UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 28, 1997
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File No. 0-24502
ROCK BOTTOM RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1265838
(State of incorporation) (I.R.S. Employer Identification No.)
248 Centennial Parkway, Suite 100, Louisville, Colorado 80027
(Address of principal executive offices) (Zip code)
(303) 664-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Common Stock ($.01 par value)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
At March 26, 1998, 8,059,506 shares of common stock were outstanding.
At March 26, 1998, the aggregate market value of the voting and non-voting
common equity held by non-affiliates was approximately $33,403,000.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders, to be filed on or before April 28, 1998, are
incorporated by reference into Part III of this Form 10-K.
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INDEX
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PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 42
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PART I
ITEM 1: Business
General
Rock Bottom Restaurants, Inc. (the "Company") was incorporated in April
1994 and currently operates 19 Rock Bottom Restaurant & BrewerySM restaurants
and 40 Old Chicago(R) restaurants in 18 states throughout the country. Rock
Bottom Restaurant & Brewery restaurants and Old Chicago restaurants are casual
dining restaurants that feature high quality, moderately priced food and a
distinctive selection of microbrewed and specialty beers. A key element of the
Company's strategy is to capitalize on the growing interest of consumers in
higher quality, more flavorful beer, including microbrewed and domestic and
imported specialty beers.
The Company also owns an indirect 50% equity interest in Trolley Barn
Brewery, Inc. ("Trolley Barn") which it acquired in 1996 in exchange for 452,073
shares of the Company's common stock. Trolley Barn currently operates eight
restaurants in the southeastern United States (see "Business -- Trolley Barn").
Business Strategy
The Company's objective is to provide its customers with an exciting and
entertaining casual dining experience. Key elements of the Company's business
strategy used in achieving this objective include:
Employee Selection and Training. The Company firmly believes that the
quality of its employees is a key factor in its operations. Employees are
selected for employment on the basis of congeniality and willingness to accept
responsibility for fulfilling customer expectations. Employees are then trained
to make broad based decisions at the customer level, thereby enhancing customer
experiences and the friendly atmosphere of the Company's restaurants. Management
believes that its employee selection and training strategy not only results in
exceptional customer experiences, but also improves productivity and serves as
an effective employee recruitment tool.
Customer Service Commitment. At each of its restaurants, the Company seeks
to provide an exceptional dining experience that exceeds the expectations of its
customers. Each employee having direct contact with customers is responsible and
accountable for the experiences of his or her customers.
Diverse Menu. Each of the Company's restaurant concepts offer a menu with
numerous selections designed to appeal to a wide variety of tastes and budgets.
The menu items are created by culinary trained chefs or professional kitchen
managers to satisfy customers' demand for quantity, quality and diversity and to
build and maintain a loyal clientele.
Microbrewed and Specialty Beer. Both Rock Bottom Restaurant & Brewery
restaurants and Old Chicago restaurants feature hand-crafted, microbrewed and
other specialty beer that the Company believes appeal to a growing consumer
interest in higher quality, more flavorful beer. The Company believes that its
diverse and high quality beer selection encourages the trial of new beer and,
over time, helps to create more knowledgeable and sophisticated beer drinkers.
Rock Bottom Restaurant & Brewery restaurants brew their own beer on-premises and
offer a selection of five to seven distinctive hand-crafted beers ranging in
taste from light ales to chocolate stout. Old Chicago restaurants present a
changing and diverse selection of 110 or more microbrewed, imported and domestic
beers from around the world and strive to be one of the first restaurants in
their markets to introduce new, hard-to-find or specialty beer.
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Distinct Appearance and Atmosphere. The Company strives to create a
distinctive, highly entertaining, and unique atmosphere at each of its
restaurants through a flexible design layout suitable for a wide variety of
restaurant sites. The Company's Rock Bottom Restaurant & Brewery restaurants are
generally located in high traffic metropolitan areas and are designed to create
an open, visually stimulating environment featuring stainless steel brewing
tanks and equipment. Each Old Chicago restaurant highlights Chicago memorabilia
or other interesting artifacts throughout the restaurant and displays the
restaurant's variety of specialty beers along the bar with an attractive array
of different bottled beers and colorful tap handles for draught beer.
The Microbrewed and Specialty Beer Market
The beer brewing industry generally is divided into large breweries with
annual brewing capacities of over 1,000,000 barrels, regional breweries with
capacities in excess of 15,000 barrels, and microbreweries with capacities of
less than 15,000 barrels. A brewpub is a restaurant-brewery that brews beer
on-premises and sells at least 50% of the beer brewed in an adjacent restaurant
or bar.
Consumer interest in higher quality, more flavorful beer continues to
result in significant growth in the micro-brewed and specialty beer markets.
According to the Institute for Brewing Studies, a division of the Association of
Brewers, micro-brewed and U.S. specialty beer sales (in barrels) have
experienced significant growth in the last six years, yet such sales still
represent only approximately 3.1% of total U.S. barrel consumption.
Additionally, the number of microbreweries has grown from 21 in 1985 to 425 in
1997, while the number of brewpubs has increased to 851 in 1997, an increase
from only eight brewpubs in 1985.
Rock Bottom Restaurant & Brewery Restaurants
Design and Layout. Rock Bottom Restaurant & Brewery restaurants range in
size from 8,000 to 14,000 square feet and are designed to create a dramatic
visual impact on their customers. Each restaurant features warm lighting, high
ceilings and wood-finished interiors complemented by an array of stainless steel
brewing tanks and equipment. The on-premises brewing equipment, which consists
of strategically placed rows of stainless steel fermenting tanks and serving
vessels, is an integral aspect of the restaurant's design and enhances the
overall visual impact. Television sets throughout the bar area allow customers
to watch sporting and other special events.
The dining and bar areas are spacious and the kitchens feature partial or
complete exhibition style cooking. Total seats in the restaurants' dining and
bar areas range between 190 and 400 and the layout is flexible, permitting
tables to be rearranged to accommodate customer demand. To complement the
overall design and dining experience, restaurants in nearly all locations
provide live music, outdoor patio seating or separate areas with pool tables.
Menu and Pricing. The menu at Rock Bottom Restaurant & Brewery restaurants
includes approximately 50 bistro style items consisting of appetizers, soups,
meal-sized salads, and entrees featuring meat, fish, pastas and regional cuisine
as well as a range of desserts. In addition, the menu is supplemented by daily
specials that are created at the discretion of each culinary trained chef. The
daily specials typically include a pasta or meat dish, and a fresh fish entree.
The menu is designed to offer a broad range of prices that convey value to the
customer. Entrees typically range in price from $6.95 to $19.95 with most
entrees priced below $10.00. Management analyzes menu items for popularity and
profitability and adapts new items to local market preferences.
Hand-crafted Beer. The Rock Bottom Restaurant & Brewery restaurants feature
hand-crafted beer brewed on-premises by each restaurant's head brewer, as well
as a wide selection of quality wines and a full range of cocktails. Each
restaurant offers five to seven different types of hand-crafted beer ranging
from a light golden ale to a full bodied stout, as well as cask-conditioned or
other limited production seasonal beers, such as Rocktoberfest Bier. Many of the
restaurants' recipes are created to complement the various hand-crafted beers.
For example, signature items such as asiago cheese dip, alder smoked salmon and
stout cheesecake are flavored to increase their compatibility with beer. The
hand-crafted beer selection ranges in price from $3.25 to $3.75 per pint, or
$5.95 for a sampler which includes one four ounce taster of each beer brewed at
the restaurant. During 1997, alcoholic beverages accounted for approximately 41%
of Rock Bottom Restaurant & Brewery restaurant sales, with beer constituting
approximately 61% of total alcoholic beverage sales.
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Customers. The Company believes its Rock Bottom Restaurant & Brewery
restaurants appeal to a wide range of customers and draw their clientele from
throughout the metropolitan area in which each restaurant is located. Each
restaurant generally is open seven days a week from 11:00 a.m. and typically
remains active across the lunch, happy hour, dinner and late-night time periods.
Sales and Marketing. The Company strives to provide its customers with
dining experiences that encourage repeat business, and has historically relied
on word of mouth advertising and local restaurant promotions to attract new
customers. To supplement these marketing efforts, the Company sells Rock Bottom
Restaurant & Brewery merchandise such as jackets, T-shirts, sweatshirts, shorts,
hats and other items bearing the restaurant's name and logo as well as the names
of certain of the restaurants' more popular hand-crafted beers. The restaurants
also support charitable and civic organizations and utilize a limited amount of
targeted print advertising and radio.
Site Selection and Location. The Company seeks to locate its Rock Bottom
Restaurant & Brewery restaurants in visible, high-traffic sites in metropolitan
areas which are recognized as established restaurant, theater, sporting and
shopping destination locations. The Company currently operates 19 Rock Bottom
Restaurant & Brewery restaurants located in Campbell, Long Beach and Fresno,
California; Denver, Boulder and Englewood, Colorado; Chicago, Illinois;
Indianapolis, Indiana; Des Moines, Iowa; Bethesda, Maryland; Minneapolis,
Minnesota; Cleveland and Cincinnati, Ohio; Portland, Oregon; Addison, Texas;
Seattle, Washington; Milwaukee, Wisconsin, and Washington D.C. The Company
operates its brewery restaurants in Boulder and Englewood under the name "Walnut
Brewery". Additionally, a brewery restaurant in Denver and the one in Washington
D.C. are operated under the names "Denver ChopHouse and BreweryTM" and "District
ChopHouse and Brewery", respectively. Fourteen of the Company's restaurants are
located near pedestrian malls, theaters, convention centers, sports arenas, or
downtown shopping areas. The other five restaurants are located in destination
restaurant and bar or shopping districts in Campbell and Fresno, California;
Englewood, Colorado; Des Moines, Iowa and Addison, Texas. During the first
quarter of 1998, the Company closed the Rock Bottom Restaurant & Brewery
restaurants located in Houston, Texas and Overland Park, Kansas due to lower
than expected sales and profitability (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Overview").
Restaurant Economics. The Company believes that its Rock Bottom Restaurant
& Brewery restaurants produce competitive unit economics. In 1997, the Rock
Bottom Restaurant & Brewery restaurants operating for the entire fiscal year,
excluding the two restaurants closed in the first quarter of 1998, generated
average revenues of approximately $4.7 million, with per restaurant revenues
ranging from $2.8 million to more than $7 million, and average earnings before
interest, taxes, depreciation and amortization ("EBITDA") of approximately
$898,000 (19.0% of revenues). As most of the brewery restaurants opened during
1997 were designed to perform at a slightly lower capacity, the Company expects
average revenues per restaurant to decrease in 1998. Additionally, the average
cash investment for the seven restaurants opened in 1997 totaled $2.6 million
for leasehold improvements, furniture, fixtures, restaurant and brewing
equipment and pre-opening costs (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources"). There can be no assurance, however, that the Company's restaurant
economics can be maintained.
Old Chicago Restaurants
Design and Layout. Old Chicago restaurants typically range in size from
5,000 to 8,500 square feet. Each restaurant is decorated to create a familiar
and neighborly atmosphere for customers that is unique to the locations they
serve, and is designed to separate the dining area from the bar area in an
effort to make all customers feel comfortable and welcome. The restaurants
feature a variety of Chicago memorabilia, a prominent display of rows of a
variety of bottled beers, a long row of colorful tap handles for draught beer,
and televisions placed strategically throughout the restaurant for viewing
sporting or other special events. The table layout at each restaurant is
flexible to accommodate groups and special seating requests, with total seats in
the dining and bar areas ranging from 175 to 360. Certain restaurants also
feature outdoor patio seating and a limited number of pool tables.
Menu and Pricing. The menu at Old Chicago restaurants is designed to appeal
to a variety of tastes and budgets and features more than 40 items, including
the Company's signature Chicago-style deep dish pizza, thin-crust pizza
(introduced during 1997), appetizers, pastas, burgers, sandwiches, large salads,
and several desserts. Menu items are prepared daily with high-quality, fresh
ingredients from original recipes. Pizza is a featured section in the menu
allowing customers to build their own by choosing from a selection of 36
different toppings, or to sample one of the specialty pizza combinations that
include such non-traditional toppings as artichokes, black beans, barbecued
chicken, shrimp or marinated sirloin steak. All new menu items and pizza
combinations are tested and selected based on uniqueness, sales popularity, ease
of preparation and profitability. Entrees range in price from approximately
$5.29 for a hamburger to $19.99 for the most expensive large pizza that serves
four.
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Wide Beer Selection. Old Chicago restaurants provide a constantly evolving
selection of 110 or more imported, domestic and microbrewed beers. Bottled beers
are prominently displayed in rows behind the bar along with an array of up to 36
colorful tap handles for draught beer. Beer selectors at Old Chicago restaurants
change the beer selection on a regular basis, and strive to be the first eating
and drinking establishment in their area to offer newly introduced or hard to
find beer selections. The beer selection in each restaurant generally ranges in
price from $2.25 for a domestic draught beer to $3.95 for a microbrewed or
imported beer. Alcoholic beverages accounted for approximately 43% of Old
Chicago restaurant sales during 1997, with beer constituting approximately 78%
of alcoholic beverage sales according to Company estimates.
Customers. Old Chicago restaurants appeal to a wide variety of customers,
including regulars who frequent the restaurants several times a week and those
who visit for the fun and congenial atmosphere, as well as for the frequent
special events. Old Chicago restaurants are open seven days a week from 11:00
a.m. and generally have customers throughout the day and into the evening hours.
Sales and Marketing. The Company's sales and marketing strategy for the Old
Chicago restaurants emphasizes promotions to encourage repeat visits by patrons.
One of the restaurants' most effective promotions has been the World Beer
TourSM, established in 1984, which encourages exploration over time of 110
different brands of beer available at each Old Chicago restaurant. Patrons who
sample 110 beers are eligible for food and bar discounts and prizes along the
way and are then inducted into the Hall of FoamSM with their names listed on a
large plaque displayed near the bar. Other promotions are designed to promote
civic and charitable events in each restaurant's local community and include
such local restaurant marketing programs as Rolling Stoves and Pizza PalzSM. The
Company also uses extensive print advertising, and radio advertising to the
extent a market is media efficient, for certain seasonal promotional events.
Site Selection and Location. The Company currently operates 40 Old Chicago
restaurants, 34 of which are located in various cities throughout Colorado,
Minnesota, Kansas, Oregon, Nebraska and Idaho, and one each in Addison, Texas;
Madison, Wisconsin; Columbia, Missouri; Bettendorf, Iowa; Tucson, Arizona and
Rockford, Illinois. The Old Chicago concept is flexible and adaptable to a
variety of markets and demographics primarily because the design and decor of
each site is tailored to the specific location, thereby enhancing its
neighborhood appeal. Old Chicago restaurants have been successful in downtown
and suburban locations, in metropolitan areas and in smaller cities and towns.
During the first quarter of 1998, the Company closed the Old Chicago restaurants
located in Gladstone, Missouri and Evergreen, Colorado due to lower than
expected sales and profitability (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations Overview").
Restaurant Economics. The Company believes that its Old Chicago restaurants
produce competitive unit economics. In 1997, the Old Chicago restaurants
operating for the entire fiscal year, excluding the two Old Chicago restaurants
closed during the first quarter of 1998, generated average revenues of
approximately $1.9 million, with per restaurant revenues ranging from $1.5
million to $2.5 million, and average EBITDA of approximately $302,000 (16.1% of
revenues). Additionally, the average cash investment for the seven restaurants
opened in 1997 totaled $1.0 million for leasehold improvements, furniture,
fixtures, restaurant equipment and pre-opening costs (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources"). There can be no assurance that these
restaurant economics can be maintained in the future.
Trolley Barn
During 1996, the Company acquired an indirect 50% equity interest in
Trolley Barn in exchange for 452,073 shares of common stock. The Company has the
option to purchase the remaining 50% interest in Trolley Barn at any time
between July 2000 and July 2002 at a predetermined multiple of earnings, plus
cash and less debt. Trolley Barn currently operates eight casual dining
restaurants, four under the name Big River Grille & Brewing WorksTM, two under
the name Rock Bottom Restaurant & Brewery, one Ragtime Tavern, and one A1A Ale
Works. All of Trolley Barn's restaurants feature hand-crafted beer brewed
on-premises, and a menu similar to the Rock Bottom Restaurant & Brewery
restaurants in both selection and variety of items and in pricing. Big River
Grille & Brewing Works restaurants are located in Chattanooga and Nashville,
Tennessee; Greenville, South Carolina and at Disney's Boardwalk adjacent to WALT
DISNEY WORLD in Lake Buena Vista, Florida. Rock Bottom Restaurant & Brewery
restaurants are located in Atlanta, Georgia and Charlotte, North Carolina.
Ragtime Tavern and A1A Ale Works are located in Jacksonville and St. Augustine,
Florida, respectively. Trolley Barn's development plans for 1998 include opening
a total of three brewery restaurants, two of which were acquired during the
first quarter of 1998. The License & Development Agreement requires that Trolley
Barn develop three restaurants during fiscal 1998, four during 1999 and five
during 2000.
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Expansion Strategy
From January 1995 through December 1997, the Company opened 44 restaurants,
including 28 Old Chicago restaurants and 16 Rock Bottom Restaurant & Brewery
restaurants. During the first quarter of 1998, the Company closed two Old
Chicago restaurants and two Rock Bottom Restaurant & Brewery restaurants opened
previously (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview"), and as of March 26, 1998, the Company
operated 40 Old Chicago restaurants and 19 Rock Bottom Restaurant & Brewery
restaurants.
