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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________to _____________________
COMMISSION FILE NUMBER 1-9684
CHART HOUSE ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0147725
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
115 SOUTH ACACIA AVENUE
SOLANA BEACH, CALIFORNIA 92075
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
Registrant's telephone number including area code: (619) 755-8281
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, par value New York Stock Exchange
$.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
INDICATE BY CHECK MARK WHETHER 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 ((S) 229.405 OF THIS CHAPTER) 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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 1998 was $43,803,487.
The number of shares outstanding of common stock as of March 12, 1998 was
11,728,589.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 29, 1997 are incorporated herein by reference into Parts I and
II.
Portions of the Registrant's Proxy Statement for the Annual Meeting to be
held May 6, 1998 are incorporated herein by reference into Part III.
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PART I
ITEM 1. BUSINESS.
As of December 29, 1997, Chart House Enterprises, Inc. (the "Company")
operated 61 restaurants, consisting of 60 Chart Houses and one Peohe's. In
addition, the Company operates a wholesale bakery under the name Solana Beach
Baking Company. The Company sold its Paradise Bakery subsidiary in December
1995, and in May 1996, the Company sold its Islands restaurant operations. The
Company was incorporated in Delaware on July 25, 1985. The Company's principal
executive offices are located at 115 South Acacia Avenue, Solana Beach,
California 92075, and its telephone number is (619) 755-8281.
The following discussion describes the Company's operations.
OPERATIONS
Chart House operations commenced in 1961 with the opening of the first Chart
House in Aspen, Colorado by a predecessor of the Company. Today, there are 60
Chart House restaurants located in 22 states, Puerto Rico and the U.S. Virgin
Islands.
Chart House restaurants are full-service, casual dinner houses with a menu
featuring fresh fish, seafood, steaks, chicken, prime rib, and as much salad
and bread as the customer desires. Many of the Chart House restaurants feature
an elaborate salad bar where the customer prepares his or her own salad and
some Chart Houses have a seafood bar which offers various appetizers.
The Company places great emphasis upon the location and exterior and
interior design of each Chart House restaurant. Each Chart House is unique and
designed to fit within and complement its surroundings. The restaurant
buildings are environmentally sensitive and functional in design.
Representative exteriors of Chart House restaurants range from the restored
1887 Victorian boathouse on Coronado Island in San Diego Bay to the modern
three-tiered glass restaurant in Philadelphia overlooking the Delaware River.
With a few exceptions, Chart House restaurants are free-standing buildings
with dinner seating capacities ranging from 92 to 350 and an average seating
capacity of 196. The restaurant interiors are casual in design and decor and
are accentuated by nautical-themed and action/adventure oriented artwork.
In 1997 the annual sales for Chart House restaurants currently in operation
ranged from $1.0 million to $8.0 million with an average annual sales per
Chart House restaurant of $2.5 million. The average dinner check was
approximately $25 per person, excluding alcoholic beverages. The operating
hours for Chart House restaurants are typically 5:00 p.m. to 11:00 p.m. on
weekdays and 5:00 p.m. to 1:00 a.m. on weekends. Selected Chart Houses are
open for lunch.
Alcoholic beverages are available at all Chart House locations. The sale of
alcoholic beverages accounted for approximately 22% of the revenues generated
by Chart House restaurants during each of the past three years.
Each Chart House restaurant is managed by one general manager and between
one and seven assistant managers, depending on the operating characteristics
and size of the restaurant. On average, general managers possess approximately
ten years experience with Chart House. The assistant managers generally are
required to participate in a comprehensive management development program with
progressive management assignments. In addition, each general manager is
required to comply with an extensive operations manual which contains
procedures to ensure uniform operations, consistently high quality products
and service and proper accounting for restaurant operations. The general
manager and his or her assistants are responsible for training restaurant
employees.
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There are eight Chart House regional directors of operations, each of whom
is responsible for five to nine Chart House restaurants in a given area. The
regional directors of operations report to the Vice President--Operations, who
reports directly to the President and Chief Operating Officer of the Company.
The duties of the directors of operations include supervising and assisting
the managerial and staff employees of all Chart House restaurants.
Peohe's
The Company opened its Peohe's restaurant in January 1988 in Coronado,
California overlooking San Diego Bay and the San Diego city skyline. Although
similar to the Company's Chart House restaurants in many respects, Peohe's
opened under a different name in part to minimize confusion and competition
with nearby Chart House restaurants and also to provide Chart House management
a suitable vehicle for experimentation and development of different menu
items, restaurant design and operating concepts. Peohe's has a more extensive
and higher priced menu, higher level of service and greater variety of cooking
techniques than the typical Chart House restaurant.
Solana Beach Baking Company
The Company operates a wholesale bakery in a leased facility located in
Carlsbad, California under the trade name "Solana Beach Baking Company." The
wholesale bakery supplies bread and other baked goods to Chart House
restaurants and also supplies muffins, croissants and other bakery products to
other retail, grocery and wholesale club accounts. Sales to Starbucks Coffee
Company comprise approximately one-half of the bakery's revenues.
Site Development
The cost of opening a Chart House restaurant varies significantly from
restaurant to restaurant, depending upon, among other things, the location of
the site and whether the land, building, furniture, fixtures and equipment are
purchased or leased. Capital expenditures for the most recently opened Chart
House in Newport, Kentucky, which was constructed on leased land and opened in
April 1996, totaled about $2.9 million.
While identifying and developing restaurant sites, particular emphasis is
placed on a potential site's physical location, with a preference for
locations near water and within major metropolitan areas. Sales and profit
projections are then prepared to determine whether the proposed restaurant
will provide a targeted return on investment. The Company accords great
importance to the selection of and coordination with the architect to ensure
that the proposed restaurant structure fits the Chart House restaurant image.
Where a new free-standing building is required to be built, up to 2 1/2 years
may elapse from site selection to restaurant opening. However, where the
Company is able to locate a suitable restaurant for conversion to a Chart
House, the development period is generally six to 12 months.
Strategic Plan
The Company's strategic plan focuses on the revitalization of the core Chart
House restaurants, the sale of non-core assets including Solana Beach Baking
Company, and the selective disposition of underperforming Chart Houses. The
Company is in the initial stages of the revitalization plan, which calls for
an upgrading of the facilities and enhanced menu offerings.
PROCUREMENT OF FOOD AND SUPPLIES
The Company's ability to maintain consistent quality throughout its
restaurants depends in part upon the ability to acquire food products and
related items from reliable sources in accordance with Company specifications.
Suppliers are pre-approved by the Company and are required to adhere to strict
product specifications to ensure that high quality food and beverage products
are served in the restaurants. Management believes that adequate alternatives
sources of supply are readily available.
2
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EMPLOYEES AND LABOR RELATIONS
As of December 29, 1997, the Company employed approximately 4,326 persons,
of whom approximately 4,051 were hourly restaurant or clerical employees and
approximately 275 were salaried, managerial employees engaged in
administrative and supervisory capacities. A majority of the hourly employees
are employed on a part-time basis to provide services necessary during peak
periods of restaurant operations. None of the Company's employees is covered
by a collective bargaining agreement. The Company has never experienced a work
stoppage and believes its labor relations to be good.
COMPETITION
In general, the restaurant business is highly competitive and can be
affected by competition created by similar restaurants in a geographic area,
changes in the public's eating habits and preferences and local and national
economic conditions affecting consumer spending habits, population trends and
traffic patterns. Key competitive factors in the industry are the quality and
value of the food products offered, quality of service, cleanliness, name
identification, restaurant locations, price and attractiveness of facilities.
The Company's strategy is to differentiate itself from its competitors by
providing consistently high quality products, and efficient and friendly
service in a unique setting.
MARKETING
The Company has developed an extensive, coordinated marketing communications
program. Efforts are concentrated on various local and national print media
and promotional campaigns and to supporting the Aloha Club, a frequent diner
program, which has a current enrollment of approximately 19,000 active
members.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to various federal, state and
local laws, regulations and administrative practices affecting its business
and must comply with provisions regulating health and sanitation standards,
equal employment, public accommodations for disabled patrons, minimum wages,
worker safety and compensation and licensing for the sale of food and
alcoholic beverages. Difficulties or failures in obtaining or maintaining
required liquor licenses, or other required licenses or approvals, could delay
or prevent the opening of new restaurants or adversely affect the operations
of existing restaurants.
Federal and state environmental regulations have not had a material effect
on the Company's operations but more stringent and varied requirements of
local governmental bodies with respect to zoning, land use and environmental
factors could delay construction of new restaurants and add to their cost.
The Company is also subject to the Fair Labor Standards Act, which governs
such matters as minimum wages, overtime and other working conditions. A
significant number of the Company's food service personnel are paid at rates
related to federal and state minimum wage requirements and, accordingly,
increases in the minimum wage or decreases in the allowable tip credit will
increase the Company's labor cost. There can be no assurance that future
legislation covering, among other matters, mandated health insurance, will not
be enacted which could have a significant effect on the Company.
The Company believes it is operating in substantial compliance with
applicable laws and regulations governing its operations.
TRADEMARKS AND SERVICE MARKS
The "Chart House" logo and trademark were registered with the United States
Patent and Trademark Office (the "USPTO") in 1972 and 1977, respectively. The
"Peohe's" logo and trademark were registered with the USPTO in 1988. The
"Aloha Club" trademark and logo were registered with the USPTO in 1996. The
new corporate "Chart House" trademark and logo were registered with the USPTO
in August 1997. Applications to register three new service marks are pending
with the USPTO.
The "Chart House" trademark and logo are licensed by the Company to the
operator of one Chart House restaurant located in Honolulu, Hawaii, and to the
operator of a Chart House restaurant in Queensland, Australia.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information about the executive
officers of the Company. Unless otherwise indicated, all positions are with
Chart House Enterprises, Inc.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ---- --- --------------------------
<S> <C> <C>
F. Philip Handy....................... 53 Acting Chief Executive Officer
Thomas J. Walters..................... 39 President and Chief Operating Officer
Randall P. McNamara................... 43 Vice President--Operations
Richard D. Tipton .................... 41 Vice President--Legal Affairs and
General Counsel
James C. Wendler...................... 38 Vice President--Finance and Chief
Financial Officer
</TABLE>
Executive officers of the Company are appointed annually by the Board of
Directors and serve at the Board's discretion.
F. Philip Handy has served as Acting Chief Executive Officer of the Company
since December 1997. Mr. Handy has been a director of the Company since March
1997. He is a managing director of EGI Corporate Investments, Inc., a division
of Equity Group Investments, Inc. Prior to joining Equity Group, Mr. Handy was
Chairman and President of Winter Park Capital Company, a private investment
firm he founded in 1980.
Thomas J. Walters joined the Company as President and Chief Operating
Officer and became a director in February 1998. From March 1995 until February
1998, Mr. Walters was President of Morton's of Chicago restaurants nationwide.
He also held the positions at Morton's of Vice President of Operations and
Regional Manager from March 1993 to March 1995. Prior to Mr. Walters
association with Morton's, he was Director of Food and Beverage with the Ritz-
Carlton Hotel Corporation for six years. He also has held positions as
Director of Food and Beverage for the La Costa Resort & Spa, and Director of
Catering and Banquet for the Hyatt Hotels Corporation.
Randall P. McNamara was named Vice President--Operations of the Company in
March 1997. Mr. McNamara has been an officer of the Chart House restaurant
organization since 1988. Mr. McNamara has been with the Chart House restaurant
organization continuously for the last 23 years.
Richard D. Tipton was named Vice President--Legal Affairs and General
Counsel in May 1997. He was Vice President and Assistant General Counsel from
January 1995 to May 1997. Previously, Mr. Tipton served as Corporate Counsel.
Mr. Tipton has been with the Company continuously for the past 10 years.
James C. Wendler was named Vice President--Finance and Chief Financial
Officer in May 1997. He was Vice President and Chief Accounting Officer from
February 1993 to May 1997. Mr. Wendler has been with the Company continuously
for the past 11 years.
Mr. Tipton's and Mr. Wendler's employment with the Company is expected to
terminate in June 1998 in connection with the Company's corporate office
relocation from Solana Beach, California to Chicago, Illinois.
4
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ITEM 2. PROPERTIES.
A majority of the restaurant properties used by the Company are leased from
others. The following table sets forth the number of restaurants owned, leased
and operated pursuant to ground leases and the average remaining lease term
(including renewal options) in years as of December 29, 1997. The table does
not include owned properties or leases under which the Company was not engaged
in restaurant operations at year end.
<TABLE>
<CAPTION>
AVERAGE
REMAINING
GROUND LEASE
OWNED LEASED(1) LEASES(2) TOTAL TERM(3)
----- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
Chart House........................ 11 31 17 59 26
Peohe's............................ -- 1 -- 1 28
--- --- --- ---
Total............................. 11 32 17 60
=== === === ===
</TABLE>
- --------
(1) The Company leases restaurant properties (a) pursuant to standard lease or
sublease arrangements and (b) under "build-to-suit" arrangements pursuant
to which the landowner/landlord builds a restaurant to the Company's
specifications. Each restaurant property is owned by the
landowner/landlord and at the expiration or termination of the lease term,
the Company will have no interest in the restaurant or any other material
improvements constructed on the real property.
(2) Under ground lease arrangements, the Company, as tenant, leases
undeveloped real property and is responsible for constructing all or
substantially all improvements on the real property. In a typical ground
lease, the improvements constructed by the Company are owned by the
Company and the landowner/landlord has no interest in the improvements
constructed by the Company until the expiration or termination of the
lease, at which time the improvements become the property of the
landowner/landlord.
(3) Includes renewal options.
The amount of rent paid to lessors and the methods of computing rent vary
considerably from lease to lease. Most leases contain a provision for a rental
equal to the greater of a fixed minimum amount or a percentage of restaurant
sales at the leased premises.
Substantially all of the owned Chart House restaurants and certain of the
leased Chart House restaurants are subject to mortgages in favor of certain
lenders. See Note 6 of the Notes to Consolidated Financial Statements as of
December 29, 1997 for information with respect to security agreements and
obligations under mortgages.
The Company operates one Chart House restaurant under a management agreement
with the owner of the property. The restaurant, located in Weehawken, New
Jersey, covers approximately 22,000 square feet.
Solana Beach Baking Company leases approximately 17,000 square feet of space
in a building in Carlsbad, California for use as a wholesale bakery. The
extended term of the lease expires in July 1998 and there is an option for an
additional six month term.
The Company's principal executive offices occupy approximately 20,400 square
feet of office space in a building located in Solana Beach, California, which
the Company sold in September 1997 and is leasing back through June 1998.
Around June 1998, the Company is expected to begin occupying leased space in
Chicago, Illinois.
ITEM 3 LEGAL PROCEEDINGS.
The Company periodically is a defendant in cases incidental to its business
activities. While any litigation or investigation has an element of
uncertainty, the Company believes that the outcome of any of these matters
will not have a materially adverse effect on its financial condition or
operations.
