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1
United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of
the Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ___
Commission file number 0-19924
RARE Hospitality International, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58-1498312
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8215 Roswell Road; Bldg 200; Atlanta, GA 30350
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(Address of principal executive offices) (Zip Code)
(770) 399-9595
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of Class)
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.
XX Yes No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to ITEM
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 9, 1997, the aggregate market value of the voting stock held by
non-affiliates (assuming for these purposes, but not conceding, that all
executive officers and directors are "affiliates" of the Registrant) of the
Registrant was $121,749,446 based upon the last reported sale price in the
NASDAQ National Market System on March 7, 1997 of $14.00.
As of March 7, 1997, the number of shares outstanding of the Registrant's
Common Stock, no par value, was 11,660,425.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 20, 1997 are incorporated by
reference in Part III, hereof.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in the following pages, particularly
regarding estimates of the number and locations of new restaurants that the
Company intends to open during fiscal 1997, constitute "forward-looking
statements" within the meaning of the Securities Act of 1933, as amended and the
Exchange Act of 1934, as amended. Forward-looking statements involve a number of
risks and uncertainties, and in addition to the factors discussed in this Form
10-K, among the other factors that could cause actual results to differ
materially are the following: the Company's ability to identify and secure
suitable locations on acceptable terms, open new restaurants in a timely manner,
hire and train additional restaurant personnel and integrate new restaurants
into its operations; the continued implementation of the Company's strict
business discipline over a large restaurant base; the economic conditions in the
new markets into which the Company expands and possible uncertainties in the
customer base in these areas; changes in customer dining patterns; competitive
pressures from other national and regional restaurant chains; business
conditions, such as inflation or a recession, and growth in the restaurant
industry and the general economy; changes in monetary and fiscal policies, laws
and regulations; and other risks identified from time to time in the Company's
SEC reports, registration statements and public announcements.
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RARE HOSPITALITY INTERNATIONAL, INC.
INDEX
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security
Holders
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Signatures
Financial Statement Schedules
Exhibits
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PART I
ITEM 1. BUSINESS
GENERAL
RARE Hospitality International, Inc. (the "Company"), formerly known as Longhorn
Steaks, Inc., operates and franchises 108 restaurants as of March 9, 1997,
including 82 Longhorn Steakhouses restaurants, 14 Bugaboo Creek Steak Houses,
and six The Capital Grilles, as well as six additional restaurants ("Specialty
restaurants"), consisting of two Skeeter's Grilles and one Lone Star Steaks in
Atlanta, Georgia and Hemenway's Seafood Grille & Oyster Bar ("Hemenway's"), The
Old Grist Mill Tavern, and Monterey in the Providence, Rhode Island market. The
Company was incorporated in Georgia in December 1982.
On September 13, 1996, the Company completed the acquisition of Bugaboo Creek
Steak House, Inc., along with certain related restaurant and real estate
properties. Bugaboo Creek Steak House, Inc., now a wholly-owned subsidiary of
the Company, owns and operates the 14 Bugaboo Creek Steak Houses and the six The
Capital Grilles. A separate subsidiary, Whip Pooling Corporation, owns and
operates the Hemenway's, The Old Grist Mill Tavern, and Monterey restaurants, as
well as the real estate associated with two of the Company's other restaurants.
On January 13, 1997, the Company changed its name from Longhorn Steaks, Inc. to
RARE Hospitality International, Inc., to reflect the organization of its
operations into three distinct restaurant operating businesses. The Company
believes that the new name and corporate structure more adequately reflect its
position as a multi-concept operator. As a result of this change, the Company's
common stock, which had traded on the Nasdaq National Market under the symbol
"LOHO" began trading under its current symbol "RARE".
CONCEPTS
Longhorn Steakhouse restaurants, which are located primarily in the southeastern
and midwestern United States, are casual dining, full-service restaurants that
serve lunch and dinner, offer full liquor service and feature a menu consisting
of fresh cut steaks, as well as salmon, shrimp, chicken, ribs,
pork chops and prime rib. Longhorn Steakhouses emphasize high
quality, moderately-priced food and attentive, friendly service, provided in a
casual atmosphere resembling a Texas roadhouse.
The 14 Bugaboo Creek Steak House restaurants are currently located in the
northeastern and mid-Atlantic regions of the United States. The Bugaboo Creek
Steak Houses are casual dining restaurants designed to resemble a Canadian Rocky
Mountain lodge. Menu offerings include seasoned steaks, prime rib, spit-roasted
half chickens, smoked baby back ribs, grilled salmon and a variety of freshwater
fish.
The six The Capital Grille restaurants are currently located in the northeastern
region of the United States, Troy, Michigan and Miami, Florida. The Capital
Grilles are fine-dining restaurants with menu offerings ranging
from chilled baby lobster and beluga caviar appetizers to entrees of dry-aged
steaks, lamb and veal steaks, lobster, grilled salmon and chicken to a
wine list of over 300 selections.
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RESTAURANT LOCATIONS
The following tables set forth the location of each existing restaurant by
concept at March 9, 1997 and the number of restaurants in each area.
LONGHORN STEAKHOUSE RESTAURANTS
EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS
Florida Alabama
Miami/Ft. Lauderdale.......... 4 Dothan..................... 1
Jacksonville.................. 4 Montgomery................. 1
Tallahassee................... 1 Mobile..................... 1
Orlando....................... 7
Ocala......................... 1 Tennessee
West Palm..................... 2 Chattanooga................ 1
Ft. Myers..................... 1 Knoxville...................1
Tampa......................... 1 Nashville.................. 5
Destin........................ 1
Ohio
Cincinnati ................ 4
Georgia Cleveland.................. 7
Athens........................ 1 Columbus................... 2
Atlanta.......................19
Columbus...................... 1 North Carolina
Macon......................... 1 Greensboro/High Point/
Winston-Salem.............. 2
Rome.......................... 1 Charlotte.................. 2
Savannah...................... 1
Augusta....................... 1 South Carolina
Valdosta...................... 1 Greenville/Spartanburg .... 2
Hilton Head................ 1
Columbia................... 1
Total Existing Company-Owned/Joint Venture Restaurants.......79
EXISTING FRANCHISE-OWNED RESTAURANTS
Alabama North Carolina
Birmingham.....................1 Raleigh.................... 1
Florida
Tampa..........................1
Total Existing Franchise-Owned Restaurants................... 3
Total Longhorn Steakhouse restaurants........................82
BUGABOO CREEK STEAK HOUSE RESTAURANTS
EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS
Massachusetts Rhode Island
Boston.........................4 Providence ................2
5
Connecticut
Virginia Manchester ............... 1
Springfield....................1
Maine
New York Portland................... 1
Albany.........................1
Rochester......................1 Maryland
Poughkeepsie...................1 Gaithersburg............... 1
Pennsylvania
Philadelphia...................1
Total Bugaboo Creek Steak House restaurants..................14
THE CAPITAL GRILLE RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
Massachusetts Rhode Island
Boston.........................2 Providence..................1
District of Columbia Michigan
Washington.....................1 Troy........................1
Florida
Miami..........................1
Total The Capital Grille restaurants..........................6
SPECIALTY RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
Rhode Island
Georgia Hemenway's Seafood Grille
Skeeter's Grille, Atlanta......2 & Oyster Bar, Providence...1
Lone Star Steaks, Atlanta......1 Monterey, Providence........1
The Old Grist Mill Tavern,
Providence................1
Total Specialty Restaurants...................................6
RESTAURANTS UNDER CONSTRUCTION
Georgia Texas
Longhorn Steakhouse, The Capital Grille,
Statesboro......1 Houston............1
Florida Illinois
Longhorn Steakhouse, The Capital Grille,
St. Petersburg..........1 Chicago............1
Longhorn Steakhouse,
Sarasota................1
Longhorn Steakhouse,
6
Ft. Lauderdale..........1
Total Restaurants Under Construction.........................6
UNIT ECONOMICS
Longhorn Steakhouse:
The Company's modified restaurant design, developed and refined over the past
three years, has increased capacity from an average of 150 seats for restaurants
open prior to 1994 to an average of 236 seats for restaurants opened in 1996.
The objective of this modification was to increase the revenues of the Company's
new restaurants while reducing capital expenditures as a percentage of revenues.
On a weighted average basis, the 14 new restaurants opened during 1996 generated
annualized revenues of $2,907,000 per unit (40% above the 1996 average revenue
by those Company-owned and joint venture restaurants open for the full year),
restaurant average annualized operating cash flow of $606,000 per unit (or 20.9%
of revenues), and restaurant average annualized operating profit after
depreciation and amortization of $269,000 per unit (or 9.3% of revenues). The
Company intends to continue to emphasize leasing as its preferred arrangement
for Longhorn Steakhouse sites and currently leases all but 17 of its Longhorn
Steakhouse sites. The Company purchases land only in those circumstances it
believes are cost effective. Four of the 14 Longhorn Steakhouse restaurants
opened in 1996 were located on property purchased at an average cost of $649,000
per location. Excluding real estate costs, the average cash investment to open a
Longhorn Steakhouse restaurant in 1996 was $1,571,000 including pre-opening
expenses of $218,000. The Company amortizes pre-opening expenses over the first
12 months of a restaurant's operation.
Bugaboo Creek Steak House:
The Company has developed a modified restaurant design which will serve as the
new prototype for all future Bugaboo Creek Steak House restaurants constructed,
beginning in 1997. The objective of this new design is to reduce the capital
expenditure for new restaurant construction and reduce ongoing operating costs
at these new restaurants due to lower square footage and a more efficient
layout. None of the Bugaboo Creek Steak House restaurants constructed to date
have utilized this design. The average revenues for Bugaboo Creek Steak House
restaurants open for a full year were $3,116,000 per unit, with average
operating cash flow per unit of $403,000 and restaurant average annualized
operating profit after depreciation and amortization per unit of $173,000. The
Company intends to continue to emphasize leasing as its preferred arrangement
for Bugaboo Creek Steak House restaurant sites and currently leases all but two
of its Bugaboo Creek Steak House restaurant sites. The Company purchases land
only in those circumstances it believes are cost effective. None of the three
Bugaboo Creek Steak House restaurants opened in 1996 were located on purchased
property. Excluding real estate costs, the average cash investment to open a
Bugaboo Creek Steak House restaurant in 1996 was $2,664,000, including
pre-opening expenses of $197,000. The Company amortizes pre-opening expenses
over the first 12 months of a restaurant's operation.
The Capital Grille restaurants:
Due to the historic nature of many of the sites selected for The Capital Grille
(which is incorporated into the design of the facility), the development of a
prototype is not feasible. Instead, the Company is evaluating methods in which
to lower construction costs while retaining the unique ambiance of each
location. For 1996, the weighted average revenues for all The Capital Grille
restaurants were $5,191,000 per unit, with average operating cash flow
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per unit of $1,313,000 and restaurant average annualized operating profit after
depreciation and amortization per unit of $1,179,000. The Company intends to
continue to emphasize leasing as its preferred arrangement for restaurant sites
and currently leases all of its restaurant sites. The Company intends to
purchase land only in those circumstances it believes are cost effective. The
average cash investment to open a The Capital Grille restaurant in 1996 was
$3,030,000, including pre-opening expenses of $294,000. The Company amortizes
pre-opening expenses over the first 12 months of a restaurant's operation.
EXPANSION STRATEGY
Longhorn Steakhouse and Bugaboo Creek Steak House:
The Company plans to expand through the development of joint ventures and
additional Company-owned Longhorn Steakhouse restaurants and Bugaboo Creek Steak
House restaurants in existing markets and in other selected metropolitan markets
in the southeastern, midwestern, northeastern and mid-Atlantic regions of the
United States. Under its joint venture arrangements, the Company intends to
expand into those markets where the Company has identified joint venture
partners who are experienced restaurant operators with knowledge of the market
in which the joint venture will operate. Currently, the Company has joint
venture arrangements covering territories in southern Alabama, various areas of
Florida, Georgia, North Carolina, South Carolina and Ohio and in the
Philadelphia/Baltimore/Harrisburg and St. Louis areas. The Company plans to
continue to expand its Company-owned restaurants by clustering its restaurants
in existing and new markets, with Longhorn Steakhouse restaurants primarily in
the southeastern and midwestern regions of the United States and Bugaboo Creek
Steak House restaurants primarily in the northeastern and mid-Atlantic regions
of the United States. The Company believes this clustering enhances its ability
to supervise operations, market the Company's concept and distribute supplies.
The Company also intends to open single restaurants in smaller markets in
sufficiently close proximity to the Company's other markets to enable the
Company to efficiently supervise operations and distribute supplies. The Company
currently does not plan to develop Longhorn Steakhouse restaurants and Bugaboo
Creek Steak House restaurants in the same markets.
The Capital Grille:
The Company plans to expand through the development of additional Company-owned
The Capital Grille restaurants in selected metropolitan markets nationwide.
Overall:
The Company's objective is to increase earnings by expanding market share in
existing markets and by developing restaurants in new markets. The Company
intends to open approximately 24 Company-owned and joint venture restaurants in
1997: 17 Longhorn Steakhouse restaurants; three Bugaboo Creek Steak House
restaurants and four The Capital Grille restaurants. Of the restaurants proposed
for 1997, the Company has opened one restaurant in Ohio, has six restaurants
under construction in Florida, Georgia, Texas and Illinois and has signed
letters of intent or leases on sites for 17 additional restaurants as of March
9, 1997. The Company expects that 18 of the 20 Longhorn Steakhouse restaurants
and Bugaboo Creek Steak House restaurants to be opened in 1997 will be developed
under joint ventures, and that all of The Capital Grille restaurants will be
Company-owned.
