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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Check One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] ---
For The Fiscal Year Ended June 28, 1998
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
UNIQUE CASUAL RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3370491
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Corporate Place, 55 Ferncroft Road, Danvers, MA 01923
(Address of principal executive offices) (Zip Code)
978-774-6606
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of the Common Stock of the registrant as
quoted on the National Association of Securities Dealers Automated Quotation
System on October 2, 1998 was $38,366,754 (for purposes of calculating this
amount only, directors, officers and beneficial owners of 10% or more of the
Common Stock of the registrant may be deemed affiliates).
Number of shares of Common Stock, $.01 par value, outstanding at October 2,
1998: 11,605,659
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 January 20, 1999
pursuant to regulation 14A, which involves the election of directors.
Cross Reference Sheet between Items of
Registrant's Proxy Statement and Form 10-K
FORM 10-K
Item No. Item in Form 10-K Item in Proxy Statement
PART III
10 Directors and Executive Election of Directors and Directors and Committees in the
Officers of the Registrant Company's Proxy Statement relating to its Annual Meeting of
Stockholders to be held on or about January 20, 1999.
11 Executive Compensation Executive Compensation in the Company's Proxy Statement
relating to its Annual Meeting of Stockholders to be held on
or about January 20, 1999.
12 Security Ownership of Certain Principal Stockholders in the Company's Proxy Statement
Beneficial Owners and Management relating to its Annual Meeting of Stockholders to be held on
or about January 20, 1999.
Copies of all documents incorporated by reference other than exhibits to such
documents will be provided without charge to each person who receives a copy of
this Annual Report upon written request addressed to Stockholder Relations,
Unique Casual Restaurants, Inc., One Corporate Place, 55 Ferncroft Road,
Danvers, Massachusetts 01923.
FORM 10-K INDEX
PART I
Item 1 Business 1
Item 2 Properties 25
Item 3 Legal Proceedings 25
Item 4 Submission of Matters to a Vote of Security Holders 26
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 26
Item 6 Selected Financial Data 27
Item 7 Management's Discussion and Analysis of Results of Operations and
Financial Condition 27
Item 7a Quantitative and Qualitative Disclosure About Market Risk 35
Item 8 Financial Statements and Supplementary Data 36
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 36
PART III
Item 10 Directors and Executive Officers of the Registrant 37
Item 11 Executive Compensation 37
Item 12 Security Ownership of Certain Beneficial Owners and Management 38
Item 13 Certain Relationships and Related Transactions 38
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 38
From time to time, the Company may make certain statements that
contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995). Words such as
"believe", "anticipate", "estimate", "project", and similar
expressions are intended to identify such forward-looking
statements. Forward-looking statements may be made by management
orally or in writing, including, but not limited to, in press
releases, as part of Management's Discussion and Analysis of
Financial Condition and Results of Operations as contained in this
report and as part of other sections of this Report or other
filings. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their
respective dates, and are subject to certain risks, uncertainties
and assumptions including those set forth in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations under the heading "Forward-Looking Statements". Should
one or more of these risks or uncertainties materialize, or should
any of the underlying assumptions prove incorrect, actual results
of current and future operations may vary materially from those
anticipated, estimated or projected.
PART I
Item 1. Business.
Unique Casual Restaurants, Inc. (the "Company") is a Delaware corporation which
was formed on May 27, 1997 prior to its spin-off to holders of the common stock
of DAKA International, Inc. ("DAKA International") pursuant to the transactions
described under the heading "Spin-off Transaction" herein (the "Spin-off"). The
Company's principal executive offices are located at One Corporate Place, 55
Ferncroft Road, Danvers, Massachusetts 01923, and its telephone number is (978)
774-6606. The Company's principal subsidiaries are Fuddruckers, Inc.
("Fuddruckers"), Champps Entertainment, Inc. ("Champps") and The Great Bagel &
Coffee Company ("Great Bagel & Coffee"). The Company's principal business for
the periods covered by this report was to own, operate and franchise
Fuddruckers, Champps Americana and Great Bagel & Coffee Company restaurants
through its subsidiaries.
The Company's Fuddruckers and Champps operations serve customers in casual and
upscale restaurant settings, respectively, throughout the United States and in
Canada and the Middle East. Restaurant operations are conducted through
company-owned and franchised stores. On June 28, 1998, the Company ceased all
operations of the Great Bagel & Coffee business. See "Great Bagel & Coffee
Company". Great Bagel & Coffee served coffee, bagels and sandwich items in a
cafe setting in western locations of the United States.
On July 31, 1998, the Company agreed to sell its Fuddruckers business to King
Cannon, Inc. ("King Cannon"), a private company controlled by Michael Cannon,
for $43.0 million in a transaction expected to close in November, 1998 (the
"Proposed Fuddruckers Transaction"). See "The Proposed Fuddruckers Transaction".
As a result of these events, the Company's ongoing operations will consist
primarily of owning, operating and franchising Champps Americana restaurants.
The Company also owns a 17% passive investment in La Salsa Fresh Mexican Grill
("La Salsa") and a 50% interest in Restaurant Consulting Services, Inc. ("RCS"),
a diversified consulting and technology company offering data processing,
strategic planning and other technology services on an outsource basis to its
customers.
On September 24, 1998, the Company announced it had retained Bear Stearns & Co.,
Inc. to assist the Company's board of directors (the "Board") in evaluating and
seeking financial and strategic alternatives, including a possible sale of the
Company. There can be no assurance, however, that the Company will pursue a sale
or any other specific alternative or that it will be able to reach any agreement
or complete any transaction that it may undertake.
1
Although formed on May 27, 1997, for purposes of this Form 10-K and financial
reporting purposes, the Company has been treated as if it was a stand-alone
entity for all periods presented. The Company's results of operations for
periods prior to July 17, 1998, as presented in the accompanying financial
statements, include allocations and estimates of certain expenses, including
corporate accounting, tax, cash management, information technology, legal, risk
management, purchasing and human resources, historically provided to the Company
by DAKA International.
Recent Trends in Operations
The Company reported a net loss of $27.7 million for fiscal 1998. This loss
includes charges for impairment and exit costs associated with its Fuddruckers
and Great Bagel & Coffee businesses of $24.6 million. Excluding these charges,
the Company's results of operations would have been a loss of $3.1 million. For
fiscal 1997, the Company reported a net loss of $39 million, and reported a loss
of $5.7 million in 1996. Refer to the Consolidated Financial Statements and
Management's Discussion and Analysis of Results of Operations and Financial
Condition for information regarding the Company's financial performance in
fiscal 1998, 1997 and 1996.
Champps
Operations
The Champps Americana concept is based upon providing the best possible food,
value and service to its customers. Although food and service are the most
important parts of the Champps Americana concept, an atmosphere that is
entertaining and energetic, yet comfortable, is also critical. The food
offerings at Champps' restaurants combine a wide selection of appetizers, soups,
salads, innovative sandwiches, pizza, burgers, and entrees including chicken,
beef, fish, pasta and desserts. Selections reflect a variety of ethnic and
regional cuisines and traditional favorites. Because Champps' menu is not tied
to any particular type of food, Champps can introduce and eliminate items based
on current consumer trends without altering its theme. Portion sizes are
generous and each dish is attractively presented. Champps believes that these
qualities give customers a sense of value. Entree prices currently range from
$4.50 to $14.25. Champps emphasizes freshness and quality in its food
preparation. Fresh sauces, dressings, batters and mixes are prepared daily on
the premises, generally from original ingredients with fresh produce. Champps
invests substantial time in training and testing kitchen employees to maintain
consistent food preparation. Strict food standards at Champps-owned restaurants
have also been established to maintain quality.
The Champps customer's experience is enhanced by the attitude and attention of
restaurant personnel. Accordingly, Champps emphasizes prompt greeting of
arrivals, frequent visits to customer tables to monitor customer satisfaction
and service and friendly treatment of its customers. Service is based upon a
team concept so that customers are made to feel that any employee can help them
and they are never left unattended. Success of the Champps restaurants depends
upon employee adherence to these standards. To maintain these standards, Champps
seeks to hire and train personnel who will work in accordance with Champps'
philosophy and frequently rewards individual and restaurant achievement through
several recognition programs intended to build and maintain employee morale. All
of the service personnel at each Champps restaurant meet with the managers at
two daily pre-shift motivational meetings. Restaurant promotions, specials and
quality control are all discussed and explained during these meetings. Also,
employee enthusiasm is raised so that the employees can help increase the energy
level and excitement of the restaurant.
Champps-owned, franchised and licensed restaurants are designed and decorated in
a casual theme, although they differ somewhat from each other. Existing Champps
restaurants range in size from 7,000 to 12,000 square feet while the new Champps
restaurant prototype is approximately 11,000 square feet. Champps' standard
restaurant features a bar, open kitchen and dining on multiple levels including
a diner-type counter. Customers can also dine at the bar or outside on the
2
patio, where available. The spacious design facilitates efficient service,
encourages customer participation in entertainment and promotional events and
allows customers to view the kitchen, dining area, and bar. Strategically placed
television screens stimulate customer perception of activity and contribute to
the total entertainment experience and excitement of the restaurant.
An important part of the Champps Americana dining experience is the
entertainment. Patrons may watch one of several sporting events that are being
broadcast, or listen to a variety of music played by the disc jockey, music
which is changed for the time of day and season of the year. The exposed kitchen
offers customers the opportunity to observe the cooks, and, in certain
locations, a discreetly located game room is provided for arcade games. The
entertainment aspects of the Champps restaurants are designed to encourage
repeat visits, increase the length of a customer's stay and attract customers
outside of normal peak hours. In addition, a variety of creative promotions and
activities are conducted such as "Family Bingo," "Spring Time Big Bike
Give-Away" and Karaoke. These promotions and activities allow for customer
participation and are continually changing. Change of the ambiance is also
experienced in each restaurant when the restaurants are decorated for the
holidays and when the dress of the restaurant staff is changed for the seasons.
The different looks and activities of the restaurant provide customers a
different feel each time they visit, thus encouraging repeat business. Champps
sells merchandise such as T-shirts, hats and sweatshirts bearing the Champps
Americana name. Although not currently a significant source of revenue, the sale
of its merchandise is believed to be an effective means of promoting the Champps
name.
Champps restaurants are generally open from 11:00 a.m. to 1:00 a.m. seven days a
week serving lunch, dinner and late night appetizers. Closing times of Champps
restaurants will vary based upon state laws concerning operating hours. Sunday
brunch is served beginning at 10:00 a.m. Each Champps restaurant maintains
standardized food preparation and service manuals which are designed to enhance
consistency of operations among the restaurants. Although Champps restaurants
differ in some respects, Champps attempts to have each Champps-owned and
franchised restaurant operate under uniform standards and specifications.
