<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1999 COMMISSION FILE NUMBER 0-19924
----------------
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 (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. [X]
As of March 15, 2000, 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 $186,155,720 based upon the last reported sale price in the
Nasdaq National Market on March 15, 2000 of $17.125.
As of March 15, 2000, the number of shares outstanding of the
Registrant's Common Stock, no par value, was 11,841,100.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 15, 2000 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. and its subsidiaries (the "Company") intend to
open during fiscal 2000, 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; 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.
================================================================================
-2-
<PAGE> 3
RARE HOSPITALITY INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
Part I
<S> <C> <C>
Item 1. Business.............................................. 4
Item 2. Properties............................................ 13
Item 3. Legal Proceedings..................................... 13
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............................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk......................................... 23
Item 8. Financial Statements and Supplementary Data........... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................. 42
Part III
Item 10. Directors and Executive Officers of the Registrant.... 42
Item 11. Executive Compensation................................ 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 42
Item 13. Certain Relationships and Related Transactions........ 43
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................. 43
Signatures......................................................... 45
Financial Statement Schedules
Exhibits
</TABLE>
-3-
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
RARE Hospitality International, Inc. and subsidiaries (the "Company"),
formerly known as LongHorn Steaks, Inc., operates and franchises 157 restaurants
as of March 15, 2000, including 126 LongHorn Steakhouse restaurants, 18
restaurants operated under the names Bugaboo Creek Steak House and Bugaboo Creek
Lodge & Bar ("Bugaboo Creek"), 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 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 18 Bugaboo Creek restaurants are located primarily in the
northeastern and mid-Atlantic regions of the United States. The Bugaboo Creek
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.
-4-
<PAGE> 5
RESTAURANT LOCATIONS
The following tables set forth the location of each existing restaurant
and restaurant under construction by concept at March 15, 2000 and the number of
restaurants in each area.
LONGHORN STEAKHOUSE RESTAURANTS
EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS
<TABLE>
<S> <C>
ALABAMA
Dothan ........................................................ 1
Huntsville .................................................... 1
Mobile ........................................................ 1
Montgomery .................................................... 1
FLORIDA
Daytona Beach ................................................. 1
Destin ........................................................ 1
Ft. Myers ..................................................... 2
Jacksonville .................................................. 4
Miami/Ft. Lauderdale .......................................... 6
Ocala ......................................................... 1
Orlando ....................................................... 6
St. Augustine ................................................. 1
Tallahassee ................................................... 1
Tampa/ St. Petersburg ......................................... 6
West Palm Beach ............................................... 2
GEORGIA
Albany ........................................................ 1
Athens ........................................................ 1
Atlanta ....................................................... 25
Augusta ....................................................... 1
Buford ........................................................ 1
Cartersville .................................................. 1
Columbus ...................................................... 1
Dalton ........................................................ 1
Macon ......................................................... 1
Newnan ........................................................ 1
Rome .......................................................... 1
Savannah ...................................................... 1
Statesboro .................................................... 1
Valdosta ...................................................... 1
Warner Robbins ................................................ 1
Woodstock ..................................................... 1
ILLINOIS
Fairview Heights ............................................. 1
KENTUCKY
Florence ..................................................... 1
MISSOURI
St. Louis ..................................................... 4
NEW HAMPSHIRE
Concord ....................................................... 1
NORTH CAROLINA
Burlington .................................................... 1
Charlotte ..................................................... 5
Greensboro/High Point/Winston-Salem ........................... 3
Hickory ....................................................... 1
OHIO
Cincinnati .................................................... 4
Cleveland ..................................................... 7
Columbus ...................................................... 4
</TABLE>
-5-
<PAGE> 6
<TABLE>
<S> <C>
Pickerington .................................................. 1
St. Clairsville ............................................... 1
SOUTH CAROLINA
Columbia ...................................................... 3
Greenville/Spartanburg ........................................ 2
Hilton Head ................................................... 1
Rock Hill ..................................................... 1
TENNESSEE
Chattanooga ................................................... 1
Clarksville ................................................... 1
Nashville ..................................................... 4
WEST VIRGINIA
Charleston .................................................... 1
Total Existing Company-Owned/Joint Venture Restaurants ..... 123
EXISTING FRANCHISEE-OWNED RESTAURANTS
PUERTO RICO
Bayamon ...................................................... 1
Carolina ..................................................... 1
San Patricio ................................................. 1
Total Existing Franchisee-Owned Restaurants ............ 3
Total LongHorn Steakhouse Restaurants .................. 126
</TABLE>
BUGABOO CREEK RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
<TABLE>
<S> <C>
CONNECTICUT
Manchester .................................................... 1
DELAWARE
Newark ....................................................... 1
GEORGIA
Duluth ........................................................ 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 Restaurants ........................... 18
</TABLE>
-6-
<PAGE> 7
THE CAPITAL GRILLE RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
<TABLE>
<S> <C>
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
</TABLE>
SPECIALTY RESTAURANTS
EXISTING COMPANY-OWNED RESTAURANTS
<TABLE>
<S> <C>
MASSACHUSETTS
The Old Grist Mill Tavern, Seekonk ............................ 1
RHODE ISLAND
Hemenway's Seafood Grille & Oyster Bar, Providence ............ 1
Total Specialty Restaurants ............................. 2
</TABLE>
RESTAURANTS UNDER CONSTRUCTION
<TABLE>
<S> <C>
FLORIDA
LongHorn Steakhouse, Gulf Gate .............................. 1
LongHorn Steakhouse, Southchase ............................. 1
LongHorn Steakhouse, Waterford Lakes ........................ 1
KENTUCKY
LongHorn Steakhouse, Bowling Green .......................... 1
MISSOURI
LongHorn Steakhouse, Chesterfield ........................... 1
NORTH CAROLINA
LongHorn Steakhouse, Charlotte .............................. 1
Total Restaurants Under Construction .................... 6
</TABLE>
-7-
<PAGE> 8
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 198 seats for LongHorn Steakhouse restaurants opened in 1999.
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 31 of its LongHorn Steakhouse restaurants in operation and owns two sites
for restaurants under construction. The Company purchases land only in those
circumstances it believes are cost-effective. Four of the 15 LongHorn Steakhouse
restaurants opened in 1999 were located on property purchased at an average cost
of approximately $707,000 per location. The average cash investment to open a
LongHorn Steakhouse restaurant in 1999 was approximately $1,251,000, excluding
real estate costs and excluding pre-opening expenses of approximately $158,000.
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 began to expense pre-opening costs as
incurred.
BUGABOO CREEK
The Company has developed a modified Bugaboo Creek restaurant design,
which served as the prototype for the Bugaboo Creek restaurant constructed in
1999. This modified design is smaller than earlier designs and utilizes
approximately 6,575 square feet with a capacity of 233 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 new restaurants.
The Company intends to continue to emphasize leasing as its preferred
arrangement for Bugaboo Creek sites and currently leases all but one of its
Bugaboo Creek sites. The Company purchases land only in those circumstances it
believes are cost-effective. The Bugaboo Creek restaurant opened in 1999 was
located on leased property. The cash investment to construct the Bugaboo Creek
restaurant opened in 1999 was approximately $1,736,000, excluding pre-opening
expenses of approximately $175,000. 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
began to 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 to balance control of 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. Through December 27,
1998, the Company amortized pre-opening expenses over the first 12 months of
each 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 RESTAURANTS:
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 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, and South Carolina. The Company plans
to continue to expand its restaurant base by clustering its restaurants in
existing and new markets, with LongHorn Steakhouse restaurants currently located
primarily in the southeastern and midwestern regions of the United States and
Bugaboo Creek restaurants located primarily in the northeastern and mid-Atlantic
regions of the United States. Beginning in 2000, the Company intends to begin to
open LongHorn Steakhouse restaurants in the northeastern United States.
The Company believes that clustering in existing markets enhances its
ability to supervise operations, market the Company's concepts and distribute
supplies. The Company, however, also intends to open single restaurants in
smaller markets in
-8-
<PAGE> 9
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 19 to 22 Company-owned and joint venture
restaurants in 2000: 17 to 19 LongHorn Steakhouse restaurants; one Bugaboo Creek
restaurant and one to two The Capital Grille restaurants. Of the restaurants
proposed for 2000, the Company has opened five LongHorn Steakhouse restaurants,
has six restaurants under construction in Virginia, Missouri, Kentucky, Florida,
and North Carolina, and has signed leases on sites for 11 additional restaurants
as of March 15, 2000. The Company expects that one of the 17 to 19 LongHorn
Steakhouse restaurants to be opened in 2000 will be developed under an existing
joint venture relationship, and that all of the Bugaboo Creek and The Capital
Grille restaurants to be opened in 2000 will be Company-owned.
In September 1999, the Company acquired the ownership interest of its
joint venture partner in ten LongHorn Steakhouse restaurants located in south
Florida markets for an aggregate purchase price of approximately $2.9 million;
comprised of 104,000 shares of Company common stock and approximately $600,000
in notes payable in a transaction accounted for under the purchase method.
Subsequent to the completion of this joint venture acquisition, the Company
became the active manager of all non-franchised LongHorn Steakhouse restaurants.
In May 1999, the Company acquired the ownership interest of its joint
venture partner in four LongHorn Steakhouse restaurants located in the Columbus,
Ohio market for an aggregate purchase price of $750,000; comprised of 25,000
shares of Company common stock, $150,000 in cash and a $30,000 note, in a
transaction accounted for under the purchase method.
The 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 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 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 34 of the Company's restaurant sites are leased (including two
sites for restaurants currently under construction).
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 198 seats in
approximately 5,200 square feet of space for LongHorn Steakhouse restaurants
opened in 1999. 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.
-9-
<PAGE> 10
The Company has renovated and remodeled some of the older LongHorn
Steakhouse restaurants to include cosmetic improvements such as repainting and
refinishing, new booths, new lighting and various decor adjustments. Exterior
improvements encompassed repainting and additional lighting designed to convey a
more inviting image.
The Company has modified its Bugaboo Creek prototype restaurant design
to incorporate a smaller seating capacity than its average restaurant. This new
prototype was utilized for the Bugaboo Creek restaurant opened in 1999. The
Company has implemented the new prototype with the objective of reducing the
capital expenditure required for new restaurant construction and reducing
ongoing operating costs.
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 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
LongHorn Steakhouse regional managers, who each have responsibility for the
operating performance of four to seven Company-owned LongHorn Steakhouse
restaurants or joint venture restaurants and report directly to one of the
Directors of Operations for the LongHorn Steakhouse concept. The Directors of
Operations report to the Senior Vice President of Operations of the LongHorn
Steakhouse division. The Company employs Bugaboo Creek regional managers, who
each have responsibility for the operating performance of from four to six
Bugaboo Creek restaurants and The Old Grist Mill Tavern. All of these regional
managers report directly to the Vice President of Operations for the Bugaboo
Creek concept. The Company also employs 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 guest 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 1999, stock options were awarded to 29 LongHorn Steakhouse
restaurant-level managing partners, general managers and assistant managers, and
restricted stock awards were made to five LongHorn Steakhouse restaurant-level
managing partners in compliance with their respective managing partner
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
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
and other protein products, 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 restaurants, beef is
aged at the facility of the Company's largest distributor, who delivers the beef
to the LongHorn Steakhouse and Bugaboo Creek restaurants when the age reaches
specified guidelines. This arrangement is closely monitored by Company personnel
and management believes it provides for efficient and cost-effective meat
processing and distribution, while maintaining the Company's control and
supervision of purchasing and aging. 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. The Company generally utilizes a different distribution
system for each of its restaurant concepts.
-10-
<PAGE> 11
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. 95 LongHorn Steakhouse restaurants, all
Bugaboo Creek 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 28
LongHorn Steakhouse restaurants as of March 15, 2000. 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 and limited partnerships pay fees to the Company at
the rate of $3,000 to $6,500 per restaurant per month. At present, all
restaurants are managed by the Company. 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. One of the joint
ventures has an area development agreement with the Company for the development
of additional restaurants. One other joint venture does not have specific
development rights although the Company has agreed, during a specified time, not
to establish restaurants in its market areas except through the joint venture.
The joint venture partnerships are terminable by either joint venture
partner upon default by the other partner. Two of the joint ventures give the
Company the option under certain circumstances to acquire the interest of the
Company's joint venture partner.
Franchised Restaurants. As of March 15, 2000, 24 of the 28 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. As of March 15, 2000, this franchisee
operated three LongHorn Steakhouse restaurants in Puerto Rico.
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
-11-
<PAGE> 12
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. 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. 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 and has an application pending with respect to BUGABOO CREEK LODGE & BAR
and design. 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 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 1999, approximately 15.3% 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 significant
delays or
-12-
<PAGE> 13
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. A significant number of the Company's
food service and preparation personnel receive gratuities and are paid at rates
related to the federal minimum wage. Significant additional government-imposed
increases in minimum wages, paid leaves-of-absence, mandated health benefits or
increased tax reporting and tax payment requirements with respect to employees
who receive gratuities would have an adverse effect on the profitability of the
Company.
EMPLOYEES
As of March 15, 2000, the Company employed approximately 9,250 persons,
166 of whom were corporate personnel, 682 of whom were restaurant management
personnel and the remainder of whom were hourly personnel. Of the 166 corporate
employees, 52 are in management positions and 114 are administrative or office
employees. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
As of March 15, 2000, all but 34 of the Company's restaurants were
located in leased space (including two sites for restaurants under
construction). Initial lease expirations typically range from ten to fifteen
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 foot 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. The
Company has recently entered into a contract to purchase an additional 5,000
square foot office building located adjacent to its corporate offices 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 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
-13-
<PAGE> 14
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 13, 1998, this action and the
counterclaim were dismissed without prejudice.
On June 9, 1998, the Company filed a Demand for Arbitration with the
American Arbitration Association in Atlanta, Georgia styled RARE Hospitality
International, Inc. v. Moo Management, Inc., AAA Case no. 30418025798, and filed
an Amended Demand for Arbitration on July 7, 1998. In this arbitration, the
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.
Following a preliminary hearing on this matter held on December 18,
1998, this action and the counterclaim were dismissed without prejudice.
A hearing was held on July 23, 1998, with respect to the Company's
request for preliminary relief. On July 29, 1998, the arbitrator entered an
Order determining that the Company's request for preliminary injunctive relief
was subject to arbitration, that the arbitrator had jurisdiction to decide that
request and granting the Company's request for preliminary relief by ordering
Moo to sign on behalf of RTL Joint Venture an assignment of the Ground Lease to
the Company. The Company must also make an accounting to Moo on a monthly basis
of the operations of the Bugaboo Creek Steak House restaurant operated on the
Ground Lease until further order of the arbitrator.
