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 January 2, 2000
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.)
5619 DTC Parkway, Suite 1000, Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
(303) 804-1333
(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 15,
2000: 11,654,750.
<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>
January 2, June 27,
2000 1999
------------ -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,840 $ 7,240
Restricted cash, current 431 397
Accounts receivable, net 1,761 1,288
Inventories 1,409 1,205
Prepaid expenses and other current assets, net 985 1,637
Note receivable 1,616 -
Net assets held for sale 897 1,665
------------ -----------
Total current assets $ 9,939 $ 13,432
Restricted cash, non-current 2,389 2,596
Property and equipment, net 38,452 36,096
Investment - 2,748
Other assets, net 334 2,270
------------ -----------
Total assets $ 51,114 $ 57,142
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,607 $ 5,264
Accrued expenses 8,028 8,679
Current portion of capital lease obligation 1,810 1,843
Current portion of note payable 167 167
------------ -----------
Total current liabilities $ 13,612 $ 15,953
Capital lease obligation, net of current portion 3,269 4,064
Note payable, net of current portion - 83
Other long-term liabilities 7,219 9,223
------------ -----------
Total liabilities $ 24,100 $ 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
January 2, 2000 and June 27, 1999, respectively) $ 117 $ 116
Additional paid-in capital 79,373 79,360
Accumulated deficit (52,476) (51,657)
------------ -----------
Total stockholders' equity $ 27,014 $ 27,819
------------ -----------
Total liabilities and stockholders' equity $ 51,114 $ 57,142
============ ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CHAMPPS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter and Six Months Ended January 2, 2000 and December 27, 1998
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
-------------------------------- -------------------------------
December 27,
January 2, December 27, January 2, 1998
2000 1998 2000 (restated)
------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 27,513 $ 21,729 $ 52,897 $ 41,979
Franchising and royalty, net 187 142 370 304
------------- ---------------- ------------- ---------------
Total revenues $ 27,700 $ 21,871 $ 53,267 $ 42,283
------------- ---------------- ------------- ---------------
Costs and expenses:
Restaurant operating expenses:
Product costs 7,832 6,298 15,199 12,166
Labor costs 8,752 7,133 17,298 13,869
Other operating expenses 4,562 3,661 8,912 7,135
Occupancy 2,245 1,756 4,454 3,530
Preopening 399 507 1,110 644
Depreciation and amortization 942 768 2,023 1,503
------------- ---------------- ------------- ---------------
Total restaurant operating expenses 24,732 20,123 48,996 38,847
General and administrative expenses 1,607 1,890 3,405 4,179
Exit and other costs - - 460 -
------------- ---------------- ------------- ---------------
Total costs and expenses 26,339 22,013 52,861 43,026
------------- ---------------- ------------- ---------------
Income (loss) from operations 1,361 (142) 406 (743)
Other (income) expense, net 25 (65) 191 (49)
Loss on sale of marketable securities 1,034 - 1,034 -
------------- ---------------- ------------- ---------------
Net income (loss) from continuing operations 302 (77) (819) (694)
Loss from discontinued operations - (8,966) (8,022)
------------- ---------------- ------------- ---------------
Net income (loss) $ 302 $ (9,043) $ (819) $ (8,716)
============= ================ ============= ===============
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.03 $ (0.01) $ (0.07) $ (0.06)
Loss from discontinued operations - (0.77) - (0.69)
------------- ---------------- ------------- ---------------
Net income (loss) $ 0.03 $ (0.78) $ (0.07) $ (0.75)
============= ================ ============= ===============
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.03 $ (0.01) $ (0.07) $ (0.06)
Loss from discontinued operations - (0.77) - (0.69)
------------- ---------------- ------------- ---------------
Net income (loss) $ 0.03 $ (0.78) $ (0.07) $ (0.75)
============= ================ ============= ===============
Basic weighted average shares outstanding 11,653 11,605 11,652 11,603
Diluted weighted average shares outstanding 11,684 11,605 11,652 11,603
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CHAMPPS ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended January 2, 2000 and December 27, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 27,
January 2, 1998
2000 (restated)
------------- ----------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net loss $ (819) $ (8,716)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,189 1,683
Loss on sale of marketable securities 1,034 -
Exit and other costs 460 -
Non-cash compensation from discontinued operations - 912
Changes in assets and liabilities:
Restricted cash balances 173 60
Changes in current assets and liabilities, net (4,409) (546)