During July 1997, the Company announced a strategic plan to reduce its
future restaurant expansion by opening six Rock Bottom Restaurant & Brewery
restaurants and no Old Chicago restaurants during fiscal 1998, and to defer its
plans for franchising the Old Chicago concept. As a result, the Company's
expansion strategy for 1998 is focused on opening company-owned brewery
restaurants. The Company anticipates resuming expansion for the Old Chicago
concept once management believes it has an effective plan in place to improve
sales and profits in certain restaurants, and to reduce new restaurant
development costs.
Expansion during 1998 for the brewery restaurants will focus primarily on
building out existing markets in California, Ohio, Illinois and Washington. New
restaurant locations currently planned for 1998 and the estimated opening dates
are as follows:
1998 Planned Restaurant Openings
Location Estimated Opening Date
-------- ----------------------
La Jolla, CA April 1998
Cleveland, OH May 1998
Irvine, CA July 1998
Warrenville, IL September 1998
Phoenix, AZ October 1998
Bellevue, WA November 1998
While the Company is evaluating new markets for possible expansion in the
future, there can be no assurance that either the Rock Bottom Restaurant &
Brewery or Old Chicago concept will be successful outside their historical
markets where regional tastes and restaurant preferences may be different. In
addition, the Company has expanded the geographic location of its restaurants,
and there can be no assurance that the Company will be able to operate
profitable restaurants dispersed in a larger geographic area.
The Company's ability to open additional restaurants will depend upon a
number of factors, including, among others, the employment and training of
restaurant management, staff and other personnel, the cost and availability of
suitable locations, regulatory limitations regarding common ownership of
breweries and restaurants in certain states, acceptable leasing or financing
terms, cost effective and timely construction of restaurants (which construction
can be delayed due to, among other factors, labor disputes, local zoning and
licensing matters and weather conditions), securing of required governmental
permits and approvals and the Company's ability to generate funds from existing
operations. There can be no assurance that the Company will be able to open its
planned restaurants in a timely or cost effective manner, if at all.
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Restaurant Operations and Management
The Company seeks to attract and retain high quality, experienced
restaurant managers by providing them with responsibility and financial
incentives. The management team of a typical restaurant consists of one general
manager, up to four department heads (service, kitchen, bar and, if applicable,
brewing) and up to four assistant managers. Each restaurant also has either an
executive chef or professional kitchen manager and up to three assistant chefs
or assistant kitchen managers. The Company presently employs a vice president of
operations for each restaurant division, four regional managers for the Rock
Bottom Restaurant & Brewery division and seven regional managers for the Old
Chicago division. The Company provides financial incentives to general and
regional managers based on certain performance measures including: (i)
profitability of the restaurant, (ii) adherence to standard hiring practices,
and (iii) completion of personnel reviews on a timely basis. General managers
are also reviewed on the basis of the advancement and growth of assistant
managers, restaurant cleanliness and safety, involvement in the community and
awareness of the market.
The Company strives to maintain quality and consistency at each of its
restaurants by assisting its personnel in achieving higher levels of execution
in service, food/beverage preparation, brewing quality assurance and facility
maintenance. Through weekly sales meetings, monthly department meetings,
"brew-chats" and quarterly employee roundtable focus groups, the Company
involves each employee in the evaluation and improvement of restaurant
operations. The Company seeks to develop and refine its performance measurement
system on an on-going basis, seeking new and innovative ways to provide feedback
to its employees to focus their attention on improving restaurant performance
and profitability.
The Company devotes significant resources to management training and
development. The Company has established a team of full-time professionals
including a vice president of training, a director of recruiting and two
directors of training to manage the recruitment and training of management
personnel for the Company's new and existing restaurants. In addition, as the
staff is the key ingredient to the Company's customer service commitment, the
Company devotes substantial resources to the recruiting, hiring and training of
these individuals, and employs three training coordinators for designing and
implementing staff training programs such as "Train the Trainer," which ensures
that trainers at each restaurant are communicating a correct and consistent
message, and "Big Brother/Big Sister," which provides all new staff members with
a designated individual for answering questions or providing assistance.
The Company maintains an alcohol awareness training program for all
restaurant-level Company employees who interact with customers, which must be
completed during the first 90 days of employment. The Company employs 30
accredited trainers who educate and train Company staff to serve alcohol
responsibly.
Internal Controls
The Company maintains internal controls for each of its restaurants through
use of centralized accounting and management information systems. Each
restaurant has the ability to compile their sales and labor information on a
daily basis through utilization of point-of-sale terminals. Certain brewery
restaurants also have sophisticated computer payroll scheduling systems that
have allowed management to manage and control labor costs efficiently as well as
transmit payroll information directly to the Company. During 1997, the Company
implemented a new accounting and financial reporting software package that has,
among other things, provided the ability to integrate daily information
generated by each restaurant's point-of-sale and labor scheduling systems with
the central accounting system and easily prepare consolidated or other selected
management reports (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources"). Cash is
controlled either through daily deposits of sales proceeds into the Company's
principal depository account, maintained in Colorado, or is transferred twice a
week from bank accounts out of state into the Colorado depository account. The
Company stresses the interaction with restaurant management to ensure accurate
and efficient reporting.
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Brewing Operations
The breweries at the Rock Bottom Restaurant & Brewery restaurants are
designed to produce between 1,600 and 5,000 barrels per year. Each system is
custom designed to be integrated into the restaurant layout in the most
efficient and aesthetic manner and emphasizes ease of control, use and
flexibility. Each Rock Bottom Restaurant & Brewery restaurant employs a head
brewer and one or more apprentice brewers. The Company also employs a vice
president of brewing operations, two brewers responsible for designing and
installing all brewing systems in new restaurants, and six brewers (four of whom
also serve as head brewers) who act as quality control supervisors.
All of the Company's brewers strive to ensure that every batch of beer
brewed is of the highest quality and consistent with prior batches. Beer is
produced from malted barley, hops, yeast and water. Malted barley, the main
ingredient of beer, is produced when barley is moistened, allowed to germinate
and then dried. The malted barley is then crushed and mixed with hot water and
strained, producing a clear amber liquid called wort. Wort is boiled in brew
tubs and hops are added which add bitterness and flavor to the brew. The mixture
is then strained and placed in a tank where yeast is added and the beer is
allowed to ferment. When the fermentation process produces the desired result,
the beer is then transferred to aging tanks where the flavor is developed. The
brewing process from the conversion of raw materials to the serving of beer is
typically completed in seven to 14 days, depending on the type of beer being
brewed.
Purchasing Operations
The Company's management negotiates directly with suppliers for key food
and beverage products to assure uniform quality and freshness of products in its
restaurants, and to obtain competitive prices. These products and certain
supplies used by the Company's restaurants are purchased from specified food
producers, independent wholesale distributors and manufacturers. Food and
beverage products and supplies are shipped directly to the restaurants as the
Company does not maintain a central product warehouse. The Company has not
experienced any significant delays in receiving restaurant products, supplies or
equipment.
The Company directs and participates in a volume buying group consisting of
14 other restaurants, two hotels and one brewery, all of which are owned in
whole or in part by affiliates of the Company. During fiscal 1997, the Company's
single largest supplier, Nobel Sysco, Inc., accounted for approximately 88% of
food and other products purchased by the Company. The master agreement under
which the Company operates with this supplier is terminable upon 30 days' notice
by either party. The Company believes that food and beverage products are
readily available from alternate suppliers.
Competition
The restaurant industry is intensely competitive. Rock Bottom Restaurant &
Brewery restaurants compete with other casual dining restaurants, brewpubs and
other restaurants primarily on the basis of service, atmosphere and quality,
among other factors. Old Chicago restaurants compete with other casual dining
restaurants and with local, neighborhood taverns on the basis of the price-value
relationship, service, location, quality, beer selection and atmosphere, among
other factors. Many competitors for both of the Company's concepts are well
established and have substantially greater financial and other resources than
does the Company.
The restaurant industry generally, and the Company in particular, is
affected by changes in consumer tastes, national, regional or local economic
conditions, weather conditions, demographic trends, traffic patterns and the
type, number and location of competing restaurants. The Company believes its
ability to compete effectively will continue to depend upon its ability to offer
superior service with high quality menu items in distinctive dining
environments.
Government Regulations
General. The Company's restaurants are subject to regulation by federal
agencies and to licensing and regulation by state and local health, sanitation,
safety, fire and other departments relating to the development and operation of
restaurants. These regulations include matters relating to environmental,
building and zoning requirements, the preparation and sale of food and alcoholic
beverages, designation of non-smoking and smoking areas and accessibility of
restaurants to disabled customers. Various federal and state labor laws govern
the Company's relationship with its employees, including minimum wage
requirements, overtime, working conditions and immigration requirements.
Significant additional government-imposed increases in minimum wages, paid
leaves of absence and mandated health benefits, or increased tax reporting and
tax payment requirements for employees who receive
<PAGE>
gratuities, could have an adverse effect on the Company's results of operations.
Delays or failures in obtaining the required construction and operating
licenses, permits or approvals could delay or prevent the opening of new
restaurants. Management believes the Company is operating in substantial
compliance with applicable laws and regulations governing its operations.
Alcoholic Beverage Regulation. Each of the Company's restaurants is subject
to licensing and regulation by a number of governmental authorities. The Company
operates its Rock Bottom Restaurant & Brewery restaurants in compliance with
federal licensing requirements imposed by the Bureau of Alcohol, Tobacco and
Firearms of the United States Department of the Treasury, as well as the
licensing requirements of states where its restaurants are located. Alcoholic
beverage control regulations require each of the Company's restaurants to apply
to a state authority and, in certain locations, county or municipal authorities
for a license and permit to brew and/or sell alcoholic beverages on premises.
Typically, licenses must be renewed annually and may be revoked or suspended for
cause at any time. Alcoholic beverage control regulations relate to numerous
aspects of the daily operations of the Company's restaurants, including minimum
age of patrons and employees, hours of operation, advertising, wholesale
purchasing, inventory control and brewing, and handling, storage and dispensing
of alcoholic beverages. The Company believes it has all material regulatory
permits and licenses necessary to operate its restaurants and the breweries at
the Rock Bottom Restaurant & Brewery restaurants. Failure on the part of the
Company to comply with federal, state or local regulations could cause the
Company's licenses to be revoked and force it to cease the brewing and/or sale
of alcoholic beverages at its restaurants. In addition, changes in legislation,
regulations or administrative interpretation of liquor laws after the opening of
restaurants in a jurisdiction may prevent or hinder the Company's expansion or
operations in that jurisdiction. The failure to receive or retain, or delay in
obtaining, a liquor or brewpub license in a particular location could adversely
affect the Company's ability to obtain such a license elsewhere.
Certain states have restrictions on the number of barrels of beer that can
be brewed annually by a brewpub. These various state liquor laws are continually
changing, and the Company may be hindered or prohibited from opening Rock Bottom
Restaurant & Brewery restaurants in certain markets. The Company does not
believe that federal or state liquor laws will have a material adverse effect on
the opening or operation of the Rock Bottom Restaurant & Brewery restaurants
planned for 1998.
The United States federal government currently imposes an excise tax of $18
per barrel on each barrel of beer produced for domestic consumption in the
United States. However, each brewer with production under 2,000,000 barrels per
year is granted a small brewer's excise tax credit in the amount of $11 per
barrel on its first 60,000 barrels produced annually. In 1997, the Company was
able to take advantage of a $359,458 credit from the production of 32,678
barrels pursuant to this exemption. The Company is not aware of any plans by the
federal government to reduce or eliminate the small brewer's credit. Individual
states also impose excise taxes on alcoholic beverages in varying amounts, which
also are subject to change. It is possible that excise taxes will be increased
by both the federal government and a number of the states. Increased excise
taxes on alcoholic beverages have been considered by the U.S. Congress as an
additional source of tax revenue in connection with various proposals and could
be included in future legislation. Certain states have special taxes on the sale
or production of alcoholic beverages. Increases in taxes on malt beverages, if
enacted, could have a material adverse effect on the Company.
The Company is subject to "dram-shop" laws in most states in which it
currently operates and will be subject to such statutes in certain other states
for future sites. These laws generally provide a person injured by an
intoxicated person the right to recover damages from an establishment which
wrongfully served alcoholic beverages to such person. The Company carries liquor
liability coverage as part of its existing comprehensive general liability
insurance which it believes is consistent with coverage carried by other
entities in the restaurant industry. However, a judgment against the Company
under a dram-shop statute in excess of the Company's liability coverage could
have a material adverse effect on the Company.
<PAGE>
Employees
At December 28, 1997, the Company had 5,295 employees, of which 86 served
in administrative capacities (including home office, brewery, administrative and
executive personnel), 330 served as restaurant management personnel, and the
remainder of whom were hourly personnel. No employee is covered by a collective
bargaining agreement, and the Company has never experienced an organized work
stoppage, strike or labor dispute. The Company believes its working conditions
and compensation are competitive with those offered by its competitors and
considers relations with its employees to be excellent.
Intellectual Property
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including Old
Chicago, Rock Bottom Restaurant & Brewery, World Beer Tour, Hall of Foam, Pizza
Palz, You've Hit Rock Bottom, Denver ChopHouse and Brewery and the Old Chicago
Fresh Pasta & Pizza design. The Company regards its Old Chicago and Rock Bottom
Restaurant & Brewery and other marks as having substantial value and as being an
important factor in the marketing of its Old Chicago restaurants and Rock Bottom
Restaurant & Brewery restaurants. The Company's policy is to pursue registration
of its marks whenever possible and to oppose vigorously any infringement of its
marks. The Company is aware, however, of a use by an unaffiliated third party of
the name Old Chicago in California which could limit the ability of the Company
to use its Old Chicago mark in parts of the California market, and of a use by
an unaffiliated third party of the name Rock Bottom in New Hampshire and
Nebraska which could limit the ability of the Company to use its Rock Bottom
Restaurant & Brewery mark in parts of New Hampshire and Nebraska.
<PAGE>
ITEM 2: Properties
As of December 28, 1997, the Company operated 63 restaurants, including 21
Rock Bottom Restaurant & Brewery restaurants and 42 Old Chicago restaurants, and
owned a 50% equity interest in six restaurants operated by Trolley Barn. The
following table sets forth the locations of these restaurants. See
"Business-Expansion Strategy" for a discussion of planned restaurant openings in
1998:
Existing Restaurant Locations as of December 28, 1997
<TABLE>
<CAPTION>
Rock Bottom Restaurant &
Brewery Old Chicago Trolley Barn
<S> <C> <C> <C>
Arizona -- 1 --
California 3 -- --
Colorado (a) 4 17 --
District of Columbia 1 -- --
Florida -- -- 1
Georgia -- -- 1
Idaho -- 2 --
Illinois 1 1 --
Indiana 1 -- --
Iowa 1 1 --
Kansas (a) 1 3 --
Maryland 1 -- --
Minnesota 1 7 --
Missouri (a) -- 2 --
Nebraska -- 3 --
Ohio 2 -- --
Oregon 1 3 --
North Carolina -- -- 1
South Carolina -- -- 1
Tennessee -- -- 2
Texas (a) 2 1 --
Washington 1 -- --
Wisconsin 1 1 --
-- -- --
Total restaurants 21 42 6
== == =
</TABLE>
(a) During the first quarter of 1998, the Company closed two Old
Chicago restaurants located in Colorado and Missouri and two Rock
Bottom Restaurant & Brewery restaurants located in Kansas and Texas
(see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview").
The Company either owns or leases the furnishings, fixtures and equipment
in each of its restaurants. Generally, each lease entered into by the Company is
conditioned upon the ability of the Company to obtain the permits and licenses
necessary to operate the restaurant identified for such site. Existing
restaurant building leases have expiration dates ranging from August 1998 to
February 2038 (excluding existing renewal options). The Company does not
anticipate any difficulties in renewing its existing leases as they expire;
however, there can be no assurance that the Company will be able to renew such
leases. See Note 10 of Notes to Consolidated Financial Statements for
information regarding aggregate minimum rentals paid by the Company for recent
periods and information regarding the Company's obligation to pay minimum
rentals in future years.
The Company owns the land and building for the Old Chicago restaurants
located in Greeley, Longmont and Grand Junction, Colorado; Addison, Texas and
Salem, Oregon, and for the Rock Bottom Restaurant & Brewery restaurants located
in Chicago, Illinois; Addison, Texas and Des Moines, Iowa. The Company completed
a sale/leaseback transaction in early 1998 for the property owned in Des Moines
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources"). The Property owned in Chicago is
encumbered by a long-term mortgage (see Note 6 of Notes to Consolidated
Financial Statements). The Company also leases approximately 23,000 square feet
of office space in Louisville, Colorado.
<PAGE>
ITEM 3: Legal Proceedings
The Company is a party to certain legal proceedings arising in the ordinary
course of its business. Management believes that any resulting liability,
individually or in the aggregate, will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
ITEM 4: Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
ITEM 5: Market for Registrant's Common Equity and Related Stockholder Matters
The table below sets forth for the fiscal quarters indicated the reported
high and low last sale prices per share of the Company's Common Stock, as
reported on The Nasdaq Stock Market SM. The last sale price of the Company's
common stock on March 26, 1998, was $5.875 per share.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
1996
First quarter $ 13.00 $ 8.75
Second quarter 14.88 9.50
Third quarter 13.75 10.88
Fourth quarter 12.50 9.25
1997
First quarter $ 12.00 $ 8.63
Second quarter 12.00 9.25
Third quarter 10.00 7.25
Fourth quarter 11.75 5.75
</TABLE>
As of March 26, 1998, there were 295 record holders of Common Stock,
although the Company believes that the number of beneficial owners of its Common
Stock is substantially greater.
The Company anticipates that for the foreseeable future, all earnings, if
any, will be retained for the operation and expansion of its business and that
it will not pay cash dividends. The payment of dividends, if any, in the future
will be at the discretion of the Board of Directors and will depend upon, among
other things, future earnings, capital requirements, restrictions in existing
financing agreements, the general financial condition of the Company and general
business conditions.
