-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TsCFJaSJFhMEAZFzmN9RL3HTv3ZIVE+hJZ5k+FeuzsLW7NoLnUtOnjGIzyDdKJHc s4bhoq6+X6nDZkCalX/g3A== 0000840826-97-000007.txt : 19970514 0000840826-97-000007.hdr.sgml : 19970514 ACCESSION NUMBER: 0000840826-97-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAKA INTERNATIONAL INC CENTRAL INDEX KEY: 0000840826 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 043024178 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17229 FILM NUMBER: 97603078 BUSINESS ADDRESS: STREET 1: ONE CORPORATE PL STREET 2: 55 FERNCROFT RD CITY: DANVERS STATE: MA ZIP: 01923 BUSINESS PHONE: 5087749115 MAIL ADDRESS: STREET 1: ONE CORPORATE PLACE 55 FERNCROFT RD CITY: DANVERS STATE: MA ZIP: 01923 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarter ended March 29, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission file number 0-17229 DAKA INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 04-3024178 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Corporate Place, 55 Ferncroft Road, Danvers, MA 01923 (Address of principal executive offices) (Zip Code) (508) 774-9115 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of Common Stock, $.01 par value, outstanding at May 9, 1997: 11,153,203 PART I - FINANCIAL INFORMATION Item 1. Financial Statements DAKA INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) (Unaudited)
March 29, June 29, 1997 1996 ASSETS: Current assets: Cash and cash equivalents ....................................................................... $ 7,956 $ 11,708 Accounts receivable, net ........................................................................ 45,618 36,699 Inventories ..................................................................................... 11,343 10,119 Prepaid expenses and other current assets ....................................................... 10,198 5,265 -------- -------- Total current assets .......................................................................... 75,115 63,791 -------- -------- Property and equipment, net ........................................................................ 131,349 124,563 Investments in, and advances to, affiliates ........................................................ 5,000 5,000 Other assets, net .................................................................................. 32,349 32,717 Deferred income taxes .............................................................................. 5,486 5,486 -------- -------- $249,299 $231,557 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable ................................................................................ $ 31,709 $ 17,772 Accrued expenses ................................................................................ 17,084 15,110 Current portion of long-term debt ............................................................... 32,200 1,507 Deferred income taxes ........................................................................... 787 787 -------- -------- Total current liabilities ..................................................................... 81,780 35,176 -------- -------- Long-term debt ..................................................................................... 77,496 98,355 Other long-term liabilities ........................................................................ 13,310 12,978 Minority interests ................................................................................. 1,088 2,181 Commitments and contingencies (Note 3) Stockholders' equity: Series A Preferred Stock, $.01 par value, $100 liquidation preference; 1,000,000 shares authorized; 11,912 shares issued and outstanding at March 29, 1997 and June 29, 1996 ................................................. -- -- Common Stock, $.01 par value; 30,000,000 shares authorized; 11,148,302 and 11,120,900 shares issued and outstanding at March 29, 1997 and June 29, 1996, respectively .................................................. 111 111 Capital in excess of par value ..................................................................... 71,974 71,907 Retained earnings .................................................................................. 3,540 10,849 -------- -------- Total stockholders' equity .................................................................... 75,625 82,867 $249,299 $231,557 ======== ========
See notes to unaudited condensed consolidated financial statements. DAKA INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- (as restated) (as restated) Revenues: Sales ............................................................. $ 98,376 $ 100,208 $ 293,193 $ 294,292 Management and other fees ......................................... 2,570 3,006 7,623 10,627 --------- --------- --------- --------- 100,946 103,214 300,816 304,919 --------- --------- --------- --------- Costs and expenses: Cost of sales and operating expenses .............................. 84,360 85,743 254,749 248,209 Selling, general and administrative expenses ...................... 10,129 9,971 33,010 28,750 Depreciation and amortization ..................................... 5,609 4,724 16,549 12,865 Impairment charges ................................................ -- 5,711 -- 5,711 Merger costs ...................................................... -- 2,900 -- 2,900 --------- --------- --------- --------- 100,098 109,049 304,308 298,435 --------- --------- --------- --------- Income (loss) from operations ........................................ 848 (5,835) (3,492) 6,484 Other (expense) income: Interest expense .................................................. (2,881) (1,830) (8,064) (4,691) Interest income ................................................... 117 44 322 244 --------- --------- --------- --------- Income (loss) before income taxes and minority interests ............. (1,916) (7,621) (11,234) 2,037 Income tax expense (benefit) ......................................... (667) (1,490) (3,910) 2,247 Minority interests ................................................... (10) (603) (63) (753) --------- --------- --------- --------- Net income (loss) .................................................... (1,239) (5,528) (7,261) 543 Preferred Stock dividend ............................................. -- -- 48 -- --------- --------- --------- --------- Net income (loss) available for Common Stockholders .................. $ (1,239) $ (5,528) $ (7,309) $ 543 ========= ========= ========= ========= Earnings (loss) per share: Primary ........................................................... $ (0.11) $ (0.56) $ (0.66) $ 0.06 Fully diluted ..................................................... $ (0.11) $ (0.56) $ (0.66) $ 0.06
See notes to unaudited condensed consolidated financial statements. DAKA INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended March 29, 1997 and March 30, 1996 (In thousands) (Unaudited)
March March 29, 1997 30, 1996 -------- -------- (as restated) Cash flows from operating activities: Net income (loss) ...................................................... ($ 7,309) $ 543 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ....................................... 16,549 12,865 Impairment charges .................................................. -- 5,711 Loss on sale of property and equipment .............................. -- 793 Minority interests .................................................. (63) (753) Changes in assets and liabilities: Accounts receivable ................................................. (8,919) (19,016) Inventories ......................................................... (1,224) (2,052) Other assets ........................................................ (6,078) (7,263) Accounts payable and accrued expenses ............................... 15,910 4,769 Other long-term liabilities ......................................... 333 4,711 -------- -------- Net cash provided by operations ................................... 9,199 308 Cash flows from investing activities: Purchase of property and equipment ..................................... (30,590) (47,379) Proceeds from sale of property and equipment ........................... 2,300 130 Investments in, and advances to, affiliates ............................ (2,538) (4,712) -------- -------- Net cash used in investing activities: ............................ (30,828) (51,961) -------- -------- Cash flows from financing activities: Increase in line-of-credit borrowing ................................... 11,950 37,955 Repayment of long-term debt ............................................ (3,242) (980) Proceeds from sale-leaseback facility .................................. 9,081 11,833 Other, net ............................................................. 88 1,944 -------- -------- Net cash provided by financing activities ......................... 17,877 50,752 -------- -------- Net decrease in cash and cash equivalents .............................. (3,752) (901) Cash and cash equivalents, beginning of period ......................... 11,708 10,538 -------- -------- Cash and cash equivalents, end of period ............................... $ 7,956 $ 9,637 ======== ======== Supplemental cash flow disclosures: Interest paid $ 6,922 $ 4,164 Income taxes paid $ 1,303 $ 4,834
