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 December 28, 1997
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 February 10,
1998: 11,531,071
<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>
December 28, June 29,
1997 1997
------ ------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 4,440 $ 172
Cash - restricted (Note 3) 2,550 5,000
Accounts receivable, net 4,624 4,376
Inventories 4,000 3,975
Prepaid expenses and other current assets, net 5,564 2,228
--------- ---------
Total current assets 21,178 15,751
Property and equipment, net 96,457 94,673
Investments in affiliates 5,000 5,000
Other assets, net 11,371 9,785
--------- ---------
Total assets $ 134,006 $ 125,209
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 18,547 $ 10,397
Accrued expenses 12,202 11,548
Accrued transaction costs -- 6,347
Current portion of long-term debt
987 1,102
--------- ---------
Total current liabilities 31,736 29,394
--------- ---------
Long-term debt 2,857 4,026
Deferred tax liabilities 1,099 1,099
Other long-term liabilities 13,007 10,537
Minority interest 1,100 1,100
--------- ---------
Total long-term liabilities 18,063 16,762
--------- ---------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares authorized; 11,505,544 and
1,000 shares issued and outstanding at December 28, 1997 and
June 29, 1997, respectively 115 --
Capital in excess of par 85,114 --
Accumulated deficit (1,022) --
Group equity -- 79,053
--------- ---------
Total stockholders' equity 84,207 79,053
--------- ---------
Total liabilities and stockholders' equity $ 134,006 $ 125,209
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 28, 1997 and 1996
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
-------------- ----------------
December December December December
28, 1997 28, 1996 28, 1997 28, 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 51,036 $ 48,556 $ 102,160 $ 98,127
Franchising and royalty income 1,230 1,307 2,548 2,671
--------- --------- --------- ---------
52,266 49,863 104,708 100,798
Costs and expenses:
Cost of sales 14,093 13,458 28,566 27,793
Labor 16,138 15,298 32,358 31,179
Other restaurant operating expenses 14,895 14,260 29,976 28,542
Marketing and promotion 1,142 1,543 1,948 2,387
Depreciation and amortization 2,472 3,652 5,065 7,311
General and administrative expenses 3,966 6,315 7,992 12,676
--------- --------- --------- ---------
Loss from operations (440) (4,663) (1,197) (9,090)
--------- --------- --------- ---------
Other income (expenses):
Interest expense (184) (154) (292) (382)
Interest income 254 59 467 157
Other non-operating expenses 141 -- -- --
--------- --------- --------- ---------
Loss before income tax benefit and minority interests (229) (4,758) (1,022) (9,315)
--------- --------- --------- ---------
Income tax benefit -- (440) -- (1,653)
Minority interests -- (27) -- (53)
--------- --------- --------- ---------
Net loss $ (229) $ (4,291) $ (1,022) $ (7,609)
========= ========= ========= =========
Basic loss per share $ (0.02) -- $ (0.09) --
Pro forma loss per share -- $ (0.38) -- $ (0.67)
Weighted average shares outstanding 11,500 -- 11,475 --
Pro forma weighted average shares outstanding -- 11,425 -- 11,425
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 28, 1997 and 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December December
28, 1997 28, 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,022) $ (7,611)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,620 7,772
Non-cash compensation 265 --
Change in restricted cash balances 2,450 --
Minority interests -- (53)
Gain on sale of property (55) --
Changes in working capital (4,687) 2,679
Changes in other long-term assets and liabilities 1,797 (2,517)
-------- --------
Net cash provided by operating activities 4,368 270
Cash flows from investing activities:
Proceeds from sale of property 644 --
Purchase of property and equipment (4,022) (8,898)
-------- --------
Net cash flows from investing activities (3,378) (8,898)
Cash flows from financing activities:
Repayment of capital lease obligations (1,284) (584)
Contributed capital 3,029 4,500
Issuances of common stock 196 --
Proceeds from sale-leaseback facility 1,337 8,832
-------- --------
Net cash flows from financing activities 3,278 12,748
-------- --------
Net cash flows 4,268 4,120
Cash and cash equivalents, beginning of period 172 5,281
-------- --------
Cash and cash equivalents, end of period $ 4,440 $ 9,401
======== ========
Supplemental cash flow disclosures: Cash paid for (received from):
Interest $ 193 $ 382
Income taxes -- (1,653)
</TABLE>
During the six months ended December 28, 1996 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
Six Months Ended December 28, 1997
(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 -- -- -- -- 5,200 5,200
Distribution by Parent 11,425 114 84,139 -- (84,253) --
Common shares issued 38 -- 265 -- -- 265
Net loss -- -- -- (793) -- (793)
-------- -------- -------- -------- -------- --------
Balance, September 28, 1997 11,464 114 84,404 (793) -- 83,725
Contributed assets, net -- -- 515 -- -- 515
Common shares issued 42 1 195 -- -- 196
Net loss -- -- -- (229) -- (229)
-------- -------- -------- -------- -------- --------
Balance, December 28, 1997 11,506 $ 115 $ 85,114 $ (1,022) $ -- $ 84,207
======== ======== ======== ======== ======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended December 28, 1997 and 1996
(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 $5.7 million, have been recorded within their respective
captions on the December 28, 1997 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. 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.
