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 March 29, 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 May 11, 1998:
11,585,230
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 29 June 29,
1998 1997
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 1,013 $ 172
Cash - restricted (Note 4) 2,569 5,000
Accounts receivable, net 4,153 4,376
Inventories 4,187 3,975
Prepaid expenses and other current assets, net 3,848
--------- ---------
2,228
Total current assets 15,770 15,751
--------- ---------
Property and equipment, net 95,007 94,673
Investments in affiliates 5,000 5,000
Other assets, net 11,837
--------- ---------
9,785
Total assets $ 127,614 $ 125,209
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 14,240 $ 10,397
Accrued expenses 11,228 11,548
Accrued transaction costs -- 6,347
Current portion of long-term debt 1,060
--------- ---------
1,102
Total current liabilities 26,528 29,394
--------- ---------
Long-term debt 2,806 4,026
Deferred tax liabilities 758 1,099
Other long-term liabilities 12,283 10,537
Minority interest 1,479
--------- ---------
1,100
Total long-term liabilities 17,326 16,762
--------- ---------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares authorized;
11,534,095 and 1,000 shares issued and outstanding
at March 29, 1998 and June 29, 1997, respectively 115 --
Capital in excess of par 84,019 --
Accumulated deficit (374) --
Group equity -- 79,053
--------- ---------
Total stockholders' equity 83,760 79,053
--------- ---------
Total liabilities and stockholders' equity $ 127,614 $ 125,209
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Periods Ended March 29, 1998 and 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------- -----------------
March March March March
29, 1998 29, 1997 29, 1998 29, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 53,630 $ 50,339 $ 155,790 $ 148,466
Franchising and royalty income 1,204 1,223 3,752 3,894
--------- --------- --------- ---------
54,834 51,562 159,542 152,360
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 14,627 13,774 43,193 41,567
Labor 16,422 15,506 48,780 46,685
Other restaurant operating expenses 16,136 14,348 46,112 42,890
Marketing and promotion 742 1,292 2,690 3,679
Depreciation and amortization 2,662 4,453 7,727 11,764
Gain on sale of restaurant (677) -- (677) --
General and administrative expenses 4,444 5,140 12,436 17,816
--------- --------- --------- ---------
Income (loss) from operations 478 (2,951) (719) (12,041)
Other income (expenses):
Interest expense (10) (231) (302) (613)
Interest income 161 164 628 321
Other non-operating expenses -- -- -- --
--------- --------- --------- ---------
Income (loss) before income tax benefit and
minority interests 629 (3,018) (393) (12,333)
Income tax benefit -- (2,068) -- (3,721)
Minority interests (19) (11) (19) (64)
--------- --------- --------- ---------
Net income (loss) $ 648 $ (939) $ (374) $ (8,548)
========= ========= ========= =========
Basic and diluted income (loss) per share $ 0.06 $ (0.03)
Pro forma loss per share $ (0.08) $ (0.75)
Basic average shares outstanding 11,528 11,494
Diluted average shares outstanding 11,717 11,683
Pro forma weighted average shares outstanding 11,405 11,405
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 29, 1998 and 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 29 March 29
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (374) $ (8,548)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 8,571 11,764
Non-cash compensation 265 --
Deferred income taxes -- 247
Minority interests (19) (64)
Gain on sale of property (733) --
Changes in assets and liabilities, net of acquisitions:
Change in restricted cash balances 2,431 --
Changes in working capital (4,433) 278
Changes in other long-term assets and liabilities (5,180) 67
-------- --------
Net cash provided by operating activities 528 3,744
Cash flows from investing activities:
Proceeds from sale of property 2,144 --
Purchases of property and equipment (4,770) (21,501)
-------- --------
Net cash flows from investing activities (2,626) (21,501)
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations (1,728) (2,975)
Contributed capital 3,029 10,168
Issuances of common stock 300 --
Proceeds from sale-leaseback facility 1,338 9,081
-------- --------
Net cash flows from financing activities 2,939 16,274
-------- --------
Net cash flows 841 (1,483)
Cash and cash equivalents, beginning of period 5,281 172
-------- --------
Cash and cash equivalents, end of period $ 1,013 $ 3,798
======== ========
Supplemental cash flow disclosures: Cash paid for (received from):
Interest paid $ 285 $ 613
Interest received (240) (321)
Income taxes 9 (1,653)
</TABLE>
During the nine months ended March 29, 1998 the Company acquired equipment by
entering into capital leases in the amount of $1,156.
