UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 0-22639
CHAMPPS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10375 Park Meadows Drive, Suite 560, Littleton, Colorado 80124
(Address of principal executive offices) (Zip Code)
(303) 804-1333
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Number of shares of Common Stock, $.01 par value, outstanding at
October 23, 2002: 12,379,959.
CHAMPPS ENTERTAINMENT INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 29, 2002 and June 30, 2002 1
Consolidated Statements of Operations - Three Months Ended September 29, 2002 and
September 30, 2001 2
Consolidated Statements of Cash Flows - Three Months Ended September 29, 2002 and
September 30, 2001 3
Consolidated Statement of Shareholders' Equity - Three Months Ended September 29, 2002 4
Notes to Unaudited Consolidated Financial Statements - Three Months Ended September
29, 2002 and September 30, 2001 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
As of September 29, 2002 and June 30, 2002
(In thousands except share data)
(Unaudited)
September 29, June 30,
2002 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,424 $ 4,643
Restricted cash 1,039 1,030
Accounts receivable 3,400 2,995
Inventories 2,799 2,701
Prepaid expenses and other current assets 3,247 1,643
Deferred tax asset 2,000 2,000
-------- --------
Total current assets 15,909 15,012
Property and equipment, net 69,880 67,541
Goodwill 5,069 5,069
Deferred tax asset 6,712 6,712
Other assets, net 1,345 1,241
-------- --------
Total assets $ 98,915 $ 95,575
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,418 $ 4,830
Accrued expenses 7,678 5,539
Current portion of capital lease obligations 1,176 1,373
Current portion of notes payable 1,374 1,350
-------- --------
Total current liabilities 15,646 13,092
Capital lease obligations, net of current portion 988 1,163
Notes payable, net of current portion 17,629 17,949
Other long-term liabilities 12,939 12,416
-------- --------
Total liabilities 47,202 44,620
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock (authorized 5,000,000 shares, none issued) - -
Common stock ($.01 par value per share; authorized 30,000,000
shares; 12,554,821 and 12,174,524 issued at September 29, 2002
and June 30, 2002, respectively) 126 122
Additional paid-in capital 83,683 81,546
Accumulated deficit (29,741) (30,713)
Treasury stock, at cost (233,121 shares at September 29, 2002) (2,355) -
-------- --------
Total shareholders' equity $ 51,713 $ 50,955
-------- --------
Total liabilities and shareholders' equity $ 98,915 $ 95,575
======== ========
See notes to unaudited consolidated financial statements.
1
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The Three Months Ended September 29, 2002 and September 30, 2001
(In thousands except per share data)
(Unaudited)
Three Months Ended
------------------
Sept. 29 Sept. 30,
2002 2001
------- -------
Revenues
Sales $41,332 $34,670
Franchising and royalty, net 148 155
------- -------
Total revenues 41,480 34,825
------- -------
Costs and expenses
Restaurant operating expenses:
Product costs 11,531 9,999
Labor costs 13,556 11,348
Other operating expense 6,443 5,562
Occupancy 3,718 2,861
Depreciation and amortization 1,767 1,489
------- -------
Total restaurant operating expenses 37,015 31,259
------- -------
Restaurant operating and franchise contribution 4,465 3,566
General and administrative expense 2,305 1,922
Pre-opening expense 703 687
Interest expense and income, net 396 444
Other (income) expense 51 (3)
------- -------
Income before income taxes 1,010 516
Income tax expense 38 40
------- -------
Net income $ 972 $ 476
======= =======
Basic income per share: $ 0.08 $ 0.04
======= =======
Diluted income per share: $ 0.08 $ 0.04
======= =======
Basic weighted average shares outstanding 12,201 12,049
======= =======
Diluted weighted average shares outstanding 12,919 12,730
======= =======
See notes to unaudited consolidated financial statements.