Changes in other long-term assets and liabilities, net (77) (1,326)
------------- ----------------
Net cash used in operating activities (1,449) (7,933)
------------- ----------------
Cash flows from investing activities:
Proceeds from discontinued operations - 33,438
Proceeds from sale of marketable securities 1,714 -
Purchase of property and equipment (8,151) (4,065)
Net proceeds from net assets held for sale 768 -
------------- ----------------
Net cash provided by (used in) investing activities (5,669) 29,373
------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 14 -
Repayment of debt (912) (761)
Proceeds from sale leaseback facility 3,616 1,135
------------- ----------------
Net cash provided by financing activities 2,718 374
------------- ----------------
Net increase (decrease) in cash and cash equivalents (4,400) 21,814
Cash and cash equivalents (overdrafts), beginning of period $ 7,240 $ (646)
------------- ----------------
Cash and cash equivalents, end of period $ 2,840 $ 21,168
============= ================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended January 2, 2000
(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 6 1 13 14
Other comprehensive loss
Unrealized loss on marketable
securities (891) (891)
Net (loss) (1,121) (1,121)
----------- ------------ ------------- ----------------- --------------- -----------
Balance, October 3, 1999 11,653 117 79,373 (891) (52,778) 25,821
Common shares issued
Realization of loss on
marketable securities 891 891
Net income 302 302
----------- ------------ ------------- ----------------- --------------- -----------
Balance, January 2, 2000 11,653 $ 117 $ 79,373 $ - $ (52,476) $ 27,014
=========== ============ ============= ================= =============== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
CHAMPPS ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarter and Six Months Ended January 2, 2000 and December 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 a 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
January 2, 2000, 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 December 27, 1998 Condensed
Consolidated Financial Statements
On November 24, 1998, the Company completed the sale of all of the outstanding
common stock of Fuddruckers, Inc. ("Fuddruckers") to King Cannon, Inc. 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.
In the financial statements for December 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
extended the expiration date of the Company's Chief Executive Officer's 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 thirteen weeks ended January
2, 2000 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 consistent with those described in
the Company's Annual Report on Form 10-K.
2. Acquisition and Disposition Transactions
Sale of Predecessor Companies
In connection with the sale of certain predecessor companies, the Company
disbursed approximately $2,500 to escrow agents to be held pending resolution of
certain contingent obligations discussed further below. At January 2, 2000,
$2,389 continues to be held in escrow and is reported as restricted cash.
<PAGE>
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 six month 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 shares would have increased by approximately
42,000 shares. For purposes of the fiscal 2000 second quarter income per share
calculations, stock options have been included for the diluted computation. As a
result, 31,000 dilutive shares have been included in the diluted income per
share computation. 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." With the second
quarter sale of the marketable securities held by the Company, the previously
recorded comprehensive loss in the Statement of Stockholders' Equity has been
eliminated, and a realized loss has been reported in the Statement of Operations
for the second quarter fiscal 2000.
Investment
On December 7, 1999, the Company sold approximately 1,142 shares of Santa
Barbara Restaurant Group (SBRG) at the current market closing price for a total
of $1,714. Champps' interest in SBRG resulted when SBRG merged with LaSalsa
Holding Co. Champps previously had a minority interest in La Salsa Holding Co.
As a result of this sale, the previously unrealized loss of $891 recorded in the
Statement of Stockholders' Equity has been eliminated, and a realized loss of
$1,034 has been reported in the second quarter's Statement of Operations. The
Company still retains ownership of two blocks of exercise price, exercisable at
$7.00 and $7.50, and certain shares held in escrow, held at zero value on the
balance sheet.
Reclassifications
Certain amounts in the fiscal 1999 condensed consolidated financial statements
have been reclassified to conform to the fiscal 2000 presentation.
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 January 2, 2000, a total of approximately $257 was paid for agreed
amounts presented to the Company by King Cannon for indemnification.