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended March 29, 1998
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated Group
Shares Stock Capital Deficit Equity Total
------ ----- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, June 29, 1997 1 $ -- $ -- $ -- $ 79,053 $ 79,053
Contributed assets, net -- -- -- -- 4,515 4,515
Distribution by Parent 11,425 114 83,454 -- (83,568) --
Common shares issued 108 1 565 -- -- 566
Net loss -- -- -- (374) -- (374)
-------- -------- -------- -------- -------- --------
Balance, March 29, 1998 11,534 $ 115 $ 84,019 $ (374) $ -- $ 83,760
======== ======== ======== ======== ======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 29, 1998 and 1997
(Dollars in thousands, except per share data)
(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 1998 consolidated and 1997 combined (hereafter referred to as
consolidated) financial statements include the accounts of Fuddruckers, Inc.
("Fuddruckers"), Champps Entertainment, Inc. ("CEI" or "Champps"), The Great
Bagel & Coffee Company ("Great Bagel & 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.
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.
Certain 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, which resulted in an increase to stockholders'
equity of approximately $4.5 million, have been recorded within their respective
captions on the March 29, 1998 consolidated balance sheet.
<PAGE>
Following the consummation of the Offer, Compass merged with and into DAKA
International. Pursuant to the Offer, DAKA International distributed to each
holder of record 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 which had been contributed to the
Company by DAKA International as part of the Additional Capital Contribution.
The purchase price will be satisfied through the repayment of a promissory note
due June 30, 2002 which bears interest at 6% per annum. The Company also
received DAKA International's 50% interest in RCS at the Transaction Date. In
connection with this sale, the Company has entered into a management agreement
with RCS whereby the Company has agreed to provide certain managerial services
to RCS. In addition, the Company has entered into a two year service agreement
with RCS for data processing and consulting services for an annual fee of $1.8
million. The Company has also provided RCS with a $300,000 line-of-credit which
bears interest at 6% and is payable in full on or before December 31, 1999. The
Company will consolidate RCS' operations until such time as the obligations of
RCS to the Company are satisfied.
3. Acquisition and Disposition Transactions
On February 2, 1998, the Company sold a Champps restaurant in Minnetonka,
Minnesota to Dean Vlahos, a former Director of the Company and the former
President and Chief Executive officer of Champps Americana, Inc., for $2.9
million representing the fair value of the restaurant based upon an independent
appraisal. The purchase price was settled through a cash payment by Mr. Vlahos
of $1.5 million and the cancellation of Mr. Vlahos' employment contract. The
Company recognized a net gain of $677 on this transaction.
On December 30, 1997, Great Bagel & Coffee acquired the assets and liabilities
of a Great Bagel & Coffee franchisee operating eight Great Bagel & Coffee
restaurants and a commissary in Phoenix, Arizona in exchange for 50 shares of
Great Bagel & Coffee common stock representing one-third of its then issued and
outstanding common shares. Pursuant to the Company's plans, the commissary and
one restaurant have been disposed of and their operations terminated. This
transaction has been accounted for as a purchase in the accompanying financial
statements. As a result of this transaction, the Company has recorded net assets
and minority interests of $0.4 million. Results of operations of the acquired
businesses for all periods presented, were immaterial.
4. Summary of Significant Accounting Policies
Business Activities of the Company
The Company is 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, Canada, and the Middle East. The Great Bagel & Coffee
operations serve coffee, bagels and sandwich items in a cafe setting in western
locations of the United States. Restaurant operations are conducted through
Company-owned and franchised stores.
<PAGE>
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of financial position and
results of operations. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the audited combined
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 29, 1997. The unaudited condensed
consolidated results of operations for the three months and nine months ended
March 29, 1998 and 1997 are not necessarily indicative of the results that could
be expected for a full year.
Restricted Cash
The Company placed certificates of deposit to serve as cash collateral for
stand-by letters of credit in the amount of $2.6 million and $5.0 million at
March 29, 1998 and June, 29, 1997, respectively.
Fiscal Year
Beginning in fiscal 1997, the Company's fiscal year ends on the Sunday closest
to June 30th. Prior to fiscal 1997, the Company's fiscal year ended on the
Saturday closest to June 30th. For purposes of these notes to the unaudited
condensed consolidated financial statements, the nine months ended March 29,
1998 and 1997 are referred to as 1998 and 1997, respectively.
