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 30, 2002
[ ] 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.
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5619 DTC Parkway, Suite 1000, Englewood, CO 80111
(Address of principal executive offices) (Zip Code)
303-804-1333
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Resolution S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K: [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of the Common Stock of the registrant as
quoted on the National Association of Securities Dealers Automated Quotation
System on September 23, 2002 was $72,147,953 (for purposes of calculating this
amount only, directors, officers and beneficial owners of 10% or more of the
Common Stock of the registrant may be deemed affiliates).
Number of shares of Common Stock, $.01 par value, outstanding at September 23,
2002: 12,314,482
DOCUMENTS INCORPORATED BY REFERENCE
The sections of the Company's definitive Proxy Statement, listed below, which
have been or will be filed by the Company with the Securities and Exchange
Commission, are incorporated in this Annual Report by reference and shall be
deemed to be a part hereof:
The Company's definitive Proxy Statement mailed in connection with its
Annual Meeting of Stockholders to be held on or about December 4, 2002
pursuant to regulation 14A, which involves the election of directors.
Cross Reference Sheet between Items of
Registrant's Proxy Statement and Form 10-K
PART III
10 Directors and Executive Election of Directors and Directors of
Officers of the Registrant Committees in the Company's Proxy
Statement relating to its Annual
Meeting of Stockholders to be held on
or about December 4, 2002.
11 Executive Compensation Compensation in the Company's
Proxy Statement relating to its Annual
Meeting of Stockholders to be held on
or about December 4, 2002.
12 Security Ownership of Certain Principal Stockholders in the Company's
Beneficial Owners and Proxy Statement relating to its Annual
Management Meeting of Stockholders to be held on
or about December 4, 2002.
13 Certain Relationships and
Related Transactions
Copies of all documents incorporated by reference other than exhibits to such
documents will be provided without charge to each person who receives a copy of
this Annual Report upon written request addressed to: Stockholder Relations,
Champps Entertainment, Inc., 5619 DTC Parkway, Suite 1000, Englewood, Colorado
80111. After October 6, 2002, we are moving and our new mailing address is:
10375 Park Meadows Drive, Suite 560, Littleton, Colorado, 80124.
i
FORM 10-K INDEX
PART I
Item 1 Business 2
Item 2 Properties 18
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 19
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters 19
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition 21
Item 7a Quantitative and Qualitative Disclosure About Market Risk 33
Item 8 Financial Statements and Supplementary Data 33
Item 9 Changes in and Disagreements with Accountants on
Accounting Financial Disclosure 33
PART III
Item 10 Directors and Executive Officers of the Registrant 34
Item 11 Executive Compensation 36
Item 12 Security Ownership of Certain Beneficial Owners and
Management 36
Item 13 Certain Relationships and Related Transactions 36
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 36
ii
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated by reference into
the Annual Report on Form 10-K include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We use words such as "may," "believe,"
"estimate," "expect," "plan," "intend," "project," "anticipate" and similar
expressions to identify forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, activities or developments. Our actual results could differ
materially from those discussed in or implied by these forward-looking
statements. Forward-looking statements include statements relating to, among
other things:
(1) the highly competitive nature of the restaurant industry;
(2) our ability to achieve and manage our planned expansion;
(3) our ability to raise capital in the future;
(4) changes in the availability and costs of food;
(5) potential fluctuation in our quarterly operating results due to
seasonality and other factors;
(6) the continued service of key management personnel;
(7) consumer perceptions of food safety;
(8) changes in consumer preferences or consumer discretionary spending;
(9) our ability to attract, motivate and retain qualified associates;
(10) labor shortages or increased labor charges;
(11) our ability to protect our name and logo and other proprietary
information;
(12) the impact of litigation; and
(13) the impact of federal, state or local government regulations relating
to our associates or the sale of food and alcoholic beverages.
These forward-looking statements are subject to numerous risks, uncertainties
and assumptions about us, including the factors described under "Item 1.
Business - Risk Factors." The forward-looking events we discuss in this Annual
Report on Form 10-K might not occur in light of these risks, uncertainties and
assumptions. We undertake no obligation and disclaim any obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Unless otherwise provided in this Annual Report on Form 10-K, references to "the
Company," "Champps," "we," "us" and "our" refer to Champps Entertainment, Inc.
and our consolidated subsidiaries. Our fiscal years ended June 30, 2002, July 1,
2001 and July 2, 2000 are referred to as fiscal 2002, 2001 and 2000,
respectively. Fiscal 2000 contained 53 weeks while fiscal 2002 and fiscal 2001
each contained 52 weeks.
1
PART I
Item 1. Business.
Overview
Champps offers an energetic, upscale casual dining experience with
uncompromising service and an extensive menu of freshly prepared items, set in a
comfortable atmosphere that promotes social interaction among our guests. As of
September 23, 2002, we owned and operated 36 restaurants in 15 states and had 12
restaurants operating under franchise or license agreements in five states. Our
menu is comprised of approximately 85 items, primarily made from scratch on the
premises. We typically include a selection of 15 appetizers, eight main plate
salads, 18 high-end sandwiches, eight specialty burgers and 25 entree
selections, along with an additional five to eight regularly changing specials.
Our menu selection includes not only traditional American favorites such as
Champp's Meatloaf and Grilled Salmon, but also a variety of ethnic cuisine such
as our Mongolian Egg Rolls and Chicken Bruschetta Salad. This diversity is
designed to provide our guests with appropriate choices to meet their dining
preference throughout our four distinct day-parts: lunch, mid-afternoon, dinner
and late night. We believe that our enticing offerings and generous portions,
combined with an average check per dining room guest of approximately $13.40 in
fiscal 2002, excluding alcoholic beverages, offer our guests exceptional value.
Our restaurants are designed to create an engaging and socially interactive
dining experience. Through the use of multiple levels and other design elements
such as Italian tile, slate style floors and extensive wood accents, we are able
to create a variety of dining atmospheres to satisfy a wide range of diners
including families with children, business professionals, couples and singles,
as well as sports fans of all ages. Our restaurants range from approximately
7,500 to nearly 12,100 square feet and seat 207 to 360 guests. We position
multiple video walls and large televisions strategically throughout each
restaurant to create an energetic and participatory dining experience. Our bar
area, which is located away from the main dining area, creates a focal gathering
point for our guests to socialize. We offer music, television broadcasts and
special promotional events to increase guest traffic and promote repeat visits.
During fiscal 2002, the average unit sales of our restaurant opened for the
entire 12 months was approximately $5.1 million, which is among the highest in
the casual dining industry.
We locate our restaurants in areas that have a combination of commercial office
space, residential housing and high traffic areas such as shopping malls or
multi-screen movie theaters to attract guests in all of our day-parts. Our
restaurants principally rely on frequent visits and loyalty from our guests who
work, reside or shop nearby, rather than tourist traffic. Typically, our
restaurants are located within large metropolitan areas that draw fan interest
in professional and collegiate sport teams to allow us to promote the
broadcasting of these sporting events in our restaurants.
We opened six restaurants in fiscal 2002. We expect to open eight to ten
restaurants in fiscal 2003 and ten to 12 restaurants in fiscal 2004 by expanding
our presence in existing markets and selectively entering new markets. We have
increased our number of company-owned restaurants from 18 in fiscal 1999 to 34
restaurants in fiscal 2002, representing a compounded annual growth rate of
23.6%. We believe that the flexibility of our day-part model, the diversity and
quality of our freshly prepared menu items, our unique entertainment and
excellent service have created an attractive, high sales volume restaurant model
that provides us with considerable growth opportunities to develop our brand
nationwide.
Business strategy
Our objectives are to build our brand awareness and guest loyalty and provide
our guests with exceptional food, uncompromising service and an exciting
ambiance during each of our four day-parts. To achieve our objectives, we have
developed the following strategies:
2
Offer a comprehensive menu featuring enticing foods and beverages. We offer an
extensive and varied menu in each of our four day-parts. Our menu is designed to
suit a wide variety of dining occasions that broadens our consumer appeal and
keeps the menu fresh for our frequent diners. In contrast to many competing
restaurant operations, substantially all of our menu items are prepared on the
premises from scratch using high quality, fresh ingredients and proprietary
recipes. Champps is recognized by our guests for providing exceptional value by
offering generous food portions at moderate prices. Our sophisticated, full
service bar offers approximately 23 selections of wine, 20 domestic and imported
bottled and draft beers, as well as premium liquor and specialty drinks. For
fiscal 2002, sales of alcoholic beverages represented approximately 32.2% of our
total food and beverage sales.
Provide service that "WOWs" our guests. We strive to personalize the dining
experiences of our guests by instilling both high standards and a sense of
urgency among our associates to exceed each guest's dining expectations. We
position associates to greet guests when they enter and train our managers to
visit each table. We also encourage our bartenders to introduce themselves to
each patron at the bar, and our servers typically are responsible for no more
than three tables at a time. Our entire staff is dedicated to executing our
standard of delivering orders within 12 minutes of being placed. We encourage a
strong, team-oriented atmosphere among our associates that we believe creates
uncompromising guest service and a sense of pride in the Champps brand.
Create a fun, high energy, social dining and entertainment experience. Our
distinct dining experience features extensive entertainment and socially
interactive activities designed to encourage guest frequency and attract guests
outside of normal peak dining hours. For example, we increase guest traffic in
our late night day-part by encouraging guest participation in a variety of
promotional events we offer, such as the "Big Bike Give-Away" and Karaoke. Our
special design elements, multiple dining levels and sizable bar area allow us to
comfortably serve guests seeking different dining experiences and further
promote frequent visits. Our two to three video walls and ten to 12 televisions
located throughout our restaurants, as well as our state-of-the-art audio
systems, enable us to provide an exciting and socially interactive environment
to view major sporting events. Our open display kitchens afford our guests the
opportunity to observe our kitchen staff in action.
Capitalize on our proven multiple day-part model. Champps restaurants generally
are open seven days a week from 11:00 a.m. to 1:00 a.m. and serve lunch,
mid-afternoon, happy hour, dinner and late night periods. For fiscal 2002, we
generated 38.1% of our sales during lunch and mid-afternoon, 47.7% during happy
hour and dinner and 14.2% during late night, demonstrating the versatility of
our concept and our ability to serve guests for a variety of occasions such as
professional lunches and everyday dining, as well as social and special
occasions. We adjust our ambiance throughout the day by changing the music and
choice of programming for each day-part. According to a market research study of
over 1,100 of our guests completed in October 2001, on average our guests visit
Champps 2.7 times per month while 10.0% of our guests visit our restaurants on
an average of 11 times per month. By operating in multiple day-parts, we are
able to maximize revenue and leverage both development and operating costs. We
believe the versatility of our operating strategy has allowed us to build strong
guest loyalty with a high percentage of repeat business.