2
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Three Months Ended September 29, 2002 and September 30, 2001
(In thousands)
(Unaudited)
September 29, September 30,
2002 2001
------- -------
Cash flows from operating activities:
Net income $ 972 $ 476
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,882 1,563
Loss on disposal of assets 55 -
Non-cash compensation - 94
Interest on loan for exercise of stock options (11) -
Changes in assets and liabilities:
Accounts receivable 45 240
Inventories (98) 118
Prepaid expenses and other current assets (1,604) 280
Accounts payable 588 (943)
Accrued expenses 2,139 (540)
Other assets (115) (14)
Other long-term liabilities (212) (605)
------- -------
Net cash provided by operating activities 3,641 669
------- -------
Cash flows from investing activities:
Purchase of property and equipment (4,265) (3,898)
Restricted cash balances (9) (10)
------- -------
Net cash used in investing activities (4,274) (3,908)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,152 294
Repurchase of common stock (2,355) -
Repayment of notes payable and capitalized lease obligations (668) (367)
Proceeds from capital lease transactions - 1,489
Proceeds from tenant improvement allowances 285 1,637
------- -------
Net cash provided by (used in) financing activities (586) 3,053
------- -------
Net change in cash and cash equivalents (1,219) (186)
Cash and cash equivalents, beginning of period 4,643 1,261
------- -------
Cash and cash equivalents, end of period $ 3,424 $ 1,075
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized and interest income $ 265 $ 330
Income taxes, net of refunds 169 37
Supplemental disclosures of non-cash investing and financing activities:
Tenant improvement allowances not yet received $ 735 $ -
See notes to unaudited consolidated financial statements.
3
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
The Three Months Ended September 29, 2002
(In thousands except share data)
(Unaudited)
Common Stock Isued Treasury Stock
----------------------- ----------------------
Additional Total
Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Shares Amount Equity
----------------------- ---------- ------------- ---------------------- --------------
Balance, June 30, 2002 12,174,524 $ 122 $81,546 $(30,713) - $ - $50,955
Common shares issued 380,297 4 2,148 - - - 2,152
Repurchase of common shares - - - - 233,121 (2,355) (2,355)
Interest on loan for exercise of stock
options - - (11) - - - (11)
Net income - - - 972 - - 972
---------- ------ ------- -------- ------- ------- -------
Balance, September 29, 2002 12,554,821 $ 126 $83,683 $(29,741) 233,121 $(2,355) $51,713
========== ====== ======= ======== ======= ======= =======
See notes to unaudited consolidated financial statements.
4
CHAMPPS ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended September 29, 2002 and September 30, 2001
(Unaudited)
1. Nature of Business and Basis of Presentation
Nature of Business
As of September 29, 2002, Champps Entertainment, Inc. (the "Company," or
"Champps") owned and operated 36 full-service, casual dining restaurants under
the names of "Champps Americana" and "Champps Restaurant." The Company also
franchised 12 restaurants under the name "Champps Americana." Champps operates
in 18 states throughout the United States.
Basis of Presentation of Consolidated Financial Statements
The accompanying unaudited consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair statement of financial position as
of September 29, 2002 and results of operations for the interim periods ended
September 29, 2002 and September 30, 2001. These unaudited consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America,
have been condensed or omitted pursuant to such SEC rules and regulations.
Operating results for the three-month period ended September 29, 2002 are not
necessarily indicative of the results that may be expected for the year ending
June 29, 2003.
The balance sheet at June 30, 2002 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and notes thereto for the fiscal year ended June 30, 2002 included in the
Company's annual report on Form 10-K.
These statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended June 30, 2002. The accounting policies used in preparing
these consolidated financial statements are consistent with those described in
the Company's Annual Report on Form 10-K.
5
2. Earnings Per Share
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended
----------------------------------
September 29, September 30,
2002 2001
------------- -------------
------------- -------------
Net income $ 972,000 $ 476,000
============= =============
Basic income per share:
Weighted average shares outstanding 12,200,512 12,048,987
------------- -------------
Net income per share - basic $ 0.08 $ 0.04
============= =============
Diluted income per share:
Weighted average shares outstanding 12,200,512 12,048,987
Net effect of dilutive stock options based on the
treasury stock method using average market price 717,705 680,574
------------- -------------
Total shares outstanding for computation of per share earnings 12,918,217 12,729,561
============= =============
Net income per share - diluted $ 0.08 $ 0.04
============= =============
3. Commitments and Contingencies
Restricted Cash
The Company had $1,039,000 of restricted cash as of September 29, 2002. These
funds serve primarily as collateral for insurance claims and construction
related obligations.