In January, 1997, the Company acquired two previously franchised Longhorn
Steakhouse restaurants in Greenville and Spartanburg, South Carolina and the
attendant
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territory franchise development rights for the Greenville-Spartanburg DMA and
the Raleigh, NC DMA. The Company may transfer other Company-owned restaurants to
joint ventures in connection with the future development of existing
territories. The Company is not currently a party to any agreement, arrangement
or understanding in connection with any other potential acquisition of existing
restaurants other than in the ordinary course of business, but the Company will
continue to evaluate suitable acquisitions in the restaurant industry as they
are identified.
The Company will consider on a selective basis qualified applicants with
substantial restaurant experience and financial resources for franchises of
either Longhorn Steakhouse restaurants or Bugaboo Creek Steak House restaurants.
The Company does not currently anticipate offering franchises for The Capital
Grille restaurants. The Company expects that it will grant franchises to
operators who are not joint venture partners with the Company primarily in
markets in which the Company would not otherwise expand itself. The Company does
not expect franchisees to open any restaurants in 1997.
The preceding discussion of expansion strategy contains certain
forward-looking statements. Forward-looking statements involve a number of
risks and uncertainties, and in addition to the factors discussed in this Form
10-K, among the other factors that could cause actual results to differ
materially are the following: the Company's ability to identify and secure
suitable locations on acceptable terms, open new restaurants in a timely
manner, hire and train additional restaurant personnel and integrate new
restaurants into its operations; the continued implementation of the Company's
strict business discipline over a large restaurant base; the economic
conditions in the new markets into which the Company expands and possible
uncertainties in the customer base in these areas; changes in customer dining
patterns; competitive pressures from other national and regional restaurant
chains; business conditions and growth in the restaurant industry and the
general economy; and other risks identified from time to time in the Company's
SEC reports and public announcements. See the discussion of forward-looking
statements found in "Documents Incorporated by Reference."
SITE SELECTION AND RESTAURANT LAYOUT
The Company considers the location of a restaurant to be a critical factor to
the unit's long-term success and devotes significant effort to the investigation
and evaluation of potential sites. The site selection process focuses on trade
area demographics, target population density and household income level as well
as specific site characteristics, such as visibility, accessibility and traffic
volumes. The Company also reviews potential competition and the profitability of
national chain restaurants operating in the area. Senior management inspects and
approves each restaurant site. It typically takes 100 to 120 days to construct
and open a new Longhorn Steakhouse restaurant, 130 to 140 days to construct and
open a new Bugaboo Creek Steak House restaurant and 170 to 185 days to construct
and open a new The Capital Grille restaurant. While the Company will consider
the option of purchasing sites for its new restaurants where it is cost
effective to do so, currently all but 20 of the Company's restaurant sites are
leased.
Over the past three years, the Company has modified its prototype Longhorn
Steakhouse restaurant, increasing its average seating capacity from
approximately 150 seats for Longhorn Steakhouse restaurants open prior to 1994
to 236 seats in approximately 6,000 square feet of space for restaurants opened
in 1996. An expanded kitchen design incorporating equipment needed for a
broader menu is also part of the prototype. The Company believes the kitchen
design simplifies training, lowers costs and improves the consistency and
quality of the food. The prototype restaurant design also includes cosmetic
changes that provide a total restaurant concept that is inviting and
comfortable while maintaining the ambiance of a Texas roadhouse.
The Company is in the process of modifying its prototype Bugaboo Creek Steak
House restaurant to incorporate a smaller seating capacity than its average
restaurant. This new prototype incorporates a target of 270 seats in
approximately 7,500 square feet of space. The Company expects the new prototype
will reduce labor, utilities and other operating costs as well as capital
required for expansion.
Over the past three years, the Company renovated and remodeled those Longhorn
Steakhouse restaurants that had been opened prior to the development of its new
prototype in late 1994. The remodeling involved the installation of kitchen
equipment needed for new menu items, as well as the installation of kitchen
printers in conjunction with the new point-of-sale ("POS") system. The
remodeling also included cosmetic improvements such as repainting and
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refinishing, new lighting and various decor adjustments. Exterior improvements
encompassed repainting and additional lighting designed to convey a more
inviting image, as well as new signage to reflect the change in the name of the
restaurant to Longhorn Steakhouse from Longhorn Steaks. In 1996, those Longhorn
Steakhouse restaurants that were remodeled were closed an average of 2.2 days to
complete the construction and train the restaurant staff on the new menu items
and the new POS system. In 1996, closing these restaurants for remodeling
resulted in reduced sales of approximately $10,000 per restaurant during the
period of remodeling and additional reductions in restaurant operating profit of
approximately $15,000 per restaurant for one to two months following the
remodeling as a result of training costs associated with new systems. The
average capitalized cost per restaurant remodeled in 1996 was approximately
$140,000. The Company remodeled two restaurants in 1994, 25 in 1995 (which
included one restaurant that had been acquired in 1995) and 20 restaurants in
1996 (which included five restaurants that had been acquired in 1995 and 1996).
RESTAURANT OPERATIONS
Management and Employees. The management staff of a typical restaurant consists
of one general manager or managing partner, two or three assistant managers and
one kitchen manager. In addition, a typical Longhorn Steakhouse restaurant
employs approximately 30 to 50 staff members, a typical Bugaboo Creek Steak
House restaurant employs approximately 85 staff members, and a typical The
Capital Grille restaurant employees approximately 60 staff members. The general
manager or managing partner of each restaurant has primary responsibility for
the day-to-day operation of the restaurant and is responsible for maintaining
Company-established operating standards. The Company employs seven Longhorn
Steakhouse regional managers, who each have responsibility for the operating
performance of three to eight Company-owned Longhorn Steakhouse restaurants and
report directly to the Director of Operations for the Longhorn Steakhouse
concept. The Company employs two Bugaboo Creek Steak House regional managers,
who each have responsibility for the operating performance of seven Bugaboo
Creek Steakhouse restaurants and report directly to the Executive Vice President
for the Bugaboo Creek Steak House concept. The Company also employs one regional
manager responsible for four The Capital Grille restaurants plus the three
specialty restaurants in the Providence, Rhode Island market, reporting directly
to the Vice President of Operations for The Capital Grille. The Vice President
of Operations for The Capital Grille also has direct responsibility for the
operating performance of the remaining The Capital Grille restaurants, which
have been opened within the last seven months.
The Company seeks to recruit managers with substantial restaurant experience.
The Company selects its restaurant personnel utilizing a selection process which
includes psychological and analytical testing which is designed to identify
individuals with those traits the Company believes are important to success in
the restaurant industry. The Company requires new managers to complete an
intensive training program focused on both on-the-job training as well as a
rigorous in-house classroom-based educational course. The program is designed to
encompass all phases of restaurant operations, including the Company's
philosophy, management strategy, policies, procedures and operating standards.
Through its management information systems, senior management receives weekly
reports on daily sales, customer counts and costs of sales. Based upon these
various reports, management believes that it is able to closely monitor the
Company's operations.
The Company maintains a performance measurement and an incentive compensation
program for its management level employees. The performance programs reward
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restaurant management teams with cash bonuses for meeting profitability targets
and for improved profitability at the restaurant. In addition, if profitability
targets are met, the management team is also awarded cash bonuses for
improvements in restaurant sales. Incentive compensation is also sometimes
provided to management in the form of stock options. For 1996, no stock options
were awarded to Longhorn Steakhouse restaurant level managers, and Bugaboo Creek
Steak House general managers received stock options upon appointment as general
managers.
Management Information Systems. The Company utilizes a Windows-based accounting
software package and a network that enables electronic communication throughout
the entire Company. In addition, the Longhorn Steakhouse restaurants utilize a
Windows-based POS system. The Company utilizes these management information
systems to develop pricing strategies, monitor new product reception and
evaluate restaurant-level productivity. The Company expects to continue to
develop its management information systems in each concept to assist restaurant
management in analyzing their business and to improve efficiency.
Purchasing. The Company establishes product quality standards for beef, then
negotiates directly with suppliers to obtain the lowest possible prices for the
required quality. The Company also utilizes select long-term contracts on
certain items to avoid short-term meat cost fluctuations. For the Bugaboo Creek
Steak House restaurants, beef is received from suppliers at age specifications;
all steaks, other than bone steaks, are then cut in each restaurant by
restaurant-level management on a daily basis. For the Longhorn Steakhouse
restaurants, beef is aged at the facility of the Company's largest distributor,
who delivers the beef to the Longhorn Steakhouse restaurants when the age
reaches specified guidelines; this arrangement is closely monitored by Company
personnel and management believes it provides for efficient and cost-effective
meat processing and distribution, while maintaining the Company's control and
supervision of purchasing and aging. Except for bone steaks, which are cut by a
meat company in Atlanta under contract with the Company, the restaurant-level
management at Longhorn Steakhouse restaurants cuts all steaks on a daily basis.
For The Capital Grille restaurants, beef is aged in a controlled climate in each
individual restaurant and all steaks, other than bone steaks, are cut in each
restaurant by restaurant-level management on a daily basis.
The Company's management negotiates directly with suppliers for most other food
and beverage products to ensure uniform quality and adequate supplies and to
obtain competitive prices. The Company purchases its meat, food and other
supplies from a sufficient number of suppliers such that the loss of any one
supplier would not have a material effect on the Company. In mid-1996, the
Company completed a transition from its current distribution system which
utilized various regional distributors to a consolidated system under which a
single distributor services all of the Longhorn Steakhouse restaurants. In early
1997, this system was also phased in for the Bugaboo Creek Steak House
restaurants. There are no plans to expand this to The Capital Grille
restaurants, which are more geographically diverse and require a wider selection
of raw products than the Longhorn Steakhouse restaurants and Bugaboo Creek Steak
House restaurants.
Seasonality. Although individual restaurants have seasonal patterns of
performance that depend on local factors, aggregate sales by the Company's
restaurants have not displayed pronounced seasonality, other than lower sales
during the "back-to-school" season, which falls in
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the Company's third fiscal quarter, and higher sales during the Christmas
holiday season, which falls in the Company's fourth fiscal quarter. Extreme
weather, especially during the winter months, may adversely affect sales.
OWNERSHIP STRUCTURES
The Company's interests in its restaurants are divided into three categories:
(1) Company-owned restaurants, (2) joint venture restaurants and (3) franchised
restaurants.
Company-owned restaurants. 43 Longhorn restaurants, all Bugaboo Creek Steak
House restaurants, all The Capital Grille restaurants, the two Skeeter's Grille
restaurants, and the Lone Star Steaks, Hemenway's, The Old Grist Mill Tavern and
Monterey are owned and operated by the Company. The general manager of each of
these restaurants is employed and compensated by the Company. See "Restaurant
Operations - Management and Employees" above.
Joint Venture Restaurants. The Company is a partner in thirteen joint ventures
for the operation of Longhorn Steakhouse restaurants that in the aggregate
operate 36 restaurants as of March 9, 1997. In each case the Company's partner
is an experienced restaurant operator who owns from 10% to 50% of the joint
venture. While the scope and terms of these joint ventures vary, they are
generally formed with the goal of developing multiple restaurants in a
particular market under the supervision of the Company's joint venture partner.
The joint ventures generally contemplate that the general manager of each
restaurant developed or operated by the joint venture will purchase a 10%
interest in the cash flow of the restaurant managed thereby ratably diluting
the interest of the Company and its joint venture partner.
The joint ventures generally pay fees to the managing partner at a rate of
$1,000 to $2,500 per restaurant per month and pay fees to the Company at a rate
of $1,500 to $4,000 per restaurant per month. Those joint ventures that operate
under franchise agreements pay royalties at the rate of 1.5% of gross sales. In
addition, under the terms of the Company's 50/50 joint ventures, the Company is
paid a $15,000 opening supervision fee from the joint venture for services
performed in connection with each restaurant opening.
The joint ventures either operate their restaurants under the control of the
Company or under franchise agreements with the Company. Franchise agreements for
joint ventures are modified by an addendum that provides that no franchise fee
is payable and reduces the royalty rate. In the event that the Company's partner
in the joint venture or any other entity should acquire the joint venture's
restaurants, this addendum to the franchise agreement would
12
terminate and the operation of the restaurants would continue under the terms of
the franchise agreement. Three of the joint ventures have area development
agreements with the Company for the development of additional restaurants.
Six other joint ventures do not have specific development rights although the
Company has agreed, during a specified time, not to establish restaurants in
their market areas except through the joint venture, so long as a specified
development schedule is met.
The Joint ventures are terminable by either joint venture partner upon default
by the other partner. Certain of the joint ventures give the Company the option
under certain circumstances to acquire the interest of the 10% joint venture
partner for cash or shares of the Company's common stock. Five of the joint
ventures obligate the Company to purchase the interest of its 10% joint venture
partner upon the death of the principal of the joint venture partner and three
include a provision permitting either partner to set a price at which the other
partner must either buy the interest of the terminating partner or sell its
interest to the terminating partner.
Franchised Restaurants. As of March 9, 1997, 27 of the 36 restaurants operated
by the Company's joint ventures are operated under franchise agreements. In
addition, the Company has three unaffiliated franchises that currently operate
three Longhorn Steakhouse restaurants in Alabama, Florida and North Carolina. In
addition, the Company has entered into an area development agreement with an
unaffiliated entity with the right to operate franchised Longhorn Steakhouse
restaurants in Puerto Rico. In 1996, no unaffiliated franchise restaurants were
opened and two were closed, one each in Roanoke, Virginia and in Birmingham,
Alabama.
