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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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COMMISSION FILE NUMBER 0-19924
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RARE HOSPITALITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1498312
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8215 ROSWELL ROAD, BLDG 200; 30350
ATLANTA, GA (Zip Code)
(Address of principal executive offices)
770-399-9595
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(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. Yes [X] 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 11, 1998, 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 $109,723,582 based upon the last reported sale price in the
Nasdaq National Market on March 11, 1998 of $10.375.
As of March 11, 1998, the number of shares outstanding of the Registrant's
Common Stock, no par value, was 11,979,308.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 20, 1998 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 1998, 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: failure of facts to conform to necessary
management estimates and assumptions; 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
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
PAGE
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Part I
Item 1. Business........................................... 4
Item 2. Properties......................................... 14
Item 3. Legal Proceedings.................................. 14
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 15
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 16
Item 6. Selected Financial Data............................ 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk....................................... 25
Item 8. Financial Statements and Supplementary Data........ 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 43
Part III
Item 10 Directors and Executive Officers of the Registrant. 43
Item 11 Executive Compensation............................. 43
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................... 43
Item 13 Certain Relationships and Related Transactions..... 44
Part IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................... 45
Signatures...................................................... 47
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 124 restaurants as of March 11,
1998, including 96 LongHorn Steakhouse restaurants, 16 Bugaboo Creek Steak House
restaurants, and 10 The Capital Grille restaurants, as well as two additional
restaurants (the "specialty restaurants"), Hemenway's Seafood Grille & Oyster
Bar ("Hemenway's") and The Old Grist Mill Tavern. 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. The Company issued 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 affiliated entities and certain
related real estate. Such acquisition was accounted for using the pooling of
interests method. Bugaboo Creek Steak House, Inc. operated 14 Bugaboo Creek
Steak Houses, five The Capital Grille restaurants, and the affiliated entities
operated three specialty concept restaurants, at the time of the merger. Bugaboo
Creek Steak House, Inc., now a wholly-owned subsidiary of the Company, owns and
operates the Bugaboo Creek Steak House restaurants and The Capital Grille
restaurants. Another wholly-owned subsidiary, Whip Pooling Corporation, which
was acquired concurrently with Bugaboo Creek Steak House, Inc., owns and
operates Hemenway's and The Old Grist Mill Tavern.
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 16 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 10 The Capital Grille restaurants are located in major metropolitan
areas across the United States. These restaurants 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 11, 1998 and the number of restaurants in each area.
LONGHORN STEAKHOUSE RESTAURANTS
EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS
FLORIDA
Destin ........................................................ 1
Cypress Creek ................................................. 1
Miami/Ft. Lauderdale .......................................... 4
Jacksonville .................................................. 4
Largo ......................................................... 1
Tallahassee ................................................... 1
Orlando ....................................................... 7
Ocala ......................................................... 1
West Palm ..................................................... 3
Ft. Myers ..................................................... 1
St. Augustine ................................................. 1
Tampa/ St. Petersburg ......................................... 2
GEORGIA
Albany ........................................................ 1
Athens ........................................................ 1
Atlanta ....................................................... 21
Cartersville .................................................. 1
Columbus ...................................................... 1
Macon ......................................................... 1
Rome .......................................................... 1
Savannah ...................................................... 1
Statesboro .................................................... 1
Augusta ....................................................... 1
Valdosta ...................................................... 1
ALABAMA
Dothan ........................................................ 1
Montgomery .................................................... 1
Mobile ........................................................ 1
TENNESSEE
Chattanooga ................................................... 1
Nashville ..................................................... 4
OHIO
Cincinnati .................................................... 4
Cleveland ..................................................... 7
Columbus ...................................................... 3
MISSOURI
St. Louis ..................................................... 1
NORTH CAROLINA
Greensboro/High Point/Winston-Salem ........................... 2
Burlington .................................................... 1
Concord ....................................................... 1
Charlotte ..................................................... 3
Columbia ...................................................... 2
Lake Norman ................................................... 1
SOUTH CAROLINA
Greenville/Spartanburg ........................................ 2
Hilton Head ................................................... 1
Columbia ...................................................... 1
Total Existing Company-Owned/Joint Venture Restaurants ..... 95
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EXISTING FRANCHISE-OWNED RESTAURANTS
FLORIDA
Tampa ................................................... 1
Total Existing Franchise-Owned Restaurants ........ 1
Total LongHorn Steakhouse Restaurants ............. 96
BUGABOO CREEK STEAK HOUSE RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
MASSACHUSETTS
Boston ................................................... 4
VIRGINIA
Springfield .............................................. 1
NEW YORK
Albany ................................................... 1
Rochester ................................................ 1
Poughkeepsie ............................................. 1
PENNSYLVANIA
Philadelphia ............................................. 1
RHODE ISLAND
Providence ............................................... 2
CONNECTICUT
Manchester ............................................... 1
MAINE
Bangor ................................................... 1
Portland ................................................. 1
MARYLAND
Gaithersburg ............................................. 1
NEW HAMPSHIRE
Newington ................................................ 1
Total Bugaboo Creek Steak House Restaurants ........ 16
THE CAPITAL GRILLE RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
MASSACHUSETTS
Boston ................................................... 2
DISTRICT OF COLUMBIA
Washington ............................................... 1
CALIFORNIA
San Francisco ............................................ 1
FLORIDA
Miami .................................................... 1
ILLINOIS
Chicago .................................................. 1
RHODE ISLAND
Providence ............................................... 1
MICHIGAN
Troy ..................................................... 1
MINNESOTA
Minneapolis .............................................. 1
TEXAS
Houston .................................................. 1
Total The Capital Grille Restaurants ............... 10
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SPECIALTY RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
RHODE ISLAND
Hemenway's Seafood Grille & Oyster Bar, Providence ............... 1
MASSACHUSETTS
The Old Grist Mill Tavern, Seekonk ............................... 1
Total Specialty Restaurants................................. 2
RESTAURANTS UNDER CONSTRUCTION
DELAWARE
Bugaboo Creek Steak House, Newark .............................. 1
GEORGIA
LongHorn Steakhouse, Atlanta ................................... 1
LongHorn Steakhouse, Cumming ................................... 1
ILLINOIS
LongHorn Steakhouse, Fairview Heights .......................... 1
MISSOURI
LongHorn Steakhouse, Ballwin ................................... 1
NORTH CAROLINA
The Capital Grille, Charlotte .................................. 1
OHIO
LongHorn Steakhouse, Beavercreek ............................... 1
Total Restaurants Under Construction...................... 7
UNIT ECONOMICS
LongHorn Steakhouse
The Company's modified LongHorn Steakhouse restaurant design, which has been
developed and refined over the past four years, has increased capacity from an
average of 150 seats for LongHorn Steakhouse restaurants open prior to 1994 to
an average of 236 seats for LongHorn Steakhouse restaurants opened in 1997. The
objective of this modification was to increase the revenues of the Company's new
LongHorn Steakhouse restaurants while reducing capital expenditures as a
percentage of revenues. The Company intends to continue to emphasize leasing as
its preferred arrangement for LongHorn Steakhouse sites and currently leases all
but 20 of its LongHorn Steakhouses in operation, owns one site for a restaurant
under construction and owns one site held for resale. The Company purchases land
only in those circumstances it believes are cost-effective. Four of the 19
LongHorn Steakhouse restaurants opened in 1997 were located on property
purchased at an average cost of $683,000 per location. Excluding real estate
costs, the average cash investment to open a LongHorn Steakhouse restaurant in
1997 was $1,571,000 including pre-opening expenses of $171,000. The Company
amortizes pre-opening expenses over the first 12 months of a restaurant's
operation.
Bugaboo Creek Steak House
The Company developed a modified Bugaboo Creek Steak House restaurant design
which served as the new prototype for Bugaboo Creek Steak House restaurants
constructed in 1997. The two Bugaboo Creek Steak House restaurants constructed
in 1997 utilized this design.
The Company is in the process of further refining the prototype, with the
objective of reducing the capital expenditure required for new restaurant
construction and reducing ongoing operating costs at these new restaurants due
to lower square footage and a more efficient layout. The Company intends to
continue to emphasize leasing as its preferred arrangement for Bugaboo Creek
Steak House sites and currently leases all but two of its Bugaboo Creek Steak
House sites. The Company purchases land only in those circumstances it believes
are cost-effective. Neither of the two Bugaboo Creek Steak House restaurants
opened in 1997 were located on purchased property. Excluding real estate costs,
the average cash investment to open
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a Bugaboo Creek Steak House restaurant in 1997 was $1,937,000, including
pre-opening expenses of $155,000. The Company amortizes pre-opening expenses
over the first 12 months of a restaurant's operation.