On August 6, 1998, Moo filed an Answer and Counterclaim in the
arbitration. In its Answer and Counterclaim, Moo denies the Company's claim,
alleges that the Company has waived its right to arbitration and that the
tribunal is without jurisdiction to hear the matter, makes essentially the same
counterclaims as contained in Moo's Answer and Counterclaim in the Delaware
action described above and seeks unspecified damages in an amount to be proven,
but not less than $5,000,000.
The week of December 7, 1998, an evidentiary hearing was conducted in
the arbitration with respect to only the issue of liability, if any, of the
Company. The hearing was continued and concluded with closing arguments on March
11, 1999. On May 26, 1999, the arbitrator rendered a decision on liability and
ruled that the Company and Moo did reach agreement to become partners in the
development of Bugaboo Creek Steak House restaurants in certain territories. The
arbitrator further ruled that the Company is liable to Moo for actual damages it
sustained, if any, from the Company's failure to perform the agreement. The
damages phase of the arbitration continued with a hearing in January 2000, at
which time the Company asserted that no damages were sustained by Moo as a
result of the Company's failure to develop Bugaboo Creek Steak House restaurants
with Moo and Moo asserted damages of up to $7.7 million. It is anticipated that
the arbitrator will render a decision on damages in the first quarter of 2000.
Management continues to believe that the Company's position has merit
and that the resolution of these matters will not have a material adverse effect
on the Company's financial condition.
-14-
<PAGE> 15
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 1999.
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 26, 1999 HIGH LOW
----------------------------------- ---- ---
<S> <C> <C>
First Quarter................................ $ 15 5/8 $ 12 3/4
Second Quarter............................... 26 3/16 13 1/4
Third Quarter................................ 25 3/4 17 11/16
Fourth Quarter............................... 22 3/8 15 1/8
</TABLE>
<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
</TABLE>
As of March 15, 2000, there were approximately 324 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 prior to
their acquisition by the Company.
In September 1999, the Company issued 104,000 shares of its common
stock (The "Underwood Shares") and issued approximately $600,000 in notes
payable to JJU, Inc. in exchange for JJU's interest in Gold Coast Restaurant
Group, a joint venture partnership between JJU, Inc. and the Company. Exemption
from registration of the issuance of the Underwood 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 May 1999, the Company issued 25,000 shares of its common stock (the
"Denti Shares"), paid $150,000 in cash and issued a $30,000 note payable to
Denti Restaurant Group, Inc. ("Denti") in exchange for Denti's interest in
Buckeye Steakhouse Ventures, a joint venture partnership between Denti and The
Company. Exemption from registration of the issuance of the Denti 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.
-15-
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
Following is selected consolidated financial data as of and for each of
the fiscal years in the five-year period ended December 26, 1999. The
Consolidated Financial Statements as of December 26, 1999 and December 27, 1998
and for each of the years in the three-year period ended December 26, 1999 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 26, DEC 27, DEC. 28, DEC. 29, DEC. 31,
1999 1998 1997 1996 1995
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales ................................ $382,275 $319,084 $ 264,727 $ 212,894 $ 149,279
Wholesale meat sales ............................ -- -- -- 2,547 6,495
Franchise revenues .............................. 195 -- 27 308 606
-------- -------- --------- --------- ---------
Total revenues ............................... 382,470 319,084 264,754 215,749 156,380
Costs and expenses:
Cost of restaurant sales ........................ 137,416 116,602 97,568 78,637 54,074
Cost of wholesale meat sales .................... -- -- -- 2,491 6,159
Operating expenses -- restaurants ................ 171,943 142,730 119,480 94,587 67,629
Operating expenses -- meat division .............. -- -- -- 234 766
Provision for asset impairments,
restaurant closings, and other charges ......... 1,800 2,500 23,666 1,436 155
Merger and conversion expenses .................. -- -- -- 2,900 --
Depreciation and amortization -- restaurants .... 15,249 17,636 15,218 12,191 7,171
Pre-opening expense ............................. 3,051 -- -- -- --
General and administrative expenses ............. 26,052 22,470 23,590 13,732 11,082
-------- -------- --------- --------- ---------
Total costs and expenses ..................... 355,511 301,938 279,522 206,208 147,036
-------- -------- --------- --------- ---------
Operating income (loss) ...................... 26,959 17,146 (14,768) 9,541 9,344
Interest expense (income), net ................... 3,866 2,939 1,245 (79) (291)
Provision for litigation settlement .............. -- -- -- 605 --
Minority interest ................................ 1,609 1,334 1,219 602 5
-------- -------- --------- --------- ---------
Earnings (loss) before income taxes .......... 21,484 12,873 (17,232) 8,413 9,630
Income tax expense (benefit) ..................... 7,060 4,120 (5,000) 3,170 3,047
-------- -------- --------- --------- ---------
Earnings (loss) before cumulative effect
of change in accounting principle ......... 14,424 8,753 (12,232) 5,243 6,583
Cumulative effect of change in accounting
principle (net of tax benefit of $760) ......... 1,587 -- -- -- --
-------- -------- --------- --------- ---------
Net earnings (loss) .......................... $ 12,837 $ 8,753 $ (12,232) $ 5,243 $ 6,583
======== ======== ========= ========= =========
Basic earnings (loss) per common share before
cumulative effect of change in accounting
principle ....................................... $ 1.20 $ 0.73 $ (1.04) $ 0.46 $ 0.67
Cumulative effect per common share of
change in accounting principle .................. 0.13 -- -- -- --
-------- -------- --------- --------- ---------
Basic earnings (loss) per common share ........... $ 1.07 $ 0.73 $ (1.04) $ 0.46 $ 0.67
======== ======== ========= ========= =========
Diluted earnings (loss) per common share
before cumulative effect of change in
accounting principle ............................ $ 1.15 $ 0.72 $ (1.04) $ 0.45 $ 0.66
Cumulative effect per common share of
change in accounting principle .................. 0.13 -- -- -- --
-------- -------- --------- --------- ---------
Diluted earnings (loss) per common share ......... $ 1.02 $ 0.72 $ (1.04) $ 0.45 $ 0.66
======== ======== ========= ========= =========
Weighted average common shares
outstanding (basic) ............................. 12,032 12,004 11,751 11,302 9,753
======== ======== ========= ========= =========
Weighted average common shares
outstanding (diluted) ........................... 12,546 12,099 11,751 11,631 9,955
======== ======== ========= ========= =========
</TABLE>
-16-
<PAGE> 17
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------------------
DEC 26, DEC 27, DEC. 28, DEC. 29, DEC. 31,
1999 1998 1997 1996 1995
----------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) ................... $ (11,031) $ 1,136 $ 1,359 $ 2,065 $ 561
Total assets ................................ 237,118 218,862 195,486 151,594 107,735
Debt, net of current installments ........... 40,000 48,000 43,000 7,100 13,858
Obligations under capital leases, net of
current installments ...................... 9,732 9,732 5,051 -- --
Minority interest ........................... 3,982 2,610 4,890 3,301 615
Total shareholders' equity .................. 137,584 120,618 111,980 121,384 78,133
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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 for fiscal years prior to 1999,
amortization 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.
The Company defines the comparable restaurant base for 1999 and 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 affected significantly 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.
-17-
<PAGE> 18
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 26, DECEMBER 27, DECEMBER 28,
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Revenues:
Restaurant Sales:
LongHorn Steakhouse ............................ 68.1% 66.3% 64.3%
The Capital Grille ............................. 15.1 16.0 14.9
Bugaboo Creek .................................. 14.9 15.7 16.9
Other restaurants .............................. 1.8 2.0 3.9
----- ----- -----
Total restaurant sales ...................... 99.9 100.0 100.0
Franchise revenues ............................... 0.1 -- --
----- ----- -----
Total revenues .............................. 100.0 100.0 100.0
Costs and expenses:
Cost of restaurant sales(1) ..................... 35.9 36.5 36.9
Operating expenses -- restaurants(1) ............ 45.0 44.7 45.1
Provision for asset impairments,
restaurant closings, and other charges ........ 0.5 0.8 8.9
Depreciation and amortization -- restaurants(1) 4.0 5.5 5.7
Pre-opening expense -- restaurants(1) ........... 0.8 -- --
General and administrative expenses ............. 6.8 7.0 8.9
----- ----- -----
Total costs and expenses .................... 93.0 94.6 105.5
----- ----- -----
Operating income (loss) ..................... 7.0 5.4 (5.5)
Interest expense (income), net ................... 1.0 0.9 0.5
Minority interest ................................ 0.4 0.4 0.5
----- ----- -----
Earnings (loss) before income taxes ......... 5.6 4.0 (6.5)
Income tax expense (benefit) .................... 1.8 1.3 (1.9)
----- ----- -----
Earnings before cumulative effect of
change in accounting principle ............. 3.8 2.7 (4.6)
Cumulative effect of change in accounting
principle (net of tax benefit) .................. 0.4 -- --
----- ----- -----
Net earnings (loss) ............................ 3.4% 2.7% (4.6)%
===== ===== =====
</TABLE>
- ------------
(1) Cost of restaurant sales, restaurant operating expenses, depreciation
and amortization and pre-opening expense are expressed as a percentage
of total restaurant sales.
RESULTS OF OPERATIONS
Year Ended December 26, 1999 Compared to Year Ended December 27, 1998
REVENUES
Total revenues increased 19.9% to $382.5 million for 1999 compared to $319.1
million for 1998.
LongHorn Steakhouse:
Sales in the LongHorn Steakhouse restaurants increased 23.2% to $260.5
million for 1999, compared to $211.4 million for 1998. The increase reflects a
13.8% increase in restaurant operating weeks in 1999 as compared to 1998,
resulting from an increase in the restaurant base from 104 company-owned and
joint venture LongHorn Steakhouse restaurants at the end of 1998 to 118
restaurants at the end of 1999. Average weekly sales for all company-owned and
joint venture LongHorn Steakhouse restaurants in 1999 were $45,086, an 8.3%
increase over 1998. Sales for the comparable LongHorn Steakhouse restaurants
increased 5.9% in 1999 as compared to 1998. The increase in comparable
restaurant sales for 1999 at LongHorn Steakhouse was attributable primarily to
an increase in guest counts.
-18-
<PAGE> 19
The Capital Grille:
Sales in The Capital Grille restaurants increased 13.3% to $57.9
million for 1999, compared to $51.1 million for 1998. Average weekly sales for
all The Capital Grille restaurants in 1999 were $101,207, a 13.3% increase from
1998. Sales for the comparable The Capital Grille restaurants increased 9.4% in
1999, as compared to 1998. The increase in total and comparable restaurant sales
at The Capital Grille restaurants is attributable primarily to an increase in
guest counts. The increase in average weekly sales was greater than the increase
in comparable restaurant sales due to the closure of an underperforming The
Capital Grille restaurant in the fourth quarter of 1998.
Bugaboo Creek:
Sales in the Bugaboo Creek restaurants increased 13.6% to $56.9 million
for 1999, compared to $50.1 million for 1998. The increase reflects a 9.5%
increase in restaurant weeks in 1999 as compared to 1998, resulting from an
increase in the restaurant base from 17 Bugaboo Creek restaurants at the end of
1998 to 18 restaurants at the end of 1999. Average weekly sales for all Bugaboo
Creek restaurants in 1999 were $63,109, a 3.8% increase from 1998. Sales for the
comparable Bugaboo Creek restaurants increased 1.6% in 1999, as compared to
1998. The increase in comparable restaurant sales at Bugaboo Creek restaurants
is attributable primarily to an increase in guest 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. In October 1999, the Company's franchisee opened its second
franchise LongHorn Steakhouse in Puerto Rico. In 1999 the Company received
$195,000 in franchise revenue.
COSTS AND EXPENSES
Cost of restaurant sales, as a percentage of restaurant sales,
decreased to 35.9% in 1999 from 36.5% in 1998. This decrease is due, in part, to
favorable purchasing contracts negotiated during the year, which reduced the
cost of restaurant sales as a percentage of restaurant sales.
Restaurant operating expenses increased as a percentage of restaurant
sales in 1999 to 45.0% from 44.7% in 1998. This was due to an increase in
management incentives and advertising expense, partially offset by greater
leverage of fixed and semi-fixed expenses.
The provision for asset impairments, restaurant closings, and other
charges of $1.8 million in 1999 consisted primarily of the write down of two
Bugaboo Creek restaurants, which 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 impaired assets.
General and administrative expenses of $26.1 million in 1999 decreased,
as a percent of sales, to 6.8% of total revenues, from $22.5 million in 1998, or
7.0% of total revenues. The decrease as a percentage of total revenues was due
primarily to the increase in sales in 1999 as partially offset by higher general
and administrative expenses in 1999, primarily payroll related, associated with
building the infrastructure necessary to support the Company's growth.
Interest expense increased to $3.9 million in 1999 compared to $2.9
million in 1998. The increase in interest expense is due to higher average
balances outstanding under the Company's obligations under capital leases as
well as additional expenses associated with amending the Company's $100 million
revolving credit facility. The Company's weighted average interest rate on
borrowings, including the amortization of debt issue costs, under its revolving
credit facility was approximately 8.7% in 1999, compared to 7.8% in 1998.
Minority interest increased to $1.6 million in 1999 from $1.3 million
in 1998. This reflects an increase in the number of joint venture restaurants
for most of 1999 and the improved performance of the joint venture restaurants,
partially offset by the purchase of joint venture partners' partnership
interests in 14 joint venture restaurants during 1999.
Income tax expense in 1999 was 32.9% 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.
-19-
<PAGE> 20
Net income of $12.8 million in 1999, as compared to net income of $8.8
million in 1998, reflects the net effect of the items discussed above after
taking into consideration the charge related to the cumulative effect of change
in accounting principle (net of tax) in 1999 of $1.6 million. This charge was
associated with the Company's adoption of SOP 98-5 in the first quarter of 1999
requiring the write-off of the balance of previously unamortized preopening
expenses.
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 guest counts.
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 guest counts.
Bugaboo Creek:
Sales in the Bugaboo Creek 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 restaurants at the end of
1997 to 17 restaurants at the end of 1998. Average weekly sales for all Bugaboo
Creek restaurants in 1998 were $60,788, a 2.8% increase from 1997. Sales for the
comparable Bugaboo Creek restaurants decreased 2.5% in 1998 as compared to 1997.
The decrease in comparable restaurant sales at Bugaboo Creek restaurants is
primarily attributable to a decrease in guest 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 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.