Deliver strong unit economics. We believe our company-owned restaurants provide
strong unit level economics. Our company-owned restaurants open throughout
fiscal 2002 generated average restaurant sales of approximately $5.1 million and
restaurant level operating cash flows of approximately $0.8 million, or 15.7% of
average annual restaurant sales. The average cash investment cost for all of our
restaurants opened since the beginning of fiscal 2001 was approximately $1.8
million, excluding pre-opening expense, which averaged approximately $0.4
million per restaurant.
3
Build awareness of the Champps brand. We believe that the Champps name has
achieved substantial brand equity among our guests and has become well known
within our markets for our high quality, innovative menu items, generous
portions, uncompromising service and a fun, engaging dining experience. We have
recently implemented a first time guest program that is intended to strengthen
our brand loyalty by educating our first time guests about the Champps concept.
In addition, we believe the most effective way to build brand awareness is to
consistently deliver a dining experience that exceeds our guests' expectations.
Growth strategy
We adhere to a disciplined growth strategy and believe that there are
significant opportunities to expand our concept in existing and new markets
throughout the United States. The future development of Champps restaurants will
be accomplished primarily through the development of company-owned restaurants
in existing markets. In addition, we plan to open approximately 30.0% of our new
restaurants in new markets. Opening multiple units in existing markets enables
us to leverage costs and gain efficiencies associated with regional supervision,
marketing, purchasing and hiring. We believe this approach reduces the risks
involved with opening new restaurants in markets where we better understand the
existing competitive conditions, consumer tastes, demographics and discretionary
spending patterns. In addition, our ability to hire qualified employees is
enhanced in markets in which we are well known and we are able to utilize
existing associates in new restaurants and capitalize on our brand awareness.
Our current expansion plans do not include adding new franchisees. In the
future, we may seek to acquire some or all of our 12 franchised restaurants from
our franchisees, which may require additional capital.
During fiscal 2000, we opened four new company-owned restaurants and acquired
two restaurants from a franchisee. In fiscal 2001 and fiscal 2002, we opened
four and six new restaurants, respectively. We plan to open eight to ten
restaurants in fiscal 2003 and ten to 12 restaurants in fiscal 2004. As of
September 23, 2002, we have opened two restaurants, begun construction on three
restaurants, and have signed six leases for new restaurants. In addition, we
have identified multiple sites that meet our growth objectives for the remainder
of fiscal 2003 and 2004.
We believe that our site selection strategy is critical to our success and we
devote substantial effort to evaluating each potential site at the highest
levels within our organization. Our chief executive officer, chief operating
officer and the respective regional director of operations must approve each
restaurant site. Our site selection criteria focuses on locating in larger
metropolitan areas with average household income of at least $75,000 and
population density in excess of 75,000 within a three mile radius. In addition,
site visibility, traffic patterns, accessibility, adequate parking, competitive
restaurants, employee availability, proximity to entertainment activities, as
well as areas near a combination of commercial office space, residential housing
and high traffic areas, influence our site selection criteria.
Unit level economics and day-part allocation
Our current restaurants range in size from approximately 7,500 to nearly 12,100
square feet and have approximately 207 to 360 indoor seats and approximately 42
additional patio seats on average. We lease 33 of our restaurants and own one.
During fiscal 2002, our base of restaurants opened for the entire 12-month
period, generated average sales of approximately $5.1 million and restaurant
level operating cash flows of approximately $0.8 million, or 15.7% of restaurant
sales. Based on the Company's average net cash investment to build a restaurant
of approximately $1.8 million, our restaurants opened for the entire 12-month
period generated a cash-on-cash return of over 44%.
Our prototype restaurant is 9,000 square feet and has seating for approximately
320 guests. We have also recently constructed restaurants of 7,500 square feet
that seet approximately 250 guests. The average investment cost for our
restaurants depends upon the type of lease entered into, the amount of tenant
improvement allowance we receive and whether we assume responsibility for the
construction of the building. The average cash investment cost for all of our
restaurants opened since the beginning of fiscal 2001 was approximately $1.8
million, net of tenant improvement allowance and excluding pre-opening expense
of $0.4 million.
4
Our success in four distinct day-parts demonstrates the strength of our concept.
The following table depicts the amount and percentage of contribution to each
day-part of overall company-owned restaurant sales during fiscal 2002. During
this period, our food and alcoholic beverage sales as a ratio of total food and
beverage sales was 67.8% and 32.2%, respectively. Our dinner day-part includes
our happy hour, which we refer to as sales of alcoholic beverages that occur
between 5:00 p.m. and 7:00 p.m. Our bar area produces approximately 22.5% of our
total restaurant sales, 59.8% of which are generated from 2:00 p.m. to 9:00
p.m., which signifies our strong after work and happy hour business. Champps
merchandise and other sales represented less than 0.4% of overall sales and are
not included below.
Sales - Fiscal 2002 (in 000's)
Alcoholic
Food Sales Beverage Sales Total Sales
------------------------- ---------------------------- ----------------------------
Sales Percentage Sales Percentage Sales Percentage
-------- --------- ------- ---------- ------- ----------
Lunch................. $ 35,925 33.7% $ 3,824 7.6% $ 39,749 25.3%
Open to 2:00 p.m.
Afternoon............. 13,658 12.8% 6,504 12.8% 20,162 12.8%
2:00 to 5:00 p.m.
Dinner................ 47,559 44.6% 27,539 54.3% 75,098 47.7%
5:00 to 9:00 p.m.
Late Night............ 9,464 8.9% 12,832 25.3% 22,296 14.2%
9:00 p.m. to close
-------- ------ ------- ------- -------- ------
Total All Day......... $106,606 100.0% $50,699 100.0% $157,305 100.0%
======== ====== ======= ======= ======== ======
Restaurant design and ambiance
Our restaurants have an ambiance enhanced by a layout that encourages social
interaction and promotes a high-energy environment. The majority of our
restaurants have multiple levels that enable us to channel guests towards a
specific location depending upon their dining preferences while also creating an
open atmosphere and the ability for guests to have a panoramic view of the
entire restaurant. Our large "L" shaped bar area, located on the first level, is
designed with numerous angles and bends to provide our guests with a place to
meet and socialize. We place large video walls and additional televisions
strategically throughout each restaurant, which together with a state of the art
sound system, provide a source of entertainment for our guests. We monitor the
selection of our broadcasts, music and volume in each dining area to create
different dining environments. As technology has progressed, we have begun using
plasma televisions more frequently to incorporate the latest technologies and
keep our restaurants up to date.
Our restaurant interiors utilize a combination of dark cherry stained wood and
brick throughout the dining area, Italian ceramic tile in the kitchen and
bathrooms, slate style tile in the bar area and noise reducing carpet in the
dining room. Our bars are stainless steel and we use accented black granite or
wood trim at our specially designed hostess stands to enhance our contemporary
feel. The majority of our restaurants include an indoor patio area with a large
fireplace and several have outdoor patios, all of which provide our guests with
multiple settings to choose from. Our display kitchens are presented behind a
floor-to-ceiling glass wall to provide a focal point for the dining room. We use
a variety of directional lighting and chandeliers to create a warm environment
in our dining room and bar area.
5
The exterior of our restaurants typically employ brick, stone and stucco to
create a highly visible restaurant that features a well-lit, large Champps sign
and logo. We extensively landscape our restaurants and where appropriate, vary
the exterior design to coordinate with the surrounding area. Lighted trees,
directional lighting on our buildings and large entries further increase our
visual appeal.
Menu
We offer our guests a comprehensive selection of approximately 85 items,
primarily made on the premises from scratch, which typically includes a
selection of 15 appetizers, eight main plate salads, 18 high-end sandwiches,
eight specialty burgers and 25 entree selections. Our menu selection includes
not only traditional American favorites such as Champp's Meatloaf and Grilled
Salmon, but also a variety of ethnic cuisine such as Mongolian Egg Rolls and
Chicken Bruschetta Salad. For example one of our most popular entrees is the
Sicilian Parmesan Crusted Chicken that is created with three large chicken
breasts crusted with an Italian herb mix and shredded parmesan cheese before pan
frying in olive oil and accompanied by tender angel hair noodles, our freshly
prepared traditional marinara sauce and fresh garlic buttered toasted crostini.
We continuously experiment with food and beverage items to develop proprietary
recipes with high flavor profiles to ensure that our menu is imaginative and
exciting to our guests. We also feature five to eight specials that change
regularly, allowing us to continually refine our menu offerings and keep our
selections fresh for our frequent users. We believe that the broad range of our
menu provides multiple dining options during each of our day-parts.
We emphasize freshness and quality in our food preparation and focus on
maintaining our reputation for creative and high quality menu offerings. Our
fresh sauces, salad dressings, batters and mixes are prepared daily in our
restaurants using high-quality ingredients and fresh produce. Our executive
chef, Andre Halston, is responsible for menu engineering. Chef Halston was
recently elected president of the International Corporate Chefs Association and
has received numerous awards for his recipes. Since joining us in August 2000,
Chef Halston has won the following awards:
o Menu strategist of the year in the casual dining segment by Restaurant
Business Magazine, 2002;
o Best new appetizer runner up for his Mongolian Egg Rolls by Nations'
Restaurant News, 2002;
o Best new menu item for his Shanghai Steamers by Nations' Restaurant News,
2001; and
o National taste of elegance for his Bourbon Glazed Pork Chops by the Pork
Producers Council, 2000.
The food items on our menu range from $3.95 to $8.95 for appetizers, $5.95 to
$11.95 for burgers and sandwiches, and $6.50 to $19.95 for dinner salads and
entrees. For fiscal 2002, our average guest check in our dining room was
approximately $13.40, excluding alcoholic beverages. Our sophisticated, full
service bar offers approximately 23 selections of wine, most of which are
available by the glass, 20 draft and bottled domestic and imported beers, as
well as premium liquor and specialty drinks. Sales of alcoholic beverages
represented approximately 32.2% of total food and beverage sales during fiscal
2002.