In the second quarter of 1997, the Company became a party to a civil action
entitled The Edward Fineman Company, Inc. v. Chart House Enterprises, Inc. &
Chart House, Inc., and Does 1 to 50, Case Number 711373, San Diego Superior
Court. On June 13, 1997, the complaint was served upon the Company and seeks
$6,000,000
5
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in compensatory damages for breach of contract. The complaint arises out of
the Company's termination of a supply contract with the plaintiff based upon
the plaintiff's numerous alleged material defaults of that contact. The
Company intends to vigorously contest the lawsuit and has filed a countersuit
against the plaintiff.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information appearing under the caption "Common Stock Information" on
page 24 of the Company's Annual Report to Stockholders for the year ended
December 29, 1997 (the "Annual Report") is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data for the Company and its subsidiaries on page 11
of the Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on pages 6 through 10 of the Annual Report and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company and its subsidiaries,
listed under Item 14, appear on pages 12 through 23 of the Annual Report and
are incorporated herein by reference.
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.
Directors. The information appearing under the caption "Election of
Directors" on pages 5, 6 and 7 of the Company's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 6, 1998 (the "Proxy Statement") is
incorporated herein by reference.
Executive Officers. The information with respect to executive officers
appearing under the caption "Executive Officers of the Company" is included in
Item 1 of this Annual Report on Form 10-K on page 4 and is incorporated herein
by reference pursuant to general instruction G and instruction 3 to Item
401(b) of Regulation S-K.
Compliance with Section 16(a) of the Exchange Act. The information appearing
under the caption "Security Ownership of Management--Compliance with Section
16(a) of the Exchange Act" on page 23 of the Proxy Statement is incorporated
herein by reference.
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ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the caption "Executive Compensation"
commencing on page 15 of the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the captions "Principal Stockholders" on
page 2 and "Security Ownership of Management" on page 23 of the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Certain Relationships and
Related Transactions" on page 21 of the Proxy Statement is incorporated herein
by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements:
Included in Part II of this report are the following financial statements
incorporated herein by reference to the following pages of the Annual
Report.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Balance Sheets as of December 29, 1997 and December 30,
1996................................................................. 12
Consolidated Statements of Operations for the fiscal years 1997, 1996
and 1995............................................................. 13
Consolidated Statements of Stockholders' Equity for the fiscal years
1997, 1996 and 1995.................................................. 13
Consolidated Statements of Cash Flows for the fiscal years 1997, 1996
and 1995............................................................. 14
Notes to Consolidated Financial Statements............................ 15-23
Report of Independent Public Accountants.............................. 23
</TABLE>
(2) Financial Statement Schedules:
All schedules have been omitted since the information required to be
submitted has been included in the consolidated financial statements or notes
thereto or have been omitted as not applicable or not required.
(3) Exhibits:
<TABLE>
<C> <S>
3.1(1) Restated Certificate of Incorporation of the Company, as
amended.(1)
(2) Certificate of Amendment of Restated Certificate of Incorporation
of the Company.(2)
3.2 Amended and Restated Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate.(2)
4.2 Section 203 of the Delaware General Corporation Law.(2)
10.1 Second Amended and Restated Credit Agreement dated as of June 27,
1997 by and among Chart House, Inc. ("CHI"), as borrower, the
Company and Big Wave, Inc., as guarantors, BankBoston, N.A, as
agent, and Sumitomo Bank of California as Security Agent.(10)
10.2 [Intentionally Omitted]
10.3 [Intentionally Omitted]
10.4 [Intentionally Omitted]
10.5(1) Registration Rights Agreement dated November 27, 1985 among the
Company and its stockholders.(1)
(2) First Amendment to Registration Rights Agreement dated as of April
28, 1986.(1)
(3) Second Amendment to Registration Rights Agreement dated as of
April 21, 1987.(1)
(4) Third Amendment to Registration Rights Agreement dated as of
September 6, 1989.(3)
10.6 [Intentionally Omitted]
10.7 [Intentionally Omitted]
10.8 Marks Licensing Agreement and Settlement Agreement, each dated as
of June 30, 1987 between CHI and Cabell Enterprises, Inc.(1)
</TABLE>
8
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<TABLE>
<C> <S>
10.9 Compensatory Plans, Contracts and Agreements:
(1) [Intentionally Omitted]
(2)(a) 1989 Non-Qualified Stock Option Plan of the Company.(2)
(b) Form of 1989 Non-Qualified Stock Option Plan
Agreement.(2)
(3)(a) 1992 Stock Option Plan.(4)
(b) Form of 1992 Stock Option Plan Agreement.(4)
(4) [Intentionally Omitted]
(5)(a) Chart House Enterprises, Inc. Corporate Employees
401(k) Plan, amended and restated as of January 1,
1996.(8)
(b) Chart House Enterprises, Inc. Restaurant Employees
401(k) Plan dated as of January 1, 1996.(8)
(c) [Intentionally Omitted]
(d) Trust Agreement between Shearson Lehman Trust Company
and the Company, effective as of June 24, 1993.(5)
(6) Executive Benefit and Wealth Accumulation Plan of the
Company, effective January 27, 1986.(1)
(7) [Intentionally Omitted]
(8) Form of Chart House Enterprises, Inc. Executive
Severance Agreement.(8)
(9) (a) 1996 Stock Option Plan.
(b) Form of 1996 Stock Option Plan Agreement.
(10) 1996 Nonemployee Director Stock Compensation Plan.
(11)(a) Restaurant Management Bonus Compensation Plan dated
October 1, 1996.
(b) Corporate Management Bonus Compensation Plan dated
January 1, 1997.
10.10 [Intentionally Omitted]
10.11(1) Stock Purchase Agreement dated as of December 30, 1988
by and among Luther's Acquisition Corporation, CHI and
Luther's Bar-B-Que, Inc.(2)
(2) Registration Rights Agreement dated as of December 30,
1988 between Luther's Acquisition Corporation and
certain shareholders, including CHI.(2)
(3) Shareholders' Agreement dated as of December 30, 1988
by and among Luther's Acquisition Corporation and
certain shareholders, including CHI.(2)
10.12 [Intentionally Omitted]
10.13 [Intentionally Omitted]
10.14 Management Agreement dated as of February 14, 1994 by
and between North Pier Associates and CHI.(6)
10.15(1) Asset Purchase Agreement dated December 20, 1994 among
Cork 'N Cleaver, Inc., Seward's Folly, Inc., and
Walter Seward.(6)
(2) Asset Purchase Agreement dated December 20, 1994 among
Cork 'N Cleaver of Kalamazoo, Inc., Seward's Folly
Michigan, Inc. and Walter Seward.(6)
(3) Management Agreement dated as of December 20, 1994
between Cork 'N Cleaver of Kalamazoo, Inc., Seward's
Folly Michigan, Inc. and Walter Seward.(6)
10.16 [Intentionally Omitted]
10.17 Stock Purchase Agreement dated as of December 14, 1995
by and among Java Centrale, Inc., the Company and
Paradise Bakery, Inc.(7)
</TABLE>
9
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<TABLE>
<C> <S>
10.18 [Intentionally Omitted]
10.19(1) Stock Purchase and Sale Agreement dated as of March 10, 1997
between Chart House Enterprises, Inc., Chart House Investors,
LLC and Alpha/ZFT Partnership. (9)
(2) Chart House Enterprises, Inc. Amended and Restated Standstill
Agreement dated October 1, 1997. (11)
10.20 Chart House Guaranty Agreement dated as of December 10, 1997
between Chart House Enterprises, Inc. and FINOVA Capital
Corporation.
13. Annual Report to Stockholders for the year ended December 29,
1997.
21. Subsidiaries of the Company.
23. Consent of Arthur Andersen LLP, Independent Public Accountants.
27. Financial Data Schedule (required for electronic filing only).
</TABLE>
- --------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
dated August 27, 1987 or amendments thereto dated October 6, 1987 and
October 14, 1987 (Registration No. 33-16795).
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
dated July 20, 1989 or amendment thereto dated August 25, 1989
(Registration No. 33-30089).
(3) Filed as an exhibit to Form 10-K for the fiscal year ended December 31,
1989.
(4) Filed as an exhibit to Form 10-K for the fiscal year ended December 31,
1991.
(5) Filed as an exhibit to Form 10-K for the fiscal year ended December 31,
1993.
(6) Filed as an exhibit to Form 10-K for the fiscal year ended December 31,
1994.
(7) Filed as an Exhibit to Form 8-K dated January 12, 1996, for the event
reported as of December 31, 1995.
(8) Filed as an exhibit to Form 10-Q for the quarterly period ended April 1,
1996.
(9) Filed as an exhibit to Form 10-Q for the quarterly period ended March 31,
1997.
(10) Filed as an exhibit to Form 10-Q for the quarterly period ended June 30,
1997.
(11) Filed as Exhibit 2.1 to Amendment No. 4 to a Schedule 13D of Chart House
Investors, LLC dated as of October 7, 1997.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed by the
Company during the fiscal year covered by this report.
10
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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.
CHART HOUSE ENTERPRISES, INC.
Date: March 27, 1998
By F. PHILIP HANDY
-------------------------------------
F. Philip Handy
Acting Chief Executive Officer;
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
F. PHILIP HANDY Acting Chief Executive March 27, 1998
- --------------------------------------- Officer (Principal
F. Philip Handy Executive Officer);
Director
THOMAS J. WALTERS President and Chief March 27, 1998
- --------------------------------------- Operating
Thomas J. Walters Officer; Director
JAMES C. WENDLER Vice President--Finance March 27, 1998
- --------------------------------------- and
James C. Wendler Chief Financial Officer
Principal Financial and
(Accounting Officer)
WILLIAM M. DIEFENDERFER Director March 27, 1998
- ---------------------------------------
William M. Diefenderfer
WILLIAM E. MAYER Director March 27, 1998
- ---------------------------------------
William E. Mayer
ARTHUR J. NAGLE Director March 27, 1998
- ---------------------------------------
Arthur J. Nagle
SAMUEL ZELL Director March 27, 1998
- ---------------------------------------
Samuel Zell
</TABLE>
11
<PAGE>
EXHIBIT 13
CHART HOUSE ENTERPRISES, INC. 1997 ANNUAL REPORT
<PAGE>
[PHOTOGRAPH APPEARS HERE]
<PAGE>
TO OUR SHAREHOLDERS
As new members of the Chart House team, we welcome the opportunity to address
our fellow owners and partners.
The 1997 fiscal year was a significant transition year for Chart House. Despite
some setbacks, we accomplished a great deal. Large-scale remodeling efforts were
put on hold as management focused its energies on improving the company's
financial position. We ended the 1997 fiscal year with a very strong balance
sheet. Substantial progress was made in the following areas:
. Early in the year, we completed a sale of common stock, which provided
the company with cash proceeds to reduce outstanding debt balances. The
company subsequently forged a strong strategic relationship with Equity
Group Investments, Inc.
. We sold selected non-core assets for cash, paid off remaining balances
of long-term debt and ended the year virtually debt-free.
. We obtained a new, three-year $20 million credit facility from our
banks, which has provided us with greater financial flexibility for our
immediate term needs.
. Richard Melman and Lettuce Entertain You Enterprises, Inc. were brought
on as creative consultants to assist us in our Chart House
revitalization efforts.
. We have addressed the leadership issue by hiring Tom Walters (formerly
President of Morton's of Chicago) as the company's President and Chief
Operating Officer.
1
[LOGO]
<PAGE>
We believe that these accomplishments and opportunities provide the platform to
begin what is essentially a major turnaround effort.
[POST CARD OF CHART HOUSE RESTAURANTS APPEARS HERE]
At the center of our activities in 1998 will be a focus on the operations and
revitalization of Chart House restaurants. We have begun with a program of re-
establishing excellence in our operating fundamentals, with short-term goals of
gaining efficiencies and reducing restaurant-level operating costs. The second
phase of our plan will include exciting restaurant menu and conceptual design
changes. Finally, we will market the "New" Chart House. Our long-term goals are
to build significant brand equity and grow revenues and profits.
The Chart House restaurants in Rancho Mirage, California, and Phoenix, Arizona
will be our first restaurants to undergo significant revitalization activities,
which are scheduled for the second quarter of 1998. We expect to start work on
other restaurants shortly thereafter.
We are very proud and excited to be a part of the Chart House team. We believe
we will add a fresh perspective to an organization with a rich tradition,
positive culture and wonderful restaurant locations. The outcome of our efforts
will be a world-class company of restaurants and long-term value for our fellow
shareholders.
Thank you for your continued support.
Sincerely,
F. Philip Handy Thomas J. Walters
Acting Chief Executive Officer President and Chief Operating Officer
2
<PAGE>
[PHOTOGRAPH APPEARS HERE]
<PAGE>
BELOW:
ARCHITECTURAL AND INTERIOR RENDERING OF THE PLANNED REVITALIZATION OF THE RANCHO
MIRAGE, CALIFORNIA LOCATION.
AT RIGHT:
NEW MENU ITEMS PLANNED FOR INTRODUCTION IN 1998. (FRONT TO BACK) TERIYAKI
MEDALLIONS, GRILLED MAUI TUNA CHOP, SZECHWAN LEMON CHICKEN AND COCONUT SHRIMP.
[PHOTO APPEARS HERE]
<TABLE>
<S> <C>
Management's Discussion and Analysis...................... 6
Selected Financial Data................................... 11
Consolidated Balance Sheets............................... 12
Consolidated Statements of Operations..................... 13
Consolidated Statements of Stockholders'Equity............ 13
Consolidated Statements of Cash Flows..................... 14
Notes to Consolidated Financial Statements................ 15
Report of Independent Public Accountants.................. 23
</TABLE>
4
<PAGE>
[PHOTOGRAPH APPEARS HERE]
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the results of operations for each of the fiscal
years in the period ended December 29, 1997. The dollar amounts are in
thousands.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
AMOUNT % AMOUNT % AMOUNT %
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $151,202 100.0 $160,551 100.0 $179,155 100.0
------------------------------------------------------
Costs and Expenses:
Cost of Sales 46,932 31.0 49,202 30.6 51,891 29.0
Restaurant Labor 42,056 27.8 45,648 28.4 48,583 27.1
Other Operating Costs 36,289 24.0 38,767 24.1 42,467 23.7
Selling, General and Administrative Expenses 12,879 8.5 13,911 8.7 15,286 8.5
Depreciation and Amortization 8,964 5.9 9,743 6.1 10,697 6.0
Write-Down of Assets and Restructuring and
Unusual Charges 43,374 28.7 7,833 4.9 4,853 2.7
Interest Expense 3,292 2.2 4,903 3.1 4,996 2.8
Interest Income (1,827) (1.2) (1,240) (.8) (185) (.1)
Other Income--Gain on Sale of Subsidiary - - - - (1,855) (1.1)
------------------------------------------------------
Total Costs and Expenses 191,959 127.0 168,767 105.1 176,733 98.6
------------------------------------------------------
Income (Loss) Before Income Taxes (40,757) (27.0) (8,216) (5.1) 2,422 1.4
Provision (Benefit) for Income Taxes (9,639) (6.4) (2,793) (1.7) (241) (.1)
------------------------------------------------------
Net Income (Loss) $(31,118) (20.6) $ (5,423) (3.4) $ 2,663 1.5
======================================================
</TABLE>
________________________________________________________________________________
Management believes that the most meaningful approach to analyzing operations is
through margin analysis which requires critically reviewing the relationships
that certain costs and expenses bear to revenues. Accordingly, the discussion
below follows this approach.
