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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended September 26, 1999
Commission file number 000-19924
RARE Hospitality International, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Georgia 58-1498312
- ----------------------------------------------------------------------------
<S> <C>
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
8215 Roswell Rd; Bldg 600; Atlanta, GA 30350
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(770) 399-9595
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[XX] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding as of November 8, 1999
------ ----------------------------------
<S> <C>
Common Stock, no par value 12,125,212 shares
</TABLE>
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RARE Hospitality International, Inc.
Index
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 26, 1999 and December 27, 1998 3
Consolidated Statements of Earnings-
For the quarters and nine months ended
September 26, 1999 and September 27, 1998 4
Consolidated Statement of Shareholders' Equity
For the nine months ended September 26, 1999 5
Condensed Consolidated Statements of Cash Flows-
For the nine months ended September 26, 1999 and
September 27, 1998 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14-15
Part II - Other Information
Item 1. Legal Proceedings 15-16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Securities
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
</TABLE>
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Part I. Financial Information
Item 1. Financial Statements
RARE Hospitality International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts) (Unaudited)
<TABLE>
<CAPTION>
September 26, December 27,
Assets 1999 1998
------ ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,244 $ 12,060
Accounts receivable 3,199 3,443
Inventories 10,076 9,609
Prepaid expenses 709 789
Preopening costs, net of
accumulated amortization -- 2,102
Refundable income taxes 3,191 2,700
Deferred income taxes 8,325 6,932
------------- -------------
Total current assets 28,744 37,635
Property and equipment, less
accumulated depreciation and
amortization 180,958 167,810
Goodwill, less accumulated
amortization 10,441 10,045
Deferred income taxes 971 1,490
Other assets 2,940 3,372
------------- -------------
Total assets $ 224,054 $ 220,352
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 12,496 $ 12,423
Accrued expenses 24,405 24,076
------------- -------------
Total current liabilities 36,901 36,499
Debt, net of current installments 40,000 48,000
Deferred income taxes 2,180 2,893
Obligations under capital leases 9,732 9,732
------------- -------------
Total liabilities 88,813 97,124
Minority interest 3,597 2,610
Shareholders' equity:
Preferred stock -- --
Common stock 107,623 105,092
Unearned compensation - restricted
stock (399) (478)
Retained earnings 26,307 16,752
Treasury shares at cost; 144,500 shares in
1999 and 59,500 shares in 1998 (1,887) (748)
------------- -------------
Total shareholders' equity 131,644 120,618
------------- -------------
Total liabilities and shareholders' equity $ 224,054 $ 220,352
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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RARE Hospitality International, Inc. and Subsidiaries
Consolidated Statements of Earnings
(In thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------- -----------------------
Revenues: Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Restaurant sales:
LongHorn Steakhouse $ 65,089 $ 52,856 $ 192,556 $ 156,908
Bugaboo Creek Steak House 15,277 12,359 42,355 36,902
The Capital Grille 12,917 11,547 41,278 35,490
Specialty concepts 1,871 1,671 5,256 4,910
--------- --------- --------- ---------
Total restaurant sales 95,154 78,433 281,445 234,210
Franchise revenues 45 -- 124 --
--------- --------- --------- ---------
Total revenues 95,199 78,433 281,569 234,210
--------- --------- --------- ---------
Costs and expenses:
Cost of restaurant sales 34,624 28,628 101,394 86,019
Operating expenses - restaurants 43,719 35,491 126,868 104,496
Depreciation and amortization
- restaurants 3,846 3,300 11,203 9,682
Pre-opening expense - restaurants 699 1,168 2,160 3,696
General and administrative
expenses
6,432 5,686 19,291 16,435
--------- --------- --------- ---------
Total costs and expenses 89,320 74,273 260,916 220,328
--------- --------- --------- ---------
Operating income 5,879 4,160 20,653 13,882
Interest expense, net 870 701 2,832 2,092
Minority interest 291 300 1,194 992
--------- --------- --------- ---------
Earnings before income taxes and
cumulative effect of change
in accounting principle 4,718 3,159 16,627 10,798
Income tax expense 1,560 1,050 5,485 3,350
--------- --------- --------- ---------
