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 June 28, 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 August 12, 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 SIX MONTHS ENDED JUNE 28, 1998
Page
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets-
June 28, 1998 and December 28, 1997 3-4
Condensed Consolidated Statements of Operations-
Three Months and Six Months Ended
June 28, 1998 and June 29, 1997 5
Condensed Consolidated Statements of Cash Flows- 6
Six Months Ended June 28, 1998 and June 29, 1997
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-18
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature page 20
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 28, December 28,
ASSETS 1998 1997
------ ---------- ----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 489,517 $ 1,622,537
Accounts receivable 166,832 938,932
Accounts receivable--affiliates 115,358 116,543
Preopening costs, net 864,859 1,520,253
Inventories 2,572,522 2,726,983
Prepaids and other current assets 961,754 1,613,374
Current deferred income taxes, net 219,214 219,214
----------- -----------
Total current assets 5,390,056 8,757,836
----------- -----------
PROPERTY AND EQUIPMENT:
Land 5,885,711 5,885,711
Buildings 4,447,161 4,447,161
Leasehold and building improvements 54,895,638 50,654,171
Furniture, fixtures and equipment 45,726,435 43,919,404
Construction-in-progress 4,990,326 2,719,135
Accumulated depreciation and amortization (21,370,224) (17,395,218)
----------- -----------
Total property and equipment, net 94,575,047 90,230,364
----------- -----------
INVESTMENT IN JOINT VENTURE, net 5,785,472 5,552,632
----------- -----------
OTHER ASSETS 590,266 735,936
----------- -----------
DEFERRED INCOME TAXES, net 2,384,809 2,334,809
----------- -----------
TOTAL ASSETS $ 108,725,650 $ 107,611,577
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 28, December 28,
LIABILITIES 1998 1997
----------- ---------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable-
Trade $ 2,149,254 $ 4,341,074
Construction projects 569,643 1,023,151
Accrued payroll and payroll taxes 1,931,022 2,311,990
Accrued taxes other than income tax 1,282,879 1,023,893
Current portion of accrued restructuring charges 1,700,260 2,447,260
Other accrued expenses 2,939,779 2,534,299
Current portion of long-term debt 183,271 115,308
Current portion of obligations under capital leases 549,785 519,924
----------- -----------
Total current liabilities 11,305,893 14,316,899
REVOLVING LINE OF CREDIT 28,200,000 26,450,000
LONG-TERM DEBT 2,295,397 2,374,533
OBLIGATIONS UNDER CAPITAL LEASES 2,796,719 1,757,462
ACCRUED RESTRUCTURING CHARGES 1,170,948 1,493,610
----------- -----------
Total liabilities 45,768,957 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, 8,054,047 and 8,059,506 issued
and outstanding 80,540 80,595
Additional paid-in capital 58,268,388 58,320,330
Retained earnings 5,444,114 3,791,586
Deferred compensation (836,349) (973,438)
------------ -----------
Total stockholders' equity 62,956,693 61,219,073
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 108,725,650 $ 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 Six Months Ended
-------------------------- -------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Old Chicago restaurants $ 18,782,969 $ 18,277,475 $ 37,171,336 $ 34,658,037
Rock Bottom Restaurant & Brewery
restaurants 21,260,608 19,154,236 41,466,496 35,465,813
---------- ---------- ---------- ----------
Total revenues 40,043,577 37,431,711 78,637,832 70,123,850
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of sales 10,071,038 9,268,041 19,790,426 17,363,157
Restaurant salaries and benefits 13,450,340 12,904,244 26,269,265 23,758,012
Operating expenses 7,722,710 7,371,896 15,422,580 14,144,660
Selling expenses 1,261,260 1,386,988 2,534,842 2,643,015
General and administrative 2,406,602 1,884,605 5,139,405 3,703,441
Depreciation and amortization 2,876,573 2,968,455 5,917,539 5,472,438
Other operating expenses (income) (18,462) -- 107,382 --
---------- ---------- ---------- ----------
Total operating expenses 37,770,061 35,784,229 75,181,439 67,084,723
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 2,273,516 1,647,482 3,456,393 3,039,127
Equity in joint venture earnings 125,000 75,000 300,000 150,000
Interest expense (739,703) (397,493) (1,323,835) (653,012)
