UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarter ended March 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from __________ to __________
Commission file number 0-17229
DAKA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3024178
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Place, 55 Ferncroft Road, Danvers, MA 01923
(Address of principal executive offices) (Zip Code)
(508) 774-9115
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $.01 par value,
outstanding at May 10, 1996: 11,076,734
<PAGE>
PART I - FINANCIAL INFORMATION
DAKA INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 30, July 1,
1996 1995
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ....................... $ 9,436 $ 10,317
Accounts receivable, net ........................ 48,344 29,994
Inventories ..................................... 11,437 9,448
Prepaid expenses and other current assets ....... 5,316 2,240
-------- --------
Total current assets .......................... 74,533 51,999
-------- --------
Property and equipment, net ........................ 118,934 93,874
Investments in, and advances to, affiliates ........ 5,000 511
Other assets, net .................................. 29,373 31,389
Deferred income taxes .............................. 2,327 2,327
-------- --------
$230,167 $180,100
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable ................................ $ 23,214 $ 20,381
Accrued expenses ................................ 20,012 18,175
Current portion of long-term debt ............... 2,876 851
Deferred income taxes ........................... 236 236
-------- --------
Total current liabilities ..................... 46,338 39,643
-------- --------
Long-term debt ..................................... 87,410 69,772
Other long-term liabilities ........................ 13,181 8,830
Minority interests ................................. 2,259 3,012
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock, $.01 par value, $100
liquidation preference; 1,000,000 shares
authorized; 11,912 and 100,000 shares issued
and outstanding at March 30, 1996 and
July 1, 1995, respectively ...................... -- 1
Common Stock, $.01 par value; 30,000,000 shares
authorized; 10,455,088 and 6,676,915 shares
issued and outstanding at March 30, 1996 and
July 1, 1995, respectively ...................... 108 69
Capital in excess of par value ..................... 69,320 47,562
Retained earnings .................................. 11,551 11,211
-------- --------
Total stockholders' equity ..................... 80,979 58,843
-------- --------
$230,167 $180,100
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DAKA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March April March April
30, 1996 1, 1995 30, 1996 1, 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales ................................................ $ 99,532 $ 86,834 $292,387 $229,216
Management fees and franchising income ............... 2,832 2,821 10,281 7,846
-------- -------- -------- --------
102,364 89,655 302,668 237,062
-------- -------- -------- --------
Costs and expenses:
Cost of sales and operating expenses ................. 82,913 73,898 244,432 192,972
Selling, general and administrative expenses ......... 9,839 8,163 28,438 22,932
Depreciation and amortization ........................ 4,797 3,012 13,038 8,130
Merger costs ......................................... 2,900 -- 2,900 --
Impairment and other charges ......................... 7,964 -- 7,964 --
Interest expense ..................................... 1,736 1,117 4,431 3,012
Interest income ...................................... (41) (159) (237) (396)
Minority interests ................................... (603) 13 (753) (91)
-------- -------- -------- --------
109,505 86,044 300,213 226,559
-------- -------- -------- --------
(Loss) income before income taxes ....................... (7,141) 3,611 2,455 10,503
Income tax (benefit) expense ............................ (1,539) 1,338 2,115 3,811
-------- -------- -------- --------
Net (loss) income ....................................... (5,602) 2,273 340 6,692
Preferred Stock dividend ................................ -- -- -- 400
-------- -------- -------- --------
Net (loss) income available for
Common Stockholders ................................... $ (5,602) $ 2,273 $ 340 $ 6,292
======== ======== ======== ========
(Loss) earnings per share:
Primary .............................................. $ (0.57) $ 0.35 $ 0.04 $ 1.00
Fully diluted ........................................ $ (0.57) $ 0.23 $ 0.04 $ 0.70
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DAKA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 30, 1996 and April 1, 1995
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
March April
30, 1996 1, 1995
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ........................................................ $ 340 $ 6,692
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................................... 13,038 8,459
Impairment and other charges .......................................... 7,964 --
Loss on the sale of property and equipment ............................ 793 --
Minority interests .................................................... (753) (91)
Change in assets and liabilities:
Accounts receivable ................................................... (18,720) (3,652)
Inventories ........................................................... (2,009) (1,055)
Other assets .......................................................... (7,191) (4,942)
Accounts payable and accrued expenses ................................. 2,131 1,068
Other long-term liabilities ........................................... 4,351 5,341
-------- --------
Net cash (used in) provided by operating activities ................. (56) 11,820
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ....................................... (46,890) (26,986)
Proceeds from sale of property and equipment ............................. 130 244
Investments in, and advances to, affiliates .............................. (4,712) (82)
Cash paid for acquisitions, net of cash acquired of $- and $12 ........... -- (11,297)
-------- --------
Net cash used in investing activities: .............................. (51,472) (38,121)
-------- --------
Cash flows from financing activities:
Proceeds from line-of-credit ............................................. 37,850 26,988
Payment of Preferred Stock dividend ...................................... -- (400)
Repayment of long-term debt .............................................. (980) (1,202)
Proceeds from sale-leaseback ............................................. 11,833 4,540
Other .................................................................... 1,944 420
-------- --------
Net cash provided by financing activities ........................... 50,647 30,346
-------- --------
Net increase in cash and cash equivalents ............................... (881) 4,045
Cash and cash equivalents, beginning of period ........................... 10,317 13,083
-------- --------
Cash and cash equivalents, end of period ................................. $ 9,436 $ 17,128
======== ========
Supplemental cash flow disclosures:
Interest paid ............................................................ $ 4,164 $ 2,084
Income taxes paid ........................................................ $ 4,834 $ 3,672
</TABLE>
During the periods ended March 30, 1996 and April 1, 1995 the Company acquired
certain equipment by entering into capital leases aggregating $3,330 and $326,
respectively.
