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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Check One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] ---
For The Fiscal Year Ended June 27, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ___
Commission File Number: 0-22639
CHAMPPS ENTERTAINMENT, INC.
(Formerly known as Unique Casual Restaurants, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Corporate Place, 55 Ferncroft Road, Danvers, MA 01923
(Address of principal executive offices) (Zip Code)
978-774-6606
(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 and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of the Common Stock of the registrant as
quoted on the National Association of Securities Dealers Automated Quotation
System on October 26, 1999 was $20,073,019 (for purposes of calculating this
amount only, directors, officers and beneficial owners of 10% or more of the
Common Stock of the registrant may be deemed affiliates).
Number of shares of Common Stock, $.01 par value, outstanding at October 26,
1999: 11,652,692
DOCUMENTS INCORPORATED BY REFERENCE
The sections of the Company's definitive Proxy Statement, listed below, which
have been or will be filed by the Company with the Securities and Exchange
Commission, are incorporated in this Annual Report by reference and shall be
deemed to be a part hereof:
The Company's definitive Proxy Statement mailed in connection with its
Annual Meeting of Stockholders to be held on or about December 8, 1999
pursuant to regulation 14A, which involves the election of directors.
Cross Reference Sheet between Items of
Registrant's Proxy Statement and Form 10-K
FORM 10-K
Item No. Item in Form 10-K Item in Proxy Statement
PART III
10 Directors and Executive Election of Directors and Committees in the Company's
Officers of the Registrant Proxy Statement relating to its Annual Meeting of Stockholders
to be held on or about December 8, 1999.
11 Executive Compensation Executive Compensation in the Company's Proxy Statement
relating to its Annual Meeting of Stockholders to be held
on or about December 8, 1999.
12 Security Ownership of Certain Principal Stockholders in the Company's Proxy Statement
Beneficial Owners and Management relating to its Annual Meeting of Stockholders to be held
on or about December 8, 1999.
Copies of all documents incorporated by reference other than exhibits to such
documents will be provided without charge to each person who receives a copy of
this Annual Report upon written request addressed to Stockholder Relations,
Champps Entertainment, Inc., One Corporate Place, 55 Ferncroft Road, Danvers,
Massachusetts 01923.
FORM 10-K INDEX
PART I
Item 1 Business 1
Item 2 Properties 14
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 16
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Results of Operations and
Financial Condition 18
Item 7a Quantitative and Qualitative Market Risk Disclosures 24
Item 8 Financial Statements and Supplementary Data 25
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 25
PART III
Item 10 Directors and Executive Officers of the Registrant 25
Item 11 Executive Compensation 26
Item 12 Security Ownership of Certain Beneficial Owners and Management 26
Item 13 Certain Relationships and Related Transactions 26
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26
From time to time, the Company may make certain statements that
contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995). Words such as
"believe", "anticipate", "estimate", "project", and similar
expressions are intended to identify such forward-looking
statements. Forward-looking statements may be made by management
orally or in writing, including, but not limited to, in press
releases, as part of Management's Discussion and Analysis of
Financial Condition and Results of Operations as contained in this
report and as part of other sections of this Report or other
filings. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their
respective dates, and are subject to certain risks, uncertainties
and assumptions including those set forth in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations under the heading "Forward-Looking Statements". Should
one or more of these risks or uncertainties materialize, or should
any of the underlying assumptions prove incorrect, actual results
of current and future operations may vary materially from those
anticipated, estimated or projected.
PART I
Item 1. Business.
Champps Entertainment, Inc. (formerly known as Unique Casual Restaurants, Inc.)
(the "Company") is a Delaware corporation which was formed on May 27, 1997 prior
to its spin-off to holders of the common stock of DAKA International, Inc.
("DAKA International") pursuant to the transactions described under the heading
"Spin-off Transaction" herein (the "Spin-off"). The Company's principal
executive offices are located at One Corporate Place, 55 Ferncroft Road,
Danvers, Massachusetts 01923, and its telephone number is (978) 774-6606. At the
time of the Spin-off, the Company's business consisted of owning, operating and
franchising casual dining restaurants through various subsidiaries under the
Champps Americana, Fuddruckers World's Greatest Hamburgers and the Great Bagel &
Coffee Company brands. Additionally, the Company also owned, at the time of the
Spin-off, a 17% passive investment in La Salsa Fresh Mexican Grill ("La Salsa")
and a 50% interest in Restaurant Consulting Services, Inc. ("RCS"). La Salsa
owned, operated and franchised a chain of fresh Mexican casual dining
restaurants. RCS was a diversified consulting and technology company offering
data processing, strategic planning and other technology services on an
outsource basis to its customers, including the Company.
The Company ceased all operations of the Great Bagel & Coffee business on June
28, 1998. On November 24, 1998, the Company sold its Fuddruckers business
segment to King Cannon, Inc. See "Acquisition and Disposition Transactions". The
Company has reported the results of operations of the Fuddruckers business
segment for all periods presented herein as discontinued operations.
On May 24, 1999, the Company sold its 50% interest in RCS as discussed more
fully under the caption "Acquisition and Disposition Transactions".
On July 15, 1999, La Salsa was purchased by Santa Barbara Restaurant Group
("SBRG") and the Company exchanged its convertible preferred shares of La Salsa
for common shares of SBRG. See "Acquisition and Disposition Transactions".
As a result of these transactions, at June 27, 1999, the Company operated in a
single business segment which owned, operated and franchised Champps Americana
casual dining restaurants. At June 27, 1999, the Company's principal subsidiary
was Champps Operating Corporation, Inc., a Minnesota corporation. Champps
Operating Corporation, Inc. in turn, owns four subsidiaries, each of which is
engaged in owning and operating Champps Americana restaurants. See Exhibit 21.1
for a complete list of the Company's subsidiaries.
Although formed on May 27, 1997, for purposes of this Form 10-K and financial
reporting purposes, the Company has been treated as if it was a stand-alone
entity for all periods presented after giving effect to sale of the Fuddruckers'
business segment. For periods prior to July 17, 1997 the accompanying financial
statements include allocations and estimates of certain expenses, including
corporate accounting, tax, cash management, information technology, legal, risk
management, purchasing and human resources, historically provided to the Company
by DAKA International.
Consideration of Strategic Alternatives, Changes in Executive Officers and
Directors, and Resolution of Proxy Contest
On November 13, 1998, a preliminary proxy was filed by Atticus Partners, L.P.
("Atticus") with respect to the Company's 1998 Annual Meeting which indicated
Atticus intended to solicit proxies for election to the Board of Directors (the
"Board") of its nominees in opposition to the Company's nominees for Director.
On March 11, 1999, the Company announced that this proxy contest had been
settled by agreement between the Company and Atticus. As a result of the
settlement, among other things, Atticus' nominees for election as Directors,
Timothy R. Barakett and James S. Goodwin, were appointed to the Board, Atticus
supported for election the Company's nominees, who were re-elected to the Board
at the Annual Meeting of Shareholders held on March 17, 1999, and the Board
established a two member strategic committee with the authority to control
and/or oversee the negotiation and preparation of any transaction to sell the
Company and provide a recommendation regarding such a transaction to the full
Board. The strategic committee also was given the authority to review and
evaluate the Company's senior executive officers in light of the Company's
strategic needs and objectives and take action in connection with its
evaluation.
The settlement agreement further provided that in the event the Company had not
entered into a definitive agreement with respect to a sale, merger or other
business combination by May 31, 1999, then the Board would be reduced in size
from seven members to five and two of the members existing prior to the
settlement would be required to step down.
On September 24, 1998, the Company had announced it had retained Bear Stearns &
Co., Inc. to assist the Company's Board in evaluating and seeking financial and
strategic alternatives, including a possible sale of the Company. On June 28,
1999, the Company announced it had terminated this process and would remain
independent and concentrate on repositioning and strengthening its remaining
business segment, the Champps Americana restaurant concept. The Company also
announced on June 28, 1999, that William H. Baumhauer had been named the
Company's President and Chief Executive Officer, replacing its Acting Chief
Executive Officer Donald C. Moore. Mr. Moore subsequently resigned as a Director
of the Company and as Chief Financial Officer and the Company accepted his
resignation.
On August 23, 1999, the Board of Directors elected William H. Baumhauer and
Nathaniel Rothschild as members of the Board of Directors and appointed William
H. Baumhauer as its Chairman of the Board. Mr. Rothschild is Executive Vice
President of Atticus Capital L.L.C. Messrs. Baumhauer and Rothschild replace
E.L. Cox and Joseph W. O'Donnell.
On April 15, 1999, Erline Belton notified the Company of her desire to resign
from the Board because of her commitment to serve as a Director of Applebees
International, Inc., a diversified casual restaurant company and the Board
accepted her resignation.
Messrs. Cox and O'Donnell served on the Board of the Company since May 1997, and
its predecessor companies since September 1988 and August 1996, respectively,
both of whom voluntarily resigned from the Board on August 13, 1999. Mr. Cox
also served as the Chairman of the Board of the Company since July 1998. With
the prior resignation of Ms. Erline Belton on April 15, 1999, the Board was
reduced from seven members to five members as contemplated by the proxy
settlement agreement between the Company and Atticus Partners, L.P. discussed
above.
The Company Board currently consists of Timothy Barakett, President of Atticus
Capital, L.L.C.; James Goodwin, an independent consultant; Nathaniel Rothschild,
Executive Vice President of Atticus Capital LLC; Alan Schwartz, Senior Managing
Director - Corporate Finance of Bear Stearns & Co., Inc.; and William H.
Baumhauer.
On August 23, 1999, the Company also announced the resignation of K.C. Moylan,
who had served as Chief Executive Officer of the Company's Champps Operating
Corporation, Inc. subsidiary since February 1998, and announced that it had
promoted Don N. Lamb to the newly created position of Vice President of
Operations. Mr. Lamb is responsible for the day-to-day operations of all
Company-owned Champps restaurants and oversees all franchised locations. Mr.
Lamb is a restaurant veteran with over 20 years of experience in the industry,
including more than 15 years of multi-unit supervision at Houlihans, Ruby
Tuesday's, and for the past three and one half years as a Regional Vice
President of Champps.
Acquisition and Disposition Transactions
Sale of Fuddruckers
On November 24, 1998, the Company completed the sale of all of the outstanding
common stock of Fuddruckers, Inc. ("Fuddruckers") to King Cannon, Inc. ("King
Cannon") pursuant to a Stock Purchase Agreement (the "Agreement"), dated as of
July 31, 1998 (the "Fuddruckers Sale"). The sale price was $43.0 million in
cash, subject to certain possible adjustments. At the closing, the Company
disbursed approximately $2.5 million to escrow agents to be held pending
resolution of certain contingent obligations discussed further below. In
addition, the Company used proceeds to pay obligations associated with the early
termination of certain leases, obtaining landlord consents to the transaction,
certain litigation settlements, and legal, accounting and severance expenses,
and to settle the Company's obligations under a put/call agreement relating to
Fuddruckers' Atlantic Restaurant Ventures, Inc. subsidiary. The Company received
approximately $2.6 million in previously restricted cash balances, which were
released by virtue of the Company's settling certain of the obligations
discussed above. The Company also purchased two closed Fuddruckers locations and
recorded assets held for sale valued at approximately $1.6 million. The
Fuddruckers sale was approved by a vote of the Company's shareholders on
November 5, 1998.
Pursuant to the Agreement, King Cannon had 120 days from the closing date to
review and propose adjustments to the portion of the estimated purchase price
related to working capital. The Company and King Cannon have agreed on the
amount of working capital as of the closing date, resulting in a reduction of
the estimated purchase price of approximately $1.5 million, including interest.
Both the Company and King Cannon have now accepted as final, the working capital
at the closing date. This reduction in estimated purchase price has been
included in the loss from discontinued operations in the accompanying financial
statements.
The Agreement contains various representations and warranties by the Company.
These include, without limitation, representations and warranties by the Company
as to (i) the organization, good standing, and capitalization of Fuddruckers and
its subsidiaries; (ii) proper corporate authority, no conflicts, no violations
and requisite approvals; (iii) ownership of the Shares; (iv) material accuracy
of financial statements, books and records; (v) absence of undisclosed
liabilities and absence of material adverse change; (vi) litigation; (vii)
compliance with law; (viii) status of employee benefit plans and labor
relations; (ix) tax matters; (x) title to and condition of assets; (xi) leases
and real property; (xii) material contractual obligations and licenses; (xiii)
intellectual property matters; (xiv) insurance policies; (xv) brokers and other
fees; (xvi) franchises; and (xvii) environmental matters.
The Company's representations and warranties contained in the Agreement survive
the closing and will expire on December 31, 2000 (the "Survival Period") except
that (i) representations and warranties made by the Company relating to
environmental matters survive the closing date until December 31, 2003, (ii)
representations and warranties made by the Company relating to employee matters
and income taxes survive the closing date until expiration of applicable
statutes of limitations and (iii) representations and warranties made by the
Company with respect to (a) the Company's power to execute the Agreement, the
Company's having executed the Agreement with required corporate action and that
the Agreement is valid and binding by its terms, the due organization, valid
existence and good standing of the Company and Fuddruckers, (b) the
representation stating the execution and delivery of the Agreement: (1) does not
violate any law, order, by-law or article of incorporation of the Company or
Fuddruckers; (2) does require approval of shareholders of Fuddruckers other than
the Company; (3) does not result in a lien or title defect in assets or shares
of Fuddruckers; or (4) does result in a claim against Fuddruckers, its assets,
shares of Fuddruckers and King Cannon; and (c) the capitalization and equity
securities of Fuddruckers shall survive the closing indefinitely. In addition,
any covenants or agreements of the Company under the Agreement, and any and all
indemnification obligations relating thereto shall survive the closing
indefinitely, unless earlier expiring in accordance with their respective terms,
including, without limitation, the Company's indemnification obligations with
respect to covenants (i) regarding environmental matters, (ii) current pending
legal proceedings; (iii) liability for taxes; (iv) sub-leases for certain
Fuddruckers restaurants; (v) undisclosed contractual obligations; (vi) violation
of the Company's representations and warranties in the Agreement; and (vii)
obligations arising between the signing on the Agreement and the closing, lease
termination amounts and rent adjustments amounts.
The Company and Champps Operating Corporation, Inc. are obligated to jointly and
severally indemnify King Cannon and Fuddruckers and their respective affiliates
from and against any losses, assessments, liabilities, claims, obligations,
damages, costs or expense which arise out of or relate to (i) any
misrepresentations in, breach of or failure to comply with any of the
representations, warranties, undertakings, covenants or agreements of the
Company, Fuddruckers and related entities, and any affiliate of any of them
contained in the Agreement; (ii) any environmental matters related to
Fuddruckers, its affiliates of business; (iii) any retained or undisclosed
liabilities; or (iv) the Company's obligations with respect to lease termination
amounts and rent adjustment amounts. With respect to the indemnification for
lease termination amounts and rent adjustment amounts, the Company obtained each
required consent and required estoppel from landlords prior to the closing of
the sale. As a result, the Company believes the risk for a material claim for
indemnification related to each of the lease termination amounts and rent
adjustment amounts provisions is remote.
Further, at the closing, the Company established a $1.0 million cash escrow
(included in the amount reported as restricted cash in the accompanying
consolidated balance sheet) as a fund for payment of any claims for
indemnification pursuant to the Agreement. Such escrow does not serve to limit
the Company's maximum exposure for indemnification claims. However, the Company
believes the risk of a claim for indemnification exceeding the $1.0 million
escrow is remote. As of June 27, 1999, no money had been paid from the escrow
fund, however in the first quarter of fiscal 2000 a total of $0.2 million was
paid for agreed amounts presented to the Company by King Cannon for
indemnification.
The maximum aggregate liability of the Company on account of any breach of any
representation or warranty is limited to the amount of the final purchase price.
There is no cap or limit on the liability of the Company to King Cannon on
account of any breach by the Company of any of its covenants or agreements under
the Agreement or on account of indemnification obligations covering matters
other than breaches of representations and warranties, provided that, if King
Cannon is entitled to recover any losses in excess of the final purchase price,
the Company may either (i) require King Cannon to reconvey to the Company full
ownership and control of the shares and all assets (to the extent then owned by
King Cannon or Fuddruckers) that are being transferred pursuant to the Agreement
in such a manner as to rescind the transactions contemplated by the Agreement,
in which case the Company will pay King Cannon an amount equal to (x) the final
purchase price plus (y) all additional investments made in Fuddruckers following
the closing plus (z) an amount equal to an internal rate of return equal to 25%
on the sum of items (x) and (y); or (ii) pay to King Cannon all of the losses
with respect to which King Cannon is entitled to indemnification.
As part of the consideration under the Agreement, each of the Company and
Champps Operating Corporation agreed that, for a period of ten years following
the closing date, neither will (i) directly or indirectly, own, manage, operate,
finance, join, or control, or participate in the ownership, management,
operation, financing or control of, or be associated as a partner or
representative in connection with, any restaurant business that is in the
gourmet hamburger business or whose method of operation or trade dress is
similar to that employed in the operation of the "Fuddruckers" restaurant; or
(ii) directly or indirectly solicit, induce or attempt to induce any person then
employed by Fuddruckers or King Cannon to enter the employ of the Company or
Champps Operating Corporation, or any of their respective affiliates.
Nothing contained in the Agreement limits the right of the Company or Champps to
operate the business of Champps as it is currently conducted or other restaurant
concepts that do not compete directly with Fuddruckers or to own less than a 5%
legal or beneficial ownership in the outstanding equity securities of any
publicly traded corporation.
La Salsa Merger
On July 16, 1999, SBRG, a publicly held corporation, reported that it had
completed the acquisition of La Salsa Fresh Mexican Grill ("La Salsa"). In
connection with this transaction, the Company exchanged all of its Series D
Convertible Preferred Stock of La Salsa for approximately 1,277,500 shares of
common stock of SBRG, of which approximately 120,650 shares have been placed in
escrow to cover any claims for indemnification by SBRG in connection with this
transaction. The Company recorded a loss on its Series D Convertible Preferred
Stock investment of approximately $2.3 million in the fourth quarter of fiscal
1999, which represents the decrease in market value of the stock through June
27, 1999.
RCS Disposition
On May 24, 1999, the Company sold its 50% interest in RCS to RCS pursuant to a
Stock Redemption and Debt Restructuring Agreement. As part of this transaction,
the Company also canceled all amounts due to the Company from RCS, including a
note and accrued interest in the amount of $2.5 million. In consideration for
its shares of RCS common stock and the cancellation of the note and accrued
interest, the Company received a note payable which was paid in full on August
25, 1999, certain computer equipment and software, a commitment to complete
certain work in progress without charge to the Company, services under a three
year consulting and professional data processing agreement without charge to the
Company and cancellation of accounts payable to RCS. The Company recorded a loss
on this transaction of approximately $350,000 during fiscal 1999.
Recent Trends in Operations
The Company has reported its Fuddruckers segment as a discontinued operation,
and as a result, the following discussion is focused primarily on the Company's
continuing operation, the Champps Americana restaurant concept. For fiscal 1999,
1998 and 1997, except as otherwise stated, the Company reported net losses from
continuing operations before cumulative effect of change in accounting for
preopening costs of approximately $14.1 million, $6.0 million and $27.4 million,
respectively. The Company incurred a loss from discontinued operations in fiscal
1999, 1998 and 1997 of approximately $9.8 million, $20.7 million and $11.7
million, respectively. Discontinued operations represent the Company's former
Fuddruckers business segment which was sold in November 1998. During the past
two years, the Company has evaluated its strategic position and evaluated
various strategic alternatives, including a possible sale of the Company. In
June 1999, the Board culminated this process with a decision to have the Company
remain independent and to focus the attention of management on repositioning and
strengthening the Champps Americana restaurant concept. As part of this
decision, the Board elected a new Chairman, President and Chief Executive
Officer, and other changes occurred in the make-up of the Company's Board and
its executive officers. These changes are discussed in more detail elsewhere in
this Form 10-K.
Results of continuing operations for fiscal 1999 include charges of
approximately $9.4 million associated with these decisions as follows:
(In millions)
Sale and write-down of non-essential assets $ 2.7
Exit and other charges 1.3
Changes in estimates on continuing obligations
for predecessor businesses 2.7
Losses on business and lease contracts 2.7
--------
$ 9.4
========
The Company believes that these decisions and its near-term strategies
including, but not limited to, its streamlining of corporate overhead, continued
development of new Champps restaurants and improving operational performance at
all levels of the organization should provide it a good opportunity for a return
to profitability. See "Management's Discussion and Analysis of Operations and
Financial Condition" for a further discussion of the Company's results of
operations for fiscal 1999, 1998 and 1997.
Champps Americana Concept
Operations
The Champps Americana ("Champps") concept is based upon providing the best
possible food, value and service to its customers. Although food and service are
the most important parts of the Champps Americana concept, an atmosphere that is
entertaining and energetic, yet comfortable, is also critical. The food
offerings at Champps' restaurants combine a wide selection of appetizers, soups,
salads, innovative sandwiches, pizza, burgers, and entrees including chicken,
beef, fish, pasta and desserts. Selections reflect a variety of ethnic and
regional cuisines and traditional favorites. Because Champps' menu is not tied
to any particular type of food, Champps can introduce and eliminate items based
on current consumer trends without altering its theme. Portion sizes are
generous and each dish is attractively presented. Champps believes that these
qualities give customers a sense of value. Entree prices currently range from
$4.95 to $15.95. Champps emphasizes freshness and quality in its food
preparation. Fresh sauces, dressings, batters and mixes are prepared daily on
the premises, generally from original ingredients using fresh produce. Champps
invests substantial time in training and testing kitchen employees to maintain
consistent food preparation. Strict food standards at Champps-owned restaurants
have also been established to maintain quality.
