<PAGE>
- -----------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission File number 0-24502
ROCK BOTTOM RESTAURANTS, INC.
(Exact name of the registrant as specified in its charter)
Delaware 84-1265838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1050 Walnut Street
Suite # 402
Boulder, Colorado 80302
(Address of principal executive offices) (Zip Code)
(303) 417-4000
(Registrant's telephone number
including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding twelve 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
ninety days.
Yes X No
----- -----
As of November 11, 1996, the Registrant had outstanding 7,905,451
shares of common stock, par value $.01 per share.
- -----------------------------------------------------------------
EXHIBIT INDEX IS LOCATED ON PAGE 17
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
----------------------------------------------
INDEX TO FORM 10-Q
------------------
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets-
September 29, 1996 and December 31, 1995 1-2
Condensed Consolidated Statements of
Operations-Three Months and Nine
Months Ended September 29, 1996 and
September 24, 1995 3
Condensed Consolidated Statements of
Cash Flows- Nine Months Ended 4
September 29, 1996 and September 24, 1995
Notes to Condensed Consolidated
Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature page 16
<PAGE>
<TABLE>
<CAPTION>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
-----------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
September 29, December 31,
ASSETS 1996 1995
------ ---------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,956,022 $ 3,555,341
Short-term investments - 7,790,442
Accounts receivable 596,848 481,458
Accounts receivable--affiliates 30,165 36,608
Preopening costs, net 2,272,020 2,019,284
Inventories 2,028,701 1,478,573
Prepaids and other current assets 936,184 818,752
--------------- --------------
Total current assets 9,819,940 16,180,458
--------------- --------------
PROPERTY AND EQUIPMENT:
Land 4,725,057 4,598,414
Buildings 3,653,660 3,144,716
Leasehold improvements 35,207,778 23,420,443
Furniture, fixtures and equipment 27,417,090 20,055,537
Construction in progress 1,941,329 1,601,059
Accumulated depreciation and amortization (8,520,592) (5,228,274)
--------------- --------------
Total property and equipment, net 64,424,322 47,591,895
--------------- --------------
INVESTMENT IN JOINT VENTURE 5,235,165 -
OTHER ASSETS 576,911 396,438
--------------- --------------
TOTAL ASSETS $ 80,056,338 $ 64,168,791
=============== ==============
See accompanying notes.
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
---------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
September 29, December 31,
LIABILITIES 1996 1995
----------- ---------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable-
Trade $ 4,293,036 $ 1,965,035
Construction projects 371,496 1,038,148
Affiliates 11,929 22,105
Accrued payroll and payroll taxes 2,330,633 1,078,194
Accrued sales taxes 497,542 1,105,076
Other accrued expenses 1,571,000 942,613
Current portion of long-term debt 117,841 43,921
Current portion of obligations under capital leases 666,076 650,833
-------------- --------------
Total current liabilities 9,859,553 6,845,925
LONG-TERM DEBT 5,477,241 596,793
OBLIGATIONS UNDER CAPITAL LEASES 519,930 1,016,482
DEFERRED INCOME TAXES 243,547 368,547
-------------- --------------
Total liabilities 16,100,271 8,827,747
-------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares
authorized, none issued and outstanding - -
Common stock - $.01 par value, 15,000,000 shares
authorized, 7,904,785 and 7,345,482 issued
and outstanding 79,048 73,455
Additional paid-in capital 56,664,489 50,809,742
Retained earnings 7,212,530 4,457,847
--------------- ---------------
Total stockholders' equity 63,956,067 55,341,044
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,056,338 $ 64,168,791
=============== ===============
See accompanying notes.
