UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 0-22639
UNIQUE CASUAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Place, 55 Ferncroft Road, Danvers, MA 01923
(Address of principal executive offices) (Zip Code)
(978) 774-6606
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $.01 par value, outstanding at November 9,
1998: 11,605,659.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
FORM 10-Q
Fiscal Quarter ended September 27, 1998
TABLE OF CONTENTS
PART I - Financial Information
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statement of Changes in Stockholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's' Discussion and Analysis of Results of Operations and Financial
Condition 11
Item 4. Submission of Matters to a Vote of Security Holders 16
</TABLE>
PART II - Other Information
<TABLE>
<CAPTION>
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
</TABLE>
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
As of September 27, 1998 and June 28, 1998
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 27, June 28,
1998 1998
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents (overdraft) $ (1,927) $ (646)
Cash - restricted 2,602 2,602
Accounts receivable, net 3,150 2,652
Inventories 4,374 4,168
Prepaid expenses and other current assets 2,162 1,567
-------- --------
Total current assets 10,361 10,343
Property and equipment, net 74,125 73,723
Investments 5,000 5,000
Other assets, net 3,289 3,480
-------- --------
Total assets $ 92,775 $ 92,546
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 10,294 $ 10,811
Accrued expenses 11,281 11,218
Current portion of long-term debt 2,199 2,209
-------- --------
Total current liabilities 23,774 24,238
Long-term debt, net of current portion 4,557 4,757
Other long-term liabilities 7,407 7,753
-------- --------
Total liabilities 35,738 36,748
-------- --------
Minority interests and obligations under put agreement 5,400 5,400
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized; 11,600,085 and 11,593,000 shares issued
and outstanding at September 27, 1998 and
June 28, 1998, respectively 116 116
Additional paid-in capital 78,017 78,017
Accumulated deficit (26,496) (27,735)
-------- --------
Total stockholders' equity 51,637 50,398
-------- --------
Total liabilities and stockholders' equity $ 92,775 $ 92,546
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 27, 1998 and September 28, 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 27, September 28
1998 1997
---- ----
<S> <C> <C>
Revenues:
Sales $ 54,184 $ 50,455
Franchising and royalty income 831 1,078
-------- --------
Total revenues 55,015 51,533
-------- --------
Costs and expenses:
Cost of sales and operating expenses 48,975 45,516
Depreciation and amortization 1,390 2,181
Selling, general and administrative expenses 3,363 4,805
Interest expense 63 108
Interest income (55) (213)
Other expense, net
40 31
Earnings from operations before income taxes and
cumulative effect of change in accounting for
preopening costs 1,239 (895)
Cumulative effect of change in accounting for preopening costs -- (987)
-------- --------
Earnings (loss) before income taxes 1,239 (1,882)
Income taxes -- --
-------- --------
Net earnings (loss) $ 1,239 $ (1,882)
======== ========
Basic earnings from operations before income taxes
and cumulative effect of change in accounting for
preopening costs per common share $ 0.11 $ (0.16)
======== ========
Diluted earnings from operations before income taxes
and cumulative effect of change in accounting for
preopening costs per common share $ 0.11 $ (0.16)
======== ========
Basic weighted average shares outstanding 11,599 11,464
Diluted weighted average shares outstanding 11,782 11,464
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 27, 1998 and September 28, 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 27, September 28
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,239 $(1,882)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of change in accounting for preopening costs -- 987
Depreciation and amortization 1,590 2,827
Changes in restricted cash balances -- (2,000)
Changes in current assets and liabilities (1,561) (937)
Changes in other long-term liabilities and deferrals (346) 6,910
------- -------
Net cash provided by (used in) operating activities 922 5,905
Cash flows from investing activities:
Purchases of property and equipment (1,994) (2,277)
------- -------
Net cash flows from investing activities (1,994) (2,277)
Cash flows from financing activities:
Repayment of capital lease obligations (209) (813)
Contributed capital -- (1,528)
Proceeds from issuances of common stock -- 265
Proceeds from sale-leaseback facility -- 1,337
------- -------
Net cash flows from financing activities (209) (739)
------- -------
Net cash flows (1,281) 2,889
Cash and cash equivalents (overdraft), beginning of period (646) 172
------- -------
Cash and cash equivalents, end of period $(1,927) $ 3,061
======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended September 27, 1998
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Shares Stock Capital Deficit Total