Earnings before cumulative
effect of change in accounting
principle 3,158 2,109 11,142 7,448
Cumulative effect of change in
accounting principle net of
tax benefit -- -- 1,587 --
--------- --------- --------- ---------
Net earnings $ 3,158 $ 2,109 $ 9,555 $ 7,448
========= ========= ========= =========
Basic earnings per common share:
Basic earnings before cumulative
effect of change in accounting
principle $ 0.26 $ 0.18 $ 0.93 $ 0.62
Cumulative effect of change in
accounting principle -- -- 0.13 --
--------- --------- --------- ---------
Basic earnings per common share $ 0.26 $ 0.18 $ 0.80 $ 0.62
========= ========= ========= =========
Diluted earnings per common share:
Diluted earnings before
cumulative effect of change in
accounting principle $ 0.25 $ 0.17 $ 0.89 $ 0.61
Cumulative effect of change in
accounting principle -- -- 0.13 --
--------- --------- --------- ---------
Diluted earnings per common share $ 0.25 $ 0.17 $ 0.76 $ 0.61
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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RARE Hospitality International, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Unearned
Common Stock Compensation Total
----------------- -Restricted Retained Treasury Shareholders'
Shares Amount Stock Earnings Stock Equity
------ -------- ------------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 27, 1998 12,077 $105,092 $ (478) $ 16,752 $ (748) $ 120,618
Net earnings -- -- -- 2,586 -- 2,586
Purchase of Treasury Stock -- -- -- -- (1,139) (1,139)
Issuance of shares pursuant
to exercise of stock
options 9 84 -- -- -- 84
Amortization of restricted
stock -- -- 36 -- -- 36
------ -------- ----------- -------- -------- -------------
Balance, March 28, 1999 12,086 105,176 (442) 19,338 (1,887) 122,185
Net earnings -- -- -- 3,811 -- 3,811
Amortization of restricted
stock -- -- 36 -- -- 36
Issuance of shares pursuant
to purchase of joint
venture interest 25 578 -- -- -- 578
Issuance of shares pursuant
to exercise of stock
options 97 1,229 -- -- -- 1,229
------ -------- ----------- -------- -------- -------------
Balance, June 27, 1999 12,208 106,983 (406) 23,149 (1,887) 127,839
Net earnings -- -- -- 3,158 -- 3,158
Amortization of restricted
stock -- -- 36 -- -- 36
Issuance of shares pursuant
to restricted stock award 1 29 (29) -- -- --
Issuance of shares pursuant
to exercise of stock
options 55 611 -- -- -- 611
------ -------- ----------- -------- -------- -------------
Balance, September 26, 1999 12,264 $107,623 $ (399) $ 26,307 $ (1,887) $ 131,644
====== ======== =========== ======== ======== =============
</TABLE>
See accompanying notes to consolidated financial statements.
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RARE Hospitality International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
Sept. 26, Sept. 27,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 9,555 $ 7,448
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,255 14,189
Changes in working capital accounts (4,343) (7,631)
Cumulative change in accounting principle 1,587 --
Minority interest 1,194 992
Preopening costs -- (2,239)
Deferred tax (benefit) expense (1,587) 750
-------- --------
Net cash provided by operating
activities 18,661 13,509
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (24,892) (18,950)
Purchase of joint venture and franchise interests (191) --
-------- --------
Net cash used in investing activities (25,083) (18,950)
-------- --------
Cash flows from financing activities:
Repayments on revolving credit facilities (8,000) (1,000)
Proceeds from minority partners' contributions 1,689 1,672
Distributions to minority partners (1,896) (2,349)
(Decrease in) increase in bank overdraft included in
accounts payable and accrued liabilities 5,054 8,997
Principal payments on capital leases (26) --
Purchase of common shares for treasury (1,139) --
Proceeds from exercise of stock options 1,924 493
-------- --------
Net cash (used in) provided by financing
activities (2,394) 7,813
-------- --------
Net increase (decrease) in cash and cash equivalents (8,816) 2,372
Cash and cash equivalents, beginning of period 12,060 1,752
-------- --------
Cash and cash equivalents, end of period $ 3,244 $ 4,124
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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RARE Hospitality International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of RARE Hospitality International, Inc.
and subsidiaries (the "Company") as of September 26, 1999 and December 27, 1998
and for the quarters and nine-month periods ended September 26, 1999 and
September 27, 1998 have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally presented in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's annual report on Form 10-K for the year
ended December 27, 1998.
