SecProbe.io

CORRESP
1
filename1.htm

March 31, 2005

Mr. David R. Humphrey

Branch Chief

United States Securities and Exchange Commission

Division of Corporate Finance

450 Fifth Street, N.W.

Washington, D.C. 20549-0305

Mail Stop 0305

Re:
Response to Letter Dated March 21, 2005

              Champps Entertainment, Inc.

              Commission File No.: 000-22639

              Form 10-K for the year ended June 27, 2004

Dear Mr. Humphrey:

In response to the above-referenced
letter, we offer the following responses in the order that they appeared in your letter.
For ease of reference, we have reproduced your comment followed by the Company’s
response.

Based upon the statements in your letter and our view of the nature of the
responses, we plan to implement all proposed changes in future filings, including our proposed filing of the Company’s
10K/A for the period ending June 27, 2004 and 10Q/A for the period ending October 3, 2004.

Form 10-K for the Fiscal
Year Ended June 27, 2004

Non-GAAP Financial
Measures pages 4 and 28

1.
In light of FR-65 and the related guidance made available by the Division of
Corporation Finance on June 13, 2003, we believe you should discontinue your
presentations of restaurant level operating cash flows, restaurant level
operating profit and restaurant operating and franchise contribution. In this
regard, our principal objection is to the exclusion of general and administrative expenses. Since your
revenue growth has been primarily attributable to the opening of additional restaurants,
the expenses relating to the corporate and administrative functions that facilitate this
growth should be included in any measure of profitability or performance. On page 5, you
state that your site selection strategy is critical to your success and you devote
substantial effort to evaluating each potential site at the highest levels within your
organization. In addition, we believe the titles and descriptions of your Non-GAAP
financial measures are too similar to those used for GAAP purposes, such as income from
operations and cash flows from operating activities. Since the availability of borrowing
under your $25 million credit facility appears contingent upon the maintenance of certain
ratios involving EBITDA, you may want to consider limiting your presentations of Non-GAAP
financial measures to a discussion of EBITDA and its relationship to your loan covenants.

Response: We concur that
general and administrative expenses are important when considering overall profitability
of the organization. These expenses are included when we disclose the GAAP measure, income
from operations.

We also concur that if we present
non-GAAP financial measures, then the GAAP financial measures should be presented more
prominently than non-GAAP financial measures. In addition, we will exclude all non-GAAP
measures from the financial statements presented at the beginning of each of our financial
reports submitted to the Securities and Exchange Commission.

We will also discontinue disclosing
the non-GAAP financial measures in the Management Discussion and Analysis sections of our
filings such as restaurant level operating profit and restaurant operating profit margin.
Instead, we intend to provide a subtotal of restaurant operating expenses in the results
of operations section of our management discussion and analysis similar to other public
companies in the restaurant industry.

Finally, although we believe that
restaurant level operating cash flow is an important indication of return on investment
when compared to the initial capital investment for our restaurants, we will exclude this
non-GAAP financial measure from future filings.

Item 7.
Management’s Discussion and Analysis

Liquidity and Capital
Resources, page 32

     2.
          Since you disclose that your $25 million credit facility is one of your primary
          sources of liquidity please expand and clarify your description of the debt
          covenants and specific financial ratios required under this credit facility. In
          this regard, we note the disclosure in Note 7 to your financial statements with
          respect to your former bank facility with First National Bank of Colorado. This
          disclosure provided specific ratios and a definition of EBITDA. Also, as
          suggested in our previous comment, you may want to consider including a
          discussion of EBITDA and its relationship to your current loan covenants- See
          the response to Question #10 of the Division of Corporation Finance’s
          outline, Frequently Asked Questions Regarding the Use of Non-GAAP Financial
          Measures, dated June 13, 2003, for additional guidance

Response: In future filings we
will expand and clarify our description of our loan covenants and include a discussion of
EBITDA and its relationship to our current loan covenants in the “Liquidity and
capital resources “ section of our report and footnote 7 to our consolidated
financial statements (see italics for changes).

