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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-19924
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RARE HOSPITALITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1498312
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8215 ROSWELL ROAD, BLDG 600; 30350
ATLANTA, GA 30350 (Zip Code)
(Address of principal executive offices)
770-399-9595
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 8, 1999, the aggregate market value of the voting stock
held by non-affiliates (assuming for these purposes, but not conceding, that all
executive officers and directors are "affiliates" of the Registrant) of the
Registrant was $165,945,391 based upon the last reported sale price in the
Nasdaq National Market on March 8, 1999 of $15.25.
As of March 8, 1999, the number of shares outstanding of the
Registrant's Common Stock, no par value, was 11,954,706.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 6, 1999 are incorporated by reference
in Part III hereof.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in the following pages, particularly
regarding estimates of the number and locations of new restaurants that RARE
Hospitality International, Inc. (the "Company") intends to open during fiscal
1999, constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include statements regarding
the intent, belief or current expectations of the Company and members of its
management team, as well as assumptions on which such statements are based.
Forward-looking statements involve a number of risks and uncertainties, and in
addition to the factors discussed elsewhere in this Form 10-K, among the other
factors that could cause actual results to differ materially are the following:
failure of facts to conform to necessary management estimates and assumptions;
the Company's ability to identify and secure suitable locations on acceptable
terms, open new restaurants in a timely manner, hire and train additional
restaurant personnel and integrate new restaurants into its operations; the
continued implementation of the Company's business discipline over a large
restaurant base; risks associated with the Year 2000 issue, including Year 2000
problems that may arise on the part of third parties which may affect the
Company's operations; the economic conditions in the new markets into which the
Company expands and possible uncertainties in the customer base in these areas;
changes in customer dining patterns; competitive pressures from other national
and regional restaurant chains; business conditions, such as inflation or a
recession, and growth in the restaurant industry and the general economy;
changes in monetary and fiscal policies, laws and regulations; the risks set
forth in Exhibit 99(a) to this Form 10-K which are hereby incorporated by
reference and other risks identified from time to time in the Company's SEC
reports, registration statements and public announcements. The Company
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
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RARE HOSPITALITY INTERNATIONAL, INC.
INDEX
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PAGE
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Part I
Item 1. Business .............................................................. 4
Item 2. Properties............................................................. 14
Item 3. Legal Proceedings...................................................... 14
Item 4. Submission of Matters to a Vote of Security
Holders ............................................................... 15
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................................... 15
Item 6. Selected Financial Data ............................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk ........................................................... 25
Item 8. Financial Statements and Supplementary Data ........................... 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................................... 44
Part III
Item 10 Directors and Executive Officers of the Registrant .................... 44
Item 11 Executive Compensation ................................................ 44
Item 12 Security Ownership of Certain Beneficial Owners
and Management ........................................................ 44
Item 13 Certain Relationships and Related Transactions ........................ 44
Part IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................................... 45
Signatures ....................................................................... 47
Financial Statement Schedules
Exhibits
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PART I
ITEM 1. BUSINESS
GENERAL
RARE Hospitality International, Inc. (the "Company"), formerly known as
LongHorn Steaks, Inc., operates and franchises 137 restaurants as of March 8,
1999, including 107 LongHorn Steakhouse restaurants, 17 Bugaboo Creek Steak
House restaurants, and 11 The Capital Grille restaurants, as well as two
additional restaurants (the "specialty restaurants"), Hemenway's Seafood Grille
& Oyster Bar ("Hemenway's") and The Old Grist Mill Tavern. The Company was
incorporated in Georgia in December 1982.
On September 13, 1996, the Company completed the acquisition of Bugaboo
Creek Steak House, Inc., along with certain related restaurant and real estate
properties. The Company issued 2,939,062 shares of the Company's common stock to
the stockholders of Bugaboo Creek Steak House, Inc. and 240,410 shares of the
Company's common stock for the purchase of three affiliated entities and certain
related real estate. Such acquisition was accounted for using the pooling of
interests method. Bugaboo Creek Steak House, Inc. operated 14 Bugaboo Creek
Steak House restaurants, five The Capital Grille restaurants, and the affiliated
entities operated three specialty concept restaurants, at the time of the
merger. Bugaboo Creek Steak House, Inc., now a wholly-owned subsidiary of the
Company, owns and operates the Bugaboo Creek Steak House restaurants and The
Capital Grille restaurants. Another wholly-owned subsidiary, Whip Pooling
Corporation, which was organized in connection with the acquisition of Bugaboo
Creek Steak House, Inc., owns and operates Hemenway's and The Old Grist Mill
Tavern.
On January 13, 1997, the Company changed its name from LongHorn Steaks,
Inc. to RARE Hospitality International, Inc., to reflect the fact that it no
longer operated only LongHorn Steakhouse restaurants. As a result of this
change, the Company's common stock, which had traded on the Nasdaq National
Market under the symbol "LOHO", began trading under its current symbol "RARE".
CONCEPTS
LongHorn Steakhouse restaurants, which are located primarily in the
southeastern and midwestern United States, are casual dining, full-service
restaurants that serve lunch and dinner, offer full liquor service and feature a
menu consisting of fresh cut steaks, as well as salmon, shrimp, chicken, ribs,
pork chops and prime rib. LongHorn Steakhouse restaurants emphasize high
quality, moderately-priced food and attentive, friendly service, provided in a
casual atmosphere resembling a Texas roadhouse.
The 17 Bugaboo Creek Steak House restaurants are located primarily in
the northeastern and mid-Atlantic regions of the United States. The Bugaboo
Creek Steak House restaurants are casual dining restaurants designed to resemble
a Canadian Rocky Mountain lodge. Menu offerings include seasoned steaks, prime
rib, spit-roasted half chickens, smoked baby back ribs, grilled salmon and a
variety of freshwater fish.
The 11 The Capital Grille restaurants are located in major metropolitan
areas across the United States. These restaurants are fine-dining restaurants
with menu offerings ranging from chilled baby lobster and beluga caviar
appetizers to entrees of dry aged steaks, lamb and veal steaks, lobster, grilled
salmon and chicken and a wine list of over 300 selections.
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RESTAURANT LOCATIONS
The following tables set forth the location of each existing restaurant
by concept at March 8, 1999 and the number of restaurants in each area.
LONGHORN STEAKHOUSE RESTAURANTS
EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS
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ALABAMA
Dothan .................................................... 1
Mobile .................................................... 1
Montgomery ................................................ 1
FLORIDA
Destin .................................................... 1
Ft. Myers ................................................. 2
Jacksonville .............................................. 4
Miami/Ft. Lauderdale ...................................... 6
Ocala ..................................................... 1
Orlando ................................................... 7
St. Augustine ............................................. 1
Tallahassee ............................................... 1
Tampa/ St. Petersburg ..................................... 5
West Palm Beach ........................................... 2
GEORGIA
Albany .................................................... 1
Athens .................................................... 1
Atlanta ................................................... 24
Augusta ................................................... 1
Cartersville .............................................. 1
Columbus .................................................. 1
Macon ..................................................... 1
Rome ...................................................... 1
Savannah .................................................. 1
Statesboro ................................................ 1
Valdosta .................................................. 1
Warner Robbins ............................................ 1
ILLINOIS
Fairview Heights ......................................... 1
KENTUCKY
Florence ................................................. 1
MISSOURI
St. Louis ................................................. 3
NORTH CAROLINA
Burlington ................................................ 1
Charlotte ................................................. 5
Greensboro/High Point/Winston-Salem ....................... 2
OHIO
Cincinnati ................................................ 3
Cleveland ................................................. 7
Columbus .................................................. 4
SOUTH CAROLINA
Columbia .................................................. 3
Greenville/Spartanburg .................................... 2
Hilton Head ............................................... 1
TENNESSEE
Chattanooga ............................................... 1
Nashville ................................................. 4
Total Existing Company-Owned/Joint Venture Restaurants . 106
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EXISTING FRANCHISEE-OWNED RESTAURANTS
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PUERTO RICO
Bayamon ......................................... 1
Total Existing Franchisee-Owned Restaurants 1
Total LongHorn Steakhouse Restaurants ..... 107
BUGABOO CREEK STEAK HOUSE RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
CONNECTICUT
Manchester ....................................... 1
DELAWARE
Newark .......................................... 1
MAINE
Bangor ........................................... 1
Portland ......................................... 1
MARYLAND
Gaithersburg ..................................... 1
MASSACHUSETTS
Boston ........................................... 5
Seekonk .......................................... 1
NEW HAMPSHIRE
Newington ........................................ 1
NEW YORK
Albany ........................................... 1
Poughkeepsie ..................................... 1
Rochester ........................................ 1
PENNSYLVANIA
Philadelphia ..................................... 1
RHODE ISLAND
Warwick .......................................... 1
Total Bugaboo Creek Steak House Restaurants 17
</TABLE>
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THE CAPITAL GRILLE RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
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DISTRICT OF COLUMBIA
Washington ....................................... 1
FLORIDA
Miami ............................................ 1
ILLINOIS
Chicago .......................................... 1
MASSACHUSETTS
Boston ........................................... 2
MICHIGAN
Troy ............................................. 1
MINNESOTA
Minneapolis ...................................... 1
NORTH CAROLINA
Charlotte ........................................ 1
RHODE ISLAND
Providence ....................................... 1
TEXAS
Dallas ........................................... 1
Houston .......................................... 1
Total The Capital Grille Restaurants ....... 11
SPECIALTY RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
MASSACHUSETTS
The Old Grist Mill Tavern, Seekonk ............... 1
RHODE ISLAND
Hemenway's Seafood Grille & Oyster Bar, Providence 1
Total Specialty Restaurants ................ 2
RESTAURANTS UNDER CONSTRUCTION
ALABAMA
LongHorn Steakhouse, Huntsville ................ 1
FLORIDA
LongHorn Steakhouse, Daytona Beach ............. 1
GEORGIA
Bugaboo Creek Steak House, Atlanta .............. 1
LongHorn Steakhouse, Atlanta .................... 2
NORTH CAROLINA
LongHorn Steakhouse, Greensboro ................ 1
OHIO
LongHorn Steakhouse, Cincinnati ................ 1
Total Restaurants Under Construction ..... 7
</TABLE>
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UNIT ECONOMICS
LONGHORN STEAKHOUSE
The Company's modified LongHorn Steakhouse restaurant design, which has
been developed and refined over the past five years, has increased capacity from
an average of 150 seats for LongHorn Steakhouse restaurants open prior to 1994
to an average of 203 seats for LongHorn Steakhouse restaurants opened in 1998.
The objective of this modification was to increase the revenues of the Company's
new LongHorn Steakhouse restaurants while reducing capital expenditures as a
percentage of revenues. The Company intends to continue to emphasize leasing as
its preferred arrangement for LongHorn Steakhouse sites and currently leases all
but 23 of its LongHorn Steakhouse restaurants in operation, owns two sites for
restaurants under construction and owns one site held for resale. The Company
purchases land only in those circumstances it believes are cost-effective. Two
of the nine LongHorn Steakhouse restaurants opened in 1998 were located on
property purchased at an average cost of approximately $705,000 per location.
The average cash investment to open a LongHorn Steakhouse restaurant in 1998 was
approximately $1,271,000, excluding real estate costs and excluding pre-opening
expenses of approximately $182,000. Through December 27, 1998, the Company
amortized pre-opening expenses over the first 12 months of a restaurant's
operation. After December 27, 1998, in accordance with Statement of Position
98-5 Reporting on the Costs of Start-up Activities ("SOP 98-5"), the Company
will expense pre-opening costs as incurred.
BUGABOO CREEK STEAK HOUSE
The Company developed a modified Bugaboo Creek Steak House restaurant
design, which served as the new prototype for Bugaboo Creek Steak House
restaurants constructed beginning in 1997. The two Bugaboo Creek Steak House
restaurants opened during 1998 utilize this design. This modified design is
smaller than earlier designs and utilizes approximately 7,200 to 7,800 square
feet with a capacity of 232 to 274 seats. The Company is in the process of
further refining the prototype, with the objective of reducing the capital
expenditure required for new restaurant construction and reducing ongoing
operating costs at these new restaurants due to lower square footage and a more
efficient layout.
The Company intends to continue to emphasize leasing as its preferred
arrangement for Bugaboo Creek Steak House sites and currently leases all but one
of its Bugaboo Creek Steak House sites. The Company purchases land only in those
circumstances it believes are cost-effective. Neither of the two Bugaboo Creek
Steak House restaurants opened in 1998 were located on purchased property. The
average cash investment to open a Bugaboo Creek Steak House restaurant in 1998
was approximately $1,813,000, excluding pre-opening expenses. The average
pre-opening expense for Bugaboo Creek Steak House restaurants opened during 1998
of approximately $334,000 was significantly above the previous year's average of
$155,000 due to the increased cost associated with a significant delay in one of
the 1998 openings caused by a dispute related to the restaurant (See "Legal
Proceedings"). Through December 27, 1998, the Company amortized pre-opening
expenses over the first 12 months of a restaurant's operation. After December
27, 1998, in accordance with SOP 98-5, the Company will expense pre-opening
costs as incurred.
THE CAPITAL GRILLE
The Capital Grille restaurant development strategy includes the use of
sites that are historic or unique in nature. Accordingly, the Company utilizes
methods with which to balance controlling the construction costs with the
retention of the unique ambiance of each location. The Company intends to
continue to emphasize leasing as its preferred arrangement for The Capital
Grille sites and currently leases all of its The Capital Grille sites. The
Company intends to purchase land only in those circumstances it believes are
cost-effective. The average cash investment to open a The Capital Grille
restaurant in 1998 was approximately $2,507,000, excluding pre-opening expenses
of approximately $331,000. Through December 27, 1998, the Company amortized
pre-opening expenses over the first 12 months of a restaurant's operation. After
December 27, 1998, in accordance with SOP 98-5, the Company will expense
pre-opening costs as incurred.
EXPANSION STRATEGY
LONGHORN STEAKHOUSE AND BUGABOO CREEK STEAK HOUSE:
The Company plans to expand through the development of existing joint
venture partnerships and additional Company-owned LongHorn Steakhouse
restaurants and additional Company-owned Bugaboo Creek Steak House restaurants
in existing markets and in other selected metropolitan markets in the
southeastern, midwestern, northeastern and mid-Atlantic regions of the United
States. Currently, the Company has joint venture arrangements covering
territories in various areas of Florida, North Carolina, South Carolina and
Ohio. The Company plans to continue to expand its restaurant base by clustering
its restaurants in existing and new markets, with LongHorn Steakhouse
restaurants located primarily in the southeastern and
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midwestern regions of the United States and Bugaboo Creek Steak House
restaurants located primarily in the northeastern and mid-Atlantic regions of
the United States. However, in 1999, the Company expects to initiate development
of the LongHorn Steakhouse in the northeast and will open at least one Bugaboo
Creek Steak House restaurant in the southeast region of the United States.
The Company believes that clustering in existing markets enhances its
ability to supervise operations, market the Company's concept and distribute
supplies. The Company, however, also intends to open single restaurants in
smaller markets in sufficiently close proximity to the Company's other markets
to enable the Company to efficiently supervise operations and distribute
supplies.
The Capital Grille:
The Company plans to expand through the development of additional
Company-owned The Capital Grille restaurants in selected metropolitan markets
nationwide.
Overall:
The Company's objective is to increase earnings by expanding market
share in existing markets and by developing restaurants in new markets. The
Company currently plans to open 15 to 18 Company-owned and joint venture
restaurants in 1999: 12 to 14 LongHorn Steakhouse restaurants; two to three
Bugaboo Creek Steak House restaurants and one The Capital Grille restaurant. Of
the restaurants proposed for 1999, the Company has opened two LongHorn
Steakhouse restaurants, has seven restaurants under construction in Alabama,
Georgia, Florida, North Carolina and Ohio, and has signed letters of intent or
leases on sites for five additional restaurants as of March 8, 1999. The Company
expects that four to six of the 12 to 14 LongHorn Steakhouse restaurants to be
opened in 1999 will be developed under joint ventures, and that all of the
Bugaboo Creek Steak House and The Capital Grille restaurants to be opened in
1999 will be Company-owned.
In December 1998, the Company acquired one previously franchised
LongHorn Steakhouse restaurant in Tampa, Florida for an aggregate purchase price
of $1.2 million in cash and a $50,000 note. In the fourth quarter of 1998, the
Company acquired the ownership interests of its joint venture partners in 11
LongHorn Steakhouse restaurants located in the Cleveland, Ohio and St. Louis,
Missouri markets for an aggregate purchase price of $5.3 million in cash and a
$200,000 note.
The Company will continue to evaluate suitable acquisitions in the
restaurant industry as they are identified.
The Company will consider on a selective basis qualified applicants
with substantial restaurant experience and financial resources for franchises of
either LongHorn Steakhouse restaurants or Bugaboo Creek Steak House restaurants.
The Company does not currently anticipate offering franchises for The Capital
Grille restaurants. The Company expects that it will grant franchises to
operators who are not joint venture partners with the Company primarily in
markets in which the Company would not otherwise expand.
SITE SELECTION AND RESTAURANT LAYOUT
The Company considers the location of a restaurant to be a critical
factor to the unit's long-term success and devotes significant effort to the
investigation and evaluation of potential sites. The site selection process
focuses on trade area demographics, target population density and household
income level as well as specific site characteristics, such as visibility,
accessibility and traffic volumes. The Company also reviews potential
competition and the profitability of national chain restaurants operating in the
area. Senior management inspects and approves each restaurant site. It typically
takes approximately 100 to 120 days to construct and open a new LongHorn
Steakhouse restaurant, approximately 130 to 140 days to construct and open a new
Bugaboo Creek Steak House restaurant and approximately 170 to 185 days to
construct and open a new The Capital Grille restaurant. While the Company will
consider the option of purchasing sites for its new restaurants where it is
cost-effective to do so, currently all but 24 of the Company's restaurant sites
are leased.
Over the past five years, the Company has modified its LongHorn
Steakhouse prototype restaurant design, increasing its average seating capacity
from approximately 150 seats for LongHorn Steakhouse restaurants open prior to
1994 to an average of 203 seats in approximately 5,500 square feet of space for
LongHorn Steakhouse restaurants opened in 1998. An expanded kitchen design
incorporating equipment needed for a broader menu is also part of the prototype.
The Company believes the kitchen design simplifies training, lowers costs and
improves the consistency and quality of the food. The prototype restaurant
design also includes cosmetic changes that provide a total restaurant concept
intended to be inviting and comfortable while maintaining the ambiance of a
Texas roadhouse.
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The Company has renovated and remodeled those LongHorn Steakhouse
restaurants that had been opened prior to the development of its new prototype
in late 1994. The remodeling involved the installation of kitchen equipment
needed for new menu items, as well as the installation of kitchen printers in
conjunction with the point-of-sale ("POS") system. The remodeling also included
cosmetic improvements such as repainting and refinishing, new lighting and
various decor adjustments. Exterior improvements encompassed repainting and
additional lighting designed to convey a more inviting image, as well as new
signage to reflect the change in the name of the restaurant to LongHorn
Steakhouse from LongHorn Steaks.
The Company has modified its Bugaboo Creek Steak House prototype
restaurant design to incorporate a smaller seating capacity than its average
restaurant. This new prototype was utilized for the four Bugaboo Creek Steak
House restaurants opened during 1998 and 1997. The new prototype has resulted in
lower investment cost, reduced labor, utilities and other operating costs while
maintaining sales averages at a level higher than the Bugaboo Creek Steak House
system average.
RESTAURANT OPERATIONS
Management and Employees. The management staff of a typical Company
restaurant consists of one general manager or managing partner, two to four
assistant managers and one or two kitchen managers. In addition, a typical
LongHorn Steakhouse restaurant employs approximately 30 to 80 staff members, a
typical Bugaboo Creek Steak House restaurant employs approximately 50 to 85
staff members, and a typical The Capital Grille restaurant employs approximately
60 staff members. The general manager or managing partner of each restaurant has
primary responsibility for the day-to-day operation of the restaurant and is
responsible for maintaining Company-established operating standards. The Company
employs 14 LongHorn Steakhouse regional managers, who each have responsibility
for the operating performance of four to eight Company-owned LongHorn Steakhouse
restaurants or joint venture restaurants managed by the Company and report
directly to one of two Vice Presidents of Operations for the LongHorn Steakhouse
concept. There are also two joint venture partners, who each have responsibility
for the operating performance of from four to 10 joint venture LongHorn
Steakhouse restaurants. The Company employs four Bugaboo Creek Steak House
regional managers, who each have responsibility for the operating performance of
from four to six Bugaboo Creek Steakhouse restaurants and The Old Grist Mill
Tavern. All four of these regional managers report directly to the Vice
President for the Bugaboo Creek Steak House concept. The Company also employs
three regional managers who each have responsibility for from three to five The
Capital Grille restaurants and Hemenway's, all reporting directly to the Vice
President of Operations for The Capital Grille.
The Company seeks to recruit managers with substantial restaurant
experience. The Company selects its restaurant personnel utilizing a selection
process which includes psychological and analytical testing which is designed to
identify individuals with those traits the Company believes are important to
success in the restaurant industry. The Company requires new managers to
complete an intensive training program focused on both on-the-job training as
well as a rigorous in-house classroom-based educational course. The program is
designed to encompass all phases of restaurant operations, including the
Company's philosophy, management strategy, policies, procedures and operating
standards. Through its management information systems, senior management
receives daily reports on sales, and weekly reports on customer counts, payroll,
cost of sales and other restaurant operating expenses. Based upon these reports,
management believes that it is able to closely monitor the Company's operations.
The Company maintains performance measurement and incentive
compensation programs for its management-level employees. The performance
programs reward restaurant management teams with cash bonuses for meeting sales
and profitability targets. Incentive compensation may also be provided to
management in some instances in the form of stock options or restricted stock
awards. During 1998, stock options were awarded to two joint venture-owned
LongHorn Steakhouse restaurant-level managing partners upon execution of their
respective employment agreements.
Management Information Systems. The Company utilizes a Windows-based
accounting software package and a network that enables electronic communication
throughout the Company. In addition, all of the Company's restaurants utilize
Windows-based POS systems and the LongHorn Steakhouse and Bugaboo Creek Steak
House restaurants employ a theoretical food costing program. The Company
utilizes these management information systems to develop pricing strategies,
identify food cost issues, monitor new product reception and evaluate
restaurant-level productivity. The Company expects to continue to develop its
management information systems in each concept to assist restaurant management
in analyzing their business and to improve efficiency.
Purchasing. The Company establishes product quality standards for beef,
then negotiates directly with suppliers to obtain the lowest possible prices for
the required quality. The Company also utilizes select long-term contracts on
certain items to avoid short-term cost fluctuations. For the LongHorn Steakhouse
and Bugaboo Creek Steak House restaurants, beef is aged at the facility of the
Company's largest distributor, who delivers the beef to the LongHorn Steakhouse
and Bugaboo Creek Steak House restaurants when the age reaches specified
guidelines. This arrangement is closely monitored by Company
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personnel and management believes it provides for efficient and cost-effective
meat processing and distribution, while maintaining the Company's control and
supervision of purchasing and aging. The Company's management negotiates
directly with suppliers for most other food and beverage products to ensure
uniform quality and adequate supplies and to obtain competitive prices. The
Company purchases its meat, food and other supplies from a sufficient number of
suppliers such that the loss of any one supplier would not have a material
effect on the Company. In mid-1996, the Company completed a transition from a
distribution system utilizing various regional distributors to a consolidated
system under which a single distributor services all LongHorn Steakhouse
restaurants. In early 1997, this system was commenced for all Bugaboo Creek
Steak House restaurants. There are no plans to expand this to The Capital Grille
restaurants, which are more geographically dispersed and require a wider
selection of raw products than the LongHorn Steakhouse restaurants and Bugaboo
Creek Steak House restaurants.
