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 October 3, 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
CHAMPPS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Place, 55 Ferncroft Road, Danvers, MA 01923
(Address of principal executive offices) (Zip Code)
(978) 774-6606
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $.01 par value, outstanding at November 15,
1999: 11,652,692.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
CHAMPPS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
October 3, June 27,
1999 1999
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 3,978 $ 7,240
Restricted cash, current 397 397
Accounts receivable, net 1,395 1,288
Inventories 1,279 1,205
Marketable securities held for sale 1,857 1,637
Prepaid expenses and other current assets, net 1,312 --
Net assets held for sale 897 1,665
-------- --------
Total current assets 11,115 13,432
Restricted cash, non-current 2,390 2,596
Property and equipment, net 39,858 36,096
Investment -- 2,748
Other assets, net 392 2,270
-------- --------
Total assets $ 53,755 $ 57,142
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,910 $ 5,264
Accrued expenses 8,546 8,679
Current portion of long-term debt 2,010 2,010
-------- --------
Total current liabilities 15,466 15,953
Long-term debt, net of current portion 3,612 4,147
Other long-term liabilities 8,856 9,223
-------- --------
Total liabilities 27,934 29,323
-------- --------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock ($.01 par value per share;
authorized 30,000 shares and 11,653
and 11,647 issued and outstanding at
October 3, 1999 and June 27
1999, respectively) 117 116
Additional paid-in capital 79,373 79,360
Accumulated other comprehensive loss (891) --
Accumulated deficit (52,778) (51,657)
-------- --------
Total stockholders' equity 25,821 27,819
-------- --------
Total liabilities and stockholders' equity $ 53,755 $ 57,142
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CHAMPPS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended October 3, 1999 and September 27, 1998
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
October 3, September 27,
1999 1998
---- ----
(Restated)
<S> <C> <C>
Revenues:
Sales $ 25,384 $ 20,250
Franchising and royalty, net 183 162
-------- --------
Total revenues 25,567 20,412
Costs and expenses:
Cost of sales 7,366 5,868
Labor costs 8,546 6,735
Operating expenses 4,350 3,382
Occupancy 2,209 1,867
Preopening 711 137
Depreciation and amortization 1,081 735
-------- --------
Restaurant operating expenses 24,263 18,724
General and administrative expenses 1,798 2,289
Exit and other costs 460 --
-------- --------
Loss from continuing operations before interes
and other expenses (954) (601)
Interest and other expenses, net 167 16
Net loss from continuing operations (1,121) (617)
Net income from discontinued operations -- 944
-------- --------
Net income (loss) $ (1,121) $ 327
======== ========
Basic income (loss) per share:
Loss from continuing operations $ (0.10) $ (0.05)
Income from discontinued operations -- 0.08
-------- --------
Net income (loss) $ (0.10) $ 0.03
======== ========
Diluted income (loss) per share:
Loss from continuing operations $ (0.05)
Income from discontinued operations 0.08
--------
Net income $ 0.03
========
Basic weighted average shares outstanding 11,651 11,599
Diluted weighted average shares outstanding 11,651 11,782
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CHAMPPS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended October 3, 1999 and September 27, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
October 3, September 27,
1999 1998
---- ----
(Restated)
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $(1,121) $ 327
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,153 1,590
Non-cash compensation discontinued operations -- 912
Exit and other costs 460 --
Changes in assets and liabilities, net of acquisitions and exit:
Restricted cash balances 205 --
Changes in current assets and liabilities (802) (1,561)
Changes in other long-term assets and liabilities, net 1,510 (346)
------- -------
Net cash provided by operating activities 1,405 922
------- -------
Cash flows from investing activities:
Purchase of property and equipment (4,915) (1,994)
Net proceeds from net assets held for sale 768 --
------- -------
Net cash used in investing activities (4,147) (1,994)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 14 --
Repayment of long-term debt (536) (209)
------- -------
Net cash used in financing activities (522) (209)
------- -------
Net decrease in cash and cash equivalents (3,264) (1,281)
Cash and cash equivalents (overdrafts), beginning of period 7,242 (646)
------- -------
Cash and cash equivalents (overdrafts), end of period $ 3,978 $(1,927)
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended October 3, 1999
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Comprehensive Accumulated
Shares Stock Capital Loss Deficit Total
------ ----- ------- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, June 27, 1999 11,647 $ 116 $ 79,360 $ -- $(51,657) $ 27,819
Common shares issued 5 1 13 -- -- 14
Other comprehensive loss:
Unrealized loss on marketable
securities -- -- -- (891) -- (891)
Net loss -- -- -- -- (1,121) (1,121)
-------- -------- -------- -------- -------- --------
Balance, October 3, 1999 11,652 $ 117 $ 79,373 $ (891) $(52,778) $ 25,821
======== ======== ======== ======== ======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CHAMPPS ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended October 3, 1999 and September 27, 1998 (Restated)
(Amounts in thousands, except share data)
(Unaudited)
1. Background, Basis of Presentation and Business Activities of the Company
Background
Champps Entertainment, Inc. (the "Company"), formerly known as Unique Casual
Restaurants, Inc., is a Delaware corporation formed on May 27, 1997 in
connection with the spin-off to holders of the common stock of DAKA
International, Inc. ("DAKA International"). At inception, and continuing through
November 1998, the Company's principal business activities were 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. At October 3, 1999, the Company's principal business activity is to
own, operate and franchise Champps Americana casual dining restaurants within a
single business segment.