-20-
<PAGE> 21
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, including the amortization of debt issue costs,
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development of new
restaurants, selected acquisitions and the refurbishment of existing
restaurants. The Company's principal financing source in 1999 was cash flow from
operations ($36.7 million). The primary use of funds consisted of costs
associated with expansion, principally leasehold improvements, equipment, land
and buildings associated with the construction of new restaurants ($36.8
million) and repayment of borrowings under the Company's revolving credit
facility ($8 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 inventory, prepaid expenses, accounts payable, and
accrued expenses are principally due to the new restaurants which were opened
during 1999 and the result of higher average unit volumes experienced during
1999. Further increases in current asset and liability accounts are expected as
the Company continues its restaurant development program.
In November 1999, the Company amended and restated its $100 million
revolving credit facility, principally to extend the maturity date. Beginning
with the last day of the quarter ending June 2003, the amount available under
the revolving credit facility would be reduced each quarter by $8.3 million,
reducing the commitment to $50 million as of the termination date in September
2004. 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 26,
1999, interest on the revolving credit facility accrues at LIBOR plus 1.5% or
the prime rate plus 0.25%. As of December 26, 1999, the Company was required to
pay a commitment fee of 0.325% per year on any unused portion of the facility.
The revolving credit facility contains various covenants 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 1999, the Company amended an existing interest rate swap
agreement with a commercial bank, which effectively fixes the interest rate at
7.6% on $40 million through August 2000, decreasing to $35 million through May
2001 and decreasing to $25 million through August 2004. 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.
On December 26, 1999, $40 million was outstanding and $60 million was
available under the Company's revolving credit facility at a weighted average
interest rate equal to 8.0%. Giving effect to the interest rate swap agreement,
the weighted average interest rate on borrowings under the revolving credit
facility was 7.6%.
The Company currently plans to open 17 to 19 Company-owned and joint
venture LongHorn Steakhouse restaurants, one Bugaboo Creek restaurant and one to
two The Capital Grille restaurants in 2000. The Company estimates that its
capital
-21-
<PAGE> 22
expenditures (without consideration of contributions from joint venture
partners) will be approximately $52 to $56 million in 2000. The capital
expenditure estimate for 2000 includes the estimated cost of developing 19 to 22
new restaurants, ongoing refurbishment in existing restaurants, a planned
expansion of the corporate offices in Atlanta, costs associated with obtaining
real estate for year 2001 planned openings, and continued investment in improved
management information systems. In February 2000, the Company's Board of
Directors authorized the Company to purchase up to $10 million of its
outstanding common stock through February 2001. As of March 15, 2000, the
Company had purchased an aggregate 436,000 shares of its common stock for a
total purchase price of approximately $7.9 million (average price of $18.04)
under this program. 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 and share repurchase plans through the year 2001.
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; 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. 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 has
experienced slight increases in hourly labor costs since this increase in the
hourly minimum wage, 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 YEAR 2000 ISSUES
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.
Beginning in 1998, the Company formulated a four-part plan to address
the Year 2000 issue, which included assessment, remediation, testing and
implementation. 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 were assessed and tested
to determine Year 2000 readiness. In addition, the Company assessed and tested
its non-IT systems that utilize embedded technology such as microcontrollers and
reviewed them for Year 2000 compliance. Required system modifications or
replacements were made by the end of 1999.
To operate its business, the Company relies upon its suppliers,
distributors and other third party service providers ("Material Providers"),
over which it can assert little control. The Company's ability to conduct its
core business is dependent upon the ability of these Material Providers to
remediate their Year 2000 issues to the extent they affect the Company. If the
Material Providers do not appropriately remediate their Year 2000 issues or
develop viable contingency plans, the Company's ability to conduct its core
business may be materially impacted, which could result in a material adverse
effect on the Company's financial condition.
The Company requested and received information regarding the state of
Year 2000 readiness from all of its Material Providers. The communications
received by the Company from its Material Providers did not disclose any
material Year 2000
-22-
<PAGE> 23
issues. As part of the Year 2000 readiness efforts, the Company developed
contingency plans to limit the Year 2000 disruptions and financial loss that
might have occurred in the event of failures in the Company's or Material
Provider's IT Systems or non-IT systems. These contingency plans were developed
and in place by the end of 1999 for all of the IT systems that were determined
to be mission critical.
The Company expensed costs associated with its Year 2000 system changes
as the costs were 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, cost approximately $1,000,000 (except for fringe
benefits of internal employees, which are not separately tracked) from inception
in calendar year 1998 through completion in calendar year 1999. Of these costs,
approximately $100,000 was incurred (approximately $80,000 of which was
capitalized) during 1998, and approximately $900,000 was incurred (approximately
$800,000 of which was capitalized) during 1999.
The Company experienced no significant difficulties with its IT systems
and non-IT systems as a result of the date change to the Year 2000 or the leap
year date of February 29, 2000 and, as of March 15, 2000, had experienced no
difficulties from material providers as a result of the Year 2000 date change or
the leap year date of February 29, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137").
This statement defers the effective date of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133") to all fiscal
quarters beginning after June 15, 2000. SFAS No. 133 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
As of December 26, 1999, $40 million was outstanding under the
Company's $100 million revolving credit facility. Amounts outstanding under such
credit facility bear interest at LIBOR plus a margin of 1.25% to 2.0% (depending
on the Company's leverage ratio), or the administrative agent's prime rate of
interest plus a margin of 0% to 0.75% (depending on the Company's leverage
ratio) at the Company's option. Accordingly, the Company is exposed to the
impact of interest rate movements. To achieve the Company's objective of
managing its exposure to interest rate changes, the Company from time to time
uses interest rate swaps.
The Company has an interest rate swap agreement with a commercial bank,
which effectively fixes the interest rate at 7.6% on $40 million of the
Company's borrowings through August 2000, decreasing to $35 million through May
2001 and decreasing to $25 million through August 2004. 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 (no amount was
outstanding in excess of amounts covered by the interest rate swap agreement at
December 26, 1999) 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 26, 1999, the Company had approximately $7
million invested in high-grade overnight repurchase agreements.
-23-
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997
WITH INDEPENDENT AUDITORS' REPORT THEREON
-24-
<PAGE> 25
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report .................................... 26
Consolidated Balance Sheets ..................................... 27
Consolidated Statements of Operations ........................... 28
Consolidated Statements of Shareholders' Equity and
Comprehensive Income ........................................ 29
Consolidated Statements of Cash Flows ........................... 30
Notes to Consolidated Financial Statements ...................... 31
</TABLE>
-25-
<PAGE> 26
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
26, 1999 and December 27, 1998, 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 26, 1999. 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 26, 1999 and
December 27, 1998, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 26, 1999 in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for pre-opening and organization costs
in 1999.
KPMG LLP
Atlanta, Georgia
February 4, 2000
-26-
<PAGE> 27
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 26, 1999 AND DECEMBER 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 8,864 $ 12,060
Accounts receivable ................................ 3,047 3,443
Inventories ........................................ 10,213 9,609
Prepaid expenses ................................... 815 789
Pre opening costs, net of accumulated amortization . -- 2,102
Refundable income taxes ............................ 2,568 2,700
Deferred income taxes (note 7) ..................... 8,179 6,932
--------- ---------
Total current assets ............................. 33,686 37,635
Property and equipment, less accumulated
depreciation and amortization (notes 4 and 9) ..... 187,281 167,810
Goodwill, less accumulated amortization ............ 13,185 10,045
Other .............................................. 2,966 3,372
--------- ---------
Total assets ..................................... $ 237,118 $ 218,862
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 17,870 $ 12,423
Accrued expenses (note 5) .......................... 26,847 24,076
--------- ---------
Total current liabilities ...................... 44,717 36,499
Debt, net of current installments (note 6) .......... 40,000 48,000
Deferred income taxes (note 7) ...................... 1,103 1,403
Obligations under capital leases, net of current
installments (note 9) .............................. 9,732 9,732
--------- ---------
Total liabilities ................................ 95,552 95,634
Minority interest ................................... 3,982 2,610
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 12,384 shares and 12,077
shares at December 26, 1999 and
December 27, 1998, respectively ................. 110,258 105,092
Unearned compensation -- restricted stock ......... (376) (478)
Retained earnings ................................. 29,589 16,752
Treasury shares at cost; 145 shares and 60 shares at
December 26, 1999 and December 27, 1998,
respectively ................................... (1,887) (748)
--------- ---------
Total shareholders' equity ..................... 137,584 120,618
Commitments and contingencies
(notes 6, 8, 9, and 13)............................
--------- ---------
Total liabilities and shareholders' equity ..... $ 237,118 $ 218,862
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-27-
<PAGE> 28
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Revenues:
Restaurant sales:
LongHorn Steakhouse ........................... $ 260,507 $ 211,440 $ 170,343
The Capital Grille ............................ 57,890 51,096 39,520
Bugaboo Creek Steak House ..................... 56,925 50,090 44,631
Other restaurants .............................. 6,953 6,458 10,233
--------- --------- ---------
Total restaurant sales ...................... 382,275 319,084 264,727
Franchise revenues .......................... 195 -- 27
--------- --------- ---------
Total revenues .............................. 382,470 319,084 264,754
--------- --------- ---------
Costs and expenses:
Cost of restaurant sales ....................... 137,416 116,602 97,568
Operating expenses -- restaurants ............... 171,943 142,730 119,480
Provision for asset impairments, restaurant
closings, and other charges (note 3) ......... 1,800 2,500 23,666
Depreciation and amortization -- restaurants ... 15,249 17,636 15,218
Pre-opening expense ........................... 3,051 -- --
General and administrative expenses ........... 26,052 22,470 23,590
--------- --------- ---------
Total costs and expenses ................... 355,511 301,938 279,522
--------- --------- ---------
Operating income (loss) .................... 26,959 17,146 (14,768)
Interest expense, net ........................... 3,866 2,939 1,245
Minority interest (note 2) ...................... 1,609 1,334 1,219
--------- --------- ---------
Earnings (loss) before income taxes and
cumulative effect of change in accounting
principle .................................. 21,484 12,873 (17,232)
Income tax expense (benefit) (note 7) ........... 7,060 4,120 (5,000)
--------- --------- ---------
Earnings (loss) before cumulative effect of
change in accounting principle ............. 14,424 8,753 (12,232)
Cumulative effect of change in accounting
principle (net of tax benefit of $760) (note 1) 1,587 -- --
--------- --------- ---------
Net earnings (loss) ........................ $ 12,837 $ 8,753 $ (12,232)
========= ========= =========
Basic earnings per common share before
cumulative effect of change in accounting
principle ...................................... $ 1.20 $ 0.73 $ (1.04)
Cumulative effect per common share of change
in accounting principle ........................ 0.13 -- --
--------- --------- ---------
Basic earnings (loss) per common share .......... $ 1.07 $ 0.73 $ (1.04)
========= ========= =========
Diluted earnings per common share before
cumulative effect of change in accounting
principle ...................................... $ 1.15 $ 0.72 $ (1.04)
Cumulative effect per common share of change in
accounting principle ........................... 0.13 -- --
--------- --------- ---------
Diluted earnings (loss) per common share ........ $ 1.02 $ 0.72 $ (1.04)
========= ========= =========
Weighted average common shares
outstanding (basic) ............................ 12,032 12,004 11,751
========= ========= =========
Weighted average common shares
outstanding (diluted) .......................... 12,546 12,099 11,751
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-28-
<PAGE> 29
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
RESTRICTED RETAINED TREASURY
SHARES DOLLARS STOCK EARNINGS STOCK
------ ------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 29, 1996 ............................. 11,653 $101,099 $ -- $20,231 $ --
Net loss ............................................... -- -- -- (12,232) --
Exercise of stock options .............................. 290 2,543 -- -- --
Issuance of shares 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 ............................... -- -- -- -- (748)
------ -------- ------ ------- -------
BALANCE, DECEMBER 27, 1998 ............................. 12,077 105,092 (478) 16,752 (748)
Net earnings ........................................... -- -- -- 12,837 --
Exercise of stock options .............................. 176 2,100 -- -- --
Tax benefit of non-qualified stock options exercised ... -- 195 -- -- --
Issuance of shares in connection with purchase
of minority interest .................................. 129 2,827 -- -- --
Issuance of shares pursuant to restricted stock
awards ................................................ 2 44 (44) -- --
------ -------- ------ ------- -------
Amortization of restricted stock ....................... -- -- 146 -- --
Purchase of common stock ............................... -- -- -- -- (1,139)
------ -------- ------ ------- -------
BALANCE, DECEMBER 26, 1999 ............................. 12,384 $110,258 $ (376) $29,589 $(1,887)
====== ======== ====== ======= =======
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE SHAREHOLDERS'
INCOME (1) EQUITY
---------- ------
<S> <C> <C>
BALANCE, DECEMBER 29, 1996 ............................. $ 54 $ 121,384
Net loss ............................................... -- (12,232)
Exercise of stock options .............................. -- 2,543
Issuance of shares 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)
------- ---------
BALANCE, DECEMBER 27, 1998 ............................. -- 120,618
Net earnings ........................................... -- 12,837
Exercise of stock options .............................. -- 2,100
Tax benefit of non-qualified stock options exercised ... -- 195
Issuance of shares in connection with purchase
of minority interest .................................. -- 2,827
Issuance of shares pursuant to restricted stock
awards ................................................ -- --
------- ---------
Amortization of restricted stock ....................... -- 146
Purchase of common stock ............................... -- (1,139)
------- ---------
BALANCE, DECEMBER 26, 1999 ............................. $ -- $ 137,584
======= =========
</TABLE>
(1) Comprehensive income (loss) for fiscal years 1999, 1998 and 1997 was
$12,837, $8,753, and $(12,286), respectively.
See accompanying notes to consolidated financial statements.
