Factors" which describe risks
relating to the UCRI Shares, including the "Absence of History as an Independent
Company," "Significant Recent Operating Losses; Uncertainty of Future
Profitability," "Limited Capital; Need for Bank Financing," "Absence of Prior
Trading Market for the Common Stock," "Risks Related to Transitional
Arrangements," "Risks Related to Assumed Liabilities and Indemnification
Obligations," and "Pending Litigation."
TERMS OF DISTRIBUTION
Capitalized terms used in this Terms of Distribution and not otherwise
defined herein, shall have the meanings ascribed thereto in the Information
Statement.
Distributed Company........ Unique Casual Restaurants, Inc., a Delaware
corporation.
UCRI Shares
Being Distributed........ Approximately 11,148,300 million UCRI Shares,
subject to increase or decrease upon the exercise
or cancellation of outstanding DAKA Stock Options
prior to the Distribution Record Date and excluding
264,701 UCRI Shares to be distributed to holders of
Series A Preferred Stock pursuant to the terms of
such preferred stock. See "The Reorganization --
Treatment of DAKA Stock Options."
Conditions to the
Distribution............... The Distribution is subject to a number of
conditions, including, among other things, the
satisfaction or waiver of all of the conditions to
the Offer other than the condition that the
Distribution shall have become effective in
accordance with the terms of the Reorganization
Agreement, and it is expected to be effected on or
about the same date on which DAKA Shares are
accepted for purchase and paid for by Purchaser
pursuant to the Offer. See "The Reorganization --
The Distribution -- Conditions to the
Distribution."
Distribution Record Date... To be determined by the DAKA International Board;
currently anticipated to be on or about June 24,
1997.
Distribution of UCRI
Shares..................... One UCRI Share is proposed to be distributed in
respect of each DAKA Share outstanding on the
Distribution Record Date. Holders of DAKA Stock
Options who exercise options on or prior to the
Distribution Record Date will be entitled to
receive UCRI Shares in the Distribution in addition
to the DAKA Shares issuable upon such exercise. See
"The Reorganization -- Treatment of DAKA Stock
Options."
Series A Preferred Stock... Pursuant to the Certificate of Designation, holders
of Series A Preferred Stock have the right to
receive dividends declared on the DAKA Common Stock
and, accordingly, will receive UCRI Shares pursuant
to the Distribution. See "Other Agreements --
Series A Preferred Stock."
Tax Consequences........... The Distribution will be a taxable transaction to
DAKA International stockholders for federal income
tax purposes, and may also be a taxable transaction
for state, local and other tax purposes. See
"Federal Income Tax Considerations."
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Trading Market -- The UCRI
Common Stock............. The Company has applied for listing of the UCRI
Common Stock on the Nasdaq National Market. A "when
issued" trading market for the UCRI Shares on
Nasdaq is expected to develop on or about the
Distribution Record Date. See "Market for Shares."
Distribution Date.......... The Company contemplates that the date on which the
Distribution will be effected (the "Distribution
Date") will be on or about the same date on which
DAKA Shares are accepted for purchase and paid for
by Purchaser pursuant to the Offer. Actual delivery
of stock certificates will be made as soon as
practicable following the Distribution Date. See
"The Reorganization -- The Distribution."
Hart-Scott-Rodino Filing Requirement
Any person receiving UCRI Shares pursuant to the Distribution and meeting
certain criteria may be required to file a Premerger Notification and Report
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and observe the applicable waiting periods under the HSR Act.
If such waiting periods have not expired or been terminated at the Distribution
Date with respect to such recipient, the Company may be required to deliver such
recipients's UCRI Shares into an escrow facility pending the expiration or
termination of such waiting period. See "Hart-Scott-Rodino Filing Requirement."
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SUMMARY HISTORICAL COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents summarized combined historical statements of
operations and balance sheet data of the Company. The balance sheet data
presented below as of June 29, 1996 and July 1, 1995 and the statements of
operations data presented below for each of the fiscal years in the three-year
period ended June 29, 1996 are derived from the Company's audited combined
financial statements included herein. The balance sheet data as of July 3, 1994,
June 26, 1993, June 27, 1992, March 29, 1997 and March 30, 1996 and the
statements of operations data for the two years ended June 26, 1993 and for the
nine months ended March 29, 1997 and March 30, 1996, respectively, 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.
The operating results for the nine months ended March 29, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
The summarized historical combined financial data should be read in conjunction
with the combined financial statements and related notes thereto for the Company
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere in this Information Statement.
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------- ---------------------
JUNE 29, JULY 1, JULY 3, JUNE 26, JUNE 27, MARCH 29, MARCH 30,
1996 1995 1994 1993 1992 1997 1996
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $183,755 $137,730 $100,677 $ 83,723 $56,309 $152,360 $135,043
Income (loss) from continuing operations
before income taxes and minority
interests................................. (6,931) 4,697 3,980 (38) (398) (12,333) (4,148)
Income (loss) from continuing operations.... (5,670) 1,798 1,300 361 (1) (8,548) (3,828)
Net income (loss)........................... (5,670) 1,798 1,300 361 (1) (8,548) (3,828)
Pro forma loss per share.................... (0.50) -- -- -- -- (0.75) --
BALANCE SHEET DATA:
Total assets................................ 142,348 102,431 78,365 52,517 41,072 147,963 131,145
Long term debt, including current portion... 6,366 4,009 3,372 3,253 14,703 5,098 8,115
-------- -------- -------- -------- ------- -------- --------
Group equity................................ 108,894 73,979 57,666 39,921 17,784 110,612 94,980
</TABLE>
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RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Information Statement.
ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY
The Company was formed for the purpose of effecting the Distribution in
order to divest DAKA International of the Transferred Assets, including the
Restaurant Business in connection with the Offer. The Distribution is a
condition of the Offer required by Purchaser. The Company does not have an
operating history as a separate entity. Accordingly, the combined financial
statements included herein may not necessarily reflect the results of
operations, financial position and cash flows of the Restaurant Business had the
Company been operated as a separate entity during the periods presented.
SIGNIFICANT RECENT OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
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 $12.3 million for the nine months ended March 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.
LIMITED CAPITAL; NEED FOR BANK FINANCING
DAKA International historically funded the Company's operations and capital
expenditures. At March 29, 1997, DAKA International had approximately $103.6
million outstanding under its bank credit facility. It is a requirement of the
Offer that Parent assume such debt and repay it in full upon consummation of the
Offer. As a result, following the Distribution, the Company is expected to have
no bank debt, though the Company anticipates obtaining a credit facility for
working capital purposes after the Distribution. After the Distribution, the
Company will continue 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 restaurant expansion in its
Fuddruckers restaurant chain, 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 capital expenditures, the Company expects to be required to raise
additional funds through bank financings or other means to meet its longer term
needs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Following the Distribution, the Company will be
responsible for obtaining its own financing. The Company has never obtained its
own financing. There can be no assurance that any such additional funding will
be available to the Company or, if available, that it will be on reasonable
terms.
ABSENCE OF PRIOR TRADING MARKET FOR THE COMMON STOCK
There has not been any established public market for the trading of the
UCRI Common Stock, although it is expected that a "when-issued" trading market
will develop on or about the Distribution Record Date. The Company has applied
for listing of the UCRI Common Stock on Nasdaq. There can be no assurance,
however, that such listing application will be approved by Nasdaq by the
Distribution Date, if at all. There also can be no assurance that a liquid
trading market for the UCRI Common Stock will develop, or that listing of the
UCRI Common Stock on Nasdaq will be maintained. There also can be no assurance
as to the prices at
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<PAGE> 15
which the UCRI Common Stock will trade before or after the Distribution Date.
Until the UCRI Common Stock is fully distributed and an orderly market develops,
the prices at which UCRI Shares trade may fluctuate significantly. Prices for
UCRI Shares will be determined in the marketplace and may be influenced by many
factors other than the financial performance and prospects of the Company,
including the depth and liquidity of the market for UCRI Shares, investor
perception of the Company and the industry in which the Company participates and
general economic and market conditions. See "Market for Shares."
RISKS RELATED TO TRANSITIONAL ARRANGEMENTS
In connection with the Distribution, the Company and DAKA International
will enter into a Transitional Services Agreement relating to, among other
things, the allocation or sharing for a period of up to 18 months (subject to
certain extensions at the option of Purchaser) of (i) employees, (ii) overhead
support services, (iii) leased office facilities, (iv) management information
support services, (v) software, (vi) accounting and payroll resources, and (vii)
record keeping resources (collectively, the "Transitional Arrangements"). 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
Transitional 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.
In addition, for a period of four months after the Offer Closing Time,
Purchaser will act as agent of the Company with respect to the collection of the
trade receivables of Daka assigned to the Company as part of the Transferred
Assets and the payment of the trade payables of Daka for which the Company has
agreed to retain full liability. Under the terms of this agency arrangement,
Purchaser will have significant control over the method of collection of the
trade receivables and the remittance of any net cash flow therefrom to the
Company. Significant delays in the remittance of such net cash flow by Purchaser
or other events that may affect the timing or the amounts of cash collections by
Purchaser as agent on behalf of the Company could have a material adverse effect
on the Company.
RISKS RELATED TO ASSUMED LIABILITIES AND INDEMNIFICATION OBLIGATIONS
The Company has assumed significant obligations and liabilities in
connection with the Contribution, including, among other things, liabilities in
connection with claims for severance pay benefits under the DAKA International,
Inc. Severance Pay Program prior to the Offering Closing Time, obligations under
DAKA International insurance policies based on occurrences prior to the Offer
Closing Time and liabilities for welfare benefit claims incurred on or prior to
the Offering Closing Time under DAKA International welfare plans. See "The
Reorganization." In addition, the Company has agreed to indemnify, among others,
the Purchaser for Indemnifiable Losses (as defined in the Post-Closing Covenants
Agreement) relating to or arising from events, occurrences and actions occurring
or existing prior to the Offer Closing Time, including liabilities related to
pending litigation, litigation commenced after the Offer Closing Time but
relating to actions, events or occurrences before the Offer Closing Time and
numerous other contingencies related to the conduct of the Foodservice Business
before the Offer Closing Time. See "Business -- Legal Proceedings." The scope
and amount of such liabilities is subject to a high degree of uncertainty and
risk, and the Company is not in a position to quantify such liabilities or
anticipate whether or when such liabilities may become due. Under the terms of
the Merger Agreement and related agreements, the Company is required to
collateralize or otherwise ensure for the benefit of Purchaser its ability to
meet its obligations with respect to its indemnification obligations under the
Post-Closing Covenants Agreement dated as of May 27, 1997, by and among DAKA
International, Daka, the Company, Champps, Fuddruckers, Purchaser and Parent
(the "Post Closing Covenants Agreement") and other liabilities. Such requirement
may reduce the Company's access to cash balances for a significant period of
time after the Distribution and may also constrain the Company's cash
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<PAGE> 16
flow. The timing and ultimate aggregate amount of such liabilities and
obligations could have a material adverse effect on the results of operations,
cash flows and financial condition of the Company.
PENDING LITIGATION
Under the Post-Closing Covenants Agreement the Company has agreed to assume
full liability in connection with all costs, losses, liabilities and damages
related to the purported class action lawsuit 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 (Venturino et al. v. DAKA International, Inc. and William H. Baumhauer,
Civil Action No. 96-12109-GAO) (the "Venturino Lawsuit") and has agreed to
indemnify DAKA International for all losses and damages related to such lawsuit.
See "Business -- Legal Proceedings." There can be no assurance that the
Venturino Lawsuit will not result in significant litigation costs or damages
being ultimately awarded to the plaintiffs, which could have a material adverse
effect on the Company.
RELIANCE ON KEY PERSONNEL
The business of the Company is dependent upon its ability to attract and
retain highly qualified managerial personnel. Competition for such personnel is
intense, and following the Distribution the Company and DAKA International may
compete with each other as well as third parties for such personnel. There can
be no assurance regarding the impact of the Distribution on the ability of the
Company to retain its key managerial personnel or to attract, assimilate or
retain such personnel in the future. The inability of the Company to attract and
retain such personnel could have a material adverse effect on the business,
results of operations and financial condition of the Company.
RISK THAT IMMEDIATE RESALES OF A SIGNIFICANT NUMBER OF SHARES MAY HAVE AN
ADVERSE EFFECT ON THE MARKET PRICE OF UCRI COMMON STOCK
Except for UCRI Shares received by persons who may be deemed to be
"affiliates" of the Company under the Securities Act of 1933, as amended (the
"Securities Act"), the Company expects the UCRI Shares issued in the
Distribution to be eligible for immediate resale. To the extent that
stockholders of the Company elect to sell a significant number of UCRI Shares
within a short period of time after the Distribution, such sales could have an
adverse impact on the market price of the UCRI Common Stock. The impact of such
sales may be increased by the limited volume of trading in UCRI Common Stock and
the resulting volatility in the market price of UCRI Common Stock. See "Market
for Shares."
COMPETITION
The casual dining restaurant industry is highly competitive. There are a
significant number of restaurant businesses that compete directly and indirectly
with the Company's Fuddruckers and Champps Americana restaurant chains in their
respective markets. Many of these entities are well-established and have
significantly greater financial, marketing, higher total sales volume and
profits and other resources than does the Company. Increasingly, other companies
are utilizing the concept of casual entertainment restaurants in a manner
similar to the Company, and, as a result, the Company expects to encounter
increased competition in the future. Such increased competition may have an
adverse effect on the Company's operating results. In addition to other
restaurant companies, the Company competes with numerous other businesses for
suitable locations for its restaurants. See "Business -- Competition."
QUARTERLY FLUCTUATIONS AND SEASONALITY AND OTHER CONDITIONS
In recent periods the Company's Fuddruckers restaurant chain has
experienced operational difficulties which have impacted its profitability. 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
8
<PAGE> 17
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.
In addition, the Company's restaurants are dependent on frequent deliveries of
food supplies and any shortages of such supplies or interruptions could have an
material adverse effect on the Company.
POTENTIAL INCREASES IN FOOD AND LIQUOR COSTS
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.
GOVERNMENT REGULATION
The Company is subject to numerous federal, state and local laws affecting
its business. Each restaurant location is subject to licensing and regulation by
a number of governmental authorities, which may include alcoholic beverage
control, health and safety and fire agencies in the state or municipality in
which each of the Company's restaurant units is located. Each restaurant is
required to obtain, directly or indirectly, a license to sell alcoholic
beverages on the premises from a state authority and, in certain locations,
county and municipal authorities. Typically, licenses must be renewed annually
and may be revoked or suspended for cause at any time. Alcoholic beverage
control regulations govern numerous aspects of the daily operations of each
entertainment restaurant location, including the minimum age of patrons and
employees, hours of operations, advertising practices, wholesale purchasing,
inventory control and handling, and storage and dispensing of alcoholic
beverages or relating to alcoholic beverage licenses to date. The failure to
receive or retain a liquor license in a particular locations could adversely
affect the Company's ability to obtain such a license elsewhere.
The Company is subject to "dram-shop" statutes in the states in which its
restaurants are located. These statutes generally provide a person injured by an
intoxicated person with the right to recover damages from an establishment which
wrongfully served alcoholic beverages to the intoxicated individual. The Company
intends to carry liquor liability coverage as part of its existing comprehensive
general liability insurance, which coverage the Company believes is consistent
with that carried by other entities serving alcoholic beverages. Although the
Company intends to be covered by insurance, a judgment against the Company under
a dram-shop statute in excess of the Company's liability coverage could have a
material adverse effect on the Company.
Various federal and state labor laws govern the Company's relationship with
its employees, including such matters as minimum wage requirements, overtime and
other working conditions. Significant additional government-imposed increases in
minimum wages, paid leave of absence and mandated health benefits, or increased
tax reporting and tax payment requirements for employees who receive gratuities,
could be detrimental to the economic viability of the Company's operations. In
addition, the Company is subject to extensive rules and regulations with respect
to discriminatory practices and accommodation of persons with disabilities. See
"Business -- Government Regulation."
POSSIBLE ANTITAKEOVER EFFECT OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
BY-LAWS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") and Amended and Restated By-laws (the
"By-laws"), certain sections of the Delaware General Corporate Law (the "DGCL"),
and the ability of the Company's Board of Directors (the "Board") to issue
shares of the Company's preferred stock (the "Preferred Stock") and to establish
the voting rights,
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<PAGE> 18
preferences and other terms thereof without further stockholder action, may be
deemed to have an antitakeover effect and may discourage takeover attempts not
first approved by the Board (including takeovers which stockholders may deem to
be in their best interests). Such provisions include, among other things, a
classified Board serving staggered three year terms, the elimination of
stockholder voting by written consent, the removal of directors only for cause,
the vesting of exclusive authority in the Board to determine the size of the
Board and (subject to certain limited exceptions) to fill vacancies thereon, the
vesting of exclusive authority in the Board (except as otherwise required by
law) to call special meetings of stockholders, and certain advance notice
requirements for stockholder proposals and nominations for elections to the
Board. These provisions, and the ability of the Board to issue Preferred Stock
without further action by stockholders, could delay or frustrate the removal of
incumbent directors or the assumption of control by stockholders, even if such
removal or assumption of control would be beneficial to stockholders, and also
could discourage or make more difficult a merger, tender offer or proxy contest,
even if such events would be beneficial, in the short term, to the interests of
stockholders. The Company is subject to Section 203 of the DGCL which generally
imposes restrictions on acquirors (including their affiliates) of 15% or more of
the UCRI Common Stock outstanding.
NO PAYMENT OF DIVIDENDS IN FORESEEABLE FUTURE
The Company does not anticipate paying cash dividends on UCRI Common Stock
in the foreseeable future. The payment of dividends may be prohibited under any
future credit facility which the Company may obtain. See "Dividend Policy."
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<PAGE> 19
THE OFFER, THE MERGER AND CERTAIN RELATED TRANSACTIONS
GENERAL
The following summary of the transactions contemplated by, and certain
terms of, the Merger Agreement does not purport to be complete and is qualified
in its entirety by reference to the full text of the Merger Agreement, (a copy
of which has been filed as an exhibit to the registration statement on Form 10
of which this Information Statement is a part).
THE OFFER
The Merger Agreement provides for the making of the Offer by Purchaser.
Purchaser has agreed to accept for payment and pay for all DAKA Shares tendered
pursuant to the Offer as soon as practicable following the Distribution Record
Date. The Distribution Record Date is expected to be June 24, 1997. Subject only
to the condition that no statute, rule, regulation, decree or injunction
initiated by a governmental entity would prohibit Purchaser from consummating
the Offer or the Merger, prohibit DAKA International from consummating the
Distribution, or have a Material Adverse Effect on DAKA International and Daka
as a whole, Purchaser has agreed to extend the period of time the Offer is open
until the first business day following the Distribution Record Date. The
obligation of Purchaser to accept for payment and pay for DAKA Shares tendered
pursuant to the Offer is subject to the satisfaction of the Distribution
Condition (as defined below), the Minimum Condition (as defined below) and
certain other conditions that are described below under "--Certain Conditions to
the Offer." Purchaser has agreed that, without the written consent of DAKA
International, no amendment to the Offer may be made which changes the form of
consideration to be paid or decreases the price per DAKA Share or the number of
DAKA Shares sought in the Offer or which imposes conditions to the Offer in
addition to the Distribution Condition, the Minimum Condition and the other
conditions described in Section 15 of the Merger Agreement or broadens the scope
of such conditions, and no other amendment may be made in the terms or
conditions of the Offer which is adverse to holders of DAKA Shares. The closing
of the Offer (the "Offer Closing") will take place immediately prior to the
Offer Closing Time upon the satisfaction or waiver of the conditions to the
Offer. The date of the Offer Closing shall be referred herein as the "Offer
Closing Date."
Certain Conditions to the Offer. Notwithstanding any other provision of
the Offer, Purchaser will not be required to purchase any DAKA Shares tendered,
and may terminate the Offer, if (i) immediately prior to the expiration of the
Offer (as extended in accordance with the terms of the Offer), (a) any
applicable waiting periods under the HSR Act and the Exon-Florio Amendment to
the Defense Production Act (the "Exon Florio Amendment") shall not have expired
or been terminated, (b) the condition that the Distribution Record Date has been
set (the "Distribution Condition") shall not have been satisfied, (c) the
condition that there have been validly tendered (including for this purpose DAKA
Shares that remain subject to guaranteed delivery procedures) and not withdrawn
prior to the Expiration Date (as defined below) a number of DAKA Shares which,
when added to the shares beneficially owned by Parent and its affiliates,
constitutes at least two-thirds of the sum of the total number of DAKA Shares
then outstanding plus the DAKA Shares then issuable upon conversion of the
Series A Preferred Stock and represents at least two-thirds of the voting power
of all shares of capital stock of DAKA International that would be entitled to
vote with respect to the Merger (the "Minimum Condition") shall not have been
satisfied, or (ii) prior to the acceptance for payment of DAKA Shares, any of
the following events shall occur:
(a) any of the representations or warranties of DAKA International
contained in the Merger Agreement shall not have been true and correct at
the date when made or (except for those representations and warranties made
as of a particular date which need only be true and correct as of such
date) shall cease to be true and correct at any time prior to consummation
of the Offer, except (i) where DAKA International has delivered to Parent a
certificate (the "DAKA International Bring-Down Certificate") dated as of
the Offer Closing Date that (x) updates any section of the disclosure
schedule previously delivered to Parent pursuant to the Merger Agreement so
long as such updated schedules taken as a whole do not constitute a
Material Adverse Change (as defined in the Merger Agreement) compared to
the original schedules, or (y) sets forth events or conditions that have
occurred since the
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<PAGE> 20
date of the Merger Agreement which, if they had occurred or been in
existence as of the date of the Merger Agreement would be required to be
disclosed, so long as such events or conditions taken as a whole do not
constitute a Material Adverse Change or (ii) where the failure to be so
true and correct would not have a Material Adverse Effect (as defined in
the Merger Agreement) on DAKA International and Daka, taken as a whole, and
Parent shall not have received a certificate signed on behalf of DAKA
International by the chief financial officer to such effect; or
(b) any of the representations or warranties of DAKA International
contained in Sections 4.2(b), (c), (d), (e), (p) and (s) of the Merger
Agreement shall not have been true and correct at the date when made or
(except for those representations and warranties made as of a particular
date which need only be true and correct as of such date) shall cease to be
true and correct at any time prior to the consummation of the Offer, and
Parent shall not have received a certificate signed on behalf of DAKA
International by the chief executive officer and the chief financial
officer to such effect; or
(c) DAKA International shall have breached any of its covenants or
agreements contained in the Merger Agreement or any Ancillary Agreement (as
defined in the Merger Agreement), provided, however, that if any such
breach is curable by DAKA International or Daka through the exercise of
best efforts within five business days and so long as DAKA International or
Daka continues to use such best efforts, Purchaser may not terminate the
Offer until such five business day period has expired without the breach
being cured; or
(d) there shall be any statute, rule, regulation, decree, order or
injunction promulgated, enacted, entered or enforced, or any legal or
administrative proceeding initiated by any United States federal or state
government, governmental authority or court (other than the routine
application to the Offer, the Merger or the Distribution of waiting periods
under the HSR Act, the Exon-Florio Amendment or review by the Commission of
the Schedule 14D-1, Schedule 14D-9 or Form 10), which would (i) prohibit
Purchaser from consummating the Offer or the Merger, (ii) prohibit DAKA
International from consummating the Distribution or (iii) have a Material
Adverse Effect on DAKA International and Daka as a whole (provided that the
provisions of this clause (iii) shall only apply in the event of any
statute, rule, regulation, decree, order or injunction (A) which is enacted
or entered into following the date of the Merger Agreement and (B) the
substantive provisions of which were initially proposed for enactment
following the date of the Merger Agreement); or
(e) there shall have occurred (i) any general suspension of trading in
securities on the New York Stock Exchange or Nasdaq, (ii) a declaration of
a banking moratorium or any suspension of payments in respect of banks in
the United States, or (iii) a commencement of a war or armed hostilities
involving the United States, which in the case of any of the foregoing
clauses (i), (ii) or (iii) would have a Material Adverse Effect on DAKA
International and Daka taken as a whole; or
(f) either the Merger Agreement or the Reorganization Agreement shall
have been terminated in accordance with its terms; or
(g) DAKA International shall have failed to enter into license
agreements for each of the "French Quarter Coffee", "Leo's Deli" and "Good
Natured Cafe" names and marks, as provided in the Reorganization Agreement;
or
(h) Parent shall not have received an opinion dated the Merger Closing
Date (as defined below) of Goodwin, Procter & Hoar LLP, counsel to DAKA
International, in substantially the form attached to the Merger Agreement;
or
(i) there shall have been a Material Adverse Change, or an event shall
have occurred which could reasonably be expected to result in a Material
Adverse Change; or
(j) Parent shall not have received all consents or releases related to
the Foodservice Business or otherwise, necessary or appropriate to effect
the Contribution, the Distribution and the Merger and to release DAKA
International, Daka, Parent, Purchaser and Compass Interim and the assets
of the Foodservice Business from any obligation or liability, including,
without limitation, the Indebtedness (as
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<PAGE> 21
defined in the Merger Agreement) except as may be otherwise expressly
permitted in the Merger Agreement or in the Ancillary Agreements (as
defined below); or
(k) any approval by a governmental entity in connection with the
transaction contemplated by the Merger Agreement and by the Ancillary
Agreements, including, without limitation, any approval under the HSR Act
or the Exon-Florio Amendment shall contain a requirement for the sale or
disposition of assets or conditions or limitations in connection with
Parent's acquisition of the Foodservice Business or operation of its
existing business and operations or the Foodservice Business after the
Offer Closing Time; or
(l) Allen R. Maxwell shall have indicated to DAKA International, Daka
or Parent that he does not intend to abide by the terms of his employment
agreement; or
(m) the Distribution shall not have become effective in accordance
with the terms of the Reorganization Agreement and each of the agreements
contemplated thereby; or
(n) the Company shall fail to have delivered to Parent indemnification
agreements in substantially the form attached as an exhibit to the
Reorganization Agreement concerning each executive officer and director of
the Company in form and substance reasonably satisfactory to Parent; or
(o) Parent shall be unable to pay in full the aggregate amount of
principal, accrued but unpaid interest and fees due under the Third Amended
and Restated Credit Agreement dated as of October 15, 1996 among DAKA
International, subsidiary guarantors, the bank party thereto and The Chase
Manhattan Bank, N.A., as Agent ("Chase Manhattan Bank"), as amended through
the date of the Merger Agreement (the "Credit Facility") or such amount
shall exceed $110,000,000; or
(p) releases of claims and indemnification rights in forms reasonably
satisfactory to Parent from each of William H. Baumhauer, Allen R. Maxwell,
Charles W. Redepenning, Jr., David G. Parker, Louis A. Kaucic, Donald C.
Moore and Dean P. Vlahos shall not have been delivered to Parent; or
(q) letters of resignation from each executive officer and director of
DAKA International other than Erline Belton and Joseph W. O'Donnell shall
not have been delivered to Parent; or
(r) DAKA International shall not have paid to Parent the amounts set
forth in Section 6.7 of the Merger Agreement, net of any amounts due from
Parent thereunder; or
(s) the Company shall have failed to enter into the Transition
Agreement as provided in the Post-Closing Covenants Agreement; or
(t) DAKA International shall have failed to have assigned or
transferred to the Company the Headquarters Lease (as defined in the Merger
Agreement).
The term "Ancillary Agreements" means the Reorganization Agreement, the
Post Closing Covenants Agreement, the Transition Agreement referred to in
Section 3.2 of the Post Closing Covenants Agreement, and the Tax Allocation
Agreement dated as of May 27, 1997, by and among DAKA International, Daka, the
Company, Champps, Fuddruckers, Purchaser and Parent (the "Tax Allocation
Agreement").
The term "Expiration Date" means 12:00 Midnight, New York City time, on
June 25, 1997, unless and until Purchaser, as provided below, will have extended
the period of time for which the Offer is open, in which event the term
"Expiration Date" means the latest time and date at which the Offer, as so
extended by Purchaser, will expire.
