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 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 0-22639
UNIQUE CASUAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Place, 55 Ferncroft Road, Danvers, MA 01923
(Address of principal executive offices) (Zip Code)
(978) 774-6606
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $.01 par value, outstanding at February 12,
1999: 11,640,790
<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>
December 27, June 28,
1998 1998
------ ------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents (overdraft) $ 21,168 $ (646)
Restricted cash 2,542 2,602
Accounts receivable, net 1,455 801
Inventories 1,182 973
Prepaid expenses and other current assets, net 699 727
Discontinued operation - assets held for sale 1,295 34,733
-------- --------
Total current assets 28,341 39,190
Property and equipment, net 32,232 29,850
Investments 5,000 5,000
Other assets, net 2,853 3,018
-------- --------
Total assets $ 68,426 $ 77,058
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,388 $ 4,784
Accrued expenses 6,864 7,178
Current portion of long-term debt 2,310 2,188
-------- --------
Total current liabilities 14,562 14,150
Long-term debt, net of current portion 5,008 4,757
Other long-term liabilities 6,262 7,753
-------- --------
Total liabilities 25,832 26,660
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock ($.01 par value per share; authorized 30,000 shares and 11,606
and 11,593 issued and outstanding at December 27, 1998 and
June 28, 1998, respectively) 116 116
Additional paid-in capital 78,017 78,017
Accumulated deficit (35,539) (27,735)
-------- --------
Total stockholders' equity 42,594 50,398
-------- --------
Total liabilities and stockholders' equity $ 68,426 $ 77,058
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 27, 1998 and December 28, 1997
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
-------------------- --------------------
December December December December
27, 1998 28, 1997 27, 1998 28, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 21,729 $ 19,344 $ 41,979 $ 37,013
Franchising and royalty income 142 187 304 530
-------- -------- -------- --------
Total revenues 21,871 19,531 42,283 37,543
Costs and expenses:
Cost of sales 6,298 5,559 12,166 10,788
Labor 7,044 6,324 13,699 12,202
Other restaurant operating expenses 6,050 5,484 11,528 10,142
Depreciation and amortization 768 746 1,503 1,740
General and administrative expenses 1,854 2,605 4,131 5,055
Interest expense (103) (183) (166) (290)
Interest income 169 243 216 441
-------- -------- -------- --------
Loss from operations before cumulative effect of change
in accounting for preopening costs and income (loss) from
discontinued operations (77) (1,127) (694) (2,233)
Cumulative effect of change in accounting for preopening costs -- -- -- (987)
-------- -------- -------- --------
Loss from operations before income (loss) from discontinued
operations (77) (1,127) (694) (3,220)
Income (loss) from discontinued operations:
Income from discontinued operations -- 382 1,856 879
Loss on disposal of discontinued operations (8,966) -- (8,966) --
-------- -------- -------- --------
Income (loss) from discontinued operations (8,966) 382 (7,110) 879
-------- -------- -------- --------
Net loss $ (9,043) $ (745) $ (7,804) $ (2,341)
======== ======== ======== ========
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 $ (0.01) $ (0.10) $ (0.06) $ (0.19)
======== ======== ======== ========
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
$ (0.01) $ (0.10) $ (0.06) $ (0.28)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.78) $ (0.06) $ (0.67) $ (0.20)
======== ======== ======== ========
Basic and diluted weighted average shares outstanding 11,605 11,500 11,603 11,475
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 27, 1998 and December 28, 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December December
27, 1998 28, 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,804) $ (1,022)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,683 5,620
Non-cash compensation -- 265
Change in restricted cash balances 60 2,450
Gain on sale of property -- (55)
Changes in working capital (546) (4,687)
Changes in other long-term assets and liabilities (1,326) 1,797
-------- --------
Net cash provided by operating activities (7,933) 4,368
Cash flows from investing activities:
Proceeds from sale of property -- 644
Proceeds from discontinued operations 33,438 --
Purchase of property and equipment (4,065) (4,022)
-------- --------
Net cash flows from investing activities 29,373 (3,378)
Cash flows from financing activities:
Repayment of capital lease obligations (761) (1,284)
Contributed capital -- 3,029
Issuances of common stock -- 196
Proceeds from sale-leaseback facility 1,134 1,337
-------- --------
Net cash flows from financing activities 374 3,278
-------- --------
Net cash flows 21,814 4,268
Cash and cash equivalents (overdraft), beginning of period (646) 172
-------- --------