Tax Contingencies
In December 2001, the State of Florida proposed to assess subsidiaries of DAKA
International, Inc. ("DAKA") $2.4 million in unpaid state sales taxes, and an
additional $2.9 million in penalties and interest as of December 2001. The
Company is contractually obligated to indemnify DAKA for this matter and is
currently protesting this proposed assessment. We believe that DAKA has
meritorious legal and factual defenses to these matters. On October 11, 2002,
Compass Group USA, Inc., a successor to DAKA, filed a complaint for declaratory
judgment and temporary and permanent injunction relief with the Ninth Judicial
Circuit Court in Orange County, Florida regarding the proposed assessment. The
complaint alleges that the Florida Department of Revenue did not have a valid
consent to extend the time to issue an assessment and therefore the statute of
limitations expired on 77 of the 87 months of the proposed assessment.
6
In addition, the Company and its predecessors, from time-to-time, have been
party to various other assessments of taxes, penalties and interest from Federal
and state agencies. The Company is in the process of settling several such
assessments. Tax reserves are accrued based upon the Company's estimates of the
ultimate settlement of the contingencies. As of September 29, 2002, the Company
had $0.4 million accrued for tax liabilities associated with Fuddrucker
pre-closing events and DAKA International pre-closing events. The Company
believes that amounts are adequately accrued. Actual amounts required to settle
those obligations may exceed those estimates.
Litigation
The Company has agreed to assume certain contingent liabilities of DAKA
International in connection with the spin-off and has agreed to assume certain
contingent liabilities of Fuddruckers for periods prior to its sale to King
Cannon. Further, the Company is also engaged in various actions arising in the
ordinary course of business. The Company believes, based upon consultation with
legal counsel, that the ultimate collective outcome of these matters will not
have a material adverse effect on the Company's consolidated financial
condition, results of operations or cash flows.
In the third quarter of fiscal 2000, a Washington, D.C. superior court jury
awarded a former Daka employee $188,000 in compensatory damages, $4.8 million in
punitive damages and a subsequent award of $276,000 for legal fees and costs,
based on the employee's claim of negligent supervision and retaliation, due to
alleged conduct that occurred in 1996 at a former Daka food service location.
The events at issue in the case took place prior to the Daka International
spin-off. On September 20, 2000, Daka filed a Notice of Appeal with the Court of
Appeals for the District of Columbia. The Company may be liable for the payment
of any amounts ultimately due by Daka upon final determination of the case. The
Company has not accrued any amounts related to the punitive damages in this
matter based upon Daka's meritorious arguments associated with its appeal and
relevant legal precedents. Based on Daka's meritorious arguments and relevant
legal precedents the Company believes, and its outside legal counsel concurs,
that the punitive damages will not be upheld. The Company has accrued
approximately $0.4 million associated with this matter based on our estimate of
the ultimate compensatory damages and legal fees. Revisions to our estimate may
be made in the future and will be reported in the period in which additional
information is known. Based upon our analysis, and the advice of outside legal
counsel, the Company believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
From time-to-time, additional lawsuits are filed against the Company in the
ordinary course of business. Such lawsuits typically involve claims from
customers and others related to operational issues common to the restaurant
industry. A number of such claims may exist at any given time. In addition, the
Company also encounters complaints and allegations from former and current
employees or others from time-to-time that are believed to be common for
businesses such as ours. Relative to such matters, the Company is currently not
a party to any litigation that could have a material adverse effect on the
Company's consolidated financial position or results of operations and the
Company is not aware of any such threatened litigation.
4. Reserve Disclosure
The Company previously recorded liabilities associated with the activities of
certain predecessor companies which were either spun-off or sold to other
entities. The following table displays the activity and balances relating to
these reserves during the three-month period ended September 29, 2002:
Balance at June 30, 2002 1,372,000
Expense recognition -
Payments (475,000)
----------
Balance at September 29, 2002 $ 897,000
==========
The reserves are incorporated into the balances for accrued expenses and other
long-term liabilities.
7
5. Statements of Cash Flows
General and administrative expenses include depreciation and amortization
expense on corporate assets of $115,000 and $74,000 in the three months ended
September 29, 2002 and September 30, 2001, respectively.