-29-
<PAGE> 30
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................................. $12,837 $8,753 $(12,232)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization ...................................... 16,758 18,733 16,418
Non-cash portion of provision for asset impairments,
restaurant closings and other charges .............................. 1,800 2,500 22,367
Cumulative effect of accounting change ............................. 1,587 -- --
Minority interest .................................................. 1,609 1,334 1,219
Preopening costs ................................................... -- (3,137) (5,208)
Deferred tax (benefit) expense ..................................... (2,307) 1,327 (3,864)
Changes in assets and liabilities:
Accounts receivable ................................................ 396 (1,389) 468
Inventories ........................................................ (604) (443) (1,269)
Prepaid expenses ................................................... (26) 584 92
Other assets ....................................................... 64 (1,207) (22)
Refundable income taxes ............................................ 1,847 1,752 (6,900)
Accounts payable ................................................... 3,366 (1,176) (126)
Accrued expenses ................................................... (672) 7,482 1,222
------- ------ --------
Net cash provided by operating activities ......................... 36,655 35,113 12,165
------- ------ --------
Cash flows from investing activities:
Proceeds from sale of marketable debt securities .................... -- 609 252
Purchase of property and equipment .................................. (36,822) (24,955) (52,970)
Purchase of joint venture and franchise interests ................... (206) (6,602) (3,797)
------- ------ --------
Net cash used in investing activities ............................ (37,028) (30,948) (56,515)
------- ------ --------
Cash flows from financing activities:
Proceeds from (repayments of) debt, net ............................. (8,000) 5,000 35,900
Principal payments on long-term debt ................................ -- -- (31)
Proceeds from minority partner contributions ........................ 2,180 1,772 2,660
Distributions to minority partners .................................. (2,417) (3,283) (2,928)
Increase in bank overdraft included in accounts payable
and accrued liabilities .......................................... 4,453 2,866 1,480
Purchase of common stock for treasury ............................. (1,139) (748) --
Proceeds from exercise of stock options ............................ 2,100 536 2, 543
------- ------ --------
Net cash provided by financing activities ....................... (2,823) 6,143 39,624
------- ------ --------
Net (decrease) increase in cash and cash equivalents ............ (3,196) 10,308 (4,726)
Cash and cash equivalents at beginning of year ...................... 12,060 1,752 6,478
------- ------ --------
Cash and cash equivalents at end of year ............................ $ 8,864 $12,060 $ 1,752
------- ======= ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes ........................................ $ 7,508 $3,033 $ 9,624
======= ====== ========
Cash paid for interest, net of interest capitalized ............... $ 3,510 $3,063 $ 1,039
======= ====== ========
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 ......... $ 2,827 $ -- $ 339
</TABLE>
See accompanying notes to consolidated financial statements.
-30-
<PAGE> 31
RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997
(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 and Mid-Western United States. At December 26, 1999, the Company
operated the following restaurants:
<TABLE>
<CAPTION>
CONCEPT NUMBER IN OPERATION
------- -------------------
<S> <C>
LongHorn Steakhouse................... 118
Bugaboo Creek ........................ 18
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 26, 1999, 28 of the Company's restaurants operate in joint ventures
and limited partnerships.
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 approximately $7 million
and $8.5 million at December 26, 1999 and December 27, 1998, respectively. The
carrying amount of these instruments approximates their fair market values. All
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.
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.
-31-
<PAGE> 32
PRE-OPENING AND ORGANIZATION COSTS
At the beginning of fiscal 1999, the Company adopted the American Institute
of Certified Public Accountants ("AICPA") Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities". SOP 98-5 requires most
entities to expense as incurred all organization and pre-opening costs that are
not otherwise capitalizable as long-lived assets. The Company previously
deferred such costs and amortized them over a twelve-month period following the
opening of each restaurant, as was the practice in the restaurant industry. As
a result of the adoption of this change in accounting policy, the Company
recorded a cumulative effect charge of $2.3 million (approximately $1.6 million
net of tax benefit, or $0.13 per diluted share). Prior to fiscal 1999,
amortization of deferred preopening costs was included with depreciation and
amortization expense on the consolidated statements of operations. Effective
with fiscal 1999, pre-opening costs are included as a separate item on the
consolidated statements of operations.
COMPUTER SOFTWARE FOR INTERNAL USE
At the beginning of Fiscal 1999, the Company adopted the AICPA 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. Prior to Fiscal 1999 the
Company expensed all such costs as incurred. The adoption of SOP 98-1 did not
have a material impact on the Company's results of operations or financial
position.
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 approximately $1.2 million and
$800,000 at December 26, 1999 and December 27, 1998, 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 resulted 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 and seven restaurants in 1997.
-32-
<PAGE> 33
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.
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. (see note 2), the Company acquired certain enterprises affiliated with
Bugaboo Creek Steak House, Inc. 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 disclosures required by SFAS No. 123.
ADVERTISING EXPENSES
Advertising costs are expensed over the period covered by the related
promotion. Total advertising expense included in operating expenses --
restaurants was approximately $10.8 million, $8.4 million and $8.3 million for
the years ended December 26, 1999 December 27, 1998, and December 28, 1997,
respectively.
SEGMENT DISCLOSURE
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. Revenues from external
customers are derived principally from food and beverage sales. The Company
does not rely on any major customers as a source of revenue.
-33-
<PAGE> 34
EARNINGS (LOSS) PER SHARE
The Company accounts for earnings (loss) per share in accordance with 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 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average number of common shares used
in basic calculation ........................................... 12,032 12,004 11,751
Dilutive effect of restricted stock award ....................... 28 1 --
Dilutive effect of net shares issuable
pursuant to stock option plans ................................. 486 94 --
-------- -------- --------
Weighted average number of common shares used
in diluted calculation ......................................... 12,546 12,099 11,751
======== ======== ========
Earnings (loss) before cumulative effect of change
in accounting principle ........................................ $ 14,424 $ 8,753 $(12,232)
Cumulative effect of change in accounting
principle (net of tax benefit) ................................. 1,587 -- --
-------- -------- --------
Net earnings (loss) ........................................ $ 12,837 $ 8,753 $(12,232)
======== ======== ========
Basic earnings (loss) per common share before
cumulative effect of change in accounting
principle ...................................................... $ 1.20 $ 0.73 $ (1.04)
Cumulative effect per common share of change
in accounting principle ........................................ 0.13 -- --
-------- -------- --------
Basic earnings (loss) per common share .......................... $ 1.07 $ 0.73 $ (1.04)
======== ======== ========
Diluted earnings (loss) per common share before
cumulative effect of change in accounting
principle ...................................................... $ 1.15 $ 0.72 $ (1.04)
Cumulative effect per common share of change
in accounting principle ........................................ 0.13 -- --
-------- -------- --------
Diluted earnings (loss) per common share ........................ $ 1.02 $ 0.72 $ (1.04)
======== ======== ========
</TABLE>
Options to purchase 266,672 shares of common stock at December 26, 1999, were
excluded from the computation of diluted earnings per share because the related
exercise prices were greater than the average market price for 1999 and would
have been antidilutive.
ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due from restaurant customers and
suppliers.
FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, 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, 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.
-34-
<PAGE> 35
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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company may, from time to time, use interest rate swap agreements in the
management of interest rate exposure. The interest rate differential to be paid
or received is normally accrued as interest rates change, and is recognized as
a component of interest expense over the life of the agreements. If an
agreement is terminated prior to the maturity date and is characterized as a
hedge, any accrued rate differential would be deferred and recognized as
interest expense through the original maturity date of the hedge. The Company
believes that it does not have material risk from any interest rate swaps, and
the Company does not anticipate any material losses from the use of such
instruments.
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 shareholders' 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.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133" ("SFAS No. 137"). This
statement defers the effective date of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133") to all fiscal quarters
beginning after June 15, 2000. SFAS No. 133 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform with the 1999 presentation.
(2) BUSINESS COMBINATIONS AND JOINT VENTURES
In September 1999, the Company acquired the ownership interest of its joint
venture partner in ten LongHorn Steakhouse restaurants located in south Florida
markets for an aggregate purchase price of approximately $2.9 million;
comprised of 104,000 shares of Company common stock and approximately $600,000
in notes payable in a transaction accounted for under the purchase method. The
excess purchase price over the book value of the minority interest acquired was
approximately $2.9 million and was recorded as goodwill to be amortized over 20
years.
In May 1999, the Company acquired the ownership interest of its joint venture
partner in four LongHorn Steakhouse restaurants located in the Columbus, Ohio
market for an aggregate purchase price of $750,000; comprised of 25,000 shares
of Company common stock, $150,000 in cash and a $30,000 note, in a transaction
accounted for under the purchase method. The excess of purchase price over the
book value of the minority interest acquired was approximately $750,000 and was
recorded as goodwill to be amortized over 20 years.
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
-35-
<PAGE> 36
$50,000 note. The excess of cost over fair value of tangible assets acquired
was approximately $1.2 million and was recorded as goodwill 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 goodwill 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 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 goodwill 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
million in cash. The excess of cost over fair value of tangible assets acquired
was approximately $1.4 million and was recorded as goodwill to be amortized
over the 13-year period remaining under the acquired franchise agreement.
(3) PROVISION FOR ASSET IMPAIRMENTS, RESTAURANT CLOSINGS, AND OTHER CHARGES
The provision for asset impairments, restaurant closings, and other charges
of $1.8 million in fiscal 1999 consisted primarily of the write down of two
Bugaboo Creek restaurants, which was determined under SFAS No. 121 by comparing
discounted future cash flows to the carrying value of impaired assets.
The provision for asset impairments, restaurant closings, and other charges
of $2.5 million in 1998 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 approximately $23.7 million 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. The Company's decision resulted from significant
changes in key management and a strategic review process employed by new
management. This charge 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.
(4) PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 26, 1999 and December 27,
1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and improvements ............................ $ 22,090 $ 18,559
Buildings ........................................ 22,374 19,608
Leasehold improvements ........................... 115,331 100,396
Assets under capital lease ....................... 9,732 9,732
Restaurant equipment ............................. 47,441 42,147
Furniture and fixtures ........................... 22,096 20,928
Construction in progress ......................... 9,927 4,262
--------- ---------
248,991 215,694
Less accumulated depreciation and amortization .. 61,710 47,884
--------- ---------
$ 187,281 $ 167,810
========= =========
</TABLE>
-36-
<PAGE> 37
During 1999, 1998 and 1997, the Company capitalized interest during
construction of approximately $457,000, $270,000, and $663,000, 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 26, 1999, such commitments totaled approximately $9.5 million.
(5) ACCRUED EXPENSES
Accrued expenses consist of the following at December 26, 1999 and December
27, 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accrued future lease obligations and other
charges ................................ $ 2,038 $ 3,037
Accrued rent ............................ 2,345 1,859
Payroll and related ..................... 6,803 5,596
Other taxes accrued ..................... 3,586 2,955
Gift certificates ....................... 6,740 4,707
Other ................................... 5,335 5,922
------- -------
$26,847 $24,076
======= =======
</TABLE>
(6) DEBT
The Company has a variable interest rate revolving credit facility which
permits the Company to borrow up to $100 million. Beginning with the last day
of the quarter ending June 2003 the amount available under the revolving credit
facility would be reduced each quarter by $8.3 million, reducing the commitment
to $50 million as of the termination date in September 2004 (the "1999
Facility"). The 1999 Facility is the result of amendments and a restatement of
the Company's previous $100 million credit facility. The 1999 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 26, 1999 and December 27, 1998, the interest rate on outstanding
obligations under the Company's revolving credit facilities was 6.836% and
6.898%, respectively, based on LIBOR plus 1.5% and LIBOR plus 1.625%,
respectively. The commitment fee on the unused portion of the 1999 Facility on
December 26, 1999, was 0.30% per year. At December 26, 1999 and December 27,
1998, debt outstanding under the revolving credit facilities totaled $40
million and $48 million, respectively. Amounts available under the Company's
revolving credit facilities totaled $60 million and $52 million at December 26,
1999 and December 27, 1998, respectively.
The 1999 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 1999 Facility is secured
by the common stock of entities, which own substantially all of the Bugaboo
Creek and The Capital Grille restaurants. At December 26, 1999, the Company was
in compliance with the provisions of the 1999 Facility. Assuming the $40
million outstanding at December 26, 1999, under the 1999 Facility is
outstanding at the end of 2002, the scheduled maturity would be in 2004.
In August 1999, the Company amended an existing interest rate swap agreement
with a commercial bank, which effectively fixes the interest rate at 7.6% on
$40 million through August 2000, decreasing to $35 million through May 2001 and
decreasing to $25 million through August 2004. 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 7.6% on December 26, 1999. Prior to amendment,
this interest rate swap agreement fixed the interest rate at 7.515% on $40
million through August 1999, decreasing to $35 million through February 2000
and decreasing to $25 million through August 2001.
-37-
<PAGE> 38
(7) INCOME TAXES
Income tax (benefit) expense consists of (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 26, 1999:
U.S. Federal ................................. $ 7,483 $(1,354) $ 6,129
State and local .............................. 1,124 (193) 931
------- ------- -------
$ 8,607 $(1,547) $ 7,060
======= ======= =======
Year ended December 27, 1998:
U.S. Federal ................................. $ 2,026 $ 1,121 $ 3,147
State and local .............................. 767 2 06 973
------- ------- -------
$ 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)
======= ======= =======
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate .................. 35.0% 35.0% (34.0)%
State income taxes, net of federal benefit ......... 3.3 3.6 (5.0)
Meals and entertainment ............................ 0.8 0.4 (1.5)
FICA tip credit .................................... (6.7) (8.3) 7.3
Other .............................................. 0.5 1.3 4.2
----- ----- -----
Effective tax rates ........................ 32.9% 32.0% (29.0)%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 26, 1999 and
December 27, 1998 are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Provisions for restaurant closings, and other charges ..... $ 4,181 $ 3,905
Deferred rent ............................................. 891 717
Accrued joint venture contract termination ................ 553 423
Preopening costs .......................................... 1,342 2,054
Accrued insurance ......................................... 203 499
Accrued workers' compensation ............................. 514 297
Other ..................................................... 1,260 527
-------
Total gross deferred tax assets ........................ 8,944 8,422
Deferred tax liability -- Property and equipment .......... (1,868) (2,893)
------- -------
Net deferred tax assets ................................ $ 7,076 $ 5,529
======= =======
</TABLE>
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 26, 1999.
-38-
<PAGE> 39
(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, $396,000,
and $260,000 for 1999, 1998, and 1997, respectively.
(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.
Future minimum lease payments under capital lease obligations and
noncancelable operating leases at December 26, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING AT OR
ABOUT DECEMBER 31: CAPITAL OPERATING
------- ---------
<S> <C> <C> <C>
2000................................. $ 860 $ 11,135
2001................................. 860 10,718
2002................................. 892 10,211
2003................................. 929 9,406
2004................................. 947 8,475
Thereafter...................................... 20,512 33,157
------- --------
Total minimum lease payments.................... 25,000 $ 83,102
Less imputed interest (at 9%)................... 15,268 ========
-------
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Minimum lease payments............. $10,942 $ 9,611 $8,252
Contingent rentals ................ 1,228 799 686
------- ------- ------
Total rental expense .............. $12,170 $10,410 $8,938
======= ======= ======
</TABLE>
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 1999, 1998, and 1997, 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 approximately $106,000, $12,000, and $11,000 for the
years 1999, 1998, and 1997, respectively.
Through August 1999, the Company leased, from entities in which certain of
the Company's directors had a financial interest, the land and buildings in
which it operates one LongHorn Steakhouse restaurant. Rental expense includes
approximately $71,800, $110,500, and $106,000 for 1999, 1998, and 1997,
respectively, for rents paid related to this restaurant site. In August 1999,
the Company acquired this land and building for a purchase price of $911,000.
