UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Check One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For The Fiscal Year Ended July 2, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ___
Commission File Number: 0-22639
CHAMPPS ENTERTAINMENT, INC.
(Formerly known as Unique Casual Restaurants, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5619 DTC Parkway, Suite 1000, Englewood, CO 80111
(Address of principal executive offices) (Zip Code)
303-804-1333
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: N/A
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
Title of Class
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 and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Resolution S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K: [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of the Common Stock of the registrant as
quoted on the National Association of Securities Dealers Automated Quotation
System on September 28, 2000 was $46,216,648 (for purposes of calculating this
amount only, directors, officers and beneficial owners of 10% or more of the
Common Stock of the registrant may be deemed affiliates).
Number of shares of Common Stock, $.01 par value, outstanding at September 28,
2000: 11,683,482
DOCUMENTS INCORPORATED BY REFERENCE
The sections of the Company's definitive Proxy Statement, listed below, which
have been or will be filed by the Company with the Securities and Exchange
Commission, are incorporated in this Annual Report by reference and shall be
deemed to be a part hereof:
The Company's definitive Proxy Statement mailed in connection with its
Annual Meeting of Stockholders to be held on or about December 13, 2000
pursuant to regulation 14A, which involves the election of directors.
Cross Reference Sheet between Items of
Registrant's Proxy Statement and Form 10-K
Item No. Item in Form 10-K Item in Proxy Statement
-------- ------------------------------------------------
PART III
10 Directors and Executive Election of Directors and Directors of
Officers of the Registrant Committees in the Company's Proxy
Statement relating to its Annual
Meeting of Stockholders to be held on
or about December 13, 2000.
11 Executive Compensation Executive
Compensation in the Company's
ProxyStatement relating to its Annual
Meeting of Stockholders to be held on
or about December 13, 2000.
12 Security Ownership of Certain Principal Stockholders in the Company's
Beneficial Owners and Proxy Statement relating to its Annual
Management Meeting of Stockholders to be held on
or about December 13, 2000.
13 Certain Relationships and
Related Transactions
Copies of all documents incorporated by reference other than exhibits to such
documents will be provided without charge to each person who receives a copy of
this Annual Report upon written request addressed to Stockholder Relations,
Champps Entertainment, Inc., 5619 DTC Parkway, Suite 1000, Englewood, Colorado
80111.
FORM 10-K INDEX
PART I
Item 1 Business 1
Item 2 Properties 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters 11
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition 14
Item 7a Quantitative and Qualitative Disclosure About Market Risk 19
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements with Accountants on
Accounting Financial Disclosure 19
PART III
Item 10 Directors and Executive Officers of the Registrant 20
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners and
Management 22
Item 13 Certain Relationships and Related Transactions 22
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 22
From time to time, the Company may make certain statements that
contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995). Words such as "believe,"
"anticipate," "estimate," "project," and similar expressions are
intended to identify such forward-looking statements. Forward-looking
statements may be made by management orally or in writing, including,
but not limited to, in press releases, as part of Management's
Discussion and Analysis of Financial Condition and Results of
Operations as contained in this report and as part of other sections
of this Report or other filings. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only
as of their respective dates, and are subject to certain risks,
uncertainties and assumptions including those set forth in the
Management's Discussion and Analysis of Financial Condition and
Results of Operations under the heading "Forward-Looking Statements".
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.
PART I
Item 1. Business.
Champps Entertainment, Inc. (formerly known as Unique Casual Restaurants, Inc.)
(the "Company") is a Delaware corporation formed on May 27, 1997. The Company's
principal executive offices are located at 5619 DTC Parkway, Suite 1000,
Englewood, Colorado 80111, and its telephone number is (303) 804-1333.
Disposition and Certain Other Transactions
At the time of its formation, the Company was a wholly owned subsidiary of DAKA
International, Inc. (DAKA International). The Company's business consisted of
owning, operating and franchising casual dining restaurants through various
subsidiaries under the Champps Americana, Fuddruckers World's Greatest
Hamburgers ("Fuddruckers") and the Great Bagel & Coffee Company brands.
Additionally, the Company also owned a 17% passive investment in La Salsa Fresh
Mexican Grill ("La Salsa") and a 50% interest in Restaurant Consulting Services,
Inc. ("RCS"). Since the time of its formation, the Company has entered into
numerous transactions which have altered the business the Company owns, operates
and franchises, as described below.
Spin-off Transaction
Pursuant to certain transactions, on July 17, 1997, DAKA International and Daka,
Inc., its wholly-owned subsidiary, merged 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 incorporated in
England and Wales (collectively "Compass") (the "Merger"). Prior to the Merger,
DAKA International, certain of its subsidiaries, the Company and Compass 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. Following the
Merger, DAKA International distributed to each common stockholder of record of
DAKA International, one share of common stock of the Company for each share of
DAKA International owned by such stockholder (the "Distribution"). 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 "Spin-off").
As part of the Merger and the Spin-off transaction, the Company agreed it would
not compete with Compass or Daka for five years following the Spin-off. In
addition, the Company agreed to indemnify, defend and hold harmless Compass,
from and against, and pay or reimburse Compass for certain indemnifiable losses
incurred relating to or arising from the liabilities that Compass did not agree
to assume, including but not limited to certain tax liabilities. The scope and
amount of such liabilities are subject to a high degree of uncertainty and risk.
Although the Company has estimated the amount of liabilities due, there can be
no assurance that such amounts to be ultimately paid will not differ from the
Company's estimate and such difference could be material.
Great Bagel & Coffee
The Company ceased all operations of the Great Bagel & Coffee business on June
28, 1998.
Sale of Fuddruckers
On November 24, 1998, the Company sold all of the outstanding common stock of
Fuddruckers, Inc. to King Cannon, Inc. ("King Cannon") for $43.0 million in cash
(the "Fuddruckers Sale").
The Agreement contains various standard representations and warranties by the
Company which survive the closing and will expire on December 31, 2000 (the
"Survival Period"), except that representations and warranties made by the
Company (i) relating to environmental matters survive until December 31, 2003,
(ii) relating to employee matters and income taxes survive the closing date
until expiration of applicable statutes of limitations and (iii) relating to
organization, corporate power, authorization, non-contravention and
capitalization shall survive the closing indefinitely. In addition, any
covenants or agreements of the Company under the Agreement, and any and all
indemnification obligations relating thereto shall survive the closing
indefinitely, unless earlier expiring in accordance with their respective terms.
The Company and Champps Operating Corporation, Inc. ("COC") are obligated to
jointly and severally indemnify King Cannon, Fuddruckers and their respective
affiliates from and against any losses, assessments, liabilities, claims,
obligations, damages, costs or expense which arise out of or relate to (i) any
misrepresentations in or breach of any of the representations, warranties,
undertakings, covenants or agreements of the Company, Fuddruckers, related
entities and affiliates contained in the Agreement; (ii) any environmental
matters related to Fuddruckers and its affiliates; (iii) any retained or
undisclosed liabilities; or (iv) the Company's obligations with respect to lease
termination amounts and rent adjustment amounts. However, the Company obtained
each required consent and required estoppel from landlords prior to the closing
of the sale and, as a result, the Company believes the risk for a material claim
for indemnification related to each of the lease termination amounts and rent
adjustment amounts provisions is remote. The maximum aggregate liability of the
Company on account of any breach of any representation or warranty is limited to
the amount of the final purchase price. There is no cap or limit on the
liability of the Company to King Cannon on account of any breach by the Company
of any of its covenants or agreements under the Agreement or on account of
indemnification obligations covering matters other than breaches of
representations and warranties, provided that, if King Cannon is entitled to
recover any losses in excess of the final purchase price, the Company may either
(i) require King Cannon to, in effect, rescind the transaction, subject to
certain adjustments, or (ii) pay to King Cannon all of the losses with respect
to which King Cannon is entitled to indemnification.
The $1.0 million indemnification escrow established at the time of the
Distribution does not limit the Company's maximum exposure for indemnification
claims, however, the Company believes the risk of such claims exceeding the
escrow amount is remote. As of July 2, 2000, approximately $636,000 was paid to
King Cannon or others from the escrow fund for indemnification and other
predecessor obligations relative to the Fuddruckers operation. In addition, for
a period of ten years following the closing date of the Fuddruckers Sale, the
Company and Champps agree not to compete directly with Fuddruckers.
La Salsa Merger
On July 15, 1999, La Salsa was purchased by Santa Barbara Restaurant Group
("SBRG") and the Company exchanged its convertible preferred shares of La Salsa
for common shares of SBRG. On December 7, 1999, the Company sold all its common
shares of SBRG, recognizing a loss on the sale of marketable securities of
$1,034,000. The Company has retained 141,944 warrants for SBRG stock that it
estimates to be of no value.
RCS Disposition
On May 24, 1999, the Company sold its 50% interest in RCS to RCS, receiving in
consideration certain assets of RCS, including a note payable in the amount of
$750,000, which was subsequently paid in full on August 25, 1999.
Purchase of Franchised Restaurants
On June 29, 2000, the Company acquired two Champps Americana restaurants from
existing franchisees.
In the first acquisition, pursuant to an Asset Purchase Agreement dated as of
April 6, 2000 a wholly owned subsidiary of Champps acquired from Prairie
Restaurant Group, Inc., a Minnesota corporation ("Prairie"), all of the assets
of Prairie, located in Eden Prairie, Minnesota, for approximately $5,675,000 in
cash. The acquisition was financed in part with the proceeds from a loan of
$4,750,000 provided by FINOVA Capital Corporation.
In the second acquisition, pursuant to an Asset Purchase Agreement dated as of
April 6, 2000 a wholly owned subsidiary of Champps acquired from Bregean
Investment Group, Inc., a Minnesota corporation ("Bregean"), all of the assets
of Bregean, located in Minnetonka, Minnesota, for approximately $5,675,000 in
cash. The acquisition was financed in part with the proceeds from a loan of
$4,750,000 provided by FINOVA Capital Corporation.
Prior to acquisition, both the Prairie and the Bregean restaurants were owned or
controlled by Dean Vlahos, a former executive and director of the Company.
In connection with the two acquired restaurants, the Company recorded $3,825,000
of goodwill. The Company intends to amortize this goodwill over a twenty year
period.
The Minnetonka, Minnesota Champps restaurant was sold to Dean Vlahos by the
Company on February 2, 1998 for $2,900,000, representing the fair market value
of the restaurant established by an independent appraisal. The purchase price
was in the form of a cash payment by Mr. Vlahos of $1,500,000 and the
cancellation of Mr. Vlahos' employment contract. The Company recognized a net
gain in fiscal 1998 of approximately $700,000 on this transaction.
The Company at July 2, 2000
As a result of these transactions, at June 27, 1999, the Company operates in a
single business segment which owns, operates and franchises Champps Americana
casual dining restaurants. At July 2, 2000, the Company's principal subsidiary
was Champps Operating Corporation, Inc., a Minnesota corporation. Champps
Operating Corporation, Inc. in turn, owns four subsidiaries, each of which is
engaged in owning and operating Champps Americana restaurants. See Exhibit 21.1
for a complete list of the Company's subsidiaries.
Although formed on May 27, 1997, for purposes of this Form 10-K and financial
reporting purposes, the Company has been treated as if it was a stand-alone
entity for all periods presented after giving effect to sale of the Fuddruckers'
business segment. For periods prior to July 17, 1997 the accompanying financial
statements include allocations and estimates of certain expenses, including
corporate accounting, tax, cash management, information technology, legal, risk
management, purchasing and human resources, historically provided to the Company
by DAKA International.
Champps Americana Concept
Operations
The Champps Americana ("Champps") concept is based upon providing the best
possible food, value and service to its customers. Although food and service are
the most important parts of the Champps Americana concept, an atmosphere that is
entertaining and energetic, yet comfortable, is also critical. The food
offerings at Champps' restaurants combine a wide selection of appetizers, soups,
salads, innovative sandwiches, pizza, burgers, and entrees including chicken,
beef, fish, pasta and desserts. Selections reflect a variety of ethnic and
regional cuisines and traditional favorites. Because Champps' menu is not tied
to any particular type of food, Champps can introduce and eliminate items based
on current consumer trends without altering its theme. Portion sizes are
generous and each dish is attractively presented. Champps believes that these
qualities give customers a sense of value. Entree prices currently range from
$4.95 to $18.95. Champps emphasizes freshness and quality in its food
preparation. Fresh sauces, dressings, batters and mixes are prepared daily on
the premises, generally from original ingredients using fresh produce. Champps
invests substantial time in training and testing kitchen employees to maintain
consistent food preparation. Strict food standards at Champps-owned restaurants
have also been established to maintain quality.
The Champps customer's experience is enhanced by the attitude and attention of
restaurant personnel. Accordingly, the Champps concept emphasizes prompt
greeting of arrivals, frequent visits to customer tables to monitor customer
satisfaction and service and friendly treatment of its customers. Service is
based upon a team concept so that customers are made to feel that any employee
can help them and they are never left unattended. Success of the Champps
restaurants depends upon employee adherence to these standards. To maintain
these standards, Champps seeks to hire and train personnel who will work in
accordance with Champps' philosophy and frequently rewards individual and
restaurant achievement through several recognition programs intended to build
and maintain employee morale. All of the service personnel at each Champps
restaurant meet with the managers at two daily pre-shift motivational meetings.
Restaurant promotions, specials and quality control are all discussed and
explained during these meetings.
Champps-owned, franchised and licensed restaurants are designed and decorated in
a casual theme, although they differ somewhat from each other. Champps
restaurants generally range in size from approximately 7,000 to 12,000 square
feet. Champps' standard restaurant features a bar, open kitchen and dining on
multiple levels. Customers can also dine at the bar or outside on the patio,
where available. The spacious design facilitates efficient service, encourages
customer participation in entertainment and promotional events and allows
customers to view the kitchen, dining area, and bar. Strategically placed
television monitors stimulate customer perception of activity and contribute to
the total entertainment experience and excitement of the restaurant.
