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 29, 1997
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 9, 1997:
11,153,203
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DAKA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 29, June 29,
1997 1996
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ....................................................................... $ 7,956 $ 11,708
Accounts receivable, net ........................................................................ 45,618 36,699
Inventories ..................................................................................... 11,343 10,119
Prepaid expenses and other current assets ....................................................... 10,198 5,265
-------- --------
Total current assets .......................................................................... 75,115 63,791
-------- --------
Property and equipment, net ........................................................................ 131,349 124,563
Investments in, and advances to, affiliates ........................................................ 5,000 5,000
Other assets, net .................................................................................. 32,349 32,717
Deferred income taxes .............................................................................. 5,486 5,486
-------- --------
$249,299 $231,557
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable ................................................................................ $ 31,709 $ 17,772
Accrued expenses ................................................................................ 17,084 15,110
Current portion of long-term debt ............................................................... 32,200 1,507
Deferred income taxes ........................................................................... 787 787
-------- --------
Total current liabilities ..................................................................... 81,780 35,176
-------- --------
Long-term debt ..................................................................................... 77,496 98,355
Other long-term liabilities ........................................................................ 13,310 12,978
Minority interests ................................................................................. 1,088 2,181
Commitments and contingencies (Note 3)
Stockholders' equity:
Series A Preferred Stock, $.01 par value, $100 liquidation preference; 1,000,000
shares authorized; 11,912 shares issued and
outstanding at March 29, 1997 and June 29, 1996 ................................................. -- --
Common Stock, $.01 par value; 30,000,000 shares authorized;
11,148,302 and 11,120,900 shares issued and outstanding at
March 29, 1997 and June 29, 1996, respectively .................................................. 111 111
Capital in excess of par value ..................................................................... 71,974 71,907
Retained earnings .................................................................................. 3,540 10,849
-------- --------
Total stockholders' equity .................................................................... 75,625 82,867
$249,299 $231,557
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
DAKA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Revenues:
Sales ............................................................. $ 98,376 $ 100,208 $ 293,193 $ 294,292
Management and other fees ......................................... 2,570 3,006 7,623 10,627
--------- --------- --------- ---------
100,946 103,214 300,816 304,919
--------- --------- --------- ---------
Costs and expenses:
Cost of sales and operating expenses .............................. 84,360 85,743 254,749 248,209
Selling, general and administrative expenses ...................... 10,129 9,971 33,010 28,750
Depreciation and amortization ..................................... 5,609 4,724 16,549 12,865
Impairment charges ................................................ -- 5,711 -- 5,711
Merger costs ...................................................... -- 2,900 -- 2,900
--------- --------- --------- ---------
100,098 109,049 304,308 298,435
--------- --------- --------- ---------
Income (loss) from operations ........................................ 848 (5,835) (3,492) 6,484
Other (expense) income:
Interest expense .................................................. (2,881) (1,830) (8,064) (4,691)
Interest income ................................................... 117 44 322 244
--------- --------- --------- ---------
Income (loss) before income taxes and minority interests ............. (1,916) (7,621) (11,234) 2,037
Income tax expense (benefit) ......................................... (667) (1,490) (3,910) 2,247
Minority interests ................................................... (10) (603) (63) (753)
--------- --------- --------- ---------
Net income (loss) .................................................... (1,239) (5,528) (7,261) 543
Preferred Stock dividend ............................................. -- -- 48 --
--------- --------- --------- ---------
Net income (loss) available for Common Stockholders .................. $ (1,239) $ (5,528) $ (7,309) $ 543
========= ========= ========= =========
Earnings (loss) per share:
Primary ........................................................... $ (0.11) $ (0.56) $ (0.66) $ 0.06
Fully diluted ..................................................... $ (0.11) $ (0.56) $ (0.66) $ 0.06
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
DAKA INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 29, 1997 and March 30, 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
March March
29, 1997 30, 1996
-------- --------
(as restated)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... ($ 7,309) $ 543
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ....................................... 16,549 12,865
Impairment charges .................................................. -- 5,711
Loss on sale of property and equipment .............................. -- 793
Minority interests .................................................. (63) (753)
Changes in assets and liabilities:
Accounts receivable ................................................. (8,919) (19,016)
Inventories ......................................................... (1,224) (2,052)
Other assets ........................................................ (6,078) (7,263)
Accounts payable and accrued expenses ............................... 15,910 4,769
Other long-term liabilities ......................................... 333 4,711
-------- --------
Net cash provided by operations ................................... 9,199 308
Cash flows from investing activities:
Purchase of property and equipment ..................................... (30,590) (47,379)
Proceeds from sale of property and equipment ........................... 2,300 130
Investments in, and advances to, affiliates ............................ (2,538) (4,712)
-------- --------
Net cash used in investing activities: ............................ (30,828) (51,961)
-------- --------
Cash flows from financing activities:
Increase in line-of-credit borrowing ................................... 11,950 37,955
Repayment of long-term debt ............................................ (3,242) (980)
Proceeds from sale-leaseback facility .................................. 9,081 11,833
Other, net ............................................................. 88 1,944
-------- --------
Net cash provided by financing activities ......................... 17,877 50,752
-------- --------
Net decrease in cash and cash equivalents .............................. (3,752) (901)
Cash and cash equivalents, beginning of period ......................... 11,708 10,538
-------- --------
Cash and cash equivalents, end of period ............................... $ 7,956 $ 9,637
======== ========
Supplemental cash flow disclosures:
Interest paid $ 6,922 $ 4,164
Income taxes paid $ 1,303 $ 4,834
</TABLE>
During the nine months ended March 29, 1997 and March 30, 1996 the Company
acquired certain equipment by entering into capital leases aggregating $1,756
and $3,330, respectively.
See notes to unaudited condensed consolidated financial statements.
<PAGE>
DAKA INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 29, 1997 and March 30, 1996
(Dollars in thousands, except per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited condensed 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. ("CEI" or
"Champps"), The Great Bagel and Coffee Company ("Great Bagel and Coffee") and
Americana Dining Corp. ("ADC"). The accompanying March 30, 1996 unaudited
condensed consolidated financial statements have been restated to reflect the
business combination accounted for as a pooling-of-interests more fully
described in Note 2 and the matters discussed under the caption
"Classifications" discussed below. Significant intercompany balances and
transactions have been eliminated in consolidation.
The Company is a diversified restaurant company serving customers through a
variety of channels. The Company's Fuddruckers and Champps subsidiaries (CEI and
ADC) operate in casual and upscale restaurant settings, respectively, throughout
the United States and in Canada, Australia and the Middle East. The Company's
Great Bagel and Coffee subsidiary primarily serves coffee, bagels and sandwich
items in a cafe setting in western locations of the United States. Restaurant
operations are conducted through Company-owned and franchised stores. The
Company's Daka subsidiary is a leading contract foodservice management
corporation operating throughout the United States.
In the opinion of management, the accompanying unaudited condensed 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 unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 29, 1996. The unaudited consolidated
results of operations for the quarter and nine months ended March 29, 1997 and
March 30, 1996 are not necessarily indicative of the results that could be
expected for a full year.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June 30. For purposes
of these notes to the unaudited condensed consolidated financial statements, the
quarter and nine months ended March 29, 1997 and March 30, 1996 are referred to
as 1997 and 1996, respectively.
Classifications
Certain amounts related to the third quarter of 1996 have been reclassified from
their presentation in such previously filed Form 10-Q to reflect further
analysis performed by the Company related to the adoption of SFAS No. 121 and
the write-down of reacquired franchise rights, investments and other assets.