<PAGE>
ITEM 6: Selected Financial Data
The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 28, 1997, are derived from the
Consolidated Financial Statements of the Company, which have been audited by
Arthur Andersen LLP, independent accountants. The Selected Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K. The financial data presented prior to 1994 represents the historical
combined operations of certain predecessor corporations. See Note 1 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------------------
December 26, December 25, December 31, December 29, December 28,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Old Chicago restaurants $15,641 $22,201 $40,499 $ 58,328 $ 73,117
Rock Bottom Restaurant & Brewery
restaurants 9,126 16,652 33,465 50,902 77,131
------- ------ ------ -------- --------
Total revenues 24,767 38,853 73,964 109,230 150,248
------ ------ ------ ------- -------
Operating Expenses:
Cost of sales 6,777 9,785 18,509 27,100 37,672
Restaurant salaries and benefits 8,113 12,727 24,739 35,552 51,086
Operating expenses 5,201 8,044 15,135 23,529 30,627
Selling expenses 942 1,272 2,855 4,272 5,773
General and administrative 1,434 2,468 4,577 5,620 9,073
Depreciation and amortization 565 1,325 4,200 7,802 12,136
Restructuring charge -- -- -- -- 9,707
------- ------- ------- -------- --------
Total operating expenses 23,032 35,621 70,015 103,875 156,074
------ ------ ------ ------- -------
Income (Loss) From Operations 1,735 3,232 3,949 5,355 (5,826)
Equity in joint venture earnings -- -- -- 223 330
Interest income (expense), net (174) (106) 831 (74) (1,763)
Other income (expense), net (148) 8 40 (1) --
-------- ------- ------- --------- ---------
Income (Loss) Before Taxes 1,413 3,134 4,820 5,503 (7,259)
Net Income (Loss) (1) $ 880 $ 1,924 $ 3,270 $ 4,025 $ (4,691)
====== ====== ====== ====== ======
Diluted Net Income (Loss) Per Share $ .29 $ .47 $ .45 $ .52 $ (.58)
====== ====== ====== ====== ======
Diluted Weighted Average
Shares Outstanding (2) 3,062 4,072 7,264 7,725 8,027
===== ===== ===== ===== =====
Balance Sheet Data (at end of period):
Working capital (deficit) $(3,072) $ 1,113 $ 9,335 $ (732) $ (5,567)
Total assets 5,757 26,359 64,169 84,948 108,195
Long-term debt (including current
portion) 1,825 706 641 11,564 28,940
Obligations under capital leases
(including current portion) 292 1,794 1,667 1,372 2,861
Stockholders' equity 940 17,924 55,341 65,337 61,219
</TABLE>
(1) The Company was taxed as an S corporation through July 10, 1994 and,
therefore, the income statement data includes certain adjustments to
reflect a provision for income taxes through that date as if the
Company had been taxed as a C Corporation.
(2) Weighted average common shares outstanding include (a) 3,000,000 shares
of Common Stock issued to stockholders of certain predecessor
corporations and (b) 62,375 additional shares deemed issued at December
26, 1993, to fund undistributed S corporation earnings at that date.
<PAGE>
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's audited Consolidated
Financial Statements and notes thereto appearing in Item 8 in this Form 10-K.
Cautionary Statement Under "Safe Harbor" Provision of the
Private Securities Litigation Reform Act of 1995
Certain statements contained in this report are not historical facts, and
are forward-looking statements that involve known and unknown risks and
uncertainties which may cause actual results or performance of the Company to
differ materially from such forward-looking statements. Such statements include
statements regarding:
-Restaurant expansion plans for 1998;
-Estimated capital expenditures in 1998;
-Estimated average construction cost for new restaurants opening
during 1998;
-Trolley Barn's development plans during the next three years;
-The Company's expansion strategy;
-Ability of the Company to renew existing leases;
-Ability to complete sale-leaseback transactions for prototype
brewery restaurants;
-Availability of food and beverage products from alternate
suppliers;
-Ability of the Company to compete effectively within the
restaurant industry;
-Changes in federal or state liquor or tax laws;
-Impact on financial condition, results of operations or
liquidity from legal proceedings arising in the ordinary
course of business;
-Ability of brewery restaurants to achieve operating efficiencies;
-Timing and results of cost reduction efforts;
-Estimated amounts accrued for restaurant closings;
-Ability to generate sufficient cash from operations to complete
financing of 1998 restaurant expansion.
Factors that could cause actual results to differ materially include, among
others: availability of suitable restaurant locations; availability of financing
on acceptable terms to fund future growth; increasing costs associated with new
restaurant construction, or developing a significant number of new restaurants
over a relatively short period of time; delays in opening new restaurants;
ability to hire and train increasing numbers of restaurant management, staff and
other personnel for new restaurants; ability of Trolley Barn to open restaurants
or conduct operations as anticipated; fluctuations in consumer demand and tastes
including a decrease in consumers' preference for higher quality, more flavorful
beer; acceptance in new markets; competitive conditions in the Company's
markets; general economic conditions; adverse weather conditions; operating
restrictions and costs associated with governmental regulations; regulatory
limitations regarding common ownership of breweries and restaurants in certain
states; greater than expected costs associated with closing restaurants, 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 21 Rock Bottom Restaurant &
Brewery restaurants and 42 Old Chicago restaurants, an increase of 14
restaurants from the end of the preceding fiscal year. The following table lists
the Company's new restaurant openings by quarter during 1997:
<TABLE>
<CAPTION>
New Restaurant Openings
Qtr. Ended Qtr. Ended Qtr. Ended Qtr. Ended Total
3/30/97 6/29/97 9/28/97 12/28/97 1997
<S> <C> <C> <C> <C> <C>
Old Chicago restaurants 2 4 1 -- 7
Rock Bottom Restaurant & Brewery
restaurants 2 3 2 -- 7
- - - -- -
Total restaurants 4 7 3 0 14
= = = = ==
</TABLE>
The Old Chicago restaurants opened during 1997 are primarily located in
existing markets throughout the west and mid-west. The Rock Bottom Restaurant &
Brewery restaurants opened during 1997 are located in Campbell, Fresno and Long
Beach, California; Englewood, Colorado; Des Moines, Iowa; Milwaukee, Wisconsin
and the District of Columbia. Due to the maturation of the Company's existing
restaurant base and the possible effects of opening additional restaurants in
close proximity, revenues of certain of the Company's restaurants may be lower
in future periods than previously experienced.
During 1997, the Company approved 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 profits. As a result of these decisions, the
Company incurred a pre-tax restructuring charge of approximately $9.7 million.
Such charge includes the estimated costs accrued to close these four restaurants
of approximately $3.9 million, write-downs of certain assets to their net
realizable value totaling approximately $5.5 million, and expenses related to
the elimination of certain corporate office overhead in response to the planned
reduction in future growth totaling approximately $272,000. Subsequent to
yearend, the Company closed the Old Chicago restaurants located in Evergreen,
Colorado and Gladstone, Missouri, and the Rock Bottom Restaurant & Brewery
restaurants located in Houston, Texas and Overland Park, Kansas.
Restaurant openings planned for 1998 include six Rock Bottom Restaurant &
Brewery restaurants. All leases for new restaurants are either signed or in the
final stages of negotiation. Future operating results may be adversely affected
by costs associated with developing a significant number of new restaurants over
a relatively short time period. Additionally, new restaurants typically incur
certain increased costs in the process of achieving operational efficiencies
during the first several months of operation. Preopening costs, which are
incurred prior to opening a new restaurant but amortized over the first 12
months after opening, and restaurant salaries and benefits are one example of
these increased costs.
The Accounting Standards Executive Committee of the AICPA has issued for
comment a proposed statement of position ("SOP") titled "Reporting on the Costs
of Start-up Activities." If issued as proposed, the new standard would require
the Company to prospectively expense preopening costs as incurred. As currently
proposed, the new SOP would not require restatement of prior periods and would
be applied as of the beginning of the fiscal year in which the SOP is first
adopted, which would be 1998 for the Company. Initial application would be
reported as a cumulative effect of a change in accounting principle.
<PAGE>
The Company operates on a 52 or 53 week fiscal year ending the last Sunday
in December. Fiscal years 1996 and 1997 each contained 52 weeks, while fiscal
1995 contained 53 weeks.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to restaurant revenues of certain income statement data and certain
restaurant data:
<TABLE>
<CAPTION>
Percentage of Revenues
----------------------
Years Ended
-----------
December 31, December 29, December 28,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income Statement Data:
Revenues:
Old Chicago restaurants 54.8% 53.4% 48.7%
Rock Bottom Restaurant & Brewery restaurants 45.2 46.6 51.3
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Operating Expenses:
Cost of sales 25.0 24.8 25.1
Restaurant salaries and benefits 33.4 32.6 34.0
Operating expenses 20.5 21.5 20.4
Selling expenses 3.9 3.9 3.8
General and administrative 6.2 5.1 6.0
Depreciation and amortization 5.7 7.2 8.1
Restructuring charge -- -- 6.4
----- ----- -----
Total operating expenses 94.7 95.1 103.8
----- ----- -----
Income (Loss) From Operations 5.3 4.9 (3.8)
Equity in joint venture earnings -- 0.2 0.2
Interest income 1.5 0.2 --
Interest expense (0.3) (0.3) (1.2)
Other income (expense), net -- -- --
----- ----- -----
Income Before Taxes 6.5 5.0 (4.8)
Net Income (Loss) 4.4% 3.7% (3.1)%
===== ===== =====
Restaurant Data:
Restaurants open (end of period):
Old Chicago restaurants 23 35 42
Rock Bottom Restaurant & Brewery restaurants 10 14 21
--- --- ---
Total 33 49 63
=== === ===
Restaurant operating weeks:
Old Chicago restaurants 983 1,541 2,058
Rock Bottom Restaurant & Brewery restaurants 369 588 949
------ ------ ------
Total 1,352 2,129 3,007
===== ===== =====
Average sales per restaurant (open for full period)
(in thousands):
Old Chicago restaurants $2,144 $1,902 $ 1,834
Rock Bottom Restaurant & Brewery restaurants 4,705 4,466 4,393
</TABLE>
Fiscal 1997 Compared to Fiscal 1996
Revenues. Revenues increased $41.0 million (37.6%) to $150.2 million in
fiscal 1997 from $109.2 million in fiscal 1996. Revenues from the 14 new
restaurants which opened during 1997 accounted for $24.5 million (22.4%) of the
increase. The balance of the increase primarily resulted from the 16 restaurants
opened during 1996 contributing a full year of sales in 1997. Comparable
restaurant sales for the year ended December 28, 1997 were down slightly more
than one percent. When computing comparable restaurant sales, restaurants open
for at least six full quarters are compared from year to year.
<PAGE>
Revenues from the Company's Rock Bottom Restaurant & Brewery restaurants,
as a percentage of total revenues, increased significantly to 51.3% in 1997 from
46.6% in 1996. Although the Company opened seven brewery restaurants and seven
Old Chicago restaurants during the last 12 months, the brewery restaurants
generate greater average weekly sales ("AWS") resulting in the increase to this
percentage. The Company expects revenues from the Rock Bottom Restaurant &
Brewery restaurants to comprise an even greater percentage of the Company's
total revenues in 1998, as there are no Old Chicago restaurant openings planned
for 1998.
AWS for the Old Chicago restaurants during 1997 were $35,528 as compared to
$37,850 during fiscal 1996 (a decrease of 6.1%). Comparable restaurant sales for
the Old Chicago restaurants were down 2.6% for the year ended December 28, 1997.
These decreasing trends in AWS and comparable restaurant sales for the Old
Chicago restaurants continue to reflect the ever-increasing competitive nature
of the restaurant industry. Management also believes that the uneven sales
performance among its Old Chicago restaurants, which have fiscal 1997 AWS
currently ranging from approximately $28,000 to $49,000, indicates inconsistent
execution of the concept at certain locations. During the third quarter of 1997,
the Company began implementing an extensive analysis of its Old Chicago
restaurants to direct management's efforts towards improving overall execution
in each restaurant by increasing AWS in certain restaurants while achieving more
consistent profitability. Such analysis covers all aspects of operations
including hiring and training of new staff, restaurant maintenance and
cleanliness, local restaurant marketing promotions, menu merchandising, service
standards and food quality and consistency. The Company has begun to see some
benefits from focusing on these areas including improved AWS and comparable
restaurant sales trends during the fourth quarter of 1997 as compared to the
fourth quarter of 1996. However, management expects that complete implementation
of this program will not occur system wide until mid 1998.
AWS for the Rock Bottom Restaurant & Brewery restaurants during 1997 were
$81,277 as compared to $86,568 during fiscal 1996 (a decrease of 6.5%).
Comparable restaurant sales for the brewery restaurants were flat for the year
ended December 28, 1997. The Company anticipated the decrease in AWS as most of
the brewery restaurants opened during 1997 were designed to operate at a
slightly lower capacity than the Company's previous restaurants. AWS during 1997
for this group of restaurants were approximately $71,000 as compared to $84,000
for the 14 restaurants opened prior to 1997. As the Company will continue to
design certain of its new brewery restaurants with this lower capacity,
decreases in AWS are expected to continue in the future.
Cost of Sales. Cost of sales, which consists of food, beverage and
merchandise costs, increased $10.6 million (39.0%) to $37.7 million in fiscal
1997 from $27.1 million in fiscal 1996, and increased as a percentage of
revenues to 25.1% in fiscal 1997 from 24.8% in fiscal 1996. The increase in cost
of sales as a percentage of revenues was due primarily to new menus implemented
in both concepts in late third quarter and early fourth quarter of 1997.
Management believes such cost increases are temporary and result from
inefficiencies associated with rolling out new menus. Additionally, although the
Company benefited from greater purchasing efficiencies during 1997, including
certain non-recurring benefits in the third quarter of 1997, these cost savings
were offset by greater than expected food costs during 1997 for the seven
brewery restaurants opened during the year. New brewery restaurants typically
incur significantly higher food costs during their first several months of
operation due to complexity of the menu items. As new brewery restaurants begin
to achieve operational efficiencies, the Company expects that cost of sales as a
percentage of revenues may decrease slightly over time. Additionally, the
Company has engaged an outside consultant to assist in reengineering the brewery
menu and streamlining food preparation procedures. Cost savings from such steps
are not expected until mid-1998.
Restaurant Salaries and Benefits. Restaurant salaries and benefits, which
consist of restaurant management and hourly employee wages, payroll taxes, and
group health insurance, increased $15.5 million (43.7%) to $51.1 million in
fiscal 1997 from $35.6 million in fiscal 1996. Restaurant salaries and benefits
as a percentage of revenues increased to 34.0% in 1997 from 32.6% in 1996. The
increase in labor costs as a percentage of revenues is primarily attributed to
two factors: significantly higher labor costs associated with the seven new
brewery restaurants opened during 1997, and decreases in AWS for the Old Chicago
restaurants.
Although labor costs as a percentage of revenues for brewery restaurants
opened prior to 1997 decreased during fiscal 1997 as compared to fiscal 1996,
labor costs in the new brewery restaurants, most of which operate in higher cost
labor markets, more than offset this savings. Labor costs in the new brewery
restaurants improved significantly during the fourth quarter of 1997 from the
third quarter of 1997, and additional cost savings are anticipated over the next
several months as these restaurants achieve operational efficiency. Other
increases in labor are due to greater costs for management and kitchen labor in
the Old Chicago restaurants. As the majority of these labor costs are fixed, the
decrease in AWS resulted in an increase to these costs as a percentage of
revenues.
<PAGE>
Federal legislation effective September 1, 1997 increased the minimum wage
rate $.40 per hour to $5.15 per hour. This legislation also provided for an
additional increase to the Federal tip credit by the same amount, so that the
federal minimum wage paid to tipped employees did not increase. Additionally,
certain states passed minimum wage legislation to increase rates to amounts in
excess of the Federal minimum wage. Although a majority of the Company's
restaurants operate in states that have wage laws consistent with the Federal
minimum wage laws, the Company implemented a menu price increase of
approximately 2% in both restaurant concepts late during the third quarter of
1997 to help mitigate the anticipated impact of such legislation.
Operating Expenses. Operating expenses, which include occupancy costs,
utilities, repairs, maintenance and linen, increased $7.1 million (30.2%) to
$30.6 million in fiscal 1997 from $23.5 million for fiscal 1996. As a percentage
of revenues, such expenses decreased to 20.4% in 1997 from 21.5% in 1996. This
decrease was principally due to a reduction in 1997 insurance premium rates,
particularly workmen's compensation insurance, as well as a continued emphasis
on cost control measures in numerous areas of restaurant operations.
General and Administrative ("G&A"). G&A expenses increased $3.5 million
(61.5%) to $9.1 million in fiscal 1997 from $5.6 million in fiscal 1996, and
increased as a percentage of revenues from 5.1% in fiscal 1996 to 6.0% in fiscal
1997. The significant increase in dollars is primarily due to (1) personnel
additions in the areas of marketing, training, information systems, supervision,
accounting and finance, and senior management necessary to support the Company's
expansion program, and (2) approximately $1.3 million in non-recurring charges
incurred during the fourth quarter of 1997 for executive severance pay and costs
associated with the Company's exploration of strategic alternatives.
Depreciation and Amortization. Depreciation and amortization, including
amortization of preopening expenses, increased $4.3 million (55.5%) to $12.1
million for fiscal 1997 from $7.8 million in fiscal 1996. As a percentage of
revenues, depreciation expense and amortization of intangible assets, other than
preopening costs, was 5.1% during 1997 as compared to 4.4% in 1996, and
preopening expense amortization was 3.0% in 1997 as compared to 2.8% in 1996.