An important part of the Champps dining experience is the entertainment. Patrons
may watch one of several sporting events being broadcast, or listen to a variety
of music played by the disc jockey, music which is changed for the time of day
and season of the year. The exposed kitchen offers customers the opportunity to
observe the cooks, and, in certain locations, a discreetly located game room is
provided for arcade games. The entertainment aspects of the Champps restaurants
are designed to encourage repeat visits, increase the length of a customer's
stay and attract customers outside of normal peak hours. In addition, a variety
of creative promotions and activities are conducted such as "Family Bingo,"
"Spring Time Big Bike Give-Away" and Karaoke. These promotions and activities
allow for customer participation and are continually changing. Change of the
ambiance is also experienced in each restaurant when the restaurants are
decorated for the holidays. The different looks and activities of the restaurant
provide customers a different feel each time they visit, thus encouraging repeat
business. Champps sells merchandise such as T-shirts, hats and sweatshirts
bearing the Champps Americana name. Although not currently a significant source
of revenue, the sale of its merchandise is believed to be an effective means of
promoting the Champps name.
Champps restaurants are generally open from 11:00 a.m. to 1:00 a.m. seven days a
week serving lunch, dinner and late night appetizers. Closing times of Champps
restaurants will vary based upon state laws concerning operating hours. Sunday
brunch is served beginning at 10:00 a.m. Each Champps restaurant maintains
standardized food preparation and service manuals which are designed to enhance
consistency of operations among the restaurants. Champps attempts to have each
Champps-owned and franchised restaurant operate under uniform standards and
specifications which are formulated at its headquarters in Englewood, Colorado.
Management
The management staff of a Champps restaurant is divided into three areas, the
General Manager, Front-of-House Managers and Back-of-House Managers. The General
Manager has responsibility for the entire restaurant. Front-of-House management
generally consists of an associate manager, two floor managers and a bar
manager. Back-of-House management generally consists of a kitchen manager, two
to three assistant kitchen managers and a daily specials chef. All General
Managers report directly to the Directors of Operations. Managers are
compensated based on salary plus a monthly bonus. The bonus is determined by
means of monthly restaurant sales and profit goals.
Marketing
Champps restaurants have historically expended minimal amounts on traditional
media advertising and marketing, but have relied on in-restaurant marketing and
promotions.
Site Selection
Champps uses its own personnel and consultants to analyze markets and sites for
new restaurants, obtain the required zoning and other permits, negotiate the
leasing or real estate purchase and oversee all aspects of the construction
process. Champps believes that location is a key factor in a restaurant's
ability to operate a profitable lunch and dinner business, and considers several
demographic factors in selecting sites, including the average income of the
neighboring residential population, the proximity of retail, office and
entertainment facilities, traffic patterns and the visibility of the site.
The cost to construct a typical Champps restaurant, where Champps purchases real
estate, depending upon its location, is approximately $4.4 to $5.9 million,
which includes approximately $1.0 million for furniture, fixtures and equipment,
$1.5 to $2.5 million for building and improvements, $1.5 to $2.0 million for
land and site work, and $0.4 million related to pre-opening costs of the
restaurant.
The typical cost to construct a new Champps restaurant where Champps enters into
a leasing arrangement is approximately $2.9 to $3.4 million which is comprised
of approximately $1.0 million for furniture, fixtures and equipment, $1.5 to
$2.0 million for leasehold improvements, and $0.4 million related to pre-opening
costs of the restaurant.
Future development of Champps restaurants will be accomplished primarily through
the development of Champps-owned restaurants. The development of additional
restaurants is contingent upon locating satisfactory sites, financing,
negotiating satisfactory leases or, alternatively, leasing and converting
existing restaurant sites into Champps restaurants. It is also dependent upon
securing appropriate governmental permits and obtaining liquor licenses. During
fiscal 2000, four new Champps Company-owned restaurants were opened and two
restaurants were acquired from a franchisee. During fiscal 1999, two new Champps
Company-owned restaurants were opened. At July 2, 2000, the Company was in
negotiations on several additional sites. Subsequent to year-end, the Company
opened its Las Colinas, Texas restaurant on July 24, 2000. The Company expects
to open three to four additional stores in fiscal 2001 and six to eight
additional stores in fiscal 2002. Development of Champps-owned restaurants will
be concentrated in existing markets with population density levels sufficient to
support the restaurants and new markets with consistent demographics to the
Company's most successful, existing restaurants.
Franchising and Licensing
Champps has offered franchises in markets where it deems expansion to be
advantageous to the development of the Champps concept and a system of
restaurants. Pursuant to franchise agreements, franchisees are granted an
exclusive territorial license to operate a single restaurant within a specified
area. As of July 2, 2000, there are thirteen franchised restaurants, of which,
two franchisees are operating multiple restaurants.
The franchisee agreement requires a franchisee to pay an initial fee of $75,000
per restaurant (part of which may be associated with a development fee), a
continuing royalty fee of 3 1/4% of gross sales, and may provide for a regional
and/or national advertising fee of 1/2% of gross sales at such time as Champps
establishes a regional/national advertising program. Among the services and
materials that Champps may provide to franchisees are site selection assistance,
assistance in design development, an operating manual that includes quality
control and service procedures, training, on-site pre-opening supervision and
consultation relating to the operation of the franchised restaurants. Champps
has granted both single and multi-restaurant development rights depending upon
market factors and franchisee capabilities. With respect to multi-restaurant
agreements, the franchisee's continuing right to obtain franchises is contingent
upon the franchisee's continuing compliance with the restaurant development
schedule.
All franchisees are required to operate their restaurants in accordance with
Champps' standards and specifications, including controls over menu selection,
food quality and preparation. Champps approves all restaurant site selections
and applies the same criteria used for its own restaurant sites. Champps
requires all new franchisees to provide at least annual financial statements
reviewed by an independent certified public accountant. Periodic on-site
inspections are conducted to assure compliance with Champps standards and to
assist franchisees with operational issues. Franchisees bear all direct costs
involved in the development, construction and operation of their restaurants.
Champps Restaurant Locations
The following table sets forth the locations of restaurants operated by Champps
and its franchisees as of September 28, 2000:
Company Owned Restaurant Locations Franchised Restaurant Locations
Domestic - Total 25 Domestic - Total 13
CALIFORNIA MINNESOTA
Irvine Burnsville
COLORADO Duluth
Denver Maple Grove
FLORIDA Maplewood
Ft. Lauderdale Minnetonka
GEORGIA New Brighton
Alpharetta St. Paul
ILLINOIS Woodbury
Lombard NEBRASKA
Schaumburg Omaha
INDIANA NORTH CAROLINA
Indianapolis Charlotte
MICHIGAN SOUTH DAKOTA
Livonia Sioux Falls
Troy WISCONSIN
West Bloomfield Milwaukee (2)
MINNESOTA
Eden Prairie
Minnetonka
Richfield
NEW JERSEY
Edison
Marlton
OHIO
Columbus (3)
Dayton
Lyndhurst
TEXAS
Addison
Houston
Las Colinas
San Antonio
VIRGINIA
Reston
Purchasing
On November 15, 1997, the Company entered into a five-year distribution
agreement with Sysco Corporation ("Sysco") pursuant to which Sysco is entitled
to distribute not less than 80% of food and food-related purchases of Champps.
The agreement with Sysco is cancelable by either party upon 60 days notice.
Champps franchisees also have the option of purchasing from Sysco.
Accounting and Management Information Systems
Since its inception with the Spin-off, the Company has provided each of its
operating segments with centralized financial and management controls through
the use of an automated data processing system and prescribed reporting
procedures. The Company continues to upgrade its computer hardware and financial
software. Restaurants forward weekly sales reports, vendor invoices, payroll
information and other operating information to the Company's corporate
headquarters. The Company utilizes this data to centrally monitor sales,
product, labor and other costs and to prepare periodic financial and management
reports. The Company believes that its centralized accounting, payroll, cash
management and information systems permit the Company to control and manage its
operations efficiently.
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 was evidenced
through a promissory note due June 30, 2002 which accrued interest at 6% per
annum. The promissory note was contributed to the Company as part of the
Additional Capital Contribution described under the caption "Spin-off". The
Company also received DAKA International's 50% interest in RCS at the
Transaction Date. In connection with this sale, the Company entered into a
management agreement with RCS whereby the Company agreed to provide certain
managerial services to RCS. In addition, the Company entered into a two year
service agreement with RCS for data processing and consulting services for an
annual fee of $1.8 million. This agreement was terminated, and a new three year
agreement between the Company and RCS was entered into as part of the Company's
sale of its ownership interest in RCS. See "Acquisition and Disposition
Transactions". See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" for a discussion of the Company's Y2K
compliance initiatives. The Company consolidated RCS operations for fiscal 1999
and 1998, while the Company maintained 50% ownership of RCS and held the RCS
note.
Competition
The restaurant industry is highly competitive. Champps competes with other
national and international restaurant chains as well as local and regional
operations. Competition within the industry is based principally on the quality,
variety and price of food products served. Site location, quality of service and
attractiveness of facilities are also important factors for a successful
restaurant. The restaurant industry is affected by general economic conditions,
changing tastes, population, traffic patterns and spending habits of guests.
Champps believes that their competitive position is enhanced by providing guests
with a diverse selection of menu items served in bountiful portions at moderate
prices in an upscale and entertaining atmosphere.
The Company also believes factors such as service, cleanliness and atmosphere
are as important in a guest's dining decision as menu and food quality. In
response to this trend, the Company has provided training, education and
motivational programs for its associates to focus on providing quality service
and to sustain a sensitivity to guest needs. The Company believes that by
operating in a professional manner where each of its associates places the guest
first, Champps can win guest loyalty.
Government Regulation
The Company is subject to various federal, state and local laws affecting its
business. Its operations are subject to various health, sanitation and safety
standards, federal and state labor laws, zoning restrictions and state and local
licensing. Federal and state environmental regulations have not had a material
effect on the Company's operations to date. Champps is also subject to federal
and state laws regulating franchise operations and sales. Such laws impose
registration and disclosure requirements on franchisors in the offer and sale of
franchises, or impose substantive standards on the relationship between
franchisor and franchisee.
Champps restaurants are subject to state and local licensing and regulation with
respect to selling and serving alcoholic beverages. The sale of alcoholic
beverages accounted for approximately 33% of Champps' total restaurant sales
during fiscal year 2000 and 1999. The failure to receive or retain, or a delay
in obtaining, a liquor license in a particular location could adversely affect
Champps' or a franchisee's operation in that location. Typically, licenses must
be renewed annually and may be revoked or suspended for cause.
Champps restaurants are subject to "dram shop" statutes in certain states. These
statutes generally give a person injured by an intoxicated person the right to
recover damages from the establishment that has wrongfully served alcoholic
beverages to the intoxicated person. Champps carries liquor liability coverage
in the amount of $1.0 million per occurrence subject to a policy aggregate of
$25.0 million. However, a judgment against Champps under a "dram shop" statute
in excess of Champps' liability coverage, or any inability to continue to obtain
such insurance coverage at reasonable costs, could have a material adverse
effect on the Company.
Research and Development
The Company is engaged in research activities relating to the development or
improvement of new and existing products or services. Champps, together with its
franchisees, utilize test kitchen facilities to develop recipes, test food
products and equipment and set nutritional and quality standards. Champps, and
their franchisees test additional menu items in various markets on an on-going
basis. These tests are coordinated through the corporate headquarters.
Furthermore, the Company employs a professional support staff to establish,
maintain and enforce high standards of sanitation and safety in all phases of
food preparation and service. The cost of research and development currently is
not material to the Company's cost of operations.
Service Marks
The Company, through its operating subsidiaries, has registered a number of
trademarks and service marks, in connection with providing bar and restaurant
services, with the United States Patent and Trademark Office and with certain
states, including the trade names: "Champ's," "Champps," "Champps American
Sports Cafe," and "Champps Entertainment," (collectively, the "Marks").
Pursuant to a Master Agreement dated February 1, 1994, whereby Champps acquired
certain "Champ's" and "Champps" service marks, trademarks and trade names from
Champs Restaurants, Inc. ("CRI"), Champps agreed to pay CRI an annual fee equal
to the lesser of approximately $260,000 or one-quarter percent (0.25%) of the
gross sales of Champps restaurants, but in no event less than $40,000. The
maximum fee payable by Champps is increased annually by the lesser of the
increase in the Consumer Price Index or 4%. Champps is currently arbitrating the
validity and term of the Master Agreement.
All of the service marks, trade names and trademarks are of significant
importance to the businesses of Champps. Champps has also registered various
service marks in several foreign countries. The Company and its subsidiaries
intend to protect their service marks through registration with appropriate
governmental authorities.
Seasonality
Champps sales are historically higher in the fall, winter and spring months, due
primarily to dining habits of its guests, the interest in athletic events at
these times of year which are featured on video walls in the Company's
restaurants and eating out trends of the general public.
Corporate Offices and Employees
Champps Entertainment, Inc. is incorporated under the laws of the State of
Delaware. As of July 2, 2000, the Company employs at its corporate headquarters
approximately 28 employees on a full-time basis, four of which are executive
officers.
Champps Operating Corporation, Inc. is incorporated under the laws of the State
of Minnesota and employs approximately 3,800 employees on a full-time and
part-time basis. Substantially all restaurant employees, other than restaurant
management, are compensated on an hourly basis.
None of the Company's or its subsidiaries' employees are covered by collective
bargaining agreements. The Company considers its relations with its employees to
be good.
The Company maintains its present principal executive offices at 5619 DTC
Parkway, Suite 1000, Englewood, Colorado 80111. The telephone number for the
Company is (303) 804-1333.
Item 2. Properties.
As of July 2, 2000, the Company leased approximately 7,500 square feet of office
space at its corporate headquarters in Englewood, Colorado, at an average annual
rent of $165,000, through January 2005. The Company has terminated both of its
former leases in Danvers, Massachusetts and Wayzata, Minnesota.
Item 3. Legal Proceedings.
The Company assumed certain contingent liabilities of DAKA International in
connection with the Spin-off and agreed to assume certain contingent liabilities
of Fuddruckers for periods prior to its sale to King Cannon , see "Disposition
Transactions" in this Form 10-K. Further, the Company is also engaged in various
other actions arising in the ordinary course of business. The Company believes,
based upon consultation with legal counsel, that the ultimate collective outcome
of these other matters will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows. See Item
1, "Business - Disposition and Certain Other Transactions - Spin-off Transaction
and Sale of Fuddruckers".