</TABLE>
-2-<PAGE>
<TABLE>
<CAPTION>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
-----------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 29, September 24, September 29, September 24,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Old Chicago restaurants $ 15,413,309 $ 10,746,558 $ 42,598,584 $ 28,756,532
Rock Bottom Restaurant & Brewery
restaurants 13,551,356 8,870,155 36,292,183 22,186,469
-------------- -------------- -------------- --------------
Total revenues 28,964,665 19,616,713 78,890,767 50,943,001
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Cost of sales 7,267,487 4,904,216 19,572,139 12,607,270
Restaurant salaries and benefits 9,313,272 6,473,515 25,857,933 16,951,110
Operating expenses 6,225,263 3,980,536 16,839,296 10,298,277
Selling expenses 1,130,372 745,435 3,083,389 1,798,103
General and administrative expenses 1,378,562 1,064,427 4,321,580 3,160,072
Depreciation and amortization 2,044,204 1,110,773 5,552,823 2,728,505
-------------- -------------- -------------- --------------
Total operating expenses 27,359,160 18,278,902 75,227,160 47,543,337
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 1,605,505 1,337,811 3,663,607 3,399,664
Equity in income of joint venture 112,941 - 112,941 -
Interest expense (67,341) (58,468) (201,488) (190,728)
Interest income 8,449 326,187 208,328 848,683
Other income (expense), net (273) 28 (1,041) 39,418
-------------- -------------- -------------- --------------
INCOME BEFORE TAXES 1,659,281 1,605,558 3,782,347 4,097,037
PROVISION FOR INCOME TAXES 369,522 545,890 1,027,664 1,434,063
-------------- -------------- -------------- --------------
NET INCOME $ 1,289,759 $ 1,059,668 $ 2,754,683 $ 2,662,974
============= ============== ============== ==============
NET INCOME PER SHARE $.16 $.14 $.36 $.38
==== ==== ==== ====
WEIGHTED AVERAGE
SHARES OUTSTANDING 7,995,000 7,676,300 7,667,000 7,095,300
========= ========= ========= =========
See accompanying notes.
</TABLE>
-3-<PAGE>
<TABLE>
<CAPTION>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
----------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 24, 1995
-------------------------------------------------------------------
(Unaudited)
1996 1995
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,754,683 $ 2,662,974
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 5,552,823 2,728,505
Equity in income of joint venture (112,941) -
Gain on disposition of assets, net - (1,585)
Deferred income taxes (125,000) 220,000
Increase in accounts receivable (115,390) (307,681)
Increase in inventories (550,128) (472,985)
Increase in prepaids and other (297,905) (239,491)
Expenditures for preopening costs (2,480,420) (2,008,900)
Increase (decrease) in accounts payable 1,661,323 (1,174,914)
Increase (decrease) in accrued expenses 1,273,318 (101,815)
-------------- --------------
Net cash provided by operating activities 7,560,363 1,304,108
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (20,124,745) (21,473,826)
Advances to affiliates, net (3,733) (99,221)
Sale (purchase) of short-term investments, net 7,790,442 (4,397,364)
Investment in joint venture (155,045) -
-------------- --------------
Net cash used in investing activities (12,493,081) (25,970,411)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 5,000,000 -
Repayments of long-term debt (45,632) (54,985)
Repayments of capital lease obligations (481,309) (379,035)
Issuance of common stock, net of offering costs 860,340 33,957,232
-------------- --------------
Net cash provided by financing activities 5,333,399 33,523,212
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 400,681 8,856,909
CASH AND CASH EQUIVALENTS, beginning of period 3,555,341 5,113,675
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 3,956,022 $ 13,970,584
============== ==============
See accompanying notes.
</TABLE>
-4-<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 29, 1996
------------------
(Unaudited)
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
The financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the
disclosures included herein are adequate to make the information
presented not misleading. A description of the Company's
accounting policies and other financial information is included
in the audited consolidated financial statements as filed with
the Securities and Exchange Commission in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments necessary to present fairly the financial position of
the Company as of September 29, 1996, and the results of
operations and cash flows for the periods presented. All such
adjustments are of a normal recurring nature. The results of
operations for the three and nine months ended September 29,
1996, are not necessarily indicative of the results that may be
achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
(2) LONG-TERM DEBT
--------------
On July 2, 1996, the Company closed its $20 million bank
revolving credit facility. Interest accrues on the average
outstanding balance at either the prime rate or LIBOR plus 1.5%
and is payable quarterly. The facility converts to a three year
fully amortizing term loan after two years, or after three years
upon agreement of the parties. The loan includes customary
financial covenants and ratios and restrictions on investment and
acquisitions. As of September 29, 1996, $2.5 million was
outstanding under this obligation and is included in long-term
debt in the accompanying condensed consolidated balance sheet.