Food preparation and quality control
We believe our food quality and control standards are among the highest in the
industry. Our systems are designed to provide freshly prepared items based on
the specifications set by our corporate executive chef and overseen by an
assistant general manager and up to three management assistants. We invest
substantial time in training and testing of our kitchen associates to adhere to
our strict standards and preparation guidelines to maintain our quality control.
The design of our facilities enables us to ensure food is maintained in
accordance with the requirements of the Food and Drug Administration. We audit
our sanitary conditions at each restaurant and train all of our management
associates regarding safe handling practices of all perishable food products.
6
Guest loyalty
We believe our restaurants generate higher than average repeat visits due to our
four day-part offerings of lunch, mid-afternoon, dinner and late night, as well
as the increased guest traffic generated from the broadcasting of major sporting
events. Based upon a market research study of over 1,100 of our guests completed
in October 2001, we determined that on average our guests visit Champps 2.7
times per month as compared to 1.9 visits per month for the casual dining
industry, while 10.0% of our guests visit our restaurants on average 11 times
per month. The social interaction that is created within our restaurants also
provides our guests with a comfortable setting to meet family, friends and
co-workers. We rely on frequent visits and loyalty from our guests to generate
the high volume of sales in our restaurants.
Marketing and advertising
Historically, we have relied primarily on guest referrals rather than marketing
initiatives to promote our brand. Within our restaurants we continually promote
special events and upcoming entertainment activities as well as special menu
items or drinks to drive guest frequency and sales. We are implementing a first
time guest program that is intended to strengthen our brand loyalty by educating
our first time guests about the Champps concept. During fiscal 2002 and fiscal
2001, our expenditures for advertising and promotions were less than 1.5% of
total restaurant sales.
Our associates are integral to the success of our in-store marketing strategy.
Our hosts introduce our specials to our guests upon seating, and at the end of
each dining experience, our wait staff informs guests of upcoming special or
promotional events. We communicate special events to our guests with poster
stanchions or special displays. Finally, when exiting our restaurants, the
greeters thank each guest for coming to Champps and invite them to come back
soon.
On occasion, we engage in paid advertising for individual restaurant locations,
including newspaper and radio advertisements, on occasion, and are testing cable
television advertising. We utilize a variety of printed marketing materials,
including restaurant location brochures, hotel concierge cards, take-out menus
and direct and electronic mailings.
Operations
Restaurant management. At September 23, 2002, we had seven regional directors
who each typically oversee approximately five to seven restaurants, and we had
hired one additional regional director to accommodate future restaurant
expansion. These regional directors supervise the general managers at each
restaurant. Due to the complexity of our operations and to ensure our high level
of guest service, our restaurant management is divided into three areas, the
general manager, front-of-house managers and back-of-house managers, each of
whom are supported by additional staff members. Our managers are often promoted
from within Champps to encourage continuity and opportunities for development,
as well as enhance our corporate culture. We compensate our management team
through a combination of base salary and bonuses based on achieving established
performance levels for revenue, profit and guest service.
Restaurant associates and service. We believe that our uncompromising service is
one of our differentiating factors. Our service is based on a team concept to
ensure that guests are made to feel that any associate can help them and that
they are never left unattended. To maintain these high standards, we seek to
hire and train personnel who believe in our philosophy and are passionate about
guest service. We strive to personalize the dining experiences of our guests by
instilling both high standards and a sense of urgency among our associates. All
associates meet with their managers at two daily pre-shift motivational and
informational meetings in which service standards, restaurant promotions,
specials and quality control are reviewed. We frequently reward individual and
restaurant achievement through several recognition programs intended to build
and maintain associate morale. For example, our "Pin Program" rewards and
recognizes the efforts of associates with pins that are worn proudly on uniforms
to publicly acknowledge their commitment to guest service.
7
Training. The restaurant management team is provided with an intensive
eight-week training program to ensure they have appropriate knowledge to excel
in their position. All members of management are required to receive kitchen
training to understand the importance of the food preparation process and how
the quality of our menu is a significant driver of repeat guest visits. In
addition, all field management associates with a minimum of six months
experience with Champps complete a one-week training program entitled "Champps
Management Leadership Conference." This program combines hands-on training and
demonstrations with classroom instruction from each of the various corporate
departments in order to educate them on Company policies, train them to be more
effective managers and prepare them for potential general manager positions. We
also host an annual general managers conference focusing on strategic issues in
addition to conducting other training classes and serving as a platform to
recognize the general managers who exceeded our expectations.
We provide all new associates with complete orientation and training for their
positions to ensure they are able to meet our high standards. For servers, we
require a minimum of seven days training on how to serve our food, the
composition and preparation techniques for the entire menu, direction on how to
treat our guests and promote our business. Our food preparation staff undergo an
intensive five day hands-on training program for their respective positions,
which includes a review of our safety procedures. The training encompasses
classroom instruction, on-the-job training programs for each position, and
testing of the new associate's progress at pre-determined stages within the
training schedule.
When we open a new restaurant, we provide an extensive and varied level of
training to associates in each position to ensure the smooth and efficient
operation of the restaurant from the first day it opens to the public. This
training helps to provide our guests with a quality dining experience from day
one. Our training programs enable us to promote existing associates and managers
as new restaurants open. We believe that we can support our expansion strategy
as a result of having a large manager base in existing restaurants that can be
promoted or transferred to new restaurants, combined with our thorough training
programs and hiring of outside personnel.
Restaurant franchise and licensing agreements
As of September 23, 2002, we had 12 franchised restaurants that began operations
between 1991 and 2000. The franchise in Duluth, MN was closed in July 2002. For
fiscal 2002, the Duluth franchise recorded sales of approximately $1.0 million
and we recorded net franchise royalty income of approximately $18,000. Seven of
our current franchised restaurants are located in the Minneapolis, MN area. We
also have franchised restaurants in Charlotte, NC, Sioux City, SD, Omaha, NE,
and two in Milwaukee, WI. Three franchisees own eight of the 12 franchised
restaurants.
Our revenue from current franchisee agreements represented approximately 0.4% of
our revenue in fiscal 2002. The franchisee is responsible for all direct costs
involved in the construction and maintenance of their restaurants. We provide
menu development and marketing support on a limited basis. Franchisees are
required to provide periodic financial reports and annual financial statements
to our corporate office for performance measurement and fee calculations.
Currently, we are not actively seeking additional franchisees. Our existing
franchisees do not have the right to open additional restaurants, although we
may permit our existing franchisees to open additional restaurants from
time-to-time on a limited basis. Although we have no obligation to do so, we may
seek to acquire one or more of our existing franchised restaurants if they meet
our acquisition criteria.
8
Accounting and management information systems
We use an automated data processing system and standardized reporting procedures
to provide each of our company-owned restaurants with centralized financial and
management controls. During February 2002, we changed our data processing and
hosting services provider to allow for additional scale and improve processing
capabilities. The transition occurred without incident and will enable us to
support our long-term growth objectives. Our management information system
tracks each restaurant's weekly sales reports, vendor invoices, payroll
information and other operating information which is transmitted into our
centralized accounting and management information systems at our corporate
headquarters. By having a system where data can be input remotely and controlled
centrally, the overhead functions are streamlined and administrative expenses
are reduced.
While we continue to monitor our computer hardware and financial software for
potential upgrades, we believe our existing management information systems are
sufficient to support our long-term expansion plans.
Purchasing
We endeavor to obtain high quality menu ingredients and other supplies and
services for our operations from reliable sources at competitive prices. We rely
on SYSCO Corporation, a national food distributor, as the primary supplier of
our food. In November 2000, we entered into a five-year distribution agreement
with SYSCO. By utilizing a distribution company with a national presence, we are
able to ensure consistent application of menu specifications throughout the
country at a pre-negotiated price. We also periodically enter into selective
short-term agreements for the products we use most extensively. This helps us to
consistently maintain our product costs. We believe that all essential food and
beverage products are available from several qualified suppliers at competitive
prices should an alternative source be required.
To maximize purchasing efficiencies and to provide for the freshest ingredients
for our menu items, each restaurant's management determines the quantities of
food and supplies required. Our centralized purchasing staff, under the
direction of our chief operating officer, specifies the products to be used at
our restaurants, designates the vendors and provides suppliers with detailed
ingredient specifications.
Competition
The restaurant industry is highly competitive. We compete 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. Changes in consumer preferences, economic
conditions, environmental conditions, demographic trends and the location and
number of, and type of food served by, competing restaurants could adversely
affect our business as could the availability of experienced management and
hourly associates. We believe that the flexibility of our multiple day-part
model, the diversity and quality of our freshly prepared menu items and our
unique entertainment and excellent service have created an attractive, high
sales volume restaurant model that provides us with considerable growth
opportunities to develop our brand nationwide.
Employees
As of September 23, 2002, we had approximately 4,600 employees on the Champps
team, approximately 341 of which were restaurant management and field support
personnel and 36 who worked at corporate headquarters. We do not have any
collective bargaining agreements. We consider our employee relations to be good.
9
History
The original Champps concept began operations in 1984 and grew to eight
restaurants by December 1995. In 1996, William H. Baumhauer, chief executive
officer and president of DAKA International, Inc., a large publicly-traded food
service management and restaurant company, led DAKA's purchase of Champps to add
to its portfolio of restaurant concepts. As part of a corporate restructuring in
1997, DAKA spun off its restaurant business, which included Champps,
Fuddruckers, the Great Bagel & Coffee Company, Casual Dining Ventures and
Restaurant Consulting Service, to DAKA's shareholders as a new company called
Unique Casual Restaurants, Inc. At the end of 1998 and early 1999, Fuddruckers
and Restaurant Consulting Services were sold to separate buyers. In June 1999,
Unique Casual Restaurants closed Great Bagel & Coffee Company and Casual Dining
Ventures and changed its name to Champps Entertainment, Inc.
Shortly thereafter, Mr. Baumhauer, who had left the DAKA organization in May
1998, was recruited back to Champps as president and chief executive officer.
Upon his return, Mr. Baumhauer set in motion a series of strategic initiatives
that included hiring a new management team, consolidating our headquarters,
improving our operational and financial reporting procedures, standardizing the
purchasing process and establishing new employee training and retention
practices. As a result, our restaurant level operating profit margin increased
50.0% during this period, from 7.6% in 1999 to 11.4% in fiscal 2002. In
addition, our earnings before interest, taxes, depreciation and amortization
increased from a negative $8.8 million in fiscal 1999 to a positive $13.9
million in fiscal 2002 and our income from continuing operations increased from
a negative $14.1 million in fiscal 1999 to a positive $5.5 million in fiscal
2002. We have also implemented a disciplined expansion strategy and have added
16 restaurants since Mr. Baumhauer's return.