------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, June 28, 1998 11,593 116 $ 78,017 $(27,735) $ 50,398
Common shares issued 7 -- -- -- --
Net (loss) -- -- -- 1,239 1,239
-------- -------- -------- -------- --------
Balance, September 27, 1998 11,600 116 $ 78,017 $(26,496) $ 51,637
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 27, 1998 and September 28, 1997
(Unaudited)
1. Background and Basis of Presentation
Background
Unique Casual Restaurants, Inc. (the "Company") is a Delaware corporation formed
on May 27, 1997 which was spun-off to holders of the common stock of DAKA
International, Inc. ("DAKA International") pursuant to the transactions
described below in Note 2 (the "Spin-off"). The Company's principal business
activities are to own and operate the restaurant operations previously operated
by various subsidiaries and divisions of DAKA International prior to the
formation and the Spin-off of the Company.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Fuddruckers, Inc. ("Fuddruckers"), Champps Entertainment, Inc. ("CEI" or
"Champps"), The Great Bagel and Coffee Company ("Great Bagel and Coffee"),
Casual Dining Ventures, Inc. ("CDVI"), Atlantic Restaurant Ventures, Inc.
("ARVI") and Restaurant Consulting Services, Inc. ("RCS"). 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. Minority stockholders' equity in earnings (losses)
of less than 100% owned subsidiaries is presented as minority interests in the
accompanying consolidated financial statements. Significant intercompany
balances and transactions have been eliminated in consolidation.
These consolidated financial statements do not include certain information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, all adjustments
considered necessary for a fair presentation have been included and are of a
normal, recurring nature. Operating results for the thirteen weeks ended
September 27, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 29, 1999. Certain reclassifications of
prior year balances have been made in the accompanying financial statements in
order to conform with the presentation in the current year. Such
reclassifications had no effect on previously reported net operating results.
These statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended June 29, 1998. The accounting policies used in preparing
these consolidated financial statements are the same as those described in the
Company's annual report on Form 10-K, except that during the current period the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 130, ("SFAS 130"), "Reporting Comprehensive Income." See Note 4.
2. Formation of the Company
On May 27, 1997, DAKA International and its wholly-owned subsidiary, Daka, Inc.,
a Massachusetts corporation ("Daka"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Compass Interim, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Holdings, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Group PLC (collectively
"Compass"), pursuant to which Compass agreed, upon the satisfaction of certain
conditions, to commence a tender offer (the "Offer") for all of the outstanding
shares of DAKA International common stock (the "Merger"). The Offer was
consummated on July 17, 1997. Immediately prior to the consummation of the
Offer, pursuant to a plan of contribution and distribution as described in the
Reorganization Agreement (the "Reorganization Agreement"), dated as of May 27,
1997, by and among DAKA International, Daka, the Company and Compass, DAKA
International and certain of its subsidiaries made various contributions of
assets and equity interests to each other in the form of dividends and capital
contributions in order to divest DAKA International of its restaurant businesses
which were contributed to the Company.
5
<PAGE>
During 1998, certain remaining non-restaurant operating assets and liabilities
of DAKA International were also contributed to the Company (the "Additional
Capital Contribution") consisting of cash, prepaid expenses, notes receivable,
property and accounts payable, accrued expenses, refundable income taxes and
contingent liabilities. These assets and liabilities resulted in a net decrease
to stockholders' equity of approximately $1.5 million and have been recorded
within their respective captions during 1998.
Following the consummation of the Offer, Compass merged with and into DAKA
International. Pursuant to the Offer, DAKA International distributed to each
holder of record of shares of DAKA International common stock, one share of
common stock of the Company for each share of DAKA International owned by such
stockholder (the "Distribution"). No consideration was paid by DAKA
International's stockholders for the shares of the Company's common stock. As a
result of the Distribution, the Company ceased to be a subsidiary of DAKA
International and began operating as an independent, publicly-held company on
July 17, 1997. The Company's net loss during the period June 30 to July 17, 1997
has been charged to retained earnings in the accompanying financial statements,
as the loss was not material.