The Capital Grille
Due to the historic nature of many of the sites selected for The Capital
Grille restaurants (which is incorporated into the design of the facility), the
development of a prototype is not feasible. Instead, the Company is evaluating
methods with which to lower construction costs while retaining the unique
ambiance of each location. The Company intends to continue to emphasize leasing
as its preferred arrangement for The Capital Grille sites and currently leases
all of its The Capital Grille 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 1997 was $3,314,000,
including pre-opening expenses of $338,000. 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 existing joint
venture partnerships and additional Company-owned LongHorn Steakhouse
restaurants and additional Company-owned 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 continue to
expand in those markets by utilizing the joint venture partners who are
experienced restaurant operators with knowledge of the market in which the joint
venture operates. Currently, the Company has joint venture arrangements covering
territories in various areas of Florida, North Carolina, South Carolina and
Ohio, and in the St. Louis area. The Company plans to continue to expand its
Company-owned restaurant base 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 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 12 Company-owned and joint venture restaurants in
1998: eight LongHorn Steakhouse restaurants; two Bugaboo Creek Steak House
restaurants and two The Capital Grille restaurants. Of the restaurants proposed
for 1998, the Company has opened one restaurant in North Carolina, has seven
restaurants under construction in Delaware, Georgia, Illinois, Missouri, North
Carolina and Ohio and has signed letters of intent or leases on sites for five
additional restaurants as of March 11, 1998. The Company expects that 4 of the 8
LongHorn Steakhouse restaurants to be opened in 1998 will be developed under
joint ventures, and that all of the Bugaboo Creek Steak House and 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 territory franchise development rights for the Greenville-Spartanburg
market area and the Raleigh, North Carolina market area. The Company may
transfer other Company-owned restaurants to joint ventures in connection with
the future development of existing territories. In the fourth quarter of 1997,
the Company acquired joint venture partner ownership interests in 10 LongHorn
Steakhouse restaurants located in South Georgia, Southern Alabama, and the
Panhandle of Florida for an aggregate purchase price of $1,088,000 in cash,
notes payable, and the Company's common stock.
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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 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 24 of the Company's restaurant sites are leased.
Over the past four years, the Company has modified its prototypical LongHorn
Steakhouse restaurant, increasing its average seating capacity from
approximately 150 seats for LongHorn Steakhouse restaurants open prior to 1994
to an average of 236 seats in approximately 6,000 square feet of space for
LongHorn Steakhouse restaurants opened in 1997. 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
intended to be inviting and comfortable while maintaining the ambiance of a
Texas roadhouse.
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
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.
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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. The Company expects the new prototype will reduce labor, utilities
and other operating costs as well as capital required for expansion.
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 80 staff members, a typical Bugaboo Creek
Steak House restaurant employs approximately 85 staff members, and a typical The
Capital Grille restaurant employs 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 nine LongHorn
Steakhouse regional managers, who each have responsibility for the operating
performance of five to nine Company-owned LongHorn Steakhouse restaurants and
report directly to either the Director of Operations or Vice President of
Operations for the LongHorn Steakhouse concept. There are also five joint
venture partners, who each have responsibility for the operating performance of
from one to 11 joint-venture LongHorn Steakhouse restaurants and report directly
to either the Director of Operations or Vice President of Operations for the
LongHorn Steakhouse concept. The Company employs three Bugaboo Creek Steak House
regional managers, who each have responsibility for the operating performance of
from four to eight Bugaboo Creek Steakhouse restaurants plus one regional
manager who has responsibility for the operating performance of the two
specialty restaurants. All four of these regional managers report directly to
the Executive Vice President for the Bugaboo Creek Steak House concept. The
Company also employs two regional managers who each have responsibility for from
four to six The Capital Grille restaurants, reporting directly to the Executive
Vice President of Operations for The Capital Grille.
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, payroll and cost 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 restaurant management teams with cash bonuses for meeting
profitability targets and for improved restaurant profitability. 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. During 1997, no stock
options were awarded to LongHorn Steakhouse restaurant-level managers. However,
stock options were awarded to joint venture-owned LongHorn Steakhouse
restaurant-level managing partners upon execution of their employment
agreements.
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.
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
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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.
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 a distribution system utilizing various
regional distributors to a consolidated system under which a single distributor
services all LongHorn Steakhouse restaurants. In early 1997, this system was
commenced for 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 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. 53 LongHorn Steakhouse restaurants, all Bugaboo
Creek Steak House restaurants, all The Capital Grille restaurants, Hemenway's
and The Old Grist Mill Tavern 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 various joint venture
partnerships and limited partnerships that in the aggregate operate 42 LongHorn
Steakhouse restaurants as of March 11, 1998. In each case, the Company's partner
is an experienced restaurant operator who owns from 10% to 50% of the
partnership. 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
generally 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 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
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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 11, 1998, 27 of the 42 restaurants
operated by the Company's joint ventures are operated under franchise
agreements. In addition, the Company has one unaffiliated franchisee that
currently operates one LongHorn Steakhouse restaurant in Florida. The Company
has also entered into an area development agreement with an unaffiliated entity
with the right to operate franchised LongHorn Steakhouse restaurants in Puerto
Rico. In 1997, there were no changes in the unaffiliated franchise restaurants,
while 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. 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. One LongHorn
Steakhouse restaurant currently operates under the original franchise agreement.
The Company no longer receives royalties with respect to this restaurant.
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 restaurants 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
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.
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
refuse to renew a franchise.
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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, 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, both steakhouses and non-steakhouses, 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 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.
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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 franchisors 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 11, 1998, the Company employed approximately 8,100 persons, 113
of whom were corporate personnel, 514 of whom were restaurant management
personnel and the remainder of whom were hourly personnel. Of the 113 corporate
employees, 50 are in management positions and 63 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 11, 1998, all but 24 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 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: two in 1998; two in
1999; four in 2000 and the remainder over the period from 2001 through 2028.
The Company owns a 10,000 square feet office building and leases 5,000
square feet of office building in which its corporate offices, LongHorn
Steakhouse restaurant operations and The Capital Grille restaurant operations
are headquartered in Atlanta, Georgia. In addition, the Company leases
approximately 1,500 square feet of space in East Providence, Rhode Island to
house staff to support the operation of Bugaboo Creek Steak House 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 or results of operations.
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,
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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 Company has answered this complaint, denies any liability and intends to
vigorously defend the case. On August 4, 1997 the plaintiff filed a motion to
certify the action as a class action. On December 16, 1997, the court denied the
plaintiff's motion for class certification, requiring the action to proceed on
an individual basis. Although 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.
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 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock was traded on the Nasdaq National Market under the symbol
"LOHO" from March 31, 1992 to January 10, 1997. The stock now trades under the
symbol "RARE". The table below sets forth the high and low sales prices of the
Company's Common Stock, as reported on the Nasdaq National Market, during the
periods indicated.
FISCAL YEAR ENDED DECEMBER 29, 1996 HIGH LOW
-------------------------------------------- -------- ------
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
FISCAL YEAR ENDED DECEMBER 28, 1997
-------------------------------------------
First Quarter............................. $19 1/2 $12 3/4
Second Quarter............................ 16 3/4 10 3/4
Third Quarter............................. 14 1/8 9 1/2
Fourth Quarter............................ 11 1/8 8 5/8
As of March 11, 1998, there were 385 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.
While the Company has not declared or paid any cash dividends on its capital
stock since its initial public offering, due to the accounting for a subsequent
acquisition as a pooling of interests the Company's consolidated financial
statements reflect distributions made by certain entities acquired by the
Company prior to such acquisition.
On December 28, 1997, the registrant issued 36,183 shares of its common
stock (the "Shares") and issued a note payable in the amount of $361,832 to
Pangulf Ventures, Inc. ("Pangulf") in exchange for Pangulf's interest in Eagle
Ventures, a joint venture partnership between Pangulf and the registrant.