6. Shareholders' Equity and Stock Option Plans
On September 13, 2002, Mr. William Baumhauer, the Company's chairman, chief
executive officer and president, announced he had entered into a stock trading
plan which complies with the requirements of Rule 10b5-1 of the Securities and
Exchange Commission. Under the plan, Mr. Baumhauer could exercise stock options
to purchase up to 1,009,000 shares of common stock of the Company over the
ensuing ten months. Rule 10b5-1 permits employees to adopt written plans at a
time when they are not aware of material nonpublic information and to sell
shares according to the plan on a regular basis, regardless of any subsequent
nonpublic information they receive or the price of the stock at the time of the
sale. Plans permitted under this rule allow an employee to minimize the effect
of sales by spreading them over a more extended period than the traditional
trading "windows" permitted under typical insider trading policies, and also
avoid being prohibited from selling any shares for long periods of time due to
nonpublic information they may possess during traditional windows. These stock
options expire June 30, 2003.
Prior to September 29, 2002, Mr. Baumhauer exercised options to purchase 370,852
shares of common stock of the Company under this plan with an aggregate exercise
price of approximately $2,068,000. Mr. Baumhauer satisfied the exercise price of
options to purchase 326,274 common shares and paid certain of his withholding
tax liabilities by tendering to the Company (i) 187,073 common shares owned by
him for more than six months having a fair market value of approximately
$1,890,000 and (ii) 46,048 common shares that he received from the exercise of
such options with a fair market value of approximately $465,000.
7. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company does not currently have any obligations falling under the scope of SFAS
No. 143, and therefore its adoption did not have a material impact on its
results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance on the
recognition of impairment losses on long-lived assets to be held and used or to
be disposed of, and also broadens the definition of what constitutes a
discontinued operation and how the results of discontinued operation are to be
measured and presented. The Company adopted SFAS No. 144 in its fiscal 2003 and
the adoption of SFAS No. 144 did not have a material impact on its results of
operations or financial position.
8
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". This statement amends SFAS No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
Company adopted SFAS No. 145 in its fiscal year 2003 and the adoption of SFAS
No. 145 did not have a material impact on its results of operations or financial
position.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." The statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The principal difference between
SFAS No. 146 and Issue No. 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. The statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue No. 94-3, a
liability for an exit cost (as defined in that issue) was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 also establishes that
fair value is the objective for initial measurement of the liability. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002 and the Company does not expect the adoption of SFAS No. 146
to have a material impact on its results of operations or financial position.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
The matters discussed in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company and elsewhere in
this Quarterly Report on Form 10-Q, which are not historical information, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Words such as "believe," "anticipate,"
"estimate," "project," "plan," "expect," and similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
respective dates. Forward-looking statements involve risks and uncertainties,
many of which are beyond the Company's control. Should one or more of these
risks or uncertainties materialize, or should any of the underlying assumptions
prove incorrect, actual results of current and future operations may vary
materially from those anticipated, estimated or projected. In addition to the
factors set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002, factors that may cause such a difference include,
among others, the following:
o Changes in general economic, political or public safety conditions,
including changes caused by terrorist activities, which affect
consumer spending for restaurant dining occasions.
o 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.
o The availability and terms of financing for the Company and any
changes to that financing.
o The impact of an increase in the minimum wage and its effect on the
economy as well as the cost structure of the Champps restaurants.
o The impact of increases in energy costs nationwide, including natural
gas and electricity, and the Company's ability to pass along these
increases in costs to its customers.
o The Company's ability to manage, within acceptable parameters,
contingencies associated with its former businesses including
Fuddruckers and its former foodservice businesses.
o The effectiveness of initiatives to lower selling, general and
administrative expenses and to improve operations within Champps.
o The Company's ability to anticipate and react to changes in the demand
for and cost of food and liquor products.
9
o The Company's ability to open new restaurants consistent with its
expansion plans.
o The Company's ability to resolve its current litigation actions
favorably.
o Uncertainty regarding the issuance and renewal of licenses and permits
for restaurant development and operations, including the sale of
alcoholic beverages.
This list is intended to identify some of the principal factors that could cause
results to differ materially from those described in the forward-looking
statements included elsewhere in this report. These factors are not intended to
represent a complete list of all risks and uncertainties inherent in the
Company's business, and should be read in conjunction with the more detailed
cautionary statements and risk factors identified in the Company's 2002 Annual
Report on Form 10-K under the caption "Item1. Business - Risk Factors," other
Securities and Exchange Commission filings, and press releases. All
forward-looking statements attributable to the Company's officers, directors and
employees, or to persons acting on the Company's behalf, are expressly qualified
in their entirety by such factors and other events, many of which are outside of
the Company's control. Any of these factors could have a material adverse effect
on the Company's results of operations. Furthermore, the Company assumes no
obligation to publicly release the results of any revisions or updates to any
forward-looking statements to reflect future events or unanticipated
occurrences.
