UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-24502
ROCK BOTTOM RESTAURANTS, INC.
(Exact name of the registrant as specified in its charter)
Delaware 84-1265838
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
248 Centennial Parkway, Suite # 100, Louisville, Colorado 80027
(Address of principal executive offices) (Zip Code)
(303) 664-4000
(Registrant's telephone number
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
As of November 10, 1998, the Registrant had outstanding 8,056,085 shares of
common stock, par value $.01 per share.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998
Page
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets-
September 27, 1998 and December 28, 1997 3-4
Condensed Consolidated Statements of Operations-
Three Months and Nine Months Ended
September 27, 1998 and September 28, 1997 5
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended September 27, 1998
and September 28, 1997 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-20
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signature page 21
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 27, December 28,
ASSETS 1998 1997
------ ------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 699,682 $ 1,622,537
Accounts receivable, net 240,850 938,932
Accounts receivable--affiliates 115,396 116,543
Preopening costs, net 947,677 1,520,253
Inventories 2,433,296 2,726,983
Prepaids and other current assets 1,313,965 1,613,374
Current deferred income taxes, net 219,214 219,214
------------- ------------
Total current assets 5,970,080 8,757,836
------------- ------------
PROPERTY AND EQUIPMENT:
Land 4,190,770 5,885,711
Buildings 4,827,001 4,447,161
Leasehold and building improvements 54,127,554 50,654,171
Furniture, fixtures and equipment 45,488,475 43,919,404
Construction-in-progress 5,782,102 2,719,135
Accumulated depreciation and amortization (22,369,475) (17,395,218)
------------ ------------
Total property and equipment, net 92,046,427 90,230,364
------------ ------------
INVESTMENT IN JOINT VENTURE, net 5,929,537 5,552,632
------------ ------------
ASSETS HELD FOR DISPOSITION 4,020,394 --
------------ ------------
OTHER ASSETS 583,065 735,936
------------ ------------
DEFERRED INCOME TAXES, net 2,384,809 2,334,809
------------ ------------
TOTAL ASSETS $ 110,934,312 $ 107,611,577
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 27, December 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ --------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable-
Trade $ 3,262,097 $ 4,341,074
Construction projects 124,344 1,023,151
Accrued payroll and payroll taxes 3,765,398 2,311,990
Accrued taxes other than income tax 1,190,333 1,023,893
Current portion of accrued restructuring charges 1,301,528 2,447,260
Other accrued expenses 3,132,935 2,534,299
Current portion of long-term debt 161,364 115,308
Current portion of obligations under capital leases 246,291 519,924
------------- -------------
Total current liabilities 13,184,290 14,316,899
REVOLVING LINE OF CREDIT 27,600,000 26,450,000
LONG-TERM DEBT 2,266,228 2,374,533
OBLIGATIONS UNDER CAPITAL LEASES 2,706,506 1,757,462
ACCRUED RESTRUCTURING CHARGES 722,321 1,493,610
------------- -------------
Total liabilities 46,479,345 46,392,504
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares
authorized, none issued and outstanding -- --
Common stock - $.01 par value, 15,000,000 shares
authorized, 8,056,085 and 8,059,506 issued
and outstanding 80,560 80,595
Additional paid-in capital 58,287,943 58,320,330
Retained earnings 6,855,265 3,791,586
Deferred compensation (768,801) (973,438)
------------- -------------
Total stockholders' equity 64,454,967 61,219,073
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,934,312 $ 107,611,577
============ ============
</TABLE>
See accompanying notes.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Old Chicago restaurants $ 18,801,482 $ 19,886,204 $ 55,972,818 $ 54,544,241
Rock Bottom Restaurant & Brewery restaurants 22,427,428 20,844,770 63,893,924 56,310,583
---------- ---------- ----------- -----------
Total revenues 41,228,910 40,730,974 119,866,742 110,854,824
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 10,503,665 10,098,182 30,294,091 27,461,339
Restaurant salaries and benefits 13,837,063 14,058,229 40,106,328 37,816,241
Operating expenses 8,259,715 8,064,369 23,682,295 22,209,029
Selling expenses 1,254,895 1,398,715 3,789,737 4,041,730
General and administrative 2,641,161 1,775,585 7,780,566 5,479,026
Depreciation and amortization 2,371,497 3,270,684 8,289,036 8,743,122
Other operating expenses (income) (87,592) 5,165,685 19,790 5,165,685
---------- ---------- ----------- -----------
Total operating expenses 38,780,404 43,831,449 113,961,843 110,916,172
---------- ---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 2,448,506 (3,100,475) 5,904,899 (61,348)
Equity in joint venture earnings 194,516 90,000 494,516 240,000
Interest expense (554,008) (480,290) (1,877,843) (1,133,302)
Interest income 1,552 1,607 17,150 8,709
Other income, net 11 4 44 16
---------- ---------- ----------- -----------
INCOME (LOSS) BEFORE TAXES 2,090,577 (3,489,154) 4,538,766 (945,925)
Income tax expense (benefit) 679,426 (1,249,837) 1,475,087 (508,633)
---------- ---------- ----------- ------------
NET INCOME (LOSS) $ 1,411,151 $ (2,239,317) $ 3,063,679 $ (437,292)
=========== =========== ============ ===========
BASIC NET INCOME (LOSS)
PER SHARE $.18 $ (.28) $.38 $(.05)
=== === === ===
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 8,056,000 8,071,000 8,056,000 8,075,000
DILUTED NET INCOME (LOSS)
PER SHARE $.18 $(.28) $.38 $(.05)
=== === === ===
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 8,056,000 8,071,000 8,056,000 8,075,000
</TABLE>
See accompanying notes.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,063,679 $ (437,292)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Equity in joint venture earnings (494,516) (240,000)
Depreciation and amortization 8,289,036 8,743,122
Deferred income tax benefit (50,000) (2,258,591)
Loss on disposition of equipment 205,116 --
Amortization of deferred compensation, net of cancellations 189,548 --
Non-cash portion of restructuring charge -- 4,869,009
Revision of accrued restructuring charges (191,062) --
Decrease (increase) in accounts receivable 698,082 (285,818)
Decrease (increase) in inventories 293,687 (534,345)
Decrease (increase) in prepaids and other assets 298,278 (1,203,972)
Expenditures for preopening costs (1,192,254) (3,128,667)
(Decrease) increase in accounts payable (1,977,784) 3,227,412
Increase in accrued expenses 2,218,484 2,538,718
Decrease in accrued restructuring charges (598,678) --
----------- -----------
Net cash provided by operating activities 10,751,616 11,289,576
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (14,195,392) (27,843,068)
Proceeds from sale of property 2,100,000 1,975,307
(Repayments) advances from/to officers and affiliates, net 1,147 (35,928)
----------- -----------
Net cash used in investing activities (12,094,245) (25,903,689)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and revolving line of credit 23,750,000 38,600,000
Repayments of long-term debt and revolving line of credit (22,662,249) (23,346,663)
Repayments of capital lease obligations (667,977) (423,562)
Issuance of common stock -- 297,054
----------- -----------
Net cash provided by financing activities 419,774 15,126,829
----------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (922,855) 512,716
CASH AND CASH EQUIVALENTS, beginning of period 1,622,537 --
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 699,682 $ 512,716
=========== ==========
</TABLE>
See accompanying notes.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
(Unaudited)
(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the disclosures included herein are adequate to make the
information presented not misleading. A description of the Company's
accounting policies and other financial information is included in the
audited consolidated financial statements as filed with the Securities
and Exchange Commission in the Company's Form 10-K for the year ended
December 28, 1997.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of September
27, 1998, and the results of operations and cash flows for the periods
presented. All such adjustments are of a normal recurring nature. The
results of operations for the three and nine months ended September 27,
1998, are not necessarily indicative of the results that may be
achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
(2) ACCRUED RESTRUCTURING CHARGES
During the fourth quarter of 1997, the Company accrued certain
restructuring charges related to a strategic plan to reduce restaurant
expansion, suspend development of new Old Chicago restaurants and close
two Rock Bottom Restaurant & Brewery restaurants and two Old Chicago
restaurants during early 1998. Such steps were part of an overall
restructuring effort to improve restaurant operating profit.