Such reclassifications had the effect of reducing the amounts reported as
"impairment charges" as of March 30, 1996 by approximately $2,250 and increasing
the amount reported as "cost of sales and operating expenses" by approximately
$2,250. Certain other reclassifications have been made to the prior year's
financial statements in order to conform to the 1997 presentation. These
reclassifications had no effect on previously reported gross profit, income
(loss) before taxes and minority interests, net income (loss) or primary and
fully diluted earnings (loss) per share.
<PAGE>
Significant Estimates
In the process of preparing its financial statements, 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 financial statements include allowances for potential bad debts on
accounts and notes receivable, the useful lives and recoverability of its assets
such as property and intangibles, fair values of financial instruments, the
realizable value of its tax assets and accruals for health insurance, workers'
compensation and other matters. Management bases its estimates on certain
assumptions, which they believe are reasonable in the 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 financial position or the results of operations.
Earnings (Loss) Per Share
Primary earnings (loss) per share are computed using the weighted average number
of common and common equivalent shares (dilutive options) outstanding. The
calculation of fully diluted earnings per share includes the shares issuable
upon conversion of the Preferred Stock which amounted to approximately 264,700
shares in 1996, and the shares issuable upon conversion of the 7% Convertible
Subordinated Notes (the "Notes") which amounted to 1,003,750 in 1996. 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, unless they
are anti-dilutive, 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.
The weighted average number of shares used in the computation of earnings (loss)
per share for 1997 and 1996 are as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
(as restated) (as restated)
Primary 11,148,302 9,802,236 11,140,536 9,513,250
Fully diluted 11,148,302 9,802,236 11,140,536 11,379,922
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which the
Company will adopt in fiscal 1998. Had SFAS No. 128 been effective for the three
and nine months ended March 29, 1997 and March 30, 1996, reported earnings
(loss) per share would have been as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
Basic (0.11) (0.56) (0.66) 0.06
Diluted (0.11) (0.56) (0.66) 0.06
<PAGE>
Effective June 30, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB Opinion
No. 25 to its stock-based compensation awards to employees and will disclose the
required pro forma effect on results from operations and earnings per share.
2. Merger with The Great Bagel and Coffee Company
In April 1996, the Company merged with Great Bagel and Coffee whereupon Great
Bagel and Coffee became a wholly-owned subsidiary of DAKA. The merger has been
accounted for as a pooling-of-interests and, accordingly, the Company's
previously issued unaudited condensed March 31, 1996 consolidated financial
statements have been restated to include the accounts of Great Bagel and Coffee
for all periods presented.
3. Commitments and Contingencies
Litigation
On October 18, 1996, a purported class action lawsuit was filed in the United
States District Court for the District of Massachusetts on behalf of persons who
acquired the Company's stock between October 30, 1995 and September 9, 1996
(Venturino et al. V. DAKA International, Inc. And William H. Baumhauer, Civil
Action No. 96-12109-GAO). The complaint alleges violations of federal and state
securities laws by, among other things, allegedly misrepresenting and/or
omitting material information concerning the results and prospects of
Fuddruckers during that period and seeks compensatory damages and reasonable
costs and expenses, including counsel fees. Contrary to earlier indications,
counsel for the plaintiffs have informed the Company that they do not intend to
amend the complaint and the parties have agreed that the Company will have until
May 22, 1997 to answer or otherwise respond to the original pending complaint.
The Company believes that the case is without merit and intends to defend itself
vigorously.
The Company is also engaged in various other legal actions arising in the
ordinary course of business. The Company believes, based upon consultation with
legal counsel, that the ultimate outcome will not have a material adverse effect
on the Company's financial condition, results of operations or liquidity.
Letters of Credit
As of March 29, 1997, the Company has approximately $3.0 million of outstanding
letters of credit. The outstanding letters of credit reduce the Company's
borrowing capacity under its line-of-credit agreement (see Note 4 of Notes to
Unaudited Condensed Consolidated Financial Statements).
<PAGE>
4. Debt
On February 7, 1997, the Company amended its revolving line-of-credit agreement
(the "February Agreement") principally to reduce the Company's borrowing limit
to $115 million, change the maturity date to January 2, 1998, and amend certain
loan covenants. On May 7, 1997, the Company renegotiated certain terms and
conditions of the February Agreement (the "May Agreement", collectively, the
"Agreements") whereby the Company's borrowing limit will be sequentially reduced
to $72.5 million by March 31, 1998, the maturity date was extended to April 2,
1998, and certain loan covenants were amended. The Agreements require the
Company to reduce its borrowing limit and to repay principal balances as
follows:
<TABLE>
<CAPTION>
Borrowing
Date Amount Limit
- ---- ------ -----
<S> <C> <C>
May 31, 1997 ................................ $ 5.0 million $110.0 million
June 30, 1997 ............................... 10.0 million 100.0 million
July 31, 1997 ............................... 0.5 million 99.5 million
August 31, 1997 ............................. 0.5 million 99.0 million
September 30, 1997 .......................... 0.5 million 98.5 million
October 31, 1997 ............................ 1.0 million 97.5 million
November 30, 1997 ........................... 2.5 million 95.0 million
December 31, 1997 ........................... 5.0 million 90.0 million
January 31, 1998 ............................ 5.0 million 85.0 million
February 28, 1998 ........................... 5.0 million 80.0 million
March 31, 1998 .............................. 7.5 million 72.5 million
------------- -------------
........................................... $42.5 million
=============
</TABLE>
Accordingly, the Company has classified approximately $31.1 million of
outstanding borrowings as current in the balance sheet as of March 29, 1997. At
March 29, 1997, the Company had available borrowings under the Agreements of
approximately $11.4 million.