In the third quarter of fiscal 2000, a Washington, D.C. superior court jury
awarded a former Daka, Inc. employee $187,000 in compensatory damages and $4.8
million in punitive damages based on the employee's claim of negligent
supervision and retaliation, due to alleged conduct that occurred in 1996 at a
former Daka food service location. While Daka is now a subsidiary of Compass
Group, PLC., the events at issue in the case took place while a predecessor
company of Champps owned Daka. On March 28, 2000, Daka filed post-trial motions,
including motions to reduce the damage awards, for judgment not withstanding the
verdict, or in the alternative, for a new trial. These motions were subsequently
denied by the court. On September 20, 2000, Daka filed a Notice of Appeal with
the Court of Appeals for the District of Columbia. The Company may be liable for
the payment of any amounts ultimately due by Daka upon final determination of
the appeal. The Company is of the opinion that the ultimate outcome of this
matter will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted by the Company to a vote of Stockholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year for which this report is filed.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
The Company's common stock originally was listed on the NASDAQ National Market
("Nasdaq") under the symbol "UNIQ" from July 17, 1997, the date on which the
Company became a publicly traded company as a result of its spin-off from DAKA,
through July 28, 1999. On July 28, 1999, the Company changed its name from
Unique Casual Restaurants, Inc. to Champps Entertainment, Inc. and changed its
symbol on Nasdaq to "CMPP." The table below sets forth, since such date and for
the calendar periods indicated, the high and low intra-day sales price per share
with respect to fiscal 1999 and closing price with respect to fiscal 2000 of the
Common Stock as reported on the Nasdaq. The Company has no history of market
price for its common stock prior to such date, and data with respect to the
common stock of DAKA, as predecessor of the Company, which was listed on Nasdaq
before July 17, 1997, would not be meaningful.
High Low
Fiscal 1999
First Fiscal Quarter 7.38 4.88
Second Fiscal Quarter 6.94 4.56
Third Fiscal Quarter 6.38 4.56
Fourth Fiscal Quarter 5.25 3.56
Fiscal 2000
First Fiscal Quarter 3.38 2.13
Second Fiscal Quarter 3.50 1.94
Third Fiscal Quarter 4.50 2.94
Fourth Fiscal Quarter 5.50 3.81
On September 28, 2000, there were 2,591 holders of record of the Company's
Common Stock.
The Company has never paid cash dividends on shares of its Common Stock and does
not expect to pay dividends in the foreseeable future. The Company presently has
no plans to buy back shares of the Company Common Stock in the open market.
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
The following table presents selected consolidated data from continuing
operations and balance sheet data of the Company. Data for periods prior to 1999
have been restated to account for the Company's Fuddruckers segment as a
discontinued operation. The balance sheet data as of July 2, 2000, June 27,
1999, June 28, 1998, June 29, 1997 and June 29, 1996 and the statements of
operations data for each of the five fiscal years in the period ended July 2,
2000 presented below are derived from the Company's audited consolidated
financial statements.
For purposes of this Form 10-K and financial reporting purposes, the Company has
been treated as if it was a stand-alone entity for all periods presented. The
Company's results from continuing and discontinued operations, as presented in
the table below for periods prior to July 17, 1997, include allocations and
estimates of certain expenses, including corporate accounting, tax, cash
management, information technology, legal, risk management, purchasing and human
resources, historically provided to the Company by DAKA International.
The selected consolidated financial data should be read in conjunction with the
consolidated financial statements and related notes thereto of the Company and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere in this Annual Report on Form 10-K.
<TABLE>
As of and for the Fiscal Years Ended
------------------------------------
<CAPTION>
July 2, June 27, June 28, June 29, June 29,
2000 1999 1998 1997 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Total Revenues 109,114 87,950 77,700 64,239 45,589
Income (loss) from continuing operations before cumulative
effect of change in accounting for preopening cost 2,350 (14,079) (5,999) (27,389)
Net Income (loss) 2,273 (23,922) (27,735) (39,043) (5,670)
Basic Income (loss) per share from continuing operations 0.20 (1.21) (0.52)
Proforma basic (loss) per share from continuing operations (2.40) (1.11)
Diluted Income (loss) per share from continuing operations 0.19 (1.21) (0.52)
Proforma diluted (loss) per share from continuing operations (2.40) (1.11)
Basic weighted average shares (in thousands):
Historical 11,654 11,622 11,489
Proforma 11,426 11,426
Diluted weighted average shares (in thousands):
Historical 11,742 11,622 11,489
Proforma 11,426 11,426
Balance Sheet Data:
Total assets 67,093 57,142 86,660 110,267 125,239
Long-term debt related to continuing operations,
including current portion 19,324 6,157 6,945 4,256 4,460
Total equity 30,122 27,819 50,398 79,053 108,894
Discontinued operations:
Minority interest and obligations under put agreement
related to the discontinued operations - - 5,400 1,100 1,168
Net long-term assets - - 44,335 65,307 83,591
Net current liabilities - - (4,202) (6,492) (132)
</TABLE>
Item 7. 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 from continuing
operations, financial position and cash flow. Prior to July 17, 1997, the
Company historically operated as part of DAKA International. The historical
consolidated financial statements for fiscal 1997 include the assets,
liabilities, income and expenses that were directly related to the restaurant
business as operated within DAKA International prior to the Spin-off. The
Company's financial statements for fiscal 1997 include all of the related costs
of doing business, including charges for the use of facilities and for employee
benefits, and includes an allocation of certain general corporate expenses,
including costs for corporate logistics, information technologies, finance,
legal and corporate executives. These allocations of general corporate expenses
were based on a number of factors including, for example, personnel, labor costs
and sales volumes. Management believes these allocations as well as the
assumptions underlying the preparation of the Company's separate consolidated
financial statements to be reasonable.
As a result of the Spin-off, certain other non-restaurant operating assets and
liabilities of DAKA International were contributed to the Company as described
in Note 2 to 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.
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-K 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," 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; unforeseen
difficulties in integrating acquired businesses; 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 a net income of $2.3 million for the fiscal year ended July
2, 2000, compared to a net loss of $23.9 million last year. Included in the net
income for fiscal 2000 were charges associated with exit and other charges ($0.5
million); loss on the sale of marketable securities ($1.0 million); and, loss
associated with discounting a mortgage receivable ($0.1 million). Exclusive of
these charges, the Company would have reported a profit from continuing
operations of $3.9 million for fiscal 2000. While the Company believes its
strategies will continue to produce overall profitability, there can be no
assurance that such strategies will continue to be successful. Accordingly, the
Company may again incur operating losses. To sustain profitability, the Company
must, among other things, manage, within acceptable parameters, contingencies
associated with its former businesses including Fuddruckers, its former food
service and Great Bagel and Coffee businesses, continue to 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.
In Item 1, see "Background" for a discussion of events in fiscal 1999 and 2000
that, in part, will shape the future direction of the Company.
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
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.
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and, particularly for Champps Americana restaurants, the
mix between food and liquor revenues. Various factors beyond the Company's
control, such as adverse weather changes, may affect food costs and increases in
federal, state and local taxes may affect liquor costs. While in the past, 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 actions taken
since June 29, 1997 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 the opportunity for
increased profitability.
Champps
The following table sets forth certain financial information for Champps.
(in thousands)
2000 1999 1998
--------- --------- ---------
Restaurant sales $108,312 $87,392 $73,387
========= ========= =========
Sales from Champps restaurants 100.0% 100.0% 100.0%
Operating Expenses:
Labor costs (32.5) (32.9) (33.0)
Product costs (28.5) (28.8) (29.0)
Other restaurant operating expenses (25.9) (28.1) (27.8)
Depreciation and amortization (3.8) (3.9) (3.9)
--------- --------- ---------
Restaurant unit contribution 9.3% 6.3% 6.3%
========= ========= =========
Restaurant unit contribution $10,125 $ 5,539 $ 4,622
Gain on sale of franchise - 677
Franchising and royalty income 802 558 644
--------- --------- ---------
Restaurant unit, franchising and royalty
contribution $10,927 $ 6,097 $ 5,943
========= ========= =========
Comparison of Fiscal Years Ended July 2, 2000 and June 27, 1999
Sales in Company-owned restaurants increased approximately $20.9 million, or
23.9%, to $108.3 million for fiscal 2000 compared with $87.4 million for fiscal
1999. The increase reflects both an increase in the number of Company-owned
restaurants open between years, and an increase in same store sales. The Company
opened four new restaurants in fiscal 2000. The Company also acquired two
franchised restaurants at June 29, 2000. Same store sales increased
approximately 4.7% in fiscal 2000.
Restaurant unit contribution of $10.1 million for fiscal 2000 was up 82.8% from
$5.5 million in fiscal 1999. The restaurant unit contribution margin increased
to 9.3% for fiscal 2000 from 6.3% in fiscal 1999. Improvements were made in all
expense categories.
Other restaurant operating expenses include controllable restaurant operating
expenses, occupancy costs and pre-opening expenses. Other restaurant operating
expenses expressed as a percentage of sales were 25.9% for fiscal 2000 compared
with 28.1% for fiscal 1999. This decrease reflects lower controllable restaurant
operating expenses between periods, offset, in part, by higher pre-opening
expenses.
Preopening expenses were approximately $1.5 million in fiscal 2000 compared with
$1.2 million in fiscal 1999. This increase relates primarily to the number of
units opened, the timing of construction, and construction in progress between
years. Preopening expenses have historically been approximately $0.4 million per
location.
Comparison of Fiscal Years Ended June 27, 1999 and June 28, 1998
Sales in Company-owned restaurants increased approximately $14.0 million, or
19.1%, to $87.4 million for fiscal 1999 compared with $73.4 million for fiscal
1998. The increase reflects both an increase in the number of Company-owned
restaurants open between years, and an increase in same store sales. The Company
opened two new restaurants in fiscal 1999. Same store sales increased
approximately 2.0% in fiscal 1999.
Restaurant unit contribution of $5.5 million for fiscal 1999 was up 19.9% from
$4.6 million in fiscal 1998. Included in depreciation was $0.4 million related
to the accelerated depreciation of existing point of sale systems. These systems
were replaced by new equipment in the first and second quarters of fiscal 2000,
to enable the implementation of more efficient software at both the operating
level and for corporate financial reporting. Other restaurant operating expenses
include controllable restaurant operating expenses, and also include occupancy
and pre-opening expenses. Other restaurant operating expenses expressed as a
percentage of sales were 28.1% for fiscal 1999 compared with 27.8% for fiscal
1998. This increase reflects both higher occupancy costs and controllable
restaurant operating expenses between periods, offset, in part, by lower
pre-opening expenses. Occupancy costs expressed as a percentage of sales have
increased from 8.5% to 9.2% in fiscal 1998 and 1999, respectively, as a result
of restaurants opened over the last two years. Such restaurants were generally
constructed under a sale-leaseback facility where substantially all of the costs
of construction were financed by the landlord. This facility allowed the Company
to conserve cash but resulted in higher rents in these units when compared with
restaurants built in earlier years.
Pre-opening expenses were approximately $1.2 million in fiscal 1999, compared
with $1.9 million in fiscal 1998. This decrease relates primarily to the number
of units opened, the timing of construction, and construction in progress
between years. Pre-opening expenses have historically been approximately $0.4
million per location.
General and Administrative Expenses
Comparison of Fiscal Year Ended July 2, 2000 and June 27, 1999
General and administrative expenses from continuing operations were
approximately $6.4 million for fiscal 2000 compared with approximately $19.0
million in fiscal 1999. In fiscal 2000, there were no unusual expenses impacting
general and administrative expenses.
In fiscal 1999, general and administrative expenses include losses of $2.7
million of the sale of non-essential assets, $2.7 million in charges related to
predecessor businesses and $2.3 million of the total $2.7 million in losses on
business and lease contracts. Exclusive of these costs, general and
administrative expenses for 1999 would have been $11.3 million. General and
administrative expenses, excluding unusual items have decreased from $11.3
million in fiscal 1999 to $6.4 million for fiscal 2000. The decrease is
primarily the result of consolidation of the Company's former offices in
Massachusetts and Minnesota into one office based in Englewood, Colorado.
Comparison of Fiscal Year Ended June 27, 1999 and June 28, 1998
General and administrative expenses from continuing operations were
approximately $19.0 million for fiscal 1999, compared with approximately $10.8
million in fiscal 1998. In fiscal 1999, general and administrative expenses
include a loss of $2.7 million of the sale of non-essential assets and $2.7
million in charges related to predecessor businesses, and $2.3 million in
diminution of business contracts and asset lives. Exclusive of these costs,
general and administrative expenses for 1999 would have been $11.3 million.
Income Taxes
Prior to July 17, 1997, the operations of the Company were generally included in
the consolidated U.S. federal income tax return and certain combined and
separate state and local tax returns of DAKA International. A benefit in lieu of
taxes for 1997 has been presented as if the Company was a separate taxpayer. For
fiscal year 2000, the Company utilized its net operating loss carryforwards to
offset income of $2.3 million. No benefit for net operating losses were
recognized in fiscal 1999. As of July 2, 2000, the Company had net operating
loss carryforwards of approximately $46.0 million. The carryforwards expire at
various dates through fiscal 2019. The carryforwards are not currently subject
to Section 382 limitations.
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 has experienced no material Year 2000-date related disruptions or
other significant problems.
Through July 2, 2000, the Company has spent approximately $640,000 on upgrading
its systems and hardware to evaluate and mitigate its exposure in areas where
appropriate including, payroll, point of sale, accounting and financial
reporting core systems. Based on currently available information, management
continues to believe that Year 2000-date related disruptions or other problems,
if any, will not have a significant adverse impact on its operational results or
financial condition. As of July 2, 2000, the Company is anticipating no further
expenditures or issues relative to the Year 2000 issue.
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,
and other operating expenses are generally paid in 30 to 60 days after receipt
of invoices and labor costs are paid bi-weekly. Capital expenditures for
expansion during fiscal 2000, 1999 and 1998 were generally provided through cash
balances (including in fiscal 1999 a portion of the proceeds from the
Fuddruckers Sale) and proceeds from sale-leaseback and mortgage facilities.
Capital expenditures were $13.9 million, $10.4 million and $5.4 million for
continuing operations, respectively, for fiscal 2000, 1999 and 1998.