2. Cumulative Effect of Change in Accounting Principle
At the beginning of fiscal 1999, the Company adopted AICPA Statement of Position
98-5, "Reporting the Cost of Start-Up Activities." This statement requires
entities to expense start-up costs as they are incurred. The Company previously
amortized start-up costs over a 12-month period, as was the practice in the
restaurant industry. As a result of the adoption of this change in accounting
policy, the Company recorded a cumulative effect charge of $2.3 million
(approximately $1.6 million net of tax benefit, or $0.13 per diluted share)
during the first quarter of 1999.
3. Acquisition of Joint Venture Interest
In May 1999, the Company acquired the ownership interest of its joint venture
partner in four LongHorn Steakhouse restaurants located in the Columbus, Ohio
market for an aggregate purchase price of $750,000; comprised of 25,000 shares
of Company Common Stock, $150,000 in cash and a $30,000 note, in a transaction
accounted for under the purchase method. The excess of the purchase price over
the book value of the minority interest acquired was approximately $750,000 and
was recorded as goodwill to be amortized over 20 years.
4. Income Taxes
Income tax expense for the nine months ended September 26, 1999 has been
provided for based on the estimated effective tax rate then currently expected
to be applicable for the full 1999 fiscal year. The effective income tax rate of
33.0% for the nine months ended September 26, 1999 differs from the statutory
federal income tax rate of 35% primarily due to employee FICA tip tax credits (a
reduction in income tax expense), partially offset by state income taxes.
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5. Long-Term Debt
At September 26, 1999, $40.0 million was outstanding under the Company's $100.0
million revolving credit agreement at a weighted average interest rate equal to
6.96%.
6. Earnings Per Common Share
Basic earnings per common share equals net earnings divided by the weighted
average number of common shares outstanding and does not include the dilutive
effect of stock options or restricted stock. Diluted earnings per common share
equals net earnings divided by the weighted average number of common shares
outstanding, after giving effect to dilutive stock options and restricted stock.
A reconciliation between basic and diluted weighted average shares outstanding
and the related earnings per share calculation is presented below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
Sept. 26, Sept. 27,
1999 1998
-------- --------
<S> <C> <C>
Basic weighted average
shares outstanding 11,984 12,004
Dilutive effect of stock options 483 116
Dilutive effect of restricted stock 25 --
-------- --------
Diluted weighted average shares outstanding 12,492 12,120
======== ========
Earnings before cumulative effect of change in
accounting principle $ 11,142 $ 7,448
Cumulative effect of change in accounting
principle (net of tax benefit) 1,587 --
-------- --------
Net earnings $ 9,555 $ 7,448
======== ========
Basic earnings per common share:
Basic earnings before cumulative effect of
change in accounting principle $ 0.93 $ 0.62
Cumulative effect of change in accounting
principle (0.13) --
-------- --------
Basic earnings per common share $ 0.80 $ 0.62
======== ========
Diluted earnings per common share:
Diluted earnings before cumulative effect
of change in accounting principle $ 0.89 $ 0.61
Cumulative effect of change in accounting
principle (0.13) --
-------- --------
Diluted earnings per common share $ 0.76 $ 0.61
======== ========
</TABLE>
7. Comprehensive Income
For the quarters and nine month periods ended September 26, 1999 and September
27, 1998, there was no difference between the Company's net earnings and
comprehensive income.
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8. Shareholder Equity
In 1998, the Company's Board of Directors authorized the Company to purchase up
to $5 million of its Common Stock, through open market transactions, block
purchases, or in privately negotiated transactions. As of September 26, 1999,
the Company has purchased an aggregate 144,500 shares of its Common Stock for a
total purchase price of $1,887,000 (average price of $13.06 per share).
9. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the Company for
periods beginning in fiscal year 2001. The Company believes that the adoption of
the provisions of SFAS No. 133 will not have a material effect on its financial
statements, based on current activities.
10. Subsequent Event
On September 30, 1999, the Company acquired the ownership interest of its joint
venture partner in ten LongHorn Steakhouse restaurants located in south Florida
markets for an aggregate purchase price of approximately $2,850,000; comprised
of 104,000 shares of Company common stock and approximately $600,000 in cash in
a transaction to be accounted for under the purchase method.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
REVENUES
The Company currently derives all of its revenues from restaurant sales and
franchise revenues. Total revenues increased 21.4% and 20.2% for the quarter and
nine months ended September 26, 1999, respectively, as compared to the quarter
and nine months ended September 27, 1998.