The foregoing conditions are for the sole benefit of Parent and may be
asserted by Parent regardless of the circumstances giving rise to such
conditions, or may be waived by Parent in whole or in part at any time and from
time to time in its sole discretion; provided that the conditions set forth in
clauses (i)(a), (b), (c) and (ii)(d) and (m) above may be waived only by mutual
consent of Purchaser and the Company.
No assurance can be given that all of these considerable conditions to the
consummation of the Offer will be fulfilled or waived by Parent or that the
Offer will be consummated.
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<PAGE> 22
THE MERGER
The Merger Agreement provides that, following the purchase of DAKA Shares
pursuant to the Offer, and the satisfaction or waiver of the other conditions to
the Merger, Compass Interim will be merged with and into DAKA International. The
Merger Agreement provides that the Merger will become effective and the Merger
Effective Time will occur immediately following the Distribution upon the filing
of certificates of merger or other appropriate documents (in any such case, the
"Certificate of Merger") with the Delaware Secretary of State or at such other
time as agreed to by DAKA International and Purchaser and approved by the
independent directors of DAKA International. The Merger Agreement provides that
the closing of the Merger (the "Merger Closing") will take place within five
business days after the satisfaction or waiver of the conditions to the Merger
or such other date established by Purchaser and approved by the independent
directors of the Company. The parties have agreed to use reasonable best efforts
to cause the Merger Closing to occur immediately after the Offer Closing Time.
Otherwise Purchaser has agreed to use reasonable best efforts to cause the
Merger Closing to occur as soon as practicable after the Offer Closing. The date
of the Merger Closing is referred to in the Merger Agreement as the "Merger
Closing Date."
At the Merger Effective Time, (i) except as provided in (ii) below, each
DAKA Share issued and outstanding immediately prior to the Merger Effective Time
will be converted into the right to receive $7.50 in cash, or any higher price
paid per DAKA Share in the Offer, without interest (the "Merger Price"); (ii)(a)
each DAKA Share held in the treasury of DAKA International or held by any wholly
owned subsidiary of DAKA International (but not any Benefit Plan (as defined in
the Merger Agreement)) and each DAKA Share held by Purchaser, Compass Interim or
any wholly owned subsidiary of Parent, excluding, in each case, any such shares
held by the Company, Purchaser or any of their wholly owned subsidiaries in a
fiduciary, custodial or similar capacity immediately prior to the Merger
Effective Time will be canceled and retired and cease to exist; (b) each DAKA
Share held by any holder who has not voted in favor of the Merger or consented
thereto in writing and who has delivered a written demand for appraisal of such
DAKA Shares and perfected such appraisal rights, all in accordance with Section
262 of the DGCL will not be converted into or be exchangeable for the right to
receive the Merger Price (the "Dissenting Shares"); and (iii) each share of
common stock of Purchaser issued and outstanding immediately prior to the
Effective Date will be converted into and exchangeable for one share of common
stock of the Surviving Corporation.
Conditions to the Merger. The respective obligation of each party to the
Merger Agreement to effect the Merger is subject to the satisfaction or waiver
on or prior to the Merger Closing Date of a number of conditions, including the
following: (a) the Merger Agreement shall have been adopted by the affirmative
vote of the stockholders of DAKA International by the requisite vote in
accordance with applicable law, if required by applicable law, (b) no statute,
rule, regulation, order, decree, or injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which prohibits
or restricts the consummation of the Merger, (c) the Offer shall not have been
consummated, (d) the Distribution shall have become effective in accordance with
the terms of the Reorganization Agreement and each of the agreements
contemplated thereby, (e) no temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Merger, the Contribution or the Distribution shall be in effect and no
such litigation or legal action shall have been threatened or shall be pending.
No action, suit or other proceeding shall be pending by any governmental entity
that, if successful, would restrict or prohibit the consummation of the Merger,
the Contribution or the Distribution; provided, however, that DAKA International
will not unreasonably withhold its waiver of the condition set forth in this
sentence upon Parent's request in the event such an action, suit or other
proceeding is pending with respect to the Merger alone.
Approval of DAKA International Stockholders. If required by applicable law
in order to consummate the Merger, DAKA International will duly call, give
notice of, convene and hold a special meeting (the "Special Meeting") of its
stockholders as soon as practicable following the consummation of the Offer for
the purpose of considering and taking action upon the Merger Agreement and the
Merger. In addition to receiving notice of such Special Meeting, stockholders
would receive a Proxy Statement from DAKA International (the "Proxy Statement")
recommending approval of the Merger Agreement and the Merger at the Special
Meeting. Section 253 of the DGCL would permit the Merger to occur without a vote
of DAKA
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<PAGE> 23
International's stockholders (a "short-form merger") if Purchaser were to
acquire at least 90% of all of the outstanding DAKA Shares in the Offer. If
Purchaser acquires 90% or more of the outstanding DAKA Shares in the Offer,
Purchaser intends to cause the Merger to occur as a short-form merger.
Representations and Warranties. The Merger Agreement includes customary
representations and warranties by DAKA International and Daka to Parent,
Purchaser and Compass Interim as to corporate organization and power,
authorization and approval of agreements and the transactions contemplated
thereby, noncontravention of laws and agreements, the filing of all required
reports, schedules, forms, statements and other documents with the Commission,
the accuracy of financial statements and filings with the Commission, and the
conduct of the Foodservice Business in the ordinary course and the absence of
any material adverse change with respect to DAKA International, Daka or the
Foodservice Business.
The Merger Agreement also includes customary representations and warranties
by Parent, Purchaser and Compass Interim to DAKA International.
Composition of the DAKA International Board Pending the Merger. The Merger
Agreement provides that, in the event that Purchaser acquires at least
two-thirds of the DAKA Shares outstanding pursuant to the Offer, Purchaser shall
be entitled to designate for appointment or election to the DAKA International
Board, upon written notice to DAKA International, such number of persons
("Purchaser's Designees") so that Purchaser's Designees constitute the same
percentage (but in no event less than five persons) of the DAKA International
Board, rounded up to the next whole number, as the percentage of DAKA Shares
acquired in connection with the Offer. Prior to the consummation of the Offer,
DAKA International will obtain the resignations of such number of directors as
is necessary to enable Purchaser's Designees to be elected to the DAKA
International Board and will take all action required to appoint or elect such
Purchaser's Designees.
The Merger Agreement also provides that, in the event that Purchaser's
Designees are elected to the DAKA International Board after the acceptance for
payment of shares pursuant to the Offer, until the Merger Effective Time, the
DAKA International Board will have at least two directors who are directors on
May 27, 1997 (the "Independent Directors"), provided that, in such event, if the
number of Independent Directors shall be reduced below two for any reason
whatsoever, any remaining Independent Directors (or Independent Director, if
there is only one remaining) shall be entitled to designate persons to fill such
vacancies who shall be deemed to be Independent Directors for purposes of the
Merger Agreement or, if no Independent Director then remains, the other
directors shall designate two persons to fill such vacancies who will not be
stockholders, affiliates or associates of Parent, Purchaser or Compass Interim
and such persons will be deemed to be Independent Directors for purposes of the
Merger Agreement. In the event that Purchaser's Designees are elected to the
DAKA International Board after the acceptance for payment of DAKA Shares
pursuant to the Offer and prior to the Merger Effective Time, the Merger
Agreement provides that the affirmative vote of a majority of the Independent
Directors shall be required to (i) amend or terminate the Merger Agreement by
DAKA International, (ii) exercise or waive any of DAKA International's rights,
benefits or remedies under the Merger Agreement, (iii) extend the time for
performance of Parent's, Purchaser's or Compass Interim's respective obligations
under the Merger Agreement, (iv) take any other action by the DAKA International
Board under or in connection with the Merger Agreement or any of the
transactions contemplated thereby or (v) approve any other action by DAKA
International which could adversely affect the interests of the stockholders of
DAKA International (other than Parent, Purchaser or Compass Interim and their
affiliates) with respect to the transactions contemplated by the Merger
Agreement.
Business of DAKA International Pending the Merger. The Merger Agreement
provides that, during the period from the date of the Merger Agreement and
continuing until the Offer Closing Time, except for the Contribution, the
Distribution and the other transactions expressly provided for in the
Reorganization Agreement and the Tax Allocation Agreement, as expressly
contemplated or permitted by the Merger Agreement, or to the extent that Parent
otherwise consents in writing (which consent will not be unreasonably withheld),
DAKA International and Daka will conduct the Foodservice Business in the
ordinary course, consistent with past practice including, without limitation,
using reasonable efforts to preserve beneficial relationships between the
Foodservice Business and its suppliers, employees and customers. The Merger
Agreement also includes limitations, prohibitions and other provisions relating
to the conduct of the business
15
<PAGE> 24
of DAKA International and its subsidiaries during this period with respect to
(a) capital projects, (b) contracts and agreements outside the ordinary course
of business, (c) sales incentive programs, (d) changes in or issuances,
repurchases or redemption of capital stock, (e) charter or by-law amendments,
(f) acquisitions and dispositions, (g) levels of indebtedness as of the Merger
Effective Time, (h) adoption or amendment of benefit plans or arrangements, (i)
actions relating to employment agreements of certain employees of DAKA
International, (j) changes in accounting principles, policies or procedures, (k)
incurrence of liens, (l) nonwaiver of existing standstill and confidentiality
agreements, (m) defense of pending litigation, (n) increases in the amount of
deferred tax liabilities, or decreases in the amount of deferred assets of DAKA
International or its subsidiaries other than in the ordinary course of business
consistent with past practice, and (o) provision to Parent and its officers,
employees and advisors of reasonable access, during the period prior to the
Offer Closing Time, to DAKA International's properties, books, records, reports
and personnel relating to the Foodservice Business.
No Solicitation of Third Party Acquisition Proposals. Pursuant to the
Merger Agreement, neither DAKA International nor any of its directors, officers
or employees will, and DAKA International will use its best efforts to ensure
that none of its representatives will, directly or indirectly, solicit, initiate
or encourage any inquiries or proposals from or with any person (other than
Parent and its subsidiaries) or such person's directors, officers, employees,
representatives and agents that constitute, or could reasonably be expected to
lead to a Third Party Acquisition. A "Third Party Acquisition" means (i) the
acquisition by any person of more than 20% of the total assets of the
Foodservice Business, (ii) the acquisition by any person of 20% or more of (A)
the DAKA Shares or (B) the total number of votes that may be cast in the
election of directors of DAKA International at any meeting of stockholders of
DAKA International assuming all the DAKA Shares and all other securities of DAKA
International, if any, entitled to vote generally in the election of directors
were present and voted at such meeting, or (iii) any merger, consolidation or
other combination of DAKA International or Daka with any person; provided that
"Third Party Acquisition" does not include any transactions which relate solely
to the business to be owned by the Company and its subsidiaries following the
Distribution and which would not have a material adverse effect on the
consummation of the Offer, the Merger, the Distribution or the transactions
contemplated by the Merger Agreement. The Merger Agreement provides that DAKA
International has ceased or caused to be terminated any discussions or
negotiations with any parties other than Parent conducted prior to the date of
the Merger Agreement with respect to any Third Party Acquisition.
Notwithstanding the foregoing, DAKA International may furnish or cause to be
furnished information (pursuant to confidentiality arrangements no less
favorable to DAKA International than the Confidentiality Agreement (as defined
in the Merger Agreement), unless already in existence on the date of the Merger
Agreement) and may participate in such discussions and negotiations directly or
through its representatives if another person or group makes an offer or
proposal which the DAKA International Board believes, in the good faith exercise
of its business judgment and based upon advice of its outside legal and
financial advisors, could reasonably be expected to be consummated and
represents a transaction more favorable to its stockholders than the
transactions contemplated by the Merger Agreement (a "Higher Offer"). Subject to
compliance by the DAKA International Board with their fiduciary duty, DAKA
International will notify Parent as soon as practicable if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with it,
which notice will provide the identity of the third party or parties and the
terms of any such proposal or proposals. The DAKA International Board may fail
to recommend or fail to continue to recommend the Offer or the Merger Agreement
in connection with any vote of its stockholders, or withdraw, modify, or change
any such recommendation, or recommend or enter into an agreement regarding a
Higher Offer, if the DAKA International Board, after receiving the advice of its
outside counsel, determines in good faith that making such recommendation, or
the failure to recommend any other offer or proposal, or the failure to so
withdraw, modify, or change its recommendation, or the failure to recommend or
enter into an agreement regarding a Higher Offer, could constitute a breach of
the directors' fiduciary duties under applicable law. In such event,
notwithstanding anything contained in the Merger Agreement to the contrary, any
such failure to recommend, withdrawal, modification, or change of recommendation
or recommendation of such other offer or proposal, or the entering by DAKA
International into an agreement with respect to a Higher Offer (provided that
DAKA International will have provided Parent notice of its intention to so
enter, the terms of
16
<PAGE> 25
the Higher Offer and the identity of the other party thereto), will not
constitute a breach of the Merger Agreement by DAKA International.
Notwithstanding the foregoing, DAKA International will not enter into an
agreement with a third party with respect to, or take any action to approve such
transaction under any antitakeover provision of DAKA International's Certificate
of Incorporation, as amended or state law in connection with any Third Party
Acquisition unless and until the Merger Agreement is terminated in accordance
with the provisions contained therein.
Certain Covenants of Parent. Under the Merger Agreement, Parent has agreed
to limitations, prohibitions and other provisions applicable during the period
from the date of the Merger Agreement and continuing until the Offer Closing
Time relating to the provision of certain information to DAKA International (or
its counsel) regarding filings with any Governmental Entity (as defined in the
Merger Agreement) in connection with the Merger Agreement and the transactions
contemplated thereby.
Covenants of Parent and Purchaser Regarding Tax Treatment. In the Merger
Agreement, Parent and Purchaser have agreed that each will and each will cause
the Surviving Corporation to, treat the Distribution for purposes of all federal
and state taxes as an integrated transaction with the Offer and the Merger and
thus report the Distribution as a constructive redemption of a number of DAKA
Shares equal in value to the value of the UCRI Shares distributed in the
Distribution.
Covenants of Parent Regarding Continued Indemnification of Officers and
Directors. In the Merger Agreement, Parent has agreed that for a period of
three years after the Offer Closing Time, it will not modify the rights of
certain non-employee directors of DAKA International to indemnification and will
cause DAKA International and the Surviving Corporation to include in their
Certificates of Incorporation and By-laws provisions with respect to the right
of directors and officers to indemnification substantially similar to such
provisions in the Certificate of Incorporation and By-laws of DAKA International
as of the date of the Merger Agreement.
Certain Other Covenants, Agreements and Actions. Subject to the terms and
conditions of the Merger Agreement, DAKA International has agreed to use its
reasonable best efforts to comply promptly with all legal and regulatory
requirements which may be imposed on it or its subsidiaries with respect to the
Offer, the Distribution, the Contribution, and the Merger and the transactions
contemplated by the Merger Agreement and to obtain any consent, authorization,
order or approval of, or any exemption by, and to satisfy any condition or
requirement imposed by, any Governmental Entity or other public or private third
party, required to be obtained, made or satisfied by DAKA International or any
of its subsidiaries in connection with the Distribution or the Merger or the
taking of any action contemplated thereby or by the Merger Agreement or the
Ancillary Agreements. Likewise, Parent has agreed to use its reasonable best
efforts to comply promptly with all legal and regulatory requirements which may
be imposed on it or its subsidiaries with respect to the Offer, the Merger and
transactions contemplated thereby and by the Merger Agreement and to obtain any
consent, authorization, order or approval of, or any exemption by, and to
satisfy any condition or requirement imposed by, any Governmental Entity or
other public or private third party, required to be obtained, made or satisfied
by Parent or any of its subsidiaries in connection with the Merger or the taking
of any action contemplated thereby or by the Merger Agreement or the Ancillary
Agreements. Additionally, (i) an employment agreement between Allen R. Maxwell,
DAKA International and Daka must have been executed in the form attached as an
exhibit to the Merger Agreement and (ii) Parent must have received certified
DAKA International Board resolutions and certified resolutions of the Board of
Directors of Daka authorizing the Distribution and the Merger and the
transactions contemplated thereby, and reflecting its determination that the
consummation of such transactions will not violate applicable insolvency laws.
Indebtedness. In the Merger Agreement, DAKA International has agreed to
take such action as may be necessary so that, as of the Offering Closing Time,
DAKA International and Daka, taken as a whole, will not have any indebtedness
other than: (A) the Funded Debt (as defined below), and (B) indebtedness
incurred pursuant to a written agreement that provides that such indebtedness
will be assumed by the Company or a subsidiary of the Company at or prior to the
Offer Closing Time and that, upon such assumption, DAKA International and Daka
will have no obligation or liability in respect of such indebtedness.
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<PAGE> 26
The term "Funded Debt" means the amount of indebtedness outstanding plus
any accrued but unpaid interest and fees under the terms of the Credit Facility,
together with the amount of indebtedness outstanding (consisting of market to
market exposure) plus all other amounts due under any Interest Rate Protection
Agreement (as defined in the Credit Facility), which aggregate amount will not
exceed $110,000,000.
Simultaneously with the Offer Closing Time, Purchaser will, or will cause
DAKA International to, repay the Funded Debt and will use its reasonable best
efforts to cause the lenders under the Credit Facility to deliver to the Company
such documents or instruments necessary to release or terminate all liens on
assets of DAKA International, the Company or their respective subsidiaries
securing the Funded Debt. The parties must have receipt of reasonably
satisfactory evidence to Parent of the amount of Funded Debt outstanding at the
Offer Closing Time and confirmation that such Funded Debt (as adjusted in
accordance with the terms of the Merger Agreement) has been repaid pursuant to
Parent's wire transfer to Chase Manhattan Bank, simultaneously with the Merger
Closing and that all obligations or liabilities of DAKA International and Daka,
and all liens related to the Acquired Assets (as defined in the Merger
Agreement), have been satisfied or released in full.
Stock Option and Stock Purchase Plans. Pursuant to the Merger Agreement,
DAKA International will make all adjustments and take all steps set forth in the
Reorganization Agreement with respect to DAKA Stock Options as a result of the
Distribution and other transactions contemplated by the Merger Agreement and the
Reorganization Agreement. After taking into account all such adjustments to such
DAKA Stock Options and the other matters set forth in the Reorganization
Agreement, all DAKA Stock Options which are outstanding immediately prior to
Purchaser's acceptance for payment and payment for DAKA Shares pursuant to the
Offer will, regardless of whether such DAKA Stock Options are vested and
exercisable be canceled as of the Offer Closing Time and the holders thereof
will be entitled to receive from the Company, for each share subject to such
DAKA Stock Option, an amount in cash equal to the excess of the Offer Price over
the per share exercise price of such DAKA Stock Option, less all applicable
withholding taxes, which amount will be payable by the Company not later than 30
days after the Offer Closing Time.
In addition, DAKA International will make all adjustments and take all
steps set forth in the Reorganization Agreement with respect to its Stock
Purchase Plan (the "Existing Stock Purchase Plan") regarding DAKA Shares
purchasable by participating employees of DAKA International or its subsidiaries
(the "Participating Employees") under the Existing Stock Purchase Plan with
respect to offerings thereunder (the "Purchasable DAKA Shares"). In lieu of
receiving Purchasable DAKA Shares, the Participating Employees shall be entitled
to receive from the Company, for each DAKA Purchasable Share, in addition to
UCRI Shares in the Distribution as provided above, an amount in cash equal to
the excess of the Offer Price over the per-share purchase price of such
Purchasable DAKA Share under the Existing Stock Purchase Plan, less all
applicable withholding taxes, which amount shall be payable by the Company not
later than 30 days after the Offering Closing Time, whereafter all rights of
Participating Employees under the Existing Stock Purchase Plan shall terminate.
DAKA International will use its reasonable best efforts to ensure that
neither DAKA International nor any of its subsidiaries is or will be bound by
any options, warrants, rights or agreements which would entitle any person,
other than Parent, Purchaser, Compass Interim or DAKA International or any of
their respective subsidiaries, to beneficially own, or receive any payments in
respect of, any capital stock of DAKA International or the Surviving Corporation
(other than as provided in the Merger Agreement or in the Ancillary Agreements).
Offer Closing Date Payments. The Merger Agreement provides that at the
Offer Closing, (a) DAKA International will deliver to Purchaser in cash or cash
equivalents an amount equal to (i) $1,500,000, plus (ii) $7.50 multiplied by the
sum of (A) the number of outstanding Shares and (B) the outstanding DAKA Shares
into which the Series A Preferred Stock, is convertible, minus $85,000,000 and
(b) Parent will deliver to the Company any amount by which the Funded Debt is
less than $110,000,000.
Fees and Expenses. Except as provided in the Merger Agreement with respect
to termination of the Merger Agreement under certain circumstances, all fees and
expenses incurred in connection with the Merger, the Contribution, the
Distribution, the Merger Agreement, the Reorganization Agreement and the
transac-
18
<PAGE> 27
tions contemplated by the Merger Agreement and the Ancillary Agreements will be
paid by the party incurring such fees or expenses, whether or not the Merger is
consummated. In accordance with the foregoing sentence, the Company agrees to
pay the fees and expenses of Bear, Stearns & Co. Inc. ("Bear Stearns") and
Parent agrees to pay the fees and expenses of Patricof & Co. Capital Corp.,
NationsBanc Capital Markets, Inc., MacKenzie Partners, Inc., and The Bank of New
York, and the filing fees associated with any filing under the HSR Act.
Notwithstanding the foregoing, Purchaser and the Company have agreed to share
equally any transfer taxes imposed in connection with or as a result of the
Merger, other than transfer taxes imposed on any holder of DAKA Shares.
In the event that Parent or DAKA International terminates the Merger
Agreement as a result of certain acts or omissions by the DAKA International
Board, as described in the Merger Agreement, and, at the time of termination
there has been made a proposal relating to a Third Party Acquisition that has
become public and, within 12 months following such termination, DAKA
International or Daka enters into a definitive agreement with respect to (a) the
sale of the Foodservice Business, (b) the sale of substantially all of the
assets of DAKA International or Daka, or (c) the merger of DAKA International or
Daka with or into any other entity, or DAKA International shall recommend any
Third Party Acquisition to its stockholders, then DAKA International or Daka
will promptly pay to Parent an amount equal to the sum of (i) $5,800,000 and
(ii) the fees and expenses actually incurred by Parent in connection with the
negotiation and preparation of the Merger Agreement and the Ancillary Agreements
to which Parent is a party, the performance of Parent's covenants therein, and
the transactions contemplated thereby, including, without limitation, all fees
and disbursements of Parent's financial advisors, legal counsel, accountants and
other advisors, up to a maximum of an additional $2,000,000.
Termination. The Merger Agreement provides that such agreement may be
terminated at any time prior to the Offer Closing Time, notwithstanding any
approval of the Merger Agreement by the stockholders of DAKA International, by:
(a) mutual written consent of Parent and DAKA International; or
(b) by either Parent or DAKA International if:
(i) there has been a failure to perform an obligation or satisfy a
condition precedent (regardless of materiality) or an unwaived material
breach of the Merger Agreement by a party, provided that only the
non-breaching party may terminate;
(ii) the Offer shall expire or have been terminated in accordance
with its terms without any DAKA Shares being purchased thereunder, or
Purchaser shall not have accepted for payment or paid for DAKA Shares
validly tendered pursuant to the Offer (as a result of the conditions to
the Offer not being satisfied or waived by Purchaser) prior to July 31,
1997, unless the failure to consummate the Offer is the result of a
willful and material breach by the party seeking to terminate the Merger
Agreement;
(iii) if any Governmental Entity shall have issued a final and
nonappealable order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Offer;
or
(c) Parent if (i) the DAKA International Board shall have withdrawn,
or modified or changed, in a manner adverse to Parent, its approval or
recommendation of the transactions contemplated by the Merger Agreement and
the Ancillary Agreements or shall have recommended another offer or
proposal with respect to a Third Party Acquisition, or a Third Party
Acquisition has occurred or any person will have entered into a definitive
agreement with DAKA International with respect to a Third Party
Acquisition; or
(d) DAKA International if the DAKA International Board shall have
failed to recommend to its stockholders the approval of the transactions
contemplated by the Merger Agreement and the Ancillary Agreements or will
have withdrawn, modified or changed such recommendation.
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THE REORGANIZATION
THE REORGANIZATION AGREEMENT
The following summary of certain terms of the Reorganization Agreement does
not purport to be complete and is qualified in its entirety by references to the
full text of the Reorganization Agreement (a copy of which has been filed as an
exhibit to the registration statement on Form 10 of which this Information
Statement is a part).
The Contribution. Under the terms of the Reorganization Agreement, prior
to the Distribution, DAKA International, Daka and Daka's subsidiaries
(collectively, the "DAKA International Group") will contribute to the Company
all of DAKA International's and Daka's right, title and interest in, to and
under all of the Transferred Assets, which exclude the Foodservice Assets (as
defined below) to be specifically acquired by Parent pursuant to the Merger. The
Foodservice Assets, which are listed in a schedule attached to the
Reorganization Agreement, will consist principally of the assets that are used
primarily in or held primarily for the use in or otherwise necessary for the
operation, as presently conducted, of the Foodservice Business, excluding
certain current foodservice net assets to be contributed by DAKA International
to the Company in the Additional Capital Contribution to provide the Company
with additional working capital to fund operations. The specific assets and
liabilities to be included in the Additional Capital Contribution will consist
of specific customer accounts receivable, certain prepaid assets, identified
property and equipment, vendor trade accounts payable, accrued expenses,
contingent liabilities and deferred taxes as of the Offer Closing Time. At the
same time, the Company will assume all of DAKA International's liabilities as of
the Offer Closing Time except for outstanding indebtedness under DAKA
International's bank credit agreements (the "Assumed Liabilities").
Notwithstanding the foregoing, the Reorganization Agreement provides that the
Contribution will not result in the assignment of any lease, license agreement,
contract, agreement, sales order, purchase order, open bid or other commitment
or asset if an assignment or attempted assignment of the same without the
consent of the other party or parties thereto would constitute a breach thereof
or in any way impair the rights of DAKA International or CDV, Champps, French
Quarter, Fuddruckers, Great Bagel and Coffee, Pulseback, Specialty Concepts and
their subsidiaries (the "UCRI Group") thereunder. In the event any attempted
assignment is deemed ineffective for the reasons set forth in the preceding
sentence, the Reorganization Agreement describes certain alternative methods by
which the parties will attempt to place the Company in substantially the same
position as if the assignment had occurred. The Reorganization Agreement
provides for certain adjustments to reflect that the income and expenses
attributable to the operation of the Foodservice Business on or before the Offer
Closing Time shall be for the account of the Company and the income and expenses
attributable to the operation of the Foodservice Business after the Offer
Closing Time shall be for the account of DAKA International.
The purpose and effect of the Contribution is to facilitate the Merger by
separating the Transferred Assets and the Assumed Liabilities from the
Foodservice Business of DAKA International and its subsidiaries, and to transfer
the Transferred Assets and the Assumed Liabilities to the Company. Accordingly,
following the Contribution and the Distribution, the Foodservice Business will
consist of all of the businesses, assets and liabilities of DAKA International
at the time of the Merger.
The Distribution. The equity capitalization of the Company prior to the
Distribution will consist of 1,000 issued and outstanding shares of UCRI Common
Stock (the "Existing UCRI Shares"), all of which are outstanding and owned
beneficially and of record by DAKA International. Immediately prior to the Offer
Closing Time, the Company will cause the Company to exchange the Existing UCRI
Shares owned by DAKA International for a total number of UCRI Shares equal to
the total number of DAKA Shares outstanding as of the Distribution Record Date.
In the Distribution, DAKA International will distribute on a pro rata basis all
of the issued and outstanding UCRI Shares to the holders of the DAKA Shares. All
UCRI Shares issued in the Distribution will be duly authorized, validly issued,
fully paid and nonassessable.