We expect that our disclosure will be
as follows:

In
March 2004, we obtained a three-year $25.0 million senior secured credit facility with a
new lender, LaSalle Bank. We used a portion of the facility to refinance certain of our
existing debt and the facility may also be used to support growth and general working
capital needs and provide up to $5.0 million for the issuance of letters of credit. The
facility is secured by a blanket lien on all personal assets and real property of the
Company. Borrowings under the facility will bear interest depending on a total funded debt
to EBITDA ratio and will range from prime to prime plus 50 basis points or, if elected by
us, LIBOR plus 200 to 300 basis points. Total funded debt is defined as all
indebtedness of the consolidated  entities, including senior and subordinated debt,
capital lease obligations and contingent liabilities.  We paid an up-front fee of
$188,000 and are required to pay an annual unused commitment fee of 37.5 basis points to
50 basis points.

The
facility limits the opening of new company owned restaurants to a maximum of twenty-four
over a three-year period and also limits the amount of dividends and/or stock repurchases.
As of June 27, 2004, the Company had $2.5 million of outstanding borrowings under this
facility and had placed letters of credit of $1.3 million under the facility with $19.4
million available for additional borrowing.

Outstanding
borrowings under the facility may be converted to a five-year term loan if the ratio of
senior debt to EBITDA exceeds specified levels. The facility requires the Company to
maintain a minimum fixed charge coverage ratio and tangible net worth level and not exceed
thresholds for total funded debt to EBITDA and total senior debt to EBITDA ratios.
EBITDA is defined in the agreement as “(the) Consolidated Entities’ net
income for such period, plus (a) without duplication the sum of (i) Interest Expense,
(ii) federal and  state income taxes, (iii) depreciation and amortization expenses,
(iv) start-up costs associated with  the opening of new restaurants, and (v)
one-time prepayment fees associated with payment in full of all  Indebtedness of
Borrower that is pre-paid at the Closing Date with proceeds from the 3-Year Loan; minus
 (b) without duplication, extraordinary gains, in each case as charged against (or
added to, as the case  may be) revenues to arrive at net income for such period,
all as determined in accordance with GAAP.”

As
of June 27, 2004, we were in compliance with all debt covenants and financial ratios. This
facility has four financial ratios that measure our fixed charge coverage ratio,
borrower’s total funded debt to EBITDA, total senior debt to EBITDA and
minimum tangible net worth.

Contractual Obligations
and Commitments, page 35

     3.
          We note from your disclosure on page 12 that you are required to pay the seller
          of the “Champ’s” and “Champp’s” service marks an
          annual fee. Supplementally explain to us how you have included this fee in your
          table of contractual obligations. If this fee has not been included, please
          revise in future filings.

Response: We had not previously included
these obligations in prior filings. Had we included these obligations,
our table of obligations would have increased as follows:

     One year and less

     $     333

     Two to three years
       707

     Four to five years
       765

     After five years
       17,955

     Total
       19,760

Amounts in thousands

We intend to modify the contractual
obligations and commitments section of our filings as follows:

Payments, including interest, due by period as of June 27, 2004 (in 000's)

     Contractual Obligations
     Total

     One year
and less
     Two to
three years
     Four to
five years
     After five
years

     Operating leases

     $  227,540

     $   13,848

     $   30,856

     $   32,014

     $  150,822

     Long-term debt
       22,514

       1,937

       5,164

       15,413

       --

     Letters of credit
       2,092

       2,092

       --

       --

       --

     Construction commitments
       7,618

       7,618

       --

       --

       --

     Build-to-suit construction
       192

       192

       --

       --

       --

       commitments

     Licensing fees
       19,760

       333

       707

       765

       17,955

     $  279,716

     $   26,020

     $   36,727

     $   48,192

     $  168,777

We
are obligated to pay a licensing fee for the use of the “Champ’s” and
“Champps” service marks, trademarks and trade names. Although this
agreement runs in perpetuity, we have presented only 20 years of our obligation in
the schedule above. (See “Trademarks” in the “Business” section,
Part 1, Item 1 of this report)

4.
We note that you have included interest payments in your table of contractual
obligations and that a portion of your debt is charged interest at variable
rates. Supplementally explain to us and expand your disclosure in future filings
to indicate how such interest is calculated.

Response: The obligation
associated with interest on debt with variable interest rates is calculated using the
prevailing rate on the date of the balance sheet. In the future we propose to continue to complete this calculation
in the same manner. However we will expand our disclosure as follows (see italics for
changes):

Additionally,
at June 27, 2004, we had term debt balances of $1.8 million and $2.5 million of loans
outstanding under our revolving credit facility. Our term debt and revolving credit
facility incur  interest expense at variable rates based upon either, the
prevailing prime rate or the LIBOR rate plus a  factor. At June 27, 2004, the term
debt and revolving credit facility were charged interest expense at  an average
rate of 5.0% and 3.7%, respectively. We used these interest rates to calculate our future
 obligations for these debts. The rate of interest charged for our variable rate
obligations may change  in the future. As a result our future obligations related
to our variable debt may increase or decrease  from those amounts presented above.
The credit facility borrowings mature in March 2007.