For each of the Company's restaurant concepts, same store sales comparisons for
the quarter ended September 26, 1999, consist of sales at restaurants opened
prior to December 28, 1997.
LongHorn Steakhouse:
Sales in the LongHorn Steakhouse restaurants for the quarter and nine months
ended September 26, 1999, increased 23.1% and 22.7%, respectively, as compared
to the quarter and nine months ended September 27, 1998. The increases reflect a
13.5% and 13.2% increase in restaurant weeks in the quarter and nine months
ended September 26, 1999, respectively, as compared to the same periods of the
prior year, resulting from an increase in the restaurant base from 100 LongHorn
Steakhouse restaurants at September 27, 1998 to 114 restaurants at September 26,
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1999. Average weekly sales for all LongHorn Steakhouse restaurants in the third
quarter of 1999 were $44,491, an 8.5% increase over the comparable period in
1998. Same store sales for the comparable LongHorn Steakhouse restaurants
increased 6.8% in the third quarter of 1999, as compared to the same period in
1998, primarily due to an increase in customer counts.
The Capital Grille:
Sales in The Capital Grille restaurants increased 11.9% and 16.3% for the third
quarter and nine months ended September 26, 1999, compared to the quarter and
nine months ended September 27, 1998. The increases reflect a 2.1% decrease and
a 3.1% increase in restaurant weeks in the quarter and nine months ended
September 26, 1999, respectively, as compared to the quarter and nine months
ended September 27, 1998, resulting from the third quarter 1998 opening of one
The Capital Grille restaurant and the fourth quarter 1998 closure of one The
Capital Grille restaurant. Average weekly sales for all The Capital Grille
restaurants in the third quarter of 1999 were $90,327, a 14.2% increase from the
comparable period in 1998. The increase in average weekly sales was primarily
due to an increase in customer counts and to a lesser extent due to the closing
of a lower than average unit volume restaurant that was included in the third
quarter 1998 average. Same store sales for the comparable The Capital Grille
restaurants increased 9.6% in the third quarter of 1999 as compared to the same
period in 1998, which is primarily attributable to an increase in customer
counts.
Bugaboo Creek Steak House:
Sales in the Bugaboo Creek Steak House restaurants for the quarter and nine
months ended September 26, 1999 increased 23.6% and 14.8%, respectively, as
compared to the quarter and nine months ended September 27, 1998. The increases
reflect a 12.4% and 10.4% increase in restaurant weeks in the quarter and nine
months ended September 26, 1999, respectively, as compared to the quarter and
nine months ended September 27, 1998, resulting from an increase in the
restaurant base from 16 Bugaboo Creek Steak House restaurants at September 27,
1998 to 18 restaurants at September 26, 1999. Average weekly sales for all
Bugaboo Creek Steak House restaurants in the third quarter of 1999 were $67,598,
a 9.9% increase from the comparable period for 1998, primarily due to an
increase in customer counts. Same store sales for the comparable Bugaboo Creek
Steak House restaurants in the third quarter of 1999 increased 9.4% as compared
to the same period in 1998, primarily due to an increase in customer counts.
Company-wide:
Franchise revenues of approximately $45,000 and $124,000 for the quarter and the
nine months ended September 26, 1999, respectively, were derived from two
franchisee-owned LongHorn Steakhouse restaurants in Puerto Rico. These two
franchise restaurants were opened in September 1998 and September 1999.
COSTS AND EXPENSES
Cost of restaurant sales as a percentage of restaurant sales decreased to 36.4%
from 36.5% for the third quarter of 1999 and decreased to 36.0% from 36.7% for
the nine months ended September 26, 1999, as compared to the respective periods
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of 1998. The decrease in cost of sales as a percentage of restaurant sales for
the quarter and nine months ended September 26, 1999, was primarily due to
favorable protein purchasing contracts, the majority of which continue into the
year 2000, and decreases in beer, wine and liquor costs resulting from favorable
price negotiations with certain beer, wine and liquor vendors.