<PAGE>
5. Segment Information
The Company operates in the contract foodservice management and restaurant
industries. The table below presents selected results of operations for the
Company's businesses for the quarter and nine months ended March 29, 1997 and
March 30, 1996, respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Revenues:
Sales from profit and loss contracts ........................................$ 48,038 $ 55,883 $144,728 $165,987
Management and other fees ................................................... 1,348 1,517 3,730 4,099
Restaurant sales - Fuddruckers .............................................. 34,670 32,058 102,790 96,788
Franchising income - Fuddruckers ............................................ 1,001 1,174 2,856 5,755
Restaurant sales - Champps .................................................. 14,300 11,591 41,847 29,612
Franchising income - Champps ................................................ 120 141 385 427
Unit sales - Specialty Concepts ............................................. 1,368 676 3,828 1,905
Franchising income - Specialty Concepts ..................................... 101 174 652 346
-------- -------- -------- --------
Total revenues ........................................................... $100,946 $103,214 $300,816 $304,919
======== ======== ======== ========
Foodservice:
Sales from profit and loss contracts ........................................$ 48,038 $ 55,883 $144,728 $165,987
Operating expenses:
Labor costs ............................................................... 16,212 20,807 48,997 57,060
Product costs ............................................................. 17,123 20,240 53,043 60,251
Other operating expenses .................................................. 7,000 8,136 21,170 24,169
Depreciation and amortization ............................................. 1,509 1,490 4,236 4,163
Impairment charges ........................................................ -- 3,198 -- 3,198
-------- -------- -------- --------
Income from profit and loss contracts ....................................... 6,194 2,012 17,282 17,146
Management and other fees ................................................... 1,348 1,517 3,730 4,099
-------- -------- -------- --------
Income from foodservice operations .......................................... 7,542 3,529 21,012 21,245
-------- -------- -------- --------
Fuddruckers:
Sales from restaurant operations ............................................ 34,670 32,058 102,790 96,788
Operating expenses:
Labor costs ............................................................... 10,261 9,247 31,285 27,487
Product costs ............................................................. 9,280 8,900 28,373 27,028
Other operating expenses .................................................. 11,005 8,054 32,408 25,790
Depreciation and amortization ............................................. 2,471 2,001 7,172 5,650
Impairment charges ........................................................ -- 2,450 -- 2,450
-------- -------- -------- --------
Income from restaurant operations ........................................... 1,653 1,406 3,552 8,383
Franchising income - Fuddruckers ............................................ 1,001 1,174 2,856 5,755
-------- -------- -------- --------
Income from restaurant and franchising operations ........................... 2,654 2,580 6,408 14,138
-------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Champps:
Sales from restaurant operations ............................................ 14,300 11,591 41,847 29,612
Operating expenses:
Labor costs ............................................................... 4,531 3,852 13,629 9,766
Product costs ............................................................. 4,108 3,331 12,100 8,489
Other operating expenses .................................................. 3,353 2,599 9,814 6,645
Depreciation and amortization 1,122 957 3,447 2,324
Impairment charges -- 63 -- 63
Merger costs .............................................................. -- 2,900 -- 2,900
-------- -------- -------- --------
Income (loss) from restaurant operations .................................... 1,186 (2,111) 2,857 (575)
Franchising income - Champps ................................................ 120 141 385 427
-------- -------- -------- --------
Income (loss) from restaurant and franchising
operations ................................................................ 1,306 (1,970) 3,242 (148)
-------- -------- -------- --------
Specialty Concepts:
Sales from unit operations .................................................. 1,368 676 3,828 1,905
Operating expenses:
Labor costs ............................................................... 713 169 1,770 435
Product costs ............................................................. 384 298 1,092 817
Other operating expenses .................................................. 390 110 1,068 272
Depreciation and amortization 289 23 574 73
-------- -------- -------- --------
Income (loss) from unit operations .......................................... (408) 76 (676) 308
Franchising income - Specialty Concepts ..................................... 101 174 652 346
-------- -------- -------- --------
Income (loss) from unit and franchising operations .......................... (307) 250 (24) 654
-------- -------- -------- --------
Income from operations before selling,
general and administrative expenses .......................................... 11,195 4,389 30,638 35,889
-------- -------- -------- --------
Selling, general and administrative expenses (1):
Foodservice ................................................................. 1,909 2,361 6,095 6,671
Fuddruckers ................................................................. 3,040 2,859 10,284 8,974
Champps ..................................................................... 769 1,095 2,650 2,850
Specialty Concepts .......................................................... 598 122 1,819 302
Corporate ................................................................... 4,031 3,787 13,282 10,608
-------- -------- -------- --------
Total ..................................................................... 10,347 10,224 34,130 29,405
-------- -------- -------- --------
Operating income (loss) ........................................................ 848 (5,835) (3,492) 6,484
Interest expense ............................................................... (2,881) (1,830) (8,064) (4,691)
Interest income ................................................................ 117 44 322 244
-------- -------- -------- --------
Income (loss) before income taxes and minority interests ....................... (1,916) (7,621) (11,234) 2,037
Income tax expense (benefit) ................................................... (667) (1,490) (3,910) 2,247
Minority interests ............................................................. (10) (603) (63) (753)
-------- -------- -------- --------
Net income (loss) .............................................................. (1,239) (5,528) (7,261) 543
Preferred Stock dividend ....................................................... -- -- (48) --
-------- -------- -------- --------
Net income (loss) available for common
stockholders .................................................................$ (1,239) $ (5,528) $ (7,309) $ 543
======== ======== ======== ========
</TABLE>
(1) Includes depreciation expense of $218, $253, $1,120 and $655 for the
quarters and nine months ended March 29, 1997 and March 30, 1996, respectively.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Certain Factors Affecting Future Operating Results
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements including uncertainties regarding the effectiveness of initiatives to
lower selling, general and administrative expenses and to improve operations
within the core businesses. Certain factors which may cause such a difference
include, but are not limited to, the following: the impact of increased
competition in the bidding process for foodservice contracts against competitors
with significant financial resources and market share; the exercise by
foodservice clients of their right to terminate contracts which typically
provide for termination upon 30 to 60 days notice; the impact of increasing
competition in the casual and upscale casual dining segment 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 cost of product, labor and other resources necessary to operate
both the restaurants and the foodservice facilities; unforeseen difficulties in
integrating acquired businesses; the amount and rate of growth of general and
administrative expenses associated with building a strengthened corporate
infrastructure to support operations; 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); and the amount of, and any changes to,
tax rates.
Summary
The Company recorded a net loss for the three months ended March 29, 1997, of
$1.2 million, or $0.11 per share, compared with net income of $1.8 million, or
$0.17 per share (on a fully diluted basis), excluding impairment charges and
merger costs, for the same period last year. The Company also reported a net
loss of $7.3 million, or $0.66 per share, for the first nine months of fiscal
1997 compared with net income of $5.4 million, or $0.52 per share (on a fully
diluted basis), excluding impairment charges and merger costs, for the first
nine months of fiscal 1996.
Total revenues for the three and nine months ended March 29, 1997, decreased
2.2% to $100.9 million and 1.3% to $300.8 million, respectively, compared with
$103.2 million and $304.9 million, respectively, in the same periods last year.
Income (loss) from operations, excluding impairment charges and merger costs, in
fiscal 1996, declined 69% to $848 for the current quarter compared with $2,776 a
year ago. This decrease was primarily attributable to lower foodservice
revenues, lower average store sales in the Fuddruckers segment which reduced the
Company's ability to leverage fixed costs, and poor operating results in the
Specialty Concepts segment principally related to its operations in
non-traditional foodservice venues, offset, in part, by higher sales in Champps
and improved operating margins in the foodservice and Champps segments.
Income (loss) from operations, excluding impairment charges and merger costs, in
fiscal 1996, were $3,492 for the first nine months of fiscal 1997 compared with
$15,095 in the same period a year ago. This decrease was primarily attributable
to lower foodservice revenues, lower average store sales in the Fuddruckers
segment which reduced the Company's ability to leverage fixed costs, lower
Fuddruckers franchise income, poor operating results in the Specialty Concepts
segment and higher SG&A costs, offset, in part, by higher sales in Champps due
to one new store being opened between periods.
<PAGE>
The results of the prior year third quarter and nine months results have been
restated to reflect the Company's merger with Great Bagel and Coffee which was
accounted for as a pooling-of-interests.
On May 7, 1997, the Company renegotiated certain terms and conditions of its
existing line-of-credit facility (see Financial Condition and Liquidity and Note
4 of Notes to Unaudited Condensed Consolidated Financial Statements).