During 2000, the Company acquired two restaurants from existing franchisees. The
restaurants, located in Eden Prairie, Minnesota and Minnetonka, Minnesota, were
acquired for approximately $11.4 million. The assets acquired were valued at
approximately $7.5 million for building and equipment and an additional $60,000
for smallwares inventory. The resulting goodwill of approximately $3.8 million
will be amortized over a twenty-year period. The Company obtained mortgage
financing for these properties totaling $9.5 million.
At the end of fiscal 2000, the Company's unrestricted cash was $4.4 million and
restricted cash was $0.4 million. The Company anticipates that it will continue
to generate positive cash flow in the fiscal year 2001; however, there are also
significant cash expenditures anticipated during the forthcoming year.
During fiscal 2001, the Company anticipates receipt of $0.5 million from the
sale of a former Fuddruckers property currently listed on the balance sheet as
"Asset held for sale." The Company currently has a $3.0 million commitment for
the sale leaseback of its Las Colinas, Texas restaurant which was opened July
24, 2000. The Company also has a tenant improvement allowance of $0.5 million
which it intends to receive in the second quarter of fiscal 2001 associated with
the completion of its West Bloomfield, Michigan restaurant.
Anticipated in fiscal 2001 are capital expenditures of approximately $14.0
million, primarily for new restaurants and standard remodeling and upgrades in
existing restaurants. These expenditures will be funded through cash flow from
existing operations, and through tenant improvement allowances associated with
new restaurants.
It is also anticipated that there will be substantial cash payments in fiscal
2001 associated with liabilities previously recorded in fiscal 1998 and 1999
related to the Spin-off Transaction and Fuddruckers Sale transactions and the
consolidation and relocation of the headquarters to Englewood, Colorado.
Included in these cash payments, the Company anticipates that there will be
payments for prior year insurance claims, tax audits and legal settlements.
These latter expenditures are estimated to range between $1.5 million to $2.5
million for fiscal 2001.
The impact of 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.
Item 7A. Quantitative and Qualitative Market Risk Disclosures
The market risk exposure inherent in the Company's financial instruments and
consolidated financial position represents the potential losses arising from
adverse changes in interest rates. The Company is exposed to such interest rate
risk primarily in its significant investment in cash and cash equivalents and
the use of fixed and variable rate debt to fund its acquisitions of property and
equipment in past years and the implicit investment rate in the Company's
sale-leaseback arrangements.
Market risk for cash and cash equivalents and fixed rate borrowings is estimated
as the potential change in the fair value of the assets or obligations resulting
from a hypothetical ten percent adverse change in interest rates, which would
not have been significant to the Company's financial position or results of
operations during 2000. The effect of a similar hypothetical change in interest
rates on the Company's variable rate debt and the investment rates implicit in
the Company's sale-leaseback arrangements also would have been insignificant due
to the immaterial amounts of borrowings outstanding under the Company's credit
arrangements. For additional information about the Company's financial
instruments and these financing arrangements, see "Notes to Consolidated
Financial Statements".
Item 8. Financial Statements and Supplementary Data.
The information required under this Item 8 is set forth on pages F-1 through
F-25 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Change in Accountants
On April 3, 2000, the Company determined not to renew the engagement of Deloitte
& Touche LLP as independent accountants for the Company and the Company engaged
Arthur Andersen, L.L.P. as independent accountants to audit and report upon the
Company's financial statements for the current fiscal year ending July 2, 2000.
The determination by management and the Audit Committee not to renew the
engagement of Deloitte & Touche LLP was approved by the Board of Directors.
At the end of fiscal 1998 and in October 1999 Deloitte & Touche LLP verbally
reported to the Audit Committee and senior management that the Company needed to
improve certain aspects of its internal control structure and accounting
operations to ensure the filing of its financial statements on a reliable and
timely basis. Under standards established by the American Institute of Certified
Public Accountants these matters were considered by Deloitte & Touche LLP to be
reportable conditions and material weaknesses when viewed in the aggregate. The
Company has taken action on the recommendations received from Deloitte & Touche
LLP.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors of the Registrant
Incumbent Directors
The following table sets forth certain information regarding current members of
the Board of Directors:
<TABLE>
<CAPTION>
Principal Director Expiration
Name Age Occupation Since of Term Class
--------------------------- ------ ------------------------------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
William H. Baumhauer 52 Chairman, President and Chief June 1999 2001 II
Executive Officer of the Company
Timothy R. Barakett 35 Chairman of Atticus Capital, L.L.C. March 1999 2000 I
James Goodwin 44 Independent Consultant March 1999 2000 I
Nathaniel P.J.V. Rothschild 29 President of Atticus August 1999 2001 II
Capital, L.L.C.
Alan D. Schwartz 50 Senior Managing Director of May 1997 2000 III
Corporate Finance for Bear,
Stearns & Co., Inc.
</TABLE>
The name, age and principal occupation during the past five years and other
information concerning each director are set forth below:
William H. Baumhauer has served as a Director and Chairman of the Board of
Directors since August 23, 1999, and as President and Chief Executive Officer
since June 24, 1999. Mr. Baumhauer also held these positions with the Company or
its predecessors from September 1988 until July 24, 1998, when he left the
Company to serve as President and Chief Operating Officer of Planet Hollywood
International, Inc., a position he held until his return to the Company on June
24, 1999. Subsequent to his return to the Company, on October 12, 1999, Planet
Hollywood filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
Timothy R. Barakett, 35, has been the Chairman of Atticus Capital, L.L.C., a
private investment management company and an affiliate of Atticus Partners,
since October 1995. From June 1993 until March 1995, Mr. Barakett was a Managing
Director at Junction Advisors, Inc. a private investment management company. Mr.
Barakett also serves as a director of RIT Capital Partners plc., and Groupe
Andre, SA.
James Goodwin, 44, has been a private investor since 1998. From 1990 until
February 1998, Mr. Goodwin was a Managing Director at Gleacher Natwest, Inc., an
investment banking company. Mr. Goodwin also serves as a Director for Kiewet
Materials Company located in Omaha, Nebraska.
Nathaniel P.V.J. Rothschild, 29, has been President of Atticus Capital, L.L.C.
since January 2000, and member of Atticus Capital, L.L.C., a private investment
management company and an affiliate of Atticus Partners, since March 1996. From
March 1995 to March 1996 was a Financial Analyst at Gleacher Natwest, Inc., an
investment banking company. Mr. Rothschild is the Chairman and Director of
Groupe Andre, SA.
Alan D. Schwartz, 50, has served as a Director of the Company or its
predecessors since September 1988 and served as a Director of Fuddruckers, Inc.
from September 1984 until its merger with DAKA in 1988. Mr. Schwartz is Senior
Managing Director-Corporate Finance of Bear, Stearns & Co., Inc., and a Director
of its parent The Bear Stearns Companies, Inc. He has been associated with such
investment banking firms for more than five years. Mr. Schwartz is also a
Director of Young & Rubicam, Inc., Atwood Richards, Inc., St. Vincent's
Services, the American Foundation for AIDS Research, the New York Blood Center
and NYU Medical Center and a member of the Board of Visitors of the Fuqua School
of Business at Duke University.
Meetings and Committees
The Board of Directors of the Company has a Compensation Committee, a Nominating
Committee and an Audit Committee. During the fiscal year 2000, the Board of
Directors held seven meetings and the Audit Committee held four meetings. The
Nominating Committee and the Compensation Committee did not meet separately, as
their duties were performed at meetings of the full Board of Directors. Each
director attended 75% or more of the aggregate of (a) the total number of
meetings of the board of Directors during fiscal year 2000, and (b) the total
number of meetings held by all committees of the Board of Directors on which
such director served during fiscal year 2000. The Audit Committee has the
responsibility of selecting the Company's independent auditors and communicating
with the Company's independent auditors on matters of auditing and accounting.
The Audit Committee is currently composed of Mr. Barakett, Mr. Goodwin and Mr.
Rothschild.
The Compensation Committee has the responsibility of reviewing on an annual
basis all officer and employee compensation. The Compensation Committee is
currently composed of Mr. Barakett, Mr. Goodwin, Mr. Rothschild and Mr.
Schwartz.
Executive Officers of the Registrant
Certain information is set forth below concerning the executive officers of the
Company, each of whom has been elected to serve until the regular meeting of the
Board of Directors and until his successor is duly elected and qualified. The
executive officers of the Company are as follows:
Name Age Position
William H. Baumhauer 52 Director, Chairman of the Board of Directors,
President and Chief Executive Officer
Donna L. Depoian 40 Vice President, General Counsel and Secretary
Frederick J. Dreibholz 45 Vice President, Chief Financial Officer,
and Treasurer
William H. Baumhauer has served as a Director and Chairman of the Board of
Directors since August 23, 1999, and as President and Chief Executive Officer
since June 24, 1999. Mr. Baumhauer also held these positions with the Company or
its predecessors from September 1988 until July 24, 1998, when he left the
Company to serve as President and Chief Operating Officer of Planet Hollywood
International, Inc., a position he held until his return to the Company on June
24, 1999. Subsequent to his return to the Company, on October 12, 1999, Planet
Hollywood filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
Donna L. Depoian has served as Vice President, General Counsel and Secretary of
the Company since May 1998. She served as Acting General Counsel and Assistant
Secretary from February 1998 to May 1998 and as Corporate Counsel and Assistant
Secretary since July 1997. Ms. Depoian also served as Corporate Counsel and
Assistant Secretary for DAKA International, Inc. since April 1994. From May 1989
to April 1994, she practiced as an attorney for Bass & Doherty, P.C., a Boston
law firm concentrating in business and commercial real estate. From February
1988 to April 1989 she practiced as an attorney for Rossman, Rossman and
Eschelbacher, a Boston based law firm.
Frederick J. Dreibholz has served as Vice President, Chief Financial Officer and
Treasurer since October 1999. From April 1997 to November 1998, he served as
Chief Financial Officer of Unique Casual Restaurants, Inc. and Sforza
Enterprises, Inc. From November 1987 to April 1997, he served as Chief Financial
Officer of Flik International Corp. From June 1977 to April 1987, he held
various management and finance positions with Sky Chefs. From November 1998 to
October 1999, Mr. Dreibholz acted as a consultant to numerous restaurant and
food service clients in South Florida and New York City.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
section captioned "Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
Item 13. Certain Relationships And Related Transactions.
The information required by this Item is incorporated by reference from the
sections captioned "Certain Relationship and Related Transactions" contained in
the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following are being filed as part of this Annual Report on Form 10-K.
A. Financial Statements:
Reports of Independent Auditors
Consolidated Balance Sheets - July 2, 2000 and June 27, 1999
Consolidated Statements of Operations - Fiscal years ended July 2, 2000,
June 27, 1999, and June 28, 1998
Consolidated Statements of Cash Flows - Fiscal years ended July 2, 2000,
June 27, 1999 and June 28, 1998
Consolidated Statements of Changes in Stockholders' Equity - Fiscal
years ended July 2, 2000, June 27, 1999 and June 28, 1998
Notes to Consolidated Financial Statements
B. Financial Statement Schedules:
There are no Financial Statement Schedules required to be filed.
Information required by Article 12 of Regulation S-X with respect to
Valuation and Qualifying Accounts has been included in the Notes to the
Consolidated Financial Statements.
C. Exhibits:
*2.1 Agreement and Plan of Merger, dated as of May 27, 1997, by and among
Compass Interim, Inc. ("Compass Interim"), Compass Holdings, Inc.
("Purchaser"), Compass Group PLC ("Parent") and DAKA International, Inc.
("DAKA International").
*2.2 Reorganization Agreement dated as of May 27, 1997, by and among DAKA
International, Daka, Inc. ("Daka"), the Company, Parent and Compass
Holdings, together with certain exhibits thereto.
*2.3 Agreement and Plan of Merger among Champps Entertainment, Inc.
("Champps"), DAKA and CEI Acquisition Corp., dated as of October 10,
1995, incorporated herein by reference to DAKA's Registration Statement
on Form S-4 (File No. 33-65425) ("1996 DAKA Form S-4").
**2.4 Series D Convertible Preferred Stock and Warrant Purchase Agreement,
dated as of January 12, 1996, by and among La Salsa Holding Co. and
Casual Dining Ventures, Inc. Pursuant to Item 601(b)(2) of Regulation
S-K, the Schedules to the Series D Convertible Preferred Stock and
Warrant Purchase Agreement are omitted. The Company hereby undertakes to
furnish supplementally a copy of any omitted Schedule to the Commission
upon request.
**2.5 Stock Purchase Agreement, dated as of March 18, 1996, by and among
Casual Dining Ventures, Inc., DAKA, Champps Development Group, Inc.,
Steven J. Wagenheim, Arthur E. Pew, III, PDS Financial Corporation,
Douglas B. Tenpas and certain other stockholders of Americana Dining
Corp. Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules to the
Stock Purchase Agreement are omitted. The Company hereby undertakes to
furnish supplementally a copy of any omitted Schedule to the Commission
upon request.
**2.6 Asset Purchase Agreement, dated March 18, 1996, between Americana Dining
Corp., as Seller, and New Brighton Ventures, Inc., as Buyer. Pursuant to
Item 601(b)(2) of Regulation S-K, the Schedules to the Asset Purchase
Agreement are omitted. The Company hereby undertakes to furnish
supplementally a copy of any omitted Schedule to the Commission upon
request.
**2.7 Stock Purchase Agreement, dated as of March 29, 1996, by and among DAKA,
The Great Bagel & Coffee Franchising Corp., GBC Credit Company, Gemini
Production Facility, Inc., The Great Bagel & Coffee Company, Mark C.
Gordon, Brian H. Loeb, Jason R. Olivier, Michael F. Zerbib, Nicholas D.
Zerbib, and Thierry E. Zerbib. Pursuant to Item 601(b)(2) of Regulation
S-K, the Schedules to the Stock Purchase Agreement are omitted. The
Company hereby undertakes to furnish supplementally a copy of any
omitted Schedule to the Commission upon request.
**2.8 Stock Purchase Agreement, dated as of March 31, 1996, by and among
Casual Dining Ventures, Inc., DAKA and Edgebrook, Inc. Pursuant to Item
601(b)(2) of Regulation S-K, the Schedules to the Stock Purchase
Agreement are omitted. The Company hereby undertakes to furnish
supplementally a copy of any omitted Schedule to the Commission upon
request.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-laws of the Company
*3.3 Form of Amended and Restated Certificate of Incorporation of the
Company.