Management
The management staff of a Champps restaurant is divided into three areas, the
General Manager, Front-of-House Managers and Back-of-House Managers. The General
Manager has responsibility for the entire restaurant. Front-of-House management
consists of an associate manager, two floor managers and a bar manager.
Back-of-House management consists of a kitchen manager, two to three assistant
kitchen managers and a daily specials chef. All General Managers report directly
to the Directors of Operations. Managers are compensated based on salary plus a
monthly bonus. The bonus is determined by means of monthly restaurant sales and
profit goals.
Marketing
Champps has achieved its historical success while expending minimal amounts on
advertising and marketing. Champps restaurants have relied on location and
customer word-of-mouth. However, Champps-owned restaurants expend a different
amount of resources on in-restaurant marketing and promotions.
Site Selection
Champps uses its own personnel and consultants to analyze markets and sites for
new restaurants, obtain the required zoning and other permits, negotiate the
leasing or real estate purchase and oversee all aspects of the construction
process. Champps believes that location is a key factor in a restaurant's
ability to operate a profitable lunch and dinner business, and considers several
demographic factors in selecting sites, including the average income of the
neighboring residential population, the proximity of retail, office and
entertainment facilities, traffic patterns and the visibility of the location.
3
The cost to construct a typical Champps restaurant, where Champps purchases real
estate, depending upon its location, is approximately $4.5 to $5.5 million,
which includes approximately $1.0 million for furniture, fixtures and equipment,
$2.0 to $2.5 million for building and improvements, $1.1 to $1.6 million for
land and site work, and $400,000 related to pre-opening costs of the restaurant.
In fiscal 1996, Champps arranged for sale-leaseback financing whereby Champps
would acquire real estate, construct a new restaurant and then sell and lease
back the property. This has enabled Champps to open new restaurants on sites
where a leasing arrangement was not available, with minimal capital investment.
The cost to construct a new Champps restaurant where Champps enters into a
leasing arrangement is approximately $3.4 to $3.9 million which is comprised of
approximately $1.0 million for furniture, fixtures and equipment, $2.0 to $2.5
million for leasehold improvements, and $400,000 related to pre-opening costs of
the restaurant.
Future development of Champps restaurants will be accomplished primarily through
the development of Champps-owned restaurants. The development of additional
restaurants is contingent upon locating satisfactory sites, financing,
negotiating satisfactory leases or, alternatively, leasing and converting
existing restaurant sites into Champps restaurants. It is also dependent upon
securing appropriate governmental permits and obtaining liquor licenses. During
fiscal 1998, four new Champps Company-owned restaurants were opened, and on
February 2, 1998, the Company sold a Champps Company-owned restaurant in
Minnetonka, Minnesota. The restaurant was sold to Dean Vlahos, a former Director
of the Company and the former President and Chief Executive officer of Champps
Americana, Inc., for $2.9 million representing the fair value of the restaurant
based upon an independent appraisal. The purchase price was settled through a
cash payment by Mr. Vlahos of $1.5 million and the cancellation of Mr. Vlahos'
employment contract. The Company recognized a net gain of approximately $700,000
on this transaction. As part of this transaction, the Company entered into a
separation agreement with Mr. Vlahos which grants Mr. Vlahos the right, subject
to certain restrictions, to develop up to six franchised Champps restaurants in
the United States by February 2, 2006. Under the separation agreement, Mr.
Vlahos will not pay a franchise fee with respect to such restaurants and will
pay a continuing royalty of 1.25% of gross sales. At June 28, 1998, the Company
had three new Champps Company-owned restaurants under construction and one
Champps restaurants under development, which are expected to open in fiscal
1999. Development of Champps-owned restaurants will be concentrated in selected
markets with population density levels sufficient to support the restaurants.
Champps believes its concept can be adapted to a variety of locations, both in
terms of market demographics and configuration of the restaurant. The location
of Champps restaurants are very important. Potential sites are reviewed for a
variety of factors, including trading-area demographics, such as target
population density and household income levels; an evaluation of site
characteristics, including visibility, accessibility, traffic volume and
available parking; proximity to activity centers, such as shopping malls and
offices; and an analysis of potential competition.
Franchising
Champps has offered franchises in markets where it deems expansion to be
advantageous to the development of the Champps concept and a system of
restaurants. Franchise agreements grant franchisees an exclusive territorial
license to operate a single restaurant within a specified area. Currently, there
are two franchisees operating multiple restaurants.
A typical franchisee pays an initial fee of $75,000 per restaurant, of which a
part may be associated with a development fee, a continuing royalty fee of
3-1/4% of gross sales, and a regional and/or national advertising fee of 1/2% of
gross sales at such time as Champps establishes a regional/national advertising
program. Among the services and materials that Champps provides to franchisees
are site selection assistance, assistance in design development, an operating
manual that includes quality control and service procedures, training, on-site
4
pre-opening supervision and consultation relating to the operation of the
franchised restaurants. Champps has granted both single and multi-restaurant
development rights depending upon market factors and franchisee capabilities.
With respect to multi-restaurant agreements, the franchisee's continuing right
to obtain franchises is contingent upon the franchisee's continuing compliance
with the restaurant development schedule.
All franchisees are required to operate their restaurants in accordance with
Champps' standards and specifications, including controls over menu selection,
food quality and preparation. Champps approves all restaurant site selections
and applies the same criteria used for its own restaurant sites. Champps
requires all new franchisees to provide at least annual financial statements
reviewed by an independent certified public accountant. Periodic on-site
inspections are conducted to assure compliance with Champps standards and to
assist franchisees with operational issues. Franchisees bear all direct costs
involved in the development, construction and operation of their restaurants.
Champps Restaurant Locations
The following table sets forth the locations of restaurants operated by Champps
and its franchisees as of October 2, 1998:
Company Owned Restaurant Locations TEXAS
Domestic - Total 16 Addison
CALIFORNIA San Antonio
Irvine VIRGINIA
COLORADO Reston
Denver
FLORIDA Franchised Restaurant Locations
Ft. Lauderdale Domestic - Total 11
ILLINOIS MINNESOTA
Livonia Burnsville
Schaumburg Maple Grove
INDIANA Maplewood
Indianapolis Minnetonka
MICHIGAN New Brighton
Troy St. Paul
MINNESOTA Woodbury
Richfield NEBRASKA
NEW JERSEY Omaha
Edison NORTH CAROLINA
Marlton Charlotte
OHIO SOUTH DAKOTA
Columbus (2) Sioux Falls
Lyndhurst WISCONSIN
Greenfield
Fuddruckers
Operations
Fuddruckers restaurants, with an average bill of $6.50 per person, are designed
to appeal to both families and adults seeking value in a casual dining
atmosphere. The restaurants offer a distinctive atmosphere created by an open
grill area, a glassed-in butcher shop, a display case featuring choice steaks
and hamburgers that have been freshly-cut or ground and an open bakery for
hamburger buns, brownies and cookies. Each restaurant offers a substantially
similar menu that prominently features Fuddruckers' signature hamburger in
5
one-third pound and one-half pound sizes. Hamburgers are made from fresh beef,
cut and ground daily at each restaurant and served on buns baked daily "from
scratch" at each restaurant. The hamburgers are available with optional
specialty toppings from the grill. While the menu is focused on Fuddruckers'
signature hamburger, which accounts for approximately 60% of sales, it also
includes fresh-cut, ribeye steak sandwiches, fresh-cut, ribeye, chopped steak
and chicken platters with baked potatoes, various grilled chicken breast
sandwiches, hot dogs, a variety of tossed and specially prepared salads and
soups, fish sandwiches, french fries, onion rings, soft drinks, high quality
milkshakes and bakery items. Beer and wine are served and, generally, account
for approximately 3% of restaurant sales. The restaurants permit guests to
participate in the preparation of their meals by allowing them to garnish their
own entrees from a bountiful array of fresh lettuce, tomatoes, onions, pickles,
relish and a variety of condiments, sauces and melted cheeses at the "fixin's
bar." Guests generally place their own orders and serve themselves, thereby
minimizing waiting time.
Each restaurant contains a principal dining area from which guests may observe
the preparation of their meals, and, in some restaurants, an additional dining
area with a patio motif. Decor of the principal dining area of a Fuddruckers
restaurant generally includes an open warehouse style with neon beverage signs,
wood tables and chairs and, in some instances, original shipping containers from
certain foods sold by the restaurant. The open grill area enables guests to view
the preparation of their meals, all of which are cooked to order.
The typical Fuddruckers restaurant is located in a suburban area in a
free-standing building or in a shopping center. The area within a five-mile
radius of the restaurant is usually zoned for retail, office and residential
uses. Fuddruckers' guests have an average household income of approximately
$50,000. Fuddruckers' restaurants typically range in size from 6,000 to 8,000
square feet with 200 to 300 seats and parking for between 100 and 200 vehicles.
Restaurants built since fiscal 1995 are typically between 4,800 and 6,000 square
feet with 160 to 220 seats.
The restaurants are open seven days a week, generally from 11:00 a.m. to 10:00
p.m., for lunch, dinner and late night meals. Certain restaurants are open
earlier to accommodate the sale of freshly-baked goods. Restaurants are designed
to enable guests to complete their visit within a convenient 40-minute period,
which attracts the business person on a limited luncheon schedule. This
contributes to Fuddruckers' higher percentage of lunch (45%) versus dinner (55%)
sales than the industry average for casual dining restaurants.
All restaurants are operated in accordance with strict standards and
specifications for the quality of ingredients, preparation of food, maintenance
of premises and associates conduct, as set forth in Fuddruckers' policy and
procedures manuals. At each restaurant, Fuddruckers emphasizes uniform standards
for product quality, portion control, courteous service and cleanliness.
Fuddruckers establishes specifications and approves purchasing arrangements for
basic menu ingredients and supplies for all its restaurants in order to obtain
favorable prices and ensure consistent levels of quality and freshness. Food
products in Fuddruckers-owned and franchised restaurants are regularly and
systematically tested for quality and compliance with Fuddruckers' standards.
Fuddruckers emphasizes simplicity in its operations. Its restaurants generally
have a total staff of one General Manager, two or three Assistant Managers and
25 to 45 other associates, including full-time and part-time associates working
in overlapping shifts. Since Fuddruckers generally utilizes a self-service
concept, it typically does not employ waiters or waitresses.
