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 28, 1999
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, M 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 10, 1999:
11,647,427.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNIQUE CASUAL RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 28, June 28,
1999 1998
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents (overdraft) $ 15,361 $ (647)
Restricted cash 2,554 2,602
Accounts receivable, net 2,329 801
Inventories 1,201 973
Prepaid expenses and other current assets, net 827 727
Assets held for sale 880 34,733
-------- --------
Total current assets 23,152 39,189
Property and equipment, net 32,832 29,850
Investments 5,000 5,000
Other assets, net 1,605 3,019
-------- --------
Total assets $ 62,589 $ 77,058
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,499 $ 4,784
Accrued expenses 5,091 7,178
Current portion of long-term debt 1,815 2,188
-------- --------
Total current liabilities 12,406 14,150
Long-term debt, net of current portion 4,933 4,757
Other long-term liabilities 5,752 7,753
-------- --------
Total liabilities 23,090 26,660
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock ($.01 par value per share;
authorized 30,000 shares and 11,646
and 11,593 issued and outstanding at
March 28, 1999 and June 28, 1998, respectively) 116 116
Additional paid-in capital 78,115 78,016
Accumulated deficit (38,732) (27,735)
-------- --------
Total stockholders' equity 39,499 50,398
-------- --------
Total liabilities and stockholders' equity $ 62,589 $ 77,058
======== ========
</TABLE>
See notes to unaudited condensed consolidated
financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 28, 1999 and March 29, 1998
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------- -----------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sales $ 22,472 $ 19,425 $ 64,452 $ 56,438
Franchising and royalty income 139 320 443 851
-------- -------- -------- --------
Total revenues 22,611 19,745 64,895 57,289
Costs and expenses:
Cost of sales 6,496 5,651 18,663 16,438
Labor 7,512 6,411 21,211 18,614
Other restaurant operating expenses 6,320 4,549 17,846 15,369
Depreciation and amortization 779 743 2,282 2,483
General and administrative expenses 3,055 2,856 7,051 7,911
Other (income) and expense, net 110 (160) 196 (987)
-------- -------- -------- --------
Loss from operations before cumulative effect
of change in accounting for preopening costs
and income (loss) from discontinued operations (1,661) (305) (2,354) (2,539)
Cumulative effect of change in accounting for preopening
costs -- -- -- (987)
-------- -------- -------- --------
Loss from operations before income (loss) from
discontinued operations (1,661) (305) (2,354) (3,526)
Income (loss) from discontinued operations:
Income (loss) from discontinued operations (34) 1,110 1,822 1,989
Loss on disposal of discontinued operations (1,499) -- (10,465) --
-------- -------- -------- --------
Income (loss) from discontinued operations (1,533) 1,110 (8,643) 1,989
Net income (loss) $ (3,194) $ 805 $(10,997) $ (1,537)
======== ======== ======== ========
Basic and diluted loss from operations before
cumulative effect of change in accounting
for preopening costs and income (loss)from
discontinued operations per common share $ (0.14) $ (0.03) $ (0.20) $ (0.22)
======== ======== ======== ========
Basic and diluted loss from operations and
cumulative effect of change in accounting
for preopening costs per common share before
income (loss) from discontinued operations
$ (0.14) $ (0.03) $ (0.20) $ (0.31)
======== ======== ======== ========
Basic and diluted income (loss) per common share $ (0.28) $ 0.07 $ (0.95) $ (0.13)
======== ======== ======== ========
Basic and diluted weighted average shares outstanding 11,614 11,528 11,614 11,494
</TABLE>
See notes to unaudited condensed consolidated
financial statements.