Original Franchise Agreements. The Company entered into its first generation of
franchise agreements during the years 1987 through 1993. Three Longhorn
Steakhouse restaurants currently operate under the original franchise
agreements. These franchise agreements were typically for a ten-year period and
were usually renewable for two or three subsequent five year periods. The
franchise agreements permitted the operation of multiple restaurants in a
specified territory and typically provided for payment of a franchise fee in the
aggregate amount of $50,000, generally payable in installments upon execution
and the opening of the second and third units. The franchise fee could vary
depending on the territorial size and location of the franchise area and the
number of restaurants the Company estimates could be developed within the
designated franchise area.
The franchise agreements also provided for royalties with respect to each
franchise unit of 4% of gross sales per unit on the first $1.0 million in annual
gross sales and 3% of gross sales per unit on the second $1.0 million of annual
gross sales, with a minimum payment of $2,800 per month per franchised unit. In
addition to the royalties described above, the franchise is required to pay a 3%
royalty with respect to each franchise unit on annual gross sales between $2.0
million and $2.5 million during the first five year renewal period, and on
annual sales between $2.0 million and $3.0 million during the second five year
renewal period.
The franchisee has the right to terminate a franchise agreement at any time,
upon 30 days written notice to the Company. The Company has the right to
terminate a franchise agreement for a variety of reasons, including the
franchisee's failure to pay all amounts due when required or the willful failure
to adhere to the Company's methods and standards.
New Franchise Agreements. In 1994, the Company revised its form of franchise
agreement and all franchises granted since 1993 have been on this revised form.
27 Longhorn Steakhouse restaurants operate under the new franchise agreement,
all of which are operated by joint ventures. The Company may grant additional
franchises to operate Longhorn Steakhouse and Bugaboo Creek Steak House
restaurants under the revised form. The franchise agreements are granted with
respect to individual restaurants and are either for a term of ten years
13
with a right of the franchisee to acquire a successor franchise for an
additional ten-year period if specified conditions are met or for a period of
twenty years. The franchise agreements provide for a franchise fee of $60,000,
which amount is reduced for subsequent franchises acquired by the same
franchisee. The franchise fee is payable in full upon execution. The franchise
agreements provide for royalties with respect to each restaurant of 4% of gross
sales and require the franchisee to expend on local advertising during each
calendar month an amount equal to at least 1.5% of gross sales and, if the
Company establishes an advertising fund, to contribute an additional amount of
0.5% of gross sales to such fund or up to 4.5% of the restaurant's gross sales
during the conduct of a market, regional or national advertising campaign.
The franchisee has the right to terminate the franchise agreement upon default
by the Company. The Company also retains the right to terminate a franchise for
a variety of reasons, including the franchisee's failure to pay amounts due
under the agreement or to otherwise comply with the terms of the franchise
agreement.
General. An important element of the Company's franchise program is the training
the Company provides for each franchisee. With respect to each new franchisee,
the Company provides the same training program provided to the Company's
management and employees. In addition to this initial training, the Company
provides supervision at the opening of the franchisee's first restaurant,
beginning one week prior to opening, and routine supervision thereafter. In
addition, the Company makes available, at no cost to franchisees, the
advertising materials which it has developed for its own Longhorn Steakhouse
restaurants, or Bugaboo Creek Steak House restaurants as appropriate.
All franchisees are required to operate their restaurants in compliance with the
Company's methods, standards and specifications regarding such matters as menu
items, ingredients, materials, supplies, services, fixtures, furnishings, decor
and signs. The franchisee has full discretion to determine the prices to be
charged to all customers. In addition, all franchisees are required to purchase
food, ingredients, supplies and materials that meet standards established by the
Company or which are provided by suppliers approved by the Company. Although not
required to do so by the franchise agreements, all of the franchisees currently
purchase beef from the Company's suppliers. The Company does not receive fees or
profits on sales by third-party suppliers to franchisees.
Many state franchise laws limit the ability of a franchisor to terminate or
renew a franchise.
Area Development Agreements. The Company has also entered into area development
agreements with developers, including joint ventures in which the Company is a
partner. Under these agreements, the developer has exclusive rights to establish
and operate Longhorn Steakhouse restaurants in a defined territory generally for
a period of five years, conditioned upon meeting a development schedule provided
in the area development agreement. The Company may enter into similar agreements
with respect to Bugaboo Creek Steak House restaurants. The area development
agreements provide the developer with the option to renew the agreement, usually
for an additional five-year period, predicated upon the establishment of new
performance goals and the Company's determination that the developer has the
capability to comply with the new performance goals. Development fees paid upon
execution of area development agreements reflect the size of the territory
involved and are non-refundable,
14
but are applied to the payment of franchise fees for restaurants opened pursuant
to franchises granted to the developer.
TRADEMARKS
The Company has registered LONGHORN STEAKS and BUGABOO CREEK STEAK HOUSE and
design and THE CAPITAL GRILLE as service marks with the United States Patent and
Trademark Office and has applied for registration of its LONGHORN STEAKHOUSE and
design service mark. The Company regards its service marks as having significant
value and as being important factors in the marketing of its restaurants. The
Company is aware of names and marks similar to the service marks of the Company
used by other persons in certain geographic areas; however, the Company believes
such uses will not adversely affect the Company. It is the Company's policy to
pursue registration of its mark whenever possible and to oppose vigorously any
infringement of its marks.
COMPETITION
The restaurant industry is intensely competitive with respect to price, service,
location and food quality, and there are many well-established competitors with
substantially greater financial and other resources than the Company. Such
competitors include a large number of national and regional restaurant chains.
Some of the Company's competitors have been in existence for a substantially
longer period than the Company and may be better established in the markets
where the Company's restaurants are or may be located. The restaurant business
is often affected by changes in consumer tastes, national, regional or local
economic conditions, demographic trends, traffic patterns, and the type, number
and location of competing restaurants. In addition, factors such as inflation,
increased food, labor and benefits costs and the lack of experienced management
and hourly employees may adversely affect the restaurant industry in general and
the Company's restaurants in particular.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws affecting its
business. Each of the Company's restaurants is subject to licensing and
regulation by a number of governmental authorities, which may include alcoholic
beverage control, health, safety, sanitation, building and fire agencies in the
state or municipality in which the restaurant is located. In addition, most
municipalities in which the Company's restaurants are located require local
business licenses. Difficulties in obtaining or failures to obtain the required
licenses or approvals could delay or prevent the development of a new restaurant
in a particular area. The Company is also subject to federal and state
environmental regulations, but they have not had a material effect on the
Company's operations.
Approximately 17% of the Company's restaurant sales are attributable to the sale
of alcoholic beverages. Alcoholic beverage control regulations require each of
the Company's restaurants to apply to a state authority and, in certain
locations, county or municipal authorities for a license or permit to sell
alcoholic beverages on the premises and to provide service for extended hours
and on Sundays. Typically, licenses must be renewed annually and may be revoked
or suspended for cause at any time. The Company has not experienced and does not
presently anticipate experiencing any delays or other problems in
15
obtaining or renewing licenses or permits to sell alcoholic beverages; however,
the failure of a restaurant to obtain or retain liquor or food service licenses
would adversely affect the restaurant's operations.
The Company and its franchisees are subject in each state in which they
operate restaurants to "dramshop" statutes or case law interpretations, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance.
The Company is also subject to federal and state laws regulating the offer and
sale of franchises administered by the Federal Trade Commission and various
similar state agencies. Such laws impose registration and disclosure
requirements on franchisers in the offer and sale of franchises. These laws
often apply substantive standards to the relationship between franchisor and
franchisee and limit the ability of a franchisor to terminate or refuse to renew
a franchise.
The Federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company designs
its restaurants to be accessible to the disabled and believes that it is in
substantial compliance with all current applicable regulations relating to
restaurant accommodations for the disabled.
The Company's restaurant operations are also subject to federal and state laws
governing such matters as wages, working conditions, citizenship requirements,
overtime and tip credits. Significant numbers of the Company's food service and
preparation personnel are paid at rates related to the federal minimum wage and,
accordingly, further increases in the minimum wage could increase the Company's
labor costs.
Various proposals for comprehensive health care reform have been or are expected
to be submitted to Congress. To the extent that proposals are enacted which
require employers to pay for employees' health insurance or other coverage, such
legislation may have a significant effect on the Company.
EMPLOYEES
As of March 9, 1997, the Company employed approximately 6,321 persons,
117 of whom were corporate personnel, 466 of whom were restaurant management
personnel and the remainder of whom were hourly personnel. Of the 117 corporate
employees, 46 are in management positions and 71 are administrative or office
employees. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
As of March 9, 1997, all but 20 of the Company's restaurants were located in
leased space. The Company's Tucker, Georgia restaurant is leased from a
partnership that is 50% owned by the four original shareholders of the Company.
Initial lease expirations typically range from five to ten years, with the
majority of these leases providing for an option to renew for at least one
additional term. All of the Company's leases provide for a minimum annual rent,
and approximately half of the leases call for additional rent
16
based on sales volume (generally 2.0% to 8.0%) at the particular location over
specified minimum levels. Generally the leases are net leases which require the
Company to pay the costs of insurance, taxes and a portion of lessors' operating
costs.
The leases on the operating Company-owned restaurants will expire (assuming
exercise of all renewal options) on the following schedule: 1 in 1997; 2 in
1998; 2 in 1999 and the remainder over the period from 2000 through 2028. (A
complete listing of each restaurant is set forth under "Restaurant Locations.")
The Company's executive offices are located in 10,000 square feet of space in
Atlanta, Georgia, in a building purchased by the Company in November 1992. In
addition, the Company leases approximately 7,300 square feet of space in East
Providence, Rhode Island to house primarily operations, marketing, training,
purchasing, and administrative staff to support the operation of Bugaboo Creek
Steak House restaurants and The Capital Grille restaurants.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions incidental to the normal
conduct of its business. Management does not believe that the ultimate
resolution of these incidental actions will have a material adverse effect on
the Company's financial position.
In addition, on December 11, 1996 the Company announced it had reached an
agreement in principle to settle for $1.4 million the putative class action
filed on February 10, 1994 against the Company, several of its directors, and
the two managing underwriters of its previous public offering of common stock,
styled Linda Upton v. George W. McKerrow, Jr., Ronald P. Sheean, Ronald W. San
Martin, J. William Norman, George W. McKerrow, Sr., J. C. Bradford & Co., The
Robinson-Humphrey Company, Inc., and Longhorn Steaks, Inc., Civil Action No.
1:94-CV-0353-MHS, U. S. District Court for the Northern District of Georgia,
Atlanta Division. The consummation of the settlement is subject to
documentation, approval by the court, conditional certification of a class for
settlement purposes, and approval by that class of the settlement. The Company
believes that the settlement will be consummated. A total consideration of $1.4
million, the major portion of which was funded by an officers and directors
liability insurance policy, has been placed in escrow to fund this settlement.
The cost to the Company, including related attorneys' fees, was approximately
$605,000.
The Plaintiff purported to represent a class of all persons who purchased the
Common Stock of the Company between July 27, 1992 and June 17, 1993. The
complaint alleged that during this interval the defendants made material
misrepresentations and omissions in connection with the financial condition of
the Company which had the effect of artificially inflating the market price of
the Company's Common Stock. The complaint alleged that by virtue of this conduct
defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the
1934 "Act") and SEC Rule 10b-5 thereunder. The complaint sought compensatory
damages along with pre- and post-judgment interest, reasonable attorney's fees,
expert witness fees, costs and equitable relief. In the plaintiff's answers to
mandatory interrogatories filed under the Court's rules, the plaintiff states
that, although this is a matter for experts, at this point, it appears that
"class-wide damages likely total in excess of $40 million." The defendants deny
any wrongdoing and liability, and this settlement reflects the desire of the
Company to limit further expenses,
On March 25, 1997, Michael Blocker, a former employee of the Company filed a
complaint, styled Michael Blocker v. RARE Hospitality International, Inc. d/b/a
Longhorn Steaks, Inc., in the United States District Court, Northern District
of Georgia, Atlanta Division. Civil Action File No. 1:97-CV-0794-JEC. The
individual plaintiff, who purports to represent a class of all male applicants
who have sought wait staff positions with the Company, filed this putative class
action alleging a pattern and practice of discrimination on the basis of race
and gender in the hiring of wait staff employees. The complaint further
alleges the individual plaintiff has been discriminated against on the basis of
his race and gender, and has been retaliated against upon complaining of the
discrimination. The complaint has only recently been filed, and an answer is
not due for some time. Discovery has not commenced. The Company believes that
the claims of the plaintiff in this lawsuit are unfounded and completely without
merit. The Company denies any liability with respect to these claims and
intends to vigorously defend the case, including contesting certification of
the class action, and defending against the individual claims by the
plaintiff. This action is at its earliest stages and it is not possible at this
time to determine the outcome of the lawsuit or the effect of its resolution on
the Company's Financial position or operating results. Management believes
that the Company's defenses have merit and that the resolution of this matter
will not have a material adverse effect on the Company's financial condition or
results of operations.