Basis of Presentation and Restatement of September 27, 1998 Condensed
Consolidated Financial Statements
The accompanying consolidated financial statements include for various periods
of time the accounts of the Company, Champps Operating Corporation, Inc., 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. The Company sold its interest in RCS
on May 24, 1999. On November 24, 1998, the Company completed the sale of all of
the outstanding common stock of Fuddruckers, Inc. ("Fuddruckers") to King
Cannon, Inc. as discussed more fully in Note 3. The historical results of
operations of Fuddruckers, Inc. and its majority owned subsidiary, Atlantic
Restaurant Ventures, Inc. ("ARVI") have been treated as discontinued operations
for all periods presented. Significant intercompany balances and transactions
have been eliminated in consolidation. The historical DAKA International basis
in the assets and liabilities of the spun-off operations transferred to the
Company in connection with the transactions have been recorded as the Company's
initial cost basis.
In the financial statements for September 27, 1998, income from discontinued
operations has been restated to reflect non-cash compensation expense of $912.
This expense is associated with a first quarter fiscal 1999 agreement which
provided the Company's Chief Executive Officer with various below market stock
option grants in connection with the sale of Fuddruckers.
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 fourteen weeks ended October
3, 1999 are not necessarily indicative of the results that may be expected for
the fiscal year ending July 2, 2000.
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 27, 1999. The accounting policies used in preparing
theses consolidated financial statements are the same as those described in the
Company's annual report on Form 10-K.
Business Activities of the Company
The Company's Champps operations serve customers in upscale restaurant settings
throughout the United States. Restaurant operations are conducted through
Company-owned and franchised stores.
<PAGE>
2. Acquisition and Disposition Transactions
Sale of Fuddruckers
In connection with the sale of Fuddruckers, the Company disbursed approximately
$2,500 to escrow agents to be held pending resolution of certain contingent
obligations discussed further below. At October 3, 1999, $2,390 continues to be
held in escrow and is reported as restricted cash.
3. 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 resulting in the
issuance of common stock. For purposes of the fiscal 2000 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. Had such shares been
included, dilutive earnings per share would have increased by approximately 52
shares. No adjustments were made to net income in computing diluted income per
share.
Comprehensive Income
Effective June 29, 1998, the Company adopted the provisions of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Effective first
quarter fiscal 2000, the Company has other comprehensive income related to
marketable securities, which is included in the accompanying Statement of
Stockholders' Equity. The Company has also recorded a valuation allowance
against the deferred tax asset relating to unrealized loss in its marketable
securities.
Investment
In January 1996, the Company acquired a 16.7% equity interest in the form of
convertible redeemable preferred stock (the "La Salsa Preferred Stock") in La
Salsa Holding Co. ("La Salsa"), a franchisor and operator of La Salsa Mexican
restaurants for approximately $5,000. On July 16, 1999, Santa Barbara Restaurant
Group ("SBRG"), a publicly held corporation, reported that it had completed the
acquisition of La Salsa. In connection with this transaction, the Company
exchanged all of its Series D Convertible Preferred Stock for approximately
1,277,500 shares of common stock of SBRG, of which approximately 120,650 shares
have been placed in escrow to cover any claims for indemnification by SBRG in
connection with this transaction. Effective the first quarter of fiscal 2000,
the Company accounted for the investment in SBRG in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities", and the
Company classified this investment as marketable securities available for sale.
