Unique Casual Restaurants, Inc.

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Unique Casual Restaurants, Inc.

One Corporate Place
55 Ferncroft Road
Danvers, Massachusetts 01923
U.S.A.
(978) 774-6606
Fax: (978) 750-1414

Public Company
Incorporated: 1973 as Daka, Inc.
Employees: 8,000
Sales: $215.3 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: UNIQ
SICs: 5812 Eating Places

A restaurant operator undergoing extensive change, Unique Casual Restaurants, Inc. owns, operates, and franchises a chain of restaurants under the Champps Americana banner, but prior to late 1998 the company’s holdings were far more plentiful and diverse. At its peak, when Unique Casual operated as Daka International, the company’s assets included a quarter-billion-dollar contract feeding business, a more than 200-unit restaurant chain named Fuddruckers, and a specialty concepts division that operated multi-unit restaurants such as Great Bagel and Coffee Co. and French Quarter Coffee Co. Financial problems in 1996 precipitated major divestitures in 1997 and 1998 that stripped the company of roughly 75 percent of its annual revenue volume and left it dependent on Champps Americana for its existence. In 1999 the Champps Americana chain comprised approximately 30 restaurants that offered a casual menu of pizza, burgers, chicken, and fish in a combination sports bar and entertainment dining environment.

Origins and 1988 Fuddruckers Merger

Unique Casual’s predecessor, a company named Daka, Inc., was founded by Terry Vince, a British citizen who arrived in the United States in the late 1950s. Upon his arrival in the United States, Vince began working as a chef-manager at the foodservice division of transportation giant Greyhound, eventually working his way up to research and development director during his ten-year tenure. When he left in 1968, Vince joined Servomation Wilbur (later Service America Inc.), a contract feeding company that managed and operated dining facilities for corporate and institutional clients. Vince spent five years at Service America’s predecessor, then left in 1973 to start his own contract feeding company, an enterprise he named Daka, Inc. From the beginning, Vince strove to provide what he called “low-profile, highly personalized, state-of-the-art” service. He avoided displaying the Daka name in the dining facilities he operated, convinced that the name of a contract foodservice provider “means nothing to the diner anyway.” Instead, Vince chose modern and unique names under which to operate his facilities, thereby decreasing the institutional “feel” of the dining rooms and, as he perceived it, increasing the longevity of the contract with the client. Although in large part unknown because of Vince’s reluctance to use the Daka name for promotion, the company prospered and grew, acquiring a sufficient volume of clients to enable diversification into hotel ownership. Vince’s acquisition of several hotel properties was followed by the acquisition of Fuddruckers, a gourmet hamburger chain. Although the addition of Fuddruckers, like the acquisition of the hotels, pointed to Vince’s growing prominence as a businessman, the combination of the two diversifications ultimately led to his departure from the company he had started in 1973.

The 1988 acquisition of Fuddruckers brought with it the talents and services of William H. Baumhauer, Fuddruckers president and chairman. Baumhauer was graduated with a degree in accounting from Florida Atlantic University, although accounting was not his first choice. “I wanted a professional degree—to be a doctor or lawyer,” Baumhauer once remarked, “but I didn’t have the money. I went into accounting for all the wrong reasons.” Despite his disinclination, Baumhauer proved to be a particularly adept accountant, earning enough respect during his 11 years as a public accountant to be presented with a number of enticing professional opportunities. In one month in 1982, Baumhauer was offered three executive positions: president of a freight airline company in Miami, president of a real estate subsidiary owned by a large insurance company, and chief financial officer of Fuddruckers, which at the time operated five restaurants and was looking to convert to public ownership. Lured by the risk and the financial rewards of joining the ambitious yet modestly sized hamburger chain, Baumhauer chose the position at Fuddruckers and helped the company through its 1983 initial public offering. For the next two years, Baumhauer had little time to reflect on his choice, as he assisted in the company’s prolific expansion from a five-restaurant enterprise into a 100-unit chain. In January 1985 Fuddruckers’ founder, Phil Romano, retired, paving the way for Baumhauer’s promotion to president. Two months later Baumhauer took over as chairman as well, building on his influence over the fast-growing chain. Unfortunately for Baumhauer, Romano’s departure was a timely one and Baumhauer’s ascension to the top of Fuddruckers’ executive ranks was not. The company was strapped for cash, its resources exhausted by the rapid expansion, and Baumhauer was faced with mustering a revival. He restructured the company, and for the next two years he closed unprofitable restaurants, reevaluated Fuddruckers’ franchisees, and implemented wholesale changes within the company’s executive ranks. “We were fortunate to survive,” he later remarked. “We had no money, no good operations, and we started every Monday looking at how to make payroll Friday.”