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 six months ended
December 28, 1997 and 1996 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
December 28, 1997 and June, 29, 1997, respectively.
<PAGE>
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 six months ended December 28,
1997 and 1996 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, fair values of financial instruments, the
realizable value of its tax assets and accruals for 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.
4. Commitments and Contingencies
Transaction Indemnifications
The Company has 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 of the 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 currently
being managed and collected by Compass on behalf of the Company ($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.
<PAGE>
Litigation
On October 18, 1996, a purported class action lawsuit was filed in the United
States District Court for the District of Massachusetts on behalf of persons who
acquired DAKA International's common stock between October 30, 1995 and
September 9, 1996 (Venturino et al. V. DAKA International, Inc. and William H.
Baumhauer, Civil Action No. 96-12109-GAO). The complaint alleges violations of
federal and state securities laws by, among other things, allegedly
misrepresenting and/or omitting material information concerning the results and
prospects of Fuddruckers during that period and seeks compensatory damages and
reasonable costs and expenses, including counsel fees. On May 22, 1997, DAKA
International filed with the court a motion to dismiss plaintiffs' complaint.
The Company has agreed to indemnify Compass for any losses or expenses
associated with the complaint. 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 in the current quarter and the settlement
payment will be 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 will be returned to the Company. On January 27, 1998,
the court preliminarily approved the settlement and set the timetable for
granting final approval. It is possible that certain members of the purported
class will choose not to take part in, or challenge the fairness of the
settlement. Defendants have the right to withdraw from settlement if a certain
number of potential claimants opt out of the settlement. The court is expected
to make its final determination at or following a hearing currently scheduled
for April 27, 1998. There can be no assurances that the settlement as presently
proposed will become final at that time or at all.While the outcome of the case
is not presently determinable, the Company believes that the ultimate outcome of
this matter will not have a material adverse effect on the Company's
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. 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.
5. 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.
<PAGE>
6. Business Information
Income from restaurant and franchising operations have been determined applying
the accounting policies in Note 3. Revenue and costs as shown below are directly
related to each business and do not include an allocation of corporate expenses,
non-operating income, interest expense and income taxes. There are no sales
among the Company's three businesses. The table below presents certain financial
information for the Company's Fuddruckers, Champps and Great Bagel & Coffee
businesses for the six months ended December 28, 1997 and 1996:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
December December December December
28, 1997 28, 1996 28, 1997 28, 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Revenues:
Restaurant sales - Fuddruckers $ 31,692 $ 33,175 $ 65,147 $ 68,120
Franchising income - Fuddruckers 1,044 948 2,018 1,855
Restaurant sales - Champps 18,750 14,067 35,750 27,547
Franchising income - Champps 125 148 229 265
Restaurant sales - Great Bagel & Coffee 594 1,314 1,263 2,460
Franchising income - Great Bagel & Coffee 61 211 301 551
--------- --------- --------- ---------
Total revenues $ 52,266 $ 49,863 $ 104,708 $ 100,798
========= ========= ========= =========
Fuddruckers:
Sales from restaurant operations 31,692 33,175 65,147 68,120
Operating expenses:
Cost of sales 8,535 9,168 17,779 19,093
Labor 9,814 10,195 20,155 21,024
Other restaurant operating expenses 10,247 10,626 20,870 21,403
Marketing and promotion 1,142 1,543 1,948 2,387
Depreciation and amortization 1,377 2,390 3,011 4,701
--------- --------- --------- ---------
Income (loss) from company operations 577 (747) 1,384 (488)
Franchising income 1,044 948 2,018 1,855
--------- --------- --------- ---------
Income from company and franchising operations 1,621 201 3,402 1,367
--------- --------- --------- ---------
Champps:
Sales from restaurant operations 18,750 14,067 35,750 27,547
Operating expenses:
Cost of sales 5,395 4,012 10,338 7,992
Labor 6,136 4,536 11,727 9,098
Other restaurant operating expenses 4,579 3,287 8,864 6,461
Depreciation and amortization 1,056 1,095 1,990 2,325
--------- --------- --------- ---------
Income from company operations 1,584 1,137 2,831 1,671
Franchising income
125 148 229 265
--------- --------- --------- ---------
Income from company and franchising operations 1,709 1,285 3,060 1,936