Leases
The Company had a lease obligation for the corporate headquarters in Danvers,
Massachusetts which expired during 2001. The Company terminated the lease and
exited this location on December 31, 1999. The Company previously accrued for
the cost of terminating this lease.
<PAGE>
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 January 2, 2000, the Company had utilized $829 for employee
severance and lease related expenses. In the first quarter of fiscal 2000, the
Company recorded additional exit and other costs of $460 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. Reserve Disclosure
The Company had previously recorded liabilities as of June 27, 1999 associated
with the activities of certain predecessor companies which were either spun-off
or sold to other entities. In addition, the Company had previously recorded exit
costs associated with the Company's relocation to Denver, Colorado. For the six
months ending January 2, 2000, certain of these reserves were reallocated to
more accurately reflect transactions occurring during the period. The following
tables display the activity and balances relating to the relocation of the
reserves:
<TABLE>
<CAPTION>
Reserves
-------------------------------------------------------------
Lease Predecessor Assets held for
Severance Termination Obligations sale
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 27, 1999 $ 344 $ 1,047 $ 4,195 $ -
Additional Expense Recognition 460 - - -
Deductions (471) (358) (585) -
Revision to Estimate 289 (289) (300) 300
------------- ------------- ------------ -------------
Balance at January 2, 2000 $ 622 $ 400 $ 3,310 $ 300
</TABLE>
7. Statements of Cash Flows
General and administrative expenses include depreciation expense on corporate
assets of $166 and $180 in the six months ended January 2, 2000 and December 27,
1998, respectively.
8. Stock Option Plan
During the quarter ended September 27, 1999, the company granted options to
employees to acquire 896,750 shares of common stock at an exercise price of
$4.00 per share. During the quarter ending January 2, 2000, the Company granted
options to employees to acquire 67,000 shares of common stock at an exercise
price of $4.00 per share. As the grant price was in excess of the market price
at the time of the grant, the Company has not recorded any compensation expenses
related to these grants in the accompanying consolidated condensed financial
statements.
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 Quarterly Report on
Form 10-Q are forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Words such as "believe",
"anticipate", "estimate", "project", "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
<PAGE>
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 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 reported net income of $302 for the quarter ended January 2, 2000,
compared with a restated net loss of $9,043, which included a net loss from
discontinued operations, in the comparable quarter last year. For the six months
ended January 2, 2000, the Company reported a loss from continuing operations of
$819, compared with a restated net loss of $8,716, which included a net loss
from discontinued operations, in the comparable period last year. Included in
the net loss in the first quarter of fiscal 2000 were $460, of additional exit
and other costs associated with the consolidation and relocation of its
corporate offices to Denver, Colorado. Included in the second quarter of fiscal
2000 was a loss of $1,034 associated with the sale of marketable securities.
During fiscal 1999, the Company sold its Fuddruckers, Inc. subsidiary, and
accordingly, has restated its historical financial statements to reflect
Fuddruckers as discontinued operations. The Company reported a loss from
discontinued operations of $8,966 for the second quarter of fiscal 1999 and a
loss of $8,022 for the first half of fiscal 1999.
The Company's Champps Americana concept is in an expansion phase. The timing of
revenues and expenses associated with opening new restaurants is 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.
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.
<PAGE>
Fiscal Year
Fiscal year 2000 is a fifty-three week year. Accordingly, the six months ended
January 2, 2000 contain 27 weeks of operating results compared to 26 weeks of
operating results for the first six months of fiscal 1999.