Additionally, interest expense totaling $46,166 was capitalized
in construction costs.
Also during July 1996, the Company closed on a $2.5 million first
mortgage on real property located in Chicago, Illinois. Interest
accrues at 9% with principal and interest payments due monthly,
based on a fifteen year amortization. Remaining outstanding
principal and interest are due July 1, 2001. As of September 29,
1996, $2,486,881 was outstanding under this obligation, of which
$83,044 is included in current portion of long-term debt in the
accompanying condensed consolidated balance sheet.
-5-<PAGE>
(3) INVESTMENT IN JOINT VENTURE
---------------------------
On July 8, 1996 the Company acquired an indirect 50% equity
interest in Trolley Barn Brewery Inc. ("Trolley Barn"), effective
July 1, 1996, in exchange for 452,080 shares of the Company's
$0.01 par value common stock. The Company also received the
right to purchase the remaining 50% of Trolley Barn from the
selling shareholders. The option is exercisable at any time
between four and six years after the closing of the Trolley Barn
acquisition, or upon a change in control of the ownership of the
50% of Trolley Barn retained by the selling shareholders.
Trolley Barn currently operates three brew pub restaurants in the
southeastern United States under the name Big River Grille &
Brewing Works. In connection with the acquisition, the Company
agreed to certain licensing and development arrangements whereby
Trolley Barn may develop restaurants throughout the southeastern
United States utilizing various names, including Rock Bottom
Restaurant & Brewery and Old Chicago.
The Company's investment in Trolley Barn is accounted for under
the equity method. As of September 29, 1996, the investment in
joint venture carrying amount exceeded the Company's equity in
Trolley Barn's underlying net assets by approximately $4.5
million. This amount represents goodwill at the date of
acquisition less amortization expense of $32,820.
-6-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
- --------
Rock Bottom Restaurant & Brewery restaurants and Old Chicago
restaurants are casual dining restaurants that feature high quality,
moderately priced food and a distinctive selection of microbrewed and
specialty beers. The Company began operations in 1976 with the
opening of its first Old Chicago restaurant in Boulder, Colorado, and
as of November 11, 1996 operates 13 Rock Bottom Restaurant & Brewery
restaurants and 34 Old Chicago restaurants. Expansion plans for the
remainder of 1996 include opening one Rock Bottom Restaurant & Brewery
restaurant and one Old Chicago restaurant. With these planned
additions, total 1996 restaurant openings will include 12 Old Chicago
restaurants and four Rock Bottom Restaurant & Brewery restaurants, an
increase of two Old Chicago restaurants from the Company's original
1996 expansion plans.
1996 Restaurant Openings
Qtr ended Qtr ended Qtr ended Qtr ended
3/31/96 6/30/96 9/29/96 12/29/96 Total
--------- -------- -------- -------- ------
Old Chicago
restaurants 4 3 2 3 12
Rock Bottom Restaurant
& Brewery restaurants 0 1 2 1 4
--- --- --- --- ---
Total restaurant
openings 4 4 4 4 16
=== === === === ===
The Old Chicago restaurants opened in the first two quarters are
located in Madison, Wisconsin; Silverthorne and Grand Junction,
Colorado; Apple Valley and Minnetonka, Minnesota; Salem, Oregon and
Omaha, Nebraska. In the third quarter of 1996, the Company opened Old
Chicago restaurants in Bettendorf, Iowa and Columbia, Missouri. The
Company completed fourth quarter Old Chicago restaurant openings
during October in Roseville, Minnesota and Lincoln, Nebraska for a
total of 11 new restaurant openings as of November 11, 1996. The
Company's plans also include opening one additional Old Chicago
restaurant in Nebraska later this quarter.