During the nine months ended March 29, 1997 and March 30, 1996 the Company acquired certain equipment by entering into capital leases aggregating $1,756 and $3,330, respectively. See notes to unaudited condensed consolidated financial statements. DAKA INTERNATIONAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended March 29, 1997 and March 30, 1996 (Dollars in thousands, except per share data) (Unaudited) 1. Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements include the accounts of DAKA International, Inc. and its majority-controlled subsidiaries ("DAKA" or the "Company") including Daka, Inc. ("Daka"), Fuddruckers, Inc. ("Fuddruckers"), Champps Entertainment, Inc. ("CEI" or "Champps"), The Great Bagel and Coffee Company ("Great Bagel and Coffee") and Americana Dining Corp. ("ADC"). The accompanying March 30, 1996 unaudited condensed consolidated financial statements have been restated to reflect the business combination accounted for as a pooling-of-interests more fully described in Note 2 and the matters discussed under the caption "Classifications" discussed below. Significant intercompany balances and transactions have been eliminated in consolidation. The Company is a diversified restaurant company serving customers through a variety of channels. The Company's Fuddruckers and Champps subsidiaries (CEI and ADC) operate in casual and upscale restaurant settings, respectively, throughout the United States and in Canada, Australia and the Middle East. The Company's Great Bagel and Coffee subsidiary primarily serves coffee, bagels and sandwich items in a cafe setting in western locations of the United States. Restaurant operations are conducted through Company-owned and franchised stores. The Company's Daka subsidiary is a leading contract foodservice management corporation operating throughout the United States. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of financial position and results of operations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1996. The unaudited consolidated results of operations for the quarter and nine months ended March 29, 1997 and March 30, 1996 are not necessarily indicative of the results that could be expected for a full year. Fiscal Year The Company's fiscal year ends on the Saturday closest to June 30. For purposes of these notes to the unaudited condensed consolidated financial statements, the quarter and nine months ended March 29, 1997 and March 30, 1996 are referred to as 1997 and 1996, respectively. Classifications Certain amounts related to the third quarter of 1996 have been reclassified from their presentation in such previously filed Form 10-Q to reflect further analysis performed by the Company related to the adoption of SFAS No. 121 and the write-down of reacquired franchise rights, investments and other assets. Such reclassifications had the effect of reducing the amounts reported as "impairment charges" as of March 30, 1996 by approximately $2,250 and increasing the amount reported as "cost of sales and operating expenses" by approximately $2,250. Certain other reclassifications have been made to the prior year's financial statements in order to conform to the 1997 presentation. These reclassifications had no effect on previously reported gross profit, income (loss) before taxes and minority interests, net income (loss) or primary and fully diluted earnings (loss) per share. Significant Estimates In the process of preparing its financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. The primary estimates underlying the Company's financial statements include allowances for potential bad debts on accounts and notes receivable, the useful lives and recoverability of its assets such as property and intangibles, fair values of financial instruments, the realizable value of its tax assets and accruals for health insurance, workers' compensation and other matters. Management bases its estimates on certain assumptions, which they believe are reasonable in the circumstances, and while actual results could differ from those estimates, management does not believe that any change in those assumptions in the near term would have a material effect on the Company's financial position or the results of operations. Earnings (Loss) Per Share Primary earnings (loss) per share are computed using the weighted average number of common and common equivalent shares (dilutive options) outstanding. The calculation of fully diluted earnings per share includes the shares issuable upon conversion of the Preferred Stock which amounted to approximately 264,700 shares in 1996, and the shares issuable upon conversion of the 7% Convertible Subordinated Notes (the "Notes") which amounted to 1,003,750 in 1996. Fully diluted earnings per share assumes that the Preferred Stock and Notes were converted into Common Stock as of the beginning of the fiscal year, unless they are anti-dilutive, and reflect the elimination of interest expense related to the Notes, net of the related income tax effect, and the elimination of dividends related to the Preferred Stock. The weighted average number of shares used in the computation of earnings (loss) per share for 1997 and 1996 are as follows: Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- (as restated) (as restated) Primary 11,148,302 9,802,236 11,140,536 9,513,250 Fully diluted 11,148,302 9,802,236 11,140,536 11,379,922 In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which the Company will adopt in fiscal 1998. Had SFAS No. 128 been effective for the three and nine months ended March 29, 1997 and March 30, 1996, reported earnings (loss) per share would have been as follows: Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- Basic (0.11) (0.56) (0.66) 0.06 Diluted (0.11) (0.56) (0.66) 0.06 Effective June 30, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on results from operations and earnings per share. 2. Merger with The Great Bagel and Coffee Company In April 1996, the Company merged with Great Bagel and Coffee whereupon Great Bagel and Coffee became a wholly-owned subsidiary of DAKA. The merger has been accounted for as a pooling-of-interests and, accordingly, the Company's previously issued unaudited condensed March 31, 1996 consolidated financial statements have been restated to include the accounts of Great Bagel and Coffee for all periods presented. 3. Commitments and Contingencies Litigation On October 18, 1996, a purported class action lawsuit was filed in the United States District Court for the District of Massachusetts on behalf of persons who acquired the Company's stock between October 30, 1995 and September 9, 1996 (Venturino et al. V. DAKA International, Inc. And William H. Baumhauer, Civil Action No. 96-12109-GAO). The complaint alleges violations of federal and state securities laws by, among other things, allegedly misrepresenting and/or omitting material information concerning the results and prospects of Fuddruckers during that period and seeks compensatory damages and reasonable costs and expenses, including counsel fees. Contrary to earlier indications, counsel for the plaintiffs have informed the Company that they do not intend to amend the complaint and the parties have agreed that the Company will have until May 22, 1997 to answer or otherwise respond to the original pending complaint. The Company believes that the case is without merit and intends to defend itself vigorously. The Company is also engaged in various other legal actions arising in the ordinary course of business. The Company believes, based upon consultation with legal counsel, that the ultimate outcome will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. Letters of Credit As of March 29, 1997, the Company has approximately $3.0 million of outstanding letters of credit. The outstanding letters of credit reduce the Company's borrowing capacity under its line-of-credit agreement (see Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements). 4. Debt On February 7, 1997, the Company amended its revolving line-of-credit agreement (the "February Agreement") principally to reduce the Company's borrowing limit to $115 million, change the maturity date to January 2, 1998, and amend certain loan covenants. On May 7, 1997, the Company renegotiated certain terms and conditions of the February Agreement (the "May Agreement", collectively, the "Agreements") whereby the Company's borrowing limit will be sequentially reduced to $72.5 million by March 31, 1998, the maturity date was extended to April 2, 1998, and certain loan covenants were amended. The Agreements require the Company to reduce its borrowing limit and to repay principal balances as follows:
Borrowing Date Amount Limit - ---- ------ ----- May 31, 1997 ................................ $ 5.0 million $110.0 million June 30, 1997 ............................... 10.0 million 100.0 million July 31, 1997 ............................... 0.5 million 99.5 million August 31, 1997 ............................. 0.5 million 99.0 million September 30, 1997 .......................... 0.5 million 98.5 million October 31, 1997 ............................ 1.0 million 97.5 million November 30, 1997 ........................... 2.5 million 95.0 million December 31, 1997 ........................... 5.0 million 90.0 million January 31, 1998 ............................ 5.0 million 85.0 million February 28, 1998 ........................... 5.0 million 80.0 million March 31, 1998 .............................. 7.5 million 72.5 million ------------- ------------- ........................................... $42.5 million =============
Accordingly, the Company has classified approximately $31.1 million of outstanding borrowings as current in the balance sheet as of March 29, 1997. At March 29, 1997, the Company had available borrowings under the Agreements of approximately $11.4 million. 5. Segment Information The Company operates in the contract foodservice management and restaurant industries. The table below presents selected results of operations for the Company's businesses for the quarter and nine months ended March 29, 1997 and March 30, 1996, respectively.
Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- (as restated) (as restated) Revenues: Sales from profit and loss contracts ........................................$ 48,038 $ 55,883 $144,728 $165,987 Management and other fees ................................................... 1,348 1,517 3,730 4,099 Restaurant sales - Fuddruckers .............................................. 34,670 32,058 102,790 96,788 Franchising income - Fuddruckers ............................................ 1,001 1,174 2,856 5,755 Restaurant sales - Champps .................................................. 14,300 11,591 41,847 29,612 Franchising income - Champps ................................................ 120 141 385 427 Unit sales - Specialty Concepts ............................................. 1,368 676 3,828 1,905 Franchising income - Specialty Concepts ..................................... 101 174 652 346 -------- -------- -------- -------- Total revenues ........................................................... $100,946 $103,214 $300,816 $304,919 ======== ======== ======== ======== Foodservice: Sales from profit and loss contracts ........................................$ 48,038 $ 55,883 $144,728 $165,987 Operating expenses: Labor costs ............................................................... 16,212 20,807 48,997 57,060 Product costs ............................................................. 17,123 20,240 53,043 60,251 Other operating expenses .................................................. 7,000 8,136 21,170 24,169 Depreciation and amortization ............................................. 1,509 1,490 4,236 4,163 Impairment charges ........................................................ -- 3,198 -- 3,198 -------- -------- -------- -------- Income from profit and loss contracts ....................................... 6,194 2,012 17,282 17,146 Management and other fees ................................................... 1,348 1,517 3,730 4,099 -------- -------- -------- -------- Income from foodservice operations .......................................... 7,542 3,529 21,012 21,245 -------- -------- -------- -------- Fuddruckers: Sales from restaurant operations ............................................ 34,670 32,058 102,790 96,788 Operating expenses: Labor costs ............................................................... 10,261 9,247 31,285 27,487 Product costs ............................................................. 9,280 8,900 28,373 27,028 Other operating expenses .................................................. 11,005 8,054 32,408 25,790 Depreciation and amortization ............................................. 2,471 2,001 7,172 5,650 Impairment charges ........................................................ -- 2,450 -- 2,450 -------- -------- -------- -------- Income from restaurant operations ........................................... 1,653 1,406 3,552 8,383 Franchising income - Fuddruckers ............................................ 1,001 1,174 2,856 5,755 -------- -------- -------- -------- Income from restaurant and franchising operations ........................... 2,654 2,580 6,408 14,138 -------- -------- -------- --------
Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- (as restated) (as restated) Champps: Sales from restaurant operations ............................................ 14,300 11,591 41,847 29,612 Operating expenses: Labor costs ............................................................... 4,531 3,852 13,629 9,766 Product costs ............................................................. 4,108 3,331 12,100 8,489 Other operating expenses .................................................. 3,353 2,599 9,814 6,645 Depreciation and amortization 1,122 957 3,447 2,324 Impairment charges -- 63 -- 63 Merger costs .............................................................. -- 2,900 -- 2,900 -------- -------- -------- -------- Income (loss) from restaurant operations .................................... 1,186 (2,111) 2,857 (575) Franchising income - Champps ................................................ 120 141 385 427 -------- -------- -------- -------- Income (loss) from restaurant and franchising operations ................................................................ 1,306 (1,970) 3,242 (148) -------- -------- -------- -------- Specialty Concepts: Sales from unit operations .................................................. 1,368 676 3,828 1,905 Operating expenses: Labor costs ............................................................... 713 169 1,770 435 Product costs ............................................................. 384 298 1,092 817 Other operating expenses .................................................. 390 110 1,068 272 Depreciation and amortization 289 23 574 73 -------- -------- -------- -------- Income (loss) from unit operations .......................................... (408) 76 (676) 308 Franchising income - Specialty Concepts ..................................... 101 174 652 346 -------- -------- -------- -------- Income (loss) from unit and franchising operations .......................... (307) 250 (24) 654 -------- -------- -------- -------- Income from operations before selling, general and administrative expenses .......................................... 11,195 4,389 30,638 35,889 -------- -------- -------- -------- Selling, general and administrative expenses (1): Foodservice ................................................................. 1,909 2,361 6,095 6,671 Fuddruckers ................................................................. 3,040 2,859 10,284 8,974 Champps ..................................................................... 769 1,095 2,650 2,850 Specialty Concepts .......................................................... 598 122 1,819 302 Corporate ................................................................... 4,031 3,787 13,282 10,608 -------- -------- -------- -------- Total ..................................................................... 10,347 10,224 34,130 29,405 -------- -------- -------- -------- Operating income (loss) ........................................................ 848 (5,835) (3,492) 6,484 Interest expense ............................................................... (2,881) (1,830) (8,064) (4,691) Interest income ................................................................ 117 44 322 244 -------- -------- -------- -------- Income (loss) before income taxes and minority interests ....................... (1,916) (7,621) (11,234) 2,037 Income tax expense (benefit) ................................................... (667) (1,490) (3,910) 2,247 Minority interests ............................................................. (10) (603) (63) (753) -------- -------- -------- -------- Net income (loss) .............................................................. (1,239) (5,528) (7,261) 543 Preferred Stock dividend ....................................................... -- -- (48) -- -------- -------- -------- -------- Net income (loss) available for common stockholders .................................................................$ (1,239) $ (5,528) $ (7,309) $ 543 ======== ======== ======== ========
(1) Includes depreciation expense of $218, $253, $1,120 and $655 for the quarters and nine months ended March 29, 1997 and March 30, 1996, respectively. ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Certain Factors Affecting Future Operating Results This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements including uncertainties regarding the effectiveness of initiatives to lower selling, general and administrative expenses and to improve operations within the core businesses. Certain factors which may cause such a difference include, but are not limited to, the following: the impact of increased competition in the bidding process for foodservice contracts against competitors with significant financial resources and market share; the exercise by foodservice clients of their right to terminate contracts which typically provide for termination upon 30 to 60 days notice; the impact of increasing competition in the casual and upscale casual dining segment of the restaurant industry; changes in general economic conditions which impact consumer spending for restaurant occasions; adverse weather conditions; competition among restaurant companies for attractive sites and unforeseen events which increase the cost to develop and/or delay the development and opening of new restaurants; increases in the cost of product, labor and other resources necessary to operate both the restaurants and the foodservice facilities; unforeseen difficulties in integrating acquired businesses; the amount and rate of growth of general and administrative expenses associated with building a strengthened corporate infrastructure to support operations; the availability and terms of financing for the Company and any changes to that financing; the revaluation of any of the Company's assets (and related expenses); and the amount of, and any changes to, tax rates. Summary The Company recorded a net loss for the three months ended March 29, 1997, of $1.2 million, or $0.11 per share, compared