Effective July 1, 1997, the Company entered into a sale and services agreement
with RCS whereby the Company sold to RCS for an aggregate purchase price of $2.3
million certain data processing equipment. The purchase price will be satisfied
through the repayment of a promissory note due June 30, 2002 which bears
interest at 6% per annum. The promissory note was contributed to the Company as
part of the Additional Capital Contribution. The Company also received DAKA
International's 50% interest in RCS on July 17, 1997. In connection with this
sale, the Company has entered into a management agreement with RCS whereby the
Company has agreed to provide certain managerial services to RCS. In addition,
the Company has entered into a two-year service agreement with RCS for data
processing and consulting services for an annual fee of $1.8 million. The
Company consolidates RCS' operations until such time as the obligations of RCS
to the Company are satisfied.
3. Acquisition and Disposition Transactions
Pending Sale of Fuddruckers
On July 31, 1998, the Company agreed to sell all of the issued and outstanding
stock of Fuddruckers, Inc. and subsidiaries to King Cannon, Inc. (the
"Fuddruckers Sale"). The purchase price for Fuddruckers is $43.0 million,
subject to certain adjustments based on, among other things, the level of
Fuddruckers fiscal 1998 earnings before interest, taxes, depreciation and
amortization (EBITDA), calculated pursuant to the Stock Purchase Agreement, and
closing date working capital. The transaction was approved by the Company's
stockholders on November 5, 1998. The Company expects the transaction will close
in November, 1998, although there can be no assurance that the transaction will
close.
Pursuant to the Stock Purchase Agreement, the Company has agreed to settle
certain cash obligations not assumed by the buyer, including equipment lease
termination costs. Such expenses are expected to aggregate $6.1 million and will
be recorded as incurred during the second quarter of fiscal 1999.
Closure of Great Bagel and Coffee
On June 28, 1998, the Company ceased all operations of the Great Bagel & Coffee
business. Previously, on December 30, 1997, Great Bagel & Coffee had acquired
the assets and liabilities of one of its former franchisees, then operating a
commissary and eight Great Bagel & Coffee restaurants in Phoenix, Arizona. The
Company had hoped that this transaction would help Great Bagel & Coffee improve
sales and margins, and also provide the best opportunity for a possible sale of
the business. However, the business did not improve and no buyer or strategic
partner could be located. Accordingly, a decision was reached to close the
business. Exit costs associated with this decision of $40,000 during the three
months ended September 27, 1998, and sales of $909,000 and operating expenses of
$940,000 for the three months ended September 28, 1997, for Great Bagel & Coffee
have been recorded net as other expense in the accompanying consolidated
financial statements.
6
<PAGE>
4. Significant Accounting Policies
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if outstanding options and warrants were exercised and result in the
issuance of common stock.
A reconciliation of the denominators of the basic and diluted earnings per share
computations is shown below:
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
----------------------------
September 27, September 28,
1998 1997
---- ----
<S> <C> <C>
Shares for basic earnings per share 11,599 11,464
Effect of options and warrants 183 --
------ ------
Shares for diluted earnings per share 11,782 11,464
====== ======
</TABLE>
No adjustments have been made to net income in computing diluted income per
share.
Options to purchase 807,873 shares of common stock were excluded from the
calculation of diluted earnings per share for the three months ended September
27, 1998 because their exercise prices exceeded the average market price of
common shares for the period.
Comprehensive Income
Effective June 29, 1998, the Company adopted the provisions of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." No items, other
than net income, are currently considered elements of comprehensive income, and
accordingly, net income and comprehensive income are the same for all periods
presented.
5. Commitments and Contingencies
Spin-Off Indemnifications
The Company agreed to assume certain liabilities in connection with the Spin-off
including all losses or damages related to the purported class action lawsuit
discussed further below. In addition, the Company entered into a Post-Closing
Covenants Agreement which provides for post-closing payments by the Company to
Compass under certain circumstances. Further, the Company agreed to a $15.0
million settlement with Compass pursuant to the Post-Closing Covenants Agreement
and to reimburse Compass an additional $3.8 million for liabilities assumed by
the Company but paid by Compass. The effect of this settlement has been
reflected in the net distribution recorded in the accompanying consolidated
financial statements. The Company also agreed to indemnify Compass for certain
losses on liabilities existing prior to the Spin-off Transaction Date but
unidentified at such date. This indemnification begins to expire on December 31,
1998. The Company believes the risk of a significant claim for indemnification
being presented by Compass is remote.