Restaurant operating expenses as a percentage of restaurant sales increased to
45.9% from 45.3% for the third quarter of 1999 and to 45.1% from 44.6% for the
first nine months of 1999 as compared to the respective periods of 1998. These
increases in operating expenses as a percentage of restaurant sales were due to
an increase in promotional and advertising expenses (principally at the
Company's Bugaboo Creek Steak House restaurants), manager incentives and
training expenses, partially offset by greater leverage of fixed and semi-fixed
expenses created by an increase in average unit sales.
Restaurant depreciation and amortization decreased as a percentage of restaurant
sales compared to the corresponding periods of the prior year due to an increase
in average unit sales providing greater leverage of this fixed expense.
Due to the Company's adoption of AICPA Statement of Position 98-5, "Reporting
the Cost of Start-Up Activities" (SOP 98-5), pre-opening costs are expensed as
they are incurred effective as of the beginning of the first quarter of 1999.
Rather than restate prior periods for this change in accounting principle, the
cumulative effect of the change is shown net of tax benefit as a separate line
on the consolidated statement of earnings. Accordingly, the line on the
consolidated statement of earnings "pre-opening expense - restaurants" reflects
a comparison of amounts incurred and expensed in 1999 to pre-opening
amortization in the prior year.
General and administrative expenses as a percentage of total revenues decreased
to 6.8% from 7.2% for the third quarter and decreased to 6.9% from 7.0% for the
first nine months of 1999 as compared to the respective periods of the prior
year. These decreases were primarily due to greater leverage of fixed and
semi-fixed expenses created by an increase in average unit sales.
As a result of the relationships between revenues and expenses discussed above,
the Company's operating income increased to $5.9 million for the third quarter
of 1999 as compared to $4.2 million for the corresponding period of the prior
year.
Interest expense, net increased to $870 thousand in the third quarter of 1999,
from $701 thousand for the same period of the prior year, due to an increase in
the effective interest rate on borrowings and the amortization of loan costs
associated with the Company's revolving credit facility.
Minority interest expense decreased to $291 thousand for the third quarter of
1999 from $300 thousand for the same period of the prior year primarily due to a
reduction in minority interest expense created by the purchase of a joint
venture partner's partnership interest in 11 joint venture restaurants during
the fourth quarter of 1998 and the purchase of a joint venture partner's
partnership interest in four joint venture restaurants in May 1999.
Income tax expense for the third quarter of 1999 was 33.1% of earnings before
income taxes, bringing the Company's effective tax rate for the first nine
months of 1999 to 33%. This compares to 33.2% of earnings before income taxes
for the third quarter and 31.0% for the first nine months of 1998. The Company's
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effective income tax rate differs from applying the statutory federal income tax
rate of 35% to earnings before income taxes primarily due to employee FICA tip
tax credits (a reduction of income tax expense), partially offset by state
income taxes.
Net earnings increased 49.7% to $3.2 million for the third quarter of 1999 from
net earnings of $2.1 million for the third quarter of 1998, reflecting the net
effect of the items discussed above.
Liquidity and Capital Resources:
The Company requires capital primarily for the development of new restaurants,
selected acquisitions and the remodeling of existing restaurants. During the
first nine months of 1999, the Company's principal source of working capital was
cash provided by operating activities ($18.7 million). For the nine months ended
September 26, 1999, the principal uses of working capital were capital
expenditures for new and improved facilities ($24.9 million), repayments on the
Company's revolving credit facility ($8.0 million) and the purchase of common
shares for treasury ($1.1 million). As of September 26, 1999, $40.0 million was
outstanding and $60.0 million was available under the Company's $100.0 million
revolving credit facility.
The Company intends to open 15 Company-owned and joint venture LongHorn
Steakhouse restaurants and one Bugaboo Creek Steak House restaurant in fiscal
year 1999. The Company estimates that its capital expenditures for fiscal year
1999 will be approximately $35-40 million. During the third quarter of 1999, the
Company opened three LongHorn Steakhouse restaurants, bringing the total number
of LongHorn Steakhouse restaurants opened during the first nine months of 1999
to 10. During the third quarter of 1999, the Company also opened one Bugaboo
Creek Steak House restaurant. For 2000, the Company plans to open 17 to 19
LongHorn Steakhouse restaurants, one Bugaboo Creek Steak House restaurant and
one to two The Capital Grille restaurants. Management believes that available
cash, cash provided by operations, and available borrowings under the Company's
$100 million revolving credit facility will provide sufficient funds to finance
the Company's expansion plans through the year 2000.