with net income of $1.8 million, or $0.17 per share (on a fully diluted basis), excluding impairment charges and merger costs, for the same period last year. The Company also reported a net loss of $7.3 million, or $0.66 per share, for the first nine months of fiscal 1997 compared with net income of $5.4 million, or $0.52 per share (on a fully diluted basis), excluding impairment charges and merger costs, for the first nine months of fiscal 1996. Total revenues for the three and nine months ended March 29, 1997, decreased 2.2% to $100.9 million and 1.3% to $300.8 million, respectively, compared with $103.2 million and $304.9 million, respectively, in the same periods last year. Income (loss) from operations, excluding impairment charges and merger costs, in fiscal 1996, declined 69% to $848 for the current quarter compared with $2,776 a year ago. This decrease was primarily attributable to lower foodservice revenues, lower average store sales in the Fuddruckers segment which reduced the Company's ability to leverage fixed costs, and poor operating results in the Specialty Concepts segment principally related to its operations in non-traditional foodservice venues, offset, in part, by higher sales in Champps and improved operating margins in the foodservice and Champps segments. Income (loss) from operations, excluding impairment charges and merger costs, in fiscal 1996, were $3,492 for the first nine months of fiscal 1997 compared with $15,095 in the same period a year ago. This decrease was primarily attributable to lower foodservice revenues, lower average store sales in the Fuddruckers segment which reduced the Company's ability to leverage fixed costs, lower Fuddruckers franchise income, poor operating results in the Specialty Concepts segment and higher SG&A costs, offset, in part, by higher sales in Champps due to one new store being opened between periods. The results of the prior year third quarter and nine months results have been restated to reflect the Company's merger with Great Bagel and Coffee which was accounted for as a pooling-of-interests. On May 7, 1997, the Company renegotiated certain terms and conditions of its existing line-of-credit facility (see Financial Condition and Liquidity and Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements). Selling, General and Administrative Expenses Selling, general and administrative expenses increased approximately $0.1 million and $4.7 million, respectively, to $10.3 million and $34.1 million for the three and nine months ended March 29, 1997. These increases primarily reflect the impact of costs associated in the current year with the terminated venture with Kmart, increased marketing costs for Fuddruckers, higher overhead, including severance costs, associated with the Specialty Concepts segment and ongoing investment in divisional infrastructures. Selling, general and administrative expenses expressed as a percentage of managed volume, which includes managed volume in the foodservice business as well as sales at Company-owned Fuddruckers, Champps and Specialty Concepts locations, increased to 8.2% and 9.2% for the three and nine months ended March 29, 1997, respectively, compared with 8.0% and 7.9% for the same periods last year. The Company expects to lower the absolute level of selling, general and administrative expenses over the balance of fiscal 1997 as its near-term expansion plans have been moderated and the effect of certain events described herein are not expected to continue to impact operations. Subsequent to the end of the quarter, the Company has taken certain actions, including the elimination of 35 positions in the corporate office, to further reduce its general and administrative expenses. The Company believes these actions should reduce its general and administrative expenses on an on-going basis by approximately $1.8 million. Interest Expense Interest expense increased approximately $1.1 million and $3.4 million to $2.9 million and $8.1 million, respectively, during the three and nine months ended March 29, 1997, compared with $1.8 million and $4.7 million a year ago. These increases reflect higher levels of borrowings during the current year coupled with higher borrowing rates and costs associated with the Company's October 1996 and February 1997 amended and restated credit agreements (see Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements). The Company has used the line-of-credit to finance capital expenditures and working capital requirements for new and existing Company-owned restaurants, foodservice client facilities and corporate infrastructure. Income Taxes The Company's effective tax benefit rate was approximately 35% for the three and nine months ended March 29, 1997, respectively, compared with an effective tax benefit rate of approximately 20% and an effective tax expense rate of approximately 110% for the comparable periods last year. The effective tax rate reflects the federal tax benefit expected to be received by the Company. No benefit has been provided on state operating losses where such losses cannot be carried back by the Company. Earnings (Loss) Per Share Primary and fully diluted earnings (loss) per share, excluding impairment expenses and merger costs, decreased significantly for the three and nine months ended March 29, 1997 compared with the same periods last year primarily reflecting the significant losses incurred in fiscal 1997. The following tables set forth, for the periods presented, certain financial information for the Company's business segments. For further information relating to the businesses, see Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements. Foodservice
Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- (as restated) (as restated) Managed volume: Management fee contracts ....................................................$ 27,504 $ 27,907 $ 76,355 $ 80,038 Profit and loss contracts ................................................... 48,038 55,883 144,728 165,987 --------- --------- --------- --------- Total managed volume ......................................................$ 75,542 $ 83,790 $ 221,083 $ 246,025 ========= ========= ========= ========= Sales from profit and loss contracts ........................................... 100.0% 100.0% 100.0% 100.0% Operating expenses: Labor costs ................................................................. (33.7) (37.2) (33.9) (34.4) Product costs ............................................................... (35.6) (36.2) (36.7) (36.3) Other operating expenses .................................................... (14.6) (14.6) (14.6) (14.6) Depreciation and amortization (3.1) (2.7) (2.9) (2.5) Impairment charges .......................................................... -- (5.7) -- (1.9) --------- --------- --------- --------- Income from profit and loss contracts .......................................... 13.0% 3.6% 11.9% 10.3% ========= ========= ========= ========= Income from profit and loss contracts .....................................$ 6,194 $ 2,012 $ 17,282 $ 17,146 Management and other fees ..................................................... 1,348 1,517 3,730 4,099 --------- --------- --------- --------- Income from foodservice operations ...........................................$ 7,542 $ 3,529 $ 21,012 $ 21,245 ========= ========= ========= =========
Daka conducts its operations on the basis of two types of foodservice contracts with its clients. The first type is a management fee contract pursuant to which a client pays Daka a negotiated fee for overseeing and administering its foodservice operations and reimburses Daka for all costs incurred in providing such service. Management fee contracts are prevalent where companies subsidize foodservice as part of the benefits provided to employees and in elementary and secondary schools. The second type of contract is a profit and loss contract whereby Daka assumes the risk of profit or loss from the foodservice operations. While Daka manages the total sales volume attributable to both contract types, generally accepted accounting principles require that Daka recognize sales and expenses from profit and loss contracts, but only the management fee amount derived from management fee contracts as earned. Consequently, Daka does not recognize sales and related costs of sales with respect to management fee contracts. Managed volume in the foodservice segment decreased approximately $8.2 million, or 9.8%, to $75.5 million for the three months ended March 29, 1997 compared with $83.8 million in the comparable quarter of 1996. For the nine months ended March 29, 1997, managed volume decreased approximately $24.9 million, or 10.1%, to $221.1 million compared with $246.0 million in 1996. The decrease in managed volume reflects the impact of a net reduction in contracts in fiscal 1997 offset, in part, by higher same location foodservice sales volumes. Prior to 1996, the Company had increased its managed volumes primarily through the acquisition of contracts and other foodservice businesses. Given the Company's limited financial resources in the current year, there have been no such acquisitions in 1997 and none are presently anticipated. Income from foodservice operations, excluding impairment expenses, increased 12.1% to $7.5 million for the three months ended March 29, 1997 compared with $6.7 million in the comparable quarter of 1996. For the three months ended March 29, 1997, operating margins, excluding impairment charges, expressed as a percentage of sales increased 3.7% resulting from lower labor and product costs offset, in part, by higher depreciation and amortization expenses. Income from foodservice operations, excluding impairment charges, decreased 14.0% to $21.0 million for the nine months ended March 29, 1997, compared with $24.2 million for the comparable period last year. Operating margins, excluding impairment charges, expressed as a percentage of sales, for the first nine months of fiscal 1997 decreased 0.3% reflecting the impact of higher product, depreciation and amortization costs offset, in part, by lower labor costs. Fuddruckers
Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- (as restated) (as restated) Restaurant sales ...............................................................$ 34,670 $ 32,058 $ 102,790 $ 96,780 Sales from Fuddruckers-owned restaurants ....................................... 100.0% 100.0% 100.0% 100.0% Operating expenses: Labor costs ................................................................. (29.6) (28.8) (30.4) (28.4) Product costs ............................................................... (26.8) (27.8) (27.6) (27.9) Other operating expenses .................................................... (31.7) (25.1) (31.5) (26.6) Depreciation and amortization ............................................... (7.1) (6.2) (7.0) (5.8) Impairment charges .......................................................... -- (7.6) -- (2.5) --------- --------- --------- -------- Income from restaurant operations .............................................. 4.8% 4.5% 3.5% 8.8% ========= ========= ========= ======== Income from restaurant operations ..............................................$ 1,653 $ 1,406 $ 3,552 $ 8,383 Franchising income ............................................................. 1,001 1,174 2,856 5,755 --------- --------- --------- -------- Income from restaurant and franchising operations ..............................$ 2,654 $ 2,580 $ 6,408 $ 14,138 ========= ========= ======== ======== Number of restaurants (end of period): Fuddruckers-owned 122 115 Franchised 79 76 -------- -------- Total restaurants 201 191 ======== ========
Sales from Fuddruckers-owned restaurants increased approximately $2.6 million, or 8.1%, to $34.7 million for the three months ended March 29, 1997 compared with $32.1 million for the comparable period last year. For the first nine months of fiscal 1997, sales increased approximately $6.0 million, or 6.2%, to $102.8 million compared with $96.8 million for the comparable period last year. These increases reflect the net addition of nine new Fuddruckers-owned restaurants during the periods offset primarily by a 3.1% and 7.7% decline in comparable restaurant sales for the quarter and first nine months of fiscal 1997, respectively, and lower per restaurant average sales volumes within the Fuddruckers segment compared to last year. Income from restaurant operations, excluding impairment charges, for the three months ended March 29, 1997 decreased approximately $2.2 million, or 57.1%, to $1.7 million compared with $3.9 million a year ago. Income from restaurant operations, excluding impairment charges, for the first nine months of fiscal 1997 decreased approximately $7.3 million, or 67.2%, to $3.6 million compared with $10.8 million a year ago. Operating margins continue to be negatively impacted by poor sales levels, higher labor and other operating costs, and higher depreciation and amortization expenses offset, in part, by the impact of new menu changes, a 3% price increase effective in early December, 1996 and improved product costs. Franchise income decreased approximately $0.2 million and $2.9 million for the three and nine months ended March 29, 1997, respectively. During the first nine months of fiscal 1997, the Company did not execute any international multi-unit development agreements. Royalty income from domestic franchised restaurants remained consistent for the quarter and first nine months of fiscal 1997 compared to last year. Champps
Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- (as restated) (as restated) Restaurant sales ..................................................... $ 14,300 $ 11,591 $ 41,847 $ 29,612 Sales from Champps-owned restaurants ................................. 100.0% 100.0% 100.0% 100.0% Operating expenses: Labor costs ....................................................... (31.7) (33.2) (32.6) (33.0) Product costs ..................................................... (28.7) (28.7) (28.9) (28.7) Other operating expenses .......................................... (23.5) (22.4) (23.5) (22.4) Depreciation and amortization (7.8) (8.3) (8.2) (7.8) Merger costs ...................................................... -- (25.0) -- (9.8) --------- --------- --------- --------- Income (loss) from restaurant operations ............................ 8.3% (17.6)% 6.8% (1.7)% ========= ========= ========= ========= Income (loss) from restaurant operations ............................. $ 1,186 $ (2,111) $ 2,857 $ (575) Franchising income ................................................... 120 141 385 427 --------- --------- --------- --------- Income (loss) from restaurant and franchising operations ............. $ 1,306 $ (1,970) $ 3,242 $ (148) ========= ========= ========= ========= Number of restaurants (end of period): Champps-owned ..................................................... 11 9 Franchised ........................................................ 10 10 --------- --------- Total restaurants 21 19 ========= =========
Sales in Champps-owned restaurants increased approximately $2.7 million, or 23.4%, to $14.3 million for the three months ended March 29, 1997, compared with $11.6 million a year ago. For the first nine months of fiscal 1997, sales increased approximately $12.2 million, or 41.3%, to $41.8 million compared with $29.6 million a year ago. These increases primarily reflect the addition of six new Champps-owned restaurants in fiscal 1996 (open for all of 1997), one new Champps-owned restaurant opened in 1997, continued positive quarterly increases in comparable restaurant sales and higher per restaurant average sales volumes for the quarter and first nine months of fiscal 1997. Income from restaurant operations, excluding merger costs, for the three months ended March 29, 1997 increased approximately $0.4 million, or 50.3%, to $1.2 million compared with $0.8 million a year ago. Income from restaurant operations, excluding merger costs, for the first nine months of fiscal 1997 increased approximately $0.5 million, or 22.9%, to $2.9 million compared with $2.3 million a year ago. Operating margins for the three and nine months ended March 29, 1997, continue to be directly impacted by the increase in comparable restaurant sales and improved product costs offset, in part, by higher other operating expenses, depreciation and amortization expenses associated with new store openings and pre-opening costs. Specialty Concepts
Three Months Ended Nine Months Ended ------------------ ----------------- March March March March 29, 1997 30, 1996 29, 1997 30, 1996 -------- -------- -------- -------- (as restated) (as restated) Unit sales ..............................................................$ 1,368 $ 676 $ 3,828 $ 1,905 Sales from unit operations .............................................. 100.0% 100.0% 100.0% 100.0% Operating expenses: Labor costs .......................................................... (52.1) (25.0) (46.2) (22.8) Product costs ........................................................ (28.1) (44.1) (28.5) (42.9) Other operating expenses ............................................. (28.5) (16.3) (27.9) (14.3) Depreciation and amortization ........................................ (21.1) (3.4) (15.0) (3.8) -------- -------- -------- -------- Income (loss) from unit operations ...................................... (29.8)% 11.2% (17.7)% 16.2% ======== ======== ======== ======== Income (loss) from unit operations ......................................$ (408) $ 76 $ (676) $ 308 Franchising income ...................................................... 101 174 652 346 -------- -------- -------- -------- Income (loss) from unit and franchising operations ......................$ (307) $ 250 $ (24) $ 654 ======== ======== ======== ========