Reclassifications
Certain reclassifications have been made to the 1997 financial statements in
order to conform to the 1998 presentation.
Significant Estimates
In the process of preparing its 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 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, the realizable value of its tax assets and
accruals for workers' compensation, health insurance and other matters.
Management bases its estimates on certain assumptions, which they believe are
reasonable in the 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.
Group Equity
Group equity represented the net intercompany activities between the Company and
DAKA International through July 17, 1997. At June 29, 1997, the Company had
issued 1,000 shares of its common stock, par value $.01 per share, to DAKA
International for $.01 in connection with its formation. Such shares were
reported within group equity for purposes of the June 29, 1997 financial
statements.
<PAGE>
5. Commitments and Contingencies
Transaction Indemnifications
The Company agreed to a $15.0 million settlement with Compass pursuant to a
Post-Closing Covenants Agreement and to reimburse Compass an additional $3.8
million for liabilities assumed by the Company which were paid by Compass on
behalf ofthe Company. This obligation has been settled through the transfer by
the Company to Compass of (i) certain cash balances of the Company being held by
Compass ($4.3 million); (ii) all rights to certain trade receivables ($5.2
million); (iii) refundable income taxes of DAKA International at June 29, 1997
($6.3 million); (iv) assignment of notes receivable ($2.3 million); and (v)
assignment of all future tax benefits resulting from the operations of DAKA
International prior to July 17, 1997 (valued by the Company at $700,000). The
effect of this settlement has been reflected in the net contribution recorded in
the accompanying consolidated financial statements.
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 December 19, 1997, the
parties entered into a Stipulation and Agreement of Settlement pursuant to which
defendants deny any wrongdoing, and the parties agree 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 (the successor owner of
DAKA International, Inc.) 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 believe that settlement of
the case is in the best interests of the Company and its shareholders 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 has agreed to assume certain contingent liabilities of DAKA
International in connection with the Spin-off in addition to the matter
discussed above. Further, the Company is 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
consolidated financial condition, results of operations or cash flows.
<PAGE>
6. Long-Term Debt
Obligations Transferred to the Company
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 through July 2002.
All of the assets of the Company were pledged as collateral under DAKA
International's various debt agreements pursuant to such agreements through the
Transaction Date. Subsequent to the transaction, the security interests in these
assets were released. In connection with the Transaction, the Company has
pledged eight Fuddruckers restaurants and future royalties as collateral to
creditors and to Compass.
7. Earnings Per Share
In February of 1997, the FASB released Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," effective for fiscal periods ending
after December 15, 1997. The statement simplifies the standards for computing
earnings per share ("EPS") and makes them comparable to international EPS
standards. The statement replaces primary EPS with basic EPS. Basic EPS is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock. Diluted EPS is computed similarly to
fully diluted EPS previously presented. In accordance with the standard, EPS
data for the quarter and nine months ended March 29, 1997, is presented as Basic
and diluted income (loss) per share. Due to losses in prior year periods, the
pro forma EPS data does not change.
