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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-24502
ROCK BOTTOM RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1265838
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
248 CENTENNIAL PARKWAY, LOUISVILLE, COLORADO 80027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 664-4000
(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:
TITLE OF CLASS
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Common Stock ($.01 par value)
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 [ ].
At March 25, 1997, 7,906,783 shares of common stock were outstanding.
At March 25, 1997, the aggregate market value of the voting stock held by
non-affiliates was approximately $66,201,000.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Definitive Proxy Statement for the 1997
Annual Meeting of Stockholders, to be filed on or before April 28, 1997,
are incorporated by reference into Part III of this Form 10-K.
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INDEX
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PART I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
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PART I
ITEM 1: BUSINESS
GENERAL
Rock Bottom Restaurants, Inc. (the "Company") was incorporated in April
1994, and currently operates 16 Rock Bottom Restaurant & Brewery(SM) restaurants
and 36 Old Chicago(R) Restaurants in 17 states throughout the country. 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. A key element of the
Company's strategy is to capitalize on the growing interest of consumers in
higher quality, more flavorful beer, including microbrewed and domestic and
imported specialty beers. As of March 25, 1997, the Company has opened three
additional restaurants, and intends to open 11 more restaurants during the
remainder of 1997 for a total of 14 new restaurants during 1997.
During 1996, the Company also acquired an indirect 50% equity interest in
Trolley Barn Brewery, Inc. ("Trolley Barn") in exchange for 452,073 shares of
the Company's common stock. Trolley Barn operates four restaurants in the
southeastern United States under the name Big River Grille & Brewing Works(TM)
(see "Business -- Trolley Barn").
BUSINESS STRATEGY
The Company's objective is to provide its customers with an exciting and
entertaining casual dining experience. Key elements of the Company's business
strategy used in achieving this objective include:
Employee Selection. The Company firmly believes that the quality and
training of its employees are key factors in its operations. Employees are
selected for employment on the basis of congeniality and willingness to accept
responsibility for fulfilling customer expectations. Employees are given broad
decision-making powers and the Company believes that its employees have
significantly greater decision-making authority at the customer level than do
those of its competitors, thereby enhancing customer experiences and the
friendly atmosphere of the Company's restaurants. Additionally, management
believes that its focus on the employee not only results in exceptional
customer experiences but also reduces turnover, improves productivity and
serves as an effective employee recruitment tool.
Customer Service Commitment. At each of its restaurants, the Company seeks
to provide an exceptional dining experience that exceeds the expectations of
its customers. Employee selection and training are key elements to this
strategy. Each employee having direct contact with customers is responsible and
accountable for the experiences of his or her customers. It is the Company's
philosophy that the front-line employee works for the customer and that all
other employees within the Company work to support the front-line employee's
efforts.
Diverse and Distinguished Menu. Each of the Company's restaurant concepts
offer a distinguished menu with numerous selections designed to appeal to a
wide variety of tastes and budgets. The menu items are created by culinary
trained chefs or professional kitchen managers to satisfy customers' demand for
quantity, quality and diversity and to build and maintain a loyal clientele.
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Microbrewed and Specialty Beer. Both Rock Bottom Restaurant & Brewery
restaurants and Old Chicago restaurants feature hand-crafted, microbrewed and
other specialty beer that the Company believes appeal to a growing consumer
interest in higher quality, more flavorful beer. The Company believes that its
diverse and high quality beer selection encourages the trial of new beer and,
over time, helps to create more knowledgeable and sophisticated beer drinkers.
Rock Bottom Restaurant & Brewery restaurants brew their own beer on-premises
and offer a selection of five to seven distinctive hand-crafted beers ranging
in taste from light ales to chocolate stout. Old Chicago restaurants present a
changing and diverse selection of 110 or more microbrewed, imported and
domestic beers from around the world and strive to be one of the first or only
restaurants in their markets to introduce new, hard-to-find or specialty beer.
Distinct Appearance and Atmosphere. The Company strives to create a
distinctive, highly entertaining, and unique atmosphere at each of its
restaurants through a flexible design layout suitable for a wide variety of
restaurant sites. The Company's Rock Bottom Restaurant & Brewery restaurants
are generally located in high traffic metropolitan areas and are designed to
create an open, visually stimulating environment featuring stainless steel
brewing tanks and equipment. Each Old Chicago restaurant highlights Chicago
memorabilia or other interesting artifacts throughout the restaurant and
displays the restaurant's variety of specialty beers along the bar with an
attractive array of different bottled beers and colorful tap handles for
draught beer.
THE MICROBREWED AND SPECIALTY BEER MARKET
The beer brewing industry generally is divided into large breweries with
annual brewing capacities of over 1,000,000 barrels, regional breweries with
capacities in excess of 15,000 barrels, and microbreweries with capacities of
less than 15,000 barrels. A brewpub is a restaurant-brewery that brews beer
on-premises and sells at least 50% of the beer brewed in an adjacent restaurant
or bar.
Consumer interest in higher quality, more flavorful beer has resulted in
significant growth in the micro-brewed and specialty beer markets during the
last several years. According to the New Brewer, a leading beer industry
publication, micro-brewed and U.S. specialty beer sales (in barrels) have
experienced a compound annual growth of in excess of 40% over the last five
years, yet such sales still represent only approximately 2.8% of total U.S.
barrel consumption. According to the Association of Brewers, the number of
microbreweries has grown from 21 in 1985 to 385 in 1996, while the number of
brewpubs has increased to 657 in 1996, an increase from only eight brewpubs in
1985.
ROCK BOTTOM RESTAURANT & BREWERY RESTAURANTS
Design and Layout. Rock Bottom Restaurant & Brewery restaurants range in
size from 8,000 to 14,000 square feet and are designed to create a dramatic
visual impact on their customers. Each restaurant features warm lighting, high
ceilings and wood-finished interiors complemented by an array of stainless
steel brewing tanks and equipment. The on-premises brewing equipment, which
consists of strategically placed rows of stainless steel fermenting tanks and
serving vessels, is an integral aspect of the restaurant's design and enhances
the overall visual impact. Television sets throughout the bar area allow
customers to watch sporting and other special events.
The dining and bar areas are spacious and the kitchens feature partial or
complete exhibition style cooking. Total seats in the restaurants' dining and
bar areas range between 220 and 480 and the layout is flexible, permitting
tables to be rearranged to accommodate customer demand. To complement the
overall design and dining experience, restaurants in certain locations provide
live music, outdoor patio seating or separate areas with pool tables.
Menu and Pricing. The menu at Rock Bottom Restaurant & Brewery restaurants
includes approximately 50 bistro style items consisting of appetizers, soups,
meal-sized salads, and entrees featuring meat, fish, pastas and regional
cuisine as well as a range of desserts. In addition, the menu is supplemented
by daily specials that are created at the discretion of each culinary trained
chef. The daily specials typically include a pasta or meat dish, and a fresh
fish entree. The menu is designed to offer a broad range of prices that convey
value to the customer. Entrees typically range in price from $5.95 to $18.95
with most entrees priced below $10.00. Management continually analyzes menu
items for popularity and profitability and adapts new items to local market
preferences.
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Hand-crafted Beer. The Rock Bottom Restaurant & Brewery restaurants
feature hand-crafted beer brewed on-premises by each restaurant's head brewer,
a wide selection of quality wines and a full range of cocktails. Each
restaurant offers five to seven different types of hand-crafted beer ranging
from a light golden ale to a full bodied stout, as well as cask-conditioned or
other limited production seasonal beers such as the Fire Chief Ale to support
each local community's fire department. Many of the restaurants' recipes are
created to complement the various hand-crafted beers. For example, signature
items such as asiago cheese dip, alder smoked salmon and stout cheesecake are
flavored to increase their compatibility with beer. The hand-crafted beer
selection ranges in price from $3.25-$3.75 per pint, or $5.95 for a sampler
which includes one four ounce taster of each beer brewed at the restaurant.
During 1996, alcoholic beverages accounted for approximately 42% of Rock Bottom
Restaurant & Brewery restaurant sales, with beer constituting approximately 63%
of total alcoholic beverage sales.
Customers. The Company believes its Rock Bottom Restaurant & Brewery
restaurants appeal to a wide range of customers and draw their clientele from
throughout the metropolitan area in which each restaurant is located. Each
restaurant generally is open seven days a week from 11:00 a.m. and typically
remains active across the lunch, happy hour, dinner and late-night time
periods.
Sales and Marketing. The Company strives to provide its customers with
dining experiences that encourage repeat business and has relied primarily on
word of mouth to attract new customers. To supplement its service-oriented
marketing efforts, the Company sells Rock Bottom Restaurant & Brewery
merchandise such as jackets, T-shirts, sweatshirts, shorts, hats and other
items bearing the restaurant's name and logo as well as the names of certain of
the restaurants' more popular hand-crafted beers. The restaurants also support
charitable and civic organizations and utilize a limited amount of targeted
print advertising and radio.
Site Selection and Location. The Company seeks to locate its Rock Bottom
Restaurant & Brewery restaurants in visible, high-traffic sites in metropolitan
areas which are recognized as established restaurant, theater, sporting and
shopping destination locations. The Company currently operates 16 Rock Bottom
Restaurant & Brewery restaurants located in Denver, Minneapolis, Houston,
Portland, Chicago, Cleveland, Indianapolis, Cincinnati, Seattle, San Jose,
Milwaukee, Bethesda, Maryland; Boulder, Colorado; Addison, Texas and Overland
Park, Kansas. The Company operates its Rock Bottom Restaurant & Brewery
restaurant in Boulder under the name "Walnut Brewery" and its second brewery
restaurant in Denver under the name "Denver ChopHouse and Brewery(TM)." Twelve
of the Company's restaurants are located near pedestrian malls, theaters,
convention centers, sports arenas, or downtown shopping areas. The other four
restaurants are located in destination restaurant and bar or shopping districts
in Houston, San Jose, Addison, Texas; and Overland Park, Kansas.
Restaurant Economics. The Company believes that its Rock Bottom Restaurant
& Brewery restaurants produce competitive unit economics. In 1996, the ten Rock
Bottom Restaurant & Brewery restaurants operating for the entire fiscal year
generated average revenues of approximately $4.5 million, with per restaurant
revenues ranging from $3.0 to $7.3 million per restaurant, and average pre-tax
cash flow of $743,000 (16.6% of revenues). The average cash investment for the
four restaurants opened during 1996 totaled $2.9 million for leasehold
improvements, furniture, fixtures, restaurant equipment, brewing equipment and
preopening costs. The Company estimates that during 1997 the cost to construct
and open a leased Rock Bottom Restaurant & Brewery restaurant is expected to
range from $2.6 million to $3.0 million, depending on the size of the
restaurant. In certain instances, the Company has received landlord
contributions in the form of tenant finish allowances, reducing the cost of
opening a new restaurant. There can be no assurance, however, that the Company's
restaurant economics can be maintained or that landlord contributions will be
available in the future.
OLD CHICAGO RESTAURANTS
Design and Layout. Old Chicago restaurants typically range in size from
5,000 to 8,000 square feet. Each restaurant is decorated to create a familiar
and neighborly atmosphere for customers that is unique to the locations they
serve, and is designed to separate the dining area from the bar area in an
effort to make all customers feel comfortable and welcome. The restaurants
feature a variety of Chicago memorabilia, a prominent display of rows of a
variety of bottled beers, a long row of colorful tap handles for draught beer,
and televisions placed strategically throughout the restaurant for viewing
sporting or other special events. The table layout at each restaurant is
flexible to accommodate groups and special seating requests, with total seats
in the dining and bar areas ranging from 175 to 350. Certain restaurants also
feature outdoor patio seating and a limited number of pool tables.
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Menu and Pricing. The menu at Old Chicago restaurants is designed to
appeal to a variety of tastes and budgets and features more than 40 items,
including Chicago-style deep dish pizza, appetizers, pastas, calzones, burgers,
sandwiches, large salads, and several desserts. Menu items are prepared daily
with high-quality, fresh ingredients from original recipes. Pizza is a featured
section in the menu allowing customers to build their own by choosing from a
selection of 38 different toppings, or to sample one of the specialty pizza
combinations that include such non-traditional toppings as artichokes, black
beans, barbecued chicken, shrimp or marinated sirloin steak. All new menu items
and pizza combinations are tested and selected based on uniqueness, sales
popularity, ease of preparation and profitability. Entrees range in price from
approximately $5.50 for a hamburger to $18.95 for the most expensive large
pizza that serves four.
Wide Beer Selection. Old Chicago restaurants provide a constantly evolving
selection of 110 or more imported, domestic and microbrewed beers. Bottled beers
are prominently displayed in rows behind the bar along with an array of up to 36
colorful tap handles for draught beer. Beer selectors at Old Chicago restaurants
change the beer selection on a regular basis, and strive to be the first eating
and drinking establishment in their area to offer newly introduced or hard to
find beer selections. The Company markets its wide selection of beer through the
World Beer Tour(SM), a frequency building program where customers can sample 110
of the offered beers over time and be inducted into the Hall of Foam(SM). The
beer selection in each restaurant generally ranges in price from $2.75 for a
domestic draught beer to $3.95 for a microbrewed or imported beer. Alcoholic
beverages accounted for approximately 43% of Old Chicago restaurant sales during
1996, with beer constituting approximately 83% of alcoholic beverage sales
according to Company estimates.
Customers. Old Chicago restaurants appeal to a wide variety of customers,
including regulars who frequent the restaurants several times a week and those
who visit for the fun and congenial atmosphere, as well as for the frequent
special events. Old Chicago restaurants are open seven days a week from 11:00
a.m. and generally have customers throughout the day and into the evening
hours.
Sales and Marketing. The Company's sales and marketing strategy for the
Old Chicago restaurants emphasizes promotions to encourage repeat visits by
patrons. One of the restaurants' most effective promotions has been the World
Beer Tour(SM), established in 1984, which encourages exploration over time of
110 different brands of beer available at each Old Chicago restaurant. Patrons
who sample 110 beers are eligible for food and bar discounts and prizes along
the way and are then inducted into the Hall of Foam(SM) with their names listed
on a large plaque displayed near the bar. Other promotions are designed to
promote civic and charitable events in each restaurant's local community and
include such local restaurant marketing programs as Rolling Stoves and Pizza
Palz(SM). The Company also uses extensive print advertising, and radio
advertising to the extent a market is media efficient, for certain seasonal
promotional events. During 1996 the Company utilized electronic media for the
first time to promote Old Chicago restaurants in the Colorado Front Range. To
create additional Old Chicago name recognition and customer identification,
each restaurant sells T-shirts, sweatshirts and other merchandise bearing the
Old Chicago name and logo.
Site Selection and Location. The Company currently operates 36 Old Chicago
restaurants, 32 of which are located in various cities throughout Colorado,
Minnesota, Kansas, Oregon, Missouri and Nebraska, and one each in Addison,
Texas; Madison, Wisconsin; Boise, Idaho and Bettendorf, Iowa. The Old Chicago
concept has proven to be flexible and adaptable to a variety of markets,
demographics and consumer preferences primarily because the design and decor of
each site is tailored to the specific location thereby enhancing its
neighborhood appeal. Old Chicago restaurants have been successful in downtown
and suburban locations, in metropolitan areas and in smaller cities and towns.
The Company has successfully converted existing restaurant sites into Old
Chicago restaurants. This approach has allowed the Company to acquire
attractively-priced, high traffic locations, usually with conversion costs
which are less than an investment in a new restaurant at a newly-constructed
site.
Restaurant Economics. The Company believes that its Old Chicago
restaurants produce competitive unit economics. In 1996, the 23 Old Chicago
restaurants operating for the entire fiscal year generated average revenues of
approximately $1.9 million, with per restaurant revenues ranging from $1.4 to
$2.5 million per restaurant, and average pre-tax cash flow of $318,000 (16.7%
of revenues). The average cash investment for the 12 restaurants opened during
1996 totaled $1.0 million for leasehold improvements, furniture, fixtures,
restaurant equipment, and preopening costs. The Company estimates that during
1996 the average cost to construct and open a new Old Chicago restaurant is
expected to be approximately $950,000. There can be no assurance that these
restaurant economics can be maintained in the future.
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TROLLEY BARN
During 1996, the Company acquired an indirect 50% equity interest in
Trolley Barn in exchange for 452,073 shares of common stock. The Company also
agreed to certain licensing and development arrangements pursuant to which
Trolley Barn will develop restaurants in the southeastern United States
utilizing various names, including Rock Bottom Restaurant & Brewery and Old
Chicago, and other concepts licensed by the Company. Trolley Barn's use of
certain brewpub restaurant names and concepts is limited to Alabama, Arkansas,
Florida (north of West Palm Beach), Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee. The Company also has the option
to purchase the remaining 50% interest in Trolley Barn at any time between July
2000 and July 2002 at a predetermined multiple of earnings, plus cash and less
debt.
Trolley Barn currently operates four casual dining restaurants under the
name Big River Grille & Brewing Works which feature high quality, moderately
priced food and hand-crafted beer brewed on-premises. The menu in each
restaurant is similar to the Rock Bottom Restaurant & Brewery menu in both
selection and variety of items and in pricing. Restaurants are located in
Chattanooga, Nashville, Greenville, South Carolina and at Disney's Boardwalk
adjacent to WALT DISNEY WORLD in Lake Buena Vista, Florida. Trolley Barn
anticipates opening two additional restaurants during 1997 in Atlanta and
Charlotte, North Carolina under the name Rock Bottom Restaurant & Brewery. The
License & Development Agreement requires that Trolley Barn also develop an
additional 12 restaurants over the succeeding three years. Failure of Trolley
Barn to comply with this requirement will result in an acceleration of the
Company's buyout option.
Trolley Barn's operations are overseen by an Operating Committee that
consists of three members including two representatives from the Company. The
Committee is responsible for monitoring certain aspects of ongoing operations
and for reviewing and approving new restaurant expansion plans.
EXPANSION STRATEGY
The Company intends to continue expanding its position in the casual
dining industry through the following three principal strategies:
o Opening additional company owned restaurants in both the Rock Bottom
Restaurant & Brewery and Old Chicago restaurant divisions.
o Implementing partner programs in strategic parts of the country in
the Rock Bottom Restaurant & Brewery division.
o Developing a franchise program for the Old Chicago division.
During 1997, the Company's planned expansion will include seven Rock Bottom
Restaurant & Brewery restaurants and seven Old Chicago restaurants for a total
of 14 new restaurants in 1997, three of which were opened as of March 25, 1997.
Expansion for the Rock Bottom Restaurant & Brewery division will focus on
entering the California market and other high profile metropolitan locations
with upside market potential, and for the Old Chicago division on building out
existing secondary markets. The following locations are currently planned for
1997.
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1997 PLANNED RESTAURANT OPENINGS
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Rock Bottom Restaurant & Brewery Old Chicago
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Location Number Location Number
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San Jose, CA (opened February 1997) 1 Boise, ID (one opened January 1997) 2
Milwaukee, WI (opened March 1997) 1 Wichita, KS 1
Fresno, CA 1 Tucson, AZ 1
District of Columbia 1 Rockford, IL 1
Long Beach, CA 1 Duluth, MN 1
Denver, CO 1 Beaverton, OR 1
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Des Moines, IA 1 7
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7
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While the Company is evaluating new markets for possible expansion in the
future, there can be no assurance that either the Rock Bottom Restaurant &
Brewery or Old Chicago concept will be successful outside their historical
markets where regional tastes and restaurant preferences may be different. In
addition, the Company has expanded the geographic location of its restaurants,
and there can be no assurance that the Company will be able to operate
profitably restaurants dispersed in a larger geographic area.
The Company's acquisition of a 50% indirect interest in Trolley Barn during
1996 reflects the Company's strategy of expanding its restaurant operations
through the expertise of experienced operators in strategic parts of the
country not yet targeted for internal Company development. The Company
currently anticipates that any future agreements or acquisitions would be
structured similar to the Trolley Barn acquisition by stipulating a defined
development territory for a limited number of new restaurants, and providing
for future buyout by the Company. Although the Company has no present
understandings or agreements for any acquisitions, it may from time to time
consider such opportunities.
The Company anticipates franchising the Old Chicago concept during 1997 and
is currently completing the required regulatory documentation. There can be no
assurance that the Company will be able to attract and retain qualified
franchisees, that criteria necessary to evaluate prospective franchisees will be
appropriately established by the Company, or that prospective franchisees will
have the business abilities or access to financial resources required to open a
specified number of restaurants.