The Rock Bottom Restaurant & Brewery restaurant opened in
the second quarter is located in Indianapolis. In the third quarter
of 1996, the Company opened Rock Bottom Restaurant & Brewery
restaurants in Cincinnati and Seattle. One additional Rock Bottom
Restaurant & Brewery restaurant is planned to open late in the fourth
quarter in Bethesda, Maryland.
The Company has historically leased its facilities and plans to
lease sites for a majority of its future restaurant locations. There
can be no assurance, however, that the Company will be able to
identify suitable restaurant sites, purchase sites or obtain leases on
acceptable terms, or open new restaurants on anticipated dates.
-7-<PAGE>
During July 1996, the Company acquired an indirect interest in
Trolley Barn Brewery, Inc. ("Trolley Barn") and agreed to certain
licensing and development arrangements pursuant to which Trolley Barn
would develop restaurants throughout the southeastern United Sates
utilizing various names, including Rock Bottom Restaurant & Brewery,
Old Chicago, and Big River Grille & Brewing Works. Trolley Barn
currently operates three brew pub restaurants under the name Big River
Grille & Brewing Works which are located in Nashville and Chattanooga,
Tennessee, and within the WALT DISNEY WORLD Resort in Lake Buena
Vista, Florida. A fourth restaurant opening is planned for
Greenville, South Carolina during the fourth quarter of 1996. Failure
of Trolley Barn or any future joint venture partner to open
restaurants or conduct operations as anticipated could adversely
affect the Company's earnings and could hinder the Company's
expansion.
Future operating results may also be adversely affected by costs
incurred by the Company in developing a significant number of new
restaurants over a relatively short period of time. Also, new
restaurants initially operate with below normal revenues and incur
certain increased costs in the process of achieving operational
efficiencies.
Additionally, the Company operates in a highly competitive
environment. Competitive factors include perceived price-value,
service, location, quality, selection and atmosphere. Many
competitors of the Company are well established and have substantially
greater financial and other resources than does the Company. Also,
the restaurant industry generally, and the Company in particular, is
affected by changes in consumer tastes, national, regional or local
economic conditions, demographic trends and traffic patterns.
Cautionary Statement Under "Safe Harbor" Provision of the Private
- -----------------------------------------------------------------
Securities Litigation Reform Act of 1995
- ----------------------------------------
Statements contained in this report that are not historical facts
are forward looking statements that involve risks and uncertainties
that could cause actual results to differ materially from such forward
looking statements. Factors that could cause actual results to differ
materially include those discussed above and, among others: the cost
and availability of suitable restaurant locations, cost effective and
timely construction of new restaurants, operating restrictions and
costs associated with governmental regulations, fluctuations in
consumer demand, acceptance in new markets, the Company's ability to
manage its operations during its rapid expansion, competitive
conditions in the Company's markets, general economic conditions, the
availability of financing on acceptable terms to fund future growth
and other risks detailed in the Company's reports on Form 10-K and
Form 10-Q and other filings under the Securities Exchange Act of 1934.