Cash and cash equivalents, end of period $ 21,168 $ 4,440
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended December 27, 1998
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Shares Stock Capital Deficit Total
------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, June 28, 1998 11,593 116 $ 78,017 $(27,735) $ 50,398
Common shares issued 7 -- -- -- --
Net (loss) -- -- -- 1,239 1,239
-------- -------- -------- -------- --------
Balance, September 27, 1998 11,600 116 78,017 (26,496) 51,637
Common shares issued 6
Net (loss) -- -- -- (9,043) (9,043)
-------- -------- -------- -------- --------
Balance, December 27, 1998 11,606 116 $ 78,017 $(35,539) $ 42,594
======== ======== ======== ======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
UNIQUE CASUAL RESTAURANTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended December 27, 1998 and December 28, 1997
(Dollars in thousands, except per share data)
(Unaudited)
1. Background and Basis of Presentation
Background
Unique Casual Restaurants, Inc. (the "Company") is a Delaware corporation formed
on May 27, 1997 which was spun-off to holders of the common stock of DAKA
International, Inc. ("DAKA International") pursuant to the transactions
described below in Note 2 (the "Spin-off"). The Company's principal business
activities are to own and operate the restaurant operations previously operated
by various subsidiaries and divisions of DAKA International prior to the
formation and the Spin-off of the Company.
Basis of Presentation
The accompanying 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. 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.
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
December 27, 1998 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 operating results.
These statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended June 29, 1998. The accounting policies used in preparing
these consolidated financial statements are the same as those described in the
Company's annual report on Form 10-K, except that during the current period the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 130, ("SFAS 130"), "Reporting Comprehensive Income." See Note 4.
5
<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 $1.5 million and have been recorded
within their respective captions during 1998.
Following the consummation of the Offer, Compass merged with and into DAKA
International. Pursuant to the Offer, DAKA International distributed to each
holder of record of shares of DAKA International common stock, one share of
common stock of the Company for each share of DAKA International owned by such
stockholder (the "Distribution"). No consideration was paid by DAKA
International's stockholders for the shares of the Company's common stock. As a
result of the Distribution, the Company ceased to be a subsidiary of DAKA
International and began operating as an independent, publicly-held company on
July 17, 1997. The Company's net loss during the period June 30 to July 17, 1997
has been charged to retained earnings in the accompanying financial statements,
as the loss was not material.
Effective July 1, 1997, the Company entered into a sale and services agreement
with RCS whereby the Company sold to RCS for an aggregate purchase price of $2.3
million certain data processing equipment. The purchase price will be satisfied
through the repayment of a promissory note due June 30, 2002 which bears
interest at 6% per annum. The promissory note was contributed to the Company as
part of the Additional Capital Contribution. The Company also received DAKA
International's 50% interest in RCS on July 17, 1997. In connection with this
sale, the Company has entered into a management agreement with RCS whereby the
Company has agreed to provide certain managerial services to RCS. In addition,
the Company has entered into a two-year service agreement with RCS for data
processing and consulting services for an annual fee of $1.8 million. The
Company consolidates RCS' operations until such time as the obligations of RCS
to the Company are satisfied.
6
<PAGE>
3. Acquisition and Disposition Transactions
Sale of Fuddruckers
On November 24, 1998, Unique Casual Restaurants, Inc. (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, dated as of
July 31, 1998 (the "Fuddruckers Sale"). The sale price was $43 million in cash,
before adjustments. At the closing the Company disbursed approximately $2.5
million to escrow agents to be held pending resolution of certain contingent
obligations (see Note 5). In addition, the Company incurred approximately $9.0
million 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 $5.5 million 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
$535,000 from the Buyer as reimbursement for working capital at the closing date
and has received approximately $2.6 million 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 $1.6
million. The sale was approved by a majority vote of the Company's shareholders
on November 5, 1998.