Exemption from registration of the Shares was claimed under Rules 504, 505 and
506 promulgated under the Securities Act of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL DATA
Following is selected consolidated financial data as of and for each of the
years in the five-year period ended December 28, 1997. The Consolidated
Financial Statements as of December 28, 1997 and December 29, 1996 and for each
of the years in the three-year period ended December 28, 1997 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. 28, DEC. 29, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales ......................................... $ 264,727 $ 212,894 $ 149,279 $ 111,025 $ 85,710
Wholesale meat sales ..................................... -- 2,547 6,495 3,389 3,504
Franchise revenues ....................................... 27 308 606 615 478
--------- --------- --------- --------- --------
Total revenues ...................................... 264,754 215,749 156,380 115,029 89,692
--------- --------- --------- --------- --------
Costs and expenses:
Cost of restaurant sales ................................. 97,568 78,637 54,074 39,956 30,143
Cost of wholesale meat sales ............................. -- 2,491 6,159 3,137 3,174
Operating expenses-- restaurants ......................... 119,480 94,587 67,629 50,924 37,622
Operating expenses-- meat division ....................... -- 234 766 702 734
Provision for asset impairments,
restaurant closings, and other charges ................. 23,666 1,436 155 1,120 --
Merger and conversion expenses ........................... -- 2,900 -- -- --
Depreciation and amortization-- restaurants .............. 15,218 12,191 7,171 5,025 3,946
General and administrative expenses ...................... 23,590 13,732 11,082 10,131 6,896
--------- --------- --------- --------- ---------
Total costs and expenses ............................ 279,522 206,208 147,036 110,995 82,515
--------- --------- --------- --------- ---------
Operating (loss) income ............................. (14,768) 9,541 9,344 4,034 7,177
Interest expense (income), net ............................. 1,245 (79) (291) (794) (372)
Provision for litigation settlement ........................ -- 605 -- -- --
Minority interest .......................................... 1,219 602 5 -- --
--------- --------- --------- --------- ---------
(Loss) earnings before income taxes ................. (17,232) 8,413 9,630 4,828 7,549
Income tax (benefit) expense ............................... (5,000) 3,170 3,047 1,286 1,855
--------- --------- --------- --------- ---------
Net (loss) earnings ................................ $ (12,232) $ 5,243 $ 6,583 $ 3,542 $ 5,694
========= ========= ========= ========= =========
Basic (loss) earnings per common share ..................... $ (1.04) $ 0.46 $ 0.67 $ 0.37 $ 0.69
========= ========= ========= ========= =========
Weighted average common shares outstanding (basic) ......... 11,751 11,302 9,753 9,517 8,227
========= ========= ========= ========= =========
Diluted (loss) earnings per common share ................... $ (1.04) $ 0.45 $ 0.66 $ 0.37 $ 0.69
========= ========= ========= ========= =========
Weighted average common shares outstanding (diluted) ....... 11,751 11,631 9,955 9,526 8,227
========= ========= ========= ========= =========
FISCAL YEARS ENDED
-----------------------------------------------------------------
DEC. 28, DEC. 29, DEC. 31, DEC. 31, DEC. 31,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit) .................................. $ (2,905) $ 2,065 $ 561 $ 22,488 $ 19,076
Total assets ............................................... 193,051 151,594 107,735 81,951 62,319
Debt, net of current installments .......................... 43,000 7,100 13,858 1,808 5,108
Obligations under capital leases, net of
current installments ..................................... 5,051 -- -- -- --
Minority interest .......................................... 4,890 3,301 615 -- --
Total shareholders' equity ................................. 111,980 121,384 78,133 70,289 49,446
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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 last Sunday in December.
Interim reporting periods within 1996 contained three months for the first two
quarters. The third and fourth quarters of 1996 each contained 13 weeks. Each
quarter within 1997 contained 13 weeks. Fiscal 1996, which ended on December 29,
1996, and fiscal 1997, which ended on December 28, 1997, each contained 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 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 of its 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 1997 to include those
restaurants open prior to October 1, 1995. The Company defines the comparable
restaurant base for 1996 to include those restaurants open prior to October 1,
1994. 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.
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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 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Revenues:
Restaurant Sales:
LongHorn Steakhouse ............................ 64.3% 63.3% 62.7%
Bugaboo Creek Steak House ...................... 16.9 20.4 16.6
The Capital Grille ............................. 14.9 9.4 9.1
Other restaurants .............................. 3.9 5.6 7.1
----- ----- -----
Total restaurant sales ..................... 100.0 98.7 95.5
Wholesale meat sales ............................ -- 1.2 4.1
Franchise revenues .............................. -- 0.1 0.4
----- ----- -----
Total revenues ............................. 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of restaurant sales(1) ..................... 36.9 36.9 36.2
Cost of wholesale meat sales(1) ................ -- 97.8 94.8
Operating expenses--restaurants(1) .............. 45.1 44.4 45.3
Operating expenses-- meat division .............. -- 0.1 0.5
Provision for asset impairments,
restaurant closings, and other charges ........ 8.9 0.7 0.1
Merger and conversion expenses .................. -- 1.3 --
Depreciation and amortization--restaurants(1) ... 5.7 5.7 4.6
General and administrative expenses ............. 8.9 6.4 7.1
Total costs and expenses ................... 105.5 95.6 94.0
----- ----- -----
Operating (loss) income .................... (5.5) 4.4 6.0
Interest expense (income), net ................... 0.5 (0.1) (0.2)
Provision for settlement of shareholder suit ..... -- 0.3 --
Minority interest ................................ 0.5 0.3 --
----- ----- -----
(Loss) earnings before income taxes ........ (6.5) 3.9 6.2
Income tax (benefit) expense .................... (1.9) 1.5 2.0
----- ----- -----
Net (loss) earnings ........................ (4.6)% 2.4% 4.2%
===== ===== =====
(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 28, 1997 Compared to Year Ended December 29, 1996
REVENUES
Total revenues increased 22.7% to $264.8 million for 1997 compared to $215.7
million for 1996. Restaurant sales increased 24.3% to $264.7 million in 1997
compared to $212.9 million in 1996.
LongHorn Steakhouse:
Sales in the LongHorn Steakhouse restaurants increased 24.8% to $170.3 million
for 1997 compared to $136.5 million for 1996. The increase reflects a 23.7%
increase in restaurant operating weeks in 1997 as compared to 1996, resulting
from an increase in the number of LongHorn Steakhouse restaurants. Average
weekly sales for all LongHorn Steakhouse restaurants in 1997 were $39,035, a
0.5% increase over 1996. Sales for the 54 comparable LongHorn Steakhouse
restaurants increased 0.2% in 1997 as compared to 1996.
Bugaboo Creek Steak House:
Sales in the Bugaboo Creek Steak House restaurants increased 1.3% to $44.6
million for 1997 compared to $44.1 million for 1996. The increase reflects a
6.9% increase in restaurant weeks in 1997 as compared to 1996, resulting from an
increase in the number of
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Bugaboo Creek Steak House restaurants. Average weekly sales for all Bugaboo
Creek Steak House restaurants in 1997 were $59,114, a 5.2% decrease from 1996.
Sales for the ten comparable Bugaboo Creek Steak House restaurants decreased
5.3% in 1997 as compared to 1996. The decrease in comparable restaurants sales
at Bugaboo Creek Steak House restaurants is primarily attributable to a decrease
in customer counts.
The Capital Grille:
Sales in The Capital Grille restaurants increased 94.4% to $39.5 million for
1997 compared to $20.3 million for 1996. The increase reflects a 96.4% increase
in restaurant operating weeks in 1997 as compared to 1996, resulting from an
increase in the number of The Capital Grille Restaurants. Average weekly sales
for all The Capital Grille restaurants in 1997 were $98,169, a 1.0% decrease
from 1996. Sales for the three comparable The Capital Grille restaurants
increased 8.7% in 1997 as compared to 1996. The increase in comparable
restaurant sales at The Capital Grille restaurants is primarily attributable to
an increase in customer counts.
Company-wide:
A contracted meat distribution system was implemented for the LongHorn
Steakhouse restaurants during the first half of 1996, thereby eliminating the
need for an internal meat production and distribution facility. Accordingly, the
Company's meat cutting and distribution activities ceased during 1996 and
wholesale meat sales were eliminated. Franchise revenues decreased to $27,000 in
1997 compared to $308,000 in 1996 due to i) the termination of the franchise
agreement for the Hoover Alabama franchised LongHorn Steakhouse restaurant, ii)
the Company's acquisition of two franchised LongHorn Steakhouse restaurants in
the first quarter of 1997, iii) the closure of two franchised LongHorn
Steakhouse restaurants (one each, in the first and third quarters of 1996), and
iv) the formation of a joint venture to operate three previously franchised
LongHorn Steakhouse restaurants in the second quarter of 1996.
COSTS AND EXPENSES
Cost of restaurant sales, as a percentage of restaurant sales, remained flat in
1997 and 1996 at 36.9%. Due to the elimination of wholesale meat sales during
1996, there were no wholesale meat costs in 1997, compared to 97.8% of wholesale
meat sales in 1996.
Restaurant operating expenses increased as a percentage of restaurant sales in
1997 to 45.1% from 44.4% in 1996. The increase was primarily attributable to i)
incremental labor, controllable expenses and start-up expenses associated with
increased activity in the Company's new store opening program, as the Company
opened 25 restaurants in 1997; and ii) increased labor and controllable expenses
as the Company focused on better execution and higher standards in the LongHorn
Steakhouse concept.