The increase in depreciation expense and amortization of intangible assets
as a percentage of revenues is due primarily to decreases in AWS for both
concepts, increased depreciation expense associated with a greater number of
corporate assets resulting from the Company's expansion program, and increased
amortization of intangible assets including goodwill associated with the
Company's investment in Trolley Barn. 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
1997, preopening expense was amortized for a larger number of Rock Bottom
Restaurant & Brewery restaurants than in 1996, resulting in the increase to
preopening expense amortization as a percentage of revenues.
Restructuring Charge. The Company incurred a pre-tax restructuring charge
during 1997 of approximately $9.7 million ($5.2 million during the third quarter
of 1997 and $4.5 million during the fourth quarter of 1997) related primarily to
write-downs of certain assets to their net realizable value, costs associated
with downsizing the corporate office, and estimated costs associated with
closing four restaurants during 1998. See Note 7 of Notes to Consolidated
Financial Statements.
Equity in Joint Venture Earnings. The equity in joint venture earnings
represents the Company's 50% equity interest in net after-tax earnings of
Trolley Barn (see Note 5 of Notes to Consolidated Financial Statements). The
increase from 1996 of approximately $107,000 is due to the Company recording a
full year of earnings during 1997 as compared to only six months of earnings
during 1996. Additionally, although Trolley Barn operated six restaurants at the
end of 1997 as compared to four restaurants at the end of 1996, increased
earnings from these restaurants were offset by greater general and
administrative expenses associated with Trolley Barn's expansion program.
Interest Expense / Interest Income. Interest expense for the year ended
December 28, 1997 increased $1.5 million from 1996, excluding approximately
$378,000 of interest expense capitalized to construction costs. The increase in
interest expense is primarily attributable to an increase in long-term debt from
the end of 1996, principally additional net borrowings of $17.9 million under
the Company's line of credit. See Note 6 of Notes to Consolidated Financial
Statements. Interest income during 1996 primarily represents amounts earned from
the temporary investment of cash proceeds from the Company's follow-on offering
in the first quarter of 1995.
<PAGE>
Net Income (Loss) and Diluted Net Income (Loss) Per Share. Net loss and
diluted net loss per share for the year ended December 28, 1997 was $4.7 million
and $.58, respectively. Net income and diluted net income per share, exclusive
of the restructuring charge and certain other non-recurring G&A expenses, is
summarized as follows:
Pre-tax loss $ (7,258,894)
Add: Restructuring charge 9,706,554
Non-recurring G&A expenses 1,300,000
---------
Pro forma pre-tax income excluding
non-recurring charges 3,747,660
Allocable income tax expense (1,305,154)
---------
Pro forma net income $ 2,442,506
=========
Pro forma diluted net income per share $ .30
Income Tax Provision (Benefit). The effective tax rate associated with the
income tax benefit in 1997 was 35.4% as compared to the effective tax rate for
the income tax provision in 1996 of 26.9%. The difference between the two rates
is primarily due to income tax credits generated during each fiscal year net of
any related valuation allowance. Such net credits are used to reduce the
effective combined federal and state tax rate. Due to alternative minimum tax
limitations and the relatively volatile nature of the restaurant industry,
during fiscal 1997 the Company recorded a valuation allowance for 100% of the
FICA tax credits generated, as compared to fiscal 1996 when the Company recorded
a valuation allowance for approximately 30% of tax credits generated. See Note 8
of Notes to Consolidated Financial Statements.
Fiscal 1996 Compared to Fiscal 1995
Revenues. Revenues increased $35.3 million (47.7%) to $109.2 million in
fiscal 1996 from $74.0 million in fiscal 1995. Revenues from the 16 new
restaurants which opened during 1996 accounted for $19.9 million (26.9%) of the
increase. The balance of the increase primarily resulted from the 14 restaurants
opened during 1995 contributing a full year of sales in 1996, as comparable
restaurant sales were flat for the year. When computing comparable restaurant
sales, restaurants open for at least six full quarters are compared from year to
year.
Revenues from the Company's Rock Bottom Restaurant & Brewery restaurants,
as a percentage of total revenues, increased slightly to 46.6% in 1996 from
45.2% in 1995. Although the Company opened only four Rock Bottom Restaurant &
Brewery restaurants during the last 12 months as compared to 12 Old Chicago
restaurants, the brewery restaurants generate greater average weekly sales
("AWS") resulting in the increase to this percentage.
AWS for the Rock Bottom Restaurant & Brewery restaurants during 1996 were
$86,568 as compared to $90,690 during fiscal 1995. The decrease in AWS of $4,122
(4.5%) is due primarily to the impact the Company's restaurant in Denver has on
the AWS computation. This restaurant generates AWS of approximately $135,000 as
compared to the Company's targeted restaurant model of $86,000 in AWS. Due to
additional restaurant openings, this restaurant contributed only approximately
14% to total brewery revenues in 1996 as compared to approximately 22% of total
brewery revenues in 1995.
AWS during 1996 for the Old Chicago restaurants were $37,850 as compared to
$41,199 during fiscal 1995. The decrease in AWS of $3,349 (8.1%) is due
primarily to six restaurants that generate AWS below the Company's targeted
restaurant model. These restaurants, all of which were opened or selected for
opening during 1995, incurred AWS of $29,966 during 1996 as compared to $34,404
during 1995.
Cost of Sales. Cost of sales, which consists of food, beverage and
merchandise costs, increased $8.6 million (46.4%) to $27.1 million in fiscal
1996 from $18.5 million in fiscal 1995, but decreased slightly as a percentage
of revenues to 24.8% in fiscal 1996 from 25.0% in fiscal 1995. Although the
Company experienced significant increases in certain commodity prices during the
latter part of the second quarter and into the third quarter of 1996,
particularly cheese and chicken, these cost increases were offset by increased
purchasing efficiencies, and increased training and development of restaurant
management to focus on controlling food and beverage waste and yields. Commodity
prices for cheese and chicken have since returned to their pre-inflation 1996
levels.
<PAGE>
Restaurant Salaries and Benefits. Restaurant salaries and benefits, which
consist of restaurant management and hourly employee wages, payroll taxes, and
group health insurance, increased $10.8 million (43.7%) to $35.6 million in
fiscal year 1996 from $24.7 million in fiscal year 1995. Such salaries and
benefits decreased as a percentage of revenues from 33.4% in 1995 to 32.6% in
1996. This decrease is due primarily to sophisticated labor scheduling systems
installed in the Rock Bottom Restaurant & Brewery restaurants during the last
part of 1995 and early 1996, and procedures implemented in the Old Chicago
restaurants during the first part of 1996 to address labor scheduling on a more
real-time basis.
Operating Expenses. Operating expenses, which include occupancy costs,
utilities, repairs, maintenance and linen, increased $8.4 million (55.5%) to
$23.5 million in fiscal year 1996 from $15.1 million for fiscal year 1995. As a
percentage of revenues, such expenses increased to 21.5% in 1996 from 20.5% in
1995. This increase is primarily a result of higher occupancy costs including an
increase in the level of insurance coverage carried by the Company, higher
property taxes in certain markets and increases in certain fixed costs as a
percentage of revenues due to decreases in AWS for both concepts.
General and Administrative ("G&A"). G&A expenses increased $1.0 million
(22.8%) to $5.6 million in fiscal year 1996 from $4.6 million in fiscal year
1995 and decreased significantly as a percentage of revenues from 6.2% in 1995
to 5.1% in 1996. The increase in dollars primarily reflects personnel additions
in the areas of marketing, training, information systems, supervision,
accounting and finance and senior management as well as increases in overall
corporate infrastructure resulting from the Company's continuing expansion
program. The decrease of 1.1% as a percentage of revenues is due primarily to
efficiencies gained in administering a larger number of restaurants and reflects
results from an extensive cost containment program initiated in the first
quarter of 1996.
Depreciation and Amortization. Depreciation and amortization, including
amortization of preopening expenses, increased $3.6 million (85.8%) to $7.8
million for fiscal year 1996 from $4.2 million in fiscal year 1995. As a
percentage of revenues, depreciation expense was 4.4% during 1996 as compared to
3.2 % in 1995, and preopening expense was 2.8% in 1996 as compared to 2.5% in
1995.
The increase in depreciation expense as a percentage of revenues is
attributable primarily to two Old Chicago restaurants and three Rock Bottom
Restaurant & Brewery restaurants opened during the last part of 1995. These
restaurants experienced higher construction costs than restaurants opened prior
to July 1995, including land and building purchases for three of these
restaurants. The increase in preopening expense as a percentage of revenues is
attributable primarily to an increase in average preopening costs for certain
Old Chicago restaurants. This increase is principally due to opening restaurants
in new markets outside of Colorado, which requires a greater investment for
travel expense, training and other personnel related costs.
Equity in Joint Venture Earnings. The 1996 equity in joint venture earnings
represents the Company's 50% equity interest in Trolley Barn's net after-tax
earnings.
Interest Expense / Interest Income. Interest expense for the year ended
December 29, 1996, increased $51,856 from 1995. Additionally, interest expense
of approximately $195,000 was capitalized to construction costs. This increase
in interest expense is primarily attributable to proceeds from long-term debt of
$11 million during 1996. See Note 6 of Notes to Consolidated Financial
Statements. Interest income primarily represents amounts earned from the
temporary investment of cash proceeds from the Company's follow-on offering in
the first quarter of 1995. Such proceeds were used primarily for the
construction of new restaurants in 1996, resulting in lower interest income
during 1996 as compared to 1995.
Provision for Income Taxes. The 1996 provision for income taxes reflects
utilization of approximately $1.1 million in tax credits attributable to FICA
tax paid on certain tips to hourly restaurant employees (the "FICA Credit"), and
to rehabilitation costs incurred for certain owned restaurant property in
Chicago. The 1995 tax provision included a FICA Credit of only approximately
$502,000. These credits in both years reduced the effective combined federal and
state tax rate. As of December 29, 1996, the Company had tax credits available
totaling $1.5 million to reduce income taxes payable in future years. Due to
alternative minimum tax limitations and the relatively volatile nature of the
<PAGE>
restaurant industry, the Company recorded a valuation allowance in 1996 for
approximately 22% of these credits. See Note 8 of Notes to Consolidated
Financial Statements.
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 three 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
fiscal year 1995, 1996, and 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------- ---------------- ---------------
December 31, December December 28,
1995 29, 1996 1997
----------------- ---------------- ---------------
<S> <C> <C> <C>
Net cash provided by operating activities $ 3,762,046 $ 6,827,645 $ 13,275,857
Net cash used in investing activities (38,623,814) (21,525,687) (28,631,473)
Net cash provided by financing activities 33,303,434 11,142,701 16,978,153
(Decrease) increase in cash and cash equivalents (1,558,334) (3,555,341) 1,622,537
</TABLE>
Net cash used in investing activities during 1995, 1996 and 1997
included net capital expenditures of $30.7 million, $29.0 million and $28.6
million, respectively. These capital expenditures were primarily for the
construction of new restaurants, routine expenditures and remodels of existing
restaurants, and for leasehold improvements, furniture and equipment in the
corporate office. The average cash investment for leasehold improvements,
furniture, fixtures, restaurant equipment, brewing equipment and preopening
costs for restaurants opened during these periods is as follows:
Average Cash Investment per Restaurant
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------- -------------------------- -----------------------
#of #of #of
restaurants Average restaurants Average restaurants Average
opened Investment opened Investment opened Investment
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Old Chicago 9 $ 936,000 12 $1,017,000 7 $1,025,000
Rock Bottom Restaurant & 5 $3,174,000 4 $2,900,000 7 $2,633,000
Brewery
</TABLE>
In certain instances, the Company has received landlord contributions in
the form of tenant finish allowances, reducing the cost of opening a new
restaurant. There can be no assurance, however, that landlord contributions will
be available in the future. Investing activities also include a $7.8 million use
of cash in 1995 for the purchase of short-term investments. Such investments
were sold in 1996 and the proceeds included as a source of cash.
Although the Company has historically leased its facilities, during 1997,
the Company purchased undeveloped land for two Rock Bottom Restaurant & Brewery
restaurants. Such land was utilized to construct build-to-suit locations in
Englewood, Colorado and Des Moines, Iowa using the Company's newly introduced
design prototype. During September 1997, the Company completed a sale-leaseback
transaction for the Englewood location, resulting in a recovery of substantially
all its investment in the land and building, or approximately $2 million. The
sale portion of this transaction is reflected in investing activities in the
accompanying Consolidated Cash Flow Statement. The Company also completed a
sale-leaseback transaction for the Des Moines location during the first quarter
of 1998, resulting in the recovery of an additional $2 million. The Company
estimates that during 1998, the cost to construct and open a brewery restaurant
prototype, assuming completion of a sale-leaseback transaction, will be
approximately $1.7 million to $1.9 million, as compared to the estimated $2.6 to
$3.0 million, before landlord contributions, to construct and open a leased
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.
<PAGE>
Net cash provided by financing activities during 1995 primarily represents
net proceeds of $33.7 million received from the Company's public offering during
that year. During 1996, the Company secured a $20 million bank revolving credit
facility (the "Credit Facility"), and executed a $2.5 million first mortgage on
real property located in Chicago, Illinois. These financing instruments provided
cash sources in 1996 of $11.0 million. The Company amended the Credit Facility
in February 1997 and again in July 1997 to increase the maximum borrowings
available to $40 million (see Note 6 of Notes to Consolidated Financial
Statements). Such amended Credit Facility provided additional financing sources
during 1997 of $17.9 million. As of December 28, 1997, the Company had $26.4
million outstanding under the amended Credit Facility. Additionally, the Company
receives trade credit based upon negotiated terms for purchasing food and
supplies, and does not have significant receivables or inventory.
During the third quarter of 1996, the Company financed its acquisition of
an indirect 50% interest in Trolley Barn by exchanging 452,073 shares of its
$.01 par value common stock (see Note 5 of Notes to Consolidated Financial
Statements). The corresponding increase in assets and equity is excluded from
the above cash flows reflecting the non-cash nature of this transaction.
The Company estimates that total capital expenditures for 1998, excluding
preopening costs and net of proceeds from sale-leaseback transactions, will be
approximately $15.5 million. This includes $12.3 million in estimated total
costs for the six new brewery restaurants, two of which will be prototypes and
four of which will be converted from existing properties, $2.5 million in
estimated costs for routine capital expenditures and remodels of existing
restaurants, and $700,000 for capital expenditures for the corporate office.
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.
The Company believes that its existing cash balances, cash flow generated
from operations and funds available under the amended Credit Facility will be
sufficient to satisfy its currently anticipated cash needs through fiscal 1998.
However, results of operations could be negatively affected by changes in
consumer tastes, national, regional or local economic conditions, demographic
trends and traffic patterns, decreased interest income and increased interest
expense, among other factors. In the event the impact of such factors is
significant, the Company may require additional sources of external financing.
Additionally, as the amended Credit Facility 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 either
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.
<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, but
as the Company enters new markets, it may encounter different seasonal patterns.
In addition, quarterly results have been and, in the future are likely to be,
substantially affected by the timing of new restaurant openings. Specifically,
results of operations from new restaurants opening in the first or fourth
quarters will experience lower margins initially than new restaurants opening in
the second and third quarters. Because of the seasonality of the Company's
business and the impact of new restaurant openings, results for any quarter are
not necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire year.
See Note 11 of Notes to Consolidated Financial Statements.