See notes to consolidated financial statements.
<PAGE>
DAKA INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY Nine months ended March 30, 1996 and Years ended
July 1, 1995 and July 2, 1994
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Capital
Preferred Stock Common Stock In Excess Total
Outstanding Par Outstanding Par of Par Retained Stockholders'
Shares Value Shares Value Value Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 2, 1994 ..................100,000 $ 1 5,955,225 $ 60 $38,846 $ 2,284 $41,191
Employee stock options
exercised ........................... 37,360 2 823 825
Shares issued upon conversion of
certain Convertible Subordinated
Notes, net .......................... 684,330 7 7,893 7,900
Preferred Stock dividend ............... (400) (400)
Net income ............................. 9,327 9,327
------- --- ---------- ---- ------- ------ ------
Balance, July 1, 1995 ..................100,000 1 6,676,915 69 47,562 11,211 58,843
Employee stock options exercised ....... 109,170 1 1,924 1,925
Shares issued upon conversion of
certain Convertible Subordinated
Notes, net .......................... 1,711,482 18 19,834 19,852
Shares issued upon conversion of
certain Preferred Stock .............(88,088) (1) 1,957,521 20 19
Net income (loss) ...................... 340 340
------- --- ---------- ---- ------- ------ ------
Balance, March 30, 1996 ................ 11,912 $ 0 10,455,088 $108 $69,320 $11,551 $80,979
======= === ========== ==== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
DAKA INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation The accompanying unaudited consolidated financial
statements include the accounts of DAKA International, Inc. and its
majority-controlled subsidiaries ("DAKA" or the "Company") including Daka, Inc.
("Daka"), Fuddruckers, Inc. ("Fuddruckers"), Champps Entertainment, Inc. (see
Note 2) and Americana Dining Corp. ("ADC"). Significant intercompany balances
and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments, consisting of normal recurring adjustments, necessary
for the fair presentation of financial position and results of operations. The
accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 1, 1995. The
consolidated results of operations for the quarter and nine months ended March
30, 1996 and April 1, 1995 are not necessarily indicative of results that could
be expected for a full year.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June 30th. For
purposes of these notes to the consolidated financial statements the nine months
ended March 30, 1996 and April 1, 1995 are referred to as 1996 and 1995,
respectively.
Earnings Per Share
Primary earnings per share are computed using the weighted average number of
common and common equivalent shares (dilutive options and warrants) outstanding.
In addition to the inclusion of common and common equivalent shares, the
calculation of fully diluted earnings per share includes the shares issuable
upon conversion of the Preferred Stock which amounted to 264,700 and 2,222,222
shares in 1996 and 1995, respectively, and the shares issuable upon conversion
of the Convertible Subordinated Notes ("Notes") which amounted to 2,094,418
shares in 1995. All Notes have been converted as of March 30, 1996 (see Note 5).
Fully diluted earnings per share assumes that the Preferred Stock and Notes were
converted into Common Stock as of the beginning of the fiscal year and reflect
the elimination of interest expense related to the Notes, net of the related
income tax effect, and the elimination of dividends related to the Preferred
Stock. Fully dilutive earnings per share is excluded for the quarter and nine
months ended March 30, 1996 as they are anti-dilutive.
The weighted average number of shares used in the computation of earnings per
share for 1996 and 1995 are as follows:
Quarters Ended Nine Months Ended
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
Primary ................... 9,810 6,488 9,174 6,275
Fully diluted ............. 11,059 10,843 11,041 10,821
<PAGE>
2. Merger with Champps Entertainment, Inc.
On February 21, 1996, CEI Acquisition Corp., a wholly-owned subsidiary of DAKA,
was merged with and into Champps Entertainment, Inc. ("CEI" or "Champps")
whereupon Champps became a wholly-owned subsidiary of DAKA pursuant to an
Agreement and Plan of Merger dated October 10, 1995 (the "Merger Agreement").
Under the terms of the Merger Agreement, the holders of Champps common stock and
options to acquire shares of Champps common stock received 2,181,722 shares of
DAKA common stock.
The Merger has been accounted for as a pooling-of-interests and, accordingly,
the consolidated financial statements have been restated to include the accounts
of Champps for all periods presented.