On September 13, 1996, Longhorn Steaks of Alabama, Inc. (the Company's
franchisee in certain Alabama counties), William L. Kemp, and James E. Adams,
each 50% stockholders of Longhorn Steaks of Alabama, Inc., filed suit in the
Circuit Court of Jefferson County, Alabama, alleging that the Company had
breached certain terms of the Franchise Agreement between Longhorn Steaks of
Alabama, Inc. and the Company. The case is styled Longhorn Steaks of Alabama,
Inc., William L. Kemp, and James E. Adams v. Longhorn Steaks, Inc. and Richard
E. Rivera, in the Circuit Court of Jefferson County, Alabama, Civil Action No.
CV9605485. Specifically, plaintiffs allege that the Company violated a right of
first refusal concerning future expansion by the Company into Alabama counties
not specifically assigned to Longhorn Steaks of Alabama, Inc. The Company filed
its responsive pleading on October 21, 1996, and intends to vigorously defend
the action. While the Company denies all allegations in this action, it is not
possible to determine the outcome of this action. Management believes that the
Company's defenses have merit and that the resolutions of this matter will not
have a material adverse effect on the Company's financial condition or results
of operations.
17
distraction and diversion of personnel, and to remove the cloud of protracted
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of security holders during the Fourth
Quarter of 1996.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
Information about the Registrant's Executive Officers is incorporated herein by
reference from the section of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 20, 1997, entitled "Executive
Officers".
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock has been traded on Nasdaq National Market under the symbol
"LOHO" since March 31, 1992 (the stock now trades under the symbol "RARE" to
reflect the January name change). The table below sets forth the high and low
sales prices of the Common Stock, as reported on the Nasdaq National Market,
during the periods indicated.
High Low
---- ---
Fiscal Year Ended December 31, 1995
-----------------------------------
First Quarter.................. $11 $ 8 1/2
Second Quarter................. 14 1/2 10 1/2
Third Quarter.................. 18 3/4 13 3/4
Fourth Quarter................. 18 1/4 14 1/2
Fiscal Year Ended December 29, 1996
-----------------------------------
First Quarter.................. $24 3/4 $15 1/2
Second Quarter................. 29 1/2 21 3/4
Third Quarter.................. 25 1/2 14 1/2
Fourth Quarter................. 21 1/8 14 3/4
As of March 9, 1997, there were 425 holders of record of Common Stock.
Since the Company's public offering in 1992, the Company has not
declared or paid any cash dividends or distributions on its capital stock. The
Company does not intend to pay any cash dividends on its Common Stock in the
foreseeable future, as the current policy of the Company's Board of Directors is
to retain all earnings to support operations and finance expansion. The
Company's existing revolving line of credit restricts the payment of cash
dividends without prior lender approval. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." Future declaration and payment of dividends, if any, will be
determined in light of then current conditions, including the Company's
earnings, operations, capital requirements, financial condition, restrictions in
financing arrangements and other factors deemed relevant by the Board of
Directors.
18
ITEM 6. SELECTED FINANCIAL DATA
Following is selected consolidated financial data as of and for each of the
years in the five years ended December 29, 1996. The Consolidated Financial
Statements as of December 29, 1996 and December 31, 1995 and for each of the
years in the three year period ended December 29, 1996 and the independent
auditors' report thereon are included in this Form 10-K. The data should be read
in conjunction with the Consolidated Financial Statements of the Company and
related notes in this Form 10-K and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," also included in this Form 10-K.
Fiscal Years Ended
------------------
Dec. 29, Dec. 31, Dec. 31, Dec. 31, Dec. 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Earnings Data:
Revenues:
Restaurant sales ......... $212,894 $149,279 $111,025 $85,710 59,705
Wholesale meat sales ..... 2,547 6,495 3,389 3,504 3,575
Franchise revenues........ 308 606 615 478 667
Total revenues... 215,749 156,380 115,029 89,692 63,947
Costs and expenses:
Cost of restaurant sales.. 78,637 54,074 39,956 30,143 19,764
Cost of wholesale meat
sales .......... 2,491 6,159 3,137 3,174 3,199
Operating expenses -
restaurants........ 94,587 67,629 50,924 37,622 26,664
Operating expenses -
meat division...... 234 766 702 734 610
Provision for restaurant
closings........... 1,436 155 1,120 -- --
Merger and conversion
expenses........... 2,900 -- -- -- --
Depreciation and
amortization-
restaurants........ 12,191 7,171 5,025 3,946 2,877
General and administrative
expenses........... 13,732 11,082 10,131 6,896 5,661
------ ------ ------ ----- ------
Total costs and
expenses.. 206,208 147,036 110,995 82,515 58,775
Operating income.. 9,541 9,344 4,034 7,177 5,172
Interest income (expense),
net................. 79 291 794 372 (8)
Provision for litigation
settlement.......... 605 -- -- -- --
Minority interest........... 602 5 -- -- 71
Earnings before
income taxes 8,413 9,630 4,828 7,549 5,093
Income taxes................ 3,170 3,047 1,286 1,855 1,384
----- ----- ----- ----- ------
Net earnings..... 5,243 6,583 3,542 5,694 3,709
19
Earnings per common and
common equivalent share... $ 0.46 $ 0.66 $ 0.37 $ 0.69 $ .50
Weighted average common and
common equivalent shares
outstanding............... 11,302 9,955 9,517 8,227 7,480
Fiscal Years Ended
------------------
Dec. 29, Dec. 31, Dec. 31, Dec. 31, Dec. 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital $ 2,065 $ 561 $22,488 $19,076 $ 6,238
Total assets 151,594 107,735 81,951 62,319 33,727
Long-term debt 7,100 13,858 1,808 5,108 3,807
Minority interest 3,301 615 -- -- --
Total stockholders' equity 121,384 78,133 70,289 49,446 23,483
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
On September 13, 1996, the Company completed the acquisition of Bugaboo Creek
Steak House, Inc., along with related restaurant and real estate properties. The
acquisition provided for the issuance of 2,939,062 shares of the Company's
common stock to the stockholders of Bugaboo Creek Steak House, Inc. and 240,410
shares of the Company's common stock for the purchase of three other related
restaurants and certain related real estate. The exchange of shares was
accounted for as a pooling of interests, and accordingly, the accompanying
consolidated financial statements have been restated to include the accounts and
operations of Bugaboo Creek Steak House, Inc. and the related restaurant and
real estate properties that were acquired for all periods presented.
Effective July 1, 1996, the Company changed its fiscal year-end from December 31
to a 52- or 53-week year ending on the Sunday closest to December 31. Interim
reporting periods within 1996 contained three months for the first two quarters.
The third and fourth quarters each contained 13 weeks. Fiscal 1996, which ended
on December 29, 1996, contains 52 weeks. All general references to years relate
to fiscal years, unless otherwise noted.
The Company's revenues are derived primarily from restaurant sales from
Company-owned and joint venture restaurants. The Company also derives a small
percentage of its total revenue from franchise revenues from unaffiliated
franchised restaurants. Cost of restaurant sales consists of food and beverage
costs for Company-owned and joint venture restaurants. Restaurant operating
expenses consist of all other restaurant-level costs. These expenses include the
cost of labor, advertising, operating supplies, rent, and utilities.
Depreciation and amortization includes only the depreciation attributable to
restaurant level capital expenditures and amortization primarily associated with
pre-opening expenditures.
General and administrative expenses include finance, accounting, management
information
20
systems, and other administrative overhead related to support functions for
Company-owned, joint venture, and franchise restaurant operations.
Minority interest consists of partners' share of earnings in
joint venture restaurants.
In April, 1996, the Company discontinued the meat cutting and distribution
operations at the Company's meat division, but retained the purchasing and
quality control functions. As a result, the Company no longer generates
wholesale meat sales to franchises or unaffiliated businesses.
Prior to April 1996, the Longhorn Steakhouse restaurants were not charged
distribution costs, which were absorbed by the Company's meat division.
Subsequent to April 1996 the Longhorn Steakhouse restaurants absorb the full
cost of purchased beef.
The Company defines the comparable restaurant base for 1996 to include those
restaurants open prior to October 1, 1994. The Company defines the comparable
restaurant base for 1995 to include those restaurants open prior to October 1,
1993. Average weekly sales are defined as total restaurant sales divided by
restaurant weeks. A "restaurant week" is one week during which a single
restaurant is open, so that two restaurants open during the same week
constitutes two restaurant weeks.
The Company's revenues and expenses can be significantly affected by the number
and timing of the opening of additional restaurants. The timing of restaurant
openings also can affect the average sales and other period-to-period
comparisons.
The following table sets forth the percentage relationship to total revenues of
the listed items included in the Company's statement of earnings, except as
indicated:
Fiscal Years Ended
December 29, December 31, December 31,
1996 1995 1994
---- ---- ----
Revenues:
Restaurant Sales:
Longhorn Steakhouse 63.3% 62.7% 68.5%
Bugaboo Creek Steak House 20.4 16.6 11.4
The Capital Grille 9.4 9.1 7.3
Other restaurants 5.6 7.1 9.3
----- ----- -----
Total restaurant sales 98.7 95.5 96.5
Wholesale meat sales 1.2 4.1 3.0
Franchise revenues 0.1 0.4 0.5
----- ----- -----
Total revenues 100.0 100.0 100.0
Costs and expenses:
Cost of restaurant sales (1) 36.0 36.2 36.0
Cost of wholesale meat sales (1) 97.8 94.8 92.6
Operating expenses - restaurants (1) 44.4 45.3 45.9
Operating expenses - meat division 0.1 0.5 0.6
Provision for restaurant closings 0.7 0.1 1.0
Merger and conversion expenses 1.3 -- --
Depreciation and amortization -
restaurants (1) 5.7 4.6 4.4
General and administrative expenses 6.4 7.1 8.8
----- ----- -----
Total costs and expenses 95.6 94.0 96.5
Operating income 4.4 6.0 3.5
Interest income, net 0.1 0.2 0.7
Provision for litigation settlement 0.3 -- --
Minority interest 0.3 -- --
21
Earnings before income taxes 4.2 6.2 3.9
Income taxes 1.1 2.0 1.5
Net earnings 3.1 4.2 2.4
================================================================================
(1) Cost of restaurant sales, restaurant operating expenses, and depreciation
and amortization are expressed as a percentage of restaurant sales, and
cost of wholesale meat sales is expressed as a percentage of wholesale meat
sales.
RESULTS OF OPERATIONS
Year Ended December 29, 1996 Compared to Year Ended December 31, 1995
Revenues
Total revenues increased 37.9% to $215.7 million for 1996 compared to $156.4
million for 1995. Restaurant sales increased 42.5% to $212.8 million in 1996
compared to $149.3 million in 1995.
Longhorn Steakhouse:
Sales in the Longhorn Steakhouse restaurants increased 39.3% to $136.5 million
for 1996 compared to $98.0 million for 1995. The increase reflects a 28.8%
increase in restaurant weeks in 1996 as compared to 1995, resulting primarily
from the opening of 14 new Longhorn Steakhouse restaurants and the acquisition
of 3 additional Longhorn Steakhouse restaurants. Average weekly sales for all
Longhorn Steakhouse restaurants in 1996 were $38,858, a 8.1% increase over 1995.
Sales for the 45 comparable Longhorn Steakhouse restaurants increased 3.0% in
fiscal 1996 as compared to fiscal 1995. The increase in comparable restaurant
sales at the Longhorn Steakhouse restaurants is primarily attributable to an
increase in customer counts.
Bugaboo Creek Steak House:
Sales in the Bugaboo Creek Steak House restaurants increased 70.0% to $44.1
million for 1996 compared to $25.9 million for 1995. The increase reflects a
77.6% increase in restaurant weeks in 1996 as compared to 1995, resulting
primarily from the opening of 3 new Bugaboo Creek Steak House restaurants.
Average weekly sales for all Bugaboo Creek Steak House restaurants in 1996 were
$62,370, a 4.3% decrease from 1995. Sales for the 5 comparable Bugaboo Creek
Steak House restaurants decreased 9.4% in fiscal 1996 as compared to fiscal
1995. The decrease in comparable restaurants sales at the Bugaboo Creek Steak
House restaurants is primarily attributable to a decrease in customer counts.
Bugaboo Creek Steak House restaurant customer counts and sales in 1996 were
severely impacted by record setting winter storms in the northeastern and
mid-Atlantic regions of the United States.
The Capital Grille:
Sales in The Capital Grille restaurants increased 43.0% to $20.3 million for
1996 compared to $14.2 million for 1995. The increase reflects a 32.1% increase
in restaurant weeks in 1996 as compared to 1995, resulting primarily from the
opening of 3 new The Capital Grille restaurants. Average weekly sales for all
The Capital Grille restaurants in 1996 were $99,166, a 8.3% increase over 1995.
Sales for the 2 comparable The Capital Grille restaurants increased 15.2% in
fiscal 1996 as compared to fiscal 1995. The increase in comparable restaurants
sales at The Capital Grille restaurants is primarily attributable to an increase
in customer counts.
22
Company-wide:
Wholesale meat sales decreased $4.0 million to $2.5 million in 1996 from $6.5
million in 1995. This decrease resulted from the cessation of meat cutting and
distribution at the Company's meat division, Superior Meats, Ltd. As a result,
the Company discontinued selling meat to its Longhorn Steakhouse franchisees and
other unaffiliated parties.
Franchise revenues decreased $298,000 to $308,000 in 1996 from $606,000 in 1995.
This decrease resulted primarily from the closure of a franchised Longhorn
Steakhouse restaurant in Roanoke, Virginia in the first quarter of 1996, the
Company's purchase of the two franchised Longhorn Steakhouse restaurants in
Greensboro and High Point, North Carolina in the third quarter of 1995, the
formation of a joint venture to own and operate these two restaurants along with
the three franchised Longhorn Steakhouse restaurants in Charlotte, North
Carolina and Columbia, South Carolina in the second quarter of 1996 and the
closure of a franchised Longhorn Steakhouse restaurant in Birmingham, Alabama in
the third quarter of 1996.