Sales in Specialty Concepts units increased approximately $0.7 million and $1.9 million to $1.4 million and $3.8 million, respectively, for the three and the nine months ended March 29, 1997 compared with $0.7 million and $1.9 million for the comparable three and nine months last year. These increases reflect the expansion initiatives in nontraditional foodservice venues in late fiscal 1996 and throughout fiscal 1997. Operating results within the Specialty Concepts segment remained unprofitable in fiscal 1997 due to higher operating costs in the Fudd Cafe units and the development and construction of the Company's "Leo's Deli" concept. The Company is currently evaluating its strategic options regarding this segment as a whole. Prior year quarterly and nine month results, which were immaterial for reporting purposes in fiscal 1996, except for Great Bagel and Coffee, were combined within the foodservice and Fuddruckers operations. At March 29, 1997, Specialty Concepts consisted of six Fudd Cafes, three Company-owned and approximately 25 franchised Great Bagel and Coffee units and over 400 French Quarter Coffee locations. FINANCIAL CONDITION AND LIQUIDITY At March 29, 1997, the Company had negative working capital of $6.7 million, a decrease of $35.3 million compared to working capital of $28.6 million at June 29, 1996. The decrease in working capital is principally due to the change in current maturities of its long-term debt offset, in part, by working capital provided by increases in accounts payable. Capital expenditures for restaurant expansion during the quarter and first nine months of fiscal 1997 were funded primarily through $9.4 million of existing sale-leaseback and equipment financing facilities, while corporate capital expenditures were funded primarily through the Company's existing line-of-credit facility. On February 7, 1997, the Company amended its revolving line-of-credit agreement (the "February Agreement"). Under the February Agreement, the Company's borrowing limit was reduced to $115 million, the maturity date was extended to January 2, 1998, and its loan covenants amended. On May 7, 1997, the Company renegotiated certain terms and conditions of its February Agreement (the "May Agreement" collectively the "Agreements") whereby the Company's borrowing limit will be further reduced to $72.5 million by March 31, 1998, the maturity date extended to April 2, 1998, and certain loan covenants amended. The Agreements require certain principal repayments and further reductions in the Company's borrowing limits (see Note 4 to Unaudited Condensed Consolidated Financial Statements). Accordingly, the Company has classified approximately $32.1 million of outstanding borrowings as current in the balance sheet as of March 29, 1997. At March 29, 1997, the Company had available borrowings under the February Agreement of approximately $11.4 million. At March 29, 1997, the Company had three new Champps-owned restaurants under construction and two Champps restaurants under development which are expected to open in fiscal 1997 and the first half of fiscal 1998, respectively. The Company had no new Fuddruckers-owned restaurants under construction or development. There are no other restaurant expansion or development efforts planned by the Company for the balance of fiscal 1997 or the first half of fiscal 1998. The Company will continue to make improvements at existing restaurants and facilities of its foodservice clients, and will continue to invest in improved data processing systems, pursuant to the terms and conditions of its May Agreement. The Company has been exploring a number of strategic alternatives to improve performance and increase shareholder value. While no agreement has been reached with respect to any particular strategic alternative, the Company currently expects to be in a position to announce specific initiatives before the end of fiscal 1997. There can be no assurance, however, that the Company will be able to reach any agreement or complete any transaction. Currently, management believes that the curtailment of restaurant expansion, improved cash flows from operations, existing cash balances and working capital, available sale-leaseback financing and equipment financing will provide sufficient liquidity to meet its obligations, fund capital expenditures and service debt requirements as outlined in the Agreements. PART II - OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 10.26 Second Amendment Agreement, dated as of May 7, 1997, among DAKA International, Inc. Subsidiary Guarantors, The Chase Manhattan Bank, N.A., Fleet National Bank, Mellon Bank, N.A. and The First National Bank of Boston. 11 Computation Regarding Per Share Earnings (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended March 29, 1997. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAKA INTERNATIONAL, INC. (Registrant) By: /s/Donald C. Moore -------------------------------- Donald C. Moore Chief Financial Officer (Principal Financial and Principal Accounting Officer) Date: May 12, 1997 EX-11 2 PER SHARE EARNINGS COMPUTATION Exhibit 11 DAKA INTERNATIONAL, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS) THREE AND NINE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
Three Months Ended Nine Months Ended ------------------ ----------------- March 29, March 30, March 29, March 30, 1997 1996 1997 1996 ---- ---- ---- ---- Primary: Net income (loss) ................................................. $ (1,239) $ (5,528) $ (7,261) $ 543 Net income (loss) available to common stockholders ................ $ (1,239) $ (5,528) $ (7,309) $ 543 -------- -------- -------- -------- Weighted average number of shares outstanding ..................... 11,148 9,802 11,140 9,165 Additional shares assuming conversion of stock options -- -- -- 348 -------- -------- -------- -------- 11,148 9,802 11,140 9,513 ======== ======== ======== ======== Primary earnings (loss) per share: Net income (loss) available to common stockholders ................ $ (0.11) $ (0.56) $ (0.66) $ 0.06 ======== ======== ======== ======== Fully Diluted: Net income available to common stockholders ....................... $ (1,239) $ (5,528) $ (7,309) $ 543 Add back interest expense on Convertible Notes, after tax effect ................................................ -- -- -- 468 -------- -------- -------- -------- $ (1,239) $ (5,528) $ (7,309) $ 1,011 ======== ======== ======== ======== Weighted average number of shares outstanding ..................... 11,148 9,802 11,140 10,740 Weighted average number of options outstanding .................... -- -- -- 375 Shares issuable upon conversion of Preferred Stock ................ -- -- -- 265 Shares issuable upon conversion of Notes .......................... -- -- -- -- -------- -------- -------- -------- 11,148 9,802 11,140 11,380 ======== ======== ======== ======== Fully diluted earnings (loss) per share: Net income (loss) ................................................. $ (0.11) $ (0.56) $ (0.66) $ 0.09 ======== ======== ======== ========
EX-27 3 FINANCIAL DATA SCHEDULE
5 0000840826 DAKA INTERNATIONAL, INC. 1,000 9-MOS JUN-28-1997 MAR-29-1997 7,956 0 46,070 452 11,343 75,115 180,421 49,072 249,299 81,780 77,496 0 0 111 75,514 249,299 293,193 300,816 254,749 254,749 0 0 8,064 (11,234) (3,910) (7,309) 0 0 0 (7,309) (0.66) (0.66)
EX-10.26 4 SECOND AMENDMENT AGREEMENT dated as of May 7, 1997 among DAKA INTERNATIONAL, INC. SUBSIDIARY GUARANTORS THE BANKS SIGNATORY HERETO and THE CHASE MANHATTAN BANK as Agent SECOND AMENDMENT AGREEMENT SECOND AMENDMENT AGREEMENT (this "Agreement") dated as of May 7, 1997 among DAKA INTERNATIONAL, INC., a corporation organized under the laws of Delaware (the "Borrower"); each of the Subsidiaries of the Borrower which is a signatory hereto (collectively the "Subsidiary Guarantors" and, together with the Borrower, the "Obligors"); each of the banks which is a signatory hereto (collectively the "Banks"); and THE CHASE MANHATTAN BANK, a bank organized under the laws of New York, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"). WHEREAS, the Borrower, the Subsidiary Guarantors, the Banks and the Agent have entered into that certain Third Amended and Restated Credit Agreement dated as of October 15, 1996 (as amended by that certain First Amendment Agreement dated as of February 7, 1997 (the "First Amendment Agreement"), as further amended by that certain side letter dated February 20, 1997 and as in effect prior to the effectiveness of this Agreement, the "Existing Credit Agreement," and, as amended by this Agreement, the "Amended Credit Agreement") pursuant to which the Banks have extended credit to the Obligors evidenced by certain Promissory Notes dated October 15, 1996 issued by the Borrower and guarantied by the Subsidiary Guarantors; WHEREAS, the Borrower, the Subsidiary Guarantors, the Banks and the Agent have agreed to enter into this Agreement to provide for, among other things, the modification of certain covenants and definitions contained in the Existing Credit Agreement; and WHEREAS, the Facility Documents, as amended and supplemented by this Agreement (including, without limitation, this Agreement and the Amended Credit Agreement) and as each may be amended or supplemented from time to time, are referred to herein as the "Amended Facility Documents". NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1. AMENDMENTS TO EXISTING AGREEMENTS. Section 1.01. Amendments to Existing Credit Agreement. Each of the Obligors and, subject to the satisfaction of the conditions set forth in Article 3, the Agent and the Banks hereby consents and agrees to the amendments to the Existing Credit Agreement set forth below: 1 (a) The definition of "Letter of Credit Availability" in Section 1.01 of the Existing Credit Agreement is hereby amended to substitute "$3,023,387" in place of "$5,000,000". (b) The definition of "Termination Date" in Section 1.01 of the Existing Credit Agreement is hereby amended to substitute "April 2, 1998" in place of "January 2, 1998". (c) Section 2.01(a) of the Existing Credit Agreement is hereby amended to add ", (vii) $5,000,000 on January 31, 1998, (viii) $5,000,000 on February 28, 1998 and (ix) $7,500,000 on March 31, 1998" immediately subsequent to "December 31, 1997" in the second sentence thereof. (d) Section 8.04(a) of the Existing Credit Agreement is hereby amended to add "and, on or after January 1, 1998, three additional 'Champps' restaurants" immediately subsequent to "Schedule V". (e) Section 8.15 of the Existing Credit Agreement is hereby amended (i) to add "or (v) if such fiscal quarter ends on March 28, 1998, $3,000,000" immediately subsequent to "$2,800,000" in subsection (a) thereof; and (ii) to add "; and (c) during the fiscal period from March 29, 1997 through March 28, 1998 would exceed $14,032,000" immediately subsequent to "$20,000,000". (f) Section 8.16(c) of the Existing Credit Agreement is hereby amended to add "and, on or after January 1, 1998, three additional 'Champps' restaurants" immediately subsequent to "Detroit, Michigan". (g) Section 9.01(a) of the Existing Credit Agreement is hereby amended to add "or (v) if such fiscal quarter ends on March 28, 1998, $500,000" immediately subsequent to "$0". (h) Section 9.02 of the Existing Credit Agreement is hereby amended (i) to delete "January, February, March" in subsection (a) thereof; and (ii) to add "January, February, March, " immediately prior to "June" in subsection (b) thereof. (i) Section 9.04 of the Existing Credit Agreement is hereby amended to add "or (e) if such fiscal quarter ends on March 28, 1998, 1.00 to 1.00" immediately subsequent to ".90 to 1.00". (j) Section 9.05 of the Existing Credit Agreement is hereby amended (i) to add "or (v) if such fiscal quarter ends on March 28, 1998, 2.47 to 1.00" immediately subsequent to "2.33 to 1.00" in subsection (a) thereof; (ii) to substitute 2 "(.39)" in place of "(.24)", "(.20)" in place of "(.09)" and ".49" in place of ".57" in subsection (b) thereof; and (iii) to add "; and (c) for the fiscal period from March 29, 1997 through March 28, 1998 shall be not less than 1.05 to 1.00" immediately subsequent to ".57 to 1.00". (k) Schedules I-IV of the Existing Credit Agreement are hereby amended and restated as set forth in Schedules I-IV hereto. Section 1.02. Amendments to First Amendment Agreement. Each of the Obligors and, subject to the satisfaction of the conditions set forth in Article 3, the Agent and the Banks hereby consents and agrees to the amendments to the First Amendment Agreement set forth below: (a) Section 5.01 of the First Amendment Agreement is hereby amended to substitute "establish by May 30, 1997" in place of "take all necessary actions to establish within 60 days, and agrees to establish within 90 days, of the Effective Date" in the second sentence thereof. (b) Section 5.03 of the First Amendment Agreement is hereby amended to add "or, if not financed in accordance with the terms hereof prior to February 15, 1998, on or after February 15, 1998" immediately subsequent to "Event of Default" in the last sentence thereof. Section 1.03. Amendments to Security Agreement. Each of the Obligors and, subject to the satisfaction of the conditions set forth in Article 3, the Agent and the Banks hereby consents and agrees that Schedule A to the Security Agreement is hereby amended and restated as set forth in Schedule V hereto. Section 1.04. Amendments to Pledge Agreement. Each of the Obligors and, subject to the satisfaction of the conditions set forth in Article 3, the Agent and the Banks hereby consents and agrees that Schedule A to the Pledge Agreement is hereby amended and restated as set forth in Schedule VI hereto. ARTICLE 2. REPRESENTATIONS AND WARRANTIES. Each of the Obligors hereby represents and warrants that as of the Effective Date: Section 2.01. Existing Representations and Warranties. Each of the representations and warranties contained in Article 6 of the Existing Credit Agreement, in Article 3 of the Security Agreement, in Article 3 of the Trademark 3 Security Agreement and in Article 3 of the Pledge Agreement are true and correct as of the Effective Date. Section 2.02. No Defaults. No event has occurred and no condition exists which would constitute a Default or an Event of Default under the Facility Documents, and no event has occurred and no condition exists which would constitute a Default or an Event of Default under the Amended Facility Documents. Section 2.03. Corporate Power and Authority; No Conflicts. The execution, delivery and performance by each of the Obligors of the Amended Facility Documents to which it is a party have been duly authorized by all necessary corporate, partnership or limited liability company action and do not and will not: (a) require any consent or approval of its stockholders, partners or members; (b) contravene its organizational documents; (c) violate any provision of, or require any filing (other than the filing of the financing statements contemplated by the Security Agreement and the filing of the Mortgages and the Trademark Security Agreement), registration, consent or approval under, any law, rule, regulation (including, without limitation, Regulation U), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to any Consolidated Entity; (d) result in a breach of or constitute a default or require any consent under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Consolidated Entity is a party or by which it or its properties may be bound or affected if such breach, default or failure to obtain consent could reasonably be expected to have a Material Adverse Effect; (e) result in, or require, the creation or imposition of any Lien (other than as created under the Security Documents), upon or with respect to any of the properties now owned or hereafter acquired by any Consolidated Entity; or (f) cause any Consolidated Entity to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument if such default could reasonably be expected to have a Material Adverse Effect. Section 2.04. Legally Enforceable Agreements. Each Amended Facility Document to which any Obligor is a party has been duly executed and delivered by such Obligor. Each Amended Facility Document to which any Obligor is a party is a legal, valid and binding obligation of such Obligor enforceable against such Obligor in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. Section 2.05. Financial Statements. The consolidated balance sheet of the Consolidated Entities as at June 29, 1996, and the related consolidated and consolidating (by business segment) income statements and consolidated statements 4 of cash flows and changes in stockholders' equity of the Consolidated Entities for the fiscal year then ended, and the accompanying footnotes, together with the unqualified opinion on the consolidated statements of Deloitte & Touche, independent certified public accountants, and the interim draft unaudited consolidated balance sheet of the Consolidated Entities as at March 29, 1997, and the related draft unaudited consolidated and consolidating (by business segment) income statements and consolidated statements of cash flows and changes in stockholders' equity of the Consolidated Entities for the nine months then ended, copies of which have been furnished to each of the Banks, are complete and correct and fairly present the financial condition of the Consolidated Entities at such dates and the results of the operations of the Consolidated Entities for the periods covered by such statements, all in accordance with GAAP consistently applied. There are no liabilities of any Consolidated Entity, fixed or contingent, which are material but are not reflected in the financial statements or in the notes thereto and which would be required to be recorded in such financial statements or notes in accordance with GAAP, other than liabilities arising in the ordinary course of business since March 29, 1997. No information, exhibit or report furnished by any Consolidated Entity to the Banks in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not materially misleading. Since March 29, 1997, there has been no change which could reasonably be expected to have a Material Adverse Effect. ARTICLE 3. CONDITIONS PRECEDENT. The effectiveness of this Agreement is subject to the condition precedent that the Agent shall have received on or before May 7, 1997 (the "Effective Date") each of the following, in form and substance satisfactory to the Agent and its counsel: (a) counterparts of this Agreement executed by each of the Borrower, the Subsidiary Guarantors, the Banks and the Agent; (b) evidence that all actions necessary or appropriate (or, in any event, as may be requested by the Agent) to create, perfect or protect the Liens created or purported to be created by the "Mortgages" (as defined in the First Amendment Agreement), the Security Agreement, the Trademark Security Agreement and the Pledge Agreement have been taken; (c) certificates of the Secretary or Assistant Secretary of each of the Obligors, dated