In fiscal 1997 and through the first half of fiscal 1998, the Company
experienced negative same store sales and significantly lower margins. The
Company attributed the declining sales to several factors including: poor
operational execution due to a rapid expansion program in 1995 and 1996; poor
real estate selection, and in certain new markets, consumer confusion over the
Fuddruckers core concept of the "World's Greatest Hamburgers"; too narrow of a
base of customers given its relatively high check average for a meal of a
hamburger, fries and soft drink; and, deterioration of its customer base due to
its limited menu offerings.
6
In response to these factors, the Company adopted a number of strategies
including: curtailment of expansion; exiting certain restaurants; introduction
of new menu offerings including "platters" in the dinner period; and expanding
its "Kids Eat Free" program from Monday through Thursday after 4:00 pm to seven
days a week from January through Memorial Day in substantially all Company
markets. The Company also introduced kids meals priced everyday at $0.99 after
Memorial Day, which is its current kids meal program in Company-owned
restaurants.
The Company believes these initiatives were successful in improving sales and
profitability over the course of fiscal 1998. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition".
Management
Fuddruckers restaurant operations for fiscal 1998 were divided into two regions,
each supervised by a Senior Vice President of Operations. The two regions were
further divided into a total of fifteen districts, each supervised by a Director
of Operations. On average, each Director of Operations supervises eight
restaurants and reports to a Senior Vice President of Operations.
Marketing
Fuddruckers uses television, radio and print media to promote its various themes
in markets with a high concentration of Fuddruckers-owned restaurants. These
themes emphasize Fuddruckers' unique name and fresh baked buns which are unique
characteristics and help differentiate Fuddruckers from other restaurant
concepts.
Marketing research conducted by Fuddruckers indicates a strong consumer desire
for fresh, high-quality food. Fuddruckers restaurants, which feature fresh
produce available at the "fixin's bar," fresh beef ground daily and fresh buns
baked daily, address these consumer desires.
Fuddruckers has developed local store marketing manuals to assist its managers
and franchisees in the development of a marketing and public relations strategy
for their geographic area. Workshops, seminars and marketing manuals are made
available to all franchisees. In addition, Fuddruckers allows its franchisees to
use its various television, radio and print advertising materials in the
franchisees' markets for a nominal fee intended to cover Fuddruckers' cost.
Site Selection
Fuddruckers uses its own personnel to analyze markets and sites for new
restaurants, obtain the required zoning and other permits, negotiate the leasing
or real estate purchase and oversee all aspects of the construction process.
Fuddruckers believes that location is a key factor in a restaurant's ability to
operate a profitable lunch and dinner business and considers several demographic
factors in selecting sites, including the average income of the neighboring
residential population, the proximity of retail, office and entertainment
facilities, traffic patterns and the visibility of the location.
The average total cost to construct a typical Fuddruckers restaurant, where
Fuddruckers purchases real estate, depending upon its location, is approximately
$1.5 million, which includes $265,000 for furniture, fixtures and equipment,
$510,000 for building and improvements, $680,000 for land and site work, and
$50,000 related to pre-opening costs of the restaurant. Since 1995, Fuddruckers
has arranged for sale-leaseback financing whereby Fuddruckers acquires real
estate, constructs a new restaurant and then sells and leases back the property.
This has enabled Fuddruckers to open new restaurants on sites where a leasing
arrangement was not available, with a minimal capital investment.
7
The average total cost to construct a new Fuddruckers restaurant where
Fuddruckers enters into a leasing arrangement is approximately $800,000 which is
comprised of $265,000 for furniture, fixtures and equipment, $485,000 for
leasehold improvements, and $50,000 related to pre-opening costs associated with
the restaurant. Fuddruckers typically receives a contribution of between
$300,000 and $400,000 toward the construction and renovation costs from
landlords and believes that its growth enhances its ability to obtain attractive
leasing terms. Despite this favorable condition, there remains considerable
competition among restaurant businesses for desirable sites.
If the Proposed Fuddruckers Transaction is not consummated, the Company
anticipates that future development of Fuddruckers restaurants will be
accomplished through the sale of franchises and the development of
Fuddruckers-owned restaurants, although no new Company-owned restaurants are
planned for fiscal 1999. The development of additional restaurants is contingent
upon locating satisfactory sites, financing, negotiating satisfactory leases or,
alternatively, leasing and converting existing restaurant sites into Fuddruckers
restaurants. It is also dependent upon securing appropriate governmental permits
and obtaining beer and wine licenses.
Franchising
Fuddruckers offers franchises in markets where it deems expansion to be
advantageous to the development of the Fuddruckers' concept and system of
restaurants. Franchise agreements typically grant franchisees an exclusive
territorial license to operate a single restaurant within a specified area,
usually a four-mile radius surrounding the franchised restaurant. Fuddruckers
has a close relationship with its franchisees and seeks to identify potential
franchisees with the capability and financial resources to operate multiple
restaurants. Of the 40 Fuddruckers franchisees, 20 operate multiple restaurants,
and 19 have operated Fuddruckers restaurants for more than five years.
Franchisees bear all direct costs involved in the development, construction and
operation of their restaurants. In exchange for a franchise fee, Fuddruckers
provides its franchisees assistance in the following areas: site selection,
prototypical architectural plans, interior and exterior design and layout,
training, marketing and sales techniques, assistance by a Fuddruckers "opening
team" at the time a franchised restaurant opens and operations and accounting
guidelines set forth in various policies and procedures manuals.
All franchisees are required to operate their restaurants in accordance with
Fuddruckers' standards and specifications, including controls over menu items,
food quality and preparation. Fuddruckers requires the successful completion of
its training program by a minimum of three managers for each franchised
restaurant. In addition, franchised restaurants are evaluated regularly by
Fuddruckers for compliance with franchise agreements, including standards and
specifications through the use of periodic, unannounced, on-site inspections and
standards evaluation reports.
The current standard franchise agreement provides for the payment to Fuddruckers
of a non-refundable franchise fee of between $25,000 and $50,000 per restaurant
and ongoing royalties of 5% of gross sales of each restaurant. Certain
multi-unit franchisees have entered into royalty buy-down agreements with
Fuddruckers, which reduce royalty payments required under the respective
franchise agreements. The royalty buy-down agreements generally provide for a
one-time payment to Fuddruckers covering a period of twelve to fourteen months,
and an amendment of the underlying franchise agreement to reduce the royalty to
3% of gross sales. Once a franchisee executes a buy-down agreement, the royalty
on any subsequent franchise agreement will be reduced to 3%.
8
Fuddruckers Locations - Company Owned
The following table sets forth the locations of restaurants owned and operated
by Fuddruckers as of October 2, 1998:
Domestic - Total 111 Domestic (Cont'd) Domestic (Cont'd)
ALABAMA KANSAS TEXAS
Birmingham Overland Park Austin (3)
ARIZONA KENTUCKY Clearlake
Flagstaff Florence Houston (11)
Glendale MARYLAND Irving
Mesa (2) Annapolis Kingwood
Phoenix (2) Baltimore Plano
Scottsdale Gaithersburg San Antonio (4)
Tempe Pikesville Stafford
Tucson Rockville Woodlands
CALIFORNIA MASSACHUSETTS UTAH
Burbank Boston Layton
Chula Vista MINNESOTA Orem
La Mesa Bloomington Sandy
Lake Forest Brooklyn Center Salt Lake
Lakewood Burnsville VIRGINIA
Pasadena Coon Rapids Alexandria
San Diego Eden Prairie Annandale
COLORADO Maple Grove Chesapeake (2)
Aurora Roseville Fairfax
Marston Park St. Louis Park Fredericksburg
Thornton MISSOURI Herndon
GEORGIA Independence Newport News
Alpharetta Maryland Heights Richmond
Atlanta St. Louis (2) Vienna
Duluth OHIO Virginia Beach
Kennasaw Cincinnati (2) Woodbridge
Marietta Columbus (4) WISCONSIN
Norcross Fields Ertel Brookfield
Peachtree City Forest Park
Snellville Hilliard
Tucker Norwood
ILLINOIS
Addison
Aurora
Calumet City
Downers Grove N
Downers Grove S
Highland Park
Matteson
Orland Park
Palatine
Schaumburg (2)
9
Fuddruckers Restaurants - Franchised Locations
The following table sets forth the locations of restaurants operated by
Fuddruckers franchisees as of October 2, 1998:
Domestic - Total 80 Domestic (Cont'd) Domestic (Cont'd)
CALIFORNIA Voorhees TENNESSEE
Buena Park Wayne Kingsport
Citrus Heights NEW YORK Murfreesboro
Concord Amherst Nashville (2)
Walnut Creek Westbury Sevierville
FLORIDA NORTH CAROLINA TEXAS
Altamonte Springs Asheville Beaumont
Clearwater Charlotte Dallas
Coconut Grove Durham Kennewick
Coral Springs Fargo Killeen
Ft. Lauderdale Hickory Laredo
Miami Huntersville Lubbock
N. Miami Beach Jacksonville McAllen
Plantation Matthews Midland
Tallahassee Wilmington San Antonio (2)
Tampa NORTH DAKOTA Temple
LOUISIANA Fargo Waco
Baton Rouge OHIO Washington
MARYLAND Canton
Owings Mills Cleveland International - Total 13
MASSACHUSETTS OREGON
North Andover Lake Oswego BAHRAIN
Saugus Portland Adliya
MICHIGAN PENNSYLVANIA Manama
Detroit Harmarville CANADA
Flint Lancaster Edmonton
Kentwood Philadelphia Saskatoon
Sterling Heights Fairless Hill KUWAIT
MONTANA SOUTH CAROLINA Kuwait City
Billings Columbia OMAN
Missoula Greenville (2) Muscat
NEBRASKA Hilton Head PUERTO RICO
Omaha Myrtle Beach Caguas
NEW JERSEY North Myrtle Beach Carolina
New Brunswick Spartanburg SAUDI ARABIA
Paramus SOUTH DAKOTA Al Khobar
Parsippany Rapids City Jeddah (2)
Tom's River Sioux Falls Riyadh
Turnersville UNITED ARAB EMIRATES
Union Dubai
10
The Proposed Fuddruckers Transaction
On July 31, 1998, the Company agreed to sell, subject to shareholder approval,
its Fuddruckers business to King Cannon (the "Proposed Fuddruckers
Transaction"). The Board believes that the sale of Fuddruckers is a key
strategic move for the Company. In July 1997 DAKA International, the Company's
predecessor, sold its foodservice business to alleviate a significant debt
burden and to position the Company for restoring the profitability of its
restaurant businesses, Fuddruckers and Champps. Since then, the Company has
accomplished many of its goals for the continued turnaround of Fuddruckers and
the expansion of Champps. However, such efforts have been constrained by limited
available capital resources. As the Board continued to explore strategic
alternatives to improve shareholder value, it concluded that a sale of
Fuddruckers at this time would allow the Company to realize the benefits of
Fuddruckers' improved performance and provide the capital needed to position the
Company for future growth.