Supplemental disclosure of separate results of the combined Company for the full
fiscal years ended July 1, 1995, July 2, 1994 and June 26, 1993 have been
included in the Company's Current Report on Form 8-K filed on March 6, 1996.
In connection with the merger, the Company recorded a non-recurring charge for
the merger and pooling costs of $2,900. Included in these costs are legal,
investment banking and accounting fees associated with the transaction, costs
associated with combining the operations of previously separate companies and
instituting certain operational efficiencies.
3. Adoption of New Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." SFAS No. 121
provides guidance in determining and measuring impairment for long-lived assets
and certain intangibles used in the business. The Company adopted early the
provisions of SFAS No. 121 which resulted in a third quarter noncash pretax
charge of approximately $8,000. The provision includes charges for impairments
to the carrying value of certain restaurant and foodservice contract assets,
write down of goodwill, reacquired franchise rights, investments and other
assets.
4. Commitments and Contingencies
Litigation
In certain circumstances, where management and legal counsel believe that a loss
has been incurred, the Company has recorded an estimate of such loss. The
Company is also engaged in various other legal actions arising in the ordinary
course of business which, in the judgment of management, based upon consultation
with legal counsel, the Company has adequate legal defenses or insurance
coverage with respect to these actions or believes that the ultimate outcome
will not have a material adverse affect on the Company's consolidated financial
statements.
Letters of Credit
At March 30, 1996, the Company had approximately $4 million of outstanding
letters of credit. The outstanding letters of credit reduces the Company's
borrowing capacity under its line-of-credit agreement.
<PAGE>
Leases
In December 1995, CEI 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, CEI will sell and lease back from AEI
Champps restaurants to be constructed, in which CEI has an ownership interest in
the real estate and will pay a commitment fee of 1% of the sale price of each
property sold to AEI. The purchase price shall 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, if any, expires on December
6, 1997. The leases, to be guaranteed by DAKA, provide for a fixed minimum rent
based on a percentage of the respective property's Purchase Price, subject to
subsequent CPI-based increases. The leases also provide for an initial term of
20 years with two 5-year renewal options exercisable at the option of CEI. The
terms and conditions of the sale-leaseback are such that they do not meet the
criteria for treatment as capital leases under Statement of Financial Accounting
Standards (SFAS) No. 13 "Accounting for Leases." As of March 30, 1996 no
restaurants have been constructed pursuant to this sale-leaseback facility.
In December 1995, the Company obtained a $3,500 capital lease facility from
Chase Equipment Leasing, Inc. ("Chase"). The lease provides for fifty-one
consecutive monthly rental payments, based on the total of all progress payments
made by Chase, commencing on or before July 1, 1996. Interest accrues at the
LIBOR rate plus 1%. As of March 30, 1996 there were no borrowings under this
facility.
In October 1995, Fuddruckers obtained a commitment for a $25,000 sale-leaseback
financing facility from Franchise Finance Corporation of America ("FFCA").
Pursuant to the terms of the facility, Fuddruckers will sell and lease back from
FFCA up to 20 Fuddruckers restaurants to be constructed, in which Fuddruckers
has an ownership interest in the real estate and will pay a commitment fee of
1.5% of the sale price of each property sold to FFCA. The sale price is limited
to the lesser of 80% of the fair market value of the property or $1,250. The
unused commitment, if any, expires on October 31, 1996. The leases provide for a
fixed minimum rent plus additional rent based on a percentage of sales and
provide for an initial lease term of 20 years with two 5-year renewal options
exercisable at the option of Fuddruckers. The terms and conditions of the
sale-leaseback are such that they do not meet the criteria for treatment as
capital leases under SFAS No. 13. As of March 30, 1996 ten Fuddruckers
restaurants have been constructed pursuant to the terms of this sale-leaseback
facility.
5. Debt
In December 1995, the Company amended its revolving line-of-credit agreement,
increasing the Company's borrowing capacity under its revolving line-of-credit
from $75,000 to $100,000, extending the maturity date to November 30, 1998 and
amending certain loan covenants. At March 30, 1996, borrowings under the
line-of-credit aggregated $84,219. In addition, the Company was not in
compliance with certain debt service and fixed charge ratio covenants as a
result of adopting SFAS No. 121 and incurring $2,900 of merger costs during the
third quarter. The Company has obtained a waiver of non-compliance dated May 13,
1996 related to such covenants from the bank.
During the quarter and nine months ended March 30, 1996, $12,045 and $20,484,
respectively, of Notes were converted into DAKA common stock. In connection with
the conversion, the Company increased Stockholders' Equity by $11,644 and
$19,841, respectively, for the quarter and nine months ended March 30, 1996. All
outstanding Notes have been converted as of March 30, 1996. The conversion had
no effect upon fully diluted earnings per share since the shares issuable upon
conversion of the Notes were included in the calculation of fully diluted
earnings per share.