Conditions to the Distribution. The obligations of DAKA International to
consummate the Contribution and Distribution are subject to the fulfillment of
each of the following conditions: (i) in the case of the Distribution, the
transactions accomplishing the Contribution must have been consummated; (ii)
each of
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Parent, Purchaser and Compass Interim will have performed in all material
respects all obligations required to be performed by it under the Reorganization
Agreement at or prior to the Offer Closing Time, and DAKA International will
have received a certificate signed on behalf of Parent by the chief executive
officer and the chief financial officer of Parent to such effect; (iii) DAKA
International will have received opinions of Smith Helms Mulliss & Moore, L.L.P.
and Freshfields, each dated as of the Offer Closing Time, in substantially the
forms attached as exhibits to the Reorganization Agreement; (iv) simultaneously
with the Offer Closing, Parent will have paid to Chase Manhattan Bank on behalf
of DAKA International all Funded Debt; (v) no temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Contribution or the Distribution will be in effect and no
such litigation or legal action will have been threatened or will be pending and
no action, suit or other proceeding will be pending by any governmental entity
that, if successful, would restrict or prohibit the consummation of the
Contribution or the Distribution; (vi) any applicable waiting periods under the
HSR Act or the Exon-Florio Amendment will have expired or been terminated; (vii)
the Registration Statement on Form 10 filed by the Company with the Commission
under the Exchange Act with respect to the UCRI Shares being distributed in the
Distribution (the "Form 10") will have been declared effective by the
Commission; (viii) Purchaser will have accepted for payment pursuant to the
Offer a number of validly tendered shares which satisfies the Minimum Condition;
(ix) the representations and warranties of Parent contained in the Merger
Agreement will be true and correct in all material respects; (x) the
non-contravention of laws; (xi) the absence of a Material Adverse Change or any
event that could reasonably be expected to result in a Material Adverse Change;
(xii) Allen R. Maxwell will not have indicated that he does not intend to abide
by the terms of his employment agreement; and (xiii) Parent will have paid to
the Company any amount by which the Funded Debt outstanding at the Offer Closing
Time is less than $110,000,000.
Under applicable law, the Contribution and the Distribution would
constitute a "fraudulent transfer" if (i) DAKA International is insolvent at the
Offer Closing Time or the time of Distribution, (ii) the Contribution or the
Distribution would render DAKA International insolvent, (iii) the Contribution
or the Distribution would leave DAKA International engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital or (iv) DAKA International intended to incur or believed it would incur
debts beyond its ability to pay as such debts mature. Generally, an entity is
considered insolvent if it is unable to pay its debts as they become due and
payable or if the fair value of its assets is less than the amount of its actual
and expected liabilities. In addition, under Section 170 of the DGCL (which is
applicable to the Distribution), a corporation generally may make distributions
to its stockholders only out of its surplus (net assets minus stated capital)
and not out of stated capital.
If a court, in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that, at the time DAKA
International effects the Contribution and the Distribution, DAKA International
(i) was insolvent, (ii) was rendered insolvent by reason of such transaction,
(iii) was engaged in a business or transaction for which DAKA International's
remaining assets constituted unreasonably small capital or (iv) intended to
incur or believed it would incur debts beyond its ability to pay as such debts
matured, such court could void the Contribution and the Distribution as a
fraudulent conveyance and require that stockholders of DAKA International return
the UCRI Common Stock to DAKA International or to a fund for the benefit of DAKA
International's creditors.
EMPLOYEE BENEFITS AND LABOR MATTERS
General. For purposes of allocating employee benefit liabilities and
obligations, "Foodservice Employee" in the Reorganization Agreement means any
individual who upon the Offer Closing Time is an officer or employee of any
member of either the UCRI Group or the DAKA International Group and who is set
forth on the disclosure schedules to the Reorganization Agreement (which
schedule will be updated by mutual agreement of the Company and Parent prior to
the Offer Closing Time). The schedule will include such officers or employees
who are on approved leave or lay-off (with recall rights) from active
employment, other than any individual who, as of the Merger Closing Date, has
been determined to be permanently disabled under existing benefit plans of the
Company.
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Also under the Reorganization Agreement, the Company and the UCRI Group
generally will be responsible for claims or proceedings against DAKA
International or Daka relating to any alleged violation of any legal requirement
pertaining to labor relations or employee matters to the extent that the
allegations relate to any period prior to the Offer Closing Time and for
withdrawal liabilities in connection with a multi-employee plan beyond certain
threshold amounts decided in the Reorganization Agreement.
Furthermore, DAKA International will take the necessary actions to transfer
ownership of life insurance policies on the lives of its executives (other than
Allen R. Maxwell) to the Company, and the Company will assume all liability for
earned or accrued vacation pay and banked or earned/accrued sick leave pay
accrued by Foodservice Employees and the Company's employees through the Offer
Closing Time. Vacation pay and sick leave for Foodservice Employees after the
Offer Closing Time will be provided under Parent's vacation and sick leave
policies.
Employee Welfare Plans. In general, the Reorganization Agreement requires
DAKA International to amend its employee benefit and executive compensation
plans to remove DAKA International as sponsor and named fiduciary and substitute
the Company in its place prior to the Offer Closing Time. Also prior to the
Offer Closing Time, Parent is required to establish new plans, or amend existing
plans (the "Parent Plans"), in order to make available to eligible Foodservice
Employees approximately the same benefits as were available to them (with the
same vesting or service credit status, where applicable) prior to the Offer
Closing Time. The Reorganization Agreement also provides that the appropriate
amount of plan assets, in the case of funded benefit plans, will be transferred
from DAKA International welfare plans (the "DAKA Welfare Plans") to Parent Plans
in order to provide benefits to the eligible Foodservice Employees after the
Offer Closing Time. Foodservice Employees will be permitted to roll over their
DAKA Welfare Plan account balances into Parent Plans, subject to the terms
thereof. Except as otherwise noted in the Reorganization Agreement, DAKA
International will cause the Company or one of its subsidiaries to assume and be
solely responsible for or cause its insurance carriers or agents to be solely
responsible for, all liabilities for welfare benefit claims incurred on or prior
to the Closing Date under the DAKA Welfare Plans.
The Reorganization Agreement provides that the Company and the UCRI Group
will be responsible for any retiree medical, life insurance or other benefits
that are now or may hereafter become payable with respect to any former employee
of DAKA International or one of its affiliates who retired from the Company,
DAKA International, or any of their subsidiaries prior to the Offer Closing Time
and who met the eligibility requirements for such benefits at that time. The
Foodservice Employees who retire from DAKA International or Parent after the
Offer Closing Time will not be entitled to retiree medical and life insurance
benefits from either the DAKA Welfare Plans or the Parent Plans.
Severance Pay. The UCRI Group will assume and be solely responsible for
all liabilities and obligations whatsoever in connection with claims for
severance pay benefits without regard to when such claims are made under the
terms of the Daka International, Inc. Severance Pay Program or any of the
severance plans sponsored by any member of DAKA International Group prior to the
Offer Closing Time, including, without limitation, any individuals who, in
connection with the Distribution, cease to be employees of the DAKA
International Group, whether or not such individuals are offered or accept
employment with either Group. DAKA International will be responsible for the
payment of severance pay benefits payable pursuant to any New Welfare Plan (as
defined in the Reorganization Agreement) that may be established after the Offer
Closing Time to provide severance pay benefits to Foodservice Employees at the
time of their termination.
Collective Bargaining Agreements. Under the Reorganization Agreement, as
of the Offer Closing Time DAKA International and the DAKA International Group
will retain and be responsible only for the collective bargaining agreements
listed in the Reorganization Agreement, and only to the extent such agreements
relate to the terms and conditions of employment of the Foodservice Employees.
The Company and the UCRI Group will assume and be solely responsible for all
liabilities or claims made or arising under any collective bargaining agreement
covering the terms and conditions of either group of employees relating to any
period of time on or before the Offer Closing Time.
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TREATMENT OF DAKA STOCK OPTIONS
Effective as of the Distribution Date, the Company will adopt (and DAKA
International, as sole stockholder of the Company, will approve) the Company's
1997 Stock Option and Incentive Plan (the "1997 Stock Option Plan") for the
benefit of employees of the Company and non-employee directors of the Company.
See "Management -- Employee Stock Plans -- 1997 Stock Option Plan."
As provided in the Reorganization Agreement, DAKA Stock Options which have
been granted to employees of the Company, non-employee directors of the Company,
and former DAKA International employees (who are not employees of the Company)
pursuant to DAKA International's 1994 Equity Incentive Plan, the 1988 Incentive
Stock Option Plan, and the 1988 Nonqualified Stock Option Plan (collectively,
the "DAKA Option Plans"), and which are outstanding immediately prior to the
Distribution, shall be converted into two (2) separate non-qualified options.
The holder of a DAKA Stock Option will receive one option to purchase DAKA
Shares (the "DAKA Converted Option") and one option to purchase UCRI Shares (the
"UCRI Converted Option"), with each Converted Option to purchase shares of
either DAKA Stock or UCRI Stock, as the case may be, equal in number to the
number of DAKA Shares relating to such DAKA Stock Option. The exercise price per
share of each DAKA Converted Option shall be adjusted by dividing the
pre-conversion exercise price by the DAKA Conversion Factor. The DAKA Conversion
Factor shall mean an amount equal to the quotient obtained by dividing (a) the
sum of (i) the Offer Price, plus (ii) the per share fair market price of the
UCRI Common Stock, determined based on the average closing price of the UCRI
Common Stock over the three-consecutive day trading period immediately following
the Offer Closing Time (the "UCRI Stock Value") by (b) the Offer Price. The
exercise price per share of each UCRI Converted Option shall be adjusted by
dividing the pre-conversion exercise price by the UCRI Conversion Factor. The
UCRI Conversion Factor shall mean an amount equal to the quotient obtained by
dividing (a) the sum of (i) the Offer Price, plus (ii) the UCRI Stock Value by
(b) the UCRI Stock Value. Each Converted Option shall otherwise be subject to
the same terms and conditions as the original DAKA Stock Option.
REPRESENTATIONS AND WARRANTIES
In the Reorganization Agreement, the Company makes certain representations
and warranties to DAKA International, Daka and Parent, and each of DAKA
International and Daka, jointly and severally, made certain representations and
warranties to the Company, with respect to: (a) its due organization, good
standing and corporate power; (b) its power and authority to execute the
Reorganization Agreement and the other Ancillary Agreements to which it is party
and to consummate the transactions contemplated thereby; (c) the enforceability
of the Reorganization Agreement and the other Ancillary Agreement to which it is
party; (d) the non-contravention of laws or, articles of incorporation and
bylaws and; (e) the absence of the need for governmental or third-party consents
in connection with the execution, delivery and performance by it of the
Reorganization Agreement and the other Ancillary Agreements to which it is
party, except as set forth in the Merger Agreement.
AMENDMENT
The Reorganization Agreement provides that the parties thereto may modify
or amend the Reorganization Agreement only by written agreement executed and
delivered by duly authorized officers of the respective parties.
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OTHER AGREEMENTS
THE TAX-ALLOCATION AGREEMENT
The following summary of certain terms of the Tax Allocation Agreement does
not purport to be complete and is qualified in its entirety by reference to the
full text of the Tax Allocation Agreement (a copy of which has been filed as an
exhibit to the registration statement on Form 10 of which this Information
Statement is a part).
The Company, DAKA International and Parent have entered into the 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 the DAKA International Group and the UCRI
Group 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 UCRI Group, and DAKA International will be responsible for tax liabilities
of DAKA International Group.
POST-CLOSING COVENANTS AGREEMENT
The Post-Closing Covenants Agreement includes significant undertakings on
the part of the Company with respect to its operations after the Offer Closing
Time and potential liability and payments due to DAKA International and
Purchaser after the Offer Closing Time. 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 could have a material effect on the financial
condition of the Company.
The following summary of certain provisions of the Post-Closing Covenants
Agreement does not purport to be complete and is qualified in its entirety by
reference to the full text of the Post-Closing Covenants Agreement (a copy of
which has been filed as an exhibit to the registration statement on Form 10 of
which this Information Statement is a part).
Indemnification by the Company. The Post-Closing Covenants Agreement
provides that except as otherwise specifically provided in the Merger Agreement
or any Ancillary Agreement, and subject to certain provisions of the
Post-Closing Covenants Agreement, the Company, will indemnify, defend and hold
harmless Parent, each affiliate of Parent, including any of its direct or
indirect subsidiaries (including, after the Offer Closing Time, DAKA
International and Daka and any subsidiary of Daka), (the "Compass Indemnitees")
from and against, and pay or reimburse the Compass Indemnitees 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 such Compass
Indemnitee's rights under the Post-Closing Covenants Agreement, suffered by such
Compass Indemnitee ("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 Offer Closing Time; (ii) a claim by any person who is not the Company
or an affiliate of the Company (other than DAKA International or Daka)
(collectively, "UCRI Indemnitees") or one of the Compass Indemnitees (a "Third
Party Claim") that there is any untrue statement or alleged untrue statement of
a material fact contained in any of the Schedule 14D-1, the Schedule 14D-9, the
Form 10, the Information Statement, the Proxy Statement or any other document
filed or required to be filed with the Commission in connection with the
transactions contemplated by the Merger Agreement, the Reorganization Agreement
or any preliminary or final form thereof or any amendment or supplement
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thereto (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; but only (a) in the case of the Schedule 14D-1 with respect to
information provided by the Company, DAKA International or Daka in writing
relating to the Company, DAKA International or Daka, as the case may be,
contained in or omitted from such Filings or (b) in the case of the Proxy
Statement, information that is derived from filings made by DAKA International
with the Commission prior to the Offer Closing Time; (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 which does not by
its express terms expire at the Offer Closing Time; (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, 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 Offer Closing Time; (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 to which it is or will be a
party 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
(each as defined in the Post-Closing Covenants Agreement); (vii)(a) the Benefit
Plans or Multiemployer 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
Offer Closing Time 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 Offer Closing Time, or (c) the employment or
termination of any employee of the Company whether before, on or after the Offer
Closing Time; (viii) the collection of Trade Receivables or the payment of
Obligations (each as defined in the Post-Closing Covenants Agreement), 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 Parent or its subsidiaries; (ix) the Stock Purchase
Agreement (as defined below) other than monetary obligations thereunder relating
to the purchase of the Series A Preferred Stock; (x) the repayment by Parent or
its subsidiaries of any bonus or similar payments paid to DAKA International or
Daka prior to the Offer Closing Time under the purchasing contacts set forth in
the Post-Closing Covenants Agreement on a prorated basis, as further provided
therein; and (xi) relating to the lease agreement by which DAKA International
leases its headquarters.
Indemnification by Parent and Purchaser. The Post-Closing Covenant
Agreement provides that except as otherwise specifically provided in the Merger
Agreement or any Ancillary Agreement, and subject to certain provisions of the
Post-Closing Covenants Agreement, Parent and Purchaser (jointly and severally)
will indemnify, defend and hold harmless the UCRI Indemnitees from and against
and pay or reimburse the UCRI Indemnitees for, all Indemnifiable Losses, as
incurred, relating to or arising from (i) the Foodservice Assets, the
obligations and liabilities of DAKA International and Daka other than the
Assumed Liabilities or the conduct of the Foodservice Business where such
Indemnifiable Losses relate to or arise form events,
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occurrences, actions, omissions, facts or circumstances occurring, existing or
asserted after the Offer Closing Time; (ii) a Third Party Claim that there is
any untrue statement or alleged untrue statement of a material fact contained in
any of 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; but only in the case of the Schedule 14D-9, Form 10, Information
Statement, or Proxy Statement with respect with respect to information provided
by Parent or its subsidiaries (excluding DAKA International and Daka prior to
the Offer Closing Time) in writing relating to Parent or its subsidiaries
contained in or omitted from such Filings; (iii) the breach by Parent or its
subsidiaries (other than DAKA International or Daka) of any agreement or
covenant, or from an inaccuracy in any representation or warranty of Parent or
its subsidiaries (other than DAKA International or Daka) contained in the Merger
Agreement or an Ancillary Agreement (other than an agreement or covenant assumed
by the Company pursuant to an Ancillary Agreement) which does not by its express
terms expire at the Offer Closing Time; (iv) any actual or alleged criminal
matters by Parent or any of its subsidiaries, including DAKA International or
Daka or any director, officer, employee or agent of Parent or any of its
subsidiaries, including DAKA International or Daka, after the Offer Closing
Time, occurring or alleged to have occurred prior to or after the Offer Closing
Time, but, in the case of DAKA International or Daka, only where such matters do
not relate to a pattern or course of conduct commencing prior to the Offer
Closing Time; (v) the employment of any Foodservice Employee, but only with
regard to events, occurrences, actions, omissions, facts or circumstance
occurring, existing or asserted after the Offer Closing Time; (vi) the
collection of Trade Receivables or the payment of Obligations by Parent or its
subsidiaries pursuant to the terms of the Post-Closing Covenants Agreement, but
only in the event that such Indemnifiable Losses are finally determined to have
resulted primarily from the gross negligence or willful misconduct of Parent or
its subsidiaries; and (vii) the repayment by the Company of any bonus or similar
payments paid to Parent or its subsidiaries after the Offer Closing Time under
the purchasing contracts set forth in the Post-Closing Covenants Agreement on a
prorated basis, as further provided therein.
Limitation on Indemnification Obligations. The Post-Closing Covenants
Agreement provides 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,
neither the Company nor Parent will 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). In no event will the
Company have a right of contribution against DAKA International or Daka in
connection with indemnities of DAKA International and Daka found in the
Post-Closing Covenants Agreement, the Merger Agreement or any of the Ancillary
Agreements.
Transitional Arrangements. The Company and Parent have agreed to enter
into an agreement or agreements with respect to certain transitional
arrangements (the "Transition Agreement") to be effective upon the consummation
of the Merger. The Transition Agreement is expected to address, among other
things, the allocation of employees; overhead support services; the sublease by
Parent 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.
Insurance. Except as otherwise specifically provided in the Merger
Agreement, the Reorganization Agreement or any other Ancillary Agreement, with
respect to any loss, liability or damage relating to the Foodservice Assets
rising out of events occurring prior to the Offer Closing Time, the Company will
assert any such claims under the Insurance Policies with respect to such loss,
liability or damage in accordance with the terms thereof. Upon the request of
the Company, Parent will use reasonable best efforts to assist the Company in
resolving any such claims under the Insurance Policies with respect to such
loss, liability or damage.
26
<PAGE> 35
Notwithstanding the foregoing, the Company will have full responsibility to
assert any claim with respect to the Foodservice Assets arising out of events
occurring prior to the Offer Closing Time and the Company assumes full
responsibility for all costs, payment obligations and reimbursement obligations
relating to such claims.
Reorganization Expenses. The Post-Closing Covenants Agreement provides
that, except as otherwise expressly provided in the Ancillary Agreements, the
Company will be responsible for and agree to pay such expenses which are agreed
in the Merger Agreement to be the responsibility of DAKA International or Daka
but only to the extent they were incurred before the Offering Closing Time;
provided that DAKA International may, prior to the Offer Closing Time, pay any
such expenses that would otherwise be or become the responsibility of the
Company.
Covenant Not to Compete. In the Post-Closing Covenants Agreement, the
Company agrees that, for a period of five years following the Offer Closing
Time, neither it nor any of its subsidiaries will 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"); provided, however, that the Company without
violating the Post-Closing Covenants Agreement, may own a passive investment of
in the aggregate not more than 2% of the issued and outstanding stock of a
publicly held corporation, partnership or other entity engaged in the business
of providing foodservice or vending services; (ii) influence or attempt to
influence any customer of Parent, Purchaser, DAKA International or Daka to
divert its business from Parent, DAKA International or Daka to any person then
engaged in any aspect of the Restricted Business in competition with Parent,
DAKA International 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 Parent, 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 Parent, DAKA International, or Daka; provided the foregoing
will not apply to foodservice (i) terminated by Parent, DAKA International, or
Daka after the Offer Closing Time or (ii) who have been employed by Persons
other than Parent, DAKA International, or Daka for at least six months prior to
being hired by the Company or its subsidiaries.
Net Worth. The Post-Closing Covenants Agreement provides that for a period
ending on the later of three years following the Offer Closing Time or the final
resolution of certain claims for indemnification thereunder, the Company and its
subsidiaries, on a consolidated basis, will maintain at all times a 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 Parent, 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 Parent.
Duty to Defend. Under the Post-Closing Covenants Agreement, the Company
covenants and agrees that it will vigorously and in good faith defend the
Compass Indemnitees in any proceeding or claim of which it has assumed (or is
required to assume the defense) pursuant to the Post-Closing Covenants
Agreement, including but not limited to the Special Liabilities and any Third
Party Claim. If the Company determines to settle any claim, including but not
limited to the Special Liabilities or any Third Party Claim, the Compass
Indemnitees will have no duty or obligation to contribute to any settlement, and
the failure of any Compass Indemnitee to so contribute will in no way excuse or
discharge the obligations of the Company under the Post-Closing Covenants
Agreement.
Guaranty by Champps and Fuddruckers. Pursuant to the terms of the
Post-Closing Covenants Agreement, each of Champps and Fuddruckers, jointly and
severally, continuously and unconditionally guarantees to Parent and its
subsidiaries the full and prompt payment and performance of all obligations of
the Company under the Ancillary Agreements, whenever the same, or any part
thereof, shall become due and
27
<PAGE> 36
payable in accordance with the terms of the Ancillary Agreements (the
"Guaranty"). Notwithstanding the foregoing, the Guaranty is limited to those
obligations of the Company that become due for payment or for which performance
will have begun and as to which the Company has been properly put on notice of a
potential claim of Indemnifiable Loss on or before December 31, 1998. In
addition, Champps and Fuddruckers each agree that Parent or its subsidiaries may
at any time and from time to time without notice to Champps or Fuddruckers
renew, amend, modify or extend the time of payment or performance of any
obligations guaranteed under the Post-Closing Covenants Agreement as Parent may
deem advisable without discharging, releasing or in any manner affecting the
liability of Champps or Fuddruckers thereunder. Finally, the Post-Closing
Covenants Agreement provides that the Guaranty is a guaranty of payment and
performance and not of collection, and each of Champps and Fuddruckers waives
any right it may have to require that any action be brought against the Company
or to require that resort be had to any security.
Trade Receivables and Obligations. The Reorganization Agreement provides
that the Trade Receivables and the Obligations (as each is defined in the
Post-Closing Covenants Agreement) have been assigned and transferred to the
Company. Pursuant to the Post-Closing Covenants Agreement, the Company appointed
Daka as its agent after the Offer Closing Time for the purposes of collection of
the Trade Receivables and payment of the Obligations, and authorized Daka to pay
the Obligations and to collect the Trade Receivables. Daka will serve in such
capacity commencing at the Offer Closing Time and continuing thereafter for a
period of not more than four months 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 to be
identified by the Company to Daka at the Offer Closing Time. 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 Receivables if Daka in reasonable discretion requests
such efforts. With respect to Obligations, commencing at the Offer Closing Time
and continuing for a period of not more than four months thereafter, Daka will
pay when due certain Obligations of the Company to be identified by the Company
to Daka at the Offer Closing Time. 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 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 Offer Closing
Time. Not later than the business day following the last day of the eighth week
after the Offer Closing Time, Daka will remit to the Company the amount of
collected Trade Receivables in excess of the aggregate amount of Obligations
paid by Daka, provided that Purchaser may retain an amount sufficient to cover
any payments that Purchaser in good faith determines to be due to Purchaser from
the Company under the terms of the Post Closing Covenants Agreement (including
the "Post Closing Payments" provisions summarized below), even if the amount of
such payments or the obligations of the Company to make such payments has not
been finally established. Thereafter, Parent will remit any such net amount of
the Company not later than the first business day following the end of each
succeeding two-week period, provided, however, that Parent's obligation to remit
any such excess Trade Receivables to the Company will be subject to a right of
setoff granted to Parent in connection with the "Post-Closing Payments"
provisions summarized below. The extent to which Purchaser 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.
Post-Closing Payments. The Post-Closing Covenants Agreement provides for
post-closing payments in the following circumstances: (i) if the amount of the
Foodservice Current Assets (as defined in the Post-
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<PAGE> 37
Closing Covenants Agreements and determined from the financial statements for
the Foodservice Business) is less than $10,000,000, then the Company will pay to
Parent an amount equal to such shortfall; (ii) if the product of $7.50 times the
sum of (A) the total number of issued and outstanding DAKA Shares as of the
Offer Closing Time plus (B) the total number of DAKA Shares into which all
shares of Series A Preferred Stock issued and outstanding as of the Offer
Closing Time are convertible is greater than $85,000,000 plus the amount paid by
the Company to Parent pursuant to Section 6.7(a)(ii) of the Merger Agreement,
then the Company will pay Parent the amount of such difference; and (iii) if the
Total Foodservice Managed Volume and Total Foodservice Segment Income (as
defined in the Post-Closing Covenants Agreement and determined from the
financial statements of the Foodservice Business), as adjusted to take into
account customer contracts that have been lost or gained between June 30, 1996
and the Offer Closing Date and certain other adjustments, are below or above
$289,300,000 and $20,500,000, respectively, the Company or Parent, as
applicable, will pay to the other party a Managed Volume/Profitability
Adjustment calculated by applying to $195,000,000 a percentage derived from a
formula set forth in the Post-Closing Covenants Agreement that gives equal
weight to any such shortfall or excess of the adjusted managed volume, on the
one hand, and any such shortfall or excess of the adjusted segment income, on
the other hand.
SERIES A PREFERRED STOCK
DAKA International currently has issued and outstanding 11,911.545 shares
of Series A Preferred Stock (which are convertible into 264,701 DAKA Shares) and
264,701 warrants exercisable for DAKA Shares upon redemption of the Series A
Preferred Stock. DAKA International has entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement"), dated as of May 26, 1997, among DAKA
International, Parent, Purchaser, First Chicago Equity Corporation, an Illinois
corporation ("FCEC"), and Cross Creek Partners I, an Illinois general
partnership ("Cross Creek"), and all of the other holders of Series A Preferred
Stock (together with FCEC and Cross Creek, the "Preferred Stockholders"),
pursuant to which the Preferred Stockholders will sell to Purchaser, and
Purchaser will buy, all of the issued and outstanding Series A Preferred Stock
and related warrants. Such purchase and sale of the Series A Preferred Stock
will occur immediately following the consummation of the Offer and the Preferred
Stockholders will receive from Purchaser an amount in cash equal to the product
of the Offer Price multiplied by the number of DAKA Shares into which such
shares of Series A Preferred Stock are then convertible. The Stock Purchase
Agreement also provides that, as required by the Certificate of Designation of
the Series A Preferred Stock, any dividend declared on the DAKA Common Stock
will be paid to the Preferred Stockholders. Accordingly, because the
Distribution Record Date will be the date immediately prior to the consummation
of the Offer, and the sale of the Series A Preferred Stock is conditioned upon
such consummation, the Preferred Stockholders will not be obligated to sell
their Series A Preferred Stock unless and until the Offer is consummated and
will receive 264,701 UCRI Shares pursuant to the Distribution. The Preferred
Stockholders will receive no consideration in the Offer or in the Merger and the
Series A Preferred Stock and related warrants will be cancelled. The Company
will have no preferred stock or warrants outstanding immediately after the
Distribution.
29
<PAGE> 38
MARKET FOR SHARES
LISTING AND TRADING OF THE UCRI COMMON STOCK
Under existing Nasdaq requirements, DAKA International will make a public
announcement of the special dividend to effect the Distribution at least 10
calendar days prior to the Distribution Record Date (or such shorter period as
permitted by Nasdaq).
The Company has applied for listing of the UCRI Common Stock on Nasdaq
under the symbol "UCRI." Initially the Company is expected to have approximately
1,794 holders of record, based on the number of stockholders of record of DAKA
International as of May 23, 1997.
A "when-issued" trading market for the UCRI Common Stock is expected to
develop on or about the Distribution Date. The term "when-issued" means that
shares can be traded prior to the time certificates are actually available or
issued. Prices at which the UCRI Shares may trade, on a "when-issued" basis or
after the Distribution, cannot be predicted. The Company has applied for listing
of the UCRI Common Stock on Nasdaq. There can be no assurance, however, that
Nasdaq will approve the UCRI Common Stock for trading prior to the Distribution
Record Date or at all, that a liquid trading market for the UCRI Common Stock
will develop, or that listing of the UCRI Common Stock on Nasdaq will be
maintained. There also can be no assurance as to the prices at which the UCRI
Common Stock will trade before or after the Distribution Date. Until the UCRI
Common Stock is fully distributed and an orderly market develops, the prices at
which shares trade may fluctuate significantly. Prices for UCRI Shares will be
determined in the marketplace and may be influenced by many factors other than
the financial performance and prospects of the Company, including the depth and
liquidity of the market for the shares, investor perception of the Company and
the industry in which the Company participates and general economic and market
conditions. See "Risk Factors -- Absence of Prior Trading Market for the Common
Stock."