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 28, 1999 and March 29, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 28, March 29,
1999 1998
---- ----
<S> <C> <C>
Cash flows from (used in) operating activities:
Net loss $(10,997) $ (1,535)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change -- 987
Depreciation and amortization 2,464 3,014
Non-cash compensation -- 265
Minority interests -- (19)
Gain on sale of property -- (733)
Changes in assets and liabilities, net
of acquisitions:
Change in restricted cash balances 48 2,431
Changes in working capital, net (3,228) (3)
Changes in other long-term assets
and liabilities, net (587) (3,879)
-------- --------
Net cash provided by (used in)
operating activities (12,300) 528
Cash flows from investing activities:
Proceeds from sale of property -- 2,144
Proceeds from sale of discontinued operations 33,853 --
Purchase of property and equipment (5,447) (4,770)
-------- --------
Net cash flows from investing activities 28,406 (2,626)
Cash flows from financing activities:
Repayment of capital lease obligations (1,332) (1,728)
Contributed capital -- 3,029
Issuances of common stock 98 300
Proceeds from sale-leaseback facility 1,135 1,338
-------- --------
Net cash flows from financing activities (99) 2,939
Net cash flows 16,007 841
Cash and cash equivalents (overdrafts),
beginning of period (646) 172
-------- --------
Cash and cash equivalents, end of period $ 15,361 $ 1,013
======== ========
</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 28, 1999 and March 29, 1998
(Amounts 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 have been 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. As discussed in Note 3, the
Company has recently completed the sale of its Fuddruckers restaurant segment
and the Company's principal business segment now consists primarily of owning,
operating and franchising Champps Americana restaurants.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Champps Entertainment, Inc. ("CEI" or "Champps"), The Great Bagel & Coffee
Company ("Great Bagel & Coffee"), Casual Dining Ventures, Inc. ("CDVI"), and
Restaurant Consulting Services, Inc. ("RCS"). Great Bagel & Coffee ceased
operations on June 28, 1998. On November 24, 1998, the Company completed the
sale of all of the outstanding common stock of Fuddruckers, Inc. to King Cannon,
Inc. as discussed more fully in Note 3. As a result of this sale, the historical
results of operations of Fuddruckers, Inc. and its majority owned subsidiary,
Atlantic Restaurant Ventures, Inc., have been treated as discontinued operations
for all periods presented. Significant intercompany balances and transactions
have been eliminated in consolidation.
These consolidated financial statements do not include certain information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, all adjustments
considered necessary for a fair presentation have been included and are of a
normal, recurring nature. Operating results for the thirteen weeks ended March
28, 1999 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 27, 1999. Certain reclassifications of prior year
balances have been made in the accompanying financial statements in order to
conform with the presentation in the current year. Such reclassifications had no
effect on previously reported net income (loss).
These statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended June 29, 1998. The accounting policies used in preparing
these consolidated financial statements are the same as those described in the
Company's Annual Report on Form 10-K, except that during the current year the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 130, ("SFAS 130"), "Reporting Comprehensive Income." See Note 4.
<PAGE>
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.
During 1998, certain remaining non-restaurant operating assets and liabilities
of DAKA International were also contributed to the Company (the "Additional
Capital Contribution") consisting of cash, prepaid expenses, notes receivable,
property and accounts payable, accrued expenses, refundable income taxes and
contingent liabilities. These assets and liabilities resulted in a net decrease
to stockholders' equity of approximately $1,500 and have been recorded within
their respective captions during 1998.
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
$2,300 certain data processing equipment. The purchase price will be satisfied
through the repayment of a promissory note due June 30, 2002 which bears
interest at 6% per annum. The promissory note was contributed to the Company as
part of the Additional Capital Contribution. The Company also received DAKA
International's 50% interest in RCS on July 17, 1997. In connection with this
sale, the Company has entered into a management agreement with RCS whereby the
Company has agreed to provide certain managerial services to RCS. In addition,
the Company has entered into a two-year service agreement with RCS for data
processing and consulting services for an annual fee of $1,800. The Company
consolidates RCS' operations until such time as the obligations of RCS to the
Company are satisfied.