The Champps customer's experience is enhanced by the attitude and attention of
restaurant personnel. Accordingly, the Champps concept emphasizes prompt
greeting of arrivals, frequent visits to customer tables to monitor customer
satisfaction and service and friendly treatment of its customers. Service is
based upon a team concept so that customers are made to feel that any employee
can help them and they are never left unattended. Success of the Champps
restaurants depends upon employee adherence to these standards. To maintain
these standards, Champps seeks to hire and train personnel who will work in
accordance with Champps' philosophy and frequently rewards individual and
restaurant achievement through several recognition programs intended to build
and maintain employee morale. All of the service personnel at each Champps
restaurant meet with the managers at two daily pre-shift motivational meetings.
Restaurant promotions, specials and quality control are all discussed and
explained during these meetings. Also, employee enthusiasm is raised so that the
employees can help increase the energy level and excitement of the restaurant.
Champps-owned, franchised and licensed restaurants are designed and decorated in
a casual theme, although they differ somewhat from each other. Champps
restaurants generally range in size from approximately 7,000 to 12,000 square
feet. Champps' standard restaurant features a bar, open kitchen and dining on
multiple levels . Customers can also dine at the bar or outside on the patio,
where available. The spacious design facilitates efficient service, encourages
customer participation in entertainment and promotional events and allows
customers to view the kitchen, dining area, and bar. Strategically placed
television monitors stimulate customer perception of activity and contribute to
the total entertainment experience and excitement of the restaurant.
An important part of the Champps dining experience is the entertainment. Patrons
may watch one of several sporting events being broadcast, or listen to a variety
of music played by the disc jockey, music which is changed for the time of day
and season of the year. The exposed kitchen offers customers the opportunity to
observe the cooks, and, in certain locations, a discreetly located game room is
provided for arcade games. The entertainment aspects of the Champps restaurants
are designed to encourage repeat visits, increase the length of a customer's
stay and attract customers outside of normal peak hours. In addition, a variety
of creative promotions and activities are conducted such as "Family Bingo,"
"Spring Time Big Bike Give-Away" and Karaoke. These promotions and activities
allow for customer participation and are continually changing. Change of the
ambiance is also experienced in each restaurant when the restaurants are
decorated for the holidays and when the dress of the restaurant staff is changed
for the seasons. The different looks and activities of the restaurant provide
customers a different feel each time they visit, thus encouraging repeat
business. Champps sells merchandise such as T-shirts, hats and sweatshirts
bearing the Champps Americana name. Although not currently a significant source
of revenue, the sale of its merchandise is believed to be an effective means of
promoting the Champps name.
Champps restaurants are generally open from 11:00 a.m. to 1:00 a.m. seven days a
week serving lunch, dinner and late night appetizers. Closing times of Champps
restaurants will vary based upon state laws concerning operating hours. Sunday
brunch is served beginning at 10:00 a.m. Each Champps restaurant maintains
standardized food preparation and service manuals which are designed to enhance
consistency of operations among the restaurants. Although Champps restaurants
differ in some respects, Champps attempts to have each Champps-owned and
franchised restaurant operate under uniform standards and specifications.
Management
The management staff of a Champps restaurant is divided into three areas, the
General Manager, Front-of-House Managers and Back-of-House Managers. The General
Manager has responsibility for the entire restaurant. Front-of-House management
generally consists of an associate manager, two floor managers and a bar
manager. Back-of-House management generally consists of a kitchen manager, two
to three assistant kitchen managers and a daily specials chef. All General
Managers report directly to the Directors of Operations. Managers are
compensated based on salary plus a monthly bonus. The bonus is determined by
means of monthly restaurant sales and profit goals.
Marketing
Champps restaurants have historically expended minimal amounts on traditional
media advertising and marketing, but have relied on in-restaurant marketing and
promotions.
Site Selection
Champps uses its own personnel and consultants to analyze markets and sites for
new restaurants, obtain the required zoning and other permits, negotiate the
leasing or real estate purchase and oversee all aspects of the construction
process. Champps believes that location is a key factor in a restaurant's
ability to operate a profitable lunch and dinner business, and considers several
demographic factors in selecting sites, including the average income of the
neighboring residential population, the proximity of retail, office and
entertainment facilities, traffic patterns and the visibility of the site.
The cost to construct a typical Champps restaurant, where Champps purchases real
estate, depending upon its location, is approximately $4.5 to $6.0 million,
which includes approximately $1.0 million for furniture, fixtures and equipment,
$1.5 to $2.5 million for building and improvements, $1.5 to $2.0 million for
land and site work, and $0.4 million related to pre-opening costs of the
restaurant.
The typical cost to construct a new Champps restaurant where Champps enters into
a leasing arrangement is approximately $3.0 to $3.5 million which is comprised
of approximately $1.0 million for furniture, fixtures and equipment, $1.5 to
$2.0 million for leasehold improvements, and $0.4 million related to pre-opening
costs of the restaurant.
Future development of Champps restaurants will be accomplished primarily through
the development of Champps-owned restaurants. The development of additional
restaurants is contingent upon locating satisfactory sites, financing,
negotiating satisfactory leases or, alternatively, leasing and converting
existing restaurant sites into Champps restaurants. It is also dependent upon
securing appropriate governmental permits and obtaining liquor licenses. During
1999, two new Champps Company-owned restaurants were opened. During fiscal 1998,
four new Champps Company-owned restaurants were opened, and on February 2, 1998,
the Company sold a Champps Company-owned restaurant in Minnetonka, Minnesota.
The restaurant was sold to Dean Vlahos, a former Director of the Company and the
former President and Chief Executive officer of Champps Americana, Inc., for
$2.9 million representing the fair value of the restaurant based upon an
independent appraisal. The purchase price was settled through a cash payment by
Mr. Vlahos of $1.5 million and the cancellation of Mr. Vlahos' employment
contract. The Company recognized a net gain of approximately $700,000 on this
transaction. As part of this transaction, the Company entered into a separation
agreement with Mr. Vlahos which grants Mr. Vlahos the right, subject to certain
restrictions, to develop up to six franchised Champps restaurants in the United
States by February 2, 2006. Under the separation agreement, Mr. Vlahos will not
pay a franchise fee with respect to such restaurants and will pay a continuing
royalty of 1.25% of gross sales. At June 27, 1999, the Company had three new
Champps Company-owned restaurants under construction and one Champps restaurants
under development, which are expected to open in fiscal 2000. Development of
Champps-owned restaurants will be concentrated in selected markets with
population density levels sufficient to support the restaurants.
Franchising and Licensing
Champps has offered franchises in markets where it deems expansion to be
advantageous to the development of the Champps concept and a system of
restaurants. Pursuant to franchise agreements, franchisees are granted an
exclusive territorial license to operate a single restaurant within a specified
area. Currently, there are two franchisees operating multiple restaurants.
The franchisee agreement requires a franchisee to pay an initial fee of $75,000
per restaurant (a part may be associated with a development fee), a continuing
royalty fee of 3 1/4% of gross sales, and may provide a regional and/or national
advertising fee of 1/2% of gross sales at such time as Champps establishes a
regional/national advertising program. Among the services and materials that
Champps may provide to franchisees are site selection assistance, assistance in
design development, an operating manual that includes quality control and
service procedures, training, on-site pre-opening supervision and consultation
relating to the operation of the franchised restaurants. Champps has granted
both single and multi-restaurant development rights depending upon market
factors and franchisee capabilities. With respect to multi-restaurant
agreements, the franchisee's continuing right to obtain franchises is contingent
upon the franchisee's continuing compliance with the restaurant development
schedule.
All franchisees are required to operate their restaurants in accordance with
Champps' standards and specifications, including controls over menu selection,
food quality and preparation. Champps approves all restaurant site selections
and applies the same criteria used for its own restaurant sites. Champps
requires all new franchisees to provide at least annual financial statements
reviewed by an independent certified public accountant. Periodic on-site
inspections are conducted to assure compliance with Champps standards and to
assist franchisees with operational issues. Franchisees bear all direct costs
involved in the development, construction and operation of their restaurants.
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Champps Restaurant Locations
The following table sets forth the locations of restaurants operated by Champps
and its franchisees as of October 6, 1999:
Company Owned Restaurant Locations Franchised Restaurant Locations
Domestic - Total 20 Domestic - Total 13
CALIFORNIA MINNESOTA
Irvine Burnsville
COLORADO Maple Grove
Denver Maplewood
FLORIDA Minnetonka (2)
Ft. Lauderdale New Brighton
GEORGIA St. Paul
Alpharetta Woodbury
ILLINOIS NEBRASKA
Schaumburg Omaha
INDIANA NORTH CAROLINA
Indianapolis Charlotte
MICHIGAN SOUTH DAKOTA
Livonia Sioux Falls
Troy WISCONSIN
MINNESOTA Milwaukee (2)
Richfield
NEW JERSEY
Edison
Marlton
OHIO
Columbus (3)
Dayton
Lyndhurst
TEXAS
Addison
Houston
San Antonio
VIRGINIA
Reston
Centralized Functions
During fiscal 1998, and through the first half of fiscal 1999 the Company
provided Fuddruckers and Champps with centralized purchasing, accounting and
management information services. During the first few months after the sale of
Fuddruckers, the Company and King Cannon agreed to "share" certain support
functions including purchasing, payroll, accounts payable, risk management and
technology support. On June 27, 1999, the Company and King Cannon have
terminated all significant support function sharing arrangements.
Purchasing
On November 15, 1997, the Company entered into a five-year distribution
agreement with Sysco Corporation ("Sysco") pursuant to which Sysco is entitled
to distribute not less than 80% of food and food-related purchases of
Fuddruckers and Champps. The agreement with Sysco is cancelable by either party
upon 60 days notice. Fuddruckers and Champps franchisees also have the option of
purchasing from Sysco. King Cannon assumed the Fuddruckers portion of the
Agreement when it acquired Fuddruckers.
Accounting and Management Information Systems
Since its inception with the Spin-off, the Company has provided each of its
operating segments with centralized financial and management controls through
the use of an automated data processing system and prescribed reporting
procedures. The Company continues to upgrade its computer hardware and financial
software. Restaurants forward weekly sales reports, vendor invoices, payroll
information and other operating information to the Company's corporate
headquarters. The Company utilizes this data to centrally monitor sales,
product, labor and other costs and to prepare periodic financial and management
reports. The Company believes that its centralized accounting, payroll, cash
management and information systems permit the Company to control and manage its
operations efficiently.
Effective July 1, 1997, the Company entered into a sale and services agreement
with RCS whereby the Company sold to RCS for an aggregate purchase price of $2.3
million certain data processing equipment. The purchase price was evidenced
through a promissory note due June 30, 2002 which included interest at 6% per
annum. The promissory note was contributed to the Company as part of the
Additional Capital Contribution described under the caption "Spin-off
Transaction." The Company also received DAKA International's 50% interest in RCS
at the Transaction Date. In connection with this sale, the Company entered into
a management agreement with RCS whereby the Company agreed to provide certain
managerial services to RCS. In addition, the Company entered into a two year
service agreement with RCS for data processing and consulting services for an
annual fee of $1.8 million. This agreement was terminated, and a new three year
agreement between the Company and RCS was entered into as part of the Company's
sale of its ownership interest in RCS. See "Acquisition and Disposition
Transactions". See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" for a discussion of the Company's Y2K
compliance initiatives. The Company consolidated RCS operations for fiscal 1999
and 1998, while the Company maintained 50% ownership of RCS and had the RCS
note.
Competition
The restaurant industry is highly competitive. Champps competes with other
national and international restaurant chains as well as local and regional
operations. Competition within the industry is based principally on the quality,
variety and price of food products served. Site location, quality of service and
attractiveness of facilities are also important factors for a successful
restaurant. The restaurant industry is affected by general economic conditions,
changing tastes, population, traffic patterns and spending habits of guests.
Champps believes that their competitive position is enhanced by providing guests
with a diverse selection of menu items served in bountiful portions at moderate
prices in an upscale and entertaining atmosphere.
The Company also believes factors such as service, cleanliness and atmosphere
are as important in a guest's dining decision as menu and food quality. In
response to this trend, the Company has provided training, education and
motivational programs for its associates to focus on providing quality service
and to sustain a sensitivity to guest needs. The Company believes that by
operating in a professional manner where each of its associates places the guest
first, Champps can win guest loyalty.
Government Regulation
The Company is subject to various federal, state and local laws affecting its
business. Its operations are subject to various health, sanitation and safety
standards, federal and state labor laws, zoning restrictions and state and local
licensing. Federal and state environmental regulations have not had a material
effect on the Company's operations to date. Champps is also subject to federal
and state laws regulating franchise operations and sales. Such laws impose
registration and disclosure requirements on franchisors in the offer and sale of
franchises, or impose substantive standards on the relationship between
franchisor and franchisee.
Champps restaurants are subject to state and local licensing and regulation with
respect to selling and serving alcoholic beverages. The sale of alcoholic
beverages accounted for approximately 33% of Champps' total restaurants sales
during fiscal year 1999 and 1998. The failure to receive or retain, or a delay
in obtaining, a liquor license in a particular location could adversely affect
Champps' or a franchisee's operation in that location and could impair Champps'
or such franchisee's ability to obtain licenses elsewhere. Typically, licenses
must be renewed annually and may be revoked or suspended for cause.
Champps restaurants are subject to "dram shop" statutes in certain states. These
statutes generally give a person injured by an intoxicated person the right to
recover damages from the establishment that has wrongfully served alcoholic
beverages to the intoxicated person. Champps carries liquor liability coverage
in the amount of $1.0 million per occurrence subject to a policy aggregate of
$25.0 million. However, a judgment against Champps under a "dram shop" statute
in excess of Champps' liability coverage, or any inability to continue to obtain
such insurance coverage at reasonable costs, could have a material adverse
effect on the Company.
Research and Development
The Company is engaged in research activities relating to the development or
improvement of new and existing products or services. Champps, together with its
franchisees, utilize test kitchen facilities to develop recipes, test food
products and equipment and set nutritional and quality standards. Champps, and
their franchisees test additional menu items in various markets on an on-going
basis. These tests are coordinated through the corporate headquarters.
Furthermore, the Company employs a professional support staff to establish,
maintain and enforce high standards of sanitation and safety in all phases of
food preparation and service. The cost of research and development currently is
not material to the Company's cost of operations.
Service Marks
The Company, through its operating subsidiaries, has registered a number of
trademarks and service marks with the United States Patent and Trademark Office
and with certain states, including the trade names: "Champ's", "Champps",
"Champps American Sports Cafe" and "Champps Entertainment", in connection with
providing bar and restaurant services (collectively, the "Marks").
Pursuant to a Master Agreement dated February 1, 1994, whereby Champps acquired
certain "Champ's" and "Champps" service marks, trademarks and trade names from
Champs Restaurants, Inc. ("CRI"), Champps pays CRI an annual fee equal to the
lesser of approximately $260,000 or one-quarter percent (0.25%) of the gross
sales of Champps restaurants, but in no event less than $40,000. The maximum fee
payable by Champps is increased annually by the lesser of the increase in the
Consumer Price Index or 4%.
All of the service marks, trade names and trademarks are of significant
importance to the businesses of Champps. Champps has also registered various
service marks in several foreign countries. The Company and its subsidiaries
intend to protect their service marks through registration with appropriate
governmental authorities.
Seasonality
Champps sales are historically higher in the fall and spring months, due
primarily to dining habits of its guests, the interest in athletic events at
these times of year which are featured on video walls in the Company's
restaurants and eating out trends of the general public.
Corporate Offices and Associates
Champps Entertainment, Inc. is incorporated under the laws of the State of
Delaware and employs at its corporate headquarters approximately 16 associates
on a full-time basis, two of which are executive officers, as of June 27, 1999.
Champps Operating Corporation, Inc. is incorporated under the laws of the State
of Minnesota and employs approximately 3,124 associates on a full-time and
part-time basis. Substantially all restaurant associates, other than restaurant
management, are compensated on an hourly basis.
None of the Company's or its subsidiaries' employees are covered by collective
bargaining agreements. The Company considers its relations with its associates
to be good.
The Company maintains its present principal executive offices at One Corporate
Place, 55 Ferncroft Road, Danvers, Massachusetts 01923. The telephone number for
the Company is (978) 774-6606. See "Properties" for transfer of corporate
office.
Spin-off Transaction
On May 27, 1997, DAKA International and its wholly-owned subsidiary, Daka, Inc.,
a Massachusetts corporation ("Daka"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Compass Interim, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Holdings, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Group PLC incorporated in
England and Wales (collectively "Compass"), pursuant to which Compass agreed,
upon the satisfaction of certain conditions, to commence a tender offer (the
"Offer") for all of the outstanding shares of DAKA International common stock
(the "Merger"). The Offer was consummated on July 17, 1997. Immediately prior to
the consummation of the Offer, pursuant to a plan of contribution and
distribution as described in the Reorganization Agreement dated as of May 27,
1997, by and among DAKA International, Daka, the Company and Compass, DAKA
International and certain of its subsidiaries, including Daka and the Company,
made various contributions of assets and equity interests to each other in the
form of dividends and capital contributions in order to divest DAKA
International of its restaurant businesses which were contributed to the
Company.
Certain non-restaurant operating assets and liabilities of DAKA International
were also contributed to the Company (the "Additional Capital Contribution")
consisting of notes receivable, property and accounts payable, accrued expenses,
and contingent liabilities. These net assets and liabilities, which resulted in
a decrease to stockholders' equity of approximately $1.5 million, were recorded
within their respective captions during fiscal 1998.
Following the consummation of the Offer, Compass merged with and into DAKA
International. Pursuant to the Offer, DAKA International distributed to each
holder of record of shares of DAKA International common stock, one share of
common stock of the Company for each share of DAKA International owned by such
stockholder (the "Distribution"). No consideration was paid by DAKA
International's stockholders for the shares of the Company's common stock. As a
result of the Distribution, the Company ceased to be a subsidiary of DAKA
International and began operating as an independent, publicly-held company on
July 17, 1997.
As part of the merger and the Spin-off transaction, except as otherwise
specifically provided, the Company agreed to indemnify, defend and hold harmless
Compass, from and against, and pay or reimburse Compass for, all losses,
liabilities, damages, deficiencies, obligations, fines, expenses, claims,
demands, actions, suits, proceedings, judgments or settlements, including
certain interest and penalties, out-of-pocket expenses and reasonable attorneys'
and accountants' fees and expenses incurred in the investigation or defense of
any of the same or in asserting, preserving or enforcing any of Compass' rights
suffered by Compass ("Indemnifiable Losses"), as incurred relating to or arising
from the liabilities that Compass did not agree to assume (including the failure
by the Company or any of its subsidiaries to pay, perform or otherwise discharge
such assumed liabilities in accordance with their terms), whether such
Indemnifiable Losses relate to or arise from events, occurrences, actions,
omissions, facts or circumstances occurring, existing or asserted before, at or
after the Spin-off. Further the Company will be responsible for all tax
liabilities of DAKA International and Daka and the Company for periods (or
portions of periods) ending on or before the effective date of the Distribution
and will have the benefit of any tax refunds, tax credits or loss carryforwards
arising in such pre-Distribution periods. For periods (or portions of periods)
beginning after the effective date of the Distribution, in general, the Company
will be responsible for tax liabilities of the Company, and DAKA International
will be responsible for tax liabilities of DAKA International and Daka. The
scope and amount of such liabilities is subject to a high degree of uncertainty
and risk. Although the Company has estimated the amount of liabilities due,
there can be no assurance that such amounts to be ultimately paid will not
differ from the Company's estimate and such difference could be material.
Covenant Not to Compete
In the Post-Closing Covenants Agreement, the Company agreed that, for a period
of five years following the Spin-off, it would not directly or indirectly,
either individually or as an agent, partner, shareholder, investor, consultant
or in any other capacity, (i) participate or engage in, or assist others in
participating or engaging in, the business of providing contract catering,
contract food and vending services to business and industry, educational
institutions, airports, healthcare or museums or similar leisure facilities in
the continental United States but excluding food service at certain retail
outlets (the "Restricted Business"); (ii) influence or attempt to influence any
customer of Compass or Daka to divert its business from Compass or Daka to any
person then engaged in any aspect of the Restricted Business in competition with
Compass or Daka; or (iii) solicit or hire any of the foodservice employees at
the district manager level or above, either during the term of such person's
employment by DAKA International or Daka or within 12 months after such person's
employment has ceased for any reason, to work for the Company or any person in
any aspect of foodservice (including vending service) in competition with
Compass, or Daka.
Item 2. Properties.
As of June 27, 1999, the Company leased approximately 44,000 square feet of
office space at its corporate headquarters in Danvers, Massachusetts, at an
average annual rent of $722,000 through November 30, 2001. Compass subleased
approximately 20,000 square feet from the Company for the first half of fiscal
1999 and all of fiscal 1998 at an annual rental of $361,000 equal to one-half
the Company's annual rent. As of June 28, 1998, King Cannon had agreed to
sub-lease 10,000 square feet at a monthly rent of $10,800 from February 1, 1999
to the end of the lease, and RCS subleases approximately 3,700 square feet at
$5,000 monthly, for the remaining term of the lease.
Champps Operating Corporation, Inc. leases approximately 4,000 square feet for
its corporate office, located in Wayzata, Minnesota, pursuant to a five-year
lease at an average annual rent of $70,800.
As part of the Company's decision to terminate its evaluation of strategic
alternatives and refocus on repositioning and strengthening the Champps
restaurant concept, the Company has made a decision to consolidate all of its
corporate offices into approximately 7,500 square feet in Denver, Colorado. The
Company is currently negotiating for space in Denver. No lease has been signed
as of October 15, 1999. The Company anticipates completing the move by the end
of December 1999, although there can be no assurance that the move can be
completed in this time frame. The Company believes that the elimination of
excess assets, space and work force, and the consolidation and relocation of the
two existing headquarters will cost approximately $2.0 million, of which $1.3
million was recorded as "Exit and other charges" in fiscal 1999. See
"Management's Discussion of Results of Operations and Financial Condition."