Seasonality. Although individual restaurants have seasonal patterns of
performance that depend on local factors, aggregate sales by the Company's
restaurants have not displayed pronounced seasonality, other than lower sales
during the "back-to-school" season, which falls in the Company's third fiscal
quarter, and higher sales during the Christmas holiday season, which falls in
the Company's fourth fiscal quarter. Extreme weather, especially during the
winter months, may adversely affect sales.
OWNERSHIP STRUCTURES
The Company's interests in its restaurants are divided into three
categories: (1) Company-owned restaurants, (2) joint venture restaurants and (3)
franchised restaurants.
Company-owned restaurants. 70 LongHorn Steakhouse restaurants, all
Bugaboo Creek Steak House restaurants, all The Capital Grille restaurants,
Hemenway's and The Old Grist Mill Tavern are owned and operated by the Company.
The general manager of each of these restaurants is employed and compensated by
the Company. See "Restaurant Operations -- Management and Employees" above.
Joint Venture Restaurants. The Company is a partner in various joint
venture partnerships and limited partnerships that in the aggregate operate 36
LongHorn Steakhouse restaurants as of March 8, 1999. The joint ventures are
either 50/50 joint ventures for the ownership of a single restaurant managed by
the Company or are formed with the goal of developing multiple restaurants in a
particular market with an experienced restaurant operator who owns from 10% to
32% of the joint venture. All limited partnerships are for the operation of a
single restaurant with the restaurant manager as a 10% limited partner and the
Company or a joint venture as the general partner. The joint ventures generally
contemplate that the general manager of each restaurant developed or operated by
the joint venture will purchase a 10% interest in the cash flow of the
restaurant managed, thereby ratably diluting the interest of the Company and its
joint venture partner.
The joint ventures not managed by the Company generally pay fees to the
managing partner at a rate of $1,500 to $2,500 per restaurant per month and pay
fees to the Company at a rate of $1,500 to $4,000 per restaurant per month. The
joint ventures and limited partnerships that are managed by the Company pay fees
to the Company at the rate of $3,000 to $4,500 per restaurant per month. Those
joint ventures that operate under franchise agreements pay royalties at the rate
of 1.5% of gross sales.
The Company either controls its joint ventures' use of its service
marks or the joint ventures operate under franchise agreements with the Company.
Franchise agreements for joint ventures are modified by an addendum that
provides that no franchise fee is payable and reduces the royalty rate to 1.5%
of gross sales. In the event that the Company's partner in the joint venture or
any other entity should acquire the joint venture's restaurants, this addendum
to the franchise agreement would terminate and the operation of the restaurants
would continue under the terms of the franchise agreement. Two of the joint
ventures have area development agreements with the Company for the development
of additional restaurants. Two other joint ventures do not have specific
development rights although the Company has agreed, during a specified time, not
to establish restaurants in their market areas except through the joint venture,
so long as a specified development schedule is met.
The joint ventures are terminable by either joint venture partner upon
default by the other partner. Certain of the joint ventures give the Company the
option under certain circumstances to acquire the interest of the 10% joint
venture partner for cash or shares of the Company's common stock. Two of the
joint ventures obligate the Company to purchase the interest of its 10% joint
venture partner upon the death of the principal of the joint venture partner and
include a provision permitting either partner to set a price at which the other
partner must either buy the interest of the terminating partner or sell its
interest to the terminating partner.
- 11 -
<PAGE> 12
Franchised Restaurants. As of March 8, 1999, 30 of the 36 restaurants
operated by the Company's joint ventures are operated under franchise
agreements. In addition, the Company has one unaffiliated franchisee with an
area development agreement with the right to operate franchised LongHorn
Steakhouse restaurants in Puerto Rico. In 1998, this franchisee opened one
LongHorn Steakhouse restaurant in Puerto Rico and the Company purchased one
franchised restaurant in Tampa, Florida from another unaffiliated franchisee.
Franchise Agreements. The franchise agreements are granted with respect
to individual restaurants and are either for a term of ten years with a right of
the franchisee to acquire a successor franchise for an additional ten-year
period if specified conditions are met or for a period of twenty years. The
franchise agreements provide for a franchise fee of $60,000, which amount is
reduced for subsequent franchises acquired by the same franchisee. The franchise
fees are payable in full upon execution. The franchise agreements provide for
royalties with respect to each restaurant of 4% of gross sales and require the
franchisee to expend on local advertising during each calendar month an amount
equal to at least 1.5% of gross sales and, if the Company establishes an
advertising fund, to contribute an additional amount of 0.5% of gross sales to
such fund or up to 4.5% of the restaurant's gross sales during the conduct of a
market, regional or national advertising campaign.
Each franchisee has the right to terminate its franchise agreement upon
default by the Company. The Company also retains the right to terminate a
franchise for a variety of reasons, including the franchisee's failure to pay
amounts due under the agreement or to otherwise comply with the terms of the
franchise agreement.
General. An important element of the Company's franchise program is the
training the Company provides for each franchisee. With respect to each new
franchisee, the Company provides the same training program provided to the
Company's management and employees. In addition to this initial training, the
Company provides supervision at the opening of the franchisee's first
restaurant, beginning one week prior to opening, and routine supervision
thereafter.
Franchisees are required to operate their restaurants in compliance
with the Company's methods, standards and specifications regarding such matters
as menu items, ingredients, materials, supplies, services, fixtures,
furnishings, decor and signs. The franchisee has full discretion to determine
the prices to be charged to all customers. In addition, all franchisees are
required to purchase food, ingredients, supplies and materials that meet
standards established by the Company or which are provided by suppliers approved
by the Company. Although not required to do so by the franchise agreements, the
Company's franchisees currently purchase beef from the Company's suppliers. The
Company does not receive fees or profits on sales by third-party suppliers to
franchisees.
The franchise laws of many jurisdictions limit the ability of a
franchisor to terminate or refuse to renew a franchise.
Area Development Agreements. The Company has also entered into area
development agreements with developers, including joint ventures in which the
Company is a partner. Under these agreements, the developer has exclusive rights
to establish and operate LongHorn Steakhouse restaurants in a defined territory
generally for a period of five years, conditioned upon meeting a development
schedule provided in the area development agreement. The Company may enter into
similar agreements with respect to Bugaboo Creek Steak House restaurants. Each
area development agreement provides the developer with the option to renew the
agreement, usually for an additional five-year period, predicated upon the
establishment of new performance goals and the Company's determination that the
developer has the capability to comply with the new performance goals.
Development fees paid upon execution of area development agreements reflect the
size of the territory involved and are non-refundable, but are applied to the
payment of franchise fees for restaurants opened pursuant to franchises granted
to the developer.
SERVICE MARKS
The Company has registered LONGHORN STEAKS and design, LONGHORN
STEAKHOUSE and design, BUGABOO CREEK STEAK HOUSE and design and THE CAPITAL
GRILLE and design as service marks with the United States Patent and Trademark
Office. The Company has additional registered marks used in connection with the
operations of its various restaurants. The Company regards its service marks as
having significant value and as being important factors in the marketing of its
restaurants. The Company is aware of names and marks similar to the service
marks of the Company used by other persons in certain geographic areas; however,
the Company believes such uses will not adversely affect the Company. It is the
Company's policy to pursue registration of its marks whenever possible and to
oppose vigorously any infringement of its marks.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
competitors, both steakhouses and non-steakhouses, with substantially greater
financial and other
- 12 -
<PAGE> 13
resources than the Company. Such competitors include a large number of national
and regional restaurant chains. Some of the Company's competitors have been in
existence for a substantially longer period than the Company and may be better
established in the markets where the Company's restaurants are or may be
located. The restaurant business is often affected by changes in consumer
tastes, national, regional or local economic conditions, demographic trends,
traffic patterns, and the type, number and location of competing restaurants. In
addition, factors such as inflation, increased food, labor and benefits costs
and the lack of experienced management and hourly employees may adversely affect
the restaurant industry in general and the Company's restaurants in particular.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws
affecting its business. Each of the Company's restaurants is subject to
licensing and regulation by a number of governmental authorities, which may
include alcoholic beverage control, health, safety, sanitation, building and
fire agencies in the state or municipality in which the restaurant is located.
In addition, most municipalities in which the Company's restaurants are located
require local business licenses. Difficulties in obtaining or failures to obtain
the required licenses or approvals could delay or prevent the development of a
new restaurant in a particular area. The Company is also subject to federal and
state environmental regulations, but they have not had a material effect on the
Company's operations.
During 1998, approximately 15.9% of the Company's restaurant sales are
attributable to the sale of alcoholic beverages. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time. The Company has
not experienced and does not presently anticipate experiencing any delays or
other problems in obtaining or renewing licenses or permits to sell alcoholic
beverages; however, the failure of a restaurant to obtain or retain liquor or
food service licenses would adversely affect the restaurant's operations.
The Company and its franchisees are subject in each state in which they
operate restaurants to "dram shop" statutes or case law interpretations, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance.
The Company is also subject to federal and state laws regulating the
offer and sale of franchises administered by the Federal Trade Commission and
various similar state agencies. Such laws impose registration and disclosure
requirements on franchisors in the offer and sale of franchises. These laws
often apply substantive standards to the relationship between franchisor and
franchisee and limit the ability of a franchisor to terminate or refuse to renew
a franchise.
The Federal Americans With Disabilities Act prohibits discrimination on
the basis of disability in public accommodations and employment. The Company
designs its restaurants to be accessible to the disabled and believes that it is
in substantial compliance with all current applicable regulations relating to
restaurant accommodations for the disabled.
The Company's restaurant operations are also subject to federal and
state laws governing such matters as wages, working conditions, citizenship
requirements, overtime and tip credits. Significant numbers of the Company's
food service and preparation personnel are paid at rates related to the federal
minimum wage and, accordingly, further increases in the minimum wage could
increase the Company's labor costs.
Various proposals for comprehensive health care reform have been or
could be submitted to Congress. To the extent that proposals are enacted which
require employers to pay for employees' health insurance or other coverage, such
legislation may have a significant effect on the Company.
EMPLOYEES
As of March 8, 1999, the Company employed approximately 8,350 persons,
126 of whom were corporate personnel, 617 of whom were restaurant management
personnel and the remainder of whom were hourly personnel. Of the 126 corporate
employees, 53 are in management positions and 73 are administrative or office
employees. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its employee relations to be good.
- 13 -
<PAGE> 14
ITEM 2. PROPERTIES
As of March 8, 1999, all but 24 of the Company's restaurants were
located in leased space. The Company's Tucker, Georgia restaurant is leased from
a partnership that is 40% owned by three directors of the Company who were
original shareholders of the Company.
Initial lease expirations typically range from five to ten years, with
the majority of these leases providing for an option to renew for at least one
additional term of three to 15 years. All of the Company's leases provide for a
minimum annual rent, and approximately half of the leases call for additional
rent based on sales volume (generally 2.0% to 8.0%) at the particular location
over specified minimum levels. Generally the leases are net leases which require
the Company to pay the costs of insurance, taxes and a portion of lessors'
operating costs.
The leases on the operating Company-owned restaurants will expire over
the period from 2002 through 2029 (assuming exercise of all renewal options).
The Company owns a 10,000 square feet office building and leases a
15,000 square feet office building in which its corporate offices, LongHorn
Steakhouse restaurant operations and The Capital Grille restaurant operations
are headquartered. Both office buildings are located in Atlanta, Georgia. In
addition, the Company leases approximately 1,500 square feet of space in East
Providence, Rhode Island to house staff to support the operation of Bugaboo
Creek Steak House restaurants.
ITEM 3. LEGAL PROCEEDINGS
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 versus Moo
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 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
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<PAGE> 15
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. The arbitrator will accept proposed findings of fact and conclusions
of law from both parties and render his decision regarding liability following
those submissions.
On July 7, 1998, the Company filed a complaint in the Superior Court of
Fulton County, Georgia in the matter styled RARE Hospitality International, Inc.
v. Moo Management, Inc., Robert C. Rosenblit, David C. Tuttleman, Mark Greene
and RTL Joint Venture, C.A. File No. E-71219. In this action, the Company seeks
injunctive relief and damages resulting from the defendants', Rosenblit, Greene,
Tuttleman and Moo, enticing certain of the Company's top managers to discontinue
their employment with the Company and enticing others not to enter into or
continue business relationships with the Company.
On September 11, 1998, Moo filed an Answer and Counterclaim in the
Fulton County action, objecting to the jurisdiction and venue in the case,
denying the Company's claims and making essentially the same counterclaims as
contained in Moo's Answer and Counterclaim in the arbitration described above.
Also on September 11, 1998, Messrs. Rosenblit, Tuttleman and Green each filed an
Answer in the Fulton County action objecting to jurisdiction and venue and
denying the Company's claims.
The Fulton County action has been referred to mandatory, non-binding
arbitration and a hearing was held on March 19, 1999. Following this hearing the
arbitrators entered an award denying the Company's claim and denying the
defendants counterclaims, in each case without explanation. This procedure is
required by the Fulton County court, but either party can reject the arbitration
award and proceed to a trial of the matter.
The Company denies any liability with respect to the claims of Moo in
its counterclaims against the Company and intends to vigorously defend the
counterclaims. Management believes that the Company's position has merit and the
resolution of these matters will not have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of security holders during
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on the Nasdaq National Market
under the symbol "LOHO" from March 31, 1992 until January 10, 1997. The stock
now trades under the symbol "RARE". The table below sets forth the high and low
sales prices of the Company's common stock, as reported on the Nasdaq National
Market, during the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 27, 1998 HIGH LOW
- ----------------------------------- ----- ---
<S> <C> <C>
First Quarter ..................... $ 12 $ 8 5/8
Second Quarter .................... 13 7/8 10 7/8
Third Quarter ..................... 15 10 9/16
Fourth Quarter .................... 14 8 1/2
FISCAL YEAR ENDED DECEMBER 28, 1997
- -----------------------------------
First Quarter ..................... $19 1/2 $12 3/4
Second Quarter .................... 16 3/4 10 3/4
Third Quarter ..................... 14 1/8 9 1/2
Fourth Quarter .................... 11 1/8 8 5/8
</TABLE>
- 15 -
<PAGE> 16
As of March 8, 1999, there were approximately 365 holders of record of
the Company's common stock.
Since the Company's initial public offering in 1992, the Company has
not declared or paid any cash dividends or distributions on its capital stock.
The Company does not intend to pay any cash dividends on its common stock in the
foreseeable future, as the current policy of the Company's Board of Directors is
to retain all earnings to support operations and finance expansion. The
Company's existing revolving line of credit restricts the payment of cash
dividends without prior lender approval. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Future declaration and payment of dividends, if any, will be
determined in light of then current conditions, including the Company's
earnings, operations, capital requirements, financial condition, restrictions in
financing arrangements and other factors deemed relevant by the Board of
Directors.
While the Company has not declared or paid any cash dividends on its
capital stock since its initial public offering, due to the accounting for a
subsequent acquisition as a pooling of interests the Company's consolidated
financial statements reflect distributions made by certain entities acquired by
the Company prior to such acquisition.
In April 1998, the Company issued 45,098 shares of its common stock
(the "DMC Shares") and paid $175,000 to D.C. George Management Corporation
("DMC") in exchange for DMC's interest in a management agreement with Carolina
Steakhouse Ventures, a joint venture between the Company and two other entities
for the operation of LongHorn Steakhouse restaurants. The DMC Shares are subject
to the terms of a Restricted Stock Agreement between the Company and DMC, and
will vest periodically over four years conditioned upon the continued employment
of D.C. George by the Company. Exemption from registration of the DMC Shares was
claimed under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended,
and Rules 505 and 506 promulgated under the Securities Act of 1933, as amended.
In December 1997, the Company issued 36,183 shares of its common stock
(the "Pangulf Shares") and issued a $361,832 note to Pangulf Ventures, Inc.
("Pangulf") in exchange for Pangulf's interest in Eagle Ventures, a joint
venture partnership between Pangulf and the Company. Exemption from registration
of the Pangulf Shares was claimed under Sections 4(2) and 4(6) of the Securities
Act of 1933 as amended, and Rules 505 and 506 promulgated under the Securities
Act of 1933, as amended.
- 16 -
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
Following is selected consolidated financial data as of and for each of
the years in the five-year period ended December 27, 1998. The Consolidated
Financial Statements as of December 27, 1998 and December 28, 1997 and for each
of the years in the three-year period ended December 27, 1998 and the
independent auditors' report thereon are included in this Form 10-K. The data
should be read in conjunction with the Consolidated Financial Statements of the
Company and related notes in this Form 10-K and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," also included in
this Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------------------------------
DEC 27, DEC. 28, DEC. 29, DEC. 31, DEC. 31,
1998 1997 1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales .......................... $319,084 $ 264,727 $ 212,894 $ 149,279 $ 111,025
Wholesale meat sales ...................... -- -- 2,547 6,495 3,389
Franchise revenues ........................ -- 27 308 606 615
-------- --------- --------- --------- ---------
Total revenues ...................... 319,084 264,754 215,749 156,380 115,029
Costs and expenses:
Cost of restaurant sales .................. 116,602 97,568 78,637 54,074 39,956
Cost of wholesale meat sales .............. -- -- 2,491 6,159 3,137
Operating expenses--restaurants ........... 142,730 119,480 94,587 67,629 50,924
Operating expenses--meat division ......... -- -- 234 766 702
Provision for asset impairments,
restaurant closings, and other charges .. 2,500 23,666 1,436 155 1,120
Merger and conversion expenses ............ -- -- 2,900 -- --
Depreciation and amortization--restaurants 17,636 15,218 12,191 7,171 5,025
General and administrative expenses ....... 22,470 23,590 13,732 11,082 10,131
-------- --------- --------- --------- ---------
Total costs and expenses ............ 301,938 279,522 206,208 147,036 110,995
-------- --------- --------- --------- ---------
Operating income (loss) ............. 17,146 (14,768) 9,541 9,344 4,034
Interest expense (income), net .............. 2,939 1,245 (79) (291) (794)
Provision for litigation settlement ......... -- -- 605 -- --
Minority interest ........................... 1,334 1,219 602 5 --
-------- --------- --------- --------- ---------
Earnings (loss) before income taxes . 12,873 (17,232) 8,413 9,630 4,828
Income tax expense (benefit) ................ 4,120 (5,000) 3,170 3,047 1,286
-------- --------- --------- --------- ---------
Net earnings (loss) ................. $ 8,753 $ (12,232) $ 5,243 $ 6,583 $ 3,542
======== ========= ========= ========= =========
Basic earnings (loss) per common share ...... $ 0.73 $ (1.04) $ 0.46 $ 0.67 $ 0.37
======== ========= ========= ========= =========
Weighted average common shares
outstanding (basic) ....................... 12,004 11,751 11,302 9,753 9,517
======== ========= ========= ========= =========
Diluted earnings (loss) per common share .... $ 0.72 $ (1.04) $ 0.45 $ 0.66 $ 0.37
======== ========= ========= ========= =========
Weighted average common shares
outstanding (diluted) ..................... 12,099 11,751 11,631 9,955 9,526
======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------------------------
DEC 27, DEC. 28, DEC. 29, DEC. 31, DEC. 31,
1998 1997 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ........................ $ 1,136 $ 1,359 $ 2,065 $ 561 $22,488
Total assets ........................... 220,352 195,486 151,594 107,735 81,951
Debt, net of current installments ...... 48,000 43,000 7,100 13,858 1,808
Obligations under capital leases, net of
current installments ................. 9,732 5,051 -- -- --
Minority interest ...................... 2,610 4,890 3,301 615 --
Total shareholders' equity ............. 120,618 111,980 121,384 78,133 70,289
</TABLE>
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On September 13, 1996, the Company completed the acquisition of Bugaboo
Creek Steak House, Inc., along with related restaurant and real estate
properties. The acquisition provided for the issuance of 2,939,062 shares of the
Company's common stock to the stockholders of Bugaboo Creek Steak House, Inc.
and 240,410 shares of the Company's common stock for the purchase of three other
related restaurants and certain related real estate. The exchange of shares was
accounted for as a pooling of interests, and accordingly, the accompanying
consolidated financial statements have been restated to include the accounts and
operations of Bugaboo Creek Steak House, Inc. and the related restaurant and
real estate properties that were acquired for all periods presented.
Effective July 1, 1996, the Company changed its fiscal year-end from
December 31 to a 52- or 53-week year ending on the last Sunday in December.
Interim reporting periods within 1996 contained three months for the first two
quarters. The third and fourth quarters of 1996 each contained 13 weeks. Fiscal
1998, which ended on December 27, 1998, and fiscal 1997, which ended on December
28, 1997, each contained 52 weeks. All general references to years relate to
fiscal years, unless otherwise noted.
The Company's revenues are derived primarily from restaurant sales from
Company-owned and joint venture restaurants. The Company also derives a small
percentage of its total revenue from franchise revenues from unaffiliated
franchised restaurants. Cost of restaurant sales consists of food and beverage
costs for Company-owned and joint venture restaurants. Restaurant operating
expenses consist of all other restaurant-level costs. These expenses include the
cost of labor, advertising, operating supplies, rent, and utilities.
Depreciation and amortization includes only the depreciation attributable to
restaurant-level capital expenditures and amortization primarily associated with
pre-opening expenditures.
General and administrative expenses include finance, accounting,
management information systems, and other administrative overhead related to
support functions for Company-owned, joint venture, and franchise restaurant
operations. Minority interest consists of the partners' share of earnings in
joint venture restaurants.
In April 1996, the Company discontinued the meat cutting and
distribution operations of its meat division, but retained the purchasing
function. As a result, the Company no longer generates wholesale meat sales to
franchises or unaffiliated businesses. Prior to April 1996, the LongHorn
Steakhouse restaurants were not charged distribution costs, which were absorbed
by the Company's meat division. Subsequent to April 1996 the LongHorn Steakhouse
restaurants absorb the full cost of purchased beef.
Beginning with 1998, the Company defines the comparable restaurant base
for 1998 to include those restaurants open for a full 18 months prior to the
beginning of each fiscal quarter. The Company defines the comparable restaurant
base for 1997 to include those restaurants open for a full 15 months prior to
the beginning of the fiscal year. Average weekly sales are defined as total
restaurant sales divided by restaurant weeks. A "restaurant week" is one week
during which a single restaurant is open, so that two restaurants open during
the same week constitutes two restaurant weeks.
The Company's revenues and expenses can be significantly affected by
the number and timing of the opening of additional restaurants. The timing of
restaurant openings also can affect the average sales and other period-to-period
comparisons.