<PAGE>
3. Acquisition and Disposition Transactions
Sale of Fuddruckers
On November 24, 1998, the Company completed the sale of all of the outstanding
common stock of Fuddruckers, Inc. to King Cannon, Inc. (the "Buyer") pursuant to
a Stock Purchase Agreement (the "Agreement"), dated as of July 31, 1998 (the
"Fuddruckers Sale"). The sale price was $43,000 in cash, subject to certain
possible adjustments. At the closing, the Company disbursed approximately $2,500
to escrow agents to be held pending resolution of certain contingent obligations
(see Note 5). In addition, the Company incurred approximately $9,000 in costs
associated with the early termination of certain leases, obtaining landlord
consents to the transaction, certain litigation settlements, and legal,
accounting and severance expenses. An additional $5,500 was used to settle the
Company's obligations under a put/call agreement which was originally due to be
paid in January 2000. The Company received approximately $2,600 in previously
restricted cash balances, which were released by virtue of the Company's
settling certain of the obligations discussed above. The Company also purchased
two closed Fuddruckers locations and recorded assets held for sale valued at
approximately $1,600. The sale was approved by a vote of the Company's
shareholders on November 5, 1998.
Pursuant to the Agreement, King Cannon had 120 days from the Closing Date to
review and propose adjustments to the portion of the Estimated Purchase Price
related to Working Capital. The Company and King Cannon have agreed on the
amount of Working Capital resulting in a reduction of the Estimated Purchase
Price of approximately $1,500, including interest. Both the Company and King
Cannon have now accepted as final, the Working Capital at the Closing Date. This
reduction in Estimated Purchase Price has been included in the loss from
discontinued operations for the third quarter of fiscal 1999 in the accompanying
financial statements.
As part of the adjustment to Working Capital discussed above, the Company
received from King Cannon approximately $470 in royalty receivables from its
former franchisees which King Cannon deemed uncollectible. The Company will now
vigorously pursue collection of these amounts from such former franchisees.
Closure of Great Bagel & Coffee
On June 28, 1998, the Company ceased all operations of the Great Bagel & Coffee
business. Exit costs associated with this decision were not significant.
4. Significant Accounting Policies
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if outstanding options and warrants were exercised and result in the
issuance of common stock. For purposes of the fiscal 1999 and 1998 loss per
share calculations, stock options have been excluded from the diluted
computation as they are anti-dilutive on a cumulative year to date basis. Stock
options and warrants convertible into common stock were excluded from shares for
diluted earnings per share for the three months ended March 28, 1999 because
they were anti-dilutive. Had such shares been included, shares for dilutive
earnings per share would have increased by approximately 170 shares. No
adjustments were made to net income in computing diluted income per share.
<PAGE>
Comprehensive Income
Effective June 29, 1998, the Company adopted the provisions of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." No items, other
than net income, are currently considered elements of comprehensive income, and
accordingly, net income (loss) and comprehensive income (loss) are the same for
all periods presented.
5. Commitments and Contingencies
Fuddruckers Indemnifications
The Company and Champps are obligated to jointly and severally indemnify King
Cannon and Fuddruckers and their respective affiliates from and against any
losses, assessments, liabilities, claims, obligations, damages, costs or
expenses which arise out of or relate to (i) any misrepresentation in, breach of
or failure to comply with any of the representations, warranties, undertakings,
covenants or agreements of Unique, Fuddruckers and related entities, and any
affiliate of any of them contained in the Stock Purchase Agreement; (ii) any
environmental matters related to Fuddruckers, its affiliates or business; (iii)
any retained or undisclosed liabilities; or (iv) Unique's obligations with
respect to Lease Termination Amounts and Rent Adjustment Amounts, as defined in
the Stock Purchase Agreement. With respect to the indemnification for Lease
Termination Amounts and Rent Adjustment Amounts, the Company obtained each
Required Consent and Required Estoppel from landlords prior to the closing of
the sale. As a result, the Company believes the risk for a material claim for
indemnification related to each of the Lease Termination Amount and Rent
Adjustment Amount provisions is remote.