RESULTS OF OPERATIONS
Overview
As of September 29, 2002, Champps Entertainment, Inc. owned and operated 36, and
franchised 12 upscale, full-service, casual dining restaurants under the Champps
Americana and Champps Restaurant names. Champps provides an extensive menu of
approximately 85 items consisting of high quality ingredients, freshly prepared
and served in an exciting environment with exceptional service. Since June 1999,
the Company has positioned itself to increase profitability while embarking on a
strategic expansion in major metropolitan areas throughout the United States.
Prior to June 1999, the Company disposed of all non-Champps operating businesses
and began to concentrate solely on the Champps concept. At June 1999, the
Company owned 18 restaurants. In fiscal year 2000, the Company opened four
restaurants and acquired two franchises. In fiscal 2001, the Company opened four
restaurants and in fiscal 2002 the Company opened six restaurants. As of
September 29, 2002, the Company had opened two additional locations, had three
locations under construction and had fully executed contracts for four
additional stores and eight locations are being actively negotiated. We intend
to open a total of eight to ten restaurants in fiscal 2003 and 10 to12
restaurants in fiscal 2004.
The Company's new restaurants typically will range in size from 7,500 square
feet to 9,000 square feet. These restaurants will require, on average, a total
cash investment of approximately $1.8 million and total invested capital of
approximately $2.8 to $3.3 million per restaurant exclusive of land costs and
$4.3 million to $5.1 million with land costs. Pre-opening expenses are expected
to average approximately $375,000 per restaurant.
Because the Company is in an expansion phase, the timing of revenues and
expenses associated with opening new restaurants is expected to result in
fluctuations in the Company's quarterly and annual results. In addition, the
Company's results, and the results of the restaurant industry as a whole, may be
adversely affected by changes in consumer tastes, discretionary spending
priorities, national, regional or local economic conditions, demographic trends,
consumer confidence in the economy, traffic patterns, weather conditions,
employee availability and the type, number and location of competing
restaurants. Changes in any of these factors could adversely affect the Company.
10
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and the mix between food and liquor revenues. Various
factors beyond the Company's control, such as adverse weather conditions, may
affect food costs and increases in federal, state and local taxes may affect
liquor costs. While in the past the Company has been able to manage its exposure
to the risk of increasing food and liquor costs through certain purchasing
practices, menu changes and price adjustments, there can be no assurance that
the Company will be able to do so in the future or that changes in its sales mix
or its overall buying power will not adversely affect the Company's results of
operations.
Notwithstanding these risks, the Company believes that its near-term strategies,
including, but not limited to, continued expansion of the Champps Americana
concept, and improving the execution of operating fundamentals should provide
the Company with an opportunity for improved overall profitability.
The Company's restaurant sales are comprised almost entirely of food and
beverage sales. Product costs include the costs of food and beverages. Labor
costs include direct hourly and management wages, bonuses, workers'
compensation, taxes and benefits for restaurant employees. Other operating
expense consists primarily of restaurant-level expenses for utilities, marketing
expenses, repairs and maintenance and supplies such as tableware, cleaning and
paper supplies. Occupancy includes rent, property taxes, and property insurance
costs. Depreciation and amortization principally includes depreciation on
capital expenditures for restaurants. Restaurant level operating profit is
composed of restaurant sales less restaurant operating costs, which includes
product costs, labor costs, other operating expense, occupancy and depreciation
and amortization. General and administrative expense is composed of expenses
associated with all corporate, administrative and indirect supervision functions
that support existing operations, management and staff salaries, employee
benefits, travel, information systems, training and market research. Pre-opening
expense consists of direct costs related to hiring and training the initial
restaurant workforce and certain other direct costs associated with opening new
restaurants. Interest expense and income, net includes the cost of interest
expense on debt offset by interest income and capitalized interest.
The Company reported net income of $972,000 for the quarter ended September 29,
2002, compared with net income of $476,000 for the comparable quarter last year.
The Company utilizes a 52/53 week fiscal year ending on the Sunday closest to
June 30 for financial reporting purposes. Fiscal 2003 will consist of 52 weeks
and will end on Sunday, June 29, 2003. The quarters ending September 29, 2002
and September 30, 2001 both had thirteen operating weeks and are referred to as
the first quarter of fiscal 2003 and fiscal 2002, respectively.