Interest income 14,586 5,249 15,598 7,102
Other income, net 11 9 33 12
---------- ---------- ---------- ----------
INCOME BEFORE TAXES 1,673,410 1,330,247 2,448,189 2,543,229
Provision for income taxes 543,858 388,430 795,661 741,204
---------- ----------- ----------- ----------
NET INCOME $ 1,129,552 $ 941,817 $ 1,652,528 $ 1,802,025
========== ========== ========== ===========
BASIC NET INCOME
PER SHARE $.14 $.12 $.21 $.23
=== === === ===
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 8,056,100 7,993,100 8,056,200 7,961,300
DILUTED NET INCOME
PER SHARE $.14 $.12 $.21 $.23
=== === === ===
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 8,056,100 8,056,300 8,056,200 8,026,100
</TABLE>
See accompanying notes.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 28, 1998 AND JUNE 29, 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,652,528 $ 1,802,025
Adjustments to reconcile net income to net cash
provided by operating activities-
Equity in joint venture earnings (300,000) (150,000)
Depreciation and amortization 5,917,539 5,472,437
Deferred income tax benefit (50,000) (16,267)
Loss on disposition of equipment 159,736 --
Amortization of deferred compensation, net of cancellations 102,425 --
Revision of accrued restructuring charges (13,762) --
Decrease (increase) in accounts receivable 772,100 (102,999)
Decrease (increase) in inventories 154,461 (393,983)
Decrease (increase) in prepaids and other assets 655,947 (574,772)
Expenditures for preopening costs (802,517) (2,378,548)
(Decrease) increase in accounts payable (2,645,328) 2,275,236
Increase in accrued expenses 283,498 410,646
Decrease in accrued restructuring charges (478,619) --
------------ ------------
Net cash provided by operating activities 5,408,008 6,343,775
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (10,006,770) (20,730,654)
Proceeds from sale of property 2,000,000 --
(Repayments) advances from/to officers and affiliates, net 1,185 (23,138)
----------- -----------
Net cash used in investing activities (8,005,585) (20,753,792)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and revolving line of credit 17,250,000 26,800,000
Repayments of long-term debt and revolving line of credit (15,511,173) (10,638,533)
Repayments of capital lease obligations (274,270) (310,380)
Issuance of common stock -- 297,054
---------- ----------
Net cash provided by financing activities 1,464,557 16,148,141
---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,133,020) 1,738,124
CASH AND CASH EQUIVALENTS, beginning of period 1,622,537 0
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 489,517 $ 1,738,124
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 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 June 28,
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 six months ended June 28, 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 three months ended June 28, 1998, the Company executed a
lease settlement agreement with the owner of its Old Chicago
restaurant in Gladstone, Missouri, which was closed during the first
quarter of 1998. Under the terms of the settlement agreement, the
Company has no further obligation under the previously executed lease
agreement. As the cost of this settlement together with all other exit
costs was less than the previously accrued restructuring charges,
income of $13,762 is included in other operating income in the
accompanying condensed consolidated statement of operations.
Subsequent to June 28, 1998, the Company began subleasing its Rock
Bottom Restaurant & Brewery restaurant in Houston, Texas, which was
also closed during the first quarter of 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. Management
believes that the previously accrued restructuring costs related to
the closure of this restaurant, as well as the restaurants in
Evergreen, Colorado and Overland Park, Kansas, are sufficient to cover
the related costs associated with the ultimate disposition of all
assets and obligations related to these locations.
(3) 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. All other modifications to the
Credit Facility were non-substantive in nature.
(4) RECLASSIFICATIONS
Certain amounts in the accompanying December 28, 1997 condensed
consolidated balance sheet have been reclassified to conform to the
current period presentation.