Further, at the closing, the Company established a $1,000 cash escrow (reported
as restricted cash in the accompanying consolidated balance sheet) as a fund for
payment of any claims for indemnification pursuant to the Stock Purchase
Agreement. Such escrow does not serve to limit the Company's maximum exposure
for indemnification claims, which is $43,000. However, the Company believes the
risk of a claim for indemnification exceeding the $1,000 escrow is remote.
Spin-Off Indemnifications
The Company agreed to assume certain liabilities in connection with the Spin-off
including all losses or damages related to the purported class action lawsuit
discussed further below. In addition, the Company entered into a Post-Closing
Covenants Agreement which provides for post-closing payments by the Company to
Compass under certain circumstances. Further, the Company agreed to a $15,000
settlement with Compass pursuant to the Post-Closing Covenants Agreement and to
reimburse Compass an additional $3,800 for liabilities assumed by the Company
but paid by Compass. The effect of this settlement has been reflected in the net
distribution recorded in the accompanying consolidated financial statements. The
Company also agreed to indemnify Compass for certain losses on liabilities
existing prior to the Spin-off Transaction Date but unidentified at such date.
This indemnification begins to expire on December 31, 1999. The Company believes
the risk of a significant claim for indemnification being presented by Compass
is remote.
The Company has also established a $1,500 cash escrow to serve as collateral
pending resolution of a suit brought by the Company against a former supplier.
The cash escrow was necessary to compel the former supplier to release all of
its collateral which included assets of Fuddruckers being conveyed to the Buyer
in the sale, pending resolution of the dispute.
<PAGE>
Litigation
The Company is engaged in various actions arising in the ordinary course of
business or pursuant to the agreements with Compass and King Cannon as
previously discussed. The Company believes, based upon consultation with legal
counsel, that the ultimate collective outcome of these other matters will not
have a material adverse effect on the Company's consolidated financial
condition, results of operations or cash flows.
6. Statements of Cash Flows
General and administrative expenses include depreciation expense on corporate
assets of $182 and $844 in the nine months ended March 28, 1999 and March 29,
1998, 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.
On July 31, 1998, the Company agreed to sell its Fuddruckers business to King
Cannon, Inc. ("King Cannon"), a private company controlled by Michael Cannon.
See Note 3 to Consolidated Financial Statements. The transaction was approved by
the stockholders on November 5, 1998. As a result of these events, the Company's
ongoing operations consist primarily of owning, operating and franchising
Champps Americana restaurants. The results of operations for Fuddruckers have
been treated as discontinued operations in the accompanying financial statements
for all periods presented.
The Company also owns a 17% passive investment in La Salsa Fresh Mexican Grill
("La Salsa") and a 50% interest in Restaurant Consulting Services, Inc. ("RCS"),
a diversified consulting and technology company offering data processing,
strategic planning and other technology services on an outsource basis to its
customers.
Certain reclassifications have been made to the selected financial data and
other financial data presented for prior periods to be consistent with their
current classifications.
Consideration of Strategic Alternatives and Resolution of Proxy Contest
On September 24, 1998, the Company announced it had retained Bear Stearns & Co.,
Inc. to assist the Company's board of directors (the "Board") in evaluating and
seeking financial and strategic alternatives, including a possible sale of the
Company. The process is continuing and the Company is not in a position to
disclose any additional details or to anticipate whether and when the Company
will enter into any binding agreement or the process will be terminated.
On November 13, 1998, a preliminary proxy was filed by Atticus Partners, L.P.