[Remainder of page left intentionally blank]
11
Operations
The following table sets forth, for the periods presented, certain unaudited
consolidated financial information for the Company (dollars in 000's).
Three Months Ended
------------------------------------------
September 29, September 30,
2002 2001
------------------ ---------------------
Revenues:
Sales $41,332 99.6% $34,670 99.6%
Franchising and royalty, net 148 0.4 155 0.4
------------------ ----------------
Total revenues 41,480 100.0% 34,825 100.0%
------------------ ----------------
Restaurant operating expenses (as a
percentage of restaurant sales)
Product costs 11,531 27.9 9,999 28.8
Labor costs 13,556 32.8 11,348 32.7
Other operating expense 6,443 15.6 5,562 16.1
Occupancy 3,718 9.0 2,861 8.3
Depreciation and amortization 1,767 4.3 1,489 4.3
------------------ ----------------
Restaurant operating expenses 37,015 89.6 31,259 90.2
------------------ ----------------
Restaurant level operating profit 4,317 10.4 3,411 9.8
------------------ ----------------
Restaurant operating and franchise contribution 4,465 10.8 3,566 10.3
General and administrative expense 2,305 5.6 1,922 5.5
Pre-opening expense 703 1.7 687 2.0
Interest expense and income, net 396 1.0 444 1.3
Other (income) expense 51 0.1 (3) -
------------------ ----------------
Total costs and expenses 40,470 97.6 34,309 98.5
------------------ ----------------
Income before income taxes 1,010 2.4 516 1.5
Income tax expense (38) (0.1) (40) (0.1)
------------------ ----------------
Net income $ 972 2.3% $ 476 1.4%
================== ================
Restaurant operating weeks 449 364
Restaurant sales per operating week $ 92 $ 95
Number of restaurants (end of period)
Company-owned 36 28
Franchised 12 13
------- -------
Total restaurants 48 41
======= ========
Historically, the Company has experienced volatility quarter-to-quarter in the
amount of pre-opening expenses and the percentage relationship of these expenses
to revenues. The Company typically incurs the most significant portion of
pre-opening expenses associated with the opening of a new restaurant within the
two months immediately preceding and during the month of the opening of a new
restaurant. In addition, labor and operating costs associated with a newly
opened restaurant are usually higher in the first three to four months of
operation, both in aggregate dollars and as a percentage of revenues.
Accordingly, the volume and timing of new restaurant openings has had, and is
expected to continue to have, a meaningful impact on pre-opening expenses, labor
and operating costs.
12
Thirteen Weeks Ended September 29, 2002 Compared to the Thirteen Weeks Ended
September 30, 2001
Total revenue. Total revenue increased approximately $6.7 million, or 19.1%, to
$41.5 million in the thirteen weeks ended September 29, 2002 from $34.8 million
for the comparable prior year period primarily due to the opening of six
additional restaurants in fiscal 2002, the opening of two restaurants in the
first quarter of fiscal 2003 and a menu price increase of approximately three
percent in August 2002. The increase was partially offset by lower comparable
restaurant sales of 1.6%. Although comparable restaurant sales were positive in
September 2002 as a result of a weak September 2001 associated with the
terrorist attacks, the positive impact in September was not sufficient to offset
the negative comparable restaurant sales generated primarily in July. In the
first quarter of fiscal 2003, comparable food sales increased 0.7% due largely
to the menu price increase; however, comparable alcohol sales decreased 6.5%.
The comparable alcohol sales decrease was due, in part, to a strategic decision
to de-emphasize the Company's late night promotions. The Company's view is that
the late night promotions are costly and negatively impacted the dinner meal
period.
Restaurant operating costs.
Product costs. Product costs increased by $1.5 million, or 15.3%, to
$11.5 million in the first quarter of fiscal 2003 from $10.0 million in the
comparable prior year period. Product costs as a percentage of restaurant
sales decreased to 27.9% for fiscal 2003 compared to 28.8% for fiscal 2002
due to the menu price increase and lower commodity costs.
Labor costs. Labor costs increased by $2.3 million, or 19.5%, to $13.6
million in the thirteen weeks ended September 29, 2002 from $11.3 million
in the comparable prior year period primarily as the result of our
increased restaurant base. Labor costs as a percentage of restaurant sales
slightly increased to 32.8% in fiscal 2003 from 32.7% in fiscal 2002.