During the second quarter of 1998, the Company settled its lease
obligation for the Old Chicago restaurant located in Gladstone,
Missouri, which was closed in January 1998, and has no further
obligations under the Gladstone lease. As the cost of this settlement
together with all other exit costs was less than the previously accrued
amount, income of approximately $14,000 is included in other operating
income in the accompanying 1998 condensed consolidated statement of
operations.
During the third quarter of 1998, the Company executed a sublease for
its Rock Bottom Restaurant & Brewery restaurant in Houston, Texas,
which was closed in February 1998. The sublease term runs from July
1998 to June 2001, with renewal options through August 2009.
Substantially all other provisions of the sublease agreement are
similar to the Company's obligations under its existing lease
agreement, which lease agreement expires August 2009. The Company also
conveyed certain assets to the sub-lessee in exchange for $100,000.
Based on the terms of this agreement, the Company revised its estimated
costs to close this restaurant. As such estimate was less than the
related accrued restructuring charge liability, income of approximately
$177,000 is included in other operating income in the accompanying 1998
condensed consolidated statement of operations.
<PAGE>
Subsequent to September 27, 1998, the Company executed an agreement
with a prospective buyer ("Buyer") of the property leased by the
Company for its Old Chicago restaurant in Evergreen, Colorado, which
closed during January 1998. The agreement provides for a full release
of the Company's obligations under the existing lease agreement, but is
contingent upon the Buyer purchasing the property.
Management believes that the remaining accrued restructuring charges
applicable to restaurants closed during the first quarter of 1998 are
sufficient to cover the related costs associated with the ultimate
disposition of all assets and obligations related to these locations.
(3) ASSETS HELD FOR DISPOSITION
Assets held for disposition represent the net book value of property
and equipment held for sale, disposition or future rental. Included in
this amount is approximately $1.5 million related to leasehold
improvements and equipment for the Rock Bottom Restaurant & Brewery
restaurant in Fresno, California, which restaurant was closed in
September 1998 (see Note 6), and approximately $1.3 million related to
land, building and improvements for the Old Chicago restaurant in
Salem, Oregon, which was closed in July 1998. Additionally,
approximately $1.2 million of property and equipment related to
restaurants closed in Houston, Evergreen and Overland Park, Kansas was
reclassified during the third quarter of 1998 to assets held for
disposition. The net book value of all assets held for disposition is
either less than or approximating fair value.
(4) REVOLVING LINE OF CREDIT
On June 29, 1998, the Company executed a third amendment to its bank
revolving credit facility (the "Credit Facility") primarily to modify
certain financial covenants and ratios, including the ratio for total
liabilities to tangible net worth.
(5) RECLASSIFICATIONS
Certain amounts in the accompanying December 28, 1997 condensed
consolidated balance sheet have been reclassified to conform to the
current period presentation.
(6) SUBSEQUENT EVENTS
Subsequent to September 27, 1998 the Company closed on the sale of
certain assets located at its Rock Bottom Restaurant & Brewery
restaurant in Fresno, California, including substantially all leasehold
improvements, furniture and equipment, and assigned to the buyer its
rights and obligations under the lease. The Company received proceeds
of $2.1 million from this transaction.
Additionally, the Company has entered into an agreement to sell its
indirect 50% equity interest in Trolley Barn Brewery, Inc. ("Trolley")
to Trolley for $7.0 million. In connection therewith, the Company will
be released from its guarantee of Trolley's debt, and Trolley's rights
to develop restaurants throughout the southeastern United States under
the Rock Bottom Restaurant & Brewery and Old Chicago names will be
terminated. However, the Company will grant certain license rights to
Trolley whereby Trolley can continue to use certain licensed
trademarks and tradenames owned by the Company for two existing
restaurant locations, such use to be limited to the duration of the
remaining lease terms, including option renewal periods. The Company
anticipates closing on the sale of this investment during the fourth
quarter of 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement under the "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
statements regarding:
-Sufficiency of liability for accrued restructuring charges;
-The effect of the sale of the brewery restaurant in Fresno,
California;
-Timing of the sale of the Company's indirect 50% equity
interest in Trolley;
-Restaurant expansion plans for 1998 and 1999;
-Estimated charge to earnings as a result of applying SOP 98-5;
-Ability of the Company to compete effectively within the
restaurant industry;
-Ability of new restaurants to achieve operating efficiencies;
-Percentage of revenues contributed by the brewery restaurants;
-Efforts to improve sales trends in certain brewery restaurants;
-Increase in operating expenses due to greater expenditures
for repairs;
-Increase in selling expenses as a percentage of revenues;
-Timing and results of cost reduction efforts, including the best
practices initiative;
-Estimated average construction costs for new restaurants opening
during 1998;
-Ability to complete sale-leaseback transactions for prototype
brewery restaurants and recover investment costs;
-Estimated capital expenditures in 1998;
-Ability to generate sufficient cash from operations to complete
financing of 1999 restaurant expansion;
-Ability of the Company to develop an effective implementation
plan for all Year 2000 issues.
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; acceptance in new markets; fluctuations in
consumer demand and tastes including a decrease in consumers' preference for
higher quality, more flavorful beer; competitive conditions in the Company's
markets; greater than expected costs associated with closing restaurants;
greater than anticipated preopening expenses incurred during 1998; timing and
extent of third and fourth quarter 1998 marketing promotions; general economic
conditions; adverse weather conditions; operating restrictions and costs
associated with governmental regulations; regulatory limitations regarding
common ownership of breweries and restaurants in certain states; ability to
identify all systems within the Company impacted by Year 2000 issues and to
provide the necessary financial and personnel resources to address all such
issues; 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
these forward-looking statements, whether as a result of new information, future
events, or otherwise.
<PAGE>
Overview
- --------
As of December 28, 1997, the Company operated a total of 63 restaurants
- - 42 Old Chicago restaurants and 21 Rock Bottom Restaurant & Brewery
restaurants. During the first nine months of 1998, the Company opened two
additional Rock Bottom Restaurant & Brewery restaurants in La Jolla, and Irvine,
California, and a ChopHouse & Brewery restaurant in Cleveland, Ohio. The Company
also closed three Old Chicago restaurants and three Rock Bottom Restaurant &
Brewery restaurants during 1998, and as of September 27, 1998 operated a total
of 60 restaurants - 39 Old Chicago restaurants and 21 Rock Bottom Restaurant &
Brewery restaurants. The following table identifies restaurants closed during
1998:
Qtr. Closed
Old Chicago restaurants:
Gladstone, Missouri (a) Q1 98
Evergreen, Colorado (a) Q1 98
Salem, Oregon Q3 98
Rock Bottom Restaurant & Brewery restaurants:
Houston, Texas (a) Q1 98
Overland Park, Kansas (a) Q1 98
Fresno, California Q3 98
(a) Estimated costs to close these restaurants were accrued as of
December 28, 1997.