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, increasing minimum wage
rates have the potential to impact all aspects of the Company's business due to
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>
ITEM 8: Financial Statements and Supplementary Data
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants 24
Consolidated Balance Sheets as of December 29, 1996 and December 28, 1997 25
Consolidated Statements of Operations for the Years Ended December 31, 1995,
December 29, 1996, and December 28, 1997 26
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995,
December 29, 1996, and December 28, 1997 27
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
December 29, 1996, and December 28, 1997 28
Notes to Consolidated Financial Statements 29
</TABLE>
All financial statement schedules are omitted as they are not applicable to the
Company.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Rock Bottom Restaurants, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ROCK
BOTTOM RESTAURANTS, INC. and SUBSIDIARIES as of December 29, 1996 and December
28, 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
28, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Rock
Bottom Restaurants, Inc. and Subsidiaries as of December 29, 1996 and December
28, 1997 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 28, 1997 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 13, 1998.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 29 and 28,
-------------------
1996 1997
---------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ -- $ 1,622,537
Accounts receivable 747,762 938,932
Accounts receivable--affiliates 101,342 116,543
Preopening costs, net 2,552,185 1,520,253
Inventories 2,206,139 2,726,983
Prepaids and other current assets 1,253,124 1,613,374
Current deferred income taxes, net (Note 8) -- 219,214
----------- -----------
Total current assets 6,860,552 8,757,836
PROPERTY AND EQUIPMENT, net (Notes 2 and 4) 72,275,290 90,814,019
INVESTMENT IN JOINT VENTURE, net (Note 5) 5,348,729 5,552,632
OTHER ASSETS 463,368 735,936
DEFERRED INCOME TAXES, net (Note 8) -- 2,334,809
----------- -----------
TOTAL ASSETS $ 84,947,939 $108,195,232
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade $ 1,680,714 $ 4,341,074
Construction projects 516,357 1,023,151
Affiliates 9,483 --
Accrued payroll and payroll taxes 1,605,980 2,311,990
Accrued taxes other than income tax 1,027,920 1,023,893
Current portion of accrued restructuring charges (Note 7) -- 2,447,260
Other accrued expenses 963,413 2,534,299
Current deferred income taxes, net (Note 8) 515,232 --
Current portion of long-term debt (Note 6) 575,199 115,308
Current portion of obligations under capital leases (Note 6) 697,992 527,396
---------- ----------
Total current liabilities 7,592,290 14,324,371
REVOLVING LINE OF CREDIT (Note 6) 8,500,000 26,450,000
LONG-TERM DEBT (Note 6) 2,488,420 2,374,533
OBLIGATIONS UNDER CAPITAL LEASES (Note 6) 673,987 2,333,645
ACCRUED RESTRUCTURING CHARGES (Note 7) -- 1,493,610
DEFERRED INCOME TAXES, net (Note 8) 356,510 --
----------- ----------
Total liabilities 19,611,207 46,976,159
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 10)
STOCKHOLDERS' EQUITY (Note 9):
Preferred stock--$.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock--$.01 par value, 15,000,000 shares authorized,
7,905,451 and 8,059,506 shares issued and outstanding, respectively 79,055 80,595
Additional paid-in capital 56,774,747 58,320,330
Retained earnings 8,482,930 3,791,586
Deferred compensation -- (973,438)
----------- ------------
Total stockholders' equity 65,336,732 61,219,073
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 84,947,939 $108,195,232
=========== ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated balance sheets.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31, 29 and 28,
-----------------------
1995 1996 1997
-------------- ------------ -----------
<S> <C> <C> <C>
REVENUES:
Old Chicago restaurants $ 40,498,773 $ 58,328,162 $ 73,116,613
Rock Bottom Restaurant & Brewery restaurants 33,464,742 50,901,983 77,131,617
----------- ------------ ------------
Total revenues 73,963,515 109,230,145 150,248,230
----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 18,509,320 27,099,911 37,671,802
Restaurant salaries and benefits 24,739,012 35,552,068 51,085,653
Operating expenses 15,135,430 23,529,265 30,627,422
Selling expenses 2,854,877 4,272,132 5,773,094
General and administrative 4,576,499 5,619,612 9,073,514
Depreciation and amortization 4,199,694 7,802,033 12,136,018
Restructuring charges (Note 7) -- -- 9,706,554
----------- ----------- -----------
Total operating expenses 70,014,832 103,875,021 156,074,057
----------- ----------- -----------
INCOME FROM OPERATIONS 3,948,683 5,355,124 (5,825,827)
Equity in joint venture earnings (Note 5) -- 222,941 330,000
Interest income 1,079,982 227,235 9,507
Interest expense (248,688) (300,544) (1,772,592)
Other income (expense), net 40,056 (1,364) 18
---------- ---------- -----------
INCOME BEFORE TAXES 4,820,033 5,503,392 (7,258,894)
INCOME TAX PROVISION (BENEFIT) (Notes 2 and 8) 1,550,005 1,478,309 (2,567,550)
------------ ------------ -------------
NET INCOME $ 3,270,028 $ 4,025,083 $ (4,691,344)
============ ============ =============
BASIC NET INCOME (LOSS)
PER SHARE $ .47 $ .53 $ (0.58)
=========== =========== ===========
BASIC WEIGHTED AVERAGE
SHARES OUTSTANDING 6,936,000 7,626,000 8,027,000
=========== ============ =============
DILUTED NET INCOME (LOSS)
PER SHARE $ .45 $ .52 $ (0.58)
=========== =========== ===========
DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 7,264,000 7,725,000 8,027,000
============ ============ ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated statements.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock (Note 1)
------------------------
Additional Total
Number of Paid-in Retained Deferred Sockholders'
Shares Amount Capital Earnings Compensation Equity
---------- --------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 25, 1994 5,300,000 $ 53,000 $ 16,683,352 $ 1,187,819 $ -- $ 17,924,171
Proceeds from follow-on public
offering, net of offering
costs 2,015,000 20,150 33,672,771 -- -- 33,692,921
Proceeds from exercise of stock
options 30,482 305 246,051 -- -- 246,356
Tax benefit resulting from the
exercise of stock options -- -- 207,568 -- -- 207,568
Net income -- -- -- 3,270,028 -- 3,270,028
---------- ---------- ----------- ---------- ----------- ---------
BALANCES, December 31, 1995 7,345,482 73,455 50,809,742 4,457,847 -- 55,341,044
Proceeds from exercise of stock
options 107,896 1,079 864,589 -- -- 865,668
Issuance of common stock in
exchange for joint venture
interest (Note 5) 452,073 4,521 4,995,479 -- -- 5,000,000
Tax benefit resulting from the
exercise of stock options -- -- 104,937 -- -- 104,937
Net income -- -- -- 4,025,083 -- 4,025,083
---------- ----------- ----------- ----------- ------------ -----------
BALANCES, December 29, 1996 7,905,451 79,055 56,774,747 8,482,930 -- 65,336,732
Proceeds from exercise of stock
options 39,333 393 317,997 -- -- 318,390
Issuance of restricted stock
(Note 9) 169,145 1,691 1,762,815 -- (1,764,506) --
Amortization of deferred
compensation on restricted -- -- -- -- 321,235 321,235
stock
Cancellation of restricted
stock (54,423) (544) (569,456) -- 469,833 (100,167)
Tax benefit resulting from the
exercise of stock options -- -- 34,227 -- -- 34,227
Net loss -- -- -- (4,691,344) -- (4,691,344)
----------- ----------- ------------ ----------- ----------- -----------
BALANCES, December 28, 1997 8,059,506 $ 80,595 $ 58,320,330 $ 3,791,586 $ (973,438) $ 61,219,073
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated statements.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31, 29 and 28,
-----------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,270,028 $ 4,025,083 $ (4,691,344)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities--
Equity in joint venture earnings -- (222,941) (330,000)
Depreciation and amortization 4,199,694 7,802,033 12,136,018
Amortization of deferred compensation, net of cancellations -- -- 221,068
Deferred income tax provision (benefit) 317,442 218,732 (3,425,765)
Tax benefit from exercise of stock options 207,568 104,937 34,227
Loss on disposition of assets 13,725 -- --
Non-cash portion of restructuring charge -- -- 9,409,879
Increase in accounts receivable (374,803) (266,304) (191,170)
Expenditures for preopening costs (2,847,458) (3,522,152) (3,430,440)
Increase in inventories (760,177) (727,566) (630,708)
Increase in prepaids and other assets (616,572) (533,959) (1,265,929)
(Decrease) increase in accounts payable (660,007) (806,114) 3,167,154
Increase in accrued expenses 1,012,606 755,896 2,272,869
----------- ------------ -----------
Net cash provided by operating activities 3,762,046 6,827,645 13,275,857
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (30,739,840) (29,046,644) (30,582,096)
Proceeds from sale of property -- -- 1,975,307
Advances to officers and affiliates, net (93,532) (77,357) (24,684)
(Purchases) sales of short-term investments, net (7,790,442) 7,790,442 --
Joint venture acquisition costs -- (192,128) --
----------- ----------- -----------
Net cash used in investing activities (38,623,814) (21,525,687) (28,631,473)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 11,000,000 17,950,000
Repayments of long-term debt (65,278) (77,095) (573,778)
Repayments of capital lease obligations (570,565) (645,872) (716,459)
Issuance of common stock 33,939,277 865,668 318,390
----------- ------------ -----------
Net cash provided by financing activities 33,303,434 11,142,701 16,978,153
----------- ------------ -----------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,558,334) (3,555,341) 1,622,537
CASH AND CASH EQUIVALENTS, beginning of year 5,113,675 3,555,341 --
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 3,555,341 $ -- $ 1,622,537
============ ============= ============
</TABLE>
SUPPLEMENTAL CASH FLOW DISCLOSURES: See Note 2.
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated statements.
<PAGE>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, DECEMBER 29, 1996 AND DECEMBER 28, 1997
(1) ORGANIZATION AND NATURE OF BUSINESS
Rock Bottom Restaurants, Inc. ("Rock Bottom" or the "Company") is a
Delaware corporation incorporated in April 1994. Prior to consummation of the
Company's initial public offering and pursuant to an agreement (the "Share
Exchange Agreement") entered into on July 10, 1994 among the Company and each of
the stockholders of certain predecessor companies (the "Predecessor
Subsidiaries"), Rock Bottom (i) exchanged 3,000,000 shares of its common stock
for all of the outstanding capital stock of the Predecessor Subsidiaries and
(ii) consolidated ownership of all the Predecessor Subsidiaries' restaurants
into Rock Bottom ("Share Exchange"). Under the terms of the Share Exchange
Agreement, each Stockholder received, in consideration for the exchange of the
outstanding capital stock of the Predecessor Subsidiaries, shares of common
stock of Rock Bottom. The Share Exchange was accounted for at historical cost in
a manner similar to pooling-of-interest accounting as the entities included in
the Share Exchange were under common control.
As of December 28, 1997, the Company owned and operated 42 Old Chicago
restaurants and 21 Rock Bottom Restaurant & Brewery restaurants. Old Chicago
restaurants feature "deep-dish" Chicago-style pizza, burgers and sandwiches,
pasta specialties, salads and a full bar emphasizing a selection of 110 or more
different types of beer from around the world. Rock Bottom Restaurant & Brewery
restaurants feature eclectic menus and on-premises microbrewed beer. The
Company's restaurants are located in Arizona, California, Colorado, Idaho,
Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota, Missouri, Nebraska, Ohio,
Oregon, Texas, Washington, Wisconsin and the District of Columbia.
The Company is subject to the risks associated with an aggressive expansion
strategy and a highly competitive industry.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Accounting Period
The accompanying consolidated financial statements represent the
consolidation of Rock Bottom and its eight wholly-owned subsidiaries. Although
intercompany transactions are minimal, all material intercompany amounts have
been eliminated in consolidation. Also consolidated is Rock Bottom Kansas, LLC
("RBK"). Rock Bottom owns 50% of RBK but has 100% control of the daily
operations. The other investor is entitled to a maximum return of $12,500 per
year on the investment. Subsequent to yearend, the Company purchased the
remaining 50% of RBK (see Note 7).
The Company operates on a 52 or 53 week fiscal year ending the last Sunday
in December. Fiscal years 1996 and 1997 each contain 52 weeks; fiscal year 1995
contains 53 weeks.
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments with original
maturities of three months or less and which are not subject to significant risk
from changes in interest rates. As of December 28, 1997, the Company held only
cash.
At December 29, 1996, the Company had a negative book cash balance of
approximately $570,000 which is classified as accounts payable-trade in the
accompanying 1996 consolidated balance sheet. Such negative balance results from
the Company's cash management program whereby all excess cash is either invested
or used to repay long-term borrowings.
<PAGE>
Preopening Costs
Direct incremental costs incurred prior to the opening of new restaurants
are capitalized and amortized over a period of one year after the restaurant
commences operations. These costs consist primarily of payroll, employee
recruiting and training, and initial opening expenses. Amortization expense of
$1,826,989, $2,989,251 and $4,421,666 in 1995, 1996 and 1997, respectively, is
included in depreciation and amortization in the accompanying consolidated
statements of operations.
The Accounting Standards Executive Committee of the AICPA has issued for
comment a proposed statement of position ("SOP") titled "Reporting on the Costs
of Start-up Activities." If issued as proposed, the new standard would require
the Company to prospectively expense preopening costs as incurred. As currently
proposed, the new SOP would not require restatement of prior periods and would
be applied as of the beginning of the fiscal year in which the SOP is first
adopted, which would be 1998 for the Company. Initial application would be
reported as a cumulative effect of a change in accounting principle.
Inventories
Inventories, which consist of restaurant food items, alcoholic beverages,
clothing emblazoned with restaurant names and logos, and related paper supplies
are valued at the lower of first-in, first-out cost or net realizable value.
Property and Equipment
Property and equipment additions are capitalized at cost and include
acquisitions of property and equipment, costs incurred in the development and
construction of new restaurants, and major renewals and improvements to existing
restaurants' property and equipment. Repairs and maintenance costs which do not
improve or extend the life of the respective assets are expensed currently.
Depreciation and amortization is provided over the lesser of the estimated
useful lives of the assets or the remaining lease terms using the straight-line
method. Estimated useful lives are as follows:
Buildings 25-30 years
Leasehold and building improvements 10-30 years
Furniture, fixtures and equipment 3-20 years
Income Taxes
The Company records income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax basis of assets and
liabilities and carryforwards using enacted tax laws. Valuation allowances are
established, if necessary, to reduce deferred tax assets to the amount that
will, more likely than not, be realized.
Net Income (Loss) Per Common Share
Effective December 1997 , the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128,
earnings per share is computed using both the basic and diluted methods. When
computing diluted earnings per share, weighted average shares outstanding are
adjusted to consider the dilutive effect of the Company's stock options and
restricted stock using the treasury stock method. Earnings per share and
weighted average shares outstanding have been restated for all periods to comply
with the provisions of SFAS 128.
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest, including the amount capitalized,
was $249,354, $385,540 $2,150,629 in 1995, 1996 and 1997, respectively, and cash
paid for income taxes was $1,330,500, $1,485,458, and $1,787,885 in 1995, 1996
and 1997, respectively. The Company acquired equipment of $443,841, $350,536 and
$169,711 in 1995, 1996 and 1997, respectively, and restaurant buildings and
improvements of $2,035,810 in 1997 under capital lease obligations, and issued
452,073 shares of common stock in 1996 in exchange for an indirect 50% equity
interest in a joint venture (see Note 5). Additionally, an increase to
additional paid-in capital was recorded in 1995, 1996 and 1997 of $207,568,
$104,937 and $34,227, respectively, related to the tax benefit resulting from
the exercise of nonstatutory stock options and the disqualifying dispositions of
incentive stock options.
<PAGE>
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, revolving line of credit and
long-term debt. The carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the short maturity of those instruments. The carrying amount of the
revolving line of credit and long-term debt approximates fair value as the
pricing and terms of those instruments are indicative of current rates and
credit risk.
Asset Impairment
The Company reviews its assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets which are held and used in operations, the asset would
be impaired if the undiscounted future cash flows related to the asset did not
exceed the net book value. During 1997, the Company recorded asset impairment
charges totaling $5.5 million which are included in restructuring charge in the
accompanying consolidated statement of operations (see Note 7).
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Effective in 1995, the Company adopted the disclosure
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that companies which
do not choose to account for stock-based compensation as prescribed by the
statement shall disclose the pro forma effects on net income and net income per
share as if SFAS 123 had been adopted. Additionally, certain other disclosures
are required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.
Restricted Stock
Restricted stock grants are recorded as equity on the date of issuance with
a corresponding amount recorded as deferred compensation. Deferred compensation
is equal to the fair value of the related common stock on the date of issuance,
and is amortized over the related restricted stock vesting period.
(3) RELATED PARTY TRANSACTIONS
The Company leases building space and certain equipment, furniture and
improvements for four Old Chicago restaurants, the Rock Bottom Restaurant &
Brewery restaurant in Englewood, Colorado (see Note 6) and the Rock Bottom
Restaurant & Brewery restaurant in Boulder, Colorado from partnerships or
corporations in which certain directors and stockholders of the Company, or
their affiliates, have partial or complete ownership interests. Certain leases
also include provisions for additional rent based on the difference between base
rent and 6% of gross retail revenues. Total rent expense paid to these
partnerships or corporations was $600,029, $603,695 and $634,332, which included
additional rents of $173,929 $153,845 and $95,686, during 1995, 1996 and 1997,
respectively. Management believes these terms are no less favorable to the
Company than could be obtained from third parties.
Prior to August 1996, the Company obtained its employee health insurance
coverage with Concept Restaurants, Inc. (Concept"), a restaurant management
company wholly owned by two stockholders of the Company, who in turn contracted
with a third party insurance company. Premiums paid were determined by the
insurance company and were based on total number of employees. Included in
restaurant salaries and benefits were premiums paid to Concept of $277,893 and
$231,011 during 1995 and 1996, respectively. Premiums paid to Concept for health
insurance coverage of administrative and supervisory staff were included in
general and administrative expenses, and were $113,700 and $96,528 during 1995
and 1996, respectively. In August 1996, the Company began administering its own
self-funded employee health insurance plan (see Note 10).
<PAGE>
During 1996 and 1997, the Company paid $100,000 to a corporation owned by a
director and stockholder for consulting services performed relating to site
selection and design for the Company's new restaurants. No fees were paid to
this corporation during 1995. Management believes all such payments were
reasonable based on the services received and were no less favorable to the
Company than could be obtained from an unrelated party.
During 1995, 1996 and 1997, the Company paid approximately $413,000,
$601,000 and $464,000, respectively, to a company owned by a stockholder and
director for certain food products used in the Company's restaurants. Management
believes all such payments were reasonable and no less favorable to the Company
than could be obtained from an unrelated party.
During 1995, the Company purchased for $280,000 a 37,500 square foot parcel
of land in Colorado to use as a parking lot for an existing restaurant from a
company wholly-owned by a stockholder and director of the Company. Management
believes the purchase price is no less favorable to the Company than could be
obtained from a third party.
During 1995, 1996 and 1997, two separate companies, each wholly-owned by
two different directors of the Company, provided strategic planning and
development consulting services to Rock Bottom, and advertising and marketing
services, respectively, to the Old Chicago and Rock Bottom Restaurant & Brewery
restaurants. Fees paid to the former company totaling $78,753, $71,688 and
$24,413, respectively, are included in general and administrative expenses and
fees paid to the latter totaling $93,734, $13,996 and $816, respectively, are
included in selling expenses in the accompanying consolidated statements of
operations.