("Atticus") with respect to the Company's Annual Meeting which indicated Atticus
intended to solicit proxies for election to the Board of Directors of its
nominees in opposition to the nominees for Director. On March 11, 1999, the
Company announced that this Company's proxy contest had been settled by
agreement between the Company and Atticus. As a result of the settlement, among
other things, Atticus' nominees for election as Directors, Timothy R. Barakett
and James S. Goodwin, were appointed to the Board, Atticus supported for
election the Company's nominees, who were re-elected to the Board at the Annual
Meeting of Shareholders held on March 17, 1999, and the Board established a two
member strategic committee with the authority to control and/or oversee the
negotiation and preparation of any transaction to sell the Company and provide a
recommendation regarding such a transaction to the full Board. The strategic
committee also has the authority to review and evaluate the Company's senior
executive officers in light of the Company's strategic needs and objectives and
take action in connection with its evaluation. The members of the strategic
committee are Alan D. Schwartz and Timothy R. Barakett. The strategic committee
is in the process of making its evaluation consistent with its duties. Until the
committee has completed its work, there will be no further announcement
regarding strategic alternatives or a sale of the Company.
The settlement agreement further provides that in the event the Company does not
enter into a definitive agreement with respect to a sale, merger or other
business combination by May 31, 1999, then the Board shall be reduced in size
from seven members to five and two of the members existing prior to the
settlement will be required to step down.
<PAGE>
Resignation of Director
On April 15, 1999, Erline Belton notified the Company of her desire to resign
from the Board of Directors because of her commitment to serve as a Director of
Applebees International, Inc., a diversified casual restaurant company. The
Board accepted her resignation and thanks her for her loyal and valuable service
to the Company and its stockholders.
RESULTS OF OPERATIONS
Overview
The Company reported an operating loss from continuing operations of $2,353, and
$2,539 for the nine month periods ended March 28, 1999 and March 29, 1998,
respectively. While the Company believes it has strategies that will give it the
best opportunity to achieve overall profitability, there can be no assurance
that such strategies will be implemented within the anticipated time frame or at
all, or if implemented, will be successful. Accordingly, the Company may
continue to incur substantial and increasing operating losses over the next
several years. The amount of net operating losses and the time required by the
Company to reach sustained profitability are highly uncertain and to achieve
profitability the Company must, among other things, address operational issues,
successfully reduce selling, general and administrative expenses as a percentage
of sales from historical levels while continuing to increase net revenues from
its existing and continuing restaurants, successfully execute its growth
strategy for the Champps Americana restaurant chain and manage within acceptable
parameters contingent obligations relating to its predecessor businesses.
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
is expected to result in fluctuations in the Company's quarterly results. In
addition, the Company's results, and the results of the restaurant industry as a
whole, may be adversely affected by changes in consumer tastes, discretionary
spending priorities, national, regional or local economic conditions,
demographic trends, consumer confidence in the economy, traffic patterns,
weather conditions, employee availability and the type, number and location of
competing restaurants. Changes in any of these factors could adversely affect
the Company.
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and the mix between food and liquor revenues. Various
factors beyond the Company's control, such as adverse weather changes, may
affect food costs and increases in federal, state and local taxes may affect
liquor costs. While in the past the Company has been able to manage its exposure
to the risk of increasing food and liquor costs through certain purchasing
practices, menu changes and price adjustments, there can be no assurance that
the Company will be able to do so in the future or that changes in its sales mix
or its overall buying power will not adversely affect the Company's results of
operations.
Notwithstanding these risks, the Company believes that its near-term strategies,
including, but not limited to, continued expansion of Champps, improving
operational excellence, and anticipated continued lower general and
administrative expenses from historical levels resulting from the effects of the
sale of Fuddruckers, and other related transactions, should provide it with the
best opportunity for improved overall profitability.
<PAGE>
Overall Results of Continuing Operations
Total revenues for the nine month period ended March 28, 1999, increased 13.3%
to $64,895 compared with $57,289 last year. This increase reflects additional
restaurant revenues at Champps as discussed further below, offset, in part, by
the reduction in the current year of $2,681 in revenues associated with the
closure of the Company's Great Bagel & Coffee business on June 28, 1998. For the
nine months ended March 29, 1998, the Great Bagel & Coffee business reported net
income before general and administrative expenses of $413.