During the second quarter of 1998 the Company executed a lease
settlement agreement with the owner of the Gladstone, Missouri restaurant and as
a result has no further obligations under the previously executed lease
agreement. During the third quarter of 1998, the Company began subleasing its
brewery restaurant in Houston, Texas. The sublease term runs from July 1998 to
June 2001, with renewal options through August 2009. Substantially all other
provisions of the sublease agreement are similar to the Company's obligations
under its existing lease agreement, which lease agreement expires August 2009.
As a result of these two transactions, the Company recognized income of
approximately $191,000 during the nine months ended September 27, 1998.
Subsequent to September 27, 1998, the Company executed an agreement with a
prospective buyer of the property leased by the Company for the restaurant in
Evergreen, Colorado. Such agreement would relieve the Company of all obligations
under this lease, but is subject to the prospective buyer's purchase of the
property. Management believes that the remaining accrued restructuring charges
for the Houston and Evergreen restaurants, as well as the restaurant in Overland
Park, Kansas, are sufficient to cover the related costs associated with the
ultimate disposition of all assets and obligations related to these locations.
During the third quarter of 1998, the Company closed restaurants in
Salem, Oregon and Fresno, California. The Company owns the property for the
restaurant in Oregon, and is actively pursuing the sale or rental of such
property. Subsequent to September 27, 1998, the Company closed on a sale of
certain assets located at the California restaurant including substantially all
leasehold improvements, furniture and equipment, and assigned to the buyer its
rights and obligations under the lease for approximately $2.1 million. The
Company expects to record a pre-tax gain on this sale during the fourth quarter
of 1998 of approximately $300,000.
The Company has entered into an agreement to sell its indirect 50%
equity interest in Trolley Barn Brewery, Inc. ("Trolley"), its joint venture
partner in the southeastern United States, to Trolley for $7.0 million. In
exchange, the Company will be released from its guarantee of Trolley's debt, and
Trolley's rights to develop restaurants throughout the southeastern United
States under the Rock Bottom Restaurant & Brewery and Old Chicago names will be
terminated. However, the Company will grant certain license rights that allow
Trolley to continue to use certain Company-owned trademarks and tradenames for
two existing restaurants owned by Trolley. The Company anticipates closing on
the sale of this investment during the fourth quarter of 1998.
The Company plans to open an additional brewery restaurant during the
fourth quarter of 1998 in Warrenville, Illinois, and had anticipated opening an
additional brewery restaurant during the fourth quarter in Bellevue, Washington.
The restaurant in Bellevue, however, is part of a location based entertainment
center, and as the Company must comply with the real estate developers'
construction schedule for completing certain aspects of its project, this
restaurant opening is now planned for the first quarter of 1999. Other
restaurant openings planned for 1999 include three brewery restaurant openings
in Phoenix, Arizona, San Diego, California and Arlington, Virginia, and two Old
Chicago restaurant openings in existing markets.
<PAGE>
The Company has historically leased its facilities and plans to lease
sites for a majority of its future restaurant locations. There can be no
assurance, however, that the Company will be able to identify suitable
restaurant sites, purchase sites or obtain leases on acceptable terms, or open
new restaurants on anticipated dates. Additionally, new restaurants 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 and are currently amortized over
twelve months, and restaurant salaries and benefits are two examples of these
increased costs.
The Accounting Standards Executive Committee of the AICPA issued a
statement of position entitled "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). This standard requires that the Company prospectively expense
preopening and other start-up costs as incurred, and is required to be applied
beginning with the Company's first quarter of 1999, although earlier adoption is
permitted. Restatement of prior periods is not required. Initial application of
SOP 98-5 will be reported as a cumulative effect of a change in accounting
principle. Based on deferred preopening and other start-up costs as of September
27, 1998, the cumulative effect to adopt this standard in the first quarter of
1999 would be approximately $1.4 million, less applicable income taxes.
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. For the three and nine month periods ended September 27,
1998 and September 28, 1997, the Company's net income equaled its comprehensive
income.
The Company operates in an extremely competitive environment.
Competitive factors include price-value, service, location, quality, selection
and atmosphere. Many competitors of the Company are well established and have
substantially greater financial and other resources than does the Company. Also,
the restaurant industry generally, and the Company in particular, is affected by
changes in consumer tastes, national, regional or local economic conditions,
weather conditions, demographic trends and traffic patterns.
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage
relationship to restaurant revenues of certain income statement data, and
certain restaurant data:
<TABLE>
<CAPTION>
Percentage of Revenues
----------------------
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Old Chicago restaurants.................................. 45.6% 48.8% 46.7% 49.2%
Rock Bottom Restaurant & Brewery restaurants............. 54.4 51.2 53.3 50.8
----- ----- ----- -----
Total revenues...................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating Expenses:
Cost of sales............................................ 25.5 24.8 25.3 24.8
Restaurant salaries and benefits......................... 33.6 34.5 33.4 34.1
Operating expenses....................................... 20.0 19.8 19.8 20.0
Selling expenses......................................... 3.0 3.4 3.2 3.6
General and administrative expenses...................... 6.4 4.4 6.5 4.9
Depreciation and amortization............................ 5.8 8.0 6.9 7.9
Other operating expenses (income)........................ (0.2) 12.7 0.0 4.7
----- ----- ----- -----
Total operating expenses............................ 94.1 107.6 95.1 100.0
----- ----- ---- -----
Income (Loss) From Operations............................... 5.9 (7.6) 4.9 0.0
Equity in joint venture earnings............................ 0.4 0.2 0.4 0.2
Interest expense............................................ (1.3) (1.2) (1.5) (1.0)
Interest income............................................. -- -- -- --
Other income................................................ -- -- -- --
----- ----- ----- ----
Income (Loss) Before Taxes.................................. 5.0 (8.6) 3.8 (0.8)
Income tax expense (benefit)................................ 1.6 (3.1) 1.2 (0.4)
----- ----- ----- -----
Net Income (Loss)........................................... 3.4% (5.5)% 2.6% (0.4)%
===== ===== ===== =====
Restaurant Data:
Restaurant operating weeks:
Old Chicago restaurants.................................. 505 544 1,547 1,512
Rock Bottom Restaurant & Brewery restaurants............. 278 259 803 676
--- --- ---- ----
Total............................................... 783 803 2,350 2,188
=== === ==== ====
Restaurants open (end of period):
Old Chicago restaurants.................................. 39 42
Rock Bottom Restaurant & Brewery restaurants............. 21 21
-- --
Total............................................ 60 63
== ==
</TABLE>
<PAGE>
Revenues
- --------
Revenues increased slightly (1.2%) to $41.2 million in the quarter
ended September 27, 1998 from $40.7 million for the comparable quarter in 1997.
For the nine months ended September 27, 1998, revenues increased $9.0 million
(8.1%) to $119.9 million from $110.9 million for the comparable period in 1997.