-39-
<PAGE> 40
(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. During 1999 and 1998, the Company
purchased 85,000 and 59,500 shares, respectively, of its common stock for a
total purchase price of approximately $1.9 million (average price of $13.06 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
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 December 26, 1999, there were no shares of Series A Stock issued and
outstanding and all of such shares are issuable in accordance with the Company's
Shareholders Rights Plan.
(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, are generally exercisable after three to five years, 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 of Bugaboo
Creek Steak House, Inc.. 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
were 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 1994 Stock Option Plan was cancelled
by the Company in 1999; accordingly, no additional shares are available to be
issued.
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
-40-
<PAGE> 41
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 1999, 1998, and 1997 net earnings (loss) and
net earnings (loss) per share would have been reduced (increased in 1997) by
approximately $1.7 million, $2 million, and $1 million, or approximately $0.14,
$0.17, and $0.09 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 1999, 1998, and 1997 is estimated at approximately $1.4 million, $1.7
million, and $3.4 million, respectively, on the date of grant, using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield of zero, volatility of 20%, risk-free interest rate of 6%, and an average
expected life of eight years.
As of December 26, 1999 and December 27, 1998, options to purchase 911,010
and 592,626 shares of common stock, respectively, were exercisable at weighted
average exercise prices of $13.16 and $13.47 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 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
Granted in 1999.............................. 205,513 18.65
Exercised in 1999............................ (175,296) 11.95
Canceled in 1999............................. (135,543) 14.05
---------
Outstanding at December 26, 1999............. 1,696,522 14.28
=========
</TABLE>
The following table summarizes information concerning options outstanding and
exercisable as of December 26, 1999:
<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...................... 375,050 7.6 $ 9.52 305,150 $ 9.51
$10.01 to $15..................... 820,230 7.7 13.14 374,616 12.12
$15.01 to $20..................... 299,570 6.7 17.96 121,450 17.37
$20.01 to $25..................... 201,672 5.4 22.19 107,794 22.07
</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.
-41-
<PAGE> 42
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 2000 and 2001.
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, employee medical and general
liability costs. Provisions for losses expected under these programs are
recorded based upon the Company's estimates of the aggregate liability for
claims incurred.
The Company has a surety bond totaling $1.5 million at December 26, 1999 that
is being maintained as security under the Company's worker's 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 arbitrator
in the arbitration has determined that the Company is liable to its partner for
breach of a joint venture agreement. A hearing has been held on the issue of
damages, at which time the Company asserted that no damages were sustained and
the joint venture partner asserted damages of up to $7.7 million. The arbitrator
has not rendered his decision. 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.
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.
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
15, 2000 (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 Committee's Report on Executive Compensation" be incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference from
the section of the Proxy Statement entitled "Beneficial Owners of More Than
Five Percent of the Company's Common Stock; Shares Held by Directors and
Executive Officers."
-42-
<PAGE> 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions is
incorporated herein by reference from the section of the Proxy Statement
entitled "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) LISTING OF FINANCIAL STATEMENTS
The following financial statements of the Registrant are set forth herein in
Part II, Item 8:
Consolidated Balance Sheets as of December 26, 1999 and December 27, 1998
Consolidated Statements of Operations - For Each of the Years in the
Three-Year Period Ended December 26, 1999
Consolidated Statements of Shareholders' Equity and Comprehensive Income -
For Each of the Years in the Three-Year Period Ended December 26, 1999
Consolidated Statements of Cash Flows - For Each of the Years in the
Three-Year Period Ended December 26, 1999
Notes to Consolidated Financial Statements
Independent Auditors' Report
(A)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES
Not applicable.
-43-
<PAGE> 44
(A)(3) LISTING OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<S> <C>
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 (incorporated herein by reference from Exhibit
4(b) of the Registrant's annual report on Form 10-K for the
year ended December 27, 1998).
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 (incorporated herein
by reference from Exhibit 10(b) of the Registrant's annual
report on Form 10-K for the year ended December 27, 1998).
10(c) -- Second Amendment to Credit Agreement.
10(d) -- Pledge Agreement dated as of November 4, 1999 by
Registrant in favor of First Union National Bank.
10(e) -- 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(f) -- Amended and Restated RARE Hospitality International,
Inc. 1996 Stock Plan for Outside Directors (incorporated
herein by reference from Exhibit 10(e) of the Registrant's
annual report on Form 10-K for the year ended December 27,
1998).
10(g) -- 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(h) -- 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).
10(i) -- 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(j) -- Amendment No. 2 to RARE Hospitality International, Inc.
1997 Long-Term Incentive Plan Directors (incorporated
herein by reference from Exhibit 10(i) of the Registrant's
annual report on Form 10-K for the year ended December 27,
1998).
10(k) -- Employment Agreement dated February 13, 1992 between the
Registrant and George W. McKerrow, Sr. (incorporated by
reference from Exhibit 10(o) to Registration Statement on
Form S-1, Registration Statement No. 33-45695).
10(l) -- Employment Agreement dated February 13, 1992 between the
Registrant and George W. McKerrow, Jr. (incorporated by
reference from Exhibit 10(p) to Registration Statement on
Form S-1, Registration Statement No. 33-45695).
10(m) -- Employment Agreement dated September 30, 1997 between
the Registrant and Philip J. Hickey, Jr. (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(n) -- 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(o) -- 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(p) -- Employment Agreement dated November 30, 1998 between the
Registrant and Thomas W. Gathers (incorporated herein by
reference from Exhibit 10(p) of the Registrant's annual
report on Form 10-K for the fiscal year ended December 27,
1998).
</TABLE>
-44-
<PAGE> 45
<TABLE>
<S> <C>
10(q) -- 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) -- 1999 Financial Data Schedule (for SEC use only).
99(a) -- Safe Harbor Compliance Statement.
</TABLE>
(B) REPORTS ON FORM 8-K
None.
(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.
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 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date
----
By /s/ George W. McKerrow, Jr. March 22, 2000
---------------------------
George W. McKerrow, Jr.
Chairman of the Board
By /s/ Philip J. Hickey, Jr. March 22, 2000
-------------------------
Philip J. Hickey, Jr.
President, Chief Executive Officer and Director
(Principal Executive Officer)
-45-
<PAGE> 46
By /s/ W. Douglas Benn March 22, 2000
-------------------
W. Douglas Benn
Executive Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ George W. McKerrow, Sr. March 22, 2000
---------------------------
George W. McKerrow, Sr.
Director
By /s/ Ronald W. San Martin March 22, 2000
-------------------
Ronald W. San Martin
Director
By /s/ John G. Pawly March 22, 2000
-----------------
John G. Pawly
Director
By /s/ Don L. Chapman March 22, 2000
------------------
Don L. Chapman
Director
By /s/ Lewis H. Jordan March 22, 2000
-------------------
Lewis H. Jordan
Director
-46-
<PAGE> 1
EXHIBIT 10 (c)
SECOND AMENDMENT AND WAIVER TO CREDIT AGREEMENT
THIS SECOND AMENDMENT AND WAIVER TO CREDIT AGREEMENT (this "Second
Amendment") is made and entered into as of this 4th day of November, 1999 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 by the First Amendment to Credit Agreement
dated as of December 31, 1999 and as further amended or supplemented from time
to time, the "Credit Agreement").
The parties now desire to amend the Credit Agreement in certain
respects and waive certain provisions of the Credit Agreement, all 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 Amendments and Waivers. Except as expressly amended
hereby, the Credit Agreement and Loan Documents shall be and remain in full
force and effect. The waivers granted herein are specific and limited and shall
not constitute an amendment of the Credit Agreement or the Loan Documents or a
modification, acceptance or waiver of any other provision of or default under
the Credit Agreement, the Loan Documents or any other document or instrument
entered into in connection therewith or a future modification, acceptance or
waiver of the provisions set forth therein (except to the extent necessary to
give effect to the specific waivers and agreements set forth herein).
2. Capitalized Terms. All capitalized undefined terms used in
this Second 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 defined terms "Fixed Charges" and "Revolving Credit
Termination Date" set forth in Section 1.1 of the Credit Agreement are each
hereby deleted in their 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)
fiscal quarters ending on such date, plus (b) Rental Expense
calculated for the period of four (4) fiscal quarters ending on such
date, plus (c) the difference (if positive) between (i) the average
daily aggregate Revolving Credit Loans outstanding during the calendar
month preceding such date minus (ii) the Aggregate Commitment, as
reduced by any mandatory reductions pursuant to Section 2.6(c), on the
last day of the fiscal quarter immediately following such date, all
determined on a Consolidated basis in accordance with GAAP."
"'Revolving Credit Termination Date' means the
earliest of the dates referred to in Section 2.7."
(b) The defined terms "Term-Out Amount", "Term-Out Maturity
Date", and "Term-Out Period" set forth in Section 1.1 of the Credit Agreement
are each hereby deleted in their entirety.
<PAGE> 2
(c) The following defined terms shall be inserted into Section
1.1 in the correct alphabetical order:
"'Conversion Date' shall have the meaning assigned thereto in
Section 2.6(c)."
"'Second Amendment' means the Second Amendment and Waiver to
the Credit Agreement dated as of November __, 1999 by and among the
Borrower, the Lenders and the Administrative Agent and the Co-Agents."
(d) Section 2.4(a) of the Credit Agreement is hereby deleted in
its entirety and the following Section 2.4(a) shall be substituted in lieu
thereof:
"(a) Repayment on Termination Date. The Borrower shall
repay the outstanding principal amount of (i) all Revolving Credit
Loans in full on the Revolving Credit Termination Date and (ii) all
Swingline Loans in accordance with Section 2.2(b), together, in each
case, with all accrued but unpaid interest thereon."
(e) Section 2.6 of the Credit Agreement is hereby deleted in its
entirety and the following Section 2.6 shall be substituted in lieu thereof:
"SECTION 2.6 Permanent Reduction of the Aggregate Commitment.
(a) Voluntary Reduction. The Borrower shall have the
right at any time and from time to time, upon at least five (5)
Business Days prior written notice to the Administrative Agent, to
permanently reduce, without premium or penalty, (i) the entire
Aggregate Commitment at any time or (ii) portions of the Aggregate
Commitment, from time to time, in an aggregate principal amount not
less than $3,000,000 or any whole multiple of $1,000,000 in excess
thereof.
(b) Mandatory Permanent Reduction. The Aggregate
Commitment shall be permanently reduced by the following amounts: (i)
100% of the Net Cash Proceeds received by the Borrower or any of its
Subsidiaries from any issuance of Funded Debt (other than Funded Debt
permitted pursuant to Section 10.1), (ii) 100% of the Net Cash
Proceeds received by the Borrower or any of its Subsidiaries in
connection with any sale of assets (including its equity ownership in
any Person) not permitted pursuant to Section 10.6 (a) through (e)
unless, so long as no Default or Event of Default has occurred and is
continuing, such Net Cash Proceeds are reinvested in similar assets
(or otherwise in a manner acceptable to the Administrative Agent, in
its sole discretion) within 270 days after receipt of such Net Cash
Proceeds; provided, that this clause (ii) shall not apply with respect
to up to $10,000,000 of the aggregate Net Cash Proceeds received by
the Borrower and its Subsidiaries prior to the Conversion Date and
(iii) 100% of the Net Cash Proceeds received by the Borrower or any of
its Subsidiaries under any policy of insurance of such Person or in
connection with any condemnation proceeding involving property of such
Person, unless, so long as no Default or Event of Default has occurred
and is continuing, such Net Cash Proceeds are utilized by the Borrower
or such Subsidiary within one hundred eighty (180) days of receipt of
such Net Cash Proceeds to replace or repair any of its assets damaged
in connection with the related claim or proceeding.
(c) Regular Quarterly Reductions. Commencing with the
last day of the fiscal quarter ending June 30, 2003 (the "Conversion
Date") and continuing through the Revolving Credit Termination Date,
the Aggregate Commitment shall be reduced on the last day of each
fiscal quarter in equal quarterly reduction amounts (the "Reduction
Amounts") equal to the amount required to reduce the Aggregate
Commitment to $50,000,000 as of September 30, 2004; provided, that
each of the Reduction Amounts remaining after any reduction pursuant
to Section 2.6(b) shall be adjusted on a pro rata basis in connection
with such reduction.
<PAGE> 3
(d) Repayments. Each permanent reduction permitted or
required pursuant to this Section 2.6 shall be accompanied by a
payment of principal sufficient to reduce the aggregate outstanding
Extensions of Credit of the Lenders after such reduction to the
Aggregate Commitment as so reduced and if the Aggregate Commitment as
so reduced is less than the aggregate amount of all outstanding
Letters of Credit, the Borrower shall be required to deposit in a cash
collateral account opened by the Administrative Agent an amount equal
to the aggregate then undrawn and unexpired amount of such Letters of
Credit. Any reduction of the Aggregate Commitment to zero shall be
accompanied by payment of all outstanding Obligations (and furnishing
of cash collateral satisfactory to the Administrative Agent for all
L/C Obligations) and shall result in the termination of the
Commitments and Credit Facility. Such cash collateral shall be applied
in accordance with Section 11.2(b). If the reduction of the Aggregate
Commitment requires the repayment of any LIBOR Rate Loan, such
repayment shall be accompanied by any amount required to be paid
pursuant to Section 4.9 hereof."
(f) Section 2.7 of the Credit Agreement is hereby deleted in its
entirety and the following Section 2.7 shall be substituted in lieu thereof:
SECTION 2.7 Termination of Credit Facility. The Credit
Facility shall terminate on the earliest of (a) September 30, 2004,
(b) the date of permanent reduction of the Aggregate Commitment in
whole pursuant to Section 2.6 and (c) the date of termination by the
Administrative Agent on behalf of the Lenders pursuant to Section
11.2(a).