*3.4 Form of Amended and Restated By-laws of the Company.
3.5 Certificate of Designations, Preferences and Rights of a Series of
Preferred Stock of the Company, dated January 30, 1998, incorporated
herein by reference to the Company's Current Report on Form 8-K filed
February 2, 1998.
4.2 Amended and Restated Shareholder Rights Agreement, dated as of January
30, 1998, between the Company and American Stock Transfer and Trust
Company, as Rights Agent, incorporated herein by reference to the
Company's Current Report on Form 8-K filed February 2, 1998.
*4.1 Specimen Stock Certificate for shares of the UCRI Common Stock.
*10.1 Tax Allocation Agreement dated as of May 27, 1997, by and among DAKA,
the Company, and Parent.
*10.2 Post-Closing Covenants Agreement, dated as of May 27, 1997, by and among
DAKA, Daka, Inc., the Company, Champps, Fuddruckers, Inc., Purchaser and
Parent.
*10.3 Stock Purchase Agreement, dated as of May 26,1997, between DAKA, Parent,
Purchaser, First Chicago Equity Corporation, Cross Creek Partners I and
the other holders of Series A Preferred Stock of DAKA.
*10.4 Form of the Company's 1997 Stock Option and Incentive Plan.
*10.5 Form of the Company's 1997 Stock Purchase Plan.
*10.6 Form of Indemnification Agreement, by and between the Company and
directors and officers of DAKA.
**10.7 Third Amended and Restated Registration Rights Agreement, dated as of
January 12, 1996, by and among La Salsa Holding Co., FMA High Yield
Income L.P., WSIS Flexible Income Partners L.P., WSIS High Income L.P.,
Howdy S. Kabrins, La Salsa, Inc., Crown Associates III, L.P.,
Crown-Glynn Associates, L.P., Nueberger & Berman as Trustee for the
Crown Trust, Theodore H. Ashford, Noro-Moseley Partners II, L.P.,
Seidler Salsa, L.P., Bankers Trust Company as Master Trustee for Hughes
Aircraft Retirement Plans, Charles A. Lynch, Sienna Limited Partnership
I, Sienna Limited Partnership II, Sienna Holdings, Inc., as Nominee,
InterWest Partners IV, Donald Benjamin, Vicki Tanner, Ronald D.
Weinstock, Inc., Frank Holdraker, and Casual Dining Ventures, Inc.
**10.8 Fourth Amended and Restated Restricted Stock Agreement, dated as of
January 12, 1996, by and among La Salsa Holding Co., Howdy S. Kabrins,
La Salsa, Inc., InterWest Partners IV, Sienna Holding, Inc., Sienna
Limited Partnership I, Charles A. Lynch, Theodore H. Ashford, Crown
Associates III, L.P., Crown-Glynn Associates, L.P., Nueberger & Berman
as Trustee for The Crown Trust, Noro-Moseley Partners II, L.P., Seidler
Salsa, L.P., Bankers Trust Company, as Master Trustee, for Hughes
Aircraft Retirement Plans, FMA High Yield Income L.P., WSIS Flexible
Income Partners L.P., WSIS High Yield Income L.P., Sienna Limited
Partnership II, Donald Benjamin, Vicki Tanner, Ronald D. Weinstock,
Inc., Frank Holdraker, and Casual Dining Ventures, Inc.
**10.9 La Salsa Holding Co. Warrant to Purchase Shares of Series D Convertible
Preferred Stock, dated as of January 12, 1996, issued to Casual Dining
Ventures, Inc. by La Salsa Holding Co.
**10.10 Severance, Non-Competition and Confidentiality Agreement, dated as of
March 18, 1996, between Steven J. Wagenheim and Americana Dining Corp.
**10.11 La Salsa License Agreement, dated as of February 14, 1996, by and
between La Salsa Franchise, Inc. and La Salsa Holding Co.
10.12 Separation Agreement, dated as of February 2, 1998, by and among Dean P.
Vlahos, the Company and Champps.
10.13 Asset Purchase Agreement, dated as of February 2, 1998, by and between
Dean P. Vlahos and Champps.
10.14 Champps Restaurant Development Agreement, dated as of February 2, 1998,
by and between Dean P. Vlahos and Champps.
10.15 Stock Purchase Agreement, dated as of July 31, 1998, by and between King
Cannon, Inc. and Unique Casual Restaurants, Inc.
10.16 Employment Agreement, dated as of June 24, 1999, by and between Unique
Casual Restaurants, Inc. and William H. Baumhauer.
10.17 Termination Agreement and General Release, dated July 21, 1999, by and
between Champps Entertainment, Inc., Champps Operating Corporation and
Donald C. Moore.
10.18 Non-negotiable Promissory Note, dated August 2, 1999, payable by Donald
C. Moore to Champps Entertainment, Inc.
10.19 Asset Purchase Agreement, dated April 6, 2000, made by and between
Prairie Restaurant Group, Inc. and Champps Operating Corporation.
10.20 Asset Purchase Agreement, dated April 6, 2000, made by and between Dean
P. Vlahos and the Breagan Investment Group, Inc. and Champps Operating
Corporation.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen, LLC
23.2 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney.
* Incorporated herein by reference to the Company's Registration Statement
on Form 10 filed June 3, 1997, as amended.
** Incorporated herein by reference to the Annual Report on Form 10-K of
DAKA International for the year ended June 29, 1996.
D. Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuantto the requirements of Section 13 or 15(d) 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
Date: September 28, 2000
By: /s/Frederick J. Dreibholz
Frederick J. Dreibholz
Vice President, Chief Financial Officer
and Treasurer
Date: September 28, 2000
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, and
in the capacities and on the date indicated.
Signature Title
William H. Baumhauer Chairman of the Board
Timothy Barakett* Director
James Goodwin* Director
Nathaniel Rothschild* Director
Alan D. Schwartz* Director
*By: /s/Frederick J. Dreibholz Date: September 28, 2000
Frederick J. Dreibholz
Vice President, Chief Financial Officer and Treasure
Report of Independent Public Accountants
To: Champps Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of Champps
Entertainment, Inc. and subsidiaries as of July 2, 2000 and the related
consolidated statement of operations, cash flows and changes in shareholders'
equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly the consolidated financial position of Champps Entertainment, Inc. and
subsidiaries as of July 2, 2000 and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Denver, Colorado,
September 5, 2000.
(except Note 13 as to which
the date is September 20, 2000)
INDEPENDENT AUDITORS' REPORT
Champps Entertainment, Inc.:
We have audited the accompanying consolidated balance sheet of Champps
Entertainment, Inc. and subsidiaries (formerly Unique Casual Restaurants, Inc.)
as of June 27, 1999 and the related consolidated statements of operations, cash
flows and changes in stockholders' equity for each of the two years in the
period ended June 27, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies as of June 27, 1999
and the results of their operations and their cash flows for each of the two
years in the period ended June 27, 1999, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
October 1, 1999
Champps Entertainment, Inc.
Consolidated Balance Sheets
As of July 2, 2000 and June 27, 1999
(In thousands)
2000 1999
----- -----
ASSETS
Current assets:
Cash and cash equivalents $ 4,373 $ 7,240
Restricted cash, current 437 397
Accounts receivable, net 1,512 1,288
Inventories 2,022 1,205
Prepaid expenses and other current assets, net 1,320 1,637
Net assets held for sale 452 1,665
-------- --------
Total current assets 10,116 13,432
Restricted cash, non-current - 2,596
Property and equipment, net 52,555 36,096
Investment - 2,748
Goodwill 3,825 -
Other assets, net 597 2,270
-------- --------
Total assets $ 67,093 $ 57,142
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,507 $ 5,264
Accrued expenses 7,520 8,679
Current portion of capital lease obligations 1,873 1,843
Current portion of notes payable 657 167
-------- --------
Total current liabilities 14,557 15,953
Capital lease obligations, net of current portion 2,191 4,064
Notes payable, net of current portion 14,603 83
Other long-term liabilities 5,620 9,223
-------- --------
Total liabilities 36,971 29,323
-------- --------
Commitments and contingencies (Note 12 and 13)
Shareholders' equity:
Common stock ($.01 par value per share; authorized 30,000 shares and 11,659
and 11,647 issued and outstanding at July 2,
2000 and June 27, 1999, respectively) 117 116
Additional paid-in capital 79,389 79,360
Accumulated deficit (49,384) (51,657)
-------- --------
Total shareholders' equity 30,122 27,819
-------- --------
Total liabilities and shareholders' equity $ 67,093 $ 57,142
======== ========
The accompanying notes are an integral part of these balance sheets.
<TABLE>
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended
July 2, 2000, June 27, 1999 and June 28,1998
(In thousands, except per share data)
<CAPTION>
2000 1999 1998
-------- -------- ---------
Revenues:
<S> <C> <C> <C>
Sales $ 108,312 $ 87,392 $ 76,711
Franchising and royalty, net 802 558 989
--------- --------- ---------
Total revenues 109,114 87,950 77,700
--------- --------- ---------
Costs and expenses:
Cost of sales and operating expenses 94,115 78,412 69,310
General and administrative expenses 6,804 18,998 10,804
Depreciation and amortization 4,072 3,441 3,080
Impairment, exit and other charges 460 1,305 1,436
Gain on sale of restaurant to related party - - (677)
Other expenses (income), net 279 (127) (254)
Loss of sale of marketable securities 1,034 - -
--------- --------- ---------
Total costs and expenses 106,764 102,029 83,699
--------- --------- ---------
Income (loss) from continuing operations before
cumulative effect of change in accounting for
preopening costs 2,350 (14,079) (5,999)
--------- --------- ---------
Loss from discontinued operations:
Income (loss) from discontinued operations - 910 (20,749)
Loss on disposal of discontinued operations - (10,753) -
--------- --------- ---------
Loss from discontinued operations - (9,843) (20,749)
--------- --------- ---------
Income (loss) before cumulative effect of change
in accounting for preopening costs 2,350 (23,922) (26,748)
Cumulative effect of change in accounting for
preopening costs - - (987)
--------- --------- ---------
Net income (loss) before provision for income
taxes 2,350 (23,922) (27,735)
Provision for income taxes 77 - -
--------- --------- ---------
Net income (loss) $ 2,273 $ (23,922) $ (27,735)
========= ========= =========
Basic income (loss) per share:
Income (loss) before discontinued operations
and cumulative effect of accounting change $ 0.20 $ (1.21) $ (0.52)
Loss from discontinued operations - (0.85) (1.81)
Cumulative effect of accounting change - - (0.08)
--------- --------- ---------
Net income (loss) $ 0.20 $ (2.06) $ (2.41)
========= ========= =========
Diluted income (loss) per share:
Income (loss) before discontinued operations
and cumulative effect of accounting change $ 0.19 $ (1.21) $ (0.52)
Loss from discontinued operations - (0.85) (1.81)
Cumulative effect of accounting change - - (0.08)
--------- --------- ---------
Net income (loss) $ 0.19 $ (2.06) $ (2.41)
========= ========= =========
Basic weighted average shares outstanding 11,654 11,622 11,489
========= ========= =========
Diluted weighted average shares outstanding 11,742 11,622 11,489
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Fiscal Years Ended July 2, 2000, June 27, 1999 and
June 28,1998 (In thousands)
<CAPTION>
Additional
Common Paid-in Accumulated Group
Shares Stock Capital Deficit Equity Total
------ ----- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, June 29, 1997 1 $ - $ - $ - $ 79,053 $ 79,053
Net liabilities contributed by -
former Parent - - - - (1,528) (1,528)
Common stock issued in -
connection with distribution -
by former Parent 11,425 114 77,411 - (77,525) -
Common shares issued 167 2 606 - - 608
Net loss - - - (27,735) - (27,735)
-------------------------------------------------------------------------------
Balance, June 28, 1998 11,593 116 78,017 (27,735) - 50,398
Common shares issued 54 - 100 - - 100
Non-cash compensation - - 1,243 - - 1,243
Net loss - - - (23,922) - (23,922)
-------------------------------------------------------------------------------
Balance, June 27, 1999 11,647 116 79,360 (51,657) - 27,819
Common shares issued 12 1 29 - - 30
Net income - - - 2,273 - 2,273
-------------------------------------------------------------------------------
Balance, July 2, 2000 11,659 $ 117 $ 79,389 $(49,384) $ - $ 30,122
===============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended
July 2, 2000, June 27, 1999 and June 28,1998
(In thousands)
<CAPTION>
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 2,273 $ (23,922) $ (27,735)
Cumulative effect of change in accounting for preopening costs - - 987
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 4,448 4,145 10,227
Non-cash compensation from continuing operations 500 331 265
Non-cash compensation from discontinuing operations - 912 -
Gain on sale of property and equipment - - (56)
Gain on sale of restaurant to related party - - (677)
Loss on write-off of notes receivable 146 - -
Impairment, exit costs and other charges 460 1,305 24,625
Loss on investment - 2,252 -
Loss on sale of La Salsa Investment 1,034 - -
Changes in assets and liabilities, net of dispositions:
Restricted cash 2,556 (391) 2,398
Changes in current assets and liabilities, net (1,968) (205) (10,980)
Changes in other long-term assets and liabilities, net (1,639) 1,470 2,473
-------- -------- --------
Net cash provided by (used in) operating activities 7,810 (14,103) 1,527
-------- -------- --------
Cash flows from investing activities:
Net proceeds from sale of discontinued operations - 33,068 -
Proceeds from sale of La Salsa Investment 1,714 - -
Purchase of property and equipment (13,929) (10,391) (7,318)
Purchase of restaurants from franchisees (11,350) - -
Proceeds from sale of restaurant to related party - - 1,515
Net proceeds from net assets held for sale 768 - -
-------- -------- --------
Net cash (used in) provided by investing activities (22,797) 22,677 (5,803)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 30 100 343
Repayment of debt (2,410) (1,811) (1,865)
Proceeds from equipment financing - 1,023 3,642
Proceeds from mortgage financing 14,500 - -
-------- -------- --------
Net cash provided by (used in) financing activities 12,120 (688) 3,458
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (2,867) 7,886 (818)
Cash and cash equivalents (overdrafts), beginning of period 7,240 (646) 172
-------- -------- --------
Cash and cash equivalents (overdrafts), end of period $ 4,373 $ 7,240 $ (646)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
CHAMPPS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years Ended
July 2, 2000, June 27, 1999 and June 28, 1998
(Dollars in thousands, except per share amounts)
1. Background and Basis of Presentation
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") pursuant to the transactions
described below in Note 2 (the "Spin-off" or "Spin-off Transaction"). 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 July 2, 2000, the Company's
principal business activity is to own, operate and franchise Champps Americana
casual dining restaurants. The Company's Champps operations serve customers in
upscale restaurant settings throughout the United States.