These increases are due primarily to revenues generated by the seven Rock Bottom
Restaurant & Brewery restaurants and seven Old Chicago restaurants opened during
fiscal 1997, and the three brewery restaurants opened during fiscal 1998. Such
increases were offset by a decrease in revenues of $2.3 million and $5.8 million
for the three and nine-month periods ended September 27, 1998, respectively,
resulting from the six restaurants closed during 1998. Additionally, comparable
restaurant sales for the third quarter of 1998 were flat, and were down slightly
less than 1% year to date. When computing comparable restaurant sales,
restaurants open for at least six full quarters are compared from year to year.
Revenues from the Company's Rock Bottom Restaurant & Brewery
restaurants, as a percentage of total revenues, increased to 54.4% for the
quarter ended September 27, 1998 as compared to 51.2% in the comparable period
of 1997, and for the nine months ended September 27, 1998 increased to 53.3%
from 50.8% in the first nine months of 1997. The increase to this percentage is
a result of the Company opening a greater number of brewery restaurants than Old
Chicago restaurants, and because the brewery restaurants generate greater
average weekly sales ("AWS"). The Company expects that the percentage of
revenues contributed by the Rock Bottom Restaurant & Brewery restaurants will
continue to increase as the Company anticipates opening more brewery restaurants
than Old Chicago restaurants.
AWS for the Old Chicago restaurants were $37,231 and $36,182
during the three and nine-month periods ended September 27, 1998, and were up
1.8% and 0.3% from the comparable periods of 1997. Comparable restaurant sales
for Old Chicago increased 1.7% during the third quarter of 1998 and 1.4% for the
first nine months of 1998. Management believes that the improvement in
comparable restaurant sales and AWS trends during 1998 is largely due to the
Company's efforts toward improving the overall dining experience in each of its
Old Chicago restaurants, and the Company's focus on local restaurant marketing
promotions to generate repeat business.
AWS for the Rock Bottom Restaurant & Brewery restaurants increased 0.2%
to $80,674 during the third quarter of 1998 as compared to the third quarter of
1997, and decreased 4.5% to $79,569 for the first nine months of 1998 as
compared to the comparable period of 1997. Comparable restaurant sales for 1998
decreased 2.1% during the third quarter and 3.4% during the first nine months.
Although AWS and comparable restaurant sales trends have improved during fiscal
1998, these sales trends reflect the increasingly competitive conditions in some
of the Company's key markets, and difficulties retaining market share due to
poor execution of the concept in some other markets. Efforts being made to
improve sales trends include menu revisions as part of the "best practices"
initiative (see "Cost of Sales"), reassessing the beer program to capitalize on
the consumers' changing interest in microbrewed beers, and implementing
marketing promotions specific to each restaurant's local community. The Company
has also begun an in-depth evaluation of its concept positioning using focus
groups and quantitative data gathering methods.
Cost of Sales
- -------------
Cost of sales, which consists of food, beverage, and merchandise costs,
increased $.4 million (4.0%) to $10.5 million in the third quarter of 1998 from
$10.1 million in the third quarter of 1997, and increased as a percentage of
revenues to 25.5% from 24.8% in the same period of 1997. For the nine months
ended September 27, 1998, cost of sales increased $2.8 million (10.3%) to $30.3
million from $27.5 million in the comparable period of 1997, and as a percentage
of revenues increased to 25.3% from 24.8% in the comparable period of 1997.
<PAGE>
The increase to cost of sales as a percentage of revenues during the
third quarter of 1998 is due to increases in the cost of cheese and other
commodities, and to certain non-recurring purchasing benefits received during
the third quarter of 1997. Additionally, during the first quarter of 1998, the
Company utilized assistance from an outside consultant to perform an assessment
of operating policies and procedures in the Company's kitchens. The "best
practices" developed from this assessment are focused on streamlining food
preparation procedures and introducing higher margin menu items. The increase to
cost of sales as a percentage of revenues during the first nine months of 1998
was partially due to higher food costs as a result of implementing new menus in
accordance with this initiative. The Company anticipated these higher costs as
several new menu items were either added or reengineered. This process resulted
in changes to several recipes and the related inefficiencies in yields and waste
resulted in an increase to food costs. The additional increase to cost of sales
as a percentage of revenues during the first nine months of 1998 is largely due
to greater food sales as a percentage of total sales. As the cost of sales for
food is greater than the cost of sales for beverage alcohol, an increase in
sales mix results in the increase to this percentage.
Restaurant Salaries and Benefits
- --------------------------------
Restaurant salaries and benefits, which consist of restaurant
management and hourly employee wages, payroll taxes, and group health insurance,
decreased $.2 million (1.6%) to $13.8 million in the third quarter of 1998 from
$14.1 million in the third quarter of 1997. For the nine months ended September
27, 1998 salaries and benefits increased $2.3 million (6.1%) to $40.1 million
from $37.8 million in the comparable period of 1997. Restaurant salaries and
benefits as a percentage of revenues decreased in both periods to 33.6% in the
third quarter of 1998 as compared to 34.5% in the third quarter of 1997, and to
33.4% for the nine-month period ended September 27, 1998 from 34.1% for the
comparable period of 1997.
The decrease in salaries and benefits as a percentage of revenues in
both periods is due primarily to lower kitchen and floor labor costs in both
restaurant concepts. This decrease is partially due to a reduction in kitchen
labor hours as a result of the Company's best practices initiative. Streamlining
food preparation procedures was a key goal of this initiative, and the Company
began implementing these new procedures during the second and third quarters of
1998. Additional decreases in labor costs were due to the brewery restaurants
opened in the last twelve months achieving operational efficiencies.
Operating Expenses
- ------------------
Operating expenses, which include occupancy costs, utilities, repairs,
maintenance and linen, increased $.2 million (2.4%) to $8.3 million in the third
quarter of 1998 from $8.1 million for the same period in 1997. For the nine
months ended September 27, 1998, operating expenses increased $1.5 million
(6.6%) to $23.7 million from $22.2 million in the comparable period of 1997. As
a percentage of revenues, such expenses increased slightly to 20.0% in the third
quarter of 1998 from 19.8% for the same period in 1997, and decreased slightly
to 19.8% for the nine-month period ended September 27, 1998 from 20.0% for the
comparable period of 1997.
The increase in operating expenses as a percentage of revenues during
the third quarter of 1998 is due primarily to greater expenses for repairs and
maintenance as the Company has begun a comprehensive program to repair certain
of its operating assets. Such program may result in slight increases to
operating expenses over the next twelve months. The decrease in operating
expenses as a percentage of revenues for the first nine months of 1998 is due to
lower overall operating costs resulting from management's focus on the
fundamentals of running restaurants, and to a reduction in 1998 insurance
premium rates, particularly workmen's compensation insurance.
Selling Expenses
- ----------------
Selling expenses decreased $.1 million (10.3%) to $1.3 million in the
third quarter of 1998 from $1.4 million for the same period in 1997. For the
nine months ended September 27, 1998, selling expenses decreased $.2 million
(6.2%) to $3.8 million from $4.0 million in the comparable period of 1997. As a
percentage of revenues, such expenses decreased to 3.0% in the third quarter of
1998 from 3.4% for the same period in 1997, and to 3.2% for the nine-month
period ended September 27, 1998 from 3.6% for the comparable period of 1997.