The Company's ability to open additional restaurants will depend upon a
number of factors, including, among others, the employment and training of
restaurant management, staff and other personnel, the cost and availability of
suitable locations, regulatory limitations regarding common ownership of
breweries and restaurants in certain states, acceptable leasing or financing
terms, cost effective and timely construction of restaurants (which
construction can be delayed due to, among other factors, labor disputes, local
zoning and licensing matters and weather conditions), securing of required
governmental permits and approvals and the Company's ability to generate funds
from existing operations. There can be no assurance that the Company will be
able to open its planned restaurants in a timely or cost effective manner, if
at all.
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RESTAURANT OPERATIONS AND MANAGEMENT
The Company seeks to attract and retain high quality, experienced
restaurant managers by providing them with responsibility and financial
incentives. The management team of a typical restaurant consists of one general
manager, up to four department heads (service, kitchen, bar and, if applicable,
brewing) and up to four assistant managers. Each restaurant also has either an
executive chef or professional kitchen manager and up to three assistant chefs
or assistant kitchen managers. The Company presently employs an executive vice
president of operations for each restaurant division, four regional managers
for the Rock Bottom Restaurant & Brewery division and seven regional managers
for the Old Chicago division. The Company provides financial incentives to
general and regional managers based on certain performance measures including:
(i) profitability of the restaurant, (ii) adherence to standard hiring
practices, and (iii) completion of personnel reviews on a timely basis. General
managers are also reviewed on the basis of the advancement and growth of
assistant managers, restaurant cleanliness and safety, involvement in the
community and awareness of the market. There are additional financial
incentives available to general managers for percentage increases that exceed
expectations for sales and profitability of their individual restaurant.
The Company strives to maintain quality and consistency at each of its
restaurants by assisting its personnel in achieving higher levels of execution
in service, food/beverage preparation, brewing quality assurance and facility
maintenance. Through daily sales meetings, monthly department meetings,
brew-chats and quarterly employee roundtable focus groups, the Company involves
each employee in the evaluation and improvement of restaurant operations. The
Company seeks to develop and refine its performance measurement system on an
on-going basis, seeking new and innovative ways to provide feedback to its
employees to focus their attention on improving restaurant performance and
profitability.
The Company devotes significant resources to management training and
development. The Company has established a team of full-time professionals
including a vice president of training, one recruiting director and two training
managers to manage the recruitment and training of management personnel at the
Company's new and existing restaurants. In addition, as the staff is the key
ingredient to the Company's customer service commitment, the Company devotes
substantial resources to the recruiting, hiring and training of these
individuals, and employs three training coordinators for designing and
implementing staff training programs such as "Train the Trainer," which ensures
that trainers at each restaurant are communicating a correct and consistent
message, and "Big Brother/Big Sister," which provides all new staff members with
a designated individual for answering questions or providing assistance.
Additionally, prior to assuming floor shifts, each new staff member must
convince at least ten current employees to hire them.
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The Company maintains an alcohol awareness training program for all
restaurant-level Company employees who interact with customers, which must be
completed during the first 90 days of employment. The Company employs 13
accredited trainers who educate and train Company staff to serve alcohol
responsibly.
INTERNAL CONTROLS
The Company maintains internal controls for each of its restaurants
through use of centralized accounting and management information systems. Each
restaurant has the ability to compile their sales and labor information on a
daily basis through utilization of point-of-sale terminals. Certain restaurants
also have sophisticated computer payroll scheduling systems that have allowed
management to manage and control labor costs efficiently as well as transmit
payroll information directly to the Company. During January 1997, the Company
began implementing a new accounting and financial reporting software package
that will, among other things, provide the ability to integrate the daily
information generated by each restaurant's point-of-sale and labor scheduling
systems with the central accounting system and easily prepare consolidated or
other selected management reports. Cash is controlled either through daily
deposits of sales proceeds into the Company's principal depository account,
maintained in Colorado, or is transferred twice a week from bank accounts out
of state into the Colorado depository account. The Company has enhanced its
budgeting, forecasting and accounting capabilities with an expanded team of
professionals and stresses the interaction with restaurant management to ensure
accurate and efficient reporting.
BREWING OPERATIONS
The breweries at the Rock Bottom Restaurant & Brewery restaurants are
designed to produce between 2,000 and 5,000 barrels per year. Each system is
custom designed to be integrated into the restaurant layout in the most
efficient and aesthetic manner and emphasizes ease of control, use and
flexibility. Each Rock Bottom Restaurant & Brewery restaurant employs a head
brewer and one or more apprentice brewers. The Company also employs a vice
president of brewing operations, three brewers responsible for designing and
installing all brewing systems in new restaurants, and two brewers who serve as
quality control supervisors.
All of the Company's brewers strive to ensure that every batch of beer
brewed is of the highest quality and consistent with prior batches. Beer is
produced from malted barley, hops, yeast and water. Malted barley, the main
ingredient of beer, is produced when barley is moistened, allowed to germinate
and then dried. The malted barley is then crushed and mixed with hot water and
strained, producing a clear amber liquid called wort. Wort is boiled in brew
tubs and hops are added which add bitterness and flavor to the brew. The mixture
is then strained and placed in a tank where yeast is added and the beer is
allowed to ferment. When the fermentation process produces the desired result,
the beer is then transferred to aging tanks where the flavor is developed. The
brewing process from the conversion of raw materials to the serving of beer is
typically completed in seven to 14 days, depending on the type of beer being
brewed.
PURCHASING OPERATIONS
The Company's management negotiates directly with suppliers for key food
and beverage products to assure uniform quality and freshness of products in its
restaurants, and to obtain competitive prices. These products and certain
supplies used by the Company's restaurants are purchased from specified food
producers, independent wholesale distributors and manufacturers. Food and
beverage products and supplies are shipped directly to the restaurants as the
Company does not maintain a central product warehouse. The Company has not
experienced any significant delays in receiving restaurant products, supplies or
equipment.
The Company directs and participates in a volume buying group consisting
of 12 other restaurants, two hotels and one brewery owned in whole or in part
by certain officers and directors of the Company. During fiscal 1996, the
Company's single largest supplier, Nobel Sysco, Inc., accounted for
approximately 84% of food and other products purchased by the Company. The
master agreement under which the Company operates with such supplier is
terminable upon 30 days' notice by either party. The Company believes that food
and beverage products are readily available from alternate suppliers.
COMPETITION
The restaurant industry is intensely competitive. Rock Bottom Restaurant &
Brewery restaurants compete with
8
<PAGE> 11
other casual dining restaurants, brewpubs and other restaurants primarily on
the basis of service, atmosphere and quality, among other factors. Old Chicago
restaurants compete with other casual dining restaurants and with local,
neighborhood taverns on the basis of the price-value relationship, service,
location, quality, beer selection and atmosphere, among other factors. Many
competitors for both of the Company's concepts are well established and have
substantially greater financial and other resources than does the Company.
The restaurant industry generally is 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.
The Company believes its ability to compete effectively will continue to depend
upon its ability to offer superior service with high quality menu items in
distinctive dining environments.
GOVERNMENT REGULATIONS
General. The Company's restaurants are subject to regulation by federal
agencies and to licensing and regulation by state and local health, sanitation,
safety, fire and other departments relating to the development and operation of
restaurants. These regulations include matters relating to environmental,
building and zoning requirements, the preparation and sale of food and
alcoholic beverages, designation of non-smoking and smoking areas and
accessibility of restaurants to disabled customers. Various federal and state
labor laws govern the Company's relationship with its employees, including
minimum wage requirements, overtime, working conditions and immigration
requirements. Significant additional government-imposed increases in minimum
wages, paid leaves of absence and mandated health benefits, or increased tax
reporting and tax payment requirements for employees who receive gratuities,
could have an adverse effect on the Company's results of operations. Delays or
failures in obtaining the required construction and operating licenses, permits
or approvals could delay or prevent the opening of new restaurants. Management
believes the Company is operating in substantial compliance with applicable
laws and regulations governing its operations.
Alcoholic Beverage Regulation. Each of the Company's restaurants is
subject to licensing and regulation by a number of governmental authorities.
The Company operates its Rock Bottom Restaurant & Brewery restaurants in
compliance with federal licensing requirements imposed by the Bureau of
Alcohol, Tobacco and Firearms of the United States Department of the Treasury,
as well as the licensing requirements of states where its restaurants are
located. 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 and permit to brew and/or sell alcoholic
beverages on premises. Typically, licenses must be renewed annually and may be
revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of the daily operations of the Company's
restaurants, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and brewing,
handling, storage and dispensing of alcoholic beverages. The Company believes
it has all regulatory permits and licenses necessary to operate its restaurants
and the breweries at the Rock Bottom Restaurant & Brewery restaurants. Failure
on the part of the Company to comply with federal, state or local regulations
could cause the Company's licenses to be revoked and force it to cease the
brewing and/or sale of alcoholic beverages at its restaurants. In addition,
changes in legislation, regulations or administrative interpretation of liquor
laws after the opening of restaurants in a jurisdiction may prevent or hinder
the Company's expansion or operations in that jurisdiction. The failure to
receive or retain, or delay in obtaining, a liquor or brewpub license in a
particular location could adversely affect the Company's ability to obtain such
a license elsewhere.
Certain states have restrictions on the number of barrels of beer that can
be brewed annually by a brewpub. These various state liquor laws are
continually changing, and the Company may be hindered or prohibited from
opening Rock Bottom Restaurant & Brewery restaurants in certain markets. The
Company does not believe that federal or state liquor laws will affect the
opening or operation of the Rock Bottom Restaurant & Brewery restaurants
planned for 1997.
The United States federal government currently imposes an excise tax of
$18 per barrel on each barrel of beer produced for domestic consumption in the
United States. However, each brewer with production under 2,000,000 barrels per
year is granted a small brewer's excise tax credit in the amount of $11 per
barrel on its first 60,000 barrels produced annually. In 1996, the Company was
able to take advantage of a $263,461 credit from the production of 23,951
barrels pursuant to this exemption. The Company is not aware of any plans by
the federal government to reduce or eliminate the small brewer's credit.
Individual states also impose excise taxes on alcoholic beverages in varying
amounts, which also are subject to change. It is possible that excise taxes
will be increased by
9
<PAGE> 12
both the federal government and a number of the states. Increased excise taxes
on alcoholic beverages have been considered by the U.S. Congress as an
additional source of tax revenue in connection with various proposals and could
be included in future legislation. Certain states have special taxes on the
sale or production of alcoholic beverages. Increases in taxes on malt
beverages, if enacted, could adversely affect the Company.
The Company is subject to "dram-shop" laws in most states in which it
currently operates and will be subject to such statutes in certain other states
for future sites. These laws generally provide a person injured by an
intoxicated person the right to recover damages from an establishment which
wrongfully served alcoholic beverages to such person. The Company carries
liquor liability coverage as part of its existing comprehensive general
liability insurance which it believes is consistent with coverage carried by
other entities in the restaurant industry. However, a judgment against the
Company under a dram-shop statute in excess of the Company's liability coverage
could have a material adverse effect on the Company.
Franchising. Franchising arrangements are subject to extensive Federal and
state regulations. Recent decisions of several state and federal courts and
recent state regulations demonstrate a trend toward increased protection of the
rights and interests of franchisees against franchisors. Such decisions and
regulations have limited the ability of franchisors to enforce certain
provisions of franchise agreements and alter or terminate franchisee agreements.
EMPLOYEES
At December 29, 1996, the Company had 4,400 employees, of which 105 served
in administrative capacities (including home office, brewery, administrative and
executive personnel), 271 served as restaurant management personnel, and the
remainder of whom were hourly personnel. No employee is covered by a collective
bargaining agreement, and the Company has never experienced an organized work
stoppage, strike or labor dispute. The Company's only employment agreement is
with the vice president of brewing operations and provides for a term of
employment through November 30, 1998. The Company believes its working
conditions and compensation are competitive with those offered by its
competitors and considers relations with its employees to be excellent.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including Old
Chicago, Rock Bottom Restaurant & Brewery, World Beer Tour, Hall of Foam, Pizza
Palz, You've Hit Rock Bottom, Denver ChopHouse and Brewery and the Old Chicago
Fresh Pasta & Pizza design. The Company regards its Old Chicago and Rock Bottom
Restaurant & Brewery and other marks as having substantial value and as being
an important factor in the marketing of its Old Chicago restaurants and Rock
Bottom Restaurant & Brewery restaurants. The Company's policy is to pursue
registration of its marks whenever possible and to oppose vigorously any
infringement of its marks. The Company is aware, however, of a use by an
unaffiliated third party of the name Old Chicago in California which could
limit the ability of the Company to use its Old Chicago mark in parts of the
California market, and of a use by an unaffiliated third party of the name Rock
Bottom in New Hampshire and Nebraska which could limit the ability of the
Company to use its Rock Bottom Restaurant & Brewery mark in parts of New
Hampshire and Nebraska.
10
<PAGE> 13
ITEM 2: PROPERTIES
As of December 29, 1996, the Company operated 49 restaurants, including 14
Rock Bottom Restaurant & Brewery restaurants and 35 Old Chicago restaurants, and
owned a 50% equity interest in four restaurants operated by Trolley Barn. The
following table sets forth the locations of these restaurants. See "Business --
Expansion Strategy" for a discussion of planned restaurant openings in 1997.
RESTAURANT LOCATIONS AS OF DECEMBER 29, 1996
<TABLE>
<CAPTION>
ROCK BOTTOM RESTAURANT &
BREWERY OLD CHICAGO TROLLEY BARN
------------------------- ----------- ------------
<S> <C> <C> <C>
Colorado 3 17 --
South Carolina -- -- 1
Florida -- -- 1
Illinois 1 -- --
Indiana 1 -- --
Iowa -- 1 --
Kansas 1 2 --
Maryland 1 -- --
Minnesota 1 6 --
Missouri -- 2 --
Nebraska -- 3 --
Ohio 2 -- --
Oregon 1 2 --
Tennessee -- -- 2
Texas 2 1 --
Washington 1 -- --
Wisconsin -- 1 --
-- -- --
Total restaurants 14 35 4
== == ==
</TABLE>
The Company either owns or leases the furnishings, fixtures and equipment
in each of its restaurants. Generally, each restaurant lease entered into by the
Company is conditioned upon the ability of the Company to obtain the permits
and licenses necessary to operate the restaurant identified for such site.
Existing restaurant building leases have expiration dates ranging from January
1998 to first quarter 2014 (excluding existing renewal options). The Company
does not anticipate any difficulties in renewing its existing leases as they
expire; however, there can be no assurance that the Company will be able to
renew such leases. See Note 8 of Notes to Consolidated Financial Statements for
information regarding aggregate minimum rentals paid by the Company for recent
periods and information regarding the Company's obligation to pay minimum
rentals in future years.
The Company owns the land and building for the Old Chicago restaurants
located in Greeley, Longmont and Grand Junction, Colorado; Addison, Texas and
Salem, Oregon, and for the Rock Bottom Restaurant & Brewery restaurants located
in Chicago and Addison, Texas. Properties owned in Greeley, Colorado and Chicago
are encumbered by long-term mortgages. See Note 5 of Notes to Consolidated
Financial Statements.
The Company also leases approximately 23,000 square feet of office space
in Louisville, Colorado, and has a remaining lease commitment through October
1997 on approximately 14,000 square feet of office space located in Boulder,
Colorado.
11
<PAGE> 14
ITEM 3: LEGAL PROCEEDINGS
The Company is a party to certain legal proceedings arising in the
ordinary course of its business. Management believes that any resulting
liability, individually or in the aggregate, will not have a material adverse
effect on the Company's financial condition, results of operations or
liquidity.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering of Common Stock in 1994
at a price to the public of $8.00 per share. The table below sets forth for
the fiscal quarters indicated the reported high and low last sale prices per
share of the Company's Common Stock, as reported on the Nasdaq National
Market. The last sale price of the Company's common stock on March 25, 1997,
was $11.75 per share.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First quarter $22.50 $17.75
Second quarter 28.25 19.75
Third quarter 29.75 15.75
Fourth quarter 17.25 13.63
1996
First quarter $13.00 $8.75
Second quarter 14.88 9.50
Third quarter 13.75 10.88
Fourth quarter 12.50 9.25
</TABLE>
As of March 25, 1997, there were 327 record holders of Common Stock,
although the Company believes that the number of beneficial owners of its
Common Stock is substantially greater.
The Company anticipates that for the foreseeable future, all earnings, if
any, will be retained for the operation and expansion of its business and that
it will not pay cash dividends. The payment of dividends, if any, in the future
will be at the discretion of the Board of Directors and will depend upon, among
other things, future earnings, capital requirements, restrictions in financing
agreements, the general financial condition of the Company and general business
conditions.
12
<PAGE> 15
ITEM 6: SELECTED FINANCIAL DATA
The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 29, 1996, are derived from the
Consolidated Financial Statements of the Company, which have been audited by
Arthur Andersen LLP, independent accountants. The Selected Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K. The financial data presented prior to 1994 represents the historical
combined operations of certain predecessor corporations. See Note 1 of Notes
to Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------------------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 29,
1992 1993 1994 1995 1996
------------ ------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Old Chicago restaurants $12,632 $15,641 $22,201 $40,499 $58,328
Rock Bottom Restaurant & Brewery
restaurants 8,557 9,126 16,652 33,465 50,902
------------ ------------- ------------- ------------- ------------
Total revenues 21,189 24,767 38,853 73,964 109,230
------------ ------------- ------------- ------------- ------------
OPERATING EXPENSES:
Cost of sales 5,943 6,777 9,785 18,509 27,100
Restaurant salaries and benefits 7,168 8,113 12,727 24,739 35,552
Operating expenses 4,322 5,201 8,044 15,135 23,529
Selling expenses 781 942 1,272 2,855 4,272
General and administrative 842 1,434 2,468 4,577 5,620
Depreciation and amortization 637 565 1,325 4,200 7,802
------------ ------------- ------------- ------------- ------------
Total operating expenses 19,693 23,032 35,621 70,015 103,875
------------ ------------- ------------- ------------- ------------
INCOME FROM OPERATIONS 1,496 1,735 3,232 3,949 5,355
Equity in joint venture earnings - - - - 223
Interest income (expense), net (159) (174) (106) 831 (74)
Other income (expense), net (43) (148) 8 40 (1)
------------ ------------- ------------- ------------- ------------
INCOME BEFORE TAXES 1,294 1,413 3,134 4,820 5,503
PRO FORMA DATA:
Pro forma net income (1) $806 $880 $1,924 $3,270 $4,025
============ ============= ============= ============= ============
Pro forma net income per common
and common equivalent share (2) $.27 $.29 $.47 $.45 $.52
============ ============= ============= ============= ============
Pro forma weighted average shares
outstanding (2) 3,000 3,062 4,072 7,264 7,725
============ ============= ============= ============= ============
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit) $(1,801) $(3,072) $1,113 $9,335 $(732)
Total assets 3,546 5,757 26,359 64,169 84,948
Long-term debt (including current
portion) 1,628 1,825 706 641 11,564
Obligations under capital leases
(including current portion) 216 292 1,794 1,667 1,372
Stockholders' equity 70 940 17,924 55,341 65,337
</TABLE>
(1) The Company was taxed as an S corporation through July 10, 1994 and,
therefore, the pro forma income statement data includes certain
adjustments to reflect a provision for income taxes through that date as
if the Company had been taxed as a C corporation. See Notes 2 and 6 of
Notes to Consolidated Financial Statements.
(2) Common and common equivalent shares include (a) 3,000,000 shares of Common
Stock issued to stockholders of certain predecessor corporations and (b)
62,375 additional shares deemed issued at December 26, 1993, to fund
undistributed S corporation earnings at that date. See Notes 2 and 7 of
Notes to Consolidated Financial Statements.
13
<PAGE> 16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's audited Consolidated
Financial Statements and notes thereto appearing in Item 8 in this Form 10-K.
CAUTIONARY STATEMENT UNDER "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this report are not historical facts, and
are forward-looking statements that involve known and unknown risks and
uncertainties which may cause actual results or performance of the Company to
differ materially from such forward-looking statements. Such statements include,
among others;
o Restaurant expansion plans for 1997;
o Estimated capital expenditures in 1997;
o Estimated average construction cost for new restaurants
opening during 1997;
o Trolley Barn's development plans over the next three years;
o Expansion strategy, including franchising and strategic partnering
programs;
o Ability of the Company to renew existing leases;
o Availability of food and beverage products from alternate
suppliers;
o Ability of the Company to compete effectively within the
restaurant industry;
o Changes in federal or state liquor or tax laws;
o Impact on financial condition, results of operations or
liquidity from legal proceedings arising in the ordinary course of
business;
o Success of marketing programs to improve sales in certain Old
Chicago restaurants;
o Ability to generate sufficient cash from operations to complete
financing of 1997 restaurant expansion.