7
<PAGE>
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 agreed to purchase substantially all shares of
common stock of the subsidiary not currently owned by the Company. The
subsidiary operates 22 Fuddruckers restaurants. The partnership also invested
$1.1 million in shares of the subsidiary's preferred stock which has been
recorded as minority interest at June 29, 1997. 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 $5.4 million 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 January 1,
2000, and, if exercised, is payable on January 31, 2000.
On the initial date of the put/call agreement and through June 29, 1997, 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
$5.4 million based upon an independent valuation of the common stock obtained by
the Company from an investment banking firm. At June 28, 1998, management of the
Company believed that the market value of the Fuddruckers assets held by the
subsidiary and not owned by the Company had decreased to a nominal level and,
accordingly, the Company recorded a charge of $4.3 million to reflect the
minority interest at its estimated purchase price under the put/call agreement.
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 legal fees. On December 19, 1997, the
parties entered into a Stipulation and Agreement of Settlement pursuant to which
defendants deny any wrongdoing, and the parties agreed to settle the matter as a
class action, subject to the court's approval, with payment of $3.5 million to
the class. The Company has agreed to indemnify Compass for any losses or
expenses associated with the complaint. On February 10, 1998, the Company
announced that it had agreed to settle the case for $3.5 million. While
defendants deny all of the allegations in the complaint and any wrongdoing
whatsoever, they believed that settlement of the case was in the best interests
of the Company and its stockholders to avoid the costs and risks of litigation.
The settlement had no impact on results of operations and the settlement payment
was funded from restricted cash deposits previously set aside for this
contingency. As a result of the settlement, approximately $1.5 million in
restricted cash deposits were returned to the Company. On January 27, 1998, the
court preliminarily approved the settlement and set the timetable for granting
final approval. The court concluded a final settlement hearing on April 27,
1998. The court took the matter under advisement and has not yet made its final
determination concerning the settlement. While the Company cannot predict when
the court will make that determination or what the court's determination
ultimately will be, the Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's consolidated
financial condition, results of operations or cash flows.
The Company is also engaged in various other actions arising in the ordinary
course of business or pursuant to agreement with Compass as previously
discussed. 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 consolidated financial condition,
results of operations or cash flows.
8
<PAGE>
6. Statements of Cash Flows
General and administrative expenses include depreciation expense on corporate
assets of $200,000 and $215,000 in the three months ended September 27, 1998 and
September 28, 1997, respectively. Depreciation expense of $44,000 is included in
other expense in the three months ended September 28, 1997.
The Company received $62,000 and $108,000 in interest income payments in the
three months ended September 27, 1998 and September 28, 1997, respectively, and
paid $325,000 in income taxes during the three months ended September 28, 1997.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
9
<PAGE>
7. Business Information
Revenue and costs as shown below are directly related to each business and do
not include an allocation of corporate expenses, non-operating income, interest
expense and income taxes. There are no sales among the Company's businesses. The
table below presents certain financial information for the Company's Fuddruckers
and Champps businesses for the thirteen week periods ended September 27, 1998
and September 28, 1997:
<TABLE>
<CAPTION>
(In thousands)
September 27, September 28,
1998 1997
---- ----
<S> <C> <C>
Total Revenues:
Restaurant sales - Fuddruckers $ 33,934 $ 33,455
Franchising income - Fuddruckers 669 974
Restaurant sales - Champps 20,250 17,000
Franchising income - Champps 162 104
-------- --------
Total revenues $ 55,015 $ 51,533
======== ========
Champps:
Sales from restaurant operations 20,250 17,000
Operating expenses:
Cost of sales 5,868 4,943
Labor 6,655 5,591
Other restaurant operating expenses 5,478 4,774
Depreciation and amortization 735 734
-------- --------
Income from restaurant operations 1,514 958
Franchising income 162 104
-------- --------
Income from restaurant and franchising operations 1,676 1,062
-------- --------
Fuddruckers:
Sales from restaurant operations 33,934 33,455
Operating expenses:
Cost of sales 9,247 9,244
Labor 10,784 10,341
Other restaurant operating expenses 10,943 10,623
Marketing and promotion 345 806
Depreciation and amortization 655 1,447
-------- --------
Income from restaurant operations 1,960 994
Franchising income 669 974
-------- --------
Income from restaurant and franchising operations 2,629 1,968
-------- --------
Income from restaurant and franchising operations 4,305 3,030
General and administrative expenses 3,018 3,999
-------- --------
Earnings (loss) from operations before interest,
income taxes, and cumulative effect of change
in accounting for preopening costs 1,287 (969)
Interest expense (63) (108)
Interest income 55 213
Other expense, net (40) (31)
-------- --------
Earnings (loss) from operations before income taxes
and cumulative effect of change in accounting
for preopening costs $ 1,239 $ (895)
======== ========
</TABLE>
<PAGE>
10
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General
The following Management's Discussion and Analysis of Results of Operations and
Financial Condition is based upon the historical consolidated financial
statements of the Company, which present the Company's results of operations,
financial position and cash flow. Prior to July 17, 1997 the Company operated as
part of DAKA International. Certain other non-restaurant operating assets and
liabilities of DAKA International were contributed to the Company as described
in Note 2 to Consolidated Financial Statements. Those assets and liabilities
consisting of notes receivable, property, accounts payable, accrued expenses and
contingent liabilities have been recorded within their respective captions
during fiscal 1998 and resulted in a decrease to stockholders' equity of $1.5
million.
Certain reclassifications have been made to the selected financial data and
other financial data presented for prior periods to be consistent with current
classifications.
RESULTS OF OPERATIONS
Overview
The Company reported operating income before income taxes of $1,293,000, and an
operating loss before income taxes of $1,882,000 for the three month periods
ended September 27, 1998 and September 28, 1997, respectively. While the Company
believes it has strategies that will give it the best opportunity to maintain
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, successfully reduce
selling, general and administrative expenses as a percentage of sales from
historical levels while continuing to increase net revenues from its existing
and continuing restaurants and successfully execute its growth strategy for the
Champps Americana restaurant chain. While progress has been made during the
quarter ended September 27, 1998 in many of these areas, there can be no
assurance that the Company will be able to maintain profitability on a sustained
basis.
On July 31, 1998, the Company agreed to sell its Fuddruckers business to King
Cannon, Inc. ("King Cannon"), a private company controlled by Michael Cannon,
for $43.0 million in a transaction expected to close in November 1998. The
transaction was approved by a majority vote of the stockholders on November 5,
1998. As a result of these events, the Company's ongoing operations will consist
primarily of owning, operating and franchising Champps Americana restaurants.
The Company also owns a 17% passive investment in La Salsa Fresh Mexican Grill
("La Salsa") and a 50% interest in Restaurant Consulting Services, Inc. ("RCS"),
a diversified consulting and technology company offering data processing,
strategic planning and other technology services on an outsource basis to its
customers.
On September 24, 1998, the Company announced it had retained Bear Stearns & Co.,
Inc. to assist the Company's board of directors (the "Board") in evaluating and
seeking financial and strategic alternatives, including a possible sale of the
Company. There can be no assurance, however, that the Company will pursue a sale
or any other specific alternative or that it will be able to reach any agreement
or complete any transaction that it may undertake.
11
<PAGE>
The Company's Champps Americana restaurant chain is in the expansion phase. The
timing of revenues and expenses associated with the opening of new restaurants
or the closing or repositioning of existing restaurants are expected to result
in fluctuations in the Company's quarterly results. In addition, the Company's
results, and the results of the restaurant industry as a whole, may be adversely
affected by changes in consumer tastes, discretionary spending priorities,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, traffic patterns, weather conditions, employee
availability and the type, number and location of competing restaurants.
Changes in any of these factors could adversely affect the Company.
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and 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 the Company has been able to manage its 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.