(4) PROPERTY AND EQUIPMENT
Property and equipment as of December 29, 1996 and December 28, 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Land $ 5,021,927 $ 5,885,711
Buildings 3,653,660 4,447,161
Leasehold and building improvements 38,380,894 51,237,826
Furniture, fixtures and equipment 30,460,508 43,919,404
Construction-in-progress 4,700,360 2,719,135
Less: Accumulated depreciation and amortization (9,942,059) (17,395,218)
--------- -----------
$ 72,275,290 $ 90,814,019
========== ==========
</TABLE>
(5) INVESTMENT IN JOINT VENTURE
In July 1996, the Company acquired an indirect 50% equity interest in
Trolley Barn Brewery, Inc. ("Trolley Barn") in exchange for 452,073 shares of
the Company's common stock. The Company also received the option to purchase the
remaining 50% of Trolley Barn from the selling shareholders. The option is
exercisable at any time between July 2000 and July 2002, or upon a change in
control of the ownership of the 50% of Trolley Barn retained by the selling
shareholders. The purchase price for this option is based on earnings before
interest, taxes, depreciation and amortization, as defined. In connection with
the acquisition, the Company agreed to certain licensing and development
arrangements whereby Trolley Barn may develop restaurants throughout the
southeastern United States under the names Rock Bottom Restaurant & Brewery and
Old Chicago. As of December 28, 1997, Trolley Barn operated six brewery
restaurants, four under the name Big River Grille & Brewing Works and two under
the name Rock Bottom Restaurant & Brewery, all located in the southeastern
United States.
The Company's investment in Trolley Barn is accounted for under the equity
method. At closing, the investment in joint venture carrying amount exceeded the
Company's equity in Trolley Barn's underlying net assets by approximately $4.5
million. This amount represents goodwill at the date of the acquisition and is
being amortized over 35 years. Accumulated amortization at December 29, 1996 and
December 28, 1997 of $66,340 and $201,479, respectively, is netted against the
investment. The Company and the selling shareholders also agreed to each
guarantee one-half of Trolley Barn's bank financing up to a maximum of $5
million each, and may guarantee certain other debt of Trolley Barn in the
future. Trolley Barn had approximately $8.1 million outstanding under this bank
financing at December 28, 1997.
<PAGE>
(6) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt as of December 29, 1996 and December 28, 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Mortgage note payable to a bank, interest at 9%, secured by land and
building in Chicago, Illinois, assignment of rents thereon and other
assets, principal and interest payable in monthly installments of
$25,615, balloon payment of $2,015,320 due at maturity in July 2001. $ 2,466,826 $ 2,381,866
Mortgage note payable to a trust company, interest at 9%,
secured by building in Greeley, Colorado, principal and
interest due in July 1997. 466,331 --
Note payable to landlord of $196,605, interest
at 12.5%, principal and interest payable in
quarterly installments, maturing October 2001. 127,632 107,975
Other 2,830 --
----------- -----------
3,063,619 2,489,841
Less--current portion (575,199) (115,308)
----------- ----------
$ 2,488,420 $ 2,374,533
========== ==========
</TABLE>
In July 1996, the Company closed a $20 million bank revolving credit
facility (the "Credit Facility") secured by substantially all assets of the
Company. Interest accrues on the average outstanding balance at either the prime
rate or LIBOR plus 1.5%, depending on the Company's election, and is paid
quarterly in arrears (weighted average interest rate of 7.58% during 1996 and
7.57% at December 29, 1996). The Credit Facility converts to a three-year fully
amortizing term loan after two years, and a commitment fee of .25% on the unused
availability is due quarterly during the revolving credit period. Under the
terms of this agreement, the Company is subject to certain financial covenants
and ratios, restrictions on investments and acquisitions and other restrictions.
The Company amended the Credit Facility in February 1997 and again in July
1997 (the "Amended Credit Facility"). Revised terms under the Amended Credit
Facility include (i) an increase in maximum borrowings available to $40 million,
(ii) modification of certain financial covenants and ratios, (iii) extension of
the revolving credit period to July 28, 1999, (iv) elimination of the provision
to convert the facility to a term loan, and (v) inclusion of a sliding interest
rate schedule based on the Company's ratio of total debt to cash flow. All other
terms, conditions and restrictions remained substantially the same. Interest
accrues under the Amended Credit Facility at either prime to prime plus .5%, or
at the Company's election, at LIBOR plus 1.5% to LIBOR plus 2.5% (weighted
average interest rate of 7.48% during 1997 and 8.04% at December 28, 1997). The
minimum and maximum borrowings outstanding under the Credit Facility and Amended
Credit Facility during 1997 were $8.5 million and $27.7 million, respectively.
During 1996 and 1997, interest expense of approximately $195,000 and
$378,000, respectively, was capitalized in total construction costs of new
restaurants.
Principal payments due on the outstanding balance of long-term debt and the
Amended Credit Facility as of December 28, 1997 are as follows:
1998 $ 115,308
1999 26,577,312
2000 139,945
2001 2,107,276
----------
Total $ 28,939,841
==========
<PAGE>
The Company has entered into capital lease obligations for buildings and
improvements, and furniture and equipment used in restaurant operations, and for
certain computer hardware and software used in the corporate office. Future
minimum lease payments required under these capital leases, together with the
present value of the net minimum lease payments at discount rates ranging from
8% to 18%, are as follows as of December 28, 1997:
1998 $ 799,423
1999 572,487
2000 230,777
2001 230,779
2002 238,421
Thereafter 2,753,147
---------
Minimum lease payments 4,825,034
Less: Amount representing interest (1,963,993)
----------
Present value of net minimum lease payments 2,861,041
Less: Current portion (527,396)
----------
$ 2,333,645
==========
The above payments include a capital lease obligation for the brewery
restaurant located in Englewood, Colorado. During 1997, the Company constructed
this restaurant on land previously acquired, then entered into a sale-leaseback
transaction with a partnership in which a director of the Company has a
beneficial ownership interest. The sales price of this property approximated the
Company's carrying amount of the investment. As of December 28, 1997, the
present value of net minimum lease payments for this obligation totaled
$2,029,006.
(7) RESTRUCTURING CHARGE
During 1997, the Company approved 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 profits. As a result of these decisions, the
Company incurred a pre-tax restructuring charge of approximately $9.7 million.
Such charge includes the estimated costs accrued to close these four restaurants
of approximately $3.9 million, write-downs of certain assets to their net
realizable value totaling approximately $5.5 million, and expenses related to
the elimination of certain corporate office overhead in response to the planned
reduction in future growth totaling approximately $272,000.
Subsequent to yearend, the Company closed the Old Chicago restaurants
located in Evergreen, Colorado and Gladstone, Missouri, and the Rock Bottom
Restaurant & Brewery restaurants located in Houston, Texas and Overland Park,
Kansas. The four restaurants incurred losses from operations totaling $422,000,
$862,000 and $1.0 million during fiscal 1995, 1996 and 1997, respectively.
Additionally, as the Overland Park restaurant was the only restaurant owned by
RBK, the Company purchased the remaining 50% interest in RBK, pursuant to the
partnership agreement, for $70,000.
(8) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Federal $ 1,213,211 $ 1,197,386 $ (2,118,577)
State 336,794 280,923 (448,973)
------------ ------------ ----------
Total $ 1,550,005 $ 1,478,309 $ (2,567,550)
========== ========== ===========
Current $ 1,232,563 $ 1,259,577 $ 895,208
Deferred 317,442 218,732 (3,462,758)
------------ ------------ ----------
Total $ 1,550,005 $ 1,478,309 $ (2,567,550)
========== ========== ===========
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 29, 1996 and December 28,
1997 consist of the following primary components:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Current deferred tax assets (liabilities):
Preopening costs $ (696,777) $ (448,490)
Accrued restructuring costs -- 332,281
Capitalized inventory costs and other 181,545 335,423
------- -------
Net current deferred tax assets (liabilities) $ (515,232) $ 219,214
========= =======
Long-term deferred tax assets (liabilities):
FICA and rehabilitation tax credits $ 1,495,558 $ 2,478,765
Valuation allowance against tax credits (331,181) (1,254,257)
AMT tax credit -- 277,774
Accrued restructuring costs -- 566,974
Property, equipment and other (1,520,887) 220,406
Restricted stock -- 45,147
---------- ---------
Net long-term deferred tax assets (liabilities) $ (356,510) $ 2,334,809
========== =========
</TABLE>
At December 28, 1997, the Company had federal FICA and rehabilitation
tax credit carryforwards of $2,478,765. The carryforwards will begin to expire
in 2009. The valuation allowance relates to a portion of the tax credit
carryforwards. It is the opinion of management that due to alternative minimum
tax limitations and the relatively volatile nature of the restaurant industry,
it is more likely than not that a portion of these tax credit carryforwards will
expire before the Company is able to realize their benefit.
The following table reconciles the federal statutory income tax rate
to the Company's effective income tax rate:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Provision (benefit) for income taxes at federal statutory rate 34.0% 34.0% (34.0)%
Permanent differences and other 4.1 2.9 2.2
Tax credits (10.4) (20.4) (12.7)
Valuation allowance against tax credits -- 6.0 12.7
State income taxes, net of federal benefit 4.4 4.4 (3.6)
----- ----- -----
Effective income tax rate 32.1% 26.9% (35.4)%
===== ===== =====
</TABLE>
(9) STOCKHOLDERS' EQUITY
Public Offering
On March 7, 1995, the Company closed its follow-on public offering of
2,100,000 shares of common stock (of which 400,000 shares were sold by certain
existing stockholders) at $18.00 per share, and on March 13, 1995, sold an
additional 315,000 shares at $18.00 per share in connection with the
underwriters' exercise of their over-allotment option. Net proceeds received by
the Company after deducting offering expenses and underwriting discounts were
$33,692,921.
Executive Bonus Plans
In April 1996, the Company adopted an Executive Bonus Plan. Under the plan,
certain executive officers received a bonus equal to a percentage of their
yearly salary, the majority of which was paid in restricted common stock. The
bonus was awarded based on achieving certain annual financial goals, and in
February 1997 the Company issued 65,145 shares of restricted stock pursuant to
this plan. The restricted common stock shall vest, and trading restrictions on
those shares shall lapse, three years from the date of issuance, provided the
executive continues to be an employee of the Company. In the event of a change
of control, as defined, the Compensation Committee (the "Committee") of the
Company's Board of Directors (the "Board") has the sole discretion to eliminate
all restrictions on these shares. Subsequent to yearend, the Board amended this
bonus plan to eliminate all restrictions on these shares in two years from the
date of issuance if certain fiscal 1998 earnings targets are achieved, and in
the event of a change of control.
<PAGE>
In April 1997, certain executive officers executed long-term incentive
agreements with the Company as a component of their 1997 total compensation
package. The agreements provided for restricted common stock grants totaling
104,000 shares, all of which vest on December 31, 2006, provided the executive
continues to be an employee of the Company. The vesting of such stock grants may
be accelerated to December 31, 2000 if specified cumulative earnings targets are
met as of that date. In the event of a change of control, as defined,
restrictions on 50% of these shares will immediately lapse.
In December 1997, the Company canceled 54,423 restricted shares issued to
one executive pursuant to these bonus plans as such indiviual was no longer an
employee of the Company.
Stock Option Plans
Rock Bottom adopted an Equity Incentive Plan (the "Employees' Plan")
effective July 21, 1994. The Employees' Plan was amended in May 1995, June 1996
and May 1997, to increase the total number of shares of the Company's common
stock authorized for issuance from 600,000 shares to 1,500,000 shares.
Additionally, the Employees' Plan provides for an automatic increase each year
in the number of shares of common stock authorized equal to one-half of one
percent of the then outstanding shares. As of December 28, 1997, 75,768
additional shares of common stock were authorized for issuance under this
provision.
The Employees' Plan provides for the granting of both "incentive stock
options" (as defined in Section 422 of the Internal Revenue Code) and
nonstatutory stock options, as well as restricted stock grants, and is designed
to serve as an incentive for hiring and retaining qualified and competent
employees. The Committee of the Board administers and interprets the Employees'
Plan. Options are granted under the Employees' Plan on such terms and at such
prices as determined by the Committee, except that the per share exercise price
of incentive stock options cannot be less than the fair market value of the
common stock on the date of grant. Options granted under this plan vest annually
over three years from date of grant.
A summary of the status of the Employees' Plan as of December 31, 1995,
December 29, 1996 and December 28,1997 and the changes during those periods is
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of period 528,900 936,218 860,154
Granted 595,000 155,200 224,650
Exercised (30,482) (100,396) (39,333)
Canceled (151,200) -- --
Forfeited (6,000) (130,868) (148,152)
------- ------- -------
Outstanding at end of period 936,218 860,154 897,319
======= ======= =======
Exercisable at end of period 148,380 319,041 487,548
======= ======= =======
Range of exercise prices, at end of period $8.00-$30.47 $8.00-$30.47 $8.00-$25.75
============ ============ ============
Weighted average exercise prices:
At beginning of period $ 8.24 $ 12.35 $ 12.70
At end of period 12.35 12.70 11.88
Exercisable at end of period 8.39 11.88 11.39
Options granted 18.65 11.78 10.93
Options exercised 8.08 8.02 8.09
Options canceled 23.49 -- --
Options forfeited 15.07 12.73 16.22
Weighted average end of period
remaining contractual life (in years) 8.99 8.14 7.62
Weighted average fair value of options $ 7.60 $ 6.20 $ 4.97
granted during the period
</TABLE>
<PAGE>
The following summary shows, for the price range indicated, the weighted
average exercise price, weighted average price of options exercisable and the
remaining contractual life of options granted under the Employees' Plan:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Range of exercise prices
------------------------
Weighted average exercise price
for options outstanding:
$ 8.00-$ 9.99 472,418 $ 8.03 304,288 $ 8.03 264,955 $ 8.02
$10.00-$13.99 256,500 13.80 369,300 12.88 504,466 12.29
$14.00-$17.99 64,300 15.50 78,566 15.36 66,566 15.31
$18.00-$25.75 143,000 22.63 108,000 23.30 61,332 21.35
Weighted average exercise price
for options exercisable:
$ 8.00-$ 9.99 138,386 $ 8.02 173,544 $ 8.03 264,955 $ 8.02
$10.00-$13.99 7,996 12.61 87,878 13.68 128,871 12.86
$14.00-$17.99 1,998 16.95 19,619 15.57 37,390 15.38
$18.00-$25.75 -- -- 38,000 23.43 56,332 21.23
Weighted average remaining
contractual life (in years): Shares Life Shares Life Shares Life
------ ---- ------ ---- ------ ----
$ 8.00-$ 9.99 472,418 8.55 304,288 7.56 264,955 6.56
$10.00-$13.99 256,500 9.88 369,300 9.05 504,466 8.40
$14.00-$17.99 64,300 9.69 78,566 7.37 66,566 6.14
$18.00-$25.75 143,000 8.51 108,000 7.25 61,332 7.37
</TABLE>
The weighted average fair value of each option grant has been estimated as
of the date of grant using the Black-Scholes option-pricing model and the
following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Dividend rate 0 % 0 % 0 %
Expected volatility 68 % 73 % 54 %
Risk-free interest rate 5.85 % 5.85 % 5.85 %
Expected life (in years):
$ 8.00-$ 9.99 3.5 3.5 N/A
$10.00-$13.99 4.0 4.0 5
$14.00-$17.99 4.5 4.5 N/A
$18.00-$30.47 5.0 N/A N/A
</TABLE>
Rock Bottom has also adopted the Nonemployee Directors' Stock Option Plan
(the "Directors' Plan"). The Directors' Plan was amended in May 1997 to increase
the number of shares of common stock authorized for issuance from 75,000 shares
to 100,000 shares. All stock options granted pursuant to the Directors' Plan
vest equally over a one to two-year period from the date of grant.
<PAGE>
A summary of the status of the Company's Directors' Plan as of December 31,
1995, December 29, 1996 and December 28, 1997, and the changes during those
periods is as follows.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of period 22,500 39,000 58,500
Granted 16,500 27,000 18,000
Exercised -- (7,500) --
------ ------ ------
Outstanding at end of period 39,000 58,500 76,500
====== ====== ======
Exercisable at end of period 11,250 27,750 51,000
====== ====== ======
Range of exercise prices, at end
of period $8.00 - $25.75 $8.88 - $25.75 $8.88 - $25.75
============== ============== ==============
Weighted average exercise prices:
At beginning of period $ 9.38 $13.89 $ 13.74
At end of period 13.89 13.74 12.79
Exercisable at end of period 9.38 14.58 14.07
Options granted 20.03 11.92 9.71
Options exercised -- 8.00 --
Weighted average end of period
remaining contractual life (in years) 9.01 8.10 7.67
Weighted average fair value of options
granted during the period $ 10.16 $ 6.11 $ 3.93
</TABLE>
The following summary shows, for the price range indicated, the weighted
average exercise price, weighted average price of options exercisable and the
remaining contractual life of options granted under the Directors' Plan:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Range of exercise prices
------------------------
Weighted average exercise price
for options outstanding:
$ 8.00 - $ 9.99 7,500 $ 8.00 7,500 $ 8.88 19,500 $ 9.12
$ 10.00 - $13.99 15,000 10.08 27,000 11.14 33,000 11.04
$ 14.00 - $17.99 6,000 16.52 13,500 15.16 13,500 15.16
$ 18.00 - $25.75 10,500 22.04 10,500 22.04 10,500 22.04
Weighted average exercise price
for options exercisable:
$ 8.00 - $ 9.99 3,750 $ 8.00 -- $ -- 3,750 $ 8.88
$ 10.00 - $13.99 7,500 10.08 15,000 10.08 27,000 11.14
$ 14.00 - $17.99 -- -- 6,000 16.52 9,750 15.58
$ 18.00 - $25.75 -- -- 6,750 22.86 10,500 22.04
Weighted average remaining
contractual life (in years): Shares Life Shares Life Shares Life
------ ---- ------ ---- ------ ----
$ 8.00 - $ 9.99 7,500 8.55 7,500 9.16 19,500 9.08
$ 10.00 - $13.99 15,000 8.71 27,000 8.54 33,000 7.85
$ 14.00 - $17.99 6,000 9.71 13,500 6.41 13,500 5.41
$ 18.00 - $25.75 10,500 9.36 10,500 8.37 10,500 7.37
</TABLE>
<PAGE>
The weighted average fair value of each option grant has been estimated as
of the date of grant using the Black-Scholes option-pricing model and the
following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Dividend rate 0% 0% 0%
Expected volatility 68% 73% 54%
Risk-free interest rate 5.85% 5.85% 5.85%
Expected life (in years):
$ 8.00 - $ 9.99 3.0 - 4.0 3.0 - 4.0 3.0
$10.00 - $13.99 3.0 - 4.0 3.0 - 4.0 3.0
$14.00 - $17.99 3.0 - 4.0 3.0 - 4.0 N/A
$18.00 - $25.75 3.0 - 4.0 3.0 - 4.0 N/A
</TABLE>
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under APB 25,
under which no compensation expense is recognized as all options have been
granted at an exercise price equal to the fair market value of the Company's
common stock on the date of grant. Effective in 1995, the Company adopted the
disclosure option of SFAS 123 whereby pro forma net income and net income per
share information must be disclosed as if compensation expense had been
recognized over the vesting period of stock options. Cumulative compensation
cost recognized in pro forma net income with respect to options that are
forfeited prior to vesting is adjusted as a reduction of pro forma compensation
expense in the period of forfeiture. For SFAS 123 purposes, the fair value of
each option grant has been estimated as of the date of grant using the
Black-Scholes option-pricing model and assumptions described above.