- 18 -
<PAGE> 19
The following table sets forth the percentage relationship to total
revenues of the listed items included in the Company's consolidated statements
of operations, except as indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Revenues:
Restaurant Sales:
LongHorn Steakhouse ........................... 66.3% 64.3% 63.3%
The Capital Grille ............................ 16.0 14.9 9.4
Bugaboo Creek Steak House ..................... 15.7 16.9 20.4
Other restaurants ............................. 2.0 3.9 5.6
----- ----- -----
Total restaurant sales .................. 100.0 100.0 98.7
Wholesale meat sales ........................... -- -- 1.2
Franchise revenues ............................. -- -- 0.1
----- ----- -----
Total revenues .......................... 100.0 100.0 100.0
Costs and expenses:
Cost of restaurant sales(1) .................... 36.5 36.9 36.9
Cost of wholesale meat sales(1) ................ -- -- 97.8
Operating expenses--restaurants(1) ............. 44.7 45.1 44.4
Operating expenses--meat division .............. -- -- 0.1
Provision for asset impairments,
restaurant closings, and other charges ....... 0.8 8.9 0.7
Merger and conversion expenses ................. -- -- 1.3
Depreciation and amortization--restaurants(1) .. 5.5 5.7 5.7
General and administrative expenses ............ 7.0 8.9 6.4
----- ----- -----
Total costs and expenses ................ 94.6 105.5 95.6
----- ----- -----
Operating income (loss) ................. 5.4 (5.5) 4.4
Interest expense (income), net .................. 0.9 0.5 (0.1)
Provision for settlement of shareholder suit .... -- -- 0.3
Minority interest ............................... 0.4 0.5 0.3
----- ----- -----
Earnings (loss) before income taxes ..... 4.0 (6.5) 3.9
Income tax expense (benefit) ................... 1.3 (1.9) 1.5
----- ----- -----
Net earnings (loss) ..................... 2.7% (4.6)% 2.4%
===== ===== =====
</TABLE>
- -----------
(1) Cost of restaurant sales, restaurant operating expenses, and
depreciation and amortization are expressed as a percentage of
restaurant sales, and cost of wholesale meat sales is expressed as a
percentage of wholesale meat sales.
RESULTS OF OPERATIONS
Year Ended December 27, 1998 Compared to Year Ended December 28, 1997
REVENUES
Total revenues increased 20.5% to $319.1 million for 1998 compared to $264.7
million for 1997.
LongHorn Steakhouse:
Sales in the LongHorn Steakhouse restaurants increased 24.1% to $211.4
million for 1998 compared to $170.3 million for 1997. The increase reflects a
16.4% increase in restaurant operating weeks in 1998 as compared to 1997,
resulting from an increase in the restaurant base from 96 LongHorn Steakhouse
restaurants at the end of 1997 to 104 restaurants at the end of 1998. Average
weekly sales for all LongHorn Steakhouse restaurants in 1998 were $41,638, a
6.7% increase over 1997. Sales for the comparable LongHorn Steakhouse
restaurants increased 5.0% in 1998 as compared to 1997. The increase in
comparable restaurant sales for 1998 at LongHorn Steakhouse was attributable
primarily to an increase to customer counts.
- 19 -
<PAGE> 20
The Capital Grille:
Sales in The Capital Grille restaurants increased 29.3% to $51.1
million for 1998 compared to $39.5 million for 1997. The increase reflects a
42.1% increase in restaurant operating weeks in 1998 as compared to 1997,
resulting from an increase in the restaurant base from 10 The Capital Grille
Restaurants at the end of 1997 to 11 restaurants at the end of 1998. Average
weekly sales for all The Capital Grille restaurants in 1998 were $89,329, a 9.0%
decrease from 1997. Sales for the comparable The Capital Grille restaurants
increased 6.1% in 1998 as compared to 1997. The increase in comparable
restaurant sales at The Capital Grille restaurants is primarily attributable to
an increase in customer counts.
Bugaboo Creek Steak House:
Sales in the Bugaboo Creek Steak House restaurants increased 12.2% to
$50.1 million for 1998 compared to $44.6 million for 1997. The increase reflects
a 9.1% increase in restaurant weeks in 1998 as compared to 1997, resulting from
an increase in the restaurant base from 16 Bugaboo Creek Steak House restaurants
at the end of 1997 to 17 restaurants at the end of 1998. Average weekly sales
for all Bugaboo Creek Steak House restaurants in 1998 were $60,788, a 2.8%
increase from 1997. Sales for the comparable Bugaboo Creek Steak House
restaurants decreased 2.5% in 1998 as compared to 1997. The decrease in
comparable restaurant sales at Bugaboo Creek Steak House restaurants is
primarily attributable to a decrease in customer counts.
Franchise Revenue:
During 1997, the Company acquired all of the LongHorn Steakhouse
restaurants that were then paying franchise revenues. In September 1998, a
franchise LongHorn Steakhouse restaurant opened in Puerto Rico; this franchisee
began paying franchise fees in January 1999. No franchise revenues were earned
during 1998.
COSTS AND EXPENSES
Cost of restaurant sales, as a percentage of restaurant sales,
decreased to 36.5% in 1998 from 36.9% in 1997. This decrease is due, in part, to
purchasing contracts negotiated during the year, which stabilized the cost of
restaurant sales as a percentage of restaurant sales.
Restaurant operating expenses decreased as a percentage of restaurant
sales in 1998 to 44.7% from 45.1% in 1997. The decrease in operating expenses as
a percentage of sales in 1998 was due to an increase in average unit sales
providing greater leverage of fixed and semi-fixed expenses, principally rent
and management labor.
The provision for asset impairments, restaurant closings, and other
charges of $2.5 million in 1998 was determined under Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" ("SFAS No. 121") by comparing
expected future cash flows to the carrying value of these assets. This charge
was primarily the result of a decision by management, in the fourth quarter, to
close one The Capital Grille restaurant partially offset by favorable
developments in estimated amounts accrued in 1997 for costs associated with
closed facilities.
General and administrative expenses decreased to $22.5 million in 1998
or 7.0% of total revenues, from $23.6 million in 1997, or 8.9% of total
revenues. The decrease as a percentage of total revenues was primarily due to
the $5 million in nonrecurring expenses recognized in 1997 as partially offset
by higher general and administrative expenses in 1998, primarily payroll
related, associated with building the infrastructure necessary to support the
Company's growth.
Interest expense increased to $2.9 million in 1998 compared to $1.2
million in 1997. The increase in interest expense is due to higher average
borrowings outstanding under the Company's revolving credit agreement as well as
additional expenses associated with obtaining the Company's new revolving credit
facility. The Company's weighted average interest rate on borrowings was
approximately 7.8% in 1998 as compared to 7.2% in 1997.
Minority interest increased to $1.3 million in 1998 from $1.2 million
in 1997. This reflects an increase in the number of joint venture restaurants
for most of 1998, partially offset by the purchase of joint venture partners'
partnership interests in 11 joint venture restaurants during the fourth quarter
of 1998.
Income tax expense in 1998 was 32.0% of earnings before income taxes.
The Company's 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 partially offset by state income taxes.
- 20 -
<PAGE> 21
Net income of $8.8 million in 1998, as compared to a net loss of $12.2
million in 1997, reflects the net effect of the items discussed above.
Year Ended December 28, 1997 Compared to Year Ended December 29, 1996
REVENUES
Total revenues increased 22.7% to $264.8 million for 1997 compared to
$215.7 million for 1996. Restaurant sales increased 24.3% to $264.7 million in
1997 compared to $212.9 million in 1996.
LongHorn Steakhouse:
Sales in the LongHorn Steakhouse restaurants increased 24.8% to $170.3
million for 1997 compared to $136.5 million for 1996. The increase reflects a
23.7% increase in restaurant operating weeks in 1997 as compared to 1996,
resulting primarily from the opening of 14 new LongHorn Steakhouse restaurants
and the acquisition of 3 additional LongHorn Steakhouse restaurants. Average
weekly sales for all LongHorn Steakhouse restaurants in 1997 were $39,035, a
0.5% increase over 1996. Sales for the 54 comparable LongHorn Steakhouse
restaurants increased 0.2% in 1997 as compared to 1996.
Bugaboo Creek Steak House:
Sales in the Bugaboo Creek Steak House restaurants increased 1.3% to
$44.6 million for 1997 compared to $44.1 million for 1996. The increase reflects
a 6.9% increase in restaurant operating weeks in 1997 as compared to 1996,
resulting from the opening of 3 new Bugaboo Creek Steak House restaurants.
Average weekly sales for all Bugaboo Creek Steak House restaurants in 1997 were
$59,114, a 5.2% decrease from 1996. Sales for the 10 comparable Bugaboo Creek
Steak House restaurants decreased 5.3% in 1997 as compared to 1996. The decrease
in comparable restaurants sales at the Bugaboo Creek Steak House restaurants is
primarily attributable to a decrease in customer counts.
The Capital Grille:
Sales in The Capital Grille restaurants increased 94.4% to $39.5
million for 1997 compared to $20.3 million for 1996. The increase reflects a
96.4% increase in restaurant operating weeks in 1997 as compared to 1996,
resulting primarily from new The Capital Grille restaurants. Average weekly
sales for all The Capital Grille restaurants in 1997 were $98,169, a 1.0%
decrease from 1996. Sales for the three comparable The Capital Grille
restaurants increased 8.7% in 1997 as compared to 1996. The increase in
comparable restaurants sales at The Capital Grille restaurants is primarily
attributable to an increase in customer counts.
Company-wide:
A contracted meat distribution system was implemented for the LongHorn
Steakhouse restaurants during the first half of 1996, thereby eliminating the
need for an internal meat production and distribution facility. Accordingly, the
Company's meat cutting and distribution activities ceased during 1996 and
wholesale meat sales were eliminated. Franchise revenues decreased to $27,000 in
1997 compared to $308,000 in 1996 due to i) the termination of the franchise
agreement for the Hoover, Alabama franchised LongHorn Steakhouse restaurant, ii)
the Company's acquisition of two franchised LongHorn Steakhouse restaurants in
the first quarter of 1997, iii) the closure of two franchised LongHorn
Steakhouse restaurants (one each, in the first and third quarters of 1996), and
iv) the formation of a joint venture to operate three previously franchised
LongHorn Steakhouse restaurants in the second quarter of 1996.
COSTS AND EXPENSES
Cost of restaurant sales, as a percentage of restaurant sales, remained
flat in 1997 and 1996 at 36.9%.
Due to the elimination of wholesale meat sales during 1996, there were
no wholesale meat costs for 1997, compared to 97.8% of wholesale meat sales in
1996.
Restaurant operating expenses increased as a percentage of restaurant
sales in 1997 to 45.1% from 44.4% in 1996. This increase was primarily
attributable to i) incremental labor, controllable expenses and start-up
expenses associated with the Company's new store opening program, as the Company
opened 25 restaurants in 1997; and ii) increased labor and controllable expenses
as the Company focused on better execution and higher standards in the LongHorn
Steakhouse concept.
- 21 -
<PAGE> 22
General and administrative expenses increased to $23.6 million in 1997,
or 8.9% of total revenues, from $13.7 million in 1996, or 6.4% of total
revenues. The increase was primarily due to $5.0 million in non-recurring
expenses including charges resulting from i) current asset reconciliation and
evaluation processes and ii) severance, hiring and other employment related
charges.
In the fourth quarter of 1997, management initiated an in-depth
analysis of the Company's growth strategies and assets available for
accomplishing future growth plans. This analysis prompted an evaluation of the
fair value of certain underperforming assets under SFAS No. 121, by comparing
expected future cash flows to the carrying value of these assets. The resulting
impairment, primarily related to restaurant closings and the write-down or
write-off of restaurant assets in the LongHorn division, along with the
write-off of other specific assets, aggregated $23.7 million.
Interest expense increased to $1.2 million in 1997 compared to $79,000
in net interest income in 1996. The increase in interest expense is due to
higher average borrowing outstanding under the Company's revolving credit
agreement.
Minority interest increased to $1.2 million in 1997 from $602,000 in
1996. This reflects an increase in the number of joint venture restaurants to 43
at December 28, 1997, from 35 at December 29, 1996, partially offset by the
purchase of joint venture partners' partnership interests in 10 joint venture
restaurants during the fourth quarter of 1997.
Income tax benefit for 1997 was $5 million due to the pre-tax loss
reported by the Company, resulting primarily from the aggregate $28.7 million in
nonrecurring charges recorded during the year. Income tax expense in 1996 was
37.7% of earnings before income taxes, reflecting $2.5 million of nondeductible
merger and conversion expense, offset primarily by the benefits of FICA tip
credits.
The net loss of $12.2 million in 1997, as compared to net earnings of
$5.2 million in 1996, reflects the net effect of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development of new
restaurants, selected acquisitions and the refurbishment of existing
restaurants. Principal financing sources in 1998 consisted of cash flow from
operations ($35.1 million) and additional borrowings under the Company's
revolving credit facility ($5.0 million). The primary uses of funds consisted of
costs associated with expansion, principally leasehold improvements, equipment,
land and buildings associated with the construction of new restaurants ($25.0
million) and the acquisition of joint venture partnership and franchise
interests ($6.6 million).
Since substantially all sales in the Company's restaurants are for
cash, and accounts payable are generally due in seven to 30 days, the Company
operates with little or negative working capital.
The increases in accounts receivable, inventory and accrued expenses
are principally due to the new restaurants which were opened during 1998 and the
result of higher average unit volumes experienced during 1998. Further increases
in current asset and liability accounts are expected as the Company continues
its restaurant development program.
On August 26, 1998, the Company amended and restated its revolving
credit facility to increase the aggregate commitment from $60 million to $100
million with an initial term of three years. The terms of the revolving credit
facility, as amended, require the Company to pay interest on outstanding
borrowings 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, and pay a commitment fee of 0.3% to 0.5% per year on any
unused portion of the facility. As of December 27, 1998, interest on the
revolving credit facility accrues at LIBOR plus 1.625% or the prime rate plus
0.375%. As of December 27, 1998, the Company was required to pay a commitment
fee of 0.35% per year on any unused portion of the facility. The revolving
credit facility contains various convenants and restrictions which, among other
things, require the maintenance of stipulated leverage and fixed charge coverage
ratios and minimum consolidated net worth, as defined, and also limit additional
indebtedness in excess of specified amounts. The Company is currently in
compliance with such covenants.
In August 1998, the Company entered into an interest rate swap
agreement with a commercial bank, which effectively fixes the interest rate at
7.515% on $40.0 million of the Company's borrowings through August 1999,
decreasing to $35.0 million through February 2000 and 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.
- 22 -
<PAGE> 23
On December 27, 1998, $48.0 million was outstanding and $52.0 million
was available under the Company's revolving credit facility at a weighted
average interest rate equal to 6.836%. Giving effect to the interest rate swap
agreement, the weighted average interest rate on borrowings under the revolving
credit facility was 7.421%.
The Company currently plans to open 12 to 14 Company-owned and joint
venture LongHorn Steakhouse restaurants, two or three Bugaboo Creek Steak House
restaurants and one The Capital Grille restaurant in 1999. The Company estimates
that its capital expenditures (without consideration of contributions from joint
venture partners) will be approximately $44 to $48 million in 1999. The capital
expenditure estimate for 1999 includes the estimated cost of developing 15 to 18
new restaurants, ongoing refurbishment in existing restaurants, a planned
expansion of the corporate offices in Atlanta, costs associated with obtaining
real estate for year 2000 planned openings, and continued investment in improved
management information systems. The Company expects that available borrowings
under the Company's revolving credit facility, together with cash on hand and
cash provided by operating activities, will provide sufficient funds to finance
its expansion plans through the year 2000.
The preceding discussion of liquidity and capital resources contains
certain forward-looking statements. Forward-looking statements involve a number
of risks and uncertainties, and in addition to the factors discussed elsewhere
in this Form 10-K, among the other factors that could cause actual results to
differ materially are the following: failure of facts to conform to necessary
management estimates and assumptions; the Company's ability to identify and
secure suitable locations on acceptable terms, open new restaurants in a timely
manner, hire and train additional restaurant personnel and integrate new
restaurants into its operations; the continued implementation of the Company's
business discipline over a large restaurant base; risks associated with the Year
2000 issue, including Year 2000 problems that may arise on the part of third
parties which may affect the Company's operations; the economic conditions in
the new markets into which the Company expands and possible uncertainties in the
customer base in these areas; changes in customer dining patterns; competitive
pressures from other national and regional restaurant chains; business
conditions, such as inflation or a recession, and growth in the restaurant
industry and the general economy; the risks set forth in Exhibit 99(a) to this
Form 10-K, which are hereby incorporated by reference and other risks identified
from time to time in the Company's SEC reports, registration statements and
public announcements. See the description of forward-looking statements found in
"Forward Looking Statements."
EFFECT OF INFLATION
Management believes that inflation has not had a material effect on
earnings during the past several years. Inflationary increases in the cost of
labor, food and other operating costs could adversely affect the Company's
restaurant operating margins. In the past, however, the Company generally has
been able to modify its operations and increase menu prices to offset increases
in its operating costs.
Federal law increased the hourly minimum wage to $5.15 on September 1,
1997. The legislation, however, froze the wages of tipped employees at $2.13 per
hour if the difference is earned in tip income. Although the Company experienced
a slight increase in hourly labor costs during 1997 and 1998, the effect of the
increase in minimum wage was significantly diluted due to the fact that the
majority of the Company's hourly employees are tipped and the Company's
non-tipped employees have historically earned wages greater than the federal
minimum. As such, the Company's increases in hourly labor cost were not
proportionate to the increases in minimum wage rates.
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
detailed plans have been developed to address any remediations required before
the end of 1999. The Company is in the process of testing its IT Systems to
determine Year 2000 compliance. Management anticipates that such testing will be
complete by September 30, 1999. In addition, the Company is in the process of
assessing its non-IT systems that utilize embedded technology such as
microcontrollers and reviewing them for Year 2000 compliance. Assessment of the
Company's non-IT Systems is scheduled for completion by September 30, 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
- 23 -
<PAGE> 24
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 is assessing and attempting 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 all
of its Material Providers to provide information regarding their state of Year
2000 readiness. The process of following up with Material Providers who have not
yet responded and evaluating all responses is expected to be completed by
September 30, 1999. Although the communications received by the Company from its
Material Providers, to date, have not disclosed any material Year 2000 issues,
there is no assurance that these Material Providers will be Year 2000 ready on a
timely basis. 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 is developing contingency plans
which will need to be implemented in the event of failures in the Company's IT
Systems or non-IT systems. The remainder of the contingency plans are expected
to be completed by September 30, 1999, 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
contingency plans, including the compensation of internal employees working on
Year 2000 projects, is expected to cost approximately $1,025,000 (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 $925,000 is expected to be
incurred in 1999 (approximately $800,000 of which will be capitalized). 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 present in its own IT Systems and non-IT systems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133, which is effective for 2000,
requires all derivatives to be recorded on the balance sheet at fair value and
establishes accounting treatment for certain hedge transactions. The Company is
analyzing the implementation requirements and currently does not anticipate
there will be a material impact on the results of operations or financial
position after the adoption SFAS No. 133.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131, which is effective for 1998,
significantly modifies disclosures associated with segments of an entity. Due to
the similar economic characteristics as well as a single type of product,
production process, distribution system and type of customer, the Company
reports the operations of its different concepts on an aggregated basis and does
not separately report segment information as provided for by SFAS No. 131.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 identifies the
characteristics of internal-use software and specifies that once the preliminary
project stage is complete, certain external direct costs, certain direct
internal payroll and payroll-related costs and interest costs incurred during
the development of computer software for internal use should be capitalized and
amortized. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998, with earlier application encouraged, and must
be applied to internal-use computer software costs incurred in those fiscal
years for all projects, including those projects in progress upon initial
application of this SOP. The Company currently expenses all such costs as
incurred. Management has not yet quantified the dollar impact of adopting SOP
98-1; however, when implemented in 1999, it will result in the capitalization of
costs which would have been previously expensed.
As is currently the practice of many casual dining and upscale
restaurant entities, through the end of 1998, the Company deferred its
restaurant pre-opening costs and amortized them over the twelve-month period
following the opening of each respective restaurant. The Company also deferred
organization costs and amortizes them over a five-year period through the end of
1998.
- 24 -
<PAGE> 25
Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" was issued in April 1998. SOP 98-5 requires entities to expense as
incurred all start-up and pre-opening costs that are not otherwise capitalized
as long-lived assets. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, although earlier adoption is encouraged. Restatement of
previously issued financial statements is not permitted by SOP 98-5, and
entities are not required to report the pro forma effects of the retroactive
application of the new accounting standard. The Company's adoption of the
expense-as-incurred accounting principle required by SOP 98-5 will involve the
recognition of the cumulative effect of the change in accounting principle
required by SOP 98-5 as a one-time charge against earnings, net of any related
income tax effect, retroactive to the beginning of the fiscal year of adoption.
The Company will adopt SOP 98-5 in the first quarter of 1999. The adoption of
this change in accounting method is expected to result in a one-time charge of
$2.3 million, less applicable income taxes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
As of December 27, 1998, $48.0 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.
In August 1998, the Company entered into an interest rate swap
agreement with a commercial bank, which effectively fixes the interest rate at
7.515% on $40.0 million of the Company's borrowings through August 1999,
decreasing to $35.0 million through February 2000 and 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.
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 (of which only $8.0
million was outstanding at December 27, 1998) in the future, the Company does
not consider its current exposure to changes in such rates to be material, and
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 December 27, 1998, the Company had approximately $8.5
million invested in high-grade overnight repurchase agreements.
- 25 -
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996
WITH INDEPENDENT AUDITORS' REPORT THEREON
- 26 -
<PAGE> 27
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report ...................... 28
Consolidated Balance Sheets ....................... 29
Consolidated Statements of Operations ............. 30
Consolidated Statements of Shareholders' Equity and
Comprehensive Income .......................... 31
Consolidated Statements of Cash Flows ............. 32
Notes to Consolidated Financial Statements ........ 33
</TABLE>
- 27 -
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
RARE Hospitality International, Inc.:
We have audited the accompanying consolidated balance sheets of RARE
Hospitality International, Inc. and subsidiaries (the "Company") as of December
27, 1998 and December 28, 1997, and the related consolidated statements of
operations, shareholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 27, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RARE
Hospitality International, Inc. and subsidiaries as of December 27, 1998 and
December 28, 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 27, 1998 in conformity
with generally accepted accounting principles.