Item 3. Legal Proceedings.
The Company assumed certain contingent liabilities of DAKA International in
connection with the Spin-off in Item 1, (see "Spin-Off Transactions") and agreed
to assume certain contingent liabilities of Fuddruckers for periods prior to its
sale to King Cannon as discussed in Item 1, see "Acquisitions and Dispositions
Transactions" in this Form 10-K. Further, the Company is also engaged in various
other actions arising in the ordinary course of business. The Company believes,
based upon consultation with legal counsel, that the ultimate collective outcome
of these other matters will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted by the Company to a vote of Stockholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year for which this report is filed.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The Company's common stock originally was listed on the Nasdaq National Market
("Nasdaq") under the symbol "UNIQ" from July 17, 1997, the date on which the
Company became a publicly trade company as a result of its spin-off from DAKA
through July 28, 1999. On July 28, 1999, the Company changed its name from
Unique Casual Restaurants, Inc. to Champps Entertainment, Inc. and changed its
symbol on Nasdaq to "CMPP." The table below sets forth, since such date and for
the calendar periods indicated, the high and low intra-day sales price per share
with respect to fiscal 1998 and closing price with respect to fiscal 1999 of the
Common Stock as reported on the Nasdaq. The Company has no history of market
price for its common stock prior to such date and data with respect to the
common stock of DAKA, as predecessor of the Company, which was listed on Nasdaq
before July 17, 1997, would not be meaningful.
High Low
Fiscal 1998
First Fiscal Quarter (after July 17, 1997) $ 7.44 $ 6.13
Second Fiscal Quarter 7.06 5.75
Third Fiscal Quarter 7.00 5.81
Fourth Fiscal Quarter 6.50 5.13
Fiscal 1999
First Fiscal Quarter 7.38 4.88
Second Fiscal Quarter 6.94 4.56
Third Fiscal Quarter 6.38 4.56
Fourth Fiscal Quarter 5.25 3.56
On October 18, 1999, there were 2,810 holders of record of the Company's Common
Stock.
The Company has never paid cash dividends on shares of its Common Stock and does
not expect to pay dividends in the foreseeable future. The Company presently has
no plans to buy back shares of the Company Common Stock in the open market.
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Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
The following table presents selected consolidated data from continuing
operations and balance sheet data of the Company. Data for periods prior to 1999
have been restated to account for the Company's Fuddruckers segment as a
discontinued operation. The balance sheet data as of June 27, 1999, June 28,
1998, and June 29, 1997 and 1996 and the statements of operations data for each
of the four fiscal years in the period ended June 27, 1999 presented below are
derived from the Company's audited consolidated financial statements. The
balance sheet data as of July 1, 1995 and for the fiscal year then ended have
been derived from the Company's unaudited internal financial statements.
For purposes of this Form 10-K and financial reporting purposes, the Company has
been treated as if it was a stand-alone entity for all periods presented. The
Company's results from continuing and discontinued operations, as presented in
the table below for periods prior to July 17, 1997, include allocations and
estimates of certain expenses, including corporate accounting, tax, cash
management, information technology, legal, risk management, purchasing and human
resources, historically provided to the Company by DAKA International.
The selected consolidated financial data should be read in conjunction with the
consolidated financial statements and related notes thereto of the Company and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere in this Annual Report on Form 10-K.
As of and for the Fiscal Years Ended
-------------------------------------------------------------
June 27, June 28, June 29, June 29, July 1,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Statements of Operations Data:
Total revenues $ 87,950 $ 77,700 $ 64,239 $ 45,589 $ 21,655
Loss from continuing operations before cumulative effect
of change in accounting for preopening costs (14,079) (5,999) (27,389) (12,736) (5,813)
Net income (loss) (23,922) (27,735) (39,043) (5,670) 1,798
Basic and diluted loss per share from continuing
operations (1.21) (0.52) -- -- --
Pro forma basic and diluted loss per share from
continuing operations -- -- (2.40) (1.11) (0.51)
Weighted average shares (in thousands):
Historical 11,622 11,489
Pro forma 11,426 11,426 11,426
Balance Sheet Data:
Total assets $ 57,142 $ 86,660 $ 110,267 $ 125,239 $ 92,107
Long-term debt related to continuing operations,
including current portion 6,157 6,945 4,256 4,460 1,992
Total equity 27,819 50,398 79,053 108,894 73,979
Discontinued operations:
Minority interests and obligations under put agreement
related to the discontinued operations -- 5,400 1,100 1,168 1,908
Net long-term assets -- 44,335 65,307 83,591 71,638
Net current liabilities -- (4,202) (6,492) (132) (4,606)
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
General
The following Management's Discussion and Analysis of Results of Operations and
Financial Condition is based upon the historical consolidated financial
statements of the Company, which present the Company's results from continuing
operations, financial position and cash flow. Prior to July 17, 1997, the
Company historically operated as part of DAKA International. The historical
consolidated financial statements for fiscal 1997 include the assets,
liabilities, income and expenses that were directly related to the restaurant
business as operated within DAKA International prior to the Spin-off. The
Company's financial statements for fiscal 1997 include all of the related costs
of doing business, including charges for the use of facilities and for employee
benefits, and includes an allocation of certain general corporate expenses,
including costs for corporate logistics, information technologies, finance,
legal and corporate executives. These allocations of general corporate expenses
were based on a number of factors including, for example, personnel, labor costs
and sales volumes. Management believes these allocations as well as the
assumptions underlying the preparation of the Company's separate consolidated
financial statements to be reasonable.
As a result of the Spin-off, certain other non-restaurant operating assets and
liabilities of DAKA International were contributed to the Company as described
in Note 2 to Financial Statements. Those assets and liabilities consisting of
notes receivable, property, accounts payable, accrued expenses, and contingent
liabilities have been recorded within their respective captions during fiscal
1998 and resulted in a decrease to stockholders' equity of $1.5 million.
Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in
the following Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Company and elsewhere in this Annual Report on Form
10-K are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Words such as "believe",
"anticipate", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
respective dates. Forward-looking statements involve risks and uncertainties,
many of which may be beyond the Company's control. Should one or more of these
risks or uncertainties materialize, or should any of the underlying assumptions
prove incorrect, actual results of current and future operations may vary
materially from those anticipated, estimated or projected. Factors that may
cause such a difference include, among others, the following: the ability of the
Company to successfully implement strategies to improve overall profitability;
the impact of increasing competition in the casual and upscale casual dining
segments of the restaurant industry; changes in general economic conditions
which impact consumer spending for restaurant occasions; adverse weather
conditions, competition among restaurant companies for attractive sites and
unforeseen events which increase the cost to develop and/or delay the
development and opening of new restaurants; increases in the costs of product,
labor, and other resources necessary to operate the restaurants; unforeseen
difficulties in integrating acquired businesses; the availability and terms of
financing for the Company and any changes to that financing; the revaluation of
any of the Company's assets (and related expenses); the ultimate outcome of
certain contingent obligations related to the Company's former Fuddruckers
segment and its other predecessor businesses; the impact on the Company and/or
its suppliers of matters related to the so-called Y2K problem; the issuance and
renewal of licenses and permits for restaurant development and operations,
including the sale of alcoholic beverages; and the amount of, and any changes
to, tax rates.
RESULTS OF OPERATIONS
Overview
The Company incurred a net loss from continuing operations of $14.1 million for
the fiscal year ended June 27, 1999, compared to a comparable operating loss of
$6.0 million last year. Included in the loss for continuing operations for
fiscal 1999 were charges associated with exit and other charges ($1.3 million);
sale and write-down of non-essential assets ($2.7 million); changes in estimates
for continuing obligations of predecessor businesses ($2.7 million); and losses
on business and lease contracts ($2.7 million). Exclusive of these charges, the
Company would have reported a loss from continuing operations of $4.7 million
for fiscal 1999. While the Company believes it has strategies that will give it
an opportunity to return to overall profitability, there can be no assurance
that such strategies will be implemented, or if implemented, will be successful.
Accordingly, the Company may continue to incur operating losses. The amount of
losses and the time required by the Company to reach sustained profitability
cannot be predicted with certainty and to achieve profitability the Company
must, among other things, successfully reduce selling, general and
administrative expenses as a percentage of sales from historical levels while
continuing to increase net revenues from its restaurants and successfully
executing its growth strategy for the Champps Americana concept.
In Item 1, see "Consideration of Strategic Alternatives, Changes in Executive
Officers and Directors and Resolution of Proxy Contest" and "Acquisition and
Disposition Transactions" for a discussion of events in fiscal 1999 that, in
part, will shape the future direction of the Company.
The Company's Champps Americana concept is in the expansion phase. The timing of
revenues and expenses associated with opening new restaurants or closing or
repositioning of existing restaurants are expected to result in fluctuations in
the Company's quarterly and annual results. In addition, the Company's results,
and the results of the restaurant industry as a whole, may be adversely affected
by changes in consumer tastes, discretionary spending priorities, national,
regional or local economic conditions, demographic trends, consumer confidence
in the economy, traffic patterns, weather conditions, employee availability and
the type, number and location of competing restaurants. Changes in any of these
factors could adversely affect the Company. To date, however, these factors have
not had a significant negative impact since both sales and same store sales have
increased overall.
Among other factors, the success of the Company's business and its operating
results are dependent upon its ability to anticipate and react to changes in
food and liquor costs and the mix between food and liquor revenues. Various
factors beyond the Company's control, such as adverse weather changes, may
affect food costs and increases in federal, state and local taxes may affect
liquor costs. While in the past the Company has been able to manage its exposure
to the risk of increasing food and liquor costs through certain purchasing
practices, menu changes and price adjustments, there can be no assurance that
the Company will be able to do so in the future or that changes in its sales mix
or its overall buying power will not adversely affect the Company's results of
operations.
Notwithstanding these risks, the Company believes that its near-term strategies,
including, but not limited to, continued expansion of the Champps Americana
concept, improving the execution of operating fundamentals, and streamlining the
Company's organizational structure and the effects of the Spin-off, the
Fuddruckers Sale, the consolidation of corporate headquarters and the sale of
non-essential assets and businesses, and other related transactions, should
provide it with an opportunity for improved overall profitability.
Champps
The following table sets forth certain financial information for Champps.
(In thousands)
1999 1998 1997
---- ---- ----
Restaurant sales $ 87,392 $ 73,387 $ 57,832
========= ========= =========
Sales from Champps restaurants 100.0% 100.0% 100.0%
Operating expenses:
Labor costs (32.9) (33.0) (33.0)
Product costs (28.8) (29.0) (28.9)
Other restaurant operating expenses (28.1) (27.8) (25.7)
Depreciation and amortization (3.9) (3.9) (8.2)
--------- --------- ---------
Restaurant unit contribution 6.3% 6.3% 4.2%
========= ========= =========
Restaurant unit contribution $ 5,539 $ 4,622 $ 2,435
Gain on sale of franchise -- 677 --
Franchising and royalty income 558 644 539
--------- --------- ---------
Restaurant unit, franchising and royalty contribution $ 6,097 $ 5,943 $ 2,974
========= ========= =========
Comparison of Fiscal Years Ended June 27, 1999 and June 28, 1998
Sales in Company-owned restaurants increased approximately $14.0 million, or
19.1%, to $87.4 million for fiscal 1999 compared with $73.4 million for fiscal
1998. The increase reflects both an increase in the number of Company-owned
restaurants open between years, and an increase in same store sales. The Company
opened two new restaurants in fiscal 1999. Same store sales increased
approximately 2.0% in fiscal 1999.
Restaurant unit contribution of $5.5 million for fiscal 1999 was up 19.9% from
$4.6 million in fiscal 1998. Included in depreciation was $0.4 million related
to the accelerated depreciation of existing point of sale systems. These systems
will be replaced by new equipment in the first and second quarters of fiscal
2000, to enable the implementation of more efficient software at both the
operating level and for corporate financial reporting. Other restaurant
operating expenses include controllable restaurant operating expenses, and also
include occupancy and preopening expenses. Other restaurant operating expenses
expressed as a percentage of sales were 28.1% for fiscal 1999 compared with
27.8% for fiscal 1998. This increase reflects both higher occupancy costs and
controllable restaurant operating expenses between periods, offset, in part, by
lower preopening expenses. Occupancy costs expressed as a percentage of sales
have increased from 8.5% to 9.2% in fiscal 1998 and 1999, respectively, as a
result of restaurants opened over the last two years. Such restaurants were
generally constructed under a sale-leaseback facility where substantially all of
the costs of construction were financed by the landlord. This facility allowed
the Company to conserve cash but resulted in higher rents in these units when
compared with restaurants built in earlier years.
Preopening expenses were approximately $1.2 million in fiscal 1999, compared
with $1.9 million in fiscal 1998. This decrease relates primarily to the number
of units opened, the timing of construction, and construction in progress
between years. Preopening expenses have historically been approximately $0.4
million per location.
Comparison of Fiscal Years Ended June 28, 1998 and June 29, 1997
Sales in Champps-owned restaurants increased approximately $15.6 million, or
26.9%, to $73.4 million for fiscal 1998 compared with $57.8 million a year ago.
The increase primarily reflects three new Champps-owned restaurants in fiscal
1997 opened for the full current fiscal year, four new Champps-owned restaurants
opened during 1998, and higher per restaurant average sales volumes ($5.6
million annually for same stores). Same store sales increased approximately 1%
in 1998.
Restaurant unit contribution, for fiscal 1998 increased approximately $2.2
million to $4.6 million compared with $2.4 million in the preceding year.
Operating margins for 1998 were impacted by lower depreciation offset, in part,
by higher occupancy costs. Other operating expenses in 1998 include preopening
costs directly incurred totaling $1.9 million, compared with $1.6 million in
fiscal 1997.
Specialty Concepts
On June 28, 1998, the Company ceased the operations of its Great Bagel & Coffee
business, which represented the sole remaining business of its former "Specialty
Concepts" operation. This decision resulted in a charge of $1.4 million in
fiscal 1998 for exit costs associated with the termination of leases, severance
and write-downs of fixed assets abandoned. Specialty Concepts has historically
included the operations of the Great Bagel & Coffee Company and the operations
of certain non-traditional foodservice venues such as restaurant operations
conducted by the Company in Home Depot locations under the names Leo's
Delicatessen and Fudd Cafes. During the fourth quarter of fiscal 1997, the
Company decided to terminate its non-traditional restaurant operations leaving
only the Great Bagel & Coffee business operating. The Specialty Concepts
operation generated restaurant total revenues of $3.7 million in 1998 and $5.9
million in 1997 and unit losses of $1.4 million and $7.8 million in fiscal 1998
and 1997, respectively.
General and Administrative Expenses
Comparison of Fiscal Year Ended June 27, 1999 and June 28, 1998
General and administrative expenses from continuing operations were
approximately $19.0 million for fiscal 1999, compared with approximately $10.8
million in fiscal 1998. In fiscal 1999, general and administrative expenses
include losses of $2.7 million of the sale of non-essential assets, $2.7 million
in charges related to predecessor businesses and $2.3 million of the total $2.7
million in losses on business and lease contracts. Exclusive of these costs,
general and administrative expenses for 1999 would have been $11.3 million
representing a 4.6% increase over the prior year.
The Company has recently undertaken an initiative to consolidate its existing
corporate offices in Massachusetts and Minnesota into one office to be based in
Denver, Colorado. The Company is targeting the completion of this initiative by
late calendar 1999 or early in calendar 2000, although there can be no assurance
this initiative can be completed within this time frame. The Company believes
that as a result of the changes discussed elsewhere in this Form 10-K, general
and administrative expenses in fiscal 2000 should approximate 7.0% of revenues.
Comparison of Continuing Operations Fiscal Year Ended June 28, 1998 and June 29,
1997
General and administrative expenses were 13.9% of revenues in fiscal 1998
compared with 26.1% in fiscal 1997. This improvement relates primarily to
reduction in the work force and other reductions taken in 1998 coupled with the
actual costs of maintaining the corporate overhead of the Company when compared
with the allocation of DAKA International's overhead estimated in fiscal 1997 as
previously discussed.
Income Taxes
Prior to July 17, 1997, the operations of the Company were generally included in
the consolidated U.S. federal income tax return and certain combined and
separate state and local tax returns of DAKA International. Given the Company's
history of losses, no benefit for net operating losses were recognized in fiscal
1999 and 1998. The Company's effective tax benefit rate was approximately 8.7%
for 1997. As of June 27, 1999, the Company had net operating loss carryforwards
of approximately $40.5 million. The carryforwards expire at various dates
through 2019.
Discontinued Operations
On November 24, 1998, the Company completed the sale of its Fuddruckers business
to King Cannon for an estimated purchase price of $43.0 million, subject to
certain adjustments. Results of operations for the Fuddruckers business have
been presented in the accompanying financial statements as discontinued
operations. See "Acquisition and Disposition Transactions" in Item 1 for a more
complete discussion of this transaction.
Accounting Pronouncements Not Yet Adopted
In June 1999 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company will adopt SFAS No. 133 during
fiscal year 2000. Management is currently reviewing the effect, if any, from
adoption of this statement to the Company's consolidated financial statements.
Year 2000 Compliance
The statements in the following section include "year 2000 readiness disclosure"
within the meaning of the year 2000 Information and Readiness Disclosure Act.
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the roll-over of the two digit year value to "00". This issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Company has an Information Technology Steering Committee (the "Committee")
which has been given the assignment of evaluating year 2000 compliance for all
of the Company's primary and mission critical software and hardware assets
("core systems") and attempt to mitigate year 2000 compliance exposure. Based on
the Committee's review, the Company has segregated its core systems into the
following categories: consolidated accounting and financial reporting; payroll;
restaurant sales and accounting; data transmission; office support; and banking
services. Except for banking services, the Committee has completed its review of
each of these categories and, as discussed further below, has identified several
areas of non-compliance including Champps point of sale devices (cash registers)
and payroll processing hardware and software as systems requiring upgrades
and/or replacement in order to be year 2000 compliant. With respect to
consolidated accounting and financial reporting core systems, the Company
utilizes nationally recognized systems such as Oracle, Windows, Novell and
Xcellenet which are, or with readily available upgrades will be, year 2000
compliant and has received written assurances from a majority of these third
parties to this effect. The Company estimates the costs to upgrade these systems
are insignificant and its exposure to catastrophic year 2000 risk to be highly
unlikely.
With respect to its payroll core system, the Company's existing software and the
related hardware are year 2000 deficient. The Company has selected a new
software provider and the new payroll system is currently being installed. The
Company completed initial installation tests of this year 2000 compliant payroll
system in early October, 1999. However, due to other software changes, retesting
of the Company's payroll system implementation will be required. All work is
targeted to be completed by mid-November, 1999. Originally the Company had
estimated this system would be installed by July 1, 1999, however the
implementation was delayed in part due to the changes in strategic direction
discussed elsewhere in this Form 10-K. The Company presently estimates the cost
to bring its payroll core systems year 2000 compliant to be approximately
$200,000. The payroll core system is important to the Company's day to day
operations. However, the Company believes that it could manage its payroll
processes manually in the event of a year 2000 system failure.
The Company's Champps' point of sale and back office systems run on a Windows 95
platform. The Company is aware that although Windows 95 is substantially year
2000 compliant, there are certain non-compliant features (see "Financial
Condition and Liquidity"). The operating software that resides on the Windows 95
platform are year 2000 compliant, however, the effect on such programs of any
Windows 95 non-compliance has not been determined. As a result, the Company is
evaluating the impact, if any, of Windows 95 non-compliance on its other POS and
back office software.
The Company's data transmission and office support core systems are year 2000
compliant in all significant respects. An analysis of the Company's banking
services core systems has not been completed. The Company's primary banks are
large, national banks, which the Company believes mitigates exposure. However,
the Company's review of its banking services will be completed by mid-November,
1999.
The Company has not completed its evaluation of year 2000 compliance of its
primary vendors for impact on the Company. The Company has requested written
confirmation from its third party vendors regarding their state of compliance
with the year 2000 problem. The Company's main information technology provider,
RCS, has a back-up generator which will facilitate the continued operation of
financial reporting systems. In addition, one Champps' finance person will
continue to reside in Massachusetts near the RCS headquarters at the end of the
calendar year. Along with other responsibilities, this person will support a
contingency strategy for corporate financial reporting should long distance data
communication be disrupted by year 2000 issues. The Company will continue to
examine cost effective contingency strategies where warranted. Unless public
suppliers of water, electricity, natural gas and banks are disrupted for a
substantial period of time (in which case the Company's business may be
materially adversely affected), the Company believes its operations will not be
significantly disrupted even if third parties with whom the Company has
relationships are not year 2000 compliant. However, uncertainty exists
concerning the potential costs and effects associated with any year 2000
compliance, and as a result it is impossible to predict the impact of the
Company's computers to fail to recognize the year 2000. The Company intends to
continue to make efforts to ensure that third parties with whom it has
relationships are year 2000 compliant. Any year 2000 compliance problem of
either the Company or its vendors could materially adversely affect the
Company's business, financial condition or operating results.
FINANCIAL CONDITION AND LIQUIDITY
The working capital needs of companies engaged in the restaurant industry are
generally low as sales are made for cash, and purchases of food and supplies,
labor costs and other operating expenses are generally paid in 30 to 60 days
after receipt of invoices. Capital expenditures for expansion during 1999, 1998
and 1997 were generally provided through cash balances (including in 1999 a
portion of the proceeds from the sale of Fuddruckers) and proceeds from
sale-leaseback facilities. Capital expenditures were $10.4 million, $5.4 million
and $7.6 million for continuing operations, respectively, for fiscal 1999, 1998
and 1997.