________________________________________________________________________________
1997 COMPARED TO 1996
Revenues for the 1997 fiscal year decreased by $9,349,000 from $160,551,000 in
1996 to $151,202,000 in 1997. The disposition of the Islands restaurants in May
1996 accounted for a decrease in revenues of $11,095,000. Revenues for Chart
House restaurants increased by $936,000 over 1996, due primarily to one new
restaurant opening (in April 1996) and the reopening of two restaurants
following shutdown/remodels (in March and July 1996), the effects of which were
partially offset by the permanent closing of three Chart House restaurants in
November 1997 and the temporary shutdown of one restaurant for a kitchen
remodel. Comparable sales (sales at restaurants open the entire period of both
years) were even with the previous year, reflecting a slight increase in average
check and corresponding decrease in customer counts. Increased sales at Solana
Beach Baking Company, primarily from the growth of two retail customers,
accounted for an increase in revenues of $810,000 for the 1997 fiscal year.
Operating-related cost and expense categories in the consolidated statements
of operations were lower in 1997 than 1996 because of the disposition of the
Islands restaurants. Aggregate operating-related costs of Islands for 1996 were
approximately $9,700,000. As a percentage of sales, Islands had lower food costs
than Chart House restaurants; conversely, Islands had higher percentage labor
and other operating costs than Chart House restaurants.
Restaurant-level operating margins in 1997 were even to slightly down from
1996, as cost pressures caused decreases in the second half of the year. Cost of
sales as a percentage of revenues was higher in 1997 compared to 1996; excluding
Islands from 1996, percentage comparisons were the same. Restaurant labor was
lower in 1997 than 1996, as the Company focused efforts on further controlling
hourly labor costs to counter the effects of Federal and state minimum wage
increases. Other operating costs overall as a percentage of revenues were
comparable between 1997 and 1996, however, other operating costs at Chart House
restaurants were slightly higher in 1997 because of increases in costs of, among
other things, supplying uniforms to restaurant employees.
Selling, general and administrative expenses decreased by $1,032,000 in 1997,
and were also slightly lower as a percentage of revenues. The disposition of
Islands accounted for approximately $455,000 of the decrease. In addition,
salaries and wages were lower because of reduced numbers of administrative
management and other employees as a result of the Company's restructuring and
reorganization activities. Partially offsetting these decreases were increased
costs and expenses related to the Company's planning and creative revitalization
efforts.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Depreciation and amortization decreased from 1996 levels primarily because of
asset write-downs recorded at the end of the 1997 third quarter.
The Company incurred special charges in 1997 of $43.4 million, consisting of
asset write-downs and other charges. The Company also incurred charges in the
1996 fiscal year as a result of restructuring-related activity. These charges
are discussed further below.
Interest expense decreased by approximately $1.6 million in 1997. The Company
used net proceeds from the sale of shares of common stock and certain asset
sales and excess cash flows from operating activities to pay off the remaining
balances of long-term senior notes and reduce outstanding debt under the
revolving credit agreement, the effect of which reduced interest expense.
Interest income was higher in 1997 because the note receivable from which
substantially all interest income was generated was outstanding longer in 1997
than in 1996. The note was received in connection with the disposition of
Islands restaurants in May 1996 and was paid in December 1997.
The effective rate for the benefit for income taxes was approximately 24% for
1997. The loss reported in 1997 from the special charges generated a tax benefit
which will be applied against previous years' and estimated future taxable
income. The effective rate for the benefit for income taxes for 1996 was 34%.
The loss for the 1996 year was applied against previous years' taxable income to
generate income tax refunds in the 1997 fiscal year.
Operating profits at Solana Beach Baking Company increased by $362,000 in
1997, primarily as a result of the increase in sales referred to above.
As a result of the foregoing, the net loss increased by $25,695,000 from a
loss of $5,423,000 in 1996 to a loss of $31,118,000 in 1997.
1996 COMPARED TO 1995
Revenues decreased by $18,604,000 from $179,155,000 in 1995 to $160,551,000 in
1996. The disposition of Paradise Bakery (December 1995) and the Islands
restaurants (May 1996) accounted for a combined decrease in revenues of
$16,853,000 in 1996. The closing of a total of four restaurants in the Chart
House division in 1995 and 1996 accounted for a decrease in revenues of
$2,300,000. One new Chart House, which opened in April 1996, contributed
revenues of $2,666,000. Chart House comparable sales (sales at restaurants open
the entire period of both years) fell by 1.4% due mostly to lower average check
amounts resulting from the introduction in early 1996 of certain lower-priced
menu items. Customer counts between the two years were relatively stable.
Restaurant-level operating margins were lower in 1996 than in 1995. Generally,
increased operating expenses without corresponding revenue increases placed
significant pressure on restaurant-level margins, contributing to unfavorable
operating results. Beginning in the early part of 1996, new menu items were
introduced at Chart House restaurants, most of which were priced lower than
other existing menu items. This changed the menu product mix, resulting in
higher percentage food and hourly restaurant labor costs. Other operating costs
at the restaurants, which include expenses for rent, maintenance, utilities,
supplies, tableware, property taxes, insurance and other services and costs,
increased slightly as a percentage of revenues; however, this increase was
minimized as efforts were focused on reducing controllable operating expenses.
The disposition of Paradise Bakery and the Islands restaurants impacts
comparisons of operating-related costs and expenses, in particular food costs.
Paradise Bakery and Islands historically had lower percentage food costs than
Chart House restaurants which stand-alone were approximately 29.7% for 1995.
Conversely, the disposed operations had higher percentage other operating costs
than Chart House restaurants.
Selling, general and administrative expenses decreased by $1,375,000, and as a
percentage of revenues increased from 8.5% in 1995 to 8.7% in 1996. There were
decreases in costs resulting from the disposition of Islands and reduction in
administrative payroll costs. Partially offsetting these decreases was a
significant increase in marketing-related expenses and increases in consulting
and product development costs.
Depreciation and amortization as percentage of revenues did not change
materially from 1995 to 1996.
The Company incurred special charges for restructuring-related activity in
1996 and 1995, as further discussed below.
Interest expense in 1996 was $93,000 lower than in 1995 due to reduced average
borrowing levels (the result of cash proceeds received from the sale of Paradise
Bakery in December 1995), and from lower prevailing interest rates in 1996 under
the revolving credit agreement. Partially offsetting the decrease was an
increase in interest costs from capitalized lease additions.
Interest income in 1996 increased by $1,055,000 over 1995 due primarily to
interest earned on a note received in connection with the sale of the Islands
restaurant operations in May 1996.
The effective rate for the benefit for income taxes was 34% for 1996. The
loss reported in 1996 generated a tax benefit as a result of the Company's
ability to carry back the loss against previous years' taxable income. The tax
benefit generated in 1995 is primarily the result of the Company's utilization
of significant federal tax credits from employment-related FICA taxes paid on
tip earnings reported by the Company's employees.
As a result of the foregoing, net income decreased by $8,086,000 from
$2,663,000 in 1995 to a loss of $5,423,000 in 1996.
ISLANDS DISPOSITION
Beginning in 1991 and in stages through the end of 1995, the Company had
acquired from the owner/licensor of the Islands concept rights to develop,
license and operate Islands restaurants. During that period, the Company built
18 Islands restaurants in California, Arizona and Florida. The expansion of
Islands required significant time and resources on the Company's part, and over
time had not produced a return on investment which was in line with management's
and the Board of Directors' expectations. In addition, the Islands restaurants
outside of the core base of operations in California had lower sales volumes and
were less profitable than the West Coast restaurants.
In March 1996, the Company announced its decision to dispose of the Islands
restaurants and that it had negotiated a sale with the owner/licensor of the
Islands concept, who also
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
owned 15 separate Islands restaurants. In connection therewith, the Company sold
75% of its Islands operations to two partnerships controlled by the
owner/licensor of the Islands concept for $23.0 million in notes. The buyer used
two partnerships (in which they were general partner) for purposes of acquiring
the Company's 18 restaurants: Islands California/Arizona LP (which acquired a
75% interest in 12 Islands restaurants in California and Arizona, "CA/AZ LP")
and Islands Florida LP (which acquired a 75% interest in six Islands restaurants
located in Florida, "Florida LP"). The Company agreed to retain a passive 25%
limited partner interest in the two partnerships. The sale closed in May 1996.
The Company recognized no gain on the sale. The book value of the Company's
limited partner interests was based on 25% of the net assets of Islands
reflected in the Company's balance sheet immediately preceding the sale, which
amounted to approximately $4.6 million. At the time of the sale, Company
management determined that projected future cash flows from the 18 restaurants
would be sufficient to enable the Company to ultimately realize its carrying
values of the limited partner investments and related notes receivable.
In the 1996 third quarter, Florida LP was experiencing a significant erosion
of sales and profits and subsequently the new owners agreed to sell its six
restaurants in the partnership for a nominal sum to an unrelated party. The
transaction closed in November 1996. As a result of this transaction between
Florida LP and the buyer, the Company recognized charges of $4.2 million in the
third quarter of 1996. The charge was required because the Company's investment
in Florida LP at that time was deemed by management to be significantly
impaired. The charge was substantially comprised of the write-off of the
Company's entire investment in Florida LP ($980,000 limited partner interest and
$3.0 million note receivable). This partnership was subsequently dissolved.
From November 1996 through December 1997, the Company's remaining investment
in Islands consisted entirely of the Company's 25% limited partner interest in
CA/AZ LP (in which the Company had no day-to-day operational or managerial
involvement or significant element of control) and the related $20 million note
receivable. Operating results for CA/AZ LP were consistently strong and note
payments to the Company were timely.
In July 1997, as part of the Company's restructuring activities and efforts to
reduce long-term debt balances, the Company's Board of Directors decided to sell
for cash the remaining investment in Islands. Subsequently, the Company and the
owner reached an agreement whereby the owner would buy the Company's remaining
25% limited partner interest in CA/AZ LP and repay the note (refinancing with a
new lender) at a discounted amount. The transaction closed in December 1997 and
provided the Company net cash proceeds of approximately $17.1 million, which
were used by the Company to repay remaining balances of long-term debt. The
difference between the carrying value of the Company's investment and the sale
price resulted in a $5.7 million write-down, which was included in the 1997
special charges reflected in the Company's consolidated statement of operations.
RESTRUCTURING ACTIONS
AND SPECIAL CHARGES
Throughout most of its 36-year history, the Company enjoyed relative
stability in executive management and Chart House restaurant operations. In
recent years, the Company has experienced disruption from organizational changes
including significant turnover of senior management and attempts to grow and
then subsequently sell other restaurant concepts. Operating profitability
declined over the 1996 and 1997 fiscal years.
By late 1996, the Company had built up significant debt balances, and as a
result, the Company's Board of Directors began to review strategic financing
alternatives. In May 1997, the Company completed a sale of common stock to an
investment company and partially paid down outstanding debt balances. In the
following months, there were additional management and organizational changes
and a change in the composition of the Board of Directors. The Company entered
into new strategic and creative alliances in order to accelerate the
revitalization process of the Chart House restaurants. In the third quarter of
1997, the Board made the decision to sell for cash all non-core assets (assets
and operations outside of the core restaurant operations) in efforts to pay down
remaining debt balances and focus management attention on the revitalization of
the Chart House restaurants, which had been contemplated prior to 1997 but not
effectively implemented. Management and the Board also re-examined the Company's
prior management's willingness to maintain marginally-performing restaurants.
New management and the Board established new operating standards with a much
greater emphasis on achieving higher economic return over the estimated life of
each restaurant property. As a result of this change in direction, a decision
was made to dispose of certain restaurants and write down others to amounts
which current management and the Board believes approximate fair value. Such
write-downs were prepared in accordance with SFAS 121. In addition, the Company
sold its corporate office building and a decision was made to relocate the
corporate operations from Solana Beach, CA to Chicago, IL. A resulting
termination plan affected approximately 55 corporate managerial and clerical
employees. The relocation is expected to be completed by June 1998. As a direct
result of certain of these restructuring activities, the Company has been able
to generate significant proceeds from asset disposals to pay off long-term debt.
Management does not currently contemplate additional restructurings.
The 1997 special charges of $43.4 million are primarily the result of write-
downs of assets to be used in ongoing operations or to be disposed of. The
charges included (i) approximately $21.2 million in write-downs to estimated net
realizable value of assets to be sold or otherwise disposed of, including the
Company's remaining investment in Islands ($5.7 million); five Chart House
restaurants ($6.3 million); fixtures, decor and other identified restaurant
assets to be disposed of in connection with the remodel/revitalization of the
Chart House restaurants ($7.8 million); and other non-core assets and minority
interests in unrelated companies ($1.4 million), and (ii) approximately $16.8
million in write downs to estimated fair value of several underperforming Chart
House restaurants to be used in ongoing operations and other non-cash charges,
including a write down of goodwill associated with impaired assets ($4.2
million). The remainder of the special charges
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
consisted of approximately $5.4 million of charges, which included, among other
things, costs associated with hiring a new chief executive officer, severance
and other costs related to executive management and organizational changes, and
termination benefits to be paid to employees in connection with the planned
relocation of the Company's headquarters.
Prior to 1997, special charges primarily resulted from unanticipated economic
events related to executive management departures and decisions to dispose of
certain restaurants and other operations in efforts to strengthen the Company.
The Company incurred special charges in the 1995 and 1996 fiscal years. In 1995,
restructuring actions resulted in charges to operations of $4.9 million before
income taxes. Approximately $4.5 million of these charges related to the
Company's decision to dispose of three Chart House restaurants and two former
Chart House restaurant properties. The charges included amounts to write down
assets to their net realizable value and estimated costs to cease operations and
sell the restaurants. The remainder of the 1995 charges consisted of severance
expense for certain management employees. In 1996, the Company incurred
additional charges to operations which were not contemplated, nor part of, the
1995 restructuring actions. These charges amounted to $7.8 million and included
costs associated with the turnover of two chief executive officers, the write
down of the investment in Florida LP, severance and special compensation costs
resulting from a reorganization of the Company's management team, and charges to
write down to estimated net realizable value certain assets and one restaurant
property to be disposed of.
OPERATING OUTLOOK
The Company made modifications to the Chart House menu beginning in the second
half of 1997 which contributed to higher cost of sales. Management plans to
continue to test menu ideas and develop new products in efforts to provide
increased value to the customer, and expects higher cost of sales in 1998
related to these efforts.
On September 1, 1997, the Federal minimum hourly wage increased from $4.75 to
$5.15 per hour. Additionally, the minimum hourly wage to employees based in
California (a state in which the Company operates 19 restaurants) increased from
$5.00 to $5.15 per hour, with a further increase to $5.75 effective March 1,
1998. The increases in minimum hourly wages in 1996 and 1997 have resulted in
labor cost pressures for the Company. Management believes that the recent
measures will increase the Company's 1998 labor costs, and is taking specific
steps to minimize the impact of the increased wage rates.