The following table sets forth, for the periods presented, certain financial
information for the Company's Champps business segment.
<TABLE>
<CAPTION>
(In thousands)
Quarters Ended Nine Months
Ended
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Restaurant sales $ 22,472 $ 18,333 $ 64,452 $ 54,083
========= ========= ========= =========
Sales from Champps-owned restaurants 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales (28.9) (29.0) (29.0) (29.0)
Labor (33.4) (32.9) (32.9) (32.8)
Other restaurant operating expenses (28.1) (27.0) (27.7) (27.4)
Depreciation and amortization (3.5) (3.2) (3.5) (3.8)
--------- --------- --------- ---------
Income from restaurant operations 6.1% 7.9% 6.9% 7.0%
========= ========= ========= =========
Income from restaurant operations $ 1,365 $ 1,466 $ 4,450 $ 3,759
Franchising income 139 295 443 525
Gain on sale of restaurant -- 677 -- 677
--------- --------- --------- ---------
Income from restaurant and franchising operations $ 1,504 $ 2,418 $ 4,893 $ 4,961
========= ========= ========= =========
Number of restaurants (end of period)
Champps-owned 18 14
Franchised 12 12
--------- ---------
Total restaurants 30 26
========= =========
</TABLE>
Sales in Champps-owned restaurants increased $4,139, or 22.6%, to $22,472 for
the quarter ended March 28, 1999 compared to $18,333 for the quarter ended March
29, 1998. This increase results from the opening of additional restaurants
between periods and an increase in same store sales of approximately 1.5%
offset, in part, by the sale of one unit in February 1998.
Sales in Champps-owned restaurants increased $10,369, or 19.2%, to $64,452 for
the nine months ended March 28, 1999 compared to $54,083 for the nine months
ended March 29, 1998. This increase results from the opening of additional
restaurants between periods and an increase in same store sales of approximately
1.7% offset, in part, by the sale of one unit in February 1998.
Income from restaurant operations declined slightly in the quarter to $1,365
compared with $1,446 last year. This decrease is primarily attributable to the
timing of the opening of new restaurants between periods and to higher occupancy
costs in restaurants opened over the last two years.
<PAGE>
Operating results of new restaurants are significantly lower than the results of
mature restaurants. The Company's policy has been to invest in labor and food
and beverage costs in new restaurants to ensure guests have an exceptional
dining experience. The Company believes a new restaurant requires up to one year
after opening for its managers and crew to reach peak efficiency in operations.
The increase in other restaurant operating expenses expressed as a percentage of
sales reflects higher occupancy expenses for restaurants opened over the last
two years. Such restaurants were generally constructed under a sale-leaseback
facility where substantially all of the costs of construction were financed by
the landlord. This facility allowed the Company to conserve cash but resulted in
higher rents in these units when compared with restaurants built in earlier
years.
Income from restaurant operations for the nine months ended March 28, 1999 and
March 29, 1998 were comparable when expressed as a percentage of sales. This
reflects increases in same store sales and the maturing of restaurants opened
over the last two years, offset, in part, by higher occupancy expenses as
discussed above.
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. No tax benefit has
been recognized for the loss attributable to the current quarter. As of June 28,
1998 the Company had net operating loss carryforwards of approximately $24,500.
The carryforwards expire at various dates through 2012.
Discontinued Operations
As discussed above and in Notes 3 and 5 to the Unaudited Condensed Consolidated
Financial Statements, on November 24, 1998, the Company completed the sale of
its Fuddruckers business to King Cannon for an estimated purchase price of
$43,000, subject to certain adjustments. Results of operations for the
Fuddruckers business have been included in the accompanying financial statements
as discontinued operations. In the third quarter of fiscal 1999, the Company and
King Cannon agreed to a downward adjustment of $1,489 in the estimated purchase
price related to the working capital conveyed to King Cannon at the Closing.