At the end of fiscal 1999, the Company's unrestricted cash was $7.2 million and
restricted cash was $3.0 million. The Company anticipates that it will generate
positive cash flow from operations during fiscal 2000, however, there are also
significant cash expenditures anticipated during the forthcoming year.
Anticipated in fiscal 2000 are capital expenditures of approximately $15.7
million, primarily for new restaurants now under construction and a new point of
sale system. On September 15, 1999, the Company received a commitment for
sale-leaseback financing for new restaurants. This commitment is subject to
various pre-closing conditions and there can be no assurances that the financing
will be available on the terms currently anticipated or at all. The Company is
also pursuing a bank line of credit, although no commitment has been secured to
date. Any additional restaurants opened in fiscal 2000 will be contingent upon
obtaining additional financing.
It is also anticipated that there will be substantial cash payments in fiscal
2000 associated with liabilities recorded in fiscal 1999 related to the
Spin-Off, the Fuddruckers Sale and the consolidation and relocation of the
headquarters to Denver, Colorado. Included in theses cash payments, the Company
anticipates expenditures of more than $1.5 million for early termination of the
lease on excess space, severance and other headquarters consolidation and
relocation expenses. In addition, there will be payments for prior year
insurance claims, tax audits and legal settlements. These latter expenditures
are estimated to range between $1.5 million to $2.5 million.
There can be no assurance that a line of credit will be obtained or a
sale-leaseback facility implemented. If the Company is unable to obtain sources
of financing, the Company's planned expansion program and its ability to manage
continuing obligations associated with predecessor businesses would be adversely
effected. In such a case, the Company believes that it has the ability to
curtail its Champps expansion program and further reduce non-essential operating
costs to conserve working capital sufficiently to continue its day to day
operations through fiscal 2000.
Inflation and changing prices has had no measurable impact on net sales and
revenue or income from continuing operations during the last three fiscal years.
Item 7a. Quantitative and Qualitative Market Risk Disclosures
The market risk exposure inherent in the Company's financial instruments and
consolidated financial position represents the potential losses arising from
adverse changes in interest rates. The Company is exposed to such interest rate
risk primarily in its significant investment in cash and cash equivalents and
the use of fixed and variable rate debt to fund its acquisitions of property and
equipment in past years and the implicit investment rate in the Company's
sale-leaseback arrangements.
Market risk for cash and cash equivalents and fixed rate borrowings is estimated
as the potential change in the fair value of the assets or obligations resulting
from a hypothetical ten percent adverse change in interest rates, which would
not have been significant to the Company's financial position or results of
operations during 1999. The effect of a similar hypothetical change in interest
rates on the Company's variable rate debt and the investment rates implicit in
the Company's sale-leaseback arrangements also would have been insignificant due
to the immaterial amounts of borrowings outstanding under the Company's credit
arrangements.
For additional information about the Company's financial instruments and these
financing arrangements, see Notes to Consolidated Financial Statements.
Item 8. Financial Statements and Supplementary Data.
The information required under this Item 8 is set forth on pages F-1 through
F-24 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors of the Registrant
Incumbent Directors
The following table sets forth certain information regarding current
members of the Board of Directors:
Principal Director Expiration
Name Age Occupation Since of Term Class
---- --- ---------- ----- ------- -----
William H. Baumhauer............... 51 Chairman, President and June 1999 2001 II
Chief Executive Officer of the
Company
Timothy R. Barakett................ 34 President of Atticus Capital,L.L.C. March 1999 2000 I
James Goodwin...................... 43 Independent Consultant March 1999 2000 I
Nathaniel P.J.V. Rothschild........ 28 Executive Vice President of
Atticus Capital, L.L.C. August 1999 2001 II
Alan D. Schwartz................... 49 Senior Managing Director May 1997 1999 III
of Corporate Finance for
Bear, Stearns & Co., Inc.
- -----------------------
The name, age and principal occupation during the past five years and other
information concerning each director are set forth below:
William H. Baumhauer, 51, has served as a director and Chairman of the Board of
Directors since August 23, 1999, and as President and Chief Executive Officer of
the Company since June 24, 1999. Mr. Baumhauer also held these positions with
the Company or its predecessors from September 1988 until July 24, 1998, when he
left the Company to serve as President and Chief Operating Officer of Planet
Hollywood International, Inc., a position he held until his return to the
Company on June 24, 1999. He served Fuddruckers, Inc. as Chairman of the Board,
President and Chief Executive Officer between March 1985 and the merger of
Fuddruckers, Inc. with DAKA in 1988.
Timothy R. Barakett, 34, has been the President and Managing Member of Atticus
Capital, L.L.C., a private investment management company and an affiliate of
Atticus Partners, since October 1995. From June 1993 until March 1995, Mr.
Barakett was a Managing Director at Junction Advisors Inc., a private investment
management company.
James Goodwin, 43, has been a private investor since 1998. From 1990 until
February 1998, Mr. Goodwin was a Managing Director at Gleacher Natwest, Inc., an
investment banking company.
Nathaniel P.J.V. Rothschild, 28, has been Executive Vice President of Atticus
Capital, L.L.C. since January 1999. Mr. Rothschild is also a Vice President at
Atticus Management (Bermuda) Ltd. From July 1995 to April 1997 Mr. Rothschild
was a Financial Analyst with Gleacher & Co. and prior to that time he was a
Financial Analyst with Lazard Brothers & Co. Ltd. in London.
Alan D. Schwartz, 49, has served as a director of the Company or its
predecessors since September 1988 and served as a director of Fuddruckers, Inc.
from September 1984 until its merger with DAKA in 1988. Mr. Schwartz is Senior
Managing Director--Corporate Finance of Bear, Stearns & Co., Inc., and a
director of its parent, The Bear Stearns Companies, Inc. He has been associated
with such investment banking firm for more than five years. Mr. Schwartz is also
a director of Young & Rubicam, Inc., Atwood Richards, Inc., St. Vincent's
Services, the American Foundation for AIDS Research, the New York Blood Center
and NYU Medical Center and a member of the Board of Visitors of the Fuqua School
of Business at Duke University.
Meetings and Committees
The Board of Directors of the Company has a Compensation Committee, a Nominating
Committee and an Audit Committee. During the fiscal year 1999, the Board of
Directors held 19 meetings and the Compensation Committee held three meetings.
The Nominating and Audit Committees did not meet separately, as their duties
were performed by the full Board of Directors. Each director attended 75% or
more of the aggregate of (a) the total number of meetings of the Board of
Directors during fiscal year 1999, and (b) the total number of meetings held by
all committees of the Board of Directors on which such director served during
fiscal year 1999.
The Audit Committee has the responsibility of selecting the Company's
independent auditors and communicating with the Company's independent auditors
on matters of auditing and accounting. The Audit Committee is currently composed
of Mr. Barakett, Mr. Goodwin and Mr. Rothschild.
The Compensation Committee has the responsibility of reviewing on an annual
basis all officer and employee compensation. The Compensation Committee is
currently composed of Mr. Barakett, Mr. Goodwin, Mr. Rothschild and Mr.
Schwartz. The Compensation Committee also acts as the Stock Option Committee,
and has the responsibility of administering the Company's 1997 Stock Option and
Incentive Plan and the 1997 Stock Purchase Plan.
Executive Officers of the Registrant
Certain information is set forth below concerning the executive officers of the
Company, each of whom has been elected to serve until the regular meeting of the
Board of Directors and until his successor is duly elected and qualified. The
executive officers of the Company are as follows:
Name Age Position
William H. Baumhauer 51 Director, Chairman of the Board of Directors,
President and Chief Executive Officer
Donna L. Depoian 39 Vice President, General Counsel and Secretary
William H. Baumhauer, 51, has served as a director and Chairman of the Board of
Directors since August 23, 1999, and as President and Chief Executive Officer of
the Company since June 24, 1999. Mr. Baumhauer also held these positions with
the Company or its predecessors from September 1988 until July 24, 1998, when he
left the Company to serve as President and Chief Operating Officer of Planet
Hollywood International, Inc., a position he held until his return to the
Company on June 24, 1999. He served Fuddruckers, Inc. as Chairman of the Board,
President and Chief Executive Officer between March 1985 and the merger of
Fuddruckers, Inc. with DAKA in 1988.
Donna L. Depoian has served as Vice President, General Counsel and Secretary of
the Company since May 1998. She served as Acting General Counsel and Assistant
Secretary from February 1998 to May 1998 and as Corporate Counsel and Assistant
Secretary since July 1997. Ms. Depoian also served as Corporate Counsel and
Assistant Secretary for DAKA International, Inc. since April 1994. From May 1989
to April 1994, she practiced as an attorney for Bass & Doherty, P.C., a Boston
law firm concentrating in business and commercial real estate. From February
1988 to April 1989 she practiced as an attorney for Rossman, Rossman and
Eschelbacher, a Boston based law firm.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and to
furnish copies to the Company.
Based upon a review of the reports furnished to the Company and representations
made to the Company by its officers and directors, the Company believes that,
during fiscal year 1999, its officers, directors and its 10% beneficial owners,
other than Messrs. Baumhauer, Moore, Moylan, Cox, O'Donnell and Schwartz and
Mmes. Depoian and Randall, complied with all applicable reporting requirements.
Item 11. Executive Compensation.
The following table provides information as to compensation paid by the Company
for fiscal years 1997, 1998 and 1999 to the Chief Executive Officer and the four
other most highly compensated executive officers whose total salary and bonus
for fiscal year 1999 exceeded $100,000 (the "Named Executives").
Summary Compensation Table
Long-Term
Compensation
Annual Awards
Name and Compensation Other Annual Options/ All Other
Principal Position Year Salary Bonus Compensation SARs(1) Compensation
------------------ ---- ------ ----- ------------ --------------- ------------
William H. Baumhauer(2)...... 1999 $58,950 $ 0 0(3) $ 0(3)
Chairman, President and 1998 $450,500 $175,000(4) 250,000 $675,000(5)
Chief Executive Officer 1997 $449,869 $ 0 $265,014(6)
Donald C. Moore(7)........... 1999 $250,000 $ 0 35,000
Chief Executive Officer 1998 $187,981 $ 80,000 35,000
1997 $ 70,673 $ 30,000 $40,820(8)
K.C. Moylan(9)............... 1999 $240,000 $ 0 20,000
1998 $200,000 $ 80,000 $31,700(10) 50,000
1997 $163,130 $ 50,000
Donna L. Depoian............. 1999 $120,000 $ 0 20,000 $120,000(11)
Vice President, General 1998 $ 80,000 $ 35,000
Counsel and Secretary 1997 $ 76,000 $ 0
Cynthia S. Randall........... 1999 $ 110,000 $ 0 5,000
Director of Human Resources 1998 $ 90,000 $ 11,000
1997 $ 76,800 $ 9,000
- -------------
(1) Represents the number of options to acquire Common Stock granted during the
applicable fiscal year.
(2) Mr. Baumhauer resigned as President and Chief Executive Officer of the
Company in June 1998 and returned to the Company as President and Chief
Executive Officer effective June 24, 1999. He was elected a director of the
Company and appointed Chairman of the Board of Directors in August 1999.
(3) Does not include the extension until June 30, 1999, upon Mr. Baumhauer's
resignation from the Company in July 1998, of the termination date of
options to acquire 437,000 shares of Common Stock at exercise prices
ranging from $1.21 per share to $6.31 per share (including options to
acquire 187,500 shares of Common Stock at an exercise price of $6.31 per
share which were not vested at the time of Mr. Baumhauer's resignation from
the Company on July 24, 1998 and which would have terminated on such date
unless exercised). The termination date of these options was further
extended until June 30, 2001 upon Mr. Baumhauer's return to the Company on
June 24, 1999. The Company recorded $1,243,000 of non-cash compensation
expense in fiscal year 1999 on account of these modifications to employee
stock options.
(4) Represents a bonus for fiscal year 1998 made conditional and paid upon the
consummation of the sale of Fuddruckers awarded to Mr. Baumhauer in
consideration of his contribution to the turnaround of the Fuddruckers
business, his role in positioning Fuddruckers for sale, and his commitment
to cooperate with the Company in satisfying various pre-closing covenants
and conditions.
(5) Represents a cash payment made to Mr. Baumhauer upon the consummation of
the sale of Fuddruckers pursuant to separation arrangements in July 1998,
in part in consideration of his contribution to the Fuddruckers business
during fiscal year 1998 and his commitment to cooperate with the Company in
completing the sale of Fuddruckers during fiscal year 1999 and in part in
consideration of the fact that the sale of Fuddruckers would have allowed
Mr. Baumhauer to terminate his employment agreement with the Company for
"good reason", thereby becoming entitled to termination benefits equal to
his base salary of $450,500 per year for a period of three years, if he had
resigned after the date of consummation of the sale.
(6) Represents amounts earned under Mr. Baumhauer's long term incentive plan,
which vested during fiscal year 1997. In connection with the Spin-off
Transaction, the Board of Directors determined to pay amounts due to Mr.
Baumhauer pursuant to his long term incentive plan through the issuance of
Common Stock of the Company rather than in cash. On July 23, 1997 the
Company issued to Mr. Baumhauer 37,973 shares of Common Stock, having a
value of $265,014 based on the average closing price of the Company's
Common Stock during the period from July 21, 1997 through July 23, 1997.
(7) Mr. Moore served as Chief Executive Officer and Chief Financial Officer of
the Company from July 1998 through June 1999. As of July 1999 Mr. Moore was
no longer employed by the Company.
(8) Represents reimbursed relocation expenses.
(9) Mr. Moylan served as President and Chief Executive Officer of the Company's
Champps Entertainment, Inc. subsidiary during fiscal years 1998 and 1999.
As of August 1999 Mr. Moylan was no longer employed by the Company.
(10) Represents amounts paid in connection with the repurchase of stock options.
(11) Represents a cash payment made to Ms. Depoian upon the consummation of the
sale of Fuddruckers in consideration of her in role in completing the sale.
Option Grants in Fiscal Year 1999
The following table provides certain information with respect to stock options
granted by the Company during fiscal year 1999 to the Chief Executive Officer
and the Named Executives, all of which became fully vested upon the consummation
of the sale of Fuddruckers.
% of
Total Options
Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year Per Share Date Grant Date Valuation
---- ------- ----------- --------- ---- --------------------
William H. Baumhauer 0(1)
Donald C. Moore 35,000 22.65% $6.50 8/12/08 $49,457(2)
Kevin C. Moylan 20,000 12.94% $6.50 8/12/08 $28,261(2)
Donna L. Depoian 20,000 12.94% $6.50 8/12/08 $28,261(2)
Cynthia S. Randall 5,000 3.23% $5.12 9/02/08 $ 5,188(3)
- --------------------
(1) Does not include options to acquire 437,000 shares of Common Stock at
exercise prices ranging from $1.21 per share to $6.31 per share (including
options to acquire 187,500 shares of Common Stock at an exercise price of
$6.31 per share which were not vested at the time of Mr. Baumhauer's
resignation from the Company on July 24, 1998, which would have terminated
on such date unless exercised and which became immediately vested) the
termination date of which was extended until June 30, 1999 upon Mr.
Baumhauer's resignation from the Company in July 1998. The termination date
of these options was further extended until June 30, 2001 upon Mr.
Baumhauer's return to the Company in June 1999. The Company recorded
$1,243,000 of non-cash compensation expense in fiscal year 1999 on account
of these modifications to employee stock options.
(2) Calculated using the binomial pricing model. The assumptions used in
determining the present value of these options using this methodology are
as follows: option term of 10 years; risk-free rate of 5.72%; .3728
volatility over the course of a year; closing price of Common Stock on date
of grant of $6.50; and a 0% reduction factor for the risk of forfeiture due
to vesting restrictions. The actual value, if any, that an executive
officer may realize will depend on the continued employment of the
executive officer holding the option through its vesting period, and the
excess of the market price over the exercise price on the date the option
is exercised so that there is no assurance that the value realized by an
executive officer will be at or near the value estimated by the binomial
pricing model, which is based on assumptions as to the variables of stock
price volatility, future dividend yield, interest rates, etc.
(3) Calculated using the binomial pricing model. The assumptions used in
determining the present value of these options using this methodology are
as follows: option term of 10 years; risk-free rate of 5.72%; .4122
volatility over the course of a year; closing price of Common Stock on date
of grant of $5.12; and a 0% reduction factor for the risk of forfeiture due
to vesting restrictions. The actual value, if any, that an executive
officer may realize will depend on the continued employment of the
executive officer holding the option through its vesting period, and the
excess of the market price over the exercise price on the date the option
is exercised so that there is no assurance that the value realized by an
executive officer will be at or near the value estimated by the binomial
pricing model, which is based on assumptions as to the variables of stock
price volatility, future dividend yield, interest rates, etc.
Aggregate Option Exercises in Fiscal Year 1999
and Year-End Option Values
Neither the Chief Executive Officer nor any of the Named Executives exercised
any of their stock options during fiscal year 1999. The following table sets
forth the number of shares of Common Stock covered by the stock options held by
the Chief Executive Officer and the Named Executives as of the end of fiscal
year 1999. The value of unexercised in-the-money options is based on the closing
price of the Common Stock as reported by Nasdaq on June 25, 1999 minus the
exercise price, multiplied by the number of shares underlying the options.
Value of Outstanding
Shares Number of Beneficial In-the-Money options
Acquired Value Options at Fiscal Year-End at Fiscal Year-End(1)
Name On Exercise Realized Exercisable Unexercisable ExercisableUnexercisable
---- ----------- -------- ------------------------- ------------------------
William H. Baumhauer 0 $0 437,000 750,000(1) $319,640 $0
Donald C. Moore 0 $0 100,000 0 $0 $0
K.C. Moylan 0 $0 70,000 0 $0 $0
Donna L. Depoian 0 $0 21,300 0 $0 $0
Cynthia S. Randall 0 $0 10,000 0 $0 $0
- --------------------
(1) Granted effective July 1, 1999.
Employment and Termination Agreements
William H. Baumhauer Employment Agreement.
On June 24, 1999 the Company entered into a two-year employment contract with
Mr. Baumhauer. The agreement provides for a base salary of $400,000 per year.
The agreement further provides that, in the event the Company terminates Mr.
Baumhauer's employment without "Cause" (as defined below) or Mr. Baumhauer
terminates his employment for "Good Reason" (as defined below), the Company
shall continue to pay Mr. Baumhauer's base salary through the term of the
agreement as described above. "Good Reason" is defined as: (i) any assignment to
Mr. Baumhauer of any duties other than those contemplated by or any limitation
of the powers of Mr. Baumhauer in any respect not contemplated by the agreement;
(ii) removal of Mr. Baumhauer from or failure to re-elect or elect Mr. Baumhauer
to the positions of President and Chief Executive Officer of the Company except
in connection with termination of employee's employment for cause or (iii) a
reduction in Mr. Baumhauer's rate of compensation. "Cause" is defined as: (i)
theft or fraud from the Company; (ii) Mr. Baumhauer's conviction of or pleading
guilty or no contest to a felony; (iii) violation of terms and conditions of his
employment; (iv) his willful disregard or neglect in the duties required to be
performed under the agreement or (v) his willful and demonstrated unwillingness
to prosecute and perform such duties to the extent deemed reasonably necessary
and advisable and which duties encompass the duties reasonably required of a
President and Chief Executive Officer of a restaurant company. The agreement
grants Mr. Baumhauer certain rights in the event of a sale of the Company which
would cause a termination of his employment. These rights include a payment on
account of Mr. Baumhauer's stock options if the amount of salary paid to him
plus gross proceeds received by him, net of any cash exercise price paid, upon
the exercise or other disposition of stock options is less than $1,200,000. Mr.
Baumhauer was granted, pursuant to the agreement, options to acquire 750,000
shares of Common Stock at an exercise price of $4.00 per share, which will vest
in December 2000 or earlier if Mr. Baumhauer's employment is terminated by the
Company without Cause or by Mr. Baumhauer with Good Reason, or if the Company is
sold. In addition, all stock options held by Mr. Baumhauer and fully vested as
of June 24, 1999 were extended until June 30, 2001.
Donna L. Depoian Employment Agreement.
Effective as of February 26, 1999, the Company entered into an employment
agreement with Donna L. Depoian to serve as Vice President, General Counsel and
Secretary of the Company. The agreement provides for an initial term of one year
and for successive one-year renewals thereafter. Under the agreement, Ms.
Depoian receives an annual base salary of $120,000, subject to adjustment at the
discretion of the Board of Directors. The agreement further provides that, in
the event the Company terminates Ms. Depoian's employment without "Cause" (as
defined below) or Ms. Depoian terminates her employment for"Good Reason" (as
defined below), the Company shall pay Ms. Depoian an amount equal to Ms.
Depoian's cash compensation for one year. "Good Reason" is defined in the
agreement as: (i) an assignment to Ms. Depoian of duties other than those
contemplated by the agreement, or a limitation on the powers of Ms. Depoian not
contemplated by the agreement; (ii) the removal of Ms. Depoian from or failure
to elect Ms. Depoian to her named position, including the position of Vice
President, General Counsel and Secretary of the Company or (iii) a reduction in
Ms. Depoian's rate of compensation or level of fringe benefits. "Cause" is
defined in the agreement as: Ms. Depoian's (i) theft from or fraud on the
Company; (ii) conviction of a felony or crime of moral turpitude; (iii) willful
violation of the terms of the agreement; (iv) conscious disregard or neglect of
her duties or (v) willful and demonstrated unwillingness to perform her duties
under the agreement.
Donald C. Moore Termination Agreement
On July 21, 1999 Donald C. Moore entered into a Termination Agreement and
General Release (the "Termination Agreement"). The Termination Agreement
provides that Mr. Moore will be paid $500,000 in liquidated damages over a
two-year period. In August 1999, the Company paid Mr. Moore a $50,000 advance
toward future liquidated damages payments. With respect to Mr. Moore's options
to acquire 100,000 shares of Common Stock of the Company, the period during
which all unexercised and unexpired options may be exercised was extended until
July 21, 2001. The Termination Agreement provided for a mutual release from Mr.