Management believes the 1997 restructuring and other activity will also impact
results of operations for 1998. Revenues will be reduced to the extent of the
closed and sold restaurants and operations. Operating profits will be favorably
impacted by the shutdown and disposal of certain restaurants in 1997; however, a
sale of Solana Beach Baking Company (as currently planned) will reduce operating
profits. Initially, depreciation and amortization expense will be lower because
of the write down and disposition of assets and restaurants. However, this
expense will begin to increase in the latter part of 1998 and in 1999 as
remodeling activities accelerate. Costs incurred to relocate the Company's
corporate office and train new staff (through 1998 mid-year) and continuing
costs involving the Chart House restaurant revitalization program will add to
selling, general and administrative costs. In addition, restaurant sales and
operating expenses will be impacted to the extent there is shutdown time in
connection with the remodeling of restaurants. Interest expense will be
significantly lower in 1998 than in 1997 because of the reduction in debt
levels. Interest income will be substantially eliminated as a result of the
payoff of the remaining Islands note receivable.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for the acquisition and construction
of new restaurants and for the remodeling and refurbishing of existing
restaurants. The Company's primary sources of working capital are cash flows
from operations and borrowings under a credit agreement with two banks which
provides a $20 million line of credit (reduced from $20.4 million in June 1997
under an amended and restated agreement, as discussed below) with interest at
the lead bank's base rate (or LIBOR plus a maximum 1.25%). Net cash flows from
operating, investing and financing activities are used primarily to reduce or
increase those borrowings. At December 29, 1997, the Company had no outstanding
borrowings under the line of credit. However, the Company expects borrowings to
increase during 1998 depending on the timing of working capital and capital
expenditure needs.
The Company planned limited capital investment activity in 1997 for
approximately twenty restaurants. Capital resources were primarily directed
toward restaurant level improvements which would be noticed by Chart House
customers: paint, carpeting, lighting, sound systems, and cookline upgrades,
among other things. Capital expenditures for the 1997 fiscal year were $5.9
million. The Company did not open any new restaurants in 1997.
In the first quarter of 1997, the Company completed a process that had begun
in late 1996 to obtain alternative financing in order to reduce amounts owed to
its existing lenders and to provide capital needed to enable the Company to move
forward with its plan to revitalize the Chart House restaurants.
On March 10, 1997, the Company agreed to sell 3,400,000 newly-issued shares of
common stock in a private placement to an investment company at $5.75 per share,
for a total sale price of $19.5 million. The initial sale of 1,641,750 shares
for $9.4 million was completed in March 1997. An additional 1,758,250 shares
were sold for $10.1 million, following approval by the Company's shareholders at
the annual meeting held in May 1997. The Company used the net proceeds of
approximately $18.4 million from the transaction to repay an aggregate of $12
million of scheduled principal installments under two senior secured notes and
to reduce outstanding borrowings under the bank credit agreement.
In June 1997, in connection with the completion of the additional stock sale
transaction, the Company obtained a new, longer term credit facility with its
banks. The restated credit agreement provides for a $20 million revolving loan
credit limit, which includes availability for letters of credit primarily
covering insurance reserves (of which approximately $3.1 million were
outstanding at December 29, 1997). Interest on borrowings is at the lead bank's
base rate or LIBOR plus a maximum 1.25%, and there is an annual facility fee on
the total commitment of .25%. The credit agreement includes certain financial
and other covenants and matures in June 2000.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In July 1997, the Company's Board of Directors approved the sale of certain
assets in an effort to further reduce debt balances. Between August 1997 and
December 1997, the Company sold "non-core" assets, including the Company's
Solana Beach headquarters building and the remaining investment in Islands,
which generated net cash proceeds of approximately $20 million. These proceeds
were used to repay remaining debt balances outstanding under two senior notes
and borrowings under the bank revolving credit agreement.
As a result of the 1997 restructuring and other activities, including the
decision by the Company to sell or otherwise dispose of certain assets as well
as the sale of common stock completed earlier in the year, proceeds of which
were used to reduce outstanding indebtedness, management believes that the
Company's liquidity has significantly improved. Cash flows from operations plus
availability under the $20 million revolving credit agreement will, in the
opinion of management, be sufficient to fund working capital and regular capital
expenditure commitments. The Company currently projects 1998 capital
expenditures to be $10 million, however, this amount may vary depending on the
timing of revitalization activities. The extent and timing of remodeling and
revitalization activities may require alternative sources of long-term financing
to fully implement. However, no assurance can be given that such financing will
be available or on terms satisfactory to the Company.
EFFECT OF INFLATION
Management does not believe inflation has had a significant effect on the
Company's operations during the past several years. Management believes the
Company generally has been able to increase menu prices or make other
adjustments to substantially offset increases in its operating costs resulting
from inflation, but there can be no assurance that it will be able to do so in
the future. Although management does not anticipate that inflation will have a
material effect on income from restaurant operations in 1998, future increases
in labor, food or other operating costs could adversely affect the Company's
operating results.
SEASONALITY AND OTHER INFORMATION
Historically, the Company's business is seasonal in nature with Revenues and
Net Income for the second and third quarters greater than in the first and
fourth quarters.
In 1996, the Company switched from a calendar-based fiscal year to a 52/53-
week fiscal year. This reporting method is used by many companies in the
restaurant and retail industries and is meant to improve future year-to-year
comparisons of operating results. The new fiscal year consists of four equal 13-
week quarterly periods ending on the Monday nearest to the calendar quarter end.
This change did not have a material effect on reported results for the fiscal
year ended December 30, 1996. However, the first fiscal quarter of 1997
benefited from the inclusion of December 31, which historically is the highest
sales day for the Chart House restaurants. The first quarter of 1998 will also
include sales for December 31.
The Company's wholesale baking subsidiary, Solana Beach Baking Company, has
expanded its business over the past few years, primarily with the addition of
retail and grocery accounts. Sales for the baking company were $5,815,000 in
1997, $5,005,000 in 1996 and $4,772,000 in 1995, and pre-tax earnings for the
respective periods were approximately $1,190,000, $830,000 and $1,100,000. In
the 1997 fiscal year, approximately one half of the bakery's sales were
attributable to a single customer. The Company plans to sell the bakery in 1998.
In 1997, the Company began converting its computer systems to be Year 2000
compliant. At December 29, 1997, approximately 50% of the Company's systems were
compliant, with all systems expected to be compliant by mid-1999. The total cost
of the project is estimated to be $100,000. The Company is expensing costs
associated with these system changes. As of December 29, 1997, approximately
$50,000 had been expensed.
This report contains forward-looking statements that were made within the safe
harbor provisions of the Securities Litigation Reform Act of 1995. Actual
results could differ from those projected in the forward-looking statements.
10
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $151,202 $160,551 $179,155 $174,940 $157,137
Depreciation and Amortization 8,964 9,743 10,697 9,872 9,395
Restructuring and Other Charges (1) 43,374 7,833 4,853 - -
Interest Expense 3,292 4,903 4,996 4,718 5,351
Interest Income (1,827) (1,240) (185) (191) (177)
Other Income-Gain on
Sale of Subsidiary (2) - - (1,855) - -
Income (Loss) Before Income Taxes
and Extraordinary Item (40,757) (8,216) 2,422 6,598 7,227
Income (Loss) Before Extraordinary Item (31,118) (5,423) 2,663 4,286 4,147
Extraordinary Item (3) - - - - (172)
Net Income (Loss) (31,118) (5,423) 2,663 4,286 3,975
Income (Loss)Per Common Share
Before Extraordinary Item (4) (2.91) (.66) .32 .52 .50
Extraordinary Item - - - - (.02)
Net Income (Loss) Per Common Share --
Basic and Diluted (4) $ (2.91) $ (.66) $ .32 $ .52 $ .48
Weighted Average Shares Outstanding (4) 10,688 8,254 8,277 8,292 8,285
Balance Sheet Data (End of Period):
Total Assets $ 88,245 $148,925 $153,446 $156,709 $147,008
Current Portion of
Long-Term Indebtedness 816 6,772 3,401 646 782
Long-Term Indebtedness - 50,499 51,694 61,982 56,209
Stockholders' Equity 59,005 71,308 76,652 73,958 69,582
</TABLE>
________________________________________________________________________________
(1) Restructuring and Other Charges in 1997, 1996 and 1995 include asset write-
downs, severance and other charges.
(2) Other Income in 1995 represents the gain recorded on the sale of the
Company's wholly-owned subsidiary, Paradise Bakery, Inc.
(3) Extraordinary Item in 1993 represents a prepayment penalty on early
retirement of debt in the amount of $300,000, net of the related income tax
benefit of $128,000.
(4) Effective December 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). The adoption
of the standard had no material impact for any of the years presented above.
For all years presented, basic and diluted earnings per share are the same.
11
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DEC. 29, DEC. 30,
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash $ 205 $ 204
Accounts Receivable 3,249 4,807
Refundable Income Taxes 537 1,852
Inventories 2,624 3,226
Prepaid Expenses and Other Current Assets 429 882
------------------
Total Current Assets 7,044 10,971
------------------
Property and Equipment, at Cost:
Land 6,582 7,655
Buildings 19,145 25,581
Equipment 29,236 39,530
Leasehold Interests and Improvements 46,541 73,637
Construction in Progress 924 787
------------------
102,428 147,190
Less: Accumulated Depreciation and Amortization 40,726 53,643
------------------
Net Property and Equipment 61,702 93,547
------------------
Leased Property under Capital Leases, Less Accumulated
Amortization of $5,479 in 1997 and $4,561 in 1996 5,026 5,672
------------------
Investment in Islands Limited Partnership and Note Receivable - 23,416
------------------
Deferred Tax Asset 5,675 -
------------------
Other Assets and Goodwill, Net 8,798 15,319
------------------
$ 88,245 $148,925
==================
</TABLE>
<TABLE>
<CAPTION>
DEC. 29, DEC. 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Current Portion of Long-Term Debt $ - $ 6,000
Current Portion of Obligations under Capital Leases 816 772
Accounts Payable 4,955 3,303
Accrued Liabilities 17,723 13,466
------------------
Total Current Liabilities 23,494 23,541
------------------
Long-Term Debt - 44,200
------------------
Long-Term Obligations under Capital Leases 5,746 6,299
------------------
Deferred Income Taxes - 3,577
------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $1.00 par value, authorized 10,000,000 shares;
none outstanding - -
Common Stock, $.01 par value, authorized 30,000,000 shares;
11,727,409 shares outstanding in 1997 and 8,262,513 in 1996 117 83
Additional Paid-In Capital 60,926 42,145
Retained Earnings (Deficit) (2,038) 29,080
------------------
Total Stockholders' Equity 59,005 71,308
------------------
$ 88,245 $148,925
==================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
12
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
DEC. 29, DEC. 30, DEC. 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $151,202 $160,551 $179,155
-----------------------------------------
Costs and Expenses:
Cost of Sales 46,932 49,202 51,891
Restaurant Labor 42,056 45,648 48,583
Other Operating Costs 36,289 38,767 42,467
Selling, General and Administrative Expenses 12,879 13,911 15,286
Depreciation and Amortization 8,964 9,743 10,697
Write-Down of Assets and Restructuring and
Unusual Charges 43,374 7,833 4,853
Interest Expense 3,292 4,903 4,996
Interest Income (1,827) (1,240) (185)
Other Income -- Gain on Sale of Subsidiary - - (1,855)
-----------------------------------------
Total Costs and Expenses 191,959 168,767 176,733
-----------------------------------------
Income (Loss) Before Income Taxes (40,757) (8,216) 2,422
Provision (Benefit) for Income Taxes (9,639) (2,793) (241)
-----------------------------------------
Net Income (Loss) $(31,118) $ (5,423) $ 2,663
=========================================
Net Income (Loss) Per Common Share -- Basic and Diluted $ (2.91) $ (.66) $ .32
=========================================
Weighted Average Shares Outstanding 10,688 8,254 8,277
=========================================
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 8,196 $ 82 $ 42,036 $ 31,840 $ 73,958
Exercise of Stock Options 20 - 31 - 31
Net Income - - - 2,663 2,663
---------------------------------------------------------------------
Balance, December 31, 1995 8,216 82 42,067 34,503 76,652
Exercise of Stock Options 46 1 78 - 79
Net Loss - - - (5,423) (5,423)
---------------------------------------------------------------------
Balance, December 30, 1996 8,262 83 42,145 29,080 71,308
Issuance of New Shares 3,400 34 18,407 - 18,441
Exercise of Stock Options 57 - 324 - 324
Non-Employee Directors Compensation 8 - 50 - 50
Net Loss - - - (31,118) (31,118)
---------------------------------------------------------------------
Balance, December 29, 1997 11,727 $ 117 $ 60,926 $ (2,038) $ 59,005
=====================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------
DEC. 29, DEC. 30, DEC. 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ (31,118) $ (5,423) $ 2,663
Adjustments to Reconcile Net Income (Loss)
to Cash Flows Provided by Operating Activities:
Depreciation and Amortization 8,964 9,743 10,697
Deferred Income Taxes (9,252) (941) (1,957)
Common Stock Issued in lieu of Compensation 50 - -
Loss on Retirement and Write-Down of Assets 38,113 6,999 4,912
Gain on Sale of Subsidiary - - (1,855)
Change in Net Current Liabilities 9,837 (2,529) 2,745
-------------------------------------------------
Cash Provided by Operating Activities 16,594 7,849 17,205
-------------------------------------------------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment (5,926) (11,481) (17,351)
Reductions to Other Assets and Goodwill 510 865 344
Proceeds from Sale of Subsidiary - - 5,375
Proceeds from Sale/Leaseback of Asset - - 905
Net Proceeds from Disposition of Assets 3,968 1,596 441
Payments Received on Notes Receivable 17,070 659 416
-------------------------------------------------
Cash Provided by (Used in) Investing Activities 15,622 (8,361) (9,870)
-------------------------------------------------
Cash Flows from Financing Activities:
Principal Payments on Long-Term Obligations under
Capital Leases (780) (534) (640)
Net Borrowings (Payments) under Revolving Credit Agreement (19,200) 3,926 (6,726)
Payments of Long-Term Debt (31,000) (3,000) -
Proceeds from Issuance of Common Stock 18,765 79 31
-------------------------------------------------
Cash Provided by (Used in) Financing Activities (32,215) 471 (7,335)
-------------------------------------------------
Increase (Decrease) in Cash 1 (41) -
Cash, Beginning of Year 204 245 245
-------------------------------------------------
Cash, End of Year $ 205 $ 204 $ 245
=================================================
The Change in Net Current Liabilities is Comprised of
the Following:
Decrease (Increase) in Accounts Receivable $ 1,558 $ (263) $ 980
Decrease (Increase) in Refundable Income Taxes 1,315 (1,852) -
Decrease (Increase) in Inventories 602 53 (103)
Decrease (Increase) in Prepaid Expenses and Other
Current Assets 453 280 (292)
Increase (Decrease) in Accounts Payable 1,652 (937) 972
Increase (Decrease) in Accrued Liabilities 4,257 190 1,188
-------------------------------------------------
Change in Net Current Liabilities $ 9,837 $ (2,529) $ 2,745
=================================================
Supplemental Cash Flow Disclosure:
Cash Paid During the Year For:
Interest (Net of Amount Capitalized) $ 4,044 $ 5,037 $ 4,923
Income Taxes (Net of Refunds) $ (2,269) $ 786 $ 1,505
Non-Cash Investing and Financing Activities:
Notes Received from Sale of 75% of Islands Operations $ - $ 23,000 $ -
Notes Received from Sale of Subsidiary $ - $ - $ 1,350
Capitalized Lease Obligations Incurred for Property
Additions and Acquisitions $ 271 $ 2,532 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1997
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Chart House Enterprises, Inc. and its subsidiaries, all of which are wholly-
owned (hereinafter referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In 1996, the Company switched from a calendar-based fiscal year to a 52/53-
week fiscal year. This reporting method is used by many companies in the
restaurant and retail industries and is meant to improve future year-to-year
comparisons of operating results. The new fiscal year consists of four equal 13-
week quarterly periods ending on the Monday nearest to the calendar quarter end.