Basis of Presentation
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 4. 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. The historical DAKA International basis in the assets and
liabilities of the spun-off operations 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.
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 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 (the "Spin-off
Transaction Date"). 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 notes receivable, property and equipment,
and accounts payable, accrued expenses and certain contingent liabilities. These
assets and liabilities resulted in a net decrease to group equity of
approximately $1,500 and have been recorded within their respective captions
during fiscal 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 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.
3. Purchase of Franchised Restaurants
On June 29, 2000, the Company purchased two restaurants located in Eden Prairie
and Minnetonka, Minnesota from existing franchisees. The Company paid $5,675 in
cash for each of the two restaurants. Concurrent with the acquisitions, the
Company entered into two separate mortgage loan agreements each in the amount of
$4,750, the terms of which are described in Note 10. The Company has accounted
for the acquisition of the restaurants using the purchase method in accordance
with Accounting Principles Board ("APB") Opinion No. 16. Accordingly, the
purchase price has been allocated to the assets and liabilities acquired based
upon their estimated fair value. The excess of purchase price over the fair
value of identifiable assets and liabilities has been recorded as goodwill. The
resulting goodwill balance of $3,825 is being amortized over the estimated
useful life of 20 years using the straight-line method. The allocation of
purchase price is preliminary, and is subject to adjustment based upon the
results of appraisals and further assessment of the fair value of assets and
liabilities to be performed during the twelve month period following the
acquisition.
Had the acquisition of the two franchised restaurants occurred at the beginning
of fiscal year 2000, unaudited proforma revenues would have been $122,300.
Unaudited proforma income would have been $2,900.
On February 2, 1998, the Company sold the Minnetonka, Minnesota Champps
restaurant to a former officer and director (See Note 4).
4. Disposition Transactions
Sale of Fuddruckers
On November 24, 1998, the Company completed the sale of all of the outstanding
common stock of Fuddruckers to King Cannon, Inc. (the "Buyer") pursuant to a
Stock Purchase Agreement (the "Agreement"), dated as of July 31, 1998 (the
"Fuddruckers Sale"). The sale price was $43,000 in cash, subject to certain
adjustments. At the closing, the Company disbursed approximately $2,500 to
escrow agents to be held pending resolution of certain contingent obligations
discussed further below. At July 2, 2000, $402 continues to be held in escrow
and is reported as restricted cash. In addition, the Company paid approximately
$9,000 associated with the early termination of certain leases, obtaining
landlord consents to the transaction, certain litigation settlements, and legal,
accounting and severance expenses. An additional $5,500 was used to settle the
Company's obligations under a put/call agreement which was originally due to be
paid in January 2000. The Company received approximately $2,600 in previously
restricted cash balances, which were released by virtue of the Company's
settling certain of the obligations discussed above. The Company also purchased
two closed Fuddruckers locations and recorded assets held for sale valued at
approximately $1,600. The sale was approved by a vote of the Company's
shareholders on November 5, 1998.
Pursuant to the Agreement, King Cannon had 120 days from the closing date to
review and propose adjustments to the portion of the estimated purchase price
related to working capital. During November 1999, King Cannon sought payment for
additional working capital adjustments totaling $78. As this request was
received beyond the 120-day period allowed for working capital adjustments as
defined in the Agreement, the Company has recognized no liability for this
assertion. On April 6, 2000, King Cannon filed for arbitration for the payment
of this demand. Prior to this assertion, the Company and King Cannon have
adjusted the purchase price by approximately $1.5 million, including interest,
for working capital adjustments. This reduction in estimated purchase price has
been included in the loss from discontinued operations in the accompanying
financial statements for fiscal year 1999.
Closure of Great Bagel & Coffee
On June 28, 1998, the Company ceased all operations of the Great Bagel & Coffee
business. Previously, on December 30, 1997, Great Bagel & Coffee had acquired
the assets and liabilities of one of its former franchisees, then operating a
commissary and eight Great Bagel & Coffee restaurants in Phoenix, Arizona. The
Company had hoped that this transaction would help Great Bagel & Coffee improve
sales and margins, and also provide the best opportunity for a possible sale of
the business. However, the business did not improve and no buyer or strategic
partner could be located. Accordingly, a decision was reached to close the
business. The Company has recorded impairment and exit costs associated with
this decision of $1,400 in the accompanying consolidated financial statements
for fiscal 1998.
Other Transactions
Effective July 1, 1997, the Company entered into a sale and services agreement
with RCS whereby the Company sold to RCS for an aggregate purchase price of
$2,300 certain data processing equipment. The purchase price was evidenced
through a promissory note due June 30, 2002 which bore 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 at the Spin-off Transaction Date. The Company entered into a
two-year service agreement with RCS for data processing and consulting services
for an annual fee of $1,800. The Company consolidated RCS' operations through
May 24, 1999, when the Company sold its 50% interest in RCS to RCS pursuant to a
Stock Redemption and Debt Restructuring Agreement (the "Stock Redemption
Agreement"). As part of this transaction, the Company also canceled all amounts
due to the Company from RCS, including a note and accrued interest in the amount
of $2,500. In consideration for its shares of RCS common stock and the
cancellation of the note and accrued interest, the Company received cash in the
amount of $750, certain computer equipment and software valued at approximately
$142, a commitment to complete certain work in progress valued at approximately
$313 without charge to the Company, a three year consulting and professional
data processing agreement valued at approximately $750 without charge to the
Company, cancellation of approximately $263 in accounts payable to RCS, and the
release of the Company for a contingent obligation related to RCS employment of
its Chief Executive Officer. The Company recorded a loss on this transaction of
approximately $350 in fiscal 1999.
On February 2, 1998, the Company sold a Champps restaurant in Minnetonka,
Minnesota to Dean Vlahos, a former Director of the Company and the former
President and Chief Executive Officer of Champps Americana, Inc., for $2,900
representing the fair value of the restaurant based upon an independent
appraisal. The purchase price was settled through a cash payment by Mr. Vlahos
of $1,500 and the cancellation of Mr. Vlahos' employment contract. The Company
recognized a net gain in fiscal 1998 of approximately $700 on this transaction.
The Company reacquired the restaurant in 2000 (see Note 3).
5. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Sunday closest to June 30th. For purposes
of these notes to the consolidated financial statements, the fiscal years ended
July 2, 2000, June 27, 1999 and June 28, 1998, are referred to as 2000, 1999,
and 1998, respectively. Fiscal 2000 contains 53 weeks. Fiscal 1999 and 1998 each
contain 52 weeks.
Significant Estimates by the Company
In the process of preparing its consolidated financial statements in accordance
with accounting principles generally accepted in the United States, the Company
estimates the appropriate carrying value of certain assets and liabilities which
are not readily apparent from other sources. The primary estimates underlying
the Company's consolidated financial statements include allowances for potential
bad debts on accounts and notes receivable, the useful lives and recoverability
of its assets such as property, equipment and intangibles, fair values of
financial instruments, the realizable value of its tax assets and accruals for
workers compensation, general liability and health insurance programs and
representations and warranties provided in connection with the Spin-off
Transaction and Fuddruckers Sale. Management bases its estimates on certain
assumptions, which they believe are reasonable in the present circumstances and
while actual results could differ from those estimates, management does not
believe that any change in those assumptions in the near term would have a
material effect on the Company's consolidated financial position or the results
of operations.
Concentration of Credit Risk
The Company extends credit to its Champps' franchisees on an unsecured basis in
the normal course of business. No individual franchisee is significant to the
Company's franchisee base. The Company has policies governing the extension of
credit and collection of amounts due from franchisees.
The Company's allowance for uncollectible accounts receivable and related bad
debt expense are not material for each period presented.
Cash Equivalents and Restricted Cash
Cash equivalents consist of highly liquid investments with a maturity of three
months or less at the date of purchase. These investments are carried at cost,
which approximates fair value. The Company placed certificates of deposit to
serve as cash collateral for stand-by letters of credit in the amount of $35,
$417 and $2,600 at July 2, 2000, June 27,1999 and June 28, 1998, respectively.
Such collateral commitments have expired or will during calendar 2000 and
accordingly they have been classified as current assets in the accompanying
consolidated financial statements.
Inventories
Inventories are stated at the lower of cost, principally determined using the
first-in, first-out method, or market value. Inventories include the initial
cost of smallwares with replacements charged to expense when purchased.
Approximately 80% of the Company's food products and supplies are purchased
under a distribution contract with Sysco Corporation.
The components of inventories are as follows:
2000 1999
---- ----
Food and liquor products $ 830 $ 617
Smallwares 865 292
Supplies 327 296
-------- --------
$2,022 $1,205
======== ========
Prepaid Expenses and Other Current Assets
Through June 29, 1997, the Company had capitalized direct incremental
pre-opening costs associated with the opening of new or the expansion and major
remodeling of existing restaurants with such costs being amortized over twelve
months. In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5") which requires companies to expense all costs
associated with pre-opening activities. The effect of adopting the provisions of
SOP 98-5 during 1998 was to expense approximately $987 of capitalized costs
existing at June 29, 1997, of which approximately $800 is related to continuing
operations. The Company has reported this expense as a cumulative effect of an
accounting change in the accompanying fiscal 1998 consolidated financial
statements.
Property and Equipment
Property and equipment is stated at cost. Property and equipment is depreciated
using the straight-line method over the estimated useful lives of the assets. As
a pre-condition to the Fuddruckers Sale, in November 1998, the Company purchased
certain point of sale terminals, which were on an operating lease with
Fuddruckers equipment. These point of sale terminals were written down to market
value, and a charge of $850 was included in general and administrative expenses
in fiscal 1999. In June 1999, it was determined that the point of sale terminals
would need to be replaced to accommodate new software requirements.
Consequently, the estimated useful life was shortened resulting in an
accelerated depreciation charge of approximately $360. The remaining value was
depreciated in the first quarter of fiscal 2000 when these machines were
retired. Leasehold improvements and assets capitalized pursuant to capital lease
obligations are amortized over the shorter of the initial lease term, contract
term or the estimated useful life. Useful lives range from 15 to 20 years for
buildings and leasehold improvements and 3 to 10 years for equipment.
Accrued Insurance Costs
The Company has purchased commercial insurance to cover workers' compensation,
general liability, and various other risks for claims incurred after June 29,
1997. Through June 29, 1997, the Company was self-insured for workers'
compensation, general liability, and various other risks up to specified limits.
The Company's share of prior workers' compensation and general liability
programs of DAKA International through June 29, 1997 were allocated using labor
costs and the aggregate costs of such programs were determined through actuarial
studies which determined the estimated amount required to be provided for
incurred incidents. In connection with the Spin-off Transaction, the Company is
obligated to indemnify Compass for all claims arising subsequent to the Spin-off
Transaction, including claims related to employees of DAKA International not
continuing with the Company after the Spin-off Transaction, that relate to
events occurring prior to the Spin-off Transaction Date. The Company believes
that any claims related to its obligation to further indemnify Compass after
July 2, 2000 are adequately accrued.
Reserves
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 year
ending July 2, 2000, certain of these reserves were reallocated to more
accurately reflect revisions to estimates occurring during the period. The
Company believes that these reserves are adequate but not excessive to provide
for the outcome of the related contingencies. Such amounts are expected to be
paid over the next several years as the amounts become known and payable. The
following tables display the activity and balances relating to the reallocation
of the reserves:
<TABLE>
<CAPTION>
Champps Predecessor Assets held Total
Obligations Obligations for sale Reserves
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balance at June 27, 1999 $ 2,528 $ 6,643 $ - $ 9,171
Additional expense recognition 460 - - 460
Deductions (2,011) (1,980) - (3,991)
Revision to estimate (139) (311) 450 -
------- ------- ------- -------
Balance at July 2, 2000 $ 838 $ 4,352 $ 450 $ 5,640
======= ======= ======= =======
</TABLE>
The reserve for assets held for sale is netted against the asset held for sale
value on the balance sheet. The exit and other costs and predecessor obligations
reserves are incorporated into the balances for accrued expenses and other
long-term liabilities.
Other Long-Term Liabilities
Other long-term liabilities are comprised of deferred rent liabilities and
management's estimate of the non-current portion of the liability related to the
Company's workers' compensation and general liability self-insurance program and
are included in the summary of reserves described above.
Deferred Rent Assets and Liabilities
Deferred rent assets, included in other assets, represent the difference between
the cost and the net proceeds received from property sold pursuant to
sale-leaseback agreements and are amortized on a straight-line basis over the
initial term of the lease. For leases which contain rent escalations, the
Company records the total rent payable during the lease term on a straight-line
basis over the term of the lease. In addition, lease incentive payments received
from landlords are recorded as deferred rent liabilities and are amortized on a
straight-line basis over the lease term as a reduction of rent expense.
Group Equity
Prior to the Distribution, group equity represented the net intercompany
activities between the Company and DAKA International. As of June 29, 1997, the
Company had issued 1,000 shares of its common stock, par value $.01 per share,
to DAKA International for $.01 in connection with its formation. Such shares
were reported within group equity for purposes of the 1997 consolidated
financial statements.
Revenue Recognition
The Company records sales from its restaurant operations and franchise and
royalty fees as earned. Coupons and other discounts are recorded as a reduction
of sales.
Franchising and Royalty Income
Franchise fees for new franchises are recognized as revenue when substantially
all commitments and obligations have been fulfilled, which is generally upon
commencement of operations by the franchisee. The Company has also entered into
development agreements granting franchisees the exclusive right to develop and
operate restaurants in certain territories in exchange for a development fee or
other consideration.