Moore and the Company from any actions, suits, debts, demands, or claims. Mr.
Moore was party to an employment agreement with the Company dated August 12,
1999. The agreement provided for an initial term of one year. Under the
agreement, Mr. Moore received an annual base salary of $250,000, subject to
adjustment at the discretion of the Board of Directors. The agreement further
provided that, in the event the Company terminated Mr. Moore's employment
without "Cause" (as defined below) or Mr. Moore terminated his employment for
"Good Reason" (as defined below), the Company would pay Mr. Moore an amount
equal to Mr. Moore's cash compensation for two years. "Good Reason" was defined
in the agreement as (i) an assignment to Mr. Moore of duties other than those
contemplated by the agreement, or a limitation on the powers of Mr. Moore not
contemplated by the agreement, (ii) the removal of Mr. Moore from or failure to
elect Mr. Moore to his named position, including the position of Chief Executive
Officer of the Company, or (iii) a reduction in Mr. Moore's rate of compensation
or level of fringe benefits. "Cause" was defined in the agreement as Mr. Moore's
(i) theft from or fraud on the Company, (ii) conviction of a felony or crime of
moral turpitude, (iii) willful violation of the terms of the agreement, (iv)
conscious disregard or neglect of his duties, or (v) willful and demonstrated
unwillingness to perform his duties under the agreement.
Kevin C. Moylan Agreement
On August 31, 1999, Mr. Moylan resigned as President and Chief Executive Officer
of the Company's Champps Entertainment, Inc. subsidiary and received a
termination payment of $87,692 (including unpaid vacation) in cash. Mr. Moylan
was party to an employment agreement with the Company dated November 17, 1998,
as amended as of July 27, 1999. The agreement provided for an initial term of
one year. Under the agreement, Mr. Moylan received an annual base salary of
$240,000, subject to adjustment at the discretion of the Board of Directors. The
agreement further provided that, in the event the Company terminated Mr.
Moylan's employment without "Cause" (as defined below) or Mr. Moylan terminated
this employment for "Good Reason" (as defined below), the Company would pay Mr.
Moylan an amount equal to Mr. Moylan's cash compensation for one year. "Good
Reason" was defined in the agreement as (i) an assignment to Mr. Moylan of
duties other than those contemplated by the agreement, or a limitation on the
powers of Mr. Moylan not contemplated by the agreement, (ii) the removal of Mr.
Moylan from or failure to elect Mr. Moylan to his named position, including the
position of Chief Executive Officer of Champps, or (iii) a reduction in Mr.
Moylan's rate of compensation or level of fringe benefits. "Cause" was defined
in the agreement as Mr. Moylan's (i) theft from or fraud on the Company, (ii)
conviction of a felony or crime of moral turpitude, (iii) willful violation of
the terms of the agreement, (iv) conscious disregard or neglect of his duties,
or (v) willful an demonstrated unwillingness to perform his duties under the
agreement. The employment agreement further provided that in the event the
Company completed a sale of itself or Champps (or a transaction with similar
effect), the Company would pay Mr. Moylan upon the closing of such sale or
transaction a lump sum amount equal to his base salary in effect at the time of
the sale.
Directors' Compensation
In fiscal year 1999, non-employee directors received a quarterly retainer of
$3,000 and a fee of $1,000 per meeting attended, plus travel expenses. Effective
for fiscal year 2000, the directors' compensation has been revised. Directors
will not receive any cash compensation for their service on the Board of
Directors or committees other than reimbursement of expenses. Instead, while
serving on the Board of Directors each director will receive an annual grant of
options to acquire 5,000 shares of Common Stock at an exercise price at least
equal to the fair market value of the Common Stock as of the date of grant.
Indemnification Agreements
The Company has entered into Indemnification Agreements with certain of the
executive officers of the Company and members of the Board who are not officers
of the Company (the "Indemnitees"), pursuant to which the Company has agreed to
advance expenses and indemnify such Indemnitees against certain liabilities
incurred in connection with their services as executive officers and/or
directors of the Company and in connection with their services as executive
officers and/or directors of DAKA prior to the completion of the Spin-Off
Transaction. In the event of a proceeding brought against an Indemnitee by or in
the right of DAKA or the Company, such Indemnitee shall not be entitled to
indemnification if such Indemnitee is adjudged to be liable to DAKA or the
Company, as the case may be, or if applicable law prohibits such
indemnification; provided, however, that, if applicable law so permits,
indemnification shall nevertheless be made by the Company in such event if, and
only to the extent that, the Court of Chancery of the State of Delaware, or
another court in which such proceeding shall have been brought or is pending,
shall determine.
Under the terms of each Indemnification Agreement, the Company shall advance all
reasonable expenses incurred by or on behalf of such Indemnitee in connection
with any proceeding in which such Indemnitee is involved by reason of
Indemnitee's service to the Company or by reason of Indemnitee's service to DAKA
prior to the completion of the Spin-Off Transaction. Such statement shall
include, among other things, an undertaking by or on behalf of such Indemnitee
to repay any expenses so advanced if it shall be ultimately determined that such
Indemnitee is not entitled to indemnification for such expenses.
Compensation Committee Report
The Compensation Committee reviews and approves compensation levels for the
Company's executive officers and oversees and administers the Company's
executive compensation programs. All members of the Compensation Committee,
listed at the end of this report, are outside directors who are not eligible to
participate in the compensation programs that the Compensation Committee
oversees except for non-discretionary option grants. See "--Directors'
Compensation."
Philosophy. The Compensation Committee believes that the interests of the
Company's stockholders are best served when compensation is directly aligned
with the Company's financial performance. Therefore, the Compensation Committee
has approved overall compensation programs which award a competitive base
salary, and then encourage exceptional performance through meaningful incentive
awards, both short and long term, which are tied to the Company's performance.
Responsibilities. The responsibilities of the Compensation Committee include:
- developing compensation programs that are consistent with and are
linked to the Company's strategy;
- assessing the performance of and determining an appropriate
compensation package for the Chief Executive Officer; and
- ensuring that compensation for the other executive officers reflects
individual, team, and the Company's performance appropriately.
Purpose. The Company's executive compensation programs are designed to:
- attract, retain, and motivate key executive officers;
- link the interests of executive officers with stockholders by
encouraging stock ownership;
- support the Company's goal of providing superior value to its
stockholders and customers; and
- provide appropriate incentives for executive officers, based on
achieving key operating and organizational goals.
The Compensation Committee believes that the Company's executive compensation
policies should be reviewed during the first quarter of the fiscal year when the
financial results of the prior fiscal year become available. The policies should
be reviewed in light of their consistency with the Company's financial
performance, its business plan and its position within the restaurant industry,
as well as the compensation policies of similar companies in the restaurant
business. The compensation of individual executives is reviewed annually by the
Compensation Committee in light of its executive compensation policies for that
year.
In setting and reviewing compensation for the executive officers, the
Compensation Committee considers a number of different factors designed to
assure that compensation levels are properly aligned with the Company's business
strategy, corporate culture and operating performance. Among the factors
considered are the following:
Comparability -- The Compensation Committee considers the compensation
packages of similarly situated executives at companies deemed
comparable to the Company. The objective is to maintain competitiveness
in the marketplace in order to attract and retain the highest quality
executives. This is a principal factor in setting base levels of
compensation.
Pay for Performance -- The Compensation Committee believes that
compensation should in part be directly linked to operating
performance. To achieve this link with regard to short-term
performance, the Compensation Committee relies on cash bonuses which
are determined on the basis of certain objective criteria and
recommendations of the Chief Executive Officer.
Equity Ownership -- The Compensation Committee believes that
equity-based, long-term compensation aligns executives' long-range
interests with those of the stockholders. These long-term incentive
programs are reflected in the Company's stock option plans. The
Compensation Committee believes that significant stock ownership is a
major incentive in building stockholder value and reviews grants of
options with that goal in mind.
Qualitative Factors -- The Compensation Committee believes that in
addition to corporate performance and specific business unit
performance, in setting and reviewing executive compensation it is
appropriate to consider the personal contributions that a particular
individual may make to the overall success of the Company. Such
qualitative factors as leadership skills, planning initiatives and
employee development have been deemed to be important qualitative
factors to take into account in considering levels of compensation.
Annual Cash Compensation. Annual cash compensation for the executive officers
consists of a base salary and a variable, at-risk incentive bonus under the
Company's Management Annual Incentive Plan.
It is the Company's general policy to pay competitive base compensation to its
executive officers. The Compensation Committee annually reviews and, if
appropriate, adjusts executive officers' base salaries. In making individual
base salary recommendations, the Compensation Committee considers the
executive's experience, management and leadership ability and technical skills,
his or her compensation history, as well as the performance of the Company as a
whole and, where applicable, the performance of specific business units.
Under the Management Annual Incentive Plan, each executive is assigned a target
incentive award. This incentive award, or some portion thereof, is awarded by
the Compensation Committee in its discretion based on its assessment of a
combination of four factors: the Company's overall performance, business unit
performance, attainment of predetermined individual goals, and the level of
personal/leadership impact. This evaluation process is not strictly
quantitative, but is largely based on qualitative judgments made by the Chief
Executive Officer, with the concurrence of the Compensation Committee, related
to individual, team, and the Company's performance.
Chief Executive Officer Compensation. Upon the departure of Mr. Baumhauer on
July 24, 1998, the Board of Directors determined that Mr. Moore was the logical
choice to serve as the Company's acting Chief Executive Officer while the
Company pursued the sale of Fuddruckers and tackled issues concerning its
strategic direction. Upon the appointment of Mr. Moore as acting Chief Executive
Officer, his salary was adjusted commensurate with his new responsibilities,
while he also continued to perform the duties of Chief Financial Officer. At the
recommendation of the Compensation Committee, the Company entered into an
employment contract with Mr. Moore on terms comparable to those of his
predecessor, as disclosed elsewhere in this Proxy Statement, to ensure that his
services as an executive knowledgeable of the operations and affairs of the
Company continued to be available to the Company during a period of uncertainty
and transition. For fiscal year 1999 Mr. Moore participated in the compensation
programs outlined above. As disclosed elsewhere in this Proxy Statement, on July
21, 1999 Mr. Moore entered into a Termination Agreement and General Release with
the Company.
At the time of his departure in July 1998, Mr. Baumhauer was employed by the
Company as Chairman of the Board of Directors and Chief Executive Officer under
the terms of an employment contract and, upon the recommendation of the
Compensation Committee, entered into separation arrangements with the Company,
as disclosed elsewhere in this Proxy Statement. For fiscal year 1999 Mr.
Baumhauer did not participate in the compensation programs outlined above except
for the period prior to his departure. On June 24, 1999, Mr. Baumhauer returned
to the Company as President and Chief Executive Officer and in August 1999 was
elected as a director and was appointed Chairman of the Board of Directors. At
the recommendation of the Compensation Committee, the Company entered into a new
employment contract with Mr. Baumhauer, as disclosed elsewhere in this Proxy
Statement. The Compensation Committee believes that the terms of Mr. Baumhauer's
new employment contract are appropriate in light of the Company's strategic
direction following the sale of Fuddruckers, the Board of Directors' decision
that the Company would remain independent and pursue the growth of the Champps
Americana restaurant concept, and Mr. Baumhauer's experience and reputation in
the restaurant industry.
Compensation of Other Officers. The Company's executive compensation program for
other executive officers is described above, although the corporate business
unit and individual performance goals and the relative weighting of the
quantitative performance factors described above varies, depending upon the
responsibilities of particular officers.
Timothy R. Barakett
James Goodwin
Nathaniel P.J.V. Rothschild
Alan D. Schwartz
PERFORMANCE GRAPH
[Performance Graph]
COMPANY/INDEX/MARKET 7/15/1997 6/26/1998 6/25/1999
Champps Entertainment Inc. 100.00 91.96 53.57
Customer Selected Stock List 100.00 98.34 82.41
Russell 3000 Index 100.00 119.44 142.18
Selected Index Group:
Avado Brands Inc.
Cheesecake Factory Inc.
Dave & Buster's Inc.
Landrys Seafood Rest Inc.
Rainforest Cafe Inc.
Rare Hospitality Int Inc.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of October 18, 1999, with
respect to each person known by the Company to be the beneficial owner of more
than 5% of the Common Stock, each director of the Company, executive officers
included in the Summary Compensation Table below, and all directors and
executive officers of the Company as a group:
Amount and
Nature of
Name and Address of Beneficial Percent
Beneficial Owner Ownership(1) Of Class
---------------- ------------ --------
William H. Baumhauer(2)........................................... 446,037(3) 3.7%
James Goodwin(2).................................................. 0(4) *
Alan D. Schwartz(2)............................................... 14,880(5) *
Nathaniel P.J.V. Rothschild(6).................................... 0(7) *
Timothy R. Barakett(6)............................................ 1,908,506(8) 16.4%
Donna L. Depoian(2)............................................... 22,433(9) *
Cynthia S. Randall (2)............................................ 17,825(10) *
Douglas A. Hirsch(11)............................................. 719,880(12) 6.2%
Franklin Resources, Inc(13)....................................... 1,135,000(14) 9.7%
Atticus Holdings, L.L.C.(6)....................................... 1,025,500(6) 8.8%
Atticus Qualified Partners, L.P.(6). ............................. 607,450(6) 5.2%
All directors and executive officers
as a group (7 persons).......................................... 2,409,681(15) 19.9%
- --------------------
* Less than 1%
(1) Beneficial share ownership is determined pursuant to Rule 13d-3 promulgated
by the Securities and Exchange Commission (the "SEC") under the Securities
Exchange Act of 1934, as amended. Accordingly, a beneficial owner of a
security includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, has or
shares the power to vote such security or the power to dispose of such
security. The amounts set forth in the table as beneficially owned include
shares owned, if any, by spouses and relatives living in the same home as
to which beneficial ownership may be disclaimed. The amounts set forth in
the table as beneficially owned include shares of Common Stock which
directors and executive officers have the right to acquire pursuant to
previously granted options exercisable within 60 days of October 18, 1999.
(2) The address of the beneficial owner is c/o Champps Entertainment, Inc., One
Corporate Place, 55 Ferncroft Road, Danvers, Massachusetts 01923.
(3) Includes 437,000 shares of Common Stock issuable upon the exercise of
options.
(4) In connection with Mr. Goodwin's appointment to the Board of Directors in
March 1999, Atticus Capital, L.L.C. entered into an agreement with Mr.
Goodwin which provides that Atticus Capital, L.L.C. will pay to Mr. Goodwin
an amount equal to five percent of the proceeds above $4.875 per share of
Common Stock realized by Atticus Partners, L.P., Atticus Qualified
Partners, L.P. and Atticus International, Ltd. upon the sale or disposition
of the Common Stock beneficially owned by them. In addition, Atticus
Partners, L.P. agreed to indemnify Mr. Goodwin against any and all losses,
claims, liabilities and expenses in connection with serving as a member of
the Company's Board of Directors. Mr. Goodwin does not have or share the
power to vote or the power to dispose of any shares of Common Stock
beneficially owned by Atticus Partners, L.P., Atticus Qualified Partners,
L.P. or Atticus International, Ltd., and therefore disclaims beneficial
ownership of any of the 1,577,056 shares of Common Stock held by them
collectively.
(5) Includes 14,500 shares of Common Stock issuable upon the exercise of
options.
(6) The address of the beneficial owner is c/o Atticus Capital, L.L.C., 590
Madison Avenue, 32nd Floor, New York, NY 10022
(7) Mr. Rothschild is Executive Vice President of Atticus Capital, L.L.C., a
Delaware limited liability company that (i) is an affiliate of Atticus
Holdings, L.L.C., a Delaware limited liability company that serves as the
general partner of Atticus Partners, L.P. and Atticus Qualified Partners,
L.P., which beneficially own 418,050 and 607,450 shares of Common Stock,
respectively, and (ii) has investment discretion with respect to certain
managed accounts (the "Managed Accounts"), which collectively beneficially
own 331,450 shares of Common Stock. He is also Vice President of Atticus
Management, Ltd., an international business company organized under the
laws of the British Virgin Islands that serves as the manager of Atticus
International, Ltd., which beneficially owns 551,556 shares of Common
Stock. Mr. Rothschild does not have or share the power to vote or the power
to dispose of any shares of Common Stock beneficially owned by Atticus
Partners, L.P., Atticus Qualified Partners, L.P., Atticus International,
Ltd. or the Managed Accounts, and therefore disclaims beneficial ownership
of any of the 1,908,506 shares of Common Stock held by them collectively.
(8) Mr. Barakett is the Managing Member of Atticus Holdings, L.L.C., a Delaware
limited liability company that serves as the general partner of Atticus
Partners, L.P. and Atticus Qualified Partners, L.P., which beneficially own
418,050 and 607,450 shares of Common Stock, respectively. Mr. Barakett is
also the President of Atticus Management, Ltd., an international business
company organized under the laws of the British Virgin Islands that serves
as the manager of Atticus International, Ltd., which beneficially owns
551,556 shares of Common Stock. Mr. Barakett is also the Managing Member of
Atticus Capital, L.L.C, which has investment discretion with respect to
certain managed accounts (the "Managed Accounts"), which collectively
beneficially own 331,450 shares of Common Stock. Mr. Barakett is deemed to
be the beneficial owner of all shares of Common Stock owned by Atticus
Partners, L.P., Atticus Qualified Partners, L.P., Atticus International,
Ltd. and the Managed Accounts.
(9) Includes 21,300 shares of Common Stock issuable upon the exercise of
options.
(10) Includes 10,000 shares of Common Stock issuable upon the exercise of
options.
(11) The address of the beneficial owner is c/o Seneca Capital Advisors LLC, 830
Third Avenue, 14th Floor, New York, NY 10022.
(12) Includes 569,800 shares beneficially owned by Seneca Capital Advisors LLC
and Seneca Capital Investments, LLC, of which Mr. Hirsch is a controlling
person. Includes 150,000 shares with respect to which Mr. Hirsch disclaims
beneficial ownership. This information is based on a Schedule 13D, dated
June 23, 1997, filed by Seneca Capital Advisors LLC on behalf of Douglas
Hirsch with the SEC.
(13) The address of the beneficial owner is 777 Mariners Island Blvd., 6th
Floor, San Mateo, CA 94404.
(14) This information is based on a Schedule 13G/A, dated February 9, 1999,
filed by Franklin Resources, Inc. with the SEC.
(15) Includes 482,800 shares of Common Stock issuable upon the exercise of
options.
Item 13. Certain Relationships And Related Transactions.
Compensation Committee Interlocks
Alan D. Schwartz, a director of the Company who is also a member of the
Compensation Committee, is Senior Managing Director-Corporate Finance of Bear
Stearns & Co., Inc. In the past Bear Stearns and its affiliates have provided
financial advisory and financing services to the Company and have received fees
and reimbursement of expenses for rendering such services. In particular, during
fiscal year 1999 Bear Stearns (i) received payment of an approximately $1.8
million fee earned in fiscal year 1997 in connection with its role as a
financial advisor to the Company with respect to the Spin-Off Transaction, which
had not been paid during fiscal year 1997, and (ii) was entitled to the
reimbursement of out of pocket expenses of approximately $50,000, which remain
payable, related to its role as financial advisor to the Company in connection
with evaluating and seeking financial and strategic alternatives, including a
possible sale of the Company.
Timothy R. Barakett and Nathaniel P.J.V. Rothschild, two directors of the
Company who are also members of the Compensation Committee, are President and
Executive Vice President, respectively, of Atticus Capital, L.L.C. As disclosed
elsewhere in this Proxy Statement, Mr. Barakett may also be deemed the
beneficial owner of 1,908,506 shares of Common Stock, or approximately 16.4% of
all Common Stock outstanding. During fiscal year 1999 Atticus Capital, L.L.C.
and certain of its affiliates (collectively, "Atticus") conducted a proxy
contest regarding the Company's annual meeting of stockholders held on March 17,
1999, which proxy contest was settled by agreement between the Company and
Atticus on March 11, 1999. Under the terms of the settlement agreement, among
other things, Mr. Barakett and James Goodwin were appointed to the Board of
Directors as Class I directors to serve until the 2000 annual meeting of
stockholders and the Company paid certain of Atticus' expenses incurred in
connection with the solicitation of proxies in the amount of $150,000. Mr.
Goodwin is also a member of the Compensation Committee. In connection with Mr.
Goodwin's appointment to the Company's Board of Directors, Atticus Capital,
L.L.C. entered into an agreement with Mr. Goodwin which provides that Atticus
Capital, L.L.C. will pay to Mr. Goodwin an amount equal to five percent of the
proceeds above $4.875 per share of Common Stock realized by Atticus Partners,
L.P., Atticus Qualified Partners, L.P. and Atticus International, Ltd. upon the
sale or disposition of 1,577,056 shares of Common Stock beneficially owned by
them. In addition, Atticus Partners, L.P. agreed to indemnify Mr. Goodwin
against any and all losses, claims, liabilities and expenses in connection with
serving as a member of the Company's Board of Directors.
Joseph W. O'Donnell, who was a director of the Company and a member of the
Compensation Committee until his resignation in August 1999, is a principal in
Osgood, O'Donnell and Walsh, which has in the past provided marketing consulting
services to the Company and received fees for providing such services. During
fiscal year 1999, the Company paid Osgood, O'Donnell and Walsh $30,000 for such
services and related expenses. Mr. O'Donnell also owns a controlling equity
interest in PulseBack, Inc., a company engaged in providing customer
satisfaction measurement services to the restaurant industry to which the
Company paid $67,744 for services rendered during fiscal year 1999. The Company
owns a non-controlling equity interest in Pulseback, the value of which was
written down to zero by the Company before fiscal year 1999. During fiscal year
1999 the Company wrote off a $75,000 note receivable from PulseBack.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following are being filed as part of this Annual Report on Form 10-K.
A. Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets - June 27, 1999 and June 28, 1998
Consolidated Statements of Operations - Fiscal years ended June 27,
1999, June 28, 1998, and June 29, 1997
Consolidated Statements of Cash Flows - Fiscal years ended June 27,
1999, June 28, 1998, and June 29, 1997
Consolidated Statements of Changes in Stockholders' Equity - Fiscal
years ended June 27, 1999, June 28, 1998, and June 29, 1997
Notes to Consolidated Financial Statements
B. Financial Statement Schedules:
There are no Financial Statement Schedules required to be filed.
Information required by Article 12 of Regulation S-X with respect to
Valuation and Qualifying Accounts has been included in the Notes to the
Consolidated Financial Statements.
C. Exhibits:
*2.1 Agreement and Plan of Merger, dated as of May 27, 1997, by and among
Compass Interim, Inc. ("Compass Interim"), Compass Holdings, Inc.
("Purchaser"), Compass Group PLC ("Parent") and DAKA International, Inc.
("DAKA International").
*2.2 Reorganization Agreement dated as of May 27, 1997, by and among DAKA
International, Daka, Inc. ("Daka"), the Company, Parent and Compass
Holdings, together with certain exhibits thereto.
*2.3 Agreement and Plan of Merger among Champps Entertainment, Inc. ("Champps"),
DAKA and CEI Acquisition Corp., dated as of October 10, 1995, incorporated
herein by reference to DAKA's Registration Statement on Form S-4 (File No.
33-65425) ("1996 DAKA Form S-4").
**2.4Series D Convertible Preferred Stock and Warrant Purchase Agreement, dated
as of January 12, 1996, by and among La Salsa Holding Co. and Casual Dining
Ventures, Inc. Pursuant to Item 601(b)(2) of Regulation S-K, the Schedules
to the Series D Convertible Preferred Stock and Warrant Purchase Agreement
are omitted. The Company hereby undertakes to furnish supplementally a copy
of any omitted Schedule to the Commission upon request.
**2.5Stock Purchase Agreement, dated as of March 18, 1996, by and among Casual
Dining Ventures, Inc., DAKA, Champps Development Group, Inc., Steven J.
Wagenheim, Arthur E. Pew, III, PDS Financial Corporation, Douglas B. Tenpas
and certain other stockholders of Americana Dining Corp. Pursuant to Item
601(b)(2) of Regulation S-K, the Schedules to the Stock Purchase Agreement
are omitted. The Company hereby undertakes to furnish supplementally a copy
of any omitted Schedule to the Commission upon request.
**2.6Asset Purchase Agreement, dated March 18, 1996, between Americana Dining
Corp., as Seller, and New Brighton Ventures, Inc., as Buyer. Pursuant to
Item 601(b)(2) of Regulation S-K, the Schedules to the Asset Purchase
Agreement are omitted. The Company hereby undertakes to furnish
supplementally a copy of any omitted Schedule to the Commission upon
request.
**2.7Stock Purchase Agreement, dated as of March 29, 1996, by and among DAKA,
The Great Bagel & Coffee Franchising Corp., GBC Credit Company, Gemini
Production Facility, Inc., The Great Bagel & Coffee Company, Mark C.
Gordon, Brian H. Loeb, Jason R. Olivier, Michael F. Zerbib, Nicholas D.
Zerbib, and Thierry E. Zerbib. Pursuant to Item 601(b)(2) of Regulation
S-K, the Schedules to the Stock Purchase Agreement are omitted. The Company
hereby undertakes to furnish supplementally a copy of any omitted Schedule
to the Commission upon request.
**2.8Stock Purchase Agreement, dated as of March 31, 1996, by and among Casual
Dining Ventures, Inc., DAKA and Edgebrook, Inc. Pursuant to Item 601(b)(2)
of Regulation S-K, the Schedules to the Stock Purchase Agreement are
omitted. The Company hereby undertakes to furnish supplementally a copy of
any omitted Schedule to the Commission upon request.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-laws of the Company
*3.3 Form of Amended and Restated Certificate of Incorporation of the Company.
*3.4 Form of Amended and Restated By-laws of the Company.
*4.1 Specimen Stock Certificate for shares of the Unique Casual Restaurants,
Inc. Common Stock.
4.2 Amended and Restated Shareholder Rights Agreement, dated as of January 30,
1998, between the Company and American Stock Transfer and Trust Company, as
Rights Agent, incorporated herein by reference to the Company's Current
Report on Form 8-K filed February 2, 1998.
4.3 Certificate of Designations, Preferences and Rights of a Series of
Preferred Stock of the Company, dated January 30, 1998, incorporated herein
by reference to the Company's Current Report on Form 8-K filed February 2,
1998.
*10.1Tax Allocation Agreement dated as of May 27, 1997, by and among DAKA, the
Company, and Parent.
*10.2Post-Closing Covenants Agreement, dated as of May 27, 1997, by and among
DAKA, Daka, Inc., the Company, Champps, Fuddruckers, Inc., Purchaser and
Parent.
*10.3Stock Purchase Agreement, dated as of May 26,1997, between DAKA, Parent,
Purchaser, First Chicago Equity Corporation, Cross Creek Partners I and the
other holders of Series A Preferred Stock of DAKA.
*10.4Form of the Company's 1997 Stock Option and Incentive Plan.
*10.5Form of the Company's 1997 Stock Purchase Plan.
*10.6Form of Indemnification Agreement, by and between the Company and directors
and officers of DAKA.
*10.7Employment Agreement, dated as of January 1, 1997, by and between DAKA and
William H. Baumhauer.
*10.8Employment Agreement, dated as of January 1, 1997, by and between DAKA
and Allen R. Maxwell.
*10.9Employment Agreement, dated as of February 21, 1996, by and among Dean
P. Vlahos, DAKA and Champps.
**10.10 Third Amended and Restated Registration Rights Agreement, dated as of
January 12, 1996, by and among La Salsa Holding Co., FMA High Yield Income
L.P., WSIS Flexible Income Partners L.P., WSIS High Income L.P., Howdy S.
Kabrins, La Salsa, Inc., Crown Associates III, L.P., Crown-Glynn
Associates, L.P., Nueberger & Berman as Trustee for the Crown Trust,
Theodore H. Ashford, Noro-Moseley Partners II, L.P., Seidler Salsa, L.P.,
Bankers Trust Company as Master Trustee for Hughes Aircraft Retirement
Plans, Charles A. Lynch, Sienna Limited Partnership I, Sienna Limited
Partnership II, Sienna Holdings, Inc., as Nominee, InterWest Partners IV,
Donald Benjamin, Vicki Tanner, Ronald D. Weinstock, Inc., Frank Holdraker,
and Casual Dining Ventures, Inc.
**10.11 Fourth Amended and Restated Restricted Stock Agreement, dated as of
January 12, 1996, by and among La Salsa Holding Co., Howdy S. Kabrins, La
Salsa, Inc., InterWest Partners IV, Sienna Holding, Inc., Sienna Limited
Partnership I, Charles A. Lynch, Theodore H. Ashford, Crown Associates III,
L.P., Crown-Glynn Associates, L.P., Nueberger & Berman as Trustee for The
Crown Trust, Noro-Moseley Partners II, L.P., Seidler Salsa, L.P., Bankers
Trust Company, as Master Trustee, for Hughes Aircraft Retirement Plans, FMA
High Yield Income L.P., WSIS Flexible Income Partners L.P., WSIS High Yield
Income L.P., Sienna Limited Partnership II, Donald Benjamin, Vicki Tanner,
Ronald D. Weinstock, Inc., Frank Holdraker, and Casual Dining Ventures,
Inc.
**10.12 La Salsa Holding Co. Warrant to Purchase Shares of Series D Convertible
Preferred Stock, dated as of January 12, 1996, issued to Casual Dining
Ventures, Inc. by La Salsa Holding Co.
**10.13 Severance, Non-Competition and Confidentiality Agreement, dated as of
March 18, 1996, between Steven J. Wagenheim and Americana Dining Corp.
**10.14 La Salsa License Agreement, dated as of February 14, 1996, by and
between La Salsa Franchise, Inc. and La Salsa Holding Co.
+ 10.15 Separation Agreement, dated as of February 2, 1998, by and among Dean
P. Vlahos, the Company and Champps.
+ 10.16 Asset Purchase Agreement, dated as of February 2, 1998, by and
between Dean P. Vlahos and Champps.
+ 10.17 Champps Restaurant Development Agreement, dated as of February 2,
1998, by and between Dean P. Vlahos and Champps.
+ 10.18 Venturino Settlement Agreement, dated as of December, 1997, by and
among Rita Venturino, Cosmos Phillips and Matthew Minogue, et. al. and DAKA
International, Inc. and William H. Baumhauer.
+ 10.19 Stock Purchase Agreement, dated as of July 31, 1998, by and between
King Cannon, Inc. and Unique Casual Restaurants, Inc.
+ 10.20 Employment Agreement, dated as of August 12, 1998, by and between
Unique Casual Restaurants, Inc. and Donald C. Moore.
10.21Post Closing Payments Agreement, dated as of January 21, 1998, by and
among DAKA International, Inc., Daka, Inc., Compass Group PCL, Unique
Casual Restaurants, Inc., Champps and Fuddruckers incorporated herein by
reference to the amended Annual Report on Form 10-K/A of Unique Casual
Restaurants, Inc. for the year ended June 28, 1998.
10.22Letter agreement among Unique Casual Restaurants, Inc., Atticus Partners,
L.P., and the other parties thereto, dated March 10, 1999, incorporated
herein by reference to the Current Report on Form 8-K of Unique Casual
Restaurants, Inc. filed March 17, 1999.
10.23Employment Agreement, dated as of June 24, 1999, by and between Unique
Casual Restaurants, Inc. and William H. Baumhauer.
10.24Stock Redemption and Debt Restructuring Agreement, dated as of May 24,
1999, by and among Champps Entertainment, Inc., f/k/a/ Unique Casual
Restaurants, Inc., Theodore M. Mountzuris and Restaurant Consulting
Services, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney.
* Incorporated herein by reference to the Company's, when known as Unique
Casual Restaurants, Inc., Registration Statement on Form 10 filed June
3, 1997, as amended.
** Incorporated herein by reference to the Annual Report on Form 10-K of
DAKA International for the year ended June 29, 1996.
+ Incorporated herein by reference to the Annual Report on Form 10-K of
Unique Casual Restaurants, Inc. for the year ended June 28, 1998.
D. Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHAMPPS ENTERTAINMENT, INC.
(Registrant)
By: /s/William H. Baumhauer
----------------------------
William H. Baumhauer
Chairman of the Board, President and
Chief Executive Officer,
(Principal Executive, Financial and
Accounting Officer)
Date: October 27, 1999
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, and
in the capacities and on the date indicated.
Signature Title
William H. Baumhauer Chairman of the Board
Timothy Barakett* Director
James Goodwin* Director
Nathaniel Rothschild* Director
Alan D. Schwartz* Director
*By: /s/Donna L. Depoian Date: October 27, 1999
--------------------
Donna L. Depoian
Attorney-In-Fact
INDEPENDENT AUDITORS' REPORT
Champps Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of Champps
Entertainment, Inc. and subsidiaries (formerly Unique Casual Restaurants, Inc.)
as of June 27, 1999 and June 28, 1998 and the related consolidated statements of
operations, cash flows and changes in stockholders' equity for each of the three
years in the period ended June 27, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies as of June 27, 1999
and June 28, 1998 and the results of their operations and their cash flows for
each of the three years in the period ended June 27, 1999, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
October 1, 1999
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
As of June 27, 1999 and June 28, 1998
(In thousands, except per share data)
1999 1998
---- ----
ASSETS:
Current assets:
Cash and cash equivalents (overdraft) $ 7,240 $ (646)
Restricted cash, current 397 2,602
Accounts receivable, net 1,288 801
Inventories 1,205 973
Prepaid expenses and other current assets 1,637 726
Net assets held for sale 1,665 --
-------- --------
Total current assets 13,432 4,456
Restricted cash, non-current 2,596 --
Property and equipment, net 36,096 29,850
Net long-term assets related to the discontinued operations -- 44,335
Investment 2,748 5,000
Other assets, net 2,270 3,019
-------- --------
Total assets $ 57,142 $ 86,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,264 $ 4,784
Accrued expenses 8,679 5,378
Accrued transaction costs -- 1,800
Current portion of long-term debt 2,010 2,188
Net current liabilities related to the discontinued operations -- 4,202
-------- --------
Total current liabilities 15,953 18,352
Long-term debt, net of current portion 4,147 4,757
Other long-term liabilities 9,223 7,753
-------- --------
Total liabilities 29,323 30,862
-------- --------
Minority interests and obligations under put agreement
related to the discontinued operations -- 5,400
-------- --------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock ($.01 par value per share; authorized
30,000 shares and 11,647 and 11,593 issued and outstanding
at June 27, 1999, and June 28, 1998, respectively) 116 116
Additional paid-in capital 79,360 78,017
Accumulated deficit (51,657) (27,735)
-------- --------
Total stockholders' equity 27,819 50,398
-------- --------
Total liabilities and stockholders' equity $ 57,142 $ 86,660
======== ========
See notes to consolidated financial statements.
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended June 27, 1999, June 28, 1998, and June 29, 1997
(In thousands, except per share amounts)
1999 1998 1997
---- ---- ----
Revenues:
Sales $ 87,392 $ 76,711 $ 63,117
Franchising and royalty income 558 989 1,122
--------- --------- ---------
Total 87,950 77,700 64,239
--------- --------- ---------
Costs and expenses:
Cost of sales and operating expenses 78,412 69,310 56,176
General and administrative expenses 18,998 10,804 16,771
Depreciation and amortization 3,441 3,080 5,719
Impairment, exit costs and other charges 1,305 1,436 12,564
Gain on sale of restaurant to related party -- (677) --
Other (income) expenses, net (127) (254) 398
--------- --------- ---------
Total 102,029 83,699 91,628
--------- --------- ---------
Loss from continuing operations before cumulative effect of
change in accounting for preopening costs (14,079) (5,999) (27,389)
--------- --------- ---------
Loss from discontinued operations:
Income (loss) from discontinued operations, net of income tax
benefit of $3,721 in 1997 910 (20,749) (11,654)
Loss on disposal of discontinued operations (10,753) -- --
--------- --------- ---------
Loss from discontinued operations (9,843) (20,749) (11,654)
--------- --------- ---------
Loss before cumulative effect of change in accounting for
preopening costs (23,922) (26,748) (39,043)
Cumulative effect of change in accounting for preopening costs
-- (987) --
--------- --------- ---------
Net loss $ (23,922) $ (27,735) $ (39,043)
========= ========= =========
Basic and diluted loss per share:
Loss before discontinued operations and cumulative effect of
accounting change $ (1.21) $ (0.52) --
Loss from discontinued operations (0.85) (1.81) --
Cumulative effect of accounting change -- (0.08) --
--------- --------- ---------
Net loss $ (2.06) $ (2.41) --
========= ========= =========
Weighted average shares outstanding 11,622 11,489 --
========= ========= =========
Pro forma basic and diluted loss per share:
Pro forma loss from continuing operations -- -- $ (2.40)
Pro forma loss from discontinued operations -- -- (1.02)
---------
Pro forma net loss -- -- $ (3.42)
=========
Pro forma weighted average shares outstanding -- -- 11,426
=========
See notes to consolidated financial statements.
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended June 27, 1999, June 28, 1998, and June 29, 1997
(In thousands)
1999 1998 1997
---- ---- ----
Cash flows from (used in) operating activities:
Net loss $(23,922) $(27,735) $(39,043)
Cumulative effect of change in accounting for preopening costs -- 987 --
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 4,145 10,227 15,547
Non-cash compensation for continuing operations 331 265 --
Non-cash compensation for discontinuing operations 912 -- --
Gain on sale of property and equipment -- (56) --
Gain on sale of restaurant to related party -- (677) --
Impairment, exit costs and other charges 1,305 24,625 21,671
Loss on investment 2,252 -- --
Deferred income taxes -- -- 454
Other -- -- (68)
Changes in assets and liabilities, net of dispositions:
Restricted cash (391) 2,398 (5,000)
Accounts receivable, net (487) 314 1,133
Inventories (232) (193) (1,312)
Prepaid expenses and other assets (170) (4,838) (1,428)
Accounts payable and accrued expenses, net 684 (6,263) 8,481
Other long-term and deferred liabilities 1,470 2,473 398
-------- -------- --------
Net cash provided by (used in) operating activities (14,103) 1,527 833
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (10,391) (7,318) (23,685)
Net proceeds from sale of discontinued operations 33,068 -- --
Proceeds from sale of restaurant to related party -- 1,515 --
-------- -------- --------
Net cash provided by (used in) investing activities 22,677 (5,803) (23,865)
-------- -------- --------
Cash flows from financing activities:
Proceeds from equipment financing 1,023 3,642 --
Proceeds from sale-leaseback facility -- 1,338 11,489
Proceeds from issuance of common stock 100 343 --
Contributed capital -- -- 9,080
Repayments of long-term debt (1,811) (1,865) (2,646)
-------- -------- --------
Net cash provided by (used in) financing activities (688) 3,458 17,923
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 7,886 (818) (5,109)
Cash and cash equivalents (overdraft), beginning of year (646) 172 5,281
-------- -------- --------
Cash and cash equivalents (overdraft), end of year $ 7,240 $ (646) $ 172
======== ======== ========
See notes to consolidated financial statements.
CHAMPPS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY Fiscal Years Ended June 29, 1997, June 28, 1998 and June 27, 1999
(Amounts in thousands)
Additional
Common Paid-in Accumulated Group
Shares Stock Capital Deficit Equity Total
------ ----- ------- ------- ------ -----
Balance, June 29, 1996 -- $ -- $ -- $ -- $ 108,894 $ 108,894
Contributed capital:
Cash -- -- -- -- 9,080 9,080
Non-cash -- -- -- -- 122 122
Net loss -- -- -- -- (39,043) (39,043)
Common shares issued 1 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance, June 29, 1997 1 -- -- -- 79,053 79,053
Net liabilities contributed by
former Parent -- -- -- -- (1,528) (1,528)
Common stock issued in connection
with distribution by former
Parent 11,425 114 77,411 -- (77,525) --
Common shares issued 167 2 606 -- -- 608
Net loss -- -- -- (27,735) -- (27,735)
--------- --------- --------- --------- --------- ---------
Balance, June 28, 1998 11,593 116 78,017 (27,735) -- 50,398
--------- --------- --------- --------- --------- ---------
Common shares issued 54 -- 100 -- -- 100
Non-cash compensation -- -- 1,243 -- -- 1,243
Net loss -- -- -- (23,922) -- (23,922)
--------- --------- --------- --------- --------- ---------
Balance, June 28, 1998 11,647 $ 116 $ 79,360 $ (51,657) -- $ 27,819
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
CHAMPPS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended June 27, 1999, June 28, 1998, and June 29, 1997
(Dollars in thousands, except per share amounts)
1. Background, Basis of Presentation and Business Activities of the Company
Background
Champps Entertainment, Inc. (the "Company"), formerly known as Unique Casual
Restaurants, Inc., is a Delaware corporation formed on May 27, 1997 in
connection with the spin-off to holders of the common stock of DAKA
International, Inc. ("DAKA International") pursuant to the transactions
described below in Note 2 (the "Spin-off" or "Spin-off Transaction"). At
inception, and continuing through November 1998, the Company's principal
business activities were to own and operate the restaurant operations previously
operated by various subsidiaries and divisions of DAKA International prior to
the formation and the Spin-off of the Company. At June 27, 1999, the Company's
principal business activity is to own, operate and franchise Champps Americana
casual dining restaurants within a single business segment.
Basis of Presentation
The accompanying consolidated financial statements include for various periods
of time the accounts of the Company, Champps Operating Corporation, Inc., the
Great Bagel & Coffee Company ("Great Bagel & Coffee"), Casual Dining Ventures,
Inc. ("CDVI") and Restaurant Consulting Services, Inc. ("RCS"). Great Bagel &
Coffee ceased operations on June 28, 1998. The Company sold its interest in RCS
on May 24, 1999. On November 24, 1998, the Company completed the sale of all of
the outstanding common stock of Fuddruckers, Inc. ("Fuddruckers") to King
Cannon, Inc. as discussed more fully in Note 3. The historical results of
operations of Fuddruckers, Inc. and its majority owned subsidiary, Atlantic
Restaurant Ventures, Inc. ("ARVI") have been treated as discontinued operations
for all periods presented. Significant intercompany balances and transactions
have been eliminated in consolidation. The historical DAKA International basis
in the assets and liabilities of the spun-off operations transferred to the
Company in connection with the transactions described in Note 2 have been
recorded as the Company's initial cost basis. The accompanying 1997 financial
statements are combined financial statements which present the combined
financial position, results of operations and cash flows of the spun-off
operations for various periods of time in a manner similar to a
pooling-of-interests. Significant intercompany balances and transactions have
been eliminated in consolidation.
Business Activities of the Company
The Company's Champps operations serve customers in upscale restaurant settings
throughout the United States. Restaurant operations are conducted through
Company-owned and franchised stores.