<PAGE>
6. Preferred Stock
During 1996, in two separate transactions, Holders of the Company's Series A
Preferred Stock ("Preferred Stock") converted 88,088 shares of Preferred Stock
into 1,957,521 shares of common stock. The conversion had no effect upon fully
diluted earnings per share since the shares issuable upon conversion of the
Preferred Stock were already included in the calculation of fully diluted
earnings per share. As of March 30, 1996, 11,912 shares of Preferred Stock
remain outstanding which may be converted into 264,700 shares DAKA common stock
at any time at the Holders' option.
7. Investments
In January 1996, DAKA acquired for approximately $5 million, a 16.7% equity
interest in the form of convertible redeemable preferred stock (the "Preferred
Stock") in La Salsa Holding Co. ("La Salsa"), a franchisor and operator of La
Salsa Mexican restaurants. Each share of Preferred Stock may be converted into
La Salsa's Class D Common Stock at $1.50 per share and is redeemable at face
value in installments beginning on March 3, 2000. In addition, DAKA received
warrants to acquire, within 18 months, shares of convertible redeemable
preferred stock representing an additional 13.3% equity interest for
approximately $7.1 million. La Salsa currently has 30 franchised and 27
company-owned stores in California and throughout the southwestern part of the
United States. The Company's investment in La Salsa is being accounted for under
the cost method of accounting.
8. Subsequent Events
On March 31, 1996, the Company entered into separate Stock Purchase Agreements
(the "Stock Agreements") with two stockholders of ADC to acquire all outstanding
shares of ADC common stock. Under the terms of the Stock Agreements, the Company
issued .18182 shares of DAKA common stock in exchange for each share of ADC
common stock. In addition, the Company sold a restaurant to a stockholder of ADC
in exchange for a promissory note pursuant to the terms of an Asset Purchase
Agreement dated March 31, 1996.
In April 1996, the Company merged with The Great Bagel and Coffee Company
("Great Bagel") whereby the Company exchanged approximately 339,000 shares of
DAKA common stock for all outstanding shares of Great Bagel common stock. The
transaction is to be accounted for as a pooling-of-interests and, accordingly,
the Company will restate its historical consolidated financial statements in the
fourth quarter of 1996 to reflect the operations of Great Bagel for all periods
presented. Merger costs will be charged to expense in the fourth quarter. Great
Bagel currently has 15 franchised and 3 company-owned stores located throughout
Arizona.
<PAGE>
9. Segment Information
The Company operates in the contract foodservice management and restaurant
industries. The table below presents selected results of operations for the
Company's foodservice management, Fuddruckers and Champps businesses for the
quarters and nine months ended March 30, 1996 and April 1, 1995.
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March April March April
30, 1996 1, 1995 30, 1996 1, 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Sales from profit and loss contracts ........ $ 55,883 $ 54,006 $165,987 $135,863
Management fees ............................. 1,517 1,536 4,099 4,134
Restaurant sales - Fuddruckers .............. 32,058 27,822 96,788 79,747
Restaurant sales - Champps .................. 11,591 5,006 29,612 13,606
Franchising income - Fuddruckers ............ 1,174 1,178 5,755 3,292
Franchising income - Champps ................ 141 107 427 420
-------- -------- -------- --------
Total revenues ............................ $102,364 $ 89,655 $302,668 $237,062
======== ======== ======== ========
Foodservice:
Sales from profit and loss contracts ........ $ 55,883 $ 54,006 $165,987 $135,863
Operating expenses:
Labor costs ............................... 18,554 18,688 54,807 46,048
Product costs ............................. 20,240 19,919 60,251 48,582
Other operating expenses .................. 8,136 8,385 24,169 21,326
Depreciation and amortization ............. 1,490 1,223 4,163 3,076
Impairment and other charges .............. 5,451 -- 5,451 --
-------- -------- -------- --------
Income from profit and loss contracts ....... 2,012 5,791 17,146 16,831
Management fees ............................. 1,517 1,536 4,099 4,134
-------- -------- -------- --------
Income from foodservice operations .......... 3,529 7,327 21,245 20,965
-------- -------- -------- --------
Fuddruckers:
Sales from restaurant operations ............ 32,058 27,822 96,788 79,747
Operating expenses:
Labor costs ............................... 9,247 8,154 27,487 23,235
Product costs ............................. 8,900 7,712 27,028 22,014
Other operating expenses .................. 8,054 7,129 25,790 20,899
Depreciation and amortization ............. 2,001 1,322 5,650 3,766
Impairment and other charges .............. 2,450 -- 2,450 --
-------- -------- -------- --------
Income from restaurant operations ........... 1,406 3,505 8,383 9,833
Franchising income - Fuddruckers ............ 1,174 1,178 5,755 3,292
-------- -------- -------- --------
Income from restaurant and franchising
operations ................................ 2,580 4,683 14,138 13,125
-------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March April March April
30, 1996 1, 1995 30, 1996 1, 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Champps:
Sales from restaurant operations ............ 11,591 5,006 29,612 13,606
Operating expenses:
Labor costs ............................... 3,852 1,486 9,766 4,168
Product costs ............................. 3,331 1,437 8,489 3,931
Other operating expenses .................. 2,599 988 6,645 2,769
Depreciation and amortization ............. 957 257 2,324 664
Impairment and other charges 63 -- 63 --
Merger costs .............................. 2,900 -- 2,900 --
-------- -------- -------- --------
Income (loss) from restaurant operations .... (2,111) 838 (575) 2,074
Franchising income - Champps ................ 141 107 427 420
-------- -------- -------- --------
Income (loss) from restaurant and franchising