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased approximately $0.1
million and $4.7 million, respectively, to $10.3 million and $34.1 million for
the three and nine months ended March 29, 1997. These increases primarily
reflect the impact of costs associated in the current year with the terminated
venture with Kmart, increased marketing costs for Fuddruckers, higher overhead,
including severance costs, associated with the Specialty Concepts segment and
ongoing investment in divisional infrastructures. Selling, general and
administrative expenses expressed as a percentage of managed volume, which
includes managed volume in the foodservice business as well as sales at
Company-owned Fuddruckers, Champps and Specialty Concepts locations, increased
to 8.2% and 9.2% for the three and nine months ended March 29, 1997,
respectively, compared with 8.0% and 7.9% for the same periods last year. The
Company expects to lower the absolute level of selling, general and
administrative expenses over the balance of fiscal 1997 as its near-term
expansion plans have been moderated and the effect of certain events described
herein are not expected to continue to impact operations. Subsequent to the end
of the quarter, the Company has taken certain actions, including the elimination
of 35 positions in the corporate office, to further reduce its general and
administrative expenses. The Company believes these actions should reduce its
general and administrative expenses on an on-going basis by approximately $1.8
million.
Interest Expense
Interest expense increased approximately $1.1 million and $3.4 million to $2.9
million and $8.1 million, respectively, during the three and nine months ended
March 29, 1997, compared with $1.8 million and $4.7 million a year ago. These
increases reflect higher levels of borrowings during the current year coupled
with higher borrowing rates and costs associated with the Company's October 1996
and February 1997 amended and restated credit agreements (see Note 4 of Notes to
Unaudited Condensed Consolidated Financial Statements). The Company has used the
line-of-credit to finance capital expenditures and working capital requirements
for new and existing Company-owned restaurants, foodservice client facilities
and corporate infrastructure.
Income Taxes
The Company's effective tax benefit rate was approximately 35% for the three and
nine months ended March 29, 1997, respectively, compared with an effective tax
benefit rate of approximately 20% and an effective tax expense rate of
approximately 110% for the comparable periods last year. The effective tax rate
reflects the federal tax benefit expected to be received by the Company. No
benefit has been provided on state operating losses where such losses cannot be
carried back by the Company.
Earnings (Loss) Per Share
Primary and fully diluted earnings (loss) per share, excluding impairment
expenses and merger costs, decreased significantly for the three and nine months
ended March 29, 1997 compared with the same periods last year primarily
reflecting the significant losses incurred in fiscal 1997.
<PAGE>
The following tables set forth, for the periods presented, certain financial
information for the Company's business segments. For further information
relating to the businesses, see Note 5 of Notes to Unaudited Condensed
Consolidated Financial Statements.
Foodservice
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Managed volume:
Management fee contracts ....................................................$ 27,504 $ 27,907 $ 76,355 $ 80,038
Profit and loss contracts ................................................... 48,038 55,883 144,728 165,987
--------- --------- --------- ---------
Total managed volume ......................................................$ 75,542 $ 83,790 $ 221,083 $ 246,025
========= ========= ========= =========
Sales from profit and loss contracts ........................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs ................................................................. (33.7) (37.2) (33.9) (34.4)
Product costs ............................................................... (35.6) (36.2) (36.7) (36.3)
Other operating expenses .................................................... (14.6) (14.6) (14.6) (14.6)
Depreciation and amortization (3.1) (2.7) (2.9) (2.5)
Impairment charges .......................................................... -- (5.7) -- (1.9)
--------- --------- --------- ---------
Income from profit and loss contracts .......................................... 13.0% 3.6% 11.9% 10.3%
========= ========= ========= =========
Income from profit and loss contracts .....................................$ 6,194 $ 2,012 $ 17,282 $ 17,146
Management and other fees ..................................................... 1,348 1,517 3,730 4,099
--------- --------- --------- ---------
Income from foodservice operations ...........................................$ 7,542 $ 3,529 $ 21,012 $ 21,245
========= ========= ========= =========
</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 as earned. Consequently, Daka does not
recognize sales and related costs of sales with respect to management fee
contracts.
Managed volume in the foodservice segment decreased approximately $8.2 million,
or 9.8%, to $75.5 million for the three months ended March 29, 1997 compared
with $83.8 million in the comparable quarter of 1996. For the nine months ended
March 29, 1997, managed volume decreased approximately $24.9 million, or 10.1%,
to $221.1 million compared with $246.0 million in 1996. The decrease in managed
volume reflects the impact of a net reduction in contracts in fiscal 1997
offset, in part, by higher same location foodservice sales volumes. Prior to
1996, the Company had increased its managed volumes primarily through the
acquisition of contracts and other foodservice businesses. Given the Company's
limited financial resources in the current year, there have been no such
acquisitions in 1997 and none are presently anticipated.
<PAGE>
Income from foodservice operations, excluding impairment expenses, increased
12.1% to $7.5 million for the three months ended March 29, 1997 compared with
$6.7 million in the comparable quarter of 1996. For the three months ended March
29, 1997, operating margins, excluding impairment charges, expressed as a
percentage of sales increased 3.7% resulting from lower labor and product costs
offset, in part, by higher depreciation and amortization expenses. Income from
foodservice operations, excluding impairment charges, decreased 14.0% to $21.0
million for the nine months ended March 29, 1997, compared with $24.2 million
for the comparable period last year. Operating margins, excluding impairment
charges, expressed as a percentage of sales, for the first nine months of fiscal
1997 decreased 0.3% reflecting the impact of higher product, depreciation and
amortization costs offset, in part, by lower labor costs.
Fuddruckers
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Restaurant sales ...............................................................$ 34,670 $ 32,058 $ 102,790 $ 96,780
Sales from Fuddruckers-owned restaurants ....................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs ................................................................. (29.6) (28.8) (30.4) (28.4)
Product costs ............................................................... (26.8) (27.8) (27.6) (27.9)
Other operating expenses .................................................... (31.7) (25.1) (31.5) (26.6)
Depreciation and amortization ............................................... (7.1) (6.2) (7.0) (5.8)
Impairment charges .......................................................... -- (7.6) -- (2.5)
--------- --------- --------- --------
Income from restaurant operations .............................................. 4.8% 4.5% 3.5% 8.8%
========= ========= ========= ========
Income from restaurant operations ..............................................$ 1,653 $ 1,406 $ 3,552 $ 8,383
Franchising income ............................................................. 1,001 1,174 2,856 5,755
--------- --------- --------- --------
Income from restaurant and franchising operations ..............................$ 2,654 $ 2,580 $ 6,408 $ 14,138
========= ========= ======== ========
Number of restaurants (end of period):
Fuddruckers-owned 122 115
Franchised 79 76
-------- --------
Total restaurants 201 191
======== ========
</TABLE>
Sales from Fuddruckers-owned restaurants increased approximately $2.6 million,
or 8.1%, to $34.7 million for the three months ended March 29, 1997 compared
with $32.1 million for the comparable period last year. For the first nine
months of fiscal 1997, sales increased approximately $6.0 million, or 6.2%, to
$102.8 million compared with $96.8 million for the comparable period last year.
These increases reflect the net addition of nine new Fuddruckers-owned
restaurants during the periods offset primarily by a 3.1% and 7.7% decline in
comparable restaurant sales for the quarter and first nine months of fiscal
1997, respectively, and lower per restaurant average sales volumes within the
Fuddruckers segment compared to last year.
Income from restaurant operations, excluding impairment charges, for the three
months ended March 29, 1997 decreased approximately $2.2 million, or 57.1%, to
$1.7 million compared with $3.9 million a year ago. Income from restaurant
operations, excluding impairment charges, for the first nine months of fiscal
1997 decreased approximately $7.3 million, or 67.2%, to $3.6 million compared
with $10.8 million a year ago. Operating margins continue to be negatively
impacted by poor sales levels, higher labor and other operating costs, and
higher depreciation and amortization expenses offset, in part, by the impact of
new menu changes, a 3% price increase effective in early December, 1996 and
improved product costs.