Operations
The following table sets forth, for the periods presented, certain financial
information for the Company.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------------ ------------------------------
December 27,
January 2, December 27, January 2, 1998
2000 1998 2000 (restated)
------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Restaurant Sales $ 27,513 $ 21,729 $ 52,897 $ 41,979
============= =============== ============ ===============
Sales from Champps restaurants 100.0% 100.0% 100.0% 100.0%
Product costs (28.5%) (29.0%) (28.7%) (29.0%)
Labor costs (31.8%) (32.8%) (32.7%) (33.0%)
Operating expenses (16.6%) (16.9%) (16.8%) (17.0%)
Occupancy (8.1%) (8.1%) (8.5%) (8.4%)
Preopening (1.5%) (2.3%) (2.1%) (1.5%)
Depreciation and amortization (3.4%) (3.5%) (3.8%) (3.6%)
------------- --------------- ------------ ---------------
Restaurant unit contribution 10.1% 7.4% 7.4% 7.5%
============= =============== ============ ===============
Restaurant unit contribution $ 2,781 $ 1,606 $ 3,901 $ 3,132
Franchising and royalty income 187 142 370 304
------------- --------------- ------------ ---------------
Restaurant unit, franchising and royalty contribution 2,968 1,748 4,271 3,436
General and administrative expenses 1,607 1,890 3,405 4,179
------------- --------------- ------------ ---------------
Income (loss) from restaurant and franchising
operations $ 1,361 $ (142) $ 866 $ (743)
============= =============== ============ ===============
Number of restaurants (end of period)
Company-owned 21 17
Franchised 14 12
------------- ---------------
Total restaurants 35 29
============= ===============
</TABLE>
Sales in Company-owned restaurants increased $5,784, or 26.6%, to $27,513 for
the quarter ended January 2, 2000 compared with $21,729 for the quarter ended
December 27, 1998. This increase results from the opening of additional
restaurants between periods and an increase in same store sales of 4.7%.
Sales in Company-owned restaurants increased $10,918, or 26.0%, to $52,897 for
the six months ended January 2, 2000 compared with $41,979 for the six months
ended December 27, 1998. This increase results from the opening of additional
restaurants between periods, an increase in same store sales of 4.9%, and, in
part, the addition of one week in the first quarter of fiscal 2000.
Restaurant franchising and royalty contribution increased $1,220 and $835 for
the quarter and six months ended January 2, 2000, respectively, as compared with
last year's comparable quarter and six months than ended. Restaurant operating
margins as a percentage of sales improved 2.7% for the quarter as compared to a
year ago. This improvement was a result of operating efficiencies realized
during the quarter resulting in improved cost of
<PAGE>
sales and labor costs. Restaurant operating margins as a percentage of sales for
the six months ended January 2, 2000 decreased 0.1% as compared to the
comparable period a year ago.
Income Taxes
Given the Company's history of losses, no benefit for net operating losses was
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.
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.
As is true with most companies, Champps faces a risk from the Year 2000 issue.
We intend for some of our disclosures and announcements concerning our Year 2000
programs, including those in this report on Form 10-Q, to constitute "Year 2000
Readiness Disclosures" as defined in the Year 2000 Information and Readiness
Disclosure Act. While not all Year 2000-date related disruption scenarios have
been experienced, and there is a possibility of disruptions in the future,
through the date of this report, the Company has experienced no material
disruption or other significant problems. We are continuing to evaluate and
mitigate our exposure in areas where appropriate. Based on currently available
information, management continues to believe that Year 2000-related disruptions
or other problems, if any, will not have a significant adverse impact on our
operational results or financial condition. However, we cannot be certain that
Year 2000 issues will not have a material adverse impact on us, since our
evaluation process is not yet complete and it is early in the year.
Year 2000 State of Readiness and Risks
Champps has identified three key exposure areas within Champps with respect to
the Year 2000 issues, namely: key transaction processing applications, equipment
and facilities and key suppliers. As of the date of this report, the following
impacts to Champps of the Year 2000-date rollover have been observed:
Key transaction processing applications - Key transaction processing
applications include those used to run Champps' business, such as finance, food
production, and service delivery. No errors have been reported immediately after
or since the Year 200 date rollover. Applications will continue to be monitored
for the next several weeks and over the leap year date to confirm continued
correct date processing. If we identify significant new non-compliance issues or
encounter unexpected difficulties in area previously considered to be Year 2000
ready, our ability to conduct our business or record transactions could be
disrupted, which could adversely affect our results of operations or financial
condition.
Equipment and facilities - To date, we are not aware of any Year 2000 related
failures in critical equipment or facilities. If we encounter any unexpected
difficulties in areas previously considered being Year 2000 ready, over
production and service delivery capabilities could be disrupted, which could
adversely affect our results of operations or financial condition.