[Remainder of page left intentionally blank]
<PAGE>
8. Business Information
Income from restaurant and franchising operations have been determined applying
the accounting policies in Note 4. Revenue and costs as shown below are directly
related to each business and do not include an allocation of corporate expenses,
non-operating income, interest expense and income taxes. There are no sales
among the Company's three businesses. The table below presents certain financial
information for the Company's Fuddruckers, Champps and Great Bagel & Coffee
businesses for the three and nine months ended March 29, 1998 and 1997:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------- -----------------
March March March March
29, 1998 29, 1997 29, 1998 29, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Revenues:
Restaurant sales - Fuddruckers $ 34,204 $ 34,670 $ 99,351 $ 102,790
Franchising income - Fuddruckers 884 1,001 2,902 2,856
Restaurant sales - Champps 18,333 14,300 54,083 41,847
Franchising income - Champps 296 120 525 385
Restaurant sales - Great Bagel & Coffee 1,092 1,369 2,355 3,829
Franchising income - Great Bagel & Coffee 25 102 326 653
--------- --------- --------- ---------
Total revenues $ 54,834 $ 51,562 $ 159,542 $ 152,360
========= ========= ========= =========
Fuddruckers:
Sales from restaurant operations $ 34,204 $ 34,670 $ 99,351 $ 102,790
Operating expenses:
Cost of sales 8,975 9,282 26,754 28,375
Labor 10,011 10,262 30,166 31,286
Other restaurant operating expenses 11,362 10,605 32,232 32,008
Marketing and promotion 742 1,292 2,690 3,679
Depreciation and amortization 1,419 3,042 4,430 7,743
--------- --------- --------- ---------
Income (loss) from company operations 1,695 187 3,079 (301)
Franchising income 884 1,001 2,902 2,856
--------- --------- --------- ---------
Income from company and franchising operations 2,579 1,188 5,981 2,555
--------- --------- --------- ---------
Champps:
Sales from restaurant operations 18,333 14,300 54,083 41,847
Operating expenses:
Cost of sales 5,323 4,108 15,661 12,100
Labor 6,032 4,531 17,759 13,629
Other restaurant operating expenses 4,492 3,353 13,356 9,814
Depreciation and amortization 1,196 1,122 3,186 3,447
--------- --------- --------- ---------
Income from company operations 1,290 1,186 4,121 2,857
Franchising income 296 120 525 385
Gain on sale of restaurant 677 -- 677 --
--------- --------- --------- ---------
Income from company and franchising operations 2,263 1,306 5,323 3,242
--------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------- -----------------
March March March March
29, 1998 29, 1997 29, 1998 29, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Great Bagel & Coffee:
Sales from restaurant operations 1,092 1,369 2,355 3,829
Operating expenses:
Cost of sales 328 384 777 1,092
Labor 379 713 855 1,770
Other restaurant operating expenses 282 390 524 1,068
Depreciation and amortization 48 289 112 574
-------- -------- -------- --------
Income (loss) from company operations 55 (407) 87 (675)
Franchising income 25 102 326 653
-------- -------- -------- --------
Income (loss) from company and franchising
operations 80 (305) 413 (22)
-------- -------- -------- --------
Income from operations before general and
administrative expenses 4,922 2,189 11,717 5,775
General and administrative expenses (1) 4,444 5,140 12,436 17,816
-------- -------- -------- --------
Operating income (loss) 478 (2,951) (719) (12,041)
Interest expense (10) (231) (302) (613)
Interest income 161 164 628 321
-------- -------- -------- --------
Income (loss) before income taxes and
minority interests 629 (3,018) (393) (12,333)
Income tax benefit -- (2,068) -- (3,721)
Minority interests (19) (11) (19) (64)
-------- -------- -------- --------
Net income (loss) $ 648 $ (939) $ (374) $ (8,548)
======== ======== ======== ========
</TABLE>
(1) General and administrative expenses include depreciation expense on
corporate assets of $844 and $1,120 in 1998 and 1997, respectively.
[Remainder of page left intentionally blank]
<PAGE>
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. The consolidated balance sheet for the period ended
June 29, 1997 includes the assets, liabilities, income and expenses that were
directly related to the restaurant business as it was operated within DAKA
International prior to the Spin-off. The Company's statement of operations for
the three and nine month periods ended March 29, 1997 includes all of the
related costs of doing business, including charges for the use of facilities and
for employee benefits, and includes an allocation of certain general corporate
expenses, including costs for corporate logistics, information technologies,
finance, legal and corporate executives. These allocations of general corporate
expenses were based on a number of factors including, for example, personnel,
labor costs and sales volumes. Management believes these allocations as well as
the assumptions underlying the preparation of the Company's separate
consolidated financial statements to be reasonable.
Certain other non-restaurant operating assets and liabilities of DAKA
International were contributed to the Company as described in Note 2 to
Condensed Consolidated Financial Statements. Those assets and liabilities
consisting of trade accounts receivable, certain prepaid assets, property and
equipment, accounts payable, accrued expenses, contingent liabilities and
deferred taxes have not been included in the accompanying combined financial
statements for periods prior to July 17, 1997 since those assets and liabilities
were principally related to DAKA International's Foodservice Businesses and were
not used in the historical operation of the transferred businesses.
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 Quarterly Report on
Form 10-Q are forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Words such as "believe",
"anticipate", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
respective dates. Forward-looking statements involve risks and uncertainties,
many of which may be beyond the Company's control. Should one or more of these
risks or uncertainties materialize, or should any of the underlying assumptions
prove incorrect, actual results of current and future operations may vary
materially from those anticipated, estimated or projected. Factors that may
cause such a difference include, among others, the following: the ability of the
Company to successfully implement strategies to improve overall profitability;
the 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); the amount of, and any
changes to, tax rates; and other factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission.