Factors that could cause actual results to differ materially include, among
others: availability of suitable restaurant locations; availability of financing
on acceptable terms to fund future growth; increasing costs associated with new
restaurant construction, or delays in opening new restaurants; ability to hire
and train increasing numbers of restaurant management, staff and other personnel
for new restaurants; ability of Trolley Barn or any future joint venture partner
to open restaurants or conduct operations as anticipated; ability of the Company
to attract and retain qualified franchisees or to establish criteria necessary
to evaluate prospective franchisees; the business abilities or financial
resources of prospective franchisees to open a specified number of restaurants;
fluctuations in consumer demand and tastes including a decrease in consumers'
preference for higher quality, more flavorful beer; acceptance in new markets;
competitive conditions in the Company's markets; general economic conditions;
operating restrictions and costs associated with governmental regulations;
regulatory limitations regarding common ownership of breweries and restaurants
in certain states; and other risks detailed in the Company's reports and other
filings under the Securities Exchange Act of 1934. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved. In addition, the Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events, or otherwise.
14
<PAGE> 17
OVERVIEW
As of December 29, 1996, the Company operated 14 Rock Bottom Restaurant &
Brewery restaurants and 35 Old Chicago restaurants, an increase of 16
restaurants from the prior fiscal year. The following table lists the Company's
new restaurant openings by quarter during 1996:
NEW RESTAURANT OPENINGS
<TABLE>
<CAPTION>
Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Total
3/31/96 6/30/96 9/29/96 12/29/96 1996
---------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Rock Bottom Restaurant &
Brewery restaurants -- 1 2 1 4
Old Chicago restaurants 4 3 2 3 12
---------- ---------- ---------- ---------- -----
Total restaurants 4 4 4 4 16
========== ========== ========== ========== =====
</TABLE>
The Rock Bottom Restaurant & Brewery restaurants opened during 1996 are
located in Indianapolis, Cincinnati, Seattle and Bethesda, Maryland. The Old
Chicago restaurants opened during 1996 are primarily located in existing
markets throughout the west and mid-west, including Colorado, Minnesota, Oregon
and the Kansas / Nebraska area. Due to the maturation of the Company's existing
restaurant base and the possible effects of opening additional restaurants in
close proximity, revenues of certain of the Company's restaurants may be lower
in future periods than previously experienced.
Effective July 1, 1996, the Company acquired an indirect 50% interest in
Trolley Barn. As of December 29, 1996, Trolley Barn operated four brewery
restaurants located in the southeastern United States. The Company's investment
in Trolley Barn is accounted for under the equity method. See Note 4 of Notes
to Consolidated Financial Statements.
Restaurant openings planned for 1997 include seven Rock Bottom Restaurant &
Brewery restaurants and seven Old Chicago restaurants. Restaurants open as of
March 25, 1997, include Rock Bottom Restaurant & Brewery restaurants in San Jose
and Milwaukee, and an Old Chicago restaurant in Boise, Idaho. The Company has
signed leases in place for the remaining five Rock Bottom Restaurant & Brewery
restaurants and four of the remaining Old Chicago restaurants, with negotiations
substantially complete on the other two Old Chicago sites. Future operating
results may be adversely affected by costs associated with developing a
significant number of new restaurants over a relatively short time period.
Additionally, new restaurants typically incur certain increased costs in the
process of achieving operational efficiencies during the first several months of
operation. Preopening costs, which are incurred prior to opening a new
restaurant but amortized over the first 12 months after opening, are one example
of these increased costs.
The Company operates on a 52 or 53 week fiscal year ending the last Sunday
in December. Fiscal years 1994 and 1996 each contained 52 weeks, while fiscal
1995 contained 53 weeks.
15
<PAGE> 18
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
---------------------------------------
YEARS ENDED
-----------
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Old Chicago restaurants 57.1% 54.8% 53.4%
Rock Bottom Restaurant & Brewery restaurants 42.9 45.2 46.6
-------- -------- --------
Total revenues 100.0 100.0 100.0
-------- -------- --------
OPERATING EXPENSES:
Cost of sales 25.2 25.0 24.8
Restaurant salaries and benefits 32.7 33.4 32.6
Operating expenses 20.7 20.5 21.5
Selling expenses 3.3 3.9 3.9
General and administrative 6.3 6.2 5.1
Depreciation and amortization 3.4 5.7 7.2
-------- -------- --------
Total operating expenses 91.6 94.7 95.1
-------- -------- --------
INCOME FROM OPERATIONS 8.4 5.3 4.9
Equity in joint venture earnings -- -- 0.2
Interest income 0.4 1.5 0.2
Interest expense (0.7) (0.3) (0.3)
Other income (expense), net -- -- --
-------- -------- --------
INCOME BEFORE TAXES 8.1 6.5 5.0
PRO FORMA NET INCOME (1) 5.0% 4.4% 3.7%
======== ======== ========
RESTAURANT DATA:
Restaurants open (end of period):
Old Chicago restaurants 14 23 35
Rock Bottom Restaurant & Brewery restaurants 5 10 14
-------- -------- --------
Total 19 33 49
======== ======== ========
Restaurant operating weeks:
Old Chicago restaurants 514 983 1,541
Rock Bottom Restaurant & Brewery restaurants 170 369 588
-------- -------- --------
Total 684 1,352 2,129
======== ======== ========
Average sales per restaurant (open for full period)
(in thousands):
Old Chicago restaurants $ 2,220 $ 2,144 $ 1,902
Rock Bottom Restaurant & Brewery restaurants 5,126 4,705 4,466
</TABLE>
(1) The Company was taxed as an S corporation through July 10, 1994 and,
therefore, the pro forma income statement data for fiscal 1994 includes
certain adjustments to reflect a provision for income taxes through that
date as if the Company had been taxed as a C corporation. See Notes 2 and
6 of Notes to Consolidated Financial Statements.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Revenues increased $35.3 million (47.7%) to $109.2 million in
fiscal 1996 from $74.0 million in fiscal 1995. Revenues from the 16 new
restaurants which opened during 1996 accounted for $19.9 million (26.9%) of the
increase. The balance of the increase primarily resulted from the 14
restaurants opened during 1995 contributing a full year of sales in 1996, as
comparable restaurant sales were flat for the year. When computing comparable
restaurant sales, restaurants open for at least six full quarters are compared
from year to year.
16
<PAGE> 19
Revenues from the Company's Rock Bottom Restaurant & Brewery restaurants,
as a percentage of total revenues, increased slightly to 46.6% in 1996 from
45.2% in 1995. Although the Company opened only four Rock Bottom Restaurant &
Brewery restaurants during the last 12 months as compared to 12 Old Chicago
restaurants, the brewery restaurants generate greater average weekly sales
("AWS") resulting in the increase to this percentage. The Company expects
revenues from the Rock Bottom Restaurant & Brewery restaurants to comprise an
even greater percentage of the Company's total revenues in 1997 as the brewery
restaurants represent half of total restaurant openings planned for 1997.
AWS for the Rock Bottom Restaurant & Brewery restaurants during 1996 were
$86,568 as compared to $90,690 during fiscal 1995. The decrease in AWS of $4,122
(4.5%) is due primarily to the impact the Company's restaurant in Denver has on
the AWS computation. This restaurant generates AWS of approximately $135,000 as
compared to the Company's targeted restaurant model of $86,000 in AWS. Due to
additional restaurant openings, this restaurant contributed only approximately
14% to total brewery revenues in 1996 as compared to approximately 22% of total
brewery revenues in 1995.
AWS during 1996 for the Old Chicago restaurants were $37,850 as compared
to $41,199 during fiscal 1995. The decrease in AWS of $3,349 (8.1%) is due
primarily to six restaurants that generate AWS below the Company's targeted
restaurant model. These restaurants, all of which were opened or selected for
opening during 1995, incurred AWS of $29,966 during 1996 as compared to $34,404
during 1995. The Company is implementing various marketing programs for these
restaurants during 1997 to increase sales back to their 1995 levels. These
programs include a direct mail campaign with discounted food specials to
promote early week sales, and re-merchandising the menu in certain markets to
encourage trial of the restaurants' traditional pizzas and domestic beers.
Cost of Sales. Cost of sales, which consists of food, beverage and
merchandise costs, increased $8.6 million (46.4%) to $27.1 million in fiscal
1996 from $18.5 million in fiscal 1995, but decreased slightly as a percentage
of revenues to 24.8% in fiscal 1996 from 25.0% in fiscal 1995. Although the
Company experienced significant increases in certain commodity prices during
the latter part of the second quarter and into the third quarter of 1996,
particularly cheese and chicken, these cost increases were offset by increased
purchasing efficiencies, and increased training and development of the
restaurant management to focus on controlling food and beverage waste and
yields. Commodity prices for cheese and chicken have since returned to their
pre-inflation 1996 levels, and the Company currently does not anticipate any
significant increases in these prices during the first half of 1997.
Restaurant Salaries and Benefits. Restaurant salaries and benefits, which
consist of restaurant management and hourly employee wages, payroll taxes, and
group health insurance, increased $10.8 million (43.7%) to $35.6 million in
fiscal year 1996 from $24.7 million in fiscal year 1995. Such salaries and
benefits decreased as a percentage of revenues from 33.4% in 1995 to 32.6% in
1996. 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 on a more
real-time basis. Although the Company also anticipates upgrading labor
scheduling software currently used in the Old Chicago restaurants,
implementation is now targeted for the first half of 1997 due to delays from
the vendor in releasing the product. The new software is intended to
computerize some of the manual procedures now performed.
Operating Expenses. Operating expenses, which include occupancy costs,
utilities, repairs, maintenance and linen, increased $8.4 million (55.5%) to
$23.5 million in fiscal year 1996 from $15.1 million for fiscal year 1995. As a
percentage of revenues, such expenses increased to 21.5% in 1996 from 20.5% in
1995. This increase is primarily a result of higher occupancy costs including
an increase in the level of insurance coverage carried by the Company, higher
property taxes in certain markets and increases in certain fixed costs as a
percentage of revenues due to decreases in AWS for both concepts.
General and Administrative ("G&A"). G&A expenses increased $1.0 million
(22.8%) to $5.6 million in fiscal year 1996 from $4.6 million in fiscal year
1995 and decreased significantly as a percentage of revenues from 6.2% in 1995
to 5.1% in 1996. The increase in dollars primarily reflects personnel
additions in the areas of marketing, training, information systems,
supervision, accounting and finance and senior management as well as increases
in overall corporate infrastructure resulting from the Company's continuing
expansion program. The decrease of 1.1% as a percentage of revenues is due
primarily to efficiencies gained in administering a larger number of
restaurants and reflects results from an extensive cost containment program
initiated in the first quarter of 1996. During
17
<PAGE> 20
1997, the Company anticipates an increase to G&A as a percentage of revenues
due to management additions in the Old Chicago division, increased costs
associated with relocation of the Company's corporate offices and the expense
associated with executive bonuses earned during 1996, but expensed beginning in
1997 (see Note 7 of Notes to Consolidated Financial Statements).
Depreciation and Amortization. Depreciation and amortization, including
amortization of preopening expenses, increased $3.6 million (85.8%) to $7.8
million for fiscal year 1996 from $4.2 million in fiscal year 1995. As a
percentage of revenues, depreciation expense was 4.4% during 1996 as compared
to 3.2 % in 1995, and preopening expense was 2.8% in 1996 as compared to 2.5%
in 1995.
The increase in depreciation expense as a percentage of revenues is
attributable primarily to two Old Chicago restaurants and three 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. As construction costs for restaurants opened in 1996 have been
consistent with management's estimates, the Company does not anticipate
significant future increases in depreciation expense as a percentage of
revenues.
The increase in preopening expense as a percentage of revenues 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
and location of new restaurants opened in any given period.
Equity in Joint Venture Earnings. The 1996 equity in joint venture earnings
represents the Company's 50% equity interest in Trolley Barn's net after tax
earnings.
Interest Expense / Interest Income. Interest expense for the year ended
December 29, 1996, increased $51,856 from 1995. Additionally, interest expense
of approximately $195,000 was capitalized to construction costs. This increase
in interest expense is primarily attributable to proceeds from long-term debt
of $11 million during 1996. See Note 5 of Notes to 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. Such proceeds were used primarily for the
construction of new restaurants in 1996, resulting in lower interest income
during 1996 as compared to 1995.
Provision for Income Taxes. The 1996 provision for income taxes reflects
utilization of approximately $1.1 million in tax credits attributable to FICA
tax paid on certain tips to hourly restaurant employees (the "FICA Credit"),
and to rehabilitation costs incurred for certain owned restaurant property in
Chicago. The 1995 tax provision included a FICA Credit of only approximately
$502,000. These credits in both years reduced the effective combined federal and
state tax rate. As of December 29, 1996, the Company had tax credits available
totaling $1.5 million to reduce income taxes payable in future years. Due to
alternative minimum tax limitations and the relatively volatile nature of the
restaurant industry, the Company recorded a valuation allowance in 1996 for
approximately 22% of these credits. See Note 6 of Notes to Consolidated
Financial Statements.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues. Revenues increased $35.1 million (90.4%) to $74.0 million in
fiscal 1995 from $38.9 million in fiscal 1994. Revenues from the 14 new
restaurants which opened in 1995, and from the Rock Bottom Restaurant & Brewery
and two Old Chicago restaurants which opened in December 1994, accounted for
$28.9 million (82.3%) of the increase. The balance of the increase resulted
from the remaining five restaurants opened during 1994 contributing a full year
of sales in 1995, offset by a less than 1% decrease in comparable restaurant
sales. Revenues for the Rock Bottom Restaurant & Brewery restaurants, as a
percentage of total revenues, increased from 42.9% in 1994 to 45.2% in 1995 due
to opening five additional restaurants during 1995.
AWS for the Rock Bottom Restaurant & Brewery restaurants during 1995 were
$90,690 as compared to $97,952 during fiscal 1994. The decrease in AWS of $7,262
(7.4%) is due primarily to the impact the Company's restaurant in Denver has on
the AWS computation. This restaurant generates AWS of approximately $135,000 as
compared to the Company's targeted restaurant model of $86,000 in AWS. Due to
additional restaurant openings, this restaurant contributed approximately 22% to
total brewery revenues in 1995 as
18
<PAGE> 21
compared to approximately 47% of total brewery revenues in 1994.
AWS during 1995 for the Old Chicago restaurants were $41,199 as compared
to $43,193 during fiscal 1994. The decrease in AWS of $1,994 (4.6%) was due
primarily to the five new restaurants opened during 1994. These restaurants
experienced a substantial honeymoon period in 1994 at which time AWS exceeded
the Company's expectations. During 1995, AWS from these restaurants decreased
approximately 14%, which represented a return to sales levels consistent with
management's expectations.
Cost of Sales. Cost of sales, which consists of food, beverage and
merchandise costs, increased $8.7 million (89.2%) to $18.5 million in fiscal
1995 from $9.8 million in fiscal 1994, but decreased slightly as a percentage
of revenues to 25.0% in fiscal 1995 from 25.2% in the fiscal 1994. This
decrease was primarily attributable to the increase in revenues contributed
from Rock Bottom Restaurant & Brewery restaurants. Beer brewed on-premises at
these restaurants has a lower cost of sales than other beverages and food
products purchased by the Company. Increased purchasing efficiencies also
contributed to the decrease, however, this savings was offset somewhat by
inefficient food inventory utilization at certain of the Company's newer
restaurants and increases in certain commodity prices. Food inventory
utilization issues (due to less experienced management at a number of new
restaurants) and price increases were much more significant in the fourth
quarter of 1995 than in other quarters resulting in total cost of sales as a
percentage of revenues of 25.6 % during that quarter.
Restaurant Salaries and Benefits. Restaurant salaries and benefits, which
consist of restaurant management and hourly employee wages, payroll taxes, and
group health insurance, increased $12.0 million (94.4%) to $24.7 million in
fiscal year 1995 from $12.7 million in fiscal year 1994. Such salaries and
benefits increased as a percentage of revenues from 32.7% in 1994 to 33.4% in
1995. These increases are due primarily to the significant increase in the
number of new restaurants (74%) which tend to experience higher labor costs in
their first several months of operations. With almost two thirds of the new
restaurants opening in the second half of 1995, the cost as a percentage of
revenues was highest in the fourth quarter (33.8%). As the base of mature
restaurants begins to increase, the Company expects this percentage to decrease
over time.
Operating Expenses. Operating expenses, which include occupancy costs,
utilities, repairs, maintenance and linen, increased $7.1 million (88.2%) to
$15.1 million in fiscal year 1995 from $8.0 million for fiscal year 1994. As a
percentage of revenues, such expenses decreased slightly to 20.5% in 1995 from
20.7% in 1994 due to improved lease rates, lower occupancy costs for the
restaurants where the Company has purchased the land and building and reduced
repair and maintenance costs as a percentage of revenues. The reduction in
repairs and maintenance is primarily due to the 74% increase in the number of
new restaurants which generally experience lower repair costs.
Selling Expenses. Selling expenses increased $1.6 million (124.4%) to $2.9
million for fiscal year 1995 from $1.3 million for fiscal year 1994. As a
percentage of revenues, these expenses have increased to 3.9% in fiscal year
1995 from 3.3% in fiscal year 1994. As the Company continues its expansion in
Colorado and into new markets outside of Colorado, emphasis is placed on
marketing programs to build name recognition resulting in increases to selling
expenses. Such programs included significant gift certificate and radio
advertising campaigns in the fourth quarter of 1995, which resulted in selling
expenses of 4.6% as a percentage of revenues during that quarter.
General and Administrative ("G&A"). G&A expenses increased $2.1 million
(85.4%) to $4.6 million in fiscal year 1995 from $2.5 million in fiscal year
1994 and decreased slightly as a percentage of revenues from 6.3% in 1994 to
6.2% in 1995. The increase in dollars primarily reflects personnel additions as
well as increases in overall corporate infrastructure including office space and
supplies, all resulting from the Company's continuing expansion program. Because
costs associated with these increases are lower in proportion to the revenues
added from new restaurants, G&A decreased as a percentage of revenues.
Depreciation and Amortization. Depreciation and amortization, including
amortization of preopening expenses, increased $2.9 million (216.9%) to $4.2
million for fiscal year 1995 from $1.3 million in fiscal year 1994. As a
percentage of revenues, depreciation expense was 3.2% during 1995 as compared
to 2.4% in 1994, and preopening expense was 2.5% in 1995 as compared to 1.0% in
1994. The increase in depreciation expense as a percentage of revenues is due
primarily to the 14 restaurants opened during 1995. Restaurants opened prior to
this time experienced a lower average construction cost due to their proximity
to the Company's Colorado market, and correspondingly have a lower depreciation
rate. In addition, as the average age of restaurants opened prior to 1995 was
19
<PAGE> 22
in excess of five years, many assets were already fully depreciated. The
increase in preopening expense as a percentage of revenues is principally due to
opening a significant number of 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 and location of new
restaurants opened in any given period.
Interest Income. The increase in interest income to $1.1 million in fiscal
year 1995 from $154,000 in fiscal year 1994 was attributable to the temporary
investment of proceeds received from the Company's public offerings in July
1994 and March 1995.
Provision for Income Taxes. The 1995 provision for income taxes reflects
utilization of a $502,000 FICA Credit as compared to only a $138,000 FICA
credit utilized in 1994. These FICA Credits reduce the effective combined
federal and state tax rate. The 1994 provision also includes a pro forma
provision of $445,215 for the period from December 27, 1993 through July 10,
1994 and a provision of $111,000 to record cumulative deferred income taxes
existing at that date. See Notes 2 and 6 of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flows for
fiscal year 1994, 1995, and 1996:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
December 25, December 31, December 29,
1994 1995 1996
------------ ------------- ------------
<S> <C> <C> <C>
Net cash provided by operating activities $ 4,957,941 $ 3,762,046 $ 6,827,645
Net cash used in investing activities (13,421,479) (38,623,814) (21,525,687)
Net cash provided by financing activities 13,191,453 33,303,434 11,142,701
Increase (decrease) in cash and cash
equivalents 4,727,915 (1,558,334) (3,555,341)
</TABLE>
The Company requires capital principally for the development and
construction of new restaurants and for capital expenditures at existing
restaurants. The Company has financed its expansion over the last three years
principally through cash flow from operations, proceeds from its public
offerings, borrowings on long-term debt and capital lease obligations. Net cash
used in investing activities during 1994, 1995 and 1996 included total capital
expenditures of $13.4 million, $30.7 million and $29.0 million, respectively.