<PAGE>
Franchise income decreased approximately $0.2 million and $2.9 million for the
three and nine months ended March 29, 1997, respectively. During the first nine
months of fiscal 1997, the Company did not execute any international multi-unit
development agreements. Royalty income from domestic franchised restaurants
remained consistent for the quarter and first nine months of fiscal 1997
compared to last year.
Champps
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Restaurant sales ..................................................... $ 14,300 $ 11,591 $ 41,847 $ 29,612
Sales from Champps-owned restaurants ................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs ....................................................... (31.7) (33.2) (32.6) (33.0)
Product costs ..................................................... (28.7) (28.7) (28.9) (28.7)
Other operating expenses .......................................... (23.5) (22.4) (23.5) (22.4)
Depreciation and amortization
(7.8) (8.3) (8.2) (7.8)
Merger costs ...................................................... -- (25.0) -- (9.8)
--------- --------- --------- ---------
Income (loss) from restaurant operations ............................ 8.3% (17.6)% 6.8% (1.7)%
========= ========= ========= =========
Income (loss) from restaurant operations ............................. $ 1,186 $ (2,111) $ 2,857 $ (575)
Franchising income ................................................... 120 141 385 427
--------- --------- --------- ---------
Income (loss) from restaurant and franchising operations ............. $ 1,306 $ (1,970) $ 3,242 $ (148)
========= ========= ========= =========
Number of restaurants (end of period):
Champps-owned ..................................................... 11 9
Franchised ........................................................ 10 10
--------- ---------
Total restaurants 21 19
========= =========
</TABLE>
Sales in Champps-owned restaurants increased approximately $2.7 million, or
23.4%, to $14.3 million for the three months ended March 29, 1997, compared with
$11.6 million a year ago. For the first nine months of fiscal 1997, sales
increased approximately $12.2 million, or 41.3%, to $41.8 million compared with
$29.6 million a year ago. These increases primarily reflect the addition of six
new Champps-owned restaurants in fiscal 1996 (open for all of 1997), one new
Champps-owned restaurant opened in 1997, continued positive quarterly increases
in comparable restaurant sales and higher per restaurant average sales volumes
for the quarter and first nine months of fiscal 1997.
Income from restaurant operations, excluding merger costs, for the three months
ended March 29, 1997 increased approximately $0.4 million, or 50.3%, to $1.2
million compared with $0.8 million a year ago. Income from restaurant
operations, excluding merger costs, for the first nine months of fiscal 1997
increased approximately $0.5 million, or 22.9%, to $2.9 million compared with
$2.3 million a year ago. Operating margins for the three and nine months ended
March 29, 1997, continue to be directly impacted by the increase in comparable
restaurant sales and improved product costs offset, in part, by higher other
operating expenses, depreciation and amortization expenses associated with new
store openings and pre-opening costs.
<PAGE>
Specialty Concepts
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March March March March
29, 1997 30, 1996 29, 1997 30, 1996
-------- -------- -------- --------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Unit sales ..............................................................$ 1,368 $ 676 $ 3,828 $ 1,905
Sales from unit operations .............................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Labor costs .......................................................... (52.1) (25.0) (46.2) (22.8)
Product costs ........................................................ (28.1) (44.1) (28.5) (42.9)
Other operating expenses ............................................. (28.5) (16.3) (27.9) (14.3)
Depreciation and amortization ........................................ (21.1) (3.4) (15.0) (3.8)
-------- -------- -------- --------
Income (loss) from unit operations ...................................... (29.8)% 11.2% (17.7)% 16.2%
======== ======== ======== ========
Income (loss) from unit operations ......................................$ (408) $ 76 $ (676) $ 308
Franchising income ...................................................... 101 174 652 346
-------- -------- -------- --------
Income (loss) from unit and franchising operations ......................$ (307) $ 250 $ (24) $ 654
======== ======== ======== ========
</TABLE>
Sales in Specialty Concepts units increased approximately $0.7 million and $1.9
million to $1.4 million and $3.8 million, respectively, for the three and the
nine months ended March 29, 1997 compared with $0.7 million and $1.9 million for
the comparable three and nine months last year. These increases reflect the
expansion initiatives in nontraditional foodservice venues in late fiscal 1996
and throughout fiscal 1997. Operating results within the Specialty Concepts
segment remained unprofitable in fiscal 1997 due to higher operating costs in
the Fudd Cafe units and the development and construction of the Company's "Leo's
Deli" concept. The Company is currently evaluating its strategic options
regarding this segment as a whole. Prior year quarterly and nine month results,
which were immaterial for reporting purposes in fiscal 1996, except for Great
Bagel and Coffee, were combined within the foodservice and Fuddruckers
operations. At March 29, 1997, Specialty Concepts consisted of six Fudd Cafes,
three Company-owned and approximately 25 franchised Great Bagel and Coffee units
and over 400 French Quarter Coffee locations.
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
At March 29, 1997, the Company had negative working capital of $6.7 million, a
decrease of $35.3 million compared to working capital of $28.6 million at June
29, 1996. The decrease in working capital is principally due to the change in
current maturities of its long-term debt offset, in part, by working capital
provided by increases in accounts payable. Capital expenditures for restaurant
expansion during the quarter and first nine months of fiscal 1997 were funded
primarily through $9.4 million of existing sale-leaseback and equipment
financing facilities, while corporate capital expenditures were funded primarily
through the Company's existing line-of-credit facility.
On February 7, 1997, the Company amended its revolving line-of-credit agreement
(the "February Agreement"). Under the February Agreement, the Company's
borrowing limit was reduced to $115 million, the maturity date was extended to
January 2, 1998, and its loan covenants amended. On May 7, 1997, the Company
renegotiated certain terms and conditions of its February Agreement (the "May
Agreement" collectively the "Agreements") whereby the Company's borrowing limit
will be further reduced to $72.5 million by March 31, 1998, the maturity date
extended to April 2, 1998, and certain loan covenants amended. The Agreements
require certain principal repayments and further reductions in the Company's
borrowing limits (see Note 4 to Unaudited Condensed Consolidated Financial
Statements).
Accordingly, the Company has classified approximately $32.1 million of
outstanding borrowings as current in the balance sheet as of March 29, 1997. At
March 29, 1997, the Company had available borrowings under the February
Agreement of approximately $11.4 million.
At March 29, 1997, the Company had three new Champps-owned restaurants under
construction and two Champps restaurants under development which are expected to
open in fiscal 1997 and the first half of fiscal 1998, respectively. The Company
had no new Fuddruckers-owned restaurants under construction or development.
There are no other restaurant expansion or development efforts planned by the
Company for the balance of fiscal 1997 or the first half of fiscal 1998. The
Company will continue to make improvements at existing restaurants and
facilities of its foodservice clients, and will continue to invest in improved
data processing systems, pursuant to the terms and conditions of its May
Agreement.
The Company has been exploring a number of strategic alternatives to improve
performance and increase shareholder value. While no agreement has been reached
with respect to any particular strategic alternative, the Company currently
expects to be in a position to announce specific initiatives before the end
of fiscal 1997. There can be no assurance, however, that the Company will be
able to reach any agreement or complete any transaction. Currently,
management believes that the curtailment of restaurant expansion,
improved cash flows from operations, existing cash balances and working
capital, available sale-leaseback financing and equipment financing
will provide sufficient liquidity to meet its obligations, fund
capital expenditures and service debt requirements as outlined in the
Agreements.