This decrease in both periods is primarily due to a reduction in the amount of
food and beverages discounted to customers. Although discounting is one of the
Company's primary forms of word-of-mouth advertising, increased staff training
and education have avoided overuse of this program. Additional decreases during
the first nine months of 1998 are due to an increased use of lower cost local
restaurant marketing promotions as compared to more expensive Company wide
promotions that utilize extensive radio and print media. As Company wide
promotions implemented at the end of the third quarter continued into the fourth
quarter of 1998, management anticipates an increase to selling expenses as a
percentage of revenues during the fourth quarter of 1998.
<PAGE>
General and Administrative ("G&A")
- ---------------------------------
G&A expense increased $.8 million (48.7%) to $2.6 million in the third
quarter of 1998 from $1.8 million in the third quarter of 1997, and increased
$2.3 million (42.0%) to $7.8 million for the nine-month period ending September
27, 1998 from $5.5 million for the comparable period in 1997. As a percentage of
revenues, such expenses increased to 6.4% in the third quarter of 1998 from 4.4%
for the same period of 1997, and to 6.5% for the nine months ended September 27,
1998 from 4.9% for the comparable period of 1997. Due to the Company's reduced
expansion plans, less G&A costs have been allocated to the Company's development
program resulting in an increase to G&A expense for both periods. Additionally,
the Company incurred increased spending during 1998 related to its best
practices initiative, additional personnel in the training, accounting, human
resources and information systems departments, and costs associated with
attaining Year 2000 compliance (see "Year 2000").
Depreciation and Amortization ("D&A")
- ------------------------------------
D&A, including amortization of preopening expense, decreased $.9
million (27.5%) to $2.4 million for the third quarter of 1998 from $3.3 million
in the third quarter of 1997, and decreased $.4 million (5.2%) to $8.3 million
for the nine-month period ending September 27, 1998 from $8.7 million for the
comparable period in 1997. As a percentage of revenues, depreciation expense and
amortization of intangible assets, other than preopening costs, was 5.0% for the
third quarter of 1998 as compared to 4.9% in the comparable period of 1997, and
5.4% for the nine-month period ending September 27, 1998 as compared to 5.0% in
the comparable period of 1997. Preopening expense amortization was 0.8% as a
percentage of revenues for the third quarter of 1998 as compared to 3.1% in the
comparable period of 1997, and 1.5% for the nine-month period ending September
27, 1998 as compared to 2.9% for the comparable period of 1997.
The increase in depreciation expense and amortization of intangible
assets as a percentage of revenues is due primarily to a decrease in AWS for the
Rock Bottom Restaurant & Brewery restaurants, greater depreciation expense for
the Old Chicago restaurants resulting from a significant investment for
restaurant remodels over the last 12 months, and increased depreciation expense
associated with a greater number of corporate assets. Amortization of preopening
expense as a percentage of revenues fluctuates with the number and type of
restaurant (Old Chicago or Rock Bottom Restaurant & Brewery) opened in any given
period. During the three and nine-month periods ended September 27, 1998,
preopening expense was being amortized for fewer restaurants than in the
comparable periods of 1997.
Other Operating Expenses (Income)
- --------------------------------
Other operating expenses (income) for the first nine months of 1998
consist primarily of severance payments made to employees during the first
quarter of 1998 in connection with restaurants closed during this period. Such
costs were offset by income of approximately $14,000 and $177,000 during the
second and third quarters of 1998, respectively, related to a lease settlement
agreement and a change in estimate for exit costs for the restaurants closed in
Gladstone, Missouri and Houston, Texas, respectively.
Equity in Joint Venture Earnings
- --------------------------------
Equity in joint venture earnings represents the Company's 50% equity
interest in net after-tax earnings of Trolley. The increase in both periods is
due to an increase in Trolley's revenues as the total number of restaurants
operated by Trolley increased from five restaurants during the nine months ended
September 28, 1997 to eight restaurants during the nine months ended September
27, 1998. The Company expects to close on an agreement during the fourth quarter
of 1998 to sell its investment in Trolley back to Trolley .
Interest Expense / Interest Income
- ----------------------------------
Interest expense for the third quarter of 1998 increased $73,718 from
the third quarter of 1998 to $554,008, and for the first nine months of 1998
increased $744,541 to $1.9 million from the comparable period of 1997.
Additionally, interest expense of approximately $75,000 and $186,000 was
capitalized to construction costs in the three and nine-month periods ended
September 27, 1998, respectively. The increase in interest expense in both
periods is primarily attributable to an increase in the average balance
outstanding under the Company's revolving line of credit from $16.4 million in
the first nine months of 1997 to $27.0 million in the first nine months of 1998.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company requires capital principally for the development and
construction of new restaurants and for capital expenditures at existing
restaurants. The Company has financed its expansion over the last four years
principally through cash flow from operations, proceeds from public offerings,
borrowings on long-term debt and capital lease obligations. As is common in the
restaurant industry, the Company has generally operated with negative working
capital. The following table presents a summary of the Company's cash flows for
the nine months ended September 27, 1998, and September 28, 1997:
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
1998 1997
------------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 10,751,616 $ 11,289,576
Net cash used in investing activities (12,094,245) (25,903,689)
Net cash provided by financing activities 419,774 15,126,829
(Decrease) increase in cash and cash equivalents (922,855) 512,716
Cash and cash equivalents, end of period 699,682 512,716
</TABLE>
Net cash used in investing activities during the first nine months of
1998 and 1997 included net capital expenditures of $12.1 million and $25.9
million, respectively. This decrease is due to a reduction in the Company's
expansion program. During the first nine months of 1997, the Company opened
seven Rock Bottom Restaurant & Brewery restaurants and seven Old Chicago
restaurants as compared to three brewery restaurant openings in the first nine
months of 1998.
Although the Company has historically leased its facilities, it has
also purchased undeveloped land in some instances to construct brewery
restaurants utilizing its design prototype. Management's intention for these
locations is to recover a significant amount of its investment in land and
construction costs through a sale-leaseback transaction. The Company constructed
locations for two brewery restaurants in 1997 in Englewood, Colorado and Des
Moines, Iowa, and is constructing two additional brewery restaurants in
Warrenville, Illinois and Phoenix, Arizona. Sale-leaseback transactions were
completed in September 1997 for Englewood and in March 1998 for Des Moines, with
proceeds from each transaction included in investing activities in the
respective accompanying condensed consolidated cash flow statements. Management
estimates that the cash investment to construct and open a brewery restaurant
prototype during 1998, assuming completion of a sale-leaseback transaction, will
be approximately $1.7 million to $2.0 million, as compared to the estimated $2.6
to $3.0 million to construct and open a brewery restaurant converted from an
existing property. There can be no assurance, however, that suitable locations
for prototype brewery restaurants will be identified, that sale-leaseback
transactions can be entered into on acceptable terms, or that the costs of
acquiring sites and opening new restaurants will not increase in the future.
Net cash provided by financing activities decreased during the first
nine months of 1998 primarily due to lower net borrowings under the revolving
line of credit. As capital expenditures for 1998 are significantly less than
1997 due to the Company's reduced expansion program, the need for increased
long-term borrowings has also been reduced. Additionally, as restaurant openings
during 1998 have occurred throughout the year, a larger portion of the related
capital expenditures have been financed from cash flow instead of increased
borrowings under the Company's revolving line of credit. Subsequent to September
27, 1998, the Company assigned its rights under the lease for the Fresno,
California restaurant and sold substantially all assets related to this property
for approximately $2.1 million. Proceeds were used to repay a portion of the
revolving line of credit. The Company also expects to use the net proceeds from
the sale of its investment in Trolley to repay a portion of the revolving line
of credit. The Company receives trade credit based upon negotiated terms in
purchasing food and supplies, and does not have significant receivables or
inventory.