the Effective Date, (i) attesting to all corporate action taken by such Obligor, including resolutions of its Board of Directors authorizing the execution, delivery and performance of each of the Amended Facility Documents to which it is 5 a party and each other document to be delivered pursuant to this Agreement, (ii) certifying the names and true signatures of the officers of such Obligor authorized to sign the Amended Facility Documents to which it is a party and the other documents to be delivered by such Obligor under this Agreement and (iii) verifying that the organizational documents of such Obligor attached thereto are true, correct and complete as of the date thereof; (d) a certificate of a duly authorized officer of each of the Obligors, dated the Effective Date, stating that the representations and warranties in Article 2 are true and correct on such date as though made on and as of such date and that no event has occurred and is continuing which constitutes a Default or Event of Default; and (e) evidence that the fees and expenses incurred as of the Effective Date under Section 4.05 shall have been paid in full. ARTICLE 4. MISCELLANEOUS. Section 4.01. Defined Terms. The terms used herein and not defined herein shall have the meanings assigned to such terms in the Amended Credit Agreement. Section 4.02. Reaffirmation. Each of the Obligors acknowledges that the Liens granted to the Agent under the Security Documents in and to the Collateral secure all of the Obligations, including, without limitation, all liabilities and obligations under the Loans as herein modified and decreased. All references to "Secured Obligations" in any Facility Document shall be deemed to include all liabilities and obligations under the Loans as herein modified and decreased. Each of the Obligors further acknowledges and reaffirms all of its other respective obligations and duties under the Amended Facility Documents to which it is a party. Section 4.03. Nonwaiver. The terms of this Agreement shall not operate as a waiver by the Agent or any Bank or otherwise prejudice the rights, remedies or powers of the Agent or any Bank under the Amended Credit Agreement, the other Amended Facility Documents or applicable law. Except as expressly provided herein: (x) no terms and provisions of the Facility Documents are modified or changed by this Agreement; and (y) the terms and provisions of the Facility Documents shall continue in full force and effect. Section 4.04. Amendments and Waivers. Any provision of this Agreement may be amended or modified only by an instrument in writing signed by the Borrower, the Agent and the Required Banks, or by the Borrower and the Agent acting with the consent of the Required Banks and any provision of this Agreement may be waived 6 by the Required Banks or by the Agent acting with the consent of the Required Banks; except any provision the subject matter of which the consent of all of the Banks would be necessary under the Facility Documents shall require the consent of all of the Banks prior to the amendment or waiver thereof. Section 4.05. Expenses. The Borrower shall reimburse the Agent on demand for all reasonable costs, expenses and charges (including, without limitation, reasonable fees and charges of legal counsel to the Agent and of Alvarez & Marsal, Inc.) in connection with the preparation of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any other Amended Facility Document and any other documents prepared in connection herewith or therewith. The Borrower shall also pay to the Agent for the account of the Banks an amendment fee equal to $125,000 to be split among the Banks in accordance with their Pro Rata Shares. Section 4.06. Notices. Unless the party to be notified otherwise notifies the other party in writing as provided in this Section, and except as otherwise provided in this Agreement, notices shall be given to the Agent by telephone, confirmed by telex, telecopy or other writing, and to the Banks and to the Obligors by ordinary mail or telecopier addressed to such party at its address on the signature page of this Agreement. Notices shall be effective: (a) if given by mail, 72 hours after deposit in the mails with first class postage prepaid, addressed as aforesaid; and (b) if given by telecopier, when the telecopy is transmitted to the telecopier number as aforesaid; provided that notices to the Agent and the Banks shall be effective upon receipt. Section 4.07. Headings; Parentheticals. The headings and captions hereunder are for convenience only and shall not affect the interpretation or construction of this Agreement. All numbers contained herein enclosed by parentheticals are deemed to reflect losses or the negative of such numbers. Section 4.08. Severability. The provisions of this Agreement are intended to be severable. If for any reason any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. Section 4.09. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing any such counterpart. 7 Section 4.10. Integration. The Amended Facility Documents set forth the entire agreement among the parties hereto relating to the transactions contemplated thereby and supersede any prior oral or written statements or agreements with respect to such transactions. SECTION 4.11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS. Section 4.12. Release. Each of the Obligors hereby releases and forever discharges the Agent and each of the Banks and their respective successors, assigns, affiliates, directors, employees and agents from all causes of action, covenants, agreements, damages, claims and demands whatsoever, in law or in equity, which such Obligor ever had or now has in any way relating to or arising out of the Existing Credit Agreement, any other Facility Document or any other document contemplated by or referred to herein or the transactions contemplated hereby or thereby or the enforcement of any of the terms thereof. 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. DAKA INTERNATIONAL, INC. By__________________________________ Name: Title: FUDDRUCKERS, INC. By__________________________________ Name: Title: DAKA, INC. By__________________________________ Name: Title: CASUAL DINING VENTURES, INC. By__________________________________ Name: Title: ATLANTIC RESTAURANT VENTURES, INC. By__________________________________ Name: Title: [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] FRENCH QUARTER COFFEE COMPANY By__________________________________ Name: Title: AMERICANA DINING CORP. By__________________________________ Name: Title: CHAMPPS ENTERTAINMENT OF EDISON, INC. By__________________________________ Name: Title: CHAMPPS ENTERTAINMENT OF TEXAS, INC. By__________________________________ Name: Title: [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] CHAMPPS AMERICANA, INC. (Formerly known as Champps Entertainment of Wayzata, Inc.) By__________________________________ Name: Title: CHAMPPS ENTERTAINMENT, INC. By__________________________________ Name: Title: SPECIALTY CONCEPTS, INC. By__________________________________ Name: Title: THE GREAT BAGEL AND COFFEE COMPANY By__________________________________ Name: Title: HOSPITALITY SUPPLY, INC. By__________________________________ Name: Title: [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] FUDDRUCKERS EUROPE, INC. By__________________________________ Name: Title: Address for Notices: One Corporate Place 55 Ferncroft Road Danvers, Massachusetts 01923 Telecopier No.:(508)774-1334 [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] AGENT: THE CHASE MANHATTAN BANK By__________________________________ Name: Title: Address for Notices: 270 Park Avenue 30th Floor New York, NY 15258 Attention: Patrick Daniello [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] BANKS: THE CHASE MANHATTAN BANK By__________________________________ Name: Title: Lending Office and Address for Notices: 270 Park Avenue 30th Floor New York, NY 15258 Attention: Patrick Daniello [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] BANKS: FLEET NATIONAL BANK By__________________________________ Name: Title: Lending Office and Address for Notices: 40 Westminster Street Providence, RI 02901 Attention: Edward O'Brien [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] BANKS: MELLON BANK, N.A. By__________________________________ Name: Title: Lending Office and Address for Notices: One Mellon Bank Center Room 4835 Pittsburgh, PA 15258-0001 Attention: Gary A. Saul [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] BANKS: BANKBOSTON, N.A. By__________________________________ Name: Title: Lending Office and Address for Notices: 100 Federal Street Boston, MA 02110 Attention: Corinne Barrett [SIGNATURE PAGE TO SECOND AMENDMENT AGREEMENT] SCHEDULE I Commitments Loan Commitments The Chase Manhattan Bank $57,500,000.00 Fleet National Bank $19,166,666.67 Mellon Bank, N.A. $19,166,666.67 BankBoston, N.A. $19,166,666.66 -------------- Total Loan Commitments $115,000,000.00 Standby Letter of Credit Commitments The Chase Manhattan Bank $1,511,693.50 Fleet National Bank $503,897.83 Mellon Bank, N.A. $503,897.83 BankBoston, N.A. $503,897.84 ----------- Total Letter of Credit Commitments $3,023,387.00 -----END PRIVACY-ENHANCED MESSAGE-----