<PAGE>
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.26 Second Amendment Agreement, dated as of May 7, 1997, among DAKA
International, Inc. Subsidiary Guarantors, The Chase Manhattan Bank,
N.A., Fleet National Bank, Mellon Bank, N.A. and The First National Bank
of Boston.
11 Computation Regarding Per Share Earnings
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
March 29, 1997.
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/Donald C. Moore
--------------------------------
Donald C. Moore
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
Date: May 12, 1997
Exhibit 11
DAKA INTERNATIONAL, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS)
THREE AND NINE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March 29, March 30, March 29, March 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Net income (loss) ................................................. $ (1,239) $ (5,528) $ (7,261) $ 543
Net income (loss) available to common stockholders ................ $ (1,239) $ (5,528) $ (7,309) $ 543
-------- -------- -------- --------
Weighted average number of shares outstanding ..................... 11,148 9,802 11,140 9,165
Additional shares assuming conversion of stock options -- -- -- 348
-------- -------- -------- --------
11,148 9,802 11,140 9,513
======== ======== ======== ========
Primary earnings (loss) per share:
Net income (loss) available to common stockholders ................ $ (0.11) $ (0.56) $ (0.66) $ 0.06
======== ======== ======== ========
Fully Diluted:
Net income available to common stockholders ....................... $ (1,239) $ (5,528) $ (7,309) $ 543
Add back interest expense on Convertible Notes,
after tax effect ................................................ -- -- -- 468
-------- -------- -------- --------
$ (1,239) $ (5,528) $ (7,309) $ 1,011
======== ======== ======== ========
Weighted average number of shares outstanding ..................... 11,148 9,802 11,140 10,740
Weighted average number of options outstanding .................... -- -- -- 375
Shares issuable upon conversion of Preferred Stock ................ -- -- -- 265
Shares issuable upon conversion of Notes .......................... -- -- -- --
-------- -------- -------- --------
11,148 9,802 11,140 11,380
======== ======== ======== ========
Fully diluted earnings (loss) per share:
Net income (loss) ................................................. $ (0.11) $ (0.56) $ (0.66) $ 0.09
======== ======== ======== ========
</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-28-1997
<PERIOD-END> MAR-29-1997
<CASH> 7,956
<SECURITIES> 0
<RECEIVABLES> 46,070
<ALLOWANCES> 452
<INVENTORY> 11,343
<CURRENT-ASSETS> 75,115
<PP&E> 180,421
<DEPRECIATION> 49,072
<TOTAL-ASSETS> 249,299
<CURRENT-LIABILITIES> 81,780
<BONDS> 77,496
0
0
<COMMON> 111
<OTHER-SE> 75,514
<TOTAL-LIABILITY-AND-EQUITY> 249,299
<SALES> 293,193
<TOTAL-REVENUES> 300,816
<CGS> 254,749
<TOTAL-COSTS> 254,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,064
<INCOME-PRETAX> (11,234)
<INCOME-TAX> (3,910)
<INCOME-CONTINUING> (7,309)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,309)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
SECOND AMENDMENT AGREEMENT
dated as of May 7, 1997
among
DAKA INTERNATIONAL, INC.
SUBSIDIARY GUARANTORS
THE BANKS SIGNATORY HERETO
and
THE CHASE MANHATTAN BANK
as Agent
<PAGE>
SECOND AMENDMENT AGREEMENT
SECOND AMENDMENT AGREEMENT (this "Agreement") dated as of May 7, 1997
among DAKA INTERNATIONAL, INC., a corporation organized under the laws of
Delaware (the "Borrower"); each of the Subsidiaries of the Borrower which is a
signatory hereto (collectively the "Subsidiary Guarantors" and, together with
the Borrower, the "Obligors"); each of the banks which is a signatory hereto
(collectively the "Banks"); and THE CHASE MANHATTAN BANK, a bank organized under
the laws of New York, as agent for the Banks (in such capacity, together with
its successors in such capacity, the "Agent").
WHEREAS, the Borrower, the Subsidiary Guarantors, the Banks and the
Agent have entered into that certain Third Amended and Restated Credit Agreement
dated as of October 15, 1996 (as amended by that certain First Amendment
Agreement dated as of February 7, 1997 (the "First Amendment Agreement"), as
further amended by that certain side letter dated February 20, 1997 and as in
effect prior to the effectiveness of this Agreement, the "Existing Credit
Agreement," and, as amended by this Agreement, the "Amended Credit Agreement")
pursuant to which the Banks have extended credit to the Obligors evidenced by
certain Promissory Notes dated October 15, 1996 issued by the Borrower and
guarantied by the Subsidiary Guarantors;
WHEREAS, the Borrower, the Subsidiary Guarantors, the Banks and the
Agent have agreed to enter into this Agreement to provide for, among other
things, the modification of certain covenants and definitions contained in the
Existing Credit Agreement; and
WHEREAS, the Facility Documents, as amended and supplemented by this
Agreement (including, without limitation, this Agreement and the Amended Credit
Agreement) and as each may be amended or supplemented from time to time, are
referred to herein as the "Amended Facility Documents".
NOW THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1. AMENDMENTS TO EXISTING AGREEMENTS.
Section 1.01. Amendments to Existing Credit Agreement. Each of the
Obligors and, subject to the satisfaction of the conditions set forth in Article
3, the Agent and the Banks hereby consents and agrees to the amendments to the
Existing Credit Agreement set forth below:
1
<PAGE>
(a) The definition of "Letter of Credit Availability" in
Section 1.01 of the Existing Credit Agreement is hereby amended to substitute
"$3,023,387" in place of "$5,000,000".
(b) The definition of "Termination Date" in Section 1.01 of
the Existing Credit Agreement is hereby amended to substitute "April 2, 1998" in
place of "January 2, 1998".
(c) Section 2.01(a) of the Existing Credit Agreement is hereby
amended to add ", (vii) $5,000,000 on January 31, 1998, (viii) $5,000,000 on
February 28, 1998 and (ix) $7,500,000 on March 31, 1998" immediately subsequent
to "December 31, 1997" in the second sentence thereof.
(d) Section 8.04(a) of the Existing Credit Agreement is hereby
amended to add "and, on or after January 1, 1998, three additional 'Champps'
restaurants" immediately subsequent to "Schedule V".
(e) Section 8.15 of the Existing Credit Agreement is hereby
amended (i) to add "or (v) if such fiscal quarter ends on March 28, 1998,
$3,000,000" immediately subsequent to "$2,800,000" in subsection (a) thereof;
and (ii) to add "; and (c) during the fiscal period from March 29, 1997 through
March 28, 1998 would exceed $14,032,000" immediately subsequent to
"$20,000,000".
(f) Section 8.16(c) of the Existing Credit Agreement is hereby
amended to add "and, on or after January 1, 1998, three additional 'Champps'
restaurants" immediately subsequent to "Detroit, Michigan".
(g) Section 9.01(a) of the Existing Credit Agreement is hereby
amended to add "or (v) if such fiscal quarter ends on March 28, 1998, $500,000"
immediately subsequent to "$0".
(h) Section 9.02 of the Existing Credit Agreement is hereby
amended (i) to delete "January, February, March" in subsection (a) thereof; and
(ii) to add "January, February, March, " immediately prior to "June" in
subsection (b) thereof.
(i) Section 9.04 of the Existing Credit Agreement is hereby
amended to add "or (e) if such fiscal quarter ends on March 28, 1998, 1.00 to
1.00" immediately subsequent to ".90 to 1.00".