Costs and Expenses
Cost of restaurant sales in 1996 as a percentage of restaurant sales increased
to 36.9% from 36.2% in 1995. During 1995 and early 1996, the cost of restaurant
sales in the Longhorn Steakhouse restaurants was reduced by the distribution
costs absorbed by the Company's meat division. If these distribution costs
absorbed by the meat division in 1995 and 1996 were charged directly to the
Longhorn Steakhouse restaurants, cost of restaurant sales would have been 37.1%
in 1996 compared to 36.9% in 1995. The increase was primarily due to higher
contracted beef prices and late year increases in dairy and baked good costs
during 1996.
The cost of wholesale meat sales increased to 97.8% of wholesale meat sales in
1996 as compared to 94.8% in 1995, primarily as the result of the resale of
certain overstocks of beef at lower than normal margins.
Restaurant operating expenses decreased as a percentage of restaurant sales in
1996 to 44.4% from 45.3% in 1995. This decrease was primarily attributable to
higher sales levels and relatively stable fixed costs in the Longhorn Steakhouse
restaurants and The Capital Grille restaurants. Meat division operating costs
decreased to 0.1% of revenues in 1996 as compared to 0.5% in 1995 as the meat
cutting and distribution operations were discontinued.
In 1996, the Company recorded a $1.4 million provision before tax benefits
related to the closure of two Longhorn Steakhouse restaurants in Cincinnati,
Ohio and Knoxville, Tennessee. The Ohio restaurant was closed in the fourth
quarter of 1996. In 1995, the Company recorded a $155,000 provision before tax
benefits related to the closure of one Longhorn Steakhouse restaurant in
Jacksonville, Florida, which was closed in the first quarter of 1996. The
provisions included estimated future net lease obligations and other costs of
closing the facilities and the writedown of restaurant assets to estimated net
realizable value.
In 1996, the Company expensed transaction costs of $2.9 million associated with
the acquisition of Bugaboo Creek Steak House, Inc. and related restaurant and
real estate properties. These transaction costs consisted of investment banking,
accounting, legal and regulatory agency fees and other expenses related to
completing the acquisition and integrating the management information systems.
General and administrative expenses increased to $13.7 million in 1996, or 6.4%
of total revenues, from $11.1 million in 1995, or 7.1% of total revenues. The
dollar amount increase was primarily due to increased labor and support expenses
related to managing a larger number of restaurants; further, in the restated
1995 and 1996 periods, two full support offices were maintained, one of which
(Providence, Rhode Island) was reduced to an operations support office during
the last quarter of 1996. The decreased percentage is due to restaurant revenues
increasing at a faster rate than general and administrative expenses, which have
a large fixed component.
23
Operating income increased to $9.5 million for 1996 from $9.3 million for 1995.
After adjusting for one-time merger and conversion expenses, operating income
increased a total of $3.1 million, or 33.3%. This increase is primarily
attributable to higher sales levels resulting from an increase in the Company's
restaurant base, relatively stable fixed costs and decrease in general and
administrative costs as a percentage of revenues, but is partially offset by the
provision for restaurant closings discussed above.
Interest income, net decreased to $79,000 for 1996 from $291,000 for 1995. The
reduction was due to lower average levels of cash and cash equivalents and
higher average levels of long-term debt in 1996 as compared to 1995.
In 1996, the Company recorded a $605,000 provision associated with the defense
and settlement of a shareholder litigation matter. (See "Item 3 -- Legal
Proceedings").
Minority interest increased to $602,000 in 1996 from $5,000 in 1995. This
reflects the increase in the number of joint venture restaurants to 35
restaurants at fiscal year end 1996 from 16 at fiscal year end 1995.
Income tax expense for 1996 was 37.7% of earnings before income taxes reflecting
$2.5 million of non-deductible merger and conversion expenses, offset primarily
by the benefits of FICA tip credits.
Net earnings decreased 21.2% to $5.2 million for 1996 from net earnings of $6.6
million for 1995, reflecting the net effect of the items discussed above.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues
Total revenues increased 35.9% to $156.4 million for 1995 compared to $115.0
million for 1994. Restaurant sales increased 34.5% to $149.3 million in 1995
compared to $111.0 million in 1994.
Longhorn Steakhouse:
Sales in the Longhorn Steakhouse restaurants increased 24.4% to $98.0 million
for 1995 compared to $78.8 million for 1994. The increase reflects a 15.2%
increase in restaurant weeks in 1995 as compared to 1994, resulting primarily
from the opening of 10 new Longhorn Steakhouse restaurants, the acquisition of 2
additional Longhorn Steakhouse restaurants, and the conversion of one restaurant
acquired in 1995 to a Longhorn Steakhouse. Average weekly sales for all Longhorn
Steakhouse restaurants in 1995 were $35,932, a 8.1% increase over 1994. Sales
for the 40 comparable restaurants increased 5.1% in fiscal 1995 as compared to
fiscal 1994. The increase in comparable restaurant sales at the Longhorn
Steakhouse restaurants is primarily attributable to an increase in customer
counts.
Bugaboo Creek Steak House:
Sales in the Bugaboo Creek Steak House restaurants increased 97.7% to $25.9
million for 1995 compared to $13.1 million for 1994. The increase reflects a
109.3% increase in restaurant weeks in 1995, resulting primarily from the
opening of 6 new Bugaboo Creek Steak House restaurants. Average weekly sales
for all Bugaboo Creek Steak House restaurants in 1995 were $65,195, a 5.6%
decrease from 1994. Sales for the 2 comparable restaurants decreased 3.7% in
fiscal 1995 as compared to fiscal 1994. The decrease in comparable restaurant
sales at the Bugaboo Creek Steak House restaurants is primarily attributable to
a decrease in customer counts.
The Capital Grille:
24
Sales in The Capital Grille restaurants increased 69.0% to $14.2 million for
1995 compared to $8.4 million for 1994. The increase reflects a 43.3% increase
in restaurant weeks in 1995 as compared to 1994. Average weekly sales for all
The Capital Grille restaurants in 1995 were $91,535, an 18.4% increase over
1994. Sales for the 2 comparable restaurants increased 15.7% in fiscal 1995 as
compared to fiscal 1994. The increase in comparable restaurant sales at The
Capital Grille restaurants is primarily attributable to an increase in customer
counts.
Company-wide:
Wholesale meat sales increased $3.1 million to $6.5 million in 1995 from $3.4
million in 1994. This increase resulted from increased meat sales to unrelated
parties, partially offset by a decrease in sales to franchisees.
Franchise revenues decreased $9,000 to $606,000 in 1995 from $615,000 in 1994.
This decrease resulted primarily from closure of one franchised Longhorn
Steakhouse restaurant in Charlotte, North Carolina in the first quarter of 1995
and the Company's purchase of the two franchised Longhorn Steakhouse restaurants
Greensboro and High Point, North Carolina in the third quarter of 1995. The
was partially offset by the opening of another franchised Longhorn Steakhouse
restaurant in Raleigh, North Carolina in the third quarter of 1995.
Costs and Expenses
Cost of restaurant sales in 1995 as a percentage of restaurant sales increased
to 36.2% from 36.0% in 1994. In both 1995 and 1994, the cost of restaurant sales
in the Longhorn Steakhouse restaurants was reduced by the distribution costs
absorbed by the Company's meat division. If these distribution costs absorbed by
the meat division in 1995 and 1994 were charged directly to the Longhorn
Steakhouse restaurants, cost of restaurant sales would have been 36.9% in 1995
compared to 37.0% in 1994. The decrease was primarily due to lower beef costs
and an increase in sales of non-beef items in Longhorn Steakhouse restaurants,
partially offset by higher beef costs in Bugaboo Creek Steak House restaurants
and The Capital Grille restaurants.
The cost of wholesale meat sales increased to 94.8% of wholesale meat sales in
1995 as compared to 92.6% in 1994, primarily as the result of the resale of
certain overstocks of beef at lower than normal margins.
Restaurant operating expenses decreased as a percentage of restaurant sales in
1995 to 45.3% from 45.9% in 1994. This decrease was primarily attributable to
higher sales levels and relatively stable fixed costs in the Longhorn Steakhouse
restaurants and The Capital Grille restaurants. Meat division operating costs
decreased to 0.5% of revenues in 1995 as compared to 0.6% in 1994. The decrease
was primarily attributable to higher sales levels and relatively stable fixed
costs.
In 1995, the Company recorded a $155,000 provision before tax benefits related
to the closure of one Longhorn Steakhouse restaurant in Jacksonville, Florida,
which was closed in the first quarter of 1996. In 1994, the Company recorded a
$1,120,000 provision before tax benefits related to the closure of one
Longhorn Steakhouse restaurant in Orlando, Florida and the planned relocation of
one Longhorn Steakhouse restaurant in Jacksonville, Florida. The provisions
included estimated future net lease obligations and other costs of closing the
facilities and the writedown of restaurant assets to estimated net realizable
value.
General and administrative expenses increased to $11.1 million in 1995, or 7.1%
of total revenues, from $10.1 million in 1994, or 8.8% of total revenues. The
dollar increase was primarily due to increased labor and support expenses
related to managing a larger number of restaurants; further, in the restated
1995 and 1996 periods, two full support offices were maintained, one of which
(Providence, Rhode Island) was reduced to an operations support office during
the last quarter of 1996. The decreased percentage is due to restaurant revenues
increasing at a faster rate than general and administrative expenses, which have
a fixed component.
25
Operating income increased to $9.3 million for 1995 from $4.0 million for 1994.
The increase is primarily attributable to higher sales levels resulting from an
increase in the Company's restaurant base, relatively stable fixed costs and
decrease in general and administrative costs as a percentage of revenues.
Interest income for 1995 was $291,000 compared to $794,000 for 1994. The
reduction was due to lower average levels of cash and cash equivalents and
higher average levels of long-term debt in 1995 as compared to 1994.
Income tax expense for 1995 was 31.6% of earnings before income taxes reflecting
the benefits of FICA tip credits.
Net earnings increased 85.9% to $6.6 million for 1995 from net earnings of $3.5
million for 1994, reflecting the net effect of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development of new restaurants,
selected acquisitions and the refurbishment of existing restaurants. Capital
expenditures totaled $45.5 million in 1996, $41.1 million in 1995, and $18.1
million in 1994. The Company's primary sources of working capital have been the
proceeds of its previous public offerings of Common Stock in 1992, 1993 and
1994, the public offering of Bugaboo Creek Steak House, Inc. in 1994, cash flow
from operations and borrowings under its line of credit. The Company had working
capital of $2.1 million, $0.6 million and $3.6 million at the end of 1996, 1995
and 1994, respectively.
As of March 9, 1997, the Company had borrowings of $13.1 million under a $60.0
million line of credit, which bears interest at the rate of either (i) 75 basis
points over the LIBOR rate with a term that the Company selects, ranging from 30
days to 6 months or (ii) prime. As of March 9, 1997, the weighted average rate
on all outstanding borrowings was 6.26%. Borrowings under the line of credit are
unsecured. The line of credit contains certain financial covenants including a
debt to capitalization ratio, a leverage ratio, an interest coverage ratio, a
minimum net worth and a limit on capital expenditures and payment of dividends.
The Company intends to open approximately 24 Company-owned and joint venture
restaurants in 1997 and approximately 30 in 1998. The Company estimates that its
capital expenditures (without consideration of contributions from joint venture
partners) will be approximately $50-55 million in fiscal 1997 and $60-70 million
in fiscal 1998. The capital expenditure estimate for 1997 includes the estimated
cost of developing 24 new restaurants, continuing to refurbish Longhorn
Steakhouse restaurants, and continuing to invest in improved management
information systems. The Company expects that available borrowing under the
Company's line of credit, together with cash on hand and cash provided by
operating activities will provide sufficient funds to finance its expansion
plans through 1998.
The preceding discussion of liquidity and capital resources contains certain
forward-looking statements. Forward-looking statements involve a number of risks
and uncertainties, and in addition to the factors discussed in this Form 10-K,
among the other factors that could cause actual results to differ materially are
the following: the Company's ability to identify and secure suitable locations
on acceptable terms, open new restaurants in a timely manner, hire and train
additional restaurant personnel and integrate new restaurants into its
operations; the continued implementation of the Company's strict business
discipline over a large restaurant base; the economic conditions in the new
markets into which the Company expands and possible uncertainties in the
customer base in these areas; changes in customer dining patterns; competitive
pressures from other national and regional restaurant chains; business
conditions and growth in the restaurant industry and the general economy; and
other risks identified from time to time in the Company's SEC reports and public
announcements. See the description of forward-looking statements found in
"Documents Incorporated by Reference."