Certain prior year balances have been reclassified to conform to the 1997
presentation.
NATURE OF OPERATIONS
The Company is engaged primarily in the restaurant business. At December
29, 1997, the Company operated 60 Chart House restaurants and one Peohe's
restaurant. The restaurants are located in 22 states, Puerto Rico and the U.S.
Virgin Islands, with a concentration of operations on the east and west coasts.
The Company also operates Solana Beach Baking Company, a wholesale bakery.
As discussed in Note 2, the Company plans to sell or otherwise dispose of the
bakery. Revenues for this operation, which totaled $5.8 million in 1997, have
increased over the past three years with the addition of new retail accounts. In
the 1997 fiscal year, approximately one-half of the bakery's revenues were
attributable to a single customer.
INVENTORIES
Inventories are priced at the lower of cost (first-in, first-out) or
market, and consist of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 29, DEC. 30,
1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Food and Non-Alcoholic
Beverages $ 1,227 $ 1,370
Alcoholic Beverages 1,264 1,195
Operating Supplies 133 661
--------------------
$ 2,624 $ 3,226
====================
</TABLE>
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets include, among other things,
deferred restaurant pre-opening costs which are amortized over a period of
twelve months from the opening dates of the respective restaurants. Pre-opening
costs consist of hiring and training-related expenses and other direct costs
associated with opening a restaurant. Deferred pre-opening costs amounted to $0
and $208,000 at December 29, 1997 and December 30, 1996, respectively.
Amortization of deferred pre-opening costs for the fiscal years 1997, 1996 and
1995 was $208,000, $767,000 and $921,000, respectively.
PROPERTY AND EQUIPMENT AND LEASED PROPERTY
Depreciation and amortization are recorded for financial reporting purposes
using the straight-line method over the estimated useful lives of the assets.
Leasehold interests and improvements and leased property are amortized over the
shorter of the lease term or the asset life. The average estimated depreciable
lives for financial reporting purposes are 30 years for buildings, 22 years for
leasehold interests and improvements and leased property, and 7 years for
equipment.
Maintenance, repairs and minor purchases are expensed as incurred. Major
purchases of equipment and facilities, and major replacements and improvements
are capitalized. When assets are sold or otherwise disposed of, the cost and
related accumulated depreciation and amortization are removed from the accounts
and the resulting gains or losses are reflected in the accompanying consolidated
statements of operations.
OTHER ASSETS AND GOODWILL
The costs of purchasing transferable liquor licenses in jurisdictions with
a restricted market for issuance of new licenses for fees in excess of nominal
amounts are capitalized and are not amortized because of the licenses'
transferability, generally unlimited life and value retention. Such assets are
reviewed for potential impairment under the provisions of SFAS 121 (see below).
The costs of obtaining non-transferable liquor licenses that are directly issued
by local government agencies for nominal fees are expensed in the year incurred.
Annual fees for renewal of all liquor licenses are expensed.
Goodwill was $7,819,000 and $12,464,000 at December 29, 1997 and December
30, 1996, respectively, net of accumulated amortization of $3,361,000 and
$4,741,000, respectively. The goodwill is being amortized using the straight-
line method over 40 years. The Company evaluates goodwill for impairment on an
ongoing basis (see Note 2).
LONG-LIVED ASSETS
On a regular basis, the Company evaluates and assesses its assets and
properties for impairment under the guidelines of Financial Accounting Standards
Board Statement No. 121, "Accounting for Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS 121), and makes appropriate adjustments when an
asset is deemed to be impaired (see Note 2). In performing this analysis, the
Company generally groups assets by individual location or restaurant property.
Future estimated cash flows to be generated as a result of operating the
particular restaurant, generally over specified lease terms or useful lives, are
compared against the carrying value of the related assets.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FEES AND ROYALTIES
The Company operates a Chart House restaurant in Weehawken, New Jersey
under a management agreement with the owner of the property that provides the
Company with a management fee of 7% of sales of the restaurant. Management fees
related to this operation, which are included in revenues in the accompanying
statements of operations, were $557,000 in 1997, $502,000 in 1996 and $480,000
in 1995.
The Company earned franchise fees and royalties from its franchised
Paradise Bakery operations, which were sold in December 1995 (see Note 3), and
earned management fees through operating under a management agreement certain
Islands restaurants, which were sold in May 1996 (also see Note 3). Total fees
earned that related to these sold operations were $573,000 and $2,716,000 in the
fiscal years 1996 and 1995, respectively.
INTEREST COSTS
Interest costs incurred during the construction period for new restaurants
are capitalized. Property additions for the Company include capitalized interest
of $0, $76,000, and $256,000 for the fiscal years 1997, 1996 and 1995,
respectively.
NET INCOME (LOSS) PER COMMON SHARE
Earnings per share calculations are based on the weighted average number of
common shares and common stock equivalents (stock options) outstanding during
the period. Anti-dilutive securities are excluded from calculations of any loss
per share. Diluted earnings per share equals basic earnings per share for all
periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). The
statement specifies the computation, presentation and disclosure requirements
for earnings per share. The statement is effective for financial statements for
periods ending after December 15, 1997. The adoption of this standard by the
Company did not have a material effect on earnings per share computations.
(2) RESTRUCTURING ACTIONS AND SPECIAL CHARGES
In 1997, the Company's Board of Directors approved certain actions to be
taken in connection with the Company's strategy to revitalize its core Chart
House restaurants, sell for cash or otherwise dispose of non-core assets and
selected underperforming Chart Houses, reorganize senior management and reduce
debt levels. These and other actions resulted in special charges in 1997 of
$43.4 million.
The special charges are primarily the result of write-downs of assets
either to be used in ongoing operations or to be disposed of. The charges
included (i) approximately $21.2 million in write downs to estimated net
realizable value of assets to be sold or otherwise disposed of, including the
Company's remaining interest in an Islands limited partnership ($2.5 million)
and related note receivable ($3.2 million); five Chart House restaurants ($6.3
million); fixtures, decor and other identified restaurant assets to be disposed
of in connection with the remodel/revitalization of the Chart House restaurants
($7.8 million) and other non-core assets and minority interests in unrelated
companies ($1.4 million), and (ii) approximately $16.8 million in write-downs to
estimated fair value of several Chart House restaurants to be used in ongoing
operations and other non-cash charges, including a write-down of goodwill
associated with impaired assets ($4.2 million), in accordance with SFAS 121. The
remainder of the $43.4 million special charge consisted of approximately $5.4
million in charges, which included among other things, costs associated with
hiring a new chief executive officer, severance and other costs related to
executive management and organizational changes, and termination benefits to be
paid to corporate managerial and clerical employees in connection with the
planned relocation of the Company's headquarters.
The Company incurred special charges in the 1995 and 1996 fiscal years
primarily resulting from unanticipated economic events related to executive
management departures and decisions to dispose of assets in efforts to
strengthen the Company. In 1995, restructuring actions resulted in charges to
operations of $4,853,000 before income taxes. Approximately $4,443,000 of these
charges related to the Company's decision to dispose of three Chart House
restaurants and two former Chart House restaurant properties. The charges
included amounts to write down assets to their estimated net realizable value
and estimated costs to cease operations and sell the restaurants. The remainder
of the 1995 restructuring charges consisted of severance expense for certain
management employees. In 1996, the Company incurred additional charges to
operations which were not contemplated, nor part of, the 1995 restructuring
actions. These charges amounted to $7,833,000 and included costs associated with
the turnover of two chief executive officers, the write-down of the investment
in an Islands limited partnership (see Note 3), severance and special
compensation costs resulting from a reorganization of the Company's management
team, and charges to write down to estimated net realizable value certain assets
and one restaurant property to be disposed of.
Of the six restaurants and properties written down in 1995 and 1996, five
have been sold or otherwise disposed of through December 29, 1997 (with the
remaining one listed for sale). Of the five Chart House restaurants identified
for disposal as part of the 1997 restructuring actions, one was disposed of in
1997 and one was closed and listed for sale in January 1998. The Company
anticipates that the disposal of the remainder of restaurants and other
restructuring actions, including a planned sale of Solana Beach Baking Company,
will be substantially completed in 1998. The Company does not contemplate
further restructuring actions.
The following table summarizes the charges for write-down of assets and
other activity, as presented in the accompanying consolidated statements of
operations (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Severance and Other
Special Costs $ 5,446 $ 1,430 $ 410
Write-Down of Assets 37,928 6,403 4,443
--------------------------------------
$ 43,374 $ 7,833 $ 4,853
======================================
</TABLE>
In 1997, amounts paid and charged against the liability for severance and
other special costs totaled $2,232,000. At December 29, 1997 and December 30,
1996, the balance of the liability (included in other current liabilities) was
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$4,087,000 and $873,000, respectively. Included in property and equipment in the
accompanying balance sheets are assets held for disposal of approximately $2.4
million at December 29, 1997 and $696,000 at December 30, 1996. The amount of
write-down and resulting carrying value of the respective assets, and other
assets held for disposal, at December 29, 1997 and December 30, 1996 include
management's best estimates of the amounts to be realized on the disposition of
the assets. The amounts the Company will ultimately realize may differ from the
amounts assumed in arriving at the aforementioned write-down. In determining
estimated fair values and realizable values, the Company generally used
appraisals and discounted cash flow valuations. Revenues and operating profits
from restaurants and operations that were sold or otherwise disposed of in 1997
or held for disposal at the end of the 1997 fiscal year, and which will not be
continued were as follows: $14.3 million and $784,000 for 1997; $13.9 million
and $632,000 for 1996; and $14.4 million and $1.3 million for 1995.
(3) ACQUISITIONS AND DISPOSITIONS
In December 1995, the Company sold to an unrelated third party all of the
outstanding common stock of its wholly-owned subsidiary, Paradise Bakery, Inc.
The total sale price was $6,725,000, consisting of $5,375,000 cash proceeds and
a $1,350,000 note (see Note 4). The Company recognized a net gain on sale of
$1,855,000 before income taxes, which is included in the accompanying 1995
consolidated statement of operations. Approximately 20% of the gain on sale, or
$450,000, which represented the proportionate share of the total sale price of
non-cash proceeds (i.e. note) received, was deferred and applied against the
note balance. Paradise Bakery, Inc. had total assets prior to the sale of
approximately $4.7 million and its revenues for 1995 were approximately $4.7
million and income before income taxes was approximately $700,000.
In March 1996, the Company announced its decision to dispose of its 18
Islands restaurants, which over time had not produced a return on investment
which was in line with the Company's expectations. In May 1996, the Company
completed the sale of a 75% interest in its Islands restaurants operations to
two affiliated partnerships of the owner/licensor of the Islands concept (and
owner of 15 existing Islands restaurants), for a total sale price of $23 million
in secured notes ($20 million from Islands CA/AZ Holdings LP, and $3 million
from Islands Florida LP), with interest at 9% annually. The notes were payable
over a 20-year amortization period, with the remaining principal balances due at
the end of 15 years. In connection with the sale, the Company retained a 25%
interest as a limited partner in each of the partnerships, which entitled it to
periodic distributions based on available cash flows, as provided in the
partnership agreements. As part of the transaction, the existing area
development and license agreement and management agreement between the Company
and the owner/licensor terminated, thereby relieving the Company of its
obligation to continue developing Islands restaurants, and reverting the license
and development rights back to the owner. The Company recognized no gain on the
sale. Following the sale, the book value of the limited partner interests was
based on 25% of the balance of the net assets of Islands reflected in the
Company's balance sheet immediately preceding the sale, which amounted to
approximately $4.6 million. The Islands restaurants division had total assets
prior to the sale of approximately $29 million and its revenues for 1995 were
approximately $23 million and income before income taxes was approximately
$67,000.
In the 1996 third quarter, one of the partnerships, Islands Florida LP, was
experiencing significant erosion of sales and profits, and subsequently
thereafter the new owner agreed to sell its six Islands restaurants in the
partnership for a nominal sum to an unrelated third party. The transaction
closed in November 1996, and as a result of the transaction, the Company
recorded a special charge of $4.2 million, which was included in the 1996
consolidated statement of operations. The charge was required because the
Company's investment in Islands Florida LP at that time was deemed by management
to be significantly impaired. The charge was substantially comprised of the
Company's entire investment in Islands Florida LP ($980,000 limited partner
interest and $3.0 million note receivable). This partnership was subsequently
dissolved. As of December 30, 1996, the carrying value of the Company's
remaining investment in Islands consisted of its limited partner interest in
Islands California/Arizona LP ($3.6 million) and related note receivable from
the partnership's general partner, Islands CA/AZ Holdings LP ($19.8 million).
The Company performed a review for potential impairment at December 30, 1996 in
accordance with SFAS 121 and SFAS 114 ("Accounting by Creditors for Impairment
of a Loan") and determined that estimated future cash flows were sufficient to
support the carrying amount of this asset.
In July, 1997, as part of the Company's restructuring activities and
efforts to reduce long-term debt balances, the Company's Board of Directors
decided to sell for cash the remaining investment in Islands. Subsequently
thereafter, the Company and Islands CA/AZ Holdings LP reached an agreement
whereby Islands CA/AZ Holdings LP would buy the Company's limited partner
interest in California/Arizona LP and repay the note to the Company (refinancing
with a new lender) at a discounted amount. The transaction closed in December
1997 and provided the Company with net proceeds of approximately $17.1 million.
The difference between the carrying value of the Company's investment and the
sale price resulted in a $5.7 million write-down, which was included in the 1997
special charges reflected in the Company's consolidated statement of operations
(see Note 2). In connection with the transaction, the Company agreed to
guarantee through January 2004 an amount of $4.0 million of note obligations to
the Islands entity's new lender. The Company had no remaining asset balances
with respect to Islands as of December 29, 1997.