Using these assumptions, the fair value of the stock options granted in
1995, 1996 and 1997 was estimated to be approximately $4,690,000, $1,128,000 and
$1,188,000, respectively, which under SFAS 123 would be amortized as
compensation expense over the vesting period of the options. Had compensation
cost been recorded consistent with SFAS 123 utilizing the assumptions detailed
above, the Company's pro forma net income and diluted net income per share would
have been as follows for the years ended December 31, 1995, December 29, 1996
and December 28, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $ 3,270,028 $ 4,025,083 $ (4,691,344)
Pro forma $ 2,432,623 $ 2,745,745 $ (5,739,389)
Basic net income (loss) per share:
As reported $ .47 $ .53 $ (.58)
Pro forma $ .35 $ .36 $ (.72)
Diluted net income (loss) per share: $ .45 $ .52 $ (.58)
As reported $ .33 $ .36 $ (.72)
Pro forma
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to December 25, 1994, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
Subsequent to year end, the Board approved a repricing of all outstanding
stock options. Each option holders' number of options held were reduced in an
amount necessary to yield an identical fair value of options held after the
reprice as compared to the fair value of options held immediately prior, based
on a Black-Scholes option pricing model valuation. Substantially all option
holders agreed to have their options repriced, and also agreed to forego
exercising any options for six months from the date of the repricing.
<PAGE>
Shareholder Rights Plan
In December 1997, the Company's Board adopted a Rights Agreement under
which the Common Stock holders of record as of December 12, 1997 received a
dividend in the form of Preferred Stock Purchase Rights ("Rights"). The Rights
permit the holder to purchase one-hundredth of a share of Series A Junior
Participating Preferred Stock ("a unit") at an initial exercise price of $50 per
unit under certain circumstances. The purchase price, the number of units of
Preferred Stock and the type of securities issuable upon exercise of the Rights
are subject to adjustment from time to time. The Rights expire on December 12,
2007, unless earlier redeemed or exchanged. Until a Right is exercised, the
holder has no rights as a stockholder of the Company, including the right to
vote or receive dividends. The Rights are exercisable only in certain
situations, as defined in the Rights Plan, including (i) acquisition of
beneficial ownership of 15 percent or more of the Company's outstanding common
stock by a person other than the Company's Chairman of the Board, and (ii) a
change in the composition of the Board over a period of 18 consecutive months or
less such that 50% or more of the members of the Board who were directors at the
beginning of such 18-month period cease to be directors during such period and
are replaced by directors that were not unanimously elected or nominated by
persons that were directors at the commencement of such 18-month period. The
Company will generally be entitled to redeem the Rights at $.001 per Right at
any time prior to such time as a person or group has acquired 15 percent or more
of the Company's common stock.
(10) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has entered into various operating leases for land, buildings
and equipment, most of which contain renewal options and provisions for payments
of real estate taxes, insurance and maintenance costs. In addition, certain
leases contain contingent rentals based on a percentage of gross revenues, as
defined. Total rent expense was $3,762,890, $5,387,774 and $ 7,602,314 in 1995,
1996 and 1997, respectively, including additional rent of $1,013,642, $1,080,911
and $ 896,343, respectively.
Aggregate future minimum lease payments required under noncancelable
operating leases at December 28, 1997 (which include commitments for two
restaurants opening in 1998) are as follows:
<TABLE>
<CAPTION>
Total
-----
<S> <C>
1998 $ 6,063,799
1999 5,969,847
2000 5,970,359
2001 5,897,230
2002 5,894,894
Thereafter 38,549,490
----------
Total future minimum lease payments required $ 68,345,619
==========
</TABLE>
Self-Funded Employee Health Insurance Plan
Beginning August 1996, the Company began administering its own self-funded
employee health insurance plan (the "Plan"). Employees contribute to the Plan
based on pre-determined premium amounts and certain co-payment terms. The
Company is then responsible for the remaining payment of covered claims up to
$35,000 per person per annum, after which a third party insurer provides "stop
loss" insurance protection to the Plan for payment of claims of any covered
individual in excess of $35,000, but not to exceed $1 million per employee per
lifetime. The Company records insurance expense equal to the estimated costs
expected to result from incurred claims plus an estimate of claims incurred but
not reported based on the best available information. However, the nature of
these claims is such that actual development of the claims may vary
significantly from the estimated expenses. All changes in expense estimates are
accounted for on a prospective basis and could have a significant impact on the
Company's financial position or results of operations.
<PAGE>
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 either
modifications or upgrades of substantially all existing restaurant point-of-sale
systems.
Litigation
The Company is a party in certain legal proceedings that have arisen out of
the ordinary course of business. Based upon advice of the Company's legal
counsel, management believes that the costs of defending and resolving these
legal matters will not have a material adverse effect on the Company.
(11) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected 1996 and 1997 quarterly financial
data:
<TABLE>
<CAPTION>
1996 March 31 June 30 September 29 December 29
- ---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $23,512,027 $26,414,075 $28,964,665 $30,339,378
Income from operations 783,458 1,274,644 1,605,505 1,691,517
Income before taxes 843,675 1,279,391 1,659,281 1,721,045
Net income 582,136 882,788 1,289,759 1,270,400
Diluted net income per share .08 .12 .16 .16
1997 March 30 June 29 September 28 December 28
- ---- -------- ------- ------------ -----------
Revenues $32,692,139 $37,431,711 $40,730,974 $39,393,406
Income from operations 1,391,645 1,647,482 (3,100,475) (5,764,479)
Income before taxes 1,212,982 1,330,247 (3,489,154) (6,312,969)
Net income (loss) 860,208 941,817 (2,239,317) (4,254,052)
Diluted net income (loss) per share .11 .12 (.28) (.52)
</TABLE>
Income from operations during the fourth quarter of 1997 was impacted by a
restructuring charge of $4.5 million (see Note 7), and incremental general &
administrative expenses totaling $1.3 million for executive severance pay and
costs associated with the Company's exploration of strategic alternatives.
<PAGE>
ITEM 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference.
ITEM 10: Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to the
section "Directors, Executive Officers and Key Employees" in the Company's Proxy
Statement.
ITEM 11: Executive Compensation
The information required by this Item is incorporated by reference to the
section "Directors, Executive Officers and Key Employees" excluding the "Board
Compensation Committee Report on Executive Compensation" and the "Performance
Graph" in the Company's Proxy Statement.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
section "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.
ITEM 13: Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
section "Certain Relationships and Related Transactions" in the Company's Proxy
Statement.
PART IV
ITEM 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Financial Statements.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 29, 1996
and December 28, 1997
Consolidated Statements of Operations for the
Years Ended December 31, 1995, December 29, 1996,
and December 28, 1997
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1995, December 29,
1996, and December 28, 1997
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, December 29, 1996, and
December 28, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
All financial statement schedules are omitted as
they are not applicable to the Company.
<PAGE>
3. Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ----- ----------------------------------
<S> <C>
2 -- Form of Share Exchange Agreement and Amendment among the
Company and the Shareholders of the Predecessor
Subsidiaries, filed as Exhibit No. 2 to the Company's
Registration Statement on Form S-1 (Registration No.
33-79898) and incorporated herein by reference.
3(i) -- Amended and Restated Certificate of Incorporation of the
Company, filed as Exhibit No. 3(i) to the Company's
Registration Statement on Form S-1 (Registration No.
33-79898) and incorporated herein by reference.
3(ii) -- Bylaws of the Company, filed as Exhibit No. 3(ii) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 25, 1994, and incorporated herein by
reference.
4.1 -- Form of Rights Agreement, dated as of December 12, 1997,
by and between the Company and American Securities Transfer
& Trust, Incorporated, which includes the form of
Certificate of Designations for the Series A Junior
Participating Preferred Stock as Exhibit A and the form of
Right Certificate as Exhibit B, filed as Exhibit No. 4.1 to
the Company's Registration Statement on Form 8-A, and
incorporate herein by reference.
10.1 -- Rock Bottom Restaurants, Inc. Equity Incentive Plan,
filed as Exhibit No. 4.1 to the Company's Registration
Statement on Form S-8 (Registration No. 33-94256) and
incorporated herein by reference.
10.2 -- Rock Bottom Restaurants, Inc. Nonemployee Directors'
Stock Option Plan, filed as Exhibit No. 4.2 to the Company's
Registration Statement on Form S-8 (Registration No.
33-94256) and incorporated herein by reference.
10.3 -- Lease Agreement, dated September 1, 1978, between the
Company and Madeline Day, filed as Exhibit No. 10.3 to the
Company's Registration Statement on Form S-1 (Registration
No.33-79898) and incorporated herein by reference.
10.4 -- Lease Agreement, dated March 15, 1986, as amended on June
21, 1995, between the Company and Lux/Day Northport, Ltd.,
filed as Exhibit No. 10.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, and
incorporated herein by reference.
10.5 -- Lease Agreement, dated June 8, 1989, between the Company
and Robert Greenlee, and Assignment, dated March 23, 1990,
by Robert Greenlee to the 1123 Walnut Corporation, filed as
Exhibit No. 10.5 to the Company's Registration Statement on
Form S-1 (Registration No. 33-79898) and incorporated herein
by reference.
10.6 -- Lease Agreement, dated August 29, 1990, between the
Company and C.B. Partnership, filed as Exhibit No. 10.6 to
the Company's Registration Statement on Form S-1
(Registration No. 33-79898) and incorporated herein by
reference.
10.7 -- Lease Agreement, dated May 9, 1995, between the Company
and Old Chicago Colorado Springs Limited Partnership, filed
as Exhibit No. 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, and
incorporated herein by reference.
10.8 -- Executive Bonus Plan, filed as Exhibit No. 10 to the
Company's Form 10-Q for the quarterly period ended June 30,
1996, and incorporated herein by reference.
10.9 -- Real Estate Mortgage, dated June 27, 1996, between the
Company and Lakeside Bank, together with Promissory Note,
filed as Exhibit No. 10 to the Company's Form 10-Q, as
amended, for the quarterly period ended September 29, 1996,
and incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ----- ---------------------------------
<S> <C>
10.10 -- Loan Agreement for $20,000,000 Revolving Line of Credit
from Norwest Bank Colorado, National Association, First
Security Bank of Idaho, N.A., and West One Bank, Idaho to
Rock Bottom Restaurants, Inc., dated July 2, 1996, filed as
Exhibit No. 2.1 to the Company's Form 8-K dated July 2,
1996, and incorporated herein by reference.
10.11 -- Amendment to Loan Agreement between Norwest Bank
Colorado, National Association, First Security Bank of
Idaho, N.A., and West one Bank, Idaho to Rock Bottom
Restaurants, Inc., dated February 24, 1997, filed as Exhibit
No. 10.1 to the Company's Form 10-Q for the Quarterly period
ended March 30, 1997, and incorporated herein by reference.
10.12 -- Second 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 July 28, 1997, filed as Exhibit No.
10.1 to the Company's Form 10-Q for the quarterly period
ended September 28, 1997, and incorporated herein by
reference.
10.13 -- Stock Purchase Agreement, dated June 4, 1996, between
Rock Bottom, Restaurants, Inc., Trolley Barn, TBB
Acquisition Group, Inc., TBB Holding Company, and the TBB
Shareholders, filed as Exhibit No. 2.2 to the Company's Form
8-K dated July 2, 1996, and incorporated herein by
reference.
10.14 -- Lease Agreement, dated June 25, 1996, between the Company
and Dulcet L.L.C., Elaine C. Wong and Eugene B. Weisman,
filed as Exhibit No. 10.12 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 29, 1996, and
incorporated herein by reference.
10.15 -- Lease Agreement, dated September 26,1997, between Rock Bottom
Restaurants, Inc. and Zymotic, LLC, filed as Exhibit No.
10.2 to the Company's Form 10-Q for the quarterly period
ended September 28, 1997, and incorporated herein by
reference.
10.16 -- Form of Management Employment Agreement, filed as Exhibit
No. 10.1 to the Company's Form 10-Q for the quarterly period
ended June 29, 1997, and incorporated herein by reference.
10.17 -- Form of Management Compensation Agreement, filed as Exhibit
No. 10.2 to the Company's Form 10-Q for the quarterly period
ended June 29, 1997, and incorporated herein by reference.
10.18 -- Form of Long Term Incentive Agreement, filed as Exhibit No.
10.3 to the Company's Form 10-Q for the quarterly period ended
June 29, 1997, and incorporated herein by reference.
10.19 -- Consulting Agreement, dated January 1, 1997, between Rock
Bottom Restaurants, Inc. and FBD Management Corp., filed as
Exhibit No. 10.19.
10.20 -- Service and Consulting Agreement, dated January 1, 1997,
between Rock Bottom Restaurants, Inc. and Concept
Management, Inc., filed as Exhibit No. 10.20.
10.21 -- License Agreement, dated July 12, 1997, by and between
Rock Bottom Restaurants, Inc., and Frank B. Day, filed as
Exhibit No. 10.21.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ----- ----------------------------------
<S> <C>
21 -- Subsidiaries of the Company:
Old Chicago of Colorado, Inc., a Colorado corporation;
Old Chicago of Westminster, Inc., a Colorado corporation;
Old Chicago of Kansas, Inc., a Kansas corporation.
Rock Bottom of Minneapolis, Inc., a Colorado corporation;
Rock Bottom of Texas, Inc., a Texas corporation;
Wadsworth Old Chicago, Inc., a Colorado corporation;
Walnut Brewery, Inc., a Colorado corporation;
Rock Bottom Kansas LLC, a Kansas limited liability company.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule, filed as Exhibit No. 27
(b) Reports on Form 8-K.
A current report on Form 8-K dated December 12, 1997 was filed
to announce the Company's declaration of a dividend of one
preferred stock purchase right (a "Right") for each
outstanding share of common stock of the Company, and adoption
of the Rights Agreement dated December 12, 1997.
(c) Exhibits.
See Item 14(a)(3) above.
(d) Financial Statement Schedules.
All financial statement schedules are omitted as they are not
applicable to the Company.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Louisville, State of Colorado.
ROCK BOTTOM RESTAURANTS, INC.
Date: March 26, 1998 By: /s/ FRANK B. DAY
Frank B. Day
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ FRANK B. DAY
Frank B. Day Chairman of the Board, President, March 26, 1998
Chief Executive Officer, and Director
(Principal Executive Officer)
/s/ WILLIAM S. HOPPE
William S. Hoppe Executive Vice President, Chief March 26, 1998
Financial Officer, Chief Administrative
Officer and Treasurer
(Principal Financial Officer)
/s/ THERESA D. SHELTON
Theresa D. Shelton Vice President Finance and March 26, 1998
Assistant Secretary
(Principal Accounting Officer)
/s/ ROBERT D. GREENLEE
Robert D. Greenlee Secretary and Director March 26, 1998
/s/ DAVID M. LUX
David M. Lux Director March 26, 1998
/s/ GERALD A. HORNBECK
Gerald A. Hornbeck Director March 26, 1998
/s/ MARY C. HACKING
Mary C. Hacking Director March 26, 1998
/s/ ARTHUR WONG
Arthur Wong Director March 26, 1998
/s/ DUNCAN H. COCROFT
Duncan H. Cocroft Director March 26, 1998
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ----- --------------------------------
<S> <C>
10.19 Consulting Agreement, dated January 1, 1997, between Rock Bottom
Restaurants, Inc. and FBD Management Corp., filed as Exhibit No. 10.19.
10.20 Service and Consulting Agreement, dated January 1, 1997, between Rock
Bottom Restaurants, Inc. and Concept Management, Inc., filed as Exhibit No. 10.20.
10.21 License Agreement, dated July 12, 1997, by and between Rock Bottom
Restaurants, Inc., and Frank B. Day, filed as Exhibit No. 10.21.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is made this 1st day of
January, 1997, between Rock Bottom Restaurants, Inc. ("Rock Bottom"), a Delaware
corporation, located at 248 Centennial Parkway, Suite 100, Louisville, Colorado,
80027, and FBD Management Corp. (the "Consultant").
RECITALS
WHEREAS, Consultant has certain expertise and knowledge regarding
restaurant operation and administration, restaurant design, site selection and
implementation of management systems; and
WHEREAS, Rock Bottom is engaged in the restaurant business and desires
to hire Consultant as an independent contractor-consultant to provide restaurant
design, site selection and other Services to Rock Bottom under the terms and
conditions hereinafter set forth, and Consultant is willing to work in such
capacity.