Operating Locations
We lease all but one of our restaurants. The leases for our restaurants expire
at varying times commencing in 2004. We have recently executed an option to
extend this lease to 2009. Nearly all of our leases are for fifteen to twenty
year terms with renewal options extending our leases from five to twenty
additional years. Currently, our leases, with option periods, expire between
2014 to 2037.
[Remainder of page left intentionally blank]
10
The following table sets forth data regarding our 34 company-owned restaurants
at June 30, 2002.
Company-owned restaurants
State City Approx. Conditioned Approximate
Square Footage Total Seating
- ---------------------- --------------------- ------------------------- --------------------------------
CALIFORNIA Irvine 9,809 245
COLORADO Denver 9,810 274
Littleton 9,163 300
FLORIDA Ft. Lauderdale 8,517
257
GEORGIA Alpharetta 10,182 288
ILLINOIS Schaumburg 10,967 310
Lombard 10,480 302
Skokie 9,846 328
INDIANA Indianapolis 10,270 286
Indianapolis 9,500 273
MARYLAND Columbia 8,590 291
MICHIGAN Livonia 10,059 285
Troy 10,059 275
West Bloomfield 7,498 248
Utica 7,565 261
MINNESOTA Minnetonka 12,085 360
Richfield 7,890 241
Eden Prairie 9,040 299
NORTH CAROLINA Durham 9,596 288
NEW JERSEY Edison 7,619 244
Marlton 10,150 287
OHIO Lyndhurst 8,170 282
Columbus 8,170 291
Columbus 8,930 291
Columbus 10,128 317
Dayton 9,368 314
PENNSYLVANIA King of Prussia 9,160 334
TEXAS Addison 9,900 318
San Antonio 8,878 207
Las Colinas 10,182 316
Houston 11,384 331
Houston 9,160 325
VIRGINIA Reston 11,469 327
Pentagon City 9,487 293
11
Restaurants to open
As of September 23, 2002, we had opened additional restaurants during fiscal
2003 in Lincolnshire, IL and Houston, TX. We had begun construction on
restaurantes located in Cleveland, OH, Raleigh, NC and Phoenix, AZ. We also had
signed leases to open restaurants in Colorado Springs, CO, Tampa, FL, Cleveland,
OH, Fairfax, VA, Richmond, VA and Baltimore, MD.
Franchised restaurants
As of September 23, 2002, we had 12 franchised restaurants, seven of which are
located in the Minneapolis, MN area, two in Milwaukee, WI, and one in each of
Charlotte, NC, Sioux City, SD and Omaha, NE. A franchise located in Duluth, MN
was closed in July 2002.
Trademarks
Through our operating subsidiaries, we have registered a number of trademarks
and service marks with the United States Patent and Trademark Office and with
certain states, including, but not limited to the trade names: "Champ's,"
"Champps," and "Champps Americana."
Pursuant to a Master Agreement dated February 1, 1994, whereby Champps acquired
the "Champ's" and "Champps" service marks, trademarks and trade names, we agreed
to pay the seller an annual fee. Currently, the maximum fee is equal to the
lesser of $306,593 or one-quarter percent (0.25%) of the gross sales of certain
Champps restaurants excluding two of our oldest restaurants. The maximum fee
payable is increased annually by the lesser of the increase in the consumer
price index or 4.0%. In fiscal 2002, we paid $0.3 million under this agreement.
Government regulation
Our business is subject to various federal, state and local laws, including
health, sanitation and safety standards, federal and state labor laws, zoning
restrictions and state and local licensing. We are also subject to federal and
state laws regulating franchise operations and sales, which 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.
Our restaurants are subject to state and local licensing and regulation with
respect to selling and serving alcoholic beverages. Typically, licenses must be
renewed annually and may be revoked or suspended for cause. The failure to
receive or retain, or a delay in obtaining, a liquor license in a particular
location would adversely affect ours, or a franchisee's, operation in that
location.
In addition, our restaurants are subject to "dram shop" statutes in certain
states, which 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. We carry liquor liability coverage in the
amount of $1.0 million per occurrence subject to an aggregate annual policy
limit of $5.0 million, with a $0.25 million deductible per occurrence.
Risk Factors Related to Our Business
Our growth strategy depends on our ability to open new restaurants, and we may
not be able to achieve our planned unit expansion
Our ability to expand our operations through the continuation of our program of
accelerated new restaurant development is critical to our future success. Since
fiscal 1997 through fiscal 2002, we have expanded our operations from 12
company-owned restaurants in nine states to 34 company-owned restaurants in 15
states. We expect to open an additional eight to ten restaurants during fiscal
12
2003 and nearly 12 more restaurants in fiscal 2004. We have experienced delays
in restaurant openings from time to time and may experience delays in the
future. We cannot guarantee that we will be able to achieve our expansion goals
or that new restaurants will be operated profitably. Further, we cannot assure
that any restaurant we open will obtain operating results similar to those of
our existing restaurants or will not adversely affect the results of other
Champps restaurants in the same market. The success of our planned expansion
will depend upon numerous factors, many of which are beyond our control,
including the following:
o identification and availability of suitable restaurant sites;
o competition for restaurant sites;
o negotiation of favorable lease terms;
o timely development in certain cases of commercial, residential, street or
highway construction near our restaurants;
o management of construction and development costs of new restaurants;
o securing of required governmental approvals and permits in a timely manner,
or at all;
o recruitment of qualified operating personnel, particularly general managers
and other restaurant managers;
o competition in our markets; and
o general economic conditions.
In addition, we contemplate entering new markets in which we have no operating
experience. These new markets may have different demographic characteristics,
competitive conditions, consumer tastes and discretionary spending patterns than
our existing markets, which may cause the new restaurants to be less successful
in these new markets than in our existing markets.
Our growth strategy may strain our management, financial and other resources.
For instance, our existing systems and procedures, restaurant management
systems, financial controls, information systems, management resources and human
resources may be inadequate to support our planned expansion of new restaurants.
We may not be able to respond on a timely basis to all of the changing demands
that the planned expansion will impose on our infrastructure and other
resources.
The inability to develop and construct our restaurants within budget and
projected time periods will adversely affect our business and financial
condition
Critical to our success is our ability to construct our restaurants within
budget and on a timely basis. Many factors may affect the costs associated with
the development and construction of our restaurants, including:
o labor disputes;
o shortages of material and skilled labor;
o weather interference;
o unforeseen engineering problems;
o environmental problems;
o construction or zoning problems;
o local government regulations and approvals; and
o unanticipated increases in costs, any of which could give rise to delays or
cost overruns.
13
If we are unable to develop new restaurants within anticipated budget or time
periods, our revenue will not meet our expectations and labor costs may exceed
our projections. In addition, returns on our investments may be impaired and the
amount of capital available for other new restaurants may not be available.
The failure of our existing or new restaurants to perform as anticipated could
adversely affect our business
As of June 30, 2002, we owned and operated 34 restaurants, six of which were
opened within the preceding 12-month period. The results achieved by these
restaurants may not be indicative of longer-term performance or the potential
market acceptance of restaurants in other locations. We cannot assure you that
any new restaurant that we open will have similar operating results to those of
prior restaurants. We anticipate that our new restaurants will take at least
several months to reach planned operating levels due to inefficiencies typically
associated with new restaurants, including lack of market awareness, inability
to hire sufficient staff and other factors.
Because of our small restaurant base, our operating results could be materially
and adversely affected by the negative performance of a small number of
restaurants
Due to our small restaurant base, poor operating results at any one or more of
our restaurants could materially and adversely affect our business, financial
condition, results of operations or cash flows. In addition, we locate our
restaurants close to areas that have a combination of commercial office space,
residential housing and high traffic areas, such as shopping malls or
multi-screen movie theaters. Changes in levels of office occupancy, new or
competing real estate development projects, or delays in the development of the
projects where we are located may adversely affect the performance of a
restaurant. In addition, our operating results achieved to date may not be
indicative of our future operating results with a larger number of restaurants.
We may require additional capital to expand our business in accordance with our
growth strategy
Changes in our operating plans, acceleration of our expansion plans, lower than
anticipated sales, increased expenses or other events may cause us to seek
additional debt or equity financing on an accelerated basis. Financing may not
be available on acceptable terms, or at all, and our failure to raise capital
when needed could negatively impact our growth and other plans, as well as our
financial condition and results of operations. Additional debt financing, if
available, may involve significant cash payment obligations and covenants or
financial ratios that restrict our ability to operate our business. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Our franchisees could take actions that could harm our business
Franchisees are independent operators and are not our employees. We provided
training and support to franchisees, but any number of factors beyond our
control may diminish the quality of franchised restaurant operations.
Consequently, franchisees may not successfully operate restaurants in a manner
consistent with our standards and requirements or may not hire and train
qualified managers and other restaurant personnel. If franchisees do not operate
in accordance with our standards, our image and reputation may suffer materially
and system-wide sales could significantly decline. Also, the presence of
franchised restaurants may limit our ability to expand in a desired market.
14
Our operations are susceptible to changes in food availability and costs, which
could adversely affect our operating results
Our profitability depends in part on our ability to anticipate and react to
changes in food costs. We rely on SYSCO Corporation, a national distributor, as
the primary supplier of our food. Any increase in distribution prices or failure
of SYSCO to perform could cause our food costs to increase. There also could be
a significant short-term disruption in our supply chain if SYSCO failed to meet
our distribution requirements or our relationship was terminated. Further,
various factors beyond our control, including adverse weather conditions,
governmental regulation, production, availability and seasonality may affect our
food costs or cause a disruption in our supply. We cannot predict whether we
will be able to anticipate and react to changing food costs by adjusting our
purchasing practices and menu prices, and a failure to do so could materially
and adversely affect our operating results.
Changes in consumer preferences or discretionary consumer spending could
negatively impact our results of operations
Our continued success depends, in part, upon the popularity of the menu items
served in the Champps environment and our dining style. Shifts in consumer
preferences away from our cuisine or dining style could materially and adversely
affect our future profitability. In addition, our success depends to a
significant extent on numerous factors affecting discretionary consumer
spending, including economic conditions, disposable consumer income and consumer
confidence. Adverse changes in these factors could reduce guest traffic or
impose practical limits on pricing, either of which could materially and
adversely affect our operating results.