operations ................................ (1,970) 945 (148) 2,494
-------- -------- -------- --------
Income from operations before selling, general
and administrative expenses ................. 4,139 12,955 35,235 36,584
-------- -------- -------- --------
Selling, general and administrative expenses:
Foodservice ................................. 2,361 2,103 6,671 6,299
Restaurant .................................. 2,859 2,152 8,974 6,194
Corporate (1) ............................... 3,873 3,441 10,844 9,040
Champps ..................................... 1,095 677 2,850 2,023
-------- -------- -------- --------
Total ..................................... 10,188 8,373 29,339 23,556
-------- -------- -------- --------
Operating (loss) income ........................ (6,049) 4,582 5,896 13,028
Interest expense ............................... 1,736 1,117 4,431 3,012
Interest income ................................ (41) (159) (237) (396)
Minority interests ............................. (603) 13 (753) (91)
-------- -------- -------- --------
Income (loss) before taxes ..................... (7,141) 3,611 2,455 10,503
Income taxes (benefit) ......................... (1,539) 1,338 2,115 3,811
-------- -------- -------- --------
Net income (loss) .............................. $ (5,602) $ 2,273 $ 340 $ 6,692
======== ======== ======== ========
</TABLE>
(1) Includes depreciation expense of $349, $210, $901 and $624 for the
quarters and nine months ended March 30, 1996 and April 1, 1995,
respectively.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This Form 10-Q contains forward looking information which involves risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward looking financial statements.
RESULTS OF OPERATIONS
Summary
On February 21, 1996, CEI Acquisition Corp., a wholly-owned subsidiary of DAKA,
was merged with and into Champps Entertainment, Inc. ("Champps") whereupon
Champps became a wholly-owned subsidiary of DAKA. The acquisition has been
accounted for as a pooling-of-interests, and accordingly the consolidated
financial statements and management's discussion and analysis have been restated
to include the accounts of Champps for all periods presented.
Income before taxes and special charges of $3.7 million and $13.3 million for
the quarter and nine months ended March 30, 1996 includes the operating results
of all segments as well as net interest charges and minority interest.
Consolidated results of operations for the quarter of $3.7 million compare
slightly favorably to prior year results of $3.6 million on due to new
restaurant openings and margin improvement in the foodservice segment, offset by
weak comparable sales due to inclement weather, higher overhead expense and
higher interest expense.
Consolidated results of operations include charges related to the implementation
of a new accounting pronouncement and costs associated with the Champps merger.
The Company adopted early the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of" which resulted in a third quarter
noncash pretax charge of approximately $8.0 million. The provision includes
charges for impairments to the carrying value of certain restaurant and
foodservice contract assets, write down of goodwill, reacquired franchise
rights, investments and other assets. In addition, the third quarter includes a
non-tax deductible charge of $2.9 million relating to the merger with Champps.
Included in these costs are legal, investment banking and accounting fees
associated with the transaction and costs associated with combining the
operations of previously separate companies and instituting certain operating
efficiencies.
<PAGE>
Foodservice
The following table sets forth, for the periods presented, certain financial
information for the Company's foodservice business. For further information
relating to the foodservice business, see Note 9 of Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March April March April
30, 1996 1, 1995 30, 1996 1, 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales from profit and loss contracts ..... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs ........................... (33.2) (34.6) (33.0) (33.9)
Product costs ......................... (36.2) (36.9) (36.3) (35.7)
Other operating expenses .............. (14.5) (15.5) (14.6) (15.7)
Depreciation and amortization ......... (2.7) (2.3) (2.5) (2.3)
Impairment and other charges .......... (9.8) -- (3.3) --
-------- -------- -------- --------
Income from profit and loss contracts .... 3.6% 10.7% 10.3% 12.4%
======== ======== ======== ========
Total foodservice revenues ............... $ 57,400 $ 55,542 $170,086 $139,997
Managed volume:
Management fee contracts .............. $ 27,907 $ 29,283 $ 80,038 $ 79,407
Profit and loss contracts ............. 55,883 54,006 165,987 135,863
-------- -------- -------- --------
Total managed volume ................ $ 83,790 $ 83,289 $246,025 $215,270
======== ======== ======== ========
Income from foodservice operations ....... $ 3,529 $ 7,327 $ 21,245 $ 20,965
======== ======== ======== ========
Income from foodservice operations as
a percentage of managed volume:
Management fee contracts .............. 5.4% 5.2% 5.1% 5.2%
Profit and loss contracts ............. 13.4% 10.7% 13.6% 12.4%
Income from foodservice operations as
a percentage of total managed volume ... 4.2% 8.8% 8.6% 9.7%
Income from foodservice operations as
a percentage of foodservice revenues ... 6.1% 13.2% 12.5% 15.0%
</TABLE>
Daka conducts its operations on the basis of two types of foodservice contracts
with its clients. The first type is a management fee contract pursuant to which
a client pays Daka a negotiated fee for overseeing and administering its
foodservice operations and reimburses Daka for all costs incurred in providing
such service. Management fee contracts are prevalent where companies subsidize
foodservice as part of the benefits provided to employees, and in elementary and
secondary schools. The second type of contract is a profit and loss contract
whereby Daka assumes the risk of profit or loss from the foodservice operations.