The UCRI Shares distributed to DAKA International stockholders are expected
to be freely transferable, except for UCRI Shares received by persons who may be
deemed to be "affiliates" of the Company under the Securities Act. Persons who
may be deemed to be affiliates of the Company after the Distribution generally
include individuals or entities that control, are controlled by, or are under
common control with the Company, and may include the directors and principal
executive officers of the Company as well as any principal stockholder of the
Company. Persons who are affiliates of the Company will be permitted to sell
their UCRI Shares only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemptions afforded by Section 4(2) of the
Securities Act and Rule 144 thereunder.
TRADING MARKET OF DAKA STOCK
As of May 23, 1997, there were approximately 1,794 stockholders of record
of DAKA International. Following the consummation of the Offer, the DAKA Common
Stock may no longer meet the requirements of Nasdaq for continued listing and
may, therefore, be delisted by the National Association of Securities Dealers.
DIVIDEND POLICY
The Company does not currently anticipate paying any dividends or
distributions in the foreseeable future. The Company currently intends to retain
all earnings to support its growth strategy. The payment of dividends may be
prohibited under any future credit facility which the Company may obtain.
Payment of future dividends, if any, on the UCRI Common Stock will be at the
discretion of the Board after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion.
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<PAGE> 39
FEDERAL INCOME TAX CONSIDERATIONS
The following summary addresses the material federal income tax
consequences to holders of DAKA Common Stock from the Offer, the Merger and the
Distribution. The discussion is based on the application by the Company to the
relevant facts and circumstances of applicable federal income tax laws,
regulations and interpretations, as such laws, regulations and interpretations
have been analyzed by the Company with the advice of its counsel, Goodwin,
Procter & Hoar LLP. However, due to the uncertainties concerning the tax
treatment of the transaction, it is not feasible for the Company to obtain an
opinion of counsel on the specific tax consequences to a holder of DAKA Common
Stock. The summary does not address all aspects of federal income taxation that
may be relevant to particular holders of DAKA Common Stock and thus, for
example, may not be applicable to holders of DAKA Common Stock who are not
citizens or residents of the United States or holders of DAKA Common Stock who
are employees and who acquired their shares pursuant to the exercise of
incentive stock options; nor does this summary address the effect of any
applicable foreign, state, local or other tax laws. The discussion assumes that
each holder of DAKA Common Stock holds such shares as a capital asset within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code").
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PRECISE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE PROPOSED
TRANSACTIONS.
Tax Consequences of Receipt of Cash and Shares of UCRI Common
Stock. Assuming that Purchaser accepts DAKA Common Stock pursuant to the Offer,
and the Distribution and the Merger are consummated, holders of record of DAKA
Common Stock on the Distribution Record Date, and who also tender their DAKA
Shares in the Offer or have such shares exchanged for the Merger Price upon
consummation of the Merger, will receive for each DAKA Share consideration
consisting of (i) one UCRI Share and (ii) $7.50 in cash. Holders of record of
DAKA Common Stock on the Distribution Record Date, and who sell their DAKA
Shares after the Distribution Date other than pursuant to the Offer or the
Merger, will receive consideration consisting of (i) one UCRI Share for each
DAKA Share held on the Distribution Record Date and (ii) the proceeds from the
sale of their DAKA Shares. In each of the above-mentioned cases, the receipt of
such consideration will be a taxable transaction for federal income tax
purposes, and may also be a taxable transaction under applicable state, local,
foreign and other tax laws.
The proper federal income tax characterization of the Distribution as
either a dividend or as proceeds from the sale or exchange of DAKA Shares is
unclear. When addressing the issue of whether a distribution from a corporation
in connection with a disposition of all of the shares of that corporation is
treated as sale proceeds or as an ordinary income dividend, the courts and the
Internal Revenue Service ("IRS") have each reached inconsistent positions and
have used inconsistent methods of analysis.
Certain authorities support treatment of the Offer, the Distribution and
the Merger as a single integrated transaction in which a holder of DAKA Common
Stock receives the cash in an actual exchange for a portion of such holder's
DAKA Common Stock and receives UCRI Shares in a constructive redemption of such
holder's remaining DAKA Common Stock. Parent and the Company have agreed to
treat the purchase of DAKA Common Stock in the Offer, the Distribution and the
Merger in accordance with this analysis for all tax purposes. If this treatment
applies, a holder of DAKA Common Stock would recognize gain or loss equal to the
difference between (i) the sum of the amount of cash plus the fair market value
of the UCRI Shares received (which fair market value likely will equal the
average trading value per share of UCRI Common Stock on the first Nasdaq trading
day following the Distribution Date) and (ii) such holder's adjusted tax basis
for such holder's DAKA Common Stock. Such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if, on the date of the exchange,
the stockholder has held the DAKA Common Stock for more than one year.
Although there are authorities supporting the view that the UCRI Common
Stock received in the Distribution should be treated as having been received in
a constructive redemption of a portion of the DAKA Common Stock, certain other
authorities support treating the receipt of the UCRI Common Stock as taxable in
an independent transaction. If the Distribution is treated as an independent
transaction, the fair market
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<PAGE> 40
value of the shares of UCRI Common Stock would be taxable to the recipient as a
distribution from the Company under Section 301 of the Code. In either case, the
cash received by a holder of DAKA Common Stock would still be treated as
received in exchange for such holder's DAKA Common Stock and would be subject to
tax in the manner described above.
Under Section 301 of the Code, the amount of the Distribution would be
taxable as a dividend for federal income tax purposes to the extent of the
Company's current and accumulated earnings and profits. The amount of the
Distribution that exceeds such earnings and profits would first be treated as a
non-taxable return of capital to the extent of the stockholder's tax basis in
such stockholder's DAKA Common Stock, and such stockholder's tax basis in such
DAKA Common Stock would be reduced accordingly (but not below zero), and
thereafter as capital gain. The amount of any reduction in the stockholder's
basis in such DAKA Common Stock would increase the stockholder's gain (or reduce
the stockholder's loss) on the exchange of the DAKA Common Stock for cash. The
determination of a corporation's earnings and profits requires complex factual
and legal analyses; moreover, the amount of a corporation's current earnings and
profits cannot be determined until the close of its taxable year. To the extent,
if any, that the receipt of UCRI Common Stock is treated as a dividend under the
foregoing rules, certain corporate stockholders may be eligible for the
"dividends received deduction" ("DRD") with respect to such dividend, subject to
certain holding period and other limitations. Any such dividend received by a
corporate stockholder eligible for the DRD would constitute an "extraordinary
dividend" subject to the provisions of Section 1059 of the Code if, in general,
the value of the distribution exceeds 10% of the holder's basis in its DAKA
Shares. If Section 1059 were to apply, a corporate stockholder that has not held
its DAKA Shares for a period of more than two years prior to the dividend
announcement date would be required to reduce its basis in (thereby increasing
its gain or reducing its loss on the disposition of) such DAKA Shares by the
portion of the dividend that was excluded from income by reason of the DRD.
Under current law, the maximum federal tax rate applicable to long-term
capital gains recognized by an individual is 28%, and the maximum federal tax
rate applicable to ordinary income (including dividends) and short-term capital
gains recognized by individuals is 39.6%. The maximum federal tax rate
applicable to all capital gains and ordinary income recognized by a corporation
is 35%. It is possible that legislation may be enacted that would reduce the
maximum federal tax rate applicable to long-term capital gains, possibly with
retroactive effect. It is not possible to predict whether or in what form any
such legislation may be enacted.
Regardless of whether the receipt of the UCRI Common Stock is treated as a
constructive redemption or a distribution under Section 301 of the Code, a
holder's tax basis in the UCRI Common Stock generally will be equal to the fair
market value of the UCRI Common Stock on the Distribution Date, and such
holder's holding period for the UCRI Common Stock will begin on the day after
the Distribution Date.
Withholding. Unless a stockholder complies with certain reporting and/or
certification procedures or is an exempt recipient under applicable provisions
of the Code (and regulations promulgated thereunder), such stockholder may be
subject to a "backup" withholding tax of 31% with respect to any payments
received in the Offer, the Merger or as a result of the exercise of the holder's
dissenters' rights. Stockholders should contact their brokers to ensure
compliance with such procedures. Foreign stockholders should consult with their
tax advisors regarding withholding taxes in general.
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<PAGE> 41
PRO FORMA CAPITALIZATION
The Company is a holding company formed solely to effect the Distribution
and until the Distribution Date will have no material assets or operations.
Immediately prior to the Distribution, the Company's assets will consist of its
net investment in the Transferred Assets and all of the Company's operations
(other than the management of the Transferred Assets) thereafter will be
conducted through the Transferred Assets. The following presents the pro forma
capitalization of the Company assuming that the formation of the Company, and
the Contribution and the related transactions and events described in the Notes
to the Unaudited Pro Forma Combined Balance Sheet included in this Information
Statement had each been consummated on March 29, 1997.
Management believes that the assumptions used provide a reasonable basis on
which to present such Pro Forma Capitalization. The Pro Forma Capitalization
table below should be read in conjunction with the Company's historical combined
financial statements, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Unaudited Pro Forma Combined Balance
Sheet." The Pro Forma Capitalization table below is provided for informational
purposes only and should not be construed to be indicative of the Company's
capitalization or financial condition had the Contribution and such related
transactions and events been consummated on the date indicated. Further, the Pro
Forma Capitalization table may not reflect the capitalization or financial
condition which would have resulted had the Transferral Assets been operated as
a separate, independent company during such period, and are not necessarily
indicative of the Company's future capitalization or financial condition.
UNIQUE CASUAL RESTAURANTS, INC.
PRO FORMA CAPITALIZATION
MARCH 29, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------- ------------
<S> <C> <C>
Cash................................................................. $ 3,798 $ 12,256
======== ========
Long-term debt:
Capitalized lease obligations...................................... $ 4,517 $ 5,518
Notes payable...................................................... 581 581
-------- --------
Total long-term debt....................................... 5,098 6,099
Minority interests................................................... 1,104 1,104
Equity:
Group equity....................................................... 110,612 --
Preferred Stock, 5,000,000 shares authorized; none issued and
outstanding..................................................... -- --
Common stock, par value $.01 per share; 30,000,000 shares
authorized; 11,405,000 shares issued and outstanding after
giving effect to converting
the initial issuance of the Company's common stock into the
number of shares necessary to effect the Distribution........... -- 114
Additional paid-in capital......................................... -- 131,853
-------- --------
Total equity............................................... 110,612 131,967
-------- --------
Total capitalization................................................. $116,814 $139,170
======== ========
</TABLE>
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UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following Unaudited Pro Forma Combined Balance Sheet sets forth the
historical combined balance sheet of the Company assuming that the formation of
the Company and the related transactions and events described in the Notes to
such Unaudited Pro Forma Combined Balance Sheet had each been consummated on
March 29, 1997. The pro forma adjustments are based on the historical amounts of
DAKA International and not on fair value.
Under the terms of the Reorganization Agreement, immediately prior to the
Distribution, DAKA International will make a one-time contribution of certain
current foodservice net assets to the Company (the "Additional Capital
Contribution") 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.
However, those assets and liabilities, consisting of specific customer accounts
receivable, refundable income taxes, property and equipment, other assets,
vendor trade accounts payable, accrued expenses, long-term debt, other long-term
liabilities, contingent liabilities and deferred taxes, have not been included
in the historical combined financial statements since the specific assets and
liabilities that will ultimately comprise the Additional Capital Contribution
did not exist at the date of the Company's historical balance sheet presented.
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".
Management believes that the assumptions used provide a reasonable basis on
which to present such Unaudited Pro Forma Combined Balance Sheet. The unaudited
pro forma combined balance sheet, however, has been prepared using financial
data as of March 29, 1997 and there can be no assurance that the amounts
ultimately contributed to the Company will not be substantially different. The
Unaudited Pro Forma Combined Balance sheet should be read in conjunction with
the Company's historical combined financial statements and notes thereto
included elsewhere in this Information Statement and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The Unaudited
Pro Forma Combined Balance Sheet should not be construed to be indicative of the
Company's financial position had the Contribution and such related transactions
and events described been consummated on the date contributed. Furthermore, the
Unaudited Pro Forma Combined Balance Sheet may not reflect the financial
condition which would have resulted had the Company been operated as a separate,
independent company during such period, and is not necessarily indicative of the
Company's future financial condition.
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<PAGE> 43
UNIQUE CASUAL RESTAURANTS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 29, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR
ADDITIONAL
CAPITAL
HISTORICAL CONTRIBUTION PRO FORMA
---------- ------------ ------------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash................................................ $ 3,798 $ 8,458(1) $ 12,256
Accounts receivable, net............................ 5,460 40,158(2) 45,618
Inventories......................................... 4,389 -- 4,389
Refundable income taxes............................. -- 1,800 1,800
Deferred tax assets (liabilities)................... (676) 3,845(3) 3,169
Prepaid expenses and other current assets........... 2,854 2,854
-------- ------- --------
Total current assets........................ 15,825 54,261 70,086
Property and equipment, net........................... 113,453 1,915(4) 115,368
Investments in, and advances to, affiliates........... 5,000 -- 5,000
Deferred tax assets................................... 883 883
Other assets, net..................................... 12,126 1,810(5) 13,936
-------- ------- --------
Total assets................................ $147,287 $57,986 $205,273
======== ======= ========
LIABILITIES & GROUP EQUITY:
Current liabilities:
Accounts payable.................................... $ 9,719 $21,990(6) $ 31,709
Accrued expenses.................................... 8,432 12,652(8) 21,084
Current portion of long-term debt................... 1,096 118(7) 1,214
-------- ------- --------
Total current liabilities................... 19,247 34,760 54,007
Long-term debt........................................ 4,002 883(7) 4,885
Other long-term liabilities........................... 12,322 988(9) 13,310
Minority interests.................................... 1,104 -- 1,104
Group equity.......................................... 110,612 21,355(10) 131,967
-------- ------- --------
$147,287 $57,986 $205,273
======== ======= ========
</TABLE>
35
<PAGE> 44
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 29, 1997
(1) To reflect the transfer to the Company of excess Foodservice Business
depository cash and the additional borrowings up to the long-term debt
balance assumed by Purchaser pursuant to the Merger Agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."
(2) To reflect the transfer to the Company of all Foodservice Business trade
accounts receivable.
(3) To reflect the transfer to the Company of anticipated income tax refunds
resulting from the current year loss of DAKA International and the
temporary differences resulting from the Additional Capital Contribution.
(4) To reflect the transfer to the Company of certain corporate property and
equipment.
(5) To reflect the transfer to the Company of a long-term note receivable due
from a certain educational institution.
(6) To reflect the transfer to the Company of Foodservice Business trade
accounts payable.
(7) To reflect the transfer to the Company of certain corporate capital lease
obligations.
(8) To reflect (i) the transfer to the Company of all Foodservice Business
accrued expenses; and (ii) to record certain transaction costs including
professional fees, insurance costs associated with the shareholder lawsuit
described in "Business -- Legal Proceedings", and certain costs associated
with foodservice contracts.
(9) To reflect the transfer to the Company of all Foodservice Business
long-term accrued expenses, including health and workers' compensation
accruals and reserves.
(10) To reflect the net increase in group equity resulting from the Additional
Capital Contribution.
36
<PAGE> 45
SELECTED HISTORICAL COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents selected historical combined statement of
operations and balance sheet data of the Company. The balance sheet data
presented below as of June 29, 1996 and July 1, 1995 and the statement of
operations data presented below for each of the fiscal years in the three-year
period ended June 29, 1996 are derived from the the Company's audited combined
financial statements included elsewhere herein. The balance sheet data as of
July 3, 1993, June 26, 1993, June 27, 1992, March 29, 1997 and March 30, 1996
and the statement of operations data for the two years ended June 26, 1993 and
for the nine months ended March 29, 1997 and March 30, 1996, respectively, 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.
The operating results for the nine months ended March 29, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
The selected historical 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 Information Statement.
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------- ---------------------
JUNE 29, JULY 1, JULY 3, JUNE 26, JUNE 27, MARCH 29, MARCH 30,
1996 1995 1994 1993 1992 1997 1996
-------- -------- -------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $183,755 $137,730 $100,677 $83,723 $56,309 $152,360 $135,043
Income (loss) from continuing operations
before income taxes and minority
interests................................. (6,931) 4,697 3,980 (38) (398) (12,333) (4,148)
Income (loss) from continuing operations.... (5,670) 1,798 1,300 361 (1) (8,548) (3,828)
Net income (loss)........................... (5,670) 1,798 1,300 361 (1) (8,548) (3,828)
Pro forma loss per share.................... (0.50) -- -- -- -- (0.75) --
BALANCE SHEET DATA:
Total assets................................ 142,348 102,431 78,365 52,517 41,072 147,963 131,145
Long term debt, including current portion... 6,366 4,009 3,372 3,253 14,703 5,098 8,115
Group equity................................ 108,894 73,979 57,666 39,921 17,784 110,612 94,980
</TABLE>
37
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations is based upon the separate historical combined
financial statements of the Company, which present the Company's results of
operations, financial position and cash flow. 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. Regardless of the allocation of these assets and liabilities,
however, 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 of
DAKA International which were not directly related to the Transferred Assets,
including costs for corporate logistics, information technologies, finance,
legal and corporate executives. These allocations 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
development of the Company's separate combined financial statements to be
reasonable.
The financial information included herein may not, however, 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. The historical financial information included herein also does
not reflect any changes which may occur in the operations of the Company
following the Distribution.
The Company historically has operated as part of DAKA International.
Following the Distribution, the Company will be a stand-alone entity with
objectives and strategies separate from those of DAKA International. The Company
will focus on operating the Restaurant Business.
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
Information Statement are forward-looking statements. Forward-looking statements
involve risks and uncertainties, many of which may be beyond the Company's
control. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors which may cause such a
difference are set forth in this Information Statement under the heading "Risk
Factors" and 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. The safe
harbor for forward-looking statements provided in Section 27A of the Securities
Act and Section 21E of the Exchange Act is unavailable to the Company since it
currently is not subject to the reporting requirements of Section 13(a) or
Section 15(d) of the Exchange Act.
38
<PAGE> 47
PROPOSED TRANSACTION
The Company has been formed for the purpose of effecting the Distribution
in order to divest DAKA International of the Restaurant Business so that Parent
may purchase the Foodservice Business pursuant to the Merger Agreement for
approximately $195 million, including the assumption of DAKA International
indebtedness up to $110 million.
Pursuant to the Merger Agreement, Purchaser commenced the Offer on May 29,
1997. Following the purchase of DAKA Shares under the Offer and satisfaction of
certain other conditions, including approval by DAKA International stockholders
as may be required by law, DAKA International and Purchaser will consummate the
Merger. See "The Offer, the Merger and Certain Related Transactions."
In addition, prior to the consummation of the Offer, DAKA International
will effect the Distribution. After giving effect to the Distribution and the
consummation of the Offer, the Restaurant Business will be continued through the
Company. See "The Reorganization."
RECENT DEVELOPMENTS
All of the assets of the Company have been pledged as collateral under DAKA
International's various debt agreements and the Company is a guarantor of any
obligations pursuant to such agreements. During June 1996, DAKA International
amended its revolving line-of-credit agreement principally to increase its
borrowing capacity and extend the maturity date to June 30, 1999 (the "June
Agreement"). At June 29, 1996, DAKA International was not in compliance with the
debt service coverage, minimum tangible net worth and fixed charge coverage
covenants contained in the June Agreement. On October 15, 1996, DAKA
International obtained a waiver of noncompliance related to such covenants from
its lenders and renegotiated certain terms and conditions of the June Agreement
(the "October Agreement").
On May 7, 1997, DAKA International renegotiated certain terms and
conditions of the October Agreement (the "May Agreement," collectively the
"Principal Credit Agreements") whereby DAKA International's borrowing limit will
be sequentially reduced to $72.5 million by March 31, 1998. The maturity date
was extended to April 2, 1998 and certain loan covenants were amended.
RESULTS OF OPERATIONS
The Company was formed for the purpose of effecting the Distribution in
order to divest DAKA International of the Transferred Assets, including the
Restaurant Business in connection with the Offer. The Distribution is a
condition of the Offer required by Purchaser. The Company does not have an
operating history as a separate entity. Accordingly, the combined financial
statements included herein may not necessarily reflect the results of
operations, financial position and cash flows of the Restaurant Business had the
Company been operated as a separate entity during the periods presented.
The Company has incurred significant operating losses over the past two
years and had a loss before income tax benefit minority interests of
approximately $12.3 million for the nine months ended March 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 Fuddrucker
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.
DAKA International historically funded the Company's operations and capital
expenditures. At March 29, 1997, DAKA International had approximately $103.6
million outstanding under its bank credit facility. It is a requirement of the
Offer that Parent assume such debt and repay it in full upon consummation of the
39
<PAGE> 48
Offer. As a result, following the Distribution, the Company is expected to have
no bank debt, though the Company anticipates obtaining a credit facility for
working capital purposes after the Distribution. After the Distribution the
Company will continue 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 restaurant expansion of
Fuddruckers 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 capital
and general corporate expenditures, the Company expects to be required to raise
additional funds through bank financings or other means to meet its longer term
needs. See "Risk Factors -- Limited Capital; Need for Bank Financing." Following
the Distribution, the Company will be responsible for obtaining its own
financing. The Company has never obtained its own financing. There can be no
assurance that any such additional funding will be available to the Company or,
if available, that it will be on reasonable terms.
Notwithstanding these risks, the Company believes 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 March 29,
1997 and the Transaction, should provide it with the best opportunity for
improved overall profitably.
Summary
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.
The Company incurred a net loss of $8.5 million for the first nine months
of fiscal 1997 compared with a net loss of $3.8 million for the first nine
months of fiscal 1996. Included within the 1996 loss are merger costs and
impairment charges aggregating $5.9 million.
Total revenues for the nine months ended March 29, 1997, increased 12.8% to
$152.4 million compared with $135.0 million last year.
Loss before income tax benefit and minority interests amounted to
approximately $12.3 million for the first nine months of fiscal 1997 compared
with income from operations of $1.8 million, excluding impairment charges and
merger costs, in the same period a year ago. This increase in operating loss was
primarily attributable to lower average store sales in the Fuddruckers segment
which reduced the Company's ability to leverage fixed costs, lower Fuddruckers
franchise income, poor operating results in the Specialty Concepts segment and
higher selling, general and administrative costs, offset, in part, by higher
sales in the Champps segment due to one new store being opened between periods.
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 and $4.0 million in fiscal
1994. 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 and $1.3
million in 1995 and 1994, respectively.
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, 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
40
<PAGE> 49
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. See Note 3 to
Combined Financial Statements.
Management is reviewing the Company's restaurant units to determine whether
the Company's financial resources after the Distribution will be sufficient to
continue supporting restaurant units with marginal performance. To the extent
that management determines through its ongoing analysis that the Company will
not continue to support such underperforming restaurants, the Company
anticipates recording a charge during the fourth quarter of fiscal 1997 to
provide for exit costs associated with these restaurant units. Further, the
Company anticipates recording additional charges during the fourth quarter of
fiscal 1997 to provide for the costs of downsizing the Company's corporate and
field functions after the Transaction. While the precise amount of such charges
has not yet been determined, management currently expects it to be between $20
million and $25 million.
Fuddruckers
The following table sets forth, for the periods presented, certain
financial information for Fuddruckers:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
MARCH 29, MARCH 30,
1996 1995 1994 1997 1996
-------- -------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Restaurant sales...................... $131,592 $110,703 $87,030 $102,790 $96,788
======== ======== ======= ======== =======
Sales from Fuddruckers-owned
restaurants......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs......................... (29.0) (28.8) (28.8) (30.4) (28.4)
Product costs....................... (28.2) (27.8) (27.8) (27.6) (27.9)
Other operating expenses............ (27.0) (25.7) (25.7) (31.5) (26.6)
Depreciation and amortization....... (6.1) (4.8) (4.6) (7.0) (5.9)
Impairment charges.................. (1.9) -- -- -- (2.5)
-------- -------- ------- -------- --------
Restaurant unit contribution.......... 7.8% 12.9% 13.1% 3.5% 8.7%
======== ======== ======= ======== =======
Restaurant unit contribution.......... $ 10,324 $ 14,252 $11,400 $ 3,552 $ 8,383
Franchising and royalty income........ 6,575 5,372 4,318 2,856 5,755
-------- -------- ------- -------- -------
Restaurant unit, franchising and
royalty contribution................ $ 16,899 $ 19,624 $15,718 $ 6,408 $14,138
======== ======== ======= ======== =======
</TABLE>
COMPARISON OF NINE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
Sales from Fuddruckers-owned restaurants increased approximately $6.0
million, or 6.2%, to $102.8 million for the first nine months of fiscal 1997
compared with $96.8 million for the comparable period last year. This increase
reflects the net addition of nine new Fuddruckers-owned restaurants during the
periods, offset primarily by a 7.7% decline in comparable restaurant sales for
the first nine months of fiscal 1997 and lower per restaurant average sales
volumes within Fuddruckers compared with last year.
Restaurant unit contribution, excluding impairment charges, for the first
nine months of fiscal 1997 decreased approximately $7.2 million, or 67.2%, to
$3.6 million compared with $10.8 million a year ago. 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.
Franchising and royalty income decreased approximately $2.9 million for the
nine months ended March 29, 1997. During the first nine months of fiscal 1997,
the Company did not execute any international multi-unit development agreements.
Royalty income from domestic franchised restaurants remained consistent for the
first nine months of fiscal 1997 compared to last year.
41
<PAGE> 50
COMPARISON OF FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
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. Sales at Fuddruckers-owned restaurants increased $23.7 million or 27.2%
to $110.7 million in 1995 compared with $87.0 million in 1994. This increase is
due to a combination of $12.7 million of sales at 17 restaurants acquired from
franchisees during the second half of 1994 and in 1995, $14.6 million of sales
at restaurants during their first year of operation, including 22 new
restaurants opened in 1995 and a 0.8% increase in comparable restaurant sales
offset, in part, by a $1.5 million decrease in sales resulting from the closing
and/or sale of five restaurants and the effect of 52 weeks of sales in 1995
whereas 1994 had 53 weeks.
Restaurant unit contribution, excluding impairment charges, decreased $1.5
million or 10.5% 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. Restaurant unit contribution increased $2.9 million or 25.4% to $14.3
million in 1995 as compared with $11.4 million in 1994. The improvement in 1995
operating margins is attributable to lower operating expenses associated with
the acquired Atlanta restaurants, strong operating results at the new
restaurants opened, the closing of marginally profitable restaurants, and
improved product costs through national purchasing programs. Depreciation and
amortization in 1996 increased significantly as a percentage of sales compared
with 1995 and 1994 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 offset, in part, by the closing of 7 franchised restaurants during 1996.
In 1995, franchise income increased $1.1 million compared with 1994 due to
revenues generated from the sale of domestic and international multi-unit
development agreements domestically offset by the reduction of royalty income
associated with the acquisition of 5 franchised restaurants in 1995.
42
<PAGE> 51
Champps
The following table sets forth certain financial information for Champps
restaurants:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------
MARCH 29, MARCH 30,
1996 1995 1994 1997 1996
------- ------- ------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Restaurant sales.......................... $41,593 $19,257 $8,273 $41,847 $29,612
======= ======= ====== ======= =======
Sales from Champps-owned restaurants...... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs............................. (33.2) (31.0) (31.4) (32.6) (33.0)
Product costs........................... (28.8) (29.0) (28.0) (28.9) (28.7)
Other operating expenses................ (22.4) (20.5) (20.2) (23.5) (22.4)
Depreciation and amortization........... (8.7) (5.5) (3.4) (8.2) (7.8)
Impairment charges...................... (0.2) -- -- -- (0.2)
Merger costs............................ (6.3) -- -- -- (9.8)
------- ------- ------ ------- -------
-
Restaurant unit contribution.............. 0.4% 14.0% 17.0% 6.8% (1.9)%
======= ======= ====== ======= =======
Restaurant unit contribution.............. $ 150 $ 2,689 $1,409 $ 2,857 $ (575)
Franchising and royalty income............ 555 636 554 385 427
------- ------- ------ ------- -------
Restaurant unit, franchising and royalty
contribution............................ $ 705 $ 3,325 $1,963 $ 3,242 $ (148)
======= ======= ====== ======= =======
</TABLE>
COMPARISON OF NINE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
Sales in Champps-owned restaurants increased approximately $12.2 million,
or 41.3%, to $41.8 million for the first nine months of fiscal 1997 compared
with $29.6 million a year ago. The increase primarily reflects the addition of
six new Champps-owned restaurants in fiscal 1996 (open for all of 1997), one new
Champps-owned restaurant opened in 1997, continued positive increases in
comparable restaurant sales and higher per restaurant average sales volumes for
the first nine months of fiscal 1997.