(4) NOTES RECEIVABLE
At December 29, 1997 and December 30, 1996, the Company held $446,000 and
$874,000, respectively, in notes receivable from the buyer of Paradise Bakery,
Inc. (see Note 3). The amounts are included in other assets and goodwill in the
accompanying consolidated balance sheets net of reserves of $446,000 at December
29, 1997 and $331,000 at December 30, 1996. The note bears interest at 10% and
matures in November 1998.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(5) Income Taxes
The provision (benefit) for income taxes consists of the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ (537) $(1,852) $ 1,716
Deferred (9,102) (941) (1,957)
-------------------------------
Provision (Benefit)
for Income Taxes $(9,639) $(2,793) $ (241)
===============================
</TABLE>
The components of deferred income tax (asset) liability are as follows (in
thousands):
<TABLE>
<CAPTION>
DEC. 29, DEC. 30,
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Excess of Tax Depreciation
Over Book Depreciation $ 6,696 $ 6,660
Compensation and Other Benefits
Not Deductible Until Paid (1,564) (334)
State Income Taxes 50 50
Excess of Book Expense
over Tax Expense Related
to Restructuring Charges (2,785) (1,379)
Excess of Book Expense over
Tax Expense Related to Fixed
Asset Write-Downs (9,737) (289)
Excess of Book Expense over
Tax Expense Related to
Capitalized Leases (398) (401)
Deferred Tax Credits,
including Targeted Jobs and
FICA Credit Carry Forwards (718) (718)
Other Deferred Costs (598) (12)
--------------------
(9,054) 3,577
Deferred Tax Benefit
Valuation Allowance 3,379 -
--------------------
Deferred Income Taxes $(5,675) $ 3,577
====================
</TABLE>
The provision (benefit) for income taxes reconciles to the amounts computed
by applying the Federal statutory rate to income before tax as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal Income
Tax Provision $(13,858) $(2,793) $ 824
Amortization of
Goodwill 1,536 103 117
State Income Taxes,
Net of Federal
Benefit (716) (156) 286
Deferred Tax
Benefit Valuation
Allowance 3,379
Other, Net,
Including Targeted
Jobs and FICA
Tax Credits 20 53 (1,468)
------------------------------
Provision (Benefit)
for Income Taxes $ (9,639) $(2,793) $ (241)
==============================
</TABLE>
(6) LONG-TERM DEBT
Long-term debt of the Company is as follows (in
thousands):
<TABLE>
<CAPTION>
DEC. 29, DEC. 30,
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Notes payable to banks under
Revolving Credit Agreement,
interest payable quarterly at
the banks' base rate (8.50%
at December 29, 1997) $ - $19,200
10.4% Senior Secured Notes
due 2000 (a) - 12,000
6.69% Senior Secured Notes
due 2001 (a) - 19,000
-------------------
- 50,200
Less: Current Portion - 6,000
-------------------
$ - $44,200
===================
</TABLE>
(a) Amount was payable to an insurance company that is a principal stockholder
of the Company.
During 1997, the Company and its lenders amended certain terms of the
existing debt agreements and agreed to, among other things, provide for early
payment of debt (without prepayment penalty) with proceeds from the sale of
shares of common stock (see Note 10) and disposition of certain assets (see Note
3).
In June 1997, the Company obtained a new, three-year credit facility with
its banks. The amended and restated credit agreement provides for a commitment
of $20.0 million with interest at the lead bank's base rate or LIBOR plus a
maximum 1.25%. The Company is required to pay a facility fee of .25% per annum
on the total commitment. The Company must also maintain certain specified
financial ratios. All of the Company's assets are pledged as security to the
banks in accordance with the terms of the agreement.
The amount of current portion of long-term debt at December 30, 1996
represented two installments due under the 6.69% and 10.4% senior secured notes
($3,000,000 each), which were paid in March 1997 (see Note 10). The two
succeeding principal installments under the 10.4% senior note ($3,000,000 each,
due in July 1998 and July 1999) were prepaid in June 1997 following the
completion of the sale of shares of common stock. The remaining balances owing
under the two senior notes (totalling $19,000,000) were prepaid in September and
December 1997 with net proceeds from the sale of certain non-core assets. Excess
proceeds from the sale of common stock and asset dispositions were used to
reduce borrowings under the revolving credit agreement.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) Leases
The Company is committed under long-term lease agreements primarily
involving land and restaurant buildings, improvements and equipment which expire
on various dates through 2031. Also, a substantial number of leases contain
renewal options ranging from five to fifty years. Certain of the leases require
the payment of an additional amount by which a percentage of annual sales
exceeds annual minimum rentals. The total amount of such contingent rentals for
the fiscal years 1997, 1996 and 1995 amounted to $2,251,000, $2,254,000 and
$2,392,000, respectively.
CAPITAL LEASES
At December 29, 1997, minimum lease payments under long-term capital leases
were as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
- -----------------------------------------------------------------
<S> <C>
1998 $ 1,393
1999 1,230
2000 1,148
2001 930
2002 584
Thereafter 6,229
-------
Total Minimum Lease Payments 11,514
Less: Amount Representing Interest 4,952
-------
Total Obligations under Capital Leases 6,562
Less: Current Portion 816
-------
Long-Term Obligations under Capital
Leases, with an Average Interest Rate of 9% $ 5,746
</TABLE> =======
Amortization of leased property under capital leases and interest expense on
the outstanding obligations under such leases were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization $ 917 $ 630 $ 688
Interest Expense $ 623 $ 572 $ 588
</TABLE>
OPERATING LEASES
The Company is committed under long-term operating leases (primarily for
restaurant land) to make minimum rental payments as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
- -----------------------------------------------------------------
<S> <C>
1998 $ 3,308
1999 3,134
2000 3,117
2001 2,849
2002 2,438
Thereafter 19,021
-------
$33,867
=======
</TABLE>
The Company, as sublessor, subleased certain Paradise Bakery locations in
connection with the 1992 and 1993 franchise sales. Rentals received under these
subleases amounted to $293,000 for the fiscal year 1995.
Minimum rental expense for all operating leases, excluding contingent rent,
for the fiscal years 1997, 1996 and 1995 was $4,140,000, $4,571,000 and
$5,560,000, respectively.
(8) EMPLOYEE BENEFITS PLANS
The Company's 401(k) Plan allows qualified employees to contribute through
payroll deductions from 1% to 5% of gross pay. The Company makes basic matching
contributions to the plan equal to 25% of the employee's contribution, not to
exceed $1,250 per employee per year, plus a supplemental 25% matching
contribution on a quarterly basis if targeted financial results are achieved.
Company matching contributions and administrative costs associated with the plan
were $325,000, $295,000 and $282,000 for the fiscal years 1997, 1996 and 1995,
respectively.
The Company's Executive Benefit and Wealth Accumulation Plan allows
qualified key executives to defer compensation of at least $5,000 per year and
to obtain supplemental survivor and disability benefits.
(9) STOCK OPTION PLANS
All options under the Company's 1985 incentive stock option plan (the "ISO
Plan") were granted and exercised as of December 30, 1996.
In July 1989, the Board of Directors adopted and the stockholders of the
Company approved the 1989 Non-Qualified Stock Option Plan (the "1989 Plan")
which authorized the grant of non-qualified stock options to purchase up to
250,000 shares of the Company's common stock. Under the 1989 Plan, options to
purchase 250,000 shares were granted in 1989 to certain senior management and
other employees at a fair market value exercise price of $13.50 per share. The
options vested at a rate of 25% per year over four years and expire ten years
from the date of grant. In December 1991, the Board of Directors approved an
exchange program giving option holders under the 1989 Plan an opportunity to
surrender their existing options in exchange for the reissuance of a new option
with an exercise price of $8.50 that covers one-half the number of shares
covered by the existing option. The exchange also required the four-year vesting
schedule to start over. Options covering a total of 7,250 shares were reissued
in connection with this program. In September 1995, the Board of Directors
approved an additional exchange program giving all option holders, excluding
executive officers, the opportunity to surrender their existing $13.50 options
and $8.50 options for the reissuance of new options with an exercise price of
$6.25 that cover one-half the number of shares covered by the existing $13.50
options and four-fifths the number of shares covered by the existing $8.50
options. The exchange required a new two-year vesting period to start.
In February 1992, the Board of Directors adopted, and stockholders later
approved, the 1992 Stock Option Plan (the "1992 Plan"), which authorized the
grant of options to purchase up to 310,000 shares of the Company's common stock.
The options under the 1992 Plan were awarded as non-qualified stock options at
an exercise price equal to the fair market
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
value of the common stock at the date of grant. Through September 1995,
management and other employees were granted stock options to purchase an
aggregate of 377,000 shares of common stock (which included option grants for
shares totalling 70,500 related to previously granted and forfeited options).
The options vest at a rate of 20% per year over five years and expire ten years
from the date of grant. The Company does not anticipate granting any additional
options under this plan.
In May 1996, the Board of Directors adopted and the stockholders of the
Company approved the 1996 Stock Option Plan (the "1996 Plan"), which authorizes
the grant of non-qualified stock options or incentive stock options to employees
to purchase up to 1,000,000 shares of the Company's common stock. Options were
granted in 1996 and 1997 to employees at exercise prices ranging from $4.88 to
$8.38 per share, the fair market value at the date of grant. The options granted
generally vest at a rate of 20% per year over five years and expire ten years
from the date of grant. There are 580,100 options available for future grant
under the 1996 Plan as of December 29, 1997.
In May 1997, options to purchase a total of 12,500 shares of common stock
were granted to directors following the Company's annual meeting of shareholders
under the 1996 Nonemployee Director Stock Compensation Plan. There were no
options granted in 1996 (see Note 10).
In addition to options granted under the plans described above, an option
to purchase 20,000 shares of common stock was granted to an officer in April
1988 at a price of $2.31 per share. The option vested over a five-year period
and would have expired ten years from the date of grant. In August 1997, this
officer exercised the remaining 10,000 shares outstanding and exercisable. Also,
an option for 100,000 shares was granted in May 1997 to a director of the
Company at an exercise price of $6.75 per share, the fair market value at date
of grant. This option grant, which is not covered under the Company's option
plans, becomes exercisable subject to and upon approval by the stockholders of
the Company at the next stockholders' meeting, and expires in ten years from
date of grant. Additionally, an option for 400,000 shares was granted (also
outside of the Company's option plans) in July 1997 to an officer of the Company
at an exercise price of $8.25 per share, the fair market value at date of grant.
This option grant was cancelled in December 1997 upon the resignation of the
officer.
There have been no charges to operations with respect to options granted in
the 1997, 1996 and 1995 fiscal years.
The following table summarizes stock option transactions for the fiscal
years 1995, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
ISO PLAN/ TOTAL OPTION PRICE
OTHER 1989 PLAN 1992 PLAN 1996 PLAN SHARES PER SHARE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
December 31, 1994 76,300 207,750 246,400 - 530,450 $ 11.15
Granted - - 80,000 - 80,000 $ 6.25
Exercised (19,910) - - - (19,910) $ 1.56
Forfeited - (35,500) (38,900) - (74,400) $ 12.34
Surrendered - (72,750) - - (72,750) $ 8.50
Reissued - 37,800 - - 37,800 $ 6.25
---------------------------------------------------------------------------------------
Outstanding,
December 31, 1995 56,390 137,300 287,500 - 481,190 $ 9.43
Granted - - - 434,000 434,000 $ 6.40
Exercised (46,390) - - - (46,390) $ 1.70
Forfeited - (34,250) (91,500) (110,500) (236,250) $ 8.00
---------------------------------------------------------------------------------------
Outstanding,
December 30, 1996 10,000 103,050 196,000 323,500 632,550 $ 7.84
Granted 512,500 - - 451,500 964,000 $ 7.52
Exercised (10,000) (1,250) (32,000) (13,800) (57,050) $ 5.68
Forfeited (400,000) (64,800) (89,400) (355,100) (909,300) $ 7.90
---------------------------------------------------------------------------------------
Outstanding at
December 29, 1997 112,500 37,000 74,600 406,100 630,200 $ 7.46
=======================================================================================
Exercisable at
December 29, 1997 100,000 29,000 60,500 21,700 211,200 $ 7.73
=======================================================================================
</TABLE>
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information concerning outstanding and
exercisable stock options as of December 29, 1997:
<TABLE>
<CAPTION>
RANGE OF SHARES COVERED BY OPTIONS WEIGHTED AVERAGE PRICE WEIGHTED AVERAGE
------------------------- -----------------------
EXERCISE PRICES OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE REMAINING LIFE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.88-5.88 88,650 15,200 $ 5.57 $ 5.72 8.36
$6.25-8.38 495,550 158,000 7.29 6.65 9.18
$12.15-13.50 46,000 38,000 12.99 13.01 4.10
------------------------------------------------------------------
Total 630,200 211,200 $ 7.46 $ 7.73 8.69
==================================================================
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, ("Accounting
for Stock Issued to Employees"), and related interpretations in accounting for
its employee stock option plans and, accordingly, does not recognize
compensation expense. Had the Company elected to recognize compensation expense
based on the fair value at the grant date for options granted under the plans
consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, ("Accounting for Stock-Based Compensation"), the
Company's net income (loss) and per share amounts would reflect the following
pro forma amounts (in thousands):
<TABLE>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Net Income (Loss)
As Reported $ (31,118) $ (5,423)
Pro Forma $ (31,406) $ (5,570)
Net Income (Loss)
Per Common Share:
As Reported $ (2.91) $ (.66)
Pro Forma $ (2.94) $ (.67)
</TABLE>
The Company has options outstanding from the 1989 and 1992 Plans that have not
been included in the above pro forma amounts. Therefore, these amounts may be
understated.
The weighted average fair values of the options granted in 1997 and 1996 are
estimated as $3.36 and $2.82, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: expected stock price volatility of 46%, risk-free interest rates of
5.8% for the 1997 grants, and 6.7% for the 1996 grants, expected lives of 4.9
years for the 1997 grants and 4.3 years for the 1996 grants.
(10) STOCKHOLDERS' EQUITY
The Company's preferred stock may be issued in one or more series and the
Board of Directors may fix the designation, powers, preferences, rights,
qualifications, limitations and restrictions of each class or series so
authorized.
In connection with the Company's initial public offering in 1989, warrants to
purchase a total of 435,000 shares of the Company's common stock were issued to
two stockholders. The warrants, which had a price per share of $18.00, became
exercisable in September 1993 and expired without being exercised in September
1997.
In May 1996, the Board of Directors' adopted and stockholders of the Company
approved the 1996 Nonemployee Director Stock Compensation Plan. The plan
provides the right for each nonemployee director, at his or her election, to
receive the Company's common stock and stock options in lieu of receipt of
compensation in the form of cash and the automatic grant to each participating
director of an option to purchase 2,500 shares of common stock as of the date of
each annual meeting of shareholders. There are a total of 50,000 shares reserved
for issuance under the plan. In 1997, a total of 7,846 shares of common stock
were issued to directors under this plan. No shares were issued in the 1996
fiscal year (see Note 9).