Pursuant to the terms of the Stock Purchase Agreement, the Company proposes to
sell to King Cannon all of the issued and outstanding capital stock of
Fuddruckers (the "Shares"). The purchase price for Fuddruckers is $43 million,
subject to certain adjustments based on, among other things, the level of
Fuddruckers' fiscal 1998 EBITDA and closing date working capital. While the
adjustments are without limit, either the Company or King Cannon may refuse to
consummate the transaction if at the closing the purchase price less estimated
adjustments is less than $40 million, subject to the Company's obligations to
pay to King Cannon liquidated damages of $1,000,000.
The Board considered the following factors in reaching the conclusion to approve
the Stock Purchase Agreement and the transactions contemplated thereby:
The belief of the Company's management, which was adopted by the Board,
that the financial and investor community viewed the businesses of
Fuddruckers and of Champps as targeting very different segments of the
casual dining market and that this viewpoint has had a negative impact
on the price of the Company's common stock as Fuddruckers was perceived
as a constraint on Champp's growth prospects.
The Board's belief that the Proposed Transaction represents a more
desirable alternative than continuing to operate Fuddruckers. In this
connection, the Board gave consideration to the fact that, while
management has made significant progress in the continuing turnaround
of Fuddruckers' operations, continuing to operate Fuddruckers would
subject the Company and its shareholders to the risk of failing to
complete the full turnaround strategy, the burden of a significant
investment of management and financial resources and the uncertainty of
the future long-term performance of Fuddruckers' as a casual restaurant
concept. After evaluating such risks, the Board concluded that, while
the Company's turnaround strategy could ultimately prove successful,
the risk that Fuddruckers will continue to experience operating issues
adversely impacting the performance of the Company's common stock
justifies a sale of Fuddruckers pursuant to the Stock Purchase
Agreement.
The Board's consideration that, while sales trends and same-store sales
at Fuddruckers restaurants have shown improvement in the last fiscal
year and Fuddruckers is an established brand which continues to show
significant consumer acceptance, if the Company were to retain the
Fuddruckers business it would have to commit to the continuing
elimination of under-performing restaurants, the development of new
restaurants and a series of new initiatives aimed at reinvigorating the
Fuddruckers concept, introducing new menu items, increasing check
averages, broadening the guest base and increasing guest frequency. The
Board viewed the Proposed Transaction as a less risky and more
attractive alternative for the Company shareholders than the
development and execution of a long-term operating and growth strategy
for Fuddruckers.
The sale of Fuddruckers will allow the Company's management to focus
its attention and devote adequate capital resources to executing the
Champps operating and growth strategies.
11
The consideration to be paid by King Cannon to the Company consists
entirely of cash thereby enabling the Company to have funds available
for the operation and growth of Champps and other general corporate
purposes.
The Stock Purchase Agreement does not contain a financing condition for
King Cannon and, accordingly, the Company is less exposed to the risk
that King Cannon will be unable to obtain financing for the Proposed
Transaction. In the Stock Purchase Agreement, King Cannon has agreed to
pay the Company liquidated damages equal to $5 million as the Company's
sole and exclusive remedy if King Cannon fails to consummate the
Proposed Transaction for any reason, including lack of financing,
assuming that all conditions to closing are otherwise satisfied and the
Company has not breached the Stock Purchase Agreement.
The Board's determination that the consideration to be received by the
Company in the Proposed Transaction is fair to the Company's
shareholders from a financial point of view, which determination was
based on the Board's assessment of the business and financial results
of Fuddruckers.
The Board also considered the following risks and uncertainties associated with
consummation of the Proposed Transaction:
Following consummation of the Proposed Transaction, the Company's sole
remaining strategic business will be Champps and the Company's overhead
will have to be covered from a smaller revenue base.
The terms of the Stock Purchase Agreement provide that (i) should the
Board change its recommendation that the Company's stockholders vote
for the Proposed Transaction, the Company would be obligated to pay
King Cannon $1,720,000; and (ii) should the Proposed Transaction fail
to close because the purchase price after estimated adjustments is less
than $40 million or because the Company's shareholders fail to approve
it, the Company would be obligated to pay King Cannon $1,000,000.
In analyzing the Proposed Transaction and related transactions and in its
deliberations regarding the recommendation of the Stock Purchase Agreement, the
Board also considered a number of other factors, including (i) its knowledge of
the business, operations, properties, assets, financial condition and operating
results of Fuddruckers; (ii) judgments as to the Company's future prospects with
and without Fuddruckers; and (iii) the terms of the Stock Purchase Agreement,
which were the product of extensive arm's length negotiations. The Board did not
find it practical to and did not quantify or attempt to attach relative weight
to any of the specific factors considered by it. The Board did, however, find
that the positive factors listed above outweighed the potential risks of the
Proposed Transaction, and found the opportunity to generate increased
shareholder value through the sale of Fuddruckers compelling.
Notwithstanding expectations of the Company's senior management regarding the
benefits to be realized from the Proposed Transaction, no assurance can be given
that the Company will be able to realize such benefits or compete effectively
against certain other competitors that possess significantly greater resources
and marketing capabilities.
Terms of the Stock Purchase Agreement
The following discussion of the terms and conditions of the Stock Purchase
Agreement, while materially complete, is qualified in its entirety by reference
to the provisions of the Stock Purchase Agreement, which is filed as an Exhibit
to this Form 10K. Terms which are not otherwise defined in this summary have the
meaning set forth in the Stock Purchase Agreement, or an Exhibit thereto, as the
case may be. An index to all defined terms is set forth in Section 1.3(c) of the
Stock Purchase Agreement.
12
Purchase Price
The aggregate purchase price for the stock of Fuddruckers is $43.0 million in
cash (the "Unadjusted Purchase Price") subject to adjustment as described below.
On the Closing Date (as defined below), the Company will deliver to King Cannon
its good faith statement (the "Closing Statement") of Fuddruckers' Working
Capital (as defined in the Stock Purchase Agreement) as of the Closing Date (the
"Estimated Working Capital"). The Unadjusted Purchase Price shall be (i)
decreased by the amount of the EBITDA Adjustment (as defined in the Stock
Purchase Agreement); (ii) increased by the amount that the Estimated Working
Capital is more than $0 and decreased by the amount that the Estimated Working
Capital is less than $0, as the case may be; (iii) decreased by the amount of
the Maintenance Expenditure Adjustment (as defined in the Stock Purchase
Agreement); (iv) decreased by the amount of the Cash Payment Adjustment (as
defined in the Stock Purchase Agreement); and (v) decreased by the amount of the
Closed Store Adjustment (as defined in the Stock Purchase Agreement) (as so
adjusted, the "Estimated Purchase Price"). On the Closing Date, King Cannon is
required to pay, by wire transfer of immediately available funds, to such
account as the Company shall have designated, an amount equal to the Estimated
Purchase Price less (i) $1.0 million, which will be placed in escrow to support
the Company's indemnification obligations to King Cannon; (ii) if certain
required consents of landlords under leases covering certain Fuddruckers
restaurants are not obtained before the closing, an additional $1.0 million,
which would then be placed in escrow to fund possible losses from the
termination of such leases or increases in rent; and (iii) if certain contingent
and long-term liabilities of Fuddruckers are not settled or satisfied before the
closing, additional amounts to fund the payment thereof which would be placed in
dedicated escrow accounts until payment is required. The term "EBITDA
Adjustment" is defined as an amount equal to five (5) times the amount by which
Fuddruckers' earnings before interest, taxes, depreciation and amortization
(derived from the audited financial statements of Fuddruckers for the fiscal
year ended June 28, 1998, with certain adjustments described in detail in the
Stock Purchase Agreement) is less than $8.5 million. The Company believes its
EBITDA, calculated pursuant to the Stock Purchase Agreement, is in excess of the
minimum required amount of $8.5 million. Either the Company or King Cannon can
refuse to consummate the Proposed Transaction if the purchase price after
estimated adjustments as of the closing date is less than $40 million, subject
to the Company's obligation to pay to King Cannon liquidated damages equal to
$1.0 million.
In addition to the possible reduction in the purchase price as a result of the
various contingent adjustments and the payment of funds in escrow as summarized
above, the Company will be required to use a portion of the cash proceeds from
the Proposed Transaction to satisfy accrued and contingent liabilities which are
required by the Stock Purchase Agreement to be satisfied prior to and as a
condition of closing. The Company currently estimates that, exclusive of the
possible impact of any contingent adjustments and without deduction for amounts
deposited in escrow, it will have net cash proceeds remaining from the Proposed
Transaction between $33.0 million and $35.0 million after settling transaction
costs and obligations of Fuddruckers not assumed by King Cannon.
By no later than 120 days after the Closing Date, King Cannon may in its sole
discretion require that the Company purchase from King Cannon any Current Asset
(as defined in the Stock Purchase Agreement) (other than Inventory (as defined
in the Stock Purchase Agreement), cash and assumable prepaid expenses as of the
Closing Date which are reflected as Current Assets on the Closing Statement)
which had been reflected on the Company's Closing Statement, at an amount equal
to (i) in the case of any Current Receivable (as defined in the Stock Purchase
Agreement), the amount thereof set forth in the Company's Closing Statement
minus 100% of all amounts collected on account of such Current Receivable since
the Closing Date by King Cannon; and (ii) in the case of any other Current
Asset, the book value thereof as of the date on which the purchase thereof by
the Company takes place. The aggregate amount owed by the Company to King Cannon
on account of the foregoing asset transfers is the "Post-Closing Asset Transfer
Adjustment."
13
The Estimated Purchase Price shall be (i) if necessary, increased or decreased,
as the case may be, by the amount by which the Estimated Working Capital exceeds
or is exceeded by the Final Working Capital; and (ii) decreased by the amount of
the Post-Closing Asset Transfer Adjustment (as so adjusted, the "Final Purchase
Price").
At the closing, the Company will transfer to Fuddruckers certain furniture,
fixtures and equipment, consisting principally of office furniture, computer
workstations and related equipment located at the Company's corporate
headquarters and used by employees of the Company who will become employees of
Fuddruckers immediately after the closing.