<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:
-Restaurant expansion plans for 1998;
-The effect of the sale of the brewery restaurant in Fresno,
California and sale or sublease of the Old Chicago restaurant in
Salem, Oregon;
-Sufficiency of liability for accrued restructuring charges;
-Estimated charge to first quarter 1999 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;
-Efforts to improve sales trends in certain brewery restaurants;
-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 1998 restaurant expansion;
-Ability of the Company to develop an 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 quarter of 1998, the Company closed two Old
Chicago restaurants located in Evergreen, Colorado and Gladstone, Missouri, and
two Rock Bottom Restaurant & Brewery restaurants located in Houston, Texas and
Overland Park, Kansas. During the second quarter of 1998, the Company opened a
Rock Bottom Restaurant & Brewery restaurant in La Jolla, California and a
ChopHouse & Brewery restaurant in Cleveland, Ohio, and as of June 28, 1998 the
Company operated a total of 61 restaurants - 40 Old Chicago restaurants and 21
Rock Bottom Restaurant & Brewery restaurants.
During the three months ended June 28, 1998 the Company executed a
lease settlement agreement with the owner of the Gladstone, Missouri,
restaurant, and as a result has no further obligation under the previously
executed lease agreement. Additionally, subsequent to June 28, 1998, the Company
began subleasing its restaurant in Houston, Texas, which was also closed during
the first quarter of 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. Management
believes that the previously accrued restructuring charges related to the
closure of the Houston restaurant, as well as the restaurants in Evergreen,
Colorado and Overland Park, Kansas, are sufficient to cover the related costs
associated with the ultimate disposition of all assets and obligations related
to these locations.
The Company is also negotiating the sale of its Rock Bottom Restaurant
& Brewery restaurant in Fresno, California, and closed its Old Chicago
restaurant in Salem, Oregon during July 1998 to pursue the sale or sublease of
this facility. Neither transaction is anticipated to have a material adverse
effect on the Company's financial position or results of operations.
The Company's remaining expansion plans for 1998 include one brewery
restaurant opening during the third quarter in Irvine, California (opened July
30, 1998), and two brewery restaurant openings during the fourth quarter in
Warrenville, Illinois and Bellevue, Washington. The last two 1998 restaurant
openings are either under construction or are in the permitting phase prior to
construction. The Company previously anticipated opening an additional brewery
restaurant during the fourth quarter of 1998 in Phoenix, Arizona. This
restaurant, 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.
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 but amortized over the first 12
months after opening, and restaurant salaries and benefits are two examples of
these increased costs.
<PAGE>
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. 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 June 28, 1998, the cumulative effect
would be approximately $1.2 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 six month periods ended June 28, 1998
and June 29, 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 Six Months Ended
---------------------- ---------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Old Chicago restaurants.................................. 46.9% 48.8% 47.3% 49.4%
Rock Bottom Restaurant & Brewery restaurants............. 53.1 51.2 52.7 50.6
---- ---- ---- ----
Total revenues...................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating Expenses:
Cost of sales............................................ 25.1 24.8 25.2 24.8
Restaurant salaries and benefits......................... 33.6 34.5 33.4 33.9
Operating expenses....................................... 19.3 19.7 19.6 20.2
Selling expenses......................................... 3.1 3.7 3.2 3.8
General and administrative expenses...................... 6.0 5.0 6.6 5.3
Depreciation and amortization............................ 7.2 7.9 7.5 7.8
Other operating expenses (income)........................ -- -- 0.1 --
---- ---- ---- ----
Total operating expenses............................ 94.3 95.6 95.6 95.7
---- ---- ---- ----
Income From Operations...................................... 5.7 4.4 4.4 4.3
Equity in joint venture earnings............................ 0.3 0.2 0.4 0.2
Interest expense............................................ (1.8) (1.1) (1.7) (0.9)
Interest income............................................. -- -- -- --
Other (income) expense, net................................. -- -- -- --
---- ---- ---- ----
Income Before Taxes......................................... 4.2 3.5 3.1 3.6
Provision for income taxes.................................. 1.4 1.0 1.0 1.0
---- ---- ---- ----
Net Income ................................................. 2.8% 2.5% 2.1% 2.6%
===== ===== ===== =====
Restaurant Data:
Restaurant operating weeks:
Old Chicago restaurants.................................. 517 503 1,042 968
Rock Bottom Restaurant & Brewery restaurants............. 267 225 525 417
---- ---- ---- ----
Total............................................... 784 728 1,567 1,385
===== ===== ===== =====
Restaurants open (end of period):
Old Chicago restaurants.................................. 40 41
Rock Bottom Restaurant & Brewery restaurants............. 21 19
-- --
Total............................................ 61 60
== ==
</TABLE>
<PAGE>
Revenues
Revenues increased $2.6 million (7.0%) to $40.0 million in the quarter
ended June 28, 1998 from $37.4 million for the comparable quarter in 1997. For
the six months ended June 28, 1998, revenues increased $8.5 million (12.1%) to
$78.6 million from $70.1 million for the comparable period in 1997. These
increases are due primarily to revenues generated by the four new Rock Bottom
Restaurant & Brewery restaurants and one new Old Chicago restaurant that have
opened since the end of the second quarter of 1997. These increases were offset
by a decrease in revenues of $1.8 million and $3.0 million for the three and
six-month periods ended June 28, 1998, respectively, resulting from the four
restaurants closed in the first quarter of 1998. Additionally, comparable
restaurant sales decreased 1.4% for the second quarter of 1998, and were down
1.3% 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 53.1% for the
quarter ended June 28, 1998 as compared to 51.2% in the comparable period of
1997, and for the six months ended June 28, 1998 increased to 52.7% from 50.6%
in the first six 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
throughout the year as three additional brewery restaurant openings are planned
for 1998.