2. Formation of the Company
On May 27, 1997, DAKA International and its wholly-owned subsidiary, Daka, Inc.,
a Massachusetts corporation ("Daka"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Compass Interim, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Holdings, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Group PLC (collectively
"Compass"), pursuant to which Compass agreed, to commence a tender offer (the
"Offer") for all of the outstanding shares of DAKA International common stock
(the "Merger"). The Offer was consummated on July 17, 1997 (the "Spin-off
Transaction Date"). Immediately prior to the consummation of the Offer, pursuant
to a plan of contribution and distribution as described in the Reorganization
Agreement (the "Reorganization Agreement"), dated as of May 27, 1997, by and
among DAKA International, Daka, the Company and Compass, DAKA International and
certain of its subsidiaries made various contributions of assets and equity
interests to each other in the form of dividends and capital contributions in
order to divest DAKA International of its restaurant businesses which were
contributed to the Company.
During 1998, certain remaining non-restaurant operating assets and liabilities
of DAKA International were also contributed to the Company (the "Additional
Capital Contribution") consisting of notes receivable, property and equipment,
and accounts payable, accrued expenses and certain contingent liabilities. These
assets and liabilities resulted in a net decrease to group equity of
approximately $1,500 and have been recorded within their respective captions
during fiscal 1998.
Following the consummation of the Offer, Compass merged with and into DAKA
International. Pursuant to the Offer, DAKA International distributed to each
holder of record of shares of DAKA International common stock, one share of
common stock of the Company for each share of DAKA International owned by such
stockholder (the "Distribution"). No consideration was paid by DAKA
International's stockholders for the shares of the Company's common stock. As a
result of the Distribution, the Company ceased to be a subsidiary of DAKA
International and began operating as an independent, publicly-held company on
July 17, 1997.
3. Disposition Transactions
Sale of Fuddruckers
On November 24, 1998, the Company completed the sale of all of the outstanding
common stock of Fuddruckers to King Cannon, Inc. (the "Buyer") pursuant to a
Stock Purchase Agreement (the "Agreement"), dated as of July 31, 1998 (the
"Fuddruckers Sale"). The sale price was $43,000 in cash, subject to certain
adjustments. At the closing, the Company disbursed approximately $2,500 to
escrow agents to be held pending resolution of certain contingent obligations
discussed further below. At June 27, 1999, $2,596 continues to be held in escrow
and is reported as restricted cash. In addition, the Company used proceeds to
pay obligations associated with the early termination of certain leases,
obtaining landlord consents to the transaction, certain litigation settlements,
and legal, accounting and severance expenses, and to settle the Company's
obligations under a put/call agreement relating to ARVI which was originally due
to be paid in January 2000. The Company received approximately $2,600 in
previously restricted cash balances, which were released by virtue of the
Company's settling certain of the obligations discussed above. The Company also
purchased two closed Fuddruckers locations and recorded assets held for sale
valued at approximately $1,600. The sale was approved by a vote of the Company's
shareholders on November 5, 1998.
Pursuant to the Agreement, King Cannon had 120 days from the Closing Date to
review and propose adjustments to the portion of the estimated purchase price
related to working capital. The Company and King Cannon have agreed on the
amount of working capital resulting in a reduction of the estimated purchase
price of approximately $1,500, including interest. Both the Company and King
Cannon have now accepted as final, the working capital at the closing date. This
reduction in estimated purchase price has been included in the loss from
discontinued operations in the accompanying financial statements.
As part of the adjustment to working capital discussed above, the Company
received from King Cannon approximately $430 in royalty receivables from its
former franchisees which King Cannon deemed uncollectible. The Company believes
that $220 of such receivables are collectable and will vigorously pursue
collection of these amounts from such former franchisees.
Closure of Great Bagel and Coffee
On June 28, 1998, the Company ceased all operations of the Great Bagel & Coffee
business. Previously, on December 30, 1997, Great Bagel & Coffee had acquired
the assets and liabilities of one of its former franchisees, then operating a
commissary and eight Great Bagel & Coffee restaurants in Phoenix, Arizona. The
Company had hoped that this transaction would help Great Bagel & Coffee improve
sales and margins, and also provide the best opportunity for a possible sale of
the business. However, the business did not improve and no buyer or strategic
partner could be located. Accordingly, a decision was reached to close the
business. The Company has recorded impairment and exit costs associated with
this decision of $1,400 in the accompanying consolidated financial statements
for fiscal 1998.
Other Transactions
Effective July 1, 1997, the Company entered into a sale and services agreement
with RCS whereby the Company sold to RCS for an aggregate purchase price of
$2,300 certain data processing equipment. The purchase price was evidenced
through a promissory note due June 30, 2002 which bore interest at 6% per annum.
The promissory note was contributed to the Company as part of the additional
capital contribution. The Company also received DAKA International's 50%
interest in RCS at the Spin-off Transaction Date. The Company entered into a two
year service agreement with RCS for data processing and consulting services for
an annual fee of $1,800. The Company consolidated RCS' operations through May
24, 1999, when the Company sold its 50% interest in RCS to RCS pursuant to a
Stock Redemption and Debt Restructuring Agreement (the "Stock Redemption
Agreement"). As part of this transaction, the Company also canceled all amounts
due to the Company from RCS, including a note and accrued interest in the amount
of $2,500. In consideration for its shares of RCS common stock and the
cancellation of the note and accrued interest, the Company received a note
payable which was paid in full on August 25, 1999, certain computer equipment
and software, a commitment to complete certain work in progress without charge
to the Company, services under a three year consulting and professional data
processing agreement without charge to the Company, cancellation of accounts
payable to RCS, and the release of the Company for a contingent obligation
related to RCS employment of its Chief Executive Officer. The Company recorded a
loss on this transaction of approximately $350 during fiscal 1999.
On February 2, 1998, the Company sold a Champps restaurant in Minnetonka,
Minnesota to Dean Vlahos, a former Director of the Company and the former
President and Chief Executive officer of Champps Americana, Inc., for $2,900
representing the fair value of the restaurant based upon an independent
appraisal. The purchase price was settled through a cash payment by Mr. Vlahos
of $1,500 and the cancellation of Mr. Vlahos' employment contract. The Company
recognized a net gain in fiscal 1998 of approximately $700 on this transaction.
4. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends on the Sunday closest to June 30th. For purposes
of these notes to the consolidated financial statements, the fiscal years ended
June 27, 1999, June 28, 1998, and June 29, 1997 are referred to as 1999, 1998,
and 1997, respectively. Fiscal 1999, 1998, and 1997 each contain 52 weeks.
Allocation of Certain Expenses
The 1997 continuing operations of the Spin-off Transaction, as presented herein,
include allocations and estimates of certain expenses, principally corporate
accounting and tax, cash management, corporate information technology, legal,
risk management, purchasing and human resources, historically provided to the
Company by DAKA International. The amount of such allocated expenses in these
consolidated financial statements were allocated by management based upon a
variety of factors including, for example, personnel, labor costs and sales
volumes. Such allocations have been reported within selling, general and
administrative expenses and aggregate $9,800 for 1997. Management believes these
allocations were made on a reasonable basis. However, the accompanying 1997
consolidated financial statements may not necessarily be indicative of the
conditions that would have existed, the financial position, or results of
operations, if the Spun-off Operations had been operated as a separate entity.
The accompanying 1997 consolidated financial statements do not include an
allocation of interest expense associated with DAKA International's revolving
line-of-credit agreements as such obligations were assumed by Compass pursuant
to the terms of the Spin-off Transaction. Interest on long-term obligations
transferred to the Company has been included in the Company's 1997 consolidated
statement of operations.
Significant Estimates by the Company
In the process of preparing its consolidated financial statements in accordance
with generally accepted accounting principles, the Company estimates the
appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources. The primary estimates underlying the
Company's consolidated financial statements include allowances for potential bad
debts on accounts and notes receivable, the useful lives and recoverability of
its assets such as property, equipment and intangibles, fair values of financial
instruments, the realizable value of its tax assets and accruals for workers
compensation, general liability and health insurance programs and
representations and warranties provided in connection with the Spin-off
Transaction and Fuddruckers sale. Management bases its estimates on certain
assumptions, which they believe are reasonable in the present circumstances and
while actual results could differ from those estimates, management does not
believe that any change in those assumptions in the near term would have a
material effect on the Company's consolidated financial position or the results
of operations.
Concentration of Credit Risk
The Company extends credit to its Champps' franchisees on an unsecured basis in
the normal course of business. No individual franchisee is significant to the
Company's franchisee base. The Company has policies governing the extension of
credit and collection of amounts due from franchisees.
The Company's allowance for uncollectible accounts receivable and related bad
debt expense are not material for each period presented.
Cash Equivalents and Restricted Cash
Cash equivalents consist of highly liquid investments with a maturity of three
months or less at date of purchase. These investments are carried at cost, which
approximates fair value. The Company placed certificates of deposit to serve as
cash collateral for stand-by letters of credit in the amount of $417 and $2,600
at June 27,1999 and June 28, 1998, respectively. Such collateral commitments
begin to expire during calendar 1999 and accordingly they have been classified
as current assets in the accompanying consolidated financial statements.
Inventories
Inventories are stated at the lower of cost, principally determined using the
first-in, first-out method, or market value. Inventories include the initial
cost of smallwares with replacements charged to expense when purchased.
Approximately 80% of the Company's food products and supplies are purchased
under a distribution contract with Sysco Corporation.
The components of inventories are as follows:
(In thousands)
1999 1998
---- ----
Food and liquor products $ 617 $ 574
Smallwares 292 120
Supplies 296 279
-------- --------
$ 1,205 $ 973
======== ========
Prepaid Expenses and Other Current Assets
Through June 29, 1997, the Company had capitalized direct incremental preopening
costs associated with the opening of new or the expansion and major remodeling
of existing restaurants with such costs being amortized over twelve months. In
April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5") which requires companies to expense all costs associated with
preopening activities. The effect of adopting the provisions of SOP 98-5 during
1998 was to expense approximately $987 of capitalized costs existing at June 29,
1997 as of June 30, 1997, of which approximately $800 is related to continuing
operation. The Company has reported this expense as the cumulative effect of an
accounting change in the accompanying fiscal 1998 consolidated financial
statements.
Property and Equipment
Property and equipment is stated at cost. Property and equipment is depreciated
using the straight-line method over the estimated useful lives of the assets. As
a pre-condition to the Fuddruckers sale, in November 1998, the Company purchased
certain point of sale terminals, which were being leased. The Company determined
that the purchase price exceeded the current market value and recorded a charge
of $850 which was included in general and administrative expenses in fiscal
1999. In June 1999, it was determined that the point of sale terminals would
need to be replaced to accommodate new software requirements. Consequently, the
estimated useful life was shortened resulting in an accelerated depreciation
charge of approximately $360. The remaining value will be depreciated in the
first quarter of fiscal 2000, when these machines are retired. Leasehold
improvements and assets capitalized pursuant to capital lease obligations are
amortized over the shorter of the initial lease term, contract term or the
estimated useful life. Useful lives range from 15 to 20 years for buildings and
leasehold improvements and three to ten years for equipment.
Accrued Transaction Costs
Accrued Transaction costs included legal, accounting and other costs associated
with completing the Spin-off Transaction at June 28, 1998.
Accrued Insurance Costs
The Company has purchased commercial insurance to cover workers' compensation,
general liability, and various other risks for claims incurred after June 29,
1997. Through June 29, 1997, the Company was self-insured for workers'
compensation, general liability, and various other risks up to specified limits.
The Company's share of prior workers' compensation and general liability
programs of DAKA International through June 29, 1997 were allocated using labor
costs and the aggregate costs of such programs were determined through actuarial
studies which determined the estimated amount required to be provided for
incurred incidents. In connection with the Spin-off Transaction, the Company is
obligated to indemnify Compass for all claims that relate to events occurring
prior to the Spin-off Transaction Date which arise subsequent to the Spin-off
Transaction, including claims related to employees of DAKA International not
continuing with the Company after the Spin-off Transaction. The Company believes
that any claims related to its obligation to further indemnify Compass after
June 27, 1999 are not material.
Other Long-Term Liabilities
Other long-term liabilities are comprised of deferred rent liabilities and
management's estimate of the non-current portion of the liability related to the
Company's workers' compensation and general liability self-insurance program.
Deferred Rent Assets and Liabilities
Deferred rent assets, included in other assets, represent the difference between
the cost and the net proceeds received from property sold pursuant to
sale-leaseback agreements and are amortized on a straight-line basis over the
initial term of the lease. For leases which contain rent escalations, the
Company records the total rent payable during the lease term on a straight-line
basis over the term of the lease. In addition, lease incentive payments received
from landlords are recorded as deferred rent liabilities and are amortized on a
straight-line basis over the lease term as a reduction of rent expense.
Group Equity
Prior to the Distribution, group equity represented the net intercompany
activities between the Company and DAKA International. As of June 29, 1997, the
Company had issued 1,000 shares of its common stock, par value $.01 per share,
to DAKA International for $.01 in connection with its formation. Such shares
were reported within group equity for purposes of the 1997 consolidated
financial statements.
Revenue Recognition
The Company records sales from its restaurant operations and franchise and
royalty fees as earned.
Franchising and Royalty Income
Franchise fees for new franchises are recognized as revenue when substantially
all commitments and obligations have been fulfilled, which is generally upon
commencement of operations by the franchisee. The Company has also entered into
development agreements granting franchisees the exclusive right to develop and
operate restaurants in certain territories in exchange for a development fee or
other consideration.
Amounts received in connection with such development agreements are recognized
as franchise fee revenues when earned since the Company is not required to
provide any future services and such fees are non-refundable. Franchisees
entering into development agreements are also required to execute franchise
agreements and pay the standard franchise fee which is sufficient to cover the
Company's contractual obligations to the franchisee for each unit opened. To the
extent that the Company provides services beyond its contractual obligation, the
Company charges the franchisee a fee for such additional services. The Company
recognized development and franchise fee revenues of $86 and $165 during 1998,
and 1997, respectively. No development and franchise fee revenues were
recognized in fiscal 1999.
Royalty revenues from franchised restaurants are recognized as revenues when
earned in accordance with the respective franchise agreement. The Company
recognized royalty revenues from continuing operations of $558, $903 and $957
during 1999, 1998, and 1997, respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the carrying value for
financial reporting purposes and the tax basis of assets and liabilities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are recorded
using the enacted tax rates expected to apply to taxable income in the years in
which such differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities, resulting from a change in tax rates, is
recognized as a component of income tax expense (benefit) in the period that
such change occurs. Targeted jobs tax credits are treated as a reduction of
income tax expense in the year such credits are utilized.
Prior to the Distribution, the Spin-off Transaction was generally included in
the consolidated U.S. Federal income tax return and certain combined and
separate state and local income tax returns of DAKA International. For purposes
of the 1997 financial statements, a credit in lieu of taxes has been presented
as if the Company was a stand alone taxpayer. Current income tax liabilities
(assets) were considered to have been paid (received) from DAKA International
and were recorded through the group equity account.
The Company has entered into an indemnification agreement, whereby the Company
has agreed to indemnify Compass against all state and federal income and other
tax liabilities of DAKA International for any period before the Spin-off
Transaction Date as well as any tax consequences resulting from the Spin-off
Transaction. The Company believes that any amounts due to Compass under this
indemnification agreement after June 27, 1999, if any, will not be material.
As part of the sale of Fuddruckers, the Company agreed to indemnify the acquiror
against liabilities arising from breaches of the acquisition agreement, as well
as identified preclosing liabilities, including tax liabilities. The Company
believes that any amounts due to King Cannon under this indemnification
agreement after June 27, 1999, if any, will not be material.
Accounting for Stock-Based Compensation
The Company continues to apply Accounting Principles Board ("APB") Opinion No.
25, which recognizes compensation cost based on the intrinsic value of the
equity instrument awarded. The Company discloses the required pro forma effect
on results from operations and net income (loss) per share in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation.".
Options to purchase shares of DAKA International common stock held by employees
remaining with the Company after the Distribution were converted into options to
purchase shares of the Company's common stock in accordance with Emerging Issues
Task Force Abstract 90-9 and, accordingly, such conversion had no effect on the
Company's 1998 consolidated financial position or results of operations.
In fiscal 1999, the Company recorded non-cash compensation expense of $1,243
related to extension of termination dates and early vesting of stock options of
an officer of the Company. Of this total, $912 was related to the Fuddruckers'
sale and was included in the loss from discontinued operations. The balance of
$331 was included in general and administrative expense.
During 1998, the Company recorded compensation expense of $236 related to the
repurchase from certain option holders of an aggregate of 172,044 common stock
options at an average price of $1.37 per option.
Cash Flow Information
Cash payments for interest aggregated $635, $491, and $451 in 1999, 1998, and
1997, respectively.
Capital lease obligations of $1,605 were incurred when the Company entered into
leases for new Champps restaurant equipment in 1997.
Significant other non-cash investing and financing transactions are as follows:
1998
Certain non-restaurant operating assets and liabilities were
contributed to the Company in connection with the Spin-off Transaction
resulting in a net decrease to stockholders' equity of $1,528.
The Company also increased its obligations under a minority interest
put obligation related to the discontinued operations by $4,300.
1997
The Company sold a restaurant under construction with a book value of
$1,205, in exchange for a $1,200 promissory note.
Equity and Pro Forma Loss Per Share
The authorized capital stock of the Company consists of 30,000,000 shares of
common stock, of which 11,647,427 and 11,593,000 shares were issued and
outstanding as of June 27, 1999 and June 28, 1998, respectively, and 5,000,000
shares of preferred stock, of which no shares are issued and outstanding.
Approximately 11,425,000 shares were issued upon the consummation of the
Spin-off Transaction.
During 1998 the Company adopted SFAS No. 128, "Earnings per Share." The pro
forma loss per share for 1997 was computed using the number of shares
outstanding immediately after the Spin-off.
For purposes of the fiscal 1999 and 1998 earnings per share calculations, stock
options have been excluded from the diluted computation as they are
anti-dilutive. Had such options been included in the computation. The weighted
average shares would have increased by approximately 132,000 and 166,000,
respectively.
Impairment of Long-Lived Assets, Exit Costs and Other Charges
The Company evaluates the carrying value of long-lived assets including
property, equipment and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Under SFAS No. 121, an
assessment is made to determine if the sum of the expected future undiscounted
cash flows from the use of the assets and eventual disposition is less than the
carrying value. If the sum of the expected undiscounted cash flows is less than
the carrying value, an impairment loss is recognized by measuring the excess of
carrying value over fair value (generally estimated by projected future
discounted cash flows from the applicable operation or independent appraisal).
In 1999, the Company recorded approximately $1,300 in exit costs against
continuing operations. Included in exit costs is approximately $250 related to
the termination of fifteen employees which is expected to begin during the
second quarter of fiscal 2000. The Company expects to pay amounts related to
non-severance costs in the first and second quarter of fiscal 2000.
In addition, the Company has recorded approximately $8,100 against continuing
operations of which $2,700 represents losses on the sale and write down of
non-essential assets, $2,700 represents changes in estimates of continuing
obligations for the Company's predecessor businesses and $2,700 represents
losses on business and lease contracts. The Company recorded accrued liabilities
aggregating $3,900 in connection with such charges, none of which have been paid
as of June 27, 1999.
In 1998, the Company recorded a provision for continuing operations of $1,400
which represents exit costs associated with closing the Great Bagel & Coffee
business. Additional fiscal 1998 impairment, exit and other charges of $23,225
have been reclassified as discontinued operations.
In 1997, the Company recorded a provision against continuing operations of
$12,564 of which $7,164 represented impairment of net assets at restaurants
which had been or were to be closed and exit costs associated with lease
settlements and identified employee termination benefits. The remainder of
$5,400 consisted primarily of legal costs associated with the Spin-off and the
sale of the Foodservice business. An additional charge of $9,107 has been
reclassified to discontinued operations for fiscal 1997.
Reclassifications
Certain amounts in the 1998 and 1997 consolidated financial statements have been
reclassified to conform to the 1999 presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Financial Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
accounting for derivative instruments and hedging activities. The Company has
not yet determined the effect that the adoption of SFAS No. 133 will have on the
Company's results of operations or financial condition.
5. Investment
In January 1996, the Company acquired a 16.7% equity interest in the form of
convertible redeemable preferred stock (the "La Salsa Preferred Stock") in La
Salsa Holding Co. ("La Salsa"), a franchisor and operator of La Salsa Mexican
restaurants for approximately $5,000. On July 16, 1999, Santa Barbara Restaurant
Group ("SBRG"), a publicly held corporation, reported that it had completed the
acquisition of La Salsa. In connection with this transaction, the Company
exchanged all of its Series D Convertible Preferred Stock for approximately
1,277,500 shares of common stock of SBRG, of which approximately 120,650 shares
have been placed in escrow to cover any claims for indemnification by SBRG in
connection with this transaction. The Company recorded a loss based on this
transaction of approximately $2,252 in the fourth quarter of fiscal 1999.
Effective the first quarter of fiscal 2000, the Company will account for the
investment in SBRG in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", and the Company will classify this
investment as available for sale.
6. Property, Plant and Equipment
Property and equipment consist of the following:
(In thousands)
1999 1998
---- ----
Buildings and leasehold improvements $ 22,597 $ 21,653
Equipment 18,117 15,352
Construction in progress 7,506 549
---------- ----------
48,220 37,554
Accumulated depreciation (12,124) (7,704)
---------- ----------
$ 36,096 $ 29,850
========== ==========
7. Other Assets
The components of other assets are as follows:
(In thousands)
1999 1998
---- ----
Notes receivable $ 1,904 $ 2,427
Other 366 592
-------- --------
$ 2,270 $ 3,019
======== ========
Notes receivable include a note from a franchisee bearing interest at 10%,
requires monthly payments and interest, and matures in 2003. As part of the RCS
sale, a note payable of $750 was recorded in the fourth quarter of fiscal 1999.
That note was paid in full in the first quarter of fiscal 2000.