In recent periods the Company's Fuddruckers restaurant chain has experienced
operational difficulties which have impacted its profitability. The Company also
believes certain of its Fuddruckers locations opened in fiscal 1995, 1996 and
1997 have underperformed principally due to poor real estate selection and, in
certain new markets, consumer confusion over the Fuddruckers core concept of the
"World's Greatest Hamburger". The Company believes such consumer confusion was
due in part to design changes to its restaurants opened in the last three fiscal
years which de-emphasized the Butcher Shop and Bakery which, the Company
believes, resulted in new customers not realizing the quality of the ingredients
and freshness of the products used in making its sandwiches and other menu items
when compared with its competitors. The Company believes it has addressed these
issues for future Fuddruckers locations, although no Company Fuddruckers
restaurants are presently planned to open in fiscal 1999 and the Company has
decided to sell its Fuddruckers business in a transaction expected to close in
November 1998.
Notwithstanding these risks, the Company believes that its near-term strategies,
including, but not limited to, continued expansion of Champps, improving
operational excellence, and anticipated continued lower general and
administrative expenses from historical levels resulting from actions taken
since June 29, 1997 and the effects of the spin-off from DAKA International, the
proposed sale of Fuddruckers, and other related transactions, should provide it
with the best opportunity for improved overall profitability.
Overall Results of Operations
The Company reported net earnings of $1,293,000 for the three month period ended
September 27, 1998 compared with a net loss of $1,882,000 for the same period a
year ago. The improvement year over year results from improved results of
operations in each business segment and from lower general and administrative
expenses between years. These matters are discussed further below. Total
revenues for the period ended September 27, 1998, increased 6.8% to $55.0
million compared with $51.5 million last year. This increase reflects additional
restaurant revenues at Champps and Fuddruckers offset, in part, by lower
franchising income in Fuddruckers as discussed further below.
12
<PAGE>
The following tables set forth, for the periods presented, certain financial
information for the Company's business segments. For further information
relating to these segments see Note 7 to Notes to Consolidated Financial
Statements.
Champps
<TABLE>
<CAPTION>
(In thousands)
September 27, September 28,
1998 1997
---- ----
<S> <C> <C>
Restaurant sales $ 20,250 $ 17,000
======== ========
Sales from Champps-owned restaurants 100.0% 100.0%
Operating expenses:
Cost of sales (29.0) (29.1)
Labor (32.9) (32.9)
Other restaurant operating expenses (27.0) (28.1)
Depreciation and amortization (3.6) (4.3)
-------- --------
Income from restaurant operations 7.5% 5.6%
======== ========
Income from restaurant operations $ 1,514 $ 958
Franchising income 162 104
-------- --------
Income from restaurant and franchising operations $ 1,676 $ 1,062
======== ========
Number of restaurants (end of period)
Champps-owned 16 14
Franchised 12 11
-------- --------
Total restaurants 28 25
======== ========
</TABLE>
Sales in Champps-owned restaurants increased $3.3 million, or 19.1%, to $20.3
million for the quarter ended September 27, 1998 compared to $17.0 million for
the quarter ended September 28, 1997. This increase results from the opening of
four additional restaurants between periods and an increase in same store sales
of approximately 1.0% offset, in part, by the sale of one unit in February 1998
to Champps' former chief executive officer and founder.
Income from restaurant operations increased 58.0% to $1.5 million for the
quarter ended September 27, 1998 as compared to $1.0 million for the comparable
quarter of last year. This increase results primarily from costs associated with
a new store opening incurred during the three months ended September 27, 1998
compared to insignificant preopening costs incurred during the current three
months. This effect is coupled with lower costs of sales, labor costs and
depreciation and amortization expenses expressed as a percentage of sales,
offset, in part, by higher occupancy and operating lease payments originating
subsequent to the prior period.