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Consolidated Financial Statements
December 29, 1996 and December 31, 1995
With Independent Auditors' Report Thereon
27
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Index to Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 29, 1996 and
December 31, 1995
Consolidated Statements of Earnings for Each of the Years in the
Three-Year Period ended December 29, 1996
Consolidated Statements of Stockholders' Equity for Each of the Years in the
Three-Year Period ended December 29, 1996
Consolidated Statements of Cash Flows for Each of the Years in the Three-Year
Period ended December 29, 1996
Notes to Consolidated Financial Statements
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
RARE Hospitality International, Inc.:
We have audited the accompanying consolidated balance sheets of RARE Hospitality
International, Inc. and subsidiaries (the "Company") - (formerly Longhorn
Steaks, Inc.) as of December 29, 1996 and December 31, 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 29, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RARE Hospitality
International, Inc. and subsidiaries as of December 29, 1996 and December 31,
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 29, 1996 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 31, 1997
29
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Consolidated Balance Sheets
December 29, 1996 and December 31, 1995
(In thousands, except share data)
Assets 1996 1995
------ ---- ----
Current assets:
Cash and cash equivalents $ 6,478 2,427
Marketable debt securities 861 817
Accounts receivable 2,522 2,292
Inventories 7,883 6,137
Prepaid expenses 1,465 1,467
Preopening costs, net of accumulated amortization 2,665 2,271
------------- ----------
Total current assets 21,874 15,411
Property and equipment, less accumulated depreciation
and amortization (note 4) 120,431 84,913
Goodwill, less accumulated amortization 6,139 5,691
Property acquired, held for sale - 680
Deferred income taxes (note 7) 816 -
Other 2,334 1,040
------------- ----------
Total assets $ 151,594 107,735
============= ==========
See accompanying notes to consolidated financial statements.
-2-
30
Liabilities and Stockholders' Equity 1996 1995
------------------------------------ ---- ----
Current liabilities:
Current debt (note 6) $ - 1,025
Accounts payable 11,385 6,492
Accrued expenses (note 5) 8,152 7,267
Deferred income taxes (note 7) 272 66
---------- ---------
Total current liabilities 19,809 14,850
Debt, net of current installments (note 6) 7,100 13,858
Deferred income taxes (note 7) - 146
Other - 133
---------- ---------
Total liabilities 26,909 28,987
---------- ---------
Minority interest 3,301 615
Stockholders' equity (notes 2, 11, and 12):
Preferred stock, no par value. Authorized 10,000
shares, none issued - -
Common stock, no par value. Authorized 25,000
shares; issued and outstanding 11,653 shares and
9,805 shares at December 29, 1996 and December 31, 1995,
respectively 100,180 61,861
Additional paid-in capital 919 919
Retained earnings 20,231 15,349
Unrealized gain on marketable debt securities 54 4
---------- ---------
Total stockholders' equity 121,384 78,133
Commitments and contingencies (notes 8, 9, and 13)
---------- ---------
Total liabilities and stockholders' equity $ 151,594 107,735
========== =========
See accompanying notes to consolidated financial statements.
-3-
31
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Consolidated Statements of Earnings
Years ended December 29, 1996 and December 31, 1995 and 1994
(In thousands, except per share data)
1996 1995 1994
---- ---- ----
Revenues:
Restaurant sales:
Longhorn Steakhouse $ 136,547 98,034 78,780
Bugaboo Creek Steak House 44,060 25,929 13,121
The Capital Grille 20,329 14,201 8,372
Other restaurants 11,958 11,115 10,752
-------------- ---------- ---------
Total restaurant sales 212,894 149,279 111,025
Wholesale meat sales 2,547 6,495 3,389
Franchise revenues 308 606 615
-------------- ---------- ---------
Total revenues 215,749 156,380 115,029
-------------- ---------- ---------
Costs and expenses:
Cost of restaurant sales 78,637 54,074 39,956
Cost of wholesale meat sales 2,491 6,159 3,137
Operating expenses - restaurants 94,587 67,629 50,924
Operating expenses - meat division 234 766 702
Provision for restaurant closings 1,436 155 1,120
Merger and conversion expenses (note 3) 2,900 - -
Depreciation and amortization - restaurants 12,191 7,171 5,025
General and administrative expenses 13,732 11,082 10,131
-------------- ---------- ---------
Total costs and expenses 206,208 147,036 110,995
-------------- ---------- ---------
Operating income 9,541 9,344 4,034
Interest income, net 79 291 794
Provision for litigation settlement (note 13) 605 - -
Minority interest (note 2) 602 5 -
-------------- ---------- ---------
Earnings before income taxes 8,413 9,630 4,828
Income taxes (note 7) 3,170 3,047 1,286
-------------- ---------- ---------
Net earnings $ 5,243 6,583 3,542
============== ========== =========
Earnings per common and common
equivalent share $ .46 .66 .37
============== ========== =========
Weighted average common and common
equivalent shares outstanding 11,302 9,955 9,517
============== ========== =========
See accompanying notes to consolidated financial statements.
-4-
32
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Consolidated Statements of Stockholders' Equity
Years ended December 29, 1996 and December 31, 1995 and 1994
(In thousands)
Unrealized
gain/loss on Total
Common stock Additional marketable stock-
------------ paid-in Retained debt holders'
Shares Dollars capital earnings securities equity
------ ------- ------- -------- ---------- ------
Balance, December 31, 1993 8,730 $ 42,622 919 5,236 - 48,777
Net earnings - - - 3,542 - 3,542
Issuance of shares pursuant to
public offering 970 18,995 - - - 18,995
Distributions made by acquired
companies - (1,110) - (12) - (1,122)
Exercise of stock options 1 11 - - - 11
Unrealized loss on marketable
debt securities - - - - (246) (246)
------ ---------- --- ------- ---- --------
Balance, December 31, 1994 9,701 60,518 919 8,766 (246) 69,957
Net earnings - - - 6,583 - 6,583
Exercise of stock options 8 93 - - - 93
Issuance of shares in
connection with acquisition 96 1,250 - - - 1,250
Unrealized gain on marketable
debt securities - - - - 250 250
------ ---------- --- ------- --- --------
Balance, December 31, 1995 9,805 61,861 919 15,349 4 78,133
Net earnings - - - 5,243 - 5,243
Issuance of shares pursuant to
public offering 1,781 37,638 - - - 37,638
Exercise of stock options 67 681 - - - 681
Distributions made by acquired
companies - - - (361) - (361)
Unrealized gain on marketable
debt securities - - - - 50 50
------ ---------- --- ------- ---- --------
Balance, December 29, 1996 11,653 $ 100,180 919 20,231 54 121,384
====== ========== === ======= ==== ========
See accompanying notes to consolidated financial statements.
-5-
33
RARE HOSPITALITY INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Years ended December 29, 1996 and December 31, 1995 and 1994
(In thousands of dollars)
December 29, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Operating activities:
Net earnings $ 5,243 6,583 3,542
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 12,856 7,475 5,242
Provision for restaurant closings 1,436 155 1,120
Provision for litigation settlement 605 - -
Minority interest 602 5 -
Preopening costs (4,341) (4,293) (1,766)
Deferred tax (benefit) expense (743) 15 (353)
Loss on sale of property and equipment - 68 -
Changes in:
Accounts receivable (230) (263) (1,229)
Inventories (1,746) (2,961) (601)
Prepaid expenses 2 (572) (389)
Other assets (97) - (745)
Income taxes refundable - 507 (507)
Accounts payable 1,020 1,628 1,719
Accrued expenses 885 2,396 656
Other liabilities (133) (347) 92
-------- -------- -------
Net cash provided by operating activities 15,359 10,396 6,781
-------- -------- -------
Investing activities
Purchase of marketable debt securities - (2,288) (12,207)
Proceeds from sale of marketable debt securities 6 6,728 5,754
Proceeds from maturity of marketable debt securities - 1,200 -
Purchase of property and equipment (45,524) (41,115) (18,058)
Proceeds from sale of property and equipment - 16 -
Asset acquisitions - (4,716) -
-------- -------- -------
Net cash used in investing activities (45,518) (40,175) (24,511)
-------- -------- -------
Financing activities
(Repayments of) proceeds from borrowings on
lines of credit (5,950) 13,050 800
Principal payments on long-term debt (1,833) (13) (4,189)
Proceeds from issuance of shares pursuant to
public offering 37,638 - 18,995
Proceeds from minority partner contributions 1,796 833 -
Distributions to minority partners (1,634) (223) -
Increase in bank overdraft included in accounts payable 3,873 647 -
Distributions made by acquired companies (361) - (1,122)
Proceeds from exercise of stock options 681 93 11
-------- -------- -------
Net cash provided by financing activities 34,210 14,387 14,495
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents 4,051 (15,392) (3,235)
Cash and cash equivalents at beginning of year 2,427 17,819 21,054
-------- -------- -------
Cash and cash equivalents at end of year $ 6,478 2,427 17,819
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes 2,807 983 1,742
======== ======== =======
Cash paid for interest 109 147 257
======== ======== =======
See accompanying notes to consolidated financial statements
-6-
34
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
December 29, 1996 and December 31, 1995 and 1994
(1) Summary of Significant Accounting Policies
Operations
RARE Hospitality International, Inc. (formerly Longhorn Steaks, Inc.),
including its wholly owned subsidiaries (the "Company"), is a
multi-concept restaurant company operating throughout the Eastern
United States. At December 29, 1996, the Company operated the
following restaurants:
Concept Number in operation
------- -------------------
Longhorn Steakhouse 76
Bugaboo Creek Steak House 14
The Capital Grille 6
Other specialty concepts 6
The Company has also franchised certain Longhorn Steakhouse
restaurants throughout the southeastern region of the United States.
The Company operated a wholesale meat division through April 1996.
Operations of this division consisted of the purchasing, cutting,
aging and distribution of meat, primarily to the Company's Longhorn
Steakhouse restaurants, including franchisees.
The Company is a partner in several joint ventures organized for
the purpose of operating Longhorn Steakhouse restaurants. As of
December 29, 1996, 35 of the Company's restaurants operate in joint
ventures.
Fiscal Year
Effective July 1, 1996, the Company changed its fiscal year-end from
December 31 to a 52- or 53-week year ending on the Sunday closest to
December 31. Interim reporting periods within 1996 contained three
months for the first two quarters. The third and fourth quarters each
contained 13 weeks. Fiscal 1996, which ended on December 29, 1996,
contains 52 weeks. All general references to years relate to fiscal
years, unless otherwise noted.
Revenue Recognition
The Company recognizes initial franchise fees as income when
substantially all of its obligations are satisfied, which generally
coincides with the opening of the franchised restaurants. The Company
also receives continuing royalty fees based upon a percentage of each
franchised restaurant's gross revenues. Royalty fees are recognized
when earned.
(Continued)
-7-
35
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents. The carrying amount of
these instruments approximates their fair values. All bank overdraft
balances have been reclassified to accounts payable.
Marketable Debt Securities
Marketable debt securities are classified as available-for-sale and
are reported at fair value, with any unrealized gains or losses, net
of deferred taxes, reflected as a separate component of stockholders'
equity.
Inventories
Inventories, consisting principally of food and beverages, are stated
at the lower of cost or market, using the first-in, first-out (FIFO)
method.
Property and Equipment
Property and equipment are stated at cost. Leasehold improvements are
amortized using the straight-line method over the shorter of the term
of the lease or the estimated useful life of the assets. Depreciation
expense is computed using principally the straight-line method over
the estimated useful lives of the respective assets.
Principles of Consolidation
The consolidated financial statements include the financial statements
of RARE Hospitality International, Inc., its wholly owned
subsidiaries, and joint ventures over which the Company exercises
control. All material balances and transactions between the
consolidated entities have been eliminated.
Pre-opening Costs
Costs related to hiring and training and other direct costs associated
with opening new restaurants are capitalized and amortized over the
first 12 months of a new restaurant's operations.
Unredeemed Gift Certificates
The Company records a liability for outstanding gift certificates at
the time they are issued. Upon redemption, sales are recorded and the
liability is reduced by the amount of certificates redeemed.
(Continued)
-8-
36
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
Goodwill
Goodwill, net of accumulated amortization of $499,219 and $234,450 at
December 29, 1996 and December 31, 1995, respectively, represents the
excess of purchase price over fair value of net assets acquired.
Goodwill is amortized using the straight-line method over the expected
period to be benefited, 25 years. The Company assesses the
recoverability of goodwill by determining whether the amortization of
the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation.
The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.
Other Assets
Other assets consist of organization costs, debt issuance costs,
trademarks, and liquor licenses. Organization costs, trademarks, and
liquor licenses are amortized on a straight-line basis over five
years. Debt issuance costs are amortized on a straight-line basis over
the term of the debt.
Restaurant Closing Costs
Upon the decision to close or relocate a restaurant, estimated
unrecoverable costs are charged to expenses. Such costs include
leasehold improvements, equipment, and furniture and fixtures, net of
salvage value, and a provision for the present value of future lease
obligations, less estimated subrental income. The Company provided for
the closure of two restaurants in 1996, one restaurant in 1995, and
two restaurants in 1994.
Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. Adoption of this Settlement did not have a material impact
on the Company's financial position, results of operations, or
liquidity.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
In connection with the merger of the Company with Bugaboo Creek Steak
House, Inc. ("Bugaboo Creek") (note 2), the Company acquired certain
enterprises affiliated with Bugaboo Creek in a transaction accounted
for as a pooling of interests. Prior to the merger, these affiliated
entities were either S Corporations or partnerships, and as such,
their stockholders or partners, and not the enterprises, were
responsible for Federal and state income taxes.
(Continued)
-9-
37
38
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
Development Costs
Certain direct and indirect costs are capitalized in conjunction with
acquiring and developing new restaurant sites. These costs are
amortized over the life of the related building. Development costs
were capitalized as follows: $389,000 in 1996, $411,000 in 1995, and
$156,000 in 1994.
Stock-Based Compensation
Stock-based compensation is determined using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at
the date of grant over the amount an employee must pay to acquire the
stock (note 12).