The provision for asset impairments, restaurant closings, and other charges of
$23.7 million in 1997 was determined primarily under Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" ("SFAS No. 121") by comparing
expected future cash flows to the carrying value of these assets. This
determination was the result of a decision by management, in the fourth quarter,
to close seven restaurants and certain administrative facilities, as well as the
Company's assessment of the impairment of certain assets based upon the
Company's current plans. The Company's current plans resulted from significant
changes in key management and a strategic review process employed by new
management. The provision for asset impairments, restaurant closings, and other
charges includes adjustments of $8.3 million to impaired long-lived assets to be
disposed of, adjustments of $6.0 million to the carrying values of impaired
long-lived assets to be held and used, $4.2 million of goodwill write-offs and
approximately $5.2 million in accrued costs primarily associated with closed
facilities. The provision for asset impairments, restaurant closings, and other
charges of $1.4 million in 1996, represented adjustments to the carrying value
of two restaurants that the Company determined would be closed.
General and administrative expenses increased to $23.6 million in 1997, or 8.9%
of total revenues, from $13.7 million in 1996, or 6.4% of total revenues. The
increase as a percentage of total revenues was primarily due to increased costs
related to the accelerated pace of restaurant openings in 1997 and costs
resulting from a higher level of management turnover plus $5.0 million in
nonrecurring expenses. These non-recurring expenses include charges resulting
from current asset reconciliation and evaluation processes and severance, hiring
and other employment-related charges.
Interest expense increased to $1.2 million in 1997 compared to $79,000 in
interest income in 1996. The increase in interest expense is due to higher
average borrowings outstanding under the Company's revolving credit agreement.
20
21
Minority interest increased to $1.2 million in 1997 from $602,000 in 1996. This
reflects an increase in the number of joint-venture restaurants to 43 at
December 28, 1997, from 35 at December 29, 1996, partially offset by the
purchase of joint venture partners' partnership interests in 10 joint venture
restaurants during the fourth quarter of 1997.
Income tax benefit for 1997 was $5.0 million due to the pre-tax loss reported by
the Company, resulting primarily from the aggregate $28.7 million in SFAS No.
121 charges and non-recurring general and administrative expenses recorded
during 1997. Income tax expense in 1996 was 37.7% of earnings before income
taxes, reflecting $2.5 million of nondeductible merger and conversion expenses,
offset primarily by the benefits of FICA tip credits.
The net loss of $12.2 million in 1997, as compared to net earnings of $5.2
million in 1996, reflected the net effect of the items discussed above.
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.
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.
21
22
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 had been
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 $1.4 million in 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 $155,000 in 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.
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.
22
23
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.
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 and asset acquisitions totaled $56.2 million
in 1997, $45.5 million in 1996, and $45.8 million in 1995. The Company's primary
sources of working capital have been the proceeds of its previous public
offerings of Common Stock in 1992, 1993 and 1996, the public offering of Bugaboo
Creek Steak House, Inc. in 1994, cash flow from operations and borrowings under
its line of credit.
As of March 11, 1998, the Company had borrowings of $43.0 million under a
$60.0 million line of credit, which bears interest at the rate of either (i) 75
to 150 basis points over LIBOR (depending upon the Company's leverage ratio)
with a term that the Company selects, ranging from 30 days to 6 months or (ii)
prime. As of March 11, 1998, the weighted average rate on all outstanding
borrowings under the Company's line of credit was 7.15%. 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 is currently in compliance with or has
obtained waivers for events of non-compliance with the covenants of its debt
agreement.
The Company intends to open approximately 12 Company-owned and joint venture
restaurants in 1998. The Company estimates that its capital expenditures
(without consideration of contributions from joint venture partners) will be
approximately $38 million in 1998. The capital expenditure estimate for 1998
includes the estimated cost of developing 12 new restaurants, ongoing
refurbishment in the restaurants, a planned expansion of the corporate offices
in Atlanta, and continued investment in improved management information systems.
The Company expects that available borrowings 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.
Since substantially all sales in the Company's restaurants are for cash, and
accounts payable are generally due in seven to 30 days, the Company operates
with little or negative working capital.
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: failure of facts to conform to necessary management estimates and
assumptions; 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 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; and other risks identified from time to time in the Company's SEC
reports, registration statements and public announcements. See the description
of forward-looking statements found in "Documents Incorporated by Reference."
EFFECT OF INFLATION
Management believes that inflation has not had a material effect on earnings
during the past several years. Inflationary increases in the cost of labor, food
and other operating costs could adversely affect the Company's restaurant
operating margins. In the past, however, the Company generally has been able to
modify its operations to offset increases in its operating costs.
23
24
Federal law, enacted during 1996, increased the hourly minimum wage by $0.50
to $4.75 on October 1, 1996 and by another $0.40 to $5.15 on September 1, 1997.
The legislation, however, froze the wages of tipped employees at $2.13 per hour
if the difference is earned in tip income. Although the Company experienced a
slight increase in hourly labor costs during 1997, the effect of the increase in
minimum wage was significantly diluted due to the fact that the majority of the
Company's hourly employees are tipped and the Company's non-tipped employees
have historically earned wages greater than the federal minimum. As such, the
Company's increases in hourly labor cost were not proportionate to the increases
in minimum wage rates. The impact of minimum wage increases is expected to
slightly increase hourly labor costs in 1998.
YEAR 2000
The Company has implemented plans to address its potential exposure to
so-called "Year 2000" problems. The Company's key financial, informational and
operational systems have been assessed and detailed plans have been developed to
address system modifications required by December 31, 1999. The Company expenses
all costs associated with these system changes as the costs are incurred. The
financial impact of making the required system changes is not expected to be
material to the Company's consolidated financial position or results of
operations. However, the Company is unable to estimate the costs that it may
incur as a result of Year 2000 problems suffered by the parties with which it
deals, such as suppliers, and there can be no assurance that the Company will
successfully address the Year 2000 problems present in its own systems.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income". SFAS No. 130, which will be effective for the Company's
fiscal 1998, establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period, except
those resulting from investments by owners and distributions to owners. The
Company expects that implementation of SFAS No. 130 will not have a material
effect on its consolidated financial position or results of operations.
Additionally, during 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131, which is effective for
1998, significantly modifies disclosures associated with segments of an entity.
Disclosures of segment information under the requirements of SFAS No. 131 are
made pursuant to the "Management Approach." Under this approach, operating
segments for disclosure correspond to the organizational units management uses
internally to monitor performance and make operating decisions. Segment
aggregation would be permitted if it can be determined that the segments have
essentially the same business activities in essentially similar economic
environments. Management is currently evaluating the disclosure impact of the
adoption of SFAS No. 131.
24
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
WITH INDEPENDENT AUDITORS' REPORT THEREON
25
26
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
PAGE
----
Independent Auditors' Report.......................................... 27
Consolidated Balance Sheets........................................... 28
Consolidated Statements of Operations................................. 29
Consolidated Statements of Shareholders' Equity....................... 30
Consolidated Statements of Cash Flows................................. 31
Notes to Consolidated Financial Statements............................ 32
26
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
RARE Hospitality International, Inc.:
We have audited the accompanying consolidated balance sheets of RARE
Hospitality International, Inc. and subsidiaries (the "Company") as of December
28, 1997 and December 29, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 28, 1997. 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 28, 1997 and
December 29, 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 28, 1997 in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
February 27, 1998
27
28
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND DECEMBER 29, 1996
(IN THOUSANDS)
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 1,752 $ 6,478
Marketable debt securities............................... 609 861
Accounts receivable...................................... 2,054 2,522
Inventories.............................................. 9,152 7,883
Prepaid expenses......................................... 1,373 1,465
Preopening costs, net of accumulated amortization........ 3,385 2,665
Refundable income taxes ................................. 6,900 --
--------- ---------
Total current assets............................. 25,225 21,874
Property and equipment, less accumulated depreciation and
amortization (notes 4 and 9)............................. 155,758 120,431
Goodwill, less accumulated amortization.................... 5,304 6,139
Deferred income taxes (note 7)............................. 4,408 816
Other...................................................... 2,356 2,334
--------- ---------
Total assets..................................... $ 193,051 $ 151,594
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... 12,739 11,385
Accrued expenses (note 5)................................ 14,873 7,652
Current installments of obligations under
capital leases (note 9)................................ 518 --
Income taxes payable..................................... -- 500
Deferred income taxes (note 7)........................... -- 272
--------- ---------
Total current liabilities................................ 28,130 19,809
Debt, net of current installments (note 6)................. 43,000 7,100
Obligations under capital leases, net of current
installments (note 9).................................... 5,051 --
--------- ---------
Total liabilities................................ 76,181 26,909
--------- ---------
Minority interest.......................................... 4,890 3,301
Shareholders' equity (notes 2, 6, 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 11,979 shares and 11,653 shares
at December 28, 1997 and December 29, 1996,
respectively.......................................... 103,981 101,099
Retained earnings........................................ 7,999 20,231
Unrealized gain on marketable debt securities............ -- 54
--------- ---------
Total shareholders' equity....................... 111,980 121,384
Commitments and contingencies (notes 8, 9, and 13) --------- ---------
Total liabilities and shareholders' equity....... $ 193,051 $ 151,594
========= =========
See accompanying notes to consolidated financial statements.