(g) The initial clause of Section 2.8 of the Credit Agreement is
hereby deleted in its entirety and the following shall be substituted in lieu
thereof:
"SECTION 2.8 Increase in Aggregate Commitment. So long as no Default
or Event of Default shall have occurred and be continuing, at any time prior to
the Conversion Date,"
(h) Section 4.1(b)(iv) of the Credit Agreement is hereby deleted
in its entirety and the following Section 4.1(b)(iv) shall be substituted in
lieu thereof:
"(iv) no Interest Period shall extend beyond the Revolving
Credit Termination Date; and"
(i) Section 4.1(c)(ii) of the Credit Agreement is hereby deleted
in its entirety and the following Section 4.1(c)(ii) shall be substituted in
lieu thereof:
"(ii) upon the initial Adjustment Date and at all times
thereafter, be determined by reference to the Adjusted Leverage Ratio
in accordance with the following charts:
<TABLE>
<CAPTION>
Adjusted Applicable Margin Per Annum
Leverage Prior to April 1, 2003
Level Ratio LIBOR Rate Base Rate
- ----- ----- ----------------------------
<S> <C> <C> <C>
1 Greater than or equal to 3.0 to 1.00 2.000% 0.750%
2 Less than 3.0 to 1.0 but greater than
or equal to 2.50 to 1.0 1.875% 0.625%
3 Less than 2.5 to 1.0 but greater than
or equal to 2.0 to 1.0 1.750% 0.500%
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
4 Less than 2.0 to 1.0 but greater than
or equal to 1.50 to 1.0 1.625% 0.375%
5 Less than 1.50 to 1.0 but greater than
or equal to 1.0 to 1.0 1.500% 0.250%
6 Less than 1.0 to 1.0 1.250% 0.000%
<CAPTION>
Adjusted Applicable Margin Per Annum
Leverage Prior to April 1, 2003
Level Ratio LIBOR Rate Base Rate
- ----- ----- ----------------------------
<S> <C> <C> <C>
1 Greater than or equal to 3.0 to 1.00 2.500% 1.250%
2 Less than 3.0 to 1.0 but greater than
or equal to 2.50 to 1.0 2.375% 1.125%
3 Less than 2.5 to 1.0 but greater than
or equal to 2.0 to 1.0 2.250% 1.000%
4 Less than 2.0 to 1.0 but greater than
or equal to 1.50 to 1.0 2.125% 0.875%
5 Less than 1.50 to 1.0 but greater than
or equal to 1.0 to 1.0 2.000% 0.750%
6 Less than 1.0 to 1.0 1.750% 0.500%
</TABLE>
Adjustments, if any, in the Applicable Margin shall be made
by the Administrative Agent on the tenth (10th) Business Day (the
"Adjustment Date") after receipt by the Administrative Agent of
financial statements for the Borrower and its Subsidiaries delivered
under Section 7.1(a) or (b), as applicable, and the accompanying
Officer's Compliance Certificate setting forth the Adjusted Leverage
Ratio of the Borrower and its Subsidiaries as of the most recent
fiscal quarter end. The Administrative Agent agrees to give the
Borrower and the Lenders notice of any adjustment in the Applicable
Margin within two (2) Business Days of such adjustment; provided, that
the Administrative Agent's failure to give such notice shall not
result in any liability to the Administrative Agent or in any way
affect the validity of any such adjustment. In the event the Borrower
fails to deliver such financial statements and certificate within the
time required by
<PAGE> 5
Sections 7.1(a) and 7.2 hereof, the Applicable Margin shall be the
highest Applicable Margin set forth above until the delivery of such
financial statements and certificate unless at such time the
outstanding principal balance of the Loans are bearing interest at the
"default rate" set forth in Section 4.1(d) below in which case the
Applicable Margin shall not be increased pursuant to this sentence."
(j) Section 9.4 of the Credit Agreement is hereby deleted in its
entirety and the following Section 9.4 shall be substituted in lieu thereof:
SECTION 9.4 Capital Expenditures. Permit Capital Expenditures plus the
aggregate investments permitted by Sections 10.4(d) and (f) made by
the Borrower and its Subsidiaries after the Closing Date (excluding
any investment to the extent funded with the capital stock of the
Borrower) to be greater than the following amounts in the aggregate
during the following Fiscal Years:
<TABLE>
<CAPTION>
Fiscal Year Capital Expenditures
----------- --------------------
<S> <C>
1998 (including only the
portion thereof remaining
after the Closing Date) $ 35,000,000
1999 $ 75,000,000
2000 $ 90,000,000
2001 $100,000,000
2002 $ 80,000,000
2003 and thereafter $ 80,000,000
</TABLE>
provided, that (a) investments in any single restaurant unit owned by
a Non-Controlled Joint Venture shall not exceed $1,500,000, (b)
investments in Non-Controlled Joint Ventures shall not exceed
$22,500,000 in the aggregate on any date of determination and (c) in
no event shall more than forty percent (40%) of aggregate Capital
Expenditures permitted in any Fiscal Year be used for Capital
Expenditures with respect to The Capital Grille and Bugaboo Creek
Steak House restaurants, on a combined basis. For the purposes of this
Section 9.4 "Non-Controlled Joint Venture" shall mean a joint venture
in which the Borrower and its Subsidiaries do not own more than fifty
percent (50%) of the outstanding capital stock or other ownership
interests having ordinary voting power to elect a majority of the
board of directors or other managers of such Person.
(k) Section 10.1(d) of the Credit Agreement is hereby amended by
deleting the number "$20,000,000" set forth therein and substituting therefore
the number "$40,000,000".
(l) Section 10.7(d) of the Credit Agreement is hereby deleted in
its entirety and the following Section 10.7(d) shall be substituted in lieu
thereof:
"(d) the Borrower may purchase, redeem, retire or
otherwise acquire shares of its capital stock in an aggregate amount
not to exceed $10,000,000 for the period from and including the date
of the Second Amendment through and including the Revolving Credit
Termination Date (plus, up to $10,000,000 of the Net Cash Proceeds
received by the Borrower or any of its Subsidiaries prior to the
Conversion Date from any sale of assets permitted pursuant to Section
10.6(f) above); and"
4. Waivers of Credit Agreement. The Borrower and its
Subsidiaries intend to enter into a corporate restructuring (the "Corporate
Restructuring") pursuant to which, among other things, (a) certain assets will
be transferred to Bugaboo Creek Steakhouse, Inc. ("Bugaboo"), (b) the entities
owning substantially all of the operations of The Capital Grille restaurants
will be merged into The Capital Grille of Charlotte, Inc., which entity will
change its name to Capital Grille Holdings, Inc. ("Capital Grille Holdings"),
(c) the entities owning substantially all of the operations of Bugaboo Creek
Steak House restaurants will be merged into Bugaboo Creek of Newark, Inc.,
which entity will change its name to Bugaboo Creek Holdings, Inc. ("Bugaboo
Creek Holdings") (d) the operations of Old Grist Mill and Hemenways restaurants
will each be consolidated into separate holding companies named Grist Mill
Holdings, Inc. ("Grist Mill Holdings") and Hemenway Holdings, Inc. ("Hemenway
Holdings"), respectively, and (e) Bugaboo will enter into transactions
<PAGE> 6
with certain Affiliates to manage the operations of restaurants they own. The
Administrative Agent and the Lenders hereby agree to waive the provisions of
Sections 10.4, 10.5, 10.6 and 10.8 solely to permit the Corporate
Restructuring; provided, that (i) each of the Borrower and Bugaboo shall
survive the Corporate Restructuring; provided, that Bugaboo shall be permitted
to change its name to Rare Hospitality Management, Inc., (ii) each of Capital
Grille Holdings, Bugaboo Creek Holdings, Grist Mill Holdings and Hemenway
Holdings shall be Wholly-Owned Subsidiaries of Bugaboo, (iii) neither the
Borrower nor Bugaboo shall make any sale or transfer of assets in connection
with the Corporate Restructuring except for a sale or transfer of assets to
their respective Wholly-Owned Subsidiaries, (iv) neither the Borrower nor
Bugaboo shall make any investments in connection with the Corporate
Restructuring except investments in their respective Wholly-Owned Subsidiaries
and (v) the Borrower and Bugaboo shall provide such documents reasonably
requested by the Administrative Agent reflecting the name change of Bugaboo to
Rare Hospitality Management, Inc., including without limitation, new stock
certificates and stock powers pledged pursuant to the Pledge Agreement.
5. Representations and Warranties/No Default. By its execution
hereof, the Borrower hereby certifies that (giving effect to this Second
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.
6. Fees. The Borrower shall pay (a) to each of the Lenders party
to this Second Amendment an amendment fee in an amount equal to the product of
(i) .10% multiplied by (ii) the commitment of such Lender under the Credit
Agreement and (b) to the Administrative Agent, the fees set forth in a separate
fee letter of even date herewith.
7. Expenses. The Borrower shall pay all reasonable out-of-pocket
expenses of the Administrative Agent in connection with the preparation,
execution and delivery of this Second Amendment, including without limitation,
the reasonable fees and disbursements of counsel for the Administrative Agent.
8. Governing Law. This Second Amendment shall be governed by and
construed in accordance with the laws of the State of North Carolina.
9. Counterparts. This Second 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.
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the date and year first above written.
[CORPORATE SEAL] RARE HOSPITALITY INTERNATIONAL,
INC.
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
FIRST UNION NATIONAL BANK,
as Administrative Agent, Lender, Swingline Lender
and Issuing Lender
By:
----------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
BANKBOSTON, N.A., as Co-Agent and as Lender
By:
----------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
FLEET NATIONAL BANK, as Co-Agent and as
Lender
By:
----------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
SOUTHTRUST BANK, N.A., as Lender
By:
----------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
THE FUJI BANK, LIMITED, as Lender
By:
---------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE> 8
AMSOUTH BANK, as Lender
By:
----------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
WACHOVIA BANK, N.A., as Lender
By:
----------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
<PAGE> 1
EXHIBIT 10(d)
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (as amended, restated, supplemented, or
otherwise modified, the "Pledge Agreement"), dated as of August 26, 1998, is
made by RARE HOSPITALITY INTERNATIONAL, INC., a corporation organized under the
laws of the state of Georgia (the "Pledgor"), in favor of FIRST UNION NATIONAL
BANK, a national banking association, as Administrative Agent (the
"Administrative Agent"), for the ratable benefit of itself and the financial
institutions (the "Lenders") that are, or may from time to time become, parties
to the Credit Agreement referred to below.
STATEMENT OF PURPOSE
Pursuant to the terms of the Amended and Restated Credit Agreement
dated the date hereof (as amended, restated, supplemented or otherwise
modified, the "Credit Agreement") by and among the Pledgor, as borrower, the
Lenders who are or may become party thereto, the Administrative Agent and
BankBoston, N.A. and Fleet National Bank, as Co-Agents, the Lenders have agreed
to make certain Extensions of Credit to the Pledgor as more particularly
described therein.
The Pledgor is the legal and beneficial owner of (a) the shares of
Pledged Stock (as hereinafter defined) issued by certain corporations as
specified on Schedule I attached hereto and incorporated herein by reference
(collectively, the "Issuers") and (b) the Partnership/LLC Interests (as
hereinafter defined) in the partnerships and limited liability companies listed
on Schedule I hereto (collectively, the "Partnerships/LLCs").
In connection with the transactions contemplated by the Credit
Agreement and as a condition precedent thereto, the Lenders have requested, and
the Pledgor has agreed to execute and deliver this Pledge Agreement together
with the Pledged Stock to the Administrative Agent, for the ratable benefit of
itself and the Lenders.
NOW, THEREFORE, in consideration of the foregoing premises and to
induce the Administrative Agent and the Lenders to enter into and make
available Extensions of Credit pursuant to the Credit Agreement, the Pledgor
hereby agrees with the Administrative Agent, for the ratable benefit of itself
and the Lenders, as follows:
1. Defined Terms. Unless otherwise defined herein, terms which
are defined in the Credit Agreement and used herein are so used as so defined,
and the following terms shall have the following meanings:
"Code" means the Uniform Commercial Code as in effect in the
State of North Carolina; provided that if by reason of mandatory
provisions of law, the
<PAGE> 2
perfection or the effect of perfection or non-perfection of the
security interests in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than North
Carolina, "Code" means the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions hereof relating
to such perfection or effect of perfection or non-perfection.
"Collateral" means the Stock Collateral and the
Partnership/LLC Collateral.
"Obligations" means the Pledgor's obligations under the
Credit Agreement, and each Loan Document to which such Pledgor is a
party.
"Partnership/LLC Collateral" means all of the Partnership/LLC
Interests of the Pledgor in the Partnerships/LLCs and all Proceeds
therefrom.
"Partnership/LLC Interests" means the entire partnership or
membership interest of the Pledgor in each Partnership/LLC listed on
Schedule I hereto, including, without limitation, the Pledgor's
capital account, its interest as a partner or member in the net cash
flow, net profit and net loss, and items of income, gain, loss,
deduction and credit of the Partnerships/LLCs, its interest in all
distributions made or to be made by the Partnerships/LLCs to the
Pledgor and all of the other economic rights, titles and interests of
the Pledgor as a partner or member of the Partnerships/LLCs, whether
set forth in the partnership agreement or membership agreement of the
Partnerships/LLCs, by separate agreement or otherwise.
"Pledge Agreement" means this Pledge Agreement, as amended,
restated, supplemented or otherwise modified from time to time.
"Pledged Stock" means the shares of capital stock of each
Issuer listed on Schedule I hereto, together with all stock
certificates, options or rights of any nature whatsoever that may be
issued or granted by such Issuer to the Pledgor while this Pledge
Agreement is in effect.
"Proceeds" means all "proceeds" as such term is defined in
Section 9-306(1) of the Code on the date hereof and, in any event,
shall include, without limitation, all dividends or other income from
the Pledged Stock and the Partnership/LLC Interests, collections
thereon, proceeds of sale thereof or distributions with respect
thereto.
"Stock Collateral" means the Pledged Stock and all Proceeds
therefrom.
2. Pledge and Grant of Security Interest. The Pledgor hereby
delivers to the Administrative Agent, for the ratable benefit of itself and the
Lenders, all the Pledged Stock and hereby grants to the Administrative Agent,
for the ratable benefit of itself and the Lenders, a first priority security
interest in the Pledged Stock and all other Collateral, as collateral security
for the
2
<PAGE> 3
prompt and complete payment and performance when due (whether at the stated
maturity, by acceleration or otherwise) of the Obligations.
3. Stock Powers; Register of Pledge. Concurrently with the
delivery to the Administrative Agent of each certificate representing one or
more shares of Pledged Stock, the Pledgor shall deliver an undated stock power
covering such certificate, duly executed in blank by the Pledgor with, if the
Administrative Agent so requests, signature guaranteed.
4. Pledgor Remains Liable. Anything herein to the contrary
notwithstanding, (a) the Pledgor shall remain liable to perform all of its
duties and obligations as a partner or member of the Partnerships/LLCs to the
same extent as if this Pledge Agreement had not been executed, (b) the exercise
by the Administrative Agent or any Lender of any of its rights hereunder shall
not release the Pledgor from any of its duties or obligations as a partner or
member of the Partnerships/LLCs, and (c) neither the Administrative Agent nor
any Lender shall have any obligation or liability as a partner or member of the
Partnerships/LLCs by reason of this Pledge Agreement.