13
<PAGE>
Fuddruckers
<TABLE>
<CAPTION>
September 27, September 28,
1998 1997
---- ----
<S> <C> <C>
Restaurant sales $ 33,934 $ 33,455
========= =========
Sales from Fuddruckers-owned restaurants: 100.0% 100.0%
Operating expenses:
Cost of sales (27.3) (27.6)
Labor (31.8) (30.9)
Other restaurant operating expenses (32.2) (31.8)
Marketing and promotion (1.0) (2.4)
Depreciation and amortization (1.9) (4.3)
--------- ---------
Income from restaurant operations 5.8% 3.0%
========= =========
Income from restaurant operations $ 1,960 $ 994
Franchising income 669 974
--------- ---------
Income from restaurant and franchising operations $ 2,629 $ 1,968
========= =========
Number of restaurants (end of period):
Fuddruckers-owned 111 116
Franchised 95 85
--------- ---------
Total restaurants 206 201
========= =========
</TABLE>
Sales in Fuddruckers-owned restaurants increased $0.5 million, or 1.4%, for the
three months ended September 27, 1998 compared to the quarter ended September
28, 1997. This increase results from an increase in comparable stores' sales by
4.7%, offset, in part, by fewer restaurants being open between years.
Income from restaurant operations increased $1.0 million, or 97.2%, to $2.0
million for the three months ended September 27, 1998 compared to $1.0 million
for the comparable quarter of last year. The increase reflects the impact of
menu changes, closing of underperforming restaurants, improved cost of sales,
and lower depreciation and amortization. The decrease in depreciation and
amortization expense is the result of a lower cost basis in property after
having sold or otherwise disposed of restaurant assets and recorded impairment
charges in fiscal 1998 related to the pending sale of Fuddruckers. Marketing and
promotion expense decreased between periods reflecting a decision in the current
year to both reduce marketing expenses and to utilize newsprint instead of the
electornic media used in the prior year.
Franchising income decreased $0.3 million, or 31.3%, from $1.0 million in the
three months ended September 28, 1997, to $0.7 million for the same period in
the current year. The decrease in franchise revenues is due principally to the
Company recognizing less income for opening fees than amounts recognized in the
same quarter a year ago. Franchisees opened two new restaurants in the quarter
and three new franchised restaurants are expected to open in the second quarter.
Income Taxes
Through July 17, 1997, the operations of the Company were 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
through that date. The Company's effective tax benefit rate was approximately
8.7% for all of fiscal 1997. No tax benefit has been recognized for the loss
attributable to the current quarter. As of June 28, 1998 the Company had net
operating loss carryforwards of approximately $24.5 million. The carryforwards
expire at various dates through 2012 and a portion of such carryforwards can
only be applied against the taxable income of Fuddruckers and a portion against
the earnings of the Company's 63% owned subsidiary, Atlantic Restaurant
Ventures, Inc.
14
<PAGE>
Accounting Pronouncements Not Yet Adopted
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information," and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company will adopt SFAS No.
131 during fiscal year 1999 and SFAS No. 133 during fiscal year 2000. Management
does not expect that the adoption of these statements will have a material
impact on the consolidated financial statements.
Year 2000 Compliance
The Company has an Information Technology Steering Committee (the "Committee")
which has been given the assignment of evaluating year 2000 compliance for all
of the Company's primary and mission critical software and hardware assets
("core systems") to correct or mitigate year 2000 compliance exposure. Based on
the Committee's review, the Company has segregated its core systems into the
following categories: consolidated accounting and financial reporting; payroll;
restaurant sales and accounting; data transmission; office support; and banking
services. Except for banking services, the Committee has completed its review of
each of these categories and, as discussed further below, has identified several
areas of non-compliance including Fuddruckers point of sale devices (cash
registers) and payroll processing hardware and software as systems requiring
upgrades and/or replacement in order to be year 2000 compliant.
With respect to consolidated accounting and financial reporting core systems,
the Company utilizes nationally recognized systems such as Oracle, Windows,
Novell and Xcellenet which are, or with readily available upgrades will be, year
2000 compliant. The Company estimates the costs to upgrade these systems are
insignificant and its exposure to catastrophic year 2000 risk to be highly
unlikely.
With respect to its payroll core systems, the Company's version of Ceridian
software and the related hardware are year 2000 deficient. Ceridian and the
Company are working together to provide a solution and the Company expects the
solution to be in place by January 1, 1999. The Company presently estimates the
cost to bring its payroll core systems year 2000 compliant to be approximately
$200,000. The payroll core system is important to the Company's day to day
operations. A failure of the payroll core system would be mitigated, however, by
the reduction in force that would occur after the proposed Fuddruckers
transaction closes. The Company believes that it could manage its payroll
processes manually after the sale is completed.