28
29
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
--------- --------- ---------
Revenues:
Restaurant sales:
LongHorn Steakhouse .................................... $ 170,343 $ 136,547 $ 98,034
Bugaboo Creek Steak House .............................. 44,631 44,060 25,929
The Capital Grille ..................................... 39,520 20,329 14,201
Other restaurants ...................................... 10,233 11,958 11,115
--------- --------- ---------
Total restaurant sales ............................... 264,727 212,894 149,279
Wholesale meat sales ................................... -- 2,547 6,495
Franchise revenues ..................................... 27 308 606
--------- --------- ---------
Total revenues ....................................... 264,754 215,749 156,380
--------- --------- ---------
Costs and expenses:
Cost of restaurant sales .................................. 97,568 78,637 54,074
Cost of wholesale meat sales .............................. -- 2,491 6,159
Operating expenses-- restaurants .......................... 119,480 94,587 67,629
Operating expenses-- meat division ........................ -- 234 766
Provision for asset impairments, restaurant
closings, and other charges (note 3) .................... 23,666 1,436 155
Merger and conversion expenses (note 3) ................... -- 2,900 --
Depreciation and amortization-- restaurants ............... 15,218 12,191 7,171
General and administrative expenses ....................... 23,590 13,732 11,082
--------- --------- ---------
Total costs and expenses ............................. 279,522 206,208 147,036
--------- --------- ---------
Operating (loss) income .............................. (14,768) 9,541 9,344
Interest expense (income), net ............................ 1,245 (79) (291)
Provision for settlement of shareholder suit (note 13) .... -- 605 --
Minority interest (note 2) ................................ 1,219 602 5
--------- --------- ---------
(Loss) earnings before income taxes .................. (17,232) 8,413 9,630
Income tax (benefit) expense (note 7) ..................... (5,000) 3,170 3,047
--------- --------- ---------
Net (loss) earnings .................................. $ (12,232) $ 5,243 $ 6,583
========= ========= =========
Basic (loss) earnings per common share .................... $ (1.04) $ 0.46 $ 0.67
========= ========= =========
Weighted average common shares outstanding (basic) ........ 11,751 11,302 9,753
========= ========= =========
Diluted (loss) earnings per common share .................. $ (1.04) $ 0.45 $ 0.66
========= ========= =========
Weighted average common shares outstanding (diluted) ...... 11,751 11,631 9,955
========= ========= =========
See accompanying notes to consolidated financial statements.
29
30
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS)
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK MARKETABLE TOTAL
--------------------- RETAINED DEBT SHAREHOLDERS'
SHARES DOLLARS EARNINGS SECURITIES EQUITY
--------- --------- --------- ----------- --------------
BALANCE, DECEMBER 31, 1994 ............................ 9,701 $ 61,437 $ 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 62,780 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 ............................ 11,653 101,099 20,231 54 121,384
Net loss .............................................. -- -- (12,232) -- (12,232)
Exercise of stock options ............................. 290 2,543 -- -- 2,543
Issuance of stock in connection with purchase
of minority interest ................................ 36 339 -- -- 339
Unrealized loss on marketable debt securities ......... -- -- -- (54) (54)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 28, 1997 ............................ 11,979 $ 103,981 $ 7,999 $ -- $ 111,980
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
30
31
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS)
DECEMBER 28 DECEMBER 29 DECEMBER 31
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net (loss) earnings ............................................ $(12,232) $ 5,243 $ 6,583
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ................................ 16,418 12,856 7,475
Non-cash portion of provision for asset impairments,
restaurant closings and other charges....................... 22,367 1,436 155
Provision for litigation settlement .......................... -- 605 --
Minority interest ............................................ 1,219 602 5
Preopening costs ............................................. (5,208) (4,341) (4,293)
Deferred tax (benefit) expense ............................... (3,864) (743) 15
Loss on sale of property and equipment ....................... -- -- 68
Changes in assets and liabilities:
Accounts receivable .......................................... 468 (230) (263)
Inventories .................................................. (1,269) (1,746) (2,961)
Prepaid expenses ............................................. 92 2 (572)
Other assets ................................................. (22) (97) --
Refundable income taxes ...................................... (6,900) -- 507
Accounts payable ............................................. (126) 1,020 1,628
Accrued expenses ............................................. 1,222 885 2,396
Other liabilities ............................................ -- (133) (347)
-------- -------- --------
Net cash provided by operating activities ................ 12,165 15,359 10,396
-------- -------- --------
Cash flows from investing activities:
Purchase of marketable debt securities ......................... -- -- (2,288)
Proceeds from sale of marketable debt securities ............... 252 6 6,728
Proceeds from maturity of marketable debt securities ........... -- -- 1,200
Purchase of property and equipment ............................. (52,970) (45,524) (41,115)
Proceeds from sale of property and equipment ................... -- -- 16
Purchase of joint venture partnership interests ................ (535) -- --
Asset acquisitions ............................................. (3,262) -- (4,716)
-------- -------- --------
Net cash used in investing activities .................... (56,515) (45,518) (40,175)
-------- -------- --------
Cash flows from financing activities:
Proceeds from (repayments of) borrowings on
lines of credit, net ......................................... 35,900 (5,950) 13,050
Principal payments on long-term debt ........................... -- (1,833) (13)
Principal payments on capital lease obligations ................ (31) -- --
Proceeds from issuance of shares pursuant to public offering ... -- 37,638 --
Proceeds from minority partner contributions ................... 2,660 1,796 833
Distributions to minority partners ............................. (2,928) (1,634) (223)
Increase in bank overdraft included in accounts payable ........ 1,480 3,873 647
Distributions made by acquired companies ....................... -- (361) --
Proceeds from exercise of stock options ........................ 2,543 681 93
-------- -------- --------
Net cash provided by financing activities ................ 39,624 34,210 14,387
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ..... (4,726) 4,051 (15,392)
Cash and cash equivalents at beginning of year .................. 6,478 2,427 17,819
-------- -------- --------
Cash and cash equivalents at end of year ........................ $ 1,752 $ 6,478 $ 2,427
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes .................................... $ 6,265 $ 2,807 $ 983
======== ======== ========
Cash paid for interest, net of interest capitalized ........... $ 1,039 $ 109 $ 147
======== ======== ========
Supplemental disclosure of non-cash financing and
investing activities:
Assets acquired under capital lease ........................... $ 5,600 $ -- $ --
======== ======== ========
Issuance of common stock in purchase of minority interest ..... $ 339 $ -- $ --
======== ======== ========
See accompanying notes to consolidated financial statements
31
32
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
RARE Hospitality International, Inc., including its wholly owned
subsidiaries (the "Company"), is a multi-concept restaurant company operating
primarily in the Eastern United States. At December 28, 1997, the Company
operated the following restaurants:
CONCEPT NUMBER IN OPERATION
-------------------------- --------------------
LongHorn Steakhouse.......................... 96
Bugaboo Creek Steak House.................... 16
The Capital Grille........................... 10
Other specialty concepts..................... 3
The Company is a partner in several joint ventures organized for the purpose
of operating LongHorn Steakhouse restaurants. As of December 28, 1997, 42 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 last Sunday in December.
Fiscal 1996, which ended on December 29, 1996, and fiscal 1997, which ended on
December 28, 1997, each contained 52 weeks. All general references to years
relate to fiscal years, unless otherwise noted.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments which have original maturities of three
months or less to be cash equivalents. Cash equivalents, comprised of overnight
repurchase agreements, totalled $563,000 at December 28, 1997. The carrying
amount of these instruments approximates their fair market 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 market value, with any unrealized gains or losses, net of
deferred income taxes, reflected as a separate component of shareholders'
equity.
INVENTORIES
Inventories, consisting principally of food and beverages, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property under capital leases are
stated at the present value of minimum lease payments. Leasehold improvements
and property held under capital leases are amortized on the straight-line method
over the shorter of the term of the lease, which may include renewals, or the
estimated useful life of the assets (generally 15 years for non-ground lease
sites and 25 years for ground lease sites). Depreciation on property and
equipment is calculated on the straight-line method over the estimated useful
lives of the related assets, which approximates 25 years for buildings, seven
years for equipment and 25 years for land improvements.
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BASIS OF PRESENTATION
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 significant intercompany
balances and transactions have been eliminated in consolidation.
PRE-OPENING COSTS
Preopening costs are incurred before a restaurant is opened and consist
primarily of wages and salaries, meals, lodging, plus costs related to hiring
and training the management teams and other direct costs associated with opening
new restaurants. These costs 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.
GOODWILL
Goodwill, net of accumulated amortization of $466,000 and $499,000 at
December 28, 1997 and December 29, 1996, 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 (from 13
to 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. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved. In 1997, the Company's provision for asset impairments,
restaurant closings and other charges included a $4.2 million charge for the
write-off of goodwill recorded upon the acquisition of i) the Company's meat
company; ii) the assets of Lone Star Steaks, Inc. (see note 2); and iii) the
franchise rights obtained from Longhorn Steaks of Alabama (see note 2).