--------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
December December December December
28, 1997 28, 1996 28, 1997 28, 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Great Bagel & Coffee
Sales from restaurant operations $ 594 $ 1,314 $ 1,263 $ 2,460
Operating expenses:
Cost of sales 163 278 449 708
Labor 188 567 476 1,057
Other restaurant operating expenses 69 347 242 678
Depreciation and amortization 39 167 64 285
-------- -------- -------- --------
Income (loss) from company operations 135 (45) 32 (268)
Franchising income 61 211 301 551
-------- -------- -------- --------
Income from company and franchising operations 196 166 333 283
-------- -------- -------- --------
Income from operations before general and
administrative expenses 3,526 1,652 6,795 3,586
General and administrative expenses (1) 3,966 6,315 7,992 12,676
-------- -------- -------- --------
Operating loss (440) (4,663) (1,197) (9,090)
Interest expense (184) (154) (292) (382)
Interest income 254 59 467 157
Other income - net 141 -- -- --
-------- -------- -------- --------
Loss before income taxes and minority interests (229) (4,758) (1,022) (9,315)
Income tax benefit -- (440) -- (1,653)
Minority interests -- (27) -- (53)
-------- -------- -------- --------
Net loss $ (229) $ (4,291) $ (1,022) $ (7,609)
======== ======== ======== ========
</TABLE>
(1) General and administrative expenses include depreciation expense on
corporate assets of $555 and $461 in 1998 and 1997, respectively.
<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 period ended December 28, 1996 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.
RESULTS OF OPERATIONS
Overview
The Company incurred an operating loss before income tax benefit and minority
interests of $229 and $4,758 for the quarters ended December 28, 1997 and 1996,
respectively and incurred an operating loss before income tax benefit and
minority interests of $1,022 and $9,315 for the first six months of fiscal 1998
and 1997, respectively. 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 was made in the quarter ended December 28, 1997 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.
<PAGE>
In recent periods the Company's Fuddruckers restaurant chain has experienced
operational difficulties which have impacted its profitability. The Company also
believes certain of its Fuddruckers opened in fiscal 1995, 1996 and 1997 have
underperformed principally due to poor real estate selection and, in certain new
markets, consumer confusion over the Fuddruckers core concept of the "World's
Greatest Hamburger". The Company believes such consumer confusion was due in
part to design changes to its restaurants opened in the last three fiscal years
which de-emphasized the Butcher Shop and Bakery which, the Company believes,
resulted in new customers not realizing the quality of the ingredients and
freshness of the products used in making its sandwiches and other menu items
when compared with its competitors. The Company believes it has addressed these
issues for future Fuddruckers locations, although no Company restaurants are
presently planned to open in fiscal 1998. As discussed further below, the
Company has decided to close or refranchise certain of these underperforming
Fuddruckers locations in fiscal 1998.
The Company's Champps Americana restaurant chain is in the expansion phase. The
timing of revenues and expenses associated with the opening of new restaurants
or the closing or repositioning of existing restaurants are expected to result
in fluctuations in the Company's quarterly results. In addition, the Company's
results, and the results of the restaurant industry as a whole, may be adversely
affected by changes in consumer tastes, discretionary spending priorities,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, traffic patterns, weather conditions, employee
availability and the type, number and location of competing restaurants.
Changes in any of these factors could adversely affect the Company.
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and, particularly for Champps Americana restaurants, the
mix between food and liquor revenues. Various factors beyond the Company's
control, such as adverse weather changes, may affect food costs and increases in
federal, state and local taxes may affect liquor costs. While in the past
Fuddruckers and Champps have been able to manage their exposure to the risk of
increasing food and liquor costs through certain purchasing practices, menu
changes and price adjustments, there can be no assurance that the Company will
be able to do so in the future or that changes in its sales mix or its overall
buying power will not adversely affect the Company's results of operations.
Overall Results of Operations
The Company incurred a net loss of $229 for the period ended December 28, 1997
compared with a net loss of $4,291 for the same period a year ago. The Company
incurred a net loss of $1,022 for the first half of fiscal 1998 compared with a
net loss of $7,609 for the first half 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. These matters are discussed further below. Total
revenues for the quarter ended December 28, 1997, increased 4.8% to
approximately $52.3 million compared with approximately $49.9 million last year.