Other operating expense. Other operating expense increased $0.8
million, or 15.8%, to $6.4 million in the thirteen weeks ended September
29, 2002 from $5.6 million in the comparable prior year period. Operating
expense as a percentage of restaurant sales decreased to 15.6% in fiscal
2003 from 16.1% in fiscal 2002. The decrease was due to lower repairs and
maintenance expense and lower marketing costs.
Occupancy. Occupancy expense increased $0.8 million, or 30.0%, to $3.7
million in the thirteen weeks ended September 29, 2002 from $2.9 million in
the comparable prior year period. Occupancy expense as a percentage of
restaurant sales increased to 9.0% in fiscal 2003 from 8.3% in fiscal 2002
primarily due to higher property tax costs coupled with lower comparable
restaurant sales.
Depreciation and amortization. Depreciation and amortization expense
increased $0.3 million, or 18.7%, to $1.8 million for the thirteen weeks
from $1.5 million in the comparable prior year period primarily due to an
increase in assets associated with the opening of new restaurants.
Depreciation and amortization expense as a percentage of restaurant sales
was 4.3% for both first quarters of fiscal 2003 and fiscal 2002.
Restaurant level operating profit. Restaurant level operating profit increased
approximately $0.9 million, or 26.6%, to $4.3 million in the thirteen weeks
ended September 29, 2002 from $3.4 million in the comparable prior year period.
Restaurant level operating profit as a percentage of restaurant sales increased
to 10.4% in fiscal 2003 from 9.8% in fiscal 2002 primarily due to the reasons
described above.
General and administrative expense. General and administrative expense increased
$0.4 million, or 19.9%, to $2.3 million in the thirteen weeks ended September
29, 2002 from $1.9 million in the comparable prior year period. General and
administrative expense as a percentage of revenue increased to 5.6% for fiscal
2003 from 5.5% in fiscal 2002. General and administrative expense increased as a
result of $180,000 reversal of bad debt from a franchisee in fiscal 2002 and
higher computer service and professional fees in fiscal 2003.
13
Pre-opening expense. Pre-opening expense was approximately $0.7 million for both
the thirteen weeks ended September 29, 2002 and the comparable prior year
period. Pre-opening expense as a percentage of revenue decreased to 1.7% for
fiscal 2003 from 2.0% in fiscal 2002. Pre-opening expense has historically been
approximately $0.4 million per location.
Interest expense and income, net. Interest expense and income, net was
approximately $0.4 million in both the first thirteen weeks of fiscal 2003 and
fiscal 2002.
Income before income taxes. Income before income taxes increased $0.5 million,
or 95.7%, to $1.0 million for the thirteen weeks ended September 29, 2002 from
$0.5 million in the comparable prior year period primarily for the reasons
described herein.
Income tax expense. For the thirteen weeks ended September 29, 2002, the Company
recorded an income tax expense of $0.04 million in both fiscal 2003 and fiscal
2002 for state and local income taxes.
FINANCIAL CONDITION AND LIQUIDITY
The working capital needs of companies engaged in the restaurant industry are
generally low, as sales are made for cash, and purchases of food and supplies
and other operating expenses are generally paid within 30 to 60 days after
receipt of invoices. Funding for expansion during fiscal year 2003 and fiscal
year 2002 was generally provided through available cash balances, use of
build-to-suit facilities, equipment financing and tenant improvement allowances.
Capital expenditures before tenant improvement allowances were $4.3 million and
$3.9 million for the three months ended September 29, 2002 and September 30,
2001, respectively.
As of September 29, 2002, the Company's unrestricted cash balance was $3.4
million and the restricted cash balance was $1.0 million. The restricted cash
balance primarily serves as collateral for insurance claims and construction
related obligations. The Company anticipates that it will generate positive cash
flows from operations for the remainder of fiscal year 2003. Capital
expenditures for the balance of fiscal year 2003 are anticipated to be
approximately $27.2 million before tenant improvement allowances primarily for
the construction of ten new restaurants and for upgrades to existing
restaurants.
For the three months ended September 29, 2002, the Company generated cash flow
from operating activities of $3.6 million. The Company utilized these funds and
available cash balances for the $4.3 million in capital expenditures.