Advertising and Promotion Expenses
Advertising and promotion costs are expensed over the period covered
by the related promotion. Advertising expense was $4,929,000,
$3,438,000, and $2,959,000 for 1996, 1995, and 1994, respectively.
Earnings Per Share
Earnings per common and common equivalent share are computed by
dividing net earnings by the weighted average common and common
equivalent shares outstanding during the year. Outstanding stock
options, which are common stock equivalents, were not included in the
computation of 1995 and 1994 earnings per share, as their effect would
have been antidilutive. The difference between primary and fully
diluted earnings per share was not significant in 1996.
Accounts Receivable
Accounts receivable represent amounts due from restaurant customers
and suppliers and interest receivable relating to marketable debt
securities.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent liabilities to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform with the current year's presentation.
(Continued)
-10-
39
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
(2) Business Combinations and Joint Ventures
Lone Star-Georgia
During 1995, the Company purchased certain assets and trademark rights
of Lone Star Steaks, Inc. for a purchase price, including acquisition
expenses, of $3,402,000. The purchase price included cash
consideration of $2,152,000 and 96,153 newly issued shares of the
Company's common stock. These shares had a market value at the time of
the transaction of $1,250,000. Goodwill on this acquisition of
$3,002,000 is being amortized over 25 years.
Bullhead
In 1995, the Company also purchased the assets of two previously
franchised locations in Greensboro and High Point, North Carolina for
$2,564,000. Goodwill on this acquisition of $1,358,000 is being
amortized over 25 years.
Bugaboo Creek
On September 13, 1996, the Company exchanged approximately 3,179,000
newly issued shares of its common stock for all of the outstanding
shares of Bugaboo Creek Steak House, Inc. and certain affiliated
entities (2,939,000 shares for Bugaboo Creek Steak House, Inc. and
240,000 shares for other nonpublic affiliated enterprises). Bugaboo
Creek Steak House, Inc. operated 14 Bugaboo Creek Steak Houses and
five The Capital Grille restaurants, and managed three specialty
concept restaurants at the time of the merger.
The exchange of shares was accounted for as a pooling of interests,
and accordingly, the accompanying consolidated financial statements
have been restated to include the accounts and operations of Bugaboo
Creek for all periods presented. Separate results for the combining
entities for the years ended December 31, 1995 and 1994, and for the
most recent interim period prior to acquisition (the six-month period
ended June 30, 1996) are as follows (amounts are in thousands of
dollars):
June 30, December 31, December 31,
1996 1995 1994
---- ---- ----
Revenues:
Previously reported $ 69,139 102,188 82,510
Bugaboo Creek and
affiliated enterprises 34,720 54,192 32,519
------------- ---------- ----------
$ 103,859 156,380 115,029
============= ========== ==========
(Continued)
-11-
40
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
June 30, December 31, December 31,
1996 1995 1994
---- ---- ----
Net earnings:
Previously reported $ 3,204 4,137 1,514
Bugaboo Creek and 1,221 2,446 2,028
affiliated enterprises ---------- ---------- ----------
$ 4,425 6,583 3,542
========== ========== ==========
There were no adjustments required to conform Bugaboo Creek's
accounting policies to those of the Company.
The following summary, prepared on an unaudited pro forma basis,
presents the results of operations of the Company and Bugaboo Creek on
a pooled basis, combined with the acquired assets of the Lone
Star-Georgia and Bullhead acquisitions for the years ended December
31, 1995 and 1994 as if the purchase business combinations had been
completed as of the beginning of the periods presented, after the
impact of certain adjustments, such as amortization of intangibles,
elimination of franchise revenues, and increased interest expense (or
reduced interest income).
1995 1994
---- ----
Net earnings $6,382,000 3,476,000
Earnings per common and common
equivalent share outstanding $ .64 .37
Dukes-Joint Venture
During 1996, the Company entered into a joint venture arrangement whereby
the Company contributed two Longhorn Steakhouse restaurants and agreed to
contribute funds to construct a third Longhorn Steakhouse restaurant to a
joint venture. The other partners in the joint venture contributed three
restaurants with a fair market value of approximately $780,000 for a 49%
minority interest. The Company has recorded goodwill of $1,050,000 on
this joint venture, based on the fair value of assets the Company
contributed for its 51% interest versus joint venture partner
contributions.
(3) Merger and Conversion Expenses
Merger and conversion expenses are nonrecurring costs related to the
merger with Bugaboo Creek, consisting primarily of investment banking
fees, accounting and legal fees, printing costs, costs to integrate
point-of-sale systems, and other costs related to the merger.
(Continued)
-12-
41
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
(4) Property and Equipment
Major classes of property and equipment at December 29, 1996 and December
31, 1995 are summarized as follows (in thousands of dollars):
1996 1995
---- ----
Land and improvements $ 13,294 12,868
Buildings 15,032 9,167
Leasehold improvements 68,039 43,569
Restaurant equipment 28,220 18,542
Furniture and fixtures 16,300 10,219
Construction in progress 4,131 5,858
------------- ----------
145,016 100,223
Less accumulated depreciation and amortization 24,585 15,310
------------- ----------
$ 120,431 84,913
============= ==========
During 1996 and 1995, the Company capitalized interest during
construction of approximately $135,000 and $183,000, respectively, as a
component of property and equipment.
The Company has, in the normal course of business, entered into
agreements with vendors for the purchase of restaurant equipment,
furniture, fixtures, buildings, and improvements for restaurants that
have not yet opened. At December 29, 1996, such commitments totaled
approximately $6,000,000.
(5) Accrued Expenses
Accrued expenses consist of the following at December 29, 1996 and
December 31, 1995 (in thousands of dollars):
1996 1995
---- ----
Payroll and related $ 1,456 1,548
Income taxes 500 428
Other taxes accrued and withheld 1,096 1,490
Gift certificates 3,689 1,494
Construction costs 442 478
Other 969 1,829
----------- -----
$ 8,152 7,267
=========== =====
(Continued)
-13-
42
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
(6) Debt
At December 29, 1996 and December 31, 1995, debt
outstanding was as follows (in thousands of Dollars):
1996 1995
---- ----
Variable interest rate revolving credit and term loan
agreement, with conversion of amounts outstanding
at May 1, 1998 into a term note repayable over the
forthcoming five years at a fixed or variable rate,
at the option of the Company; bearing interest at
7.39% at December 31, 1995 -- 5,000
Variable interest rate revolving credit and term loan
agreement, with conversion of amounts outstanding
at May 31, 1996 into a term note repayable over five
years; bearing interest at 9% at December 31, 1995 -- 8,050
Variable interest rate revolving credit and term
agreement (the "1996 Facility") 7,100 --
Other notes payable, secured by real estate -- 1,833
----- ------
Total debt 7,100 14,883
Less current portion -- 1,025
----- ------
Debt, net of current portion 7,100 13,858
===== ======
The 1996 Facility permits the Company to borrow up to $60,000,000
through December 1999. At that date, all amounts outstanding will
convert to a two-year term loan, payable in eight equal quarterly
installments of principal, plus interest. The 1996 Facility bears
interest at the Company's option of LIBOR plus a margin of .75% to
1.25% (depending on the Company's leverage ratio) or the
administrative agent's prime rate of interest. At December 29, 1996,
the interest rate on outstanding obligations under the 1996 Facility
was 6.375%, based on LIBOR plus .75%. Amounts available under the
credit facility totaled $52,900,000 at December 29, 1996.
The 1996 Facility restricts payment of dividends, without prior
approval of the lender, and contains certain financial covenants,
including debt to capitalization, leverage and interest coverage
ratios, as well as minimum net worth and maximum capital expenditure
covenants. The agreement is unsecured. At December 29, 1996, the
Company was in compliance with the provisions of the 1996 Facility.
(Continued)
-14-
43
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
(7) Income Taxes
Income tax (benefit) expense consists of (in thousands of dollars):
Current Deferred Total
------- -------- -----
Year ended December 29, 1996:
U.S. Federal $ 2,884 (534) 2,350
State and local 1,029 (209) 820
---------- ---- -------
$ 3,913 (743) 3,170
========== ==== =======
Year ended December 31, 1995:
U.S. Federal $ 2,403 12 2,415
State and local 629 3 632
---------- ---- -------
$ 3,032 15 3,047
========== ==== =======
Year ended December 31, 1994:
U.S. Federal $ 1,366 (327) 1,039
State and local 273 (26) 247
---------- ---- -------
$ 1,639 (353) 1,286
========== ==== =======
The differences between income taxes at the statutory Federal income tax
rate of 34% and income tax expense reported in the consolidated
statements of earnings are as follows:
1996 1995 1994
---- ---- ----
Federal statutory income tax rate 34.0% 34.0 34.0
State income taxes, net of federal benefit 5.0 4.2 4.1
Nondeductible merger and conversion expenses 11.1 - -
Meals and entertainment .6 .3 .1
FICA tip credit (11.2) (5.2) (8.2)
Other (1.8) (1.7) (3.4)
----- ----- ----
Effective tax rates 37.7% 31.6 26.6
===== ===== ====
(Continued)
-16-
44
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 29, 1996
and December 31, 1995 are presented below:
1996 1995
---- ----
Deferred tax assets:
Provisions for restaurant closings $ 599 367
Deferred rent 490 299
Alternative minimum taxes and general business
credit carryforwards 785 413
Conversion costs not currently deductible 129 -
Accrued health insurance not currently deductible 122 111
Accrued workers' compensation not currently deductible 36 86
Other 47 51
--------- ------
Total gross deferred tax assets 2,208 1,327
Less valuation allowance - 45
--------- ------
Net deferred tax assets 2,208 1,282
--------- ------
Deferred tax liabilities:
Property and equipment due to differences in
depreciation and amortization (1,187) (1,211)
Preopening costs expensed for tax purposes
when incurred (430) (263)
Other (47) (20)
--------- ------
Total gross deferred liabilities (1,664) (1,494)
--------- ------
Net deferred tax assets (liabilities) $ 544 (212)
========= ======
(8) Employee Benefit Plans
The Company provides employees, not covered by the Bugaboo Creek plan
discussed in the following paragraph and who meet minimum service
requirements, with retirement benefits under a 401(k) salary reduction
and profit sharing plan. Under the plan, employees may make contributions
of between 1% and 20% of their annual compensation. The Company is
required to make an annual matching contribution up to a maximum of
2-1/2% of employee compensation. Additional contributions are made at the
discretion of the Board of Directors. The Company's expense under the
plan was $220,000 for 1996 and $200,000 for 1995 and 1994.
Additionally, commencing April 1, 1996, the Company provides a 401(k)
salary reduction plan to Bugaboo Creek employees at the date of the
merger. Under the plan, employees make contributions of between 1% and
15% of their annual compensation. The Company is required to make a
matching contribution of 10% of the first 6% contributed by each
employee. All employees of Bugaboo Creek prior to the merger with one
year and 1,000 hours of service are eligible for the plan. The Company's
expense under the plan was $20,000 for 1996.
(Continued)
-17-
45
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
(9) Leases and Related Commitments
The Company leases certain restaurant facilities under various
noncancelable leases. The leases include minimum lease payments, plus
additional amounts based on sales at the individual stores (contingent
rentals). Many of the leases provide for the payment of taxes, insurance,
and maintenance by the lessee. Under the terms of the leases, there are
certain rent holidays and escalations in payments over the lease term.
The effects of the holidays and escalations have been reflected in rent
expense on a straight-line basis over the life of the anticipated lease
terms. The Company also leases vehicles and equipment under operating
leases. Future minimum lease payments under these operating leases with
initial or remaining terms of one year or more are summarized as follows
(in thousands of dollars):
Years ending at or
about December 31:
1997 $ 8,128
1998 8,322
1999 8,130
2000 7,916
2001 7,918
Thereafter 42,980
-----------
$ 83,394
===========
Rental expense consisted of the following (in thousands of dollars):
1996 1995 1994
---- ---- ----
Minimum lease payments $ 6,218 5,207 3,321
Contingent rentals 640 536 374
---------- ----- -----
Total rental expense $ 6,858 5,743 3,695
========== ===== =====
Future minimum lease payments to related parties aggregated $253,800 at
December 29, 1996.
Rental expense includes approximately $120,000, $163,000, and $114,000
for 1996, 1995, and 1994, respectively, for rents paid to entities in
which certain of the Company's principal stockholders have a financial
interest.
The Company has guaranteed a restaurant lease of a franchisee that
expires in 1999. Future minimum lease payments under this lease
aggregated approximately $400,000 at December 29, 1996. The lease
guarantee is collateralized by an agreement by the stockholders of the
franchisee to indemnify the Company for any loss thereunder. In addition,
the Company has guaranteed lease payments of a lease assignee in a former
Company-leased location. Future minimum lease payments under this lease
aggregate approximately $350,000 at December 29, 1996. The Company does
not believe that these guarantees subject it to a material risk of loss.
(Continued)
-18-
46
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
A standby letter of credit in the amount of $750,000 has been issued to
secure the Company's obligations under a lease of real estate. Drafts may
be presented against this letter of credit in the event that the Company
is in default of the terms of the lease, all applicable grace periods
have expired and the Company has failed to cure all such defaults. The
amount of such drafts may be for the amount presently due and owing by
the Company to the landlord or the full amount of the letter of credit
if the landlord has notified tenant that it has terminated the lease or
has exercised its right to repossess the leased premises.
(10) Related Party Transactions
In February 1994, pursuant to an employment agreement, the Company
purchased the Dallas, Texas home of the Company's new president for
$740,000, the home's appraised value at that point in time. The property
was sold in 1996 for approximately $650,000 in net proceeds to the
Company.