Since substantially all sales in the Company's restaurants are for cash, and
accounts payable are generally due in seven to 30 days, the Company operates
with little or negative working capital.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the Company for
periods beginning in fiscal year 2001. The Company believes that the adoption of
the provisions of SFAS No. 133 will not have a material effect on its financial
statements, based on current activities.
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Impact of the Year 2000 Issue
Most hardware and software designed in the past was not designed to recognize
calendar dates beginning in the Year 2000. The failure of such hardware and
software to properly recognize the dates beginning in the Year 2000 could result
in miscalculations or system failures, which could result in an adverse effect
on the Company's operations.
The Company's key information technology systems, including its financial,
informational and operational systems ("IT Systems"), which are mainly comprised
of third party hardware and software have been assessed and tested to determine
Year 2000 readiness. In addition, the Company has completed assessing and
testing its non-IT systems that utilize embedded technology such as
microcontrollers and reviewing them for Year 2000 compliance. Detailed plans are
currently in place for required system modifications or replacements.
Remediation activities are well underway with substantially all of the systems
already compliant. The Company expects to be fully compliant by November 1999.
To operate its business, the Company relies upon its suppliers, distributors and
other third party service providers ("Material Providers"), over which it can
assert little control. The Company's ability to conduct its core business is
dependent upon the ability of these Material Providers to remediate their Year
2000 issues to the extent they affect the Company. If the Material Providers do
not appropriately remediate their Year 2000 issues or develop viable contingency
plans, the Company's ability to conduct its core business may be materially
impacted, which could result in a material adverse effect on the Company's
financial condition.
Where predictable, the Company has developed plans to mitigate its risks with
respect to the failure of its Material Providers to be Year 2000 ready as part
of its ongoing contingency planning. The Company has requested and received
information regarding the state of Year 2000 readiness from all of its Material
Providers. Although the communications received by the Company from its Material
Providers have not disclosed any material Year 2000 issues, there can be no
assurance that these Material Providers will not experience Year 2000 failures.
Unanticipated failures or significant delays in furnishing products or services
by Material Providers could cause certain restaurants to temporarily close or
remove certain items from their menus, which could have a material adverse
effect on the Company's consolidated financial position, results of operations
and cash flows. If unanticipated problems arise from systems or equipment, there
could be material adverse effects on the Company's consolidated financial
position, results of operations and cash flows. As part of the Year 2000
readiness efforts, the Company has developed contingency plans to limit the Year
2000 disruptions and financial loss that may occur in the event of failures in
the Company's or Material Provider's IT Systems or non-IT systems. Contingency
plans have been developed for all of the IT systems that have been determined to
be mission critical. The remainder of the contingency plans have been completed,
but will be modified as additional information regarding possible failures
becomes available.
The Company expenses costs associated with its Year 2000 system changes as the
costs are incurred, except for system change costs that the Company would
otherwise capitalize. The program, including testing and remediation of all of
the Company's systems and applications, the cost of external consultants, the
purchase of software and hardware, the development and implementation of viable
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<PAGE> 14
contingency plans, including the compensation of internal employees working on
Year 2000 projects, is expected to cost approximately $1,000,000 (except for
fringe benefits of internal employees, which are not separately tracked) from
inception in calendar year 1998 through completion in calendar year 1999. Of
these costs, approximately $100,000 was incurred (approximately $80,000 of which
was capitalized) during 1998, and approximately $900,000 was incurred
(approximately $800,000 of which was capitalized)during the first nine months of
1999. However, the Company is unable to estimate the additional costs that it
may incur subsequent to 1999 as a result of Year 2000 problems suffered by
Material Providers, and there can be no assurance that the Company will
successfully address the Year 2000 problems, which may be present in its own IT
Systems and non-IT systems that our testing has not identified.
Forward-Looking Statements
Statements contained in this Report concerning future results, performance or
expectations, including those regarding the opening of additional restaurants,
planned capital expenditures, the adequacy of the Company's capital resources,
disclosures related to the effect of the advent of the year 2000 on the Company
and its systems and other statements regarding trends relating to various
revenue and expense items, are forward looking statements. These statements are
subject to a number of risks and uncertainties, some of which are beyond the
Company's control that could cause the Company's actual results to differ
materially from those projected in such forward-looking statements.