The Closing
Upon the terms and subject to the conditions of the Stock Purchase Agreement,
the closing of the transactions contemplated by the Stock Purchase Agreement
(the "Closing") is scheduled to take place on or about November 2, 1998 (the
"Closing Date").
Representations and Warranties
The Stock Purchase Agreement contains various representations and warranties by
the Company and King Cannon. These include, without limitation, representations
and warranties by the Company as to (i) the organization, good standing, and
capitalization of Fuddruckers and its subsidiaries; (ii) proper corporate
authority, no conflicts, no violations and requisite approvals; (iii) ownership
of the Shares; (iv) accuracy of financial statements, books and records; (v)
absence of undisclosed liabilities and absence of material adverse change; (vi)
material litigation; (vii) compliance with law; (viii) employee benefit plans
and employee matters; (ix) tax matters; (x) title to and condition of assets;
(xi) leases and real property; (xii) certain contracts and licenses; (xiii)
intellectual property matters; (xiv) insurance policies; (xv) brokers, finders
and fees; (xvi) franchises; and (xvii) environmental matters.
The Stock Purchase Agreement also contains representations and warranties of
King Cannon, including, without limitation, representations and warranties as to
(i) the organization and good standing of King Cannon; (ii) proper corporate
authority, no conflicts, no violations and requisite approvals; (iii) minimum
net worth; (iv) capitalization; (v) material litigation; (vi) compliance with
laws; and (vii) brokers, finders and fees.
For a description of the survivability of the representations and warranties and
related indemnification, see "Survival of Representations and Warranties;
Indemnification."
Certain Covenants
The Stock Purchase Agreement also contains various covenants of the Company,
Champps and King Cannon. During the period from the date of the Stock Purchase
Agreement to the Closing Date, the Company will, among other things:
(i) conduct Fuddruckers only in the ordinary course consistent with
past practice, and use its commercially reasonable efforts to (a)
maintain Fuddruckers' assets and those assets of the Company that are
used in Fuddruckers' business in their current condition subject to
additions, deletions and normal wear and tear in the ordinary course,
(b) preserve intact the current business organization of Fuddruckers
and of the Company to the extent related to Fuddruckers' business, (c)
keep available the services of the current officers, employees and
agents of Fuddruckers and those employees of the Company who perform
services for Fuddruckers, and (d) maintain the relations and good will
with suppliers, customers, landlords, creditors, franchisees,
employees, agents, and others having material business relationships
with Fuddruckers or with the Company to the extent related to the
Fuddruckers business;
14
(ii) ensure that none of the changes or events listed in Section 4.1(E)
of the Stock Purchase Agreement occurs without the prior written
consent of King Cannon;
(iii) perform, pay or discharge, or cause Fuddruckers to perform, pay
or discharge, certain specified liabilities including (a) the cost of
terminating certain operating leases for equipment used in the
Fuddruckers business, (b) all non-current liabilities of Fuddruckers,
and (c) the anticipated cost of performing certain contingent or
deferred liabilities of Fuddruckers;
(iv) transfer to itself, or otherwise assume responsibility for in a
manner and on terms reasonably satisfactory to King Cannon, all assets
and liabilities relating to any "Fuddruckers" location that is no
longer operating as a "Fuddruckers" restaurant on the Closing Date;
(v) pay and discharge all liabilities in regard to any concluded legal
proceeding (except for any such legal proceeding as to which the
Company is pursuing an appeal) that (a) has been reduced to a judgment
against Fuddruckers or the Company to the extent relating to
Fuddruckers' business, (b) is the subject of an executed settlement
agreement, or (c) is otherwise concluded as of the Closing Date;
(vi) file, or cause to be filed, UCC-3 termination statements and
obtain, or cause to be obtained, any other releases, consents or
similar documents necessary to release liens on Fuddruckers' assets,
the Company's assets related to Fuddruckers' business or the Shares;
and
(vii) spend not less than $250,000 per month (or pro rated for any
partial month) on capital expenditures.
In addition, at the closing, the Company expects to enter into an agreement with
King Cannon covering certain transitional arrangements, including without
limitation (i) causing the Company's data processing and consulting services
provider to provide such services to Fuddruckers after the closing in
consideration of a payment to the Company of $40,000 per month toward the cost
of such services; (ii) providing to Fuddruckers 10,000 square feet of office
space at the Company's corporate headquarters at an all-inclusive monthly rent
of $20 per square foot; (iii) cooperating with Fuddruckers with respect to the
hiring of any Company employees who have been assigned to perform services for
Fuddruckers; and (iv) other miscellaneous transitional matters.
Non-Competition
As part of the consideration under the Stock Purchase Agreement, each of the
Company and Champps agreed that, for a period of ten years following the Closing
Date, neither will (i) directly or indirectly, own, manage, operate, finance,
join, or control, or participate in the ownership, management, operation,
financing or control of, or be associated as a partner or representative in
connection with, any restaurant business that is in the gourmet hamburger
business or whose method of operation or trade dress is similar to that employed
in the operation of the "Fuddruckers" restaurants; or (ii) directly or
indirectly solicit, induce or attempt to induce any person then employed by
Fuddruckers or King Cannon to enter the employ of the Company or Champps, or any
of their respective affiliates.
Nothing contained in the Stock Purchase Agreement limits the right of the
Company or Champps to operate the business of Champps as it is currently
conducted or other restaurant concepts that do not compete directly with
Fuddruckers or to own less than a 5% legal or beneficial ownership in the
outstanding equity securities of any publicly traded corporation.
15
The Company's Closing Conditions
The obligation of the Company to consummate the transactions contemplated by the
Stock Purchase Agreement is subject to satisfaction or waiver of the following
conditions:
(i) each of King Cannon's representations and warranties in the Stock
Purchase Agreement must have been accurate in all respects as of the
date of the Stock Purchase Agreement and must be accurate in all
respects as of the Closing Date as if made on the Closing Date, except
for such breaches as would not, in the aggregate, have a material
adverse effect on King Cannon and which King Cannon undertakes to cure
within 30 days following the Closing Date with such obligation to
survive the Closing Date as a covenant of King Cannon;
(ii) each of the covenants and obligations that King Cannon is required
to perform or to comply with pursuant to the Stock Purchase Agreement
on or prior to the Closing Date must be duly performed and complied
with and King Cannon must deliver each of the documents required to be
delivered by it;
(iii) as of the Closing Date, there shall be no effective injunction,
writ or preliminary restraining order or any order of any nature issued
by a court or governmental entity of competent jurisdiction directing
that any of the transactions contemplated in the Stock Purchase
Agreement not be consummated, and no legal proceeding shall have been
commenced or threatened in writing by any person against the Company
seeking to enjoin or obtain damages in respect of the consummation of
any transaction contemplated by the Stock Purchase Agreement;
(iv) the Proposed Transaction shall have been approved and adopted by
the requisite vote of the Company's shareholders; and
(v) the Estimated Purchase Price shall not be less than $40,000,000.
King Cannon's Closing Conditions
The obligation of King Cannon to consummate the transactions contemplated by the
Stock Purchase Agreement are subject to the satisfaction or waiver at or prior
to the Closing Date of the following conditions:
(i) each of the Company's representations and warranties in the Stock
Purchase Agreement must have been accurate in all respects as of the
date of the Stock Purchase Agreement, and must be accurate in all
respects as of the Closing Date as if made on the Closing Date, except
for such breaches as could not reasonably be anticipated to result in,
in the aggregate, a material adverse effect on Fuddruckers' business
and which the Company undertakes to cure within 30 days following the
Closing Date with such cure obligation to survive the Closing as a
covenant of the Company;
(ii) each of the covenants and obligations that the Company is required
to perform or to comply with pursuant to the Stock Purchase Agreement
as of or prior to the Closing Date must be duly performed and complied
with and the Company must deliver each of the documents required to be
delivered by it pursuant to Section 3.2(A) of the Stock Purchase
Agreement;
(iii) as of the Closing Date, there shall be no effective injunction,
writ or preliminary restraining order or any order of any nature issued
by a court or governmental entity of competent jurisdiction directing
that any of the transactions contemplated in the Stock Purchase
Agreement not be consummated, and no legal proceeding shall have been
commenced or threatened in writing by any person against King Cannon or
Fuddruckers seeking to enjoin or obtain damages in respect of the
consummation of any transaction contemplated by the Stock Purchase
Agreement;
16
(iv) there must not have been made or threatened in writing by any
person any claim asserting that such person is the holder or the
beneficial owner of, or has the right to acquire or to obtain
beneficial ownership of, any of the Shares, or any equity securities in
Atlantic Restaurant Ventures, Inc. (other than the equity securities
owned by North American Restaurants Limited Partnership);
(v) King Cannon shall have obtained current appraisals from an "MAI"
appraiser selected by the Company and acceptable to the financial
institution providing financing to King Cannon in connection with the
transactions contemplated by the Stock Purchase Agreement of the value
of each of Fuddruckers' owned real properties, which value shall not
be, in the aggregate for all of such owned real properties, less than
$12,500,000;
(vi) King Cannon shall have obtained, at King Cannon's sole cost and
expense, updated Environmental Site Assessment ("ESA") reports for each
of Fuddruckers' owned real properties (the "Updates") and except as set
forth below, such Updates shall either (a) confirm that the conclusions
and/or recommendations set forth in existing ESA reports or (b) set out
modified conclusions and/or recommendations which are determined to be
acceptable to King Cannon in King Cannon's sole discretion; and
(vii) the Estimated Purchase Price shall not be less than $40,000,000.