Year to date, total revenues increased 3.9% to approximately $104.7 million
compared with $100.8 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.
<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 6 to Notes to Condensed Consolidated
Financial Statements.
Fuddruckers
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
December December December December
28, 1997 28, 1996 28, 1997 28, 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Restaurant sales $ 31,692 $ 33,175 $ 65,147 $ 68,120
========= ========= ========= =========
Sales from Fuddruckers-owned restaurants: 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales (26.9) (27.7) (27.3) (28.0)
Labor (31.0) (30.7) (31.0) (30.9)
Other restaurant operating expenses (32.3) (32.0) (32.0) (31.4)
Marketing and promotion (3.6) (4.7) (3.0) (3.5)
Depreciation and amortization (4.4) (7.2) (4.6) (6.9)
--------- --------- --------- ---------
Income from restaurant operations 1.8% (2.3)% 2.1% (0.7)%
========= ========= ========= =========
Income from restaurant operations $ 577 $ (747) $ 1,384 $ (488)
Franchising income (loss) 1,044 948 2,018 1,855
--------- --------- --------- ---------
Income from restaurant and franchising operations $ 1,621 $ 201 $ 3,402 $ 1,367
========= ========= ========= =========
Number of restaurants (end of period):
Fuddruckers-owned 114 121
Franchised 88 78
--------- ---------
Total restaurants 202 199
========= =========
</TABLE>
Sales in Fuddruckers-owned restaurants decreased approximately $1.5 million, or
4.5%, for the quarter ended December 28, 1997 compared with the quarter ended
December 28, 1996. Sales for the first half of fiscal 1998 decreased
approximately $3.0 million, or 4.4%, compared with the same period a year ago.
These changes result from a decrease in both same store sales and in the total
number of Company-owned stores open during the periods. Same store sales were
down 2.5% for the quarter and were down 2.6% for the first six months of fiscal
1998. Subsequent to December 28, 1997, same store sales have been positive but
there can be no assurance such sales trends will continue. During the quarter,
the Company closed two restaurants pursuant to its previously announced strategy
to close or refranchise up to fifteen Fuddruckers. At February 10, 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 $331,000 for the current quarter and
approximately $773,000 year to date.
Income from restaurant operations increased approximately $1.4 million to
approximately $0.6 million for the quarter ended December 28, 1997 compared to a
loss of approximately $0.7 million for the comparable quarter of last year. For
the first half of fiscal 1998, income from restaurant operations improved
approximately $1.9 million to approximately $1.4 million compared with a loss of
approximately $0.5 million last year. This improvement between respective
periods reflects the interplay of improved cost of sales, marketing and
promotional expenses, and depreciation and amortization expenses expressed as a
percentage of sales offset, in part, by higher labor and other restaurant
operating expenses expressed as a percentage of sales.
<PAGE>
The improvement in cost of sales is primarily attributable to lower food costs
in the current year and to improved operational 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 labor and other restaurant operating expenses
reflect the impact of lower sales on fixed and semi-fixed costs such as
management, labor and occupancy. Expenses associated with the Company's "Kids
Eat Free" program also increased in the current quarter as the Company began to
test "Kids Eat Free Everyday" in certain markets. The Company believes this test
improved sales in the test markets and has extended this test to substantially
all Company markets beginning in January, 1998. The Company cannot predict the
ultimate outcome of this test on sales or store level profitability in the
Company's third quarter, although the Company attributes the recent upturn in
comparable sales in part to this initiative.
Franchisees opened three new restaurants in the quarter and five new franchised
restaurants have opened year to date. For the year, the Company anticipates a
total of seven to twelve new franchised restaurants will be opened.
Champps
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
December December December December
28, 1997 28, 1996 28, 1997 28, 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Restaurant sales $ 18,750 $ 14,067 $ 35,750 $ 27,547
========= ========= ========= =========
Sales from Champps-owned restaurants 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales (28.8) (28.5) (28.9) (29.0)
Labor (32.7) (32.3) (32.8) (33.0)
Other restaurant operating expenses (24.5) (23.3) (24.8) (23.5)
Depreciation and amortization (5.6) (7.8) (5.6) (8.4)
--------- --------- --------- ---------
Income from restaurant operations 8.4% 8.1% 7.9% 6.1%
========= ========= ========= =========
Income from restaurant operations $ 1,584 $ 1,137 $ 2,831 $ 1,671
Franchising income 125 148 229 265
--------- --------- --------- ---------
Income from restaurant and franchising operations $ 1,709 $ 1,285 $ 3,060 $ 1,936
========= ========= ========= =========
Number of restaurants (end of period)
Champps-owned 15 10
Franchised 11 10
--------- ---------
Total restaurants 26 20
========= =========
</TABLE>
Sales in Champps-owned restaurants increased approximately $4.7 million, or
33.3%, to approximately $18.8 million for the quarter ended December 28, 1997
compared to $14.1 million last year. Sales in Champps-owned restaurants
increased approximately $8.3 million for the first half of fiscal 1998, or 30.2%
to approximately $35.8 million compared with approximately $27.5 million last
year. These increases between respective periods result primarily from an
increase in same store sales of approximately 1.0% and more restaurants being
open between periods.