These expenditures were primarily for the construction of eight new restaurants
during 1994, 14 during 1995 and 16 during 1996. Additionally, investing
activities in 1995 included a $7.8 million use of cash for short-term
investments that were subsequently sold in 1996 as a source of cash.
Net cash provided by financing activities during 1994 and 1995 primarily
represents net proceeds received from the Company's public offerings during
those periods of $16.2 million and $33.7 million, respectively. In July 1996,
the Company secured a $20 million bank revolving credit facility (the
"Credit Facility"), and executed a first mortgage on real property located in
Chicago. These financing instruments provided cash sources in 1996 of $11.0
million. During the first quarter of 1997, the Company amended the Credit
Facility to increase the maximum borrowing capacity to $25 million. As of
December 29, 1996, the Company had $8.5 million outstanding under the Credit
Facility, and $16.5 million available under the amended Credit Facility.
During the third quarter of 1996, the Company financed its acquisition of
an indirect 50% interest in Trolley Barn by exchanging 452,073 shares of its
$.01 par value common stock. See Note 4 of Notes to Consolidated Financial
Statements. The corresponding increase in assets and equity is excluded from
the above cash flows reflecting the non-cash nature of this transaction.
The Company historically has leased its facilities and plans to lease
sites for a majority of its future restaurant locations. The Company has
purchased five Old Chicago restaurant sites and two Rock Bottom Restaurant &
Brewery sites and may purchase additional restaurant sites in the future. See
"Item 2: Properties." The Company estimates that total capital expenditures for
1997, excluding preopening costs and potential real estate purchases, will
20
<PAGE> 23
be approximately $29 million, of which the cost of new restaurants will be
approximately $23.5 million (including the two Rock Bottom Restaurant & Brewery
restaurants and the Old Chicago restaurant opened during the first quarter).
The remaining $5.5 million is the amount estimated for routine capital
expenditures and remodels of existing restaurants, and for other corporate
requirements.
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 the amended Credit Facility will be sufficient to
satisfy its currently anticipated cash needs for fiscal 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.
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, but
as the Company enters new markets, it may encounter different seasonal
patterns. In addition, quarterly results have been and, in the future are
likely to be, substantially affected by the timing of new restaurant openings.
Specifically, results of operations from new restaurants opening in the first
or fourth quarters will experience lower margins initially than new restaurants
opening in the second and third quarters. Because of the seasonality of the
Company's business and the impact of new restaurant openings, results for 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. See Note 9 of Notes to Consolidated Financial Statements.
IMPACT OF INFLATION
Substantial increases in costs and expenses, particularly food, supplies,
labor and operating expenses could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
operating results in any of the past three years.
21
<PAGE> 24
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants 23
Consolidated Balance Sheets as of December 31,1995 and December 29, 1996 24
Consolidated Statements of Operations for the Years Ended December 25, 1994,
December 31, 1995, and December 29, 1996 25
Consolidated Statements of Stockholders' Equity for the Years Ended December 25, 1994,
December 31, 1995, and December 29, 1996 26
Consolidated Statements of Cash Flows for the Years Ended December 25, 1994,
December 31, 1995, and December 29, 1996 27
Notes to Consolidated Financial Statements 28
</TABLE>
All financial statement schedules are omitted as they are not applicable to the
Company.
22
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Rock Bottom Restaurants, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ROCK
BOTTOM RESTAURANTS, INC. and SUBSIDIARIES as of December 31, 1995 and December
29, 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
29, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Rock Bottom
Restaurants, Inc. and Subsidiaries as of December 31, 1995 and December 29,
1996 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 29, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 31, 1997.
23
<PAGE> 26
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 AND 29,
-------------------
1995 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 3,555,341 $ --
Short-term investments (Note 2) 7,790,442 --
Accounts receivable 481,458 747,762
Accounts receivable--affiliates 36,608 101,342
Preopening costs, net 2,019,284 2,552,185
Inventories 1,478,573 2,206,139
Prepaids and other current assets 818,752 1,253,124
------------ ------------
Total current assets 16,180,458 6,860,552
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land 4,598,414 5,021,927
Buildings 3,144,716 3,653,660
Leasehold and building improvements 23,420,443 38,380,894
Furniture, fixtures and equipment 20,055,537 30,460,508
Construction-in-progress 1,601,059 4,700,360
Accumulated depreciation and amortization (5,228,274) (9,942,059)
------------ ------------
Total property and equipment, net 47,591,895 72,275,290
------------ ------------
INVESTMENT IN JOINT VENTURE, net (Note 4) -- 5,348,729
------------ ------------
OTHER ASSETS 396,438 463,368
------------ ------------
TOTAL ASSETS $ 64,168,791 $ 84,947,939
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade $ 1,965,035 $ 1,680,714
Construction projects 1,038,148 516,357
Affiliates 22,105 9,483
Accrued payroll and payroll taxes 1,078,194 1,605,980
Accrued taxes other than income tax 1,105,076 1,027,920
Other accrued expenses 658,150 963,413
Current deferred income taxes (Note 6) 284,463 515,232
Current portion of long-term debt (Note 5) 43,921 575,199
Current portion of obligations under capital leases (Note 5) 650,833 697,992
------------ ------------
Total current liabilities 6,845,925 7,592,290
REVOLVING LINE OF CREDIT (Note 5) -- 8,500,000
LONG-TERM DEBT (Note 5) 596,793 2,488,420
OBLIGATIONS UNDER CAPITAL LEASES (Note 5) 1,016,482 673,987
DEFERRED INCOME TAXES (Note 6) 368,547 356,510
------------ ------------
Total liabilities 8,827,747 19,611,207
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock--$.01 par value,
5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock--$.01 par value,
15,000,000 shares authorized,
7,345,482 and 7,905,451 shares issued
and outstanding, respectively 73,455 79,055
Additional paid-in capital 50,809,742 56,774,747
Retained earnings 4,457,847 8,482,930
------------ ------------
Total stockholders' equity 55,341,044 65,336,732
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,168,791 $ 84,947,939
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
24
<PAGE> 27
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 25, 31 AND 29,
------------------------------------------------
1994 1995 1996
----------- ------------------- --------------
<S> <C> <C> <C>
REVENUES:
Old Chicago restaurants $ 22,201,384 $ 40,498,773 $ 58,328,162
Rock Bottom Restaurant & Brewery restaurants 16,651,869 33,464,742 50,901,983
------------- ------------- -------------
Total revenues 38,853,253 73,963,515 109,230,145
------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales 9,784,605 18,509,320 27,099,911
Restaurant salaries and benefits 12,726,624 24,739,012 35,552,068
Operating expenses 8,043,968 15,135,430 23,529,265
Selling expenses 1,272,032 2,854,877 4,272,132
General and administrative 2,468,152 4,576,499 5,619,612
Depreciation and amortization 1,325,343 4,199,694 7,802,033
------------- ------------- -------------
Total operating expenses 35,620,724 70,014,832 103,875,021
------------- ------------- -------------
INCOME FROM OPERATIONS 3,232,529 3,948,683 5,355,124
Equity in joint venture earnings (Note 4) -- -- 222,941
Interest income 153,925 1,079,982 227,235
Interest expense (259,592) (248,688) (300,544)
Other income (expense), net 7,726 40,056 (1,364)
------------- ------------- -------------
INCOME BEFORE TAXES 3,134,588 4,820,033 5,503,392
PROVISION FOR INCOME TAXES (PRO FORMA
FOR 1994) (Notes 2 and 6) 1,210,569 1,550,005 1,478,309
------------- ------------- -------------
NET INCOME (PRO FORMA FOR 1994) $ 1,924,019 $ 3,270,028 $ 4,025,083
============= ============= =============
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (PRO FORMA FOR 1994) $ .47 $ .45 $ .52
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,072,727 7,263,620 7,725,496
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
25
<PAGE> 28
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
(NOTE 1)
--------------------------------- ADDITIONAL RETAINED TOTAL
NUMBER OF PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------------- ---------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 26, 1993 -- $-- $ 1,109,584 $ (169,150) $ 940,434
Capital contributions prior to
Share Exchange -- -- 46,000 -- 46,000
Shares issued to Predecessor
Subsidiaries' stockholders 3,000,000 30,000 (30,000) -- --
Dividends and distributions -- -- -- (1,665,002) (1,665,002)
Income before taxes, prior
to the Share Exchange -- -- -- 1,181,415 1,181,415
Termination of S corporation
status -- -- (652,737) 652,737 --
Proceeds from initial public
offering, net of offering
costs 2,300,000 23,000 16,210,505 -- 16,233,505
Net income, subsequent to
the Share Exchange -- -- -- 1,187,819 1,187,819
------------ ------------ ------------ ------------ ------------
BALANCES, December 25, 1994 5,300,000 53,000 16,683,352 1,187,819 17,924,171
Proceeds from follow-on
public offering, net of
offering costs 2,015,000 20,150 33,672,771 -- 33,692,921
Proceeds from exercise
of stock options 30,482 305 246,051 -- 246,356
Tax benefit resulting from the
exercise of stock options -- -- 207,568 -- 207,568
Net income -- -- -- 3,270,028 3,270,028
------------ ------------ ------------ ------------ ------------
BALANCES, December 31, 1995 7,345,482 73,455 50,809,742 4,457,847 55,341,044
Proceeds from exercise of
stock options 107,896 1,079 864,589 -- 865,668
Issuance of common stock in
exchange for an indirect 50%
equity interest in joint venture 452,073 4,521 4,995,479 -- 5,000,000
Tax benefit resulting from the
exercise of stock options -- -- 104,937 -- 104,937
Net income -- -- -- 4,025,083 4,025,083
------------ ------------ ------------ ------------ ------------
BALANCES, December 29, 1996 7,905,451 $ 79,055 $ 56,774,747 $ 8,482,930 $ 65,336,732
============ ============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
26
<PAGE> 29
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 25, 31 AND 29,
---------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Pro Forma for 1994) $ 1,924,019 $ 3,270,028 $ 4,025,083
Adjustments to reconcile net income
to net cash provided by operating activities--
Equity in joint venture earnings -- -- (222,941)
Depreciation and amortization 1,325,343 4,199,694 7,802,033
Pro forma adjustment for income taxes 445,215 -- --
Deferred income taxes 335,568 317,442 218,732
Tax benefit from exercise of stock options -- 207,568 104,937
Loss on disposition of assets 9,116 13,725 --
Increase in accounts receivable (56,586) (374,803) (266,304)
Expenditures for preopening costs (1,238,089) (2,847,458) (3,522,152)
Increase in inventories (398,377) (760,177) (727,566)
Increase in prepaids and other assets (381,594) (616,572) (533,959)
Increase (decrease) in accounts payable 2,061,902 (660,007) (806,114)
Increase in accrued expenses 931,424 1,012,606 755,896
------------ ------------ ------------
Net cash provided by operating activities 4,957,941 3,762,046 6,827,645
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (13,372,552) (30,739,840) (29,046,644)
Advances to officers and affiliates, net (48,927) (93,532) (77,357)
(Purchases) sales of short-term investments, net -- (7,790,442) 7,790,442
Joint venture acquisition costs -- -- (192,128)
------------ ------------ ------------
Net cash used in investing activities (13,421,479) (38,623,814) (21,525,687)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 3,876,080 -- 11,000,000
Repayments of long-term debt (4,994,679) (65,278) (77,095)
Repayments of capital lease obligations (304,451) (570,565) (645,872)
Capital contributions and issuance of common stock 16,279,505 33,939,277 865,668
Dividends and distributions (1,665,002) -- --
------------ ------------ ------------
Net cash provided by financing activities 13,191,453 33,303,434 11,142,701
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,727,915 (1,558,334) (3,555,341)
CASH AND CASH EQUIVALENTS, beginning of year 385,760 5,113,675 3,555,341
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 5,113,675 $ 3,555,341 $ --
============ ============ ============
</TABLE>
SUPPLEMENTAL CASH FLOW DISCLOSURES: See Note 2.
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
27
<PAGE> 30
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 1994, DECEMBER 31, 1995 AND DECEMBER 29, 1996
(1) ORGANIZATION AND NATURE OF BUSINESS
Rock Bottom Restaurants, Inc., ("Rock Bottom" or the "Company") is a
Delaware corporation incorporated in April 1994. Prior to consummation of the
Company's initial public offering (see Note 7) and pursuant to an agreement (the
"Share Exchange Agreement") entered into on July 10, 1994 among the Company and
each of the stockholders of certain predecessor companies (the "Predecessor
Subsidiaries"), Rock Bottom (i) exchanged 3,000,000 shares of its common stock
for all of the outstanding capital stock of the Predecessor Subsidiaries and
(ii) consolidated ownership of all the Predecessor Subsidiaries' restaurants
into Rock Bottom ("Share Exchange"). Under the terms of the Share Exchange
Agreement, each Stockholder received, in consideration for the exchange of the
outstanding capital stock of the Predecessor Subsidiaries, shares of common
stock of Rock Bottom. The Share Exchange was accounted for at historical cost in
a manner similar to pooling-of-interest accounting as the entities included in
the Share Exchange were under common control.
As of December 29, 1996, the Company owned and operated 35 Old Chicago
restaurants and 14 Rock Bottom Restaurant & Brewery restaurants. Old Chicago
restaurants feature "deep-dish" Chicago-style pizza, burgers and sandwiches,
pasta specialties, salads and a full bar emphasizing a selection of 110 or more
different types of beer from around the world. Rock Bottom Restaurant & Brewery
restaurants feature eclectic menus and on-premises microbrewed beer. The
Company's restaurants are located throughout Colorado and in Oregon, Minnesota,
Texas, Kansas, Illinois, Ohio, Missouri, Wisconsin, Nebraska, Iowa, Washington,
Maryland and Indiana.
The Company is subject to the risks associated with an aggressive
expansion strategy and a highly competitive industry.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Accounting Period
The accompanying consolidated financial statements represent the
consolidation of Rock Bottom and its eight wholly-owned subsidiaries. Although
intercompany transactions are minimal, all material intercompany amounts have
been eliminated in consolidation. Also consolidated is Rock Bottom Kansas, LLC
("RBK"). Rock Bottom owns 50% of RBK but has 100% control of the daily
operations. The other investor is entitled to a maximum return of $12,500 per
year on the investment.
The Company operates on a 52 or 53 week fiscal year ending the last Sunday
in December. Fiscal years 1994 and 1996 each contain 52 weeks; fiscal year 1995
contains 53 weeks.
Cash and Cash Equivalents and Short-term Investments
Cash and cash equivalents include cash and investments with original
maturities of three months or less and which are not subject to significant
risk from changes in interest rates. Short-term investments include those
investments with original maturities between three and twelve months. At
December 31, 1995, all investments were classified as available-for-sale and
therefore were accounted for at fair market value in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The carrying value of
all investments approximated fair market value. Cash and cash equivalents and
short-term investments as of December 31, 1995 were as follows.
28
<PAGE> 31
<TABLE>
<CAPTION>
Cash and Cash Short-Term
Equivalents Investments Total
------------- ----------- -----------
<S> <C> <C> <C>
Cash $ 2,547,964 $ -- $ 2,547,964
Commercial paper 1,007,377 -- 1,007,377
Corporate bonds -- 7,790,442 7,790,442
------------- ----------- -----------
$3,555,341 $7,790,442 $11,345,783
============= =========== ===========
</TABLE>
At December 29, 1996, the Company had a negative book cash balance of
approximately $570,000 which is classified as accounts payable-trade in the
accompanying 1996 consolidated balance sheet. Such negative balance results from
the Company's cash management program whereby all excess cash is either invested
or used to repay long-term borrowings.
Preopening Costs
Direct incremental costs incurred prior to the opening of new restaurants
are capitalized and amortized over a period of one year after the restaurant
commences operations. These costs consist primarily of payroll, employee
recruiting and training, and initial opening expenses. Amortization expense of
$409,015, $1,826,989 and $2,989,251 in 1994, 1995 and 1996, respectively, is
included in depreciation and amortization in the accompanying consolidated
statements of operations.
Inventories
Inventories, which consist of restaurant food items, alcoholic beverages,
clothing emblazoned with restaurant names and logos, and related paper supplies
are valued at the lower of first-in, first-out cost or net realizable value.
Property and Equipment
Property and equipment additions are capitalized at cost and include
acquisitions of property and equipment, costs incurred in the development and
construction of new restaurants, and major renewals and improvements to
existing restaurants' property and equipment. Repairs and maintenance costs
which do not improve or extend the life of the respective assets are expensed
currently. Depreciation and amortization is provided over the lesser of the
estimated useful lives of the assets or the remaining lease terms using the
straight-line method. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings 25-30 years
Leasehold and building improvements 10-30 years
Furniture, fixtures and equipment 3-20 years
</TABLE>
Income Taxes
Prior to July 10, 1994, profits or losses of the Predecessor Subsidiaries
included in these financial statements were reflected in the individual tax
returns of the stockholders as these entities were S-Corporations. Dividends to
stockholders were, at a minimum, declared each year in an estimated amount
necessary to cover income taxes incurred by the individual stockholders on
taxable profits of the S-Corporations.
As a result of the Company's initial public offering of common stock and
concurrent with the Share Exchange, the Company and its Predecessor
Subsidiaries terminated their S-Corporation status. At that time, the Company
began recording income taxes pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax basis of assets and liabilities using
enacted tax laws. Valuation allowances are established, if necessary, to reduce
deferred tax assets to the amount that will, more likely than not, be realized.
Cumulative deferred income taxes, which arose primarily as a result of the use
of accelerated depreciation methods for income tax reporting purposes, were
recorded on July 10, 1994 resulting in an adjustment of $111,122 to the
Company's reported income tax expense and a corresponding increase in deferred
tax liabilities.
29
<PAGE> 32
Net Income Per Common and Common Equivalent Share
Pro forma net income per common and common equivalent share is calculated
assuming that the 3,000,000 shares of the Company's common stock, outstanding
after consummation of the Share Exchange Agreement, were outstanding at the
beginning of fiscal year 1993.
The dilutive effect of common equivalent shares outstanding in 1994, 1995
and 1996 has been computed using the treasury stock method.
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest, including the amount capitalized,
was $253,142, $249,354, and $385,540 in 1994, 1995 and 1996, respectively, and
cash paid for income taxes was $680,000, $1,330,500 and $1,485,458 in 1994,
1995, and 1996, respectively. The Company acquired equipment of $1,806,094,
$443,841 and $350,536 in 1994, 1995 and 1996, respectively, under capital lease
obligations and recorded an increase to additional paid-in capital in 1995 and
1996 of $207,568 and $104,937, respectively, related to the tax benefit
resulting from the exercise of nonstatutory stock options and the disqualifying
dispositions of incentive stock options. Also, during 1996 the Company issued
452,073 shares of common stock in exchange for an indirect 50% equity interest
in joint venture (see Note 4).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, revolving line of credit and
long-term debt. The carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the short maturity of those instruments. The carrying amount of the
revolving line of credit and long-term debt approximates fair value as the
pricing and terms of those instruments are indicative of current rates and
credit risk.
Asset Impairment
The Company reviews its assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets which are held and used in operations, the asset would
be impaired if the undiscounted future cash flows related to the asset did not
exceed the net book value.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Effective in 1995, the Company adopted the
disclosure option of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that
companies which do not choose to account for stock-based compensation as
prescribed by the statement shall disclose the pro forma effects on net income
and net income per share as if SFAS 123 had been adopted. Additionally, certain
other disclosures are required with respect to stock compensation and the
assumptions used to determine the pro forma effects of SFAS 123.
(3) RELATED PARTY TRANSACTIONS
The Company leases building space and certain equipment, furniture and
improvements for four Old Chicago restaurants and for the Rock Bottom
Restaurant & Brewery restaurant in Boulder, Colorado from partnerships or
corporations in which certain directors and stockholders of the Company, or
their affiliates, have partial or complete ownership interests. These leases
also include provisions for additional rent based on the difference between
base rent and 6% of gross retail revenues, plus 3% of wholesale beer sales at
the Rock Bottom Restaurant & Brewery restaurant in Boulder.
30
<PAGE> 33
Total rent expense paid to these partnerships or corporations was $641,974,
$600,029 and $603,695, which included additional rents of $185,680, $173,929
and $153,845, during 1994, 1995 and 1996, respectively. Management believes
these terms are no less favorable to the Company than could be obtained from
third parties.