While Daka manages the total sales volume attributable to both contract types,
generally accepted accounting principles require that Daka recognize sales and
expenses from profit and loss contracts, but only the management fee amount
derived from management fee contracts. Consequently, Daka does not recognize
sales and expenses with respect to management fee contracts. As a result, Daka's
managed volume, which represents both sales made pursuant to profit and loss
contracts and sales to guests of foodservice clients pursuant to management fee
contracts, is considerably greater than the revenues it recognizes.
<PAGE>
Managed volume in the Company's foodservice business increased $0.5 million or
0.6% to $83.8 million during the quarter ended March 30, 1996, as compared to
$83.3 million in the comparable quarter of 1995. During the nine months ended
March 30, 1996, managed volume increased $30.8 million or 14% to $246.0 million
compared to $215.3 million in 1995. The increase in managed volume was primarily
due to managed volume generated by the educational and corporate foodservice
contracts acquired from ServiceMaster Management Services L.P. ("SMMSLP") on
February 8, 1995 by Daka Restaurants, L.P. ("DRLP"), an 80.01% owned
consolidated subsidiary of Daka, increased comparable sales of 2.5% in the
quarter and nine month periods and new contracts added during 1996, offset by
decreases in managed volume associated with certain lost or terminated
contracts.
During fiscal 1996, a number of marginally profitable or unprofitable contracts
expired and, accordingly, became subject to a competitive bidding process.
Throughout this process, Daka rebid unprofitable or marginally profitable
contracts on terms that should provide an acceptable profit. Certain of these
contracts were retained, and, as anticipated, certain other contracts were not
retained. Despite the loss of these contracts, operating margins as well as
income from foodservice operations in Daka's base business, excluding the
educational and corporate foodservice contracts acquired in 1995 from SMMSLP,
improved during the quarter and nine month periods ended March 30, 1996,
compared to the same periods last year.
Income from foodservice operations, excluding impairment and other charges,
increased 23% to $9.0 million during the quarter ended March 30, 1996, as
compared to $7.3 million in the comparable quarter of 1995. Income from profit
and loss contracts as a percentage of sales from profit and loss contracts
increased during the quarter and nine months ended March 30, 1996, as compared
to the comparable periods ended April 7, 1995, despite the lower operating
margins associated with the educational foodservice contracts acquired from
SMMSLP in 1995. The lower operating margins associated with the educational
foodservice contracts acquired is typical of the educational foodservice
industry and consistent with the operating margins in Daka's existing
educational foodservice business.
<PAGE>
Fuddruckers
The following table sets forth, for the periods presented, certain financial
information for Fuddruckers. For further information regarding Fuddruckers, see
Note 9 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March April March April
30, 1996 1, 1995 30, 1996 1, 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Sales from Fuddruckers-owned
restaurants ............................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs ........................... (28.8) (29.3) (28.4) (29.2)
Product costs ......................... (27.8) (27.7) (27.9) (27.6)
Other operating expenses .............. (25.1) (25.6) (26.6) (26.2)
Depreciation and amortization ......... (6.2) (4.8) (5.9) (4.7)
Impairment and other charges .......... (7.6) -- (2.5) --
-------- -------- -------- --------
Income from restaurant operations ........ 4.5% 12.6% 8.7% 12.3%
======== ======== ======== ========
Restaurant sales ......................... $ 32,058 $ 27,822 $ 96,788 $ 79,747
Income from restaurant operations ........ $ 1,406 $ 3,505 $ 8,383 $ 9,833
Franchising income ....................... 1,174 1,178 5,755 3,292
-------- -------- -------- --------
Income from restaurant and franchising
operations .............................. $ 2,580 $ 4,683 $ 14,138 $ 13,125
======== ======== ======== ========
Number of restaurants (end of period):
Fuddruckers-owned ..................... 115 86
Franchised 75 77
......................................... -------- --------
Total restaurants 190 163
======== ========
</TABLE>
Sales in Fuddruckers-owned restaurants increased $4.2 million or 15.1% during
the quarter ended March 30, 1996, compared to the quarter ended April 1, 1995.
This increase results from $0.9 million of sales at four restaurants acquired
from franchisees during fiscal 1995, $8.5 million of sales at 37 new restaurants
opened after the second quarter of last year offset, in part, by a $1.4 million
decrease in sales resulting from the closing of two restaurants and the sale of
three restaurants to franchisees. In addition, comparable sales decreased by
6.0% in the third quarter ended March 30, 1996, compared to the third quarter of
last year, principally due to continued inclement weather in many of
Fuddruckers' major markets.