Termination
The Stock Purchase Agreement may be terminated (subject to a termination fee
under certain circumstances as described below) and the transactions
contemplated by the Stock Purchase Agreement may be abandoned at any time prior
to the Closing Date:
(i) by the mutual consent of King Cannon and the Company;
(ii) by either King Cannon or the Company if a material breach of any
provision of the Stock Purchase Agreement has been committed by the
other party and such breach has not been waived by the terminating
party;
(iii) (a) by King Cannon if any of the conditions precedent to King
Cannon's obligation to close have not been satisfied as of the Closing
Date or if satisfaction of any such condition is or becomes impossible
(other than through the failure of King Cannon to comply with its
obligations under the Stock Purchase Agreement) and King Cannon has not
waived such condition on or before the Closing Date, or (b) by the
Company if any of the conditions precedent to the Company's obligation
to close have not been satisfied as of the Closing Date or if
satisfaction of any such condition is or becomes impossible (other than
through the failure of the Company to comply with its obligations under
the Stock Purchase Agreement) and the Company has not waived such
condition at or before the Closing Date;
(iv) by the Company if (a) the Board withdraws or modifies its approval
or recommendation to the Company's shareholders of, or otherwise fails
to approve or recommend, the Proposed Transaction and the consummation
of the transactions contemplated by the Stock Purchase Agreement, and
(b) the Company pays to King Cannon an alternative transaction fee
equal to $1,720,000, promptly upon such withdrawal, modification or
failure, by wire transfer of immediately available funds to such
account as shall have been designated by King Cannon; or
(v) by either King Cannon or the Company if the Closing has not
occurred (other than through the failure of any party seeking to
terminate the Stock Purchase Agreement to comply fully with its
obligations under the Stock Purchase Agreement) on or before November
2, 1998 (the "Outside Date") or such later date as the parties may
agree upon; provided, however, that notwithstanding anything to the
17
contrary in the Stock Purchase Agreement (a) if on November 2, 1998 the
applicable waiting periods under the Hart-Scott-Rodino Act have not
expired or terminated then each of King Cannon and the Company shall
have the independent right, exercisable in its sole discretion by
delivery of written notice thereof to the other on or before November
2, 1998, to extend the Outside Date to the earlier of five (5) business
days after such regulatory approvals have been obtained or December 15,
1998 and (b) if on November 2, 1998 the Company has not obtained the
consents required to be delivered pursuant to Section 3.2(A)(5) of the
Stock Purchase Agreement, then the Company shall have the right
exercisable in its sole discretion by delivery of written notice
thereof to King Cannon on or before November 2, 1998 to extend the
Outside Date to December 15, 1998.
Termination Fees
In the event that the Closing does not occur on or prior to the Outside Date (as
the same may be extended) due to King Cannon's breach of its obligations under
the Stock Purchase Agreement, the Company's sole and exclusive remedy against
King Cannon under the Stock Purchase Agreement and with respect to the
transactions contemplated thereby shall be to exercise its rights to terminate
the Stock Purchase Agreement and to receive the payment from King Cannon of cash
in an amount equal to $5,000,000 as liquidated damages with respect to which
King Cannon has furnished a letter of credit for the benefit of the Company. In
the event that the closing does not occur on or prior to the Outside Date (as
the same may be extended) due to the non-satisfaction of the conditions
contained in Section 8.7 or Section 9.5 of the Stock Purchase Agreement or the
failure of the Company's shareholders to approve the Proposed Transaction where
the Board has approved or recommended the same to the shareholders (without
modification or withdrawal of such approval or recommendation), the Company
shall pay to King Cannon an amount equal to $1,000,000 as liquidated damages
(and not as a penalty) in consideration of the time, the fees and expenses spent
or incurred by King Cannon, or on its behalf, in connection with the Stock
Purchase Agreement and the transactions contemplated hereby.
Survival of Representations and Warranties
All representations and warranties of the parties contained in the Stock
Purchase Agreement will survive the Closing and will expire on December 31, 2000
(the "Survival Period") except that (i) representations and warranties made by
the Company relating to environmental matters will survive the Closing Date
until December 31, 2003, (ii) representations and warranties made by the Company
relating to employee matters and income taxes will survive the Closing Date
until expiration of applicable statutes of limitations and (iii) representations
and warranties made by the Company in (a) Section 4.1(A) of the Stock Purchase
Agreement with respect to the due organization, valid existence and good
standing of the Company and Fuddruckers, as well as with respect to the matters
referred to in the last two sentences of Section 4.1(A), (b) Section 4.1(B)
(except for clause (iv) and the last sentence thereof) of the Stock Purchase
Agreement, and (c) Section 4.1(C) shall survive the Closing indefinitely. In
addition, any covenants or agreements of the Company under the Stock Purchase
Agreement, and any and all indemnification obligations relating thereto shall
survive the Closing indefinitely, unless earlier expiring in accordance with
their respective terms, including, without limitation, the Company's
indemnification obligations with respect to covenants and the items described in
Section 13.14(A)(2), Section 13.14(A)(3), and Section 13.14(A)(4) of the Stock
Purchase Agreement.
King Cannon's representations and warranties under the Stock Purchase Agreement,
and its indemnification obligations arising from such representations and
warranties, will survive the Closing and will expire and terminate on December
31, 2000. Any covenants or agreements of King Cannon under the Stock Purchase
Agreement, and any and all indemnification obligations relating thereto will
survive the Closing indefinitely, unless earlier expiring in accordance with
their respective terms.
18
The Company's and Champps' Indemnification Obligations
The Company and Champps will jointly and severally indemnify, defend and hold
harmless King Cannon and Fuddruckers, each affiliates of King Cannon and
Fuddruckers, and each of the employees, officers, directors, stockholders,
members, managers, partners and representatives of any one of them, from and
against any losses, assessments, liabilities, claims, obligations, damages,
costs or expenses (including without limitation reasonable attorneys' fees and
disbursements) which arise out of or relate to:
(i) any misrepresentation in, breach of or failure to comply with, any
of the representations, warranties, undertakings, covenants or
agreements of the Company, Fuddruckers or any affiliate of any of them
contained in the Stock Purchase Agreement;
(ii) any Environmental Matters (as defined in Section 13.14 of the
Stock Purchase Agreement);
(iii) any Retained Liabilities (as defined in the Stock Purchase
Agreement); or
(iv) obligations of the Company under Section 2.4 of the Stock Purchase
Agreement with respect to Lease Termination Amounts and Rent Adjustment
Amounts (as such terms are defined in the Stock Purchase Agreement).
The Company shall not have any obligation to indemnify King Cannon on account of
any breach of any representation or warranty as described in clause (1) above
unless and until King Cannon's losses paid or incurred by King Cannon on account
of all such breaches of representations and warranties exceed $100,000 in the
aggregate, in which event King Cannon will be entitled to such indemnification
in respect of all such losses, including without limitation such initial
$100,000.
King Cannon's Indemnification Obligations
King Cannon will indemnify, defend and hold harmless the Company and its
employees, officers, directors, partners and representatives (other than any of
the foregoing as may become employees of Fuddruckers or King Cannon at or after
the Closing) from and against any losses, assessments, liabilities, claims,
obligations, damages, costs or expenses (including without limitation reasonable
attorneys' fees and disbursements) which arise out of or relate to:
(i) any misrepresentation in, breach of or failure to comply with, any
of the representations, warranties, covenants or agreements of King
Cannon contained in the Stock Purchase Agreement; or
(ii) Transferred Liabilities (as defined in the Stock Purchase
Agreement).
King Cannon will not have any obligation to indemnify the Company on account of
any breach of any representation or warranty unless and until the Company's
losses paid, incurred, suffered or accrued on account of all breaches of
representations and warranties exceed $100,000 in the aggregate, in which event
the Company will be entitled to indemnification in respect of all such losses,
including without limitation such initial $100,000.
Indemnification Caps
The maximum aggregate liability of the Company on account of any breach of any
representation or warranty is limited to the amount of the Final Purchase Price.
There is no cap or limit on the liability of the Company to King Cannon on
account of any breach by the Company of any of its covenants or agreements under
the Stock Purchase Agreement or on account of indemnification obligations
covering matters other than breaches of representations and warranties, provided
that, if King Cannon is entitled to recover any losses in excess of the Final
Purchase Price, the Company may either (i) require King Cannon to reconvey to
19
the Company full ownership and control of the Shares and all assets (to the
extent then owned by King Cannon or Fuddruckers) that are being transferred
pursuant to the Stock Purchase Agreement in such a manner as to rescind the
transactions contemplated by the Stock Purchase Agreement, in which case the
Company will pay King Cannon an amount equal to (x) the Final Purchase Price
plus (y) all additional investments made in Fuddruckers following the Closing
plus (z) an amount equal to an internal rate of return equal to 25% on the sum
of items (x) and (y); or (ii) pay to King Cannon all of the losses with respect
to which King Cannon is entitled to indemnification.
The maximum aggregate liability of King Cannon on account of any breach of any
representation or warranty is limited to $5,000,000. There is no cap or limit on
the liability of King Cannon to the Company on account of any breach by King
Cannon of any of its covenants or agreements under the Stock Purchase Agreement
or on account of indemnification obligations covering matters other than
breaches of representations and warranties.
Expenses
Whether or not the Proposed Transaction is consummated, and except as otherwise
expressly set forth in the Stock Purchase Agreement, all costs and expenses
(including legal and financial advisory fees and expenses) incurred in
connection with, or in anticipation of, the Stock Purchase Agreement and the
transactions contemplated thereby will be paid by the party incurring such
expenses. the Company and King Cannon will each pay one half of the filing fee
required under the Hart-Scott-Rodino Act. the Company will pay all fees and
expenses related to filings with governmental entities relating to business
licenses, which filings are required to be made following the Closing.
Centralized Functions
During fiscal 1998, the Company provided Fuddruckers and Champps with
centralized purchasing, accounting and management information services. The
Company has arranged with King Cannon to "share" certain functions post closing
through June 1999. The shared functions, which can be terminated on 30 days
notice, are purchasing, payroll, accounts payable, risk management and
technology support.
Purchasing
The Company capitalizes on the diversity of its businesses through a centralized
and coordinated purchasing program and food distribution network. On November
15, 1997, the Company entered into a five-year distribution agreement with Sysco
Corporation ("Sysco") pursuant to which Sysco is entitled to distribute not less
than 80% of food and food-related purchases of Fuddruckers and Champps. The
agreement with Sysco is cancelable by either party upon 60 days notice.
Fuddruckers and Champps franchisees also have the option of purchasing from
Sysco.
The Company also acts as a restaurant equipment dealer, enabling it to take
advantage of dealer pricing, manufacturer discounts and rebates. The Company has
not experienced any difficulty in obtaining an adequate supply of quality food
products at acceptable prices from its suppliers.
20
Accounting and Management Information Systems
During fiscal 1998, the Company provided Fuddruckers and Champps with
centralized financial and management controls through the use of an automated
data processing system and prescribed reporting procedures. The Company
continues to upgrade its computer hardware and financial software and has
recently implemented a new point of sale system for its Fuddruckers restaurants.
The restaurants forward weekly sales reports, vendor invoices, payroll
information and other operating information to the Company's corporate
headquarters. The Company utilizes this data to centrally monitor sales,
product, labor and other costs and to prepare periodic financial and management
reports. The Company believes that its centralized accounting, payroll, cash
management and information systems improve its ability to control and manage its
operations efficiently.