Restaurant unit contribution, excluding impairment charges and merger
costs, for the first nine months of fiscal 1997 increased approximately $0.5
million, or 22.9%, to $2.9 million compared with $2.4 million a year ago.
Operating margins for the nine months ended March 29, 1997 were impacted by a
10.6% increase in comparable restaurant sales and improved product costs offset,
in part, by higher other operating expenses and depreciation and amortization
expenses associated with store openings and pre-opening costs.
COMPARISON OF FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
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. Sales at
Champps-owned restaurants increased $11.0 million, or 132.5%, to $19.3 million
in 1995 as compared to $8.3 million in 1994, due to the opening of two new
restaurants.
Restaurant unit contribution, excluding impairment charges and merger
costs, increased 3.6% to $2.8 million in 1996 as compared to $2.7 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. Income from restaurant operations increased 92.9% to $2.7 million in 1995
as compared to $1.4 million in 1994 primarily due to revenues derived from new
restaurants. Franchise incoming and royalty has remained relatively consistent
in 1996, 1995 and 1994.
43
<PAGE> 52
Specialty Concepts
The following table sets forth certain financial information for Specialty
Concepts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
MARCH 29, MARCH 30,
1996 1995 1994 1997 1996
------ ------ ------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Unit sales............................... $2,865 $1,738 $ 495 $3,829 $2,115
====== ====== ====== ====== ======
Sales from unit operations............... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs............................ (29.5) (37.0) (35.8) (46.2) (20.6)
Product costs.......................... (17.1) (24.8) (17.2) (28.5) (38.6)
Other operating expenses............... (19.3) (9.1) (12.0) (27.8) (27.3)
Depreciation and amortization.......... (5.3) (3.0) (5.3) (15.0) (3.5)
Impairment charges..................... (17.9) -- -- -- (24.2)
Merger costs........................... (10.5) -- -- -- --
------ ------ ------ ------ ------
Unit contribution........................ 0.4% 26.1% 29.7% (17.7)% 14.6%
====== ====== ====== ====== ======
Unit contribution........................ $ (11) $ 453 $ 147 $ (676) $ 308
Franchising and royalty income........... 575 24 7 653 346
------ ------ ------ ------ ------
Unit and franchising contribution........ $ 564 $ 477 $ 154 $ (23) $ 654
====== ====== ====== ====== ======
</TABLE>
COMPARISON OF MARCH 29, 1997 AND MARCH 30, 1996
Sales in Specialty Concepts units increased approximately $1.7 million to
$3.8 million for the nine months ended March 29, 1997 compared with $2.1 million
for the comparable nine months last year. This increase reflects the expansion
initiatives in nontraditional restaurant venues in late fiscal 1996 and
throughout fiscal 1997. Unit contribution, excluding impairment charges, 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. The Company is currently evaluating various
strategic options relative to its specialty concept business as a whole. At
March 29, 1997, Specialty Concepts consisted of six Fudd Cafes, seven Leo's
Deli's, three Company-owned and approximately 25 franchised Great Bagel and
Coffee units and over 400 French Quarter Coffee locations.
COMPARISON OF FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
Sales in Specialty Concepts units increased approximately $1.2 million to
$2.9 million in 1996 compared with $1.7 million in 1995 and $0.5 million in
1994. 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 and 1994. No units were opened in 1995. Unit contribution was
essentially break-even in 1996 compared with unit contribution of approximately
$0.5 million in 1995 and $0.1 million in 1994. This decrease reflects the impact
of higher operating costs in the Fudd Cafe units and the development and
construction of the Company's "Leo's Deli" concept.
Franchising and royalty income increased approximately $0.5 million in 1996
compared with 1995 and 1994 amounts due to an increased number of multi-unit
franchise agreements signed with Great Bagel and Coffee franchisees.
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<PAGE> 53
Selling, General and Administrative Expenses
Included within the Company's historical selling, general and
administrative expenses are allocations of certain general corporate expenses of
DAKA International which were not directly related to the Transferred Assets,
including costs for corporate logistics, information technologies, finance,
legal and corporate executives. These allocations 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
development of the Company's separate combined financial statements to be
reasonable.
COMPARISON OF NINE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 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 $3.6 million to $21.9 million
for the nine months ended March 29, 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. Selling, general
and administrative expenses expressed as a percentage of total restaurant and
unit sales increased to 14.7% for the nine months ended March 29, 1997, compared
with 14.2% for the same period last year. Subsequent to March 29, 1997, the
Company has taken certain actions, including the elimination of various
positions in the corporate office, to further reduce its general and
administrative expenses.
COMPARISON OF FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
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 $24.4 million, $18.6 million and $13.6
million in 1996, 1995 and 1994, respectively. Selling, general and
administrative expenses as a percentage of total restaurant and unit sales of
$176 million, $132 million and $96 million in 1996, 1995 and 1994, respectively,
aggregated 13.9%, 14.1% and 14.2%, respectively.
The $5.8 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. The $5.0 million
increase in selling, general and administrative expenses in 1995, compared with
1994, was primarily due to increased Fuddruckers' and Champps' marketing
expenses and higher Champps' overhead costs.
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 30% for the nine-months ended March 29, 1997,
compared with an effective tax expense rate of approximately 110% for the
comparable period last year. The effective tax rate reflects the federal tax
benefit expected to be received by the Company. No benefit has been provided on
the state operating losses where such losses cannot be carried back by the
Company. As of June 29, 1996 the Company had net operating loss carryforwards of
approximately $11.5 million. The carryforwards expire at various dates through
2011 and a portion of such carry forwards 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. The Company's
effective tax rate on income was 12.5%, 35.7% and 32.8% in 1996, 1995 and 1994,
respectively.
Accounting Pronouncement Not Yet Adopted
In March 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
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<PAGE> 54
No. 128 been effective for the nine months ended March 29, 1997 there would be
an immaterial effect to the Company's report pro forma loss per share.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1997, the Company had a working capital deficiency of $3.4
million, a decrease of $4.8 million compared to working capital of $1.4 million
at June 29, 1996. The decrease in working capital is principally due to the loss
incurred by the Company during the period. Capital expenditures for restaurant
expansion during the first nine months of fiscal 1997 were funded primarily
through $9.4 million of sale-leaseback and equipment financing under existing
facilities.
At June 29, 1996, working capital amounted to $1.4 million, an increase of
$3.5 million, compared with a working capital deficiency of $2.1 million at July
1, 1995. Cash at June 29, 1996 aggregated $5.3 million, a decrease of $0.4
million compared with cash of $5.7 million at July 1, 1995. Immediately prior to
the Distribution, DAKA International will make a one-time contribution of
certain current foodservice net assets to the Company to provide the Company
with additional working capital to fund operations as such assets and
liabilities are liquidated. 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 over the next twelve months.
All of the assets of the Company have been pledged as collateral under DAKA
International's various debt agreements and the Company is a guarantor of any
obligations pursuant to the Principal Credit Agreements. See "-- Recent
Developments." In connection with the Merger, Parent will assume up to $110
million of the outstanding debt under the Principal Credit Agreements. Any
amounts outstanding in excess of $110 million as of the Offer Closing Date will
be repaid to the banks by the Company. At March 29, 1997, DAKA International had
approximately $103.6 million outstanding under its Principal Credit Agreements.
Pursuant to the Additional Capital Contribution, the net current assets
(approximately $19.5 million as of March 29, 1997) of the Foodservice Business
will be transferred to the Company as of the Offer Closing Time. The Company and
Purchaser have entered into the Post-Closing Covenants Agreement which provides
for Purchaser to act as agent for the Company in collecting such receivables and
paying such payables for 120 days after the Offer Closing Time. Beginning with
the eighth week after the Offer Closing Time, Purchaser will remit to the
Company every two weeks the net positive cash flow derived from collecting such
receivables and paying such payables. After 120 days, the net uncollected
receivables and unpaid payables, if any, will be returned to the Company. The
extent to which Purchaser can control the timing and amount of cash payments to
the Company from the collection of trade accounts receivable could have a
material adverse effect on the Company's cash flow and financial condition.
DAKA International historically funded the Company's operations and capital
expenditures. At March 29, 1997, DAKA International had approximately $103.6
million outstanding under its bank credit facility. It is a requirement of the
Offer that Parent assume such debt and repay it in full upon consummation of the
Offer. As a result, following the Distribution, the Company is expected to have
no bank debt, though the Company anticipates to obtain a credit facility for
working capital purposes after the Distribution. After the Distribution the
Company will continue 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 financings or other means to meet its longer term
needs. See "Risk Factors -- Limited Capital; Need for Bank Financing." At the
Offer Closing Time, all debt outstanding under the Principal Credit Agreements
will be repaid and the Principal Credit Agreements will be terminated. The
Company is seeking to obtain a line-of-credit on its own behalf and is
optimistic that a line-
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<PAGE> 55
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.
At March 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 1997 and the first half of fiscal 1998, respectively.
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 the balance of fiscal 1997 or the first half of
fiscal 1998.
In January 1997, Fuddruckers obtained a commitment for $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 a
commitment for $40 million of sale-leaseback financing for the construction of
up to 10 new Champps restaurants. At June 29, 1996, the entire $40 million
committed amount of sale-leaseback financing was available for use. Any unused
commitment expires in December 1997.
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<PAGE> 56
BUSINESS
OVERVIEW
Unique Casual Restaurants, Inc. (the "Company") was incorporated in the
State of Delaware on May 27, 1997. The Company's principal executive offices are
located at One Corporate Place, 55 Ferncroft Road, Danvers, Massachusetts 01923,
and its telephone number is (508) 774-9115. Following the Distribution, the
Company will operate the Restaurant Business, consisting of the restaurant
operation businesses formerly owned and operated by DAKA International.
References to "the Company" below refer to the Restaurant Business after the
Distribution, or as operated by DAKA International prior to the Distribution, as
the context requires.
DAKA International was formed in 1988 in connection with the merger of Daka
and Fuddruckers and, prior to the Contribution and Distribution, was a
diversified foodservice and restaurant company operating in the contract
foodservice management industry and in the restaurant industry. Following the
Contribution and Distribution, DAKA International, through its Daka subsidiary,
will continue to operate the Foodservice Business, including restaurant-style
contract foodservice management at a variety of schools and colleges, corporate
offices, factories, healthcare facilities, museums and government offices as a
subsidiary of Purchaser.
Fuddruckers owns, operates and franchises Fuddruckers restaurants, which
specialize in moderately-priced, casual dining for families and adults.
In fiscal year 1994, the Company acquired a 57% voting interest in
Americana Dining Corporation ("ADC"), a newly formed company which acquired two
restaurants operated under the name "Champps Sports Cafe," pursuant to a license
from Champps. Champps owns, licenses and franchises Champps Americana
restaurants, which specialize in providing an energetic, upper-scale, casual
theme dining experience to a broad customer base, including business
professionals, families and adults. In fiscal year 1996, the Company acquired
Champps and the remaining 43% voting interest in ADC.
In fiscal year 1996, DAKA International also acquired Great Bagel and
Coffee. Great Bagel and Coffee owns, operates and franchises its concept,
featuring a full line of fresh-baked bagels and distinctive cream cheeses,
gourmet coffees and sandwiches in a cafe setting.
FUDDRUCKERS
Operations
Fuddruckers restaurants, with an average bill of $6.25 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, 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, hand-dipped
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 neon beverage signs, wood tables and
chairs and, in some
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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 additional dining area has colorful
yellow awnings and patio-style tables and chairs and, in some restaurants, a
wall of doors which may be opened, weather permitting.
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 year 1996 and those planned for fiscal year 1997 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
11:00 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.
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. 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. Ten outlets were opened in fiscal year 1996.
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 thirteen districts, each supervised by a Director of
Operations. On average, each Director of Operations supervises nine 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.
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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. Since implementing
this promotion in 1990, Fuddruckers has experienced increased guest traffic
while significantly increasing the number of kids meals served, and still
improving its operating margins.
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.
The average total cost to construct a typical Fuddruckers restaurant, where
Fuddruckers purchases real estate, depending upon its location, is approximately
$1.45 million, which includes $255,000 for furniture, fixtures and equipment,
$480,000 for building and improvements, $665,000 for land and site work, and
$50,000 related to pre-opening costs of the restaurant. In 1995, Fuddruckers
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. During fiscal
1996, Fuddruckers opened 14 new restaurants pursuant to such sale-leaseback
arrangement.
The average total cost to construct a new Fuddruckers restaurant where
Fuddruckers enters into a leasing arrangement is approximately $785,000 which is
comprised of $255,000 for furniture, fixtures and equipment, $480,000 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 the balance of fiscal
1997 and the first half of 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 37 Fuddruckers franchisees, 15 operate multiple restaurants,
and 22 have operated Fuddruckers restaurants for more than five years.
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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 May 27, 1997,
royalty buy-down agreements have been executed with seven multi-unit
franchisees.
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Fuddruckers Restaurants -- Company Owned
The following table sets forth the locations of restaurants owned and
operated by Fuddruckers as of May 27, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
DOMESTIC - TOTAL 122 ILLINOIS OHIO
ALABAMA Addison Cincinnati(2)
Birmingham Aurora Columbus(4)
ARIZONA Calumet City Fields Ertel
Flagstaff Downers Grove N Forest Park
Glendale Downers Grove S Hilliard
Mesa(2) Highland Park Mason
Phoenix(2) Matteson Norwood
Scottsdale Orland Park TEXAS
Tempe Palatine Austin(3)
Tucson Schaumburg (2) Clearlake
CALIFORNIA INDIANA Coperfield
Burbank Merrillville Dallas
Chula Vista KANSAS Houston (10)
La Mesa Overland Park Irving
Lake Forest KENTUCKY Kingwood
Lakewood Florence Plano
Mira Mesa MARYLAND San Antonio(4)
Pasadena Annapolis Woodlands
San Diego Baltimore UTAH
COLORADO Gaithersburg Layton
Aurora(2) Pikesville Orem
Lakewood Rockville Salt Lake City
Littleton MASSACHUSETTS Sandy
Marston Park Boston VIRGINIA
Thornton North Andover Alexandria
GEORGIA Saugus Annandale
Alpharetta MICHIGAN Chesapeake (2)
Athens Kentwood Colonial Heights
Duluth MINNESOTA Fairfax
Marietta Bloomington Falls Church
Norcross Brooklyn Center Fredericksburg
Peachtree City Burnsville Herndon
Snellville Eden Grove Midlothian
Town Center Mall Maple Grove Newport News
Tucker Roseville Richmond
St. Louis Park Vienna
MISSOURI Virginia Beach
Independence Woodbridge
Maryland Heights WISCONSIN
St. Louis(2) Brookfield
INTERNATIONAL - TOTAL 3
CANADA
Calgary
Edmonton
Regina
</TABLE>
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Fuddruckers Restaurants -- Franchised Locations
<TABLE>
The following tables set forth the locations of restaurants operated by
Fuddruckers franchisees as of May 27, 1997:
<CAPTION>
<S> <C> <C>
DOMESTIC - TOTAL 69 NEW YORK SOUTH DAKOTA
CALIFORNIA Amherst Rapid City
Buena Park Westbury Sioux City
Citris Heights NORTH CAROLINA TENNESSEE
Concord Asheville Kingsport
FLORIDA Charlotte Nashville
Altmonte Springs Durham TEXAS
Clearwater Greensboro College Station
Coconut Grove Hickory Laredo
Coral Springs Huntersville Lubbock
Ft. Lauderdale Matthews McAllen
Miami Wilmington Midland
N. Miami Beach NORTH DAKOTA San Antonio(2)
Plantation Fargo Temple
Tallahassee OHIO Waco
Tampa Akron INTERNATIONAL - TOTAL 10
MARYLAND Canton AUSTRALIA
Owings Mills Cleveland Sydney
MICHIGAN South Euclid BAHRAIN
Flint OREGON Manama
Novi Lake Oswego Adliya
Sterling Heights Portland CANADA
MONTANA PENNSYLVANIA Saskatoon
Billings Greensburg INDONESIA
Missoula Hamarville Kelapa Gadung
NEBRASKA Philadelphia KUWAIT
Omaha Fairless Hill Kuwait City
NEW JERSEY SOUTH CAROLINA PUERTO RICO
New Brunswick Columbia Caugus
Paramus Greenville(2) SAUDI ARABIA
Parsippany Hilton Head Al Khobar
Tom's River Myrtle Beach Jeddah
Turnersville North Myrtle Beach Riyadh
Union Spartanburg
Voorhees
Wayne
</TABLE>
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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 Americana restaurants range in size from 7,000 to 12,000 square
feet while the new Champps Americana restaurant prototype is approximately 8,700
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, which
varies depending on 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 dining atmosphere 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 Americana 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 Americana restaurants will vary
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<PAGE> 63
based upon state laws concerning operating hours. Sunday brunch is served
beginning at 10:00 a.m. Each Champps Americana restaurant maintains standardized
food preparation and service manuals which are designed to enhance consistency
of operations among the restaurants. Although Champps Americana 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 Americana 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 Company's Chief Operating Officer. Managers are
compensated with a base salary plus 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 Americana restaurants have relied on
location and customer word-of-mouth. However, Champps-owned restaurants expend
varied amounts 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 Americana 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.
The average total cost to construct a new Champps Americana 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 Americana 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.
Franchising
Champps offers 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 no franchisees operating multiple restaurants.
A typical franchisee pays an initial fee of $75,000 per restaurant, a part
of which may constitute 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
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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 grants 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 and conducts
its own audit of the franchisee's books and records. 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.
Restaurant Locations
The following table sets forth the locations of restaurants owned and
operated by Champps and owned and operated by franchisees as of May 27, 1997:
<TABLE>
<CAPTION>
OWNED RESTAURANT LOCATIONS FRANCHISED RESTAURANT LOCATIONS
-------------------------- -------------------------------
DOMESTIC -- TOTAL 12 DOMESTIC -- TOTAL 10
<S> <C>
CALIFORNIA MINNESOTA
Irvine Burnsville
COLORADO Maple Grove
Denver Maplewood
FLORIDA Minneapolis
Ft. Lauderdale New Brighton
INDIANA St. Paul
Indianapolis NEBRASKA
OHIO Omaha
Columbus NORTH CAROLINA
Lyndhurst Charlotte
MINNESOTA SOUTH DAKOTA
Minnetonka Sioux Falls
Richfield WISCONSIN
NEW JERSEY Greenfield
Edison
Marlton
TEXAS
Addison
VIRGINIA
Reston
</TABLE>
Expansion Strategy
The Company's long-term objective is to expand the Champps Americana
restaurant concept nationally by opening additional Champps-owned and operated
restaurants. Champps does not anticipate significant expansion through new
franchise agreements, but expects that new franchise locations will open
pursuant to existing franchise development and licensing agreements. 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 locations of
Champps restaurants are very important. Potential sites are
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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.
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
December 1, 1992, the Company entered into a five-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. The Company believes that this
agreement is unique because it provides for a sharing between Alliant and the
Company of the savings that may be obtainable through purchasing from selected
vendors. 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.
Historically, the Company's purchasing programs have enabled Fuddruckers to
maintain the same menu prices for its signature hamburgers since December 1990.
However, in December 1996 the Company implemented a 3% price increase for its
core menu items. 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 the centralized
accounting, payroll, cash management and information systems improve its ability
to control and manage its operations efficiently.
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
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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 35% of Champps' total restaurants sales during fiscal year
1996. 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 has registered a number of trademarks and service marks with
the United States Patent and Trademark Office and with certain states. In
addition, the Company is in the process of registering certain trademarks with
respect to its signature concepts including, among others, French Quarter Coffee
Company. Fuddruckers has registered various service marks with the United States
Patent and Trademark Office, including the trade names "Fuddruckers" and
"Daiquiritas" and the "Fuddruckers -- World's Greatest Hamburgers" logo. Champps
owns the names and marks "Champ's", "Champps", "Champps American Sports Cafe"
and "Champps Entertainment" in connection with providing bar and restaurant
services, and in connection with the sale of related food products
(collectively, the "Marks"). Pursuant to the Reorganization Agreement, DAKA
International will transfer to the Company its rights associated with those
Marks related to the Restaurant Business. Those Marks related to the Foodservice
Business shall remain the property of DAKA International. In addition, pursuant
to certain licensing agreements between the Company and DAKA International, the
Company will grant a license to DAKA International for the names and marks
associated with "French Quarter Coffee", "Leo's Deli" and "Good Natured Cafe."
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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
will employ approximately 120 associates on a full-time basis, three who will be
executive officers.
Fuddruckers is incorporated under the laws of the State of Texas and
employs approximately 9,900 associates on a full-time and part-time basis.
Champps is incorporated under the laws of the State of Minnesota and
employs approximately 1,500 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 and 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) 774-9115.
Champps maintains its principal executive offices at 153 East Lake Street,
Wayzata, Minnesota, 55391. The telephone number for Champps is (602) 449-4841.
PROPERTIES
As of March 29, 1997, DAKA International leased approximately 40,000 square
feet of office space at its corporate headquarters in Danvers, Massachusetts, at
an average annual rental of $610,000 through November 30, 2001. Prior to the
Distribution, the lease will be assigned to the Company. Under the terms of
various agreements with Purchaser, 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 Offer Closing Time.
Fuddruckers owns the land and related improvements at 11 of the 122
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.
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
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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 Parent 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. 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
William H. Baumhauer...... 48 Chairman, Chief Executive Officer and President and Director of the
Company and President of Fuddruckers
Erline Belton(1).......... 52 Director
E. L. Cox(1).............. 70 Director
Allen R. Maxwell.......... 58 Director
Donald C. Moore........... 42 Senior Vice President, Chief Financial Officer and Treasurer
Joseph W. O'Donnell(1).... 54 Director
Charles W. Redepenning,
Jr...................... 41 Senior Vice President, General Counsel and Secretary
Alan D. Schwartz(1)....... 47 Director
Dean P. Vlahos............ 46 Director of the Company and Chairman of the Board, President and
Chief Executive Officer of Champps
</TABLE>
- ---------------
(1) Member of both the Compensation Committee and Audit Committee.
EXECUTIVE OFFICERS
The following executive officers, all of whom previously served in similar
capacities as executive officers of DAKA International, were appointed by the
Board of Directors of the Company (the "Board") in May 1997.
William H. Baumhauer, Chairman, Chief Executive Officer and President and
Class III Director of the Company and President of Fuddruckers. Mr. Baumhauer
has served as Chairman of the Board and Chief Executive Officer of DAKA
International since November 1990 and as a Class III Director since September
1988. He has served as President and Chief Operating Officer of DAKA
International from September 1988 to November 1990. He has also served
Fuddruckers as Chairman of the Board since March 1985, President since January
1985 and as a director since July 1983.
Donald C. Moore, Senior Vice President, Chief Financial Officer and
Treasurer. Mr. Moore joined DAKA International as its Chief Financial Officer
in January, 1997. Prior to joining DAKA International, Mr. Moore served as
Senior Vice President and Chief Financial Officer of Al Copeland Enterprises, a
casual dining restaurant operation in New Orleans, Louisiana, from November 1995
to November 1996. He also served as Executive Vice President and Chief Financial
Officer of Rally's Hamburgers Inc., a quick service restaurant operation in
Louisville, Kentucky, from April 1990 to August 1995.
Charles W. Redepenning, Jr., Senior Vice President, General Counsel and
Secretary. Mr. Redepenning has served as Senior Vice President, General Counsel
and Secretary of DAKA International since November 1988. Prior to joining DAKA
International, he served as Vice President, General Counsel and Secretary of
Fuddruckers from 1986 to November 1988.
DIRECTORS
All of the members of the Board previously served as directors of DAKA
International and were elected to serve on the Board in May 1997. As provided in
the By-laws, the stockholders of the Company elect the members of the Board. The
Certificate provides for the Board to be divided into three classes of directors
serving staggered three-year terms. Accordingly, approximately one-third of the
Board will be elected each year. Initially, however, members of all three
classes were elected by DAKA International as sole stockholder of the Company
prior to the Distribution. The directors were elected to three classes as
follows: Messrs. Cox and Maxwell were elected as Class I Directors for a term
expiring at the 1997 Annual Meeting; Messrs. O'Donnell and Vlahos and Ms. Belton
were elected as Class II Directors for a term expiring at the 1998
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Annual Meeting; and Messrs. Baumhauer and Schwartz were elected as Class III
Directors for a term expiring at the 1999 Annual Meeting. At each Annual Meeting
of Stockholders beginning in 1997, directors will be elected to succeed those
whose terms expire, with each newly elected director to serve a three-year term.
Erline Belton, Class II Director. Ms. Belton has served as a director of
DAKA International since December 1993. She has served as President and Chief
Executive Officer of The Lyceum Group, a human resource consulting firm, since
September 1992. She served as Senior Vice President of Human Resource and
Organizational Development for Progressive Insurance Companies from April 1991
through September 1992. She also served as International Human Relations
Director, as well as several other human resources positions, with Digital
Equipment Corporation from 1978 through April 1991. Ms Belton serves on the
Board of Directors of: The National Leadership Coalition on AIDS; National
Minority AIDS Coalition; and Museum of African American History.
E. L. Cox, Class I Director. Mr. Cox has served as a director of DAKA
International since September 1988 and as a director of Fuddruckers from June
1988 until November 1988. Mr. Cox served as Chairman and Chief Executive Officer
of the Michigan Accident Fund from February 1990 until his retirement in August
1995. Prior thereto Mr. Cox served as Chairman and Chief Executive Officer of
Michigan Mutual/Amerisure Companies and its affiliated insurance companies from
May 1981 through January 1990. Mr. Cox is also a member of the Board of
Directors of Comerica, Inc., a publicly-traded financial institution, and a
director of various trade associations in the insurance industry.
Allen R. Maxwell, Class I Director. Mr. Maxwell has served as President
and Chief Operating Officer of DAKA International since November 1990 and as a
director since September 1988. Following the Distribution, Mr. Maxwell will
serve as the President of DAKA and will be an officer and a member of senior
management of Compass Group USA, Inc.
Joseph W. O'Donnell, Class II Director. Mr. O'Donnell has served as a
director of DAKA International since August 1996. He is a partner in the firm of
Osgood, O'Donnell & Walsh. Mr. O'Donnell has served as Chairman and Chief
Executive Officer of The J. Walter Thompson Company and Campbell-Mithun-Esty
Advertising, Inc.
Alan D. Schwartz, Class III Director. Mr. Schwartz has served as a
director of DAKA International since September 1988 and as a director of
Fuddruckers from September 1984 until November 1988. Mr. Schwartz is Senior
Managing Director -- Corporate Finance of Bear Stearns, and a director of its
parent, The Bear Stearns Companies, Inc. He has been associated with such
investment banking firm for more than five years. Mr. Schwartz is also a
director of Protein Databases, Inc. and a member of the Board of Visitors of the
Fuqua School of Business at Duke University.
Dean P. Vlahos, Class II Director and Chairman of the Board, President and
Chief Executive Officer of Champps. Mr. Vlahos has served as a director of DAKA
International since February 1996. Mr. Vlahos was the founder, and has been
Chairman of the Board, President and Chief Executive Officer of Champps since
its inception in October 1988. Mr. Vlahos also served as Chief Financial Officer
of Champps from its inception to March 1994. Prior to establishing Champps, he
started, owned and operated the original Champps Americana restaurants in St.
Paul, Minnesota (opened January 1983) and Richfield, Minnesota (opened February
1986). Mr. Vlahos has over 20 years of experience in the restaurant industry.