Health concerns relating to the consumption of our food products could
negatively impact our results of operations
We are subject to the risk that consumer preferences could be affected by health
concerns about the consumption of particular food products. Beef and chicken are
the key ingredients in many of our menu items. Negative publicity concerning
food quality, illness and injury generally, publication of government or
industry findings concerning food products served by us, or other health
concerns or operating issues stemming from one restaurant or a limited number of
restaurants may adversely affect demand for our food and could result in a
decrease in guest traffic to our restaurants.
If we lose the services of our president, our business could suffer
Our future success significantly depends on the continued service and
performance of William H. Baumhauer, our president and chief executive officer.
Our future performance will depend on our ability to motivate and retain Mr.
Baumhauer and other executive officers and key associates, particularly regional
directors of operation, restaurant general managers and kitchen managers.
Competition for these employees is intense. Mr. Baumhauer's employment agreement
expires in June 2003. The loss of the services of Mr. Baumhauer or members of
our senior management and key associates or the inability to attract additional
qualified personnel as needed could materially harm our business. We do not
currently have key person life insurance for any of our officers or directors.
We face indemnification liability from our predecessor companies
In connection with our spin-off in late 1997 from DAKA International, Inc., we
assumed certain contingent liabilities of DAKA and its subsidiary, Daka, Inc. In
March 2000, a former employee of Daka was awarded approximately $0.2 million in
compensatory damages, $4.8 million in punitive damages and $0.3 million in legal
fees in a jury trial based on the employee's claim of negligent supervision and
retaliation due to alleged conduct that occurred in 1996 at a former Daka food
service location. The amount of these awards accrues interest at a rate of 6.0%
15
per annum. On September 20, 2000, Daka filed a Notice of Appeal with the Court
of Appeals for the District of Columbia and this matter is now pending in that
court. On February 9, 2001, Daka also filed its Notice of Appeal in connection
with the court's award of legal fees and this matter is pending in that court.
Under our Post-Closing Covenant Agreement with DAKA, we have been responsible
for handling the defense of these claims, including the appeals. At June 30,
2002, our consolidated balance sheet included our accrual of approximately $0.4
million in respect of the potential award in this matter and related legal
expenses. If Daka does not prevail on its appeals in substantially all material
respects, we would be required to take a charge to net income in the amount by
which our final payout exceeds our reserve for this matter, and this charge
could be a significant amount in relation to our income from operations at the
time. In addition, the payment of a substantial amount of cash as a result of an
adverse ruling by the Court of Appeals could result in delays in our expansion
plans or could result in our needing to seek additional financing sources to
support our expansion or our day-to-day operations. It is also possible that
Daka could settle this case in advance of a final judicial determination, and
the settlement amount itself could be substantial. Depending on the timing and
nature of the ruling by the Court of Appeals, or the timing of any settlement of
this case, we also could incur substantial additional legal expenses in pursuing
Daka's appeal and the ultimate resolution of this matter.
We are also engaged in various tax audits arising from the operations of these
predecessor companies. In December 2001, the State of Florida proposed to assess
subsidiaries of DAKA $2.4 million in unpaid state sales taxes, and an additional
$2.9 million in penalties and interest through December 2001. We are
contractually obligated to indemnify DAKA for this matter, and are currently
protesting this proposed assessment. A final determination of this matter
requiring a substantial payment by us would have the same adverse consequences
as a substantial final payment in the lawsuit referred to in the preceding
paragraph.
We reserve in our financial statements for these and other matters, which
reserves are reviewed periodically to determine their adequacy. Although we
believe that our current reserves are proper under generally accepted accounting
principles in light of our analysis of the probable outcome of the related
matters, there can be no guarantees that we will not have to recognize
additional expenses as these matters are ultimately resolved, which expenses
could be significant.
Litigation could have a material adverse affect on our business
We are subject to complaints or allegations from current and former or
prospective employees from time to time. In addition, we are the subject of
complaints or litigation from guests alleging illness, injury or other food
quality, health or operational concerns. We may be adversely affected by
publicity resulting from such allegations, regardless of whether such
allegations are valid, whether we are liable, or whether such allegations
involve one of our franchisees or licensees. A lawsuit or claim could result in
an adverse decision or result that could have a material adverse affect on our
business.
We are also subject to state "dram shop" laws and regulations, which generally
provide that a person injured by an intoxicated person may seek to recover
damages from an establishment that wrongfully served alcohol to such person.
While we carry liquor liability coverage as part of our existing comprehensive
general liability insurance, we may still be subject to a judgment in excess of
our insurance coverage and we may not be able to obtain or continue to maintain
such insurance coverage at reasonable costs, or at all.
16
If we are unable to protect our intellectual property rights, it could reduce
our ability to capitalize on our brand names
Pursuant to a Master Agreement dated February 1, 1994, we acquired the
"Champps," "Champ's" and "Champps Americana" service mark, trademark and trade
name. Our business prospects will depend, in part, on our ability to develop
favorable consumer recognition of the Champps name and logo. Our trademarks
could be infringed in ways that leave us without redress, such as by imitation.
In addition, we rely on trade secrets and proprietary know-how, and we employ
various methods to protect our concepts and recipes. However, such methods may
not afford adequate protection and others could independently develop similar
know-how or obtain access to our know-how, concepts and recipes. Moreover, we
may face claims of infringement that could both interfere with our use of our
proprietary know-how, concepts, recipes, trade secrets or trademarks or subject
us to damages. Defending against such claims may be costly and, if unsuccessful,
may prevent us from continuing to use such proprietary information in the
future.
Although Champps, Champ's and Champps Americana are federally registered
trademarks, there are other restaurants and bars that operate under similar
names. If these restaurants or bars are affected by negative publicity and
consumers confuse these competitors with our Champps branded restaurants, our
operating results could be adversely affected.
We are subject to extensive governmental regulations concerning the sale and
serving of alcoholic beverages and wages paid to our associates that could
adversely affect our operations and our ability to expand and develop our
restaurants
The restaurant industry is subject to various federal, state and local
governmental regulations. While at this time we have been able to obtain and
maintain the necessary governmental licenses, permits and approvals, the failure
to maintain these licenses, permits and approvals, including food and liquor
licenses, could adversely affect our operating results. Difficulties or failure
in obtaining the required licenses and approvals could delay or result in our
decision to cancel the opening of new restaurants. Local authorities may
suspend, revoke or deny renewal of our food and liquor licenses if they
determine that our conduct does not meet applicable standards or if there are
changes in regulations.
For fiscal 2002, approximately 32.2% of our restaurant food and beverage sales
was attributable to the sale of alcoholic beverages, and we believe our ability
to serve these beverages is an important factor in attracting guests. Alcoholic
beverage control regulations require each of our restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time, which could
include sales to minors or intoxicated persons. Alcoholic beverage control
regulations relate to numerous aspects of daily operations of our restaurants.
The failure of a restaurant to obtain or retain liquor or food service licenses
would adversely affect the restaurant's operations.
Various federal and state labor laws govern our relationship with our associates
and employees and affect our operating costs. These laws include minimum wage
requirements, overtime pay, unemployment tax rates, workers' compensation rates,
citizenship requirements and sales taxes. Additional government imposed
increases in minimum wages, overtime pay, paid leave of absence and mandated
health benefits, increased tax reporting and tax payment requirements for
employees who receive gratuities or a reduction in the number of states that
allow tips to be credited toward minimum wage requirements could harm our
operating results.
17
On June 17, 2002, the United States Supreme Court ruled that the Internal
Revenue Service ("IRS") can use aggregate tip estimates to ensure that the
employer is paying FICA taxes on allegedly underreported tips. Under the ruling,
the IRS does not need to examine individual employees' records and it is
permissible for the IRS to estimate the amount of cash tips given to employees
based on tips included on credit card receipts.
The reporting of tips is the responsibility of the employees receiving the tips.
We encourage our employees to abide by the law and report 100% of the tips that
they receive. While we believe our employees do a reasonably adequate job in the
area of tip reporting, we are currently evaluating our tip reporting policies
and procedures. In addition, we have recently submitted an executed Tip
Reporting Alternative Commitment agreement with the IRS to limit potential tip
underreporting liability in light of the Supreme Court ruling.
Our success depends on our ability to compete effectively in the restaurant
industry
The restaurant industry is highly competitive. Although we believe that our
operating concept, quality of food, ambiance and overall dining experience
differentiates us from competitors, we may be unable to compete effectively with
new restaurant concepts or with larger, better-established competitors, which
have substantially greater financial resources and operating histories than
ours.
Item 2. Properties.
As of June 30, 2002, the Company leased approximately 7,500 square feet of
office space at its corporate headquarters in Englewood, Colorado, at an average
annual rent of $165,000, plus approximately $28,000 annually for common area
maintenance and parking. The Company plans to move into new office space in
Littleton (Douglas County), Colorado for its headquarters in October 2002. The
new leased space will consist of approximately 12,600 square feet. The lease
term for the new office space ends June 2008 and has an average annual total
rent of $275,000 based upon the base year cost structure. See "Item 1. Business
- - Operating Locations" for a listing of the Company's owned and franchised
restaurant locations.
Item 3. Legal Proceedings.
We assumed certain contingent liabilities of DAKA and its subsidiary, Daka, Inc.
in connection with its spin-off of restaurant operations. In the third quarter
of fiscal 2000, a Washington, D.C. superior court jury awarded a former Daka
employee $188,000 in compensatory damages, $4.8 million in punitive damages and
a subsequent award of $276,000 for legal fees and costs, based on the employee's
claim of negligent supervision and retaliation, due to alleged conduct that
occurred in 1996 at a former Daka food service location. While Daka was formerly
a subsidiary of DAKA International and while DAKA International is now a
subsidiary of Compass Group, PLC., the events at issue in the case took place
while a predecessor company of Champps owned DAKA International. On September
20, 2000, Daka filed a Notice of Appeal with the Court of Appeals for the
District of Columbia. The Company may be liable for the payment of any amounts
ultimately due by Daka upon final determination of the case. The Company has not
accrued any amounts related to the punitive damages in this matter based upon
Daka's meritorious arguments associated with its appeal and relevant legal
precedents. Based on Daka's meritorious arguments and relevant legal precedents
the Company believes, and its outside legal counsel concurs, that the punitive
damages will not be upheld. The Company has accrued approximately $0.4 million
associated with this matter based on our estimate of the ultimate compensatory
damages and legal fees anticipated to be awarded. Revisions to our estimate may
be made in the future and will be reported in the period in which additional
information is known. Based upon our analysis, and the advice of outside legal
counsel, the Company believes that the ultimate outcome of this matter will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
18
In December 2001, the State of Florida proposed to assess subsidiaries of DAKA
$2.4 million in unpaid state sales taxes, and an additional $2.9 million in
penalties and interest through December 2001. We are contractually obligated to
indemnify DAKA for this matter and are currently protesting this proposed
assessment. We believe that DAKA has meritorious legal and factual defenses to
these matters. Further, we are engaged in various other actions arising in the
ordinary course of business. We believe based on management's analysis and the
advice of outside counsel that the ultimate collective outcome of these other
matters will not have a material adverse effect on our consolidated financial
condition, results of operations or cash flows.