KPMG LLP
Atlanta, Georgia
February 11, 1999
- 28 -
<PAGE> 29
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1998 AND DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 12,060 $ 1,752
Marketable debt securities ........................ -- 609
Accounts receivable ............................... 3,443 2,054
Inventories ....................................... 9,609 9,152
Prepaid expenses .................................. 789 1,373
Pre opening costs, net of accumulated amortization 2,102 3,385
Refundable income taxes ........................... 2,700 4,452
Deferred income taxes (note 7) .................... 6,932 6,712
--------- --------
Total current assets .......................... 37,635 29,489
Property and equipment, less accumulated
depreciation and amortization (notes 4 and 9) ... 167,810 155,758
Goodwill, less accumulated amortization ........... 10,045 5,304
Deferred income taxes (note 7) .................... 1,490 2,579
Other ............................................. 3,372 2,356
--------- --------
Total assets .................................. $ 220,352 $195,486
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 12,423 $ 12,739
Accrued expenses (note 5) ......................... 24,076 14,873
Current installments of obligations under
capital leases (note 9) ......................... -- 518
--------- --------
Total current liabilities ................. 36,499 28,130
Debt, net of current installments (note 6) .......... 48,000 43,000
Deferred income taxes (note 7) ...................... 2,893 2,435
Obligations under capital leases, net of current
installments (note 9) ............................. 9,732 5,051
--------- --------
Total liabilities ............................. 97,124 78,616
Minority interest .................................... 2,610 4,890
Shareholders' equity (notes 2, 6, 11, and 12):
Preferred stock, no par value. Authorized
10,000 shares, none issued ..................... -- --
Common stock, no par value. Authorized 25,000
shares; issued 12,077 shares and 11,979
shares at December 27, 1998 and
December 28, 1997, respectively ................. 105,092 103,981
Unearned compensation - restricted stock ........... (478) --
Retained earnings .................................. 16,752 7,999
Treasury shares at cost; 60 shares at
December 27, 1998 .............................. (748) --
--------- --------
Total shareholders' equity .................... 120,618 111,980
Commitments and contingencies
(notes 6, 8, 9, and 13) .......................... -- --
--------- --------
Total liabilities and shareholders' equity $ 220,352 $195,486
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
- 29 -
<PAGE> 30
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Restaurant sales:
LongHorn Steakhouse ..................... $211,440 $ 170,343 $ 136,547
Bugaboo Creek Steak House ............... 50,090 44,631 44,060
The Capital Grille ...................... 51,096 39,520 20,329
Other restaurants ....................... 6,458 10,233 11,958
-------- --------- ---------
Total restaurant sales .............. 319,084 264,727 212,894
Wholesale meat sales .................... -- -- 2,547
Franchise revenues ...................... -- 27 308
-------- --------- ---------
Total revenues ...................... 319,084 264,754 215,749
-------- --------- ---------
Costs and expenses:
Cost of restaurant sales .................. 116,602 97,568 78,637
Cost of wholesale meat sales .............. -- -- 2,491
Operating expenses--restaurants ........... 142,730 119,480 94,587
Operating expenses--meat division ......... -- -- 234
Provision for asset impairments, restaurant
closings, and other charges (note 3) .... 2,500 23,666 1,436
Merger and conversion expenses (note 3) ... -- -- 2,900
Depreciation and amortization--restaurants. 17,636 15,218 12,191
General and administrative expenses ....... 22,470 23,590 13,732
-------- --------- ---------
Total costs and expenses ............ 301,938 279,522 206,208
-------- --------- ---------
Operating income (loss) ............. 17,146 (14,768) 9,541
Interest expense (income), net .............. 2,939 1,245 (79)
Provision for settlement of shareholder
suit (note 13) .......................... -- -- 605
Minority interest (note 2) .................. 1,334 1,219 602
-------- --------- ---------
Earnings (loss) before income taxes . 12,873 (17,232) 8,413
Income tax expense (benefit) (note 7) ....... 4,120 (5,000) 3,170
-------- --------- ---------
Net earnings (loss) ................. $ 8,753 $ (12,232) $ 5,243
======== ========= =========
Basic earnings (loss) per common share ...... $ 0.73 $ (1.04) $ 0.46
======== ========= =========
Weighted average common shares
outstanding (basic) ..................... 12,004 11,751 11,302
======== ========= =========
Diluted earnings (loss) per common share .... $ 0.72 $ (1.04) $ 0.45
======== ========= =========
Weighted average common shares
outstanding (diluted) ................... 12,099 11,751 11,631
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 30 -
<PAGE> 31
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
RESTRICTED RETAINED
SHARES DOLLARS STOCK EARNINGS
------ ------- ----- --------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 .......................... 9,711 $ 62,780 $ -- $ 15,349
Net earnings ........................................ -- -- -- 5,243
Issuance of shares pursuant to public offering ...... 1,875 37,638 -- --
Exercise of stock options ........................... 67 681 -- --
Distributions made by acquired companies ............ -- -- -- (361)
Unrealized gain on marketable debt securities ....... -- -- -- --
------ -------- ----- --------
BALANCE, DECEMBER 29, 1996 .......................... 11,653 101,099 -- 20,231
Net loss ............................................ -- -- -- (12,232)
Exercise of stock options ........................... 290 2,543 -- --
Issuance of stock in connection with purchase
of minority interest .............................. 36 339 -- --
Unrealized loss on marketable debt securities ....... -- -- -- --
------ -------- ----- --------
BALANCE, DECEMBER 28, 1997 .......................... 11,979 103,981 -- 7,999
Net earnings ........................................ -- -- -- 8,753
Exercise of stock options ........................... 53 536 -- --
Issuance of shares pursuant to restricted stock award 45 575 (575) --
Amortization of restricted stock .................... -- -- 97 --
Purchase of common stock ............................ -- -- -- --
------ -------- ----- --------
BALANCE, DECEMBER 27, 1998 .......................... 12,077 $105,092 $(478) $ 16,752
====== ======== ===== ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK INCOME(1) EQUITY
----- --------- ------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 .......................... $ -- $ 4 $ 78,133
Net earnings ........................................ -- -- 5,243
Issuance of shares pursuant to public offering ...... -- -- 37,638
Exercise of stock options ........................... -- -- 681
Distributions made by acquired companies ............ -- -- (361)
Unrealized gain on marketable debt securities ....... -- 50 50
----- ---- ---------
BALANCE, DECEMBER 29, 1996 .......................... -- 54 121,384
Net loss ............................................ -- -- (12,232)
Exercise of stock options ........................... -- -- 2,543
Issuance of stock in connection with purchase
of minority interest .............................. -- -- 339
Unrealized loss on marketable debt securities ....... -- (54) (54)
----- ---- ---------
BALANCE, DECEMBER 28, 1997 .......................... -- -- 111,980
Net earnings ........................................ -- -- 8,753
Exercise of stock options ........................... -- -- 536
Issuance of shares pursuant to restricted stock award -- -- --
Amortization of restricted stock .................... -- -- 97
Purchase of common stock ............................ (748) -- (748)
----- ---- ---------
BALANCE, DECEMBER 27, 1998 .......................... $(748) $ -- $ 120,618
===== ==== =========
</TABLE>
(1) Comprehensive income (loss) for fiscal years 1998, 1997 and 1996 was
$8,753, ($12,286) and $5,293, respectively.
See accompanying notes to consolidated financial statements.
- 31 -
<PAGE> 32
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, DECEMBER 29,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ............................................ $ 8,753 $(12,232) $ 5,243
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................ 18,733 16,418 12,856
Non-cash portion of provision for asset impairments,
restaurant closings and other charges ....................... 2,500 22,367 1,436
Provision for litigation settlement .......................... -- -- 605
Minority interest ............................................ 1,334 1,219 602
Preopening costs ............................................. (3,137) (5,208) (4,341)
Deferred tax (benefit) expense ............................... 1,327 (3,864) (743)
Changes in assets and liabilities:
Accounts receivable .......................................... (1,389) 468 (230)
Inventories .................................................. (443) (1,269) (1,746)
Prepaid expenses ............................................. 584 92 2
Other assets ................................................. (1,207) (22) (97)
Refundable income taxes ...................................... 1,752 (6,900) --
Accounts payable ............................................. (1,176) (126) 1,020
Accrued expenses ............................................. 7,482 1,222 752
-------- -------- --------
Net cash provided by operating activities ................. 35,113 12,165 15,359
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of marketable debt securities ............... 609 252 6
Purchase of property and equipment ............................. (24,955) (52,970) (45,524)
Purchase of joint venture and franchise interests .............. (6,602) (3,797) --
-------- -------- --------
Net cash used in investing activities ..................... (30,948) (56,515) (45,518)
-------- -------- --------
Cash flows from financing activities:
Proceeds from (repayments of) borrowings on lines of credit, net 5,000 35,900 (5,950)
Principal payments on long-term debt ........................... -- (31) (1,833)
Proceeds from issuance of shares pursuant to public offering ... -- -- 37,638
Proceeds from minority partner contributions ................... 1,772 2,660 1,796
Distributions to minority partners ............................. (3,283) (2,928) (1,634)
Increase in bank overdraft included in accounts payable
and accrued liabilities ................................... 2,866 1,480 3,873
Distributions made by acquired companies ....................... -- -- (361)
Purchase of common stock for treasury .......................... (748) -- --
Proceeds from exercise of stock options ........................ 536 2, 543 681
-------- -------- --------
Net cash provided by financing activities ................ 6,143 39,624 34,210
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ..... 10,308 (4,726) 4,051
Cash and cash equivalents at beginning of year .................. 1,752 6,478 2,427
-------- -------- --------
Cash and cash equivalents at end of year ........................ $ 12,060 $ 1,752 $ 6,478
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes ................................... $ 3,033 $ 9,624 $ 2,807
======== ======== ========
Cash paid for interest, net of interest capitalized .......... $ 3,063 $ 1,039 $ 109
======== ======== ========
Supplemental disclosure of non-cash financing and investing
activities:
Assets acquired under capital lease ........................... $ 4,163 $ 5,600 $ --
Issuance of common stock in purchase of minority interest .... $ -- $ 339 $ --
</TABLE>
See accompanying notes to consolidated financial statements
- 32 -
<PAGE> 33
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
RARE Hospitality International, Inc., including its wholly owned
subsidiaries (the "Company"), is a multi-concept restaurant company operating
primarily in the Eastern United States. At December 27, 1998, the Company
operated the following restaurants:
<TABLE>
<CAPTION>
CONCEPT NUMBER IN OPERATION
------- -------------------
<S> <C>
LongHorn Steakhouse ....................... 104
Bugaboo Creek Steak House ................. 17
The Capital Grille ........................ 11
Other specialty concepts .................. 2
</TABLE>
The Company is a partner in several joint ventures and limited
partnerships organized for the purpose of operating LongHorn Steakhouse
restaurants. As of December 27, 1998, 36 of the Company's restaurants operate in
joint ventures and limited partnerships.
FISCAL YEAR
Effective July 1, 1996, the Company changed its fiscal year-end from
December 31 to a 52- or 53-week year ending on the last Sunday in December.
Fiscal 1998, which ended on December 27, 1998, and fiscal 1997, which ended on
December 28, 1997, each contained 52 weeks. All general references to years
relate to fiscal years, unless otherwise noted.
CASH EQUIVALENTS
The Company considers all highly liquid investments which have original
maturities of three months or less to be cash equivalents. Cash equivalents,
comprised of overnight repurchase agreements, totaled $8,464,000 at December 27,
1998. The carrying amount of these instruments approximates their fair market
values. All book overdraft balances have been reclassified as current
liabilities.
MARKETABLE DEBT SECURITIES
Marketable debt securities are classified as available-for-sale and are
reported at fair market value, with any unrealized gains or losses, net of
deferred income taxes, reflected as a separate component of shareholders'
equity.
INVENTORIES
Inventories, consisting principally of food and beverages, are stated
at the lower of cost or market. Cost is determined using the first-in, first-out
(FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property under capital
leases is stated at the present value of minimum lease payments. Leasehold
improvements and property held under capital leases are amortized on the
straight-line method over the shorter of the term of the lease, which may
include renewals, or the estimated useful life of the assets (generally 15 years
for non-ground lease sites and 25 years for ground lease sites). Depreciation on
property and equipment is calculated on the straight-line method over the
estimated useful lives of the related assets, which approximates 25 years for
buildings and land improvements, and seven years for equipment.
- 33 -
<PAGE> 34
BASIS OF PRESENTATION
The consolidated financial statements include the financial statements
of RARE Hospitality International, Inc., its wholly owned subsidiaries, and
joint ventures over which the Company exercises control. All significant
intercompany balances and transactions have been eliminated in consolidation.
PRE-OPENING AND ORGANIZATION COSTS
In April of 1998, Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities", was issued. SOP 98-5 requires entities to expense
as incurred all organization and pre-opening costs that are not otherwise
capitalizable as long-lived assets. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998. Restatement of previously issued financial
statements is not permitted by SOP 98-5, and entities are not required to report
the pro forma effects of the retroactive application of the new accounting
standard. The Company's adoption of the expense-as-incurred accounting principle
required by SOP 98-5 will involve the recognition of the cumulative effect of
the change in accounting principle required by SOP 98-5 as a one time charge
against earnings, net of any related income tax effect, retroactive to the
beginning year of adoption. The Company will adopt SOP 98-5 in the first quarter
of 1999. The adoption of this change in accounting method is expected to result
in a one time charge of approximately $2.3 million, less applicable income
taxes.
UNREDEEMED GIFT CERTIFICATES
The Company records a liability for outstanding gift certificates at
the time they are issued. Upon redemption, sales are recorded and the liability
is reduced by the amount of certificates redeemed.
GOODWILL
Goodwill, net of accumulated amortization of $755,000 and $466,000 at
December 27, 1998 and December 28, 1997, respectively, represents the excess of
purchase price over fair value of net assets acquired. Goodwill is amortized
using the straight-line method over the expected period to be benefited (from 13
to 25 years). The Company assesses the recoverability of goodwill by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved. In 1997, the Company's provision for asset impairments,
restaurant closings and other charges included a $4.2 million charge for the
write-off of goodwill recorded upon the acquisition of i) the Company's meat
company; ii) the assets of Lone Star Steaks, Inc.; and iii) the franchise rights
obtained from LongHorn Steaks of Alabama.
OTHER ASSETS
Other assets consist of organization costs, debt issuance costs,
trademarks, and liquor licenses. Trademarks and liquor licenses are amortized
on a straight-line basis over five years. Debt issuance costs are amortized on a
straight-line basis over the term of the debt. The first quarter 1999 adoption
of the change in accounting method prescribed by SOP 98-5 will result in a one
time charge of approximately $200,000, less applicable income taxes, related to
the write-off of organization costs.
RESTAURANT CLOSING COSTS
Upon the decision to close or relocate a restaurant, estimated
unrecoverable costs are charged to expense. Such costs include the write-down of
buildings and/or leasehold improvements, equipment, and furniture and fixtures,
to the estimated fair market value less costs of disposal, and a provision for
future lease obligations, less estimated subrental income. The Company provided
for the closure of one restaurant in 1998, seven restaurants in 1997, and two
restaurants in 1996.
RECOVERABILITY OF LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires the Company to review its long-lived assets related to each
restaurant periodically or whenever events or changes in circumstances indicate
that the carrying amount of a restaurant may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. Considerable
management judgment is required to estimate discounted cash flows and fair value
less costs to sell. Accordingly, actual results could vary significantly from
such estimates.
- 34 -
<PAGE> 35
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
In connection with the merger of the Company with Bugaboo Creek Steak
House, Inc. ("Bugaboo Creek") (see note 2), the Company acquired certain
enterprises affiliated with Bugaboo Creek in a transaction accounted for as a
pooling of interests. Prior to the merger, these affiliated entities were either
S Corporations or partnerships, and as such, their stockholders or partners, and
not the enterprises, were responsible for Federal and state income taxes.
STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB 25 and provide pro forma net earnings (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB 25 and provide the pro forma disclosure provisions of SFAS No. 123.
ADVERTISING EXPENSES
Advertising costs are expensed over the period covered by the related
promotion. Total advertising expense included in other operating expenses was
$8,432,000, $8,262,000, and $5,216,000 for the years ended December 27, 1998,
December 28, 1997 and December 29, 1996, respectively.
EARNINGS (LOSS) PER SHARE
Effective for the year ended December 28, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings Per Share". SFAS No. 128 requires dual disclosure of earnings
(loss) per share-basic and diluted. Basic earnings (loss) per share equals net
earnings (loss) divided by the weighted average number of common shares
outstanding and does not include the dilutive effects of stock options and
restricted stock. Diluted earnings (loss) per share is computed by dividing
adjusted net earnings (loss) by the weighted average number of common shares
outstanding after giving effect to dilutive stock options and restricted stock.
For purposes of computing the diluted loss per share for 1997, the potentially
dilutive impact of stock options is excluded since the effect would be
antidilutive.
The following table presents a reconciliation of weighted average
shares and earnings (loss) per share amounts (amounts in thousands, except per
share data):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average number of common shares used
in basic calculation ......................... 12,004 11,751 11,302
Dilutive effect of restricted stock award ...... 1 -- --
Dilutive effect of net shares issuable
pursuant to stock option plans ............... 94 -- 329
------- -------- -------
Weighted average number of common shares used
in diluted calculation ....................... 12,099 11,751 11,631
======= ======== =======
Net earnings (loss) for computation of basic and
diluted earnings per common share ............ $ 8,753 $(12,232) $ 5,243
Basic earnings (loss) per common share ......... $ 0.73 $ (1.04) $ 0.46
Diluted earnings (loss) per common share ....... $ 0.72 $ (1.04) $ 0.45
</TABLE>
- 35 -
<PAGE> 36
Options to purchase 1,171,928 shares of common stock at December 27,
1998, were excluded from the computation of diluted earnings per share because
the related exercise prices were greater than the average market price for 1998
and would have been antidilutive.
ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due from restaurant customers and
suppliers and interest receivable relating to marketable debt securities.
FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents,
marketable debt securities, accounts receivable, accounts payable, accrued
expenses, debt, and obligations under capital leases approximates their fair
value. The fair value of a financial instrument is the amount for which the
instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
For cash and cash equivalents, marketable debt securities, accounts
receivable, accounts payable and accrued expenses the carrying amounts
approximate fair value because of the short maturity of these financial
instruments. The fair value of the Company's debt and obligations under capital
leases is estimated by discounting future cash flows for these instruments at
rates currently offered to the Company for similar debt or long-term leases, as
appropriate. The fair value of the marketable debt security is obtained from
publicly available sources.
The Company, from time to time, uses interest rate swaps to reduce
interest rate volatility. The interest differential to be paid or received on
the swap is recognized in the consolidated statement of operations, as incurred,
as a component of interest expense.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains (loses) on
securities and is presented in the consolidated statements of stockholders'
equity and comprehensive income. The statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of
SFAS No. 130.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform with the 1998 presentation.
(2) BUSINESS COMBINATIONS AND JOINT VENTURES
In December 1998, the Company purchased the assets of one previously
franchised LongHorn Steakhouse location in Tampa, Florida, in a transaction
accounted for under the purchase method, for approximately $1.2 million in cash
and a $50,000 note. The excess of cost over fair value of tangible assets
acquired was approximately $1.2 million and was recorded as an intangible asset
to be amortized over 20 years.
In November 1998, the Company acquired the ownership interest of its
joint venture partners in 11 LongHorn Steakhouse restaurants located in the
Cleveland, Ohio, and St. Louis, Missouri markets for an aggregate purchase price
of $5.3 million in cash and a $200,000 note in a transaction accounted for under
the purchase method. The excess of cost over the minority interest acquired was
approximately $3.8 million and was recorded as an intangible asset to be
amortized over 20 years.
In the fourth quarter of 1997, the Company acquired the ownership
interests of its joint venture partners in ten LongHorn
- 36 -
<PAGE> 37
Steakhouse restaurants located in South Georgia, Southern Alabama, and the
Panhandle of Florida for an aggregate purchase price of approximately $1.1
million in cash, notes payable, and the Company's common stock in a transaction
accounted for under the purchase method. The excess of cost over the minority
interest acquired was approximately $1.1 million and was recorded as an
intangible asset to be amortized over 20 years.
In January 1997, the Company purchased the assets of two previously
franchised locations in Greenville and Spartanburg, South Carolina, in a
transaction accounted for under the purchase method, for approximately $2.0
million in cash. The excess of cost over fair value of tangible assets acquired
was approximately $1.4 million and was recorded as an intangible asset to be
amortized over the 13-year period remaining under the acquired franchise
agreement.
In September 1996, the Company exchanged 3,179,472 newly issued shares
of its common stock for all of the outstanding shares of Bugaboo Creek Steak
House, Inc. and certain affiliated entities (2,939,062 shares for Bugaboo Creek
Steak House, Inc. and 240,410 shares for other nonpublic affiliated
enterprises). Bugaboo Creek Steak House, Inc. operated 14 Bugaboo Creek Steak
House restaurants and five The Capital Grille restaurants and the affiliated
entities operated three specialty concept restaurants at the time of the merger.
The exchange of shares was accounted for as a pooling of interests, and
accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations of Bugaboo Creek Steak House,
Inc. for all periods presented.
There were no adjustments required to conform Bugaboo Creek Steak
House, Inc.'s accounting policies to those of the Company.
During 1996, the Company entered into a joint venture arrangement
whereby the Company contributed two LongHorn Steakhouse restaurants and agreed
to contribute funds to construct a third LongHorn Steakhouse restaurant to a
joint venture. The other partners in the joint venture contributed three
restaurants with a fair market value of approximately $2,340,000 for a 49%
minority interest. The Company recorded goodwill of $1,050,000 on this joint
venture, based on the fair value of assets the Company contributed for its 51%
interest versus joint venture partner contributions.
(3) PROVISION FOR ASSET IMPAIRMENTS, RESTAURANT CLOSINGS, AND OTHER CHARGES
The provision for asset impairments, restaurant closings, and other
charges of $2.5 million in 1998 was determined under SFAS No. 121 by comparing
expected discounted future cash flows to the carrying value of these assets.
This charge was primarily the result of a decision by management, in the fourth
quarter, to close one The Capital Grille restaurant partially offset by
favorable developments in estimated amounts accrued in 1997 for costs associated
with closed facilities.
The provision for asset impairments, restaurant closings, and other
charges of $23,666,000 in 1997 was the result of a decision by management, in
the fourth quarter, to close seven restaurants and certain administrative
facilities, as well as the Company's assessment of the impairment of certain
assets based upon the Company's current plans. The Company's current plans
resulted from significant changes in key management and a strategic review
process employed by new management. The provision for asset impairments,
restaurant closings, and other charges consists primarily of adjustments of
$8,300,000 to impaired long-lived assets to be disposed of, adjustments of
$6,000,000 to the carrying values of impaired long-lived assets to be held and
used and $4,200,000 of goodwill write-offs. These adjustments reduced carrying
values for long-lived assets to be held and used to estimated fair value and of
long-lived assets to be disposed of in connection with the closure of the seven
restaurants and the administrative facilities to estimated fair market value
less costs to sell. The long-lived assets to be disposed of are primarily
included in property and equipment in the accompanying consolidated balance
sheet at December 28, 1997, and have an adjusted carrying value of $1,520,000.
Additionally, the provision included $5,166,000 in accrued costs primarily
associated with closed facilities.
The charge in 1996 was comprised principally of the write-off of
abandoned leasehold improvements and the accrual of the future lease payments on
restaurants closed in those periods.
Merger and conversion expenses in 1996 were nonrecurring costs related
to the merger with Bugaboo Creek Steak House, Inc., consisting primarily of
investment banking fees, accounting and legal fees, printing costs, and costs to
integrate point-of-sale systems.
(4) PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 27, 1998 and
December 28, 1997 are summarized as follows (in thousands):
- 37 -
<PAGE> 38
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and improvements ......................... $ 18,559 $ 17,347
Buildings ..................................... 19,608 23,883
Leasehold improvements ........................ 100,396 86,366
Assets under capital lease .................... 9,763 5,569
Restaurant equipment .......................... 42,147 36,578
Furniture and fixtures ........................ 20,928 19,004
Construction in progress ...................... 4,293 1,177
-------- --------
215,694 189,924
Less accumulated depreciation and amortization 47,884 34,166
-------- --------
$167,810 $155,758
======== ========
</TABLE>
During 1998, 1997 and 1996, the Company capitalized interest during
construction of approximately $270,000, $663,000, and $135,000, respectively, as
a component of property and equipment.
The Company has, in the normal course of business, entered into
agreements with vendors for the purchase of restaurant equipment, furniture,
fixtures, buildings, and improvements for restaurants that have not yet opened.
At December 27, 1998, such commitments totaled approximately $11 million.