BOARD OF DIRECTORS AND ITS COMMITTEES
Each executive officer serves at the discretion of the Board. There are no
family relationships among any of the directors and executive officers of the
Company.
The Board has a Compensation Committee and an Audit Committee. The
Compensation Committee makes recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company, establishes and
approves salaries and incentive compensation for certain senior officers and
employees. The Audit Committee reviews the results and scope of the financial
audit and other services provided by the Company's independent public
accountants. As of the Distribution Date, the members of both
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the Compensation Committee and Audit Committee will be Messrs Cox, O'Donnell and
Schwartz and Ms. Belton. None of the members of such committees are officers or
employees of the Company.
BOARD OF DIRECTORS COMPENSATION
Directors receive $1,000 per meeting plus travel expenses. Under the
Company's proposed 1997 Stock Option Plan, each non-employee director will
receive on an annual basis an option to purchase 1,500 UCRI Shares at an
exercise price equal to the fair market value of the UCRI Common Stock as of the
date of grant.
EXECUTIVE COMPENSATION
The Company was recently formed for the purpose of effecting the
Distribution and, as a result, historical information on the executive
compensation of the Company's officers as such (as opposed to their compensation
as officers of DAKA International) is not available. Compensation levels for the
Company's executive officers will be established by the Board and the
Compensation Committee in due course after the Distribution. It is anticipated,
however, that such compensation levels will be similar to those compensation
levels earned by executive officers while serving in similar capacities at DAKA
International. The following tables provide information as to compensation paid
by DAKA International during each of the three fiscal years ending with the
fiscal year ended June 29, 1996 to the Chief Executive Officer and the four
other most highly compensated executive officers whose total salary and bonus
for fiscal year 1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
--------------------- ALL OTHER OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS(1) COMPENSATION
- --------------------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
William H. Baumhauer.......... 1996 $369,558 $200,000
Chairman and Chief 1995 325,000 230,000 $1,220,848(2)
Executive Officer 1994 303,708 161,000 9,000
Allen R. Maxwell(3)........... 1996 254,527 50,000 $60,000(4) 30,000(5)
President and Chief 1995 248,850 50,000 60,000(4) 5,000
Operating Officer 1994 256,036 80,500 60,000(4)
David G. Parker............... 1996 172,160 25,000 18,000(5)
Senior Vice President 1995 171,500 30,000 1,500
and Chief Administrative 1994 174,798 36,750 1,500
Officer
William T. Freeman(6)......... 1996 147,116 50,000 21,000(5)
Senior Vice President 1995 108,270 6,000
Corporate Development 1994 (7)
Louis A. Kaucic............... 1996 154,500 25,000 15,000(5)
Senior Vice President 1995 154,500 25,000 1,500
Human Resources 1994 157,471 36,750 1,500
</TABLE>
- ---------------
(1) Represents the number of DAKA Stock Options granted during the fiscal year.
(2) Represents amount earned pursuant to a long-term incentive plan, based on
the market value of the DAKA Stock as of June 29, 1996 (the closing sale
price of DAKA Common Stock on June 28, 1996, as reported by Nasdaq, was
$23.50 per share). Due to the decline in the DAKA Common Stock price
subsequent to June 29, 1995, as of October 22, 1996 this amount had declined
to zero. The amount earned under such plan vests on June 30, 1997 and is
payable in either cash or DAKA Common Stock at the option of DAKA
International. No portion of the amount earned under the plan vests or is
payable until June 30, 1997. See "-- Amendment to CEO Long-Term Incentive
Plan."
(3) Mr. Maxwell will not serve as an executive officer of the Company.
(4) In lieu of the receipt of senior executive stock options in fiscal 1992 in
connection with the recapitalization of DAKA International, DAKA
International provides to Mr. Maxwell an annuity for which DAKA
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International pays to an insurance company $60,000 per year for five years,
which payments commenced in fiscal year 1992.
(5) Granted on August 1, 1995 pursuant to a long-term incentive plan for
management pursuant to which the options will vest 100% on August 1, 1998
and have an exercise price equal to $24.00 per share (the fair market price
of the DAKA Common Stock as of the date of grant) with respect to one third
of the options granted, $25.80 per share with respect to another one third
of the options granted and $27.60 per share with respect to the remaining
one third of the options granted. See "The Reorganization -- Treatment of
DAKA Stock Options."
(6) Mr. Freeman resigned from DAKA International in January 1997 and will not
serve as an executive officer of the Company.
(7) Mr. Freeman became an employee of DAKA International in August 1994.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUES AT ASSUMED
ANNUAL RATES OF STOCK
% OF PRICE APPRECIATION
TOTAL OPTIONS FOR OPTION TERM
GRANTED TO EXERCISE (10 YEARS)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% ($) 10% ($)
- ---- ------- ------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allen R. Maxwell.................. 30,000(1) 5.7% (1) 7/31/05 486,765 1,233,557
David G. Parker................... 18,000(1) 3.3 (1) 7/31/05 292,059 740,134
Louis A. Kaucic................... 15,000(1) 2.7 (1) 7/31/05 243,381 616,778
William T. Freeman................ 21,000(1) 4.0 (1) 7/31/05 347,737 863,490
</TABLE>
- ---------------
(1) Granted on August 1, 1995 pursuant to a long-term incentive plan for
management pursuant to which the options will vest 100% on September 1, 1998
and have an exercise price equal to $24.00 per share (the fair market price
of DAKA Common Stock as of the date of grant) with respect to one third of
the options granted, $25.80 per share with respect to another one third of
the options granted and $27.60 per share with respect to the remaining one
third of the options granted. See "The Reorganization -- Treatment of DAKA
Stock Options."
AGGREGATE OPTION EXERCISES IN FISCAL 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF OUTSTANDING
NUMBER OF BENEFICIAL IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED VALUE --------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
William H. Baumhauer........ -- -- 187,000 -- $3,584,580 --
Allen R. Maxwell............ -- -- 35,000 30,000 683,100 --
David G. Parker............. 10,000 $187,500 32,500 18,000 585,985 --
Louie A. Kaucic............. 0 -- 14,500 15,000 223,985 --
William T. Freeman.......... 6,000 86,220 -- 21,000 -- --
</TABLE>
- ---------------
(1) Based on the closing bid price of DAKA Common Stock on Nasdaq of $23.50 per
share on June 28, 1996. Based on subsequent declines in the market price of DAKA
Common Stock, these values are currently substantially lower.
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<PAGE> 73
LONG-TERM INCENTIVE PLAN -- AWARD IN FISCAL 1996
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE ESTIMATED FUTURE PAYOUTS UNDER
SHARES, UNITS OR OTHER NON STOCK-PRICE-BASED PLANS
OR OTHER PERIOD UNTIL ------------------------------
NAME RIGHTS MATURATION THRESHOLD TARGET MAXIMUM
- ---- ------------- ------------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
William H. Baumhauer.................. (1) June 30, 1997 (1) (1) (1)
</TABLE>
- ---------------
(1) The long-term incentive plan implemented by the DAKA International Board on
July 3, 1994 for the Chief Executive Officer is designed to provide an
incentive payment, payable at DAKA International's option in the form of
either cash or stock, equal to 2% of the increase in the market value of
DAKA International, as determined by the average 30 day trading price of
DAKA Common Stock and the weighted average number of shares outstanding,
from July 3, 1994 to June 30, 1997 in excess of 15% of the market value at
June 30, 1994. The incentive payment vests on June 30, 1997. See
"-- Amendment to CEO Long-Term Incentive Plan."
EMPLOYMENT AGREEMENTS
The Baumhauer Employment Agreement. DAKA International entered into an
employment agreement (the "Baumhauer Employment Agreement") with William H.
Baumhauer which commenced on January 1, 1997 and provides for an initial term of
three (3) years. After the Distribution, the Company will assume the Baumhauer
Employment Agreement under the same terms and conditions and DAKA International
will be released therefrom. The date of the agreement, however, will be amended
to be June 30, 1997. The Baumhauer Employment Agreement provides for automatic
renewal each year so that the residual term of such agreement is never less than
three years. Under the agreement, Mr. Baumhauer receives an annual base salary
of $450,500, subject to adjustment at the discretion of the Board. It further
provides that in the event the Company terminates the executive's employment
without "cause" (as defined therein) or the executive terminates his employment
for "good reason" (as defined therein), the Company shall pay the executive an
amount equal to the executive's cash compensation for three years. "Good reason"
is defined in each agreement as (i) an assignment to the executive of duties
other than those contemplated by the agreement, or a limitation on the powers of
the executive not contemplated by the agreement, (ii) the removal of the
executive from or failure to elect the executive to his named position, or (iii)
a reduction in the executive's rate of compensation or level of fringe benefits.
"Cause" is defined in each agreement as the executive's (i) theft from or fraud
on the Company, (ii) conviction of a felony or crime of moral turpitude, (iii)
willful violation of the terms of the agreement, (iv) conscious disregard or
neglect of his duties, or (v) willful and demonstrated unwillingness to perform
his duties under the agreement.
The Vlahos Employment Agreement. DAKA International, Champps and Dean
Vlahos are parties to a five-year employment agreement for Mr. Vlahos (the
"Vlahos Employment Agreement") which commenced on February 21, 1996. Following
the Distribution, the Company will succeed DAKA International as the guarantor
of Champps' obligations under the Vlahos Employment Agreement under
substantially the same terms and conditions. Under such agreement, Mr. Vlahos
provides full-time services to Champps in the capacity of Chairman of the Board,
Chief Executive Officer and President and has the authority to control the
operations of Champps so long as the average annual gross revenues per square
foot of the Champps-owned restaurants is at least $400. During the period of Mr.
Vlahos' full-time employment, Champps will pay Mr. Vlahos an initial base salary
of $350,000 plus a bonus of 50% of his base salary if he attains certain targets
established by the Board, which amount may be increased to up to 100% of his
base salary if he exceeds such performance targets by margins determined by the
Board. Twenty percent (20%) of the potential bonus payments for Mr. Vlahos were
related to performance targets established for DAKA International as a whole
(prior to the Distribution) and eighty percent (80%) were related to performance
targets established for Champps. Following the Distribution and the assumption
of the Vlahos Employment Agreement, 20% of the potential bonus payments for Mr.
Vlahos will relate to the Company as a whole and 80% will relate to performance
targets established for Champps. If Mr. Vlahos leaves for "good reason," or is
terminated by DAKA International without "cause," during the term of his
employment contract, the Company will be obligated to pay Mr. Vlahos his
remaining salary and bonus as severance. "Good reason" is defined in such
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<PAGE> 74
agreement as (i) an assignment to Mr. Vlahos of duties other than those
contemplated by the agreement, or a limitation on the powers of Mr. Vlahos not
contemplated by the agreement, (ii) the removal of Mr. Vlahos from or failure to
elect Mr. Vlahos to his named position, or (iii) a reduction in Mr. Vlahos' rate
of compensation or level of fringe benefits. "Cause" is defined in the agreement
as Mr. Vlahos' (i) theft from or fraud on the Company, (ii) conviction of a
felony, (iii) violation of the terms of the agreement, (iv) conscious disregard
or neglect of his duties, or (v) demonstrated unwillingness to perform his
duties under the agreement. In the event that Mr. Vlahos' employment is
terminated for any reason other than by the Company for cause, Mr. Vlahos will
be provided the right, subject to certain obligations to the Company, to
establish a franchise for up to five Champps Americana restaurants anywhere in
the world, but no such restaurant may be within a 20 mile radius of any other
Champps restaurant, or in any territory that has been franchised or licensed by
Champps.
The Maxwell Employment Agreement.
Allen R. Maxwell entered into an employment agreement (the "Maxwell
Employment Agreement") with DAKA International which commenced on January 1,
1997. As required by Purchaser as a condition of the Offer, Mr. Maxwell has
agreed that, following the Distribution, Mr. Maxwell will release DAKA
International from such employment agreement. In consideration of such release,
the Company has agreed to pay Mr. Maxwell an aggregate of $500,000 over three
years commencing January 1, 1998. Effective as of the Offering Closing Date, Mr.
Maxwell has entered into a new employment agreement with DAKA International on
terms negotiated directly with Purchaser.
INDEMNIFICATION AGREEMENTS
The Company intends to enter into Indemnification Agreements with certain
of the executive officers of the Company and members of the Board who are not
officers of the Company (the "Indemnitees"), pursuant to which the Company has
agreed to advance expenses and indemnify such Indemnitees against certain
liabilities incurred in connection with their services as executive officers
and/or directors of the Company and in connection with their services as
executive officers and/or directors of DAKA International prior to the
consummation of the Offer (and, with respect to the Independent Directors (as
defined below), prior to the consummation of the Merger). In the event of a
proceeding brought against an Indemnitee by or in the right of DAKA
International or the Company, such Indemnitee shall not be entitled to
indemnification if such Indemnitee is adjudged to be liable to DAKA
International or the Company, as the case may be, if applicable law prohibits
such indemnification; provided, however, that, if applicable law so permits,
indemnification shall nevertheless be made by the Company in such event if, and
only to the extent that, the Court of Chancery of the State of Delaware, or
another court in which such proceeding shall have been brought or is pending,
shall determine.
Under the terms of each Indemnification Agreement, the Company shall
advance all reasonable expenses incurred by or on behalf of such Indemnitee in
connection with any proceeding in which Indemnitee is involved by reason of
Indemnitee's service to the Company or by reason of Indemnitee's service to DAKA
International prior to the consummation of the Offer (and, with respect to the
Independent Directors, prior to the consummation of the Merger). Such statement
shall include, among other things, an undertaking by or on behalf of such
Indemnitee to repay any expenses so advanced if it shall be ultimately
determined that such Indemnitee is not entitled to indemnification for such
expenses.
AMENDMENT TO CEO LONG-TERM INCENTIVE PLAN
The long-term incentive plan implemented by the DAKA International Board on
July 3, 1994 for the Chief Executive Officer was designed to provide an
incentive payment, payable at DAKA International's option in the form of either
cash or stock, equal to 2% of the increase in the market value of DAKA
International, as determined by the average 30 day trading price of the DAKA
Common Stock and the weighted average number of shares outstanding, from July 3,
1994 to June 30, 1997 in excess of 15% of the market value at June 30, 1994.
Pursuant to this long-term incentive plan ("LTIP") William H. Baumhauer has the
right (the "Performance Award") to receive an amount in cash, shares or a
combination equal to 2%
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<PAGE> 75
of the excess (if any) of (A) the market value of the DAKA International as of
June 30, 1997 (determined based on the average aggregate trading price of
outstanding DAKA Shares during the period beginning June 1, 1997 and ending June
30, 1997) over (B) $137,776,000. Pursuant to its right to adjust the Performance
Award if it determines that external changes or other unanticipated business
conditions have materially affected the intended operation of the LTIP, the
Compensation Committee of the DAKA International Board has amended the terms of
the Performance Award such that Mr. Baumhauer's right to receive the Performance
Award shall instead be treated as though Mr. Baumhauer were the holder of an
option expiring immediately after the Offer Closing Time to acquire 228,260 DAKA
Shares at an exercise price of $12.07 per share (the "Deemed LTIP Option"). Upon
consummation of the Offer, after the conversion pursuant to the terms of the
Reorganization Agreement (the "Conversion") of the outstanding DAKA Stock
Options into (x) options to acquire an equal number of UCRI Shares and (y)
options to acquire an equal number of DAKA Shares, Mr. Baumhauer's rights
pursuant to the amended Performance Award will be determined as though the
Deemed LTIP Option were converted pursuant to the Conversion. See "The
Reorganization -- Treatment of DAKA Stock Options." Under the terms of the
amended Performance Award, the Company will (I) purchase Mr. Baumhauer's deemed
option to purchase DAKA Shares into which the Deemed LTIP Option was converted
for an amount equal to the product of (i) 228,260 and (ii) the excess, if any,
of the Offer Price over the exercise price for such deemed option determined
pursuant to the Conversion and (II) purchase Mr. Baumhauer's deemed option to
purchase UCRI Shares into which the Deemed LTIP Option was converted in exchange
for that number of UCRI Shares that is equal to the quotient obtained by
dividing (i) the product of (A) 228,260 and (B) the excess, if any, of the
per-share fair market value of the UCRI Common Stock, based on the average
closing price of the UCRI Common Stock over the three-consecutive-day trading
period immediately following the Offer Closing Date (the "LTIP Price") over the
exercise price for such deemed option determined pursuant to the Conversion
divided by (ii) the LTIP Price.
EMPLOYEE STOCK PLANS
Treatment of Stock Options in the Reorganization.
As provided in the Reorganization Agreement, outstanding DAKA Stock Options
which have been granted to employees of the Company, non-employee directors of
the Company, and former DAKA International employees (who are not employees of
the Company) pursuant to the DAKA Option Plans and which are outstanding
immediately prior to the Distribution shall be converted into two separate
non-qualified options. The holder of a DAKA Stock Option will receive one DAKA
Converted Option and one UCRI Converted Option, with each Converted Option equal
in number to the number of DAKA Shares relating to such DAKA Stock Option. The
exercise price per share of each DAKA Converted Option shall be adjusted by
dividing the pre-conversion exercise price by the DAKA Conversion Factor. The
DAKA Conversion Factor shall mean an amount equal to the quotient obtained by
dividing (a) the sum of (i) the Offer Price, plus the UCRI Stock Value by (b)
the Offer Price. The exercise price per share of each UCRI Converted Option
shall be adjusted by dividing the pre-conversion exercise price by the UCRI
Conversion Factor. The UCRI Conversion Factor shall mean an amount equal to the
quotient obtained by dividing (a) the sum of (i) the Offer Price, plus (ii) the
UCRI Common Stock Value by (b) the UCRI Stock Value. Each Converted Option shall
otherwise be subject to the same terms and conditions as the original DAKA Stock
Option.
The Company's 1997 Stock Option and Incentive Plan.
Effective as of the Distribution Date, the Board has adopted the 1997 Stock
Option Plan pursuant to which 1,250,000 UCRI Shares are authorized and reserved
for issuance. The 1997 Stock Option Plan permits the grant of (i) options to
purchase UCRI Shares intended to qualify as incentive stock options under
Section 422 of the Code ("Incentive Options") and (ii) options that do not so
qualify ("Non-Qualified Options"). The 1997 Stock Option Plan also permits the
grant of up to 250,000 UCRI Shares in the form of restricted stock, unrestricted
stock and Performance Share Awards (as defined in the 1997 Stock Option Plan).
The 1997 Stock Option Plan is designed and intended as a performance incentive
for officers, directors, employees,
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<PAGE> 76
consultants and other key persons performing services for the Company or its
subsidiaries to encourage such persons to acquire or increase a proprietary
interest in the success of the Company.
Plan Administration. The 1997 Stock Option Plan provides that it shall be
administered either by the entire Board or the Compensation Committee as
appointed by the Board from time to time (in either case, the "Administrator").
Each member of the Compensation Committee must be an "outside director" within
the meaning of Section 162(m) of the Code and an "non-employee" director within
the meaning of the rules promulgated by the Commission under Section 16 of the
Exchange Act in order for specific grants of Incentive Options or Non-Qualified
Options to receive favorable treatment under certain relevant securities and tax
laws.
The Administrator has full power to select, from among the persons eligible
for awards under the 1997 Stock Option Plan, the individuals to whom awards will
be granted, to make any combination of awards to participants, and to determine
the specific terms of each award, subject to the provisions of the 1997 Stock
Option Plan. Incentive Options may be granted only to officers or other
employees of the Company, including members of the Board who are also employees
of the Company or its subsidiaries. Non-Qualified Options and other awards may
be granted or issued to officers or other employees of the Company, directors
and to consultants and other key persons who provide services to the Company
(regardless of whether they are also employees). Stock options with respect to
no more than 100,000 UCRI Shares can be granted to any individual during any
calendar year period.
The exercise price of each option granted under the 1997 Stock Option Plan
shall generally be the fair market value of the UCRI Common Stock on the date of
grant as determined by the Administrator; provided, however, that if the UCRI
Common Stock is traded on a national securities exchange or Nasdaq, the fair
market value shall not be less than the closing price reported for the UCRI
Common Stock on such date of grant. In the case of a grant of a Non-Qualified
Stock Option in lieu of cash compensation, the exercise price shall be no less
than 50% of the fair market value of the UCRI Common Stock on the date of grant.
No Incentive Option may be granted under the 1997 Stock Option Plan to any
employee of the Company or any subsidiary who owns at the date of grant shares
of stock representing in excess of 10% of the voting power of all classes of
stock of the Company or a parent or a subsidiary unless the exercise price for
stock subject to such option is at least 110% of the fair market value of such
stock at the time of grant and the option term does not exceed five years. No
options may be transferred by the optionee other than by will or the laws of
descent or distribution provided, however, that the Administrator may permit an
optionee to transfer his Non-Qualified Option to members of his immediate
family, to trusts for the benefit of such family members, or to partnerships in
which such family members are the only partners.
The term of each option is fixed by the Administrator and, in the case of
an Incentive Option, may not exceed ten years from the date of grant. The
Administrator determines at what time or times each option may be exercised and,
subject to the provisions of the 1997 Stock Option Plan, the period of time
during which options may be exercised, if any, after termination of employment
for any reason. Options may be made exercisable in installments, and the
exercisability of options may be accelerated by the Administrator. Upon exercise
of options, the option exercise price must be paid in full (i) in cash or by
certified or bank check or other instrument acceptable to the Administrator,
(ii) if the applicable option agreement permits, by delivery of UCRI Shares
already owned by the optionee, or (iii) through a "cashless" exercise procedure,
subject to certain limitations.
At the discretion of the Administrator, stock options granted under the
1997 Stock Option Plan may include a "re-load" feature pursuant to which an
optionee exercising an option by the delivery of shares of UCRI Shares would
automatically be granted an additional stock option (with an exercise price
equal to the fair market value of the UCRI Common Stock on the date the
additional stock option is granted) to purchase that number of UCRI Shares equal
to the number delivered to exercise the original stock option. The purpose of
this feature is to enable participants to maintain an equity interest in the
Company without dilution.
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<PAGE> 77
Stock Options Granted to Non-employee Directors
The 1997 Stock Option Plan provides for the automatic grant of
Non-Qualified Options to non-employee directors. Each non-employee director who
is serving as a director of the Company on the fifth business day after each
annual meeting of stockholders, beginning with the 1997 annual meeting of
stockholders, will automatically be granted on such day a Non-Qualified Option
to acquire 1,500 UCRI Shares. The exercise price of each such Non-Qualified
Option is the fair market value of the UCRI Common Stock on the date of grant.
The Administrator may also grant additional Non-Qualified Options to
non-employee directors.
Restricted Stock
The Administrator may also award shares of UCRI Shares to participants,
subject to such conditions and restrictions as the Administrator may determine.
These conditions and restrictions may include the achievement of certain
performance goals and/or continued employment with the Company through a
specified restricted period. If the performance goals and other restrictions are
not attained, the participants will forfeit their shares of restricted stock.
The purchase price of shares of restricted stock will be determined by the
Administrator.
Unrestricted Stock
The Administrator may also grant UCRI Shares (at no cost or for a purchase
price determined by the Administrator) which are free from any restrictions
under the 1997 Stock Option Plan. Shares of unrestricted stock may be issued to
participants in recognition of past services or other valid consideration, and
may be issued in lieu of cash compensation to be paid to such participants. With
the consent of the Administrator, participants may elect to receive their cash
compensation in the form of unrestricted stock, either payable currently or on a
deferred basis.
Performance Share Awards
The Administrator may also grant performance share awards to participants
entitling the participants to receive UCRI Shares upon the achievement of
individual or Company performance goals and such other conditions as the
Administrator shall determine.
Adjustments for Stock Dividends, Mergers, Etc.
The Administrator will make appropriate adjustments in outstanding awards
to reflect stock dividends, stock splits and similar events. In the event of a
merger, liquidation, sale of the Company or similar event, the Administrator, in
its discretion may provide for substitution or adjustments of outstanding
awards, or may terminate all awards with payment of cash or in-kind
consideration.
Change of Control Provisions. The 1997 Stock Option Plan provides that in
the case of certain transactions constituting a change in control of the
Company, the 1997 Stock Option Plan and the awards issued thereunder shall
terminate upon the effectiveness of any such transaction or event, unless
provision is made in connection with such transaction for the assumption of
awards theretofore granted, or the substitution for such awards of new awards of
the successor entity or parent thereof, with appropriate adjustment as to the
number and kind of shares and the per share exercise price, if any. In the event
of such termination, each vested award, other than options, shall be settled in
cash or in kind, and each holder of outstanding options shall be permitted to
exercise all options whether vested or unvested for a period of at least 15 days
prior to the date of such termination.
Amendments and Termination
The Board may at any time amend or discontinue the 1997 Stock Option Plan
and the Administrator may at any time amend or cancel outstanding awards for the
purpose of satisfying changes in the law or for any other lawful purpose.
However, no such action may be taken which adversely affects any rights under
outstanding awards without the holder's consent. Further, 1997 Stock Option Plan
amendments shall be subject to approval by the Company's stockholders if and to
the extent required by the Code to preserve the
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<PAGE> 78
qualified status of Incentive Options or to preserve tax deductibility of
compensation earned under stock options.
TAX ASPECTS OF THE 1997 STOCK OPTION PLAN UNDER THE U.S. INTERNAL REVENUE CODE
The following is a summary of the principal Federal income tax consequences
of option grants under the 1997 Stock Option Plan. It does not describe all
Federal tax consequences under the 1997 Stock Option Plan, nor does it describe
state or local tax consequences.
Incentive Options. Under the Code, an employee will not realize taxable
income by reason of the grant or the exercise of an Incentive Option. If an
employee exercises an Incentive Option and does not dispose of the shares until
the later of (a) two years from the date the option was granted or (b) one year
from the date the shares were transferred to the employee, the entire gain, if
any, realized upon disposition of such shares will be taxable to the employee as
long-term capital gain, and the Company will not be entitled to any deduction.
If an employee disposes of the shares within such one-year or two-year period in
a manner so as to violate the holding period requirements (a "disqualifying
disposition"), the employee generally will realize ordinary income in the year
of disposition, and, provided the Company complies with applicable withholding
requirements, the Company will receive a corresponding deduction in an amount
equal to the excess of (1) the lesser of (x) the amount, if any, realized on the
disposition and (y) the fair market value of the shares on the date the option
was exercised over (2) the option price. Any additional gain realized on the
disposition of the shares acquired upon exercise of the option will be long-term
or short-term capital gain and any loss will be long-term or short-term capital
loss depending upon the holding period for such shares. The employee will be
considered to have disposed of his shares if he sells, exchanges, makes a gift
of or transfers legal title to the shares (except by pledge or by transfer on
death). If the disposition of shares is by gift and violates the holding period
requirements, the amount of the employee's ordinary income (and the Company's
deduction) is equal to the fair market value of the shares on the date of
exercise less the option price. If the disposition is by sale or exchange, the
employee's tax basis will equal the amount paid for the shares plus any ordinary
income realized as a result of the disqualifying disposition. The exercise of an
Incentive Option may subject the employee to the alternative minimum tax.
Special rules apply if an employee surrenders UCRI Shares in payment of the
exercise price of such employee's Incentive Option.
An Incentive Option that is exercised by an employee more than three months
after an employee's employment terminates will be treated as a Non-Qualified
Option for Federal income tax purposes. In the case of an employee who is
disabled, the three-month period is extended to one year and in the case of an
employee who dies, the three-month employment rule does not apply.
Non-Qualified Options. There are no Federal income tax consequences to
either the optionee or the Company on the grant of a Non-Qualified Option. On
the exercise of a Non-Qualified Option, the optionee (except as described below)
has taxable ordinary income equal to the excess of the fair market value of the
UCRI Common Stock received on the exercise date over the option price of the
shares. The optionee's tax basis for the shares acquired upon exercise of a
Non-Qualified Option is increased by the amount of such taxable income. The
Company will be entitled to a Federal income tax deduction in an amount equal to
such excess, provided the Company complies with applicable withholding rules.
Upon the sale of the shares acquired by exercise of a Non-Qualified Option, the
optionee will realize long-term or short-term capital gain or loss depending
upon his or her holding period for such shares.
Special rules apply if an optionee surrenders UCRI Shares in payment of the
exercise price of a Non-Qualified Option.