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 expense. Such costs include the write-down of buildings
and/or leasehold improvements, equipment, and furniture and fixtures, to the
estimated fair market value less costs of disposal, and a provision for future
lease obligations, less estimated subrental income. The Company provided for the
closure of seven restaurants in 1997, two restaurants in 1996, and one
restaurant in 1995.
RECOVERABILITY OF LONG-LIVED ASSETS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", on January 1, 1996. SFAS
No. 121 requires the Company to review its long-lived assets related to each
restaurant periodically or whenever events or changes in circumstances indicate
that the carrying amount of a restaurant 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. Considerable
management judgment is required to estimate discounted cash flows and fair value
less costs to sell. Accordingly, actual results could vary significantly from
such estimates. Adoption of SFAS No. 121 did not have a material impact on the
Company's financial position, results of operations, or liquidity.
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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") (see 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.
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:
$737,000 in 1997, $389,000 in 1996, and $411,000 in 1995.
STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB 25 and provide pro forma net earnings (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB 25 and provide the pro forma disclosure provisions of SFAS No. 123.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion costs are expensed over the period covered by the
related promotion. Total advertising expense included in other operating
expenses was $5,498,000, $4,929,000, and $3,438,000 for the years ended December
28, 1997, December 29, 1996 and December 31, 1995, respectively.
EARNINGS (LOSS) PER SHARE
Effective for the year ending December 28, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings Per Share". SFAS No. 128 requires dual disclosure of earnings
(loss) per share-basic and diluted. Basic earnings (loss) per share equals net
earnings (loss) divided by the weighted average number of common shares
outstanding and does not include the dilutive effects of stock options. Diluted
earnings (loss) per share is computed by dividing adjusted net earnings (loss)
by the weighted average number of common shares outstanding after giving effect
to dilutive stock options. For purposes of computing the diluted loss per share,
the potentially dilutive impact of stock options is excluded since the effect
would be antidilutive. In accordance with SFAS No. 128, disclosure of all prior
period earnings per share have been restated.
The following table presents a reconciliation of weighted average shares and
earnings (loss) per share amounts (amounts in thousands, except per share data):
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1997 1996 1995
-------- -------- ------
Weighted average number of common shares used
in basic calculation ................................ 11,751 11,302 9,753
Dilutive effect of net shares issuable
pursuant to stock option plans ...................... -- 329 202
-------- -------- ------
Weighted average number of common shares used
in diluted calculation .............................. 11,751 11,631 9,955
======== ======= ======
Net (loss) earnings for computation of basic and
diluted earnings per common share ................... $(12,232) $ 5,243 $6,583
Basic earnings per common share ....................... $ (1.04) $ 0.46 $ 0.67
Diluted earnings per common share ..................... $ (1.04) $ 0.45 $ 0.66
Options to purchase 1,473,093 shares of common stock were outstanding at
December 28, 1997 but were excluded from the computation of diluted loss per
share. Options to purchase 916,392 shares of common stock had exercise prices
ranging from $12.94 to $27.25, which were greater than the average market price
for 1997 and would have been antidilutive.
ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due from restaurant customers and
suppliers and interest receivable relating to marketable debt securities.
FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, marketable
debt securities, accounts receivable, accounts payable, accrued expenses, debt,
and obligations under capital leases approximates their fair value. The fair
value of a financial instrument is the amount which the instrument could be
exchanged in a current transaction between willing parties. The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments:
For cash and cash equivalents, marketable debt securities, accounts
receivable, accounts payable and accrued expenses the carrying amounts
approximate fair value because of the short maturity of these financial
instruments. The fair value of the Company's debt and obligations under capital
leases is estimated by discounting future cash flows for these instruments at
rates currently offered to the Company for similar debt or long-term leases, as
appropriate.
The fair value of the marketable debt security is obtained from publicly
available sources.
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 assets and 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 the 1996 consolidated financial
statements to conform with the 1997 presentation.
BUSINESS COMBINATIONS AND JOINT VENTURES
In the fourth quarter of 1997, the Company acquired the ownership interests
of its joint venture partner in ten LongHorn Steakhouse restaurants located in
South Georgia, Southern Alabama, and the Panhandle of Florida for an aggregate
purchase price of $1,088,000 in cash, notes payable, and the Company's common
stock.
In January, 1997, the Company purchased the assets of two previously
franchised locations in Greenville and Spartanburg, South Carolina, in a
transaction accounted for under the purchase method, for approximately $2.0
million in cash. The excess of
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cost over fair value of tangible assets acquired was approximately $1.4 million
and was recorded as an intangible asset to be amortized over the 13-year period
remaining under the acquired franchise agreement.
In September, 1996, the Company exchanged 3,179,472 newly issued shares of
its common stock for all of the outstanding shares of Bugaboo Creek Steak House,
Inc. and certain affiliated entities (2,939,062 shares for Bugaboo Creek Steak
House, Inc. and 240,410 shares for other nonpublic affiliated enterprises).
Bugaboo Creek Steak House, Inc. operated 14 Bugaboo Creek Steak Houses and five
The Capital Grille restaurants and the affiliated entities operated 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 Steak House,
Inc. for all periods presented. Separate results for the combining entities for
the year ended December 31, 1995, and for the most recent interim period prior
to the acquisition (the six-month period ended June 30, 1996) are as follows (in
thousands):
JUNE 30, DECEMBER 31,
1996 1995
-------- --------
Revenues:
Previously reported .............................. $ 69,139 $102,188
Bugaboo Creek and affiliated enterprises ......... 34,720 54,192
-------- --------
$103,859 $156,380
======== ========
Net earnings:
Previously reported .............................. $ 3,204 $ 4,137
Bugaboo Creek and affiliated enterprises ......... 1,221 2,446
-------- --------
$ 4,425 $ 6,583
======== ========
There were no adjustments required to conform Bugaboo Creek Steak House,
Inc.'s accounting policies to those of the Company.
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 $2,340,000 for a 49% minority
interest. The Company 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.
During 1995, the Company purchased certain assets and trademark rights of
Lone Star Steaks, Inc. ("Lone Star-Georgia") 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 was being amortized over
25 years. As discussed in note 3, during 1997, the Company decided to close this
acquired restaurant and all associated intangible assets were determined to be
impaired and were written off.
In 1995, the Company also purchased the assets of two previously franchised
locations in Greensboro and High Point, North Carolina for $2,564,000 (the
"Bullhead acquisition"). Goodwill on this acquisition of $1,358,000 is being
amortized over 25 years.
The Company, combined with the assets acquired in the Lone Star-Georgia and
Bullhead acquisitions for the year ended December 31, 1995, as if the purchase
business combinations had been completed as of January 1, 1995, would have had
unaudited proforma net earnings of $6,382,000, or $0.64 per common share: basic
and diluted. These unaudited proforma results consider the impact of certain
adjustments, such as amortization of intangibles, elimination of franchise
revenues, and increased interest expense (or reduced interest income).
(3) PROVISION FOR ASSET IMPAIRMENTS, RESTAURANT CLOSINGS, AND OTHER CHARGES
The provision for asset impairments, restaurant closings, and other charges
of $23,666,000 in 1997 was the result of a decision by management, in the fourth
quarter, to close seven restaurants and certain administrative facilities, as
well as the Company's assessment of the impairment of certain assets based upon
the Company's current plans. The Company's current plans resulted
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from significant changes in key management and a strategic review process
employed by new management. The provision for asset impairments, restaurant
closings, and other charges consists primarily of adjustments of $8,300,000 to
impaired long-lived assets to be disposed of, adjustments of $6,000,000 to the
carrying values of impaired long-lived assets to be held and used and $4,200,000
of goodwill write-offs. These adjustments reduced carrying values for long-lived
assets to be held and used to estimated fair value and of long-lived assets to
be disposed of in connection with the closure of the seven restaurants and the
administrative facilities to estimated fair market value less costs to sell.
The long-lived assets to be disposed of are primarily included in property and
equipment in the accompanying consolidated balance sheet at December 28, 1997,
and have an adjusted carrying value of $1,520,000. Additionally, the provision
included $5,166,000 in accrued costs primarily associated with closed
facilities.
The charge in 1996 and 1995 was comprised principally of the write-off of
abandoned leasehold improvements and the accrual of the future lease payments on
restaurants closed in those periods.
Merger and conversion expenses in 1996 were nonrecurring costs related to
the merger with Bugaboo Creek Steak House, consisting primarily of investment
banking fees, accounting and legal fees, printing costs, and costs to integrate
point-of-sale systems.