Sales in Fuddruckers-owned restaurants increased $17.0 million or 21.4% during
the nine months ended March 30, 1996, compared to the comparable period last
year. This increase results from $3.2 million of sales at five restaurants
acquired from franchisees during fiscal 1995, $21.9 million of sales at 37 new
restaurants, offset, in part, by a $3.3 million decrease in sales resulting from
the closing of two restaurants and the sale of three restaurants to franchisees.
Comparable restaurant sales for the nine months ended March 30, 1996 decreased
by 3.0% compared to last year.
<PAGE>
Income from restaurant and franchise operations, excluding impairment and other
charges increased to $5.0 million and $16.6 million for the quarter and nine
months ended March 30, 1996, as compared to $4.7 million and $13.1 million
during the comparable quarter and nine month period of last year. Income from
restaurant operations as a percentage of sales from Fuddruckers-owned
restaurants decreased during the quarter and nine month periods ended March 30,
1996, due to the effect of lower comparable sales and increased discounting
related to the "Kids Eat Free" program available for the first time on Sundays
in the second quarter in many of Fuddruckers' markets. The decrease in
comparable restaurant sales and operating margins during the quarter and nine
months ended March 30, 1996 was offset by income from new restaurants and
increased franchising income principally due to increased franchising in
international markets.
Champps
The following table sets forth certain financial information for the three
restaurants owned by ADC and the six restaurants owned by Champps. For further
information related to Champps see Note 9 of Notes to the Consolidated Financial
Statements.
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March April March April
30, 1996 1, 1995 30, 1996 1, 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales from Champps restaurants ........... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs ........................... (33.2) (29.7) (33.0) (30.6)
Product costs ......................... (28.7) (28.7) (28.7) (28.9)
Other operating expenses .............. (22.4) (19.7) (22.4) (20.4)
Depreciation and amortization ......... (8.3) (5.1) (7.8) (4.9)
Merger costs (25.0) -- (9.8) --
-------- -------- -------- --------
(Loss) income from restaurant
operations ............................. (17.6)% 16.8% (1.7)% 15.2%
======== ======== ======== ========
Restaurant sales ......................... $ 11,591 $ 5,006 $ 29,612 $ 13,606
(Loss) income from restaurant
operations ............................. $ (2,111) $ 838 $ (575) $ 2,074
Franchising income ....................... 141 107 427 420
-------- -------- -------- --------
(Loss) income from restaurant and
franchising operations ................. $ (1,970) $ 945 $ (148) $ 2,494
======== ======== ======== ========
Number of restaurants (end of period):
Champps-owned ......................... 9 4
Franchised............................. 10 8
-------- --------
Total restaurants ................... 19 12
======== ========
</TABLE>
Sales in Champps-owned restaurants, on a restated basis, increased $6.6 million
and $16.0 million during the quarter and nine months ended March 30, 1996,
compared to the comparable periods ended April 1, 1995. These increases
primarily result from sales at five new stores opened after the fourth quarter
of 1995.
Income from restaurant operations, excluding merger costs and impairment and
other charges, for the quarter and nine months ended March 30, 1996, has
decreased significantly compared to the comparable periods ended April 1, 1995.
These decreases primarily result from increased preopening and labor cost
associated with opening five new restaurants after the fourth quarter of 1995.
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.8 million to $10.2
million for the quarter ended March 30, 1996. Selling, general and
administrative expenses increased $5.7 million to $29.3 million for the nine
months ended March 30, 1996, compared to $23.6 million in the comparable period
of last year. The increase relates primarily to the continued upgrading of
management information systems and hiring additional personnel to support
Company acquisitions and the overall growth in revenues. Selling, general and
administrative expenses as a percentage of managed volume, which includes
managed volume in the foodservice business as well as sales at Company-owned
Fuddruckers and Champps restaurants, increased to 8.0% and 7.9% during the three
and nine months ended March 30, 1996, as compared to 7.2% and 7.6% in the
comparable periods of last year.
Interest Expense
Interest expense increased $0.6 million to $1.7 million during the quarter and
increased $1.4 million to $4.4 million during the nine months ended March 30,
1996, compared to comparable periods of last year. The increase is a result of
an overall higher level of borrowings under the Company's line-of-credit which
were used to fund capital expenditures in both the foodservice, Fuddruckers and
Champps businesses, offset, in part, by a decrease in interest expense as a
result of the conversion of $25.1 million of the Convertible Subordinated Notes
since April 1995.
Income Taxes
The income tax benefit and provision for the quarter and nine months ended March
30, 1996 do not bear a normal relationship to the expected marginal tax rate for
the 1996 fiscal year due primarily to the merger costs incurred during the third
quarter, which were non-tax deductible.