Effective July 1, 1997, the Company entered into a sale and services agreement
with RCS whereby the Company sold to RCS for an aggregate purchase price of $2.3
million certain data processing equipment. The purchase price will be satisfied
through the repayment of a promissory note due June 30, 2002 which bears
interest at 6% per annum. The promissory note was contributed to the Company as
part of the Additional Capital Contribution. The Company also received DAKA
International's 50% interest in RCS at the Transaction Date. In connection with
this sale, the Company has entered into a management agreement with RCS whereby
the Company has agreed to provide certain managerial services to RCS. In
addition, the Company has entered into a two year service agreement with RCS for
data processing and consulting services for an annual fee of $1.8 million. The
Company consolidates RCS operations until such time as the obligations of RCS to
the Company are satisfied.
Competition
The restaurant industry is highly competitive. Fuddruckers and Champps 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. Site location, quality of
service and attractiveness of facilities are also important factors for a
successful restaurant. The restaurant industry is affected by general economic
conditions, changing tastes, population, traffic patterns and spending habits of
guests. Fuddruckers believes that their competitive position is enhanced by
providing guests with moderately-priced quality food in a comfortable
atmosphere.
The Company believes that the businesses of Fuddruckers and Champps share
important characteristics in their desire to provide guests with discernible
value and the highest quality of customer service and dining atmosphere. Factors
such as service, cleanliness and atmosphere are as important in a guest's dining
decision as menu and food quality. In response to this trend, the Company has
provided training, education and motivational programs for its associates to
focus on providing quality service and to sustain a sensitivity to guest needs.
The Company believes that by operating in a professional, restaurant-style
manner where each of its associates place the guest first, Fuddruckers and
Champps can win guest loyalty.
Government Regulation
The Company is subject to various federal, state and local laws affecting its
business. Its operations are subject to various health, sanitation and safety
standards, federal and state labor laws, zoning restrictions and state and local
licensing. Federal and state environmental regulations have not had a material
effect on the Company's operations to date. Fuddruckers and Champps are also
subject to federal and state laws regulating franchise operations and sales.
Such laws impose registration and disclosure requirements on franchisors in the
offer and sale of franchises, or impose substantive standards on the
relationship between franchisor and franchisee.
21
Fuddruckers and Champps restaurants are subject to state and local licensing and
regulation with respect to selling and serving alcoholic beverages. The sale of
alcoholic beverages accounted for approximately 3.0% of Fuddruckers' and 35% of
Champps' total restaurants sales during fiscal year 1998. The failure to receive
or retain, or a delay in obtaining, a liquor license in a particular location
could adversely affect Fuddruckers', Champps' or a franchisee's operation in
that location and could impair Fuddruckers', Champps' or such franchisee's
ability to obtain licenses elsewhere. Typically, licenses must be renewed
annually and may be revoked or suspended for cause.
Fuddruckers and Champps restaurants are subject to "dram shop" statutes in
certain states. These statutes generally give a person injured by an intoxicated
person the right to recover damages from the establishment that has wrongfully
served alcoholic beverages to the intoxicated person. Fuddruckers and Champps
each carry liquor liability coverage in the amount of $1.0 million per
occurrence subject to a policy aggregate of $25.0 million. However, a judgment
against Fuddruckers or Champps under a "dram shop" statute in excess of
Fuddruckers' or Champps' liability coverage, or any inability to continue to
obtain such insurance coverage at reasonable costs, could have a material
adverse effect on the Company, Fuddruckers or Champps.
Research and Development
The Company is engaged in research activities relating to the development or
improvement of new and existing products or services. Fuddruckers and Champps,
together with their franchisees, utilize test kitchen facilities to develop
recipes, test food products and equipment and set nutritional and quality
standards. Fuddruckers, Champps, and their franchisees test additional menu
items in various markets on an on-going basis. These tests are coordinated
through the corporate headquarters. Furthermore, the Company employs a
professional support staff to establish, maintain and enforce high standards of
sanitation and safety in all phases of food preparation and service. The cost of
research and development currently is not material to the Company's cost of
operations.
Service Marks
The Company, through its operating subsidiaries, has registered a number of
trademarks and service marks with the United States Patent and Trademark Office
and with certain states, including the trade names: "Fuddruckers" and the
"Fuddruckers -- World's Greatest Hamburgers" logo; "Champ's", "Champps",
"Champps American Sports Cafe" and "Champps Entertainment"; "The Great Bagel &
Coffee Company"; the "French Quarter Coffee Co.; and, "Leo's Deli", in
connection with providing bar and restaurant services, and in connection with
the sale of related food products (collectively, the "Marks").
Pursuant to a Master Agreement dated February 1, 1994, whereby Champps acquired
certain "Champ's" and "Champps" service marks, trademarks and trade names from
Champs Restaurants, Inc. ("CRI"), Champps pays CRI an annual fee equal to the
lesser of approximately $260,000 or one-quarter percent (0.25%) of the gross
sales of Champps restaurants, but in no event less than $40,000. The maximum fee
payable by Champps is increased annually by the lesser of the increase in the
Consumer Price Index or 4%.
All of the service marks, trade names and trademarks are of significant
importance to the businesses of Fuddruckers and Champps. Fuddruckers and Champps
have also registered various service marks in several foreign countries. The
Company and its subsidiaries intend to protect their service marks through
registration with appropriate governmental authorities.
Seasonality
Fuddruckers and Champps sales are historically higher in the spring and
summer-time months, due primarily to dining habits of its guests and eating out
trends of the general public.
22
Corporate Offices and Associates
The Company is incorporated under the laws of the State of Delaware and employs
approximately 50 associates on a full-time basis, two of which are executive
officers.
Fuddruckers is incorporated under the laws of the State of Texas and employs
approximately 5,000 associates on a full-time and part-time basis.
Champps is incorporated under the laws of the State of Minnesota and employs
approximately 3,000 associates on a full-time and part-time basis. Substantially
all restaurant associates, other than restaurant management, are compensated on
an hourly basis.
None of the Company's or its subsidiaries' employees are covered by collective
bargaining agreements. The Company considers its relations with its associates
to be good.
The Company and Fuddruckers maintain their principal executive offices at One
Corporate Place, 55 Ferncroft Road, Danvers, Massachusetts 01923. The telephone
number for the Company is (978) 774-6606.
Champps maintains its principal executive offices at 153 East Lake Street,
Wayzata, Minnesota, 55391. The telephone number for Champps is (602) 449-4841.
Spin-off Transaction
On May 27, 1997, DAKA International and its wholly-owned subsidiary, Daka, Inc.,
a Massachusetts corporation ("Daka"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Compass Interim, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Holdings, Inc., a Delaware
corporation, a wholly-owned subsidiary of Compass Group PLC incorporated in
England and Wales (collectively "Compass"), pursuant to which Compass agreed,
upon the satisfaction of certain conditions, to commence a tender offer (the
"Offer") for all of the outstanding shares of DAKA International common stock
(the "Merger"). The Offer was consummated on July 17, 1997. Immediately prior to
the consummation of the Offer, pursuant to a plan of contribution and
distribution as described in the Reorganization Agreement (the "Reorganization
Agreement"), dated as of May 27, 1997, by and among DAKA International, Daka,
the Company and Compass, DAKA International and certain of its subsidiaries,
including Daka and the Company, made various contributions of assets and equity
interests to each other in the form of dividends and capital contributions in
order to divest DAKA International of its restaurant businesses which were
contributed to the Company.
Certain non-restaurant operating assets and liabilities of DAKA International
were also contributed to the Company (the "Additional Capital Contribution")
consisting of notes receivable, property and accounts payable, accrued expenses,
and contingent liabilities. These net assets and liabilities, which resulted in
a decrease to stockholders' equity of approximately $1.5 million, were recorded
within their respective captions during fiscal 1998.
Following the consummation of the Offer, Compass merged with and into DAKA
International. Pursuant to the Offer, DAKA International distributed to each
holder of record of shares of DAKA International common stock, one share of
common stock of the Company for each share of DAKA International owned by such
stockholder (the "Distribution"). No consideration was paid by DAKA
International's stockholders for the shares of the Company's common stock. As a
result of the Distribution, the Company ceased to be a subsidiary of DAKA
International and began operating as an independent, publicly-held company on
July 17, 1997.
23
The following summary of certain provisions of the Agreements with Compass does
not purport to be complete and is qualified in its entirety by reference to the
full text of such Agreements (copies of which have been filed as an exhibit to
the Registration Statement No. 000-22639 on Form 10 originally filed June 3,
1997).
The Tax-Allocation Agreement
The Company, DAKA International and Compass have entered into a tax allocation
agreement which sets forth each party's rights and obligations with respect to
payments and refunds, if any, of federal, state, local or foreign taxes for
periods before and after the Merger and related matters such as the filing of
tax returns and the conduct of audits and other tax proceedings. In general,
under the tax allocation agreement, the Company will be responsible for all tax
liabilities of DAKA International and Daka and the Company for periods (or
portions of periods) ending on or before the effective date of the Distribution
and will have the benefit of any tax refunds, tax credits or loss carryforwards
arising in such pre-Distribution periods. For periods (or portions of periods)
beginning after the effective date of the Distribution, in general, the Company
will be responsible for tax liabilities of the Company, and DAKA International
will be responsible for tax liabilities of DAKA International and Daka.
Indemnification by the Company
The Post-Closing Covenants Agreement provides that except as otherwise
specifically provided the Company, will indemnify, defend and hold harmless
Compass, from and against, and pay or reimburse Compass for, all losses,
liabilities, damages, deficiencies, obligations, fines, expenses, claims,
demands, actions, suits, proceedings, judgments or settlements, including
certain interest and penalties, out-of-pocket expenses and reasonable attorneys'
and accountants' fees and expenses incurred in the investigation or defense of
any of the same or in asserting, preserving or enforcing any of Compass' rights
suffered by Compass ("Indemnifiable Losses"), as incurred relating to or arising
from the Assumed Liabilities, including without limitation the Special
Liabilities (as defined in the Post Closing Covenants Agreement) (including the
failure by the Company or any of its subsidiaries to pay, perform or otherwise
discharge such Assumed Liabilities in accordance with their terms), whether such
Indemnifiable Losses relate to or arise from events, occurrences, actions,
omissions, facts or circumstances occurring, existing or asserted before, at or
after the Spin-off. The scope and amount of such liabilities is subject to a
high degree of uncertainty and risk. Although the Company has estimated the
amount of liabilities due, there can be no assurance that such amounts to be
ultimately paid will not differ from the Company's estimate and such difference
could be material. Under the terms of the Merger Agreement and related
agreements, the Company is required to collateralize or otherwise ensure for the
benefit of Compass its ability to meet its obligations with respect to its
indemnification obligations and other liabilities. Such requirement may reduce
the Company's access to cash balances for a significant period of time after the
Spin-off and may also constrain the Company's cash flow.