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 $25,000 during the six
months ended December 27, 1998.
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.
Comprehensive Income
Effective June 29, 1998, the Company adopted the provisions of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." No items, other
than net income, are currently considered elements of comprehensive income, and
accordingly, net income and comprehensive income are the same for all periods
presented.
7
<PAGE>
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 $1.0 million 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 $43.0 million. However, the
Company believes the risk of a claim for indemnification exceeding the $1.0
million 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 $15.0
million settlement with Compass pursuant to the Post-Closing Covenants Agreement
and to reimburse Compass an additional $3.8 million for liabilities assumed by
the Company but paid by Compass. The effect of this settlement has been
reflected in the net distribution recorded in the accompanying consolidated
financial statements. The Company also agreed to indemnify Compass for certain
losses on liabilities existing prior to the Spin-off Transaction Date but
unidentified at such date. This indemnification begins to expire on December 31,
1998. The Company believes the risk of a significant claim for indemnification
being presented by Compass is remote.
The Company has also established a $1.5 million cash escrow to serve a
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.
8
<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 legal fees. On December 19, 1997, the
parties entered into a Stipulation and Agreement of Settlement pursuant to which
defendants deny any wrongdoing, and the parties agreed to settle the matter as a
class action, subject to the court's approval, with payment of $3.5 million to
the class. The Company has agreed to indemnify Compass for any losses or
expenses associated with the complaint. On February 10, 1998, the Company
announced that it had agreed to settle the case for $3.5 million. While
defendants deny all of the allegations in the complaint and any wrongdoing
whatsoever, they believed that settlement of the case was in the best interests
of the Company and its stockholders to avoid the costs and risks of litigation.
The settlement had no impact on results of operations and the settlement payment
was funded from restricted cash deposits previously set aside for this
contingency. As a result of the settlement, approximately $1.5 million in
restricted cash deposits were returned to the Company. On January 27, 1998, the
court preliminarily approved the settlement and set the timetable for granting
final approval. On October 29, 1998 the court granted final approval of the
settlement.
The Company is also engaged in various other actions arising in the ordinary
course of business or pursuant to agreement with Compass as previously
discussed. The Company believes, based upon consultation with legal counsel,
that the ultimate collective outcome of these other matters will not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.
6. Statements of Cash Flows
General and administrative expenses include depreciation expense on corporate
assets of $180,000 and $555,000 in the six months ended December 27, 1998 and
December 28, 1997, respectively.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
9
<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. Certain other non-restaurant operating assets and
liabilities of DAKA International were contributed to the Company as described
in Note 2 to Consolidated Financial Statements. Those assets and liabilities
consisting of notes receivable, property, accounts payable, accrued expenses and
contingent liabilities have been recorded within their respective captions
during fiscal 1998 and resulted in a decrease to stockholders' equity of $1.5
million.
On July 31, 1998, the Company agreed to sell its Fuddruckers business to King
Cannon, Inc. ("King Cannon"), a private company controlled by Michael Cannon,
for $43.0 million in a transaction expected to close in November 1998. The
transaction was approved by a majority vote of the stockholders on November 5,
1998. As a result of these events, the Company's ongoing operations will consist
primarily of owning, operating and franchising Champps Americana restaurants.
The results of operations for Fuddruckers have been treated as discontinued
operations in the accompanying financial statements for all periods presented.
Certain reclassifications have been made to the selected financial data and
other financial data presented for prior periods to be consistent with current
classifications.