The Company estimates that total capital expenditures for 1998,
excluding preopening costs and net of proceeds from sale-leaseback transactions,
will be approximately $15.5 million, including approximately $12.3 million in
estimated total costs for new brewery restaurants. There can be no assurance
that these estimated capital expenditures will be sufficient for completion of
current development plans or that they will not increase in the future.
<PAGE>
The Company believes that its existing cash balances, cash flow
generated from operations and funds available under the revolving line of credit
will be sufficient to satisfy its currently anticipated cash needs through
fiscal 1999. However, results of operations could be negatively affected by
changes in consumer tastes, national, regional or local economic conditions,
weather conditions, demographic trends and traffic patterns, and increased
interest expense, among other factors. In the event the impact of such factors
is significant, the Company may require additional sources of external
financing. Additionally, as the revolving line of credit expires in July 1999,
the Company may seek additional sources of debt or equity capital for its
continuing expansion. There can be no assurance that such funds will be
available on favorable terms, if at all.
Year 2000 Compliance
- --------------------
The Year 2000 will have an impact on the abilities of certain computer
systems to accurately process information. This impact is a result of computer
programs being written using two digits rather than four to define the
applicable year, therefore time-sensitive software may recognize a date using
00 as the year 1900 rather than the year 2000.
During 1997, the Company began a review of its computer systems to
identify the systems that could be affected by the Year 2000 issue. As the
Company's information technology (IT) systems primarily consist of either
third-party software programs purchased by the Company or use of outside vendors
to process financial information, the Company is relying on the abilities of
these third parties to attain Year 2000 compliance with their systems. The
Company has obtained representation of Year 2000 compliance from vendors for
approximately 40% of these systems, including the accounting and point-of-sale
systems. For the remaining 60% of the IT systems, the Company anticipates that
it will either receive representation from such vendors that the systems are
Year 2000 compliant, upgrade or modify the systems with Year 2000 compatible
programs, or seek replacement systems. The Company is currently in the process
of evaluating its various options for its non-compliant Year 2000 IT systems,
and expects to complete such evaluation by the first quarter of 1999. The
Company believes it has identified its mission-critical systems, and has either
received representation from vendors that such systems are Year 2000 compliant,
or is taking the appropriate action necessary to achieve Year 2000 compliance.
Additionally, the Company has completed its assessment and remediation for all
office computer hardware in the restaurants and the corporate office.
The Company has also begun an investigation and assessment of its
non-IT systems (i.e. embedded technology such as microprocessors in kitchen
equipment, elevators, etc.), and of the Year 2000 readiness of its critical
suppliers. For non-IT systems, the Company expects to complete the assessment by
the second quarter of 1999, and then make a determination as to the process for
testing, verifying and remedying any non-compliant systems. To assess the
readiness of its suppliers, the Company is in the process of sending
informational questionnaires to critical vendors, and will review responses to
obtain assurance that such vendors have achieved Year 2000 readiness, or have
developed plans to do so. To the extent that these vendors are unable to provide
sufficient evidence of Year 2000 compliance by the first quarter of 1999, the
Company will seek to obtain replacement vendors.
Costs incurred to date related to Year 2000 compliance have not
had a material impact on the Company's financial condition or results of
operations. Management does not have an estimate for future costs that may be
incurred to achieve Year 2000 compliance. Management expects, but makes no
assurance, that future Year 2000 costs will not have a material adverse effect
on the Company's financial condition or results of operations. Such expectation
does not consider any costs that may be incurred by the Company for failure of
third-party software vendors, suppliers, or other third parties, including
providers of public utilities or services, to achieve Year 2000 compliance in a
timely manner.
Although certain systems have been identified that can be remedied with
manual processes, a comprehensive contingency plan has not yet been formulated
in the event that non-compliant IT and non-IT systems (or their replacements),
critical suppliers or other third parties do not become Year 2000 compliant. The
Company plans to formulate a contingency plan during the first and second
quarters of 1999 to address the possibility that its non-compliant IT and non-IT
systems may not achieve Year 2000 compliance, and anticipates that such steps
will mitigate the risk of business interruption. There can be no assurance that
such contingency plan will eliminate all risks of business interruption.
Additionally, the Company is unable to predict with certainty whether the
consequences associated with the failure of its suppliers, third-party software
vendors, or other third parties to achieve Year 2000 readiness will have a
material adverse impact on its financial condition, results of operations or
liquidity.
<PAGE>
Seasonality and Quarterly Results
- ---------------------------------
The Company's sales and earnings fluctuate seasonally. Historically,
the Company's highest earnings have occurred in the second and third quarters,
and are more susceptible to weather conditions in the first and fourth quarters.
In addition, quarterly results have been and, in the future are likely to be,
substantially affected by the timing of new restaurant openings. Because of the
seasonality of the Company's business and the impact of new restaurant openings,
results in any quarter are not necessarily indicative of the results that may be
achieved for a full fiscal year and cannot be used to indicate financial
performance for the entire year.
Impact of Inflation
- -------------------
Although the Company does not believe inflation has materially affected
operating results during the past three years, inflationary pressures could
result in substantial increases in costs and expenses, particularly food,
supplies, labor and operating expenses. Additionally, increases to minimum wage
rates have the potential to impact all aspects of the Company's business because
of higher labor rates experienced by its suppliers and vendors. These labor
rates could translate into higher costs for goods and services purchased by the
Company. All such increases in costs and expenses could have a significant
impact on the Company's operating results to the extent that such increases
cannot be passed along to customers.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
----- ----------------------
10 Third Amendment to Loan Agreement for
$40,000,000 Revolving Line of Credit
from Norwest Bank Colorado, National
Association, First Security Bank, N.A.,
U.S.Bank and Suntrust Bank, Central Florida,
N.A. to Rock Bottom Restaurants, Inc.,
dated June 29, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by
this report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROCK BOTTOM RESTAURANTS, INC.
(Registrant)
November 11, 1998 By: /s/ WILLIAM S. HOPPE
----------------------
William S. Hoppe
Chief Financial Officer and
Executive Vice President
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
10 Third Amendment to Loan Agreement for $40,000,000 Revolving
Line of Credit from Norwest Bank Colorado, National
Association, First Security Bank, N.A., U.S. Bank and Suntrust
Bank, Central Florida, N.A. to Rock Bottom Restaurants, Inc.,
dated June 29, 1998.
27 Financial Data Schedule
THIRD AMENDMENT TO LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT (this "Amendment") executed as
of June 29, 1998 is among ROCK BOTTOM RESTAURANTS, INC, a Delaware corporation
("Borrower"), the LENDERS (as such term is defined in the Loan Agreement
described below) and NORWEST BANK COLORADO, NATIONAL ASSOCIATION, a national
banking association, as agent for the Lenders ("Agent").