Prior to July 1994, the Company paid various accounting, administrative
and supervisory fees to Concept Restaurants, Inc. ("Concept"), a restaurant
management company wholly-owned by two stockholders of the Company. The fees
charged represented actual costs incurred by Concept. Allocation of Concept's
total costs to Rock Bottom and other restaurants managed was based on
restaurant sales for one-half of the fee and evenly allocated to all
restaurants for the other half. Included in general and administrative expenses
are fees paid to Concept totaling $326,360 during 1994. In July 1994, the
Company terminated this arrangement and hired certain of the personnel of
Concept to provide these services directly.
Prior to August 1996, the Company obtained its employee health insurance
coverage with Concept who in turn contracted with a third party insurance
company. Premiums paid were determined by the insurance company and were based
on total number of employees. Included in restaurant salaries and benefits were
premiums paid to Concept of $154,326, $277,893 and $231,011 during 1994, 1995
and 1996, respectively. Premiums paid to Concept for health insurance coverage
of administrative and supervisory staff were included in general and
administrative expenses, and were $19,553, $113,700 and $96,528 for 1994, 1995
and 1996, respectively. Prior to July 1994, these costs were included in the
administrative and supervisory fees paid to Concept. In August 1996, the
Company began administering its own self-funded employee health insurance plan
(see Note 8).
Prior to August 1994, the Company paid consulting fees to a corporation
owned by a director and stockholder based on approximately 2% of each
restaurant's gross revenues. Included in general and administrative expenses
were fees paid of approximately $227,000 during 1994. During 1996, the Company
paid $100,000 to this same corporation for additional consulting services
performed relating to site selection and design for the Company's new
restaurants. No fees were paid to this corporation during 1995. Management
believes all such payments were reasonable based on the services received and
were no less favorable to the Company than could be obtained from an unrelated
party.
The Company also previously engaged Concept Design Services, Inc.
("Concept Design"), a company wholly-owned by a stockholder, to administer the
construction process for new restaurants. This included contracting with
vendors for all leasehold improvements, restaurant furniture and restaurant
equipment. Concept Design was reimbursed by the Company for the cost of its
administrative expenses. In August 1994, the Company acquired 100% of the
outstanding stock of Concept Design for a nominal amount and changed the name
to Rock Bottom Design, Inc.
During 1995, the Company purchased for $280,000 a 37,500 square foot
parcel of land in Colorado to use as a parking lot for an existing restaurant
from a company wholly-owned by a stockholder and director of the Company.
Management believes the purchase price is no less favorable to the Company than
could be obtained from a third party.
During 1995 and 1996, two separate companies, each wholly-owned by two
different directors of the Company, provided strategic planning and development
consulting services to Rock Bottom, and advertising and marketing services,
respectively, to the Old Chicago and Rock Bottom Restaurant & Brewery
restaurants. Fees paid to the former company totaling $78,753 and $71,688,
respectively, are included in general and administrative expenses and fees paid
to the latter totaling $93,734 and $13,996, respectively, are included in
selling expenses in the accompanying consolidated statements of operations.
(4) INVESTMENT IN JOINT VENTURE
In July 1996, the Company acquired an indirect 50% equity interest in
Trolley Barn Brewery, Inc. ("Trolley Barn") in exchange for 452,073 shares of
the Company's common stock. The Company also received the option to purchase
the remaining 50% of Trolley Barn from the selling shareholders. The option is
exercisable at any time between July 2000 and July 2002, or upon a change in
control of the ownership of the 50% of Trolley Barn retained by the selling
shareholders. The purchase price for this option is based on earnings before
interest, taxes, depreciation and amortization, as defined. In addition, the
Company and the selling shareholders each agreed to guarantee one-half of
Trolley Barn's bank financing up to a maximum of $3 million each, and may
guarantee certain other debt of Trolley Barn in the future. Trolley Barn had
approximately $2.8 million outstanding under this bank financing at
December 29, 1996.
31
<PAGE> 34
Trolley Barn currently operates four brewpub 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 under the names Big River Grille &
Brewing Works, Rock Bottom Restaurant & Brewery, and Old Chicago.
The Company's investment in Trolley Barn is accounted for under the equity
method. At closing, 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 the acquisition
and is being amortized over 35 years. Accumulated amortization at December 29,
1996 of $66,340 is netted against the investment.
(5) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt as of December 31, 1995 and December 29, 1996 is as
follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Mortgage note payable to a bank, interest at 9%, secured by
land and building in Chicago, Illinois, assignment of rents
thereon and other assets, principal and interest payable
in monthly installments of $25,615, balloon payment of
$2,030,701 due at maturity in July 2001 $ -- $ 2,466,826
Mortgage note payable to a trust company, interest at 9%,
secured by building in Greeley, Colorado, principal and
interest payable in monthly installments of $4,408, balloon
payment of $459,808 due at maturity in July 1997 476,751 466,331
Note payable to landlord of $196,605, interest
at 12.5%, principal and interest payable in
quarterly installments, maturing October 2001 145,012 127,632
Other
18,951 2,830
----------- -----------
640,714 3,063,619
Less--current portion (43,921) (575,199)
----------- -----------
$ 596,793 $ 2,488,420
=========== ===========
</TABLE>
In July 1996, the Company closed a $20 million bank revolving credit
facility (the "Credit Facility") secured by substantially all assets of the
Company. Interest accrues on the average outstanding balance at either the
prime rate or LIBOR plus 1.5%, depending on the Company's election, and is paid
quarterly in arrears (weighted average interest rate of 7.57% at December 29,
1996). During the revolving credit period, the Company pays a quarterly
commitment fee of .25% on the unused availability, as defined. The Credit
Facility converts to a three-year fully amortizing term loan after two years,
or after three years upon agreement of the parties. Under the agreement, the
Company is subject to certain financial covenants and ratios, restrictions on
investments and acquisitions and other restrictions.
Subsequent to yearend, the Company amended the Credit Facility to increase
maximum borrowings available to $25 million and to amend certain covenants and
financial ratios. All other terms, conditions and restrictions remained
substantially the same.
During 1996, approximately $195,000 of interest expense was capitalized
and included in total construction costs of new restaurants.
Principal payments due on the outstanding balance of long-term debt and
the Credit Facility as of December 29, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 575,199
1998 1,531,974
1999 2,960,443
2000 2,973,478
2001 3,522,525
-----------
Total $11,563,619
===========
</TABLE>
32
<PAGE> 35
The Company has entered into capital lease obligations for restaurant
point-of-sale equipment and other furniture and equipment used in restaurant
operations. Future minimum lease payments required under these capital leases,
together with the present value of the net minimum lease payments, are as
follows as of December 29, 1996:
<TABLE>
<S> <C>
1997 $784,331
1998 489,178
1999 277,067
---------
Minimum lease payments 1,550,576
Less: Amount representing interest (178,597)
---------
Present value of net minimum lease payments 1,371,979
Less: Current portion (697,992)
---------
$ 673,987
=========
</TABLE>
Four stockholders have personally guaranteed certain lease obligations for
which the present value of net minimum lease payments totals $311,586.
(6) INCOME TAXES
The provision for income taxes (or for 1994, pro forma adjustment to
reflect income taxes) consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal $1,078,216 $1,213,211 $1,197,386
State 132,353 336,794 280,923
---------- ---------- ----------
Total $1,210,569 $1,550,005 $1,478,309
========== ========== ==========
Current $875,001 $1,232,563 $1,259,577
Deferred 335,568 317,442 218,732
---------- ---------- ----------
Total $1,210,569 $1,550,005 $1,478,309
========== ========== ==========
</TABLE>
The current income tax provision for the year ended December 25, 1994
includes a pro forma adjustment of $445,215 for the period of the year prior to
the Company's change in tax status on July 10, 1994. The pro forma adjustments
to reflect income taxes have been calculated at the approximate combined
federal and state statutory rate of 37.7%.
Deferred tax liabilities as of December 31, 1995 and December 29, 1996
consist of the following primary components:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Current deferred tax assets (liabilities):
Preopening costs $(383,895) $(696,777)
Capitalized inventory costs and other 99,432 181,545
---------- -----------
Net current deferred tax liabilities $(284,463) $(515,232)
========== ===========
Long-term deferred tax assets (liabilities):
FICA and rehabilitation tax credits $387,128 $1,495,558
Valuation allowance against tax credits --- (331,181)
Property, equipment and other (755,675) (1,520,887)
---------- -----------
Net long-term deferred tax liabilities $(368,547) $(356,510)
========== ===========
</TABLE>
33
<PAGE> 36
At December 29, 1996, the Company had federal FICA and rehabilitation tax
credit carryforwards of $1,495,558. The carryforwards will begin to expire in
2009. The valuation allowance relates to a portion of the tax credit
carryforwards. It is the opinion of management that due to alternative minimum
tax limitations, the relatively volatile nature of the restaurant industry, and
the continued generation of FICA tax credits in the future, it is more likely
than not that a portion of these tax credit carryforwards will expire before
the Company is able to realize their benefit.
The following table reconciles the federal statutory income tax rate to
the Company's effective income tax rate:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Provision for income taxes at federal statutory rate 34.0% 34.0% 34.0%
Permanent differences and other 1.7 4.1 2.9
Change in tax status 3.5 --- ---
Tax credits (4.4) (10.4) (20.4)
Valuation allowance against tax credits --- --- 6.0
State income taxes, net of federal benefit 3.8 4.4 4.4
---- ---- ----
Effective income tax rate 38.6% 32.1% 26.9%
==== ==== ====
</TABLE>
(7) STOCKHOLDERS' EQUITY
Public Offerings
On July 21, 1994, the Company closed its initial public offering of
2,000,000 shares of common stock at $8.00 per share, and on August 25, 1994,
sold an additional 300,000 shares at $8.00 per share in connection with the
underwriters' exercise of their over-allotment option. Net proceeds received by
the Company after deducting offering expenses and underwriting discounts were
$16,233,505.
On March 7, 1995, the Company closed its follow-on public offering of
2,100,000 shares of common stock (of which 400,000 shares were sold by certain
existing stockholders) at $18.00 per share, and on March 13, 1995, sold an
additional 315,000 shares at $18.00 per share in connection with the
underwriters' exercise of their over-allotment option. Net proceeds received by
the Company after deducting offering expenses and underwriting discounts were
$33,692,921.
Executive Bonus Plan
In April 1996, the Company adopted an Executive Bonus Plan. Under the
plan, the executive management group will receive a bonus equal to a percentage
of their yearly salary, which generally will be paid in restricted common
stock. The bonus will be awarded only if certain annual target financial goals
are met.
The Chairman and Chief Executive Officer are eligible to receive up to
100% of their base salary as a bonus, and certain other executive officers are
eligible to receive up to 70% of their base salary as a bonus. An additional
award of restricted common stock, from 5% to 25% of base salary, may be awarded
if annual target financial goals are exceeded.
The restricted common stock granted shall vest, and trading restrictions
on those shares shall lapse, three years from the date of issuance, as long as
the executive continues to be an employee of the Company. In the event of a
change of control, as defined, all unvested shares shall vest immediately, and
trading restrictions on those shares shall lapse immediately. The Compensation
Committee (the "Committee") of the Board of Directors has the discretion to
accelerate the vesting of unvested shares.
For the year ended December 29, 1996, the annual targeted financial goal
was met resulting in a total of 54,646 shares of restricted common stock being
issued subsequent to year end.
34
<PAGE> 37
Stock Option Plans
In June 1994, Rock Bottom adopted an Equity Incentive Plan (the
"Employees' Plan") that became effective upon consummation of the public
offering. The Employees' Plan was amended in June 1995, to increase the number
of shares of the Company's common stock authorized for issuance from 600,000
shares to 1,000,000 shares and again in June 1996 to 1,200,000 shares. The
Employees' Plan provides for the granting of both "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code) and nonstatutory stock
options, as well as restricted stock grants, and is designed to serve as an
incentive for hiring and retaining qualified and competent employees. The
Committee of the Company's Board of Directors administers and interprets the
Employees' Plan. Options are granted under the Employees' Plan on such terms
and at such prices as determined by the Committee, except that the per share
exercise price of incentive stock options cannot be less than the fair market
value of the common stock on the date of grant. Options granted under this plan
vest annually over three years from date of grant.
A summary of the status of the Company's Employees' Plan as of December
25,1994, December 31, 1995 and December 29,1996 and the changes during those
periods is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at beginning of period -- 528,900 936,218
Granted 528,900 595,000 155,200
Exercised -- (30,482) (100,396)
Canceled -- (151,200) --
Forfeited -- (6,000) (130,201)
------------ ----------- -----------
Outstanding at end of period 528,900 936,218 860,821
============ =========== ===========
Exercisable at end of period -- 148,380 319,041
============ =========== ===========
Range of exercise prices, at end of
period $8.00-$13.98 $8.00-$30.47 $8.00-$30.47
============ ============ ============
Weighted average exercise prices:
At beginning of period $ -- $ 8.24 $ 12.35
At end of period 8.24 12.35 12.70
Exercisable at end of period -- 8.39 11.88
Options granted 8.24 18.65 11.78
Options exercised -- 8.08 8.02
Options canceled -- 23.49 --
Options forfeited -- 15.07 12.73
Weighted average end of period
remaining contractual life (in years) 9.58 8.99 8.14
Weighted average fair value of options
granted during the period N/A $ 7.60 $ 6.20
</TABLE>
The following summary shows, for the price range indicated, the weighted
average exercise price, weighted average price of options exercisable and the
remaining contractual life of options granted under the Employees' Plan.
35
<PAGE> 38
<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- ---------------
Shares Prices Shares Price Shares Price
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Range of exercise prices
- ------------------------
Weighted average exercise price
for options outstanding:
$ 8.00-$ 9.99 504,900 $ 8.03 472,418 $ 8.03 304,955 $ 8.03
$10.00-$13.99 24,000 12.61 256,500 13.80 369,300 12.88
$14.00-$17.99 -- -- 64,300 15.50 78,566 15.36
$18.00-$30.47 -- -- 143,000 22.63 108,000 23.30
Weighted average exercise price
for options exercisable:
$ 8.00-$ 9.99 -- -- 138,386 8.02 173,544 8.03
$10.00-$13.99 -- -- 7,996 12.61 87,878 13.68
$14.00-$17.99 -- -- 1,998 16.95 19,619 15.57
$18.00-$30.47 -- -- -- -- 38,000 23.43
Weighted average remaining
contractual life
(in years):
$ 8.00-$ 9.99 504,900 9.57 472,418 8.55 304,955 7.56
$10.00-$13.99 24,000 9.80 256,500 9.88 369,300 9.05
$14.00-$17.99 -- -- 64,300 9.69 78,566 7.37
$18.00-$30.47 -- -- 143,000 8.51 108,000 7.25
</TABLE>
The weighted average fair value of each option grant has been estimated as
of the date of grant using the Black-Scholes option-pricing model and the
following assumptions:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Dividend rate 0% 0%
Expected volatility 68% 73%
Risk-free interest rate 5.85% 5.85%
Expected life (in years):
$ 8.00-$ 9.99 3.5 3.5
$10.00-$13.99 4.0 4.0
$14.00-$17.99 4.5 4.5
$18.00-$30.47 5.0 5.0
</TABLE>
Rock Bottom has also adopted the Nonemployee Directors' Stock Option Plan
(the "Directors' Plan") and has reserved 75,000 shares for issuance thereunder.
All stock options granted pursuant to the Directors' Plan vest equally over a
one to two-year period from the date of grant.
A summary of the status of the Company's Directors' Plan as of December
24, 1994, December 31, 1995 and December 29, 1996, and the changes during those
periods is as follows.
36
<PAGE> 39
<TABLE>
<CAPTION>
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Outstanding at beginning of period -- 22,500 39,000
Granted 22,500 16,500 27,000
Exercised -- -- (7,500)
-------------- -------------- --------------
Outstanding at end of period 22,500 39,000 58,500
============== ============== ==============
Exercisable at end of period -- 11,250 27,750
============== ============== ==============
Range of exercise prices, at end of
period $8.00 - $10.08 $8.00 - $25.75 $8.88 - $25.75
============== ============== ==============
Weighted average exercise prices:
At beginning of period $ -- $ 9.38 $13.89
At end of period 9.38 13.89 13.74
Exercisable at end of period -- 9.38 14.58
Options granted 9.38 20.03 11.92
Options exercised -- -- 8.00
Weighted average end of period
remaining contracted life (in years) 9.67 9.01 8.10
Weighted average fair value of options
granted during the period N/A $10.16 $ 6.11
</TABLE>
The following summary shows, for the price range indicated, the weighted
average exercise price, weighted average price of options exercisable and the
remaining contractual life of options granted under the Directors' Plan:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
Range of exercise prices
------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average exercise price
for options outstanding:
$ 8.00 - $ 9.99 7,500 $ 8.00 7,500 $ 8.00 7,500 $ 8.88
$10.00 - $13.99 15,000 10.08 15,000 10.08 27,000 11.14
$14.00 - $17.99 -- -- 6,000 16.52 13,500 15.16
$18.00 - $25.75 -- -- 10,500 22.04 10,500 22.04
Weighted average exercise price
for options exercisable:
$8.00 - $9.99 -- -- 3,750 8.00 -- --
$10.00 - $13.99 -- -- 7,500 10.08 15,000 10.08
$14.00 - $17.99 -- -- -- -- 6,000 16.52
$18.00 - $25.75 -- -- -- -- 6,750 22.86
Weighted average remaining
contractual life (in years):
$ 8.00 - $ 9.99 7,500 9.57 7,500 8.55 7,500 9.16
$10.00 - $13.99 15,000 9.73 15,000 8.71 27,000 8.54
$14.00 - $17.99 -- -- 6,000 9.71 13,500 6.41
$18.00 - $25.75 -- -- 10,500 9.36 10,500 8.37
</TABLE>
37
<PAGE> 40
The weighted average fair value of each option grant has been estimated as
of the date of grant using the Black-Scholes option-pricing model and the
following assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Dividend rate 0% 0%
Expected volatility 68% 73%
Risk-free interest rate 5.85% 5.85%
Expected life (in years):
$ 8.00 - $ 9.99 3.0 - 4.0 3.0 - 4.0
$10.00 - $13.99 3.0 - 4.0 3.0 - 4.0
$14.00 - $17.99 3.0 - 4.0 3.0 - 4.0
$18.00 - $25.75 3.0 - 4.0 3.0 - 4.0
</TABLE>
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under APB 25,
under which no compensation expense is recognized, as all options have been
granted at an exercise price equal to the fair market value of the Company's
common stock on the date of grant. Effective in 1995, the Company adopted the
disclosure option of SFAS 123 whereby pro forma net income and net income per
share information must be disclosed as if compensation expense had been
recognized over the vesting period of stock options. Cumulative compensation
cost recognized in pro forma net income with respect to options that are
forfeited prior to vesting is adjusted as a reduction of pro forma compensation
expense in the period of forfeiture. For SFAS 123 purposes, the fair value of
each option grant has been estimated as of the date of grant using the
Black-Scholes option-pricing model and assumptions described above.
Using these assumptions, the fair value of the stock options granted in
1995 and 1996 was estimated to be approximately $4,690,000 and $1,128,000,
respectively, which under SFAS 123, would be amortized as compensation expense
over the vesting period of the options. Had compensation cost been recorded
consistent with SFAS 123 utilizing the assumptions detailed above, the
Company's pro forma net income and net income per share would have been as
follows for the years ended December 31, 1995 and December 29, 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net income:
As reported $3,270,028 $4,025,083
Pro forma $2,432,623 $2,745,745
Net income per common and
common equivalent share:
As reported $ .45 $ .52
Pro forma $ .33 $ .36
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to December 26, 1994, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
Subchapter S Distributions
In June 1994, the Predecessor Subsidiaries issued promissory notes to
their stockholders in the principal amount of $1,300,000, in connection with
previously undistributed S-Corporation earnings through June 3, 1994. The
foregoing promissory notes, which accrued interest at the rate of 5% per annum,
and the final distribution of $122,970 for undistributed earnings through July
10, 1994, were repaid in August 1994 with a portion of the net proceeds from
the initial public offering. Total payments in 1994 to stockholders of the
Predecessor Subsidiaries for undistributed earnings through July 10, 1994 were
$1,665,002.
38
<PAGE> 41
(8) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has entered into various operating leases for land, buildings
and equipment, most of which contain renewal options and provisions for
payments of real estate taxes, insurance and maintenance costs. In addition,
certain leases contain contingent rentals based on a percentage of gross
revenues, as defined. Total rent expense was $1,953,782, $3,762,890 and
$5,387,774 in 1994, 1995 and 1996, respectively, including additional rent of
$754,825, $1,013,642 and $1,080,911, respectively.