-8-<PAGE>
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, the
percentage relationship to restaurant revenues of certain income
statement data and certain restaurant data:
<TABLE>
<CAPTION>
Percentage of Revenues
----------------------------------------------------------
Three Months Ended Nine Months Ended
----------------------- ------------------------
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Old Chicago restaurants 53.2% 54.8% 54.0% 56.4%
Rock Bottom Restaurant & Brewery
restaurants 46.8 45.2 46.0 43.6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating Expenses:
Cost of sales 25.1 25.0 24.8 24.7
Restaurant salaries and benefits 32.2 33.0 32.8 33.3
Operating expenses 21.5 20.3 21.4 20.2
Selling expenses 3.9 3.8 3.9 3.5
General and administrative expenses 4.8 5.4 5.5 6.2
Depreciation and amortization 7.0 5.7 7.0 5.4
----- ----- ----- ------
Total operating expenses 94.5 93.2 95.4 93.3
----- ----- ----- ------
Income From Operations 5.5 6.8 4.6 6.7
Equity in income of joint venture 0.4 - 0.1 -
Interest expense (0.2) (0.3) (0.2) (0.4)
Interest income - 1.7 0.3 1.6
Other income (expense), net - - - 0.1
----- ----- ----- -----
Income Before Taxes 5.7 8.2 4.8 8.0
Provision for income taxes 1.2 2.8 1.3 2.8
----- ----- ----- -----
Net Income 4.5% 5.4% 3.5% 5.2%
===== ===== ===== =====
Restaurant Data:
Restaurant operating weeks:
Old Chicago restaurants 396 250 1,099 673
Rock Bottom Restaurant & Brewery
restaurants 154 92 416 240
----- ----- ----- -----
Total 550 342 1,515 913
===== ===== ===== =====
Restaurants open (end of period):
Old Chicago restaurants 32 21
Rock Bottom Restaurant & Brewery
restaurants
13 8
--- ---
Total 45 29
=== ===
</TABLE>
-9-<PAGE>
Revenues
Revenues increased $9.3 million (47.7%) to $29 million in the
quarter ended September 29, 1996 from $19.6 million in the comparable
quarter of 1995. For the nine months ended September 29, 1996,
revenues increased $27.9 million (54.9%) to $78.9 million from $50.9
million for the comparable period in 1995. Revenues from 11 new Old
Chicago restaurants and five new Rock Bottom Restaurant & Brewery
restaurants that opened during the last quarter of 1995 and the first
nine months of 1996 accounted for the majority of the third quarter
variance as comparable restaurant revenues remained flat during this
period. For the nine months ended September 29, 1996, the growth in
revenues from expansion was offset somewhat by a decrease in year to
date comparable restaurant revenues of 1.3%. This decrease is
primarily due to harsher winter weather conditions experienced in
Colorado and Minnesota during the first quarter of 1996 which resulted
in a 4.4% decrease in comparable restaurant revenues during that
period.
Revenues from the Company's Rock Bottom Restaurant & Brewery
restaurants have increased to 46.8% as a percentage of total revenues
for the third quarter of 1996 from 45.2% in the comparable period of
1995, and for the nine months ended September 29, 1996 have increased
to 46.0% as a percentage of total revenues from 43.6% in the
comparable period of 1995. Although the Company has opened only five
Rock Bottom Restaurant & Brewery restaurants during the last twelve
months as compared to 11 Old Chicago restaurants, the brewery
restaurants generate greater average weekly sales resulting in the
increase in this percentage for both periods.
Cost of Sales
Cost of sales, which consists of food, beverage, and supply
costs, increased $2.4 million (48.2%) to $7.3 million in the third
quarter of 1996 from the third quarter of 1995, and increased $7.0
million (55.2%) to $19.6 million for the nine months ended September
29, 1996 compared to the same period in 1995. As a percentage of
revenues, cost of sales in the third quarter of 1996, and in the nine
months ended September 29, 1996, were relatively flat compared to the
same periods in 1995. Although the Company experienced significant
increases in certain commodity prices, particularly cheese and
chicken, these cost increases have been offset by greater efficiencies
in managing food and beverage waste and yields as a result of
increased training and development of restaurant management.
Restaurant Salaries and Benefits
Restaurant salaries and benefits, which consist of restaurant
management and hourly employee wages, payroll taxes, and group health
insurance, increased $2.8 million (43.9%) to $9.3 million in the third
quarter of 1996 compared to the third quarter of 1995, and increased
$8.9 million (52.5%) to $25.9 million for the nine months ended
September 29, 1996 compared to the same period in 1995. As a
percentage of revenues, restaurant salaries and benefits decreased
0.8% to 32.2% in the third quarter of 1996 compared to 33.0% in 1995,
and decreased to 32.8% for the nine months ended September 29, 1996
compared to 33.3% for the same period in 1995. This decrease is due
primarily to sophisticated labor scheduling systems installed in the
Rock Bottom Restaurant & Brewery restaurants during the last part of
1995 and early 1996, and procedures implemented in the Old Chicago
restaurants during the first part of 1996 to address labor scheduling
issues on a more real-time basis. The Company also anticipates
upgrading labor scheduling software currently used in the Old Chicago
restaurants during the fourth quarter of 1996 and the first half of
1997, which will computerize some of the manual procedures now
performed.