As of October 3, 1999, the Company recorded an $891 unrealized loss in the
market value of these securities. This unrealized loss is recorded as a
component of accumulated other comprehensive loss in the Consolidated Statement
of Stockholders' Equity. The Company has also recorded a valuation allowance
against the deferred tax asset relating to the unrealized loss on its marketable
securities.
Reclassifications
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform to the fiscal 2000 presentation.
<PAGE>
4. Commitments and Contingencies
Fuddruckers Indemnity
In connection with the sale of Fuddruckers, the Company was required to
establish a $1,000 cash escrow as a fund for payment of any claims for
indemnification pursuant to the Agreement. Such escrow does not serve to limit
the Company's maximum exposure for indemnification claims. However, the Company
believes the risk of a claim for indemnification exceeding the $1,000 escrow is
remote. As of October 3, 1999, a total of approximately $237 was paid for agreed
amounts presented to the Company by King Cannon for indemnification.
Leases
The Company has a lease obligation for the corporate headquarters in Danvers,
Massachusetts which expires during 2001. The Company plans to exit this location
by December 31, 1999, and expects that a lease termination penalty of less than
$1,000 will be paid to the landlord.
Litigation
The Company assumed certain contingent liabilities of DAKA International in
connection with the spin-off and assumed certain contingent liabilities of
Fuddruckers for periods prior to its sale to King Cannon. Further, the Company
is also engaged in various actions arising in the ordinary course of business.
The Company believes, based upon consultation with legal counsel, that the
ultimate collective outcome of these matters will not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or cash flows.
5. Exit and Other Costs
In the fourth quarter of fiscal 1999, the Company recorded $1,305 in exit and
other costs. As of October 3, 1999, the Company had utilized $181 for employee
severance and lease related expenses. In the first quarter of fiscal 2000, the
Company recorded additional exit and other costs of $460. These additional costs
are also related to severance and other expenses associated with the
consolidation and relocation of the headquarters. It is anticipated that most of
the associated reserves will be utilized by year end, with a small portion of
severance reserves being paid out in early fiscal 2001.
6. Statements of Cash Flows
General and administrative expenses include depreciation expense on corporate
assets of $72 and $55 in the three months ended October 3, 1999 and September
27, 1998, respectively.
7. Stock Option Plan
Effective July 1, 1999, the Company's Chief Executive Officer was granted
options to acquire 750,000 shares of common stock at an exercise price of $4.00
per share. The market price was $3.125 on July 1, 1999. Accordingly, the Company
has not recorded any compensation expenses related to this grant in the
accompanying financial statements.
8. Related Parties Transaction
In the first quarter of fiscal 2000, a mortgage held by the Company, on property
sold to a previous officer of the Company, was paid off at a discounted rate.
The Company received $1,000 in cash and recorded the discount of $146 as other
expense.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in
the following Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Company and elsewhere in this Annual Report on Form
10-Q are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Words such as "believe",
"anticipate", "estimate", "project", "plan," "expect," and similar expressions
are intended to identify such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their respective dates. Forward-looking statements involve risks and
uncertainties, many of which may be beyond the Company's control. Should one or
more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Factors that may cause such a difference include, among others, the following:
the ability of the Company to successfully implement strategies to improve
overall profitability; the impact of increasing competition in the casual and
upscale casual dining segments of the restaurant industry; changes in general
economic conditions which impact consumer spending for restaurant occasions;
adverse weather conditions, competition among restaurant companies for
attractive sites and unforeseen events which increase the cost to develop and/or
delay the development and opening of new restaurants; increases in the costs of
product, labor, and other resources necessary to operate the restaurants; the
availability and terms of financing for the Company and any changes to that
financing; the revaluation of any of the Company's assets (and related
expenses); the ultimate outcome of certain contingent obligations related to the
Company's former Fuddruckers segment and its other predecessor businesses; the
impact on the Company and/or its suppliers of matters related to the so-called
Y2K problem; the issuance and renewal of licenses and permits for restaurant
development and operations, including the sale of alcoholic beverages; and the
amount of, and any changes to, tax rates.
RESULTS OF OPERATIONS
Overview
The Company incurred a net loss from continuing operations of $1,121 for the
quarter ended October 3, 1999, compared with a loss of $617 in the comparable
quarter last year. Included in the loss from continuing operations in the first
quarter of fiscal 2000 were exit and other charges of $460 related to the
consolidation and relocation of the corporate headquarters. Also included were
preopening expenses of $711 for two new restaurants opened in July and August of
1999, and a planned restaurant opening scheduled for the second quarter of this
fiscal year. Exclusive of these charges, the Company would have reported a
profit from continuing operations of $50 for the first quarter of fiscal 2000.