In March 1997, the Company agreed to sell 3,400,000 newly-issued shares of
common stock in a private placement to an investment company at $5.75 per share
for a total sale price of $19.5 million. The initial sale of 1,641,750 shares
for $9.4 million was completed in March 1997. The additional 1,758,250 shares
were sold for $10.1 million following shareholder approval at the annual meeting
held in May 1997. Transaction costs applied against the proceeds were
approximately $1.1 million. The Company used the net proceeds from the
transaction to repay $12.0 million of scheduled principal installments under two
senior secured notes (See Note 6), with the remainder of the net proceeds from
the sale applied to reduce outstanding borrowings under the bank credit
agreement.
(11) SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Accounts receivable at December 30, 1996 include reimbursable amounts of
$175,000 related to pre-opening construction, fixturizations, inventories and
operating costs for the Weehawken Chart House. The reimbursable amounts were
paid back to the Company in 1997 from operating cash flows of the restaurant, as
defined in the management agreement with the owner of the property. Also
included in accounts receivable at December 30, 1996 is $1,106,000 of insurance
proceeds receivable in connection with Hurricane Marilyn property damage and
business interruption coverage. This amount was subsequently received in 1997.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 29, DEC. 30,
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Rent $ 681 $ 708
Sales Tax 767 737
Payroll and Payroll Taxes 1,652 2,139
Insurance 2,017 1,761
Interest 89 1,013
Unredeemed Gift Certificates 3,232 2,812
Severance and Other
Special Costs 4,087 873
Other 5,198 3,423
-----------------------------------
$ 17,723 $ 13,466
===================================
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
The Company periodically is a defendant in cases incidental to its business
activities. While any litigation or investigation has an element of uncertainty,
the Company believes that the outcome of any of these matters will not have a
materially adverse effect on its financial condition or results of operations.
The Company maintains letters of credit primarily to cover insurance
reserves. At December 29, 1997, outstanding letters of credit amounted to
$3,071,000.
The Company has guaranteed certain debt obligations of third parties
with an outstanding balance totalling $4,844,000 as of December 29, 1997.
The Company is contingently liable, in certain circumstances, for certain
lease obligations of the Islands restaurants sold in 1996.
The Company believes that the stated amounts of contingent financial
obligations approximate fair value.
(13) SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations
for 1997 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
1997 MARCH 31 JUNE 30 SEPT. 29 DEC. 29
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 38,347 $ 39,344 $ 39,273 $ 34,238
-----------------------------------------------------
Costs and Expenses:
Cost of Sales 11,828 11,859 12,217 11,028
Restaurant Labor 10,333 10,805 10,851 10,067
Other Operating Costs 9,106 9,520 9,351 8,312
Selling, General and Administrative Expenses 3,029 3,062 3,784 3,004
Depreciation and Amortization 2,384 2,366 2,378 1,836
Write-Down of Assets and Restructuring and
Unusual Charges (Credits)(a) - 933 43,241 (800)
Interest Expense 1,181 971 586 554
Interest Income (491) (498) (450) (388)
------------------------------------------------------
Total Costs and Expenses 37,370 39,018 81,958 33,613
-----------------------------------------------------
Income (Loss) Before Income Taxes 977 326 (42,685) 625
Provision (Benefit) for Income Taxes 303 101 (10,193) 150
-----------------------------------------------------
Net Income (Loss) $ 674 $ 225 $ (32,492) $ 475
=====================================================
Net Income (Loss) Per Common Share --
Basic and Diluted $ .08 $ .02 $ (2.78) $ .04
=====================================================
Weighted Average Shares Outstanding 8,647 10,723 11,696 11,744
=====================================================
</TABLE>
(a) Special credit in fourth quarter is primarily the result of a non-recurring
cash settlement.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
1996 APRIL 1 JULY 1 SEPT. 30 DEC. 30
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $43,246 $43,897 $ 38,812 $34,596
---------------------------------------------
Costs and Expenses:
Cost of Sales 12,552 13,505 12,266 10,879
Restaurant Labor 12,432 12,487 10,905 9,824
Other Operating Costs 10,696 10,984 8,845 8,242
Selling, General and Administrative Expenses 3,883 3,582 3,104 3,342
Depreciation and Amortization 2,705 2,384 2,297 2,357
Write-Down of Assets and Restructuring
and Unusual Charges 710 619 4,198 2,306
Interest Expense 1,178 1,181 1,306 1,238
Interest Income (36) (272) (480) (452)
---------------------------------------------
Total Costs and Expenses 44,120 44,470 42,441 37,736
---------------------------------------------
Income (Loss) Before Income Taxes (874) (573) (3,629) (3,140)
Provision (Benefit) for Income Taxes (244) (161) (1,320) (1,068)
---------------------------------------------
Net Income (Loss) $ (630) $ (412) $ (2,309) $(2,072)
=============================================
Net Income (Loss) Per Common Share
-Basic and Diluted $ ( .08) $ ( .05) $ (.28) $ (.25)
=============================================
Weighted Average Shares Outstanding 8,264 8,281 8,263 8,263
=============================================
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Chart House Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Chart House
Enterprises, Inc. (a Delaware corporation) and subsidiaries as of December 29,
1997 and December 30, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three fiscal
years in the period ended December 29, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Chart House Enterprises, Inc.
and subsidiaries as of December 29, 1997 and December 30, 1996, and the results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 29, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
January 30, 1998
23
<PAGE>
BOARD OF DIRECTORS
WILLIAM M. DIEFENDERFER III
Partner,
Diefenderfer, Hoover, Boyle & Wood,
law firm
F. PHILIP HANDY
Managing Director,
EGI Corporate Investments, Inc.,
investment firm
WILLIAM E. MAYER
Partner,
Development Capital LLC,
investment firm
ARTHUR J. NAGLE
Managing Director,
Vestar Capital Partners, Inc.,
investment banking firm
THOMAS J.WALTERS
President and Chief Operating Officer,
Chart House Enterprises, Inc.
SAMUEL ZELL
Chairman of the Board,
Equity Group Investments, Inc.,
investment firm
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
San Diego, California
TRANSFER AGENT & REGISTRAR
BankBoston, N.A.
c/o Boston EquiServe
P.O. Box 8040
Boston, MA 02266-8040
ANNUAL MEETING
The Company's annual meeting of
stockholders will be held Wednesday,
May 6, 1998 at 1:00 p.m. at:
One North Franklin Street
3rd Floor
Chicago, Illinois 60606
COMPANY OFFICERS
F. PHILIP HANDY
Acting Chief Executive Officer
THOMAS J.WALTERS
President and Chief Operating Officer
NYDIA I. CASAS
Vice President -- Purchasing
LEWIS M. JACKSON
Vice President -- Development
BERNARD J.JOHANSEN II
Vice President -- Information Services
RANDALL P. MCNAMARA
Vice President -- Operations
TIMOTHY E. PERREIRA
Vice President -- Concept Development
RICHARD D. TIPTON
Vice President -- Legal Affairs and
General Counsel
JAMES C. WENDLER
Vice President -- Finance and Chief
Financial Officer
CORPORATE OFFICES
(through June 1998)
115 S. Acacia Avenue
Solana Beach, CA 92075-1803
(619) 755-8281
THE COMPANY
Chart House Enterprises, Inc., based in Solana Beach, California, operates 59
Chart House restaurants and one Peohe's restaurant, which are full-service
dinner houses located in 22 states, Puerto Rico and the U.S. Virgin Islands. The
Company also operates Solana Beach Baking Company, a wholesale bakery facility
in Carlsbad, California.
COMMON STOCK INFORMATION
The Company's Common Stock is listed on the New York Stock Exchange under the
trading symbol CHT. On March 12, 1998, there were 647 holders of record of the
Company's Common Stock. The Company has not paid any cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The following table sets forth the quarterly high and low sales prices
for a share of the Company's Common Stock for the two most recent fiscal years.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---------------------------------
<S> <C> <C>
First Quarter 6 1/4 4 7/8
Second Quarter 7 11/16 5 1/4
Third Quarter 9 3/4 7 1/2
Fourth Quarter 8 5/16 5 5/8
1996 HIGH LOW
- ---------------------------------
First Quarter 6 7/8 5 1/8
Second Quarter 8 1/4 5 7/8
Third Quarter 6 7/8 5 3/8
Fourth Quarter 5 3/4 4 1/8
</TABLE>
SEC FORM 10-K REPORT
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge to stockholders and may be obtained by
writing to:
Susan Obuchowski
Secretary
Chart House Enterprises, Inc.
115 S. Acacia Avenue
Solana Beach, CA 92075-1803
STOCKHOLDER MAILING LIST
The Company maintains a direct mailing list to ensure that stockholders whose
shares are held in the name of a brokerage firm, bank or other person may
receive corporate reports on a timely basis. If you would like your name added
to this list, please send us your request in writing.
24
<PAGE>
EXHIBIT 10.20
CHART HOUSE GUARANTY AGREEMENT
------------------------------
This CHART HOUSE GUARANTY AGREEMENT (this "AGREEMENT"), dated as of
December 10, 1997, is between CHART HOUSE ENTERPRISES, INC., a Delaware
corporation ("GUARANTOR"), and FINOVA CAPITAL CORPORATION, a Delaware
corporation ("FINOVA"). All capitalized terms used but not elsewhere defined in
this Guaranty shall have the respective meanings ascribed to such terms in the
Loan Agreement described below.
PRELIMINARY STATEMENT:
A. Islands California/Arizona LP, a Delaware limited partnership
("BORROWER"), and FINOVA have entered into a Loan Agreement of even date
herewith (as the same may be amended, supplemented, modified or restated from
time to time, the "LOAN AGREEMENT") pursuant to which FINOVA has agreed to make
the Loan to Borrower, subject to the terms and conditions set forth in the Loan
Agreement.
B. On the Closing Date Borrower will use the proceeds of the Loan,
together with Borrower's cash on hand, among other things to distribute to
Borrower's general partner, Islands CA/AZ Holdings LP, a Delaware limited
partnership ("GENERAL PARTNER"), an amount which shall be used by General
Partner to repay in full all currently existing outstanding indebtedness of
General Partner to Guarantor or Guarantor's wholly owned subsidiary, Big Wave,
Inc., in an outstanding principal amount of $16,500,000. Accordingly, Guarantor
has a direct financial interest in inducing FINOVA to make the Loan.
C. One of the conditions precedent to the obligation of FINOVA to enter
into the Loan Agreement is the execution and delivery by Guarantor of this
Agreement and the performance by Guarantor of its obligations hereunder.
NOW, THEREFORE, in order to induce FINOVA to enter into the Loan Agreement,
and for other good and valuable consideration, the receipt and sufficiency of
which hereby are acknowledged, the parties hereto hereby agree as follows:
1. GUARANTY OF PAYMENT. Subject to the terms and conditions of this
-------------------
Agreement, including, without limitation, the provisions of SECTION 2 and
SECTION 5 below, Guarantor hereby unconditionally and irrevocably guarantees to
FINOVA the punctual payment and performance when due, whether at stated maturity
or by acceleration or otherwise, of Borrower's Obligations. Guarantor agrees
that this Agreement is a present and continuing guaranty of payment and not of
collectibility, and that FINOVA shall not be required to prosecute collection,
enforcement or other remedies against Borrower or any other Person, or to
enforce or resort to any of the Collateral or other rights or remedies
pertaining thereto, before calling Guarantor for payment.
2. LIMITATION OF GUARANTORS' OBLIGATIONS. Notwithstanding anything in
-------------------------------------
this Agreement to the contrary, the obligations of Guarantor hereunder
("GUARANTOR'S OBLIGATIONS")
<PAGE>
shall be limited to the sum of $4,000,000.00 plus all costs and expenses
incurred by FINOVA under Section 12 hereof. This Agreement automatically shall
terminate, and Guarantor's Obligations shall be deemed to be released and
satisfied in full, as of the second Business Day of January, 2004, or the second
Business Day of any January thereafter, if both of the following conditions are
satisfied as of such day: (i) no Event of Default then exists under the Loan
Instruments, and (ii) the ratio of Operating Cash Flow for the twelve month
period ending on the last day of the preceding calendar year to Fixed Charges
for such period is greater than 1.25.
3. CONTINUING GUARANTY. Subject to the terms and conditions of SECTION 5
-------------------
below, Guarantor agrees that Guarantor's Obligations shall be primary
obligations of Guarantor, shall not be subject to any counterclaim, set-off,
abatement, deferment or defense based upon any claim that Guarantor may have
against FINOVA, Borrower or any other Person, and shall remain in full force and
effect without regard to, and shall not be released, discharged, limited or
affected in any way by any circumstance or condition (whether or not Guarantor
shall have any knowledge thereof), including, without limitation:
(a) any lack of validity or enforceability of any of the Loan
Instruments;
(b) any termination, restatement, amendment, modification or other
change in any of the Loan Instruments;
(c) any furnishing, exchange, substitution or release of any
Collateral, or any failure to perfect any Lien in any Collateral;
(d) any failure, omission or delay on the part of Borrower or FINOVA
to conform or comply with any term of any of the Loan Instruments or any
failure of FINOVA to give notice of any Incipient Default or any Event of
Default;
(e) any waiver, compromise, release, settlement or extension of time
of payment or performance or observance of any of the obligations or
agreements contained in any of the Loan Instruments;
(f) any action or inaction by FINOVA under or in respect of any of
the Loan Instruments, any failure, lack of diligence, omission or delay on
the part of FINOVA to enforce, assert or exercise any right, power or
remedy conferred on FINOVA in any of the Loan Instruments, or any other
action or inaction on the part of FINOVA;
(g) any voluntary or involuntary bankruptcy, insolvency,
reorganization, arrangement, readjustment, assignment for the benefit of
creditors, composition, receivership, liquidation, marshaling of assets
and. liabilities or similar events or proceedings with respect to Guarantor
or Borrower or any of their respective Property or creditors, or any action
taken by any trustee or receiver or by any court in any such proceeding;
-2-
<PAGE>
(h) any merger or consolidation of Guarantor or Borrower into or with
any Person, or any sale, lease or transfer of any of the assets of
Guarantor or Borrower to any other Person;
(i) any change in the relationship between. Guarantor, Borrower or
any other Person, or any termination of any such relationship;
(j) to the extent permitted by law, any release or discharge by
operation of law of Guarantor or Borrower from any obligation or agreement
contained in any of the Loan Instruments; or
(k) to the extent permitted by law, any other occurrence,
circumstance, happening or event, whether similar or dissimilar to the
foregoing and whether foreseen or unforeseen, which otherwise might
constitute a legal or equitable defense or discharge of the liabilities of
a guarantor or surety or which otherwise might limit recourse against
Guarantor or Borrower.
4. WAIVERS. Subject to the terms and conditions of SECTION 5 below,
-------
Guarantor unconditionally waives, to the extent not prohibited by law, (i)
notice of any of the matters referred to in SECTION 3 above, (ii) all notices
which may be required by statute, rule of law or otherwise, now or hereafter in
effect, to preserve intact any rights against Guarantor, including, without
limitation, any demand, presentment and protest, proof of notice of non-payment
under any of the Loan Instruments or any failure on the part of Guarantor or the
Borrower to perform or comply with any covenant, agreement, term or condition of
any of the Loan Instruments, (iii) any right to the enforcement, assertion or
exercise against Guarantor or the Borrower of any right or remedy conferred
under any of the Loan Instruments, (iv) any requirement of diligence on the part
of any Person, (v) any requirement to exhaust any remedies or to mitigate the
damages resulting from any default under any of the Loan Instruments, (vi) any
notice of any sale, transfer or other disposition of any right, title or
interest of FINOVA under any of the Loan Instruments and (vii) any rights of
Guarantor pursuant to Sections 12-1641 of the Arizona Civil Code or Rule 17(f)
of the Arizona Rules of Civil Procedure.