-10-<PAGE>
Federal legislation effective October 1, 1996 increased the
minimum wage rate $.50 per hour, with another increase of $.40 per
hour effective September 1, 1997. This legislation also increased
the Federal tip credit by the same amount, so that the federal minimum
wage paid to tipped employees has not increased. Additionally, in
November 1996, certain states passed minimum wage legislation to
increase rates to amounts in excess of the Federal minimum wage.
Although the Company has not yet quantified the impact of all such
legislation, a majority of the Company's restaurants operate in states
which have wage laws consistent with the Federal minimum wage laws,
and most non-tipped employees are currently paid above the minimum
wage rate.
Operating Expenses
Operating expenses, which include occupancy costs, utilities,
repairs, maintenance and linen, increased $2.2 million (56.4%) to $6.2
million in the third quarter of 1996 compared to the third quarter of
1995, and increased $6.5 million (63.5%) to $16.8 million for the nine
months ended September 29, 1996 as compared to the same period in
1995. As a percentage of revenues, operating expenses increased to
21.5% in the third quarter of 1996 from 20.3% for the third quarter in
1995, and increased to 21.4% for the nine months ended September 29,
1996 from 20.2% for the comparable period in 1995. This increase is
primarily a result of higher occupancy costs due to increased
insurance coverage, higher property taxes and greater utilities
expense.
Selling Expenses
Selling expenses increased $384,937 (51.6%) to $1.1 million in
the third quarter of 1996 compared to $745,435 in the third quarter of
1995, and increased $1.3 million (71.5%) to $3.1 million in the nine
months ended September 29, 1996 compared to the same period in 1995.
As a percentage of revenues, these expenses remained relatively flat
for the third quarter of 1996 compared to the same quarter of 1995,
but increased 0.4% to 3.9% for the nine months ended September 29,
1996 from 3.5% for the comparable period in 1995. This increase
reflects additional marketing of both restaurant concepts in
connection with the Company's continued expansion. The Company has
now broadened its use of radio advertising and promotions to build
name recognition and has retained an outside advertising agency to
provide consultation on these and other advertising programs.
General and Administrative Expenses
General and administrative expenses ("G&A") increased $314,135
(29.5%) to $1.4 million in the third quarter of 1996 compared to $1.1
million in the third quarter of 1995, and increased $1.2 million
(36.8%) to $4.3 million for the nine months ended September 29, 1996
compared to the same period in 1995. As a percentage of revenues,
these expenses have decreased to 4.8% in the third quarter of 1996
from 5.4% for the same quarter of 1995, and have decreased to 5.5% for
the nine months ended September 29, 1996, from 6.2% for the same
period of 1995. These decreases as a percentage of revenues are
largely due to efficiencies gained in the administration of a larger
number of restaurants. Additionally, the decrease of 0.6% in the
third quarter of 1996 as compared to the same period in 1995 reflects
results from the cost containment program initiated in the first
quarter of 1996 to reduce administrative costs.
-11-<PAGE>
Depreciation and Amortization
Depreciation and amortization expense, including amortization of
preopening expenses, increased to $2.0 million in the third quarter of
1996 from $1.1 million for the comparable period in 1995, and
increased to $5.6 million for the nine months ended September 29, 1996
from $2.7 million for the comparable period in 1995. As a percentage
of revenues, depreciation expense was 4.3% for the third quarter of
1996 as compared to 2.9% for the same period in 1995, and for the nine
months ended September 29, 1996 was 4.2% as compared to 3.0% for the
same period in 1995. Preopening expense was 2.7% as a percentage of
revenues for the third quarter of 1996 as compared to 2.8% for the
same period in 1995, and for the nine months ended September 29, 1996
was 2.8% as compared to 2.4% for the same period in 1995.