By 1987 Fuddruckers was once again profitable, its number of restaurants pared to 80. Buoyed by Fuddruckers’ resurgence, Baumhauer was skeptical when a broker suggested a merger with another company involved in another area of the foodservice industry—Vince’s Daka. After meeting with Vince, however, Baumhauer reconsidered, and their talks led to the November 1988 formation of Daka International, parent company of Daka, Inc., Fuddruckers, and the hotel properties acquired by Vince. The union of the two companies created an enviable enterprise: annual sales exceeded $360 million, foodservice accounts numbered 500, hotel properties comprised six Ramada units, and the restaurant segment of the business constituted 120 Fuddruckers units, 47 of which were operated under franchise agreements. Within months, however, differences between Baumhauer and Vince began to surface. Their disagreement centered on the hotel properties, whose value had plummeted amid an anemic real estate market during the late 1980s and the first hints of the early 1990s national economic recession. The differences evidently were irreconcilable because in November 1990 Vince left the company. One year later the hotel properties were divested, sold to Vince for $5 million worth of Daka International stock. For the second time in his career as a corporate executive, Baumhauer had ascended to the position of sole command.

Strategy Set for the 1990s

In the aftermath of Vince’s 1990 exit, Baumhauer fine-tuned Daka International’s operations. Unprofitable Fuddruckers were closed, restructuring efforts took place, and he implemented a strategy of acquiring franchised Fuddruckers units in selected markets. For the first time since 1984, Fuddruckers was advertised on television. Baumhauer also raised capital by selling stock to investors on two occasions, leading up to his 1993 proclamation that he would double the size of Daka International during the ensuing three years. The 1993-96 period saw Daka International expand mightily, and not just in the number of Fuddruckers restaurants. The contract feeding operations housed within Daka, Inc. generated the majority of Daka International’s revenues, a reality not lost on Baumhauer despite his allegiance to the Fuddruckers chain. Building on a base of more than 500 foodservice operations in the eastern half of the United States, Baumhauer pressed ahead, acquiring 102 educational foodservice accounts from Service America Inc. in August 1993. Including accounts primarily in Florida, Georgia, New Jersey, and Pennsylvania, the deal with Service America added $80 million in new business and was followed by the acquisition of the education and corporate accounts belonging to Service Master, worth another $81 million. Baumhauer made equally bold moves in other segments of Daka International’s business, particularly within the company’s restaurant division. In early 1996 a $69 million stock swap added another restaurant chain, the 15-unit Champps Americana chain, featuring multitiered dining rooms, open kitchens, video screens, and disc jockeys. Baumhauer was “thrilled to get the concept,” referring to the combination entertainment and sports bar restaurants scattered in Minnesota, Texas, and New Jersey, and welcomed the addition of the chain’s $80 million a year in sales. A short time later, in April 1996, Baumhauer acquired another chain, the 18-unit Great Bagel and Coffee Co., described as a combination specialty coffee retailer, bagel bakery, and grab-and-go deli.

While the acquisition campaign that added foodservice contracts and the two restaurant chains was being conducted, Baumhauer also directed his energies toward developing expansion internally. Between 1993 and 1996 he oversaw the development of Daka International’s specialty concepts division, which created concepts to be used as in-house vehicles in the company’s institutional foodservice accounts and in locations not managed by the company. French Quarter Coffee Co. and Good Natural Café were two examples of the concepts created by Daka International’s specialty concepts division, appearing in company-managed dining rooms and at Home Depot, General Cinema, Macy’s, and Texaco. It was through this segment of Daka International’s ever-expanding business that news of Baumhauer’s biggest deal emerged, one that would have a profound effect on the entire operations of the company.