Aggregate future minimum lease payments required under noncancelable
operating leases at December 29, 1996 (which include commitments for seven
restaurants opening in 1997) are as follows:
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
1997 $ 5,481,699
1998 5,534,501
1999 5,487,667
2000 5,467,409
2001 5,383,760
Thereafter 40,487,870
-----------
Total future minimum lease payments required $67,842,906
===========
</TABLE>
Self-Funded Employee Health Insurance Plan
Beginning August 1996, the Company began administering its own self-funded
employee health insurance plan. The Company and its employees contribute to the
plan which is then responsible for the payment of incurred claims up to
specified individual and aggregate limits, over which a third party insurer is
contractually liable for any additional payment of such claims. The Company
records insurance expense equal to the estimated costs expected to result from
incurred claims plus an estimate of claims incurred but not reported based on
the best available information. However, the nature of these claims is such
that actual development of the claims may vary significantly from the estimated
expenses. All changes in expense estimates are accounted for on a prospective
basis and could have a significant impact on the Company's financial position
or results of operations.
Litigation
The Company is a party in certain legal proceedings that have arisen out
of the ordinary course of business. Based upon advice of the Company's legal
counsel, management believes that the costs of defending and resolving these
legal matters will not have a material adverse effect on the Company.
39
<PAGE> 42
(9) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected 1995 and 1996 quarterly financial
data:
<TABLE>
<CAPTION>
1995 MARCH 26 JUNE 25 SEPTEMBER 24 DECEMBER 31
- ---- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $14,488,589 $16,837,699 $19,616,713 $23,020,514
Income from operations 936,353 1,125,500 1,337,811 549,019
Income before taxes 986,636 1,504,843 1,605,558 722,996
Net income 617,634 985,672 1,059,668 607,054
Net income per common and common equivalent share .10 .13 .14 .08
1996 MARCH 31 JUNE 30 SEPTEMBER 29 DECEMBER 29
- ---- ----------- ----------- ------------ -----------
Revenues $23,512,027 $26,414,075 $28,964,665 $30,339,378
Income from operations 783,458 1,274,644 1,605,505 1,691,517
Income before taxes 843,675 1,279,391 1,659,281 1,721,045
Net income 582,136 882,788 1,289,759 1,270,400
Net income per common and common equivalent share .08 .12 .16 .16
</TABLE>
The effective tax rate for the fourth quarter of 1995 is significantly
lower than previous 1995 quarters due to a lower effective tax rate for the
year than initially estimated. The lower effective tax rate for the year
resulted from significantly lower pre-tax income in the fourth quarter than
projected and was magnified by a greater FICA credit than estimated initially.
40
<PAGE> 43
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference. Only those sections of the Proxy
Statement which specifically address the items set forth herein are
incorporated by reference.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
section "Directors, Executive Officers and Key Employees" in the Company's
Proxy Statement.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section "Directors, Executive Officers and Key Employees" excluding the "Board
Compensation Committee Report on Executive Compensation" and the "Performance
Graph" in the Company's Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section "Certain Relationships and Related Transactions" in the Company's Proxy
Statement.
41
<PAGE> 44
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1995 and
December 29, 1996
Consolidated Statements of Operations for the Years Ended
December 25, 1994, December 31, 1995, and December 29, 1996
Consolidated Statements of Stockholders' Equity for the Years
Ended December 25, 1994, December 31, 1995, and December 29,
1996
Consolidated Statements of Cash Flows for the Years Ended
December 25, 1994, December 31, 1995, and December 29, 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
All financial statement schedules are omitted as they are not
applicable to the Company.
3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------
<S> <C>
2 -- Form of Share Exchange Agreement and Amendment among the Company
and the Shareholders of the Predecessor Subsidiaries, filed as
Exhibit No. 2 to the Company's Registration Statement on Form S-1
(Registration No. 33-79898) and incorporated herein by reference.
3(i) -- Amended and Restated Certificate of Incorporation of the Company,
filed as Exhibit No. 3(i) to the Company's Registration Statement
on Form S-1 (Registration No. 33-79898) and incorporated herein
by reference.
3(ii) -- Bylaws of the Company, filed as Exhibit No. 3(ii) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 25,
1994 and incorporated herein by reference.
10.1 -- Rock Bottom Restaurants, Inc. Equity Incentive Plan, filed as
Exhibit No. 4.1 to the Company's Registration Statement on Form
S-8 (Registration No. 33-94256) and incorporated herein by
reference.
10.2 -- Rock Bottom Restaurants, Inc. Nonemployee Directors' Stock Option
Plan, filed as Exhibit No. 4.2 to the Company's Registration
Statement on Form S-8 (Registration No. 33-94256) and
incorporated herein by reference.
10.3 -- Lease Agreement, dated September 1, 1978, between the Company and
Madeline Day, filed as Exhibit No. 10.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-79898)
and incorporated herein by reference.
10.4 -- Lease Agreement, dated March 15, 1986, as amended on June 21,
1995, between the Company and Lux/Day Northport, Ltd., filed as
Exhibit No. 10.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------
<S> <C>
10.5 -- Lease Agreement, dated June 8, 1989, between the Company and
Robert Greenlee, and Assignment, dated March 23, 1990, by Robert
Greenlee to the 1123 Walnut Corporation, filed as Exhibit No.
10.5 to the Company's Registration Statement on Form S-1
(Registration No. 33-79898) and incorporated herein by reference.
10.6 -- Lease Agreement, dated August 29, 1990, between the Company and
C.B. Partnership, filed as Exhibit No. 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 33-79898)
and incorporated herein by reference.
10.7 -- Lease Agreement, dated May 9, 1995, between the Company and Old
Chicago Colorado Springs Limited Partnership, filed as Exhibit No.
10.7 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
10.8 -- Executive Bonus Plan, filed as Exhibit No. 10 to the Company's
Form 10-Q for the quarterly period ended June 30, 1996, and
incorporated herein by reference.
10.9 -- Real Estate Mortgage, dated June 27, 1996, between the Company and
Lakeside Bank, together with Promissory Note, filed as Exhibit No.
10 to the Company's Form 10-Q, as amended, for the quarterly
period ended September 29, 1996.
10.10 -- Loan Agreement for $20,000,000 Revolving Line of Credit from
Norwest Bank Colorado, National Association, First Security Bank
of Idaho, N.A., and West One Bank, Idaho to Rock Bottom
Restaurants, Inc., dated July 2, 1996, filed as Exhibit No. 2.1 to
the Company's Form 8-K dated July 2, 1996, and incorporated herein
by reference.
10.11 -- Stock Purchase Agreement, dated June 4, 1996, between Rock Bottom,
Trolley Barn, TBB Acquisition Group, Inc., TBB Holding Company,
and the TBB Shareholders, filed as Exhibit No. 2.2 to the
Company's Form 8-K dated July 2, 1996, and incorporated herein by
reference.
10.12 -- Lease Agreement, dated June 25, 1996, between the Company and
Dulcet L.L.C., Elaine C. Wong and Eugene B. Weisman, filed as
Exhibit No. 10.12.
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------
<S> <C>
21 -- Subsidiaries of the Company:
Old Chicago of Colorado, Inc., a Colorado corporation; Old
Chicago of Westminster, Inc., a Colorado corporation; Old
Chicago of Kansas, Inc., a Kansas corporation. Rock Bottom of
Minneapolis, Inc., a Colorado corporation; Rock Bottom of Texas,
Inc., a Texas corporation; Wadsworth Old Chicago, Inc., a
Colorado corporation; Walnut Brewery, Inc., a Colorado
corporation; Rock Bottom Kansas LLC, a Kansas limited liability
company.
23.1 Consent of Arthur Andersen LLP filed as Exhibit No. 23.1
27 Financial Data Schedule, filed as Exhibit No. 27
(b) Reports on Form 8-K. There were no reports filed on Form 8-K
during the fourth quarter of 1996.
(c) Exhibits.
See Item 14(a)(3) above.
(d) Financial Statement Schedules.
All financial statement schedules are omitted as they are not
applicable to the Company.
</TABLE>
44
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Louisville, State of Colorado.
ROCK BOTTOM RESTAURANTS, INC.
Date: March 25, 1997
By: /s/ THOMAS A. MOXCEY
Thomas A. Moxcey
Chief Executive Officer
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
------------------------ ------------------------------- --------------
<S> <C> <C>
/s/ FRANK B. DAY
------------------------
Frank B. Day Chairman of the Board March 25, 1997
/s/ THOMAS A. MOXCEY
------------------------
Thomas A. Moxcey President, Chief Executive March 25, 1997
Officer and Director
(Principal Executive Officer)
/s/ WILLIAM S. HOPPE
------------------------
William S. Hoppe Executive Vice President, Chief March 25, 1997
Financial Officer and Treasurer
(Principal Financial Officer)
/s/ THERESA D. SHELTON
------------------------
Theresa D. Shelton Vice President Finance and March 25, 1997
Assistant Secretary
(Principal
Accounting Officer)
/s/ ROBERT D. GREENLEE
------------------------
Robert D. Greenlee Secretary and Director March 25, 1997
/s/ DAVID M. LUX
------------------------
David M. Lux Director March 25, 1997
/s/ GERALD HORNBECK
------------------------
Gerald Hornbeck Director March 25, 1997
/s/ MARY C. HACKING
------------------------
Mary C. Hacking Director March 25, 1997
/s/ ARTHUR WONG
------------------------
Arthur Wong Director March 25, 1997
/s/ DUNCAN H. COCROFT
------------------------
Duncan H. Cocroft Director March 25, 1997
</TABLE>
45
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- -----------------------------------------
<S> <C>
10.12 Lease Agreement, dated June 25, 1996, between the Company
and Dulcet L.L.C., Elaine C. Wong and Eugene B. Weisman.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
48
<PAGE> 1
EXHIBIT 10.12
RESTAURANT LEASE AGREEMENT
Between
DULCET L.L.C., an Iowa limited liability company, ELAINE C. WONG &
EUGENE B. WEISMAN, as Landlord
and
WADSWORTH OLD CHICAGO, INC., as Tenant
THIS RESTAURANT LEASE AGREEMENT (the "Lease), made and entered into this
25th day of June, 1996, by and between Dulcet L.L.C., an Iowa limited liability
company, Elaine C. Wong and Eugene B. Weisman, (hereinafter collectively
referred to as "Landlord"), and, Wadsworth Old Chicago, Inc.., a Colorado
corporation, ( "Tenant"), upon the following terms and conditions:
ARTICLE I
FUNDAMENTAL LEASE PROVISIONS
The following is intended as a summary of the fundamental terms of the
Lease. In the event of any conflict between this summary and the actual terms
of the Lease, the terms of the Lease shall control:
1.01 RESTAURANT'S NAME: Wadsworth Old Chicago, Inc., d/b/a/
Old Chicago
1.02 LEASED PREMISES:
-Address Lot 2, Signature Inns Addition to the City
of Bettendorf, Iowa, a/k/a
3030 Utica Ridge Road
Bettendorf, Iowa
1.03 TENANT'S NAME AS IT
APPEARS ON LEASE,
ADDRESS AND PHONE: Wadsworth Old Chicago, Inc., a Colorado
corporation
1050 Walnut St. - Suite 402
Boulder, CO 80302
Phone: (303) 417-4000
Fax: (303) 417-4199
<PAGE> 2
1.04 LANDLORD'S NAME
ADDRESS, PHONE & Dulcet, L.L.C
FAX ATTN: David E. Carpenter
P.O. Box 216, West Liberty, Iowa 52776
Phone: (319) 627-4101
Fax: (319) 627-4403
Elaine C. Wong
1240 Hyde Park Boulevard
Chicago, IL 60615
Phone: (312) 464-9002
Fax: (312) 464-9004 (c/o Arthur Wong)
Eugene B. Weisman
3150 North Lakeshore Drive - Room 34C
Chicago, IL 60657
Phone: (312) 975-1456
Fax: (312) 464-9004 (c/o Arthur Wong)
1.05 AGENT/MANAGER
(Name, address, phone
and Fax) Dulcet, L.L.C
ATTN: David E. Carpenter
P.O. Box 216, West Liberty, Iowa 52776
Phone: (319) 627-4101
Fax: (319) 627-4403
1.06 SQUARE FOOTAGE
LEASED: Five thousand four hundred and sixty eight
(5,468) SF, as expanded.
1.07 DATE LEASE SIGNED: June 25, 1996
1.08 DATE LEASE COMMENCES: The date Landlord takes possession of the
Premises.
1.09 DATE RENT COMMENCES: Tenant's obligation to pay rent shall commence
upon the day Landlord closes on the purchase of
the Property.
1.10 INITIAL LEASE TERM: The fractional period for the first month of
possession plus One hundred eighty (180) MONTHS
1.11 INITIAL TERM ENDS: July 1, 2011
2
<PAGE> 3
1.12 BASE RENT:
Years 1-5 $ 75,000/yr. $ 6,250.00/mo
Years 6-10 $ 84,938/yr $ 7,078.17/mo
Years 10-15 $ 96,192/yr $ 8,016.00/mo
1.13 GROSS OR NNN LEASE: NNN lease
1.14 RENT INCREASE FORMULA: As described in Section 1.12, above.
1.15 (Intentionally Omitted)
1.16 UTILITIES: Paid by Landlord: None:
------------------------------------
Paid by Tenant: All
1.17 REPAIR & MAINTENANCE RESPONSIBILITIES: All maintenance and repairs
to be paid by Tenant.
1.18 INSURANCE COVERAGE REQUIRED: $ 2,000,000 Liability
$ As required by state law.
$ Full replacement value for
casualty/natural disaster.
1.19 RENEWAL OPTIONS: Four (4) TERMS OF Sixty
(60) MONTHS EACH.
1st 5-year option: $108,937/yr
2nd 5-year option: $123,371/yr
3rd 5-year option: $139,718/yr
4th 5-year option: $158,231/yr
1.20 CONSENT REQUIRED FOR:
-Assignment/Sublet: Yes
-Physical Changes to Structure: Yes
3
<PAGE> 4
ARTICLE II
GRANT, TERM AND OPTIONS TO EXTEND
2.1 LEASED PREMISES. Landlord demises and leases to Tenant, and Tenant
leases from Landlord: A. The building outlined in red on Exhibit A (as well as
the area of the building to be expanded by Tenant) and referred to as 3030 Utica
Ridge Road, Bettendorf, Iowa (the "Leased Premises" or the "Premises), which is
located on the real property legally described in Exhibit B attached hereto
(said real property and the buildings and improvements located thereon from time
to time herein called the "Property"). The Leased Premises consist of
approximately five thousand four hundred sixty eight (5,468) square feet. B.
The Property. Included in the items covered by this Lease are the furniture,
fixtures and equipment (referred to hereinafter as FF&E) presently located on
the Premises which have previously been conveyed to Landlord and which are
described in Exhibit C attached hereto and incorporated herein by this
reference. Landlord acknowledges that Tenant may treat said FF&E as its own in
that it may sell, destroy or use all or any portion of same.
2.02 USE OF COMMON AREAS. (Not applicable)
2.03 CLOSING AND POSSESSION DATE. Landlord shall deliver possession of the
Premises to Tenant in accordance with the Agreement Regarding Assignment of
Purchase Contract between the parties dated June 25, 1996. It is the intent
of the parties that possession of the Property be delivered simultaneously with
the closing by Landlord of the purchase of the Property, currently expected to
be June 27, 1996.
2.04 COMMENCEMENT OF RENTAL. Tenant's obligation to pay rent shall
commence the day the Tenant takes possession of the Premises.
2.05 LENGTH OF TERM. The term of this Lease shall be for a period of one
hundred eighty (180) months, commencing with the commencement date determined
in accordance with the terms of the Rider if said date shall occur on the first
day of a calendar month. If said commencement date is other than the first day
of the month, the first year of the lease term shall be deemed to be extended
to include such partial month and the following twelve months, so as to end on
the last day of the month.
2.06 OPTIONS TO RENEW. Provided Tenant shall not then be in material
default hereunder, Tenant shall have the option to extend the term of the Lease
for four (4) additional terms of sixty (60) months each upon the same terms and
conditions herein contained, except the fixed minimum monthly rental shall be
as specified in the Section 1.19, above. To exercise its option hereunder,
Tenant shall deliver notice of said election to Landlord at least Ninety (90)
days prior to the expiration of the then existing term hereof. If Tenant
elects not to exercise an option to extend hereunder, Tenant will deposit with
Landlord a sum equal to two (2) months' rent ninety (90) days prior to the
expiration of the current term. Said amount is intended as a security deposit
and shall be returned to Tenant no later than thirty (30) days
4
<PAGE> 5
from delivery of possession of the Premises to Landlord, less any amounts
lawfully retainable by Landlord as a result of damage to the Property.
2.07 LANDLORD CONTRIBUTION TO TENANT IMPROVEMENTS. (Not applicable.)
ARTICLE III
RENT
3.01 ANNUAL RENTAL. Annual rental hereunder shall be as set forth in
Section 1.12, above and is payable in equal monthly installments, also as set
forth in Section 1.12, above, in advance, on the first day of each and every
month throughout the lease term at the office of Agent/Manager as set forth in
paragraph 1.05 hereof, or at such other place designated by Landlord, without
prior demand. Base rental for any fractional month shall be prorated and
payable in advance. Monthly rental shall commence on the date of the closing
referenced in 2.03, above.
3.02 TAX AND INSURANCE ADJUSTMENT. Tenant shall, for each Lease Year, pay
to Landlord as additional rent real estate taxes and assessments and all
insurance for the Property. Landlord shall notify Tenant of the amount of such
assessment and Tenant shall pay Landlord such amounts within thirty (30) days
from the date of notice to it by Landlord. Additionally, with respect to
taxes:
(a) Right to Contest Assessments. Tenant may, at its expense, contest any
and all such real estate taxes in the name of and on behalf of the Landlord.
(b) Municipal, County, State or Federal Taxes. Tenant shall pay, before
delinquency, all municipal, county and state or federal taxes assessed against
any leasehold interest of Tenant or any fixtures, furnishings, equipment,
stock-in-trade or other personal property of any kind owned, installed or used
in or on the Property.
(c) Rental Taxes. Tenant shall not be responsible for any income,
inheritance or estate taxes imposed on Landlord or the income of Landlord.
ARTICLE IV
CONDITION OF PREMISES AT COMMENCEMENT OF LEASE
AND
CLEANING AND REPAIR OF LEASED PREMISES
4.01 LANDLORD'S AND TENANT'S WORK. The obligations of Landlord and Tenant
with respect to the construction and improvement of the Property shall be in
accordance with the provisions of Exhibit D. All work by Landlord and Tenant
shall comply with all applicable statutes, ordinances, regulations, and codes.
5
<PAGE> 6
4.02 ACCEPTANCE OF LEASED PREMISES. Landlord and Tenant warrant and
represent, each to the other, that they have each made certain investigations
concerning the condition of the Property including, without limitation, the
environmental condition of the Property, and that they have disclosed, each to
the other, all results of such investigations, as well as any other information
each may have which is relevant to the condition of the Property. Subject to
such representations, the occupancy by Tenant of the Property shall be deemed
to be an acceptance of same.
ARTICLE V
CONDUCT OF BUSINESS BY TENANT
5.01 USE OF PREMISES. Tenant shall use the Leased Premises for the purpose
of a sit down restaurant with full service bar and entertainment, and for any
other business or purpose permitted by law. The foregoing language
notwithstanding, Tenant will not conduct in the Premises a second hand store,
auction, distress or fire sale or bankruptcy or going-out-of-business sale,
topless bar or restaurant, adult movie or book store, or any business in
violation of the laws of the United States of America, the State of Iowa, or
the ordinances, regulations and lawful requirements of the City of Bettendorf,
Iowa, or other lawful authorities having jurisdiction over the Premises. In
any event, Tenant's initial use of the Premises shall be as an Old Chicago
restaurant. The foregoing notwithstanding, Tenant shall not use the Premises
for any operation primarily used as a storage warehouse operation, or any
assembling, manufacturing, refining, smelting, agricultural or mining
operation; for any dumping, disposing, incineration, or reduction of garbage
(exclusive of garbage compactors located near the rear of a building); for any
living quarter, sleeping apartments, or lodging rooms; for any veterinary
hospital or animal raising facilities (except that this prohibition shall not
prohibit pet shops); for any establishment selling or exhibiting pornographic
materials or drug- related paraphernalia; or for any flea market.