(5) ACCRUED EXPENSES
Accrued expenses consist of the following at December 27, 1998 and
December 28, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued future lease obligations and other
charges ................................ $ 3,037 $ 3,867
Accrued rent ............................. 1,859 1,620
Payroll and related ...................... 5,596 1,263
Other taxes accrued ...................... 2,107 649
Gift certificates ........................ 4,707 3,766
Other .................................... 6,770 3,708
------- -------
$24,076 $14,873
======= =======
</TABLE>
(6) DEBT
The Company has a variable interest rate revolving credit facility
which permits the Company to borrow up to $100,000,000 through October 2001 and
converts to a two year term loan at that time (the "1998 Facility"). The 1998
Facility is the result of amendments and a restatement of the Company's previous
$60,000,000 credit facility. The 1998 Facility bears interest at the Company's
option of 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) and requires
payment of a commitment fee on any unused portion at a rate of 0.3% to 0.5% per
year (depending on the Company's leverage ratio). At December 27, 1998 and
December 28, 1997, the interest rate on outstanding obligations under the
Company's revolving credit facilities was 6.836% and 6.898%, respectively, based
on LIBOR plus 1.625% and LIBOR plus 0.75%, respectively. The commitment fee on
the unused portion of the 1998 Facility on December 27, 1998, was 0.35% per
year. At December 27, 1998 and December 28, 1997, debt outstanding under the
revolving credit facilities totaled $48,000,000 and $43,000,000, respectively.
Amounts available under the Company's revolving credit facilities totaled
$52,000,000 and $17,000,000 at December 27, 1998 and December 28, 1997,
respectively.
The 1998 Facility restricts payment of dividends, without prior
approval of the lender, and contains certain financial covenants, including debt
to capitalization, leverage and interest coverage ratios, as well as minimum net
worth and maximum capital expenditure covenants. The 1998 Facility is secured by
the common stock of Bugaboo Creek Steak House, Inc. At December 27, 1998, the
Company was in compliance with the provisions of the 1998 Facility. Assuming the
$48,000,000 outstanding under the 1998 Facility is outstanding at the end of
2001, the scheduled maturities are as follows: 2002 - $24,000,000 and 2003 -
$24,000,000.
In August 1998, the Company entered into an interest rate swap
agreement with a commercial bank, which effectively fixes the interest rate at
7.515% on $40.0 million through August 1999, decreasing to $35.0 million through
February 2000 and 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. After
giving affect to the interest rate swap agreement, the weighted average interest
rate on borrowings under the revolving credit facility was 7.421% on December
27, 1998.
- 38 -
<PAGE> 39
(7) INCOME TAXES
Income tax (benefit) expense consists of (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 27, 1998:
U.S. Federal ............. $ 2,026 $ 1,121 $ 3,147
State and local .......... 767 206 973
------- ------- -------
$ 2,793 $ 1,327 $ 4,120
======= ======= =======
Year ended December 28, 1997:
U.S. Federal ............. $ (923) $(3,215) $(4,138)
State and local .......... (213) (649) (862)
------- ------- -------
$(1,136) $(3,864) $(5,000)
======= ======= =======
Year ended December 29, 1996:
U.S. Federal ............. $ 2,884 $ (534) $ 2,350
State and local .......... 1,029 (209) 820
------- ------- -------
$ 3,913 $ (743) $ 3,170
======= ======= =======
</TABLE>
The differences between income taxes at the statutory Federal income
tax rate and income tax expense reported in the consolidated statements of
operations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate ............ 35.0% (34.0)% 34.0%
State income taxes, net of federal benefit ... 5.5 (5.0) 5.0
Nondeductible merger and conversion expenses . -- -- 11.1
Meals and entertainment ...................... 0.4 (1.5) .6
FICA tip credit .............................. (8.3) 7.3 (11.2)
Other ........................................ (0.6) 4.2 (1.8)
---- ---- ----
Effective tax rates .............. 32.0% (29.0)% 37.7%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 27, 1998 and
December 28, 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Provisions for restaurant closings, and other charges $ 3,905 $ 4,558
Deferred rent ....................................... 717 556
Alternative minimum taxes and general
business credit carryforwards .................... -- 2,704
Accrued joint venture contract termination .......... 423 --
Preopening costs .................................... 2,054 1,931
Net operating loss carryforwards .................... -- 681
Accrued insurance ................................... 499 132
Accrued workers' compensation ....................... 297 212
Other ............................................... 527 217
------- --------
Total gross deferred tax assets ............... 8,422 10,991
Less valuation allowance ............................ -- (1,700)
------- --------
Net deferred tax assets ........................ 8,422 9,291
------- --------
Deferred tax liability - Property and equipment ....... (2,893) (2,435)
------- --------
Net deferred tax assets .......... $ 5,529 $ 6,856
======= ========
</TABLE>
- 39 -
<PAGE> 40
The valuation allowance for deferred tax assets as of December 27, 1998
and December 28, 1997 was $0 and $1,700,000, respectively. The net change in the
valuation allowance for the years ended December 27, 1998, December 28, 1997 and
December 29, 1996 was a decrease of $1,700,000, an increase of $1,700,000, and a
decrease of $45,000, respectively. The reduction in the valuation allowance for
the year ended December 27, 1998, occurred because the Company was able to
utilize net operating loss carryforwards as well as general business credits. In
assessing the realizability of deferred tax assets, the Company's management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The Company's
management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections of
future taxable income over the periods in which the deferred tax assets are
deductible, the Company's management believes it is more likely than not the
Company will realize the benefits of these deductible differences, at December
27, 1998.
At December 28, 1997, the Company had net operating loss carryforwards
for Federal income tax purposes of $2,350,000 which are available to offset
future taxable income, if any, through 2012. In addition, the Company had
alternative minimum tax and other general business credit carryforwards of
approximately $2,700,000 which are available to reduce Federal regular income
taxes, if any, over an indefinite period.
(8) EMPLOYEE BENEFIT PLANS
The Company provides employees who meet minimum service requirements
with retirement benefits under a 401(k) salary reduction and profit sharing plan
(the "RARE Plan"). Under the RARE plan, employees may make contributions of
between 1% and 20% of their annual compensation. The Company is required to make
an annual matching contribution up to a maximum of 2.5% of employee
compensation. Additional contributions are made at the discretion of the Board
of Directors. The Company's expense under the RARE plan was $396,000, $260,000,
and $220,000 for 1998, 1997, and 1996, respectively.
Commencing April 1, 1996, the Company provided a 401(k) salary
reduction plan to Bugaboo Creek Steak House employees (the "Bugaboo Creek
Plan"). Under the Bugaboo Creek Plan, employees made contributions of between 1%
and 15% of their annual compensation. The Company made a matching contribution
of 10% of the first 6% contributed by each employee. All employees of Bugaboo
Creek Steak House prior to the merger with one year and 1,000 hours of service
are eligible for the Bugaboo Creek Plan. The Company's expense under the Bugaboo
Creek Plan was $20,000 for 1996. Effective in 1997, the Company merged the
Bugaboo Creek Plan into the RARE Plan.
(9) LEASES AND RELATED COMMITMENTS
The Company is obligated under various capital leases for certain
restaurant facilities that expire at various dates during the next 25 years. The
Company has noncancelable operating leases for restaurant facilities. Rental
payments include minimum rentals, plus contingent rentals based on restaurant
sales at the individual stores. These leases generally contain renewal options
for periods ranging from three to 15 years and require the Company to pay all
executory costs such as insurance and maintenance. Under the provisions of
certain leases, there are certain rent holidays and/or escalations in payments
over the base lease term, as well as renewal periods. The effects of the
holidays and escalations have been reflected in rent expense on a straight-line
basis over the life of the anticipated lease terms. The Company also leases
vehicles and equipment under operating leases.
- 40 -
<PAGE> 41
Future minimum lease payments under capital lease obligations and
noncancelable operating leases at December 27, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING AT OR
ABOUT DECEMBER 31: CAPITAL OPERATING
------- ---------
<S> <C> <C>
1999 $ 859 $10,219
2000 859 10,007
2001 859 9,542
2002 890 9,207
2003 929 8,119
Thereafter... 21,400 33,452
------- -------
Total minimum lease payments $25,796 $80,546
=======
Less imputed interest (at 9%) 16,064
-------
Present value of minimum lease payments 9,732
Less current maturities -
-------
Obligations under capital leases,
excluding current maturities $ 9,732
=======
</TABLE>
Rental expense consisted of the following amounts (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Minimum lease payments $ 9,611 $8,252 $6,218
Contingent rentals ... 799 686 640
------- ------ ------
Total rental expense . $10,410 $8,938 $6,858
======= ====== ======
</TABLE>
Future minimum lease payments to related parties aggregated $141,000 at
December 27, 1998.
Rental expense includes approximately $110,531, $106,000, and $120,000
for 1998, 1997, and 1996, respectively, for rents paid to entities in which
certain of the Company's directors have a financial interest.
A standby letter of credit in the amount of $750,000 has been issued to
secure the Company's obligations under a lease of real estate. Drafts may be
presented against this letter of credit in the event that the Company is in
default of the terms of the lease, all applicable grace periods have expired and
the Company has failed to cure all such defaults. The amount of such drafts may
be for the amount presently due and owing by the Company to the landlord or the
full amount of the letter of credit if the landlord has notified tenant that it
has terminated the lease or has exercised its right to repossess the leased
premises.
(10) RELATED PARTY TRANSACTIONS
During 1998, 1997 and 1996, RDM Design, a company owned by a relative
of two Company directors, provided architectural design services to the Company.
Fees paid for these services (including payments for subcontracted engineering
services) amounted to $12,000, $11,000, and $114,000 for the years 1998, 1997,
and 1996, respectively.
(11) SHAREHOLDERS' EQUITY
In 1998, the Company's Board of Directors authorized the Company to
purchase shares of its common stock, through open market transactions, block
purchases or in privately negotiated transactions. As of December 27, 1998, the
Company had purchased an aggregate 59,500 shares of its common stock for a total
purchase price of approximately $748,000 (average price of $12.57 per share).
The Company's Articles of Incorporation authorize 10,000,000 shares of
preferred stock, no par value. The Board of Directors of the Company may
determine the preferences, limitations, and relative rights of any class of
shares of preferred stock prior to the issuance of such class of shares. In
November 1997, in connection with the adoption of a Shareholders Rights Plan,
the Board of Directors designated 500,000 shares of Series A Junior
Participating Preferred Stock (the "Series A Stock") and filed such designation
as an amendment to the Company's Articles of Incorporation. Holders of shares of
Series A Stock are entitled to receive, when, as and if declared by the Board of
Directors, (i) on each date that dividends or other distributions (other than
dividends or distributions payable in common stock) are payable on the common
stock comprising part of the Reference Package (as defined in the Articles of
Incorporation), an amount per whole share of Series A Stock equal to the
aggregate amount of dividends or other distributions that would be payable on
such date to a holder of the Reference Package and (ii) on the last day of
March, June, September and December in each year, an amount per whole
- 41 -
<PAGE> 42
share of Series A Stock equal to the excess of $1.00 over the aggregate
dividends paid per whole share of Series A Stock during the three-month period
ending on such last day. If any shares of Series A Stock are issued, no
dividends (other than dividends payable in common stock) may be declared or paid
unless the full cumulative dividends on all outstanding shares of Series A Stock
have been or are contemporaneously paid. Upon the liquidation, dissolution or
winding up of the affairs of the Company and before any distribution or payment
to the holders of common stock, holders of shares of the Series A Stock are
entitled to be paid in full an amount per whole share of Series A Stock equal to
the greater of (i) $1.00 or (ii) the aggregate amount distributed or to be
distributed prior to the date of such liquidation, dissolution or winding up to
a holder of the Reference Package. After payment in full to each holder of
shares of Series A Stock, the Series A Stock shall have no right or claim to any
of the remaining assets of the Company. Each outstanding share of Series A Stock
votes on all matters as a class with any other capital stock comprising part of
the Reference Package and shall have the number of votes that a holder of the
Reference Package would have.
As of March 8, 1999, there were no shares of Series A Stock issued and
outstanding and the Board of Directors had no present intention to issue any
shares of Series A Stock.
On April 1, 1996, the Company closed a public offering for 1,875,000
shares of common stock. Net proceeds to the Company from this offering were
approximately $38,000,000, including the underwriters' overallotment.
(12) STOCK OPTIONS
The Company's 1997 Long-Term Incentive Plan, as amended (the "1997
Stock Option Plan"), provides for the granting of incentive stock options,
nonqualified stock options, stock appreciation rights, performance units,
restricted stock, dividend equivalents and other stock based awards to
employees, officers, directors, consultants, and advisors. The Company's Amended
and Restated 1992 Incentive Plan (the "1992 Stock Option Plan") provides for the
granting of incentive stock options, nonqualified stock options, and stock
appreciation rights to key employees and directors, based upon selection by the
Stock Option Committee. All stock options issued under the 1997 Stock Option
Plan and the 1992 Stock Option Plan were granted at prices which equate to or
were higher than current market value on the date of the grant and must be
exercised within ten years from the date of grant. The 1997 Stock Option Plan
and the 1992 Stock Option Plan authorized the granting of options to purchase
750,000 shares of common stock and 1,500,000 shares of common stock,
respectively.
The 1994 Bugaboo Creek Stock Option Plan (the "1994 Stock Option Plan")
provides for the granting of options to acquire approximately 306,550 shares of
the Company's common stock to directors, officers, and key employees. Through
December 27, 1998, the Company had granted options to purchase approximately
214,050 shares of common stock pursuant to the terms of the 1994 Stock Option
Plan. Options awarded under the 1994 Stock Option Plan prior to the merger were
adjusted based on the exchange ratio of 1.78 shares of common stock of Bugaboo
Creek Steak House, Inc. for each share of the Company's common stock. Options
awarded under the 1994 Stock Option Plan are generally granted at prices which
equate to current market value on the date of the grant, are generally
exercisable after two to three years, and expire ten years subsequent to award.
The Company's Amended and Restated 1996 Stock Plan for Outside
Directors (the "1996 Stock Option Plan") provides for the automatic granting of
non-qualified stock options to outside directors. The 1996 Stock Option Plan
authorizes the granting of options to purchase up to an aggregate of 100,000
shares of common stock. All stock options issued under the 1996 Stock Option
Plan are granted at prices which are equal to the current market value on the
date of the grant, become exercisable six months and one day after the date of
grant, and must be exercised within ten years from the date of grant.
The Company applies APB 25 in accounting for its stock option plans.
Accordingly, no compensation expense has been recognized for the Company's
stock-based compensation plans. Had compensation cost for the Company's stock
option plans been determined based upon the fair value methodology prescribed
under SFAS No. 123, the Company's 1998, 1997, and 1996 net earnings (loss) and
net earnings (loss) per share would have been reduced (increased in 1997) by
approximately $2,002,000, $1,002,000, and $705,000, or approximately $0.17,
$0.09, and $0.06 per share, respectively. The effects of disclosing compensation
cost under SFAS No. 123 may not be representative of the effects on reported
earnings for future years. The fair value of the options granted during 1998,
1997, and 1996 is estimated at $1,718,000, $3,384,000, and $1,593,000,
respectively, on the date of grant, using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of zero, volatility of 20%,
risk-free interest rate of 6%, and an average expected life of eight years.
- 42 -
<PAGE> 43
As of December 27, 1998 and December 28, 1997, options to purchase
592,626 and 367,281 shares of common stock, respectively, were exercisable
at weighted average exercise prices of $13.47 and $16.37 per share,
respectively. Option activity under the Company's stock option plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE PRICE
------ -------------
<S> <C> <C>
Outstanding at December 31, 1995 1,569,977 $15.40
Granted in 1996 ................ 162,115 21.56
Exercised in 1996 .............. (67,367) 10.10
Canceled in 1996 ............... (253,959) 21.39
---------
Outstanding at December 29, 1996 1,410,766 15.28
Granted in 1997 ................ 995,150 14.47
Exercised in 1997 .............. (289,980) 8.81
Canceled in 1997 ............... (642,843) 17.72
---------
Outstanding at December 28, 1997 1,473,093 14.79
Granted in 1998 ................ 567,950 11.62
Exercised in 1998 .............. (52,400) 10.17
Canceled in 1998 ............... (186,795) 16.24
---------
Outstanding at December 27, 1998 1,801,848 13.58
=========
</TABLE>
The following table summarizes information concerning options
outstanding and exercisable as of December 27, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$8.75 to $10 ........... 449,500 8.4 $ 9.49 304,430 $ 9.45
$10.01 to $15 .......... 915,390 8.8 12.92 82,560 12.46
$15.01 to $20 .......... 272,700 6.7 17.47 101,060 17.39
$20.01 to $25 .......... 162,258 6.0 21.87 102,576 22.05
$25.01 to $27.25 ....... 2,000 0.1 27.25 2,000 27.25
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
JOINT VENTURES
Several of the Company's joint venture agreements and employment
agreements with joint venture partners and restaurant managers require or
provide the Company with the option to purchase the managers' interests upon
termination of the joint venture. The purchase prices are based upon certain
multiples of the relevant restaurant's cash flow or profits.
SHAREHOLDER SUIT
In February 1994, the Company, several directors, and the two managing
underwriters of its previous public offering were named as defendants in a
lawsuit filed as a class action in the United States District Court in Atlanta,
Georgia. The suit was filed by a shareholder of the Company who claimed to
represent a class of all persons who purchased the Company's common stock
between July 27, 1992 and June 17, 1993.
The plaintiff alleged that the defendants made material
misrepresentations and omissions in connection with the financial condition of
the Company and sought compensatory damages and other relief. A total
consideration of $1.4 million was paid in settlement of the case in 1997, the
major portion of which was funded by an officers and directors liability
insurance policy. The cost to the Company, including related attorneys' fees,
was approximately $605,000.
- 43 -
<PAGE> 44
PURCHASE COMMITMENTS
The Company has entered into certain purchasing agreements with certain
meat suppliers requiring the Company to purchase contracted quantities of meat
at established prices through their expiration on varying dates in 1999 and
2000. The quantities contracted for are based on usage projections management
believes to be conservative estimates of actual requirements during the contract
terms. The Company does not anticipate any material adverse effect on its
results of operations or financial condition from these contracts.
OTHER
Under the Company's insurance programs, coverage is obtained for
significant exposures as well as those risks required to be insured by law or
contract. It is the Company's preference to retain a significant portion of
certain expected losses related primarily to workers' compensation and employee
medical costs. Provisions for losses expected under these programs are recorded
based upon the Company's estimates of the aggregate liability for claims
incurred.
Letters of credit aggregating $1,100,000 at December 27, 1998 are being
maintained as security under the Company's workers' compensation policies.
The Company is engaged in arbitration and litigation with a joint
venture partner regarding a dispute related to a joint venture agreement. The
Company denies any liability with respect to the counterclaims against the
Company and intends to vigorously defend the counterclaims. Management believes
that the Company's position has merit and the resolution of these matters will
not have a material adverse effect of the Company's financial condition or
results of operations.
The Company is involved in various legal actions incidental to the
normal conduct of its business. Management does not believe that the ultimate
resolution of these incidental actions will have a material adverse effect on
the Company's financial condition or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about directors and nominees for director and executive
officers of the Registrant is incorporated herein by reference from the sections
of the Registrant's definitive Proxy Statement to be delivered to shareholders
of the Registrant in connection with the annual meeting of shareholders to be
held May 6, 1999 (the "Proxy Statement") entitled "Election of Directors -
Certain Information Concerning Nominees and Directors," and "-- Meetings of the
Board of Directors and Committees" and "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference from the section of the Proxy Statement entitled "Executive
Compensation." In no event shall the information contained in the Proxy
Statement under the sections entitled "Shareholder Return Analysis," or
"Compensation and Stock Option Committees' Report on Executive Compensation" be
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference
from the section of the Proxy Statement entitled "Beneficial Owners of More Than
Five Percent of the Company's Common Stock; Shares Held by Directors and
Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions is
incorporated herein by reference from the section of the Proxy Statement
entitled "Certain Transactions."
- 44 -
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) LISTING OF FINANCIAL STATEMENTS
The following financial statements of the Registrant are set forth herein in
Part II, Item 8:
Consolidated Balance Sheets as of December 27, 1998 and December 28,
1997
Consolidated Statements of Operations - For Each of the Years in the
Three-Year Period Ended December 27, 1998
Consolidated Statements of Shareholders' Equity and Comprehensive
Income - For Each of the Years in the Three-Year Period Ended December
27, 1998
Consolidated Statements of Cash Flows - For Each of the Years in the
Three-Year Period Ended December 27, 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
(A)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES
Not applicable.
(A)(3) LISTING OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ------------------------
3(a) -- Amended and Restated Articles of Incorporation of the
Registrant (incorporated herein by reference from Exhibit 3(a)
of the Registrant's annual report on Form 10-K for the fiscal
year ended December 28, 1997).
3(b) -- Bylaws of the Registrant (incorporated herein by reference
from Exhibit 3(b) of the Registrant's annual report on Form
10-K for the fiscal year ended December 28, 1997).
4(a) -- See Exhibits 3(a) and 3(b) for provisions of the Amended and
Restated Articles of Incorporation and Bylaws of the
Registrant defining rights of holders of Common Stock of the
Registrant
4(b) -- Specimen Stock Certificate for the Common Stock of the
Registrant.
4(c) -- Shareholder Protection Rights Agreement, dated as of November
4, 1997, between RARE Hospitality International, Inc. and
SunTrust Bank, Atlanta, as Rights Agent (which includes as
Exhibit B thereto the Form of Right Certificate) (incorporated
herein by reference from Exhibit 99.1 of the Registrant's Form
8-K dated November 4, 1997).
10(a) -- Amended and Restated Credit Agreement dated August 26, 1998,
by and among the Registrant and First Union National Bank as
administrative agent and Bank Boston, N.A. and Fleet National
Bank as co-agents (incorporated by reference from Exhibit 10.1
of the Registrant's quarterly report on Form 10-Q for the
quarter ended September 27, 1998).
10(b) -- First Amendment to Credit Agreement.
10(c) -- Pledge Agreement dated as of August 26, 1998 by Registrant in
favor of First Union National Bank (incorporated by reference
from Exhibit 10.2 of the Registrant's quarterly report on Form
10-Q for the quarter ended September 27, 1998).
10(d) -- LongHorn Steaks, Inc. Amended and Restated 1992 Incentive Plan
(incorporated by reference from Exhibit 10(n) to Registration
Statement on Form S-1, Registration Statement No. 33-45695).
10(e) -- Amended and Restated RARE Hospitality International, Inc. 1996
Stock Plan for Outside Directors.
10(f) -- Bugaboo Creek Steak House, Inc. 1994 Stock Option Plan
(incorporated herein by reference from Exhibit 4(c) to
Registration Statement on Form S-8, Registration No.
333-11983).
10(g) -- RARE Hospitality International, Inc. 1997 Long-Term Incentive
Plan (incorporated herein by reference from Exhibit 10(i) of
the Registrant's annual report on Form 10-K for the fiscal
year ended December 28, 1997).
- 45 -
<PAGE> 46
10(h) -- Amendment No. 1 to RARE Hospitality International, Inc. 1997
Long-Term Incentive Plan (incorporated herein by reference
from Exhibit 10(j) of the Registrant's annual report on Form
10-K for the fiscal year ended December 28, 1997).
10(i) -- Amendment No. 2 to RARE Hospitality International, Inc. 1997
Long-Term Incentive Plan.
10(j) -- Employment Agreement dated February 13, 1992 between the
Registrant and George W. McKerrow, Sr. (incorporated by
reference from Exhibit 10(o) to Registration Statement on Form
S-1, Registration Statement No. 33-45695).