RECITALS
A. Borrower, the Lenders and the Agent are parties to a Loan Agreement,
dated as of July 2, 1996, and amended by an Amendment to Loan Agreement dated
February 24, 1997 and a Second Amendment to Loan Agreement dated July 28, 1997
(as amended, and as it may hereafter be amended, restated or supplemented from
time to time, the "Loan Agreement"), providing for a revolving line of credit
Loan from the Lenders to the Borrower in the amended maximum amount of
$40,000,000. Capitalized terms that are used but not defined herein have the
meanings set forth in the Loan Agreement.
B. Borrower has requested and the Lenders have agreed to (i) modify the
Total Liabilities to Tangible Net Worth covenant; (ii) modify the definition and
method of calculation of Fixed Charges to exclude principal payable by the
Borrower in connection with the Loan on the Maturity Date; (iii) modify the
capital expenditures limit set forth in Section 7.4 of the Loan Agreement and
exclude from such calculation certain sale leaseback transactions; (iv) exclude
certain capital leases from the calculation of permitted Indebtedness under
Section 7.1(e) of the Loan Agreement; and (v) consent to the sale by Borrower of
a facility in Fresno, California.
C. The parties desire to enter into this Amendment to reflect the
changes described above.
AGREEMENT
IN CONSIDERATION of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Borrower, the Lenders and the Agent agree as follows:
1. Amendments to Loan Agreement.
a. The definition of "Fixed Charges" in Section 1.1 of the Loan Agreement
is hereby amended and restated in its entirety to read as follows and the
following definitions of "Qualified Sale Leaseback" and "Sale Leaseback Credit"
are added to Section 1.1 of the Loan Agreement in appropriate alphabetical
order:
<PAGE>
"Fixed Charges" means the following for Borrower and its
Subsidiaries, calculated on a Consolidated basis in accordance with
GAAP: interest expense; plus long-term contractual debt (including
capital leases) principal payments required to be made in accordance
with the terms of the instruments governing such debt (excluding the
principal repayment required to be made by Borrower in connection with
the Loan on the Maturity Date pursuant to Section 2.1(f) hereof); plus
all required payments under all operating leases.
"Sale Leaseback Credit" means with respect to each Qualified
Sale Leaseback the lesser of (a) the net proceeds (gross proceeds minus
closing and transaction costs) received by Borrower from the purchaser
in connection with such Qualified Sale Leaseback or (b) the capital
expenditures incurred by Borrower in connection with the acquisition of
the land and construction of the improvements to which such Qualified
Sale Leaseback relates.
"Qualified Sale Leaseback" means any transaction in which
Borrower acquires the land and constructs a restaurant, brew pub or
similar facility and sells the land and facility to a third party and
immediately leases such land and facility back from the third party for
a minimum lease term of ten years.
b. Section 6.11(b) and (c) of the Loan Agreement (Financial Covenants) are
hereby amended and restated in their entirety to read as follows:
(b) Fixed Charge Coverage Ratio. Borrower shall maintain a
Fixed Charge Coverage Ratio (determined on a Consolidated basis) of not
less than 2.25 to 1 for the period in which the applicable Fiscal
Quarter ends, calculated at the end of each Fiscal Quarter and based
(except as set forth in the following sentence) on such Fiscal Quarter
and the three immediately preceding Fiscal Quarters. In determining
Fixed Charges for purposes of calculation of the Fixed Charge Coverage
Ratio, "long-term contractual debt (including capital leases) principal
payments required to be made in accordance with the terms of the
instruments governing such debt (excluding the principal repayment
required to be made by Borrower in connection with the Loan on the
Maturity Date pursuant to Section 2.1(f) hereof) plus all required
payments under operating leases" shall be based on the payments
required to be made in the four Fiscal Quarters immediately succeeding
the Fiscal Quarter during which the Fixed Charge Coverage Ratio is
being determined. All other aspects of the Fixed Charge Coverage Ratio
(including interest expense and Operating Cash Flow) shall be based on
such Fiscal Quarter and the three immediately preceding Fiscal
Quarters.
(c) Total Liabilities to Tangible Net Worth. The ratio of
Borrower's Total Liabilities to Tangible Net Worth calculated at the
end of each Fiscal Quarter shall not exceed 1 to 1 at any time during
the term of the Loan.
c. Section 7.1(e) of the Loan Agreement is hereby amended and restated in
its entirety to read as follows:
<PAGE>
(e) Indebtedness (including all capital leases, except for
capital leases entered into by Borrower as part of a Qualified Sale
Leaseback transaction) incurred after the date hereof, not exceeding
$2,000,000 in the aggregate outstanding at any one time (in addition to
(1) the Loan, (2) the trade payables described in (b) above and (3)
Indebtedness described in (c) and (d) above;
d. Section 7.4 of the Loan Agreement (Negative Covenants) is amended and
restated in its entirety to read as follows:
7.4 Capital Expenditures. Make or incur any capital
expenditures (as such term is defined in accordance with GAAP),
exceeding the aggregate limit of $25,000,000 during any Fiscal Year,
beginning with the Fiscal Year ended December 29, 1998. For purposes of
calculating Borrower's compliance with this Section 7.4, actual capital
expenditures by Borrower during any fiscal year shall be reduced by the
Sale Leaseback Credit resulting from each Qualified Sale Leaseback
closed and funded during such fiscal year.
e. Exhibit D to the Loan Agreement is hereby replaced with
Exhibit D attached hereto and Exhibit D attached hereto is substituted
in place of Exhibit D to the Loan Agreement as locations where the
Collateral is located. Borrower hereby represents, warrants and
certifies that (a) each Subsidiary set forth on Exhibit D (as amended
by this Amendment) conducts operations only at the locations set forth
below such Subsidiary's name on Exhibit D (as amended by this
Amendment) and Borrower or such Subsidiary own all of the Collateral
located at such location, (b) the Collateral is not located in any
location, and neither Borrower nor any Subsidiary conducts any
operations in any location other than those listed on Exhibit D of the
Loan Agreement (as amended by this Amendment) and (c) Borrower leases
and does not own, directly or indirectly, any of the locations
described on Exhibit D other than the Fee Properties.
f. Exhibit F to the Loan Agreement is hereby replaced with
Exhibit F attached hereto and Exhibit F attached hereto is substituted
in place of Exhibit F to the Loan Agreement.
2. Sale and Closure of Facilities.
a. Lenders hereby consent to Borrower entering into a contract to sell and
selling the business known as "Rock Bottom Fresno" operated at 706 West Shaw
Avenue in Fresno, California; on the condition that (i) such sale occurs on or
before December 31, 1998 and (ii) immediately upon the closing of such sale,
Borrower repays the Loan in an amount equal to the greater of (A) $1,500,000 or
(B) the net sale proceeds from the sale of such operation. Lenders authorize
Agent to execute UCC-3 releases releasing the lien on inventory, equipment and
related collateral used in connection with such operation.
b. In the event that Borrower elects to close its business operation known
as "Rock Bottom Salem" located in Salem, Oregon, Lenders hereby consent to the
closure of such operation.
<PAGE>
c. Lenders hereby consent to the closure of Borrower's "Rock Bottom
Restaurant" operations in Houston, Texas, and Overland Park, Kansas, and
Borrower's "Old Chicago" operations in Evergreen, Colorado, and Gladstone,
Missouri.
3. Conditions Precedent. All of Lenders' obligations under this Amendment are
conditioned upon and subject to satisfaction of all of the following conditions
precedent in a manner acceptable to Agent:
a. Borrower shall pay to Agent, as agent for Lenders, a restructure fee in
the amount of $40,000. Such restructure fee shall be distributed between the
Lenders in the following manner: Norwest: $20,000, First Security: $5,000, U.S.