<PAGE>
Champps income from restaurant operations expressed as a percentage of sales
improved in the current quarter to 8.5% compared with 8.1% last year, which
reflects lower depreciation and amortization expenses offset, in part, by higher
cost of sales, labor and other restaurant operating expenses, each expressed as
a percentage of sales. 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. 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 expenses have also been impacted by the addition of management and
crew in anticipation of future growth and by changes in the minimum wage.
Champps income from restaurant operations expressed as a percentage of sales
improved in the first half of fiscal 1998 to 7.9% compared with 6.1% a year ago.
This was primarily attributable to lower depreciation and amortization expressed
as a percentage of sales as discussed above. Cost of sales and labor expressed
as a percentage of sales improved slightly, offset by higher other restaurant
expenses expressed as a percentage of sales, which also reflect the variability
of operating expenses due to the changing mix of new stores relative to mature
stores.
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 Unique 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 the employment agreement he entered into in 1995 when Champps
Entertainment, Inc. was acquired by the Company. Mr. Vlahos will also have the
right to develop up to five additional Champps Americana restaurants over an
eight year period. This transaction is not expected to have a material effect on
the overall results of operations of Champps.
<PAGE>
Great Bagel & Coffee
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
December December December December
28, 1997 28, 1996 28, 1997 28, 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Unit sales $ 594 $ 1,314 $ 1,263 $ 2,460
====== ======== ======== ========
Sales from unit operations 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales (27.4) (21.1) (35.5) (28.8)
Labor (31.7) (43.2) (37.7) (42.9)
Other restaurant operating expenses (11.6) (26.4) (19.2) (27.6)
Depreciation and amortization (6.6) (12.7) (5.1) (11.6)
------ -------- -------- --------
Income (loss) from unit operations 22.7% (3.4)% 2.5% (10.9)%
====== ======== ======== ========
Income (loss) from unit operations $ 135 $ (45) $ 32 $ (268)
Franchising income 61 211 301 551
------ -------- -------- --------
Income from unit and franchising operations $ 196 $ 166 $ 333 $ 283
====== ======== ======== ========
</TABLE>
Sales in the Great Bagel & Coffee segment decreased approximately $0.7 million,
or 54.8%, to approximately $0.6 million for the quarter ended December 28, 1997
compared to approximately $1.3 million for the comparable quarter last year, and
decreased approximately $1.2 million, or 48.7%, to approximately $1.3 million
for the first six months compared with approximately $2.5 million a year ago.
This decrease is due primarily to the closing of all of the non-traditional
venues of the segment in the current year. This segment is not expected to be
significant to overall results of operations or cash flow for the balance of
fiscal 1998.
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.
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 six 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.
<PAGE>
Accounting Pronouncements Not Yet Adopted
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which the
Company will adopt in fiscal 1998. Had SFAS No. 128 been effective for the
fiscal year ended June 29, 1997, there would be an immaterial effect to the
Company's reported loss or pro forma loss per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company will adopt these
statements during fiscal year 1998 and does not expect that the adoption of
these statements will have a material impact on the consolidated financial
statements.
FINANCIAL CONDITION AND LIQUIDITY
At December 28, 1997, the Company had a working capital deficiency of
approximately $10.6 million, compared with a working capital deficiency of
approximately $13.6 million at June 29, 1997. The increase in working capital in
the first half 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.
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.
At December 28, 1997, the Company had one new Champps-owned restaurant under
construction and two Champps restaurants under development which are expected to
open in fiscal 1998. The Company had no new Fuddruckers-owned restaurants under
construction or development. There are no other restaurant expansion or
development efforts planned by the Company for fiscal 1998.
In 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.
<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)
February 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040328
<NAME> UNIQUE CASUAL RESTAURANTS, INC.
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-END> DEC-28-1997
<CASH> 6,990
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