AWS for the Old Chicago restaurants were $36,331 and $35,673
during the three and six-month periods ended June 28, 1998, respectively, and
were consistent with AWS for the comparable periods in 1997. Comparable
restaurant sales for Old Chicago were up 1.6% during the second quarter of 1998
and up 1.2% for the first six months of 1998. These trends in both AWS and
comparable restaurant sales represent a significant improvement from 1997 when
the Company experienced decreases in AWS of nearly 8%. Management believes that
the improvement in comparable restaurant sales and AWS trends is largely due to
the Company's efforts towards 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 during the
second quarter of 1998 were $79,628 as compared to $85,130 during the second
quarter of 1997, and $78,984 for the first six months of 1998 as compared to
$85,050 for the comparable period in 1997. This decrease is largely due to a
decrease in comparable restaurant sales, which were down 4.6% for the second
quarter and 4.1% for the first six months of 1998. Although the 11 restaurants
in the comparable restaurant base generate average annualized revenues of in
excess of $4.5 million per restaurant, this decrease reflects the increasingly
competitive conditions in certain of the Company's key markets. Efforts being
made to improve these sales trends include significant 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. Additional decreases in AWS in 1998 as compared to 1997 were
anticipated by the Company due to certain newer brewery restaurants opened in
the last 12 months that were designed to operate at a slightly lower
capacity than certain of the Company's previous restaurants.
<PAGE>
Cost of Sales
Cost of sales, which consists of food, beverage, and merchandise costs,
increased $.8 million (8.7%) to $10.1 million in the second quarter of 1998 from
$9.3 million in the second quarter of 1997, and increased as a percentage of
revenues to 25.1% from 24.8% in the same period of 1997. For the six months
ended June 28, 1998, cost of sales increased $2.4 million (14.0%) to $19.8
million from $17.4 million in the comparable period of 1997, and as a percentage
of revenues increased to 25.2% from 24.8% in the comparable period of 1997.
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 in cost of sales as a
percentage of revenues during the three months ended June 28, 1998 is primarily
due to higher food costs in the brewery restaurants as a result of implementing
new menus in accordance with this initiative. These higher costs were
anticipated by the Company as several new menu items were added, and
substantially all other menu items were reengineered. This process resulted in
changes to several recipes and the related inefficiencies in yields and waste
resulted in an increase to food costs. Management believes such increase is
temporary. The additional increase in cost of sales as a percentage of revenues
during the six months ended June 28, 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,
increased $.5 million (4.2%) to $13.5 million in the second quarter of 1998 from
$12.9 million in the second quarter of 1997. For the six months ended June 28,
1998 salaries and benefits increased $2.5 million (10.6%) to $26.3 million from
$23.8 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 second
quarter of 1998 as compared to 34.5% in the second quarter of 1997, and to 33.4%
for the six month period ended June 28, 1998 from 33.9% 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 the
brewery restaurants. This decrease is due primarily to newer brewery restaurants
achieving operational efficiencies, and to a slight 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 in the brewery restaurants during June 1998.
Management anticipates implementing similar procedures in the Old Chicago
restaurants during the third quarter.