The increase in depreciation expense as a percentage of revenues
in both periods is attributable primarily to two new Old Chicago
restaurants and three new Rock Bottom Restaurant & Brewery restaurants
opened during the last part of 1995. These restaurants experienced
higher construction costs than restaurants opened prior to July 1995,
including land and building purchases for three of these restaurants.
Construction costs for restaurants opened in 1996 have been consistent
with previously disclosed estimates. Accordingly, the Company does
not anticipate significant future increases in depreciation expense as
a percentage of revenues.
Preopening expense as a percentage of revenues was relatively
flat for the third quarter of 1996 as compared to the same period in
1995. The increase in preopening expense as a percentage of revenues
for the nine months ended September 29, 1996 is attributable primarily
to an increase in average preopening costs for certain Old Chicago
restaurants. This increase is principally due to opening restaurants
in new markets outside of Colorado, which requires a greater
investment for travel expense, training and other personnel related
costs. Although the Company does not anticipate preopening expense as
a percentage of revenues to continue to increase significantly, the
percentage will fluctuate depending on the number of new restaurants
opened in any given period.
Interest Expense/Interest Income
Interest expense for the three and nine months ended September
29, 1996, increased $8,873 and $10,760, respectively, from the
comparable periods in 1995. Additionally, interest expense of $46,166
for the three months ended September 29, 1996 was capitalized in
construction costs. This increase in expense is primarily
attributable to borrowings of long-term debt of $5 million during the
third quarter of 1996. See Note 2 of Notes to Condensed Consolidated
Financial Statements.
Interest income primarily represents amounts earned from the
temporary investment of cash proceeds from the Company's follow-on
offering in the first quarter of 1995. These proceeds have been used
in the construction of new restaurants over the past twelve months,
resulting in lower interest income in the three and nine month periods
ended September 29, 1996, as compared to the same periods in 1995.
Equity in Income of Joint Venture
Equity in income of joint venture reflects the Company's 50%
equity interest in the after-tax earnings from the Trolley Barn joint
venture. See Note 3 of Notes to Condensed Consolidated Financial
Statements.
-12-<PAGE>
Provision for Income Taxes
The estimated effective tax rate for the three and nine month
periods ended September 29, 1996, was 28% as compared to 34% and 35%,
respectively, for the comparable periods in 1995. The decrease in the
tax rate for both periods in 1996 is due primarily to greater amounts
available for the FICA tip tax credit and rehabilitation tax credit.
Additionally, the provision for income taxes for the three months
ended September 29, 1996 includes an adjustment of approximately
$63,000 to reduce the 1996 annual effective tax rate from 31% to 28%.
This decrease is due to a change in estimate of the impact these tax
credits will have on 1996 annual estimated taxable income.
Liquidity and Capital Resources
- -------------------------------
The Company requires capital principally for the development and
construction of new restaurants and for capital expenditures at
existing restaurants. The Company estimates that total capital
expenditures for 1996, excluding preopening costs, will be
approximately $23.6 million, of which the cost of new restaurants will
be approximately $21.6 million. The increase in these estimates from
prior periods is primarily due to opening two additional Old Chicago
restaurants in 1996. For the nine months ended September 29, 1996,
total capital expenditures incurred of $20.1 million included $18.4
million for the development of new restaurants, and $1.7 million for
existing restaurants and other corporate requirements.
The Company has financed its capital spending through cash flow
from operations, proceeds from public offerings, capital lease
obligations, and long-term debt. Net cash flow from operating
activities provided $7.5 million for capital spending during the nine
months ended September 29, 1996. Additionally, the Company secured a
$20 million revolving line of credit facility, executed a first
mortgage on real property located in Chicago, and liquidated all
remaining short-term investments during the third quarter of 1996.
These financing instruments provided an additional $12.8 million in
cash for capital spending during the nine months ended September 29,
1996.
During the third quarter of 1996, the Company financed its
acquisition of an indirect 50% interest in Trolley Barn by exchanging
452,080 shares of its $.01 par value common stock. See Note 3 of
Notes to Condensed Consolidated Financial Statements. The
corresponding increases in assets and equity are excluded from the
accompanying Condensed Consolidated Statement of Cash Flows,
reflecting the non-cash nature of this transaction.