8. Accrued Expenses
The components of accrued expenses are as follows:
(In thousands)
1999 1998
---- ----
Salaries, wages and related taxes $ 1,874 $ 2,727
Sales and use taxes 1,433 615
Insurance accruals 2,987 1,061
Lease termination accruals 1,047 -
Other 1,338 975
--------- ---------
$ 8,679 $ 5,378
========= =========
9. Long-Term Debt
The components of long-term debt are as follows:
(In thousands)
1999 1998
---- ----
Notes payable $ 250 $ 439
Capital lease obligations 5,907 6,506
-------- --------
6,157 6,945
Less current portion (2,010) (2,188)
-------- --------
Total $ 4,147 $ 4,757
======== ========
Maturities of long-term debt, including capital lease obligations, at June 27,
1999 are as follows:
(In thousands)
2000 $ 2,010
2001 1,955
2002 1,179
2003 950
2004 63
-------
$ 6,157
=======
10. Income Taxes
Deferred tax assets and (liabilities) are comprised of the following:
(In thousands)
1999 1998 1997
---- ---- ----
Current:
Accrued expenses $ 2,651 $ 282 $ 1,635
Prepaid expenses -- (366) (330)
Net operating loss carryforwards -- -- 327
Other 86 526 412
Less valuation allowance (2,737) (442) (2,044)
-------- -------- --------
$ 0 $ 0 $ 0
-------- -------- --------
Noncurrent:
Net operating loss carryforwards $ 14,192 $ 9,457 $ 4,704
Depreciation and amortization 1,856 12,215 6,069
Deferred income 73 268 300
Accrued expenses -- -- 1,967
Less valuation allowance (16,121) (21,940) (13,040)
-------- -------- --------
$ 0 $ 0 $ 0
======== ======== ========
The following is a reconciliation of income taxes at the federal statutory rate
to the Company's income tax expense (benefit):
(In thousands)
1999 1998 1997
---- ---- ----
Income tax provision (benefit) computed at
statutory federal income tax rates $ (8,372) $ (9,707) $(14,970)
Adjustment related to net operating loss limitations 11,860 -- --
Non-deductible costs 36 162 865
Increase (decrease) in the valuation allowance (3,524) 7,298 9,525
Other, net -- 2,247 859
-------- -------- --------
Income tax benefit $ 0 $ 0 $ (3,721)
======== ======== ========
As of June 27, 1999, the Company had federal net operating loss carryforwards of
approximately $40,500, expiring at various dates through 2019. For the fiscal
years ended 1999, 1998 and 1997, the Company provided a valuation allowance for
the tax benefit of the deferred tax assets not expected to be utilized based on
historical operating results and other available evidence. During the fiscal
years ended 1998 and 1997 the valuation allowance was increased by $7,300 and
$9,500, respectively, principally as a result of the Company's losses. During
1999, the valuation allowance decreased $3,500 on a net basis due to adjustments
to the Company's deferred tax assets, offset by current year operating losses.
During 1999, as a result of a change in ownership, as defined under Section 382
of the Internal Revenue Code ("IRC"), and the decline in the market price of the
Company's stock, the Company wrote off $11,860 of deferred tax assets which will
not be utilized as a result of net operating loss carryforward limitations under
IRC Section 382. The reduction had no effect on operations as such assets had a
full valuation allowance. The Company's remaining loss carryforwards at June 27,
1999 may be subject to further limitations under IRC Section 382.
11. Commitments and Contingencies
Fuddruckers Representations and Indemnity
The Agreement contains various representations and warranties by the Company.
These include, without limitation, representations and warranties by the Company
as to (i) the organization, good standing, and capitalization of Fuddruckers and
its subsidiaries; (ii) proper corporate authority, no conflicts, no violations
and requisite approvals; (iii) ownership of the Shares; (iv) material accuracy
of financial statements, books and records; (v) absence of undisclosed
liabilities and absence of material adverse change; (vi) litigation; (vii)
compliance with law; (viii) status of employee benefit plans and labor
relations; (ix) tax matters; (x) title to and condition of assets; (xi) leases
and real property; (xii) material contractual obligations and licenses; (xiii)
intellectual property matters; (xiv) insurance policies; (xv) brokers, finders
and other fees; (xvi) franchises; and (xvii) environmental matters.
The Company's representations and warranties contained in the Agreement survive
the closing and will expire on December 31, 2000 (the "Survival Period") except
that (i) representations and warranties made by the Company relating to
environmental matters survive the closing date until December 31, 2003, (ii)
representations and warranties made by the Company relating to employee matters
and income taxes survive the closing date until expiration of applicable
statutes of limitations and (iii) representations and warranties made by the
Company with respect to (a) the Company's power to execute the Agreement, the
Company's having executed the Agreement with required corporate action and that
the Agreement is valid and binding by its terms, the due organization, valid
existence and good standing of the Company and Fuddruckers, (b) the
representation stating the execution and delivery of the Agreement: (1) does not
violate any law, order, by-law or article of incorporation of the Company or
Fuddruckers; (2) does require approval of shareholders of Fuddruckers other than
the Company; (3) does not result in a lien or title defect in assets or shares
of Fuddruckers; or (4) does result in a claim against Fuddruckers, its assets,
shares of Fuddruckers and King Cannon; and (c) the capitalization and equity
securities of Fuddruckers shall survive the closing indefinitely. In addition,
any covenants or agreements of the Company under the Agreement, and any and all
indemnification obligations relating thereto shall survive the closing
indefinitely, unless earlier expiring in accordance with their respective terms,
including, without limitation, the Company's indemnification obligations with
respect to covenants (i) regarding environmental matters, (ii) current pending
legal proceedings; (iii) liability for taxes; (iv) sub-leases for certain
Fuddruckers restaurants; (v) undisclosed contractual obligations; (vi) violation
of the Company's representations and warranties in the Agreement; and (vii)
obligations arising between the signing on the Agreement and the closing, lease
termination amounts and rent adjustments amounts.
King Cannon's representations and warranties under the Stock Purchase Agreement,
and its indemnification obligations arising from such representations and
warranties, survive the Closing and will expire and terminate on December 31,
2000. Any covenants or agreements of King Cannon under the Stock Purchase
Agreement, and any and all indemnification obligations relating thereto survive
the Closing indefinitely, unless earlier expiring in accordance with their
respective terms.
The Company and Champps Operating Corporation, Inc. are obligated to jointly and
severally indemnify King Cannon and Fuddruckers and their respective affiliates
from and against any losses, assessments, liabilities, claims, obligations,
damages, costs or expense which arise out of or relate to (i) any
misrepresentations in, breach of or failure to comply with any of the
representations, warranties, undertakings, covenants or agreements of the
Company, Fuddruckers and related entities, and any affiliate of any of them
contained in the Agreement; (ii) any environmental matters related to
Fuddruckers, its affiliates of business; (iii) any retained or undisclosed
liabilities; or (iv) the Company's obligations with respect to lease termination
amounts and rent adjustment amounts. With respect to the indemnification for
lease termination amounts and rent adjustment amounts, the Company obtained each
required consent and required estoppel from landlords prior to the closing of
the sale. As a result, the Company believes the risk for a material claim for
indemnification related to any environmental matters, or to each of the lease
termination amounts and rent adjustment amounts provisions, is remote.
Further, at the closing, the Company established a $1.0 million cash escrow
(included in the amount reported as restricted cash at June 27, 1999 in the
accompanying consolidated balance sheet) as a fund for payment of any claims for
indemnification pursuant to the Agreement. Such escrow does not serve to limit
the Company's maximum exposure for indemnification claims. However, the Company
believes the risk of a claim for indemnification exceeding the $1.0 million
escrow is remote. As of June 27, 1999, no money had been paid from the escrow
fund, however in the first quarter of fiscal 2000 a total of $0.2 million was
paid for agreed amounts presented to the Company by King Cannon for
indemnification.
The maximum aggregate liability of the Company on account of any breach of any
representation or warranty is limited to the amount of the final purchase price.
There is no cap or limit on the liability of the Company to King Cannon on
account of any breach by the Company of any of its covenants or agreements under
the Agreement or on account of indemnification obligations covering matters
other than breaches of representations and warranties, provided that, if King
Cannon is entitled to recover any losses in excess of the final purchase price,
the Company may either (i) require King Cannon to reconvey to the Company full
ownership and control of the shares and all assets (to the extent then owned by
King Cannon or Fuddruckers) that are being transferred pursuant to the Agreement
in such a manner as to rescind the transactions contemplated by the Agreement,
in which case the Company will pay King Cannon an amount equal to (x) the final
purchase price plus (y) all additional investments made in Fuddruckers following
the closing plus (z) an amount equal to an internal rate of return equal to 25%
on the sum of items (x) and (y); or (ii) pay to King Cannon all of the losses
with respect to which King Cannon is entitled to indemnification.
As part of the consideration under the Agreement, each of the Company and
Champps Operating Corporation agreed that, for a period of ten years following
the closing date, neither will (i) directly or indirectly, own, manage, operate,
finance, join, or control, or participate in the ownership, management,
operation, financing or control of, or be associated as a partner or
representative in connection with, any restaurant business that is in the
gourmet hamburger business or whose method of operation or trade dress is
similar to that employed in the operation of the "Fuddruckers" restaurant; or
(ii) directly or indirectly solicit, induce or attempt to induce any person then
employed by Fuddruckers or King Cannon to enter the employ of the Company or
Champps Operating Corporation, or any of their respective affiliates.
Nothing contained in the Agreement limits the right of the Company or Champps to
operate the business of Champps as it is currently conducted or other restaurant
concepts that do not compete directly with Fuddruckers or to own less than a 5%
legal or beneficial ownership in the outstanding equity securities of any
publicly traded corporation.
Spin-Off Indemnifications
The Company agreed to assume certain liabilities in connection with the
Spin-off. In addition, the Company entered into a Post-Closing Covenants
Agreement which provides for post-closing payments by the Company to Compass
under certain circumstances. The Company also agreed to indemnify Compass for
certain losses on liabilities existing prior to the Spin-off Transaction Date
but unidentified at such date. This indemnification begins to expire on December
31, 1999. The Company believes the risk of a significant claim for
indemnification being presented by Compass is remote.
Leases
Pursuant to the terms of the Spin-off Transaction, the Company assumed the
existing lease obligations and purchase commitments of DAKA International
consisting principally of the corporate headquarters in Danvers, Massachusetts
which expires during 2001. The Company plans to exit this location by December
31, 1999, and expects that a lease termination penalty of $1,000 will be paid to
the landlord.
The Company has entered into lease agreements for certain restaurant facilities
and office space. The fixed terms of the leases range up to 20 years and, in
general, contain multiple renewal options for various periods ranging from 5 to
25 years. Certain leases contain provisions which require additional payments
based on sales performance and the payment of common area maintenance charges
and real estate taxes. Finally, the Company also leases certain restaurant and
computer equipment under operating leases which expire at various dates through
June 2001.
In December 1995, Champps obtained a commitment for a $40,000 development and
sale-leaseback financing facility from AEI Fund Management, Inc. ("AEI").
Pursuant to the terms of the agreement, the Company would sell and lease-back
from AEI, Champps restaurants to be constructed and would pay a commitment fee
of 1% of the sale price of each property sold to AEI. The purchase price would
be equal to the total project cost of the property, as defined in the agreement,
not to exceed its appraised value (the "Purchase Price"). The unused commitment
expired on December 31, 1998. The leases provide for a fixed minimum rent based
on a percentage of the respective property's Purchase Price, subject to
subsequent increases based on the Consumer Price Index. The leases also provide
for an initial term of 20 years with two 5-year renewal options exercisable at
the option of Champps. As of June 27, 1999, eight Champps restaurants had been
fully funded under this commitment and none had been partially funded.
Future minimum lease payments pursuant to leases with noncancelable lease terms
in excess of one year at June 27, 1999 are as follows:
Fiscal (In thousands)
Years Operating Capital
Ending Leases Leases
- ------ ------ ------
2000 $ 5,855 $ 2,301
2001 5,819 2,139
2002 5,580 1,315
2003 5,291 996
2004 5,261 64
Thereafter 56,490 --
--------- ---------
Total future minimum lease payments $ 84,296 6,815
========
Less amount representing interest (908)
---------
Present value of future minimum lease payments $ 5,907
=========
Total rent expense in 1999, 1998 and 1997 approximated $6,509, $4,315 and
$3,154, respectively. Contingent rentals included in rent expense are not
material for the periods presented.
Included in property and equipment in 1999, 1998 and 1997 are approximately
$9,300, $9,300 and $5,700, respectively, of equipment held pursuant to capital
lease arrangements. The related accumulated amortization was approximately
$3,700, $2,400 and $1,300, respectively.
Litigation
The Company has agreed to assume certain contingent liabilities of DAKA
International in connection with the Spin-off and has agreed to assume certain
contingent liabilities of Fuddruckers for periods prior to its sale to King
Cannon as discussed elsewhere in this Form 10-K. Further, the Company is also
engaged in various actions arising in the ordinary course of business. The
Company believes, based upon consultation with legal counsel, that the ultimate
collective outcome of these matters will not have a material adverse effect on
the Company's consolidated financial condition, results of operations or cash
flows.
12. Stock Options and Employee Benefit Plans
Stock Options
On July 17, 1998, the Company adopted a stock option and restricted stock plan
for the benefit of the employees and non-employee directors of the Company
whereby the Company authorized and reserved for issuance 1,250,000 shares of
common stock. In connection with the Spin-off Transaction, each outstanding
option held by a Company employee to acquire DAKA International common stock was
converted into an option to acquire one share of common stock of the Company and
one share of common stock of DAKA International (the "Adjusted Options"). The
exercise prices of the Adjusted Options were determined such that each option
holder will remain in an equivalent economic position before and after the
Spin-off Transaction.
Through the date of the Spin-off Transaction, the Company's employees
participated in various incentive and non-qualified stock option plans sponsored
by DAKA International (the "Plans"). The Plans provided for the granting of
options for terms of up to ten years to eligible employees at exercise prices
equal to the fair market value of the DAKA International common stock on the
date of the grant. In recognition of the terms of stock option plans, on
November 24, 1998, with the sale of Fuddruckers, all outstanding stock option
grants became fully vested. All option grants held by employees who transferred
to King Cannon as part of the Fuddruckers sale expired at the end of February,
1999. All shares exercised in fiscal 1999 were fully vested prior to the sale of
Fuddruckers.
The following table presents activity under the Company's stock option plan:
Weighted Weighted
Average Average
Number of Exercise Grant Date
Options Price Fair Value
------- ----- ----------
Outstanding at July 17, 1997 -- --
DAKA International adjusted options 597,554 $ 6.10
Granted 569,850 6.31 $ 1.47
Exercised (70,280) 2.93
Forfeited (245,894) 10.92
---------- ---------
Outstanding at June 28, 1998 851,230 5.11
Granted 1,028,500 5.79 $ 1.70
Exercised (35,150) 1.48
Forfeited (1,026,905) 6.57
---------- ---------
Outstanding at June 27, 1999 817,675 $ 5.12
========== =========
The number of options exercisable at the dates presented below and their
weighted average exercise price were as follows:
Weighted
Average
Options Exercisable
Exercisable Price
----------- -----
July 17, 1997 487,689 $ 6.40
June 28, 1998 246,265 3.16
June 27, 1999 817,675 5.12
The following table sets forth information regarding options outstanding at June
27, 1999:
Weighted
Average Weighted
Weighted Remaining Number Average Price
Number of Range of Average Contractual Currently for Currently
Options Prices Price Life Exercisable Exercisable
------- ------ ----- ---- ----------- -----------
193,500 $ 1.21 - 2.41 $ 1.95 1 193,500 $ 1.95
38,025 4.52 - 4.86 4.73 6 38,025 4.73
88,025 5.12 - 5.85 5.20 8 88,025 5.20
488,925 6.03 - 6.72 6.34 8 488,925 6.34
9,200 7.00 -13.80 8.20 6 9,200 8.20
The Company applies APB Opinion No. 25 to account for various stock plans.
Accordingly, pursuant to the terms of the plans, no compensation cost has been
recognized for the stock plans. However, if compensation cost for stock option
grants issued to Company employees during 1999, 1998 and 1997 had been
determined using the fair value method under the provisions of SFAS No. 123, the
Company's net loss and pro forma net loss per share would have been increased to
the pro forma amounts shown below:
(In thousands,except per share amounts)
1999 1998 1997
---- ---- ----
Net loss:
As reported $ 23,922 $ 27,735 $ 39,043
Pro forma 24,532 28,869 39,943
Net loss per share:
As reported $ 2.06 $ 2.41 $ 3.42
Pro forma - as adjusted 2.11 2.51 3.50
The pro forma net loss reflects the compensation cost only for those options
granted during 1999, 1998 and 1997. Compensation cost is reflected over a stock
option's vesting period and compensation cost for options granted prior to July
2, 1995 is not considered..
The fair value of each stock option granted in 1999, 1998 and 1997 under DAKA
International stock option plans was estimated on the date of grant using the
Black-Scholes option-pricing model. The following key assumptions were used to
value grants issued for each year:
Weighted Average
Average Expected Dividend
Risk Free Rate Life Volatility Yield
-------------- ---- ---------- -----
1997 6.28% 4 years 50.00% 0%
1998 5.36% 4 years 14.73% 0%
1999 5.72% 2 years 53.44% 0%
The weighted-average fair values per share of stock options granted during 1999,
1998 and 1997 were $5.79, $2.14 and $4.13, respectively. It should be noted that
the option pricing model used was designed to value readily tradable stock
options with relatively short lives. The options granted to employees are not
tradable and have contractual lives of up to ten years. However, management
believes that the assumptions used and the model applied to value the awards
yields a reasonable estimate of the fair value of the grants made under the
circumstances.
Employee Stock Purchase Plan
The Company has reserved 400,000 shares of its common stock to be offered under
its 1997 Stock Purchase Plan (the "Plan"). Under the Plan, eligible employees of
the Company may participate in quarterly offerings of shares made by the
Company. The participating employees purchase shares at a discount from the
lower of fair value at the beginning or end of each quarterly offering period
through payroll deductions. In fiscal 1999, employees purchased 19,000 shares
for a total of $90.
Shareholders' Rights Plan
On January 30, 1998, the Company adopted a Shareholder Rights Plan designed to
enhance the Company's ability to protect all of its shareholders' interests and
ensure that all shareholders receive fair treatment in the event of any
potential sale of the Company. In connection with this plan, the Board of
Directors declared a dividend distribution of one preferred stock purchase right
for each outstanding share of common stock to shareholders of record as of the
close of business on February 11, 1998. These rights became exercisable on
January 30, 1998. Each holder of a right is entitled to acquire such number of
shares of preferred stock which are equivalent to the Company's common stock
having a value of twice the then-current exercise price of the right. If the
Company is acquired in a merger or other business combination transaction after
any such event, each holder of a right is entitled to purchase, at the
then-current exercise price, shares of the acquiring company's common stock
having a value of twice the exercise price of the right.
Employee Benefit Plan
The Company sponsors a 401(k) retirement plan and, prior to the Transaction
Date, the Company's employees participated in a 401(k) retirement plan sponsored
by DAKA International. Both plans enabled employees to contribute up to 15% of
their annual compensation. The Company's discretionary contributions to the Plan
have been determined by the Board for fiscal 1998, and by DAKA International
before the Spin-off Transaction. The Company contributed $25 and $204 to the
Plan in 1997 and 1996, respectively. A contribution of $65 was made in 1999 for
the 1998 plan.
13. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and various valuation methodologies.
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments for which it was practicable to estimate
that value:
Current Assets and Liabilities - The carrying amount of cash, accounts
receivable, accounts payable and accrued expenses approximates fair value
because of the short maturity of these instruments.
Notes Receivable - The carrying value of notes receivable approximates fair
value and was estimated based on discounted cash flows expected to be received
using interest rates at which similar loans are made to borrowers with similar
credit ratings, or if the loan is collateral dependent, management's estimate of
the fair value of the collateral.
Capital lease obligations - The carrying value of capital lease obligations
approximates fair value based upon current market interest rates.
14. Related Party Transactions
See Note 3, "Other Transactions".
The Company's Chief Executive Officer received various below market stock option
grants in fiscal 1999. Non-cash compensation expense related to these grants
aggregated $1,243.
Fiscal 1999 results included a $150 payment made to Atticus Partners, L.P., a
related party, as part of a proxy settlement.
In fiscal 1999, Bear Stearns & Co., Inc., the employer of Alan Schwartz, member
of the Company's Board of Directors, received a fee of approximately $1,800 for
services related to the 1997 Spin-Off Transaction. In fiscal 1999, Bear Stearns
provided services related to the Company's financial and strategic alternatives,
and is entitled to approximately $50 in out-of-pocket expenses, which remain
payable.
Joseph O'Donnell, who resigned from the Company's Board of Directors in August
1999, is a principal of Osgood, O'Donnell & Walsh, which provides marketing
consulting services. In fiscal 1999, the Company paid Osgood, O'Donnell & Walsh
approximately $30 for such services. Mr. O'Donnell also owns a controlling
interest in Pulseback, Inc., which provides restaurant related services. The
Company holds notes payable from Pulseback, Inc. for approximately $75. The
Company wrote off the full value of this note in fiscal 1999. During fiscal
1999, the Company paid Pulseback approximately $68 for services rendered,
primarily to Fuddruckers.
In connection with Mr. Goodwin's appointment to the Company's Board of
Directors, Atticus Capital, L.L.C. entered into an agreement with Mr. Goodwin
which provides that Atticus Capital, L.L.C. will pay to Mr. Goodwin an amount
equal to five percent of the proceeds above $4.875 per share of Common Stock
realized by Atticus Partners, L.P., Atticus Qualified Partners, L.P. and Atticus
International, Ltd. upon the sale or disposition of 1,577,056 shares of Common
Stock beneficially owned by them. In addition, Atticus Partners, L.P. agreed to
indemnify Mr. Goodwin against any and all losses, claims, liabilities and
expenses in connection with serving as a member of the Company's Board of
Directors.