Operating Expenses
Operating expenses, which include occupancy costs, utilities, repairs,
maintenance and linen, increased $.4 million (4.8%) to $7.7 million in the
second quarter of 1998 from $7.4 million for the same period in 1997. For the
six months ended June 28, 1998, operating expenses increased $1.3 million (9.0%)
to $15.4 million from $14.1 million in the comparable period of 1997. As a
percentage of revenues, such expenses decreased to 19.3% in the second quarter
of 1998 from 19.7% for the same period in 1997, and to 19.6% for the six month
period ended June 28, 1998 from 20.2% for the comparable period of 1997. This
decrease is due primarily to lower overall operating costs resulting from
management's focus on the fundamentals of running restaurants. Additional costs
savings are due to a reduction in 1998 insurance premium rates, particularly
workmen's compensation insurance.
Selling Expenses
Selling expenses, decreased $.1 million (9.1%) to $1.3 million in the
second quarter of 1998 from $1.4 million for the same period in 1997. For the
six months ended June 28, 1998, selling expenses decreased $.1 million (4.1%) to
$2.5 million from $2.6 million in the comparable period of 1997. As a percentage
of revenues, such expenses decreased to 3.1% in the second quarter of 1998 from
3.7% for the same period in 1997, and to 3.2% for the six month period ended
June 28, 1998 from 3.8% 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, it has been modified by increased staff
training and education to avoid overuse. Additional decreases in the second
quarter 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. The Company anticipates an increase to
selling expenses as a percentage of revenues in the third quarter of 1998 as
more Company wide marketing promotions are planned for this period.
<PAGE>
General and Administrative ("G&A")
G&A expense increased $.5 million (27.7%) to $2.4 million in the second
quarter of 1998 compared to $1.9 million in the second quarter of 1997, and
increased $1.4 million (38.8%) to $5.1 million for the six month period ending
June 28, 1998 from $3.7 million for the comparable period in 1997. As a
percentage of revenues, such expenses increased to 6.0% in the second quarter of
1998 from 5.0% for the same period of 1997, and to 6.6% for the six months ended
June 28, 1998 from 5.3% 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. Additionally, the
Company also incurred increased spending during the first quarter of 1998
related to its best practices initiative, additional personnel in the training
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 expenses, decreased $91,882
(3.1%) to $2.9 million in the second quarter of 1998 from $3.0 million for the
comparable period in 1997, and increased $.4 million (8.1%) to $5.9 million for
the six month period ending June 28, 1998 from $5.5 million for the comparable
period in 1997. As a percentage of revenues, depreciation expense and
amortization of intangible assets, other than preopening costs, was 5.7% during
the three and six month periods ended June 28, 1998 as compared to 5.0% in the
comparable periods of 1997. Preopening expense amortization was 1.5% as a
percentage of revenues in the second quarter of 1998 as compared to 2.9% in the
comparable period of 1997, and 1.8% for the six month period ending June 28,
1998 as compared to 2.8% 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: decreases 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 six month periods ended June 28, 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 six months ended June 28,
1998 consist primarily of severance payments made to employees in connection
with restaurants closed during the first quarter of 1998. Additionally, during
the three months ended June 28, 1998, income of $13,762 is included in this
amount pursuant to the lease settlement agreement with the owner of the
Gladstone, Missouri, restaurant.
Equity in Joint Venture Earnings
The 1998 equity in joint venture earnings represents the Company's 50%
equity interest in net after-tax earnings of Trolley Barn Brewery, Inc.
("Trolley Barn"), its joint venture partner in the southeastern United States.
The increase in both periods is due to an increase in Trolley's Barn's revenues
as the total number of restaurants operated by Trolley Barn increased from five
restaurants during the six months ended June 29, 1997 to eight restaurants
during the six months ended June 28, 1998.
Interest Expense / Interest Income
Interest expense for the second quarter of 1998 increased $342,210 from
the second quarter of 1997 to $739,703, and for the first six months of 1998
increased $670,823 to $1.3 million from the comparable period of 1997.