5.
In the second paragraph below the table, you state that your long-term debt is
principally comprised of convertible notes due December 2007, unless otherwise
earlier converted into your common stock. Please revise this disclosure to
clarify that conversion is at the option of the holder, and there can be no
assurance that the price of your common stock will rise above the conversion
price. Further, please discuss management’s expectations with respect to
repayment or refinancing of this debt in the event it is not converted into your
common stock in the future. See Instruction #5 to Item 303(a) of Regulation S-K.

Response: We intend to modify our
disclosure as follows (see italics for changes):

Our
long-term debt is principally comprised of a $15.0 million issuance of 5.5% convertible
notes due December 2007. The Notes are convertible at the option of the holder at any
time prior to maturity into  shares of Common Stock, at a conversion price of
$10.66 per share, subject to adjustment upon certain  events. At any time on or
after December 15, 2005, the Company may redeem some or all of the Notes at  par
plus accrued and unpaid interest. All of the Notes will be automatically converted, at the
 Company’s option, into shares of common stock at the then effective
conversion price if the closing price  of the common stock exceeds 150% of the then
effective conversion price for any 15 out of 20 consecutive  trading days at any
time within three years after the first issuance date of the Notes. If the
automatic conversion date occurs prior to December 15, 2004, the Company will make an
additional cash  payment with respect to the Notes in an amount equal to $110.00
per $1,000 principal amount of the Notes  converted (representing 24 months of
interest), less the amount of interest actually paid on the Notes  prior to the
automatic conversion date. There are no assurances that the convertible debt holders will
 convert their debt into shares prior to December 2007, nor are there any
assurances that the stock price  will rise, allowing the Company to automatically
convert the debt. If the debt is not converted it may  be necessary for the Company
to seek additional financings when this debt matures. If the Company seeks
additional financings there are no assurances that the Company will be able to do so at
that time, and  the terms of the debt may not be as favorable as our existing debt.

Consolidated Statements
of Operations, page F-3

6.
We note the Total All Day Sales presented in the table on page 6 is $333,000
lower than the total restaurant sales presented in your Consolidated Statement
of Operations. Please revise or advise us supplementally with respect to this
difference.

Response: The amount
identified on page 6 of $210,590,000 is for food and alcoholic beverage sales only (please
see title of column). The amount identified in our consolidated statements of operations
of $210,923,000 is for total restaurant sales. Total restaurant sales include other sales
which are comprised of the sale of merchandise, clothing and cigarettes/cigars. Such other
sales for the period were $333,000, which accounts for the difference.

Consolidated Statement of
Cash Flows, page F-5

7.
The value assigned to proceeds from issuance of convertible subordinated notes
of $115 million is inconsistent with the related footnotes, which disclose a
value of $15 million. Please revise.

Response:
This was a typographical error and will be corrected in the 10K/A filing.

Note 4 — Other
Assets, page F-4

8.
Please explain to us the facts and circumstances surrounding the acquisition of
the available for sale securities with zero cost basis.

Response: We owned a minority
investment in a quick service restaurant business, LaSalsa Holding Co., Inc
(“LaSalsa”). This investment was subsequently acquired by a different company in July 15,
1999, Santa Barbara Restaurant Group, Inc. (“SBRG”). Shortly after our investment was
acquired by SBRG, we wrote off the asset as being an other than temporary impairment
resulting in a new cost basis of zero. This impacted our fiscal 2000 financials.  At the time of the acquisition of LaSalsa by SBRG,
SBRG was in a poor financial condition and near bankruptcy. In 2001, SBRG was acquired by
a third company, CKE Restaurants, Inc. In 2004, as the result of increased comparative
same store sales at CKE Restaurants, Inc., the value of our original investment
appreciated significantly, at which time we increased the value in the available for sale
investment through other comprehensive income.

Form 10-Q for the
quarterly period ended January 2, 2005

Consolidated Statements
of Operations, page 2

9.
As discussed in