Bank: $5,000, SunTrust: $5,000, and UMB: $5,000;
b. Borrower or the Subsidiaries, as the case may be, shall have executed
and delivered this Amendment, and any other documents, instruments or agreements
as may be required by Agent, to give effect to the amendments effected by this
Amendment, including without limitation any additional Uniform Commercial Code
financing statements required by Agent;
c. Borrower shall pay all Loan Expenses incurred by the Agent in connection
with the transactions contemplated by this Amendment;
d. Borrower shall provide to Agent an opinion of counsel to Borrower
acceptable in form and substance to Agent;
e. As of the date of this Amendment, there was and is no Event of Default
or Unmatured Event of Default, other than the Events of Default arising out of
(i) Borrower's failure to comply with the Total Liabilities to Tangible Net
Worth ratio, as set forth in Section 6.11(c) of the Loan Agreement for the
period ended March 28, 1998, (ii) Borrower's failure to comply with the
limitation on Indebtedness in Section 7.1 of the Loan Agreement and (iii)
Borrower's dissolution of Rock Bottom Kansas, LLC, which may be in violation of
Section 8.12 of the Loan Agreement (the foregoing are hereinafter collectively
referred to as the "Existing Defaults"); and
f. The representations and warranties set forth in Paragraph 5 below shall
be true and correct in all respects.
4. Further Assurances. Borrower shall execute all documents and instruments and
take all actions or cause any other party to execute all documents and
instruments and take all actions as the Agent may reasonably require to effect
the transactions contemplated by this Amendment.
<PAGE>
5. Representations and Warranties.
a. Borrower hereby represents and warrants to the Lenders that as of the
date of this Amendment (taking into consideration the transactions contemplated
by this Amendment), all of Borrower's representations and warranties contained
in the Loan Documents are true, accurate and complete in all material respects,
and no Event of Default or Unmatured Event of Default has occurred under any
Loan Document (as amended concurrent herewith), other than the Existing
Defaults.
b. Without limiting the generality of the foregoing, Borrower represents
and warrants to the Lenders that the execution and delivery of this Amendment
has been authorized by all necessary action on the part of Borrower, that each
person executing this Amendment on behalf of Borrower is duly authorized to do
so, and that this Amendment constitutes the legal, valid, binding and
enforceable obligation of Borrower (subject to the same limitations of
enforceability as set forth in the Loan Agreement).
c. In addition, without limiting the generality of the foregoing, Borrower
represents and warrants to Lender that Borrower has not created or formed any
new Subsidiaries since July 28, 1997.
d. Borrower represents and warrants that Indebtedness (for purposes of
Section 7.1(e) of the Loan Agreement) outstanding at any one time has not at any
time exceeded $4,500,000.
6. Old Chicago Franchising, Inc. Borrower represents and warrants that Old
Chicago Franchising, Inc. ("Franchising") does not conduct any operations as of
the date hereof and does not own any assets as of the date hereof. Borrower
covenants and agrees that at least 30 days prior to Franchising commencing any
operations or acquiring any assets that Borrower will notify Agent and will
grant Agent, as agent for Lenders, a lien on all assets of Franchinsing and a
pledge of 100 percent of the stock of Franchising; subject in each case to no
other liens or encumbrances and all in accordance with the terms of the Loan
Documents. The representations, warranties and covenants set forth in this
Paragraph 6 are incorporated into and made a part of the Loan Agreement.
7. Loan Documents.
a. The Lenders, the Agent, and the Borrower agree that all of the Loan
Documents shall be amended to reflect the amendments set forth herein.
b. All references in any document to the Loan Agreement hereafter refer to
the Loan Agreement as amended pursuant to this Amendment.
c. All references in the Loan Agreement to the Loan Documents, or any
particular Loan Document, hereby refer to such Loan Documents as amended
pursuant to the amendments executed concurrent herewith.
<PAGE>
8. Continuation of the Loan Agreement Except as specified in this Amendment, the
provisions of the Loan Agreement remain in full force and effect, and if there
is a conflict between the terms of this Amendment and those of the Loan
Agreement, the terms of this Amendment control.
9. Miscellaneous.
a. This Amendment shall be governed by and construed under the laws of the
State of Colorado and shall be binding upon and inure to the benefit of the
parties hereto and their successors and permissible assigns.
b. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
instrument.
c. This Amendment and all documents to be executed and delivered hereunder
may be delivered in the form of a facsimile copy, subsequently confirmed by
delivery of the originally executed document.
d. Time is of the essence hereof with respect to the dates, terms and
conditions of this Amendment and the documents to be delivered pursuant hereto.
e. This Amendment constitutes the entire agreement between Borrower, the
Agent, and the Lenders concerning the subject matter of this Amendment. This
Amendment may not be amended or modified orally, but only by a written agreement
executed by Borrower, the Agent and the Lenders and designated as an amendment
or modification of the Loan Agreement.
f. If any provision of this Amendment is held to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions of this Amendment shall not be impaired thereby.
g. The section headings herein are for convenience only and shall not
affect the construction hereof.
h. By execution of this Amendment, Lenders hereby waive the Existing
Defaults. Execution of this Amendment is not intended to and shall not
constitute a waiver by the Lenders of any other Event of Default or Unmatured
Event of Default.
<PAGE>
EXECUTED as of the date first set forth above.
LENDERS:
NORWEST BANK COLORADO, NATIONAL ASSOCIATION,
a national banking association
By:
--------------------------
Karen I. Hardy
Vice President
<PAGE>
FIRST SECURITY BANK, N.A., a
national banking association
(f/k/a First Security Bank of Idaho, N.A.)
By:
--------------------------
Mary Monroe
Vice President
U.S. BANK NATIONAL ASSOCIATION
(f/k/a U.S. Bank of Idaho)
By:
-------------------------
James Henken
Vice President
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By:
-------------------------
Richard Doucet, Jr.
Vice President
UMB BANK, N.A.
By:
--------------------------
Terry Dierks
Senior Vice President
AGENT:
NORWEST BANK COLORADO, NATIONAL ASSOCIATION,
a national banking association
By:
--------------------------
Karen I. Hardy
Vice President
<PAGE>
BORROWER:
ROCK BOTTOM RESTAURANTS, INC., a
Delaware corporation
By:
-------------------------
William S. Hoppe
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 27, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1998
<PERIOD-END> SEP-27-1998
<CASH> 699,682
<SECURITIES> 0
<RECEIVABLES> 386,246
<ALLOWANCES> 30,000
<INVENTORY> 2,433,296
<CURRENT-ASSETS> 5,970,080
<PP&E> 114,415,902
<DEPRECIATION> 22,369,475
<TOTAL-ASSETS> 110,934,312
<CURRENT-LIABILITIES> 13,184,290
<BONDS> 30,027,592
0
0
<COMMON> 80,560
<OTHER-SE> 64,374,407
<TOTAL-LIABILITY-AND-EQUITY> 110,934,312
<SALES> 119,866,742
<TOTAL-REVENUES> 119,866,742
<CGS> 30,294,091
<TOTAL-COSTS> 113,961,843
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,877,843
<INCOME-PRETAX> 4,538,766
<INCOME-TAX> 1,475,087
<INCOME-CONTINUING> 3,063,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,063,679
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