(4) PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 28, 1997 and December
29, 1996 are summarized as follows (in thousands):
1997 1996
--------- ---------
Land and improvements.................... $ 17,347 $ 13,294
Buildings................................ 23,883 15,032
Leasehold improvements................... 91,935 68,039
Restaurant equipment..................... 36,578 28,220
Furniture and fixtures................... 19,004 16,300
Construction in progress................. 1,177 4,131
--------- ---------
189,924 145,016
Less accumulated depreciation and
amortization........................... 34,166 24,585
--------- ---------
$ 155,758 $ 120,431
========= =========
During 1997, 1996 and 1995, the Company capitalized interest during
construction of approximately $663,000, $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 28, 1997, such commitments totaled approximately $6,000,000.
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(5) ACCRUED EXPENSES
Accrued expenses consist of the following at December 28, 1997 and December
29, 1996 (in thousands):
1997 1996
------- -------
Accrued future lease obligations and other
charges ........................................ $ 3,867 --
Accrued rent ..................................... 1,620 $ 1,212
Payroll and related .............................. 1,263 1,456
Other taxes accrued and withheld ................. 649 1,096
Gift certificates ................................ 3,766 3,689
Other ............................................ 3,708 199
------- -------
$14,873 $ 7,652
======= =======
(6) DEBT
LINE OF CREDIT
The Company has a variable interest rate revolving credit agreement which
permits the Company to borrow up to $60,000,000 through December 1999 (the "1996
Facility"). The 1996 Facility bears interest at the Company's option of LIBOR
plus a margin of .75% to 1.50% (depending on the Company's leverage ratio) or
the administrative agent's prime rate of interest. At December 28, 1997 and
December 29, 1996, the interest rate on outstanding obligations under the 1996
Facility was 6.898% and 6.375%, respectively, based on LIBOR plus 0.75%. At
December 28, 1997 and December 29, 1996, debt outstanding under the 1996
Facility totaled $43,000,000 and $7,100,000, respectively. Amounts available
under the 1996 Facility totaled $17,000,000 and $52,900,000 at December 28, 1997
and December 29, 1996, respectively.
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 28, 1997, the Company was in compliance with or had obtained waivers
for non-compliance with, the provisions of the 1996 Facility.
(7) INCOME TAXES
Income tax (benefit) expense consists of (in thousands):
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 28, 1997:
U.S. Federal............... $ (923) $(3,215) $(4,138)
State and local............ (213) (649) (862)
------- ------- -------
$(1,136) $(3,864) $(5,000)
======= ======= =======
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
====== ====== =======
The differences between income taxes at the statutory Federal income tax
rate of 34% and income tax (benefit) expense reported in the consolidated
statements of operations are as follows:
1997 1996 1995
------ ------ ------
Federal statutory income tax rate ................ 34.0% 34.0% 34.0%
State income taxes, net of federal benefit ....... 5.0 5.0 4.2
Nondeductible merger and conversion expenses ..... -- 11.1 --
Meals and entertainment .......................... 1.5 .6 .3
FICA tip credit .................................. (7.3) (11.2) (5.2)
Other ............................................ (4.2) (1.8) (1.7)
---- ---- ----
Effective tax rates .................... 29.0% 37.7% 31.6%
==== ==== ====
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The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 28, 1997 and
December 29, 1996 are presented below:
1997 1996
------- -------
Deferred tax assets:
Provisions for restaurant closings, and other charges...... $ 4,558 $ 599
Deferred rent ............................................. 556 490
Alternative minimum taxes and general
business credit carryforwards ............................ 2,704 785
Conversion costs not currently deductible ................. 122 129
Net operating loss carryforwards .......................... 681 --
Accrued health insurance not currently deductible ......... 132 122
Accrued workers' compensation not currently deductible .... 212 36
Other ..................................................... 217 47
------- -------
Total gross deferred tax assets ...................... 9,182 2,208
Less valuation allowance .................................. (1,700) --
------- -------
Net deferred tax assets .............................. 7,482 2,208
------- -------
Deferred tax liabilities:
Property and equipment due to differences in
depreciation and amortization ............................ (2,347) (1,187)
Preopening costs expensed for tax purposes when incurred .. (720) (430)
Other ..................................................... (7) (47)
------- -------
Total gross deferred liabilities ..................... (3,074) (1,664)
------- -------
Net deferred tax assets............................... $4,408 $ 544
======= =======
The valuation allowance for deferred tax assets as of December 28, 1997 was
$1,700,000. No valuation allowance was established at December 29, 1996. The net
change in the valuation allowance for the years ended December 28, 1997,
December 29, 1996 and December 31, 1995 was an increase of $1,700,000, a
decrease of $45,000 and an increase of $45,000, respectively. In assessing the
realizability of deferred tax assets, the Company's management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company's management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections of future taxable
income over the periods in which the deferred tax assets are deductible, the
Company's management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance, at December 28, 1997. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
At December 28, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of $2,350,000 which are available to offset future
taxable income, if any, through 2012. In addition, the Company had alternative
minimum tax and other general business credit carryforwards of approximately
$2,700,000 which are available to reduce federal regular income taxes, if any,
over an indefinite period.
(8) EMPLOYEE BENEFIT PLANS
The Company provides employees who meet minimum service requirements with
retirement benefits under a 401(k) salary reduction and profit sharing plan (the
"RARE 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 2.5% of employee compensation.
Additional contributions are made at the discretion of the Board of Directors.
The Company's expense under the plan was $260,000, $220,000, and $200,000 for
1997, 1996 and 1995, respectively.
Commencing April 1, 1996, the Company provided a 401(k) salary reduction
plan to Bugaboo Creek Steak House employees (the "Bugaboo Creek Plan"). Under
the Bugaboo Creek Plan, employees made contributions of between 1% and 15% of
their annual compensation. The Company made a matching contribution of 10% of
the first 6% contributed by each employee. All employees of Bugaboo Creek Steak
House prior to the merger with one year and 1,000 hours of service are eligible
for the Bugaboo Creek Plan. The Company's expense under the Bugaboo Creek Plan
was $20,000 for 1996. Effective in 1997, the Company merged the Bugaboo Creek
Plan into the RARE Plan.
(9) LEASES AND RELATED COMMITMENTS
The Company is obligated under various capital leases for certain restaurant
facilities that expire at various dates during the next 25 years. At December
28, 1997, the gross amount of restaurant facilities and related accumulated
amortization recorded under capital leases were as follows:
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DECEMBER 28,
1997
-----------
Buildings................................ $5,600
Less accumulated amortization............ 142
------
Net book value of assets held under
capital leases......................... $5,458
======
Amortization of assets held under capital leases is included with
depreciation and amortization - restaurants.
The Company has noncancelable operating leases for restaurant facilities.
Rental payments include minimum rentals, plus contingent rentals based on
restaurant sales at the individual stores. These leases generally contain
renewal options for periods ranging from five to 15 years and require the
Company to pay all executory costs such as insurance and maintenance. Under the
provisions of certain leases, there are certain rent holidays and/or escalations
in payments over the base lease term, as well as renewal periods. 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 capital lease obligations and
noncancelable operating leases at December 28, 1997 are as follows (in
thousands):
YEARS ENDING AT OR
ABOUT DECEMBER 31: CAPITAL OPERATING
-------------------- ------- ---------
1998......... $ 518 $ 9,684
1999......... 518 9,959
2000......... 518 9,756
2001......... 518 9,453
2002......... 549 9,178
Thereafter... 10,062 44,369
------- -------
Total minimum lease
payments 12,683 $92,399
=======
Less imputed
interest (at 9%) 7,114
-------
Present value of
minimum lease
payments 5,569
Less current
maturities 518
-------
Obligations under
capital leases,
excluding current
maturities $ 5,051
=======
Rental expense consisted of the following amounts (in thousands):
1997 1996 1995
------ ------ ------
Minimum lease payments ............ $8,252 $6,218 $5,207
Contingent rentals ................ 686 640 536
------ ------ ------
Total rental expense ........ $8,938 $6,858 $5,743
====== ====== ======
Future minimum lease payments to related parties aggregated $197,000 at
December 28, 1997.
Rental expense includes approximately $106,000, $120,000, and $163,000 for
1997, 1996, and 1995, respectively, for rents paid to entities in which certain
of the Company's directors 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
$267,000 at December 28, 1997. The stockholders of the franchisee have agreed to
indemnify the Company for any loss under this lease guarantee. In addition, the
Company has guaranteed lease
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payments of a lease assignee in a former Company-leased location. Future minimum
lease payments under this lease aggregate approximately $323,000 at December 28,
1997. The Company does not believe that these guarantees subject it to a
material risk of loss.
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
During 1997, 1996, and 1995, 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 $11,000, $114,000, and $961,000 for the years 1997, 1996,
and 1995, respectively.
(11) SHAREHOLDERS' EQUITY
On April 1, 1996, the Company closed a 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.