PARACHUTE PAYMENTS
The exercise of any portion of any option that is accelerated due to the
occurrence of a change of control may cause a portion of the payments with
respect to such accelerated options to be treated as "parachute payments" as
defined in the Code. Any such parachute payments may be non-deductible to the
Company, in whole or in part, and may subject the recipient to a non-deductible
20% federal excise tax on all or portion of such payments (in addition to other
taxes ordinarily payable).
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LIMITATION ON COMPANY'S DEDUCTIONS
As a result of Section 162(m) of the Code, the Company's deduction for
certain awards under the 1997 Stock Option Plan may be limited to the extent
that the Chief Executive Officer or other executive officer whose compensation
is required to be reported in the summary compensation table receives
compensation (other than performance-based compensation) in excess of $1 million
a year.
1997 STOCK PURCHASE PLAN
The Company's 1997 Stock Purchase Plan (the "Stock Purchase Plan") provides
an opportunity for eligible employees of the Company and its subsidiaries to
purchase UCRI Shares, at a discount, through regular payroll deductions of up to
50% of their pre-tax gross salary. Subject to adjustment for stock splits, stock
dividends and similar events, a maximum of 400,000 UCRI Shares may be issued
under the Stock Purchase Plan.
The first offering under the Stock Purchase Plan will begin on the first
business day after the Offer Closing Date and end on September 30, 1997. Unless
otherwise determined by the Board, subsequent offerings will commence on each
October 1, January 1, April 1 and July 1 thereafter and will have a duration of
three months. The Purchase Plan Administrator (as defined below) may, in its
discretion select a different offering period for any offering, provided the
duration of the offering is not more than one year. Generally, all employees who
are customarily employed for more than 20 hours per week as of the first day of
the applicable offering period are eligible to participate in the Stock Purchase
Plan.
The maximum number of shares which may be purchased by a participating
employee of the Company and is subsidiaries during an offering will be
determined by the Purchase Plan Administrator on a uniform basis and generally
will equal 1,000 UCRI Shares. An employee may purchase shares under the Stock
Purchase Plan by authorizing payroll deductions of up to 50% of his regular pay
during this offering period. Unless the employee has previously withdrawn from
the offering, his accumulated payroll deductions will be used to purchase UCRI
Shares on the last business day of the period at a price equal to no less than
85% of the fair market value of the UCRI Common Stock on the first or last day
of this offering period, whichever is lower. For these purposes, the fair market
value of the UCRI Common Stock on the first day of the initial offering period
shall be deemed to be the offering price to the public on such date. Under
applicable tax rules, an employee may purchase no more than $25,000 worth of
UCRI Common Stock in any calendar year (determined on the first day of this
offering period(s) in which such stock is purchased); certain other tax
limitations may apply.
The Stock Purchase Plan will be administered by the person or persons
appointed by the Board (the "Purchase Plan Administrator"). The Purchase Plan
Administrator has the discretion to designate the subsidiaries of the Company
whose employees are eligible to participate in the Stock Purchase Plan from time
to time. The Purchase Plan Administrator may at any time amend the Stock
Purchase Plan, subject to the approval of the Company's stockholders if and to
the extent required to preserve the favorable tax treatment of participants, or
discontinue the Stock Purchase Plan.
The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" as defined in Section 423 of the Code, which provides that an
employee will not have income for federal income tax purposes at the start of an
offering or upon receipt of UCRI Shares at the end of an offering, but generally
will recognize ordinary income, in addition to capital gain or loss, when the
employee sells the shares. The Company generally will not be entitled to a tax
deduction upon either the purchase or sale of shares issued under the Stock
Purchase Plan if certain holding period requirements are met.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Board are Messrs.
Cox, O'Donnell and Schwartz and Ms. Belton, all of whom served as members of the
Compensation Committee of the DAKA International Board. For a discussion of
certain transactions among the Company and the members of the Compensation
Committee, see "Certain Relationships and Related Transactions."
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<PAGE> 80
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INTEREST OF CERTAIN PERSONS IN THE DISTRIBUTION
Employee Benefit and Other Arrangements for Officers and Directors
The executive officers of the Company will be entitled to participate in
certain deferred compensation, stock option, severance and other benefit
arrangements provided by the Company following the Distribution, which will not
be available to all employees of the Company; however, the compensation and
other benefit arrangements in which the officers and directors of the Company
will be entitled to participate following the Distribution will be substantially
the same as the compensation and other benefit arrangements which were extended
to those individuals in their previous capacities as officers and/or directors
of DAKA International. In addition, following the Distribution, certain of the
directors, officers and employees of the Company may be entitled to receive
certain adjustments to their existing benefit arrangements, including
adjustments made to outstanding stock options, as a result of the consummation
of the proposed transactions. See "The Reorganization -- Treatment of DAKA Stock
Options" and "Management -- Amendment to CEO Long-Term Incentive Plan."
In addition, each officer or director of the Company who is a former
officer or director of DAKA International and/or Daka will be entitled to be
indemnified by the Company to the fullest extent authorized by Delaware law, as
it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with his previous service for or
on behalf of DAKA International and/or Daka pursuant to Indemnification
Agreements with the Company (the "Indemnification Agreements" and each, an
"Indemnification Agreement"). See "Liability and Indemnification of Directors
and Officers" and "Management -- Interest of Certain Persons in the
Distribution."
Bear Stearns has acted as financial advisor to DAKA International in
connection with the Offer, the Merger and the Distribution, and will receive a
fee for such services, payment of which is contingent upon the consummation of
the transactions contemplated by the Merger Agreement and the Ancillary
Agreements. The transaction fee relating to the Offer, the Merger and the
Distribution is expected to equal approximately $1.95 million. In the past, Bear
Stearns and its affiliates have provided financial advisory and financing
services for DAKA International and have received fees for rendering such
services. Alan D. Schwartz is Senior Managing Director -- Corporate Finance of
Bear Stearns, and a director of the Company and, effective after the Offer is
consummated, a former director of DAKA International.
Allen R. Maxwell, a director of the Company and, effective after the Offer
is consummated, a former director of DAKA International, entered into a
Termination and General Release Agreement (the "Release") with DAKA
International and the Company as of May 27, 1997, which Release was required by
the Purchaser as a condition of the Offer. Pursuant to the Release and
conditioned upon the consummation of the Offer, (i) Mr. Maxwell will terminate
his existing employment agreement with DAKA International as of the Offer
Closing Time, (ii) each of DAKA International and Mr. Maxwell will release the
other from the claims it may have under the employment agreement as of the Offer
Closing Time and (iii) the Company will pay Mr. Maxwell $500,000 over a
three-year period that commences on January 1, 1998.
On May 23, 1997, Mr. Maxwell entered into a new employment agreement (the
"New Maxwell Employment Agreement") by and among Compass Group USA, Inc.
("Compass US"), DAKA International and Daka. Pursuant to the New Maxwell
Employment Agreement, Mr. Maxwell will act as the president of Daka and will be
an officer and a member of senior management of Compass US during the term of
the agreement. The agreement provides for an initial term commencing on the
Merger Effective Time and ending on September 30, 1999 and for a continuing term
until the agreement is terminated in accordance with the terms thereof. Under
the New Maxwell Employment Agreement, Mr. Maxwell will receive an annual base
salary of $280,000 and other customary benefits, and will be eligible to receive
a discretionary bonus at year-end for his services rendered during the initial
term. The agreement further provides that in the event Mr. Maxwell's employment
is terminated without "cause" (as defined therein), he shall be paid a severance
amount equal to one and one-half times his compensation package under the
agreement over an eighteen-month period. The New Maxwell Employment Agreement is
contingent upon the consummation of the Merger.
William H. Baumhauer, Chairman, Chief Executive Officer and President of
the Company had his Performance Award under the LTIP amended pursuant to an
agreed upon formula in the manner described under "Management -- Amendment to
CEO Long-Term Incentive Plan."
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<PAGE> 81
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The outstanding voting securities of DAKA International as of April 30,
1997 consisted of 11,092,859 DAKA Shares, each of which is entitled to one vote
on each matter submitted to a vote of the stockholders, and 11,911,545 shares of
Series A Preferred Stock, convertible into 264,701 DAKA Shares, each of which is
entitled to one vote on each matter submitted to a vote of the stockholders for
each DAKA Share issuable upon conversion of the Series A Preferred Stock at the
time a vote is taken.
The following table sets forth certain information, as of April 30, 1997,
with respect to each person known by the Company to be the beneficial owner of
more than 5% of any class of the voting stock of DAKA International, each
director of the Company, each named executive officer of the Company, and all
directors and executive officers of the Company as a group. After giving effect
to the Distribution, it is expected that these holders will hold UCRI Shares in
similar proportions to the amounts set forth below.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------------
PERCENTAGE
-------------------
NUMBER OF COMMON VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES(1) STOCK STOCK(2)
- ------------------------------------------------------------- --------- ------ --------
<S> <C> <C> <C>
5% Stockholders
Timothy R. Barakett.......................................... 608,600(3) 5.5% 5.4%
590 Madison Avenue, 32nd Floor, New York, NY 10022
Barrow, Hanley, Mewhinney & Strauss, Inc..................... 579,600(4) 5.2 5.1
One McKinney Plaza, 3232 McKinney Avenue, 15th Floor
Dallas, TX 75204-2429
Named Executive Officers and Directors
William H. Baumhauer(5)...................................... 187,000(6) 1.7 1.6
Erline Belton(7)............................................. 6,500(8) * *
E.L. Cox(9).................................................. 8,500(10) * *
Louis A. Kaucic(5)........................................... 15,100(11) * *
Allen R. Maxwell(5).......................................... 392,766(12) 3.5 3.4
Joseph W. O'Donnell(13)...................................... 3,400(14) * *
David G. Parker(5)........................................... 32,500(15) * *
Charles W. Redepenning, Jr.(5)............................... 23,100(16) * *
Alan D. Schwartz(17)......................................... 10,000(18) * *
Dean P. Vlahos(19)........................................... 847,014 7.6 7.4
All directors and executive officers as a group (10)
persons.................................................... 1,525,880 13.4% 13.1%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial share ownership is determined pursuant to Rule 13d-3 promulgated
under the Exchange Act. Accordingly, a beneficial owner of a security
includes any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise has or shares the
power to vote such security or the power to dispose of such security. The
amounts set forth in the table as beneficially owned include shares owned,
if any, by spouses and relatives living in the same home as to which
beneficial ownership may be disclaimed. The amounts set forth in the table
as beneficially owned include (i) DAKA Shares which directors and executive
officers have the right to acquire pursuant to previously granted options
exercisable within 60 days of April 30, 1997 and (ii) DAKA Shares which may
be acquired upon conversion of shares of Series A Preferred Stock
outstanding as of April 30, 1997.
(2) Includes all outstanding DAKA Shares and 11,911.545 shares of Series A
Preferred Stock remaining outstanding. For purposes of determining the
percentages set forth in the table, each outstanding share of Series A
Preferred Stock is counted as the equivalent of the 22.22 DAKA Shares into
which it can be converted, because it is entitled to one vote on each
matter submitted to a vote of stockholders for each DAKA Share issuable
upon conversion.
(3) This information is based upon a Schedule 13D filed with the Commission on
May 19, 1997.
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<PAGE> 82
(4) This information is based upon a Schedule 13D filed with the Commission on
February 13, 1997.
(5) The address of the beneficial owner is One Corporate Place, 55 Ferncroft
Road, Danvers, MA 01923.
(6) DAKA Shares issuable upon exercise of options.
(7) The address of the beneficial owner is 41 Hawthone Street,
Roxbury, MA 02119.
(8) Includes 5,500 DAKA Shares issuable upon exercise of options.
(9) The address of the beneficial owner is 2215 Covey Court,
Grand Rapids, MI 49546.
(10) DAKA Shares issuable upon exercise of options.
(11) Includes 14,500 DAKA Shares issuable upon exercise of options.
(12) Includes 35,000 DAKA Shares issuable upon exercise of options.
(13) The address of the beneficial owner is Route 7A, Equinox Jr., Floor 2,
Manchester, VT, 05254.
(14) Includes 1,500 DAKA Shares issuable upon exercise of options.
(15) DAKA Shares issuable upon exercise of options.
(16) Includes 22,500 DAKA Shares issuable upon exercise of options.
(17) The address of the beneficial owner is 245 Park Avenue, New York, NY 10167.
(18) DAKA Shares issuable upon exercise of options.
(19) The address of the beneficial owner is 153 East Lake Street,
Wayzata, MN 55391.
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<PAGE> 83
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 UCRI
Shares, of which 11,413,001 UCRI Shares will be issued and outstanding as of the
Distribution Date, and 5,000,000 shares of Preferred Stock, of which no shares
will be issued and outstanding. The following summary description of the capital
stock of the Company is qualified in its entirety by reference to the
Certificate as of the Distribution Date and By-laws, copies of which are filed
as exhibits to the registration statement of which this Information Statement is
a part. The Certificate and By-laws have been adopted by the stockholders of the
Company and the Board.
Common Stock. Holders of UCRI Common Stock are entitled to one vote per
share on all matters to be voted on by stockholders. Holders of UCRI Common
Stock are not entitled to cumulative voting rights. Therefore, the holders of a
majority of the shares voted in the election of directors can elect all of the
directors then standing for election, subject to the rights of the holders of
Preferred Stock, if and when issued. The holders of UCRI Common Stock have no
preemptive or other subscription rights.
The holders of UCRI Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board from funds legally
available therefor, with each UCRI Share sharing equally in such dividends. The
possible issuance of Preferred Stock with a preference over UCRI Common Stock as
to dividends could impact the dividend rights of holders of UCRI Common Stock.
There are no redemption or sinking fund provisions with respect to the UCRI
Common Stock. All outstanding UCRI Shares, including the shares offered hereby,
are, or will be upon completion of the Offering, fully paid and non-assessable.
The By-laws provide, subject to the rights of the holders of the Preferred
Stock, if and when issued, that the number of directors shall be fixed by the
Board. The directors, other than those who may be elected by the holders of
Preferred Stock, if and when issued, are divided into three classes, as nearly
equal in number as possible, with each class serving for a three-year term,
except with respect to the initial term of each class of directors which shall
be for the period described under "Management -- Directors and Executive
Officers." Subject to any rights of the holders of Preferred Stock, if and when
issued, to elect directors, and to remove any director, whom the holders of any
such stock had the right to elect, any director of the Company may be removed
from office only for cause and by the affirmative vote of at least two-thirds of
the total votes which would be eligible to be cast by stockholders in the
election of such director.
Undesignated Preferred Stock. The Board is authorized, without further
action of the stockholders of the Company, to issue up to 5,000,000 shares of
Preferred Stock in classes or series and to fix the designations, powers,
preferences and the relative, participating, optional or other special rights of
the shares of each series and any qualifications, limitations and restrictions
thereon as set forth in the Certificate. Any such Preferred Stock issued by the
Company may rank prior to the UCRI Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into UCRI Shares.
The purpose of authorizing the Board to issue Preferred Stock is, in part,
to eliminate delays associated with a stockholder vote on specific issuances.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding stock
of the Company.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
General. A number of provisions of the Certificate and By-laws concern
matters of corporate governance and the rights of stockholders. Certain of these
provisions, as well as the ability of the Board to issue shares of Preferred
Stock and to set the voting rights, preferences and other terms thereof, may be
deemed to have an anti-takeover effect and may discourage takeover attempts not
first approved by the Board (including takeovers which certain stockholders may
deem to be in their best interests). To the extent takeover attempts are
discouraged, temporary fluctuations in the market price of the UCRI Common
Stock, which may result from actual or rumored takeover attempts, may be
inhibited. These provisions, together with
75
<PAGE> 84
the classified Board and the ability of the Board to issue Preferred Stock
without further stockholder action, also could delay or frustrate the removal of
incumbent directors or the assumption of control by stockholders, even if such
removal or assumption would be beneficial to the stockholders of the Company.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy contest, even if favorable to the interests of the stockholders
of the Company, and could depress the market price of the UCRI Common Stock. The
Board believes that these provisions are appropriate to protect the interests of
the Company and all of its stockholders. The Board has no present plans to adopt
any other measures or devices which may be deemed to have an "anti-takeover
effect".
Board of Directors. The Certificate provides for the Board to be divided
into three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board will be elected each year. In addition, the
Certificate provides that stockholders may remove a director only for cause and
only by the vote of the holders of two-thirds of the UCRI Common Stock.
Meetings of Stockholders. The By-laws provide that a special meeting of
stockholders may be called only by the Board, unless otherwise required by law.
The By-laws provide that only those matters set forth in the notice of special
meeting may be considered or acted upon at that special meeting, unless
otherwise provided by law. In addition, the By-laws set forth certain advance
notice and informational requirements and time limitations on any director
nomination or any new business which a stockholder wishes to propose for
consideration at an annual or special meeting of stockholders.
No Stockholder Action by Written Consent. The Certificate provides that
any action required or permitted to be taken by the stockholders of the Company
at an annual or special meeting of stockholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof.
Indemnification and Limitation of Liability. The By-laws provide that
directors and officers of the Company shall be, and, in the discretion of the
Board, non-officer employees may be, indemnified by the Company to the fullest
extent authorized by Delaware law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with service for or on behalf of the Company, and under certain circumstances in
connection with service for or on behalf of DAKA International. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. See "Liability and Indemnification of Directors and Officers." The
Certificate contains a provision permitted by Delaware law that generally
eliminates the personal liability of directors for monetary damages for breaches
of their fiduciary duty, including breaches involving negligence or gross
negligence in business combinations, unless the director has breached his or her
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or a knowing violation of law, paid a dividend or approved a stock repurchase in
violation of the DGCL or obtained an improper personal benefit. This provision
does not alter a director's liability under the federal securities laws. In
addition, this provision does not affect the availability of equitable remedies,
such as an injunction or rescission, for breach of fiduciary duty.
Amendment of the Certificate. The Certificate provides that an amendment
thereof must first be approved by, a majority of the Board and (with certain
exceptions) thereafter approved by the holders of a majority of the outstanding
shares entitled to vote on such amendment or repeal and the affirmative vote of
a majority of the outstanding shares of each class entitled to vote thereon as a
class; provided however, that the affirmative vote of two-thirds of the
outstanding shares of each class entitled to vote thereon as a class, is
required to amend (i) provisions set forth in Article V therein relating to
stockholder actions at annual or special meetings of stockholders, (ii)
provisions set forth in Article VI therein relating to directors of the Company,
(iii) provisions set forth in Article VII therein relating to the limitation of
liability of directors and officers of the Company and (iv) provisions set forth
in Article IX therein relating to amendments to the Certificate.
Amendment of By-laws. The Certificate provides that the By-laws may be
amended or repealed by the Board or by the stockholders. Such action by the
Board requires the affirmative vote of a majority of the
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<PAGE> 85
directors then in office. Such action by the stockholders requires the
affirmative vote of the holders of at least two-thirds of the total votes
eligible to be cast by holders of voting stock with respect to such amendment or
repeal at an annual meeting of stockholders or a special meeting called for such
purpose, unless the Board recommends that the stockholders approve such
amendment or repeal at such meeting, in which case such amendment or repeal
shall only require the affirmative vote of a majority of the total votes
eligible to be cast by holders of voting stock with respect to such amendment or
repeal.
Ability to Adopt Shareholder Rights Plan. The Board may in the future
resolve to issue shares of Preferred Stock or rights to acquire such shares to
implement a shareholder rights plan. A shareholder rights plan typically creates
voting or other impediments to discourage persons seeking to gain control of the
Company by means of a merger, tender offer, proxy contest or otherwise if such
change in control is not in the best interest of the Company and its
stockholders. The Board has no present intention of adopting a shareholder
rights plan and is unaware of any attempt to gain control of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the DGCL
("Section 203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder, (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage, provided that such by-law or
charter amendment shall not become effective until 12 months after the date it
is adopted. Neither the Certificate nor the By-laws contains any such exclusion.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the UCRI Common Stock is American Stock
Transfer & Trust Company.
HART-SCOTT-RODINO FILING REQUIREMENT
Any person receiving UCRI Shares pursuant to the Distribution and meeting
the criteria set forth below may be required to file a Premerger Notification
and Report pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976,
as amended (the "HSR Act"). In general, if (i) a person receiving UCRI Shares
pursuant to the Distribution would own, upon consummation of the Distribution,
UCRI Shares that exceed $15 million in value, (ii) certain jurisdictional
requirements are met and (iii) no exemption applies, then the HSR Act would
require that such person file a Premerger Notification and Report Form and
observe the applicable waiting periods under the HSR Act prior to acquiring UCRI
Shares pursuant to the Distribution. If such waiting periods have not expired or
been terminated at the Distribution Date with respect to such recipient, the
Company may be required to deliver such recipient's UCRI Shares into an escrow
facility
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<PAGE> 86
pending the expiration or termination of such waiting period. Holders of UCRI
Shares are urged to consult their legal counsel to determine whether the
requirements of the HSR Act will apply to the receipt by them of UCRI Shares in
the Distribution.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The directors and officers of the Company are indemnified by certain
provisions of the By-Laws and the Certificate. See "Description of the Company's
Capital Stock -- Certain Provisions of the Company's Certificate of
Incorporation and By-Laws -- Indemnification and Limitation of Liability." In
addition, the Company intends to enter into Indemnification Agreements with the
Indemnitees, pursuant to which the Company will agree to advance expenses and
indemnify such Indemnitees against certain liabilities incurred in connection
with their services as executive officers and/or directors of the Company and in
connection with their services as executive officers and/or directors of DAKA
International, prior to the consummation of the Offer (and, with respect to the
Independent Directors, prior to the consummation of the Merger). In the event of
a proceeding brought against an Indemnitee by or in the right of the Company or
DAKA International, such Indemnitee shall not be entitled to indemnification if
such Indemnitee is adjudged to be liable to the Company or DAKA International,
as the case may be, if applicable law prohibits such indemnification; provided,
however, that, if applicable law so permits, indemnification shall nevertheless
be made by the Company in such event if, and only to the extent that, the Court
of Chancery of the State of Delaware, or another court in which such proceeding
shall have been brought or is pending, shall determine.
Under the terms of each Indemnification Agreement, the Company shall
advance all reasonable expenses incurred by or on behalf of such Indemnitee in
connection with any proceeding in which Indemnitee is involved by reason of
Indemnitee's service to the Company or by reason of Indemnitee's service to DAKA
International prior to the consummation of the Offer (and, with respect to the
Independent Directors, prior to the consummation of the Merger) within ten days
after the receipt by the Company of a statement from such Indemnitee requesting
such advance. Such statement shall include, among other things, an undertaking
by or on behalf of such Indemnitee to repay any expenses so advanced if it shall
be ultimately determined that such Indemnitee is not entitled to indemnification
against such expenses.
The preceding description of the indemnification obligations of the Company
is intended as a summary only and is qualified in its entirety by the full text
of the form of such agreements on file with the Commission.
INDEPENDENT AUDITORS
The Board anticipates appointing Deloitte & Touche LLP as the Company's
independent auditors to audit the Company's financial statements for the fiscal
year ending June 28, 1997.
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<PAGE> 87
UNIQUE CASUAL RESTAURANTS, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Report of Independent Public Accountants.............................................. F-3
Combined Financial Statements:
Balance Sheets as of June 29, 1996, July 1, 1995 and March 29, 1997 (Unaudited)..... F-4
Statements of Operations for the fiscal years ended June 29, 1996, July 1, 1995
and July 2, 1994 and for the nine months ended March 29, 1997 (Unaudited) and
March 30, 1996 (Unaudited)....................................................... F-5
Statements of Cash Flows for the fiscal years ended June 29, 1996, July 1, 1995
and July 2, 1994 and for the nine months ended March 29, 1997 (Unaudited) and
March 30, 1996 (Unaudited)....................................................... F-6
Statements of Group Equity for the fiscal years ended June 29, 1996, July 1, 1995
and July 2, 1994 and for the nine months ended March 29, 1997 (Unaudited)........ F-7
Notes to Combined Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE> 88
INDEPENDENT AUDITORS' REPORT
UNIQUE CASUAL RESTAURANTS, INC.:
We have audited the accompanying combined balance sheets of Unique Casual
Restaurants, Inc. as of June 29, 1996 and July 1, 1995 and the related combined
statements of operations, cash flows and group equity for each of the three
years in the period ended June 29, 1996. 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 the
consolidated financial statements of Champps Entertainment, Inc. (an acquisition
by the Company accounted for as a pooling-of-interests), which statements
reflect total assets constituting 12.0% of combined total assets as of July 1,
1995, total revenues constituting 9.1% and 6.8% of combined total revenues for
the years ended July 1, 1995 and July 2, 1994, respectively, and net income
constituting 11.7% and 47.5% of combined net income for the years ended July 1,
1995 and July 2, 1994, respectively. 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, 1996 and
July 1, 1995 and the results of its operations and its cash flows for each of
the three years in the period ended June 29, 1996, in conformity with generally
accepted accounting principles.
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
July 14, 1997
F-2
<PAGE> 89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Champps Entertainment, Inc.:
We have audited the consolidated balance sheet of Champps Entertainment,
Inc. (a Minnesota corporation) and Subsidiaries as of July 2, 1995, and the
related consolidated statements of operations and shareholders' investment and
cash flows for the years ended July 2, 1995 and June 30, 1994, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Champps Entertainment, Inc.
and Subsidiaries as of July 2, 1995 and the results of their operations and cash
flows for the years ended July 2, 1995 and June 30, 1994 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 5, 1996
F-3
<PAGE> 90
UNIQUE CASUAL RESTAURANTS, INC.
COMBINED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 29, JULY 1, MARCH 29,
1996 1995 1997
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (PLEDGED AS COLLATERAL UNDER DAKA INTERNATIONAL'S
VARIOUS DEBT AGREEMENTS -- SEE NOTE 7):
Current assets:
Cash........................................................ $ 5,281 $ 5,727 $ 3,798
Accounts receivable, net.................................... 5,509 2,776 5,460
Inventories................................................. 3,488 2,633 4,389
Deferred tax assets......................................... -- 370 --
Prepaid expenses and other current assets................... 2,174 1,766 2,854
-------- -------- --------
Total current assets................................ 16,452 13,272 16,501
-------- -------- --------
Property and equipment:
Land........................................................ 10,587 8,751 10,587
Buildings and leasehold improvements........................ 80,787 66,008 93,468
Equipment................................................... 42,073 23,342 43,478
-------- -------- --------
133,447 98,101 147,533
Accumulated depreciation and amortization................... (26,168) (18,724) (34,080)
-------- -------- --------
Property and equipment, net.............................. 107,279 79,377 113,453
-------- -------- --------
Investments in, and advances to, affiliates................... 5,000 -- 5,000
Deferred tax assets........................................... 682 847 883
Other assets, net............................................. 12,935 8,935 12,126
-------- -------- --------
$142,348 $102,431 $147,963
======== ======== ========
LIABILITIES AND GROUP EQUITY:
Current liabilities:
Accounts payable............................................ $ 6,305 $ 5,997 $ 9,719
Accrued expenses............................................ 7,177 8,605 8,432
Current portion of long-term debt........................... 1,299 731 1,096
Deferred tax liabilities.................................... 228 -- 676
-------- -------- --------
Total current liabilities........................... 15,009 15,333 19,923
Long-term debt................................................ 5,067 3,278 4,002
Other long-term liabilities................................... 12,210 7,933 12,322
Minority interests............................................ 1,168 1,908 1,104
Commitments and contingencies (Note 11)
Group equity.................................................. 108,894 73,979 110,612
-------- -------- --------
$142,348 $102,431 $147,963
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-4
<PAGE> 91
UNIQUE CASUAL RESTAURANTS, INC.