(j) Section 9.05 of the Existing Credit Agreement is hereby
amended (i) to add "or (v) if such fiscal quarter ends on March 28, 1998, 2.47
to 1.00" immediately subsequent to "2.33 to 1.00" in subsection (a) thereof;
(ii) to substitute
2
<PAGE>
"(.39)" in place of "(.24)", "(.20)" in place of "(.09)" and ".49" in place of
".57" in subsection (b) thereof; and (iii) to add "; and (c) for the fiscal
period from March 29, 1997 through March 28, 1998 shall be not less than 1.05 to
1.00" immediately subsequent to ".57 to 1.00".
(k) Schedules I-IV of the Existing Credit Agreement are
hereby amended and restated as set forth in Schedules I-IV hereto.
Section 1.02. Amendments to First Amendment Agreement. Each of the
Obligors and, subject to the satisfaction of the conditions set forth in Article
3, the Agent and the Banks hereby consents and agrees to the amendments to the
First Amendment Agreement set forth below:
(a) Section 5.01 of the First Amendment Agreement is hereby
amended to substitute "establish by May 30, 1997" in place of "take all
necessary actions to establish within 60 days, and agrees to establish within 90
days, of the Effective Date" in the second sentence thereof.
(b) Section 5.03 of the First Amendment Agreement is hereby
amended to add "or, if not financed in accordance with the terms hereof prior to
February 15, 1998, on or after February 15, 1998" immediately subsequent to
"Event of Default" in the last sentence thereof.
Section 1.03. Amendments to Security Agreement. Each of the Obligors
and, subject to the satisfaction of the conditions set forth in Article 3, the
Agent and the Banks hereby consents and agrees that Schedule A to the Security
Agreement is hereby amended and restated as set forth in Schedule V hereto.
Section 1.04. Amendments to Pledge Agreement. Each of the Obligors and,
subject to the satisfaction of the conditions set forth in Article 3, the Agent
and the Banks hereby consents and agrees that Schedule A to the Pledge Agreement
is hereby amended and restated as set forth in Schedule VI hereto.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES.
Each of the Obligors hereby represents and warrants that as of the
Effective Date:
Section 2.01. Existing Representations and Warranties. Each of the
representations and warranties contained in Article 6 of the Existing Credit
Agreement, in Article 3 of the Security Agreement, in Article 3 of the Trademark
3
<PAGE>
Security Agreement and in Article 3 of the Pledge Agreement are true and correct
as of the Effective Date.
Section 2.02. No Defaults. No event has occurred and no condition
exists which would constitute a Default or an Event of Default under the
Facility Documents, and no event has occurred and no condition exists which
would constitute a Default or an Event of Default under the Amended Facility
Documents.
Section 2.03. Corporate Power and Authority; No Conflicts. The
execution, delivery and performance by each of the Obligors of the Amended
Facility Documents to which it is a party have been duly authorized by all
necessary corporate, partnership or limited liability company action and do not
and will not: (a) require any consent or approval of its stockholders, partners
or members; (b) contravene its organizational documents; (c) violate any
provision of, or require any filing (other than the filing of the financing
statements contemplated by the Security Agreement and the filing of the
Mortgages and the Trademark Security Agreement), registration, consent or
approval under, any law, rule, regulation (including, without limitation,
Regulation U), order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to any Consolidated Entity; (d) result
in a breach of or constitute a default or require any consent under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which any Consolidated Entity is a party or by which it or its
properties may be bound or affected if such breach, default or failure to obtain
consent could reasonably be expected to have a Material Adverse Effect; (e)
result in, or require, the creation or imposition of any Lien (other than as
created under the Security Documents), upon or with respect to any of the
properties now owned or hereafter acquired by any Consolidated Entity; or (f)
cause any Consolidated Entity to be in default under any such law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award or
any such indenture, agreement, lease or instrument if such default could
reasonably be expected to have a Material Adverse Effect.
Section 2.04. Legally Enforceable Agreements. Each Amended Facility
Document to which any Obligor is a party has been duly executed and delivered by
such Obligor. Each Amended Facility Document to which any Obligor is a party is
a legal, valid and binding obligation of such Obligor enforceable against such
Obligor in accordance with its terms, except to the extent that such enforcement
may be limited by applicable bankruptcy, insolvency and other similar laws
affecting creditors' rights generally.
Section 2.05. Financial Statements. The consolidated balance sheet of
the Consolidated Entities as at June 29, 1996, and the related consolidated and
consolidating (by business segment) income statements and consolidated
statements
4
<PAGE>
of cash flows and changes in stockholders' equity of the Consolidated Entities
for the fiscal year then ended, and the accompanying footnotes, together with
the unqualified opinion on the consolidated statements of Deloitte & Touche,
independent certified public accountants, and the interim draft unaudited
consolidated balance sheet of the Consolidated Entities as at March 29, 1997,
and the related draft unaudited consolidated and consolidating (by business
segment) income statements and consolidated statements of cash flows and changes
in stockholders' equity of the Consolidated Entities for the nine months then
ended, copies of which have been furnished to each of the Banks, are complete
and correct and fairly present the financial condition of the Consolidated
Entities at such dates and the results of the operations of the Consolidated
Entities for the periods covered by such statements, all in accordance with GAAP
consistently applied. There are no liabilities of any Consolidated Entity, fixed
or contingent, which are material but are not reflected in the financial
statements or in the notes thereto and which would be required to be recorded in
such financial statements or notes in accordance with GAAP, other than
liabilities arising in the ordinary course of business since March 29, 1997. No
information, exhibit or report furnished by any Consolidated Entity to the Banks
in connection with the negotiation of this Agreement contained any material
misstatement of fact or omitted to state a material fact or any fact necessary
to make the statements contained therein not materially misleading. Since March
29, 1997, there has been no change which could reasonably be expected to have a
Material Adverse Effect.
ARTICLE 3. CONDITIONS PRECEDENT.
The effectiveness of this Agreement is subject to the condition
precedent that the Agent shall have received on or before May 7, 1997 (the
"Effective Date") each of the following, in form and substance satisfactory to
the Agent and its counsel:
(a) counterparts of this Agreement executed by each of the
Borrower, the Subsidiary Guarantors, the Banks and the Agent;
(b) evidence that all actions necessary or appropriate (or, in
any event, as may be requested by the Agent) to create, perfect or protect the
Liens created or purported to be created by the "Mortgages" (as defined in the
First Amendment Agreement), the Security Agreement, the Trademark Security
Agreement and the Pledge Agreement have been taken;
(c) certificates of the Secretary or Assistant Secretary of
each of the Obligors, dated the Effective Date, (i) attesting to all corporate
action taken by such Obligor, including resolutions of its Board of Directors
authorizing the execution, delivery and performance of each of the Amended
Facility Documents to which it is
5
<PAGE>
a party and each other document to be delivered pursuant to this Agreement, (ii)
certifying the names and true signatures of the officers of such Obligor
authorized to sign the Amended Facility Documents to which it is a party and the
other documents to be delivered by such Obligor under this Agreement and (iii)
verifying that the organizational documents of such Obligor attached thereto are
true, correct and complete as of the date thereof;
(d) a certificate of a duly authorized officer of each of the
Obligors, dated the Effective Date, stating that the representations and
warranties in Article 2 are true and correct on such date as though made on and
as of such date and that no event has occurred and is continuing which
constitutes a Default or Event of Default; and
(e) evidence that the fees and expenses incurred as of the
Effective Date under Section 4.05 shall have been paid in full.