While the Company believes it has strategies that will give it an opportunity to
return to overall profitability, there can be no assurance that such strategies
will be implemented, or if implemented, will be successful. Accordingly, the
Company may continue to incur operating losses. The amount of losses and the
time required by the Company to reach sustained profitability cannot be
predicted with certainty and to achieve profitability the Company must, among
other things, successfully reduce selling, general and administrative expenses
as a percentage of sales from historical levels while continuing to increase net
revenues from its restaurants and successfully executing its growth strategy for
the Champps Americana concept.
The Company's Champps Americana concept is in the expansion phase. The timing of
revenues and expenses associated with opening new restaurants or closing or
repositioning of existing restaurants are expected to result in fluctuations in
the Company's quarterly and annual 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. To date, however, these factors have
not had a significant negative impact since both sales and same store sales have
increased overall.
<PAGE>
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and 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 the Champps Americana
concept, improving the execution of operating fundamentals, and streamlining the
Company's organizational structure and the effects of the Spin-off, the
Fuddruckers Sale, the consolidation of corporate headquarters and the sale of
non-essential assets and businesses, and other related transactions, should
provide it with an opportunity for improved overall profitability.
Fiscal Year
Fiscal year 2000 is a fifty-three week year with the first quarter being a
fourteen week quarter. Fiscal 1999 was a fifty-two week year and the first
quarter was a 13 week quarter.
[Remainder of page left intentionally blank]
<PAGE>
Champps
The following table sets forth, for the periods presented, certain financial
information for the Company's Champps business segment.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
October 3, September 27,
1999 1998
---- ----
(Restated)
<S> <C> <C> <C> <C>
Revenues:
Sales from Champps-owned restaurants $ 25,384 100.0% $ 20,250 100.0%
Royalties 183 0.7% 162 0.8%
-------- ----- -------- -----
Total revenues 25,567 100.7% 20,412 100.8%
Product costs 7,366 29.0% 5,868 29.0%
Labor costs 8,546 33.7% 6,735 33.3%
Operating expenses 4,350 17.1% 3,382 16.7%
Occupancy 2,209 8.7% 1,867 9.2%
Preopening 711 2.8% 137 0.7%
Depreciation and amortization 1,081 4.3% 735 3.6%
-------- ----- -------- -----
Restaurant operating expenses 24,263 95.6% 18,724 92.5%
General and administrative expenses 1,798 7.1% 2,289 11.3%
Exit and other costs 460 --
-------- --------
Loss from continuing operations before
interest and other expenses (954) (601)
Interest and other expenses 167 16
-------- --------
Loss from continuing operations (1,121) (617)
Income from discontinued operations -- 944
-------- --------
Net income (loss) $ (1,121) $ 327
======== ========
Number of restaurants (end of period):
Company-owned 20 16
Franchised 13 11
-------- --------
Total restaurants 33 27
======== ========
</TABLE>
Total revenues for the three month period ended October 3, 1999, increased 25.3%
to $25,567 compared with $20,412 last year. Sales in Champps-owned restaurants
increased $5,134, or 24.5%, to $25,384 for the quarter ended October 3, 1999
compared with $20,250 for the quarter ended September 27, 1998. This increase
results from the opening of additional restaurants between periods, an increase
in same store sales of approximately 5.1%, and, in part, the addition of one
week in the first quarter of fiscal 2000.
Restaurant operating expenses increased in the quarter to $24,263 compared with
$18,724 last year. This increase is primarily attributable to the opening of two
new restaurants in the quarter and accelerated depreciation on the point of
sales systems most of which were replaced in the first quarter of fiscal 2000.
<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 the timing of opening new restaurants between periods.
Income Taxes
Given the Company's history of losses, no benefit for net operating losses were
recognized in fiscal 2000 and 1999. As of June 27, 1999, the Company had net
operating loss carryforwards of approximately $40,500. The carryforwards expire
at various dates through 2019.
Discontinued Operations
On November 24, 1998, the Company completed the sale of its Fuddruckers business
to King Cannon for a purchase price of $43,000 in cash, subject to certain
adjustments. Results of operations for the Fuddruckers business have been
presented in the accompanying financial statements as discontinued operations.
Accounting Pronouncements Not Yet Adopted
In June 1999 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 this statement to the Company's consolidated financial statements.
Year 2000 Compliance
The statements in the following section include "year 2000 readiness disclosure"
within the meaning of the year 2000 Information and Readiness Disclosure Act.