As of June 30, 2002, we had an aggregate of approximately $1.4 million reserved
for liabilities associated with predecessor companies, $0.4 million of which are
reserved for the Daka employee judgment noted above and $0.3 million for the
proposed sales tax assessment noted above. These amounts have been reserved to
fund legal expenses and the probable amounts that we would expect to pay. We
have not reserved for the entire amounts of such judgments or claims based on
our internal analysis and consultation with outside counsel.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted by the Company to a vote of stockholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year for which this report is filed.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
The Company's common stock is listed on the NASDAQ National Market ("Nasdaq")
under the symbol "CMPP." The following table sets forth, for the periods
indicated, the high and low closing sales prices per share for the common stock
as reported by Nasdaq.
High Low
------------- -------------
Fiscal 2001
First Fiscal Quarter $ 6.31 $ 4.81
Second Fiscal Quarter 9.06 5.00
Third Fiscal Quarter 8.94 6.63
Fourth Fiscal Quarter 10.25 6.95
Fiscal 2002
First Fiscal Quarter 10.25 5.99
Second Fiscal Quarter 9.60 6.20
Third Fiscal Quarter 13.00 8.35
Fourth Fiscal Quarter 14.45 10.85
On September 23, 2002, there were approximately 2,489 holders of record of the
Company's common stock. On September 23, 2002, the closing price of the
Company's common stock was $8.40 per share.
19
The Company has never declared or paid dividends on its common stock. The
Company currently intends to retain future earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends in the foreseeable future. Moreover, certain of the Company's credit
arrangements prohibit the declaration or payment of any dividends or other
distributions on any shares of capital stock, subject to specified exceptions.
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 1999 and earlier
periods have been restated to account for the Company's Fuddruckers segment as a
discontinued operation. The balance sheet data as of June 30, 2002, July 1,
2001, July 2, 2000, June 27, 1999 and June 28, 1998 and the statements of
operations data for each of the five fiscal years in the period ended June 30,
2002 presented below are derived from the Company's audited consolidated
financial statements.
For purposes of this Form 10-K and financial reporting purposes, the Company has
been treated as if it was a stand-alone entity for all periods presented.
Certain amounts have been reclassified for fiscal 2000 and earlier periods to
conform to the fiscal 2002 and 2001 presentations. The reclassifications have no
impact on net income (loss), earnings (loss) per share or balance sheet data.
Fiscal 1998 included activity from the discontinued subsidiaries Specialty
Concepts, Inc. and Casual Dining Ventures, Inc. and the subsidiaries of Casual
Dining Ventures, Inc. During fiscal 1998, revenues from these discontinued
subsidiaries were $3.7 million.
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.
[Remainder of page left intentionally blank]
20
Amounts are in thousands except per share data.
As of and for the Fiscal Years Ended
------------------------------------
June 30, July 1, July 2, June 27, June 28,
2002 2001 2000 1999 1998
--------- --------- --------- -------- --------
Statements of Operations Data:
Total revenues $ 158,537 $ 133,316 $ 109,445 $ 88,286 $ 78,008
Income (loss) from continuing operations before cumulative
effect of change in accounting for preopening costs 5,496 5,721 2,350 (14,079) (5,999)
Net income (loss) 5,134 13,537 2,273 (23,922) (27,735)
Basic income (loss) per share from continuing operations 0.43 1.15 0.20 (1.21) (0.52)
Diluted income (loss) per share from continuing operations 0.41 1.10 0.19 (1.21) (0.52)
Basic weighted average shares (in thousands): 12,104 11,871 11,654 11,622 11,489
Diluted weighted average shares (in thousands): 12,864 12,363 11,742 11,622 11,489
Balance Sheet Data:
Total assets 95,575 79,458 67,093 57,142 86,660
Long-term debt including current portion 21,835 17,093 19,324 6,157 6,945
Total equity 50,955 44,616 30,122 27,819 50,398
Discontinued operations:
Minority interest and obligations under put agreement
related to the discontinued operations - - - - 5,400
Net long-term assets - - - - 44,335
Net current liabilities - - - - (4,202)
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
Overview
As of June 30, 2002, we owned and operated 34 upscale casual dining restaurants
in 15 states and had 13 restaurants operating under franchise or license
agreements in five states. Our restaurants offer an extensive and varied menu in
each of four distinct day-parts: lunch, mid-afternoon, dinner and late night. We
believe that the flexibility of our multiple day-part model, the diversity and
quality of our freshly prepared menu items, our unique entertainment and
uncompromising service have created an attractive, high sales volume restaurant
model that provides us with considerable growth opportunities to develop our
brand nationwide.
21
The original Champps concept began operations in 1984 and grew to eight
restaurants by December 1995. In 1996, William H. Baumhauer, the chief executive
officer and president of DAKA International, Inc., a large publicly-traded food
service management and restaurant company, led DAKA's purchase of Champps as an
addition to DAKA's portfolio of restaurant concepts. As part of a corporate
restructuring in 1997, DAKA spun off its restaurant business, which included
Champps and several other businesses (including Fuddruckers restaurants), to
DAKA's shareholders as a new company called Unique Casual Restaurants, Inc.
During 1998 and the first half of 1999, Unique Casual Restaurants sold or closed
its businesses other than Champps and changed its name to Champps Entertainment,
Inc.
Shortly thereafter, Mr. Baumhauer, who had left the DAKA organization in May
1998, was recruited back to Champps as president and chief executive officer.
Upon his return, Mr. Baumhauer hired a new management team, consolidated our
headquarters, implemented procedures to improve operational and financial
reporting procedures, standardized the purchasing process and established new
employee training and retention practices. As a result of the changes we
implemented following Mr. Baumhauer's return in 1999, our restaurant-level
operating profit increased $11.3 million or 168.7% from $6.7 million for fiscal
1999 to $18.0 million for fiscal 2002. As a percent of restaurant sales, our
restaurant-level operating margin increased 3.8% from 7.6% in fiscal 1999 to
11.4% in fiscal 2002. Our EBITDA increased from a negative $8.8 million in
fiscal 1999 to a positive $13.9 million in fiscal 2002. In addition, our income
from continuing operations increased from a negative $14.1 million in fiscal
1999 to a positive $5.5 million in fiscal 2002.
Our restaurants open throughout fiscal 2002 generated average unit sales of
approximately $5.1 million, among the highest in the casual dining industry. As
a result of our existing high unit volumes, we do not expect that increases in
comparable restaurant sales will provide significant sources for overall growth
in our revenue, and our comparable restaurant sales will continue to fluctuate
over time. Instead, we anticipate that our disciplined expansion strategy will
be the principal driver for our future growth. We opened six restaurants in
fiscal 2002 and expect to open eight to ten restaurants in fiscal 2003 and ten
to 12 restaurants in fiscal 2004. We believe that there are significant
opportunities to expand our concept both in our existing markets and in new
markets throughout the United States. The majority of our growth will be in
existing markets, which will enable us to leverage costs and gain efficiencies
associated with regional supervision, marketing, purchasing and hiring in these
markets.
Our growth strategy will have several impacts on our financial results, in
addition to increases in our restaurant sales. As we open more restaurants, our
aggregate pre-opening expense will increase. Pre-opening expense has
historically been approximately $0.4 million per location. Because our openings
will not necessarily be spaced evenly throughout a fiscal year, our pre-opening
expense will fluctuate, possibly significantly, on a quarterly basis. In
addition, new restaurants tend to have higher operating costs as a percentage of
restaurant sales than do more established restaurants, which will impact
negatively our overall operating margins in periods following large numbers of
restaurant openings. On the other hand, because a substantial portion of our
general and administrative expense does not increase proportionately with
increases in restaurant sales and because we believe that our corporate
infrastructure is substantially in place to support our planned growth, we
expect that general and administrative expense as a percentage of restaurant
sales will be positively impacted over time as we grow our restaurant base. We
are not pursuing new franchise arrangements as part of our growth strategy and
do not expect franchising and royalty revenue to be significant in the future.
Critical accounting policies
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts and disclosures in
the consolidated financial statements. The estimates and assumptions are
evaluated on an ongoing basis and are based on historical experience and on
various other factors that are believed to be reasonable.
22
Items significantly impacted by estimates and judgments include, but are not
limited to, representations, warranties and indemnities provided in connection
with the spin-off of our business by DAKA International, Inc. in 1997 and the
subsequent sale of our Fuddruckers business unit in 1998, the useful lives and
recoverability of our long-lived assets such as property, equipment and
intangibles, fair value attributed to assets and liabilities of acquired
businesses, realization of our deferred tax assets, self-insured risks relating
to workers compensation and general liability claims, legal liabilities and
employee benefits.
Loss contingencies
We maintain accrued liabilities and reserves relating to the resolution of
certain contingent obligations and reserves for self-insurance. Significant
contingencies include those related to litigation and state tax assessments. We
account for contingent obligations in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies," which
requires that we assess each contingency to determine estimates of the degree of
probability and range of possible settlement. Those contingencies that are
deemed to be probable and where the amount of such settlement is reasonably
estimable are accrued in our financial statements. If only a range of loss can
be determined, we accrue to the best estimate within that range; if none of the
estimates within that range is better than another, we accrue to the low end of
the range. We determine reserves for self-insurance based on the insurance
companies incurred loss estimates and management's judgment.
The assessment of contingencies is a highly subjective process that requires
judgments about future events. Contingencies are reviewed at least quarterly to
determine the adequacy of the accruals and related financial statement
disclosure. The ultimate settlement of contingencies may differ materially from
amounts we have accrued in our financial statements.
Valuation of long-lived assets
We evaluate the carrying value of long-lived assets including property,
equipment and related identifiable intangible assets 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 based on fair value.