King Cannon had 120 days from the Closing Date to review and propose adjustments
to the amount of working capital which had been estimated at the Closing. This
adjustment to purchase price has been included in the loss on disposal of
discontinued operations in the third quarter of fiscal 1999.
Accounting Pronouncements Not Yet Adopted
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which the Company is required to adopt
in fiscal 1999. With the completion of the sale of Fuddruckers the Company
operates in only one segment, and therefore does not believe that additional
disclosure will be required in the Company's 1999 10-K. In June 1999 the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company will adopt SFAS No. 133 during fiscal year 2000.
Management is currently reviewing the effect, if any, from adoption of these
statements to the Company's consolidated financial statements.
<PAGE>
Year 2000 Compliance
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the roll-over of the two digit year value to "00". This issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Company has an Information Technology Steering Committee (the "Committee")
which has been given the assignment of evaluating year 2000 compliance for all
of the Company's primary and mission critical software and hardware assets
("core systems") to correct or mitigate year 2000 compliance exposure. Based on
the Committee's review, the Company has segregated its core systems into the
following categories: consolidated accounting and financial reporting; payroll;
restaurant sales and accounting; data transmission; office support; and banking
services. Except for banking services, the Committee has completed its review of
each of these categories and, as discussed further below, has identified several
areas of non-compliance including Champps point of sale devices (cash registers)
and payroll processing hardware and software as systems requiring upgrades
and/or replacement in order to be year 2000 compliant.
With respect to consolidated accounting and financial reporting core systems,
the Company utilizes nationally recognized systems such as Oracle, Windows,
Novell and Xcellenet which are, or with readily available upgrades will be, year
2000 compliant and has received written assurances from a majority of these
third parties to this effect. The Company estimates the costs to upgrade these
systems are insignificant and its exposure to catastrophic year 2000 risk to be
highly unlikely.
With respect to its payroll core systems, the Company's version of Ceridian
software and the related hardware are year 2000 deficient. The Company has
selected ADP to provide a year 2000 compliant payroll system currently being
installed. The Company's plans are to test and complete installation of this
year 2000 compliant payroll system by July 1, 1999. The Company presently
estimates the cost to bring its payroll core systems year 2000 compliant to be
approximately $200,000. The payroll core system is important to the Company's
day to day operations. However, the Company believes that it could manage its
payroll processes manually in the event of a year 2000 system failure.
The Company's Champps' point of sale devices (POS) and back office systems run
on a Windows 95 platform. The Company is aware that although Windows 95 is
substantially year 2000 compliant, there are certain non-compliant features. The
operating software that resides on the Windows 95 platform are year 2000
compliant, however, the effect on such programs of any Windows 95 non-compliance
has not been determined. As a result, the Company is evaluating the impact, if
any, of Windows 95 non-compliance on its other POS and back office software.
The Company's data transmission and office support core systems are year 2000
compliant in all significant respects. An analysis of the Company's banking
services core systems has not been completed. The Company's primary banks are
large, national banks, which the Company believes mitigates exposure. However,
the Company's review of its banking services will be completed by July 1, 1999.
<PAGE>
The Company has not completed its evaluation of year 2000 compliance of its
primary vendors for impact on the Company. The Company has begun to request
written confirmation from its third party vendors regarding their state of
compliance with the year 2000 problem. Unless public suppliers of water,
electricity, natural gas and banks are disrupted for a substantial period of
time (in which case the Company's business may be materially adversely
affected), the Company believes its operations will not be significantly
disrupted even if third parties with whom the Company has relationships are not
year 2000 compliant. However, uncertainty exists concerning the potential costs
and effects associated with any year 2000 compliance, and the Company intends to
continue to make efforts to ensure that third parties with whom it has
relationships are year 2000 compliant. Any year 2000 compliance problem of
either the Company or its vendors could materially adversely affect the
Company's business, financial condition or operating results.