10(k) -- Employment Agreement dated February 13, 1992 between the
Registrant and George W. McKerrow, Jr. (incorporated by
reference from Exhibit 10(p) to Registration Statement on Form
S-1, Registration Statement No. 33-45695).
10(l) -- Employment Agreement dated September 30, 1997 between the
Registrant and Philip J. Hickey, Jr. (incorporated herein by
reference from Exhibit 10(m) of the Registrant's annual report
on Form 10-K for the fiscal year ended December 28, 1997).
10(m) -- Employment Agreement dated October 16, 1997 between the
Registrant and Eugene I. Lee (incorporated herein by reference
from Exhibit 10(n) of the Registrant's annual report on Form
10-K for the fiscal year ended December 28, 1997).
10(n) -- Employment Agreement dated November 3, 1997 between the
Registrant and William A. Burnett (incorporated herein by
reference from Exhibit 10(o) of the Registrant's annual report
on Form 10-K for the fiscal year ended December 28, 1997).
10(o) -- Employment Agreement dated November 30, 1998 between the
Registrant and Thomas W. Gathers.
10(p) -- Employment Agreement dated March 23, 1998 between the
Registrant and W. Douglas Benn (incorporated herein by
reference from Exhibit 10(p) of the Registrant's quarterly
report on Form 10-Q for the quarter ended March 29, 1998).
21(a) -- Subsidiaries of the Company.
23(a) -- Consent of KPMG LLP.
27(a) -- 1998 Financial Data Schedule. (for SEC use only).
27(b) -- Restated 1997 Financial Data Schedule. (for SEC use only).
99(a) -- Safe Harbor Compliance Statement.
(B) REPORTS ON FORM 8-K
One report on Form 8-K was filed during the last quarter of the period
covered by this report, a report dated November 2, 1998.
(C) EXHIBITS
The exhibits to this Report are listed under Item 14(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2) above.
- 46 -
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RARE Hospitality International, Inc.
By: /s/ Philip J. Hickey, Jr.
-------------------------
Philip J. Hickey, Jr.
President and Chief Executive Officer
Date: March 26, 1999
- 47 -
<PAGE> 48
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By /s/ George W. McKerrow, Jr. Date March 26, 1999
----------------------------
George W. McKerrow, Jr.
Chairman of the Board
By /s/ Philip J. Hickey, Jr. Date March 26, 1999
----------------------------
Philip J. Hickey, Jr.
President, Chief Executive Officer and Director
(Principal Executive Officer)
By /s/ W. Douglas Benn Date March 26, 1999
----------------------------
W. Douglas Benn
Executive V.P., Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ George W. McKerrow, Sr. Date March 26, 1999
----------------------------
George W. McKerrow, Sr.
Director
By /s/ Edward P. Grace, III Date March 26, 1999
----------------------------
Edward P. Grace, III
Director
By /s/ Ronald W. San Martin Date March 26, 1999
----------------------------
Ronald W. San Martin
Director
By /s/ John G. Pawly Date March 26, 1999
----------------------------
John G. Pawly
Director
By /s/ Don L. Chapman Date March 26, 1999
----------------------------
Don L. Chapman
Director
By /s/ Lewis H. Jordan Date March 26, 1999
----------------------------
Lewis H. Jordan
Director
- 48 -
<PAGE> 1
EXHIBIT 4(b)
[RARE HOSPITALITY INTERNATIONAL, INC. LOGO]
NUMBER SHARES
RH-
COMMON STOCK SEE REVERSE FOR
CERTAIN
DEFINITIONS
CUSIP [---------]
RARE HOSPITALITY INTERNATIONAL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
THIS IS TO CERTIFY THAT
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
RARE HOSPITALITY INTERNATIONAL, INC. transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
<TABLE>
<S> <C> <C>
/s/ W. Douglas Benn [RARE HOSPITALITY INTERNATIONAL, /s/ Philip J. Hickey, Jr.
Executive Vice President, Finance and INC. CORPORATE SEAL] President and Chief
Chief Financial Officer Executive Officer
COUNTERSIGNED AND REGISTERED: SUNTRUST BANK ATLANTA
TRANSFER AGENT AND REGISTRAR
----------------------------
Authorized Signature
</TABLE>
<PAGE> 2
RARE HOSPITALITY INTERNATIONAL, INC.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT- _________________ Custodian ________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ____________________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE /______________________/
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
______________________________________________________________________ shares of
the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_________________________
____________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: ____________________________________________
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 3
LEGEND: Until the Separation Time (as defined in the Rights Agreement referred
to below), this certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement, dated as of November 4, 1997
(as such may be amended from time to time, the "Rights Agreement"), between RARE
Hospitality International, Inc. (the "Company") and SunTrust Bank, Atlanta, as
Rights Agent, the terms of which are hereby incorporated herein by reference and
a copy of which is on file at the principal executive offices of the Company.
Under certain circumstances, as set forth in the Rights Agreement, such Rights
may be redeemed, may become exercisable for securities or assets of the Company
or of another entity, may be exchanged for shares of Common Stock or other
securities or assets of the Company, may expire, may become void (if they are
"Beneficially Owned" by an "Acquiring Person" or an Affiliate or Associate
thereof, as such terms are defined in the Rights Agreement, or by any transferee
of any of the foregoing) or may be evidenced by separate certificates and may no
longer be evidenced by this certificate. The Company will mail or arrange for
the mailing of a copy of the Rights Agreement to the holder of this certificate
without charge promptly after the receipt of a written request therefor.
<PAGE> 1
Exhibit 10(b)
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment") is
made and entered into as of this 31st day of December, 1998 by and among RARE
HOSPITALITY INTERNATIONAL, INC., a corporation organized under the laws of
Georgia (the "Borrower"), , the Lenders who are or may become a party to the
Credit Agreement referred to below, FIRST UNION NATIONAL, as Administrative
Agent for the Lenders (the "Administrative Agent) and BANKBOSTON, N.A. and FLEET
NATIONAL BANK, as Co-Agents (collectively, the "Co-Agents").
Statement of Purpose
The Lenders agreed to extend certain extensions of credit to the
Borrower pursuant to the Amended and Restated Credit Agreement dated as of
August 26, 1998 by and among the Borrower, the Lenders, the Administrative Agent
and the Co-Agents (as amended or supplemented from time to time, the "Credit
Agreement").
The parties now desire to amend the Credit Agreement in certain
respects on the terms and conditions set forth below.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Effect of Amendment. Except as expressly amended hereby, the
Credit Agreement and Loan Documents shall be and remain in full force and effect
2. Capitalized Terms. All capitalized undefined terms used in
this First Amendment shall have the meanings assigned thereto in the Credit
Agreement.
3. Modification of Credit Agreement. The Credit Agreement is
hereby amended as follows:
(a) The definition of "Fixed Charges" set forth in Section 1.1 of
the Credit Agreement is hereby deleted in its entirety and the following
definition shall be substituted in lieu thereof:
"'Fixed Charges' means, with respect to the Borrower and its
Subsidiaries as of the last day of any fiscal quarter, the sum of the
following: (a) Interest Expense calculated for the period of four (4)
consecutive fiscal quarters ending on such date, plus (b) Rental
Expense calculated for the period of four (4) consecutive fiscal
quarters ending on such date plus (c) scheduled principal payments with
regard to Funded Debt which are due and payable during the period of
four (4) consecutive fiscal quarters following such date, all
determined on a Consolidated basis in accordance with GAAP."
<PAGE> 2
(b) Section 9.3 of the Credit Agreement is hereby deleted in its
entirety and the following Section 9.3 shall be substituted in lieu thereof:
"SECTION 3.3 Fixed Charges Coverage Ratio. As of the end of any fiscal
quarter, permit the ratio of (a) Adjusted EBITDA plus Rental Expense
for the period of four (4) consecutive fiscal quarters ending on such
date to (b) Fixed Charges as of such date, to be less than the
following ratios during the following time periods:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From the Closing Date through
and including 9/30/01 2.00 to 1.00
From 10/1/01 and thereafter 1.10 to 1.00"
</TABLE>
4. Representations and Warranties/No Default. By its execution
hereof, the Borrower hereby certifies that (giving effect to this First
Amendment) each of the representations and warranties set forth in the Credit
Agreement and the other Loan Documents is true and correct in all material
respects as of the date hereof as if fully set forth herein, except to the
extent that such representations and warranties expressly relate to an earlier
date (in which case such representations and warranties shall have been true and
correct in all material respects on and as of such earlier date), and that as of
the date hereof no Default or Event of Default has occurred and is continuing.
5. Expenses. The Borrower shall pay all reasonable out-of-pocket
expenses of the Agent in connection with the preparation, execution and delivery
of this First Amendment, including without limitation, the reasonable fees and
disbursements of counsel for the Administrative Agent.
6. Governing Law. This First Amendment shall be governed by and
construed in accordance with the laws of the State of North Carolina.
7. Counterparts. This First Amendment may be executed in separate
counterparts, each of which when executed and delivered is an original but all
of which taken together constitute one and the same instrument.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed as of the date and year first above written.
[CORPORATE SEAL] RARE HOSPITALITY INTERNATIONAL, INC.
By: /s/ W. Douglas Benn
-----------------------------------------
Name: W. DOUGLAS BENN
------------------------------------
Title: Executive VP Finance & CFO
-----------------------------------
FIRST UNION NATIONAL BANK,
as Administrative Agent, Lender,
Swingline Lender and Issuing Lender
By: /s/ Rick Price
-----------------------------------------
Name: RICK PRICE
------------------------------------
Title: Senior Vice President
-----------------------------------
BANKBOSTON, N.A., as Co-Agent and as Lender
By: /s/ Tomas F. Farley, Jr.
-----------------------------------------
Name: THOMAS F. FARLEY, JR.
------------------------------------
Title: Managing Director
-----------------------------------
FLEET NATIONAL BANK, as Co-Agent and as
Lender
By: /s/ Oliver Bennett
-----------------------------------------
Name: OLIVER BENNETT
------------------------------------
Title: Senior Vice President
-----------------------------------
SOUTHTRUST BANK, N.A., as Lender
By: /s/ Jon R. Hauseman
-----------------------------------------
Name: JON R.HAUSEMAN
------------------------------------
Title: Group Vice President
-----------------------------------
THE FUJI BANK, LIMITED, as Lender
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
AMSOUTH BANK, as Lender
By: /s/ Mary Anne Rabuin
-----------------------------------------
Name: MARY ANNE RABUIN
------------------------------------
Title: VICE PRESIDENT
-----------------------------------
3
<PAGE> 1
EXHIBIT 10(e)
AMENDED AND RESTATED
RARE HOSPITALITY INTERNATIONAL, INC.
1996 STOCK PLAN FOR OUTSIDE DIRECTORS
1. Purpose. The purpose of the Amended and Restated RARE
Hospitality International, Inc. 1996 Stock Plan for Outside Directors (the
"Plan") is to advance the interests of RARE Hospitality International, Inc. (the
"Corporation") by encouraging ownership of the Corporation's no par value common
stock (the "Common Stock") by non-employee directors of the Corporation, thereby
giving such directors an increased incentive to devote their efforts to the
success of the Corporation.
2. Administration. Grants of stock and options under this Plan
are automatic. This Plan is intended to be a "formula plan" as recognized by
Rule 16b-3(c)(2)(ii) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and shall be interpreted accordingly.
3. Eligibility. Except as provided otherwise in this Section 3,
stock and options under the Plan shall be granted in accordance with Section 5
to each member of the Corporation's Board of Directors who is not a current
employee of the Corporation (an "Outside Director"); provided that shares of the
Corporation's Common Stock remain available for grant hereunder in accordance
with Section 4. An Outside Director to whom stock or options are granted under
the Plan shall be referred to hereinafter as a "Grantee."
4. Shares Subject to Plan. The shares subject to the Plan shall
be authorized but unissued or reacquired shares of the Corporation's Common
Stock. Subject to adjustment in accordance with the provisions of Section 6 of
the Plan, the maximum number of shares of Common Stock for which awards may be
granted under the Plan shall be 100,000 and the initial adoption of the Plan by
the Board of Directors of the Corporation shall constitute a reservation of
100,000 authorized but unissued, or reacquired, shares of Common Stock for
issuance under the Plan. In the event that any outstanding option granted under
the Plan for any reason expires or is terminated prior to the end of the period
during which awards may be granted under the Plan, the shares of Common Stock
allocable to the unexercised portion of such option may again be subject in
whole or in part to any award of stock or options granted under the Plan.
5. Terms and Conditions of Awards. Awards granted pursuant to the
Plan shall be evidenced by Stock Award Agreements in such form as shall comply
with and be subject to the following terms and conditions:
(a) Grant. On the date of adoption of the Plan by the Board of
Directors, each Outside Director shall be granted an option to purchase 5,000
shares of the Corporation's Common Stock, subject to adjustment as provided in
the Plan, and subject to approval of the Plan by the Corporation's shareholders
within one year following the adoption of the Plan by the Board of Directors. If
the shareholders of the Corporation fail to approve the Plan within such
<PAGE> 2
time, the initial grant of options shall be null and void and no further awards
shall be granted under the Plan.
On the date that each subsequent Outside Director is initially elected
or appointed to the Board or, in the case of a director who was employed by the
Corporation on the date that such director was initially elected or appointed to
the Board and who remains a director following the termination of his or her
employment, the date that such Outside Director's employment with the
Corporation is terminated, such director will receive an option to purchase (i)
2,500 shares of Common Stock if such date is on or before June 30 of the year in
question, or (ii) 1,250 shares of Common Stock if such date is on or after July
1 of the year in question, subject to adjustment as provided in the Plan.
In addition, each year, beginning in 1997, on the day immediately
preceding the release of the Corporation's financial results for the preceding
fiscal year, each Outside Director who is serving in such capacity as of such
date will receive an option to purchase 2,500 shares of Common Stock (subject to
adjustment as provided in the Plan); provided, however, that such options will
be granted if and only if the operating earnings per share of the Corporation's
Common Stock has increased by at least 20% over the immediately preceding fiscal
year. Each such day that annual awards are to be granted under the Plan is
referred to hereinafter as a "Grant Date."
If on any Grant Date, shares of Common Stock are not available under
this Plan to grant to Outside Directors the full amount of a grant contemplated
by the immediately preceding paragraph, then each Outside Director shall receive
an award (a "Reduced Grant") equal to the number of shares of Common Stock then
available under the Plan divided by the number of Outside Directors as of the
applicable Grant Date. Fractional shares shall be ignored and not granted.
If a Reduced Grant has been made and, thereafter, during the term of
this Plan, additional shares of Common Stock become available for grant (e.g.,
because of the forfeiture or lapse of an option), then each person who was an
Outside Director both on the Grant Date on which the Reduced Grant was made and
on the date additional shares of Common Stock become available (a "Continuing
Outside Director") shall receive an additional option to purchase shares of
Common Stock. The number of newly available shares shall be divided equally
among the options granted to the Continuing Outside Directors; provided,
however, that the aggregate number of shares of Common Stock subject to a
Continuing Outside Director's additional option plus any prior Reduced Grant to
the Continuing Outside Director on the applicable Grant Date shall not exceed
2,500 shares (subject to adjustment pursuant to Section 6). If more than one
Reduced Grant has been made, available options shall be granted beginning with
the earliest such Grant Date.
(b) Option Price. The option price for each option granted under
the Plan shall be the Fair Market Value (as defined below) of the shares of
Common Stock subject to the option on the date of grant of the option. For
purposes of the Plan, the "Fair Market Value" of a share of Common Stock on a
given date shall mean the closing price of a share of Common Stock traded
-2-
<PAGE> 3
on the Nasdaq National Market on such date, as reported in the composite
transactions quoted in The Wall Street Journal or, if no shares were traded on
such day, on the next preceding day on which shares were traded.
(c) Medium and Time of Payment. The option price shall be payable
in full upon the exercise of an option in cash, by check, in shares of Common
Stock, or in any combination thereof. To the extent permitted under Regulation T
of the Federal Reserve Board, and subject to applicable securities laws, options
may be exercised through a broker in a so-called "cashless exercise" whereby the
broker sells the option shares and delivers cash sales proceeds to the Company
in payment of the exercise price. However, to avoid possible short-swing profit
liability under Section 16(b) of the Exchange Act, the Grantee should wait at
least six (6) months from the date of grant of the option before engaging in a
"cashless" exercise.
(d) Term. Each option granted under the Plan shall, to the extent
not previously exercised, terminate and expire on the date ten (10) years after
the date of grant of the option, unless earlier terminated as provided
hereinafter in Section 5(g).
(e) Exercisability. Each option granted under the Plan shall,
unless earlier terminated as provided hereinafter in Section 5(g), become
exercisable on the date six (6) months and one day following the date of grant.
(f) Method of Exercise. All options granted under the Plan shall
be exercised by an irrevocable written notice directed to the Secretary of the
Corporation at the Corporation's principal place of business. Except in the case
of a "cashless exercise" through a broker, such written notice shall be
accompanied by payment in full of the option price for the shares for which such
option is being exercised. In the case of a "cashless exercise," payment in full
of the option price for the shares for which such option is being exercised
shall be paid in cash by the broker from the sale proceeds. The Corporation
shall make delivery of certificates representing the shares for which an option
has been exercised within a reasonable period of time; provided, however, that
if any law, regulation or agreement requires the Corporation to take any action
with respect to the shares for which an option has been exercised before the
issuance thereof, then the date of delivery of such shares shall be extended for
the period necessary to take such action. Certificates representing shares for
which options are exercised under the Plan may bear such restrictive legends as
may be necessary or desirable in order to comply with applicable federal and
state securities laws. Nothing contained in the Plan shall be construed to
require the Corporation to register any shares of Common Stock underlying
options granted under this Plan.
(g) Effect of Termination of Directorship or Death.
(i) Termination of Directorship. Upon termination of any Grantee's
membership on the Board of Directors of the Corporation for any reason other
than for cause or death, the options held by the Grantee under the Plan shall
terminate ninety (90) days following the date of termination of the Grantee's
membership on the Board or, if earlier, on the date of expiration of the options
as provided by Section 5(d) of the Plan. If the Grantee exercises the options
after termination of the Grantee's service on the Board of Directors, the
Grantee may exercise the
-3-
<PAGE> 4
options only with respect to the shares that were otherwise exercisable on the
date of termination of the Grantees' service on the Board. Such exercise
otherwise shall be subject to the terms and conditions of the Plan. If the
Grantee's membership on the Board of Directors is terminated for cause, all
options granted to such Grantee shall expire upon such termination.
(ii) Death. In the event of the death of a Grantee, the Grantee's
personal representatives, heirs or legatees (the "Grantee's Successors") may
exercise the options held by the Grantee on the date of death, upon proof
satisfactory to the Corporation of their authority. The Grantee's Successors
must exercise any such options within one (1) year after the Grantee's death and
in any event prior to the date on which the options expire as provided by
Section 5(d) of the Plan. Such exercise otherwise shall be subject to the terms
and conditions of the Plan.
(h) Nonassignability of Option Rights. No option shall be
assignable or transferable by the Grantee except by will, by the laws of descent
and distribution or pursuant to a qualified domestic relations order as defined
in Title I of the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986. During the lifetime of the Grantee, the option
shall be exercisable only by the Grantee.
(i) Rights as Shareholder. Neither the Grantee nor the Grantee's
Successors shall have rights as a shareholder of the Corporation with respect to
shares of Common Stock covered by the Grantee's option until the Grantee or the
Grantee's Successors become the holder of record of such shares.
(j) No Options after Ten Years. No options shall be granted except
within a period of ten (10) years after the effective date of the Plan.
6. Adjustments.
(a) If any change is made in the stock subject to the Plan, or
subject to any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Plan and outstanding
options will be automatically and appropriately adjusted, including the maximum
number of shares subject to the Plan and the number of shares and price per
share of stock subject to outstanding options.
(b) In the event of: (i) a merger or consolidation in which the
Corporation is not the surviving corporation; (ii) a reverse merger in which the
Corporation is the surviving corporation but the shares of the Corporation's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash other otherwise; or (iii) any other capital reorganization in which more
than fifty percent (50%) of the shares of the Corporation entitled to vote are
exchanged, then any surviving corporation shall assume any options outstanding
under the Plan or shall substitute similar options for those outstanding under
the Plan. If there is no surviving corporation, all outstanding options shall
expire.
-4-
<PAGE> 5
7. Effective Date and Termination of Plan.
(a) Effective Date. The Plan shall become effective upon adoption
of the same by the Board of Directors of the Corporation (February 26, 1996),
subject to approval of the Plan by the shareholders of the Corporation within
one year following the adoption of the Plan by the Board of Directors.
(b) Termination. The Plan shall terminate ten (10) years after its
effective date, but the Board of Directors may terminate the Plan at any time
prior to such date. Termination of the Plan shall not alter or impair any of the
rights or obligations under any option theretofore granted under the Plan unless
the Grantee shall so consent.
8. No Obligation to Exercise Option. The granting of an option
shall impose no obligation upon the Grantee to exercise such option.
9. Amendment. The Board of Directors of the Corporation by
majority vote may amend the Plan from time to time but may not, without
shareholder approval, adopt any amendment that would require shareholder
approval in order for the Plan or transactions thereunder to qualify for the
exemptions provided by Rule 16b-3 under the Exchange Act, as the same may be
amended from time to time ("Rule 16b-3"), or under under applicable rules of any
exchange on which the shares of Common Stock are traded, or under any other
applicable law, rule or regulation. To the extent required by Rule 16b-3, the
provisions of the Plan determining (i) the persons eligible to receive awards
under the Plan, (ii) the timing of awards, (iii) the number of shares subject to
awards, (iv) the exercise price of options, (v) the periods during which options
are exercisable, and (vi) the dates on which options terminate, may not be
amended more than once every six months other than to comport with changes in
the Internal Revenue Code, the Employee Retirement Income Security Act of 1974,
or the rules thereunder.
It is expressly contemplated that the Board may amend the Plan in any
respect that the Board deems necessary to cause the Plan to meet the
requirements of Rule 16b-3 (or any successor rule) and otherwise to comport with
the provisions of the Exchange Act and the applicable regulations thereunder.
Any amendment to the Plan shall not, without the written consent of the
Grantee, affect such Grantee's rights under any award theretofore granted to
such Grantee.
-5-
<PAGE> 1
EXHIBIT 10(i)
AMENDMENT NO. 2 TO THE
RARE HOSPITALITY INTERNATIONAL, INC.
1997 LONG-TERM INCENTIVE PLAN
THIS AMENDMENT NO. 2 (this "Amendment") to the RARE Hospitality
International, Inc. 1997 Long-Term Incentive Plan, as previously amended, (the
"Plan") is made this 14th day of December, 1998.
The Board of Directors of RARE Hospitality International, Inc. (the
"Company") has determined that it is in the best interests of the Company and
its shareholders to revise Section 4.1 of the Plan as provided in this Amendment
No. 2.