Amounts received in connection with such development agreements are recognized
as franchise fee revenues when earned since the Company is not required to
provide any future services and such fees are non-refundable. Franchisees
entering into development agreements are also required to execute franchise
agreements and pay the standard franchise fee which is sufficient to cover the
Company's contractual obligations to the franchisee for each unit opened. To the
extent that the Company provides services beyond its contractual obligation, the
Company charges the franchisee a fee for such additional services. The Company
recognized development fee revenues of $86 in 1998. No development fee revenues
were recognized in fiscal 2000 or 1999.
Royalty revenues from franchised restaurants are recognized as revenues when
earned in accordance with the respective franchise agreement. The Company
recognized royalty revenues of $802, $558, and $903 during 2000, 1999 and 1998,
respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the carrying value for
financial reporting purposes and the tax basis of assets and liabilities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are recorded
using the enacted tax rates expected to apply to taxable income in the years in
which such differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities, resulting from a change in tax rates, is
recognized as a component of income tax expense (benefit) in the period that
such change occurs. Targeted jobs tax credits are treated as a reduction of
income tax expense in the year such credits are utilized.
Prior to the Distribution, the Spun-off Operations were generally included in
the consolidated U.S. Federal income tax return and certain combined and
separate state and local income tax returns of DAKA International. For purposes
of the 1997 financial statements, a credit in lieu of taxes has been presented
as if the Company was a stand-alone taxpayer. Current income tax liabilities
(assets) were considered to have been paid (received) from DAKA International
and were recorded through the group equity account.
The Company has entered into an indemnification agreement, whereby the Company
has agreed to indemnify Compass against all state and federal income and other
tax liabilities of DAKA International for any period before the Spin-off
Transaction Date as well as any tax consequences resulting from the Spin-off
Transaction. The Company believes that any amounts due to Compass under this
indemnification agreement after July 2, 2000 are adequately accrued.
As part of the sale of Fuddruckers, the Company agreed to indemnify the acquirer
against liabilities arising from breaches of the acquisition agreement, as well
as identified pre-closing liabilities, including tax liabilities. The Company
believes that any amounts due to King Cannon under this indemnification
agreement after July 2, 2000, are adequately accrued.
As of July 2, 2000, the Company has $2,573 accrued for tax liabilities
associated with Fuddrucker pre-closing events and DAKA International events
occuring prior to the Spin-off Transaction Date.
Accounting for Stock-Based Compensation
The Company continues to apply APB Opinion No. 25, which recognizes compensation
cost based on the intrinsic value of the equity instrument awarded. The Company
discloses the required pro forma effect on results from operations and net
income (loss) per share in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation".
Options to purchase shares of DAKA International common stock held by employees
remaining with the Company after the Distribution were converted into options to
purchase shares of the Company's common stock in accordance with Emerging Issues
Task Force Abstract 90-9 and, accordingly, such conversion had no effect on the
Company's 1998 consolidated financial position or results of operations.
In fiscal 1999, the Company recorded non-cash compensation expense of $1,243
related to extension of termination dates and early vesting of stock options of
an officer of the Company. Of this total, $912 was related to the Fuddruckers'
sale and was included in the loss from discontinued operations. The balance of
$331 was included in general and administrative expense.
During 1998, the Company recorded compensation expense of $236 related to the
repurchase from certain option holders of an aggregate of 172,044 common stock
options at an average price of $1.37 per option.
Cash Flow Information
Cash payments for interest aggregated $699, $635 and $491 in 2000, 1999, and
1998, respectively.
Equity and Income (Loss) Per Share
The authorized capital stock of the Company consists of 30,000 shares of common
stock, of which 11,659 and 11,647 shares were issued and outstanding as of July
2, 2000 and June 27, 1999, respectively, and 5,000 shares of preferred stock, of
which no shares are issued and outstanding. Approximately 11,425 shares were
issued upon the consummation of the Spin-off Transaction.
For purposes of the fiscal 1999 and 1998 earnings per share calculations, stock
options have been excluded from the diluted computation as they are
anti-dilutive. Had such options been included in the computation, the weighted
average shares would have increased by approximately 132 shares. For purposes of
the fiscal 2000 earnings per share calculation, stock options of approximately
88 have been included in the diluted computation. At July 2, 2000 the Company
had approximately 1,615 options outstanding.
Impairment of Long-Lived Assets, Exit Costs and Other Charges
The Company evaluates the carrying value of long-lived assets including
property, equipment and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Under SFAS No. 121, an
assessment is made to determine if the sum of the expected future undiscounted
cash flows from the use of the assets and eventual disposition is less than the
carrying value. If the sum of the expected undiscounted cash flows is less than
the carrying value, an impairment loss is recognized by measuring the excess of
carrying value over fair value (generally estimated by projected future
discounted cash flows from the applicable operation or independent appraisal).
In 2000, the Company recorded approximately $460 in exit costs against
continuing operations. Included in exit costs is approximately $152 related to
the termination of nine employees and the termination of the Wayzata, Minnesota
lease and other obligations.
In 1999, the Company recorded approximately $1,300 in exit costs against
continuing operations. Included in exit costs is approximately $250 related to
the termination of fifteen employees during fiscal 2000. The Company also paid
amounts related to non-severance costs in fiscal 2000.
In addition, during 1999, the Company has recorded approximately $8,100 against
continuing operations of which $2,700 represents losses on the sale and write
down of non-essential assets, $2,700 represents changes in estimates of
continuing obligations for the Company's predecessor businesses and $2,700
represents losses on business and lease contracts. The Company recorded accrued
liabilities aggregating $3,900 in connection with such charges.
In 1998, the Company recorded a provision for continuing operations of $1,400
which represents exit costs associated with closing the Great Bagel & Coffee
business.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No.138. SFAS No. 133 establishes standards for accounting for derivative
instruments as hedging activities. The Company has determined that the adoption
of SFAS No. 133, as amended by SFAS No. 138, will have no material impact on
the Company's results of operations or financial condition.
6. Investments
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
1,278 shares of common stock of SBRG, of which approximately 121 shares have
been placed in escrow to cover any claims for indemnification by SBRG in
connection with this transaction. The Company recorded a loss on this
transaction of approximately $2,252 in the fourth quarter of fiscal 1999. The
Company accounted for the investment in SBRG in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". During 2000,
the Company recorded a loss of $1,034 upon the sale of the investment.
7. Property and Equipment
Property and equipment consist of the following:
2000 1999
---- ----
Land $ 5,092 $ -
Buildings & leasehold improvements 33,887 22,597
Equipment 21,716 18,117
Construction in progress 4,779 7,506
-------- --------
65,474 48,220
Accumulated depreciation and amortization (12,919) (12,124)
-------- --------
$ 52,555 $ 36,096
======== ========
8. Other Assets
The components of other assets are as follows:
2000 1999
---- ----
Notes receivable $ 25 $ 1,904
Other 572 366
------ ------
$ 597 $2,270
====== ======
Notes receivable include a note from a franchisee bearing interest at 10%,
requires monthly payments and interest, and matures in 2003. As part of the RCS
sale, a note payable of $750 was recorded in the fourth quarter of fiscal 1999.
That note was paid in full during fiscal 2000.
9. Accrued Expenses
The components of accrued expenses are as follows:
2000 1999
---- ----
Salaries, wages and related taxes $1,447 $1,874
Accrued Taxes 2,761 2,305
Insurance accruals 1,708 2,987
Lease termination accruals - 1,047
Legal expenses 566 -
Gift Certificates 197 145
Other 841 321
------ ------
$7,520 $8,679
====== ======
10. Long-Term Debt
The components of long-term debt are as follows:
2000 1999
---- ----
Notes Payable $ 15,260 $ 250
Capital lease obligations 4,064 5,907
-------- --------
19,324 6,157
Less current portion (2,530) (2,010)
-------- --------
Total $ 16,794 $ 4,147
======== ========
Maturities of long-term debt, including capital lease obligations, at July 2,
2000 are as follows:
2001 $ 2,530
2002 1,558
2003 1,369
2004 460
2005 349
Thereafter 13,058
--------
$ 19,324
========
Notes payable and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
Effective Fiscal year
interest Face Current Nature Nature of 2000 interest
Lender rate amount Balance of debt collateral expense Maturity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINOVA Mortgage Lombard
10.23% $ 5,000 $ 4,987 Financing resaturant $ 43 April, 2020
FINOVA Mortgage Eden Prairie
10.36% 4,750 4,744 Financing restaurant 4 May, 2020
FINOVA Mortgage Minnetonka
10.36% 4,750 4,744 Financing restaurant 4 May, 2020
Capital Leases Capital Various equipment
(See Note 12) Various Various 4,064 Lease and leasehold improvements 576 Various
Notes payable to Note
former employees Various Various 785 Payable N/A 72 Various
-------- -------
$ 19,324 $ 699
======== =======
</TABLE>
11. Income Taxes
Deferred tax assets and (liabilities) are comprised of the following:
2000 1999 1998
---- ---- ----
Current:
Accrued expenses $ 2,668 $ 2,651 $ 282
Prepaid expenses (91) - (366)
Other - 86 526
--------- --------- ---------
2,577 2,737 442
--------- --------- ---------
Noncurrent:
Net operating loss carryforwards $ 16,083 $ 14,192 $ 9,457
Depreciation and amortization (905) 1,856 12,215
Deferred income 62 73 268
--------- --------- ---------
15,240 16,121 21,940
--------- --------- ---------
Less valuation allowance $(17,817) $(18,858) $(22,382)
--------- --------- ---------
0 0 0
========= ========= =========
The following is a reconciliation of income taxes at the federal statutory rate
to the Company's income tax expense (benefit):
<TABLE>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Income tax provision (benefit) computed at statutory
federal income tax rates $ 823 $ (8,372) $ (9,707)
Adjustment related to net operating loss limitations - 11,860 -
Non-deductible costs 154 36 162
(Decrease) increase in the valuation allowance (1,041) (3,524) 7,298
State Income Tax Provision 77 - -
Other, net 64 - 2,247
--------- ---------- ----------
Provision for Income Taxes $ 77 $ - $ -
========= ========== ==========
</TABLE>
As of July 2, 2000, the Company had federal net operating loss carryforwards of
approximately $45,951, expiring at various dates through 2019. For the fiscal
years ended 2000, 1999 and 1998, the Company provided a valuation allowance for
the tax benefit of the deferred tax assets not expected to be utilized based on
historical operating results and other available evidence. During the fiscal
years ended 1998 the valuation allowance was increased by $7,300, principally as
a result of the Company's losses. During 1999, the valuation allowance decreased
$3,500 on a net basis due to adjustments to the Company's deferred tax assets,
offset by current year operating losses. During 2000 the valuation allowance
decreased $1,041 on a net basis due to adjustments to the Comapny's deferred tax
assets offset by current year taxable losses.
12. Commitments and Contingencies
Fuddruckers Representations and Indemnity
The Agreement contains various representations and warranties by the Company.
These include, without limitation, representations and warranties by the Company
as to (i) the organization, good standing, and capitalization of Fuddruckers and
its subsidiaries; (ii) proper corporate authority, no conflicts, no violations
and requisite approvals; (iii) ownership of the Shares; (iv) material accuracy
of financial statements, books and records; (v) absence of undisclosed
liabilities and absence of material adverse change; (vi) litigation; (vii)
compliance with law; (viii) status of employee benefit plans and labor
relations; (ix) tax matters; (x) title to and condition of assets; (xi) leases
and real property; (xii) material contractual obligations and licenses; (xiii)
intellectual property matters; (xiv) insurance policies; (xv) brokers, finders
and other fees; (xvi) franchises; and (xvii) environmental matters.
The Company's representations and warranties contained in the Agreement survive
the closing and will expire on December 31, 2000 (the "Survival Period") except
that (i) representations and warranties made by the Company relating to
environmental matters will survive the closing date until December 31, 2003,
(ii) representations and warranties made by the Company relating to employee
matters and income taxes will survive the closing date until expiration of
applicable statutes of limitations and (iii) representations and warranties made
by the Company with respect to (a) the Company's power to execute the Agreement,
the Company's having executed the Agreement with required corporate action and
that the Agreement is valid and binding by its terms, the due organization,
valid existence and good standing of the Company and Fuddruckers, (b) the
representation stating the execution and delivery of the Agreement: (1) does not
violate any law, order, by-law or article of incorporation of the Company of
Fuddruckers; (2) does require approval of shareholders of Fuddruckers other than
the Company; (3) does not result in a lien or title defect in assets or shares
of Fuddruckers; or (4) does result in a claim against Fuddruckers, its assets,
shares of Fuddruckers and King Cannon; and (c) the capitalization and equity
securities of Fuddruckers shall survive the closing indefinitely. In addition,
any covenants or agreements of the Company under the Agreement, and any and all
indemnification obligations relating thereto shall survive the closing
indefinitely, unless earlier expiring in accordance with their respective terms,
including, without limitation, the Company's indemnification obligations with
respect to covenants (i) regarding environmental matters, (ii) current pending
legal proceedings; (iii) liability for taxes; (iv) sub-leases for certain
Fuddruckers restaurants; (v) undisclosed contractual obligations; (vi) violation
of the Company's representations and warranties in the Agreement; and (vii)
obligations arising between the signing on the Agreement and the closing, lease
termination amounts and rent adjustment amounts.
King Cannon's representations and warranties under the Stock Purchase Agreement,
and its indemnification obligations arising from such representations and
warranties, survive the Closing and will expire and terminate on December 31,
2000. Any covenants or agreements of King Cannon under the Stock Purchase
Agreement, and any and all indemnification obligations relating thereto survive
the Closing indefinitely, unless earlier expiring in accordance with their
respective terms.
The Company and Champps Operating Corporation, Inc. 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 expense which arise out of or relate to (i) any
misrepresentations in, breach of or failure to comply with any of the
representations, warranties, undertakings, covenants or agreements of the
Company, 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 of business; (iii) any retained or
undisclosed liabilities; or (iv) the Company's obligations with respect to lease
termination amounts and rent adjustment amounts. 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 any environmental matters, or
each of the lease termination amounts and rent adjustment amounts provisions is
remote.
Further, at the closing, the Company established a $1.0 million 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 $1.0 million escrow is remote. As of July 2, 2000,
$636 was disbursed for amounts presented to the Company by King Cannon for
indemnification. Certain of these amounts are currently being disputed.