Beginning in fiscal 2002, we evaluate impairment of goodwill and other
unidentifiable intangible assets in accordance with SFAS No. 142 "Goodwill and
Other Intangible Assets." Under the provisions of SFAS No. 142, we are required
to assess impairment at least annually by means of a fair value-based test. At
June 30, 2002, we evaluated our goodwill and determined that the goodwill was
not impaired. The determination of fair value requires us to make certain
assumptions and estimates related to our business and is highly subjective.
Actual amounts realized through operations or upon disposition of related assets
may differ significantly from our estimate.
Leases
We lease most of our properties including our corporate office. We account for
our leases under the provisions of SFAS No. 13 "Accounting for Leases" and
subsequent amendments which requires that leases be evaluated and classified as
operating leases or capital leases for financial reporting purposes. In
addition, the Company records the total rent payable during the lease term on a
straight-line basis over the term of the lease and records the difference
between the rent paid and the straight-line rent as a deferred rent liability.
Lease incentive payments ("tenant improvement allowances") received from
landlords are recorded as deferred rent liabilities and are amortized on a
straight-line basis over the lease term as a reduction in rent. Future
authoritative changes to the methods of accounting for leases could have a
material impact on the Company's reported results of operations and financial
position.
23
Income taxes
We recognize 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 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. Net operating loss and other credit
carryforwards, including FICA tip tax credits and targeted jobs tax credits, are
recorded as deferred tax assets. A valuation allowance is recorded for the tax
benefit of the deferred tax assets not expected to be utilized based on
projected future taxable income. As of June 30, 2002, we had a net deferred tax
asset of $8.7 million. As a result of our improved profitability, we have
determined that more likely than not we will be able to realize $8.7 million of
these net deferred tax assets through the generation of future taxable income in
the next three years. The change in the valuation allowance takes into account
actual current year taxable income and any adjustments to the three-year taxable
income forecast. Net deferred tax assets consist primarily of net operating loss
and other credit carryforwards that may be used to offset taxable income in
future periods. As of June 30, 2002, we had federal net operating loss
carryforwards of approximately $54.9 million, expiring at various dates through
2020.
Our accounting policies are more fully described in Note 3 to our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
Financial definitions
Revenue. Our revenue is comprised of restaurant sales, and net franchise
royalties and fees. Our restaurant sales are comprised almost entirely of food
and beverage sales, with less than 0.4% of the restaurant sales represented by
sales of Champps merchandise and other revenue.
Comparable restaurant sales. In calculating company-owned comparable restaurant
sales, we include restaurants open at least 66 weeks. As of June 30, 2002, we
had 25 company-owned restaurants open at least 66 weeks.
Product costs. Product costs are composed primarily of food and beverage
expenses. The components of product costs are variable and increase with sales
volume.
Labor costs. Labor costs include direct hourly and management wages, bonuses,
workers' compensation, taxes and benefits for restaurants.
Other operating expense. Other operating expense includes restaurant supplies,
marketing costs specifically related to the restaurants' activities, utilities,
repairs and maintenance and other related costs. Other operating expenses
generally increase with sales volume but decline as a percentage of restaurant
sales.
Occupancy. Occupancy costs include equipment rental, fixed rent, percentage
rent, common area maintenance charges, general liability and property insurance
and real estate and personal property taxes.
Depreciation and amortization. Depreciation and amortization principally
includes depreciation on capital expenditures for restaurants. Typically, our
assets are depreciated over their estimated useful lives, which is generally
seven years for restaurant equipment, five years for data processing equipment
and over the life of the lease, including certain option periods, for leasehold
improvements. Depreciation and amortization excludes corporate level
depreciation and amortization, which are included in general and administrative
expense.
24
Restaurant level operating profit. Restaurant level operating profit is composed
of restaurant sales less restaurant operating costs, which includes product
costs, labor costs, other operating expense, occupancy and depreciation and
amortization.
General and administrative. General and administrative includes all corporate
and administrative functions that support existing operations and provide
infrastructure to facilitate our future growth. Components include management,
regional supervisory and staff salaries, bonuses and related employee benefits,
travel, information systems, training, corporate rent, corporate depreciation
and amortization and professional and consulting fees.
Pre-opening expense. Pre-opening expense, which is expensed as incurred,
consists of the costs of hiring and training the initial work force, travel, the
cost of food and beverages used in training, marketing costs and other costs
directly related to the opening of a new restaurant.
Interest expense and income, net. Interest expense and income, net consists of
interest expense on notes payable and capitalized lease obligations and
amortization of loan fee costs partially offset by interest income earned on
excess cash balances and interest capitalized as a part of the construction
process.
Net income before provision for income taxes. Net income before provision for
income taxes is composed of restaurant level operating profit and franchise and
royalty income less general and administrative expense, pre-opening expense,
interest expense and income, net and other (income) expense. In certain years,
expenses related to predecessor companies, impairment, exit and other charges,
loss on sale of investments and losses on discontinued operations are also
included.
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25
RESULTS OF OPERATIONS
Champps
The following table sets forth certain financial information for Champps (in
000's).
Fiscal Year Ended
-------------------------------------------------------------------
June 30, July 1, July 2,
2002 2001 2000
------------------ ----------------- -----------------
Revenues:
Sales $157,889 99.6% $132,672 99.5% $108,643 99.3%
Franchising and royalty, net 648 0.4 644 0.5 802 0.7
----------------- ---------------- -----------------
Total revenues 158,537 100.0% 133,316 100.0% 109,445 100.0%
----------------- ---------------- -----------------
Restaurant operating expenses (as a
percentage of restaurant sales)
Product costs 44,583 28.2 38,282 28.9 31,381 28.9
Labor costs 51,112 32.4 41,916 31.6 35,849 33.0
Other operating expense 24,229 15.3 20,070 15.0 16,306 15.0
Occupancy 13,560 8.6 10,731 8.1 9,448 8.7
Depreciation and amortization 6,435 4.1 5,517 4.2 4,072 3.7
------------------ ---------------- ----------------
Restaurant operating expenses 139,919 88.6 116,516 87.8 97,056 89.3
------------------ ---------------- ----------------
Restaurant level operating profit 17,970 11.4 16,156 12.2 11,587 10.7
------------------ ---------------- ----------------
General and administrative expenses 8,599 5.4 7,687 5.8 6,804 6.2
Pre-opening expense 2,617 1.7 1,470 1.1 1,462 1.3
Expenses related to predecessor companies 305 0.2 534 0.4 - -
Impairment, exit and other charges - - - - 460 0.4
Interest expense and income, net 1,613 1.0 1,471 1.1 132 0.1
Other (income) expense (12) - (83) (0.1) 147 0.1
Loss on sale of investments - - - - 1,034 0.9
------------------ ---------------- ----------------
Total costs and expenses 153,041 96.5 127,595 95.7 107,095 97.9
------------------ ---------------- ----------------
Income from continuing operations 5,496 3.5 5,721 4.3 2,350 2.1
Loss from discontinued operations (153) (0.1) (77) (0.1) - -
------------------ ---------------- ----------------
Net income before income taxes 5,343 3.4 5,644 4.2 2,350 2.1
Income tax benefit (expense) (209) (0.2) 7,893 6.0 (77) -
------------------ ---------------- ----------------
Net income $ 5,134 3.2% $ 13,537 10.2% $ 2,273 2.1%
================== ================ ================
Certain amounts have been reclassified for fiscal year 2000 to conform to the
fiscal year 2002 and 2001 presentations.
Fiscal 2002 compared to fiscal 2001
Total revenue. Total revenue increased approximately $25.2 million, or 18.9%, to
$158.5 million for fiscal 2002 from $133.3 million for the comparable prior
period. The increase was primarily due to the operation of six additional
restaurants in fiscal 2002 partially offset by a decrease in comparable
restaurant sales of 1.1%. Comparable restaurant sales decreased primarily as the
result of the terrorist attacks of September 11th and their subsequent effect on
consumer confidence and the economy in general. During fiscal 2002, food sales
and alcoholic beverage sales represented 67.8% and 32.2% of our total food and
beverage sales, respectively.
26
Restaurant operating costs.
Product costs. Product costs increased by $6.3 million, or 16.4%, to $44.6
million in fiscal 2002 from $38.3 million for the comparable prior period
primarily as a result of our increased restaurant base. Product costs as a
percentage of restaurant sales in fiscal 2002 decreased to 28.2% from
28.9% for the comparable prior period. This improvement is primarily the
result of decreased commodity costs and stable produce prices as well as
the continued positive impact of our profit improvement plan implemented
in fiscal 1999. During April 2001, we implemented a 1.0% price increase to
offset the increasing cost of beef.
Labor costs. Labor costs increased by $9.2 million, or 22.0%, to $51.1
million in fiscal 2002 from $41.9 million for the comparable prior period
primarily as a result of our increased restaurant base. Labor costs as a
percentage of restaurant sales increased to 32.4% in fiscal 2002 from
31.6% for the comparable prior period primarily due to higher restaurant
management payroll associated with new restaurant openings as well as an
increase in employment tax expense.
Other operating expense. Other operating expense increased $4.1 million,
or 20.4%, to $24.2 million for fiscal 2002 from $20.1 million for the
comparable prior period. Other operating expense as a percentage of
restaurant sales increased to 15.3% in fiscal 2002 from 15.0% for the
comparable prior period primarily due to lower comparable restaurant sales
coupled with higher expenses for planned repairs and maintenance and the
recognition of a one-time credit for fees on credit cards in fiscal 2001.
This increase was partially offset by lower utility expenses.
Occupancy. Occupancy expense increased $2.9 million, or 27.1%, to $13.6
million for fiscal 2002 from $10.7 million for the comparable prior
period. Occupancy expense as a percentage of restaurant sales increased to
8.6% for fiscal 2002 from 8.1% for the comparable prior period primarily
due to an increase in real estate taxes and insurance expenses coupled
with lower comparable restaurant sales.
Depreciation and Amortization. Depreciation and amortization expense
increased $0.9 million, or 16.4%, to $6.4 million for fiscal 2002 from
$5.5 million for the comparable prior period. Depreciation and
amortization expense as a percentage of restaurant sales decreased to 4.1%
for fiscal 2002 from 4.2% for the comparable prior period. During the
comparable prior period, we recognized $191,000 of goodwill amortization.
As the result of the adoption of SFAS No. 142 at the beginning of fiscal
2002, we did not recognize any goodwill amortization for fiscal 2002.