5. Representations and Warranties. To induce the Administrative
Agent and the Lenders to execute the Credit Agreement and make any Extensions
of Credit and to accept the security contemplated hereby, the Pledgor hereby
makes to the Administrative Agent and the Lenders all of the representations
and warranties made by the Pledgor in the Credit Agreement and the other Loan
Documents, as if the same was set forth herein in full and additionally
represents and warrants that:
(a) as of the Closing Date, the shares of Pledged Stock
listed on Schedule I constitute all of the issued and outstanding
shares of all classes of the capital stock of each Issuer;
(b) all the shares of the Pledged Stock have been duly
and validly issued and are fully paid and nonassessable;
(c) as of the Closing Date, the Pledgor is the record
and beneficial owner of, and has good and marketable title to, the
Pledged Stock listed on Schedule I, free of any and all Liens or
options in favor of, or claims of, any other Person, except the Lien
created by this Pledge Agreement and the Liens permitted under Section
10.3 of the Credit Agreement; and
(d) upon delivery to the Administrative Agent of the
stock certificates evidencing the Pledged Stock, the Lien granted
pursuant to this Pledge Agreement will constitute a valid, perfected
first priority Lien on the Collateral, enforceable as such against all
creditors of the Pledgor and any Persons purporting to purchase any of
the Collateral from the Pledgor.
6. Certain Covenants. The Pledgor covenants and agrees with the
Administrative Agent, for the ratable benefit of itself and the Lenders, that,
from and after the date of this Pledge Agreement until the Obligations are paid
in full and the Commitments are terminated:
3
<PAGE> 4
(a) The Pledgor agrees that as a partner or member in
the Partnerships/LLCs it will abide by, perform and discharge each and
every obligation, covenant and agreement to be abided by, performed or
discharged by the Pledgor under the terms of the partnership
agreements and operating agreements, as applicable, of the
Partnerships/LLCs, except where the failure to do so could not
reasonably be expected to have a Material Adverse Effect, at no cost
or expense to the Administrative Agent and the Lenders.
(b) If the Pledgor shall, as a result of its ownership
of the Collateral, become entitled to receive or shall receive any
stock certificate (including, without limitation, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital or any certificate
issued in connection with any reorganization), whether in addition to,
in substitution of, as a conversion of, or in exchange for any of the
Collateral, or otherwise in respect thereof, the Pledgor shall accept
the same as the agent of the Administrative Agent, hold the same in
trust for the Administrative Agent and deliver the same forthwith to
the Administrative Agent in the exact form received, duly indorsed by
the Pledgor to the Administrative Agent, if required, together with an
undated stock power covering such certificate duly executed in blank
by the Pledgor, to be held by the Administrative Agent, subject to the
terms hereof, as additional collateral security for the Obligations.
Further, if the Pledgor shall, as a result of its ownership of the
Collateral, become entitled to receive or shall receive any options or
rights, whether in addition to, in substitution of, as a conversion
of, or in exchange for any of the Collateral, or otherwise in respect
thereof, the Pledgor shall assign such options or rights as the case
may be to the Administrative Agent, to be held by the Administrative
Agent, subject to the terms hereof, as additional collateral security
for the Obligations. In addition, any sums paid upon or in respect of
the Collateral upon the liquidation or dissolution of any Issuer or
Partnership/LLC shall be held by the Administrative Agent as
additional collateral security for the Obligations.
(c) Without the prior written consent of the
Administrative Agent, the Pledgor will not (i) vote to enable, or take
any other action to permit, any Issuer or Partnership/LLC to issue any
stock, partnership interests, limited liability company interests or
other equity securities of any nature or to issue any other securities
convertible into or granting the right to purchase or exchange for any
stock, partnership interests, limited liability company interests or
other equity securities of any nature of such Issuer or
Partnership/LLC except stock, partnership interests, limited liability
company interests or other securities issued to the Pledgor and
pledged to the Administrative Agent pursuant to the terms of this
Pledge Agreement, (ii) sell, assign, transfer, exchange, or otherwise
dispose of, or grant any option with respect to, the Collateral, or
(iii) create, incur or permit to exist any Lien or option in favor of,
or any claim of any Person with respect to, any of the Collateral, or
any interest therein, except for the Lien provided for by this Pledge
Agreement and Liens permitted under Section 10.3 of the Credit
Agreement. The Pledgor will defend the right, title and interest of
the Administrative Agent in and to the Collateral against the claims
and demands of all Persons whomsoever.
4
<PAGE> 5
(d) At any time and from time to time, upon the written
request of the Administrative Agent, and at the sole expense of the
Pledgor, the Pledgor will promptly and duly execute and deliver such
further instruments and documents and take such further actions as the
Administrative Agent may reasonably request for the purposes of
obtaining or preserving the full benefits of this Pledge Agreement and
of the rights and powers herein granted. If any amount payable under
or in connection with any of the Collateral shall be or become
evidenced by any promissory note, other instrument or chattel paper,
such note, instrument or chattel paper shall be immediately delivered
to the Administrative Agent, duly endorsed in a manner satisfactory to
the Administrative Agent, to be held as Collateral pursuant to this
Pledge Agreement.
(e) The Pledgor agrees to pay, and to save the
Administrative Agent and the Lenders harmless from, any and all
liabilities with respect to, or resulting from any delay in paying,
any and all stamp, excise, sales or other similar taxes which may be
payable or determined to be payable with respect to any of the
Collateral or in connection with any of the transactions contemplated
by this Pledge Agreement.
(f) Within ten (10) Business Days following the
formation or acquisition of any Material Subsidiary of the Pledgor,
the Pledgor agrees to execute a new pledge agreement or a supplement
to this Pledge Agreement, as applicable, and such other documents and
instruments as required pursuant to Section 8.12 of the Credit
Agreement.
7. Cash Dividends and Distributions; Voting Rights. Unless an
Event of Default shall have occurred and be continuing and the Administrative
Agent shall have given notice to the Pledgor of the Administrative Agent's
intent to exercise its rights pursuant to Paragraph 8 below, the Pledgor shall
be permitted to receive all cash dividends and shareholder, partnership and
membership distributions paid in accordance with the terms of the Credit
Agreement in respect of the Collateral and to exercise all voting and
corporate, partnership or membership rights, as applicable, with respect to the
Collateral; provided, that no vote shall be cast or corporate, partnership or
membership right exercised or other action taken which would impair in any
material respect the Collateral or which would result in any violation of any
provision of the Credit Agreement, the Notes, this Pledge Agreement or any
other Loan Document.
8. Rights of the Administrative Agent.
(a) If an Event of Default shall occur and be continuing and the
Administrative Agent shall give notice of its intent to exercise such rights to
the Pledgor, (i) the Administrative Agent shall have the right to receive any
and all cash dividends paid in respect of the Pledged Stock and partnership and
membership distributions in respect of the Partnership/LLC Interests and make
application thereof to the Obligations in the order set forth in Section 4.5 of
the Credit Agreement and (ii) all shares of the Pledged Stock and the
Partnership/LLC Interests shall be registered in the name of the Administrative
Agent or its nominee, and the Administrative Agent or its nominee may
thereafter exercise (A) all voting, corporate, partnership, membership and
other rights pertaining to such shares of the Pledged Stock or Partnership/LLC
Interests at any meeting of shareholders, partners or members of the applicable
Issuer or Partnership/LLC or otherwise and (B) any and all
5
<PAGE> 6
rights of conversion, exchange, subscription and any other rights, privileges
or options pertaining to such shares of the Pledged Stock or Partnership/LLC
Interests as if it were the absolute owner thereof (including, without
limitation, the right to exchange at its discretion any and all of the Pledged
Stock or Partnership/LLC Interests upon the merger, consolidation,
reorganization, recapitalization or other fundamental change in the corporate
structure of the applicable Issuer or Partnership/LLC, or upon the exercise by
the Pledgor or the Administrative Agent of any right, privilege or option
pertaining to such shares of the Pledged Stock or the Partnership/LLC
Interests, and in connection therewith, the right to deposit and deliver any
and all of the Pledged Stock or the Partnership/LLC Interests with any
committee, depositary, transfer agent, registrar or other designated agency
upon such terms and conditions as it may determine), all without liability
except to account for property actually received by it, but the Administrative
Agent shall have no duty to the Pledgor to exercise any such right, privilege
or option and shall not be responsible for any failure to do so or delay in so
doing.
(b) The rights of the Administrative Agent and the Lenders
hereunder shall not be conditioned or contingent upon the pursuit by the
Administrative Agent or any Lender of any right or remedy against the Pledgor
or against any other Person which may be or become liable in respect of all or
any part of the Obligations or against any collateral security therefor,
guarantee thereof or right of offset with respect thereto. Neither the
Administrative Agent nor any Lender shall be liable for any failure to demand,
collect or realize upon all or any part of the Collateral or for any delay in
doing so, nor shall the Administrative Agent be under any obligation to sell or
otherwise dispose of any Collateral upon the request of the Pledgor or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof.
9. Remedies. If an Event of Default shall occur and be
continuing, upon the request of the Required Lenders, the Administrative Agent
shall exercise, on behalf of itself and the Lenders, all rights and remedies
granted in this Pledge Agreement and in any other instrument or agreement
securing, evidencing or relating to the Obligations, and in addition thereto,
all rights and remedies of a secured party under the Code. Without limiting the
generality of the foregoing with regard to the scope of the Administrative
Agent's remedies, the Administrative Agent, without demand of performance or
other demand, presentment, protest, advertisement or notice of any kind (except
any notice required by Applicable Law referred to below) to or upon the
Pledgor, any Issuer, any Partnership/LLC or any other Person (all and each of
which demands, defenses, advertisements and notices are hereby waived), may in
such circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, assign, give option
or options to purchase or otherwise dispose of and deliver the Collateral or
any part thereof (or contract to do any of the foregoing), in one or more
parcels at public or private sale or sales, in the over-the-counter market, at
any exchange, broker's board or office of the Administrative Agent or any
Lender or elsewhere upon such terms and conditions as it may deem advisable and
at such prices as it may deem best, for cash or on credit or for future
delivery without assumption of any credit risk. The Administrative Agent or any
Lender shall have the right upon any such public sale or sales, and, to the
extent permitted by Applicable Law, upon any such private sale or sales, to
purchase the whole or any part of the Collateral so sold, free of any right or
equity of redemption in the Pledgor, which right or equity is hereby waived or
released. The Administrative Agent shall apply any Proceeds from time to time
held by it and the net proceeds of any such collection,
6
<PAGE> 7
recovery, receipt, appropriation, realization or sale, after deducting all
reasonable costs and expenses of every kind incurred in respect thereof or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Administrative Agent and the
Lenders hereunder, including, without limitation, reasonable attorneys' fees
and disbursements of counsel thereto, to the payment in whole or in part of the
Obligations, in the order set forth in Section 4.5 of the Credit Agreement, and
only after such application and after the payment by the Administrative Agent
of any other amount required by any provision of Applicable Law, including,
without limitation, Section 9-504(1)(c) of the Code, need the Administrative
Agent account for the surplus, if any, to the Pledgor. To the extent permitted
by Applicable Law, the Pledgor waives all claims, damages and demands it may
acquire against the Administrative Agent or any Lender arising out of the
exercise by them of any rights hereunder. If any notice of a proposed sale or
other disposition of Collateral shall be required by Applicable Law, such
notice shall be deemed reasonable and proper if given at least five (5)
Business Days before such sale or other disposition. The Pledgor further waives
and agrees not to assert any rights or privileges which it may acquire under
Section 9-112 of the Code. Nothing in this Section 9 or otherwise in this
Pledge Agreement shall be construed to require the Administrative Agent to give
any notice of an action not otherwise required by Applicable Law and the
express provision of the Pledge Agreement, the Credit Agreement or any other
Loan Document.
10. Private Sales.
(a) The Pledgor recognizes that the Administrative Agent may be
unable to effect a public sale of any or all the Pledged Stock, by reason of
certain prohibitions contained in the Securities Act and applicable state
securities laws or otherwise, and may be compelled to resort to one or more
private sales thereof to a restricted group of purchasers which will be obliged
to agree, among other things, to acquire such securities for their own account
for investment and not with a view to the distribution or resale thereof. The
Pledgor acknowledges and agrees that any such private sale may result in prices
and other terms less favorable than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall be
deemed to have been made in a commercially reasonable manner. The
Administrative Agent shall be under no obligation to delay a sale of any of the
Pledged Stock for the period of time necessary to permit the applicable Issuer
to register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if the applicable Issuer would agree to
do so.
(b) The Pledgor further agrees to use commercially reasonable
efforts to do or cause to be done all such other acts as may be necessary to
make such sale or sales of all or any portion of the Collateral pursuant to
this Paragraph 10 valid and binding and in compliance with any and all other
Applicable Laws. The Pledgor further agrees that a breach of any of the
covenants contained in this Paragraph 10 will cause irreparable injury to the
Administrative Agent and the Lenders not compensable in damages, that the
Administrative Agent and the Lenders have no adequate remedy at law in respect
of such breach and, as a consequence, that each and every covenant contained in
this Paragraph 10 shall be specifically enforceable against the Pledgor, and
the Pledgor hereby waives and agrees not to assert any defenses against an
action for specific performance of such covenants except for a defense that no
Event of Default has occurred under the Credit Agreement.
7
<PAGE> 8
11. Amendments, etc. With Respect to the Obligations. The Pledgor
shall remain obligated hereunder, and the Collateral shall remain subject to
the Lien granted hereby, notwithstanding that, without any reservation of
rights against the Pledgor, and without notice to or further assent by the
Pledgor, any demand for payment of any of the Obligations made by the
Administrative Agent or any Lender may be rescinded by the Administrative Agent
or such Lender, and any of the Obligations continued, and the Obligations, or
the liability of the Pledgor or any other Person upon or for any part thereof,
or any collateral security or guarantee therefor or right of offset with
respect thereto, may, from time to time, in whole or in part, be renewed,
extended, amended, modified, accelerated, compromised, waived, surrendered, or
released by the Administrative Agent or any Lender, and the Credit Agreement,
the Notes, any other Loan Documents and any other documents executed and
delivered in connection therewith may be amended, modified, supplemented or
terminated, in whole or part, as the Lenders (or the Required Lenders, as the
case may be) may deem advisable from time to time, and any guarantee, right of
offset or other collateral security at any time held by the Administrative
Agent or any Lender for the payment of the Obligations may be sold, exchanged,
waived, surrendered or released. Neither the Administrative Agent nor any
Lender shall have any obligation to protect, secure, perfect or insure any
other Lien at any time held by it as security for the Obligations or any
property subject thereto. The Pledgor waives any and all notice of the
creation, renewal, extension or accrual of any of the Obligations and notice of
or proof of reliance by the Administrative Agent or any Lender upon this Pledge
Agreement; the Obligations, and any of them, shall conclusively be deemed to
have been created, contracted or incurred in reliance upon this Pledge
Agreement; and all dealings between the Pledgor, on the one hand, and the
Administrative Agent and the Lenders, on the other, shall likewise be
conclusively presumed to have been had or consummated in reliance upon this
Pledge Agreement. The Pledgor waives diligence, presentment, protest, demand
for payment and notice of default or nonpayment to or upon the Pledgor with
respect to the Obligations.