Actual results, performance or developments could differ materially from those
expressed or implied by those forward-looking statements as a result of known or
unknown risks, uncertainties and other factors, including those described from
time to time in the Company's filings with the Securities and Exchange
Commission, press releases and other communications. The Company undertakes no
obligation to update or revise forward-looking statements to reflect the
occurrence of unanticipated events or changes to future operating results over
time.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
As of September 26, 1999, $40.0 million was outstanding under the Company's
$100.0 million revolving credit facility. Amounts outstanding under such credit
facility bear interest at LIBOR plus a margin of 1.25% to 2.0% (depending on the
Company's leverage ratio), or the administrative agent's prime rate of interest
plus a margin of 0% to 0.75% (depending on the Company's leverage ratio), at the
Company's option. Accordingly, the Company is exposed to the impact of interest
rate movements. To achieve the Company's objective of managing its exposure to
interest rate changes, the Company from time to time uses interest rate swaps.
The Company entered into an interest rate swap agreement with a commercial bank,
which effectively fixes the interest rate at 7.515% on $35.0 million of the
Company's borrowings through February 2000, decreasing to $25.0 million through
August 2001. The Company is exposed to credit losses on this interest rate swap
in the event of counterparty non-performance, but does not anticipate any such
losses.
14
<PAGE> 15
While changes in LIBOR and the administrative agent's prime rate of interest
could affect the cost of borrowings under the credit facility in excess of
amounts covered by the interest rate swap agreement in the future, the Company
does not consider its current exposure to changes in such rates to be material.
The Company believes that the effect, if any, of reasonably possible near-term
changes in interest rates on the Company's financial condition, results of
operations or cash flows would not be material.
Investment Portfolio
The Company invests portions of its excess cash, if any, in highly liquid
investments. At September 26, 1999, the Company had approximately $2.7 million
invested in high-grade overnight repurchase agreements.
Part II - Other Information
Item 1. Legal Proceedings.
In January 1996, the Company and Moo Management, Inc. ("Moo") formed a joint
venture ("RTL Joint Venture") for the development of LongHorn Steakhouse
restaurants. The parties never developed LongHorn Steakhouse restaurants and,
beginning in the fall of 1996, negotiated to amend their joint venture agreement
to develop Bugaboo Creek Steak House restaurants in an expanded territory. While
these negotiations were taking place, the parties entered into a ground lease
(the "Ground Lease") in the name of RTL Joint Venture and the Company, with its
own funds, subsequently built on the leased premises a Bugaboo Creek Steak House
restaurant. In the fall of 1997, the negotiations between the Company and Moo
broke down. The Company believes that the parties did not reach a binding
agreement to develop Bugaboo Creek Steak House restaurants while Moo asserts
that such an agreement was reached.
On, April 30, 1998, the Company filed a Petition for Declaratory Relief and
Contract Reformation styled RARE Hospitality International, Inc. v. Centercap
Associates, L.L.C. and Moo Management, Inc., C.A. No. 16350 NC in the Chancery
Court of New Castle County, Delaware seeking a determination that the Company,
and not RTL Joint Venture, is the tenant under the Ground Lease. In its amended
Answer and Counterclaim in this action, Moo alleged that the Company and Moo
agreed to the terms of a binding joint venture agreement to develop Bugaboo
Creek Steak House restaurants and entered into the Ground Lease in furtherance
thereof. In its Counterclaim, Moo alleged that the Company has breached the
alleged agreement and, as a result, Moo has been deprived of the profit that it
would have earned from the purchase and operation of three Bugaboo Creek Steak
House restaurants owned by the Company, has been damaged by the efforts
undertaken and the expenses incurred by Moo in preparation for performance of
the alleged joint venture agreement and has been deprived of the profits lost
and that would be lost as the result of the Company's failure to perform the
alleged joint venture agreement. Moo sought an unspecified amount of monetary
damages and the dismissal of the Company's petition.
Following a preliminary hearing in this matter held on December 18, 1998, this
action and the counterclaim were dismissed without prejudice.