Earnings Per Share
Primary and fully diluted earnings per share decreased significantly for the
quarter and nine months ended March 30, 1996, as compared to the same periods
last year. The decrease in primary and fully diluted earnings per share was
primarily due to increases in the weighted average number of shares outstanding
at the end of the quarter and nine months ended March 30, 1996, respectively,
compounded by significant losses and lower net income derived during these
periods.
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
Working capital amounted to $33.2 million at March 30, 1996, an increase of
$23.0 million compared to working capital of $12.3 million at July 1, 1995. The
increase in working capital is principally due to the use of borrowings under
the Company's line-of-credit agreement, classified as long-term debt, to fund
operating activities as a result of the seasonal increase in accounts
receivable. At March 30, 1996, the Company had approximately $11.7 million of
available borrowing capacity remaining on its line-of-credit.
Capital expenditures in the nine months ended March 30, 1996 aggregated
approximately $46.9 million, and consisted of $30.4 million for new Fuddruckers
restaurants and upgrades at existing restaurants, $9.6 million for new Champps
restaurants under construction, $1.9 million for updating the Company's
information systems and $5.0 million for improvements at facilities of
foodservice clients. Capital expenditures were funded through a combination of
borrowings under the Company's line-of-credit agreement and approximately $11.8
million of proceeds from its sale-leaseback facility.
The Company plans to open additional new Fuddruckers-owned and Champps-owned
restaurants, continue to reorient facilities of foodservice clients to a more
retail restaurant environment and continue to seek additional growth through
strategic acquisitions during the fourth quarter of fiscal 1996. Management
believes that cash flow from operations, existing cash, available borrowings
under its line-of-credit, as well as its sale-lease back facilities, will
provide sufficient liquidity to pay all liabilities in the normal course of
business, fund capital expenditures and service debt requirements for the
foreseeable future.
<PAGE>
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation Regarding Per Share Earnings
(b) Reports on Form 8-K
On March 6, 1996, the Company filed a Current Report on Form 8-K. The
Company reported in Item 2 of the Form 8-K, the acquisition by subsidiary
merger of Champps Entertainment, Inc. ("Champps") and included, pursuant
to Item 7 of the Form 8-K, audited consolidated financial statements of
Champps and unaudited pro forma condensed consolidated financial
statements of the Company and Champps.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DAKA INTERNATIONAL, INC.
(Registrant)
By: /s/William H. Baumhauer
------------------------
William H. Baumhauer
Chairman of the Board and
Chief Executive Officer
By: /s/Earl T. Benson
-----------------
Earl T. Benson
Executive Vice President and
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
Date: May 14, 1996
Exhibit 11
DAKA INTERNATIONAL, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
QUARTERS AND NINE MONTHS ENDED MARCH 30, 1996 AND APRIL 1, 1995
<TABLE>
<CAPTION>
Quarters ended Nine Months ended
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary:
Net income (loss) (5,602) 2,273 340 6,692
Net income available to
common stockholders (5,602) 2,273 340 6,292
Weighted average number of
shares outstanding 9,464 6,219 8,799 6,024
Weighted average number of
options outstanding 346 269 375 251
------- ------- ------- -------
9,810 6,488 9,174 6,275
======= ======= ======= =======
Primary earnings per share:
Net income (loss) available
to common stockholders $ (0.57) $ 0.35 $ 0.04 $ 1.00
======= ======= ======= =======
Fully Diluted:
Net income (loss) available
to common stockholders (5,602) 2,273 340 6,292
Add back dividend on
Preferred Stock - - - 400
Add back interest expense
on Convertible Notes,
after tax effect 108 275 468 912
------- ------- ------- -------
$(5,494) $ 2,548 $ 808 $ 7,604
======= ======= ======= =======
Weighted average number of
shares outstanding 10,430 6,219 10,401 6,214
Weighted average number of
options outstanding 364 307 375 290
Shares issuable upon conversion
of Preferred Stock 265 2,222 265 2,222
Shares issuable upon conversion
of Notes - 2,095 - 2,095
------- ------- ------- -------
11,059 10,843 11,041 10,821
======= ======= ======= =======
Fully diluted earnings per share:
Net income $ (0.50) $ 0.23 $ 0.07 $ 0.70
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000840826
<NAME> DAKA INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> MAR-30-1996
<CASH> 9,436
<SECURITIES> 0
<RECEIVABLES> 48,806
<ALLOWANCES> 462
<INVENTORY> 11,437
<CURRENT-ASSETS> 74,533
<PP&E> 155,800
<DEPRECIATION> 36,866
<TOTAL-ASSETS> 230,167
<CURRENT-LIABILITIES> 46,338
<BONDS> 87,410
0
0
<COMMON> 108
<OTHER-SE> 80,871
<TOTAL-LIABILITY-AND-EQUITY> 230,167
<SALES> 292,387
<TOTAL-REVENUES> 302,668
<CGS> 244,432
<TOTAL-COSTS> 244,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,431
<INCOME-PRETAX> 2,455
<INCOME-TAX> 2,115
<INCOME-CONTINUING> 340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 340
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