RESULTS OF OPERATIONS
Overview
The Company reported an operating loss from continuing operations of $694,000,
and an operating loss from continuing operations before cumulative change in
accounting for preopening expenses of $2,233,000 for the six month periods ended
December 27, 1998 and December 28, 1997, 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 and successfully execute its growth strategy for the
Champps Americana restaurant chain. While progress has been made during the
quarter ended December 27, 1998 in many of these areas, there can be no
assurance that the Company will be able to maintain profitability on a sustained
basis.
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.
10
<PAGE>
On September 24, 1998, the Company announced it had retained Bear Stearns & Co.,
Inc. to assist the Company's board of directors (the "Board") in evaluating and
seeking financial and strategic alternatives, including a possible sale of the
Company. There can be no assurance, however, that the Company will pursue a sale
or any other specific alternative or that it will be able to reach any agreement
or complete any transaction that it may undertake.
The Company's Champps Americana restaurant chain is in the expansion phase. The
timing of revenues and expenses associated with the opening of new restaurants
or the closing or repositioning of existing restaurants are expected to result
in fluctuations in the Company's quarterly results. In addition, the Company's
results, and the results of the restaurant industry as a whole, may be adversely
affected by changes in consumer tastes, discretionary spending priorities,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, traffic patterns, weather conditions, employee
availability and the type, number and location of competing restaurants.
Changes in any of these factors could adversely affect the Company.
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and the mix between food and liquor revenues. Various
factors beyond the Company's control, such as adverse weather changes, may
affect food costs and increases in federal, state and local taxes may affect
liquor costs. While in the past the Company has been able to manage its exposure
to the risk of increasing food and liquor costs through certain purchasing
practices, menu changes and price adjustments, there can be no assurance that
the Company will be able to do so in the future or that changes in its sales mix
or its overall buying power will not adversely affect the Company's results of
operations.
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.
Overall Results of Continuing Operations
Total revenues for the six month period ended December 27, 1998, increased 12.6%
to $42,283,000 compared with $37,543,000 last year. This increase reflects
additional restaurant revenues at Champps as discussed further below, offset, in
part, by the reduction of $1,564,000 in revenues associated with the closure of
the Company's Great Bagel & Coffee business on June 28, 1998. For the six months
ended December 28, 1997, the Great Bagel & Coffee business reported net income
before general and administrative expenses of $128,000.
11
<PAGE>
The following table sets forth, for the periods presented, certain financial
information for the Company's Champps business segments.
Champps
<TABLE>
<CAPTION>
(In thousands)
Quarters Ended Six Months Ended
-------------- ----------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Restaurant sales $ 21,729 $ 18,750 $ 41,979 $ 35,750
========= ========= ========= =========
Sales from Champps-owned restaurants 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales (29.0) (28.8) (29.0) (28.9)
Labor (32.4) (32.7) (32.6) (32.8)
Other restaurant operating expenses (27.8) (28.9) (27.5) (27.7)
Depreciation and amortization (3.5) (3.9) (3.6) (4.1)
--------- --------- --------- ---------
Income from restaurant operations 7.2% 5.7% 7.3% 6.5%
========= ========= ========= =========
Income from restaurant operations $ 1,570 $ 1,069 $ 3,084 $ 2,324
Franchising income 142 126 304 229
--------- --------- --------- ---------
Income from restaurant and franchising operations $ 1,712 $ 1,194 $ 3,388 $ 2,553
========= ========= ========= =========
Number of restaurants (end of period)
Champps-owned 17 15
Franchised 12 11
--------- ---------
Total restaurants 29 26
========= =========
</TABLE>
Sales in Champps-owned restaurants increased approximately $3.0 million, or
15.9%, to approximately $21.7 million for the quarter ended December 27, 1998
compared to approximately $18.8 million for the quarter ended December 28, 1997.
This increase results from the opening of additional restaurants between periods
and an increase in same store sales of approximately 2.7% offset, in part, by
the sale of one unit in February 1998.
Sales in Champps-owned restaurants increased approximately $6.2 million, or
17.4%, to approximately $42.0 million for the six months ended December 27, 1998
compared to approximately $35.8 million for the six months ended December 28,
1997. This increase results from the opening of additional restaurants between
periods and an increase in same store sales of approximately 1.9% offset, in
part, by the sale of one unit in February 1998.