The Company may continue to seek additional sources of debt or
equity capital for its continuing expansion, although there can be no
assurance that such funds will be available on favorable terms, if at
all. The Company believes that its existing cash balances, cash flow
generated from operations and funds available under its revolving line
of credit will be sufficient to satisfy its currently anticipated cash
needs through 1997. However, results of operations may be affected by
changes in consumer tastes, national, regional or local economic
conditions, demographic trends and traffic patterns, decreased
interest income and increased interest expense, among other factors.
There can also be no assurance that budgeted capital expenditures will
be sufficient for current development plans or that the costs of
acquiring sites and opening new restaurants will not increase in the
future.
The Company does not have significant receivables or inventory
and receives trade credit based upon negotiated terms in purchasing
food and supplies.
-13-<PAGE>
Seasonality and Quarterly Results
- ---------------------------------
The Company's sales and earnings fluctuate seasonally.
Historically, the Company's highest earnings have occurred in the
second and third quarters. In addition, quarterly results have been,
and in the future are likely to be, substantially affected by the
timing of new restaurant openings. Because of the seasonality of the
Company's business and the impact of new restaurant openings, results
in any quarter are not necessarily indicative of the results that may
be achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
Impact of Inflation
- -------------------
Although the Company does not believe inflation has materially
affected operating results during the past three years, inflationary
pressures could result in substantial increases in costs and expenses,
particularly food, supplies, labor and operating expenses.
Additionally, federal legislation effective October 1, 1996 increased
minimum wage rates, which has the potential to impact all aspects of
the Company's business because of higher labor rates that may be
experienced by its suppliers and vendors. These labor rates could
translate into higher costs for goods and services purchased by the
Company. All such increases in costs and expenses could have a
significant impact on the Company's operating results to the extent
that such increases cannot be passed along to customers.
-14-<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10 Real Estate Mortgage, dated June 27, 1996, between
the Company and Lakeside Bank, together with
Promissory Note*
27 Financial Data Schedule
----------------------------
* To be filed by amendment.
(b) Reports on Form 8-K
A current report on Form 8-K dated July 2, 1996 was filed to
announce the closing of a $20 million revolving credit
facility with Norwest Bank, and the execution of a Stock
Purchase Agreement between the Company, Trolley Barn, TBB
Acquisition Group, Inc., TBB Holding Company, and the TBB
shareholders.
-15-<PAGE>
SIGNATURES
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ROCK BOTTOM RESTAURANTS, INC.
(Registrant)
November 13, 1996 By: /s/ WILLIAM S. HOPPE
-------------------------------
William S. Hoppe
Chief Financial Officer and
Vice President
(Principal Financial Officer)
-16-<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10 Real Estate Mortgage, dated
June 27, 1996, between the
Company and Lakeside Bank,
together with Promissory Note*
27 Financial Data Schedule
- ---------------------------
* To be filed by amendment.
-17-<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 29, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> SEP-29-1996
<CASH> 3,956,022
<SECURITIES> 0
<RECEIVABLES> 627,013
<ALLOWANCES> 0
<INVENTORY> 2,028,701
<CURRENT-ASSETS> 9,819,940
<PP&E> 72,944,914
<DEPRECIATION> 8,520,592
<TOTAL-ASSETS> 80,056,338
<CURRENT-LIABILITIES> 9,859,553
<BONDS> 5,595,082
0
0
<COMMON> 79,048
<OTHER-SE> 63,877,019
<TOTAL-LIABILITY-AND-EQUITY> 80,056,338
<SALES> 78,890,767
<TOTAL-REVENUES> 78,890,767
<CGS> 19,572,139
<TOTAL-COSTS> 75,227,160
<OTHER-EXPENSES> 1,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,488
<INCOME-PRETAX> 3,782,347
<INCOME-TAX> 1,027,664
<INCOME-CONTINUING> 2,754,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,754,683
<EPS-PRIMARY> .36
<EPS-DILUTED> 0
</TABLE>