The Plan is hereby amended by deleting Section 4.1 in its entirety and
by substituting in lieu thereof a new Section 4.1 to read as follows:
4.1 COMMITTEE. The Plan shall be administered by a committee (the
"Committee") appointed by the Board (which Committee shall consist of two or
more directors) or, at the discretion of the Board from time to time, the Plan
may be administered by the Board. It is intended that the directors appointed to
serve on the Committee shall be "non-employee directors" (within the meaning of
Rule 16b-3 promulgated under the 1934 Act) and "outside directors" (within the
meaning of Code Section 162(m) and the regulations thereunder) to the extent
that Rule 16b-3 and, if necessary for relief from the limitation under Code
Section 162(m) and such relief is sought by the Corporation, Code Section
162(m), respectively, are applicable. However, the mere fact that a Committee
member shall fail to qualify under either of the foregoing requirements shall
not invalidate any Award made by the Committee which Award is otherwise validly
made under the Plan. The members of the Committee shall be appointed by, and may
be changed at any time and from time to time in the discretion of, the Board.
During any time that the Board is acting as administrator of the Plan, it shall
have all the powers of the Committee hereunder, and any reference herein to the
Committee (other than in this Section 4.1) shall include the Board.
Except as expressly amended hereby, the terms of the Plan, as
previously amended, shall be and remain unchanged and the Plan as amended hereby
shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed by its duly authorized representative on the day and year first above
written.
RARE HOSPITALITY INTERNATIONAL, INC.
By: Philip J. Hickey, Jr.
-----------------------------------------
Its: President and Chief Executive Officer
-----------------------------------------
<PAGE> 1
EXHIBIT 10(o)
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of the 30th day of November,
1998, by and between RARE HOSPITALITY INTERNATIONAL, INC., a Georgia corporation
(hereinafter referred to as the "Company"), and THOMAS W. GATHERS, a resident of
the Commonwealth of Massachusetts (hereinafter referred to as the "Executive").
WITNESSETH:
The Company is engaged in the business of owning, operating and
franchising the operation of restaurants under the names LongHorn Steakhouse(R),
The Capital Grille(R), Bugaboo Creek Steak House(R) and others. The Company
desires to employ Executive in an executive capacity and to be assured of his
services in such capacity on the terms and conditions set forth in this
Agreement. Executive desires to accept such employment on such terms and
conditions.
In the course of Executive's employment, Executive will gain knowledge
of the business, affairs, customers, franchisees, plans and methods of the
Company, will be trained at the expense of the Company in the development,
opening, operation and management of the Company's restaurants through the use
of techniques, systems, practices and methods used and devised by the Company,
will have access to information relating to the Company's customers and their
preferences and dining habits and will become personally known to and acquainted
with the Company's suppliers and managers in the Restricted Area thereby
establishing a personal relationship with such suppliers and managers for the
benefit of the Company.
The Company would suffer irreparable harm if Executive were to use such
knowledge, information and personal relationships related to the Company and its
business that are obtained and developed in the course of Executive's employment
with the Company other than in the proper performance of his duties for the
Company.
In consideration of the sum of $1.00 in hand paid by the Company to
Executive, the receipt and sufficiency of which are hereby acknowledged, and the
mutual covenants and obligations contained herein, the Company and Executive
hereby agree as follows:
1. Employment. The Company hereby employs Executive and Executive
hereby accepts such employment and agrees to perform his duties and
responsibilities hereunder, in accordance with the terms and conditions
hereinafter set forth.
1.1. Employment Term. The employment term of this
Agreement shall commence on the date hereof (the "Commencement Date") and shall
continue as employment at will until terminated by the Company or Executive. The
period from the Commencement Date until the employment term is terminated by the
Company or Executive is hereinafter referred to as the "Employment Term."
<PAGE> 2
1.2 Duties of Executive. Executive agrees that during the
Employment Term, he will devote his full professional and business-related time,
skills and best efforts to the business of the Company, initially in the
capacity of Executive Vice President of Human Resources of the Company. In
addition, Executive shall devote his full time and his best efforts in the
performance of any other reasonable duties as may be assigned to him from time
to time by the Company. Executive shall devote all of his full professional and
business-related skills solely to the affairs of the Company. Executive shall
perform his duties under this Agreement in the Atlanta, Georgia metropolitan
area. Executive agrees to relocate his primary residence to the Atlanta, Georgia
metropolitan area by August 1, 1999. Executive acknowledges that the discharge
of his duties for the Company will involve reasonable travel from the Company's
offices in Atlanta, Georgia.
2. Compensation and Benefits.
2.1 Base Compensation. For all the services rendered by
Executive hereunder, the Company shall pay Executive a salary at the rate of
$185,000 per year plus such additional amounts, if any, as may be approved by
the Company's Board of Directors, ("Base Compensation) payable in installments
at such times as the Company customarily pays its other senior officers (but in
any event no less often than monthly). The Company agrees that the Executive's
salary will be reviewed at least annually by the Compensation Committee of the
Company's Board of Directors to determine if an increase is appropriate, which
increase shall be in the sole discretion of the Company's Board of Directors.
Executive's salary shall be prorated for any partial year during which this
Agreement remains in effect.
2.2 Bonus Awards. Beginning December 28, 1998, in
addition to the Base Compensation, during the Employment Term Executive shall be
eligible for a bonus determined and paid in accordance with the bonus program
for executive officers of the Company as approved by the Company's Board of
Directors from time to time. During the term of this Agreement, Executive's
maximum bonus potential under such bonus program shall be not less than forty
percent (40%) of Executive's base compensation for the fiscal year. Executive
must be employed by the Company on the last day of a fiscal year in order to be
entitled to a bonus for that year.
2.3 Stock Options. (a) The Company shall grant to
Executive, effective as of the Commencement Date, the following incentive stock
options to acquire shares of the Company's common stock:
(i) an option to acquire a number of whole
shares equal to (x) $100,000 divided by (y) the fair market value of
the Company's common stock on the date of the grant, with an exercise
price equal to the fair market value of the Company's common stock on
the date of grant, which option shall become exercisable on the first
anniversary of the date of this Agreement; and
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<PAGE> 3
(ii) an option to acquire a number of whole
shares equal to (x) $100,000 divided by (y) the sum of the fair market
value of the Company's common stock on the date of grant plus $2.00 per
share, with an exercise price equal to the sum of the fair market value
of the Company's common stock on the date of grant plus $2.00 per
share, which option shall become exercisable on the second anniversary
of the date of this Agreement; and
(iii) an option to acquire a number of whole
shares equal to (x) $100,000 divided by (y) the sum of the fair market
value of the Company's common stock on the date of grant plus $2.00 per
share, with an exercise price equal to the sum of fair market value of
the Company's common stock on the date of grant plus $2.00, which
option shall become exercisable on the third anniversary of the date of
this Agreement.
The options granted to Executive in this Section 2.3(a) shall be granted
pursuant to the Company's 1997 Long-Term Incentive Plan and the terms and
conditions governing such options shall be as set forth in the form of Stock
Option Agreement attached hereto as Exhibit A and made a part hereof.
(b) The Company shall grant to Executive, effective as of
the Commencement Date, the following non-qualified stock options to acquire
shares of the company's common stock;
(i) an option to acquire a number of whole
shares equal to (x) 10,000 less (y) the number of shares subject to the
option described in Section 2.3(a)(i), with an exercise price equal to
the fair market value of the Company's common stock on the date of
grant, which option shall become exercisable on the first anniversary
of the date of this Agreement; and
(ii) an option to acquire a number of whole
shares equal to (x) 10,000 less (y) the number of shares subject to the
option described in Section 2.3(a)(ii), with an exercise price equal to
the sum of the fair market value of the Company's common stock on the
date of grant plus $2.00 per share, which option shall become
exercisable with respect to all of such shares on the second
anniversary of the date of this Agreement; and
(iii) an option to acquire a number of whole
shares equal to (x) 10,000 less (y) the number of shares subject to the
option described in Section 2.3(a)(iii) with an exercise price equal to
the sum of the fair market value of the Company's common stock on the
date of grant plus $2.00 per share, which option shall become
exercisable with respect to all of such shares on the third anniversary
of the date of this Agreement;
The options granted to Executive in this Section 2.3(b) shall be granted to
Executive pursuant to the Company's 1997 Long-Term Incentive Plan and the terms
and conditions
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<PAGE> 4
governing such options shall be as set forth in the form of Stock Option
Agreement attached hereto as Exhibit B and made a part hereof.
2.4 Other Benefits. In addition to all other compensation
paid or payable from the Company to Executive hereunder, during the Employment
Term Executive shall be entitled to participate in any and all other employee
benefit programs maintained by the Company for the benefit of its executive
employees generally, in accordance with and subject to the terms and conditions
of such programs.
2.5 Expenses. In addition to the compensation described
in this Agreement, the Company shall promptly reimburse Executive for all
reasonable expenses incurred by him in the performance of his duties under this
Agreement and vouched to the reasonable satisfaction of the Board of Directors
or appropriate officers of the Company, pursuant to established procedures.
2.6 Additional Bonus.Simultaneously with the execution of
this Agreement, the Company agrees to lend to Executive the sum of Forty
Thousand Dollars ($40,000.00) which loan will be evidenced by a promissory note
in the form of Exhibit E attached hereto and made a part hereof (the "Note"). As
provided in the Note, this loan will be without interest prior to maturity and
will be payable on demand at any time following the termination of the
employment of Executive either by the Company for Cause or by Executive, which
termination occurs within two years following the date of this Agreement. If
Executive remains employed by the Company on the date that is two years
following the date of this Agreement, the Company agrees that the entire
principal amount of the Note shall be forgiven as additional compensation to
Executive for his services under this Agreement.
3. Payment upon Termination.
(a) Upon termination of the Employment Term for any
reason other than (i) Executive's death, or (ii) by the Company other than for
Cause (as defined in Exhibit C attached hereto) or (iii) by the Company during
Executive's Disability (as defined in Exhibit C attached hereto), Executive
shall be entitled to receive the compensation owed to Executive but unpaid for
performance rendered under this Agreement as of the date of termination and any
additional compensation he may be entitled to receive under the terms of any
employee benefit plan.
(b) Upon termination of the Employment Term by the death
of Executive, Executive's estate shall be entitled to receive the compensation
under Section 2.1 as calculated and owed to Executive but unpaid for performance
rendered under this Agreement as of the date of termination and any additional
compensation he may be entitled to receive under the terms of any employee
benefit plan plus the Company will pay to the personal representative of
Executive, a lump sum amount equal to one-half of Executive's annual Base
Compensation under Section 2.1 as in effect on the date of his death plus, to
the extent reasonably calculable under any bonus program then applicable to
Executive, a pro rata portion (calculated as of the date of Executive's death)
of the bonus
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<PAGE> 5
that Executive would have earned if Executive had remained employed by the
Company at the end of the fiscal year in which his death occurred.
(c) In the event that during the Employment Term
Executive becomes Disabled and the Company thereafter terminates Executive's
employment during the continuation of such Disability, Executive shall be
entitled to receive the compensation under Section 2.1 as calculated and owed to
Executive but unpaid for performance rendered under this Agreement as of the
date of termination and any additional compensation he may be entitled to
receive under the terms of any employee benefit plan plus, to the extent
reasonably calculable under any bonus program then applicable to Executive, a
pro rata portion (calculated as of the date of Executive's Disability) of the
bonus that Executive would have earned if Executive had remained employed by the
Company at the end of the fiscal year in which his Disability occurred. In
addition, the Company shall pay to Executive, for up to ninety (90) days, an
amount equal to the difference between the amount of Executive's then level of
Base Compensation payable pursuant to Section 2.1 and 150% of the amount paid to
Executive under any short-term disability insurance policy obtained by the
Executive and paid by the Company through the Company's group coverage until the
Company's long-term disability insurance begins to pay.
(d) In the event that within two (2) years following the
Commencement Date the Company terminates Executive's employment other than for
Cause, unless the provisions of Section 3(f) apply, Executive shall be entitled
to receive the compensation under Section 2.1 as calculated and owed to
Executive but unpaid for performance rendered under this Agreement as of the
date of termination and the Company will be obligated to pay Executive his
annual Base Compensation under Section 2.1 as of the date of termination of such
employment from the date of such termination for twelve (12) months. Such
payment shall be made as and when otherwise due under this Agreement.
(e) In the event that at any time that is more than two
(2) years following the Commencement Date the Company terminates Executive's
employment other than for Cause, unless the provisions of Section 3(f) apply,
Executive shall be entitled to receive the compensation under Section 2.1 as
calculated and owed to Executive but unpaid for performance rendered under this
Agreement as of the date of termination and the Company will be obligated to pay
Executive at the rate of his annual Base Compensation under Section 2.1 as of
the date of termination of such employment from the date of such termination for
six (6) months. Such payment shall be made as and when otherwise due under this
Agreement.
(f) In the event that the Company terminates Executive's
employment other than for Cause within eighteen (18) months following the
occurrence of a Change in Control (as defined in Exhibit C attached hereto), in
lieu of the amounts payable pursuant to Section 3(d) or (e) Executive shall be
entitled to receive the compensation under Section 2.1 as calculated and owed to
Executive but unpaid for performance rendered under this Agreement as of the
date of termination of such employment and the Company will be
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<PAGE> 6
obligated to pay Executive an additional amount equal to the sum of (x) his
annual Base Compensation as of the date of termination of such employment plus
(y) an amount equal to the bonus paid to Executive pursuant to Section 2.2 for
the calendar year immediately preceding the calendar year in which the
termination of employment occurs. Such payment shall be made within thirty (30)
days following termination of Executive's employment.
(g) Payments made pursuant to this Section 3 are in lieu
of any other obligations to Executive pursuant to the terms of this Agreement.
4. Noncompetition. Executive covenants and agrees that during the
term of his employment by the Company and for a period of one (1) year
immediately following the termination of Executive's employment by the Company
for any reason whatsoever, Executive will not, within the area described on
Exhibit D hereto (the "Restricted Area") directly or indirectly compete with the
Company by carrying on a business any significant portion of which involves the
development, opening, operation or franchising of restaurants that derive more
than thirty percent (30%) of their food sales from steak products, if the
Company is still engaged in such business in such area.
4.1 Definition of "Compete." For the purposes of this
Agreement, the term "compete" shall mean the providing of general management or
supervisory services for the development or operation or franchising of
restaurants that derive more than thirty percent (30%) of their food sales from
steak products.
4.2 Direct or Indirect Competition. For the purposes of
this Agreement, the words "directly or indirectly" as they modify the word
"compete" shall mean (i) acting as an agent, representative, consultant,
officer, director, independent contractor, or employee engaged in a management
capacity with any entity or enterprise which is carrying on a business any
significant portion of which involves the development, opening, or operation of
restaurants offering steak as a principal portion of their menu, (ii)
participating in any such competing entity or enterprise as an owner, partner,
limited partner, joint venturer, creditor or stockholder (except as a
stockholder holding less than one percent (1%) interest in a corporation whose
shares are actively traded on a regional or national securities exchange or in
the over-the-counter market), and (iii) communicating to any such competing
entity or enterprise the names or addresses or any other information concerning
any employee or supplier of the Company or any successor to the goodwill of the
Company with respect to the business of the Company.
5. Confidentiality. Executive recognizes and acknowledges that by
reason of his employment by and service to the Company, he will have access to
all trade secrets and other confidential information of the Company including,
but not limited to, confidential: pricing information, marketing information,
sales techniques of the Company, confidential records, the Company's expansion
plans, restaurant development and marketing techniques, operating procedures,
training programs and materials, business plans, franchise arrangements, plans
and agreements, information regarding suppliers, product
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<PAGE> 7
quality and control procedures, financial statements and projections and other
information regarding the operation of the Company's restaurants (hereinafter
referred to as the "Confidential Information"). Executive acknowledges that such
Confidential Information is a valuable and unique asset of the Company and
covenants that he will not, either during the term of his employment by the
Company or for a period of two (2) years thereafter, disclose any such
Confidential Information to any person for any reason whatsoever (except as his
duties for the Company may require) without the prior written authorization of
the Company's Board of Directors. Executive agrees that he will not copy any
Confidential Information except as the performance of his duties for the Company
may require and that upon the termination of his employment by the Company, he
shall return all Confidential Information and any copies thereof in his
possession to the Company. Executive hereby acknowledges and agrees that the
prohibitions against disclosure of Confidential Information recited herein are
in addition to, and not in lieu of, any rights or remedies which the Company may
have available pursuant to the laws of any jurisdiction or at common law to
prevent the disclosure of trade secrets or proprietary information, and the
enforcement by the Company of its rights and remedies pursuant to this Agreement
shall not be construed as a waiver of any other rights or available remedies
which it may possess in law or equity absent this Agreement. Notwithstanding the
foregoing, the Company acknowledges and agrees that nothing contained herein
shall restrict or otherwise prohibit or prevent (i) disclosure of Confidential
Information pursuant to legal proceedings, subpoena, civil investigative demand
or other similar process. Executive agrees that if disclosure of Confidential
Information is requested or required pursuant to any such process, he shall
provide the Company with prompt written notice of any such request or
requirement so that the Company may seek a protective order or other appropriate
remedy and/or waive compliance with the provisions of this Agreement. If, in the
absence of a protective order or other remedy or the receipt of a waiver by the
Company, Executive is nonetheless, legally compelled to disclose Confidential
Information to any tribunal or other agency, Executive may, without liability
hereunder, disclose to such tribunal or other agency only that portion of the
Confidential Information which Executive is legally required to disclose,
Executive agrees to cooperate with the Company to obtain an appropriate
protective order or other reliable assurance that such tribunal or other agency
will accord the Confidential Information confidential treatment. The Company
also acknowledges and agrees that Confidential Information shall not include any
information (a) known by Executive prior to the date of his employment by the
Company and learned by Executive other than as a result of his employment
relationship with the Company, (b) independently developed by the Executive
outside of the scope of his employment relationship with the Company or (c) is
or becomes publicly available through no breach by the Executive of his
obligation to the Company.
6. Non-Solicitation of Employees. Executive covenants that during
the term of his employment by the Company, and during the two (2) year period
immediately following the termination of such employment, Executive will neither
directly nor indirectly induce or attempt to induce or cause any employee of the
Company to terminate his or her employment to go to work for any other employer
in a business competing with that of the Company.
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<PAGE> 8
7. Hiring of Employees. Executive covenants that during the term
of his employment by the Company, and during the one (1) year period immediately
following the termination of such employment, Executive will neither directly
nor indirectly hire any salaried employee of the Company.
8. Property of Company. Executive acknowledges that from time to
time in the course of providing services pursuant to this Agreement he shall
have the opportunity to inspect and use certain property, both tangible and
intangible, of the Company, and Executive hereby agrees that said property shall
remain the exclusive property of the Company and the Executive shall have no
right or proprietary interest in such property, whether tangible or intangible,
including, without limitation, the Company's franchise and supplier lists,
contract forms, books of account, training and operating materials and similar
property.
9. Developments. All developments, including inventions, whether
patentable or otherwise, trade secrets, discoveries, improvements, ideas and
writings which either directly or indirectly relate to or may be useful in the
business of the Company or any of its affiliates (the "Developments") which
Executive, either by himself or in conjunction with any other person or persons,
has conceived, made, developed, acquired or acquired knowledge of during his
employment by the Company or which Executive, either by himself or in
conjunction with any other person or persons, shall conceive, make, develop,
acquire or acquire knowledge of during the Employment Term, shall become and
remain the sole and exclusive property of the Company. Executive hereby assigns,
transfers and conveys, and agrees to so assign, transfer and convey, all of his
right, title and interest in and to any and all such Developments and to
disclose fully as soon as practicable, in writing, all such Developments to the
Chairman of the Company. At any time and from time to time, upon the request and
at the expense of the Company, Executive will execute and deliver any and all
instruments, documents and papers, give evidence and do any and all other acts
which, in the opinion of counsel for the Company, are or may be necessary or
desirable to document such transfer or to enable the Company to file and
prosecute applications for and to acquire, maintain and enforce any and all
patents, trademark registrations or copyrights under United States or foreign
law with respect to any such Developments or to obtain any extension,
validation, reissue, continuance or renewal of any such patent, trademark or
copyright. The Company will be responsible for the preparation of any such
instruments, documents and papers and for the prosecution of any such
proceedings and will reimburse Executive for all reasonable expenses incurred by
him in compliance with the provisions of this Section.
10. Reasonableness. The restrictions contained in Sections 4,5,6
and 7 are considered by the parties hereto to be fair and reasonable and
necessary for the protection of the legitimate business interests of the
Company.
11. Equitable Relief. Executive acknowledges that the services to
be rendered by him are of a special, unique, unusual, extraordinary, and
intellectual character, which gives them a peculiar value, and the loss of which
cannot reasonably or adequately be
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<PAGE> 9
compensated in damages in an action at law; and that a breach by him of any of
the provisions contained in Sections 4, 5, 6 and 7 of this Agreement will cause
the Company irreparable injury and damage. Executive further acknowledges that
he possesses unique skills, knowledge and ability and that any material breach
of the provisions of Sections 4, 5, 6 and 7 of this Agreement would be extremely
detrimental to the Company. By reason thereof, Executive agrees that the Company
shall be entitled, in addition to any other remedies it may have under this
Agreement or otherwise, to injunctive and other equitable relief to prevent or
curtail any breach of the provisions of Sections 4, 5, 6 and 7 of this Agreement
by him.
12. Survival of Provisions. The provisions of Sections 4 through
14 , inclusive, of this Agreement shall survive the termination of this
Agreement to the extent required to give full effect to the covenants and
agreements contained in those sections. All provisions of this Agreement which
contemplate the making of payments or the provision of consideration or other
items of economic value by the Company to the Executive after the termination of
this Agreement shall likewise survive the termination of this Agreement to the
extent required to give full effect to such undertakings or obligations of the
Company to Executive hereunder.
13. Warranties and Representations. In order to induce the Company
to enter into this Employment Agreement, Executive hereby warrants and
represents to the Company that Executive is not under any obligation,
contractual or otherwise, to any party which would prohibit or be contravened by
Executive's acceptance of employment by the Company and the performance of
Executive's duties as Executive Vice President of Human Resources of the Company
or the performance of Executive's obligations under this Agreement.
14. Successors Bound; Assignability. This Agreement shall be
binding upon Executive, the Company and their successors in interest, including
without limitation, any corporation into which the Company may be merged or by
which it may be acquired. This Agreement is nonassignable except that the
Company's rights, duties and obligations under this Agreement may be assigned to
the Company's acquiror in the event the Company is merged, acquired or sells
substantially all of its assets.
15. Severability. In the event that any one or more of the
provisions of this Agreement or any word, phrase, clause, sentence or other
portion thereof shall be deemed to be illegal or unenforceable for any reason,
such provision or portion thereof shall be modified or deleted, to the extent
permissible under applicable law, in such a manner so as to make this Agreement
as modified legal and enforceable to the fullest extent permitted under
applicable laws.
16. Withholding. Notwithstanding any of the terms or provisions of
this Agreement, all amounts payable by the Company hereunder shall be subject to
withholding of such sums related to taxes as the Company may reasonably
determine it should withhold pursuant to applicable law or regulation.
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<PAGE> 10
17. Headings. The headings and captions used in this Agreement are
for convenience of reference only, and shall in no way define, limit, expand or
otherwise affect the meaning or construction of any provision of this Agreement.
18. Notices. Any notice required or permitted to be given pursuant
to this Agreement shall be deemed sufficiently given when delivered in person or
when deposited in the United States mail, registered or certified mail, postage
prepaid, addressed as follows:
If to the Company, to: RARE Hospitality International, Inc.
8215 Roswell Road
Building 200
Atlanta, Georgia 30350
Attention: Chief Executive Officer
With a copy to: Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention: William H. Avery
If to Executive, to: Thomas W. Gathers
143 Blacken Drive
Marlboro, Massachusetts 01752
Any party may by written notice change the address to which notices to such
party are to be delivered or mailed.