Income from restaurant operations increased 46.9% to approximately $1.6 million
and 32.7% to approximately $3.1 million for the quarter and six months ended
December 27, 1998, respectively, as compared with approximately $1.1 million and
approximately $2.3 million for the comparable quarter and six months,
respectively, of last year. Restaurant level operating margins improved to 7.2%
for the quarter ended December 27, 1998 compared with 5.7% in the corresponding
quarter a year ago. This improvement primarily reflects lower start-up costs
incurred in the current quarter compared with such costs last year.
For the first half of fiscal 1999, restaurant operating margins improved to 7.3%
compared with 6.5% in the prior year. This improvement reflects lower start-up
costs in the current year, offset, in part, by higher occupancy costs. The
change in occupancy reflects the Company's increased use of landlord or
sale-leaseback financing for stores opened since January of 1997 (seven stores).
12
<PAGE>
Income Taxes
Through July 17, 1997, the operations of the Company were generally included in
the consolidated U.S. Federal Income tax return and certain combined and
separate state and local tax returns of DAKA International. No tax benefit has
been recognized for the loss attributable to the current quarter. As of June 28,
1998 the Company had net operating loss carryforwards of approximately $24.5
million. The carryforwards expire at various dates through 2012 and a portion of
such carryforwards can only be applied against the taxable income of Fuddruckers
and a portion against the earnings of the Company's 63% owned subsidiary,
Atlantic Restaurant Ventures, Inc.
Accounting Pronouncements Not Yet Adopted
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information," and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company will adopt SFAS No.
131 during fiscal year 1999 and SFAS No. 133 during fiscal year 2000. Management
is currently reviewing the effect, if any, from adoption of these statements to
the Company's consolidated financial statements.
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 is
working to evaluate Ceridian's proposed solution, as well as other payroll
processing solutions, in order to purchase, test and install a 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.
13
<PAGE>
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.
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.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
14
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
At December 27, 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. Given the Company's plans for
the expansion of its Champps business, and existing sources of financing through
existing cash balances and sale-leaseback facilities, the Company does not
anticipate any significant need for additional working capital for its primary
business over the next twelve months.
Capital expenditures for restaurant expansion during the quarter were funded
primarily through cash flows from operations and proceeds from sale-leaseback
facilities.
In December 1995, Champps obtained $40.0 million of sale-leaseback financing for
the construction of new Champps restaurants. As of June 28, 1998, the
construction of four Champps restaurants had been fully funded under this
commitment and two had been partially funded. At December 31, 1998, one Champps
under construction will be funded under this commitment. The remaining unused
portion of this commitment expired on December 31, 1998.
Forward-Looking Statements
Certain information included in this report and other materials filed or to be
filed by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or written statements made or to be made
by the Company) may contain statements that are forward-looking within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements include
information relating to current expansion plans, business development
activities, and Year 2000 compliance. Such forward-looking information is based
on assumptions concerning important risks and uncertainties that could
significantly affect anticipated results in the future and, accordingly, such
results may differ from those expressed in any forward-looking statements made
by or on behalf of the Company. These risks and uncertainties include, but are
not limited to, those relating to real estate development and construction
activities, the issuance and renewal of licenses and permits for restaurant
development and operations, economic conditions, changes in federal or state
laws or the administration of such laws, and the Year 2000 readiness of
suppliers, banks, vendors and others having a direct or indirect business
relationship with the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On November 5, 1998, in a special meeting of stockholders, the proposed sale of
the Company's Fuddruckers subsidiary to King Cannon was approved by a majority
of stockholders in a quorum with a vote of 7,432,437 for the proposed sale and
4,167,648 against the proposal or abstaining. The transaction is closed during
November 1998.
15
<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
Director, Chief Executive Officer
(Principal Financial and Principal
Accounting Officer)
February 16, 1999
16
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