<PAGE>
RESULTS OF OPERATIONS
Overview
The Company reported an operating profit before income tax benefit and minority
interests of $629 for the quarter ended March 29, 1998, compared to a comparable
operating loss of $3,018 for the same quarter last year. The Company incurred an
operating loss before income tax benefit and minority interests of $393 and
$12,333 for the first nine months of fiscal 1998 and 1997, respectively. As
discussed further below, results for the current quarter include a net gain of
$677 on the sale of one Champps restaurant. 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. While progress has
been made in the nine months ended March 29, 1998 in many of these areas, there
can be no assurance that the Company will be able to achieve profitability at
all or on a sustained basis.
Notwithstanding these risks, the Company believes that its near-term strategies,
including, but not limited to, product and menu introductions, marketing,
improving operational excellence in Fuddruckers, and anticipated continued lower
general and administrative expenses from historical levels resulting from
actions taken since June 29, 1997 and the effects of the Spin-off and related
transactions, should provide it with the best opportunity for improved overall
profitability.
In recent periods the Company's Fuddruckers restaurant chain has experienced
operational difficulties which have impacted its profitability. The Company also
believes certain of its Fuddruckers opened in fiscal 1995, 1996 and 1997 have
underperformed principally due to poor real estate selection and, in certain new
markets, consumer confusion over the Fuddruckers core concept of the "World's
Greatest Hamburger". The Company believes such consumer confusion was due in
part to design changes to its restaurants opened in the last three fiscal years
which de-emphasized the Butcher Shop and Bakery which, the Company believes,
resulted in new customers not realizing the quality of the ingredients and
freshness of the products used in making its sandwiches and other menu items
when compared with its competitors. The Company believes it has addressed these
issues for future Fuddruckers locations, although no Company restaurants are
presently planned to open in fiscal 1998. As discussed further below, the
Company has decided to close or refranchise certain of these underperforming
Fuddruckers locations in fiscal 1998.
The Company's Champps Americana restaurant chain is in the expansion phase. The
timing of revenues and expenses associated with the opening of new restaurants
or the closing or repositioning of existing restaurants are expected to result
in fluctuations in the Company's quarterly results. In addition, the Company's
results, and the results of the restaurant industry as a whole, may be adversely
affected by changes in consumer tastes, discretionary spending priorities,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, traffic patterns, weather conditions, employee
availability and the type, number and location of competing restaurants.
Changes in any of these factors could adversely affect the Company.
<PAGE>
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.
Overall Results of Operations
The Company reported a net profit of $648 for the quarter ended March 29, 1998
compared with a net loss of $939 for the same period a year ago. The Company
incurred a net loss of $374 for the first nine months of fiscal 1998 compared
with a net loss of $8,548 for the first nine months of fiscal 1997. The
improvement in the quarter and year over year results is attributable to
improved results of operations in each business segment and lower general and
administrative expenses between years. Also impacting the quarter was a gain of
$677 on the sale of a Champps restaurant. These matters are discussed further
below. Total revenues for the quarter ended March 29, 1998, increased 6.3% to
approximately $54.8 million compared with approximately $51.6 million last year.
Year to date, total revenues increased 4.7% to approximately $159.5 million
compared with $152.4 million last year. These increases reflect additional
revenues at Champps offset, in part, by lower revenues in Fuddruckers and Great
Bagel & Coffee as discussed further below.
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 Condensed Consolidated
Financial Statements.