The Company anticipates that funding for its expansion and other capital
expenditures will be provided from cash flows from operations, tenant
improvement allowances and equipment financing.
During the first quarter of fiscal 2003, the Company received tenant allowances
of approximately $0.3 million. The Company is anticipating tenant improvement
allowances of approximately $5.5 million for the remainder of fiscal 2003 for
leases that have already been executed and $3.5 million for leases yet to be
executed.
The Company currently has a 24-month commitment for a three store build-to-suit
facility with AEI Fund Management, Inc. Our Houston, Texas restaurant that
opened on September 16, 2002 was the first restaurant developed under this
commitment. The commitment expires October 2003 and is subject to various
pre-closing conditions.
On September 13, 2002, the Company signed a proposal with GE Capital for a $5.0
million term loan collateralized with equipment. The Company is currently under
credit review by GE Capital. These funds would be used to fund the construction
of the six to eight restaurants during the remainder of fiscal 2003. The Company
is also investigating other sources of financing at this time. In the event that
such financing is not available, the Company has the ability to curtail its
expansion program and reduce non-essential operating costs to conserve working
capital.
14
The Company also anticipates that there will be cash payments for the balance of
fiscal year 2003 associated with liabilities previously recorded and related to
the sale of predecessor companies. These liabilities consist of prior year
insurance claims, tax audits and legal expenses and settlements. These
expenditures are estimated to range between $0.4 million and $0.9 million during
the balance of fiscal year 2003. During the first quarter of fiscal 2003, the
Company expended approximately $0.5 million for these liabilities.
Inflation and changing prices have had no measurable impact on net sales and
revenue or income during the last three fiscal years.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The market risk exposure inherent in the Company's financial instruments and
consolidated financial position represents the potential losses arising from
adverse changes in interest rates. The Company is exposed to such interest rate
risk primarily in its significant investment in cash and cash equivalents and
the use of fixed and variable rate debt to fund its acquisitions of property and
equipment in past years and the implicit investment rate in the Company's
build-to-suit arrangements.
Market risk for cash and cash equivalents and fixed rate borrowings is estimated
as the potential change in the fair value of the assets or obligations resulting
from a hypothetical ten percent adverse change in interest rates, which would
not have been significant to the Company's financial position or results of
operations during the first quarter of fiscal year 2003. The effect of a similar
hypothetical change in interest rates on the Company's variable rate debt and
the investment rates implicit in the Company's build-to-suit arrangements also
would have been insignificant due to the immaterial amounts of borrowings
outstanding under the Company's credit arrangements.
Item 4. Controls and Procedures
Based upon their evaluation of the Company's internal controls, disclosure
controls and procedures within 90 days of the filing date of this report, the
Chief Executive Officer and the Chief Financial Officer have concluded that the
effectiveness of such controls and procedures is satisfactory. Further, there
were not any significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
[Remainder of page left intentionally blank]
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See "Note 3. Commitments and Contingencies -Litigation" in Notes to
Unaudited Consolidated Financial Statements.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the security holders.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
99.1 Certification by William H. Baumhauer pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Frederick J. Dreibholz pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K on August 9, 2002, announcing its change
in independent accountants from Arthur Andersen LLP to KPMG LLP.
The Company filed a Form 8-K on September 19, 2002, announcing that on
September 13, 2002, Mr. William H. Baumhauer, its chairman, chief executive
officer and president, informed the Company he had entered into a stock trading
plan.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHAMPPS ENTERTAINMENT, INC.
(Registrant)
By: /s/William H. Baumhauer
William H. Baumhauer
Chairman of the Board, President and
Chief Executive Officer
By: /s/ Frederick J. Dreibholz
Frederick J. Dreibholz
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
October 29, 2002
17
CERTIFICATION OF CHIEF EXECUTIVE OFFICER,
CHAMPPS ENTERTAINMENT, INC.
I, William H. Baumhauer, Chief Executive Officer, Champps Entertainment, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Champps
Entertainment, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 29, 2002 By: /s/ William H. Baumhauer
William H. Baumhauer
Chairman of the Board, President and
Chief Executive Officer
18
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CHAMPPS ENTERTAINMENT, INC.
I, Frederick J. Dreibholz, Chief Financial Officer, Champps Entertainment, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Champps
Entertainment, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 29, 2002 By: /s/ Frederick J. Dreibholz
Frederick J. Dreibholz
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting
Officer)
19