During 1996, 1995, and 1994, RDM Design, a company owned by a relative of
two Company directors, provided architectural design services to the
Company. Fees paid for these services (including payments for
subcontracted engineering services) amounted to $114,000, $961,000, and
$319,000 for the years 1996, 1995, and 1994, respectively.
(11) Stockholders' Equity
On April 13, 1994, Bugaboo Creek sold 1,500,000 shares of common stock to
the public as part of an initial public stock offering. On May 10, 1994,
an additional 225,000 shares were sold upon exercise by the underwriters
of their over allotment provision. Net proceeds from this offering were
approximately $19,000,000.
On April 1, 1996, the Company closed a secondary public offering for
1,875,000 shares of common stock. Net proceeds to the Company from this
offering were approximately $38,000,000, including the underwriters'
overallotment.
(12) Stock Options
In February 1992, the Company's Board of Directors adopted and
the stockholders approved a stock option plan ("1992 Stock Option Plan").
The 1992 Stock Option Plan provides for the granting of incentive stock
options, nonqualified stock options, and stock appreciation rights to key
employees and directors, based upon selection by the Stock Option
Committee. All stock options issued under the 1992 Stock Option Plan were
granted at prices which equate to fair market value on the date of the
grant and must be exercised within ten years from the date of grant.
The 1994 Bugaboo Creek Stock Option Plan (the "1994 Stock Option Plan")
provides for the granting of approximately 306,550 shares of the
(Continued)
-19-
47
Company's common stock to directors, officers, and key employees. Through
December 29, 1996, approximately 214,050 options have been awarded,
pursuant to the terms of the 1994 Stock Option Plan. Options awarded
under the 1994 Stock Option Plan prior to the merger were adjusted based
on the exchange ratio of 1.78 shares of common stock of Bugaboo Creek for
each share of the Company's common stock. Options awarded under the 1994
Stock Option Plan are generally granted at prices which equate to fair
market value on the date of the grant, are generally exercisable after
two to three years, and expire ten years subsequent to award.
(Continued)
-20-
48
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
On January 6, 1994, the Board of Directors adopted a resolution granting
nonqualifying options for the purchase of 485,417 shares to the Company's
new President and Chief Executive Officer. Of these options granted,
300,000 are exercisable at the closing price of $8.75 on that date,
91,667 at $12.00 per share, and 93,750 at $16.00 per share. The options
become exercisable in installments on the first five anniversaries of the
date of grant and expire in 2004.
During 1995, the Company granted 2,500 nonqualifying options to a
director of the Company at the closing price of $9.50 on the date of
grant.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plans. Accordingly, no compensation
expense has been recognized for the Company's stock-based compensation
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value methodology prescribed under
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
Accounting for Stock-Based Compensation, the Company's 1996 net earnings
and net earnings per share would have been reduced by approximately
$705,000, or approximately $.06 per share. The effects of disclosing
compensation cost under SFAS No. 123 may not be representative of the
effects on reported earnings for future years. The fair value of the
options granted during 1996 is estimated at $1,593,000 on the date of
grant, using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of zero, volatility of 20%, risk-free
interest rate of 6%, and an average expected life of eight years.
As of December 29, 1996, options to purchase 436,898 shares were
exercisable at a weighted-average exercise price of $14.10. Option
activity under the Company's option plans is as follows:
Average
Shares price
------ -------
Outstanding at December 31, 1993 125,983 21.48
Granted in 1994 1,036,970 13.45
Exercised in 1994 (1,000) 11.00
Canceled in 1994 (35,135) 21.48
---------
Outstanding at December 31, 1994 1,126,818 14.10
Granted in 1995 512,586 18.68
Exercised in 1995 (8,300) 11.20
Canceled in 1995 (61,127) 19.45
---------
Outstanding at December 31, 1995 1,569,977 15.40
Granted in 1996 162,115 21.56
Exercised in 1996 (67,367) 10.10
(Continued)
-21-
49
Canceled in 1996 (253,959) 21.39
---------
Outstanding at December 29, 1996 1,410,766 15.28
=========
(Continued)
-22-
50
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
The following table summarizes information concerning currently
outstanding and exercisable options:
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Range of Weighted- Weighted- Weighted-
exercise average average average
prices (in Number remaining exercise Number exercise
dollars) outstanding life price exercisable price
---------- ----------- --------- --------- ----------- ----------
8.75 to 10 393,900 8.0 8.86 203,580 8.82
10.01 to 15 230,833 8.2 12.38 45,500 11.85
15.01 to 20 431,581 8.5 17.25 62,012 17.55
20.01 to 25 344,452 5.1 21.78 125,806 21.76
25.01 to 27.25 10,000 10.0 26.50 - -
(13) Commitments and Contingencies
Joint Ventures
Several of the Company's joint venture agreements and employment
agreements with joint venture partners and restaurant
managers require or provide the Company with the option, to purchase
the managers' interest upon termination of the joint venture. The
purchase prices are based upon certain multiples of the relevant
restaurant's cash flow.
Shareholder Suit
In February 1994, the Company, several directors, and the two managing
underwriters of its previous public offering were named as defendants
in a lawsuit filed as a class action in the United States District
Court in Atlanta, Georgia. The suit was filed by a shareholder of the
Company who claims to represent a class of all persons who purchased
the Company's common stock between July 27, 1992 and June 17, 1993.
The Plaintiff alleged that the defendants made material
misrepresentations and omissions in connection with the financial
condition of the Company and sought compensatory damages and other
relief. A total consideration of $1.4 million, the major portion of
which was funded by an officers and directors liability insurance
policy, has been placed in escrow to fund this settlement. The cost to
the Company, including related attorneys' fees, was approximately
$605,000.
Purchase Commitments
The Company has entered into certain purchasing agreements with a meat
supplier which required the Company to purchase contracted quantities
of meat at established prices through their expiration on varying dates
in 1997. The quantities contracted for are based on quantities
management believes to be conservative estimates of actual requirements
during the contract terms. The Company does not anticipate any material
adverse effect on its results of operations or financial position from
these contracts.
Other
(Continued)
-23-
51
Under the Company's insurance programs, coverage is obtained for
significant exposures as well as those risks required to be insured by
law or contract. It is the Company's preference to retain a significant
portion of certain expected losses related primarily to workers'
compensation and employee medical costs. Provisions for losses expected
under these programs are recorded based upon the Company's estimates of
the aggregate liability for claims incurred.
(Continued)
-24-
52
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly Longhorn Steaks, Inc.)
Notes to Consolidated Financial Statements
Letters of credit for approximately $510,000 at December 29, 1996 are
being maintained as security under the Company's workers' compensation
policies.
The Company is involved in various legal actions incidental to the
normal conduct of its business. Management does not believe that the
ultimate resolution of these incidental actions will have a material
adverse effect on the Company's financial position.
(14) Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of
operations for the years ended December 29, 1996 and December 31, 1995
(in thousands, except per share data):
First Second Third Fourth
quarter quarter quarter quarter Total year
------- ------- ------- ------- ----------
1996:
Revenues $53,330 51,672 54,635 56,112 215,749
Operating income (loss) 3,382 3,440 (1,285) 4,004 9,541
Earnings (loss) before
income taxes 3,013 3,406 (1,188) 3,182 8,413
Net earnings (loss) 2,008 2,381 (1,659) 2,513 5,243
Net earnings (loss) per share .20 .20 (.15) .21 .46
1995:
Revenues $35,541 35,602 39,886 45,351 156,380
Operating income 2,002 2,081 2,409 2,852 9,344
Earnings before income taxes 2,164 2,165 2,430 2,871 9,630
Net earnings 1,409 1,438 1,585 2,151 6,583
Net earnings per share .15 .14 .16 .21 .66
1
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None required to be reported in this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about directors and nominees for director of the Registrant and
Executive Officer is incorporated herein by reference from the section of the
Registrant's definitive Proxy Statement to be delivered to shareholders of the
Registrant in connection with the annual meeting of shareholders to be held May
20, 1997 (the "Proxy Statement"), entitled "Election of Directors - Certain
Information Concerning Nominees and Directors," and "-Meetings of the Board of
Directors and Committees and Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation is incorporated herein by reference
from the section of the Proxy Statement entitled "Executive Compensation". In no
event shall the information contained in the Proxy Statement under the sections
entitled "Shareholder Return Analysis," and "Compensation and Stock Option
Committee's Report on Executive Compensation" be incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this item is incorporated herein by reference from the
section of the Proxy Statement entitled "Beneficial Owners of More Than Five
Percent of the Company's Common Stock; Shares Held by Directors and Executive
Officers".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions is
incorporated herein by reference from the section of the Proxy Statement
entitled "Certain Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Listing of Financial Statements
The following financial statements of the Registrant, included in the
Registrant's Annual Report to Shareholders for the year ended December 31, 1996,
are incorporated by reference in Part II, Item 8:
Consolidated Balance Sheets as of
December 29, 1996 and 1995
Consolidated Statements of Earnings-
2
54
For Each of the Years in the Three-Year Period Ended December 29, 1996
Consolidated Statements of Stockholders' Equity-
For Each of the Years in the Three-Year Period Ended December 29, 1996
Consolidated Statements of Cash Flows-
For Each of the Years in the Three-Year Period Ended December 29, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Selected Financial Data
(a)(2) Listing of Financial Statement Schedules
No schedules are required to be filed herewith pursuant to Article 5 of
Regulation S-X.
(a)(3) Listing of Exhibits
Exhibit
Number Description of Exhibits
- ------- -----------------------
3(a) - Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference from the Registrant's Current Report
on Form 8-K filed January 17, 1997).
3(b) - Amended and Restated Bylaws of the Registrant (incorporated by
reference from Exhibit 3(b) to Registration Statement on Form S-1,
Registration Statement No. 33-45695).
4(a) - See Exhibits 3(a) and 3(b) for provisions of the Amended and
Restated Articles of Incorporation and Bylaws of the Registrant
defining rights of holders of Common Stock of the Registrant.
4(b) - Specimen Stock Certificate for the Common Stock of the Registrant
(incorporated by reference from exhibit 4(b) to Registration
Statement on Form S-1, Registration Statement No. 33-45695).
10(a) - Line of Credit Agreement dated as of December 18, 1996 by and among
Longhorn Steaks, Inc. and First Union National Bank of Georgia.
10(b) - Credit Agreement dated as of December 18, 1996 by and among
Longhorn Steaks, Inc. and several lenders with First Union
National Bank of Georgia as Agent and Fleet National Bank as
Co-Agent.
3
55
Executive Compensation Plans and Arrangements
10(c) - Longhorn Steaks, Inc. Amended and Restated 1992 Incentive Plan
(incorporated by reference from Exhibit 10(n) to Registration
Statement on Form S-1, Registration Statement No. 33-45695).
10(d) - Longhorn Steaks, Inc. 1996 Stock Plan for Outside Directors
(incorporated be reference from Exhibit 4(c) to Registration
Statement on Form S-8, Registration No. 333-11963).
10(e) - Employment Agreement dated February 13, 1992 between the Registrant
and George W. McKerrow, Sr. (incorporated by reference from
Exhibit 10(o) to Registration Statement on Form S-1, Registration
Statement No. 33-45695).
10(f) - Employment Agreement dated February 13, 1992 between the Registrant
and George W. McKerrow, Jr. (incorporated by reference from
Exhibit 10(p) to Registration Statement on Form S-1, Registration
Statement No. 33-45695).
10(g) - Employment Agreement dated as of February 1, 1994 between the
Registrant and Richard E. Rivera (incorporated by reference from
Exhibit 10(x) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993).
10(h) - Employment Agreement dated as of January 6, 1994 between the
Registrant and Richard E. Rivera (incorporated by reference from
Exhibit 10(x) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993).
21 - Subsidiaries of the Company.
23(a) - Consent of KPMG Peat Marwick.
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits in response to this Report are listed under Item 14(a)(3) above.
(d) Financial Statement Schedules
The financial statement schedules to this Report are listed under Item 14(a)(2)
above.
4
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RARE Hospitality International, Inc.
By /s/ Richard E. Rivera
-----------------------------------------
Richard E. Rivera, President
Date March 28, 1997
---------------------
By /s/ Anne D. Huemme
---------------------------------------
Anne D. Huemme, Chief Financial Officer
Date March 28, 1997
----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By Date March 28, 1997
---------------------------------------- ---------------
George W. McKerrow, Jr., Chairman
Director
By /s/ Anne D. Huemme Date March 28, 1997
-------------------------------------- ---------------
Anne D. Huemme, Chief Financial
Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
5
57
By /s/ Richard E. Rivera Date March 28, 1997
------------------------------------- ---------------
Richard E. Rivera, President, Chief
Executive Officer and Director
By /s/ George W. McKerrow, Sr. Date March 28, 1997
------------------------------------- ---------------
George W. McKerrow, Sr.
Director
By /s/ Edward P. Grace Date March 28, 1997
------------------------------------- ---------------
Edward P. Grace
Director
By /s/ Ronald W. San Martin Date March 28, 1997
------------------------------------- ---------------
Ronald W. San Martin
Director
By /s/ John G. Pawly Date March 28, 1997
-------------------------------------- ---------------
John G. Pawly
Director
By Date March 28, 1997
-------------------------------------- ---------------
Don L. Chapman
Director
By /s/ John C. Metz Date March 28, 1997
-------------------------------------- ---------------
John C. Metz
Director
6