Fuddruckers
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------- -----------------
March March March March
29, 1998 29, 1997 29, 1998 29, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Restaurant sales $ 34,204 $ 34,670 $ 99,351 $ 102,790
========= ========= ========= =========
Sales from Fuddruckers-owned restaurants: 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales (26.2) (26.8) (26.9) (27.6)
Labor (29.3) (29.6) (30.4) (30.4)
Other restaurant operating expenses (33.2) (30.6) (32.4) (31.1)
Marketing and promotion (2.2) (3.7) (2.7) (3.6)
Depreciation and amortization
(4.1) (8.8) (4.5) (7.5)
Income (loss) from restaurant operations 5.0% 0.5% 3.1% (0.2)%
========= ========= ========= =========
Income (loss) from restaurant operations $ 1,695 $ 187 $ 3,079 $ (301)
Franchising income 884 1,001 2,902 2,856
--------- --------- --------- ---------
Income from restaurant and franchising operations $ 2,579 $ 1,188 $ 5,981 $ 2,555
========= ========= ========= =========
Number of restaurants (end of period):
Fuddruckers-owned 111 122
Franchised 90 79
--------- ---------
Total restaurants 201 201
</TABLE>
<PAGE>
Sales in Fuddruckers-owned restaurants decreased approximately $0.5 million, or
1.3%, for the quarter ended March 29, 1998 compared with the quarter ended March
29, 1997. Sales for the first nine months of fiscal 1998 decreased approximately
$3.4 million, or 3.3%, compared with the same period a year ago. These changes
reflect both changes in same store sales and the closure pursuant to
management's plan of certain restaurants in fiscal 1998 which were open in the
prior year. Same store sales were up 4.2% for the quarter and were down 0.3% for
the first nine months of fiscal 1998. Subsequent to March 29, 1998, same store
sales have remained positive but there can be no assurance such sales trends
will continue. During the quarter, the Company closed four restaurants pursuant
to its previously announced strategy to close or refranchise up to fifteen
Fuddruckers. At May 12, 1998, ten restaurants were closed or refranchised. The
results of operations of the restaurants targeted to be closed included in
Fuddruckers overall results of operations were a loss of approximately $0.4
million for the current quarter and approximately $1.2 million year to date.
The Company believes its positive same store sales in the quarter were primarily
attributable to the introduction of a special "Kids Eat Free, Everyday"
promotion which began in most Company markets on December 21, 1997. This
promotion is currently scheduled to expire on May 24, 1998. This program allows
one child under 12 to eat a kid's meal for free when an adult purchases an
entree. The Company had previously offered "Kids Eat Free" Monday through
Thursday. This new program was implemented together with the introduction of new
menu items, most notably platters, which are offered for sale at significantly
higher prices than the Company's traditional sandwich offerings. As a result of
this program and menu introductions, the Company significantly improved its
sales trends.
Although discounts and coupons expense, reported in other restaurant operating
expenses, were 9.5% of sales in the current quarter compared with 4.5% a year
ago, the overall effect of this program was profitable for the Company.
Income from restaurant operations increased approximately $1.5 million to
approximately $1.7 million for the quarter ended March 29, 1998 compared to
approximately $0.2 million for the comparable quarter of last year. For the
first nine months of fiscal 1998, income from restaurant operations improved
approximately $3.4 million to approximately $3.1 million compared with a loss of
approximately $0.3 million last year. This improvement between respective
periods reflects the interplay of improved cost of sales, labor, marketing and
promotions expenses, and depreciation and amortization expenses expressed as a
percentage of sales offset, in part, by higher restaurant operating expenses
expressed as a percentage of sales.
The improvement in cost of sales is primarily attributable to lower food costs
in the current year and to improved operational efficiency. Labor costs were
down slightly for the quarter and flat for the nine months reflecting some
improved operating efficiency. Marketing and promotion expenses are lower
between periods but are consistent with management's plan for fiscal 1998.
Depreciation and amortization are lower due to less preopening amortization
between periods and due to write-downs taken last year for impairment of assets
and closed stores which result in lower depreciation in subsequent periods.
The increase between periods in other restaurant operating expenses are
primarily attributable to expenses associated with the Company's "Kids Eat Free"
program discussed above.
Franchisees opened four new restaurants in the quarter and nine new franchised
restaurants have opened year to date. For the year, the Company anticipates a
total of ten to twelve new franchised restaurants will be opened.