NOW, THEREFORE, in consideration of the compensation, Services,
promises and mutual covenants herein set forth, and for other good and valuable
consideration, including past, present and future compensation, the parties
hereby agree as follows:
ARTICLE I
SERVICES OF CONSULTANT
Rock Bottom agrees to employ Consultant in the capacity of independent
contractor-consultant to assist Rock Bottom with restaurant design, site
selection and other Services ("Services").
ARTICLE II
CONSULTING FEE
Rock Bottom agrees to pay Consultant a fee of One Hundred Thousand
Dollars ($100,000) per year in twelve equal monthly installments of Eight
Thousand Three Hundred Thirty-three Dollars and thirty-three cents ($8,333.33)
for the term of this Agreement. In addition, Rock Bottom agrees to pay
Consultant for all expenses incurred while providing such Services, including,
but not limited to, travel, meals, entertainment, and lodging, on a semi-monthly
basis. Payment shall be made by checks payable to FBD Management Corp.
ARTICLE III
TERM
The term of this Agreement is two years, beginning as of the date first
above written. Thereafter, it shall be in effect for successive periods of one
year each, each year beginning on the day and month that this Agreement is
originally executed ("Successive Period"), unless either party provides written
notice to the other party at least 60 days prior to the beginning of the
Successive Period.
ARTICLE IV
TERMINATION
Either party hereto may terminate this Agreement upon the breach of a
material term hereof by the other party, which breach remains uncured for thirty
(30) days after the date that the nonbreaching party has served written notice
on the breaching party, which notice will set forth the basis of such breach and
the party's intent to terminate the Agreement.
<PAGE>
ARTICLE V
GENERAL PROVISIONS
A. No Assignability. Neither party shall have the right to assign its
rights and obligations hereunder to any other person or entity
without the express written consent of the other party hereto. Any
assignment, delegation, or any transfer by either party in
violation of this paragraph shall be null and void, and shall be a
material breach of this Assignment.
B. Separateness. Nothing in this Agreement shall be construed as
combining the business operations of Rock Bottom in any way with
the business operations of Consultant. All such operations shall
be maintained separately and distinctly.
C. No Agency Relationship. This Agreement does not establish any
agency, joint venture, or partnership relationship between the
parties, and neither party can bind the other by any contract or
representation.
D. Independent Contractor Status. Nothing in this Agreement shall
construe Consultant as an employee of Rock Bottom. Consultant is
an independent contractor, engaged in and independent business
from Rock Bottom, and is free from Rock Bottom's control and
direction in the performances of Services.
E. Worker's Compensation Insurance. Consultant and its employees are
not entitled to workers' compensation benefits through Rock
Bottom, and Consultant is obligated to pay federal and state
income tax on any moneys paid pursuant to this Agreement.
F. Unemployment Insurance. Consultant and its employees are not
entitled to unemployment insurance benefits through Rock Bottom
and Consultant is obligated to pay federal and state income tax on
any moneys paid pursuant to this Agreement.
G. Notices. All notices provided for in this Agreement shall be in
writing and shall be deemed effective when either served by
personal delivery or sent by express, registered or certified
mail, postage prepaid, return receipt requested, to the other
party at the corresponding mailing address set forth above or at
such other address as such other party may hereafter designate by
written notice in the manner aforesaid.
H. Modification. The parties acknowledge and agree that this
Agreement may only be modified by the mutual written agreement of
the parties.
I. Arbitration. IN THE EVENT OF ANY DISPUTE ARISING OUT OF OR
RELATING TO THIS AGREEMENT, OR THE BREACH OF VALIDITY THEREOF, THE
PARTIES AGREE TO MAKE ALL REASONABLE EFFORTS TO REACH AN AMIABLE
SETTLEMENT OF THEIR DIFFERENCES. FAILING SUCH SETTLEMENT WITHIN
THIRTY (30) DAYS AFTER THE NOTICE OF SUCH DISPUTE, THE DISPUTE
SHALL BE SETTLED BY ARBITRATION UNDER THE COMMERCIAL RULES OF
ARBITRATION OF THE AMERICAN ARBITRATION ASSOCIATION. THE DECISION
OF THE ARBITRATORS SHALL BE BINDING AND CONCLUSIVE UPON EACH PARTY
HERETO AND MAY BE ENFORCED IN ANY COURT OF COMPETENT JURISDICTION.
<PAGE>
J. Attorney Fees. In the event that action is brought to enforce,
interpret, or construe the terms of this Agreement or the acts of
the parties in relation thereto, the prevailing party in such
action shall, in addition to any other relief awarded, be entitled
to reasonable attorneys fees in such action or in a separate
action bought for that purpose.
K. Governing Law. The parties agree that this Agreement is entered
into and will be governed in accordance with the laws of the State
of Colorado in any action relating to this Agreement.
L. Entire Agreement. This Agreement, together with any written
agreements delivered contemporaneously herewith, contains the
entire agreement of the parties with respect to its subject matter
and no waiver, modification or change of an of its provisions
shall be valid unless in writing and signed by the party or
parties against whom such claimed waiver, modification or change
is to be enforced.
M. Waiver. The waiver of any breach of any one or more of the
provisions of this Agreement shall not be, or be construed to be,
a waiver of any subsequent or other breach of this Agreement; nor
shall any failure on the part of the nonbreaching party to require
the exact full and complete compliance with any of the provisions
of this Agreement be construed as in any manner changing the terms
hereof.
N. Divisibility. If any term or provision of this Agreement or the
application thereof to any person or circumstances shall to any
extent be invalid or unenforceable, the remainder of this
Agreement or the application of such term or provision to persons
or circumstances other than those as to which is held invalid or
unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
ROCK BOTTOM RESTAURANTS, INC. CONSULTANT:
FBD MANAGEMENT CORP.
By: ________________________ By: ________________________
Tom Moxcey Frank B. Day
President & CEO President
ROCK BOTTOM RESTAURANTS, INC.
SERVICE AND CONSULTING AGREEMENT
CONCEPT MANAGEMENT, INC.
THIS AGREEMENT (the "Agreement"), is entered into as of the 1st day of
January, 1997, by and between CONCEPT MANAGEMENT, INC., a Tennessee corporation,
having an office at 2221 S. Ashford Court, Nashville, Tennessee, 37214
("Consultant"), and Rock Bottom Restaurants, Inc., a Delaware corporation having
an office at 248 Centennial Parkway, Suite 100, Louisville, Colorado, 80027.
WITNESSETH:
WHEREAS, The Company desires to retain Consultant for the purpose of
rendering consulting services by which the Company shall have the benefit of
Consultant's experience and knowledge in those areas of service as directed by
the President of the Company; and
WHEREAS, Consultant desires to be retained by the Company and to
provide such services on the terms and conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual promises
hereinafter set forth, the parties hereto agree as follow:
1. Term. This agreement shall commence on January 1, 1997, and shall continue
for a period of twelve months, terminating on December 31, 1997, unless sooner
terminated pursuant to Section 4 hereof.
2. Duties of Consultant.
2.1 The Company hereby employs Consultant, and Consultant agrees, upon the terms
and conditions herein set forth, to provide consulting services, as directed by
the President or Board of Directors of the Company, on a part-time basis as
needed in connection with the Company's business, with Consultant to use
reasonable efforts to be available from time to time as needed, subject to other
demands and the understanding that this consulting agreement is non-exclusive of
either party. Such services shall be on a retainer or project basis as directed
by the President or the Company's Board of Directors, and can include, but not
be limited to the following:
A. Evaluation and assessment of Company's strategic planning and
organizational development processes.
B. Consultation and recommendations with respect to strategic planning,
organizational development, management development and succession planning,
organizational design and on-going review of Company organizational
productivity.
C. Consultation with appropriate officers, directors and consultants of the
Company in connection with the Company's planned growth and development,
and development strategies.
D. Consultation and recommendations with respect to recruiting, management
training and development, and development of the Company's Training
Department.
E. Consultation and recommendations with respect to executive performance,
coaching, and intervention.
F. Consultation and inputs as to market and consumer behavioral trends, and
future concept positioning and productivity.
G. Upon request of the Company's President, review various aspects of the
Company's operations and staff in order to propose and recommend methods to
achieve increased levels of efficiency and high profitability.
<PAGE>
2.2 Non-Exclusive Services. The parties agree and acknowledge that Consultant's
services to the Company shall be provided on a non-exclusive basis and
Consultant may be retained by others and perform services in connection with
such retention.
2.3 Principal Performance. The parties agree and acknowledge that it is intended
that the services to be provided hereunder are to be solely performed by its
President and Chief Executive Officer, Gerald A. Hornbeck.
2.4 Support Service. The Company shall provide to the Consultant office space
for one individual during such time as Consultant is performing at the Company's
corporate office or at one of its restaurant locations, and such clerical and
secretarial services as Consultant shall reasonably require to carry out its
responsibility pursuant to this Agreement.
2.5 No Agency. The parties acknowledge and agree that in no event is Consultant
being requested, nor does Consultant intend, to be an agent of or for the
Company.
3. Compensation and Reimbursement.
3.1 Retainer. For the services rendered by Consultant pursuant to the Agreement,
the Company shall pay to Consultant a fee One Thousand Five Hundred dollars
($1500.00) per day on as called, as needed basis. Consultant will make all
reasonable efforts to be available as needed by Company.
3.2 Hours. A "day" for the purposes of the Agreement, shall consist, on average,
of eight hours of services provided by Consultant on behalf of the Company,
pursuant to the directions given to Consultant by the President for purposes
other than duties and obligations required of or performed by Consultant as a
director of the Company. Consultant agrees to provide services on an as called,
as needed basis during the term of this Agreement, to include all regular and
on-going communications regarding the status of the Company and Company
activities.
3.3 Stock Options. The Company, at its sole option, shall grant the Consultant
the option to acquire N/A shares of Common Stock pursuant to the execution of
this Agreement. Options would vest one year from date of grant, and expire ten
years from date of grant. (Section 3.3 final language to be developed and
written by Company as required).
3.4 Duties. Consultant agrees to perform its best efforts on behalf of the
Company and make all reasonable efforts to conform to the time requirements and
schedules as directed or set by the Company's President or Board of Directors.
3.5 Expenses. The company shall promptly reimburse Consultant for all of its
reasonable expenses including travel of Gerald A. Hornbeck with respect to his
engagement, provided expenses over $3500 for any one month shall receive prior
approval from the President. All expenses shall be paid upon written receipt by
the Company of an invoice from Consultant, and said expenses shall be submitted
monthly and paid by the Company Promptly upon receipt of said invoice.
4. Termination of Employment. Either party shall have the right to terminate
this Agreement upon thirty (30) days' written notice to the other party. In such
event, Consultant shall be entitled to fees in full for the entire month of the
date of termination.
5. Confidentiality.
<PAGE>
5.1 Non-Disclosure. Consultant recognizes that services to be performed
hereunder are special and that, by reason of its retention hereunder, it may
acquire or has acquired confidential information concerning the Company, the use
or disclosure of which could cause the Company or its affiliates or subsidiaries
substantial loss and damages. Accordingly, Consultant agrees that it will
execute a Confidentiality Agreement as required by the Company.
5.2 Injunctive Relief. Without intending to limit the remedies available to the
Company, Consultant acknowledges that breach of the covenants contained in this
Section 5 will result in a material, irreparable inury to the Company or its
affiliates or subsidiaries for which there is no adequate remedy at law, that it
will not be possible to measure damages for such injuires precisely and that, in
the event of such a breach, the Company shall be entitled to obtain a temporary
restraining order and/or a preliminary or permanent injunction restraining the
Consultant from engaging in activities prohibited by this Section 5 an/or the
Confidentiality Agreement, or such other relief as may be required to
specifically enforce any of the covenants of this Section 5.
6. Indemnification. The Company will indemnify and hold Consultant (including
its officers, directors, partners, employees within the meaning of section 15 of
the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934)
harmless from and against all claims, liabilities, losses, damages and expenses
incured, including reasonable fees and disbursements of counsel, related to or
arising out of this engagement.
7. Miscellaneous.
7.1 Non-Assignability. Neither party may assign its rights or interests pursuant
to the Agreement without the prior written consent of the other party, which
consent may be granted or withheld in such party's sole discretion.
7.2 Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, any successors to or assigns of the Company
and any successors to or assigns of Consultant.
7.3 Severability. Should any provision of this Agreement be unenforceable or
prohibited by applicable law, this Agreement shall be considered divisible as to
such provisions which shall be inoperative, and the remainder of this Agreement
shall be valid and binding as though such provisions were not included herein.
7.4 Amendment Waiver. This Agreement may not be modified, amended or waived, in
any manner, except by an instrument in writing signed by all parties hereto. The
waiver by any party of compliance with any provision of this Agreement by the
other party shall not operate or be construed as a waiver of any other provision
of this Agreement.
7.5 Governing Law. All matters affecting this agreement are to be governed by,
interpreted and construed in accordance with the laws of the State of Colorado.
7.6 Notices. Any notice hereunder by either party to the other shall be given in
writing by personal delivery or certified mail, return receipt requested, at the
address set forth above. Notice shall be given, if by personal delivery, on the
date of such delivery or, if by certified mail, the date shown on the applicable
return receipt.
7.7 Merger. This Agreement constitutes the entire agreement between the parties
hereto and supersedes all prior or contemporaneous negotiations, commitments,
agreements and writings with respect to the subject matter hereof. No such other
negotiations, commitments, agreements and writings are part of this Agreement
shall have any force or effect or be valid or binding on the parties hereto.
7.8 Headings. The headings of paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
ROCK BOTTOM RESTAURANTS, INC.
By: _______________________
Name: Thomas A. Moxcey
Title: President
CONCEPT MANAGEMENT, INC.
By: _______________________
Name: Gerald A. Hornbeck
Title: President
LICENSE AGREEMENT
This Agreement is made on the ________ of _____________, 1998 [hereinafter
referred to as the "Effective Date"], by and between ROCK BOTTOM RESTAURANTS,
INC., a Delaware corporation ("Rock Bottom") and Frank B. Day
("Day").
RECITALS AND PREMISES
WHEREAS, Rock Bottom owns and operates numerous restaurants and owns
certain proprietary information with respect to such restaurants;
WHEREAS, Rock Bottom has developed special knowledge, know-how,
techniques, methods, designs, brewing recipes, inventions, and technologies
useful in the restaurant business (collectively, the "Licensed Information");
WHEREAS, Day desires to utilize the Licensed Information in the
St.Croix restaurant; and
WHEREAS, Rock Bottom is willing to grant Day a license to use the
Licensed Information solely in the St. Croix restaurant.
NOW, THEREFORE, in consideration of the premises and of the promises
and obligations in the terms, conditions, and mutual agreements contained
herein, Rock Bottom and Day agree as follows:
1. Ownership. The Licensed Information is solely owned by Rock Bottom, and Day
shall not in any way by oral or written statements or otherwise conduct himself
as being the owner of the Licensed Information.
2. Power to Enter Agreement. Each party represents and warrants to the other
that it has the power, right, and authority to enter into this Agreement, and to
grant the rights and undertake the obligations set forth in this Agreement.
3. Term. This Agreement shall be perpetual from the Effective Date.
4. Mutual Termination. This Agreement may be mutually terminated by the mutual
written consent of Rock Bottom and Day.
5. Compensation. Day will pay to Rock Bottom a one time fee of Five Thousand
Dollars ($5,000) as compensation for the use of the Licensed Information solely
in the St. Croix restaurant. This compensation will cover Day's use of the
Licensed Information in the St. Croix restaurant for as long as this Agreement
is in place.
6. Non-Assignment; No Other Beneficiaries. Except as otherwise provided
herein, neither this Agreement nor any interest herein shall be assignable by
Day without the written consent of Rock Bottom.
7. Entire Agreement; Amendments. Each party acknowledges that it has read this
Agreement, understands it, and agrees to be bound by its terms, and further
agrees that this is the complete and exclusive statement of the Agreement
between the parties, which supersedes and merges all prior proposals,
understandings and all other agreements, oral and written between the parties
relating to this Agreement. This Agreement may not be modified or altered except
by a written instrument duly executed by both parties.
8. Governing Law. This Agreement is made under, and is to be construed and
enforced in accordance with, the internal laws of the State of Colorado.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
ROCK BOTTOM RESTAURANTS, INC.,
a Delaware corporation
By: ________________________________
William S. Hoppe,
Executive Vice President
Date: ________________________________
By: ________________________________
Frank B. Day
Date: ________________________________
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 13, 1998 included in the form 10-K, into the
Company's previously filed Registration Statements on Form S-8 (No. 33-94256 and
No. 333-25397) of the Rock Bottom Restaurants, Inc. Non-Employee Directors'
Stock Option Plan dated June 3, 1994 and Rock Bottom Restaurants, Inc. Equity
Incentive Plan dated June 3, 1994.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
March 26, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 28, 1997, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 1,622,537
<SECURITIES> 0
<RECEIVABLES> 1,055,475
<ALLOWANCES> 0
<INVENTORY> 2,726,983
<CURRENT-ASSETS> 8,757,836
<PP&E> 108,209,237
<DEPRECIATION> (17,395,218)
<TOTAL-ASSETS> 108,195,232
<CURRENT-LIABILITIES> 14,324,371
<BONDS> 28,939,841
0
0
<COMMON> 80,595
<OTHER-SE> 61,138,478
<TOTAL-LIABILITY-AND-EQUITY> 108,195,232
<SALES> 150,248,230
<TOTAL-REVENUES> 150,248,230
<CGS> 37,671,802
<TOTAL-COSTS> 146,367,503
<OTHER-EXPENSES> <F1> 9,706,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,772,592
<INCOME-PRETAX> (7,258,894)
<INCOME-TAX> (2,567,550)
<INCOME-CONTINUING> (4,691,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,691,344)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
<FN>
<F1> Includes restructuring charge of $9,706,554
</FN>
</TABLE>