FINANCIAL CONDITION AND LIQUIDITY
At March 28, 1999 and June 28, 1998, the Company had significant positive
working capital. The working capital needs of companies engaged in the
restaurant industry are generally low as sales are made for cash and inventory
and labor costs and other operating expenses are generally paid on terms.
Capital expenditures for restaurant expansion during the nine months were funded
primarily through cash balances and proceeds from sale-leaseback facilities.
In December 1995, Champps obtained $40,000 of sale-leaseback financing for the
construction of new Champps restaurants. Through March 28, 1999, eight
restaurants had been funded under this commitment. The sale of the Company's
Fuddruckers business generated substantial cash balances. As a result, and
because of the Company's initiation of a process to evaluate strategic
alternatives, including a sale of the Company, the Company did not renew the
sale-leaseback facility when it expired on December 31, 1998. The Company
believes it could obtain a similar facility or obtain financing from a
commercial bank if such facilities are deemed in the future to be consistent
with the Company's strategic direction.
The Company believes its existing cash balances, cash flows from operations, and
proceeds from financing alternatives that could be obtained if needed, are
sufficient to operate the business and execute the current growth strategy over
the next twelve months.
Forward-Looking Statements
Certain information included in this report and other materials filed or to be
filed by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or written statements made or to be made
by the Company) may contain statements that are forward-looking within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements include
information relating to current expansion plans, business development
activities, and Year 2000 compliance. Such forward-looking information is based
on assumptions concerning important risks and uncertainties that could
significantly affect anticipated results in the future and, accordingly, such
results may differ from those expressed in any forward-looking statements made
by or on behalf of the Company. These risks and uncertainties include, but are
not limited to, those relating to real estate development and construction
activities, the issuance and renewal of licenses and permits for restaurant
development and operations, economic conditions, changes in federal or state
laws or the administration of such laws, and the Year 2000 readiness of
suppliers, banks, vendors and others having a direct or indirect business
relationship with the Company.
<PAGE>
Item 3A. Quantitative and Qualitative Market Risk Disclosures
The market risk exposure inherent in the Company's financial instruments and
consolidated financial position represents the potential losses arising from
adverse changes in interest rates. The Company is exposed to such interest rate
risk primarily in its significant investment in cash and cash equivalents and
the use of fixed and variable rate debt to fund its acquisitions of property and
equipment in past years.
Market risk for cash and cash equivalents and fixed rate borrowings is estimated
as the potential change in the fair value of the assets or obligations resulting
from a hypothetical ten percent adverse change in interest rates, which would
not have been significant to the Company's financial position or results of
operations during 1999. The effect of a similar hypothetical change in interest
rates on the Company's variable rate debt also would have been insignificant due
to the immaterial amounts of borrowings outstanding under the Company's credit
arrangements.
For additional information about the Company's financial instruments and debt
obligations, see Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended June 28, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
On November 5, 1998, at a special meeting of stockholders at which a quorum was
present, in person or by proxy, the proposed sale of the Company's Fuddruckers
subsidiary to King Cannon was approved by a majority of stockholders with a vote
of 7,432,437 for the proposed sale out of 11,600,085 shares outstanding and
entitled to vote. The transaction closed during November 1998.
[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
The Company filed Form 8-K on January 14, 1999 with respect to the sale
described in Note 3 to the Unaudited Condensed Consolidated Financial
Statements.
The Company filed Form 8-K on March 17, 1999 with respect to the
settlement of a proxy contest discussed in Management's Discussion and
Analysis of Results of Operations and Financial Conditions.
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
Director, Chief Executive Officer
(Principal Financial and Principal
Accounting Officer)
May 12, 1999
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