<PAGE>
Champps
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------- -----------------
March March March March
29, 1998 29, 1997 29, 1998 29, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Restaurant sales $ 18,333 $ 14,300 $ 54,083 $ 41,847
======== ======== ========= =========
Sales from Champps-owned restaurants 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales (29.1) (28.7) (29.0) (28.9)
Labor (32.9) (31.7) (32.8) (32.6)
Other restaurant operating expenses (24.5) (23.5) (24.7) (23.5)
Depreciation and amortization (6.5) (7.8) (5.9) (8.2)
-------- -------- --------- ---------
Income from restaurant operations 7.0% 8.3% 7.6% 6.8%
Income from restaurant operations $ 1,290 $ 1,186 $ 4,121 $ 2,857
Franchising income 296 120 525 385
Gain on sale of restaurant 677 -- 677 --
-------- -------- --------- ---------
Income from restaurant and franchising
operations $ 2,263 $ 1,306 $ 5,323 $ 3,242
======== ======== ========= =========
Number of restaurants (end of period)
Champps-owned 14 11
Franchised 12 10
--------- ---------
Total restaurants 26 21
========= =========
</TABLE>
Sales in Champps-owned restaurants increased approximately $4.0 million, or
28.2%, to approximately $18.3 million for the quarter ended March 29, 1998
compared to $14.3 million last year. Sales in Champps-owned restaurants
increased approximately $12.2 million for the first nine months of fiscal 1998,
or 29.2% to approximately $54.1 million compared with approximately $41.8
million last year. These increases between respective periods result primarily
from an increase in same store sales of approximately 1.0% for the nine months
and more restaurants open between periods. Same store sales were positive
approximately 2.0% for the quarter.
Champps income from restaurant operations expressed as a percentage of sales
decreased in the current quarter to 7.0% compared with 8.3% last year. The
changes in cost of sales, labor and other restaurant expenses result primarily
from the impact of the timing of new store openings and the number of stores
which have been open for less than a year in the current period compared with a
year ago. New stores are expected to have higher operating costs expressed as a
percentage of sales than more mature stores. Labor a year ago was favorably
impacted through lower employee benefit programs versus the current year. Labor
expenses have also been impacted by the addition of management and crew in
anticipation of future growth and by changes in the minimum wage. Other
restaurant expenses were higher in part due to higher rent expense on new
equipment placed in service in late 1997. The change in depreciation is
primarily related to lower overall preopening amortization in the current
quarter than in the corresponding period a year ago offset, in part, by higher
depreciation expense due to more restaurants open between periods.
Champps income from restaurant operations expressed as a percentage of sales
improved in the first nine months of fiscal 1998 to 7.6% compared with 6.8% a
year ago. This was primarily attributable to lower depreciation and amortization
expressed as a percentage of sales as discussed above. Cost of sales, labor and
other restaurant expenses expressed as a percentage of sales were higher than
the prior year, reflecting the variability of operating expenses due to the
changing mix of new stores relative to mature stores.
<PAGE>
On February 3, 1998, the Company announced that Dean Vlahos resigned his
positions as President and Chief Executive Officer of Champps and as a Director
of the Company and acquired from the Company a Champps Americana restaurant in
Minnetonka, Minnesota, which he will own and operate as a franchisee. In
consideration for the Minnetonka restaurant, Mr. Vlahos paid $1.5 million in
cash and waived all severance and other payments otherwise due in connection
with his 1995 employment agreement. Mr. Vlahos will also have the right to
develop up to five additional Champps Americana restaurants over an eight year
period. As a result of this transaction, the Company recorded a net gain of $677
on the sale of the Minnetonka location.
Great Bagel & Coffee
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------- -----------------
March March March March
29, 1998 29, 1997 29, 1998 29, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Unit sales $ 1,092 $ 1,369 $ 2,355 $ 3,829
======== ======== ======== ========
Sales from unit operations 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales (30.1) (28.0) (33.0) (28.5)
Labor (34.7) (52.1) (36.3) (46.2)
Other restaurant operating expenses (25.8) (28.5) (22.2) (27.9)
Depreciation and amortization (4.4) (21.1) (4.8) (15.0)
-------- -------- -------- --------
Income (loss) from unit operations 5.0% (29.7)% 3.7% (17.6)%
======== ======== ======== ========
Income (loss) from unit operations $ 55 $ (407) $ 87 $ (675)
Franchising income 25 102 326 653
-------- -------- -------- --------
Income (loss) from unit and franchising operations $ 80 $ (305) $ 413 $ (22)
======== ======== ======== ========
</TABLE>
Sales in the Great Bagel & Coffee segment decreased approximately $0.3 million,
or 20.2%, to approximately $1.1 million for the quarter ended March 29, 1998
compared to approximately $1.4 million for the comparable quarter last year, and
decreased approximately $1.5 million, or 38.5%, to approximately $2.4 million
for the first nine months compared with approximately $3.8 million a year ago.
This decrease is due primarily to closing all of the non-traditional venues of
the segment in the current year offset, in part, by the acquisition of seven
operating Great Bagel restaurants from a franchisee on December 30, 1997. This
segment is not expected to be significant to overall results of operations or
cash flow for the balance of fiscal 1998.