<PAGE>
Key Suppliers - To date, there have been no Year 2000 related failures in the
receipt of key raw materials, components, products or services. If key suppliers
fail to adequately address the Year 2000 issue for the products or services they
provide to Champps, critical materials, products and services may not be
delivered in a timely manner, which could adversely affect our results of
operations or financial condition.
We believe that our most reasonably likely worst-case Year 2000 scenario would
relate to problems with the systems and services of third parties rather than
with Champps internal systems and products. Champps cannot identify all possible
disruption scenarios. Contingency plans for critical business operations are in
place. These plans will continue to be validated and modified as needed, and as
we learn about disruptions, if any, caused by Year 2000 date rollover.
Through January 2, 2000, we have spent approximately $640 on upgrading our
systems and hardware. With respect to Champps' 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.
With respect to Champps' point of sale systems, all stores have been upgraded to
the most current platform for both hardware and software. The system has been
successfully tested and is currently operational. With respect to the
consolidated accounting and financial reporting core systems, the Company has
upgraded both its network and accounting and financial reporting application.
The system has been successfully tested and is currently operational.
[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 within 30 to 60 days
after receipt of invoices. Funding for expansion during 2000 and 1999 were
generally provided through available cash balances (including in 1999 a portion
of the proceeds from the sale of Fuddruckers) and proceeds from sale-leaseback
facilities. Capital expenditures were $8,151 and $4,065 for continuing
operations, respectively, for the six months ended January 2, 2000 and December
27, 1998, respectively.
As of January 2, 2000, the Company's unrestricted cash balance was $2,840 and
restricted cash balance was $2,389. The Company anticipates that it will
generate positive cash flows from operations for the remainder of fiscal 2000;
however, there are also significant cash expenditures anticipated during the
balance of fiscal 2000.
Capital expenditures for the balance of fiscal 2000 are anticipated to be
approximately $7,600, which will be incurred primarily for new restaurants now
under construction and upgrades. On September 15, 1999, the Company received an
$11,300 commitment for sale-leaseback financing for three new restaurants. As of
January 2, 2000, the Company had received $2,000 of this commitment and received
an additional $1,616 on January 7, 2000. This commitment is subject to various
pre-closing conditions and there can be no assurances that the balance of the
commitment will be available on the terms currently anticipated or at all.
It is also anticipated that there will be cash payments in fiscal 2000
associated with liabilities recorded in fiscal 1999 related to the Spin-Off and
sale of predecessor companies and the consolidation and relocation of the
headquarters to Denver, Colorado. As of January 2, 2000, $829 has been expended
for this purpose. In addition, there will be expenditures for prior year
insurance claims, tax audits and legal settlements. These expenditures are
estimated to range between $1,000 and $1,500 during the balance of fiscal 2000.
If the Company is unable to obtain additional sources of financing, the
Company's planned expansion program would be adversely effected. In such a case,
the Company believes that it has the ability to curtail its expansion program
and further reduce non-essential operating costs to conserve cash sufficiently
to continue its day-to-day operations through fiscal 2000 and beyond.
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 4: Submission of Matters to a Vote of Security Holders.
On December 8, 1999, Champps Entertainment, Inc. held its Annual Meeting of
Stockholders. During the meeting, Alan D. Schwartz was nominated and
reelected as a member of the Board of Directors. In addition, the four
incumbent directors continued their terms on the Board of Directors. These
directors are: William H. Baumhauer, Timothy R. Barakett, James Goodwin and
Nathaniel P.Z.J. Rothschild.
No other matters were submitted to a vote of the security holders.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Not applicable
(b) Reports on Form 8-K
On December 8, 1999 the Company's Board of Directors approved the
termination of Champps' Shareholder Rights Agreement, effective on that
date. The Board's decision to terminate the Shareholder Rights
Agreement was based on the Board's desire to improve liquidity in the
Company's Common Stock by removing restrictions on the ability of the
Company's stockholders to buy additional Common Stock of the Company,
as well as the Board's belief that the Shareholder Rights Agreement,
which was adopted in 1998, was no longer appropriate given the
Company's simpler structure and reduced size.
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)
February 16, 2000
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