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") and attempt to 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, had identified several
areas of non-compliance including Champps point of sale devices (cash registers)
and payroll processing hardware and software as systems which would require
upgrades and/or replacement in order to be year 2000 compliant.
<PAGE>
With respect to consolidated accounting and financial reporting core systems,
the Company utilizes nationally recognized systems such as Oracle, Windows, and
Novell 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 that its exposure to catastrophic
year 2000 risk to be highly unlikely.
With respect to its payroll core system, the Company has implemented year 2000
compliant payroll software and the associated hardware. The system has been
successfully tested and is currently operational. The payroll upgrade costs,
including hardware, were approximately $100. Costs on other upgrades were
insignificant.
The Company's point of sale and back office systems are scheduled to be upgraded
by December 1, 1999. The point of sale hardware was replaced in all stores as of
November 15, 1999. The stores current back office systems are being replaced via
a wide area network version of the Oracle software operating on the same server
as the corporate applications. The resulting point of sale and back office
systems are year 2000 compliant.
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 the end of
November, 1999.
The Company has not completed its evaluation of year 2000 compliance of its
primary vendors for impact on the Company. The Company has requested written
confirmation from its third party vendors regarding their state of compliance
with the year 2000 problem. The Company's main information technology provider,
RCS, has a back-up generator which will facilitate the continued operation of
financial reporting systems. In addition, one Champps' finance person will
continue to reside in Massachusetts near the RCS headquarters at the end of the
calendar year. Along with other responsibilities, this person will support a
contingency strategy for corporate financial reporting should long distance data
communication be disrupted by year 2000 issues. The Company will continue to
examine cost effective contingency strategies where warranted. 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 as a result it is impossible to predict the impact of the
Company's computers to fail to recognize the year 2000. 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.
[Remainder of page left intentionally blank]
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
The working capital needs of companies engaged in the restaurant industry are
generally low as sales are made for cash, and purchases of food and supplies,
labor costs and other operating expenses are generally paid in 30 to 60 days
after receipt of invoices. Capital expenditures for expansion during 2000 and
1999 were generally provided through cash balances (including in 1999 a portion
of the proceeds from the sale of Fuddruckers) and proceeds from sale-leaseback
facilities. Capital expenditures were $4,915 and $1,994 for continuing
operations, respectively, for the three months ended October 3, 1999 and
September 27, 1998, respectively.
As of October 3, 1999, the Company's unrestricted cash was $3,978 and restricted
cash was $2,787. The Company anticipates that it will generate positive cash
flow from operations for the remainder of fiscal 2000, however, there are also
significant cash expenditures anticipated during the forthcoming year.
Anticipated in fiscal 2000 are capital expenditures of approximately $15,700,
primarily for new restaurants now under construction. On September 15, 1999, the
Company received a commitment for sale-leaseback financing for new restaurants.
This commitment is subject to various pre-closing conditions and there can be no
assurances that the financing will be available on the terms currently
anticipated or at all. The Company is also pursuing a bank line of credit,
although no commitment has been secured to date. Any additional restaurants
opened in fiscal 2000 will be contingent upon obtaining additional financing.
It is also anticipated that there will be substantial cash payments in fiscal
2000 associated with liabilities recorded in fiscal 1999 related to the
Spin-Off, the Fuddruckers Sale and the consolidation and relocation of the
headquarters to Denver, Colorado. Included in theses cash payments, the Company
anticipates expenditures of more than $1,500 for early termination of the lease
on excess space, severance and other headquarters consolidation and relocation
expenses. In addition, there will be payments for prior year insurance claims,
tax audits and legal settlements. These latter expenditures are estimated to
range between $1,500 to $2,500.
There can be no assurance that a line of credit will be obtained or a
sale-leaseback facility implemented. If the Company is unable to obtain sources
of financing, the Company's planned expansion program and its ability to manage
continuing obligations associated with predecessor businesses would be adversely
effected. In such a case, the Company believes that it has the ability to
curtail its Champps expansion program and further reduce non-essential operating
costs to conserve working capital sufficiently to continue its day to day
operations through fiscal 2000.
Inflation and changing prices has had no measurable impact on net sales and
revenue or income from continuing operations during the last three fiscal years.
<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.
CHAMPPS ENTERTAINMENT, INC.
(Registrant)
By: /s/William H. Baumhauer
-----------------------
William H. Baumhauer
Chairman of the Board, President and
Chief Executive Officer,
(Principal Executive, Financial and
Accounting Officer)
November 17, 1999
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