See Note 3 to the condensed consolidated financial statements regarding the
acquisition in the current quarter of eight franchised locations.
General and Administrative Expenses
As noted above, for periods prior to July 17, 1997, general and administrative
expenses include allocations of certain general corporate expenses of DAKA
International. Management believes these allocations as well as the assumptions
underlying the development of the Company's separate combined financial
statements to be reasonable although not indicative of the anticipated general
and administrative costs of the Company in fiscal 1998. Changes in these
expenses between years reflect that actual general and administrative expenses
are less than the allocated expenses in the prior year.
<PAGE>
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 nine months. As of June 29, 1997 the Company had net
operating loss carryforwards of approximately $12.8 million. The carryforwards
expire at various dates through 2012 and a portion of such carryforwards can
only be applied against the taxable income of Fuddruckers and a portion against
the earnings of the Company's 63% owned subsidiary, Atlantic Restaurant
Ventures, Inc.
Accounting Pronouncements Not Yet Adopted
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company will adopt these
statements during fiscal year 1998 and does not expect that the adoption of
these statements will have a material impact on the consolidated financial
statements.
FINANCIAL CONDITION AND LIQUIDITY
At March 29, 1998, the Company had a working capital deficiency of approximately
$10.8 million, compared with a working capital deficiency of approximately $13.6
million at June 29, 1997. The increase in working capital in the first nine
months of fiscal 1998 is principally due to the contribution of net assets
discussed in Note 2 to condensed consolidated financial statements, cash flow
generated from operations, collections of accounts receivable and proceeds from
sale-leaseback financing, offset, in part, by the loss incurred by the Company
during the period. Capital expenditures for restaurant expansion during the
period were funded primarily through operations, existing cash balances and
sale-leaseback financing under existing facilities.
The working capital needs of companies engaged in the restaurant industry are
generally low as sales are made for cash, and inventory, labor costs and other
operating expenses are generally paid on terms. Given the Company's limited
plans for expansion of its Fuddruckers restaurant chain and existing sources of
financing through sale-leaseback facilities, the Company does not anticipate any
significant need for working capital for its primary business over the next
twelve months.
On March 31, 1998, the Company closed on a sale-leaseback transaction with an
equipment lender which provided $2.5 million for restaurant equipment at three
existing Champps locations. The lease is for 60 months and carries an effective
interest rate of 10.9%.
The Company has no bank debt and has no lines-of-credit with banks. 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 anticipated 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 financing or other means to meet its longer-term
needs. The Company is seeking to obtain a line-of-credit and is optimistic that
a line-of-credit between $5.0 million and $10.0 million can be obtained,
although the timing and amount of any such facility cannot be assured.
<PAGE>
At March 29, 1998, the Company had two new Champps-owned restaurants under
construction and three Champps restaurants under development. The two
restaurants under construction are expected to open in fiscal 1998. The Company
had no new Fuddruckers-owned restaurants under construction or development.
There are no other restaurant expansion or development efforts planned by the
Company for fiscal 1998.
In December 1995, Champps obtained $40 million of sale-leaseback financing for
the construction of up to 10 new Champps restaurants. At June 29, 1997, $32.8
million was available for use. Any unused commitment expires in December 1998.
The Company has made a preliminary evaluation of the technological issues
surrounding year 2000 with respect to its information technology resources. That
assessment indicates the Company can achieve year 2000 compatibility at a cost
of between $200 and $500. Substantially all of the Company's investment in
technology is built on open systems architecture with established vendors.
[Remainder of page left intentionally blank]
<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 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
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040328
<NAME> UNIQUE CASUAL RESTAURANTS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-END> MAR-29-1998
<CASH> 3,582
<SECURITIES> 0
<RECEIVABLES> 5,034
<ALLOWANCES> 881
<INVENTORY> 4,187
<CURRENT-ASSETS> 15,770
<PP&E> 129,577
<DEPRECIATION> 34,570
<TOTAL-ASSETS> 127,614
<CURRENT-LIABILITIES> 26,528
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 83,645
<TOTAL-LIABILITY-AND-EQUITY> 127,614
<SALES> 155,790
<TOTAL-REVENUES> 159,542
<CGS> 43,193
<TOTAL-COSTS> 160,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> (374)
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</TABLE>