In July 1996 discount store chain Kmart Corp. and Daka International announced a joint venture of mammoth proportions. Under the terms of the proposed venture, Baumhauer’s company would take over operation of 1,850 Kmart in-store restaurants, including 550 Little Caesar pizza franchise stores and any other restaurants opened during the 15-year agreement between Daka International and Kmart. By committing to invest $51 million in the restaurants over a three-year period, Daka International would gain a majority 51 percent stake in the restaurants and control foodservice operations capable of doubling Daka International’s revenue volume. By all measures, it was an enticing deal, but negotiations stalled between the two parties as the summer progressed. Frustration over the delay was compounded severely when the financial figures for the previous year were announced. Net income for the year had plunged from $9.2 million to $905,000, and sales had dropped five percent, causing investors to eye the company negatively. Amid concerns that Daka International’s portfolio of businesses was too diverse, the company’s stock price slumped, dropping from a high of $34 per share in 1995 to $10 per share after the depressed financial figures were released. The situation was exacerbated by the yet-to-materialize agreement with Kmart and was aggravated further when the joint venture was abandoned entirely before the end of 1996. In the aftermath of these pernicious events, sweeping changes were made, pervasive alterations that stripped away much of Daka International to create Unique Casual Restaurants, Inc.

Late 1990s Divestitures

To solve Daka International’s pressing financial problems, a two-step process was arranged for execution in May 1997. The first step in the plan entailed the sale of the company’s foodservice division, the $285 million in sales generated by the corporate, educational, and other contract feeding clients that represented the origins of the Daka name. Compass Group USA Inc., a subsidiary of London, England-based Compass Group PLC, paid $195 million in cash and assumed the debt of the former Daka, Inc. The divestiture left Baumhauer in charge of the commercial restaurant businesses, comprising Fuddruckers, Champps Americana, and Great American Bagel and Coffee Co.—250 commercial units in all, with annual sales eclipsing $325 million. The second step of the plan involved spinning off the commercial holdings formerly owned by Daka International to shareholders and creating a new corporate entity, a company named Unique Casual Restaurants, Inc.

The two-step transaction was completed in July 1997, with Baumhauer assuming control of Unique Casual as chairman and chief executive officer. Thanks to the spin-off and the divestiture of the contract feeding operations, the new company began its corporate life virtually debt-free and better able to focus on solving some of the problems that had surfaced in 1996 and led to crippling losses. Chief among these problems was the ailing Fuddruckers chain, whose low profitability had precipitated the need to restructure and start anew. Many of the newer Fuddruckers units—those opened during the 1993 to 1996 period—had performed poorly, while the older units had suffered from declining sales. In response, Baumhauer announced plans in July 1997 to close between ten and 12 underperforming Fuddruckers, to halt expansion of company-owned Fuddruckers in 1998, and to invigorate sales at the older Fuddruckers units. To increase sales, the company began experimenting with several product introductions such as $8 to $9 steak and grilled chicken breast platters to increase the average bill recorded during dinner hours. Concurrently, the company turned its attention to its other major chain, the Champps Americana restaurants. While operating under the auspices of Daka International, Champps Americana had suffered from a lack of sufficient capital, unable to expand amid the financial crisis that existed from the first day of its acquisition. Baumhauer, with Unique Casual’s nearly debt-free balance sheet to work from, was able to expand the chain for the first time and build upon the 12-restaurant base in existence in mid-1997. As part of his plans for the future success of his three commercial holdings, Baumhauer projected the establishment of five or six Champps Americana restaurants by the end of 1998.

Nine months after focus was centered on the progress of Fuddruckers, Champps Americana, and the specialty concepts division’s contender, Great Bagel and Coffee Co., there were small yet encouraging signs of improvement. By mid-1998 same-store sales had increased at Fuddruckers, four new Champps Americana restaurants had opened, with three more units slated for openings by the end of 1998, and the company-owned portfolio of Great Bagel and Coffee Co. units had been increased by the acquisition of eight restaurants from a Phoenix franchisee. Financially, the company was on the mend, but there was still much to be done. The first nine months of Unique Casual’s existence resulted in a net loss of $374,000, but the total represented a significant increase from the $8.55 million loss reported for the nine-month period of the previous year. Perhaps because an immediate turnaround had not been effected, the company again turned to divestitures for help in improving its financial health. Before the end of 1998 the company sold its 204-unit Fuddruckers chain, stripping itself of more than 60 percent of its revenue. Another portion of the company’s financial might was removed in late 1998 when the Great Bagel and Coffee Co. chain was closed, leaving Unique Casual as a single-concept restaurant company dependent on its roughly 30 Champps Americana chain. As the company prepared for the future, having undergone a complete transformation from the Daka International of the early 1990s, all attention was focused on the success and expansion of the Champps Americana chain. Entering 1999, Unique Casual anticipated opening at least six new restaurants in the coming year.