Additionally, interest expense of approximately $70,000 and $111,000 was
capitalized to construction costs in the three and six-month periods ended June
28, 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 $16.6 million in the first six
months of 1997 to $27.3 million in the first six 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 six months ended June 28, 1998, and June 29, 1997:
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------
1998 1997
------------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 5,408,008 $ 6,343,775
Net cash used in investing activities (8,005,585) (20,753,792)
Net cash provided by financing activities 1,464,557 16,148,141
(Decrease) increase in cash and cash equivalents (1,133,020) 1,738,124
Cash and cash equivalents, end of period 489,517 1,738,124
</TABLE>
Net cash used in investing activities during the first six months of
1998 and 1997 included net capital expenditures of $8.0 million and $20.7
million, respectively. This decrease is due to a reduction in the Company's
expansion program. During the first six months of 1997, the Company opened five
Rock Bottom Restaurant & Brewery restaurants and six Old Chicago restaurants as
compared to two brewery restaurant openings in the first six 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 substantially all 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 anticipates constructing two additional brewery restaurants in
Warrenville, Illinois in 1998 and Phoenix, Arizona in early 1999. Sale-leaseback
transactions were completed in September 1997 for Englewood and in March 1998
for Des Moines, with proceeds from the latter transaction included in investing
activities in the accompanying condensed consolidated cash flow statement.
Management estimates that the cost 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
quarter of 1998 primarily due to decreased 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, new restaurant openings for 1998
are planned to occur throughout the year, and it is anticipated that a majority
of the related capital expenditures will be financed from cash flow instead of
increased borrowings under the Company's 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 1998. 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
During 1997, the Company began a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000"issue.
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's system
conversion during 1997 addressed a significant part of this problem as the new
general financial and payroll software applications implemented were represented
by the vendors to be Year 2000 compliant. The Company is also developing an
implementation plan for its remaining Year 2000 issues, including modifications
or upgrades of substantially all existing restaurant point-of-sale systems.
Total estimated costs to resolve the Year 2000 problem are unknown at this time,
however, the Company expects to incur capital expenditures of approximately
$250,000 during 1998 to upgrade the personal computer hardware and software in
all restaurants as the next step in achieving Year 2000 compliance.
Additionally, approximately $75,000 is included in general and administrative
expenses during the first quarter of 1998 as a result of upgrading computer
hardware and software to be Year 2000 compliant.
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 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on May 29,
1998.
(b) The following directors were elected at the meeting:
Duncan H. Cocroft
Frank B. Day
The following directors hold terms of office that continued after
the meeting:
Robert D. Greenlee Dave Lux
Mary C. Hacking Arthur Wong
Gerald A. Hornbeck
(c) Three proposals were submitted for approval, which were passed with
voting results as follows:
(1) Both of the Company's nominees for directors were
re-elected to serve until the Annual Meeting of
Stockholders in 2001, based on the following
tabulations:
For Withheld
Duncan H. Cocroft 6,728,270 459,734
Frank B. Day 6,734,892 453,112
(2) The amendment to the Rock Bottom Restaurants, Inc.
Equity Incentive Plan to increase the number of
shares of common stock authorized for issuance under
the Equity plan by 300,000 shares was approved as
follows:
For: 5,193,975 Abstain: 53,066
Against: 1,940,963 Broker non-votes: ----
(3) The appointment of Arthur Andersen LLP as the
Company's independent auditors was approved as
follows:
For: 7,129,924 Abstain: 31,133
Against: 26,947 Broker non-votes: ----
(d) None.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
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)
August 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
- ---------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE
28, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1998
<PERIOD-END> JUN-28-1998
<CASH> 489,517
<SECURITIES> 0
<RECEIVABLES> 312,190
<ALLOWANCES> 30,000
<INVENTORY> 2,572,522
<CURRENT-ASSETS> 5,390,056
<PP&E> 115,945,271
<DEPRECIATION> 21,370,224
<TOTAL-ASSETS> 108,725,650
<CURRENT-LIABILITIES> 11,305,893
<BONDS> 30,678,668
0
0
<COMMON> 80,540
<OTHER-SE> 62,876,153
<TOTAL-LIABILITY-AND-EQUITY> 108,725,650
<SALES> 78,637,832
<TOTAL-REVENUES> 78,637,832
<CGS> 19,790,426
<TOTAL-COSTS> 75,181,439
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,323,835
<INCOME-PRETAX> 2,448,189
<INCOME-TAX> 795,661
<INCOME-CONTINUING> 1,652,528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,652,528
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