The Company's restaurant sales and accounting core systems are segregated
between Champps and Fuddruckers. The Champps systems are year 2000 compliant.
The Fuddruckers systems will require upgrades of hardware and software which are
currently available and are estimated to cost approximately $250,000. However,
pending the sale of Fuddruckers, no action is planned at this time.
The Company's data transmission and office support core systems are year 2000
compliant in all significant respects. An analysis of the Company's banking
services core systems will be delayed until after the pending Fuddruckers
transaction is completed. The Company believes the size of the remaining
business will greatly reduce any exposure in these core systems.
The Company has not completed its evaluation of year 2000 compliance of its
primary vendors for impact on the Company. However, the Committee does not
believe the Company faces any significant exposure from any vendor year 2000
issues given the availability of inventory, the size and stature of its primary
vendors, and the relatively low technology nature of its business.
15
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
At September 27, 1998, the Company had a working capital deficiency of $13.4
million. 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. The Company was
unable to obtain a line-of-credit with a bank during fiscal 1998, although
equipment lease financing was obtained and remains available for future
construction projects, if necessary. Given the Company's plans for the sale of
its Fuddruckers restaurant chain, and existing sources of financing through
sale-leaseback facilities, the Company does not anticipate any significant need
for working capital for its primary business over the next twelve months.
However, should the pending sale of Fuddruckers fail to close, the effect on the
Company's near-term liquidity could be adversely affected. Nonetheless, the
Company believes its financial resources are sufficient to sustain operations
through fiscal 1999. In the event that such resources are less than anticipated,
the Company has the ability to curtail its Champps expansion program and further
reduce non-essential operating costs to conserve working capital. Further, the
Company believes that certain of its existing restaurant units can be used as
collateral for obtaining loans and could provide working capital within a
relatively short time frame.
Capital expenditures for restaurant expansion during the quarter were funded
primarily through cash flows from operations.
In December 1995, Champps obtained $40.0 million of sale-leaseback financing for
the construction of new Champps restaurants. As of June 28, 1998, the
construction of four Champps restaurants had been fully funded under this
commitment and two had been partially funded. Any unused commitment expires on
December 31, 1998.
During the second quarter of fiscal 1999, the Company expects to incur $6.1
million additional expenses related to the pending sale of Fuddruckers. The
Company estimates that it will expend $12.3 million in cash related to charges
recorded during fiscal 1998 and the aforementioned additional expenses.
Forward-Looking Statements
Certain information included in this report and other materials filed or to be
filed by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or written statements made or to be made
by the Company) may contain statements that are forward-looking within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements include
information relating to current expansion plans, business development
activities, and Year 2000 compliance. Such forward-looking information is based
on assumptions concerning important risks and uncertainties that could
significantly affect anticipated results in the future and, accordingly, such
results may differ from those expressed in any forward-looking statements made
by or on behalf of the Company. These risks and uncertainties include, but are
not limited to, those relating to real estate development and construction
activities, the issuance and renewal of licenses and permits for restaurant
development and operations, economic conditions, changes in federal or state
laws or the administration of such laws, and the Year 2000 readiness of
suppliers, banks, vendors and others having a direct or indirect business
relationship with the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On November 5, 1998, in a special meeting of stockholders, the proposed sale of
the Company's Fuddruckers subsidiary to King Cannon was approved by a majority
of stockholders in a quorum with a vote of 7,432,437 for the proposed sale and
4,167,648 against the proposal or abstaining. The transaction is expected to
close during November 1998.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Not applicable
(b) Reports on Form 8-K
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNIQUE CASUAL RESTAURANTS, INC.
(Registrant)
By:/s/Donald C. Moore
---------------------
Donald C. Moore
Director, Chief Executive Officer,
Chief Financial Officer and Treasurer
(Principal Executive and
Financial Officer)
By:/s/Elizabeth M. Haight
------------------------
Elizabeth M. Haight
Director of Financial Reporting
(Chief Accounting Officer)
Date: November 20, 1998
17
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<CIK> 0001040328
<NAME> UNIQUE CASUAL RESTAURANTS, INC.
<MULTIPLIER> 1,000
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<PERIOD-END> SEP-27-1998
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<INVENTORY> 4,374
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0
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