12. Limitation on Duties Regarding Collateral. The Administrative
Agent's sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Section 9-207 of the
Code or otherwise, shall be to deal with it in the same manner as the
Administrative Agent deals with similar securities and property for its own
account. Neither the Administrative Agent, any Lender nor any of their
respective directors, officers, employees or agents shall be liable for failure
to demand, collect or realize upon any of the Collateral or for any delay in
doing so or shall be under any obligation to sell or otherwise dispose of any
Collateral upon the request of the Pledgor or otherwise.
13. Powers Coupled with an Interest. All authorizations and
agencies herein contained with respect to the Collateral constitute irrevocable
powers coupled with an interest.
14. Severability. Any provision of this Pledge Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
8
<PAGE> 9
15. Paragraph Headings. The paragraph headings used in this
Pledge Agreement are for convenience of reference only and are not to affect
the construction hereof or be taken into consideration in the interpretation
hereof.
16. No Waiver; Cumulative Remedies. Neither the Administrative
Agent nor any Lender shall by any act (except by a written instrument pursuant
to Paragraph 17 hereof) be deemed to have waived any right or remedy hereunder
or to have acquiesced in any Default or Event of Default or in any breach of
any of the terms and conditions hereof. No failure to exercise, nor any delay
in exercising, on the part of the Administrative Agent or any Lender, any
right, power or privilege hereunder shall operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Administrative Agent or any Lender
of any right or remedy hereunder on any one occasion shall not be construed as
a bar to any right or remedy which the Administrative Agent or such Lender
would otherwise have on any future occasion. The rights and remedies herein
provided are cumulative, may be exercised singly or concurrently and are not
exclusive of any other rights or remedies provided by law.
17. Waivers and Amendments; Successors and Assigns; Governing
Law. None of the terms or provisions of this Pledge Agreement may be amended,
supplemented or otherwise modified except by a written instrument executed by
the Pledgor and the Administrative Agent; provided that any consent by the
Administrative Agent to any waiver, amendment, supplement or modification
hereto shall be subject to approval thereof by the Lenders or Required Lenders,
as applicable, in accordance with Section 13.11 of the Credit Agreement. This
Pledge Agreement shall be binding upon the successors and assigns of the
Pledgor and shall inure to the benefit of the Administrative Agent, the Lenders
and their respective successors and assigns. This Pledge Agreement shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of North Carolina.
18. Notices. All notices and communications hereunder shall be
given to the addresses and otherwise in accordance with Section 13.1 of the
Credit Agreement.
19. Control Agreement; Acknowledgement by Issuers and
Partnership/LLC. (a) The Pledgor hereby authorizes and instructs each Issuer
and Partnership/LLC to comply, and each Issuer and Partnership LLC hereby
agrees to so comply, with any instruction received thereby from the
Administrative Agent in accordance with the terms of this Pledge Agreement with
respect to the Collateral, without any consent or further instructions from the
Pledgor (or other registered owner), and the Pledgor agrees that such Issuer
and Partnership/LLC shall be fully protected in so complying. Each Issuer and
Partnership/LLC agrees that its agreement set forth in the preceding sentence
shall be sufficient to create in favor of the Administrative Agent, for the
benefit of the Lenders, "control" of the Partnership/LLC Interests within the
meaning of such term under Section 8-106(c) of the Code. (Notwithstanding the
foregoing, nothing in this Pledge Agreement is intended or shall be construed
to mean or imply that the Partnership/LLC Interests constitute "securities"
within the meaning of such term under Section 8-102(a)(15) of the Code or
otherwise to limit or modify the application of Section 8-103(c) of the Code.
Rather, the Administrative Agent has requested that this provision be included
in this Pledge Agreement solely out of an
9
<PAGE> 10
abundance of caution in the event the Partnership/LLC Interests are,
nevertheless, deemed to constitute "securities" under the Code.)
(b) Each Issuer and Partnership/LLC acknowledges receipt of a
copy of this Pledge Agreement and agrees to be bound thereby and to comply with
the terms thereof insofar as such terms are applicable to it. Each Issuer and
Partnership/LLC agrees to notify the Administrative Agent promptly in writing
of the occurrence of any of the events described in Section 6(c) of this Pledge
Agreement. Each Issuer and Partnership/LLC further agrees that the terms of
Section 10 of this Pledge Agreement shall apply to it with respect to all
actions that may be required of it under or pursuant to or arising out of
Section 10 of this Pledge Agreement.
20. Authority of Administrative Agent. The Pledgor acknowledges
that the rights and responsibilities of the Administrative Agent under this
Pledge Agreement with respect to any action taken by the Administrative Agent
or the exercise or non-exercise by the Administrative Agent of any option,
voting right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Pledge Agreement shall, as between the
Administrative Agent and the Lenders, be governed by the Credit Agreement and
by such other agreements with respect thereto as may exist from time to time
among them, but, as between the Administrative Agent and the Pledgor, the
Administrative Agent shall be conclusively presumed to be acting as agent for
itself and the Lenders with full and valid authority so to act or refrain from
acting, and neither the Pledgor nor any Issuer or Partnership/LLC shall be
under any obligation, or entitlement, to make any inquiry respecting such
authority.
21. Consent to Jurisdiction. The Pledgor hereby irrevocably
consents to the personal jurisdiction of the state and federal courts located
in Mecklenburg County, North Carolina, in any action, claim or other proceeding
arising out of or any dispute in connection with this Pledge Agreement, any
rights or obligations hereunder, or the performance of such rights and
obligations. The Pledgor hereby irrevocably consents to the service of a
summons and complaint and other process in any action, claim or proceeding
brought by the Administrative Agent or any Lender in connection with this
Pledge Agreement, any rights or obligations hereunder, or the performance of
such rights and obligations, on behalf of itself or its property, in the manner
provided in Section 13.1 of the Credit Agreement. Nothing in this Paragraph 21
shall affect the right of the Administrative Agent or any Lender to serve legal
process in any other manner permitted by Applicable Law or affect the right of
the Administrative Agent or any Lender to bring any action or proceeding
against the Pledgor or its properties in the courts of any other jurisdictions.
22. Binding Arbitration; Waiver of Jury Trial.
(a) Binding Arbitration. Upon demand of any party, whether made
before or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to this Pledge Agreement
or any other Loan Document ("Disputes"), between or among parties to this
Pledge Agreement or any other Loan Document shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a party
does not waive the right of that party to demand arbitration hereunder.
Disputes may include, without limitation, tort claims, counterclaims, claims
brought as class actions, claims arising from Loan Documents
10
<PAGE> 11
executed in the future, or claims concerning any aspect of the past, present or
future relationships arising out of or connected with the Loan Documents.
Arbitration shall be conducted under and governed by the Commercial Financial
Disputes Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association and Title 9 of the U.S. Code. All arbitration hearings
shall be conducted in Charlotte, North Carolina. The expedited procedures set
forth in Rule 51, et seq. of the Arbitration Rules shall be applicable to
claims of less than $1,000,000. All applicable statutes of limitation shall
apply to any Dispute. A judgment upon the award may be entered in any court
having jurisdiction. Notwithstanding anything foregoing to the contrary, any
arbitration proceeding demanded hereunder shall begin within ninety (90) days
after such demand thereof and shall be concluded within one-hundred and twenty
(120) days after such demand. These time limitations may not be extended unless
a party hereto shows cause for extension and then such extension shall not
exceed a total of sixty (60) days. The panel from which all arbitrators are
selected shall be comprised of licensed attorneys. The single arbitrator
selected for expedited procedure shall be a retired judge from the highest
court of general jurisdiction, state or federal, of the state where the hearing
will be conducted. The parties hereto do not waive any applicable Federal or
state substantive law except as provided herein. Notwithstanding the foregoing,
this paragraph shall not apply to any Hedging Agreement that is a Loan
Document.
(b) Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE
ADMINISTRATIVE AGENT, EACH LENDER AND THE PLEDGOR HEREBY IRREVOCABLY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR
OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT,
THE NOTES OR THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR
THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(c) Preservation of Certain Remedies. Notwithstanding the
preceding binding arbitration provisions, the parties hereto and the other Loan
Documents preserve, without diminution, certain remedies that such Persons may
employ or exercise freely, either alone, in conjunction with or during a
Dispute. Each such Person shall have and hereby reserves the right to proceed
in any court of proper jurisdiction or by self help to exercise or prosecute
the following remedies: (i) all rights to foreclose against any real or
personal property or other security by exercising a power of sale granted in
the Loan Documents or under applicable law or by judicial foreclosure and sale,
(ii) all rights of self help including peaceful occupation of property and
collection of rents, set off, and peaceful possession of property, (iii)
obtaining provisional or ancillary remedies including injunctive relief,
sequestration, garnishment, attachment, appointment of receiver and in filing
an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by
confession of judgment. Preservation of these remedies does not limit the power
of an arbitrator to grant similar remedies that may be requested by a party in
a Dispute.
23. Entire Agreement; Term of Agreement. This Pledge Agreement,
together with the other Loan Documents, constitutes the entire agreement with
respect to the subject matter hereof and supersedes all prior agreements with
respect to the subject matter hereof. This Pledge Agreement shall remain in
effect from the Closing Date through and including the date upon which
11
<PAGE> 12
all Obligations shall have been indefeasibly and irrevocably paid and satisfied
in full and the Commitments terminated.
[Signature Pages Follow]
12
<PAGE> 13
IN WITNESS WHEREOF, the undersigned have caused this Pledge Agreement
to be duly executed and delivered as of the date first above written.
[CORPORATE SEAL] RARE HOSPITALITY INTERNATIONAL, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
[CORPORATE SEAL] BUGABOO CREEK STEAK HOUSE, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE> 14
SCHEDULE I
To Pledge
Agreement
DESCRIPTION OF PLEDGED STOCK
Subsidiaries
<TABLE>
<CAPTION>
=================================================================================================================================
Percentage of
all Outstanding
issued
Issuer Class of Stock Certificate No. No. of Shares Capital Stock
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bugaboo Creek Steak Common 2 1,000 100%
House, Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DESCRIPTION OF PARTNERSHIP/LLC INTEREST
Partnerships/LLCs
Partnership/LLC Partnership/LLC Interest
None
<PAGE> 1
EXHIBIT 21(A)
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME STATE OF ORGANIZATION
- ---- ---------------------
<S> <C>
RARE Hospitality Management, Inc. Delaware
WHIP Pooling Corporation Georgia
Hemenway Holdings, Inc. Georgia
Grist Mill Holdings, Inc. Georgia
Capital Grille Holdings of Texas, Inc. Texas
The Capital Grille of Beverly Hills, Inc. California
Capital Grille Holdings, Inc. North Carolina
The Capital Grille of Las Vegas, Inc. Nevada
The Capital Grille of New York, Inc. New York
The Capital Grille of San Francisco, Inc. California
The Capital Grille of Scottsdale, Inc. Arizona
Bugaboo Creek of Abington, Inc. Pennsylvania
Bugaboo Creek of East Longmeadow, Inc. Massachusetts
Bugaboo Creek of Hicksville, Inc. New York
Bugaboo Creek of Norwood, Inc. Massachusetts
Bugaboo Creek Holdings, Inc. Delaware
Bugaboo Creek of Virginia, Inc. Virginia
Bugaboo Creek of West Orange, Inc. New Jersey
RMA-LSI Joint Venture Georgia
Carolina Steakhouse Ventures Georgia
LSI-Elias Partners Florida
LSI-Elias Partners II Florida
LSI-Elias Partners III Georgia
6201 Airport Blvd. Limited Partnership Georgia
5440 Fruitville Road Limited Partnership Georgia
11102 Causeway Blvd. Limited Partnership Georgia
6225 North Andrews Avenue Limited Partnership Georgia
34863 Emerald Coast Parkway Limited Partnership Georgia
17211 South Park Center Limited Partnership Georgia
16641 Statesville Road Limited Partnership Georgia
171 Harbison Blvd. Limited Partnership Georgia
153 Huffman Mill Road Limited Partnership Georgia
6035 Blazer Limited Partnership Georgia
719 Northside Limited Partnership Georgia
</TABLE>
<PAGE> 1
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.
333-30046, 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 4, 2000, relating
to the consolidated balance sheets of RARE Hospitality International, Inc. as
of December 26, 1999 and December 27, 1998, 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 26,
1999, which report appears in the December 26, 1999 annual report on Form 10-K
of RARE Hospitality International, Inc.
KPMG LLP
Atlanta, Georgia
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-K OF RARE HOSPITALITY INTERNATIONAL, INC. 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-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 8,864
<SECURITIES> 0
<RECEIVABLES> 3,047
<ALLOWANCES> 0
<INVENTORY> 10,213
<CURRENT-ASSETS> 33,686
<PP&E> 187,281<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 237,118
<CURRENT-LIABILITIES> 44,717
<BONDS> 49,732
0
0
<COMMON> 110,258
<OTHER-SE> 27,326
<TOTAL-LIABILITY-AND-EQUITY> 237,118
<SALES> 382,275
<TOTAL-REVENUES> 382,470
<CGS> 137,416
<TOTAL-COSTS> 326,408
<OTHER-EXPENSES> 29,103
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,866
<INCOME-PRETAX> 21,484
<INCOME-TAX> 7,060
<INCOME-CONTINUING> 14,424
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,587
<NET-INCOME> 12,837
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.02
<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 plan to open 19 to 22 new restaurants in 2000. 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;
- - 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.
<PAGE> 2
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 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.
OUR RESULTS OF OPERATIONS OR STOCK PRICE MAY BE IMPACTED
AS A RESULT OF THE MOO ARBITRATION
As disclosed in Item. 3 of our Annual Report on Form 10-K for the fiscal year
ended December 26, 1999, and in previous filings with the Securities and
Exchange Commission, we have been involved in the arbitration of a dispute with
Moo Management, Inc. The damages phase of the hearing was concluded on January
27, 2000, at which time we asserted that no damages were sustained by Moo and
Moo asserted damages of up to $7.7 million. The arbitrator's decision, which is
expected in late March 2000, could have an adverse impact on our earnings, or
could cause the market price of our common stock to drop.
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
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.
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 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.
<PAGE> 3
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 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. Another factor which could affect our stock
price is the outcome of the pending arbitration with Moo Management, Inc. 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.
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 2000 and each director elected in the first class in 2000 would serve until
2003, the term of the second class would expire in 2001 and each director
elected in the second class in 2001 would serve until 2004, and the term of
third class would expire in 2002 and each director elected in 2002 would serve
until 2005. 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.