Restaurant level operating profit. Restaurant level operating profit increased
approximately $1.8 million, or 11.1%, to $18.0 million for fiscal 2002 compared
with $16.2 million for the comparable prior period. Restaurant level operating
profit as a percentage of restaurant sales decreased to 11.4% for fiscal 2002
from 12.2% for the comparable prior period. The decrease was due to higher
expenses associated with the opening of six new restaurants in fiscal 2002 plus
three new restaurants in late fiscal 2001. The income generated from new
restaurants is typically lower during the first four months of operation
compared to an existing restaurant. In addition, lower comparable restaurant
sales resulted in a higher percentage of fixed expenses during fiscal 2002.
General and administrative expense. General and administrative expense increased
$0.9 million, or 11.7%, to $8.6 million for fiscal 2002 from $7.7 million for
the comparable prior period. The increase was largely due to the addition of
support personnel. However, general and administrative expense as a percentage
of total revenue decreased to 5.4% for fiscal 2002 from 5.8% for the comparable
prior period due to the larger revenue base in fiscal 2002.
27
Pre-opening expense. Pre-opening expense increased $1.1 million to $2.6 million
during fiscal 2002 from $1.5 million for the comparable prior period. We opened
six new restaurants in fiscal 2002 and opened four new restaurants for the
comparable prior period. In addition, two of the restaurants opened in the last
quarter of fiscal 2001, were open only in the last week of that quarter.
Although pre-opening expense is incurred prior to the opening of a new
restaurant, we continue to incur pre-opening expense for trainers up to two
weeks after a new restaurant opens. Pre-opening expense has historically been
approximately $0.4 million per location.
Interest expense and income, net. Interest expense and income, net increased
$0.1 million to $1.6 million from $1.5 million in the prior period primarily due
to interest expense on additional debt partially offset by increased capitalized
interest from higher construction spending. As of June 30, 2002, we had a total
of $21.8 million in notes payable and capitalized leases versus $17.1 million as
of July 1, 2001.
Net income before provision for income taxes. Net income before provision for
income taxes decreased $0.3 million, or 5.4%, to $5.3 from $5.6 million for the
comparable prior period. During fiscal 2002, $0.5 million was added to reserves
for predecessor company obligations and discontinued operations as compared to
$0.6 million for the comparable period.
Provision for income tax benefit/expense. For fiscal 2002, we recognized a
provision for state and local income tax expense of $0.2 million compared to
$0.3 million in fiscal 2001. We currently have an approximate 4.0% effective tax
rate associated with these state and local income taxes. For the comparable
prior period, we recorded a benefit for income taxes of $7.9 million primarily
related to the recognition of a portion of our deferred tax assets.
Fiscal 2001 (52 weeks) compared to fiscal 2000 (53 weeks)
Total revenue. Total revenue increased approximately $23.9 million, or 21.8%, to
$133.3 million in fiscal 2001 from $109.4 million in fiscal 2000 primarily due
to the opening of four additional restaurants in fiscal 2001, the acquisition of
two franchised restaurants in late fiscal 2000 and an increase in comparable
restaurant sales of 0.2%.
Restaurant operating costs.
Product costs. Product costs increased by $6.9 million, or 22.0%, to $38.3
million in fiscal 2001 from $31.4 millions in fiscal 2000 primarily as the
result of our increased restaurant base. Product costs as a percentage of
restaurant sales remained constant at 28.9% for both fiscal 2001 and
fiscal 2000. During April 2001, we implemented a 1.0% price increase to
offset the increasing cost of beef.
Labor costs. Labor costs increased by $6.1 million, or 17.0%, to $41.9
million in fiscal 2001 from $35.8 million in fiscal 2000 primarily as the
result of our increased restaurant base. Labor costs as a percentage of
restaurant sales decreased to 31.6% in fiscal 2001 from 33.0% in fiscal
2000 primarily due to menu re-engineering which resulted in improved
efficiencies and production techniques and lower employee benefits costs.
Other operating expense. Other operating expense increased $3.8 million,
or 23.3%, to $20.1 million in fiscal 2001 from $16.3 million in fiscal
2000. Operating expense as a percentage of restaurant sales remained
constant at 15.0% in fiscal 2001 and fiscal 2000 due to a decrease in
complimentary and promotional food and beverage and a decrease in
discounting, offset by an increase in utility expense.
Occupancy. Occupancy expense increased $1.3 million, or 13.8%, to $10.7
million in fiscal 2001 from $9.4 million in fiscal 2000. Occupancy expense
as a percentage of restaurant sales decreased to 8.1% in fiscal 2001 from
8.7% in fiscal 2000 primarily from a decrease in equipment rental expense
and a decrease in insurance claims.
28
Depreciation and amortization. Depreciation and amortization expense
increased $1.4 million, or 34.1%, to $5.5 million for fiscal 2001 from
$4.1 million in fiscal 2000. Depreciation and amortization expense as a
percentage of restaurant sales increased to 4.2% for fiscal 2001 from 3.7%
in fiscal 2000 primarily due to an increase in assets associated with the
opening of new restaurants.
Restaurant level operating profit. Restaurant level operating profit increased
approximately $4.6 million, or 39.7%, to $16.2 million in fiscal 2001 from $11.6
million in fiscal 2000. Restaurant level operating profit as a percentage of
restaurant sales increased to 12.2% in fiscal 2001 from 10.7% in fiscal 2000
primarily due to the reasons described above.
General and administrative expense. General and administrative expense increased
$0.9 million, or 13.2%, to $7.7 million in fiscal 2001 from $6.8 million in
fiscal 2000. General and administrative expense as a percentage of revenue
decreased to 5.8% for fiscal 2001 from 6.2% in fiscal 2000 primarily to higher
restaurant sales and improvements in corporate payroll expense as the personnel
stabilized after the relocation our corporate headquarters in December 1999.
Pre-opening expense. Pre-opening expense was approximately $1.5 million in both
fiscal 2001 and fiscal 2000. We opened four new restaurants in both fiscal 2000
and fiscal 2001. Pre-opening expense as a percentage of revenue decreased to
1.1% for fiscal 2001 from 1.3% in fiscal 2000. In fiscal 2000, we also acquired
two restaurants from an existing franchisee, which resulted in minimal
pre-opening expense. Pre-opening expense has historically been approximately
$0.4 million per location.
Interest expense and income, net. Interest expense and income, net increased
$1.4 million to $1.5 million from $0.1 million in the prior period primarily due
to interest expense on additional debt.
Net income before provision for income taxes. Net income before provision for
income taxes increased $3.2 million, or 133.3%, to $5.6 million in fiscal 2001
from $2.4 million in fiscal 2000 primarily for the reasons described above.
During fiscal 2001, $0.6 million was added to reserves for predecessor company
obligations and discontinued operations.
Provision for income tax benefit/expense. For fiscal year 2001, we recorded a
benefit for income taxes of $7.9 million related to the recognition of a portion
of our deferred tax asset. We recorded a provision for state and local income
taxes of $0.08 million for fiscal 2000.
FINANCIAL CONDITION AND LIQUIDITY
The working capital needs of companies engaged in the restaurant industry are
generally low as sales are made for cash, and purchases of food and supplies and
other operating expenses are generally paid in 30 to 60 days after receipt of
invoices and labor costs are paid bi-weekly.
Historically, our primary sources of liquidity for funding our operations and
expansion have been net cash from operations, proceeds from the sale of the
Fuddruckers business in 1998 and standard restaurant financing methods, such as
build-to-suit transactions, sale-leaseback transactions, mortgage facilities,
notes payable, tenant improvement allowances and equipment financing. Capital
expenditures for the purchase of property and equipment were $17.3 million,
$15.2 million and $13.9 million for fiscal 2002, 2001 and 2000, respectively.
In April 2000 and June 2000, we entered into an aggregate of $14.5 million in
term loans with Finova Capital Corporation that allowed us to purchase two
existing franchise restaurants located in Eden Prairie, Minnesota and
Minnetonka, Minnesota, as well as provide mortgage financing for the
construction of our Lombard, Illinois restaurant. The Finova Capital term loans
bear interest at a fixed rate of 10.23% for a $5.0 million loan and 10.36% for
29
two loans of $4.75 million each, and are amortized over a 20-year period with a
balloon payment due May 2010. The term loans require that we maintain a minimum
debt service coverage ratio, a minimum fixed charge coverage ratio and a maximum
leverage ratio. The Finova Capital term loans also contain covenants that,
subject to specified exceptions, restrict our ability to incur additional debt,
incur liens, engage in mergers or acquisitions, incur contingent liabilities,
make dividends or distributions, pay indebtedness for borrowed money, make
investments or loans and sell assets, develop new restaurants, change facility
sites, sell or transfer assets, amend specified agreements, acquire additional
properties, issue capital stock and engage in transactions with affiliates. As
of the date of this filing, we are in compliance with all financial ratios and
covenants. The Finova Capital term loans are secured by a security interest in
substantially all of the property related to these restaurants.
Between December 2001 and February 2002, we entered into two term loans
collateralized by equipment with General Electric Capital Business Asset Funding
Corporation ("GE Capital"). As of June 30, 2002, we had approximately $4.6
million outstanding under these term loans. These loans bear interest at the
30-day commercial paper rate, plus 3.75% (5.60% as of June 30, 2002), and mature
between December 2006 and February 2007. The GE Capital loans require that we
maintain a maximum debt to net worth ratio, a minimum debt coverage ratio, a
minimum ratio of earnings before interest, taxes, depreciation and amortization
compared to debt and a maximum funded indebtedness ratio. We were in compliance
with all of these financial ratios as of June 30, 2002.
At June 30, 2002, our unrestricted cash was $4.6 million and restricted cash was
$1.0 million. Restricted cash includes certificates of deposits to serve as cash
collateral for stand-by letters of credit and are classified as current assets
in the accompanying consolidated balance sheets. We anticipate that our
operations will continue to generate positive operating cash flow for fiscal
2003. However, there are also significant cash expenditures anticipated related
to the opening of new restaurants and the remodeling and improvements of
existing restaurants.
At September 13, 2002, the Company had executed a proposal for an additional
$5.0 million term loan collateralized with equipment with GE Capital. The
Company is currently under credit review by GE Capital. These funds are intended
to be used for the construction of the eight to ten restaurants in fiscal 2003.
The Company is also investigating other sources of financing at this time. In
the event that such financing is not available, the Company has the ability to
curtail its expansion program and reduce non-essential operating costs to
conserve working capital.
During fiscal 2002, we generated positive cash flow from operating ac