ARTICLE VI
COMMON USE FACILITIES
(Not Applicable)
ARTICLE VII
SIGNS, ALTERATIONS, ADDITIONS AND IMPROVEMENTS
7.01 ALTERATIONS, ADDITIONS AND IMPROVEMENTS. After the initial renovation
or remodeling of the Premises, which renovation shall be in substantial
accordance with the plans and specifications approved by Landlord and attached
hereto and incorporated
6
<PAGE> 7
herein by this reference as Exhibit D, Tenant shall not, without Landlord's
prior written consent, either make or cause to be made any alterations,
additions, or improvements to the Property or to any exterior signs, shades, or
awnings which in any one instance involve a cost in excess of $50,000.
Landlord's consent shall not be unreasonably withheld so long as such
alterations do not diminish the value of the Property, it being the
understanding and agreement of the parties that alterations or modifications
which are consistent with a commercial use of the Property or the Premises will
not be deemed to reduce the value of the Property. In the event Landlord's
consent is required under this paragraph 7.01, Tenant shall present to Landlord
plans and specifications for such work at the time approval is sought, and
prior to commencement of construction. Any plans and specifications not
expressly disapproved by Landlord, in writing, on or before the fifteenth
(15th) day after submission by Tenant shall be deemed approved.
As a further condition to Landlord's consent to alterations,
additions, or improvements, Tenant shall, as required or permitted by Iowa law,
advise all subcontractors, suppliers, materialmen, and laborers that they shall
not have the right to file a Mechanic's Lien against the Property owned by the
Landlord. The Tenant hereby agrees to hold the Landlord harmless from any and
all liabilities of every kind and description which may arise out of or be
connected in any way with said alterations, additions, or improvements. Before
commencing any work in connection with alterations, additions, or improvements,
the Tenant, if requested by Landlord, and only in those instances when
Landlord's consent is required hereunder, shall furnish the Landlord with
certificates of insurance from all contractors performing labor or furnishing
materials insuring the Landlord against liabilities which are customarily
covered by such insurance and which may arise out of or be connected in any way
with said additions, alterations, or improvements, except such liabilities as
may arise from the negligent act or failure to act of Landlord, its agents,
representatives, employees or servants.
7.02 TENANT SHALL DISCHARGE ALL LIENS. Tenant shall promptly pay its
contractors and materialmen for all work done and performed for Tenant, so as
to prevent the assertion or imposition of liens upon or against the Property,
and should any such lien be asserted or filed, Tenant shall bond against or
discharge the same within thirty ((30) business days after written request by
Landlord.
7.03 SIGNS, AWNINGS, CANOPIES, BILLIARD TABLES AND SATELLITE DISHES.
Tenant will not, without Landlord's prior written consent, place or suffer to
be placed or maintained on any exterior door or wall of the Leased Premises,
any sign, awning, or canopy, or advertising matter or other thing of any kind.
All signs, awnings, canopies, decorations, lettering, advertising matter, or
other thing so installed by Tenant shall at all times be maintained by Tenant,
at its expense, in good condition and repair. Tenant shall present to Landlord
plans and specifications for any of the above signs, awnings and canopies at
the time approval is sought, and prior to installation. Any plans and
specifications not expressly disapproved by Landlord, in writing, on or before
the fifteenth (15th) day after submission by Tenant shall be deemed approved.
In addition, Landlord has no objection to the use of billiard tables in the
Leased Premises or to the placement of satellite receptions dishes on the roof
of the Leased Premises. It is the understanding of the parties that it is
essential to Tenant that it utilize its customary trade dress on the Premises,
which trade dress has been reviewed and
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approved by Landlord. In any event, Landlord will not object to any signs or
advertising matter which are permissible under the rule of the local authority
having jurisdiction over such matters.
ARTICLE VIII
REPAIR AND MAINTENANCE OF LEASED PREMISES,
SURRENDER AND RULES
8.01 MAINTENANCE, REPAIR, AND REPLACEMENT BY TENANT. Tenant shall be
responsible for all maintenance and repair with respect to the Property,
including, without limitation (a) the roof, walls, foundation, and all
structural parts; (b) the interior of the Property, together with exterior
entrances, all glass, and all window moldings, (c) all fixtures, partitions,
interior ceilings, floor coverings, and utility lines within the Leased
Premises; (d) all doors, door openers, trade equipment and machinery,
appliances, signs, and appurtenances thereof; and, (e) landscaping, outside
lighting, and parking lot; in conformity with governmental regulations in good
order, condition, and repair, with Tenant failing to do so constituting a
default hereunder. If Tenant refuses or neglects to commence or complete
repairs, maintenance or replacements promptly and adequately, Landlord may make
or complete said repairs, maintenance or replacements and Tenant shall pay the
cost hereof to Landlord upon demand.
8.02 SURRENDER OF PREMISES. At the expiration of the tenancy hereby
created, Tenant shall peaceably surrender the Property, including all
alterations, additions, improvements, and repairs made thereto (but excluding
all trade fixtures, decorations, hoods, furniture, equipment, signs, and other
personal property installed by Tenant), broom clean and in good condition and
repair, reasonable wear and tear and damage by casualty excepted. Tenant shall
remove all its trade fixtures and any of its other property not required to be
surrendered to Landlord before surrendering the Property as aforesaid, and
shall repair any damage to the Property caused by such removal. Any personal
property remaining in the premises after the expiration of the lease period and
Tenant's vacation of the Property shall be deemed abandoned by Tenant and
Landlord may claim the same and shall in no circumstances have any liability to
Tenant therefor.
ARTICLE IX
INSURANCE AND INDEMNITY
9.01 LIABILITY INSURANCE. Tenant shall, at its cost and expense, at
all times during the term of this Lease maintain bodily injury and property
damage liability insurance covering the Property from acts or omissions which
are customarily insurable of Tenant, its employees, agents, representatives,
assigns, guests, invitees, persons in privity with Tenant, or licensees. Such
insurance policy shall be written for not less than $2,000,000 single limit of
liability for risks normally covered by comprehensive general liability
insurance for bodily injury and property damage combined with an annual
aggregate limit of not less than $2,000,000, and shall include Landlord as an
additional
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insured. Tenant shall deliver to Landlord a certificate of such insurance
which shall also contain a 30-day prior written notice of cancellation
provision. The limits on such insurance shall be re-indexed no more
frequently than once every 5 years so as to conform to the industry standard
and to the limits carried by other Old Chicago restaurants. Such insurance
shall be provided by a company or companies with an A.M. Best rating of not
less than A X, and authorized to do business in the state of Iowa.
Tenant shall also maintain liquor liability or "dram shop" insurance
as required by law.
9.02 WAIVER OF SUBROGATION. Each of the parties hereto does hereby release
the other party hereto from all liability for damage due to any act or neglect
of the other party (except as hereinafter provided) occasioned to property
owned by said parties which is or might be incident to or the result of a fire
or any other casualty against loss from which either of the parties is now
carrying or hereafter may carry insurance; provided, however, that the releases
herein contained shall not apply to any loss or damage occasioned by the
willful acts of either of the parties hereto. The parties further covenant
that any insurance obtained on their respective properties shall contain an
appropriate provision whereby the insurance company or companies consent(s) to
the mutual waiver of subrogation contained in this paragraph.
9.03 CASUALTY INSURANCE PREMIUMS. Tenant is responsible for the
maintenance of casualty insurance on the Property and Leased Premises for full
replacement value of the improvements thereon, excluding from such coverage the
cost of footings and foundations..
9.04 INDEMNIFICATION OF LANDLORD. Tenant will indemnify and save harmless
Landlord, its agents and servants, from and against any and all claims,
actions, damages, suits, judgments, decrees, orders, liability and expense in
connection with loss of life, personal injury and/or damage to property arising
from or out of any occurrence in, upon or about the Property, or in the
occupancy or use by Tenant of the Property or any part thereof, or occasioned
wholly or in part by any act or omission of Tenant, its agents, contractors,
employees, servants, subtenants, guests, invitees, persons in privity with
Tenant, or concessionaires, unless the same be caused by the willful or
negligent act or failure to act of Landlord its agents, servants, employees, or
persons or firms in privity with Landlord.
9.05 INDEMNIFICATION OF TENANT. Landlord agrees to hold harmless and
indemnify Tenant from and against any and all claims, demands, damages,
actions, suits, judgments, decrees, orders, and expenses arising out of or on
account of any damage or injuries sustained or claimed to have been sustained
to any person or property in or upon any of the common facilities of the
Property by any person whatsoever, unless the same shall be due to the willful
or negligent act or failure to act of Tenant, its agents, servants, employees,
or persons or firms in privity with Tenant.
9.06 PLATE GLASS. Tenant shall replace at its own expense any and all
plate and other glass in and about the Leased Premises damaged or broken from
any cause whatsoever.
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9.07 ADDITIONAL RENT. If Tenant shall not comply with its covenants made
in this Article 9, Landlord may cause insurance as aforesaid to be issued, in
such event Tenant agrees to pay as additional rent, the premium for such
insurance upon Landlord's demand.
ARTICLE X
UTILITIES
10.01 UTILITY CHARGES. Tenant shall be solely responsible for and promptly
pay all charges for heat, water, gas, sewer, electricity, or any other utility
or service used on or attributable to the Property.
ARTICLE XI
ASSIGNMENT AND SUBLETTING
11.01 CONSENT NOT REQUIRED. Tenant may voluntarily, or by operation of law,
assign this Lease in whole or in part, and may sublet all or any part of the
Leased Premises without the prior written consent of Landlord so long as the
Guarantor remains liable under the terms of the Lease and the Guaranty.
11.02 TRANSFERS PERMITTED. In the event that Landlord's consent is
required, Tenant shall forthwith notify Landlord in writing of Tenant's desire
to sublet or assign this Lease, including a summary of the proposed terms, or a
copy of any offer, as the case may be. Landlord shall have fifteen (15) days
to accept or reject said assignment or sublease. Any proposed sublease or
assignment not specifically disapproved by Landlord, in writing and specifying
all reasons for such disapproval and delivered to Tenant within said fifteen
(15) days, shall be deemed approved.
Tenant is a corporation, and any sale, transfer or other disposition of 51% or
more of the corporate stock shall be deemed to be an assignment.
Notwithstanding the foregoing restrictions, Tenant may sublet all or any
portion of the Leased Premises or assign this Lease to any corporation which is
a subsidiary or affiliate of, or more than seventy percent (70%) of whose
shares are owned by, Tenant or by any Guarantor of this Lease, without the
consent of Landlord. In the event of such a transfer, Tenant will notify
Landlord of the name, address and phone number of the sublessee or assignee.
In addition, in the event of such a transfer, Tenant shall remain liable under
the terms of this Lease.
Landlord acknowledges that Tenant is a wholly-owned subsidiary of Rock Bottom
Restaurants, Inc., the shares of which are publicly-traded. Sales of
stock via public trading shall not be deemed a "sale, transfer or other
disposition" within the meaning of this Article XI. Further, Tenant may
sublet all or any portion of the Leased Premises, or assign this Lease, to any
corporation or other entity which is a subsidiary of, or more than fifty
percent (50%) of whose shares are owned by and which is controlled by, Tenant
or Rock Bottom Restaurants, Inc., without the consent of Landlord. In the
event of such a transfer, Tenant will notify Landlord of the name, address and
phone number of the
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sublessee or assignee. In addition, in the event of such a transfer, Tenant
shall remain liable to Landlord under the terms of this Lease for the
performance by the sublessee or assignee. Any assignment, subletting,
mortgaging or hypothecation permitted hereunder or to which the Landlord has
consented shall be by written instrument under which the assignee, or sublessee
shall agree for the benefit of Landlord to be bound by and to perform this
Lease.
11.04 TRANSFERS BY LANDLORD. Landlord shall have the right to sell, convey,
transfer or assign all or any part of its interest in the real property and the
buildings of which the Property are a part or its interest in this Lease. All
covenants and obligations of Landlord under this Lease, except those already in
existence on the date of conveyance, shall cease upon the execution of such
conveyance, transfer or assignment, but such covenants and obligations shall
run with the land and shall be binding upon the subsequent owner or owners
thereof or of this Lease. All obligations incurred or in existence prior to
the date of transfer shall survive said transfer and remain the obligation of
Landlord.
11.05 NO RELEASE OF GUARANTOR. Any wording or implication herein to the
contrary notwithstanding, any assignment or subletting under this Article XI
shall not operate to release or waive the obligations of Tenant or any
Guarantor under this Lease.
ARTICLE XII
WASTE, GOVERNMENTAL REGULATIONS
12.01 WASTE OR NUISANCE. Tenant shall not commit or suffer to be committed
any waste upon the Property.
12.02 GOVERNMENTAL REGULATIONS. Tenant shall, at its sole cost and expense,
comply with all of the requirements pertaining to the operation of its business
as imposed by county, municipal, state, federal and other applicable
governmental authorities, now in force or which may hereafter be in force;
provided, however, requirements imposed on the Property in general or the
Leased Premises in general, and not required because of the nature of Tenant's
business, shall be complied with at the cost of Landlord. The foregoing
language notwithstanding, Tenant agrees that any requirements of the Americans
with Disabilities Act shall be met at Tenant's expense; likewise, a requirement
imposed on the Property in general or the Leased Premises in general, and not
imposed because of the nature of Tenant's business, but compliance with which
is triggered by a request by Tenant to remodel or otherwise change the
Property, and such request requires a building permit, shall be met at the
expense of Tenant.
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ARTICLE XIII
DESTRUCTION OF LEASED PREMISES
13.01 TOTAL OR PARTIAL DESTRUCTION. If the Leased Premises shall be
partially or totally destroyed by fire or other casualty insurable under full
standard fire and extended risk insurance, so as to become partially or totally
untenantable, the same (unless Landlord shall elect not to rebuild as
hereinafter provided) shall be repaired and restored by and at the cost of
Landlord, and a just and proportionate part of the rent, as provided for
hereinafter and as is reasonably acceptable to Tenant, shall be abated until
the Leased Premises are so restored.
If more than one-third (1/3) of the building in which the Leased Premises are
located shall be destroyed or damaged by fire or other casualty, and if the
unexpired portion of the term of this Lease shall be two (2) years or less at
the date of the damage, then Landlord may elect not to repair or rebuild by
giving written notice within thirty (30) days after such occurrence of its
election to terminate this Lease; otherwise, Landlord shall commence and pursue
diligently such reconstruction.
In the event that Landlord shall exercise the right given heretofore to
terminate, then this Lease and the terms hereof shall cease as of the date of
such damage or destruction, and all rent or other charges payable by Tenant
shall be prorated to the date of such damage or destruction. In the event that
this Lease is not canceled, then the rent shall be abated or reduced
proportionately during any period in which the Leased Premises are rendered
wholly or partially untenantable to the extent such damage or destruction shall
interfere with the operation of Tenant's business in the Leased Premises, as
determined in Tenant's reasonable business judgment. Such abatement or
reduction shall continue for the period commencing with such destruction or
damage and ending with Tenant's substantial completion of the work or repair or
restoration as Tenant is obligated or elects to do, as the case may be, and as
in this Article provided. In such event, Tenant shall commence the work with
due diligence and shall prosecute the same vigorously to completion.
13.02 PARTIAL DESTRUCTION OF PROPERTY. In the event that sixty percent (60)
or more of the gross leasable area in the Property shall be damaged or
destroyed by fire or other cause, notwithstanding that the Leased Premises may
be unaffected by such fire or other cause, Landlord shall have the right, to be
exercised by notice in writing delivered to the Tenant within thirty (30) days
after said occurrence, to cancel and terminate this Lease. Upon the giving of
such notice to Tenant, the term of this Lease shall expire as of the date of
the damage, and Tenant shall vacate the Leased Premises and surrender the same
to Landlord pursuant to the terms of the lease, allowing a reasonable period of
time for the closing of Tenant's business and the removal of Tenant's property
from the Premises.
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ARTICLE XIV
EMINENT DOMAIN
14.01 TOTAL CONDEMNATION. If the whole of the Leased Premises shall be
acquired or condemned by eminent domain for any public or quasi-public use or
purpose, or be conveyed in lieu of any such taking, or if a part of the Leased
Premises shall be so acquired or condemned, and if such partial taking or
acquisition renders the Leased Premises unsuitable for the business of Tenant,
in Tenant's reasonable business judgment, then the term of this Lease shall
cease and terminate as of the date of the taking, and all rentals shall be paid
up to that date.
14.02 TOTAL PARKING AREA. If the whole of the common parking areas in the
Property shall be acquired or condemned by eminent domain for any public or
quasi-public use or purpose, or be conveyed in lieu of any such taking, then
the term of this Lease shall cease and terminate as of the date of taking, and
all rentals shall be paid up to that date.
14.03 PARTIAL PARKING AREA. If such portion of the common parking areas in
the Property shall be acquired or condemned by eminent domain for any public or
quasi-public use or purpose, or be conveyed in lieu of any such taking, so as
to render the Leased Premises unsuitable for the continuation of Tenant's
business, in Tenant's reasonable business judgment, then the term of this Lease
shall cease and terminate as of the date of taking, and all rentals shall be
paid up to that date. Tenant agrees that the condemnation of 17 or fewer
parking spaces shall not be deemed to render the Leased Premises unsuitable for
continuation of Tenant's business, and would not entitle Tenant to terminate
this Lease; provided, however, Tenant would be entitled to a reduction in rent
to compensate for said lost parking.
14.04 PARTIAL CONDEMNATION. In the event of a partial taking, or conveyance
of the Leased Premises in lieu thereof, which is not extensive enough to render
the Leased Premises unsuitable for the business of Tenant, in Tenant's
reasonable business judgment, the Landlord, to the extent possible, shall
promptly restore the Leased Premises to a condition comparable to its condition
immediately prior to such taking (less the portion lost in the taking), and
this Lease shall continue in full force and effect. In such case, all rents
due hereunder shall, from the date of said taking or conveyance, be abated on a
fair and equitable basis to the extent of any reduction, if any, in the area of
the Leased Premises resulting from such taking and not restored, and also
taking into account the impact, if any, of the loss of parking on the Property.
14.05 DAMAGES. In the event of any condemnation, taking, or conveyance in
lieu thereof, as hereinbefore provided, whether whole or partial, Tenant shall
not be entitled to any part of the award or price, as damages or otherwise,
awarded to Landlord for such condemnation, taking, or conveyance, except to the
extent provided in Section 14.05. Tenant hereby expressly waives any right or
claim to any part thereof and assigns to Landlord its interest therein;
provided, however, that where the taking is such as results in a termination of
the Lease pursuant to other provisions of this Article, that, notwithstanding
anything herein to the contrary, Landlord shall not be entitled to that
portion, if any, of an award made to or for the
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benefit of Tenant for loss of Tenant's business or depreciation to and cost of
removal of its stock, trade fixtures and equipment which it is entitled to
remove. Tenant shall have no claim against Landlord for the value of any
unexpired term of this Lease.
14.06 TENANT'S DAMAGES. The foregoing language of Section 14.05
notwithstanding, Tenant shall have the right to claim and recover from the
condemning authority (but not from Landlord) such compensation as may be
separately awarded to Tenant in Tenant's own name and right on account of all
damages suffered by Tenant of any nature whatsoever, including, without
limitation, court costs and attorney's fees, by reason of the condemnation and
including any cost which Tenant may incur in removing its property from the
Leased Premises or restoring all or any portion of the Leased Premises to their
former condition.
ARTICLE XV
DEFAULT OF TENANT
15.01 DEFAULT. The following shall constitute an "Event of Default" under
this Lease:
(a) failure of Tenant to pay any rental or obligation due
hereunder within ten (10) days after the date due hereunder; or ,
(b) Tenant's failure to perform any other of the terms,
conditions or covenants of this Lease to be observed or performed by Tenant for
more than thirty (30) days after written notice thereof;,
(c) if Tenant or Guarantor shall become bankrupt or insolvent,
file or have filed against it any bankruptcy proceedings, or take or have taken
against it in any court pursuant to any statute, either of the United States or
of any state, a petition of bankruptcy or insolvency, or for reorganization or
for the appointment of a receiver or trustee of all or a portion of Tenant's or
Guarantor's Property, or if Tenant or Guarantor makes an assignment for the
benefit of creditors, or petitions for or enters into an arrangement; and shall
not withdraw, or have withdrawn, said filing or petition within sixty (60) days
of the date of filing; or ,
(d) If Tenant shall abandon the Leased Premises and shall fail to
pay sums due hereunder in a timely manner, or suffer this Lease to be taken
under any writ of execution.