ARTICLE 4. MISCELLANEOUS.
Section 4.01. Defined Terms. The terms used herein and not defined
herein shall have the meanings assigned to such terms in the Amended Credit
Agreement.
Section 4.02. Reaffirmation. Each of the Obligors acknowledges that the
Liens granted to the Agent under the Security Documents in and to the Collateral
secure all of the Obligations, including, without limitation, all liabilities
and obligations under the Loans as herein modified and decreased. All references
to "Secured Obligations" in any Facility Document shall be deemed to include all
liabilities and obligations under the Loans as herein modified and decreased.
Each of the Obligors further acknowledges and reaffirms all of its other
respective obligations and duties under the Amended Facility Documents to which
it is a party.
Section 4.03. Nonwaiver. The terms of this Agreement shall not operate
as a waiver by the Agent or any Bank or otherwise prejudice the rights, remedies
or powers of the Agent or any Bank under the Amended Credit Agreement, the other
Amended Facility Documents or applicable law. Except as expressly provided
herein: (x) no terms and provisions of the Facility Documents are modified or
changed by this Agreement; and (y) the terms and provisions of the Facility
Documents shall continue in full force and effect.
Section 4.04. Amendments and Waivers. Any provision of this Agreement
may be amended or modified only by an instrument in writing signed by the
Borrower, the Agent and the Required Banks, or by the Borrower and the Agent
acting with the consent of the Required Banks and any provision of this
Agreement may be waived
6
<PAGE>
by the Required Banks or by the Agent acting with the consent of the Required
Banks; except any provision the subject matter of which the consent of all of
the Banks would be necessary under the Facility Documents shall require the
consent of all of the Banks prior to the amendment or waiver thereof.
Section 4.05. Expenses. The Borrower shall reimburse the Agent on
demand for all reasonable costs, expenses and charges (including, without
limitation, reasonable fees and charges of legal counsel to the Agent and of
Alvarez & Marsal, Inc.) in connection with the preparation of, and any
amendment, supplement, waiver or modification to (in each case, whether or not
consummated), this Agreement, any other Amended Facility Document and any other
documents prepared in connection herewith or therewith. The Borrower shall also
pay to the Agent for the account of the Banks an amendment fee equal to $125,000
to be split among the Banks in accordance with their Pro Rata Shares.
Section 4.06. Notices. Unless the party to be notified otherwise
notifies the other party in writing as provided in this Section, and except as
otherwise provided in this Agreement, notices shall be given to the Agent by
telephone, confirmed by telex, telecopy or other writing, and to the Banks and
to the Obligors by ordinary mail or telecopier addressed to such party at its
address on the signature page of this Agreement. Notices shall be effective: (a)
if given by mail, 72 hours after deposit in the mails with first class postage
prepaid, addressed as aforesaid; and (b) if given by telecopier, when the
telecopy is transmitted to the telecopier number as aforesaid; provided that
notices to the Agent and the Banks shall be effective upon receipt.
Section 4.07. Headings; Parentheticals. The headings and captions
hereunder are for convenience only and shall not affect the interpretation or
construction of this Agreement. All numbers contained herein enclosed by
parentheticals are deemed to reflect losses or the negative of such numbers.
Section 4.08. Severability. The provisions of this Agreement are
intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
Section 4.09. Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Agreement by signing any
such counterpart.
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<PAGE>
Section 4.10. Integration. The Amended Facility Documents set forth the
entire agreement among the parties hereto relating to the transactions
contemplated thereby and supersede any prior oral or written statements or
agreements with respect to such transactions.
SECTION 4.11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF
THE COMMONWEALTH OF MASSACHUSETTS.
Section 4.12. Release. Each of the Obligors hereby releases and forever
discharges the Agent and each of the Banks and their respective successors,
assigns, affiliates, directors, employees and agents from all causes of action,
covenants, agreements, damages, claims and demands whatsoever, in law or in
equity, which such Obligor ever had or now has in any way relating to or arising
out of the Existing Credit Agreement, any other Facility Document or any other
document contemplated by or referred to herein or the transactions contemplated
hereby or thereby or the enforcement of any of the terms thereof.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
DAKA INTERNATIONAL, INC.
By__________________________________
Name:
Title:
FUDDRUCKERS, INC.
By__________________________________
Name:
Title:
DAKA, INC.
By__________________________________
Name:
Title:
CASUAL DINING VENTURES, INC.
By__________________________________
Name:
Title:
ATLANTIC RESTAURANT VENTURES,
INC.
By__________________________________
Name:
Title:
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
FRENCH QUARTER COFFEE COMPANY
By__________________________________
Name:
Title:
AMERICANA DINING CORP.
By__________________________________
Name:
Title:
CHAMPPS ENTERTAINMENT OF
EDISON, INC.
By__________________________________
Name:
Title:
CHAMPPS ENTERTAINMENT OF
TEXAS, INC.
By__________________________________
Name:
Title:
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
CHAMPPS AMERICANA, INC.
(Formerly known as Champps
Entertainment of Wayzata, Inc.)
By__________________________________
Name:
Title:
CHAMPPS ENTERTAINMENT, INC.
By__________________________________
Name:
Title:
SPECIALTY CONCEPTS, INC.
By__________________________________
Name:
Title:
THE GREAT BAGEL AND COFFEE
COMPANY
By__________________________________
Name:
Title:
HOSPITALITY SUPPLY, INC.
By__________________________________
Name:
Title:
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
FUDDRUCKERS EUROPE, INC.
By__________________________________
Name:
Title:
Address for Notices:
One Corporate Place
55 Ferncroft Road
Danvers, Massachusetts 01923
Telecopier No.:(508)774-1334
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
AGENT:
THE CHASE MANHATTAN BANK
By__________________________________
Name:
Title:
Address for Notices:
270 Park Avenue
30th Floor
New York, NY 15258
Attention: Patrick Daniello
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
BANKS:
THE CHASE MANHATTAN BANK
By__________________________________
Name:
Title:
Lending Office and Address for
Notices:
270 Park Avenue
30th Floor
New York, NY 15258
Attention: Patrick Daniello
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
BANKS:
FLEET NATIONAL BANK
By__________________________________
Name:
Title:
Lending Office and Address for
Notices:
40 Westminster Street
Providence, RI 02901
Attention: Edward O'Brien
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
BANKS:
MELLON BANK, N.A.
By__________________________________
Name:
Title:
Lending Office and Address for
Notices:
One Mellon Bank Center
Room 4835
Pittsburgh, PA 15258-0001
Attention: Gary A. Saul
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
BANKS:
BANKBOSTON, N.A.
By__________________________________
Name:
Title:
Lending Office and Address for
Notices:
100 Federal Street
Boston, MA 02110
Attention: Corinne Barrett
[SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT]
<PAGE>
SCHEDULE I
Commitments
Loan Commitments
The Chase Manhattan Bank $57,500,000.00
Fleet National Bank $19,166,666.67
Mellon Bank, N.A. $19,166,666.67
BankBoston, N.A. $19,166,666.66
--------------
Total Loan Commitments $115,000,000.00
Standby Letter of Credit Commitments
The Chase Manhattan Bank $1,511,693.50
Fleet National Bank $503,897.83
Mellon Bank, N.A. $503,897.83
BankBoston, N.A. $503,897.84
-----------
Total Letter of Credit Commitments $3,023,387.00