The maximum aggregate liability of the Company on account of any breach of any
representation or warranty is limited to the amount of the final purchase price.
There is no cap or limit on the liability of the Company to King Cannon on
account of any breach by the Company of any of its covenants or agreements under
the Stock Purchase Agreement or on account of indemnification obligations
covering matters other than breaches of representations and warranties, provided
that, if King Cannon is entitled to recover any losses in excess of the final
purchase price, the Company may either (i) require King Cannon to reconvey to
the Company full ownership and control of the shares and all assets (to the
extent then owned by King Cannon or Fuddruckers) that are being transferred
pursuant to the Stock Purchase Agreement in such a manner as to rescind the
transactions contemplated by the Stock Purchase Agreement, in which case the
Company will pay King Cannon an amount equal to (x) the final purchase price
plus (y) all additional investments made in Fuddruckers following the closing
plus (z) an amount equal to an internal rate of return equal to 25% on the sum
of items (x) and (y); or (ii) pay to King Cannon all of the losses with respect
to which King Cannon is entitled to indemnification.
As part of the consideration under the Stock Purchase Agreement, each of the
Company and Champps Operating Corporation agreed that, for a period of ten years
following the closing date, neither will (i) directly or indirectly, own,
manage, operate, finance, join, or control, or participate in the ownership,
management, operation, financing or control of, or be associated as a partner or
representative in connection with, any restaurant business that is in the
gourmet hamburger business or whose method of operation or trade dress is
similar to that employed in the operation of the "Fuddruckers" restaurants; or
(ii) directly or indirectly solicit, induce or attempt to induce any person then
employed by Fuddruckers or King Cannon to enter the employ of the Company or
Champps Operating Corporation, or any of their respective affiliates.
Nothing contained in the Stock Purchase Agreement limits the right of the
Company or Champps to operate the business of Champps as it is currently
conducted or other restaurant concepts that do not compete directly with
Fuddruckers or to own less than a 5% legal or beneficial ownership in the
outstanding equity securities of any publicly traded corporation.
Spin-Off Indemnifications
The Company agreed to assume certain liabilities in connection with the
Spin-off. 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. 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 began to expire on December
31, 1999. The Company believes the risk of a significant claim for
indemnification being presented by Compass is remote.
Pursuant to the terms of the Spin-off Transaction, the Company assumed the
existing lease obligations and purchase commitments of DAKA International
consisting principally of the corporate headquarters in Danvers, Massachusetts
which expires during 2001. In 2000, the Company exited this location and paid a
lease termination penalty of $758.
Leases
The Company has entered into lease agreements for certain restaurant facilities
and office space. The fixed terms of the leases range up to 20 years and, in
general, contain multiple renewal options for various periods ranging from 5 to
25 years. Certain leases contain provisions which require additional payments
based on sales performance and the payment of common area maintenance charges
and real estate taxes.
In December 1995, Champps obtained a commitment for a $40,000 development and
sale-leaseback financing facility from AEI Fund Management, Inc. ("AEI").
Pursuant to the terms of the agreement, the Company would sell and lease-back
from AEI, Champps restaurants to be constructed and would pay a commitment fee
of 1% of the sale price of each property sold to AEI. The purchase price would
be equal to the total project cost of the property, as defined in the agreement,
not to exceed its appraised value (the "Purchase Price"). The unused commitment
expired on December 31, 1998. The leases provide for a fixed minimum rent based
on a percentage of the respective property's Purchase Price, subject to
subsequent increases based on the Consumer Price Index. The leases also provide
for an initial term of 20 years with two 5-year renewal options exercisable at
the option of Champps. As of July 2, 2000, eight Champps restaurants had been
fully funded under this commitment and none had been partially funded.
Future minimum lease payments pursuant to leases with non-cancelable lease terms
in excess of one year at July 2, 2000 are as follows:
Operating Capital
Fiscal Years Ending Leases Leases
----------------------------------------- --------- -------
2001 $ 6,716 $ 2,150
2002 6,699 1,320
2003 6,578 996
2004 6,551 63
2005 6,479 -
Thereafter 71,796 -
--------- ---------
Total future minimum lease payments $ 104,819 4,529
=========
Less amount representing interest (465)
---------
Present value of future minimum lease payments $ 4,064
=========
Total rent expense in 2000, 1999 and 1998 approximated $7,055, $6,509 and
$4,315, respectively. Contingent rentals included in rent expense are not
material for the periods presented.
Included in property and equipment in 2000, 1999 and 1998 are approximately
$9,300, $9,300 and $9,300, respectively, of equipment held pursuant to capital
lease arrangements. The related accumulated amortization was approximately
$5,000, $3,700 and $2,400, respectively.
13. Litigation
The Company has agreed to assume certain contingent liabilities of DAKA
International in connection with the Spin-off and has agreed to assume certain
contingent liabilities of Fuddruckers for periods prior to its sale to King
Cannon as discussed elsewhere in this Form 10-K. 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.
In the third quarter of fiscal 2000, a Washington, D.C. superior court jury
awarded a former Daka employee $187 in compensatory damages and $4,813 in
punitive damages based on the employee's claim of negligent supervision and
retaliation, due to alleged conduct that occurred in 1996 at a former Daka food
service location. While Daka was formerly a subsidiary of DAKA International and
while DAKA International is now a subsidiary of Compass Group, PLC., the events
at issue in the case took place while a predecessor company of Champps owned
DAKA International. On March 28, 2000, DAKA International filed post-trial
motions, including motions to reduce the damage awards, for judgment not
withstanding the verdict, or in the alternative, for a new trial. These motions
were subsequently denied by the court. On September 20, 2000, Daka filed a
Notice of Appeal with the Court of Appeals for the District of Columbia. The
Company may be liable for the payment of any amounts ultimately due by Daka upon
final determination of the case. The Company has not accrued any amounts related
to the punitive damages in this matter. Any such amounts will be reported in the
period that payment becomes probable. Based upon its analysis, and the advice of
counsel, the Company believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's financial position or results of
operations.
14. Stock Options and Employee Benefit Plans
Stock Options
On July 17, 1998, the Company adopted a stock option and restricted stock plan
for the benefit of the employee and non-employee directors of the Company
whereby the Company authorized and reserved for issuance 1,250 shares of common
stock. In connection with the Spin-off Transaction, each outstanding option held
by a Company employee to acquire DAKA International common stock was converted
into an option to acquire one share of common stock of the Company and one share
of common stock of DAKA International (the "Adjusted Options"). The exercise
prices of the Adjusted Options were determined such that each option holder will
remain in an equivalent economic position before and after the Spin-off
Transaction.
On November 4, 1999, the Company authorized and reserved for issuance 750 shares
of common stock in connection with a non-qualified stock option agreement with
the Company's Chief Executive Officer. The options expire on June 30, 2001 and
are exercisable at $4.00 per share.
Through the date of the Spin-off Transaction, the Company's employees
participated in various incentive and non-qualified stock option plans sponsored
by DAKA International (the "Plans"). The Plans provided for the granting of
options for terms of up to ten years to eligible employees at exercise prices
equal to the fair market value of the DAKA International common stock on the
date of the grant. In recognition of the terms of stock option plans, on
November 24, 1998, with the sale of Fuddruckers, all outstanding stock option
grants became fully vested. All option grants held by employees who transferred
to King Cannon as part of the Fuddruckers sale expired at the end of February
1999.
The Company has granted options to its executive officers, managers and
directors in the corporate office, the regional directors of operations and the
general manager of the restaurants. In addition, options have been granted to
the corporate office employees below the level of manager and director.
The following table presents activity under the Company's stock option plan:
Weighted Weighted
Average Average Grant
Number of Exercise Date Fair
Options Price Value
--------- -------- -------------
Outstanding at June 28, 1998 851,230 $ 5.11
Granted 1,028,500 5.79 $ 1.70
Exercised (35,150) 1.48
Forfeited (1,026,905) 6.57
----------- --------
Outstanding at June 27, 1999 817,675 5.12
Granted 963,750 4.00 2.94
Exercised - N/A
Forfeited (165,975) 5.71
----------- --------
Outstanding at July 2, 2000 1,615,450 $ 4.39
=========== ========
The number of options exercisable at the dates presented below and their
weighted average exercise price were as follows:
Weighted
Average
Options Excercisable
Exercisable Price
------------ ------------
June 28, 1998 246,265 $ 3.16
June 27, 1999 817,675 5.12
July 2, 2000 715,950 4.89
The following table sets forth information regarding options outstanding at July
2, 2000:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Number of Range of Weighted Average Remaining Number Currently Price for Currently
Options Prices Price Contractual Life Exercisable Exercisable
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
193,500 $1.21 - 2.41 $ 1.95 1 193,500 $ 1.95
967,000 4.00 - 4.86 4.03 9 67,500 4.38
64,500 5.12 - 5.85 5.22 5 64,500 5.22
383,000 6.03 - 6.72 6.34 2 383,000 6.34
7,450 7.00 - 13.80 8.23 4 7,450 8.23
</TABLE>
The Company applies APB Opinion No. 25 to account for various stock plans.
Accordingly, pursuant to the terms of the plans, no compensation cost has been
recognized for the stock plans. However, if compensation cost for stock option
grants issued to Company employees during 2000, 1999 and 1998 had been
determined using the fair value method under the provisions of SFAS No. 123, the
Company's net income (loss) and pro forma net income (loss) per share would have
been decreased/increased to the pro forma amounts shown below:
2000 1999 1998
---- ---- ----
Net income (loss):
As reported $ 2,273 $(23,922) $(27,735)
Proforma 1,314 (24,532) (28,869)
Net income (loss) per share:
As reported $ 0.20 $ (2.06) $ (2.41)
Proforma 0.11 (2.11) (2.51)
The pro forma net income (loss) reflects the compensation cost only for those
options granted during 2000, 1999 and 1998. Compensation cost is reflected over
a stock option's vesting period and compensation cost for options granted prior
to July 2, 1995 is not considered.
The fair value of each stock option granted in 2000, 1999 and 1998 under DAKA
International stock option plans was estimated on the date of grant using the
Black-Scholes option-pricing model. The following key assumptions were used to
value grants issued for each year:
Weighted Average
Average Risk Expected Dividend
Free Rate Life Volatility Yield
------------ -------- ---------- --------
1998 5.360% 4 Years 14.73% 0.00%
1999 5.720% 2 Years 53.44% 0.00%
2000 5.710% 4 Years 80.14% 0.00%
The weighted-average fair values per share of stock options granted during 2000,
1999 and 1998 were $0.95, $5.79 and $2.14, respectively. It should be noted that
the option pricing model used was designed to value readily tradable stock
options with relatively short lives. The options granted to employees are not
tradable and have contractual lives of up to ten years. However, management
believes that the assumptions used and the model applied to value the awards
yields a reasonable estimate of the fair value of the grants made under the
circumstances.
Employee Stock Purchase Plan
The Company has reserved 400,000 shares of its common stock to be offered under
its 1997 Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan,
eligible employees of the Company may participate in quarterly offerings of
shares made by the Company. The participating employees purchase shares at a
discount from the lower of fair value at the beginning or end of each quarterly
offering period through payroll deductions. In fiscal 2000, employees purchased
approximately 12,000 shares for a total of $30.
Shareholders' Rights Plan
On January 30, 1998, the Company adopted a Shareholder Rights Plan designed to
enhance the Company's ability to protect all of its shareholders' interests and
ensure that all shareholders receive fair treatment in the event of any
potential sale of the Company. On December 8, 1999 the Company's Board of
Directors approved the termination of Champps' Shareholder Rights Plan,
effective on that date.
Employee Benefit Plan
The Company sponsors a 401(k) retirement plan and, prior to the Transaction
Date, the Company's employees participated in a 401(k) retirement plan sponsored
by DAKA International. Both plans enabled employees to contribute up to 15% of
their annual compensation. The Company's discretionary contributions to the
401(k) Plan have been determined by the Board for fiscal 2000, 1999 and 1998,
and by DAKA International before the Spin-off Transaction. The Company's
contribution to the Plan for fiscal years 2000, 1999 and 1998 were $40, $30 and
$65, respectively.
15. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. The following methods and assumptions were used to estimate the
fair value of the Company's financial instruments for which it was practicable
to estimate that value:
Current Assets and Liabilities - The carrying amount of cash, accounts
receivable, accounts payable and accrued expenses approximates fair value
because of the short maturity of these instruments.
Notes Receivable - The carrying value of notes receivable approximates fair
value and was estimated based on discounted cash flows expected to be received
using interest rates at which similar loans are made to borrowers with similar
credit ratings, or if the loan is collateral dependent, management's estimate of
the fair value of the collateral.
Capital lease obligations - The carrying value of capital lease obligations
approximates fair value based upon current market interest rates.
16. Related Party Transactions
The Company's Chief Executive Officer received various below market stock option
grants in fiscal 1999. The options were an extension of options previously
granted and recorded in prior periods. The extension was awarded upon the Chief
Executive Officer's return to the Company. Non-cash compensation expense related
to these grants aggregated $1,243.
Fiscal 1999 results included a $150 payment made to Atticus Partners, L.P., a
related party, as part of a proxy settlement. These expenses were a partial
reimbursement of legal expenses.
In fiscal 1999, Bear Stearns & Co. Inc., Inc., the employer of Alan Schwartz,
member of the Company's Board of Directors, received a fee of approximately
$1,800 for services related to the 1997 Spin-off Transaction. In fiscal 1999,
Bear Stearns provided services related to the Company's financial and strategic
alternatives.
In fiscal 2000, Bear Stearns & Co., received payment of $50 for out-of-pocket
expenses associated with these services provided and accrued in fiscal 1999.
Joseph O'Donnell, who resigned from the Company's Board of Directors in August
1999, is a principal of Osgood, O'Donnell & Walsh, which provides marketing
consulting services. In fiscal 1999, the Company paid Osgood, O'Donnell & Walsh
approximately $30 for such services. Mr. O'Donnell also owns a controlling
interest in Pulseback, Inc., which provides restaurant related services. The
Company holds notes payable from Pulseback, Inc. for approximately $75. The
Company wrote off the full value of this note in fiscal 1999. During fiscal
1999, the Company paid Pulseback approximately $68 for services rendered,
primarily to Fuddruckers.