If any Event of Default occurs, the Landlord, besides all such other rights or
remedies it may have at law or equity, shall, upon proper observance of all
requirements of law, have the right to enter the Property and take possession
thereof and of all permanent improvements thereon and may remove all persons
and property from the Property by force, summary action, or otherwise, and such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Tenant, all upon proper service of notice or
observance of all legal process. Tenant agrees to quit and deliver up the
possession of the Property, including permanent improvements to the Property,
when this Lease terminates.
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15.02 REMEDIES. If an Event of Default occurs, the Landlord may elect to
re-enter, as herein provided, or take possession pursuant to legal proceedings
or pursuant to any notice provided for herein, and it may either terminate this
lease, or it may from time to time without terminating this Lease make such
alterations and repairs as may be reasonably and commercially necessary in
order to relet the premises and relet said premises or any part thereof for
such term or terms (which may be for a term extending beyond the term of this
Lease) and at such rental or rentals and upon such other terms and conditions
as Landlord in its reasonable business judgment and discretion may deem
advisable. Upon each such reletting all rentals received by Landlord from such
reletting shall be applied first to the payment of any indebtedness other than
rent due hereunder from Tenant to Landlord; second to the payment of any costs
and expenses of such reletting, including brokerage fees and reasonable
attorneys' fees, and of costs of such alterations and repairs; third to the
payment of rent due and unpaid hereunder; and the residue, if any, shall be
held by Landlord and applied in payment of future rent as the same may become
due and payable hereunder from Tenant. If such rentals received from such
reletting during any month be less than that to be paid during that month by
Tenant hereunder, Tenant shall be liable for the payment of such deficiency to
Landlord. Such deficiency shall be calculated and become payable monthly. No
such re-entry or the taking of possession of the Property by Landlord shall be
construed as an election on its part to terminate this Lease or to accept a
surrender thereof unless a written notice of such intention be given to Tenant.
Notwithstanding any such reletting without termination, Landlord may at any
time thereafter elect to terminate this Lease for such previous breach. Should
Landlord at any time terminate this Lease for any Event of Default, in addition
to any other remedies it may have, it may recover from Tenant all damages it
may incur by reason of such breach, including the cost of recovering the
Property. Any reletting shall be done in such reasonable and commercially
prudent manner as Landlord may reasonably deem proper.
15.03 LEGAL EXPENSES. If suit shall be brought for recovery of possession
of Property, and/or the recovery of rent or any other amount due under
provisions of this Lease, or because of the breach of any other covenant herein
contained on the part of the Tenant to be kept or performed, and the breach
shall be established, Tenant shall pay to Landlord, in addition to all other
sums and relief available to Landlord, all expenses incurred therefor,
including reasonable attorneys' fees to the maximum extent permitted by law.
If suit shall be brought for the breach of any covenant herein contained on the
part of the Landlord to be kept or performed, and the breach shall be
established, Landlord shall pay to Tenant, in addition to all other sums and
relief available to Tenant, all expenses incurred therefor, including
reasonable attorneys' fees to the maximum extent permitted by law.
15.04 FAILURE TO PAY; INTEREST. If either party at any time shall fail to
pay any taxes, assessments, or liens, or to make any payment or perform any act
required by this lease to be made or performed by it, the party not required to
make the payment or perform the act, without waiving or releasing the
non-performing party from any obligation or default under this Lease, may (but
shall be under no obligation to) at any time thereafter make such payment or
perform such act for the account and at the expense of the non-performing
party. All sums so paid and all costs and expenses so incurred shall accrue
interest at a rate equal to the then
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"prime rate" as quoted in the Wall Street Journal for the month in which the
default occurs, plus three percent (3%) per month from the date of payment or
incurring thereof by the party making the payment or performing the obligation
of the non-performing party and shall be paid to the performing party upon
demand.
ARTICLE XVI
ACCESS BY LANDLORD
16.01 RIGHT OF ENTRY. Upon forty-eight (48) hours' prior written notice,
Landlord or Landlord's agents shall have the right to enter the Property at all
reasonable times to examine the same and to make such repairs, alterations,
improvements or additions as Landlord may reasonably deem necessary or
desirable, and Landlord shall be allowed to take all material into and upon said
Property that may be required therefor without the same constituting an eviction
of Tenant in whole or in part. During the six (6) months prior to the
expiration of the term of this Lease or any renewal term, Landlord may exhibit
the Property to prospective tenants. Nothing herein contained, however, shall
be deemed or construed to impose upon Landlord any obligation, responsibility or
liability whatsoever for the care, maintenance or repair of the Property or any
part hereof, except as otherwise herein specifically provided. Any other
language herein to the contrary notwithstanding, Landlord shall take no action
under the terms of the within Article which shall interfere with the conduct of
Tenant's business, cause inconvenience to Tenant's customers, or change or
interfere with the ingress/egress provided to and from the Leased Premises,
without Tenant's prior written consent, which consent shall be given or withheld
in Tenant's reasonable business judgment. Except in the case of emergency
repairs necessary to prevent or mitigate damage to the Premises, Landlord shall
not exercise any rights under this paragraph during Tenant's usual "busy" times,
being the lunch and dinner periods of the day. The foregoing language
notwithstanding, Landlord may enter the Property at any time and without prior
notice to make emergency repairs necessary to prevent or mitigate damage to the
Property.
ARTICLE XVII
TENANT'S PROPERTY
17.01 TAXES ON LEASEHOLD. Tenant shall be responsible for and shall pay
before delinquency all municipal, county, or state taxes assessed during the
term of this Lease against any leasehold interest or personal property of any
kind owned by or placed in, upon, or about the Property by Tenant.
17.02 LOSS AND DAMAGE. Landlord shall not be liable for any injury or
damage to persons or property resulting from fire, explosion, falling plaster,
steam, gas, electricity, water, rain or snow, or leaks from any part of the
Leased Premises, or from the pipes, appliances or plumbing works, or from the
roof, street or subsurface, or from any other place, or by dampness or by any
other cause of whatsoever nature, and whether originating in the Leased
Premises or elsewhere, unless the same be caused by the negligence or negligent
failure to act
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of Landlord, or Landlord's agents, representatives, employees, or others in
privity with Landlord. The terms of this paragraph notwithstanding, Landlord
shall not be liable by way of subrogation if the claim is barred or waived
under the waiver of subrogation provisions of this Lease. All property of
Tenant kept or stored on the Property shall be so kept or stored at the risk of
the Tenant only, and Tenant hereby holds Landlord harmless from any claims
arising out of damage to the same, including subrogation claims by Tenant's
insurance carrier, a waiver of which shall be obtained in advance by Tenant.
17.03 NOTICE BY TENANT. Tenant shall give reasonable notice to Landlord in
case of fire or accidents, or of defects in the Leased Premises or in the
Property of which the Leased Premises are a part.
ARTICLE XVIII
HOLDING OVER; SUCCESSORS
18.01 HOLDING OVER. In the event Tenant remains in possession of the
Property after the expiration of the tenancy created hereunder, and without the
execution of a new lease, Tenant, at the option of Landlord, shall be deemed to
be occupying the Property as a tenant from month to month, at the rate of one
hundred fifty percent (150%) of the Annual Rent for the last Lease Year of the
term, subject to all the other conditions, provisions and obligations of this
Lease insofar as the same are applicable to month-to-month tenancy.
18.02 SUCCESSORS AND ASSIGNS. Except as otherwise herein provided, this
Lease and all the covenants, terms, provisions and conditions herein contained
shall inure to the benefit of and be binding upon the heirs, representatives,
successors and assigns of each party hereto, and all covenants herein contained
shall run with the land and bind any and all successors in title to Landlord.
ARTICLE XIX
QUIET ENJOYMENT
19.1 LANDLORD'S COVENANT. Upon payment by Tenant of the rents herein
provided, and upon the observance and performance of all the covenants, terms
and conditions on Tenant's part to be observed and performed, Tenant shall
peaceably and quietly hold and enjoy the Property for the term hereby demised
without hindrance or interruption by Landlord or any other person or persons
lawfully or equitably claiming by, through, or under Landlord.
17
<PAGE> 18
ARTICLE XX
MISCELLANEOUS
20.01 WAIVER. The waiver by Landlord or Tenant of any breach of any term,
covenant or condition herein contained shall not be deemed to be a waiver of
any subsequent breach of the same or any other term, covenant or condition
herein contained. No covenant, term or condition of this Lease shall be deemed
to have been waived by Landlord or Tenant, as the case may be, unless such
waiver shall be in writing.
20.02 ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord
of a lesser amount than the monthly rent installments herein stipulated shall
be deemed to be other than on account of the earliest stipulated rent.
20.03 NO PARTNERSHIP OR OTHER ASSOCIATION. Landlord does not, in any way or
for any purpose, become a partner of Tenant in the conduct of its business or
otherwise, or joint venturer or a member of a joint enterprise with Tenant.
20.04 FORCE MAJEURE. In the event that either party hereto shall be delayed
or hindered in or prevented from the performance of any act required hereunder
by reason of strikes, lockouts, labor troubles, inability to procure materials,
failure of power, restrictive governmental laws or regulations, riots,
insurrection, war, or other reason of a like nature not the fault of the party
delayed in performing work or doing acts required under the terms of this
Lease, then the time allowed for performance of such act shall be extended by a
period equivalent to the period of such delay. The provisions of this Section
20.04 shall not operate to excuse Tenant from the prompt payment of rent or any
other payments required by the terms of this Lease.
20.05 LANDLORD'S AND TENANT'S LIABILITY. (Intentionally Omitted.)
20.06 NOTICES AND PAYMENTS. Any notice by Tenant to Landlord must be served
either by certified mail, postage prepaid, addressed to Landlord at the place
designated for the payment of rent, or at such other address as Landlord may
designate from time to time by written notice, or by facsimile transmission to
the facsimile number provided to Tenant in writing. Any notice by Landlord to
Tenant must be served either by certified mail, postage prepaid, addressed to
Tenant at its home office, 1050 Walnut Street, Suite 402, Boulder, CO 80302,
ATTN.: Vice-President-Real Estate, and to Tenant's General Manager at the
Leased Premises, or at such other address or addresses as Tenant may designate
from time to time by written notice to Landlord, or by facsimile transmission
to the facsimile number provided to Landlord in writing. Until otherwise
notified in writing, Tenant shall pay all rent reserved herein and all other
sums required under this Lease by check payable to the order of Landlord, and
shall forward the same to Landlord at:
Dulcet, L.L.C.
ATTN: David E. Carpenter
18
<PAGE> 19
P.O. Box 216,
West Liberty, Iowa 52776
Phone: (319) 627-4101
Fax: (319) 627-4403
If notice is provided by facsimile transmission before 12:00 noon, local time,
it shall be deemed delivered on the date transmitted. If transmission is after
12:00 noon local time, it shall be deemed delivered on the next business day.
Landlord acknowledges and agrees that notice as indicated above is deemed to be
notice to all persons and/or entities defined as "Landlord" pursuant to the
terms of this Lease, and that Tenant is not required to give notice to each of
the persons and/or entities so defined.
20.07 CAPTIONS AND SECTION NUMBERS. The captions, section numbers, article
numbers, and headings appearing in this Lease are inserted only as a matter of
convenience, and in no way define, limit, construe, or describe the scope or
intent of such sections or articles of this Lease.
20.8 DEFINITIONS. The word "Tenant" shall mean Wadsworth Old Chicago,
Inc., the corporation mentioned as a Tenant herein.
20.9 PARTIAL INVALIDITY. If any term, covenant, or condition of this
Lease, or the application thereof to any person or circumstance, shall to any
extent be invalid or unenforceable, the remainder of this Lease or the
application of such term, covenant, or condition of this Lease shall be valid
and enforceable to the fullest extent permitted by law.
20.10 RECORDING. A certificate or memorandum thereof prepared by Landlord,
may at the option and expense of Landlord be recorded. Tenant shall execute
any such certificate or memorandum which accurately reflects the terms of this
Lease upon request by Landlord.
20.11 ENTIRE AGREEMENT. The Lease, the exhibits and Rider set forth all the
covenants, promises, agreements, conditions and understandings between Landlord
and Tenant concerning the Property and there are no covenants, promises,
agreements, conditions or understandings, either oral or written, between them
other than as herein set forth. All prior communications, negotiations,
arrangements, representations, agreements and understandings, whether oral,
written or both, between the parties hereto, and their representatives, are
merged herein and extinguished, this Lease superseding and canceling the same.
Except as herein otherwise provided, no subsequent alteration, amendment,
change or addition to this Lease shall be binding upon Landlord or Tenant
unless reduced to writing and executed by the party against which such
subsequent alteration, amendment, change or modification is to be enforced. If
any provision contained in any Rider hereto is inconsistent with any printed
provisions of this Lease the provision contained in such Rider shall supersede
said printed provision.
19
<PAGE> 20
20.12 APPLICABLE LAW. This Lease and the rights and obligations of the
parties arising hereunder shall be construed in accordance with the laws of the
State of Iowa.
20.13 HAZARDOUS MATERIALS. Neither Landlord nor Tenant will store, use, or
dispose of any hazardous, toxic, corrosive, explosive, reactive or radioactive
matter in, on, or about the Property. Landlord and Tenant will comply with all
applicable environmental laws and permitting requirements impacting the
operations on the Property, and Landlord shall indemnify and hold harmless the
Tenant from any claims or actions, including, without limitation, costs,
reasonable attorneys' fees and costs of remediation, arising out of the
existence, or of Landlords use, storage or disposal of toxic or hazardous
materials at the Property or on or in the Leased Premises. In that regard,
each party acknowledges that the other party has disclosed all information
known to the disclosing party concerning the Property, including, without
limitation, the information set forth in the Phase I and Phase II environmental
assessments prepared by Preston Engineering, Inc. Tenant shall have no right
of termination arising out of any environmental condition on the Property
disclosed in Phase I and II Assessments prepared by Preston Engineering, Inc.,
at the request of Tenant and provided to Landlord.
ARTICLE XXI
SUBORDINATION
21.01 SUBORDINATION. Tenant agrees that this Lease and the estate of Tenant
hereby created may be made subject and subordinate to the lien of any mortgage
or mortgages hereafter placed upon the Property. Notwithstanding anything set
out in this Lease to the contrary, in the event the holder of any mortgage or
deed of trust elects to have this Lease superior to its mortgage or deed of
trust, then, upon Tenant being notified to that effect by such encumbrance
holder, this Lease shall be deemed prior to the lien of said mortgage or deed
of trust, whether this Lease is adopted prior to or subsequent to the date of
said mortgage or deed of trust; provided, however, neither the holder of the
encumbrance nor any person or entity claiming by or through said holder may
disrupt, terminate or otherwise interfere with Tenant's quiet possession of the
Property so long as Tenant keeps and performs the covenants of Tenant
hereunder. The agreements herein shall be self-operative and no further
instrument of subordination shall be required. However, upon demand by the
holder of any mortgage covering all or any part of the Property, Tenant shall
forthwith execute, acknowledge and deliver an agreement in favor of and in the
form customarily used by such encumbrance holder. The foregoing language
notwithstanding, Tenant shall not be required to sign, nor presumed to have
signed or agreed to, any document hereunder which does not contain in form
reasonably satisfactory to Tenant language which provides that notwithstanding
the subordination of the Lease to the
20
<PAGE> 21
encumbrance in question, neither the holder of the encumbrance nor any person
or entity claiming by or through said holder may disrupt, terminate or
otherwise interfere with Tenant's quiet possession of the Property so long as
Tenant keeps and performs the covenants of Tenant hereunder. Further, Landlord
shall obtain from all current holders of encumbrances against the Property a
statement that notwithstanding the subordination of the Lease to the
encumbrance in question, neither the holder of the encumbrance nor any person
or entity claiming by or through said holder may disrupt, terminate or
otherwise interfere with Tenant's quiet possession of the Property so long as
Tenant keeps and performs the covenants of Tenant hereunder. Landlord will
provide to Tenant Landlord's lender's form of subordination, non- disturbance
and attornment agreement, and the Tenant shall execute the same in conformance
with the terms of this paragraph.
Landlord reserves the right, without notice to or consent of Tenant, to
assign this Lease and/or any and all rents hereunder as security for the
payment of any mortgage loan, deed of trust loan, or other method of financing
or refinancing.
21.02 NOTICE TO LANDLORD OF DEFAULT. In the event of any act or omission by
Landlord which would give Tenant the right to terminate this Lease, or make any
claim against Landlord for the payment of money, Tenant will not make such
claim or exercise such right until it has given written notice of such act or
omission to the Landlord, and after fifteen (15) days shall have elapsed
following the giving of such notice, during which Landlord has not commenced
diligently to remedy such act or omission or to cause the same to be remedied.
21.03 ESTOPPEL CERTIFICATE. Tenant agrees, no more frequently than
annually, upon not less than ten (10) business days' prior notice by Landlord,
to execute, acknowledge and deliver to Landlord, a statement in writing
addressed to Landlord or other party designated by Landlord certifying that
this Lease is in full force and effect (or, if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), stating the actual commencement and expiration dates of the
lease, stating the dates to which rent, and other charges, if any, have been
paid, that the Property have been completed on or before the date of such
certificate and that all conditions precedent to the lease taking effect have
been carried out, that Tenant has accepted possession, that the lease term has
commenced, Tenant is occupying the Property and is open for business, and
stating whether or not to the best of Tenant's knowledge and belief there
exists any default by either party in the performance of any covenant,
agreement, term, provision or condition contained in this Lease, and, if so,
specifying each such default of which the Tenant may have knowledge and the
claims or offsets, if any, claimed by the Tenant, it being intended that any
such statement delivered pursuant hereto may be relied upon by Landlord or a
purchaser of Landlord's interest and by any mortgagee or prospective mortgagee
of any mortgage affecting the Leased Premises or the Property. If an estoppel
certificate is requested more frequently than annually, any expenses associated
therewith shall be borne by Landlord.
21.04 ATTORNMENT. Tenant agrees that no foreclosure of a mortgage affecting
the Leased Premises, nor the institution of any suit, action, summary or other
proceeding against the Landlord herein, or any successor Landlord, or any
foreclosure proceeding brought by the holder of any such mortgage to recover
possession of such property, shall by operation of law or otherwise result in
cancellation or termination of this Lease or the obligations of the Tenant
hereunder, and upon the request of the holder of any such mortgage, Tenant
covenants and agrees to execute an instrument in writing satisfactory to such
party or parties or to the
21
<PAGE> 22
purchaser of the mortgaged premises in foreclosure whereby Tenant attorns to
such successor in interest. The foregoing language notwithstanding, Tenant
shall not be required to sign, nor presumed to have signed or agreed to, any
document hereunder which does not contain in form reasonably satisfactory to
Tenant language which provides that notwithstanding the attornment document,
neither the holder of the document nor any person or entity claiming by or
thorough said holder may disrupt, terminate or otherwise interfere with
Tenant's quiet possession of the Property so long as Tenant keeps and performs
the covenants of Tenant hereunder.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease, consisting of
23 pages, Exhibits A, B, C, and D, as of the day and year first above written.
LANDLORD: TENANT:
DULCET, L.L.C, an Iowa limited WADSWORTH OLD CHICAGO, INC.
liability company
BY: BY:
-------------------------------------- ------------------------------
David E. Carpenter, Thomas A. Moxcey, President
Member/Manager
- ----------------------------------------
Elaine C. Wong, by David E. Carpenter,
her agent and attorney in fact.
- ----------------------------------------
Eugene B. Weisman, by David E. Carpenter,
his agent and attorney in fact.
22
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated January 31, 1997 included in this Form 10-K,
into the Company's previously filed Registration Statement on Form S-8 (No.
33-94256) of the Rock Bottom Restaurants, Inc. Non-Employee Directors' Stock
Option Plan dated June 3, 1994 and Rock Bottom Restaurants, Inc. Equity
Incentive Plan dated June 3, 1994.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
March 25, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 29,1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 849,104
<ALLOWANCES> 0
<INVENTORY> 2,206,139
<CURRENT-ASSETS> 16,180,458
<PP&E> 82,217,349
<DEPRECIATION> (9,942,059)
<TOTAL-ASSETS> 84,947,939
<CURRENT-LIABILITIES> 7,592,290
<BONDS> 11,563,619
0
0
<COMMON> 79,055
<OTHER-SE> 65,257,677
<TOTAL-LIABILITY-AND-EQUITY> 84,947,939
<SALES> 109,230,145
<TOTAL-REVENUES> 109,230,145
<CGS> 27,099,911
<TOTAL-COSTS> 103,875,021
<OTHER-EXPENSES> 1,364
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 300,544
<INCOME-PRETAX> 5,503,392
<INCOME-TAX> 1,478,309
<INCOME-CONTINUING> 4,025,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,025,083
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