On June 9, 1998, the Company filed a Demand for Arbitration with the American
Arbitration Association in Atlanta, Georgia styled RARE Hospitality
International, Inc. v. Moo Management, Inc., AAA Case no. 30418025798, and filed
an Amended Demand for Arbitration on July 7, 1998. In this arbitration, the
15
<PAGE> 16
Company sought an immediate hearing and injunctive relief directing that the
Ground Lease be transferred to the Company and that Moo and its principals be
relieved from liability on the Ground Lease. The Company further requested an
award declaring that there is no joint venture or partnership between the
Company and Moo to develop Bugaboo Creek Steak House restaurants and granting
monetary damages for the Company's losses incurred as a result of the wrongful
conduct of Moo.
A hearing was held on July 23, 1998, with respect to the Company's request for
preliminary relief. On July 29, 1998, the arbitrator entered an Order
determining that the Company's request for preliminary injunctive relief was
subject to arbitration, that the arbitrator had jurisdiction to decide that
request and granting the Company's request for preliminary relief by ordering
Moo to sign on behalf of RTL Joint Venture an assignment of the Ground Lease to
the Company. The Company must also make an accounting to Moo on a monthly basis
of the operations of the Bugaboo Creek Steak House restaurant operated on the
Ground Lease until further order of the arbitrator.
On August 6, 1998, Moo filed an Answer and Counterclaim in the arbitration. In
its Answer and Counterclaim, Moo denies the Company's claim, alleges that the
Company has waived its right to arbitration and that the tribunal is without
jurisdiction to hear the matter, makes essentially the same counterclaims as
contained in Moo's Answer and Counterclaim in the Delaware action described
above and seeks unspecified damages in an amount to be proven, but not less than
$5,000,000.
The week of December 7, 1998, an evidentiary hearing was conducted in the
arbitration with respect to only the issue of liability, if any, of the Company.
The hearing was continued and concluded with closing arguments on March 11,
1999. On May 26, 1999, the arbitrator rendered a decision on liability and ruled
that the Company and Moo did reach agreement to become partners in the
development of Bugaboo Creek Steak House restaurants in certain territories. The
arbitrator further ruled that the Company is liable to Moo for actual damages it
sustained, if any, from the Company's failure to perform the agreement. The
damages phase of the arbitration will continue with a hearing in December 1999,
at which time the Company intends to assert that no damages were sustained by
Moo as a result of the Company's failure to develop Bugaboo Creek Steak House
restaurants with Moo. It is anticipated that the arbitrator will render a
decision on damages following the hearing.
Management continues to believe that the Company's position has merit and that
the resolution of these matters will not have a material adverse effect on the
Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
On September 30, 1999, the Company agreed to issue 104,000 shares of its common
stock, no par value, to JJU, Inc. ("JJU") in partial consideration for the
Company's acquisition of JJU's ownership interest in its joint venture with the
Company regarding ten LongHorn Steakhouse restaurants located in south Florida
markets. The issuance of these securities to JJU was made in reliance upon
exemptions from registration under Sections 4(2) and 4(6) of the Securities Act
of 1933 and Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities
16
<PAGE> 17
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed.
27.1 - Financial Data Schedule (for SEC use only)
(b) Reports filed on Form 8-K.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RARE Hospitality International, Inc.
Date: November 10, 1999 /s/ W. Douglas Benn
----------------- --------------------------------------
W. Douglas Benn
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer
and Chief Accounting Officer,
and a duly authorized officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q OF
RARE HOSPITALITY INTERNATIONAL, INC. FOR THE QUARTER ENDED SEPTEMBER 26, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> SEP-27-1999
<CASH> 3,244
<SECURITIES> 0
<RECEIVABLES> 3,199
<ALLOWANCES> 0
<INVENTORY> 10,076
<CURRENT-ASSETS> 28,744
<PP&E> 180,958<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 224,054
<CURRENT-LIABILITIES> 36,901
<BONDS> 49,732
0
0
<COMMON> 107,623
<OTHER-SE> 24,021
<TOTAL-LIABILITY-AND-EQUITY> 224,054
<SALES> 281,445
<TOTAL-REVENUES> 281,569
<CGS> 101,394
<TOTAL-COSTS> 239,465
<OTHER-EXPENSES> 21,451
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,832
<INCOME-PRETAX> 16,627
<INCOME-TAX> 5,485
<INCOME-CONTINUING> 11,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,587
<NET-INCOME> 9,555
<EPS-BASIC> 0.80
<EPS-DILUTED> 0.76
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
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