COMBINED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994,
AND FOR THE NINE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
MARCH 29, MARCH 30,
1996 1995 1994 1997 1996
-------- -------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales............................... $176,050 $131,698 $ 95,798 $148,466 $128,515
Franchising and royalty income...... 7,705 6,032 4,879 3,894 6,528
-------- -------- -------- -------- --------
Total............................ 183,755 137,730 100,677 152,360 135,043
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales and operating
expenses......................... 148,155 108,126 78,562 131,142 106,685
Selling, general and administrative
expenses......................... 24,181 18,566 13,611 21,495 18,107
Depreciation and amortization....... 12,136 6,632 4,551 11,764 8,342
Impairment charges.................. 3,026 -- -- -- 3,026
Merger costs........................ 2,900 -- -- -- 2,900
Interest expense.................... 641 331 300 613 375
Interest income..................... (353) (622) (327) (321) (244)
-------- -------- -------- -------- --------
Total............................ 190,686 133,033 96,697 164,693 139,191
-------- -------- -------- -------- --------
Income (loss) before income taxes
(benefit) and minority interests.... (6,931) 4,697 3,980 (12,333) (4,148)
Income tax expense (benefit).......... (536) 3,068 2,591 (3,721) 404
Minority interests.................... (725) (169) 89 (64) (724)
-------- -------- -------- -------- --------
Net income (loss)..................... $ (5,670) $ 1,798 $ 1,300 $ (8,548) $ (3,828)
======== ======== ======== ======== ========
Pro forma loss per share.............. $(0.50) -- -- $(0.75) --
Pro forma weighted average common
shares outstanding.................. 11,405 11,405
</TABLE>
See notes to combined financial statements.
F-5
<PAGE> 92
UNIQUE CASUAL RESTAURANTS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
AND FOR THE NINE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
MARCH 29, MARCH 30,
1996 1995 1994 1997 1996
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ (5,670) $ 1,798 $ 1,300 $ (8,548) $ (3,828)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............ 12,136 6,632 4,551 11,764 8,342
Impairment charges....................... 3,026 -- -- -- 3,026
Deferred income taxes.................... 763 (36) 402 247 392
Minority interests....................... (725) (169) 89 (64) (724)
Write-down of shareholder note........... -- -- 344 -- --
Change in assets and liabilities, net of
acquisitions:
Accounts receivable...................... (2,733) (657) (954) 49 (2,931)
Inventories.............................. (855) (705) (155) (901) (543)
Prepaid expenses and other assets........ (7,849) (3,140) (1,544) (3,539) (3,346)
Accounts payable and accrued expenses.... (845) 3,700 2,455 4,669 (1,317)
Other long-term liabilities.............. 1,385 1,889 2,178 67 (371)
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities........... (1,367) 9,312 8,666 3,744 (1,300)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......... (51,572) (32,146) (8,181) (21,501) (41,418)
Cash paid for acquisitions, net............ -- (623) (7,137) -- --
Investment in, and advances to
affiliates............................... (5,000) -- (2,800) -- (5,000)
-------- -------- -------- -------- --------
Net cash used in investing
activities..................... (56,572) (32,769) (18,118) (21,501) (46,418)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under a subsidiaries revolving
credit facility, net..................... 1,500
Proceeds from sale-leaseback facility...... 18,651 5,742 -- 9,081 11,833
Contributed capital........................ 39,932 14,179 16,445 10,168 32,899
Sales of preferred stock by subsidiary..... -- -- 1,103 -- --
Repayments of capital lease on
obligations.............................. (1,090) (1,588) (1,328) (2,975) (621)
-------- -------- -------- -------- --------
Net cash provided by financing
activities..................... 57,493 18,333 16,220 16,274 45,611
-------- -------- -------- -------- --------
Net increase (decrease) in cash............ (446) (5,124) 6,768 (1,483) (2,107)
Cash, beginning of year.................... 5,727 10,851 4,083 5,281 5,727
-------- -------- -------- -------- --------
Cash, end of year.......................... $ 5,281 $ 5,727 $ 10,851 $ 3,798 $ 3,620
======== ======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-6
<PAGE> 93
UNIQUE CASUAL RESTAURANTS, INC.
COMBINED STATEMENTS OF GROUP EQUITY
FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
AND FOR THE NINE MONTHS ENDED MARCH 29, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, JUNE 27, 1993............... $ 39,921
Contributed capital:
Cash............................... 16,445
Net income........................... 1,300
--------
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 (unaudited)................... 10,168
Non-cash (unaudited)............... 98
Net loss (unaudited)................. (8,548)
--------
BALANCE, MARCH 29, 1997
(UNAUDITED)........................ $110,612
========
</TABLE>
See notes to combined financial statements.
F-7
<PAGE> 94
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
(INFORMATION AS OF MARCH 29, 1997 AND FOR THE NINE MONTHS ENDED MARCH 29, 1997
AND MARCH 30, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
Unique Casual Restaurants, Inc. (the "Company") is a newly formed 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 below in Note 2 (the "Spinoff"). 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 Spinoff of the Company.
Basis of Presentation and Business
The accompanying combined financial statements include the accounts of the
DAKA International majority controlled subsidiaries which will be transferred to
the Company prior to the Spinoff, 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 a manner similar to a pooling-of-interests. 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 (the "Purchaser"), a wholly-owned subsidiary of Compass Holdings,
Inc., a Delaware corporation, a wholly-owned subsidiary of Compass Group PLC
("Compass"), pursuant to which the Purchaser 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").
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, intend to make 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 for such assets to be
contributed to the Company. Following these transactions, the remaining business
activities of DAKA International will be its existing foodservice operations.
Following consummation of the Offer, and subject to certain conditions, the
Purchaser will merge with and into DAKA International. 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 will distribute to each holder
F-8
<PAGE> 95
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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").
The Distribution is conditioned upon, among other things, the satisfaction
or waiver of all of the conditions to the Offer. The Offer is conditioned upon,
among other things, there being validly tendered and not withdrawn shares of
DAKA International common stock which, when added to the shares then
beneficially owned by Compass and its affiliates, constitute at least two-thirds
of the voting power of all such outstanding shares of DAKA International common
stock on a fully diluted basis. No consideration will be paid by DAKA
International's stockholders for the shares of the Company's common stock. As a
result of the Distribution, the Company will cease to be a subsidiary of DAKA
International and will operate as an independent, publicly-held company. If
shares of DAKA International common stock are not accepted for tender pursuant
to the Offer, DAKA International does not presently intend to effect the
Distribution.
Immediately prior to the Distribution, DAKA International will make a
one-time contribution of certain current foodservice net assets to the Company
(the "Additional Capital Contribution") to provide the Company with additional
working capital to fund operations as such assets and liabilities are
liquidated. However, those assets and liabilities consisting of specific
customer accounts receivable, certain prepaid assets, property and equipment,
vendor trade accounts payable, accrued expenses, contingent liabilities and
deferred taxes have not been included in the accompanying combined financial
statements since the specific assets and liabilities that will ultimately
comprise the Additional Capital Contribution did not exist at the date of the
accompanying historical combined balance sheets of the Company. 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").
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, Australia,
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.
During the nine months ended March 29, 1997, the Company incurred a loss
before income tax benefit and minority interests of approximately $12,300.
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. The Company is negotiating the terms and
conditions of a new bank facility. 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. Prior to the distribution DAKA International has financed the
Company's operating activities principally through DAKA International's lending
agreements.
F-9
<PAGE> 96
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June 30th. For
purposes of these notes to the combined financial statements, the fiscal years
ended June 29, 1996, July 1, 1995 and July 2, 1994 are referred to as 1996, 1995
and 1994, respectively. Fiscal 1996, 1995 and 1994 contain 52, 52 and 53 weeks,
respectively.
Unaudited Interim Information
In the opinion of management, the combined financial statements for the
unaudited periods presented include all adjustments necessary for a fair
presentation in accordance with generally accepted accounting principles,
consisting solely of normal recurring accruals and adjustments. The results of
operations and cash flows for the nine months ended March 29, 1997 and March 30,
1996 are not necessarily indicative of results which would be expected for a
full year.
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
$7,790, $6,550 and $5,981 for 1996, 1995 and 1994, respectively, and $6,743 and
$5,410 for each of the nine months in the periods ended March 29, 1997 and March
30, 1996, 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 financial position and results
of operations, as presented herein, may not be the same as would have occurred
had the restaurant operations been 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 will be 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 financial position
or the results of operations. However, management is reviewing the Company's
restaurant units to determine whether the Company's financial resources after
the Transaction will be sufficient to continue supporting restaurant units with
marginal performance. To the extent that management determines through its
ongoing analysis that the Company will not continue to support such
underperforming restaurants, the Company anticipates recording a charge during
the fourth quarter of fiscal 1997 to provide for exit costs associated with
these restaurant units. Further, the Company anticipates recording additional
charges during the fourth quarter of fiscal 1997 to provide for the costs of
downsizing the Company's corporate and field functions after the Transaction.
F-10
<PAGE> 97
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
MARCH 29,
1996 1995 1997
------ ------ ----------
<S> <C> <C> <C>
Food and liquor........................................ $1,109 $ 786 $1,478
Smallwares............................................. 1,970 1,558 2,277
Supplies............................................... 409 289 634
------ ------ ------
$3,488 $2,633 $4,389
====== ====== ======
</TABLE>
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 1996 and
1995, $653 and $336 of interest costs were capitalized. For the nine months
ended March 29, 1997 and March 30, 1996, the Company capitalized $98 and $478 of
interest costs. There were no interest costs capitalized during 1994.
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. Allocated workers' compensation and general
liability programs by DAKA International were accrued based upon actuarial
studies which determine the estimated amount required to cover 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.
F-11
<PAGE> 98
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 $3,406, $2,205 and $1,036 during 1996, 1995 and 1994, respectively,
and $649 and $3,344 during the nine months ended March 29, 1997 and March 30,
1996, 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 $4,299, $3,827 and $3,843 during
1996, 1995, and 1994, respectively, and $3,245 and $3,184 for the nine months
ended March 29, 1997 and March 30, 1996, 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. Unamortized preopening costs included in other
assets amounted to $3,310, $1,782 and $1,871 at June 29, 1996, July 1, 1995, and
March 29, 1997, respectively.
F-12
<PAGE> 99
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 earnings (loss) per
share.
Adjustments 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 financial position or results of
operations.
Cash Flow Information
The Company participates 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 $641, $331 and $300 in 1996, 1995 and
1994, respectively.
Capital lease obligations of $3,447, $2,225 and $1,435 were incurred when
the Company entered into leases for new restaurant and office equipment in 1996,
1995 and 1994, respectively.
Significant other non-cash investing and financing transactions are as
follows:
1996
- -----
- - The Company sold a restaurant with a book value of $1,306, in exchange for a
$1,280 promissory note.
F-13
<PAGE> 100
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1995
- -----
- - The Company sold three Fuddruckers restaurants, with an aggregate book value
of $1,944, in exchange for various notes receivable.
1994
- -----
- - The Company acquired a Fuddruckers restaurant in exchange for the forgiveness
of a $1,005 promissory note.
- - The Company forgave approximately $334 of a $1,072 promissory note from
former CEI shareholders.
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 approximately 11,405,000 shares are expected to be
issued and outstanding upon the consummation of the Transaction, and 5,000,000
shares of preferred stock, of which no shares will be issued and outstanding.
Pro forma loss per share for 1996 and the nine months ended March 29, 1997
is computed using the weighted average number of shares outstanding as of March
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. Outstanding
options which may be exercised prior to the consummation of the Transaction have
been excluded from the calculation of the weighted average number of shares as
such amounts are anti-dilutive.
In March 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 the
nine months ended March 29, 1997, there would be an immaterial effect to the
Company's reported pro forma loss per share.
Impairment of Long-Lived Assets
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.
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
F-14
<PAGE> 101
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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").
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.
The following presents the operations of the previously separate companies
prior to the consummation of the 1996 Mergers:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
The Company(1)........................... $167,252 (4) $123,498 $ 93,686
CEI...................................... 14,253 (2) 12,470 6,489
Great Bagel and Coffee................... 2,250 (3) 1,762 502
-------- -------- --------
$183,755 $137,730 $100,677
======== ======== ========
Net income (loss):
The Company.............................. $ (5,764)(4) $ 1,331 $ 616
CEI...................................... (109)(2) 209 620
Great Bagel and Coffee................... 203 (3) 258 64
-------- -------- --------
$ (5,670) $ 1,798 $ 1,300
======== ======== ========
</TABLE>
- ---------------
(1) Principally Fuddruckers, ARVI, ADC and CDVI.
(2) For the six-month period ended December 31, 1995.
(3) For the nine-month period ended March 31, 1996.
(4) Includes the results of operations of CEI and Great Bagel and Coffee
subsequent to December 31, 1995 and March 31, 1996, respectively.
Transactions between the Company and the 1996 Merged Companies prior to the
1996 Mergers were not significant. The Company has not recorded an adjustment to
conform the accounting policies of the 1996 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, 1996:
1994 Transactions
On March 29, 1994, DAKA International acquired a 50% ownership interest in
ADC, a newly formed company which then acquired from three individuals two
Champps restaurants located in Minnesota for a purchase price of $2,800 plus
100,000 shares of ADC common stock. In addition, DAKA International invested
$2,800 in ADC in the form of preferred stock. The terms of the preferred stock
provided for an 8% dividend, payable quarterly, mandatory redemption in March
1997 and allowed DAKA International to convert the preferred stock into common
stock at any time at an initial conversion price of $6 per share. In
F-15
<PAGE> 102
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
addition, the preferred stock had voting privileges as if converted to common
stock, giving 57% voting control of ADC; accordingly, ADC has been included in
the Company's combined financial statements (see 1996 Transactions).
On June 7, 1994, the Company acquired the assets, operations and certain
working capital items of nine Fuddruckers restaurants located in Minnesota,
Nebraska and Missouri from a franchisee. The purchase price of $6,273 was paid
in cash at the closing. Also during fiscal 1994, in a series of transactions,
the Company and a majority-owned subsidiary acquired three Fuddruckers
restaurants and the remaining 50% interest in two restaurants from its joint
venture partners. The total purchase price for these five restaurants was $2,382
and consisted of a combination of cash and offsets of notes receivable from the
sellers.
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.
1996 Transactions
On March 31, 1996, DAKA International entered into separate Stock Purchase
Agreements (the "Stock Agreements") with two stockholders of 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.
The pro forma information below does not purport to be indicative of the
results of operations that would have actually been achieved if the transactions
described above had actually been consummated as of the beginning of 1996 and
1995. In addition, the pro forma information below does not purport to be
indicative of the results of operations which may be achieved in the future.
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues....................................................... $183,755 $142,168
======== ========
Net income (loss).............................................. $ (5,674) $ 1,978
======== ========
Pro forma loss per share....................................... $ (0.50)
========
</TABLE>
F-16
<PAGE> 103
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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:
<TABLE>
<CAPTION>
MARCH 29,
1996 1995 1997
------- ------ ---------
<S> <C> <C> <C>
Notes payable......................................... $ 687 $ 829 $ 581
Capital lease obligations............................. 5,679 3,180 4,517
------- ------ -------
6,366 4,009 5,098
Less current portion.................................. (1,299) (731) (1,096)
------- ------ -------
Total............................................... $ 5,067 $3,278 $ 4,002
======= ====== =======
</TABLE>
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 1996 to July 2002. Maturities of long-term
debt, including capital lease obligations, at June 29, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $1,299
1998........................................................ 1,141
1999........................................................ 1,114
2000........................................................ 1,119
2001........................................................ 905
Thereafter.................................................. 788
</TABLE>
Company Assets Serving as Collateral
All of the assets of the Company have been pledged as collateral under DAKA
International's various debt agreements and the Company is a guarantor of any
obligations pursuant to such agreements. During June 1996, DAKA International
amended its revolving line-of-credit agreement principally to increase its
borrowing capacity and extend the maturity date to June 30, 1999 (the "June
Agreement"). DAKA International had $92,969 outstanding on the revolving
line-of-credit agreement at June 29, 1996. At June 29, 1996, DAKA International
was not in compliance with the debt service coverage, minimum tangible net worth
and fixed charge coverage covenants contained in the June Agreement. On October
15, 1996, DAKA International obtained a waiver of noncompliance related to such
covenants from its lenders and renegotiated certain terms and conditions of the
June Agreement (the "October Agreement").
F-17
<PAGE> 104
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On May 7, 1997, DAKA International renegotiated certain terms and
conditions of a previously amended agreement (the "May Agreement", collectively
the "Principal Credit Agreements") whereby DAKA International's borrowing limit
will be sequentially reduced to $72.5 million by March 31, 1998. The maturity
date was extended to April 2, 1998 and certain loan covenants were amended.
In connection with the Transaction, the Purchaser will assume $110 million
of the outstanding DAKA International debt. Any amounts outstanding in excess of
$110 million as of the date the Transaction is consummated will be repaid to the
banks by the Company. At March 29, 1997, DAKA International had approximately
$103.6 million outstanding under its Principal Credit Agreements.
8. OTHER ASSETS
The components of other assets are as follows:
<TABLE>
<CAPTION>
MARCH 29,
1996 1995 1997
------- ------- ---------
<S> <C> <C> <C>
Preopening costs...................................... $ 5,567 $ 2,557 $ 3,690
Reacquired franchise rights........................... 4,488 4,718 4,877
Notes receivable...................................... 3,320 1,544 3,443
Deferred rent......................................... 1,673 416 1,938
Other................................................. 2,332 2,240 2,309
------- ------- -------
17,380 11,475 16,257
Less accumulated amortization......................... (4,445) (2,540) (4,131)
------- ------- -------
$12,935 $ 8,935 $12,126
======= ======= =======
</TABLE>
9. ACCRUED EXPENSES
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
MARCH 29,
1996 1995 1997
------- ------- ---------
<S> <C> <C> <C>
Salaries, wages and related taxes....................... $3,096 $3,249 $2,890
Taxes................................................... 2,134 2,288 2,146
Advertising............................................. -- -- 1,330
Other................................................... 1,947 3,068 2,066
------ ------ ------
$7,177 $8,605 $8,432
====== ====== ======
</TABLE>
10. INCOME TAXES
In 1994, the Company changed its method of accounting for income taxes by
adopting SFAS No. 109, "Accounting for Income Taxes." Prior to 1994, the Company
accounted for income taxes pursuant to SFAS No. 96, "Accounting for Income
Taxes." The Company elected to record the effect of adopting SFAS No. 109 in
1994's combined financial statements rather than by restating prior years'
combined financial statements. The adoption of SFAS No. 109 had no material
impact on net income.
F-18
<PAGE> 105
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
MARCH 29, MARCH 30,
1996 1995 1994 1997 1996
------- ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Currently (receivable) payable:
Federal......................... $(1,299) $2,328 $1,642 $(3,968) $ 12
State........................... -- 776 547 -- --
Deferred income tax (benefit)
expense...................... 763 (36) 402 247 392
------- ------ ------ ------- ----
Income tax (benefit) expense.... $ (536) $3,068 $2,591 $(3,721) $404
======= ====== ====== ======= ====
</TABLE>
Deferred tax assets and liabilities are comprised of the following
<TABLE>
<CAPTION>
ASSET (LIABILITY)
---------------------------------
MARCH 29,
1996 1995 1997
------- ------- ---------
<S> <C> <C> <C>
CURRENT:
Accrued expenses.................................... $ 321 $ 428 $ 486
Prepaid expenses.................................... (1,467) (821) (1,640)
Net operating loss carryforwards.................... 327 342 327
Other............................................... 591 421 151
------- ------- -------
$ (228) $ 370 $ (676)
======= ======= =======
NONCURRENT:
Net operating loss carryforwards.................... $ 4,876 $ 4,924 $ 5,858
Depreciation and amortization....................... 470 (400) 574
Deferred income..................................... 166 163 169
Accrued expenses.................................... 729 1,184 892
Less valuation allowance............................ (5,559) (5,024) (6,610)
------- ------- -------
$ 682 $ 847 $ 883
======= ======= =======
</TABLE>
The following is a reconciliation of income taxes at the federal statutory
rate to the Company's income tax expense:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
MARCH 29, MARCH 30,
1996 1995 1994 1997 1996
------- ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Income taxes computed at statutory
federal income tax rates........ $(2,172) $1,703 $1,362 $(4,294) $(1,198)
Non-deductible merger costs....... 1,175 -- -- -- 1,175
State income taxes, net of federal
tax benefit..................... -- 269 215 -- --
Increase in the valuation
allowance....................... 535 822 851 1,051 416
Other, net........................ (74) 274 163 (478) 11
------- ------ ------ ------- -------
Income tax (benefit)
expense............... $ (536) $3,068 $2,591 $(3,721) $ 404
======= ====== ====== ======= =======
</TABLE>
As of June 29, 1996, the Company had federal net operating loss
carryforwards of approximately $11,502 expiring at various dates through 2011.
Approximately $8,646 of the losses are related to Fuddruckers and $2,856 are
related to Fuddruckers' 63% owned subsidiary, ARVI. Both the Fuddruckers' and
ARVI loss
F-19
<PAGE> 106
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
carryforwards are limited on an annual basis. For the nine months ended March
29, 1997 and fiscal years ended 1996, 1995 and 1994, the Company provided a
valuation allowance for the tax benefit of the net operating loss carryforwards
not expected to be utilized based on historical operating results and other
available evidence. During the fiscal years ended 1996, 1995 and 1994, and the
nine months ended March 29, 1997 the valuation allowance was increased by $535,
$822 and $851 and $1,051, respectively, relating to the net operating losses
incurred by both Fuddruckers and ARVI.
11. COMMITMENTS AND CONTINGENCIES
Transaction Indemnifications
The Company has agreed to assume certain liabilities in connection with the
Transaction including any losses or damages incurred 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 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 will assume the
existing lease obligations and purchase commitments of Daka International.
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 $25,000
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, in which the Company had an ownership interest in the real estate
and pay 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 $1,250. 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 are such that they are accounted for as operating
leases. As of June 29, 1996, 11 Fuddruckers restaurants have been sold to FFCA.
In January 1997, the Company obtained $7.5 million of sale-leaseback financing
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 $40,000 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 in which the Company has an
ownership interest in the real estate 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
F-20
<PAGE> 107
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, 1996, approximately $4,000 of the lease facility commitment was available
for use.
Included in property and equipment in 1996, 1995, 1994 and March 29, 1997
are $5,794, $3,271, $1,340 and $5,728, respectively, of equipment held pursuant
to capital lease arrangements. The related accumulated amortization was $1,208,
$424, $133 and $2,237, respectively. Capital lease additions for equipment
totaled $3,447, $2,225 and $1,435 in 1996, 1995 and 1994, respectively and
$1,707 for the nine months ended March 29, 1997.
Future minimum lease payments pursuant to leases with noncancelable lease
terms in excess of one year at June 29, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS OPERATING CAPITAL
ENDING LEASES LEASES
------------ --------- -------
<S> <C> <C>
1997............................................................. $ 17,155 $1,548
1998............................................................. 15,742 1,542
1999............................................................. 15,506 1,533
2000............................................................. 14,901 1,185
2001............................................................. 14,635 615
Thereafter....................................................... 99,999 30
-------- ------
Total future minimum lease payments.............................. $177,938 6,453
========
Less amount representing interest................................ (774)
------
Present value of future minimum lease payments................... $5,679
======
</TABLE>
Total rent expense in 1996, 1995 and 1994 amounted to $16,755, $12,182 and
$9,329, respectively, and $15,636 and $12,136 for the nine months ended March
29, 1997 and March 30, 1996, 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, 1996 and March
29, 1997, 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.
F-21
<PAGE> 108
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996 and March 29, 1997, the Company's commitments under the
Coffee Agreement were approximately $400 and $370, respectively.
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. 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.
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
financial condition, results of operations or cash flows.
12. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
Stock Options
The Company's employees participate 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, 1996 and March
29, 1997, 539,146 and 580,949 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.
Concurrent with a consummation of the Transaction, a stock option and
restricted stock plan for the benefit of the employee and non-employee directors
of the Company will be adopted. The Company expects to authorize and reserve for
issuance 1,250,000 shares under the Stock Option Plan. Each outstanding option
to acquire DAKA International common stock at the Transaction date will be
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"). In
connection with determining the exercise price of the Adjusted Options, the
exercise prices of the Adjusted Options will be determined so that each option
holder will remain in an equivalent economic position before and after the
Transaction.
Employee Benefit Plan
The Company's employees participate in a 401(k) retirement plan sponsored
by DAKA International. The Plan enables 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
F-22
<PAGE> 109
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
contributed $204, $251 and $0 to the Plan in 1996, 1995 and 1994, respectively.
The Company has not yet made a fiscal 1997 discretionary contribution. The
Company expects that after the consummation of the Transaction, plans similar to
those presently offered by DAKA International will be 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 vest on June 30, 1997. At June 29, 1996,
$1,221 had been accrued representing a pro rata portion of the amount expected
to be payable under the plan based on the market value of DAKA International's
common stock on June 29, 1996. Due to the decline in the market value of DAKA
International's common stock, the amount accrued was reversed during the first
quarter of fiscal 1997.
On May 22, 1997, the Board of Directors 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 expiring on June 30,
1997 to acquire 228,260 shares of DAKA International Stock at an exercise price
of $12.07 (the "Deemed LTIP Option"). Upon consummation of the Transaction, the
Deemed LTIP Option will be converted in a manner similar to the Adjusted Options
and the Company will purchase the Chief Executive Officer's Deemed LTIP Option.
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 were 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.
Long-Term Debt -- The fair values of each of the Company's long-term
debt instruments approximates the carrying values since the interest rates
are generally floating or fixed for a period of short duration and are
based on prevailing market rates.
F-23
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------------------------------------------------------------------------- ----
<C> <C> <S> <C>
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 Registrant, Parent and Compass
Holdings, together with certain exhibits thereto.............................
3.1 -- Certificate of Incorporation of the Registrant...............................
3.2 -- By-laws of the Registrant....................................................
3.3 -- Form of Amended and Restated Certificate of Incorporation of the
Registrant...................................................................
3.4 -- Form of Amended and Restated By-laws of the Registrant.......................
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
International, Daka, the Registrant, Champps Entertainment, Inc. ("Champps"),
Fuddruckers, Inc. ("Fuddruckers"), Purchaser and Parent......................
10.2 -- Post-Closing Covenants Agreement, dated as of May 27, 1997, by and among DAKA
International, Daka, the Registrant, Champps, Fuddruckers, Purchaser and
Parent.......................................................................
10.3 -- Stock Purchase Agreement, dated as of May 26, 1997, between DAKA
International, Parent, Compass Interim, First Chicago Equity Corporation,
Cross Creek Partners I and the other holders of Series A Preferred Stock of
DAKA International...........................................................
10.4 -- Form of the Registrant's 1997 Stock Option and Incentive Plan................
10.5 -- Form of the Registrant's 1997 Stock Purchase Plan............................
10.6 -- Form of Indemnification Agreement, by and between the Registrant and
directors and officers of DAKA International.................................
10.7 -- Employment Agreement, dated as of January 1, 1997, by and between DAKA
International and William H. Baumhauer.......................................
10.8 -- Employment Agreement, dated as of January 1, 1997, by and between DAKA
International and Allen R. Maxwell...........................................
10.9 -- Employment Agreement, dated as of May 23, 1997, by and among Compass Group
USA, Inc., DAKA International, Daka and Allen R. Maxwell.....................
10.10 -- Employment Agreement, dated as of February 21, 1996, by and among Dean P.
Vlahos, DAKA International and Champps.......................................
20.1 -- Form of Letter to Stockholders of DAKA International, as amended.............
21.1 -- List of Subsidiaries of the Registrant.......................................
*23.1 -- Consent of Deloitte & Touche LLP.............................................
*23.2 -- Consent of Arthur Andersen LLP...............................................
27.1 -- Financial Data Schedule......................................................
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement
No. 0-22639 of Unique Casual Restaurants, Inc. on Form 10 of our report
dated July 14, 1997 (which refers to a report of other auditors with
respect to the consolidated financial statements of Champps Entertainment,
Inc. included in the Company's combined financial statements as of July 1, 1995
and the years ended July 1, 1995 and July 2, 1994 and includes an explanatory
paragraph with respect to the Company's adoption during the year ended
June 29, 1996, of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of"), appearing in the Information Statement, which is part of
this Registration Statement.
Deloitte & Touche LLP
Boston Massachusetts
July 14, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated April 5, 1996 on the consolidated financial statements of
Champps Entertainment, Inc. (which are included in the financial statements of
Unique Casual Restaurants, Inc.) in this Form 10 of Unique Casual Restaurants,
Inc. It should be noted that we have not audited any financial statements of
Champps Entertainment, Inc. subsequent to July 2, 1995, or performed any audit
procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
July 14, 1997