19. Entire Agreement. This Agreement, together with Exhibits A, B,
C and D hereto which are incorporated herein by this reference, constitutes the
entire Agreement between the parties hereto with regard to the subject matter
hereof, and there are no agreements, understandings, specific restrictions,
warranties or representations relating to said subject matter between the
parties other than those set forth herein or herein provided for.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will take effect as an original and all of which
shall evidence one and the same Agreement.
21. Amendment, Modification and Waiver. This Agreement may only be
amended, modified or terminated prior to the end of its term by the mutual
agreement of the parties. The waiver by either party to this Agreement of a
breach of any of the provisions of this Agreement shall not operate or be
construed as a waiver of any subsequent or simultaneous breach.
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<PAGE> 11
22. Mitigation. Executive shall have no duty to attempt to
mitigate the compensation or level of benefits payable by the Company to him
hereunder and the Company shall not be entitled to set off against the amounts
payable by the Company to Executive hereunder any amounts received by the
Executive from any other source, including any subsequent employer.
23. Governing Law. All of the terms and provisions of this
Agreement shall be construed in accordance with and governed by the applicable
laws of the State of Georgia.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
RARE HOSPITALITY INTERNATIONAL, INC.
By: Philip J. Hickey, Jr.
--------------------------
Title: President
EXECUTIVE
/s/ Thomas W. Gathers
------------------------------
THOMAS W. GATHERS
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<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
A INCENTIVE STOCK OPTION AGREEMENT
B NON-QUALIFIED STOCK OPTION AGREEMENT
C DEFINITIONS
D RESTRICTED AREA
E FORM OF PROMISSORY NOTE
</TABLE>
<PAGE> 13
EXHIBIT C
DEFINITIONS
As used in Section 3 of this Agreement, the following terms shall have
the meanings ascribed to each below:
"Cause" means:
(A) Commission by Executive of a willful or grossly negligent act
which causes material harm to the Company,
(B) The commission or perpetration by Executive of any criminal
act involving a felony for which Executive is indicted or with
respect to which Executive pleads nolo contendere (or any
similar response), any act of moral turpitude, or any fraud
upon the Company,
(C) Habitual and unauthorized absenteeism by reason other than
physical or mental illness, chronic alcoholism or other form
of substance abuse resulting in material harm or actual or
potential physical danger to the Company or its employees,
(D) Any material violation by Executive of his obligations under
this Agreement or breach of his fiduciary obligations to the
Company,
(E) Any misrepresentation or breach by Executive of warranty
contained in Section 13 of this Agreement;
provided, however, that if the cause specified in notice to the
Executive of the termination of Employee's employment for Cause is such
that there is a reasonable prospect that it can be cured with diligent
effort within a reasonable time, Executive shall have such reasonable
time (having regard for the nature of the cause) to cure such cause,
which time shall not in any event exceed thirty (30) days from the date
of such notice, and Executive's employment shall continue in effect
during such reasonable time so long as Executive makes diligent efforts
during such time to cure such cause. If such cause shall be cured by
Executive during such reasonable time his employment and the
obligations of the Company hereunder shall not terminate as a result of
the notice which has been given with respect to such cause. Cure of any
cause with or without notice from the Company shall not relieve
Executive from any obligations to the Company under this Agreement or
otherwise and shall not affect the Company's rights upon the
reoccurrence of the same, or the occurrence of any other, cause. If
such cause shall not be cured within such reasonable time the
employment of Executive under this Agreement shall terminate upon the
expiration of such reasonable time.
<PAGE> 14
"Change in Control" means and includes each of the following:
(1) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 25% or more of the combined voting
power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that for purposes of
this subsection (1), the following acquisitions shall not constitute a
Change of Control: (i) any acquisition by a Person who is on the date
of this Agreement (the "Effective Date") the beneficial owner of 25% or
more of the Outstanding Company Voting Securities, (ii) any acquisition
by the Company, (iii) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (iv) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i),
(ii) and (iii) of subsection (3) of this definition; or
(2) Individuals who, as of the Effective Date, constitute
the Board of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board of Directors
of the Company; provided, however, that any individual becoming a
director subsequent to October 1, 1997 whose election, or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board of
Directors of the Company; or
(3) Consummation of a reorganization, share exchange,
merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Company
Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of
the Outstanding Company Voting Securities, and (ii) no Person
(excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 25% or more of the combined voting power
of the then outstanding voting securities of such corporation except to
the extent that such
-2-
<PAGE> 15
ownership existed prior to the Business Combination, and (iii) at least
a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the
action of the Board of Directors of the Company, providing for such
Business Combination; or
(4) approval by the shareholders of the Corporation of a
complete liquidation or dissolution of the Corporation.
"Disability" or "Disabled" means that by reason of any physical or mental
incapacity Executive has been unable, or it is reasonably expected that he will
be unable, for a period of at least one hundred and eighty (180) substantially
continuous days to perform his regular duties and responsibilities hereunder. In
the event of any disagreement between Executive and the Company as to whether
Executive is physically or mentally incapacitated, the question of such
incapacity shall be submitted to an impartial and reputable physician for
determination, selected by mutual agreement of Executive and the Company or,
failing such agreement, selected by two physicians (one of which shall be
selected by the Company and the other by Executive), and such determination of
the question of such incapacity by such physician shall be final and binding on
Executive and the Company. The Executive shall pay the fees and expenses of such
physician.
-3-
<PAGE> 16
EXHIBIT D
The area within the Metropolitan Statistical Area ("MSA") surrounding each city
listed below, as said MSA is determined from time to time by the U. S. Bureau of
the Census, or for each city with no MSA within fifty (50) miles of the city
limits.
Alabama Florida
Auburn Altamonte Springs
Birmingham Boynton Beach
Dothan Brandon
Huntsville Coral Springs
Mobile Davie
Montgomery Destin
Ft. Lauderdale
California Ft. Myers
Jacksonville Beach
San Francisco Jacksonville
Jensen Beach
Connecticut Kissimmee
Lake Mary
Hartford Largo
Merritt Island
Delaware Miami
Naples
Wilmington Ocala
Orlando
District of Columbia Sarasota
St. Augustine
St. Petersburg
Tallahassee
Tampa
D-1
<PAGE> 17
Georgia Maine
Albany Augusta
Athens Bangor
Atlanta Portland
Augusta
Austell Maryland
Cartersville
Chamblee Gaithersburg
College Park
Columbus Massachusetts
Conyers
Douglasville Boston
Duluth Braintree
Gainesville Framingham
Jonesboro Milford
Kennesaw Newton
Lawrenceville North Attleboro
Macon Peabody
Marietta Seekonk
Montgomery Watertown
Peachtree City
Rome Michigan
Roswell
Savannah Ann Arbor
Snellville Detroit
Tucker Troy
Valdosta
Minnesota
Illinois
Chicago Minneapolis
Vairview Heights
Missouri
Kentucky
St. Louis
Florence
New Hampshire
Concord
Newington
New York
Albany
Poughkeepsie
Rochester
White Plains
D-2
<PAGE> 18
North Carolina Pennsylvania
Burlington Philadelphia
Charlotte
Concord Rhode Island
Gastonia
Greensboro Providence
High Point Warwick
Huntersville
Pineville South Carolina
Winston-Salem
Columbia
Ohio Greenville
Hilton Head
Athens Spartanburg
Cincinnati
Cleveland Tennessee
Columbus
Cuyahoga Falls Antioch
Dublin Chattanooga
Fairview Park Hermitage
Mayfield Heights Jackson
Mentor Knoxville
North Canton Nashville
Solon Madison
Springdale
Strongsville Texas
Dallas
Houston
San Antonio
Executive acknowledges and agrees that the geographical area described above is
the area in which Executive will initially perform his services for the Company,
and that the area in which such services are performed is intended to expand as
the business of the Company grows. Executive and the Company agree that as the
geographical area in which the Company conducts its business expands, the list
of cities described on this Exhibit D shall be deemed to be amended, from time
to time, without any further consent, action or notice on the part of the
Company or Executive, to include each additional city in which the Company
operates a restaurant or a franchisee of the Company operates a restaurant under
the terms of a franchise from the Company. Executive agrees to execute one or
more amendments hereto upon the request of the Company from time to time in
order to confirm such amended list.
D-3
<PAGE> 1
EXHIBIT 21(a)
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name of Subsidiary State of Organization
- ------------------ ---------------------
<S> <C>
Bugaboo Creek Steak House, Inc.................................................. Delaware(1)
Bugaboo Investments, Inc........................................................ Delaware
RARE Capital, Inc............................................................... Delaware
WHIP Pooling Corporation........................................................ Georgia
Longhorn Steaks, Inc. .......................................................... Georgia
Buckeye Steak Ventures ......................................................... Georgia
Carolina Steakhouse Ventures ................................................... Georgia
Gold Coast Restaurant Group .................................................... Georgia
LSI-Elias Partners ............................................................. Florida
LSI-Elias Partners II .......................................................... Florida
LSI-Elias Partners III.......................................................... Georgia
RMA-LSI Joint Venture........................................................... Georgia
11102 Causeway Blvd. Limited Partnership........................................ Georgia
13701 S. Tamiami Trail Limited Partnership...................................... Florida
15135 N. Kendall Drive Limited Partnership...................................... Florida
153 Huffman Road Limited Partnership............................................ Georgia
16641 Statesville Road Limited Partnership...................................... Georgia
171 Harbison Boulevard Limited Partnership...................................... Georgia
17211 S. Park Center Limited Partnership........................................ Georgia
2176 Tyrone Boulevard .......................................................... Georgia
2260 University Limited ........................................................ Florida
2901 Federal Highway Limited Partnership ....................................... Georgia
34863 Emerald Coast Parkway Limited Partnership ................................ Georgia
505 North Congress, Ltd. ....................................................... Florida
5375 East Bay Limited Partnership .............................................. Georgia
5440 Fruitville Road Limited Partnership ....................................... Georgia
6035 Blazer Limited Partnership ................................................ Georgia
6201 Airport Blvd. Limited Partnership ......................................... Georgia
6225 North Andrews Avenue Limited Partnership .................................. Florida
719 Northside Drive East Limited Partnership ................................... Georgia
</TABLE>
(1) Bugaboo Creek Steak House, Inc. has 39 wholly owned subsidiaries
that carry on the business of owning and operating restaurants in the United
States, the names of which are not listed in this exhibit.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF KPMG LLP
EXHIBIT 23(A)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
RARE Hospitality International, Inc.
We consent to incorporation by reference in the registration statements No.
333-65485, No. 333-11983, No. 333-11963, No. 333-11969, No. 333-11977, No.
333-1028, No. 333-1030, and No. 33-57900 on Form S-8 of RARE Hospitality
International, Inc. of our report dated February 11, 1999, relating to the
consolidated balance sheets of RARE Hospitality International, Inc. as of
December 27, 1998 and December 28, 1997, and the related consolidated statements
of operations, shareholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 27, 1998, which report
appears in the December 27, 1998 annual report on Form 10-K of RARE Hospitality
International, Inc.
KPMG LLP
Atlanta, Georgia
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> DEC-27-1998
<CASH> 12,060
<SECURITIES> 0
<RECEIVABLES> 3,443
<ALLOWANCES> 0
<INVENTORY> 9,609
<CURRENT-ASSETS> 37,635
<PP&E> 167,810<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 220,352
<CURRENT-LIABILITIES> 36,499
<BONDS> 57,732
0
0
<COMMON> 105,092
<OTHER-SE> 15,526
<TOTAL-LIABILITY-AND-EQUITY> 220,352
<SALES> 319,084
<TOTAL-REVENUES> 319,084
<CGS> 116,602
<TOTAL-COSTS> 116,602
<OTHER-EXPENSES> 185,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,939
<INCOME-PRETAX> 12,873
<INCOME-TAX> 4,120
<INCOME-CONTINUING> 8,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,753
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.72
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 1,752
<SECURITIES> 609
<RECEIVABLES> 2,054
<ALLOWANCES> 0
<INVENTORY> 9,152
<CURRENT-ASSETS> 29,489
<PP&E> 155,758<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 195,486
<CURRENT-LIABILITIES> 28,130
<BONDS> 48,051
0
0
<COMMON> 103,981
<OTHER-SE> 7,999
<TOTAL-LIABILITY-AND-EQUITY> 195,486
<SALES> 264,727
<TOTAL-REVENUES> 264,754
<CGS> 97,568
<TOTAL-COSTS> 97,568
<OTHER-EXPENSES> 181,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,245
<INCOME-PRETAX> (17,232)
<INCOME-TAX> (5,000)
<INCOME-CONTINUING> (12,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,232)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
RARE Hospitality International, Inc. ("RARE") intends to qualify both
its written and oral forward-looking statements for protection under Section 27A
of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended, and any other similar safe harbor provisions.
Generally, forward-looking statements include expressed expectations of
future events and the assumptions on which the expressed expectations are based.
All forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of RARE. RARE undertakes
no obligation to update or revise this Safe Harbor Compliance Statement for
Forward-Looking Statements to reflect future developments. In addition, RARE
undertakes no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.
RARE provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking statements
for the safe harbor protection of the Securities Act of 1933 and the Securities
Exchange Act of 1934 and any other similar safe harbor provisions. Important
factors currently known to management that could cause actual results to differ
materially from those in forward-looking statements include the disclosures
contained in the Form 10-K to which this statement is attached as an exhibit and
also include the following:
WE MAY INCUR ADDITIONAL COSTS AND REDUCED PROFITS BY FAILING TO OPEN OR
BY DELAYING THE OPENING OF PLANNED RESTAURANTS
We are planning on opening 15 to 18 new restaurants in 1999. If we are
unable to open a new restaurant or have to delay the opening of a new
restaurant, we may incur substantial costs we would not otherwise incur, which
may directly decrease our profits. We may be unable to open such restaurants, or
open them on time, due to factors such as:
- Our inability to find quality locations to open new
restaurants;
- Our inability to reach acceptable agreements regarding the
lease or purchase of locations on which to open new
restaurants;
<PAGE> 2
- Our inability to raise or have available an adequate amount of
money to construct and open new restaurants;
- Our inability to hire, train and retain the skilled management
and other employees necessary to staff new restaurants when
they are scheduled to open.
- Our inability to obtain required permits and approvals to open
new restaurants;
- Our inability to efficiently manage the amount of time and
money used to build and open each new restaurant.
In addition, if we believe that we will be unable to open a new
restaurant because of one of the above factors, we may have to stop construction
of the restaurant or terminate any lease or purchase contract that we entered
regarding such restaurant and pay damages or a termination fee to the other
party to the contract.
WE MAY BE UNABLE TO PROFITABLY OPERATE NEW RESTAURANTS
As part of our expansion plans, we may open new restaurants in areas in
which we have little or no operating experience and in which potential customers
may not be familiar with our restaurants. As a result, we may have to incur
costs related to the opening, operation and promotion of those new restaurants
that are substantially greater than those incurred in other areas. Even though
we may incur substantial additional opening and promotion costs with these new
restaurants, they may fail to attract the number of customers that our more
established restaurants in existing markets attract. As a result, the revenue
and profit generated at new restaurants may not equal the revenue and profit
generated by our existing restaurants. The new restaurants may even operate at a
loss. Because of our limited number of existing restaurants, if we open one or
more new restaurants that we are unable to operate at a profit, this could have
a significant adverse effect on our overall profits.
Even if we do not incur substantial opening and promotion costs in
opening a new restaurant that we would not otherwise usually incur, we may not
be able to profitably operate a new restaurant in new markets. Most of our
restaurants are located in the southeastern United States. If we open
restaurants in areas where we did not previously have a restaurant, we may not
be able to attract enough customers to operate that restaurant at a profit
because potential customers may be unfamiliar with our restaurants or the
atmosphere or menu of our restaurants might not appeal to them.
Another part of our expansion plans is to open restaurants in markets
in which we already have existing restaurants. We may be unable to attract
enough customers to the new restaurants for them to operate at a profit. Even if
we are able to attract enough
-2-
<PAGE> 3
customers to the new restaurants to operate them at a profit, those customers
may be former customers of one of our existing restaurants in that market.
WE MAY EXPERIENCE HIGHER OPERATING COSTS DUE TO INCREASED PRICES AND
SALARIES.
If we have to increase the compensation to our employees or pay higher
prices for supplies and food items, we may have an increase in operating costs.
If we are unable to increase our menu prices or take other actions to offset our
increased operating costs, our profits will decrease. Many factors affect the
prices that we have to pay for the various food and other items that we need to
operate our restaurants, including seasonal fluctuations, changes in weather or
demand and inflation. Factors that may affect the salaries and benefits that we
pay to our employees, include the local unemployment rates and changes in
minimum wage and employee benefits laws. In addition to the above factors over
which we have no control, we may introduce new menu items and operating
procedures which may either temporarily or permanently result in increased food
or labor costs.
WE MAY LOSE REVENUE OR INCUR INCREASED COSTS IF OUR RESTAURANTS DO NOT
RECEIVE FREQUENT DELIVERIES OF FOOD AND OTHER SUPPLIES.
We have a contract with a single distributor for the distribution of
most meat, food and other supplies for our LongHorn Steakhouse and Bugaboo Creek
Steak House restaurants. Although we believe that we would be able to replace
this distributor or to return to our prior system of using multiple distributors
for these restaurants, our inability to do so in a short period of time on
acceptable terms could increase our costs or could cause shortages at our
restaurants of food and other items which may cause us to remove certain items
from a restaurant's menu or temporarily close a restaurant. If we temporarily
close a restaurant or remove popular items from a restaurant's menu, that
restaurant may experience a significant reduction in revenue during the time
affected by the shortage.
WE DEPEND ON SENIOR MANAGEMENT FOR SUCCESSFUL OPERATION
We believe that we will highly depend on the services of Philip J.
Hickey, Jr. and Eugene I. Lee. If we lost the services of either Messrs. Hickey,
Jr. or Lee, for any reason, we may be unable to replace them with qualified
personnel which could have a material adverse effect on our business and
development. Although we have employment agreements with Messrs. Hickey, Jr. and
Lee, we could not prevent them from terminating their employment with us. Also,
we do not carry key person life insurance on Messrs. Hickey, Jr. or Lee.
-3-
<PAGE> 4
OUR RESTAURANTS MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY
WITH OTHER RESTAURANTS.
If our restaurants are unable to continue to compete successfully with
other restaurants in new and existing markets, we may lose significant revenue.
Our industry is intensely competitive with respect to price, service, location,
type and quality of food. We compete with other restaurants for customers,
restaurant locations and qualified management and other restaurant staff. Our
LongHorn Steakhouse and Bugaboo Creek Steak House restaurants compete with other
mid-priced, full service, casual dining restaurants, including steakhouses, such
as Outback Steakhouse, Lone Star Steaks and Logan's Roadhouse. Our The Capital
Grille restaurants compete with other upscale restaurants, including
steakhouses, such as Morton's of Chicago, Ruth's Chris Steakhouse and The Palm
as well as independent operators. Some of our competitors have greater financial
resources than we have, have been in business longer or are better established
in the markets where our restaurants are located or are planned to be located.
In addition, we may have to make changes in one or more of our concepts
in order to respond to changes in consumer tastes or dining patterns. If we
change a restaurant concept, we may have different or additional competitors for
our intended customers and may not be able to successfully compete against such
competitors.
WE MAY INCUR ADDITIONAL COSTS OR LIABILITY AND LOSE REVENUE AS THE
RESULT OF GOVERNMENT REGULATION.
Our restaurants are subject to extensive federal, state and local
government regulation, including regulations related to the preparation and sale
of food, the sale of alcoholic beverages, zoning and building codes, and other
health, sanitation and safety matters. Our restaurants may lose revenue if they
are unable to maintain liquor or other licenses required to serve alcoholic
beverages or food. If one or more of our restaurants was unable to serve alcohol
or food for even a short time period, we could experience a reduction in our
overall revenue.
The costs of operating our restaurants may increase if there are
changes in minimum hourly wages, workers' compensation insurance rates,
unemployment tax rates, sales tax, laws and regulations governing access for the
disabled, such as the Federal American with Disabilities Act, and similar
matters over which we have no control. If any of the above costs increased and
we were unable to offset such increase by increasing our menu prices or by other
means, we would generate lower profits.
Our restaurants are subject in each state in which we operate to "dram
shop" laws which allow a person to sue us if that person was injured by a
legally intoxicated person who was wrongfully served alcoholic beverages at one
of our restaurants. We carry liquor liability coverage as part of our existing
insurance. However, a lawsuit under a dram shop law may result in a verdict in
excess of our policy limits which could result in
-4-
<PAGE> 5
substantial liability for us and which may have an adverse material effect on
our profitability and business.
WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE.
The market price of our common stock may experience significant
volatility from time to time. Such volatility may be affected by factors such as
our quarterly operating results or changes in the economy, financial markets or
the restaurant industry in general. In recent years, the stock market has
experienced extreme price and volume fluctuations which has had a significant
effect on the market prices of the securities issued by a company which may be
unrelated to the operational performance of the company. In addition, we may be
subject to securities class action litigation if the market price of our stock
experiences significant volatility. Our management's attention and resources may
be diverted from normal operations if we would become subject to any securities
class action, which may have a material adverse effect on our business.
OUR ANTI-TAKEOVER PROVISIONS MAY LIMIT SHAREHOLDER VALUE.
We have provisions in our articles of incorporation and in our
shareholder protection rights agreement that may discourage or prevent a person
or group from acquiring us without our approval. A shareholder may not receive
as much in exchange for their shares of common stock as they could without these
provisions. The following is a description of the above provisions that may
reduce the market value of our shares of common stock.
Under our shareholder protection rights agreement, we distributed one
preferred stock purchase right for each outstanding share of our common stock to
the shareholders of record on November 20, 1997. Each right entitles holders of
a share of our common stock to purchase one one-hundredth of a share of our
junior participating preferred stock at an exercise price initially equal to
$48.00. Each one one-hundredth of a share of our junior participating preferred
stock (1) has the same voting rights as one share of our common stock and (2)
would be paid dividends at least equal to the dividends paid on each share of
our common stock. Our preferred stock purchase rights are exercisable only if a
person or group acquires beneficial ownership of 15% or more of our common
stock, or announces a tender or exchange offer upon completion of which such
person or group would beneficially own 15% or more of our common stock. If a
person or group becomes a beneficial owner of 15% or more of our common stock,
then each right not owned by the person or group entitles its holder to
purchase, for an amount of cash equal to the right's then-current exercise
price, shares of our common stock having a value equal to twice the right's
exercise price. We may redeem the rights at a price of $.01 per right at any
time until the close of business on the tenth business day following our
announcement that a person or group has become the beneficial owner of 15% or
more of our common stock.
-5-
<PAGE> 6
Our articles of incorporation contain a provision which provides that
our board of directors consists of three classes of directors. Each class has
the same number of directors or as close to equal as possible. The directors of
each class serve for a term of three years with each class' term expiring in
different successive years. For example, the term of the first class may expire
in 1999 and each director elected in the first class in 1999 would serve until
2002, the term of the second class would expire in 2000 and each director
elected in the second class in 2000 would serve until 2003, and the term of
third class would expire in 2001 and each director elected in 2001 would serve
until 2004. As a result, shareholders with sufficient shares to determine the
election of directors would have to vote for their nominees at two successive
annual meetings of shareholders in order to elect a majority of the directors.
-6-