In 1997, the Company entered into a Shareholder Protection Rights Agreement
(the "Rights Agreement") and declared a dividend distribution of one "Right"
for each outstanding share of common stock. The Rights initially have an
exercise price of $48.00 per share, and will become exercisable only under
certain conditions relating to an actual or threatened change in control of the
Company. Under certain conditions the rights will entitle the holder thereof to
purchase from the Company that number of shares of the Company's Common Stock
(or, under certain conditions, an acquiring company's equity securities) having
a value equal to twice the exercise price for an amount equal to the exercise
price. The Company will be entitled to redeem the Rights at $0.01 at any time
prior to the "Flip-in Date" (as that term is defined in the Rights Agreement).
Until such time as they become exercisable, the Rights have no dilutive effect
on the earnings per share of the Company.
(12) STOCK OPTIONS
The Company's 1997 Long-Term Incentive Plan (the "1997 Stock Option Plan")
provides for the granting of incentive stock options (subject to shareholder
approval), nonqualified stock options, stock appreciation rights, performance
units, restricted stock, dividend equivalents and other stock based awards to
employees, officers, directors, consultants, and advisors. The Company's 1992
Incentive 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 1997 Stock Option Plan and the
1992 Stock Option Plan were granted at prices which equate to or were higher
than current market value on the date of the grant and must be exercised within
ten years from the date of grant. The 1997 Stock Option Plan and the 1992 Stock
Option Plan authorized the granting of options to purchase 750,000 shares of
common stock and 1,500,000 shares of common stock, respectively.
The 1994 Bugaboo Creek Stock Option Plan (the "1994 Stock Option Plan")
provides for the granting of options to acquire approximately 306,550 shares of
the Company's common stock to directors, officers, and key employees. Through
December 28, 1997, 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 Steak House, Inc. 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 current market value on the date of
the grant, are generally exercisable after two to three years, and expire ten
years subsequent to award.
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 APB 25 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 SFAS No. 123 the Company's 1997, 1996 and 1995 net (loss) earnings and net
(loss) earnings per
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share would have been reduced by approximately $1,002,000, $705,000, and $84,000
or approximately $0.09, $0.06 and $0.01 per share, respectively. 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 1997, 1996 and 1995 is estimated at $3,384,000, $1,593,000 and
$2,998,000, respectively, 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 28, 1997 and December 29, 1996 options to purchase 367,281
and 436,898 shares, respectively, were exercisable at a weighted-average
exercise price of $16.37 and $14.10 per share, respectively. Option activity
under the Company's stock option plans is as follows:
WEIGHTED
SHARES AVERAGE PRICE
----------- -------------
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
Canceled in 1996....................... (253,959) 21.39
Outstanding at December 29, 1996....... 1,410,766 15.28
-----------
Granted in 1997........................ 995,150 14.47
Exercised in 1997...................... (289,980) 8.81
Canceled in 1997....................... (642,843) 17.72
------------
Outstanding at December 28, 1997....... 1,473,093 14.79
===========
The following table summarizes information concerning currently outstanding and
exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES (IN DOLLARS) OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------------------------------------------------------- -----------------------
$8.75 to $10...................... 301,400 9.0 $ 9.39 54,840 $ 9.39
$10.01 to $15..................... 627,850 9.2 13.44 95,980 13.04
$15.01 to $20..................... 330,263 8.2 17.60 116,265 17.60
$20.01 to $25..................... 208,580 7.5 21.88 98,696 22.00
$25.01 to $27.25.................. 5,000 8.3 27.25 1,500 27.25
(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' interests 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 claimed 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 was paid in settlement of the case in 1997, the major portion of which
was funded by an officers and directors liability insurance policy.
The cost to the Company, including related attorneys' fees, was approximately
$605,000.
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PURCHASE COMMITMENTS
The Company has entered into certain purchasing agreements with certain meat
suppliers requiring the Company to purchase contracted quantities of meat at
established prices through their expiration on varying dates in 1998. The
quantities contracted for are based on usage projections 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
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.
Letters of credit for $1,352,000 at December 28, 1997 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 or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about directors and nominees for director and executive officers
of the Registrant is incorporated herein by reference from the sections 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, 1998 (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 of the Company."
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," or
"Compensation and Stock Option Committees' 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."
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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."
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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 are set forth herein in
Part II, Item 8:
Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996
Consolidated Statements of Operations - For Each of the Years in the
Three-Year Period Ended December 28, 1997
Consolidated Statements of Shareholders' Equity - For Each of the Years in
the Three-Year Period Ended December 28, 1997
Consolidated Statements of Cash Flows - For Each of the Years in the
Three-Year Period Ended December 28, 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(A)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES
Not applicable.
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(A)(3) LISTING OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- -----------------------------------------------------
3(a) --Articles of Incorporation of the Registrant
3(b) --Bylaws of the Registrant
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
4(c) -- Shareholder Protection Rights Agreement, dated as of
November 4, 1997, between RARE Hospitality International, Inc.
and SunTrust Bank, Atlanta, as Rights Agent (which includes as
Exhibit B thereto the Form of Right Certificate) (incorporated
herein by reference from Exhibit 99.1 of the Registrant's Form
8-K dated November 4, 1997).
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 (incorporated herein by reference from Exhibit
10(a) of the Registrant's annual report on Form 10-K for the
fiscal year ended December 29, 1996).
10(b) -- First Amendment to Line of Credit Agreement dated as of
November 6, 1997, by and among RARE Hospitality International,
Inc. and First Union National Bank (incorporated herein by
reference from Exhibit 10.1 of the registrant's quarterly
report on Form 10-Q for the quarter ended September 28, 1997).
10(c) -- Second Amendment to Line of Credit Agreement dated as of
March 27, 1998, by and among RARE Hospitality International,
Inc. and First Union National Bank.
10(d) -- 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 (incorporated herein by reference from Exhibit
10(b) of the Registrant's annual report on Form 10-K for the
fiscal year ended December 29, 1996).
10(e) -- First Amendment to Credit Agreement dated as of November 6,
1997, by and among RARE Hospitality International, Inc. and
several lenders with First Union National Bank as Agent and
Fleet National Bank as Co-Agent (incorporated herein by
reference from Exhibit 10.1 of the registrant's quarterly
report on Form 10-Q for the quarter ended September 28, 1997).
10(f) -- Second Amendment to Credit Agreement dated as of March 27,
1998, by and among RARE Hospitality International, Inc. and
several lenders with First Union National Bank as Agent and
Fleet National Bank as co-Agent.
Executive Compensation Plans and Arrangements.
10(g) -- 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(h) -- Longhorn Steaks, Inc. 1996 Stock Plan for Outside Directors
(incorporated by reference from Exhibit 4(c) to Registration
Statement on Form S-8, Registration No. 333-11963).
10(i) -- RARE Hospitality International, Inc. 1997 Long-Term
Incentive Plan.
10(j) -- Amendment No. 1 to RARE Hospitality International, Inc.
1997 Long-Term Incentive Plan.
10(k) -- 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(l) -- 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(m) -- Employment Agreement dated September 30, 1997 between the
Registrant and Philip J. Hickey, Jr.
10(n) -- Employment Agreement dated October 16, 1997 between the
Registrant and Eugene I. Lee.
10(o) -- Employment Agreement dated November 3, 1997 between the
Registrant and William A. Burnett.
21 -- Subsidiaries of the Company.
23(a) -- Consent of KPMG Peat Marwick LLP.
27(a) -- 1997 Financial Data Schedule.
27(b) -- 1996 Restated Financial Data Schedule.
(B) REPORTS ON FORM 8-K
One report on Form 8-K was filed during the last quarter of the period
covered by this report, a report dated November 4, 1997.
(C) EXHIBITS
The exhibits in response to this Report are listed under Item 14(a)(3)
above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
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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/ Philip J. Hickey, Jr.
--------------------------------
Philip J. Hickey, Jr.
President and COO
Date: March 30, 1998
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Pursuant to the requirements of the Securities and 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 /s/ George W. McKerrow, Jr.
------------------------------------------------- Date March 30, 1998
George W. McKerrow, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
By /s/ Philip J. Hickey, Jr.
------------------------------------------------- Date March 30, 1998
Philip J. Hickey, Jr.
President, Chief Operating Officer and Director
By /s/ Benjamin A. Waites
------------------------------------------------- Date March 30, 1998
Benjamin A. Waites
Controller and Assistant Secretary (Principal
Financial and Accounting Officer)
By /s/ George W. McKerrow, Sr.
------------------------------------------------- Date March 30, 1998
George W. McKerrow, Sr.
Director
By
------------------------------------------------- Date March , 1998
Edward P. Grace, III
Director
By /s/ Ronald W. San Martin
------------------------------------------------- Date March 30, 1998
Ronald W. San Martin
Director
By /s/ John G. Pawly
------------------------------------------------- Date March 30, 1998
John G. Pawly
Director
By /s/ Don L. Chapman
------------------------------------------------- Date March 30, 1998
Don L. Chapman
Director
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