5. AGREEMENTS OF FINOVA. In consideration of Guarantor's execution and
--------------------
delivery of this Agreement, FINOVA hereby agrees as follows:
5.1 NOTICE AND OPPORTUNITY TO CURE. Before calling on Guarantor for
------------------------------
payment under this Agreement, FINOVA first shall provide written notice to
Guarantor of the occurrence of an Event of Default. Such notice shall
contain a description of the claimed Event of Default, including, without
limitation, the provisions of the Loan Instruments which have been
violated. Guarantor, at its option but without any obligation to do so,
(i) within 10 days after receipt by Guarantor of such notice, may cure any
Event of Default arising due to the failure of Borrower to pay all or any
portion of Borrower's Obligations when the same become due and (ii) within
the same number of days after receipt by Guarantor of such notice as
Borrower is granted under the Loan Agreement to
-3-
<PAGE>
cure any other Event of Default, may cure such other Event of Default.
Guarantor shall not be obligated to make any payment in respect of
Borrower's Obligations unless Guarantor has been given notice of the
applicable Event of Default and the opportunity to cure same as described
in this SECTION 5.1.
5.2 RESTRICTIONS ON AMENDMENTS. Without the prior written consent of
--------------------------
Guarantor, FINOVA shall not agree to any amendment or modification of, or
supplement to, the Loan Instruments as in effect on the date hereof, the
effect of which is to (i) increase the rate of interest on or fees payable
by Borrower thereunder, (ii) alter the dates fixed for payment of interest
and principal thereunder, (iii) shorten the final maturity date of
Borrower's Obligations, (iv) if the effect of all such amendments,
modifications or supplements would increase the Principal Balance by an
amount in excess of 20% of the Principal Balance outstanding as of the
Closing Date or (v) make the covenants and Events of Default contained in
the Loan Instruments materially more restrictive.
5.3 RELEASES OF COLLATERAL. Without the prior written consent of
----------------------
Guarantor, FINOVA shall not release any Liens on the Collateral except in
connection with the sale, transfer or other disposition in an arm's length
transaction to a third party which is not an Affiliate of Borrower or
FINOVA of Collateral having a fair value (as conclusively determined by the
purchase price payable by the buyer in such sale, transfer or other
disposition) not in excess of 20% of the Principal Balance outstanding as
of the Closing Date for all such sales, transfers or other dispositions,
provided the gross cash proceeds of each such sale, transfer or other
disposition, after deduction of all reasonable, customary and documented
costs and expenses of such sale, transfer or other disposition, are applied
in permanent reduction of the Principal Balance.
5.4 SUBROGATION AND OTHER RIGHTS. Guarantor does not waive, and
----------------------------
hereby retains, all rights of subrogation, reimbursement, restitution,
contribution and similar rights Guarantor may have as a result of any
amounts Guarantor may pay to FINOVA under or with respect to this Guaranty.
6. SUBORDINATION. Guarantor agrees that any and all present and future
-------------
debts and obligations of the Borrower to Guarantor hereby are subordinated to
the claims of FINOVA. Until Borrower's Obligations are paid and performed in
full, Guarantor shall not take any action or exercise any remedies available to
Guarantor, either at law or in equity, to (i) collect any such debts and
obligations or (ii) enforce any rights of subrogation, reimbursement,
contribution, restitution or payment with respect to any amounts Guarantor may
pay to FINOVA under or with respect to this Guaranty.
7. REINSTATEMENT. Subject to the limitations described herein,
-------------
Guarantor's Obligations shall continue to be effective or automatically be
reinstated, as the case may be, if at any time payment of any of Borrower's
Obligations is rescinded or otherwise must be restored or returned by FINOVA
upon the insolvency, bankruptcy, dissolution, liquidation or reorganization
-4-
<PAGE>
of Guarantor or the Borrower or for any other reason, all as though such payment
had not been made.
8. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
------------------------------
FINOVA as follows:
8.1 BINDING AGREEMENTS. This Agreement constitutes the valid and
------------------
legally binding obligations of Guarantor, enforceable against Guarantor in
accordance with its respective terms, except as such enforceability may be
limited by (i) applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws now or hereafter in effect affecting the
enforcement of creditors' rights generally, and (ii) equitable principles
(whether or not any action to enforce such document is brought at law or in
equity).
8.2 DEFAULTS IN OTHER AGREEMENTS; CONSENTS; CONFLICTING AGREEMENTS.
--------------------------------------------------------------
Guarantor is not in default under any agreement to which Guarantor is a
party or by which Guarantor or any of Guarantor's Property is bound, the
effect of which default could reasonably be expected to materially impair
the ability of FINOVA to collect Guarantor's Obligations. No
authorization, consent, approval or other action by, and no notice to or
filing with, any Governmental Body or any other Person which has not
already been obtained, taken or filed, as applicable, is required (i) for
the due execution, delivery or performance by Guarantor of this Agreement
or (ii) as a condition to the validity or enforceability of this Agreement.
No provision of any mortgage, indenture, contract, agreement, statute,
role, regulation, judgment, decree or order binding on Guarantor or
affecting the Property of Guarantor conflicts with, or requires any consent
which has not already been obtained under, or would in any way prevent the
execution, delivery or performance of the terms of this Agreement. The
execution, delivery and performance of the terms of this Agreement will not
constitute a default under, or result in the creation or imposition of, or
obligation to create, any Lien upon the Property of Guarantor pursuant to
the terms of any such mortgage, indenture, contract or agreement.
8.3 TAXES. Guarantor has filed all tax returns required to be filed,
-----
and has paid, or made adequate provision for the payment of, all taxes
shown to be due and payable on such returns or in any assessments made
against Guarantor, and no tax Liens have been filed and no claims are being
asserted in respect of such taxes. None of the tax returns of Guarantor
are under audit.
8.4 COMPLIANCE WITH APPLICABLE LAWS. Guarantor is not in default in
-------------------------------
respect of any judgment, order, writ, injunction, decree or decision of any
Governmental Body, the effect of which default could reasonably be expected
to materially impair the ability of FINOVA to collect Guarantor's
Obligations.
8.5 NO MISREPRESENTATION. Neither this Agreement nor any other Loan
--------------------
Instrument furnished by or on behalf of Guarantor to FINOVA in connection
with any of the transactions contemplated hereby or thereby, contains or
will contain a misstatement
-5-
<PAGE>
of material fact, or omits or will omit to state a material fact required
to be stated in order to make the statements contained herein or therein,
taken as a whole, not misleading in the light of the circumstances under
which such statements were made.
8.6 LITIGATION. There are no actions, arbitration proceedings or
----------
claims pending or, to the best knowledge of Guarantor, threatened against
Guarantor or maintained by Guarantor at law or in equity or before any
Governmental Body, which, if adversely determined, could reasonably be
expected to impair the ability of FINOVA to collect Guarantor's
Obligations.
9. REMEDIES ON DEFAULT. If any Event of Default occurs and is
-------------------
continuing, (i) Guarantor shall, subject to the terms and conditions of this
Agreement, including, without limitation, SECTION 2 and SECTION 5, pay
Borrower's Obligations to FINOVA in full, immediately upon demand and (ii)
FINOVA, at its option, may enforce its rights and remedies under this Agreement
in accordance with its terms and enforce any other rights or remedies accorded
to FINOVA at equity or law, by virtue of statute or otherwise.
10. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
----------------------
FINOVA and its successors and assigns permitted under the Loan Agreement. This
Agreement shall be binding on Guarantor and its successors and assigns and shall
continue in full force and effect until all of Borrower's Obligations are paid
and performed in full, subject to the limitations described above.
11. NO WAIVER OF RIGHTS. Neither any delay in exercising, nor any failure
-------------------
on the part of FINOVA to exercise any right, power or privilege under this
Agreement, any of the other Loan Instruments shall operate as a waiver thereof,
and no single or partial exercise of any right, power or privilege shall
preclude any other or further exercise thereof or the exercise of any other
power or right, or be deemed to establish a custom or course of dealing or
performance among the parties hereto. The rights and remedies herein provided
are cumulative and not exclusive of any rights or remedies provided by law. No
notice to or demand on Guarantor in any case shall entitle Guarantor to any
other or further notice or demand in the same, similar or any other
circumstance.
12. MODIFICATION. The terms of this Agreement may be waived, discharged
------------
or terminated only by an instrument in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought. No
amendment, modification, waiver or other change of any of the terms of this
Agreement shall be effective without the prior written consent of FINOVA.
13. COSTS AND EXPENSES. Guarantor agrees to pay on demand all reasonable
------------------
costs and expenses incurred by or on behalf of FINOVA (including, without
limitation, reasonable attorneys' fees and expenses) in enforcing Guarantor's
Obligations.
-6-
<PAGE>
14. JURISDICTION. GUARANTOR HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS
------------
ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT, ANY OR ALL OF THE OTHER
LOAN INSTRUMENTS SHALL BE LITIGATED IN THE SUPERIOR COURT OF ARIZONA, MARICOPA
COUNTY, OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA OR, IF
FINOVA INITIATES SUCH ACTION, IN ADDITION TO THE FOREGOING COURTS, ANY OTHER
COURT IN WHICH FINOVA SHALL INITIATE OR TO WHICH FINOVA SHALL REMOVE SUCH
ACTION, TO THE EXTENT SUCH COURT HAS JURISDICTION. GUARANTOR HEREBY EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO JURISDICTION IN ANY ACTION OR PROCEEDING
COMMENCED IN OR REMOVED BY FINOVA IN ANY OF SUCH COURTS, AND HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT, OR OTHER PROCESS OR PAPERS ISSUED
THEREIN, AND AGREES THAT SERVICE OF SUCH SUMMONS AND COMPLAINT OR OTHER PROCESS
OR PAPERS MAY BE MAILED, POSTAGE PREPAID, EITHER BY REGISTERED OR CERTIFIED
MAIL, RETURN RECEIPT REQUESTED, OR BY OVERNIGHT EXPRESS CARRIER, ADDRESSED TO
GUARANTOR AT THE ADDRESS SET FORTH BELOW IT SIGNATURE ON THIS AGREEMENT.
GUARANTOR WAIVES ANY CLAIM THAT PHOENIX, ARIZONA OR THE DISTRICT OF ARIZONA IS
AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF VENUE. SHOULD
GUARANTOR, AFTER BEING SO SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS,
COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THE PERIOD OF TIME PRESCRIBED BY
LAW AFTER THE MAILING THEREOF, GUARANTOR SHALL BE DEEMED IN DEFAULT AND AN ORDER
AND/OR JUDGMENT MAY BE ENTERED BY FINOVA OR FINOVA AGAINST GUARANTOR AS DEMANDED
OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. THE EXCLUSIVE
CHOICE OF FORUM FOR GUARANTOR SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO
PRECLUDE THE ENFORCEMENT BY FINOVA OF ANY JUDGMENT OBTAINED IN ANY OTHER FORUM
OR THE TAKING BY FINOVA OF ANY ACTION TO ENFORCE THE SAME IN ANY OTHER
APPROPRIATE JURISDICTION.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED AS TO VALIDITY,
--------------
INTERPRETATION, EFFECT AND IN ALL OTHER RESPECTS BY LAWS AND DECISIONS OF THE
STATE OF ARIZONA. FOR PURPOSES OF THIS SECTION 16, THIS AGREEMENT SHALL BE
DEEMED TO BE PERFORMED AND MADE IN THE STATE OF ARIZONA.
16. WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND GUARANTOR ACKNOWLEDGE AND
-----------------------------
AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT, ANY OF THE
OTHER LOAN INSTRUMENTS, OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED
THEREBY, WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES AND THEREFORE, FINOVA
AND GUARANTOR AGREE THAT ANY COURT PROCEEDING ARISING OUT OF
-7-
<PAGE>
ANY SUCH CONTROVERSY WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A
JUDGE SITTING WITHOUT A JURY.
17. TIME OF ESSENCE. Time is of the essence in the performance by
---------------
Guarantor of the obligations under this Agreement.
18. NO JOINDER. Guarantor agrees that any action to enforce this
----------
Agreement may be brought against Guarantor without any reimbursement or joinder
of any Borrower in such action.
19. SEVERABILITY. If any provision of this Agreement is deemed to be
------------
invalid by reason of the operation of any law, or by reason of the
interpretation placed thereon by any court or other Governmental Body, this
Agreement shall be construed as not containing such provision and the invalidity
of such provision shall not affect the validity of any other provision hereof,
and any and all other provisions hereof which otherwise are lawful and valid
shall remain in full force and effect.
20. NOTICES. All notices given under the terms of this Agreement shall be
-------
in writing and shall be given and deemed received in the manner set forth in
Section 12.1 of the Loan Agreement.
[remainder of this page intentionally left blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CHART HOUSE ENTERPRISES, INC., a Delaware
corporation
By: /s/ RICHARD D. TIPTON
---------------------------------
Name: Richard D. Tipton
-------------------------------
Title: Vice President - Legal Affairs
------------------------------
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By: /s/ BERNICE H. CARR
---------------------------------
Name: Bernice H. Carr
-------------------------------
Title: Vice President Contract Adm
------------------------------
-9-
<PAGE>
EXHIBIT 21
CHART HOUSE ENTERPRISES, INC.
SUBSIDIARIES AS OF DECEMBER 29, 1997
<TABLE>
<CAPTION>
Name State of Incorporation Trade Name
- ---- ---------------------- ----------
<S> <C> <C>
Chart House, Inc. Delaware Chart House, Peohe's,
Solana Beach Baking
Company
Big Wave, Inc. Delaware
(formerly known as
Islands Restaurants, Inc.)
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements File Numbers 33-32501 and 33-34947.
ARTHUR ANDERSEN LLP
San Diego, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> DEC-29-1997
<CASH> 205
<SECURITIES> 0
<RECEIVABLES> 3,249
<ALLOWANCES> 0
<INVENTORY> 2,624
<CURRENT-ASSETS> 7,044
<PP&E> 102,428
<DEPRECIATION> 40,726
<TOTAL-ASSETS> 88,245
<CURRENT-LIABILITIES> 23,494
<BONDS> 5,746
0
0
<COMMON> 117
<OTHER-SE> 58,888
<TOTAL-LIABILITY-AND-EQUITY> 88,245
<SALES> 151,202
<TOTAL-REVENUES> 151,202
<CGS> 46,932
<TOTAL-COSTS> 46,932
<OTHER-EXPENSES> 130,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,292
<INCOME-PRETAX> (40,757)
<INCOME-TAX> (9,639)
<INCOME-CONTINUING> (31,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,118)
<EPS-PRIMARY> (2.91)
<EPS-DILUTED> (2.91)
</TABLE>