Covenant Not to Compete
In the Post-Closing Covenants Agreement, the Company agreed that, for a period
of five years following the Spin-off, it would not directly or indirectly,
either individually or as an agent, partner, shareholder, investor, consultant
or in any other capacity, (i) participate or engage in, or assist others in
participating or engaging in, the business of providing contract catering,
contract food and vending services to business and industry, educational
institutions, airports, healthcare or museums or similar leisure facilities in
the continental United States but excluding food service at certain retail
outlets (the "Restricted Business"); (ii) influence or attempt to influence any
customer of Compass or Daka to divert its business from Compass or Daka to any
person then engaged in any aspect of the Restricted Business in competition with
Compass or Daka; or (iii) solicit or hire any of the foodservice employees at
the district manager level or above, either during the term of such person's
employment by DAKA International or Daka or within 12 months after such person's
employment has ceased for any reason, to work for the Company or any person in
any aspect of foodservice (including vending service) in competition with
Compass, or Daka.
24
Item 2. Properties.
As of June 28, 1998, the Company leased approximately 44,000 square feet of
office space at its corporate headquarters in Danvers, Massachusetts, at an
average annual rent of $722,000 through November 30, 2001. Compass subleased
approximately 20,000 square feet from the Company in fiscal 1998 at a rent equal
to one-half the Company's annual rent. Compass is expected to continue to lease
this space on the same terms through December, 1998; and may lease the space for
up to 30 days thereafter. King Cannon has agreed to sub-lease 10,000 square feet
at a monthly rent consistent with the Company's rent on a per square foot basis
for an indefinite period subject to a 120 day termination notification. The
Company will seek a sub-lease tenant to replace Compass in fiscal 1999.
Fuddruckers owns the land and related improvements at 12 of the 111
Fuddruckers-owned restaurants with the balance of the restaurants operated
pursuant to long-term leases.
Champps leases approximately 4,000 square feet for its corporate office, located
in Wayzata, Minnesota, pursuant to a five-year lease at an average annual rent
of $70,800.
Item 3. Legal Proceedings.
On October 18, 1996, a purported class action lawsuit was filed in the United
States District Court for the District of Massachusetts on behalf of persons who
acquired DAKA International's common stock between October 30, 1995 and
September 9, 1996 (Venturino et al. V. DAKA International, Inc. and William H.
Baumhauer, Civil Action No. 96-12109-GAO). The complaint alleges violations of
federal and state securities laws by, among other things, allegedly
misrepresenting and/or omitting material information concerning the results and
prospects of Fuddruckers during that period and seeks compensatory damages and
reasonable costs and expenses, including counsel fees. On December 19, 1997, the
parties entered into a Stipulation and Agreement of Settlement pursuant to which
defendants deny any wrongdoing, and the parties agree to settle the matter as a
class action, subject to the court's approval, with payment of $3.5 million to
the class. The Company has agreed to indemnify Compass (the successor owner of
DAKA International, Inc.) for any losses or expenses associated with the
complaint. On February 10, 1998, the Company announced that it had agreed to
settle the case for $3.5 million. While defendants deny all of the allegations
in the complaint and any wrongdoing whatsoever, they believe that settlement of
the case was in the best interests of the Company and its shareholders to avoid
the costs and risks of litigation. The settlement had no impact on results of
operations and the settlement payment was funded from restricted cash deposits
previously set aside for this contingency. As a result of the settlement,
approximately $1.5 million in restricted cash deposits were returned to the
Company. On January 27, 1998, the court preliminarily approved the settlement
and set the timetable for granting final approval. The court concluded a final
settlement hearing on April 27, 1998. The court took the matter under advisement
and has not yet made its final determination concerning the settlement. While
the Company cannot predict when the court will make that determination or what
the court's determination ultimately will be, the Company believes that the
ultimate outcome of this matter will not have a material adverse effect on the
Company's consolidated financial condition, results of operations or cash flows.
The Company has agreed to assume certain contingent liabilities of DAKA
International in connection with the Spin-off in addition to the matter
discussed above. Further, the Company is also engaged in various other actions
arising in the ordinary course of business. The Company believes, based upon
consultation with legal counsel, that the ultimate collective outcome of these
other matters will not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows.
25
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. The Company expects to submit
the Fuddruckers transaction to a vote of stockholders during October 1998. See
"The Proposed Fuddruckers Transaction."
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholdee
Matters.
The Company's common stock has been listed on the Nasdaq National Market
("Nasdaq") under the symbol "UNIQ" since July 17, 1997, the date on which the
Company became a publicly trade company as a result of its spin-off from DAKA.
The table below sets forth, since such date and for the calendar periods
indicated, the high and low intra-day sales price per share of the Common Stock
as reported on the Nasdaq. The Company has no history of market price for its
common stock prior to such date and data with respect to the common stock of
DAKA, as predecessor of the Company, which was listed on Nasdaq before July 17,
1997, would not be meaningful.
High Low
Fiscal 1998
First Fiscal Quarter (after July 17, 1997) $ 7.44 $ 6.13
Second Fiscal Quarter 7.06 5.75
Third Fiscal Quarter 7.00 5.81
Fourth Fiscal Quarter 6.50 5.13
Fiscal 1999
First Fiscal Quarter 7.38 4.50
Second Fiscal Quarter (through October 2, 1998) 5.75 4.88
On October 2, 1998, there were 2,852 holders of record of the Company's Common
Stock .
The Company has never paid cash dividends on shares of its Common Stock and does
not expect to pay dividends in the foreseeable future. The Company intends to
retain all of its otherwise available funds for the operation and expansion of
its business.
26
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
The following table presents selected consolidated statements of operations and
balance sheet data of the Company. The balance sheet data as of June 28, 1998
and June 29, 1997 and 1996 and the statements of operations data for each of the
four fiscal years in the period ended June 28, 1998 presented below are derived
from the Company's audited consolidated financial statements. The balance sheet
data as of July 1, 1995 and July 2, 1994, and the statements of operations data
for the fiscal year ended July 2, 1994, have been derived from the Company's
unaudited internal financial statements.
For purposes of this Form 10-K and financial reporting purposes, the Company has
been treated as if it was a stand-alone entity for all periods presented. The
Company's results of operations, as presented in the accompanying financial
statements for periods prior to July 17, 1997, include allocations and estimates
of certain expenses, including corporate accounting, tax, cash management,
information technology, legal, risk management, purchasing and human resources,
historically provided to the Company by DAKA International.
The selected consolidated financial data should be read in conjunction with the
consolidated financial statements and related notes thereto of the Company and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere in this Annual Report on Form 10-K.
As of and for the Fiscal Years Ended
--------------------------------------------------------------
June 28, June 29, June 29, July 1, July 2,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
Statements of Operations Data:
Total revenues $ 215,321 $ 205,884 $ 183,755 $ 137,730 $ 100,677
Income (loss) from continuing operations
before income taxes, minority interests and cumulative
effect of change in accounting for preopening costs
(26,748) (42,832) (6,931) 4,697 3,980
Net income (loss) (27,735) (39,043) (5,670) 1,798 1,300
Basic and diluted loss per share (2.41) -- -- -- --
Pro forma basic and diluted loss per share -- (3.42) -- -- --
Balance Sheet Data:
Total assets 92,546 125,209 142,348 102,431 78,365
Long-term debt, including current portion 6,966 5,128 6,366 4,009 3,372
Total equity 50,398 79,053 108,894 73,979 57,666
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
General
The following Management's Discussion and Analysis of Results of Operations and
Financial Condition is based upon the historical consolidated financial
statements of the Company, which present the Company's results of operations,
financial position and cash flow. Prior to July 17, 1997, the Company
historically operated as part of DAKA International. These historical
consolidated financial statements include the assets, liabilities, income and
expenses that were directly related to the restaurant business as it was
operated within DAKA International prior to the Spin-off. The Company's
statement of operations includes all of the related costs of doing business,
27
including charges for the use of facilities and for employee benefits, and
includes an allocation of certain general corporate expenses, including costs
for corporate logistics, information technologies, finance, legal and corporate
executives. These allocations of general corporate expenses were based on a
number of factors including, for example, personnel, labor costs and sales
volumes. Management believes these allocations as well as the assumptions
underlying the preparation of the Company's separate consolidated financial
statements to be reasonable.
Certain other non-restaurant operating assets and liabilities of DAKA
International were contributed to the Company as described in Note 2 to
Financial Statements. Those assets and liabilities consisting of notes
receivable, property, accounts payable, accrued expenses, and contingent
liabilities have been recorded within their respective captions during fiscal
1998 and resulted in a decrease to stockholders' equity of $1.5 million.
Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in
the following Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Company and elsewhere in this Annual Report on Form
10-K are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Words such as "believe",
"anticipate", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
respective dates. Forward-looking statements involve risks and uncertainties,
many of which may be beyond the Company's control. Should one or more of these
risks or uncertainties materialize, or should any of the underlying assumptions
prove incorrect, actual results of current and future operations may vary
materially from those anticipated, estimated or projected. Factors that may
cause such a difference include, among others, the following: the ability of the
Company to successfully implement strategies to improve overall profitability;
the completion of the sale of Fuddruckers; the impact of increasing competition
in the casual and upscale casual dining segments of the restaurant industry;
changes in general economic conditions which impact consumer spending for
restaurant occasions; adverse weather conditions, competition among restaurant
companies for attractive sites and unforeseen events which increase the cost to
develop and/or delay the development and opening of new restaurants; increases
in the costs of product, labor, and other resources necessary to operate the
restaurants; unforeseen difficulties in integrating acquired businesses; the
availability and terms of financing for the Company and any changes to that
financing; the revaluation of any of the Company's assets (and related
expenses); and the amount of, and any changes to, tax rates.
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28
RESULTS OF OPERATIONS
Overview
The Company incurred an operating loss before income tax benefit and minority
interests of $27.7 million for the fiscal year ended June 28, 1998, compared to
a comparable operating loss of $42.8 million last year. Included in the loss
before income tax benefit and minority interest for fiscal 1998 were impairment,
exit and other charges of $24.6 million. Exclusive of these expense charges, the
Company would have reported a net loss of $3.1 million for fiscal 1998. As
discussed further below, results for the current fiscal year include a net gain
of $0.7 million on the sale of a Champps restaurant. While the Company believes
it has strategies that will give it the best opportunity to return to overall
profitability, there can be no assurance that